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Taxation Law
Things necessary to be put in your head
GENERAL PRINCIPLES
Fiscal Adequacy - sources of revenues must be adequate to meet government expenditures and their
variations.
Theoretical Justice - The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
Administrative Feasibility - Tax laws must be capable of effective and efficient enforcement.
SITUS OF TAXATION
KIND OF TAX SITUS
Poll/Capitalization/Community Residence of the taxpayer, regardless of the
source of income or location of the property of the
Tax taxpayer.
Property Tax
Real Property Where the real property is located, following the
doctrine of Lex rei sitae or lex situs.
Personal Property Wherever it was actually kept or located, following
the doctrine of mobilia sequuntur personam
(Movables follow the person)
Excise Tax On the place where the act is performed or
occupation engaged in.
Value Added Tax The place where the transaction is made. If the
transaction is made (perfected and consummated)
outside of the Philippines, then we can no longer
tax such transaction.
Income Tax
Non-resident alien Sources of income derived from within the
Non-resident foreign corporation Philippines
Non-resident citizen
Resident citizen Sources of income derived from within and
Domestic corporation without the Philippines
Resident alien Sources of income derived from sources within
Resident foreign corporation the Philippines
Estate and Donors Tax (same rule applies!)
Non-resident Alien Properties situated within the Philippines
Resident/Non-resident citizen Properties wherever situated
Resident alien
MISCELLANEOUS NOTES
The doctrine of Unjust Enrichment applies to the Government
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INCOME TAXATION
WHAT ARE SUBJECT TO FINAL INCOME TAX (SEE SEC. 57(A))
1. GEN: Fringe Benefits (Sec. 33(A),NIRC)
XPN: when required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the
employer. (Sec. 33 (A), NIRC)
2. Interests, Royalties, Prizes, and Other Winnings (Sec. 24(B))
3. Cash and/or Property Dividends (Sec. 24(B))
4. Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange (Sec. 24(B))
5. Capital Gains from Sale of Real Property (Sec. 24(B))
RULE ON TRUSTS
An irrevocable trust is treated as a separate taxable entity and taxed in the same manner (and on
the same basis) as an individual. Hence, income of an irrevocable trust may be exempt from the 20%
final withholding tax if the underlying investment is a qualified long-term investment, and if the
trust holds on to that investment for at least five years.
A revocable trust is only a pass-through entity and is not, for tax purposes, separate from those who
establish or create it by pooling their money for investment purposes. Income from such trusts is
included in the taxable income of the grantor. (BIR Ruling 03-2005, July 22, 2005)
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SPECIFIC DEDUCTIONS
Sub-sections A to J and M1 of Section 34 of the NIRC refer to the other specific deductions:
1. Ordinary and Necessary Expenses
2. Interest
3. Taxes
4. Losses
5. Bad Debts
6. Depreciation
7. Depletion of Oil and Gas Wells and Mines
8. Charitable and Other Contributions
9. Research and Development
10. Pension Trusts
1. It is necessary that the loss had not been previously offset as deduction from gross income;
2. Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax (as in
the case of tax honeymoon) shall not be allowed as a deduction;
3. A NOLCO shall be allowed only if there had been no substantial change in the ownership of the
business or enterprise
MISCELLANEOUS NOTES
Cohan rule Taxpayers may use estimates when they can show that there is some factual
foundation on which to base a reasonable approximation of the expense, but cannot ascertain
the same due to absence of documentary evidence.
A corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any
taxable year.
The running of the three-year period for the expiry of NOLCO is not interrupted by the fact that
such corporation is subject to MCIT in any taxable year during such three-year period.2
Proportionate test A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax.
Requiring that the income tax return or the final adjustment return of the succeeding year be
presented to the BIR in requesting a tax refund has no basis in law and jurisprudence.
1
Authors note: Subsection K refers to additional requirements for deductibility of certain payments, while
subsection L refers to the OSD (optional standard deduction), previously discussed.
