FEU CBO 2017 Tax Last Minute Tips 11.11.17 v3

FAR EASTERN UNIVERSITY INSTITUTE OF LAW TAXATION LAW LAST MINUTE TIPS | BAR EXAMINATIONS 2017

Elements of a Tax (EIL) 1. Enforced proportional contribution 2. Imposed by the State by virtue of its sovereignty; and 3. Levied for the support of the government (PCGG vs. Cojuangco) Inherent Limitations of Taxation (PLITE) 1. Public purpose; 2. Legislative in nature; 3. International Comity; 4. Territoriality; and 5. Exemption of the Government Constitutional Limitations of Taxation (UP-VOTER-PUSSLE) 1. Uniformity and equality of taxation; 2. Prohibition against imprisonment for nonpayment of Poll tax; 3. Veto power of the President; 4. Origin of revenue and tariff bills; 5. Grant by Congress of authority to the President to impose Tariff rates; 6. Majority vote of Congress for grant of tax Exemption; 7. Tax Exemption of Religious, charitable and educational entities; 8. Progressive system of taxation; 9. Prohibition on the Use of public money or property for religious purposes; 10. Special assessments; 11. Non Impairment of Jurisdiction of the SC; 12. Grant of power to Local Government Units to create its own sources of revenue; and 13. Tax exemption of non-stock, non-profit Educational institutions; Exemptions granted under Art. XIV, Sec. 4(3) vs. under Art. VI, Sec. 28(3) of the 1987 Constitution ART. XIV, ART. VI, Sec. 4(3) Sec. 28(3) Grantee Non-stock, non- Religious, profit educational, educational charitable institution institutions Taxes Income tax, Property tax covered customs duties, property tax and donor’s tax (for donations made to them) Subject of Property and Property only exemption income Tax vs. License Fee Tax Source Power of Taxation Purpose Raise revenue Object Persons, property and privilege

License Fee Police Power Regulation Right to exercise a privilege

Amount imposed

Tax No limit

License Fee Only necessary to carry out regulation

Tax vs. Special Assessments Tax Imposed on Why imposed

Persons, property and privilege No specific reason – inherent power of the state

Purpose

Support of the government

When imposed

Regularly exacted

Basis

Necessity

Special Assessments Only on land

Public improvement benefits the land and increases its value Contribution to the cost of public improvement Case to case basis as to time and locality Benefits obtained

Tax vs. Toll Imposed by Purpose

Basis

Tax State

Toll Private persons

Raise revenue

Reimbursement of cost of construction with reasonable amount of income Attribute of ownership

Sovereign power of the state

Impact vs. Incidence of taxation Impact of taxation is the point where the tax is originally imposed or formally assessed while incidence of taxation is the point on whom the tax burden finally rests. What is Tax Pyramiding? It is the practice of imposing a tax upon another tax. Define Direct Double Taxation and Indirect Double Taxation (2010, 2014, 2015, 2016 Bar) Direct double taxation is double taxation in its strict sense and is prohibited because of the violation of the constitutional precepts of equal protection and uniformity in taxation. In order for double taxation to occur, the following requisites must be present: (SAME – SPA JPK) 1. taxing same SUBJECT (person, property or right) twice; 2. for the same PURPOSE;

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3. 4. 5. 6.

by the same taxing AUTHORITY; within the same JURISDICTION; within the same taxable PERIOD; and the tax must be of the same KIND or character (Nursery Care vs. Acevedo, G.R. 180651 dated July 30, 2014).

Indirect double taxation is double taxation in its broad sense and is permissible. This exists when one or more of the abovementioned requisite/s is/are not present. Modes of Eliminating Double Taxation (CDRET) 1. Tax Credits – an amount deducted from tax liability to arrive at the total tax liability (e.g., foreign taxes paid); 2. Tax Deductions – tax write-off or reduction in the gross amount on which a tax is calculated; 3. Reduction of the Philippine Income Tax Rate – an example is the Tax Sparing Rule; 4. Tax Exemptions – a grant of immunity from the obligation to pay taxes; 5. Tax Treaties – agreement between two countries specifying what items of income will be taxed by the authorities of the country where the income is earned. Origin of Tax Laws “All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.” (Section 24, Article VI, 1987 Constitution) Tax Amnesty vs. Tax Exemption Tax Amnesty Scope of immunity

Grantee

Application

Immune from the payments of taxes, as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the NIRC General pardon given to all payers

Applies only to past tax periods hence, retroactive

Tax Exemption Immunity from civil liability only

To persons exempted by law. A freedom from a change or burden to which others are subjected. Generally prospective in application

Tax Amnesty

Presence of actual revenue loss

application. “Shall cover all national internal revenue taxes for the taxable year 2005 and prior years. Yes, there is revenue loss since there were actual taxes due but collection was waived by the government.

Tax Exemption

None, because there was no actual taxes due as the person or transaction is protected by tax exemption

Tax Evasion vs. Tax Avoidance Tax Evasion Tax Avoidance Other Also called Also called “Tax Name “Tax-dodging” minimization” Means Uses illegal Uses legal means to forego means to the liability and minimize the payment of payment of taxes. taxes. Penalty Punishable by Not punishable law and may by law, as it only hold the aims to minimize taxpayer the liability of the criminally and taxpayer within civilly liable. the bounds of the law. Object To escape To minimize liability and payment of payment of taxes within the taxes through limits set by law. the use of deceptive and illegal means. No Injunction Rule NIRC expressly provides that no court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the code. An exception to this rule obtains only when in the opinion of the CTA the collection thereof may jeopardize the interest of the government and/or the taxpayer. The situation, however, is different in the case of the collection of local taxes as there is no express provision in the LGC prohibiting courts from issuing an injunction to restrain local governments from collecting taxes. Q: What is the Doctrine of Equitable Recoupment? A: A claim for refund barred by prescription may be allowed to offset unsettled tax liabilities arising from the same transaction.

