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TA XA TION II

Bacom o.Bangos.Casas.Leg aspi.P atio.P ocot.Rome ro.T eves.

VALU E -ADD ED T AX
(Se cti ons 105 to 115 of th e TAX CODE, as a men de d)

REVENUE REGULATIONS NO. 16-2011 issued on October 28, 2011 increases the amount of
threshold amounts for sale of residential lot, sale of house and lot, lease of residential unit and sale
or lease of goods or properties or performance of services covered by Section 109 (P), (Q) and (V)
of the Tax Code of 1997, as amended, thereby amending certain provisions of Revenue Regulations
No. 16-2005, as amended, otherwise known as the Consolidated Value-Added Tax (VAT)
Regulations of 2005.
The adjusted threshold amounts, rounded off to the nearest hundred, are as follows:
Section
Sec. 109 (P)
Residential Lot
Sec. 109 (P)
Residential House and Lot
Sec. 109 (Q)
Lease of Residential Units:
Rent
Sec. 109 (V)
Sale or lease of goods or
properties or the
performance of services
Other than the transactions
mendioned in pars A to U of
Sec. 109(1).

Amount in Pesos
(2005)

Adjusted Threshold Amounts


(Effective January 1, 2012)

1,500,000.00

1,919,500.00

2,500,000.00

3,199,200.00

10,000.00

12,800.00

1,500.00

1,919,500.00

VALUE-ADDED TAX
(Sections 105 to 115 of the Tax Code, as amended)

I.

Nature and Characteristics of VAT

11_29_2011
32:47
VAT

-is a 12% tax imposed on persons who sell, barters or exchanges goods, properties or services including the leasing of properties.

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VAT-is the best example for an indirect tax, which is a tax, imposed on a certain person, the burden of which can be shifted to another
person.
Whenever you purchased something from the store you pay VAT, but the statutory taxpayer is not really you. If ever no VAT is remitted
by that seller to the government, the government will not go after you. The government will run after the seller who is the statutory
taxpayer.

But in the practical side of it, like income tax is a tax on income, without income there can be no income tax. VAT is a tax on the value
added. And if you dont add value to what you sell, you dont pay any VAT.

Illustration: A sale of an agricultural product in its original state will not be subject to VAT. (i.e. sale by Mr. Cula to Mr. Nierre)
But when Mr. Nierre processed the banana into banana chips and sold it to Mr. Pilapil, there is already VAT.

Cula

Nierre

grower

processor retailer

Pilapil

Garcia
consumer

10
10

100
+12
112

200
+24
224

Q: How much VAT will be collected by the government?


A: 12 & 12 = 24
Q: Who is the 1st seller who should shoulder the VAT?

A: Mr. Nierre, for he is the 1st seller of a product who is no longer in its original state. Therefore when he sold the banana chips, there is
Php12, which is to be paid to the government by Mr. Nierre.
When this was sold further by Mr. Pilapil to Ms. Garcia, the GSP/GR is Php200, therefore the 12% VAT is Php24. (VAT is to be based on
the GSP/GR).This should go to the government as well. But since there was puhonan on the part of Mr. Pilapil before he could sell. He
purchased it from Mr. Nierre for Php112, inclusive of VAT, which means that Mr. Pilapil has only to pay Php12 to the government.
VAT on his selling price
VAT on his purchased price
NET (VAT)

24
12
12

VAT- the tax is only on the value that you have added on.
If you have not added value on what you sold, you would not be remitting tax on the government.

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Note: The ultimate burden of VAT is always on the end consumer.
In the case of CIR vs. Magsaysay Lines, Inc., et al SC GR No. 146984, July 28, 2006, SC said that in all levels of transaction
there is always VAT as a general rule.

-Notice that the entire payment of VAT if you total it, thats the burden of what the consumer has to shoulder.
-Taxes paid to the government in the banana chips transaction:
1st 12 by Mr. Niere. 2nd 12 by Mr. Pilapil. Total of 24 which is actually paid by Ms. Garcia.

Issue: Whether or not VAT Law violates the progressive system of taxation.
Tax rates are classified into the following:
a. progressive tax rates
b. regressive tax rates
c. proportional tax rates
But when you discussed progressive system of taxation it is different from progressive tax rates.

Progressive system of taxation- means that your tax rate increases as your income increases.

VAT is a flat rate of 12%. Although VAT remains stagnant at 12% its effect is actually reversed. The higher the income is the lower the
effect of VAT. The lower the income is the higher the effect of VAT.
SC: Low income earners you will be paying products which are still in their original state. Unlike those who belong to the higher income
bracket, you will be buying much more expensive food. Although VAT has some regressive effects, it provides for various exemptions as
found in Sec. 109 of the Tax Code. The Tax Code also provides zero-rating of several transactions whether it be a sale of service or sale of
goods. The transaction or product is subject to VAT but the rate of VAT is 0%. What is multiplied by zero always produces the product of
zero.

12_1_2011
CIR vs. Magsaysay Lines, Inc., et al SC GR No. 146984, July 28, 2006
- In this case SC said that VAT is a consumption tax (pervasive tax because it is a consumers tax) imposed on the sale of goods,
properties, and services or leased of properties.
Why was it selected by the government instead of the other percentage taxes?
Percentage taxes under the Tax Code:
Simplified Percentage taxes- 3% on gross receipts from services rendered
Common carriers tax- on common carriers by land
Gross receipts tax imposed on banks and non-banks financial intermediaries
A: The reason why VAT is chosen despite it being considered as a regressive tax or of being anti-poor, etc. its because VAT is a
built in mechanism in aiding the government (BIR) in tax collection on the regular basis or avoiding tax evasion.

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There is a very strict regulation in VAT.
If a seller is a VAT registered taxpayer and the buyer is also a VAT registered taxpayer, then both of the parties will be interested
in having the strict requirements complied with, especially on the part of the buyer. Because every seller who is registered under
the VAT system is required to register their official receipts and invoices as VAT registered and every buyer who would wish to
purchase from a VAT registered seller and such buyer is VAT registered as well. It will compel the seller to issue a VAT official
receipt/ VAT invoice. This is in order to allow such buyer to claim the input taxes or the VAT that it has paid. For a seller to be
able to pay a lesser VAT than that passed on to its consumer, it must be able to show proof that it is supported by VAT registered
receipts/ VAT invoice. For in the absence of such official receipt, the VAT paid on purchases may not be claimed and so it has to
pay the entire VAT to the government sans deduction.

We all know that sellers do not want to issue receipts if only they have the liberty not to issue especially the family owned
businesses so as not to increase their gross receipts (as the basis of VAT). Absence of these receipts, the BIR would have no idea
on how much income your business is now generating. But since we have a buyer who is interested in getting the VAT
OR/Invoice, the seller would be compelled to issue receipts. In that way the government is assured that the seller would be
declaring its real income generated.

Note: The seller cannot just issue a VAT official receipt for an exempt transaction because the penalty or the consequences for
issuing a VAT official receipt even for an exempt transaction is bigger than the actual tax liability that you have. The seller is not
only liable to pay the should be tax which is the percentage tax but also the VAT, this is because the buyer would have an
evidence of a VAT registered receipts/ VAT invoice to which he could claim a deduction for its purchases.
So, there is that input-output mechanism in VAT assuring the government of good collection of taxes.

VAT considered anti-poor because it is an indirect tax.


Indirect tax- is presumed to put the burden of taxation on the end-users, like VAT.

Another reason why the government imposes VAT is because there is regular collection of taxes from one transaction to the next.

II.

Applicable Laws
A. Sections 105-115 of Republic Act 8424, amended by Republic Act 9337 (2005)
VAT is the most dynamic tax law. It has been considered as sales tax, VAT, Improved-VAT, Expanded-VAT, and RevisedVAT.
When the President increased the 10% to 12% it did not violate the principle that only the legislative branch of the government
can enact a law. E.O. that was issued in 2007, where PGMA then, increased the VAT rate from 10% to 12% was simply a
ministerial act of increasing the rate. Republic Act 9337 already provided the parameters/standards when it shall be increased.
When these economic standards were met by January 2007, PGMA then issued the E.O. But PNOY now, cannot increase it
further to another rate.

B.
C.
III.

Revenue Regulations No. 16-05 (Consolidated VAT Regulations)


Regulations amending RR No. 16-05 (RR Nos. 02-07, 04-07, 07-08)

Status in Relation to VAT


A person may be subject to VAT or may be exempt. A transaction may be subject to VAT or may be exempt.

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Persons Exempt from VAT
Even if the transaction is vatable but since the person is
exempt, then there will be no VAT to be collected.

Transactions exempt from VAT


It is the nature of the transaction which is exempt

Q: Who are required to register under the VAT system?


A: Persons who are required to register under the VAT system are those persons who in the course of trade or business sells,
barters, exchanges or transfers goods, properties or sells services or leases properties AND whose gross receipts/sales exceed
Php1.5M during any 12 month period.

Reason why they are required to register:


They have to register the issuance of OR/ Invoices will be monitored by the government.

No registration required in the following instances:

If you are into business but your sales do not reach Php1.5M.

Even if your sales is more than Php1.5M but you are not into trade or business.
Note: Reckoning point of the Php1.5M is not always the calendar period. It could be any given 12 month period.

A. Persons or transactions are subject to VAT at 12% or 0%


Register for VAT purposes
B.

Persons or transactions are exempt from VAT

IV.
Persons Liable to VAT
There are other taxpayers who are liable to pay VAT even if they are NOT in the course of trade and business but not necessarily required
to register under the VAT system.
Eg. If you are an importer, and you want to import a luxury motor vehicle, you are not required to register because it is an
isolated transaction but you are charged with the 12% VAT.
So, its not true that if you are required to pay VAT you are also required to register.

A.

Seller or Transferor (of goods, properties or services) Including stock, non-stock, non-profit entities engaged in the
course of trade or business
in the course of trade or business
-means the regular conduct (on regular basis) or pursuit of a commercial or an economic activity (want for profit),
including transactions incidental thereto.
So if the company is registered as a real estate business, so you have to look into if whether the transaction entered into for
VAT purposes is an incidental transaction.
Eg. If it is a real estate business, the sale of a motor vehicle is still considered as incidental, the sale of furniture is still
incidental. Look into the secondary purposes of the AOI.
-It includes incidental transactions entered into by stock, non-stock and non- profit corporations or taxable partnerships and
even government institutions.

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Q: What if the non-stock, non-profit institution uses the entire proceeds of the transaction for the purpose for which it was
created and no income inures to the benefit of any private individual?
A: Regardless as to how the proceeds was used by these entities. Even if it sells exclusively to members, it is still considered
as VATable if it is made in the course of trade or business.

Condominium corporations are generally not subject to VAT. But if they collect fees which are more than the actual charges
then they may be subject to VAT, because it may be considered as a regular conduct of a commercial or an economic
activity.

Government entities (not the GOCCs mentioned before that are totally subject to income tax, except for a few) are exempt
from income tax but are subject to VAT because the exemptions allowed by law only exempts direct taxes. Indirect taxes
even the Constitution did not provide for such an exemption. The exemption granted insofar as taxation is concerned is only
directed against direct taxes. Seldom is there an exemption for indirect taxes.
To Illustrate: When the government entity enters into a transaction, like for example in project infrastructures, where the
seller of the service is the private contractor. The private contractor can actually passed on VAT to the government entity
entering into such transaction. Because the private contractor falls among the seller of services and is statutorily liable for
VAT, it can pass on VAT to whoever the buyer of services even if its a government entity. Why? Since VAT is an indirect
tax. Once it is shifted by the seller of service down to the purchaser or consumer, it already forms part of the purchase price
of the buyer if it is not engaged in any trade or business. Its just like us, being the end consumer of Jollibee chicken joy. If
for example Jollibee pass on the 12% VAT to us, we no longer consider that 12% pass on to us as a VAT that we can off-set.
We will consider that as part of the purchase price. But if the government entity is into trade or business, then the VAT that
is passed on will not be part of gross but will be part of its input taxes that can be off-set.

You are the president of a real estate corporation. You donated parcels of land to the government.
Are you subject to donors tax? No.
Is it subject to VAT? Yes, the transfer could be subject to VAT. Persons who are engaged in real estate business and made
TRANSFERS of land are subject to VAT.
When you donate properties that are part of your ordinary assets or those properties which are ordinarily held out for sale
such real estate business giving out parcels of land. If it so happens that the transferee is a government entity then its not
burdened with donors tax. But if the transferee is other than an exempt recipient you would be liable for donors tax of 30%
and liable for VAT.
Reason: VAT is imposed not only to sellers but also to TRANSFERORS regardless of the mode of transfer.
What he transferred was a property that could have been subjected to VAT had he sold it. If he sold it to consumers or
buyers it could have been subjected to VAT. You cannot deprive something that is due to the government, simply by giving
it out.

CIR vs Magsaysay Lines, Inc. et al. SC GR No. 146984, July 28, 2006
o
o

Whenever a company engaged in manufacturing business decides to sell one of its manufacturing plants, it will be
considered as part of its incidental transaction, thus subject to VAT. Even if the manufacturing business is not leasing
or selling the plant, since its incidentally part of the business, still subject to VAT.
In this case it was into leasing of the vessel, but the government treated it as not subject of VAT because the sale was
not by virtue of simple sale but because it was an involuntary sale. The selling of the vessel was not incidental since it
was part of the government privatization program. The selling was involuntary made hence it was just an isolated
transaction. So its not subject to VAT.

1. Of goods or properties
Q: Is property not goods or vice-versa? Why is there a distinction?

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A: The reason why there are GOODS or PROPERTIES is because in the old VAT Law, real properties (i.e. parcels of land,
houses, condominium units were not subjected to VAT. Before only goods are subjects of VAT. But with the 1997 VAT Law,
real properties are now included.
2.

Of services
Q: What is the coverage of services, that is subject to VAT? Does it include services performed without the use of mental
faculties?
A: Yes. The list in the Tax Code is not exclusive.

Any type of service so long as it is not subjected to another type of tax in the Tax Code will be subject to VAT. But when it
says that it is all encompassing, its not automatic that if you will render a service, it will automatically be VAT, because
there are other taxes. If it does not fall under any other taxes then its VAT. But it may not be VAT because there is
percentage tax. Percentage tax and VAT can never co-exist in one and the same transaction.
When is Percentage tax available? If you render service for example, and the revenue that you generate in any 12 month
period does not exceed 1.5 million. Then even if it falls under the definition of sale or exchange of service, its not subject to
VAT but to percentage tax.

Define sale of exchange of services


Renato vs. Diaz and Aurora Ma. F. Timbol vs. The Secretary of Finance and The CIR, SC GR No. 193007, July 19,
2011
Toll fees are not taxes. They are just payment for the services rendered by tollway operators used to recover the cost of the
infrastructure. So its an exercise of power other than the power of taxation.

CIR vs. SM Prime Holdings, Inc. and First Asia Realty Development Corporation, SC GR No. 183505, Feb. 26, 2010
If the intent of the legislature is to be look at, the showing of films, the gross receipts from admission fees will be subjected
to amusement tax. It will not be subject to VAT since it is a specific coverage of amusement tax. There are amusement taxes
that are collected by the national government and there are amusement taxes that are collected by the local government. The
national government coverage includes PBA games, nightclubs, etc. The local government coverage includes showing of
films, cinema tickets, concerts with the rate of 10%.

B.

Importer
-Importations- bringing of goods from abroad to the Philippines.
An importer need not be in the course of trade or business to be subject to VAT. Even if you are a first time importer, so
long as the item that you have imported does not fall under the conditionally free/exempt importation, it will be subject to
VAT.
-Importations are generally subject to VAT.
The exception is when it falls under the conditionally free importation under the Tariff and Customs Code. It means that the
Tariff and Customs Code, says that the transaction/importation is exempt from customs duties then corollarily it is exempt
from VAT. But if it is subject to customs duties then it is automatically subject to VAT.
Example of transactions which are exempt from customs duties: meaning exempt from VAT

12_6_2011

Importations made by persons that are exempt under an international law or special law or treaties.
If you are a returning resident and you import personal and household effects together with you except motor
vehicles, vessels, aircraft, etc.

[TAXATION II 403 BATCH 2013 EDITION]


C.

Non-resident Persons who perform services in the Philippines


Q: If a non-resident person performs services in the Philippines in an isolated case will it be subject to VAT?
A: Yes.
Non-resident persons- include natural (NRC & NRA) and juridical persons (NRFC).

A NRFC, not doing business in the Philippines (therefore it has no business of registering here in the Philippines) entered
into a multi-transaction to make repairs here in the Philippines.
Q: Is the transaction subject to VAT, even if it was performed one time or in an isolated case?
A: Yes. If the person rendering service in the Philippines is non-resident, the rule of regularity or the phrase in the course of
trade or business does not apply. It is automatically considered that it is made in the course of trade and business.
But if the transaction entered into by the non-resident is a sale of goods or properties, then that transaction must be made in
the regular course of trade and business so that it can be subject to VAT.

GR: For VAT, you always look at the regularity of the conduct of trade or business, except importers.
BUT, when it comes to determining the VAT liability of non-resident persons rendering service here in the Philippines, we
disregard the rule of regularity. So any service rendered by a NON-RESIDENT PERSON, whether natural or juridical, even
if it is an isolated transaction, it will be subject to VAT because the law treats it as done in the course of trade and business.
SEC. 105 NIRC. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being in the course of trade or business.

V.
Transactions Subject to VAT
Taxpayer/Person selling is
exempt from VAT
subject to VAT

Transaction/Product is
subject to VAT
exempt from VAT (per se)

VAT to be collected
X
X

A.

Transactions made in the course of Trade or Business


Rule of Regularity, exceptions: NRA performing services in Philippines

B.
o

Transactions made Incidental to the Principal Business


Incidental activity- is something which is dependent upon the main business. It is subject to VAT.
It is not restricted in determining whether or not the property sold is the one directly used previously in the operation.
Anything that is directly or indirectly used in the business can be considered as incidental when it is sold since it is part of
the operation of the business itself because you can see it happening with regularity in the future.
Eg. Spa services. If there are excess/used furniture and it was sold (beyond the 1.5M), then it can be subjected to VAT.

Isolated transaction-when you consider it as one time transaction that cannot be repeated. Such as selling the business itself,
etc. Isolated transaction is NOT subject to VAT.

C.

Importations, exceptions
Importations are automatically subject to VAT.
Exportations are zero-rated as a rule.

D.

Subsequent Sale of Tax-Free Importation


Q: Are we looking at an exempt product, exempt transaction or an exempt person?
A: exempt person

[TAXATION II 403 BATCH 2013 EDITION]


Q: If its an exempt product that has been imported and is subsequently sold to another person. Do you think it will generate
the VATable transaction?
A: It will not dba. As we said if the product itself is exempt regardless of the status of the taxpayer, it will always be an
exempt transaction.
When we say that a previously imported product that has been given an exempt status it was because of the status of the
person (i.e. Importer).
If the importation was exempt because the importer was granted himself an exemption from the indirect tax (i.e. VAT) by a
special law or international agreement then the exemption would only extend to him. If ever that same product that was
imported was later on sold by that importer to another person, there would arise a question of whether it is subject to VAT or
not.

