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TAXATION OF NON-RESIDENT FOREIGN


TAXATION LAW 1 CORPORATIONS ................................... 103
IMPROPERLY ACCUMULATED EARNINGS
OF CORPORATIONS .............................. 105
General Principles of Taxation ........... 1 TAXATION OF PARTNERSHIPS ................ 107
DEFINITION AND CONCEPT OF TAXATION.. 1 TAXATION OF GENERAL PROFESSIONAL
NATURE OF THE POWER OF TAXATION ...... 1 PARTNERSHIPS .................................... 108
ESSENTIAL CHARACTERISTICS OF TAX ......3 WITHHOLDING TAX.................................. 109
POWER OF TAXATION COMPARED WITH
OTHER POWERS ...................................... 4
PURPOSE OF TAXATION ............................. 4
PRINCIPLES OF SOUND TAX SYSTEM......... 5
THEORY AND BASIS OF TAXATION ............ 6
DOCTRINES IN TAXATION .......................... 6
TAXATION LAW 2
SCOPE AND LIMITATION OF TAXATION .... 14
KINDS STAGES OR PROCESS OF TAXATION Estate Tax ........................................ 119
................................................................ 24 DEFINITION ............................................... 119
REQUISITES OF A VALID TAX .................... 24 NATURE .................................................... 119
TAX AS DISTINGUISHED FROM OTHER PURPOSE OR OBJECT ............................... 119
FORMS OF EXACTIONS .......................... 24 TIME AND TRANSFER OF PROPERTIES ... 120
OF TAXES .................................................. 26 CLASSIFICATION OF DECEDENT .............. 120
GROSS ESTATE AND NET ESTATE ............ 121
Income Taxation ...............................28 COMPOSITION OF THE GROSS ESTATE ... 123
INCOME TAX SYSTEMS ............................. 29 ITEMS TO BE INCLUDED IN GROSS ESTATE
FEATURES OF THE PHILIPPINE INCOME TAX ............................................................... 123
LAW ........................................................ 29 DEDUCTIONS FROM ESTATE ................... 127
CRITERIA IN IMPOSING PHILIPPINE EXEMPTIONS AND EXCLUSIONS FROM THE
INCOME TAX........................................... 29 GROSS ESTATE ..................................... 133
TYPES OF PHILIPPINE INCOME TAX ......... 30 TAX CREDIT FOR ESTATE TAXES PAID IN A
TAXABLE PERIOD...................................... 30 FOREIGN COUNTRY .............................. 134
KINDS OF TAXPAYERS .............................. 30 FILING OF NOTICE OF DEATH .................. 135
INCOME TAXATION .................................... 33 ESTATE TAX RETURN .............................. 135
INCOME ...................................................... 33
GROSS INCOME.......................................... 37 Donor’s Tax ...................................... 137
SUBSTITUTED BASIS OF STOCK OR BASIC PRINCIPLES ................................... 137
SECURITIES RECEIVED BY TRANSFEROR DEFINITION .............................................. 137
UPON THE EXCHANGE ........................... 49 NATURE ................................................... 137
SUBSTITUTED BASIS OF PROPERTY PURPOSE OR OBJECT .............................. 137
TRANSFERRED ...................................... 49 REQUISITES OF VALID DONATION .......... 137
TAXATION OF RESIDENT CITIZENS, TRANSFERS WHICH MAY BE CONSTITUTED
NON-RESIDENT CITIZENS AND AS DONATION ....................................... 138
RESIDENT ALIENS ..................................... 80 TRANSFER FOR LESS THAN ADEQUATE
TAXATION OF NON-RESIDENT ALIENS AND FULL CONSIDERATION ................. 138
ENGAGED IN TRADE OR BUSINESS ........ 91 CLASSIFICATION OF DONORS ................. 138
NON-RESIDENT ALIENS NOT ENGAGED IN DETERMINATION OF GROSS GIFT ........... 139
TRADE OR BUSINESS ............................. 92 COMPOSITION OF GROSS GIFT................ 139
INDIVIDUAL TAXPAYERS EXEMPT FROM VALUATION OF GIFTS MADE IN PROPERTY
INCOME TAX............................................93 ............................................................... 139
TAXATION OF DOMESTIC CORPORATIONS TAX CREDIT FOR DONOR’S TAXES PAID IN
.................................................................93 A FOREIGN COUNTRY ........................... 139
TAXATION OF RESIDENT FOREIGN EXEMPTIONS OF GIFTS FROM
CORPORATIONS ................................... 100 DONOR’S TAX .......................................... 140

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PERSONS LIABLE ..................................... 140 FLOWCHART: PROCEDURES FOR


TAX BASIS .................................................141 DISTRAINT AND LEVY—NIRC ................ 194

VAT ...................................................143 Organization and Function of the BIR


CONCEPT .................................................. 143 ......................................................... 194
CHARACTERISTICS/ELEMENTS OF A VAT- RULE-MAKING AUTHORITY OF THE
TAXABLE TRANSACTION ...................... 143 SECRETARY OF FINANCE ...................... 194
IMPACT OF TAX ........................................ 144 POWER OF THE COMMISSIONER TO
INCIDENCE OF TAX .................................. 144 SUSPEND THE BUSINESS OPERATION
TAX CREDIT METHOD .............................. 144 OF A TAXPAYER ...................................... 195
DESTINATION PRINCIPLE ......................... 171 LOCAL GOVERNMENT CODE OF 1991, AS
PERSONS LIABLE ..................................... 145 AMENDED ............................................. 196
VAT ON SALE OF GOODS OR PROPERTIES FLOWCHART: PROCEDURE FOR
............................................................... 146 ASSESSMENT OF LAND VALUE FOR REAL
ZERO-RATED SALES OF GOODS OR PROPERTY TAX PURPOSES—LGC ........ 218
PROPERTIES, AND EFFECTIVELY ZERO- FLOWCHART: TAXPAYER’S REMEDIES
RATED SALES OF GOODS OR PROPERTIES INVOLVING COLLECTION OF REAL
............................................................... 148 PROPERTY TAX—LGC ........................... 219
TRANSACTIONS DEEMED SALE............... 150 FLOWCHART: PROCEDURE FOR LEVY FOR
CHANGE OR CESSATION OF STATUS AS PURPOSES OF SATISFYING REAL
VAT-REGISTERED PERSON .................. 150 PROPERTY TAXES—LGC ...................... 220
VAT ON IMPORTATION OF GOODS ........... 151 TARIFF AND CUSTOMS CODE OF 1978, AS
VAT ON SALE OF SERVICE AND USE OR AMENDED ............................................. 221
LEASE OF PROPERTIES......................... 152 FLOWCHART: REMEDIES FROM SEIZURE
ZERO-RATED SALE OF SERVICES ............ 154 AND FORFEITURE CASES—TCC ........... 240
VAT EXEMPT TRANSACTIONS ................. 155 TABLE OF SPECIAL DUTIES: WHEN
INPUT TAX AND OUTPUT TAX, DEFINED 158 IMPOSED ............................................... 241
SOURCES OF INPUT TAX.......................... 158 TABLE OF SPECIAL DUTIES: IMPOSING
PERSONS WHO CAN AVAIL OF INPUT TAX AUTHORITY AND AMOUNT.................. 242
CREDIT .................................................. 159 JUDICIAL REMEDIES ................................243
DETERMINATION OF OUTPUT/INPUT TAX;
VAT PAYABLE; EXCESS INPUT TAX
CREDITS ................................................ 160
SUBSTANTIATION OF INPUT TAX CREDITS
............................................................... 162
REFUND OR TAX CREDIT OF EXCESS INPUT
TAX ........................................................ 163
INVOICING REQUIREMENTS .................... 164
FILING OF RETURN AND PAYMENT......... 166
WITHHOLDING OF FINAL VAT ON SALES TO
GOVERNMENT ...................................... 167

Tax Remedies under the NIRC ...... 168


TAXPAYER’S REMEDIES........................... 168
GOVERNMENT REMEDIES ....................... 184
STATUTORY OFFENSES AND PENALTIES
............................................................... 190
COMPROMISE AND ABATEMENT OF TAXES
................................................................ 191
FLOWCHART: TAXPAYER’S REMEDIES
FROM TAX ASSESSMENT—NIRC .......... 193

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General Principles of The basis of taxation is found in the reciprocal


duties of protection and support between the
Taxation State and its inhabitants. The State receives
taxes that it may be enabled to carry its
mandates into effect and perform the functions
DEFINITION AND CONCEPT OF of government and the citizen pays the portion
TAXATION of taxes demanded in order that he may, by
means thereof, be secured in the enjoyment of
TAXATION (4) the benefits of an organized society, (see 51 Am.
(a) is a mode by which governments make Jur. 42-43.) This is the so-called benefits-
exactions for revenue in order to support received principle.
their existence and carry out their legitimate
objectives. NATURE OF THE POWER OF TAXATION
(b) a mode of raising revenue for public (1) Inherent in sovereignty- The power to tax is an
purpose; the exercise of sovereign power to attribute of sovereignty. It is a power
raise revenue for the expense of the emanating from necessity. It is a necessary
government; burden to preserve the State's sovereignty
(c) the process or means by which the sovereign, and a means to give the citizenry an army to
through its law-making body, raises income resist an aggression, a navy to defend its
to defray the necessary expenses of shores from invasion, a corps of civil
government; a method of apportioning the servants to serve, public improvement
cost of government among those who in designed for the enjoyment of the citizenry
some measure are privileged to enjoy its and those which come within the State's
benefits and must, therefore, bear its territory, and facilities and protection which
burdens, (see 51 Am. Jur. 341; 1 Cooley 72-93.) a government is supposed to provide (Phil.
(d) as a power, it refers to the inherent power of Guaranty Co., Inc. v. Commissioner, G.R. No.
the state to demand enforced contributions L-22074 April 30, 1965). It is
for public purpose or purposes. essential to the existence of every
government. It exists apart from
TAXES constitutions and without being expressly
(a) are enforced proportional contributions from conferred by the people (71 Am.Jur.2d 397-
persons and property levied by the law- 398). Constitutional provisions relating to
making body of the State by virtue of its the power of taxation do not operate as
sovereignty for the support of the grants of the power to the government.
government and all public needs. They merely constitute limitations upon a
(b) The enforced proportional and pecuniary power which would otherwise be practically
contributions from persons and property without limit. (1 Cooley 150). While the
levied by the law-making body of the state power to tax is not expressly provided for in
having jurisdiction over the subject of the our Constitution, its existence is recognized
burden for the support of the government by the provisions relating to taxation (infra).
and public needs. (2) Essentially a legislative function- The power
to tax is peculiarly and exclusively
UNDERLYING THEORY AND BASIS OF legislative and cannot be exercised by the
TAXATION executive or judicial branch of the
The power of taxation proceeds upon the theory government (1 Cooley 160-161). Hence, only
that the existence of government is a necessity; Congress, our national legislative body, can
that it cannot continue without means to pay its impose taxes. The levy of a tax, however,
expenses; and that for those means it has the may also be made by a local legislative
right to compel all citizens and property within body subject to such limitations as may be
its limits to contribute. provided by law.

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(3) Subject to constitutional and inherent In the final analysis, therefore, the decision on
limitations - These limitations are those the question is not a legislative but a judicial
provided in the fundamental law or implied function. But once it is settled that the purpose
therefrom, while the rest spring from the is public, the courts can make no other inquiry
nature of the taxing power itself although into the objective of the legislature in imposing
they may or may not be provided in the a tax (see Pascual vs. Sec. of Public Works, 110
Constitution. Phil. 331 [1961]), or the wisdom, advisability, or
expediency of the tax. [Blunt vs. U.S., 255 Fed.
SCOPE OF TAXATION 322.]
Subject to constitutional and inherent
restrictions, the power of taxation is regarded as Judicial action is limited only to a review where
supreme, unlimited and comprehensive. The it involves:
principal check on its abuse rests only on the (a) The determination of the validity of the
responsibility of the members of the legislature tax in relation to constitutional precepts
to their constituents. or provisions. Thus, a tax may be
declared invalid because it violates the
EXTENT OF THE LEGISLATIVE POWER TO constitutional requirement of uniformity
TAX and equity in taxation; or
Subject to constitutional and inherent (b) The determination in an appropriate
restrictions, the legislature has discretion to case of the application of a tax law.
determine the incidence of the power to tax. (see1 Cooley 165.) Thus, a court may
decide that a tax has been illegally
(1) The subjects or objects to be taxed— refer to collected where the taxpayer is entitled
the coverage and the kind or nature of the tax. to tax exemption or his liability has
They may be persons, whether natural or already been extinguished by reason of
juridical; property, whether real or personal, prescription.
tangible or intangible; businesses, transactions,
rights, or privileges. A state is free to select the (3) The amount or rate of the tax.- As a general
subject of taxation and it has been repeatedly rule, the legislature may levy a tax of any
held that that inequalities which result from a amount or rate it sees fit. If the taxes are
singling out of one particular class for taxation oppressive or unjust, the only remedy is the
or exemption infringe no constitutional ballot box and the election of new
limitation so long as such exemption is representatives. [see Cooley 178-181.]
reasonable and not arbitrary. [see Lutz vs.
Araneta, 98 Phil. 148; Sison, Jr. vs. Ancheta, 130 According to Chief Justice John Marshall, "the
SCRA 654, 1984] power to tax involves the power to destroy."
[McCulloch vs. Maryland, 17 U.S. [4 Wheat.] 316-
Thus, the power to tax carries with it the power 428, 4L. ed. 579.] To say, however, that the
to grant exemption therefrom. power to tax is the power to destroy is to
describe not the purposes for which the taxing
(2) The purpose or object of the tax so long as it is power may be used but the extent to which it
a public purpose—The legislative body’s may be employed in order to raise revenues.
determination, however, on the question of [see: Cooley 178.] Thus, even if a tax should
what is a public purpose is not conclusive. The destroy a business, such fact alone could not
courts can inquire into whether the purpose is invalidate the tax. [84 C.J.S. 46.]
really public or private.

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Incidentally, our Constitution mandates that (7) It is levied for public purpose. Revenues
"the rule of taxation shall be uniform and derived from taxes cannot be used for
equitable." In a case, our Supreme Court said: purely private purposes or for the exclusive
"The power of taxation is sometimes called also benefit of private persons. [Gaston v.
the power to destroy. Therefore, it should be Republic Planters Bank, 158 SCRA 626,
exercised with caution to minimize injury to the March 15, 1988]. The “public purpose or
proprietary rights of the taxpayer. It must be purposes” of the imposition is implied in the
exercised fairly, equally and uniformly, lest the levy of tax. (see Mendoza v. Municipality, 94
tax collector kills the 'hen that lays the golden Phil. 1047[1954]), A tax levied for a private
eggs.' And in order to maintain the general purpose constitutes a taking of property
public's trust and confidence in the government, without due process of law.
this power must be used justly and not
treacherously." (Roxas v. Court of Tax Appeals, It is also an important characteristic of most
23 SCRA276, App120, 1968; Philex Mining Corp. taxes that they are commonly required to be
vs. Comm. of Internal Revenue, 97 SCAD 777,294 paid at regular periods or intervals (see 1
SCRA 687, Aug. 28, 1998.) Cooley 64) every year.

(4) The manner, means, and agencies of


collection of the tax. – These refer to the
administration of the tax or the implementation
of tax laws. The legislature possesses the sole
power to prescribe the mode or method by
which the tax shall be collected, and to
designate the officers through whom its will
shall be enforced as well as the remedies which
the State or the taxpayer may avail in
connection therewith.

ESSENTIAL CHARACTERISTICS OF TAX


(1) It is an enforced contribution for its imposition
is in no way dependent upon the will or
assent of the person taxed.
(2) It is generally payable in the form of money,
although the law may provide payment in
kind (e.g. backpay certificates under Sec. 2,
R.A. No. 304, as amended);
(3) It is proportionate in character or islaid by
some rule of apportionment which is usually
based on ability to pay;
(4) It is levied on persons, property, rights, acts,
privileges, or transactions.
(5) It is levied by the State which has jurisdiction
or control over the subject to be taxed.
(6) It is levied by the law-making body of the
State. The power to tax is a legislative
power but is also granted to local
governments, subject to such guidelines
and limitations as law may provided [Sec. 5,
Art. X, Constitution]; and;

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POWER OF TAXATION COMPARED WITH OTHER POWERS

Taxation Police Power Eminent Domain


1. As to concept Power to enforce Power to make and Power to take private
contribution to raise implement laws for the property for public use with
government funds general welfare just compensation
2. As to scope Plenary, comprehensive and Broader in application. Merely a power to take
supreme General power to make and private property for public
implement laws. use
3. As to authority Exercised only by Exercised only by May be granted to public
government or its political government or its political service or public utility
subdivisions subdivisions companies
4. As to purpose Money is taken to support Property is taken or Private property is taken for
the government destroyed to promote public use
general welfare
5. As to necessity of The power to make tax laws Can be expressly delegated Can be expressly delegated
delegation cannot be delegated to the local government to the local government
units by the law making units by the law making
body body
6. As to person Operates on a community or Operates on a community or Operates on the particular
affected a class of individual a class of individual private property of an
individual
7. As to benefits Continuous protection and Healthy economic standard Market value of the property
organized society of society expropriated
8. As to amount of Generally no limit Cost of regulation, license No imposition
imposition and other necessary
expenses
9. As to importance Inseparable for the Protection, safety and Common necessities and
existence of a nation – it welfare of society interest of the community
supports police power and transcend individual rights
eminent domain in property
10. As to Subject to Constitutional Relatively free from Superior to and may
relationship to and Inherent limitations. Constitutional limitations. override Constitutional
Constitution Inferior to non-impairment Superior to non-impairment impairment provision
clause. clause. because the welfare of the
State is superior to any
private contract
11. As to limitation Constraints by Limited by the demand for Bounded by public purpose
Constitutional and Inherent public interest and due and just compensation
limitations process
th
[Valencia and Roxas, Income Taxation 6 Edition (2013-2014), Valencia Educational Supply, pp. 9-10]

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PURPOSE OF TAXATION In Lutz v. Araneta, 78 Phil 148, it has been


held that the Sugar Adjustment Act is an
Revenue Raising act enacted primarily under the police
Primary purpose of taxation is to provide funds power and designed to obtain a
or property with which to promote the general readjustment of the benefits derived by
welfare and protection it its citizens. people interested in the sugar industry as
well as to rehabilitate and stabilize the
Fees may be properly regarded as taxes even industry which constitutes one of the great
though they also serve as an instrument of sources of the country's wealth and,
regulation... If the purpose is primarily revenue, therefore, affects a great portion of the
or if revenue is, at least, one of the real and population of the country.
substantial purposes, then the exaction is
properly called a tax. [PAL v. Edu, G.R. No. L- Taxes may be levied with a regulatory
41383 August 15, 1988] purpose to provide means for rehabilitation
and stabilization of a threatened industry
Non-Revenue/Special or Regulatory which is imbued with public interest as to be
Taxation is often employed as a device for within the police power of the State. [Caltex
regulation by means of which certain effects or v. COA, G.R. No. 92585 May 8, 1992]
conditions envisioned by governments may be
achieved. These regulatory purposes are also As long as a tax is for a public purpose, its
known as Sumptuary. Thus, taxation can: validity is not affected by collateral
(1) Strengthen anemic enterprises or provide purposes or motives of the legislature in
incentive to greater production through grant imposing the levy, or by the fact that it has a
of tax exemptions or the creation of regulatory effect [51 Am. Jur. 381-382.] or it
conditions conducive to their growth. discourages or even definitely deters the
(2) Protect local industries against foreign activities taxed. The principle applies even
competition by imposing additional taxes though the revenue obtained from the tax
on imported goods, or encourage foreign appears very negligible or the revenue
trade by providing tax incentives on purpose is only secondary. [see United
imported goods. States vs. Sanchez, 340 U.S. 42; Tio vs.
(3) Be a bargaining tool by setting tariff rates Videogram Regulatory Board, 151 SCRA 208,
first at a relatively high level before trade 1987]
negotiations are entered into with another
country. PRINCIPLES OF SOUND TAX SYSTEM
(4) Halt inflation in periods of prosperity to curb
spending power; ward off depression in Fiscal adequacy
periods of slump to expand business. The sources of tax revenue should coincide with,
(5) Reduce inequalities in wealth and incomes, as and approximate the needs of, government
for instance, the estate, donor's and income expenditures. The revenue should be elastic or
taxes, their payers being the recipients of capable of expanding or contracting annually in
unearned wealth or mostly in the higher response to variations in public expenditures.
income brackets.
(6) Taxes may be levied to promote science and Administrative feasibility
invention [see RA. No. 5448] or to finance Tax laws should be capable of convenient, just
educational activities [see RA. No. 5447) or and effective administration. Each tax should be
to improve the efficiency of local police forces capable of uniform enforcement by government
in the maintenance of peace and order officials, convenient as to the time, place, and
through grant of subsidy (see RA.No. 6141)]. manner of payment, and not unduly
(7) Be an implement of the police power to burdensome upon, or discouraging to business
promote the general welfare. activity.

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Theoretical justice or equality Benefits-protection theory (symbiotic


The tax burden should be in proportion to the relationship)
taxpayer’s ability to pay. This is the so-called This principle serves as the basis of taxation and
ability to pay principle. Taxation should be is founded on the reciprocal duties of protection
uniform as well as equitable and support between the State and its
inhabitants.
Note: The non-observance of the above
principles will not necessarily render the tax Despite the natural reluctance to surrender part
imposed invalid except to the extent those of one's hard earned income to the taxing
specific constitutional limitations are violated. authorities, every person who is able to must
[De Leon] contribute his share in the running of the
government. The government for its part is
THEORY AND BASIS OF TAXATION expected to respond in the form of tangible and
intangible benefits intended to improve the lives
Lifeblood theory of the people and enhance their moral and
Taxes are the lifeblood of the government and material values. This symbiotic relationship is
their prompt and certain availability is an the rationale of taxation and should dispel the
imperious need. [CIR v. Pineda] erroneous notion that it is an arbitrary method
of exaction by those in the seat of power. [CIR v.
Taxes are the lifeblood of the government and Algue]
so should be collected without unnecessary
hindrance... It is said that taxes are what we pay Jurisdiction over subject and objects
for civilized society. Without taxes, the The limited powers of sovereignty are confined
government would be paralyzed for lack of the to objects within the respective spheres of
motive power to activate and operate it [CIR v. governmental control. These objects are the
Algue, G.R. No. L-28896, February 17, 1988]. proper subjects or objects of taxation and none
else.
Necessity theory
The power of taxation proceeds upon theory DOCTRINES IN TAXATION
that the existence of government is a necessity;
that is cannot continue without means to pay its Prospectivity of tax laws
expenses; and that for those means it has the General rule: Tax laws are prospective in
right to compel all citizens and property within operation.
its limits to contribute. Rationale: Nature and amount of the tax could
not be foreseen and understood by the taxpayer
The power to tax, an inherent prerogative, has at the time the transaction.
to be availed of to assure the performance of
vital state functions. It is the source of the bulk Exception: Tax laws may be applied retroactively
of public funds. [Sison v. Ancheta, G.R. No. L- provided it is expressly declared or clearly the
59431, July 25, 1984] legislative intent.(e.g increase taxes on income
already earned) when retroactive application
The obligation to pay taxes rests… upon the would be so harsh and oppressive [Republic v.
necessity of money for the support of the state. Fernandez, G.R. No. L-9141. September 25,
For this reason, no one is allowed to object to or 1956].
resist the payment of taxes solely because no
personal benefit to him can be pointed out It is a cardinal rule that laws shall have no
[Lorenzo v. Posadas, G.R. No. L-43082, June 18, retroactive effect, unless the contrary is
1937]. provided (citing Art. 4 of the Civil Code).[Hydro
Resources v.CA]

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The language of the statute must clearly (2) Tariff and Customs Code- does not express
demand or press that it shall have a retroactive any general statute of limitation; it provides,
effect.[Lorenzo v.Posadas] however, that “when articles have been
entered and passed free of duty or final
Exception to the exception: adjustments of duties made, with
Collection of interest in tax cases is not penal in subsequent delivery, such entry and
nature; it is but a just compensation to the passage free of duty or settlements of
State. The constitutional prohibition against ex duties will, after the expiration of one (1) year,
post facto laws is not applicable to the from the date of the final payment of duties,
collection of interest on back taxes. [Central in the absence of fraud or protest or
Azucarera v.CTA] compliance audit pursuant to the provisions
of this Code, be final and conclusive upon
Non-retroactivity of rulings (sec. 246) all parties, unless the liquidation of the
General rule: Any revocation, modification or import entry was merely tentative.” [Sec.
reversal of rules and regulations promulgated in 1603]
accordance with Sections 244 and 245 of the (3) Local Government Code- prescribes
Tax Code and rulings or circulars promulgated prescriptive periods for the assessment (5
by the CIR, that is prejudicial to the taxpayer, years) and collection (5 years) of taxes. [see
shall NOT be given retroactive effect. Sections 194 and 270, Rep. Act No. 7160].

Exceptions: DOUBLE TAXATON


(1) Where the taxpayer deliberately misstates or Means taxing twice the same taxpayer for the
omits material facts from his return or any same tax period upon the same thing or activity,
document required of him by BIR; when it should be taxed but once, for the same
(2) Where the facts subsequently gathered by purpose and with the same kind of character of
the BIR are materially different from the tax.
facts on which the ruling is based; OR
(3) Where the taxpayer acted in bad faith. (Sec. Strict sense (Direct Duplicate Taxation)
246, NIRC) (1) the same property must be taxed twice when
it should be taxed once;
Imprescriptibility (2) both taxes must be imposed on the same
Unless otherwise provided by the tax itself, property or subject matter;
taxes are imprescriptible. [CIR v. Ayala Securities (3) for the same purpose;
Corporation] (4) by the same State, Government, or taxing
authority;
The law on prescription, being a remedial (5) within the same territory, jurisdiction or taxing
measure, should be liberally construed in order district;
to afford such protection. As a corollary, the (6) during the same taxing period; and
exceptions to the law on prescription should (7) of the same kind or character of tax.
perforce be strictly construed. [Commissioner v.
C.A., G.R.No. 104171 (1999)] Broad sense (Indirect Duplicate Taxation)
There is double taxation in the broad sense or
Prescriptions found in statutes there is indirect duplicate taxation if any of the
(1) National Internal Revenue Code- statute of elements for direct duplicate taxation is absent.
limitations [see Section 203 and 222] in the
assessment and collection of taxes therein It extends to all cases in which there is a burden
imposed. of two or more pecuniary impositions. For
example, a tax upon the same property imposed
by two different states.

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Double taxation, standing alone and not being Ways of shifting the tax burden
forbidden by our fundamental law, is not a valid (1) Forward shifting - When the burden of the
defense against the legality of a tax measure tax is transferred from a factor of production
[Pepsi Cola v. Mun. of Tanauan, G.R. No. L-31156 through the factors of distribution until it
February 27, 1976]. But from it might emanate finally settles on the ultimate purchaser or
such defenses against taxation as consumer. Example: VAT, percentage tax
oppressiveness and inequality of the tax. (2) Backward shifting - When the burden of the
tax is transferred from the consumer or
Constitutionality of double taxation purchaser through the factors of
There is no constitutional prohibition against distribution to the factor of production.
double taxation in the Philippines. It is Example: Consumer or purchaser may shift
something not favored, but is permissible, tax imposed on him to retailer by
provided some other constitutional requirement purchasing only after the price is reduced,
is not thereby violated.[Villanueva v. City of Iloilo, and from the latter to the wholesaler, and
G.R. No. L-26521, December 28, 1968] finally to the manufacturer or producer.
(3) Onward shifting - When the tax is shifted two
If the tax law follows the constitutional rule on or more times either forward or backward.
uniformity, there can be no valid objection to
taxing the same income, business or property Meaning of impact and incidence of taxation
twice.[China Banking Corp. v. CA, G.R. No. Impact of taxation is the point on which a tax is
146749 (2003)] originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is
Double taxation in its narrow sense is the person who must pay the tax to the
undoubtedly unconstitutional but that in the government.
broader sense is not necessarily so. [De Leon,
citing 26 R.C.L 264-265].Where double taxation Incidence of taxation is that point on which the
(in its narrow sense) occurs, the taxpayer may tax burden finally rests or settles down. It takes
seek relief under the uniformity rule or the equal place when shifting has been effected from the
protection guarantee. [De Leon, citing 84 statutory taxpayer to another.
C.J.S.138].
Relationship between Impact, Shifting, and
Modes of eliminating double taxation Incidence of a Tax
(1) Allowing reciprocal exemption either by law The impact is the initial phenomenon, the
or by treaty; shifting is the intermediate process, and the
(2) Allowance of tax credit for foreign taxes paid incidence is the result. Impact is the imposition
(3) Allowance of deductions such as for foreign of the tax; shifting is the transfer of the tax;
taxes paid, and vanishing deductions in while incidence is the setting or coming to rest
estate tax of the tax. (e.g impact in a sales tax is on the
(4) Reduction of Philippine tax rate. seller who shifts the burden to the customer
who finally bears the incidence of the tax)
ESCAPE FROM TAXATION
Tax avoidance (Tax Minimization)
Shifting of tax burden The exploitation by the taxpayer of legally
Shifting - the transfer of the burden of a tax by permissible alternative tax rates or methods of
the original payer or the one on whom the tax assessing taxable property or income in order to
was assessed or imposed to someone else. avoid or reduce tax liability. It is politely called
What is transferred is not the payment of the tax “tax minimization” and is not punishable by law.
but the burden of the tax.
Example: A person refrains from engaging in
All indirect taxes may be shifted; direct taxes some activity or enjoying some privilege in order
cannot be shifted. to avoid the incidental taxation or to lower his
tax bracket for a taxable year.

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Transformation EXEMPTION FROM TAXATION


TRANSFORMATION – method of escape in
taxation whereby the manufacturer or producer Meaning of exemption from taxation
upon whom the tax has been imposed pays the The grant of immunity to particular persons or
tax and endeavors to recoup himself by corporations or to person or corporations of a
improving his process of production thereby particular class from a tax which persons and
turning out his units of products at a lower cost. corporations generally within the same state or
The taxpayer escapes by a transformation of the taxing district are obliged to pay. It is an
tax into a gain through the medium of immunity or privilege; it is freedom from a
production. financial charge or burden to which others are
subjected. It is strictly construed against the
Tax evasion (Tax Dodging) taxpayer.
Tax Evasion - is the use by the taxpayer of illegal
or fraudulent means to defeat or lessen the Taxation is the rule; exemption is the exception.
payment of a tax. It is also known as “tax He who claims exemption must be able to
dodging.” It is punishable by law. justify his claim or right thereto, by a grant
expressed in terms “too plain to be mistaken
Example: Deliberate failure to report a taxable and too categorical to be misinterpreted.” If not
income or property; deliberate reduction of expressly mentioned in the law, it must at least
income that has been received. be within its purview by clear legislative intent.

Elements of Tax Evasion Nature of tax exemption


(a) The end to be achieved. Example: the  Mere personal privilege- cannot be assigned
payment of less than that known by the or transferred without the consent of the
taxpayer to be legally due, or in paying no Legislature. The legislative consent to the
tax when such is due. transfer may be given either in the original
(b) An accompanying state of mind described as act granting the exemption or in a
being “evil,” “in bad faith,” “willful” or subsequent law
“deliberate and not accidental.”  General rule: revocable by the government.
(c) A course of action (or failure of action) which  Exception: if founded on a contract which is
is unlawful. protected from impairment. But the
contract must contain the essential
Since fraud is a state of mind, it need not be elements of other contracts. An exemption
proved by direct evidence but may be inferred provided for in a franchise, however, may be
from the circumstances of the case. Thus: repealed or amended pursuant to the
(1) The failure of the taxpayer to declare for Constitution [see Sec. 11, Art. XII]. A
taxation purposes his true and actual legislative franchise is in the nature of a
income derived from his business for two contract.
consecutive years has been held as an  Implies a waiver on the part of the
indication of his fraudulent intent to cheat government of its right to collect taxes due
the government of its due taxes. [Republic v. to it, and, in this sense, is prejudicial thereto.
Gonzales, 13 SCRA 633, 1965] Hence, it exists only by virtue of an express
(2) The substantial underdeclaration of income grant and must be strictly construed.
in the income tax returns of the taxpayer for
 Not necessarily discriminatory, provided it
four (4) consecutive years coupled with his
has reasonable foundation or rational basis.
intentional overstatement of deductions
Where, however, no valid distinction exists,
justifies the finding of fraud. [Perez v. CTA
the exemption may be challenged as
and Collector, 103 Phil. 1167, 1958]
violative of the equal protection guarantee
or the uniformity rule.

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Principles of Tax Exemption: These contractual tax exemptions, however,


(1) They are not presumed [Floro Cement v. are not to be confused with tax exemptions
Gorospe] granted under franchises. A franchise
(2) When granted, they are strictly construed partakes the nature of a grant which is
against the taxpayer [Luzon Stevedoring Co. beyond the purview of the non-impairment
v. CTA] clause of the Constitution. [Manila Electric
(3) They are higHly disfavoured and may almost Company v. Province of Laguna, G.R.No.
be said “to be directly contrary to the 131359, May 5, 1999]
intention of tax laws.” [Manila Electric
Company v. Vera], [Valencia and Roxas] RATIONALE/GROUNDS FOR EXEMPTION

Kinds of tax exemption Rationale of Tax Exemption


(1) Express or Affirmative - either entirely or in Such exemption will benefit the body of the
part, may be made by provisions of the people and not particular individuals or private
Constitution, statutes, treaties, ordinances, interest and that the public benefit is sufficient
franchises, or contracts. to offset the monetary loss entailed in the grant
(2) Implied or Exemption by Omission - when a of the exemption.
tax is levied on certain classes without
mentioning the other classes. Every tax Grounds for tax exemption
statute, in a very real sense, makes (1) It may be based on contract.
exemptions since all those not mentioned (2) It may be based on some ground of public
are deemed exempted. The omission may policy.
be either accidental or intentional. (3) It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of
Exemptions are not presumed, but when international or multiple taxation.
public property is involved, exemption is the
rule, and taxation is the exception. But equity is NOT a ground for tax exemption.
(3) Contractual - The legislature of a State may, Exemption from tax is allowable only if there is
in the absence of special restrictions in its a clear provision. While equity cannot be used
constitution, make a valid contract with a as a basis or justification for tax exemption, a
corporation in respect to taxation, and that law may validly authorize the condonation of
such contract can be enforced against the taxes on equitable considerations.
State at the instance of the corporation
[Casanovas Hord, G.R. No. 3473, March 22, REVOCATION OF TAX EXEMPTION
1907]. In the real sense of the term and General Rule: revocable by the government.
where the non-impairment clause of the Exception: Contractual tax exemptions may not
Constitution can rightly be invoked, this be unilaterally so revoked by the taxing
includes those agreed to by the taxing authority without thereby violating the non-
authority in contracts, such as those impairment clause of the Constitution.
contained in government bonds or
debentures, lawfully entered into by them COMPENSATION AND SET-OFF
under enabling laws in which the General rule: Internal revenue taxes cannot be
government, acting in its private capacity, the subject of set-off or compensation [Republic
sheds its cloak of authority and waives its v. Mambulao Lumber, G.R. No. L-17725,
governmental immunity. February 28, 1962].

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Reasons: (1) In the National Internal Revenue Code, the


(1) This would adversely affect the government Commissioner of Internal Revenue is
revenue system (Philex Mining v. CA G.R. expressly authorized to enter, under certain
No. 125704. August 28, 1998). conditions, into a compromise of both the
(2) Government and the taxpayer are not civil and criminal liabilities of the taxpayer
creditors and debtors of each other. The [Sec. 204, NIRC].
payment of taxes is not a contractual (2) The power to compromise in respect of
obligation but arises out of a duty to pay. customs duties is, at best, limited to cases
[Republic v. Mambulao Lumber (1962)] where potestive authority is specifically
granted such as in the remission of duties
Exception: If the claims against the government by the Collector of Customs [Sec. 709, Tariff
have been recognized and an amount has and Customs Code] and cases involving
already been appropriated for that purpose. imposition of fines, surcharges and
Where both claims have already become due forfeitures which may be compromised by
and demandable as well as fully liquidated, the Commissioner subject to the approval of
compensation takes place by operation of law the Secretary of Finance [Sec. 2316, Tariff
under Art. 1200 in relation to Articles 1279 and and Customs Code]
1290 of the NCC, and both debts are (3) No provisions exist under the Local
extinguished to the concurrent amount. Government Code, while the tax (not
[Domingo v. Garlitos, G.R. No. L-18994, June 29, criminal) liability is not prohibited from
1963] being compromised [see Arts. 2034 and
2035, Civil Code]; there is no specific
Doctrine of Equitable Recoupment- a claim for authority, however, given to any public
refund barred by prescription may be allowed to official to execute the compromise so as to
offset unsettled tax liabilities. The doctrine finds render it effective. [Vitug, p. 48]
no application in this jurisdiction.
TAX AMNESTY
COMPROMISE  A tax amnesty partakes of an absolute
 A contract whereby the parties, by making forgiveness or waiver by the Government of its
reciprocal concessions avoid litigation or put right to collect what otherwise would be due
an end to one already commenced. (Art. it, and in this sense, prejudicial thereto,
2028, Civil Code). It involves a reduction of particularly to give tax evaders, who wish to
the taxpayer’s liability. relent and are willing to reform a chance to do
 Requisites of a tax compromise: so and become a part of the new society with
(a) The taxpayer must have a tax liability. a clean slate.[Republic v. IAC (1991)]
(b) There must be an offer (by the taxpayer  A tax amnesty, much like a tax exemption, is
or Commissioner) of an amount to be never favored nor presumed in law. If granted,
paid by the taxpayer. the terms of the amnesty, like that of a tax
(c) There must be acceptance (by the exemption, must be construed strictly against
Commissioner or the taxpayer, as the the taxpayer and liberally in favor of the
case may be) of the offer in settlement taxing authority. For the right of taxation is
of the original claim. inherent in government. The State cannot
 Generally, compromises are allowed and strip itself of the most essential power of
enforceable when the subject matter thereof taxation by doubtful words. He who claims an
is not prohibited from being compromised exemption (or an amnesty) from the common
and the person entering into it is duly burden must justify his claim by the clearest
authorized to do so. grant of organic or state law. It cannot be
allowed to exist upon a vague implication. If a
doubt arises as to the intent of the legislature,
that doubt must be resolved in favor of the
state. [CIR v. Marubeni Corp.,372 SCRA 576,
2001]

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Distinguished from tax exemption Tax statutes are to receive a reasonable


Tax amnesty is immunity from all criminal and construction or interpretation with a view to
civil obligations arising from non-payment of carrying out their purpose and intent. They
taxes. It is a general pardon given to all should not be construed as to permit the
taxpayers. It applies to past tax periods, hence taxpayer easily to evade the payment of tax.
of retroactive application.[People v. Castañeda, [Carbon Steel Co. v. Lewellyn, 251 U.S. 201]. Thus,
G.R. No. L-46881, September 15, 1988] the good faith of the taxpayer is not a sufficient
justification for exemption from the payment of
Tax exemption is an immunity from all civil surcharges imposed by the law for failing to pay
liability only. It is an immunity or privilege, a tax within the period required by law.
freedom from a charge or burden of which
others are subjected. [Greenfield v. Meer, 77 Phil. Tax exemption and exclusion
394 [1946]). It is generally prospective in Tax exemptions must be shown to exist clearly
application.(Dimaampao, 2005, p. 111) and categorically, and supported by clear legal
provisions. [NPC v. Albay, G.R. No. 87479, June
CONSTRUCTION AND INTERPRETATION 4, 1990]

Tax laws General Rule: In the construction of tax statutes,


General Rule:Tax laws are construed strictly exemptions are not favored and are construed
against the government and liberally in favor of strictissimi juris against the taxpayer. [Republic
the taxpayer. [Manila Railroad Co. v. Coll. of Flour Mills v. Comm. & CTA, 31 SCRA 520, 1970].
Customs, 52 Phil. 950, 1929]
 Tax exemptions must be shown to exist
No person or property is subject to taxation clearly and categorically, and supported by
unless within the terms or plain import of a clear legal provisions [NPC v. Albay].
taxing statute. [See72 Am.Jur. 2d 44].  Claims for an exemption must be able to
point out some provision of law creating the
Taxes, being burdens, they are not to be right, and cannot be allowed to exist upon a
presumed beyond what the statute expressly mere vague implication or inference [Floro
and clearly declares. [Coll. v. La Tondena, 5 Cement v. Gorospe].
SCRA 665, 1962] Thus, a tax payable by  Refunds are in the nature of exemption, and
“individuals” does not apply to “corporations.” must be construed strictly against the
grantee/taxpayer [CIR v. CA]
Tax statutes offering rewards are liberally  Taxation is the rule and exemption the
construed in favor of informers. [Penid v. Virata, exception, and therefore, he who claims
121 SCRA 166, 1983] exemption must be able to justify his claim
or right thereto, by a grant expressed in
Exceptions: terms “too plain to be mistaken and too
(1) The rule of strict construction as against the categorical to be misinterpreted.”[Comm. V.
government is not applicable where the Kiener Co. Ltd. (65 SCRA 142, 1975)]
language of the statute is plain and there is
no doubt as to the legislative intent. (see 51 Exceptions:
Am.Jur.368). In such case, the words (1) When the law itself expressly provides for a
employed are to be given their ordinary liberal construction, that is, in case of doubt,
meaning. Ex. Word “individual” was changed it shall be resolved in favor of exemption;
by the law to “person”. This clearly indicates and
that the tax applies to both natural and (2) When the exemption is in favor of the
juridical persons, unless otherwise expressly government itself or its agencies, or of
provided. religious, charitable, and educational
(2) The rule does not apply where the taxpayer institutions because the general rule is that
claims exemption from the tax. they are exempt from tax.

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(3) When the exemption is granted under Tax regulations (issued by the CIR/DOF
special circumstances to special classes of Secretary) whose purpose is to enforce or
persons. implement existing law must (a) be published in
(4) If there is an express mention or if the a newspaper of general circulation (see Art. 2 of
taxpayer falls within the purview of the the Civil Code), AND (b) filed with UP Law
exemption by clear legislative intent, the Center ONAR (per Chapter 2, Book VII of the
rule on strict construction does not apply. Admin Code of 1987 (EO 292) before they can
[Comm. V. Arnoldus Carpentry Shop, Inc., become effective.
159 SCRA 19, 1988].
Such rules once established and found to be in
Tax rules and regulations consonance with the general purposes and
The Secretary of Finance, upon objects of the law have the force and effect of
recommendation of the CIR, shall promulgate law, and so they must be applied and enforced.
all needful rules and regulations for the [De Guzman v. Lontok, 68 Phil. 495, 1939]. They
effective enforcement of the provisions of the are, therefore, just as binding as if the
NIRC. [Sec. 244]. regulations had been written in the law itself.
[Rep. of the Philippines v. Pilipinas Shell
Requisites for validity and effectivity of Petroleum Corporation, G.R. No. 173918, April 8,
regulations 2008]
(a) Reasonable NOTE: Administrative rules and regulations
(b) Within the authority conferred must always be in harmony with the provisions
(c) Not contrary to law and the Constitution (Art. of the law. In case of conflict with the law or the
7, Civil Code) Constitution, the administrative rules and
(d) Must be published regulations are null and void. As a matter of
policy, however, courts will declare a regulation
There are two kinds of administrative issuances: or provision thereof invalid only when the
the legislative rules and the interpretative rules. conflict with the law is clear and unequivocal.
A legislative rule is in the nature of subordinate
legislation, designed to implement a primary Administrative interpretations and opinions
legislation by providing the details thereof. An The power to interpret the provisions of the Tax
interpretative rule, on the other hand, is designed Code and other tax laws is under the exclusive
to provide guidelines to the law, which the and original jurisdiction of the Commissioner of
administrative agency is in charge of enforcing. Internal Revenue subject to review by the
An administrative rule should be published if it Secretary of Finance [Sec. 4, par.1, NIRC].
substantially adds to or increases the burden of
those governed. When an administrative rule is Revenue regulations are the formal
merely interpretative in nature, its applicability interpretation of the provisions of the NIRC and
needs nothing further than its bare issuance for other laws by the Secretary of Finance upon the
it gives no real consequence more than what recommendation of the Commissioner of
the law itself has already prescribed. When, Internal Revenue.
upon the other hand, the administrative rule
goes beyond merely providing for the means The Commissioner has the sole authority to
that can facilitate or render least cumbersome issue rulings but he also has the power to
the implementation of the law but substantially delegate said authority to his subordinates. He
adds to or increases the burden of those cannot, however, delegate to any of his
governed, it behooves the agency to accord at subordinate officials the power to issue rulings
least to those directly affected a chance to be of first impression (i.e., question involved is new
heard, and thereafter to be duly informed, and important) or to reverse, revoke or modify
before that new issuance is given the force and any existing ruling of the BIR [Sec. 7[B], NIRC].
effect of law. [Commissioner v. Court of Appeals,
G.R.No. 119761, 1996].

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Decisions of the Supreme Court and Court of SCOPE AND LIMITATION OF


Tax Appeals
Decisions of the Supreme Court applying or TAXATION
interpreting existing tax laws are binding on all INHERENT LIMITATIONS
subordinate courts and have the force and
effect of law. As provided for in Article 8 of the PUBLIC PURPOSE
Civil Code, they “form part of the law of the  The proceeds of the tax must be used (a) for
land”. They constitute evidence of what the law the support of the State or (b) for some
means. [People v. Licera, 65 SCRA 270, 1975]. recognized objects of government or directly
to promote the welfare of the community.
The same is also true with respect to decisions  Test: whether the statute is designed to
of the Court of Tax Appeals. However, by the promote the public interest, as opposed to the
nature of its jurisdiction, the decisions of this furtherance of the advantage of individuals,
court are still appealable to the Supreme Court although each advantage to individuals might
by a petition for review on certiorari. incidentally serve the public. [Pascual v.
Secretary of Public Works (1960)]
Penal provisions of tax laws  The protection and promotion of the sugar
Penal provisions of tax laws must be strictly industry is a matter of public concern; the
construed. It is not legitimate to stretch the legislature may determine within reasonable
language of a rule, however beneficent its bounds what is necessary for its protection
intention, beyond the fair and ordinary meaning and expedient for its promotion. [Lutz v
of its language. Araneta (1955)]
 The public purpose of a tax may legally exist
A penal statute should be construed strictly even if the motive which impelled the
against the State and in favor of the accused. legislature to impose the tax was to favor one
The reason for this principle is the tenderness of industry over another. [Tio v. Videogram
the law for the rights of individuals and the (1987)]
object is to establish a certain rule by conformity
to which mankind would be safe, and the Tests in Determining Public Purpose:
discretion of the court limited. [People v. (1) Duty Test - Whether the thing to be furthered
Purisima, 86 SCRA 524,1978]. by the appropriation of public revenue is
something which is the duty of the State as
Non-retroactive application of tax laws to a government to provide.
taxpayers (2) Promotion of General Welfare Test - Whether
General rule: Tax laws are prospective in the proceeds of the tax will directly promote
operation. The reason is that the nature and the welfare of the community in equal
amount of the tax could not be foreseen and measure.
understood by the taxpayer at the time the (3) Character of the Direct Object of the
transaction which the law seeks to tax was Expenditure – it is the essential character of
completed. the direct object of the expenditure which
must determine its validity as justifying a
Exception: Tax laws may be applied retroactively tax and not the magnitude of the interests
provided it is expressly declared or clearly the to be affected nor the degree to which the
legislative intent. [Lorenzo v. Posadas, 64 Phil. general advantage of the community, and
353, 1937]. thus the public welfare, may be ultimately
benefited by their promotion. Incidental
Exception to the exception: a tax law should not advantage to the public or to the State,
be given retroactive application when it would which results from the promotion of private
be so harsh and oppressive for in such case, the enterprises or business, does not justify their
constitutional limitation of due process would aid with public money. [Pascual v. Sec. of
be violated [Republic v. Fernandez,1956]. Public Works, G.R. No. L-10405, December
29, 1960]

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INHERENTLY LEGISLATIVE This is logical for after all, municipal


Stated in another way, taxation may corporations are merely instrumentalities of
exceptionally be delegated, subject to such the state for the better administration of the
well-settled limitations as – government in respect to matters of local
(1) The delegation shall not contravene any concern. [Pepsi-Cola Bottling Co. of the Phil.
constitutional provision or the inherent Inc. v. Mun. of Tanauan, 69 SCRA 460,
limitations of taxation; 1976]. Under the new Constitution,
(2) The delegation is effected either by the however, LGUs are now expressly given the
Constitution or by validly enacted legislative power to create its own sources of revenue
measures or statute; and and to levy taxes, fees and charges, subject
(3) The delegated levy power, except when the to such guidelines and limitations as the
delegation is by an express provision of the Congress may provide which must be
Constitution itself, should only be in favor of consistent with the basic policy of local
the local legislative body of the local or autonomy. [Art X, Sec 5, 1987 Constitution]
municipal government concerned. [Vitug and (2) Delegation to the President
Acosta] (a) to enter into Executive agreements, and
(b) To ratify treaties which grant tax
General Rule: Delegata potestas non potest exemption subject to Senate
delegari. The power to tax is exclusively vested in concurrence.
the legislative body and it may not be re-
delegated. The Congress may, by law, authorize the
President to fix within specified limits,
Judge Cooley enunciates the doctrine in the and subject to such limitations and
following oft-quoted language: "One of the restrictions as it may impose, tariff
settled maxims in constitutional law is that the rates, import and export quotas,
power conferred upon the legislature to make tonnage and wharfage dues, and other
laws cannot be delegated by that department duties or imposts within the framework
to any other body or authority. Where the of the national development program of
sovereign power of the state has located the the Government. [Art. 6, Sec. 28 (2),
authority, there it must remain; and by the 1987 Constitution]
constitutional agency alone the laws must be (3) Delegation to administrative agencies -
made until the Constitution itself is charged.” Limited to the administrative
[People v. Vera, G.R. No. L-45685, November 16, implementation that calls for some degree
1937] of discretionary powers under sufficient
standards expressed by law or implied from
Legislature has the power to determine the: the policy and purposes of the Act.
(1) nature (kind), (a) There are certain aspects of the taxing
(2) object (purpose), process that are not legislative and they
(3) extent (rate), may, therefore, be vested in an
(4) coverage (subjects) and administrative body. The powers which
(5) situs (place) of taxation. are not legislative include: (1) the power
to value property for purposes of
Exceptions taxation pursuant to fixed rules; (2) the
(1) Delegation to local governments - This power to assess and collect the taxes;
exception is in line with the general and (3) the power to perform any of the
principle that the power to create municipal innumerable details of computation,
corporations for purposes of local self- appraisement, and adjustment, and the
government carries with it, by necessary delegation of such details.
implication, the power to confer the power (b) The exercise of the above powers is
to tax on such local governments. [1 Cooley really not an exception to the rule as no
190]. delegation of the strictly legislative
power to tax is involved.

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(c) The powers which cannot be delegated personal (as distinguished from territorial)
include the determination of the jurisdiction of his government over him remains.
subjects to be taxed, the purpose of the In this case, the basis of the power to tax is not
tax, the amount or rate of the tax, the dependent on the source of the income nor
manner, means, and agencies of upon the location of the property nor upon the
collection, and the prescribing of the residence of the taxpayer but upon his relation
necessary rules with respect thereto. as a citizen to the state. As such citizen, he is
entitled, wherever he may be, inside or outside
TERRITORIAL of his country, to the protection of his
Rule: A state may not tax property lying outside government.
its borders or lay an excise or privilege tax upon
the exercise or enjoyment of a right or privilege SITUS OF TAXATION
derived from the laws of another state and Situs of taxation literally means the place of
therein exercise and enjoyed. (51 Am.Jur. 87-88). taxation. The basic rule is that the state where
the subject to be taxed has a situs may rightfully
Reasons: levy and collect the tax; and the situs is
(1) Tax laws (and this is true of all laws) do not necessarily in the state which has jurisdiction or
operate beyond a country’s territorial limits. which exercises dominion over the subject in
(2) Property which is wholly and exclusively question. Within the territorial jurisdiction, the
within the jurisdiction of another state taxing authority may determine the situs.
receives none of the protection for which a
tax is supposed to be a compensation. Factors that Determine Situs:
(1) Nature of the tax;
Note: Where privity of relationship exists. - It (2) Subject matter of the tax (person, property,
does not mean, however, that a person outside act or activity);
of state is no longer subject to its taxing powers. (3) Possible protection and benefit that may
The fundamental basis of the right to tax is the accrue both to the government and the
capacity of the government to provide benefits taxpayer;
and protection to the object of the tax. A person (4) Citizenship of the taxpayer;
may be taxed where there is between him and (5) Residence of the taxpayer;
the taxing state, a privity of the relationship (6) Source of income.
justifying the levy. Thus, the citizen’s income
may be taxed even if he resides abroad as the

INCOME TAX

Who is being taxed Source or Location


Citizenship Residency Within the PH Outside the Partly Within and
PH Partly Outside
Filipino Resident Taxable Taxable Taxable
Filipino Nonresident Taxable Not Only income from
Taxable within is Taxable
Alien Resident Taxable Not Only income
Taxable from within is
Taxable
Alien Nonresident Not Taxable Not Only income
Taxable from within is
Taxable

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PROPERTY TAX International Comity


Kind of Property Situs Comity - respect accorded by nations to each
Real property Where it is located (lex other because they are sovereign equals. Thus,
rei sitae) the property or income of a foreign state or
Tangible Personal Where property is government may not be the subject of taxation
property physically located by another state.
although the owner
resides in another Reasons:
jurisdiction. (1) In par in parem non habet imperium. As
Intangible personal Gen Rule: Domicile of between equals there is no sovereign
property (e.g., credits, the owner. Mobilia (Doctrine of Sovereign Equality among
bills receivables, bank sequuntur personam states under international law). One state
deposits, bonds, (movables follow the cannot exercise its sovereign powers over
promissory notes, person) another.)
mortgage loans, (2) In international law, a foreign government
judgments and Exceptions: may not be sued without its consent→
corporate stocks) (1) When property has useless to impose a tax which could not be
acquired a collected.
business situs in (3) Usage among states that when a foreign
another sovereign enters the territorial jurisdiction of
jurisdiction; or another, there is an implied understanding
(2) When the law that the former does not intend to degrade
provides for the its dignity by placing itself under the
situs of the subject jurisdiction of the other.
of tax (e.g., Sec 104, (4) Rule in international law that a foreign
NIRC) government may not be sued without its
consent so that it is useless to assess the
EXCISE TAX tax anyway since it cannot be collected.
Kind of Excise Tax Situs
Income Source of the income, Exemption of Government Entities, Agencies,
nationality or and Instrumentalities
residence of taxpayer
(Sec. 23, NIRC) If the taxing authority is the National
Donor’s Tax Location of property; Government:
nationality or General Rule: Agencies and instrumentalities of
residence of taxpayer the government are exempt from tax.
Estate Location of property;
nationality or Note: Unless otherwise provided by law, the
residence of taxpayer exemption applies only to government entities
through which the government immediately
BUSINESS TAX and directly exercises its sovereign powers. With
Kind of Business Tax Situs respect to government-owned or controlled
VAT Where transaction is corporations performing proprietary (not
made governmental) functions, they are generally
Sale of Real Property Where the real subject to tax in the absence of tax exemption
property is located provisions in their charters or the law creating
Sale of Personal Where the personal them.
Property property was sold

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Reasons for the exemption: (1) To levy a tax upon  Uniformity- All taxable articles or properties
public property would render necessary new of the same class shall be taxed at the same
taxes on other public property for the payment rate. [City of Baguio v. de Leon, 25 SCRA
of the tax so laid and thus, the government 938]. (1) Uniformity of operation throughout
would be taxing itself to raise money to pay over tax unit - The rule requires the uniform
for itself. (2) This immunity also rests upon application and operation, without
fundamental principles of government, being discrimination, of the tax in every place
necessary in order that the functions of where the subject of it is found. This means,
government shall not be unduly impeded. (1 for example, that a tax for a national
Cooley 263). (3) The practical effect of an purpose must be uniform and equal
exemption running to the benefit of the throughout the country and a tax for a
government is merely to reduce the amount of province, city, municipality, or barangay
money that has to be handled by the must be uniform and equal throughout the
government in the course of its operations: For province, city, municipality or barangay. (2)
these reasons, provisions granting exemptions Equality in burden – Uniformity implies
to government agencies may be construed equality in burden, not equality in amount
liberally in favor of non-tax liability of such or equality in its strict and literal meaning.
agencies. [Maceda v. Macaraig, Jr., 197 SCRA 771, The reason is simple enough. If legislation
1991]. imposes a single tax upon all persons,
properties, or transactions, an inequality
Exception: When it chooses to tax itself. Nothing would obviously result considering that not
can prevent Congress from decreeing that even all persons, properties, and transactions are
instrumentalities or agencies of the government identical or similarly situated. Neither does
performing governmental functions may be uniformity demand that taxes shall be
subject to tax. [Mactan Cebu Airport v Marcos, proportional to the relative value or amount
G.R. No. 120082 September 11, 1996] There is no of the subject thereof. Taxes may be
constitutional prohibition against the progressive.
government taxing itself. [Coll. v. Bisaya Land  Equity – 1) Uniformity in taxation is effected
Transportation, 105 Phil. 338, 1959]. through the apportionment of the tax
burden among the taxpayers which under
If the taxing authority is the local government the Constitution must be equitable.
unit: RA 7160 expressly prohibits LGUs from “Equitable” means fair, just, reasonable and
levying tax on the National Government, its proportionate to the taxpayer’s ability to
agencies and instrumentalities and other LGUs. pay. Taxation may be uniform but
[Local Government Code, Sec. 133 (o)] inequitable where the amount of the tax
imposed is excessive or unreasonable. (2)
CONSTITUTIONAL LIMITATIONS The constitutional requirement of equity in
taxation also implies an approach which
PROVISIONS DIRECTLY AFFECTING employees a reasonable classification of the
TAXATION entities or individuals who are to be affected
by a tax. Where the “tax differentiation is
Prohibition against imprisonment for non- not based on material or substantial
payment of poll tax differences,” the guarantee of equal
Art III, Sec 20, 1987 Constitution- No person protection of the laws and the uniformity
shall be imprisoned for debt or non-payment of rule will likewise be infringed.
a poll tax.  Taxation does not require identity or equality
under all circumstances, or negate the
Uniformity and equality of taxation authority to classify the objects of taxation. –
 Art VI, Sec 28(1), 1987 Constitution- The rule Classification to be valid, must, be
of taxation shall be uniform and equitable. reasonable and this requirement is not
Congress shall evolve a progressive system deemed satisfied unless:
of taxation.

