L M T 2018 – T L: General Principles Of Taxation Basic Theories and Doctrines in Taxation

LAST MINUTE TIPS 2018

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TAXATION LAW 

GENERAL PRINCIPLES OF TAXATION Basic Theories and Doctrines in Taxation Lifeblood Theory

Necessity Theory

Benefits-Protection Theory

Taxes are the lifeblood  lifeblood  of the government and so should be collected without unnecessary hindrance. hindrance. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it.

The existence of government is a necessity; necessity; it cannot continue without means to pay its expenses; and that for these means, it has a right to compel all its citizens  citizens  and property within its limits to contribute.

The power of the State to demand and receive taxes based on the reciprocal duties of support and protection between protection between the State and its citizens. Taxes are what we pay for a civilized society. (also known as Doctrine of Symbiotic Relationship) Relationship)

If taxpayer and BIR are equally at fault, validity of BIR’s acts are sustained based on the lifeblood theory. theory.

Characteristics Characteristics of Taxation (CUPS): Comprehensive, Unlimited, Plenary, and Supreme Principles of a Sound Tax System (FAT): a. Fiscal Adequacy (sufficiency to meet public expenditures), b.  Administrative  Administrative Feasibility (capable of being effectively administered; least inconvenience to taxpayer), and c. Theoretical Justice (taxpayer’s ability to pay) Congress has the power to determine coverage, object, nature, extent, and situs (CONES) situs  (CONES) of tax. P

Requisites U J of a Valid Tax CO

For a public purpose. Uniform. The person or property being taxed should be within the jurisdiction of the taxing authority. The tax must not impinge on the constitutional constitutional and inherent limitations.

Construction of Tax Laws

Prospectivity of Tax Laws

Marshall and Holmes Doctrine

Tax statutes must be construed strictly against the government and liberally in favor of the taxpayer

GR: GR: Tax laws must only be imposed prospectively.

Tax exemptions are construed in  strictissimi juris  juris  against the taxpayers  taxpayers  and liberally in favor of the taxing authority XPN: XPN: If taxpayer is government political subdivision or instrumentality, tax exemptions are construed liberally.

XPN: XPN: If the law expressly provides for retroactive application. Such may be allowed if it will not amount to denial of due process

The power to tax involves the power to destroy (Marshall Doctrine) Doctrine ) since the power to tax includes the power to regulate even to the extent of prohibition or destruction, when it is used validly as an implement of police power. power . If it is employed solely to raise revenues, taxes cannot be allowed to confiscate or destroy “as long as the court sits”. (Holmes’ Doctrine)

Imposition of 20% senior citizen’s discount   is a valid exercise of police power. The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses and other disabilities, and thus, in need of subsidy in purchasing basic commodities. It is a price p rice regulatory measure(Manila measure(Manila Memorial Park v. DSWD) DSWD ) Coconut levy funds are considered as taxes. Market stall fees, fees, universal charges under EPIRA Law, Law , and socialized housing tax do tax do not constitute taxes. They are regulatory charges; these are imposed in the exercise of police power.

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UST Law Bar Operations 2018  ACADEMICS COMMITTEE

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TAXATION LAW

Summary of Limitations on the Power to Tax Inherent Limitations

Direct Constitutional Limitations

Public Purpose  Purpose  - used (a) for the support of the State or (b) for some recognized objective of the government or to directly promote the welfare of the community.

- No imprisonment for nonpayment of poll tax. - Uniformity and equality rule in taxation - Prohibition against taxation of religious, charitable entities, and educational entities. (Covers only RPT) - Prohibition against taxation of non-stock, nonprofit educational institutions (Covers income tax, VAT, and local business tax) -  Absolute majority  majority  vote of Congress for grant of tax exemption - Power of item veto  veto  of the President in revenue and tariff bills. - Revenue and tariff bills must originate in the House of Representatives; Representatives; Note: Senate may introduce amendments. - No appropriation or use of public money for religious purposes

Inherently Legislative –  cannot be delegated. XPN: can be delegated to LGU (on local taxes), President (on tariffs), admin agencies (on administrative implementations) Territorial  Territorial  - exercised only within the territorial jurisdiction of the taxing authority International Comity  Comity  respect accorded by nations to each other because they are sovereign equals Note: Tax treaties prevail over NIRC. Ratio: Special law prevails over general law, and pacta and pacta sunt servanda

Indirect Constitutional Limitations - Due Process Substantive DP - public purpose, within territorial jurisdiction

Procedural DP – not arbitrary in assessment or collection. - Equal Protection Clause Requisites [SAGA] 1. Substantial distinction 2.  Applies  Applies to present and future conditions 3. Germane to the purpose of the law 4.  Applies  Applies equally to all members of the same class - Religious Freedom - Non-Impairment Clause - Freedom of the Press

Exemption of Government – XPN: When the government chooses to tax itself in its proprietary activities. activities .

Double Taxation Direct   double taxation – Unconstitutional (violative of equal protection clause and uniformity clause) Indirect   double Constitutional

taxation

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Note: If one element is missing, such is only indirect double taxation.

