Taxation law review notes COVERAGE OF TAXATION LAW REVIEW
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I.
Basic Principles of Constitutional Limitations Due process clause which could be either substantive due process and procedural due process clause Equal protection clause Read: • Ormoc Sugar Central vs. City Treasurer 22 SCRA 603 • Tiu vs. CA 301 SCRA 178 Article III sec. 1 of the 1987 Constitution – non-impairment clause Article III sec. 5 – freedom of religion Article III sec. 20 – non-payment of poll tax Article VI sec. 28 par. 2 – flexible tariff clause Article VI sec. 28 par. 3 – exemption from real property tax Read: • Herrera vs. Quezon City 3 SCRA 186 • Abra vs. Hernando 107 SCRA 104 • Abra Valley vs. Aquino 52 SCRA 106 • Philippine Lung Center vs. Quezon City 433 SCRA 119 Article VI sec. 28 par. 4 – qualified majority in tax exemption International double taxation • CIR vs. Johnson 309 SCRA 87 j) Doctrine of equitable recoupment k) Doctrine of Set-off or compensation in taxation • Republic vs. Mambulao 4 SCRA 622 • Domingo vs. Garlitos 8 SCRA 443 • Francia vs. IAC 162 SCRA 753 • Caltex vs. COA 208 SCRA 726 • Philex vs. CIR 294 SCRA 687
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Different Kinds of Income Tax 1. Net Income Tax secs. 24 (A), 25 (A) (1), 26, 27 (A) (B) (C), 28 (A) up to 3rd par. 31 and 32 (A) 2. Gross Income Tax secs. 25 (B) first part and 28 (B) (1) 3. Final Income Taxes sec. 57 (A) 4. Minimum Corporate Income Tax of 2% of the Gross Income secs. 27 (E), 28 (A) (2) 5. Improperly Accumulated Earnings Tax of 10% of its taxable income sec. 29 NIRC Rev. Reg. 2-2001
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Optional Corporate Income Tax of 15% of its gross income sections 27 (A) 4th to 10th par. And 28 A(1) but only up to the 4th paragraph
-Proceed to section 42 and 23 of the NIRC • NDC vs. Comm 151 SCRA 472 • Comm. Vs. IAC 127 SCRA 9 -Then go to sec. 39 of NIRC • Calazans vs. Comm. 144 SCRA 664 RR 7-2003 -Then proceed to sec. 24 (A), 25 (A) (1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and sec 51 (D) -Then continue to sec 24 B 1, 25 B,C,D,E; 27 (D) (1) -Then go to se. 24 (B) (2) sec. 73 • Comm. Vs. Manning 66 SCRA 14 • Anscor vs. Comm. 301 SCRA 152
II. Income Tax Law Section 22-26 of the National Internal Revenue Code a) Read in the commentaries or magic notes the different kinds of: 1. Income Taxpayers 2. Income Taxes 3. Sources of Income sec. 42 of NIRC - Income Taxpayers a) Individuals b) Corporation c) Estates and Trusts – -Individuals are classified • Resident Citizens sec. 23 (A), sec 24 (A) (a)
Non-Resident Citizens sec 23 (B), 24 (A) (b) 22 (E) Overseas Contract Workers Sec. 23 (C), 24 (A) (b) Resident Aliens Rev. Reg. sec 5, 23 (D), 24 (A) (c) Non-Resident Aliens Engaged in trade or business sections 25 (A) (1) Non-Resident Aliens Not Engaged in trade or business sec. 25 (B) Aliens Employed in Multi-National Corporations sec. 25 (C) and Rev. Reg. 12-2001 • Aliens Employed in Offshore Banking Units sec 25 (D) • Aliens Employed in petroleum Service Contractors & Subcontractors sec. 25 (E) -Corporate Income Taxpayers Domestic Corporations sec. 23 (E), and sec 27 of NIRC Resident Foreign Corporations sec. 22 (H) and (28)A Non-Resident Foreign Corporations sec. 22 (1) and 28 (B) -Estates and Trusts sec. 60-66 of NIRC
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); 28 (A) (7) (D); 32 B (7) (a) -
Then you go to sec. 24 C, 25A (3); 25 B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 sec. 127 NIRC Then you go to sec. 24 D (1); 25 (A) (3); 25 (B) last par. 27 (D) (5)
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Taxation law review notes • China Bank vs. Court of Appeals 336 SCRA ___; RR 7-2003 -Upon reading sec. 24 (D) (2) read RR 13-1999 -Upon reading sec. 27 (A) go to sec. 22 (B) • Batangas vs. Collector 102 Phil. 822 • Evangelista vs. Collector 102 Phil 140 • Reyes vs. Comm. 24 SCRA 198 • Ona vs. Bautista 45 SCRA 74 • Obillos vs. Comm 139 SCRA 436 • Pascua vs. Comm. 166 SCRA 560 • Afisco vs. Comm. 302 SCRA 1 -Upon reading sec. 27 (C) of NIRC see RA 9337 then go to sec. 32 (B) (7) (b) of NIRC, sec. 133 par (o) of LGC, sec. 154 of the LGC. • Pagcor vs. Basco 197 SCRA 52 • Mactan vs. Cebu 261 SCRA 667 • LRT vs. City of Manila 342 SCRA 692 -Proceed to sections 27 (D) (1), 27 (D) (2), 27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5) (b) • Marubeni vs. CIR 177 SCRA 500 • Proctor & Gamble vs. Comm 160 SCRA 560 • Same case Proctor and Gamble on the Motion for Reconsideration 204 SCRA 377 • Wonder vs. Comm 160 SCRA 573 -Proceed to sec. 27(D) (5) then sections 27 (E) and 28 (A) (2) -Go to sec. 28 (A) (3) read RR 15-2002 -Go to sec. 28 (A) (4) see RA 9337 -Then see sec 28 (A) (5) see Marubeni vs. Comm 177 SCRA 500 -Proceed to sec. 28(B) (5) (a) and sec 32 (B) (7) (a) • Read Mitsubishi vs. Comm 181 SCRA 214 -Then go to sec. 29 and Rev. Reg. 2-2001 -Upon reading sec. 32 (B) 1 and 2, read sec. 85 par (e), sec. 108A and sec. 123 of the NIRC -Proceed to sec. 33 read Rev. Reg. 3-98 -then go to sec. 34 (A) (1) (a) see Aguinaldo vs. Comm. 112 SCRA 136, RR 102002 -Under Sec. 34 (B) read RR 13-2000 -Upon reading sec. 49 read Banas vs. CA 325 SCRA 259 and Filipina vs. Comm. 316 SCRA 480 -Upon reading sec. 60-66, read Ona vs. Bautista 45 SCRA 74 III. Estate Tax
-Sections 84-97 see sec. 104 -Upon reading sec. 85 (B) read Vidal Dizon vs. Posadas 57 Phil 465 -Sec. 85 (G) compare with sec. 100 -sec. 85 (H) compare with sec. 86 (C) -Upon reading sec. 86 see RR 2-2003 -Upon reading sec. 94 see Marcos vs.
de Roces vs. Posadas 58 Phil. 108
Sandiganbayan 273 SCRA 47
IV. Donors Tax Law Sections 98-104 G and Cumulative methods of filing donor’s tax returns sections 99 (A), 103 (A) (1) and RR 2-2003 Sections 100 and 85 (9) V. Value Added Tax - Sections 105-115 -Read RA 9337 -Read ABAKADA vs Comm. GR 168056, Sept. 1, 2005 VI. Remedies Under the Internal Revenue Code -Sections 202-229 -RR 12-99 • Phoenix vs Comm 14 SCRA 52 • Basilan vs. Comm. 21 SCRA 17 • Yabut vs. Flojo 115 SCRA 278 • Union Shipping vs. Comm 185 SCRA 547 • Comm. vs. TMX 205 SCRA 184 • Comm. vs. Philamlife 244 SCRA • Comm. vs. CA & BPI 301 SCRA 435 • BPI vs. Comm. 363 SCRA 840 -Prescription sections 203 and 222 of NIRC, sec. 194 of the LGC, sec. 270 of the LGC, sec. 1603 of Tariff and Customs Code -Protest sec. 228 of NIRC and RR 12-99 sec. 195 of LGC, 252 LGC, sec. 2313 of Tariff & Customs Code and RA 7651 VII. Local Taxation - Sections 128-196 of LGC -Proceed 1st to sec. 186 read Bulacan vs. CA 299 SCRA 442 -Then proceed to 187 -Then to 151 -128 -Under sec. 133 (e) read Palma vs. Malangas 413 SCRA 572 -Under 133 (h) read Pililia vs. Petron 198 SCRA 82 -Under 133 (i) read First Holdings Co. vs. batangas City 300 SCRA 661 -Under 133 (l) read Butuan vs. LTO 322 SCRA 805
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Taxation law review notes -Under 137 read sec. 193 of LGC • Misamis vs. Cagayan de Oro 181 SCRA 38 • Reyes vs. San Pablo City 305 SCRA 353 • Meralco vs. Laguna 306 SCRA 750 • PLDT vs. Davao City 363 SCRA 522 -
codal commentaries (any author will do) magic notes (Sababan Lecture and Q&A) Book stand
Co-relate sec. 139 and 147 of LGC Under sec. 140 of the LGC see sec. 125 of the Internal Revenue Code Under sec. 150 of the LGC read the following: • Phil. Match vs. Cebu 81 SCRA 99 • Allied Thread vs. Manila 133 SCRA 338 • Sipocat vs. Shell 105 Phil. 1263 • Iloilo Bottles vs. Iloilo City 164 SCRA 607
VIII. Real Property Tax Sections 197-294 Sec. 235 • LRT vs. Manila 342 SCRA 692 • Cebu City vs. Mactan 261 SCRA 667 IX. Tariff & Customs Code Special Customs Duty sec. 301-304 of TCC Regukar Customs Duty sec. 104 of TCC RA 7631
Rules in the Classroom: 1. do not be absent if you are absent, you have to transcribe what happened in class when you were out. The next meeting you attend class, consider yourself a resident of balic-balic, babalikbalikan ka sa recit. Exception: if you get married. 2. read the assignment. Wag zapote ang aral. 3. holiday – make up class probably on a Sunday 4. allowed to glance at your notes, wag lang pahalata/garapal 5. materials:
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Taxation law review notes ► Autonomous Regions → power conferred by Congress through law. Art. X Sec. 20 #2 of the Constitution is a non-self-executing provision. Thus the power is granted by Congress because said provision requires an enabling law. Coverage of Taxation Law Review: 1. Basic Principles including Constitutional Provisions 2. Income Tax 3. Estate Tax 4. Donor’s Tax 5. Remedies 6. Local Tax 7. Real Property Tax 8. Tariff and Customs Code 9. Court of Tax Appeals 10. VAT (although not part of the coverage of the Bar Exams, questions have been asked since 1999)
Title 5,6 and 7 are always included in the coverage No computations in the bar
There are only 1 or 2 questions in the Bar about Basic Principles What are the favorite topics in the Bar? 12 questions on Income Tax 8-10 questions on remedies 8-10 questions allocated to the 7 topics
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BASIC PRINCIPLES: ►
Taxation is an inherent power of the State.
Q: What do you mean by INHERENT? A: The power to tax is not provided for in the law, statute or constitution; it depends on the existence of the state. No law or legislation for the exercise of the power to tax by the national government. Q: Do local governments exercise this inherent power? A: No. Only the National Government exercises the inherent power to impose taxes. Q: The taxing power of local governments is a DELAGATED power. Delegated by whom? A: Delegated by Congress through law in case of autonomous regions, and delegated by the constitution in case of LGUs not considered an autonomous region. ► Cities, provinces and municipalities → power granted under Art. X Sec. 5&6 of the Constitution
► Article X, Section 5 is self-executing thus the power is granted by the constitution. CONSTITUTIONAL LIMITATIONS (Substantive and Procedural) Due Process Clause Q: why is it a limitation to the power to tax? A: The due process clause as a limitation to the power to tax refers both to substantive and procedural due process. Substantive due process requires that a tax statute must be within the constitutional authority of Congress to pass and that it be reasonable, fair and just. Procedural due process, on the other hand, requires notice and hearing or at least the opportunity to be heard. Ex: On Substantive Due Process- when the Congress passes a law exempting the 13th month pay from tax but with the concurrence only of the majority of the quorum – law would be invalid because the Constitution provides that any grant of tax exemption shall be passed with the concurrence of the majority of all the members of the Congress. Q: Does it follow that the adverse party must always be notified? A: No. As a rule, notice and hearing or the opportunity to be heard is necessary only when expressly required by law. Where there is no such requirement, notice and the opportunity to be heard are dispensable. Ex. Before Oct. 1, 1995, you can secure a TRO without notifying the adverse party. If you are a suspect in a criminal case, you have the right to have an opportunity to be heard (if there is a law). Before July 1, 1998, no notice need be given to a party declared in default. After the amendment, the party declared in default has to be notified of subsequent proceedings albeit without the right to participate therein. In the case of a search warrant, the person to be searched was not notified. The person searched cannot claim that there was a violation of due process because there is no law requiring that the person to be searched should be notified. Regarding delinquent tax payers, before levy, there must be notice. REASON: No provision of law requires notice to the adverse party. If the adverse party is notified, he may abscond. Thus, in adversarial proceedings, in connection with procedural due process, the adverse party need not be notified all the time.
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Taxation law review notes Equal Protection Clause ► As a rule, taxpayers of the same footing are treated alike, both as to privileges conferred and liabilities imposed. Difference in treatment is allowed only when based on substantial distinction. Difference in treatment not based on substantial distinction is frowned upon as “class legislation.” This is violated when taxpayers belonging to the same classification are treated differently form one another; and taxpayers belonging different classifications are treated alike. Requirements of Reasonable Classification: 1) There must be substantial distinctions that make a real difference. 2) It must be germane or relevant to the purpose of the law. 3) The distinction or classification must apply not only to the present but also to future situations. 4) The distinction must apply to persons, things and transactions belonging to the same class. Ex: In one case, a tax ordinance was assailed on the ground that the ordinance failed to distinguish a worker form casual, permanent or temporary. The SC said that the ordinance was invalid because of the failure to state the said classification.
The Court observed that those foreign businessmen operating within the secured area have to give a larger capital to operate in the secured area (to spur economic growth and guarantee employment). ORMOC SUGAR CENTRAL vs. CIR Q: What did the municipality of Ormoc do? A: The City Council of Ormoc passed a Municipal Ordinance No.4 imposing upon any and all centrifugal sugar milled at the Ormoc Sugar Central a municipal tax on the net sale of the same to the United States and other foreign countries. Q: Did the owner accept this imposition? A: No. the tax due was paid under protest, then filed a complaint against the City of Ormoc. H: The Supreme Court said there was a violation of the equal protection clause. The element invoked here was element #3, that it must be applicable to both present and future circumstances. The Supreme Court said that one must go to the provision itself, in the case at bar, there was a violation of element #3 because the law was worded in such a way that it only applies to Ormoc Sugar Central alone and to the exclusion of all other sugar centrals to be established in the future. TAKE NOTE: People vs. Cayat Freedom of Religion
In PEOPLE v. CAYAT the Supreme Court mandated the requisites for a valid classification. TIU v. COURT OF APPEALS (301 SCRA 278) Q: what happened in the city of Olonggapo? A: The Congress, with the approval of the President, passed RA 7227, an act creating the conversion of the military bases into other productive uses. Q: Who was the President at that time? A: President Ramos Q: What were signed? A: RA 7227, EO 97 and EO 97-A → The first led to the creation of the Subic Special Economic Zone (SSEZ). The latter set the limitations and boundaries of the application of the incentives (no taxes, local and national, shall be imposed within SSEZ. In lieu thereof, 3% of the Gross Income shall be remitted to the national gov’t) to those operating their businesses within the said area. Q: Who are the petitioners and what was their contention? A: The petitioners are Filipino businessmen who are operating their business outside the secured area. The petitioners contended that the law in question was violative of their right to equal protection of laws since they are also Filipino businessmen. H: The Supreme Court ruled that there was no violation since the classification was based on a substantial distinction. The element invoked here is element #1 that there must be substantial distinction in the classification of taxpayers on whom the tax will be imposed.
It Involves 3 Things: 1. freedom to choose religion 2. freedom to exercise one’s religion 3. prohibition upon the national government to establish a national religion Q: Which one limits the power to tax? A: Prohibition upon the national government to establish a national religion because this will require a special appropriation of money coming from the national treasury which is funded by the taxes paid by the people. Non-impairment Clause (No law impairing the obligation of contarcts shall be passed) Q: What are the sources of obligation in the Civil Code? A: Law, Contracts, Quasi-Contracts, Delict, Quasi-Delict. Q: What is the obligation contemplated in this limitation? A: Those obligations arising from contracts. General Rule: The power to tax is pursuant to law, therefore, the obligation to pay taxes is imposed by law, thus the non-impairment clause does not apply. ►
You have to determine first the source of obligation:
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Taxation law review notes 1.
If the law merely provides for the fulfillment of the obligation then the law is not the source of the obligation. 2. When the law merely recognizes or acknowledges the existence of an obligation created by an act which may constitute a contract, quasi-contract, delict, and quasi-delict, and its only purpose is to regulate such obligation, then the act itself is the source of the obligation, not the law. When the law establishes the obligation and also provides for its fulfillment, then the law itself is the source of the obligation Q: So, in what instance does the non-impairment of contracts clause becomes a limitation to the power to tax? A: it is when the taxpayer enters into a compromise agreement with the government. In this instance, the obligation to pay the tax is now based on the contract between the taxpayer and the government pursuant to their compromise agreement. Take Note: the requirement for its application: the parties are the government and private individual. (cannot be withdrawn without violating the non impairment clause) Poll Tax Q: What is a poll tax? A: It is a tax of a fixed amount on individuals residing within a particular territory, whether citizens or not, without regard to their property or to the occupation in which they may be engaged. It is a tax imposed on persons without any qualifications. persons may be allowed to pay even if they are not qualified as to age or property ownership. Example of Poll Tax: Community Tax Certificate under Section 162 of the Local Government Code. Q: Why is it a limitation to the power to tax? A: It is a limitation to the power to tax because Congress is prohibited from passing a law penalizing with imprisonment a person who does not pay poll tax. (funds for sending a person to jail is taken from the national treasury which is funded by the taxes paid by the people) Exemption from payment of Real Estate Tax Q: What is the requirement for exemption from payment of real property tax under the 1935, 1973 and 1987 Constitution? A: Art. 6, Sec 22 (3), 1935 Constitution – Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings and improvements used EXCLUSIVELY for RELIGIOUS, CHARITABLE or EDUCATIONAL purposes shall be exempt for taxation.
Art. 8, Sec. 17 (3), 1973 Constitution – charitable institutions, churches, parsonages or convents appurtenant thereto, mosque, and non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY, and EXCLUSIVELY used for RELIGIOUS and CHARITABLE purposes shall be exempt from taxation. (educational entity was removed) Art. 6, Sec. 28 (3), 1987 Constitution – charitable institutions, churches, and parsonages or convents appurtenant thereto, mosque, non-profit cemeteries, and all lands, buildings, and improvements ACTUALLY, DIRECTLY and EXCLUSIVELY used for RELIGIOUS, EDUCATIONAL and CHARITABLE purposes shall be exempt from taxation. (It is important to know the governing Constitution; the grounds on Real Estate Tax differ/varies.) HERRERA v. QC-BOARD OF ASSESSMENT 3 SCRA 186 (1935 Constitution) Q: What is involved in this case? A: A charitable institution, St. Catherine’s Hospital. The hospital was previously exempt from taxation until it was reclassified and subsequently assessed for the payment of real property tax. The contention of the respondent is that the hospital was no longer a charitable institution because it accepts pay-patients, it also operates a school for midwifery and nursing, and a dormitory. Since it is not exclusively used for charitable purposes it is not exempt from taxation. (properties are subject to assessment) H:
The Court ruled that petitioner is not liable for the payment of real estate taxes. It is a charitable institution, thus exempt from the payment of such tax. The hospital, schools and dormitory are all exempt fro taxation because they are incidental to the primary purpose of the hospital. NOTE: this arose during the 1935 Constitution. (Note: Incidental to the Primary Purpose of the Hospital) “Exempted by virtue of incidental purpose” was merely coined by the Supreme Court. Thus, it does not apply to other taxes except Real Estate Tax. PROVINCE OF ABRA v. HERNANDO 107 SCRA 104 (1981) Q: What is involved in this case? A A religious institution was involved in this case, the Roman Catholic Bishop of Bangued, Inc. (bishop filed declaratory relief after assessed for payment of tax). The respondent judge granted the exemption from taxes of said church
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Taxation law review notes based only on the allegations of the complaint without conducting a hearing/trial. The assistant prosecutor filed a complaint contending that petitioner was deprived of its right to due process. SC: the Court ordered that the case be remanded to the lower court for further proceedings. The Court observed that the cause action arose under the 1973 Constitution, not under the 1935 Constitution (note the difference). Tax exemption is not presumed. It must be strictly construed against the taxpayer and liberally construed in favor of the government. Substantial distinction of 1973 and 1935 Constitution) ABRA VALLEY COLLEGE INC. v. AQUINO Q: What is involved in this case? A: An educational institution is involved in this case. The ground floor of the school was leased to Northern Marketing Corp., a domestic corporation. The 2nd floor thereof was used as the residence of the school director and his family. The Province of Abra now contends that since the school is not exclusively used for educational purposes, the school is now liable to pay real estate tax. H: The Court held that the school is PARTIALLY liable for real estate tax. 1. Residence – exempt by virtue of incidental purpose; justified because it is necessary. 2. Commercial – not exempt because it is not pursuant to the primary purpose; not for educational purposes. Q: is the doctrine in the case of Herrera the same with this case? A: NO. in the Herrera case, the exemption was granted to all the real property (hospital, school and dorm). But in this case, the Supreme Court made a qualification. The Supreme Court said it depends. NOTE: both cases arose under the 1935 Constitution despite having been decided in 1988. Q: At present, do we still apply the exemption from tax by virtue of the Doctrine of Incidental Purpose? A: Not anymore. The cause of action in said case arose under the 1935 Constitution and it does not apply to the provisions of the 1987 Constitution. PHILIPPINE LUNG CENTER v. QUEZON CITY 433 SCRA 190 (1987) (partially exempt) Q: What is involved in this case? A: A charitable institution, a hospital. It is provided in the charter of the Lung Center of the Philippines is a charitable institution. However, part of its building was leased to private individuals and the vacant portion of its lot was rented
out to Elliptical Orchids. Respondent contends that since the hospital is not used actually, directly, an d exclusively for charitable purposes, it is liable to pay real estate taxes. H: The Supreme Court held that the petitioner is liable to pay tax for those parts leased to private individuals for commercial purposes. For the part of the hospital used for charitable purposes (whether for pay or non-pay patients), petitioner is exempt from payment of real estate tax. NOTE: petitioner contended that the profits derived from the lease of its premises were used for the operation of the hospital. The Court held that the use of the profits does not determine exemption, rather it is the use of the property that determines exemption. The case of Herrera does not apply because said case arose under the 1935 Constitution and the present case arose under the 1987 Constitution. The requirements for exemption are different. In the 1935 Constitution, the property must be EXCLUSIVELY used for religious, educational or charitable purposes. Under the 1987 Constitution, the property must be used ACTUALLY, DIRECTLY, and EXCLUSIVELY for religious, educational and charitable purposes. (It is the USE of the Property that determines Exemption) Q: Was the doctrine laid down in Abra Valley affirmed in the Lung Center case? A: Yes. The Supreme Court unconsciously applied a doctrine laid down by the 1935 Constitution. The Supreme Court reiterated the ruling in the Abra Valley case which arose under the 1935 Constitution. The Supreme Court made a qualification, it held that it depends on whether or not the use is incidental to the primary purpose of the institution. NOTE: at present, “exemption from tax by virtue of incidental purpose” is not applicable to all taxes including real estate tax. COMM v. SC JOHNSON and SONS, INC. Important : 1. international juridical double taxation 2. importance of international tax treaty 3. implication of most favored nation clause Q: What is the corporation involved in this case? A: A domestic corporation (DC). SC Johnson and Sons, Inc. entered into a license agreement with SC Johnson and Sons U.S.A (Non-Resident Foreign Corp, NRFC) whereby the former was allowed to use the latter’s trademark and facilities to manufacture its products. In return, the DC will pay the NRFC royalties as well as payment of withholding tax. A case for refund of overpaid withholding tax was filed. Apparently, the DC should have paid only 10% under the most favored nation clause. H: The Supreme Court coined the term International Double Taxation or International Juridical Double Taxation.
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Taxation law review notes Q: A:
Q: A:
Q: A:
What prompted the SC to coin such term? Because a single income (tax royalties paid by a DC) was subjected to tax by two countries, the Philippines income tax and the U.S. tax. International Juridical Double Taxation applies only to countries where the tax liabilities of its nationals are imposed on income derived from sources coming from within and without. Is there an instance where international double taxation does not apply? Yes. If it involves nationals of countries wherein the tax liability is imposed only from income derive from sources within and not including those derived from sources without. (Ex: Switzerland) → The controversy in the case at bar involves the income tax paid in the Philippines. After paying 25%, the US firm discovered that they are entitled to 10% under the most favored nation clause. The question is: was the tax paid under similar circumstances with that of the RP-West Germany Treaty? The CTA and Court of Appeals ruled that it was paid under similar circumstances. The phrase referred to the royalties in payment of income tax. The Supreme Court ruled that the lower courts’ interpretation of the phrase was erroneous. Rather, the phrase applies to the application of matching credit. What is matching tax credit? RP-Germany Treaty provides for that 20% of the tax paid in the Philippines shall be credited to their tax due to be paid in Germany. The 10% does not apply because there is no matching credit. Thus, there is no similarity in the circumstances.
( RP- US Treaty has no matching tax credit provision) (Art. 13(2)(b)(III)) (The lowest rate of Phil. Tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a 3rd StateGermany 10% on Royalties) (Matching Credit – tax paid in country at sources may be credited to the tax due at the country of national) (Under similar circumstances- the 2 countries provides that a similar tax is being paid in the country at sources and the country of the national) (Most taxes are direct tax except VAT) (Set-off subjects are debts: Tax is not a debt and taxpayer and government are not mutual debtor and creditor) (tax and debt are of different sources) EQUITABLE RECOUPMENT AND DOCTRINE OF SET-OFF (1. No law in the Phils.; 2. negligence)
burdered BIR Credit; 3.
encourage
Equitable Recoupment This doctrine provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities. This is not allowed in this jurisdiction, because of common law origin. If allowed, both the collecting agency and the taxpayer might be tempted to delay and neglect the pursuit of their respective claims within the period prescribed by law. (1st and 2nd groups) Q: What is the doctrine of Equitable Recoupment? A: When the claim for refund is barred by prescription, the same is allowed to be credited to unsettled tax liabilities. (Sir gives an illustration found in page 3 of magic notes) Q: Is the rule absolute? Reason A: Yes, the rule is absolute. The rationale behind this is to prevent the taxpayer and government official from being negligent in the payment and collection of taxes. (furthermore, you have to be honest for this to work, hence, the government is preventing corruption) There is no exception at all otherwise, the BIR would be flooded with so many claims. Set-off Presupposes mutual obligation between the parties. In taxation, the concept of set-off arises where a taxpayer is liable to pay tax but the government, for one reason or another, is indebted to the said taxpayer. Q: What do you mean by SET-OFF? A: This presupposes mutual obligations between the parties, and that they are mutual creditors and debtors of each other. In taxation, the concept of taxation arises where a taxpayer is liable to pay taxes but the government, for one reason or another, is INDEBTED to said taxpayer. REPUBLIC v. MAMBULAO LUMBER CO. Q: What is the liability of Mambulao? A: They are liable to pay forest charges (under the old tax code). NOTE: under our present tax code, the NIRC, we do not have forest charges as the same was abolished by President Aquino. (EO 37 1987 abolished Q: What did the lumber company do? A: The lumber company claimed that since the government did not use the reforestation charges it paid for reforestation of the denuded land covered by its license, the amount paid should be reimbursed to them or at least compensated or applied to their liability to pay forest charges. H: The Court ruled that the reforestation charges paid is in the nature of taxes.
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Taxation law review notes The principle of compensation does not apply in this case because the parties are not mutually creditors and debtors of each other. A claim for taxes is not a debt, demand, contract or judgment as is allowed to be set-off under the statute of set-off which is construed uniformly, in the light of public policy, to exclude the remedy in connection or any indebtedness of the State or any municipality to one who is liable for taxes. Neither are they a proper subject for recoupment since they do not arise out of contract or the same transaction sued on. General Rule: no set-off is admissible against demands for taxes levied in general or local governmental purposes. Reason: Taxes are not in the nature of contracts or debts between the taxpayer and the government, but arises out of a duty to, and are positive acts of the government to the making and enforcing of which, the consent of the individual is not required. Taxes cannot be the subject matter of compensation. (Gen. Rule: Taxes cannot be the subject matter of compensation) DOMINGO v. GARLITOS Q: What is being collected in this case? A: Estate and inheritance taxes. NOTE: we do not have inheritance taxes anymore because the same was abolished by Lolo Macoy. Q: Who is the administratrix? A: The surviving spouse. Q: What did the surviving spouse do? A: The surviving spouse suggested that the compensation to which the decedent was entitled to as an employee of the Bureau of Lands be set-off from the estate and inheritance taxes imposed upon the estate of the deceased. H: Both the claim of the government for estate and inheritance taxes and the claim of the (intestate) for the services rendered have already become overdue hence demandable as well as fully liquidated, compensation therefore takes place by operation of law, in accordance with Art. 1279 and 1290 of the Civil Code and both debts are extinguished to the concurrent amount. Compelling Reason: Congress has enacted RA 2700, allocating a certain sum of money to the estate of the deceased. (Local Franchise tax can not be passed to consumer; Reasons: 1. no law allowing it; 2. no jurisprudence; 3. no indirect tax (VAT) Exception: 1. agreement; 2. law) FRANCIA v. IAC Q: This happened in what city? A: Pasay City Q: What is the tax being collected? Who is collecting the same?