True or False. An imported item of a tax exempt person will always be subject to VAT if it is subsequently sold.
If the product is imported from a foreign country to the Philippines and the importer/ recipient is a VAT exempt person, no
VAT shall be paid. But once the product shall be subsequently sold to another person, it may be VATable or it may NOT be
VATable. It is subject to VAT when the person who subsequently purchased it, is not exempt from VAT.
So you cannot definitely say that it is VATable or not, because this will be considered an importation again. When there is
an exempt importation because of the status of the person subsequent sale will be considered as TECHNICAL
IMPORTATION (because it is not actually imported).It is not ACTUAL importation because its not bringing in goods to
the Philippines, the goods are already in the Philippines. It is just considered as TECHNICAL IMPORTATION because if
the importation was made directly to this VATable person, it is supposed to be VATable.

Q: Who is that person who is exempt from VAT in importation?


A: Eg. The ambassador imported a motor vehicle and sold it to another ambassador.

TECHNICAL IMPORTATIONS are still subject to VAT even if there is no actual shipment from abroad down to the
President-buyer, otherwise this could be an avenue where VAT evasion could take place. You can simply request these
persons who are exempt from VAT to bring in items from abroad where they will post as a buyer and you will subsequently
purchase from them. You can request companies within the Economic Zone to buy vehicles that you desire they get it VATfree; you could purchase it from them VAT-free.

Q: Who pays the VAT? Is it the seller or the buyer?


Q: Is it not an importation issue and in importation it is the buyer who pays the VAT?
From a taxexempt person it is sold to another person who is not exempt from VAT, it is called technical importation
which is subject to VAT. Who is the person liable (liable to declare the VAT) for VAT?
A: The buyer becomes the importer. In technical importations it is the buyer who pays the VAT.

E.
VI.

Transactions Deemed Sale NOT REALLY SALES


There is no actual sale which took place but there was a transfer.

Transactions Deemed Sale


A. Transfer, Use or Consumption Not in the Ordinary Course of Trade or Business
Q: Would all goods or properties of the corporation that are transferred not in the ordinary course of trade or business be a
transaction deemed sale subject to VAT?
A: Whenever the property or goods that has been the subject of the transfer Use or Consumption Not in the Ordinary
Course of Trade or Business falls under the category:

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10


1. those properties or goods that forms part of the inventories, stocks in trade; those primarily held out for sale
2. those properties or goods that are used in ordinary trade or business (incidental transactions)
Even if the property is not part of the principal activity, if ever it is sold it will generate VAT. The same way that if it
becomes the object of the transaction deemed sale, even if its incidental only it will be subject to VAT.
B.

Distribution or Transfer to Shareholders/Investors and Creditors


Q: Shareholders, investors and creditors may be transferees of goods or properties, when is it considered as a
transaction deemed sale.
A: under transactions deemed sale Shareholders, investors usually received properties as their share in the profits of the
corporation. There can be property dividends. When a shareholder/investor receives property dividends instead of cash
dividends it may be subject to VAT if it covers the same type of properties with the goods that are given.
So if the seller is in the processing of sardines, it can give property dividends such as the boxes of sardines. Since it is
part of the inventory of the corporation it will be subject to VAT in order not to deprived the government. Because had
it been sold it would have been subject to VAT. So whenever property dividends is declared it is not at all beneficial
than cash dividends. Although cash and property dividends are subject to the same final withholding taxes, 10% RC,
RA, NRC 20% NRA-ETB 25% NRA-NETB.
But cash dividends are not subject to VAT.
But if its a property dividends and the property that was given out was a share of the profits falls under the category of
inventories, stocks in trade or those used in trade or business, it will not only be subject to the final withholding tax but
it will also be subjected to the 12% VAT.
Why do you have to pay VAT? Because if you are not liquid and you want to declare dividends to the stockholders and
you want to declare cash in order to avoid the VAT and property dividends, what you naturally do if the corporation is
not liquid is to sell the inventories and whatever the proceeds is will be used to pay off cash dividends instead of
property and if you sold it, it will be subject to VAT.
In transfers, use or consumption not in the ordinary course of trade or business or in paying off property
dividends to shareholders/investors you have to pay VAT generally.
On what amount shall you compute the VAT, if there is no sale that took place?
Its not in all cases that you will have a selling price because properties or goods that have been distributed or has been
personally used belongs to the inventory of stocks in trade, you have already the selling price and how much you are
selling to the market. But if its your furniture, your fixtures that are not part of your inventory but part of those
properties used in trade or business, but is actually nor for sale and you want to distribute it as property dividends then
you have to go to the market value of the property.
Take note: Even the regulations provide that in order for you not to avoid the payment of the true VAT due. You have
to compare the gross selling price of each other. But if the GSP is unreasonably lower than the market value, then use
the market value.
Unreasonably lower than the market value if it lowers more than 30% of the market value.
Why do creditors received goods or properties for
It will be part like dacion en pago.
What happens if the property that you transfer is valued more than your debt?
What if your debt is higher than the value?
Either way if the value of the property is higher or lower the basis for VAT is always the value of the property that was
transferred and not the indebtedness.
Because Sec. 106 provides that the 12% VAT shall be based on the GSP of goods, properties, services, etc

C.

Consignment of Goods, requisites


Q: Are all consignments subject to VAT?

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11


A: it only becomes subject to VAT, if it is unsold and unreturned within 60 days following the consignment. But if its
returned then there is no VAT.
Q: Who is liable for the VAT?
A: the consignor (the one who owns the items that are consigned).
D.

Retirement From or Cessation of Business, with respect to inventories of taxable goods


Would the merger of Company A and Company B, resulting to the surviving company B result to the VAT imposition of the
inventories of A, the absolved entity.
Closure of business, when a business closes whatever the inventory thats left will be paid the VAT because the government
somehow considers that it had an inchoate right over any 12% VAT that could have been generated from the sale of those
inventories.
How about change in business name?
Would merger or consolidation would result to a VATable transaction.
Sec. 40 C Tax Free Transaction or Tax-Free Exchanges
1. Merger or consolidation of properties solely in kind without any cash involved (not subject to income tax, VAT nor
documentary stamp tax) the entire transaction is tax-free
2. When a person alone or together not exceeding 4 transfers and thereby acquires controlling interest of at least 51% its not
subject to income
But if the merger or consolidation is not solely in kind (there is cash) its when that is subject to VAT.
1. Change in the Business Activity from VAT Taxable Status to VAT-exempt Status
Eg. If your business is into the processing of banana chips and would want to convert your business into selling raw bananas
then thats from VATable Transaction to Non-VATable Transaction. At the point of transfer whatever existing inventories
you have you have to pay VAT, because it is already part of which could have been sold.
What is the basis of the 12% VAT?
The acquisition cost of the inventories or the FMV of whatever has been left at the time of transition from a VATable
taxpayer to either a close business or VAT-exempt person
When you revert your VAT status to Exempt Status, this is a transaction deemed sale Even if you are exempt you have the
option to register as a VAT taxpayer
2.

Approval of a Request for Cancellation of Registration, instances


a. Reversion to exempt status
b. Desire to revert to exempt status, after the lapse of 3 years of voluntary VAT registration
c. Failed expectation to reach Php1.5M

What are the two kinds of VAT rates?


12% and 0%
Why do we have 0%? Is it not exempt from Vat? When you say zero-rated VAT, can we call it exempt
transaction?
The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions charges no output tax but can
claim a refund or a tax credit certificate for the VAT previously charged by the suppliers.
Zero-rated VAT and exempt transaction are different. In exempt sellers, whatever you paid input
VAT to your suppliers, you do not recognize it as a VAT. You simply recognize it as part of your cost
of purchase.
Zero-rated sale distinguished from exempt transactions:
a. A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt
transaction is not subject to the output tax
b. The input tax on the purchases of a VAT registered person who has zero-rated sales may be
allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to
any input tax on his purchases despite the issuance of a VAT invoice or receipt

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12


c.

Vat Registration
Sales output
Purchase Input

Persons engaged in transactions which are zero-rated being subject to VAT are required to
register WHILE registration is optional for VAT-exempt persons.
12%

12%
12%

0%

0%
12%

VAT Exempt transactions


X
X
X

Does the VAT taxpayer of zero-rated sale pay VAT to the government? So, if it is an export sale which is
zero-rated sale transaction, should the seller pay VAT to the government?
So if the transaction entered into by vat registered taxpayer is zero-rated sale of goods or services,
it is vatable transaction but will not result into any output tax because the output VAT rate is zero.
When you say output VAT, this is the VAT on the sale of your goods or services. Input VAT is
opposite.
When you purchase goods or services you pay output VAT to the supplier. You actually pass on the
burden to your consumer and pay it to the government.
So far as the 12% and 0% vatable transations, the difference lies that the output vat rate in a 12%
transaction is 12% of whatever the gross selling price is. If it is 0%, the government cannot collect
any VAT because the output is equal to zero and that the seller cannot pass on the VAT to the
consumer.
For exempt, there is no output tax because the transaction is itself exempt from any of the two VAT
rates
Input VAT is the VAT that the person has to pay or has to shoulder in purchasing either goods or
services
SELLER 1 (output Vat on its sale) seller 2 (input vat and output vat) seller 3 (input and output)
Whatever seller 2 purchases from seller 1 will have input vat and output vat goes to government
and if seller number 3 also purchases from seller2 will have input vat and output vat, the difference
goes to government.
A zero- rated transaction will result to zero percent output vat. How about his purchases, will he
recognize input vat? At what rate?
12%

EXAMPLE:
SM department store, exporter, USC purchase a furniture at 100,000 . The seller is a vat tax payer and a local
manufacturer furniture seller. Three buyers and one seller which is a local manufacturer of furniture. Each of the
item cost 100,000 plus value added tax of 12%. The total selling price including vat is 112,000. All the customers
will pay 112,000.
For SM how much input tax shall be paid and purchase price?
100,000 purchase price and input vat of 12,000
Will SM recognize 12,000 input vat paid as part of the cost of the furniture bought?
NO because SM is a vat registered
Whatever a person purchases and the product that he has purchased will form part of the item that he will later on
sell or even used in business basta lang so long as the purchaser is as well a vat registered taxpayer any purchase
that he makes must to be segregated of what forms part of the cost of the item exclusive of the vat. The value
added tax component of any purchase made by a vat registered person shall never form part of cost. It should
always be recognized as input VAT against output vat on sales .

If the purchaser is an EXPORTER engaged in zero-rated transaction, how much is the cost of the furniture?
Would there be recognition of input vat?
The cost is 112,000. So there is no difference between a zero-rated taxpayer and 12%
taxpayer.
If it is a purchase made by a zero-rated taxpayer still there will be recognition of the input vat of the purchases. So
the cost of the exporter will still be 100,000 deductible as expense or part of its inventory. The 12,000 will be input
vat. So what will happen to the input vat for which there will never be output vat if all sales to be exported? Diba all
are zero percent. So meaning this will be offsetted against zero, do you have the option to make this part of the cost

[TAXATION II 403 BATCH 2013 EDITION]

13


in order to have a higher expense deductible for income tax? Diba you have no output tax so you do not have
liability to the government. What if you decide to make it part of the purchase price na lang like cost of the item so
that your expenses will be higher meaning to say the income tax will be lower because of a lower taxable income?
So which is which having it refunded or making it part of the cost of the purchase price. When you are registered
under the vat system whether you are zero-rate or 12% taxpayer, you always recognize the input vat in your
purchases, you do not have the option to make it part of your cost of purchases . So whatever you have
accumulated as the vat that you have paid in your purchases, if you are engaged in export sales the law provides
that you have the option to file a claim for refund within two years from the close of the taxable quarter when the
export sales were made (anyway we will discuss that towards the end of this topic).

How about the purchase price of the University of San Carlos?

Since USC is not a vat-registered taxpayer, any purchase that it makes even it had it on the value added tax by the
seller will always be considered as cost or purchase price because there is no output tax against which to offset.
Everything else will be considered as cost.
Does USC have the option to treat only 100,000 as cost and the 12,000 will be input tax valid claimed for refund of
the entire 12,000? Even if it appears to be beneficial on the part of zero-rated taxpayer to claim a refund because
claiming a refund would have assuming that it will be refunded. Everything will be given back because it is fully
beneficial because 100% will be given back, unlike making it part of the cost or purchase price which is only
beneficial in so far as whatever tax rate is available as expenses diba to the extent that it forms part of the expenses
it will reduce the taxable income but it will be refunded? No it will only reduce the taxable income and whatever tax
rate is applicable meaning if its 30% then its only 30% beneficial to you. But for a school, it is not taxable, it will
never be beneficial. Anyway as we said San Carlos as exempt taxpayer cannot refuse to pay the value added tax
that is pass on. It is on the ground that San Carlos exemption is only to direct taxes not indirect taxes.

What is the reason export sales granted zero-rated?


To encourage exportation of certain products in the Philippines in order to have inflow of
foreign currency and to strengthen the reserves we have with the legal tender we are
issuing. More of these transactions are intended for the economy.
It is based on destination principle, according which; Vat shall only be imposed to where
the goods are consumed. Hence, the actual or contructive export of goods and services
from the Philippines to a foreign country must be zero-rated for VAT; while those destined
for use or consumption within the Philippines shall be imposed the twelve percent (12%)
VAT.
Exports are zero-rated whereas imports are taxed
Is destination principle the same with cross boarder doctrine?
Cross border doctrine as the Supreme Court puts it, no VAT shall be imposed to form part
of the cost of goods destined for consumption outside the territorial border of the taxing
power authority which in our case is the Philippines

Destination principle emphasizes the destination of the goods to where they will be
consumed and that cross border doctrine emphasizes the jurisdictional reach of the value
added tax system. The VAT is only up to the territorial border of the Philippines. Exports are
zero-rated whereas imports are 12% vatable.

In your study diba we have three items subject to 12% VAT, zero-rated VAT and transactions that are exempt from
VAT. We dont have an inclusive list of what is subject to vat simply because the general provision says that all
exchange and sale of goods or services will be subject to 12% value added tax. What we will focus on is what are
the transactions subject to zero-rate and those which are exempt. So any transactions or persons do not fall under
exemption or zero-rating then we can say that they are subject to VAT.
ZERO-RATED TRANSACTIONS
Number four is not really an export sale but subject to zero-rate
1.

The sales and actual shipment of goods from the Philippines to a foreign country

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14


So can we say that this first type of export sale there is actual shipment from the Philippines to foreign
country? If it is not actual shipment from the Philippines to foreign country, it belongs to the other
country.
REQUIREMENTS:
a. There is actual shipment.
b. It must be paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas
Example: You made exportation, an actual shipment of goods from the Philippines to foreign
country. Your buyer/customer came to the Philippines and paid you directly in US dollars.
Would it fall under zero-rated transaction? What if you sell the dollars to the black market would it be
acceptable to the BSP? What do you mean by accounted for in the rules and regulations of BSP?
It requires that it course through a bank regulated by BSP. If it is personally paid it cannot be regulated by
BSP and not make through a bank. When you say in accordance with the rules and regulations of the BSP,
the banks are under the regulations of BSP. The payment is deposited to your bank account. (Atty. Tiu:
superficial!)
2.

Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident localexport oriented enterprise
How is this different from number 1? Since it is locally delivered to an export oriented enterprise,
can it be paid in Philippine peso?
Number 2 is a sale of raw materials, the buyer here is non-resident person but it is to be delivered to a local
export oriented enterprise for manufacturing but it is a must that the buyer is a non-resident person. It is
also a requirement that it is paid in acceptable foreign currency and accounted for in accordance with the
rules and regulations of BSP.
EXAMPLE: There is sub-contracting company inside the economic zone. If there is a foreign purchaser who
wishes to purchase raw materials but would still require somebody else to have it sub-contracted the
processing to another person that is located in the economic zone. There is no use in buying the raw
materials here and delivering it to the foreign country and the foreign country delivering it here to the
economic zone for further processing. So, that arrangement is a short cut na lang. Delivering it to the one
who will process the raw materials or packaging materials. Dba have you noticed, it is not a sale of goods
but a sale of raw materials for which locally made. But it is to be delivered to a local export oriented
enterprise.
3.

Sale of raw materials or packaging materials to export-oriented enterprise whose export sales
exceed seventy percent of total annual production.
Total annual production of what year, the year of sale or projected sale? Past sale.

Would a sale be zero rated if the payment is made in foreign currency accounted for under the rules
of BSP? Are those two items present in a transaction suffice for the transaction to be considered
zero-rated?
EXAMPLE: I am a supplier of raw materials I sell to you a domestic enterprise. you pay me in foreign
currency through a bank. Is it zero-rated?
CIR vs. Burmeister : The SC said that the mere fact that the payment is made in foreign currency
accounted for in accordance with the rules and regulations of the BSP does not automatically make
the transaction a zero-rated. Because if it were true then all the transactions in the Philippines
between locals made in foreign currency under the rules of BSP then it would be automatically zerorated. This is not the intent of the law.
4.

Sale of gold to the Banko Sentral ng Pilipinas


Should the BSP pay in foreign currency for the sale to be zero-rated? Not necessarily.

5.

Zero-rated export sales under the Omnibus Investment Code of 1987 and other special law.
What falls under this category?
Should there be actual export sale to be considered as zero-rated or does it include constructive
delivery?

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15


1.
2.

3.

Actual exportation made by registered export producers


Sale made by registered export producer to registered export producer or to registered export
trader. Its a sale made locally. It is considered actual export sales when these buyers will
eventually export abroad. But despite that, it will be considered in category to as constructive
export when sold to the fourth enumerated buyers:
2.1 Sales to warehouses, export oriented manufacturers
2.2 Sales to export operating bonded trading houses
2.3 Sales to diplomatic mission entities, agencies granted tax immunities whether paid in local
currency or foreign
2.4 Sales to EPZA
Even if sale is made domestically, it can be considered export if made to these four.
Sales made to BOI (bureau of investment) registered companies.