When is it direct? (PAPS-JK) It is imposed on a. on the same subject matter, b. for the same purpose, c. by the same taxing authority, d. within the same jurisdiction, e. during the same taxing period; and f. taxes must be of the same k ind ind or character

Remedies against double taxation (CREDIT) •Apply for Tax Credit •Principle of Reciprocity • Tax Exemption •Apply for Tax Deduction •Apply for Tax Incentive •Apply for Tax Treaty

The Revenue Code of Manila imposed on o n a Tax on Wholesalers, Distributors, or Dealers and Tax on Retailers. At the same time, the City of Manila imposed additional taxes on a person who sold goods and services in the course of trade or business based on a certain percentage of his gross sales or receipts in the preceding calendar year. Such is direct double taxation. taxation . (Nursery (Nursery Care Corporation v. Acevedo) Acevedo ) The imposition of local business tax based on gross revenue will result in direct double taxation inasmuch taxation  inasmuch as the revenue or income for income for a taxable year will definitely include its gross receipts already receipts already reported during the previous year and for which local business tax has already been paid. ( Ericsson Telecommunications vs. City of Pasig) Pasig) There is no direct no direct double taxation on taxation  on FWT on interest income and the 5% gross receipts tax paid by banks.

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LAST MINUTE TIPS 2018

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TAXATION LAW 

Tax Amnesty vs. Tax Exemption; Tax Evasion vs. Tax Avoidance ; Taxpayer’s Suit vs. Citizen’s Suit TAX AMNESTY

TAX EXEMPTION

 Scope of immunity 

Immunity from all criminal, civil and administrative obligations arising from non-payment of taxes

Immunity from civil liability only

Grantee

General pardon given to all erring taxpayers

A freedom from a charge or burden to which others are subjected

How applied 

Applied retroactively

Applied prospectively

Note: BIR cannot grant tax exemption. exemption . It is within the province of the Congress. Can tax exemptions be revoked? GR: YES. YES. Tax exemption is a mere privilege. (e.g., Franchise) XPN: If exemption is contractual because it may violate the non-impairment clause. Tax exemptions are personal and non-transferable non- transferable.. He who claims an exemption must justify that the legislature intended to exempt him by words too plain to be mistaken. He must convincingly prove that he is exempted. It must be strictly construed against the taxpayer Tax exemption is generally revocable. revocable. XPN: XPN: (1) founded on contracts which are protected by the Non-impairment clause. (2) constitutionally-granted exemptions

Principles on Tax Exemptions

Elements of Tax Evasion

U S E

- Course of action is unlawful; - Accompanying state of mind: evil, in bad faith, willful or deliberate and not accidental - End to be achieved, i.e., payment of less than that known by the taxpayer to be legally due, or non-payment of tax when it is shown that the tax is due.

Note: Tax avoidance is avoidance  is legal and does not result to criminal penalties. Tax evasion is evasion is illegal and results to criminal penalties. An estate planning scheme, scheme , e.g., transfer of assets to a family corporation, is a form of tax avoidance. Q: Is prior assessment a condition sine condition  sine qua non for non for a criminal case of tax evasion?  A: NO.  NO.  (1) The crime is complete  complete   when the taxpayer willfully and fraudulently files his tax return or underpays his taxes. (2) Section 205, NIRC, provides that civil and c riminal actions may be filed simultaneously (3) They differ as to purpose. purpose. The assessment seeks to determine tax liability while the criminal action seeks to penalize the penalize the taxpayer. A taxpayer’s suit   requires that there be illegal or irregular disbursement of public funds  funds  derived from taxation. In a citizen’s suit , the plaintiff/petitioner is but the mere instrument of the public concern. concern.

ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE

Nondelegable powers of the BIR

R R I C

A

To Recommend promulgation of rules and regulations by the Secretary of Finance; To Reverse, revoke or modify any existing rule of the BIR; To Issue rulings of first impression Note: If the rulings are based on established precedents, such power can be delegated. To Compromise or abate any tax liability; XPN: The Regional Evaluation Board may compromise assessments involving deficiency taxes of P500,000 or less and minor crime violations. To A To  Assign ssign or reassign internal revenue officers to establishments where articles subject to excise tax are kept. BIR Ruling

Revenue Regulations

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TAXATION LAW

BIR Ruling Persuasive, but does not have the force and effect of laws Does not require publication

Force and effect Publication

Issued by BIR

Who issues

Revenue Regulations Has the force and effect of tax laws Requires publication in a newspaper of general circulation for validity. Otherwise, void. Issued by Secretary of Finance (SOF). Finance  (SOF). CIR’s power is merely recommendatory recommendatory.

INCOME TAX General Principles of Income Taxation Basic Principles

(RC)   and domestic corporations (DC)  (DC)   are subject to income tax on their  Only resident citizens (RC)  worldwide income. income.  Tax base: income = Gross income – allowable deductions  Taxable income = NRANETBs and NRFCs – Taxed on gross income  XPN: NRANETBs and Income is any wealth which flows into the taxpayer other than a mere return of capital  Income vs. Capital: Income is while capital constitutes capital constitutes the investment which is the source of income.

P

Requisites of Income

1. There must be a profit or gain. N 2. The income is not excluded or exempted by law. R 3. The income must be realized actually or constructively. It must not  be   be a return of capital. capital.

When is income realized? a. The earning process is complete or virtually complete; and b. An exchange has taken place.  All-Events Test (RRD) [also applicable for claiming deductions] a. Fixing of an unconditional, valid, and enforceable right to income or liability to pay; and b. Availability of the reasonable accurate determination of such income or liability. c. Amount will be paid in due course

TAXABLE  Bad debt recovery

Condonation/cancellation

to the extent of of debt for services income tax benefit rendered. derived from the Income from theft (even write-off   (taxthough the law imposes benefit rule) an obligation to return since it is the intention of  Gain on sale of personal asset the thief to appropriate it from [ James Doctrine] Doctrine]  Income illegal sources (e.g., drugs, gambling)

NOT TAXABLE  Advanced

 Liquidating dividends

payments/deposits  Money borrowed from  Increments revaluation of property  Proceeds from life insurance, regardless of designation  Return of premiums

