Sababan Tax Notes

TAXATION LAW REVIEW NOTES - ATTY. FRANCIS J. SABABAN -

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COVERAGE OF TAXATION LAW REVIEW

I. Basic Principles of Constitutional

Limitations

a) Due process clause which

could be either substantive

due process and

procedural due process

clause

b) Equal protection clause

Read:

Ormoc Sugar Central vs.

City Treasurer 22 SCRA

603

Tiu vs. CA 301 SCRA 178

c) Article III sec. 1 of the

1987 Constitution – non-

impairment clause

d) Article III sec. 5 – freedom

of religion

e) Article III sec. 20 – non-

payment of poll tax

f) Article VI sec. 28 par. 2 –

flexible tariff clause

g) Article VI sec. 28 par. 3 –

exemption from real

property tax

Read:

Herrera vs. Quezon City 3

SCRA 186

Abra vs. Hernando 107 SCRA

104

Abra Valley vs. Aquino 52

SCRA 106

Philippine Lung Center vs.

Quezon City 433 SCRA 119

h) Article VI sec. 28 par. 4 –

qualified majority in tax

exemption

i) International double

taxation

CIR vs. Johnson 309 SCRA

87

j) Doctrine of equitable recoupment

k) Doctrine of Set-off or compensation in

taxation

Republic vs. Mambulao 4 SCRA 622

Domingo vs. Garlitos 8 SCRA 443

Francia vs. IAC 162 SCRA 753

Caltex vs. COA 208 SCRA 726

Philex vs. CIR 294 SCRA 687

II. Income Tax Law

Section 22-26 of the National Internal

Revenue Code

a) Read in the commentaries or magic

notes the different kinds of:

1. Income Taxpayers

2. Income Taxes

3. Sources of Income sec. 42 of NIRC

- Income Taxpayers

a) Individuals

b) Corporation

c) Estates and Trusts –

-Individuals are classified

Resident Citizens sec. 23 (A), sec

24 (A) (a)

Non-Resident Citizens sec 23 (B),

24 (A) (b) 22 (E)

Overseas Contract Workers Sec.

23 (C), 24 (A) (b)

Resident Aliens Rev. Reg. sec 5,

23 (D), 24 (A) (c)

Non-Resident Aliens Engaged in

trade or business sections 25 (A)

(1)

Non-Resident Aliens Not Engaged

in trade or business sec. 25 (B)

Aliens Employed in Multi-

National Corporations sec. 25 (C)

and Rev. Reg. 12-2001

Aliens Employed in Offshore

Banking Units sec 25 (D)

Aliens Employed in petroleum

Service Contractors &

Subcontractors sec. 25 (E)

-Corporate Income Taxpayers

Domestic Corporations sec. 23 (E),

and sec 27 of NIRC

Resident Foreign Corporations sec. 22

(H) and (28)A

Non-Resident Foreign Corporations

sec. 22 (1) and 28 (B)

-Estates and Trusts sec. 60-66 of NIRC

Different Kinds of Income Tax

1. Net Income Tax secs. 24 (A), 25

(A) (1), 26, 27 (A) (B) (C), 28 (A) up

to 3rd

par. 31 and 32 (A)

2. Gross Income Tax secs. 25 (B) first

part and 28 (B) (1)

3. Final Income Taxes sec. 57 (A)

4. Minimum Corporate Income Tax

of 2% of the Gross Income secs.

27 (E), 28 (A) (2)


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5. Improperly Accumulated Earnings

Tax of 10% of its taxable income

sec. 29 NIRC Rev. Reg. 2-2001

Optional Corporate Income Tax of

15% of its gross income sections

27 (A) 4th

to 10th

par. And 28 A(1)

but only up to the 4th

paragraph

-Proceed to section 42 and 23 of the

NIRC

NDC vs. Comm 151 SCRA 472

Comm. Vs. IAC 127 SCRA 9

-Then go to sec. 39 of NIRC

Calazans vs. Comm. 144 SCRA

664 RR 7-2003

-Then proceed to sec. 24 (A), 25 (A)

(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),

28 (A) (6) and sec 51 (D)

-Then continue to sec 24 B 1, 25

B,C,D,E; 27 (D) (1)

-Then go to se. 24 (B) (2) sec. 73

Comm. Vs. Manning 66 SCRA 14

Anscor vs. Comm. 301 SCRA 152

-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4);

28 (A) (7) (D); 32 B (7) (a)

- Then you go to sec. 24 C, 25A (3); 25 B,

C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5)

(C) RA 7717 sec. 127 NIRC

- Then you go to sec. 24 D (1); 25 (A) (3);

25 (B) last par. 27 (D) (5)

China Bank vs. Court of Appeals 336

SCRA ___; RR 7-2003

-Upon reading sec. 24 (D) (2) read RR 13-

1999

-Upon reading sec. 27 (A) go to sec. 22 (B)

Batangas vs. Collector 102 Phil. 822

Evangelista vs. Collector 102 Phil 140

Reyes vs. Comm. 24 SCRA 198

Ona vs. Bautista 45 SCRA 74

Obillos vs. Comm 139 SCRA 436

Pascua vs. Comm. 166 SCRA 560

Afisco vs. Comm. 302 SCRA 1

-Upon reading sec. 27 (C) of NIRC see RA

9337 then go to sec. 32 (B) (7) (b) of NIRC,

sec. 133 par (o) of LGC, sec. 154 of the LGC.

Pagcor vs. Basco 197 SCRA 52

Mactan vs. Cebu 261 SCRA 667

LRT vs. City of Manila 342 SCRA 692

-Proceed to sections 27 (D) (1), 27 (D) (2),

27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B)

(5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5)

(b)

Marubeni vs. CIR 177 SCRA 500

Proctor & Gamble vs. Comm 160 SCRA

560

Same case Proctor and Gamble on the

Motion for Reconsideration 204 SCRA

377

Wonder vs. Comm 160 SCRA 573

-Proceed to sec. 27(D) (5)

then sections 27 (E) and 28 (A) (2)

-Go to sec. 28 (A) (3) read RR 15-2002

-Go to sec. 28 (A) (4) see RA 9337

-Then see sec 28 (A) (5) see Marubeni vs.

Comm 177 SCRA 500

-Proceed to sec. 28(B) (5) (a) and sec 32 (B)

(7) (a)

Read Mitsubishi vs. Comm 181 SCRA

214

-Then go to sec. 29 and Rev. Reg. 2-2001

-Upon reading sec. 32 (B) 1 and 2, read sec.

85 par (e), sec. 108A and sec. 123 of the

NIRC

-Proceed to sec. 33 read Rev. Reg. 3-98

-then go to sec. 34 (A) (1) (a) see Aguinaldo

vs. Comm. 112 SCRA 136, RR 10-2002

-Under Sec. 34 (B) read RR 13-2000

-Upon reading sec. 49 read Banas vs. CA

325 SCRA 259 and Filipina vs. Comm. 316

SCRA 480

-Upon reading sec. 60-66, read Ona vs.

Bautista 45 SCRA 74

III. Estate Tax

-Sections 84-97 see sec. 104

-Upon reading sec. 85 (B) read Vidal

de Roces vs. Posadas 58 Phil. 108

Dizon vs. Posadas 57 Phil 465

-Sec. 85 (G) compare with sec. 100

-sec. 85 (H) compare with sec. 86 (C)

-Upon reading sec. 86 see RR 2-2003

-Upon reading sec. 94 see Marcos vs.

Sandiganbayan 273 SCRA 47

IV. Donors Tax Law

- Sections 98-104

- G and Cumulative methods of filing

donor’s tax returns sections 99 (A), 103

(A) (1) and RR 2-2003

- Sections 100 and 85 (9)

V. Value Added Tax

- Sections 105-115


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-Read RA 9337

-Read ABAKADA vs Comm.

GR 168056, Sept. 1, 2005

VI. Remedies Under the Internal Revenue

Code

-Sections 202-229

-RR 12-99

Phoenix vs Comm 14 SCRA 52

Basilan vs. Comm. 21 SCRA 17

Yabut vs. Flojo 115 SCRA 278

Union Shipping vs. Comm 185 SCRA

547

Comm. vs. TMX 205 SCRA 184

Comm. vs. Philamlife 244 SCRA

Comm. vs. CA & BPI 301 SCRA 435

BPI vs. Comm. 363 SCRA 840

-Prescription sections 203 and 222 of

NIRC, sec. 194 of the LGC, sec. 270 of

the LGC, sec. 1603 of Tariff and

Customs Code

-Protest sec. 228 of NIRC and RR 12-99

sec. 195 of LGC, 252 LGC, sec. 2313 of

Tariff & Customs Code and RA 7651

VII. Local Taxation

- Sections 128-196 of LGC

-Proceed 1st

to sec. 186 read Bulacan

vs. CA 299 SCRA 442

-Then proceed to 187

-Then to 151

-128

-Under sec. 133 (e) read Palma vs.

Malangas 413 SCRA 572

-Under 133 (h) read Pililia vs. Petron

198 SCRA 82

-Under 133 (i) read First Holdings Co.

vs. batangas City 300 SCRA 661

-Under 133 (l) read Butuan vs. LTO

322 SCRA 805

-Under 137 read sec. 193 of LGC

Misamis vs. Cagayan de Oro 181

SCRA 38

Reyes vs. San Pablo City 305

SCRA 353

Meralco vs. Laguna 306 SCRA

750

PLDT vs. Davao City 363 SCRA

522

- Co-relate sec. 139 and 147 of LGC

- Under sec. 140 of the LGC see sec.

125 of the Internal Revenue Code

- Under sec. 150 of the LGC read the

following:

Phil. Match vs. Cebu 81 SCRA 99

Allied Thread vs. Manila 133

SCRA 338

Sipocat vs. Shell 105 Phil. 1263

Iloilo Bottles vs. Iloilo City 164

SCRA 607

VIII. Real Property Tax

- Sections 197-294

- Sec. 235

LRT vs. Manila 342 SCRA 692

Cebu City vs. Mactan 261 SCRA 667

IX. Tariff & Customs Code

- Special Customs Duty sec. 301-304 of

TCC

- Regukar Customs Duty sec. 104 of TCC

- RA 7631

X. Court of Tax Appeals

- RA 1125 as amended by RA 9282


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Rules in the Classroom:

1. do not be absent

if you are absent, you have to

transcribe what happened in class when

you were out.

The next meeting you attend class,

consider yourself a resident of balic-balic,

babalikbalikan ka sa recit.

Exception: if you get married.

2. read the assignment. Wag zapote ang

aral.

3. holiday – make up class probably on a

Sunday

4. allowed to glance at your notes, wag lang

pahalata/garapal

5. materials:

codal

commentaries (any author will do)

magic notes (Sababan Lecture and

Q&A)

Book stand

Coverage of Taxation Law Review:

1. Basic Principles including Constitutional

Provisions

2. Income Tax

3. Estate Tax

4. Donor’s Tax

5. Remedies

6. Local Tax

7. Real Property Tax

8. Tariff and Customs Code

9. Court of Tax Appeals

10. VAT (although not part of the coverage of

the Bar Exams, questions have been asked

since 1999)

Title 5,6 and 7 are always included in the

coverage

No computations in the bar

There are only 1 or 2 questions in the Bar

about Basic Principles

What are the favorite topics in the Bar?

→ 12 questions on Income Tax

→ 8-10 questions on remedies

→ 8-10 questions allocated to the 7 topics

BASIC PRINCIPLES:

► Taxation is an inherent power of the

State.

Q: What do you mean by INHERENT?

A: The power to tax is not provided for in

the law, statute or constitution; it depends on

the existence of the state. No law or

legislation for the exercise of the power to

tax by the national government.

Q: Do local governments exercise this

inherent power?

A: No. Only the National Government

exercises the inherent power to impose

taxes.

Q: The taxing power of local governments is

a DELAGATED power. Delegated by whom?

A: Delegated by Congress through law in

case of autonomous regions, and delegated

by the constitution in case of LGUs not

considered an autonomous region.

► Cities, provinces and municipalities →

power granted under Art. X Sec. 5&6 of the

Constitution

► Autonomous Regions → power conferred

by Congress through law. Art. X Sec. 20 #2

of the Constitution is a non-self-executing

provision. Thus the power is granted by

Congress because said provision requires an

enabling law.

► Article X, Section 5 is self-executing thus

the power is granted by the constitution.

CONSTITUTIONAL LIMITATIONS

Due Process Clause

Q: why is it a limitation to the power to tax?

A: The due process clause as a limitation to

the power to tax refers both to substantive

and procedural due process. Substantive due

process requires that a tax statute must be

within the constitutional authority of

Congress to pass and that it be reasonable,

fair and just.

Procedural due process, on the other

hand, requires notice and hearing or at least

the opportunity to be heard.

Ex: On Substantive Due Process- when the

Congress passes a law exempting the 13th

month pay from tax but with the concurrence

only of the majority of the quorum – law

would be invalid because the Constitution

provides that any grant of tax exemption


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shall be passed with the concurrence of the

majority of all the members of the Congress.

Q: Does it follow that the adverse party must

always be notified?

A: No. As a rule, notice and hearing or the

opportunity to be heard is necessary only

when expressly required by law. Where there

is no such requirement, notice and the

opportunity to be heard are dispensable.

Ex. Before Oct. 1, 1995, you can secure a

TRO without notifying the adverse party. If

you are a suspect in a criminal case, you have

the right to have an opportunity to be heard

(if there is a law).

Before July 1, 1998, no notice need be

given to a party declared in default. After the

amendment, the party declared in default has

to be notified of subsequent proceedings

albeit without the right to participate therein.

In the case of a search warrant, the

person to be searched was not notified. The

person searched cannot claim that there was

a violation of due process because there is no

law requiring that the person to be searched

should be notified.

Regarding delinquent tax payers,

before levy, there must be notice.

REASON:

No provision of law requires notice to the

adverse party. If the adverse party is notified,

he may abscond. Thus, in adversarial

proceedings, in connection with procedural

due process, the adverse party need not be

notified all the time.

Equal Protection Clause

► As a rule, taxpayers of the same footing

are treated alike, both as to privileges

conferred and liabilities imposed. Difference

in treatment is allowed only when based on

substantial distinction. Difference in

treatment not based on substantial

distinction is frowned upon as “class

legislation.” This is violated when taxpayers

belonging to the same classification are

treated differently form one another; and

taxpayers belonging different classifications

are treated alike.

Requirements of Reasonable Classification:

1) There must be substantial distinctions

that make a real difference.

2) It must be germane or relevant to the

purpose of the law.

3) The distinction or classification must

apply not only to the present but also

to future situations.

4) The distinction must apply to

persons, things and transactions

belonging to the same class.

Ex: In one case, a tax ordinance was

assailed on the ground that the ordinance

failed to distinguish a worker form casual,

permanent or temporary. The SC said that

the ordinance was invalid because of the

failure to state the said classification.

In PEOPLE v. CAYAT the Supreme Court

mandated the requisites for a valid

classification.

TIU v. COURT OF APPEALS (301 SCRA 278)

Q: what happened in the city of Olonggapo?

A: The Congress, with the approval of the

President, passed RA 7227, an act

creating the conversion of the military

bases into other productive uses.

Q: Who was the President at that time?

A: President Ramos

Q: What were signed?

A: RA 7227, EO 97 and EO 97-A

→ The first led to the creation of the

Subic Special Economic Zone (SSEZ). The

latter set the limitations and boundaries

of the application of the incentives (no

taxes, local and national, shall be

imposed within SSEZ. In lieu thereof, 3%

of the Gross Income shall be remitted to

the national gov’t) to those operating

their businesses within the said area.

Q: Who are the petitioners and what was

their contention?

A: The petitioners are Filipino businessmen

who are operating their business outside

the secured area. The petitioners

contended that the law in question was

violative of their right to equal protection

of laws since they are also Filipino

businessmen.

H: The Supreme Court ruled that there

was no violation since the classification

was based on a substantial distinction.


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The element invoked here is element

#1 that there must be substantial

distinction in the classification of

taxpayers on whom the tax will be

imposed.

The Court observed that those foreign

businessmen operating within the

secured area have to give a larger capital

to operate in the secured area (to spur

economic growth and guarantee

employment).

ORMOC SUGAR CENTRAL vs. CIR

Q: What did the municipality of Ormoc do?

A: The City Council of Ormoc passed a

Municipal Ordinance No.4 imposing upon

any and all centrifugal sugar milled at the

Ormoc Sugar Central a municipal tax on

the net sale of the same to the United

States and other foreign countries.

Q: Did the owner accept this imposition?

A: No. the tax due was paid under protest,

then filed a complaint against the City of

Ormoc.

H: The Supreme Court said there was a

violation of the equal protection clause.

The element invoked here was element

#3, that it must be applicable to both

present and future circumstances. The

Supreme Court said that one must go to

the provision itself, in the case at bar,

there was a violation of element #3

because the law was worded in such a

way that it only applies to Ormoc Sugar

Central alone and to the exclusion of all

other sugar centrals to be established in

the future.

TAKE NOTE: People vs. Cayat

Freedom of Religion

It Involves 3 Things:

1. freedom to choose religion

2. freedom to exercise one’s religion

3. prohibition upon the national

government to establish a national religion

Q: Which one limits the power to tax?

A: Prohibition upon the national government

to establish a national religion because this

will require a special appropriation of money

coming from the national treasury which is

funded by the taxes paid by the people.

Non-impairment Clause

Q: What are the sources of obligation in the

Civil Code?

A: Law, Contracts, Quasi-Contracts, Delict,

Quasi-Delict.

Q: What is the obligation contemplated in

this limitation?

A: Those obligations arising from contracts.

General Rule: The power to tax is pursuant

to law, therefore, the obligation to pay taxes

is imposed by law, thus the non-impairment

clause does not apply.

► You have to determine first the source of

obligation:

1. If the law merely provides for the

fulfillment of the obligation then the law is

not the source of the obligation.

2. When the law merely recognizes or

acknowledges the existence of an obligation

created by an act which may constitute a

contract, quasi-contract, delict, and quasi-

delict, and its only purpose is to regulate

such obligation, then the act itself is the

source of the obligation, not the law.

When the law establishes the obligation

and also provides for its fulfillment, then the

law itself is the source of the obligation

Q: So, in what instance does the non-

impairment of contracts clause becomes a

limitation to the power to tax?

A: it is when the taxpayer enters into a

compromise agreement with the government.

In this instance, the obligation to pay the tax

is now based on the contract between the

taxpayer and the government pursuant to

their compromise agreement.

Take Note: the requirement for its

application: the parties are the government

and private individual.

Poll Tax

Q: What is a poll tax?

A: It is a tax of a fixed amount on individuals

residing within a particular territory, whether

citizens or not, without regard to their

property or to the occupation in which they

may be engaged.


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It is a tax imposed on persons without

any qualifications. persons may be allowed to

pay even if they are not qualified as to age or

property ownership.

Example of Poll Tax: Community Tax

Certificate under Section 162 of the Local

Government Code.

Q: Why is it a limitation to the power to tax?

A: It is a limitation to the power to tax

because Congress is prohibited from passing

a law penalizing with imprisonment a person

who does not pay poll tax. (funds for sending

a person to jail is taken from the national

treasury which is funded by the taxes paid by

the people)

Exemption from payment of Real Estate

Tax

Q: What is the requirement for exemption

from payment of real property tax under the

1935, 1973 and 1987 Constitution?

A: Art. 6, Sec 22 (3), 1935 Constitution –

Cemeteries, churches and parsonages or

convents appurtenant thereto, and all lands,

buildings and improvements used

EXCLUSIVELY for RELIGIOUS, CHARITABLE or

EDUCATIONAL purposes shall be exempt for

taxation.

Art. 8, Sec. 17 (3), 1973 Constitution –

charitable institutions, churches, parsonages

or convents appurtenant thereto, mosque,

and non-profit cemeteries, and all lands,

buildings, and improvements ACTUALLY,

DIRECTLY, and EXCLUSIVELY used for

RELIGIOUS and CHARITABLE purposes shall

be exempt from taxation.

Art. 6, Sec. 28 (3), 1987 Constitution –

charitable institutions, churches, and

parsonages or convents appurtenant thereto,

mosque, non-profit cemeteries, and all lands,

buildings, and improvements ACTUALLY,

DIRECTLY and EXCLUSIVELY used for

RELIGIOUS, EDUCATIONAL and CHARITABLE

purposes shall be exempt from taxation.

HERRERA v. QC-BOARD OF ASSESSMENT

(1935 Constitution)

Q: What is involved in this case?

A: A charitable institution, St.

Catherine’s Hospital. The hospital was

previously exempt from taxation until it

was reclassified and subsequently

assessed for the payment of real property

tax.

The contention of the respondent is

that the hospital was no longer a

charitable institution because it accepts

pay-patients, it also operates a school for

midwifery and nursing, and a dormitory.

Since it is not exclusively used for

charitable purposes it is not exempt from

taxation.

H: The Court ruled that petitioner is not

liable for the payment of real estate

taxes. It is a charitable institution, thus

exempt from the payment of such tax.

The hospital, schools and dormitory

are all exempt fro taxation because they

are incidental to the primary purpose of

the hospital.

NOTE: this arose during the 1935

Constitution.

“Exempted by virtue of incidental

purpose” was merely coined by the Supreme

Court. Thus, it does not apply to other taxes

except Real Estate Tax.

PROVINCE OF ABRA v. HERNANDO


A A religious institution was involved in

this case, the Roman Catholic Bishop of

Bangued, Inc. (bishop filed declaratory

relief after assessed for payment of tax).

The respondent judge granted the

exemption from taxes of said church

based only on the allegations of the

complaint without conducting a

hearing/trial. The assistant prosecutor

filed a complaint contending that

petitioner was deprived of its right to due

process.

SC: the Court ordered that the case be

remanded to the lower court for further

proceedings. The Court observed that the

cause action arose under the 1973

Constitution, not under the 1935

Constitution (note the difference). Tax

exemption is not presumed. It must be

strictly construed against the taxpayer and

liberally construed in favor of the

government.

ABRA VALLEY COLLEGE INC. v. AQUINO



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A: An educational institution is involved

in this case. The ground floor of the

school was leased to Northern Marketing

Corp., a domestic corporation. The 2nd

floor thereof was used as the residence of

the school director and his family.

The Province of Abra now contends

that since the school is not exclusively

used for educational purposes, the school

is now liable to pay real estate tax.

H: The Court held that the school is

PARTIALLY liable for real estate tax.

1. Residence – exempt by virtue of

incidental purpose; justified because

it is necessary.

2. Commercial – not exempt because it

is not pursuant to the primary

purpose; not for educational

purposes.

Q: is the doctrine in the case of Herrera the

same with this case?

A: NO. in the Herrera case, the exemption

was granted to all the real property (hospital,

school and dorm). But in this case, the

Supreme Court made a qualification. The

Supreme Court said it depends.

NOTE: both cases arose under the 1935

Constitution despite having been decided in

1988.

Q: At present, do we still apply the

exemption from tax by virtue of the Doctrine

of Incidental Purpose?

A: Not anymore. The cause of action in said

case arose under the 1935 Constitution and

it does not apply to the provisions of the

1987 Constitution.

PHILIPPINE LUNG CENTER v. QUEZON CITY


A: A charitable institution, a hospital. It

is provided in the charter of the Lung

Center of the Philippines is a charitable

institution. However, part of its building

was leased to private individuals and the

vacant portion of its lot was rented out to

Elliptical Orchids. Respondent contends

that since the hospital is not used

actually, directly, an d exclusively for

charitable purposes, it is liable to pay real

estate taxes.

H: The Supreme Court held that the

petitioner is liable to pay tax for those

parts leased to private individuals for

commercial purposes. For the part of the

hospital used for charitable purposes

(whether for pay or non-pay patients),

petitioner is exempt from payment of real

estate tax.

NOTE: petitioner contended that the profits

derived from the lease of its premises were

used for the operation of the hospital. The

Court held that the use of the profits does

not determine exemption, rather it is the use

of the property that determines exemption.

The case of Herrera does not apply

because said case arose under the 1935

Constitution and the present case arose

under the 1987 Constitution. The

requirements for exemption are different. In

the 1935 Constitution, the property must be

EXCLUSIVELY used for religious, educational

or charitable purposes. Under the 1987

Constitution, the property must be used

ACTUALLY, DIRECTLY, and EXCLUSIVELY for

religious, educational and charitable

purposes.

Q: Was the doctrine laid down in Abra Valley

affirmed in the Lung Center case?

A: Yes. The Supreme Court unconsciously

applied a doctrine laid down by the 1935

Constitution. The Supreme Court reiterated

the ruling in the Abra Valley case which arose

under the 1935 Constitution. The Supreme

Court made a qualification, it held that it

depends on whether or not the use is

incidental to the primary purpose of the

institution.

NOTE: at present, “exemption from tax by

virtue of incidental purpose” is not applicable

to all taxes including real estate tax.

COMM v. SC JOHNSON and SONS, INC.

Important :

1. international double taxation

2. importance of international tax treaty

3. implication of most favored nation

clause

Q: What is the corporation involved in this

case?

A: A domestic corporation (DC).


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SC Johnson and Sons, Inc. entered

into a license agreement with SC Johnson

and Sons U.S.A (Non-Resident Foreign

Corp, NRFC) whereby the former was

allowed to use the latter’s trademark and

facilities to manufacture its products. In

return, the DC will pay the NRFC royalties

as well as payment of withholding tax.

A case for refund of overpaid

withholding tax was filed. Apparently, the

DC should have paid only 10% under the

most favored nation clause.

H: The Supreme Court coined the term

International Double Taxation or

International Juridical Double Taxation.

Q: What prompted the SC to coin such

term?

A: Because a single income (tax royalties

paid by a DC) was subjected to tax by two

countries, the Philippines income tax and

the U.S. tax.

International Juridical Double Taxation

applies only to countries where the tax

liabilities of its nationals are imposed on

income derived from sources coming

from within and without.

Q: Is there an instance where

international double taxation does not

apply?

A: Yes. If it involves nationals of

countries wherein the tax liability is

imposed only from income derive from

sources within and not including those

derived from sources without.

(Ex: Switzerland)

→ The controversy in the case at bar

involves the income tax paid in the

Philippines.

After paying 25%, the US firm

discovered that they are entitled to 10%

under the most favored nation clause.

The question is: was the tax paid under

similar circumstances with that of the RP-

West Germany Treaty?

The CTA and Court of Appeals ruled

that it was paid under similar

circumstances. The phrase referred to the

royalties in payment of income tax. The

Supreme Court ruled that the lower

courts’ interpretation of the phrase was

erroneous. Rather, the phrase applies to

the application of matching credit.

Q: What is matching tax credit?

A: RP-Germany Treaty provides for that

20% of the tax paid in the Philippines

shall be credited to their tax due to be

paid in Germany.

The 10% does not apply because there

is no matching credit. Thus, there is no

similarity in the circumstances.

EQUITABLE RECOUPMENT AND DOCTRINE

OF SET-OFF

Equitable Recoupment

This doctrine provides that a claim for

refund barred by prescription may be allowed

to offset unsettled tax liabilities. This is not

allowed in this jurisdiction, because of

common law origin. If allowed, both the

collecting agency and the taxpayer might be

tempted to delay and neglect the pursuit of

their respective claims within the period

prescribed by law.

Q: What is the doctrine of Equitable

Recoupment?

A: When the claim for refund is barred by

prescription, the same is allowed to be

credited to unsettled tax liabilities.

(Sir gives an illustration found in page 3 of

magic notes)

Q: Is the rule absolute? Reason

A: Yes, the rule is absolute. The rationale

behind this is to prevent the taxpayer and

government official from being negligent in

the payment and collection of taxes.

(furthermore, you have to be honest for this

to work, hence, the government is preventing

corruption)

There is no exception at all otherwise, the

BIR would be flooded with so many claims.

Set-off

Presupposes mutual obligation between

the parties. In taxation, the concept of set-

off arises where a taxpayer is liable to pay

tax but the government, for one reason or

another, is indebted to the said taxpayer.

Q: What do you mean by SET-OFF?

A: This presupposes mutual obligations

between the parties, and that they are mutual


11

creditors and debtors of each other. In

taxation, the concept of taxation arises where

a taxpayer is liable to pay taxes but the

government, for one reason or another, is

INDEBTED to said taxpayer.

REPUBLIC v. MAMBULAO LUMBER CO.

Q: What is the liability of Mambulao?

A: They are liable to pay forest charges

(under the old tax code).

NOTE: under our present tax code, the NIRC,

we do not have forest charges as the

same was abolished by President Aquino.

Q: What did the lumber company do?

A: The lumber company claimed that

since the government did not use the

reforestation charges it paid for

reforestation of the denuded land covered

by its license, the amount paid should be

reimbursed to them or at least

compensated or applied to their liability

to pay forest charges.

H: The Court ruled that the reforestation

charges paid is in the nature of taxes.

The principle of compensation does

not apply in this case because the parties

are not mutually creditors and debtors of

each other. A claim for taxes is not a

debt, demand, contract or judgment as is

allowed to be set-off under the statute of

set-off which is construed uniformly, in

the light of public policy, to exclude the

remedy in connection or any

indebtedness of the State or any

municipality to one who is liable for

taxes. Neither are they a proper subject

for recoupment since they do not arise

out of contract or the same transaction

sued on.

General Rule: no set-off is admissible against

demands for taxes levied in general or local

governmental purposes.

Reason: Taxes are not in the nature of

contracts or debts between the taxpayer and

the government, but arises out of a duty to,

and are positive acts of the government to

the making and enforcing of which, the

consent of the individual is not required.

Taxes cannot be the subject matter of

compensation.

DOMINGO v. GARLITOS

Q: What is being collected in this case?

A: Estate and inheritance taxes.

NOTE: we do not have inheritance taxes

anymore because the same was abolished

by Lolo Macoy.

Q: Who is the administratrix?

A: The surviving spouse.

Q: What did the surviving spouse do?

A: The surviving spouse suggested that

the compensation to which the decedent

was entitled to as an employee of the

Bureau of Lands be set-off from the estate

and inheritance taxes imposed upon the

estate of the deceased.

H: Both the claim of the government for

estate and inheritance taxes and the

claim of the (intestate) for the services

rendered have already become overdue

hence demandable as well as fully

liquidated, compensation therefore takes

place by operation of law, in accordance

with Art. 1279 and 1290 of the Civil Code

and both debts are extinguished to the

concurrent amount.

Compelling Reason: Congress has

enacted RA 2700, allocating a certain sum

of money to the estate of the deceased.

FRANCIA v. IAC

Q: This happened in what city?

A: Pasay City

Q: What is the tax being collected? Who is

collecting the same?

A: Payment for real estate taxes for the

property of Francia. It appears that

petitioner was delinquent in the payment

of his real estate tax liability. The same is

being collected by the Treasurer of Pasay.

Q: What is the suggestion of petitioner?

A: Suggested that the just compensation

for the payment of his expropriated

property be set-off from his unpaid real

estate taxes. (the other part of his

property was sold at a public auction)

H: The factual milieu of the case does

not justify legal compensation.

The Court has consistently ruled that

there can be no off-setting of taxes

against the claims that the taxpayer may

have against the government. A taxpayer

cannot refuse to pay a tax on the ground

that the government owes him an

amount.


12

Internal Revenue taxes cannot be the

subject of compensation because the

government and the taxpayer are not

mutually creditors and debtors of each

other, and a claim for taxes is not a debt,

demand, contract or judgment as is

allowed to be compensated or set-off.

Furthermore, the payment of just

compensation was already deposited with

PNB Pasay, and the taxes were collected

by a local government, the property was

expropriated by the national government.

(diff parties, not mutual creditors and

debtors of each other.)

CALTEX PHIL v. COA

Q: What is being collected?

A: Caltex’s contribution to the Oil Price

Stabilization Fund (OPSF).

COA sent a letter to Caltex asking the

latter to settle its unremitted collection

stating that until the same is paid, its

claim for reimbursement from the OPSF

will be held in abeyance.

Q: Why is Caltex entitled to reimbursement?

A: Because of the fluctuation of the oil

prices in the Middle East and Europe.

Caltex wanted to off-set its unremitted

collection from its reimbursements.

H: The Court did not allow the set-off,

and reiterated its ruling in the case of

Mambulao and Francia. Furthermore, RA

6952 expressly prohibits set-off from the

collection of contributions to the OPSF.