A:
Payment for real estate taxes for the property of Francia. It appears that petitioner was delinquent in the payment of his real estate tax liability. The same is being collected by the Treasurer of Pasay. Q: What is the suggestion of petitioner? A: Suggested that the just compensation for the payment of his expropriated property be set-off from his unpaid real estate taxes. (the other part of his property was sold at a public auction) H: The factual milieu of the case dose not justify legal compensation. The Court has consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A taxpayer cannot refuse to pay a tax on the ground that the government owes him an amount. Internal Revenue taxes cannot be the subject of compensation because the government and the taxpayer are not mutually creditors and debtors of each other, and a claim for taxes is not a debt, demand, contract or judgment as is allowed to be compensated or set-off. Furthermore, the payment of just compensation was already deposited with PNB Pasay, and the taxes were collected by a local government, the property was expropriated by the national government. (diff parties, not mutual creditors and debtors of each other.) CALTEX PHIL v. COA (Rule 44: recovery of financing charges from OPSF and reimbursement of under recovery arising from sales to NPC) Q: What is being collected? A: Caltex’s contribution to the Oil Price Stabilization Fund (OPSF). COA sent a letter to Caltex asking the latter to settle its unremitted collection stating that until the same is paid, its claim for reimbursement from the OPSF will be held in abeyance. Q: Why is Caltex entitled to reimbursement? A: Because of the fluctuation of the oil prices in the Middle East and Europe. Caltex wanted to off-set its unremitted collection from its reimbursements. H: The Court did not allow the set-off, and reiterated its ruling in the case of Mambulao and Francia. Furthermore, RA 6952 expressly prohibits set-off from the collection of contributions to the OPSF. The Court likewise stated that Caltex merely acted as agent of the government in collecting contributions for the OPSF because such is being shouldered by the consumers when they purchase petroleum products of oil companies, such as Caltex. Taxation is no longer envisioned as a measure merely to raise revenues to support the existence of the government. Taxes may be levied for regulatory purposes such as to provide means for the rehabilitation and stabilization of a threatened industry which is vested with public interest, a concern which is within the police power of the State to address. PHILEX MINING CORP v. COMM
9
Taxation law review notes The petitioner is liable for the payment of excise taxes, which it wanted to be set-off from its pending claim for a VAT Input credit/refund. The Court did not allow set-off. Taxes cannot be the subject of compensation for the simple reason that the government and taxpayer are not mutual creditors and debtors of each other. Taxes are not debts. Furthermore, in the instant case, the claim for VAT refund is still pending. The collection of a tax cannot await the results of a lawsuit against the government. DOUBLE TAXATION Double taxation is allowed because there is no prohibition in the Constitution or statute. Obnoxious double taxation is the synonym of double taxation. Elements of Double Taxation: 1) Levied by the same taxing authority 2) For the same subject matter 3) For the same taxing period and 4) For the same purpose There is no double taxation if the tax is levied by the LGU and another by the national government. The two (2) are different taxing authorities. LGUs are expressly prohibited by the provisions of RA 7160 or the LGC of 1991 from levying tax upon: (1) the National Government; (2) its agencies and instrumentalities; (3) LGUs (sec.113(o)). The National Government, pursuant to the provisions of RA 8424 of the Tax Reform Act of 1997, can levy tax upon GOCCs, agencies and instrumentalities (Section 27 c)), although income received by the Government form: 1) any public utility or 2) the exercise of any essential governmental function is exempt from tax.
KINDS OF INCOME TAXPAYERS Q: Generally, how many kinds of income taxpayers are there? A: Under section 22A of NIRC, there are three (3), namely: 1. individual; 2. corporate; 3. estate and trust. I.
INDIVIDUAL TAXPAYER
Q: How many kinds of individual taxpayers are there? A: There are seven (7). Namely: 1. Resident Citizen (§23A and 24A);
2. 3. 4. 5. 6. 7.
Nonresident Citizen (§23B and 24A); OCW and Seaman (§23C and 24A); Resident Alien (§22F, 23D and 24A); Nonresident Alien Engaged in Trade or Business (§22G, 23D and 25A) Nonresident Alien NOT Engaged in Trade or Business (§22G, 23D and 25B) Aliens Engaged in Multinational Companies, Offshore Banking Units, Petroleum Service Contractors (§25C,D and E)
Resident Citizen (RC)
10
Taxation law review notes Q: How many types of RC? A: There are two (2), namely: 1. RC residing in the Philippines; and 2. Filipino living abroad with no intention to reside permanently therein. Q: If you are abroad, and you have the intention to permanently reside therein, can you still be considered a RC? A: Yes. If such intention to permanently reside therein was not manifested to the Commissioner and the fact of your physical presence therein, you may still be considered a RC. OCW and Seamen
Resident Alien (RA) An individual whose residence is within the Philippines and who is not a citizen thereof. Intention to reside permanently in the Philippines is not a requirement on the part of the alien. The requirement under RR#2 is that he is actually present in the Philippines, neither a sojourner, a traveler, not a tourist. Whether he’s a transient or not is determined by his intent as to the nature and length of his stay.
OCW was used and not OFW in the CTRP, because the classification shall cover only those Filipino citizens working abroad with a contract. TNTs are not covered.
Q: Is the intention to permanently reside in the Philippines necessary? A: No, so long as he is not a sojourner, tourist or a traveler.
A Filipino seaman is deemed to be an OCW for purposes of taxation if he receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade. Consequently, if he is not a member of the complement or even if he is but the vessel where he works is not exclusively engaged in international trade, said seaman is not deemed to be an OCW. He is either a RC or a NRC depending on where he stays most of the time during the taxable year. If he stays in the Philippines most of the time during the taxable year, he is considered a RC, otherwise, a NCR.
Non-Resident Alien Engaged in Trade or Business (NRAETB) A foreigner not residing in the Philippines but who is engaged in trade or business here. RR 2-98 has expanded the coverage of the term, “engaged in trade or business” to include the exercise of a profession. Furthermore, by the express provision of the law, a NRA who is neither a businessman nor a professional but who come to and stays in the Philippines for an aggregate period of more than 180 days during any calendar year is deemed to a NRAETB in the Philippines.
If you are a seaman in the US Navy, you are not the one being referred to. The importance of ascertaining whether or not a seaman is a RC or a NRC, is that if he is a RCm he is taxable on ALL income derived from all sources within and without. If he is a NRC, he is taxable only on income derived form sources within the Philippines. Q: What is the significance of using OCW? A: It only covers Filipinos who works abroad with a contract. It does not cover TNTs. Q: What is the status of a TNT? A: Since they are not covered by this classification, they are considered RC because they work abroad without a contract and they have not manifested their intention to permanently reside abroad. (distinguish from an immigrant) Requirements for a seaman to be considered an OCW: 1. must be a member of the compliment of a vessel; 2. the vessel must be exclusively engaged in international trade or commerce.
Q: How many types? A: There are three (3) types, namely: 1. NRA engaged in trade or business (25a1); 2. NRA who practices a profession (Revenue Regulation 2-98); 3. foreigner who comes and stays in the Philippines for an aggregate period of MORE THAN 180 days during any calendar year. Q: What is the status of a Chinese who stays here for 200 days in 2001? A: NRAETB Q: Suppose he stayed here for 100 days in 2000 and another 100 days in 2001? A: He is not a NRAETB. To be considered as such, he must stay for an aggregate period of more than 180 days during a calendar year. Q: What is the income tax applicable to said taxpayer? A: Net Income Tax (NIT) on all its income derived form sources within the Philippines. Non-Resident Alien Not Engaged in Trade or Business
11
Taxation law review notes Q: How many kinds? A: Only one. The reason why the NRANETB are included in any income tax law is because they may be deriving income form sources within the Philippines. They are subject to tax based on their GROSS INCOME received form all sources within the Philippines. Aliens Employed by Regional or Area Headquarters & Regional Operating Headquarters of Multinational Companies/ Aliens Employed by Offshore Banking Units (Aliens Employed by MOP) ►
Status: either a RA or NRA depending on their stay here in the Philippines.
► Their status may either be RA or NRA because Section 25 C and D does not distinguish. ►
Liable to pay 15% from Gross Income received from their employer
► Income earned from all OTHER sources shall be subject to the pertinent income tax, as the case may be. Aliens Employed in Multinational and Offshore Banking Units Q: How are they classified? A: If they derived income from other sources aside from their employer, you may classify them either as RA, NRAETB, or NRANETB. Aliens Employed in Petroleum Service Contractors and Subcontractors ► Status: ALWAYS NRA. If they derive income from other sources, such income shall be subject to the pertinent income tax, as the case may be. ► Income derived or coming from their employer shall be subject to a tax of 15% of the gross. II.
CORPORATE TAXPAYER
1. 2. 3.
Domestic Corporation (DC) – created or organized under Philippine laws. Resident Foreign Corporation (RFC) – corporation created under foreign law, and engaged in trade or business. Nonresident Foreign Corporation (NRFC) – created under foreign law, and NOT engaged in trade or business.
Q: What are deemed corporations under the NIRC?
A: The term corporation shall include partnerships, no matter how created or organized, joint stock companies, joint accounts, associations, or insurance companies, but DOES NOT includes general professional partnerships and a joint venture or consortium formed of the purpose of undertaking construction projects or operations pursuant to or engaging in petroleum, coal, geothermal or consortium agreement under a service contract with the Government. 1. Partnerships and others no matter how created 2. Joint Stock Companies 3. Joint Accounts 4. Associations 5. Insurance Companies CIR v. COURT OF APPEALS The phrase no “matter how created or organized” was interpreted. Even if the partnership was pursuant to law or not, whether nonstick, nonprofit, it is still deemed a corporation. Reason: because of the possibility of earning profits form sources within the Philippines. Q: Are partnerships always considered corporations? Is there no exception? A: General Rule: a partnership is a corporation. Exception: General Professional Partnerships (GPP) Q: What is a GPP? A: It is a partnership formed by persons for the sole purpose of exercising their profession, no part of the income of which in derived from any trade or business. (what if a partner has other businesses not related to the GPP? > read section 26 quoted hereunder) Two (2) Kinds of GPP formed for: 1) Exercise of a profession – not a corporation; exempt from Corporate Income Tax (CIT) 2) Exercise of a profession and engaged in trade or business – a corporation; subject to CIT TAN v. DEL ROSARIO general rule: a partnership is a corporation exception: GPP exception to the exception: if the GPP derives income from other sources, it is considered a corporation, thus liable to pay corporate income tax. Rule: 1. if the income is derived from other sources and such income is subject to NET INCOME TAX, it is not exempt and it is considered a corporation.
12
Taxation law review notes 2. if the income is derived from other sources and such income is subject to FINAL INCOME TAX, it is still EXEMPT and it is not deemed a corporation. ( separate return for this. It will not reflect in the GPP’s ITR) » This is pursuant to the fact that FIT will not reflect in the ITR of the GPP since the withholding agent is liable for the payment of the FIT.
Taxable for income derived within the Philippines.
Q: What is the importance of knowing whether the corporation is exempt or not? A: To determine their tax liability. This is important to determine the tax liability of the individual partners of the GPP.
Taxable for income derived within the Philippines.
Non-Resident Foreign Corporation Foreign corporations not engaged in trade or business in the Philippines.
Both DC and RFC are liable for the payment of the following: 1) NIT – Net Income Tax 2) FIT – Final Income Tax 3) 10% income tax on corporations with properly accumulated earnings. 4) MCIT (Minimum Corporate Income Tax) of 2% of the Gross Income 5) Optional Corporate Income Tax of 15% of the Gross Income
► Section 26 (1st paragraph) provides: “a GPP as such shall not be subject to the Net Income Tax…” however, “…persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities.” In short, each partner will be paying NIT, and the distributive shares they will be receiving from the net income of the GPP will be included in the gross income of the partner. Q: If the GPP is deemed a corporation, will the partners have to pay for the income tax? A: No. as far as the share of the GPP is concerned, it is considered a taxable dividend which is subject to FIT. Q: Is a joint venture a corporation? A: Generally, yes, it is a corporation. Q: Corporation X and Corporation Y joined together. How many corporations do we have? A: Three, namely Corporation X, Y, and X+Y. the joint venture has a separate and distinct personality from the two corporations. Q: When is a joint venture not considered a corporation? A: It is not deemed a corporation when it is formed for the purpose of undertaking a (“construction?) project or engaging in petroleum, gas, and other energy operations pursuant to “?” or consortium agreement under a service contract with the government.
A NRFC is liable for payment of the ff: 1) GIT- Gross Income Tax 2) FIT – Final Income Tax III.
TRUST AND ESTATE
Q: How many for each? A: Seven (7) kinds for each because the trust or estate will be determined by the status of the trustor, grantor, or creator, or of the decedent. The status of the estate is determined by the status of the decedent at the time of his death; so an estate, as an income taxpayer can be a citizen or an alien.
Is one created or organized in the Philippines or under its laws.
When a person who owns property dies, the following taxes are payable under the provision of income tax law: 1) Income Tax for Individuals – to cover the period beginning January to the time of death. 2) Estate Income Tax – if the property is transferred to the heirs. 3) If no partition is made, Individual or Corporate Income Tax, depending on whether there is or there is no settlement of the estate. If there is, depending on whether the settlement is judicial or extrajudicial.
Taxable on all income derived from sources within or without the Philippines.
Judicial Settlement
Domestic Corporation
Resident Foreign Corporation
1) During the pendency of the settlement, the estate through the executor, administrator, or heirs is liable for the payment of ESTATE INCOME TAX (Sex, 60 (3)).
Foreign corporations engaged in trade or business in the Philippines.
13
Taxation law review notes 2) If upon the termination of the judicial settlement, when the decision of the court shall have become final and executory, the heirs still do not divide the property, the following possibilities may arise: a) If the heirs contribute to the estate money, property or industry with the intention to divide the profits between and among themselves, an UNREGISTERED PARTNERSHIP is created and the estate becomes liable for payment of CIT (Evangelista vs. Collector (102 Phil 140)) b) If the heirs without contributing money, property or industry to improve the estate, simply divide the fruits thereof between and among themselves, a CO-OWNERSHIP is created and Individual Income Tax (IIC) is imposed on the income derived by each of the heirs, payable in their separate and individual capacity (Pascual vs. COMM (165 scra 560) and Obillos vs. COMM (139 SCRA 436)) Extrajudicial Settlement and if NO Settlement Some possibilities may arise. The income tax liability depends on whether or not the unregistered partnership or co-ownership is created. Trust Trusts can be created by will, by contract or by agreement. The status of a trust depends upon the status of the grantor or trustor or creator of the trust. Hence, a trust can also be a citizen or an alien. Q: Where the trust earns income and such income is not passive, who among the parties mentioned is liable for payment of income tax thereon? A: The TRUST itself, through the trustee or fiduciary but only if the trust is irrevocable. If it is revocable, or for the benefit of the grantor, the liability for the payment of income tax devolves upon the trustor himself in his capacity as individual taxpayer.
6. I.
Optional Corporate Income Tax of 15% on the Gross Income
NET INCOME TAX
Q: what is the formula? A: Gross Income – Deductions and Personal Exemptions = Taxable Income Taxable Income x Tax Rate = Net Income Taxable Net Income – Tax Credit = Taxable Net Income Due Net Income means Gross Income less deductions and Formula: GI - deductions Net Income x Tax Rate Income Tax Due Q: What is the rate? A: Individual: 32% Corporation: 35% NOTE: the formula allows for deduction, personal exemptions and tax credit. Q: What are the other terms for NIT? A: NIRC: a. taxable income b. gross income (wlang kasunod) → only income tax from improperly accumulated earnings does not use this term. 1. 2. a. b.
CFA: “to be included in the gross income” Revenue Regulations and Statutes: ordinary way of paying income tax; normal way of paying income tax .
Characteristics: KINDS OF INCOME TAX Q: How many kinds of income tax? A: There are Six (6), namely: 1. Net Income Tax (NIT); 2. Gross Income Tax (GIT); 3. Final Income Tax (FIT); 4. Minimum Corporate Income Tax of 2% of the Gross Income (MCIT) 5. Income Tax on Improperly Accumulated Earnings subject to 10% of the Taxable Income;
Q: Who are not liable to pay NIT? A: 1. NRANETB (liable for GIT); 2. NRFC (GIT also); 3. With certain modifications, AEMOP, if they derive income from other sources; Q: Is the taxable net income subject to withholding tax? A: It is subject to withholding tax if the law says so.
14
Taxation law review notes Q: What if the law is silent? A: If the law is silent, it is not subject to withholding tax.
be, in final income tax, you cannot join all the income in one group because each income has a particular rate.
Q: What is another term for withholding tax? A: It is also known as the creditable withholding tax system under the income tax law.
Q: What is the rate? A: 35% as the case may be.
Q: Do we have to determine if there is an actual gain or loss? A: Yes because the formula for deductions, etc.
NOTE: like GIT, the formula does not allow deductions, personal exemptions, and tax credit.
Q: If you fail to pay, will you be held liable? A: Yes, you will be held liable.
Characteristics:
II.
GROSS INCOME TAX (GIT)
Q: What is the formula? A: Gross Income x Rate Q: How many taxpayers pay by way of the gross? A: There are two (2) individual - NRANETB corporation - NRFC NOTE: the formula does not allow any deduction, personal exemptions and tax credit.
Q: Who are liable to pay FIT? A: All taxpayers are liable to pay FIT provided the requisites for its application are present. Q: Do you still have to pay NIT? A: No. if you are liable for FIT, no need to pay NIT or else there will be double taxation. NOTE: as time passed by, the number of FIT increased. ► before 1979 – proceeds from the sale of real property not exempt, it is subject to NIT or GIT, as the case may be. after 1979 – capital gains tax. Proceeds from the sale of real property is exempt.
Characteristics: ► NRANETB and NRFC, though not engaged in trade or business, are liable to pay by way of the gross for any income derived in the Philippines. While not engaged in trade or business, there is a possibility that they may earn income in the Philippines. Q: Is this subject to withholding tax? A: Yes, it is subject to withholding tax because the persons liable are foreigners. This rule is ABSOLUTE NOTE: there are two (2) ways of paying taxes depending on which side of the bench you are. III.
Q: If you fail to pay, will you be liable? A: No. the withholding agent is liable to pay FIT. ►
Case of Juday, Richard and Regine
► For one to be liable for the payment of NIT, the income must be derived on the basis of an employer – employee relationship. Employer – Employee Relationship (3 Cs): 1. contract; 2. control; 3. compensation;
FINAL INCOME TAX (FIT)
Q: What is the formula? A: (Each Income) x (Particular Rate) Unlike in the gross income tax where you add all the income from all the sources and multiply the sum thereof by the rate of 25% or 35%, as the case may
► However, in the case of celebrities, there is no employer – employee relationship, they are merely receiving royalties. Royalties are subject to final withholding tax, thus the agent is liable to pay. (so, distinguish nature of income, whether royalty or compensation) RULE:
15
Taxation law review notes 1. 2.
for NIT, whether or not subject to Creditable Withholding Tax (CWT), the taxpayer is always liable if he fails to pay. for GIT and FIT, absolute liability to pay is upon the withholding agent.
Q: Why is it that the rate of withholding is always lower, and why is it that the rate of GIT and FIT is always equal? A: 1. NIT allows deductions; 2. GIT and FIT do not allow deductions. Q: Do you have to determine whether there is an actual loss or gain? A: No need to determine because the formula does not allow deductions. Gain is presumed. No liability for final withholding tax except for the sale of shares of stock. (?) IV.
MINIMUM CORPORATE INCOME TAX (MCIT)
Q: What is the formula? A: Gross Income x 2% Q: Who pays this tax? A: DC and RFC only. Q: May it be applied simultaneous with NIT? A: No. there must be a computation of the NIT first then apply which ever is higher. The MCIT is paid in lieu of the NIT. Reason: to discourage corporations from claiming too many deductions. V. OPTIONAL CORPORATE INCOME TAX Q: Under what section is this found? A: Section 27A 4th paragraph and Section 28 A(1) 4th paragraph. Q: Is this applicable now? A: No. this is not yet implemented. Q: To what kind of taxpayer does this apply? A: To DC and RFC. Q: What kind of taxes are applicable or imposed upon the 1st five individual taxpayers? A: Only two (2) kinds are applicable out of the six (6) kinds of income taxes. 1. NIT; 2. FIT;
A: Generally, only one kind, 15% FIT with respect to income derived from their employer. Income from other sources: 1. Determine the status of the AEMOP; a. NIT b. FIT 2. NRANETB a. GIT b. FIT Q: What kind of income tax applies to DC? A: Only four (4) kinds will apply out of the six (6) 1. NIT 2. FIT 3. MCIT 4. Improperly Accumulated Earnings Q: May all of these be applied simultaneously? A: No. only the NIT, FIT and Improperly Accumulated Earnings be applied simultaneously. NIT and MCIT cannot be applied simultaneously. Only one will apply, whichever is higher between the two. ( Why? Because the application of the Net and the MCIT shall be whichever is higher, it shall be the one imposed) Q: What kind of tax will apply to NRFC? A: Out of the six (6) kinds, only two (2) will apply: 1. GIT 2. FIT Q: What is the significance of knowing the classification of these taxpayers? A: 1. to determine the kind of income tax applicable to them; 2. to determine their tax liability. Q: Under Section 23, who are liable for income within and income without? A: Only 1. RC 2. DC ►
The rest of the taxpayers will be liable for income coming from sources within.
►
Income from sources without, no liability, therefore exempt.
Q: What kind of income tax will apply to AEMOP?
16
Taxation law review notes NOTE: The income taxpayer is not a RC or a DC. Determine if the income came from sources within or without to know the taxpayer’s liability. ► If the facts are specific, do not qualify your answer. Answers must be responsive to the question. Q: Is section 42 relevant to all the taxpayers? A: NO. SECTION 42 IS NOT MATERIAL TO ALL taxpayers, particularly the RC and DC because these two are liable for both income within and without. ► Section 42 is applicable only to taxpayers who are liable for income within, the rest of the taxpayers are otherwise exempt. Q: Section 42(A)(1) provides for how many kinds of interests? A: It establishes two (2) kinds of interests, namely: 1. interest derived from sources within the Philippines. 2. interest on bonds, notes or other interest bearing obligations of residents, corporate or otherwise. Q: What is the determining factor in order to know if the income is from within?
H:
The government’s right to levy and collect income tax on interest received by a foreign corporation not engaged in trade or business within the Philippines is not planted upon the condition that the activity or labor and the sale from which the income flowed had its situs in the Philippines. Nothing in the law (Section 42(1)) speaks of the act or activity of nonresident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment is the determining factor of the source of the income. Accordingly, if the obligor is a resident of the Philippines, the interest paid by him can have no other source than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm, becomes a stockholder of two corporations, a DC and a RFC, and both corporations declared dividends, what is the liability of the Indonesian firm if the same received the dividends? A: 1. Dividends received from DC: the Indonesian firm is liable to pay taxes. NRFC, under the law, is liable if the income is derived from sources within. (Sec 42a) 2. Dividends received from RFC: the Indonesian firm’s liability will depend on amount of gross income from sources within the Philippines.
A: 1.
2.
location if the bank is from within the Philippines (pursuant to a Revenue Reg.) residence of the obligor (whether an individual or a corp.) – contract of loan with respect to the interest earned thereon.
► For example the borrower is a NRAETB, he borrowed money from a RA. The interest earned by the loan will be considered as an income without. RA is not liable to pay tax since RA is liable only for income within, therefore exempt from paying the tax. NATIONAL DEVELOPMENT CO. v. CIR F: The National Development Company (NDC) entered into a contract with several Japanese shipbuilding companies for the construction of 12 oceangoing vessels. The contract was made and executed in Tokyo. The payments were initially in cash and irrevocable letters of credit. Subsequently, four promissory notes were signed by NDC guaranteed by the Government. Later on, since no tax was withheld from the interest on the amount due, the BIR was collecting the amount from NDC. The NDC contended that the income was not derived from sources within the Philippines, and thus they are not liable to withhold anything. NDC said that since the contract was entered into and was executed in Japan, it is an income without.
The NRFC will be liable to pay income tax if the following requisites are present: 1. at least 50% is income from sources within; (gross income)
2.
the (last) 1st requisite is for the three (3) preceding taxable years from the time of declaration of the dividends.
► In the absence of any or both requisites, the income will be considered from sources without, thus exempting the Indonesian firm from payment of income tax. Q: Same scenario, but this time the shares of stock of the two corporations were being disposed off. What is the tax liability of the Indonesian firm? A: 1. sale of shares of stock of DC: the Indonesian firm will be liable for the payment of taxes because the income is from sources within. 2. sale of shares of stock of RFC: the liability will depend on where the shares of stock were sold. (mejo Malabo sa notes, please be guided accordingly) Q: Filipino Executive, assigned to Hong Kong, receiving two salaries, one from the Philippines, the other from HK. The performance of the job was in HK. Is he liable for both salaries? A: No, he is not liable for the two incomes. His status is an OCW (note facts: working in HK under contract). The compensation he received is not subject to tax pursuant to Section 42(c). Compensation for labor or personal services performed in the Philippines is considered an income within.
17
Taxation law review notes When it comes to services, it is the place where the same is rendered which is controlling. In the case at bar, the services were rendered abroad, thus it is an income derived from sources without, irrespective of the place of payment.
1. 2.
Q: Suppose a DC hired a NRFC to advertise its products abroad. What is the liability of the NRFC? Will there be a withholding tax imposed? A: The income is derived from sources without since the services in this case were performed abroad. As such, the NRFC is not liable and therefore exempt from the payment of tax. If the NRFC is not subject to NIT, then it is not also subject to withholding tax. Q: What is the controlling factor? A: The controlling factor is the place where the services were performed and not where the compensation therefore was received. (Suppose there was declaration of dividends where the recipient is an Indonesian corporation; If declared by DC- always income within; If declared by FC, within if 2 requisites are present) RENTALS AND ROYALTIES ►income from sources within Q: Granted by who? A: NRFC Q: Suppose you are the franchise holder, how much is the withholding? A: 35% (GIT) Q: if the franchise is granted by RFC, how much is the withholding? A: 10% (NIT) and in some cases 15% Section 42(4) MEMORIZE FOR RECIT (CEKSTTM) a. b. c. d. e. f. g.
right of, or the right to use copyright, patents, etc industrial, commercial, scientific equipment supply of knowledge supply of services by nonresident supply of technical assistance supply of technical advice right to use: motion picture films, etc.
Q: What is the rule as regards the sale of real property? A: Gains, profits, and income from the sale of real property located within the Philippines considered income within. Q: What about the sale of personal property, what is the rule? A: Determine first if the property is produced or merely purchased.
it the property is manufactured in the Philippines and sold abroad, or viceversa, it is an income partly within and partly without. if the property is purchased, considered derived entirely from the sources within the country where it is sold.
EXCEPTION: shares of stock of domestic corporation, it is an income within wherever it is sold. COMMISSIONER v. IAC Q: What is the issue here? A: They cannot determine if the business expense was incurred in the Philippines. Q: if you are the BIR, and the taxpayer is not sure, will you disallow the deduction? A: No. determine it pro rata. Formula: GI from within GI from without Example: 100,000 1,000,000 = 10% ► Hence, 10% is the ratable share in the deduction. If the deduction being asked is 100,000 not all of it will be allowed. Only 10,000 or 10% of 100,000 will be allowed as deduction. CAPITAL GAINS AND LOSSES Section 39 Q: What is capital asset? A: Capital asset is an asset held by a taxpayer which is not an ordinary asset. The following are ordinary assets: 1. stock in trade of the taxpayer or other property of a kind which properly be included in the inventory of the taxpayer if on hand close of the taxable year; 2. property held by the taxpayer primarily for sale to customers ordinary course of trade or business; 3. property used in trade or business of a character which is subject allowance for depreciation provided in subsection 1. 4. real property used in trade or business of the taxpayer.
would at the in the to the
All other property not mentioned in the foregoing are considered capital assets. Q: What is a capital gain? What is a capital loss? A: Capital gains are gains incurred or received from transactions involving property which are capital assets. Capital losses are losses incurred from transactions involving capital assets.
18
Taxation law review notes 2. Q: What is ordinary gain? Ordinary loss? A: Ordinary gains are those received from transactions involving ordinary assets. Capital losses are losses incurred in transactions involving ordinary assets. Q: What is the relevance of making a distinction? A: It is relevant because Section 39B,C, and D apply to capital assets only. 1. time when property was held (39B) (holding period applies only to individuals); 2. limitations on capital losses (39C); (loss limitation rule- capital losses shall be to the extent of capital gain) 3. Net Capital Carry-Over (39D) (The 3 above apply only to Capital Assets; Ordinary Assets are not applicable) I.
CAPITAL ASSETS
Q: What is the holding period? A: If capital asset is sold or exchanged by an individual taxpayer, only a certain percentage of the gain is subject to income tax. It is the length of time or the duration of the period by which the taxpayer held the asset. Q: What is the requirement? A: 1. the taxpayer must be an individual. Section 39B states “in case of a taxpayer, other than a corporation..” 2. property is capital in nature. Q: What is the term? A: 100% if the capital asset has been held for not more than 12 months; (short term) 50% if the capital asset has been held for more than 12 months. (long term) NOTE: the holding period applies to both gains and losses. Q: Do you include capital gains in your ITR? A: General rule: yes, include in ITR. EXCEPT: 1. gains in sales of shares of stock not traded in stock exchange(section 24); 2. capital gains from sale of real property(section 24). Q: When will the holding period not apply? A: 1. property is an ordinary asset
3.
taxpayer is a corporation sale of real property considered as ordinary asset
II. LIMITATION ON CAPITAL LOSSES ►synonymous to 34D & loss capital rule ► this applies to individual and corporate taxpayer Q: What is the loss limitation rule? A: Pursuant to Section 39 C, losses from sales or exchange of capital assets may be deducted only from capital gains, but losses from the sale or exchange of ordinary assets may be deducted from capital or ordinary gains. (applies to individual and corporation) Q: In connection with 34 D, Losses in Allowable Deduction, what is the rationale behind this rule? A: If it is otherwise, it will run counter with the rule that the loss should always be connected with the trade or business, capital losses are losses not connected to the trade or business, thus it is not deductible Q: what is your remedy? A: 39 D, net capital loss carry-over Q: What is the rationale in allowing ordinary loss to be deducted from either the capital gains or ordinary gains? A: It is already included in ITR, the gross income less deductions hence it already carries with it the deduction TAKE NOTE: Normally if the loss is an ordinary loss there is no carry over. Except: a. 34D3 b. if the loss is more than GI III. NET CAPITAL LOSS CARRY-OVER Q: What are the requirements? A: 1. taxpayer is an individual; 2. paid in the immediately succeeding year; 3. applies only to short term capital gain; 4. capital loss should not exceed net income in the year that it was incurred. Q: How does net capital loss carry-over differ from net operating loss carry-over under Section 34 D (3)? A: Under the net capital loss carry-over rule, the capital loss can be carried over in the immediate succeeding year. In net operating loss carry-over rule, capital loss can be carried over to the next three (3) succeeding calendar year following the year when the loss was incurred.