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General Rule: Taxes cannot be the subject of compensation or set-off. Rationale: 1. Lifeblood theory; 2. Taxes are not contractual obligations but arise out of duty to the government; and 3. The government and the taxpayers are not mutually creditors and debtors of each other. INCOME TAXATION Requisites for Taxability of Income (PERC) 1. A gain or Profit is derived therefrom; 2. There is no law Excluding it from taxation; 3. The income, gain or profit is Received or realized during the taxable year; and 4. There must be a Closed or completed transaction; Income Realization Doctrines: Claim of Right doctrine A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay that which would otherwise constitute a gain Realization Test There is no taxable income until there is a separation from capital or something of exchangeable value thereby supplying the realization or transmutation which would result in the receipt of income Economic Benefit Principle That even without the sale or other disposition if by reason of appraisal, the cost basis is used as the new tax base for purposes of computing the allowable depreciation expense, the net difference between the original cost basis and new basis due to appraisal is taxable. Severance Test Income is not deemed earned until the fruit has been plucked from the tree. Income is recognized when there is separation of something which is of exchangeable value All Events Test Requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy before income shall be taxable and expense be deductible to income tax purposes. NOTE: However, the test does not demand that the amount of income or liability be known absolutely, only that the taxpayer has at his disposal the information necessary to

compute the amount with reasonable accuracy (CIR v. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007). Immediacy Test If the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. (The Manila Wine Merchants vs CIR, GR No. L-26145, Feb. 20, 1984). Income vs. Capital Income All wealth, which flows into the taxpayer other than a mere return of capital. Flow of wealth Service of wealth

Capital Fund or property which can be used in producing goods or services. Fund or property Wealth

Global vs. Schedular System of Taxation Global System of Schedular System of Taxation Taxation One where the Provides for a different taxpayer is required tax treatment of to lump all the different types of items of income income so that a earned during a separate tax return is taxable period and required to be filed for pay under a single each type of income and set of income tax the tax is computed on a rules on these per return or per different types of schedule basis. income. Source Rules - Income Within the Philippines Type of Test of Source of Income Income Interest Residence of the Debtor Dividends From a domestic corporation; or From a foreign corporation unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence was derived from sources within the Philippines Services or Place of performance compensation income Rental Location of property income Royalty Place of use of intangible income Gain on sale From sale of real property of real located within the Philippines property Gain on sale Place of market rule

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Type of Income of personal property Gain on sale of shares of stock of domestic corporation

Test of Source of Income

Derived entirely from sources within the Philippines regardless of where the shares were sold

employed in such country. (BIR Ruling 5172011) Rule on business profits on services rendered within the Philippines of NRFCs General rule: Subject to Phil. income tax Exception: If such income is exempt under a Tax Treaty

Source Rules – Partly Within or Partly Without the Philippines This would include: 1. Income from services rendered partly within or partly without; 2. Income from sale of personal property produced (in whole or in part) within and sold without the Philippines; and 3. Income from sale of personal property produced (in whole or in part) without and sold within the Philippines

Requisites for unregistered or unincorporated Joint Venture undertaking construction projects to be not taxable: 1. Undertakes a construction project; 2. Involves joining or pooling of resources by local licensed contractors (licensed as general contractor by the Philippine Contractors Association Board or PCAB); 3. Local contractors are engaged in construction business; and 4. JV must also be licensed as such by PCAB.

Taxation of Ordinary Income Source Kind of Tax Rate Taxpayers w/in w/out Individuals   RC 5 – 32%   NRC 5 – 32%   RA 5 – 32%   NRAETB 5 – 32%   NRANETB 25% Corporations   DC 30%   RFC 30%   NRFC 30%

Constructive Receipt of Income Income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made.

Tax Base Net Net Net Net Gross Net Net Gross

Non-Resident Alien Individual: Engaged v. Not-Engaged A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines, otherwise it will be considered NRANETB. Tax Treatment of Income of OCW and OFW OCWs and OFWs, including seamen or seafarers, are taxable only on their income within the Philippines. Thus, an OCW or OFW’s income arising out of his overseas employment is exempt from income tax (RR No. 1-2011). Q: Are employees of Philippine companies temporarily assigned abroad and stays therein for a period of 214 days considered non-resident citizens? A: No. These employees shall still be considered as resident citizens since they still remain on the Philippine payroll. In interpreting the conditions to be qualified as non-resident citizens, the BIR held that these employees cannot qualify because the phrase “employment thereat” [as used in paragraph (3) of Section 22(E)] means that the individual must be

Q: When is a debt instrument considered a “deposit substitute” and consequently subject to 20% FWT? A: The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public (the term 'public' means borrowing from 20 or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. Hence, the number of lenders is determinative of whether a debt instrument should be considered a deposit substitute and consequently subject to the 20% FWT. Also the meaning of the phrase “at any one time” was enlarged to include not only the original issuance of the bonds but also transactions within the secondary market. (BDO vs Republic, GR No. 198756, Jan. 13, 2015). Exclusions from Gross Income Other Than Those Under Section 32(B) of the NIRC Under the Constitution: Income and assets of non-stock, non-profit educational institutions used ACTUALLY, DIRECTLY AND EXCLUSIVELY for educational purposes (Sec. 4[3] Art. XIV, 1987 Constitution); Under Special Laws: 1. Income earned from investments and distributions upon death/retirement provided that: a. Beneficiary is at least 55 years of age (inapplicable in case of death) and

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b. With at least 5 years contribution. (Personal Equity and Retirement Account [PERA] Act of 2008); 2. Income from operations of Barangay Micro Business Enterprise (BMBE Act of 2002); 3. Income of PEZA-registered entities (PEZA Law); 4. Income of participants in socialized housing (Urban Development Housing Act of 1992); and 5. Income of duly registered cooperatives from transactions with members (Cooperative Code). NOTE: PEZA-registered entities are subject to preferential tax rates IN LIEU of ALL national and local taxes. Income Tax Exemption of Prizes and Awards in Sports Competition In order to be exempt from income tax, the sports event must have been sanctioned by a national sports association. The place where the competition was held is irrelevant. Compensation Income Exempt from Income Tax 1. Exempt under various international agreements; and 2. Compensation income falling within the meaning of “statutory minimum wage” under R.A. No. 9504 Requisites of a private retirement plan to be excluded from gross income a. Employee is at least 50 years old; b. Has served for at least 10 years; c. The benefit is availed of only once; and d. Plan is approved by BIR. Tax implications of condonation of debt The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. Personal and Additional Exemptions Personal Exemption: P50,000 Additional Exemption: P25,000 per qualified dependent child (maximum of 4 qualified dependents) Requisites of a Qualified Dependent Child 1. A legitimate child, legitimated, or tlegally adopted child of the taxpayer; 2. Not more than 21 years of age;

3. Living with the taxpayer. A child who is away for his education is still considered living with the taxpayer; 4. Dependent upon the taxpayer for chief support; 5. Unmarried; and 6. Not gainfully employed. Additional exemption for persons caring and living with PWD Those caring for and living with qualified PWD, up to the fourth civil degree of consanguinity or affinity, can claim an additional tax exemption of P25,000 against their annual income tax. Provided that the PWD is not gainfully employed and is chiefly dependent upon the taxpayer. The maximum number of allowable dependents are 4 including the PWD, if any. Ordinary and Necessary Expenses Ordinary connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. On the other hand, necessary connotes expenditure that is appropriate or helpful in the development of the taxpayer’s business or that the same is proper for the purpose of realizing a profit or minimizing a loss (General Electric vs Collector, CTA Case No. 1117, July 14, 1963). Tax Arbitrage General Rule: Allowed as deduction from taxpayer’s gross income Exception: As a limitation on the general rule, the amount of interest expense shall be reduced by 33% of interest income earned which had been subjected to final withholding tax. Taxation of Fringe Benefits General Rule: Taxable if received by non-rank and file (NRF) employees. Exceptions: 1. Required or necessary to the business or for the convenience or advantage of employer; 2. Fringe benefits not taxable under Sec. 32 (B); 3. Fringe benefits authorized and exempted under special laws; 4. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans (Labor Code, Section 166); 5. Fringe benefits given to rank and file employees 6. De minimis benefits Benefits Required of Necessary to the Business or for the Convenience or Advantage of Employer (Convenience of the Employer Rule) The bureau exempted mobile phone allowance granted to employees from fringe benefit tax and tax on compensation on the basis that the mobile allowance is deemed required by the nature of the job of the employees and deemed necessary to business. The ruling