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(a) it is based upon substantial distinctions In general, special assessments are not covered
which make real differences; by the exemption because by nature they are
(b) these are germane to the purpose of the not classified as taxes. [Apostolic Prefect v. City
legislation or ordinance; Treasurer of Baguio]
(c) the classification applies, not only to
present conditions, but, also, to future To be entitled to the exemption, the petitioner
conditions substantially identical to must prove that:
those of the present; and (1) it is a charitable institution
(d) the classification applies equally to all (2) its real properties are actually, directly and
those who belong to the same class. exclusively used for charitable purposes.
[Pepsi-Cola v. Butuan City, 24 SCRA 789]
 The progressive system of taxation would Revenue or income from trade, business or
place stress on direct rather than indirect other activity, the conduct of which is not
taxes, on non-essentiality rather than related to the exercise or performance of
essentiality to the taxpayer of the object of religious, educational and charitable purposes
taxation, or on the taxpayer’s ability to pay. or functions shall be subject to internal revenue
Example is that individual income tax taxes when the same is not actually, directly or
system that imposes rates progressing exclusively used for the intended purposes. [BIR
upwards as the tax base (taxpayer’s taxable Ruling 046-2000]
income) increases. A progressive tax,
however, must not be confused with a Test of Use of the property, and not
progressive system of taxation. Exemption the ownership
Actual, direct and exclusive
While equal protection refers more to like Nature of Use use for religious, charitable or
treatment of persons in like circumstances, educational purposes.
uniformity and equity refer to the proper relative Real property taxes on facilities
treatment for tax purposes of persons in unlike which are
circumstances. (1) actual,
(2) incidental to, or
Grant by Congress of authority to the (3) reasonably necessary for
President to impose tariff rates the accomplishment of said
Delegation of Tariff powers to the President purposes such as in the
under the flexible tariff clause [Art VI, Sec 28(2)], case of hospitals, a school
1987 Constitution], which authorizes the for training nurses, a
Scope of
President to modify import duties. [Sec. 401, nurses’ home, property to
Exemption
Tariff and Customs Code] provide housing facilities for
interns, resident doctors
Prohibition against taxation of religious, and other members of the
charitable entities, and educational entities hospital staff, and
Art VI, Sec 28(3), 1987 Constitution: recreational facilities for
(a) Charitable institutions, churches and student nurses, interns and
personages or convents appurtenant residents, such as athletic
thereto, mosques, non-profit cemeteries, fields. [Abra Valley College v.
and all lands, buildings, and improvements, Aquino]
(b) actually, directly, and exclusively used for
religious, charitable, or educational Test: whether an enterprise is charitable or not:
purposes shall be exempt from taxation. whether it exists to carry out a purpose
(c) The tax exemption under this constitutional recognized in law as charitable or whether it is
provision covers property taxes only and not maintained for gain, profit, or private
other taxes [Lladoc v. Commissioner, 14 advantage.
SCRA 292, 1965].

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A charitable institution does not lose its Prohibition against taxation of non-stock,
character as such and its exemption from taxes non-profit educational institutions
simply because it derives income from paying
patients, whether out-patient, or confined in the Art. XIV, Sec. 4, 1987 Constitution
hospital, or receives subsidies from the xxx
government, so long as the money received is (3) All revenues and assets of non-stock, non-
devoted or used altogether to the charitable profit educational institutions used actually,
object which it is intended to achieve; and no directly, and exclusively for educational
money inures to the private benefit of the purposes shall be exempt from taxes and
persons managing or operating the institution. duties.
Proprietary educational institutions,
“Exclusive" - possessed and enjoyed to the including those cooperatively owned, may
exclusion of others; debarred from participation likewise be entitled to such exemptions
or enjoyment; "Exclusively" - "in a manner to subject to the limitations provided by law,
exclude; as enjoying a privilege exclusively.” including restrictions on dividends and
provisions for reinvestment.
If real property is used for one or more (4) Subject to conditions prescribed by law, all
commercial purposes, it is not exclusively used grants, endowments, donations, or
for the exempted purposes but is subject to contributions used actually, directly, and
taxation. The words "dominant use" or exclusively for educational purposes shall be
"principal use" cannot be substituted for the exempt from tax.
words "used exclusively" without doing violence
to the Constitutions and the law. Solely is This provision covers only non-stock, non-profit
synonymous with exclusively. [Lung Center of educational institutions
the Philippines v. Quezon City (2004)]
The exemption covers income, property, and
Note: Lung Center did not necessarily overturn donor’s taxes, custom duties, and other taxes
the case of Abra Valley College v. Aquino (1988). imposed by either or both the national
Lung Center just provided a stricter government or political subdivisions on all
interpretation. In Abra Valley, the court held: The revenues, assets, property or donations, used
primary use of the school lot and building is the actually, directly and exclusively for educational
basic and controlling guide, norm and standard purposes. (In the case of religious and
to determine tax exemption, and not the mere charitable entities and non-profit cemeteries,
incidental use thereof. Under the 1935 the exemption is limited to property tax.)
Constitution, the trial court correctly held that
the school building as well as the lot where it is The exemption does not cover revenues derived
built, should be taxed, not because the second from, or assets used in, unrelated activities or
floor of the same is being used by the Director enterprise.
and his family for residential purposes Similar tax exemptions may be extended to
(incidental to its educational purpose), but proprietary (for profit) educational institutions
because the first floor thereof is being used for by law subject to such limitations as it may
commercial purposes. However, since only a provide, including restrictions on dividends and
portion is used for purposes of commerce, it is provisions for reinvestment. The restrictions are
only fair that half of the assessed tax be designed to insure that the tax-exemption
returned to the school involved. benefits are used for educational purposes.
Lands, buildings, and improvements actually,
directly and exclusively used for educational
purposes are exempt from property tax [Sec.
28[3], Art. VI, 1987 Constitution], whether the
educational institution is proprietary or non-
profit.

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Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3 Note:
Charitable institutions, Non-stock, non-profit (1) Local government units may, through
churches and educational ordinances duly approved, grant tax
parsonages or convents institutions. exemptions, incentives or reliefs under such
appurtenant thereto, terms and conditions as they may deem
mosques, non-profit necessary. [Sec. 192, LGC]
cemeteries, and all (2) The President of the Philippines may, when
lands, buildings, and public interest so requires, condone or
improvements, actually, reduce the real property tax and interest for
directly, and exclusively any year in any province or city or a
used for religious, municipality within the Metropolitan Manila
charitable, or Area. [Sec. 277, LGC]
educational purposes.
Property taxes Income, property, and Prohibition on use of tax levied for special
donor’s taxes and purpose
custom duties. All money collected on any tax levied for a
special purpose shall be treated as a special
Majority vote of Congress for grant of tax fund and paid out for such purpose only.
exemption If the purpose for which a special fund was
Art. VI Sec.28, 1987 Constitution created has been fulfilled or abandoned, the
xxx balance, if any, shall be transferred to the
(4) No law granting any tax exemption shall be general funds of the Government [see Gaston v.
passed without the concurrence of a majority Republic Planters Bank, 158 SCRA 626].
of all the Members of the Congress.
President’s veto power on appropriation,
Basis: The inherent power of the state to impose revenue, tariff bills
taxes carries with it the power to grant tax Art VI, Sec 27(2), 1987 Constitution
exemptions. (2) The President shall have the power to veto
any particular item or items in an
Exemptions may be created by: appropriation, revenue, or tariff bill, but the
(1) the Constitution or veto shall not affect the item or items to
(2) statute subject to constitutional limitations which he does not object.

Vote required for the grant of exemption: Non-impairment of jurisdiction of the


Absolute majority of the members of Congress Supreme Court
(at least ½ + 1 of ALL the members voting Art VIII, Sec 2, 1987 Constitution - he Congress
separately) shall have the power to define, prescribe, and
apportion the jurisdiction of the various courts
Vote required for withdrawal of such grant of but may not deprive the Supreme Court of its
exemption: Relative majority is sufficient jurisdiction over cases enumerated in Section 5
(majority of the quorum). hereof.

The provision guaranteeing equal protection of Art VIII, Sec 5(2,b), 1987 Constitution - The
the laws and that mandating the rule of Supreme Court shall have the following powers:
taxation shall be uniform and equitable likewise xxx (2) Review, revise, modify or affirm on
limit, although not expressly, the legislative appeal or certiorari, as the laws or the Rules of
power to grant tax exemption. Court may provide, final judgments and orders
Grants in the nature of tax exemptions: of lower courts in xxx (b) all cases involving the
(1) Tax amnesties legality of any tax, impost, assessment or toll or
(2) Tax condonations any penalty imposed in relation thereto.
(3) Tax refunds

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Even the legislative body cannot deprive the SC No appropriation or use of public money for
of its appellate jurisdiction over all cases religious purposes
coming from inferior courts where the Art VI, Sec 29, 1987 Constitution
constitutionality or validity of an ordinance or (1) No money shall be paid out of the Treasury
the legality of any tax, impost, assessment, or except in pursuance of an appropriation
toll is in question. [San Miguel Corp v. Avelino made by law.
(G.R. No. L-39699 March 14, 1979] (2) No public money or property shall be
appropriated, applied, paid, or employed,
Art VI, Sec 30, 1987 Constitution – No law shall directly or indirectly, for the use, benefit, or
be passed increasing the appellate jurisdiction support of any sect, church, denomination,
of the Supreme Court without its advice and sectarian institution, or system of religion, or
concurrence. of any priest, preacher, minister, other
religious teacher, or dignitary as such, except
Scope of Judicial Review in taxation: limited only when such priest, preacher, minister, or
to the interpretation and application of tax laws. dignitary is assigned to the armed forces, or
Its power does not include inquiry into the policy to any penal institution, or government
of legislation. Neither can it legitimately orphanage or leprosarium.
question or refuse to sanction the provisions of (3) All money collected on any tax levied for a
any law consistent with the Constitution. [Bisaya special purpose shall be treated as a special
Land Transportation Co v. Collector, May 29, fund and paid out for such purpose only. If
1959] the purpose for which a special fund was
created has been fulfilled or abandoned, the
Grant of power to the local government units balance, if any, shall be transferred to the
to create its own sources of revenue general funds of the Government.
LGUs have power to create its own sources of
revenue and to levy taxes, fees and charges, Provisions Indirectly Affecting Taxation
subject to such guidelines and limitations as the
Congress may provide which must be consistent Due process
with the basic policy of local autonomy. [Art X, Art III, Sec 1, 1987 Constitution – No person shall
Sec 5, 1987 Constitution] be deprived of life, liberty, or property without due
process of law, nor shall any person be denied
Flexible tariff clause the equal protection of the laws.
Delegation of Tariff powers to the President
under the flexible tariff clause [Art VI, Sec 28(2), (1) Substantive Due Process – An act is done
1987 Constitution] under the authority of a valid law or the
Constitution itself.
Flexible tariff clause: the authority given to the (2) Procedural Due Process – An act is done after
President, upon the recommendation of NEDA, compliance with fair and reasonable
to adjust the tariff rates under Sec. 401 of the methods or procedure prescribed by law.
Code in the interest of national economy,
general welfare and/or national security. Due Process in Taxation requirements:
(1) public purpose
Exemption from real property taxes (2) imposed within taxing authority’s territorial
Art VI, Sec 28(3), 1987 Constitution – Charitable jurisdiction
institutions, churches and personages or (3) assessment or collection is not arbitrary or
convents appurtenant thereto, mosques, non- oppressive
profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively
used for religious, charitable, or educational
purposes shall be exempt from taxation.

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The due process clause may be invoked where a (4) the classification applies equally well to all
taxing statute is so arbitrary that it finds no those belonging to the same class.
support in the Constitution, as where it can be
shown to amount to the confiscation of Religious freedom
property. [Sison v. Ancheta, 130 SCRA 654,1984] Art III, Sec 5, 1987 Constitution – No law shall be
made respecting an establishment of religion,
Instances of violations of the due process clause: or prohibiting the free exercise thereof. (non-
(1) If the tax amounts to confiscation of property; establishment clause)
(2) If the subject of confiscation is outside the
jurisdiction of the taxing authority; The free exercise and enjoyment of religious
(3) If the tax is imposed for a purpose other than profession and worship, without discrimination
a public purpose; or preference, shall forever be allowed. (free
(4) If the law which is applied retroactively exercise clause)
imposes just and oppressive taxes.
(5) If the law violates the inherent limitations on No religious test shall be required for the
taxation. exercise of civil or political rights.

Equal protection The free exercise clause is the basis of tax


Art III, Sec 1, 1987 Constitution - No person shall exemptions.
be deprived of life, liberty, or property without
due process of law, nor shall any person be The imposition of license fees on the
denied the equal protection of the laws. distribution and sale of bibles and other
religious literature by a non-stock, non-profit
All persons subject to legislation shall be missionary organization not for purposes of
treated alike under similar circumstances and profit amounts to a condition or permit for the
conditions both in the privileges conferred and exercise of their right, thus violating the
liabilities imposed. [1 Cooley 824-825; See Sison constitutional guarantee of the free exercise and
v. Ancheta,1984] enjoyment of religious profession and worship
which carries with it the right to disseminate
The doctrine does not require that persons or religious beliefs and information. [American
properties different in fact be treated in laws as Bible Society v. City of Manila, L-9637 April 30,
though they were the same. Indeed, to treat 1957]It is actually in the nature of a condition or
them the same or alike may offend the permit for the exercise of the right. This is
Constitution. What the Constitution prohibits is different from a tax in the income of one who
class legislation which discriminates against engages in religious activities or a tax on
some and favors others. As long as there are property used or employed in connection with
rational or reasonable grounds for so doing, those activities. It is one thing to impose a tax
Congress may, therefore, group the persons or on the income or property of a preacher. It is
properties to be taxed and it is sufficient “if all of quite another thing to exact a tax for the
the same class are subject to the same rate and privilege of delivering a sermon. [American Bible
the tax is administered impartially upon them.” Society v. City of Manila]
[1 Cooley 608].
The Constitution, however, does not prohibit
The equal protection clause is subject to imposing a generally applicable tax on the sale
reasonable classification. Classification is valid of religious materials by a religious
as long as: organization. [Tolentino v. Secretary of Finance,
(1) classification rests on substantial distinctions 235 SCRA 630,1994].
which make real differences,
(2) classification is germane to achieve the
legislative purpose,
(3) the law applies, all things being equal, to
both present and future conditions, and

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Non-impairment of obligations of contracts REQUISITES OF A VALID TAX


Art III, Sec 10, 1987 Constitution – No law (1) for a public purpose
impairing the obligation of contracts shall be (2) rule of taxation should be uniform
passed. (3) the person or property taxed is within the
jurisdiction of the taxing authority
The Contract Clause has never been thought as (4) assessment and collection is in consonance
a limitation on the exercise of the State's power with the due process clause
of taxation save only where a tax exemption has (5) The tax must not infringe on the inherent
been granted for a valid consideration. and constitutional limitations of the power
[Tolentino v. Secretary of Finance (1994)] of taxation

STAGES OR PROCESS OF TAXATION TAX AS DISTINGUISHED FROM OTHER


The exercise of taxation involves three stages, FORMS OF EXACTIONS
namely:
(1) Levy or imposition– This process involves Tarrif
the passage of tax laws or ordinances Taxes Tariff
through the legislature. The tax laws to be All embracing term to A kind of tax imposed
passed shall determine those to be taxed include various kinds on articles which are
(person, property or rights), how much is to of enforced traded internationally
be collected (the rate and the base of tax), contributions upon
and how taxes are to be implemented (the persons for the
manner of imposing and collecting tax). It attainment of public
also involves the granting of tax exemptions, purposes
tax amnesties or tax condonation.
(2) Assessment and Collection – This process Toll
involves the act of administration and Taxes Toll
implementation of tax laws by the executive Paid for the support of Paid for the use of
through its administrative agencies such as the government another’s property.
the Bureau of Internal Revenue or Bureau of Demand of Demand of
Customs. sovereignty proprietorship
(3) Payment – this process involves the act of Generally, no limit on Amount paid depends
compliance by the taxpayer in contributing the amount collected upon the cost of
his share to pay the expenses of the as long as it is not construction or
government. Payment of tax also includes excessive, maintenance of the
the options, schemes or remedies as may be unreasonable or public improvement
legally open or available to the taxpayer. confiscatory used.
(4) Refund – A claim for refund must first be Imposed only by the Imposed by the
filed with the Commissioner of Internal government government or by
Revenue. A suit or proceeding may be filed private individuals or
within two years from the date of payment of entities.
the tax or penalty regardless of any
supervening cause that may arise after A toll is a sum of money for the use of
payment. The Commissioner may, even something, generally applied to the
without a written claim therefor, refund or consideration which is paid for the use of a road,
credit any tax, where on the face of the bridge or the like, of a public nature. [1 Cooley
return, such payment appears clearly to have 77.]
been erroneously paid. [Sec. 229, NIRC]
The view has been expressed, however, that the
taking of tolls is only another method of taxing
the public for the cost of the construction and
repair of the improvement for the use of which
the toll is charged. [71 Am. Jur. 2d 351.]

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License Fee (2) The power to regulate as an exercise of


Taxes License and police power does not include the power to
Regulatory Fee impose fees for revenue purposes. The
Imposed under the Levied under the amount of tax bears no relation at all to the
taxing power of the police power of the probable cost of regulating the activity,
state for purposes of state. occupation, or property being taxed. [see
revenue. Progressive Development Corp. vs. Quezon
Forced contributions Exacted primarily to City, 172 SCRA 629, 1989]
for the purpose of regulate certain (3) An exaction, however, may be considered
maintaining businesses or both a tax and a license fee. This is true in
government occupations. the case of car registration fees which may
functions. be regarded as taxes even as they also serve
Generally, unlimited Should not as an instrument of regulation. If the
as to amount unreasonably exceed purpose is primarily revenue, or if revenue,
the expenses of is, at least, one of the real and substantial
issuing the license purposes, then the exaction is properly
and of supervision. called a tax. [Phil. Airlines, Inc. vs. Edu, 164
Imposed on persons, Imposed only on the SCRA 320, 1988]
property and to right to exercise a (4) But a tax may have only a regulatory
exercise a privilege. privilege purpose. The general rule, however, is that
Failure to pay does Failure to pay makes the imposition is a tax if its primary purpose
not necessarily make the act or business is to generate revenue, and regulation is
the act or business illegal. merely incidental; but if regulation is the
illegal. primary purpose, the fact that incidentally
revenue is also obtained does not make the
Penalty for non- imposition a tax. [see Progressive
payment: surcharges Development Corp. vs. Quezon City]
or imprisonment
(except poll tax). To be considered a license fee (PRIMARY
PURPOSE TEST):
License or permit fee is a charge imposed under (1) imposition must relate to an occupation or
the police power for purposes of regulation. activity that so engages the public interest in
health, morals, safety and development as to
License is in the nature of a special privilege, of require regulation for the protection and
a permission or authority to do what is within its promotion of such public interest;
terms. It makes lawful an act which would (2) imposition must bear a reasonable relation
otherwise be unlawful. A license granted by the to the probable expenses of regulation,
State is always revocable. [Gonzalo Sy Trading taking into account not only the costs of
vs. Central Bank of the Phil., 70 SCRA 570, 1976] direct regulation but also its incidental
consequences as well [Progressive
Importance of the distinctions Development Corp v. QC (1989)]
(1) It is necessary to determine whether a
particular imposition is a tax or a license fee Note: Taxes may also be imposed for regulatory
because some limitations apply only to one purposes. It is called regulatory tax.
and not to the other, and for the reason that
exemption from taxes may not include Fees may be properly regarded as taxes even
exemption from license fee. though they also served as an instrument of
regulation. If the purpose is primarily revenue,
or if revenue is, at least, one of the real and
substantial purposes, then the exaction is
properly called a tax.[PAL v. Edu (1988)]

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Special Assessment Taxes Debt


Taxes Special Assessment A person cannot be Imprisonment is a
Levied not only on Levied only on land. imprisoned for non- sanction for non-
land. payment of debt payment of tax,
Imposed regardless of Imposed because of (except when it arises except poll tax.
public improvements an increase in value of from a crime),
land benefited by Governed by the Governed by the
public improvement. special prescriptive ordinary periods of
Contribution of a Contribution of a periods provided for in prescription.
taxpayer for the person for the the NIRC.
support of the construction of a Does not draw Draws interest when it
government. public improvement interest except only is so stipulated or
It has general Exceptional both as to when delinquent where there is default.
application both as to time and locality. Imposed only by Can be imposed by
time and place. public authority private individual

A special assessment is not a personal liability A tax is not a debt in the ordinary sense of the
of the person assessed, i.e., his liability is limited word.
only to the land involved. It is based wholly on
benefits (not necessity). Penalty
Taxes Penalty
A charge imposed only on property owners Violation of tax laws Any sanction imposed
benefited is a special assessment rather than a may give rise to as a punishment for
tax notwithstanding that the statute calls it a imposition of penalty. violation of law or acts
tax. The rule is that an exemption from taxation deemed injurious
does not include exemption from special Generally intended to Designed to regulate
assessment. But the power to tax carries with it raise revenue conduct
the power to levy a special assessment. May be imposed only May be imposed by
by the government the government or
Note: The term "special levy" is the name used private individuals or
in the present Local Government Code (RA. No. entities
7160). A province, city, or municipality, or the Cannot be a subject of Can be a subject of
National Government, may impose a special set off or set off or
levy on lands especially benefited by public compensation compensation (see
works or improvements financed by it [see Sec. Art. 1279, Civil Code)
240, RA 7160].

Debt
KINDS OF TAXES
Taxes Debt
AS TO OBJECT
Based on laws Generally based on (1) Personal, Poll or Capitation Tax – tax of a
contract, express or fixed amount imposed on persons residing
implied. within a specified territory, whether citizens
Generally cannot be Assignable or not, without regard to their property or
assigned the occupation or business in which they
Generally paid in May be paid in kind. may be engaged (e.g. community (formerly
money residence) tax). Taxes of a specified amount
Cannot be a subject of Can be a subject of imposed upon each person performing a
set off or set off or certain act or engaging in a certain business
compensation compensation (see or profession are not, however, poll taxes.
Art. 1279, Civil Code) [71 Am.Jur.2d 357].

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(2) Property Tax – tax imposed on property, real AS TO TAX RATES


or personal, in proportion to its value or in (1) Specific Tax – a tax of a fixed amount
accordance with some other reasonable imposed by the head or number or by some
method of apportionment (e.g., real estate other standard of weight or measurement.
tax). The obligation to pay the tax is It requires no assessment (valuation) other
absolute and unavoidable and is not based than the listing or classification of the
upon the voluntary action of the person objects to be taxed (e.g., taxes on distilled
assessed. spirits, wines, and fermented liquors; cigars
(3) Privilege/Excise Tax – any tax which does and cigarettes)
not fall within the classification of a poll tax (2) Ad Valorem Tax – a tax of a fixed proportion
or a property tax. Thus, it is said that an of the value of the property with respect to
excise tax is a charge imposed upon the which the tax is assessed. It requires the
performance of an act, the enjoyment of a intervention of assessors or appraisers to
privilege, or the engaging in an occupation, estimate the value of such property before
profession, or business. The obligation to the amount due from each taxpayer can be
pay the tax is based on the voluntary action determined. The phrase “ad valorem”
of the person taxed in performing the act or means literally, “according to value.” (e.g.
engaging in the activity which is subject to real estate tax, excise tax on automobiles,
the excise. The term “excise tax” is non-essential goods such as jewelry and
synonymous with “privilege tax” and the perfumes, customs duties (except on
two are often used interchangeably (e.g., cinematographic films)).
income tax, value added tax, estate tax, (3) Mixed
donor’s tax).
AS TO PURPOSES
AS TO BURDEN OR INCIDENCE (1) General or Fiscal Tax –levied for the general
(1) Direct Taxes – taxes which are demanded or ordinary purposes of the Government,
from persons who also shoulder them; taxes i.e., to raise revenue for governmental needs
for which the taxpayer is directly or primarily (e.g. income tax, value added tax, and
liable, or which he cannot shift to another almost all taxes).
(eg. Income tax, estate tax, donor’s tax, (2) Special/Regulatory/ Sumptuary Tax –levied
community tax) for special purposes i.e., to achieve some
(2) Indirect Taxes – taxes which are demanded social or economic ends irrespective of
from one person in the expectation and whether revenue is actually raised or not
intention that he shall indemnify himself at (e.g. protective tariffs or customs duties on
the expense of another, falling finally upon imported goods to enable similar products
the ultimate purchaser or consumer; taxes manufactured locally to compete with such
levied upon transactions or activities before imports in the domestic market).
the articles subject matter thereof, reach
the consumers who ultimately pay for them Tariff duties intended mainly as a source of
not as taxes but as part of the purchase revenue are relatively low so as not to
price. Thus, the person who absorbs or discourage imports.
bears the burden of the tax is other than the
one on whom it is imposed and required by AS TO SCOPE (OR AUTHORITY IMPOSING
law to pay the tax. Practically all business THE TAX)
taxes are indirect (e.g., VAT, percentage tax; (1) National – taxes imposed by the national
excise taxes on specified goods; customs government (e.g. national internal revenue
duties). taxes, customs duties, and national taxes
imposed by laws).
(2) Municipal or Local – taxes imposed by local
governments (e.g. business taxes that may
be imposed under the Local Government
Code; professional tax).

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AS TO GRADUATION
(1) Proportionate – The rate of tax is based on a National Internal Revenue
fixed percentage of the amount of the
property, receipts or other basis to be taxed.
Code of 1997 as amended
Example: real estate tax, value added tax,
and other percentage taxes.
(NIRC)
(2) Progressive – The rate of tax increases as the
tax base or bracket increases. Example: INCOME TAXATION
income tax, estate tax, donor’s tax.
(3) Digressive – A fixed rate is imposed on a Income Tax is defined as a tax on all yearly
certain amount and diminishes gradually on profits arising from property, professions,
sums below it. The tax rate in this case is trades, or offices, or as a tax on the person’s
arbitrary because the increase in tax rate is income, emoluments, profits and the like [Fisher
not proportionate to the increase of tax v. Trinidad, 43 Phil. 981].
base.
(4) Regressive – The rate of tax decreases as the It may be succinctly defined as a tax on income,
tax base or bracket increases. There is no whether gross or net, realized in one taxable
regressive tax in the Philippines. year.

Regressive/progressive system of taxation - A Income tax is generally classified as an excise


regressive tax must not be confused with the tax. It is not levied upon persons, property, funds
regressive system of taxation. or profits but upon the right of a person to
(a) In a society where the majority of the people receive income or profits.
have low incomes, regressive taxation system
exists when there are more indirect taxes In the Philippines, income tax is imposed on the
imposed than direct taxes. Since the low- net income of citizens, resident aliens, domestic
income sector of the population as a whole corporations, and nonresident aliens and
buys more consumption goods on which the foreign corporations engaged in trade or
indirect taxes are collected, the burden of business within the Philippines [Sec. 24 (A), Sec.
indirect taxes rests more on them than on 25 (A), Sec. 27 (A), Sec. 28 (A), NIRC]. It is also
the more affluent groups. There should be imposed on the gross income of nonresident
no objection if indirect taxes are raised on aliens and foreign corporations-not doing
luxury items consumed mainly by the higher business in the Philippines [Sec. 25 (B), (C), (D),
income groups and reduced on basic Sec. 28 (B), NIRC]. It is further imposed as a final
commodities consumed by the lower tax on certain passive income (interests,
income segments of society. royalties, prizes, and other winnings), cash and
(b) Studies reveal that the progressive elements property dividends, capital gains from the sale
of the income and other direct taxes have of domestic shares of stock and real property
not sufficiently offset the regressive effects classified as capital assets located in the
of the indirect taxes as a whole. Philippines [Sec. 24 (B), Sec. 25 (A) (2), (3), Sec.
27 (D), Sec. 28 (A), NIRC].
A progressive tax is, therefore, also different
from a progressive system of taxation. Income Tax Law aims to mitigate the evils
arising from the inequalities of wealth by a
progressive scheme of taxation which places the
burden of on those best able to pay [Madrigal v.
Rafferty & Concepcion, G.R. No. L-12287, August
7, 1918].

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INCOME TAX SYSTEMS PROGRESSIVE


The tax rate increases as the tax base increases.
GLOBAL TAX SYSTEM It is founded on the ability to pay principle and is
Under a global tax system, it did not matter consistent with Sec. 28, Art. VI, 1987
whether the income received by the taxpayer is Constitution.
classified as compensation income, business or
professional income, passive investment COMPREHENSIVE
income, capital gain, or other income. All items The Philippines has adopted the most
of gross income, deductions, and personal and comprehensive system of imposing income tax
additional exemptions, if any, are reported in by adopting the citizenship principle, the
one income tax return, and one set of tax rates residence principle, and the source principle.
are applied on the tax base. Any of the three principles is enough to justify
the imposition of income tax on the income of a
SCHEDULAR TAX SYSTEM resident citizen and a domestic corporation that
Different types of incomes are subject to are taxed on a worldwide income.
different sets of graduated or flat income tax
rates. The applicable tax rate(s) will depend on SEMI-SCHEDULAR OR SEMI-GLOBAL TAX
the classification of the taxable income and the SYSTEM
basis could be gross income or net income. The Philippines follows the semi-schedular or
Separate income tax returns (or other types of semi-global system of income taxation,
return applicable) are filed by the recipient of although certain passive investment incomes
income for the particular types of income and capital gains from sale of capital assets
received. (namely: (a) shares of stock of domestic
corporations, and (b) real property) are subject
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX to final taxes at preferential tax rates.
SYSTEM
All compensation income, business or NATIONAL TAX
professional income, capital gain and passive It is imposed and collected by the National
income not subject to final tax, and other Government throughout the country.
income are added together to arrive at the gross
income, and after deducting the sum of EXCISE TAX
allowable deductions, the taxable income is It is imposed on the right or privilege of a person
subjected to one set of graduated tax rates or to receive or earn income. It is not a personal tax
normal corporate income tax. With respect to or a property tax.
such income the computation is global.
For those other income not mentioned above, CRITERIA IN IMPOSING PHILIPPINE
they remain subject to different sets of tax rates INCOME TAX
and covered by different returns.
Citizenship or Nationality Principle
Note: The Philippines, under EO 37 (1986) and A citizen of the Philippines is subject to
RA 8424 (1998), follows a semi-schedular and Philippine income tax
semi-global tax system. (a) on his worldwide income, if he resides in the
Philippines; or
FEATURES OF THE PHILIPPINE INCOME TAX (b) only on his income from sources within the
LAW Philippines, if he qualifies as a nonresident
DIRECT TAX citizen.
The tax burden is borne by the income recipient
upon whom the tax is imposed. Residence Principle
A resident alien is liable to pay Philippine
income tax on his income from sources within
the Philippines but is exempt from tax on his
income from sources outside the Philippines.

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UP LAW BOC TAXATION LAW 1 TAXATION LAW

Source of Income Principle (2) Fiscal Year - Accounting period of 12 months


An alien is subject to Philippine income tax ending on the last day of any month other
because he derives income from sources within than December [Sec. 22(Q), NIRC].
the Philippines. Thus, a non-resident alien or (3) Short Period- Accounting period which starts
non-resident foreign corporation is liable to pay after the first month of the tax year or ends
Philippine income tax on income from sources before the last month of the tax year (less
within the Philippines, such as dividend interest, than 12 months).
rent, or royalty, despite the fact that he has not
set foot in the Philippines. INSTANCES WHEREBY SHORT
ACCOUNTING PERIOD ARISES
The income tax law adopts the most (1) When a corporation is newly organized.
comprehensive tax situs of nationality and (2) When a corporation is dissolved.
residence of the taxpayer and of the generally (3) When a corporation changes accounting
accepted and internationally recognized income period.
tax base. [Tan v. De Rosario, G.R. No. 109289 (4) When the taxpayer dies.
October 3, 1994] Resident citizens and domestic
corporations are subjected to income tax "Taxable year" means the calendar year, or the
liability on their income from all sources within fiscal year ending during such calendar year,
and without the Philippines. The law adopts the upon the basis of which the net income is
source rule with respect to income received by computed under Title II (Tax on Income).
taxpayers, other than resident citizens and
domestic corporations. Taxable year includes, in the case of return
made for a fractional part of a year under the
TYPES OF PHILIPPINE INCOME TAX provisions of Title II, the period for which such
(1) Graduated income tax on individuals return is made [Sec. 22 (P), NIRC].
(2) Normal corporate income tax on
corporations WHEN CALENDAR YEAR SHALL BE USED IN
(3) Minimum corporate income tax on COMPUTING TAXABLE INCOME:
corporations (1) If the taxpayer's annual accounting period is
(4) Special income tax on certain corporations other than a fiscal year; or
(5) Capital gains tax on sale or exchange of (2) if the taxpayer has no annual accounting
shares of stock of a domestic corp. classified period; or
as capital assets (3) If the taxpayer does not keep books of
(6) Capital gains tax on sale or exchange of real accounts; or
property classified as capital asset (4) If the taxpayer is an individual [Sec. 43,
(7)Final withholding tax on certain passive NIRC].
investment income paid to residents
(8) Final withholding tax on income payments KINDS OF TAXPAYERS
made to non-residents
(9) Fringe benefits tax on fringe benefits of DEFINITION OF EACH KIND OF TAXPAYER
supervisory or managerial employees Taxpayer- any person subject to tax imposed by
(10) Branch profit remittance tax Title II of the Tax Code [Sec. 22(N), NIRC].
(11) Tax on improperly accumulated earnings of
corporations Person- means an individual, a trust, estate or
corporation [Sec. 22(A), NIRC].
TAXABLE PERIOD
The accounting periods used in determining the For income tax purposes, taxpayers are
taxable income of taxpayers are: classified generally as follows:
(1) Calendar Year - Accounting period of 12 (1) Individuals;
months ending on the last day of (2) Corporations;
December (3) Partnerships; and
(4) Estates and Trusts.

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UP LAW BOC TAXATION LAW 1 TAXATION LAW

Primary (c) Citizen of the Philippines who works and


Sub-Classification(s)
Classification derives income from abroad and whose
Citizens of Residents citizens employment thereat requires him to be
the physically present abroad most of the
Non-resident citizens time during the taxable year.
Philippines
Residents (d) Citizen previously considered as non-
Engaged in resident citizen and who arrives in the
Trade or Philippines at any time during the
Business in taxable year to reside permanently in the
the Philippines  Treated as NRC with
Philippines respect to his income derived from
Aliens Non- sources abroad until the date of his
Individuals Not
residents arrival in the Philippines
Engaged in
Trade or
Business in Aliens
the (1) Resident Alien
Philippines
An alien actually present in the Philippines who
Special is not a mere transient or sojourner is a resident
Classes of Minimum Wage Earner for income tax purposes.
Individuals
No/Indefinite Intention = RESIDENT: If he lives in
Domestic Corporations the Philippines and has no definite intention as
Resident to his stay, he is a resident. A mere floating
Corporations Corporations intention indefinite as to time, to return to
Foreign Corporations
Non-resident another country is not sufficient to constitute
Corporations him a transient.
Estates and
Trusts Definite Intention = TRANSIENT: One who comes
General Business Partnership to the Philippines for a definite purpose, which
Partnerships
General Professional Partnership in its nature may be promptly accomplished, is a
Co- transient.
ownerships
Exception: Definite Intention but such cannot be
promptly accomplished; If his purpose is of such
nature that an extended stay may be necessary
INDIVIDUAL TAXPAYERS for its accomplishment, and thus the alien
makes his home temporarily in the Philippines,
Citizens then he becomes a resident.
(1) Resident Citizens (RC)
(2) Non-resident Citizens (NRC) (2) Non-resident Alien
(a) Citizen of the Philippines who
establishes to the satisfaction of the Engaged in trade or business within the
Commissioner the fact of his physical Philippines - If the aggregate period of his stay
presence abroad with a definite intention in the Philippines is more than 180 days during
to reside therein. any calendar year.
(b) Citizen who leaves the Philippines during
the taxable year to reside abroad, either Not engaged in trade or business within the
as an immigrant or for employment on a Philippines - If the aggregate period of his stay
permanent basis. in the Philippines does not exceed 180 days.

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Special class of individual employees


Minimum Wage Earner (b) Non-resident foreign corporations –
(a) A worker in the private sector paid the Foreign corporation not engaged in
statutory minimum wage; trade or business within the Philippines
(b) An employee in the public sector with
compensation income of not more than the (3) Joint venture and consortium – Essential
statutory minimum wage in the non-agricultural factors of a joint venture or consortium:
sector where he/she is assigned. (a) Each party must make a contribution,
not necessarily of capital but by way of
Corporations services, skill, knowledge, material or
 Includes all types of corporations, money;
partnerships (no matter how created or (b) Profits must be shared among the
organized), joint stock companies, joint parties;
accounts, associations, or insurance (c) There must be a joint proprietary interest
companies, whether or not registered with and right of mutual control over the
the SEC. subject matter of the enterprise;
 Excludes general professional partnerships (d) There is a single business transaction.
(GPP), joint venture or consortium formed
for the purpose of undertaking construction Partnership
projects, joint venture or consortium The Tax Code mandates that every other type of
engaging in petroleum, coal, geothermal business partnership is subject to income tax in
and other energy operations pursuant to an the same manner and at the same rate as an
operating or consortium agreement under a ordinary corporation.
service contract with the government.
General Professional Partnerships (GPP)
(1) Domestic corporations – A corporation A general professional partnership is a
created and organized under its laws (the partnership formed by persons for the sole
law of incorporation test). purpose of exercising their common profession,
(2 )Foreign corporations – A corporation which no part of the income of which is derived from
is not domestic. engaging in any trade or business.
(a) Resident foreign corporations – Foreign
corporation engaged in trade or Not considered as a taxable entity for income
business within the Philippines. tax purposes. The partners themselves are
liable, not the partnership, are liable for the
Doing business – The term implies a payment of income tax in their individual
continuity of commercial dealings and capacities.
arrangements, and contemplates, to that
extent, the performance of acts or works Estates and Trusts
or the exercise of some of the functions Taxable estates and trusts are taxed in the
normally incident to, and in progressive same manner and on the same basis as an
prosecution of commercial gain or for the individual.
purpose and object of the business
organization. [RA 7042, Foreign Co-ownership
Investments Act] For income tax purposes, the co-owners in a co-
In order that a foreign corporation may ownership report their share of the income from
be regarded as doing business within a the property owned in common by them in their
State, there must be continuity of individual tax returns for the year and the co-
conduct and intention to establish a ownership is not considered as a separate
continuous business, such as the taxable entity or a corporation.
appointment of a local agent, and not
one of a temporary character [CIR v.
BOAC]

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UP LAW BOC TAXATION LAW 1 TAXATION LAW

INCOME TAXATION
Taxpayer Within Without
DEFINITION Resident Citizen  
Income Tax is defined as a tax on all yearly Non-resident Citizen and  X
profits arising from property, professions, OCW
trades, or offices, or as a tax on the person’s Resident and Non-resident  X
income, emoluments, profits and the like [Fisher Alien
v. Trinidad]. Domestic Corporation  
Foreign Corporation  X
NATURE
Income tax is generally classified as an excise INCOME
tax. It is not levied upon persons, property, funds DEFINITION
or profits but upon the right of a person to (a) income means all wealth which flows to the
receive income or profits. taxpayer other than a mere return of
capital. It includes gain derived from the
GENERAL PRINCIPLES sale or other disposition of capital assets.
 A resident citizen of the Philippines is Income is a gain derived from labor or
taxable on all income derived from sources capital, or both labor and capital; and
within and without the Philippines; includes the gain derived from the sale or
 A nonresident citizen is taxable only on exchange of capital assets.
income derived from sources within the (b) It is an amount of money coming to a person
Philippines; within a specified time, whether as payment
 An individual citizen of the Philippines who for services, interest or profit from
is working and deriving income from abroad investment. Unless otherwise specified. It
as an overseas contract worker is taxable means cash or its equivalent. Income can
only on income derived from sources within also be thought of as a flow of the fruits of
the Philippines: one's labor. [Conwi v. CTA, G.R. No. 48532
Provided, That a seaman shall be treated as August 31, 1992]
an overseas contract worker if he is (c) Income may be received in the form of cash,
(a) citizen of the Philippines; and property, service, or a combination of the
(b) receives compensation for services three.
rendered abroad as a member of the NATURE
complement of a vessel engaged Income includes earnings, lawfully or unlawfully
exclusively in international trade acquired, without consensual recognition, express
 An alien individual, whether a resident or or implied, of an obligation to repay and without
not of the Philippines, is taxable only on restriction as their disposition. [James v. US, 366
income derived from sources within the US 213]
Philippines;
 A domestic corporation is taxable on all WHEN INCOME IS TAXABLE
income derived from sources within and Existence of taxable income
without the Philippines; and (a) There is INCOME, gain or profit
 A foreign corporation, whether engaged or (b) RECEIVED or REALIZED during the taxable
not in trade or business in the Philippines, is year
taxable only on income derived from (c) NOT EXEMPT from income tax
sources within the Philippines. [Sec. 23] (i) "The fact is that property is a tree, income
is the fruit; labor is a tree, income the
fruit; capital is a tree, income the fruit."
A tax on income is not a tax on property.
"Income," as here used, can be defined
as "profits or gains." [Madrigal vs.
Rafferty (1918)]

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UP LAW BOC TAXATION LAW 1 TAXATION LAW

(ii) A mere increase in the value of property is The doctrine of constructive receipt is designed
not income, but merely unrealized to prevent the taxpayer using the cash basis
increase in capital. [1 Mertens, Sec. from deferring or postponing the actual receipt
5.06]The increase in the value of of taxable income. Without the rule, the
property is also known as appraisal taxpayer can conveniently select the year in
surplus or revaluation increment. which he will report the income. [Dimaampao]

WHEN IS THERE INCOME? For a taxpayer using the accrual method, the
When there is a FLOW of wealth other than determinative question is, when do the facts
mere return of capital during the taxable period. present themselves in such a manner that the
taxpayer must recognize income or expense?
Income v. Capital [Madrigal v. Rafferty] The accrual of income and expense is permitted
Income Capital when the all-events test has been met. This test
Denotes a flow of Fund or property requires: (1) fixing of a right to income or liability
wealth during a existing at one distinct to pay; and (2) the availability of the reasonable
definite period of point in time. accurate determination of such income or
time. liability [CIR v. Isabela Cultural Corporation].
Service of wealth Wealth itself
Subject to tax Return of capital is The “As If” Theory of Constructive Income is
not subject to tax designed to prevent a cash basis taxpayer to
Fruit Tree delay reporting of income. It also resumes the
existence of income on transactions supposedly
REALIZATION OF INCOME not subject to tax. [Valencia and Roxas]

Tests of Realization RECOGNITION OF INCOME


Actual vis-à-vis Constructive receipt
(1) Actual receipt – Income is actually reduced to Methods of accounting in reporting income
possession. The realization of gain may take and expenses
the form of actual receipt of cash.
(2) Constructive receipt– An income is considered Cash method vis-à-vis Accrual method–Cash
constructively received when it is credited to method generally reports income upon cash
the account of, or segregated in favour of a collection and reports expenses upon payment.
person. The person may withdraw the said If earned from rendering of services, income is
account credited in his favor anytime without to be reported in the year when collected,
any substantial limitations or conditions upon whether earned or unearned. [Sec. 108, NIRC].
which payment or enjoyment is to be made or
exercised. Examples of constructive receipt Accrual method generally reports income when
of income are: earned and reports expense when incurred. If
(1) Interest credited on savings bank deposit earned from sale of goods, income is to be
(2) Matured interest coupons not yet reported in the year of sale, irrespective of
collected by the taxpayer collection. [Sec. 106, NIRC].
(3) Dividends applied by the corporation
against the indebtedness of a Income realized pertains to the accrual basis of
stockholder accounting, when recognition of income in the
(4) Share in the profit of a partner in a books is when it is realized and expenses are
general professional partnership, recognized when incurred. It is the right to
although not yet distributed, is receive and not the actual receipt that
regarded as constructively received; or determines the inclusion of the amount in gross
(5) Intended payment deposited in court income
(consignation).

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Examples: Sales of real property considered as capital


(1) interest or rent income earned but not yet asset by individuals
received An Individual who sells or disposes of real
(2) rent expense accrued but not yet paid property, considered as capital asset, if initial
(3) wages due to workers but remaining unpaid payments do not exceed 25% of the selling
price, may pay the capital gains tax in
Generally, trade and manufacturing businesses installments [Sec. 49(C), NIRC]. Note: This sale
use accrual method while servicing businesses is subject to a capital gains tax of 6% based on
use cash method. If the service business opted the selling price or zonal value, whichever is
to report on accrual basis, such method can higher.
only be applied when it comes to reporting of
expense. To prevent tax evasion, individual Note: Initial payments are the total payments
taxpayers whose business consists of the sale of received in cash or property (other than
inventories cannot use cash method. [Valencia evidences of indebtedness such as promissory
and Roxas] notes, mortgages given) by the seller upon or
before the execution of the instrument of sale
Installment method vis-à-vis Deferred method during the taxable year of the disposition of the
vis-à-vis Percentage of completion method (in real property. Considered as initial payments
long- term contracts) are the downpayment and all other payments
received by the seller during the year of sale,
Installment Method is a special method of including excess mortgage assumed by the
accounting whereby income on installment buyer over the basis or cost of the property sold.
sales of property during the year is allowed to be It contemplates at least one other payment in
reported in installments in proportion to the addition to the initial payment. If the entire
installment payments actually received in that purchase price is to be paid in a lump sum in a
year, which the gross profit realized or to be later year, there being no payment during the
realized when payment is completed, bears to first year, the income may not be returned on
the total contract price [Sec. 49, NIRC]. the installment basis.

Income may be reported on the installment Selling Price - is the total amount or price of the
basis in the following cases: sale including the cash or property received and
all notes of the buyer or mortgages assumed by
Sales of personal property by a dealer – A dealer him.
who regularly sells or otherwise disposes of
personal property on the installment plan Contract Price is the amount which the
purchaser contracts to pay the seller in cash. It
Sales of real property (inventory) and casual includes the excess of the mortgages assumed
sales of personalty over the cost or other basis of the property sold
(1) casual sale or other casual disposition of
personal property (not of a kind which Change from accrual to installment basis
would be includible in the inventory of the A taxpayer entitled to the benefits of a dealer in
taxpayer if on hand at the close of the personal property may elect for any taxable year
taxable year) where the selling price > to report his taxable income on the installment
P1,000 and the initial payments do not basis. In computing his income for the year of
exceed 25% of the selling price, or change or any subsequent year, amounts
(2) sale or other disposition of real property actually received during any such year on
(inventory), if the initial payments do not account of sales or other dispositions of
exceed 25% of the selling price. Note: This property made in any prior year shall not be
sale is subject to creditable withholding tax excluded. [see Sec. 49(D), NIRC].
and normal tax which is 30% for corporate
taxpayer or 5% to 32% for individual
taxpayer.

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Deferred Payment Percentage of completion (in long-term


(a) If the initial payments exceed 25% of the contracts)
selling price, the gain realized may be Income from long-term construction contracts
reported on a deferred payment method. refers to the earnings derived from construction
(b) The taxable gain or income returnable of a building, installation or other construction
during the year of sale is the difference contract usually covering a period in excess of
between the selling or contract price and one year. When income is derived from long-
the cost of the property, even though the term construction contracts, it is generally
entire purchase price has not been actually reported on the basis of percentage of
received in the year of sale. completion made every year that will be
(c) The obligations of the purchaser received by evidence by the certificates of engineers or
the vendor are to be considered as architects. The reportable income is calculated
equivalent of cash. by deducting from the contract price the actual
cost of construction.
Personal Property Real Property
Dealer
In recognizing realized revenue for long-term
Dealer in personal Installment method;
construction contracts, accountants usually
property who Provided, initial
regularly sells in payments do not
follow two methods:
installment plan: exceed 25% of selling
Installment method price (a) Completed contract method – requires
recognition of revenue only when the
*held as ordinary If exceeds 25%-- contract is finally completed; and
asset regardless of Deferred payment (b) Percentage of completion method – requires
amount of percentage method recognition of income based on the
of initial payments progress of work.
*held as inventory
Casual Sale Long-term contracts are no longer allowed
Installment method; to be reported based on the completed
Provided: contract method basis beginning January 1,
1998 pursuant to RA 8424; hence, all long-
(1) Selling price term contracts must be reported using the
exceeds php1,000 percentage of completion method.
(2) Initial
payments do not Tests in determining whether income is
exceed 25% of earned for tax purposes
selling price (1) Realization test – no taxable income until
there is a separation from capital of
If either of 2 or both something of exchangeable value, thereby
conditions not met—
supplying the realization or transmutation
Deferred payment
which would result in the receipt of income
method
(Eisner v Macomber). Thus, stock dividends
*personal property are not income subject to income tax on the
not considered part of the stockholder when he merely
inventory holds more shares representing the same
Sale by Individuals equity interest in the corporation that
Installment method; declared stock dividends (Fisher v Trinidad).
Provided, initial
payments do not
exceed 25% of selling
price

*held as capital asset

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(2) Claim of right doctrine (or Doctrine of GROSS INCOME


Ownership, command, or control) – a
taxable gain is conditioned upon the DEFINITION
presence of a claim of right to the alleged Gross Income means the pertinent items of
gain and the absence of a definite income referred to in Section 32(A) of the Tax
unconditional obligation to return or repay Code. It includes all income derived from
that which would otherwise constitute a whatever source (unless exempt from tax by
gain. To collect a tax would give the law), including, but not limited to, the following
government an unjustified preference as to items:
the part of the money that rightfully and (1) Gross income derived from the conduct of
completely belongs to the victim. The Trade or business or the exercise of a
embezzler’s title is void. profession
(3) Economic benefit test, Doctrine of Proprietary (2) Rents
Interest – any economic benefit to the (3) Interests
employee that increases his net worth, (4) Prizes and winnings
whatever may have been the mode by which (5) Compensation for services in whatever form
it is effected, is taxable. Thus, in stock paid, including, but not limited to fees,
options, the difference between the fair salaries, wages, commissions, and similar
market value of the shares at the time the items
option is exercised and the option price (6) Annuities
constitutes additional compensation (7) Royalties
income to the employee at the time of (8) Dividends
exercise (not upon the grant or vesting of (9) Gains derived from dealings in property
the right). (10) Pensions
(4) Severance Test - Under the doctrine of (11) Partner’s distributive share from the net
severance test of income, in order that income of the general professional
income may exist, is necessary that there be partnership (GPP) [Sec 32A, NIRC]
a separation from capital of something of
exchangeable value. The income required a  The list here is NOT exclusive
realization of gain.  The term “gross income” whenever used
(5) All Events Test – Under the accrual method without qualification, is comprehensive, as
of accounting, expenses are deductible in defined above, and is different from the
the taxable year in which: (1) all events have limited meaning of gross income for
occurred which determine the liability; and purposes of minimum corporate income tax
(2) the amount of liability can be or the gross income tax of corporations.
determined with reasonable accuracy. Gross income includes gross profit from
ordinary business and other income not
“All events test” requires: subject to passive income tax or final
(a) Fixing a right to income or liability to withholding tax.
pay; and  Gross income means income, gain, or profit
(b) The availability of reasonably accurate subject to income tax.
determination of such income or
 It includes the compensation for personal
liability.
services, business income, profits, and
income derived from any source whatever
All of the above tests are followed in the
(whether legal or illegal)
Philippines for purposes of determining whether
income is received by the taxpayer or not during  It excludes unless it is exempt from income
the year [Mamalateo]. tax under the Constitution, tax treaty, or
statute or it is subject to final withholding
income tax in accordance with the semi-
global or semi-schedular tax system
adopted by the Philippines.

