16884100 taxation reviewer[1]

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ATENEO CENTRAL BAR OPERATIONS 2007

Taxation Law

SUMMER REVIEWER

PART I GENERAL PRINCIPLESTAXATION power inherent in every sovereignState to impose a charge or burden upon persons,properties, or rights to raise revenues for the use andsupport of the government to enable it to dischargeits appropriate functions

to the other

Applies only to entities exercisinggovernment functions (acta jureimperii)CONSTITUTIONAL LIMITATIONS

A. Direct1)Due process

SCOPE OF TAXATION

TAXATION IS:

Unlimited,Far-reaching,PlenaryComprehensive

SupremeSTAGES OF TAXATION: (LAP)

1.Levy2.Assessment3.PaymentBasic Principles of a Sound Tax System

1.

Fiscal Adequacy2.Theoretical Justice3.Administrative FeasibilityINHERENT LIMITATIONS (SPING)1) Situs or territoriality of taxation2) Must be for a Public purpose


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Test is whether proceeds will beused for something which is theduty of the State to provide.Legislature is not required toadopt a policy of all or none.Incidental benefit to individualdoes not defeat exemption3) International comity

Property of a foreign State ofgovernment may not be taxed byanother4) Non-delegability of the taxing power

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Contemplates power todetermine kind, object, extent,amount, coverage, and situs of

tax;

Distinguish from power to assessand collectExemptions: (a) presidentialtaxing powers; (b) localgovernments5)Exemptions of Government agencies

Taking money from one pocketShould not be harsh, oppressive,or confiscatory (Substantive)By authority of valid law(Substantive)Must be for a public purpose(Substantive)Imposed within territorialjurisdiction (Substantive)

No arbitrariness in assessmentand collection (Procedural)Right to notice and hearing(Procedural)2) Equal protection

All persons subject to legislation


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shall be treated alike, under likecircumstances and conditionsboth in privileges conferred andliabilities imposed.Power to tax includes power toclassify provided:(a) Basedon substantialdistinction(b) Applyto present and futureconditions(c) Germane to purpose of law(d) Apply equally to all members ofthe same class3) Non-impairment clause

Rules(a) When government is party tocontract granting exemption.. cannot be withdrawnwithout violating non-

impairment clause(b) Whenexemption generallygranted by law .. withdrawaldoes not violate(c) Whenexemption grantedunder a franchise .. may berevoked; Consti provides thatfranchise is subject toamendment, alteration, orrepeal by Congress.4)

Must be uniform and equitable

Advisers: Atty. Serafin Salvador, Atty. Michael Dana Montero, Atty. Gaudencio Mendoza; Head: Julie Ann B.Domino, Juan J. P. Enriquez III; Understudies: Rachelle T. Sy, Aldwin Mendoza, Timothy John Batan


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Taxation Law Summer Reviewer


Uniform: all articles or propertiesof the same class taxed at samerateEquity: apportionment must bemore or less just in the light oftaxpayers ability to shoulder taxburden5)Non-imprisonment for non-paymentof poll tax

Taxpayer may be imprisoned fornon-payment of other kinds oftaxes where the law so expressly

provides.6)Congress shall evolve a progressivesystem of taxation

As resources of the taxpayerbecomes higher, his tax ratelikewise increases (ex. Incometax)Constitution does not prohibitregressive taxes; this is a

directive upon Congress, not ajusticiable right.7)All appropriation, revenue or tariff bills shalloriginate exclusively in the House ofRepresentatives, but the Senate maypropose or concur with amendments

It is the bill, not the law, that mustoriginate from House; bill may undergoextensive changes in Senate

Rationale: members of House are moresensitive to local needs.8) Freedom of religion

Activities simply and purely forpropagation of faith are exempt (e.g. saleof bibles and religious articles by non-stock, non-profit organization at minimal


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profit).Tax is unconstitutional if it operates as aprior restraint on exercise of religionIncome even of religious organizationsfrom any activity conducted for profil orfrom any of their property, real orpersonal, regardless of disposition ofsuch income, is taxableQuickTime and aTIFF (Uncompressed) decompressor

9)Freedom of press/expression

are needed to see this picture.Tax that operates aas prior restraintinvalid.

If fee is only for purpose of defraying costof registration and not for exercise of

privilege, no violation.10) Charitableinstitutions, churches, andparsonages or convents appurtenant thereto,mosques and non-profit cemeteries and all

lands, buildings and improvements

ACTUALLY, DIRECTLY and EXCLUSIVELYUSED for charitable, religious andeducational purposes shall be exempt fromtaxation

Pertains only to real estate tax.Test of exemption: actual use of theproperty, not ownershipUse of word exclusively meansprimarily rather than solely.Exemption extends to property incidentalto or reasonably necessary for theaccomplishment of the purposesmentioned.

11) Tax exemption of all revenues and assets of

(a) non-stock,non-profit educationalinstitutions(b)used ACTUALLY, DIRECTLY ANDEXCLUSIVELY for educationalpurposes


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Exemption covers income, property,donors tax, and customs duties(distinguish from previous which pertainsonly to property tax)Revenue must both be (a) derived froman activity in pursuance of educationalpurpose; and (b) proceeds must be usedfor the same purpose (ex. hospitaladjunct to medical school tax exempt)(ex. Interest income not exempt).Income exempt provided it is used formaintenance or improvement ofinstitution.Distinguish from tax treatment of (a)proprietary educational institutions(Preferential Tax); and (b) governmenteducational institutions (exempt, ex. UP)12) Delegated authority of President to imposetariff rates, import and export quotas,tonnage and wharfage dues

delegated by Congressthrough a lawsubject to Congressional limits andrestrictionswithin the framework of nationaldevelopment program13) Lawgranting tax exemption (includesamnesties, condonations and refunds) shall

be passed with concurrence of Congress -majority of all members voting separately

Relative majority (majority of quorum) issufficient to withdraw exemption.14) No use of publicmoney or property forreligious purposes except if priest is assignedto armed forces, penal institutions,government orphanage or leprosarium

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15) Special purpose - special fund for said

purpose, balance goes to general funds

16) Veto power of the President - revenue/tariff

bill

17) Power of review of the SC

18) Power of Local Government to create their

own sources and levy taxes, fees, charges

19) Just share of local government in national

revenue which shall be automatically

released.

20) Tax exemption of all revenues and assets of

(a) proprietary orcooperative educationalinstitutions(b) subject to limitations provided by law21) Taxexemption of grants, endowments,donations or contributions USEDACTUALLY, DIRECTLY and EXCLUSIVELYfor educational purposes

CIR v. CA (298 SCRA 85)Facts: YMCA is a non-stock, non-profit institution,which conducts various programs and activitiesbeneficial to the public pursuant to its religious,educational and charitable objective. In 1980, YMCAearned an income of more than P600K from leasingout a portion of its premises to small shop ownersand P47K from parking fees.

Issue: Is the rental income from real property ownedby the YMCA subject to income tax?

Held: YES, the exemption claimed by YMCA isexpressly disallowed by the last paragraph of then27 of the NIRC. Furthermore, Art. XIV, 4 (3) of theConstitution only exempts YMCA from property taxesNOT income tax. YMCA cannot be considered as aneducational institution within the purview of theabove-cited article. The term educational institutionunder the Education Act of 1982 refers to schools.The school system is synonymous with formaleducation, which refers to hierarchically structured


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and chronologically graded learnings organized andprovided by the formal school system and for whichcertification is required in order for the learner toprogress through grades or more to higher levels.

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Nothing in the Articles of Incorporation or By-Laws of

institution.the YMCA suggests that it is an educational

Classification of Taxes

A.As to subject matter of object1) personal, poll, capitation tax (a) fixed amount(b) individualsresiding within specifiedterritory(c) without

regard to their property,occupation or businessEx. Community Tax (Cedula)2) property tax

(a) imposed on property, real or personal(b) inproportion to its value or otherreasonable method of apportionmentEx. Real estate tax3)excise, privilege tax -(different from the

excise tax in Taxation II)

(a) imposed upon performance of an act, theenjoyment of a privilege or the engagingin an occupation, profession or businessEx. Income tax, VAT, estate tax, donors tax

B. As to who bears the burden1) Direct the tax is imposed on the personwho also bears the burden thereofEx. Income tax, community tax, estate tax

2)

Indirect imposed on the taxpayer whoshifts the burden of the tax to anotherEx. VAT, specific tax, percentage tax,customs duties

C. As to determination of amount1) Specific tax imposed and based on aphysical unit of measurement, as by head,number, weight, length or volumeEx. Tax on distilled spirits, fermented


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liquors, cigars

2)Ad Valorem - tax of a fixed proportion of thevalue of property with respect to which thetax is assessed; requires intervention ofassessor.Ex. Real estate tax, excise tax on cars, nonessentialgoods

D. As to purpose1) General, fiscal or revenue - imposed for thegeneral purpose of supporting thegovernmentEx. Income tax, percentage tax