 Moral and exemplary

damages Compensation for  injuries and sickness  Stock dividends  Gifts, bequests, and devises  Income derived by foreign governments

Situs of Income KIND OF INCOME Interest

TAX SITUS Residence of the debtor

KIND OF INCOME Dividend income from: a. Domestic Corporation

TAX SITUS Income within

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LAST MINUTE TIPS 2018

Merchandising Gain on sale of personal property purchased Gain on sale of personal property produced Gain on sale of real property Mining income

Place of sale Place of sale Place of sale and/or production Location of property Location of the mines

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TAXATION LAW 

income to the world (total) was: - Less than 50% - 50% to 85% - More than 85% Gain on sale of domestic stock Farming income

Entirely without Proportionate Entirely within Income within the Philippines Place of farming activities

Final Income Tax Income Interest

Dividends

Royalties Prizes and winnings

Summary of Rules GR: Basic income tax XPN: Subject to final tax if tax  if (1) Interest income from currency bank deposits, (2) Interest income from expanded foreign currency deposit system (EFCDS) XPN to XPN: Exempt  if  if (1) If income from EFCDS is earned by nonresident. (2) For individuals, if bank deposit is long-term (more than 5 years) GR: Final tax XPN: (1) If earned from foreign corporation, subject to basic income tax (2) If it is an intercorporate dividend (DC to DC/RFC) or a stock dividend, exempt Final tax if from Philippine sources Prizes not exceeding P10,000 – basic tax Prizes exceeding P10,000 – final tax Winnings – final tax PCSO winnings –  exempt (under TRAIN, PCSO winnings above P10,000 are subject to final tax)

Tax sparing rule: the dividends received by NRFC from DC shall be subject to 15% FWT if the country in which the corporation is domiciled either (i) allows a tax credit of 15% against the taxes due from the foreign corporation for taxes deemed paid or (ii) does not impose income tax on such dividends. Summary of tax treatment of dividend received from domestic corporation RECIPIENT DC / RFC RC, NRC, RA NRA – ETB NRA – NETB NRFC

TAXABILITY Tax exempt 10% 20% 25% 30% (XPN: Tax sparing rule applies, 15%; preferential rate under tax treaty)

Share of a partner in a commercial/business   partnership is commercial/business subject to final tax. Share of a partner in a general professional  professional  partnership is subject to basic income tax.

Capital Gains and Losses Transactions involving capital assets give rise to capital gains or losses. Two kinds of assets under NIRC: 1. Ordinary Asset  [SOUR]:  [SOUR]: - Stock in trade of the taxpayer/inventory - Property held for sale to customers in the ordinary course of trade or business; - Property used in the trade or business of character subject to

Taxation of Capital Gains and Losses GR: Subject to basic income tax XPN: Subject to final tax if tax if gain arose from: 1.Real 1. Real property  property   held as capital asset in the Philippines (6% CGT) 2.Shares 2. Shares of stock  of domestic corporations sold directly through

Rules on Basic Income Tax Treatment 1. Holding Period Rule Long-term capital gains and losses (capital asset has been held for >1 year) are only 50% recognized. (only for individuals) individuals) 2. Capital Loss Limitation Rule Capital loss may only be deducted against capital gain, not ordinary gain. 3. Net Capital Loss Carryover Rule Net capital loss may be carried over to the

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TAXATION LAW

Rules on Final Tax Treatment CGT on real property

CGT on shares of stock

higher .  Tax base: FMV or selling price, whichever is higher.

gain : 5% on the  Tax base is net capital gain:

 Applies

first P100,000, and 10% on the gain above P100,000. (now a flat rate of 15% under TRAIN)  If traded through the LSE - subject to stock transaction tax  tax   of ½ of 1% of gross selling price (6/10 of 1% under TRAIN)  If sold by a dealer in securities, the shares are ordinary assets, and the gain is therefore subject to basic income tax.  If corporation sells its own stocks, it is not subject to income tax. Excess of price above par is not considered as an income.

whether sale is voluntary or forced, i.e., expropriation or foreclosure. However, foreclosure is only taxable upon the expiration of period to redeem. redeem.  For sale to the government of a real property held as capital asset, individual   taxpayer has the option to (1) subject the gain to regular income tax or (2 ) pay 6% CGT. property  for individuals but for  6% CGT applies to real property for land and buildings only for only  for domestic corporations. residence  of the  NOTE : If what is sold is the  principal residence  taxpayer, it may be exempted from CGT, provided: a. Proceeds are used to acquire/construct new principal residence within 18 months. (Note: The sale must precede the acquisition/construction) acquisition/construction) b. Availed once every 10 years c. CIR is notified within 30 days of days of sale d. 6% CGT is deposited in an escrow account

In cases of expropriation, it is the seller  seller  who should shoulder the tax. The person whose property is expropriated pays since it is a tax on the seller’s gain from the sale of the real estate. ( Republic vs. Soriano) Soriano)

Exclusions from Gross Income Exclusion Retirement Benefits

Separation Pay Prizes and awards

Summary of Rules 1. The Reasonable Private Benefit Plan (RPBP) must be approved by the BIR; BIR; 2. The retiree must have been in the service of same employer for at least 10 years at years  at the time of retirement; 3. Must be at least 50 years old at old at the time of his retirement; and 4. Must have been availed of only once. once. Must be due to death, sickness or other physical disability; or for any cause beyond the control of the official or employee (e.g., retrenchment, cessation of business, redundancy, installation of labor saving device, automation of business operations, severe business losses) 1. Received primarily in recognition of Scientific, Civic, Artistic, Religious, Educational, Literary, or Charitable achievement [SCAR-CEL] 2. The recipient was selected without any action on action  on his part to enter the contest or proceeding; and 3. He is not required to render substantial future services  as condition to receiving the prize or award. Exemption for athletes: athletes : (1) local and international sports tournaments and competitions (2) sanctioned by their national sports associations