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Taxation law review notes NOTE: only 15% of the loss will be carried over, if the loss is greater than the gains. ► In net operating loss carry-over there is an exception to the 3 year carry-over period. In case of mines other than oil and gas wells, the period is up to 5 years. Q: What is a short sale? A: Sale of property by which the taxpayer cannot come into the possession of the property. EX: shares CALAZANX v. CIR F: The taxpayer inherited the property fro her father and at the tie of the inheritance it was considered a capital asset. In order to liquidate the inheritance, the taxpayer decided to develop the land to facilitate the sale of the lots. I: Was the property converted to ordinary asset? H: The conversion from capital asset to ordinary asset is allowed because Section 39 is silent. Q: Are you allowed to convert ordinary asset to capital asset? A: General rule: it is not allowed. Read Revenue Regulation 7-2003 The case at bar still applies despite of the issuance of said Revenue Regulation. Q: What is the conversion prohibited in the Revenue Regulation? A: Conversion of real estate property. Q: What is the rationale? A: Section 24 D – final income tax of 6% if the real estate is capital asset. If it is an ordinary asset, it will be subject to income tax of 32% for individual taxpayer, and 35% if the taxpayer is a corporation. Q: What are the properties involve in the RR 7-2003? A: 1. those property for sale by the realtors 2. real property use in trade or business not necessary realtors Q: That is the conversion allowed by the Revenue Regulation? Is there an instance when an ordinary asset may be converted to capital asset? A: Yes, provided that the property is an asset other the real property, and it has been idle for two (2) years.
SECTION 24 TAX ON INDIVIDUALS Q: What is the tax mentioned in section 24? A: NIT Q: What is taxable income? A: (memorize section 31) it is the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other laws. It refers to NIT because it allows deductions. Q: What do you mean by the phrase “other the B, C, and D”? A: It means that if the elements of passive income are present, the taxpayer has to pay FIT. Q: Who are the taxpayers mentioned in section 24? A: 1. RC 2. NRC 3. OCW 4. RA ( Why NIT? Bec. It is only tax wherein allowable deduction & additional personal exemption are allowed) ►
Additionally, under Section 25, NRAETB
Q: What is the tax liability of NRAETB? A: Section 25 (1) NRAETB is subject to income tax in the same manner as those individuals mentioned in Section 24. Q: What about Domestic Corporations? A: 1. Sec. 27 A,B, and C 2. Sec. 26- GPP is not subject to income tax. Q: What about Resident Foreign Corporations?
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Taxation law review notes A: Sec 28 (l) it is subject to 35% Net Income Tax Q: What about Non Resident foreign Corporation and Non Resident Alien not engaged in Trade or Business? A: Not Subject to Net Income Tax but they are liable for Gross Income tax. Q: Do legally married husband and wife need to file separately or jointly? A: It depends if: 1. Pure compensation income- separate 2. Not Pure compensation income- joint
A: -W/in – FIT - W/out- exempt Q: What is the rule on pre- termination? A: If it is pre terminated before 5th year a FIT shall be imposed on the entire incomeand shall be deducted and withhellod by the depositary bank from the proceeds of the long term deposit based on the remaining maturity thereof a. 4 yrs to less than 5 yrs – 5% b.3 yrs to lesss than 4 yrs- 12% c. Less than 3 yrs- 20%
Passive Income Interest, Royalties, prizes and Other winnings ( What if bank is located abroad? Most TP exempt but DC & RC subject to NIT)
Q: Does it apply to all individuals? A: No! it does not apply to 10 NRFC and NRA and NRETB because they are liable to GIT.
Interest
NOTE: if the depositary is a Non resident it is exempt
Q: Bank Interest, what is the requirement? A: The bank must be located in the Phils. because the income must be derived from sources w/in.
►
Q: Do you include this in your ITR? A: No! because it is subject already to FIT. The bank is the one liable for the payment of this. NOTE: Liability for NIT, GIT, and MCIT will depend on the elements present. Q: Who are liable for bank interst? A: 1. RC } 2. NRC} Sec. 24 B1 3. RA } 4.NRAETB 5.NRANETB Sec. 25 (25%) 6.AEMOP 7.DC 8.RFC 9.NRFC Q: What is the rate of interest? A: FIT of 20% Q: Is there a lower rate? A: 7 ½ % if under EFCDS Q: What if the depositor is non resident alien?
resident citizen liable to pay tax for bank interst earned abroad (NIT)
Q: If the money earns interst in abroad who is liable? A: RC and DC only by NIT, the rest are exempt. No FIT abroad because we do not have withholding agent abroad. Q: MCIT applies to DC and RFC in relation to bank interest? A: If the bank interest is derived abroad, RFC is exempt but DC is liable. Impose NIT if it is higher than the MCIT, otherwise apply MCIT if its higher than the NIT (Note: Any income of non-residents, whether individual or corporations for transactions with depositary bank under the expandes system shall be EXEMPT from INCOME TAX) Prizes Requirements: 1. Prizes must be derived from sources w/in the Phils. 2. it must be more than P 10,000 Q: Who are liable? (FIT) A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RC, NRAETB)
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Taxation law review notes Not Liable 1. NRAETB- liable for GIT at 25 % 2. AEMPOP (NRANETB- GIT) 3. DC- NIT 27 D is silent 4. RFC NIT law is silent 28A7a 5. NRFC subject to GIT Q: When can we apply NIT in Prizes? A: 1. When the taxpayer is RC, RFC and DC 2. For DC and RC it must be derived from income abroad RFC it must be derived from income w/in 3. amount is more than P10,000 NOTE: If the prize is derived from sources w/in but it is below P 100,000 it is not subj to tax. If derived from sources abroad, most of them are exempt except for RC and DC who are liable w/in and w/out.
1. 2. 3.
If Taxpayer is DC or RC Income is derived abroad Taxpayer is RFC and income w/in.
NOTE: If income abroad, most TP are exempt except DC and RC Q: MCIT applies when? A: It is higher than the NIT Royalties Requirement: ► The income is from w/in ► Rate? 20%. Lower rate? 10% on (authors of) books, literary works and musical compositions. (Authors and Composers)
Q; Is it possible for RC and DC to pay MCIT? A: Yes if MCIT is higher than NIT.
Q: You are a writer for Snoop Dogg are you liable for FIT? What if for April Boy? A: Liable for NIT if Income abroad like a writer for Snoop. While FIT if for April Boy.
Winnings Q: Do we apply the P100,000 req.? A: No, we do not apply it only apllies to prizes. It must not pertain to illegal gambling. ►
Thus, the only requirement is it must be derived from income w/in.
Q: Who are liable? (FIT) A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RA, NRAETB) Not liable to FIT? 1 NRANETB- GIT 2 AEMOP (NRANETB- GIT) 3 DC- law is silent NIT 4 RFC- law is silent 5 NRFC- GIT Q: When does NIT apply to winnings? A:
Q: Who are liable (FIT)? A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RC, NRAETB) Not Liable? 1. 2. 3. 4. 5.
NRANETB AEMOP DC RFC NRFC
NOTE: Lower rate of 10% applies to all except NRANETB Q: When do we apply NIT to Royalties? A: 1. TP is RC or DC 2. Income is from w/out 3. TP is RF and income is w/in ►
If income is from sources abroad all are exempt except RC and DC
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Taxation law review notes 1. 2. 3. 4. 5. 6.
Dividends ►
Confined with cash and/or property dividends.
Q: What are dividends? A: Any distribution made by Corporation to its stockholders outside of its earnings or profits and payable to its stockholders whether in money or in property (Sec. 73) COMM. vs. MANNING Q: Where did it come from? A: shares come from another shareholder Q: What are the dividends included? A: Sec. 24 refers to cash or property dividend H: For stock Dividends to be exempt it must come from the profit of the corporation. Stock Dividends → it is the transfer of the surplus profit from the authorized capital stocks. Q: Assuming that there are 5 Incorporators the Corpo has a P5 M Authorized Capital stock. It distributed 1 M stock dividends, is it taxable? A: NO, the dividends did not go to the Stock holder but to the Auth Capital Stock. Only cash and Prop Stock go to the Stock holder. ► Sec 24 B does not mention stock dividends because it is not subject to FIT but it is subject to NIT under Section 73. Q: Is there an exception when stock dividends are not taxable? A: YES, if the shares of stocks are cancelled and redeemed meaning it was reacquired by the corp. (Contract of Sale) ANSCOR CASE →the stockholders cannot escape the payment of taxes (Why? Bec. Stock dividends in Sec. 24B) Requirement: Gen Rule- the dividends must be distributed by a DC. (Bec. There is no provision wherein FIT & NIT are mixed) Except- Regular operating- always a foreign corp. ►
What rate: 10% FIT
Q: Who are liable? A:
RC NRC OCW RA NRAETB AEMOP (RC, NRAETB)
Not liable? 1. NRANETB 2. AEMOP 3. DC 4. RFC 5. NRFC ►
Shares of association and partnership is taxable
Q: Determine the tax liability of the following? A: 1. DC a Stockholder of DC= Exempt 2. RFC stockholder of DC= Exempt also 3. DC stockholder of RF= Liable for NIT. Capital Gains From Sale of Shares of Stock Not Traded (§24C) 1. 2. 3. 4.
Subj to FIT Determine whther there is a loss or a gain because the tax is impose upon the net capital gains realized from the sale, barter, or exchange or other disposition of the shares of stock in a domestic corp. It is uniformily imposed on all taxpayer not subj to w/holding tax.
Requirements: 1. Shares of stock of a DC 2. It must be capital asset 3. must not be traded in the stock market ► 25 R last part: Capital Gains realized by NRANETB in the Phils. from the sale of shares of stock in any DC and real prop shall be subj. to the income tax prescribed under Sub sec (c) and (d) of Sec. 24. ► SEC. 24 B 1&2: If the elements are present NRANETB and NRFC are liable to pay GIT. Except: under 24 C for NRANETB. What do you mena by the phrase “ the provisions of 39 notwithsatanding”?
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Taxation law review notes ► It refers to the holding period. When it comes to capital gains from sale of shares of stock not traded and capital gains from the sale of real prop. The holding period does not apply because the basis will be those provided in 24 C & D and not under 39 B (GSP or FMV) ELEMENT #1 The share is a share in DC Q: What if the share is from foreign corp? A: Determine the income considered. If income w/in read Sec. 42 (E) If the shares sold are that of a foreign corp it is subj to the ff rules: a. sold in the Phils= its income w/in b. sold in abroad= w/out c. Shares of stock in a Dc is always considered an income w/in regardless where it was sold. ►
Q: Shares of Foreign Corp sold in Phils. Who’s liable? What tax? A: Not subj to FIT because one of the elements is not present . Shares not being that of a DC. Hence: a) RC, NRC, OCW, NRAETB, AEMOP (RA, NRAETB) will pay NIT. DC and RFC b) NRANETB and NRFC will pay GIT
If the shares are ordinary asset 1. Ordinary shares in DC- income w/in a. Most of the taxpayer will pay NIT except NRFC and NRANETB 2. Ordinray assets of foreign corporations a. Income within if sold in the Phils: most will pay except NRANETB and NRFC b. Income w/out if sold abroad: most will be exempt except RC and DC MCIT Q: When is a RFC subj to NIT? A: 1. Sale of shares of stock of a Foreign corp in the Phil. 2. sale of shares of stock of DC which are ordinary asset ► DC and RFC are subj to MCIT which may be imposed if the NIT is lower than the MCIT2% MCIT will be imposed if MCIT is higher than NIT. Capital Gains From Sale of Real Property (§24D) ► In 39 B the holding period does not apply because the basis of income tax is the gross selling price (GSP) or the Fair market value (FMV) whichever is higher6% FIT
Q: Shares of Foreign Corporation sold abroad? A: It will be considered an income w/out. Thus: most of them will be exempt except RC and DC liable to pay NIT
Requirements: 1. The real prop must be sold w/in the Phils and located in the Phils. 2. It must be a capital asset 3. The seller must be an individual, estate or trust or a DC
ELEMENT # 2 NOT TRADED OR SOLD IN THE STOCK MARKET
►
RFC not liable for FIT but liable to pay NIT if all the elements are present.
►
if sold in the stock market- it is not subj to FIT
►
NRFC liable to pay GIT and not FIT
►
if sold in the stock market, it will be subj to percentage tax, in lieu of NIT.
►
NRANETB liable to pay FIT are all elements are present.
ELEMENT # 3 It must be a capital asset.
ELEMENT # 3 The real prop must be a capital asset
Q: When is it considered an ordinary asset? A: 1. When the broker or dealer a. used it in trade or business b. held for sale in the ordinary course of trade or business 2. to all other assets, it will be considered a capital asset
Q: When considered a capital asset? A: Read R.R. 7- 2003
NOTE: if all elemts are present it will be subj to FIT (why is it important to know Ordinary Assts? To determine that shares are capital asssets)
Q: Ordinary asset- shall refer to all real property specifically excluded from the definition of capital asset under Sec. 39 A: Other property not mentioned are capital asset. Q: What if all the elements are not present? A: most will be liable to pay NIT
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Taxation law review notes Except NRANETB and NRFC liable for GIT Q: May a RC be liable to pay NIT even if all the elements are present? A: YES, disposition made to the Govt. Thus, the taxpayer has the option of paying 32% NIT or 6% FIT Q: Which is more advantageous? A: It depends determine first if there’s a loss or a gain. If there’s a gain choose to be taxed at 6% FIT. In this case the gain is always presumed. If there’s a loss choose to be taxed at 32% because losses may be considered an allowable deduction . Other transactions are covered: 1. sale 2. barter 3. exchange 4. other disposition NOTE: If the prop is under mortgage contract and the mortgagee is a bank or financial inst, the FIT does not apply because the property is not yet transferred because there’s a period of redemption If after a year the mortgagor failed to redeem the property that is the only time that the FIT will apply because there’s now a change of ownership. If redeemed w/in 1 yr period FIT will not apply because there’s no change of ownership. If the mortgagee is an individual the FIT is imposed whether or not there is a transfer of ownership. Exceptions (§24(D2)) Q: What if the prop being sold was a movie house, can he claim for the exception? A: the prop covered by the exemption is a residential lot Q: Who can claim the exemption? A: Only the taxpayer mentioned in Sec. 24 Requirements: 1. The purpose of the seller is to acquire new residential real prop 2. the privilege must be availed of w/in 18 mos. From the sale 3. Comm. must be informed w/in 30 days from the date of sale with the intention to avail of the exemption 4. the adjusted basis or historical cost of the residence sold shall be carried over to the new residence. 5. the privilege must be availed only once every 10 yrs
6.
Certification of the brgy. Capt where the taxpayer resides that indeed the prop sold is the principal residence of the tax payer (RR 13- 99)
Q: What if the property is worth 10 M and it was sold only for 2M, what will happen to the unused portion or profit? A: If the proceeds are not fully utilized, the portions of the gain is subj to FIT
SEC. 27A RATES OF INCOME TAX Q: How many income taxes are paid by a DC? A: 1. NIT 2. MCIT 3. FIT 4. 10%Improperly Accumulated Earnings 5. Optional corporate income tax of 15% of the gross ►
DC liable for five, but the optional is not yet applicable so only 4.
Q: How many can be applied simultaneously? A: 1. NIT, FIT and 10% IAE 2. MCIT, FIT, 10% IAE
ONLY 3
SEC. 27 (B) PROPRIETARY EDUCATIONAL INST. & HOSP. Who are the taxpayers? 1. Non- Profit Proprietary Educl. Inst and 2. Non Profit Proprietary Hospital Q: What if the school or hospital is non profit only, is it exempt? A: No, subject to 10% on their taxable incomeexcept those covered by subsection (D) PROVIDED that gross income from unrelated business, trade or activity must not exceed 50% of its total gross income derived by such educational inst or hospital from all sources Requirements: 1. It is a private school or hospital 2. it is stock corp 3. it is non profit
25
Taxation law review notes 4. 5.
that gross income from unrelated business, trade or activity must not exceed50% of its total gross income derived by such educational inst or hospital from all sources has permit to operate from DECS, TESDA, or CHED
A: If its nonstock, non- profit educational inst. It may be exempted from local taxation. Q: Is Art 14 Sec. 4 of the Consti obsolete? A: NO, if the law is silent apply the Consti.
Q: What do you mean by unrelated trade business or activity? A: It means any trade, Business, or activity which is not substantially related to the exercise or performance by such entity of its primary purpose or performance Q: May a school or hospital be exempt from paying tax? What are the req? A: 1. It must be non- stock and non- profit 2. the assets property and revenues must be used actually, directly, and exclusively fro the primary purpose ( All revenues and assets of Non-stock non-profit educational institutions used actually, directly & exclusively for educational purpose shall be exempt from taxes and duties , Art. 14, Sec.4 Par. 3) Q: Under what law? Is it the constitution or the NIRC which provides fro the exemption? A: It is under Sec. 30 of NIRC and not under Sec.4 Art. 14 of the Constitution. The provision of the NIRC is the specific law which prevails over the Constitution which is the general law. → exempt from all taxes and custom duties Q: What about exemption from real property tax? A: Art. 6 Sec. 28 of the Constitution: charitable institution churches, ….and all lands buildings, actually directly and exclusively used for religious, charitable, and educational purposes shall be exempt from taxation. → Not Sec. 4 of Art. 14 of the Constitution. Q: You donated a property to a school will you be liable for donor’s tax? A: not liable if it falls under Sec. 101 (3) of the NIRC REQ. FOR EXEMPTION TO DONORS TAX: 1. it must be nonstock, non- profit educational inst. 2. not more than 30% of the prop donated shall be used by such donee for admin purposes. 3. paying no dividends 4. governed by trustees who don’t receive any compensation 5. devoting all its income to the accomplishment and promotion of the purposes stated in its Articles of Incorporation Q: What about exemption from VAT? A: Sec. 109 (m) of R-VAT
SEC. 23: GOCC, AGENCIES, INST of the GOVT. GEN RULE: Subj to tax. EXCEPTIONS: 1. GSIS 2. SSS 3. PHIC 4. PCSO ►
PAGCOR no longer included.
Q: If the GOCC is not one of those enumerated does it follow all of its income is automatically subject to tax? A: NO. Under Sec 32. B (7) income derived from any public utility or from the exercise of essential government functionaccruing to the Govt of the Phils or to any political subd. Are therefore exempt from income tax. Therefore, even if the GOCC is one of those enumerated under Sec. 27 it may still be exempt under Sec. 32 b7b if its performing governmental function NOTE: Pagcor vs. Basco case Q: What is the difference between Sec. 27 C and 32 b7b? A: 1. Sec 27 C exempts those enumerated without any qualification. 2. Sec. 32b7b qualification must concur before it may be exempted. Q: Can the government impose tax on itself? A: It depends on who the taxing authority is. If the taxing authority is the National Govt. as a rule, YES. Exceptions 1. those entities enumerated under §27 C
2.
those GOCC falling under §32b7b
Q: What about exemption fro Loc Gov Code?
26
Taxation law review notes If the taxing authority is the local government units, as a rule NO. LGU’s are expressly prohibited from levying tax against: (Sec 133(o) 1. National Govt. 2. Its agencies and instrumentalities 3. local government units Exception: Sec 154 of LGC says that LGU’s may fix rate for the operationof public utilities owned and maintained by the within their jurisdiction. PAL CASE July 20 2006 H: The SC used 133 (o)an exception to pay tax, real estate tax, imposed by City of PAranaque on NAIA. The SC said that the airport is not an agency or GOCC but mere instrumentality of the Govt. This is Gross ignorance of the law Sec. 133 (o) is for local taxation not real property taxation which is the one involved in the present case. NOTE: Mactan- Cebu Airport case
A: Depositary banks Q: Exempt from what kind of transaction? A: From foreign currency transaction. If it involves foreign currency transaction it is not exempt but subject to 35 % NIT Q: Who are the other parties? A: 1. Off shore banking units 2. branches of foreign banks 3. local commercial bank 4. Other depositary banks under EFCDS 5. Non- residents ► if the above enumeration are the parties, then depositary bank will be exempt from paying the NIT
SEC. 27 D(1) Foreign Currency Loan Q: How many possible incomes were mentioned? A: Two (2): bank interest and royalties REQ: 1. 2.
Bank interest must be received by a Domestic Corp Royalties derived from sources within
Q: When it comes to bank interest, what is the difference if the taxpayer is an individual or corporation? A: If individual, they may be exempt from the payment of interest in case of long term deposit except NRANETB If DC, they are not exempt from long tem deposit.
Q: Who is the lender? Borrower? A: Lender- EFCDS Borrower- RC EXEMPT Offshore banking units Other depositary banks under EFCDS ►
exemption of NR from EFCDS:
Q: Who is the income earner? A: Non Residents whether individual or Corporations
Q: What about royalties? A: If individual, have a lower rate of 10%on books, other literary and musical compositions. DC have no lower preferential rate.
Q: Derived from whom? A: Depositary Bank under EFCDS
SEC 27 D2: CAPITAL GAINS FROM SALE OF SHARES NOT TRADED
NOTE: Sec. 24 B Nonresident exempt from bank interest under EFCDS
SEC 27 D3: EFCDS
Q: What is the difference between 24 b1 from 27 D3 A: In 24 B1, NR is exempt only from bank interst derived from EFCDS while 27D3 exempts NR from any income from transactions with depositary bank under EFCDS
Q: What is the expanded foreign currency? A: It is a bank authorized by the BSP to transact business in the Philippine Currencyas well as acceptable foreign currency or both. Q: What is the tax to be paid? A: Normally it is NIT because it is subj under Sec 27 D3 and 28 A Q: Who is the income earner?
SEC. 27 D(4)- Intercorporate dividends- exempt 27 D5 Capital Gains from sale of Real Prop. Q: What is the tax? A: 6% FIT
27
Taxation law review notes Q: What is the difference if the seller is an individual and a DC? A: Individual can sell all kinds of real property DC can only dispose land and/or buildings.
► An intl. carrier doing business in the Phils. shall pay 2 ½ % on its Gross Phil Billings (GPB) Q: Is 28 A3 the Gen. rule or the Exception? A: It is the general rule because it is under 28 A3
SEC 27 (E) MCIT ► Q: Applicable to whom? A: DC and RFC Q: Can it be applied simultaneously with NIT? A: NO, imposed in lieu of the NIT, whichever is higher. Q: What is the Rationale? A: to prevent corporations from claiming too many deductions Q: When will it be imposed? A: 1. On the 4th year immediately ff the year in which such corp commenced its business. 2. When the MCIT is higher than the NIT Q: What is the carry over rule? A: Sec 27 E2 states the carry over rule. ►
In order to avail: only in the year where the MCIT is greater than the NIT.
Sec 28 A1 Q: What Kinds of taxes are paid by the RFC? A: NIT MCIT Sec. 28 B2 MCIT on RFC ►
same with Sec. 27
Sec. 28 A3- INTL CARRIER Kind: 1. 2.
Air carrier ships
GPB is in the nature of FIT, applies only if all the requirements are present.
► RFC will be liable for NIT, hence a RFC engaged in common carriage does not pay GPB but NIT ►
Income without: EXEMPT
International Carrier: ► GPB refers to the amount of revenue derived from: carriage of persons, excess baggage, cargo and mail originitang from the Phils in a continouos and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the tickets or passage document. REQ: 1. 2. 3.
Originating from the Phils. Continouos and uninterrupted flight; irrespective of the place of sale or issue and the place of the payment of tickets or passage document.
Q: Do you consider landing rights to determine liability? (RR 15-2002) A: 1. If originates from the Phils and has landing rights- ONLINE- RFC 2. No landing rights- OFFLINE- NRFC Q: If there are stopovers, is it still uninterrupted? A: YES, provided that the stopover does not exceed 48 hrs. Q: When will the place of sale of tickets matter as to the taxpayers liability? A: The place of tickets is material only if the two other elements are not present to be able to know if its subj to NIT or exempt. Revalidated, exchanged or indorsed tickets REQ: 1. 2.
The passenger boards a plane in a port or point in the Phils. The tickets must be revalidated, exchanged, or indorsed to another airline.
Q: What if it’s the same airline but different plane? A: GPB does not apply, it must be to another airline
28
Taxation law review notes Q: What if it did not originate from the Phils.? A: Determine if its income within or without. if ticket was purchased in the Phils. it is income within hence apply NIT if purchased outside, it is income without, hence exempt
EFCDS 1. 2. 3. 4.
Transhipment REQ: flight originates from the Phils transhipment of passenger takes placeat any port outside the Phils. the passenger transferred on another airline
Acceptable foreign currency, Phil. Currency or both Can be a domestic or foreign corporation Exempt if income derived by DC or RFC from EFCDS Parties: a) local commercial banks b) Foreign bank branch c) Non Residents d) OBU in the Phils e) Other banks under EFCDS
FOREIGN CURRENCY LOAN Q: How do you apply GPB? A: Only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Phils to the point of transhipment shall from part of the GPB. Q: Is it liable for the whole flight? A: From the Phils to the point of transhipment, it is income w/in From transhipment to final destination, its income w/out- EXEMPT International Shipping ►
GPB means gross revenue whether from passenger, cargo, mail
REQ: it must originate from the Phils. up to final destination regardless of the place of sale or payments of passenger or freight documents Sec28 A(4) OFF SHORE BANKING UNITS OBU’s
1. 2. 3. 4.
only acceptable foreign currencies always a foreign corporation (subj to NIT) except #3 Exempt if income is derived by the OBU from EFCDS Parties: a) local commercial banks b) Foreign bank branch c) Non Residents d) OBU in the Phils.
Difference with EFCDS:
10% FIT If: Lender- OBU Borrower- Resident Citizen EXCEPT: 1. OBU 2. Local Commercial Banks ►
Transactions of Non Residents: 1. Income earner: Non- Residents 2. Lender: OBU’s NOTE: Non resident exempt from transactions with OBU’s and EFCDS SEC. 28 A5 TAX ON BRANCH PROFITS, REMITTANCES ► profits based on the total profits applied or earmarked fro remittance remitted by a branch to its head office ► Subj to 15% tax Except: those activities which are registered with PEZA NOTE: Interests, Dividends, Rents, Royalties including remuneration for technical sevices, salaries, wages, premiums, annuities, emoluments, or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within shall not be treated as branch profits UNLESS the same are effectively connected with the conduct of its trade or business. Branch Profit Remittance (Which is better to establish?- brach or subsidiaries? Determine the tax laws of the foreign country) Two ways to receive income (FC) 1. Branch
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2.
Taxation law review notes 1. the HQ do not earn or derive income from the Phils.
Subsidiaries
2.
NOTE: 1. When a FC establishes branch, it is always a FC 2. When a FC establishes DC, it is a RFC
SEC. 28 A6b
Q; It is in addition to NIT- Why? A: NIT because it is RFC Q; What kind of tax is imposed under 28 A5? A:
Acts only as supervisory, communications, coordinating centre for their affiliates, subsidiary or branches in the Asia- Pacific Regionand other foreign markets.
► 15% FIT
Q: How do you apply the rate? A: multiplied to the total profit applied or earmarked for remittance w/o deductions It applies for branches that are: 1. the profit remitted is effectively connected with the conduct of its trade or business in the Phils. 2. One not registered with PEZA MARUBENI CASE F: A branch was established with AG&P, there was investment with AG&P Q: Did the petitioner participate with the negotiation? A: NO Q: What did the petitioner pay? A: 15% Branch Profit Remittance Tax (BPRT) 10% Intercorporate Dividends Q: What’s the issue? A: Petitioner maintains that there was overpayment of taxes, thus the same was asking for a refund of tax erroneously paid.
Regional Operating HQ are taxable and liable to pay 10% taxable income.
► Regional Operating HQ is a branch established in the Phils by a multinational company engaged in any of the services: 1. Gen. Administration and Planning 2. Business Planning and Coordination 3. Sourcing and procurement of Raw materials and components. 4. Corporate Finance and Advisory Services 5. Marketing Control and sales promotion 6. Training and personal management 7. logistic services 8. research and development services and product development 9. technical support and maintenance 10. data processing and communication and business development Rationale: Why liable? Because the claim for exemption of resident airlines shall be minimized SEC. 28A7a Interests and Royalties: ►
20%FIT
Q: Is is subj to FIT? A: NO, exempt if petitioner is RFC H: -not correct to pay 15%
►
Interests under EFCDS= 7 ½ %
To be liable for BPRT 1. It is a RFC 2. Branch did not participate in negotiations
1. Income derived from foreign currency transactions with: a) Non Residents b) OBU c) Local commercial bank d) Foreign bank branches e) Other depository bank under the EFCDS
SEC. 28 A6a
Sec. 28A7b Income derived under EFCDS
► Regional or area headquarters (Sec. 22 DD) shall not be subject to tax exempt from income tax if the requisites are present.
►
Q: What are the requisites? A:
EXCEPTION: Income from such transaction as may be specified by the secretary of Finance, upon recommendation by the Monetary Board to be subject to regular income tax payable by any banks.
As a Gen Rule: the above transaction is Exempt
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Taxation law review notes ►
liable for 7 1/2 % GIT
2. Interst income from foreign currency loans SEC 28 b5a Interest on Foreign Loans ► granted by depository bank under said EFCDS to others shall be subject to 10% FIT Exempt if granted to: 1. Other OBU in the Phils, and 2. Other depository bank under the EFCDS » SEC. 28 A7c: Capital Gains from Shares of Stocks not Traded in the Stock exchange » 5% or 10% as the case maybe SEC 28A7d: INTERCORPORATE DIVIDENDS ►
DC- RFC= EXEMPT, not subj to tax
SEC 28 B1 Q: What kind of tax? A: 35% GIT on the ff income 1. Interest 2. Dividends 3. Rents 4. Royalties 5. Salaries 6. Premiums( except reinsurance premiums) 7. annuities 8. emoluments 9. Other fixed and determinable Gains, profits and income. SEC 28 B2 Non Resident Cinematographic film owner, lessor or distributor ►
liable for 25% GIT
SEC 28 B3 Non Resident owner or lessor of Vessels chartered by Philippine Nationals. ►
liable for 4 ½ GIT
Elements: 1. Chartered to Filipino Citizens or Corporations 2. Approved by MARINA SEC. B(4) Non Resident Owner or Lessor of Aircraft, Machiniries, and other Equipments.