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recognized that there are now many businesses, especially those on 24-hour operations that require employees to be available for consultation or assignment round the clock. (BIR Ruling No. DA-233-07) Benefits from CBA Included as De Minimis Benefits Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive scheme provided that the total annual monetary value received from both CBA and productivity incentive scheme combined do not exceed P10,000 per employee, per taxable year. (RR No. 1-2015) Taxability of De Minimis Benefits Received in Excess of Ceiling The excess of the de minimis benefits over their respective ceilings shall be considered as part of “13th Month Pay and Other Benefits” and will be subject to tax only on the excess over the P82,000.00 ceiling (RR No. 10-2008 in relation to RA No. 10653, March 2015). De Minimis Value in Relation with Balikbayan Boxes Under RA 10863, residents of the Philippines, OFWs or other Filipinos while residing abroad or upon their return to the Philippines shall be allowed to bring in or send to their families or relatives in the Philippines balikbayan boxes which shall be exempt from applicable duties and taxes imposed under the NIRC of 1997, as amended: Provided, That balikbayan boxes shall contain personal and household effects only and shall neither be in commercial quantities nor intended for barter, sale or for hire and that the FCA value of which shall not exceed one hundred fifty thousand pesos (₱150,000.00); Provided, Further, That every three (3) years after the effectivity of this Act, the Secretary of Finance shall adjust the amount herein stated to its present value using the CPI as published by the PSA; Provided, Finally, That residents of the Philippines, OFWs or other Filipinos can only avail of this privilege up to three (3) times in a calendar year. Any amount in excess of the allowable non-dutiable value shall be subject to the applicable duties and taxes. Tax Effect of De Minimis Benefits to Employers De minimis benefits shall be treated as deductible expense of the employer. Tax Sparing Rule The tax due of 30% which should otherwise be imposed on dividends could be reduced to 15%, subject to the condition that the country of residence of the recipient of the dividends allows a credit of 15 percent (representing the

difference between the 30% RCIT and the 15% FWT) against the tax due in its home country. Tax Treatment of Campaign Contributions General Rule: Not included in the taxable income of the candidate Requisites for exemption: 1. must have been utilized to cover a candidate’s expenditures; 2. used for his/her electoral campaign; 3. during the campaign period; 4. filed the Statement of Expenditures with the COMELEC. Exceptions: 1. Unulitized/ excess campaign funds subject to candidate’s taxable income. 2. Failure to file Statement of Expendituresentire amount directly subject to income tax. NOTE: Purchases of goods and services given as campaign contribution to political parties and candidates- contributors and supporters are subject to 5% withholding tax (RR No. 08-2009) Final Withholding Tax and Creditable Withholding Tax Similarities: 1. Liability of the tax rests primarily on the payor as a withholding agent; and 2. Failure to withhold/ underwithholding, the deficiency tax shall be collected from the withholding agent. Distinctions: Final Withholding Tax The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee of the said income. The payee is not required to file an income tax return for the particular income.

Creditable Withholding Tax Taxes withheld on certain income payments are intended to equal or, at least, approximate the tax due of the payee on said income. The income recipient is still required to file an ITR to report the income and/or pay the difference between the tax withheld and the tax due on the income.

When is the gain (or loss) from the transfer of property to a corporation in exchange for shares NOT recognized under Section 40 (C) on Tax-Free Exchange? 1. “Property” (excludes cash and services) is transferred to a corporation; 2. In exchange for stock or unit of participation in such corporation; 3. Transferors (not more than five) gain control of the transferee corporation (i.e., gain 51% of all classes of stock entitled to vote)

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Is the failure to file a tax treaty relief application negate the taxpayer’s entitlement to a preferential tax rate under a tax treaty? No. Taxpayers cannot be deprived of their entitlement to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring the prior application for tax treaty relief. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. The denial of a tax relief based on a tax treaty due to the failure of a taxpayer to comply with a RMO would impair the value of the tax treaty and the State‘s duty to comply in good faith with the tax treaty. (Deutsche Bank AG Manila v CIR, G. R. No. 188550, 2003) Ordinary assets pertain to: a. Stock in trade Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; b. Inventory for sale Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; c.

Depreciable properties Property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Section 34 (F) of the NIRC; or

d. Land Real property used in trade or business of the taxpayer (Sec. 39[A][1], NIRC). Other assets not among the above definitions are Capital Assets. Q: When is a rental security deposit considered income? A: If it is applied to the rental of the terminal month or period of contract, it must be recognized as income at the time it is applied. If security deposit is given to ensure contract compliance, it is not recognized as income by the lessor until the lessee violates any provision of the contract. Q: Is Liquidating Dividend subject to income tax? A: General Rule: NO Exception: If the amount received is greater than the cost of the share surrendered. Such excess is considered taxable income. Tax Treatment of Prizes Taxation of prizes would depend on its amount: 1. Prizes amounting to P10,000 or less shall

form part of gross income subject to tax on ordinary income; and 2. Prizes that exceed P10,000 shall be subject to final tax. Taxability of a GPP A GPP is tax exempt; however, the individual partners are liable to pay income tax in their individual capacity on their share in the net profits of the partnership whether distributed or not. Q: How is Tax Benefit Rule applied? A: If a tax when previously paid was not considered as allowable deduction from gross income (hence no tax benefit has been derived), subsequent refund of the same tax shall not be taxable. Gross Income vs. Allowable Deductions vs. Tax Credit Exclusions Tax Credit Allowable from Gross Deductions Income There is income to the taxpayer but is not included in computing the taxable income

Amounts which the law allows to be subtracted from gross income in order to compute the net income.

Amounts paid prior to incurring the tax liability and eventually deducted therefrom.

Something received or earned by the taxpayer which do not form part of gross income.

Something spent or paid in earning gross income.

Something paid to the tax authorities without legal obligation to do so.

Q: What are the requisites in order for prizes or awards to be exempt from income tax? A: i.

ii.

iii.

Prize or award must be in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement; The recipient was selected without any action on his part to enter the contest or proceeding; and The recipient is not required to render substantial future services as a condition to receiving the prize or award.