Deductions from Gross Income Requisites for Deductibility of Itemized Deductions Summary of Rules Advertising Interest

Losses

GR: Deductible XPN: If intended to benefit future periods, it must be spread over a reasonable time. There must be an indebtedness The interest must be legally due, stipulated in writing, paid or incurred during the taxable year The indebtedness must be connected with the taxpayer’s trade, business, or profession The interest arrangement must not be between related taxpayers The allowable deduction has been reduced by 33% of the interest income subject to tax Note: Note: Theoretical interest not deductible, and CIR has no authority to impute theoretical interest. Actually sustained and charged off during the taxable year

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LAST MINUTE TIPS 2018

Bad Debts

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TAXATION LAW 

The debts are actually ascertained to be worthless or uncollectible despite diligent or earnest effort  exerted  exerted by the taxpayer: [SCRA] a. Sending of statement of accounts; b. Sending of collection letters; c. Referral to a lawyer for collection; and d. Filing an action for collection in court.

Optional Standard Deduction Amount: 1. 40%  40%  of the gross sales or gross receipts - individual taxpayer; or 2. 40% of 40% of the gross income income - a corporation

Principles: - OSD does not require proof of substantiation as substantiation  as opposed to itemized deductions. - Choice of OSD in the first quarter is irrevocable for the entire taxable year. - If no choice is made, it is assumed that the taxpayer availed of the itemized deductions. - NRAs, NRAs, NRFCs, NRFCs, and taxpayers subject to special tax rates  cannot claim OSD.

Net Capital Loss Carry Over (NCLCO) vs Net Operating Loss Carry Over (NOLCO) BASIS

NCLCO

NOLCO

 Source

Transactions involving capital asset

Transactions involving ordinary asset

Who can avail 

Individual

Individual and corporate taxpayer

Period of carryover 

In the next succeeding taxable year

Holding Period

May apply

Carryover of operating loss in 3 succeeding taxable years or 5 years, in the case of mining companies Does not apply

Taxation of Compensation Income De Minimis Benefits

Fringe Benefits Tax

These are facilities or privileges furnished or offered that are of   relatively small value as a means of  promoting the  the  health, goodwill, contentment and efficiency [CHEG] of his employees.

Nature: Final tax Base: Grossed-up monetary value Rate: 32% (TRAIN: 35%) Who pays: Employer Subject: Fringe benefits provided to supervisory and managerial employees managerial employees Note: Fringe benefits to rank-and-file are rank-and-file are subject to regular income tax paid tax  paid by the employee. employee.

Tax Treatment: Exempt . If in excess of threshold, it will form part of 13 th  month pay and other benefits subject to the P82,000 threshold (P90,000 under TRAIN) [CUTE SMALL CRIME ] 1. Clothing and uniform allowance (P5,000/year) (P6,000 under TRAIN) 2. Tangible property as employee achievement award (P10,000/year) 3. Night hift or overtime eals (25% of minimum

Convenience of the Employer Rule: Rule : An exemption from taxation is granted to benefits which are given to the employee for the exclusive benefit or convenience of the employer. The ff. are other exempt  fringe  fringe benefits:  Housing benefits to AFP

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TAXATION LAW

Note: Minimum wage earners are earners  are exempt from income tax on their basic pay and HONHA (Holiday, overtime, night shift differential, and hazard pay)

Corporate Income Tax Offline International Carrier An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a RFC doing business in the Philippines. Pursuant to the RP-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 ½% of its gross revenues earned from the sale of its tickets in the Philippines. The treaty prevails over our domestic tax laws based on the principle of pacta of pacta sunt servanda servanda. ( Air Canada v. CIR) CIR)

Branch Profit Remittance Tax (BPRT) Rate: 15%; Nature: Final tax Base: total profits applied or earmarked for remittance (note: actual remittance immaterial)

Minimum Corporate Income Tax (MCIT) Rate: 2% Base: Gross income Paid only when: MCIT is higher than 30% Regular CIT Coverage: DCs and RFCs Applicability: beginning on the 4th taxable year following the year of commencement of business operation

Not applicable to NRFCs. Not applicable to DCs and RFCs not subject to 30% regular CIT, e.g.:  Proprietary educational institutions – 10%  Non-profit hospital – 10%  Foreign international carrier – 2 ½% GPB  Those enjoying incentives under special investment laws, e.g., PEZA

Improperly Accumulated Earnings Tax (IAET) Rate: 10% Base: Improperly accumulated earnings: Earnings in excess of “reasonable needs”. Immediacy Test : construed the words “reasonable needs of the business” to mean the immediate needs of the business Example of reasonable needs: corporate expansion, loan covenants, building or plant acquisition, 100% of paid-up capital.

Not applicable: [PIPE [PIPE JoB] JoB]  Publicly-held corporations  Insurance companies  Partnerships  Enterprises duly registered with PEZA/BCDA joint ventures  Exempt joint  Banks and other financial intermediaries

Exempt and Special Corporations Exception clause of Sec. 30, NIRC: Requisites of exemption of charitable The income of whatever kind and character of the institutions [NOON] [exempt] organizations from any of their properties, properties , real CIR v. St. Luke’s Medical Center, Inc. or personal, or from any of their activities conducted 1. Organized as non-stock corporation for profit regardless of the disposition made of such 2. Operated exclusively for charitable income, shall be subject to [tax]. purposes 3. Organized exclusively for charitable Inapplicability of exception clause to non-stock, nonpurposes 4. No part of income/assets shall inure to the profit educational institutions

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LAST MINUTE TIPS 2018

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TAXATION LAW 

 Administrative Provisions Within 3 years from years from the filing of the ITR, the ITR may be amended provided that the taxpayer has not received any letter of authority to investigate Irrevocability Rule - applies only to the option of carry-over. carry-over. A taxpayer is still free to change its choice after electing a refund of its excess tax credit. But once it opts to carry over such excess creditable tax, after electing refund or issuance of tax credit certificate, the carry-over option becomes irrevocable. Accordingly, the previous choice of a claim for refund, even if subsequently pursued, may no longer be granted. Choice of refund or tax credit certificate is not irrevocable. (University Physicians Services, Inc. v. CIR 2018).

