Tax Reviewer

Taxation Law

General Principles in Taxation A. Definition and Concept of Taxation Taxation The power by which the sovereign raises revenue to defray the expenses of the government. B. Nature and Characteristics of Taxation Nature of the Power of Taxation (Mamalateo) The power to tax is inherent in the State, being an attribute of sovereignty. As an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. Being an inherent power, the legislature can enact laws to raise revenues even without the grant of said power in the Constitution. It must be noted that Constitutional provisions relating to the power of taxation do not operate as grants of power to the Government, but instead merely constitute as limitations upon a power which would otherwise be practically without limit. Nature or Characteristics or Attributes of the Power of Taxation: (Lim) 1. For public purpose 2. Inherently legislative 3. Subject to international comity or treaty 4. Exaction payable in money 5. Territorial 6. Not absolute because is exercise is subject to constitutional and inherent restrictions 7. Forced charge, imposition, contribution (NOTE: FIPINTE – Forced charge, imposition, contribution, Inherently legislative, Public Purpose, International Comity, Not absolute, Territorial, Exaction payable in money) CIR vs. Algue, Inc. (1988) Facts: Algue Inc. received a letter of assessment on delinquency income taxes in the amount of P83,183.85 for the years 1958 and 1959. Algue filed a letter of protest or request for reconsideration to the CIR. Later on, a warrant of distraint and levy was presented to Algue but such letter was refused to be received on the ground of a pending protest. In fact, it even presented a copy of a photostate showing that there was indeed a protest filed. Regardless of this however, the BIR did not take any action on the protest. Hence, Algue filed a petition for review with the CTA. Alyssa Africa

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It appears that P75,000 was disallowed by the CIR as an ordinary reasonable or necessary business expense of Algue. However, Algue claims that such expense served as promotional fees paid by it to certain individuals who helped them create the Vegetable Oil Investment Corporation of the Philippines and the purchase of properties of the Philippine Sugar Estate Development Company. It was able to establish that it was appointed as an agent of Philippine Sugar Estate Development Company to sell its properties and that pursuant to such authority certain individuals worked to form the Vegetable Oil Investment Corporation who likewise purchased the PSEDC properties. Algue received a P126,000 commission from the sale, P75,000 of which, was paid as promotional fees to the said individuals. Issue: Whether or not the Collector of Internal Revenue correctly disallowed the P75,000 deduction claimed by private respondent Algue as legitimate business expenses. Held: No, CIR was wrong for disallowing said deduction as it was a valid business expense of the company in favor of individuals which was duly proven and established by competent evidence. It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

Taxation Law

Roxas vs. CTA (1968) Facts: The Roxas brothers acquired agricultural lands from their grandparents. In order to make use of said lands, they formed a partnership called Roxas y Compania. After the Second World War, the tenants of their lands expressed their desire to purchase the land they are actually occupying. The government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among the landless persuaded the brothers to sell part of their land. They agreed to sell it and were paid in installment over the said properties. They reported 50% of the net gain from it for income tax purposes as a sale of capital asset held for more than one year provided for in Section 34 of the Tax Code. Upon assessment of the CIR however, the latter argued that they must be taxed as a real estate dealer liable to pay the corresponding fixed tax. Issue: Whether or not gain derived from the sale of the Nasugbu farm lands an ordinary gain, and is therefore, 100% taxable. Held: No, it is not an ordinary gain. Roxas y Cia is not a real estate dealer during the 10-year amortization period as the sale was only pursuant to the policy of the government to allocate lands to the landless. Hence, pursuant to Section 34 of the Tax Code, the lands sold to the farmers are capital assets, and the gain derived from the sale is capital tax subject to tax only to the extent of 50%. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. It does not conform with our sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call. Sison, Jr. vs. Ancheta (1984) Facts: Antero Sison was a regular taxpayer. He filed a suit for declaratory relief or prohibition proceeding questioning the validity of Section 1 of Batas Pambansa Blg. 135 which amends Section 21 of the NIRC of 1977 resulting to a change in tax rates on citizens or residents on their (a) taxable compensation income, (b) taxable net income, (c) Alyssa Africa

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royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross income. He alleged that the law is contrary to the equal protection, due process clause and the uniformity in taxation. His concern was that he was unduly discriminated because he was imposed higher tax rates on his professional income vis-à-vis those who have fixed income or salaried individual taxpayers. Issue:1. Whether or not the law is contrary to the Constitution on the basis of equal protection, due process, and uniformity in taxation. 2. Whether or not the imposition of tax rates based on income classification is oppressive. Held: 1. No, the law is not contrary to the Constitution. The due process clause cannot be invoked as the taxing statute was not shown to be so arbitrary. Laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. 2. No, it is not oppressive. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. Tan Tiong Bio vs. CIR (1962) Facts: Central Syndicate sent a letter to the CIR, telling the latter that it had purchased with the assumption of mortgage from Dee Hong Lue the entire stock of surplus properties which he had bought from Foreign Liquidation Commission. The Syndicate remitted the sum of P43,750 in behalf of Dee Hong Lue with the understanding that when the consideration of the sale is exacted, it would later be adjusted. The syndicate wrote another

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letter requesting a refund amounting to P1,103.28 for excess payment of sales tax due to the adjustment and reduction of the purchase price. However, upon investigation, it appears that the Syndicate would still be liable for deficiency sales tax amounting to P33,797 and a surcharge in addition to the amount of P43,750 which the Syndicate deposited in the name of Dee Hong Lue as sales tax due since it appears that the Syndicate is the true importer and original seller of the goods, and must be the one liable to pay sales tax. The case was elevated to the CTA but the claim was denied. When the Collector filed a motion requiring the syndicate to file a bond to guarantee payment of the tax assessed, the CTA denied this on the ground that the Syndicate is already a nonexisting entity due to the expiration of its corporate existence. Issue: Whether or not the sales tax in question can be enforced against its successors-in-interest who are the present petitioners Held: Yes, it can be enforced against its successors-in-interest or its stockholders. Recognized are the following rules in American jurisprudence: The dissolution of a corporation does not extinguish the debts due or owing to it. A creditor of a dissolve corporation may follow its assets, as in the nature of a trust fund, into the hands of its stockholders. An indebtedness of a corporation to the federal government for income and excess profit taxes is not extinguished by the dissolution of the corporation. And it has been stated, with reference to the effect of dissolution upon taxes due from a corporation, "that the hands of the government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the corporation, hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such action than would the physical death of an individual prevent the government from assessing taxes against him and collecting them from his administrator, who holds the property which the decedent had formerly possessed". Considering that the Central Syndicate realized from the sale of the surplus goods a net profit of P229,073.83, and that the sale of said goods was the only transaction undertaken by said syndicate, there being no evidence to the contrary, Alyssa Africa

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the conclusion is that said net profit remained intact and was distributed among the stockholders when the corporation liquidated and distributed its assets on August 15, 1948, immediately after the sale of the said surplus goods. Petitioners are therefore the beneficiaries of the defunct corporation and as such should be held liable to pay the taxes in question. However, there being no express provision requiring the stockholders of the corporation to be solidarily liable for its debts which liability must be express and cannot be presumed, petitioners should be held to be liable for the tax in question only in proportion to their shares in the distribution of the assets of the defunct corporation. The decision of the trial court should be modified accordingly. C. Purpose of Taxation 1. To raise revenues To defray the expenses of the government 2. Regulatory/special To provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. 3. Others a. Promotion of General Welfare – to promote the general welfare of the people b. Reduction of social inequality – progressive system of taxation prevents the undue concentration of wealth in the hands of a few individuals c. Encourage economic growth by granting incentives and exemptions d. Protectionism – to protect local industries from foreign competition Philippine Airlines, Inc vs. Edu (1988) Facts: Commissioner Romeo issued a regulation requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees. PAL protested and refused to register its motor vehicles on the ground that based on a previous ruling, registration fees are in reality taxes from the payment of which PAL is exempt by virtue of legislative franchise. The refund was denied based on the ruling Republic vs. Philippine Rabbit Bus Lines which explained that motor vehicle registration fees are regulatory and not revenue measures and therefore, do not come within the exemption. PAL filed a case against the LTC Commissioner but the trial court dismissed the complaint.

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Issue: Whether or not the nature of motor vehicle registration fees are that of taxes rather than regulatory fees. Held: Yes, fees for motor vehicle registration are taxes rather than regulatory fees. It is quite apparent that vehicle registration fees were originally simple exceptional, intended only for rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modem life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Without changing the earlier deputy. of registration payments as "fees," their nature has become that of "taxes." In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program. Osmena vs. Orbos (1993) Facts: President Marcos issued PD 1956 creating a Special Account in the General Fund designated as the Oil Price Stabilization Fund (OPSF). The OPSF was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from exchange rate adjustments and from increases in the world market prices of crude oil. The OPSF was then reclassified as a “trust liability account” in virtue of EO 1024 and ordered its release from the National Treasury to the Ministry of Energy. President Aquino amended PD 1956 by promulgating EO 137 expanding the grounds for reimbursement to oil companies for possible cost under recovery incurred as a result of the reduction of domestic prices of petroleum products, the amount of the under recovery being left for the determination of the Ministry of Finance. Senator Osmena assails the constitutionality of a provision in PD 1956 on the ground that it empowers the Energy Regulatory Board to approve the increase of fuel prices or impose additional amounts on petroleum products the proceeds of which shall accrue to the OPSF thus creating an undue and invalid delegation of legislative power to tax. Alyssa Africa

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Issue: Whether or not there is undue delegation of the legislative power of taxation. Held: No, there is no undue delegation of legislative power. The Court finds that the provision conferring the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by which the authority must be exercised. In addition to the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic pump rates, § 8(c) of P.D. 1956 expressly authorizes the ERB to impose additional amounts to augment the resources of the Fund. The Court is cited to this requirement by the petitioner on the premise that what is involved here is the power of taxation; but as already discussed, this is not the case. What is here involved is not so much the power of taxation as police power. Although the provision authorizing the ERB to impose additional amounts could be construed to refer to the power of taxation, it cannot be overlooked that the overriding consideration is to enable the delegate to act with expediency in carrying out the objectives of the law which are embraced by the police power of the State. The interplay and constant fluctuation of the various factors involved in the determination of the price of oil and petroleum products, and the frequently shifting need to either augment or exhaust the Fund, do not conveniently permit the setting of fixed or rigid parameters in the law as proposed by the petitioner. To do so would render the ERB unable to respond effectively so as to mitigate or avoid the undesirable consequences of such fluidity. As such, the standard as it is expressed, suffices to guide the delegate in the exercise of the delegated power, taking account of the circumstances under which it is to be exercised. For a valid delegation of power, it is essential that the law delegating the power must be (1) complete in itself, that is it must set forth the policy to be executed by the delegate and (2) it must fix a standard — limits of which are sufficiently determinate or determinable — to which the delegate must conform. The standard, as the Court has already stated, may even be implied. In that light, there can be no ground upon which to sustain the petition, inasmuch as the challenged law sets forth a determinable standard which guides the exercise of the power granted to the ERB. By the same token, the proper exercise of the delegated power may be

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tested with ease. It seems obvious that what the law intended was to permit the additional imposts for as long as there exists a need to protect the general public and the petroleum industry from the adverse consequences of pump rate fluctuations. "Where the standards set up for the guidance of an administrative officer and the action taken are in fact recorded in the orders of such officer, so that Congress, the courts and the public are assured that the orders in the judgment of such officer conform to the legislative standard, there is no failure in the performance of the legislative functions." This Court thus finds no serious impediment to sustaining the validity of the legislation; the express purpose for which the imposts are permitted and the general objectives and purposes of the fund are readily discernible, and they constitute a sufficient standard upon which the delegation of power may be justified. Caltex Phils., Inc. vs. COA (1992) Facts: On February 2, 1989, the COA sent a letter to Caltex Philippines, Inc. directing the latter to remit to the OPSF its collection, excluding that unremitted for the years 1986, and 1988, of the additional tax on petroleum products authorized under Section 8 of PD 1956. On March 9, 1989, the COA sent another letter with a breakdown of remittances to be made including the interest and surcharges. Caltex requested COA for an early release of its reimbursement certificates from the OPSF covering the claims with the Office of Energy Affairs since June 1987 up to March 1989 invoking in support thereof COA Circular No. 89-299 but the COA denied the petitioner’s request. Caltex submitted a proposal for the payment of the collections and the recovery claims which COA approved. However, COA prohibited Caltex from offsetting remittances and reimbursements. Issue: Whether or not the OPSF contributions are can be offset with reimbursements. Held: No, the OPSF contributions are still for public purpose though they go to a special fund of the government and thus cannot be offset. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened Alyssa Africa

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industry which is affected with public interest as to be within the police power of the state. There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for wage increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime concern which the state, via its police power, may properly address. It is settled that a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. D. Principles of Sound Tax System 1. Fiscal Adequacy The sources of revenue must be adequate to meet government expenditure and their variation regardless of business conditions. 2. Administrative Feasibility Tax laws should be capable of convenient, just and effective administration. They should be clear, concise and capable of proper and economic enforcement, convenient as to time and manner of payment and not burdensome. 3. Theoretical Justice Taxes levied must be based upon the ability of the taxpayer to pay; it must not be unduly burdensome, confiscatory or discouraging to business. It must be equitable and uniform. E. Theory and Basis of Taxation 1. Lifeblood Theory The existence of government is a necessity; it cannot exist nor endure without the means to pay its expenses; and for those means, the government has the right to compel all its citizens and property within its limits to contribute in the form of taxes. 2. Necessity Theory The existence of the government is a necessity and it cannot continue without means to support itself.

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3. Benefits-Protection Theory The government and the people have the reciprocal and mutual duties of support and protection to one another. 4. Jurisdiction over subject and objects The power to tax can only be exercised within the territorial jurisdiction of a taxing authority except when there exists privity of relationship between the taxing state and the object of tax. Gomez vs. Palomar (1968) Facts: To help raise funds for the Philippine Tuberculosis Society, RA 1635 as amended by RA 2631 was enacted which directs the Director of Posts to order a yearly printing and issuance of semi-postal stamps of different denominations with face value showing the regular postage charge plus the additional amount of 5 cents for the said purpose during the period of August 19 to September 30. The proceeds for the sale will constitute a special fund to be expended by the Philippine Tuberculosis Society. Benjamin Gomez questioned the constitutionality of the statute on the ground that it violates equal protection clause. Issue: Whether or not the statute is violative of the equal protection clause of the Constitution. Held: No, it does not violate the equal protection clause. We are not one to invalidate legislation on equal protection grounds except by the clearest demonstration that it sanctions invidious discrimination, which is all that the Constitution forbids. The remedy for unwise legislation must be sought in the legislature. Now, the classification of mail users is not without any reason. It is based on ability to pay, let alone the enjoyment of a privilege, and on administrative convenience. In the allocation of the tax burden, Congress must have concluded that the contribution to the anti-TB fund can be assured by those whose who can afford the use of the mails. The classification is likewise based on considerations of administrative convenience. For it is now a settled principle of law that "consideration of practical administrative convenience and cost in the administration of tax laws afford adequate ground for imposing a tax on a well-recognized and defined class." In the case of the anti-TB stamps, undoubtedly, the single most important and Alyssa Africa

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influential consideration that led the legislature to select mail users as subjects of the tax is the relative ease and convenience of collecting the tax through the post offices. The small amount of five centavos does not justify the great expense and inconvenience of collecting through the regular means of collection. On the other hand, by placing the duty of collection on postal authorities the tax was made almost self-enforcing, with as little cost and as little inconvenience as possible. And then of course it is not accurate to say that the statute constituted mail users into a class. Mail users were already a class by themselves even before the enactment of the statue and all that the legislature did was merely to select their class. Legislation is essentially empiric and Republic Act 1635, as amended, no more than reflects a distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences that exist in fact is living law; to disregard them and concentrate on some abstract identities is lifeless logic." Lorenzo vs. Posadas (1937) Facts: During the probate of the will of Thomas Henley, Moor was the trustee until February 29, 1932, when he resigned and Pablo Lorenzo was appointed in his stead. However, while the case was still pending with the court, the CIR assessed the estate and ordered Lorenzo to pay delinquent inheritance taxes. Lorenzo paid inheritance taxes under protest and on October 4, 1932, brought an action against Juan Posadas Jr, the Collector of Internal Revenue to refund the inheritance taxes paid. Issue: Whether or not the payment of inheritance taxes should have been suspended upon the appointment of Lorenzo. Held: No, it must not be suspended. The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer period which does not offend the rule against petuities. The collection of the tax would then be left to the will of a private

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individual. The mere suggestion of this result is a sufficient warning against the acceptance of the essential to the very existence of government. The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. While courts will not enlarge, by construction, the government's power of taxation they also will not place upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distinctions. When proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government. That taxes must be collected promptly is a policy deeply entrenched in our tax system. Thus, no court is allowed to grant injunction to restrain the collection of any internal revenue tax F. Aspects or Stages of Taxation 1. Levy or imposition It cannot be delegated; this usually includes the (1) selection of coverage, object, nature, extent and situs (CONES) in taxation, (2) its purpose and (3) prescribing the rules in taxation in general 2. Assessment and Collection Delegable via a valid statute; act of administration and implementation of the tax law by executive through its administrative agencies 3. Payment of the Tax Act of compliance by the taxpayer, including such options, schemes or remedies as may be legally available to him. 4. Refund Recovery of any tax alleged to have been erroneously or illegally assessed or collected or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected. G. Tax compared to the following: 1. Police Power and Eminent Domain

Definition

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Power of Taxation

Police Power

Power of Eminent Domain

Power to take property for the support of the

Power to enact laws to promote the general welfare

Power to take private property for public use upon payment

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government and for public purpose

Purpose Persons Affected

Revenue and support of the government Community of class of individuals

of the people; wider in application because it is the general power to make laws Promote welfare Community class individuals

of of

of just compensation

Property is taken for public use Operates on the owner of the property Government or private individuals or corporations There must be due delegation before local government or private party may exercise it There is transfer of right to property whether it be of ownership or lesser right The person affected receives just compensation for the property taken from him

Authority that exercises the power

Government

Government

Necessity of Delegation

No delegation is necessary because it is inherent

There must be due delegation before local government may exercise it

Effect or Transfer of Property Rights

Money paid as taxes becomes part of public funds

There is no transfer of title, at most there is restraint on the injurious use of property

Benefits

Presumption of receipt of benefits to every person

No direct and immediate benefits received by the person affected

Limitation

The exercise is constitutionall y and inherently limited or restricted

Limited to public interest and the requirement of due process

Limited to public purpose and just compensation

No limit

Sufficient to cover cost of regulation

No imposition, the owner is paid the FMV of his property

Amount of Imposition Importanc e

Relationship to the Constitution

Most important of the three Inferior to the “Nonimpairment clause” of the Constitution and cannot be exercised to impair the “Obligations and Contracts” clause