The Court likewise stated that Caltex

merely acted as agent of the government

in collecting contributions for the OPSF

because such is being shouldered by the

consumers when they purchase

petroleum products of oil companies,

such as Caltex.

Taxation is no longer envisioned as a

measure merely to raise revenues to

support the existence of the government.

Taxes may be levied for regulatory

purposes such as to provide means for

the rehabilitation and stabilization of a

threatened industry which is vested with

public interest, a concern which is within

the police power of the State to address.

PHILEX MINING CORP v. COMM

The petitioner is liable for the payment of

excise taxes, which it wanted to be set-off

from its pending claim for a VAT Input

credit/refund.

The Court did not allow set-off. Taxes

cannot be the subject of compensation for

the simple reason that the government and

taxpayer are not mutual creditors and

debtors of each other. Taxes are not debts.

Furthermore, in the instant case, the

claim for VAT refund is still pending. The

collection of a tax cannot await the results of

a lawsuit against the government.

DOUBLE TAXATION

Double taxation is allowed because there

is no prohibition in the Constitution or

statute.

Obnoxious double taxation is the

synonym of double taxation.

Elements of Double Taxation:

1) Levied by the same taxing authority

2) For the same subject matter

3) For the same taxing period and

4) For the same purpose

There is no double taxation if the tax is

levied by the LGU and another by the national

government. The two (2) are different taxing

authorities.

LGUs are expressly prohibited by the

provisions of RA 7160 or the LGC of 1991

from levying tax upon: (1) the National

Government; (2) its agencies and

instrumentalities; (3) LGUs (sec.113(o)).

The National Government, pursuant to

the provisions of RA 8424 of the Tax Reform

Act of 1997, can levy tax upon GOCCs,

agencies and instrumentalities (Section 27

c)), although income received by the

Government form:

1) any public utility or

2) the exercise of any essential

governmental function

is exempt from tax.

KINDS OF INCOME TAXPAYERS

Q: Generally, how many kinds of income

taxpayers are there?

A: Under section 22A of NIRC, there are

three (3), namely:


13

1. individual;

2. corporate;

3. estate and trust.

I. INDIVIDUAL TAXPAYER

Q: How many kinds of individual taxpayers

are there?

A: There are seven (7). Namely:

1. Resident Citizen (§23A and 24A);

2. Nonresident Citizen (§23B and 24A);

3. OCW and Seaman (§23C and 24A);

4. Resident Alien (§22F, 23D and 24A);

5. Nonresident Alien Engaged in Trade

or Business (§22G, 23D and 25A)

6. Nonresident Alien NOT Engaged in

Trade or Business (§22G, 23D and

25B)

7. Aliens Engaged in Multinational

Companies, Offshore Banking Units,

Petroleum Service Contractors

(§25C,D and E)

Resident Citizen (RC)

Q: How many types of RC?

A: There are two (2), namely:

1. RC residing in the Philippines; and

2. Filipino living abroad with no

intention to reside permanently

therein.

Q: If you are abroad, and you have the

intention to permanently reside therein, can

you still be considered a RC?

A: Yes. If such intention to permanently

reside therein was not manifested to the

Commissioner and the fact of your physical

presence therein, you may still be considered

a RC.

OCW and Seamen

OCW was used and not OFW in the CTRP,

because the classification shall cover only

those Filipino citizens working abroad with a

contract. TNTs are not covered.

A Filipino seaman is deemed to be an

OCW for purposes of taxation if he receives

compensation for services rendered abroad

as a member of the complement of a vessel

engaged exclusively in international trade.

Consequently, if he is not a member of

the complement or even if he is but the

vessel where he works is not exclusively

engaged in international trade, said seaman

is not deemed to be an OCW. He is either a

RC or a NRC depending on where he stays

most of the time during the taxable year.

If he stays in the Philippines most of the

time during the taxable year, he is

considered a RC, otherwise, a NCR.

If you are a seaman in the US Navy, you

are not the one being referred to.

The importance of ascertaining whether

or not a seaman is a RC or a NRC, is that if he

is a RCm he is taxable on ALL income derived

from all sources within and without. If he is a

NRC, he is taxable only on income derived

form sources within the Philippines.

Q: What is the significance of using OCW?

A: It only covers Filipinos who works abroad

with a contract. It does not cover TNTs.

Q: What is the status of a TNT?

A: Since they are not covered by this

classification, they are considered RC

because they work abroad without a contract

and they have not manifested their intention

to permanently reside abroad. (distinguish

from an immigrant)

Requirements for a seaman to be considered

an OCW:

1. must be a member of the compliment of

a vessel;

2. the vessel must be exclusively engaged in

international trade or commerce.

Resident Alien (RA)

An individual whose residence is within

the Philippines and who is not a citizen

thereof.

Intention to reside permanently in the

Philippines is not a requirement on the part

of the alien.

The requirement under RR#2 is that he is

actually present in the Philippines, neither a

sojourner, a traveler, not a tourist.


14

Whether he’s a transient or not is

determined by his intent as to the nature and

length of his stay.

Q: Is the intention to permanently reside in

the Philippines necessary?

A: No, so long as he is not a sojourner,

tourist or a traveler.

Non-Resident Alien Engaged in Trade or

Business (NRAETB)

A foreigner not residing in the Philippines

but who is engaged in trade or business here.

RR 2-98 has expanded the coverage of

the term, “engaged in trade or business” to

include the exercise of a profession.

Furthermore, by the express provision of the

law, a NRA who is neither a businessman nor

a professional but who come to and stays in

the Philippines for an aggregate period of

more than 180 days during any calendar year

is deemed to a NRAETB in the Philippines.

Q: How many types?

A: There are three (3) types, namely:

1. NRA engaged in trade or business

(25a1);

2. NRA who practices a profession

(Revenue Regulation 2-98);

3. foreigner who comes and stays in the

Philippines for an aggregate period of

MORE THAN 180 days during any

calendar year.

Q: What is the status of a Chinese who stays

here for 200 days in 2001?

A: NRAETB

Q: Suppose he stayed here for 100 days in

2000 and another 100 days in 2001?

A: He is not a NRAETB. To be considered as

such, he must stay for an aggregate period of

more than 180 days during a calendar year.

Q: What is the income tax applicable to said

taxpayer?

A: Net Income Tax (NIT) on all its income

derived form sources within the Philippines.

Non-Resident Alien Not Engaged in

Trade or Business

Q: How many kinds?

A: Only one.

The reason why the NRANETB are

included in any income tax law is because

they may be deriving income form sources

within the Philippines.

They are subject to tax based on their

GROSS INCOME received form all sources

within the Philippines.

Aliens Employed by Regional or Area

Headquarters & Regional Operating

Headquarters of Multinational

Companies/ Aliens Employed by

Offshore Banking Units (Aliens

Employed by MOP)

► Status: either a RA or NRA depending on

their stay here in the Philippines.

► Their status may either be RA or NRA

because Section 25 C and D does not

distinguish.

► Liable to pay 15% from Gross Income

received from their employer

► Income earned from all OTHER sources

shall be subject to the pertinent income tax,

as the case may be.

Aliens Employed in Multinational and

Offshore Banking Units

Q: How are they classified?

A: If they derived income from other sources

aside from their employer, you may classify

them either as RA, NRAETB, or NRANETB.

Aliens Employed in Petroleum Service

Contractors and Subcontractors

► Status: ALWAYS NRA. If they derive

income from other sources, such income

shall be subject to the pertinent income tax,

as the case may be.

► Income derived or coming from their

employer shall be subject to a tax of 15% of

the gross.

II. CORPORATE TAXPAYER


15

1. Domestic Corporation (DC) – created

or organized under Philippine laws.

2. Resident Foreign Corporation (RFC) –

corporation created under foreign

law, and engaged in trade or

business.

3. Nonresident Foreign Corporation

(NRFC) – created under foreign law,

and NOT engaged in trade or

business.

Q: What are deemed corporations under the

NIRC?

A: The term corporation shall include

partnerships, no matter how created or

organized, joint stock companies, joint

accounts, associations, or insurance

companies, but DOES NOT includes general

professional partnerships and a joint venture

or consortium formed of the purpose of

undertaking construction projects or

operations pursuant to or engaging in

petroleum, coal, geothermal or consortium

agreement under a service contract with the

Government.

1. Partnerships and others no matter how

created

2. Joint Stock Companies

3. Joint Accounts

4. Associations

5. Insurance Companies

CIR v. COURT OF APPEALS

The phrase no “matter how created or

organized” was interpreted.

Even if the partnership was pursuant to

law or not, whether nonstick, nonprofit, it is

still deemed a corporation.

Reason: because of the possibility of

earning profits form sources within the

Philippines.

Q: Are partnerships always considered

corporations? Is there no exception?

A: General Rule: a partnership is a

corporation.

Exception: General Professional Partnerships

(GPP)

Q: What is a GPP?

A: It is a partnership formed by persons for

the sole purpose of exercising their

profession, no part of the income of which in

derived from any trade or business. (what if a

partner has other businesses not related to

the GPP? > read section 26 quoted hereunder)

Two (2) Kinds of GPP formed for:

1) Exercise of a profession – not a

corporation; exempt from Corporate

Income Tax (CIT)

2) Exercise of a profession and engaged

in trade or business – a corporation;

subject to CIT

TAN v. DEL ROSARIO

general rule: a partnership is a

corporation

exception: GPP

exception to the exception: if the GPP

derives income from other sources, it is

considered a corporation, thus liable to pay

corporate income tax.

Rule:

1. if the income is derived from other

sources and such income is subject to NET

INCOME TAX, it is not exempt and it is

considered a corporation.

2. if the income is derived from other

sources and such income is subject to FINAL

INCOME TAX, it is still EXEMPT and it is not

deemed a corporation. ( separate return for

this. It will not reflect in the GPP’s ITR)

» This is pursuant to the fact that FIT will

not reflect in the ITR of the GPP since the

withholding agent is liable for the payment of

the FIT.

Q: What is the importance of knowing

whether the corporation is exempt or not?

A: To determine their tax liability. This is

important to determine the tax liability of the

individual partners of the GPP.

► Section 26 (1st

paragraph) provides: “a

GPP as such shall not be subject to the Net

Income Tax…” however, “…persons engaging

in business as partners in a GPP shall be

liable for income tax only in their separate

and individual capacities.”

In short, each partner will be paying NIT,

and the distributive shares they will be

receiving from the net income of the GPP will

be included in the gross income of the

partner.


16

Q: If the GPP is deemed a corporation, will the

partners have to pay for the income tax?

A: No. as far as the share of the GPP is

concerned, it is considered a taxable dividend

which is subject to FIT.

Q: Is a joint venture a corporation?

A: Generally, yes, it is a corporation.

Q: Corporation X and Corporation Y joined

together. How many corporations do we

have?

A: Three, namely Corporation X, Y, and X+Y.

the joint venture has a separate and distinct

personality from the two corporations.

Q: When is a joint venture not considered a

corporation?

A: It is not deemed a corporation when it is

formed for the purpose of undertaking a

(“construction?) project or engaging in

petroleum, gas, and other energy operations

pursuant to “?” or consortium agreement

under a service contract with the

government.

Domestic Corporation

Is one created or organized in the

Philippines or under its laws.

Taxable on all income derived from

sources within or without the Philippines.

Resident Foreign Corporation

Foreign corporations engaged in trade or

business in the Philippines.

Taxable for income derived within the

Philippines.

Non-Resident Foreign Corporation

Foreign corporations not engaged in

trade or business in the Philippines.

Taxable for income derived within the

Philippines.

Both DC and RFC are liable for the

payment of the following:

1) NIT – Net Income Tax

2) FIT – Final Income Tax

3) 10% income tax on corporations with

properly accumulated earnings.

4) MCIT (Minimum Corporate Income

Tax) of 2% of the Gross Income

5) Optional Corporate Income Tax of

15% of the Gross Income

A NRFC is liable for payment of the ff:

1) GIT- Gross Income Tax

2) FIT – Final Income Tax

III. TRUST AND ESTATE

Q: How many for each?

A: Seven (7) kinds for each because the trust

or estate will be determined by the status of

the trustor, grantor, or creator, or of the

decedent.

The status of the estate is determined by

the status of the decedent at the time of his

death; so an estate, as an income taxpayer

can be a citizen or an alien.

When a person who owns property dies,

the following taxes are payable under the

provision of income tax law:

1) Income Tax for Individuals – to cover

the period beginning January to

the time of death.

2) Estate Income Tax – if the property is

transferred to the heirs.

3) If no partition is made, Individual or

Corporate Income Tax, depending

on whether there is or there is no

settlement of the estate. If there

is, depending on whether the

settlement is judicial or

extrajudicial.

Judicial Settlement

1) During the pendency of the

settlement, the estate through the

executor, administrator, or heirs is

liable for the payment of ESTATE

INCOME TAX (Sex, 60 (3)).

2) If upon the termination of the judicial

settlement, when the decision of the

court shall have become final and

executory, the heirs still do not divide

the property, the following

possibilities may arise:


17

a) If the heirs contribute to the

estate money, property or industry

with the intention to divide the

profits between and among

themselves, an UNREGISTERED

PARTNERSHIP is created and the

estate becomes liable for payment

of CIT (Evangelista vs. Collector

(102 Phil 140))

b) If the heirs without contributing

money, property or industry to

improve the estate, simply divide

the fruits thereof between and

among themselves, a CO-

OWNERSHIP is created and

Individual Income Tax (IIC) is

imposed on the income derived by

each of the heirs, payable in their

separate and individual capacity

(Pascual vs. COMM (165 scra 560)

and Obillos vs. COMM (139 SCRA

436))

Extrajudicial Settlement and if NO Settlement

Some possibilities may arise. The income

tax liability depends on whether or not the

unregistered partnership or co-ownership is

created.

Trust

Trusts can be created by will, by contract

or by agreement. The status of a trust

depends upon the status of the grantor or

trustor or creator of the trust. Hence, a trust

can also be a citizen or an alien.

Q: Where the trust earns income and such

income is not passive, who among the parties

mentioned is liable for payment of income

tax thereon?

A: The TRUST itself, through the trustee or

fiduciary but only if the trust is irrevocable.

If it is revocable, or for the benefit of the

grantor, the liability for the payment of

income tax devolves upon the trustor himself

in his capacity as individual taxpayer.

KINDS OF INCOME TAX

Q: How many kinds of income tax?

A: There are Six (6), namely:

1. Net Income Tax (NIT);

2. Gross Income Tax (GIT);

3. Final Income Tax (FIT);

4. Minimum Corporate Income Tax of

2% of the Gross Income (MCIT)

5. Income Tax on Improperly

Accumulated Earnings subject to 10%

of the Taxable Income;

6. Optional Corporate Income Tax of

15% on the Gross Income

I. NET INCOME TAX

Q: what is the formula?

A: Gross Income – Deductions and Personal

Exemptions = Taxable Income

Taxable Income x Tax Rate = Net

Income

Taxable Net Income – Tax Credit =

Taxable Net Income Due

Net Income means Gross Income less

deductions and

Formula:

GI

- deductions

Net Income

x Tax Rate

Income Tax Due

Q: What is the rate?

A: Individual: 32%

Corporation: 35%

NOTE: the formula allows for deduction,

personal exemptions and tax credit.

Q: What are the other terms for NIT?

A: NIRC:

a. taxable income

b. gross income (wlang kasunod)

→ only income tax from improperly

accumulated earnings does not use this term.

1. CFA: “to be included in the gross

income”

2. Revenue Regulations and Statutes:

a. ordinary way of paying income

tax;

b. normal way of paying income tax .

Characteristics:


18

Q: Who are not liable to pay NIT?

A: 1. NRANETB (liable for GIT);

2. NRFC (GIT also);

3. With certain modifications, AEMOP, if

they derive income from other

sources;

Q: Is the taxable net income subject to

withholding tax?

A: It is subject to withholding tax if the law

says so.

Q: What if the law is silent?

A: If the law is silent, it is not subject to

withholding tax.

Q: What is another term for withholding tax?

A: It is also known as the creditable

withholding tax system under the income tax

law.

Q: Do we have to determine if there is an

actual gain or loss?

A: Yes because the formula for deductions,

etc.

Q: If you fail to pay, will you be held liable?

A: Yes, you will be held liable.

II. GROSS INCOME TAX (GIT)

Q: What is the formula?

A: Gross Income x Rate

Q: How many taxpayers pay by way of the

gross?

A: There are two (2)

individual - NRANETB

corporation - NRFC

NOTE: the formula does not allow any

deduction, personal exemptions and tax

credit.

Characteristics:

► NRANETB and NRFC, though not engaged

in trade or business, are liable to pay by way

of the gross for any income derived in the

Philippines. While not engaged in trade or

business, there is a possibility that they may

earn income in the Philippines.

Q: Is this subject to withholding tax?

A: Yes, it is subject to withholding tax

because the persons liable are foreigners.

This rule is ABSOLUTE

NOTE: there are two (2) ways of paying taxes

depending on which side of the bench you

are.

III. FINAL INCOME TAX (FIT)


A: (Each Income) x (Particular Rate)

Unlike in the gross income tax where you

add all the income from all the sources and

multiply the sum thereof by the rate of 25%

or 35%, as the case may be, in final income

tax, you cannot join all the income in one

group because each income has a particular

rate.


A: 35% as the case may be.

NOTE: like GIT, the formula does not allow

deductions, personal exemptions, and tax

credit.

Characteristics:

Q: Who are liable to pay FIT?

A: All taxpayers are liable to pay FIT

provided the requisites for its application are

present.

Q: Do you still have to pay NIT?

A: No. if you are liable for FIT, no need to

pay NIT or else there will be double taxation.

NOTE: as time passed by, the number of FIT

increased.

► before 1979 – proceeds from the sale of

real property not exempt, it is subject to NIT

or GIT, as the case may be.

after 1979 – capital gains tax. Proceeds

from the sale of real property is exempt.

Q: If you fail to pay, will you be liable?

A: No. the withholding agent is liable to pay

FIT.

► Case of Juday, Richard and Regine


19

► For one to be liable for the payment of

NIT, the income must be derived on the basis

of an employer – employee relationship.

Employer – Employee Relationship

(3 Cs):

1. contract;

2. control;

3. compensation;

► However, in the case of celebrities, there

is no employer – employee relationship, they

are merely receiving royalties. Royalties are

subject to final withholding tax, thus the

agent is liable to pay. (so, distinguish nature

of income, whether royalty or compensation)

RULE:

1. for NIT, whether or not subject to

Creditable Withholding Tax (CWT), the

taxpayer is always liable if he fails to

pay.

2. for GIT and FIT, absolute liability to

pay is upon the withholding agent.

Q: Why is it that the rate of withholding is

always lower, and why is it that the rate of

GIT and FIT is always equal?

A:

1. NIT allows deductions;

2. GIT and FIT do not allow deductions.

Q: Do you have to determine whether there

is an actual loss or gain?

A: No need to determine because the

formula does not allow deductions. Gain is

presumed. No liability for final withholding

tax except for the sale of shares of stock. (?)

IV. MINIMUM CORPORATE INCOME TAX

(MCIT)


A: Gross Income x 2%

Q: Who pays this tax?

A: DC and RFC only.

Q: May it be applied simultaneous with NIT?

A: No. there must be a computation of the

NIT first then apply which ever is higher. The

MCIT is paid in lieu of the NIT.

Reason: to discourage corporations from

claiming too many deductions.

V. OPTIONAL CORPORATE INCOME TAX

Q: Under what section is this found?

A: Section 27A 4th

paragraph and Section 28

A(1) 4th

paragraph.

Q: Is this applicable now?

A: No. this is not yet implemented.

Q: To what kind of taxpayer does this apply?

A: To DC and RFC.

Q: What kind of taxes are applicable or

imposed upon the 1st

five individual

taxpayers?

A: Only two (2) kinds are applicable out of

the six (6) kinds of income taxes.

1. NIT;

2. FIT;

Q: What kind of income tax will apply to

AEMOP?

A: Generally, only one kind, 15% FIT with

respect to income derived from their

employer.

Income from other sources:

1. Determine the status of the AEMOP;

a. NIT

b. FIT

2. NRANETB

a. GIT

b. FIT

Q: What kind of income tax applies to DC?

A: Only four (4) kinds will apply out of the

six (6)

1. NIT

2. FIT

3. MCIT

4. Improperly Accumulated Earnings

Q: May all of these be applied

simultaneously?

A: No. only the NIT, FIT and Improperly

Accumulated Earnings be applied

simultaneously. NIT and MCIT cannot be

applied simultaneously. Only one will apply,

whichever is higher between the two.

Q: What kind of tax will apply to NRFC?


20

A: Out of the six (6) kinds, only two (2) will

apply:

1. GIT

2. FIT

Q: What is the significance of knowing the

classification of these taxpayers?

A:

1. to determine the kind of income tax

applicable to them;

2. to determine their tax liability.

Q: Under Section 23, who are liable for

income within and income without?

A: Only

1. RC

2. DC

► The rest of the taxpayers will be liable for

income coming from sources within.

► Income from sources without, no liability,

therefore exempt.

NOTE: The income taxpayer is not a RC or a

DC. Determine if the income came from

sources within or without to know the

taxpayer’s liability.

► If the facts are specific, do not qualify

your answer. Answers must be responsive to

the question.

Q: Is section 42 relevant to all the taxpayers?

A: NO. SECTION 42 IS NOT MATERIAL TO

ALL taxpayers, particularly the RC and DC

because these two are liable for both income

within and without.

► Section 42 is applicable only to taxpayers

who are liable for income within, the rest of

the taxpayers are otherwise exempt.

Q: Section 42(A)(1) provides for how many

kinds of interests?

A: It establishes two (2) kinds of interests,

namely:

1. interest derived from sources within

the Philippines.

2. interest on bonds, notes or other

interest bearing obligations of

residents, corporate or otherwise.

Q: What is the determining factor in order to

know if the income is from within?

A:

1. location if the bank is from within the

Philippines (pursuant to a Revenue

Reg.)

2. residence of the obligor (whether an

individual or a corp.) – contract of

loan with respect to the interest

earned thereon.

► For example the borrower is a NRAETB,

he borrowed money from a RA. The interest

earned by the loan will be considered as an

income without. RA is not liable to pay tax

since RA is liable only for income within,

therefore exempt from paying the tax.

NATIONAL DEVELOPMENT CO. v. CIR

F: The National Development Company

(NDC) entered into a contract with several

Japanese shipbuilding companies for the

construction of 12 ocean-going vessels.

The contract was made and executed in

Tokyo.

The payments were initially in cash

and irrevocable letters of credit.

Subsequently, four promissory notes were

signed by NDC guaranteed by the

Government.

Later on, since no tax was withheld

from the interest on the amount due, the

BIR was collecting the amount from NDC.

The NDC contended that the income

was not derived from sources within the

Philippines, and thus they are not liable

to withhold anything. NDC said that since

the contract was entered into and was

executed in Japan, it is an income

without.

H: The government’s right to levy and

collect income tax on interest received by

a foreign corporation not engaged in

trade or business within the Philippines is

not planted upon the condition that the

activity or labor and the sale from which

the income flowed had its situs in the

Philippines. Nothing in the law (Section

42(1)) speaks of the act or activity of

nonresident corporations in the

Philippines, or place where the contract is

signed. The residence of the obligor who

pays the interest rather than the physical


21

location of the securities, bonds or notes

or the place of payment is the

determining factor of the source of the

income. Accordingly, if the obligor is a

resident of the Philippines, the interest

paid by him can have no other source

than within the Philippines.

Q: Suppose a NRFC, an Indonesian firm,

becomes a stockholder of two corporations, a

DC and a RFC, and both corporations

declared dividends, what is the liability of the

Indonesian firm if the same received the

dividends?

A:

1. Dividends received from DC: the

Indonesian firm is liable to pay taxes.

NRFC, under the law, is liable if the

income is derived from sources

within. (Sec 42a)

2. Dividends received from RFC: the

Indonesian firm’s liability will depend

on amount of gross income from

sources within the Philippines.

The NRFC will be liable to pay income tax if

the following requisites are present:

1. at least 50% is income from sources

within;

2. the 1st

requisite is for the three (3)

preceding taxable years from the time

of declaration of the dividends.

► In the absence of any or both

requisites, the income will be considered

from sources without, thus exempting the

Indonesian firm from payment of income tax.

Q: Same scenario, but this time the shares of

stock of the two corporations were being

disposed off. What is the tax liability of the

Indonesian firm?

A:

1. sale of shares of stock of DC: the

Indonesian firm will be liable for the

payment of taxes because the income

is from sources within.

2. sale of shares of stock of RFC: the

liability will depend on where the

shares of stock were sold. (mejo

Malabo sa notes, please be guided

accordingly)

Q: Filipino Executive, assigned to Hong

Kong, receiving two salaries, one from the

Philippines, the other from HK. The

performance of the job was in HK. Is he liable

for both salaries?

A: No, he is not liable for the two incomes.

His status is an OCW (note facts: working in

HK under contract). The compensation he

received is not subject to tax pursuant to

Section 42(c). Compensation for labor or

personal services performed in the

Philippines is considered an income within.

When it comes to services, it is the place

where the same is rendered which is

controlling. In the case at bar, the services

were rendered abroad, thus it is an income

derived from sources without, irrespective of

the place of payment.

Q: Suppose a DC hired a NRFC to advertise

its products abroad. What is the liability of

the NRFC? Will there be a withholding tax

imposed?

A: The income is derived from sources

without since the services in this case were

performed abroad. As such, the NRFC is not

liable and therefore exempt from the

payment of tax. If the NRFC is not subject to

NIT, then it is not also subject to withholding

tax.

Q: What is the controlling factor?

A: The controlling factor is the place where

the services were performed and not where

the compensation therefore was received.

RENTALS AND ROYALTIES

►income from sources within

Q: Granted by who?

A: NRFC

Q: Suppose you are the franchise holder, how

much is the withholding?

A: 35% (GIT)

Q: if the franchise is granted by RFC, how

much is the withholding?

A: 10% (NIT) and in some cases 15%

Section 42(4) MEMORIZE FOR RECIT

(CEKSTTM)

a. right of, or the right to use

copyright, patents, etc


22

b. industrial, commercial,

scientific equipment

c. supply of knowledge

d. supply of services by

nonresident

e. supply of technical assistance

f. supply of technical advice

g. right to use: motion picture

films, etc.

Q: What is the rule as regards the sale of real

property?

A: Gains, profits, and income from the sale

of real property located within the Philippines

considered income within.

Q: What about the sale of personal property,

what is the rule?

A: Determine first if the property is

produced or merely purchased.

1. it the property is manufactured in the

Philippines and sold abroad, or vice-

versa, it is an income partly within

and partly without.

2. if the property is purchased,

considered derived entirely from the

sources within the country where it is

sold.

EXCEPTION: shares of stock of domestic

corporation, it is an income within wherever

it is sold.

COMMISSIONER v. IAC

Q: What is the issue here?

A: They cannot determine if the business

expense was incurred in the Philippines.

Q: if you are the BIR, and the taxpayer is not

sure, will you disallow the deduction?

A: No. determine it pro rata.

Formula: GI from within

GI from without

Example: 100,000

1,000,000

= 10%

► Hence, 10% is the ratable share in the

deduction. If the deduction being asked is

100,000 not all of it will be allowed. Only

10,000 or 10% of 100,000 will be allowed

as deduction.

CAPITAL GAINS AND LOSSES

Section 39

Q: What is capital asset?

A: Capital asset is an asset held by a

taxpayer which is not an ordinary asset.

The following are ordinary assets:

1. stock in trade of the taxpayer or other

property of a kind which would

properly be included in the inventory

of the taxpayer if on hand at the close

of the taxable year;

2. property held by the taxpayer

primarily for sale to customers in the

ordinary course of trade or business;

3. property used in trade or business of

a character which is subject to the

allowance for depreciation provided in

subsection 1.

4. real property used in trade or

business of the taxpayer.

All other property not mentioned in the

foregoing are considered capital assets.

Q: What is a capital gain? What is a capital

loss?

A: Capital gains are gains incurred or

received from transactions involving property

which are capital assets. Capital losses are

losses incurred from transactions involving

capital assets.

Q: What is ordinary gain? Ordinary loss?

A: Ordinary gains are those received from

transactions involving ordinary assets.

Capital losses are losses incurred in

transactions involving ordinary assets.

Q: What is the relevance of making a

distinction?

A: It is relevant because Section 39B,C, and

D apply to capital assets only.

1. time when property was held (39B)

(holding period applies only to

individuals);

2. limitations on capital losses (39C);

3. Net Capital Carry-Over (39D)

I. CAPITAL ASSETS

Q: What is the holding period?


23

A: If capital asset is sold or exchanged by an

individual taxpayer, only a certain percentage

of the gain is subject to income tax.

It is the length of time or the duration of

the period by which the taxpayer held the

asset.

Q: What is the requirement?

A:

1. the taxpayer must be an individual.

Section 39B states “in case of a

taxpayer, other than a corporation..”

2. property is capital in nature.

Q: What is the term?

A: 100% if the capital asset has been held

for not more than 12 months; (short term)

50% if the capital asset has been held for

more than 12 months. (long term)

NOTE: the holding period applies to both

gains and losses.

Q: Do you include capital gains in your ITR?

A: General rule: yes, include in ITR.

EXCEPT:

1. gains in sales of shares of stock not

traded in stock exchange(section 24);

2. capital gains from sale of real

property(section 24).

Q: When will the holding period not apply?

A:

1. property is an ordinary asset

2. taxpayer is a corporation

3. sale of real property considered as

ordinary asset

II. LIMITATION ON CAPITAL LOSSES

►synonymous to 34D & loss capital rule

► this applies to individual and corporate

taxpayer

Q: What is the loss limitation rule?

A: Pursuant to Section 39 C, losses from

sales or exchange of capital assets may be

deducted only from capital gains, but losses

from the sale or exchange of ordinary assets

may be deducted from capital or ordinary

gains. (applies to individual and corporation)

Q: In connection with 34 D, Losses in

Allowable Deduction, what is the rationale

behind this rule?

A: If it is otherwise, it will run counter with

the rule that the loss should always be

connected with the trade or business, capital

losses are losses not connected to the trade

or business, thus it is not deductible

Q: what is your remedy?

A: 39 D, net capital loss carry-over

Q: What is the rationale in allowing ordinary

loss to be deducted from either the

capital gains or ordinary gains?

A: It is already included in ITR, the gross

income less deductions hence it already

carries with it the deduction

TAKE NOTE: Normally if the loss is an

ordinary loss there is no carry over.

Except: a. 34D3

b. if the loss is more than GI

III. NET CAPITAL LOSS CARRY-OVER

Q: What are the requirements?

A:

1. taxpayer is an individual;

2. paid in the immediately succeeding

year;

3. applies only to short term capital

gain;

4. capital loss should not exceed net

income in the year that it was

incurred.

Q: How does net capital loss carry-over differ

from net operating loss carry-over under

Section 34 D (3)?

A: Under the net capital loss carry-over rule,

the capital loss can be carried over in the

immediate succeeding year. In net operating

loss carry-over rule, capital loss can be

carried over to the next three (3) succeeding

calendar year following the year when the

loss was incurred.

NOTE: only 15% of the loss will be carried

over, if the loss is greater than the gains.

► In net operating loss carry-over there is

an exception to the 3 year carry-over period.

In case of mines other than oil and gas wells,

the period is up to 5 years.

Q: What is a short sale?


24

A: Sale of property by which the taxpayer

cannot come into the possession of the

property. EX: shares

CALAZANS v. CIR

F: The taxpayer inherited the property

fro her father and at the tie of the

inheritance it was considered a capital

asset. In order to liquidate the

inheritance, the taxpayer decided to

develop the land to facilitate the sale of

the lots.

I: Was the property converted to

ordinary asset?

H: The conversion from capital asset to

ordinary asset is allowed because Section

39 is silent.

Q: Are you allowed to convert ordinary asset

to capital asset?

A: General rule: it is not allowed. Read

Revenue Regulation 7-2003

The case at bar still applies despite of the

issuance of said Revenue Regulation.

Q: What is the conversion prohibited in the

Revenue Regulation?

A: Conversion of real estate property.

Q: What is the rationale?