What are the 2 kinds of VAT rates?


a. 12%
b. Zero-rated
Should the seller register if he is under zero-rated? Yes, must register as a VAT taxpayer.
Diff between zero-rated transaction and vat exempt transaction.
In exempt transaction, if all sales are exempt, the seller need not register as a VAT taxpayer. In zero-rated,
it is a vatable transaction but will not result to any output tax because the output tax rate or the value added tax
rate is zero.
When you say output tax, this is the value added tax on the sale of your goods and services. While the
opposite is input vat, when you buy goods and services, you pay output vat to the supplier. If zero-rated, the seller
cannot pass on the VAT to the consumer. For exempt, there is no output tax because the transaction itself is exempt
from any of these 2 rates.
How about input vat? The vat that a person has to shoulder in purchasing or services. Should a 12% vat
registered taxpayer recognize input vat on its purchase? How about zero-rated?
Input
Output
Seller 1 (12%)

Seller2 (zero-rated)

X
Seller3 (exempt)
Manufacturer of furnitures

Total selling price: P100 plus VAT


P112 (inclusive of VAT)
FOR SM (a VAT registered person), how much input tax shall be recognized?
Cost- P100,000
Input Tax- P12,000
If the purchaser is an exporter engaged in zero-rated transactions, how much is the cost? And would there
be any recognition of input vat?
Cost- P100,000
Input Vat- P12,000
But what will happen to the input vat for which there will be never be output vat if all sales
will be exported? Do you have the option to make this part form part of the cost to have a higher amount of
deduction/expenses to lessen the income tax?
Always recognize as input vat if 12% VAT registered or zero-rated. You do not have
the option to make it form part of your cost of your purchases. The law provides
that you have option to FILE FOR A REFUND within two years from the close of the
taxable quarter when export sales were made. (will be discussed towards the end
of this topic DAW ;)
USC- VAT exempt
Any purchase that it made, even if added with VAT by the seller will always be considered as
cost/purchase price. Because no output tax against which it will be offsetted.
Does the USC have the option to treat only the P100,000 as cost and the 12,000 as input tax and
file a claim for refund for the 12,000? No. even if it appears to be beneficial on the part of the zero-rated taxpayer to
claim a refund, everything will be given back, the 100%. Unlike if youll make it as part of the cost, it will only be
beneficial in so far as whatever the tax rate is applicable. As expenses diba, it will reduce the taxable amount. But

[TAXATION II 403 BATCH 2013 EDITION]

16


will it be refunded? No. it will only reduce the tax income and whatever tax rate applicable, lets say 30%, then only
30% beneficial to you. But for a school, which is not taxable, it will never be beneficial.
Cost- P112,000
However, as weve discussed, USC or any other exempt taxpayer cannot refuse to pay VAT on the ground
that it is not a vatable person because the exemption only extends to direct taxes, not indirect taxes.
What are the reasons why some sales of vat registered person are granted zero rates?
Destination principle- provides that goods and services are taxed in the country where they are consumed.
Therefore, when goods and services are consumed in the Philippines, theyll be subject to 12% VAT. But if the
consumption is abroad, then zero % VAT.
Cross border doctrine- No VAT shall be imposed on the cost of goods that are sold beyond the taxing
jurisdiction of the Philippines. Emphasizes the jurisdictional reach while the former is focused on the destination or
the place where the goods are consumed.
Boils down to: exports are zero-rated. Imports are subject to 12%.
We do not have any provision that enumerates the transactions subject to VAT. Very generic.
If not under zero-rated or exempt, then subject to VAT.
5 examples
a.
b.
c.
d.
e.

of VATABLE transactions:
Groceries, dept stores
Restaurants
Spa
Airline tickets (if it is a domestic flight)
Shipping vessel (domestic)

Zero-rated Transactions
(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
Ex. You sold goods abroad but it so happened that your customer was here and paid you dollars. Is
it a zero-rated transaction?
What do you mean accounted for according to the rules of BSP?
Cannot be regulated if not paid through a bank which is under BSP supervision. So tell your client to
deposit it in your bank account.
(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local
export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
How is this diff with number1? Not a sale of goods, but raw materials. The buyer here is a nonresident person but destined to be delivered to a resident local export-oriented enterprise. It is a
must that the buyer is a non-resident person. It also requires that payment be under acceptable
foreign currency and accounted for in accordance with blah blah blah. (see above)
(3) Sale of raw materials or packaging materials to a local export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual production;
Total annual production in the current production? Projected? Or past sale? Past sale, so as to have
reliable figures.
Is it required that payment be made in foreign currency? Nope.
Would a sale be zero-rated if the payment is made in foreign currency and accounted for in
accordance with BSP rules? Would it suffice for a transaction to qualify as zero-rated? CIR vs.
Burmeister: does not automatically make a transaction zero-rated. Because if thats the case, then
all transactions will be made in this manner, making these transactions zero-rated.

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17


(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
Sale of other metals such as platinum? Nope. The law is specific. Only gold. ;)
(5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus
Investment Code of 1987, and other special laws.
What falls under this category of export sales?
a. Actual exportation made by registered export producer
b. Sale made by a registered export producer to another registered export producer or a
registered export trader (means to say that its a sale locally) not an actual exportation yet, will
be actual if these export producers sell the goods abroad
will be considered as constructive export if sold to the following:
1. Bonded manufacturing warehouses of export oriented manufacturers
2. Sales to export traders operating bonded trading warehouses
3. Sale to diplomatic agencies that has been granted tax immunities whether paid in
foreign currency
4. Export processing zone
c. Sale to BOI (board of investments)
Should there be actual export sales?
(6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations. (added by R.A. 9337)
If theres stop over here, only that portion from the last destination in the Philippines to the foreign
country will be subject to zero-rate.
Foreign currency denominated sale- is there actual shipment?
means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled
or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
Buyer is still a non-resident. But in order to save shipping charges, the buyer opted to have
it delivered to a resident, provided that it is paid for in foreign currency and accounted for in
accordance with BSP rules.
Objects which are excluded: SEC.149- automobiles (4 or more wheeled regardless of
seating capacity) EXCEPT buses, trucks, cargo vans, jeep/jeepneys/jeepney substitues, single cab,
chassis, and special-purpose vehicles so these are subject to zero-rate; AND SEC.150- all goods
commonly or commercially knows as jewelry, whether real or imitation, pearls, precious and semiprecious stones, pefumes and toilet waters, yachts and other vessels intended for pleasure or
sports. J
Pick-ups are considered automobiles. So if sold on foreign currency, still subject to 12% on
top of excise tax.
(7) Sale to persons or entities that are exempted by special law or intl agreement to which the Philippines is
a signatory (in this provision, it includes indirect taxes)
-IRRI, PEZA, SBMA, UNICEF
in liue of ALL taxes
First, look at the status of the seller. If vat registered, then go to the next step. Does the sale qualify as an export
sale? Foreign currency denominated sale? Or sale to a vat exempt person?
But if the status of the seller is exempt, not registered as a VAT taxpayer, then whatever transaction he has will be
exempt.
Purpose of zero-rating, although u cannot pass value added tax to your customers, u can recognize input tax on the
purchase price of goods, for which if transactions are export sales, you can apply for 100% refund on whatever input
taxes that you paid to your supplier. ;)
Zero-rated Services
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

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18


(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
SEE CIR VS. BURMEISTER
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
percent (0%) rate;
(4) Services rendered to vessels engaged exclusively in international shipping; and
(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing
goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.
(6) transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country
(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to,
biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using
technologies such as fuel cells and hydrogen fuels.
Rendering of repair and maintenance not zero-rated. Because the provision refers to sale of power
or fuel only, any other type of services rendered by those corps are not zero-rated.
What do you understand of a VAT Exempt transaction?
Is a VAT exempt transaction the same as a VAT exempt taxpayer? No. So when it is a VAT exempt transaction,
either because the transaction itself is not VATABLE or the person who entered into transaction is a VAT exempt,
then it will not result to any output tax for the sale or any input tax on the purchase made by the customer.
VAT EXEMPT TRANSACTION vs VAT EXEMPT TAXPAYER
VAT exempt transaction these are the transaction under sec 109 of tax code. Transaction itself is exempt,
whatever the status of the taxpayer. So if a seller is a VAT registered taxpayer because the seller has other VATABLE
transaction, the transaction is exempt from VAT.
(enumerate)
Agricultural down to transactions not reaching down to transaction not reaching 1.9 Million gross sales or gross
receipts during the 12-month person.
VAT EXEMPT TAXPAYER meaning the exemption is directed against the taxpayer himself. Whatever the transaction
is entered into, whether VATABLE or NOT, since the exemption itself is granted to the taxpayer, then the transaction
will not result to any OUTPUT VAT on sale or INPUT VAT on purchase.
But since the exemption is directed only against the taxpayer, example when theres an importation made by the
exempt taxpayer, and subsequently sells the property or goods when its not exempt, then it will be subject to VAT.
EXEMPT TRANSACTIONS: (Please see codals)
1.

Sale or importation of agricultural or marine products in its original state, including livestock and poultry
in its original state (enumerate the chemical processes);

Consider a fish, its a marine product; it is smoked and dried. VATABLE OR NOT? Not vatable, because it is
still in its original state.
Salt. Vatable or not? Exempt.

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When the marine or agricultural products undergo the simple processing enumerated including the packaging, they
do not take out the product from its original state, therefore these simple processes do not make the items subject
to VAT tax. Just take note of what these are. So if a fish is smoked, the chicken is frozen, etc., they are still exempt.
Now iodized salt and rock salt.
Rock salt, its still in its original state, and its dry, then the iodized salt, is no longer in its original state, because
there is already some chemical process involved, and so it becomes vatable.
As to sugar, if its refined, its no longer in its original state, thus subject to vat.
How about coffee beans? Still in its original state, exempt from vat.

2.

Sale or importation of fertilizers or seed.

So there are three kinds of products that are exempt on its sale or importation:
a.
b.
c.

Fertilizers
Seeds
Feeds
All feeds are exempt from VAT? No, except for specialty feeds.

Specialty Feeds for race horses (see transcript); Feeds for pets are VATABLE. Now if your pet is a
pig, will the food of that pig VATABLE? No, because generally, we do not consider pigs as pets.
Anyway, when you say that your feeds are exempt, if your race horse is consuming the ordinary
feeds, still exempt because what is vatable are those feeds with special ingredients, which we call specialty feeds.

3.

Let us say you went abroad as tourist and brought in items. Are there items VATABLE or not? Depends.

GR: Importation of items and goods are not VATABLE provided they are for personal and household effects, and
exempt from customs duties.
In order to get the exemption, you should be:
a.
b.

Resident of the Philippines coming back from a visit abroad


Even if you are not a resident coming from a vacation abroad, so long as your intention of coming to the
Philippines is to resettle back

So bottom line, these two types of individual must be both settling in the Philippines in order to get the exemption.

4.

Importation of professional instruments and implements, wearing apparels, domestic animals, and personal
household effects.
(Sec b, 109)
For example, Mr. C is not a citizen and a non resident bringing wearing apparel, instruments, jewelries. Is he
exempt or not? Depends, if Mr. Cs coming to the Philippines is for the purpose of settling here.
The provision does not require that the importer or the persons bringing in goods in the Philippines be a
resident or a citizen. It means any person, be it a citizen or resident or even alien, so long as they are of the

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20


in intention of settling in the Philippines, as if they are relocating into the Philippines, and not to be a
fugitive from justice.
But there are other conditions when these items may be brought in the Philippines. Can it be any day of the
year? No, it must be in close proximity with your arrival, at the time you came to the Philippines or 90 days
prior to arrival or even after arrival, so long as it is still within 90 days from arrival. So long as it is close to
the actual date of your arrival.

5.

Items subject to percentage tax

Why cant VAT and percentage tax, co-exist in one transaction? BECAUSE percentage tax and VAT are both sales
taxes. Excise tax and VAT can be imposed in one transaction, or one product.
Kinds of percentage taxes:
a.

Common Carriers Tax


What types of transactions are subject to this type of tax? Common carriers by land. They are not subject to
VAT. So long as the transaction is engage in transporting passengers. If the common carrier is in engage in
transporting cargo, they are already subject to VAT. As for the other common carriers engage in the
transport of cargoes via another route which is vie sea or via air transportation, they are already subject to
VAT, some are zero-rated because some are internationally bound. So only those involve in the transport of
passenger by land. Cargoes? VATABLE

b.

Gross Receipts Tax

Imposed on what type of entities? Banks and non-banks intermediaries, and the highest rate is 5%. Banks were
experimentally subject to VAT sometime in 2004 and 2005 but it reverted to being subjected to gross receipts.
How about pawnshops and money changers? They are operating just like credit institutions or non-bank financial
intermediaries, and are subject to gross receipts tax.
How about insurance premiums? Can they collect VAT? Life Insurance is not subject to VAT, non-life, subject to
VAT.
How about international calls? You know for a fact the text messaging is subject to VAT. So international calls
are not subject to VAT, it is subject to percentage tax, particularly the overseas communications tax (OCT). It
remains at 10%. Local calls, 12% VAT.

6.

Sale of real properties

Generally, VATABLE.
Exceptions:
I would like you to check on Rev Reg 16-2011, which took effect January 1, 2012. It has raised the threshold
limits for VAT from 1.5M to 1.919M. So for those leasing 10,000 of lot, it has now become 12,800. So for those
who lease the latter, you can now claim exempt from 12% VAT.
a.
b.

c.

When the property is primarily not held for sale. So meaning if the seller is not into real estate business, it
may or may not, it just depend if the property is used in business or not.
Low cost housing refers to 750k, and it pertains to housing projects. SO meaning, theres a house. Does it
refer to house and lot, or can it be lot only? It does not refer to lot only. Not the ceiling price of which not
exceeds 750k. If its in excess, the entire price is subject to VAT.
Lease of property

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Lets say theres a commercial unit, leased out for 10k monthly. Subject to VAT or not? Commercial not
, because it only refers to residential.
Ex. 1: ABC Corp is leasing out residential units at 10k per month. Total gross receipts for the entire 2011
are 1.919 million.
Subject to VAT, or not?
No, because the exemption itself is in the transaction. So when the law says leasing of residential unit or
not more than 12800, its exempt from VAT regardless of the aggregate amount that the lessor will
generate from the transaction.
Ex. 2: Residential units are leased out by XYZ Corp by 15k per month. Total gross receipt for 2011 is 1.4M.
Subject to VAT, or not? In this case, the transaction itself is not exempt from VAT, because it has exceeded
the threshold limit of 12800 per month. But because there is another provision on exempt transaction that if
the gross receipt would not exceed 1.919M in any given 12 month period, therefore the transactions are not
vatable.
Ex. 3: What if DEF Corp owns all of the residential units (10k and 15k per month, depending on the size)
and the total gross receipt for 2011 on the lease of these properties is 3.3 million, no other transaction.
Subject to VAT, or not? Should he register for VAT? Here, there is only one owner of the units, and engaged
in no other transaction. The rules say that the gross receipts from rentals of residential units not exceeding
12800 per month per unit shall be exempt regardless of the aggregate annual gross receipts. So that means
to say you take out those units to be leased out for 15k per month, in considering whether DEF Corp is
vatable or not.
So give exclusivity, since 10k per month, regardless of the aggregate annual gross receipts, it is exempt.
The other, since even if 15k but aggregate annual gross receipt is less than the threshold limit of 1.919M,
then he remains to be exempt from VAT.
DEF Corp will be VATABLE only if and when is engage in other vatable transaction. Lets say if DEF Corp if
there is a canteen combined in the company and generates 200k in a year, then 600k + 1.4Million (from
lease of res unit for 15/month), that is more than the threshold limit, then not anymore exempt from VAT.
So as we said, when the transaction is exempt, then regardless of the status of the taxpayer or regardless of
the gross proceeds, then it will be exempt.
When we say leasing out of residential units, does it include hotel rooms? No. Even boarding houses,
dormitories, and the like are exempted.
d.
e.

Sale of Residential Lots not exceeding 2.5M (but as per Rev Reg 16-11, the threshold limit is already
3.199M)
Socialized housing
Threshold limit is only 225k. Mas sosyal pa ang low cost housing!
Does it pertain to house and lot, or it pertains to lot only? It includes the house and lot.
If you purchased a house and lot worth 225k, and it is registered under socialize housing, vatable or not?
Not, as long as it does not exceed 225k.
Socialize housing are housing projects covering house and lot or homelots only.

f.

When there is a sale of residential lots not exceeding 1.5 M (as per rev reg 16-11, it is already 1.19M)
Now assuming that you want to purchase a residential lot inside a subdivision owned by PhilInvest, the cut
of a parcel of land is 96 square meter and each cut of 96 square meter is 800k, and you want to purchase

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22


two 96 sq meter of land that is adjacent, total is 1.6M. Subject to Vat or not? (But take note sa exam na ang
bag-ong threshold limit kay dili na 1.5M) Depends.
As a gen rule, sale of residential lots are subject to VAT when the lot are primarily held out for sale by the
real estate seller.
Exception is when the residential lot value does not exceed 1.5M.
Exception to the exception is when two or more adjacent lots are purchased by one and the same buyer with
the intention of utilizing the residential lot for one residential unit; it will be subject to VAT. So that means, if
you purchase three parcels of land, adjacent, but youre intention really is to give that out to your three
children, not for purposes of building one residential unit in those three parcels of land, it will not be subject
to VAT, even if the total or aggregate will exceed 1.5M.
So lets summarize that one. If I ask you for the five items that are exceptions to the rule that sale of real
properties is subject to VAT, not lease of real properties, and then you do not include leasing of property
there. SO there are five exceptions. (Please see and verify the new figures as per Rev Reg 16-11)
1.
2.
3.
4.
5.

7.
8.

Property is not primarily held out for sale.


Low cost housing not more than 750k
Socialize housing item not exceeding 225k
Sale of residential lots not exceeding 1.5M (1.19M)
Sale of Residential house and lots not exceeding 2.5M (3.199M)

Palay something milling self explanatory accdg to Atty. T.


Blah blah
Ok, assuming one of your love ones is hospitalized. Upon release from the hospital, charges were as follows:
Operating room charges 100k exempt
Medicines from pharmacy inside the hospital 100k depends
Laboratory fees 100k exempt
Professional fees 100k Vatable
Total of 400k.
SHALL VAT be imposed? YES. As to medicines, it depends whether out-patient or in-patient. Because the
latter takes part of the hospital services, then it is exempt.
CASE: CIR vs Prof Services, 2009
So we consider whether the patient is in-patient or out-patient. If your beloved, let us say check-up lang
and he was prescribed some medicine and he purchased it inside the hospital, subject to VAT? YES, because
it will no longer form part of the hospital services, laboratory services, etc. Now what is exempt, are only
medical, dental, laboratory, etc. Professional fees of doctors, lawyers, accountants, etc., are subject to VAT.
But if the professional fees of these professionals, does not exceed 1.5M (1.9 as per rev reg 16-11), they
may forego the registration of under VAT system and pay only the 3% percentage tax. So the 3%
percentage tax is the catch all of what are not subject to VAT.
So even if Rev Reg 16-205 clearly provides that if the hospital are claiming or operates a pharmacy or
drugstore, the sale of drugs and medicine is subject to VAT, this simply refers to the sale to OUTPATIENTS, because it has been clarified in the 2009 case of St. Lukes and in a BIR opinion issued on
January 8, 2009.

9.

Are educational services Vatable? Exempt. Even if educational institution is a not a non-stock, non-profit,
meaning its a proprietary institution? Still exempt from VAT?

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23


Now let us look solely on the provisions on the Tax Code. The exemption is educational services of that by
private educ inst is exempt.
Does it qualify whether the priv educ ints is non-stock, non-profit, or not?
Even if the educational institution be proprietary or non-stock, nonprofit, its educational services maybe
exempt from VAT so long as it is duly accredited under TESDA,CHED, DEPED.
Under the old VAT LAW, TESDA ACCREDITED educational institution are not yet exempt from VAT. But
under this amended law, we can see that there are three accrediting bodies. If its not accredited, then not
VAT exempt.
How about Govt Educ Institution, are they vatable or not? No, they are not subject to VAT, because the Tax
Code is clear that it refers only to private educ inst.
Is there a chance that an educational institution may not be paying tax, assuming its accredited? Say for
example USC.May I be liable for VAT? So all income generated by USC are for educational services?
Let us check what you have learned in Tax 1, general principles when we studied the Constitution.
True or false. The income of a non-stock nonprofit institution is exempt from income tax. All income is
exempt from income tax. Ans: False.
If a school has a canteen inside, photocopy machine, dormitories, are they exempt from income tax, if the
school is non-stock nonprofit?
They may or may not be subjected or income tax. For them to be exempt,
for example for canteens: first, actually-directly-exclusively for educ purposes, 2nd, operated by the school
itself, and 3rd, located within the campus. Then it is exempt, even if it is not a tuition fee income.
What about special deposits in banks by schools, like interest income? Again, it will be exempt so long as it
is ADE used for educ services, supported by financial documents accdg to the opinion of Sec of Finance.
So going back. If USC is into leasing real prop, then it is not exempt from income tax, and the proceeds
thereof will be subject to VAT. But if the proceeds will not exceed the threshold limit, still exempt from VAT.
So you have to weigh in. Put it in perspective. First, is it exempt or vatable. Second, has it exceed the
threshold limit. Always remember that for MCQ.
10. Are Regional Headquarters subject to VAT?