2
Section 6.5, Revenue Regulations No. 14-2001
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REMEDIES
REQUISITES FOR A VALID ASSESSMENT
COMPUTATION
VALID
Assessment =
(for BOTH PAN & FAN)
of
Tax Liabilities + DEMAND + FACTUAL
BASIS + LEGAL
BASIS
(source: Art. 228 par. 7 & CIR vs. Pascor Realty & Devt Corp, G.R. No. 128315 June 29, 1999)
Gen Rule: taxes shall be assessed within three (3) years after either
(a) the last day prescribed by law for the filing of the return, or
(b) the actual filing of the return, ...whichever is later. (Sec. 203)
xpn:
1. Extra-ordinary prescription. The tax may be assessed, or a proceeding in court for the collection
of such tax may be filed without assessment, at any time within ten (10) years after the
discovery of either of the following (Sec. 222(a), NIRC):
a. False return, [regardless of intent to evade tax]
b. Fraudulent return with intent to evade tax, or
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2. Compromise (waiver through agreement). If before the expiration of the time prescribed in
Section 203 for the assessment of the tax [3 years], both the Commissioner and taxpayer have
agreed in writing to its assessment after such time, the tax may be assessed within the period
agreed upon, extendible by subsequent agreements. (Sec. 222(b), NIRC)
OR
II. Collection only: A proceeding in court for the collection of tax is filed within ten (10) years
after the discovery of the falsity, fraud or omission. (Sec. 222(a), NIRC)
1. Suspension. The running of the Statute of Limitations provided in Sections 203 [3 years]
and 222 [10 years, or the period agreed upon] on the making of assessment and the
beginning of distraint or levy a proceeding in court for collection, in respect of any
deficiency, shall be suspended (Sec. 223, NIRC):
a. For the period during which the Commissioner is prohibited from making the
assessment or beginning distraint or levy or a proceeding in court and for sixty
(60) days thereafter;
b. When the taxpayer requests for a reinvestigation which is granted by the
Commissioner;
c. 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
d. When the warrant of distraint or levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient
discretion, and no property could be located; and
e. When the taxpayer is out of the Philippines. (end of Sec. 223, NIRC)
f. Extension of time for payment of Estate tax, as provided in Sec. 91(B) of the NIRC.
2. Estoppel, as when by the tax payers repeated requests or positive acts the Government
has been, for good reasons, persuaded to postpone collection to make him feel that the
demand was not unreasonable or that no harassment or injustice is meant by the
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Gen Rule: Once the assessment has become final and executory, the taxpayer in a collection case cannot
go into the merits of the assessment.
xpn:
1. Non-service of PAN (CIR vs. Metro Star Superama, Inc, G.R. 185371, Dec 2010)
2. Waiver on part of Government (Republic vs. Ker, 18 SCRA 208 [1966])
3. No valid waiver of the prescriptive period on the part of the taxpayer3
1. Inaction by the CIR within the 180-day period (Sec. 228, last par., NIRC) from either:
a. Protest, in the following cases:
i. Request for reconsideration, since it is not based on new or additional evidence,
ii. Request for reinvestigation, when
1. the document is already submitted with the protest, or
2. there is no submitted document
b. The submission of documents, in case of its submission in a request for reinvestigation
c. The lapse of the 60-day period in a request for reinvestigation, when the tax-payer
reserves his right to submit additional document.
2. Filing of a collection case before the regular courts for the collection of the tax (Yabes vs.
Flojo, G.R. No. L-46954 [1982])
4. Sending of a Final notice before seizure, indicating that the CIR is giving the taxpayer the
LAST OPPORTUNITY to settle the assessment.7
3
Philippine Journalists, Inc. vs. CIR, G.R. No. 162852, 16 December 2004, 447 SCRA 214)
4
See CIR vs. Algue and CTA, 158 SCRA 9 [1988], with respect to the second warrant of distraint or levy
5
See CIR vs. Algue and CTA, 158 SCRA 9 [1988], with respect to the first warrant of distraint or levy
6
See CIR vs. Union Shipping, 185 SCRA 547 [1990]
7
See CIR vs. Isabela Cultural Corp, G.R. No. 135210, July 11, 2001
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5. Sending of a Demand letter, containing a text with the words final decision and appeal,
similar to the tenor of the following:
i. This constitutes our final decision on the matter. If you are not agreeable, you
may appeal to the CTA within 30 days from receipt of this letter.8
ii. This is our final decision based on the investigation. If you disagree, you may
appeal this final decision within 30 days from receipt hereof, otherwise said
deficiency tax assessment shall become final, executory and demandable.9
6. Referral by the Commissioner of the request for reinvestigation to the Solicitor General,10
because this shows the insistence of the commissioner to collect tax.