Most superior

Superior of the “Nonimpairment clause” of the Constitution

Superior and may override the nonimpairment clause because the welfare of the State is superior to any private contract

2. Toll Fee A consideration which is paid for the use of a property which is of a public nature i. Sec. 155 of the Local Government Code Section 155. Toll Fees or Charges – The sanggunian concerned may prescribe the terms and conditions and fix the rates for the

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imposition of toll fees or charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or telecommunication unit concerned: Provided, That no such toll fees or charges shall be collected from officers and enlisted men of the Armed Forces of the Philippines and members of the Philippine National Police on mission, post office personnel delivering mail, physically-handicapped, and disabled citizens who are 65 years or older. When public safety and welfare so requires, the sanggunian concerned may discontinue the collection of the tolls, and thereafter the said facility shall be free and open for public use. Persons exempted from payment of toll fees: 1. Officers and enlisted men of the Armed Forces of the Philippines; 2. Members of the Philippine National Police on mission; 3. Post office personnel delivering mail; 4. Physically-handicapped; and 5. Disabled citizens who are 65 years or older Tax

Toll

Demand of sovereignty Support for government

the

Imposed only by the government Base on governmental needs

Demand of proprietorship Compensation for the use of somebody else’s property Maybe imposed by the government or by private individuals Determined by the cost of property or improvement thereon

Diaz vs. Secretary of Finance (2011) Facts: Issue: Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on services; Held: In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. 27 Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public Alyssa Africa

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facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership. Parenthetically, 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 burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the seller’s liability but merely the burden of the VAT. Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. 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 good, property or service. 3. License Fees or Charges Imposed in the exercise of police power for purposes of regulation Tax Purpose

Revenue purpose

Source of power

Taxing power of the government

Amount

Subject or object of imposition Revocability Scope When imposed Basis of computation Nature Limitation

No limit Person, properties, business, rights, interests, privileges, acts and transactions Nature of permanence Power to tax includes the power to license Post-activity imposition Current data Self-assessing Subject to

License Purposes of regulation Police power of the government Has limit based on the necessity to carry out the regulation Required for the commencement of a business or profession or exercise of a right/privilege Always revocable Does not include the power to tax Pre-activity imposition Preceding year’s quarter’s data, if new or business, based on capitalization Not self-assessing Subject to the 3

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Exemption

constitutional, inherent and contractual limitations

limitations because it is an exercise of police power to guard and safeguard the interest and welfare of the public

Exemption from tax does not include exemption from regulatory fees

Exemption from regulatory fees is not allowed

Test in Determining Whether the Imposition is a Tax or a Fee If the generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax, but if regulation is the primary purpose, the fact that incidental revenue is also obtained does not make the imposition a tax. Importance of Distinction of Tax from Fee 1. The government instrumentality that imposes the exaction may have no authority to collect the tax but is authorized to collect the fees; 2. The person, who is required to pay the exaction, may be exempt from tax but not from the payment of fees or vice versa; 3. For income tax purposes, the tax not fees, may be claimed as income tax deduction Philippine Airlines, Inc vs. Edu (1988) Facts: Commissioner Romeo issued a regulation requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees. PAL pretested and refused to register its motor vehicles on the ground that based on a previous ruling, registration fees are in reality taxes from the payment of which PAL is exempt by virtue of legislative franchise. The refund was denied based on the ruling Republic vs. Philippine Rabbit Bus Lines which explained that motor vehicle registration fees are regulatory and not revenue measures and therefore, do not come within the exemption. PAL filed a case against the LTC Commissioner but the trial court dismissed the complaint. Issue: Whether or not the nature of motor vehicle registration fees are that of taxes rather than regulatory fees. Held: Yes, fees for motor vehicle registration are taxes rather than regulatory fees. Alyssa Africa

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It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modem life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Without changing the earlier deputy. of registration payments as "fees," their nature has become that of "taxes." In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program. Angeles University Foundation vs. City of Angeles (2012) Facts: Petitioner plans to build a Medical Center but refuses to pay for its building permit on the ground that it is exempted from payment of tax. Issue: Whether or not the petitioner is exempt from the payment of building permit and related fees imposed under the National Building Code. Held: A building permit fee is a regulatory imposition is highlighted by the fact that in processing an application for a building permit, the Building Official shall see to it that the applicant satisfies and conforms with approved standard requirements on zoning and land use, lines and grades, structural design, sanitary and sewerage, environmental health, electrical and mechanical safety as well as with other rules and regulations implementing the National Building Code.[24] Thus, ancillary permits such as electrical permit, sanitary permit and zoning clearance must also be secured and the corresponding fees paid before a building permit may be issued. And as can be gleaned from the implementing rules and regulations of the National Building Code, clearances from various government authorities exercising and enforcing regulatory functions affecting buildings/structures, like local government units, may be further required before a building permit may be issued. Since building permit fees are not charges on property, they are not impositions from which petitioner is exempt.

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City of Iloilo vs. Villanueva (1959) Facts: An ordinance was imposed by the city which sought to collect from the spouses an annual license tax fee for the operation of their apartments. The spouses refused to pay the same on the ground that it is violative of the constitutional provisions requiring uniformity of taxation contending that it is oppressive, unreasonable and discriminatory. Issue: Whether or not the city, in imposing the licensee is an exercise of its taxing power. Held: It can therefore be said that in order that a license fee may be considered merely as a regulatory measure, it must be only "of a sufficient amount to include the expenses of issuing the license and the cost of the necessary inspection or police surveillance, taking into account not only the expense of direct regulation but also incidental consequences.?' On the other hand, if the fee charged is a revenue measure, the power to exact such fee "must be expressly granted by charter or statute and is not to be implied from the conferred power to license and regulate merely." A cursory reading of the ordinance in question would at once reveal that the license fees charged therein are not merely for regulation but for revenue, because the fee of P24 per annum charged therein for every apartment far exceeds "the expense of issuing the license", plus "the cost of inspection or police surveillance", and other incidental expenses. Thus, for the first house which consists of 11 apartments, the defendants would have to pay a license fee of P264 annually; for the second house which consists of 14 apartments, the fee would be P308 annually; for the third house which consists of 14 apartments, the fee would be P308 annually; for the third house which consists of 7 apartments, and the fourth which consists of 2 apartments, the fee would be P2156 annually. All in all, defendants would have to pay a license tax fee amounting to P888 per annum. This, in addition to the fees that may be exacted from many other residents similarly situated, would constitute a sizeable sum of revenue which would engross the coffers of the City. These fees cannot therefore be considered as merely for regulation purposes as contended. It is however claimed that even if the fees exacted in the ordinance be considered as taxes for purposes of revenue still their exaction may be justified because the same comes within the power granted to the city by its Charter. And in that Alyssa Africa

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advocacy the city invokes section 21, paragraph j, of the Charter, which gives the city the power "To tax, fix the license fee for, and regulate hotels, restaurants, refreshment parlors, cafes, lodging houses, boarding houses, livery garages, public warehouses, pawnshops, theaters, cinematographs." The city claims that a tenement house can be considered as one belonging to the group of hotels, lodging houses, or boarding houses therein enumerated. We disagree. It is well-settled that a municipal corporation, unlike a sovereign state, is clothed with no inherent power of taxation. "The charter or statute must plainly show an intent to confer that power or the municipality cannot assume it. And the power when granted is to be construed strictissimi juris. Any doubt or ambiguity arising out of the term used in granting that power must be resolved against the municipality. Inferences, implications, deductions — all these — have no place in the interpretation of the taxing power of a municipal corporation." (Icard vs. City of Baguio, 83 Phil., 870; 46 Off. Gaz. 11 Sup., 320; Medina vs. City of Baguio, 91 Phil., 854; 48 Off. Gaz., [11] 4769; Yu vs. City of Lipa, 99 Phil., 975; 54 Off . Gaz., [13] 4055. And it not appearing that the power to tax owners of tenement houses is one among those clearly and expressly granted to the City of Iloilo by its Charter, the exercise of such power cannot be assumed and hence the ordinance in question is ultra vires insofar as its taxes a tenement house such as those belonging to defendants. 4. Special Assessment A kind of property tax confined to local imposition upon improvements in its immediate vicinity and levied with reference to special benefits to the property assessed. i. Sec. 240 of the Local Government Code Section 240. Special Levy by Local Government Units – A province, city or municipality may impose a special levy on the lands comprised within its territorial jurisdiction specially benefited by public works projects or improvements funded by the local government unit concerned: Provided, however, That the special levy shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith: Provided, further, That the special levy shall not apply to lands exempt from basic real property tax and the remainder of the

Taxation Law

land portions of which have been donated to the local government unit concerned for the construction of such projects or improvements.

recovery of cost and/or maintenance of improvement

Limitations: 1. Applicable only to lands within its territorial jurisdiction; 2. Land must be specially benefited by public works projects or improvements funded by the LGU concerned; and 3. Special Levy must not exceed 60% of the actual cost of the project or improvement; Exemptions: 1. Lands exempt from basic real property tax; and 2. Remainder of the land portions of which have been donated to the local government unit concerned for the construction of such projects or improvements. Tax Levied on business, interests, transactions, rights, persons, properties or privileges May be made a personal liability of the person assessed Based on necessity with no hope of direct or immediate benefit to the taxpayer Power to tax carried with it the power to levy special assessment Exemption from taxes does not include exemption from special assessment An imposition of a charge on all property, real and personal in a prescribed area is a tax and not an assessment, although the purpose is to make a local improvement on a street or highway Of general application Alyssa Africa

Special Assessment Levied on Land Cannot be made the personal liability of the person assessed, because it is the land that answers for the liability Based wholly benefits received

on

Exemption is qualified

May be imposed by the national or local government

Republic vs. Bacolod Murcia Milling Co. Inc. (1999) (Digest from Berne Guerrero) Facts: RA 632 created the Philippine Sugar Institute, a semi-public corporation. In 1951, the Institute Taxation Law I, 2004 ( 13 ) Digests (Berne Guerrero) acquired the Insular Sugar Refinery for P3.07 million payable in installments from the proceeds of the sugar tax to be collected under RA 632. The operation of the refinery for 1954 to 1957 was disastrous as the Institute suffered tremendous losses. Contending that the purchase of the refinery with money from the Institute’s fund was not authorized under RA 632, and that the continued operation of the refinery is inimical to their interest, Bacolod-Murcia Milling Co., Ma-ao Sugar Central, Talisay-Silay Milling Co. and the Central Azucarera del Danao refused to continue with their contribution to said fund. The trial court found them liable under RA 632. Issue: Whether the taxpayers may refuse to pay the special assessment, allegedly distinct from an ordinary tax which no one can refuse to pay. Held: The nature of a “special assessment” similar to the case has been discussed and explained in Lutz vs. Araneta. The special assessment or levy for the Philippine Sugar Institute (Philsugin) Fund is not so much an exercise of the power of taxation, nor the imposition of a special assessment, but the exercise of police power for the general welfare of the entire country. It is, therefore, an exercise of a sovereign power which no private citizen may lawfully resist. Section 2a of the Charter authorizing Philsugin to “conduct research work for the sugar industry in all its phases, either agricultural or industrial, for the purpose of introducing into the sugar industry such practices or processes that will reduce the cost of production and achieve greater efficiency in the industry, justifies the acquisition of the refinery in question. The financial loss resulting from the operation thereof is no means an index that the industry did not profit therefrom, as other gains of a different nature (such as experience) may have been realized. 5. Toll Fees ( see no. 2; repeated in the Syllabus)

Exceptional application

for

in the

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6. Customs Duties

Taxation Law

Imposed on goods that are imported into or exported from our country; used interchangeably with tariff. Tariff – duties payable on goods imported or exported Notable Distinction: Tariff/Customs Duties.

Tax

is

broader

than

Garcia vs. The Executive Secretary (1992) Facts: Issue: Held: Customs duties which are assessed at the prescribed tariff rates are very much like taxes which are frequently imposed for both revenueraising and for regulatory purposes. Thus, it has been held that "customs duties" is "the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country." The levying of customs duties on imported goods may have in some measure the effect of protecting local industries — where such local industries actually exist and are producing comparable goods. Simultaneously, however, the very same customs duties inevitably have the effect of producing governmental revenues. Customs duties like internal revenue taxes are rarely, if ever, designed to achieve one policy objective only. Most commonly, customs duties, which constitute taxes in the sense of exactions the proceeds of which become public funds — have either or both the generation of revenue and the regulation of economic or social activity as their moving purposes and frequently, it is very difficult to say which, in a particular instance, is the dominant or principal objective. In the instant case, since the Philippines in fact produces ten (10) to fifteen percent (15%) of the crude oil consumed here, the imposition of increased tariff rates and a special duty on imported crude oil and imported oil products may be seen to have some "protective" impact upon indigenous oil production. For the effective, price of imported crude oil and oil products is increased. At the same time, it cannot be gainsaid that substantial revenues for the government are raised by the imposition of such increased tariff rates or special duty. 7. Debt Tax Based on law Not assignable Alyssa Africa

Debt Based on contract Assignable Page 12

Non-payment covers imprisonment except poll tax as it is sanctioned under the law Generally, not subject to set-off Does not earn interest except when delinquent Generally money

payable

in

Prescriptive periods are those provided under the NIRC

No imprisonment non-payment

for

Subject to set-off Draws interest when stipulated or when in default May be paid in cash or in kind Prescriptive periods are those provided under the Civil Code or Rules of Court

When is tax considered a debt? a. when the tax is secured by a bond b.. when its collection is being enforced by court action c. when the tax is the subject of a compromise agreement validly entered into between the government and the taxpayer d. interest on tax delinquency is considered as interest on indebtedness Consequence if a tax is a debt? a. When taxes are considered debts, the prescriptive periods for their collection are governed by those provided in the general laws (Civil Law and Rules of Court) and NOT those provided under the Tax Code. b. In case of an appeal, it is the Court of Appeals that has jurisdiction and not the Court of Tax Appeals i. Rule on Compensation under the Civil Code (Art. 1279) Article 1279. In order that compensation may be proper, it is necessary: 1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; 2. That both debts consist in a sum of money, or if the things due or consumable, they be of the same kind, and also of the same quality if the latter has been stated; 3. That the two debts be due; 4. That they be liquidated and demandable; 5. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

Taxation Law

ii. Are Taxes Subject to Set-Off? In taxation, the concept of set-off arises where a taxpayer is liable to pay tax but the government for one reason or another, is indebted to the said taxpayer. General Rule: No set-off is admissible against the demands for taxes levied for general or local governmental purposes Reason: Taxes and debts are of different nature and character. The taxes assessed are the obligations of the taxpayer arising from law, while the money judgment against the government is an obligation arising from contract, whether express or implied Exception: When the set off took place because both the claim of the Government for inheritance taxes and the claim of the estate for services rendered have already become overdue and demandable and fully liquidated. Further, an amount for the claim of the estate had already been appropriated by the government by virtue of a law. Francia vs. IAC (1988) Facts: Petitioner contends that his property must not have been auctioned due to non-payment of real estate taxes on the ground that the government owed him money arising from the expropriation of his land. He contends that the claims should have been set-off by operation of law. Issue: Whether or not there can be off-setting of taxes against his outstanding claim from the government. Held: We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax

obligation had been set-off by operation of law as of October 15, 1977. There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other; xxx xxx xxx (3) that the two debts be due. xxx xxx xxx This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that: A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required. ..." We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the governmental body not included in the tax levy. Philex Mining vs. CIR (1988)

Alyssa Africa

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Taxation Law

Facts: Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities. Issue: Whether or not the tax credit may be applied against tax liabilities. Held: We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. 27 Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities. Domingo vs. Garlitos (1963) (Digest from Berne Guerrero) Facts: In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final and executory the order of the Court of First Instance of Leyte for the payment of estate and inheritance taxes, charges and penalties amounting to P40,058.55 by the Estate of the late Walter Scott Price. The petition for execution filed by the fiscal, however, was denied by the lower court. The Court held that the execution is unjustified as the Government itself is indebted to the Estate for 262,200; and ordered Alyssa Africa

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the amount of inheritance taxes be deducted from the Government’s indebtedness to the Estate. Issue: Whether a tax and a debt may be compensated. Held: The court having jurisdiction of the Estate had found that the claim of the Estate against the Government has been recognized and an amount of P262,200 has already been appropriated by a corresponding law (RA 2700). Under the circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with Article 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount. Air Canada vs. CIR (2016) Facts: Issue: Held: Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead for the regular 32% tax on its taxable income received from sources within the Philippines. Its determination of petitioner's liability for the 32% regular income tax was made merely for the purpose of ascertaining petitioner's entitlement to a tax refund and not for imposing any deficiency tax. In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax on the ground that the tax liabilities were off-set against any alleged claim the taxpayer may have against the government. Such would merely be in keeping with the basic policy on prompt collection of taxes as the lifeblood of the government. Here, what is involved is a denial of a taxpayer's refund claim on account of the Court of Tax Appeals' finding of its liability for another tax in lieu of the Gross Philippine Billings tax that was allegedly erroneously paid. H. Other Principles and Doctrines 1. Double Taxation The same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same or subject matter, for the same purpose, by the same State, Government or taxing authority, within the same jurisdiction or

Taxation Law

taxing district, during the same taxing period, and they must be the same kind or character of tax. i. Kinds a. Direct duplicate taxation – happens when the same subject/object of taxation is taxed TWICE when it should only be taxed once; prohibited and violative of the constitutional provision on uniformity and equity b. Indirect duplicate taxation – No constitutional violation; taxing the same property by 2 different taxing authorities ii. Modes of Eliminating Double Taxation Methods used in Tax Treaties 1. Setting out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states. However, for other items of income or capital both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 2. Whenever the state of source is given a full or limited right to tax together with the state of residence. The treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. Methods of Relief 1. Exemption Method Income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer’s remaining income or capital. 2. Credit Method Although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. Remedies Against Double or Multiplicity of Taxation: a. Provision for tax exemption b. Allowance of tax credit for foreign taxes paid c. Allowance of deduction for foreign taxes paid d. Application of Principle of Reciprocity e. Enter into treaties and/or agreement with foreign government; f. Allowance and/or application for tax incentives, and Alyssa Africa

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g. Reduction of Philippine Tax Rate 1. RMO No. 72-2010 dated August 25, 2010 Provides methods of reliefs from double taxation on interest income, dividend income, capital gains, royalties and business profits through the processing of Tax Treaty Relief Applications. CIR vs. Solidbank (2003) Facts: Issue: Whether or not the 20% final withholding tax on a bank’s interest income forms part of the taxable gross receipts in computing the 5% gross receipts tax. Held: Double taxation means taxing the same property twice when it should be taxed only once; that is, "x x x taxing the same person twice by the same jurisdiction for the same thing."117 It is obnoxious when the taxpayer is taxed twice, when it should be but once.118 Otherwise described as "direct duplicate taxation,"119 the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character.120 First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. A tax based on receipts is a tax on business rather than on the property; hence, it is an excise121 rather than a property tax.122 It is not an income tax, unlike the FWT. In fact, we have already held that one can be taxed for engaging in business and further taxed differently for the income derived therefrom.123 Akin to our ruling in Velilla v. Posadas,124 these two taxes are entirely distinct and are assessed under different provisions. Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor

Taxation Law

withheld, but is paid only after every taxable quarter in which it is earned. Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a percentage tax not subject to withholding. Nursery Care Corporation vs. Acevedo (2014) Facts: The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila.3 At the same time, the City of Manila imposed additional taxes upon the petitioners pursuant to Section 21 ofthe Revenue Code of Manila,4 as amended, as a condition for the renewal of their respective business licenses for the year 1999. Section 21 of the Revenue Code of Manila stated: Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under the NIRC - On any of the following businesses and articles of commerce subject to the excise, value-added or percentage taxes under the National Internal Revenue Code, hereinafter referred to as NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross sales or receipts of the preceding calendar year is hereby imposed: A) On person who sells goods and services in the course of trade or businesses; x x x PROVIDED, that all registered businesses in the City of Manila already paying the aforementioned tax shall be exempted from payment thereof. Issue: Whether or not there was double taxation. Held: Double taxation means taxingthe same property twice when it should be taxed only once; that is, "taxing the same person twice by the same jurisdictionfor the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character. Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and Alyssa Africa

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21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute tocity revenues; (3) by the same taxing authority – petitioner Cityof Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business. The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities to impose a local business tax, and to which any local business tax imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc.of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc.to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or percentagetax under the NIRC, and that are "not otherwise specified in preceding paragraphs." In the same way, businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC]. CIR vs. SC Johnson and Sons, Inc. (1999) Facts: Issue: Held: As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the Philippines — a crucial economic goal for developing countries. 23 The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax

Taxation Law

burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose muchneeded revenues to another country. At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause. The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored" among other countries. 25 The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. Alyssa Africa

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Deutsche Bank vs. AG Manila Branch (2013) Facts: Issue: Held: Our Constitution provides for adherence to the general principles of international law as part of the law of the land.15 The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith.16 More importantly, treaties have the force and effect of law in this jurisdiction.17 Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate." Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double taxation, which is why they are also known as double tax treaty or double tax agreements. "A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken."20 Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. More so, when the RPGermany Tax Treaty does not provide for any prerequisite for the availment of the benefits under said agreement.