TRANSFER TAX (ESTATE and DONOR’S TAX) Requisites for deductibility of vanishing deduction :[VIPED] deduction :[VIPED] 1. Present decedent died within 5 years from receipt of property from a prior decedent or donor 2. The property formed part of the gross estate situated in the Philippines of the prior decedent or was a taxable gift of the donor 3. The estate tax on the prior succession or donor’s tax must have been paid 4. The property must be identified as the one received or acquired 5. No vanishing deduction was claimed on the same property of the prior deceden t’s estate

Exemption of Certain Acquisitions and Transmissions 1. The merger of usufruct   in the owner of the naked title; 2. The transmission or delivery of the inheritance or legacy by the fiduciary heir  heir   or legatee to the fideicommissary; 3. The transmission from the first heir, legatee or donee in favor of another ano ther beneficiary, in accordance with the desire of the predecessor; and 4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions , no part of the net income of o f which inures to the benefit of any individual: Condition: Not more than 30% shall be used for administration purposes.

When the donor makes his will within a short time of, or simultaneously with, the making of gifts, the gifts are considered as having been made in contemplation of death subject death  subject to estate tax. (Roces ( Roces v. Posadas) Posadas) Exempted Proceeds from Life Insurance Ins urance a. Proceeds from a life insurance policy is receivable by a 3rd person (NOT the decedent’s estate, executor or administrator) AND that the said beneficiary is designated as irrevocable; irrevocable; b. Where the life insurance was not taken by the decedent upon his own life even though the beneficiary is the administrator ; decedent’s estate, executor, or administrator; c.  Accident insurance proceeds. proceeds. NIRC specifically mentions only life insurance policies; d. Proceeds of a group insurance policy taken policy  taken out by a company for its employees; e. Proceeds of insurance policies from GSIS and SSS Note: In estate taxation, the concept of revocability or irrevocability in the designation of the beneficiary is necessary to determine whether the life insurance proceeds proceeds are included in the gross estate or not. However, if the appointed beneficiary is the estate, executor or administrator, the proceeds shall be included from the gross estate. On the other hand, in income taxation, there is no need for the determination d etermination of revocability revocability or irrevocability

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TAXATION LAW

Rule regarding transfer for less than adequate and full consideration: GR: Where a property is transferred for less l ess than adequate and full consideration consideration in money or money’s worth, the amount by which the FMV exceeds the consideration shall be deemed a gift   gift   and be included in computing the amount of gifts made during the calendar year. Donative intent is not necessary. XPN: Where XPN: Where property transferred is real property located in the Philippines considered as capital asset , asset , the transfer is not subject to donor’s tax but to a capital gains tax, which is a final income tax of 6% of the fair market value or gross selling price, whichever is higher, and therefore, there can be no instance where the seller can avoid any tax by selling his capital assets below its FMV.

Q: Are donations for political campaign purposes exempted from donor’s tax?  A: YES.  A: YES. Any contribution in cash or in kind to any candidate, political party, or coalition of parties for campaign purposes, reported to COMELEC shall not be subject to payment of any gift tax. Under the date-of-death valuation rule, rule , claims existing at the time of death  should be made the basis of the determination determination of allowable deductions. Thus, post-death developments, developments, such as condonotion in this case, are not material in determining the amount of the deduction ( Dizon, et. al v. CA) CA )

VALUE-ADDED TAX Transactions Deemed Sale [CORD] O D

C

R

Transfer, use or consumption not in the course of business of goods or properties Originally intended for sale or for use in the course of business. Distribution or transfer to: a. Shareholders or investors as share in the profits of the VAT-registered persons b. Creditors in payment of debt Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned. NOTE: Consigned good returned by the consignee within the 60-day period are not deemed sold. Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor.

Zero-rated sales vs. VAT-exempt transactions Zero Rated Sale

VAT-Exempt Transaction

Generally refers to the export sale of goods and services.

The goods are not subject to VAT at a particular stage.

The seller of such transactions charges no output tax but can claim a refund or tax credit certificate for the input VAT attributable to zero-rated sales. No VAT shall be shifted or passed-on by VATregistered sellers or suppliers from the Customs Territory on their sale, barter or exchange of goods, properties or services to the subject registered Freeport Zone enterprises.

In VAT-exempt sales, the taxpayer/seller shall not bill any output tax on his sales to his customers and corollarily, is not allowed any credit or refund of the input taxes he paid on his purchases.