A: Section 24 D – final income tax of 6% if

the real estate is capital asset. If it is an

ordinary asset, it will be subject to income

tax of 32% for individual taxpayer, and 35% if

the taxpayer is a corporation.

Q: What are the properties involve in the RR

7-2003?

A: 1. those property for sale by the realtors

2. real property use in trade or business

not necessary realtors

Q: That is the conversion allowed by the

Revenue Regulation? Is there an instance

when an ordinary asset may be converted to

capital asset?

A: Yes, provided that the property is an

asset other the real property, and it has been

idle for two (2) years.

SECTION 24

TAX ON INDIVIDUALS

Q: What is the tax mentioned in section 24?

A: NIT

Q: What is taxable income?

A: (memorize section 31) it is the pertinent

items of gross income specified in the NIRC,

less the deductions and/or personal and

additional exemptions, if any, authorized for

such types of income by the NIRC or other

laws. It refers to NIT because it allows

deductions.

Q: What do you mean by the phrase “other

than B, C, and D”?

A: It means that if the elements of passive

income are present, the taxpayer has to pay

FIT.

Q: Who are the taxpayers mentioned in

section 24?

A:

1. RC

2. NRC

3. OCW

4. RA

► Additionally, under Section 25, NRAETB

Q: What is the tax liability of NRAETB?

A: Section 25(1) NRAETB is subject to

income tax in the same manner as those

individuals mentioned in Section 24.

Q: What about Domestic Corporations?

A:

1. Sec. 27 A,B, and C

2. Sec. 26- GPP is not subject to income

tax.

Q: What about Resident Foreign

Corporations?

A: Sec 28(l) it is subject to 35% Net Income

Tax

Q: What about Non Resident foreign

Corporation and Non Resident Alien not

engaged in Trade or Business?

A: Not Subject to Net Income Tax but they

are liable for Gross Income tax.

Q: Do legally married husband and wife need

to file separately or jointly?

A: It depends if:

1. Pure compensation income- separate

2. Not Pure compensation income- joint


25

Passive Income

Interest, Royalties, prizes and Other winnings

Interest

Q: Bank Interest, what is the requirement?

A: The bank must be located in the Phils.

because the income must be derived from

sources w/in.

Q: Do you include this in your ITR?

A: No! because it is subject already to FIT.

The bank is the one liable for the payment of

this.

NOTE: Liability for NIT, GIT, and MCIT will

depend on the elements present.

Q: Who are liable for bank interest?

A:

1. RC }

2. NRC} Sec. 24 B1

3. RA }

4. NRAETB

5. NRANETB Sec. 25 (25%)

6. AEMOP

7. DC

8. RFC

9. NRFC

Q: What is the rate of interest?

A: FIT of 20%

Q: Is there a lower rate?

A: 7 ½ % if under EFCDS

Q: What if the depositor is non resident

alien?

A:

-W/in – FIT

- W/out- exempt

Q: What is the rule on pre- termination?

A: If it is pre terminated before 5th

year a FIT

shall be imposed on the entire income and

shall be deducted and withheld by the

depositary bank from the proceeds of the

long term deposit based on the remaining

maturity thereof

a. 4 yrs to less than 5 yrs – 5%

b. 3 yrs to less than 4 yrs- 12%

c. Less than 3 yrs- 20%

Q: Does it apply to all individuals?

A: No! It does not apply to 10 NRFC and NRA

and NRAETB because they are liable to GIT.

NOTE: if the depositary is a Non resident it is

exempt

► Resident citizen is liable to pay tax for

bank interest earned abroad (NIT)

Q: If the money earns interest in abroad who

is liable?

A: RC and DC only by NIT, the rest are

exempt. No FIT abroad because we do not

have withholding agent abroad.

Q: MCIT applies to DC and RFC in relation to

bank interest?

A: If the bank interest is derived abroad, RFC

is exempt but DC is liable.

Impose NIT if it is higher than the MCIT,

otherwise apply MCIT if it’s higher than the

NIT

Prizes

Requirements:

1. Prizes must be derived from sources

w/in the Phils.

2. it must be more than P 10,000

Q: Who are liable? (FIT)

A:

1. RC

2. NRC

3. OCW

4. RA

5. NRAETB

6. AEMOP (RC, NRAETB)

Not Liable

1. NRANETB- liable for GIT at 25 %

2. AEMPOP (NRANETB- GIT)

3. DC- NIT 27 D is silent

4. RFC NIT law is silent 28A7a

5. NRFC subject to GIT

Q: When can we apply NIT in Prizes?

A: 1. When the taxpayer is RC, RFC and DC

2. For DC and RC it must be derived

from income abroad RFC it must be

derived from income w/in

3. amount is more than P10,000


26

NOTE: If the prize is derived from sources

w/in but it is below P 10,000 it is not subject

to tax. If derived from sources abroad, most

of them are exempt except for RC and DC

who are liable w/in and w/out.

Q; Is it possible for RC and DC to pay MCIT?

A: Yes if MCIT is higher than NIT.

Winnings

Q: Do we apply the P10, 000 req.?

A: No, we do not apply it only applies to

prizes. It must not pertain to illegal

gambling.

► Thus, the only requirement is it must be

derived from income w/in.

Q: Who are liable? (FIT)

A:

1. RC

2. NRC

3. OCW

4. RA

5. NRAETB

6. AEMOP (RA, NRAETB)

Not liable to FIT?

1 NRANETB- GIT

2 AEMOP (NRANETB- GIT)

3 DC- law is silent NIT

4 RFC- law is silent

5 NRFC- GIT

Q: When does NIT apply to winnings?

A:

1. If Taxpayer is DC or RC

2. Income is derived abroad

3. Taxpayer is RFC and income w/in.

NOTE: If income abroad, most TP are exempt

except DC and RC

Q: MCIT applies when?

A: It is higher than the NIT

Royalties

Requirement:

► The income is from w/in

► Rate? 20%. Lower rate? 10% on books,

literary works and musical compositions.

Q: You are a writer for Snoop Dogg are you

liable for FIT? What if for April Boy?

A: Liable for NIT if Income abroad like a

writer for Snoop. While FIT if for April Boy.

Q: Who are liable (FIT)?

A:

1. RC

2. NRC

3. OCW

4. RA

5. NRAETB


Not Liable?

1. NRANETB

2. AEMOP

3. DC

4. RFC

5. NRFC

NOTE: Lower rate of 10% applies to all except

NRANETB

Q: When do we apply NIT to Royalties?

A:

1. TP is RC or DC

2. Income is from w/out

3. TP is RF and income is w/in

► If income is from sources abroad all are

exempt except RC and DC

Dividends

► Confined with cash and/or property

dividends.

Q: What are dividends?

A: Any distribution made by Corporation to

its stockholders outside of its earnings or

profits and payable to its stockholders

whether in money or in property (Sec. 73)

COMM. vs. MANNING

Q: Where did it come from?

A: shares come from another shareholder

Q: What are the dividends included?

A: Sec. 24 refers to cash or property

dividend

H: For stock Dividends to be exempt it must

come from the profit of the corporation.


27

Stock Dividends → it is the transfer of the

surplus profit from the authorized capital

stocks.

Q: Assuming that there are 5 Incorporators,

the Corporation has a P5 M Authorized

Capital stock. It distributed 1 M stock

dividends, is it taxable?

A: NO, the dividends did not go to the Stock

holder but to the Auth Capital Stock. Only

cash and Prop Stock go to the Stock holder.

► Sec 24 B does not mention stock

dividends because it is not subject to FIT but

it is subject to NIT under Section 73.

Q: Is there an exception when stock

dividends are not taxable?

A: YES, if the shares of stocks are cancelled

and redeemed meaning it was reacquired by

the corp.

ANSCOR CASE

→the stockholders cannot escape the

payment of taxes

Requirement:

Gen Rule- the dividends must be distributed

by a DC.

Except- Regular operating- always a foreign

corp.

► What rate: 10% FIT

Q: Who are liable?

A:

1. RC

2. NRC

3. OCW

4. RA

5. NRAETB


Not liable?

1. NRANETB

2. AEMOP

3. DC

4. RFC

5. NRFC

► Shares of association and partnership is

taxable

Q: Determine the tax liability of the

following?

A:

1. DC a Stockholder of DC= Exempt

2. RFC stockholder of DC= Exempt also

3. DC stockholder of RF= Liable for NIT.

Capital Gains From Sale of Shares of Stock

Not Traded (§24C)

1. Subj to FIT

2. Determine whether there is a loss or a

gain because the tax is impose upon

the net capital gains realized from the

sale, barter, or exchange or other

disposition of the shares of stock in a

domestic corp.

3. It is uniformly imposed on all

taxpayer

4. not subj to w/holding tax.

Requirements:

1. Shares of stock of a DC

2. It must be capital asset

3. must not be traded in the stock

market

► 25 R last part: Capital Gains realized by

NRANETB in the Phils. from the sale of shares

of stock in any DC and real prop shall be

subj. to the income tax prescribed under Sub

sec (c) and (d) of Sec. 24.

► SEC. 24 B 1&2: If the elements are

present NRANETB and NRFC are liable to pay

GIT.

Except: under 24 C for NRANETB. What do

you mean by the phrase “ the provisions of

39 notwithstanding”?

► It refers to the holding period. When it

comes to capital gains from sale of shares of

stock not traded and capital gains from the

sale of real prop. The holding period does

not apply because the basis will be those

provided in 24 C & D and not under 39B (GSP

or FMV)

ELEMENT #1 The share is a share in DC

Q: What if the share is from foreign corp?

A: Determine the income considered. If

income w/in read Sec. 42 (E)


28

► If the shares sold are that of a foreign

corp it is subj to the ff rules:

a. sold in the Phils= its income w/in

b. sold in abroad= w/out

c. Shares of stock in a Dc is always

considered an income w/in regardless where

it was sold.

Q: Shares of Foreign Corp sold in Phils.

Who’s liable? What tax?

A: Not subj to FIT because one of the

elements is not present . Shares not being

that of a DC.

Hence: a) RC, NRC, OCW, NRAETB, AEMOP

(RA, NRAETB) will pay NIT. DC and RFC

b) NRANETB and NRFC will pay GIT

Q: Shares of Foreign Corporation sold

abroad?

A: It will be considered an income w/out.

Thus:

most of them will be exempt

except RC and DC liable to pay NIT

ELEMENT # 2 NOT TRADED OR SOLD IN

THE STOCK MARKET

► if sold in the stock market- it is not subj

to FIT

► if sold in the stock market, it will be subj

to percentage tax, in lieu of NIT.

ELEMENT # 3 It must be a capital asset.

Q: When is it considered an ordinary asset?

A: 1. When the broker or dealer

a. used it in trade or business

b. held for sale in the ordinary

course of trade or business

2. to all other assets, it will be

considered a capital asset

NOTE: if all elements are present it will be

subj to FIT

If the shares are ordinary asset

1. Ordinary shares in DC- income w/in

a. Most of the taxpayer will pay NIT

except NRFC and NRANETB

2. Ordinary assets of foreign corporations

a. Income within if sold in the Phils:

most will pay except NRANETB

and NRFC

b. Income w/out if sold abroad: most

will be exempt except RC and DC

MCIT

Q: When is a RFC subj to NIT?

A:

1. Sale of shares of stock of a Foreign

corp in the Phil.

2. sale of shares of stock of DC which

are ordinary asset

► DC and RFC are subj to MCIT which may

be imposed if the NIT is lower than the

MCIT2% MCIT will be imposed if MCIT is

higher than NIT.

Capital Gains From Sale of Real Property

(§24D)

► In 39 B the holding period does not apply

because the basis of income tax is the gross

selling price (GSP) or the Fair market value

(FMV) whichever is higher- 6% FIT

Requirements:

1. The real prop must be sold w/in the

Phils and located in the Phils.

2. It must be a capital asset

3. The seller must be an individual,

estate or trust or a DC

► RFC not liable for FIT but liable to pay NIT

if all the elements are present.

► NRFC liable to pay GIT and not FIT

► NRANETB liable to pay FIT are all

elements are present.

ELEMENT # 3 The real prop must be a

capital asset

Q: When considered a capital asset?

A: Read R.R. 7- 2003

Q: Ordinary asset- shall refer to all real

property specifically excluded from the

definition of capital asset under Sec. 39

A: Other property not mentioned are capital

asset.


29

Q: What if all the elements are not present?

A:

most will be liable to pay NIT

Except NRANETB and NRFC liable for GIT

Q: May a RC be liable to pay NIT even if all

the elements are present?

A: YES, disposition made to the Govt. Thus,

the taxpayer has the option of paying 32%

NIT or 6% FIT

Q: Which is more advantageous?

A: It depends determine first if there’s a loss

or a gain.

If there’s a gain choose to be taxed at 6%

FIT. In this case the gain is always presumed.

If there’s a loss choose to be taxed at 32%

because losses may be considered an

allowable deduction .

Other transactions are covered:

1. sale

2. barter

3. exchange

4. other disposition

NOTE: If the prop is under mortgage contract

and the mortgagee is a bank or financial inst,

the FIT does not apply because the property

is not yet transferred because there’s a

period of redemption

If after a year the mortgagor failed to

redeem the property that is the only time that

the FIT will apply because there’s now a

change of ownership. If redeemed w/in 1 yr

period FIT will not apply because there’s no

change of ownership.

If the mortgagee is an individual the FIT is

imposed whether or not there is a transfer of

ownership.

Exceptions (§24(D2))

Q: What if the prop being sold was a movie

house, can he claim for the exception?

A: the prop covered by the exemption is a

residential lot

Q: Who can claim the exemption?

A: Only the taxpayer mentioned in Sec. 24

Requirements:

1. The purpose of the seller is to acquire

new residential real prop

2. the privilege must be availed of w/in

18 mos. From the sale

3. Comm. must be informed w/in 30

days from the date of sale with the

intention to avail of the exemption

4. the adjusted basis or historical cost of

the residence sold shall be carried

over to the new residence.

5. the privilege must be availed only

once every 10 yrs

6. Certification of the brgy. Capt where

the taxpayer resides that indeed the

prop sold is the principal residence of

the tax payer (RR 13- 99)

Q: What if the property is worth 10 M and it

was sold only for 2M, what will happen to the

unused portion or profit?

A: If the proceeds are not fully utilized, the

portions of the gain is subj to FIT

SEC. 27A RATES OF INCOME TAX

Q: How many income taxes are paid by a

DC?

A:

1. NIT

2. MCIT

3. FIT

4. 10%Improperly Accumulated

Earnings

5. Optional corporate income tax of 15%

of the gross

► DC liable for five, but the optional is not

yet applicable so only 4.

Q: How many can be applied simultaneously?

A: ONLY 3

1. NIT, FIT and 10% IAE

2. MCIT, FIT, 10% IAE

SEC. 27 (B) PROPRIETARY EDUCATIONAL

INST. & HOSP.

Who are the taxpayers?

1. Non- Profit Proprietary Educl. Inst and

2. Non Profit Proprietary Hospital

Q: What if the school or hospital is non

profit only, is it exempt?

A: No, subject to 10% on their taxable

income except those covered by subsection

(D)


30

PROVIDED that gross income from

unrelated business, trade or activity must not

exceed 50% of its total gross income derived

by such educational inst or hospital from all

sources

Requirements:

1. It is a private school or hospital

2. it is stock corp

3. it is non profit

4. that gross income from unrelated

business, trade or activity must not

exceed50% of its total gross income

derived by such educational inst or

hospital from all sources

5. has permit to operate from DECS,

TESDA, or CHED

Q: What do you mean by unrelated trade

business or activity?

A: It means any trade, Business, or activity

which is not substantially related to the

exercise or performance by such entity of its

primary purpose or performance

Q: May a school or hospital be exempt from

paying tax? What are the req?

A:

1. It must be non- stock and non- profit

2. the assets property and revenues

must be used actually, directly, and

exclusively fro the primary purpose

Q: Under what law? Is it the constitution or

the NIRC which provides fro the exemption?

A: It is under Sec. 30 of NIRC and not

under Sec.4 Art. 14 of the Constitution. The

provision of the NIRC is the specific law

which prevails over the Constitution which is

the general law.

→ exempt from all taxes and custom

duties

Q: What about exemption from real

property tax?

A: Art. 6 Sec. 28 of the Constitution:

charitable institution churches, ….and all

lands buildings, actually directly and

exclusively used for religious, charitable, and

educational purposes shall be exempt from

taxation.

→ Not Sec. 4 of Art. 14 of the

Constitution.

Q: You donated a property to a school will

you be liable for donor’s tax?

A: not liable if it falls under Sec. 101 (3) of

the NIRC

REQ. FOR EXEMPTION TO DONORS TAX:

1. it must be non-stock, non-profit

educational inst.

2. not more than 30% of the prop donated

shall be used by such donee for admin

purposes.

3. paying no dividends

4. governed by trustees who don’t receive

any compensation

5. devoting all its income to the

accomplishment and promotion of the

purposes stated in its Articles of

Incorporation

Q: What about exemption from VAT?

A: Sec. 109 (m) of R-VAT

Q: What about exemption fro Loc Gov Code?

A: If its non-stock, non-profit educational

inst. It may be exempted from local taxation.

Q: Is Art 14 Sec. 4 of the Consti obsolete?

A: NO, if the law is silent apply the Consti.

SEC. 23: GOCC, AGENCIES, INST of the

GOVT.

GEN RULE: Subj to tax.

EXCEPTIONS:

1. GSIS

2. SSS

3. PHIC

4. PCSO

► PAGCOR no longer included.

Q: If the GOCC is not one of those

enumerated does it follow all of its income is

automatically subject to tax?

A: NO. Under Sec 32. B (7) income derived

from any public utility or from the exercise of

essential government function accruing to

the Govt of the Phils or to any political subd.

Are therefore exempt from income tax.

Therefore, even if the GOCC is one of

those enumerated under Sec. 27 it may still


31

be exempt under Sec. 32 b7b if its

performing governmental function

NOTE: Pagcor vs. Basco case

Q: What is the difference between Sec. 27 C

and 32 b7b?

A:

1. Sec 27 C exempts those enumerated

without any qualification.

2. Sec. 32b7b qualification must concur

before it may be exempted.

Q: Can the government impose tax on itself?

A: It depends on who the taxing authority is.

If the taxing authority is the National Govt. as

a rule, YES.

Exceptions

1. those entities enumerated under §27 C

2. those GOCC falling under §32b7b

If the taxing authority is the local

government units, as a rule NO. LGU’s are

expressly prohibited from levying tax

against: (Sec 133(o)

1. National Govt.

2. Its agencies and instrumentalities

3. local government units

Exception: Sec 154 of LGC says that LGU’s

may fix rate for the operation of public

utilities owned and maintained by the within

their jurisdiction.

PAL CASE July 20 2006

H: The SC used 133 (o)an exception to

pay tax, real estate tax, imposed by City

of PAranaque on NAIA. The SC said that

the airport is not an agency or GOCC but

mere instrumentality of the Govt.

This is Gross ignorance of the law Sec.

133 (o) is for local taxation not real

property taxation which is the one

involved in the present case.

NOTE: Mactan- Cebu Airport case

SEC. 27 D(1)

Q: How many possible incomes were

mentioned?

A: Two (2): bank interest and royalties

REQ:

1. Bank interest must be received by a

Domestic Corp

2. Royalties derived from sources within

Q: When it comes to bank interest, what is

the difference if the taxpayer is an individual

or corporation?

A: If individual, they may be exempt from

the payment of interest in case of long term

deposit except NRANETB

If DC, they are not exempt from long tem

deposit.

Q: What about royalties?

A: If individual, have a lower rate of 10%on

books, other literary and musical

compositions. DC have no lower preferential

rate.

SEC 27 D2: CAPITAL GAINS FROM SALE OF

SHARES NOT TRADED

SEC 27 D3: EFCDS

Q: What is the expanded foreign currency?

A: It is a bank authorized by the BSP to

transact business in the Philippine Currency

as well as acceptable foreign currency or

both.

Q: What is the tax to be paid?

A: Normally it is NIT because it is subj under

Sec 27 D3 and 28 A

Q: Who is the income earner?

A: Depositary banks

Q: Exempt from what kind of transaction?

A: From foreign currency transaction. If it

involves foreign currency transaction it is not

exempt but subject to 35 % NIT

Q: Who are the other parties?

A:

1. Off shore banking units

2. branches of foreign banks

3. local commercial bank

4. Other depositary banks under EFCDS

5. Non- residents

► if the above enumeration are the parties,

then depositary bank will be exempt from

paying the NIT


32

Foreign Currency Loan

Q: Who is the lender? Borrower?

A: Lender- EFCDS

Borrower- RC

EXEMPT

Offshore banking units

Other depositary banks under EFCDS

► exemption of NR from EFCDS:

Q: Who is the income earner?

A: Non Residents whether individual or

Corporations

Q: Derived from whom?

A: Depositary Bank under EFCDS

NOTE: Sec. 24 B Nonresident exempt from

bank interest under EFCDS

Q: What is the difference between 24 b1

from 27 D3

A: In 24 B1, NR is exempt only from bank

interst derived from EFCDS while 27D3

exempts NR from any income from

transactions with depositary bank under

EFCDS

SEC. 27 D(4)- Inter-corporate dividends-

exempt

27 D5 Capital Gains from sale of Real

Prop.

Q: What is the tax?

A: 6% FIT

Q: What is the difference if the seller is an

individual and a DC?

A: Individual can sell all kinds of real

property

DC can only dispose land and/or

buildings.

SEC 27 (E) MCIT

Q: Applicable to whom?

A: DC and RFC

Q: Can it be applied simultaneously with

NIT?

A: NO, imposed in lieu of the NIT, whichever

is higher.

Q: What is the Rationale?

A: to prevent corporations from claiming too

many deductions

Q: When will it be imposed?

A:

1. On the 4th

year immediately ff the year

in which such corp commenced its

business.

2. When the MCIT is higher than the NIT

Q: What is the carry over rule?

A: Sec 27 E2 states the carry over rule.

► In order to avail: only in the year where

the MCIT is greater than the NIT.

Sec 28 A1

Q: What Kinds of taxes are paid by the RFC?

A: NIT

MCIT

Sec. 28 B2 MCIT on RFC

► same with Sec. 27

Sec. 28 A3- INTL CARRIER

Kind:

1. Air carrier

2. ships

► An intl. carrier doing business in the

Phils. shall pay 2 ½ % on its Gross Phil Billings

(GPB)

Q: Is 28 A3 the Gen. rule or the Exception?

A: It is the general rule because it is under

28 A3

► GPB is in the nature of FIT, applies only if

all the requirements are present.

► RFC will be liable for NIT, hence a RFC

engaged in common carriage does not pay

GPB but NIT

► Income without: EXEMPT


33

International Carrier:

► GPB refers to the amount of revenue

derived from: carriage of persons, excess

baggage, cargo and mail originating from the

Phils in a continuous and uninterrupted

flight, irrespective of the place of sale or

issue and the place of payment of the tickets

or passage document.

REQ:

1. Originating from the Phils.

2. Continuous and uninterrupted flight;

3. Irrespective of the place of sale or

issue and the place of the payment of

tickets or passage document.

Q: Do you consider landing rights to

determine liability? (RR 15-2002)

A:

1. If originates from the Phils and has

landing rights- ONLINE- RFC

2. No landing rights- OFFLINE- NRFC

Q: If there are stopovers, is it still

uninterrupted?

A: YES, provided that the stopover does not

exceed 48 hrs.

Q: When will the place of sale of tickets

matter as to the taxpayers liability?

A: The place of tickets is material only if the

two other elements are not present to be able

to know if its subj to NIT or exempt.

Revalidated, exchanged or indorsed tickets

REQ:

1. The passenger boards a plane in a

port or point in the Phils.

2. The tickets must be revalidated,

exchanged, or indorsed to another

airline.

Q: What if it’s the same airline but different

plane?

A: GPB does not apply, it must be to another

airline

Q: What if it did not originate from the

Phils.?

A: Determine if its income within or without.

if ticket was purchased in the Phils. it is

income within hence apply NIT

if purchased outside, it is income without,

hence exempt

Transshipment

REQ:

flight originates from the Phils

transshipment of passenger takes place

at any port outside the Phils.

the passenger transferred on another

airline

Q: How do you apply GPB?

A: Only the aliquot portion of the cost of the

ticket corresponding to the leg flown from

the Phils to the point of transshipment shall

from part of the GPB.

Q: Is it liable for the whole flight?

A:

From the Phils to the point of

transshipment, it is income w/in

From transshipment to final destination,

its income w/out- EXEMPT

International Shipping

► GPB means gross revenue whether from

passenger, cargo, mail

REQ:

it must originate from the Phils.

up to final destination

- regardless of the place of sale or

payments of passenger or freight documents

Sec28 A(4) OFF SHORE BANKING UNITS

OBU’s

1. only acceptable foreign currencies

2. always a foreign corporation (subj to

NIT) except #3

3. Exempt if income is derived by the

OBU from EFCDS

4. Parties:

a) local commercial banks

b) Foreign bank branch

c) Non Residents

d) OBU in the Phils.

Difference with EFCDS:

EFCDS


34

1. Acceptable foreign currency, Phil.

Currency or both

2. Can be a domestic or foreign

corporation

3. Exempt if income derived by DC or

RFC from EFCDS

4. Parties:

a) local commercial banks

b) Foreign bank branch

c) Non Residents

d) OBU in the Phils

e) Other banks under EFCDS

FOREIGN CURRENCY LOAN

► 10% FIT

If: Lender- OBU

Borrower- Resident Citizen

EXCEPT:

1. OBU

2. Local Commercial Banks

Transactions of Non Residents:

1. Income earner: Non- Residents

2. Lender: OBU’s

NOTE: Non resident exempt from

transactions with OBU’s and EFCDS

SEC. 28 A5 TAX ON BRANCH PROFITS,

REMITTANCES

► profits based on the total profits applied

or earmarked fro remittance remitted by a

branch to its head office

► Subj to 15% tax

Except: those activities which are registered

with PEZA

NOTE: Interests, Dividends, Rents, Royalties

including remuneration for technical

sevices, salaries, wages, premiums,

annuities, emoluments, or casual gains,

profits, income and capital gains received

by a foreign corporation during each

taxable year from all sources within shall

not be treated as branch profits UNLESS

the same are effectively connected with

the conduct of its trade or business.

Branch Profit Remittance

Two ways to receive income (FC)

1. Branch

2. Subsidiaries

NOTE:

1. When a FC establishes branch, it is

always a FC

2. When a FC establishes DC, it is a RFC

Q; It is in addition to NIT- Why?

A: NIT because it is RFC

Q; What kind of tax is imposed under 28 A5?

A: 15% FIT

Q: How do you apply the rate?

A: multiplied to the total profit applied or

earmarked for remittance w/o deductions

It applies for branches that are:

1. the profit remitted is effectively

connected with the conduct of its

trade or business in the Phils.

2. One not registered with PEZA

MARUBENI CASE

F: A branch was established with AG&P,

there was investment with AG&P

Q: Did the petitioner participate with the

negotiation?

A: NO

Q: What did the petitioner pay?

A: 15% Branch Profit Remittance Tax (BPRT)

10% Intercorporate Dividends

Q: What’s the issue?

A: Petitioner maintains that there was

overpayment of taxes, thus the same was

asking for a refund of tax erroneously

paid.

Q: Is is subj to FIT?

A: NO, exempt if petitioner is RFC

H: -not correct to pay 15%

To be liable for BPRT

1. It is a RFC

2. Branch did not participate in negotiations

SEC. 28 A6a

► Regional or area headquarters (Sec. 22

DD) shall not be subject to tax exempt from

income tax if the requisites are present.


35

Q: What are the requisites?

A:

1. the HQ do not earn or derive income

from the Phils.

2. Acts only as supervisory,

communications, coordinating centre

for their affiliates, subsidiary or

branches in the Asia- Pacific Region

and other foreign markets.

SEC. 28 A6b

► Regional Operating HQ are taxable and

liable to pay 10% taxable income.

► Regional Operating HQ is a branch

established in the Phils by a multinational

company engaged in any of the services:

1. Gen. Administration and Planning

2. Business Planning and Coordination

3. Sourcing and procurement of Raw

materials and components.

4. Corporate Finance and Advisory

Services

5. Marketing Control and sales

promotion

6. Training and personal management

7. logistic services

8. research and development services

and product development

9. technical support and maintenance

10. data processing and communication

and business development

Rationale: Why liable? Because the claim for

exemption of resident airlines shall be

minimized

SEC. 28A7a Interests and Royalties:

► 20%FIT

► Interests under EFCDS= 7 ½ %

Sec. 28A7b Income derived under EFCDS

1. Income derived from foreign currency

transactions with:

a) Non Residents

b) OBU

c) Local commercial bank

d) Foreign bank branches

e) Other depository bank under the

EFCDS

► As a Gen Rule: the above transaction is

Exempt

EXCEPTION: Income from such transaction

as may be specified by the secretary of

Finance, upon recommendation by the

Monetary Board to be subject to regular

income tax payable by any banks.

2. Interest income from foreign currency

loans

► granted by depository bank under said

EFCDS to others shall be subject to 10% FIT

Exempt if granted to:

1. Other OBU in the Phils, and

2. Other depository bank under the

EFCDS

» SEC. 28 A7c: Capital Gains from

Shares of Stocks not Traded in the

Stock exchange

» 5% or 10% as the case maybe

SEC 28A7d: INTERCORPORATE DIVIDENDS

► DC- RFC= EXEMPT, not subj to tax

SEC 28 B1

Q: What kind of tax?

A: 35% GIT on the ff income

1. Interest

2. Dividends

3. Rents

4. Royalties

5. Salaries

6. Premiums( except reinsurance

premiums)

7. annuities

8. emoluments

9. Other fixed and determinable Gains,

profits and income.

SEC 28 B2 Non Resident Cinematographic

film owner, lessor or distributor

► liable for 25% GIT

SEC 28 B3 Non Resident owner or lessor of

Vessels chartered by Philippine Nationals.

► liable for 4 ½ GIT


36

Elements:

1. Chartered to Filipino Citizens or

Corporations

2. Approved by MARINA

SEC. B(4) Non Resident Owner or Lessor of

Aircraft, Machiniries, and other

Equipments.

► liable for 7 1/2 % GIT

SEC 28 b5a Interest on Foreign Loans

► Must be read with Sec. 32 B7a

Interest on Foreign Loans, if the lender is

1. NRFC liable to 20% FIT

2. Foreign Govt. Exempt because it is an

exclusion (Sec 32 b7a: income derived

by a foreign gov’t from investments in

the Phils on loans, stocks, bond, and

other domestic securities or from

interest on deposits in banks by:

a) Foreign govt.

b) Financing inst owned controlled or

enjoying, refinancing from foreign

govt; and

c) Inter nation or Regional financial

inst established by foreign govt.

COMMISIONER OF INTERNAL REV. vs.

MITSUBISHI METAL CORP. (180 SCRA 214)

F: Atlas Mining entered into a Loan and Sales

Contract with Mitsubishi Metal Corp. ( A

Japanese Corp.) for the purposes of

projected expansion of the productivity

capacity of the former’s mines in Cebu.

The contract provides that Mitsibushi will

extend a loan to Atlas in the amount 20

M dollar, so that Atlas will be able install

a new concentrator for copper

production.

-Mitsubishi to comply with its

obligation, applied for a loan from

Export- Import Bank of Japan (Exim Bank)

and from consortium of Japanese banks.

Pursuant to the contract Atlas paid

interst to Mitsubishi where the

corresponding 15% tax thereon was

withheld and only remitted to the Govt.

Subsequently Mitsubishi filed a claim

for tax credit requesting that the same be

used as payment for its existing liabilities

despite having executed a waiver and

disclaimer of its interest in favor of Atlas

earlier on. It is the contention of

Mitsubishi that it was the mere agent of

Exim Bank which is a financing inst

owned and controlled by the Japanese

Govt.

The status of Eximbank as a

government controlled inst became the

basis of the claim fro exemption by

Mitsubishi for the payment of interest on

loans.

I: WON Mitsubishi is a mere agent of

Eximbank

H: NO. The contract between the parties does

not contain any direct reference to Exim

Bank, it is strictly between Mitsubishi as

creditor and Atlas as the seller of copper.