Q: What is the Cohan Rule? A: Under this rule, taxpayers may use estimates when they can show that there is some factual

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foundation on which to base a reasonable approximation of the expense, i.e., they can prove that they have made a deductible expenditure but just cannot prove how much that expenditure was. Allowable Deduction

Expenses

Interest

Taxes

Losses

Allowable Deduction

Requisites 1. Must be ordinary and necessary; 2. Paid or incurred during the taxable year; 3. Directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession; 4. Supported by adequate invoices or receipts; 5. Not contrary to law, public policy or morals; and 6. The tax required to be withheld on the expense paid or payable is shown to have been remitted to the BIR (Sec. 2.58.5, RR No. 298). 1. There must be an indebtedness; 2. Indebtedness must be that of the taxpayer; 3. Indebtedness must be connected with the taxpayer’s trade, business or exercise of profession; 4. Interest must be legally due; 5. Interest must not incurred to finance petroleum operations; 6. Interest must be stipulated in writing; 7. In case of interest incurred to acquire property used in trade, business, or exercise of profession, the same was not treated as a capital expenditure 8. Legal liability to pay interest; 9. Not paid to related parties or taxpayers; and 10. Interest must have been paid or incurred on such indebtedness during the taxable year. 1. It must be paid or incurred within the taxable year; 2. Connected with taxpayer’s profession, trade or business; and 3. Imposed directly on the taxpayer. 1. Actually sustained by the taxpayer during the taxable year; 2. Not compensated by insurance or other forms of indemnity; 3. Incurred in connection with

Bad Debts

Depreciation

Depletion of Oil and Gas Wells and Mines

Charitable and Other Contributions

Requisites trade, profession or business; 4. Evidenced in a closed and completed transaction; 5. Arose from fires, storms, shipwreck, or other casualties or from robbery, theft, or embezzlement; 6. Not claimed as deduction for estate tax purposes; and 7. In case of casualty losses, must be reported to the BIR within 45 days from the occurrence of such loss. 1. Valid and subsisting debt, legally demandable; 2. The taxpayer is the creditor; 3. Debt is ascertained to be worthless and uncollectible as of the end of the taxable year; 4. Charged-off or written-off during the taxable year; 5. Connected with taxpayer’s profession, trade or business; 6. NOT sustained in a transaction entered into between members of the same family or related taxpayer enumerated in Section 36(B) of the NIRC; 1. There must be an exhaustion, wear, and tear; 2. It must be reasonable; 3. It must be charged off during the year; 4. The asset must be used in profession, trade or business; 5. Not specifically disallowed by law (i.e., transportation vehicle exceeding 2.4Million and yacht, vessels and aircrafts); and 6. The asset must have a limited useful life. 1. There must be an exhaustion, wear, and tear; 2. It must be reasonable; 3. It must be charged off during the year; and 4. Schedule of allowance must be attached to the return. 1. Contribution or gift must be actually paid or made within the taxable year; 2. Given to entity or institution specified by law; 3. Net income of the institution must not inure to the benefit of any private individual or stockholder; 4. Must be duly supported by Certificate of Donation and if amount is at least P50,000 should also be supported with Notice of Donation; and

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Allowable Deduction

Research and Development

Pension Trusts

Requisites 5. Taxpayer making contribution must be engaged in trade, profession, or business. 1. Paid or incurred during the taxable year; and 2. Connected with taxpayer’s profession, trade or business. 1. Employer must have established a pension or retirement plan registered with the BIR; 2. Pension plan must be reasonable and actuarially sound; 3. Funded by the employer; and 4. Amount contributed by the employer must no longer be subject to his control.

Q: Is an advertising expense for a single product which is inordinately large in amount fully deductible?

Q: Can a taxpayer claim losses attributable to fire and theft without complying with BIR Regulations? A: No. To be entitled to claim a tax deduction, the taxpayer must competently establish the factual and documentary bases of its claim. What was required for Tambunting is to submit the sworn declaration of loss mandated by RRs 12-77. Its failure to do so was prejudicial to the claim because the sworn declaration of loss was necessary to forewarn the BIR that it had suffered a loss whose extent it would be claiming as a deduction of its tax liability, and thus enable the BIR to conduct its own investigation of the incident lseading to the loss. (H. Tambunting Pawnshop, Inc. vs. Commissioner, GR No. L-173373, July 29, 2013) – Bersamin Case Q: What is a Tax Arbitrage? A: It is the practice of profiting from differences between the ways transactions are treated for tax purposes.

A: Advertising if generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time. (‘The Tang Case’ Commissioner vs General Foods, GR No. 143672, April 24, 2003)

Q: What is the interest arbitrage rule? A: The taxpayer's allowable deduction for interest expense shall be reduced by 33% of the interest income. Such limit was legislated specifically to address the tax arbitrage arising from the difference between the 20% final tax on interest income and the 30% regular corporate income tax rate (RCIT) under which interest expense can be claimed as a deduction.

Ceiling on entertainment, amusement and recreation expenses under RR No. 10-2002 1. For taxpayers engaged in the sale of goods or properties – 0.50% of net sales (which is gross sales less sales returns, allowances and discounts); and 2. For taxpayers engaged in the sale of services, exercise of profession or use/lease of properties – 1% of net revenues (which is gross revenue less discounts).

Tax Deduction vs. Personal Exemptions Tax Deduction Personal Exemptions Amount Actual expenses Arbitrary amount incurred in the pursuit allowed by law of trade, business or practice of profession Nature Constitute business Pertain to personal expenses expenses Purpose Allowed to enable the Allowed to cover taxpayer to recoup his personal, family and cost of doing business living expenses Claimants Claimed by all Claimed only by taxpayers (Individual individuals or corporate)

Requisites for valid deduction of political campaign expenses: 1. the candidate, winning or losing, must have filed a Statement of Expenditures with the COMELEC; and 2. Purchase of goods/services must be subject to 5% creditable withholding tax.

Q: What is a Net Operating Loss Carry-Over (NOLCO)? A: NOLCO is the excess of allowable deduction over gross income of the business in a taxable year which shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss.

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Q: What is the basis of property acquired by gift? A: At the same cost to the donor or the last preceding owner by whom it was not acquired by gift Q: What corporations are exempt from MCIT? (OFFERRINN) A: 1. Offshore banking units; 2. Firms taxed under a special income tax regime (such as PEZA or other economic zones); 3. Foreign currency deposit units; 4. Proprietary Educational institutions; 5. Regional operating headquarters; 6. Real estate investment trusts; and 7. International carrier; 8. Nonprofit hospitals; 9. Nonresident foreign corporations

Item of ELIT Expenses

2. 3. 4.

Judicial Expenses

1.

2.

Q: What is the Convenience of the Employer Rule? 3. A: When a fringe benefit is given to an employee and it is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer, the fringe benefit is exempt from the FBT (Sec. 33[A], NIRC)

Claims Against the Estate

4. 1.

2.

Q: Are de minimis benefits received by RF employees in excess of their respective ceilings for exemption automatically subject to income taxation?