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TAXATION LAW 

Sale of residential house & lot  and  and other residential dwellings by dwellings  by a non-dealer  

VAT 6% CGT

Use in business (incidental transaction) Not use in business (regardless of amount)

Sale of real property classified as low cost housing

VAT exempt

Sale of real property classified as socialized housing

VAT exempt

* Apply rules on adjacent lots ** Apply rules on adjacent house and lots and other residential dwellings Note: Parking lot is always subject to VAT, regardless of amount. Summary Rules on Lease of Residential Units Monthly rental P12,800 or less regardless of annual gross sales (P15,000 under TRAIN)

VAT exempt and no p percentage ercentage tax

Monthly rental above P12,800 but annual gross sales do not exceed P1,919,500

VAT-exempt under Sec. 109 (W) but shall pay p ay 3% percentage tax under Section 116 of NIRC

Monthly rental above P12,800 and annual gross sales Subject to VAT exceed P1,919,500 Monthly rental P12,800 or less regardless of annual VAT exempt and no p percentage ercentage tax gross sales Threshold is now P3,000,000 annual gross sales and sales and P15,000 monthly rental under rental under TRAIN

Transitional Transitional Input VAT Prior payment is not necessary before a taxpayer could avail of the 2% transitional input VAT. VAT . Transitional input VAT is based on the value of the inventory, which are products which the VAT-registered business offers for sale. It is not limited to improvements. (Fort ( Fort Bonifacio Development Corporation v. CIR) CIR ) Q: Are gross receipts derived from sales of admission tickets in showing motion pictures subject to VAT? A: NO. The legislative intent is not to impose VAT on persons already covered by the amusement tax

PERCENTAGE TAX, EXCISE TAX, AND DOCUMENTARY STAMP TAX Percentage Tax Any person whose sales or receipts are exempt from the payment of value-added tax for not exceeding the VAT threshold and who is not a VAT-registered person Sale, barter, exchange, or other disposition of shares of stock listed and traded through the local stock exchange other than the sale by a dealer in securities

3% of gross quarterly sales or receipts ½ of 1% of gross selling price (now 60% of 1% under TRAIN)

Documentary Stamp Tax (DST) GR: The party primarily liable on the payment of DST is the the person making, signing, issuing, accepting, or transferring the document or facility evidencing the aforesaid transactions. XPN: Whenever XPN: Whenever one of the parties is exempt from the DST, the other party thereto who is not exempt shall be the one directly liable for the tax

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TAXATION LAW

TAX REMEDIES  Assessment Requisites of a valid assessment (BaD SAWS) 1. In writing and signed by the BIR; 2. Contains the law and the facts on which the assessment is based (b (basis must be provided); 3. Contains a demand for payment within the prescribed period; (must contain a due date to pay) 4. Must be addressed to, served on and received by the taxpayer. Jeopardy assessment   is a delinquency tax assessment made without the benefit of a complete or partial investigation by an authorized revenue officer who has a reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the taxpayer’s failure to (a) comply with audit and investigation requirements to present his books of accounts and/or pertinent records, (b) substantiate all or any of the deductions, exemptions or credits claimed in his return Prescriptive Periods Date of filing Before due date On due date Beyond due date Fraudulent filing

Prescriptive period of Assessment

3 years from due date 3 years from due date 3 years from actual filing 10 years from discovery of bad faith/fraud Non-filing 10 years from discovery of non-filing LGC/local taxes 5 years from due date, except in fraud, period is 10 years Prescriptive period for collection is 3 years.

Not an assessment : - The revenue officers’ Affidavit Report, which was attached to the criminal Complaint filed with the DOJ. - A written communication by a revenue officer of tax liability of the taxpayer, giving him an opportunity to contest or disprove the BIR examiner’s findings is not an assessment since it is yet indefinite Principles on Tax Assessment 1. Prima facie presumed facie presumed correct and made in good faith (Ratio: Lifeblood doctrine, presumption of regularity) 2. Should be based on actual facts 3. Discretionary on the part of Commissioner (therefore, not compellable by mandamus) mandamus) 4. Power to assess is delegable The decision of the CIR or his duly authorized representative on a disputed assessment to state the facts, law and rules and regulations, or jurisprudence on which the decision is based. Failure to do so will invalidate the FDDA.

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TAXATION LAW 

Compromise Cases which may be compromised [DANC3]  Applicability 1. Delinquent accounts NIRC Local RPT CMTA 2. Cases under A under  Administrative dministrative protest after issuance of FAN to the YES X X YES taxpayer which are still pending with the BIR 3. Cases covered by pre-assessment notices but taxpayer is Not Notes: agreeable to the findings of the audit office - Under CMTA, the Commissioner 4. Civil tax cases disputed before the courts may compromise any 5. Collection cases filed in courts administrative case involving the 6. Criminal violations except: imposition of fines and a. Those already filed in courts; and surcharges. surcharges. b. Those involving criminal tax fraud - Cases involving forfeiture proceedings shall however not be Cases which cannot be compromised [AFP CREW] subject to any compromise under 1. Criminal violations already filed in courts. CMTA. 2. Cases which become Final and executory after final judgment o f a - Compromise is different from court, where compromise is requested on the ground of doubtful compromise penalty. validity of the assessment. Compromise as Compromise as amount of paid by 3. Payment in installment of delinquent accounts the taxpayer to settle his tax 4. Criminal tax fraud cases liability is different from 5. Final Reports of reinvestigation or reconsideration have been compromise penalty which penalty  which is the issued amount paid by the taxpayer to 6. Estate tax cases where compromise is requested on the ground of compromise tax violation and paid financial incapacity of the taxpayer. in lieu of criminal prosecution. 7. Withholding tax cases, unless the applicant –  taxpayer invokes - Any taxpayer who has filed an provisions of law that cast doubt on the taxpayer’s obligation to application for compromise of his withhold. tax liability by means of financial incapacity waives his right under Grounds for Compromise RA 1405 (Secrecy (Secrecy of Bank 1. A reasonable doubt as to the validity of the claim against the Deposits) Deposits) taxpayer exists (Doubtful Validity); Validity) ; 2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax (Financial Incapacity)

Protest NIRC

Local taxes

RPT

CMTA

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TAXATION LAW

Decision on  protest appealable to whom

Period to appeal

NIRC days  days  from submission of relevant documents If decided by DAR, to CIR or CTA Division If decided by CIR, CTA Division

Local taxes

RPT

CMTA

RTC/MTC/MeTC/MCTC (court of competent jurisdiction) depending on amount.