2 TYPES:
Regional Area Headquarters- exempt, because they do not earn income and only operating for admin
purposes; presence is a coordinating center of other affiliates within the region
Reg Operating Headquarters subject to 12% VAT, because they are operating business; remember they
are subject to 10% income tax rate

11.

Sale, importation, publication or printing of books exempt.


How about magazines, bulletins, newspapers? Subject to requirements.
Requirements:
1. Published at regular intervals, at fixed prices
2. For subscription and sale
3. Devoted for paid advertisements
How about the sale of E-books? Not subject to VAT exemption, vatable, because it does not take the form of
traditional books.

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24

12.

Cooperatives, vatable? Depends.


Are sale of electric cooperatives, vatable? YES.
Agricultural cooperatives? Exempt, so long as it is registered and in good standing, with the Cooperatives
Development Authority, whether or not the sale of their produce is directly for their members or
nonmembers, or whether in its original state or not.
How about the importation of machineries, equipments,and other input farm good, exempt? Yes.
Types of Cooperatives:
a.
b.
c.

Agricultural
Electric
Lending or credit cooperatives. Subject to vat? Not subject to VAT, so long as they are registered, and in
good standing with the Coopeartive Development Authority.
Ex. CEBU CFI owned by the Garcias.

d.
e.

Multi purpose Cooperative Exempt, as long as registered in CDA and in good standing
Non-agricultural, Non-electric, Nonlending or non-credit, non-multi-purpose exempt, so long as
registered in CDA and the contribution of each member does not exceed 15k, regardless of the
aggregate contribution of the member

Ex. Let us say that ABC Corp was incorporated in Jans 2011. It has no idea whether its 12-month gross
proceeds will exceed the threshold limit for VAT, so it did not as yet first register for VAT purposes. It made
exportations of its manufactured goods. Exempt, vatable, or zero-rated?
So although in both cases, the export sales, whether you are vat registered or not, it will not thus generate
output tax payable to the government. The difference is that if two corporations make exportations, one is
registered and the other is not, the difference lies in the treatment of the transaction. That which registered
under the VAT system can treat the transaction as zero-rated, the other one is exempt, although no output
tax, the purchase will be different bec no input vat can be registered to the one who does not register. It
can treat the export sale transaction as exempt lang, any purchase in order to generate the raw materials or
manufacture, no input vat.
So, diba I called your attention re Zero rated transaction. That before one could claim a zero-rated
transaction, one must be vat-registered first. Now if the exportation is made by a non-vat registered,
treatment of the transaction is zero-rated.
13. What about transactions that are exempt under international agreement? Is this not in conflict with the
provisions on zero-rated transaction?
If XYZ Corp will to ABC Corp, where ABC is granted exemption of VAT pursuant to a special law, where is
zero-rating transaction, where is exempt transaction? The transaction of XYZ, or that of ABC?
The sale made by XYZ to ABC is zero-rated; the exempt transaction is that of ABC when it imports goods
from other corporations.
For zero-rating, remember that when an entity is granted exemption under international agreement or
under a special law, either it is exempt or it is zero-rated. What is covered in zero-rating is that there is the
VAT registered seller making a sale to a person or an entity that has been granted indirect tax exemption.
So here, ABC Corp is granted indirect tax exemption, so its not liable for VAT. Any seller to ABC shall
recognize a transaction as zero-rated, so long as the seller is VAT registered. So we are focusing not on
ABC, but on the VAT registered person, and XYZ Corp here shall recognize the transaction to ABC as zerorated, and XYZs purchase from other entity however will not be zero-rated and there will be input VAT that

[TAXATION II 403 BATCH 2013 EDITION]

25


will be recognized. Exempt transaction means the transactions made by the person or entity itself that has
been granted exemption and so either it makes a sale or purchase, it will be exempt. But for a VAT
registered person or entity, it is zero-rated.

14. Sale by international shipping charva


If I remember it right, I also discussed fuels, good, supplies in relation to engaged in international shipping
and air transport operation. What is covered now, in this exempt transaction?
So here theres no conflict, because we are looking here at two separate taxpayers.

In zero-rated transaction, when a VAT registered makes a purchase of fuels, equipment and supplies, to an
entity that is engaged in international shipping, the transaction is zero-rated. But if this entity that is engaged in
international shipping, imports from outside, fuels, goods, it will be exempt from VAT, so long as it is engaged in
international shipping.
15. Passnegers, vessels, in ships charva
SO what is covered in the exemption is the importation or sale or lease of passenger or cargo vessel including
the implements inside, with the requirement that what is exempt only are those only reaching 150 tons and
above, and if it is below that, then it is vatable. There are requirements as to the age of the vessel. Do you know
that in the Philippines, our shipping does not purchase a brand new vessel? Bec it is very expensive.
Probably when you read this provision, very self-explanatory lang. Diba, how old the vessel should be?
16. Sales of those entities that does not exceed 1.5M (1.919M)
So we are done with what are exempt transactions.
So lets go with other VAT exempt transactions. What are these?
a.

Those incidental to the VAT Exempt transaction


So do not be misled ha, because we said that incidental transactions are VATABLE even if not made in the
course or business. But this time, it is exempt because it is an incidental transaction to VAT exempt
transaction. Because the principal activity is exempt, with more reason that the incidental activity thereof is
exempt.
Isolated transaction, are they exempt? Not.
Isolated Transaction those that can never happen again
This is what you have to put in mind. A real property transaction that is subject to CGT is 99% not subject
to VAT. Why? That which is subject to CGT is a capital asset, and VAT is imposed on ordinary asset while in
the course of trade or business.
Do you remember the case of shipping vessel, why was it not subject to VAT? Bec the reason for the sale or
transaction was that the transaction was isolated. It means to say that it is one of a kind.
Another example accdg to a BIR opinion, is the sale of a trademark of a corporation is not subject to VAT,
because it is an isolated case.

b.
c.

Sale of properties in a dissolution, etc.


Change of corporate name, merger, consolidation of properties solely in kind, (Sec 40 C2)

So the persons granted exemptions are those entering incidental transaction, isolated transaction, etc.

[TAXATION II 403 BATCH 2013 EDITION]

26


1.

Now let us say that there is an entity exempt from VAT. Does it have the option to register for VAT? YES. So
theres the liberty in choosing to be vatable.

Diba if theres an entity whose gross receipts or proceeds is oly 1.4M. The it is only subject to 3% percentage
tax. But it has the option to register for vat, meaning, all its sales will be liable to 12% VAT, but the good side of
such registration is that whatever purchases it made, so long as supported by a VAT OR or INVOICE form his
supplier will be recognized as input tax. And input tax is also 12% on purchases. If the difference between the
output tax and the input tax is lesser than the 3% percentage tax, then it will be beneficial for those under the
VAT system, rather then paying the direct percentage tax of 3% which cannot be passed on to your customers.
But for lawyers, or professionals, if your proceeds would not reach 1.5M or THE THRESHOLD LIMIT, I think it
would be beneficial to go with the 3% percentage tax, rather than paying VAT.
What about its purchases? Would it generate the input tax? Ok, if you will become lawyers, what is your
puhununan? Your mental faculties, right. Does it have input tax? Your books while stidyong law, you cannot
claim the input tax, bec books are exempt from VAT, not even your fare to school, your tuition fee. Now what is
the source of your input tax? Probably the rent of your space, but the salaries of your employees, o input tax.
But the VAT between the gap of your professional fees against the VAT on your purchases is very high than the
3% that you will pay as percentage tax.
2.
3.

Second item that you can register optionally.


How about franchise grantees in your outline?

What are the instances may a VAT exempt entity be allowed to register optionally under the VAT system?
1.
2.

3.

When your gross receipts or proceeds will not exceed the threshold limit.
If you have mixed transactions, meaning some of your sales are exempt and some are vatable, and still if it
pertains to vatable transaction but did not exceed yet the threshold limit, you may still register under the
VAT system. But if you have mixed transactions, and those transactions that are vatable already exceed the
threshold limit, it is not anymore an option, but already a mandatory registration. What it meant here, when
it is mixed transaction, is that your vatable transaction apart from those exempt must not exempt the
threshold limit so that you may have the option to register.
Franchise grantees of two types, radio and/or TV broadcasting, so long as the gross receipts of the
preceding calendar year do not exceed 10 Million.
What about those franchise grantees of radio or TV broadcasting whose gross receipts exceeds 10M?
Mandatorily they have to register under the VAT system. Otherwise, if they do not exceed 10M, they are
subject to the regular franchise tax or percentage tax, but they have the option to register under the VAT
system.
Say for example these franchise grantees opted to register under the VAT system, can it revert back to
being subjected to percentage tax and be non-vatable? The election to be vatable is irrevocable for a period
of three years.
The same rule of irrevocability of three years will apply to the three instances to optionally register under
the VAT? No.
When you say that the option to register under the VAT system is irrevocable for three years would only
apply to those whose gross receipts does not exceed 1.5 Million (now 1.919M)or those having mixed
transactions whose gross receipts from vatable transaction do not exceed 1.5M (now 1.919M), they can
revert back after three years from the quarter when the choice was made.
But for franchise grantees of radio or TV broadcasting, whose gross receipts of the preceding calendar year
do not exceed 10M, ones the option is made, it is perpetually irrevocable. So they will remain to be under
the VAT system.
Pero for those franchise grantees of water, gas, electric utilities, etc., they are covered by the VAT system.
The option is given only to these radio and TV broadcasting, because in the first place they are the ones who
are not vatable so long as the gross receipts do not exceed 10M.

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27


How do you distinguish creditable withholding tax from final withholding tax?
Creditable withholding tax by the term creditable, whatever taxes that have been withheld from your
income, it may be credited or offseted against your future tax liability.
Final withholding tax it is the withholding tax that has been withheld with finality. Such consists of the final
tax that is to be taxed against you, it can no longer be brought up in the future.
The same rule will hold true in final withholding vat, and creditable withholding vat.
Withholding VAT, as to what transactions with creditable withholding vat and final withholding vat apply?
FINAL WV = payments made by the government, or sales made to the government, or where the
government is the payor
Ex. You have your own construction company and you were hired by the govt for construction services for
the project, your billing for the services is 1M. Can you pass on VAT? Yes. So that would be 1.12M. So on
top of 1M, you are passing on a 12% VAT even if the govt entity is not for profit since we are looking at the
status not of the purchaser, but of the seller of service. And since you are vat registered, so you have to pay
the BIR the 12% on whatever sale of services made, now the government will have to shoulder the 12%
VAT. Where will the final withholding VAT apply? The government will withhold 5% of the 12% VAT. In
effect, the govt will shoulder the 7% withholding vat pay it to the seller, which is 1.07M.
Why 5% class? History of this is that our VAT is 10% before. Now for the government to be unburdened to
the passing on of VAT, half of which was withheld, meaning the government need not pay you the 10%. But
when VAT was increased to 12%, there was a question as to whether the 5% is increased also to 6%, which
is half of 12. That speculation was ended when there was a clarification that it still remained to be 5%.
Now if the other party is not a government, do not ever think of applying a final withholding vat on 5%.
How about creditable withholding vat? These are payments made by non residents. So the seller is the nonresident.
Now the rules on creditable withholding vat and final withholding vat is very specific.
Final withholding vat will only apply if there is a government in the picture. Now creditable withholding vat
will only apply if there is a non-resident as a party in the transaction.
When you say non-resident person, does it include nonresident citizens? Or what is covered of a no n
resident person? Nonresident person who renders service in the Philippines, regularity notwithstanding. So
remember, who are the persons subject to VAT?
a.
b.
c.

Those who are engage in the course of trade of business


Hose who import products whether in the course of business or not
Those nonresident persons doing business in the Philippines, regardless of regularity or
regardless of whether or not it is made in the course of trade and business.
Pero if it is made in the course of trade or business, it is not an issue, because it would be
required to register under the VAT system.

So what were looking at is someone who is not within our jurisdiction. And because these nonresident
person is not within the taxing jurisdiction of BIR, the purchaser domestic corporation or a resident citizen or anyone
that is within the jurisdiction of BIR is obligated to withhold the amount paid by nonresidents. So what really takes
place, is that these nonresident person will render service in the Philippines, and we said that even if this is made in
an isolated case, the service would be subject to VAT and this nonresident person will be liable to VAT on services
that it has rendered. But since it is not within our jurisdiction, someone else has to do that for the nonresident. Who
else could be the withholding agent or person? NO one else but the one in transaction. So if it is 1M plus 12% vat,
bec it is a nonresident person performing service in the Phil, then 1m plus 120k, 1M is to be paid to the nonresident
and 120k is paid by the Doemstic Corporation to the BIR. Why it is even called a creditable withholding vat? It is

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28


considered creditable against the output tax of the purchaser, not on the nonresident. Remember that the
nonresident is the seller.
Every time that a transaction is entered into by a nonresident person and a domestic person, the inout vat that was
paid by the domestic corp will be remitted to the BIR within 10days after the close of the month when the sales were
made or services performed. Now after its paid as VAT to the government, only then will it be allowed to claim as a
credit against the output tax of the purchaser. Clear?
For purposes of crediting, the domestic corpo must be registered, or else it cannot be credited. But the registration
diba, is not necessary for purposes of remitting to the BIR, why? Bec it is the liability of the nonresident.
VAT BASE
On what amount shall we compute if its a sale of goods, sale of service or if its an importation of products? (Sec
106)
So if the goods or equipments purchased is valued at 1M, exclusive of Vat, then VAT shall be computed at 1M, not
on 1.12M. But if the product purchased has been subjected to excise tax, will the VAT be based on the purchased
price alone or purchase price plus excise tax? Purchase price plus excise tax, bec tax code provides that excise tax
shall form part of the gross selling price.
Assuming you had your motor vehicle checked by the dealer for servicing, now in the course of having service
rendered on your motor vehicle, some spare parts had to be replaced, and your total billing was inclusive of the
parts. When you say gross receipts being subject for VAT for service, does it include parts purchased in the course of
rendering the service? Gross receipts include the parts.
Would gross receipt include deposits? So when you pay rental with 2 months deposit, should the lessor subject you 2
months deposit to VAT, meaning should it consider the rent plus 2 months deposit subject to VAT? When would
deposit form part of the gross receipt? Accdg to the definition of gross receipts, deposit shall form part of gross
receipts when it is already applied as payment. So at the time that the deposit is converted to income already as
payment, diba, kung ang Contract of Lease states that the 2-month deposit shall be applied as payment for rent or
lease, then at the time that these are already considered as payment for rent, then it will form part of the gross
receipt.
So, gross receipts is define as..(see tax code)
Vat base on imported items
Do you compute Vat on customs duties paid? Is the base of VAT inclusive of cutoms duties? Yes. So it is not a tax on
tax? It is not. Because custome duties is a tax on imported items, vat is a tax on the importation.
The definition of LANDED COST means, it is the invoice price plus customs duties, insurance, etc. and any amount
of charges that is paid in bringing the goods inside the country, inclusive of excise taxes. We will learn more of this
when we reach tariffs and customs duties.
Now you are already aware that in VAT, it is a two-way process. If youre the seller, you will recognize output tax on
your sales, and if you will recognize input tax on your purchases. And whatever the difference is the VAT payable to
the government. And usually it is the tax that you only added to your product or services. Now the basis of the 12%
VAT is actually on the gross selling price less whatever product has been returned, the sales allowances, the
discounts. Parang logically, you are not required to pay VAT on the discounts, on the allowances or product returns
made. Pero for discounts to be not vatable, it should be indicated in the invoice itself at the time of sale, later
discounts will have to be paid of vat. Diba at the time it is sold, the invoice price does not reflect of any discounts,
automatically the 12% vat shall be paid on what is reflected on the invoice. Any change of mind later on, if there is a
discount granted, it can no longer be a reverse of whatever VAT you have paid. There can be no reversal of the
output tax.
If its the sale of goods invoice, service OR. In both ways, whether you are the seller or the purchaser the BIR
will be looking at when should you be declaring the output tax as payable to the government, and when are you
allowed to recognize input tax on your purchases.

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29


INPUT TAX can be offset from your output tax.
Input tax see tax code;
Requirements:
1.
2.

You must be a VAT registered person


And the purchase the you made must come from another VAT registered person, normally in the course of
trade or business

Because if you are a purchaser who is not vat registered, any inout tax that you pay to Jollibee for example, it will
only be absorbed as part of your purchase price. You as an individual, you are not a Vat registered person, you do
not have the right to recognize the input tax. You cannot tell the government that you will go to the BIR and say
that you have gathered the official receipts by virtue of your purchase from Jollibee and you want to claim input tax.
You cannot do that bec you are not a vat reg person.

XVI. INPUT TAX


XVII. VAT LIABILITY OF THE SELLER

A. Definition
This is the opposite of output VAT. This is the VAT paid by a VAT-registered person on the importation of goods or
the local purchase of goods properties or services including the lease or use of properties in the course of trade or
business.
The phrase by a vat-registered person connotes that it is recognized ONLY IN THE COURSE OF TRADE OR
BUSINESS. Because personally we do not register ourselves under the VAT system if we do not engage in any
business activity, trade or profession. So only a VAT-registered person can say that he will recognize input VAT.
When the person purchasing or consuming is not a VAT-registered person, not doing it in the course of trade or
business, any input tax paid shall only be considered as part of the PURCHASE PRICE OR COST.
B. Sources of Input Tax

1.

12% Actual Input Tax from


a. Local purchase of GOODS, PROPERTIES, OR SERVICES.
GOODS may be raw materials, packaging materials, used goods used in business and depreciated over
its life, etc.
PURCHASE OF SERVICE local purchase of service may be lease of service or any other service as
actually enumerated in the tax code and local purchase of properties that are VATABLE. SEE SEC. 108,
NIRC
One source of input tax is a transaction subject to VAT. We cannot correctly say that its only actual
input tax that can be sourced from VAT that has actually been paid because there are different
reckoning points for recognizing input tax.
When we say input tax on the PURCHASE OF GOODS, you can recognize it already as long as you have
the VAT INVOICE.
Input tax on the purchase of SERVICE can only be recognized if you have the OFFICIAL RECEIPT. This
means to say that you have actually paid for the service that was rendered in your favor.

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b.

Importation
You recognize input vat on an importation of goods that has been subject to input tax. Without the
payment of VAT on the importation because it is excempt from customs duties and VAT, then you dont
recognize any input VAT.

2.