Gen Rule: The commissioner may delegate its power to make or issue BIR rulings
xpn:
1. Rulings of first impression
2. Rulings that reverse, revoke, or modify any existing ruling of the Bureau.
8
See Advertising Associates vs. CA, 133 SCRA 765 [1984]
9
See Allied Banking Corporation vs. CIR, G.R. No. 175097 [2010]
10
See Republic vs. Lim Tian Teng Sons, G.R. No L-21731, March 31, 1966
11
See United International Pictures vs. Commissioner, CTA Case No. 5884, June 5, 2002, as cited in Mamalateo,
Reviewer on Taxation, 2008 ed. p.484
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MR/MNT w/
CTA En Banc?
(optional) YES
NO
Appeal to SC
1. IF the service of warrant of distraint or levy was filed on time, and the taxpayer have
sufficient properties to cover the taxes,
THEN the property can be sold even beyond the prescriptive period.
2. IF a judicial proceeding was initiated on time and the taxpayer have sufficient
properties,
THEN the property can be sold even beyond the prescriptive period.
3. IF the service of warrant of distraint or levy was filed on time, and the taxpayer does
not have sufficient properties,
THEN the running of the prescriptive period to collect will be suspended. Only a
warrant of distraint or levy duly served upon the taxpayer who has no properties will
suspend the prescriptive period to collect. Thus,
4. IF a judicial proceeding was initiated on time, and the taxpayer does not have sufficient
properties,
THEN the running of the prescriptive period to collect will NOT be suspended.
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(source: Republic vs. Hizon [G.R. No. 130430 December 13, 1999] and Advertising Associates Inc. vs. CA
[133 SCRA 765 [1984]] in relation to Sec. 223 of the NIRC)
SURCHARGE
The situations where 25% surcharge is applicable are as follows (Sec. 248, NIRC):
1. Late filing, Late paying, and non-filing [Sec. 248(a)(1) and (4)]
2. Wrong venue [Sec. 248(a)(2)]
3. Delinquency surcharge [Sec. 248(a)(3)]
GEN: a claim for refund or credit must be duly filed with the commissioner for tax erroneously or
illegally collected may be recovered. (Sec. 229, NIRC)
XPN: 1. Where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid (Sec. 229, par. 2, NIRC), or
2. When the petitioner paid the disputed assessments under protest before filing his petition for
review with the CTA. (Vda. de San Agustin vs. CIR, G.R. No. 138485, September 10, 2001)
The choice of the taxpayer, whether tax refund or tax credit, may be deduced as follows:
1. Tax refund, when the taxpayer files a written claim for the same, although it failed to signify its
intention in its return.13
2. Tax credit, when the taxpayer filled out the portion Prior Years Excess Credits in its FAR.14
3. Tax credit for the succeeding taxable years after tax credit was chosen for the prior taxable yr.15
12
Banco Filipino Savings and Mortgage Bank vs. CA, G.R. No. 155682, March 27, 2007, 519 SCRA 93, 96
13
Philam Asset Management, Inc vs. CIR, G.R. Nos. 156637/162004, December 14, 2005, wrt its 1997 FAR
14
Philam Asset Management, Inc vs. CIR, G.R. Nos. 156637/162004, December 14, 2005, wrt its 1998 FAR
15
CIR vs. BPI, G.R. No. 178490, July 7, 2009
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POWER TO COMPROMISE
A correlation of Sec. 7(c) and 204 would provide that where the basic tax involved involves an
amount:
1. Exceeding P1,000.000, the National Evaluation Board may approve the compromise
2. Does not exceed P500,000, the Regional Evaluation board may approve the compromise
3. In between P500,000 and 1,000,000, the Commissioner may approve the compromise.
1. It falls under any of the cases that can be compromised and does not belong to any of
those that cannot be compromised;
2. There must be a valid basis for compromise, i.e. doubtful validity, or financial incapacity
3. Taxpayer waives in writing his privilege of the secrecy of bank deposits under Republic
Act No. 1405 or under other general or special laws, and such waiver shall constitute as
the authority of the Commissioner to inquire into the bank deposits of the taxpayer.
(Penultimate paragraph of Sec. 3, RR 302002, promulgated December 16, 2002)
1. Delinquent accounts;
2. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer
which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large
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Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the
National Office;
3. Civil tax cases being disputed before the courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those already filed in court or those involving criminal tax fraud.