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Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period. We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. 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. 2. Taxpayer’s suit A class suit brought by one or more taxpayers on behalf of themselves and as representation of a class of taxpayers situated within a taxing district and for the purpose of seeking relief from illegal or unauthorized acts of the government or its tax officials which acts are injurious to their common interest as taxpayers. Mamba vs. Lara (2009) Facts: Issue: Held: A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law. A person suing as a taxpayer, however, must show that the act complained of directly involves the illegal disbursement of public funds derived from taxation. He must also prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury because of the enforcement of the questioned statute or contract. In other words, for a taxpayers suit to prosper, two requisites must be met: (1) public Alyssa Africa

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funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly affected by the alleged act. In light of the foregoing, it is apparent that contrary to the view of the RTC, a taxpayer need not be a party to the contract to challenge its validity. As long as taxes are involved, people have a right to question contracts entered into by the government. 3. Kinds of Taxes Classification or Kinds of Taxes: a. As to subject matter: i. Personal, poll or capitation – tax of a fixed amount imposed upon persons residing within a specified territory, whether citizens or not without regard to their property, occupation or business in which they may be engaged ii. Property – tax imposed on property, whether real or personal, in proportion either to its value or some other reasonable rule of apportionment iii. Excise or privilege – charge imposed upon the performance of an act, the enjoyment of a privilege or engaging in an occupation, profession or business. b. As to who bears the burden and incidence: i. Direct – taxes which are exacted from the very person who, it is intended or desired, should pay them. The liability for the payment of tax as well as the impact of the tax falls on the same person. ii. Indirect – tax wherein the incidence or liability for the payment falls on one person but the burden may be shifted or passed on to another not as a tax but as part of the purchase price c. As to purpose: i. General, fiscal or revenue – tax imposed for the general or ordinary purposes of the Government, to raise revenue for governmental needs; ii. Special regulatory or sumptuary – tax imposed for a special purpose, to achieve some social or economic ends irrespective of whether revenue is actually raised or not d. As to how amount is determined i. Specific – tax of a fixed amount imposed by the head or number or by some standard of weight or measurement; it requires no valuation other than a listing or classification of the objects to be taxed

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ii. Ad Valorem – tax of a fixed portion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined iii. Mixed – tax having both the characteristics of specific tax and ad valorem tax

e. As to taxing authority i. National – levied by the National Government through Congress, and administered by the BIR or the BOC ii. Local or Municipal – levied by the LGUs through their respective Sanggunians, and administered by the local executive government through the local treasurer f. As to rate i. Progressive or graduated – the tax rate increases as the tax base or bracket increases ii. Regressive – the tax rate decreases as the tax base increases iii. Proportionate – tax rate is based on a fixed percentage of the amount of the property receipts or other bases to be taxed 4. Construction and Applicability of Tax Laws Nature of Tax Laws 1. Not political in character – effective even under belligerent occupation 2. Civil in nature and not penal in character – not subject to ex post facto law prohibitions Construction of Tax Laws: 1. Prospective in operation 2. Legislative intention must be considered – Tax statues are to receive a reasonable construction with a view to carrying out their purpose and intent 3. Where there is doubt – in every case of doubt, in tax statutes imposing payment of tax, laws are construed strictly against the government and liberally in favor of the taxpayer. 4. Where the language is plain – Rule of strict construction against the government does not apply where the language of the tax law is plain and there is no doubt as to the legislative intent. The words employed are to be given their ordinary meaning 5. Public purpose is always presumed 6. Provisions of the taxing act are not to be extended by implication Alyssa Africa

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Hornbook Doctrine The interpretation of tax laws that “a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously.” A tax cannot be imposed without clear and express words for that purpose. 7. Tax laws are special and prevail over general laws CIR vs. Filipinas Compania De Seguros (1960) Facts: Issue: Held: Petitioner, however, contends that the abovequoted provision refers only to fixed taxes on occupation and does not cover fixed taxes on business, such as the real estate dealer's fixed tax herein involved. This is technically correct, but we note from the deliberations in the Senate, where the proviso in question was introduced as an amendment, that said House Bill No. 5919 which became Republic Act No. 1856 was considered, amended, and enacted into law, in order precisely that the "iniquitous effects" which were then being felt by taxpayers. in general, on account of the approval of Republic Act No. 1612, Which was being given retroactive effect by the Bureau of Internal Revenue by collecting these taxes retroactively from January 1, 1956, be eliminated and complaints against such action be finally settled. (See Senate Congressional Record, May 4, 1957, pp. 10321033.) It is also to be observed that said House Bill No. 5819 as originally presented, was expressly intended to amend certain provisions of the National Internal Revenue Code dealing on fixed taxes on business. The provisions in respect of fixed tax on occupation were merely subsequently added. This would seem to indicate that the proviso in question was intended to cover not only fixed taxes on occupation, but also fixed taxes on business. (Senate Congressional Record, March 7, 1957, p. 444.)The fact that said proviso was placed only at the end of paragraph "(B) On occupation" is not, therefore, view of the circumstances, decisive and unmistakable indication that Congress limited the proviso to occupation taxes. Even though the primary purpose of the proviso is to limit restrain the general language of a statute, the legislature, unfotunately, does not always use it with technical correctness; consequently, where its use creates an ambiguity, it is the duty of the court to ascertain the legislative intention, through resort to usual rules of construction applicable to statutes, generally an

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give it effect even though the statute is thereby enlarged, or the proviso made to assume the force of an independent enactment and although a proviso as such has no existence apart from provision which it is designed to limit or to qualify. (Statutory Construction by E. T. Crawford, pp. 604605.) . . . When construing a statute, the reason for its enactment should be kept in mind, and the statute should be construe with reference to its intended scope and purpose. (Id. at p. 249.) On the general principle of prospectivity of statute on the language of Republic Act 1612 itself, especially Section 21 thereof, and on the basis of its intended scope and purpose as disclosed in the Congressional Record we find ourselves in agreement with the Court of Tax Appeals. CIR vs. CA (1997) Facts: Issue: Whether or not the private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax Code. Held: We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by 8 implication." Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be Alyssa Africa

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imposed beyond what statutes expressly and clearly import." 9 To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in the business of selling its services. Hence, to impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of an independent business. And it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only after such coverage is shown does the rule of construction — that tax exemptions are to be strictly construed against the taxpayer — come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax Appeals in its decision, 10 which was affirmed by the CA. The Ateneo de Manila University Did Not Contract for the Sale of the Service of its Institute of Philippine Culture After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Manila International Airport Authority vs. CA (2006) Facts: Issue: Held: Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs the legal relation and status of government units, agencies and offices within the entire government machinery, MIAA is a government instrumentality and not a governmentowned or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any kind" by local governments. The only exception is when MIAA leases its real property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in which case the specific real property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by the City of Parañaque.

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5. Tax Amnesty It is a general pardon or intentional overlooking by the state of its authority to impose penalties on persons otherwise guilty of tax evasion or violation of a tax law. Tax Exemption Tax Amnesty Connotes condonation Immunity from tax from payment of existing tax liabilities Grantee does not need Grantee pays a portion to pay anything Can be availed of by Not always available any qualified taxpayer Prospective in Retroactive in application application Tax liability does not Tax liability attaches to a attach to one enjoying a taxpayer who wants to privilege of tax avail of tax amnesty exemption Immunity from criminal, Immunity from civil civil, and administrative liability only liability Tax amnesty requires Tax exemption requires the payment of certain no payment of tax percentage of unpaid taxes Prospective in Retroactive in application application i. Nature and Benefits Rules on Amnesty: a. Like tax exemption, it is never favored nor presumed and construed strictly against the taxpayer b. The government is not estopped from questioning the tax liability even if amnesty tax payments were already received Reason: Erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors of its agents. c. Defense of tax amnesty, like insanity, is a personal defense. Reason: Relates to the circumstances of a particular accused and not the character of the acts charged in the information. To avail of a tax amnesty granted by the Government, and to be immune from suit on its delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income. Alyssa Africa

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ii. Old Amnesty Laws – RA No. 9480 dated May 24, 2007 and RA No. 9399 dated March 20, 2007 (Concept Only) RA 9480 grants tax amnesties to those who will avail for tax delinquencies in 2005 and prior years. RA 9399 grants tax amnesties to business enterprises operating in the special economic zones or freeport zones. 1. Administrative Amnesty – “Last Priority in Tax Audit” I. Inherent Limitations 1. Public Purpose Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and public convenience. Levy is for public purpose if: 1. it is for the welfare of the nation or greater portion of the population 2. it affects the area as a community rather than as individuals 3. designed to support the services of the government for some of the recognized objects of the country Test to Determine Public Purpose 1. Duty test – whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a government to provide; and 2. Promotion of General Welfare Test - whether the proceeds of the tax will directly promote the welfare of the community in equal measure. Pascual vs. Secretary of Public Works (1960) Facts: Issue: Held: The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter consists of an amendment of the organic law, removing, with retrospective operation, the constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for the projected feeder roads in question, the legality thereof depended upon whether said roads were public or private property when the bill, which, latter on, became Republic Act 920, was passed by

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Congress, or, when said bill was approved by the President and the disbursement of said sum became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which the projected feeder roads were to be constructed belonged then to respondent Zulueta, the result is that said appropriation sought a private purpose, and hence, was null and void. 4 The donation to the Government, over five (5) months after the approval and effectivity of said Act, made, according to the petition, for the purpose of giving a "semblance of legality", or legalizing, the appropriation in question, did not cure its aforementioned basic defect. Consequently, a judicial nullification of said donation need not precede the declaration of unconstitutionality of said appropriation. 2. Legislative in Nature Delegata potestas non potest delegari (A delegated power cannot be further delegated) Since the power of taxation is a power that is exercised by Congress as delegates of the people, then as a general rule, Congress could not redelegate this delegated power Basis: Delegated power constitutes not only a debt but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another. i. Delegation to Local Government Units The Constitution grants each LGU the power to create its own sources of revenue and levy,, taxes, fees and charges which shall accrue exclusively to the LGU (Const. Art. X Sec. 5) ii. Delegation to the President 1. Sec. 28(2) Article VI of the Constitution Section 28 (2), Article VI – 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. 2. Flexible Tariff Clause – Sec. 401 of the Tariff and Customs Code Section 401. Flexible Clause a. In the interest of national economy, general welfare and/or national security, and subject to the limitations herein prescribed, the President, Alyssa Africa

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upon recommendation of the National Economic and Development Authority is hereby empowered: (1) to increase, reduce or remove existing protective rates of import duty (including any necessary change in classification). The existing rates may be increased or decreased to any level, in one or several stages but in no case shall the increased rate of import duty be higher than a maximum of 100% ad valorem; (2) to establish import quota or to ban imports of any commodity, as may be necessary; and (3) to impose an additional duty on all imports not exceeding 10% ad valorem whenever necessary; Provided, That upon periodic investigations by the Tariff Commission and recommendation of the NEDA, the President may cause a gradual reduction of protection levels granted in Section 140 of this Code, including those subsequently granted pursuant to this section. ---( to be continued hehe) iii. Delegation to Administrative Agencies Also known as the power of subordinate legislation subject to the following tests: a. Completeness test – the law must be complete in all its essential terms and conditions when it leaves the legislature so that there will be nothing left for the delegate to do when it reaches him except to enforce it. b. Sufficient standard test 0 the law must offer a sufficient standard to specify the limits of the delegate’s authority, announce legislative policy, and specify conditions under which it is to be implemented. Pepsi Cola Bottling Co. of the Phils vs. Municpality of Tanauan (1976) Facts: Issue: Held:: Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same comes within the ambit of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation applies, particularly, to the prohibition against municipalities and municipal districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes

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on articles subject to specific tax except gasoline, under the provisions of the National Internal Revenue Code." For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and is null and void for being outside the power of the municipality to enact. 20But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate on the products, but there is not set ratio between the volume of sales and the amount of the tax. 21 Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified. AbakadaGuro Party List vs. Executive Secretary (2005) Facts: Issue: Held: Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of GDP of the previous year exceeds one and onehalf percent (1½%). If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible.57 Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our Alyssa Africa

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complex economy that is frequently the only way in which the legislative process can go forward. Garcia vs. The Executive Secretary (1992) Facts: Issue: Held: Turning first to the question of constitutionality, under Section 24, Article VI of the Constitution, the enactment of appropriation, revenue and tariff bills, like all other bills is, of course, within the province of the Legislative rather than the Executive Department. It does not follow, however, that therefore Executive Orders Nos. 475 and 478, assuming they may be characterized as revenue measures, are prohibited to the President, that they must be enacted instead by the Congress of the Philippines. There is thus explicit constitutional permission 1 to Congress to authorize the President "subject to such limitations and restrictions is [Congress] may impose" to fix "within specific limits" "tariff rates . . . and other duties or imposts . . ." CIR vs. CA (1996) Facts: Issue: Held: 3. Territorial Situs of Taxation Place of taxation; it is the place or authority that has the right to impose and collect taxes. Factors that Determine Situs 1. Kind of tax being levied; 2. Situs of the Property; 3. Residence of the Taxpayer; 4. Source of Income; 5. Citizenship of the taxpayer; and 6. Situs of the Excise, privilege, business or occupation being taxed i. Rule on situs of taxation of different kinds of taxes Situs of Subjects of Tax: 1. Persons – poll, capitation or community taxes are based upon the residence of the taxpayer regardless of the source of income or location of the property of the taxpayer 2. Property a. Real property – where the property is located b.. Tangible personal property – where the property is physically located although the owner resides in another jurisdiction

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c. Intangible personal property – domicile of the owner exceptions: a. when the property has acquired a business situs in another jurisdiction; b when the law provides for the situs of the subject of tax d. income – factors that determine the situs of income tax: i. nationality or citizenship of the taxpayer; ii. residence or domicile; iii. source of income e. excise or privilege – depends upon the place where the act is performed or occupation is engaged in f. gratuitous transfer – transmission of property from a donor to a donee or from a decedent to his heirs may be subject to taxation in the state where the transferor is a citizen or a resident or where the property is located in case of a nonresident 4. International Comity Comity is the respect accorded by nations to each other because they are equals i. Sec. 2 Art. II of the Constitution Section 2. The Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations. ii. Sec. 32(b)(7)(a) of the NIRC Section 32. Income derived by foreign government – Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii)international or regional financing institutions established by foreign governments. iii. Sec. 159 of the Local Government Code Section 159. Exemptions – The following are exempt from the community tax: 1. Diplomatic and consular representatives; and 2. Transient visitors when their stay in the Philippines does not exceed 3 months. 5. Exemption of Government entities, agencies and instrumentalities Inherent Limitation of Exemption of Government from Taxation covers: Alyssa Africa

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1. Government entities; 2. Government agencies; and 3. Government instrumentalities i. Sec. 27(C) of the NIRC Section 27. The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the GSIS, SSS, the Philippine Health Insurance Corporation, the local water districts, and the Philippine Charity Sweepstakes Office shall pay suchr ate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar business industry or activity. ii. Sec. 133(o) of the Local Government Code Section 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. Manila International Airport Authority vs. CA (2006) Facts: Issue: Held: (NOTE: PITEL – Public Purpose, International Comity, Territorial, Exemption of Gov’t Entities, and Legislative in Nature) J. Constitutional Limitations 1. Due Process and Equal Protection Tan vs. Del Rosario (1994) Facts: Issue: Held: PAGCOR vs. The BIR (2011) Facts: Issue: Held: 2. Prohibition against imprisonment for nonpayment of poll tax i. Sec. 20 Art. III of the Constitution Article 3. Bill of Rights –

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Section 20. No person shall be imprisoned for debt or non-payment of a poll tax ii. Community Tax under the Local Government Code Article VI. Community Tax Section 156. Community Tax – Cities or municipalities may levy a community tax in accordance with the provisions of this Article. Section 157. Individuals Liable to Community Tax. – Every inhabitant of the Philippines 18 years of age or over who has been regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year, or who is engaged in business or occupation, or who owns real property with an aggregate assessed value of P1,000.00 or more, or who is required by law to file an income tax return shall pay an annual community tax of P5.00 and an annual additional tax of P1.00 for every P1,000.00 of income regardless of whether from business, exercise of profession or from property which in no case shall exceed P5,000.00. In the case of husband and wife, the additional tax herein imposed shall be based upon the total property owned by them and the total gross receipts or earnings derived by them. Section 158. Juridical Persons Liable to Community Tax. – Every corporation no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual community tax of P500.00 and an annual additional tax, which, in no case, shall exceed P10,000.00 in accordance with the following schedule: (1) For every P5,000.00 worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax under existing laws, found in the assessment rolls of the city or municipality where the real property is situated – P2.00; and (2) For every P5,000.00 of gross receipts or earnings derived by it from its business in the Philippines during the preceding year – P2.00 The dividends received by a corporation from another corporation however, shall for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation.