2)Special or regulatory - imposed for aspecial purpose, to achieve some social oreconomic objectivesEx. Protective tariffs or customs duties onimported goods intended to protect localindustries

E. As to authority imposing the tax1) National -imposed by the nationalgovernmentEx. National internal revenue taxes, customduties

2)Municipal or local - imposed by themunicipal corporations or local governmentsEx. Real estate tax, occupation tax

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F.As to graduation of rate (Three systems oftaxation)1)Proportional - based on a fixed percentageof the amount of the property, income orother basis to be taxedEx. Real estate tax, VAT, percentage tax

2) Progressive or graduated taxrateincreases as the tax base or bracketincreases

Ex. Income tax, estate tax, donors tax3) Regressive - tax rate decreases as the taxbase increases4) Degressive - increase of rate is notproportionate to the increase of tax base

SITUS OF TAXATION -the place of taxation, thecountry that has the power to levy and collect thetax.TAX DISTINGUISHED FROM POLICE POWER

TAX POLICE POWER (inthe form of a FEE)Purpose Raise revenue Exercise to promotepublic welfare throughregulationAmount of

exactionNo limit Limited to the cost ofregulation, issuanceof license, orsurveillanceSuperiorityofcontractsContracts maybe impairedunless (a)government isparty to

contractgrantingexemption; or(b) involvesfranchiseContracts may beimpairedTransferofproperty


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rightsTaxes paidform part of thepublic fundsAllows merely therestraint on theexercise of propertyrights

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TAX DISTNGUISHED FROM EMINENT DOMAIN

TAX EMINENT DOMAINPurpose RaiserevenueThe taking ofproperty for publicuseCompensation Payment of Just compensation

taxes accrueto the general

benefit of thecitizens of thetaxing Stateis given the ownerof the expropriatedpropertyPersonsaffectedApplies to allpersons,property andexcises thatmay be

subjecttheretoOnly particularproperty iscomprehendedTAX DISTINGUISHED FROM LICENSE FEETAX LICENSE FEESource Exercise ofTaxing powerEmanate from the policepower of the StatePurpose Raiserevenue

RegulationObject Persons,property andprivilegeRight to exercise aprivilegeAmount no limit only necessary to carryout regulation


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Distinction lies in the primary purpose:License fee if primary purpose is toregulate and the excess of the amountcollected from the cost to carry out theregulation is minimal and incidental.Tax if primary purpose, or at least one ofthe real and substantial purposes is toraise revenue.If amount is too high for regulation, it wouldbe a tax; unless imposed on non-usefuloccupations or businesses.Purpose of distinction: limitations andexemptions apply only to one and not to theother (ex. Exemption from taxation does notinclude exemption from fee)TAX DISTINGUISHED FROM DEBT

TAX DEBTSource Law; legalobligation

Based on contractPersonal Assignable

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Generally not

Imprisonment issanction for non-paymentMay be the subjectsubject to

ofcompensation/set

compensation/setoff

off

No imprisonment

for non-payment

GENERAL RULE: Taxes cannot be the subject ofcompensation or set-off

* A person cannot refuse to pay a tax on the groundthat the government owes him an amount equal to orgreater than the tax being collected. The collection oftax cannot await the results of a lawsuit against thegovernment.Reasons:

a) lifeblood theory

b) taxes are not contractual obligation (absenceof consent of taxpayer)c) taxpayer and government are not mutualdebtors and creditors of each other

EXCEPTIONS:

1)Both claims already became overdue anddemandable as well as fully liquidated .. theremust have already been an act of appropriationby the government (legislative) of funds forpayment of the debt.

2)Tax overpayment (BIRs obligation to refund orset-off arises from time tax was paid)

3)If the case involves local government taxes

TAX DISTINGUISHED FROM SPECIAL


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ASSESSMENT

TAX SPECIALASSESSMENTImposedonpersons,properties, etc.Only on landWhyimposedregardless ofpublicimprovementPublic improvementthat benefits the landPurpose are needed to seeSupport ofgovernmentTIFF (Uncompressed) decompressorthis picture.Contribution to costof publicimprovementWhenimposed

Regular exaction Exceptional as totime and localityBasis Necessity Benefits obtained

TAX DISTINGUISHED FROM TOLL

TAX TOLLKind ofdemandDemand ofsovereigntyDemand of

ownershipPurpose support ofgovernmentCollection for theuse of propertyAmount no limit dependson need of thegovernmentFair return of thecost of the propertyor improvement

TAX DISTINGUISHED FROM CUSTOMS DUTY

TAX CUSTOMSDUTYCoverage More comprehensivethan customs dutykind of taxObject Persons, prop, etc goods importedor exported


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DOCTRINE OF EQUITABLE RECOUPMENT

1)refund of a tax illegally or erroneously collected

or overpaid by a taxpayer2) such tax refund is barred by prescription3) tax presently being assessed against a taxpayer4) may be recouped or set-off against the tax barred

by prescriptionnot allowed in Philippines, reason - LIFE BLOOD

CONCEPT OF DOUBLE TAXATIONKinds of Double Taxation

A. DIRECT DUPLICATEtaxing same person, property or righttwicefor the same purposeby the same taxing authority

within the same jurisdiction or taxingdistrictwithin the same taxable periodand they must be of the same kind orcharacter of taxB. INDIRECT DUPLICATEExists if any of the elements for Directtaxation is not present

No constitutional prohibition on double taxation.However, where there is direct duplicate taxationthen there may be violation of the constitutionalprecepts of equal protection and uniformity intaxation.Page 5 of 145


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TAX TREATY AS A MODE OF ELIMINATINGDOUBLE TAXATION:

1) EXEMPTION METHOD the income or capitalwhich is taxable in the state of source or situs isexempted in the state of residence, although insome instances it may taken into account indetermining the rate of tax applicable to the taxpayers remaining income or capital (ex. TaxSparing Credit scheme)2) CREDIT METHOD the tax paid in the state ofsource is credited against the tax levied in thestate of residence

taxpayers property. As long as the power to taxdoes not violate any constitutional or statutoryprovisions, said power can be a power to destroy.But for all its plenitude, the power to tax is notunconfined as there are restrictions. Adversely

effecting as it does property rights, both the dueprocess and equal protection clauses of theConstitution may properly be invoked to invalidate inappropriate cases a revenue measure. If it wereotherwise, there would be truth to the dictum that thepower to tax involves the power to destroy. The webor unreality spun from Justice Marshalls famousdictum was brushed away by one stroke of Mr.Justice Holmes pen, thus: The power to tax is notthe power to destroy while this Court sits.So it is inthe Philippines. [Reyes v. Almanzor (1991), citingSison v. Ancheta (1984); Obillos v. CIR (1985)].Tax Avoidance (Tax Minimization) tax saving

device that is legally permissible

Tax Evasion (Tax Dodging) connotes fraudthrough the use of pretenses and forbidden devicesto lessen or defeat taxes; must be willful andintentional.

QuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.Afisco Insurance Corp v. CA (G.R. No. 112675,Jan. 25, 1999)Petitioners are local non-life insurance corps. Whichformed a pool in order to enter into a Reinsurance

Treaty with a German company. BIR assesseddeficiency taxes against the pool on the ground thatit is considered a partnership taxable as a corp.Petitioners insist that the pool is a mere agent, notacting on its own and therefore, cannot be taxed as acorp., there being no risk undertaken by the pool, nocommon fund and no control exercised by its board inthe management of its fund.Issue (1) : Is the Pool Taxable as a Corp?Held (1): YES. Pursuant to 24 of the NIRC, the


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pool is included within the definition of domesticcorps. Which comprises even unregisteredpartnerships and associations. In this case, theceding cos. Entered into an association that wouldhandle all business under the Treaty. It has acommon fund and an executive board to manage itsaffairs. Moreover, even if the pool itself did not issueany policies on its own, its work was indispensable tothe business of the ceding companies and theGerman Co,Issue (2): Is there double taxation?Held(2): NO. Double taxation means taxing thesame person twice by the same jurisdiction for thesame thing. The pool is a taxable entity distinct fromthe individual corporate entities of the cedingcompanies. The tax on its income is obviouslydifferent from the tax on the dividends received bythe said companies.CIR vs. The Estate of Benigno Toda, GR No.147188, Sept. 14, 2004Facts: This Court is called upon to determine inthis case whether the tax planning scheme adoptedby a corporation constitutes tax evasion that wouldjustify an assessment of deficiency income tax.