►
Must be read with Sec. 32 B7a
Interest on Foreign Loans, if the lender is 1. NRFC liable to 20% FIT 2. Foreign Govt. Exempt because it is an exclusion (Sec 32 b7a: income derived by a foreign govt from investments in the Phils on loans, stocks, bond, and other domestic securities or from interest on deposits in banks by: a) Foreign govt. b) Financing inst owned controlled or enjoying, refinancing from foreign govt; and c) Inter nation or Regional financial inst established by foreign govt. COMMISIONER OF INTERNAL REV. vs. MITSUBISHI METAL CORP. (180 SCRA 214) F: Atlas Mining enetered into a Loan and Sales Contract with Mitsubishi Metal Corp. ( A Japanese Corp.) for the purposes of projected expansion of the productivity capacity of the former’s mines in Cebu. The contract provides that Mitsibushi will extend a loan to Atlas in the amount 20 M dollar, so that Atlas will be able install a new concentrator for copper production. -Mitsubishi to comply with its obligation, applied for a loan from ExportImport Bank of Japan (Exim Bank) and from consortium of Japanese banks. Pursuant to the contract Atlas paid interst to Mitsubishi where the corresponding 15% tax thereon was withheld and only remitted to the Govt. Subsequently Mitsubishi filed a claim for tax credit requesting that the same be used as payment for its existing liabilities despite having executed a waiver and disclaimer of its interest in favour of Atlas earlier on. It is the contention of Mitsubishi that it was the mere agent of Exim Bank which is a financing inst owned and controlled by the Japanese Govt. The status of Eximbank as a government controlled inst became the basis of the claim fro exemption by Mitsubishi for the payment of interst on loans. I: WON Mitsubishi is a mere agent of Eximbank H: NO. The contract between the parties does not contain any direct reference to Exim Bank, it is strictly between Mitsubishi as creditor and Atlas as the seller of copper. The bank has nothing to do with the sale of copper to Mitsubishi. Atlas and Mitsubishi had reciprocal obligations- Mitsubishi in order to fulfil its obligations had to obtain a loan, in its independent capacity with Exim bank. Laws granting exemption from tax are construed strictly against the taxpayer and liberally in favour of the taxing authority. SEC. 28 D5 b INTERCORPORATE DIVIDENDS:
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Taxation law review notes ► FIT 15% imposed on the amount of cash and or prop dividends received from a domestic corporation. SUBJ TO THE CONDITION: the country where the NRFC is domiciled allows a credit against the tax due from the NRFC taxes deemed paid or deemed to have been paid in the Phils.
2.actual proof of payment not necessary, what is necessary is the law of the domicile of the country providing fro tax credit equal to 20% of the tax deemed paid. Q: What is the rate if the law is silent? A: 35% FIT
Gen rule: 35 % FIT Exception: 15% under the “tax deemed paid rule/ reciprocity rule/ tax sparring rule”
► The rate will only be 15% if there’s a law recognizing the same but this refers to the case of those belonging to the first category.
JHONSONS CASE 2 Kinds of Categories: 1st : Japan, US, Germany, Phils liable for income within and income without
WANDER CASE Q: Who are the parties? A: DC(Wander) and FC (Glaxo)- they belong to different categories The BIR tried to collect 35% because the law is totally silent about the tax credit H: The SC said that the tax should be 15% which applies 2 instances: 1. Foreign law do not provide for tax credit- 35% 2. law provides but the law is silent- 15% 3. law is silent because there is no law- 15% 4. law is silent because ther’s no law because the subj matter is not taxable15%
2nd : countries liable only for income within. MARUBENI Case: 2 Issues 1. Is the payment of 10% FIT correct? - No because it was a branch and RFC but still Marubeni was NRFC under the old law which is liable to pay 35%, but SC said liable only to 25% because of the tax treaty ► You cannot refund right away → 15% BPRT and 10% Intercorporate Dividends tax has different basis In P&G who are involved DC (P&G Phil) and NRFC (P&G US) - DC declares dividends to NRFC 35% was withheld and remitted to the BIR What did they discover? (after paying) they discovered that they are liable only for 15% so they have a refund of 20% st
Q: In the 1 case did the SC allowed the refund? A: NO, denial anchored on 2 grounds: 1. One claiming for refund was not the proper party 2. There was a showing or proof as to the existence of the “tax deemed paid” rule Q: In 2nd case was there a refund? A: YES, the SC reversed itself 1.Income tax is FIT: the withholding agent is the proper party because he is liable to pay said taxes
SEC. 29 IAET Q: What is the rate? A: 10% of the gross income (taxable income) ► It is imposed upon the improperly accumulated taxable income of the corporation Q: Applies to what Corp? A: to DC only under RR 2- 2001( classified as closely held corporations) Q: Is it in the nature of sanction? A: Yes, it is imposed to compel the corporation to declare dividends. Q: Why? A: because if profits are distributed to the shareholders, they will be liable for the payment of Dividends tax. Now, if the profits are undistributed the shareholders will not incur liability on taxes with respect to the undistributed profits of the Corp. In a way it is in the form of detterent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them. Q: What is taxable income?
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Taxation law review notes A: SEC. 31 defines taxable income as the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special law
Q: What is a closely- held corporations? A: Those corporation at least 50% in value of the outstanding capital stock or at least 50% of thetotal combined voting power all classes of stock entitled to vote is owned directly, or indirectly by or for not more than 20 individuals
Q: When not laible to pay IAET? A: There are 2 groups of DC exempt from payment of IAET (RR2-2001)
NOTE: Publicly held Corp. has more than 20 shareholders
A) Corporations failure to declare dividends because of reasonable needs of business ► reasonable needs means are construed to mean immediate needs of the business including reasonable anticipated needs Q: What constitutes reasonable accumulation of the corporation’s earnings? Examples? A: 1. allowance for the increase in the accumulation of earnings up to 100% of the paid- up capital of the corporation. 2. earnings reserved for the definite corporate expansion projects or programs appoved by the Board 3. Earnings reserved fro buildings, plants, or equipment, acquisition approved by the Board 4. Earnings reserved for compliance with any loan agreement or pre- existing obligations 5. Earnings required by law or other applicable statutes to be retained. 6. In case of subsidiaries of foreign corporation, all undistributed earnings or profits intended or reserved for investments NOTE: the corporations belonging in the 1st group are normally liable but they can show that the accumulation of earnings is justified for reasonable needs of business, they incur no liability and exempt from payments of the same.
Q: What is the time for paying this tax? A: Calendar Year: Jan 25, 2005- Dec 31, 2005. Today is 2006. You have 1 year to declare after the close of the taxable year. 2006 is the grace period. You will pay on January 2007. Q: If you’re not mentioned to be exempted, will you still be liable? A: No, if you invoke adjustments SEC 30. EXEEMPTIONS FROM TAX ON CORPORATIONS ►
Determine the Corporations’ exemptions under Sec. 30 27 C and 22B. 1. Sec 30, the corporations shall not be taxed under this title (tax on income) in respect to income receive by them as such. 2. Sec 27, the corporations enumerated are always exempt. Thus exemption is unconditional 3. Sec 22B GPP, as a general rule is not a corporation 4. except if it earns income from other business
► Joint Venture w/ service contract w/ government not a corporation, otherwise, it is liable. Assignment: Sec. 35 August 21, 2006 – Midterms August 14, 2006
B) Corporations which are exempt whether or not it is for reasonable needs of the business: 1. Banks, and other non- bank financial intermediaries. 2. Insurance companies 3. Publicly- held corporations 4. Taxable partnerships 5. General Professional Partnerships 6. Non- taxable joint- ventures 7. Enterprises registered with a) PEZA b) Bases Conversion Devt Act of 1992 (RA 9227) c) Special Economic Zone declared by law
Q: What is the reason for not including the corporations exempt under section 27C and Section 22B under Section 30? A: Because there is an exemption which does not apply to all exempt corporation. The exemption under Section 30 is not absolute while the exemption under Section 27 C is absolute and without any conditions. In addition, Section 22B provides that a joint venture is generally taxable unless it has a service contract with the government, a generally taxable corporation cannot be joined with the group as generally not taxable corporation. General Professional Partnership is exempt but the exemption is not the same as provided by Section 30. TAKE NOTE: Las Paragraph of Section 30.
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Taxation law review notes ► exemption to the exemption: income of whatever kind and character of the foregoing organizations from: 1. any of their properties, real or personal; 2. any activities conducted for profit ►
regardless of the disposition of said income, shall be subject to tax.
Q: Enumerate the exempt corporations under Section 30; What is the requirement? A: 1. Labor, agricultural or horticultural organization not organized principally for profit; 2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purpose and without profit; 3. a beneficiary society, order or association, operating for the exclusive benefit of the members such as fraternal organization operating under lodge system. (lodge system: operating world wide) or a mutual old association or a non-stock corporation: a. organized by employees; b. providing for the payment of life, sickness, accident or other exclusive benefits to its employees and their dependents; 4. Cemetery (a) company owned and (b) operated exclusively for the benefit of its members; 5. Non-stock corporation or association organized and operated exclusively for Religious, Charitable, Scientific, Artistic or Cultural purposes, or for the Rehabilitation of Veterans (RCSACR), no part of its net income or asset shall belong ot or inure to the benefit of any member, organizer, officer, or any specific person; 6. Business league, chamber of commerce, or Board of trade, (a) not organized for profit and (b) no part of the net income of which inures to the benefit of any stock holder or individual; 7. Civil league or organization not organized for profit but operated exclusively for the promotion of social welfare. CIR vs. YMCA Q: What is the basis of Manila BIR for the imposition of the tax? A: last paragraph of Section 30, because YMCA was conducting an activity for profit. F: the CTA and the CA invoked the doctrine laid down in Herrera and Abra Valley case which involves an exemption from the payment of Real property Tax. H: The SC revised the ruling. YMCVA is liable to pay income tax applying the last paragraph of Section 30. YMCA Is exempt from the payment of property tax, but not to income tax on rentals from its property. The tax code specifically mandates that the income of exempt organizations (under section 30) from any of their properties, real or personal,
shall be subject to tax, including the rent income of the YMCA from its real prop. 8. a non-stock and non profit educational institution; 9. gov’t educational institution; 10. Farmer’s or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, or like organization of a purely local character, the income of which consists solely of assessment, dues and fees, collected from members for the sole purpose of meeting its expenses; 11. Farmer’s, fruit grower’s or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them. TAKE NOTE: income of sales agent is exempt. Section 31: TAXABLE INCOME
CHAPTER VI: COMPUTATION OF GROSS INCOME SECTION 32: GROSS INCOME Q: What is the tax treatment? Are these taxable income? Are these included in the gross income? Is it included in the ITR? Is it subject to NIT? A: Sec. 32 A answers the questions. Q: What is the income tax referred to here? A: NIT. The section refers only to the payment of NIT. It speaks of the NIT.
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Taxation law review notes Q: If the is mentioned under Section 32 A, does it follow that it is automatically included in the GIT? A: No, Section 32 A states “Except when otherwise provided in this title” Q: What are the income that are not included, not subject to NIT? A: 1. Income that are subject to FIT. 2. Income that are considered an exclusion; and 3. Income that are exempt. Q: When do you not apply Sec. 32 A? A: it applies to all except: 1. NRANETB 2. NRFC » they do not pay NIT, they pay by way of GIT. Q: What are included in the Gross income? A: 1. Compensation for services in whatever form paid including but nor limited to fees, salaries, wages, commissions, and similar items. [Sec. 32 A (1)] Q: What is compensation? A: all remuneration for services performed by an employee for his employer under an employer-employee relationship. TAKE NOTE: compensation is included in the ITR if the taxpayer is not liable for NIT. Thus, if subject to NIT, included in the ITR. Q: Is there an instance where the salaries of a RC is not included in the ITR? A: Yes, if the salary is subject to FIT, like when the RC is employed in Multinational, offshore banking, and petroleum companies. 2. Gross Income derived from the conduct of trade or business or the exercise of a profession; [Sec. 32 A (2)]
► if the elements are present, subject to FIT. Thus, it is not included in the ITR, the withholding agent will be responsible for this. Q: Income form the sale of property, do you include this in the ITR? A: it depends a. if subject to FIT, not included. Withholding agent accomplish the forms → subject to FIT if the following elements are present: 1. it is a capital asset; 2. located in the Phil.: and 3. sold by individual, trust, estate, DC. b. if subject to NIT, included in the ITR. → Elements are not present, like when the real prop. is an ordinary asset or when it is capital asset if the taxpayer is RFC. TAKE NOTE: R-R 17-2003 ►
Real property sale subject to FWT, the buyer accomplishes the ITR. 4. interest; [Sec. 32 A (4)]
Q: What interest is being referred to here? A: interest which is included in the computation of gross income is interest earned from lending money and interest from bank deposit which does not constitute passive income. Bank interest from sources, without or abroad. Q: Bank interest from Solid Bank, is it included in the ITR? A: No, because it is included or considered an income within, thus subject to FIT. Thus, not included in the ITR. 5. Rents. [Sec. 32 A (5)] ►
subject to NIT, included in the ITR. 6. Royalties; [Sec. 32 A (6)]
Q: What is the income tax here? A: NIT, included in the ITR. 3. Gains derived from dealings in property. [Sec. 32 A (3)] Q: Did the law distinguished? A: No, the law did not distinguished between real and personal property. TAKE NOTE: 1. Sale of real property 2. Sale of shares of stock (personal prop.)
Q: What is being referred to here? A: royalties which does not constitute passive income. Royalties derived from income without. – subject to NIT. Thus not included in the ITR. Q: Who are the taxpayers? A: Liable from income w/in and w/out and the rest are exempt. 1. RC 2. DC 7. Dividends. [Sec. 32 A (7)]
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Taxation law review notes Q: What kind of dividends? A: one that does not constitute a passive income. TAKE NOTE: 1. DC individual taxpayer = FIT 2. DC – DC & RFC = EXEMPT 3. DC – NRFC = FWT
A: 1. when derived from income without; 2. when less than 10,000.00; 3. when the income earner is a DC or RC. Q: When is winning subject to NIT? A: 1. When derived from income without; 2. when the income earner is a DC or RC.
► only dividends issued by a FC to an individual taxpayer (RC OR RA) is included in the computation of the gross income. Thus, included in the ITR. 8. Annuities. [Sec. 32 A (8)] Q: What kind of annuities? A: annuities which are not exempt from tax are included in the computation of the gross income. (included in the ITR)
10. Pensions [Sec. 32 A (10)] Q: What kind of pension? A: Included in the gross income if not exempt » never subject to fit (?) 11. Partner’s distributive share from the net income of the general professional partnership (GPP). Q: What is being referred to? A: GPP exempt from payment of corporate income tax
9. Prizes and Winnings [Sec. 32 A (9)] ►
shares of partners subject to NIT – Sec. 26
Q: What kind of prizes and winnings? A: a. those that does not constitute passive income; and b. those that are not considered as an exclusion. Thus, exempt. Passive Income 1. Prizes – derived from sources within and over 10,000.00 2. Winnings – derived from sources within. Exempt: a. winnings: PCSO and Lotto winnings. b. prizes: ► those primarily for recognition of (1)religious, (2)charitable, (3)scientific, (4)educational, (5)artistic, (6)literary, (7)civic achievement are exempt PROVIDED: 1. the recipient was selected without any action on his part to enter the contest or proceedings; and 2. the recipient is not required to render substantial future services as a condition to receiving the prize or award. ►
prizes and awards granted to athletes are also exempted provided: 1. local or international sports competition or tournament; 2. held in the Philippines or abroad; and 3. sanctioned by the national sports association.
SEC 32 B EXCLUSIONS FROM GROSS INCOME Q: What do you mean by exclusions? Are these exempt from income tax? A: these are not included in the gross income, THUS, exempt. TAKE NOTE: Exemptions, exclusions, deductions, have the same characteristics → all tax do not apply. 1. Life insurance [Sec. 31 B (1)] Q: What is the requirement? A: only one requirement for exemption: that the proceeds of the life insurance be payable upon the death of the insured. Q: Does it matter who the beneficiary is or paid in a lump sun or single sum? A: No. it does not matter. Exception: amounts held by the insurer under an agreement to pay interest thereon, the interest payment shall be included in the gross income.
Q: When is a prize subject to NIT?
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Taxation law review notes 2. Amount received by insured as return of premium [Sec. 32 B (2)] Q: if the insurance is payable within a certain time, say 10 years and thereafter the insured did not die, how much will be excluded? A: only the amount received by the insured as a return of the premiums. Ex. 1 M – 100 thousand = capital It is exempt (100K) 900K is taxable. Q: Why is it excluded? A: because the amount received merely represents a return of capital. Q: is this subject to Estate Tax under Sec. 85 E? do we have the same requirement? A: no, the requirement for exemption is not the same under Section 85 E. 3. Proceeds of life insurance: decedent insured himself, inclusion or exclusion will depend on who the beneficiary is. a. the beneficiary is the estate. » subject to Estate tax, included in the gross estate regardless of whether or not the designation of the beneficiary is revocable or irrevocable. b. the beneficiary is a third person other than the estate. b.1 Revocable Designation → subject to estate tax, included in the gross estate. Reason: because of the insured’s power to modify or change the beneficiary. b.2 Irrevocable Designation → not subject to Estate tax, not included in the gross estate. Reason: the insured loses the power to control, modify and change the beneficiary. Q: Is it subject to VAT? A: 1. Non-life insurance – yes, subject to VAT under 108 (A). 2. Life insurance – NO, subject to percentage tax under Sec. 123 of the Tax Code. 4. Gifts, Bequest and Devises [Sec. 32 B (3)] Q: Why is the donee exempt from income tax? A: Because the law classify it as an exclusion, not important to know whether property is real or personal. What is exempted is the “value of property acquired by gift, bequest or devise” TAKE NOTE:
A. GIFTS are excluded because they are subject to donor’s tax. B. BEQUEST and DEVISE are excluded because they are subject to ESTATE tax. Q: what is included in the gross income? A: income from such property. ► gift, bequest, devise or descent of income from any property in case of transfers of divided interest. 5. Compensation for injuries or sickness [Sec. 32 B (4)] Q: is this the same as those provided under the workmen’s compensation act (wca)? A: YES. There are 3 groups: a. Health or accident insurance or those under workmen’s compensation. b. personal injuries and sickness; and c. Damages to prevent injuries and sickness. Q: What does injury include? A: The term injury includes death, even if not injured, if the person dies this will be available. Q: when will the damages recovered be exempt? A: General Rule: all damages awarded are tax exempt. Exception: damages representing loss of income. Q: Why is it considered an exclusion? A: because this is just an indemnification for the injuries or damages suffered. 6. Income exempt under a treaty [Sec. 32 B (5)] Q: What is excluded? A: income of any kind required by treaty binding upon the Phil. Government. 7. Retirement benefits, pensions, gratuities [Sec. 32 B (6)] Q: Why do we need to distinguish retirement pay, separation pay and terminal leave pay? A: because they have different requirements for exemption. Q: What is retirement pay? A: the sum of money received upon reaching the maximum age of employment. a. Under RA4917 (with Retirement Plan) 1. the private benefit plan is approved by the BIR (RR2-98); 2. the retiring official or employee has been in the service of the same employer for the last 10 years;
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Taxation law review notes 3. he is at least 50 years old at the time of retirement; and 4. the official or employee avails himself/herself of the benefit only once. 1. b. Under RA7641 (without retirement plan) 1. the retiring official employee is at least 60 years old but not more than 65 years old; 2. the employee or official must have served the company for at least 5 years; » entitled to 15 days salary and ½ of the 13th month pay for every year of service. TAKE NOTE: the retirement benefits under RA4917 and RA7641 are exempt from income tax provided the requirements are present.
2.
GENERAL RULE: Separation pay not exempt (?) Exception: Automatic exclusions, thus exempt if due to: a. illness b. death c. physical incapacity or injury. Conditional exclusion a. causes beyond the control of the employee- excluded b. within employee’s control – included.
SEC. 32 B(6)(c)
Examples: 1. registration – CBA provides separation pay, within the control = included. 2. installation of labor saving devises or bankruptcy – beyond the control = excluded.
► retirement benefits given by foreign government, foreign corporation, public as well as private to RC, NRC, RA residing permanently in the Philippines - exempt without further qualifications – automatic exclusions.
Q: What is terminal leave pay? A: the accumulated vacation leave and sick leave benefits converted to cash or money to be given either every year or upon retirement or separation.
SEC. 32 B(6)(d,e,f)
ANSWERS = MIDTERMS
Terminal Leave Pay granted upon retirement or separation: » uder PD220, TLP in the Gov’t or in the Private Sector shall be exempt from income tax if given or granted upon retirement or separation. TLP granted on a yearly basis: 1. employee in the private sector: a. accumulated sick leave – subject to income tax. b. Accumulated vacation leave: if more than 10 days (meaning 11 pataas) – subject to income tax; »If 10 days or less – exempt. 2. Gov’t Employee: » governing law: EO 291 of Pres. Estrada, RMC 16-2000.
► Gross Income include both capital and ordinary gains, Sec. 31 says gross income-deductions, that which is ordinary loss. - may be deducted from capital gains and ordinary gains.
Rule: Gov’t workers (both officers or non-officers) granted TLP on a yearly basis → exempt from income tax. → there is no qualification as to vacation or sick leave.
Q: What is separation pay? A: on given when one is terminated from the service because of (1) illness, (2)death, (3) physical incapacity or injury, or (4) causes beyond the control of the employee.
► »
► retirement benefits given by the Philippine Gov’t through the GSIS, SSS and PVAO are exempt without further qualifications = automatic exclusions. August 21, 2006. - midterms 6-8 pm until sec 32 B(6) NIRC. August 28, 2006.
Take Note of 3 cases. be reminded of EO 291, Sec. 2. 78.2 par. 97, RR2-98, RR16-200 (3).
Q: Are there any requirement for separation pay granted by foreign gov’t or corp? A: None, the separation pay granted by the aforementioned institutions are exempt without further qualifications (“other similar benefits”).
Case of Zialcita ► retired from DOJ, contention: TLP should be exempt from income tax pursuant to the old law. SC: on a different ground – TLP is exempt because it is similar to Retirement pay, thus exempt but the ruling’s application is limited only to DOJ employees.
Q: is separation pay an exclusion, therefore, exempt? A: No.
Borromeo case: ► Same as the Zialcita case
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Taxation law review notes Issues: WON the TLP is subject to income tax and WON COLA and RATA are included? SC: RULED TLP is Exempt! Modified: the rule applies not only to DOJ officers but also to CSC commissioners. COMMISSIONER v. CASTAÑEDA - Castañeda –DFA officer in Phil. Embassy in England. 1. TLP is exempt. 2. Ruling applies to DFA officers. Q: Does the rule or decision applies to Gov’t officials only? A: No. PD220: Exemption applies to both private and public sectors(?) it does not matter if TLP is vacation or sick leave. RR2-98, Sec. 2.78.1 par. (a)(7) » JAN, 1998 – the rule applies to both private and public sectors. EO291 (SEPT., 2000) » Officer in gov’t receiving TLP is always exempt whether or not vacation or sick leave is granted. Modified RR2-98: » TLP will only apply to private sectors » if granted on a yearly basis – may be subject to tax: VACATION LEAVE 1. MORE THAN 10 DAYS = TAXABLE 2. LESS THAN 10 DAYS = EXEMPT 8. Miscellaneous items (Sec. 32 B (7) (a) income derived by foreign Gov’t [Sec. 32 B (7) (a)] Q: What kind of income? A: 1. investments in: a. loans b. stocks c. bonds d. other domestic securities 2. interest from deposits in Banks in the Philippines. Q: Who are income earners? A: 1. foreign government 2. financing institutions owned, controlled or enjoying re-financing from foreign gov’ts; and 3. int’l or regional financial institutions established by foreign gov’ts (established in the Philippines)
TAKE NOTE: if plain foreign corp., subject to FIT 20%. EXAMPLES of exclusions: a. Brunei Gov’t earns interest by depositing money in Makati Bank – Exclusion. b. SMC- Stock dividends to 3. Brunei Gov’t. exclusion c. Income derived by the Gov’t or its political subdivisions (Sec. 32 B (7) (b) a. exercise of public utility b. exercise of any essential gov’t function. » accruing to the gov’t. d prizes and awards (Sec. 32 B 7 c) » primarily for religious, charitable, scientific, educational, artistic, literary or civic achievements: 1. recipient was selected without any action on his part to enter the contest or proceedings; 2. the recipient was not required to render substantial future services as a condition to receive the prize or award. D. prizes and awards in sports (Sec. 32B 7 d) 1. granted to athletes; 2. local or int’l competitions; 3. held here or abroad; 4. sanctioned by the nat’l sports associations. E. 13th month pay and other benefits (Sec. 32B 7 e) Q: Do you include Christmas bonus in your ITR? A: No, because the law says 13 th month pay and “other benefits”/”similar benefits” – xmas bonus is included in the category. Q: Who can increase the 30,000 limit? A: The Sec. of Finance. Q: Applicable to whom? A: 1. gov’t; and 2. Private institutions. F. GSIS, SSS, Medicare and other contributions (Sec. 32 B 7 f) ► must be deducted from the GI not NIT because it is an exclusion. -creditable withholding tax is an exclusion- must be deducted first from the GI before you compute the NIT. Otherwise, you are including in the GI something that is excluded from the same. G. Gains from the Sale of bonds, debentures, or other Certificate of indebtedness. (Sec. 32 B 7 g)
39
Taxation law review notes
- Sec. 32 B 7 g is similar or the same as 24 B in long term deposit.
F: involves a corporation engaged in selling fish nets, and the corporation have a land sold through a broker. ►there was substantial profits gained from the sale of a land which was sold by a broker. The profit was in turn given to the workers as special bonus. ►the corporation claimed the bonus as a deduction.
H. Gains from redemption of shares in mutual fund (Sec. 32 B 7 h)
ISSUE: Should the deduction be allowed?
1. Fiscal Year – means an accounting period of 12 months ending on the last day of any month other than December.
H: The SC did not allow the deduction, for other forms of compensation, it must be made or given for services actually rendered.
2. Calendar year – a period of 12 months beginning on January and ending on December.
►in this case, it was proven that the sale was not made by the employees, no effort or services actually rendered by them because the sale was made through a broker. ►
Q: Why 5 years? A: certificate of indebtedness is similar to Bank Interest in a long term deposit.
Q: Business expense incurred in February 2006, is it possible to include it for April 2006? A: yes, it is possible or it is possible if fiscal year is employed, if it falls under the fiscal year and all the elements are present. - related to trade or business. REASON: Capital loss has no connection to the trade or business. TAKE NOTE: ►for taxpayers liable for income within and without (RC & DC)), they can claim deduction for expenses incurred within and without. ►for taxpayers who are liable only for income within, they can claim a deduction for expenses incurred within the Philippines. Sec. 34 A EXPENSES 1. For those business expenses not enumerated under A. You need to prove that it is an ordinary and necessary expense. 2. For those enumerated under A, all you have to prove is that it is incurred during the taxable year.
Q: Reasonable Travel Expenses, What is the requirement? A: 1. Travel must be in pursuit of business, trade or profession. 2. Travel expense while away from home. Q: Is there a travel expense which was not in pursuit of business? A: yes, those which are considered as fringe benefits (FB), expenses for foreign travel is considered a FB only if it is not in pursuit of the trade or business. Q: can you claim it under Sec. 34 A (1)(a)(ii)? A: No, you can claim it under Sec. 34 A (1)(a)(i) last paragraph. Q: Reasonable Allowances for rentals for meralco bills, requirements? A: 1. required as a condition for the continued use or possession, for the purpose of the trade, business or possession of the property. 2. taxpayer has not taken any title or no equity other than a lessor.
- for other forms of compensation, there must be services actually rendered.
Q: Reasonable allowance for entertainment, amusement and recreation expenses, what is the requirement? A: 1. connected with the development, management, and operation of the trade (DOM); 2. Does not exceed the limits or ceiling set by the Secretary of Finance; and 3. Not contrary to law, morals, good customs, public policy or public order.
AGUINLDO Case
Q: How about bribe, kickbacks, and other similar payments
Feb. 12, 2007 (Sec. 34 A, Expenses) Q: Did the law define what is reasonable? A: No. for salaries and wages all that is required by law is for it to be reasonable.
40
Taxation law review notes A: even without this provisions, kickbacks will not pass the requirement of (i) ordinary and (ii) necessary hence not deductible
1. if the entire amount or entire principal obligation has been paid – the entire amount of interest can be claimed as itemized deduction.
EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL INSTITUTION
2. if only ½ of the obligation had been paid, then the entire amount of ½ of that interest can be claimed as a deduction.
Q: Why only private educational institution is mentioned and no other taxpayers? A: it refers to section 27 for Private Educational Institution given to the educational institution. GENERAL RULE: 36 A (2) and 36 A (3) expenditures for capital outlays not deductible as business expense EXCEPTION: Private Educ. Institution can claim it under Sec. 34 A (2) BUSINESS EXPENSE vs. ALLOWANCE FOR DEPRECIATION BUSINESS EXPENSE 1. No carry-over 2. can be claimed for one year only. 3. if the amount of capital outlay is substantial, it cannot accommodate all of the expenses incurred. ALLOWANCE FOR DEPRECIATION 1. There is carry over 2. you can claim it for a longer period depending on the life span of the property. 3. it can accommodate all of the expenses incurred.
•
taxpayer’s allowable deduction for interest expense shall be deducted by an amount equal to 42% (RR 10-2000) of the interest income subject to FIT.
Q: Who claims this deduction? A: the debtor claims this deduction. Q: What kind of interest is this? A: interest on loan. ►interest on debt - when one borrows money to finance his business interest in connection with the taxpayer’s profession trade or business. REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a) ►a borrower or taxpayer can claim the interest paid in advance as itemized deduction when he filed his income tax return (ITR) depending on whether or not the principal obligation has been paid.