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Section 159. Exemptions. – The following are exempt from the community tax: (1) Diplomatic and consular representatives; and (2) Transient visitors when their stay in the Philippines does not exceed 3 months. 3. Uniformity and Equality of Taxation i. Sec. 28(1) Art. VI of the Constitution Section 28. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation Tolentino vs. Secretary of Finance (1995) Facts: Issue: Held: AbakadaGuro Party List vs. Executive Secretary (2005) Facts: Issue: Held: Tan vs. Del Rosario (1994) Facts: Issue: Held: 4. Authority of the President to impose tariff rates 5. Non-impairment of obligation of contracts /Grant of Franchise i. Sec. 10 Art. III of the Constitution Section 10. No law impairing the obligation of contracts shall be passed. ii. Sec. 11 Art. XII of the Constitution Article XII. National Economy and Patrimony Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than 50 years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The state shall encourage equity participation in public utilities by the general public. The

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participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. Meralco vs. Province of Laguna (1999) Facts: Issue: Held: Smart Communications, Inc. vs. City of Davao (2008) Facts: Issue: Held: 6. Infringement of Religious Freedom i. Sec. 5 Art. III of the Constitution Section 5. No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment o religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. American Bible Society vs. City of Manila (1957) Facts: Issue: Held: Tolentino vs. Secretary of Finance (1995) Facts: Issue: Held: 7. Infringement of Press Freedom i. Sec. 4 Art. III of the Constitution Section 4. No law shall be passed abridging the freedom of speech, of expression, or the press, o the right to the people peaceably to assemble and petition the government for redress of grievances. Tolentino vs. Secretary of Finance (1995) Facts: Issue: Held: 8. Exemption of Religious, Charitable and Educational Institutions from Tax i. Sec. 28(3) Art. VI of the Constitution Alyssa Africa

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Article VI. Legislative Department Section 28(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non profit cemeteries and all lands, buildings and improvements, actually directly, and exclusively used for religious charitable or educational purposes shall be exempt from tax. ii. Sec. 4(3) and (4) Art. XIV of the Constitution Article XIV. Education, Science and Technology, Arts, Culture, and Sports Section 4. (3) All revenues and assets of non-stock, nonprofit educational institutions used actually, directly, and exclusively for educational purposes, shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively, owned may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment. (4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used, actually, directly and exclusively for educational purposes shall be exempt from tax. iii. Secs. 27(B) and 30 of the NIRC Section 27. Rates of Income Tax on Domestic Corporations. – (B) Proprietary Educational Institutions and Hospitals. – Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of 10% on their taxable income except those covered by Subsection (D)[Passive Income] hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term “unrelated trade, business or other activity” means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A “proprietary educational institution” is any private school maintained and administered

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by private individuals or groups with an issued permit to operate from the Department of Culture and Sports, or the Commission on Higher Education, or the Technical Education and Skills Development Authority, as the case may be, in accordance with existing laws and regulations. Section 30. Exemptions from Tax on Corporations. – The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non0stock corporation organized by employees providing for the payment of life, sickness, accident, or there benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D)Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer of any specific person; (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which insures to the benefit of any private stockholder or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consist solely of assessments, dues and fees collected from members for the sole purpose of meeting its expenses; and Alyssa Africa

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(K) Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs , the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. CIR vs. CA (1998) Facts: Issue: Held: Lung Center of the Philippines vs. Quezon City (2004) Facts: Issue: Held: 9. Prohibition on the use of tax levied for special purpose i. Sec. 29 Art. VI of the Constitution Article VI. Legislative Department Section 29. (1) No money shall be paid out of the Treasury except in pursuance of an appropriation made by law. (2) No public money or property shall be appropriated, applied, paid or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or other religious teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. (3) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. Osmena vs. Orbos (1993) Facts:

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Issue: Held: 10. Origin of Appropriation, Revenue and Tariff Bills i. Sec. 24 Art. VI of the Constitution Article VI. Legislative Department Section 24. 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. Tolentino vs. Secretary of Finance (1995) Facts: Issue: Held: 11. Grant of Tax Exemption i. Sec. 28(4) Art. VI of the Constitution Article VI Legislative Department Section 28. (4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. 12. Non-impairment of the Supreme Court’s Jurisdiction i. Secs. 2 and 5 Art. VIII of the Constitution Article VIII. Judicial Department Section 2. The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Section 5 hereof. No law shall be passed reorganizing the Judiciary when it undermines the security of tenure of its Members. Section 5. The Supreme Court shall have the following powers: (1) Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus. (2) Review, revise, reverse, modify, or affirm on the appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: (a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, Alyssa Africa

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proclamation, order, instruction, ordinance, or regulation is in question. (b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. (c) All cases in which the jurisdiction of any lower court is in issue. (d) All criminal cases in which the penalty imposed is reclusion perpetua or higher. (e) All cases in which only an error or question of law is involved. (3) Assign temporarily judges of lower courts to other stations as public interest may require. Such temporary assignment shall not exceed 6 months without the consent of the judge concerned. (4) Order a change of venue or place of trial to avoid a miscarriage of justice. (5) Promulgate rules concerning the protection and enforcement of constitutional rights, pleading, practice, and procedure in all courts, the admission to the practice of law, the Integrated Bar, and legal assistance to the under-privileged. Such rules shall provide a simplified and inexpensive procedure for the speedy disposition of cases, shall be uniform for all courts of the same grade, and shall not diminish, increase, or modify substantive rights, Rules of procedure of special courts and quasijudicial bodies shall remain effective unless disapproved by the Supreme Court. (6) Appoint all officials and employees of the Judiciary in accordance with the Civil Service Law.

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II. Income Taxation A. Income Tax System 1. Global The total allowable deductions as well as personal and additional exemptions, in case of individuals, or the total allowable deductions, in case of corporations, are deducted from the gross income to arrive at the net taxable income subject to the graduated income tax rates ranging from 3% to 70%, in case of individuals, or to the two-tiered income tax rates of 25% and 35%, in the case of corporations. 2. Schedular There are different types of incomes that are subject to different sets of graduated or flat income tax rates. The applicable tax rate will depend on the classification of the taxable income and the basis could be gross income or net income. Separate income tax return or capital gains tax return, whichever is applicable, is filed by the recipient of income for the particular types of income received, but no income tax return is filed by the recipient of passive income subject to final withholding tax because the withholding agent is primarily responsible for the filing of the withholding tax return and the payment of final tax to the BIR on such income. 3. Semi-schedular or Semi-Global All compensation income, business or professional income, capital gain, passive income, and other income not subject to final tax are added together to arrive at the gross income, and after deducting the sum of allowable deductions from business or professional income, capital gain and passive income, and other income not subject to final tax, in the case of corporation, as well as personal and additional exemptions, in the case of individual taxpayer, the taxable income is subjected to one set of graduated tax rates, if an individual, or normal corporate income tax rate, if a corporation. B. Characteristics and Features of the Philippine Income Tax System 1. Direct Tax – tax burden is borne by the income recipient upon whom the tax is imposed Alyssa Africa

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2. Progressive Tax - tax base increases as the tax rate increases founded on the ability to pay principle and is consistent with the Constitutional provision that “Congress shall evolve a progressive system of taxation” 3. Adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, the residence principle and the source principle. 4. Follows the semi-schedular or semi-global system of income taxation, although certain passive investment incomes, capital gains on sale of shares of stock of domestic corporations and real property located in the Philippines, and other income are subject to final taxes at preferential tax rates. 5. Of American Origin – the authoritative decisions of the US courts and officials charged with enforcing the US Internal Revenue Code have peculiar force and persuasive effect for the Philippines C. Definition of Income Income Tax - a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on person’s income, emoluments, profits and the like. Fisher vs. Trinidad Facts: Frederick C. Fisher was a stockholder of the Philippine American Drug Company. When the corporation declared stock dividends, the appellant was issued his proportionate share of P24,800 stock dividend. The appellant paid his income tax of P889.91 under protest on the ground that the stock dividend is a capital and not income. Issue: Whether or not stock dividends are income taxable under the provisions of Section 25, Act no. 2833. Held: No, a stock dividend is not income, but capital of the corporation. The appellee argues that there is nothing in Section 25 of Act no. 2833 which contravenes the provisions of the Jones Law. That

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may be admitted. He further argues that the Act of Congress expressly authorized the Philippine Legislatures to provide for an income tax. That fact may also be admitted. But a careful reading of that Act will show that, while it permitted a tax upon income, the same provided that income shall include gains, profits, and income derived from salaries, wages, or compensation for personal services, as well as from interest, rent, dividends, securities, etc. The appellee emphasizes the income from dividends. Of course, income received as dividends is taxable as an income but an income from dividends is a very different thing from receipt of a stock dividend. One is an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of corporation. 1. When is Income Taxable? Income, gain, or profit is subject to income tax when the following conditions are present: a. income, gain or profit; b. income, gain or profit is received or realized during the taxable year; and c. income, gain or profit is not exempt from income tax Notes: As a general rule, a mere increase in the value of property is not income but merely an unrealized increase in capital. For the same reason, a decrease in the value of the property is not normally allowable as a deductible loss. No income is derived nor a loss incurred by the owner until after the actual sale or other disposition of the property in excess of its cost. i. Realization Test 1. Section 38 of RR No. 2-40 dated February 10, 1940 Section 38. Bases of Computation – Approved standard methods of accounting will be ordinarily regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and Alyssa Africa

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deductions taken accordingly, unless in order to reflect income such amounts are to be properly accounted for as of a different period. For instance, in any case in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income except an accrual method. A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property. Manila Mandarin Hotels Inc. vs. CIR (1997) Facts: Petitioner Manila Mandarin filed a protest on the assessments made to them rendering them with tax deficiencies on income. One of these deficiencies includes a deficiency on percentage tax assessment due to the imposition of the tax on deposits made by its clients for the use of the hotel facilities. Petitioner contends that these deposits, if not applied against hotel bills are not subject to percentage tax because these deposits partake of the nature of a security deposit which cannot be classified as income. Issue: Whether or not the security deposits should be treated as part of gross income subject to percentage tax. Held: No, it must not be part of gross income subject to percentage tax. Under the realization principle, revenue is generally recognized when both of the following conditions are met: (a) the earning process is complete or virtually complete, and (b) an exchange has taken place. This principle requires that revenue must be earned before it is recorded. Thus, the amounts received in advance are not treated as revenue of the period in which they are received but as revenue of the future period or periods in which they are earned. These amounts are carried as unearned revenue, that is, liabilities to transfer goods or render services in the future until the earning process is complete.

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Hence, it is only upon the use of the reserved facilities or the default of the reserving guest to cancel the reservation on time that the deposit is clearly convertible to revenues. Since the deposits are payment for future services it cannot be treated as part of its gross income until the earning process is complete. BIR Ruling No. DA-049-98 Case I Facts: On October 1, 1997, Mr. A leased his lot to X company for a period of 10 years at a monthly rent of P1,000.00. The written lease contract requires lessee X to make an advance rental payment equivalent to 2 years rentals. X company paid a lump sum of P24,000 corresponding to and credited as rentals for the first 24 months of the lease. Bothe the lessor and lessee are on a calendar year tax cycle. Issue: Whether or not the entire P24,000 is to be recorded as taxable income during the year it was received and whether or not X Company can deduct the entire amount as deductible expense in its income tax return. Held: If the advance payment is prepaid rental, then such payment is taxable to the lessor in the year when received, even though the lessor is on the accrual or cash method of accounting. On the part of the lessee, such prepaid rental is to be treated as capital expenditure and he cannot deduct in the year of payment the full amount of the prepaid rent as business expense but must spread them over the entire remaining term of the lease. Mr. A is required to declare the entire amount of P24,000.00 as his taxable income for the year 1997 when he received the same. On the other hand, X company cannot deduct the entire amount of P24,000 as deductible expense in its income tax return for the year 1997 but must amortize the same over the entire period of the lease. Case II Facts: On September 1, 1997, Mr. B leased an office unit to ABC Company for a period of 3 years Alyssa Africa

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at a monthly rent of P5,000. Bills for electricity, telephone and water shall be paid by Lessee ABC Company. The written lease contract required that lessee ABC Company make a Security deposit in cash in the amount of P15,000. This cash security deposit will be held by the lessor Mr. B to answer for whatever unpaid rentals, unpaid electrical, telephone and water bills, and damages to the leased premises, and the balance to be refunded without interest to lessee ABC Company at the end of the lease contract. Issue: Whether or not the security deposit can be declared as income by B and whether or not it is a deductible expense on the part of ABC Company. Held: No. A security deposit is an advanced payment received by the lessor from the lessee, as security for the lessee’s performance of his obligations under the lease. It is not income to the lessor when received, as the lessor is required to return this deposit at the end of the lease period upon fulfillment of all the obligations of the lessee. In this respect, a security deposit is somewhat analogous to a loan and the lessor has no income and the lessee no deduction when the deposit is made with the lessor, and the lessor has no deduction and the lessee no income when it is repaid. This rule applies even when the lessor has the right to commingle and use the security deposit for his own purposes without interest during the term of the lease. ii. Claim of Right Doctrine BIR Ruling No. (C-168) 519-08 Facts: LHC entered into a contract with Transfield Philippines Inc. for the construction of a power station. They stipulated that should Transfield fail to finish the project on time, LHC is entitled to liquidated damages. When the project became delayed, LHC claimed liquidated damages against Transfield. This was objected to by the latter and counter-claims were charged against the former. It was brought to an Arbitral Tribunal which ruled in favor of Transfield. When Transfield sought the recognition of this award in our courts, it was

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deemed contrary to public policy, causing the parties to settle for a compromise agreement wherein LHC agreed to return liquidated damages amounting to P14Million. Issue: Whether or not the return of the liquidated damages which was part of the sum previously reported as gross income of LHC in 2000 and 2001 is an allowable deduction from LHC’s gross income for tax purposes. Held: Yes, it is an allowable deduction. Generally, the tax treatment of the return of previously recognized income is dependent on the tax treatment of the income previously reported. If the taxpayer received an income and reported the same as part of taxable gross income, but later on was made to return the said income, the taxpayer is allowed a deduction for the amount returned against the gross income. The deduction must be made at the time of the return. This treatment follows the rationale behind allowing sales return as a deduction from gross sales not only from income tax but also for value-added tax purposes. The Claim of Right Doctrine provides that if a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income even though one may claim he is not entitled to the money. Should it later appear that the taxpayer was not entitled to keep the money, the taxpayer would be entitled to a deduction in the year of repayment. Manila Electric Company vs. CIR (2010) Facts: Meralco claimed a tax refund or credit due to alleged overpayment of income taxes. This was granted by the Supreme court in several cases and likewise ordered Meralco to refund or credit its customers. Said order had already been final and executory on May 5, 2003. Prior to that, however, on December 23, 1993, Meralco filed with the Energy Regulatory Board an application for the revision of its rate and schedules. On January 28, 1994, a provisional increase was granted on the condition that after hearing and evaluation, should Meralco be entitled to a lesser increase in rates, the excess previously collected will be refunded to its customers. Hence, Alyssa Africa

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Meralco paid the income tax due based on such distribution rate. On February 16, 1998, the ERB rendered a decision granting a lesser rate increase. Meralco was ordered to refund or credit to its customers the excess paid. On November 27, 2003, Meralco filed a claim for tax refund or credit of excess income tax payments with the CIR, which was later on elevated to the SC. The CIR claims that it had not granted the claim on the ground that Meralco should have refunded to or credited to bill customers first as mandated by the Supreme Court. Issue: Whether or not petitioner has the right to recover its excess income tax payments for the taxable years 1994-1998 and 2000. Held: Though the Court explains that the SC never made the refund be subject to the condition that refund or credit to future consumption be actually given or credited to the consumer, the SC said that the releases or issuances of the Tax Credit Certificate covering the tax refund should be proportionate to the amount actually disbursed to be just and equitable not only for the Meralco and the government but also the general public considering that there were discrepancies in the amount to be given and actually given or actually received by Meralco’s customers. In the exercise of this Court’s jurisdiction also as a court of equity, it is only but fair to allow Meralco to recover its excess income tax payments for the taxable years 1994-1998 and 2000, which would have prescribed (2yr prescription) if not for the special circumstance in the instant case, in proportion to or that the refund or credit to future consumption due the customers concerned in the average amount of P0.167 per kilowatthour should have been actually given or credited to them by Meralco. It would be the height of injustice if Meralco can recover all the excess income tax payments when it did not refund all to the customers what Meralco is mandated to refund from which the excess income tax payments would arise.