CIC authorized Toda, Jr., President and ownerof 99.991% of its issued and outstanding capitalstock, to sell the Cibeles Building and the twoparcels of land on which the building stands for anamount of not less than P90M. Toda thenpurportedly sold the property for P100 M to RafaelAltonaga, who, in turn, sold the same property onthe same day to RMI for P200M. These 2transactions were evidenced by Deeds of AbsoluteSale. For the sale of the property to RMI, Altonagapaid capital gains tax in the amount of P10M.CIC filed its corporate annual ITR for the year1989, declaring, among other things, its gain from

the sale of real property in the amount ofP75,728.021. Toda sold all his shares. He died 3yrs. later.The BIR sent an assessment notice anddemand letter to the CIC for deficiency income taxfor the year 1989 in the amount of P79,099,999.22,representing the tax, surcharge, & interest on thePower to Tax Involves Power to Destroy [ChiefJustice Marshall, McCullough v. Maryland, 4 L.Ed.579 (1819)]

The imposition of a valid tax could not be judiciallyrestrained merely because it would prejudice a

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Taxation Law Summer ReviewerATENEO CENTRAL BAR OPERATIONS 2007QuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.QuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.Page 7 of 145


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particular accused and not the character ofthe acts charged in the information

NATURE OF TAX AMNESTY

1)general or intentional overlooking by the State ofits authority to impose penalties on personsotherwise guilty of evasion or violation of arevenue or tax law

2)partakes of an absolute forgiveness or waiver ofthe Government of its right to collect

3)to give tax evaders, who wish to relent & are

willing to reform a chance to do so

RULES ON TAX AMNESTY

1)Tax amnesty

(a) liketax exemption, never favored norpresumed(b)construed strictly against the taxpayer (mustshow complete compliance with the law)

2) Government not estopped from questioning thetax liability even if amnesty tax payments werealready received QuickTime and aTIFF (Uncompressed) decompressorReason: are needed to see this picture.Erroneous

application and

enforcement of the law by public officers do

not block subsequent correct application of

the statute. The government is never

estopped by mistakes or errors of its agents.

Basis: Lifeblood Theory

3) Defense of Tax amnesty, like insanity, is apersonal defense.Reason: Relates to the circumstances of a

PART II THE NATIONAL INTERNAL REVENUE


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CODE OF 1997TITLE I. ORGANIZATION AND FUNCTION OF THEBUREAU OF INTERNAL REVENUE (BIR)

POWERS AND DUTIES OF THE BIR (ACEEGA)

1) Assessment and Collection of national internalrevenue:(a) taxes(b) fees(c) charges2) Enforcement of all(a) forfeitures(b) fines and(c) penaltiesconnected therewith3) Execution of all judgments decided in BIRs favorby(a) the Court of Tax Appeals (CTA) and(b) the ordinary courts4) Give effect to and Administer the supervisory andpolice powers conferred to it by NIRC or by otherlaws. (Sec. 2)

Officials of the BIR

1)one chief - Commissioner of Internal Revenue(Commissioner)

2)four assistant chiefs - Deputy Commissioners(Sec. 3)*E.O. 430 (July 28, 1997) designates each of the

4 Deputy Commissioners to head the following

functional groups:

(a) Operations group(b) Legal Enforcement Group(c) Information Systems Group(d)Resource Management GroupPowers of the Commissioner

A.Power to interpret tax law and decide taxcases (Sec 4)1)

Interpret provisions of NIRC and other taxlaws subject to review by the Secretary ofFinance

2)Decide:

(a) disputed assessments(b) refunds of internal revenue taxes, feesand charges


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(c) penalties imposed in relation thereto(d) other matters arising from NIRC or otherPage 8 of 145


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laws or portions thereof administered bythe BIR subject to the exclusive appellatejurisdiction of the CTA

B. Power to obtain information, summon,examine and take testimony of persons (Sec.5)1) For the Commissioner to ascertain:

(a)correctness of any return or in making areturn where none has been made(b) liability of any person for any internalrevenue tax or in correcting such liability(c) tax complianceThe Commissioner is authorized:2) to Examine any relevant Book, paper, recordor other data

3)to Obtain any Information (costs, volume ofproduction, receipts, sales, gross income,etc), on a regular basis from:

(a) any person other than the person underinvestigation or(b) any office or officer of the national/localgovernment, government agencies andinstrumentalities (Bangko Sentral,GOCCs)4)

To Summon

(a) the person liable for tax or required to filea return or(b) any officer or employee of such personor(c) anyperson having in hispossession/custody/ care1.the books of accounts2.accounting records of entries relating

to the business of the person liablefor tax or any other person5)to Produce such books, papers, records andother data and to give testimony

6)to take the Testimony of the personconcerned, under oath as may be relevant tothe inquiry


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7)To cause revenue officers and employees tomake a Canvass of any revenue district orregion

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granting the Commissioner the authority toinquire into bank deposits other than as providedfor under Sec. 6 (F) of the Code (authority toinquire into bank deposits).

C. Power to make assessments, prescribeadditional requirements for tax administrationand enforcement (Sec. 6)1) Examination of returns and determination of

tax due -

(a) Aftera return has been filed theCommissioner or his representative mayauthorizei. the Examination of any taxpayer;andii. the Assessment of the correctamount of tax;(b) Failure to file a returnshall not preventthe Commissioner fromauthorizing the examination of anytaxpayer;

Any tax or deficiency tax so assessed shall bepaid upon notice and demand from theCommissioner or his representative.

Any return, statement or declaration filed in anyauthorized office shall not be withdrawn; butwithin THREE YEARS from date of filing, thesame may be modified, changed or amended;provided that no notice for audit or investigationof such return, has in the meantime, beenactually served upon the taxpayer.

2)Failure to submit required returns and other

documents

If a person

(a) fails to file a required return or report atthe time prescribed or(b) Willfully or otherwise files a false or


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fraudulent return,The Commissioner shall Make or Amend thereturn from

(a) his own knowledge or(b) from such information as he can obtainthrough testimony or otherwisewhich shall be prima facie correct and sufficientfor all legal purposes

3)Inventory-taking, Surveillance, PresumptiveGross Sales

(a) Commissioner may, at any time duringthe taxable year1.order the Inventory taking of goodsof any taxpayer; or2.may place the business operations ofany person (natural/juridical) underObservation or Surveillanceif there is reason to believe that such

person is not declaring his correctincome, sales or receipts for taxpurposes.The findings may be used as basis forassessing the taxes and shall be deemedprima facie correct.

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(b) Commissioner may prescribe a Minimumamount of gross receipts, sales andtaxable base (taking into account thesales and income of other personsengaged in similar business) :1.When a person has failed to issuereceipts as required by Sec. 113(Invoice requirements for VAT-registered persons) and Sec. 237(Issuance of Receipts or CommercialInvoices); or2.When the books of accounts orrecords do not correctly reflect thedeclarations made or required to bemade in a return,such minimum amount shall

be prima facie correct

4)Terminate taxable period -Commissioner shall declare the tax period ofa taxpayer terminated and send notice to thetaxpayer of such decision with a request forimmediate payment of the tax, when it hascome to the knowledge of the Commissioner:

(RIRHO)

(a) that a taxpayer is Retiring from business

subject to tax or(b) is Intending to leave the Philippines or(c)to Remove his property therefrom or(d) to Hide or conceal his property or(e) is performing any act tending to Obstructthe proceedings for the collection of tax5)Prescribe Real Property Values -The Commissioner is authorized to:

(a) divide the Philippines into different zones

or areas and(b) determine the fair market value of realproperties located in each zone or areaFor tax purposes, the value of the propertyshall be whichever is higher of:

(a) Fair market value as determined by theCommissioner; or(b)Fair market value as shown in the


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schedule of values of the provincial andcity assessors.QuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.

6)Authority to Inquire into Bank Deposit -Notwithstanding R.A. 1405 (Bank SecrecyLaw) the Commissioner is authorized toinquire into the Bank deposits of:

(a) a decedent to determine his gross estate(b) a taxpayer who has filed an application tocompromise payment of tax liability byreason of financial incapacityThe taxpayers application for compromiseshall not be considered unless he waives inwriting his privilege under RA 1405 and othergeneral or special laws. Such waiver shallauthorize the Commissioner to inquire intohis bank deposits.

7)Authority to Register tax agents -

(a)The Commissioner shall Accredit andRegister, individuals and generalprofessional partnerships and their rep.who prepare and file tax returns andother papers or who appear before theBIR(b)The Commissioner shall create nationaland regional accreditation boardsThose who are denied accreditation mayappeal the same to the Sec. of Finance who

shall rule on the appeal within 60 days fromreceipt of such appeal. Failure of the Sec. ofFinance to rule on the appeal within the saidperiod shall be deemed as approval foraccreditation.

8)Authority to Prescribe Additional

Requirements-The Commissioner may prescribe themanner of compliance with any documentaryor procedural requirement for the submission

or preparation of financial statementsaccompanying tax returns.