LBAA  LBAA  then to CBAA.. Decision of CBAA CBAA appealable to CTA Division.

CTA Division if aggrieved party is taxpayer. Automatic review by the SOF if aggrieved party is the government.

30 days from days from adverse decision or inaction

Motions for Reconsideration  Automatic Reviews under under CMTA Prohibited –  decision of BIR, no effect, does 1. Automatic review of Commissioner of Customs if not toll the period to file an appeal to CTA decision of Collector of Customs is adverse to the Division government. Mandatory – decision of CTA Division before Division before 2. Automatic review of the Secretary of Finance (SOF) if appealing to CTA en banc decision of Commissioner of Customs is adverse to the Optional –  decision of CTA en banc before government. appealing to SC Note: Note: If decision of SOF is still adverse of the government, such is already final.

Refund NIRC 2 years from years from payment, which is the filing of the final adjustment return. (Sec. 229) Period to file

Note: For refund of unutilized input VAT, period is 2 years from the close of the taxable quarter when the zero-rated

Local taxes RPT 2 years  years  from the date of the payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit

CMTA 12 months  months  from the date of payment of duties and taxes.

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TAXATION LAW 

GR: The non-payment cannot be excused by supervening causes arising after the payment XPN: a. Assurance from the BIR that the suit or proceeding filed beyond the 2-year period shall still be accepted by the BIR. b. Agreement with the BIR to await the decision of the court. 4. Dissolved Corporation (BPI (BPI v. CIR) CIR) – Prescriptive period shall run 30 days after the approval by the SEC of its plan for dissolution Notes on VAT refund (CIR (CIR v. Aichi Forging Company ) - Admin claim (claim with BIR) must be filed within 2 years from the close of the taxable quarter when the zero-rated sale was made. - The CIR has 120 days from the date of submission of complete documents within which to decide. - Judicial claim (with CTA Division) must be filed within 30 days after denial or expiration of 30-day period.

XPN: XPN: Judicial claim was filed between December 10, 2003  2003  and October 6, 2010:  2010:  the taxpayer would not be required to wait for the lapse of 120day period. Reason: Effectivity of BIR Ruling No. DA-489-03. DA-489-03. Such BIR Ruling constitutes estoppel.

Requisities for filing of refund under Sec. 112 [PRICE] ( CIR v. Toledo Power Company) 1. Prescriptive period must be complied with 2. Registration – Taxpayer must be VAT-registered 3. Input tax must be the source of refund 4. Creditable input tax must not be applied against output VAT 5. Engaged in zero-rated transactions Comparison of Section 112 and 229 Section 112 Unutilized creditable input VAT related to  Subject zero-rated sale 2 years from the close of the taxable Prescriptive quarter where the zero-rated sale was  period made 30 days from the lapse of 120-day period  Appeal to CTA or from receipt of decision of denial, Division whichever comes first

Section 229 Internal revenue taxes other than VAT 2 years from payment, which is the filing of the final adjustment return 30 days after the receipt of adverse decision but must be within the 2-year period from payment or filing of the final adjusted return.

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TAXATION LAW

Capital gains tax a. Sale of shares not through the local stock exchange

Per transaction return – 30th day after date of sale Final/consolidated return – 15th day of the 4 th month after close of taxable year b. Sale of real property (capital asset) 30th day after day after date of sale Note: No return under local taxes and CMTA.

Other Matters - CTA (not CTA (not CA) has jurisdiction now on petitions of certiorari assailing interlocutory orders involving tax. e.g., exclusive appellate jurisdiction over decision of Secretary of Justice on findings by the fiscal of probable cause on criminal violations of CMTA is appealable to CTA, and not CA. - Simultaneous running of delinquency and deficiency interest  is interest  is allowed before TRAIN Law. Such has been disallowed under TRAIN Law. - CTA en banc cannot entertain a petition for annulment of judgment of CTA division. division . The divisions are not considered separate and distinct courts but are divisions of one and the same court. The petition is cognizable by SC. - Dispute solely between BIR and another ano ther government agency, including GOCCs, is cognizable by Secretary of Justice, Solicitor General, or Government Corporate Counsel , depending on the issues and the government agencies involved. (PSALM (PSALM v CIR) CIR) Jurisdiction for Tax Collection Cases

Taxes under NIRC: Less than or equal to P300K: MTC (P400K MTC (P400K if Metro Manila) P300K to P1M: RTC; RTC; P1M above: CTA Taxes under LGC: LGC : Less than or equal to P300K: MTC (P400K MTC (P400K if Metro Manila) Above P300K, RTC

False Return Contains wrong information due to mistake, carelessness or ignorance Does not make the taxpayer criminally liable Not subject to 50% penalty surcharge

Fraudulent Returns Intentional and deceitful with the sole aim of evading the correct tax due Will make the taxpayer criminally liable Subject to 50% penalty surcharge

The Waiver of the Statute of Limitations  Limitations   should not be construed as a waiver of the right to invoke the defense of prescription but rather an agreement between the taxpayer and the BIR to extend the period to a date certain, within which the latter could still assess or collect taxes due. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally. It must must be strictly construed.