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Dissenting Opinion of Justice Castaneda (Voted for Dismissal): In the claim of right doctrine, a taxpayer who previously claimed as income the amount he subsequently repays, is to claim it as deduction from income in the year of repayment. The 2 year prescriptive period is a mandatory provision not subject to any qualification. The instant case cannot be considered a special circumstance worthy of the relaxation of the 2 year prescriptive period. Under the claim of right doctrine, if the taxpayer who has included amounts in income pursuant to the claim of right doctrine subsequently repays those amounts, the taxpayer may be entitled to a deduction in the year of repayment. However, to be entitled to a deduction, the taxpayer must meet the requirements of a statutory provision entitling him or to a deduction. In this case, the claim of right doctrine finds application to Meralco when it recognized a bona fide claim over the amounts received out of its overcharged rate. Consistent with the recognition of income and deduction under the NIRC of 1997, Meralco’s remedy is to claim the repayments as deduction from its income instead of filing a refund considering that it is not a case of an erroneously paid tax. The words of Section 229 clearly, plainly, and explicitly state that the 2 year prescriptive period is not affected by any supervening cause, hence, the phrase “regardless of any supervening cause.” Manila Electric Company vs. CIR (2011) Facts: CIR assailed the CTA decision and argues that a claim for refund filed after the 2 year prescriptive period provided under Section 229 of the 1997 NIRC, as amended, effectively bars recovery of any refundable amount. Apparently, among the several issues previously stipulated and agreed upon by the parties to be resolved by this Court, respondent only assails the findings and conclusions pertaining to prescription. Meralco, on the other hand, argues that the 2 year prescriptive period is not just jurisdictional and may be suspended for reason of equity and other special circumstance. Alyssa Africa

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CIR maintains that the petitioner had the opportunity to claim for refund as early as 1998 when ERB issued its decision but failed to do so by reason that it chose to go through court processes. Issue: Whether or not the 2 year prescriptive period under Section 229 of the 1997 NIRC may be suspended. Held: Yes. It may be suspended. It is noted that previously recognized income using the provisional rate increase from which taxes were collected was ordered to be returned to the consumer. The CIR cannot collect taxes on income that does not exist. Correspondingly, a taxpayer should not be prohibited from recovering taxes paid on income that does not exist or ceases to exist. To do so is a clear case of unjust enrichment for the government at the expense of the taxpayer. In North American Oil vs. Burnet the court states the claim of right doctrine as follows: “if a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.” Claim of right prohibits a taxpayer to amend prior-year’s return. Considering that the Philippines adopted the US tax laws, said doctrine may come into play only in determining whether the treatment of an item of income should be influenced by the fact that the right to receive or keep it is in dispute, but the full application of the said doctrine especially the deduction of those repayments previously claimed and taxed as income in different taxable years should not be given effect. In view of the inequities related to this socalled “claim of right doctrine” as well as the fact that our legislature did not adopt nor enact a statute regarding the deductibility of repayment under the claim of right situation similar to Section 1341 of the US Internal Revenue Code, it is our best interest not to fully adopt the same in our jurisdiction. If it were the intent of the legislature to have a deduction based on claim of right situation, a similar provision of Section 1341 of the US Internal

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Revenue Code would have been expressly provided in the NIRC of 1977 or 1997, or in any amendments made thereon but there is none. Inevitably, neither should we adopt the deductibility of repayments under the claim of right situation since our legislature intentionally did not adopt the same. While taxes are the lifeblood of the government and so should be collected without unnecessary hindrance, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. The power of taxation is sometimes called the power to destroy; it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kills the “hen that lays the golden egg.” And, in order to maintain the general public’s trust and confidence in the government this power must be used justly and not treacherously. iii. All Events Test CIR vs. Isabela Cultural Corporation Facts: The BIR disallowed the ICC’s claimed expense deductions for professional and security services billed and paid by ICC in 1986 to (1) SGV and Co for auditing services for the year ending December 31, 1985, (2) to the law firm Bengzon Zarraga Narciso Culada Pecson Azcuna & Bengson for legal services for the years 1984 and 1985, and (3) expenses or security services of El Tigre Security and Investigation agency for April and May 1986. The CTA reversed the assessment and ruled that deductions for professional and security services were properly claimed in 1986 because it was only in that year that the bills demanding payment were sent to ICC. CIR contended that ICC uses the accrual method of accounting, hence, it should have declared in the year it was incurred and not on the year paid. Issue: Whether or not the CA correctly sustained the deduction of the expenses for professional and security services from ICC’s gross income. Alyssa Africa

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Held: The requisites for the deductibility of ordinary and necessary trade, business or professional expenses, like expenses paid for legal and auditing services are: (a) the expenses must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. Revenue Audit Memorandum Order No. 12000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. The accrual of income and expense is permitted when the all events test has been met. The all events test requires: (1)fixing of a right to income or liability to pay, and (2) the availability of the reasonable accurate determination of such income or liability. The all events test requires the right to income or liability be fixed, and the amount of such income of liability or liability be determined with reasonable accuracy. 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. The all events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be known but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must be determined with “reasonable accuracy.” Accordingly, the term “reasonable accuracy” implies something less than an exact or completely accurate amount. The propriety of an accrual must be judged by the facts that a taxpayer know, or could reasonably be expected to have known, at the closing of its books for the taxable year. ICC failed to establish when the 1984 tax problems were completed, or whether there was reasonable diligence in inquiring the amount of liability due for accounting purposes.

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D. Accounting Periods and Methods – Correlate with recognition of income and expense 1. Section 43-50 of the NIRC Section 43. General Rule. The taxable income shall be computed upon the basis of the taxpayer’s annual accounting period in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer’s annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year. Section 44. Period in which Items of Gross Income Included – The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. Section 45. Period for which Deductions and Credits Taken – The deductions provided for in this Title shall be taken for the taxable year in which “paid or accrued” or “paid or incurred,” dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of the taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of the death, amounts accrued up to the date Alyssa Africa

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of his death if not otherwise properly allowable in respect of such period or as prior period. Section 46. Change of Accounting Period – if a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47. Section 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months (A) Returns for Short Period Resulting from Change of Accounting Period – if a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the as the close of the fiscal year. (B) Income Computed on Basis of Short Period – Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made. Section 48. Accounting for Long-term Contracts – Income from long-term contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term “long-term contracts” means building, installation or construction contracts covering a period in excess of 1 year. Persons whose gross income is derived in whole or in part from such contracts shall report

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such income upon the basis of percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return. Section 49. Installment Basis – (A) Sales of Dealers in Personal Property – Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. (B) Sales of Realty and Casual Sales of Personality – In the case (1) of a casual sale or other casual disposition of personal property (other then 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), for a price exceeding P1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 25% of the selling price, the income may, under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner be returned on the basis and in the manner above prescribed in this Section. As used in this Section. As used in this Section, the term “initial payments” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. Alyssa Africa

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(C) Sales of Real Property Considered as Capital Asset by Individuals – An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. (D) Change from Accrual to Installment Basis – If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded. Section 50. Allocation of Income and Deductions. – In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deduction between or among such organizations, trade or business, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses. 2. Change in Accounting Period E. Individual Income Taxation 1. Kinds of Individuals (Sec. 22) 1. Resident Citizens 2. Resident Aliens 3. Non-resident Citizens a. Overseas Contract Workers 4. Non-resident Alien Engaged in Trade or Business 5. Non-resident Aliens not Engaged in Trade or Business 6. Others a. Minimum Wage Earners

Taxation Law

b. Estate and Trusts Taxed as Individuals c. Aliens Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies d. Aliens Employed by Off-Shore Banking Units e. Aliens Employed by Petroleum Service Contractor and Sub-contractor Section 22. Definitions – When used in this Title: (A) The term “person” means an individual, a trust, estate, or corporation. (B) The term “corporation” shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. “General professional partnerships” are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. (C) The term “domestic,” when applied to a corporation, means created or organized in the Philippines or under its laws. (D) The term “foreign,” when applied to a corporation, means a corporation which is not domestic. i. Resident Citizens He is a citizen of the Philippines residing therein. ii. Resident Aliens Section 22 (F) The term “resident alien” means an individual whose residence is within the Philippines and who is not a citizen thereof. 1. Sec. 5 of RR No. 2-40 Section 5. Definition. – A “non-resident alien individual” means an individual – (a) Whose residence is not within the Philippines; and Alyssa Africa

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(b) Who is not a citizen of the Philippines; An alien actually present in the Philippines who is not a mere transient is a resident of the Philippines for purposes of income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. iii. Non-resident citizens Section 22 (E) The term “nonresident citizen” means” (1) A citizen of the Philippines who establishes to the satisfaction of Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad for most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

Taxation Law

(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this Section. 1. Overseas Contract Workers a. Sec. 23 of the NIRC Section 23 (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines who receives compensation for services rendered abroad as a member of a complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. b. Secs. 2 and 3(A) of RR No. 1-11 dated February 24, 2011 Section 2. Definition of an OCW OCW refer to Filipino citizens employed in foreign countries, commonly referred to as OFWs, who are physically present in a foreign country as a consequence of their employment thereat. Their salaries and wages are paid by an employer abroad as is not borne by any entity or person in the Philippines. Requisites: 1. Registered with the Philippine Overseas Employment Administration 2. Valid Overseas Employment Certificate Seaferers or seamen are Filipino citizens who receive compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade. To be considered as an OCW or OFW they must: 1. Be duly registered as such with the POEA 2. Valid Overseas Employment Certificate 3. Valid Seaferers Identification Record Book (SIRB) or Seaman’s Book issued by the Maritime Industry Authority Section 3 – refer to actual RR Alyssa Africa

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2. Meaning of “Most of the Time” a. BIR Ruling No. 033-00 dated September 5, 2000 Section 22 (E) Nonresident citizen (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad for most of the time during the taxable year. Most of the time – said citizen shall have stayed abroad for at least 183 days in a taxable year iv. Non-resident alien engaged in trade or business 1. Sec. 25(A)(1) of the NIRC Section 25. (A) Nonresident Alien Engaged in Trade or Business within the Philippines – (1) In General – A nonresident alien individual engaged in trade or business in the Philippines shall be subject of an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a nonresident alien doing business in the Philippines, Section 22(G) of this Code notwithstanding. 2. Sec. 8 of RR No. 2-40 Section 8 The phrase “engaged in trade or business within the Philippines” includes the performance of personal services within the Philippines. Whether a non-resident alien has an “office or place of business,” however, implies a place for the regular transaction of business and does not include a place where casual or incidental transactions might be, or are, affected. Neither the beneficiary nor the grantor of a trust, whether revocable or irrevocable, is deemed to be engaged in trade or business in the Philippines or to have an office or place of business therein, merely because the trustee is

Taxation Law

engaged in trade or business in the Philippines or has an office or place of business therein. v. Non-resident aliens not engaged in trade or business 1. Sec. 25(B) of the NIRC Section 25 (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines – There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, a tax equal to 25% of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. vi. Others 1. Minimum Wage Earners a. Sec. 22(HH) Section 22(HH) (H) The term “minimum wage earner” shall refer to a worker in the private sector paid the statutory minimum wage; or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.

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b. Sec. 1 of RR No. 10-08 dated July 8, 2008 De Minimis Benefits Listed MWEs receiving other benefits exceeding the P30,000 limit shall be taxable on the excess benefits, ,as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the SMW Statutory Minimum Wage Alyssa Africa

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The rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics of the DOLE. The RTWPB of each region shall determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income for this purpose. Other Income of MWEs MWEs receiving other income such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year. 2. Estates and trusts taxed as individuals (Sec. 60 to 66 of the NIRC) – to be discussed under Part O of the syllabus 3. Aliens employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies a. Sec. 25 (C) of the NIRC Section 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies – There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, ,from such regional or area headquarters and regional operating headquarters, a tax equal to 15% of such gross income: Provided, however, that the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term “multinational company” means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.

Taxation Law

b. Same tax treatment to Filipinos occupying Technical and Managerial positions i. Sec. 2.57.1(D) of RR No. 2.-98 dated April 17, 1998 Section 2.57.1 (D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies – A final withholding tax equivalent to 15% shall be withheld by the withholding agent from the gross income received by every alien individual occupying managerial and technical positions in regional or area headquarters and regional operating headquarters and representative offices established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances, except income which is subject to the fringe benefits tax, from such regional area or area headquarters and regional operating headquarters and representative offices established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances, except income which is subject to the fringe benefits tax, from such regional or area headquarters and regional operating headquarters. The same tax treatment shall apply to Filipinos employed and occupying the same as those of alien employed by these multinational companies. The term “multinational company” means a foreign firm or entity engaged in international trade with its affiliates or subsidiaries or branch offices in the Asia Pacific Region and other foreign markets. ii. Secs. 1 to 4 of RR 11-2010 dated October 26, 2010 Section 1 Consideration Alien individuals occupying Managerial and Technical Positions in Regional or Area Headquarters or Regional Operating Headquarters of Multinational Companies Tax Alyssa Africa

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Final Withholding Tax of 15% from the gross income Requisite: (1) Same tax treatment to Filipinos employed and occupying the same positions as those aliens employed by regional or area headquarters and regional operating headquarters of multinational companies, regardless of whether or not there is an alien executive occupying the same position. (2) Such Filipinos have the option to be taxed at either 15% of gross income or at the regular rate on their taxable income in accordance with the Tax Code Technical Position Limited only to positions that are (1) highly technical in nature or (2) where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired. Section 2 Who are Qualified Filipinos employed by ROHQs or RHQs in a managerial or technical position shall have the option to be taxed at the regular income tax rate on taxable compensation income. Section 3 Eligibility to the 15% Preferential Tax Rate 1. Position and Function Test a. Must occupy a managerial position or technical position; AND b. Must actually be exercising such managerial or technical functions pertaining to said positions 2. Compensation Threshold Test – Employee must have received, or is due to receive under a contract of employment, a gross annual taxable compensation income of AT LEAST P975,000.00 WHETHER OR NOT ACTUALLY RECEIVED (NOTE: Change in compensation leading to a lesser compensation threshold subjects the individual to regular income tax)

Taxation Law

3. Exclusivity Test – Exclusively working for the RHQ or ROHQ as a regular employee and not just as a consultant or contractual worker. Section 4 Gross Compensation Not Included: 1. retirement and/or separation pay/benefits whether or not taxable 2. items considered as de minimis benefits (Note: such items are considered in determining income tax due at the time of employee’s retirement or separation. 4. Aliens employed by Offshore Banking Units a. Sec. 25 (D) of the NIRC Section 25 (D) Alien Individual Employed by Offshore Banking Units – There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such offshore banking units, a tax equal to 15% of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these offshore banking units. b. Same tax treatment to Filipinos 5. Aliens employed by Petroleum Service Contractor and Subcontractor a. Sec. 25(E) of the NIRC Section 25 (E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor – An alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor of by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of 15% of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, Alyssa Africa

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received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code. (NOT: Law states Alien individual must be a PERMANENT RESIDENT of the foreign country) b. Same tax treatment to Filipinos 2. General Principles of Income Taxation i. Sec. 23 of the NIRC Section 23. General Principles of Income Taxation in the Philippines – Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. 3. Kinds of Income

Taxation Law

(c) from all sources within the Philippines by an individual alien who is a resident of the Philippines

i. Income subject to ordinary income tax 1. Business/Profession Income 2. Compensation Income  ii. Income subject to final tax 1. Sec. 2.57(A) of RR No. 2-98 Section 2.57 Withholding of Tax at Source (A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due for the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency of tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income .It does not extend to the payee’s other tax liability on said income, such as when the said income is further subject to a percentage tax. For example, if a bank received income subject to final withholding tax, the same shall be subject to a percentage tax. 2. Sec. 24 and 25 of the NIRC Section 24 (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines (1) Income tax is imposed on all taxable income other than income under subsection (B – Certain Passive Income), (C – Capital gains from sale of shares of stock not traded in the stock exchange), and (D – Capital gains from sale of real property) of this Section. (a) from all sources within and without the Philipines by resident citizens (b) from all sources within the Philippines by non-resident citizens including overseas contract workers

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(2) Rates of Tax on Taxable Income of Individuals Married Individuals Husband and wife shall compute separately their individual income tax based on their respective total taxable income If any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income Minimum Wage Earners Exempt from payment of income tax on their taxable income including holiday pay, overtime pay, nightshift differential pay, and hazard pay [Refer to Tax Table] 4. Personal and additional Exemptions i. Sec. 35 of the NIRC Section 35. Allowance of Personal Exemptions for Individual Taxpayer (A) In General Basic Personal Exemption  amounting to P50,000 for each individual taxpayer Note: Married Individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption (B) Additional Exemptions for Dependents Dependent not Exceeding 4  P25,000 for each  claimed only by one spouse  if legally separated – spouse who has custody  Total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions therein allowed Dependent (1)

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Taxation Law

(a) legitimate, illegitimate or legally adopted child; (b) chiefly dependent upon and living with the taxpayer (c) not more than 21 years old (d) not gainfully employed (2) (a) incapable of self-support because of mental or physical defect (b) chiefly dependent upon and living with the taxpayer (c) not gainfully employed (C) Change of Status (1) if marries or have dependents – may be claimed in full for such year (2) if dies – estate may still claim (3) if spouses or any dependents die, or marries or becomes 21 or gainfully employed – may still claim the same in the tax year (D) Personal Exemption Allowable to Nonresident Alien Individual NRAETBorP – entitled to personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is subject or citizen - It should not exceed the amount fixed in this Section as exemption for citizens or residents of the Philippines (NOTE: nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title. ii. Senior Citizens 1. Secs. 2(a), 2(c) and 11 of RR no. 7-10 dated July 20, 2010 Section 2 Definitions – For purposes of these Regulations, the following terms and phrases shall be defined as follows: (a) Senior Citizen or Elderly – refers to any (1)Filipino citizen who is a (2) resident of the Philippines and who is (3) 60 years old or above. It may apply to senior citizens with “dual citizenship” status provided they prove their Filipino citizenship and have at least 6 months residency in the Philippines. Alyssa Africa

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(c) Benefactor – refers to (1) any person whether related or not to the senior citizen who (2) provides care or who gives any form of assistance to him/her, and (3) on whom the senior citizen is dependent on for primary care and material support, as (4) certified by the City or Municipal Social Welfare and Development Office. Section 11. Personal Exemptions of Benefactors of Senior Citizens – A Benefactor of a Senior Citizen shall be entitled to claim the basic personal exemption of P50,000.00 which is the amount of basic personal exemption allowed under RA 9504 for all taxpayers required to file income tax returns thereby removing the classification of tax filers into single, head of the family and married. A Senior Citizen who is not gainfully employed, living with and dependent upon his benefactor for chief support, although treated as dependent under the Act, will not entitle the benefactor to claim the additional personal exemption of P25,000. The entitlement to claim the additional personal exemption per dependent (not exceeding four) is allowable only to individual taxpayers with a qualified dependent child or children subject to the conditions set forth under Section 35(B) of the Tax Code, as amended. If required to file an income tax return, the Benefactor shall state therein the name, birthday and OSCA (Office for Senior Citizens Affairs) ID number of the dependent Senior Citizen. 5. Premium payments on health and/or hospitalization insurance i. Sec. 34(M) of the NIRC Section 34 Deductions from Gross Income – Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26(A); 27(A), (B) and (C); and 28(A)(1), there shall be allowed the following deductions from gross income: (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer

Taxation Law

– The amount of premiums not to exceed P2,400 per family or P200 a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than P250,000 for the taxable year: Provided, finally, That in case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. Notwithstanding the provisions of the preceding Subsections, the Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of the Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2) effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law. Exemptions: 1. Basic Personal Exemption (P50,000) Requisite: Income Tax Payer 2. Basic Personal Exemption as Benefactor of Senior Citizen (P50,000) Requisite: Benefactor (a) any person related to the senior or not (b) provides care or who gives any form of assistance to him/her, and (c) on whom the senior citizen is dependent on for primary care and material support, (4) certified by the City or Municipal Social Welfare and Development Office. 3. Additional Exemptions of (P25,000) for each dependents not exceeding 4 Requisites: Dependent must be (1) (a) legitimate, illegitimate or legally adopted child; Alyssa Africa

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(b) chiefly dependent upon and living with the taxpayer (c) not more than 21 years old (d) not gainfully employed (2) (a) incapable of self-support because of mental or physical defect (b) chiefly dependent upon and living with the taxpayer (c) not gainfully employed

Taxation Law

F. Corporate Income Taxation 1. Definition – Sec. 22(B) of the NIRC Section 22 (B) The term “corporation” shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. “General professional partnerships” are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. 2. Partnerships taxed as a corporation i. Joint Ventures engaged in construction projects 1. Secs. 2 and 3 of RR No. 10-12 dated June 1, 2012 Section 2 “Corporation” shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships and joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. Section 3. Joint Ventures not Taxable as Corporations: 1. for the undertaking of a construction project; and 2. should involve joining or pooling of resources by licensed local contracts; that is licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI); 3. these local contractors are engaged in construction business; and Alyssa Africa

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4. the Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry(DTI) Requisites that will treat Joint Ventures Involving Foreign Contractors as Non-Taxable Corporations: a. Member foreign contractor must be covered by a special license as contractor by the PCAB of the DTI; and b. Construction project is certified by the appropriate Tendering Agency that the project is a foreign financed/internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine Government and the foreign/ International financing institution pursuant to the implementing rules and regulations of RA 4566, Contractor’s License Law. NOTE: Tax-exempt joint venture or consortium as herein defined shall not include those who are mere suppliers of goods, services or capital to a construction project. Members to a joint venture not taxable as a corporation must each be responsible in reporting and paying appropriate income taxes on their respective share to the joint ventures profit CIR vs. Batangas Transportation Co. (1958) – take note of the discussion of the Evangelista Case Facts: Max Blouse was the President of both Batangas Transporatio and Laguna Tayabas Bus Company. During the war, the 2 corporations ceased operations. However, in 1945 they were able to acquire buses which they divided between themselves. Later on, the two entered into a Joint Emergency Operation to economize overhead expenses. At the end of each calendar year all receipts and expenses were divided equally between the parties and both prepare their own separate income tax return on the theory that they had both pooled their resources in the establishment of this operation.