Transitional Input Tax


A Person who becomes liable to VAT or any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory according to the rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of
goods, materials, and supplies, equivalent to 2% of the value of such inventory or the atual VAT paid on
such goods, materials and supplies, whichever is higher, which shall be creditable against the output
tax. (Sec. 111(A), NIRC)
So this is one instance when the tax code provides a favorable choice to the taxpayer.
The taxpayer can recognize whichever is higher: input taxes on the beginning inventory at the time of
transition or the input taxes actually paid on the goods.
Transitional input tax is a tax that can only be recognized when a business transitions its taxability.
Would tranisitional input tax be recognized if a business fails to reach the threshold limit of 1,919,500?
If you sell something, you will be liable for output tax.
If you buy something, you pay input tax on the assumption that you are a vat-registered person
anything that you sell will result to output tax, anything you purchase will result to input tax.
Under the tax credit method, in one of the cases, there is an obiter there that the SC said that VAT
system is a tax credit method, wherein if your output tax exceeds your input tax, you are liable to the
government.
If your input tax exceeds your output tax, the government is liable to you in the form of refund.
So do not be confused of what input or output tax.
Can Transitional input tax be available to a business entity that has transitioned from being vatable to
non-vatable for failure to reach the threshold limit of 1,919,500 million? We are not talking of liability
but availaibility in recognizing input tax.
When a vat-exempt person transitions to a vatable person = transitional input tax.
When vatable transitions to non-vatable person = no transitional input tax.
Rationale for transitional input tax: during that period of transition from non-vat to vat status, the
transitional input tax credit serves to alleviate the impact of the vat on the taxpayer.
Once they change their status to vat taxpayers all their transactions will be subject to vat output tax
including sales of existing inventories for which they have not recgonized any input tax.
Example:
Date of transition is January 5, 2012 for a person who is exempt, registering today as vatable. If it has
inventories worth 1M. If it sold these on January 6, it will be 1.12M. 120,000 output tax will be paid to
the government if no input tax can be deducted.
Assuming it is a regular transaction of an already vatable taxpayer, the 120k vat on the sales of the 1M
inventory will be offsetted with the input tax that was recognized during its purchase.
But since the seller of the 1M inventory was first an exempt taxpayer, it did not recognize any input tax,
so in order to give him justice to the recognition of output tax, there should as well be a recognition of
input tax, but limited only to 2% of whatever the value of the beginning inventory is --- meaning it
does not include properties or goods that are used in business. ONLY STOCKS IN TRADE, OR GOODS
PRIMARILY HELD FOR SALE. Or the actual input tax that can be substantiated from these goods,
whichever is higher.

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31


If a vatable person reverts back to being vat-exempt, there can be no transitional input tax. Instead the
liability of the goods existing at the time of transition will be output tax on the inventories at the
inventories existing at the time of transition as TRANSACTION DEEMED SALE. One of the instances of
transaction deemed sale is reversion of status to vat-exempt because the government has already
looked upon the collection of the output taxes on the existing inventories of these vat-registered
taxpayers.

3.

Presumptive Input Tax


Persons or firms engaged in the processing of sardines, mackerel, and milk, and in manufacturing
refined sugar, cooking oil, and packed noodle-based instant meals, shall be alloweda presumptive input
tax, creditable against the output tax, equivalent to 4% of the gross value in money of their
purchases of primary agricultural products which are used as inputs to their production.
PROCESSING: means pasteurization, canning and activities which through physical or chemical process
alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for
special use to which it could not have been put in its original form or condition.

limited to these only. Strictly construed.


What makes these different from other manufacturers?
This excludes a business or entity which converts sardines, fresh from the sea into dried fish. Because
this is not considered as processing.
We presume an INPUT TAX on the purchase of agricultural products in its original state. The reason is
when these agricultural products for which no input tax has been recognized because its not vatable.
When these specific agri products are eventually processed to become the finished products that we see
on groceries or supermarkets, theyre already subject to vat or output tax. Therefore the manufacturers
or processors of these types of items do not have any input tax, has not paid any input tax, but will be
fully liable for the 12% VAT when it converts the item to finished food.
In order to offset this 12% full liability, there is this recognition of presumptive input vat of 4%.
Presumptive input VAT, unlike transitional input VAT, can be recognized everytime there is a purchase of
agri product in its original state as identified in the tax code.
On the other hand, transitional input tax can only be recognized once or even 2x during the transition
period only.

PROCESSING

4.

MANUFACTURING

Sardines
Mackerel

Refined sugar
Cooking oil

Milk

Packed noodle-based instant meals

Creditable Withholding VAT

These are the VAT supposedly due from the non-resident person rendering service in PH. As a vat-registered
taxpayer, in bahalf of that non-resident person doing isolated transaction/service in PH, these output tax of non-

[TAXATION II 403 BATCH 2013 EDITION]

32


resident persons are paid by the domestic taxpayer and subsequently by the same domestic taxpayer who acted as
a withholding agent, it can be recognized as input tax.
Is there any loss to the domestic taxpayer? All things being equal if he continues to perform business as a going
concern, there will be actually no loss to the domestic taxpayer because the full 100% of that which has been paid in
behalf of the non-resident person can be claimed as an input tax.
But then if the domestic taxpayer is engaged in zero-rated transactions for which no output tax is due, the vat that
has been paid in behalf of the non-resident person will be claimed for refund which may or may not be granted.
So this is the avenue when the government will actually earn.
There are other areas when input tax can be claimed such as properties or goods for which input tax cannot be
directly identified. If there is a transaction which it cannot be identified on whether it is related to fully vatable
activites or not, it shall be pro-rated.
Illustration:
What we have mentioned is 1. The actual input vat that has been paid. There are some which can be identified as to
vatable and exempt activities, therefore we can only pro-rata its recognition of input tax.
For example, if the vatable activity produced sales of 1M, exempt activity 500k, zero rated activity 500k. total of 2m.
Output tax shall be due on ____ alone.
Vatable activity no output tax.
No ouput and input tax for exempt activity.
No output tax but there will be input tax for zero-rated activity.
So if input tax can be identified from vatable activity of 100k,
From exempt activity, though just part of purchase price, another 100k,
From the zero-rated activity another 100k
And from the purchase of capital goods for which goods such as refrigerator or frozen mango, it is stores mangoes,
bananas and some processed items, both types of vatable transactions are placed inside the ref. both vatable and
exempt activity are using one type of equipment or appliance. Its purchase will have vat. But can we recognize the
entire input VAT for purchase of the ref or freezer if it will be utilized not only to store vatable goods, but also for
goods that are exempt.
We cannot recognize the entire vat.
So if the VAT that can be attributable to both vatable and exempt activities is 100k, we have to pro-rate this in
accordance with THE RATIO OF THE VATABLE ACTIVITY TO THE ENTIRE TRANSACTION.
So what is the ratio?
If you look into the 4 types of input taxes here, the one that you can readily recognize is number 1 from the vatable
activity. You cannot recognize the number 2 as input tax because it is sourced from exempt transaction. You can
recognize number 3. Would you stop here? Would you say that we oly have 200k input taxes that we can recognize
to offset against your output tax from the sales?
The ratio or percentage that you can recognize from this 4th type of input tax is the ratio of your vatable transaction
against your total transaction. So you only get what are the vatable transactions.
So its
1.5M (from vatable activity 12% and zero-rated transaction. Remember zero rated transactions are still vatable
transctions because we have 2 types of vat rates 12% and 0%).
1.5M / 2M. this is 75% of your total transaction. Your vatable transaction comprises 75% of your total transaction.
Therefore 75% can be recognized in addition to 200k input tax.
So you can offset the total 275k from whatever output tax that is due from your vatable sales.
If only number 2 is using the ref, then totally 1 and 2, you have only 1M / 2M.
As a withholding agent, you have personal liability to the government for non-remittance of taxes that is due from
non-resident persons. Therefore you shall be personally liable for the 100% tax that should have been remitted plus
50% surcharge + interest + penalty of not being able to deduct it as input tax. Because your obligation has already
been identified by the law as withholding agent. You cannot circumvent the law.

[TAXATION II 403 BATCH 2013 EDITION]


The 4th type is the type of product purchased that you cannot identify which activity is specifically belongs. Its a
combination of any or all of the 3.
Input tax
1.Vatable activity
2.Exempt activity
3.Zero-rated activity

1M
500k
500k
_____
2M

100k [can be recognized]


100k [cannot be recognized]
100k [can be recognized]

4.Mixed transaction (product purchased where you cant recognize which activity uses it).
If used by all 3: pro rata is: 1.5M
2M
if used by just 2: pro rata is: 1M
1.5M
using number 1:
75k + 100k + 100k = 275k is the total input tax that can be deducted against the output tax.
As a tax credit method its simple:
Output tax
Less
Input tax
if the output tax is higher = liability to the government
if the input tax is higher = tax credits which you have 2 options carry over or claims for refund.
WHO CAN AVAIL?
The input tax credit method can be availed of by the:

purchaser of domestic goods or properties


purchaser of services
importers

but in the availment or recognition of input tax, REMEMBER the DOCUMENTARY REQUIREMENTS:
INPUT TAX
Purchase of goods
Purchase of service
Importation

DOCUMENTARY REQUIREMENT: (evidence)


VAT invoice
VAT Official Receipt
Import entry declaration filed with the Bureau of
Customs

Other sources of input taxes:


Purchase of real property

VAT invoice + deed of sale or public instrument

Tranisitional Input tax

Document or list of beginning inventories that you


are required to submit to BIR days after the
transition (details list of inventory of goods)

Transaction deemed sale


(for which at some point it may produce input
taxes)
Input tax that you recognize from the creditable
withholding vat
(meaning the one that you have remitted in behalf
of the non-resident person)

VAT invoice

Tax return that you filed in behalf of the nonresident person: Monthly Remittance of VAT return
withheld
(You cannot use the invoice of that non-resident
person because VAT only applies or extends to PH

33

[TAXATION II 403 BATCH 2013 EDITION]

34


jurisdiction).
(Cannot also use the VAT O.R. because it pertains
to services)

REMEMBER:
If input taxes would arise from the purchase of goods that are directly attributable to government transactions
meaning you entered into transaction with government selling this type of property any purchase of raw materials
for that finished goods sold to the government shall be recognized of input tax but shall be treated separately.
meaning to say, the input tax from purchase of goods attributable to government sale would only be
offsetted against the output tax from government sales. It cannot be offsetted against the output tax on other
regular sales (not to the government).
So if input government, output must be also government. Separate the government from all others.
Example:
Input tax exceeded the output tax for a number of months (because VAT is paid through VAT returns filed every
month).
J-Centre: construction: 1Billion.
Input tax:
120M
Output tax:
10M (every month from the lessors)
What will happen to the difference between the output tax and the input tax?
It will be perpetually carried over. Carry over is not limited to the next quarter. Carry over until it is consumed or
until you decide to file for refund.
So you have 2 options in treating the excess output taxes:
1. carry over against your future output taxes until it is consumed
2. refund (if the law permits granting that you satisfy all the requirements)
in the J-Centre example, it cannot file a claim for refund of the 120M excess input tax.
Why?
When the law was amended in 2005, it left the taxpayer with only 1 avenue for claim for refund. It is only when your
input tax would arise from the purchase of raw materials or goods directly attributable to zero-rated sales.
If you are manufacturing micro chips and directly exporting it. The purchase of raw materials in order to come up
with those products, the input tax can be claimed as refund if the input tax exceeds the output tax.
You might be confused in thinking why would I refer input tax claim to zero-rated sales, when zero-rated sales result
to 0% vat output, so what it really says is that the excess input tax can be claimed of refund if that input tax are
directly related to zero rated transactions.
So in this example, if you have zero-rated activity of 500k, you have 0% output tax but you can claim input tax. So
the input tax offsetted against zero is zero. The excess you will have to perpetually carry it over if you dont file a
claim for refund.
ONLY IF THE INPUT TAX AROSE FROM ZERO-RATED TRANSACTION WOULD A CLAIM FOR REFUND BE
AVAILABLE.
REQUIREMENTS FOR CLAIM FOR REFUND:
1.
2.

there has been a tax that has been excessively, wrongfully, illegally collected
must be a vat-registered taxpayer
otherwise you cannot recognize input tax.

3.
4.

proper substantiation (refer to documentary requirements table)


filing of the claim or the credit claim must be made within 2 years from the close of the taxable quarter
when the sales were made. (Sec.112, NIRC)

[TAXATION II 403 BATCH 2013 EDITION]

35


Example:
Purchase of service: January 5, 2012
Assuming that you have excess input taxes because all your sales are zero-rated, until when can you file a
claim for refund if you incurred input tax today (Jan.5) of 100M.
March 31, 2014
so it is not always Jan-March, April-June, July-Sept, Oct-Dec. because taxable quarter
would vary depending if the taxpayer is using fiscal year or calendar year.
if calender year, thats when it is Jan-March, etc.
if it ends Nov.31, then the first taxable quarter is Dec-Feb.

note that the 2 years is regardless of whether the said tax was paid or not the reckoning frame would
always be the end of the quarter when the pertinent sales or transaction was made, regardless when the
input VAT was paid.
Example:
Sales were made today Jan.5. sale of goods not service. So the claim of input tax is actually in sync with the
issuance of the VAT invoice. If the actual payment was made on June 30,2012, until when should the claim
for refund be made?
March 31, 2014

5.

file the claim for refund at the BIR


how about the CTA, does it follow the same 2-year period? If today is the 2nd year (the last day for filing for
refund), should you file it before the BIR and CTA simultaneously?

JANUARY 10 NOT YET SUBMITTED [CCT]

ATLAS CONSOLIDATED MINING AND DEVT CORP V. CIR


So in a given taxable year, how many VAT returns would the government be expecting from a VATregistered taxpayer? How many monthly Vat returns are there in a given year?
You said they are required to file monthly VAT returns that will be consolidated every quarter. So how many
Monthly VAT returns are there?
Let us say for example, the first quarter of 2011, January, what will you file?
Answer: there are only 12 VAT RETURNS every year that should be filed.
8 MONTHLY RETURNS
4 QUARTERLY VAT RETURNS
That means to say that for the first 2 months of every quarter, whether its calendar year or fiscal year, you
file every month a MONTHLY VAT RETURN and for the 3rd month of every quarter, you dont need to file a
monthly VAT return. Whatever you have reflected on your first 2 months will be consolidated in the
quarterly VAT returns.
So January and February, assuming its a calendar quarter:

January VAT return


ALL MONTHLY
February VAT return
March : we call it THE FIRST QUARTER VAT RETURN

[TAXATION II 403 BATCH 2013 EDITION]

36


Hence, there are only 12.
When should the monthly VAT Returns be filed?
Answer: there is a new schedule depending on what enterprise or entity you are in.
Category

A
B
C
D
E
That is in order to avoid

20
21
22
23
24
Day of the month
congestion.

So if its monthly VAT return, you file it on the 20th, 21st, 22nd, 23rd, and 24th of the month following the
calendar month.
If its quarterly VAT return, when should it be filed?
Answer: on or before the 25th day of the month following the close of the taxable calendar or
fiscal quarter.
Going back to the case of ATLAS CONSOLIDATED vs. CIR, the subject of the refund was the 4th calendar
quarter of 1993. The VAT return was filed January 20, 1994. But we now know that the due date for filing
the 4th calendar quarter of 1993 is on or before January 25, 1994.
Was the claim for refund filed within the prescriptive period?
It was filed on January 25, 1994 which is exactly the second year from the due date of filing the VAT return.
Is it filed within the prescriptive period?
Answer: its 2 years from the close of taxable quarter when the sale is made. Its not movable.
Its not
dependent on when the tax return was filed.
Unlike in all other cases of claiming all other refund of taxes found in the tax code which is actually
reckoned from the date of filing the return and payment of the tax.
In this case, for VAT, a special requirement is that the claim for refund must be made within 2 years
from the close of every taxable quarter when the sales were made regardless of when the input tax
was paid, regardless of when the Vat return was filed.
The reason why prescription was not the center of the decision of the case of ATLAS is because it was
belatedly raised before the courts. For had the BIR questioned prescription right away, that should have
been done already in the lower court.
The discussion of SC was more on documentary requirements not having been complied with. The absence
of VAT returns made the court decide that it failed to show that the input VAT subject to the claim for refund
had not been carried over to the next taxable quarter.

What are the instances when a business may be temporarily close or suspended? a, b, and c centers on
PERSONS/ ENTITIES THAT ARE ALREADY VAT-REGISTERED. d is not yet registered under the VAT system.
a.
b.

c.
d.

Failure to issue VAT official receipts and invoices- this could have been a ground for you to
inform BIR in order for the establishment to
be
closed
Underdeclaration / understatement of taxable sales or receipts by 30% or more of its correct sales or
receipts for the taxable quarter.
NOTE: its 30% or more of the actual sales for the underdeclaration. It does not include overdeclaration of
purchases but this can be considered fraud if more that 30%
Failure to file VAT return- this means non-payment of VAT due
Failure to register when in fact, they are mandatorily required to register as such when the sales would
reach 1.919M. For example, your activities are VATable and gross receipts or proceeds during the 12 month
period is expected to reach more that 1.919M.

If a business is temporarily closed, for how long should it be?


Minimum of 5 days until there is compliance of the requirements.

[TAXATION II 403 BATCH 2013 EDITION]

37


Expected gross receipts of lawyer A is 2M while lawyer B s only 1.8M. Who is required to register under the
VAT system?
Only lawyer A. Lawyer B remains to be exempt from VAT but he is liable for percentage tax for the gross
receipts he earns or will receive from his clients.
Lawyer A obtained lawyer Bs legal services and billed A 100k. When A paid B, B issued VAT official receipt.
Did B violate the law?
B violated the law which is issuance of a VAT official receipt coming from a VAT exempt person. This will
result in: (penalties)

12% VAT if the billing is 100k it is presumed that a portion of 100k is the VAT component of the
service that was rendered because it is supported by a VAT official receipt.

The 100k will be divided according to TAX INCLUSIVE BASIS rule. We consider it inclusive of VAT.
Divide it by 112%. The 100% is considered as his gross receipt and the remaining 12% will have to
be remitted to the government as VAT
PLUS 50% surcharge
Without the benefit of claiming input tax on the purchases he made such as purchase of office
supplies, payment of rent, etc.
REASON: Not being a VAT registered person, he will not be allowed to claim input tax.
On top of that, he will be asked to continue paying the 3% percentage tax.

What is the reason why lawyer B is required to remit the 12% output VAT? The reason is that the
government recognizes the fact that even if lawyer B, the issuer of the VAT official receipt, is not a VAT
registered person and the fact that the holder of the VAT official receipt is a VAT registered person (Lawyer
A), the latter can claim input tax based on that receipt. So it is included as inclusive of the VAT component.
You remember that VAT is highly dependent on documentation. So that if lawyer A has with him a VAT
official receipt, being a VAT registered person, he can claim input tax even if he was not meant to pay the
input tax.
That is merely to offset what the government is expected to lose from the reduction of the output tax that
lawyer A will pay. With the input tax lawyer A will claim, his output tax will be reduced. Hence, that
reduction has to be shouldered by lawyer B plus surcharge.
Change the facts. Lawyer B is now a VAT registered person selling both exempt goods and VATable
goods. Lawyer A, as a VAT registered person purchased from lawyer B raw materials, agricultural products
in its original state which is exempt. Instead of issuing a NON-VAT invoice, lawyer B issued a VAT invoice.
What are Bs liabilities?
NOTE: A taxpayer engaged in MIXED transactions, meaning VATable and Non-VATable, has to register for
his VAT activities. For that, he has to maintain 2 invoices or receipts. One VAT invoice or VAT official receipt
AND a non-VAT invoice. These documents have to be issued properly. For the EXEMPT transactions, the
non-VAT invoices or official receipts will be issued.
In this case, there was an erroneous issuance of a VAT receipt by B. What will happen? The same thing will
happen. B is liable to pay VAT and surcharges and will continue to pay whatever original taxes he is liable
for.
On the other hand, A can claim the input tax because it is duly supported by a VAT invoice for the purchase
of goods.