D. Authority to delegate power (Sec. 7)The Commissioner may delegate the powers vested

in him to subordinate officials with rank equivalent to

Division Chief or higher, subject to


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limitations/restrictions imposed under the rules and

regulations EXCEPT, (the following powers shall

NOT be delegated): (RIR CoA A)1) power to Recommend the promulgationof rules and regulations by the Sec. ofFinance2) power to Issue rulings of first impressionor to Reverse, revoke, modify anyexisting rule of the BIR3) power to Compromise or Abate any taxliability

EXCEPT, the regional evaluation boardmay compromise:

(a)assessments issued by regionaloffices involving deficiency taxes ofP500,000 or less; and(b)minor criminal violations as may bePage 10 of 145


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determined by the rulesof:Regional Evaluation Board is composedi. Regional Director as Chairmanii. Asst. Regional Directoriii. Heads of the Legal, Assessment andCollection Div.iv. Revenue District Officer havingjurisdiction over the taxpayer4) power to Assign or reassign internalrevenue officers to establishments where

articles subject to excise tax are kept

E.Assignment of Internal Revenue Officers(Secs. 16 &17)The Commissioner may assign/ reassign internal

revenue officers:1) involved in excise tax functions as often as the

exigencies of revenue service may require;provided that he shall in no case stay in hisassignment for more than 2 years (Sec. 16)

2)without change in rank and salary, to other orspecial duties connected with the enforcementand administration of internal revenue laws asthe exigencies of the service may require;provided that officers assigned to perform

assessment or collection functions shall notremain in the same assignment for more than 3years; assignment of officers and employees tospecial duties shall not exceed 1 year (Sec. 17)

F. Internal Revenue Districts (Sec. 9)The Commissioner, with approval of the Sec. ofFinance, shall divide the Philippines into suchnumber of revenue districts for administrativepurposes. Each district shall be under the supervisionof a Revenue District Officer.

Duties of the Commissioner: (PASO)

1) To Prescribe, provide and distribute to the proper

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officials the requisite licenses, internal revenue

stamps, labels, all other forms, certificates,bonds, records, invoices, books, receipts,


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instruments and appliances used in administeringlaws falling within the jurisdiction of BIR

2)To Acknowledge payment of any tax under this

Code expressinga) the amount paid andb) the particular account for which payment

was made (Sec. 8)

3)To Submit reports to the appropriate committeeof Congress upon its request and in aid oflegislation, which information or report shallinclude, but not be limited to:

(a) industry audits(b) collection performance data(c)status reports in criminal actions initiatedagainst persons(d) taxpayers returns

provided, any return or information which canbe associated with or identifies, directly orindirectly a particular taxpayer, shall befurnished to the appropriate committee ofCongress only when sitting in ExecutiveSession, unless the taxpayer consents inwriting to such disclosure4)Submit reports to the Oversight Committeethrough the Chairman of the Committee on Waysand Means of the Senate and House ofRepresentatives, on the exercise of his powers ofabatement and compromise of taxes (Sec. 204)

every 6 months of each calendar year. (Sec. 20)

NATIONAL INTERNAL REVENUE TAXES: (Sec.

21) (I VEE DOO)

1)Income tax

2)Estate and Donors tax

3)

Value-Added tax

4)Other percentage tax

5)Excise tax

6)Documentary stamp tax


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5)Taxpayer any person subject to tax

6)Taxable Year can either be calendar year (Jan1 to Dec 31), or the fiscal year

7)Fiscal Year an accounting period of 12 monthsending on the last day of any month other thanDecember (ex. Feb 1 to Jan 31)

8)Paid or incurred (cash method) or Paid oraccrued (accrual method) payment actuallymade or if not paid, actually liable for theexpense

TAXABLE INCOME

REQUISITES FOR INCOME TO BE TAXABLE:

1)There must be a gain or addition to net worth

2)The gain must be realized or received, actually orconstructively; recipient must have completedominion

3)

The gain must not be excluded by law or treatyfrom taxation

Note:

Not recognized as income - when fundswere merely entrusted/held money in trust (withobligation to return) to taxpayer becausetaxpayer acquires no control and does notreceive economic benefit from it.Proceeds of embezzlement/swindling are

income because embezzler/swindler alreadyhas complete dominion over them and can usesuch for his economic benefit.Increase in the value of property is notrecognized as income; this only constitutesan unrealized increase which becomes taxableincome only upon disposition and realization ofgains. Same situation for stocks and stockdividends.


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Deposit with no interest does not produceincome for the depositary; there is no flow ofwealth.In a debt/loan situation it is important todetermine whether there was an originalintention to pay/consensual recognition of anobligation to repay.If yes, then the liability thatQuickTime and aTIFF (Uncompressed) decompressor

results just offsets the increase in

are needed to see this picture.

assets of the taxpayer borrower;therefore, no increase in net worthand no income derived from thedebt/loan.

If no (as in the case of aswindler/estafa), the proceeds willbe considered as income andtherefore taxable in the hands ofthe borrower swindler.Income can be realized actually andconstructively.Assignment of Income Doctrine Ex: A isentitled to his salary of P10m but assigns it to Bfor unknown reasons. In this case, both A andB realize income. A constructively received

income (because he was able to assign thushas complete control/dominion over it) and Bactually received it. The income is taxable inthe hands of both A and B.Doctrine of Constructive Receipt Ex: A wasinformed that his check dated December 16 isalready available and he can get it anytime. Adid not get the check until January 30. In thiscase, A constructively received income inDecember and is taxable in that taxable period.Not recognized as income if proceeds are

merely a return of capital. Ex. Creditor lendsdebtor x amount. Debtor repays x amount plusy interest. Creditor does not have income on xamount as this is merely return on capital; hehas income only with respect to the amount ofy interest.COMPUTATION OF TAXABLE INCOME

1)Taxpayer earning purely compensatory


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income

Gross Compensation

less : Personal Exemptionpremium payments on health and/orhospital insurance amounting to P2,400per year

equals: Taxable income

2)Taxpayer doing business, whether individualor corporation (domestic or FC doingbusiness)

Gross Revenue/Salesless: Cost of Salesequals: Gross Incomeless : Allowable Deductionsequals: Taxable Income

for individuals, an additional deduction forpersonal exemptions is allowedSitus of Taxation is the place or authority that has theright to impose and collect taxes (CIR v. MarubeniCorp). The state where the subject to be taxed has asitus may rightfully levy and collect the tax. The situsis necessarily in the state which has jurisdiction orwhich exercises dominion over the subject inquestion.

SOURCES OF INCOME

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Philippines shall be treated as derived entirely fromsources within the country in which it was sold.

GENERAL PRINCIPLES OF INCOME TAXATIONIN THE PHILIPPINES

Taxpayer Tax Base Taxable onincomeResident Citizen TaxableIncomeWithin andwithout thePhilippinesNonresident Citizen TaxableIncomeWithin thePhilippinesResident Alien TaxableIncomeWithin thePhilippines

Nonresident Alienengaged in trade orbusinessTaxableIncomeWithin thePhilippinesNonresident Alien notengaged in trade orbusinessGrossIncomeWithin the

PhilippinesGeneral ProfessionalPartnershipTaxableIncomeWithinor/andwithout thePhilippines(dependingonclassificationof individual

partner)Estate and Trust TaxableIncomeSame basisas anindividual(dependingonclassificationof decedent,


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if estate,trustor, iftrust)Domestic Corporation TaxableIncomeWithin andWithout thePhilippinesResident ForeignCorporationTaxableIncomeWithin thePhilippinesNon-resident ForeigncorporationGrossIncomeWithin thePhilippines*Taxable Income = Gross income (less) Deductions(less) Personal and additional exemptions

*Gross Income = all income derived from whatever

source

TYPES OF INCOME TAXATION UNDER THE NIRC

1) Net Income Tax/Taxable Income (GI Deductions Exemptions)2) Gross Income Tax (All income from whateversource)3) Final Income Tax (On passive income and capital

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gains)

4)Fringe Benefits Tax (amount of benefits toManagerial and Supervisory Employee paid byEmployer; Ee is taxed but burden is on Er)

5)Capital Gains Tax (Real property and stocks not

traded in stock market)6) Optional Corporate Income Tax7) Minimum Corporate Income Tax (2% of GI)8) Improperly Accumulated Earnings Tax9) Preferential Rates (for special corporations)10) Branch Profit Remittance Tax

TYPES OF TAXPAYERS

A. IndividualsKinds of Individuals

1) Resident Citizen2) Nonresident Citizen = citizen of thePhilippines who:(a) Establishes the fact of his physical

presence abroad with a definite intentionto reside therein

(b)

Leaves the Philippines during the taxableyear to reside abroad, as immigrant or foremployment on a permanent basis(c)Works & derives income from abroad &whose employment requires him to bephysically present abroad most of thetime (i.e. not less than 183 days) duringthe taxable year(d)Previously considered as nonresidentcitizen & arrives in the Philippines at anytime during the taxable year to reside

permanently in the Philippines3)Resident Alien

4) Nonresident Aliena) Those engaged in trade or business inthe Philippines who come and stay in thePhilippines for an aggregate period ofmore than 180 days during any calendaryear


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b)Those not engaged in trade or businessin the Philippines, which include nonresidentaliens whose stay in the

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Philippines is 180 days or less

c)Aliens employed by regional or areaheadquarters and regional operatingheadquarters of multinational companiesin the Philippines

d) Aliens employed by offshore bankingunitse) Aliens employed by petroleumcontractors and subcontractors

TYPES OF INCOME

1)General (part of gross income, subject to 532%)a) Compensation Incomeb) Income from Businessc) Income from Exercise of Profession

2)Special Types of Income (not part of grossincome, subject to final tax)a) Interests, royalties, prizes and other

winnings subject to final tax (Passive

Income)

b)Cash & property dividends (does notinclude stock dividends; these arerealized only upon their subsequent sale)(Passive Income)

c) Capital gains from sale of real propertyd) Capital gains from sales of shares ofstock not listed in the stock exchange

e)

Capital gains from sale of shares of stocklisted in stock exchange (subject topercentage tax

B. Estates and TrustsEstate: property, rights and obligations of aperson which are not extinguished by his deathand those that accrues thereto; taxed in the sameway as an individual provided it is irrevocable andearns income; what is taxed is not the property


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that constitutes the trust (this was already subjectto donors tax) but the income of such property.