3. A: No. The excess of the de minimis benefits over their respective ceilings shall be considered as part of the P82,000 “13th Month Pay and Other Benefits” and the employee receiving it will be subject to tax only on the excess over such P82,000 ceiling. (RR No. 10-2008 in relation to Sec. 32[B][7][e], NIRC).

4.

5. 6.

Q: When is the payor/employer obliged to deduct and withhold the related withholding taxes on accrued bonuses? A: The obligation to withhold arises at the time the income was paid or accrued or recorded as expense, whichever comes first. (ING Bank vs CIR, GR No. 167679, July 22, 2015). Q: What is IAET? A: IAET is a penalty tax upon a corporate taxpayer for accumulating so much net income after tax beyond the reasonable needs of the business. The NIRC imposes for each taxable year an IAET of 10% of the improperly accumulated taxable income. ESTATE TAX Requisites for deductibility of Expenses, Losses, Interest and Taxes Item of ELIT Requisites Funeral 1. Actually incurred

Claims Against the Insolvent Persons

1.

2.

Unpaid Mortgage or Indebtedness

1.

2.

Requisites (whether paid or unpaid) in connection to burial or internment; Incurred up to the time of internment; Duly supported; and Amount deductible is limited to the lowest among: a. the actual amount; b. 5% of GE; or c. P200,000 (limit). Incurred during the settlement of the estate; Incurred not beyond the last day prescribed by or the extension thereof, for the filing of estate tax return; Incurred for the benefit of the estate; and Duly supported. Represents a personal obligation of the deceased existing at the time of his death except funeral and medical expenses; In good faith and for adequate and full consideration in money or money’s worth; Valid in law and enforceable in court; Not condoned by creditor or action to collect has not yet prescribed; Debt instrument must be notarized; and If the loan was contracted within 3 years before the death of the decedent, the administrator or executor shall submit a statement under oath showing the disposition of the proceeds of the loan. The amount of said claims has been initially included as part of the GE; and The incapacity of the debtors to pay their obligations is proven, not merely alleged. The full FMV of the mortgaged property is included in the GE; and The mortgage /indebtedness to be

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Item of ELIT

Taxes

1.

2.

Losses

1.

2.

3.

4.

Requisites deducted shall be limited to the extent that they were contracted in good faith and for an adequate and full consideration in money/money’s worth. The tax must have accrued prior to or as of the death of the decedent; and Such tax must be unpaid as of the time of death of the decedent; Arose from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement; Incurred during the settlement of the estate, but before the last day for the payment of estate tax (6 months after the decedent’s death, or the allowed extension); Not compensated for by insurance or otherwise; and Had not been claimed as a deduction in ITR of the estate.

Requisites of Special Deductions Special Requisites Deductions Family Home 1. Must be the actual residential home of the decedent and his family at the time of his death, as certified by Barangay Captain of the locality where it is situated; 2. Value must have been included in the GE; 3. Allowable deduction is limited to the lowest among: a. FMV as declared or included in the GE; b. the extent of the decedent’s interest (whether conjugal or community, or exclusive property); or c. P1,000,000 (limit). Medical 1. Medical expenses have Expenses been incurred within 1

Special Deductions

Amount Received by Heirs Under RA No. 4917

Requisites year prior to decedent’s death; 2. Duly substantiated; and 3. Does not exceed P500,000. A certain amount was received by the heirs from the decedent’s employer by reason of the decedent’s death in accordance with R.A. 4917; and Amount is included in the GE. DONOR’S TAX

Q: Must donative intent be proved in transfers of shares for less than adequate or full consideration? A: No. The absence of donative intent does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the Tax Code categorically states that the amount by which the FMV of the property exceeded the value of the consideration shall be deemed a gift. (Philippine American Life and General Insurance Company v. The Secretary of Finance and CIR, G.R. No. 210987, November 24, 2014) Q: What are the requisites of exempt donation of dowries? A: i. Must be on account of marriage; ii. Made before its celebration or within 1 year thereafter; iii. The donor is a parent while the donee is a legitimate, recognized natural or adopted child; and iv. Only to the extent of P10,000 (per parent). VALUE-ADDED TAX Destination Principle The destination of the goods determines taxation or exemption from VAT. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero rated while imports are taxed. Cross Border Doctrine No VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with VAT (CIR vs Toshiba, GR No. 150154, Aug. 9, 2005).

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Case Law VAT on export sales of goods are zero-rated transactions since they are destined to be used or consumed outside the Philippines. For purposes of export sales, special economic zones (like PEZA or SBMA) are considered as foreign territory by fiction of law (CIR vs Toshiba, GR No. 150154, Aug. 9, 2005). Q: Is VAT on toll fees considered as tax on tax and therefore invalid? A: No. VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and the burden of the tax. The seller who is liable for the VAT may shift or pass upon the amount of VAT it paid on goods, properties or services to the buyer. Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the buyer must pay in order to purchase the service. (Diaz v. Secretary of Finance, G.R. No. 193007, July 19, 2011)

Q: Is the sale of a fully depreciated company vehicle (which is said to be an isolated transaction) subject to VAT? A: Yes. It does not follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the Tax Code would show that a transaction "in the course of trade or business" includes "transactions incidental thereto." (Mindanao II Geothermal vs CIR, GR No. 193301, March 11, 2013) Transactions Deemed Sale Such transactions include: 1. Transfer, use or consumption not in the course of trade or business; 2. Transfer as share in profit or payment of debts; 3. Consignment of goods (if there is no actual sale within 60 days); and 4. Transfer of inventories due to retirement or cessation of business. VAT Zero-Rated Sale vs. VAT-Exempt Sale Zero-rated Sale VAT-Exempt Sale Scope Partial relief from Total relief from VAT VAT Output Tax No tax liability due to No tax liability subjecting the sale because of to 0% rate exemption Recognition of Input Tax Taxpayer must No input tax is recognize input recognized; Said taxes on purchases amount shall form made in relation to part of the goods, zero-rated sales properties or services purchased and may be claimed

Zero-rated Sale

VAT-Exempt Sale as expense Remedy for Excess Input Tax Taxpayer may apply No input tax is for tax credit or recognized; Said refund amount shall form part of the goods, properties or services purchased and may be claimed as expense Tax Credit Method / Invoice Method The Tax Credit Method is a way of computing the VAT of a taxpayer. In this method, the input taxes shifted by the sellers to the buyer are credited against the buyer’s output taxes when he in turn sells the taxable goods, properties or services. Sec. 112(c) vs. Sec. 229 of the Tax Code Section 112(C) Section 229 Prescriptive period 2 years 2 years Reckoning period From the close of From the date of the taxable quarter payment of the tax or when the sales were penalty regardless of made any supervening cause Tax involved Excess input tax Erroneously/illegally collected tax Prescription of Judicial Action within 30 days from Within the 2 year denial or expiration prescriptive period of 120 day period for BIR to act on the claim regardless of whether it is within or outside the 2 year prescriptive period Q: What are the rules on the determination of the prescriptive period for filing a tax refund or credit of unutilized input VAT? A: 1. An administrative claim must be filed with the CIR within 2 years after the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made; 2. The CIR has 120 days from the date of submission of complete documents in support of the administrative claim within which to decide whether to grant a refund or issue a TCC. The 120- day period may extend beyond the two-year period from the filing of the administrative claim if the claim is filed in the later part of the two-year period. If the 120-day period expires without any decision from the CIR, then the administrative claim may be considered to be denied by inaction; 3. A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision denying the administrative claim or