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 It is the difference between gross rule, incomes earned within the Philippines are
sales/revenue and the cost of goods taxable.
sold/services. The definition of gross (2) Derived entirely from sources without the
income is broad and comprehensive to Philippines [Sec. 42C, NIRC]. Examples:
include proceeds from sales of transport compensation for labor or service rendered by
documents. [Mamalateo] overseas contract workers; interest on bonds,
notes, deposits and the like earned abroad;
CONCEPT OF INCOME FROM WHATEVER dividends declared by nonresident foreign
SOURCE DERIVED corporation; rental and royalties from property
“Income derived from whatever source” means located outside the Philippines; and gains,
inclusion of all income not expressly exempted profits and income from sale of real property as
within the class of taxable income under the well as from personal property located outside
laws irrespective of the voluntary or involuntary the Philippines. As a rule, incomes earned with
action of the taxpayer in producing the gains, the Philippines are taxable.
and whether derived from legal or illegal (3) Derived from sources partly within or partly
sources (i.e. gambling, extortion, smuggling, without the Philippines. Examples: gains, profits
etc.) and income from transportation or other
services rendered partly within and partly
GROSS INCOME VIS-À-VIS NET INCOME VIS- outside, and dividend received by a resident
À-VIS TAXABLE INCOME citizen from a resident foreign corporation. (Sec.
(a) Gross income - means income, gain or profit 43(E), NIRC). In general, when an income is
subject to tax. earned partly from within and partly from
(b) Net income– means gross income less without, only income within is taxable in the
statutory deductions and/or exemptions Philippines, except if the taxpayer is a resident
[Sec. 31, NIRC] citizen or a domestic corporation. A Filipino
(c) Taxable income – means the pertinent items citizen or a domestic corporation whose income
of gross income specified in the Tax Code, is derived from within and without the
less the deductions and/or personal and Philippines is generally subject to tax.
additional exemptions, if any, authorized for
such types of income by the Tax Code or SOURCES OF INCOME SUBJECT TO TAX
other special laws [Sec. 31, NIRC]. It is
synonymous to the term “net income” Compensation Income
[Valencia and Roxas] Income arising from an employer-employee
(ER-EE) relationship. It means all remuneration
CLASSIFICATION OF INCOME AS TO for services performed by an EE for his ER,
SOURCE including the cash value of all remuneration
Source is ascribed to the place wherein the paid in any medium other than cash [Sec. 78(A)],
income is earned. It is governed by the situs of unless specifically excluded by the Tax Code.
taxation. This classification of income is
necessary to determine whether such income is It includes, but is not limited to, salaries and
subject to tax or not. Income may be: wages, honoraria and emoluments, allowances
(1) Derived entirely from sources within the (e.g., transportation, representation,
Philippines [Se. 42A, NIRC]. Examples: entertainment), commissions, fees (including
compensation for labor or service derived from directors’ fees, if the director is, at the same
Philippine sources; interest on bonds, notes, time, an employee of the payor-corporation),
deposits and the like earned in the Philippines; tips, taxable bonuses, fringe benefits except
dividends declared by domestic corporations; those subject to Fringe Benefit Tax (FBT) under
rentals and royalties from property located Section 33 of the Tax Code, and taxable
within the Philippines; and gains, profits and pensions and retirement pay (e.g. retirement
income from sale of real property as well as benefits earned without meeting the conditions
from personal property in the Philippines. As a for exemption thereof, such as retirement of less
than 50 years of age.)

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the employer’s home is considered as


General Rule: every form of compensation compensation.
income is taxable regardless of how it is earned,
by whom it is paid, the label by which it is The term “casual labor” includes labor which is
designated, the basis upon which it is occasional, incidental or regular. “Not in the
determined, or the form in which it is received. course of the employer’s trade or business”
The basis upon which remuneration is paid is includes labor that does not promote or
immaterial. It may be paid on the basis of piece advance the trade or business of the employer.
of work, percentage of profits, hourly, weekly,
monthly, or annually. The term “remuneration paid for services
performed as an employee of a foreign
Exception: The term wages does NOT include government or an international organization”
remuneration paid: includes not only remuneration paid for services
(1) For agricultural labor paid entirely in products performed by ambassadors, ministers and other
of the farm where the labor is performed, or diplomatic officers and employees but also
(2) For domestic service in a private home, or remuneration paid for services performed as
(3) For casual labor not in the course of the consular or other officer or employee of a
employer's trade or business, or foreign government or as a non-diplomatic
(4) For services by a citizen or resident of the representative of such government.
Philippines for a foreign government or an
int’l organization. [Sec. 78(A)] Compensation income including overtime pay,
holiday pay, night shift differential pay, and
Note: The term “agricultural labor” does not hazard pay, earned by MINIMUM WAGE
include services performed in connection with EARNERS (MWE) who has no other returnable
forestry, lumbering or landscaping. income are NOT taxable and not subject to
withholding tax on wages [RA 9504]Provided,
The term “remuneration for domestic services” however, that an employee shall not enjoy the
refers to remuneration paid for services of a privilege of being a MWE and, therefore, his/her
household nature performed by an employee in entire earning are not exempt from income tax
or about the private home of the person whom and, consequently, from withholding tax if he
he is employed. The services of household receives/earns additional compensation such as
personnel furnished to an employee (except commissions, honoraria, fringe benefits,
rank and file employees) by an employer shall benefits in excess of the allowable statutory
be subject to the fringe benefits tax pursuant to amount of P30,000, taxable allowance, and
Sec. 33 of the Tax Code. A private home is the other taxable income other than the statutory
fixed place of abode of an individual or family. If minimum wage (SMW), holiday pay, overtime
the home is utilized primarily for the purpose of pay, hazard pay and night shift differential pay.
supplying board or lodging to the public as a
business enterprise, it ceases to be a private MWEs receiving other income, such as income
home and remuneration paid for services from the conduct of trade, business, or practice
performed therein is not exempted. Services of of profession, except income subject to final tax,
the household nature in or about a private in addition to compensation income are not
home include services rendered by cooks, exempted from income tax on their income
maids, butlers, valets, laundresses, gardeners, earned during the taxable year.
chauffeurs of automobiles for family use. The
remuneration paid for the services which are This rule, notwithstanding, the SMW, Holiday
performed in or about rooming or lodging Pay, overtime pay, night differential pay and
houses, boarding houses, clubs, hotels, hazard pay shall still exempt from withholding
hospitals or commercial officer or tax.
establishments is considered as compensation.
Remuneration paid for services performed as a
private secretary, even if they are performed in

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Forms of compensation and how they are The amount of “de minimis” benefits confirming
assessed to the ceiling prescribed shall not be considered
(a) Cash – If compensation is paid in cash, the in determining the P30,000 ceiling of “other
full amount received is the measure of the benefits” excluded from gross income under
income subject to tax. Section 32 (b)(7)(e) of the Tax Code, Provided,
(b) Medium other than money – If services are that the excess of the ‘de minimis’ benefits over
paid for in a medium other than money (e.g. their respective ceilings prescribed by these
shares of stock, bonds, and other forms of regulations shall be considered as part of “other
property), the fair market value (FMV) of the benefits” and the employee receiving it will be
thing taken in payment is the amount to be subject to tax only on the excess over the
included as compensation subject to tax. If P30,000 ceiling, Provided, further, that MWEs
the services are rendered at a stipulated receiving, ‘other benefits’ exceeding the
price, in the absence of evidence to the P30,000 limit shall be taxable on the excess
contrary, such price will be presumed to be benefits, as well as on his salaries, wages, and
the FMV of the remuneration received. allowances, just like an employee receiving
(c) Living quarters or meals - General Rule: The compensation income beyond the SMW. Any
value to the employee of the living quarters amount given by the employer as benefits to its
and meals given by the employer shall be employees, whether classified as “de minimis”
added to his compensation subject to benefits or fringe benefits, shall constitute as
withholding. deductible expense upon such employer. Where
Exception: If living quarters/meals are furnished compensation is paid in property other than
to an employee for the convenience of the money, the employer shall make necessary
employer the value needed NOT be arrangements to ensure that the amount of the
included as part of compensation income. tax required to be withheld is available for
(d) Facilities and privileges of a relatively small payment to the BIR.
value - Facilities and privileges (such an
entertainment, medical services, or so Classification of Gross Compensation Income
called “courtesy” discounts on purchases), Basic salary or wage
otherwise known as “de minimis benefits” (1) Salary – earnings received periodically for a
furnished or offered by an employer to his regular work other than manual labor.
employees generally, are NOT considered Example: monthly salary of an employee
as compensation subject to income tax and (2) Wages – earnings received usually according
therefore withholding tax if such facilities to specified intervals of work, as by the hour,
are offered or furnished by the employer day, or week. Example: a carpenter’s wage.
merely as means of promoting the health,
goodwill, contentment, or efficiency of his Backwages are subject to income tax and
employees. withholding tax on wages [BIR Ruling No. DA-
073-2008]
Convenience of the Employer Rule
Allowances in kind furnished to the employee Honoraria – payments given in recognition for
for and as necessary incident to the services performed for which the established
performance of his duties are not taxable practice discourages charging a fixed fee.
[Valencia and Roxas]. Example: honorarium of a guest lecturer

If meals, living quarters, and other facilities and Fixed or variable allowances i.e. Transportation,
privileges are furnished to an employee for the Representation, and other allowances such as
convenience of the employer, and incidental to Cost of Living Allowances (COLA)
the requirement of the employee’s work or
position, the value of that privilege need not be
included as compensation [Henderson v.
Collector]

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UP LAW BOC TAXATION LAW 1 TAXATION LAW

General Rule: Fixed or variable transportation, Tips and Gratuities – those paid directly to the
representation or other allowances that are employee (usually by a customer of the
received by a public officer or employee of a employer) which are not accounted for by the
private entity, in addition to the regular employee to the employer. (taxable income but
compensation fixed for his position or office is not subject to withholding tax) [RR NO. 2-98,
COMPENSATION subject to withholding tax. Sec. 2.78.1]
[Rev. Regs. 2-98]
Hazard or Emergency Pay – additional payment
Exception: Any amount paid specifically, either received due to the workers’ exposure to danger
as advances or reimbursements for travelling, or harm while working. It is normally added to
representation and other bona fide ordinary and the basic salary together with the overtime pay
necessary expenses incurred or reasonably and night differential to arrive at gross salary.
expected to be incurred by the employee in the
performance of his duties are not compensation Retirement Pay – a lump sum payment received
subject to withholding tax, provided the by an employee who has served a company for a
following conditions are satisfied: considerable period of time and has decided to
(a) It is for ordinary and necessary traveling and withdraw from work into privacy. [RR 6-82, Sec.
representation or entertainment expenses 2b]
paid or incurred by the employee in the
pursuit of the employer’s trade, business or In general, retirement pay is taxable except in
profession; and the following instances:
(b) The employee is required to account or (1) SSS or GSIS retirement pays.
liquidate for the foregoing expenses. (2) Retirement pay (R.A. 7641) due to old age
provided the following requirements are met:
The excess of actual expenses over
(a) The retirement program is approved by
advances made shall constitute taxable
the BIR Commissioner;
income if such amount is not returned to
(b) It must be a reasonable benefit plan. (Its
the employer. The employee is required to
implementation must be fair and
account/liquidate for the expenses in
equitable for the benefit of all
accordance with the specific requirements
employees)
of substantiation for each category of
(c) The retiree should have been employed
expenses pursuant to Section 34 of the Tax
for 10 years in the said company;
Code.
(d) The retiree should have been 50 years
Note: Reasonable amounts of old or above at the time of retirement;
reimbursements/advances for traveling and and
entertainment expenses which are pre- (e) It should have been availed of for the
computed on a daily basis and are paid to an first time.
employee while he is on an assignment or duty
are NOT subject to withholding tax on wages Separation pay – taxable if voluntarily availed of.
and substantiation requirements. It shall not be taxable if involuntary i.e. death,
sickness, disability, reorganization/merger of
Commission – usually a percentage of total company and company at the brink of
sales or on certain quota of sales volume bankruptcy or for any cause beyond the control
attained as part of incentive such as sales of the said official or employee.
commission.
Fees – received by an employee for the services “For any cause beyond the control.” –
rendered to the employer including a director’s (1) Connotes involuntariness on the part of the
fee of the company, fees paid to the public official or employee
officials such as clerks of court or sheriffs for (2) The separation from the service of the official
services rendered in the performance of their or employee must not be asked for or
official duty over and above their regular initiated by him.
salaries. (3) The separation was not of his own making.

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(4) Such fact shall be duly established by the Thirteenth month pay and other benefits - Not
employer by competent evidence which taxable if the total amount received is P30,000
should be attached to the monthly return or less. Any amount exceeding P30,000 is
for the period in which the amount paid due taxable. [Sec. 32 (7)e, NIRC]
to the involuntary separation was made.
(6) Amounts received by reason of involuntary Fringe Benefits and De Minimis
separation remain EXEMPT from income  Fringe Benefits – any good, service, or other
tax even if the official or the employee, at benefit furnished or granted by an
the time of separation, had rendered less employer, in cash or in kind, in addition to
than ten (10) years of service and/or is basic salaries of an individual employee
below fifty (50) years of age. [Sec. 33, NIRC]
(7)Any payment made by an employer to an  De Minimis – privileges of relatively small
employer to an employee on account of value as given by the employer to his
dismissal, constitutes compensation employees.
regardless of whether the employer is  Fringe Benefits and De Minimis are not
legally bound by contract, statute, or considered compensation subject to income
otherwise, to make such payment. tax and withholding tax.
Pension – a stated allowance paid regularly to a Overtime Pay – premium payment received for
person on his retirement or to his dependents working beyond regular hours of work which is
on his death, in consideration of past services, included in the computation of gross salary of
meritorious work, age, loss, or injury. Pension is employee. It constitutes compensation.
taxable unless the law states otherwise, OR
unless the BIR approves the pension plan of a Profit Sharing – the proportionate share in the
private company. profits of the business received by the employee
in addition to his wages.
Vacation and sick leave- rules in determining
whether money received for vacation and sick Awards for special services – awards for past
leave is taxable or not: services or suggestions to employers resulting
(a) If paid or availed of as salary of an employee in the prevention of theft or robbery, etc. are
who is on vacation or on sick leave also compensations.
notwithstanding his absence from work, it
constitutes TAXABLE compensation income. Beneficial Payments – such as where employer
[RR 6-82, 2d] pays the income tax owed by an employee are
(b) Monetized value of unutilized VACATION additional compensation income.
leave credits of ten (10) days or less which
were paid to private employees during the Other forms of compensation – other forms
year, and the monetized value of vacation received due to services rendered are
and sick leave credits paid to government compensation paid in kind, e.g., insurance
officials and employees are NOT subject to premium paid by the employer for insurance
income tax and to the withholding tax. These coverage where the heirs of the employee are
are ‘de minimis’ benefits.’ [RR no. 5-2011, Sec the beneficiaries is the employee’s income.
2.78.1(A)(7)] Note: monetization of sick leave
credits of private employees even if not Note: Any amount which is required by law to be
exceeding 10 days is not exempt from deducted by the employer from the
income tax and withholding tax on wages. compensation of an employee including the
(c) Terminal leave or money value of withheld tax is considered as part of the
accumulated vacation and sick leave benefits employee’s compensation and is deemed to be
received by heir upon death of employee is paid to the employee as compensation at the
not taxable. time the deduction is made. (This also applies to
deductions not required by law.)

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Withholding Tax on Compensation Income Definition


The income recipient (i.e., EE) is the person Fringe benefit means any good, service, or other
liable to pay the tax on income, yet to improve benefit furnished or granted by an employer, in
the collection of compensation income of EEs, cash or in kind, in addition to basic salaries, to
the State requires the ER to withhold the tax an individual employee (except rank and file
upon payment of the compensation income. employees) such as, but not limited to the
following:
FRINGE BENEFITS (1) Housing
(2) Expense Account
Special treatment of fringe benefits (3) Vehicle of any kind
Persons liable: The Employer (as a withholding (4) Household personnel, such as maid, driver
agent), whether individual, professional and others
partnership or a corporation, regardless of (5) Interest on loan at less than market rate to
whether the corporation is taxable or not, or the the extent of the difference between the
government and its instrumentalities, is liable to market rate and actual rate granted.
remit the fringe benefit tax to the BIR once fringe (6) Membership fees, dues and other expenses
benefit is given to a managerial or supervisory borne by the employer for the employee in
employee. social and athletic clubs and similar
organizations
The fringe benefit tax (FBT) is a final tax on the (7) Expenses for foreign travel
employee’s income to be withheld by the (8) Holiday and vacation expenses
employer. The withholding and remittance of (9) Educational assistance to the employee or
FBT shall be made on a calendar quarterly his dependents; and
basis. (10) Life or health insurance and other non-life
insurance premiums or similar amounts on
Managerial employee: one who is vested with excess of what the law allows.[Sec. 33(B)]
the powers or prerogatives to lay down and
execute management policies and/or to hire, Tax Rate and Tax Base
transfer, suspend, lay-off, recall, discharge, (1) Tax base is based on the grossed-up
assign or discipline employees. monetary value (GMV) of fringe benefits.
(2) Rate is generally 32%
Supervisory employees: those who, in the (3) GMV represents: (a) the whole amount of
interest of the employer, effectively recommend income realized by the employee which
such managerial actions if the exercise of such includes the net amount of money or net
authority is not merely routinary or clerical in monetary value of property that has been
nature but requires the use of independent received; and (b) the amount of fringe
judgment. benefit tax due from the employee which
has been withheld and paid by the employer
All employees not falling within any of the for and in behalf of his employee.
above definitions are considered rank-and-file
employees. How GMV is determined
GMV is determined by dividing the actual
Fringe benefit tax is imposed on fringe benefits monetary value of the fringe benefit by 68%
received by supervisory and managerial [100% - tax rate of 32%]. For example, the
employees. The fringe benefits of rank and file actual monetary value of the fringe benefit is
employees are treated as part of compensation P1,000. The GMV is equal to P1,470.59 [P1,000
income subject to income tax and withholding / 0.68]. The fringe benefit tax, therefore, is
tax on compensation. P470.59 [P1470.59 x 32%].

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Special Cases: (b) Contributions of the employer for the


(1) For fringe benefits received by non-resident benefit of the employee for retirement,
alien not engaged in trade of business in insurance and hospitalization benefit
the Philippines (NRANETB), the tax rate is plans;
25% of the GMV. The GMV is determined by (c) Benefits given to the rank-and-file
dividing the actual monetary value of the employees, whether granted under a
fringe benefit by 75% [100% - 25%]. collective bargaining agreement or not;
(2) For fringe benefits received by alien and
individuals and Filipino citizens employed (d) Fringe benefits granted for the
by regional or area headquarters, regional convenience of the employer;
operating headquarters, offshore banking (e) De minimis benefits
units (OBUs), or foreign service contractor or
by a foreign subcontractor engaged in The exemption of any FB from the FBT shall not
petroleum operations in the Philippines, or be interpreted to mean exemption from any
by any of their Filipino individual employees other income tax imposed under the Tax Code
who are employed and occupying the same except if the same is likewise expressly exempt
positions as those occupied by the alien from any other income tax imposed under the
employees, the tax rate is 15% of the GMV. Tax Code or under any other existing law. Thus,
The GMV is determined by dividing the if the FB is exempted from the FBT, the same
actual monetary value of the fringe benefit may, however, still form of the employee’s gross
by 85% [100% - 15%]. compensation income which is subject to
(3) What is the tax implication if the employer income tax; hence, likewise subject to
gives ‘fringe benefits’ to rank-and-file withholding tax on compensation income
employees? Fringe benefits given to a rank- payment.
and-file employee are treated as part of his
compensation income subject to normal tax De minimis benefits (exempt from income tax as
rate and withholding tax on compensation well as withholding tax on compensation income
income, except de minimis benefits and of both managerial and rank and file EEs)
benefits provided for the convenience of the (a) Monetized unused vacation leave credits of
employer. private employees not exceeding ten (10)
days during the year;
Payor of Fringe Benefit Tax (FBT): The employer (b) Monetized value of vacation and sick leave
withholds and pays the FBT but the law credits paid to government officials and
allows him to deduct such tax from his gross employees;
income. (c) Medical cash allowance to dependents of
employees, not exceeding P750 per
Taxable and non-taxable fringe benefits employee per semester or P125 per month;
Fringe Benefits NOT subject to Tax (d) Rice subsidy of P1,500 or one (1) sack of 50
(1) Fringe benefits not considered as gross kg. rice per month amounting to not more
income – than P1,500;
(a) if it is required or necessary to the (e) Uniform and Clothing allowance not
business of employer exceeding P5,000 per annum (RR 8-2012)
(b) if it is for the convenience or advantage of (f) Actual medical assistance, e.g. medical
employer allowance to cover medical and healthcare
(2) Fringe Benefit that is not taxable under Sec. needs, annual medical/executive check-up,
32 (B) – Exclusions from Gross Income maternity assistance, and routine
(3) Fringe benefits not subject to Fringe Benefit consultations, not exceeding P10,000.00
Tax: per annum;
(a) Fringe Benefits which are authorized and (g) Laundry allowance not exceeding P300 per
exempted from income tax under the month;
Code or under special laws;

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(h) Employees achievement awards, e.g., for Non-taxable housing fringe benefit:
length of service or safety achievement, (1) Housing privilege of the Armed Forces of the
which must be in the form of a tangible Philippines (AFP) officials – i.e, those of the
personal property other than cash or gift Philippine Army, Philippine Navy, or
certificate, with an annual monetary value Philippine Air Force
not exceeding P10,000 received by the (2) A housing unit, which is situated inside of
employee under an established written plan adjacent to the premises of a business or
which does not discriminate in favor of factory  maximum of 50 meters from
highly paid employees; perimeter of the business premises
(i) Gifts given during Christmas and major (3) Temporary housing for an employee who
anniversary celebrations not exceeding stays in housing unit for three months or
P5,000 per employee per annum; and less
(j) Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty- Motor Vehicle
five percent (25%) of the basic minimum Motor Vehicle Fringe Benefit Tax
wage on a per region basis; [Revenue Base
Regulation No. 5-2011] (1) Purchased in the name MV= acquisition
All other benefits given by employers which are of the employee cost
not included in the above enumeration shall NOT (2) Cash given to MV= cash received
be considered as "de minimis" benefits and employee to purchase by employee
hence, shall be subject to withholding tax on in his own name
compensation (rank and file employees) and (3) Purchase on MV= acquisition
FBT (managerial/supervisory employees). installment, in the cost exclusive of
Housing name of employee interest
Fringe Benefit Tax Base (4) Employee shoulders MV= amount
Housing Privilege part of the purchase shouldered by
(Monetary Value)
price, ownership in the employer
(1) LEASE of residential MV= 50% of lease
property for the payments name of employee
residential use of (5) Employer owns and MV= (AC/5) x 50%
employees where MV = monetary maintains a fleet of
value of the FB motor vehicles for use
(2)Assignment of MV= [5% (FMV or ZV, of the business and of
residential property whichever is higher) x employees
owned by employer 50%] (6) Employer leases and MV= 50% of rental
for use of employees maintains a fleet for payment
(3)Purchase of MV= 5% x acquisition the use of the business
residential property cost exclusive of and of employees
in installment basis interest x 50%
for the use of the Professional Income
employee Refers to fees received by a professional from
(4) Purchase of MV= FMV or ZV, the practice of his profession, provided that
residential property whichever is higher there is NO employer-employee relationship
and ownership is between him and his clients.
transferred in the
name of the
employee

ZV = Zonal Value = value of the land or


improvement, as declared in the Real Property
Declaration Form
FMV = Fair Market Value = FMV as determined by
the Commissioner of Internal Revenue

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UP LAW BOC TAXATION LAW 1 TAXATION LAW

Income from Business Ordinary Assets Capital Assets


(a) Any income derived from doing business (2) Property held by the (1) stocks and
(b) Doing business: The term implies a continuity taxpayer primarily securities held by
of commercial dealings and arrangements, for sale to customers taxpayers other
and contemplates, to that extent, the in the ordinary than dealers in
performance of acts or works or the exercise course of his trade or securities
of some of the functions normally incident to, business. (2) real property not
and in progressive prosecution of, the (3) Property used in the used in trade or
purpose and object of its organization. trade or business of business, such as
a character which is residential house
Income from Dealings in Property subject to the and lot, idle or
Dealings in property such as sales or exchanges allowance for vacant land or
may result in gain or loss. The kind of property depreciation, or building
involved (i.e., whether the property is a capital (4) Real property used (3)investment
asset or an ordinary asset) determines the tax in the trade or property, such as
implication and income tax treatment, as follows: business of the interest in a
taxpayer, including partnership, stock
Net Capital
property held for investment
Taxable Ordinary Gains (other rent. (4)Personal or non-
Net = Net + than those
business
Income Income subject to final
properties, such as
CGT)
family car, home
appliances,
Ordinary Asset Capital Asset jewelry.
Gain from sale, exchange or other disposition
Ordinary Gain (part of TYPES OF GAINS FROM DEALINGS IN
Capital Gain PROPERTY
Gross Income)
(1) Ordinary income vis-à-vis Capital gain. –
Loss from sale, exchange, or other disposition
If the asset involved is classified as ordinary, the
Ordinary Loss (part of entire amount of the gain from the transaction
Allowable Deductions Capital Loss shall be included in the computation of gross
from Gross Income) income [Sec 32(A)], and the entire amount of the
Excess of Gains over Losses loss shall be deductible from gross income. [Sec
Part of Gross Income Net Capital Gain 34(D)]. (See Allowable Deductions from Gross
Income - Losses)
Excess of Losses over Gains
Part of Allowable If the asset involved is a capital asset, the rules
Deductions from Net Capital Loss on capital gains and losses apply in the
Gross Income determination of the amount to be included in
gross income. (See Capital Gains and Losses).
Types of Properties These rules do not apply to: (a) real property
Capital v. Ordinary Asset with a capital gains tax (final tax), or (2) shares
Ordinary Assets Capital Assets of stock of a domestic corporation with a capital
(1)Stock in trade of the Property held by the gains tax (final tax). Also, sale of shares of stock
taxpayer or other taxpayer, whether or of a domestic corporation, held as capital
property of a kind not connected with assets, through the stock exchange by either
which would his trade or business individual or corporate taxpayers, is subject to ½
properly be included which is not an of 1% percentage tax based on gross selling
in the inventory of ordinary asset. price.
the taxpayer if on Generally, they
hand at the close of include:
the taxable year.

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The following percentages of the gain or loss Note: For sale, barter, exchange or other forms
recognized upon the sale or exchange of a of disposition of shares of stock subject to the
capital asset shall be taken into account in 5%/10% capital gains tax on the net capital gain
computing net capital gain, net capital loss, and during the taxable year, the capital losses
net income: realized from this type of transaction during the
(a) If the taxpayer is an individual – taxable year are deductible only to the extent of
100% if the capital asset has been held for capital gains from the same type of transaction
not more than 12 months; and during the same period. If the transferor of the
50% of the capital asset has been held for shares is an individual, the rule on holding
more than 12 months period and capital loss carry-over will not apply,
(b) If the taxpayer is a corporation – notwithstanding the provisions of Section 39 of
100%, regardless of the holding period of the the Tax Code as amended. [RR 6-2008, c.4]
capital asset [Sec. 39(B), NIRC]
(1) Actual gain vis-à-vis Presumed gain
The tax rules for the gains or losses from sales Presumed Gain: In the sale of real property
or exchanges of capital assets over ordinary located in the Philippines, classified as capital
assets are as follows: asset, the tax base is the gross selling price or
(1) Net capital gain is added to ordinary gain but fair market value, whichever is higher. The law
net capital loss is not deductible from ordinary presumes that the seller makes a gain from
gain. such sale. Thus, whether or not the seller makes
(2) Net ordinary loss is deductible from ordinary a profit from the sale of real property, he has to
gain. pay 6% capital gains tax. In fact, her has to pay
(3) Capital losses are deductible only to the the tax, even if he incurs an actual loss from the
extent of the capital gain. sale thereof. (Note, however, that where an
(4) There is a net capital loss carry-over on the individual sells his real property classified as a
net capital asset’s loss in a taxable year which capital asset to the government, he has the
may be deducted as a short-term capital loss option whether to be taxed at the graduated
from the net capital gain of the subsequent income tax rates or at 6% capital gains tax.)
taxable year; provided that the following
conditions shall be observed: Actual Gain: The tax base in the sale of real
(5) The taxpayer is other than a corporation; property classified as an ordinary asset is the
(6) The amount of loss does not exceed the actual gain. If the seller incurs a loss from the
income before exemptions at the year when the sale, such loss may be deducted from his gross
loss was sustained; and income during the taxable year. The ordinary
(7) The holding period should not exceed 12 gain shall be added to the operating income
months. [Valencia] and the net taxable income shall be subject to
the graduated rates from 5% to 32% (if an
When a capital gain or capital loss is sustained individual) or to 30% corporate tax or to 2%
by a corporation, the following rules shall be MCIT (if a corporation).
observed:
(1) There is no holding period; hence, there is no Computation of the amount of gain or loss
net capital loss carry-over. Amount realized from sale or other
(2) Capital gains and losses are recognized to disposition of property
the extent of their full amount. Less: Basis or Adjusted Basis
(3) Capital losses are deductible only to the NET GAIN (LOSS)
extent of capital gains.
(4) Net capital losses are not deductible from Note: Amount realized from sale or other
ordinary gain or income but ordinary losses disposition of property = sum of money received
are deductible from net capital gains. + fair market value of the property (other than
money) received

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Note: When a taxpayer sells a real or personal (d) Property acquired by gift or donation – the
property, he should deduct its cost from its basis is the same as it would be in the
selling price to measure the gain or loss from hands of the donor or at the last preceding
the sales transaction [Sec. 40, NIRC]. owner by whom it was not acquired by gift,
or the fair market value at the time the gift
(2) Long term capital gain vis-à-vis Short was made, whichever is lower
term capital gain (e) Property acquired for less than an adequate
 Long-term capital gain: Capital asset is held consideration in money’s worth – the
for more than twelve month before it is sold. amount paid by the transferee for the
Only 50% of the gain is recognized. property
 Short-term capital Gain: Capital asset is
held for less than 12 months. 100% of the Cost or basis of the property exchanged in
gain is subject to tax. corporate reorganizations:
Sales or exchanges resulting in non-recognition
(3) Net Capital Gain vis-à-vis Net Capital of gains or losses:
Loss
 Net Capital Gain is the excess of the gains Exchange Solely in Kind –
over the losses on sales or exchange of (1) If in pursuance of a plan of merger or
capital assets during the taxable year. consolidation, exchanges:
 Net Capital Loss means the excess of the (a) Between the corporations which are
losses over the gains on sales or exchanges parties to the merger or consolidation
of capital assets during the taxable year. (property solely for stocks);
[Sec. 39A, NIRC] (b) Between a stockholder of a corporation
party to a merger or consolidation and
(4) Computation of the amount of Gain or the other corporation, which is a party
Loss to the merger or consolidation (stock in
a corporation solely for the stock of
For income tax purposes the following rules another corporation);
should be observed regarding the cost and (c) Between a security holder of a
expenses of the capital assets: (1) the costs and corporation party to a merger or
expenses of the acquisition are to be consolidation and the other corporation,
capitalized, and (2) the expenses of disposition which is a party to the merger or
are to be treated as reduction from the selling consolidation (securities solely for
price. [Valencia] securities)
(2) Transfer to a controlled corporation – a
Cost or basis of the property sold: person transfers his property to a corporation in
In computing the gain or loss from the sale or exchange for stocks in such a corporation,
other disposition of property, the BASIS shall be resulting in acquisition of corporate control by
as follows: said person, alone or together with others not
(a) Property acquired by purchase – its exceeding four (4).
acquisition cost, i.e., the purchase price plus
expenses of acquisition. Exchange Not Solely in Kind -Gain, but not the
(b) Property which should be included in the loss, shall be recognized if, in connection with
inventory – its latest inventory value [RR-2 an exchange described in the above exceptions:
sec 136] (a) An individual, a shareholder, a security
(c) Property acquired by devise, bequest or holder or a corporation receives not only
inheritance – its fair market price or value as stock or securities permitted to be received
of the date of acquisition (inheritance) without the recognition of gain or loss, but
also money and/or property.

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The gain, if any, but not the loss, shall be If the money or other property received
recognized but in an amount not in excess has the effect of a distribution of a
of the sum of the money and the fair market taxable dividend, there shall be taxed as
value of such other property received. dividend to the stockholder an amount
of the gain recognized not in excess of
As to the shareholder, if the money and/or his proportionate share of the
other property received has the effect of a undistributed earnings and profits of
distribution of a taxable dividend, there the corporation.
shall be taxed as dividend to the
shareholder an amount of the gain The remainder, if any, of the gain
recognized not in excess of his recognized shall be treated as a capital
proportionate share of the undistributed gain.
earnings and profits of the corporation.
SUBSTITUTED BASIS OF STOCK OR
The remainder, if any, of the gain SECURITIES RECEIVED BY TRANSFEROR
recognized shall be treated as a capital gain UPON THE EXCHANGE:
[Sec. 40 (C) (3) (a), NIRC]. Original basis (cost) of the property, stock or
securities exchanged/transferred
(b) The transferor corporation receives not only LESS: (a) money received, if any; and (b) FMV of
stock permitted to be received without the the other property received.
recognition of gain or loss but also money Balance
and/or other property, then – ADD: (a) the amount treated as dividend of the
(i) if the corporation receiving such money shareholder; and (b) the amount of any gain
and/or other property distributes it in that was recognized on the exchange.
pursuance of the plan of merger or Basis (Cost) of the stock received
consolidation, no gain to the
corporation shall be recognized from Notes:
the exchange, but (a) The property received as “boot” shall have
(ii) if the corporation receiving such other as basis its FMV
property and/or money does not (b) If as part of the consideration to the
distribute it in pursuance of the plan of transferor, the transferee of property
merger or consolidation, the gain, if any, assumes a liability of the transferor or
but not the loss to the corporation shall acquires from the latter property subject to
be recognized. a liability, such assumption or acquisition (in
the amount of liability), shall be treated as
The gain shall be recognized in an money received by the transferor on the
amount not in excess of the sum of such exchange
money and the fair market value of such (c) If the transferor receives several kinds of
other property so received, which is not stocks or securities, the Commissioner is
distributed [Sec. 40 (C) (3) (b), NIRC]. authorized to allocate the basis among the
several classes of stocks or securities
If an individual, stockholder, security received.
holder or corporation receives on the
exchange not only stock or securities SUBSTITUTED BASIS OF PROPERTY
but also money and/ or property (boot), TRANSFERRED:
the gain but not the loss shall be The basis of the property transferred in the
recognized, in an amount not exceeding hands of the transferee shall be the same as it
the sum of the money and fair market would be in the hands of the transferor
value of the property received. increased by the amount of the gain recognized
to the transferor on the transfer [Sec. 40 (C)(5),
NIRC].

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Recognition of gain or loss in exchange of (2) In determining whether a bona fide


property: business purpose exists, each and every
General rule- Upon the sale or exchange of step of the transaction shall be
property, the ENTIRE amount of the gain or loss considered and the whole transaction or
shall be recognized. series of transaction shall be treated as a
single unit
Exceptions- No gain or loss shall be recognized: (3) The property transferred must constitute
(1) If in pursuance of a plan of merger or a substantial portion of the property of
consolidation: the transferor [Sec. 40(C)(6)(b), NIRC].
(a) A corporation, which is a party to a Note: In determining whether the
merger or consolidation, exchanges property transferred constitutes a
property solely for stock in a substantial portion of the property of the
corporation, which is a party to the transferor, the term ‘property’ shall be
merger or consolidation; taken to include the cash assets of the
(b) A shareholder exchanges stock in a transferor [Sec. 40(C)(b), NIRC].
corporation, which is a party to a merger (c) “Substantially All”: the acquisition by one
or consolidation, solely for the stock of corporation of at least 80% of the assets,
another corporation also a party to the including cash, of another corporation,
merger or consolidation; or which has the element of permanence and
(c) A security holder of a corporation, which not merely momentary holding.
is a party to the merger or (d) Securities: bonds and debentures but not
consolidation, exchanges his securities "notes" of whatever class or duration [Sec.
in such corporation, solely for stock or 40(C)(6)(a), NIRC]
securities in another corporation, a (e) Control: ownership of stocks in a corporation
party to the merger or consolidation. possessing at least fifty-one percent (51%)
(2) If property is transferred to a corporation by of the total voting power of all classes of
a person in exchange for stock or unit of stocks entitled to vote [Sec. 40(C)(6)(c),
participation in such a corporation, of which NIRC].
as a result of such exchange, said person,
alone or together with others not exceeding (5) Income tax treatment of capital loss
4 persons, gains control of the corporation.
(a) Capital loss limitation rule (applicable to both
- Stocks issued for services shall not be corporations and individuals)
considered as issued in property. General Rule: Losses from sales or exchanges of
capital assets shall be allowed only to the extent
Meaning of merger, consolidation, control, of the gains from such sales or exchanges [Sec.
securities 39(C), NIRC].
(a) Merger and consolidation for tax purposes -
shall mean (1) The ordinary merger or EXCEPTION for Banks and Trust Companies: If a
consolidation; or (2) The acquisition by one bank or trust company incorporated under the
corporation of all or substantially all the laws of the Philippines, a substantial part of
properties of another corporation solely for whose business is the receipt of deposits, sells
stock [Sec. 40(C )(6)(b), NIRC]. any bond, debenture, note, certificate or other
(b) Requirements to establish merger or evidence of indebtedness issued by any
consolidation corporation (including one issued by a
(1) Must be undertaken for a bona fide government or political subdivision thereof) with
business purpose and not solely for the interest coupons or in registered form, any loss
purpose of escaping the burden of resulting from such sale shall not be subject to
taxation the foregoing limitation and shall not be
included in determining the applicability of such
limitation to other losses [Sec. 39(C), NIRC].

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(b) Net loss carry-over rule (applicable only to Shares listed and traded through the stock
individuals) exchange other than sale by a dealer in
If an individual sustains in any taxable year a net securities.
capital loss, such loss (in an amount not in (1) ½ of 1% of the gross selling price of the stock
excess of the net income for the year) shall be or gross value in money of the shares of
treated in the succeeding taxable year as a loss stock sold, bartered, exchanged or
from the sale or exchange of a capital asset otherwise disposed which shall be assumed
held for not more than 12 months [Sec. 39(D), and paid by the seller or transferor through
NIRC]. the remittance of the stock transaction tax
by the seller or transferor’s broker.
(6) Dealings in real property situated in the (2) Note: In the nature of percentage tax and
Philippines not income tax; exempt from income tax per
Section 127 (d):
Persons Liable and Transactions Affected “Any gain derived from the sale, barter,
(a) Individual taxpayers, estates and trusts exchange or other disposition of share of
(1) Sale or exchange or other disposition of stock under this section shall be exempt
real property considered as capital assets. from taxes imposed in Sections 24(C),
(2) Includes "pacto de retro sale" and other 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this
conditional sale. Code and from the regular individual or
(b) Domestic Corporation corporate income tax.”
Sale or exchange or disposition of lands (3) Note: Percentage tax under Sec. 127 is NOT
and/or building which are not actually used DEDUCTIBLE for income tax purposes.
in business and are treated as capital asset.
Shares not listed and traded through the stock
Rate and Basis of Tax exchange
A final withholding tax of 6% is based on the Net capital gains derived during the taxable
gross selling price or fair market value or zonal year from sale, exchange, or transfer shall be
value whichever is higher. taxed as follows (on a per transaction basis):

Note: Gain or loss is immaterial, there being a Amount of Capital Tax Rate
conclusive presumption of gain. Gain
Not over P 100,000 - 5%
(7) Dealings in shares of stock of Philippine On any amount in - 10%
corporations excess of P 100,000

Persons Liable to the Tax (8) Sale of principal residence


(a) Individual taxpayer, whether citizen or alien; Principal residence: the family home of the
(b) Corporate taxpayer, whether domestic or individual taxpayer (RR 14-2000)
foreign; and
(c) Other taxpayers not falling under (a) and (b) Disposition of principal residence (capital asset)
above, such as estate, trust, trust funds and is exempt from Capital Gains Tax, provided:
pension funds, among others. (a) Sale or disposition of the old principal
residence;
Persons not liable (b) By natural persons - citizens or aliens
(1) Dealers in securities provided that they are residents taxable
(2) Investor in shares of stock in a mutual fund under Sec. 24 of the Code (does not include
company an estate or a trust);
(3) All other persons who are specifically (c) The proceeds of which is fully utilized in (a)
exempt from national internal revenue acquiring or (b) constructing a new principal
taxes under existing investment incentives residence within eighteen (18) months from
and other special laws. date of sale or disposition;

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(d) Notify the Commissioner within thirty (30) (2) Stock dividend – Stock dividend is generally
days from the date of sale or disposition exempt from income tax, EXCEPT:
through a prescribed return of his intention (a) If a corporation cancels or redeems stock
to avail the tax exemption; issued as a dividend at such time and in
(e) Can only be availed of onlyonce every ten such manner as to make the
(10) years; distribution and cancellation or
(f) The historical cost or adjusted basis of his old redemption, in whole or in part,
principal residence shall be carried over to essentially equivalent to the distribution
the cost basis of his new principal residence of a taxable dividend, the amount so
(g) If there is no full utilization, the portion of distributed in redemption or
the gains presumed to have been realized cancellation of the stock shall be
shall be subject to capital gains tax. considered as taxable income to the
(h) Portion of presumed gains subject to CGT: extent that it represents a distribution
(Unutilized/GSP) x (higher of GSP or FMV) of earnings or profits (Sec. 73(B), NIRC);
or
Passive Investment Income (b) Where there is an option that some
Under Sec 24(B), a final tax is imposed upon stockholders could take cash or
gross passive income of citizen and resident property dividends instead of stock
aliens. An income is considered passive if the dividends; some stockholders exercised
taxpayer merely waits for it to be realized. the option to take cash of property
dividends; and the exercise of option
(a) Interest Income resulted in a change of the
An earning derived from depositing or lending stockholders’ proportionate share in the
of money, goods or credits [Valencia and Roxas] outstanding share of the corporation.
e.g., interest income from government securities (3) Property dividend - Dividends are included in
such as Treasury Bills. the gross income of the stockholder, unless
they are exempt from tax or subject to tax at
Unless exempted by law, interest income preferential rate under the NIRC. Cash
received by the taxpayer, whether or not dividend and property dividend are subject to
usurious, is subject to income tax. income tax.
(4) Liquidating dividend – Represents
(b) Dividend Income distribution of all the property or assets of a
A form of earnings derived from the distribution corporation in complete liquidation or
made by a corporation out of its earnings or dissolution. It is strictly not dividend income,
profits and payable to its stockholders, whether but rather is treated in effect, as a sale of
in money or in property. shares of stock resulting in capital gain or
loss. The difference between the cost or
In general, dividends are included in the gross other basis of the stock and the amount
income of the stockholder, unless they are received in liquidation of the stock is a
exempt from tax or subject to final ax at capital gain or a capital loss. Where
preferential rate under the Tax Code. property is distributed in liquidation, the
amount received is the FMV of such
(1) Cash dividend – Dividends are included in the property. The income is subject to ordinary
gross income of the stockholder, unless they income tax rates and NOT to the FWT on
are exempt from tax or subject to tax at dividends.
preferential rate under the NIRC. Cash
dividend is the most common form of
dividend, valued at the amount of money
received by the stockholder. Cash dividend
and property dividend are subject to income
tax.

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(c) Advance payment


(1) If the advance payment is actually a
loan to the lessor, or an option
money for the property, or a security
deposit for the faithful performance
of certain obligations of the lessee,
such advance payment is not
income to the lessor.
(2) However, a security deposit that is
applied to rental is taxable income
to the lessor.
(3) If the advance payment is, in fact, a
pre-paid rental, received by the
lessor under a claim of right and
without restriction as to its use, then
such payment is income to the
lessor.
(4) Pre-paid rent must be reported in
full in the year of receipt, regardless
(a) Royalty Income - Royalty is a valuable of the accounting method used by
property that can be developed and sold on the lessor.
a regular basis for a consideration; in which (1) Lease of personal property – Rental income on
case, any gain derived therefrom is the lease of personal property located in the
considered as an active business income Philippines and paid to a non-resident taxpayer
subject to the normal corporate tax. Where shall be taxed as follows:
a person pays royalty to another for the use
of its intellectual property, such royalty is Non- Non-
generally a passive income of the owner Resident Resident
thereof subject to withholding tax. Corporation Alien
Vessel 4.5% 25%
(b) Rental Income - Refers to earnings derived Aircraft, 7.5% 25%
from leasing real estate as well as personal machineries and
property. Aside from the regular amount of other Equipment
payment for using the property, it also Other assets 30% 25%
includes all other obligations assumed to be
paid by the lessee to the third party in (2) Lease of real property
behalf of the lessor (e.g., interest, taxes, Lessor Tax Rate
loans, insurance premiums, etc.) [RR 19-86] Citizen
Resident Alien Net taxable income
Rent income may be in the following forms: Non-resident alien shall be subject to the
(a) Cash, at the stipulated price engaged in trade or graduated income tax
(b) Obligations of the lessor to third persons business in the rates
paid or assumed by the lessee in Philippines
consideration of the contract of lease, Non-resident alien Rental income from
e.g., real estate tax on the property not engaged in trade real property located
leased assumed by the lessee or business in the in the Philippines
Philippines shall be subject to
25% final withholding
tax unless a lower rate
is imposed pursuant
to an effective tax
treaty

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Lessor Tax Rate termination of lease shall be included


Domestic Corporation Net taxable income [Sec. 49, Rev. Reg. No. 2].
Resident Foreign shall be subject to
Corporation 30% corporate If the building or other leasehold
income tax or its gross improvement is destroyed before the
income will be subject expiration of the lease, the lessor is
to 2% MCIT entitled to deduct as a loss for the year
Non-resident Foreign Gross rental income when such destruction takes place, the
Corporation from real property amount previously reported as income
located in the because of the erection of the
Philippines shall be improvement, less any salvage value, to
subject to 30% the extent that such loss was not
corporate income tax, compensated by insurance [Sec. 49,
such tax to be Rev. Reg. No. 2]
withheld and remitted
by the lessee in the (b) VAT added to rental/paid by the lessee
Philippines
If the lessee is VAT-registered, treat VAT
(3) Tax treatment of: paid as input VAT;

(a) Leasehold improvements by lessee- If the lessee is not VAT-registered OR not


Rent Income from leasehold improvements: liable to VAT, treat VAT paid as additional
(i) Outright method- lessor shall report as rent expense deductible from gross income.
income FMV of the buildings or
improvements subject to the lease in (c) Advance Rental/ Long Term Lease
the year of completion. Pre-paid rent must be reported in full in the
(ii) Spread-out method- lessor shall spread year of receipt, regardless of the accounting
over the remaining term of the lease the method used by the lessor.
estimated depreciated (book) value of
such buildings or improvements at the Annuities, Proceeds from life insurance or other
termination of the lease, and reports as types of insurance
income for each remaining term of the Annuities are installment payments received for
lease an aliquot part thereof. life insurance sold by insurance companies.
estimated BV at the end of the lease
contract/ remaining lease term = The aleatory contract of life annuity binds the
Income per year debtor to pay an annual pension or income
during the life of one or more determinate
If for any reason than a bona fide persons in consideration of a capital consisting
purchase from the lessee by the lessor, of money or other property, whose ownership is
the lease is terminated, so that the transferred to him at once with the burden of
lessor comes into possession or control the income. [Art. 2021, New Civil Code]
of the property prior to the time
originally fixed, lessor receives The annuity payments represent a part that is
additional income for the year which the taxable and not taxable. If part of annuity
lease is so terminated to the extent of payment represents interest, then it is a taxable
the value of such buildings or income. If the annuity is a return of premium, it
improvements when he became entitled is not taxable.
to such possession exceeds the amount
already reported as income on account Prizes and awards
of the erection of such building or A prize is a reward for a contest or a
improvement. No appreciation in value competition. It represents remuneration for an
due to causes other than the premature effort reflecting one’s superiority.

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Contest prizes and awards received are (b) It may amount to a gift. If a creditor wishes
generally taxable. Such payment constitutes merely to benefit the debtor, and without
gain derived from labor. any consideration therefore, cancels the
debt, the amount of the debt is a gift to the
The EXCEPTIONS are as follows: debtor and need not be included in the
(1) Prizes and awards made primarily in latter’s report of income.
recognition of religious, charitable, scientific, (c) It may amount to a capital transaction. If a
educational, artistic, literary or civic corporation to which a stockholder is
achievements are EXCLUSIONS from gross indebted forgives the debt, the transaction
income if: has the effect of a payment of dividend.
(a) The recipient was selected without any
action on his part to enter a contest or Tax Benefit Rule
proceedings; and This is a general principle in taxation which
(b) The recipient is not required to render states that is a taxpayer deducted an item on
substantial future services as a condition his income tax return and enjoyed a tax benefit
to receiving the prize or award. (reduced his income tax) thereby, and in a
(2) Prizes and awards granted to athletes in subsequent year recovers all or part of that
local and international sports competitions item, he will recognize gross income in the year
and tournaments held in the Philippines and the deducted item is recovered. The rule has
abroad and sanctioned by their national both an inclusionary and an exclusionary
associations shall be EXEMPT from income component, i.e., the recovery is included in the
tax. taxpayer’s gross income to the extent that the
taxpayer obtained a tax benefit from the prior
Pensions, retirement benefit, or separation pay year’s deduction, and the recovery is excluded to
(1) paid for past employment services rendered. the extent that the prior year’s deduction did
(2) a stated allowance paid regularly to a person not provide a tax benefit.
on his retirement or to his dependents on his
death, in consideration of past services, Recovery of accounts previously written-off – B d
meritorious work, age, loss or injury. It is debts claimed as a deduction in the preceding
generally taxable unless the law states year(s) but subsequently recovered shall be
otherwise. [VALENCIA, Income Taxation 5th included as part of the taxpayer’s gross income
ed. (200/’’9)] in the year of such recovery to the extent of the
income tax benefit of said deduction. There is an
Income from any source whatever income tax benefit when the deduction of the
Inclusion of all income not expressly exempted bad debt in the prior year resulted in lesser
within the class of taxable income under the income and hence tax savings for the company.
laws irrespective of the voluntary or involuntary [Sec. 4, RR 5-99]
action of the taxpayer in producing the gains,
and whether derived from legal or illegal
sources.

Forgiveness of indebtedness – The cancellation


or forgiveness of indebtedness may have any of
three possible consequences:
(a) It may amount to payment of income. If, for
example, an individual performs services to
or for a creditor, who, in consideration
thereof, cancels the debt, income in that
amount is realized by the debtor as
compensation for personal services.

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Illustration: In Case C, only P5,000 of the P6,000 recovered


Case A Case B Case C would be recognized as gross income in Year 2.
Year 1 It was only to this extent that the taxpayer
Gross Income 500,000 400,000 500,000 benefited from the write-off. The taxpayer did
not benefit from the extra P1,000 because at
Less: Allowable this point, the P1,000 was already a net loss.
Deductions
(before write-off Receipt of tax refunds or credit – General rule: a
of Uncollectible refund of a tax related to the business or the
Accounts/Debts) (200,000) (480,000) (495,000) practice of profession, is taxable income (e.g.,
refund of fringe benefit tax) in the year of receipt
Taxable Income 300,000 to the extent of the income tax benefit of said
(Net Loss) (60,000) 5,000 deduction (i.e., the tax benefit rule applies).
before write-off
Exceptions: However, the following tax refunds
Deduction for (2,000) (2,000) (6,000) are not to be included in the computation of
Accounts gross income:
Receivable (1) Philippine income tax, except the fringe
written off benefit tax
298,000 (62,000) (1,000) (2) Income tax imposed by authority of any
Taxable Income foreign country, if the taxpayer claimed a
(Net Loss) after credit for such tax in the year it was paid or
write-off incurred.
(3) Estate and donor’s taxes
Year 2 (4) Taxes assessed against local benefits of a
Recovery of 2,000 2,000 6,000 kind tending to increase the value of the
Amounts property assessed (Special assessments)
Written Off (5) Value Added Tax
(6) Fines and penalties due to late payment of
Taxable Income 2,000 - 5,000 tax
on the Recovery (7) Final taxes
(8) Capital Gains Tax
In Case A, the entire amount recovered Note: The enumeration of tax refunds that are
(P2,000) is included in the computation of not taxable (income) is derived from an
gross income in Year 2 because the taxpayer enumeration of tax payments that are not
benefited by the same extent. Prior to the write- deductible from gross income.
off, the taxable income was P300,000; after the
write-off, the taxable income was reduced to If a tax is not an allowable deduction from gross
P298,000. income when paid (no reduction of taxable
income, hence no tax benefit), the refund is not
In Case B, none of the P2,000 recovered would taxable.
be recognized as gross income in Year 2. Note
that even without the write-off, the taxpayer
would not have paid any income tax anyway. The
SOURCE RULES IN DETERMINING
“taxable income” before the write-off was INCOME FROM WITHIN AND
actually a net loss. WITHOUT
The following items of gross income shall be
treated as gross income from sources WITHIN
the Philippines:

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Interests (4) The supply of any assistance that is ancillary


Derived from sources within the Philippines, and and subsidiary to, and is furnished as a
interests on bonds, notes or other interest- means of enabling the application or
bearing obligation of residents. enjoyment of, any such property or right as is
mentioned in (a), any such equipment as is
Ultimately, the situs of interest income is the mentioned in (b) or any such knowledge or
residence of the debtor. information as is mentioned in (c);
(5) The supply of services by a nonresident
Dividends person or his employee in connection with
Dividends received: the use of property or rights belonging to, or
(1) from a domestic corporation; and the installation or operation of any brand,
(2) from a foreign corporation, UNLESS less than machinery or other apparatus purchased
50% of its gross income for the previous 3- from such nonresident person;
year period was derived from sources within (6) Technical advice, assistance or services
the Philippines [in which case it will be rendered in connection with technical
treated as income partly from within and management or administration of any
partly from without]. scientific, industrial or commercial
undertaking, venture, project or scheme;
The income which is considered as derived and
from within the Philippines is obtained by (7) The use of or the right to use:
using the following formula: (8) Motion picture films;
(i) Films or video tapes for use in connection
Philippine Gross Income* x Dividend = Income with television; and
Within Worldwide Gross Income* (ii) Tapes for use in connection with radio
broadcasting.
Note: of the corporation giving the dividend
As a rule, the situs of dividend income is the As a rule, the situs of rental income is the place
residence of the corporation declaring the where the property is located. The situs of royalty
dividend. income is where the rights are exercised.

Services Sale Of Real Property


Compensation for labor or personal services As a rule, the situs of the income from sale of
performed in the Philippines: As a rule, the situs real property is where the realty is located.
of compensation is the place of performance of
the services.
Sale Of Personal Property
Rentals and Royalties General Rule: Gains, profits and income from
From property located in the Philippines or from the sale of personal property, subject to the
any interest in such property, including rentals following rules:
or royalties for –
(1) The use of or the right or privilege to use in Place of Place of Treatment**
the Philippines any copyright, patent, design PURCHASE SALE
or model, plan, secret formula or process, Philippines Abroad Income from
goodwill, trademark, trade brand or other like Without
property or right; Abroad Philippines Income from
(2) The use of, or the right to use in the Within
Philippines any industrial, commercial or ** in other words, the situs of the income from
scientific equipment; the sale of personal property is the place of sale.
(3) The supply of scientific, technical, industrial or
commercial knowledge or information;

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Exceptions: Income Situs


(1) Gain from the sale of shares of stock in a (b) Intangible
domestic corporation
Treated as derived entirely from sources General rule: Place of Sale
within the Philippines regardless of where the
said shares are sold. Exception: Shares of stock of
(2) Gains from the sale of (manufactured) domestic corporations: Place
personal property: of incorporation
(a) produced (in whole or in part) by the Shares of Place of incorporation
taxpayer within and sold without the Stock of
Philippines, or Domestic
(b) produced (in whole or in part) by the Corporation
taxpayer without and sold within the
Philippines EXCLUSIONS FROM GROSS INCOME
Treated as derived partly from sources Exclusions from gross income refer to income
within and partly from sources without received or earned but is not taxable as income
the Philippines. because it is exempted by law or by treaty. Such
tax-free income is not to be included in the
Place of Place of Treatment income tax return unless information regarding
PRODUCTION SALE it is specifically called for. Receipts which are
Philippines Abroad Partly within, not in fact income are, of course, excluded from
partly gross income.
without
Abroad Philippines Partly within, The exclusion of income should not be confused
partly with the reduction of gross income by the
without application of allowable deductions. While
exclusions are simply not taken into account in
Shares of Stock of Domestic Corporation determining gross income, deductions are
Treated as derived entirely from sources within subtracted from gross income to arrive at net
the Philippines regardless of where the said income. [De Leon]
shares are sold.
Items of Exclusions representing return of
SITUS OF INCOME TAX capital
Income Situs (a) Amount of capital is generally recovered
Interest Residence of the debtor through deduction of the cost or adjusted
Dividends Residence of the corporation basis of the property sold from the gross
Services Place of performance selling price or consideration, or through the
Rentals Location of the property deduction from gross income of
Royalties Place of exercise depreciation relating to the property used in
Sale of Real Location of realty trade or business before it is sold.
Property (b) It may also related to indemnities, such as
Sale of (a) Tangible proceeds of life insurance paid to the
Personal insured’s beneficiaries and return of
(1) Purchase and sale: premiums paid by the insurance company
Location of Sale to the insured under a life insurance,
(2) Manufactured w/in and endowment or annuity contract.
sold w/o: Partly w/in and (c) Damages, in certain instances, may also be
partly w/o exempt because they represent return of
(3) Manufactured w/o and capital.
sold w/in: Partly w/in
and partly w/o

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Items of Exclusion because it is subject to  Exclusions pertain to the computation of


another internal revenue tax gross income, while deductions pertain to
The value of property acquired by gift, bequest, the computation of net income.
devise or descent is exempt from income tax on  Exclusions are something received or earned
the part of the recipient because the receipt of by the taxpayer which do not form part of
such property is already subject to transfer taxes gross income while deductions are
(estate tax or donor’s tax) something spent or paid in earning gross
income.
Items of Exclusions because they are
expressly exempt from income tax Tax Credit refers to amounts subtracted from
(1) Under the Constitution the computed tax in order to arrive at taxes
(2) Under a tax treaty payable.
(3) Under special laws
(1) Exclusions Under the Constitution
Rationale for the exclusions (a) Income derived by the government or its
The term “exclusions” refers to items that are political subdivisions from the exercise
not included in the determination of gross of any essential governmental function
income because: (b) Also, all assets and revenues of a non-
(a) They represent return of capital or are not stock, non-profit private educational
income, gain or profit; institution used directly, actually and
(b) They are subject to another kind of internal exclusively for private educational
revenue tax; purposes shall be exempt from
(c) They are income, gain or profit expressly taxation.
exempt from income tax under the
Constitution, tax treaty, Tax Code, or a (2) Exclusions Under the Tax Code (Sec. 32,
general or special law. [Mamalateo] NIRC)
(a) Proceeds of life insurance policies.—
Taxpayers who may avail of the exclusions General rule: The proceeds of life insurance
policies paid to his estate or to any beneficiary
Exclusion Taxpayer (but not a transferee for a valuable
Return of capital All taxpayers since consideration), directly or in trust, upon the
there is no income. death of the insured, are excluded from the
Already subject to All taxpayers unless gross income of the beneficiary. However, if
internal revenue tax provided that income such amounts are held by the insurer under an
is to be included. agreement to pay interest thereon, the interest
Express exclusion As expressly provided. payments received by the insured shall be
included in gross income. The interest income
shall be taxed at the graduated income tax
Exclusions distinguished from deductions rates.
and tax credit
 Exclusions from gross income refer to flow (b) Return of premium paid.—
of wealth to the taxpayer which are not General rule: The amount received by the
treated as part of gross income for purposes insured as a return of premiums paid by him
of computing the taxpayer’s taxable under life insurance, endowment, or annuity
income, due to the following reasons: (1) it is contracts, either during the term or at the
exempted by the Constitution or a statute; maturity of the term mentioned in the contract
or (2) it does not come within the definition or upon surrender of the contract is a return of
of income. Deductions, on the other hand, capital and not income.
are the amounts which the law allows to be
subtracted from gross income in order to This refers to the cash surrender value of the
arrive at net income. contract.