Taxation Law

Batangas Transporation and LagunaTayabas Bus Company were both assessed and demanded to pay deficiency income taxes. The CIR theorized that the Joint Emergency Operation was a corporation distinct from the 2 companies and so liable to income tax.

income tax on the ground that they have formed an unregistered partnership.

Issue: Whether or not the two transportation companies herein involved are liable to the payment of income tax as a corporation on the theory that the Joint Emergency Operation organized and operated by them is a corporation.

Held: Yes, they are taxable as an unregistered partnership. Petitioners engaged, thru Lorenzo Ona, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. In these circumstances, it is our considered view that rom the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo Ona as a common fund in undertaking several transactions or in business with the intention of dividing profit to be shared by time proportionately, such act was tantamount to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the above mentioned provision in the Tax Code.

Held: It is a corporation. Considering that the Batangas Transportation and Laguna Bus operated different lines, sometimes in different provinces or territories, under different franchises, with different equipment and personnel, it cannot possibly be true and correct to say that the end of each year, the gross receipts and income in the gross expense of the 2 companies are exactly the same for purposes of the payment of income tax. What was actually done in this case was that although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture or joint management operated the business affairs of the 2 companies as though they constituted a single entity ,company or partnership, thereby obtaining substantial economy and profits in the operation. Ona vs. CIR (1972) Facts: When Julia Bunales died, she left her spouse and children her estate. Her children were still minors then so the father became the administrator of the estate who filed for petition of the project of partition which was approved by the court. Though approved the petition was approved, no division of the properties were ever made. Lorenzo Ona used the properties in business by leasing selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. Every year, their shares were divided among them though the petitioners do not actually receive income. CIR subjected them to corporate Alyssa Africa

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Issue: Whether or not the petitioners were liable for corporate income tax as an unregistered partnership.

Obillos vs. CIR (1985) Facts: Issue: Held: Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership. Co-ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the Income Tax Law. Pascual vs. CIR (1988) Facts: Issue: Held: The essential elements of a partnership are 2, namely: (a) an agreement to contribute money,

Taxation Law

property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for admittedly, the petitioners have agreed to, and did, contribute money and property to a common fund. In the instant case, petitioners bought 2 parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought another 3 parcels of land from one seller. It was only in 1968 when they sold the 2 parcels of land after which they did not make any additional or new purchase. The remaining 3 were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present. AFISCO Insurance Corporation vs. CA (1999) Facts: Issue: Held: The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC. 1. the pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool. 2. The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. 3. Pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial, and economically useful to the business of the ceding company and Munich, because without it they would not have received their premiums. ii. Income of partners in a regular partnership – Sec. 73(D) Section 73. Distribution of Dividends or Assets by Corporations (D) Net Income of a Partnership Deemed Constructively Received by Partners – The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27(A) of this Alyssa Africa

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Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not. 3. Kinds of Corporations i. Domestic ii. Resident Foreign Corporation iii. Non-resident Foreign Corporation Marubeni Corporation vs. CIR (1989) Facts: Marubeni Corporation, a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engaged in business under Philippine laws. Marubeni had equity investments in AG&P Manila. In 1981, AG&P declared and paid cash dividends to Marubeni for the first and third quarters. AG&P as a withholding agent, paid 15% branch profit remittance tax and directly remitted the cash dividends to petitioner’s head office in Tokyo, Japan. In a letter dated January 29, 1981, petitioner, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are connected with its conduct of business in the Philippines to consider it branch profits subject to 15% profit remittance tax under Section 24(b)(2) of the NIRC. The acting Commissioner replied by stating that investing in shares of stock is not an activity which is effectively connected with its trade or business in the country. Consequently, Marubeni, believing that as a Philippine branch of Marubeni Japan, it was in effect a resident foreign corporation, wrote a letter to the CIR to claim its refund or issuance of tax credit for the profit tax remittance erroneously paid on dividends. In response, the CIR denied the claim on the ground that while it is not subject to profit remittance tax, because it is a non-resident stockholder, it is subject to dividend income of 25% pursuant to Article 10(2)(b) of the Tax Treaty. The CTA affirmed the decision. Issue: Whether or not Marubeni Japan is a resident foreign corporation subject to only 10%

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intercorporate final tax on dividends received from a domestic corporation. Held: The Solicitor General has adequately refuted petitioner's arguments in this wise: The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. iv. Others 1. Private Educational Institutions and NonProfit Hospitals a. Sec. 27(B) of the NIRC Section 27. Rates of Income Tax on Domestic Corporations (B) Proprietary Educational Institutions and Hospitals. – Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of 10% on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term “unrelated trade, business or other activity” means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A “proprietary educational institution” is any private school maintained and administered by private individuals or groups with an issued permit to Alyssa Africa

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operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. Requisites of Proprietary Educational Institution a. Private School b. Maintained and administered by private individuals or groups c. with issued permit to operate from DECS or CHED or TESDA in accordance with existing laws and regulations Unrelated Trade, Business or Other Activity Not substantially related to the exercise of performance by such educational institution or hospital of its primary purpose or function. b. Sec. 34(A)(2) of the NIRC Section 34. Deductions from Gross Income – Except for taxpayers earning compensation income arising from personal services rendered under employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the following deductions from gross income; (A) Expenses. – (2) Expenses Allowable to Private Educational Institutions. – In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to Under Section 27(B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof. CIR vs. St. Luke’s Medical Center (2012) Facts: BIR assessed a deficiency taxes against St. Luke’s comprised of VAT, income tax, withholding tax on compensation and expanded withholding

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tax. St. Luke’s filed an administrative protest on the ground that it was except under Section 30(E) and (G) of the NIRC. It was later on appealed to the CTA. The CTA First Division and En Banc decision partially granted St. Luke’s petition on account that St. Luke’s is a charitable institution which does not lose its charitable character and its exemption from taxation merely because recipients of its benefits who are able to pay are required to do so, where funds derived in this manner are devoted to the charitable purposes of the institution. Issue: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals Held: The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary nonprofit educational institutions 36 and proprietary nonprofit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1). Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary educational institution" as "any private school maintained and administered by private individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit. "Non-profit" does not necessarily mean "charitable." Alyssa Africa

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The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers. St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. 2. International Carrier a. Sec. 28(A)(3) of the NIRC Section 28. Rates of Income Tax on Foreign Corporations (A) Tax on Resident Foreign Corporations – (3) International Carrier. – An international carrier doing business in the Philippines shall pay a tax of 2 ½% on its Gross Philippine Billings as defined hereunder: (a) International Air Carrier – “Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating

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from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port of point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any part outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the Gross Philippine Billings. (b) International Shipping – “Gross Philippine Billings” means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents; Provided, That international carriers doing business in the Philippines may avail of a preferential rate of exemption from the tax herein imposed on their gross revenue derived from the carriage of persons and their excess baggage on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory on the basis of reciprocity such that an international carrier, whose home country grants income tax exemption to Philippine carriers, shall likewise be exempt from the tax imposed under this provision. b. Secs. 2 to 5 and 8 of RR No. 15-02 dated May 30, 2002 c. Sec. 1 of RA No. 10378 dated March 7, 2013 i. Secs. 1 to 4 of RR No. 15-13 dated September 20, 2013 CIR vs. British Overseas Airways Corporation (1987) Facts: Issue: Alyssa Africa

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Held: The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.13 It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now taxed as follows: ... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code). Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross Philippine billings," thus: ... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail provided the cargo or mail originates from the Philippines. ...

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The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2-½ % tax on gross Philippine billings is an income tax. If it had been intended as an excise or percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.

1997 National Internal Revenue Code on its taxable income116 from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1 1/2% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign corporation organized and existing under the laws of Canada.

South African Airways vs. CIR (2010) Facts: Issue: Held: the general rule is that resident foreign corporations shall be liable for a 32% income tax on their income from within the Philippines, except for resident foreign corporations that are international carriers that derive income "from carriage of persons, excess baggage, cargo and mail originating from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as coming within the purview of the general rule.11

3. Foreign Currency Deposit Units a. Sec. 27(D)(3) of the NIRC Section 27. Rates of Income Tax on Domestic Corporations (D) Rate of Tax on Certain Passive Incomes (3) Tax on Income Derived under the Expanded Foreign Currency Deposit System – Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks; Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded foreign system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system, shall be subject to a final tax at the rate of 10%. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income. Air Canada vs. CIR (2016) Facts: Issue: Held: The tax (Gross Philippine Billings)attaches only when the carriage of persons, excess baggage, cargo,and mail originated from thePhilippines in a continuous anduninterrupted flight, regardless ofwhere the passage documents weresold. Not having flights to and from thePhilippines, petitioner is clearly notliable for the Gross PhilippineBillings tax.While petitioner is taxable as aresident foreign corporation underSection 28(A)(1) of the Alyssa Africa

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b. Sec. 28(A)(7)(b) of the NIRC Section 28. Rates of Income Tax on Foreign Corporations – (A) Tax on Resident Foreign Corporations. – (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. – (b) Income Derived under the Expanded Foreign Currency Deposit System – Income derived by a

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depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than depository banks under the expanded system shall be subject to final tax at the rate of 10% Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. c. Sec. 5 of RR No. 14-12 dated November 7, 2012 Section 5. Tax Treatment of Interest Income from FCDU Subject to 7.5% Final Withholding Tax if received by: a. citizens b. resident citizens c. domestic corporations d. resident foreign corporations Non-residents whether individuals or corporations are EXEMPT. Joint ownership by non-resident and resident (5050) Interest Income from Foreign Currency Loans Granted by Such Depository Banks to Residents (except Offshore Banking Units or other Depository banks)– 10% final tax 4. Offshore Banking Units a. Sec. 28(A)(4) of the NIRC Alyssa Africa

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Section 28. Rates of Income Tax on Foreign Corporations – (A) Tax on Resident Foreign Corporations. – (4) Offshore Banking Units – The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with nonresidents, other offshore baking units, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board, which shall be subject to the regular income tax payable by banks; Provided, however, That any interest income derived from foreign currency loans granted to residents, other than offshore banking units or local commercial banks, including total branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a final tax at the rate of 10%. Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax. b. Sec. 6 of RR No. 14-12 dated November 7, 2012 5. Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies a. Secs. 22(DD) and 22(EE) Section 22. Definitions. – When used in this Title: (DD) The term “regional or area headquarters” shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. (EE) The term “regional operating headquarters” shall mean a branch established in the Philippines

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by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communication; and business development. Regional Area Headquarters a. Branch established in the Philippines by multinational companies; b. Headquarters do not derive income from the Philippines c. Acts as supervisory, communications, and coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific Region and other foreign markets Regional Operating Headquarters a. Branch established in the Philippines by multinational companies; b. Engaged in any of the following services: (a) general administration and planning; (b) business planning and coordination; (c) sourcing and procurement of raw materials and components; (d) corporate finance advisory services; (e) marketing control and sales promotion; (f) training and personnel management; (g) logistic services; (i) research and development services and product development; (j) technical support and maintenance; (k) date processing and communication; and (l) business development Section 28. Rates of Income Tax on Foreign Corporations (A) Tax on Resident Foreign Corporations (6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies – (a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of 10% of their taxable income. Alyssa Africa

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6. Other Non-Resident Foreign Corporations a. Secs. 28(B)(2) to 4 Section 28. Rates of Income Tax on Foreign Corporations (B) Tax on Nonresident Foreign Corporation (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. – A cinematographic film owner, lessor or distributor shall pay a tax of 25% of its gross income from all sources within the Philippines (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals – A nonresident owner of lessor of vessels shall be subject to a tax of 4 ½% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment – Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of 7 ½% of gross rentals or fees. 4. Exempt Corporations i. GOCCS 1. Sec. 27(C) of the NIRC Section 27. Rates of Income Tax on Domestic Corporations. – (C) Government-owned or Controlled Corporations, Agencies or Instrumentalities – The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the GSIS, SSS, Philippine Insurance Corporation (PHIC), the local water districts (LWDs) and PCSO shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity. NOTE: PAGCOR was deleted from exempt GOCCs per R.A. No. 9337. 2. RA 10026 dated March 11, 2010 PAGCOR vs. The BIR (2014)

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Facts: Issue:

Held: In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operations as the same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for the five percent (5%) franchise tax. The exemption attached to the income from gaming operations exists independently from the enactment of R.A. No. 8424. To adopt an assumption otherwise would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption was granted (then withdrawn) than when it was not granted at all in the first place.

ii. Sec. 30 of the NIRC Section 30. Exemptions from Tax on Corporations. – The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or there benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D)Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer of any specific person; Alyssa Africa

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(F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which insures to the benefit of any private stockholder or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consist solely of assessments, dues and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

1. DOF Order No. 137-87 dated December 16, 1987

2. DOF Order No. 149-95 dated November 24, 1995 Non-stock, non-profit educational institutions are exempt from taxes on all their revenues and assets used actually, directly, and exclusively for educational purposes. Subject to taxes on income from trade, business or other activity the conduct of which is not related to the exercise or performance by such educational institution of its educational purpose or function.

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3. Sec. 30 of RR No. 2-40 on what may be considered income exempt from income tax Section 30. Religious, charitable, scientific, athletic, cultural and educational corporations - Exempt from tax on its income IF such corporation meets two tests: a. It must be organized and operated for one or more of the specified purposes b. no part of its net income must inure to the benefit of private stockholders or individuals 4. RMC No. 65-2012 on taxability of condominium corporations; Amounts paid in as dues or fees by members and tenants of a condominium corporation form part of the gross income of the latter subject to income tax. Rationale: Condominium corporations furnishes members and tenants with benefits advantages and privileges. Likewise subject to VAT whether nonstock nonprofit private organization or not 5. RMC No. 9-2013 on taxability of homeowner’s associations Association dues, membership fees and other assessments/charges collected by a homeowner’s association constitute income payments or compensation for beneficial services it provide to its members and tenants. Likewise subject to VAT 6. RMC No. 35-2012 on taxability of clubs operated exclusively for pleasure, recreation and other non-profit purposes Income of recreational clubs from whatever source, including but not limited to membership fees, assessment dues, rental income and service fees are subject to income tax. Likewise subject to VAT

CIR vs. VG Sinco Educational Corporation (1956) Facts: Alyssa Africa

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Issue: Held: While the acquisition of additional facilities, may redound to the benefit of the institution itself, it cannot be positively asserted that the same will redound to the benefit of its stockholders, for no one can predict the financial condition of the institution upon its dissolution. At any rate, it has been held by several authorities that the mere provision for the distribution of its assets to the stockholders upon dissolution does not remove the right of an educational institution from tax exemption. Thus, in the case of U. S. vs. Picwick Electric Membership Corp., 158 F. 2d 272, 277, it was held — “The fact that the members may receive some benefit on dissolution upon distribution of the assets is a contingency too remote to have any material bearing upon the question where the association is admittedly not a scheme to avoid taxation and its good faith and honesty or purpose is not challenged.” With regard to the claim of Appellant that Appellee is not entitled to exemption because it has not complied with the requirement of section 24, Regulation No. 2 of the Department of Finance, we find correct the following observation of the Court of Tax Appeals: “And regarding the proof of exemption required by section 24, Regulation No. 2, Department of Finance which, according to the Defendant, is a condition precedent before an educational institution can avail itself of the exemption under consideration, we understand that it was probably promulgated for the effective enforcement of the provisions of the Tax Code pursuant to Section 338 of the National Internal Revenue Code. Intended to relieve the taxpayer of the duty of filing returns and paying the tax, it cannot be said that the failure to observe the requirement called for therein constitutes a waiver of the right to enjoy the exemption. To hold otherwise would be tantamount to incorporating into our tax laws some legislative matter by administrative regulation.” CIR vs. St. Luke’s Medical Center (2012) Facts: Issue: Held: The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can

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be construed together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary nonprofit educational institutions 36 and proprietary nonprofit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1). Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary educational institution" as "any private school maintained and administered by private individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit. "Non-profit" does not necessarily mean "charitable." The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be allowed to exploit Alyssa Africa

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this subsidy to the detriment of the government and other taxpayers. St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. Ateneo de Manila vs. CIR (2010) Facts: Issue: Held: Supreme Court gave only two requirements that the educational institution must prove, that: (1) it falls under the classification nonstock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. As regards the first requisite, the parties already stipulated that petitioner is a non-stock, non-profit educational institution. Hence, no evidence is necessary to prove the same. As regards the second requisite, petitioner's witness, Mr. Jose P. Salvador, Jr., testified that the canteen in Grade School is used as a medium for teaching Preparatory Level and Grade School students since it links the students' classroom lessons with practical applications in real life. Petitioner's witness, Ms. Leonora P. Wijancho, affirmed that income from cafeteria concession fees is commingled with the other funds that make up "other educational income," and such income is made available for school operations such as salaries, employee benefits, faculty development, supplies and expenses, new books, scholarships, research, new equipment, and major improvements. De La Salle University, Inc. vs. CIR (2010) Facts: Issue: Held: Failed to prove that the income in question is actually, directly and exclusively used for educational purposes. CIR vs. CA (1998) Facts:

Taxation Law

Issue:

Held: In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property, 20the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction. It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be applied. 21Parenthetically, a consideration of the question of construction must not even begin, particularly when such question is on whether to apply a strict construction or a liberal one on statutes that grant tax exemptions to "religious, charitable and educational propert[ies] or institutions." 22 The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the income from the properties must arise from activities 'conducted for profit' before it may be considered taxable." 23 This argument is erroneous. As previously stated, a reading of said paragraph ineludibly shows that the income from any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. The phrase "any of their activities conducted for profit" does not qualify the word "properties." This makes from the property of the organization taxable, regardless of how that income is used — whether for profit or for lofty non-profit purposes.