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from the expiration of the 120-day period without any action from the CIR; and 4. All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by the Court in Aichi on 6 October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods. (Mindanao II Geothermal Partnership v. CIR, and Mindanao I Geothermal Partnership v. CIR, G.R. Nos. 193301 and 194637, March 11, 2013) Proof of Input VAT claim 1. VAT invoice – for purchase of goods or properties 2. VAT official receipts – for exchange of services. Case Law The failure to indicate the words “zero-rated” on the invoices and receipts issued by a taxpayer would result in the denial of the claim for refund or tax credit. (Eastern Telecom Phils. vs. CIR, G.R. No. 183531 dated March 25, 2015) DOCUMENTARY STAMP TAX Q: Who is liable to pay DST? A: Either party to the transaction may be liable for the DST. If one party is exempt, the other party who is not exempt shall be directly liable for the DST. (Sec. 173, NIRC; Sec. 2, RR 9-00) Q: Are instructional letters and vouchers subject to DST? A: Yes. Instructional letters as well as the journal vouchers evidencing advances extended to affiliates qualify as loan agreements upon which DST may be imposed. (CIR vs. Filinvest, G.R. No. 163653, July 19, 2011) LOCAL BUSINESS TAX Situs of Business Taxes The place where the sales would be recognized and the tax would be paid shall depend on whether or not the business maintains a branch or sales outlet:

With a branch or sales outlet

Without a branch or sales outlet

Sales recorded/tax paid at Record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located Recorded in the principal office and the taxes due

shall accrue and shall be paid to such city or municipality If the business has factories, project offices, plants, and plantations, the following sales allocations shall be made: 1. If the factory and plantation is located in the same city or municipality: • 30% – recorded where the principal office is located; and • 70% – recorded where the factory, project office, plant, or plantation is located. 2. If the factory and plantation is located in different cities or municipalities: • 30% – recorded where the principal office is located; and • 70% – shall be divided as follows: o 60% – where the factory is located; and o 40% – where the plantation is located 3. If the business has 2 or more factories, project offices, plants, and plantations located in different localities: • 30% – recorded where the principal office is located; and • 70% – shall be prorated among the localities where the factories, project offices, plants, and plantations are located in proportion to their respective volumes of production NOTE: The foregoing sales allocation shall be applied irrespective of whether or not sales are made in the locality where the factory, project office, plant, or plantation is located. REAL PROPERTY TAXATION Real Property Taxes for Properties Owned by the Government General Rule: Real property owned by the Republic of the Philippines or any of its political subdivisions is exempt from payment of real property tax. Exception: When the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. (Sec. 234[a], LGC) “Actual use” is defined as the purpose for which the property is principally or predominantly utilized by the person in possession thereof (Sec. 199[b], LGC). It is the basis for assessment regardless of where located, whoever owns it, and whoever uses it (Sec. 217, LGC). Q: Is the Mactan Cebu International Airport Authority (MCIAA) a GOCC liable for RPT under the LGC?

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A: No. The MCIAA is an instrumentality of the government, thus, its properties actually, solely and exclusively for public purposes, consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are situated, are not subject to RPT. TARIFF AND CUSTOMS CODE Tariff Powers of the President The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. (Art. VI, Sec. 27[2], 1987 Constitution) Outright Smuggling vs. Technical Smuggling Unlawful Importation Fraudulent Practices (Outright (Technical Smuggling) Smuggling) Goods and articles Goods and articles of commerce are are brought into the brought into the country through country without the fraudulent, falsified required importation or erroneous documents, or are declarations, to disposed of in the substantially reduce, local market without if not totally avoid, having been cleared the payment of by the BOC or other correct taxes, duties authorized and other charges. government Such goods and agencies, to evade articles pass through the payment of the BOC, but the correct taxes, duties processing and and other charges. clearing procedures Such goods and are attended by articles do not fraudulent acts in undergo the order to evade the processing and payment of correct clearing procedures taxes, duties, and other at the BOC, and are charges. Often not declared through committed by means submission of import of misclassification documents, such as of the nature, quality the import entry and or value of goods and internal revenue articles, declaration. undervaluation in terms of their price, quality or weight, and misdeclaration of their kind. Misdeclaration vs. Misclassification vs. Undervaluation Misdeclaration Wrong declaration of quantity, quality, description, weight, or measurement of the goods. Misclassification Insufficient or wrong description of the goods or use of wrong tariff heading Undervaluation There is undervaluation

when: (a) the declared value fails to disclose in frill the price actually paid or payable or any dutiable adjustment to the price actually paid or payable; or (b) when an incorrect valuation method is used or the valuation rules are not properly observed. (Section 1400, CMTA) Special duties include: a. Dumping Duty b. Countervailing Duty c. Marking Duty d. Discriminatory Duty e. Safeguard Duty Formal vs. Informal Entry Informal entries Required for: 1. articles of commercial nature intended for sale, barter or hire the DV is P2,000 or less; and 2. personal and household effects, not in commercial quantity, for personal use Formal entries Required for imported items for immediate consumption, or under irrevocable domestic letter of credit, bank guarantee or bond for: 1. placing article in customs bonded warehouse; 2. constructive warehousing and immediate transportation to other Philippine ports upon proper examination and appraisal; and 3. constructive warehousing and immediate exportation. EXCISE TAX Traditional definition of Excise Tax vs. Excise Tax under the NIRC Traditional definition Excise Tax under the NIRC Refers to tax on the Refers to taxes exercise of a privilege applicable to certain or a right. specified or selected goods or articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported into the Philippines. TAX REMEDIES - NIRC Tax Deficiency vs. Tax Delinquency Tax Deficiency Tax Delinquency There is deficiency There is delinquency when: when:

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Tax Deficiency 1. the amount by which the tax imposed exceeds the amount shown as the tax by the taxpayer upon his return; or 2. If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) is a deficiency (Sec. 56[B], NIRC).

Tax Delinquency 1. the self-assessed tax was not paid or was only partially paid; or 2. the deficiency tax assessed by the BIR became final and executory.