3. if no payment had been paid on the principal obligation, the advance interest paid cannot be claimed as a deduction on the years that it was paid. REQUIREMENTS FOR REDISCOUNTING OF PAPERS: 1. incurred within the taxable year. 2. individual taxpayer reporting income on a cash basis. •
No deduction shall be allowed in respect to the following interest:
1. if within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance or through discount or otherwise. 2. if both taxpayer and the person to whom the payments has been made or is to be made are persons specified under Sec. 36 (B): a. member of a family b. bet. an individual and a corp., more than 50% in advance of the outstanding stock of which is owned directly or indirectly by or for such individual; c. Bet. 2 corp., more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual. d. bet. the grantor and a fiduciary of any trust; e. bet. the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or f. bet. a fiduciary of trust and a beneficiary of such trust. Q: Who are not allowed to claim interest under sec 36 B? A: interest incurred between related parties. Q: What if half-brother? A: not allowed to claim deduction for interest. TAKE NOTE: interest incurred from the exploration of petroleum refers not just in interest incurred on loan of money but also interest incurred for installment payments. Q: Who are related parties? A: individuals and corporations. OPTIONAL TREATMENT OF INTEREST EXPENSE:
41
Taxation law review notes 1. interest incurred to acquire property used in trade, business or exercise of profession can be claimed a an itemize deduction… a. on interest; or b. depreciation (as capital expenditure?)
►tax deduction is allowed if the taxes were paid or incurred within the taxable year and it must be connected to the trade, business or profession of the tax payer. Q: Who are entitled to claim it? A: those liable to pay NIT. (Tax credit only for NIT) Q: What is a tax credit?
Q: What is this interest income? A: the money borrowed was deposited in a bank so that it will warn interest. (RR13-2000) ILLUSTRATION: 1. loan of 1M from a bank with an interest of 20% 2. 20% of 1M is Php200,000 but you cannot claim this whole amount as a deduction. 3. when you deposited the 1M in the bank, it earned a bank interest subject to FIT worth Php10,000.00. 4. 42% (RR) of 10,000 = 4,200 (RR 9337) 5. Php200K-4,200= Php195,800/ this is the amount you can claim as a deduction. 34 C TAXES: REQUISITES: 1. taxes must paid or incurred within the taxable year 2. it must be incurred in connection with trade or business. 3. can be claimed as: a. a deduction; or 34 C 1&2 b. tax credit 34 C 3&7 Q: Where should it be deducted? A: 1. if claimed as a deduction, it should be 2. if claimed as a tax credit, it should be due (bottom of the formula)
income tax subject
due
the to
Q: What is the tax credit being referred to under 34 C (3)? A: credit against taxes for taxes of foreign country. Q: What are the other tax credit under the code? A: 1. RA 6452 – selling goods and commodities to senior citizens, the discount claimed is treated as a tax credit. 2. income tax paid to foreign country. 3. Input tax on Vat 4. Creditable w/holding tax system under NIT 5. Tax credit certificate. Q: Who are allowed to claim it? A: RC and DC only. Q: suppose you paid the 100K NIT to US, can you claim as a deduction the whole 100K? what is the formula? ►same procedure for (1) income tax paid to foreign country; (2) estate tax paid to foreign country; and (3) Donor’s tax paid to foreign country.
deducted from the gross income; deducted from the Net Income Tax
MERCURY DRUG CASE - Discount of senior citizens SC: discount claimed by senior citizens shall create a tax credit and must be deducted at the bottom of the formula. Q: What is a tax deduction? Example? A: example is business tax.
A: refers to the taxpayer’s right to deduct from the amount of tax the taxpayer paid to foreign country, limitations.
A: Formula: STEP 1 GI from sources w/in NIT: _____________________ GI from entire world STEP 2 Quotient x RATE = amount w/c can be claimed as a deduction A: you cannot claim the whole 100K, you can only claim the product of the quotient times the rate
42
Taxation law review notes TAKE NOTE: deduct at the bottom of the formula ( sa computation ng GI) Q: Suppose you are a RC, you pay NIT to US, will you be able to claim it as a tax deduction? A: 1. generally, you can claim it as tax credit. 2. you can claim under Sec. 34 C (1) b ►if the taxpayer did not signify in his return his intention to avail himself of the benefit of tax credit for taxes paid to foreign country. ►taxes incurred not related to the trade or business, you have the option to: a. claim it as tax credit; or b. claim it as a deduction ►law gives you this privilege. Q: When is taxes not allowed as a deduction? A: Sec. 34 C (1) 1. Income tax; 2. Income tax imposed by authority of any foreign country; 3. Estate and Donor’ tax; and 4. taxes assessed against local benefits of a kind tending to increase the value of the property.
Q: Who are not allowed to claim deductions? A: Under 34 C (3) - NRC, NRA; and N/RFC TAKE NOTE: 1. NRAE and NFC – allowed deduction only if and to the extent that they are connected with income from sources within the Phils. 2. Taxes that had been allowed as deduction but are later in refunded should be treated as part of the gross income during the year that it is received (34 1 last paragraph) Q: Which would you choose? Tax credit or deduction? A: tax credit because it is deducted from the taxable income while deductions are deducted from the GI.
A: No. Sec. 34 D(1) provides for 2 kinds of losses: a. incurred in pursuit of trade, bus. or profession; b. property connected with t,b,p, if the loss arises shipwrecks or other casualties or from robbery, theft (arising from natural calamity). Q: What is the requirement? A: 1. Loss actually sustained during the 2. Not compensated for by insurance or 3. Not claimed as a deduction for estate
from fire, storms, or embezzlement
taxable year other forms of indemnity. tax purposes.
Q: This is your itemized deduction which can from? A: Gross income
be claimed as a deduction
TAKE NOTE: ► The itemized deduction of losses, however, is not confined to section 34B. it is also found under section 86A (1) (e) which also pertains to deductions available under the estate tax law. ►Losses within six (6) months after the death of the decedent can be claimed as itemized deduction of losses under Section 34B. However, may be claimed as deduction under estate tax return provided that the same are not claimed as itemized deduction of losses under Section 34B. Q: How many carry-overs do we have under the Code? A: 3. Namely: 1. Section 27 E (32) Carry forward of excess minimum Tax 2. Section 39 D Net Capital Loss Carryover 3. Section 39 D 3 Net Operating Loss Carry-Over.
KINDS OF LOSSES AND THEIR CARRY-OVERS: A. ORDINARY LOSS – NOLCO ( #3 above)
FORMULA: GI-DEDUCTION = NET INCOME x RATE = TAXABLE NET INCOME – TAX CREDIT) 34 D LOSSES Q: Is always a requirement that it is incurred in pursuit of trade, bus. or profession?
Q: Why is there a need for a carry over under Sec. 34 D # when you can claim the loss from both capital and ordinary loss? A: if the loss exceeds the income for the taxable year, you cannot deduct the entire amount of loss from your income for that year so the excess may be deducted for the taxable year following the loss.
43
Taxation law review notes B. CAPITAL LOSS – NET CAPITAL LOSS CARRY OVER NET CAPITAL LOSS NET OPERATING CARRY-OVER LOSS CARRY-OVER 1. taxpayers is an individual only not corporation. 2. involves net capital loss 3. carry-over as loss from sale of capital asset in the next succeeding year
4. can only be deducted from capital gains.
( # 2 above)
1. taxpayer may be an individual or corp; 2. losses incurred or connected with T or B; 3. Business losses not previously off-set as a deduction from the GI carried over as such for the next 3 consecutive years; 4. can be deducted from capital gains and/or ordinary gains.
NET OPERATING LOSS CARRY REQUIREMENTS: 1.Net operating loss of the business or enterprise incurred w/in the taxable year 2. not previously off-set as a deduction from the GI 3. carried over as a deduction from the GI for the next 3 consecutive taxable years immediately following the year of such loss. Q: Can the period be extended? A: yes, for mines other than oil and gas well. 1. net operating loss w/out the benefit 2. incurred in any of the first 10 years of 3. carried over as a deduction from the GI loss. 4. no substantial change in the ownership
incentives provided by law; operation. for the next 5 years following such of the business or enterprise.
Q: What is the limit? A: 75% of the nominal value of outstanding shares is held by or on behalf of the same persons/ corporation ► individual no problem, problem lies with corporations or enterprises. ABANDONMENT LOSSES
1. contract area where petroleum operations are undertaken is partially or wholly abandoned; ► all (1) accumulated exploration and (2) development expenditures pertaining thereto shall be allowed as a deduction. 2. a producing well is subsequently abandoned: ►unamortized cost and undepreciated cost of equipment directly used therein shall be allowed as a deduction in the years it was abandoned. TAKE NOTE: 1. if abandoned well is reentered and production is resumed; or 2. if equipment or facilities are restored into service in the year of resumption or restoration and shall amortized or depreciated. Q: What is the Tax benefit rule? A: Last Par. of Sec. 34 E (1): recovery of bad debts previously allowed as deduction in the preceding year shall be included as part of the gross income in the year of recovery to the extent of the income tax benefits of said deduction. Q: What is a Bad Debt? A: Bad debts shall refer to those debts resulting from the worthlessness or incollectibility in whole or in part of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold and services rendered. CHINA BANK VS. CA ► bad debts can only be claimed if pursuant to a contract of loan - no bad debts for loss of instruments. Q: Who claims it? A: a. creditor b.money lender Q: What year can it be claimed? A: can be claimed in the year it was actually sit ascertained to be worthless and charged off, meaning cancelled in the books of account. Q: Do you need to file an action before you can claim? A: No, all you have to do is prove that you did exert effort to claim or recover the same. Q: What cannot be deducted as bad debts? A: 1. debts not incurred in connection with the trade, business and profession of taxpayer.
44
Taxation law review notes 2. transactions, mered into between parties mentioned under Section 36 (B) namely. a) between members of the family b) between an individual who owns more than 30% of outstanding capital stock of a corporation and that corporation c) between two (2) corporations more that 50% of the outstanding capital stock of which is owned by or for the same individual d) between a grantor and fiduciary of any trust e) between two (2) fiduciaries of two (2) trusts who has the same grantor f) between a fiduciary of a trust and above fiduciary of such trust SECURITIES BECOMING WORTHLESS 1. ascertained to be worthless and charged off within the taxable year 2. capital asset 3. taxpayer, other than a Bank or trust company incorporated under Phil. Laws 4. substantial part of business is the receipt of deposit 5. considered as a loss from the sale of capital assets on the last day of such taxable year 34 F DEPRECIATION Q: What is depreciation? A: It is the gradual dimension in the service or useful value of tangible property due from exhaustion, wear and tear and normal obsolescence.
1. properties directly related to production of petroleum 2. allowed under (1) straight line or (2) declining balance method 3. useful life of properties used or related to production of petroleum shall be ten (10) years or such shorter life as may be permitted by the Commissioner. 4. for property not used directly in the production of petroleum (1) depreciated under the straight line method, and useful life is only five (5) years DEPRECIATION OF PROPERTIES USED IN MINING OPERATIONS ALLOWANCE FOR DEPRECIATION: 1.all properties used in mining operations other than petroleum operations shall be computed as follows: a. if the expected life is ten (10) years or less – normal rate of depreciation b. if the expected life is more than ten (10) years – depreciated over any number of years between five (5) years and the expected life. REQUIREMENTS: 1. depreciation is allowed as a deduction from 61; and 2. contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate shall be used. DEPRECIATION DEDUCTIBLE BY NRAETB OR RFC ► reasonable allowance for the deterioration of property
Q: What kind of property is involved? A: 1. Real property except parcel of land 2. Personal Property REQUISITES: 1. depreciation deduction must be reasonable 2. for the exhaustion, wear and tear, including obsolescence 3. property used in the trade of business
DEPRECIATION OF PROPERTIES USED IN PETROLEUM OPERATIONS
1.
2. 3. reasonable allowance for
Q: What do you mean by “reasonable allowance”? A: it shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: 1.Straight-line method 2.Declining balance method 3.Sum-of-the-year-digital method; and 4.any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner
arising out of its use or employment or non-use in the business, trade or property is located in the Philippines
profession
34 G DEPLETION OF OIL and GAS WELLS and MINES ► only deduction which is a not self executing deduction Q: What is depletion? A: the exhaustion wear and tear of natural resources as in mines, oil, and gas wells ►the natural resources called “wasting assets” DEPRECIATION vs DEPLETION 1.involves property 2.
ordinary
wear
1. involves natural resources 2. ordinary wear and
45
Taxation law review notes and tear equipments
of
tear of resources
A: First determine the taxable income of Mr A since he is an individual, he can only deduct 10% of his taxable income.
natural
TAKE NOTE: ►Equipment used in mining operation is deductible in depreciation
Q: What if the Donee is not one of those mentioned under the law, can he claim a deduction? A: No.
Q: Method for computing depletion? A: cost depletion method
TAKE NOTE: Donee is never an individual.
Q: to whom allowed? A: only mining entities owning economic interest in mineral deposits ►Economic interest: capital investments in mineral deposits 34H CHARITABLE & OTHER CONTRIBUTIONS TAKE NOTE: 1.unique because deducted from the taxable net income and not from the gross income ►second step of the formula deduction
Q: If Donee is the Philippine Government, what is the requirement? A: it must be made exclusively for public purposes Q: What if the Donee is a province? A: there must be a qualification that it is for public purpose Q: If the Donee is a Domestic Corporation, what is the requirement? A: no part of its income inures to the benefit of any private shareholder or individual
Q: Who is claiming the deduction? A: the donor Q: Who are the Donees? A: 1.Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purpose 2. Accredited Domestic corporation or association organized and operated exclusively for religions, lion, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institution, or to non government organization and no part of its net income inures to the benefit of any private stock holder or individual Q: How many kinds of deduction? A: Two (2) kinds: 1.partial deduction ►10% of taxable income in case of an ►5% of taxable income in case of 2. full /total deduction Q: Which of the two kinds is the General A: General Rule: Partial deduction Exception: Total /Full deduction
Q: If the Donor is a pure compensation income earner and he donates P100,000 to the church, can he claim it as a deduction? A: No. pure compensation income earner can only claim a deduction under Sec 34 M
Q: What are those contributions which can be deductible in full? A: 1.Donations to the Government – no conflict with partial requirement) ►Partial donated for exclusively public purposes ►Full, used in undertaking priority activities of NEDA
2.Donations to certain Foreign Institutions or International Organizations ►in compliance with agreement, treaties or commitment entered into by the Philippine Government and such donees 3.Donations to Accredited Non government organizations government organization, non profit domestic corporation
individual corporations Rule?
(different
Non
REQUIREMENTS: 1. organized and operated exclusively for scientific, research, educational, character building and youth and sport development, health, social welfare, cultural or charitable purposes or a combination thereof 2. no part of the net income of which inures to the benefit of any private individual 3. uses the contributions directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated
Q: Suppose Mr. A made a cash donation of P1M. How much can he claim as a deduction?
46
Taxation law review notes 4. annual administrative expense does not exceed 30% of the total expenses and 5. in case of dissolution, the assets of which would be distributed to: a) another non profit domestic corporation organized for similar purpose or purposes b) to the state for public purpose c) distributed by the court to another organization to be used in such a manner which would accomplish the general purpose for within the dissolve organization was organized
Q: When not deductible? A: 1.Any expenditure for the (1) acquisition or improvement of land or (2) for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion and office site 2. Any expenditure paid or incurred for existence, location, extent or quality of including oil or gas. ► not for mineral exploration
the purpose of undermining the any deposit of one or other mineral
34I RESEARCH AND DEVELOPMENT 34 J PENSION TRUST ►In the old law, this is not allowed as a deduction. To remedy this, they felt that those should be a separate deduction for research and development. REQUISITES: ►tax payer may treat research and development expenditures as ordinary and necessary expenses provided: 1. it is paid or incurred during the taxable year 2. incurred in connection with trade, business or profession; and 3. not chargeable to capital account. Q: Treated as such when? A: during the taxable year it is paid or incurred AMORTIZATION OF CERTAIN RESEARCH AND DEVELOPMENT EXPENDITURES ►at the election of the taxpayer, the following shall or may be treated as deferred expenses: a. paid or incurred by the taxpayer in connection with his trade, business or profession; b. not treated as expenses under par 1 and c. chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion
Q: Claimed by Whom? A: the employer Q; What is a Pension Trust contribution? A: a deduction applicable only to employer on account of its contribution to a private pension plan for the benefit of its employee deduction is purely business in character.
Q: Requisites? A: 1.the employer must have established a pension or retirement plan to provide for the payment or reasonable pension of his employees 2. pension plan must be reasonable and actually sound; 3. it must be funded by the employer 4. the amount contributed must no longer be subject to his control or disposition 5. the amount has not yet been allowed as a deduction and 6. the amount has or is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made.
Q: How to compute taxable income: A: deferred expenses shall be allowed as deduction ratably distributed over a period of not less than 10 months as may be elected by the taxpayer (beginning with the month the
34 K ADDITIONAL PAYMENTS
taxpayer first realizes benefits from expenditures.)
►allowed as a deduction only if shown that the tax required to be deducted and withheld there from has been paid to the BIR in accordance with Section 58 and Section 81
►the election or option may be exercised for any taxable year after the effectivity of the code but not later than the time prescribed by law for filing the return for such taxable year.
34 L OPTIONAL STANDARD DEDUCTION
LIMITATION ON DEDUCTION
REQUIREMENTS
FOR DEDUCTIBILITY
OF CERTAIN
KINDS OF DEDUCTIONS: 1.Itemized deduction
47
Taxation law review notes 2.Optional Standard Deduction 3.Personal /Additional Deduction OPTIONAL STANDARD DEDUCTION: ►can be availed of by an individual who may elect a standard deduction in an amount not exceeding 10% of his gross income ► may apply in lieu of the other deductions under Section 34 ►the taxpayer must signify in his return his intention to elect the optional standard deduction, otherwise, he shall be considered as having availed of the itemized deduction.
A: those mentioned under Section 24 (A) 1. RC 2. NRC 3. OCW 4. RA ►all can claim both personal and additional exemption Q: Why not include NRAETB? Can the latter claim any exemption? A: NRAETB is not included because Section 35 A refers to Section 24 A ►NRAETB can claim personal deductions but not additional exemptions pursuant to Sec 35 D
Q: Who can claim this deduction? A: all individual taxpayers except non resident alien not engaged in trade or business (NRANETB) Reason: he is not liable to pay by way of the NIT, thus, follows he cannot claim this deduction because he is liable to pay by way of GIT.
REQUIREMENTS: 1.NRAETB should file a true and accurate return 2. the amount to be claimed as personal exemptions should not exceed the amount provided for under Philippine Laws
TAKE NOTE: ►can co-exist with personal and / or additional exemption
TAKE NOTE: AEMOP: can be a RA or NRAETB
34 M PREMIUM PAYMENTS ON HEALTH AND /OR HOSPITALIZATION INSURANCE OF AN INDIVIDUAL TAXPAYER ► for (1) Health and /insurance (2) Hospitalization
BASIC PERSONAL EXEMPTIONS:
REQUIREMENTS: 1. amount of premiums, paid by taxpayer for himself and members of his family, 2. amount of premiums should not exceed (1) P2,400 per family or (2) P200 a month 3. gross income of the family for the taxable year is not more than P250,000 Q: Who can avail of this deduction? A: 1.individual taxpayer earning purely compensation income during the year; 2. individual taxpayer availing itemized or optional standard deduction; and 3. individual taxpayer earning both compensation income and income from business SECTION 35 ALLOWANCE FOR PERSONAL EXEMPTION FOR INDIVIDUAL TAXPAYER Q: When do we apply this? A: apply if individual taxpayer is paying by way of NIT Q; Who are taxpayer?
1.
Single individual; or individual judicially decreed as legally separated with no qualified dependents.
2.
For head of the family – can be single or legally separated with qualified dependents.
3.
For each married individual – if only one of the spouse, earns or derives gross income, only such spouse can claim the personal exemption.
► 20, 000
► 25, 000
►32, 000 Q: Who is the “head of the family”? A: 1.unmarried or legally separated man or woman 2. With (1) one or both parties or (2) With one or more brothers and sisters (3) with one or more legitimate, recognized, natural or legally adopted children 3. living with and dependents upon him for their chief support 4. whose such brother or sisters or children are (1) not more than 11 years old and (2) not gainfully employed, (3) unmarried
48
Taxation law review notes 5. OR, regardless of age, the same are incapable of self support because of mental or physical defect. Q: Why do we have to determine who the A: only legally separated individuals can have qualified dependents.
head of the family is? claim additional exemptions if they
Q: Can a widower claim exemptions? A: exemptions must be strictly construed, widower not included in the list under Section 35 A – but can claim under sec 35B ►widower, married or used to be married
Q: Who are allowed to claim? A: Normally , it is the husband who claims the wife will claim the same (RR2-98)
such change of status occurred.
TAKE NOTE: ►always choose the higher amount of exemption if you are filing a return covering the period within which the change of status occurred
TAKE NOTE: ►R.A. 7432 and RR 2-98: a senior citizen can also be a dependent.
MARRIED INDIVIDUALS ►each legally married individuals can claim the personal exemption. and wife = P64,000
CHANGE OF STATUS: (SEC 35 C) Q: Reckoning Period? A: end of the year or close of such year when
1. if the taxpayer should (1) marry or (2) have additional dependents during the taxable year, he may claim the corresponding exemption in full for the year. Illustration: 1.Single Jan 1, 2005 2.Married June 1, 2005 – on April 15, 2006 – status: legally married can claim P 32,000
Husband
unless he executes a waiver that
Additional Exemptions: (35B)
2. if the taxpayer should die during the taxable year, estate can claim personal exemption. Illustration 1.Jan. 25, 2005 taxpayer married w/ one child can claim on April 15, 2006 P32,000+ P8,000
} P40,000
-additional exemption of P8,000 for each dependent not execeeding four (4) Q: Who can claim the same? A: 1.Married couples: only one of the spouses can claim it; 2.legally separated individuals: can be claimed by the spouse who has custody of the child or children ►the additional exemption claimed by both shall not exceed the maximum additional exemption herein allowed. Q: Define “dependents” A: legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is (1) not more than 21 years of age, (2) unmarried, and (3) not gainfully employed or (4) if such dependent, regardless of age is incapable of self support because of mental or physical defect. Q: What if widower has illegitimate children, can claim additional exemption? A: can claim, can be considered as head of the family w/ dependent Q: What if the children are temporarily away from the parents? A: still considered living with parents, can claim exemption
► In this case, as if the change of status occurred at the close of taxable year. If taxpayer’s spouse or child dies within the taxable year or the dependent’s became (1) gainfully employed (2) got married or (3) became 21 as if the change as status occurred at the close of taxable year. Illustration: 1. Taxpayer’s tragic story wife died Jan. 25, 2005 and child died the next day then another child eloped and get married. 2. Taxpayer despite the tragedy can claim ton of money on April 15, 2006. P 32,000 P 16,000 (8,000 per child) 48,000 Section 36. Items not Deductible 36 A. General Rule: In computing net income, no deduction shall be allowed: (1) Personal, living or family expenses – not related to trade or business (2) Section 36 A (2) and Section 36 A (3) General Rule: No deductions allowed for 1. Any amount paid out for new buildings or for permanent improvements, or betterments, made to increase the value of any property or estate 2. Any amount expanded in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.
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Taxation law review notes Exceptions: 1. Option granted to Private Educational Institution to deduct the same as capital outlays. TAKE NOTE: ►Amount paid for new buildings, can be deducted if it involves intangible drilling and development cost incurred in petroleum operations (Sec 34 6 (A) PREMIUMS PAID ON LIFE INSURANCE POLICY :
1. 2.
covering the life of any officer or employee or any person financially invested in any trade of business carried on by the taxpayer. taxpayer is directly or indirectly the beneficiary under such policy.
LOSSES FROM SALES OR EXCHANGES OF PROPERTY (between related parties) 1) between family members Q: Who is considered the “family of the taxpayer?” A: a. brothers and sister (whole is ½ blood) b. spouses c. ancestors d. lineal descendants Q: are uncles or nieces included? A: no
IN DONOR’S TAX ►Relatives includes relatives by consanguinity within the 4th civil code. Nephew is a stranger and relative ang nephew.
Q: What is a wash sale? A: It is a sales or other disposition of stock securities where substantially identical securities are purchased within 61 days, beginning 30 days before the sale and ending 30 days after the sale. Q: What period? A: 61 day period beginning 30 days before and ending 30 days after the sale Q: Jan 20 you purchased share of stock, and disposed of the same on Feb 5, 2005. Is this a wash sale? A: No Q: If it is a loss in wash sale, happens? A: General Rule: (Sec 131 RR No. 2) gains from wash sale are taxable but losses are non-deductible Exception: ►unless claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer Q: Reason why losses in wash sale cannot be deducted? A: 1. to avoid too much speculation in the 2. taxpayer not telling the truth, because he incurred a loss instead of a gain
market may say
he
Section 40. Determination of Amount and Recognition of Gain or Loss GENERAL RULE: This is totally irrelevant if the income is subject to fit. In fit gain is presumed. EXCEPT: sale of shares of stock where you have to determine actual gain or loss
2) individual and corporations Gen. Rule: NO DEDUCTION Except: distribution in liquidation or less than 50% of the outstanding capital stock
Q: When is there a gain? A: excess of the amount realized over the basis or adjusted basis for determining gain. (amount realized from the sale or other disposition of property)
3) 4) 5) 6)
Q: When is there a loss? A: the amount realized is not in excess of B or AB Illustration: 1987 Bar (Juan dela Cruz sold jewelry for 300,000 ) contract of sale ►amount realized is 300,000
Two corporations Grantor or Fiduciary Two fiduciaries of two trust Fiduciary and beneficiary of trust
Sec. 37 Special provisions regarding deductions of insurance companies. Codal Provisions Section 38: Losses From Wash Sales of Stock or Securities
Q: What will be the basis of the gain? A: Sec. 40 B (1), property was acquired by purchase ►Cost: purchase price + expenses Q: If there is a gain, is the whole gain subject to income tax?
50
Taxation law review notes A: it depends ►if ordinary asset = 100% is subject to income tax ►if capital assets a. short term(less than 12 months) : 100% taxable b. long term (more than 12 months): 50% taxable
1.
Property was acquired for less than an adequate consideration in money or moneys worth: the basis would be the amount paid by the transferee for the property.
Q: suppose property sold is a parcel of land will the rule be the same? A: No, and it depends ►ordinary asset: apply the cost ►capital asset: 6% FMV or selling price which ever is higher Q: Do we apply the holding period? A: No, holding period does not apply to the sale of real property. absolute rule:
This is an
►If realty is ordinary – holding period does not apply. ►If realty is capital asset – 6% FMV or selling price applies. ►Holding period applies only to sale of personal property which is a capital asset except sale of shares of stocks. ►Holding period also do not apply to corporations. Q: If the property is acquired through inheritance, what is the basis? A: Sec 40 B (2) fair market value or price as of the date of acquisition. Q: A: Q: A:
Suppose it was a sale of personal property, do we apply the same principles? No. What if it involves a sale of real property? Apply the same principles
Suppose it was a result of swindling, theft, robbery or estafa, same principles? A: Law is silent, take note of the old CIA ruling on this one
do we apply the
Q: Feb 14, 2006, your GG gave you a jewelry in Sept your GG breaks up with you. GG request the jewelry be returned but you already sold it for P200,000. Will the entire P200,000 be included in gross income? A: Basis: (1) same as if it would be in the hands of the Donor (FMV as of date of acquisition); or (2) last owner who did not acquire the same by gift (cost) Q: If it involves a parcel of land? A: apply the same rules Section 40 B (4) what is the basis?
Q: Section 40 B (5) what is the basis? A: 40 C (5) ► if the property was acquired in a transaction where gain or loss is not recognized (pursuant to a merger or consolidation plan) a. corporation, party to a merger or consolidation, exchanges property solely for stocks in another corporation, also a party to the merger or consolidation b. is a party to the merger or consolidation, solely for the stocks of another corporation also a party to the merger or consolidation, or c. Security holder of a corporation, party to a merger or consolidation, exchanges his securities solely for stock or security in another corporation, also a party to the merger or consolidation. – person transfers property to corporation to gain control
40 C EXCHANGE OF PROPERTY GENERAL RULE: In sale or exchange of property, the control amount of gain or loss shall be recognized. 1. gain is taxable 2. losses are deductible Exception: If permanent to a merger or consolidation plan, no gain or loss shall be recognized 1. gain is exempt 2. losses are not deductible REQUISITES: 1. the transaction involves a contract of exchange 2. the parties are members of the merger or consolidation 3.
the subject matter is only limited or confined with the one provided for by law
►Merger and Consolidation in corporation code and tax code are not the same. ►Sec 40 (2) (a) ►a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation Illustration: Transferor gives 1M Transferee gives 700,000 = not
taxble gain P300,000
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Taxation law review notes ►If other property received by transferee (40 C (3) (a) TRANSFEREE ►if the party receives not just the subject matter permitted to be received: lie if the party receives money and /or property, the gain, if any, but not the loss, shall be recognized (meaning taxable) but in an amount not in excess of the sum of the money and the FMV of such other property received. (40 C (3) (b) TRANSFEROR 1.Transferor corporation receives money and / or property, distributes it pursuant to the merger or consolidation plan ►no gain to the corporation shall be recognized 2. Transferor corporation receives money and / or property, does not distribute it pursuant to the merger or consolidation plan ►the gain shall be recognized but in an amount not in excess of the sum of such money and the FMV of such other property so received. Q: What is the rule? A: 40 C (3) (a) 1. gain taxable 2. loss not deductible ►40 C (3) (b) It depends on how distributed: 1. pursuant to the merger or consolidation plan: ►gain exempt ►loss not deductible 2. not pursuant to merger or consolidation plan: ►gain taxable ►loss not deductible. Sec 40 C (1) (b) ►a shareholder exchanges stock in a corporation which is a party to a merger or consolidation, solely for the stock of another corporation which is a party to the merger or consolidation Sec 40 C (2) (c) ► a security holder of a corporation which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock securities in another corporation. ►The rule is similar in 40 C (3), (a), (b) and (c) although different property are involve, that is why the last paragraph of 40 C is a separate paragraph. ►Therefore, Sec 40 C (3) (a,b,c) the rule is 1. gain exempt 2. loss not deductible
40c last paragraph ► the transferee becomes a stockholder, parties are not members of the merger ►the individual wants to be a shareholder but does not want to purchase shares but willing to give up property as a result of the exchange , the person gains control of the corporation ►The rule is: a. gain is exempt b. loss not deductible Requisites: 1. There is A contract of exchange where property was transferred by the person in exchange of stock or unit of participation in a corporation. 2. As a result, the person alone or together with others (not exceeding of 4 persons) gains control of the corporation. Q: What is control? A: ownership of stocks in a corporation possessing at least 51% of total voting power. Sec 40 B (5) ►non applicability of income tax is only temporary Reason : Basis will be 40 C (5) 1. 40 C (5) (a) Transferor ►basis of stock or securities received by the transferor: same as the basis of the property, stock or securities exchanged: ►decreased by the (1) money and (2) FMV of the property received; and ►increased by (a) amount treated as dividend and (b) amount of gain recognized 2. 40 C (5) (b) Transferee ►as it would be in the hands of transferor increased by the amount of gain recognized. Sec 40 (c) (4) Assumption of Liability 1. Taxpayer, in connection with the exchanges described – receives securities or stocks permitted (no gains recognized) – it is sole consideration of the same – the other party assumes liability of the same – the acquisition of liability not treated as money and / or other property – the exchange still falls within the exceptions. 2. If amount of liabilities assumed + amount of liabilities to which property is subjected to exceeds - adjusted basis of the property transferred – the excess shall be considered a gain from the sale of a capital asset or of property which is not a capital asset, as the case may be.