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Exception: If the amounts received by the


insured (when added to the amounts already Nontaxable – Taxable –
received before the taxable year under such compensation for compensation for
contract) exceed the aggregate premiums or damages on account of damages on account
considerations paid (whether or not paid during of
the taxable year), then the excess shall be (1) Personal (physical) (1) Actual damages
included in gross income. injuries or sickness for loss of
anticipated profits
(c) Amounts received under life insurance, (2) Any other damages (2) .Moral and
endowment or annuity contracts.—Amounts recovered on exemplary
received (other than amounts paid by reason of account of personal damages awarded
the death of the insured and interest payments injuries or sickness as a result of break
on such amounts) under a life insurance, of contract
endowment or annuity contracts are excluded (3) Exemplary and (3) Interest for non-
from gross income, but if such amounts (when moral damages for taxable damages
added to amounts already received before the out-of-court above
taxable year under such contract) exceed the settlement,
aggregate premiums of considerations paid including attorney’s
(whether or not paid during the taxable year), fees
then the excess shall be included in gross (4) Alienation of (4) Any damages as
income. However, in the case of a transfer for affection, or breach compensation for
valuable consideration, by assignment or of promise to marry unrealized income
otherwise, of a life insurance, endowment , or (5) Any amount
annuity contract, or any interest therein, only received as a return
the actual value of such consideration and the of capital or
amount of the premiums and other sums reimbursement of
subsequently paid by the transferee are exempt expenses
from taxation.
(f) Income exempt under tax treaty.— Income of
(d) Value of property acquired by gift, bequest, any kind, to the extent required by any treaty
devise or descent.— Gifts, bequests and devises obligation binding upon the Government of the
(which are subject to estate or gift taxes) are Philippines.
excluded from gross income, BUT not the
income from such property. If the amount (g) Retirement benefits, pensions, gratuities, etc..
received is on account of services rendered, These are
whether constituting a demandable debt or not, (1) Retirement benefits under RA 7641, RA
or the use or opportunity to use of capital, the 4917, and Section 60(B) of the NIRC
receipt is income [Pirovano v. Commissioner G.R. (2) Terminal pay
No. L-19865, July 31, 1965]. (3) Retirement Benefits from foreign
government agencies
(e) Amount received through accident or health (4) Veterans benefits
insurance (Compensation for damages).— As a (5) Benefits under the Social Security Act
rule, amounts received through accident or (6) GSIS benefits
health insurance or under workmen’s
compensation acts, as compensation for Retirement benefits received under RA
personal injuries or sickness, plus the amount of 7641(The Retirement Pay Law) and those
any damages received, whether by suit or received by officials and employees of private
agreement, on account of such injuries or firms under a reasonable private benefit plan
sickness are excluded from gross income. (RPBP) maintained by the employer under
RA 4917 (now Section 32(B)(6)(a) of NIRC)
Examples of nontaxable and taxable damages are excluded from gross income subject to
recoveries are: income tax.

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RA 7641 RPBP Terminal pay/Separation pay


Retiring employee Retiring official or Any amount received by an employee or by his
must be in the service employee must have heirs from the employer as a consequence of
of same employer been in the service of separation of such official or employee from the
CONTINUOUSLY for the same employer service of the employer because of death,
at least five (5) years forat least ten (10) sickness, other physical disability or for any
years. cause beyond the control of the employee. The
Retiring employee Retiring official or phrase “for any cause beyond the control of the
must be at least sixty employee must be at said official or employee” means that the
(60) years oldbut not least fifty (50) years old separation of the employee must be involuntary
more than 65 years of at the time of and not initiated by him.
age at the time of retirement
retirement The separation must not be of his own making.
Availed of only once, Retiring employee
and only when there is shall not have Notes:
no RPBP previously availed of  Sickness must be life-threatening or one
the privilege under a which renders the employee incapable of
retirement benefit working
plan of the same or  Retrenchment of the employee due to
another employer unfavorable business conditions or financial
reverses is considered as involuntary.
However, resignation or availment of an
Plan must be optional early retirement plan is voluntary
reasonable. Its and bars a claim under this provision.
implementation must  BIR Ruling 143-98: The “terminal leave pay”
be fair and equitable (amount paid for the commutation of leave
for the benefit of all credits) of retiring government employees is
employees (e.g. from considered not part of the gross salary, and
president to laborer) is exempt from taxes. The government
Plan must be recognizes that for most public servants,
approved by BIR retirement pay is always less than generous
if not meager and scrimpy. Terminal leave
A 'reasonable private benefit plan' means a payments are given not only at the same
pension, gratuity, stock bonus or profit-sharing time but also for the same policy
plan maintained by an employer for the benefit considerations governing retirement
of some or all of his employees wherein benefits. [Commissioner v. Castaneda, 203
contributions are made by such employer, or SCRA 72].
employees, or both for the purpose of  Retirement BENEFITS from foreign
distributing to such employees the earnings and government agencies – The social security
principal of the fund thus accumulated by the benefits, retirement gratuities, pensions and
trust in accordance with such plan (trust fund) other similar benefits received by resident or
non-resident citizens or aliens who come to
Further, it should be provided in the plan that at reside permanently in the Philippines from
no time prior to the satisfaction of all liabilities foreign government agencies and other
with respect to employees under any trust, shall institutions, private or public;
any part of the corpus or income of the fund be  Payments of VETERANS benefits under U.S.
used for, or be diverted to, any purpose other Veterans Administration – Payments of
than for the exclusive benefit of his employees. 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

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 Social Security Act benefits – Payments of (3) Under R.A. 7916 (PEZA Law), as amended,
benefits received under the Social Security PEZA-registered enterprises are given
Act of 1954 (RA 8282), as amended, e.g., income tax holidays of six or four years from
Maternity Benefits the date of commercial operations,
 GSIS benefits – Benefits received from GSIS depending on whether their activities are
under the GSIS Act of 1937, as amended, considered pioneer or non-pioneer.
and the retirement gratuity received by (4) Under R.A. 9178 [Barangay Micro Business
government officials and employees are not Enterprises Act of 2002], BMBEs shall be
taxable. [Sec. 32B6., NIRC; Sec. B1, RR 2-98] exempt from income tax for income arising
 Winnings, prizes and award, including those from the operation of the enterprise.
in sports competitions.—All prizes and
awards granted to athletes: DEDUCTIONS FROM GROSS INCOME
(1) in local and international sports Deductions are items or amounts which the law
competitions and tournaments whether allows to be deducted from the gross of income
held in the Philippines or abroad, AND of a taxpayer in order to arrive at taxable
(2) sanctioned by their national sports income.
associations shall not be included in gross
income and shall be tax exempt. [Sec. 32 In general, deductions or allowable deductions
B7d, NIRC] are business expenses and losses incurred
 Prizes and awards made primarily in which the law allows to reduce gross business
recognition of charitable, literary, income to arrive at net income subject to tax.
educational, artistic, religious, scientific, or [Sec. 65, Rev. Reg. No. 2].
civic achievement are not taxable, provided:
(1) Recipient was selected without any action Deductions are in the nature of an exemption
on his part to enter the contest or from taxation; they are strictly construed against
proceeding; and the claimant, who must point to a specific
(2) Recipient is not required to render provision allowing them and who has the
substantial future services as a condition burden of proving that they falls within the
to receiving the prize or award purview of such provision. Thus, all deductions
must be substantiated, except when the law
(3) Under special laws dispenses with the records, documents or
receipts to support the deductions.
Personal Equity and Retirement Account
(1) Under R.A. 6657 (Comprehensive Agrarian If the exemption is not expressly stated in the
Reform Package Law), gain arising from the law, the taxpayer must at least be within the
transfer of agricultural property covered by purview of the exemption by clear legislative
the law shall be exempt from capital gains intent [Commissioner of Customs v. Philippine
tax. Acetylene Co., G.R. No. L-22443 May 29, 1971]
(2) Under R.A. 6938 [Cooperative Code of the
Philippines], as amended by R.A. 9520, However, if there is an express mention in the
cooperatives transacting business with both law or if the taxpayer falls within the purview of
members and non-members shall not be the exemption by clear legislative intent, the
subject to tax on their transactions with rule on strict construction will not apply.
members. In relation to this, the [Commissioner v. Anoldus Caprentry Shop, G.R.
transactions of members with the No. 71122 March 25, 1988]
cooperative shall not be subject to any taxes
and fees, including but not limited to final The purpose of deductions from gross income is
taxes on members' deposits. to provide the taxpayer a just and reasonable
tax amount as the basis of income tax. It is
because many taxpayers spend adequate
expenditures in order to obtain a legitimate
income.

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Types of deductions (b) Sale of stock in trade by a real estate dealer


There are three (3) types of deductions from and dealer in securities: Real estate dealers
gross income: and dealers in securities are ordinarily not
(a) itemized deductions in Section 34(A) to (J) allowed to compute the amount
and (M) available to all kinds of taxpayers representing return of capital through cost
engaged in trade or business or practice of of sales. Rather they are required to deduct
profession in the Philippines; the total cost specifically identifiable to the
(b) optional standard deduction in Section 34(L) real property or shares of stock sold or
available only to individual taxpayers exchanged.
deriving business, professional, capital (c) Sale of services: Their entire gross receipts
gains and passive income not subject to are treated as part of gross income.
final tax, or other income; and
(c) the special deductions in Sections 37 and 38 Itemized Deductions
of the NIRC, and in special laws like the BOI These are enumerated in Section 34 of the
law [E.O. 226]. NIRC. Additional deductions are granted to
insurance companies in Section 37, while losses
General rules from wash sales of stock or securities by a
(a) Deductions must be paid or incurred in dealer in securities are provided for in Section
connection with the taxpayer’s trade, 38 of the NIRC. Other itemized deductions
business or profession could be granted under general or special laws,
(b) Deductions must be supported by adequate e.g. additional training expenses are allowed to
receipts or invoices (except standard enterprises registered with PEZA, BOI, and
deduction) SBMA.
(c) Additional requirement relating to
withholding Timing of Claiming Deductions
A taxpayer has the right to deduct all
Return of capital (cost of sales or services) authorized allowances for the taxable year. As
Income tax is levied by law only on income; a rule, if he does not within any year deduct
hence, the amount representing return of certain of his expenses, losses, interest, taxes or
capital should be deducted from proceeds from other charges, he cannot deduct them from the
sales of assets and should not be subject to income of the next of any succeeding year [Sec.
income tax. 76, Income Tax Regulations].

Costs of goods purchased for resale, with proper EXPENSES


adjustment for opening and closing inventories, Business expenses deductible from gross income
are deducted from gross sales in computing include the ordinary and necessary expenditures
gross income [Sec. 65, Rev. Reg. 2] directly connected with or pertaining to the
taxpayer’s trade or business. The cost of goods
(a) Sale of inventory of goods by manufacturers purchased for resale, with proper adjustment for
and dealers of properties: In sales of goods opening and closing inventories, is deducted
representing inventory, the amount received from gross sales in computing gross income.
by the seller consists of return of capital and
gain from sale of goods or properties. That Includes:
portion of the receipt representing return of (a) Salaries, wages, and other forms of
capital is not subject to income tax. compensation for personal services actually
Accordingly, cost of goods manufactured rendered, including the grossed-up
and sold (in the case of manufacturers) and monetary value of fringe benefits furnished
cost of sales (in the case of dealers) is or granted by the employer to the employee
deducted from gross sales and is reflected (b) Travel expenses
above the gross income line in a profit and (c) Rentals
loss statement. (d) Entertainment, recreation and amusement
expenses

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(e) Other expenses such as repairs or those invoices, receipts or vouchers, particularly lack
incurred by farmers and other persons in of proof of the items constituting the expense is
agribusiness fatal to the allowance of the deduction
[Gancayco v. Collector, G.R. No. L-13325, April
Requisites for deductibility of business 20, 1961].
expenses.—
(a) Ordinary AND necessary; Substantiation requirement – Sec. 34(A)(1)(b),
ORDINARY - normal and usual in relation NIRC: No deduction from gross income shall be
to the taxpayer's business and surrounding allowed unless the taxpayer shall substantiate
circumstances; need not be recurring with sufficient evidence, such as official receipts
NECESSARY - appropriate and helpful in or other adequate records: (1) the AMOUNT of
the development of taxpayer's business or the expense being deducted, and (2) the
are proper for the purpose of realizing a DIRECT CONNECTION or relation of the
profit or minimizing a loss expense being deducted to the development,
(b) Paid or incurred during the taxable year; management, operation and/or conduct of the
(c) Others: (not in the SC syllabus) trade, business or profession of the taxpayer.
(1) Paid or incurred in carrying on or
which are directly attributable to the When to ACCRUE expenses: “all–events test”
development, management, operation states that under the accrual method of
and/or conduct of the trade, business or accounting, expenses are deductible in the
exercise of profession; taxable year in which: (1) all events have
(2) Substantiated by adequate proof – occurred which determine the liability; and (2)
documented by official receipts or the amount of liability can be determined with
adequate records, which reflect the reasonable accuracy.
amount of expense deducted and the
connection or relation of the expense to Kinds of business expenses
the business/trade of the taxpayer); These are:
(3) Legitimately paid (not a BRIBE, (1) Salaries, wages and other forms of
kickback, or otherwise contrary to law, compensation for personal services actually
morals, public policy); rendered, including the grossed-up
(4) If subject to withholding tax, the tax monetary value of the fringe benefit
required to be withheld on the expense subjected to fringe benefit tax which tax
paid or payable is shown to have been should have been paid
properly withheld and remitted to the (2) Travelling expenses
BIR on time; (3) Cost of materials
(5) Amount must be reasonable. (4) Rentals and/or other payments for use or
possession of property
Note: The expenses allowable to a non-resident (5) Repairs and maintenance
alien or a foreign corporation consist of only (6) Expenses under lease agreements
such expenses as are incurred in carrying on any (7) Expenses for professionals
business or trade conducted within the (8) Entertainment expenses
Philippines exclusively. [Sec. 77 RR 2] (9) Political campaign expenses
(10) Training expenses
COHAN Rule: This relief will apply if the (11) Others
taxpayer has shown that it is usual and
necessary in the trade to entertain and to incur
similar kinds of expenditures, there being
evidence to show the amounts spent and the
persons entertained, though not itemized. In
such a situation, deduction of a portion of the
expenses incurred might be allowed even if
there are no receipts or vouchers. Absence of

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Salaries, wages and other forms of Cost of materials


compensation for personal services actually Deductible only to the amount that they are
rendered, including the grossed-up monetary actually consumed and used in operation during
value of the fringe benefit subjected to fringe the year for which the return is made, provided
benefit tax which tax should have been paid that their cost has not been deducted in
determining the net income for any previous
Given for personal services must be actually year.
rendered and reasonable.
Rentals and/or other payments for use or
For income payment to be allowed as possession of property
deduction, the withholding tax must have been (1) Required as a condition for continued use or
paid [RR No. 12-2013]. possession of property.
(2) For purposes of trade business or profession.
Bonuses are deductible when: (3) Taxpayer has not taken or is not taking title
(a) made in good faith to the property or has no equity other than
(b) given as additional compensation for that of lessee, user, or possessor.
personal services actually rendered
(c) such payments, when added to the On the accrual basis, rent is deductible as
stipulated salaries, do not exceed a expense when liability is incurred during the
reasonable compensation for the services period of use. On cash basis, rent is deductible
rendered when it is incurred and paid.

Traveling expenses If the advance payment is a prepaid rental, such


This include transportation expenses and meals payment is taxable income to the lessor in the
and lodging [Sections 65 and 66, Rev. Reg. No. year when it was received. However, an advance
2] payment is not deductible expense of the lessee
(1) Expenses must be reasonable and necessary. until the period is used. [Valencia and Roxas]
(2) Must be incurred or paid “while away from
home” Repairs and maintenance
(3) Tax home is the principal place of business, (a) Incidental or ordinary repairs are deductible.
when referring to “away from home” Repairs which neither materially add to the
(4) Incurred or paid in the conduct of trade or value of the property nor appreciably
business. prolong its life, but keep it in an ordinarily
efficient working condition, may be
Note: However, necessary transportation deducted as expenses, provided the plant or
expenses of the taxpayer (which are different property account is not increased by the
from the transportation expenses included in amount of such expenditure. The life of the
the term “travel expenses”) in its “tax home” are asset referred to is the probable, normal,
deductible. Thus, a taxpayer operating its useful life for the purpose of the allowance
business in Manila is allowed transportation for the return of the capital investment –
expenses from its office to its customers’ place not what the life that would have been if no
of business and back. But the transportation repairs had been made after the property
expenses of an employee from his residence to was damaged by a casualty. Since the
its office and back are not deductible as they are repairs prolonged the lives of the said
considered personal expenses. vessels of petitioners, the disallowance
must be sustained. [Visayan Transportation
Co. v. CTA, CTA Case No. 1119, Sept. 30,
1964].
(b) Extraordinary repairs are not deductible –
they are capital expenditures
(1) Repairs which add material value to the
property or appreciably prolong its life

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(2) Repairs in the nature of replacement, to Entertainment/Representation expenses


the extent that they arrest deterioration These are entertainment, amusement and
and appreciably prolong the life of the recreation (EAR) expenses incurred or paid
property, should be charged against the during the year that are directly connected to
depreciation reserves if such account is the development, management and operation
kept. [Sec. 68, Rev. Regs. 2]. of the trade, business or profession of the
taxpayer.
All maintenance expenses on account of non-
depreciable vehicles for taxation purposes are Requisites for deductibility:
disallowed in its entirely. [RR No. 12-2012] (a) Reasonable in amount.
(b) Paid or incurred during the taxable period.
Expenses under lease agreements (c) Directly connected to the development,
Requisites for deductibility: management, and operation of the trade,
(1) Required as a condition for continued use or business or profession of the taxpayer, or
possession; that are directly related to or in furtherance
(2) For purposes of the trade, business or of the conduct thereof.
possession; (d) Not to exceed such ceiling as the Secretary
(3) Taxpayer has not taken or is not taking title of Finance prescribe (under RR 10-02, in no
to the property or has no equity other than case to exceed 0.50% of net sales for sellers
that of lessee, user, or possessor. of goods or properties or 1% of net revenues
for sellers of services, including taxpayers
Expenses for professionals engaged in the exercise of profession and
Deductible in the year the professional services use or lease of properties)
are rendered, not in the year they are billed, (e) Not incurred for purposes contrary to law,
provided that the “all events” is present. morals, public policy or public order.
(f) Must be substantiated with sufficient
“All events test” requires: evidence such as receipts and/or adequate
(a) Fixing a right to income or liability to pay; records.
and
(b) The availability of reasonably accurate Exclusions from EAR expenses:
determination of such income or liability. (1) Expenses which are treated as compensation
or fringe benefits for services rendered
The “all-events test” does not demand that the under an employer-employee relationship
amount of income or liability be known (2) Expenses for charitable or fund raising
absolutely; it only requires that a taxpayer has events
at its disposal the information necessary to (3) Expenses for bona fide business meeting of
compute the amount with reasonable accuracy, stockholders, partners or directors
which implies something less than an exact or (4) Expenses for attending or sponsoring an
completely accurate amount. [Commissioner v. employee to a business league or
Isabela Cultural Corporation, GR. 172231, Feb. 12, professional organization meeting
2007] (5) Expenses for events organized for promotion
marketing and advertising, including
A professional may claim as deductions the cost concerts, conferences, seminars, workshops,
of supplies used by him in the practice of his conventions and other similar events; and
profession, expenses paid in the operation and (6) Other expenses of a similar nature.
repair of transportation equipment used in
making professional calls, dues to professional Political campaign expenses
societies and subscriptions to professional Amount expended for political campaign
journals. [Mamalateo] purposes or payments to campaign funds are
not deductible either as business expenses or as
contribution [CTA Case No. 695, April 30, 1969,
citing Mertens]

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Training expenses INTEREST


Under Section 30 of the Tax Code, as Requisites for deductibility.—
implemented by Sec. 20 of the Revenue (a) There is an indebtedness.
Regulations No. 2, organization and pre- (b) The indebtedness is that of the taxpayer
operating expenses of a corporation (including (c) The indebtedness is connected with the
training expenses) are considered as capital taxpayer‘s trade, profession, or business.
expenditures and are therefore, not deductible (d) The interest must be legally due.
in the year they are paid or incurred. But (e) The interest must be stipulated in writing.
taxpayers who incur these expenses and (f) The taxpayer is LIABLE to pay interest on the
subsequently enter the trade or business to indebtedness.
which the expenditures relate can elect to (g) The indebtedness must have been paid or
amortize these expenditures over a period not accrued during the taxable year.
less than sixty (60) months. [BIR Ruling 102-97 (h) The interest payment arrangement must not
(Sept. 29, 1997)] be between related taxpayers
(i) The interest must not be incurred to finance
This rule, however, does not apply to a situation petroleum operations.
where an existing corporation incurs these same (j) In case of interest incurred to acquire
expenditures for the purpose of expanding its property used in trade, business or exercise
business in a new line of trade, venture or of profession, the same was not treated as a
activity. capital expenditure

Others Limitation: The taxpayer's allowable deduction


(a) Expenses Allowable to Private Educational for interest expense shall be reduced by an
Institutions: amount equal to 33% of the interest income
(b) In addition to the expenses allowable as subjected to final tax (see chapter on taxation of
deductions under the NIRC, a private passive income for interest income); effective
proprietary educational institution may at January 1, 2009.
its OPTION, elect either:
(1) To deduct expenditures otherwise Non-deductible interest expense.—
considered as capital outlays or (a) Interest paid in advance by the taxpayer who
depreciable assets incurred during the reports income on cash basis shall only be
taxable year for the expansion of school allowed as deduction in the year the
facilities, OR indebtedness is paid.
(2) To deduct allowances for depreciation (b) If the indebtedness is payable in periodic
thereof. amortizations, only the amount of interest
which corresponds to the amount of the
Thus, where the expansion expense has been principal amortized or paid during the year
claimed as a deduction, no further claims for shall be allowed as deduction in such
yearly depreciation of the school facilities are taxable year.
allowed. (c) Interest payments made between related
taxpayers.
Advertising Expenses (d) Interest on indebtedness incurred to finance
The media advertising expenses which were petroleum exploration.
found to be inordinately large and thus, not
ordinary, and which were incurred in order to Related Taxpayers
protect the taxpayer’s brand franchise which is (a) Between members of the family, i.e. brothers
analogous to the maintenance of goodwill or and sisters (whether by the whole or half-
title to one’s property, are not ordinary and blood), spouse, ancestor, and lineal
necessary expenses but are capital descendants; or
expenditures, which should be spread out over a
reasonable period of time. [CIR v. General Foods
Phils. Inc, GR No. 143672, April 24, 2003]

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(b) Except in case of distributions in liquidation, Should the taxpayer elect to deduct the interest
between an individual and a corporation, payments against its gross income, the taxpayer
where the individual owns directly or cannot at the same time capitalize the interest
indirectly more than 50% of the payments. In other words, the taxpayer is not
outstanding stock of the corporation entitled to both the deduction from gross income
(c) Except in the case of distributions in and the adjusted (increased) basis for
liquidation, between two corporations determining gain or loss and the allowable
where: depreciation charge. [Paper Industries Corp. v.
(1) Either one is a personal holding company Commissioner, 250 SCRA 434]
of a foreign personal holding company
with respect to the taxable year Reduction of interest expense/interest arbitrage
preceding the date of the sale of The taxpayer's allowable deduction for interest
exchange; and expense shall be reduced by an amount equal to
(2) More than 50% of the outstanding stock 33% of the interest income subjected to final
of each is owned, directly or indirectly, tax; effective January 1, 2009. (RA 9337)
by or for the same individual; or
(d) Between parties to a trust- This limitation is apparently intended to counter
(1) Grantor and Fiduciary; or the tax arbitrage scheme where a taxpayer
(2) Fiduciary of a trust and fiduciary of obtains an interest-bearing loan and places the
another trust if the same person is a proceeds of such loan in investments that yield
grantor with respect to each trust; or interest income subject to preferential tax rate
(3) Fiduciary and Beneficiary of 20% final withholding tax. [Valencia and
Roxas]
Interest subject to special rules.
Interest paid in advance TAXES
(a) No deduction shall be allowed if within the Taxes Proper: Refers to national and local taxes;
taxable year an individual taxpayer reporting
income on cash basis incurs an indebtedness on Requisites for deductibility.—
which an interest is paid in advance through Such tax must be:
discount or otherwise. (a) Paid or incurred within the taxable year;
(b) But the deduction shall be allowed in the (b) Paid or incurred in connection with the
year the indebtedness is paid taxpayer‘s trade, profession or business;
(c) Imposed directly on the taxpayer.
Interest periodically amortized (d) Not specifically excluded by law from being
If the indebtedness is payable in periodic deducted from the taxpayer‘s gross income.
amortizations, the amount of interest which
corresponds to the amount of the principal Non-deductible taxes.—
amortized or paid during the year shall be General Rule: All taxes, national or local, paid or
allowed as deduction in such taxable year incurred during the taxable year in connection
with the taxpayer's profession, trade or
Interest expense incurred to acquire property for business, are deductible from gross income
use in trade/business/profession
At the option of the taxpayer, interest expense Exceptions:
on a capital expenditure may be allowed as: (1) Philippine income tax, except Fringe Benefit
(1) A deduction in full in the year when incurred; Taxes;
(2) A capital expenditure for which the taxpayer (2) Income tax imposed by authority of any
may claim only as a deduction the periodic foreign country, if taxpayer avails of the
amortization of such expenditure. Foreign Tax Credit (FTC)
(a) Exception to exception: When the taxpayer
does NOT signify his desire to avail of the
tax credit for taxes of foreign countries,
the amount may be allowed as a deduction

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from gross income of citizens and


domestic corporations subject to the Tax Credit Tax Deduction
limitations set forth by law. Taxes are deductible Taxes are deductible
(3) Estate and donor‘s taxes from the Phil. Income from gross income in
(4) Percentage tax on stock transaction; tax itself computing the taxable
(5) Taxes assessed against local benefits of a income
kind tending to increase the value of the Effect: Reduces Effect: Reduces
property assessed (Special Assessments) Philippine income tax taxable income upon
(6) Value Added Tax liability which the tax liability
(7) Fines and penalties is calculated
(8) Final taxes Sources: Only foreign Sources: Deductible
(9) Capital Gains Tax income taxes may be taxes (e.g. business
(10) Import duties claimed as credits tax, excise tax)
(11) Business taxes against Philippine
(12) Occupation taxes income tax.
(13) Privilege and license taxes
(14) Excise taxes An amount subtracted from an individual's or
(15) Documentary stamp taxes entity's tax liability to arrive at the total tax
(16) Automobile registration fees liability. A tax credit reduces the taxpayer's
(17) Real property taxes liability, compared to a deduction which reduces
(18) Electric energy consumption tax under BP taxable income upon which the tax liability is
36 calculated. A credit differs from deduction to
the extent that the former is subtracted from
Treatments of surcharges/interests/fines for the tax while the latter is subtracted from
delinquency.— income before the tax is computed. [CIR v.
The amount of deductible taxes is limited to the Bicolandia Drug Corp. G.R. No. 148083, July 21,
basic tax and shall not include the amount for 2006]
any surcharge or penalty on delinquent taxes.
However, interest on delinquent taxes, although The following may claim tax credits:
not deductible as tax, can be deducted as (1) Resident citizens
interest expense at its full amount. [CIR v (2) Domestic corporations, which include all
Palanca, 18 SCRA 496]. partnerships except general professional
partnerships
Although interest payment for delinquent taxes (3) Members of general professional
is not deductible as tax, the taxpayer is not partnerships
precluded thereby from claiming said interest (4) Beneficiaries of estates or trusts
payment as deduction as such. [CIR v. Vda. de
Prieto, 1960] The following may NOT claim tax credits:
(1) Non-resident citizens
Treatment of special assessment.— (2) Aliens, whether resident or non-resident
Special assessments and other taxes assessed (3) Foreign corporations, whether resident on
against local benefits of a kind tending to non-resident
increase the value of the property assessed are
non-deductible from gross income. Note: Tax credits for foreign taxes are allowed
only for income derived from sources outside
Tax credit vis-à-vis deduction.— the Philippines. The above taxpayers are not
Tax credit – amount allowed by law to reduce entitled to tax credit; they are taxable only on
the Philippine income tax due, subject to income derived from Philippine sources.
limitations, on account of taxes paid or accrued
to a foreign country

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Limitations on Tax Credit.— (b) Actually sustained and charged off within
(1) [Per Country Limit]The amount of tax credit the taxable year;
shall not exceed the same proportion of the (c) Incurred in trade, business or profession;
tax against which such credit is taken, which (d) Of property connected with the trade,
the taxpayer's taxable income from sources business, or profession, if the loss arises
within such country bears to his entire from fires, storms, shipwreck or other
taxable income for the same taxable year; casualties, or from robbery, theft, or
and embezzlement;
(2) [Worldwide Limit]The total amount of the (e) Sustained in a closed and completed
credit shall not exceed the same proportion transaction;
of the tax against which such credit is taken, (f) Not compensated for by insurance or other
which the taxpayer's taxable income from form of indemnity;
sources without the Philippines taxable (g) Not claimed as a deduction for estate tax
bears to his entire taxable income for the purposes;
same taxable year. (h) In case of casualty loss, filing of notice of loss
with the BIR within 45 days from the date of
Formula: the event that gave rise to the casualty; and
Limit #1 (i) The taxpayer must prove the elements of the
Taxable loss claimed, such as the actual nature and
Limit on occurrence of the event and amount of the
Income Per
amount of loss.
Foreign
Phil. tax credit
Country x =
Income Tax (Per
Worldwide In case a non-depreciable vehicle is sold at a
Country loss, the loss incurred from the sale of non-
Taxable
Limit) depreciable vehicle is not allowed as a
Income
deduction. [RR No. 2-2013]
Limit #2
Taxable No loss is recognized in the following.—
Limit on (1) Merger, consolidation, or control securities
Income For
amount of (where no gains are recognized either);
all Foreign
Phil. tax credit (2) Exchanges not solely in kind;
Countries x =
Income Tax (World (3) Related taxpayers (see above – (c) Interest
Worldwide
Wide expense incurred to acquire property for use
Taxable
Limit) in trade/business/profession)
Income
(4) Wash sales;
Note: Computation of FTC: Limit #2 applies (5) Illegal transactions
where taxes are paid to two or more foreign
countries. Allowable tax credit is the lower Other types of losses.—
between the tax credit computed under Limit #1 Capital losses
and that computed under Limit#2. (1) Incurred in the sale or exchange of capital
assets (allowable only to the extent of
FTC Limitations – lowest of the 3: capital gains, except for banks and trust
(1) Actual FTC companies under conditions in Sec. 39 of
(2) For taxes paid to one foreign country NIRC where loss from such sale is not
(3) For taxes paid to 2 or more foreign countries subject to the foregoing limitation);
(2) Resulting from securities becoming
LOSSES worthless and which are capital assets
Requisites for deductibility.— (considered loss from sale or exchange) on
(a) Loss must be that of the taxpayer (e.g., last day of the taxable year ;
losses of the parent corp. cannot be (3) Losses from short sales of property;
deducted by its subsidiary); (4) Losses due to failure to exercise privileges or
options to buy or sell property.

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Securities becoming worthless Exception: Mines other than oil and gas wells,
(a) Loss in shrinkage in value of stock through where a net operating loss without the benefit
fluctuation in the market is not deductible of incentives provided for under EO No. 226
from gross income. (To be deductible, the (Omnibus Investments Code) incurred in any of
loss must be actually suffered when the the first ten (10) years of operation may be carried
stock is disposed of.) over as a deduction from taxable income for the
(b) Exception: If the stock of the corporation next five (5) years immediately following the
becomes worthless, the cost or other basis year of such loss.
may be deducted by its owner in the taxable
year in which the stock became worthless, Requisites for NOLCO:
provided a satisfactory showing of its (a) The taxpayer was not exempt from income
worthlessness be made, as in the case of tax the year the loss was incurred;
bad debts. (b) There has been no substantial change in the
ownership of the business or enterprise
Losses on wash sales of stocks or securities wherein:
Wash Sale - a sale or other disposition of stock (1) AT LEAST 75% of nominal value of
or securities where substantially identical outstanding issued shares is held by or
securities (substantially the same as those on behalf of the same persons; or
disposed of) are acquired or purchased (or there (2) AT LEAST 75% of the paid up capital of
was an option to acquire, and the acquisition or the corporation is held by or on behalf
option should be by purchase or exchange upon of the same persons.
which gain or loss is recognized under the
income tax law) within a 61-day period, Taxpayers Entitled to NOLCO
beginning 30 days before the sale and ending (1) Individuals engaged in trade or business or in
30 days after the sale the exercise of his profession (including
estates and trusts); Note: An individual who
General rule: Not deductible from gross income avails of 40% OSD shall not simultaneously
Exception: If by a dealer in securities in the claim deduction of NOLCO. However, the
course of ordinary business, it is deductible. three-year reglementary period shall
continue to run during such period
Wagering losses notwithstanding the fact that the aforesaid
Losses from wagering (gambling) are taxpayer availed of OSD during the said
deductible only to the extent of gains from such period.
transactions. A wager is made when the (2) Domestic and resident foreign corporations
outcome depends upon CHANCE. subject to the normal income tax (e.g.,
manufacturers and traders) or preferential
NOLCO (Net Operating Loss Carry Over) tax rates under the Code (e.g., private
Net operating loss (NOL)is the excess of educational institutions, hospitals, and
allowable deductions over gross income for any regional operating headquarters) or under
taxable year immediately preceding the current special laws (e.g., PEZA-registered
taxable year. companies)

NOLCO: The NOL of the business or enterprise Note: Domestic and resident foreign corporations
which had not been previously offset as taxed during the taxable year with Minimum
deduction from gross income shall be carried Corporate
over as a deduction from gross incomefor the
next three (3) consecutive taxable years Income Tax cannot enjoy the benefit of NOLCO.
immediately following the year of such loss, However, the three-year period for the expiry of
provided however, that any net loss incurred in a he NOLCO is not interrupted by the fact that the
taxable year during which the taxpayer was corporation is subject to MCIT during such
exempt from income tax shall not be allowed as three-year period.
a deduction. [Sec. 34(3)(D), NIRC]

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Other Losses: (2) Receivables from an insurance or surety


(1) Abandonment losses in petroleum operation company (as debtor) may be written off as
and producing well. bad debts only when such company is
(2) Losses due to voluntary removal of building declared closed due to insolvency or similar
incident to renewal or replacements are reason
deductible from gross income.
(3) Loss of useful value of capital assets due to The taxpayer must show that the debt is indeed
charges in business conditions is deductible uncollectible even in the future. He must prove
only to the extent of actual loss sustained that he exerted diligent efforts to collect:
(after adjustment for improvement, (1) Sending of statement of accounts
depreciation and salvage value) (2) Collection letters
(4) Losses from sales or exchanges of property (3) Giving the account to a lawyer for collection
between related taxpayers are not (4) Filing the case in court [Phil. Refining Corp. v.
recognized, but the gains are taxable. CA, G.R. No. 118794, May 8, 1996]
In ascertaining the debt to be worthless, it is not
Losses of farmers incurred in the operation of
enough that the taxpayer acted in good faith.
farm business are deductible.
He must show that he had reasonably
investigated the relevant facts from which it
BAD DEBTS
became evident, in the exercise of sound,
Debts resulting from the worthlessness or
objective business judgment, that there
uncollectibility, in whole or in part, of amounts
remained no practical, but only a vague
due the taxpayer actually ascertained to be
prospect that the debt would be paid [Collector
worthless and the corresponding receivable
v. Goodrich, 1967]
should have been written off or charged off
within the taxable year Rev. Reg. No. 5-1999:
“Actually ascertained to be worthless” –
Requisites for deductibility. (1) Determination of worthlessness must
(1) Valid and legally demandable debt due to depend upon the particular facts and
the taxpayer circumstances of the case. A taxpayer may
(2) Debt is connected with the taxpayer's trade, not postpone a bad debt deduction on the
business or practice of profession; basis of a mere hope of ultimate collection or
(3) Debt was not sustained in a transaction because of a continuance of attempts to
entered into between related parties; collect, where there is no showing that the
(4) Actually ascertained to be worthless and surrounding circumstances differ from those
uncollectible as of the end of the taxable relating to other notes which were charged
year (taxpayer had determined with off in a prior year
reasonably degree of certainty that the claim (2) Accounts receivable may be written off as
could not be collected despite the fact that bad debts even without conclusive evidence
the creditor took reasonable steps to collect); that they had definitely become worthless
and when:
(5) Actually charged off the books of accounts of (a) the amount is insignificant; and
the taxpayer as of the end of the taxable year (b) collection through court action may be more
costly to the taxpayer
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the “Actually charged off from the taxpayer’s book
uncollectibility of debt of accounts”
Receivable which has actually become
Exceptions: worthless at the end of the taxable year has
(1) Banks as creditors – BSP Monetary Board been cancelled and written off. Mere recording
shall ascertain the worthlessness and in the books of account of estimated
uncollectibility of the debt and shall approve uncollectible accounts does not constitute a
the writing off write-off.

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Effect of recovery of bad debts.— Methods of computing depreciation


Tax Benefit Rule on Bad Debts allowance.—
Bad debts claimed as deduction in the (a) Straight-line cost- salvage value
preceding year(s) but subsequently recovered estimated life
shall be included as part of the taxpayer‘s gross (b) Declining balance cost – depreciation
income in the year of such recovery the extent of x Rate
the income tax benefit of said deduction. Also estimated life
called the equitable doctrine of tax benefit. (c) Sum-of-the-year- nth period x cost-
(1) Allowance must be reasonable digit (SYD) salvage
(2) Charged off during the taxable year from the SYD
taxpayer‘s books of accounts. (d) Any other method
(3) Does not exceed the acquisition cost of the which may be
property. prescribed by the
Secretary of Finance
DEPRECIATION upon the
An annual reasonable allowance to reduce the recommendation of
wasteful value of the tangible fixed assets the CIR
resulting from wear and tear and normal
obsolescence CHARITABLE AND OTHER CONTRIBUTIONS
Requisites for deductibility.—
For intangible assets, the annual allowance to (1) Actually PAID or made to the ENTITIES or
rduce their useful value is called amortization. institutions specified by law;
(2) Made within the TAXABLE year.
Requisites for Deductibility. – (3) It must be EVIDENCED by adequate receipts
(1) It must be reasonable. or records.
(2) It must be charged off during the year. (4) For Contributions Other than Money: The
(3) The asset must be used in profession, trade amount shall be BASED on the acquisition
or business. cost of the property (i.e., not the fair market
(4) The asset must have a limited useful life. value at the time of the contribution).
(6) The depreciable asset must be located in the (5) For Contributions subject to the statutory
Philippines if the taxpayer is a nonresident limitation: It must NOT EXCEED 10%
alien or a foreign corporation. [Valencia and (individual) or 5% (corporation) of the
Roxas] taxpayer‘s taxable income before charitable
contributions
No depreciation shall be allowed for yachts,
helicopters, airplanes and/or aircrafts, and land Amount that may be deducted.—
vehicles which exceed the threshold amount of
P2,400,000, unless the taxpayer’s main line of Kinds of Contributions:
business is transport operations or lease of (1) Contributions deductible in full;
transportation equipment and the vehicles (2) Contributions subject to the statutory limit.
purchased are used in the operations. [RR No.
12-2012] Contributions 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 –
(1) Exclusively to finance, provide for, or to be
used in undertaking priority activities in
(a) Education
(b) Health
(c) Youth and sports development
(d) Human settlements

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(e) Science and culture, and purpose for which the dissolved
(f) Economic development organization was organized.
(2) in accordance with a National Priority
Plan determined by NEDA (otherwise, Contributions subject to the Statutory Limit.
subject to statutory limit) These contributions are not deductible in full
(b) Donations to Certain Foreign Institutions or as specified by the law or such deduction has
International Organizations which are fully not met the requirements to be deducted in
deductible in compliance with agreements, full.
treaties or commitments entered into by the
Government of the Philippines and the Those made to:
foreign institutions or international (a) Government or any of its agencies or political
organizations or in pursuance of special laws subdivisions exclusively for public purposes
(c) Donations to Accredited Non-government (contributions for non-priority activities)
Organizations subject to conditions set forth (b) Accredited domestic corporation or
in RR No. 13-98 – NGO means a non-stock associations organized exclusively for
non-profit domestic corporation or (1) religious
organization: (2) charitable
(i) Organized and operated exclusively for: (3) scientific
(a) scientific, (4) youth and sports development
(b) research, (5) cultural
(c) educational, (6) educational purposes or
(d) character-building and youth and (7) rehabilitation of veterans
sports development, (c) Social welfare institutions
(e) health, (d) Non-government organizations: No part of
(f) social welfare, the net income of which inures to the
(g) cultural or benefit of any private stockholder or
(h) charitable purposes, or individual
(i) a combination thereof,
(ii) No part of the net income of which inures Statutory Limit:
to the benefit of any private individual (a) 10% in the case of an individual (individual
(iii) Directly utilizes contributions for the donor), and
active conduct of the activities (b) 5% in the case of a corporation (corporate
constituting the purpose or function for donor), of the taxpayer's/donor’s income
which it is organized, not later than 15th derived from trade, business or profession
day of the month following the close of its computed before the deduction for
taxable year in which contributions are contributions and donations
received, unless an extended period is
granted by the Secretary of Finance, upon The amount deductible is the actual
recommendation of the CIR contribution or the statutory limit
(iv) Administrative expense, on an annual computed, whichever is lower
basis, must not exceed 30% of total
expenses for the taxable year CONTRIBUTION TO PENSION TRUST
(v) Upon dissolution, its assets would be Contribution to a pension trust may be claimed
distributed to another accredited NGO as deduction as follows:
organized for a similar purpose or (1) Amount contributed for the present/normal
purposes, OR to the State for public service cost – 100% deductible
purpose, OR would be distributed by a (2) Amount contributed for the past service cost
competent court of justice to another – 1/10 of the amount contributed is
accredited NGO to be used in such deductible in year the contribution is made,
manner as in the judgment of said court the remaining balance will be amortized
shall best accomplish the general equally over nine consecutive years

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General Rule: An employer establishing or (c) Taxpayer signifies in his return his intention to
maintaining a pension trust to provide for the elect this deduction; otherwise he is
payment of reasonable pensions to his considered as having availed of the itemized
employees shall be allowed as a deduction, a deductions.
reasonable amount transferred or paid into (d) Election is irrevocable for the year in which
such trust in excess of the contributions to such made; however, he can change to itemized
trust made during the taxable year. deductions in succeeding years.

Requisites for deductibility of payments to Corporations, except non-resident foreign


pension trusts.— corporations
(1) There must be a pension or retirement plan The option to elect Optional Standard
established to provide for the payment of Deduction granted is now granted to
reasonable pensions to employees; corporations (domestic and resident foreign
(2) The pension plan is reasonable and corporations) by virtue of RA 9504.
actuarially sound; (1) The OSD is 40% of its gross income.
(3) It must be funded by the employer; (2) The domestic and resident foreign
(4) The amount contributed must no longer be corporation shall keep such records
subject to the employer’s control or pertaining to his gross income as defined in
disposition; and Section 32 of the NIRC during the taxable
(5) The payment has not theretofore been year, as may be required by the rules and
allowed before as a deduction. regulations promulgated by the Secretary of
Finance upon recommendation of the CIR.
Deductions under special laws.— (3) Corporations availing of OSD are still
(1) Special deductions for productivity bonus required to submit their financial
and manpower training under the statements when they file their annual ITR
Productivity Incentives Act of 1990 and to keep such records pertaining to its
(2) Deductions for training expenses of qualified gross income. [RR 2-2010].
jewelry enterprises [Jewelry Industry
Development Act of 1998] Partnerships
(3) Deductions under the Adopt-a-School Act of (1) General Co-Partnership
1998 For purposes of taxation, the Code
(4) Deductions under the Expanded Senior considers general co-partnerships as
Citizens Act of 2003. [Domondon] corporations. Hence, rules on OSD for
corporations are applicable to general co-
OPTIONAL STANDARD DEDUCTION partnerships.
Individuals, except non-resident aliens
(1) May be taken by an individual in lieu of (2) General Professional Partnerships (GPP)
itemized deductions except those earning (a) If the GPP availed of itemized
purely compensation income. deductions, the partners are not
(2) If an individual opted to use OSD, he is no allowed to claim the OSD from their
longer allowed to deduct cost of sales or cost share in the net income because the
of services. OSD is a proxy for all the items of
(3) Amount: 40% of gross sales or gross deductions allowed in arriving at
receipts(under RA 9504, effective July 6, taxable income. This means that the
2008) OSD is in lieu of the items of deductions
claimed by the GPP and the items of
Requisites: deduction claimed by the partners.
(a) Taxpayer is a citizen or resident alien; (b) If the GPP avails of OSD in computing its
(b) Taxpayer’s income is not entirely from net income, the partners comprising it
compensation; can no longer claim further deduction
from their share in the said net income
for the following reasons:

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(i) The partners’ distributive share in the PERSONAL AND ADDITIONAL EXEMPTION
GPP is treated as his gross income (R.A. NO. 9504, MINIMUM WAGE EARNER
not his gross sales/receipts and the LAW)
40% OSD allowed to individuals is
specifically mandated to be Basic personal exemptions
deducted not from his gross income According to RA 9504 (effective July 6, 2008)
but from his gross sales/receipts; basic personal exemption is Fifty thousand
and, pesos (P50,000) for each individual taxpayer,
(ii)The OSD being in lieu of the itemized regardless of status, i.e., whether single, married
deductions allowed in computing or head of the family.
taxable income as defined under
Section 32 of the Tax Code, it will But note Sec 35(A) of NIRC - In the case of
answer for both the items of married individuals where only one of the spouses
deduction allowed to the GPP and is deriving gross income, only such spouse shall
its partners. be allowed the personal exemption.
(c) Since one-layer of income tax is imposed
on the income of the GPP and the Additional exemptions for taxpayer with
individual partners where the law had dependents
placed the statutory incidence of the tax (a) An individual, whether single or married,
in the hands of the latter, the type of shall be allowed an additional exemption of
deduction chosen by the GPP must be P25,000 for each qualified dependent child
the same type of deduction that can be (QDC), provided that the total number of
availed of by the partners. Accordingly, dependents for which additional
if the GPP claims itemized deductions, exemptions may be claimed shall not
all items of deduction allowed under exceed 4 dependents (depends on the
Sec. 34 can be claimed both at the level number of qualified dependent children)
of the GPP and at the level of the (1) Married Individuals: Additional
partner in order to determine the exemptions for QDC are claimed by only
taxable income. On the other hand, one spouse.
should the GPP opt to claim the OSD,
the individual partners are deemed to Generally, the spouse who is the gross
have availed also of the OSD because compensation earner is the claimant of
the OSD is in lieu of the itemized the additional exemptions.
deductions that can be claimed in
computing taxable income. (2) Where the husband and wife are both
(d) If the partner also derives other gross compensation income earners: the
income from trade, business or practice husband is the proper claimant of the
of profession apart and distinct from his additional exemptions EXCEPT if there
share in the net income of the GPP, the is an express waiver by the husband in
deduction that he can claim from his favor of his wife, as embodied in the
other gross income would follow the application for registration (BIR Form
same deduction availed of from his No. 1902) or in the Certificate of Update
partnership income as explained in the of Exemption and of Employer’s and
foregoing rules. Provided, however, that Employee’s Information (BIR Form No.
if the GPP opts for the OSD, the 2305), whichever is applicable.
individual partner may still claim 40% (3) When the spouses have business and/or
of its gross income from trade, business professional income only: either may
or practice of profession but not to claim the additional exemptions at the
include his share from the net income of end of the year.
the GPP. [RR 2-2010]

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(4) The employed spouse shall be Status-at-the-end-of-the-year rule


automatically entitled to claim the Change of Status[Sec 35(C), NIRC]
additional exemptions for children in (1) If taxpayer marries during taxable year,
the following instances: taxpayer may claim the corresponding BPE
(b) spouse is unemployed in full for such year (i.e., no need to pro-rate
(c) spouse is a non-resident citizen the exemption).
deriving income from foreign (2) If taxpayer should have additional
sources dependent(s) during taxable year, taxpayer
(5)Legally separated spouses: Additional may claim corresponding AE in full for such
exemptions can be claimed by the year.
spouse with custody of the child or (3) If taxpayer dies during taxable year, his
children (but the total amount for the estate may claim BPE and AE as if he died at
spouses shall not exceed the maximum the close of such year.
of four). [Sec 35(B), NIRC] (4) If during the taxable year
(6) If the taxpayer should have additional (a) spouse dies or
dependents during the taxable year, he (b) any of the dependents dies or marries,
may claim the corresponding additional turns 21 years old or becomes gainfully
exemption, as the case may be, in full for employed, taxpayer may still claim
such year. same exemptions as if the spouse or
(b) Who is a dependent for purposes of any of the dependents died, or married,
additional exemptions? turned 21 years old or became gainfully
(1) A taxpayer’s child, whether legitimate, employed at the close of such year.
illegitimate or legally adopted child
(2) chiefly dependent for support upon on Note: When it comes to change of status, the
the taxpayer status beneficial to the taxpayer is used for
(3) living with the taxpayer purposes of claiming deductions as long as the
(4) not more than 21 years old, unmarried taxpayer achieved such status at any time
and not gainfully employed or during the taxable period.
(5) regardless of age, is incapable of self-
support because of mental or physical Exemptions claimed by non-resident aliens
defect. [Sec 35 B, NIRC] Non-resident aliens engaged in trade or business
are entitled personal exemptions subject to
Note: reciprocity.
Only children (not parents) may be It means that NRAETB shall be allowed a
considered “dependent” for purposes of personal exemption only if the income tax law in
additional exemptions. his country grants allowance for personal
exemptions to the citizens and residents of the
The definition of the term “dependent” Philippines as stipulated in the reciprocity tax
under Section 35(B) of the NIRC now treaty with the Philippine Government.
includes a “Foster Child” or a child placed
under planned temporary substitute Limit of PE Allowed to NRAETB: An amount
parental care by a Foster Parent or a equal to the exemptions allowed by the non-
Foster Family. [RMC No. 41-20i3, Jan. 23, resident alien’s country to Filipino citizens not
2013] residing therein but deriving income therefrom,
(c) Who may claim personal exemptions? but not to exceed the amount fixed by NIRC.[In
(1) Citizens (whether resident or non- other words, whichever is lower]
resident) and resident aliens
(2) Non-resident aliens engaged in trade or
business are entitled personal
exemptions subject to reciprocity. (See
below)

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Items not deductible (2) Government owned and controlled


General rule: In determining deductions, one of corporations
the general rules (see above) is that deductions (3) Others
must be paid or incurred in connection with the
taxpayer’s trade, business or profession. Capital Corporations & associations enumerated under
expenditures (e.g. acquisition cost of a building) Section 30 of the 1997 NIRC, as amended,
are also not deductible, because these are not including those which have been issued tax
expenses, but form part of assets. exemption rulings/certificates prior to June 30,
2012, shall file their respective Applications for
In computing taxable net income, no deduction Tax Exemption/Revalidation with the Revenue
shall be allowed in respect to: District Office (“RDO”) where they are
(1) Personal, living or family expenses (note: they registered. If a corporation or association which
are not deductible from compensation and has been issued a Tax Exemption Ruling fails to
business/professional income under Section file its annual information return, it shall
24(A), NIRC automatically lose its income tax-exempt status
(2) Any amount paid out for new buildings or for beginning the taxable year for which it failed to
permanent improvements (capital file an annual information return, in addition to
expenditures), or betterments made to the sanctions imposed under Section 250 of the
increase the value of any property or estate NIRC, as amended. [RMO No. 20-2013]
(3) Any amount expended in restoring property
(major repairs) or in making good the Proprietary Educational Institutions and
exhaustion thereof for which an allowance hospitals
[for depreciation or depletion] is or has been By way of exception, proprietary educational
made institutions and hospitals are liable for net
(4) Premiums paid on any life insurance policy income at a rate of only ten percent (10%).
covering the life of any officer, employee, or
any person financially interested in the trade All hospitals and non-stock, non-profit
or business carried on by the taxpayer, organizations operating hospitals which were
individual or corporate, when the taxpayer is issued tax exempt rulings prior to November 1,
directly or indirectly a beneficiary under such 2012 shall submit a Request for Revalidation of
policy their tax exemption. [Revenue Memorandum
(3) Interest expense and bad debts between Circular No. 4-2013]
related parties [See Sec. 36(B), NIRC].
(4) Losses from sales or exchanges of property (See Tax on Domestic Corporations, Tax on
between related taxpayers. Proprietary Educational Institutions and
(5) Non-deductible interest – should the Hospitals)
taxpayer elect to deduct interest payments
against its gross income, he cannot at the Government owned and controlled
same time capitalize such interest and corporations
claim depreciation on the undepreciated All corporations, agencies, or instrumentalities
cost which includes the interest. [PICOP v. owned or controlled by the Government are
Commissioner, G.R. No. 106949-50, Dec. 1, subject to income tax, except:
1995] (1) GSIS
(6) Non –deductible taxes (2) SSS
(7) Non-deductible losses (3) PHIC
(8) Losses on Wash Sales (except if by dealer in (4) Local water districts (LWDs)
securities in ordinary course of) (5) PCSO

EXEMPT CORPORATIONS (See Tax on Domestic Corporations, Tax on


These are: Government-Owned or Controlled Corporations,
(1) Proprietary Educational Institutions and Agencies or Instrumentalities)
hospitals

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Others purely local character, the income of which


The following organizations shall not be taxed in consists solely of assessments, dues, and
respect to income received by them as such: fees collected from members for the sole
(1) Labor,agricultural or horticultural purpose of meeting its expenses and
organization not organized principally for (9) Farmers', fruit growers', or like association
profit organized and operated as a Sales agent for
(2) Mutual savings bank not having a capital the purpose of marketing the products of its
stock represented by shares, and members and turning back to them the
cooperative bank without capital stock proceeds of sales, less the necessary selling
organized and operated for mutual expenses on the basis of the quantity of
purposes and without profit produce finished by them;
(3) A Beneficiary society, order or association, Note:
operating for the exclusive benefit of the (a) Notwithstanding the exemptions, income of
members such as a fraternal organization whatever kind and character of the
operating under the lodge system, or enumerated organizations from any of their
mutual aid association or a non-stock properties, real or personal, or from any of
corporation organized by employees their activities conducted for profit regardless
providing for the payment of life, sickness, of the disposition made of such income,
accident, or other benefits exclusively to the shall be subject to tax.
members of such society, order, or (b) RA 9178 Act to Promote the Establishment of
association, or non-stock corporation or Barangay Micro Business Enterprises
their dependents (BMBEs) implemented by DO 17-04, April 20,
(4) CEMETERY company owned and operated 2004
exclusively for the benefit of its members (1) BMBEs shall be exempt from income tax
(5) Non-stock corporation or association for income arising from the operations
organized and operated exclusively for of the enterprise.
Religious, charitable, scientific, athletic, or (2) BMBE is any business entity or enterprise
cultural purposes, or for the rehabilitation of engaged in the production, processing
veterans, no part of its net income or asset or manufacturing of products or
shall belong to or inure to the benefit of any commodities, including agro-processing
member, organizer, officer or any specific trading and services, whose total assets
person including those arising from loans but
(5) Business league chamber of commerce, or exclusive of land on which the particular
board of trade, not organized for profit and business entity’s office, plant and
no part of the net income of which inures to equipment are situated, shall not be
the benefit of any private stock-holder, or more than P3M.
individual (c) Recreational Clubs - RMC 35-2012 (August 3,
(6) Civic league or organization not organized for 2012) clarifies taxability of clubs organized
profit but operated exclusively for the exclusively for pleasure, recreation and
promotion of social welfare other non-profit purposes (recreational
(7) A non-stock and non-profit Educational clubs). Income from whatever sources
institution including but not limited to membership fees,
(8) Government Educational institution assessment dues, rental income, and service
(9) Farmers' or other mutual typhoon or fire fees are subject to income tax and VAT.
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of a

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TAXATION OF RESIDENT CITIZENS, NON-RESIDENT CITIZENS AND


RESIDENT ALIENS
Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)

Classification Taxable Income Basic Personal Additional Tax Rates


Exemption Personal
Exemption

Resident Income from Allowed Allowed 5%-32%


Citizen sources within and
outside the
Philippines

Non-Resident Income from Allowed Allowed 5%-32%


Citizen sources within the
Philippines

Resident Alien Income from Allowed Allowed 5%-32%


sources within the
Philippines

Non-resident Income from Lower amount No specific 5%-32%


Alien Engaged sources within the between PE allowed provision
in Trade or Philippines to Filipinos in the
Business foreign country
where he resides vs.
PE in the Philippines

Non-resident Income from Not allowed Not allowed 25%


Alien Not sources within the
Engaged in Philippines
Trade or
Business

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General rule that resident citizens are taxable (2) A resident alien or non-resident alien is
on income from all sources within and without taxable only on income from sources
the Philippines WITHIN the Philippines.
(i) A resident alien is an individual whose
General rule: A Filipino resident citizen is taxable residence is in the Philippines and who
on income from all sources (within and without is not a Filipino citizen.
the Philippines) (ii) A non-resident alien is an individual
whose residence and citizenship is not
(a) Non-resident citizens: A non-resident citizen in the Philippines.
is taxable only on income derived from sources (1) An alien actually present in the
within the Philippines. Philippine who is not a mere
A non-resident citizen is a Filipino citizen transient or sojourner is a resident of
who: the Philippines for purposes of the
(1) Establishes to the satisfaction of the CIR income tax.
the fact of his physical presence abroad (2) Whether he is a transient or not is
with a definite intention to reside determined by his intentions with
therein regard to the length and nature of
(2) Leaves the Philippines during the his stay. A mere floating intention
taxable year to reside abroad (as indefinite as to time, to return to
immigrant or for employment on a another country is not sufficient to
permanent basis) constitute him a transient.
(3) Works and derives income from abroad (3) If he lives in the Philippines and has
and whose employment requires him to no definite intention to stay, he is a
be present abroad most of the time resident.
during the taxable year (4) One who comes to the Philippines
(4) Has been previously considered as a for a definite purpose which, in its
non-resident and arrives in the nature, may be promptly
Philippines at any time during the accomplished is a transient.
taxable year to reside here permanently (5) But if his purpose is of such a nature
(only with respect to his income from that an extended stay may be
sources abroad until the date of his necessary for its accomplishment,
arrival in the country) and to that end the alien makes his
(b) Other considerations: home temporarily in the Philippines,
(1) A Filipino citizen working and deriving he becomes a resident, though it
abroad as an Overseas Contract Worker is may be his intention at all times to
taxable only on income from sources WITHIN return to his domicile abroad when
the Philippines. the purpose of which he came has
(i) OCW refers to Filipino citizens in foreign been consummated or abandoned.
countries, who are physically present in (Sec. 5, RR No.2)
a foreign country as a consequence of (c) In general, a non-resident alien individual
their employment in that country. Their who shall come to the Philippines and stay
salaries and wages are paid by an therein for an aggregate period of more than
employer abroad and is not borne by an 180 days during any calendar year shall be
entity or person in the Philippines. They deemed a non-resident alien doing business in
must be duly registered with the the Philippines. Intended Stay in the
Philippine Overseas Employment Philippines:
Administration (POEA) with valid  Up to 180 days – NRANETB
Overseas Employment Certificate  More than 180 days up to 2 years –
(OEC). NRAETB
(ii) An OCW’s income arising out of his  Greater than 2 years – Resident alien
overseas employment is exempt from
income tax.