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TAXATION LAW 

6. The waiver must be executed in three copies, copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. Q: Does the CTA have jurisdiction over a special civil action for certiorari assailing an interlocutory order issued by the RTC in a local tax case?  A: YES. YES. A court may issue a writ of certiorari in aid of its appellate jurisdiction if said court has jurisdiction to review, by appeal or writ of error, the final orders or decisions of the lower court (The City Of Manila v. Hon. Grecia-Cuerdo, G.R. No. 175723, February 4, 20 14). The CTA CTA may  may take cognizance of cases directly challenging the constitutionality or validity of a tax law  or regulation or administrative issuance. RA 9282, a special and later law than BP Blg. 129 provides an exception to the original jurisdiction of the RTC over actions questioning the constitutionality or validity of tax laws or regulations. Except for local tax cases, actions directly challenging the constitutionality or validity of a tax law or regulation or administrative issuance may be filed directly before the CTA ( BDO v. Secretary of Finance). Finance ).

LOCAL TAXATION Local Taxation Fundamental Principles [UE-LIP] Real Property (RP) Exempt from RPT 1. Taxation shall be Uniform in each LGU; 2. Taxes, fees, charges and other impositions shall: a) Real property owned by the Republic of the [EPU] Philippines or any of its political subdivisions a. be equitable and based as much as possible on  XPN: when the beneficial use thereof has been the taxpayer's ability to pay;  granted, for consideration or otherwise, to a b. be levied and collected only for public taxable person ; purposes; (b) Charitable Charitable institutions, churches, parsonages

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TAXATION LAW

133(h), LGC and thus, no levy can be imposed. Sec. 143(h) defines the general power of LGUs to tax businesses within its jurisdiction. Thus, the omnibus grant of power to LGUs under Sec. 143(h) of the LGC cannot overcome the specific exception or exemption in Sec. 133(h) of the same Code. ( Batangas City v. Pilipinas Shell Petroleum Corporation) Corporation)

9. Percentage or VAT on sales, barters, or exchanges or similar transactions on goods or services except as otherwise provided herein; 10. Taxes on the gross receipts of transportation contractors and persons engaged in the t ransportation ransportation of passengers or freight by hire and common carriers by air, land, or water, except as provided in this Code; 11. Taxes on premiums paid by way or reinsurance or retrocession; 12. Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except  tricycles;  tricycles; 13. Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided in the LGC  (i.e.  (i.e. Sec.  Sec. 143(c), LGC- municipalities may impose taxes on exporters); exporters ); 14. Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and duly registered cooperatives 15. Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and LGUs

Professional Tax Exercise or practice of profession requiring profession requiring government licensure examination

At such amount and reasonable classification as the sanggunian  panlalawigan  panlalawigan may impose

Not exceed P300

to

Professionals exclusively employed in the government shall be exempt from the payment of this tax.

Date of Payment: Payable annually on or before Jan 31 or before beginning the practice of the profession. Place of Payment: Province where he practices his profession or where the principal office is located.

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TAXATION LAW 

upon the local assessor by completely dispensing with his analysis and discretion which the LGC and the regulations require to be exercised. ( Allied ( Allied Banking Corporation v Quezon City )

Government Instrumentalities Exempt from RPT MIAA MCIAA PEZA

Philippine Reclamation Authority BCDA BSP

GSIS Cebu Port Authority Cagayan Port Authority

TARIFFS AND CUSTOMS Doctrine of Hot Pursuit

Balikbayan boxes

Flexible Tariff Clause

Customs laws may be enforced within the contiguous zone (24 zone (24 nautical miles within the baseline).

Balikbayan boxes are conditionally free importations.

In the interest of the general welfare and national security, the President, upon recommendation of NEDA: a) Increase, reduce or remove existing protective tariff rates of import duty, but in no case shall be higher than 100% ad valorem; b) Establish import quota or ban importation of any commodity as may be necessary; and c) Impose additional duty on all imports not exceeding 10% ad valorem, whenever necessary.

If customs laws of PH was violated within the contiguous zone, under the Doctrine of Hot Pursuit, law enforcement may pursue the violator even in the high seas but not within the EEZ (200 nautical miles) of another country.

Importation

Requisites a. Shall contain personal and household effects only b. Shall not be in commercial quantities nor quantities nor intended for barter, sale or for hire c. Value of which shall not exceed P150,000 d. Privilege may be availed up to 3 times in times in a calendar year

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TAXATION LAW

2. Having filed such goods declaration, the owner, importer, consignee or interested party after due notice, fails to pay the assessed duties, taxes and other charges thereon within 15 days from the date of final assessment; or 3. Having paid the assessed duties, taxes and other charges, the owner, importer or consignee or interested party after due notice, fails to claim the goods within 30 days from payment

Smuggling a. Fraudulent act of importing any goods into the Philippines; or b. The act of assisting in receiving, concealing, buying, selling, disposing or transporting such goods, with full knowledge that the same has been fraudulently imported ; or c. The fraudulent exportation of goods OUTRIGHT SMUGGLING An act of importing goods into the country without complete customs prescribed importation documents, or without being cleared by customs or other regulatory government agencies, for the purpose of evading payment of prescribed taxes, duties and other

TECHNICAL SMUGGLING Act of importing goods into the country by means of fraudulent, falsified or erroneous declaration of the goods to its nature, land, quality, quantity or weight, for the purpose of reducing or avoiding payment of prescribed taxes, duties and other charges

Elements of smuggling or illegal importation [MRS] 1. That the Merchandise must have been fraudulently or knowingly imported contrary to law; 2. That the defendant, if he is not the importer himself, must have Received, concealed, bought, sold or in any manner facilitated the transportation, concealment or sale of the merchandise; and 3. That the defendant must be Shown to have knowledge that the merchandise has been illegally imported.