Trust: arrangement created by agreement underwhich title to property is passed to another forconservation or investment with the income andthe corpus/principal distributed in accordancewith the directions of the creator; to be taxable asa separate entity, grantor must have absolutelyand irrevocably given up control and benefit overthe trust.

C. CorporationA corporation shall include partnerships, no matterhow created or organized. Joint stock companies,joint accounts, associations, and insurancecompanies

But does not include, for the purpose ofimposing ordinary 35% corporate income tax:ogeneral professional partnershipso

joint venture or consortium formed for thepurpose of undertaking constructionprojects or engaging in petroleum, coal,geothermal & other energy operationspursuant to an operating or consortiumagreement under a service contract withPage 14 of 145


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the govt.

General Types:

1) Domestic Corporation is created ororganized in the Philippines or under its laws2) Foreign Corporation is organized andexisting under the laws of a foreign country

(a)Resident foreign corporation foreigncorp. engaged in trade or business withinthe Philippines(b)Nonresident foreign corporation foreign corp. not engaged in trade orbusiness within the PhilippinesD. PartnershipsKinds of Partnerships

1) General Professional Partnerships

Established solely for purpose of exercisingcommon profession and not part of incomederived from engaging in trade or business.As an entity, it is not subject to income tax.Partners are liable for income tax on theirdistributive share (computed by dividing netincome of GPP). Each partner shall report hisdistributive share as part of his gross income.

2) Taxable/Business/Ordinary Partnership

All other partnerships no matter how createdor organized.Includes unregistered joint ventures andbusiness partnerships.Taxable as an entity .. ordinary corporateincome tax.Joint ventures are not taxable as

corporations when its purpose if a)undertaking construction projects; b)engaged in petroleum, coal and other energyoperation under a service contract with thegovernment.Partners are considered stockholders;therefore, their distributive share is taxed asdividends.TAX ON CORPORATIONS


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I. DOMESTIC CORPORATIONSQuickTime and a

A. In generalTIFF (Uncompressed) decompressorare needed to see this picture.B.Optional Gross Income TaxationEffective Jan. 1, 2000: the President (uponrecommendation of the Sec of Finance) mayallow corporation an option to be taxed at 15% ofgross income after the ff. conditions aresatisfied:

Tax effort ratio 20% ofGNPRatio of IT collection to total taxrevenue40%VAT tax effort 4% of GNPRatio of Consolidated PublicSector Financial Position(CPSFP) to GNP0.9%

Ratio of Cost of Sales to GrossSales from all sourcesDoes notexceed 55%

The election of the option shall be irrevocablefor 3 consecutive taxable years during which thecorp. is qualified under the scheme

Gross Income = Gross Sales( - ) Sales returns,discounts and

allowances( - ) Cost of goods soldCost of Goods Sold

Trading and Merchandising Concern

Invoice cost plus import duties andfreight in transporting goods to the placewhere actually sold, including insurancewhile in transitManufacturing concern

Cost of production of finished goods (rawmaterials, direct labor and manufacturingoverhead, freight cost, insurancepremiums, and other costs to bring theraw materials to the factory)If taxpayer is engaged in sale of service:

Gross Income = Gross receipts


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( - ) Sales returns,allowances anddiscountsC.Special Types of Domestic CorporationsOn taxable income from allsources within and withoutthe Philippines

32% (2000-2005)35% (2006-2008)30% (2009onwards)

Proprietaryeducationalinstitutions andhospital which are10% On related trade,business or activity;35% (2006) if totalgross income from

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nonprofit unrelated trade,business, or activityexceed 50% of totalincome32% Same tax rate upon(2000theirtaxable2005) income in a similar35% business, industry,(2006) or activityGSIS/ SSS / PHIC/ PCSOExemptDepository Banks 10% On interest incomefrom foreigncurrencytransactionsincluding interest

income fromforeign loans

Proprietary Educational Institutions & Hospitals(non-profit)

Proprietary educational institution anyprivate school maintained & administered byprivate individuals or groups with an issuedpermit to operate from DECS, or CHED orTESDA

Taxable at 10% on taxable income, except oncertain passive income (which are subject to finaltax)Predominance Test: if GI from unrelatedtrade/business/other activity > 50% of the total GIfrom all sources, ENTIRE taxable income shallbe subject to the REGULAR corporate tax rate(35% Effective 2006)Distinguish from non-profit non-stock educationalinstitutions which are exempt from tax onrevenues and assets Actually, Directly and

Exclusively used for educational purposes (Seeabove for discussion).GOCCs

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General Rule: all corporations, agencies, or



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instrumentalities owned or controlled by the govt.are taxable.

Exceptions:1) GSIS2) SSS3) PHIC4) PCSO

D.Rule for Corporations Exempt from TaxationGeneral Rule: those enumerated under section 30are exempt.

Exception: exempted corporations are subject toincome tax on their income from any of theirproperties, real or personal, or from any activitiesconducted for profit regardless of the dispositionmade of such income.

Ex. Non-stock, non-profit religious

organization is exempt from 35% ordinaryincome tax on corporations (by virtue ofsection 30 which uses as such) and from allproperty tax (by virtue of Constitution,provided ADE use for its religious purpose).However, if it derives income from itsproperty or conducts an activity that is forprofit (even if the proceeds will be used forthe religious purpose), the proceeds will betaxable.Ex. For educational institutions, theproceeds, to be exempt, must be both a)

realized from educational activities and b)used for educational activities.E.Minimum Corporate Income Tax (MCIT)1.MCIT Rate = 2% of gross income (GI)When to begin/apply MCIT? Beginning on the4th taxable year immediately following the year inwhich such corporation commenced its business

operation(Commencement of Business Operation:Upon Issuance of BIR Certificate of

Registration)

Imposed when on the 4th taxable year, 2% ofthe corporations GI is greater than 35% of its TI.

Example: for 2006 calendar year

GI = P500,000 2% of GI = P10,000TI = P27,000 35% of TI = P9,4502006 IT = P10,000


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Rationale: This is designed to preventcorporations from escaping being taxed byincluding frivolous expenses in their statement ofincome (Ex. Over statement of depreciationexpense)

2.Carry Forward of Excess Minimum TaxPage 16 of 145


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Excess of MCIT over the normal income tax shallbe carried forward & credited against normalincome tax for the 3 succeeding years

Example: (proceeding from above example)

Situation A: If regular income tax (35% of taxableincome) is greater than MCIT (2% of GI) .. PayRegular Income Tax

For 2007 calendar year:

GI = P500,000 2% of GI = P10,000TI = P50,000 35% of TI = P17,500

Income Tax payable for 2007= 17,500 (Regular Income Tax) 550 (MCITCarry Forward from 2006: 10,000-9450)

= 16,950

NOTE: You can deduct MCIT Carry Forward only ifRegular Income Tax is greater than MCITY

Situation B: If regular income tax is less thanMCIT .. Pay MCIT

For 2007 calendar year:

GI = P500,000 2% of GI = P10,000TI = P20,000 35% of TI = P7,000

Income Tax payable for 2007

= 10,000

NOTE: MCIT carry forward as of 2007 is already3,550 (550 from 2006 and 3,000 from 2007).So if in 2008, Regular Income Tax is alreadygreater than MCIT, you may deduct 3,550from payable Regular Income Tax.

3. Relief from MCITMCIT may be suspended by the Sec ofFinance when corporations losses are due

to:

(a) prolonged labor dispute(b) force majeure(c) legitimate business reversesQuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.