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Taxation on Compensation Income (iv) The retiree should have


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

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If the recipient of the fringe benefits is a rank (2) Benefits received by employees
and file employee, and the said fringe benefit is pursuant to PD 851 (13th Month Pay
not tax-exempt, then the value of such fringe Decree)
benefit shall be considered as part of the (3) Benefits received by employees not
compensation income of such employee subject covered by PD 851 as amended by
to tax payable by the employee. [Domondon] Memorandum Order No. 28; and,
(4) Other benefits such as productivity
Exclusions incentives and Christmas bonus
(1) Fringe benefit subject to tax
(See Chapter on Gross Income for the Deductions
discussion of Taxable and Non-taxable fringe (1) Personal exemptions and additional
benefits) exemptions (See the Chapter on Deductions
for the full discussion of Personal and
Where the recipient of the fringe benefit is additional exemptions)
not a rank and file employee, and the said (a) Basic Personal Exemptions
benefit is not tax-exempt, then the same According to RA 9504 (effective July 6,
shall not be included in the compensation 2008) basic personal exemption is Fifty
income of such employee subject to tax. The thousand pesos (P50,000) for each
fringe benefit [tax] is instead levied upon the individual taxpayer, regardless whether
employer, who is required to pay. single, married or head of the family.
[Domondon] (b) Additional Exemptions (AE)- depends on
the number of qualified dependent
Convenience of the ER Rule children
If meals, living quarters, and other facilities Amount allowed as a deduction
and privileges are furnished to an employee P25,000 per dependent child, but
for the convenience of the employer, and not to exceed four children (RA 9504)
incidental to the requirement of the (2) Health and hospitalization insurance
employee’s work or position, the value of that (a) Premium Paid on Health or
privilege need not be included as Hospitalization Insurance [Sec.34 (M)]
compensation (Henderson v. Collector (1961)). (b) Amount of premium paid on health
and/or hospitalization by an individual
(2) De minimis benefits taxpayer (head of family or married), for
(a) Facilities or privileges of relatively small himself and members of his family
value furnished by an employer to his during the taxable year.
employees and are as a means of
promoting the health, goodwill, Requisites for Deductibility
contentment, or efficiency of his (1) Insurance must have actually been taken
employees. (2) The amount of premium deductible does not
(b) These are exempt from fringe benefit tax exceed P2,400 per family or P200 per
and compensation income tax. month whichever is lower during the
taxable year.
(3) Bonuses, 13th month pay and other benefits (3) That said family has a gross income of not
and payments specifically excluded from more than P250,000 for the calendar year.
taxable compensation income (4) In case of married individual, only the spouse
(a) Gross benefits received by employees of claiming additional exemption shall be
public and private entities provided that entitled to this deduction.
the total exclusion shall not exceed
P30,000 (amounts in excess are Note: The spouse claiming the additional
considered compensation income) exemptions for qualified dependent children
(b) Benefits include: shall be the same spouse to claim the
(1) Benefits received by government deductions for premium payments.
employees under RA 6686

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The following may avail of the deduction TAXATION OF PASSIVE INCOME


(a) Individual taxpayers earning purely
compensation income during the year. Passive income subject to final tax
(b) Individual taxpayer earning business income “Final tax” means tax withheld from source, and
or in practice of his profession. the amount received by the income earner is net
of the tax already. The tax withheld by the
Taxation of compensation income of a minimum income payor is remitted by him to the BIR. The
wage earner income having been tax-paid already, it need
not be included in the income tax return at the
Statutory minimum wage – earner shall refer to end of the year. These passive income items are
rate fixed by the Regional Tripartite Wage and as follows:
Productivity Board, as defined by the Bureau of (1) Interest income
Labor and Employment Statistics (BLES) of the (2) Royalties
Department of Labor and Employment. [Sec.22 (3) Dividends from domestic corporations
GG, as amended by RA 9504] (4) Prizes and other winnings

Minimum wage earner – shall refer to a worker Interest income


in the private sector paid the statutory minimum (a) on any currency bank deposit, yield or any
wage, or to an employee in the public sector other monetary benefit from deposit
with compensation income of not more than the substitutes, trust funds and similar
statutory minimum wage in the non-agricultural arrangements - 20% final tax
sector where he/she is assigned. [Sec.22 HH, as (b) under the expanded foreign currency deposit
amended by RA 9504] system (EFCDS) - 7.5% final tax for
residents, exempt if non-residents
The minimum wage shall be exempt from the (c) Treatment of income from long-term deposits
payment of income tax on their taxable income:
Provided, further, That the holiday pay, overtime On long-term deposit or investment certificates
pay, night shift differential pay and hazard pay (LTDIC) in banks (e.g., savings, common or
received by such minimum wage earners shall individual trust funds, deposit substitutes,
likewise be exempt from income tax investment management accounts and other
investments, which have maturity of 5 years or
Income also subject to tax exemption: holiday more) – exempt
pay, overtime pay, night shift differential, and
hazard pay Should LTDIC holder pre-terminate LTDIC
before the 5th year, a final tax shall be imposed
Compensation income including overtime pay, on the entire income based on the remaining
holiday pay and hazard pay, earned by maturity:
minimum wage earners who has no other
returnable income are NOT taxable and not 4 years to less than 5 years 5%
subject to withholding tax on wages [RA 9504] 3 years to less than 4 years 12%
less than 3 years 20%
TAXATION OF BUSINESS INCOME/INCOME
FROM PRACTICE OF PROFESSION Royalties
TAXATION (See summary table)
All income obtained from doing business
and/or engaging in the practice of a profession Dividends from domestic corporation
shall be included in the computation of taxable (a) cash and/or property dividends actually or
income. constructively received by an individual from
(1) a domestic corporation
(2) a joint stock company
(3) insurance or mutual fund companies

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(4) regional operating headquarters of Prizes and other winnings


multinational companies (1) Winnings, except Philippine Charity
(b) share of an individual in the distributable net sweepstakes / lotto winnings – 20%
income after tax of a partnership (except a (2) Prizes exceeding P10,000 – 20%
general professional partnership) of which
he is a partner Prize, differentiated from winnings
(c) share of an individual member or co-venturer A prize is the result of an effort made (e.g., prize
in the net income after tax of an association, in a beauty contest), while winnings are the
(d) a joint account, or a joint venture or result of a transaction where the outcome
consortium taxable as a corporation depends upon chance (e.g., betting).
(e) RATE:
(1) 10%for residents (RC, RA) and non-
resident citizens (NRC);
(2) 20% for NRAETB(non-resident aliens
engaged in trade or business)
(e) A stock dividend representing the
transfer of surplus to capital account
shall not be subject to tax.
(f) However, if a corporation cancels or redeems
stock issued as a dividend at such time and
in such manner as to make the distribution
and cancellation or redemption, in whole or
in part, essentially equivalent to the
distribution of a taxable dividend, the
amount so distributed in redemption or
cancellation of the stock shall be considered
as taxable income to the extent that it
represents a distribution of earnings or
profits. [Sec. 73B, NIRC]
(1) In other words, stock dividends are
generally not subject to tax as long as
there are no options in lieu of the shares
of stock.
(2) On the other hand, a stock dividend
constitutes income if it gives the
shareholder an interest different from
that which his former stockholdings
represented.

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Summary Table of Rates


(Includes NRAETB and NRANETB)
Section 24(B). Final Tax Rates on Certain Passive Income from Philippine sources

(1) INTEREST, ROYALTIES, PRIZES AND OTHER WINNINGS Citizens, NRAETB NRANETB
Residents
(a) Interest from any currency bank deposit 20% 20% 20%
(b) Yield or any other monetary benefit from deposit substitute 20% 20% 20%
(c) Yield or any other monetary benefit from trust funds and 20% 20% 20%
similar arrangements
(d) Royalties, in general (other than royalties described in letter 20% 20% 20%
“e”)
(e) Royalties on books as well as other literary works and 10% 10% 25%
musical compositions
(f) Prizes exceeding P10,000 20% 20% 25%
(g) Other winnings (other than Philippine Charity Sweepstakes 20% 20% 25%
and Lotto winnings)
(h) Interest incomes received from a depositary bank under 7 1/2% Exempt Exempt
expanded foreign currency deposit system Note: NRC
– Exempt
(RR 1-
2011)
(i) Interest income from long-term deposit or investment Exempt Exempt 25%
evidenced by certificates prescribed by BSP. If
preterminatedbefore fifth year, a final tax shall be imposed
based on remaining maturity:
(a) 4 years to less than 5 years 5% 5% 25%
(b) 3 years to less than 4 years 12% 12% 25%
(c) Less than 3 years
20% 20% 25%
(2) CASH AND/OR PROPERTY DIVIDENDS Citizens, NRAETB NRANETB
Residents
(a) Cash and/or property dividends actually or constructively
received from a domestic corp. or from a joint stock co.,
insurance or mutual fund companies and regional operating
headquarters of multinational companies (beginning
January 1, 2000) 10% 20% 25%
(b) Share of an individual in the distributable net income after
tax of a PARTNERSHIP (other than a general professional
partnership) (beginning January 1, 2000)

10% 20% 25%


(c) Share of an individual in the net income after tax of an
ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE or
CONSORTIUM taxable as a corporation, of which he is a
member or a co-venturer (beginning January 1, 2000)
10% 20% 25%

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(a) For interest from foreign currency loans But should the holder of the certificate pre-
granted by FCDUs to residents other than terminate the deposit or investment before
Offshore Banking Units (OBUs) or other the 5th year, a final tax shall be imposed on
depository banks under the expanded the entire income and shall be deducted and
system – tax rate is 10% if payors are withheld by the depository bank from the
RESIDENTS, whether individuals or proceeds of the long-term deposit or
corporations. investment certificate based on the
remaining maturity thereof:
(b) For interest from foreign currency loans (a) Four (4) years to less than five (5) years -
granted by OBUs to residents other than 5%;
OBUs or local commercial banks, including (b) Three (3) years to less than four (4) years
branches of foreign banks that may be - 12%; and
authorized by the BSP to transact business (c) Less than three (3) years - 20%.
with OBUs - tax rate is 10% if payors are
RESIDENTS, whether individuals or (2) Any income of nonresidents, whether
corporations. individuals or corporations, from transactions
with depository banks under the expanded
(c) Gross income from all sources within the system shall be exempt from income tax.
Philippines derived by non-resident
cinematographic film owners, lessors or TAXATION OF CAPITAL GAINS
distributors – tax rate is 25% if payee is: (a)
non-resident alien individual, or (b) non- Income from sale of shares of stock of a
resident foreign corporation. The term Philippine corporation
“cinematographic films” includes motion
picture films, films, tapes, discs and other Shares traded and listed in the stock exchange –
such similar or related products. exempt

(d) Informer’s reward given to persons who The transaction is exempt from income tax
voluntarily provide definite and sworn regardless of the nature of business of the
information that lead to or was seller or transferor. However, it is subject to
instrumental in the discovery of fraud or the one-half of one percent (1/2 of 1%) stock
violation of the provisions of the NIRC or transaction tax imposed under Sec. 127(A) of
special laws being administered by the BIR the Tax Code based on the gross selling price
and resulted in the actual recovery or or gross value in money of the shares of stock
collection of revenues, surcharges and fees sold or transferred.
and/or the conviction of the guilty party or
parties, and/or the imposition of any fine or Shares not listed and traded in the stock
penalty or the actual collection of a exchange – subject to final tax
compromise amount, in case of amicable On sale, barter, exchange or other disposition of
settlement, shall be subject to income tax, shares of stockof a domestic corporation not
collected as a final withholding tax, at the listed and traded through a local stock exchange,
rate of 10%, pursuant to Sec. 282 of the held as a capital asset:
NIRC (RR 16-2010).
On the net capital gain:
Passive income not subject to tax (1) Not over P100,000 = Final Tax of 5%
(1) Interest income from long-term deposit or (2) On any amount in excess of P100,000 =
investment in the form of savings, common or plus Final Tax of 10% on the excess
individual trust funds, deposit substitutes,
investment management accounts and other
investments evidenced by certificates in such
form prescribed by the BSP shall be exempt
from tax

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Key Definitions (a) Tax treatment: Exempt from capital


(a) Net capital gain: selling price less cost gains tax (CGT). If there is no full
(b) Selling price: consideration on the sale OR utilization of the proceeds of sale or
fair market value of the shares of stock at disposition, the portion of the gain
the time of the sale, whichever is higher presumed to have been realized from
(c) Cost: original purchase price the sale or disposition shall be subject
to CGT.
Income from the sale of real property (b) How taxable portion and tax determined:
situated in the Philippines

What property covered


Property located in the PH classified as capital
assets
(i) The historical cost or adjusted basis of the
What transactions covered real property sold or disposed shall be
Sales, exchanges, or other disposition of real carried over to the new principal residence
property (classified as capital assets), including built or acquired.
pacto de retro sales and other forms of (ii) Computation for the basis of new principal
conditional sales of the following: citizens, residence:
resident aliens, NRAETB, NRANETB, domestic XXX
corporations. Historical cost of old principal
residence
Tax rate Add: Additional cost to acquire XXX
General rule: 6% of—whichever is higher new principal residence*
(a) Gross selling price, or Adjusted cost bases of the new XXX
(b) Fair market value (determined in accordance principal residence
with Sec. 6(E)).
*Additional cost to acquire new
Except principal residence:
(1) In case of sales made to the government, any Cost to acquire new principal XXX
of its political subdivisions or agencies, or to residence
GOCCs, it can be taxed either: Less: Gross selling price of old (XXX)
(a) Under Sec. 24(C)(1) – 6% CGT, or principal residence
(b) Under Sec. 24(A), at the option of the
Additional cost to acquire new XXX
taxpayer
principal residence
(2) In case of the sale of or disposition of their
principal residence by natural persons
(a) Requirements:
(i) Sale or disposition by a natural person of Income from the sale, exchange, or other
his principal residence, disposition of other capital assets
(ii) The proceeds of which is fully utilized in Other properties shall be subject to income
acquiring/constructing a new principal tax—
residence (1) At the graduated income tax rates, if the seller
(iii) Such acquisition/construction taking is an individual;
place within 18 calendar months from (a) Long-term capital gains: only 50% is
the date of sale or disposition recognized.
(iv) The taxpayer notifies the Commissioner (b) Short-term capital asset transactions:
within 30 days from the sale/disposition 100% subject to tax. [Sec. 39(B)]
through a prescribed return of his Determination of whether short- or long-term: If
intention to avail of the exemption, held for <12 mos, then short-term. Otherwise,
(3) The tax exemption can only be availed of long-term.
once every 10 years.

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(2) At 30% corporate income tax, if the seller is a Summary Tables of Rates
corporation. (Tables include NRAETB and NRANETB)
(a) Rule: Capital gain/loss is recognized in
full. Section 24(C).Capital Gains Tax from Sale of
Shares of Stock of a domestic corporation NOT
Capital assets shall refer to all real properties TRADED in the Stock Exchange
held by a taxpayer, whether or not connected RES/CIT NRAETB NRANETB
with his trade or business, and which are not Tax base:
included among the real properties considered Net Capital
as ordinary assets under Section 39(A)(1) of the Gain
NIRC. Tax rate: 5% 5% 5%
Not over 10% 10% 10%
Ordinary assets shall refer to all real properties P100,000
specifically excluded from the definition of
capital assets under Section 39(A)(1) of the Amount in
NIRC, namely: excess of
P100,000
(1) Stock in trade of a taxpayer or other real
property of a kind which would properly be Section 24(D).Capital Gains Tax from Sale of
included in the inventory of the taxpayer if Real Property Classified as Capital Asset
on hand at the close of the taxable year; or RES/CIT NRAETB NRANETB
(2) Real property held by the taxpayer primarily Tax base:
for sale to customers in the ordinary course Gross selling
of his trade or business; or price or
(3) Real property used in trade or business (i.e., current fair
buildings and/or improvements) of a market
character which is subject to the allowance value,
for depreciation provided for under Sec. whichever is
34(F) of the Code; or higher
(4) Real property used in trade or business of Tax rate: 6% 6% 6%
the taxpayer.

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

(4) Royalties from books, literary


works, musical compositions GIW – 10% Final Withholding Tax

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


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

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


EXEMPT
Currency Deposit System) Withholding Tax
(8) Winnings on Philippine
EXEMPT
Sweepstakes / Lotto
(9) Capital Gains on Sale of Shares of
Net Capital Gains within:
Domestic Corp. (not traded in a
Not Over P100,000 – 5% Final Tax
domestic stock exchange)
Amount in Excess of P100,000 – plus 10% Final Tax on the excess
(10) Capital Gains on Sale of Real
Gross Selling Price or FMV, whichever is higher –
Property in the Philippines
6% Final Withholding Tax
(11)Sale of Shares of Domestic Corp.
½ of 1% of the Selling Price (Stock Transaction Tax)
(traded in a domestic stock
Note: Stock Transaction Tax is not an income tax, but a business
exchange)
(percentage) tax
(12) Sale of Real Property located
AbrWoad Schedular Income Tax Rates (Sec. 24, NIRC)
(13) Sale of Shares of Foreign Corp (i.e, 5% to 32%)
(14) Passive Income from Abroad

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Computations TAXATION OF NON-RESIDENT


Pure Compensation Income
ALIENS ENGAGED IN TRADE OR
Gross Compensation Income xx BUSINESS
Less: Personal & Additional Exemptions (See above summary tables)
and hospitalization/health insurance
premium xx
Taxable Income xx GENERAL RULES
x Rate (a) Subject to an income tax in the same
Income Tax xx manner as an individual citizen and a
Less: Creditable Withholding Tax on resident alien individual on taxable income
Compensation Income xx from all sources within the Philippines
Tax Payable xx (b) Nonresident alien doing business in the
Philippines: a non-resident alien individual
Mixed-Income (i.e., compensation income and business who shall come to the Philippines and stay
income/income from the practice of profession) therein for an aggregate period of more
than 180 days during any calendar year
Gross Compensation Income Xx
Less: Personal & Additional Exemptions CASH AND/OR PROPERTY
and hospitalization/health insurance
premium Xx DIVIDENDS
Taxable Compensation Income Xx The following shall be subject to an income tax
ADD: Gross Business Income &/or of twenty percent (20%) on the total amount
Income from Practice of Profession Xx thereof:
Less: Allowable Deduction (itemized (a) Cash and/or property dividends from:
or optional deduction) Xx (1) A domestic corporation;
Taxable Income Xx (2) A joint stock company;
x Rate (3) An insurance or mutual fund company;
Income Tax Xx (4) A regional operating headquarter of
Less: Creditable Withholding Tax on multinational company;
Compensation Income/Other (5) The share of a nonresident alien
Allowable Tax Credit Xx
individual in the distributable net
Tax Payable Xx
income after tax of a partnership
(except a general professional
Pure Business/Professional Income
partnership) of which he is a partner;
Gross Business Income &/ (6) The share of a nonresident alien
or Income from Practice of Profession Xx individual in the net income after tax of
Less: (a) Allowable Deduction an association, a joint account, or a joint
(itemized or optional deduction) xx venture taxable as a corporation of
(b) Personal & Additional which he is a member or a co-venturer;
Exemptions (b) Interests
and hospitalization/health xx (c) Royalties (in any form); and
insurance premium (d) Prizes (except prizes amounting to Ten
Total Taxable Income Xx thousand pesos (P10,000) or less which
x Rate shall be subject to graduated tax) and other
Income Tax Xx winnings (except Philippine Charity
Less: Creditable Withholding Tax on
Sweepstakes and Lotto winnings);
Compensation Income/Other
Allowable Tax Credit Xx
Tax Payable Xx

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Except: NON-RESIDENT ALIENS NOT


(1) The following Royalties shall be subject to a
final tax of ten percent (10%) on the total ENGAGED IN TRADE OR
amount thereof: BUSINESS
(a) On books as well as other literary works; (1) Alien individuals employed by:
and (a) Regional or Area Headquarters (RAHQ)
(b) On musical compositions and Regional Operating Headquarters
(2) Cinematographic films and similar works (ROHQ) established in the Philippines
shall be subject to twenty-five percent by multinational companies
(25%) of the gross income
(3) Interest income from long-term deposit or Multinational company, defined a foreign
investment in the form of savings, common firm or entity engaged in international
or individual trust funds, deposit trade with affiliates or subsidiaries or
substitutes, investment management branch offices in the Asia-Pacific Region
accounts and other investments evidenced and other foreign markets
by certificates in such form prescribed by
the Bangko Sentral ng Pilipinas (BSP) shall (b) Offshore Banking Units established in the
be exempt from the tax Philippines
But should the holder of the certificate pre-
terminate the deposit or investment before the (2) Alien individuals who are permanent residents
fifth (5th) year, a final tax shall be imposed on of a foreign country but who are employed and
the entire income and shall be deducted and assigned in the Philippines by a foreign service
withheld by the depository bank from the contractor or by a foreign service subcontractor
proceeds of the long-term deposit or engaged in petroleum operations in the
investment certificate based on the remaining Philippines
maturity thereof:
(a) Four (4) years to less than five (5) years - 5%; Tax Rate and Base - 15% of gross income
(b) Three (3) years to less than four (4) years - received as salaries, wages, annuities,
12%; and compensation, remuneration and other
(c) Less than three (3) years - 20%. emoluments, such as honoraria and allowances.

CAPITAL GAINS The same tax treatment shall apply to Filipinos


Capital gains realized from sale, barter or employed and occupying the same positions as
exchange of shares of stock in domestic those of aliens employed by these multinational
corporations not traded through the local stock companies, offshore banking units and
exchange, and real properties shall be subject petroleum service contractors and
to the similar tax prescribed on citizens and subcontractors.
resident aliens.
(a) Sale, barter or exchange of Shares of stock in Note that the coverage of the special
domestic corporation not traded – classification (and the corresponding tax rate) is
(1) Net over P100,000 – 5% of net capital limited to income received as wages. Hence, any
gains realized income earned from all other sources within the
(2) On any amount in excess of P100,000 – Philippines by the alien employees shall be
10% of net capital gains realized subject to the pertinent income tax (example:
(b) Sale, barter or exchange of real properties – sale of real property in the Philippines is subject
6% of gross selling price or current FMV to 6% capital gain tax, imposed on the gross
whichever is higher selling price or fair market value of the property
at the time of the sale, whichever is higher)

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INDIVIDUAL TAXPAYERS EXEMPTIONS GRANTED UNDER


EXEMPT FROM INCOME TAX INTERNATIONAL AGREEMENTS
Individual Taxpayers exempt from income tax (SEC. 32(B))
are: See RMC No, 31-2013, April 12, 2013 – taxation of
(1) Senior Citizens compensation income of Philippine nationals
(2) Minimum wage earners and alien individuals employed by foreign
(3) Exemptions granted under international governments/embassies/diplomatic missions
agreements and international organizations situated in the
Philippines
All individuals and entities claiming exemption
from imposition of taxes on income and, TAXATION OF DOMESTIC
consequently, from withholding taxes are CORPORATIONS
required to provide a copy of a valid, current and
subsisting tax exemption certificate or ruling, as
per existing administrative issuances and any
TAX PAYABLE
Taxes payable are:
issuance that may be issued from time to time,
(1) Regular tax
before payment of the related income. The tax
(2) Minimum Corporate Income Tax
exemption certificate or ruling must explicitly
recognize the grant of tax exemption, as well as
REGULAR TAX
the corresponding exemption from imposition
Normal Corporate Income Tax Rate: 30%of
of withholding tax. Failure on the part of the
Taxable Income (effective January 1, 2009)
taxpayer to present the said tax exemption
certificate or ruling as herein required shall
Gross Income XXX
subject him to the payment of appropriate
Less: Allowable Deductions XXX
withholding taxes due on the transaction. [RMC
No. 8=2014] Taxable Income XXX

SENIOR CITIZENS MINIMUM CORPORATE INCOME TAX (MCIT)


Who covered: any resident citizen— (a) applies to domestic corporations and RFCs
(a) At least 60 years old, and whenever such corporations have zero or
(b) Who are considered minimum wage earners negative taxable income or whenever the
under RA 9504. (Sec. 4 (b) RA 7432, as MCIT is greater than the normal income tax
amended by RA 9994) and/or the due from such corporations.
aggregate amount of gross income earned (b) Imposed upon any domestic corporation
by the senior citizen during the taxable year beginning the fourth taxable year in which
does not exceed the amount of his personal such corporation commenced its business
exemptions (BPE and APE). operations. For purposes of the MCIT, the
taxable year in which business operations
MINIMUM WAGE EARNERS commenced shall be the year when the
corporation registers with the BIR (not in
Rule: they shall be exempt from payment of
which the corporation started commercial
income tax on their taxable income
operations).
Limit: however, if he receives “other benefits” in
(c) Tax rate: 2% of the Gross Income
excess of the allowable statutory amount of
P30,000, then he shall be taxable on the
IMPOSITION OF MCIT
exceeds benefits as well as his salaries, wages,
Gross Sales XXX
and allowances, just like an employee receiving
Less: Sales Returns XXX
compensation income beyond the statutory
Sales Discounts & XXX
minimum wage.
Allowances XXX XXX
Cost of Goods Sold
MCIT GI XXX

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Computation of Gross Income.— Pointers.—


The term “Gross Income” shall be equivalent to MCIT is in the nature of a tax credit, not an
gross sales less sales returns, discounts and allowable deduction. Its purpose is to prevent
allowances and cost of goods sold. “Cost of corporations from escaping being taxed by
goods sold” shall include all business expenses including frivolous expenses in their statement
directly incurred to produce the merchandise to of income.
bring them to their present location and use.
Is the Minimum Corporate Income Tax (MCIT) an
If apart from deriving income from core business addition to the regular or normal income tax?
activities there are other items of gross income No, the MCIT is not an additional tax. The MCIT
realized or earned by the taxpayer which are is compared with the regular income tax, which
subject to the normal corporate income tax, is due from a corporation. If the regular income
they must be included as part of gross income is higher than the MCIT, then the corporation
for computing MCIT. [Sec. 27 (E), NIRC; RR 12- does not pay the MCIT.
2007]
Who are covered by MCIT?
This means that the term “gross income” will The MCIT covers domestic and resident foreign
also include all items of gross income corporations which are subject to the regular
enumerated under Section 32(A) of the NIRC, income tax. The term “regular income tax”
except: (a) income exempt from income tax, and refers to the regular income tax rates under the
(b) income subjected to FWT. Tax Code. Thus, corporations which are subject
to a special corporate tax system do not fall
The computation by type of business.— within the coverage of the MCIT.
Merchandising/Manufacturing Service Concerns
Concerns These special corporations are:
Net Sales Gross (a) Corporations that are subject to ten percent
P xxx receipts/revenue (10%) preferential tax rate: Proprietary
P xxx educational institutions, nonprofit hospitals,
Less: Cost of Sales Less: Direct cost Offshore Banking Units (OBUs) on their
xxx of services income from foreign currency transactions
xxx which has been subjected to a final income
Gross Income Gross income tax at 10% of such income, and depository
P xxx P xxx banks under the expanded foreign currency
deposit system on their income from foreign
“Net Sales” is gross sales less sales returns, currency transactions which has subjected
discounts and allowances. to final income tax at 10%; RFCs engaged in
business as Regional Operating
“Direct cost of services” includes salaries of Headquarters
personnel rendering the services, expenses on (b) Firms under special income tax regime such
the facilities directly utilized, cost of supplies, as those under the PEZA law [Rep. Act
and the like. “Direct costs and expenses” shall 7916], the Bases Conversion Development
only pertain to those costs exclusively and Act [Rep. Act 7227] and forms enjoying
directly incurred in relation to the revenue Income Tax Holiday (ITH) under Exec. Order
realized by the sellers of services. These refer to No. 226;
costs which are considered indispensable to the (c) International carriers subject to tax at 2 ½%
earning of the revenue such that without such of their gross Philippine billings;
costs, no revenue can be generated.

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Note: For domestic corporations whose Annual Income Tax Computation.—


operations or activities are partly covered by the The final comparison between the normal
regular income tax and partly covered under a income tax payable and the MCIT shall be made
special income tax system, the MCIT shall apply at the end of the taxable year. The payable or
on operations covered by the regular corporate excess payment in the Annual Income Tax
income tax system. Return shall be computed taking into
consideration corporate income tax payment
MCIT gross income differentiated from the made at the time of filing of quarterly corporate
normal tax gross income income tax returns whether this be MCIT or
The latter would include other incidental normal income tax.
income items, such as rent income, interest,
gain on sale of assets, certain tax refunds, etc. In the computation of annual income tax due, if
the normal income tax due is higher than the
What amount of income tax is paid by the computed annual MCIT, the following shall be
corporation to the BIR? allowed to be credited against the annual
Whichever is higher between the normal tax and income tax: (a) quarterly MCIT payments, (b)
the minimum corporate income tax quarterly normal income tax payments, (c)
excess MCIT in the prior year/s (subject to the
Illustration.— prescriptive period allowed for its creditability),
E Co., a domestic trading corporation, in its (d) CWTs in the current year, (d) excess CWTs in
fourth year of operations had a gross profit from the prior year.
sales of P300,000 and net taxable income of
P100,000. How much was the income tax paid If in the computation of annual income tax due,
by the corporation for the year? the computed annual MCIT due is higher than
the annual normal income tax due, the
MCIT (P300,000 x 2%) P6,000 following may be credited against the annual
Normal income tax income tax: (a) quarterly MCIT payments of
(P100,000 x 30%) P30,000 current taxable quarter, (b) quarterly normal
Income Tax to be paid for the year income tax payments in current year, (c) CWTs
(whichever is higher) P30,000 in the current year, (d) excess CWTs in the prior
year.
Quarterly MCIT Computation.—
The computation and the payment of MCIT Excess MCIT from the previous taxable year/s
shall likewise apply at the time of filing the shall not be allowed to be credited against the
quarterly corporate income tax. In the annual MCIT due as the same can only be
computation of the tax due for the taxable applied against normal income tax.
quarter, if the quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be Manner of Filing and Payment.—
paid for such taxable quarter at the time of The MCIT shall be paid in the same manner
filing the quarterly corporate income tax return prescribed for the payment of the normal
shall be the MCIT. corporate income tax which is on a quarterly
and on a yearly basis.
Items allowed to be credited against quarterly
MCIT due: (a) CWT, (b) Quarterly income tax CARRY FORWARD OF EXCESS MINIMUM
payments under the normal income tax; and (c) TAX
MCIT paid in the previous taxable quarter(s). Any excess of the minimum corporate income
tax over the normal income tax shall be carried
Excess MCIT from the previous taxable year/s forward on an annual basis. The excess can be
shall not be allowed to be credited against the credited against the normal income tax in the
quarterly MCIT tax due. next hree (3) succeeding taxable years. [Sec.
27(E)(2)] In the year to which carried forward,
the normal tax should be higher than the MCIT.

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Illustration.—
A domestic corporation had the following data on computations of the normal tax (NT) and the
minimum corporate income tax (MCIT) for five years.

Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K

The excess MCIT over NT carry-forward is shown below:

Year 4 Year 5 Year 6 Year 7 Year 8


MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000
 
NT is higher n/a n/a 40,000 n/a 70,000
Less: MCIT
carry-fwd >(40,000)* >(20,000)
>(20,000)
From Year 4

From Year 5

From Year 7

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

Arrow pointing downward means that the normal tax is higher so that there can be an excess MCIT
carry-forward against it.

*Cannot carry forward an amount higher than the NT, hence the excess of 60K from Year 4 was reduced
to 40K. The unused P20,000 cannot be used in Year 8 because Year 8 was beyond three years from Year
4.

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RELIEF FROM THE MCIT UNDER CERTAIN The election of the gross income tax option by
CONDITIONS (SEC. 27 (E ), NIRC) the corporation shall be irrevocable for three (3)
The Secretary of Finance, upon the consecutive taxable years during which the
recommendation of the Commissioner, may corporation is qualified under the scheme.
suspend the imposition of the MCIT upon
submission of proof by the applicant- For purposes of gross income tax, gross income
corporation that the corporation sustained should be the same as gross income for
substantial losses on account of the following purposes of MCIT in cases of trading,
(LMB): merchandising and manufacturing concern
(1) Prolonged labor dispute (losses from a strike business. However, for service enterprises, gross
staged by employees that lasts for more income means gross receipts less sales returns,
than 6 months and caused the temporary discounts, allowances and cost of services.
shutdown of operations), or
(2) Force majeure (acts of God and other Note: At present, the OGIT has not been
calamity; includes armed conflicts like war implemented in the Philippines.
or insurgency), or
(3) Legitimate business reverses (substantial CORPORATIONS EXEMPT FROM THE MCIT:
losses due to fire, robbery, theft or other ( BIPTENG)
economic reasons). (1) Banks and other non-bank financial
intermediaries;
Optional Gross Income Tax (OGIT).— (2) Insurance companies;
Section 27 (A) of the NIRC provides for an (3) Publicly-held corporations;
optional gross income tax of 15% based on (4) Taxable partnerships;
gross income. The President, upon the (5) General professional partnerships;
recommendation of the Secretary of Finance, (6) Non- taxable joint ventures; and
may, effective January 1, 2000, allow domestic (7) Enterprises that are registered:
corporations the option to be taxed at fifteen (a) with the Philippine Economic Zone
percent (15%) of gross income as defined Authority (PEZA) under R.A. 7916;
therein, after the following conditions have been (b) pursuant to the Bases Conversion and
satisfied: Development Act of 1992 under R.A.
7227; and
Tax effort ratio 20% of GNP (c) under special economic zones declared by
Ratio of Income Tax collection 40% law which enjoy payment of special tax
to total tax revenues rate on their registered operations or
VAT tax effort 4% of GNP activities in lieu of other taxes, national or
Ratio of Consolidated Public 0.90% local.
Sector Financial Position
(CPSFP) to GNP Note: Words in regular letters are found in Sec.
29(B)(2) of the NIRC. Words in italics are
Ratio of the Corporation’s Cost Does not additions made by the revenue regulation to
of Sales to Gross Sales exceed 55% consolidate Sec. 29 with other pertinent laws.

Applicability of the MCIT where a corporation is


Gross Sales XXX governed both under the regular tax system and
Less: Sales Returns XXX a special income tax system
SalesDiscounts& XXX For corporations whose operations or activities
Allowances XXX XXX are partly covered by the regular income tax and
Cost of Goods Sold partly covered under special income tax system,
GI XXX the MCIT shall apply on operations by the regular
income tax system

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ALLOWABLE DEDUCTIONS Capital gains from the sale of shares of stock not
traded in the stock exchange
Itemized deductions On sale, barter, exchange or other disposition of
(1) Bad debts shares of stock of a domestic corporation not
(2) Expenses listed and traded through a local stock exchange,
(3) Losses held as a capital asset:
(4) Taxes
(5) Depreciation
On the net capital gain:
(6) Interest
(7) Depletion of oil and gas wells and mines (a) First P100,000: Final Tax of 5%
(8) Charitable and other contributions (b) On any amount in excess of P100,000: plus
(9) Research and development 10% Final tax on the excess
(10 Pension trusts
Income derived from depository bank under the
Optional standard deduction expanded foreign currency deposit system
(a) Before RA 9504, effective July 6, 2009, OSD Under the expanded foreign currency deposit
only applied to individuals except non-resident system (EFCDS) - 7.5%
aliens.
(b) But by virtue of RA 9504, it now also applies to
Inter-corporate dividends
corporations, except non-resident foreign
corporation. Dividends received from another domestic
(c) Moreover, the rate was increased from 10% to corporation - exempt
40%.
Capital gains realized from the sale, exchange,
TAXATION OF PASSIVE INCOME or disposition of lands and/or buildings
On the sale, exchange or disposition of lands
PASSIVE INCOME SUBJECT TO TAX and/or buildings which are not actually used in
Note: (1) and (5) below are more appropriate for the business of a corporation and are treated as
the next section. The SC Syllabus, however, capital assets On the gross selling price, or
included both in this section the current fair market value at the time of the
sale, whichever is higher, a final tax of 6%
Passive income subject to tax: (a) Note: Tax treatment is the same as that of
(1) Interest from deposits and yield or any other individuals.
monetary benefit from deposit substitutes (b) The capital gains tax is applied on the gross
and from trust funds and similar selling price, or the current fair market value
arrangements and royalties at the time of the sale, whichever is higher.
(2) Capital gains from the sale of shares of stock Any gain or loss on the sale is immaterial
not traded in the stock exchange because there is a conclusive presumption
(3) Income derived from depository bank under by law that the sale resulted in a gain.
the expanded foreign currency deposit
system PASSIVE INCOME NOT SUBJECT TO TAX
(4) Inter-corporate dividends (a) Income derived by a depository bank under
(5) Capital gains realized from the sale, the expanded foreign currency deposit
exchange, or disposition of lands and/or system from foreign currency transactions
buildings with nonresidents, offshore banking units in
the Philippines, local commercial banks,
Interest from deposits and yield or any other including branches of foreign banks that
monetary benefit from deposit substitutes and may be authorized by the Bangko Sentral
from trust funds and similar arrangements and ng Pilipinas (BSP) to transact business with
royalties foreign currency depository system units
On any currency bank deposit, yield or any other and other depository banks under the
monetary benefit from deposit substitutes, trust expanded foreign currency deposit system
funds and similar arrangements - 20% shall be exempt from income exempt from
income tax

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Except: net income from transactions TAX ON PROPRIETARY


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

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FOR INSTRUMENTALITIES AND AGENCIES Definition of “doing business” under the Foreign
OF GOVERNMENT: Investment Act of 1991
General Rule: The government is exempt from The phrase "doing business" shall include
tax. soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
Exception: When it chooses to tax itself. Nothing branches; appointing representatives or
can prevent Congress from decreeing that even distributors domiciled in the Philippines or who
instrumentalities or agencies of the government in any calendar year stay in the country for a
performing governmental functions may be period or periods totaling one hundred eighty
subject to tax. Where it is done precisely to [180] days or more; participating in the
fulfilfulfill a constitutional mandate and management, supervision or control of any
national policy, no one can doubt its wisdom. domestic business, firm, entity or corporation in
[Mactan Cebu Airport v Marcos, 1996] the Philippines; and any other act or acts that
imply a continuity of commercial dealings or
If the taxing authority is the local gov’t unit arrangements and contemplate to that extent
RA 7160 expressly prohibits LGUs from levying the performance of acts or works, or the exercise
tax on the Nat’l Gov’t, its agencies and of some of the functions normally incident to,
instrumentalities and other LGUs. and in progressive prosecution of commercial
gain or of the purpose and object of the
TAXATION OF RESIDENT business organization: Provided, however, That
the phrase "doing business" shall not be
FOREIGN CORPORATIONS deemed to include mere investment as a
shareholder by a foreign entity in domestic
GENERAL RULE
corporations duly registered to do business,
A resident foreign corporation is a corporation
and/or the exercise of rights as such investor;
organized under the laws of a foreign country,
nor having a nominee director or officer to
which is engaged in trade or business in the
represent its interests in such corporation; nor
Philippines.
appointing a representative or distributor
(a) A Philippine branch of a foreign corporation
domiciled in the Philippines which transacts
duly licensed by the SEC is considered a
business in its own name and for its own
resident foreign corporation. Thus, only the
account; [Sec. 3 (d)]
income of the Philippine branch from sources
within the Philippines is subject to Philippine
income tax.
WITH RESPECT TO THEIR INCOME
(b) Marubeni v. Commissioner: As general rule, FROM SOURCES WITHIN THE
the head office of a foreign corporation is PHILIPPINES
the same juridical entity as its branch in the Resident foreign corporations are subject to any
Philippines following the single entity or some of the following:
concept. Thus, the income from sources (1) Capital Gains Tax
within the Phils. of the foreign head office (2) Final Tax on Passive Income
shall thus be taxable to the Philippine (3) Normal Tax [OR] Minimum Corporate
branch. Income Tax (MCIT) [OR] Gross Income Tax
(GIT)
But, when the head office of a foreign (4) Branch Profit Remittance Tax
corporation independently and directly invested
in a domestic corporation without the funds MINIMUM CORPORATE INCOME TAX
passing through its Philippine branch, the The discussion with respect to this topic (income
taxpayer, with respect to the tax on dividend subject to normal tax, MCIT, or GIT) under the
income, would be the non-resident foreign subheading of domestic corporations is equally
corporation itself anditselfand the dividend applicable to resident foreign corporations, both
income shall be subject to the tax similarly as to concepts and computations, except that
imposed on non-resident foreign corporations.

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RFCs are taxed only on income from sources (3) Branch profits remittances
within the Philippines. (4) Regional or area headquarters and regional
(a) Normal Corporate Income Tax Rate30% of operating headquarters of multination
net taxable income from sources within the companies
Philippines [RA 9337]
(b) Minimum Corporate Income Tax (MCIT)2% (NOTE: Expressly excluded as indicated in the SC
of MCIT Gross Income from sources within Syllabus. The following discussion is for
the Philippines. The MCIT is imposed on information purposes)
RFCs underRFCsunder the same conditions
as domestic corporations. [Sec. 28(A)(2)] International carrier
(c) Gross Income Tax (GIT) The President, Tax Rate and Base – 2.5% on Gross Philippine
upon the recommendation of the Secretary Billings (GPB)
of Finance, may allow resident foreign
corporations the option to be taxed at What is GPB.—
fifteen percent (15%) of gross income within In the case of International Air Carriers, GPB
the Philippines, under the same conditions refers to the amount of:
as domestic corporations. [Sec. 28(A)(1)] (a) gross revenue derived from carriage of
persons, excess baggage, cargo and mail
TAX ON CERTAIN INCOME originating from the Philippines in a
continuous and uninterrupted flight,
Interest from deposits and yield or any other irrespective of the place of sale or issue and
monetary benefit from deposit substitutes, trust the place of payment of the ticket or
funds and similar arrangements and royalties passage document
On any currency bank deposit, yield or any other (b) gross revenue from tickets revalidated,
monetary benefit from deposit substitutes, trust exchanged and/or indorsed to another
funds and similar arrangements – Final tax of international airline if the passenger boards
20% a plane in a port or point in the Philippines
(c) for flights which originate from the
Income derived from a depository bank under the Philippines, but transshipment of passenger
expanded foreign currency deposit system takes place at any port outside the
Under the expanded foreign currency deposit Philippines on another airline, the gross
system (EFCDS) – Final tax of 7.5% revenue consisting of only the aliquot
portion of the cost of the ticket
Capital gain from sale of shares of stock not corresponding to the leg flown from the
traded in the stock exchange Philippines to the point of transhipment
On sale, barter, exchange or other disposition of transshipment[RR 15-2002]
shares of stock ofstockof a domestic corporation
not listed and traded through a local stock Air Canada vs. CIR (CTA Case No. 6572):
exchange, held as a capital asset: (a) A foreign airline company selling tickets in
the Philippines through their local agents
On the net capital gain: shall be considered as resident foreign
(a) First P100,000: Final Tax of 5% corporation engaged in trade or business in
(b) On any amount in excess of P100,000: plus the country.
10% Final tax on the excess (b) The absence of flight operations within the
Philippine territory cannot alter the fact that
Intercorporate dividends the income received was derived from
Dividends received from a domestic corporation activities within the Philippines.
liable to tax under the NIRC- exempt (c) The test of taxability is the source, and the
source is that activity which produced the
Exclude: income.
(1) International carrier
(2) Offshore banking units

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In the case of International Shipping, GPB Income not treated as branch profits unless
means: effectively connected with the conduct of trade
Gross revenue whether for passenger, cargo or or business in the Philippines:
mail originating from the Philippines up to final (1) Interests, dividends, rents, royalties
destination, regardless of the place of sale or remuneration for technical services
payments of the passage or freight documents. (2) salaries, wages premiums, annuities,
emoluments
Offshore banking units (3) other fixed or determinable annual, periodic
or casual gains, profits, income
Coverage of the Rule.— (4) capital gains received during each taxable
Only income derived by offshore banking units year from all sources within the Philippines
from foreign currency transactions with:
Notes:
(1) non-residents,
(a) imposed whether the head office of the
(2) other offshore banking units
foreign corporation is located in a tax treaty
(3) local commercial banks including branches
country, in a tax haven or other non-treaty
of foreign banks that may be authorized by
country.
the BangkoSentralngPilipinas (BSP) to
(b) imposed only on the profits remitted by a
transact business with offshore banking
Philippine branch to the head office of a
units
foreign corporation.
Tax Rate.—
Regional or area headquarters and Regional
Exempt from all taxes, except net income from
operating headquarters of multinational
such transactions as may be specified by the
companies
Secretary of Finance, upon recommendation by
Regional or area headquarters: not subject to
the Monetary Board to be subject to the regular
income tax
income tax payable by banks
Regional or area headquarters: a branch
Exception: Interest income derived from foreign established in the Philippines by multinational
currency loans granted to residents other than companies and which headquarters do not earn
offshore banking units or local commercial or derive income from the Philippines and which
banks, including local branches of foreign banks act as supervisory, communications and
that may be authorized by the BSP to transact coordinating center for their affiliates,
business with offshore banking units, shall be subsidiaries, or branches in the Asia-Pacific
subject only to a final tax at the rate of 10%. Region and other foreign markets.

Branch profits remittances Regional operating headquarters


Taxable transaction – any profit remitted by a (a) 10%of their taxable income
branch of a multinational corporation to its (b) a branch established in the Philippines by
head office multinational companies which are engaged
in any of the following services:
Tax Rate and Base – 15% final tax based on the (1) general Administration and planning
total profits applied or earmarked for remittance (2) business Planning and coordination
without any deduction for the tax component. (3) sourcing and Procurement of raw materials
The 15% final tax should excluding: and components
(a) profits on activities which are registered with (4) corporate finance Advisory services
the Philippine Economic Zone Authority (5) Marketing control and sales promotion
(PEZA) and (6) Training and personnel management
(7) Logistic services
(b) passive income gains and profits received
(8) Research and development services and
not directly connected with the conduct of its
product development
trade or business in the Philippines. (9) technical Support and maintenance
(10) Data processing and communications, and
(11) Business development.

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TAXATION OF NON-RESIDENT On the net capital gain:


(a) First P100,000 Final Tax of 5%
FOREIGN CORPORATIONS (b) On any amount in excess of P100,000 plus
Final Tax of 10% on the excess
GENERAL RULE
Except as otherwise provided, the tax is 30% of Exclude:
the gross income (except certain passive (1) Film rentals and other payments to non-
income)received during each taxable year from resident cinematographic film owner, lessor
all sources within the Philippines, such as or distributor
interests (except interests on foreign loans, Final tax of 25% of gross income from all
dividends, rents, royalties, salaries, premiums sources within the Philippines
(except reinsurance premiums), annuities,
emoluments or other fixed or determinable (2) Rental, lease and charter fees payable to
annual, periodic or casual gains, profits and non-resident owner or lessor of vessels
income, and capital gains EXCEPT capital gains chartered by Philippine nationals
on the sale of shares of stock (not listed and
traded through a local stock exchange), of a Final tax of 4.5% of gross rentals, lease or
domestic corporation which are subject to the tax charter fees from leases or charters to
rates prescribed for individuals and resident Filipino citizens or corporations, as
foreign corporations. approved by the Maritime Authority

TAX ON CERTAIN INCOME (3) Rentals, charter and other fees payable to
non-resident owner or lessor of aircraft
Interest on foreign loans machineries and other equipment
(a) on foreign loans contracted on or after Final tax of 7.5% of gross rentals or fees
August 1, 1986 – 20%
(b) under the expanded foreign currency deposit
system (EFCDS) - exempt

Intercorporate dividends
(a) (Intercorporate Dividend) – 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 at least15%
(b) 15% represents the difference between the
regular income tax of 30% on corporations
and the 15% tax on dividends (“tax sparing
credit”)
(c) If the country within which the NRFC is
domiciled does NOT allow a tax credit, a
final withholding tax at the rate of30% is
imposed on the dividends received from a
domestic corporation.