CIR vs. Club Filipino de Cebu (1962) on definition of “Non-profit”, discussed in the St. Luke’s Case Facts: Issue: Held: It is conceded that the Club derived profit from the operation of its bar and restaurant, but Alyssa Africa

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such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23, 1956).

iii. Secs. 1, 2, 6, and 9-12 of RMO 20-13 dated July 22, 2013 Requires a ruling that they are exempt under Section 30, of the NIRC upon meeting the following: a. Must be a nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans. b. Application for tax exemption and revalidation c. Documentary Requirements d. Meet the following tests: 1. Organizational Test – requires that the corporation or association’s constitutive documents exclusively limit its purposes to one or more of those described in par. E of Section 30 2. Operational Test – mandates that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purposes specified in paragraph E. A corporation who fails to meet the test may be considered activities conducted for profit e. All net income or assets of the corporation or association must be devoted to its purpose and no part of its net income should inure to the benefit of any members or specific persons f. must not be a branch of a foreign non-stock nonprofit org.

Taxation Law

Validity of the ruling: 3 years from the date of effectivity of the specified ruling 1. RMO No. 44-2016 dated July 25, 2016 Non-stock, non-profit educational institution is exempt by virtue of the Constitution but it must prove that: a. it is a non-stock non-profit educational institution; and b. that its income is actually, directly and exclusively used for educational purposes iv. Inurement Prohibition 1. RMC 51-14 dated June 6, 2014 v. General Professional Partnerships 1. Sec. 22(B) of the NIRC Section 22. Definitions – When used in this Title: (B) The term “corporation” shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. “General professional partnerships” are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. 2. Sec. 26 of the NIRC Section 26. Tax Liability of Members of General Professional Partnerships – A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only on their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Alyssa Africa

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Each partner shall report as a gross income his distributive share, actually or constructively received, in the net income of the partnership. 3. RMC 3-12 dated January 11, 2012

Taxation Law

G. Income Subject to Final Tax Applicable to both Individuals and Corporations 1. Final Income Tax on Interests, Royalties, Prizes and Other Winnings i. RR No. 14-12 ii. Sec. 24(B) – Citizens and Resident Aliens 1. OCWs a. Sec. 3 of RR NO. 1-11 iii. Sec. 25(A)(2) – Non-resident Alien Engaged in Trade or Business iv. Sec. 27(D)(1) Corporations

and

(3)

–

Domestic

v. Sec. 28(A)(7)(a) and (b) – Resident Foreign Corporations vi. Sec. 28(B)(1)(5)(a) – Non-resident Foreign Corporation Section 28. Rates of Income Tax on Foreign Corporations. – (B) Tax on Nonresident Foreign Corporation – (1) In General. – Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be 30%. (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. – (a) Interest on Foreign Loans. – A final withholding tax at the rate of 20% is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986 1. Interest on Foreign Loans Alyssa Africa

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Iconic Beverages, Inc. vs. CIR (2015) Facts: Issue: Held: vii. Deposit Substitutes 1. 20-lender Rule 2. Sec. 22(Y) of the NIRC Section 22. Definitions – When used in this Title (Y) The term “deposit substitutes” shall mean an alternative form of obtaining funds from the public other than deposits through the issuance, endorsement… Public – borrowing from 20 or more individual or corporate lenders at one time 19 Lender Rule – borrowing must be made from 20 or more individual or corporate lenders at any one time. If 19 or less it is not deemed as a deposit substitute. viii. Long-Term Deposits 1. Sec. 3 of RR No. 14-12 2. Sec. 22(F) of the NIRC BDO vs. Republic of the Philippines (2015) Meaning of "at any one time" Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of determining the "20 or more lenders" would mean every transaction executed in the primary or secondary market in connection with the purchase or sale of securities. For example, where the financial assets involved are government securities like bonds, the reckoning of "20 or more lenders/investors" is made at any transaction in connection with the purchase or sale of the Government Bonds When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or morelenders/investors, there is deemed to be a public borrowing and the bonds at that point intime are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed interest income from the bonds

Taxation Law

2. Final Income Tax on Cash and Property Dividends i. Sec. 24(B)(2) – Citizens and Resident Aliens ii. Sec. 25(A)(2) – Non-resident Alien Engaged in Trade or Business iii. Sec. 27(D)(4) – Domestic Corporations (4) Intercorporate Dividends – Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. iv. Sec. 28(A)(7)(d) – Resident Foreign Corporations (7) Tax on Certain Incomes Received by a Resident Foreign Corporation.(d) Intercorporate Dividends – Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this title. v. Sec. 28(B)(1)(5)(b) – Non-resident Foreign Corporation (B) Tax on Nonresident Foreign Corporation (b) Intercorporate Dividends – A final withholding tax at the rate of 15% is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow the credit against the tax due from the resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20%.....

Marubeni Corporation vs. CIR (1989) Facts: Marubeni Corporation, a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engaged in business under Philippine laws. Marubeni had equity investments in AG&P Manila. In 1981, AG&P declared and paid cash dividends to Marubeni for the first and third quarters. AG&P as a withholding agent, paid 15% branch profit remittance tax and directly remitted the cash dividends to petitioner’s head office in Tokyo, Japan. In a letter dated January 29, 1981, petitioner, sought a ruling from the Bureau of Alyssa Africa

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Internal Revenue on whether or not the dividends petitioner received from AG&P are connected with its conduct of business in the Philippines to consider it branch profits subject to 15% profit remittance tax under Section 24(b)(2) of the NIRC. The acting Commissioner replied by stating that investing in shares of stock is not an activity which is effectively connected with its trade or business in the country. Consequently, Marubeni, believing that as a Philippine branch of Marubeni Japan, it was in effect a resident foreign corporation, wrote a letter to the CIR to claim its refund or issuance of tax credit for the profit tax remittance erroneously paid on dividends. In response, the CIR denied the claim on the ground that while it is not subject to profit remittance tax, because it is a non-resident stockholder, it is subject to dividend income of 25% pursuant to Article 10(2)(b) of the Tax Treaty. The CTA affirmed the decision. Issue: Whether or not Marubeni Japan is a resident foreign corporation subject to only 10% intercorporate final tax on dividends received from a domestic corporation. Held: The Solicitor General has adequately refuted petitioner's arguments in this wise: The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. 1. Tax Sparing Rule CIR vs. Wander Philippines (1988)

Taxation Law

Two requisites of tax sparing: a. dividends must be received by a nonresident foreign corporation from a domestic corporation; b. there should be a preferential withholding tax of 15% c. 20% is deemed paid on the ground that that the home country of the nonresident foreign corporation grants tax credit on the same amount based on the difference between the normal income tax of 35% on corporations and the prefential income tax. CIR vs. Proctor & Gamble Manufacturing Corp. (1991)

Philippine

3. Final Income Tax on Sale of Shares of Stock i. Sec. 24(C) – Citizens and Resident Aliens ii. Sec. 25(A)(3) – Non-resident Alien Engaged in Trade or Business iii. Sec. 25(B) – Non-resident Alien Not Engaged in Trade or Business iv. Sec. 27(D)(2) – Domestic Corporations Jardine Davies vs. CIR v. Sec. 28(A)(7)(c) Corporations

–

Resident

Foreign

vi. Sec. 28(B)(1)(5)(c) – Non-resident Foreign Corporation vii. Stock Transaction Tax 1. Sec. 127 of the NIRC viii. RR No. 6-2008 dated April 22, 2008 4. Final Income Tax on Sale of Real Property i. Sec. 24(D)(1) – Citizens and Resident Aliens ii. Sec. 25(A)(3) – Non-resident Alien Engaged in Trade or Business iii. Sec. 25(B) – Non-resident Alien Not Engaged in Trade or Business Alyssa Africa

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iv. Se. 27(D)(5) – Domestic Corporations SMI-ED Technology Corporation, Inc. vs. CIR (2014) v. RR No. 8-98 dated August 25, 1998 vi. Foreclosure Sales 1. RR No. 4-99 dated March 9, 1999 2. RMC No. 058-08 dated August 15, 2008 – who should pay/statutory seller 3. RR No. 9-2012 dated May 31, 2012 vii. Sale of Principal Residence 1. RR No. 13-99 dated July 26, 1999 2. RR No. 14-00 dated November 20, 1999

Taxation Law

H. Taxes Applicable to Corporations i. Regular Corporate Income Tax vs. Minimum Corporate Income Tax 1. Regular Corporate Income Tax Section 27. Rates of Income Tax on Domestic Corporations. – (A) In General – Except as otherwise provided in this Code, an income tax of 35% is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009, the rate of income shall be 30%. In the case of corporations adopting the fiscalyear accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the new rate within the fiscal year by the taxable income of the corporation for the period divided by 12. Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at 15% of gross income as defined herein, after the following conditions have been satisfied: (1) A tax effort ratio of 20% of Gross National Product; (2) A ratio of 40% of income tax collection to total tax revenues; (3) A VAT tax effort of 4% of GNP; and (4) A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55% The election of the gross income tax option by the corporation shall be irrevocable for 3 Alyssa Africa

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consecutive taxable years during which the corporation is qualified under the scheme. For purposes of this Section, the term “gross income” derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. “Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, “cost of goods sold” shall include the invoice cost of the goods sold, plus import duties, freight in transporting goods to the place where the goods are actually sold, including insurance while the goods are in transit. For a manufacturing concern, “cost of goods manufactured and sold” shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, “gross income” means gross receipts less sales returns, allowances and discounts. Corporations Liable: Domestic Corporations and Resident Foreign Corporations Tax Rate:30% Tax Base: Taxable Income Formula: Gross Sales Less: Sales returns Sales allowances Sales discounts = Net Sales Less: Cost of goods sold = Gross Income from Sales Add: Incidental Income/Other Income =Gross Income Less: Allowable Deductions =Taxable Income Multiply by: 30% =RCIT due 2. Minimum Corporate Income Tax a. Secs. 27(E) and 28(A)(2) of the NIRC

Taxation Law

Section 27. Rates of Income Tax on Domestic Corporations – (E) Minimum Corporate Income Tax on Domestic Corporations – (1) Imposition of Tax – A minimum corporate income tax of 2% of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the 4th taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax – Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the 3 immediately succeeding taxable years. (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions – The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulations that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax is a meritorious case. (4) Gross Income Defined – For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term “gross income” shall mean gross sales less sales returns, discounts, and allowances and cost of goods sold. “Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, “cost of goods sold” shall include the invoice of the goods sold, plus imports duties, freight in transporting the goods to the place where the goods are actually Alyssa Africa

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sold including insurance while the goods are in transit. Fore a manufacturing concern, “cost of goods manufactured and sold” shall include all costs of productions of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, “gross income” means gross receipts less sales returns, allowances, discounts and cost of services. “Cost of services” shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the services such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, “cost of services” shall include interest expense. Section 28. Rates of Income Tax on Foreign Corporations – (A) Tax on Resident Foreign Corporations. – (2) Minimum Corporate Income Tax on Resident Foreign Corporations – A minimum corporate income tax of 2% of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. b. RR No. 9-98 dated August 25, 1998 NOTE: Applies to domestic and resident foreign corporations MCIT applies: (a) on the beginning of the 4 th taxable year immediately following the taxable year in which such corporation (DC and RFC) commenced its business operations; and (b) whenever such corporation has zero or negative taxable income or whenever the amount of minimum-corporate income tax is greater than the normal income tax due from such corporation;

Taxation Law

NOTE: in case of domestic corporations whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, MCIT apply on operations covered by the regular income tax system;





Carry Forward of Excess Minimum Corporate Income Tax Excess over the normal shall be carried forward on an annual basis and credited against the normal income tax for the 3 immediately succeeding taxable year. The corporation can credit the excess of its MCIT over the normal income tax if the RCIT is greater than the MCIT, and it can be creditable within the next 3 years from payment thereof. Relief from the MCIT under Certain Conditions – requisites: (a) submission of proof by the applicantcorporation, duly verified by the Commissioner’s authorized representative that the corporation sustained substantial losses on account of: (i.) prolonged labor dispute; (ii) force majeure; or (iii) legitimate business reverses (b) Recommendation of the Commissioner to the Secretary of Finance Substantial Losses from a Prolonged Labor Dispute (CLAWS) (a) Losses; (b) Arising from a strike staged by employees; (c) Strike lasted for more than 6 months; (d) Within a taxable period; (e) Caused the temporary shutdown of business operations; Force Majeure A cause due to an irresistible force as by “Act of God” like lightning, earthquake, storm, flood and the like; this includes armed conflicts like war or insurgency. Legitimate Business Reverses Alyssa Africa

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Substantial losses sustained due to: (a) fire; (b) robbery; (c) theft or embezzlement; or (d) other economic reason as determined by the Secretary of Finance Period When a Corporation Becomes Subject to the MCIT (DC and RFC) Taxable Year in which Business Operations Commenced - Period in which the domestic corporation is registered with the BIR Transitory Rule for 1998 – Apportionment formula should the imposition of the MCIT cover only part of the taxable year for businesses using fiscal year basis. Manner of Filing and Payment Paid on a taxable year basis; tax return to be submitted with the corporate annual final adjustment income tax return Accounting Treatment of the Excess Minimum Corporate Income Tax Paid Recorded as “deferred charges-MCIT” in the corporate books “Provision for income tax” for RCIT Exempted Domestic Corporations from MCIT (a) Domestic corporations Operating as Proprietary Educational Institutions Subject to tax of 10% on their taxable income; or (b) Domestic corporations engaged in hospital operations which are non-profit subject to tax at 10% on their taxable income; and (c) Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system, otherwise known as FCDU, on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system, including their interest income from foreign currency loans granted to residents of the Philippines under the expanded foreign currency deposit system, subject to final income tax of 10% of such income;

Taxation Law

(d) Firms taxed under a special income tax regime (i.e. PEZA law and Bases Conversion Development Act); Exempted Resident Foreign Corporations from MCIT (a) Resident foreign corporations engaged in business as “international carrier” subject to tax at 2 ½% of GPB; (b) Resident foreign corporations engaged in business as Offshore Banking Units(OBUs) on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the BSP to transact business with OBUs including interest income from foreign currency loans granted to residents of the Philippines, subject to a final income tax of 10% of such income; and (c) Resident foreign corporations engaged in business as regional operating headquarters subject to tax at 10% of their taxable income; (d) Firms that are taxed under a special income tax regime (i.e. PEZA law, and Bases Conversion Development Act, respectively)



 

c. RR No. 12-07 dated October 10, 2007 Computation and Payment of MCIT Likewise apply at the time of filing the quarterly corporate income tax return (2% gross income at the end of taxable quarter) Excess MCIT from the previous taxable years, not allowed to be credited Credited – expanded withholding tax, quarterly corporate income tax payments under RCIT, MCIT paid in previous taxable quarters Filing of the Quarterly Income Tax Return Computation is on cumulative basis covering previous taxable quarters of the same taxable year CREBA vs. Romulo (2010) Facts: Issue: Held: Manila Banking Corporation vs. CIR (2006) Facts: Alyssa Africa

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Issue: Held: ii. Branch Profit Remittance Tax 1. Sec. 28(A)(5) of the NIRC Section 28. Rates of Income Tax on Foreign Corporations – (A) Tax on Resident Foreign Corporations – (5) Tax on Branch Profits Remittance – Any profit remitted by a branch to its head office shall be subject to a tax of 15% which shall be based on the total profits applied to earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with PEZA). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. Bank of America NT &SA vs. CA (1994) Facts: Petitioner Bank of America NT & SA argues that the 15% branch profit remittance tax on the basis of the above provision should be assessed on the amount actually remitted abroad, which is to say that the 15% profit remittance tax itself should not form part of the tax base. Respondent Commissioner of Internal Revenue, contending otherwise, holds the position that, in computing the 15% remittance tax, the tax should be inclusive of the sum deemed remitted. Issue: Held: In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law (then in force) calls for nothing further. The taxpayer is a single entity, and it should be understandable if, such as in this case, it is the

Taxation Law

local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government. The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latter's shares of stock are owned by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local branches were made to pay only the usual corporate income tax of 25%-35% on net income (now a uniform 35%) applicable to resident foreign corporations (foreign corporations doing business in the Philippines). While Philippine subsidiaries of foreign corporations were subject to the same rate of 25%-35% (now also a uniform 35%) on their net income, dividend payments, however, were additionally subjected to a 15% (withholding) tax (reduced conditionally from 35%). In order to avert what would otherwise appear to be an unequal tax treatment on such subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on their remittances of profits abroad. But this is where the tax pari-passu ends between domestic branches and subsidiaries of foreign corporations. iii. Improperly Accumulated Earnings Tax 1. Sec. 29 of the NIRC Section 29. Imposition of Improperly Accumulated Earnings Tax – (A) In General – In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, on improperly accumulated earnings tax equal to 10% of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax – (1) In General – The improperly accumulated earnings tax imposed in the preceding Subsection shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to Alyssa Africa

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accumulate instead of being divided or distributed. (2) Exceptions – The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations; (b) Banks and other nonbank financial intermediaries; and (c) Insurance companies (C) Evidence of Purpose to Avoid Income Tax – (1) Prima Facie Evidence – The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. (2) Evidence Determinative of Purpose – The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary. (D) Improperly Accumulated Taxable Income – For purposes of this Section, the term “improperly accumulated taxable income” means taxable income adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carryover deducted; And reduced by the sum of: (1) Dividends actually or constructively paid; and (2) Income tax payable. Provided, however, That for corporations using the calendar year basis, the accumulated earnings tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the 12 month period of fiscal year 1997-1998. (E) Reasonable Needs of the Business – For purposes of this Section, the term “reasonable

Taxation Law

needs of the business” includes the reasonably anticipated needs of the business. 2. RR No. 2-01 dated February 12, 2001 Rationale If the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. Thus, a tax being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. Basis of Liability Purpose behind the accumulation of the income and not the consequence of accumulation. If the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or undistributed earnings subject to the tax. Corporations Exempt from Improperly Accumulated Earnings Tax (a) Banks and other non-bank financial intermediaries; (b) Insurance Companies; (c) Publicly-held Corporations; (d) Taxable Partnerships; (e) General Professional Partnerships; (f) Non-taxable joint ventures; and (g) Enterprises duly registered with PEZA and Bases Conversion Development Act, and special economic zones. a. Clarification by RMC No. 35-11 dated March 14, 2011 “Reasonable Needs of the Business” – shall be 100% of the paid-up capital of the amount contributed to the corporation representing the par value of the shares of stock, hence, any excess capital over and above the par shall be excluded. Alyssa Africa

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3. Immediacy Test Cyanamid Phils., Inc. vs. CA (2000) Facts: Issue: Held: To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the Courts of the United States have invented the so-called "Immediacy Test" which construed the words "reasonable needs of the business" to mean the immediate needs of the business, and it was generally held that 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.