B IR O R GAN IZAT IO N , FUN CT IO N S AN D T AX ADM IN IST R AT O N


(Se cti ons 1 to 2 1 of th e TAX CODE, as a men de d)

ORGANIZATIONAL STRUCTURE OF BIR

CIR- Atty. Kim Henares

Deputy Commissioners- they are all housed in the national office in Quezon City.

Regional Directors- those deployed in different regional area

[TAXATION II 403 BATCH 2013 EDITION]

38

Revenue District Officers- in Cebu, we are Revenue Region 13 and we have one regional director but
there are various heads of RDO
Revenue Enforcement Officers or Examiners

Scenario: One of the examiners assigned in Cebu City reported to his head, either RD officer or Regional
Director that Company A is committing tax fraud against. Company A should be assessed. Now the Regional
Director reported to CIR and asked to be issued a letter of Authority to assess Company A but CIR declined.
Who should be followed?
Even if CIR did not undertake any measure to really determine whether fraud took place or not?
Answer: the CIR, being the head of BIR decides that company A will not be assessed as long as there is no
abuse of power. It appears therefore that the CIR is the single most powerful person in the Bureau.
General Powers and Duties of BIR
A
B
see syllabus
C
So generally, BIR acts as the collecting agent of the government. Looking into the 3 general powers of BIR,
you will notice that theses are all COLLECTION OF TAXES to support the government.
GENERAL POWERS OF CIR
A- INTERPRET THE TAX CODE AND OTHER TAX LAWS
This is Exclusive and original jurisdiction. Ordinarily, a tax law has implementing rules and regulations
(IRR). For tax laws however, we call it Revenue Regulations (RR).
The issuing agency of RR is the Secretary of Finance after a recommending approval from the CIR. The
CIR has the power to implement the Tax Code and other tax laws as well.
CIR can also issue opinions. Is that different with RRs?
OPINION
That is by CIR. Its a specific interpretation of situations covering a particular taxpayer. A tax
question is involved. The CIR will then clarify that based on the specific question. Can a taxpayer
ask hypothetical question? No, it will not be addressed by BIR, both opinion and ruling.
REVENUE REGULATIONS
Issued by the Secretary of Finance with recommendations of CIR. This is not directed to a
particular taxpayer but they are general interpretations and clarifications of what the tax code is or
what the tax law is all about.
If you are not agreeable to an opinion issued by CIR, what are your remedies? It is subject to review by the
Secretary by the Secretary of Finance. The BIR is just one of theagencies under DOF. So that any opinion or
ruling issued by CIR, that is just one of its exclusive original jurisdiction subject to review still.

B. POWER TO DECIDE ON DISPUTED ASSESSMENTS, RETURNS, PENALTIES, AND OTHER MATTERS


This is within the jurisdiction of CIR not the Secretary of Finance nor the courts because of the principle of
exhaustion of administrative remedies.
DISPUTED ASSESSMENT- are simply assessments issued by the BIR that you want to question.
You actually protest this one.
So whatever protests you filed, decision will come from the CIR. But you will know later that it is one of the
powers which can be delegated. When you want to file a claim for refund before the BIR, expectedly you
may want to hear a decision coming from the CIR because the power to decide is with CIR.
When you want to question his decision, your remedy is to?
If it is a disputed assessment, it should be before the Court of Tax Appeals which has the exclusive appellate
jurisdiction, not the Secretary of Finance.

[TAXATION II 403 BATCH 2013 EDITION]

39


The difference between the first and the second power is also with the appellate bodies. For legal questions
or questions of law, you elevate that to the Secretary of Finance. For questions of fact, such as decisions on
disputed assessments elevate it to CTA.
C. OBTAIN INFORMATION
The sources of information in order to assess a particular taxpayer may be any other persons and any other
persons books of account or record.
The CIR is given a wide leeway in determining or obtaining information in order to assess a person or
determine the tax inquired.
As provided in the tax code, if the BIR, through the CIR would want to know whether there is compliance
with tax laws, to determine the correctness of the tax as they are recorded because its questionable, or to
collect tax return has been paid, the BIR can actually summon witnesses, obtain testimonies, even 3rd party
information (provided it is not an affiliate or sister company of the taxpayer subject to review or assessment
or audit).
Example: Every year, a taxpayer is required to declare his entire taxable income during the year and its
supposedly required to be filed on or before the 15th day of the 4th month following the close of the taxable
year. For the calendar year, its on or before April 15.
The LGU also has a requirement that every taxpayer, before it will grant a renewal of the permit to operate
for the coming year, it also requires that the taxpayer will declare the entire gross receipts of the past
calendar year.
So if you are coming from the BIR or the LGU, you may want to compare the data on whether or not the
taxpayer declared the same amount of gross receipts or gross income but that is not really the source of tax
collection. The taxpayer is reporting to both tax agencies. So if it is reducing one, it might as well reduce the
other one.
The best sources of information are the persons with whom the taxpayer subject to audit is in contact with.
Example: If you are trying to audit a particular professional who is receiving huge professional fees from
different companies, what the BIR has to do is to look into the records of these companies paying
professional fees as to what they declare as payment of professional fees. If it paid Mr. A 50M as
professional fees, it will have to reflect that amount in its expenses. Expectedly, the professional would
report the 50M. If the figures do not tie up, meaning the other is claiming 50M as expense and the other
claiming 20M is income, which is the correct amount? Its the 50M.
If you base it on the interest involved, it is the party declaring the expense who is the one properly declaring
the amount so that he can deduct it fully to his taxable income. On the other hand, the person earning
income may not want to declare fully the income in order to reduce his tax liability. In that way, the BIR can
just compare the data. It is made easier because they are already automated. Companies are already
required to submit in electronic forms so its easy to match.
D. MAKE ASSESSMENTS
The assessments by CIR is made by determining the correct amount of the tax that should be paid to the
government.
Is it fully dependent on the tax return filed before BIR or can there be assessment in the absence of a tax
return filed?
The CIR is not restricted in making the assessment just because there is no tax return filed. But, you have
to remember that if you file the tax return, that is an easy way for the government to determine who to
assess or audit because its already in their hands.
But that is not to say that it is better not to file a tax return at all in order for the government not to assess
you. It is very dangerous not to file a tax return because the right of BIR to make assessments and
determine deficiency taxes would run for as long as 10 years from the date of discovery of the non-filing. So
their right to audit or assess is longer in the absence of return filed.
BEST EVIDENCE OBTAINABLE

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40


If a taxpayer is subject to audit and refuses to supply books of accounts to the BIR, it is not necessarily
constrained not to audit. Even if there are no books of accounts, there are other evidences which can be
gathered by the BIR. If its not the books of accounts of the taxpayer himself, it may be the books of
account of an entity entirely unrelated to the taxpayer subject to assessment but those that are on the same
footing as the taxpayer subject to audit.
Example: If it is a company engaged in ship building and it is not reporting the correct income plus he does
not show books of accounts, all that the BIR has to do is to compare it, presume the same gross sales
available, to another company engaged in shipbuilding. They will only consider the circumstances
surrounding. So it will determine the other companies engaged in the same type of activity, belonging to the
same industry, operating on the same level. They will use the data gathered from there as the basis to
determine deficiency taxes of the company subject to assessment. The burden is actually shifted on the
taxpayer who refused to give the books of account to refute the data used.
You will learn later that the government is restricted as to time. It is given only 3 years to make an
assessment so that the taxpayer will have peace of mind. But if you dont file a tax return, that period is
lengthened to 10 years which is from the date of discovery. So parang it would have to be perpetual so
long as the BIR will claim that they have not discovered that sooner.
At this point, we have discussed that one of the means that can be employed by the BIR or the CIR to
determine the true taxable income of a taxpayer is to obtain information coming from 3rd persons and
presume that the sales of another entity operating similarly to the taxpayer subject to review is the same as
that assessed. Another is the NETWORTH METHOD.
Net Worth Method- simply a comparison of the net worth of a taxpayer subject to audit from one point in
time versus another point in time. You net worth is you assts less your liabilities.
Example: Company A reflected 100k income on gross sales in 2010, 100k income in 2011, so thats a total
of 200k for 2 years. If the government or tax authorities believe it to be an incorrect declaration of the gross
sales or gross receipts of company A and there are no other means of determining the income except the
net worth method (meaning, it is the only company operating in the line of business), it can go for the net
worth method.
Illustration:
COMPANY A
Tax return

100,000

plus

100,000

(2010)

(2011)

NW

NW

12/31/09
1M

=200,000

12/31/11
5M

So the best way is that if we are comparing the net worth, if we are actually questioning the 2 year
operation or declaration of income of 2010 and 2011, all you have to do is to get the net worth of Company
A as of December 31, 2009, just prior to the questionable year and the net worth after the 2nd year or the 2
years.
So the net worth of the company A as of Dec.31, 2009 is 1M and increases to 5M by Dec.31, 2011. Is
company A liable for deficiency tax?
Based on the net worth method it will appear that there has been an increase of 4M which should have been
reported to the government. Diba, what is GROSS INCOME under the tax code? Its income from whatever
source and it should be reflected as part of the tax return. But in this case, Company A only reflected 200k.
So the 4M- 200K which is 3.8M may be subject of the assessed deficiency tax for which as a corporation or
company, it may be subject to 30%tax on the 3.8M.
The burden nalang is on the part of the Company to prove that the increase of 4M actually came from a
non-taxable income. So if it is a winning from lotto which is exempt from income tax, it increased the net
worth of the company but is not part of the taxable income. So that is a justified increase in the net worth.
Its not taxable.

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Before going to the next power, the BIR is allowed to make assessment and question the returns that had
been filed by the taxpayer. Lets say for example, you have filed your tax return and declared income of only
100k. 2 years after, you received a notice from BIR that you will be subjected to audit on that taxable
income which you have recorded 2 years ago. Right after receiving the notice, you drafted your amended
income tax return reflecting the true income in order to avoid penalty. You wish to pay the difference the
following day, not the deficiency tax because there is no computation from BIR. Are you allowed to file an
amendment of your tax return?
Sec.6 provides that you can actually amend or modify the tax return that you have already filed within 3
YEARS FROM THE DATE OF FILING but once you have received a notice for audit or investigation,
amendment is no longer possible. REASON: The amendment is a result of an afterthought. You have no
honest intention that you really have to change the data or simply because you are afraid that the
government will find out your underdeclaration. So its not allowed if no actual audit has been undergoing. A
simple notice will bar you from filing your amendment.
E. PRESCRIBE REAL PROPERTY VALUES
Very simple. The CIR is given the power to divide the Philippines into zoning areas. These are the Fair
Market Value (FMV)we use when we determine what the taxable base of capital gains tax is whichever is
higher of the 2.
Before moving on to the moving on to the next assessment (she forgot this part), we discuss the power of
CIR to issue Jeopardy assessment.
JEOPARDY ASSESSMENT- diba there should be a formal notice of assessment? However, because of
circumstances not due to the fault of the government or beyond its control and the prescriptive period is
about to set in, the government is allowed to issue jeopardy assessment. These are the assessments
without the benefits of full audit and investigation just so to give the government the right to continue the
audit in the absence of data provided by the taxpayer due to the looming prescriptive period.
If the 3 years is about to set in, they can issue Jeopardy Assessment even if no full audit has taken place.
But this can be made only in specific circumstances.
The right of BIR to terminate the taxable period when there is indication of FLIGHT, which means:

Retiring from the business


Trying to conceal his property
Leaves the country
Tends to obstruct the collection of taxes, etc.

F. POWER TO INQUIRE INTO BANK DEPOSITS


GR.
Your bank deposits is treated with utmost confidentiality under RA 1405 (Bank Secrecy Law) and the Foreign
Currency Deposits Act. Your foreign exchanges and dollars are actually treated as confidential.
Exc.
1.
2.

I inquire into the decedents bank deposits in order to determine the true taxable gross estate.
Taxpayer has filed an application for COMPROMISE of his tax liability by reason of financial
incapacity
NOTE: Written waiver on taxpayers privileges under RA 1405 is required. Such requirement is
however not required in the first exception (you dont require a written waiver from a dead person
namanJ)

COMPROMISE WITH THE GOVERNMENT


The government is tasked with the collection of taxes and the government is not actually interested in
levying or forfeiting your properties because that is not liquid. It would still have to go through auction.
Therefore, the best option for the government is to enter into compromise with the taxpayer as to how
much he can afford in cash. What you actually learn in General Principles diba is that tax is generally
payable in money.
There are 2 grounds of entering into a compromise:

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42

Reasonable Doubt as to the validity of assessment made. No inquiry into the bank deposits of the
taxpayer
When you can prove to the BIR that you have financial incapacity to pay the assessed taxes.

The only way is to show that your bank records do not reflect otherwise. This is the kind of compromise
where the BIR can inquire into your bank deposits.
3. (3rd exception) RA 10021
Internal Revenue Service of U.S.A.wishes to avail of information regarding the bank deposits of a person
within our jurisdiction. They have to go through the CIR and not directly through the financial
institutions holding the bank deposits.
It must still be treated with utmost confidentiality and the information produced by BIR can also be used
by them to make their investigation.
This is not a simple request but a request of one tax authority to another based on the provision on
exchange of tax information provided in the Bilateral Tax Treatise that we have entered into.
INFORMATION THAT NEEDS TO BE GIVEN BY THE FOREIGN TAX AUTHORITY IN ORDER TAHT THE
REQUEST BE GRANTED
(a) The identity of the person under examination or investigation;
(b) A statement of the information being sought including its nature and the form in which the said
foreign tax authority prefers to receive the information from the Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in the Philippines or is in the possession
or control of a person within the jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person believed to be in possession of the
requested information;
(f) A Statement that the request is in conformity with the law and administrative practices of the said
foreign tax authority, such that if the requested information was within the jurisdiction of the said
foreign tax authority then it would be able to obtain the information under its law or in the normal
course of administrative practice and that it is conformity with a convention or international agreement;
and
(g) A statement that the requesting foreign tax authority has exhausted all means available in its own
territory to obtain the information, except those that would give rise to disproportionate difficulties.

G. ACCREDIT AND REGISTER TAX AGENTS


These are usually the individual practicioners, the CPAs, or the GPPs of accountants or auditors. They have to be
properly accredited in order to be persons who certify financial statements.
When the CIR denies accreditation to a particular individual or GPP, applicant as tax agent, what is the remedy?
APPEAL TO THE SECRETARY OF FINANCE (SOF)
if no decision is given within 60 days (SOF is given 60 days to decide appeal of the denial) it is deemed approved.
H. PRESCRIBE ADDITIONAL PROCEDURAL OR DOCUMENTARY REQUIREMENTS

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43


This means to say that from time to time the BIR is given the privilege of coming up with the recommendation
before the SOF additional procedural requirements. This is allowed as long as it is within the confines of the tax
code.
True or False: All of these powers of the CIR can be delegated. FALSE.
Not all.
IV. AUTHORITY OF THE COMMISSIONER TO DELEGATE POWER
GENERAL RULE: Powers of the CIR can be delegated to its subordinates with the rank equivalent to a division chief
or higher.
EXCEPTIONS: non-delegable powers are:

1.

Power to recommend promulgation of rules and regulations by the SOF


Deputy commissioner cannot come up with revenue regulations and delegate them to the SOF.

2.

Power to issue rulings of first impresison or to reverse, revoke, modify any existing ruling.
RULINGS OF FIRST IMPRESSION: rulings without an established precedent.
When the issue that has been raised by a taxpayer specific interpretation of the tax code or a tax
regulation is without any established BIR precedent it is the first time that it is raised before the BIR, it is
only the commissioner that can issue ruling on such matter.
But right now with the reorganization of the BIR, rulings or opinions of the CIR without regard if there is an
established precedent. So it takes a longer time before a ruling.
There is an administrative order issued by the BIR which provides that the term rulings of first impression
would include reversal, modification and revocation of existing rulings.
If there is an existing ruling and the CIR does not agree on an opinion issued by his predecessor, only the
commissioner can revoke, revise or modify such existing ruling. It will be of the same category as rulings of
first impression.
Can the CIR delegate the power to enter into compromise with a taxpayer or abate tax liability?

3.

Power to compromise or abate any tax liability, except assessments issued by the regional
offices involving basic deficiency taxes of 500,000 or less and minor criminal violations
Compromise: very generic. Its a contract whereby due to reciprocal concessions between 2 parties, the
government and the taxpayer, there is an agreement as to reduction of the tax liability etc.
Abatement: foregoing of the entire liability to the government (tax due, penalties, both depending on the
circumstances)
These kinds of agreements must be decided by the CIR because this will result to reduction in tax collection
of the government.
There are instances when delegation can be made:
When the tax liability is 500,000 or less and minor criminal violations.
What if the tax liability is 450k, surcharge of 25% is 100k, interest of another 100k, total of 600k liability.
May it be compromised by regional director total of 600k? YES.
Because when the assessments are made by the regional offices of the BIR, the basic tax involved is only
500k or less then a compromise can be validly entered into by the taxpayer with the Regional Evaluation
Board (Regional Level).
When you say 500k or less in amount that can be compromised or abated, it refers only to the basic tax
liability. Regardless of how much the surcharge is. Even if there is interest due from that liability, it may still

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44


be compromised provided that the basic tax due is 500k or less and assessment was issued by the regional
office.
But if assessment was issued by CIR, even if it is 500k or less, you have to deal with the level of the CIR.
ANOTHER POWER IS THE POWER TO ENTER INTO COMPROMISE OF MINOR CRIMINAL VIOLATIONS WITH
THE REGIONAL LEVEL.
BUT IN RR, it states there that if the basic deficiency tax involved or is the subject of compromise is 1M or
when the compromise level is below that which is required 10% or 40% meaning you are a taxpayer and
you wish to pay less than 10% of the basic assessed tax then it cannot be compromised by the regional
office alone. It should be compromised or the decision should come from the CIR.
If you want to enter into compromise 2 grounds:
1.
2.

when there is doubt as to the validity of the claim of the government: compromise of not less than 40% of
the basic tax
due to financial incapacity: compromise level of 10% of the basic tax.

If you come to a point where you cannot even pay the lowest level of 40% or 10% then that cannot be compromised
by the regional offices. You have to go to the national level --- National Evaluation Board --- consisting of the CIR
and more.
TAX AMENSTY: government foregoes the collection of taxes that were result of previous violations of the tax law.
(Parang) you are pardoned and forgiven. It comes from the taxpayer without the government making an
assessment. You go foreward and present yourself in lieu of no prosecution.
CONGRESS ISSUES TAX AMNESTY. BIR CANNOT ISSUE TAX AMNESTY BY ITSELF.
In compromise, there is an oustanding claim by the government, oustanding assessment and you are still on the
level that the government tells you to pay this certain amount and you taxpayer offers to pay but a lesser amount
lang.

4.

Power to assign or reassign internal revenue officers to establishments where articles subject to
excise tax are produced or kept

Why? To avoid familiarity between the internal revenue officer and the owner of the establishment keeping exiseable
articles for which tax is only due upon withdrawal from such warehouse where it is kept.