Capital gains from sale of shares of stock not


traded in the stock exchange
On sale, barter, exchange or other disposition of
real property or on shares of stock of a domestic
corporation not listed and traded through a local
stock exchange, held as a capital asset:

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Summary of Tax Bases and Rates of Special


Corporations
Quick Glance

Tax
Type of Corporation Tax Base
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals
Taxable Income from all sources 10%
(Non-profit)
Depository Banks (Foreign Currency Deposit Units)
(1) With respect to income derived under the expanded Exempt (except that net income
foreign currency deposit system from certain from such transactions is subject -
foreign currency transactions to the regular income tax payable
(2) With respect to interest income from foreign by banks)
currency loans to residents other than offshore
units in the Philippines or other depository banks Amount of interest income 10%
under the expanded system
Resident Foreign Corporations
International Carriers Gross Philippine Billings 2.5%
Offshore Banking Units
(1) With respect to income derived by offshore Exempt (except that net income
banking units from certain foreign currency from such transactions is subject -
transactions to the regular income tax payable
(2) With respect to interest income derived from by banks)
foreign currency loans granted to residents other
than offshore banking units or local commercial Amount of interest income 10%
banks
Resident Depository Bank (Foreign Currency Deposit
Units) Exempt (except that net income
(1) With respect to income derived under the from such transactions is subject -
expanded foreign currency deposit system from to the regular income tax payable
certain foreign currency transactions by banks)
(2) With respect to interest income from foreign
currency loans to residents other than offshore
Amount of interest income 10%
units in the Philippines or other depository banks
under the expanded system
Regional or Area Headquarters Exempt -
Regional Operating Headquarters of Multinational Taxable Income from within the
10%
Companies Philippines
Non-resident Foreign Corporations [EXCLUDED]
Non-resident cinematographic film owners, lessors or Gross Income from the Philippines
25%
distributors
Non-resident Owner or Lessor of Vessels Chartered by Gross Rentals, Lease and Charter
4.5%
Philippine Nationals Fees from the Philippines
Non-resident Owner or Lessor of Aircraft, Machineries Gross Rentals, Charges and Fees
7.5%
and Other Equipment from the Philippines

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IMPROPERLY ACCUMULATED Composition


EARNINGS OF CORPORATIONS The following constitute accumulation of
earnings for the reasonable needs of the
See: Sec. 29, as implemented by RR 2-2001 business:
which prescribes rules governing the imposition (1) Allowance for the increase in the
of IAET accumulation of earnings up to 100% of the
paid-up capital of the corporation as of
Rule: There is imposed for each taxable year, in Balance Sheet date,
addition to other taxes, a tax equal to 10% of the (2) inclusive of accumulations taken from other
improperly accumulated taxable income of years;
domestic and closely-held corporations formed or (3) Earnings reserved for definite corporate
availed of for the purpose of avoiding the income Expansion projects or programs requiring
tax with respect to its shareholders or the considerable capital expenditure as
shareholders of any other corporation, by approved by the Board of Directors or
permitting the earnings and profits of the equivalent body;
corporation to accumulate instead of dividing (4) Earnings reserved for Building, Plant or
them among or distributing them to the Equipment Acquisition as approved by the
shareholders. Board of Directors or equivalent body;
(5) Earnings reserved for compliance with any
Rationale: It is a tax in the nature of a penalty to Loan Covenant or pre-existing obligation
the corporation for the improper accumulation established under a legitimate business
of its earnings, and a deterrent to the avoidance agreement;
of tax upon shareholders who are supposed to (6) Earnings required by Law or applicable
pay dividends tax on the earnings distributed to regulations to be retained by the
them. The touchstone of the liability is the corporation or in respect of which there is
purpose behind the accumulation of the income legal prohibition against its distribution;
and not the consequences of the accumulation. (7) In the case of subsidiaries of foreign
corporations in the Philippines, all
Exception: The use of undistributed earnings undistributed earnings intended or reserved
and profits for the reasonable needs of the for Investments within the Philippines as can
business would not generally make the be proven by corporate records and/or
accumulated or undistributed earnings subject relevant documentary evidence.
to the tax.
Covered Corporations
What is meant by “reasonable needs of the Only domestic corporations classified as closely-
business” is determined by the immediacy test held corporations are liable for IAET.

Immediacy Test Closely-held corporations are those:


It states that the “reasonable needs of the (1) at least 50% in value of the outstanding
business are the capital stock; or
(1) immediate needs of the business; and (2) at least 50% of the total combined voting
(2) reasonably anticipated needs. power of all classes of stock entitled to vote
is owned directly or indirectly by or for not more
How to prove the “reasonable needs of the than 20 individuals. Domestic corporations
business” not falling under the aforesaid definition are,
The corporation should prove that there is therefore, publicly-held corporations.
(1) an immediate need for the accumulation of
the earnings and profits; or To determine whether the corporation is closely
(2) a direct correlation of anticipated needs to held corporation, insofar as such determination
such accumulation of profits. is based on stock ownership, the following rules
shall be applied:

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(1) Stock Not Owned by Individuals. - Stock Determination of Reasonable Needs of the
owned directly or indirectly by or for a Business:
corporation, partnership, estate or trust An accumulation of earnings or profits
shall be considered as being owned (including undistributed earnings or profits of
proportionately by its shareholders, partners prior years) is unreasonable if it is not necessary
or beneficiaries. for the purpose of the business, considering all
(2) Family and Partnership Ownership. - An the circumstances of the case.
individual shall be considered as owning
the stock owned, directly or indirectly, by or To determine the “reasonable needs” of the
for his family, or by or for his partner. business in order to justify an accumulation of
earnings, the Regulations adhere to the so-
For purposes of this paragraph, the ‘family of an called “Immediacy Test” under American
individual’ includes his brothers or sisters jurisprudence as adopted in this jurisdiction.
(whether by whole or half-blood), spouse, Accordingly, the term “reasonable needs of the
ancestors and lineal descendants. business” means the immediate needs of the
business, including reasonably anticipated
(3) Option to Acquire Stocks. - If any person has needs. In either case, the corporation should be
an option to acquire stock, such stock shall able to prove: (a) an immediate need for the
be considered as owned by such person. accumulation of the earnings and profits, or (b)
the direct correlation of anticipated needs to
For purposes of this paragraph, an option to such accumulation of profits. Otherwise, such
acquire such an option and each one of a accumulation would be deemed to be not for
series of option shall be considered as an the reasonable needs of the business, and the
option to acquire such stock. penalty tax would apply.

(3) Constructive Ownership as Actual Ownership. TAX EXEMPT CORPORATIONS


- Stock constructively owned by reason of (1) Government educational institutions.
the application of (a) or (c) shall, for (2) Non-stock and non-profit educational
purposes of applying (1) or (2), be treated as institutions.
actually owned by such person. (3) Nonprofit labor, agricultural or horticultural
organizations
But stock constructively owned by the (4) Associations of farmers, fruit growers, and
individual by reason of the application of (b) the like whose primary function is to market
shall NOT be treated as owned by him for the product of their members
purposes of again applying such paragraph (5) Organizations with a purely local operation
in order to make another the constructive whose income is derived only from
owner of such stock. assessment, duties and fees collected from
their members to meet operational
BIR RULING 025-02 expenses such as fire insurance company,
The ownership of a domestic corporation for farmers’ or other mutual typhoon
purposes of determining whether it is a closely associations, mutual ditch or irrigation
held corporation or a publicly held corporation company and mutual or cooperative
is ultimately traced to the individual shareholders telephone company
of the parent company. (6) Non-stock corporation or association
organized and operated exclusively for
Where at least 50% of the outstanding capital religious, charitable, scientific, athletic, or
stock or at least 50% of the total combined cultural purposes or for the rehabilitation of
voting power of all classes of stock entitled to veterans, provided that no individual person
vote in a corporation is owned directly or owns its assets or no individual person
indirectly by at least 21 or more individuals, the receives benefit on its earnings
corporation is considered as a publicly-held (7) Non-stock/ non-profit mutual savings bank
corporation, thus, exempt from IAET. or non-stock/ non-profit cooperative bank

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(8) Non-profit civic league or organization TAXATION OF PARTNERSHIPS


operating exclusively for the promotion of
social welfare CLASSIFICATION OF PARTNERSHIPS FOR
(9) Cemetery company owned and operated TAX PURPOSES
exclusively for the benefit of its members (1) General Professional Partnerships (GPP)–
(10) Non-profit business league, chamber of partnerships formed by persons for the sole
commerce, or board of trade purpose of exercising their common
(11) Associations, orders, beneficiary societies profession, no part of the income of which is
operating for the exclusive benefits of their derived from engaging in any trade or
members. [Sec.30, NIRC] business. A GPP is exempt from income
tax. It is, however, required to file a tax
NPC in general is subject to income tax; return for its income for the purpose of
PAGCOR is not subject to income tax [RA 9337] furnishing information as to the share in the
gains or profits that each partner shall
Qualification for Tax Exemption Under Section include in his individual tax return.
30 of the 1997 NIRC: (2) Other Partnerships (or General Co-
(1) It must be a non-stock corporation or partnerships) – partnerships wherein all or
association organized and operated part of their income is derived from the
exclusively for religious, charitable, conduct of trade or business. An ordinary
scientific, athletic or cultural purposes, or business partnership is considered as a
for the rehabilitation of veterans. corporation and is thus subject to corporate
(2) It should meet the following tests: tax of 30%.
(a) Organizational Test – requires that the
corporation or association’s constitutive Other Partnerships (or general co-partnerships)
documents exclusively limit its purposes Rules:
to one or more of those described in (1) The partnership is subject to the same rules
paragraph (E) of Section 30 of the 1997 on corporations (capital gains tax, final tax
NIRC. on passive income, normal tax, minimum
(b) Operational Test – mandates that the corporate income tax [MCIT] and gross
regular activities of the corporation or income tax [GIT]), but is not subject to the
association be exclusively devoted to improperly accumulated earnings tax [IAET].
the accomplishment of the purposes The partnership must file quarterly and
specified in paragraph (E) of Section 30 year-end income tax returns.
of the 1997 NIRC, as amended. A (2) The taxable income of the partnership, less
corporation or association fails to meet the normal corporate income tax (30%)
this test if a substantial part of its thereon, is the distributable net income of
operations may be considered “activities the partnership.
conducted for profit”.
(3) All the net income or assets of the The share of a partner in the partnership’s
corporation or association must be devoted distributable net income of a year shall be
to its purpose/s and no part of its net deemed to have been actually or constructively
income or asset accrues to or benefits any received by the partners in the same taxable
member or specified person. year and shall be taxed to them in their
(4) It must not be a branch of a foreign non- individual capacity, whether actually distributed
stock, non-profit corporation. or not. [Sec. 73(D)] Such share will be subjected
[RMO No. 20-2013] to a final tax of 10% to be withheld by the
partnership. [Sec. 24(B)(2)]

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Co-ownership An unincorporated joint venture is taxed likes a


There is co-ownership corporation. The share of the joint venture
(1) When two or more heirs inherit and undivided partners will no longer be taxable to them
property from a decedent. because they partake of dividends if paid to a
(2) When a donor makes a gift of an undivided domestic or resident corporation. However, an
property in favor of two or more donees. unincorporated joint venture formed for the
purpose of undertaking a construction project or
When Co-ownership is not subject to tax engaging in petroleum operations pursuant to
When the co-ownership’s activities are limited the consortium agreement with the Philippine
merely to the preservation of the co-owned Government is not subject to the corporate
property and to the collection of the income income tax. Only the joint venture partners will
from the property. The income derived by a co- be taxed on their respective shares in the
owner from the property shall be reported in his income of the joint ventures.
individual tax return regardless of whether such
Two elements necessary to exempt a joint venture
income is actually or constructively received.
or consortium from tax
(a) The joint venture must be an unincorporated
When Co-ownership is subject to tax
entity formed by two or more persons
The following circumstances would render a co-
(b) The joint venture was formed for the purpose
ownership subject to a corporate income tax: (a)
of undertaking a construction project, or
When a co-ownership is formed or established
engaging in the petroleum and other energy
voluntarily, or upon agreement of the parties;
operations with operating contract with the
(b) When the individual co-owner reinvested his
government.
share, and (c) When the inherited property
remained undivided for more than ten years,
and no attempt was ever made to divide to TAXATION OF GENERAL
same among the co-heirs, nor was the property PROFESSIONAL
under administration proceedings nor held in
trust, the property should be considered as
PARTNERSHIPS
owned by an unregistered partnership. RULES
(1) A GPP is a partnership formed by persons for
Automatically converted into an unregistered the purpose of exercising their common
partnership the moment the said common profession, no part of the income of which is
properties and/or the incomes derived from derived from engaging in trade or business.
them are used as a common fund with intent to A GPP as such shall not be subject to the
produce profits for the heirs in proportion to income tax. It is not a taxable entity for
their respective shares in the inheritance as income tax purposes.
determined in a project partition either duly (2) The partners shall only be liable for income tax
executed in an extrajudicial settlement or only in their separate and individual
approved by the court in the corresponding capacities.
testate or intestate proceeding. [Ona v. CIR, (3) For purposes of computing the distributive
May, 25 1972] share of the partners, the net income of the
GPP shall be computed in the same manner
Joint Venture and Consortium as a corporation.
To constitute a” joint venture,” certain factors (4) Each partner shall report as gross income his
are essential. Each party to the venture must distributive share, actually or constructively
make a contribution, not necessarily of capital, received, in the net income of the
but by way of services, skill, knowledge, material partnership. (5) The distributive share of a
or money; profits must be shared among the partner (actual or constructive) shall be
parties; there must be a joint proprietary subject to a creditable withholding income
interest and right of mutual control over the tax of 10% if the amount share is not more
subject matter of the enterprise; and usually, than P720,000 and 15% if the amount of the
there is single business transaction. share is more than P720,000. (RR 2- 1998)

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(6) If the partnership sustains a net operating In the operation of the withholding tax system,
loss, the partners shall be entitled to deduct the payee is the taxpayer, the person on whom
their respective shares in the net operating the tax is imposed, while the payor, a separate
loss from their individual gross income. entity, acts no more than an agent of the
government for the collection of the tax in order
GPP is not a taxable entity to ensure its payment. The amount thereby
(1) The GPP is deemed to be no more than a used to settle the tax liability is deemed sourced
mere mechanism or a flow-through entity in from the proceeds constitutive of the tax base.
the generation of income by, and the In an ad valorem tax, the tax paid or withheld is
ultimate mechanism distribution of such not deducted from the tax base, except when
income to the individual partners. [Tan v. the law clearly spells out in defining the tax
Commissioner, Oct. 3, 1994] base.
(2) But the partnership itself is required to file
income tax returns for the purpose of The duty to withhold is different from the duty
furnishing information as to the share in the to pay income tax. The revenue officers
gains or profits which each partner shall generally disallow the expenses claimed as
include in his individual return. (RR 2- 1998) deduction from gross income, if no withholding
(3) The share of an individual partner in the net of tax as required by law or the regulations was
profit of a general professional partnership withheld and remitted to the BIR within the
is deemed to have been actually or prescribed dates.
constructively received by the partner in the
same taxable year in which such partnership In addition, the withholding tax that should
net income was earned, and shall be taxed have been withheld and remitted to the BIR as
to them in their individual capacities, well as the penalties for non-, late or erroneous
whether actually distributed or not, at the payment of the withholding tax such as
graduated income tax ranging from 5% to surcharges and deficiency interest are assessed
32%. by the BIR. [Mamalateo]

Thus, the principle of constructive receipt of Withholding Agent


income or profit is being applied to Any person or entity who is required to deduct
undistributed profits of GPPs. The payment and remit the taxes withheld to the
[to the partners] of such tax-paid profits in government.
another year should no longer be liable to (a) In general, any juridical person, whether or
income tax. (Mamalateo) not engaged in trade or business;
(b) An individual, with respect to payments
WITHHOLDING TAX made in connection with his trade or
business. However, insofar as taxable sale,
CONCEPT exchange or transfer of real property is
Withholding tax is a method of collecting concerned, individual buyers who are not
income tax in advance from the taxable income engaged in trade or business are also
of the recipient of income. It is a systematic way constituted as withholding agents. In any
of collecting taxes at source, an indispensable case, no Certificate Authorizing Registration
method of collecting taxes to ensure adequate (CAR)/Tax Clearance Certificate (TCL) shall
revenue for the government. be issued to the buyer unless the
withholding tax due on the sale, transfer or
The withholding of income tax on compensation exchange of real property has been duly
income, on certain income payments made to paid; ac. All government offices, including
resident taxpayers, and on income payments GOCCs, as well as local government units.
made to non-resident taxpayers is very
important for all taxpayers, because the
obligation to withhold and remit the tax is
mandatory and prescribed by law.

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All income payments which are required to be (h) In cases covered by substituted filing, to
subjected to withholding tax shall be subject to furnish each employee with the original
the corresponding withholding tax rate to be copy of Certificate of Compensation/Tax
withheld by the person having control over the Withheld (BIR Form No. 2316) and submit
payment and who, at the same time, claims the to the BIR the duplicate copy not later than
expenses. [RR 30-2003] February 28 following the close of the
calendar year.
Duties and Obligations of the Withholding Agent
(a) To Register - withholding agent is required Withholding agents shall require all individuals
to register within ten (10) days after and entities claiming exemption from
acquiring such status with the Revenue imposition of taxes on income and,
District office having jurisdiction where the consequently, from withholding taxes to provide
business is located a copy of a valid, current and subsisting tax
(b) To Deduct and Withhold - withholding agent exemption certificate or ruling, as per existing
is required to deduct tax from all money administrative issuances and any issuance that
payments subject to withholding tax may be issued from time to time, before
(c) To Remit the Tax Withheld - withholding payment of the related income. The withholding
agent is required to remit tax withheld at agent’s failure to withhold notwithstanding the
the time prescribed by law and regulations lack of tax exemption certificate or ruling shall
(d) To File Annual Return - withholding agent is cause the imposition of penalties under Section
required to file the corresponding Annual 251 and other pertinent Sections of the 1997 Tax
Information Return at the time prescribed Code. [RMC No. 8-2014]
by law and regulations
(e) To Issue Withholding Tax Certificates - KINDS
withholding agent shall furnish Withholding Withholding of final tax of certain incomes
Tax Certificates to recipient of income Subject to rules and regulations the Secretary of
payments subject to withholding [Available, Finance may promulgate, upon the
BIR Website] recommendation of the Commissioner,
(f) To submit an alphabetical list of employees requiring the filing of income tax return by
and list of payees on income payments certain income payees, the tax imposed or
subject to creditable and final withholding prescribed by specific section of the NIRC on
taxes which are required to be attached as specified items of income shall be withheld by
integral part of the Annual Information payor-corporation and/or person and paid in
Returns (BIR Form No. 1604-CF/1604-E) the same manner and subject to the same
and Monthly Remittance Returns (BIR Form conditions as provided in Section 58 of the
No. 1601-C, etc.). [RR No. 1-2014, as clarified NIRC.
by RMC No. 5-2014]
(g) For hospitals and clinics, to submit the Withholding of creditable tax at source
names and addresses of medical The Secretary of Finance may, upon the
practitioners in the following classifications, recommendation of the Commissioner, require
every 15th day after the end of each the withholding of a tax on the items of income
calendar quarter, to the Collection Division payable to natural or juridical persons, residing
of the Revenue Region for non-large in the Philippines, by payor-corporation/persons
taxpayers and at the Large Taxpayers as provided for by law, at the rate of not less
Document Processing and Quality than one percent (1%) but not more than thirty-
Assurance Division (LTDP&QAD) in the two percent(32%), which shall be credited
National Office or Large Taxpayers District against the income tax liability of the taxpayer
Office (LTDO) in the Region for large for the taxable year.
taxpayers, where such hospital or clinic is
registered, using the prescribed format. [RR
No. 14-2013]

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Withholding of Creditable Tax (RR 2-98) Taxes as Special Fund in Trust


(a) Under the creditable withholding tax system, The taxes deducted and withheld by employers
taxes withheld on certain income payments shall be held in a special fund in trust for the
are intended to equal or at least approximate Government until the same are paid to the said
the tax due of the payee on said income. collecting officers.
(b) The income recipient is still required to file
an income tax return, to report the income Return and payment in case of government
and/or pay the difference between the tax employees
withheld and the tax due on the income. If the employer is the Government of the
(c) Taxes withheld on income payments covered Philippines or any political subdivision, agency
by the expanded withholding tax and or instrumentality thereof, the return of the
compensation income are creditable in amount deducted and withheld upon any wage
nature. shall be made by the officer or employee having
control of the payment of such wage, or by any
WITHHOLDING OF VAT officer or employee duly designated for the
(1) On gross payments for the purchase of goods purpose.
(2) On gross payments for the purchase of
services Statements and returns
(3) Payments made to government public works Every employer required to deduct and withhold
contractors a tax shall:
(4) Payments for lease or use of property or (1) Furnish to each such employee in respect of
property rights to non-resident owners his employment a written statement
confirming the wages paid by the employer
FILING OF RETURN AND PAYMENT OF to such employee during the calendar year,
TAXES WITHHELD and the amount of tax deducted and
withheld and such other information as the
Where to file and pay: Commissioner may prescribe
(1) Authorized agent bank; (a) During the calendar year, on or before
(2) Collection Agent; January thirty-first (31st) of the
(3) the duly authorized Treasurer of the city or succeeding yea; or
municipality where the employer has his (b) If his employment is terminated before
legal residence or principal place of the close of such calendar year, on the
business, or in case the employer is a same day of which the last payment of
corporation, where the principal office is wages is made
located; or (2) Submit to the Commissioner an annual
(4) As Commissioner otherwise permits. information return on or before January
thirty-first (31st) of the succeeding year
Period for filing and payment: containing:
(a) The return shall be filed and the payment (a) A list of employees;
made within twenty-five (25) days from the (b) The total amount of compensation
close of each calendar quarter. income of each employee;
(b) The Commissioner may, with the approval of (c) The total amount of taxes withheld
the Secretary of Finance, require the therefrom during the year, accompanied
employers to pay or deposit the taxes by copies of the written statements
deducted and withheld at more frequent furnished to employees, and such other
intervals, in cases where such requirement is information as may be deemed
deemed necessary to protect the interest of necessary.
the Government.
The Commissioner may grant to any employer a
reasonable extension of time to furnish and
submit the statements and returns required.

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FINAL WITHHOLDING TAX AT SOURCE (v) Prizes (except prizes amounting to


Under the final withholding tax system, the P10,000 or less which is subject to
amount of income tax withheld by the tax under Sec. 25(A)(1) of the Tax
withholding agent is constituted as a full and Code.
final payment of the income tax due from payee (vi) Winnings (except from Philippine
on the said income (e.g., interest on deposits, Charity Sweepstake Office and
royalties, etc.). The liability for payment of the Lotto)
tax rests primarily on the payor as a withholding (b) Interest on Long Term Deposits
agent. Thus, in case of the withholding agent’s (c) Capital Gains presumed to have been
failure to withhold the tax or in case of under- realized from the sale, exchange or
withholding, the deficiency tax shall be other disposition of real property
collected from him. The payee is not required to (3) Income Derived from All Sources Within the
file an income tax return for the particular Philippines by a Non-Resident Alien
income, nor is he liable for the payment of the Individual Not Engaged in Trade or Business
tax. (Sec. 2.57, RR No. 2-98) (a) On gross amount of income derived
from all sources within the Philippines
The finality of the withholding tax is limited only (b) On Capital Gains presumed to have
to the payee’s income tax liability on the been realized from the sale, exchange
particular income. It does not extend to the or disposition of real property located in
payee’s other tax liability on said income, such the Philippines
as when the said income is further subject to a (4) Income Derived by Alien Individual
percentage tax, such as gross receipts tax in the Employed by a Regional or Area
case of a bank. Headquarters and Regional Operating
Headquarters of Multinational Companies
Income payments subject to Final Withholding (5) Income Derived by Alien Individual
Tax: Employed by Offshore Banking Unit
(1) Income Payments to a Citizen or to a (6) Income of Aliens Employed by Foreign
Resident Alien Individual Petroleum Service Contractors and
(a) Interest on any peso bank deposit Subcontractors
(b) Royalties (7) Income Payment to a Domestic Corporation
(c) Prizes (except prizes amounting to (a) Interest from any currency bank
P10,000 or less which is subject to tax deposits and yield or any other
under Sec. 25(A)(1) of the Tax Code monetary benefit from deposit
(d) Winnings (except from Philippine substitutes and from trust fund and
Charity Sweepstake Office and Lotto) similar arrangements derived from
(e) Interest income on foreign currency sources within the Philippines
deposit (b) Royalties derived from sources within
(f) Interest income from long term deposit the Philippines
(g) Cash and/or property dividends (c) Interest income derived from a
(h) Capital Gains presumed to have been depository bank under the Expanded
realized from the sale, exchange or Foreign Currency Deposit (FCDU)
other disposition of real property System
(2) Income Payments to a Non-Resident Alien (d) Income derived by a depository bank
Engaged in Trade or Business in the under the FCDU from foreign
Philippines transactions with local commercial
(a) On Certain Passive Income banks
(i) cash and/or property dividend (e) On capital gains presumed to have
(ii) Share in the distributable net been realized from the sale, exchange
income of a partnership or other disposition of real property
(iii) Interest on any bank deposits located in the Philippines classified as
(iv) Royalties capital assets, including pacto de retro
sales and other forms of conditional

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sales based on the gross selling price or (10) Fringe Benefits Granted to the Employee
fair market value as determined in (except Rank and File)
accordance with Sec. 6(E) of the NIRC,
whichever is higher Goods, services or other benefits furnished
(8) Income Payments to a Resident Foreign or granted in cash or in kind by an employer
Corporation to an individual employee (except rank and
(a) Offshore Banking Units file) such as but not limited to the following:
(b) Tax on branch Profit Remittances (a) Housing
(c) Interest on any currency bank deposits (b) Vehicle of any kind
and yield or any other monetary benefit (c) Interest on loans
from deposit substitute and from trust (d) Expenses for foreign travel
funds and similar arrangements and (e) Holiday and vacation expenses
royalties derived from sources within (f) Educational assistance to employees or
the Philippines his dependents
(d) Interest income on FCDU (g) Membership fees, dues and other
(e) Income derived by a depository bank expense in social and athletic clubs or
under the expanded foreign currency other similar organizations
deposits system from foreign currency - Health insurance
transactions with local commercial (h) Informers Reward
banks
(9) Income Derived from all Sources Within the CREDITABLE WITHHOLDING TAX
Philippines by a Non-Resident Foreign Taxes withheld on certain income payments are
Corporation intended to equal or at least approximate the
(a) Gross income from all sources within tax due of the payee on the income. The income
the Philippines such as interest, recipient is still required to file his income tax
dividends, rents, royalties, salaries, return as prescribed in Section 51 of the NIRC,
premiums (except re-insurance wither to report the income and/or pay the
premiums), annuities, emoluments or difference between the tax withheld and the tax
other fixed determinable annual, due on the income.
periodic or casual gains, profits and
income or capital gains Expanded Withholding Tax
(b) Gross income from all sources within (a) a kind of withholding tax which is prescribed
the Philippines derived by a non- on certain income payments and is
resident cinematographic film owner, creditable against the income tax due of the
lessor and distributor payee for the taxable quarter/year in which
(c) On the gross rentals, lease and charter the particular income was earned.
fees derived by a non-resident owner or (b) An income payment is subject to the
lessor of vessels from leases or charters expanded withholding tax if the following
to Filipino citizens or corporations as conditions concur:
approved by the Maritime Industry (i) An expense is paid or payable by the
Authority taxpayer, which is income to the
(d) On the gross rentals, charter and other recipient thereof subject to income tax;
fees derived by a non-resident lessor of (ii) The income is fixed or determinable at
aircraft, machineries and other the time of payment;
equipment (iii) The income is one of the income
(e) Interest on foreign loans contracted on payments listed in the regulations that
or after August 1, 1986 is subject to withholding tax;
(iv) The income recipient is a resident of the
Philippines liable to income tax; and
(v) The payor-withholding agent is also a
resident of the Philippines.

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Income payments subject to Expanded (iv) Persons engaged in the installation


Withholding Tax: of water system, and gas or electric
(1) Professional fees / talent fees for services light, hear or power
rendered by the following individuals: (v) Operators of stevedoring,
(a) Those individually engaged in the warehousing or forwarding
practice of profession or callings establishments
(b) Professional entertainers such as but (vi) Printers, bookbinders, lithographers
not limited to actors and actresses, and publishers, except those
singers and emcees principally engaged in the
(c) Professional athletes including publication or printing of any
basketball players, pelotaris and jockeys newspaper, magazine, review or
(d) Directors involved in movies, stage, bulletin which appears at regular
radio, television and musical directors intervals, with fixed prices for
(e) Insurance agents and insurance subscription and sale
adjusters (vii) Advertising agencies, exclusive of
(f) Management and technical consultants payments to media
(g) Bookkeeping agents and agencies (viii) Independent producers of
(h) Other recipient of talent fees television, radio and stage
(i) Fees of directors who are not employees performances or shows
of the company paying such fees whose (ix) Independent producers of "jingles"
duties are confined to attendance art (x) Labor recruiting agencies
and participation in the meetings of the (xi) Persons engaged in the installation
Board of Directors of elevators, central air conditioning
(2) Professional fees, talent fees, etc for units, computer machines and other
services of taxable juridical persons equipment and machineries and the
(3) Rental of real property used in business maintenance services thereon
(4) Rental of personal properties in excess of P (xii) Messengerial, janitorial, security,
10,000 annually private detective and other business
(5) Rental of poles, satellites and transmission agencies
facilities (xiii) Persons engaged in landscaping
(6) Rental of billboards services
(7) Cinematographic film rentals and other (xiv) Persons engaged in the collection
payments and disposal of garbage
(8) Income payments to certain contractors (xv) TV and radio station operators on
(a) General engineering contractors sale of TV and radio airtime, and
(b) General building contractors (xvi) TV and radio blocktimers on sale of
(c) Specialty contractors TV and radio commercial spots
(d) Other contractors like: (xvii) Persons engaged in the sale of
(i) Transportation contractors which computer services, computer
include common carriers for the programmers, software
carriage of goods and merchandise developer/designer, etc.
of whatever kind by land, air or (9) Income distribution to the beneficiaries of
water, where the gross payments by estates and trusts
the payor to the same payee (10) Gross commission or service fees of
amounts to at least two thousand customs, insurance, stock, real estate,
pesos (P2,000) per month, immigration and commercial brokers and
regardless of the number of fees of agents of professional entertainers
shipments during the month (11) Commission, rebates, discounts and other
(ii) Filling, demolition and salvage work similar considerations paid/granted to
contractors and operators of mine independent and exclusive distributors,
drilling apparatus medical/technical and sales representatives
(iii) Operators of dockyards

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and marketing agents and sub-agents of classified as commission/brokerage fees subject


multi level marketing companies to 10% EWT. [RR No. 10-2013]
(12) Income payments to partners of general
professional partnerships It shall be the duty and responsibility of the
(13) Payments made to medical practitioners hospitals, clinics, HMOs and similar
through a duly registered professional establishments to withhold and remit taxes due
partnership on the professional fees of their respective
(14) Payments for medical/dental/veterinary accredited medical practitioners, paid by
services thru hospitals/clinics/health patients who were admitted and confined to
maintenance organizations, including direct such hospitals and clinics. [RR No. 14-2013]
payments to service providers
(15) Gross selling price or total amount of The withholding tax on professional fees paid to
consideration or its equivalent paid to the medical practitioners shall not apply whenever
seller/owner for the sale, exchange or there is proof that no professional fee has in fact
transfer of real property been charged by the medical practitioner and
(16) Additional income payments to government paid by his patient, as shown in a sworn
personnel from importers, shipping and declaration jointly executed by the medical
airline companies or their agents practitioner and his patient. [RR No. 14-2013]
(17) Certain income payments made by credit
card companies Withholding tax on compensation
(18) Income payments made by the top 10,000 The tax withheld from income payments to
private corporations to their purchase of individuals arising from an employer-employee
goods and services from their local/resident relationship.
suppliers other than those covered by other
rates of withholding Compensation is any remuneration received for
(19) Income payments by government offices on services performed by an employee from his
their purchase of goods and services, from employer under an employee-employer
local/resident suppliers relationship.
(20) Tolling fees paid to refineries
(21) Payments made by pre-need companies to The different kinds of compensation are:
funeral parlors (1) Regular compensation - includes basic
(22)Payments made to embalmers by funeral salary, fixed allowances for representation,
parlors transportation and others paid to an
(23)Income payments made to suppliers of employee
agricultural products (2) Supplemental compensation - includes
(24) Income payments on purchases of payments to an employee in addition to the
mineral, mineral products and quarry regular compensation such as but not
resources limited to the following:
(a) Overtime Pay
Income payments to RESPs (i.e., real estate (b) Fees, including director's fees
consultants, real estate appraisers and real (c) Commission
estate brokers) who passed the licensure (d) Profit Sharing
examination given by the Real Estate Service (e) Monetized Vacation and Sick Leave
under the Professional Regulations Commission (f) Fringe benefits received by rank & file
(PRC) are classified as professional fees subject employees
to 10%/15% EWT. (g) Hazard Pay
(h) Taxable 13th month pay and other
On the other hand, income payments to RESPs benefits
(i.e., real estate consultants, real estate (i) Other remunerations received from an
appraisers and real estate brokers) who failed or employee-employer relationship
did not take up the licensure examination given
by the Real Estate Service under the PRC are

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Exemptions from Withholding tax on (n) Compensation for injuries or sickness –


compensation: amounts received through accident or
Remuneration as an incident of employment health insurance or under Workmen’s
(a) Retirement benefits received under RA 7641 Compensation Acts, as compensation for
(Retirement Pay Law) and those received by personal injuries or sickness, plus the
officials and employees of private firms, amount of any damages received whether
under a reasonable private benefit plan. by suit or agreement on account of such
(b) Any amount received by an official or injuries or sickness.
employee or by his heirs from the employer (o) Income exempt under Treaty
due to death, sickness or other physical (p) Thirteenth (13th) month pay and other
disability or for any cause beyond the benefits (not to exceed P 30,000)
control of the said official or employee such (i) Mandatory 1 month basic salary received
as retrenchment, redundancy or cessation after the twelfth *12th) month pay
of business (ii) Other benefits such as Christmas bonus,
(c) Social security benefits, retirement productivity incentives, loyalty award, gift
gratuities, pensions and other similar in cash or in kind and other benefits of
benefits similar nature actually received by
(d) Payment of benefits due or to become due officials and employees of both
to any person residing in the Philippines government and private offices including
under the law of the US administered US the Additional Compensation Allowance
Veterans Administration (ACA) granted and paid to all officials and
(e) Payment of benefits made under the SSS employees of the Nations Government
(NGAs) including State Universities and
Act of 1954, as amended
Colleges (SUCs), Government-Owned-or-
(f) Benefits received from the GSIS Act of 1937, Controlled Corporations (GOCCs),
as amended, and the retirement gratuity Government Financial Institutions (GFIs)
received by the government employee and Local Government Units (LGUs)
(g) Remuneration paid for agricultural labor (a) De minimis benefits, given in excess
(h) Remuneration for domestic services of the ceilings prescribed in
(i) Remuneration for casual labor not in the regulations, shall be taxable to the
course of an employer's trade or business recipient –employee only if such
(j) Compensation for services by a citizen or excess is beyond the P30,000
resident of the Philippines for a foreign threshold.
government or an international (q) GSIS, SSS, Medicare and other
organization contributions – GSIS, SSS, Medicare and
(k) Payment for damages – actual, moral, Pag-Ibig contributions, and union dues of
exemplary damages received by an individual employees
employee or his heirs pursuant to a final (r) Compensation income of MWEs who work
judgment or compromise agreement arising in the private sector and being paid the
out of or related to an employer-employee statutory minimum wage (SMW), as fixed by
relationship. Regional Tripartitie Wage and Productivity
(l) Proceeds of Life Insurance – the proceeds of Board (RTWPB)/National Wages and
life insurance policies paid to the heirs or Productivity Commission (NWPC),
beneficiaries upon the death of the insured, applicable to the place where he/she is
whether in a single sum or otherwise; assigned
provided however, that interest payments (s) Compensation income of employees in the
agreed under the policy for the amounts public sector with compensation income of
which are held by the insured under such an not more than the SMW in the non-
agreement shall be INCLUDED in the gross agricultural sector, as fixed by
income. RTWPB/NWPC, applicable to the place
(m) Amount received by the insured as a return where he/she is assigned.
of premium

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TIMING OF WITHHOLDING
The obligation of the payor to deduct and
withhold the tax arises at the time an income
payment is paid or payable, or the income
payment is accrued or recorded as an expense
or asset, whichever is applicable, in the payor’s
books, whichever comes first. The term
“payable” refers to the date the obligation
becomes due, demandable or legally
enforceable.

Where income is not yet paid or payable but the


same has been recorded as an expense or asset,
whichever is applicable, in the payor’s books,
the obligation to withhold shall arise in the last
month of the return period in which the same is
claimed as an expense or amortized for tax
purposes. [Mamalateo]

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Estate Tax JUSTIFICATION (THEORIES) FOR THE


IMPOSITION OF ESTATE TAX
Estate tax laws rest in their essence upon the (1) Benefit received theory – The State collects
principle that death is the generating source the tax because of the services it renders in
from which the taxing power takes its being, the distribution of the estate of the decedent,
and that it is the power to transmit or the either by law or in accordance with his will.
transmission from the dead to the living on (2) Privilege theory or state partnership theory –
which the tax is more immediately based. Succession to the property of a deceased
[Lorenzo v. Posadas, 1937] person is not a right but a privilege granted
by the State and consequently, the
DEFINITION legislature can constitutionally burden such
(a) A graduated tax imposed upon the privilege succession with a tax. The State collects the
of the decedent to transmit property at death tax because of the protection it provides in
and is based on the net estate, considered as the acquisition of large estates. Hence, the
a unit, and it is determined by subtracting State is a “silent or passive partner” in the
from the gross estate the allowable accumulation of said large property.
deductions. (3) Ability to pay theory – Receipt of inheritance,
(b) Tax on the right to transmit property at which is in the nature of unearned wealth or
death and on certain transfers which are windfall, places assets into the hands of the
made by the statute the equivalent of heirs and beneficiaries. This creates an
testamentary dispositions and is measured ability to pay the tax and thus contributes to
by the value of property at time of death. government income.
(4) Redistribution of wealth theory – Receipt of
IN SEC. 84, NIRC, THE FOLLOWING ARE THE inheritance is a contributing factor to the
APPLICABLE TAX RATES: inequalities in wealth and income. The
Of the imposition of estate tax reduces the property
Over But not over Tax is Plus received by the successor, which helps
excess over
promote a more equitable distribution of
200,000 Exempt
wealth in society. The tax base is the value of
200,000 500,000 0 5% 200,000 the property and the progressive scheme of
500,000 2 million 15,000 8% 500,000 taxation is precisely motivated by the desire
2 million 5 million 135,000 11% 2 million to mitigate the evils of inheritance in the
present form. The taxes paid by rich people
5 million 10 million 465,000 15% 5 million are programmed for disbursement by
10 million and over 1,215,000 20% 10 million Congress for the benefit of the poor in terms
on social services, education, health, etc.

NATURE PURPOSE OR OBJECT


Lorenzo v Posadas (1937): It is in reality an excise
or privilege tax imposed on the right to succeed PURPOSE OF ESTATE TAX
to, receive, or take property by or under a will or (1) The object of estate tax is to tax the shifting
the intestacy law, or deed, grant, or gift to of economic benefits and enjoyment of
become operative at or after death. property from the dead to the living.
(2) Death taxes are imposed to give added
income to the government.

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TIME AND TRANSFER OF (e) Transfers for insufficient consideration


[Sec. 85(G), NIRC]
PROPERTIES
Decedent’s interest is to its extent at the time of Dison v Posadas (1932): The law presumes that
his death. [Sec. 85(A), NIRC] such gifts have been made in anticipation of
inheritance, devise, bequest or gift mortis causa,
Art. 777, Civil Code. The rights to the succession when the donee, after the death of the donor
are transmitted from the moment of the death proves to be his heir, devisee or donee mortis
of the decedent. causa, for the purpose of evading the tax, and it
is to prevent this that it provides that they shall
Sec. 3, RR 2-2003. THE LAW THAT GOVERNS be added to the resulting amount.
THE IMPOSITION OF ESTATE TAX. It is a well-
settled rule that estate taxation is governed by CLASSIFICATION OF
the statute in force at the time of death of the DECEDENT
decedent. The estate tax accrues as of the death The decedent may be classified into:
of the decedent and the accrual of the tax is (1) Citizen,
distinct from the obligation to pay the same. (2) Resident alien; or
Upon the death of the decedent, succession (3) Non-resident alien.
takes place and the right of the State to tax the
privilege to transmit the estate vests instantly DEFINITION OF RESIDENCE
upon death. Corre v Tan Corre (1956): It refers to the
permanent home, the place to which whenever
Time of death governs: absent, for business or pleasure, one intends to
(1) The determination of the extent of the return, and depends on facts and
decedent’s interest for computing his circumstances, in the sense that they disclose
gross estate. intent.
(2) The statute that governs estate taxation.
(3) The accrual of the estate tax. Collector v Lara (1958); Vellila v Posadas (1935):
It is, therefore, not necessarily the actual place
of residence. The term “residence” and
TAXABLE TRANSFERS “domicile” are synonymous and are used
(1) Transfers Mortis Causa – Gratuitous transfers interchangeably without distinction.
that take effect after death, either testate or
intestate. Vellila v. Posadas (1935): To effect the
(2) Transfers Inter Vivos – Generally attract abandonment of one’s domicile, there must be
donor’s tax. However, certain transfers inter a deliberate and provable choice of a new
vivos are treated by law as substitutes for domicile, coupled with actual residence in the
testamentary dispositions (i.e., transfers place chosen, with a declared or provable intent
which are inter vivos in form but mortis causa that it should be one’s fixed and permanent
in substance) where certain circumstances place of abode, one’s home. Note: In this case,
provided by law are present, and are the Supreme Court held that the motive of the
accordingly included in the computation of decedent in leaving the Philippines was to avoid
the gross estate in order to arrive at the confinement in a Leper Colony and not effect a
proper estate tax liability. These are: change in domicile.
(a) Transfers in contemplation of death [Sec.
85(B), NIRC]
(b) Transfer with retention or reservation of
certain rights [Sec. 85(B), NIRC]
(c) Revocable transfers [Sec. 85(C), NIRC]
(d) Transfers of property arising under
general power of appointment [Sec.
85(D), NIRC]

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GROSS ESTATE AND NET CIR v Fisher (1961): For the reciprocity rule to
apply, there must be TOTAL reciprocity. [For
ESTATE instance,] the reciprocity rule will not apply if
California imposes only the inheritance tax
GROSS ESTATE while the Philippines imposes both estate and
Sec. 104, NIRC. DEFINITIONS. For purposes of inheritance taxes. Reciprocity has to be total.
this Title, the terms “gross estate” and “gifts”
include real and personal property, whether Collector v. Campos-Rueda (1971); Collector v
tangible or intangible, or mixed, wherever Lara (1958): Reciprocity in exemption does not
situated x x x require the “foreign country” to possess
international personality in the traditional sense
The gross estate of a decedent who is a citizen (i.e., compliance with the requisites of
or resident alien includes the following, statehood). Thus, Tangier, Morocco and
wherever these may be situated: California, a state in the American Union were
(1) Real Property held to be foreign countries within the meaning
(2) Personal Property of Section 104.
(a) Intangible
(b) Tangible Collector v Lara (1958): When the owner of
(3) Mixed personal property, during his lifetime, extended
his activities with respect to his interests so as to
For a non-resident decedent who is not a avail himself of the protection and benefits of the
Filipino citizen at the time of his death, his real laws of the Philippines, so as to bring his person
and personal property situated outside the or property within the reach of the Philippines,
Philippines shall not be included as part of his the reason for a single place of taxation no longer
gross estate. Thus, only the following are obtains. His property in the Philippines enjoys
included in the gross estate: the protection of the government so that the
(1) Real property in the Philippines right to collect the estate tax cannot be
(2) Tangible personal property in the questioned.
Philippines
(3) Intangible personal property in the INTANGIBLE PROPERTIES WHICH ARE
Philippines, unless excluded under the CONSIDERED SITUATED IN THE
reciprocity rule PHILIPPINES
(1) Franchise which must be exercised in the
RECIPROCITY RULE Philippines
There is reciprocity if the foreign country of (2) Shares, obligations or bonds issued by any
which the decedent was a citizen and resident corporation or sociedad anonima organized
at the time of his death: or constituted in the Philippines in
(a) Did not impose a transfer tax of any accordance with its laws
character, in respect of intangible personal (3) Shares, obligations or bonds issued by any
property of citizens of the Philippines not foreign corporation 85% of the business of
residing in that foreign country; OR which is located in the Philippines
(b) Allowed a similar exemption from transfer (4) Shares, obligations or bonds issued by any
tax in respect of intangible personal property foreign corporation if such shares,
owned by citizens of the Philippines not obligations or bonds have acquired a
residing in that country business situs in the Philippines
(5) Shares or rights in any partnership, business
Note: In sum, both states must exempt or industry established in the Philippines
nonresidents (citizens of the other state) from [Sec. 104, NIRC]
transfer taxes in respect of intangible personal
property.

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SUMMARY OF RULES UNDER SEC. 104, DETERMINATION OF GROSS


NIRC
ESTATE AND NET ESTATE
Citizen or Resident Alien Non-resident Alien
Real property in the Philippines GROSS ESTATE is determined by the value of
the properties owned by the decedent at the
Included Included
time of his death.
Real property outside the Philippines
Included Not included Sec. 85, NIRC. GROSS ESTATE. The value of the
gross estate of the decedent shall be
Tangible personal property in the Philippines
determined by including the value at the time of
Included Included his death of all property, real or personal,
Tangible personal property outside the Philippines tangible or intangible, wherever situated:
Provided, however, that in the case of a
Included Not included nonresident decedent who at the time of his
Intangible personal property in the Philippines death was not a citizen of the Philippines, only
that part of the entire gross estate which is
Included Included, unless
situated in the Philippines shall be included in
exempted on the basis
his taxable estate.
of the principle of
reciprocity
General rule: Gross estate is determined by
Intangible personal property outside the including the value of all of the decedent’s
Philippines properties, wherever situated, at the time of his
Included Included death.

Exception: The gross estate shall be determined


NET ESTATE by including only that part of the estate of the
Value of the estate after all deductions have decedent that is situated in the Philippines if the
been made against the gross estate; subject to decedent is a nonresident who at the time of his
the graduated tax rates. [Sec. 6, RR 2-2003] death was not a Filipino citizen.

Net estate is arrived at using the following DETERMINATION OF THE VALUE OF


formula: THE ESTATE [Sec. 5, RR 2-2003]
For properties, the general rule is that the estate
shall be appraised at its fair market value as of
the time of death.
For real property, the FMV shall be the fair
market value as determined by the
Commissioner or the FMV as shown in the
schedule of values fixed by the provincial and
city assessors, whichever is HIGHER.

For personal property, FMV at the time of


The net estate is the basis for determining the
death
tax rate.
Manila Railroad Co. v Velasquez (1915): The
market value of property is the price which it will
bring when it is offered for sale by one who
desire, but is not obliged to sell it, and is bought
by one who is under no necessity of having it.

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For shares of stocks, the following rules apply: (b) Personal property (tangible or intangible)
(1) Unlisted common shares – valued based wherever situated
on their book value. In determining the (2) As to non-resident alien
book value of common shares, appraisal (a) Real property in the Philippines
surplus shall not be considered as well as (b) Tangible personal property in the
the value assigned to preferred shares, if Philippines
there are any. (c) Intangible personal property in the
(2) Unlisted preferred shares – valued at par Philippines, unless excluded on the basis
value of reciprocity under Section 104 NIRC (see
(3) Listed shares – FMV shall be based on the above)
arithmetic mean between the highest and
lowest quotation on the date of death. If ITEMS TO BE INCLUDED IN GROSS
none is available, then on the date ESTATE
nearest the date of death.
DECEDENT’S GROSS ESTATE
For right to usufruct, use or habitation, as well (1) Property owned by the decedent actually and
as that of annuity, the probable life of the physically present in his estate at the time of
beneficiary in accordance with the latest basic his death;
standard mortality table shall be taken into (2) Decedent’s interest;
account. (3) Properties not physically in the estate, such
as:
NET ESTATE is determined by deducting the (a) Transfers in contemplation of death [Sec.
following from the gross estate of the decedent: 85(B), NIRC];
In case of a citizen or a resident: (b) Transfers with retention or reservation of
(1) Expenses, losses, indebtedness, and taxes; certain rights [Sec. 85(B), NIRC];
(2) Properties previously taxed; (c) Revocable transfers [Sec. 85(C), NIRC];
(3) Transfers for public use; (d) Property passing under general power of
(4) The family home; appointment [Sec. 85(D), NIRC];
(5) Standard deduction; (e) Transfers for insufficient consideration
(6) Medical expenses; [Sec. 85(G), NIRC];
(7) Amount received by heirs under RA 4917; (f) Proceeds of life insurance [Sec. 85(E),
NIRC];
In case of a nonresident foreign individual: (g) Claims against insolvent persons; and
 Expenses, losses, indebtedness, and taxes; (h) Capital of the surviving spouse [Sec.
 Properties previously taxed; 85(H), NIRC].
 Transfers for public use;
Property Owned by the Decedent Actually
The net share of the surviving spouse in the and Physically Present in His Estate at the
conjugal partnership property as diminished by Time of Death
the obligations properly chargeable to such Land, buildings, shares of stock, vehicles, bank
property shall be deducted from the net estate deposits, etc.
of the decedent [Sec. 86, NIRC].
Decedent’s Interest
COMPOSITION OF THE GROSS Decedent’s interest refers to the extent of equity
ESTATE or ownership participation of the decedent on
The following properties, rights and interests any property physically existing and present in
are included in the gross estate at the time of the gross estate, whether or not in his
the decedent’s death: possession, control or dominion; also refers to
(1) As to resident (citizen or alien) or citizen the value of any interest in property owned or
(resident or non-resident) possessed by the decedent at the time of his
(a) Real property wherever situated death (interest having value or capable of being
value or transferred. [cf. Sec. 85(A), NIRC]

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Examples: dividends declared before his death Exception: Bona fide sale for an adequate and
but received after death; partnership profits full consideration.
which have accrued before his death.
Illustration:
Properties Not Physically in the Estate X transfers his property to Y in naked ownership
These have already been transferred during the and to Z in usufruct throughout Z’s lifetime
lifetime of the decedent but are still subject to subject to the condition that if Z predeceases X,
payment of estate tax), such as the following: the property shall return to X. If X dies during
Z’s life, the value of the reversionary interest of
Transfers in Contemplation of Death X at death is includible in his gross estate (see
The transfers referred to are those where the Articles 756-757 of the Civil Code). The transfer
motivating factor or controlling motive is the is taxable as intended to take effect at or after
thought of death, regardless of whether the death because the possibility of reversion to X
transferor was near the possibility of death or makes Z’s interest conditional as long as X lives.
not. Note: There is no transfer in contemplation
of death when the transfer of property is a bona Revocable Transfers
fide sale for an adequate and full consideration Decedent’s transfer of any interest by trust or
in money or money’s worth [Sec. 85(B), NIRC]. otherwise, where the enjoyment thereof was
subject at the date of his death to any change
US v Wells (1931): The mere fact that death through the exercise of power by the decedent
ensues even shortly after the gift does not ALONE or by the decedent IN CONJUNCTION
determine absolutely that it is in contemplation WITH ANY OTHER person, to alter, amend,
of death. The question, necessarily, is as to the revoke, or terminate such transfer, OR where
state of mind of the donor. Furthermore, it is the such power which would bring the property in
contemplation of death, not necessarily the taxable estate is relinquished in
contemplation of imminent death, to which the contemplation of the decedent’s death [Sec.
statute refers. 85(C )(1), NIRC].

Transfers with retention or reservation of certain Exception: Bona fide sale for an adequate and
rights full consideration.
It involves cases where the owner transfers his
property his lifetime but still retains economic The power to alter, amend or revoke shall be
benefits during his life or for any period which considered to exist on the date of the
does not in fact end before his death. decedent’s death EVEN THOUGH:
The rights retained or reserved include: (a) The exercise of the power is subject to a
(1) The possession or enjoyment of the precedent giving of notice, or
property; The alteration, amendment or revocation takes
(2) The right to the income from the property; effect only on the expiration of a stated period
or after the exercise of the power, whether or not
(3) The right, either alone or in conjunction with on or before the date of the decedent’s death
any person, to designate the person who notice has been given or the power has been
shall possess or enjoy the property or the exercised.
income therefrom.
By reason of the restriction or encumbrance, the If notice has not been given or the power has
transferee is incapable of freely enjoying and not been exercised before the date of his death,
disposing of the property until the transferor’s such notice shall be considered to have been
death, and the transfer may be regarded as given, or the power exercised, on the date of his
having been intended to take effect in death.
possession or enjoyment at the transferor’s
death.

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Property Passing under General Power of Two Kinds of Appointment and their Effects:
Appointment General Special
Power of appointment refers to the right to
designate the person or persons who will As to nature. — DONEE DONEE must appoint
succeed to the property of the prior decedent has power to appoint successor to the
[Sec. 85(D), NIRC]. any person he chooses property only within a
who shall possess or limited group or class
enjoy the property of persons
When general. — The power of appointment is without restriction
general when the power of appointment As to tax implications. Not includible in the
authorizes the donee of the power to appoint — Makes appointed gross estate of the
any person he pleases. The power may be property, for all legal DONEE when he dies
exercised in favor of anybody including the intents, the property of
done-decedent. The donee of a general power the DONEE (includible
of appointment holds the appointed property in his estate)
with all the attributes of ownership, and, thus,
the appointed property shall form part of the As to effects. — DONEE DONEE holds the
gross estate of the donee of the power upon his holds the appointed appointed property in
death. property with all the trust, or under the
attributes of concept of trustee
When special. — Special power of appointment ownership, under the
exists when the done can appoint only from a concept of owner
restricted or designated class of persons other
than himself. Property transferred under a Transfers for Insufficient Consideration
special power of appointment should be When a sale of transfer (other than a bona fide
excluded from the gross estate of the donee of sales of property for an adequate and full
the power because the done-decedent only consideration in money or money’s worth) was
holds the property in trust. made for a price less than its fair market value
at the time of sale or transfer, the excess of the
Gross estate shall include any property passed fair market value of the transferred property at
or transferred under a general power of the time of death over the value of the
appointment exercised by the decedent: consideration received should be included in the
(1) By will, or gross estate [Sec. 85(G), NIRC].
(2) By deed executed in contemplation of, or .
intended to take effect in possession or Case A: If bona fide sale – no value shall be
enjoyment at, or after his death, or included in the gross estate
(3) By deed under which he has retained (for his Case B: If not a bona fide sale - the excess of the
life or any period not ascertainable without fair market value at the time of death over the
reference to his death or for any period which value of the consideration received by the
does not in fact end before his death): decedent shall form part of his gross estate.
(a) the possession or enjoyment of, or the Case C: If inter vivos transfer is proven
right to the income from, the property, or fictitious/simulated – total value of the property
(b) the right, either alone or in conjunction at the time of death included in the gross
with any person, to designate the persons estate.
who shall possess or enjoy the property or
the income therefrom [Sec. 85(D), NIRC].

Exception: Bona fide sale for an adequate and


full consideration.

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The proceeds of an insurance policy belong


Case Case exclusively to the beneficiary and not to the
Over Case A estate of the person whose life was insured,
B C
FMV, transfer 2,000 1,500 2,500 and that such proceeds are the separate and
individual property of the beneficiary, and not
FMV, death 2,500 2,000 2,000 of the heirs of the person whose life was
Consideration received 2,000 800 0 insured. [Del Val v Del Val (1915)]
Value included in the 0 1,200 2,000 (4) Proceeds of insurance policies issued by the
Gross Estate GSIS to government officials and employees
[P.D. 1146], which are exempt from all taxes;
Note: The transfer for insufficient consideration (5) Benefits accruing under the SSS law [RA 1161,
must fall under any of the following: as amended]; and
(1) Transfer in contemplation of death; (6) Proceeds of life insurance payable to heirs of
(2) Revocable transfer, or deceased members of military personnel [RA
(3) Property passing under a GPA. 360].
Otherwise, the tax imposed is donor’s tax.
To determine the conjugal or separate character
Proceeds of Life Insurance of proceeds, the following factors are considered:
Proceeds of life insurance taken out by the (1) Policy taken before marriage – Source of
decedent on his own life shall be included in the funds determines ownership of the proceeds
gross estate in the following cases: of life insurance
(1) Beneficiary is the estate of the deceased, his (2) Policy taken during marriage
executor or administrator, irrespective of (a) Beneficiary is estate of the insured –
whether or not the insured retained the Proceeds are presumed conjugal;
power of revocation; or hence, one-half share of the surviving
(2) Beneficiary is other than the decedent’s spouse is not taxable
estate, executor or administrator, when (b) Beneficiary is third person – Proceeds
designation of beneficiary is not expressly are payable to beneficiary even in
made irrevocable [Sec. 85 (E), NIRC]. premiums were paid out of the conjugal
Note: Under the Insurance Code of 1978, if not Claims Against Insolvent Persons
clear or silent, the designation of the beneficiary For estate tax purposes, an insolvent is a person
is presumed to be revocable; hence, includible whose properties are not sufficient to satisfy,
in the decedent’s gross estate. whether fully or partially, his debts. A judicial
declaration of insolvency is not required but the
Cases when Proceeds of Life Insurance Not incapacity of the debtor should be proven. As a
Taxable rule, regardless of the amount the debtor is
(1) Accident insurance proceeds; unable to pay, the full amount of the claim
(2) Proceeds of a group insurance policy taken against the insolvent person should be included
out by a company for its employees; in the gross estate of the decedent. The portion
(3) Amount receivable by any beneficiary of the claim which is not collectible should be
irrevocably designated in the policy of allowed as a deduction from the gross estate.
insurance by the insured. The transfer is
absolute and the insured did not retain any Capital of the Surviving Spouse
legal interest in the insurance [Sec. 85 (E), It is NOT part of the gross estate of the
NIRC]; deceased spouse [Sec.85(H), NIRC]
.