52
Taxation law review notes SECTION 41 INVENTORIES Purpose: Change of inventory to determine clearly the income of any taxpayer/ to reflect the true income. Limitation: 1. once every 3 years 2. approval of the secretary of finance Section 43 Accounting Periods 1. Fiscal year 2. use of calendar year a. no annual accounting b. does not keep books of account c. individuals ►Use of method as in the opinion of the commissioner clearly reflects the income: 1. no accounting method has been employed 2. the method does not clearly reflect the income Sec 44 Period in which items of Gross Income included and Sec 45 Period for which Deductions and Credit Taken ►Under Sec 44 amount of all items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer ►Under Sec 45 deductions shall be taken for the taxable year in which “paid or accrued” or “paid or incurred.” ►Sec 44 and Sec 45 are mentioned in the code because of the death of the person. Illustration: Facts: taxpayer dies in the middle of the year January 1, 2006 – June 15, 2006 ►June 26, 2006 to Dec 31, 2006 the estate is the taxpayer ►So the income and deductions from Jan 1 to June 25,, included in the computation Section 46 Change of Accounting Period Q: Who is the taxpayer? A: corporation (taxpayer other than individual) Q: What kinds of accounting period? A: 1.fiscal year 2. calendar year
A: 1. fiscal to calendar 2. calendar to fiscal 3. fiscal to another fiscal ►with the approval of the Commissioner, net income shall be computed on the basis of the new accounting period. Q: Calendar to calendar, correct? A: not correct statement Section 47 (A) Taxpayer: Corporation 1. Fiscal to calendar ► separate final or adjusted return shall be made for the period between the so close of the last fiscal year for which the return was made and (2) the following Dec 31. 2. Calendar to Fiscal ►separate final or adjusted return shall be made for the period between the close of the last calendar year and the date designated as the close of the fiscal year. 3. Fiscal to fiscal ►separate final or adjusted return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. ►File return indicating the change in accounting method Section 48 Accounting for Long Term Contracts Q: Who are the professionals involved? A: applies to architects and engineers Q: What is a long term contract? A: it means building, installation or construction contracts covering a period in excess of one (1) year. Q: Basis of income? A: a. persons whose gross income is derived in whole or in part from such contract shall report such income upon the basis of percentage of consumption. b. the return shall be accompanied by a certificate of architects or engineers showing the percentage of completion
Q: Changes contemplated?
53
Taxation law review notes c. deduction of expenditures made during the taxable year, on account of the contract is allowed Section 49 Installment Basis ►contemplates a seller of the property Q: Is it important to know if the property is personal or real? A: Yes Q: Sale of Real Property is it important to know if it is a casual sale or regular sale? A: No Requirement: The initial payments do not exceed 25% of the selling price. Q: If the initial payment exceeds 25% what do you call it? A: called deferred sale Q: Consequence? A: you must pay the whole amount of the tax Q: Sale of Personal Property, is it important to know if it is a casual or regular sale?
Section 50 Allocation of Income and Deductions ►tremendous power of the Commissioner to allocate the income and deduction of several corporations having the same interest. Q: Same interest? A: stockholders substantially the same Q: Limitations? A: None ►That is why it is a great source of corruption Section 51 Individual Returns Who are required to file? (ITR) 1. RC 2. NRC 3. RA 4. NRAETB – sources within Q: Who is not mentioned in Sec 51 but liable to pay by way of NIT? A: OCW/ seaman Exception: RC OR ALIENS: engaged in trade or practice of profession in Phil. Shall file ITR regardless of the amount of gross income.
A: Yes Casual Sale has Requirements: 1. selling price exceeds P1,000 2. initial payment not exceeding 25% selling price ►Regular sale no requirements Case of Bañas 1. subject matter 2. sold by way 3. agreement 4. cash deposit 5. post dated promissory notes (installments) 3. 1st installment promissory note was disconnected
4. 5.
2nd installment exchanged with cash - these two exceeds the selling price you only compute cash
Q: If OFW is exempt from filing a return, what is he required to file? A: Information Return Q: who are not required to file a return? A: a. an individual whose gross income does not exceed his total personal and additional exemptions for dependents b. worker (compensation income earners) regardless of the amount of compensation shall not required to file ITR because the management files it. (RR 3-2002) c. individuals whose sole income is subject to FIT d. individuals who are exempt from income tax Exception: IT 1. the management files an incorrect return 2. the employee has two or more employer
H: Initial payment exceeds 25% installment basis is not applicable
51 A (3)
RR 2; Section 175: In payment by way of installment promissory note, bills of exchange and checks will not be considered in computing the 25% initial downpayment.
A: not required to file ITR may be required to file information return 51 B - Where to file? 1. authorized agent bank
54
Taxation law review notes 2. revenue district officer 3. collection agent 4. duly authorized treasurer of the city or municipality where taxpayer resides or has principal place of business 5. office of commissioner – if no legal residence or place of business in Phil 51 C Q: When to file? A: filed on or before the 15th day of April each year 51 C (1) – NIT Payers using CY ►two days provided (calendar) 1. on April 15; or 2. before April 15 (January, Feb or March) ► not December because the calendar year is not yet over Fiscal year: 15th day of the 4th month following the close of the fiscal year. 51 C (2) individuals subject to tax on capital gains Exception: General Rules Sec 58 1. Sale of shares of stocks ►return filed within 30 days after each transaction and ►Final consolidated return on or before April 15 2.Sale of Real Property ►return filed within 30 days following each sale 51 D Husband and Wife 1. Pure compensation income earner – separate return RR 3-2000 – pure compensation income earner regardless of amount of income not file ITR. 2. Not pure compensation: joint return 51 E. Return of Parent to Include Income of Children ► unmarried minor receives income from property received from living parent – included in the parent’s ITR. Exception: 1.Donor’s tax has been paid 2.Property exempt from donor’s tax 51 F. Persons Under Disability Q: Who makes the return? A: 1.duly authorized agent 2. duly authorized representatives 3. guardians
4.other persons charged with the care of his person or property ►both incapacitated taxpayer and agent will be liable for: 1.erroneous return 2. false or fraudulent return 51 G Signature Presumed Correct ► prima facie evidence the return was actually signed by the taxpayer Section 52 Corporation Return ►go back to Sec 51 A (2) General Rule: Sec 58 Final Income Tax ►return and creditable withholding tax return is filed monthly Exception: Sale of Shares of Stocks (Sec 51 A (2)) Sale of Real Property ►RR -17-2003: Sale of Real Property subject to final withholding tax, the buyer is deemed the agent. Sale of Shares of Stocks Q: Reasons for filing Final Income tax or Final Consolidated Return? A: Reasons: 1. FIT whose actual determination of gain or loss 2. in connection with Sec 24 C the basis of the tax is not the gross income but the net capital gains realized. In connection with Sec 40: ►actual determination of loss or gain ►file a return within 30 days from date of transaction TAKE NOTE: In all other income subject to FIT, the gains are presumed INCOME OF MINORS Q: Minor below 18: Will it be included in the Minor’s ITR? A: it depends 1. income from property received from parents ► included in parent’s ITR Except: a.Donor’s tax paid b.Property exempt from donor’s tax 2. income from minor’s own industry ►Minor’s ITR accomplished by guardian or parents Q: if the individual is exempt from income tax, can be required to file a return? A: General Rule: No Exceptions:
55
Taxation law review notes 1.engaged in trade or business; or 2.exercise of profession – Sec 51 A (2) SEC 52 CORPORATION RETURNS A.Requirements Taxpayer: DC or RFC (except NRFC) ITR Filed: 1. TRUE AND ACCURATE a. quarterly income tax return b. final or adjusted income tax return Filed by: 1.President; 2.Vice President 3. Other principal officer ►ITR must be sworn by such officer and the treasurer or assistant treasurer B. Taxable Year 1. fiscal; or 2. calendar ► corporation cannot change accounting method employed without the approval or prior approval of the commissioner (Sec 47) C. Return of Corporation Contemplatory Dissolution or Recognition 1.Within 30 days after: a. the adoption by the corporation of a resolution or plan for its dissolution; or b. liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the SEC; or c. for its reorganization 2.Render a correct return verified under oath setting form: a. forms of the resolution or plan; b. such other information prescribed 3.Secure a tax clearance from the BIR and file it with the SEC 4.Thereafter, SEC issued a Certificate of Dissolution or Reorganization. D. Sale of Stocks – ITR look at the previous notes about it Section 53 Extension of Time to File Returns Q: To whom granted? A: Corporations Grounds: Meritorious case ►subject to the provisions of Sec 56 Time Extension
Section 54 Returns or Receivers, Trustees in Bankruptcy or Assignees ►the aforementioned persons shall make returns of net income as and for such corporation in the same manner and form as such organization is required to make. Section 55 Returns of General Professional Partnership ► file a return of its income setting forth 1. items of gross income and of deductions allowed by this title (Title II – Tax on Income) 2. Names of partners 3. Taxpayer identification number (TIN) 4. address of partners 5. shares of each partners ►GPP is exempt from corporate income tax Q: Why is the GPP obliged to file a return? A: to determine the shares of each partners Section 56 Payment and Assessment of Income Tax for Individuals and Corporations A. Payment of Tax Q: Who pays the tax of tramp vessels? A: 1.the shipping agents and or the husbanding agent 2.in their absence, the captains thereof ►those people are required to file a return and pay the tax due before departure Q: What is the effect of failure to file the return and pay the tax due? A: 1.Bureau of Customs may hold the vessel and prevent its departure until: a. proof of payment of tax is presented; or b. a sufficient bond is filed to answer for the tax due. Installment Payments Tax due: more than P2,000 Taxpayer: individuals only (other than corporation) Elect to pay the tax in two (2) equal installments
a. b.
1st installment: paid at the time the return is filed 2nd installment on or before July 15 following the close of the calendar year
Q: What is the effect of non payment on the date fixed? A: The whole amount of tax unpaid becomes due and demandable together with the delinquency penalties.
56
Taxation law review notes Payment of capital gains tax : Q: Paid when? A: on the date the return is filed Avail exemption for capital gains: a.no payments shall be required; b.if you fail to qualify for exemption – tax due shall immediately become due and payable and subject to penalties c. seller pays tax – submit intention or proof of intent within six (6) months from the registration of document transferring Q: when is the real property entitled to refund? A: upon verification of compliance with the requirements for exemption. ►Report gains on installments under Sec 49 – tax due from each installment payment shall be paid within 30 days from the receipt of such payments. ►No registration of document transferring real property 1. without a certification from commissioner or his duly authorize representative that a.transfer has been reported b.tax has been paid B. Assessment and Payment of Deficiency Tax ► Return is filed, the commissioner examiner and assess the correct amount of tax ►tax deficiency discovered shall be paid upon notice and demand from the commissioner. 3 INSTANCES CONTEMPLATED 1. file the return and pay the tax 2. file the return but not pay the tax 3. not file the return and not pay the tax Section 57 Withholding of Tax at Source A. Withholding of Taxes ►subject to the Rules and Regulations the Section of Finance may promulgate, upon recommendation of commissioner: Require the filing up of certain income tax return by certain income payees. Q: Enumeration is all about what? A; Enumer ation about Final Income Tax Except: Gross Income Tax 1. 25 B (NRANETB) 2. 28 B (NRFC) B. Withholding of Creditable Tax at Source ►The Sec. of Finance, upon recommendation of the commissioner require the withholding of a tax on the items of income payable to natural or juridical
persons, residing in the Phil, by payor-corporation/ person… the same shall be credited against the income tax liability of the taxpayer for the taxable year. At the rate of not less than 1% but not more than 32% thereof. Q: What is the maximum? A: Maximum: now 35% pursuant to RA 9337 Q: When will you allow withholding beyond 15%? A: For NIT 15% is the maximum 1. FIT – the amount of withholding is totally 2. GIT - equal to the amount of tax Tax Free Covenant Bond ►the bonds, mortgages, deeds of trust or other similar obligations of DC or RFC ►contains a contract or provision where the obligor (debtor) agrees to pay the tax imposed herein ►normally between the creditor and debtor Q: Who pays the tax? A: Creditor pays the tax by virtue of an agreement the debtor assumes the liability and the creditor is now free from payment of tax before it can transfer the property to the buyer. Section 58 Returns and Payment of Taxes Withheld at Source A. Quarterly Returns and Payment of Taxes Withheld at Source 1. covered by a return and paid to: a. authorized agent bank b. revenue district officer c. collection agent d. duly authorized treasurer of city or municipality where withholding agent has: 1. his legal residence; or 2. principal place of business; or 3. if corporation , where principal office is located 2.Tax deducted and withheld ►held as a special fund in trust for the government until paid to the collecting officers. 3.Return for final withholding tax ►filed and paid within 25 days from the close of each calendar quarter 4.Return for Creditable withholding taxes
57
Taxation law review notes ►filed and paid not later than last day of the month following the close of the quarter during which withholding was made
3. 4.
5. Commissioner, with approval of Sec Finance ► require withholding agents to pay or deposit taxes at more frequent intervals where necessary to protect the interest of the government B. Statement of Income Payments Made and Taxes Withheld ►Withholding agent shall furnish payee a written statement showing: 1. income or other payments made by WHA during such quarter or year and 2. amount of tax deducted and withheld ► statement given simultaneously upon payment at the request of the payee. Creditable withholding taxes 1. corporate payee – not later than the 20th day following the close of the quarter 2. individuals payee – not later than March 1 of the following year Final Withholding taxes ►the statement should be given to the payee on or before January 31 of the succeeding year. C. Annual Information Return ►Withholding agent shall submit to the commissioner an annual information return containing : 1. the list of payees and income required 2. amount of taxes withheld from each payees 3. other pertinent information required Final Withholding Tax: AIR ►filed on or before January 31 of the succeeding year Creditable withholding tax: AIR ►not later than March 1 of the year following the year for which the annual report is being submitted ►Commissioner may grant WHA reasonable extension of time to furnish and submit the return required herein. D. Income of Recipient 1. Income upon which any creditable tax is required to be withheld at source shall be included in the return of its recipient. 2. the excess of the amount of tax so withheld over the tax due on his return shall be refunded
income tax collected at source is less than the tax due on his return – difference shall be paid all taxes withheld 1. considered trust fund 2. maintained in separate account 3. not commingled with other funds of WHA
E. Registration with Register of Deeds ►No registration of any document transferring real property shall be effected by the Register of Deeds unless the commissioner or his duly authorize representative has certified that the transfer (1) has been reported and (2) tax due has been paid ►Register of Deeds requires payment of tax before transfer of property Section 59 Tax on Profits Collectible from Owner of other Persons ►Tax imposed under this title upon gains, profits and income not falling under the foregoing and not returned and paid by virtue of the foregoing shall be assessed by personal return Intent and Purpose of this Title 1. All gains, profits and income of a taxable class shall be charged and assessed with the corresponding tax. 2. Said tax be paid by the owner of the gains, profit or income or the person having the receipt, custody, control or disposal of the same Determination of Ownership: ►determined as of the year for which a return is required to be filed CHAPTER X: ESTATES AND TRUSTS Section 60: Imposition of Tax 1. Estate ► property of the decedent created by an agreement, trust or by last will and testament 2. Trust ►agreement, contract or last will and testament Status: 1. Estate: same status as decedent 2. Trust: same status as the grantor Income taxpayer is the Estate: ►income of the estate pending partition or no partition at all: Three kinds of partition: 1. judicial 2. extra judicial partition
58
Taxation law review notes 3. or no partition at all During partition Estate earns income: 1. individual – income tax 2. corporation – corporate income tax 3. estate (Taxpayer = TP) a.Impose Income as if TP is individual b.Impose income as if TP is corporation c.Impose income as if estate itself ►depends whether there is a (1) judicial (2)extra judicial partition or (3) no partition at all When there is a judicial settlement which is final and executory but no partition: Two possibilities: 1.Creation of unregistered partnership ►Income of the Estate: corporate income tax 2.Creation of Co-ownership ►Income of the Estate: Income tax on individual -co-owner liable in their individual company Ponce Case: H: After finality heirs did not divide the property, the applicable income tax is corporate income tax because they contributed money to engage in real estate. SECTION 61 TAXABLE INCOME (Important) “Taxable income of the estate or trust shall be computed in the same manner and on the same basis as ill the use of an individual.” Section 62: Applies during Pendency of Extra Judicial Settlement Personal Exemption (P20,000) Individual ► it will depend whether he/she is classified as single, head of the family or married Estate ►regardless Special deductions:Income distributed to the heirs ►if you distribute nothing you cannot claim this special deductions ►if there is a distribution, the heir shall be liable to pay whether individual capacity ►if there is no distribution, heirs are not liable to pay anything
►it applies if the estate pays itself during the pendency of the judicial settlement Basis: Sec 60 C “during the period of administration or settlement of the estate.” Taxpayer is a Trust: Q; When liable to pay income tax? A: If the trust is revocable (if revocable, Sec 61 and 62 also apply) Parties: 1.Grantor /creator /trustor 2.fiduciary / trustee 3.beneficiary / Les Qui trust Q: Who is liable to pay tax: A: If trust revocable: ► obligation of the trustee ►liability of trust itself and not personal Liability of trustee: If trust irrevocable ►obligation of the grantor ►personal liability of the grantor as an individual TWO WAYS OF REPORTING INCOME: PURSUANT TO RR2 – (1949) 1. report only once (building paid once) 2. after the span of 25 years (payment of building divided per year) ESTATE TAX: 1.Sec 60 2.Real Estate Tax 3. Estate Tax ►transfer tax impose on the Net Estate for the transfer of property to the heirs or beneficiary whether real, personal, tangible or intangible
Payment: made by executor, administrator, to creditor to preserve the estate
3 KINDS OF TRANSFER TAX: 1.Estate Tax 2. Donor’s Tax 3. Sec 135 of LGU Transfer of Real Property
Sec. 61 and Sec 62 ►does not apply if estate is subject to income or corporate income tax
Q: We don’t have inheritance tax and donees tax, why? A: 1973 Marcos issued P.D. 69
►Special deduction not apply if individual tax is paid by the Estate itself.
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Taxation law review notes Explain: Sec 84, rate is max of 20% of net before the rate is 60% plus additional amount. ►resulted to many gimiks through tax avoidance scheme, like creating a family corporation (only taxable is the stockholders which is exempt) ►Congress enacted RA 7449 decreased 60% to 35% and then RA 8424 – 35% to 20% Q: Now is it safe to create a family corporation? A: No more. Q: Now: Iba na ang scheme – which is better sale or donation? A: 1.Sale of RP considered capital assets ►6% to 1.5% doc. Tax 7.5 % better 2.Sale of RP considered ordinary asset ►5% to 52% as per use may be 3.Donation if given to all compulsory heir ► relative lower than 20% which is 15% ► stranger: 30% so go with 20% Q: Who are the taxpayers? A: Sec 104 Estate and Donors 1.Estate a. RC b.NRC c. RA d. NRA 2. Donor’s Tax a. RC b.NRC c. RA d. NRA e. DC f. FC ►A corporation cannot die of a natural death. Q: What is the reason for classifying the taxpayers? A: 1. NRA and Estate 2. NRA and FC Donors = property outside Phil exempt 3. all, other than these 3 – taxable w in and w/out Q: Is Section 104 relevant to all taxpayers? A: No, material only to NRA and FC Section 104 speaks of intangible personal property located in the Philippines. 1.Franchise which must be exercised in the Philippines; 2.S.O.B. issued by a Domestic corporation;
3.S.O.B. issued by foreign corporation at least 85% of the business of which is located in the Philippines. – do not confuse with 42 (2nd par) 4.S.O.B. of foreign corporation which acquired a business situs in Phil 5.S.R. in business, partnership or industry established in the Phils Q: NRA, German donates SOS of FG to Filipina gf, is it subject to donor’s tax? A: it depends (you must qualify) 1.Subject to donor’s tax if: 1.S.O.B. FG at least 85% of business located in the Phil 2.S.O.B. FG which acquired a business situs in Phil 2.Exempt 1.personal property outside of Phil; or 2.intangible personal property net taxable if following requisites concern: A decedent at the time of his death or the donor at the time of donation was a citizen and resident. 1.of a foreign country which at the time of his death or donation did not impose a transfer tax of any manner, in respect of intangible personal property of citizens of Philippines not residing in that foreign country; or 2. the laws of the foreign country allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. Q: What if citizen of one country and resident of another country will the exemption apply? A: No, law requires that he must be a citizen and resident of the foreign country. Campos Rueda Case: F: NRA died – married to Moroccan man, so she was a Moroccan resident. Donated SS in DC – administrator claims exemption, ground: In Morocco, intangible personal property of Filipinos not residing therein is exempt from transfer tax. BIR contends: Morocco is not a country but a colony of Spain. H: claim granted – even if it is not a full pledged state, or it’s a mere colony, what matter is that the foreign law provides for an exception. SECTION 84 RATES OF ESTATE TAX Q: What is the formula for Estate tax? A: Gross Estate (Sec 85) - Deductions (Sec 86) -------------Net Estate x Rate
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Taxation law review notes ------------Taxable net income - Tax credit --------------------Tax due Gross estate (define) – Sec 104 ►gross estate include real and personal property, whether tangible or intangible, or mixed, wherever situated NRA: Decedent / Donor – property situated outside of Philippines not included on the gross estate
Roces case: F: during lifetime, the following document were instituted or executed simultaneously 1.will and 2. donation The heirs insisted to pay Donor’s tax, Posados the collector tried to collect inheritance tax. unique thing: Donees were also the heirs in the last will and testament Donees wanted to pay donor’s tax because it is always lower than the estate tax except when the donee is a stranger H: this is a transfer in contemplation of death
Section 85 Gross Estate (inclusion) A.Decedent’s interest
Dizon Case: F: Deed of Donation was executed Dizon died several days thereafter son claims Donor’s tax H:Transfers in contemplation of death
►includes property (1) owned at the time of death and (2) property not owned at the time of death Classic example: Usufruct Q: if terminated by the death of usufructuary, is it subject to estate tax? A: Not subject to estate tax Reason: Exempt Transmission under Sec 87 (a) ►merger of the usufruct in the owner of the naked title Q: is there a conflict between Sec 88 a and Sec 87 a? How do you reconcile? A: No conflict 1.Section 87 a contemplates a situation where the usufruct is terminated. 2.Section 88a contemplates a usufruct for a fixed period. Ex contract of lease Q: How do you determine the value of usufruct? A: Sec. 88 a provides to determine the value of the right of usufruct, take into account the probable life of the beneficiary. Q: Why definition of gross estate is longer than definition of gross gift? A: transfer occurring after death. estate tax absolute Transfer during the life time ►Normally Donor’s tax However there are exceptions: 1.transfer in contemplation of death (85B) 2.revocable transfer (85 C) 3.transfer for insufficient consideration
Q: What are transfers deemed in contemplation of death? A: 1.Property was transferred during the lifetime but the decedent: a. retains possession or receive income or fruits of property; or b.retains the right to designate persons who will possess the property or the right to receive fruits or income c.Revocable Transfers 1.revocable transfers are included in the gross estate Reason: the decedent retains tremendous power and control over the property 2.Irrevocable transfers are not included in the gross estate: exempt Reason: the decedent losses control over the property Notice Not Required because the person has the control over the property D. Property passing under general power of appointment ► same with fidel commissary substitution 3 parties: 1.testator / decedent 2.1st heir 3.2nd heir TAKE NOTE: To determine whether included in Estate or not, know who has the choice to designate the 2nd heir: ►if decedent instructs the 1st heir that he can transfer the property to whomever he wants included in gross estate ►1st heir choice – included in gross estate E. Proceed of Life Insurance 1.Beneficiary is the estate ►included in gross estate whether designation is revocable or not
B. Transfer in contemplation of death
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2.Beneficiary is 3rd person ► revocable included ►irrevocable not included
Taxation law review notes
F. Prior Interest ►important only due to the codification of the tax code B,C,E, included whether before or after the effectivity of the code G. Transfer for insufficient consideration Q: Similar provision in Sec 100 (Donor’s tax) can you apply the two (2) provisions simultaneously? A: No, alternative application, one or the other but not both. The application will depend on the time of transfer or motive: 1.If transferred because of impending death ► estate tax 2.If transfer because of generosity ►Donor’s tax Q: Parcel of land was sold for less than adequate consideration (adequate) to relative for P600,000 when FMV is 1 million pesos. Is this subject to transfer tax? Is it subject to Donor’s tax? A: No, Sec 100 provides the property should be other than real property referred to in Section 24 (D) ►Not subject to Donor’s tax, the applicable tax is 6% FIT Q: Will your answer be the same if SOS are sold? A: No, answer not the same, SOS not property contemplated in Sec 24 D (1) ►in this case, the amount by which the FMV of prop exceeds the value of the consideration shall be deemed a gift and included in the computation of the gross gift: subject to Donor’s Tax Q: What is the subject matter in 85 G? A: paragraphs 85 B, 85 C, 85 D Sale in good faith as a defense: 1.under Section 100 is not a defense
►to determine the limitations of 1. Funeral Expense 2. Whether written notice is required 3. to determine whether gross value is at least P200,000 (Sec 90) 4.to determine if gross value is at least 42 M Q: Who are the taxpayers under 86 A? A: 1.RC 2.NRC 3.RA Q: Who is the taxpayer under 86 B? A: NRA Q: Why do we need to know this? A: NRA cannot avail of the following deductions: 1.family income 2.standard deduction 3.hospitalization 4.retirement pay under RA 4917 A. Deductions Allowed to the Estate of a Citizen or Resident 1.ELIT (expenses, losses, indebtedness and taxes) a) 1.Actual Funeral Expenses; or 2.amount equal to 5% of gross estate ►apply whichever is lower Limitation: a)amount equal to 5% of gross estate should not exceed P200,000 (basis is the gross value) b) Judicial Expenses ►no limitation Pajonar vs Commissioner Issue: Whether or not extra-judicial expenses may be allowed as a deduction H: This law has been copied from U.S. In US, expenses to be claimed as a deduction both judicial and extra judicial expenses.
2. under Section 85 G, it is a defense H. Capital of Surviving Spouse ►correlate with Sec 86 C ►both speak of legally married individual ►pertains to the separate property of spouse who survived ►capital used in its generic sense ►surviving spouse may be man or woman Section 86 (c)
C. Claims against the estate ►Estate is the debtor Requirements: 1.at the time the indebtedness was incurred the debt instrument was duly notarized; 2.loan contracted within 3 days before death; 3.the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan
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Taxation law review notes D. Claims of the deceased against insolvent person ►Estate is the creditor Requirement: ►the only requirement is that the (only) amount of loan is included in the gross estate ►notarization and certification not required E. Unpaid Mortgage, taxes and losses Q: In unpaid mortgage who is the mortgagor? ►decedent mortgagor 1. Unpaid mortgage 1.value of the decedent’s interest in the property is undiminished by such mortgage; 2.included in the value of the gross estate; Illustration: 1 million FMV but mortgage is only 600,000 you include 1 million 2.Estate tax 3.Losses Requirements: 1.losses incurred during the settlement of the estate; 2.arising from fire, storms, shipwreck or other casualties, or from robbery, theft or unbezzlement 3.losses not compensated by insurance 4.losses not been claimed as a deduction for income as purpose 5. losses incurred not better than the last day for the payment of the estate tax Property Previously Taxed ►Vanishing Deduction Return Requirement: 1.person acquires the property by virtue of donation or inheritance Q: What if acquired through purchase? A: Not apply, the property must be acquired by inheritance or donation 2.Estate tax or Donor’s tax already paid by the Estate of the Decedent (1st par) 3.Any person who died within five (5) years prior to the death of the decedent Q: What are the amounts? A: Prior Decedent died within: 1.5years – 20% 2.4years – 40% 3.3 years -60% 4. 2years – 80% 5. 1 year -100%
Q: Suppose the person died within 1 year and it was inherited by son, suppose the son also died within 1 year or may be 2 years, should we apply the vanishing deductions? A: No more (last par Sec 86 A2) G. Transfer for Public Use ►amount of all bequest, legacies, devises or transfers Recipient:government or any political subdivision ►exclusively for public purpose Take Note: 30% of which not used for administrative purpose is requirement
not a
FAMILY HOME ►amount equivalent to the current FMV of the Family Home of decedent. Limit: FMV should not exceeds 1 million otherwise the excess will be subject to estate tax. Requirements: (RR 2-2003) 1.Person is legally married GR: if single not allowed to claim Except: if head of the family 2.Family Home actual residence of the decedent 3.Certification of Barangay Captain of locality STANDARD DEDUCTIONS ►automatic: RR 2-2003 no requirement provided the decedent is the one in 86 (A) (RC, NRC, RA) MEDICAL EXPENSES Requirements: 1.amount not exceeding P500,000 2.medical expenses incurred by the decedent within one (1) year prior to his death. ►must be duly substantiated with receipt RETIREMENT PAY UNDER RA 4917 (RETIREMENT PAY WITH PRIVATE PLAN) Requirements: 1.plan duly approved by the BIR 2.person at least 50 years old 3. 10 years in service 4. avail only once TAKE NOTE: This is a deduction in the nature of exemption, all other retirement plan is excluded
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Taxation law review notes 2.although exempt, when gross values of the estate exceeds P200,000 B. Deductions Allowed to Non resident Estates 1.ELIT 2.Property Previously taxed 3.Transfers for public use
Q: When filed? A: within two (2) months 1. after decedent’s death 2.same period after qualifying as executor or administrator ►give a written notice
C. Shares in the Conjugal Property D. Miscellaneous Provisions For NRA: No deduction allowed unless include in the return the value at the time of his death that part of his gross estate not situated in the Philippines. For proper deduction must include E. below E. Tax Credit for Estate Tax Paid to Foreign Country SECTION 87 EXEMPTION OF CERTAIN ACQUISITION AND TRANSMISSIONS 1.Merger of usufruct in the owner of the naked title; 2.transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; 3.transmission from the first heir, legatee or legacy donee in favor of another beneficiary, in accordance with the desire of the predecessor; 4.All bequest, devises, legacies or transfers to (1) social welfare (2) cultural and (3) charitable institution Requirements: 1.no part of the net income insures to the benefit of any individual; 2.not more than 30% of donation (BDL) shall be used by such institutions for administration purposes. SECTION 88 DETERMINATION OF THE VALUE OF THE ESTATE A.Usufruct 1.Determine value of right of usufruct: ►consider the probable life of the beneficiary based on the latest Basic Standard Mortality Table B.Properties ►fair market value of the Estate at the time of death 1.FMV determined by Commissioner 2.FMV schedule of values fixed by the Provincial or City Assessors
Q: If the Net Estate is at least P16,000 will you in form the commissioner? A: yes, the gross is at least 3-4 million SECTION 90 ESTATES TAX RETURNS Q: When required to file return? A: 1.all cases of transfer subject to tax 2.even though exempt, gross value of the estate exceeds P200,000 3.regardless of gross value of the estate, when the same consists of registered or registrable prop such as: 1.real property 2.motor vehicle 3. shares of stocks 4. other similar property where clearance from BIR necessary for transfer of ownership in the name of the transferee ►return must set forth the following: 1.value of the gross estate at time of death 2.deductions allowed 3.information necessary to establish correct taxes Q: What if Estate is exempt, is it required to file a return? A: General Rule: No Exception: a. gross value exceeds P200,000 b.estate contains registrable property Q: if the estate or gross estate exceeds 2 million, what is the requirement? A: return must be duly certified by a CPA B. Time of Filing
Q: What is the Basis? A: the gross estate of the person
►filed within 6 months from decedent’s death ►within 30 days for filing the return ►within 30 days after promulgation of such order 1.certified copy of the schedule of partition and 2.order of court approving the same
Q:When is the notice required to be filed? A: 1.all cases of transfer subject to tax
C. Extension of Time Time: 30 days
SECTION 89 NOTICE OF DEATH TO BE FILED
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Taxation law review notes Grounds: meritorious cases Who grants: Commissioner
D. Place of filing: ►return shall be filed with: 1.authorized agent bank 2.revenue district officer 3. collection officer 4. duly authorized treasurer ►city or municipality in which decedent was domiciled at the time of his death
A: The rationale is not mentioned in §186, but if you read the other provisions of the LGC, you will come to set of conclusions of the reason why there must be a tax ordinance. » In most of these provisions, it always say: one-half if the town or municipality shall collect a tax of not exceeding 1% of the gross receipt. TAKE NOTE: There is no exact amount; hence, it is the tax ordinance which will fix the exact amount. public hearing In Congress, the requirement is not absolute (by discretion only). Under local taxation (last phrase of §186), the requirement is ABSOLUTE.