Maximum length of stay that internal revenue officers be assigned in establishments keeping exiseable articles is 2
years only. Beyond that he has to be assigned sowewhere.
But ordinarily, if you have contact with the different RDO offices of the BIR, you will notice that they are assigned
and reassigned to different RDO offices. Ordinarily, they can stay in 1 RDO for 3 years as assessor and examiner.
All of these poweres can be delegated to RD and RDO except for some.
COLLECTING AGENTS OF THE GOVERNMENT:
1. BIR
2. Collector of Customs and his subordinates: with respect to NIRC taxes on imported goods (VAT)
3. Head of appropriate government office and his subordinates: with respect to energy tax.
4. Banks duly accredited by the Commissioner of Internal Revenue: with respect to payments of NIRC taxes
authorized to be made through banks.
RULE ON ESTOPPEL
No estoppel against the government.
Estoppel runs against the taxpayer. Sometimes even the mistake of a lawyer of a taxpayer would also be the
mistake of the taxpayer.
Rationale for both: Lifeblood doctrine.

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45


PNOC vs CA
Also concerned a non-compromisable tax.
Can withholding taxes be compromised? Because we only have 2 items that can be compromised and its founded by
a revenue regulation that the situation in this case did not belong to an issue that can be compromised. Not being a
compromisable issue but still there was a compromise between the predecessor of Ong and PNOC. Still the
compromise cannot be upheld, so despite this constract since it was a mistake on the part of the previous
commissioner, the government is not estopped from continuing to collect the original assessment. It is not bound by
the invalid compromise agreement.
SOURCES OF INTERNAL REVENUE TAXES:
a.
b.
c.
d.
e.
f.
g.

income tax
estate and donors taxes
value-added tax
other percentage taxes
excise tax
documentary stamp tax
such other taxes as are or hereafter may be imposed and collected by the BIR

N IR C R E M ED IE S
Se cti ons 202 to 252 a nd 2 82 o f th e tax co de, as a men de d)

R E M ED IE S O F TH E T AX P AYE R
Se cti ons 202 to 252 and 282 o f th e tax c ode, a s a men ded)

IX. KINDS OF REMEDIES


A. Administrative Remedies
1. before payment
a. petition or request for reinvestigation or reconsideration : aka: protesting the assessment
b. entering into compromise
2. after payment (erroneously, illegally, wrongfully)
a. claim for tax refund
b. claim for tax credit
B. Judicial Remedies
1. Civil action
a. appeal to the CTA, SC
b. action to contest forfeiture of chattel
c. action for damages for its arbitrary action against you.
2. Criminal action
a. filing of criminal complaint against erring BIR officials (also includes an administrative action)
as you see in the outline there are administrative remedies and judicial remedies.
Before you invoke the courts, EXHAUST ALL ADMINISTRATIVE REMEDIES AVAILABLE.
It is more beneficial to settle before the BIR than wait for the courts judgment.
Why? If it takes a very long period of time before its finally decided and if decided against you, you will have to pay
the interest over a long period of time. So if it takes 10 years, then you have to pay interest for 10 years.
CTA has exclusive original jurisdiction over decisions of the BIR through CIR or RD.
X. TAX ASSESSMENTS BY THE BIR
ASSESSMENTS CAN BE A VERB OR A NOUN.
VERB: process of determining the real tax liability of a taxpayer. Process of investigation/audit.
NOUN: the FAN that we recognize as the demand from government to pay the deficiency tax liability.

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A. Assessments, kinds
1. Self-Assessment
on a regular basis we as taxpayers make a self-assessment of what our tax liability is. There is yet no intervention
coming from the BIR.
So if we file our individual ITR at the end of the calendar year as individual taxpayers, we are making a selfassessment. Its self-assessed because we make the computation using our own data.
2. Deficiency Assessment
- Constructive means and methods of income determination
- Tax deficiency
- Tax delinquency
Which comes first? Deficiency or delinquency?
Deficiency.
So when you are assessed of taxes by the government, it will come up with a figure, an amount that you are
required to pay. Its what is usually called TAX DEFICIENCY.
The difference between the should be amount to be paid and the amount that you have declared as your tax liability.
Whats the difference?
TAX deficiency:
You are given a schedule or date within which to settle your tax deficiency. Past that date you are already
delinquent.
CONSTRUCTIVE MEANS AND METHODS OF INCOME DETERMINATION in order to come up wit deficiency assessment
by the BIR.
1. Net Worth Method
2. Inventory taking
3. Surveillance
4. Prescribe Presumptive gross sales and receipt
In Sec. 6, the different means and methods of making an assessment.
3. Jeopardy Assessment
one of the bill of rights is that no person shall be deprived of his property without due process.
Thus, the BIR cannot arbitrarily issue an assessment letter stating that this is the amount that you are liable for.
GR: Every assessment notice that you receive should comply with all the requirements otherwise its void.
Exception: Jeopardy Assessment.
This is even if without the full audit that is expected from the government but because the full audit cannot be made
or beyond the control of the government then it shall be interpreted in favor of the government just so in order to
make an assessment before the prescriptive period sets in, the government can issue Jeopardy assessment. Simply
because its due to the fault of the taxpayer audit was or cannot be made.
4. Disputed Assessment
Assessment / Final Assessment given by the BIR and its questioned by the taxpayer.
In the CTA law, one of the exclusive and orig juris of the CTA is to decide appeals of BIR decisions on disputed
assessments.
If there is an assessment and not questioned by the taxpayer, its not a disputed assessment.
5. Illegal and Void Assessment: if the assessor is acting beyond the power given to him or he has no power to act
at all in assessing the taxpayer.
if a RDO issus an assessment even without the directive of the commissioner/authority of the commissioner = illegal
assessment.

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6. Erroneous Assessment: assessor has the power to act in the assessment but errs in exercising such power.

Assessment process which begins with letter of authority. it is a letter coming from BIR indicating revenue officers to
conduct audit. its actually a letter directed to a particular taxpayer with mention of revenue officer who is assigned
for tax audit or investigation.
what are contents of letter of authority? the letter starts off with addressee and it must be identified with
particularity, if you are directing it to a taxpayer such as corporation then put it in a name registered in SEC, if sole
prorprietorship, name of sole propriertor and address of taxpayer.
there must be name of taxpayer, address and BIR examiner who are assigned, objective of letter of authority is to
determine true tax liability of taxpayer and what must be identified?. you said a while ago type of taxes audited? can
it income tax, vat, doc stamp tax? yes. can it all internal revenue taxes?
Still covered by LOA. so since it provides internal revenue taxes, still type of tax is limited to confines of tax code.
how about saying that its internal revenue from 1997, valid or not? yes. in one case, Sony Philippines. its says
unverified prior years. so presumable taxpayer us operating on a fiscal basis. SC ruled by saying with regard to
issuance of any assessments there must be a grant of authority. such authorization may be carried over by any of
its revenue officers. authority was limited to 1997. class when it was stated in LOA, that the audit shall cover period
1997 and unverified prior years it was invalid, it should be specific as what books of account it will be subjected to in
investigation. probably the reason there why 1997 and unverified blah blah is probably taxpayer is operating on a
taxable year other than calendar basis. but it would have been easier for the BIR authority to fiscal year 1997 or
1998, remember that when a taxpayer operates on a calendar year basis, we call 2011 as taxable 2011 but if
operates on a fiscal year basis which ends on any day other than dec31 ex. march 31, fiscal year, we call it fiscal
year ending 1998, if LOA would have simply said audit for investigation is fiscal yr 1998, so the coverage would have
been valid, april 1 of 1997 and ending in mar 31 1998 because we always mention of the year of the last month so if
its ending mar 31 1998, fiscal year 1998 even if there are more months in 1997. in this case, all assessments of
deficiency tax covering 1998, held as invalid? those covering jan to mar 1998, yes? because it is no longer covered
by LOA, so LOA should provide, who the taxpayer is, where is his principal place of business, the particular years
subject to audit and the type of taxes that will be audited, although all revenue taxes are considered as valid not
when you say all taxes.
who should sign LOA? can include RDO. but no examiners. powers of BIR is also on the commissioner, such as the
power to make assessments but BIR can delegate this power because this is not one of those prohibited to be
delegated.
the power to issue LOA also belongs to regional director.
what if CIR issued LOA to company A, can regional director of cebu also issue LOA to the same company? on the
assumption that it pertains to same taxable year, same type of tax.
let us say CIR has issued LOA covering covering 2010 internal revenue taxes of co. a, that issuance of LOA would
already pre-empt regional director from issuing the same LOA covering the same title of tax, because the
commissioner being head of BIR would have actually, his issuances or LOA would be over and above that which has
issued.
what about Letter Notice, is LN the same as LOA? so basic diff bet LOA and LN is that? partial investigation or
examination of the available records submitted by taxpayers such as tax returns already filed vis a vis documents
already obtained.
it begins with availability of tax return, If you submit tax return to BIR, BIR can actually make or conduct
examination of the return itself compare it with other records of other taxpayers, it can come up with computation of
deficiency taxes. with that the benefit of the full audit investigation of books of accounts. with that type of
examination, government actually skip the issuance of letter of authority with that type of tax but it does not
preclude the government from conducting an audit. so when partial audit or examination is made based on available
returns, the result is reflected in LN, if you receive a love letter from BIR it may be LOA or LN stating tax deficiencies
and inviting you to reply to such. although they may be of different contents, the effect of those letters if you receive

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any of those would be the same I so far as your right to what? despite a seemingly different contents of what an LOA
has and what LN has, it would have same effect as to right to make an amendment or modification of your return. if
you are given by government the right to amend, modify the tax return which you have filed within 3 yrs from filing
of such document, you would be precluded from modifying and amending once you have receive notice for audit and
investigation so once an LOA, any changes would be considered as an afterthought, with more reason will you be
precluded from changing, modifying or amending your tax return if you have received a LN. LN actually identified
alleged tax deficiency. if you modify the same return that has been subjected to a LN, you are actually simply, the
government cannot allow that one because it would simply be an afterthought in your part, in order to avoid
surcharges, you would amend such return, you are no longer allowed because the government has already identified
and alleged deficiency.
Formal process would start in receiving a LOA. its the formal audit. once you have received from BIR, what can you
expect? you would be invited to an informal conference embodied in a notice.
if you have an invitation of an informal conference, it is an indication that you attend. its a discussion with BIR.
initial finding is contained in what document? preliminary assessment notice (PAN)
usually you are given notice of informal conference, reply within 15 days from receiving notice, can you disregard
the notice of informal conference? yes. will it not result to any alleged tax deficiency be final and legally demandable
on your part? so class w/ your notice on informal conference on hand, you have the option to actually attend
informal conference or not, you need to give a reply within 15 days to inform them whether you attend or not, so
what wilil really take place in informal conference? although you have the option to decline or attend the invitation, it
will be better to attend the conference to be able to informal arguments so as not to be converted into a formal
assessment notice later on and will not reach judicial courts. so take advantage of it, nonetheless, as we said, you
can ignore it and if you ignore the notice of informal conference, or even if you have attended but all arguments
were not accepted, what is your next step? they will issue PAN, preliminary or pre-assessment notice.
so is informing taxpayer that after due consideration of what transpired or have not transpired during informal
conference, it is found out that the taxpayer has alleged tax deficiencies as follows, facts, legal basis, does it contain
demand to pay? no.
how will you react to PAN? you will make reply within 15 days.
is PAN mandatory? yes. in all cases. as GR. so every audit as a GR should go through stage of PAN but there are
exc. why is there a requirement to give mandatory PAN? to appraise taxpayer of alleged tax deficiencies, to give due
process, to avoid violations of bill of rights. should PAN be mandatorily replied otherwise tax will be legally
demanded? Tax code does not provide that you mandatorily provide a reply or protest to PAN otherwise will be due
demandable already. so you have the option, to reply or not.
when you wish to reply, you have to do so within prescriptive period of 15 days from PAN.
mandatory.

but we said not

what happened in case of metro star? there was a FAN issued. no PAN. in this case is it not that there is a
presumption, that officers of government has regularly performed the duties in conducting assessment process such
that a pre-assessment notice was released? there is a disputable presumption in favor of a government that the
assessment notice was really released mailed and sent to tax payer but once there is a direct denial coming from
taxpayer like it has not received such PAN then burden is shifted to the government to prove. the proof of
presumption would only lie or hold true if government can prove that? what goes with presumption is that
government has to prove that government really mailed such PAN and properly addressed to taxpayer, in this case,
gov failed to prove documentary proof that it mailed PAN, what docs could have been submitted? return card, or if
its is lost, the alternative would be certification from post office.
taxpayer in this case raised defense, SC absence of PAN given to taxpayer proves fatal assessment notice and PAN
invalid in absence of due process. one of defenses is case of menguito where government says, lack of PAN is not
fatal to assessment process. where lies difference?
case of menguito? aside from fact taxpayer failed to testify the failure to receive PAN, that means to say that to deny
nonreceipt of PAN would uphold presumption that it receive PAN, this was actually based on old tax code, wherein it
is not mandatory requirement of PAN. just think of it based on old tax code.

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GR: PAN is mandatory
SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings: provided, however, That a
preassessment notice shall not be required in the following cases:
EXC.s
1.

See sec228 (a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
-

2.

3.

228 (b) When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or
-

so this concerns withholding taxes. when you are charged or designated to act as withholding agent,
you are also obligated to remit amount withheld.

there is no need to accord due process because you have under remitted taxes in favor of government

228 (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over and automatically applied the same amount claimed
against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or
-

4.

why PAN not necessary? when there is excess taxes in whatever form. you have 2 options which cannot
be simultaneously be made
a.

apply for refund to take it out from tax return because it has no longer part of your tax excess

b.

let it remain in tax return, carry it over to next quarter until consumed

if you avail of 2 remedies, resulting to lower tax collection for government

228 (d) When the excise tax due on exciseable articles has not been paid; or
-

5.

so in that case, you dont need to be reminded that your tax tax return must have obvious
mathematical error, if there is a deficiency, BIR can go directly issuance of PAN,

if you what you not paid are excise tax, they can proceed issuance of FAN

228 (e) When the article locally purchased or imported by an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to nonexempt persons.
-

vat exempt person. in this case, not only technical importation, remember in VAT, technical
importations are vatable. this one covers importation only because it covers local purchasers covered
only by exempt persons. if exempt persons purchase locally and it is granted exemption. and transfer to
another person is not tax exempt. supposedly if a tax person transfers to non-exempt subject to tax. no
PAN is necessary

after receipt of PAN, you can reply or ignore it. gov issued a decision denying arguments raised in your reply. what
will government do? it will issue FAN with formal letter of demand.
Case of Gonzales what makes a FAN valid is not the control number. in order to fully appraised and give due notice
to the taxpayers, it must contain not only the facts, but also rules regulations jurisprudence but also the
assessments upon which it is based. also it must provide tax liabilities and demand of payment.

Letter of Authority (LOA) must state with particularity:


a. The correct name of the taxpayer

[TAXATION II 403 BATCH 2013 EDITION]

50


b.
c.
d.
e.
f.

His registered address with BIR


The type of tax that will be audited
The taxable year covered
Name of the revenue officers charged of the audit or investigation
Number of days the BIR is actually expecting to receive or be able to look into the books of account of
the taxpayer


So long as a valid LOA has been issued, the BIR can commence with the audit or investigation as early as 5 days
after the receipt of LOA or 15 days for example. But, some may take a number of months which may lead to the
taxpayer questioning the validity of LOA.


NOTICE OF INFORMAL CONFERENCE (NIC)

When audit/investigation is conducted, the BIR is expected to come up with the result which will be stated in
the NIC. This apprises of the taxpayer of what took place during the audit or investigation and will invite the
taxpayer to an informal conference. During this stage, the taxpayer may attempt to contest whatever has been
made as an assessment of the BIR.

But, the taxpayer can ignore the NIC even if it is with an invitation to reply or comment within 15 days.
Regardless of what the taxpayer s actions are in response to the NIC, it will not make the assessment final as
yet. If the NIC leads to a negative result (meaning the taxpayer was not able to come up with a mutually
acceptable decision/arrangement), the BIR can proceed to Pre-Assessment Notice (PAN).


PRE-ASSESSMENT NOTICE (PAN)

Merely a preliminary to what is forthcoming to a Final Assessment Notice (FAN). PAN contains:
a. Findings
b. Stating the facts, legal basis of the assessment
c. Computation, etc (but not as yet the categorical demand for the payment)

The taxpayer is expected to make a reply within 15 days stating therein his arguments if he does not agree with
the findings. Just like PRN/NIC, its not mandating to make a reply but it would be more advantageous for him if
he does. The prescriptive period in making a reply is 15 days.

If the amount remains unpaid or there was no reply to the PAN, the next step is for the government to issue FAN
with a formal letter of demand.

NOTE: All these steps must take place within the period of 3 years which is generally the prescriptive period in
making an assessment.

So the verb assessment and the noun assessment must take place within the prescriptive period of 3 years.

Question: should a Final Assessment Notice be in a particular form?
Answer: No. So long as it is a written notice, assessing you and containing there everything. The practice now of
the BIR is to issue documents, one for the assessment notice and the letter of demand.

C. GOVERNING PRINCIPLES OF TAX ASSESSMENT

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51


Lifeblood doctrine supports the presumption that the assessment is correct and made in good faith. Whatever
the government has done, you presume that that is done to support the government. Moreover, acting on such,
the revenue officials are presumed to regularly perform their duties.

D. REQUISITES OF A VALID ASSESSMENT

a. It must be in writing and need not be in a specific form
b. Directed against the taxpayer
c. Properly addressed
d. Containing all the facts, details of computation, legal basis, and the revenue regulations, and the
jurisprudence supporting the assessment
e. Categorical demand to pay the assessment ( without the demand, it cannot be considered a FAN as yet)
f. Must have been issued within the prescriptive period and if the period is extended, it must be issued
during the extended period.

Case: CIR v. Enron

The preliminary 5 day notice was not yet the FAN but it was protested. FAN must state the factual and
legal basis of the assessment. Whatever transpired in the previous advices or notices of tax deficiencies
could not answer for the deficiency in the FAN. Even if everything else is discussed prior to the FAN, it
should still be reiterated in the Formal Assessment Notice.

Case: Lucas Adamson v. CA

The affidavit was not the FAN required because it did not contain the legal and factual basis. It was not
likewise properly addressed to the taxpayer and there was no demand against the taxpayer to pay.
Therefore, nothing was there to protest to.

FAN is not a pre-requisite before a criminal case of tax fraud can be filed because the crime is
consummated the moment the taxpayer knowingly and wilfully makes a fraudulent tax return.

Question: will a FAN be valid if the facts and the law are not contained in it but is very well enumerated and
discussed in the PAN?
Answer: No. In the FAN, there must be a reiteration of the facts and legal basis, etc.
Question: may it be validated by an intelligent protest of the taxpayer (the FAN issued without stating the
legal basis)?
Answer: no. Even if the protest is valid and the FAN is lacking in a particular item that is required, that FAN is
void. There is nothing to protest to in that case.
NOTE: the issuance of a Letter Notice (LN) does not preclude the BIR from issuing another Letter of Authority for
the same taxable year, covering other taxes.

E. WHEN ASSESSMENT IS DEEMED MADE

The FAN must be given to the taxpayer within the prescriptive period of 3 years.