4.Gross Income (for purposes of applying


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MCIT)Gross Income= Gross Sales( - ) Sales returns,discounts & allowances( - ) Cost of Goods sold

If taxpayer is engaged in sale of service:

Gross Income = Gross Receipts

( - ) Sales returns,discounts andallowances( - ) Cost of Services

*means all direct costs and expensesnecessarily incurred to provide the servicesrequired by the customers including:

a) salaries and employee benefits ofpersonnel, consultants and specialistsdirectly rendering the service;

b) costs of facilities directly utilized inproviding the service such as depreciation orrental of equipment used and costs ofsupplies

II. RESIDENT FOREIGN CORPORATIONA. In General (the rest is the same as domesticcorp.)On taxable income from allsources within thePhilippines.32% (2000-2005)

35% (2006-2008)30% (2009 onwards)B. MCIT - same as domestic corp.C. Special types of resident foreign corporations:International Aircarriers2.5% On Gross PhilippineBillings (see case of AirCanada vs. CIR infra)InternationalShipping2.5% On Gross PhilippineBillings

Offshore 10% Any interest incomebanking units derived from foreigncurrency loans grantedto residents other thanoffshore banking unitsor local commercialbanks, including localbranches of foreignbanks that may beauthorized by the BSP


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to transact businesswith offshore bankingunitsOffshorebanking unitsExempt Income derived byoffshore banking unitsauthorized by the BSP,from foreign currencytransactions withnonresidents, otheroffshore banking units,local commercialbanks, including

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branches of foreignbanks that may beauthorized by the BSPto transact businesswith offshore bankingunits.Regional/Area ExemptHeadquartersRegional 10% On taxable incomeOperatingHeadquarters ofMultinationalcompanies

Gross Philippine Billings

For international air carriers, refers to gross

revenue derived from carriage of persons,excess baggage, cargo, and mail originatingfrom the Philippines in a continuous anduninterrupted flight, irrespective of the placeof sale or issue and the place of payment ofthe ticket or passage documentProvided, tickets revalidated, exchangedand/or indorsed to another internationalairline form part of the GPB if the passengerboards a plane in a port or point in thePhilippineso

If the ticket is indorsed to another airline,the GPB will be charged to thetransferee/indorseeProvided, for a flight which orginates in thePhilippines but transshipment (transfer) ofpassenger takes place at any port outsidethe Philippine on another airline, only thealiquot portion of the cost of the ticketcorresponding to the leg flown from thePhilippines to the point of transshipment shallform part of the GPB.o

Note: Transfer of airline company, nottransfer of aircraftGPB rule in the NIRC is a departure from theold rule which emphasized where ticketswere bought.Now we adopt the originating rule meaningto form part of GPB, passenger/cargo mustQuickTime and a


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originate from the Philippines


Does not apply to domestic corporations (Ex.PAL)Carrier must be an alien resident corporation;if its not, then it will be subject to 35% tax onGI as non-resident alien corporation.Does not apply to offline carriersoOn line carriers: those with landing rightsin the PhilippinesoOff line carriers: those without landingrights but may nevertheless be sellingtickets in the Phil .. subject to taxtreatment of ordinary resident foreigncorporation

Whats controlling is the amount stated in theticket and not the actual purchase value.Air Canada vs. CIR, CTA Case No. 6572, Dec. 22,2004It is evident that the definition of Gross PhilippineBillings under Section 28(A)(3)(a) of the 1997 TaxCode covers the gross revenue derived from thecarriage of persons, excess baggage, cargo and mailoriginating from the Philippines in a continuous anduninterrupted flight irrespective of the place or saleor issue and the place of payment of the ticket orpassage document. To originate would mean to

cause the beginning of; to start (a person or thing) ona course or journey; to begin, start. In other words,the flights carrying the passengers must haveoriginated or started from the Philippines. Verily,petitioner, being an off-line international carrier, asauthorized to operate by the CAB and having noflights originating from the Philippines in a continuousand uninterrupted flight, cannot be taxed pursuant toSection 28(A)(3)(a) of the 1997 Tax Code, that is,based on their Gross Philippine Billings.However, although petitioner Air Canada is notliable to pay the tax as an international air carrier(2.5% on gross Phil. Billings), it is still liable to pay

income tax as a resident foreign corporation.Under Section 22 of the 1997 Tax Code, the termresident foreign corporation applies to a foreigncorporation engaged in trade or business within thePhilippines, while the term non-resident foreigncorporation applies to a foreign corporation notengaged in trade or business within the Philippines.However, with regard to the term doing or engagedin business, there is no fixed or specific criterion aswhat constitutes doing or engaging in business. In


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the case of The Mentholatum Co., Inc., et al. vs.Mangiliman, et al., 72 PHIL 524, the HonorableSupreme Court had thoroughly and clearly explainedthe term in this way:There is no specific criterion as to whatconstitutes doing or engaging in or transactingbusiness. Each case must be judged in the light ofits peculiar environmental circumstances. The termimplies continuity of commercial dealings andarrangements, and contemplates, to that extent, theperformance of acts or works or the exercise of someof the functions normally incident to, and inprogressive prosecution of commercial gain or for thepurpose and object of the business organization.Page 18 of 145


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In order that a foreign corporation may beorganization.business the ofobject and purpose theforand in progressive prosecution of commercial gain orthe exercise of some functions normally incident toarrangements and performance of acts or works oractivities show continuity of commercial dealings orfor such engaged in trade or business in that countryshall be considered as resident foreign corporationoffices, agencies or branches, as in the case at bar,Philippines through their local agents, whether liaisona foreign airline company selling tickets in the words,In otherand not one of a temporary character.business, such as the appointment of a local agent,of conduct and intention to establish a continuousregarded as doing business, there must be continuity

Branch Profit Remittance Tax

BPRT shall be imposed on any profit remittedby a branch to its head office.Distinguish between a branch and asubsidiaryoIf branch, subject to BPRToIf subsidiary .. amounts received bynon-resident foreign corporation wouldbe treated as dividends .. it becomes

part of its Gross Income from withintaxable at 35%Branch will first be subjected to ordinarycorporate tax as a resident foreigncorporation (35%). Afterwards, the profits forremittance shall then be subject to 15%BPRT. (Because branch assumespersonality of an RFC and is thereforetaxable as such)Any remittance, so long as you can trace itfrom a branch to the foreign parent

corporation subject to BPRTQuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.

oEx. X foreign corp. has both regionalheadquarters and branch in Philippines.Instead of remitting straight to X, branchpays amount to regional headquarterssupposedly for administrative support


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services .. The amount paid for theservices will still be subject to BPRTbecause the tax is imposed on any formof remittance, direct or indirect.

TAX SPARING CREDIT

Tax reduced by the Philippines should befully applied or credited to the tax on dividendincome received by the non-resident foreigncorporation imposed by the country of itsdomicile. This serves as an incentive byreducing their tax liability in the Philippinesand in their residence countries.

Ex. Domestic corporation paid cash dividendto non-resident foreign corporation (NRFC)organized in Brazil. This shall form part ofNRFCs income therefore taxable also inBrazil. The dividend received shall only betaxed at 15% in the Phils (instead of 35%) ifBrazil will reduce/credit at least 20% of the

tax imposed in the Phils. from its tax imposedin Brazil. [See Section 28(5)(b)]If Brazil will credit/reduce less than 20% orwill not credit any amount, then the Phils willtax the dividend at 35% (ordinary incometax).Phils. cannot give more than 15% tax creditbecause the law only allows such.III. NONRESIDENT FOREIGN CORPORATIONA. In GeneralGross Income from all sources 32% (2000-2005)

within the Philippines (except 35% (2006-2008)Capital Gains on sale of 30% (2009domestic shares subject to final onwards)tax)

Gross Income includes interest, dividends,rents, royalties, salaries, premiums (exceptreinsurance prem.), annuities, emoluments orother fixed/determinable annual,periodic/casual gains, Capital Gains (notsubject to FT)NON-RESIDENT FOREIGN CORPORATION

CinematographicFilm owner, lessoror distributor25% On gross incomeOwner or lessorsof vessel chartedby Philippinenationals4.5% On gross income


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Owner or lessorsof aircraft,machineries andother equipment7.5% On gross income

INCOME TAX RATES

I. INDIVIDUALSA.In generalPage 19 of 145


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Graduated rates of 5 to 32%.B.Passive Income Please see exhibitCapital Gains from Sale of Real Property

Final tax on gross selling price or current fairmarket value, whichever is higher.Imposed upon capital gains presumed tohave been realized from the sale, exchange,or other disposition of real property located inthe Philippines, including pacto de retro salesand other forms of conditional sales.Law presumes a gain, hence, even if the salewas at a loss (bought for 2M, sold for 1M),

CGT will still be imposed on entire proceedsof the disposition; law does not talk about thenet gain, it only considers gross sellingprice/FMV whichever is higher.Refers to real property held as capital asset(not used for business/investment) asopposed to ordinary asset (used in ordinarycourse of business).Special Rule for disposition to governmentoTaxpayer has option of treating the

proceeds as (a) taxable income (5-32%on net gain) or as capital gains (6% finaltax on FMV/gross selling price).oIf second option is chosen: 6% final taxshall be based on actual considerationand not FMV since the former is usuallylower than FMV (BIR Ruling).oIf the disposition took nature ofexpropriation (no meeting of the minds,not voluntary), transaction is not subjectto CGT. Net gain (if any) will be treated

as part of GI. Includes disposition byjudicial order and other forms of forceddisposition.Rule for ExchangeoFMV of the property exchanged/given upshall be basis of CGT. (Ex. A exchangesproperty worth 1M for Bs property worth2M .. CGT on A will be based on 1M,


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CGT on B will be based on 2M)QuickTime and aTIFF (Uncompressed) decompressor