Reckoning of the 180day period to appeal to CTA

From date of filing of the protest

supporting documents From date of submission of the required relevant supporting documents

Proper Party to File Refund General Rule: The proper party to seek a refund is the statutory taxpayer. (Silkair v. CIR, G.R. No. 173594, 2008) Exception: If the law confers exemption from both direct or indirect taxes, claimant is entitled to a refund if claimant in not the statutory taxpayer but only bears the economic burden of the tax. (Philippine Airlines v. CIR, G.R. No. 198759, 2103)

Requisites of Valid Final Assessment Notice 1. It must be made within the prescriptive period; 2. It is preceded by a preliminary assessment; 3. It must state the facts that transpired during the preliminary assessment, the applicable law, rules and regulations or jurisprudence on which the assessment is based. Q: What is a Jeopardy Assessment: A: It is an assessment made by an authorized RO without the benefit of complete or partial audit, in the light of the RO’s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the taxpayer’s failure to: a. comply with the audit and investigation requirements to present his books of accounts and/or pertinent records; or b. substantiate all or any of the deductions, exemptions or credits claimed in his return. Motion for Reconsideration vs. Motion for Reinvestigation Motion for Motion for Reconsiderati Reinvestigati on on Basis Based on Based on existing newlyrecords discovered or additional evidence Additional No additional With additional period period period of 60 days to submit

Although PNB was not able to submit Gotesco’s BIR Form No. 2307, the Court is persuaded and so declares that PNB submitted evidence sufficiently showing Gotesco’s non-utilization of the taxes withheld subject of the refund. There is no need for PNB to present Gotesco’s BIR Form No. 2307, as insisted by the First Division, because the information contained in the said form may be very well gathered from other documents already presented by PNB. Thus, the presentation of BIR Form No. 2307 would be in the final analysis a superfluity, of little or no value. (PNB v. CIR, G.R. No. 206019, March 18, 2015) Claim for Tax Refund/Credit of Excess Input Tax Filed Beyond the Period Provided by Law The claim for refund or credit had already prescribed. The prescriptive period commences from the close of the taxable quarter when the sales were made and not from the time the input VAT was paid nor from the time the official receipt was issued. Secs. 204(C) and 229 of the NIRC where the claim for refund must be filed within two years after the payment of the tax are also inapplicable. They only apply to instances of erroneous payment or illegal collection for internal revenue taxes, and not tax refund for creditable input VAT on zero-rated sales. (CIR v. Mirant Pagbilao Corp., G.R. No. 172129. September 12, 2008). Taxpayer’s Suit vs. Citizen’s Suit Taxpayer’s Suit Citizen’s Suit Plaintiff is affected by Plaintiff is but the mere the expenditure of instrument of the public funds public concern. The right of a citizen In matter of mere and a taxpayer to public right, however maintain an action in the people are the real courts to restrain the parties. It is at least unlawful use of public the right, if not the funds to his injury duty, of every citizen to

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Taxpayer’s Suit cannot be denied. (Biraogo vs The Philippine Truth Commission, G.R. No. 192935, Dec. 7, 2010)

Citizen’s Suit interfere and see that a public offense be properly pursued and punished, and that a public grievance be remedied

Requisites of a Valid Waiver 1. The Waiver of the Statute of Limitations under Section 222 (b) and (d) shall be executed before the expiration of the period to assess or to collect taxes. The date of execution shall be specifically indicated in the waiver. 2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. ln the case of a corporation, the waiver must be signed by any of its responsible officials; 3. The expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription should be indicated. Q: Can a waiver which does not comply with RMO No. 20-90 and RDAO No. 01-05 become valid? A: Yes. The general rule is that when a waiver does not comply with the requisites for its validity specified under RMO No. 20-90 and RDAO 01-05, it is invalid and ineffective. However when there are peculiar circumstances, the waiver may be valid. In this case, First, the parties are in pari delicto or “in equal fault.” Second, the Court has repeatedly pronounced that parties must come to court with clean hands. Following the foregoing principle, respondent should not be allowed to benefit from the flaws in its own Waivers and successfully insist on their invalidity in order to evade its responsibility to pay taxes. Finally, the Court cannot tolerate this highly suspicious situation. (CIR vs. Next Mobile Inc., G.R. No. 212825 dated December 7, 2015) Compromise vs. Abatement Compromise Abatement When 1. when a 1. When the reasonable tax or any available doubt as to portion the validity thereof of the claim appears to against the be unjustly taxpayer or exists; or excessively 2. the assessed; financial or position of 2. The the administrati taxpayer on and demonstrat collection es a clear costs inability to involved do pay the not justify assessed the

tax.

Limitations

1. For cases of financial incapacity: a minimum corporate equivalent to 10% of the basic tax; and 2. For other cases: a minimum compromis e rate equivalent to 40% of the basic assessed tax.

collection of the amount due. All criminal violations may be compromised except: 1. those already filed in court, or 2. those involving fraud.

Deficiency Interest vs. Delinquency Interest Deficiency Interest Delinquency Interest Rate of 20% per Rate of 20% per annum of the unpaid annum of the unpaid amount amount Imposed on any Imposed on the unpaid amount of tax following instances: from the date of 1. Failure to pay tax due on any payment prescribed return required until the amount is fully to be filed; paid. 2. Failure to pay tax due for which no return is required; or 3. Failure to pay a deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner of Internal Revenue. Power of the CIR to inquire into bank deposits The CIR has the authority to inquire into bank deposit accounts and other related information held by financial institutions. The authority extends ONLY to information of: a. a decedent to determine his GE; b. any taxpayer applying for compromise on the ground of financial incapacity; and c. taxpayer/s upon request from a foreign tax authority pursuant to an international agreement;

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Authority of Revenue Officer to audit limited to years indicated in the LOA Based on Sec. 30 of the Tax Code, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity. (CIR vs. Sony, G.R. No. 178697 dated Nov. 17, 2010) Remedy to Question the Adverse Ruling of the Secretary of Finance in the Exercise of its Power of Review Under Section 4 There is no provision in law that expressly provides where exactly the ruling of the Secretary of Finance under the adverted NIRC provision is appealable to. However, We find that Sec. 7(a)(1) of RA 1125, as amended, addresses the seeming gap in the law as it vests the CTA, albeit impliedly, with jurisdiction over the CA petition as “other matters” arising under the NIRC or other laws administered by the BIR. Accordingly, reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the CTA. (Philippine American Life and Gen. Insurance vs. SOF and CIR, GR No.210987, November 24, 2014) Case Law A "decision" differs from an "assessment" and failure of the FDDA to state the facts and law on which it is based renders the decision void - but not necessarily the assessment. RR No. 12-99 where it is stated that failure of the FDDA to reflect the facts and law on which it is based will make the decision void does not extend to the nullification of the entire assessment. Tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided. (CIR vs. Liquigaz Philippines, G.R. No. 215534 dated April 18, 2016) TAX REMEDIES – LOCAL TAXATION Payment Under Protest Payment under protest is applicable only if the issue is anchored on the correctness, reasonableness or excessiveness of an assessment. It is not applicable nor required when the taxpayer is questioning the very authority and power of the assessor to impose the assessment and the treasurer to collect the tax. Claim for Tax Refund/Credit A taxpayer must file a written claim within 2 years from the date of the payment of the tax with the local treasurer or from the date the taxpayer is entitled to refund. No case or