The bank has nothing to do with the sale

of copper to Mitsubishi. Atlas and

Mitsubishi had reciprocal obligations-

Mitsubishi in order to fulfill its obligations

had to obtain a loan, in its independent

capacity with Exim bank. Laws granting

exemption from tax are construed strictly

against the taxpayer and liberally in favor

of the taxing authority.

SEC. 28 D5 b INTERCORPORATE

DIVIDENDS:

► FIT 15% imposed on the amount of cash

and or prop dividends received from a

domestic corporation.

SUBJ TO THE CONDITION: the country where

the NRFC is domiciled allows a credit against

the tax due from the NRFC taxes deemed

paid or deemed to have been paid in the

Phils.

Gen rule: 35 % FIT

Exception: 15% under the “tax deemed paid

rule/ reciprocity rule/ tax sparring rule”

JHONSONS CASE

2 Kinds of Categories:

1st

: Japan, US, Germany, Phils liable for

income within and income without

2nd

: countries liable only for income within.

MARUBENI Case: 2 Issues

1. Is the payment of 10% FIT correct?


37

- No because it was a branch and RFC but

still Marubeni was NRFC under the old law

which is liable to pay 35%, but SC said liable

only to 25% because of the tax treaty

► You cannot refund right away → 15%

BPRT and 10% Inter-corporate Dividends tax

has different basis

In P&G who are involved

- DC (P&G Phil) and NRFC (P&G US)

- DC declares dividends to NRFC

- 35% was withheld and remitted to the BIR

What did they discover? (after paying)

- they discovered that they are liable only

for 15% so they have a refund of 20%

Q: In the 1st

case did the SC allowed the

refund?

A: NO, denial anchored on 2 grounds:

1. One claiming for refund was not the

proper party

2. There was a showing or proof as to

the existence of the “tax deemed

paid” rule

Q: In 2nd

case was there a refund?

A: YES, the SC reversed itself

1. Income tax is FIT: the withholding

agent is the proper party because he

is liable to pay said taxes

2. actual proof of payment not

necessary, what is necessary is the

law of the domicile of the country

providing fro tax credit equal to 20%

of the tax deemed paid.

Q: What is the rate if the law is silent?

A: 35% FIT

► The rate will only be 15% if there’s a law

recognizing the same but this refers to the

case of those belonging to the first category.

WANDER CASE

Q: Who are the parties?

A: DC(Wander) and FC (Glaxo)- they

belong to different categories

The BIR tried to collect 35% because

the law is totally silent about the tax

credit

H: The SC said that the tax should be 15%

which applies 2 instances:

1. Foreign law do not provide for tax

credit- 35%

2. law provides but the law is silent- 15%

3. law is silent because there is no law-

15%

4. law is silent because there’s no law

because the subj matter is not

taxable- 15%

SEC. 29 IAET


A: 10% of the gross income (taxable income)

► It is imposed upon the improperly

accumulated taxable income of the

corporation

Q: Applies to what Corp?

A: to DC only under RR 2- 2001( classified as

closely held corporations)

Q: Is it in the nature of sanction?

A: Yes, it is imposed to compel the

corporation to declare dividends.

Q: Why?

A: because if profits are distributed to the

shareholders, they will be liable for the

payment of Dividends tax. Now, if the profits

are undistributed the shareholders will not

incur liability on taxes with respect to the

undistributed profits of the Corp.

- In a way it is in the form of deterrent to

the avoidance of tax upon shareholders who

are supposed to pay dividends tax on the

earnings distributed to them.

Q: What is taxable income?

A: SEC. 31 defines taxable income as the

pertinent items of gross income specified in

this Code, less the deductions and/or

personal and additional exemptions, if any,

authorized for such types of income by this

Code or other special law

Q: When not liable to pay IAET?

A: There are 2 groups of DC exempt from

payment of IAET (RR2-2001)

A) Corporations failure to declare dividends

because of reasonable needs of business


38

► reasonable needs means are construed to

mean immediate needs of the business

including reasonable anticipated needs

Q: What constitutes reasonable accumulation

of the corporation’s earnings? Examples?

A:

1. allowance for the increase in the

accumulation of earnings up to 100%

of the paid- up capital of the

corporation.

2. earnings reserved for the definite

corporate expansion projects or

programs approved by the Board

3. Earnings reserved fro buildings,

plants, or equipment, acquisition

approved by the Board

4. Earnings reserved for compliance with

any loan agreement or pre- existing

obligations

5. Earnings required by law or other

applicable statutes to be retained.

6. In case of subsidiaries of foreign

corporation, all undistributed

earnings or profits intended or

reserved for investments

NOTE: the corporations belonging in the 1st

group are normally liable but they can show

that the accumulation of earnings is justified

for reasonable needs of business, they incur

no liability and exempt from payments of the

same.

B) Corporations which are exempt whether or

not it is for reasonable needs of the business:

1. Banks, and other non- bank financial

intermediaries.

2. Insurance companies

3. Publicly- held corporations

4. Taxable partnerships

5. General Professional Partnerships

6. Non- taxable joint- ventures

7. Enterprises registered with

a) PEZA

b) Bases Conversion Devt Act of 1992

(RA 9227)

c) Special Economic Zone declared by

law

Q: What is a closely- held corporations?

A: Those corporation at least 50% in value of

the outstanding capital stock or at least 50%

of the total combined voting power all

classes of stock entitled to vote is owned

directly, or indirectly by or for not more than

20 individuals

NOTE: Publicly held Corp. has more than 20

shareholders

Q: What is the time for paying this tax?

A: Calendar Year: Jan 25, 2005- Dec 31,

2005. Today is 2006. You have 1 year to

declare after the close of the taxable year.

2006 is the grace period. You will pay on

January 2007.

Q: If you’re not mentioned to be exempted,

will you still be liable?

A: No, if you invoke adjustments

SEC 30. EXEEMPTIONS FROM TAX ON

CORPORATIONS

► Determine the Corporations’ exemptions

under Sec. 30 27 C and 22B.

1. Sec 30, the corporations shall not be

taxed under this title (tax on income)

in respect to income receive by them

as such.

2. Sec 27, the corporations enumerated

are always exempt. Thus exemption is

unconditional

3. Sec 22B GPP, as a general rule is not a

corporation

4. except if it earns income from other

business

► Joint Venture w/ service contract w/

government not a corporation, otherwise, it

is liable.

Assignment: Sec. 35

August 21, 2006 – Midterms

August 14, 2006

Q: What is the reason for not including the

corporations exempt under section 27C and

Section 22B under Section 30?

A: Because there is an exemption which

does not apply to all exempt corporation.

The exemption under Section 30 is not

absolute while the exemption under Section

27 C is absolute and without any conditions.


39

In addition, Section 22B provides that a joint

venture is generally taxable unless it has a

service contract with the government, a

generally taxable corporation cannot be

joined with the group as generally not

taxable corporation. General Professional

Partnership is exempt but the exemption is

not the same as provided by Section 30.

TAKE NOTE: Las Paragraph of Section 30.

► exemption to the exemption: income of

whatever kind and character of the foregoing

organizations from:

1. any of their properties, real or

personal;

2. any activities conducted for profit

► regardless of the disposition of said

income, shall be subject to tax.

Q: Enumerate the exempt corporations

under Section 30; What is the requirement?

A:

1. Labor, agricultural or horticultural

organization not organized principally

for profit;

2. Mutual savings bank not having a

capital stock represented by shares,

and cooperative bank without capital

stock organized and operated for

mutual purpose and without profit;

3. a beneficiary society, order or

association, operating for the

exclusive benefit of the members

such as fraternal organization

operating under lodge system. (lodge

system: operating world wide) or a

mutual old association or a non-stock

corporation:

a. organized by employees;

b. providing for the payment of life,

sickness, accident or other exclusive

benefits to its employees and their

dependents;

4. Cemetery (a) company owned and (b)

operated exclusively for the benefit of

its members;

5. Non-stock corporation or association

organized and operated exclusively

for Religious, Charitable, Scientific,

Artistic or Cultural purposes, or for

the Rehabilitation of Veterans

(RCSACR), no part of its net income or

asset shall belong ot or inure to the

benefit of any member, organizer,

officer, or any specific person;

6. Business league, chamber of

commerce, or Board of trade, (a) not

organized for profit and (b) no part of

the net income of which inures to the

benefit of any stock holder or

individual;

7. Civil league or organization not

organized for profit but operated

exclusively for the promotion of social

welfare.

CIR vs. YMCA

Q: What is the basis of Manila BIR for the

imposition of the tax?

A: last paragraph of Section 30, because

YMCA was conducting an activity for

profit.

F: the CTA and the CA invoked the doctrine

laid down in Herrera and Abra Valley case

which involves an exemption from the

payment of Real property Tax.

H: The SC revised the ruling. YMCVA is

liable to pay income tax applying the last

paragraph of Section 30.

YMCA Is exempt from the payment of

property tax, but not to income tax on

rentals from its property.

The tax code specifically mandates

that the income of exempt organizations

(under section 30) from any of their

properties, real or personal, shall be

subject to tax, including the rent income

of the YMCA from its real prop.

8. a non-stock and non profit educational

institution;

9. gov’t educational institution;

10. Farmer’s or other mutual typhoon or

fire insurance company, mutual ditch

or irrigation company, or like

organization of a purely local

character, the income of which

consists solely of assessment, dues

and fees, collected from members for

the sole purpose of meeting its

expenses;

11. Farmer’s, fruit grower’s or like

association organized and operated

as a sales agent for the purpose of

marketing the products of its

members and turning back to them


40

the proceeds of sales, less the

necessary selling expenses on the

basis of the quantity of produce

finished by them.

TAKE NOTE: income of sales agent is exempt.

Section 31: TAXABLE INCOME

CHAPTER VI: COMPUTATION OF GROSS

INCOME

SECTION 32: GROSS INCOME

Q: What is the tax treatment? Are these

taxable income? Are these included in the

gross income? Is it included in the ITR? Is it

subject to NIT?

A: Sec. 32 A answers the questions.

Q: What is the income tax referred to here?

A: NIT. The section refers only to the

payment of NIT. It speaks of the NIT.

Q: If the is mentioned under Section 32 A,

does it follow that it is automatically included

in the GIT?

A: No, Section 32 A states “Except when

otherwise provided in this title”

Q: What are the income that are not

included, not subject to NIT?

A:

1. Income that are subject to FIT.

2. Income that are considered an

exclusion; and

3. Income that are exempt.

Q: When do you not apply Sec. 32 A?

A: it applies to all except:

1. NRANETB

2. NRFC

» they do not pay NIT, they pay by way of

GIT.

Q: What are included in the Gross income?

A:

1. Compensation for services in whatever

form paid including but nor limited to

fees, salaries, wages, commissions, and

similar items. [Sec. 32 A (1)]

Q: What is compensation?

A: all remuneration for services performed

by an employee for his employer under an

employer-employee relationship.

TAKE NOTE: compensation is included in the

ITR if the taxpayer is not liable for NIT. Thus,

if subject to NIT, included in the ITR.

Q: Is there an instance where the salaries of

a RC is not included in the ITR?

A: Yes, if the salary is subject to FIT, like

when the RC is employed in Multinational,

offshore banking, and petroleum companies.

2. Gross Income derived from the

conduct of trade or business or the

exercise of a profession; [Sec. 32 A (2)]

Q: What is the income tax here?

A: NIT, included in the ITR.

3. Gains derived from dealings in

property. [Sec. 32 A (3)]

Q: Did the law distinguished?

A: No, the law did not distinguished between

real and personal property.

TAKE NOTE:

1. Sale of real property

2. Sale of shares of stock (personal prop.)

► if the elements are present, subject to

FIT. Thus, it is not included in the ITR, the

withholding agent will be responsible for this.

Q: Income form the sale of property, do you

include this in the ITR?

A: it depends

a. if subject to FIT, not included.

Withholding agent accomplish the forms

→ subject to FIT if the following elements

are present:

1. it is a capital asset;

2. located in the Phil.: and

3. sold by individual, trust, estate, DC.

b. if subject to NIT, included in the ITR.

→ Elements are not present, like when

the real prop. is an ordinary asset or when it

is capital asset if the taxpayer is RFC.

TAKE NOTE: R-R 17-2003


41

► Real property sale subject to FWT, the

buyer accomplishes the ITR.

4. interest; [Sec. 32 A (4)]

Q: What interest is being referred to here?

A: interest which is included in the

computation of gross income is interest

earned from lending money and interest from

bank deposit which does not constitute

passive income.

Bank interest from sources, without or

abroad.

Q: Bank interest from Solid Bank, is it

included in the ITR?

A: No, because it is included or considered

an income within, thus subject to FIT. Thus,

not included in the ITR.

5. Rents. [Sec. 32 A (5)]

► subject to NIT, included in the ITR.

6. Royalties; [Sec. 32 A (6)]

Q: What is being referred to here?

A: royalties which does not constitute

passive income. Royalties derived from

income without. – subject to NIT. Thus not

included in the ITR.

Q: Who are the taxpayers?

A: Liable from income w/in and w/out and

the rest are exempt.

1. RC

2. DC

7. Dividends. [Sec. 32 A (7)]

Q: What kind of dividends?

A: one that does not constitute a passive

income.

TAKE NOTE:

1. DC individual taxpayer = FIT

2. DC – DC & RFC = EXEMPT

3. DC – NRFC = FWT

► only dividends issued by a FC to an

individual taxpayer (RC OR RA) is included in

the computation of the gross income. Thus,

included in the ITR.

8. Annuities. [Sec. 32 A (8)]

Q: What kind of annuities?

A: annuities which are not exempt from tax

are included in the computation of the gross

income. (included in the ITR)

9. Prizes and Winnings [Sec. 32 A (9)]

Q: What kind of prizes and winnings?

A:

a. those that does not constitute passive

income; and

b. those that are not considered as an

exclusion. Thus, exempt.

Passive Income

1. Prizes – derived from sources within

and over 10,000.00

2. Winnings – derived from sources

within.

Exempt:

a. winnings: PCSO and Lotto winnings.

b. prizes:

► those primarily for recognition of

(1)religious, (2)charitable, (3)scientific,

(4)educational, (5)artistic, (6)literary, (7)civic

achievement are exempt PROVIDED:

1. the recipient was selected without any

action on his part to enter the contest

or proceedings; and

2. the recipient is not required to render

substantial future services as a

condition to receiving the prize or

award.

► prizes and awards granted to athletes are

also exempted provided:

1. local or international sports

competition or tournament;

2. held in the Philippines or abroad; and

3. sanctioned by the national sports

association.

Q: When is a prize subject to NIT?

A: 1. when derived from income without;

2. when less than 10,000.00;

3. when the income earner is a DC or RC.


42

Q: When is winning subject to NIT?

A: 1. When derived from income without;

2. when the income earner is a DC or

RC.

10. Pensions [Sec. 32 A (10)]

Q: What kind of pension?

A: Included in the gross income if not

exempt

» never subject to fit (?)

11. Partner’s distributive share from the

net income of the general professional

partnership (GPP).

Q: What is being referred to?

A: GPP exempt from payment of corporate

income tax

► shares of partners subject to NIT – Sec.

26

SEC 32 B EXCLUSIONS FROM GROSS

INCOME

Q: What do you mean by exclusions? Are

these exempt from income tax?

A: these are not included in the gross

income, THUS, exempt.

TAKE NOTE: Exemptions, exclusions,

deductions, have the same characteristics →

all tax do not apply.

1. Life insurance [Sec. 31 B (1)]


A: only one requirement for exemption: that

the proceeds of the life insurance be payable

upon the death of the insured.

Q: Does it matter who the beneficiary is or

paid in a lump sun or single sum?

A: No. it does not matter.

Exception: amounts held by the insurer under

an agreement to pay interest thereon, the

interest payment shall be included in the

gross income.

2. Amount received by insured as

return of premium [Sec. 32 B (2)]

Q: if the insurance is payable within a certain

time, say 10 years and thereafter the insured

did not die, how much will be excluded?

A: only the amount received by the insured

as a return of the premiums.

Ex. 1 M – 100 thousand = capital

It is exempt (100K)

900K is taxable.

Q: Why is it excluded?

A: because the amount received merely

represents a return of capital.

Q: is this subject to Estate Tax under Sec. 85

E? do we have the same requirement?

A: no, the requirement for exemption is not

the same under Section 85 E.

3. Proceeds of life insurance: decedent

insured himself, inclusion or exclusion

will depend on who the beneficiary is.

a. the beneficiary is the estate.

» subject to Estate tax, included in the

gross estate regardless of whether or not

the designation of the beneficiary is

revocable or irrevocable.

b. the beneficiary is a third person other than

the estate.

b.1 Revocable Designation → subject to

estate tax, included in the gross estate.

Reason: because of the insured’s power

to modify or change the beneficiary.

b.2 Irrevocable Designation → not subject

to Estate tax, not included in the gross

estate.

Reason: the insured loses the power to

control, modify and change the

beneficiary.

Q: Is it subject to VAT?

A: 1. Non-life insurance – yes, subject to

VAT under 108 (A).

2. Life insurance – NO, subject to

percentage tax under Sec. 123 of the Tax

Code.

4. Gifts, Bequest and Devises [Sec. 32

B (3)]

Q: Why is the donee exempt from income

tax?


43

A: Because the law classify it as an

exclusion, not important to know whether

property is real or personal.

What is exempted is the “value of

property acquired by gift, bequest or devise”

TAKE NOTE:

A. GIFTS are excluded because they are

subject to donor’s tax.

B. BEQUEST and DEVISE are excluded

because they are subject to ESTATE tax.

Q: what is included in the gross income?

A: income from such property.

► gift, bequest, devise or descent of income

from any property in case of transfers of

divided interest.

5. Compensation for injuries or

sickness [Sec. 32 B (4)]

Q: is this the same as those provided under

the workmen’s compensation act (wca)?

A: YES. There are 3 groups:

a. Health or accident insurance or those

under workmen’s compensation.

b. personal injuries and sickness; and

c. Damages to prevent injuries and

sickness.

Q: What does injury include?

A: The term injury includes death, even if

not injured, if the person dies this will be

available.

Q: when will the damages recovered be

exempt?

A: General Rule: all damages awarded are

tax exempt.

Exception: damages representing loss of

income.

Q: Why is it considered an exclusion?

A: because this is just an indemnification for

the injuries or damages suffered.

6. Income exempt under a treaty [Sec.

32 B (5)]

Q: What is excluded?

A: income of any kind required by treaty

binding upon the Phil. Government.

7. Retirement benefits, pensions,

gratuities [Sec. 32 B (6)]

Q: Why do we need to distinguish retirement

pay, separation pay and terminal leave pay?

A: because they have different requirements

for exemption.

Q: What is retirement pay?

A: the sum of money received upon reaching

the maximum age of employment.

a. Under RA4917 (with Retirement Plan)

1. the private benefit plan is approved

by the BIR (RR2-98);

2. the retiring official or employee has

been in the service of the same

employer for the last 10 years;

3. he is at least 50 years old at the time

of retirement; and

4. the official or employee avails

himself/herself of the benefit only

once.

b. Under RA7641 (without retirement plan)

1. the retiring official employee is at

least 60 years old but not more than

65 years old;

2. the employee or official must have

served the company for at least 5

years;

» entitled to 15 days salary and ½ of the

13th month pay for every year of service.

TAKE NOTE: the retirement benefits under

RA4917 and RA7641 are exempt from

income tax provided the requirements are

present.

SEC. 32 B(6)(c)

► retirement benefits given by foreign

government, foreign corporation, public as

well as private to RC, NRC, RA residing

permanently in the Philippines - exempt

without further qualifications – automatic

exclusions.

SEC. 32 B(6)(d,e,f)

► retirement benefits given by the

Philippine Gov’t through the GSIS, SSS and

PVAO are exempt without further

qualifications = automatic exclusions.


44

August 21, 2006.

- midterms 6-8 pm until sec 32 B(6) NIRC.

August 28, 2006.

ANSWERS = MIDTERMS

► Gross Income include both capital and

ordinary gains, Sec. 31 says gross income-

deductions, that which is ordinary loss.

- may be deducted from capital gains and

ordinary gains.

Q: What is separation pay?

A: on given when one is terminated from the

service because of (1) illness, (2)death, (3)

physical incapacity or injury, or (4) causes

beyond the control of the employee.

Q: Are there any requirement for separation

pay granted by foreign gov’t or corp?

A: None, the separation pay granted by the

aforementioned institutions are exempt

without further qualifications (“other similar

benefits”).

Q: is separation pay an exclusion, therefore,

exempt?

A: No.

GENERAL RULE: Separation pay not

exempt (?)

Exception:

1. Automatic exclusions, thus exempt if due

to:

a. illness

b. death

c. physical incapacity or injury.

2. Conditional exclusion

a. causes beyond the control of the

employee- excluded

b. within employee’s control – included.

Examples:

1. registration – CBA provides separation

pay, within the control = included.

2. installation of labor saving devises or

bankruptcy – beyond the control =

excluded.

Q: What is terminal leave pay?

A: the accumulated vacation leave and sick

leave benefits converted to cash or money to

be given either every year or upon retirement

or separation.

Terminal Leave Pay granted upon retirement

or separation:

» uder PD220, TLP in the Gov’t or in the

Private Sector shall be exempt from

income tax if given or granted upon

retirement or separation.

TLP granted on a yearly basis:

1. employee in the private sector:

a. accumulated sick leave – subject

to income tax.

b. Accumulated vacation leave: if

more than 10 days (meaning 11

pataas) – subject to income tax;

»If 10 days or less – exempt.

2. Gov’t Employee:

» governing law: EO 291 of Pres. Estrada,

RMC 16-2000.

Rule: Gov’t workers (both officers or non-

officers) granted TLP on a yearly basis →

exempt from income tax.

→ there is no qualification as to vacation or

sick leave.

► Take Note of 3 cases.

» be reminded of EO 291, Sec. 2. 78.2

par. 97, RR2-98, RR16-200 (3).

Case of Zialcita

► retired from DOJ, contention: TLP should

be exempt from income tax pursuant to the

old law.

SC: on a different ground – TLP is exempt

because it is similar to Retirement pay, thus

exempt but the ruling’s application is limited

only to DOJ employees.

Borromeo case:

► Same as the Zialcita case

Issues: WON the TLP is subject to income tax

and WON COLA and RATA are included?

SC: RULED TLP is Exempt!

Modified: the rule applies not only to DOJ

officers but also to CSC commissioners.

COMMISSIONER v. CASTAÑEDA

- Castañeda –DFA officer in Phil. Embassy in

England.

1. TLP is exempt.

2. Ruling applies to DFA officers.


45

Q: Does the rule or decision applies to Gov’t

officials only?

A: No. PD220: Exemption applies to both

private and public sectors(?)

it does not matter if TLP is vacation or

sick leave.

RR2-98, Sec. 2.78.1 par. (a)(7)

» JAN, 1998 – the rule applies to both

private and public sectors.

EO291 (SEPT., 2000)

» Officer in gov’t receiving TLP is always

exempt whether or not vacation or sick leave

is granted.

Modified RR2-98:

» TLP will only apply to private sectors

» if granted on a yearly basis – may be

subject to tax: VACATION LEAVE

1. MORE THAN 10 DAYS = TAXABLE

2. LESS THAN 10 DAYS = EXEMPT

8. Miscellaneous items (Sec. 32 B (7)

(a) income derived by foreign Gov’t

[Sec. 32 B (7) (a)]

Q: What kind of income?

A:

1. investments in:

a. loans

b. stocks

c. bonds

d. other domestic securities

2. interest from deposits in Banks in the

Philippines.

Q: Who are income earners?

A:

1. foreign government

2. financing institutions owned,

controlled or enjoying re-financing

from foreign gov’ts; and

3. int’l or regional financial institutions

established by foreign gov’ts

(established in the Philippines)

TAKE NOTE: if plain foreign corp., subject to

FIT 20%.

EXAMPLES of exclusions:

a. Brunei Gov’t earns interest by depositing

money in Makati Bank – Exclusion.

b. SMC- Stock dividends to 3. Brunei Gov’t.

exclusion

c. Income derived by the Gov’t or its

political subdivisions (Sec. 32 B (7) (b)

a. exercise of public utility

b. exercise of any essential gov’t

function.

» accruing to the gov’t.

d prizes and awards (Sec. 32 B 7 c)

» primarily for religious, charitable,

scientific, educational, artistic, literary or

civic achievements:

1. recipient was selected without any

action on his part to enter the contest

or proceedings;

2. the recipient was not required to

render substantial future services as a

condition to receive the prize or

award.

D. prizes and awards in sports (Sec. 32B 7 d)

1. granted to athletes;

2. local or int’l competitions;

3. held here or abroad;

4. sanctioned by the nat’l sports associations.

E. 13th

month pay and other benefits (Sec.

32B 7 e)

Q: Do you include Christmas bonus in your

ITR?

A: No, because the law says 13th

month pay

and “other benefits”/”similar benefits” – xmas

bonus is included in the category.

Q: Who can increase the 30,000 limit?

A: The Sec. of Finance.

Q: Applicable to whom?

A:

1. gov’t; and

2. Private institutions.

F. GSIS, SSS, Medicare and other contributions

(Sec. 32 B 7 f)

► must be deducted from the GI not NIT

because it is an exclusion.

-creditable withholding tax is an exclusion-

must be deducted first from the GI before

you compute the NIT. Otherwise, you are

including in the GI something that is

excluded from the same.


46

G. Gains from the Sale of bonds, debentures,

or other Certificate of indebtedness. (Sec. 32

B 7 g)

Q: Why 5 years?

A: certificate of indebtedness is similar to

Bank Interest in a long term deposit.

- Sec. 32 B 7 g is similar or the same as 24 B

in long term deposit.

H. Gains from redemption of shares in

mutual fund (Sec. 32 B 7 h)

1. Fiscal Year – means an accounting period

of 12 months ending on the last day of any

month other than December.

2. Calendar year – a period of 12 months

beginning on January and ending on

December.

Q: Business expense incurred in February

2006, is it possible to include it for April

2006?

A: yes, it is possible or it is possible if fiscal

year is employed, if it falls under the fiscal

year and all the elements are present.

- related to trade or business.

REASON: Capital loss has no connection to

the trade or business.

TAKE NOTE:

► for taxpayers liable for income within and

without (RC & DC)), they can claim

deduction for expenses incurred within

and without.

► for taxpayers who are liable only for

income within, they can claim a deduction

for expenses incurred within the

Philippines.

Sec. 34 A EXPENSES

1. For those business expenses not

enumerated under A. You need to prove that

it is an ordinary and necessary expense.

2. For those enumerated under A, all you

have to prove is that it is incurred during the

taxable year.

Feb. 12, 2007 (Sec. 34 A, Expenses)

Q: Did the law define what is reasonable?

A: No. for salaries and wages all that is

required by law is for it to be reasonable.

- for other forms of compensation, there

must be services actually rendered.

AGUINLDO Case

F: involves a corporation engaged in selling

fish nets, and the corporation have a land

sold through a broker.

►there was substantial profits gained from

the sale of a land which was sold by a broker.

The profit was in turn given to the workers as

special bonus.

►the corporation claimed the bonus as a

deduction.

ISSUE: Should the deduction be allowed?

H: The SC did not allow the deduction, for

other forms of compensation, it must be

made or given for services actually rendered.

►in this case, it was proven that the sale was

not made by the employees, no effort or

services actually rendered by them because

the sale was made through a broker.

►

Q: Reasonable Travel Expenses, What is the

requirement?

A:

1. Travel must be in pursuit of business,

trade or profession.

2. Travel expense while away from home.

Q: Is there a travel expense which was not in

pursuit of business?

A: yes, those which are considered as fringe

benefits (FB), expenses for foreign travel is

considered a FB only if it is not in pursuit of

the trade or business.

Q: can you claim it under Sec. 34 A (1)(a)(ii)?

A: No, you can claim it under Sec. 34 A

(1)(a)(i) last paragraph.

Q: Reasonable Allowances for rentals for

meralco bills, requirements?

A:


47

1. required as a condition for the

continued use or possession, for the

purpose of the trade, business or

possession of the property.

2. taxpayer has not taken any title or no

equity other than a lessor.

Q: Reasonable allowance for entertainment,

amusement and recreation expenses, what is

the requirement?

A:

1. connected with the development,

management, and operation of the trade

(DOM);

2. Does not exceed the limits or ceiling

set by the Secretary of Finance; and

3. Not contrary to law, morals, good

customs, public policy or public order.

Q: How about bribe, kickbacks, and other

similar payments

A: even without this provisions, kickbacks will

not pass the requirement of (i) ordinary and

(ii) necessary hence not deductible

EXPENSES ALLOWABLE TO PRIVATE

EDUCATIONAL INSTITUTION

Q: Why only private educational institution is

mentioned and no other taxpayers?

A: it refers to section 27 for Private

Educational Institution given to the

educational institution.

GENERAL RULE: 36 A (2) and 36 A (3)

expenditures for capital outlays not

deductible as business expense

EXCEPTION: Private Educ. Institution can

claim it under Sec. 34 A (2)

BUSINESS EXPENSE vs. ALLOWANCE FOR

DEPRECIATION

BUSINESS EXPENSE

1. No carry-over

2. can be claimed for one year only.

3. if the amount of capital outlay is

substantial, it cannot accommodate all of the

expenses incurred.

ALLOWANCE FOR DEPRECIATION

1. There is carry over

2. you can claim it for a longer period

depending on the life span of the property.

3. it can accommodate all of the expenses

incurred.

taxpayer’s allowable deduction for

interest expense shall be deducted by an

amount equal to 42% (RR 10-2000) of the

interest income subject to FIT.

Q: Who claims this deduction?

A: the debtor claims this deduction.

Q: What kind of interest is this?

A: interest on loan.

►interest on debt - when one borrows money

to finance his business interest in connection

with the taxpayer’s profession trade or

business.

REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a)

►a borrower or taxpayer can claim the

interest paid in advance as itemized

deduction when he filed his income tax

return (ITR) depending on whether or not the

principal obligation has been paid.

1. if the entire amount or entire principal

obligation has been paid – the entire amount

of interest can be claimed as itemized

deduction.

2. if only ½ of the obligation had been paid,

then the entire amount of ½ of that interest

can be claimed as a deduction.

3. if no payment had been paid on the

principal obligation, the advance interest paid

cannot be claimed as a deduction on the

years that it was paid.

REQUIREMENTS FOR REDISCOUNTING OF

PAPERS:

1. incurred within the taxable year.

2. individual taxpayer reporting income on a

cash basis.

No deduction shall be allowed in respect

to the following interest:


48

1. if within the taxable year an individual

taxpayer reporting income on the cash basis

incurs an indebtedness on which an interest

is paid in advance or through discount or

otherwise.

2. if both taxpayer and the person to whom

the payments has been made or is to be

made are persons specified under Sec. 36 (B):

a. member of a family

b. bet. an individual and a corp., more than

50% in advance of the outstanding stock of

which is owned directly or indirectly by or for

such individual;

c. Bet. 2 corp., more than 50% in value of the

outstanding stock of each of which is owned,

directly or indirectly, by or for the same

individual.

d. bet. the grantor and a fiduciary of any

trust;

e. bet. the fiduciary of a trust and the

fiduciary of another trust if the same person

is a grantor with respect to each trust; or

f. bet. a fiduciary of trust and a beneficiary of

such trust.

Q: Who are not allowed to claim interest

under sec 36 B?

A: interest incurred between related parties.

Q: What if half-brother?

A: not allowed to claim deduction for interest.

TAKE NOTE: interest incurred from the

exploration of petroleum refers not just in

interest incurred on loan of money but also

interest incurred for installment payments.

Q: Who are related parties?

A: individuals and corporations.

OPTIONAL TREATMENT OF INTEREST

EXPENSE:

1. interest incurred to acquire property used

in trade, business or exercise of profession

can be claimed a an itemize deduction…

a. on interest; or

b. depreciation (as capital expenditure?)

Q: What is this interest income?

A: the money borrowed was deposited in a

bank so that it will warn interest. (RR13-

2000)

ILLUSTRATION:

1. loan of 1M from a bank with an interest of

20%

2. 20% of 1M is Php200,000 but you cannot

claim this whole amount as a deduction.

3. when you deposited the 1M in the bank, it

earned a bank interest subject to FIT worth

Php10,000.00.