Exception on Principal ResidenceoGains presumed to have been realizedare needed to see this picture.

from sale or disposition of principalresidence, the proceeds of which is fullyutilized in acquiring new principalresidence within 18 months fromdisposition shall be exempt from CGT.

oCan be availed only once every 10 years.oIf the new principal residence is cheaperthan old (meaning there is no fullutilization of the proceeds), the differencewill be subject to CGT.

oExemption does not include exchange ofprincipal residence for a new principalresidence .. subject to rules onexchange above.C.Special Tax Rates for Aliens Please seeexhibitII. CORPORATIONSA. In general2006-2008 35%

2009-onwards 30%

B. Passive Income and other income Please seeexhibitC. Tax rate for Resident Foreign CorporationPlease see exhibitD. Tax rate for special types of Resident ForeignCorporation Please see exhibitIMPROPERLY ACCUMULATED EARNINGS TAX(IAET)

(Sec. 29, as implemented by Rev. Reg. 2-2001which prescribes rules governing the imposition of

IAET)

A. RuleThere is imposed for each taxable year, inaddition to other taxes, a tax equal to 10% of theimproperly accumulated taxable income ofdomestic and closely-held corporationsformed or availed of for the purpose of avoidingthe income tax with respect to its shareholders orthe shareholders of any other corporation, by


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permitting the earnings and profits of thecorporation to accumulate instead of dividingthem among or distributing them to theshareholders (Ex. Holding company).

B. RationaleIf the earnings and profits were distributed, theshareholders would then be liable for income tax;if the distribution were not made to them, theywould incur no tax in respect to the undistributedearnings and profits of the corporation. It is a taxin the nature of a penalty to the corporation forthe improper accumulation of its earnings, and adeterrent to the avoidance of tax uponshareholders who are supposed to pay dividends

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tax on the earnings distributed to them.

C. ExceptionThe use of undistributed earnings and profits forthe reasonable needs of the business wouldnot generally make the accumulated orundistributed earnings subject to the tax. What ismeant by reasonable needs of the businessis determined by the Immediacy Test.

Immediacy Test It states that thereasonable needs of the business are the1) immediate needs of the business; and2) reasonably anticipated needs (Ex.Expansion)

How to prove the reasonable needs ofthe business: The corporation should provethat there is1) an immediate need for the accumulationof the earnings and profits; or2) a direct correlation of anticipatedneeds to such accumulation of profits.

D. Composition: The following constituteaccumulation of earnings for the reasonableneeds of the business: (ILL ABE)1) Allowance for the increase in theaccumulation of earnings up to 100% of the

paid-up capital of the corporation as ofBalance Sheet date, inclusive ofaccumulations taken from other years;2) Earnings reserved for definite corporateexpansion projects or programs requiringconsiderable capital expenditure as approvedby the Board of Directors or equivalent body;3) Earnings reserved for building, plants orequipment acquisition as approved by theBoard of Directors or equivalent body;4) Earnings reserved for compliance with anyloan covenant or pre-existing obligationestablished under a legitimate business

agreement;

5)Earnings required by law or applicableregulations to be retained by the corporationor in respect of which there is legal

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prohibition against its distribution;

6)In the case of subsidiaries of foreigncorporations in the Philippines, allundistributed earnings intended or reservedfor investments within the Philippines as canbe proven by corporate records and/orrelevant documentary evidence.

E. CoveredCorporations: Only domestic andclosely-held corporations are liable for IAET.1. Closely-held corporations are those:a) at least 50% in value of the outstanding capitalstock; orb)at least 50% of the total combined voting powerof all classes of stock entitled to vote is owneddirectly or indirectly by or for not more than 20individuals. Domestic corporations not fallingunder the aforesaid definition are, therefore,

publicly-held corporations.

F.Exempt Corporations: The IAET shall not applyto the following corporations:(BIG-PEN-T)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; and7) Enterprises that are registered:

(a) withthe Philippine Economic ZoneAuthority (PEZA) under R.A. 7916;(b) pursuant to the Bases Conversion andDevelopment Act of 1992 under R.A.7227; and(c) under special economic zones declaredby law which enjoy payment of special

tax rate on their registered operations oractivities in lieu of other taxes, national orlocal.G.Period for Payment of Dividend/IAET: Thedividends must be declared and paid or issuednot later than one year following the close ofthe taxable year, otherwise, the IAET, if any,should be paid within fifteen (15) daysthereafter.


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H.Determination of Purpose to Avoid IncomeTax1) The fact that a corporation is a mere holdingcompany or investment company shall beprima facie evidence of a purpose to avoidthe tax upon its shareholders or members

.. A holding or investment company is acorporation having practically no activities exceptholding property, and collecting the incometherefrom or investing the same; and2)where the earnings or profits of a corporationare permitted to accumulate beyond the

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reasonable needs of the business.

I.Prima facie instances of accumulation ofprofits beyond the reasonable needs of abusiness and indicative of purpose to avoidincome tax upon shareholders1)Investment of substantial earnings and profitsof the corporation in unrelated business orin stock or securities of unrelated business;

2)Investment in bonds and other long-termsecurities; and

3)Accumulation of earnings in excess of 100%

of paid-up capital, not otherwise intendedfor the reasonable needs of the business.The controlling intention of the taxpayer isthat which is manifested at the time ofaccumulation. A speculative and indefinitepurpose will not suffice. The mere recognitionof a future problem or the discussion ofpossible and alternative solutions is notsufficient. Definiteness of plan/s coupled withaction/s taken towards its consummation isessential.

Cyanamid Phils. vs. CA, GR No. 108067, Jan. 20,

2000

Ideally, the working capital should equal thecurrent liabilities and there must be 2 units of currentassets for every unit of current liability, hence the so-called "2 to 1" rule. A Debt-to-Equity ratio (CurrentAssets over Current Liabilites) of 2:1 is indicative ofthe liquidity of a corporation, and furtheraccumulation would expose it to the IAET.

I. GROSS INCOMEAll income derived from whatever source, including(but not limited to the following items) (GRIP CARD

GPP)1) Gross income derived from the conduct of trade

or business or the exercise of a profession2) Rent Income3) Interest Income4) Prizes & winnings

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5)Compensation for services in whatever form paid,

including, but not limited to fees, salaries, wages,

commissions & similar items6) Annuities7) Royalties8) Dividend Income9) Gains derived from dealings in property10) Pensions11) Partners distributive share from the net income

of the GPP (distributive share from ordinary

partnerships is taxable as dividends; in this case,the ordinary partnership has already been subjectto ordinary corporate income tax)

All income from whatever source derivedRecovery of damages (compensation for

injury; from tortious acts)NottaxableRecovery of items previously deductedfrom gross income (return of capital)TaxableForgiveness of indebtedness (if effect ofentire transaction is a reduction ofpurchase price of property acquired inprior year)NotTaxableIncome derived form illegal business

(gain)TaxableRecovery of lost earnings Taxable

BIR Ruling #017-2003The transfer of land made by a person to another inpayment of services rendered in the form of attorneysfees shall be considered as part of the gross incomeof the latter valued at either the fair market value ortaxable year received.the zonal valuation, whichever is higher, in the

II. EXCLUSIONS FROM GROSS INCOME (GIRL

CRM)1)Gifts, Bequests & devises

But, income from such property shall beincluded in GIMust be characterized by disinterestedgenerosity and pure liberality


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of the contract4) Life Insurance

Proceeds of life insurance policies paid to theheirs/beneficiaries upon the death of theinsuredIf such amounts are held by the insurer underan agreement to pay interest, the interestpayments shall be included in the GIInsured must die to avail of total exemption. Ifhe survives, there/s only partial exemption to the extent that the proceeds constitutereturn of capital (total amount of premiumspaid).5)

Compensation for Injuries or Sickness

Received through Accident/Health Insuranceor Workmens Compensation Act, ascompensation for personal injuries/sickness+ amount of damages received on account ofsuch injuries/sicknessDamages will be exempt only if they arisetogether with personal injury; however, ifdamages only amount to return of capital, itis exempt (Ex. Damages from car accident

exempt only if claim includes compensationfor personal injury. If no personal injury,damages for car wreckage will only beexempt to the extent of the amount of theactual damage .. return of capital)Must be physical injury, not injury to rights.6) Retirement Benefits, Pensions, GratuitiesFormsa)RA 7641 or Reasonable PrivateBenefit Plan

oSee below for rulesb)Amount received as a consequenceof separation for any cause beyondcontrol (death, sickness or otherphysical disability)

o


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Sickness must be job threatening.. must render taxpayerincapable of working (Ex. Doesnot include STD)oBenefits from separation due toretrenchment come underexemption (no choice/option; butif the Ee avails of an optionalQuickTime and aTIFF (Uncompressed) decompressor


early retirement plan, he cannot

reason that he was separated forreasons beyond his control,therefore, he cannot claimexemption of the benefits on thisground but he can claimunder other grounds such asRPBP or RA 7641.