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DEDUCTIONS FROM ESTATE WHEN DEDUCTION NOT ALLOWED


[Sec. 86, NIRC] No deduction shall be allowed in the case of a
Resident or citizen Non-resident alien non-resident decedent not a citizen of the
decedent decedent Philippines, unless the executor, administrator,
or anyone of the heirs, as the case may be,
Gross Estate includes in the return required to be filed under
All property at the time Includes only that part Section 90 of the Code the value at the time of
of death, wherever of gross estate located the decedent’s death of that part of his gross
situated in the Philippines estate NOT situated in the Philippines [Sec. 86
(D), NIRC; Sec 7, RR 2-2003.]
Deductions
Ordinary deductions Ordinary deductions ORDINARY DEDUCTIONS
(1) Expenses, losses, (1) Proportionate
indebtedness, taxes. deductions for EXPENSES, LOSSES, INDEBTEDNESS AND
(a) Funeral expenses expenses, losses, TAXES
(b) Judicial expenses indebtedness, taxes.
(c) Claims against (a) Funeral expenses Funeral Expenses
the estate (b) Judicial expenses Allowable deduction is not to exceed P200,000
(d) Claims against (c) Claims against and whichever is lower of:
insolvent persons the estate (a) The actual funeral expenses (whether or not
(e) Unpaid mortgage (d) Claims against paid) up to the time of interment, or
and debt insolvent persons (b) An amount equal to 5% of the gross estate
(f) Taxes (e) Unpaid mortgage [Sec. 86 (A)(1), NIRC].
(g) Losses and debt
(2) Vanishing (f) Taxes Actual funeral expenses shall mean those which
deductions (g) Losses are actually incurred in connection with the
(3) Transfers for public (2) Vanishing interment or burial of the deceased and must be
use deductions paid out of the estate and not by another person
(4) Amounts received (3) Transfers for public or out of contributions from friends and
under R.A. 4917 use relatives. These must be duly supported by
(4) Amounts received receipts or invoices or other evidence to show
under R.A. 4917 that they were actually incurred.
Special deductions
The unpaid portion of the funeral expenses
(a) Family home
incurred which is in excess of the P200,000
(b) Standard deduction
threshold is NOT allowed to be claimed as a
(c) Medical expenses
deduction under “claims against the estate”
Share in conjugal Share in conjugal (see 1(c) below). [Sec. 6(A)(1), RR 02-2003]
property property
Examples of Funeral Expenses
Note: For non-resident aliens, this formula is The term “funeral expenses” is not confined to
used to compute for total allowable deductions its ordinary or usual meaning [RR 2-2003, Sec. 6
of the first six items above [Sec. 7(1), RR 2-2003]: (A)(1)].
(1) The MOURNING APPAREL of the surviving
spouse and unmarried minor children of the
deceased, bought and used on the occasion
of the burial
(2) EXPENSES of the WAKE preceding the
burial, including food and drinks
(3) PUBLICATION CHARGES for death notices

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(4) TELECOMMUNICATIONS EXPENSES (1) Inventory-taking or collection of the assets


incurred in informing relatives of the comprising the estate, their administration,
deceased (2) The payment of debts of the estate, as well
(5) Cost of BURIAL PLOT, TOMBSTONES, as the distribution of the estate among the
MONUMENT or MAUSOLEUM but not their heirs or those entitled thereto, DURING THE
upkeep. In case the deceased owns a family SETTLEMENT OF THE ESTATE BUT NOT
estate or several burial lots, only the value BEYOND THE LAST DAY PRESCRIBED BY
corresponding to the plot where he is buried LAW, or the extension thereof, FOR THE
is deductible FILING OF THE ESTATE TAX RETURN [Sec.
(6) INTERMENT and/or CREMATION FEES and 6 (A)(2), RR 02-2003].
CHARGES
(7) All other expenses incurred for the The expenses should be supported by receipts
performance of the RITES and CEREMONIES or invoices or by a sworn statement of account
incident to interment issued by the creditor.

Expenses Not Deductible as Funeral CIR v. CTA, CTA and Pajonar (2000): Although
Expenses the Tax Code specifies “judicial expenses of the
(1) Expenses incurred AFTER INTERMENT, such testamentary and intestate proceedings”, there
as for prayers, masses, entertainment, or the is no reason why expenses incurred in the
like administration and settlement of an estate in
(2) Any portion of the funeral and burial extrajudicial proceedings should not be
expenses BORNE or DEFRAYED by allowed.
RELATIVES and FRIENDS of the deceased
(3) Medical expenses as of the last illness will Attorney’s fees in order to be deductible from
not form part of funeral expenses but should the gross estate must be essential to the
be claimed as medical expenses. collection of assets, payment of debts or the
distribution of the property to the persons
Illustrations entitled thereto. The services for which the fees
(1) If five percent (5%) of the gross estate is are charged must relate to the proper
P220,000 and the amount actually incurred settlement of the estate. Attorney’s fees paid by
is P215,000, the maximum amount that may the heirs to their respective lawyers arising from
be deducted is only P200,000; conflicting claims are not deductible as judicial
(2) If five percent (5%) of the gross estate is P expenses. These expenses should be separately
100,000 and the total amount incurred is borne by them.
P150,000 where P20,000 thereof is still
unpaid, the only amount that can be claimed Examples of Judicial Expenses
as deduction for funeral expenses is (1) Actual judicial or court expenses
P100,000. The entire P50,000 excess (2) Fees of executor or administrator
amount consisting of P30,000 paid amount (3) Attorney’s fees
and P20,000 unpaid amount can no longer (4) Expenses of administration such as:
be claimed as FUNERAL EXPENSES. Neither (a) Accountant’s fees
can the P20,000 unpaid portion be (b) Appraiser’s fees
deducted from the gross estate as CLAIMS (c) Clerk hire
AGAINST THE ESTATE. (d) Costs of preserving and distributing the
estate
Judicial Expenses of Testamentary and (e) Costs of storing or maintaining property
intestate Proceedings of the estate
[Sec. 86 (A)(1), NIRC] (f) Brokerage fees for selling property of the
Allowable deductions are administration estate
expenses essential in the settlement of the
estate or necessarily incurred, such as but not
limited to the following:

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Commissioner v. CA (2000): The notarial fee Unpaid obligation arising from purchase of
paid for the extrajudicial settlement is goods or services:
deductible since such settlement effected a (1) Documents evidencing the purchase of
distribution of the estate to the lawful heirs. goods or services.
Attorney’s fees to be deductible from the gross (2) Duly notarized certification from the
estate must be essential to the collection of creditor as to the unpaid balance of the
assets, payment of debts or the distribution of debt, including interest as of the time of
property to the persons entitled to it. death.
(3) Certified true copy of the latest audited
Claims Against the Estate balance sheet of the creditor with a detailed
Claims are debts or demands of a pecuniary schedule of its receivable showing the
nature which could have been enforced against unpaid balance of the decedent-debtor.
the deceased in his lifetime and could have (4) If settlement is made through a testate or
been reduced to simple money judgments [Sec. intestate proceeding, documents filed with
86 (A)(1), NIRC]. the Court evidencing the claim and the
corresponding Court Order approving the
It may arise out of contract, tort or operation of claims, if already issued.
law. [Sec. 6 (A)(3), RR 2-2003]
Requisites for Deductibility
Substantiation Requirements [Sec. 6 (A)(3), RR 2-2003]
Simple Loans (1) Must be a PERSONAL OBLIGATION of the
(1) Duly notarized debt instrument at the time deceased existing at the time of his death
the indebtedness was incurred, except for (except unpaid funeral expenses and unpaid
loans granted by financial institutions where medical expenses, which are classified into
notarization is not part of the business their own separate categories)
practice/policy of the financial institution- (2) Liability must have been contracted in GOOD
lender. FAITH and for adequate and full
(2) Duly notarized Certification from the consideration in money or money’s worth
creditor as to the unpaid balance of the (3) The claim must be a debt or claim which is
debt, including interest as of the time of VALID IN LAW and ENFORCEABLE IN
death. COURT
(3) Proof of financial capacity of the creditor to (4) Indebtedness NOT CONDONED by the
lend the amount at the time the loan was creditor or the action to collect from the
granted. In case the creditor is an individual decedent must NOT HAVE PRESCRIBED.
who is no longer required to file income tax
returns with the Bureau or a non-resident, a Dizon v. CTA (2008): The term "claims" required
duly notarized Declaration by the creditor of to be presented against a decedent's estate is
his capacity to lend at the time when the generally construed to mean debts or demands
loan was granted. For non-resident of a pecuniary nature which could have been
creditors, the declaration must be enforced against the deceased in his lifetime, or
authenticated or certified by the tax liability contracted by the deceased before his
authority of the country where he is a death. Therefore, the claims existing at the time
resident. of death are significant to, and should be made
(4) A Statement under oath executed by the the basis for the determination of allowable
administrator or executor of the estate deductions (and post-death developments, i.e.
reflecting the disposition of the proceeds of reduction or condonation through compromise
the loan, if the loan was contracted within agreements entered into by the Estate with its
three (3) years prior to the death of the creditors, should not be considered).
decedent.

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Claims Against Insolvent Persons (b) They were unpaid as of the time of death.
[Sec. 86 (A)(1), NIRC]
These are claims that are not collectible. To be This deduction DOES NOT include income tax
deductible from the gross estate: upon income received after death, or property
(a) The incapacity of the debtor to pay his taxes accrued after his death, or the estate tax
obligation should be proven, although a due from the transmission of his estate. [Sec. 6
judicial declaration of insolvency is not (A)(5)(b), RR 2-2003]
required;
(b) The full amount owed by the insolvent must Losses
first be included in the decedent’s gross These are deductible from the gross estate if
estate; and ALL of the following conditions are satisfied:
(c) If the insolvent could only pay a partial (a) The losses were INCURRED DURING the
amount, the full amount owed shall be SETTLEMENT of the estate
included in the gross estate, and the amount (b) The losses arose from acts of God, such as
uncollectible shall be allowed as a FIRES, STORMS, SHIPWRECK or OTHER
deduction. CASUALTIES, or from acts of man, such as
ROBBERY, THEFT or EMBEZZLEMENT
Unpaid Mortgages, Losses and Taxes (c) The losses are NOT COMPENSATED BY
[Sec. 86 (A)(1), NIRC; Sec. 6 (A)(5), RR 2-2003] INSURANCE or otherwise
(d) The losses are not claimed as a deduction for
Unpaid Mortgages income tax purposes in an income tax return
These are deductible from the gross estate, of the estate subject to income tax
provided: (e) The losses were incurred NOT LATER THAN
(a) That the gross estate must include the fair THE LAST DAY FOR PAYMENT OF THE
market of the property encumbered by such ESTATE TAX (6 months after the death of
mortgage or indebtedness; the decedent) [Sec. 6 (A)(5)(c), RR 2-2003]
(b) That the deduction shall be limited to the
extent that they were contracted bona fide The amount deductible is the amount of the
and for an adequate and full consideration in property lost.
money or money’s worth, if such unpaid
mortgages or indebtedness were founded Property Previously Taxed
upon a promise or an agreement. [Sec. 6- Deduction allowed on the property left behind by
A5(a), RR 2-2003] the decedent, which he had acquired previously,
by inheritance or donation [Sec. 86 (A)(2), NIRC].
In case unpaid mortgage payable is being
claimed by the estate, verification must be Rationale
made as to who was the beneficiary of the loan As a previous transfer tax had already been
proceeds. If loan is merely an accommodation imposed on the property, either the estate tax (if
loan where the loan proceeds went to another property inherited) or the donor’s tax (if property
person, the value of the unpaid loan must be donated), the law allows a deduction to be
included as a receivable of the estate. If there is claimed on the said property to minimize the
a legal impediment to its recognition as a effects of a double tax on the same property
receivable, such unpaid obligation/mortgage within a short period of time, i.e. five (5) years.
payable shall NOT be allowed as a deduction
from the gross estate. [Sec. 6 (A)(5), RR 2-2003] Example: Mr. A died in December 2003. In
In all instances, the mortgaged property, to the March 2003, Mr. B (Mr. A’s father) died and left
extent of the decedent’ Mr. A some properties as inheritance. May
vanishing deductions be claimed as deductions
Taxes in computing Mr. A’s net taxable estate?
These are deductible from the gross estate if:
(a) They have accrued as of the death of the YES, vanishing deductions shall be allowed if
decedent, and the following conditions are met:

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Requisites for Deductibility (5) Mr. A’s gross estate amounted to


(1) Death – the present decedent (Mr. A) died P3,200,000 while total deductions
within five years from date of death of the (excluding medical expenses, standard
prior decedent (Mr. B) or date of gift; deductions, family home, including the
(2) Identity of the property – The property with above unpaid mortgage of P70,000)
respect to which deduction is sought can be amounted to P600,000.
identified as the one received from the prior
decedent or the donor, or as the property (a) First, GET THE VALUE OF THE PROPERTY
acquired in exchange for the original PREVIOUSLY TAXED (PPT): compare the
property so received. values of the property at the time of the
(3) Location of the property – The property on prior decedent’s death and at the time of
which vanishing deduction is claimed must the present decedent’s death. The lower
be located in the Philippines. amount shall be the initial basis.
(4) Inclusion of the property – The property must
have formed part of the gross estate situated In the example, the value of the PPT shall be
in the Philippines of the prior decedent, or P800,000 for the land and P70,000 for the car,
must have been included in the total amount for a total of P870,000
of the gifts of the donor made within five (5)
years prior to the present decedent’s death. Note: The value used on the PPT is significant
(5) Previous taxation of the property – the only for purposes of computing the amount of
donor's tax on the gift or estate tax on the vanishing deduction. The value included in the
prior succession (Mr. B’s succession) must decedent’s gross estate is ALWAYS the fair
have been finally determined and paid by the market value at the time of his death.
donor or the prior decedent, as the case may
be. (b) Then, THE PPT VALUE SHALL BE
(6) No previous vanishing deduction on the REDUCED BY ANY PAYMENT MADE BY
property, or the property exchanged therefor, THE PRESENT DECEDENT ON ANY
was allowed in determining the value of the MORTGAGE or lien on the property
net estate of the prior decedent. (Illustration (i) Mr. A paid P70,000 of the mortgage.
of how this requirement may NOT be met: In Thus, P870,000 less 70,000 is P800,000
the example above, if Mr. B received the (ii) The P800,000 is known as the INITIAL
same properties as a donation from Mr. C in BASIS
July 2002, a vanishing deduction on the
properties was claimed with respect to Mr. (c) The INITIAL BASIS shall be FURTHER
B’s estate. Thus, no more vanishing REDUCED by the SECOND DEDUCTION, an
deduction may be claimed by Mr. A’s estate) amount equal to:

Computation of Vanishing Deduction


(1) Using the facts above, assume that Mr. A
inherited a car and a piece of land from his
father Mr. B.
(2) At the time of Mr. B’s death, the FMV of the * Ordinary, thus excluding family home, medical
car was P120,000 and the FMV of the land expenses, standard deduction and amounts
was P800,000. received under RA 4917
(3) At the time Mr. A inherited the land, it was
subject to a mortgage of P80,000. Mr. A (i) 800,000/3,200,0008 x 600,000 equals
paid P70,000 of the mortgage during his 150,000. This will be deducted from the
lifetime (leaving a balance of P10,000). initial basis of P800,000, which gives a
balance of P650,000
(4) The FMV of the properties at the time of Mr.
A’s death were P850,000 for the land and (ii) The 650,000 is known as the FINAL
P70,000 for the car. BASIS.

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(d) Finally, the remaining balance shall be DEVISES or TRANSFERS to or for the use of
multiplied by the corresponding percentage: shall be deductible from gross estate, provided
such amount or value had been included in the
Vanishing computation of the gross estate [Sec. 86 (A)(3),
Deduction If received by inheritance or gift NIRC].
Rate
Amounts Received by Heirs Under RA 4917
Within one (1) year prior to the Any amount received by the heirs from the
100%
death of the present decedent decedent’s employer as a consequence of the
More than one year but not more death of the decedent-employee in accordance
80% than two years prior to the death with RA No. 4917 (this law provides that
of the decedent retirement benefits of private employees shall
More than two years but not not be subject to attachment, levy execution or
60% more than three years prior to any tax), PROVIDED that such amount is
the death of the decedent included in the gross estate of the decedent
[Sec. 86 (A)(7), NIRC]
More than three years but not .
40% more than four years prior to the SPECIAL DEDUCTIONS
death of the decedent
More than four years but not Family Home (maximum: P1,000,000)
20% more than five years prior to the It is the dwelling house, including the land on
death of the decedent which it is situated, where the husband and
wife, or a head of the family, and members of
(i) Since Mr. A received the inheritance in their family reside, as certified to by the
March 2003 (within 1 year from his death in Barangay Captain of the locality. It is deemed
December 2003], the balance of P650,000 constituted on the house and lot from the time
shall be multiplied by 100%. Thus, the it is actually occupied as the family residence
allowable vanishing deduction is P650,000 and considered as such for as long as any of its
beneficiaries actually resides therein. [Arts. 152
and 153, Family Code]
Formula
(1) VALUE TAKEN FOR PPT (always the lower Temporary absence from the constituted family
values) home due to travel or studies or work abroad,
LESS: MORTGAGE (OR LIEN) PAID IF ANY(1ST etc. does not interrupt actual occupancy. The
deduction) family home is generally characterized by
permanency, that is, the place to which,
(2) INITIAL BASIS (IB)
LESS: 2ND deduction = (IB/GE) x (ELIT + transfer
whenever absent for business or pleasure, one
for public use) still intends to return. [Sec. 6(D), RR 2-2003]
(3) FINAL BASIS It must be part of the ACP or CPG, or the
X RATES IN Sec 86A-2 exclusive properties of either spouse. It may also
VANISHING DEDUCTION in an Estate Tax Return, be constituted by an unmarried head of a family
this is deducted from the Exclusive Properties of on his or her own property. [Sec. 6(D), RR 2-
the decedent that form part of the gross estate. 2003 citing Art. 156, FC]

Transfers for Public Purpose For purposes of availing this deduction, a


These are dispositions in a last will and person may constitute only one family home.
testament or transfers to take effect after death [Sec. 6(D), RR 2-2003 citing Art. 161, FC]
in favor of the Government of the Republic of
the Philippines, or any political subdivision
thereof, for exclusively public purposes. The
whole amount of all the BEQUESTS, LEGACIES,

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Requisites for Deductibility Requisites for Deductibility


[Sec. 6(D)(b), RR 2-2003] [Sec. 6(F), RR 2-2003]
(1) The family home must be the actual (1) The expenses were incurred by the decedent
residential home of the decedent and his within one (1) year prior to his death
family at the time of his death, as certified by (2) The expenses are duly substantiated with
the barangay captain of the locality. receipts and other documents in support
(2) The total value of the family home must be thereof
included as part of the gross estate of the PROVIDED, that in no case shall the deductible
decedent medical expenses exceed Five Hundred
(3) Allowable deduction must be in an amount Thousand Pesos (P500,000).
equivalent to the current FMV of the family
home as declared or included in the gross Note: Any amount of medical expenses incurred
estate, or the extent of the decedent’s within one year from death in excess of
interest (whether conjugal/community or P500,000 shall no longer be allowed as a
exclusive property), whichever is lower, but in deduction under this subsection. Neither can
no case shall the deduction exceed any unpaid amount thereof in excess of the
P1,000,000 P500,000 threshold nor any unpaid amount for
(4) The decedent was married or if single, was a medical expenses incurred prior to the one-year
head of the family. period from date of death be allowed to be
(5) Along with the decedent, any of the deducted from the gross estate under “Claims
beneficiaries* must be dwelling in the family against the estate”. [RR 2-2003, Sec. 6-F]
home.
(6) The family home as well as the land on which NET SHARE OF THE SURVIVING SPOUSE IN
it stands must be owned by the decedent. THE CONJUGAL PARTNERSHIP PROPERTY
Therefore, the FMV of the family home The amount deductible is the net share of the
should have been included in the surviving spouse in the conjugal partnership
computation of the decedent’s gross estate. property. The net share is equivalent to ½ of
50% of the conjugal property after deducting
Beneficiaries of a Family Home the obligations chargeable to such property.
(1) The husband and wife, or an unmarried The share of the surviving spouse must be
person who is the head of a family; and removed to ensure that only the decedent’s
(2) Their parents, ascendants, descendants interest in the estate is taxed. Net share of the
(including legally adopted children), brothers surviving spouse is neither an ordinary nor a
and sisters, whether the relationship be special deduction [Sec. 86(A)(6), NIRC; Sec. 6(F),
legitimate or illegitimate, who are living in RR 2-2003].
the family home and who depend upon the
head of the family for legal support. EXCLUSIONS FROM THE GROSS
ESTATE
Standard Deduction (maximum: P1,000,000)
An amount equivalent to One million pesos EXCLUSIONS UNDER SEC. 85 AND 86 OF
(P1,000,000) shall be deducted from the gross THE TAX CODE
estate without need of substantiation [Sec. (1) Exclusive Property (capital/paraphernal) of
86(A)(5), NIRC; Sec. 6(E), RR 2-2003]. surviving spouse [Sec. 85 (H), NIRC]
(2) Property outside the Philippines of a non-
Medical Expenses resident alien decedent
All medical expenses (cost of medicine, hospital (3) Intangible personal property in the
bills, doctors’ fees, etc.) incurred (whether paid Philippines of a non-resident alien if there is
or unpaid) [Sec. 86(A)(6), NIRC; Sec. 6(F), RR 2- reciprocity
2003].

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EXCLUSIONS UNDER SPECIAL LAWS Illustration.—Assume the following:


(1) Proceeds of life insurance benefits received Net Estate – Philippines (reduced P1,050,000
by members of the GSIS [RA 728] by all allowable deductions,
(2) Benefits received by members from the SSS except standard deduction)
by reason of death [RA 1792]
(3) Amounts received from the Philippine and Country G Net Estate 300,000
the U.S. Governments from the damages Country H Net Estate 150,000
suffered during the last war [RA 227] Tax paid/incurred:
(4) Benefits received by beneficiaries residing in Philippines 15,000
the Philippines under laws administered by Country G 5,000
the U.S. Veterans Administration [RA 360] Country H 1,400
TAX CREDIT FOR ESTATE TAXES Net Estate – Philippines (reduced P1,050,000
by all allowable deductions,
PAID IN A FOREIGN COUNTRY except standard deduction)
TAX CREDIT
(ii) Net taxable estate is P500,000
It is a remedy against international double
(1,050,000 + 300,000 + 150,000 –
taxation. To minimize the onerous effect of
1,000,000 standard deduction). The
taxing the same property twice, tax credit
Philippine estate tax on P500,000 is
against Philippine estate tax is allowed for
P15,000
estate taxes paid to foreign countries.

WHO MAY AVAIL OF TAX CREDIT Solution – Limitation A


Only the estate of a decedent who was a citizen (iii) To get tax credit per country under
or a resident of the Philippines at the time of his Limitation A, this formula is followed:
death can claim tax credit for any estate tax
paid to a foreign country.

AMOUNT ALLOWABLE AS TAX CREDIT


[Sec. 86(E), NIRC]
(iv) The result after applying the formula
General Rule:
above is compared to the tax actually paid
The estate tax imposed by the Philippines shall
for each foreign country.
be credited with the amounts of any estate tax
(v) The lower of the two amounts for each
imposed by the authority of a foreign country.
foreign country will be added to get the
total tax credit allowed under Limitation
Limitations
A.
(a) The amount of the credit in respect to the tax
paid to any country shall not exceed the
same proportion of the tax against which Amount
such credit is taken, which the decedent's net Allowed
estate situated within such country taxable (whichever
under the NIRC bears to his entire net estate; is lower)
(PER COUNTRY BASIS) and Country G
3,000
(b) The total amount of the credit shall not (300/1500 x 15,000) 3,000
exceed the same proportion of the tax
Actually paid to Country G 5,000
against which such credit is taken, which the
decedent's net estate situated outside the Country H
1,500
Philippines taxable under the NIRC bears to (150/1500 x 15,000) 1,400
his entire net estate. (OVERALL BASIS) Actually paid to Country H 1,400
Tax credit allowed under Limitation A P 4,400

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EXEMPTION OF CERTAIN
Solution – Limitation B: ACQUISITIONS AND
TRANSMISSIONS
(1) Merger of usufruct in the owner of the naked
title
(2) Transmission or delivery of the inheritance or
legacy by the fiduciary heir (1st heir) to the
The result after applying the formula above is fideicomissary (2ndheir). Pending
compared to the tax actually paid in total to transmission of the property, the fiduciary is
foreign countries. entitled to all the rights of a usufructuary,
although the fideicomissary is entitled to all
The lower of the two amounts will be added to the rights of a naked owner.
get the total tax credit allowed under Limitation (3) Transmission from the first heir, legatee or
B. done in favour of another beneficiary, in
accordance with the desire of the
Amount predecessor.
Allowed (4) All bequests, devises, legacies or transfers to
(Lower) social welfare, cultural and charitable
institutions, no part of the net income of
450/1500 x 15,000 4,500 which inures to the benefit of any individual;
provided, however, that not more than 30%
Total foreign income taxes of said bequest, devises, legacies or transfers
6,400
paid shall be used by such institutions for
Tax credit allowed under Limitation A P 4,400 administration purposes.

Compare the tax credit allowed under FILING OF NOTICE OF DEATH


Limitation A and Limitation B. The lower of the A written Notice of Death shall be given to the
two amounts is the final allowable tax credit. In Commissioner in 1) all cases of transfers subject
this case, the amount computed under to tax or 2) where, though exempt from tax, the
Limitation A (4,400) is lower, thus it becomes gross value of the estate exceeds P20,000.
the final allowable tax credit.
The period for giving the Notice of Death shall
If there is only one foreign country involved, be:
both Limitations will yield the same answer. (1) Within two (2) months after the decedent’s
death.; or
To get the tax credit allowable, use the formula (2) Within two (2) months after the executor or
in Limitation A. administrator qualified as such.

The resulting amount will be compared to the The persons responsible for giving the notice
actual tax paid to the foreign country. The are the executor, administrator, or any of the
lower amount will be the final allowable tax legal heirs, as the case may be.
credit. [Source: Reyes, Income Tax Law and
Accounting] ESTATE TAX RETURN
The executor, administrator, or any of the legal
heirs, as the case may be, shall file an estate tax
return under oath in triplicate. If there is no
executor or administrator appointed, qualified,
and acting within the Philippines, any person in
actual or constructive possession of any
property of the decedent may file this return.

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It is required in the following cases: WHERE FILED


(1) In all cases of transfers subject to estate tax; The administrator or executor shall register the
(2) If the gross value of the estate exceeds estate of the decedent and secure a new TIN
P200,000 eve though the transfer is therefor from the Revenue District Office where
exempt from tax; the decedent was domiciled at the time of his
(3) Where the estate consists of registered or death, in cases of a resident.
registrable property where a clearance fom
the BIR is required as a condition precedent The return shall be filed and the corresponding
for the transfer of ownership thereof in the estate tax be paid with any of the following
name of the transferee having jurisdiction over the place where the
decedent was domiciled at the time of his
CONTENTS death:
[Sec. 90(A), NIRC] (1) Accredited Agent Bank (AAB)
The executor, or the administrator, or any of the (2) Revenue District Officer
legal heirs, as the case may be, shall file a (3) Collection Officer
return under oath in duplicate, setting forth: (4) Duly Authorized Treasurer of the city or
(1) The value of the gross estate of the decedent municipality
at the time of his death, or in case of a
nonresident, not a citizen of the Philippines, Note: Prevailing collection rules and procedures
of that part of his gross estate situated in the shall be followed.
Philippines;
(2) The deductions allowed from gross estate in The administrator or executor cannot use his
determining the net taxable estate; and personal TIN for the estate.
(3) Such part of such information as may at the
time be ascertainable and such For non-resident decedent, whether a citizen or
supplemental data as may be necessary to a foreign individual, the estate tax return shall
establish the correct taxes. be filed with and the TIN of the estate shall be
(4) For estate tax returns showing a gross value secured in the:
exceeding Two million pesos (P2,000,000) - (1) RDO where the executor or administrator is
there must be a statement duly certified to by registered if he is in the Philippines;
a Certified Public Accountant containing the (2) RDO having jurisdiction over the executor or
following: administrator’s legal residence if he is not
(a) Itemized assets of the decedent with their registered;
corresponding gross value at the time of (3) Office of the Commissioner through RDO
his death, or in the case of a nonresident, no. 39 – South Quezon City if the decedent
not a citizen of the Philippines, of that does not have an executor or administrator
part of his gross estate situated in the in the Philippines.
Philippines;
(b) Itemized deductions from gross estate Nonetheless, the Commissioner of Internal
allowed in Section 86; and Revenue has the power to allow a different
(c) The amount of tax due whether paid or venue/place in the filing of tax returns [Sec.
still due and outstanding. 9(C), RR 2-2003].

WHEN FILED
General Rule: Filed within six (6) months from
the decedent's death. [Sec. 90(B), NIRC]

Exception: The Commissioner shall have


authority to grant, in meritorious cases, a
reasonable extension not exceeding thirty (30)
days for filing the return [Sec. 90C]

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Donor’s Tax REQUISITES OF VALID


DONATION
BASIC PRINCIPLES (1) A donation is an act of liberality whereby a
The donor’s tax is imposed on donations inter person (donor) disposes gratuitously of a
vivos or those made between living persons to thing or right in favor of another (donee) who
take effect during the lifetime of the donor. It accepts it. [Art. 725, NCC]
supplements the estate tax by preventing the (2) In order that the donation of an immovable
avoidance of the latter through the device of may be valid, it must be made in a public
donating the property during the lifetime of the document specifying therein the property
deceased. donated. The acceptance may be made in
the same Deed of Donation or in a separate
It shall not apply unless and until there is a public document, but it shall not take effect
completed gift. The transfer of property by gift is unless it is done during the lifetime of the
perfected from the moment the donor knows of donor. If the acceptance is made in a
the acceptance by the donee; it is completed by separate instrument, the donor shall be
delivery, either actually or constructively, of the notified thereof in an authentic form, and this
donated property, to the donee. Thus, the law in step shall be noted in both instruments. [Sec.
force at the time of the perfection/completion of 11, RR 2-2003]
the donation shall govern the imposition of the Art. 725, Civil Code. Donation is an act of liberality
donor’s tax. [Sec. 11, RR 2-2003] whereby a person disposes gratuitously of a thing
or right in favor of another, who accepts it.
The requisites of a valid donation are:
DEFINITION (1) Donative intent of the donor
A donor’s tax is levied, assessed, collected and (2) Capacity of the donor
paid upon the transfer by any person, resident (3) Delivery of the donated property
or nonresident, of the property by gift. [Sec. (4) Acceptance of the donee
98(A), NIRC]. It shall apply whether the transfer (5) Donation must be in the proper form
is in trust or otherwise, whether the gift is direct (a) Movable: orally or in writing if value is
or indirect, and whether the property is real or equal to or less than P5,000.
personal, tangible or intangible [Sec. 98(B), Otherwise, it shall be in writing.
NIRC]. (b) Immovable: must be made in a public
document.
NATURE
Donor’s tax is not a property tax but a tax A gift that is incomplete because of reserved
imposed on the transfer of property by way of powers becomes complete when either:
gift inter vivos. [Sec 11, RR 2-2003 citing Lladoc v. (1) the donor renounces the power OR
CIR (1965)] (2) his right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of
PURPOSE OR OBJECT some condition, other than because of the
(1) To supplement estate tax; donor’s death. [Sec. 11, RR 2-2003]
(2) To prevent avoidance of income tax through
the device of splitting income among Note: Renunciation by a surviving spouse of
numerous donees, who are usually members his/her share in the CPG or ACP after the
of a family or into many trusts, with the dissolution of marriage in favor of the heirs or
donor thereby escaping the effect of the any other person is SUBJECT to donor’s tax.
progressive rates of income tax. General renunciation by ANY heir is NOT subject
to donor’s tax UNLESS it is specifically and
categorically done in favor of IDENTIFIED heirs
to the exclusion of other co-heirs. [Sec. 11, RR 2-
2003]

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TRANSFERS WHICH MAY BE that there is no equivalent received for the


benefit given; once such equivalent exists, the
CONSTITUTED AS DONATION nature of the act changes. It may become dation
in payment when the creditor receives a thing
SALE/EXCHANGE/TRANSFER OF different from that stipulated; or novation, when
PROPERTY FOR INSUFFICIENT the object or principal conditions of the
CONSIDERATION obligation should be changed; or compromise,
Where property is transferred for less than an when the matter renounced is in litigation or
adequate and full consideration in money or dispute and in exchange of some concession
money’s worth, then the amount by which the which the creditor receives
FMV of the property at the time of the execution
of the Contract to Sell or execution of the Deed TRANSFER FOR LESS THAN
of Sale which is not preceded by a Contract to ADEQUATE AND FULL
Sell exceeded the value of the agreed or actual
consideration or selling price shall be deemed a CONSIDERATION
gift, and shall be included in computing the
amount of gifts made during the calendar year. Sec. 100, NIRC. TRANSFER FOR LESS THAN
[Sec. 11, RR 2-2003] ADEQUATE AND FULL CONSIDERATION.
Where property, other than real property
However, where the consideration is fictitious, referred to in Sec. 24(D), is transferred for less
the entire value of the property shall be subject than an adequate and full consideration in
to donor’s tax. money or money’s worth, then the amount by
which the fair market value of the property
Real property considered as capital assets exceed the value of the consideration shall, for
under the Tax Code are excepted from this rule the purpose of the tax imposed by this Chapter,
because the taxable value taken into account in be deemed a gift, and shall be included in
the computation of tax is the higher of either computing the amount of gifts made during the
the zonal value or the assessor’s value; not the calendar year.
consideration. Therefore, the insufficiency and
inadequacy of the consideration paid would not In order for the rule to apply, there must be 1) a
affect the computation of the tax due and transfer of property, other than real property
payable [Sec. 100 in relation to Sec. 24(d), NIRC] classified as a capital asset and subject to
capital gains tax under Sec. 24 (D) and 2) the
Under Section 24(d), the fair market value itself, transfer was for less than an adequate and full
if higher than the gross selling price, is the basis consideration in money or money’s worth.
for computing the capital gains tax imposed
upon the sale of such capital assets. In this case, the amount by which the fair
market value of the property exceed the value of
Thus, what the seller avoids in the payment of the consideration shall be considered a gift.
the donor’s tax, it pays for in the capital gains
tax. CLASSIFICATION OF DONORS
[Sec. 98(A), NIRC]
CONDONATION/REMISSION OF (1) Citizens or Residents of the Philippines –
DEBT taxable on ALL properties located not only
Dizon v CTA (2008): Condonation or remission within the Philippines but also in foreign
of debt is defined as an act of liberality, by virtue countries.
of which, without receiving any equivalent, the (2) Nonresident Alien – taxable on ALL real and
creditor renounces the enforcement of the tangible properties WITHIN the
obligation, which is extinguished in its entirety PHILIPPINES, and intangible personal
or in that part or aspect of the same to which property, unless there is reciprocity, in which
the remission refers. It is an essential case intangible personal property is not
characteristic of remission that it be gratuitous, taxable

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INTANGIBLE PROPERTIES WHICH If the gift is a real property, the rules of


ARE CONSIDERED BY LAW AS valuation under Sec. 88 (B), NIRC shall apply.
Thus, the value of the property shall be
SITUATED IN THE PHILIPPINES whichever is higher of:
[See discussion on Estate Tax]
(1) The fair market value as determined by the
Commissioner; or
RULE ON RECIPROCITY [see discussion on
Estate Tax] – This rule applies to the
transmission by gift of intangible personal
property located or with a situs within the
Philippines of a nonresident alien.
(2) The fair market value as shown in the
DETERMINATION OF GROSS schedule of values fixed by the Provincial
GIFT and City Assessors.
[Sec. 98, NIRC]
(1) Gifts of real property and personal property If there is no zonal value, the taxable base is the
wherever situated belonging to the donor FMV that appears in the latest tax declaration.
who is either a resident or citizen at the time (Sec. 88(B), NIRC)
of the donation; and
If the gift consists of an improvement, the value
(2) Gifts of real and tangible personal property
situated in the Philippines, and intangible of improvement is the construction cost per
personal property with a situs in the building permit and/or occupancy permit plus
Philippines unless exempted on the basis of 10% per year after year of construction, or the
reciprocity, belonging to the donor who is a FMV per latest tax declaration.
non-resident alien at the time of the
donation TAX CREDIT FOR DONOR’S TAXES
PAID IN A FOREIGN COUNTRY
COMPOSITION OF GROSS GIFT [Sec. 101 (C), NIRC]
Gross gift shall pertain to all donations inter (1) A situation may arise when the property
vivos: given as a gift is located in a foreign country
(1) Whether the transfer is in trust or otherwise; and the donor may be subject to donor’s tax
(2) Whether the gift is direct or indirect; twice on the same property: first, by the
(3) Whether the property is real or personal, Philippine government and second, by the
tangible or intangible. [Sec. 98(B), NIRC] foreign government where the property is
situated.
Resident or Citizen Non resident Alien (2) The remedy of claiming a tax credit is,
therefore, aimed at minimizing the
Real property in the Real Property in the burdensome effect of double taxation by
Philippines Philippines allowing the taxpayer to deduct his foreign
tax from his Philippine tax, subject to the
Tangible or Intangible Tangible or Intangible limitations provided by law.
Personal Properties Personal Properties
(Within or without the (Within the Philippines)
Philippines) Except: Reciprocity
WHO MAY CLAIM TAX CREDIT
Only a resident citizen, non-resident citizen and
[Sec. 104]
resident alien.

VALUATION OF GIFTS MADE IN LIMITATIONS ON THE TAX CREDIT


PROPERTY Note: The computation of the donor’s tax credit
[Sec. 102, NIRC] is the same as the computation for estate tax
If the gift is a property, the valuation shall be credit.
the fair market value at the time of donation.

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EXEMPTIONS OF GIFTS FROM (a) National Government or any entity


DONOR’S TAX created by any of its agencies which is not
[Sec. 101, NIRC] conducted for profit, or
(b) Any political subdivision of the said
Government
In the case of gifts made by a RESIDENT [Sec.
101(A), NIRC]:
(1) Dowries or gifts made on account of
marriage and before its celebration or within
one year thereafter.
(a) Must be given by parents to their
child/children (legitimate, illegitimate, (2) Gifts in favor of an educational and/or
adopted) charitable, religious, cultural or social
(b) Applicable only for the first P10,000. welfare corporation, institution, accredited
(2) Gifts to or for the use of: non-government organization, trust or
(a) National Government or any entity philanthropic organization or research
created by any of its agencies which is institution or organization, provided not
not conducted for profit, or more than 30% of said gifts will be used by
(b) Any political subdivision of the said such donee for administration purposes
Government
(3) Gifts in favor of an educational and/or Note: Donations made to entities exempted
charitable, religious, cultural or social under special laws, e.g.:
welfare corporation, institution, accredited (1) Aquaculture Department of the Southeast
nongovernment organization, trust or Asian Fisheries Development Center of the
philanthropic organization or research Philippines
institution or organization. (2) Development Academy of the Philippines
The donee shall be: (3) Integrated Bar of the Philippines
(a) a non-stock entity, (4) International Rice Research Institute
(b) paying no dividends, (5) National Museum
(c) governed by trustees who receive no (6) National Library
compensation, and (7) National Social Action Council
(d) devoting all its income, whether (8) Ramon Magsaysay Foundation
students’ fees or gifts, donations, (9) Philippine Inventor’s Commission
subsidies or other forms of (10) Philippine American Cultural Foundation
philanthropy, to the accomplishment (11) Task Force on Human Settlement on the
and promotion of the purposes donation of equipment, materials and
enumerated in its Articles of services
Incorporation.
A condition for the exemption is that no PERSONS LIABLE
more than 30% of the gifts shall be used by Every person, whether natural or juridical,
the donee for administration purposes. In resident or non-resident, who transfers or causes
BIR Ruling no. 097-2013 (March 20, 2013), to transfer property by gift, whether in trust or
the condition shall be annotated at the back otherwise, whether the gift is direct or indirect
of the TCT/OCT, in case of donation of real and whether the property is real or personal,
property. Failure to comply with this tangible or intangible. (Sec. 98, NIRC)
condition will result in the application of
donor’s tax. DONOR’S TAX RETURN
[Sec. 103, NIRC]
In the case of gifts made by a NONRESIDENT Contents of the Donor’s Tax Return, which shall
[Sec. 101(B), NIRC]: be made under oath, in triplicate [Donor’s tax
(1) Gifts made to or for the use of the return, BIR Form no. 1800]:
(1) Each gift made during the calendar year

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which is to be included in computing net donee the obligation to pay the mortgage
gifts; liability, then the net gift is measured by
(2) The deductions claimed and allowable; deducting from the fair market value of the
(3) Any previous net gifts made during the same property the amount of the mortgage
calendar year; assumed. (Sec. 11, RR 2-2003)
(4) The name of the donee;
(5) Relationship of the donor to the donee; The taxable net gifts is illustrated through the
(6) Such further information as the following:
Commissioner may require.
First donation in the calendar year:
When Filed [Sec. 103(B), NIRC] Gross gift xx
(a) Filed within thirty (30) days after the date the Less: exemptions xx
gift is made or completed. (deductions)
(b) The tax due thereon shall be paid at the Taxable net gifts xx
same time that the return is filed. Multiplied by: applicable xx
tax rate
Where Filed and Paid (Sec. 103(B), NIRC) Donor’s tax due xx
Unless the Commissioner otherwise permits, it
shall be filed and the tax paid to any of the Subsequent donation within the same calendar
following having jurisdiction over the place year:
where the donor was domiciled at the time of Gross gift xx
the transfer: Less: exemptions xx
(a) An authorized agent bank (deductions)
(b) The Revenue District Officer Net gifts made on such xx
(c) Revenue Collection Officer or date
(d) Duly authorized Treasurer of the city or Add: Prior net gifts xx
municipality, or during the same year
Total aggregate net gift xx
If there be no legal residence in the Multiplied by: applicable xx
Philippines, with the Office of the tax rate
Commissioner (presently RDO no. 39 – Donor’s tax on the total xx
South Quezon City). net gift
Less Donor’s tax on the xx
In the case of gifts made by a non-resident, the prior net gift
return may be filed with: Foreign donor’s tax xx
credit
(a) The Philippine Embassy or Consulate in
the country where he is domiciled at the Donor’s tax payable xx
time of the transfer, or
(b) Directly with the Office of the Illustration
Commissioner. (1) P100,000 donation to son by parents on
account of marriage:
(a) Husband
TAX BASIS (i) Net Taxable Gift:
The tax for each calendar year shall be P50,000 – 10,000 = P40,000
computed on the basis of the total net gifts (ii) Tax Due:
made during the calendar. (Sec. 99, NIRC) None, since P40,000 is below
P100,000
“NET GIFTS” (b) Wife – same as above
(a) The net economic benefit from the transfer
that accrues to the donee. (2) P100,000 donation to son and daughter-in-
(b) Accordingly, if a mortgaged property is law by parents on account of marriage:
transferred as a gift, but imposing upon the (a) Husband

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(i) Gift pertaining to the son TAX RATES APPLICABLE


(1) Net Taxable Gift: The applicable donor’s tax rate is dependent
P25,000 – 10,000 = P15,000 upon the relationship between the donor and
(2) Tax Due: the donee.
None, since P15,000 is below the (1) If the donee is a stranger to the donor, the tax
P100,000 threshold rate is equivalent to 30 % of the net gifts.
(ii) Gift pertaining to the daughter-in-law
(1) Net Taxable Gift:
P25,000 A stranger for purposes of the donor’s tax
(2) Tax Due: (1) a person who is not a brother, sister (whether
P25,000 x 30% = P7,500 by whole or half-blood), spouse, ancestor or
(b) Wife – same as above lineal descendant, or
(c) Donations to donees not considered (2) a person who is not a relative by
strangers for tax purposes were made consanguinity in the collateral line within the
on: fourth degree of relationship. [Sec. 99(B)]

January 30, 2002 – P 2,000,000 Note: Donations made between business


March 30, 2002 – P 1,000,000 organizations and those made between an
August 15, 2002 – P 500,000 individual and a business organization shall be
considered as donations made to a stranger.
After the After the After the third [Sec. 10(B), RR 2-2003]
first second donation
donation donation (2) If the donee is not a stranger to the donor, the
Net Taxable Gift tax for each calendar year shall be computed
2,000,000 January January on the basis of the total net gifts made
Donation - Donation - during the calendar year [Sec. 99(A), NIRC]:
P2,000,000 P2,000,000
March March Over But not Tax Is Plus Of the
Donation - Donation - Over Excess
1,000,000 1,000,000 Over
Total August 0 100,000 Exempt
100,000 200,000 0 2% 100,000
P3,000,000 Donation -
200,000 500,000 2,000 4% 200,000
500,000 500,000 1M 14,000 6% 500,000
Total 1M 3M 44,000 8% 1M
P3,500,000 3M 5M 204,000 10% 3M
Corresponding Donor’s Tax (refer to schedule) 5M 10M 404,000 12% 5M
10M 1,004,000 15% 10M
124,000 P 204,000 P254,000
Note: A legally adopted child is entitled to all
Tax Due / Payable the rights and obligations provided by law to
124,000 Donor’s Tax Donor’s Tax legitimate children, and therefore, a donation to
P 204,000 P 254,000 him shall not be considered as a donation made
Less: Tax Less: Tax to a stranger. [Sec 10B, RR 2-2003]
Previously Previously paid
Paid (124k+80k)
124,000 204,000
Tax Due Tax Due
P80,000 P50,000

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VAT (2) 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
CONCEPT or services. [Sec. 105, NIRC]
The seller may choose to shoulder the
Sec. 4.105-2, RR 16-2005. NATURE AND burden of the VAT in order to make his prices
CHARACTERISTICS OF VAT. VAT is a tax on competitive.
consumption levied on the sale, barter,
exchange or lease of goods or properties and TRANSACTIONS SUBJECT TO VAT
services in the Philippines and on importation of (1) Sale, barter, or exchange, lease of goods or
goods into the Philippines. properties
xxx (2) Sale of services
(3) Importation of goods
(1) CIR v Benguet Corp., (2005): VAT is a
percentage tax imposed at every stage of CONSTITUTIONALITY OF VAT
the distribution process on the sale, barter,
or exchange, or lease of goods or properties, ABAKADA Guro Party List, et. al. v Ermita
and on the performance of service in the (2005):
course of trade or business, or on the (1) The validity of raising the VAT rate from 10%
importation of goods, whether for business to 12% by the President was upheld by SC.
or non-business purposes. (2) With respect to Sec. 8, amending Sec. 110
(2) VAT is a percentage tax imposed by law (A), which provides for 60-month
directly not on the thing or service but on amortization of the input tax on capital
the act (sale, barter, exchange, lease, goods purchased: It is not oppressive,
importation, rendering service) arbitrary, and confiscatory. The taxpayer is
(3) The taxpayer (seller) determines his tax not permanently deprived of his privilege to
liability by computing the tax on the gross credit the input tax. For whatever is the
selling price or gross receipt (output tax), purpose, it involves executive economic
and subtracting or crediting the earlier VAT policy and legislative wisdom in which the
on the purchase or importation of goods or Court cannot intervene.
on the purchase of service (input tax) (3) The tax law is uniform: it provides a standard
against the tax due on his own sale. rate of 0% or 10% (or 12% now) on all goods
(4) It is also an excise tax, or a tax on the or services. The law does not make any
privilege of engaging in the business of distinction as to the type of industry or trade
selling goods or services, or in the that will bear the 70% limitation on the
importation of goods but unlike excise, it is creditable input tax, 5-year amortization of
not applied only to a few selected goods input tax on purchase of capital goods, or the
(5) It is an ad valorem tax, which means that 5% final withholding tax by the government.
the amount is based on the gross selling (4) It is equitable: The law is equipped with a
price or gross value in money of goods and threshold margin (P1.5M). Also, basic marine
services and agricultural products in their original
state are still not subject to tax. Congress
also provided for mitigating measures to
CHARACTERISTICS/ ELEMENTS cushion the impact of the imposition of the
OF A VAT-TAXABLE tax on those previously exempt. Excise taxes
TRANSACTION on petroleum products and natural gas were
(1) It is a tax on consumption levied on the sale, reduced. Percentage tax on domestic
barter, exchange or lease of goods or carriers was removed. Power producers are
properties and services in the Philippines and now exempt from paying franchise tax.
on importation of goods into the Philippines.
[RR 16-2005]

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(5) VAT, by its very nature, is regressive. BUT the TAX CREDIT METHOD
Constitution does not really prohibit the The tax credit method refers to the manner by
imposition of indirect taxes (which is which the value added tax of a taxpayer is
essentially regressive). computed. The input taxes shifted by the sellers
(6) What it simply provides is that Congress to the buyer are credited against the buyer’s
shall “evolve a progressive system of output taxes when he sells the taxable goods,
taxation”. properties or services.
(7) In Tolentino v. Sec. of Finance (1995), the
Court said that direct taxes are to be Under this method, the tax is computed by
preferred, and as much as possible, indirect determining the difference between the output
taxes should be minimized… but not avoided tax on his sales and the input tax on the
entirely because it is difficult, if not purchases of goods, services, capital goods,
impossible, to avoid them. supplies, and materials.
Tolentino v. Secretary of Finance (1995):
(1) Regressivity is not a negative standard for
APPLICABILITY OF ECOZONES
(1) CIR v. Seagate Technology (2005): The
courts to enforce.
ECOZONES shall be managed and
operated by the PEZA as separate customs
What Congress is required by the
territory. (Sec. 8, RA 7916 “Special Economic
Constitution to do is to “evolve a progressive
Zone Act of 1995”) This means that in such
system of taxation.”
zone is created the legal fiction of foreign
territory. (Deoferio Jr. and Mamalateo, p.
This provision is placed in the Consti as moral
227)
incentives to legislation, not as judicially
(2) CIR v. Seagate Technology (2005):
enforceable rights.
Consequently, sales made by a person in
the customs territory to a PEZA-registered
(2) The regressive effects are corrected by the
entity are considered exports to a foreign
zero rating of certain transactions and
country and thus, zero-rated. Conversely,
through the exemptions
sales by a PEZA-registered entity to a
person in the customs territory are deemed
IMPACT OF TAX imports from a foreign country.
(1) The impact of taxation is on the statutory
taxpayer, the one from whom the TAX TREATMENT OF SALES TO & BY
government collects.
(2) The impact of VAT is on the seller or importer
PEZA-REGISTERED ENTERPRISE
upon whom the tax has been imposed. [Sec. WITHIN & WITHOUT THE ECOZONE
105, NIRC] [RMC 74-99]
(1) Any sale of goods, property or services made
by a VAT registered supplier from the
INCIDENCE OF TAX Customs Territory* to any registered
(1) The incidence of tax is on the one who bears
enterprise operating in the ecozone,
the burden of taxation.
REGARDLESS of the class or type of the
(2) The incidence of VAT is on the final
latter’s PEZA registration, is actually
consumer.
qualified and thus LEGALLY ENTITLED TO
THE 0% VAT.
Contex v CIR (2004): The Supreme Court
clarified the difference between the concepts of
“Customs Territory” shall mean the national
impact of tax (liability) and incidence of tax
(burden). The seller remains directly and legally territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES
liable for payment of the VAT but the burden is
except those areas specifically declared by
borne by the consumer or final purchaser.
other laws and/or presidential proclamations
to have the status of special economic zones

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and/or free ports. [Sec. 2(g), Rule 1, Part I, RA venture, cooperative or association (Sec.
7916-IRR] 4.105-1, RR 16-2005).

(2) By a VAT-Exempt Supplier from the Customs The transfer must be made in the
Territory to a PEZA registered enterprise Philippines. If the title to the goods were
Sale of goods, property and services by VAT- transferred outside the Philippines, then the
Exempt supplier from the Customs Territory same is not subject to VAT.
to a PEZA registered enterprise shall be
treated EXEMPT FROM VAT, regardless of Exception: When the annual sales do not
whether or not the PEZA registered buyer is exceed P1,919,500*, the taxpayer shall be
subject to taxes under the NIRC or enjoying liable instead to pay a percentage tax
the 5% special tax regime. equivalent to 3% of his gross monthly
(3) By a PEZA Registered Enterprise sales/receipts.
(a) Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs To be subject to 3% percentage tax, the
Territory (ie domestic sales) – this case following requisites must be satisfied:
shall be treated as a technical (1) The gross annual sales and/or receipts
IMPORTATION made by the buyer. Such do not exceed P1,919,500.00; AND
buyer shall be treated as an IMPORTER (2) The taxpayer is not a VAT-registered
thereof and shall be imposed with the person.
corresponding VAT. Note: The threshold amount has been
(b) Sale of Services by a PEZA registered increased from P1,500,000 to
enterprise to a buyer from the Customs P1,919,500 [RR 16-2011].
Territory – this is NOT embraced by the
5% special tax regime, hence, such seller In addition, marginal income earners are not
shall be SUBJECT TO 12% VAT. subject to business taxes because they are
(c) Sale of Goods by a PEZA registered not considered as engaged in trade or
enterprise to Another PEZA registered business. A marginal income earner is an
enterprise (ie Intra-ECOZONE Sales of individual deriving gross sales or receipts of
Goods) – this shall be EXEMPT from VAT. not exceeding P100,000 during any 12-
(d) Sale of Services by ECOZONE enterprise, month period [Rev. Reg. 11-2000]
to Another ECOZONE enterprise (Intra-
ECOZONE enterprise Sale of Service) RULE OF REGULARITY
(i) if PEZA registered seller is subject to Also, the sale, barter, exchange, lease, or
5% special tax regime - EXEMPT from rendering of service must be in the course of
VAT trade or business. The term “in the course of
(ii) if PEZA registered seller is subject to trade or business” embraces the regular
taxes under NIRC (ie not subject to conduct or pursuit of a commercial or economic
5% special tax regime) – subject to activity. It also includes transactions that are
0% VAT pursuant to “cross border incidental to the regular conduct or pursuit of
doctrine” the activity.