Example: CY 2008 Income Tax





-Calendar year basis ends on Dec.31.
Filed on Apr.15, 2009

Annual Income tax return should be filed on or before Apr.15



2010
-if its on a fiscal year basis, its on or before the 15th day of the



2011
4th month following the close of the fiscal year

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52




Apr.15, 2012
example: FY ends on June 30, so the tax return should be filed





On Oct.15 of the same year





-if its CY, it will really cross the next year
So all the steps must transpire just before Apr.16 because the last day to issue assessment is Apr.15, 2012

Question: if FAN is delivered to your office and which is received by you on Apr.16, 2012, did BIR make the
assessment within the prescriptive period?
Answer: The facts are incomplete. There is no mention of when the FAN was sent, released or mailed.

So the answer should be that so long as it was sent, released or mailed by the BIR prior to prescription, it is still
considered to have been made within the prescriptive period, regardless of when the taxpayer has been able to
receive the FAN.

2 Modes Recognized by BIR
1. REGISTERED MAIL- there are a number of days involved
2. PERSONAL DELIVERY

So assessment is deemed made so long as the FAN is mailed, registered, released or sent within the prescriptive
period regardless of when it was actually received by the taxpayer.


Case: Barcelon vs. CIR


There was a direct denial of the receipt of FAN. Although there exists a presumption in favour of the
government that it is mailed or sent in the ordinary course of mailing and received by the taxpayer, that
presumption only applies if it was properly addressed and was in fact mailed.

That presumption would not exist when there is direct denial by the taxpayer. In this case, the taxpayer
only came to know of the FAN only when it received the warrant of distraint or levy. What the BIR could
have done was to show the registry receipt or the return card or a certification from the Bureau of Post.

At the end of the day, there must be a receipt of FAN by the taxpayer in order for us to say that the
taxpayer had been appraised. We dont just follow the date stated in the assessment.
Actually, the government can proceed to file a tax collection case without a FAN and with more reason that the
government can file a criminal tax fraud case without any FAN issued. Here, simple non-payment of tax is
already a violation.

XI-PERIOD OF LIMITATION UPON ASSESSMENT

A-GENERAL RULE

Within 3 years after the last day prescribed by law for the filing of the return OR from the day the return
was filed, in case the return was filed beyond the period prescribed by law.

Question: when do you reckon the 3 year prescriptive period?
Answer:
1. From the last day prescribed by law for the filing of the return
2. OR in case of late filing of the return, from the day the return was filed.
Example:

1. CY 2010 Income Tax

[TAXATION II 403 BATCH 2013 EDITION]

53


Return was filed and taxes paid: Apr.20, 2011
If filed later than the due date, so you use the




2012
later date; it affords the government the entire




2013
3 years, regardless of whether you filed it on
BIR is allowed to assess until Apr. 20, 2014
time or later than the due date.


NOTE: so, if you file it 2 months later than the due date, we dont stick to the due date in counting the 3-
year prescriptive period because you are depriving the government 2 months to audit. Its not anymore 3
years to make an audit. Thats why it is from the due date or the later period of filing.







Any early date of filing will not benefit the
2. Return filed:
March 30, 2011
taxpayer in order to shorten the 3-year
2012
prescriptive period. So the government will still
2013
start from the due date.
Prescriptive period: Apr.15, 2014

Case: CIR vs. Mirant Navotas
There should be different reckoning points for different kinds of taxes. This case involves an audit of
income tax, expanded withholding taxes, and VAT.

Example:
A. for the VALUE-ADDED TAX ( the subject of audit/assessment is the 2nd quarter of VAT of the yearr1995
and was due for filing on July 25, 1995)
Illustration:
1st quarter
Jan
Feb
Mar
nd
2 quarter
Apr
May Jun


Jul
Aug
Sep

3-year prescriptive period ends on July 25, 1988

B. INCOME TAX- we only have one prescriptive period for audit and it is the filing of the final income tax
return
Example: If Fiscal year- March 31

Prescriptive period- July 15



If calendar year- on or before the 15the day of the 4th month following the close of the fiscal
year which is Apr.15

C. EWT- taxes withheld by a person by his purchases of his goods and services
Just like withholding tax on compensation (the salaries of your employees). The difference lies on the
kind of payment that has been withheld of tax. EWTs are withholding taxes on your purchases of goods
and service, the supplies you purchase, payment to your landlord, to any service contractors, etc.

So whatever you withheld is required to be remitted on the 10th Day of the Following Month.

Example: if you make purchases today and you withheld 100k, you are supposed to remit it or file a
return on not later than the 10th day of the month following.

It applies to ALL kinds of withholding tax (whether its a final withholding tax or EWT or withholding tax
on salaries or wages).

[TAXATION II 403 BATCH 2013 EDITION]

54



So it should be the 10th day of the month following the close of the month when you withheld the tax.
Example:
WITHHELD

REMIT TO GOVERNMENT
PRESCRIPTIVE PERIOD




For January 2012 ---------------- Feb 10, 2012--------- Feb 10, 2015

NOTE: EWT/FWT is treated as FINAL on a monthly basis.

D. CAPITAL GAINS TAX- to be filed and the tax paid 30 days following the transaction
Example: So Atty. Tiu will have to give a date of transaction, compute 30 days thereafter and count the
3-year prescriptive period from there.


AMENDED RETURN

Example: You filed your income tax return but you realized that there was a mistake.

CY 2010 Income Tax Return

(you filed it EARLIER to a
FILED ON:


March 30, 2011
void long line in the bank)


(for the losses not covered
AMENDED RETURN FILED ON: MAY 31,2011
by insurance, etc. that
should have been included)

Prescriptive period starts from MAY 31, 2011 because the subject of change or amendment is
substantial.
(Tiu said, diba, if you have losses you dont have tax liability. You increased your loss, with more reason
that you will have zero tax liability.)J

SUBSTANTIAL CHANGE
Anyway, change is substantial when the tax liability of a person is changed. A change of telephone
number for example is not substantial ha.

Question: why did you say that the amendment changes the tax liability of the taxpayer when in fact
there is no tax liability in the 2 instances?
Answer: Losses can be carried over to the next succeeding year. Although we said that its substantial
when it affects the tax liability of the taxpayer, it does not zero-in only when there is a change of how
much tax is due to the government. In this case, even if its just a mere adjustment of losses, since losses
can be carried over to the next taxable year, it will affect the taxability of that entity of his next
performance or the next taxable year. Thats why we said that its substantial because it substantially
affects his tax liabilities not necessarily this year but in the succeeding year(s) because remember, it can
be carried over up to the 3 subsequent years.

WRONG RETURN
(meaning, you used the wrong form) The 3-year prescriptive period will not generally apply up until you
make the amendment or you change it to the correct form.

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55


NOTE: When no return is required to be filed, meaning its not a regular requirement just like in the
income tax, you are required to submit a return quarter in and quarter out and that is annualized at the
end of the year. So whether or not you have an income during the quarter, since you are expected to file
a quarterly income tax return, then you have to file one.

But there are certain types of taxes that do not require you to file a return UNLESS there is an event that
took place. An example o f that is IAET (Improperly Accumulated Earnings Tax). You are not required to
file every year because you are not expected to be liable to it every year. But when you have IAE, then
necessarily, you have to file.

So, again, when there is NO RETURN REQUIRED TO BE FILED, you cannot use the 3 year prescriptive
period as a defense against the government.

Follow the 10-year prescriptive period.


B. EXCEPTIONS (2 exceptions)

1. WITHIN 10 YEARS AFTER THE DISCOVERY OF THE FALSITY, FRAUD, OR OMISSION

False return

vs.


Fraudulent return
-So long as you dont



fraudulent intent to evade the

Have the intent to evade



payment of taxes and the
The payment of taxes



omission to file a return


-False return resulting to



fraud must be ACTUAL fraud

Heavy losses to tax




and not simply constructive

Collection; not the mere



fraud which cannot be easily

Small error which can be



imputed because it would have
Determined on the face



heavy penalty to the taxpayer
Of the return




(eg.50% surcharges)


NOTE: 10 years from DISCOVERY OF
Falsity or fraud OR
From the discovery of non-filing of the return
(not 10 years from the date the return has to be filed)

So it appears that so long as the government denies having knowledge, it is IMPRESCRIPTIBLE dibah? J since
discovery is a state of mind.

Case: CIR vs. Tulio

Tulio did not file a tax return prompting BIR to file a return in his behalf that is why the RTC and the
taxpayer had the idea that the return (voluntarily filed by BIR) was filed on 1990. So counting from 1990
when it was filed and 3 years thereafter which is 1993, they said that the 3-year prescriptive period had
already ended. The collection however was filed on 1997 when BIR filed the case.

Supreme Court said that the return filed by the BIR should not be made as the basis because the taxpayer
did not actually file any return at all. Non-filing/omission to file a return will give the government 10

[TAXATION II 403 BATCH 2013 EDITION]

56


years to make an assessment from DISCOVERY, not from the date the return was supposedly required to
be filed as none was filed by the taxpayer.

2. WHERE THERE IS A WAIVER OF THE STATUTE OF LIMITATIONS

There must be mutual agreement between the taxpayer and the BIR to extend the period of time to
assess.

If the BIR sends you a letter to waive in its favour the time to assess, your first instinct would probably
be that you would not sign. The government cannot possibly complete the entire process to come up
with the FAN because all the steps have to be complied by the government as required by DUE
PROCESS. You would want to let it prescribe in your favour diba? (But you may not have any other
option but to succumb to their request because you wouldnt know, the following morning you will
receive na so many tax liabilities.)J

REQUIREMENTS FOR A VALID WAIVER OF THE 3-YEAR PRESCRIPTIVE PERIOD
1. The waiver must be in the proper form prescribed by RMO 20-90. The
phrase but not after ______ 19 ___, which indicates the expiry date of the
period agreed upon to assess/collect the tax after the regular three-year period
of prescription, should be filled up.
2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any
of its responsible officials. In case the authority is delegated by the taxpayer to
a representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver
indicating that the BIR has accepted and agreed to the waiver. The date of such
acceptance by the BIR should be indicated. However, before signing the waiver,
the CIR or the revenue official authorized by him must make sure that the
waiver is in the prescribed form, duly notarized, and executed by the taxpayer
or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the
Bureau should be before the expiration of the period of prescription or before
the lapse of the period agreed upon in case a subsequent agreement is
executed.
6. The waiver must be executed in three copies, the original copy to be
attached to the docket of the case, the second copy for the taxpayer and the
third copy for the Office accepting the waiver. The fact of receipt by the
taxpayer of his/her file copy must be indicated in the original copy to show that
the taxpayer was notified of the acceptance of the BIR and the perfection of the
agreement.

CIR vs. FMF



There was a defective waiver because:

[TAXATION II 403 BATCH 2013 EDITION]

57

a. It was the Revenue District Officer who signed when in fact, it must be the CIR who should
sign since the tax is more than 1M.
b. It was not proven that the BIR furnished FMF with a copy
c. It did not contain the date of acceptance by the CIR

CIR vs. Kudos

There was a defective waiver because:
a. The taxpayer was not represented with the proper Special power of Atty.
b. The waiver failed to indicate the date of acceptance
c. The fact of receipt by Kudos of its copy was not indicated


XII- SUSPENSION OF THE RUNNING OF THE STATUTE OF LIMITATION FOR MAKING AN ASSESSMENT
1. When the Commissioner is prohibited from making the assessment
2. When the taxpayer requests for the reinvestigation which is granted by the Commissioner
When you say a taxpayer makes a request for reinvestigation and is granted by the CIR,
it suspends the running of the 3-year period. How do you make a request for
reinvestigation? What is that?
A request for reinvestigation refers to a plea for reinvestigation of an
assessment on the basis of newly-discovered or additional evidence that a
taxpayer intends to present in the reinvestigation.
If a request for reinvestigation is made but its not granted by the CIR, would it suspend
the running of the prescriptive period? NO.
For how long will the prescriptive period be suspended?
It is suspended during the time that the CIR is actually making the
reinvestigation and will resume again once a decision has been made.
3. When the taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected; provided, that if the taxpayer informs the
Commissioner of any change in address, the running of the Statute of Limitations will not be
suspended
If a taxpayer transfers its principal place of business from one building to the other
within I.T park and the FAN cannot be served, will it at all times suspend the running of
the prescriptive period?
NO, because the prescriptive period will only be suspended if the taxpayer failed
to inform the CIR of his change of address, so in case that he informed the CIR of
his change of address, then the running of the prescriptive period will not be
suspended.
How would a taxpayer inform the CIR of the change of address? Can he simply change
his address in the return and make it official for purposes of making as assessment? Lets
say youre registered within the Cebu City District. You change your business to
Mandaue, therefore, you belong to another revenue district office. You physically
change your business operations but you did not go through the process of informing

[TAXATION II 403 BATCH 2013 EDITION]

58


formally the BIR. What you did was simply that in the subsequent returns that you filed,
you simply place there Mandaue City. Is that proper information to the BIR of the
change in address?
NO. There is a legal procedure for changing your address in so far as the tax
authorities are concerned.
Whenever you start-up a business, you register your business and it has a
definite principal place of business. If you change an address, you have to file a
return specifically for the purpose of changing your address with the current
district office and it has to be transmitted to the other district office of the BIR.
Thats the proper legal procedure.
If that has been legally made by you and the tax authorities still sent the FAN to
your old address despite the proper procedure taken for change of address,
then FAN would probably have prescribed or it will prescribe if its not actually
received by you because you properly informed the government.
4. When the taxpayer is out of the Philippines
5. Warrant of Distraint or levy is served upon the taxpayer but no property is found
Example: Your address in the BIR is Brgy.Casambagan. You transferred to a different addressed
and you already informed BIR of such change. When the BIR issued you a letter, it was sent in
the old address in Brgy.Casambagan. 3 years had lapsed. Bir tried to proceed with the audit.
Here, the right of the government already prescribed since you already informed the BIR of your
change of address.

Case: Estate of Late Juliana Diez vs. CIR
The BIR cannot invoke the suspension of the prescriptive period. The wrong service to a
taxpayer would not toll the running of the prescriptive period because it was not due to the
fault of the taxpayer but that of the government.
NOTE: REQUEST FOR RECONSIDERATION does not toll the running of the prescriptive period whereas REQUEST
FOR REINVESTIGATION suspends the running of the prescriptive period. In the latter, new evidence is
presented.

Case: Manotok vs. CIR


Motion for reinvestigation was granted and there was an issuance of revised FAN. So the period from the
request up until the issuance of the Final Assessment Notice is the period of suspension. You take that
out from the 3 year period. Do not include that n the counting of the prescriptive period. But, when the
FAN is already issued, then you start the running of the prescriptive period. (end)

XIII. ADMINISTRATIVE PROTEST TO THE ASSESSMENT


IF YOU FAIL TO FILE THE PROTEST ON TIME:
MAKES it final, unappealable, tax demandable.
If the protest is incomplete or defective: treated as void as if no protest at all. Assessment becomes final,
appealable and demandable.

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59


FAN considered final, unappealable and tax demandable if no RSD submitted.
Can a FAN be directly appealed before the CTA without protesting before the CIR?
GENERAL RULE: NO.
EXCEPTION: Estoppel because taxpayer was made to believe that appeal was the remedy in the FAN given to
the taxpayer. (Allied Bank vs CIR).
The FAN itself directed the taxpayer to appeal, rather than protest it.
What did the SC say about the word APPEAL refers to the remedy available to the taxpayer before the
CTA. It connotes a judicial remedy.
There should have been used the words protest, request for reconsideration or reinvestigation instead of the
BIR using the word appeal.
See Atty Tius illustration
YOU ARE given 30 days to file an admin protest.
An admin protest would not be recognized without RSD.
What is RSD (Relevant Supporting Document)?
First express Pawnshop:
Alleged DST deficiency because of every stock subscription there must be DST. There was no subscription yet
but the SH already paid in advance DST.
No proof of payment was submitted by Pawnshop because there was no subscription yet.
SC: relevancy of RSD does not rest with the BIR. GIS balance sheets were considered by the SC to be RSD.
These were submitted together with the protest.
But according to the NIRC, the normal time for filing RSD is 60 days from filing of protest.
But it can be submitted together with the admin protest or even before.
When is it before admin protest? Reply to the pre-assessment notice.
Atty T: just to be sure, it would may be wise to resubmit.
Again it can be before, during and after but not beyond 60 days from filing of the protest.
Note that BIR can ask for additional documents from the taxpayer.
In the illustration, if the taxpayer filed everything before the deadline.
Is the government mandated to render a decision within a certain time? NO?
The 180-day period is just to give the taxpayer another remedy to raise the case to CTA if no decision comes
out of the BIR if no decision comes out within the 180-day period.
2 things that can happen after protest and RSD:
1.BIR renders a decision
2.BIR does not render decision.
If decision is favorable, end of story.
If decision is unfavorable, and if no action during the 180-day period, then you can appeal to the CTA within
30 days from end of 180 days from submission of RSD, or from receipt of the decision of the protest. This is
an APPEAL TO THE CTA IN DIVISION.
180 days start from RSD.
If you submit RSD together with protest, then start counting from filing of protest.
If you submit the RSD before the protest, count 180 days starting from the filing of protest, do not backtrack.

[TAXATION II 403 BATCH 2013 EDITION]

60


If you availed of the 180 days, you cannot anymore appeal once the decision of the BIR comes out.
When the 180 days lapses, you can just ignore it and just wait for the CIRs decision. This is the tenor of the
tax code.
CASE: PHILAM PLANS VS CIR
On the BIR perspective, it is not mandated within 180 days. Can issue decision beyond 180 even if the
taxpayer already filed an appeal.
In so far as the taxpayer is concerned, he has 2 options. But whatever decision of the BIR comes out, the CTA
will decide on its own. It does not mean that the CIRs decision will prevail over the CTA decision.
WHO SHOULD RENDER A DECISION TO A PROTEST?
Not always the CIR. The Regional Director can decide a protest.
Can the decision of the RD on the protest be a basis of the CTA to acquire jurisdiction? YES.
But if you appeal to the CIR, you have to wait for the CIRs decision before appealing to the CTA. But if the
CIR does not render a decision within 180 days then you can go na appeal to the CTA, or you can just wait for
the decision, and if adverse appeal the CIRs decision to the CTA.
AFTER CTA DIVISION,
MOTION FOR RECON WITHIN 15 DAYS,
THEN CTA EN BANC,
THEN 15 DAYS TO SC AFTER DECISION OF CTA EN BANC.
***
ON TRANSACTION DEEMED SALE:
If the merger or consolidation is not solely in kind, subject to VAT and income.
If solely in kind, entirely tax free.
- Chris T.

QUICK GUIDE ON ASSESSMENTS:


The Government can still assess you within 3 years from this periods starting from:
VAT:
25TH day of the month following the close of the VAT Quarter.
EWT: (all kinds of withholding taxes)
10th day of the month following the close of the month when payment was made.
Stating it in another way:
EOM (End Of Month) + 10 Days.
ITR: (income tax)
FISCAL YEAR:
15th day of the 4th month following the close of the taxable year.
CALENDAR YEAR:
April 15 of the year following the close of the taxable year. (so if TY 2009, then April 15, 2010)
CGT Capital Gains Tax
30 days from the sale or transaction

***

one more thing

[TAXATION II 403 BATCH 2013 EDITION]

***
God bless us all!

NJ

61

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