(Sec. 2, RR 302002, promulgated December 16, 2002)
MISCELLANEOUS NOTES
The consent of the taxpayer is NOT necessary to get documents under the best evidence
obtainable rule (Sec. 5, NIRC; Fitness By Design, Inc. vs. CIR, G.R. No. 177982 [2008])
In a False Return, there is a deviation from the truth, whether intentional or not. It may be due
to mistake, ignorance, or carelessness. A Fraudulent Return, on the other hand, implies
intentional deceitful entry with intent to evade the taxes due.
The act of requesting a reinvestigation alone does not suspend the period. The request should
first be granted, in order to effect suspension. (CIR vs. Hambrecht & Quist Philippines, Inc., G.R.
No. 169225, November 17, 2010)
An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to
defeat and evade the income tax. A crime is complete when the violator has knowingly and
willfuly filed a fraudulent return with intent to evade and defeat the tax. (Ungab vs. Cusi, 97
SCRA 877 [1980])
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Only the following shall form part of the gross estate of the non-resident alien:
1. Real property situated in the Philippines
2. Personal property
a. Tangible personal property situated in the Philippines
b. Intangible personal property which has established a situs in the Philippines.
Generally, the situs is the domicile or residence of the non-resident alien, following
the principle of mobilia sequuntur personam. However, for taxation purposes, Sec.
104 of the NIRC enumerates intangible personal properties that should have a situs
in the Philippines, to wit:
i. Franchise which must be exercised in the Philippines;
ii. Shares, obligations or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its laws;
iii. Shares, obligations or bonds by any foreign corporation eighty-five percent
(85%) of the business of which is located in the Philippines;
iv. Shares, obligations or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines;
v. Shares or rights in any partnership, business or industry established in the
Philippines, shall be considered as situated in the Philippines
GEN: Only properties existing at the time of death are included in the gross estate.
XPN:
I. Properties NOT EXISTING at the time of death but are nonetheless INCLUDED in the estate. These
are [GRIDI]:
II. Properties, though EXISTING at the time of death are NOT INCLUDED in the estate. These are [SS]:
XPN to XPN only in cases of (1) transfers in contemplation of death, (2) Property Passing Under General
Power of Appointment, and (3) revocable transfer:
A bona fide sale for an adequate and full consideration in money or money's worth. (last phrase of Sec.
85(B), first phrase of Sec. 85[D], and Sec. 85[C] for revocable transfer , respectively, all of NIRC)
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RULE ON RECIPROCITY
There are two instances when the intangible personal property of a non-resident alien is
exempt from tax, i.e. when the foreign country of which the decedent (or donor) was a citizen
and resident at the time of his death (or donation):
1. Does not impose transfer tax with respect to the intangible personal property of the
citizens of the Philippines; OR
Imposes transfer taxes but grants a similar exemption from transfer or death taxes of every character or
description in respect of intangible personal property owned by citizens of the Philippines not residing in
that foreign country. This is known as the reciprocity rule.
DEDUCTIONS FROM THE GROSS ESTATE (SEC. 86) (SEC. 6 OF RR NO. 2-03)
Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like
are not deductible. Any portion of the funeral and burial expenses borne or defrayed by relatives and
friends of the deceased are not deductible. Medical expenses as of the last illness will not form part of
funeral expenses. (Sec. 6(A)(1), RR 2-2003)
DEDUCTIBLE TAXES
Taxes which have accrued as of the death of the decedent which were unpaid as of the time
of death. This deduction will not include the following taxes Sec. 6(A)(5), RR 2-2003:
1. Where the gross estate exceeds Php 20,000, a notice of death is required;
2. Where the gross estate exceeds Php 200,000, an estate tax return is required; and
3. Where the gross estate exceeds Php 2,000,000, such return shall be supported with a statement
duly certified to by a Certified Public Accountant (CPA).
DONORS TAX: WHO IS A STRANGER AND APPLICABLE TAX RATE (SEC. 99)
When the donation is between relatives, the applicable tax rate is as shown in the graduated
rates in Sec. 99(A). Otherwise, the tax applicable will be Sec. 99(B), or a fixed rate of 30% of the net gifts.
Relatives considered by the tax code:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.
The degree of relationship (4th degree limit) is material only with respect to collateral relatives.
There is no limit with respect the number of degrees of relationship with respect to ancestor or lineal
descendants. A legally adopted child is entitled to all the rights and obligations provided by law to
legitimate children, and therefore, donation to him shall not be considered as donation made to
stranger. (Sec. 10(B), R.R. 22003) An obligation imposed by law, such as the support given by the
parent to a child, is not subject to donors tax.