Q: What if non resident? A: NR with no legal residence here, with the office of the commissioner. Q: Let us say there are 3 compulsory heirs, namely A, B, and C. A renounces his inheritance coming from the parents, but A renounces his inheritance in favor of his 2 siblings, brother and sister B and C. Is this subject to donor’s tax? A: NO. It is exempt. Q: But if in the given example, A said “I am renouncing my inheritance, but I am giving it to my sister B”, is this subject to donor’s tax? A: YES. Renunciation is to the disadvantage of the brother. TAXATION UNDER THE LOCAL GOVERNMENT CODE: 1. Local Tax 2. Real Property Tax LOCAL TAXATION (§186, 187, then go to §151, 128 down) Q: Mayor Binay of Makati ordered the collection of elevator tax (for elevator in the city hall). Is the order of Mayor Binay legally tenable? A: NO. There should always be a tax ordinance after conducting a public hearing. (§186) tax ordinance Q: Can BIR collect the tax even in the absence of a revenue regulation? A: YES. Q: Can a province, city, municipality or barangay collect the tax if there is no tax ordinance? A: NO.
REYES vs. SECRETARY (320 SCRA 486) F: In the municipality of San Juan (just beside Mandaluyong) there was a tax ordinance passed. Reyes, a resident, claims that there was no public hearing conducted, he maintains that under §186 last phrase, there should always be a public hearing. H: The SC said: “yes, that requirement is an absolute one, but since the petitioner failed to produce evidence to support his allegation, if there is no proof presented other than his own statement, we hereby rule that the ordinance was passed in accordance to the procedure mandated by law”. While it is true that a public hearing is an absolute requirement, he who alleges, must prove the same.
Q: If you don’t agree with the validity or the constitutionality of the tax ordinance, what will be your remedy? A: Within 30 days from the effectivity of the ordinance, the taxpayer should file an appeal with the office of the Secretary of the DOJ (§187) REYES vs. SECRETARY (320 SCRA 486) F: Reyes asserted the validity and constitutionality of the tax ordinance only after the lapse of thirty (30) days (perhaps his lawyer was thinking that an ordinary statute may be contested anytime with the RTC, CA or SC). H: With regard to a tax ordinance, w have a specific rule, failure to assail the validity with the specific period of time, is fatal to the taxpayer. Since it was filed beyond the 30day period, we do not disturb the validity of the ordinance. Q: Within what period should the Sec. of Justice decide? A: Within 60 days from the time the appeal was filed. Failure to decide within this time, the taxpayer has the remedy to file an action with the regular courts.
Q: Why is it that there should be a tax ordinance as required by §186?
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Taxation law review notes » If the decision was made within the 60 day period, and receives the decision, his remedy is to file an appeal within 30days form the receipt of the decision to court of competent jurisdiction → RTC.
C. Common limitations on the taxing power of the LGU’s (§133) »
» Beginning April 23, 2004, from the ruling of the RTC, pursuant to RA 9282 (the law uplifting the standards of the CTA), the ruling of RTC on local tax cases, is appealable to the CTA en banc. TWO APPEALS DECIDED BY THE CTA EN BANC: 1. decisions of RTC involving local tax cases 2. decision of the Central Board of Assessment Appeals. »
Q: Why common? A: Because the limitations or prohibitions apply to all LGUs, the provinces, cities, municipalities and barangays. Two Common Crimes (under §133) 1. absolute prohibition 2. relative prohibition
From CTA en banc, the appeal must be file with the SC within 15days.
»
Go to §151: The city could impose the tax already imposed by the province of by the municipality. Q: What are the numerous taxes imposable by the province which a city now allowed to impose? A: Those enumerated in §135 to §141 of the LGC Reasons why a municipality wanted to be converted into a city: 1. §151 2. §233 (real estate tax) » In addition, the law says that the city could increase the rate of the tax by not more than 50% of the maximum EXCEPT those enumerated in §139: a) professional tax b) amusement tax A. General Principles (§128-130) ►
Under the old law this was §5 of the Local Tax Code.
reiteration of the constitutional tax provisions
► notice that the constitutional limitations on taxation do not only apply to the national government but also to local government units. B. Definitions (§132) Local Taxing Authority (§132)
for a province, it is the provincial board or the provincial council (sangguniang panlalawigan) for a city, we have the city council (sangguniang panlusod) for the municipality, we have the municipal council (sangguniang pangbayan) for the barangay or barrio, we have the barangay council.
It shall be unlawful for the LGUs to collect: I. Income Tax EXCEPT when levied on banks and other financing institutions (§133(A)) » the term “other financing institution shall include money changer, lending investor, pawnshop (§131(E)) » rate of tax: does not mention rate of tax, so long as it is “fair, just and reasonable” » It cannot be “prohibited taxation, because the element of “imposed by the same taxing power” is not present. One is imposed by the national government and the other is by the LGU. II. Documentary Stamp Tax (§133(B)) » absolute prohibition III. Estate tax, inheritance, donations inter vivos, donations mortis causa EXCEPT in §135 (§133(C)) » transfer tax on the transfer of realty to be imposed by provinces and cities (§135) NOTE: this is not a real estate tax, this is a local tax. IV. Custom duties, charges or fees for the registration of vessels or ships, wharfages fees and wharage dues EXCEPT if the wharf had been established, maintained and operated by the locality (§133(D)) » wharfage due – is a custom fee imposed on the weight of the cargoes. » wharf – a pier » special levy on public works (§240) » allows provinces cities and municipalities to impose a special real estate tax known as “special levy or public works” » let us say the municipality established a pier for a minimal value of P10M; out of P10M, under §240, 60% of this may be recovered; the other 40% may be recovered by warfage due. v. Tax, fee or charge for goods or commodities coming out or passing through the territorial jurisdiction even if in the guise of a toll or a fee (§133(E)) » an absolute prohibition » commodities marketed in a public market, let’s say in the city of Pasig, where the commodities came from Laguna then to Tanay, Cainta, Taytay; just
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Taxation law review notes imagine if each of the towns will impse 1peso for every head of a chicken or 50cents for every bundle of vegetable. PALMA DEV’T CORP v. MALANGAS ZAMBOANGA DEL SUR (113 SCRA 572) F: Municipal council passed a tax ordinance entitled “police surveillance fee” which provide that ALL motor vehicle passing through a particular street in the town proper of Malangas which will lead to the pier or wharf will pay a certain sum of money whether it is camote, copra, palay,or rice. One of the owners of the motor vehicle is Palma Dev’t Corp. carrying copra, banana and coconut to be loaded in a ship docked at pier of Malangas. The lawyer of petitioner assailed the validity of the ordinance stating that it is a clear violation of §133(E). H: It is not the title of the ordinance which is controlling but it is the essence of the substance of the tax ordinance. The tax ordinance clearly violated §133(E), therefore, the SC had no option but to declare the tax ordinance null and void for being in violation of the law. VI. Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen (§133(F)) Q: Don Antonio Florendo, a person coming from Pampanga who settled in Davao City, employed thousands of workers in the different banana plantation. Can the LGU impose tax on the agricultural product which is a banana? A: YES. The LGU can impose because Don Antonio is not a marginal farmer. It is only prohibited if it is sold by a marginal farmer. » Marginal Farmer – a farmer or a fisherman for subsistence only, whose immediate members are the immediate members of the family (§131(P)) VII. Tax, fee or charge on pioneer and non-pioneer enterprise duly registered with the board of investments for a period of 6yrs and 4yrs respectively (133(G)) » relative prohibition because after the period, the LGU concerned may now impose the tax. VIII. Excise tax on articles and tax, fees and charges on petroleum products (§133(G)) » relative prohibition since under §143(H), it says there that taxes which are prohibited such as excise tax, percentage tax and value added tax nonetheless, the LGU may impose a tax not exceeding 2% of the gross receipt (for cities 3%). » My former student an assistant in the city legal attorney in a city in Metro Manila, received a summon from the RTC (on complaint of a supermarket in Metro Manila) questioning the validity of the tax ordinance under §143(H) since the rate imposed was 3% I said, “ineng, una file kayo ng motion to dismiss. Nak ng puta, absent ka na naman ata eh, you invoke §151 stating that a city can impose a tax higher than the rate provided for by law not more than 50% of the maximum (50% of the maximum of 2% is 1, therefore, 2+1 is 3%)” BULACAN v. CA (299 SCRA 442) *first case decide by the SC which interpreted both the LGC and the NIRC. F: The then governor, Obet Panganiban together with his provincial council passed an ordinance imposing tax on quarrying under the provision of §138 of the LGC. The problem is that the ordinance applies to ALL entities quarrying in
the province. One of the taxpayers, Republic Cement obliged to pay the tax, argued that under §138 of the LGC, the tax on quarrying on which the province may be allowed shall only be with regard to quarrying private land, and not only that but under §133(H), there is a prohibition to impose excise tax and tax on quarrying under the IRC is an excise tax. H: The tax on quarrying allowed to provincial governments shall only be with regard to lands which are public lands, and since this is a private tax on quarrying refers to a lot without any distinction. Hence, if the LGC made a qualification as to the kind of land (where it says it should be public land), by implication, it should refer to private land under §151 (although the law did not distinguish); and since it is a tax by the national government, it should be collected by the BIR (not the LGU), and also the SC agreed that it is an excise tax where LGU’s are prohibited from collecting; thus, the SC declared the tax ordinance null and void for being contrary to law. » Sir, why is it a problem when the law is clear that under §138, it shall only apply to public land? Perhaps the provincial council thought that the subject matter of the tax ordinance may be a subject matter provided in any book including the IRC, or worse, that it may impose a tax on a subject matter not mentioned in any book. Moral lesson: although a tax ordinance may be passed even if the subject matter is not provided for in any law, it has to comply with the limitations. PETRON v. PENILLA (198 SCRA 86) * The facts here arose under the old law under §5 (now §133) of the local tax code (PD 231) F: Petron has a factory/plant in Penilla where the raw materials petroleum products are being converted into refined petroleum products. The municipal council of Penilla imposed a tax by way of a tax ordinance saying that they are invoking the old §19 (now §143(A)) stating that municipalities are authorized to impose tax of the manufacture of any commodity, hence, since it is manufacture of a petroleum product, the LGU must e authorized. However, Petron objected since under §5 (now §133(H)), the prohibition includes the prohibition to impose excise tax and not only that, under this par., the tax on petroleum products is an excise tax. Under this par., the law is clear it does not only prohibit the imposition of tax, fee or charge over petroleum products. H: The controlling provision here the old §19 (now §143(A)) that LGUs are authorized to impose the business tax for the manufacturing over any kind of commodity by and petroleum product is “any kind of commodity”. Q: What do you think? A: I don’t agree with this ruling because between §133(H) and §143(A), it is the former which is more specific. IX. Value added tax and percentage (§133(I) EXCEPT §143(H) » Relative prohibition. X. Tax, fee or charge on common carriers whether by land, water or air (§133(J)) FIRST HOLDING CO. v.BATANGAS CITY (300 SCRA 661) * 2nd SC ruling discussing both the IRC and LGC.
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Taxation law review notes F:
This revealed to the public the existence of 2 very big oil pipelines coming form Batangas City with a distance of more than 100km, one going to Pandacan Oil Depot and the other one is going to Brgy. Bicutan, Taguig. The Batangas City council deemed it necessary to impose a tax on the gross receipt of the 1st holding company for the operation of the oil pipeline, but the operator argued that the oil pipeline is not a common carrier. H: The SC reasoned out like in the case of Pajunar v. Comm (328SCRA666), saying that “we have copied the code of carrier law form the US where the definition of a common carrier is one habitually carrying not only individuals or passengers but also goods or commodities, and since the oil pipelines is habitually carrying petroleum products which is a commodity, we rule this as a common carrier which is under §133(J), LGU is prohibited from imposing tax on common carriers, and not only that but under §170 of the LGC, the law is very explicit, that ALL LGUs are prohibited to impose percentage tax on common carriers”. With that, the tax ordinance passed was declared null and void for being contrary to law. XI. Premiums on re-insurance (§133(K)) » absolute prohibition. XII. Tax, fee or charge on registration of motor vehicles and for the issuance of license and permit for driving thereof EXCEPT tricycles. (§133(L)) BATUAN CITY v. LTO (322 SCRA 805) I: Which function was delegated to the LGU? The LTO registering motor vehicles “or” the LTFRB granting franchise and regulation of common carriers? H: Under §133(L), the function of the LTO is prohibited, an therefore what may be delegated to the LGU is the function of LTFRB. XIII. Tax, fee or charge on exportation of products and is actually exported EXCEPT under §143(C) where the LGU is authorized to impose business tax on exportation (§133(M)) XIV. Tax, fee or charge on cooperatives duly registered under the cooperative cod (RA 6938) and Business Kalakalan (RA 6810) (§133(N)) » A cooperative is exempt from local tax, provided it is duly registered with the cooperative code and the cooperative development authority “or” Business Kalakalan (not kalkalan) XV. Tax, fee or charge over the national government, political subdivisions and agencies and instrumentalities of the government (§133(O)) » Relative prohibition since it admits of an exception under §154 of the LGC where it says that a LGU may be authorized to impose a fee or charge for the operation of a public utility provided it is owned, maintained and operated by such LGU.
NAIA v. PARANAQUE (JULY 2006) H: SC ruled in favor of the airport. Paranaque being a LGU can’t impose tax on a government instrumentality. Airport owned by the government is not an agency, it being an instrumentality. Q: May the government tax itself it the taxing power is the local government?
A: NO. The local government cannot impose tax on the national government, and with more reason that it cannot impose a tax with equal LGU. D. Taxes that can either be imposed by Provinces or Cities I. tax on transfer of realty (§135) ► Note that this is not a real estate tax, this is a local tax for the simple reason that it is not provide for under the topic of real estate tax (§198-280) ► Law says “it should not exceed ½ of 1% of the consideration” (NOTE: do not use zonal value since this is used only under the IRC, not the LGC. Q: Since all the provinces and cities must follow the limitation of the rate (not exceeding ½ of 1%), is it violative of the equal protection clause? A: NO, because the sangguninan had to determine the actual rate considering the status of the province. Q: Why is that Makati fix the rate of 75% or 3/4 of 1%? A: Because cities are authorized to increase the rate of 50% of the maximum, that is 50% of ½ is 25% (50+25 is 75%). NOTE: Do not apply transfer of realty pursuant to RA 6657 (CARP) → this is the Comprehensive Agrarian Reform Program → this is exempt. II. tax on printing an publication (§136) ► Normally, a province cannot impose this because the tax on business can only be imposed by a city or municipality EXCEPT this one, on printing and publication of magazines and periodicals. III. franchise tax (§137) ►
The old national franchise tax under the old tax code was already abolished.
► We still have franchise tax other than this one, known as national franchise tax → provided for in the republic act granting franchise. Two kinds of Franchise Tax: 1. local franchise tax (under LGC §137) 2. national franchise tax (provided for in the statute or republic act authorizing the franchise) Q: May LGUs impose local franchise tax? A: We have to consider here many supreme court decisions and also §193 of the LGC.
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Taxation law review notes Under §193, it says there “unless especially provided for in this code, exemptions granted to natural juridical persons are hereby withdrawn (abolished) EXCEPT: 1. local water districts 2. cooperatives registered under the cooperative code (RA 6938) 3. non-profit and non-stock educational institution. BASCO v. PAGCOR (197 SCRA 52) F: The city council passed a tax ordinance imposing tax on PAGCOR, an agency of the government. PAGCOR objected saying that the local city is prohibited under the old local authority act to impose tax on an agency of the government. H: The SC declared null and void the tax ordinance saying Manila cannot do that. CEBU v. MACTAN (261 SCRA 667) F: Cebu government was trying to collect real estate tax from the Mactan airport (note: real property tax is a territorial tax, meaning it should only be collected within its territorial jurisdiction). Lawyers of Mactan airport argued that under §13(O), Cebu, a LGU, cannot impose tax on an agency of the government, and they also invoked the ruling in BASCO. H: The lawyer of Mactan airport is devoid of any merit at all, it is 100% erroneous since the real estate tax is not a local tax, hence, why invoke a SC ruling and codal provision which can only be applied to local tax. Therefore, Mactan airport should pay Real Property Tax. ► Before the codification in 1991 (to take effect January 1, 1992), local taxation was embodied in a separate book known as Local Tax Code (PD 231) while real property tax was provided for in a separate book known as Real Property Tax Code (PD 464)
CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS OCCIDENTAL (181 SCRA 38) * This was the prevailing rule for more than 10years from 1988 H: In the franchise or the republic act, there are only two (2) kinds of franchise, one is a franchise which provide for a condition that this tax (referring to the franchise tax) shall be in lieu of all other taxes, and the other franchise is the one which do not provide for such provision; the province or the city can impose local franchise tax if the franchise belong to the second example. REYES v. SAN PABLO CITY (305 SCRA 353) * Here the SC uniformly ruled H: A provision on exemption under §193 don’t only refer to exemptions provided for by different statutes, but it includes those which claim exemptions by virtue of the case of Cagayan de Oro (because SC decisions are also laws). PLDT v. DAVAO (363 SCRA 750) F: The franchise holders of Smart and Globe are claiming exemptions from the local franchise tax because they are saying that they are holding a franchise which says that it is a franchise enacted by the house of Congress in 1995 which carries with it an exemption form local franchise tax. H: By the very explicit provision of §193, the removal of exemptions granted by different statutes and also by SC decisions applies only to statutes and decided by the SC on or before Jan. 1, 1992, because §193 says “upon effectivity of this law”. For exemptions covered by §193 therefore, Smart and Globe are authorized to claim exemptions because the statue (RA 7082) was enacted on 1995. IV. tax on sand, gravel and other quarry resources (§138) ►
LRT v. CITY OF MANILA (342 SCRA 692) F: The Manila city government tried to collect real property tax but the management of the LRT said “no you cannot do that to us since it is exclusively for public use”. H: NO, you are not exclusively for public use since every time a person wants to use the LRT he has to pay. Q: Why not use the defense that it is owned by the government? A: Because in real estate tax, the defense that it is owned by the government is not a defense. The LGC in §199(B) and in §217, both provisions says that the basis for the imposition of real estate tax is the ACTUAL USE of anybody who is using that (maybe in the concept of usufructuary or in the concept of a lessee, or in the concept of an owner); the basis is not ownership. ► in §134, the taxes here must not only be imposed by provinces, it may also be imposed by cities in line with §151 → those enumerated in §135 to 141.
We are through with that in the case of Bulacan
V. professional tax (§139) ► this must be correlated with the tax under §147. ► NOTE that this is an exemption to the rule that a city may increase the rate of the tax → under §151 of the LGC, the increase is not allowed. ► both §139 and §147 are taxes imposed on persons exercising professional calling. Section 139 are to be imposed by provinces and cities are applicable to workers who must pass a government
Section 147 are to be imposed by municipalities and cities are applicable to persons who are working but are not
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Taxation law review notes examination (e.g. engineers, physicians, etc) there is a maximum (P300) NOTE: it is not always 300, since the exact amt must be fixed by the ordinance.
required to take government examinations It does not provide for any amount, the only requirement is that it must be reasonable
VI. amusement tax (§140) ►
under the IRC, there is also amusement tax under §125.
PBA v. QUEZON CITY (137 SCRA 358) F: The city government enacted a tax ordinance trying to collect amusement tax including amusement tax on the PBA (in Araneta, Cubao); but PBA and “no, we are already paying amusement tax to the national government through the BIR because of §125 of the IRC” H: QC government can no longer collect on the ground that it is already being collected by the national government and secondly, in the enumerations of amusement under §140, you will never see professional basketball. Most of all, it is the intention of the author that it is only the national government. *nak ng putang katangahan yan.. the local tax code PD 231 was enacted in 1974 when we don’t have any professional basketball.. since professional basketball was born May 1975. * ano ba dapt tama diyan? → both the national government and the QC government can collect. There is no violation of the prohibited double taxation, because the taxing powers are different, and not only that §140 speaks of amusement tax on admission fee but under §125, it is abut gross receipts. VII. delivery van (§141) Q: What if not a delivery van, but “sako” lang? A: The applicable tax is under §143(G) (peddler’s tax, one imposed by municipalities and cities. If may dalang sasakyan, yari siya ng province sa tax. NOTE: §135-141, these are taxes that can be imposed by PROVINCES and CITIES. §143-150 are taxes to be imposed by MUNICIPALITIES, which can also be imposed by CITIES. E. Taxes that can either be imposed by Municipalities or Cities
I.
Business Tax (§143(A-H)) a. manufacturing, repacking, processing, including the manufacturer of permitted liquor and also its dealer b. wholesaling c. exportation d. retailing e. contractor’s tax f. tax on banking institution and financing institution g. peddler’s tax h. the exemption under §133(i)
Q: If you have two branches, how many business taxes do you have to pay? A: You pay only one business tax (§146) ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA 607) F: Ilo-ilo Bottlers was already paying a business tax on manufacturing under §143(A) to the city government by virtue of a tax ordinance. Later on, they are obliged to pay by virtue of another tax ordinance imposing business tax on wholesaling. Naturally, Ilo-ilo Bottlers argued, “how could it be, if you manufacture, it necessary follows that you sell the commodity so, with the payment of the business tax on manufacturing, it carries with it the business of wholesaling”. H: NO, you have to determine the marketing system of the company. If wholesaling is also being done in the place of manufacture, the business tax on wholesaling should no longer be paid it should only be the business tax on manufacturing. But if the marketing system of the company provides that wholesaling shall be done in a separate place (maybe several kilometers away), the manufacturer must still pay the business tax on wholesale because now it could be argued that they have the separate business of wholesaling. Q: On the business of retailing, should the business tax of retailing be imposed by the city or by the municipality “OR” by the barangay in the city or the barrio in the municipality? A: §143(D) must be correlated with §152, the tax to be imposed by the barangay. It depends: a. city » if the gross receipt of the retailer exceeds P50T in a minimum of one year, it is the right and privilege of a city to impose the business tax on retailing. b. barangay » if the gross receipt of the retailer did not exceed P50T, it is the barangay council where the business of retailing is located. c. municipality » if the gross receipt of the retailer did not exceed P30T within a period of one year. d. barrio
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Taxation law review notes »
if the gross receipt of the retailer did not exceed P30T within a period of one year. NOTE: These distinctions do not apply in wholesaling. These are only for retailing.
H: Since in this case the contract booked and paid, meaning, it was negotiated perfected and consummated in the warehouse where it was located in Cebu City, the Cebu City government has the right to collect business tax.
► Paragraph H: for the imposition of excise tax, percentage tax and value added tax, the municipality may impose a tax not exceeding 2% of the gross receipt (with regard to a city, it may go as far as 3%)
Q: What if there is an agreement that commodities would be delivered and that the buyer would be waiting in some other town, is the answer still the same? A: YES, the answer is still the same because delivery to the carrier is delivery to the buyer where delivery has been termed within the territorial jurisdiction of Cebu.
II. Municipalities in Metro Manila who can increase their rate (§144) ►
Right now there are only two municipalities: 1. San Juan 2. Pateros
III. Professional Tax (§147) ►
we are through with that
SHELL v. CEBUCOT, CAMARINES SUR (105 PHIL 1063) F: The petroleum products were purchased at the motor vehicle traversing the neighboring towns of Cebucot like Bason, Dimalaon, all towns in Camarines Norte. The contract of sale was negotiated and perfected in different municipalities where the motor vehicle of Shell was traveling. H: Although the oil depot was located in Cebucot, the said municipality cannot impose tax on that because the contract of sale was negotiated and perfected in the different nearby towns of Camarines.
IV. Fees for sealing and licensing of weights and measures (§148) V. Fishery rentals, fees and charges (§149)
Q: Is there a conflict with the case of Shell and Phil Matches? A: NONE. As a matter of fact, these two decisions complement each other.
F. Situs of Tax (§150)
G. Taxing Powers of the Barangay (§152)
►
The tax referred to in here is the business tax on wholesaling and retailing.
Q: RFM is manufacturing commodities, one of them is Swift hotdogs, this is being sold not only in Mandaluyong, Metro Manila, but also to the inter country from Batanes to Tawi-tawi. Where should the business tax of wholesaling or the business tax of retailing be paid? Should it be in the principal office (Mandaluyong) “or” the place where the commodities are sold? A: It will be paid in the place where it had been sold PROVIDED there is a branch office or a sales outlet (§150(A)). ► If it so happens that the company has a factory different from the place where the principal office is located → 30% should be pain in the principal office and 70% in the municipality or city where the branch is located. PHIL MATCHES v. CEBU (81 SCRA 99) F: Phil Matches were produced in Nagtahan, Manila. In Cebu city, there was a warehouse where the matches were stored. Many of the customers, by way of wholesale in the warehouse in Cebu City, they came from different towns of the Visayan Region. May the business tax ordinance of Cebu be imposed on those transactions even if the buyers did not come from the territorial jurisdiction of Cebu?
►
Only a minimal sum (fair and reasonable)
Power to impose tax: 1. On commercial breeding of fighting cocks, cockfights and cockpits » must be for commercial purposes 2. On places of recreation which charge administration fee 3. On billboards, signboards, neon signs and outdoor advertisements » especially for the barrios and barangays along the highway 4. For barangay clearance » if you want to engage in the business of retailing or wholesaling → if barangay captain will not approve that → within 7days go to the municipal hall or city hall for approval 5. For the use of barangay property » for instance the barangay has a plaza. H. Common Revenue Raising Powers (§153-155) Q: Why common? A: All the LGU could impose the same. But it does not follow that all the provinces, cities, municipalities could impose the same. Only the LGU which operate, establish, maintain the entity If established by the province, it should only be the province.
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Taxation law review notes These are: 1. service fee and charges » for services rendered 2. public utility charges » provided owned, operate and maintained by them 3. toll fees and charges » tax or toll for the use of a bridge or a street ► Padua filed a civil action in the MakatI RTC trying to stop the government form collecting a toll free in the South Express including the North expressway alleging that he is affected as a taxpayer because he is from Paranaque. He argued that if you use the property of the government like a street or a public plaza, you do not pay. He made the analogy, that if you go to Luneta, you do not pay the city government of Manila. The Makati RTC, the CA and SC had a uniform ruling that the operator should be prohibited from collecting further toll fess because if the operator had already recovered his investment and earned an income already, he should be stopped. As argue by the SC, it copied the argument of the lawyer (re: Luneta). » NOTE: that Res Judicata do not apply here. When the ruling became final an executory in 1993, the North and South Express were totally dismantled and totally destroyed by the DPWH to give way to the final and executory ruling of the Court, that It should no longer be collected. After several months, the government announced in the radio that the party in the case of Padua, mutually agreed that the collection shall be resumed in order to have money for the maintenance and repair of the highway. Exceptions to §155 (collection of toll fees) 1. members of AFP 2. members of the PMP 3. post office personnel delivering mail 4. physically handicapped 5. disabled citizens 65 years and older. I.
Community Tax (§156)
►
In the old days, known as “residence tax certificate.