proceeding shall be entertained in court after the expiration of the 2 year period. TAX REMEDIES – RPT Erroneous Assessment vs. Illegal Assessment of RPT Erroneous Illegal Assessment Assessment Presupposes that the An assessment is taxpayer is subject to illegal if it was made the tax but is disputing without authority under the correctness of the the law. amount assessed. The taxpayer claims that the local assessor erred in determining any of the items for computing the real property tax. The taxpayer must The taxpayer may directly resort to exhaust the judicial action without administrative paying under protest remedies provided the assessed tax and under the LGC before filing an appeal with resorting to judicial the Local and Central action. The taxpayer Board of Assessment Appeals. The taxpayer must first pay the real shall file a complaint property tax under for injunction before protest. Should the the RTC to enjoin the taxpayer find the LGU from collecting action on the protest real property taxes. unsatisfactory, the The party unsatisfied taxpayer may appeal with the decision of the RTC shall file an with the LBAA within 60 days from receipt of appeal, not a petition for certiorari, before the decision on the the CTA, the complaint protest. If the taxpayer being a local tax case is still unsatisfied after decided by the RTC. appealing with the The appeal shall be LBAA the taxpayer filed within fifteen (15) days from notice of the may appeal with the trial court’s decision. CBAA within 30 days The CTA’s decision from receipt of the may then be appealed Local Board’s before the SC through decision. The decision a petition for review on of the CBAAis certiorari under Rule 45 of the Rules of appealable before the Court raising pure CTA En Banc. The questions of law. CTA’s decision may then be appealed before the SCthrough a petition for review on certiorari under Rule 45 of the Rules of Court raising pure questions of law. Remedy to Question the Legality or Validity of Assessment

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FAR EASTERN UNIVERSITY INSTITUTE OF LAW TAXATION LAW LAST MINUTE TIPS | BAR EXAMINATIONS 2017

If the only issue is the legality or validity of the assessment — a question of law — direct recourse to the RTC is warranted. In the case at bar, the claim of petitioner essentially questions the very authority and power of the Municipal Assessor to impose the assessment and of the Municipal Treasurer to collect the real property tax with respect to the machineries and equipment. Certainly, it does not pertain to the correctness of the amounts assessed but attacks the validity of the assessment of the taxes itself. (Napocor v. Municipal Government Of Navotas, et al, G.R. No. 192300. November 24, 2014) TAX REMEDIES – TARIFF AND CUSTOMS Automatic Review Decisions of the Collector of Customs in seizure and protest cases are subject to review by the Commissioner upon appeal as provided under existing laws; provided, however, that where a decision of the Collector Customs in such seizure and protest cases is adverse to the government, it shall automatically be reviewed by the Commissioner of Customs. (CMO No. 2087) Returning residents Refer to nationals who have stayed in a foreign country for a period of at least 6 months. Conditions for exemptions from tax and duties Returning residents shall have tax and duty exemption on personal and household effects. Provided, that: (1) It shall not be in commercial quantities; (2) It is not intended for barter, sale or for hire; and (3) It does not exceed the FCA or FOB value limit of: a. P350,000 – those who stayed in a foreign country for at least 10 years and not availed of this privilege within 10 years prior to returning resident’s arrival. b. P250,000 – those who stayed in a foreign country for at least 5 but not more than 10 years and not availed of this privilege within 5 years prior to returning resident’s arrival. c. P150,000 – those who stayed in the foreign country for less than 5 years and not availed of this privilege within 6 months prior to returning resident’s arrival. Balikbayan box Refers to a corrugated box or other container or receptacle up to a maximum volume of 200,000 cubic centimeters without regard as to shape or receptacle. For purposes of duty tax and exemption, the Balikbayan box should contain only personal

and household effects that shall neither be in commercial quantities nor intended for barter, sale or for hire sent by Qualified Filipino While Abroad (QFWA) and shall not exceed P150,000. QFWA can send to their families or relatives in the Philippines balikbayan boxes which shall be exempt from payment of duties and taxes, up to 3 times in a calendar year CTA JURISDICTION Jurisdiction of CTA Division (1) Exclusive original or appellate jurisdiction to review a. Decisions of i. CIR on matters arising under NIRC ii. RTC in the exercise of their original jurisdiction (Note: Decisions of RTC in the exercise of their appellate jurisdiction are appealable to CTA en banc) iii. COC on matters arising under customs laws iv. SOF on customs cases elevated to him for review from decisions of the COC v. Secretary of Trade and Industry in case of non-agricultural product vi. Secretary of Agriculture in case of agricultural product b. Inaction of CIR on assessments and refunds (2) Exclusive original jurisdiction over a. Criminal offenses arising from violations of the NIRC or TCC where principal amount claimed (exclusive of charges and penalties is P1,000,000 or more b. Tax collection cases on final and executory assessments where principal amount claimed (exclusive of charges and penalties) is P1,000,000 or more; (3) Exclusive appellate jurisdiction over appeals from the judgments of the RTC in their original jurisdiction a. Criminal offenses arising from violations of the NIRC or TCC where principal amount claimed (exclusive of charges and penalties) is less than P1,000,000 or where there is no specified amount claimed; b. Tax collection cases within its territorial jurisdiction (less than P1,000,000 or where there is no specified amount claimed) Jurisdiction of CTA En Banc Exclusive appellate jurisdiction to review the decisions, resolutions or orders of (1) CTA Division in the exercise of its appellate jurisdiction (on MR/MNT) over: i. Decisions of BIR, BOC, DOF, DTI, DA; ii. Local tax cases decided by the RTC in the exercise of their original jurisdiction; and

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FAR EASTERN UNIVERSITY INSTITUTE OF LAW TAXATION LAW LAST MINUTE TIPS | BAR EXAMINATIONS 2017

iii. Tax collection cases decided by the RTC in the exercise of their original jurisdiction involving final and executory assessments where the principal amount claimed is less than P1,000,000; iv. Criminal offenses arising from violations of the NIRC or TCC (2) CTA Division in the exercise of its original jurisdiction over i. Tax collection cases (P1,000,000 or more); ii. Criminal offenses arising from violations of NIRC or the TCC (1,000,000 or more) (3) RTC in the exercise of their appellate jurisdiction over (Note: Decisions of RTC in the exercise of their original jurisdiction are appealable to CTA Division) i. local tax cases ii. tax collection cases decided by them iii. Criminal offenses arising from violations of the NIRC or TCC (4) CBAA in the exercise of its appellate jurisdiction over real property tax cases Conditions for CTA to suspend the collection of NIRC taxes Case Law The CTA may order the suspension of the collection of taxes provided that the taxpayer either: (1) deposits the amount claimed; or (2) files a surety bond for not more than double the amount. (Tridharma Marketing Corp. vs. CTA and CIR, G.R. No. 215950 dated June 20, 2016) – Bersamin case

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