Donation made between business organizations and those made between an individual and a
business organization shall be considered as donation made to a stranger. (Sec. 10(B), R.R. 22003)
Thus, the applicable tax rate would always be 30% of the net gifts, pursuant to Sec. 99(B) of the NIRC.
To be considered as exempt from income tax of the candidate, the campaign contributions must
have been utilized to cover a candidates expenditures for his / her electoral campaign.
Unutilized/excess campaign funds, that is, campaign contributions net of the candidates campaign
expenditures, shall be considered as subject to income tax, and as such, must be included in the
candidates taxable income as stated in his/her Income Tax Return (ITR) filed for the subject taxable
year. (Sec. 2, RR No. 72011, February 16, 2011)
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VAT
KINDS OF TRANSACTIONS THAT ARE SUBJECT TO VAT
1. Barter, sale, or exchange (BSE) of goods (Sec. 106)
2. Sale or exchange (SE) of services (Sec. 108)
3. Importation of goods (Sec. 107)
GEN: Rule on regularity (to be subject to VAT, the transaction must be made in the ordinary or regular
course of trade or business.)
XPN:
1. Importations (Sec. 107, NIRC), and
2. Services rendered by non-resident foreign persons in the Philippines. (Sec. 105, NIRC)
2. There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12)
months, other than those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, will exceed
One million five hundred thousand pesos (1,500,000.00).
3. Moreover, franchise grantees of radio and television broadcasting, whose gross annual receipt for
the preceding calendar year exceeded Php 10,000,000.00, shall register within thirty (30) days from
the end of the calendar year.
If the output tax is equal to the input tax, then the VAT payable is zero. This means that there is no
value added to the goods or services; hence, no VAT.
If the output tax is greater than the input tax, then the net result would be an excess output tax. The
excess would be a positive VAT payable value the net VAT to be paid by the taxpayer.
If the output tax is less than the input tax, then the net result would be an excess input tax. The
excess input tax may be carried over to the next quarter and deducted from the output tax, and
thereafter claim a refund if the net result is zero. Unlike in income taxation for corporations under
the last paragraph of Sec. 76, there is no irrevocability rule in VAT.
16
1,919,500.00 threshold was introduced by Revenue Regulation No. 16-2011 (October 27, 2011) on Sec.109(v)
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COMMON CARRIERS
LEASE OF PROPERTIES
Lease Amount Sellers Annual Liable for Liable for Required to Register?
Exceeds Php Income Exceeds Php VAT? Franchise Tax?
12,800? 1,919,500?
NO NO No law NO No law imposes
NO NO
Sec.109(Q) imposes the same such requirement
NO NO No law NO No law imposes
NO YES
Sec.109(Q) imposes the same such requirement
NO YES NO No law imposes
YES NO
Sec.109(V) Sec.116 109(v) such requirement
YES NO No law YES Sec.
YES YES
Sec. 108 imposes the same 236(G)(1)(a)
VAT REFUND
Grounds:
1. Excess input VAT attributable to effectively zero-rated sales (Sec. 112(a)), and
2. Excess input VAT at the time of cancellation of the VAT registration (Sec. 112(b)).
The two-year prescriptive period in the administrative claim does NOT apply to the judicial claim
MISCELLANEOUS NOTES
Importation of Tax-exempt persons is exempt from VAT. However, when such goods are
transferred to non-exempt persons or entities, then such transaction is subject to VAT.
For purposes of VAT, a professional partnership shall be treated as a separate and distinct
taxable person from the individual partners composing the partnership.
All gross receipts from sales of services shall entirely be taxable against the partnership.
Sales of services made by any of the partners thereof in his personal and individual
capacity shall be taxable against such partner. (Sec. 2, RR No. 1-2003, January 2, 2003)
The legislature never intended to include cinema/theater operators or proprietors in the
coverage of VAT. (CIR vs. SM Prime Holdings, Inc. G.R. No. 183505, February 26, 2010)
Destination Principle Goods and services are taxed only in the country where they are
consumed.
Cross Border Doctrine No VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority.
Pre-emption in the matter of taxation simply refers to an instance where the national
government elects to tax a particular area, impliedly withholding from the local government the
delegated power to tax the same field.
LOCAL TAXATION
GOCCS EXEMPTED FROM LOCAL TAXATION [CHEW]
(Sec. 193, LGC)
1. Local water districts,
2. Cooperatives duly registered under R.A. No. 6938
3. Non-stock and non-profit hospitals, and
4. Non-stock and non-profit educational institutions
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