Q: If the Filipino is a resident of a foreign country (NRC), is he liable to pay the community tax certificate? A: NO, because the basis of imposition of this tax is whether or not you are an inhabitant of the Philippines. Meaning you are a resident of the Philippines. Q: What about a foreigner residing in the Philippines (RA)? A: YES. You have to pay unless the foreigner is a trans-investor for not more than 3months. ►
Requirements: 1. for a natural person → at least 18 years of age
2.
for corporations → upon registration with the SEC
Q: What if you become 18 in the month of January or November or December? A: For those who celebrated their birthday before July 1 (that is up to June 30), they are liable to pay the tax, for this year. For those who celebrated their birthday on or after July 1, they are not yet liable to pay this year, but have to wait until next year. Q: Is there a difference for those who reached 18 in the months of Jan-Feb-March and those who reached 18 in the months of April-May-June? A: YES. For those who celebrated birthdays in the months of Jan-Feb-March, they have a grace period of 20days within which to pay. Those who celebrated their 18 th birthday in the month of April-May-June, they do not have any grace period at all, they have to pay the tax immediately. Q: If you have a community tax certificate for this year (2006), can it be used only until December 31, 2006? A: NO. It shall be valid up to April 15, 2007. (§163(C)) J.
Accrual of the Tax (§166)
►
January 1
Q: What if the tax was only approved in the month of May 2006, do you have to wait until January 2007? A: NO. You have the right to collect that in July 1, because the law is saying that “it should be collected in the next succeeding quarter” (§167) ► Mayor Binay had a tax ordinance in May, sabi ng mga bata niya: “bosing, collect na tayo ng June”. Binay: “hindi nga pupwede, maghintay pa tayo ng July 1”. Q: What if the tax ordinance had been existing for several years already? A: The time of accrual will always be January 1. REMEDIES UNDER THE INTERNAL REVENUE CODE 1. 2.
Remedies of the Government Remedies of the Taxpayer
Remedies of the government:
This is applied to both natural and juridical persons.
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Taxation law review notes 1. 2.
Assessment Collection
Under the NIRC, assessment and collection have 2 kinds: 1. 2.
Normal/Ordinary assessment and collection – Sec. 203, NIRC Abnormal/Extraordinary assessment and collection – Sec. 222, NIRC
I.
Normal/Ordinary assessment and collection ► There was a return filed and it is not fraudulent and not false
II. Abnormal/Extraordinary assessment and collection ► There was: 1. an omission or failure to file the return; 2. if there was a return filed, it was fraudulent, or; 3. the return was false Q: Is a false and fraudulent return presumed? A: NO, false and fraudulent return is not presumed. The burden of proof to prove that the return was false and fraudulent lies against the government through the BIR. The mere fact that the return is erroneous will not make the return fraudulent, it must be proven by the BIR. Q: Why is it important to know whether the assessment is under normal or abnormal condition? A: It is important to know because the prescriptive period between normal and abnormal assessment differ. Prescriptive Period for Assessment 1. Normal/Ordinary Assessment – 3 years from the time the return has been filed (not the payment of the tax) (Sec. 203, NIRC) ► 3 Ways of filing the return under Sec. 203, NIRC: 1. filed before the deadline (for any tax under NIRC) 2. filed on the date of deadline 3. filed after the deadline ► 2 Ways of counting the 3 year period of Assessment: 1. if return is filed before or on the day of the deadline, the prescriptive period starts on the date of the deadline; 2. if return is filed after the deadline, the prescriptive period starts on the date the return has been filed. » For the calendar year of 2004, a return must be filed and paid for Net Income Tax on or before April 15, 2005. Since he was not able to meet the deadline, the taxpayer is now being assessed for tax due for 2004. To minimize interest and
surcharges, it has been suggested by the BIR that the taxpayer file a late return. Supposed he filed his return covering 2004 on April 1, 2006. In this example, the reckoning point is the deadline of April 15, 2005. The starting point of the counting the 3 yr. period is on the date the return is filed which is April 1, 2006. » Suppose it is not a late filing of return, the counting of the period is on the date of the deadline which is April 15.
►
2. Abnormal/Extraordinary Assessment the government has 2 options: a. Assess and Collect » the prescriptive period for “assessment” shall be 10 years from the discovery of none filing or false or fraudulent return (Sec. 222, par. o, NIRC) » the prescriptive period for “collection” shall be 5 years from the date of final assessment (Sec. 222, par c, NIRC) b. Collect Without Assessment through Judicial Action » since there is “no assessment” there is no prescriptive period for assessment » prescriptive period for “collection” shall be 10 years from the date of discovery of none filing of return or false or fraudulent return. ► These options are available only if the Assessment is under the Abnormal/Extraordinary Conditions. These are not available under Normal/Ordinary Assessment
Prescriptive Period for Collection 1. Normal/Ordinary Collection – Sec. 203 did not provide for the prescriptive period for the collection Intention of the author: 5 years from the date of final assessment Reasons: (Sababan agrees with the 5 year prescriptive period) Prescriptive period of collection under 1st option on Abnormal Assessment is 5 years from final assessment (Sec. 222, par c, NIRC) 1. under the old code of 1939, 1977, and 1985, if the prescriptive period for collection under abnormal is 3 years, then the prescriptive period for collection under normal is also 3 years. If now a days, it is 5 years in abnormal, the prescriptive period for normal should also be 5 years. 2. to say that there is a prescriptive period for collection under Abnormal and there is none under Normal is too abnormal. It should be the other way around. 2. Abnormal/Extraordinary Collection a. assess and collect – 5 years from the final assessment
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Taxation law review notes b.
collect without assessment through judicial action – 10 years from date of discovery of none filing, or false, or fraudulent return.
Q: How to apply these periods? A: Annual net income tax return filed by individual using a calendar year. The return should be filed on or before April 15, 2000. It was filed on April 15, 2000. Q Without stating the date of final assessment, can it be collected in 2007? A: Under normal condition, first determine the date of final assessment. If the BIR finally assessed the tax in November 2001, then 2007 is way beyond the 5year period to collect. Count the prescriptive period for collection from the date of final assessment. Q: (same facts) Supposed it was finally assed on March 2003, can it be collected in 2007? A: Yes, because it is within the prescriptive period of 5years. BASILAN v. COMMISSIONER (21 SCRA 17) F: Supposed the notice of assessment was given within the period but it was received by the taxpayer outside the period. I: Whether or not the assessment is within the period of 3 years. H: Yes. It is within the period. If the notice is sent through registered mail, the running of the prescriptive period is “stopped”. What matters is the sending of the notice is made within the period of prescription. ► It is the sending of the notice and not the receipt that tolls the prescriptive period. Q: What if the return has been amended, how would you compute the period of assessment? A: NIRC is silent. PHOENIX v. COMMISIONER (14 SCRA 52) If the amendment of the return is substantial as distinguished from superficial, the counting of the prescriptive period is also amended. The prescriptive period shall be reckoned on the date the substantial amendment was made. If the amendment is superficial, the counting of the prescriptive period is still the original period. Procedure for Assessment (Sec. 228, NIRC; RR 12-99) Steps of assessment 1. Sec. 228, NIRC (2 steps) 2. RR 12-99 (3 steps) 2 Steps under Sec. 228, NIRC 1. Pre-assessment notice
2.
Final assessment notice
3 Steps under RR 12-99 1. Notice of Informal Conference 2. Preliminary Assessment Notice 3. Formal Letter of Demand and Notice to Pay the Tax
PROCEDURE (Sec. 228, NIRC; RR 12-99) 1. Upon receipt of the notice of informal conference, file a reply within 15 days from receipt of notice; 2. Failure to file a reply, 2 things may happen: a. BIR will send again the Notice of Informal Conference or b. BIR will send a Preliminary Notice of Assessment 3. Upon receipt of Preliminary Assessment Notice (PAN), file a reply within 15 days from receipt 4. Failure to file a reply will result in either: a. BIR will repeat PAN b. Declare the taxpayer in default, and send you a Final Assessment Notice (FAN) 5. Upon receipt of FAN, taxpayer may file a protest within 30 days. Q: Is FAN the one appealable to the Court of Tax Appeals (CTA)? A: NO. This is because §228, NIRC and RR 12-99 requires the exhaustion of administrative remedy of protest. After the receipt of FAN or formal demand within 30days must file a protest before the office of the commissioner of internal revenue. FORMS OF PROTEST 1. Local Tax (Sec. 125, Local Government Code (LGC)) 2. Real Property Tax (Sec. 252, LGC) 3. Tariff and Customs Code (Sec. 2313, RA 7651) ► In all protest under the different codes, payment under protest is only necessary under the “Real Estate Tax”. RR 12-99 ► If the taxpayer receives 2 final assessments, one under the Net Income Tax (NIT) and the other in VAT. If the taxpayer don’t want to file protest under VAT but want to file a protest under NIT. The taxpayer in order to be allowed to file a protest under the NIT must first pay the VAT where he does not intend to file a protest. ► This is not “payment under protest” because, payment under protest is the one mentioned in Real Property Tax under Sec. 252, LGC.
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Taxation law review notes A: Under NIRC, Protest is referred to as: 1. disputing of final assessment or 2. file a motion for reconsideration or reinvestigation Q: What should be done after filing a protest? A: Count 60days is the period to file the necessary documents and receipts in support of the protest. Q: What is the effect of failure to file the supporting documents? A: Failure to file the necessary and supporting documents within the 60day period, to be counted on the day the protest is filed, the final assessment shall become final and executory. ► On the 51st day you filed the necessary document, you have to count another period, which is 180 days from the day you filed the necessary documents. Relevance of the 180 Days: the case
YABES v. COMMISSIONER (150 SCRA 278) UNION SHIPPING LINES v. COMMISSIONER (185 SCRA 547)
YABES v. COMMISSIONER (150 SCRA 278) F: The taxpayer receives a notice of collection while waiting for the decision of his protest. He then filed an “appeal” with the CTA contending his protest has been denied because he did not receive a decision but receive a notice of collection. Simultaneously, the BIR filed before the CFI an “ordinary civil action” for the collection of sum of money. When the judge of the CFI, was about to conduct the hearing of the case, the taxpayer filed an injunction with the SC to prohibit the judge of the CFI contending that a single cause of action is pending in two courts, one in the CTA and another in CFI. H: Injunction was granted prohibiting the Judge of the CFI and requiring the Judge to transfer the records to the CTA saying that the remedy made by the taxpayer was the correct remedy.
180 days is the time given to the BIR to decide
Q: Supposed it did not decide the case within 180days? A: Do not invoke the Lascano case because it was rejected by RA 9282 In the Lascano case, before you file an appeal although the 180 days have lapsed, you have to wait for the BIR to take positive action. The case was ruled only by the CTA, hence it is not a law. The jurisdiction of the CTA has been amended by RA 9282. RA 9282 provides that in case of inaction of the commissioner after the lapse of 180days, remedy is to file an appeal. RR 12-99 says that after lapse of 180days but within 30days after 180days, that is the time to file an appeal. Q: Supposed the BIR rule within 180? A: Within 30days from receipt of the decision file an appeal to the CTA sitting in division. Q: A: the Q: A:
1. 2.
Supposed the CTA decided not in your favor? File a motion for reconsideration within 15days to the same division deciding case. Supposed the CTA, in division decided not in you favor? File an appeal to the CTA sitting en banc.
Q: Supposed the CTA en banc decided not in your favor? A: File an appeal within 15days from receipt of decision to Supreme Court. Q: During the pendency of the protest in the office of the Commissioner, supposed you receive a notice of collection, levy and/ or distraint, what is your remedy?
Q: Was the appeal made on time? A: Yes, when the BIR filed an ordinary action, the protest is deemed denied. Hence an appeal is a proper remedy. UNION SHIPPING LINES v. COMMISSIONER F: The taxpayer was waiting for the decision of his protest. But instead, he received a notice of collection. Immediately, he filed a Motion for Reconsideration and Clarification asking whether his protest has been denied. The BIR did not reply or answer but instead filed an Ordinary Civil Action before the CFI. When the taxpayer received summons, he did not answer but instead filed an Appeal before the CTA. I: Whether or not the remedy of Appeal was the correct remedy and Whether or not it was filed on time. H: Yes. The remedy of appeal is the correct remedy and the appeal was filed on time. The reckoning period within which to file an appeal is the time the taxpayer received the summons. While an Appeal is pending before the CTA, the CTA will determine: 1. If the decision was made within 180 days, whether the appeal was made within 30 days from the receipt of the said decision, or 2. if there was no decision after the lapse of 180 days, whether the appeal was made within 30 days upon the expiration or the lapse of the 180-day period. Q: Pending appeal with the CTA, can the BIR amend the final assessment? A: 2 SCHOOLS OF THOUGHT: 1. GUERRERO v. COMMISSIONER (19 SCRA 25) 2. BATANGAS v. COLLECTOR (102 PHIL 822)
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Taxation law review notes under protest within 60days from receipt of the notice of assessment within the same treasurer who issued the assessment.
GUERRERO v. COMMISSIONER (19 SCRA 25) H: No. Because it is no longer the disputed assessment. BATANGAS v. COLLECTOR (102 PHIL 822) H: Yes. In order to avoid multiplicity of suits
Q: If the treasurer rules against the taxpayer, remedy? A: The remedy is to file an appeal to the Local Board of Assessment within 30days from the receipt of the decision.
► ACCORDING TO JUSTICE VITUG: BATANGAS v. COLLECTOR (102 PHIL 822) IS THE BETTER RULING
Q: From the decision of the Local Board of Assessment? A: Appeal should be made to the Central Board of Assessment Appeal.
PROTEST UNDER LOCAL TAX (Sec. 195, LGC) ► Under NIRC, protest is filed in the Office of the Commissioner ► Under LGC, protest is filed with the same City or Provincial or Municipal Treasurer who issued the assessment
► Beginning April 23, 2004, the ruling of the Central Board of Assessment Appeal is no longer final. It can now be appealed to the CTA, sitting en banc. PROTEST UNDER THE TARIFF AND CUSTOMS CODE (TCC) (Sec. 2313, as amended by RA 7651)
Period to file Protest • 60 days from receipt of assessment
► Formerly, the automatic appeal under the TCC applied only to protest; but now a days, the automatic appeal applies to both protest and forfeiture.
Q: If the treasurer did not decide within a 60day period, remedy? A: Go to the court of competent jurisdiction (RTC)
For Forfeiture Under the Tariff and Customs Code ► Refers to the Order of the Collector confiscating the imported goods or commodities
Q: If the RTC decided not in you favor? A: File an appeal with CTA en banc (beginning April 23, 2004) Q: If the CTA A: Appeal to the SC.
decided
not
in
your
favor?
NOTE: Pursuant to RA 9282, direct appeal to CTA en banc can be made from: 1. Decision of the RTC involving local taxation exercising appellate jurisdiction 2. Decision of the Central Board of Assessment Appeal exercising appellate jurisdiction. PROTEST UNDER REAL PROPERTY TAX (Secs. 226, 230, and 252) • Remedy shall be the same Sec. 252, LGC • If the taxpayer receives a Notice of Assessment from municipal, city, or provincial treasurer, the remedy is to file a protest but there must be first Payment Under Protest. This is the only instance where payment under protest is necessary Q: How is payment under protest made? A: At the back of the receipt there will be an annotation that there was a payment
Doctrine of Primary Jurisdiction If the Collector ordered the forfeiture of the imported commodities the order of the Collector shall be to the exclusion of all government offices and authority. Importer of Chemical, under the TCC, the custom duties is only P27 but the collector says it should be P52. The importer will then file a protest with the Office of the Collector. In the old days, there is an automatic appeal from the decision of the collector under protest. But under RA 7651, the remedy of automatic appeal is applicable to both protest and forfeiture. I. In both cases of protest and forfeiture, if the importer lose the case and the government wins, the remedy is to file an appeal within 15 days before the Office of the Commissioner. • From the ruling of the Commissioner, the importer should file an appeal within 30 days before the CTA, sitting in division. • From the ruling of the CTA in division, the importer should file an MR within 15 days before the same division hearing the case. • From the ruling of the CTA in division, deciding on the MR, the importer should file an appeal within 15 days before the CTA sitting en banc. • From the CTA en banc, appeal to SC within 15 days.
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Taxation law review notes II. If the importer-taxpayer wins the case, the government lose the case, Sec. 2313 of TCC as amended by RA 7651, there shall be an automatic review within 15 days. Q: Where should the automatic review be made? A: It depends. Publish the value of the commodity. 1. IF P5 MILLION OR MORE – AUTOMATIC REVIEW SHALL BE BEFORE THE SECRETARY OF THE DEPT. OF FINANCE. 2. IF LESS THAN P5 MILLION – AUTOMATIC REVIEW SHALL BE BEFORE THE OFFICE OF THE COMMISSIONER Q: Suppose the commissioner decide or did not decide within 30days, what happens? A: If the commissioner reverses the ruling of the collector, the ruling is final and executory. If the commissioner affirms or did not decide within 30days, there shall be an automatic appeal before the sec. of finance. Q: Between the two which will be appealed to the CTA? A: The decision of the secretary which passes through the office of the commissioner (RA 9282) But not all the decision of the secretary which passes the office of the commissioner affirms or did not decide within 30days and appealed before the secretary of finance will appeal to the CTA be allowed. There are 3 instances when the Secretary of Finance renders a decision appealable to the CTA: 1. decision of the Secretary by virtue of automatic review passing through the Commissioner 2. cases of anti-dumping duty, where the anti-dumping duty was ordered by the Secretary 3. decision of the Secretary of Finance on countervening duty. COMPROMISE (Sec. 204, NIRC) 3 Questions asked in 2004 BAR: 1. May the Government compromise criminal cases and civil cases? 2. Supposed the corporation is already dissolved, can the stockholder be obliged to pay? 3. Suppose the civil case filed by the BIR is final and executor, can it be subject to compromise? CAN THERE BE COMPROMISE IN: 1. CIVIL CASES? YES, IN ANY STAGE OF THE PROCEEDING
-
EXCEPT WHEN THE CIVIL CASE IS ALREADY FINAL AND EXECUTORY BECAUSE IT WILL BE VIOLATIVE OF THE SEPARATION OF POWERS 2. CRIMINAL CASES? YES, EXCEPT: a. IF ALREADY FILED IN COURT (RTC) OR; b. IF IT INVOLVES FRAUD 3. IF THE CORPORATION IS ALREADY DISSOLVED, CAN THE STOCKHOLDER BE HELD LIABLE TO PAY TAX? GENERAL RULE: NO EXCEPT: a. IF IT IS PROVEN THAT THE ASSETS OF THE COPORATION IS TAKEN BY ONE STOCKHOLDER OR; b. IF THE STOCKHOLDER DID NOT PAY HIS UNPAID SUBSCRIPTION Minimum Amount to be Compromised (Sec. 204) 1. If the ground is financial incapacity of the taxpayer, the minimum shall not be less than 10% of the original assessment. 2. If based on other grounds, the minimum amount shall not be lower than 40% of the original assessment. Q: Can it be lower than that prescribed by law? A: As a rule, no. EXCEPT, if allowed by the evaluation board consisting of the: a) commissioner; and b) deputy commissioner. Instances when the Final Assessment becomes final and executor: 1. If the taxpayer did not file the protest on time 2. Failure to submit the supporting documents within the 60-day period 3. After the lapse of the 180-day period, you did not file an appeal within the 30-day period to the CTA 4. An appeal was filed but made beyond the reglementary period to appeal METHODS OF COLLECTION (SEC. 205) 1. Judicial Action a. Civil b. Criminal 2. Administrative Action a. Distraint b. Levy c. Tax lien Q: Why is it important to know whether the final assessment is under normal or abnormal conditions? A: It is important because of the requirement under §222. If the final assessment becomes final and executory, the government (BIR) can exercise the remedies under §205 in any order or simultaneously (§207). But it is not always the case,
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Taxation law review notes because the right of the government to collect is limited in case of abnormal assessment/collection under §222. Under the second option, the right of the government is limited to judicial action either civil or criminal. Administrative remedies such as distraint, levy, or tax lien is not available under such condition. Q: In distraint, levy or tax lien, is the 10 year period of collection applicable? A: No, only the 5year period should apply. Distraint
Bank Accounts ► Warrant of distraint furnished to the taxpayer or the officer of the bank with the warning that the taxpayer should not be allowed to withdraw. Debits and Credits ► Warrant of distraint furnished to the debtor and creditor
Kinds: 1. Constructive (Sec. 206) 2. Distraint of Intangible (Sec. 208) 3. Actual (Sec. 207, par. a, and Sec. 209)
3. Actual Distraint
1. Constructive Distraint ► The distraining officer shall make a list of the personal property of the property to be distraint in the presence of the owner of the property or the person in possession of the property. ► The owner shall be requested to sign the receipt. Q: What if the owner refuses to sign the receipt? A: Sec. 206: The distraining officer shall require 2 individuals within the neighborhood with the warning that they should not allow the taxpayer to dispose, transfer, or sell the property subject of distraint. Grounds for Constructive Distraint (Sec. 206): 1. The taxpayer intends to leave the Philippines 2. The taxpayer leaves the Philippines 3. The taxpayer ceases or retires from business 4. The taxpayer obstructs the collection of the tax. ► THESE GROUNDS ALSO ANSWER THE QUESTION: PERIOD LESSER THAN 12 MONTHS? 2. Distraint of Intangible Property Limited to 1. 2. 3.
► Warrant of distraint furnished to the taxpayer or the officer of the corporation with the warning that the property is subject of distraint and it should not dispose of it.
3 Intangible Properties: Shares of stocks Bank accounts Credits and debits
Share of stocks
► Personal property shall be physically taken by the distraining officer. ► Within 10 days from the receipt of the warrant, a report of the distraint shall be submitted to the BIR (Sec. 207, par a last par.) ► The property subject of distraint shall be sold at a public auction EXCEPT bank accounts and debits and credits. » Notice of sale shall be by posting in 2 conspicuous place, stating the date and the place of the sale (No publication requirement) ► Sec. 211: after the sale and within 2 days, a report shall be made to the BIR Q: If the property sold is a personal property, is there a right of redemption? A: NO. The rule is absolute. Q: If the property is a personal property, is there a right of preemption? A: SEC. 210: Before the scheduled sale, the taxpayer is allowed to recover the property by paying all the property by paying all the proper charges as well as the interest, cost and penalties.
WHAT ARE THE TAXABLE
During the Scheduled Auction Sale, 2 Things may happen: 1. There is bidder and the bid is enough 2. There is no bidder or there is a bidder but the bid is not enough Q: What is the relevance of knowing the difference? A: 1. If there is a bidder and the bid is enough » In case of insufficiency, there shall be further distraint to cover the liability. (§217) » In case of excess, the excess shall be returned to the taxpayer. 2. If there is no bidder or the bid is not enough. » It will be purchase by the government and the later sold in a public auction again (§212) » In case of insufficiency, no further distraint, §217 applies only if there was a bidder.
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Taxation law review notes » In case of excess, the excess shall not be returned to the taxpayer but shall be remitted to the national treasury. Levy ► Other than the delinquent taxpayer, warrant of levy is served to the register of deeds having jurisdiction over the real property (Sec. 213) ► Within 10 days from the receipt of the warrant, a report of the levy shall be submitted to the BIR (Sec. 207 (b) last par) Notice of Sale in Public Auction: 1. Posting in 2 conspicuous places 2. Publication in newspaper of general circulation once a week for 3 consecutive weeks. Q: Is there a right of pre emption? A: Yes, §213. Q: Is A: Yes.
there
a
right
of
redemption?
2 Things may happen in a Public Auction: 1. There is a bidder and the bid is enough 2. There is no bidder or the bid is not enough Q: What if there is no bidder A: Forfeiture shall be made (§215)
or
the
bid
is
not
enough?
3 Definitions of Forfeiture under the Internal Revenue Code 1. Violation of Excise Tax Law (Sec. 224) 2. If there is no bidder or the bid is not enough (Sec. 215) 3. The order of the Collector to confiscate imported commodities (Sec. 2313, TCC) Relevance of the Choice of Words: ► Under sec. 212, the law says “purchase” ► Under sec. 215, the law says “forfeiture” » under 215: the real property shall be automatically registered in the name of the Government (forfeiture) » under 212: the real property is not automatically registered in the name of the Government (purchase) Q: If sold at a private sale, what is the A: There must be an approval of the Secretary of Finance (§216) Q: After sale, if there was deficiency?
requirement?
A: There shall be no further levy, because §215 says that it shall be to the total satisfaction of the taxpayer. Q: After sale, if there was an excess? A: It shall not be returned to the taxpayer but shall be remitted to the national treasury. Sec. 217: this is only true if there was no bidder or the bid was not enough because of the provisions of the Secs. 212, 215, and 216 Sec. 218: no court shall issue an injunction to restrain the collection of tax under this code Determine what kind of injunction is referred to here: 1. Prohibitory – referred in Sec. 218 because it restrains the collection of tax. 2. Mandatory Q: Is the provision limited to “tax under this code”? A: Limited to internal revenue taxes. EXCEPT: CTA (Regular Court) → RA 1125 and 9282: CTA is authorized to issue injunction to restrain the collection of taxes or fees collected under other code. Q: Is the rule of distraint or levy the same under local taxation? A: Yes, local tax. » §175 for DISTRAINT » §176 for LEVY Q: How about real property tax? A: No, distraint is not authorized (§256, LGC), because the remedy is only Judicial Action and Levy. Tax Lien ► Non payment of tax, the government has the right to claim a lien over the property of the taxpayer 1. NIRC – Sec. 219, NIRC 2. Local Tax – Sec. 173, NIRC 3. Real Property Tax – Sec. 257, NIRC Q: Supposed a parcel of land is about to be levied by the government, but the same is being foreclosed by the mortgagee, which of the 2 obligee, the government or the mortgagee shall be preferred? A: §219, last portion: The government is the preferred one if the lien is annotated and recorded in the registry of deed. In the absence of annotation in the registry of deeds, the mortgagee is preferred.
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Taxation law review notes Q: Do we have the same rule under Local Tax and Real Property Tax? A: NO. Both §173 and §257, the government is always the preferred one. The lien can only be removed by payment of tax, interest and penalty. Sec. 220: approving of filing an ordinary civil action for violation of the internal revenue code ►
The approval must be made by the Commissioner of Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574) F: An ordinary civil action for violation of the tax code was filed in the city of San Fernando. But the filing was only approved by the Revenue Regional Director of Central Luzon. The plaintiff opposed the filing in the court on the ground that it should be approved by the Commissioner and the Revenue RD. H: Sec. 220 should be read with Sec. 7 of the NIRC » General Rule: powers and functions of the Commissioner may be delegated but not to a position lower than a Division Chief » Under Sec. 7, there are powers which can not be delegated a) Power to recommend to the Secretary of Finance to issue rules and regulation b) Power to decide a case of fist impression c) Power to enter into a compromise agreement d) Power to assign BIR officer in the place of production subject to income tax » Since the case does not fall under the prohibited delegation, the filing of the case is legal and tenable. ►
Decision of the Commissioner of Internal Revenue (CIR) is appealable to CTA.
Q: When is a decision of the cir appealable to the Secretary of Finance? A: §4, on matters of interpretation of tax laws.
In the absence of the written notice, the period will be suspended. Q: Change of address is from Philippines to abroad? A: The period will be suspended. Other Grounds for Suspension: 1. During collection if there is no property found, the period is suspended 2. If the BIR is prohibited from making assessment such when the subject property is under litigation 3. In distraint of levy, the BIR officer can’t locate the property CLAIM FOR REFUND (SEC 229) Written 1. 2. 3. 4. 5.
Written claim for refund under the input tax (Sec. 112) ► Period is also 2 years from the close of the taxable quarter when the transaction was made Q: Can we apply §229 to A: Yes, because there is no conflict. §112 is refund under input tax system. §229 is refund for: 1. errors in payment or; 2. collected without authority; or 3. assessment without authority. ►
SEC. 223: SUSPENSION OF THE RUNNING OF PRESCRIPTIVE PERIOD Q: A Filipino taxpayer went to Canada, after 15years he went back, he is being assessed by the BIR under normal assessment. Has the right of the government to asses the tax already prescribed? A: NO. When he went to Canada, the running of the prescribed period is suspended. Q: What if the change of address is within the Philippines, say only from manila to Pasay City, is the running of the prescriptive period suspended? A: In order that the running of the prescriptive period will not be suspended, especially if the change is district office, §223 provides that the taxpayer must send a written notice of change of address to the BIR.
claim for refund: Sec. 229, NIRC Sec. 112, VAT Sec. 136, Local Tax Sec. 253, Real Property Tax None except sec. 1603, Tariff and Custom
VAT?
The period to claim refund is 2years.
Doctrine of Equitable Recoupment ► If a taxpayer is entitled to a written claim for refund but the prescriptive period to claim has lapsed, the taxpayer is allowed to credit his written claim for refund which he failed to recover to his existing tax liability. Computed from; a. Individual – counted on the day the tax has been paid 1. paying by way of withholding tax system, the reckoning point is the end of the taxable year. 2. paying by way of installment, reckoning point is the date the last installment is paid. 3. if sold to public auction through distraint or levy, the date the proceeds is applied to the satisfaction of the tax liability.
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Taxation law review notes b.
Corporation 1. Existing 1992, *** v. Commissioner (205 SCRA 184) 1995, Commissioner v. Philam life (244 SCRA 446) 1998, Commissioner v. CTA (301 SCRA 435) 2. Non-existing 2001, BPI v. Commissioner (363 SCRA 840)
1.
Existing – the counting of the prescriptive period is 2 years on the day the annual adjusted return is filed, because it is at that day that the tax liability is known. Non-existing – the counting of the prescriptive period should also be reckoned on the day the annual return is filed. But the corporation is no longer required to wait till the taxable period is over to file the return. Upon receipt of a notice from the SEC to dissolve the corporation, within 30 days thereafter, a return should be filed.
2.
► The written claim for refund to determine the gross value of the estate because the taxpayer is already dead In case of compromise, there must be consent
Q: Suppose there is a supervening event, and the taxpayer was not able to file a written claim of refund within the period? A: Regardless of supervening event, a written claim for refund must be filed within 2years. Q: Suppose the 2 year period is about to expire and there is no decision yet as to your refund? A: Remedy is to file an appeal before the CTA (deemed a denial) Q: Suppose the BIR decided within 2 years against the refund? A: Appeal within 30days from the decision, provided it is still within the 2 year period. Q: Suppose there is only 21days remaining after receiving the decision, when to file an appeal? A: Within 21days before the end of the 2 year period. ►
A written claim for refund should be filed within 2 years
► Sec 204 (c) last phrase: in case of over payment a written claim is not necessary because a return constitutes a written claim for refund. Q: May the commissioner of internal revenue open the bank account of a taxpayer? A: General Rule: NO. EXCEPT: 1. To determine the gross value of the estate; and 2. To enter into a compromise agreement. (under §204(A))
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