4. 42% (RR) of 10,000 = 4,200 (RR 9337)

5. Php200K-4,200= Php195,800/ this is the

amount you can claim as a deduction.

34 C TAXES:

REQUISITES:

1. taxes must paid or incurred within the

taxable year

2. it must be incurred in connection with

trade or business.

3. can be claimed as:

a. a deduction; or 34 C 1&2

b. tax credit 34 C 3&7

Q: Where should it be deducted?

A:

1. if claimed as a deduction, it should be

deducted from the gross income;

2. if claimed as a tax credit, it should be

deducted from the Net Income Tax due

(bottom of the formula)

MERCURY DRUG CASE

- Discount of senior citizens

SC: discount claimed by senior citizens shall

create a tax credit and must be deducted at

the bottom of the formula.

Q: What is a tax deduction? Example?

A: example is business tax.

►tax deduction is allowed if the taxes were

paid or incurred within the taxable year and it

must be connected to the trade, business or

profession of the tax payer.

Q: Who are entitled to claim it?

A: those liable to pay NIT. (Tax credit only for

NIT)

Q: What is a tax credit?

A: refers to the taxpayer’s right to deduct

from the income tax due the amount of

tax the taxpayer paid to foreign country,

subject to limitations.


49

Q: What is the tax credit being referred to

under 34 C (3)?

A: credit against taxes for taxes of foreign

country.

Q: What are the other tax credit under the

code?

A:

1. RA 6452 – selling goods and commodities

to senior citizens, the discount claimed is

treated as a tax credit.

2. income tax paid to foreign country.

3. Input tax on Vat

4. Creditable w/holding tax system under NIT

5. Tax credit certificate.

Q: Who are allowed to claim it?

A: RC and DC only.

Q: suppose you paid the 100K NIT to US, can

you claim as a deduction the whole 100K?

what is the formula?

►same procedure for (1) income tax paid to

foreign country; (2) estate tax paid to foreign

country; and (3) Donor’s tax paid to foreign

country.

A: Formula:

STEP 1

GI from sources w/in

NIT: _____________________

GI from entire world

STEP 2

Quotient x RATE = amount w/c can be

claimed as a deduction

A: you cannot claim the whole 100K, you can

only claim the product of the quotient times

the rate

TAKE NOTE: deduct at the bottom of the

formula ( sa computation ng GI)

Q: Suppose you are a RC, you pay NIT to US,

will you be able to claim it as a tax

deduction?

A: 1. generally, you can claim it as tax credit.

2. you can claim under Sec. 34 C (1) b

►if the taxpayer did not signify in his return

his intention to avail himself of the benefit of

tax credit for taxes paid to foreign country.

►taxes incurred not related to the trade or

business, you have the option to:

a. claim it as tax credit; or

b. claim it as a deduction

►law gives you this privilege.

Q: When is taxes not allowed as a deduction?

A: Sec. 34 C (1)

1. Income tax;

2. Income tax imposed by authority of

any foreign country;

3. Estate and Donor’ tax; and

4. taxes assessed against local benefits of

a kind tending to increase the value of

the property.

Q: Who are not allowed to claim deductions?

A: Under 34 C (3) - NRC, NRA; and N/RFC

TAKE NOTE:

1. NRAE and NFC – allowed deduction only if

and to the extent that they are connected

with income from sources within the Phils.

2. Taxes that had been allowed as deduction

but are later in refunded should be treated as

part of the gross income during the year that

it is received (34 1 last paragraph)

Q: Which would you choose? Tax credit or

deduction?

A: tax credit because it is deducted from the

taxable income while deductions are

deducted from the GI.

FORMULA: GI-DEDUCTION = NET INCOME x

RATE = TAXABLE NET INCOME – TAX CREDIT)

34 D LOSSES

Q: Is always a requirement that it is incurred

in pursuit of trade, bus. or profession?

A: No. Sec. 34 D(1) provides for 2 kinds of

losses:

a. incurred in pursuit of trade, bus. or

profession;

b. property connected with t,b,p, if the

loss arises from fire, storms, shipwrecks

or other casualties or from robbery, theft


50

or embezzlement (arising from natural

calamity).


A:

1. Loss actually sustained during the

taxable year

2. Not compensated for by insurance or

other forms of indemnity.

3. Not claimed as a deduction for estate

tax purposes.

Q: This is your itemized deduction which can

be claimed as a deduction from?

A: Gross income

TAKE NOTE:

► The itemized deduction of losses,

however, is not confined to section 34B. it is

also found under section 86A (1) (e) which

also pertains to deductions available under

the estate tax law.

►Losses within six (6) months after the death

of the decedent can be claimed as itemized

deduction of losses under Section 34B.

However, may be claimed as deduction under

estate tax return provided that the same are

not claimed as itemized deduction of losses

under Section 34B.

Q: How many carry-overs do we have under

the Code?

A: 3. Namely:

1. Section 27 E (32) Carry forward of

excess minimum Tax

2. Section 39 D Net Capital Loss Carry-

over

3. Section 39 D 3 Net Operating Loss

Carry-Over.

KINDS OF LOSSES AND THEIR CARRY-

OVERS:

A. ORDINARY LOSS – NOLCO ( #3 above)

Q: Why is there a need for a carry over under

Sec. 34 D # when you can claim the loss from

both capital and ordinary loss?

A: if the loss exceeds the income for the

taxable year, you cannot deduct the entire

amount of loss from your income for that

year so the excess may be deducted for the

taxable year following the loss.

B. CAPITAL LOSS – NET CAPITAL LOSS

CARRY OVER ( # 2 above)

NET CAPITAL LOSS

CARRY-OVER

NET OPERATING

LOSS CARRY-OVER

1. taxpayers is an

individual only not

corporation.

2. involves net capital

loss

3. carry-over as loss

from sale of capital

asset in the next

succeeding year

4. can only be

deducted from

capital gains.

1. taxpayer may be

an individual or

corp;

2. losses incurred

or connected with T

or B;

3. Business losses

not previously off-

set as a deduction

from the GI carried

over as such for the

next 3 consecutive

years;

4. can be deducted

from capital gains

and/or ordinary

gains.

NET OPERATING LOSS CARRY

REQUIREMENTS:

1.Net operating loss of the business or

enterprise incurred w/in the taxable year

2. not previously off-set as a deduction from

the GI

3. carried over as a deduction from the GI for

the next 3 consecutive taxable years

immediately following the year of such loss.

Q: Can the period be extended?

A: yes, for mines other than oil and gas well.

1. net operating loss w/out the benefit

incentives provided by law;

2. incurred in any of the first 10 years of

operation.

3. carried over as a deduction from the GI

for the next 5 years following such loss.

4. no substantial change in the ownership

of the business or enterprise.

Q: What is the limit?

A: 75% of the nominal value of outstanding

shares is held by or on behalf of the same

persons/ corporation


51

► individual no problem, problem lies with

corporations or enterprises.

ABANDONMENT LOSSES

1. contract area where petroleum operations

are undertaken is partially or wholly

abandoned;

► all (1) accumulated exploration and (2)

development expenditures pertaining thereto

shall be allowed as a deduction.

2. a producing well is subsequently

abandoned:

►unamortized cost and undepreciated cost

of equipment directly used therein shall be

allowed as a deduction in the years it was

abandoned.

TAKE NOTE:

1. if abandoned well is reentered and

production is resumed; or

2. if equipment or facilities are restored into

service in the year of resumption or

restoration and shall amortized or

depreciated.

Q: What is the Tax benefit rule?

A: Last Par. of Sec. 34 E (1): recovery of bad

debts previously allowed as deduction in the

preceding year shall be included as part of

the gross income in the year of recovery to

the extent of the income tax benefits of said

deduction.

Q: What is a Bad Debt?

A: Bad debts shall refer to those debts

resulting from the worthlessness or

incollectibility in whole or in part of amounts

due the taxpayer by others, arising from

money lent or from uncollectible amounts of

income from goods sold and services

rendered.

CHINA BANK VS. CA

► bad debts can only be claimed if pursuant

to a contract of loan

- no bad debts for loss of instruments.

Q: Who claims it?

A: a. creditor

b.money lender

Q: What year can it be claimed?

A: can be claimed in the year it was actually

sit ascertained to be worthless and charged

off, meaning cancelled in the books of

account.

Q: Do you need to file an action before you

can claim?

A: No, all you have to do is prove that you did

exert effort to claim or recover the same.

Q: What cannot be deducted as bad debts?

A:

1. debts not incurred in connection with

the trade, business and profession of

taxpayer.

2. transactions, mered into between

parties mentioned under Section 36 (B)

namely.

a) between members of the family

b) between an individual who owns

more than 30% of outstanding

capital stock of a corporation and

that corporation

c) between two (2) corporations more

that 50% of the outstanding capital

stock of which is owned by or for the

same individual

d) between a grantor and fiduciary of

any trust

e) between two (2) fiduciaries of two (2)

trusts who has the same grantor

f) between a fiduciary of a trust and

above fiduciary of such trust

SECURITIES BECOMING WORTHLESS

1. ascertained to be worthless and

charged off within the taxable year

2. capital asset

3. taxpayer, other than a Bank or trust

company incorporated under Phil. Laws

4. substantial part of business is the

receipt of deposit

5. considered as a loss from the sale of

capital assets on the last day of such

taxable year

34 F DEPRECIATION

Q: What is depreciation?

A: It is the gradual dimension in the service

or useful value of tangible property due from


52

exhaustion, wear and tear and normal

obsolescence.

Q: What kind of property is involved?

A: 1. Real property except parcel of land

2. Personal Property

REQUISITES:

1. depreciation deduction must be

reasonable

2. for the exhaustion, wear and tear,

including reasonable allowance for

obsolescence

3. property used in the trade of business

Q: What do you mean by “reasonable

allowance”?

A: it shall include, but not limited to, an

allowance computed in accordance with rules

and regulations prescribed by the Secretary

of Finance, upon recommendation of the

Commissioner, under any of the following

methods:

1.Straight-line method

2.Declining balance method

3.Sum-of-the-year-digital method; and

4.any other method which may be

prescribed by the Secretary of Finance

upon recommendation of the

Commissioner

DEPRECIATION OF PROPERTIES USED IN

PETROLEUM OPERATIONS

1. properties directly related to production

of petroleum

2. allowed under (1) straight line or (2)

declining balance method

3. useful life of properties used or related

to production of petroleum shall be ten

(10) years or such shorter life as

may be permitted by the

Commissioner.

4. for property not used directly in the

production of petroleum (1) depreciated

under the straight line method, and

useful life is only five (5) years

DEPRECIATION OF PROPERTIES USED IN

MINING OPERATIONS

ALLOWANCE FOR DEPRECIATION:

1.all properties used in mining operations

other than petroleum operations shall be

computed as follows:

a. if the expected life is ten (10) years or

less – normal rate of depreciation

b. if the expected life is more than ten (10)

years – depreciated over any number of years

between five (5) years and the expected life.

REQUIREMENTS:

1. depreciation is allowed as a deduction

from 61; and

2. contractor notifies the Commissioner at

the beginning of the depreciation period

which depreciation rate shall be used.

DEPRECIATION DEDUCTIBLE BY NRAETB OR

RFC

► reasonable allowance for the deterioration

of property

1. arising out of its use or employment

2. or non-use in the business, trade or

profession

3. property is located in the Philippines

34 G DEPLETION OF OIL and GAS WELLS

and MINES

► only deduction which is a not self

executing deduction

Q: What is depletion?

A: the exhaustion wear and tear of natural

resources as in mines, oil, and gas wells

►the natural resources called “wasting

assets”

DEPRECIATION vs DEPLETION

1.involves property 1. involves natural

resources

2. ordinary wear

and tear of

equipments

2. ordinary wear

and tear of natural

resources

TAKE NOTE:

►Equipment used in mining operation is

deductible in depreciation

Q: Method for computing depletion?

A: cost depletion method


53

Q: to whom allowed?

A: only mining entities owning economic

interest in mineral deposits

►Economic interest: capital investments in

mineral deposits

34H CHARITABLE & OTHER

CONTRIBUTIONS

TAKE NOTE:

1.unique because deducted from the taxable

net income and not from the gross income

►second step of the formula deduction

Q: Who is claiming the deduction?

A: the donor

Q: Who are the Donees?

A: 1.Government of the Philippines or any of

its agencies or any political subdivision

thereof exclusively for public purpose

2. Accredited Domestic corporation or

association organized and operated

exclusively for religions, lion, charitable,

scientific, youth and sports development,

cultural or educational purposes or for

the rehabilitation of veterans, or

to social welfare institution, or to non

government organization and no part of

its net income inures to the benefit of

any private stock holder or individual

Q: How many kinds of deduction?

A: Two (2) kinds:

1.partial deduction

►10% of taxable income in case of an

individual

►5% of taxable income in case of

corporations

2. full /total deduction

Q: Which of the two kinds is the General

Rule?

A: General Rule: Partial deduction

Exception: Total /Full deduction

Q: Suppose Mr. A made a cash donation of

P1M. How much can he claim as a

deduction?

A: First determine the taxable income of Mr A

since he is an individual, he can only deduct

10% of his taxable income.

Q: What if the Donee is not one of those

mentioned under the law, can he claim a

deduction?

A: No.

TAKE NOTE: Donee is never an individual.

Q: If the Donor is a pure compensation

income earner and he donates P100,000 to

the church, can he claim it as a deduction?

A: No. pure compensation income earner can

only claim a deduction under Sec 34 M

Q: If Donee is the Philippine Government,

what is the requirement?

A: it must be made exclusively for public

purposes

Q: What if the Donee is a province?

A: there must be a qualification that it is for

public purpose

Q: If the Donee is a Domestic Corporation,

what is the requirement?

A: no part of its income inures to the benefit

of any private shareholder or individual

Q: What are those contributions which can be

deductible in full?

A: 1.Donations to the Government – no

conflict with partial (different

requirement)

►Partial donated for exclusively public

purposes

►Full, used in undertaking priority

activities of NEDA

2.Donations to certain Foreign

Institutions or International Organizations

►in compliance with agreement, treaties

or commitment entered into by the

Philippine Government and such donees

3.Donations to Accredited Non

government organizations Non

government organization, non profit

domestic corporation

REQUIREMENTS:

1. organized and operated exclusively for

scientific, research, educational, character

building and youth and sport development,


54

health, social welfare, cultural or charitable

purposes or a combination thereof

2. no part of the net income of which inures

to the benefit of any private individual

3. uses the contributions directly for the

active conduct of the activities constituting

the purpose or function for which it is

organized and operated

4. annual administrative expense does not

exceed 30% of the total expenses and

5. in case of dissolution, the assets of which

would be distributed to:

a) another non profit domestic

corporation organized for similar purpose

or purposes

b) to the state for public purpose

c) distributed by the court to another

organization to be used in such a manner

which would accomplish the general

purpose for within the dissolve

organization was organized

34I RESEARCH AND DEVELOPMENT

►In the old law, this is not allowed as a

deduction. To remedy this, they felt that

those should be a separate deduction for

research and development.

REQUISITES:

►tax payer may treat research and

development expenditures as ordinary and

necessary expenses provided:

1. it is paid or incurred during the taxable

year

2. incurred in connection with trade, business

or profession; and

3. not chargeable to capital account.

Q: Treated as such when?

A: during the taxable year it is paid or

incurred

AMORTIZATION OF CERTAIN RESEARCH AND

DEVELOPMENT EXPENDITURES

►at the election of the taxpayer, the

following shall or may be treated as deferred

expenses:

a. paid or incurred by the taxpayer in

connection with his trade, business or

profession;

b. not treated as expenses under par 1 and

c. chargeable to capital account but not

chargeable to property of a character which

is subject to depreciation or depletion

Q: How to compute taxable income:

A: deferred expenses shall be allowed as

deduction ratably distributed over a period of

not less than 10 months as may be elected by

the taxpayer (beginning with the month the

taxpayer first realizes benefits from

expenditures.)

►the election or option may be exercised for

any taxable year after the effectivity of the

code but not later than the time prescribed

by law for filing the return for such taxable

year.

LIMITATION ON DEDUCTION

Q: When not deductible?

A: 1.Any expenditure for the

(1) acquisition or improvement of land or

(2) for the improvement of property to be

used in connection with research and

development of a character which is

subject to depreciation and depletion and

office site

2. Any expenditure paid or incurred for

the purpose of undermining the

existence, location, extent or quality of

any deposit of one or other mineral

including oil or gas.

► not for mineral exploration

34 J PENSION TRUST

Q: Claimed by Whom?

A: the employer

Q; What is a Pension Trust contribution?

A: a deduction applicable only to employer on

account of its contribution to a private

pension plan for the benefit of its employee

deduction is purely business in character.

Q: Requisites?

A:

1.the employer must have established a

pension or retirement plan to provide for the

payment or reasonable pension of his

employees


55

2. pension plan must be reasonable and

actually sound;

3. it must be funded by the employer

4. the amount contributed must no longer be

subject to his control or disposition

5. the amount has not yet been allowed as a

deduction and

6. the amount has or is apportioned in equal

parts over a period of 10 consecutive years

beginning with the year in which the transfer

or payment is made.

34 K ADDITIONAL REQUIREMENTS FOR

DEDUCTIBILITY OF CERTAIN PAYMENTS

►allowed as a deduction only if shown that

the tax required to be deducted and withheld

there from has been paid to the BIR in

accordance with Section 58 and Section 81

34 L OPTIONAL STANDARD DEDUCTION

KINDS OF DEDUCTIONS:

1.Itemized deduction

2.Optional Standard Deduction

3.Personal /Additional Deduction

OPTIONAL STANDARD DEDUCTION:

►can be availed of by an individual who may

elect a standard deduction in an amount not

exceeding 10% of his gross income

► may apply in lieu of the other deductions

under Section 34

►the taxpayer must signify in his return his

intention to elect the optional standard

deduction, otherwise, he shall be considered

as having availed of the itemized deduction.

Q: Who can claim this deduction?

A: all individual taxpayers except non

resident alien not engaged in trade or

business (NRANETB)

Reason: he is not liable to pay by way of the

NIT, thus, follows he cannot claim this

deduction because he is liable to pay by way

of GIT.

TAKE NOTE:

►can co-exist with personal and / or

additional exemption

34 M PREMIUM PAYMENTS ON HEALTH

AND /OR HOSPITALIZATION INSURANCE

OF AN INDIVIDUAL TAXPAYER

► for (1) Health and /insurance

(2) Hospitalization

REQUIREMENTS:

1. amount of premiums, paid by taxpayer

for himself and members of his family,

2. amount of premiums should not exceed

(1) P2,400 per family or (2) P200 a

month

3. gross income of the family for the

taxable year is not more than P250,000

Q: Who can avail of this deduction?

A: 1.individual taxpayer earning purely

compensation income during the year;

2. individual taxpayer availing itemized or

optional standard deduction; and

3. individual taxpayer earning both

compensation income and income from

business

SECTION 35 ALLOWANCE FOR PERSONAL

EXEMPTION FOR INDIVIDUAL TAXPAYER

Q: When do we apply this?

A: apply if individual taxpayer is paying by

way of NIT

Q; Who are taxpayer?

A: those mentioned under Section 24 (A)

1. RC

2. NRC

3. OCW

4. RA

►all can claim both personal and additional

exemption

Q: Why not include NRAETB? Can the latter

claim any exemption?

A: NRAETB is not included because Section 35

A refers to Section 24 A

►NRAETB can claim personal deductions but

not additional exemptions pursuant to Sec 35

D

REQUIREMENTS:

1.NRAETB should file a true and accurate

return

2. the amount to be claimed as personal

exemptions should not exceed the amount

provided for under Philippine Laws


56

TAKE NOTE:

AEMOP: can be a RA or NRAETB

BASIC PERSONAL EXEMPTIONS:

1. Single individual; or individual judicially

decreed as legally separated with no qualified

dependents.

► 20, 000

2. For head of the family – can be single or

legally separated with qualified dependents.

► 25, 000

3. For each married individual – if only one

of the spouse, earns or derives gross income,

only such spouse can claim the personal

exemption.

►32, 000

Q: Who is the “head of the family”?

A: 1.unmarried or legally separated man or

woman

2. With (1) one or both parties or

(2) With one or more brothers and

sisters

(3) with one or more legitimate,

recognized, natural or legally adopted

children

3. living with and dependents upon him

for their chief support

4. whose such brother or sisters or

children are

(1) not more than 11 years old and

(2) not gainfully employed,

(3) unmarried

5. OR, regardless of age, the same are

incapable of self support because of

mental or physical defect.

Q: Why do we have to determine who the

head of the family is?

A: only legally separated individuals can

claim additional exemptions if they have

qualified dependents.

TAKE NOTE:

►R.A. 7432 and RR 2-98: a senior citizen can

also be a dependent.

Q: Can a widower claim exemptions?

A: exemptions must be strictly construed,

widower not included in the list under

Section 35 A – but can claim under sec

35B

►widower, married or used to be married

MARRIED INDIVIDUALS

►each legally married individuals can claim

the personal exemption. Husband and wife =

P64,000

Q: Who are allowed to claim?

A: Normally , it is the husband who claims

unless he executes a waiver that the wife

will claim the same (RR2-98)

Additional Exemptions: (35B)

-additional exemption of P8,000 for each

dependent not execeeding four (4)

Q: Who can claim the same?

A: 1.Married couples: only one of the

spouses can claim it;

2.legally separated individuals: can be

claimed by the spouse who has custody

of the child or children

►the additional exemption claimed by both

shall not exceed the maximum additional

exemption herein allowed.

Q: Define “dependents”

A: legitimate, illegitimate or legally adopted

child chiefly dependent upon and living

with the taxpayer if such dependent is (1)

not more than 21 years of age, (2)

unmarried, and (3) not gainfully employed

or (4) if such dependent, regardless of age

is incapable of self support because of

mental or physical defect.

Q: What if widower has illegitimate children,

can claim additional exemption?

A: can claim, can be considered as head of

the family w/ dependent

Q: What if the children are temporarily away

from the parents?

A: still considered living with parents, can

claim exemption

CHANGE OF STATUS: (SEC 35 C)

Q: Reckoning Period?

A: end of the year or close of such year when

such change of status occurred.


57

TAKE NOTE:

►always choose the higher amount of

exemption if you are filing a return covering

the period within which the change of status

occurred

1. if the taxpayer should (1) marry or (2) have

additional dependents during the taxable

year, he may claim the corresponding

exemption in full for the year.

Illustration:

1.Single Jan 1, 2005

2.Married June 1, 2005 – on April 15, 2006 –

status: legally married can claim P 32,000

2. if the taxpayer should die during the

taxable year, estate can claim personal

exemption.

Illustration

1.Jan. 25, 2005 taxpayer married w/ one

child

can claim on April 15, 2006

P32,000+

P8,000

► In this case, as if the change of status

occurred at the close of taxable year. If

taxpayer’s spouse or child dies within the

taxable year or the dependent’s became (1)

gainfully employed (2) got married or (3)

became 21 as if the change as status

occurred at the close of taxable year.

Illustration:

1. Taxpayer’s tragic story wife died Jan. 25,

2005 and child died the next day then

another child eloped and get married.

2. Taxpayer despite the tragedy can claim ton

of money on April 15, 2006.

P 32,000

P 16,000 (8,000 per child)

48,000

Section 36. Items not Deductible

36 A. General Rule: In computing net income,

no deduction shall be allowed:

(1) Personal, living or family expenses – not

related to trade or business

(2) Section 36 A (2) and Section 36 A (3)

General Rule: No deductions allowed for

1. Any amount paid out for new buildings

or for permanent improvements, or

betterments, made to increase the value of

any property or estate

2. Any amount expanded in restoring

property or in making good the exhaustion

thereof for which an allowance is or has

been made.

Exceptions:

1. Option granted to Private Educational

Institution to deduct the same as

capital outlays.

TAKE NOTE:

►Amount paid for new buildings, can be

deducted if it involves intangible drilling and

development cost incurred in petroleum

operations (Sec 34 6 (A)

PREMIUMS PAID ON LIFE INSURANCE

POLICY :

1. covering the life of any officer or

employee or any person financially

invested in any trade of business

carried on by the taxpayer.

2. taxpayer is directly or indirectly the

beneficiary under such policy.

LOSSES FROM SALES OR EXCHANGES OF

PROPERTY (between related parties)

1) between family members

Q: Who is considered the “family of the

taxpayer?”

A: a. brothers and sister (whole is ½ blood)

b. spouses

c. ancestors

d. lineal descendants

Q: are uncles or nieces included?

A: no

IN DONOR’S TAX

►Relatives includes relatives by

consanguinity within the 4th

civil code.

Nephew is a stranger and relative ang

nephew.

2) individual and corporations

Gen. Rule: NO DEDUCTION

Except: distribution in liquidation or

less than 50% of the outstanding

capital stock

} P40,000


58

3) Two corporations

4) Grantor or Fiduciary

5) Two fiduciaries of two trust

6) Fiduciary and beneficiary of trust

Sec. 37 Special provisions regarding

deductions of insurance companies.

Codal Provisions

Section 38: Losses From Wash Sales of Stock

or Securities

Q: What is a wash sale?

A: It is a sales or other disposition of stock

securities where substantially identical

securities are purchased within 61 days,

beginning 30 days before the sale and ending

30 days after the sale.

Q: What period?

A: 61 day period beginning 30 days before

and ending 30 days after the sale

Q: Jan 20 you purchased share of stock, and

disposed of the same on Feb 5, 2005. Is

this a wash sale?

A: No

Q: If it is a loss in wash sale, happens?

A: General Rule: (Sec 131 RR No. 2)

gains from wash sale are taxable but

losses are non-deductible

Exception:

►unless claim is made by a dealer in stock or

securities and with respect to a transaction

made in the ordinary course of the business

of such dealer

Q: Reason why losses in wash sale cannot be

deducted?

A: 1. to avoid too much speculation

in the market

2. taxpayer not telling the truth,

because he may say he incurred

a loss instead of a gain

Section 40. Determination of Amount and

Recognition of Gain or Loss

GENERAL RULE: This is totally irrelevant

if the income is subject to fit. In fit gain is

presumed.

EXCEPT: sale of shares of stock where

you have to determine actual gain or loss

Q: When is there a gain?

A: excess of the amount realized over the

basis or adjusted basis for determining

gain. (amount realized from the sale or

other disposition of property)

Q: When is there a loss?

A: the amount realized is not in excess of B

or AB

Illustration: 1987 Bar (Juan dela Cruz

sold jewelry for 300,000 ) contract of sale

►amount realized is 300,000

Q: What will be the basis of the gain?

A: Sec. 40 B (1), property was acquired by

purchase

►Cost: purchase price + expenses

Q: If there is a gain, is the whole gain subject

to income tax?

A: it depends

►if ordinary asset = 100% is subject to

income tax

►if capital assets

a. short term(less than 12 months) :

100% taxable

b. long term (more than 12 months):

50% taxable

Q: suppose property sold is a parcel of land

will the rule be the same?

A: No, and it depends

►ordinary asset: apply the cost

►capital asset: 6% FMV or selling price

which ever is higher

Q: Do we apply the holding period?

A: No, holding period does not apply to the

sale of real property. This is an absolute

rule:

►If realty is ordinary – holding period

does not apply.

►If realty is capital asset – 6% FMV or

selling price applies.

►Holding period applies only to sale of

personal property which is a capital asset

except sale of shares of stocks.

►Holding period also do not apply to

corporations.


59

Q: If the property is acquired through

inheritance, what is the basis?

A: Sec 40 B (2) fair market value or price as

of the date of acquisition.

Q: Suppose it was a sale of personal property,

do we apply the same principles?

A: No.

Q: What if it involves a sale of real property?

A: Apply the same principles

Suppose it was a result of swindling, theft,

robbery or estafa, do we apply the

same principles?

A: Law is silent, take note of the old CIA

ruling on this one

Q: Feb 14, 2006, your GG gave you a jewelry

in Sept your GG breaks up with you. GG

request the jewelry be returned but you

already sold it for P200,000. Will the

entire P200,000 be included in gross

income?

A: Basis: (1) same as if it would be in the

hands of the Donor (FMV as of date of

acquisition); or (2) last owner who did not

acquire the same by gift (cost)

Q: If it involves a parcel of land?

A: apply the same rules Section 40 B (4)

what is the basis?

1. Property was acquired for less

than an adequate consideration in

money or moneys worth: the basis

would be the amount paid by the

transferee for the property.

Q: Section 40 B (5) what is the basis? A: 40 C

(5)

► if the property was acquired in a

transaction where gain or loss is not

recognized (pursuant to a merger or

consolidation plan)

a. corporation, party to a merger or

consolidation, exchanges property

solely for stocks in another

corporation, also a party to the

merger or consolidation

b. is a party to the merger or

consolidation, solely for the stocks of

another corporation also a party to

the merger or consolidation, or

c. Security holder of a corporation,

party to a merger or consolidation,

exchanges his securities solely for

stock or security in another

corporation, also a party to the

merger or consolidation. – person

transfers property to corporation to

gain control

40 C EXCHANGE OF PROPERTY

GENERAL RULE: In sale or exchange of

property, the control amount of gain or loss

shall be recognized.

1. gain is taxable

2. losses are deductible

Exception: If permanent to a merger or

consolidation plan, no gain or loss shall

be recognized

1. gain is exempt

2. losses are not deductible

REQUISITES:

1. the transaction involves a contract of

exchange

2. the parties are members of the

merger or consolidation

3. the subject matter is only limited or

confined with the one provided for by

law

►Merger and Consolidation in corporation

code and tax code are not the same.

►Sec 40 (2) (a)

►a corporation which is a party to a

merger or consolidation, exchanges

property solely for stock in a corporation

which is a party to the merger or

consolidation

Illustration:

Transferor gives 1M

Transferee gives 700,000 = not

taxble gain P300,000

►If other property received by transferee (40

C (3) (a) TRANSFEREE

►if the party receives not just the subject

matter permitted to be received: lie if the

party receives money and /or property,

the gain, if any, but not the loss, shall be

recognized (meaning taxable) but in an

amount not in excess of the sum of the


60

money and the FMV of such other

property received.

(40 C (3) (b) TRANSFEROR

1.Transferor corporation receives money and

/ or property, distributes it pursuant to the

merger or consolidation plan

►no gain to the corporation shall be

recognized

2. Transferor corporation receives money and

/ or property, does not distribute it pursuant

to the merger or consolidation plan

►the gain shall be recognized but in an

amount not in excess of the sum of such

money and the FMV of such other property so

received.

Q: What is the rule?

A: 40 C (3) (a)

1. gain taxable

2. loss not deductible

►40 C (3) (b)

It depends on how distributed:

1. pursuant to the merger or

consolidation plan:

►gain exempt

►loss not deductible

2. not pursuant to merger or

consolidation plan:

►gain taxable

►loss not deductible.

Sec 40 C (1) (b)

►a shareholder exchanges stock in a

corporation which is a party to a merger

or consolidation, solely for the stock of

another corporation which is a party to

the merger or consolidation

Sec 40 C (2) (c)

► a security holder of a corporation

which is a party to the merger or

consolidation, exchanges his securities in

such corporation, solely for stock

securities in another corporation.

►The rule is similar in 40 C (3), (a), (b) and

(c) although different property are involve,

that is why the last paragraph of 40 C is a

separate paragraph.

►Therefore, Sec 40 C (3) (a,b,c) the rule is

1. gain exempt

2. loss not deductible

40c last paragraph

► the transferee becomes a stockholder,

parties are not members of the merger

►the individual wants to be a shareholder

but does not want to purchase shares but

willing to give up property as a result of

the exchange , the person gains control

of the corporation

►The rule is:

a. gain is exempt

b. loss not deductible

Requisites:

1. There is A contract of exchange

where property was transferred by

the person in exchange of stock

or unit of participation in a

corporation.

2. As a result, the person alone or

together with others (not

exceeding of 4 persons) gains

control of the corporation.

Q: What is control?

A: ownership of stocks in a corporation

possessing at least 51% of total voting

power.

Sec 40 B (5)

►non applicability of income tax is only

temporary

Reason : Basis will be 40 C (5)

1. 40 C (5) (a) Transferor

►basis of stock or securities received by

the transferor: same as the basis of the

property, stock or securities exchanged:

►decreased by the (1) money and (2) FMV

of the property received; and

►increased by (a) amount treated as

dividend and (b) amount of gain

recognized

2. 40 C (5) (b) Transferee

►as it would be in the hands of

transferor increased by the amount of

gain recognized.