c)Benefits received from a foreigngovernment by resident of non

resident citizens or aliens who reside

permanently in the Philippinesd) Veterans benefitse) Benefits under SSSf) Benefits received from GSIS

2 Options under paragraph (a), Section32(B)(6)g) RA 7641oConditions: (i) at least 60 years old;(ii) 5 years of service at time ofretirementoAvailed if there is no reasonableprivate benefit plan (benefits underthis option is less)oLimted exemption: month salary

for every year of service. In RPBP,all is excludable.h)Reasonable Private Benefit Plan

oConditions: (i) at least 50 yrs old; (ii)in the service of same employer forat least 10 years at time of retiremento


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Must be approved by BIRoA pension, gratuity, stock bonus orprofit-sharing plan maintained by anER for the benefit of some or all ofhis officials/employees, whereincontributions are made by such ERfor the officials/employees, or both,for the purpose of distributing to suchofficials & employees the earnings &principal of the fund thusaccumulated; & provided in the planthat no part of the income shall beused for/be diverted to any purposeother than for the exclusive benefit ofthe said officials & employeesService must be continuous.You can avail of the benefits only once(once youve availed of RPBP, you cannotavail of another RPBP); but you can avail ofexemption under another groundo

Ex. A government employee can claimexemption for retirement benefitsreceived from the GSIS even afteravailing of RPBP.. taxpayer can claimRPBP after qualifying as a privateemployee then under GSIS proceedsexemption after qualifying as agovernment employeeoEx. Employee can claim exemptionunder RPBP then later claim on theground that the amount he received is aconsequence of his separation in a

subsequent job for any cause beyond hiscontrolPage 23 of 145


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Terminal Leave Pay: amount paid for thecommutation of leave creditsoExcludable only for governmentemployees (this exemption does not findsupport in NIRC but is backed by SCdecision and BIR Ruling #143-98)7)Miscellaneous Items

(a) income derived by foreign government (frominvestments in Philippines in loans, stocks,bonds or other domestic securities)Refers only to passive income. If theforeign government engages in trade,income is taxable.(b) income

derived by govt./its politicalsubdivisions (from public utility or exerciseessential governmental function)Key: Income should accrue togovernment; if the income is retained bythe public utility, it is not exempt .. lookat charter of political subdivision/GOCCto determine whether its income accruesto the government or not.(c) prizes,awards in sports competitionsanctioned by national sports associations

whether held in Philippines or abroadContemplates a particular competition,not a cumulative achievement (Ex.Sportsman of the year award does notqualify for exemption)(d) prizes & awardsin recognition of religious, charitable,scientific, educational, artistic, literary orcivic achievement, but only if:recipient was selected without any action

on his partrecipient not required to rendersubstantial future services as a conditionof receiving the prize/awardExample: Nobel prize awardConstrued strictly, take note of 7categories. It does not include athleticachievement.


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household personnel (such as maid, driver &others)

5)interest on loan at less than market rate to theextent of the difference between the market rate& actual rate granted

6)membership fees, dues & other expenses borneby the employer for the employee in social &athletic clubs or other similar organizations

7)expenses for foreign travel

8)holiday & vacation expenses

9)educational assistance to the employee or hisdependents

10) life or health insurance & other non-life insurance

premiums or similar amounts in excess of whatthe law allows

B.Nature of FBTFinal tax imposed on the grossed-up monetary value

of fringe benefit furnished/granted to the EE by the

ER, whether an individual or corp. (payable by the

employer)Effective 1/1/98 34%

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employee per annum

i)Flowers, fruits, books or similar items givento employees under special circumstanceson account of illness, marriage, birth of ababy, etc

j)Daily meal allowance of overtime work notexceeding 25% of basic minimum wage

CONVENIENCE OF THE EMPLOYER RULE

When a fringe benefit is given solely for theconvenience of the employer, the fringebenefit is exempt from FBT because theemployee does not recognize income fromthe benefit.Ex. Expenditure on housing of engineerwithin factory premises is not subject toFBT

General Rule: If housing is locatedoutside, it is subject to FBT.Exception: If the nature of the Ersbusiness is hazardous to health ofEe, housing can be located outsidethe factory without being subject toFBT.Ex. If employee is given housing allowance incash, this will constitute compensation ofthe employee (income from whatever

source). However, if it qualifies as a FringeBenefit, then it will be subject to FBT andthe burden is shifted to Er (Tax on Ee,Burden on Er)III. DEDUCTION FROM GROSS INCOMEDefined as: Items or amounts which the law allowto be deducted from gross income in order toarrive at the taxable income.The basic principle governing deductions fromgross income apply to all taxpayers.

Because deductions are strictly construedagainst the taxpayer, one seeking a deductionmust point to some specific provisions of thestatute in which that deduction is authorized &must be able to prove that he is entitled to thededuction which the law allows.Adequate records should be kept to support thedeductions.


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The deduction claimed must have beensubjected to withholding tax, if required.Deductions for income tax purposes partake ofthe nature of tax exemptions; hence, if taxexemptions are to be strictly construed, then itfollows that deductions must be STRICTLYconstrued.He must be able to prove that he is entitled to thededuction authorized or allowed. (AtlasConsolidated Mining & Devt. Corp. vs. CIR,January 12, 1981)WHO MAY AVAIL OF THE DEDUCTIONS?

1)Individuals

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(a) citizen(b) resident alien(c)non-resident alien doing business in thePhilippines(d) member of GPP2) Corporations(a) domestic corp.(b) resident foreign corp.(c) proprietaryeducational institutions &hospitals(d) GOCCsWHO CANNOT AVAIL OF DEDUCTIONS FROMGROSS INCOME:

1.Citizens and resident aliens whose income is

purely compensation income (except forpremium payments on health and/orhospitalization insurance);2.Non-resident aliens not engaged in trade orbusiness in the Philippines; and3.Non-resident foreign corporationTHE FOLLOWING ARE THE ALLOWABLEDEDUCTIONS FROM GROSS INCOME BASED ONCLASSES OF TAXPAYER:

1. Individuals with gross income from employee-

employer relationship only (gross income only):oPremium payments on health and/or hospitalinsurance (if requisites are complied with)oPersonal exemptions and additionalexemptions2. Individuals with gross income from business orpractice of profession:oOptional Standard Deduction (OSD) ORItemized deductionso

Optional Standard Deductions 10% of thegross income. May be availed only byindividuals (except nonresident aliens) whoare not purely compensation income earners.This is in lieu of the itemized deductions.oPremium payments on health and/or hospitalinsurance (if requisites are complied with)oPersonal and additional exemptions


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3. CorporationsQuickTime and a

oItemized DeductionsTIFF (Uncompressed) decompressorare needed to see this picture.

4. Estates and TrustsSection 62 of the NIRCITEMIZED DEDUCTIONS/ ALLOWABLEDEDUCTIONS SEC. 34 (BELT DID CRP)1) Bad Debts2) Expenses3) Losses

4) Taxes5) Depreciation6) Interest7) Depletion of oil & gas wells & mines8) Charitable & other contributions9) Research & Development10) Pension trusts

1.

EXPENSES (SEC 34A)1)Ordinary & necessary trade, business orprofessional expenses only

REQUISITIES FOR DEDUCTIBILITY:

a.Must be ordinary AND necessary (bothmust be complied with)b.Must be paid or incurred during thetaxable year

c.Must be paid or incurred in carrying on orwhich are directly attributable to, thedevelopment, management, operationand or conduct of the trade, business orexercise of a profession, includingreasonable allowance for:1.salaries, wages & other forms ofcompensation for personal servicesactually rendered (including grossed-up monetary value of FB); but thefinal tax should have been paid

2.travel expenses in pursuit of trade,business/ profession3.rentals &/or other payments aslessee, user or possessor4.entertainment, amusement &recreation expenses directlyconnected to the devt., mgt. &


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QuickTime and aby Rev. Reg. 13-2000

(a) there must be an indebtedness(b) there should be an interest expense paidor incurred upon such indebtedness(c) indebtednessmust be that of thetaxpayer(d) indebtedness must beconnected withthe taxpayers trade, business orexercise of profession(e) interest expense must have been paid orincurred during the taxable year

(f)interest must have been stipulated inwriting(g) interest must be legally due(h) interest payment arrangement must notbe between related taxpayers(i)interest must not be incurred to financepetroleum operations

(j)in case of interest incurred to acquireproperty used in trade, business orexercise of profession, the same was nottreated as a capital expenditure(k) the interest id not expressly disallowedby law to be deducted from gross incomeof the taxpayer.GENERAL RULE ON DEDUCTION

- The amount of interest expensepaid or incurred within a taxable yearof indebtedness in connection with

the taxpayers trade, business, orexercise of profession shall beallowed as a deduction from thetaxpayers gross income.LIMITATION ON DEDUCTION

Interest expense shall be reduced by an amt.

equal to the ff. % of interest incomesubjected to FT:1/1/00 38%1/1/06 42% (RA9337)1/1/09 33%

Example: Year 2006

Int. exp. = P2,000 Int. income

16884100 taxation reviewer[1]

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