PERSONS LIABLE CS Garments, Inc. v CIR (2007): The term


Value-added Tax (VAT) is a percentage tax incidental means something else as primary;
imposed upon: something necessary, appertaining to, or
(1) Any person who, in the course of trade or depending upon another, which is termed the
business, sells, barters, exchanges, leases principal. Hence, an isolated transaction is not
goods or properties, or renders services. necessarily disqualified from being made
incidentally in the course of trade or business. In
The term “person” refers to any individual, this case, the court imposed VAT on the sale of
trust, estate, partnership, corporation, joint motor vehicle that was purchased and used in

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furtherance of petitioner’s business. The sale VAT ON SALE OF GOODS OR


falls within the term “incidental.”
PROPERTIES
A person is deemed to act “in the course of Rate: 12% VAT beginning 1 February 2006 [RMC
trade or business” regardless of whether or not No. 7-06]
it is a nonstock, nonprofit private organization
(irrespective of the disposition of its net income Transactions: Every sale, barter or exchange, or
and whether or not it sells exclusively to its transactions “deemed sale” of taxable goods or
members or their guests) or a government properties (RR 16-2005)
entity.
Basis: Gross selling price or gross value in
In CIR v CA and Commonwealth Management money of the goods or properties sold, bartered
and Services Corp. (2000), the Supreme Court or exchanged.
clarified that VAT is a tax on the value added by
the performance of the service. It is immaterial Who Pays: Paid by SELLER/TRANSFEROR.
whether profit is derived from rendering the [Sec. 106, NIRC]
service. The Court held that the absence of any
profit is immaterial for as long as the entity GOODS OR PROPERTIES – All tangible
provides service for a fee, remuneration or and intangible objects which are capable of
consideration, then the service rendered is pecuniary estimation, including:
subject to VAT. (1) Real properties held primarily for sale to
customers or held for lease in the ordinary
However, the rule of regularity is not applied to course of trade or business;
services rendered by nonresident foreign (2) The right or the privilege to use patent,
persons. The same shall be considered as copyright, design, or model, plan, secret
rendered in the course of trade or business for formula or process, goodwill, trademark,
as long as they are rendered in the Philippines. trade brand or other like property or right;
(3) The right or the privilege to use in the
Membership fees and association dues Philippines of any industrial, commercial or
collected by clubs organized and operated scientific equipment;
exclusively for pleasure, recreation and other (4) The right or the privilege to use motion
non-profit purposes are subject to VAT (RMC picture films, films tapes and discs;
35-2012). (5) Radio, television, satellite transmission and
cable television time. [Sec. 106, NIRC]
Condominium corporations are subject to VAT
on association dues, membership fees and other REQUISITES OF TAXABILITY OF SALE
assessments and charges collected from OF GOODS OR PROPERTIES
tenants and members (RMC 65-2012) The sale of goods (tangible or intangible) must
be:
(1) An actual or deemed sale of goods or
(2) Any person who imports goods. properties for a valuable consideration;
(2) Undertaken in the course of trade or
The importation is not qualified by the term business;
“in the course of trade or business”. Hence, (3) For the use or consumption in the
an importer, whether an individual or Philippines; and
corporation, remains liable for the payment (4) Not exempt from value added tax under the
of VAT regardless of whether or not the Tax Code, special law, or international
importation was made in the course of his agreement
trade or business.

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GROSS SELLING PRICE (GSP) – The total NOT TAXABLE:


amount of money or its equivalent which the (1) Not primarily held for sale
purchaser pays or is obligated to pay to the (2) Low cost or socialized housing
seller in consideration of the sale, barter or (3) Residential lot < P1,919,500
exchange of the goods or properties, excluding (4) House and lot/ other residential dwelling<
the VAT. The excise tax, if any, on such goods or P3,199,200
properties shall form part of the gross selling (5) Lease (rental per unit < 12,800/month and
price. (Sec. 106, NIRC) total rental from all units < P1,919,500/ year)
(6) Transmission to a trustee (Except when the
FOR REAL PROPERTY, GSP MEANS THE transmission is deemed a sale transaction)
HIGHER OF THE FF VALUES: [RR 16-2005]
(1) The consideration stated in the sales Transmission of property to a trustee shall
document, or NOT be subject to VAT IF the property is to
(2) The fair market value (FMV), whichever is the be merely held in trust for the trustor and/or
HIGHER of: beneficiary. However, IF the property
(a) FMV as determined by the Commissioner transferred is originally intended for sale,
(zonal value), or lease or use in the ordinary course of trade or
(b) FMV as shown in schedule of values of the business AND the transfer constitutes a
Provincial & City assessors (real property completed gift, the transfer is subject to VAT
tax declaration) as a deemed sale transaction. The transfer is
(c) If GSP is based on the zonal value or a completed gift if the transferor divests
market value of the property, the zonal or himself absolutely of control over the
market value shall be deemed property, i.e., irrevocable transfer of corpus
EXCLUSIVE of VAT. and/or irrevocable designation of
(d) If the VAT is not billed separately, the beneficiary.
selling price stated in the sales document (7) Transfer to corporation in exchange of shares
shall be deemed to be EXCLUSIVE of of stocks [see Sec. 40, NIRC for Tax-free
VAT. exchange]
(8) Advance payment by the lessee
SALE OF REAL PROPERTY (9) Security deposits for lease agreements
[RR 16-2005]
PERSON LIABLE: gross sales/receipts > The real estate dealer shall be subject to VAT on
P1,919,500/year [per RR 16-2011] the installment payments, including interest
(1) Any person (natural or juridical) engaged in and penalties, actually and/or constructively
sale or exchange of real properties received by the seller.
(2) Real estate lessors
(3) Non-resident lessors (property located in the ON INSTALLMENT PLAN
Philippines) [RR 16-2005]
(4) Non-stock, Non-profit organizations Scope [Sec. 4.106 – 3]
(5) Government agencies, instrumentalities,
GOCCs
Installment Plan Deferred Payment
TAXABLE:
(1) On installment plan Initial payments in the Initial payment in the
(2) Pre-selling by real estate dealers year of sale do not year of sale exceeds
(3) Sale of residential lot >P1,919,500 ; or house exceed 25% of the 25% of the gross
and lot/other residential gross selling price selling price
dwelling>P3,199,200 (RR 16-2011) Taxable only on the Treated as cash sale
(4) Lease of residential units (rental per unit payment actually or and the entire selling
>12,800/month OR total rental from ALL constructively received price is taxable on the
units>P1,919,500/year) month of sale

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INITIAL PAYMENTS – payment/payments accordance with the rules and regulations of


which the seller receives before or upon the BSP
execution of the instrument of sale and
payments which he expects or is scheduled to (3) Sale of raw materials or packaging materials
receive in cash or property during the year when to Export-oriented enterprise whose export
the sale or disposition of the real property was sales exceed seventy percent (70%) of total
made. annual production.
(a) It includes down payment and all payments
actually or constructively received during the (4) Any enterprise whose export sales exceed
year of sale. 70% of the total annual production of the
(b) It does not include the amount of mortgage preceding taxable year shall be considered
on the real property sold (except as to the an export-oriented enterprise upon
excess when such mortgage exceeds the cost accreditation under the rules & regulations of
or other basis of the property to the seller) Export Development Act, RA 7844 [RR 7-95]
and notes or other evidence of indebtedness
issued by the purchaser to the seller at the (5) Sale of Gold to the Bangko Sentral ng
time of the sale. Pilipinas (BSP)

ZERO-RATED SALES OF GOODS (6) Those considered export sales under the
Omnibus Investment Code of 1987, and other
OR PROPERTIES, AND special laws (ex. Bases Conversion &
EFFECTIVELY ZERO-RATED Development Act of 1992)
SALES OF GOODS OR
UNDER OMNIBUS INVESTMENT CODE:
PROPERTIES (1) Phil. port FOB value of export products
A zero-rated sale by a VAT-registered person is exported directly by a registered export
a taxable transaction for VAT purposes, but producer; OR
shall not result in any output tax. However, (2) Net selling price of export products sold by a
input tax on purchases of goods, properties or registered export producer to another export
services related to such zero-rated sale shall be producer, or to an export trader that
available as tax credit or refund. (RR 16-2005) subsequently exports the same (only when
actually exported by the latter).
Contex v CIR (2004): Under zero-rating, all VAT
is removed from the zero-rated goods, activity, CONSTRUCTIVE EXPORTS (without actual
or firm. exportation):
(1) sales to bonded manufacturing warehouses
EXPORT SALES of export-oriented manufacturers;
[Sec. 106(A)(2)(a), NIRC] (2) sales to export processing zones;
(1) The sale and actual shipment of goods from (3) sales to registered export traders operating
the Philippines to a Foreign country AND paid bonded trading warehouses supplying raw
for in acceptable foreign currency or its materials in the manufacture of export
equivalent in goods or services, AND products;
accounted for in accordance with the rules (4) sales to diplomatic missions and other
and regulations of the BSP agencies and/or instrumentalities granted
tax immunities, of locally manufactured,
(2) Sale of raw materials or packaging materials assembled or repacked products, whether
to a Nonresident buyer for delivery to a paid for in foreign currency or not.
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

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Export sales of registered export traders shall the BSP shall also be considered export
include commission income, and that sales. [RR 16-2005]
exportation of goods on consignment shall not
be deemed export sales until the export EFFECTIVELY ZERO-RATED SALES
products consigned are in fact sold by the An effectively zero-rated sale of goods and
consignee, and properties shall refer to the local sale of goods
and properties by a VAT-registered person to a
Sales by a VAT-registered supplier to a person or entity who was granted indirect tax
manufacturer/producer whose products are exemption under special laws or international
100% exported are considered export sales. A agreement. Transactions are considered as
certification to this effect must be issued by the “constructive export” although not involving
Board of Investment which shall be good for 1 actual export and are entitled to the benefit of
year unless subsequently re-issued. [RR 16- zero-rating. These transactions include:
2005] (1) Sale to export-oriented enterprises
(2) Sale of goods, supplies, equipment and fuel
(7) The sale of goods, supplies, equipment and to persons engaged in international
fuel to persons engaged in International shipping or international air transport
shipping or international air transport operations
operations. [added by RA 9337] (3) Foreign currency denominated sale
(a) Limited to goods, supplies, equipment (4) Sales to tax-exempt persons or entities
and fuel pertaining to or attributable to Other cases of zero-rated sales, except for
the transport of goods and passengers export sales and foreign currency denominated
from a port in the Phil. directly to a foreign sale, shall require prior application with the
port without docking or stopping at any appropriate BIR office for effective zero-rating.
other port in the Phil. Without an approved application, the
(b) If any portion of such fuel, goods, or transaction shall be considered exempt.
supplies is used for purposes other than
that mentioned, such portion of fuel, Examples:
goods, and supplies shall be subject to (1) Sales to enterprises duly registered &
VAT. [RR 16-2005] accredited with the
(a) Subic Bay Metropolitan Authority,
FOREIGN CURRENCY (b) Philippine Economic Zone Authority
DENOMINATED SALE (FCDS) (PEZA),
(1) Sale to a nonresident of goods, except those (2) International agreements to which the Phil.
mentioned in Sections 149 and 150 is signatory, such as
(automobiles and non-essential goods like (a) Asian Development Bank (ADB),
jewelry, perfume, and yachts), assembled or (b) International Rice Research Institute
manufactured in the Philippines for delivery (IRRI)
to a resident in thePhilippines paid for in
acceptable foreign currency AND accounted Note: RR 4-2007 removed the distinction
for in accordance with the rules and between automatic and effectively zero-rated
regulations of the BSP. [Sec. 106(A)(2)(b), transactions found in prior Revenue Regulations
NIRC] (including RR 16-2005) with respect to prior
(2) Sales of locally manufactured or assembled application. The paragraph requiring prior
goods for household and personal use to application has now been deleted.
Filipinos abroad and other non-residents of
the Philippines as well as returning Overseas
Filipinos under the Internal Export Program
of the government paid for in convertible
foreign currency AND accounted for in
accordance with the rules and regulations of

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CIR v. Seagate Technology (Philippines) Property dividends which constitute stocks in


February 11, 2005: trade or properties primarily held for sale or
(1) The BIR regulations additionally requiring an lease declared out of retained earnings on or
approved prior application for effective zero after Jan. 1, 1996 and distributed by the
rating cannot prevail over the clear VAT company to its shareholders shall be subject to
nature of Seagate’s transactions (subject to VAT based on the zonal value or FMV at the
zero-rating, as an entity registered with the time of the distribution, whichever is applicable.
PEZA). [RR 16-2005]
(2) An effectively zero-rated transaction does
not and cannot become exempt simply CONSIGNMENT OF GOODS IF
because an application therefor was not
made or, if made, was denied.
ACTUAL SALE IS NOT MADE WITHIN
60 DAYS FOLLOWING THE DATE
TRANSACTIONS DEEMED SALE SUCH GOODS WERE CONSIGNED
[Sec. 106 (B), NIRC] Consigned goods returned by the consignee
within the 60-day period are not deemed sold.
Rate: 12% VAT [RR 16-2005]

Basis: Market value of the goods deemed sold as RETIREMENT FROM OR CESSATION
of the time of the occurrence of the OF BUSINESS, WITH RESPECT TO
transactionsor as the Commissioner shall INVENTORIES OF TAXABLE GOODS
prescribe. In the case of retirement/cessation of EXISTING AS OF SUCH RETIREMENT
business, the tax base shall be the acquisition
cost or the current market price of the goods or
OR CESSATION
With respect to ALL goods on hand, whether
properties, whichever is lower. In the case of a
capital goods, stock-in-trade, supplies or
sale where the gross selling price is
materials, as of the date of such retirement or
unreasonably lower than the fair market value,
cessation, whether or not the business is
the actual market value shall be the tax base.
continued by the new owner or successor.
The gross selling price is unreasonably lower
than the actual market value if it is lower by
Examples are change of ownership of the
more than 30% of the actual market value of the
business (e.g. when a sole proprietorship
same goods of the same quantity and quality
incorporates, or the proprietor sells his entire
sold in the immediate locality on or nearest the
business) and dissolution of a partnership and
date of sale. [RR 16-2005]
creation of a new partnership which takes over
the business. [RR 16-2005]
TRANSFER, USE OR CONSUMPTION
NOT IN THE COURSE OF BUSINESS CHANGE OR CESSATION OF
OF GOODS OR PROPERTIES
ORIGINALLY INTENDED FOR SALE STATUS AS VAT-REGISTERED
OR FOR USE IN THE COURSE OF PERSON
BUSINESS (e.g. when a VAT-registered [Sec.106(C), NIRC]
Rate: 12%
person withdraws goods from his business for
Basis: the acquisition cost or the current market
his personal use. [RR 16-2005]
price of the goods or properties, whichever is
LOWER.
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;

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VAT shall apply to goods disposed of or existing Change in the trade or corporate name of the
as of a certain date if under the circumstances to business
be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon Merger or consolidation of corporations. The
recommendation of the Commissioner, the unused input tax of the dissolved corporation,
status of a person as a VAT-registered person as of the date of merger or consolidation, shall
changes or is terminated. be absorbed by the surviving or new
corporation.
UNDER RR 16-2005 SEC. 4.106 (B):
Subject to VAT - applicable to goods/properties VAT ON IMPORTATION OF
originally intended for sale or use in business
and capital goods which are existing as of the GOODS
occurrence of the following: Rate: 12%
Basis: total value used by the Bureau of
Change of business activity from VAT taxable Customs in determining tariff and customs
status to VAT-exempt status duties, plus customs duties, excise taxes, if any,
Example: A VAT-registered person engaged in a and other charges (such as postage,
taxable activity like wholesaler or retailer who commission).
decides to discontinue such activity and
engages instead in life insurance business or in Where the customs duties are determined on
any other business not subject to VAT. the basis of the quantity or volume of the goods,
the value-added tax shall be based on the
Approval of request for cancellation of a landed cost plus excise taxes, if any.
registration due to reversion to exempt status
Approval of request for cancellation of Landed Cost = invoice amount + customs duties
registration due to desire to revert to exempt + freight + insurance + other charges + excise
status after lapse of 3 consecutive years from tax (if any)
the time of registration by a person who
voluntarily registered despite being exempt Who Pays: IMPORTER prior to the release of
under Sec. 109 (2) such goods from customs custody [Sec. 107 (A),
NIRC]
Approval of request for cancellation of
registration of one who commenced business Importer = any person who brings goods into
with the expectation of gross sales/receipts the Philippines, whether or not made in the
exceeding P1,919,500 [per RR 16-2011] but who course of his trade or business, including non-
failed to exceed this amount during the first 12 exempt persons or entities who acquire tax-free
months of operation imported goods from exempt persons, entities
or agencies [RR 16-2005]
Not Subject to VAT – goods or properties
existing as of the occurrence of the following: TRANSFER OF GOODS BY TAX
EXEMPT PERSONS
Change of control of a corporation by the [Sec. 107 (B), NIRC]
acquisition of the controlling interest of such (1) If importer is tax-exempt, the subsequent
corporation by another stockholder (individual purchasers, transferees or recipients of such
or corporate) or group of stockholders. imported goods shall be considered as
importers who shall be liable for the tax on
Note: Exchange of goods or properties including importation.
the real estate properties used in business or (2) The tax due on such importation shall
held for sale or for lease by the transferor, for constitute a lien on the goods superior to all
shares of stocks, whether resulting in corporate charges or liens on the goods, irrespective of
control or not, is SUBJECT TO VAT [RR 10-11] the possessor thereof [as amended by RA
9337].

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VAT ON SALE OF SERVICE AND MEANING OF “SALE/EXCHANGE OF


SERVICES” - the performance of all kind of
USE OR LEASE OF PROPERTIES services in the Philippines for others for a fee,
Rate: 12% remuneration or consideration, whether in kind
Basis: Gross receipts derived from the sale or or in cash, including those performed or
exchange of services, including the use or lease rendered by the following: (unless otherwise
of properties. indicated, from RR 16-2005)
(1) Construction and service contractors
Gross Receipts: the total amount of money or its (2) Stock, real estate, commercial, customs and
equivalent representing the contract price, immigration brokers
compensation, service fee, rental or royalty, (3) Lessors of property, whether personal or real
including the amount charged for materials In a lease contract, the advance payment by
supplied with the services and deposits and the lessee may be:
advanced payments actually or constructively (a) a loan to the lessor from the lessee - NOT
received during the taxable quarter for the subject to VAT
services performed or to be performed for (b) an option money for the property - NOT
another person, excluding VAT. [Sec. 108 (A), subject to VAT
NIRC] (c) a security deposit to insure the faithful
performance of certain obligations of the
“Constructive receipt” occurs when the money lessee to the lessor - NOT subject to VAT
consideration or its equivalent is placed at the BUT if the security deposit is applied to
control of the person who rendered the service rental, it shall be subject to VAT at the
without restrictions by the payor. Examples: time of its application
(1) deposit in banks which are made available to (d) Pre-paid rental - subject to VAT when
the seller of services without restrictions received, irrespective of the accounting
(2) issuance by the debtor of a notice to offset method employed by the lessor
any debt or obligation and acceptance (4) Persons engaged in warehousing services
thereof by the seller as payment for services (5) Lessors or distributors of cinematographic
rendered films
(3) transfer of the amounts retained by the (6) Persons engaged in milling, processing,
contractee to the account of the contractor. manufacturing or repacking goods for others
[RR 16-2005] are subject to VAT, EXCEPT palay into rice,
corn into corn grits, and sugarcane into raw
REQUISITES FOR TAXABILITY sugar
(1) The service must be performed or is to be (7) Proprietors, operators, or keepers of hotels,
performed in the course of trade or business motels, rest houses, pension houses, inns,
in the Philippines; resorts, theaters, and movie houses
(2) For a valuable consideration actually or (8) Proprietors or operators of restaurants,
constructively received; and refreshment parlors, cafes and other eating
(3) The service is not exempt under the Tax places, including clubs and caterers
Code, special law or international agreement (9) Dealers in securities
(4) Person selling or rendering service is liable to “Gross receipts” means gross selling price
VAT less cost of the securities sold. RR 7-95:
Pre-need companies are considered dealers
LEASE OF PROPERTIES: in securities.
Subject to the tax imposed irrespective of the (10) Lending investors
place where the contract of lease or licensing All persons OTHER than banks, non-bank
agreement was executed if the property is leased financial intermediaries, finance companies
or used in the Philippines. and other financial intermediaries NOT
performing quasi-banking functions who
make a practice of lending money for
themselves or others at interest

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(11) Transportation contractors on their (14) Franchise grantees of electric utilities,


transport of goods or cargoes, including telephone and telegraph, radio and/or
persons who transport goods or cargoes for television broadcasting and all other
hire and other domestic common carriers by franchise grantees (including PAGCOR and
land relative to their transport of goods or its licensees/franchisees)
cargoes (a) EXCEPT franchise grantees of radio
(12) Common carriers by air and sea relative to and/or television broadcasting
their transport of passengers, goods or whose annual gross receipts of the
cargoes from one place in the Philippines to preceding year do not exceed Ten
another place in the Philippines Million Pesos (P10,000,000.00)
On transportation: All receipts from service, (which shall be subject to 3%
hire, or operating lease of transportation franchise tax under Sec. 119, subject
equipment not subject to the percentage tax to optional registration), and
on domestic common carriers and keepers franchise grantees of gas and water
of garages shall be subject to VAT. utilities (under Sec. 109, subject to
2% franchise tax)
Common Transporting Kind of Tax Liability (b) With respect to franchise grantees
carrier carrier of telephone and telegraph services,
By land Persons Domestic 3% percentage amounts received for overseas
tax (Sec. 117,
NIRC)
dispatch, message, or conversation
Goods/ cargo Domestic 12% VAT (Sec. originating from the Philippines are
108, NIRC) subject to the percentage tax under
By sea/air Domestic Domestic trip - Sec. 120 and hence exempt from
Whether 12% VAT VAT
transporting International trip
persons or
(15) Non-life insurance companies (except their
– zero-rated VAT
goods/ cargo International Doing business crop insurances), including surety, fidelity,
in the indemnity and bonding companies; and
Philippines - 3% (a) Insurance and reinsurance commissions,
percentage tax as opposed to premiums, whether life or
(Sec. 118, NIRC)
non-life, are subject to VAT.
International trip
- zero-rated VAT (b) Non-life insurance premiums are subject
(Sec. 108 (B)(6), to VAT.
NIRC) (c) Life insurance premiums are NOT subject
to VAT, for they are subject to
(13) Sales of electricity by generation, percentage tax.
transmission, and/or distribution
companies (16) Similar services regardless of whether or not
(a) EXCEPT sale of power or fuel the performance thereof calls for the
generated through renewable exercise or use of the physical or mental
sources of energy, such as, but not faculties
limited to, biomass, solar, wind (17) The lease or the use of or the right or
hydropower, geothermal, ocean privilege to use any copyright, patent,
energy, and other emerging energy design or model, plan secret formula or
sources using technologies such as process, goodwill, trademark, trade brand
fuel cells and hydrogen fuels, which or other like property or right
shall be subject to 0% rate of VAT (18) The lease of the use of, or the right to use of
(zero-rated). any industrial, commercial or scientific
(b) The universal charge passed on and equipment
collected by distribution companies (19) The supply of scientific, technical, industrial
and electric cooperatives shall be or commercial knowledge or information
excluded from the computation of
gross receipts.

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(20) The supply of any assistance that is CIR v. Burmeister (2007): The services
ancillary and subsidiary to and is furnished referring to ‘processing, manufacturing,
as a means of enabling the application or repacking’ and ‘services other than those in
enjoyment of any such property, or right as (1)’ both require (i) payment in foreign
is mentioned in #18 or any such knowledge currency; (ii) inward remittance; (iii)
or information as is mentioned in #19 accounted for by the BSP; AND (iv) that the
(21) The supply of services by a nonresident service recipient is doing business outside the
person or his employee in connection with Philippines. If this is not the case, taxpayers
the use of property or rights belonging to, or can circumvent just by stipulating payment
the installation or operation of any brand, in foreign currency.
machinery or other apparatus purchased
from such nonresident person (3) Services rendered to persons or entities
(22)The supply of technical advice, assistance or whose exemption under special laws or
services rendered in connection with international agreements to which the
technical management or administration of Philippines is a signatory effectively subjects
any scientific, industrial or commercial the supply of such services to zero percent
undertaking, venture, project or scheme (0%) rate [as amended by RA 9337]
(23)The lease of motion picture films, films, (4) Services rendered to persons engaged in
tapes and discs international shipping or international air
(24) The lease or the use of or the right to use transport operations, including leases of
radio, television, satellite transmission and property for use thereof [as amended by RA
cable television time 9337];
Provided, however, that the services referred
ZERO-RATED SALE OF to herein shall not pertain to those made to
common carriers by air and sea relative to
SERVICES their transport of passengers, goods or
[Sec. 108 (B), NIRC] cargoes from one place in the Phil. to
A zero-rated sale by a VAT-registered person is another place in the Phil. (the same being
a taxable transaction for VAT purposes, but subject to 12% VAT under Sec. 108)
shall not result in any output tax.
(5) Services performed by subcontractors and/or
Input tax on purchases of goods, properties or contractors in processing, converting, or
services related to such zero-rated sale shall be manufacturing goods for an enterprise
available as tax credit or refund. (RR 16-2005) whose export sales exceed seventy percent
(70%) of total annual production.
(1) Processing, manufacturing or repacking (6) Transport of passengers and cargo by air or
goods for other persons doing business
sea vessels from the Philippines to a foreign
outside the Philippines which goods are
country [as added by RA 9337] and;
subsequently exported, where the services
(7) Sale of power or fuel generated through
are paid for in acceptable foreign currency
renewable sources of energy such as, but not
AND accounted for in accordance with the
limited to, biomass, solar, wind, hydropower,
rules and regulations of the BSP
geothermal, ocean energy, and other
(2) Services other than those mentioned in the
emerging energy sources using technologies
preceding paragraph rendered to a person such as fuel cells and hydrogen fuels. [as
engaged in business conducted outside the
added by RA 9337]
Philippines OR a nonresident person not
engaged in business who is outside the
Zero-rating shall apply strictly to the sale of
Philippines when the services are performed,
power or fuel generated through renewable
the consideration for which is paid for in
sources of energy, and shall not extend to the
acceptable foreign currency AND accounted
sale of services related to the maintenance or
for in accordance with the rules and
operation of plants generating said power.
regulations of the BSP

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RR 4-2007 removed the distinction between (3) Import of personal and household effects of
automatic and effectively zero-rated Phil resident returning from abroad and
transactions found in prior Revenue Regulations nonresident citizens coming to resettle in the
[inc. RR 16-2005] with respect to prior Philippines
application from the BIR. (4) Import of professional instruments and
implements, wearing apparel, domestic
VAT EXEMPT TRANSACTIONS animals, and personal household effects
belonging to persons coming to settle in the
Philippines, for their own use and not for
IN GENERAL sale, barter or exchange
(1) Sale of goods or properties and/or services (5) Services subject to percentage tax
and the use or lease of properties that is NOT (6) Services by agricultural contract growers and
subject to VAT (output tax) and the seller is milling for others of palay into rice, corn into
not allowed any tax credit of VAT (input tax) grits and sugar cane into raw sugar
on purchases. (7) Medical, dental, hospital and veterinary
(2) The person making the exempt sale of services except those rendered by
goods, properties or services shall not bill professionals:
any output tax to his customers. [RR 16- Laboratory services are exempted. If the
2005] hospital or clinic operates a pharmacy or
(3) But, the VAT-registered person may elect drug store, the sale of drugs and medicine is
that the exemption not apply to its sale of subject to VAT. [RR 16-2005]
goods or properties or services; provided that (8) Educational services rendered by private
the election made shall be irrevocable for a educational institutions, duly accredited by
period of three (3) years from the quarter the DEPED, CHED, TESDA, and those rendered
election was made [Sec. 109(2), NIRC]. by government educational institutions;
“Educational services” does not include
EXEMPT TRANSACTION, seminars, in-service training, review classes
ENUMERATED and other similar services rendered by
(1) Sale/import of agricultural, marine food persons who are not accredited by the
products in original state; of livestock and DepED, CHED, and/or TESDA. [RR 16-
poultry 2005]
(a) Original state even if they have undergone (9) Services rendered by individuals
the simple processes of preparation or pursuant to an employer-employee
preservation for the market, such as relationship
freezing, drying, salting, broiling, roasting, (10) Services rendered by regional or area
smoking or stripping. headquarters established in the
(b) Polished and/or husked rice, corn grits, Philippines by multinational
raw cane sugar and molasses, ordinary corporations which act as supervisory,
salt, AND COPRA shall be considered in communications and coordinating
their original state centers for their affiliates, subsidiaries
Livestock or poultry does not include fighting or branches in the Asia-Pacific Region
cocks, race horses, zoo animals and other and do not earn or derive income from
animals generally considered as pets. [RR 16- the Philippines
2005] (11) Transactions which are exempt under
Original state – including preservation using international agreements to which the
advanced technological means of packaging, Philippines is a signatory or under
such as shrink wrapping in plastics, vacuum special laws, except those under PD No.
packing, tetra-pack, and other similar 529 [Petroleum Exploration
packaging methods. [RR 16-2005] Concessionaires under the Petroleum Act
(2) Sale/ import of fertilizers; seeds, seedlings of 1949]
and fingerlings; fish, prawn, livestock and
poultry feeds

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(12) Sales by agricultural cooperatives duly and other related laws, such as RA No.
registered with the Cooperative 7835 and RA No. 8763.
Development Authority to their “Low-cost housing" refers to housing
members as well as sale of their projects intended for homeless low-
produce to non-members. Exemption income family beneficiaries, undertaken
includes importation of direct farm by the Government or private developers,
inputs, machineries and equipment, which may either be a subdivision or a
including spare parts thereof, to be condominium registered and licensed by
used directly and exclusively in the the Housing and Land Use Regulatory
production and/or processing of their Board/Housing (HLURB) under BP Blg.
produce. 220, PD No. 957 or any other similar law,
Sale by agricultural cooperatives to non- wherein the unit selling price is within the
members can only be exempted from VAT if selling price ceiling per unit of
the producer of the agricultural products P750,000.00 under RA No. 7279, and
sold is the cooperative itself. If the other laws, such as RA No. 7835 and RA
cooperative is not the producer (e.g., No. 8763.
trader), then only those sales to its (c) Sale of real properties utilized for
members shall be exempted from VAT. [RR socialized housing as defined under RA
16-2005] No. 7279, and other related laws, such as
(13) Gross receipts from lending activities by RA No. 7835 and RA No. 8763, wherein
credit or multi-purpose cooperatives the price ceiling per unit is P225,000.00
duly registered with the Cooperative or as may from time to time be
Development Authority determined by the HUDCC and the NEDA
(14) Sales by non-agricultural, non- electric and other related laws.
and non-credit cooperatives duly "Socialized housing" refers to housing
registered with the Cooperative programs and projects covering houses
Development Authority are exempt BUT and lots or home lots only undertaken by
their importation of machineries and the Government or the private sector for
equipment, including spare parts the underprivileged and homeless citizens
thereof, to be used by them are which shall include sites and services
SUBJECT to VAT. development, long-term financing,
(15) Export sales by persons who are not liberated terms on interest payments,
VAT-registered and such other benefits in accordance
(16) Sale of real properties – the ff. sales are with the provisions of RA No. 7279and
exempt: RA No. 7835 and RA No. 8763.
(a) Sale of real properties NOT primarily "Socialized housing" shall also refer to
held for sale to customers or held for projects intended for the
lease in the ordinary course of trade or underprivileged and homeless wherein
business. the housing package selling price is
However, even if the real property is not within the lowest interest rates under
primarily held for sale to customers or the Unified Home Lending Program
held for lease in the ordinary course of (UHLP) or any equivalent housing
trade or business but the same is used in program of the Government, the private
the trade or business of the seller, the sector or non-government organizations.
sale thereof shall be subject to VAT (d) Sale of residential lot valued at
being a transaction incidental to the P1,919,500 and below, or house & lot
taxpayer’s main business. [RR 4-2007] and other residential dwellings valued at
(b) Sale of real properties utilized for low- P3,199,200 and below
cost housing as defined by RA No. 7279,
otherwise known as the "Urban
Development and Housing Act of 1992"

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(i) If two or more adjacent residential lots In cases where a lessor has several
are sold or disposed in favor of one residential units for lease, some are leased
buyer, for the purpose of utilizing the out for a monthly rental per unit of not
lots as one residential lot, the sale exceeding P12,800 while others are leased
shall be exempt from VAT only if the out for more than P12,800 per unit, his tax
aggregate value of the lots does not liability will be as follows:
exceed P1,919,500. [RR 13-2012] (a) The gross receipts from rentals not
(ii) Adjacent residential lots, although exceeding P12,800 per month per unit
covered by separate titles and/or shall be exempt from VAT regardless of
separate tax declarations, when sold the aggregate annual gross receipts.
or disposed to one and the same (b) The gross receipts from rentals
buyer, whether covered by one or exceeding P12,800 per month per unit
separate Deed of Conveyance, shall shall be subject to VAT IF the aggregate
be presumed as a sale of one annual gross receipts from said units
residential lot. [RR 16-2005] only (not including the gross receipts
Sale, transfer or disposal within a 12- from units leased for not more than
month period of 2/more adjacent P12,800 ) exceeds P1,919,500 .
residential lots, house and lots or Otherwise, the gross receipts will be
other residential dwellings to one subject to the 3% tax imposed under
buyer, whether from the same or from Section 116 of the Tax Code.
different sellers shall be considered The term 'residential units' shall refer to
one single transaction. Hence, the apartments and houses & lots used for
sale of the adjacent lots shall be residential purposes, and buildings or
subject to VAT if the aggregate value parts or units thereof used solely as
exceeds P1,919,500 for residential lots dwelling places (e.g., dormitories, rooms
and P3,199,200 for residential house and bed spaces) except motels, motel
lots or residential dwellings, rooms, hotels and hotel rooms.
notwithstanding that the value of the The term 'unit' shall mean an
individual properties do not exceed apartment unit in the case of
the VAT exemption thresholds. apartments, house in the case of
Sale/purchase of parking lots shall residential houses; per person in the
not be considered a sale of residential case of dormitories, boarding houses
lot/dwelling. Hence, it shall be and bed spaces; and per room in case of
subject to VAT regardless of its selling rooms for rent. [RR 16-2005]
price. [RR 13-2012] (18) Sale, importation, printing or
(17) Lease of residential units with a publication of books and any
monthly rental per unit not exceeding newspaper, magazine review or bulletin
P12,800, regardless of the amount of which appears at regular intervals with
aggregate rentals received by the lessor fixed prices for subscription and sale
during the year. and which is not devoted principally to
Lease of residential units where the monthly the publication of paid advertisements;
rental per unit exceeds P12,800 but the (19) Sale, importation or lease of passenger
aggregate of such rentals of the lessor or cargo vessels and aircraft, including
during the year do not exceed One Million engine, equipment and spare parts
Five Hundred Pesos P1,919,500 shall thereof for domestic or international
likewise be exempt from VAT, however, the transport operations [added by RA
same shall be subjected to three percent 9337];
(3%) percentage tax.

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The exemption from VAT on the derives revenue from other lines of
importation and local purchase of business which are otherwise subject to
passenger and/or cargo vessels shall be VAT, the same shall be combined for
limited to those of 150 tons and above, purposes of determining whether the
including engine and spare parts of said threshold has been exceeded.
vessels; The VAT-exempt sales shall NOT be
Provided, further, that the vessels to be included in determining the threshold.
imported shall comply with the age [RR 16-2005]
limit requirement, at the time of
acquisition counted from the date of the INPUT TAX AND OUTPUT TAX,
vessel's original commissioning, as
follows: DEFINED
(a) for passenger and/or cargo vessels, INPUT TAX – the VAT due on or paid by a
the age limit is 15 years old, VAT-registered person on importation of goods
(b) for tankers, the age limit is 10 years or local purchases of goods, properties, or
old, and services, including lease or use of properties, in
(c) for high-speed passenger crafts, the the course of his trade or business.
age limit is 5 years old [RR 16-2005] (1) It includes the transitional input tax and the
(20) Importation of fuel, goods, and presumptive input tax as determined in
supplies by persons engaged in accordance with Section 111 of the Code.
international shipping or air transport (2) It includes input taxes which can be directly
operations; [added by RA 9337] attributed to transactions subject to the VAT
The said fuel, goods and supplies shall plus a ratable portion of any input tax which
be used exclusively or shall pertain to cannot be directly attributed to either the
the transport of goods and/or taxable or exempt activity.
passenger from a port in the (3) Input tax must be evidenced by a VAT invoice
Philippines directly to a foreign port or official receipt issued by a VAT-registered
without stopping at any other port in person in accordance with Secs. 113 and 237
the Philippines; of the Code. [RR 16-2005]
If any portion of such fuel, goods or
supplies is used for purposes other OUTPUT TAX – the VAT due on the sale or
than that mentioned in this paragraph,
lease of taxable goods or properties or services
such portion of fuel, goods and
by any person registered or required to register
supplies shall be subject to 12% VAT
under Section 236 of the Code. [Sec. 110 (A),
starting Feb. 1, 2006. [RR 16-2005]
NIRC]
(21) Services of banks, non-bank financial
intermediaries performing quasi-
banking functions and other non-bank SOURCES OF INPUT TAX
financial intermediaries; and
(22)Sale or lease of goods or properties or PURCHASE OR IMPORTATION OF
the performance of services other than GOODS
the transactions mentioned in the (1) For sale; or
preceding paragraphs, the gross annual (2) For conversion into or intended to form part
sales and/or receipts do not exceed the of a finished product for sale including
amount of P1,919,500 packaging materials; or
For purposes of the threshold of (3) For use as supplies in the course of business;
P1,919,500, the husband and the wife or
shall be considered separate taxpayers. (4) For use as materials supplied in the sale of
However, the aggregation rule for each service; or
taxpayer shall apply. (5) For use in trade or business for which
For instance, if a professional, aside deduction for depreciation or amortization is
from the practice of his profession, also allowed under the Code.

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PURCHASE OF REAL PROPERTIES allowed for yachts, helicopters, airplanes or


FOR WHICH A VAT HAS ACTUALLY land vehicles over P2.4 million unless the
vehicle is used in the company's transport
BEEN PAID operations or lease of transport equipment.
[RR 12-2012]
PURCHASE OF SERVICES IN WHICH
VAT HAS ACTUALLY BEEN PAID PERSONS WHO CAN AVAIL OF
INPUT TAX CREDIT
TRANSACTIONS DEEMED SALE
CREDITABLE INPUT TAX
PRESUMPTIVE INPUT TAX
[Sec. 110(A)(2), NIRC]
[Sec. 111(B), NIRC]
Input tax on domestic purchase or importation
Persons or firms engaged in the processing of
of goods or properties shall be creditable:
sardines, mackerel and milk, and in
(1) To the purchaser upon consummation of sale
manufacturing refined sugar and cooking oil
and on importation of goods or properties;
and packed noodle based instant meals, shall
and
be allowed a presumptive input tax, creditable
(2) To the importer upon payment of the VAT
against the output tax, equivalent to FOUR
prior to the release of the goods from the
PERCENT (4%) of the gross value in money of
custody of the Bureau of Customs.
their purchases of primary agricultural products
(1) The input tax on goods purchased or
which are used as inputs to their production.
imported in a calendar month for use in
trade or business for which deduction for
TRANSITIONAL INPUT TAX
depreciation is allowed under the Code, shall
(1) 2% of the value of the beginning inventory on
be spread evenly over the month of
hand or actual VAT paid on such, goods,
acquisition and the fifty-nine (59) succeeding
materials and supplies, whichever is
months if the aggregate acquisition cost for
HIGHER, which amount shall be creditable
such goods, excluding the VAT component
against the output tax of VAT-registered
thereof, exceeds One million pesos
person.
(P1,000,000)
(2) The value allowed for income tax purposes
(2) However, if the estimated useful life of the
on inventories shall be the basis for the
capital good is less than five (5) years, as used
computation of the 2% transitional input tax,
for depreciation purposes, then the input
EXCLUDING goods that are exempt from
VAT shall be spread over such a shorter
VAT under Sec. 109 of the Tax Code. (RR 16-
2005) period
(3) To the purchaser of services or the lessee or
(3) Fort Bonifacio Development Corp. v. CIR
licensee upon payment of the compensation,
(2012): A real estate dealer is entitled to
rental, royalty or fee.
claim transitional input VAT based on the
value of the entire real property sold
regardless of whether there was in fact TRANSITIONAL TAX
actual payment of VAT on the purchase of [Sec. 111(A), NIRC]
the real property. At the time the purchase Any person liable for VAT or who elects to be a
was made, there was still no VAT imposed. VAT-registered person shall be allowed INPUT
Claiming of input VAT on motor vehicles TAX in his beginning inventory of goods,
subject to the ff conditions: (1) Purchase of materials and supplies
vehicle must be substantiated with official (a) equivalent to TWO PERCENT (2%) of the
receipts and other records; (2) Taxpayer has value of such inventory; OR
to prove the direct connection of the motor (b) the actual VAT paid on such goods, materials
vehicle to the business; (3) Only one vehicle and supplies, whichever is HIGHER, which
for land transport is allowed for the use of an shall be creditable against the OUTPUT TAX.
official/employee with value not exceeding
P2.4 million; (4) No depreciation shall be

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PRESUMPTIVE INPUT TAX If at the end of any taxable quarter, the output
[Sec. 111(B), NIRC] tax exceeds the input tax, the excess shall be
Persons or firms engaged in the processing of paid by the VAT-registered person. [Sec. 110(B),
sardines, mackerel and milk, and in NIRC]
manufacturing refined sugar and cooking oil and
packed noodle based instant meals, shall be DETERMINATION OF INPUT TAX
allowed a presumptive input tax, creditable CREDITABLE
against the output tax, equivalent to 4% of the [Sec. 110 , NIRC]
gross value in money of their purchases of (1) The sum of the excess input tax carried over
primary agricultural products which are used as from the preceding month or quarter and the
inputs to their production. input tax creditable to a VAT-registered
person during the taxable month or quarter
"Processing" shall mean pasteurization, canning shall be reduced by the amount of claim for
and activities which through physical or refund or tax credit for value-added tax and
chemical process alter the exterior texture or other adjustments, such as purchase returns
form or inner substance of a product in such or allowances and input tax attributable to
manner as to prepare it for special use to which exempt sale.
it could not have been put in its original form or (2) The claim for tax credit referred to includes
condition. [RR 16-05] not only those filed with the BIR but also
those filed with other government agencies,
DETERMINATION OF such as the Board of Investments the Bureau
of Customs.
OUTPUT/INPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX ALLOCATION OF INPUT TAX ON
CREDITS MIXED TRANSACTIONS
A VAT-registered person who is also engaged in
DETERMINATION OF OUTPUT TAX transactions not subject to VAT shall be allowed
For the sale of goods, properties, and services to recognize input tax credit on transactions
and use or lease of properties, the output tax subject to VAT as follows:
shall be computed by multiplying the total
amount indicated in the invoice or receipt by (1) All the input taxes that can be directly
12%. attributed to transactions subject to VAT may
be recognized for input tax credit
For the sale of real property where the zonal Input taxes that can be directly attributable
value/market value applies, the output tax shall to VAT taxable sales of goods and services to
be computed by multiplying the zonal value or the Government or any of its political
market value by 12%. subdivisions, instrumentalities or agencies,
including GOCCs shall not be credited
For importation, the output tax is equivalent to against output taxes arising from sales to
the VAT due on such importation. non-Government entities
(2) If any input tax cannot be directly attributed
For transactions deemed sale, the output tax to either a VAT taxable or VAT-exempt
shall be based on the market value of the goods transaction, the input tax shall be pro-rated
deemed sold as of the time of the occurrence of to the VAT taxable and VAT-exempt
the transactions except that in the case of transactions and ONLY the ratable portion
retirement from or cessation of business, the tax pertaining to transactions subject to VAT may
base shall be the acquisition cost or the current be recognized for input tax credit.
market price of the goods, whichever is lower.

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Illustration: ERA Corporation has the following Ratable portion of the input tax not directly
sales during the month: attributable to any activity, computed as follows:

Sale to private entities subject to


12% 100,000.00
Sale to private entities subject to
0% 100,000.00
Sale of exempt goods 100,000.00
Sale to gov't. subjected to 5% final
VAT w/holding 100,000.00
Total sales for the month 400,000.00
Total input tax attributable to sales to
The following were its input taxes (or passed on government: P9,000.00 (P4,000 + P5,000)
by its VAT suppliers):
These amounts are not available for input tax
Input tax on taxable goods (12%) 5,000.00 credit but may be recognized as cost or
Input tax on zero-rated sales 3,000.00 expense. That is because as far as sales to
Input tax on sale of exempt goods 2,000.00 government are concerned, there is a VAT that
Input tax on sale to government 4,000.00 is finally withheld (at 5%).
Input tax on depreciable capital good
not attributable to any specific activity Step 3: The input tax attributable to VAT-
(monthly amortization for 60 exempt sales for the month shall be computed
months) 20,000.00
as follows:
Step 1: The creditable input tax for the month Input tax on VAT-exempt sales P2,000.00
shall be computed as follows:
Input tax on sale subject to 12% P5,000.00 Ratable portion of the input tax not directly
Input tax on zero-rated sale attributable to any activity, computed below:
3,000.00

Ratable portion of the input tax not directly


attributable to any activity, computed below

Total input tax attributable:P7,000.00


VAT-exempt sales (P2,000+ P5,000)

These amounts are not available for input tax


credit but may be recognized as cost or
Total creditable input tax for the month:
expense.
P18,000.00 (P5,000+P3,000+P10,000)

Step 2: The input tax attributable to sales to


government for the month shall be computed
as follows:
Input tax on sale to gov't. P4,000.00

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DETERMINATION OF THE OUTPUT (1) Any input tax attributable to zero-rated sales
TAX AND VAT PAYABLE AND by a VAT-registered person may at his option
be refunded or applied for a tax credit
COMPUTATION OF VAT PAYABLE OR certificate which may be used in the payment
EXCESS TAX CREDITS of internal revenue taxes.
[Sec. 110 (B), NIRC]

HOW OUTPUT TAX COMPUTED SUBSTANTIATION OF INPUT


[RR 16-05] TAX CREDITS
[RR 16-2005]
In a Sale of Goods/Properties (1) INPUT TAXES must be substantiated and
supported by the following documents, and
must be reported in the information returns
required to be submitted to the Bureau:
(a) For the importation of goods = Import
For Sellers of Services entry or other equivalent document
showing actual payment of VAT on the
imported goods.
(b) For the domestic purchase of goods and
properties = Invoice showing the
WHERE VAT ERRONEOUSLY BILLED
information required under Secs. 113
Where the basis for computing the output tax is
(Invoicing and Accounting Requirements
either the gross selling price/gross receipts, but
for VAT-Registered Persons) and 237
the amount of VAT is erroneously billed in the
(Issuance of Receipts or Sales or
invoice, the total invoice amount shall be
Commercial Invoices) of the Tax Code.
presumed to be comprised of the gross selling
(c) For the purchase of real property = public
price/gross receipts plus the correct amount of
instrument i.e., deed of absolute sale,
VAT. Hence,
deed of conditional sale,
contract/agreement to sell, etc., together
with VAT invoice issued by the seller.
(d) For the purchase of services = official
receipt showing the information required
under Secs. 113 and 237 of the Tax Code.
Accordingly, the input tax that can be claimed by A cash register machine tape issued to a
the buyer shall be the corrected amount of VAT registered buyer shall constitute valid proof of
computed in accordance with the formula substantiation of tax credit only if it shows the
prescribed. information required under Secs. 113 and 237 of
the Tax Code.
VAT Payable & Excess Input Tax (2) TRANSITIONAL INPUT TAX shall be
supported by an inventory of goods as shown
The VAT payable is the excess of output tax over in a detailed list to be submitted to the BIR.
allowable input tax. (3) Input tax on "DEEMED SALE"
TRANSACTIONS shall be substantiated with
If at the end of any taxable month or quarter: the invoice required.
(a) the output tax exceeds the input tax, the (4) INPUT TAX FROM PAYMENTS MADE TO
excess shall be paid by the VAT-registered NON-RESIDENTS (such as for services,
person rentals and royalties) shall be supported by a
(b) the input tax exceeds the output tax, the copy of the Monthly Remittance Return of
excess shall be carried over to the Value Added Tax Withheld [BIR Form 1600]
succeeding quarter or quarters filed by the resident payor in behalf of the
non-resident evidencing remittance of VAT
due which was withheld by the payor.

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(5) ADVANCE VAT ON SUGAR shall be VAT withholding and VAT-exempt sales).
supported by the Payment Order showing [RR 16-2005]
payment of the advance VAT. Eastern Telecommunications Philippines,
Inc. v. CIR (2012): The absence of the word
REFUND OR TAX CREDIT OF “zero-rated” on the invoices and receipts
of a taxpayer will result in the denial of
EXCESS INPUT TAX the claim for tax refund.
(2) Cancellation of VAT Registration. [Sec. 112 (C),
WHO MAY CLAIM FOR NIRC]
REFUND/APPLY FOR ISSUANCE OF (a) A person whose registration has been
TAX CREDIT CERTIFICATE (TCC) cancelled due to retirement from or
(1) Zero-Rated Sales [Sec. 112(A), NIRC] cessation of business, or due to changes in
(a) Any VAT-registered person, whose sales or cessation of status under Section
are zero-rated or effectively zero-rated 106(C) of the Code may, within two (2)
may apply for the issuance of a tax credit years from the date of cancellation, apply
certificate/refund of creditable input tax for the issuance of a tax credit certificate
due or paid attributable to such sales, for any unused input tax which may be
EXCEPT transitional input tax, to the used in payment of his other internal
extent that such input tax has not been revenue taxes.
applied against output tax, within two (2) (b) He shall be entitled to a refund if he has
years after the close of the taxable quarter no internal revenue tax liabilities against
when the sales were made. The input tax which the tax credit certificate may be
that may be subject of the claim shall utilized.
exclude the portion of input tax that has
been applied against the output tax.
(b) The acceptable foreign currency exchange PERIOD TO FILE CLAIM/APPLY FOR
proceeds must have been duly accounted ISSUANCE OF TAX CREDIT
for in accordance with the rules and
regulations of the Bangko Sentral ng
CERTIFICATE [Sec. 112 (D), NIRC]
In proper cases, the Commissioner of Internal
Pilipinas (BSP) in the case of zero-rated
Revenue shall grant a tax credit
transactions paid for in acceptable foreign
certificate/refund for creditable input taxes
currency and requiring that such be
accounted for in accordance with BSP within one hundred twenty (120) days from the
date of submission of complete documents in
rules & regulations [Secs. 106(A)(2)(a)(1)
support of the application.
and (2), and Sec. 106(A)(2)(b) and Sec.
108(B)(1) and (2), NIRC].
In case of full or partial denial of the claim for
(c) Where the taxpayer is engaged in zero-
tax credit certificate/refund as decided by the
rated or effectively zero-rated sale and
Commissioner of Internal Revenue:
also in taxable or exempt sale of goods of
(a) The taxpayer may appeal to the Court of Tax
properties or services, and the amount of
creditable input tax due or paid cannot be Appeals (CTA) within thirty (30) days from
the receipt of said denial, otherwise the
directly and entirely attributed to any one
decision shall become final.
of the transactions, it shall be allocated
(b) If no action on the claim for tax credit
proportionately on the basis of the volume
certificate/refund has been taken by the
of sales.
Commissioner of Internal Revenue after the
(d) In the case of a person engaged in the
one hundred twenty (120) day period from
transport of passenger and cargo by air or
the date of submission of the application
sea vessels from the Philippines to a
foreign country, the input taxes shall be with complete documents, the taxpayer may
appeal to the CTA within 30 days from the
allocated ratably between his zero-rated
lapse of the 120-day period. [RR 16-2005]
sales and non-zero-rated sales (sales
subject to regular rate, subject to final

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MANNER OF GIVING REFUND As a general rule, the value-added tax (VAT)


Revenue Memorandum Circular no. 57-2013 system uses the destination principle.
(August 23, 2013): Unutilized creditable input
taxes attributed to zero-rated sales can only be However, our VAT law itself provides for a clear
recovered through the application for refund or exception, under which the supply of service
tax credit. There is no other mode of recovering shall be zero-rated when the following
unapplied input taxes aside from an application requirements are met:
for refund or tax credit. The Memorandum (1) the service is performed in the Philippines;
Circular also instructed the disallowance of (2) the service falls under any of the categories
unutilized creditable input taxes attributable to provided in Section 102(b) of the Tax Code;
VAT zero-rated sales that is claimed as a and
deduction for income tax purposes. (3) it is paid for in acceptable foreign currency
that is accounted for in accordance with the
Refunds shall be made upon warrants drawn by regulations of the Bangko Sentral ng
the Commissioner or by his duly authorized Pilipinas.
representative without the necessity of being
countersigned by the Chairman, Commission on
Audit, the provisions of the Administrative Code
INVOICING REQUIREMENTS
of 1987 notwithstanding: provided that refunds
shall be subject to post audit by the INVOICING REQUIREMENTS IN
Commission on Audit. [Sec. 112(D), NIRC] GENERAL
A VAT-registered person shall issue:
DESTINATION PRINCIPLE OR (1) A VAT invoice for every sale, barter or
exchange of goods or properties; and
CROSS-BORDER DOCTRINE (2) A VAT official receipt for every lease of goods
or properties, and for every sale, barter or
DESTINATION PRINCIPLE exchange of services.
(1) It is the basis for the jurisdictional reach of
the VAT. Only VAT-registered persons are required to
(2) CIR v. American Express International (2005): print their TIN followed by the word “VAT” in
As a general rule, goods and services are their invoice or ORs. Said documents shall be
taxed only in the country where they are considered as a “VAT Invoice” or VAT official
consumed. (Deoferio Jr. and Mamalateo. The receipt. All purchases covered by
Value Added Tax in the Philippines, p. 43) invoices/receipts other than VAT Invoice/VAT
OR shall not give rise to any input tax. [RR 16-
Corollarily, the Cross Border Doctrine mandates 05]
that no VAT shall be imposed to form part of
the cost of the goods destined for consumption INFORMATION CONTAINED IN THE VAT
outside the territorial border of the taxing INVOICE OR VAT OFFICIAL RECEIPT
authority. [RR 16-2005]
(1) A statement that the seller is a VAT-
Atlas Consolidated Mining & Dev. Corp. v. CIR registered person, followed by his taxpayer's
(2007): Hence, actual export of goods and identification number (TIN);
services from the Philippines to a foreign (2) The total amount which the purchaser pays
country must be free of VAT, while those or is obligated to pay to the seller with the
destined for use or consumption within the indication that such amount includes the
Philippines shall be imposed with 12% VAT. VAT:
[Deoferio Jr. and Mamalateo, p. 422] (a) The amount of the tax shall be shown as a
separate item in the invoice/receipt;
CIR v. American Express (2005):
The court enumerated the exceptions to the
destination principle.

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(b) If the sale is exempt from VAT, the term


"VAT-exempt sale" shall be written or Transaction Invoicing Requirement
printed prominently on the invoice or
receipt; Consignment of goods Invoice, at the time of
(c) If the sale is subject to zero percent (0%) if actual sale is not the transaction, which
value-added tax, the term "zero-rated made within 60 days should include all the
sale" shall be written or printed info prescribed above;
prominently on the invoice or receipt; data in the invoice
(d) If the sale involves goods, properties or shall be duly recorded
services some of which are subject to and in the subsidiary sales
some of which are VAT zero-rated or VAT- journal
exempt, the invoice or receipt shall clearly Retirement from or An inventory shall be
indicate the breakdown of the sale price cessation of business prepared and
between its taxable, exempt and zero- with respect to all submitted to the RDO
rated components, and the calculation of goods on hand who has jurisdiction
the value-added tax on each portion of over the taxpayer’s
the sale shall be shown on the invoice or principal place of
receipt. The seller has the option to issue business not later
separate invoices or receipts for the than 30 days after
taxable, exempt, and zero-rated retirement or
components of the sale. cessation from
(3) The date of transaction, quantity, unit cost business. An invoice
and description of the goods or properties or shall be prepared for
nature of the service; and the entire inventory,
(4) In the case of sales in the amount of one which shall be the
thousand pesos (P1,000) or more where the basis of the entry into
sale or transfer is made to a VAT-registered the subsidiary sales
person, the name, business style, if any, journal. The invoice
address and taxpayer identification number need not enumerate
(TIN) of the purchaser, customer or client. the specific items
appearing in the
INVOICING AND RECORDING inventory regarding
DEEMED SALE TRANSACTIONS the description of the
goods. If the business
Transaction Invoicing Requirement is to be continued by
the new owners or
Transfer, use or Memorandum entry in successors, the entire
consumption not in the subsidiary sales amount of output tax
the course of business journal to record on the amount
of goods or properties withdrawal of goods deemed sold shall be
originally intended for for personal use allowed as input
sale or for use in the taxes.
course of business
Distribution or transfer Invoice, at the time of CONSEQUENCES OF ISSUING
to the transaction, which ERRONEOUS VAT INVOICE OR VAT
shareholders/investor should include all the OFFICIAL RECEIPT
s or creditors info prescribed above; [Sec. 113 (D), NIRC]
data in the invoice
shall be duly recorded
in the subsidiary sales
journal