Sec 40 (c) (4) Assumption of Liability


61

1. Taxpayer, in connection with the

exchanges described – receives

securities or stocks permitted (no

gains recognized) – it is sole

consideration of the same – the other

party assumes liability of the same –

the acquisition of liability not treated

as money and / or other property –

the exchange still falls within the

exceptions.

2. If amount of liabilities assumed +

amount of liabilities to which

property is subjected to exceeds -

adjusted basis of the property

transferred – the excess shall be

considered a gain from the sale of a

capital asset or of property which is

not a capital asset, as the case may

be.

SECTION 41 INVENTORIES

Purpose: Change of inventory to determine

clearly the income of any taxpayer/ to reflect

the true income.

Limitation:

1. once every 3 years

2. approval of the secretary of finance

Section 43 Accounting Periods

1. Fiscal year

2. use of calendar year

a. no annual accounting

b. does not keep books of account

c. individuals

►Use of method as in the opinion of the

commissioner clearly reflects the income:

1. no accounting method has been

employed

2. the method does not clearly reflect

the income

Sec 44 Period in which items of Gross

Income included and Sec 45 Period for

which Deductions and Credit Taken

►Under Sec 44 amount of all items of

gross income shall be included in the

gross income for the taxable year in

which they are received by the taxpayer

►Under Sec 45 deductions shall be taken

for the taxable year in which “paid or

accrued” or “paid or incurred.”

►Sec 44 and Sec 45 are mentioned in the

code because of the death of the person.

Illustration:

Facts: taxpayer dies in the middle of the

year

January 1, 2006 – June 15, 2006

►June 26, 2006 to Dec 31, 2006 the

estate is the taxpayer

►So the income and deductions from Jan

1 to June 25,, included in the

computation

Section 46 Change of Accounting Period

Q: Who is the taxpayer?

A: corporation (taxpayer other than

individual)

Q: What kinds of accounting period?

A: 1.fiscal year

2. calendar year

Q: Changes contemplated?

A: 1. fiscal to calendar

2. calendar to fiscal

3. fiscal to another fiscal

►with the approval of the Commissioner,

net income shall be computed on the

basis of the new accounting period.

Q: Calendar to calendar, correct?

A: not correct statement

Section 47 (A)

Taxpayer: Corporation

1. Fiscal to calendar

► separate final or adjusted return shall

be made for the period between the so

close of the last fiscal year for which the

return was made and (2) the following

Dec 31.

2. Calendar to Fiscal

►separate final or adjusted return shall

be made for the period between the close

of the last calendar year and the date

designated as the close of the fiscal year.

3. Fiscal to fiscal

►separate final or adjusted return shall

be made for the period between the close


62

of the former fiscal year and the date

designated as the close of the new fiscal

year.

►File return indicating the change in

accounting method

Section 48 Accounting for Long Term

Contracts

Q: Who are the professionals involved?

A: applies to architects and engineers

Q: What is a long term contract?

A: it means building, installation or

construction contracts covering a period in

excess of one (1) year.

Q: Basis of income?

A: a. persons whose gross income is derived

in whole or in part from such contract

shall report such income upon the basis

of percentage of consumption.

b. the return shall be accompanied by a

certificate of architects or engineers

showing the percentage of completion

c. deduction of expenditures made during

the taxable year, on account of the

contract is allowed

Section 49 Installment Basis

►contemplates a seller of the property

Q: Is it important to know if the property is

personal or real?

A: Yes

Q: Sale of Real Property is it important to

know if it is a casual sale or regular sale?

A: No

Requirement: The initial payments do not

exceed 25% of the selling price.

Q: If the initial payment exceeds 25% what do

you call it?

A: called deferred sale

Q: Consequence?

A: you must pay the whole amount of the tax

Q: Sale of Personal Property, is it important to

know if it is a casual or regular sale?

A: Yes

Casual Sale has Requirements:

1. selling price exceeds P1,000

2. initial payment not exceeding 25%

selling price

►Regular sale no requirements

Case of Bañas

1. subject matter

2. sold by way

3. agreement

4. cash deposit

5. post dated promissory notes

(installments)

3. 1st

installment promissory note was

disconnected

4. 2nd

installment exchanged with cash -

these two exceeds the selling price

5. you only compute cash

H: Initial payment exceeds 25% installment

basis is not applicable

RR 2; Section 175: In payment by way of

installment promissory note, bills of

exchange and checks will not be considered

in computing the 25% initial downpayment.

Section 50 Allocation of Income and

Deductions

►tremendous power of the

Commissioner to allocate the income and

deduction of several corporations having

the same interest.

Q: Same interest?

A: stockholders substantially the same

Q: Limitations?

A: None

►That is why it is a great source of

corruption

Section 51 Individual Returns

Who are required to file? (ITR)

1. RC

2. NRC

3. RA

4. NRAETB – sources within

Q: Who is not mentioned in Sec 51 but liable

to pay by way of NIT?

A: OCW/ seaman


63

Exception:

RC OR ALIENS: engaged in trade or practice

of profession in Phil. Shall file ITR regardless

of the amount of gross income.

Q: If OFW is exempt from filing a return, what

is he required to file?

A: Information Return

Q: who are not required to file a return?

A:

a. an individual whose gross income

does not exceed his total personal

and additional exemptions for

dependents

b. worker (compensation income

earners) regardless of the amount of

compensation shall not required to

file ITR because the management files

it. (RR 3-2002)

c. individuals whose sole income is

subject to FIT

d. individuals who are exempt from

income tax

Exception: IT

1. the management files an incorrect

return

2. the employee has two or more

employer

51 A (3)

A: not required to file ITR may be required to

file information return

51 B - Where to file?

1. authorized agent bank

2. revenue district officer

3. collection agent

4. duly authorized treasurer of the city or

municipality where taxpayer resides or

has principal place of business

5. office of commissioner – if no legal

residence or place of business in Phil

51 C

Q: When to file?

A: filed on or before the 15th

day of April

each year

51 C (1) – NIT Payers using CY

►two days provided (calendar)

1. on April 15; or

2. before April 15 (January, Feb or March)

► not December because the calendar year is

not yet over

Fiscal year: 15th

day of the 4th

month

following the close of the fiscal year.

51 C (2) individuals subject to tax on

capital gains

Exception: General Rules Sec 58

1. Sale of shares of stocks

►return filed within 30 days after each

transaction and

►Final consolidated return on or before

April 15

2.Sale of Real Property

►return filed within 30 days following each

sale

51 D Husband and Wife

1. Pure compensation income earner –

separate return RR 3-2000 – pure

compensation income earner regardless of

amount of income not file ITR.

2. Not pure compensation: joint return

51 E. Return of Parent to Include Income of

Children

► unmarried minor receives income from

property received from living parent –

included in the parent’s ITR.

Exception:

1.Donor’s tax has been paid

2.Property exempt from donor’s tax

51 F. Persons Under Disability

Q: Who makes the return?

A:

1.duly authorized agent

2. duly authorized representatives

3. guardians

4.other persons charged with the care of

his person or property

►both incapacitated taxpayer and agent

will be liable for:

1.erroneous return

2. false or fraudulent return

51 G Signature Presumed Correct

► prima facie evidence the return was

actually signed by the taxpayer


64

Section 52 Corporation Return

►go back to Sec 51 A (2)

General Rule: Sec 58 Final Income

Tax

►return and creditable withholding tax

return is filed monthly

Exception: Sale of Shares of Stocks

(Sec 51 A (2)) Sale of Real Property

►RR -17-2003: Sale of Real Property

subject to final withholding tax, the buyer

is deemed the agent.

Sale of Shares of Stocks

Q: Reasons for filing Final Income tax or Final

Consolidated Return?

A: Reasons:

1. FIT whose actual determination of

gain or loss

2. in connection with Sec 24 C the

basis of the tax is not the gross

income but the net capital gains

realized.

In connection with Sec 40:

►actual determination of loss or gain

►file a return within 30 days from date of

transaction

TAKE NOTE: In all other income subject to

FIT, the gains are presumed

INCOME OF MINORS

Q: Minor below 18: Will it be included in the

Minor’s ITR?

A: it depends

1. income from property received from

parents ► included in parent’s ITR

Except:

a.Donor’s tax paid

b.Property exempt from donor’s tax

2. income from minor’s own industry

►Minor’s ITR accomplished by guardian

or parents

Q: if the individual is exempt from income

tax, can be required to file a return?

A: General Rule: No

Exceptions:

1.engaged in trade or business; or

2.exercise of profession – Sec 51 A (2)

SEC 52 CORPORATION RETURNS

A.Requirements

Taxpayer: DC or RFC (except NRFC)

ITR Filed: 1. TRUE AND ACCURATE

a. quarterly income tax return

b. final or adjusted income tax return

Filed by:

1.President;

2.Vice President

3. Other principal officer

►ITR must be sworn by such officer and the

treasurer or assistant treasurer

B. Taxable Year

1. fiscal; or 2. calendar

► corporation cannot change accounting

method employed without the approval or

prior approval of the commissioner (Sec 47)

C. Return of Corporation Contemplatory

Dissolution or Recognition

1.Within 30 days after:

a. the adoption by the corporation of a

resolution or plan for its dissolution; or

b. liquidation of the whole or any part of

its capital stock, including a corporation

which has been notified of possible

involuntary dissolution by the SEC; or

c. for its reorganization

2.Render a correct return verified under oath

setting form:

a. forms of the resolution or plan;

b. such other information prescribed

3.Secure a tax clearance from the BIR and file

it with the SEC

4.Thereafter, SEC issued a Certificate of

Dissolution or Reorganization.

D. Sale of Stocks – ITR

look at the previous notes about it

Section 53 Extension of Time to File

Returns

Q: To whom granted?

A: Corporations

Grounds: Meritorious case


65

►subject to the provisions of Sec 56

Time Extension

Section 54 Returns or Receivers, Trustees

in Bankruptcy or Assignees

►the aforementioned persons shall make

returns of net income as and for such

corporation in the same manner and form

as such organization is required to make.

Section 55 Returns of General Professional

Partnership

► file a return of its income setting forth

1. items of gross income and of

deductions allowed by this title (Title

II – Tax on Income)

2. Names of partners

3. Taxpayer identification number (TIN)

4. address of partners

5. shares of each partners

►GPP is exempt from corporate income tax

Q: Why is the GPP obliged to file a return?

A: to determine the shares of each partners

Section 56 Payment and Assessment of

Income Tax for Individuals and

Corporations

A. Payment of Tax

Q: Who pays the tax of tramp vessels?

A: 1.the shipping agents and or the

husbanding agent

2.in their absence, the captains thereof

►those people are required to file a return

and pay the tax due before departure

Q: What is the effect of failure to file the

return and pay the tax due?

A: 1.Bureau of Customs may hold the vessel

and prevent its departure until:

a. proof of payment of tax is presented;

or

b. a sufficient bond is filed to answer

for the tax due.

Installment Payments

Tax due: more than P2,000

Taxpayer: individuals only (other than

corporation)

Elect to pay the tax in two (2) equal

installments

a. 1st

installment: paid at the time the

return is filed

b. 2nd

installment on or before July 15

following the close of the calendar

year

Q: What is the effect of non payment on the

date fixed?

A: The whole amount of tax unpaid becomes

due and demandable together with the

delinquency penalties.

Payment of capital gains tax :

Q: Paid when?

A: on the date the return is filed

Avail exemption for capital gains:

a. no payments shall be required;

b. if you fail to qualify for exemption –

tax due shall immediately become

due and payable and subject to

penalties

c. seller pays tax – submit intention or

proof of intent within six (6) months

from the registration of document

transferring

Q: when is the real property entitled to

refund?

A: upon verification of compliance with

the requirements for exemption.

►Report gains on installments under Sec

49 – tax due from each installment

payment shall be paid within 30 days

from the receipt of such payments.

►No registration of document

transferring real property

1. without a certification from

commissioner or his duly authorize

representative that

a. transfer has been reported

b. tax has been paid

B. Assessment and Payment of Deficiency Tax

► Return is filed, the commissioner examiner

and assess the correct amount of tax

►tax deficiency discovered shall be paid

upon notice and demand from the

commissioner.

3 INSTANCES CONTEMPLATED

1. file the return and pay the tax

2. file the return but not pay the tax

3. not file the return and not pay the tax


66

Section 57 Withholding of Tax at Source

A. Withholding of Taxes

►subject to the Rules and Regulations the

Section of Finance may promulgate, upon

recommendation of commissioner: Require

the filing up of certain income tax return by

certain income payees.

Q: Enumeration is all about what?

A; Enumer ation about Final Income Tax

Except: Gross Income Tax

1. 25 B (NRANETB)

2. 28 B (NRFC)

B. Withholding of Creditable Tax at Source

►The Sec. of Finance, upon

recommendation of the commissioner

require the withholding of a tax on the

items of income payable to natural or

juridical persons, residing in the Phil, by

payor-corporation/ person… the same

shall be credited against the income tax

liability of the taxpayer for the taxable

year. At the rate of not less than 1% but

not more than 32% thereof.

Q: What is the maximum?

A: Maximum: now 35% pursuant to RA 9337

Q: When will you allow withholding beyond

15%?

A:

For NIT 15% is the maximum

1. FIT – the amount of withholding is

totally

2. GIT - equal to the amount of tax

Tax Free Covenant Bond

►the bonds, mortgages, deeds of trust or

other similar obligations of

DC or RFC

►contains a contract or provision where the

obligor (debtor) agrees to pay the tax

imposed herein

►normally between the creditor and debtor

Q: Who pays the tax?

A: Creditor pays the tax by virtue of an

agreement the debtor assumes the liability

and the creditor is now free from payment of

tax before it can transfer the property to the

buyer.

Section 58 Returns and Payment of Taxes

Withheld at Source

A. Quarterly Returns and Payment of Taxes

Withheld at Source

1. covered by a return and paid to:

a. authorized agent bank

b. revenue district officer

c. collection agent

d. duly authorized treasurer of city or

municipality where withholding agent

has:

1. his legal residence; or

2. principal place of business; or

3. if corporation , where principal

office is located

2.Tax deducted and withheld

►held as a special fund in trust for the

government until paid to the collecting

officers.

3.Return for final withholding tax

►filed and paid within 25 days from the

close of each calendar quarter

4.Return for Creditable withholding taxes

►filed and paid not later than last day of the

month following the close of the quarter

during which withholding was made

5. Commissioner, with approval of Sec

Finance

► require withholding agents to pay or

deposit taxes at more frequent intervals

where necessary to protect the interest of the

government

B. Statement of Income Payments Made and

Taxes Withheld

►Withholding agent shall furnish payee a

written statement showing:

1. income or other payments made by

WHA during such quarter or year and

2. amount of tax deducted and withheld

► statement given simultaneously upon

payment at the request of the payee.

Creditable withholding taxes

1. corporate payee – not later than the

20th

day following the close of the

quarter


67

2. individuals payee – not later than

March 1 of the following year

Final Withholding taxes

►the statement should be given to the

payee on or before January 31 of the

succeeding year.

C. Annual Information Return

►Withholding agent shall submit to the

commissioner an annual information return

containing :

1. the list of payees and income required

2. amount of taxes withheld from each

payees

3. other pertinent information required

Final Withholding Tax: AIR

►filed on or before January 31 of the

succeeding year

Creditable withholding tax: AIR

►not later than March 1 of the year following

the year for which the annual report is being

submitted

►Commissioner may grant WHA reasonable

extension of time to furnish and submit the

return required herein.

D. Income of Recipient

1. Income upon which any creditable tax

is required to be withheld at source

shall be included in the return of its

recipient.

2. the excess of the amount of tax so

withheld over the tax due on his

return shall be refunded

3. income tax collected at source is less

than the tax due on his return –

difference shall be paid

4. all taxes withheld

1. considered trust fund

2. maintained in separate account

3. not commingled with other funds

of WHA

E. Registration with Register of Deeds

►No registration of any document

transferring real property shall be

effected by the Register of Deeds unless

the commissioner or his duly authorize

representative has certified that the

transfer (1) has been reported and (2) tax

due has been paid

►Register of Deeds requires payment of

tax before transfer of property

Section 59 Tax on Profits Collectible from

Owner of other Persons

►Tax imposed under this title upon gains,

profits and income not falling under the

foregoing and not returned and paid by

virtue of the foregoing

shall be assessed by personal return

Intent and Purpose of this Title

1. All gains, profits and income of a

taxable class shall be charged and

assessed with the corresponding tax.

2. Said tax be paid by the owner of the

gains, profit or income or the person

having the receipt, custody, control or

disposal of the same

Determination of Ownership:

►determined as of the year for which a

return is required to be filed

CHAPTER X: ESTATES AND TRUSTS

Section 60: Imposition of Tax

1. Estate ► property of the decedent

created by an agreement, trust or by

last will and testament

2. Trust ►agreement, contract or last

will and testament

Status:

1. Estate: same status as decedent

2. Trust: same status as the grantor

Income taxpayer is the Estate:

►income of the estate pending partition

or no partition at all:

Three kinds of partition:

1. judicial

2. extra judicial partition

3. or no partition at all

During partition Estate earns income:

1. individual – income tax

2. corporation – corporate income

tax

3. estate (Taxpayer = TP)

a.Impose Income as if TP is individual


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b.Impose income as if TP is corporation

c.Impose income as if estate itself

►depends whether there is a (1) judicial

(2)extra judicial partition or (3) no partition at

all

When there is a judicial settlement which is

final and executory but no partition:

Two possibilities:

1.Creation of unregistered partnership

►Income of the Estate: corporate income tax

2.Creation of Co-ownership

►Income of the Estate: Income tax on

individual

-co-owner liable in their individual company

Ponce Case:

H: After finality heirs did not divide the

property, the applicable income tax is

corporate income tax because they

contributed money to engage in real estate.

SECTION 61 TAXABLE INCOME (Important)

“Taxable income of the estate or trust shall

be computed in the same manner and on the

same basis as ill the use of an individual.”

Section 62: Applies during Pendency of

Extra Judicial Settlement

Personal Exemption (P20,000)

Individual ► it will depend whether

he/she is classified as single, head of

the family or married

Estate ►regardless

Special deductions:Income distributed to the

heirs

►if you distribute nothing you cannot

claim this special deductions

►if there is a distribution, the heir shall

be liable to pay whether individual

capacity

►if there is no distribution, heirs are not

liable to pay anything

►Special deduction not apply if individual tax

is paid by the Estate itself.

Payment: made by executor, administrator,

to creditor to preserve the estate

Sec. 61 and Sec 62

►does not apply if estate is subject to

income or corporate income tax

►it applies if the estate pays itself during

the pendency of the judicial settlement

Basis: Sec 60 C

“during the period of administration or

settlement of the estate.”

Taxpayer is a Trust:

Q; When liable to pay income tax?

A: If the trust is revocable (if revocable, Sec

61 and 62 also apply)

Parties:

1.Grantor /creator /trustor

2.fiduciary / trustee

3.beneficiary / Les Qui trust

Q: Who is liable to pay tax:

A: If trust revocable:

► obligation of the trustee

►liability of trust itself and not personal

Liability of trustee:

If trust irrevocable

►obligation of the grantor

►personal liability of the grantor as an

individual

TWO WAYS OF REPORTING INCOME:

PURSUANT TO RR2 – (1949)

1. report only once

(building paid once)

2. after the span of 25 years

(payment of building divided per year)

ESTATE TAX:

1.Sec 60

2.Real Estate Tax

3. Estate Tax

►transfer tax impose on the Net Estate

for the transfer of property to the heirs or

beneficiary whether real, personal,

tangible or intangible

3 KINDS OF TRANSFER TAX:

1.Estate Tax

2. Donor’s Tax

3. Sec 135 of LGU Transfer of Real

Property

Q: We don’t have inheritance tax and donees

tax, why?


69

A: 1973 Marcos issued P.D. 69

Explain: Sec 84, rate is max of 20% of net

before the rate is 60% plus additional

amount.

►resulted to many gimiks through tax

avoidance scheme, like creating a family

corporation (only taxable is the stockholders

which is exempt)

►Congress enacted RA 7449 decreased 60%

to 35% and then RA 8424 – 35% to 20%

Q: Now is it safe to create a family

corporation?

A: No more.

Q: Now: Iba na ang scheme – which is better

sale or donation?

A:

1.Sale of RP considered capital assets

►6% to 1.5% doc. Tax 7.5 % better

2.Sale of RP considered ordinary asset

►5% to 52% as per use may be

3.Donation if given to all compulsory heir

► relative lower than 20% which is 15%

► stranger: 30% so go with 20%

Q: Who are the taxpayers?

A: Sec 104 Estate and Donors

1.Estate

a. RC

b.NRC

c. RA

d. NRA

2. Donor’s Tax

a. RC

b.NRC

c. RA

d. NRA

e. DC

f. FC

►A corporation cannot die of a natural death.

Q: What is the reason for classifying the

taxpayers?

A:

1. NRA and Estate

2. NRA and FC Donors = property

outside Phil exempt

3. all, other than these 3 – taxable w in

and w/out

Q: Is Section 104 relevant to all taxpayers?

A: No, material only to NRA and FC

Section 104 speaks of intangible personal

property located in the Philippines.

1.Franchise which must be exercised in

the Philippines;

2.S.O.B. issued by a Domestic

corporation;

3.S.O.B. issued by foreign corporation at

least 85% of the business of which is

located in the Philippines. – do not

confuse with 42 (2nd

par)

4.S.O.B. of foreign corporation which

acquired a business situs in Phil

5.S.R. in business, partnership or industry

established in the Phils

Q: NRA, German donates SOS of FG to

Filipina gf, is it subject to donor’s tax?

A: it depends (you must qualify)

1.Subject to donor’s tax if:

1.S.O.B. FG at least 85% of business

located in the Phil

2.S.O.B. FG which acquired a business

situs in Phil

2.Exempt

1.personal property outside of Phil; or

2.intangible personal property net taxable

if following requisites concern:

A decedent at the time of his death or the

donor at the time of donation was a citizen

and resident.

1.of a foreign country which at the time of

his death or donation did not impose a

transfer tax of any manner, in respect of

intangible personal property of citizens of

Philippines not residing in that foreign

country; or

2. the laws of the foreign country allows

a similar exemption from transfer or

death taxes of every character or

description in respect of intangible

personal property owned by citizens of

the Philippines not residing in that

foreign country.

Q: What if citizen of one country and resident

of another country will the exemption

apply?

A: No, law requires that he must be a citizen

and resident of the foreign country.

Campos Rueda Case:

F: NRA died – married to Moroccan man, so

she was a Moroccan resident.


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Donated SS in DC – administrator claims

exemption, ground: In Morocco,

intangible personal property of Filipinos

not residing therein is exempt from

transfer tax.

BIR contends: Morocco is not a country

but a colony of Spain.

H: claim granted – even if it is not a full

pledged state, or it’s a mere colony, what

matter is that the foreign law provides for

an exception.

SECTION 84 RATES OF ESTATE TAX

Q: What is the formula for Estate tax?

A: Gross Estate (Sec 85)

- Deductions (Sec 86)

--------------

Net Estate

x Rate

-------------

Taxable net income

- Tax credit

---------------------

Tax due

Gross estate (define) – Sec 104

►gross estate include real and personal

property, whether tangible or intangible,

or mixed, wherever situated

NRA: Decedent / Donor – property

situated outside of Philippines not

included on the gross estate

Section 85 Gross Estate (inclusion)

A.Decedent’s interest

►includes property (1) owned at the time of

death and (2) property not owned at the time

of death

Classic example: Usufruct

Q: if terminated by the death of usufructuary,

is it subject to estate tax?

A: Not subject to estate tax

Reason: Exempt Transmission under

Sec 87 (a)

►merger of the usufruct in the owner of

the naked title

Q: is there a conflict between Sec 88 a and

Sec 87 a? How do you reconcile?

A: No conflict

1.Section 87 a contemplates a situation

where the usufruct is terminated.

2.Section 88a contemplates a usufruct for

a fixed period. Ex contract of lease

Q: How do you determine the value of

usufruct?

A: Sec. 88 a provides to determine the value

of the right of usufruct, take into account

the probable life of the beneficiary.

Q: Why definition of gross estate is longer

than definition of gross gift?

A: transfer occurring after death. estate tax

absolute

Transfer during the life time

►Normally Donor’s tax

However there are exceptions:

1.transfer in contemplation of death (85B)

2.revocable transfer (85 C)

3.transfer for insufficient consideration

B. Transfer in contemplation of death

Roces case:

F: during lifetime, the following document

were instituted or executed simultaneously

1.will and 2. donation

The heirs insisted to pay Donor’s tax,

Posados the collector tried to collect

inheritance tax.

unique thing: Donees were also the heirs in

the last will and testament

Donees wanted to pay donor’s tax because

it is always lower than the estate tax except

when the donee is a stranger

H: this is a transfer in contemplation of death

Dizon Case:

F: Deed of Donation was executed

Dizon died several days thereafter

son claims Donor’s tax

H:Transfers in contemplation of death

Q: What are transfers deemed in

contemplation of death?

A: 1.Property was transferred during the

lifetime but the decedent:

a. retains possession or receive income

or fruits of property; or

b.retains the right to designate persons

who will possess the property or the

right to receive fruits or income

c.Revocable Transfers


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1.revocable transfers are included in the

gross estate

Reason: the decedent retains tremendous

power and control over the property

2.Irrevocable transfers are not included in

the gross estate: exempt

Reason: the decedent losses control over

the property

Notice Not Required because the person has

the control over the property

D. Property passing under general power of

appointment

► same with fidel commissary substitution

3 parties:

1.testator / decedent

2.1st

heir

3.2nd

heir

TAKE NOTE: To determine whether included

in Estate or not, know who has the choice to

designate the 2nd

heir:

►if decedent instructs the 1st

heir that he can

transfer the property to whomever he wants

included in gross estate

►1st

heir choice – included in gross estate

E. Proceed of Life Insurance

1.Beneficiary is the estate

►included in gross estate whether

designation is revocable or not

2.Beneficiary is 3rd

person

► revocable included

►irrevocable not included

F. Prior Interest

►important only due to the codification of

the tax code B,C,E, included whether before

or after the effectivity of the code

G. Transfer for insufficient consideration

Q: Similar provision in Sec 100 (Donor’s tax)

can you apply the two (2) provisions

simultaneously?

A: No, alternative application, one or the

other but not both.

The application will depend on the time of

transfer or motive:

1.If transferred because of impending

death

► estate tax

2.If transfer because of generosity

►Donor’s tax

Q: Parcel of land was sold for less than

adequate consideration (adequate) to

relative for P600,000 when FMV is 1

million pesos. Is this subject to transfer

tax? Is it subject to Donor’s tax?

A: No, Sec 100 provides the property should

be other than real property referred to in

Section 24 (D)

►Not subject to Donor’s tax, the

applicable tax is 6% FIT

Q: Will your answer be the same if SOS are

sold?

A: No, answer not the same, SOS not property

contemplated in Sec 24 D (1)

►in this case, the amount by which the

FMV of prop exceeds the value of the

consideration shall be deemed a gift and

included in the computation of the gross

gift: subject to Donor’s Tax

Q: What is the subject matter in 85 G?

A: paragraphs 85 B, 85 C, 85 D

Sale in good faith as a defense:

1.under Section 100 is not a defense

2. under Section 85 G, it is a defense

H. Capital of Surviving Spouse

►correlate with Sec 86 C

►both speak of legally married individual

►pertains to the separate property of

spouse who survived

►capital used in its generic sense

►surviving spouse may be man or woman

Section 86 (c)

►to determine the limitations of

1. Funeral Expense

2. Whether written notice is required

3. to determine whether gross value is

at least P200,000 (Sec 90)

4.to determine if gross value is at least

42 M

Q: Who are the taxpayers under 86 A?

A: 1.RC

2.NRC

3.RA

Q: Who is the taxpayer under 86 B?


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A: NRA

Q: Why do we need to know this?

A: NRA cannot avail of the following

deductions:

1.family income

2.standard deduction

3.hospitalization

4.retirement pay under RA 4917

A. Deductions Allowed to the Estate of a

Citizen or Resident

1.ELIT (expenses, losses, indebtedness and

taxes)

a) 1.Actual Funeral Expenses; or

2.amount equal to 5% of gross estate

►apply whichever is lower

Limitation:

a)amount equal to 5% of gross estate

should not exceed P200,000 (basis is

the gross value)

b) Judicial Expenses

►no limitation

Pajonar vs Commissioner

I: Whether or not extra-judicial expenses

may be allowed as a deduction

H: This law has been copied from U.S. In US,

expenses to be claimed as a deduction

both judicial and extra judicial expenses.

Claims against the estate

►Estate is the debtor

Requirements:

1.at the time the indebtedness was

incurred the debt instrument was duly

notarized;

2.loan contracted within 3 days before

death;

3.the administrator or executor shall

submit a statement showing the

disposition of the proceeds of the loan

Claims of the deceased against insolvent

person

►Estate is the creditor

Requirement:

►the only requirement is that the (only)

amount of loan is included in the gross

estate

►notarization and certification not required

Unpaid Mortgage, taxes and losses

Q: In unpaid mortgage who is the

mortgagor?

►decedent mortgagor

1. Unpaid mortgage

1.value of the decedent’s interest in the

property is undiminished by such

mortgage;

2.included in the value of the gross

estate;

Illustration:

1 million FMV but mortgage is only

600,000 you include 1 million

2.Estate tax

3.Losses

Requirements:

1.losses incurred during the settlement of

the estate;

2.arising from fire, storms, shipwreck or

other casualties, or from robbery, theft or

unbezzlement

3.losses not compensated by insurance

4.losses not been claimed as a deduction

for income as purpose

5. losses incurred not better than the last

day for the payment of the estate tax

Property Previously Taxed

►Vanishing Deduction Return

Requirement:

1.person acquires the property by virtue of

donation or inheritance

Q: What if acquired through purchase?

A: Not apply, the property must be acquired

by inheritance or donation

2.Estate tax or Donor’s tax already paid by

the Estate of the Decedent (1st

par)

3.Any person who died within five (5) years

prior to the death of the decedent

Q: What are the amounts?

A: Prior Decedent died within:

1.5years – 20%

2.4years – 40%

3.3 years -60%

4. 2years – 80%

5. 1 year -100%


73

Q: Suppose the person died within 1 year and

it was inherited by son, suppose the son

also died within 1 year or may be 2 years,

should we apply the vanishing

deductions?

A: No more (last par Sec 86 A2)

Transfer for Public Use

►amount of all bequest, legacies, devises

or transfers

Recipient:government or any political

subdivision

►exclusively for public purpose

Take Note: 30% of which not used for

administrative purpose is not a

requirement

FAMILY HOME

►amount equivalent to the current FMV of

the Family Home of decedent.

Limit: FMV should not exceeds 1 million

otherwise the excess will be subject to

estate tax.

Requirements: (RR 2-2003)

1.Person is legally married

GR: if single not allowed to claim

Except: if head of the family

2.Family Home actual residence of the

decedent

3.Certification of Barangay Captain of

locality

STANDARD DEDUCTIONS

►automatic: RR 2-2003 no requirement

provided the decedent is the one in 86 (A)

(RC, NRC, RA)

MEDICAL EXPENSES

Requirements:

1.amount not exceeding P500,000

2.medical expenses incurred by the

decedent within one (1) year prior to his

death.

►must be duly substantiated with receipt

RETIREMENT PAY UNDER RA 4917

(RETIREMENT PAY WITH PRIVATE PLAN)

Requirements:

1.plan duly approved by the BIR

2.person at least 50 years old

3. 10 years in service

4. avail only once

TAKE NOTE: This is a deduction in the nature

of exemption, all other retirement plan is

excluded

B. Deductions Allowed to Non resident

Estates

1.ELIT

2.Property Previously taxed

3.Transfers for public use

C. Shares in the Conjugal Property

D. Miscellaneous Provisions

For NRA: No deduction allowed unless

include in the return the value at the time

of his death that part of his gross estate

not situated in the Philippines. For proper

deduction must include E. below

E. Tax Credit for Estate Tax Paid to

Foreign Country

SECTION 87 EXEMPTION OF CERTAIN

ACQUISITION 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

or legatee to the fideicommissary;

3. transmission from the first heir, legatee

or legacy donee in favor of another

beneficiary, in accordance with the desire

of the predecessor;

4. All bequest, devises, legacies or transfers

to (1) social welfare (2) cultural and (3)

charitable institution

Requirements:

1.no part of the net income insures to the

benefit of any individual;

2.not more than 30% of donation (BDL)

shall be used by such institutions for

administration purposes.

SECTION 88 DETERMINATION OF THE

VALUE OF THE ESTATE

A.Usufruct

1.Determine value of right of usufruct:

►consider the probable life of the

beneficiary based on the latest Basic

Standard Mortality Table

B.Properties


74

►fair market value of the Estate at the time

of death

1.FMV determined by Commissioner

2.FMV schedule of values fixed by the

Provincial or City Assessors

SECTION 89 NOTICE OF DEATH TO BE

FILED

Q: What is the Basis?

A: the gross estate of the person

Q:When is the notice required to be filed?

A: 1.all cases of transfer subject to tax

2.although exempt, when gross values of

the estate exceeds P200,000

Q: When filed?

A: within two (2) months

1. after decedent’s death

2.same period after qualifying as executor

or administrator

►give a written notice

Q: If the Net Estate is at least P16,000 will

you in form the commissioner?

A: yes, the gross is at least 3-4 million

SECTION 90 ESTATES TAX RETURNS

Q: When required to file return?

A: 1.all cases of transfer subject to tax

2.even though exempt, gross value

of the estate exceeds P200,000

3.regardless of gross value of the

estate, when the same consists of

registered or registrable prop such as:

a.real property

b.motor vehicle

c. shares of stocks

d. other similar property where

clearance from BIR necessary for

transfer of ownership in the name of

the transferee

►return must set forth the following:

1.value of the gross estate at time of death

2.deductions allowed

3.information necessary to establish correct

taxes

Q: What if Estate is exempt, is it required to

file a return?

A: General Rule: No

Exception:

a. gross value exceeds P200,000

b.estate contains registrable property

Q: if the estate or gross estate exceeds 2

million, what is the requirement?

A: return must be duly certified by a CPA

B. Time of Filing

►filed within 6 months from decedent’s

death

►within 30 days for filing the return

►within 30 days after promulgation of such

order

1.certified copy of the schedule of partition

and

2.order of court approving the same

C. Extension of Time

Time: 30 days

Grounds: meritorious cases

Who grants: Commissioner

D. Place of filing:

►return shall be filed with:

1.authorized agent bank

2.revenue district officer

3. collection officer

4. duly authorized treasurer

►city or municipality in which decedent

was domiciled at the time of his death

Q: What if non resident?

A: NR with no legal residence here, with the

office of the commissioner.

Q: Let us say there are 3 compulsory heirs,

namely A, B, and C. A renounces his

inheritance coming from the parents, but A

renounces his inheritance in favor of his 2

siblings, brother and sister B and C. Is this

subject to donor’s tax?

A: NO. It is exempt.

Q: But if in the given example, A said “I am

renouncing my inheritance, but I am giving it

to my sister B”, is this subject to donor’s tax?

A: YES. Renunciation is to the disadvantage

of the brother.

TAXATION UNDER THE LOCAL GOVERNMENT

CODE:

1. Local Tax

2. Real Property Tax


75

LOCAL TAXATION (§186, 187, then go to

§151, 128 down)

Q: Mayor Binay of Makati ordered the

collection of elevator tax (for elevator in the

city hall). Is the order of Mayor Binay legally

tenable?

A: NO. There should always be a tax

ordinance after conducting a public hearing.

(§186)

tax ordinance

Q: Can BIR collect the tax even in the

absence of a revenue regulation?

A: YES.

Q: Can a province, city, municipality or

barangay collect the tax if there is no tax

ordinance?

A: NO.

Q: Why is it that there should be a tax

ordinance as required by §186?

A: The rationale is not mentioned in §186,

but if you read the other provisions of the

LGC, you will come to set of conclusions of

the reason why there must be a tax

ordinance.

» In most of these provisions, it always say:

one-half if the town or municipality shall

collect a tax of not exceeding 1% of the gross

receipt.

TAKE NOTE: There is no exact amount;

hence, it is the tax ordinance which will fix

the exact amount.

public hearing

In Congress, the requirement is not

absolute (by discretion only). Under local

taxation (last phrase of §186), the

requirement is ABSOLUTE.

REYES vs. SECRETARY (320 SCRA 486)

F: In the municipality of San Juan (just

beside Mandaluyong) there was a tax

ordinance passed. Reyes, a resident,

claims that there was no public hearing

conducted, he maintains that under §186

last phrase, there should always be a

public hearing.

H: The SC said: “yes, that requirement is an

absolute one, but since the petitioner

failed to produce evidence to support his

allegation, if there is no proof presented

other than his own statement, we hereby

rule that the ordinance was passed in

accordance to the procedure mandated

by law”. While it is true that a public

hearing is an absolute requirement, he

who alleges, must prove the same.

Q: If you don’t agree with the validity or the

constitutionality of the tax ordinance, what

will be your remedy?

A: Within 30 days from the effectivity of the

ordinance, the taxpayer should file an appeal

with the office of the Secretary of the DOJ

(§187)

REYES vs. SECRETARY (320 SCRA 486)

F: Reyes asserted the validity and

constitutionality of the tax ordinance only

after the lapse of thirty (30) days (perhaps

his lawyer was thinking that an ordinary

statute may be contested anytime with

the RTC, CA or SC).

H: With regard to a tax ordinance, w have a

specific rule, failure to assail the validity

with the specific period of time, is fatal to

the taxpayer. Since it was filed beyond

the 30day period, we do not disturb the

validity of the ordinance.

Q: Within what period should the Sec. of

Justice decide?

A: Within 60 days from the time the appeal

was filed. Failure to decide within this time,

the taxpayer has the remedy to file an action

with the regular courts.

» If the decision was made within the 60

day period, and receives the decision, his

remedy is to file an appeal within 30days

form the receipt of the decision to court of

competent jurisdiction → RTC.

» Beginning April 23, 2004, from the ruling

of the RTC, pursuant to RA 9282 (the law

uplifting the standards of the CTA), the

ruling of RTC on local tax cases, is

appealable to the CTA en banc.


76

TWO APPEALS DECIDED BY THE CTA EN BANC:

1. decisions of RTC involving local tax

cases

2. decision of the Central Board of

Assessment Appeals.

» From CTA en banc, the appeal must be

file with the SC within 15days.

» Go to §151:

The city could impose the tax already

imposed by the province of by the

municipality.

Q: What are the numerous taxes imposable

by the province which a city now allowed to

impose?

A: Those enumerated in §135 to §141 of the

LGC

Reasons why a municipality wanted to be

converted into a city:

1. §151

2. §233 (real estate tax)

» In addition, the law says that the city

could increase the rate of the tax by not more

than 50% of the maximum EXCEPT those

enumerated in §139:

a) professional tax

b) amusement tax

A. General Principles (§128-130)

► reiteration of the constitutional tax

provisions

► notice that the constitutional limitations

on taxation do not only apply to the national

government but also to local government

units.

B. Definitions (§132)

Local Taxing Authority (§132)

for a province, it is the provincial

board or the provincial council

(sangguniang panlalawigan)

for a city, we have the city council

(sangguniang panlusod)

for the municipality, we have the

municipal council (sangguniang

pangbayan)

for the barangay or barrio, we have

the barangay council.

C. Common limitations on the taxing

power of the LGU’s (§133)

» Under the old law this was §5 of the Local

Tax Code.

Q: Why common?

A: Because the limitations or prohibitions

apply to all LGUs, the provinces, cities,

municipalities and barangays.

Two Common Crimes (under §133)

1. absolute prohibition

2. relative prohibition

It shall be unlawful for the LGUs to collect:

I. Income Tax EXCEPT when levied on banks

and other financing institutions (§133(A))

» the term “other financing institution

shall include money changer, lending

investor, pawnshop (§131(E))

» rate of tax: does not mention rate of

tax, so long as it is “fair, just and

reasonable”

» It cannot be “prohibited taxation,

because the element of “imposed by the

same taxing power” is not present. One is

imposed by the national government and

the other is by the LGU.

II. Documentary Stamp Tax (§133(B))

» absolute prohibition

III. Estate tax, inheritance, donations inter

vivos, donations mortis causa EXCEPT in

§135 (§133(C))

» transfer tax on the transfer of realty

to be imposed by provinces and cities

(§135)

NOTE: this is not a real estate tax,

this is a local tax.

IV. Custom duties, charges or fees for the

registration of vessels or ships, wharfages

fees and wharage dues EXCEPT if the wharf

had been established, maintained and

operated by the locality (§133(D))

» wharfage due – is a custom fee

imposed on the weight of the cargoes.

» wharf – a pier

» special levy on public works (§240)

» allows provinces cities and

municipalities to impose a special real


77

estate tax known as “special levy or

public works”

» let us say the municipality established

a pier for a minimal value of P10M; out

of P10M, under §240, 60% of this may be

recovered; the other 40% may be

recovered by warfage due.

v. Tax, fee or charge for goods or

commodities coming out or passing through

the territorial jurisdiction even if in the guise

of a toll or a fee (§133(E))

» an absolute prohibition

» commodities marketed in a public

market, let’s say in the city of Pasig,

where the commodities came from

Laguna then to Tanay, Cainta, Taytay; just

imagine if each of the towns will impse

1peso for every head of a chicken or

50cents for every bundle of vegetable.

PALMA DEV’T CORP v. MALANGAS

ZAMBOANGA DEL SUR (113 SCRA 572)

F: Municipal council passed a tax ordinance

entitled “police surveillance fee” which

provide that ALL motor vehicle passing

through a particular street in the town

proper of Malangas which will lead to the

pier or wharf will pay a certain sum of

money whether it is camote, copra,

palay,or rice. One of the owners of the

motor vehicle is Palma Dev’t Corp.

carrying copra, banana and coconut to be

loaded in a ship docked at pier of

Malangas. The lawyer of petitioner

assailed the validity of the ordinance

stating that it is a clear violation of

§133(E).

H: It is not the title of the ordinance which is

controlling but it is the essence of the

substance of the tax ordinance. The tax

ordinance clearly violated §133(E),

therefore, the SC had no option but to

declare the tax ordinance null and void

for being in violation of the law.

VI. Taxes, fees or charges on agricultural

and aquatic products when sold by marginal

farmers or fishermen (§133(F))

Q: Don Antonio Florendo, a person

coming from Pampanga who settled in

Davao City, employed thousands of

workers in the different banana

plantation. Can the LGU impose tax on

the agricultural product which is a

banana?

A: YES. The LGU can impose because

Don Antonio is not a marginal farmer. It

is only prohibited if it is sold by a

marginal farmer.

» Marginal Farmer – a farmer or a

fisherman for subsistence only, whose

immediate members are the immediate

members of the family (§131(P))

VII. Tax, fee or charge on pioneer and non-

pioneer enterprise duly registered with the

board of investments for a period of 6yrs and

4yrs respectively (133(G))

» relative prohibition because after the

period, the LGU concerned may now

impose the tax.

VIII. Excise tax on articles and tax, fees and

charges on petroleum products (§133(G))

» relative prohibition since under

§143(H), it says there that taxes which

are prohibited such as excise tax,

percentage tax and value added tax

nonetheless, the LGU may impose a tax

not exceeding 2% of the gross receipt (for

cities 3%).

» My former student an assistant in the

city legal attorney in a city in Metro

Manila, received a summon from the RTC

(on complaint of a supermarket in Metro

Manila) questioning the validity of the tax

ordinance under §143(H) since the rate

imposed was 3%

I said, “ineng, una file kayo ng motion

to dismiss. Nak ng puta, absent ka na

naman ata eh, you invoke §151 stating

that a city can impose a tax higher than

the rate provided for by law not more

than 50% of the maximum (50% of the

maximum of 2% is 1, therefore, 2+1 is

3%)”

BULACAN v. CA (299 SCRA 442)

*first case decide by the SC which interpreted

both the LGC and the NIRC.

F: The then governor, Obet Panganiban

together with his provincial council

passed an ordinance imposing tax on

quarrying under the provision of §138 of

the LGC. The problem is that the

ordinance applies to ALL entities

quarrying in the province. One of the

taxpayers, Republic Cement obliged to

pay the tax, argued that under §138 of

the LGC, the tax on quarrying on which

the province may be allowed shall only be

with regard to quarrying private land, and


78

not only that but under §133(H), there is

a prohibition to impose excise tax and

tax on quarrying under the IRC is an

excise tax.

H: The tax on quarrying allowed to

provincial governments shall only be with

regard to lands which are public lands,

and since this is a private tax on

quarrying refers to a lot without any

distinction. Hence, if the LGC made a

qualification as to the kind of land (where

it says it should be public land), by

implication, it should refer to private land

under §151 (although the law did not

distinguish); and since it is a tax by the

national government, it should be

collected by the BIR (not the LGU), and

also the SC agreed that it is an excise tax

where LGU’s are prohibited from

collecting; thus, the SC declared the tax

ordinance null and void for being contrary

to law.

» Sir, why is it a problem when the law

is clear that under §138, it shall only

apply to public land?

Perhaps the provincial council thought

that the subject matter of the tax

ordinance may be a subject matter

provided in any book including the IRC,

or worse, that it may impose a tax on a

subject matter not mentioned in any

book.

Moral lesson: although a tax

ordinance may be passed even if the

subject matter is not provided for in any

law, it has to comply with the limitations.

PETRON v. PENILLA (198 SCRA 86)

* The facts here arose under the old law

under §5 (now §133) of the local tax code

(PD 231)

F: Petron has a factory/plant in Penilla

where the raw materials petroleum

products are being converted into refined

petroleum products. The municipal

council of Penilla imposed a tax by way of

a tax ordinance saying that they are

invoking the old §19 (now §143(A))

stating that municipalities are authorized

to impose tax of the manufacture of any

commodity, hence, since it is

manufacture of a petroleum product, the

LGU must e authorized. However, Petron

objected since under §5 (now §133(H)),

the prohibition includes the prohibition to

impose excise tax and not only that,

under this par., the tax on petroleum

products is an excise tax. Under this par.,

the law is clear it does not only prohibit

the imposition of tax, fee or charge over

petroleum products.

H: The controlling provision here the old

§19 (now §143(A)) that LGUs are

authorized to impose the business tax for

the manufacturing over any kind of

commodity by and petroleum product is

“any kind of commodity”.

Q: What do you think?

A: I don’t agree with this ruling because

between §133(H) and §143(A), it is the

former which is more specific.

IX. Value added tax and percentage (§133(I)

EXCEPT §143(H)

» Relative prohibition.

X. Tax, fee or charge on common carriers

whether by land, water or air (§133(J))

FIRST HOLDING CO. v.BATANGAS CITY (300

SCRA 661)

* 2nd

SC ruling discussing both the IRC and

LGC.

F: This revealed to the public the existence

of 2 very big oil pipelines coming form

Batangas City with a distance of more

than 100km, one going to Pandacan Oil

Depot and the other one is going to Brgy.

Bicutan, Taguig. The Batangas City

council deemed it necessary to impose a

tax on the gross receipt of the 1st

holding

company for the operation of the oil

pipeline, but the operator argued that the

oil pipeline is not a common carrier.

H: The SC reasoned out like in the case of

Pajunar v. Comm (328SCRA666), saying

that “we have copied the code of carrier

law form the US where the definition of a

common carrier is one habitually carrying

not only individuals or passengers but

also goods or commodities, and since the

oil pipelines is habitually carrying

petroleum products which is a

commodity, we rule this as a common

carrier which is under §133(J), LGU is

prohibited from imposing tax on common

carriers, and not only that but under

§170 of the LGC, the law is very explicit,

that ALL LGUs are prohibited to impose

percentage tax on common carriers”. With

that, the tax ordinance passed was


79

declared null and void for being contrary

to law.

XI. Premiums on re-insurance (§133(K))

» absolute prohibition.

XII. Tax, fee or charge on registration of

motor vehicles and for the issuance of license

and permit for driving thereof EXCEPT

tricycles. (§133(L))

BATUAN CITY v. LTO (322 SCRA 805)

I: Which function was delegated to the LGU?

The LTO registering motor vehicles “or”

the LTFRB granting franchise and

regulation of common carriers?

H: Under §133(L), the function of the LTO is

prohibited, an therefore what may be

delegated to the LGU is the function of

LTFRB.

XIII. Tax, fee or charge on exportation of

products and is actually exported EXCEPT

under §143(C) where the LGU is authorized to

impose business tax on exportation (§133(M))

XIV. Tax, fee or charge on cooperatives

duly registered under the cooperative cod (RA

6938) and Business Kalakalan (RA 6810)

(§133(N))

» A cooperative is exempt from local

tax, provided it is duly registered with the

cooperative code and the cooperative

development authority “or” Business

Kalakalan (not kalkalan)

XV. Tax, fee or charge over the national

government, political subdivisions and

agencies and instrumentalities of the

government (§133(O))

» Relative prohibition since it admits of

an exception under §154 of the LGC

where it says that a LGU may be

authorized to impose a fee or charge for

the operation of a public utility provided

it is owned, maintained and operated by

such LGU.

NAIA v. PARANAQUE (JULY 2006)

H: SC ruled in favor of the airport. Paranaque

being a LGU can’t impose tax on a

government instrumentality. Airport

owned by the government is not an

agency, it being an instrumentality.

Q: May the government tax itself it the

taxing power is the local government?

A: NO. The local government cannot

impose tax on the national government,

and with more reason that it cannot

impose a tax with equal LGU.

D. Taxes that can either be imposed by

Provinces or Cities

I. tax on transfer of realty (§135)

► Note that this is not a real estate tax, this

is a local tax for the simple reason that it is

not provide for under the topic of real estate

tax (§198-280)

► Law says “it should not exceed ½ of 1% of

the consideration” (NOTE: do not use zonal

value since this is used only under the IRC,

not the LGC.

Q: Since all the provinces and cities must

follow the limitation of the rate (not

exceeding ½ of 1%), is it violative of the equal

protection clause?

A: NO, because the sangguninan had to

determine the actual rate considering the

status of the province.

Q: Why is that Makati fix the rate of 75% or

3/4 of 1%?

A: Because cities are authorized to increase

the rate of 50% of the maximum, that is 50%

of ½ is 25% (50+25 is 75%).

NOTE: Do not apply transfer of realty

pursuant to RA 6657 (CARP) → this is the

Comprehensive Agrarian Reform Program →

this is exempt.

II. tax on printing an publication (§136)

► Normally, a province cannot impose this

because the tax on business can only be

imposed by a city or municipality EXCEPT this

one, on printing and publication of

magazines and periodicals.

III. franchise tax (§137)

► The old national franchise tax under the

old tax code was already abolished.

► We still have franchise tax other than this

one, known as national franchise tax →

provided for in the republic act granting

franchise.

Two kinds of Franchise Tax:

1. local franchise tax (under LGC §137)


80

2. national franchise tax (provided for in

the statute or republic act authorizing

the franchise)

Q: May LGUs impose local franchise tax?

A: We have to consider here many supreme

court decisions and also §193 of the LGC.

Under §193, it says there “unless

especially provided for in this code,

exemptions granted to natural juridical

persons are hereby withdrawn (abolished)

EXCEPT:

1. local water districts

2. cooperatives registered under the

cooperative code (RA 6938)

3. non-profit and non-stock educational

institution.

BASCO v. PAGCOR (197 SCRA 52)

F: The city council passed a tax ordinance

imposing tax on PAGCOR, an agency of

the government. PAGCOR objected saying

that the local city is prohibited under the

old local authority act to impose tax on

an agency of the government.

H: The SC declared null and void the tax

ordinance saying Manila cannot do that.

CEBU v. MACTAN (261 SCRA 667)

F: Cebu government was trying to collect

real estate tax from the Mactan airport

(note: real property tax is a territorial tax,

meaning it should only be collected

within its territorial jurisdiction). Lawyers

of Mactan airport argued that under

§13(O), Cebu, a LGU, cannot impose tax

on an agency of the government, and

they also invoked the ruling in BASCO.

H: The lawyer of Mactan airport is devoid of

any merit at all, it is 100% erroneous

since the real estate tax is not a local tax,

hence, why invoke a SC ruling and codal

provision which can only be applied to

local tax. Therefore, Mactan airport

should pay Real Property Tax.

► Before the codification in 1991 (to take

effect January 1, 1992), local taxation was

embodied in a separate book known as Local

Tax Code (PD 231) while real property tax

was provided for in a separate book known

as Real Property Tax Code (PD 464)

LRT v. CITY OF MANILA (342 SCRA 692)

F: The Manila city government tried to

collect real property tax but the

management of the LRT said “no you

cannot do that to us since it is exclusively

for public use”.

H: NO, you are not exclusively for public use

since every time a person wants to use

the LRT he has to pay.

Q: Why not use the defense that it is owned

by the government?

A: Because in real estate tax, the defense

that it is owned by the government is not a

defense.

The LGC in §199(B) and in §217, both

provisions says that the basis for the

imposition of real estate tax is the ACTUAL

USE of anybody who is using that (maybe in

the concept of usufructuary or in the concept

of a lessee, or in the concept of an owner);

the basis is not ownership.

► in §134, the taxes here must not only be

imposed by provinces, it may also be

imposed by cities in line with §151 → those

enumerated in §135 to 141.

CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS

OCCIDENTAL (181 SCRA 38)

* This was the prevailing rule for more than

10years from 1988

H: In the franchise or the republic act, there

are only two (2) kinds of franchise, one is

a franchise which provide for a condition

that this tax (referring to the franchise

tax) shall be in lieu of all other taxes, and

the other franchise is the one which do

not provide for such provision; the

province or the city can impose local

franchise tax if the franchise belong to

the second example.

REYES v. SAN PABLO CITY (305 SCRA 353)

* Here the SC uniformly ruled

H: A provision on exemption under §193

don’t only refer to exemptions provided

for by different statutes, but it includes

those which claim exemptions by virtue

of the case of Cagayan de Oro (because

SC decisions are also laws).

PLDT v. DAVAO (363 SCRA 750)

F: The franchise holders of Smart and Globe

are claiming exemptions from the local


81

franchise tax because they are saying that

they are holding a franchise which says

that it is a franchise enacted by the house

of Congress in 1995 which carries with it

an exemption form local franchise tax.

H: By the very explicit provision of §193, the

removal of exemptions granted by

different statutes and also by SC

decisions applies only to statutes and

decided by the SC on or before Jan. 1,

1992, because §193 says “upon

effectivity of this law”. For exemptions

covered by §193 therefore, Smart and

Globe are authorized to claim exemptions

because the statue (RA 7082) was enacted

on 1995.

IV. tax on sand, gravel and other quarry

resources (§138)

► We are through with that in the case of

Bulacan

V. professional tax (§139)

► this must be correlated with the tax under

§147.

► NOTE that this is an exemption to the rule

that a city may increase the rate of the tax →

under §151 of the LGC, the increase is not

allowed.

► both §139 and §147 are taxes imposed

on persons exercising professional calling.

Section 139 Section 147

are to be imposed

by provinces and

cities

are to be imposed

by municipalities

and cities

are applicable to

workers who must

pass a government

examination (e.g.

engineers,

physicians, etc)

are applicable to

persons who are

working but are

not required to

take government

examinations

there is a

maximum (P300)

NOTE: it is not

always 300, since

the exact amt

must be fixed by

the ordinance.

It does not provide

for any amount,

the only

requirement is that

it must be

reasonable

VI. amusement tax (§140)

► under the IRC, there is also amusement

tax under §125.

PBA v. QUEZON CITY (137 SCRA 358)

F: The city government enacted a tax

ordinance trying to collect amusement

tax including amusement tax on the PBA

(in Araneta, Cubao); but PBA and “no, we

are already paying amusement tax to the

national government through the BIR

because of §125 of the IRC”

H: QC government can no longer collect on

the ground that it is already being

collected by the national government and

secondly, in the enumerations of

amusement under §140, you will never

see professional basketball. Most of all, it

is the intention of the author that it is

only the national government.

*nak ng putang katangahan yan.. the local

tax code PD 231 was enacted in 1974 when

we don’t have any professional basketball..

since professional basketball was born May

1975.

* ano ba dapt tama diyan? → both the

national government and the QC government

can collect. There is no violation of the

prohibited double taxation, because the

taxing powers are different, and not only that

§140 speaks of amusement tax on admission

fee but under §125, it is abut gross receipts.

VII. delivery van (§141)

Q: What if not a delivery van, but “sako”

lang?

A: The applicable tax is under §143(G)

(peddler’s tax, one imposed by municipalities

and cities.

If may dalang sasakyan, yari siya ng

province sa tax.

NOTE: §135-141, these are taxes that can be

imposed by PROVINCES and CITIES.

§143-150 are taxes to be imposed by

MUNICIPALITIES, which can also be imposed

by CITIES.

E. Taxes that can either be imposed by

Municipalities or Cities


82

I. Business Tax (§143(A-H))

a. manufacturing, repacking,

processing, including the

manufacturer of permitted liquor and

also its dealer

b. wholesaling

c. exportation

d. retailing

e. contractor’s tax

f. tax on banking institution and

financing institution

g. peddler’s tax

h. the exemption under §133(i)

Q: If you have two branches, how many

business taxes do you have to pay?

A: You pay only one business tax (§146)

ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA

607)

F: Ilo-ilo Bottlers was already paying a

business tax on manufacturing under

§143(A) to the city government by virtue

of a tax ordinance. Later on, they are

obliged to pay by virtue of another tax

ordinance imposing business tax on

wholesaling. Naturally, Ilo-ilo Bottlers

argued, “how could it be, if you

manufacture, it necessary follows that

you sell the commodity so, with the

payment of the business tax on

manufacturing, it carries with it the

business of wholesaling”.

H: NO, you have to determine the marketing

system of the company. If wholesaling is

also being done in the place of

manufacture, the business tax on

wholesaling should no longer be paid it

should only be the business tax on

manufacturing. But if the marketing

system of the company provides that

wholesaling shall be done in a separate

place (maybe several kilometers away),

the manufacturer must still pay the

business tax on wholesale because now it

could be argued that they have the

separate business of wholesaling.

Q: On the business of retailing, should the

business tax of retailing be imposed by the

city or by the municipality “OR” by the

barangay in the city or the barrio in the

municipality?

A: §143(D) must be correlated with §152,

the tax to be imposed by the barangay.

It depends:

a. city

» if the gross receipt of the retailer

exceeds P50T in a minimum of

one year, it is the right and

privilege of a city to impose the

business tax on retailing.

b. barangay


did not exceed P50T, it is the

barangay council where the

business of retailing is located.

c. municipality


did not exceed P30T within a

period of one year.

d. barrio


did not exceed P30T within a

period of one year.

NOTE: These distinctions do not apply in

wholesaling. These are only for retailing.

► Paragraph H: for the imposition of

excise tax, percentage tax and value added

tax, the municipality may impose a tax not

exceeding 2% of the gross receipt (with

regard to a city, it may go as far as 3%)

II. Municipalities in Metro Manila who can

increase their rate (§144)

► Right now there are only two

municipalities:

1. San Juan

2. Pateros

III. Professional Tax (§147)

► we are through with that

IV. Fees for sealing and licensing of weights

and measures (§148)

V. Fishery rentals, fees and charges (§149)

F. Situs of Tax (§150)

► The tax referred to in here is the business

tax on wholesaling and retailing.


83

Q: RFM is manufacturing commodities, one

of them is Swift hotdogs, this is being sold

not only in Mandaluyong, Metro Manila, but

also to the inter country from Batanes to

Tawi-tawi. Where should the business tax of

wholesaling or the business tax of retailing

be paid? Should it be in the principal office

(Mandaluyong) “or” the place where the

commodities are sold?

A: It will be paid in the place where it had

been sold PROVIDED there is a branch office

or a sales outlet (§150(A)).

► If it so happens that the company has a

factory different from the place where the

principal office is located → 30% should be

pain in the principal office and 70% in the

municipality or city where the branch is

located.

PHIL MATCHES v. CEBU (81 SCRA 99)

F: Phil Matches were produced in Nagtahan,

Manila. In Cebu city, there was a

warehouse where the matches were

stored. Many of the customers, by way of

wholesale in the warehouse in Cebu City,

they came from different towns of the

Visayan Region. May the business tax

ordinance of Cebu be imposed on those

transactions even if the buyers did not

come from the territorial jurisdiction of

Cebu?

H: Since in this case the contract booked and

paid, meaning, it was negotiated

perfected and consummated in the

warehouse where it was located in Cebu

City, the Cebu City government has the

right to collect business tax.

Q: What if there is an agreement that

commodities would be delivered and that the

buyer would be waiting in some other town,

is the answer still the same?

A: YES, the answer is still the same because

delivery to the carrier is delivery to the buyer

where delivery has been termed within the

territorial jurisdiction of Cebu.

SHELL v. CEBUCOT, CAMARINES SUR (105

PHIL 1063)

F: The petroleum products were purchased

at the motor vehicle traversing the

neighboring towns of Cebucot like Bason,

Dimalaon, all towns in Camarines Norte.

The contract of sale was negotiated and

perfected in different municipalities

where the motor vehicle of Shell was

traveling.

H: Although the oil depot was located in

Cebucot, the said municipality cannot

impose tax on that because the contract

of sale was negotiated and perfected in

the different nearby towns of Camarines.

Q: Is there a conflict with the case of Shell

and Phil Matches?

A: NONE. As a matter of fact, these two

decisions complement each other.

G. Taxing Powers of the Barangay (§152)

► Only a minimal sum (fair and reasonable)

Power to impose tax:

1. On commercial breeding of fighting

cocks, cockfights and cockpits

» must be for commercial purposes

2. On places of recreation which charge

administration fee

3. On billboards, signboards, neon signs

and outdoor advertisements

» especially for the barrios and

barangays along the highway

4. For barangay clearance

» if you want to engage in the business

of retailing or wholesaling → if

barangay captain will not approve that

→ within 7days go to the municipal

hall or city hall for approval

5. For the use of barangay property

» for instance the barangay has a plaza.

H. Common Revenue Raising Powers

(§153-155)

Q: Why common?

A: All the LGU could impose the same. But it

does not follow that all the provinces, cities,

municipalities could impose the same. Only

the LGU which operate, establish, maintain

the entity

If established by the province, it should

only be the province.

These are:

1. service fee and charges

» for services rendered

2. public utility charges


84

» provided owned, operate and

maintained by them

3. toll fees and charges

» tax or toll for the use of a bridge or a

street

► Padua filed a civil action in the MakatI

RTC trying to stop the government form

collecting a toll free in the South Express

including the North expressway alleging that

he is affected as a taxpayer because he is

from Paranaque. He argued that if you use

the property of the government like a street

or a public plaza, you do not pay. He made

the analogy, that if you go to Luneta, you do

not pay the city government of Manila.

The Makati RTC, the CA and SC had a

uniform ruling that the operator should be

prohibited from collecting further toll fess

because if the operator had already recovered

his investment and earned an income

already, he should be stopped. As argue by

the SC, it copied the argument of the lawyer

(re: Luneta).

» NOTE: that Res Judicata do not apply

here.

When the ruling became final an

executory in 1993, the North and South

Express were totally dismantled and totally

destroyed by the DPWH to give way to the

final and executory ruling of the Court, that It

should no longer be collected.

After several months, the government

announced in the radio that the party in the

case of Padua, mutually agreed that the

collection shall be resumed in order to have

money for the maintenance and repair of the

highway.

Exceptions to §155 (collection of toll fees)

1. members of AFP

2. members of the PMP

3. post office personnel delivering mail

4. physically handicapped

5. disabled citizens 65 years and older.

I. Community Tax (§156)

► In the old days, known as “residence tax

certificate.

Q: If the Filipino is a resident of a foreign

country (NRC), is he liable to pay the

community tax certificate?

A: NO, because the basis of imposition of

this tax is whether or not you are an

inhabitant of the Philippines. Meaning you

are a resident of the Philippines.

Q: What about a foreigner residing in the

Philippines (RA)?

A: YES. You have to pay unless the foreigner

is a trans-investor for not more than

3months.

► This is applied to both natural and

juridical persons.

Requirements:

1. for a natural person → at least 18

years of age

2. for corporations → upon registration

with the SEC

Q: What if you become 18 in the month of

January or November or December?

A: For those who celebrated their birthday

before July 1 (that is up to June 30), they are

liable to pay the tax, for this year.

For those who celebrated their birthday

on or after July 1, they are not yet liable to

pay this year, but have to wait until next year.

Q: Is there a difference for those who

reached 18 in the months of Jan-Feb-March

and those who reached 18 in the months of

April-May-June?

A: YES. For those who celebrated birthdays

in the months of Jan-Feb-March, they have a

grace period of 20days within which to pay.

Those who celebrated their 18th

birthday in

the month of April-May-June, they do not

have any grace period at all, they have to pay

the tax immediately.

Q: If you have a community tax certificate

for this year (2006), can it be used only until

December 31, 2006?

A: NO. It shall be valid up to April 15, 2007.

(§163(C))

J. Accrual of the Tax (§166)

► January 1

Q: What if the tax was only approved in the

month of May 2006, do you have to wait until

January 2007?


85

A: NO. You have the right to collect that in

July 1, because the law is saying that “it

should be collected in the next succeeding

quarter” (§167)

► Mayor Binay had a tax ordinance in May,

sabi ng mga bata niya: “bosing, collect na

tayo ng June”.

Binay: “hindi nga pupwede, maghintay pa

tayo ng July 1”.

Q: What if the tax ordinance had been

existing for several years already?

A: The time of accrual will always be January

1.

REMEDIES UNDER THE INTERNAL REVENUE

CODE

1. Remedies of the Government

2. Remedies of the Taxpayer

Remedies of the government:

1. Assessment

2. Collection

Under the NIRC, assessment and collection

have 2 kinds:

1. Normal/Ordinary assessment and

collection – Sec. 203, NIRC

2. Abnormal/Extraordinary assessment

and collection – Sec. 222, NIRC

I. Normal/Ordinary assessment and

collection

► There was a return filed and it

is not fraudulent and not false

II. Abnormal/Extraordinary assessment

and collection

► There was:

1. an omission or failure to file

the return;

2. if there was a return filed, it

was fraudulent, or;

3. the return was false

Q: Is a false and fraudulent return

presumed?

A: NO, false and fraudulent return is not

presumed. The burden of proof to prove that

the return was false and fraudulent lies

against the government through the BIR.

The mere fact that the return is erroneous

will not make the return fraudulent, it must

be proven by the BIR.

Q: Why is it important to know whether the

assessment is under normal or abnormal

condition?

A: It is important to know because the

prescriptive period between normal and

abnormal assessment differ.

Prescriptive Period for Assessment

1. Normal/Ordinary Assessment – 3 years

from the time the return has been filed

(not the payment of the tax) (Sec. 203,

NIRC)

► 3 Ways of filing the return under Sec.

203, NIRC:

1. filed before the deadline (for any tax

under NIRC)

2. filed on the date of deadline

3. filed after the deadline

► 2 Ways of counting the 3 year period of

Assessment:

1. if return is filed before or on the day

of the deadline, the prescriptive

period starts on the date of the

deadline;

2. if return is filed after the deadline, the

prescriptive period starts on the date

the return has been filed.

» For the calendar year of 2004, a return

must be filed and paid for Net Income Tax on

or before April 15, 2005. Since he was not

able to meet the deadline, the taxpayer is

now being assessed for tax due for 2004. To

minimize interest and surcharges, it has been

suggested by the BIR that the taxpayer file a

late return. Supposed he filed his return

covering 2004 on April 1, 2006. In this

example, the reckoning point is the deadline

of April 15, 2005. The starting point of the

counting the 3 yr. period is on the date the

return is filed which is April 1, 2006.

» Suppose it is not a late filing of return,

the counting of the period is on the date of

the deadline which is April 15.

2. Abnormal/Extraordinary Assessment

► the government has 2 options:

a. Assess and Collect


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» the prescriptive period for

“assessment” shall be 10 years from

the discovery of none filing or false or

fraudulent return (Sec. 222, par. o,

NIRC)

» the prescriptive period for

“collection” shall be 5 years from the

date of final assessment (Sec. 222,

par c, NIRC)

b. Collect Without Assessment through

Judicial Action

» since there is “no assessment”

there is no prescriptive period for

assessment

» prescriptive period for “collection”

shall be 10 years from the date of

discovery of none filing of return or

false or fraudulent return.

► These options are available only if the

Assessment is under the

Abnormal/Extraordinary Conditions.

These are not available under

Normal/Ordinary Assessment

Prescriptive Period for Collection

1. Normal/Ordinary Collection – Sec. 203

did not provide for the prescriptive period

for the collection

- Intention of the author: 5 years

from the date of final assessment

Reasons: (Sababan agrees with the 5 year

prescriptive period)

Prescriptive period of collection under

1st

option on Abnormal Assessment is

5 years from final assessment (Sec.

222, par c, NIRC)

1. under the old code of 1939, 1977,

and 1985, if the prescriptive

period for collection under

abnormal is 3 years, then the

prescriptive period for collection

under normal is also 3 years. If

now a days, it is 5 years in

abnormal, the prescriptive period

for normal should also be 5 years.

2. to say that there is a prescriptive

period for collection under

Abnormal and there is none under

Normal is too abnormal. It should

be the other way around.

2. Abnormal/Extraordinary Collection

a. assess and collect – 5 years from

the final assessment

b. collect without assessment

through judicial action – 10 years

from date of discovery of none

filing, or false, or fraudulent

return.

Q: How to apply these periods?

A: Annual net income tax return filed by

individual using a calendar year. The return

should be filed on or before April 15, 2000.

It was filed on April 15, 2000.

Q Without stating the date of final

assessment, can it be collected in 2007?

A: Under normal condition, first determine

the date of final assessment. If the BIR finally

assessed the tax in November 2001, then

2007 is way beyond the 5year period to

collect. Count the prescriptive period for

collection from the date of final assessment.

Q: (same facts) Supposed it was finally assed

on March 2003, can it be collected in 2007?

A: Yes, because it is within the prescriptive

period of 5years.

BASILAN v. COMMISSIONER (21 SCRA 17)

F: Supposed the notice of assessment was

given within the period but it was

received by the taxpayer outside the

period.

I: Whether or not the assessment is within

the period of 3 years.

H: Yes. It is within the period. If the notice is

sent through registered mail, the running

of the prescriptive period is “stopped”.

What matters is the sending of the notice

is made within the period of prescription.

► It is the sending of the notice and not the

receipt that tolls the prescriptive period.

Q: What if the return has been amended,

how would you compute the period of

assessment?

A: NIRC is silent.

PHOENIX v. COMMISIONER (14 SCRA 52)

If the amendment of the return is

substantial as distinguished from superficial,

the counting of the prescriptive period is also

amended. The prescriptive period shall be


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reckoned on the date the substantial

amendment was made. If the amendment is

superficial, the counting of the prescriptive

period is still the original period.

Procedure for Assessment (Sec. 228, NIRC;

RR 12-99)

Steps of assessment

1. Sec. 228, NIRC (2 steps)

2. RR 12-99 (3 steps)

2 Steps under Sec. 228, NIRC

1. Pre-assessment notice

2. Final assessment notice

3 Steps under RR 12-99

1. Notice of Informal Conference

2. Preliminary Assessment Notice

3. Formal Letter of Demand and Notice

to Pay the Tax

PROCEDURE (Sec. 228, NIRC; RR 12-99)

1. Upon receipt of the notice of informal

conference, file a reply within 15 days

from receipt of notice;

2. Failure to file a reply, 2 things may

happen:

a. BIR will send again the Notice of

Informal Conference or

b. BIR will send a Preliminary Notice

of Assessment

3. Upon receipt of Preliminary

Assessment Notice (PAN), file a reply

within 15 days from receipt

4. Failure to file a reply will result in

either:

a. BIR will repeat PAN

b. Declare the taxpayer in default,

and send you a Final Assessment

Notice (FAN)

5. Upon receipt of FAN, taxpayer may

file a protest within 30 days.

Q: Is FAN the one appealable to the Court of

Tax Appeals (CTA)?

A: NO. This is because §228, NIRC and RR

12-99 requires the exhaustion of

administrative remedy of protest. After the

receipt of FAN or formal demand within

30days must file a protest before the office

of the commissioner of internal revenue.

FORMS OF PROTEST

1. Local Tax (Sec. 125, Local

Government Code (LGC))

2. Real Property Tax (Sec. 252, LGC)

3. Tariff and Customs Code (Sec. 2313,

RA 7651)

► In all protest under the different codes,

payment under protest is only necessary

under the “Real Estate Tax”.

RR 12-99

► If the taxpayer receives 2 final

assessments, one under the Net Income Tax

(NIT) and the other in VAT. If the taxpayer

don’t want to file protest under VAT but want

to file a protest under NIT. The taxpayer in

order to be allowed to file a protest under the

NIT must first pay the VAT where he does not

intend to file a protest.

► This is not “payment under protest”

because, payment under protest is the one

mentioned in Real Property Tax under Sec.

252, LGC.

Under NIRC, Protest is referred to as:

1. disputing of final assessment or

2. file a motion for reconsideration or

reinvestigation

Q: What should be done after filing a

protest?

A: Count 60days is the period to file the

necessary documents and receipts in support

of the protest.

Q: What is the effect of failure to file the

supporting documents?

A: Failure to file the necessary and

supporting documents within the 60day

period, to be counted on the day the protest

is filed, the final assessment shall become

final and executory.

► On the 51st

day you filed the necessary

document, you have to count another period,

which is 180 days from the day you filed the

necessary documents.

Relevance of the 180 Days: 180 days is

the time given to the BIR to decide the case

Q: Supposed it did not decide the case

within 180days?


88

A: Do not invoke the Lascano case because

it was rejected by RA 9282

In the Lascano case, before you file an

appeal although the 180 days have lapsed,

you have to wait for the BIR to take positive

action.

The case was ruled only by the CTA,

hence it is not a law. The jurisdiction of the

CTA has been amended by RA 9282.

RA 9282 provides that in case of inaction

of the commissioner after the lapse of

180days, remedy is to file an appeal.

RR 12-99 says that after lapse of 180days

but within 30days after 180days, that is the

time to file an appeal.

Q: Supposed the BIR rule within 180?

A: Within 30days from receipt of the

decision file an appeal to the CTA sitting in

division.

Q: Supposed the CTA decided not in your

favor?

A: File a motion for reconsideration within

15days to the same division deciding the

case.

Q: Supposed the CTA, in division decided

not in you favor?

A: File an appeal to the CTA sitting en banc.

Q: Supposed the CTA en banc decided not in

your favor?

A: File an appeal within 15days from receipt

of decision to Supreme Court.

Q: During the pendency of the protest in the

office of the Commissioner, supposed you

receive a notice of collection, levy and/ or

distraint, what is your remedy?

A:

1. YABES v. COMMISSIONER (150 SCRA

278)

2. UNION SHIPPING LINES v.

COMMISSIONER (185 SCRA 547)

YABES v. COMMISSIONER (150 SCRA 278)

F: The taxpayer receives a notice of

collection while waiting for the decision

of his protest. He then filed an “appeal”

with the CTA contending his protest has

been denied because he did not receive a

decision but receive a notice of collection.

Simultaneously, the BIR filed before the

CFI an “ordinary civil action” for the

collection of sum of money. When the

judge of the CFI, was about to conduct

the hearing of the case, the taxpayer filed

an injunction with the SC to prohibit the

judge of the CFI contending that a single

cause of action is pending in two courts,

one in the CTA and another in CFI.

H: Injunction was granted prohibiting the

Judge of the CFI and requiring the Judge

to transfer the records to the CTA saying

that the remedy made by the taxpayer

was the correct remedy.

Q: Was the appeal made on time?

A: Yes, when the BIR filed an ordinary action,

the protest is deemed denied. Hence an

appeal is a proper remedy.

UNION SHIPPING LINES v. COMMISSIONER

F: The taxpayer was waiting for the decision

of his protest. But instead, he received a

notice of collection. Immediately, he filed

a Motion for Reconsideration and

Clarification asking whether his protest

has been denied. The BIR did not reply or

answer but instead filed an Ordinary Civil

Action before the CFI. When the taxpayer

received summons, he did not answer but

instead filed an Appeal before the CTA.

I: Whether or not the remedy of Appeal was

the correct remedy and Whether or not it

was filed on time.

H: Yes. The remedy of appeal is the correct

remedy and the appeal was filed on time.

The reckoning period within which to file

an appeal is the time the taxpayer

received the summons.

While an Appeal is pending before the CTA,

the CTA will determine:

1. If the decision was made within 180

days, whether the appeal was made

within 30 days from the receipt of the

said decision, or

2. if there was no decision after the

lapse of 180 days, whether the appeal

was made within 30 days upon the

expiration or the lapse of the 180-day

period.

Q: Pending appeal with the CTA, can the BIR

amend the final assessment?

A: 2 SCHOOLS OF THOUGHT:


89

1. GUERRERO v. COMMISSIONER (19

SCRA 25)

2. BATANGAS v. COLLECTOR (102

PHIL 822)

GUERRERO v. COMMISSIONER (19 SCRA 25)

H: No. Because it is no longer the disputed

assessment.

BATANGAS v. COLLECTOR (102 PHIL 822)

H: Yes. In order to avoid multiplicity of suits

► ACCORDING TO JUSTICE VITUG:

BATANGAS v. COLLECTOR (102 PHIL 822) is

the better ruling

PROTEST UNDER LOCAL TAX (Sec. 195,

LGC)

► Under NIRC, protest is filed in the Office

of the Commissioner

► Under LGC, protest is filed with the same

City or Provincial or Municipal Treasurer who

issued the assessment

Period to file Protest

60 days from receipt of assessment

Q: If the treasurer did not decide within a

60day period, remedy?

A: Go to the court of competent jurisdiction

(RTC)

Q: If the RTC decided not in you favor?

A: File an appeal with CTA en banc

(beginning April 23, 2004)

Q: If the CTA decided not in your favor?

A: Appeal to the SC.

NOTE:

Pursuant to RA 9282, direct appeal to CTA en

banc can be made from:

1. Decision of the RTC involving local

taxation exercising appellate

jurisdiction

2. Decision of the Central Board of

Assessment Appeal exercising

appellate jurisdiction.

PROTEST UNDER REAL PROPERTY TAX

(Secs. 226, 230, and 252)

Remedy shall be the same

Sec. 252, LGC

If the taxpayer receives a Notice of

Assessment from municipal, city, or

provincial treasurer, the remedy is to

file a protest but there must be first

Payment Under Protest.

- This is the only instance where

payment under protest is

necessary

Q: How is payment under protest made?

A: At the back of the receipt there will be an

annotation that there was a payment under

protest within 60days from receipt of the

notice of assessment within the same

treasurer who issued the assessment.

Q: If the treasurer rules against the taxpayer,

remedy?

A: The remedy is to file an appeal to the

Local Board of Assessment within 30days

from the receipt of the decision.

Q: From the decision of the Local Board of

Assessment?

A: Appeal should be made to the Central

Board of Assessment Appeal.

► Beginning April 23, 2004, the ruling of

the Central Board of Assessment Appeal is no

longer final. It can now be appealed to the

CTA, sitting en banc.

PROTEST UNDER THE TARIFF AND

CUSTOMS CODE (TCC) (Sec. 2313, as

amended by RA 7651)

► Formerly, the automatic appeal under the

TCC applied only to protest; but now a days,

the automatic appeal applies to both protest

and forfeiture.

For Forfeiture Under the Tariff and Customs

Code

► Refers to the Order of the Collector

confiscating the imported goods or

commodities

Doctrine of Primary Jurisdiction

If the Collector ordered the forfeiture of

the imported commodities the order of the

Collector shall be to the exclusion of all

government offices and authority.


90

Importer of Chemical, under the TCC, the

custom duties is only P27 but the collector

says it should be P52. The importer will then

file a protest with the Office of the Collector.

In the old days, there is an automatic

appeal from the decision of the collector

under protest. But under RA 7651, the

remedy of automatic appeal is applicable to

both protest and forfeiture.

I. In both cases of protest and forfeiture, if

the importer lose the case and the

government wins, the remedy is to file an

appeal within 15 days before the Office of the

Commissioner.

From the ruling of the Commissioner,

the importer should file an appeal

within 30 days before the CTA, sitting

in division.

From the ruling of the CTA in division,

the importer should file an MR within

15 days before the same division

hearing the case.

From the ruling of the CTA in division,

deciding on the MR, the importer

should file an appeal within 15 days

before the CTA sitting en banc.

From the CTA en banc, appeal to SC

within 15 days.

II. If the importer-taxpayer wins the case, the

government lose the case, Sec. 2313 of TCC

as amended by RA 7651, there shall be an

automatic review within 15 days.

Q: Where should the automatic review be

made?

A: It depends. Publish the value of the

commodity.

1. IF P5 MILLION OR MORE – AUTOMATIC

REVIEW SHALL BE BEFORE THE

SECRETARY OF THE DEPT. OF

FINANCE.

2. IF LESS THAN P5 MILLION –

AUTOMATIC REVIEW SHALL BE BEFORE

THE OFFICE OF THE COMMISSIONER

Q: Suppose the commissioner decide or did

not decide within 30days, what happens?

A: If the commissioner reverses the ruling of

the collector, the ruling is final and

executory.

If the commissioner affirms or did not

decide within 30days, there shall be an

automatic appeal before the sec. of finance.

Q: Between the two which will be appealed

to the CTA?

A: The decision of the secretary which

passes through the office of the

commissioner (RA 9282)

But not all the decision of the secretary

which passes the office of the commissioner

affirms or did not decide within 30days and

appealed before the secretary of finance will

appeal to the CTA be allowed.

There are 3 instances when the Secretary of

Finance renders a decision appealable to the

CTA:

1. decision of the Secretary by virtue of

automatic review passing through the

Commissioner

2. cases of anti-dumping duty, where the

anti-dumping duty was ordered by the

Secretary

3. decision of the Secretary of Finance

on countervening duty.

COMPROMISE (Sec. 204, NIRC)

3 Questions asked in 2004 BAR:

1. May the Government compromise

criminal cases and civil cases?

2. Supposed the corporation is already

dissolved, can the stockholder be

obliged to pay?

3. Suppose the civil case filed by the BIR

is final and executor, can it be subject

to compromise?

CAN THERE BE COMPROMISE IN:

1. CIVIL CASES?

- YES, IN ANY STAGE OF THE

PROCEEDING

- EXCEPT WHEN THE CIVIL CASE IS

ALREADY FINAL AND EXECUTORY

BECAUSE IT WILL BE VIOLATIVE OF

THE SEPARATION OF POWERS

2. CRIMINAL CASES?

- YES, EXCEPT:

a. IF ALREADY FILED IN COURT

(RTC) OR;

b. IF IT INVOLVES FRAUD


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3. IF THE CORPORATION IS ALREADY

DISSOLVED, CAN THE STOCKHOLDER BE

HELD LIABLE TO PAY TAX?

- GENERAL RULE: NO

- EXCEPT:

a. IF IT IS PROVEN THAT THE

ASSETS OF THE COPORATION

IS TAKEN BY ONE

STOCKHOLDER OR;

b. IF THE STOCKHOLDER DID

NOT PAY HIS UNPAID

SUBSCRIPTION

Minimum Amount to be Compromised (Sec.

204)

1. If the ground is financial incapacity of

the taxpayer, the minimum shall not

be less than 10% of the original

assessment.

2. If based on other grounds, the

minimum amount shall not be lower

than 40% of the original assessment.

Q: Can it be lower than that prescribed by

law?

A: As a rule, no. EXCEPT, if allowed by the

evaluation board consisting of the:

a) commissioner; and

b) deputy commissioner.

Instances when the Final Assessment

becomes final and executor:

1. If the taxpayer did not file the protest

on time

2. Failure to submit the supporting

documents within the 60-day period

3. After the lapse of the 180-day period,

you did not file an appeal within the

30-day period to the CTA

4. An appeal was filed but made beyond

the reglementary period to appeal

METHODS OF COLLECTION (SEC. 205)

1. Judicial Action

a. Civil

b. Criminal

2. Administrative Action

a. Distraint

b. Levy

c. Tax lien

Q: Why is it important to know whether the

final assessment is under normal or

abnormal conditions?

A: It is important because of the

requirement under §222. If the final

assessment becomes final and executory, the

government (BIR) can exercise the remedies

under §205 in any order or simultaneously

(§207). But it is not always the case, because

the right of the government to collect is

limited in case of abnormal

assessment/collection under §222. Under

the second option, the right of the

government is limited to judicial action either

civil or criminal. Administrative remedies

such as distraint, levy, or tax lien is not

available under such condition.

Q: In distraint, levy or tax lien, is the 10 year

period of collection applicable?

A: No, only the 5year period should apply.

Distraint

Kinds:

1. Constructive (Sec. 206)

2. Distraint of Intangible (Sec. 208)

3. Actual (Sec. 207, par. a, and Sec. 209)

1. Constructive Distraint

► The distraining officer shall make a list of

the personal property of the property to be

distraint in the presence of the owner of the

property or the person in possession of the

property.

► The owner shall be requested to sign the

receipt.

Q: What if the owner refuses to sign the

receipt?

A: Sec. 206: The distraining officer shall

require 2 individuals within the neighborhood

with the warning that they should not allow

the taxpayer to dispose, transfer, or sell the

property subject of distraint.

Grounds for Constructive Distraint (Sec. 206):

1. The taxpayer intends to leave the

Philippines

2. The taxpayer leaves the Philippines

3. The taxpayer ceases or retires from

business


92

4. The taxpayer obstructs the collection

of the tax.

► THESE GROUNDS ALSO ANSWER THE

QUESTION: WHAT ARE THE TAXABLE PERIOD

LESSER THAN 12 MONTHS?

2. Distraint of Intangible Property

Limited to 3 Intangible Properties:

1. Shares of stocks

2. Bank accounts

3. Credits and debits

Share of stocks

► Warrant of distraint furnished to the

taxpayer or the officer of the corporation

with the warning that the property is

subject of distraint and it should not

dispose of it.

Bank Accounts


taxpayer or the officer of the bank with

the warning that the taxpayer should not

be allowed to withdraw.

Debits and Credits


debtor and creditor

3. Actual Distraint

► Personal property shall be physically

taken by the distraining officer.

► Within 10 days from the receipt of the

warrant, a report of the distraint shall be

submitted to the BIR (Sec. 207, par a last

par.)

► The property subject of distraint shall

be sold at a public auction EXCEPT bank

accounts and debits and credits.

» Notice of sale shall be by posting

in 2 conspicuous place, stating the

date and the place of the sale (No

publication requirement)

► Sec. 211: after the sale and within 2

days, a report shall be made to the BIR

Q: If the property sold is a personal

property, is there a right of redemption?

A: NO. The rule is absolute.

Q: If the property is a personal property, is

there a right of preemption?

A: SEC. 210: Before the scheduled sale, the

taxpayer is allowed to recover the property

by paying all the property by paying all the

proper charges as well as the interest, cost

and penalties.

During the Scheduled Auction Sale, 2 Things

may happen:

1. There is bidder and the bid is enough

2. There is no bidder or there is a bidder

but the bid is not enough

Q: What is the relevance of knowing the

difference?

A: 1. If there is a bidder and the bid is

enough

» In case of insufficiency, there shall be

further distraint to cover the liability.

(§217)

» In case of excess, the excess shall be

returned to the taxpayer.

2. If there is no bidder or the bid is not

enough.

» It will be purchase by the government

and the later sold in a public auction

again (§212)

» In case of insufficiency, no further

distraint, §217 applies only if there was a

bidder.

» In case of excess, the excess shall not

be returned to the taxpayer but shall be

remitted to the national treasury.

Levy

► Other than the delinquent taxpayer,

warrant of levy is served to the register of

deeds having jurisdiction over the real

property (Sec. 213)

► Within 10 days from the receipt of the

warrant, a report of the levy shall be

submitted to the BIR (Sec. 207 (b) last

par)

Notice of Sale in Public Auction:

1. Posting in 2 conspicuous places

2. Publication in newspaper of general

circulation once a week for 3

consecutive weeks.

Q: Is there a right of pre emption?


93

A: Yes, §213.

Q: Is there a right of redemption?

A: Yes.

2 Things may happen in a Public Auction:

1. There is a bidder and the bid is

enough

2. There is no bidder or the bid is not

enough

Q: What if there is no bidder or the bid is not

enough?

A: Forfeiture shall be made (§215)

3 Definitions of Forfeiture under the Internal

Revenue Code

1. Violation of Excise Tax Law (Sec. 224)

2. If there is no bidder or the bid is not

enough (Sec. 215)

3. The order of the Collector to

confiscate imported commodities

(Sec. 2313, TCC)

Relevance of the Choice of Words:

► Under sec. 212, the law says

“purchase”

► Under sec. 215, the law says

“forfeiture”

» under 215: the real property shall

be automatically registered in the

name of the Government (forfeiture)

» under 212: the real property is

not automatically registered in the

name of the Government (purchase)

Q: If sold at a private sale, what is the

requirement?

A: There must be an approval of the

Secretary of Finance (§216)

Q: After sale, if there was deficiency?

A: There shall be no further levy, because

§215 says that it shall be to the total

satisfaction of the taxpayer.

Q: After sale, if there was an excess?

A: It shall not be returned to the taxpayer

but shall be remitted to the national treasury.

Sec. 217: this is only true if there was no

bidder or the bid was not enough because of

the provisions of the Secs. 212, 215, and 216

Sec. 218: no court shall issue an injunction

to restrain the collection of tax under this

code

Determine what kind of injunction is referred

to here:

1. Prohibitory – referred in Sec. 218

because it restrains the collection of

tax.

2. Mandatory

Q: Is the provision limited to “tax under this

code”?

A: Limited to internal revenue taxes.

EXCEPT: CTA (Regular Court) → RA 1125 and

9282: CTA is authorized to issue injunction

to restrain the collection of taxes or fees

collected under other code.

Q: Is the rule of distraint or levy the same

under local taxation?

A: Yes, local tax.

» §175 for DISTRAINT

» §176 for LEVY

Q: How about real property tax?

A: No, distraint is not authorized (§256,

LGC), because the remedy is only Judicial

Action and Levy.

Tax Lien

► Non payment of tax, the government has

the right to claim a lien over the property of

the taxpayer

1. NIRC – Sec. 219, NIRC

2. Local Tax – Sec. 173, NIRC

3. Real Property Tax – Sec. 257, NIRC

Q: Supposed a parcel of land is about to be

levied by the government, but the same is

being foreclosed by the mortgagee, which of

the 2 obligee, the government or the

mortgagee shall be preferred?

A: §219, last portion: The government is

the preferred one if the lien is annotated and

recorded in the registry of deed. In the

absence of annotation in the registry of

deeds, the mortgagee is preferred.

Q: Do we have the same rule under Local

Tax and Real Property Tax?

A: NO. Both §173 and §257, the government

is always the preferred one. The lien can only


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be removed by payment of tax, interest and

penalty.

Sec. 220: approving of filing an ordinary civil

action for violation of the internal revenue

code

► The approval must be made by the

Commissioner of Internal Revenue

HIZON v. REPUBLIC (320 SCRA 574)

F: An ordinary civil action for violation of the

tax code was filed in the city of San

Fernando. But the filing was only

approved by the Revenue Regional

Director of Central Luzon. The plaintiff

opposed the filing in the court on the

ground that it should be approved by the

Commissioner and the Revenue RD.

H: Sec. 220 should be read with Sec. 7 of the

NIRC

» General Rule: powers and

functions of the Commissioner may

be delegated but not to a position

lower than a Division Chief

» Under Sec. 7, there are powers

which can not be delegated

a) Power to recommend to the

Secretary of Finance to issue

rules and regulation

b) Power to decide a case of fist

impression

c) Power to enter into a

compromise agreement

d) Power to assign BIR officer in

the place of production

subject to income tax

» Since the case does not fall under

the prohibited delegation, the filing of

the case is legal and tenable.

► Decision of the Commissioner of Internal

Revenue (CIR) is appealable to CTA.

Q: When is a decision of the cir appealable

to the Secretary of Finance?

A: §4, on matters of interpretation of tax

laws.

SEC. 223: SUSPENSION OF THE RUNNING

OF PRESCRIPTIVE PERIOD

Q: A Filipino taxpayer went to Canada, after

15years he went back, he is being assessed

by the BIR under normal assessment. Has the

right of the government to asses the tax

already prescribed?

A: NO. When he went to Canada, the running

of the prescribed period is suspended.

Q: What if the change of address is within

the Philippines, say only from manila to Pasay

City, is the running of the prescriptive period

suspended?

A: In order that the running of the

prescriptive period will not be suspended,

especially if the change is district office,

§223 provides that the taxpayer must send a

written notice of change of address to the

BIR.

In the absence of the written notice, the

period will be suspended.

Q: Change of address is from Philippines to

abroad?

A: The period will be suspended.

Other Grounds for Suspension:

1. During collection if there is no

property found, the period is

suspended

2. If the BIR is prohibited from making

assessment such when the subject

property is under litigation

3. In distraint of levy, the BIR officer

can’t locate the property

CLAIM FOR REFUND (SEC 229)

Written claim for refund:

1. Sec. 229, NIRC

2. Sec. 112, VAT

3. Sec. 136, Local Tax

4. Sec. 253, Real Property Tax

5. None except sec. 1603, Tariff and

Custom

Written claim for refund under the input

tax (Sec. 112)

► Period is also 2 years from the close of

the taxable quarter when the transaction was

made

Q: Can we apply §229 to VAT?

A: Yes, because there is no conflict. §112 is

refund under input tax system.


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§229 is refund for:

1. errors in payment or;

2. collected without authority; or

3. assessment without authority.

► The period to claim refund is 2years.

Doctrine of Equitable Recoupment

► If a taxpayer is entitled to a written claim

for refund but the prescriptive period to

claim has lapsed, the taxpayer is allowed to

credit his written claim for refund which he

failed to recover to his existing tax liability.

Computed from;

a. Individual – counted on the day the

tax has been paid

1. paying by way of withholding tax

system, the reckoning point is the

end of the taxable year.

2. paying by way of installment,

reckoning point is the date the

last installment is paid.

3. if sold to public auction through

distraint or levy, the date the

proceeds is applied to the

satisfaction of the tax liability.

b. Corporation

1. Existing

- 1992, *** v. Commissioner (205

SCRA 184)

- 1995, Commissioner v. Philam life

(244 SCRA 446)

- 1998, Commissioner v. CTA (301

SCRA 435)

2. Non-existing

- 2001, BPI v. Commissioner (363

SCRA 840)

1. Existing – the counting of the

prescriptive period is 2 years on the

day the annual adjusted return is

filed, because it is at that day that the

tax liability is known.

2. Non-existing – the counting of the

prescriptive period should also be

reckoned on the day the annual return

is filed. But the corporation is no

longer required to wait till the taxable

period is over to file the return. Upon

receipt of a notice from the SEC to

dissolve the corporation, within 30

days thereafter, a return should be

filed.

Q: Suppose there is a supervening event,

and the taxpayer was not able to file a written

claim of refund within the period?

A: Regardless of supervening event, a

written claim for refund must be filed within

2years.

Q: Suppose the 2 year period is about to

expire and there is no decision yet as to your

refund?

A: Remedy is to file an appeal before the

CTA (deemed a denial)

Q: Suppose the BIR decided within 2 years

against the refund?

A: Appeal within 30days from the decision,

provided it is still within the 2 year period.

Q: Suppose there is only 21days remaining

after receiving the decision, when to file an

appeal?

A: Within 21days before the end of the 2

year period.

► A written claim for refund should be filed

within 2 years

► Sec 204 (c) last phrase: in case of over

payment a written claim is not necessary

because a return constitutes a written claim

for refund.

Q: May the commissioner of internal revenue

open the bank account of a taxpayer?

A: General Rule: NO. EXCEPT:

1. To determine the gross value of the

estate; and

2. To enter into a compromise

agreement. (under §204(A))

► The written claim for refund to determine

the gross value of the estate because the

taxpayer is already dead

In case of compromise, there must be

consent.

Sababan Tax Notes

Documents

convents appurtenant

union shipping

duly authorize

favored nation

offshore banking

procedural

improperly

acceptable