Taxation Law

I. Inclusions from Gross Income 1. Sec. 32(A) Section 32 Gross Income (A) General Definition – Except when otherwise provided in this Title, gross income means all income derived from whatever source, including but not limited to the following items: (1) Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner’s distributive share from the net income from the general professional partnership. 2. Compensation i. Sec. 2.78.1(A) of RR No. 2-98 (A) Compensation Income Defined. — In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually. Alyssa Africa

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Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them. (1) Compensation paid in kind. Compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to withholding. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time the services were rendered. (2) Living quarters or meals. If a person receives a salary as remuneration for services rendered, and in addition thereto, living quarters or meals are provided, the value to such person of the quarters and meals so furnished shall be added to the remuneration paid for the purpose of determining the amount of compensation subject to withholding. However, if living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income. (3) Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as compensation subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Commissioner.

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(4) Tips and gratuities. Tips or gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding. (5) Pensions, retirement and separation pay. Pensions, retirement and separation pay constitute compensation subject to withholding, except those provided under Subsection B of this section. (6)Fixed or variable transportation, representation and other allowances (a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding. (b) Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are satisfied: i) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or profession; and (ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer. Reasonable amounts of reimbursements/ advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding. (7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the Alyssa Africa

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year are not subject to income tax and to the withholding tax. (8) Deductions made by employer from compensation of employee. Any amount which is required by law to be deducted by the employer from the compensation of an employee including the withheld tax is considered as part of the employee's compensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (9) Remuneration for services as employee of a nonresident alien individual or foreign entity. The term "compensation" includes remuneration for services performed by an employee of a nonresident alien individual, foreign partnership or foreign corporation, whether or not such alien individual or foreign entity is engaged in trade or business within the Philippines. Any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation which is not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable to an employer. (10) Compensation for services performed outside the Philippines. Remuneration for services performed outside the Philippines by a resident citizen for a domestic or a resident foreign corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines shall be treated as compensation which is subject to tax. A non-resident citizen as defined in these regulations is taxable only on income derived from sources within the Philippines. In general, the situs of the income whether within or without the Philippines, is determined by the place where the service is rendered. 3. Gross Income from Trade or Business i. Forgiveness of Indebtedness 1. Sec. 50 of RR No. 2-40 SECTION 50. Forgiveness of indebtedness. 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

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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. Creditor cancels the debt based on consideration – taxable Creditor cancels the debt without consideration – not taxable/gift 4. Gains from Dealings in Property 5. Interests i. Rule on Imputation of Interest on Loans CIR vs. Filinvest Development Corporation (2011) Facts: Issue: Held: 6. Rents i. Rule on Improvements 1. Sec. 49 of RR No. 2-40 SECTION 49. Improvements by lessees. When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases; (a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease. (b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each year of the lease an aliquot part thereof. If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in Alyssa Africa

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which the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the premature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance. 7. Royalties 8. Dividends Any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. (Sec. 73(A)) i. Cash and/or Property Dividends ii. Forgiveness of Indebtedness 1. Sec. 50 of RR No. 2-40 SECTION 50. Forgiveness of indebtedness. 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.

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iii. Stock Dividends 1. Sec. 73(B) of the NIRC Section 73. Distribution of Dividends of Assets by Corporations – (B) Stock Dividend – A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits.

(c) Other taxpayers not falling under a and b such as estates, trust funds, and pension funds among others

CIR vs. Manning (1975) Facts: Issue: Held:

Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock Exchange. — There shall be levied, assessed and collected on every 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 of securities, under the following rules: (a) Tax Rate. — A stock transaction tax at the rate of one-half of one percent (1/2 of 1%) based on the amount determined in subsection (b) hereunder. (b) Tax Base. — Gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be assumed and paid by the seller or transferor through the remittance of the stock transaction tax by the seller or transferor's broker.

CIR vs. CA (1999) Facts: Issue: Held: iv. Liquidating Dividends 1. Sec. 73(A) of the NIRC Section 73. Distribution of Dividends or Assets by Corporation – (A) Definition of Dividends – The term “dividends” when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss as the case may be. 2. RR. No. 6-2008 dated April 22, 2008 Persons Liable to Tax (a) Individual taxpayer, whether citizen or alien; (b) Corporate taxpayer, whether domestic or foreign; and

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Persons not Liable to the Tax. — The taxes imposed herein shall not apply to the following: (a) Dealers in securities; (b) Investors in shares of stock in a mutual fund company, as defined in Section 22 (BB) of the Tax Code, as amended, and Sec. 2 (s) of these Regulations, in connection with the gains realized by said investor upon redemption of said shares of stock in a mutual fund company; and (c) All other persons, whether natural or juridical, who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws.

Sale, Barter or Exchange, or Issuance of Shares of Stock Through IPO. — There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering (IPO) of shares of stock in closely held corporations, as defined in Sec. 2 (q) hereof, under the following rules: CSTEHI (a) Tax Rates. — A tax at the rates provided hereunder shall be imposed based on subsection (b) hereof in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the Local Stock Exchange: Proportion of Disposed Shares to Outstanding Shares Tax Rate Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty three and one-third percent (33

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1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% (b) Tax Base. — Gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed of. (c) Determination of the Persons Liable to Pay the Tax. — (c.1) Primary Offering. — The tax herein imposed shall be paid by the issuer corporation with respect to the Shares of Stock corresponding to the Primary Offering. (c.2) Secondary Offering. — The tax herein imposed shall be paid by the selling shareholder(s) with respect to the Shares of Stock corresponding to the Secondary Offering. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock Exchange Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28 (A) (7) (C), 28 (B) (5) (C) of The Tax Code, as Amended. — (a) Tax Rate. — The provisions of Sec. 39 (B) of the Tax Code, as amended, notwithstanding, a final tax at the rates prescribed below is hereby imposed on the sale, barter or exchange of shares of stock not traded through the Local Stock Exchange pursuant to Secs. 24 (C), 25 (A) (3), 25 (B), 27 (D) (2), 28 (A) (7) (c), 28 (b) (5) (c) of the said Tax Code, as amended. Amount of Capital Gain Tax Rate Not over Php100,000 5% On any amount in excess of Php100,000 10% (b) Tax Base. — The tax imposed in Subsection (a) above shall be upon the net capital gains realized during the taxable year from the sale, barter, exchange or disposition of shares of stock, except shares sold or disposed of through the Local Stock Exchange which is covered by the provisions of Secs. 5 and 6 above. Wise & Co., Inc. vs. Meer (1947) Facts: Issue: Held: Liquidated dividends received by the stockholders of a dissolved corporation must be deemed as taxable income because and no stock can be redeemed by a dissolved corporation. 9. Annuities 10. Prizes and Winnings Alyssa Africa

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11. Pensions 12. Partner’s distributive share from the net income of the general professional partnership i. Sec. 26 of the NIRC Section 26. Tax Liability of Members of General Professional Partnerships – A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only on their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as a gross income his distributive share, actually or constructively received, in the net income of the partnership. ii. RMC 3-12 dated January 11, 2012 General Professional Partnerships - not subject to income tax or withholding of creditable withholding tax Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. NOTE: Income payments made periodically or at the end of the taxable year by a GPP to the partners, such as drawings, advances, sharings, allowances, stipends and the like, are subject to the 15% if the payments to the partner for the current year exceeds P720,000.00 and 10% creditable withholding tax if otherwise. 13. Tax Benefit Rule i. Refunded Taxes 1. Sec. 34(C)(1) of the NIRC Section 34. Deductions from Gross Incomes – Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax

Taxation Law

under Sections 24(A)[Individual Citizen and Individual Resident Alien]; 25(A)[Nonresident Alien Engaged in Trade or Business within the Philippines]; 26[Members of General Professional Partnerships]; 27(A)[Domestic Corporations], (B) [Proprietary Education Institutions and Hospitals] and (C)[Government-owned or Controlled Corporations, Agencies or Instrumentalities]; and 28(A)(1)[Resident Foreign Corporation], there shall be allowed the following deductions from gross income: (C) Taxes – (1) In General – Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession, trade or business, shall be allowed as deduction, except: (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent to the benefits of paragraph (3) of this Subsection (relating to credits for taxes of foreign countries); (c) Estate and donor’s taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of the gross income in the year of receipt to the extent of the income tax benefit of said deduction. ii. Recovered Bad Debts 1. Sec. 34(E)(1) of the NIRC Section 34. – Deductions from Gross Income (E) Bad Debts. – (1) In General. – Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36(B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year Alyssa Africa

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of recovery to the extent of the income tax benefit of said deduction. Following Items not Subject to Bad Debts (a) Transactions not connected with profession, trade or business; (b) Losses from sales or exchanges or property between: (Section 36B) (1) Family members (spouse, ancestors, lineal descendants, and brothers and sisters whether by the whole of half blood); (2) In case of distributions in liquidation between an individual and a corporation more than 50% in value of the OS of which is owned, directly or indirectly, by or for such individual; (3) Distributions in liquidations between 2 corporations more than 50% in value of the OS of each of which is owned, directly or indirectly, by of for the same individual if either one of such corporations with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; or (4) Grantor and fiduciary of any trust; (5) Fiduciary of a trust and fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Fiduciary trust and a beneficiary of such trust 2. Sec. 4 of RR No. 5-99 dated March 10, 1999 Section 4. Tax Benefit Rule – The recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. Example: If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any deduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without

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deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income.

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J. Exclusions from Gross Income 1. Life Insurance i. Secs. 32(B)(1) and (2) of the NIRC Section 32. Gross Income (B) Exclusions from Gross Income – The following items shall not be included in gross income and shall be exempt from taxation under this Title: (1) Life Insurance – The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income; (2) Amount Received by Insured as Return of Premium – The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. 2. Gifts, Bequests, and Devises i. Sec. 32(B)(3) of the NIRC Section 32 (B) Exclusions from Gross Income (3) Gifts, Bequests, and Devises – The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest shall be included in gross income. ii. Are damages Taxable? Section 32 (B) Exclusions from Gross Income (4) Compensation for Injuries or Sickness. – Amount received, through Accident or Health Insurance or under Workmen’s Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received whether by suit or agreement, on account of such injuries or sickness.

5. Retirement Benefits, Pensions, Gratuities, etc. i. Secs. 32(B)(6)(a) to (f) of the NIRC Section 32 Gross Income (B) Exclusions from Gross Income (6) Retirement Benefits, Pensions, Gratuities, etc. – (a) Retirement benefits received under RA no. 7642 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer ii. Art. 287 of the Labor Code Art. 287. Retirement. Any employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract. In case of retirement, the employee shall be entitled to receive such retirement benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements: Provided, however, That an employee’s retirement benefits under any collective bargaining and other agreements shall not be less than those provided therein. In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year. Unless the parties provide for broader inclusions, the term ‘one-half (1/2) month salary’ shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th

4. Income under Tax Treaty Section 32 (B) Exclusions from Gross Income Alyssa Africa

(5) Income Exempt under Treaty – Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.

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month pay and the cash equivalent of not more than five (5) days of service incentive leaves. Retail, service and agricultural establishments or operations employing not more than ten (10) employees or workers are exempted from the coverage of this provision. Violation of this provision is hereby declared unlawful and subject to the penal provisions under Article 288 of this Code.

iii. Sec. 2.78.1(B)(1)(a) and (b) of RR No. 2-98 SECTION 2.78.1. Withholding of Income Tax on Compensation Income. — (B) Exemptions from withholding tax on compensation. — The following income payments are exempted from the requirement of withholding tax on compensation: (1) Remunerations received as an incident of employment, as follows: (a) Retirement benefits received under Republic Act under 7641 and those received by officials and employees of private firms, whether individual or corporate, under a reasonable private benefit plan maintained by the employer which meet the following requirements: (i) The plan must be reasonable; (ii) The benefit plan must be approved by the Bureau; (iii) The retiring official or employee must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and (iv) The retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer. (b) Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, such as retrenchment, redundancy, or cessation of business. The phrase "for any cause beyond the control of the said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The separation was not of his own making. Whether or not the separation is beyond Alyssa Africa

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the control of the official or employee, being essentially a question of fact, shall be determined on the basis of prevailing facts and circumstances. It shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made. Amounts received by reason of involuntary separation remain exempt from income tax even if the official or the employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty (50) years of age. Any payment made by an employer to an employee on account of dismissal, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payment. CIR vs. CA (1991) . . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. (Manual on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits.

In Re Zialcita AM No. 90-6-015-SC dated October 18, 1990 The case of Atty. Bernardo Zialcita (entitled Administrative Matter No. 90-6-015-SC) is merely an administrative matter involving an employee of this Court who applied for retirement benefits and who questioned the deductions on the benefits given to him. Hence, our resolution applies only to employees of the Judiciary. Terminal Leaves and Retirement benefits

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-

Both exempt from income taxation

international or regional financial established by foreign governments.

International Broadcasting Corporation, Inc. vs. Amarilla (2006) Facts: Issue: Whether the retirement benefits of respondents are part of their gross income Held: Respondents were qualified to retire optionally from their employment with petitioner. However, there is no evidence on record that the 1993 CBA had been approved or was ever presented to the BIR; hence, the retirement benefits of respondents are taxable. An agreement to pay the taxes on the retirement benefits as an incentive to prospective retirees and for them to avail of the optional retirement scheme is not contrary to law or to public morals. Petitioner had agreed to shoulder such taxes to entice them to voluntarily retire early, on its belief that this would prove advantageous to it. Respondents agreed and relied on the commitment of petitioner. For petitioner to renege on its contract with respondents simply because its new management had found the same disadvantageous would amount to a breach of contract. There is even no evidence that any "new management" was ever installed by petitioner after respondents’ retirement; nor is there evidence that the Board of Directors of petitioner resolved to renege on its contract with respondents and demand the reimbursement for the amounts remitted by it to the BIR. BIR Ruling No. DA-151-04 dated March 31, 2004 BIR Ruling No. 052-00 dated October 30, 2000 BIR Ruling No. 496-14 dated December 12, 2014 6. Income Derived by Foreign Government i. Sec. 32(B)(7)(a) of the NIRC Section 32 Gross Income (B) Exclusions from Gross Income (7) Miscellaneous Items – (a) Income Derived by Foreign Government. – Income derived from investments in the Philippines in loans, stocks, bonds, or other domestic securities, or from interest on deposit in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled or enjoying refinancing from foreign governments, and (iii) Alyssa Africa

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institutions

CIR vs. Mitsubishi Metal Corporation, (1990) Facts: Issue:

Held: The contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other considerationsaliunde. The application for the loan was approved on May 20, 1970, or more than a month after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that this proves is the justification for the loan as represented by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it that the same are in line with the provisions and objectives of its charter.

7. Income Derived by the Government or its Political Subdivisions i. Sec. 32(B)(7)(b) of the NIRC Section 32 Gross Income (B) Exclusions from Gross Income (7) Miscellaneous Items – (b) Income Derived by the Government of its Political Subdivisions – Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivisions thereof. 8. Prizes and Awards i. Secs. 32(B)(7)(c) and (d) of the NIRC

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Section 32 Gross Income (B) Exclusions from Gross Income (7) Miscellaneous Items – (c) Prizes and Awards – Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceedings; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (d) Prizes and Awards in Sports Competitions – All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. 9. 13th Month Pay and Other Benefits i. RA No. 10653 dated February 12, 2015 ii. Sec. 32(B)(7)(e) of the NIRC Section 32 Gross Income (B) Exclusions from Gross Income (7) Miscellaneous Items – (e) 13th Month Pay and Other Benefits – Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed P82,000 which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to RA No. 6686; (ii) Benefits received by officials and employees not covered by PD No. 852 as amended by MO 28 dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, That every 3 years after the effectivity of this Act, the President of the Philippines shall adjust the amount herein stated to its present value using the Consumer Price index(CPI) as published by the NSO.

BDO vs. Republic of the Philippines (2015) Facts: Issue: Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax under the 1997 National Internal Revenue Code. Held: It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe Bonds were issued at the time of

iii. Rule on “excess” De Minimis Benefits Sec. 1 of RR No. 10-08 Alyssa Africa

10. Gains from Sale of Bonds, Debentures or Other Certificates of Indebtedness i. Secs. 32(B)(7)(c) and (e) of the NIRC Section 32 Gross Income (B) Exclusions from Gross Income (7) Miscellaneous Items – (c) Prizes and Awards – Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceedings; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. th (e) 13 Month Pay and Other Benefits – Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed P82,000 which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to RA No. 6686; (ii) Benefits received by officials and employees not covered by PD No. 852 as amended by MO 28 dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, That every 3 years after the effectivity of this Act, the President of the Philippines shall adjust the amount herein stated to its present value using the Consumer Price index(CPI) as published by the NSO.

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origination. However, a reading of the underwriting agreement221 and RCBC term sheet222reveals that the settlement dates for the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately P11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion borrowing received by the Bureau of Treasury in exchange for the P35 billion worth of PEACe Bonds was sourced directly from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time of origination or issuance. At this point, however, we do not know as to how many investors the PEACe Bonds were sold to by RCBC Capital. Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit substit7utes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest or discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be required of any lender/investor had the latter turnedaround and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors. We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income received by individuals from longterm deposits or investments with a holding period of not less than five (5) years is exempt from the final tax. Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC Capital/CODE-NGO, orany lender or investor if such be the case, as the withholding agents.

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K. Fringe Benefits Tax 1. Sec. 33 of the NIRC Section 33. Special Treatment of Fringe Benefit – (A) Imposition of Tax – A final tax of 34% effective January 1, 1998; 33% effective January 1, 1999, and 32% effective January 1, 2000 and thereafter, is imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit 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 tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57(A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by 66% effective 1, 1998, 67% effective January 1, 1999, and effective 68% effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed therat: Provided, further that the grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between 100% and the applicable rates of income tax under Subsections (B), (C), (D) and (E) of Section 25.

(4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and the actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employer or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

i. Definition of Fringe Benefits Section 33. Special Treatment of Fringe Benefit. – (B) Fringe Benefit Defined – For purposes of this Section, the term “fringe benefit” means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank-and-file employees as defined herein)

iv. RR No. 3-98 dated May 21, 1998 (exclude tax accounting rules) Coverage Only those given or furnished to managerial or supervisory employees and not to the rank and file.

ii. Fringe Benefits subject to FBT Section 33. (B) …such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; Alyssa Africa

iii. Fringe Benefits not subject to FBT Section 33. Special Treatment of Fringe Benefit. (C) Fringe Benefits Not Taxable – the following fringe benefits are not taxable under this Section: (1) Fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization plans; (3) Benefits given to the rank-and-file employees; whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

Rank and File Employees All employees who are holding neither managerial nor supervisory position. Managerial Employee One vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign, or discipline employees.

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Supervisory Employees Those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. Determination of the Amount Subject to the Fringe Benefit Tax (a) Valuation of the benefit granted; and (b) Determination of the proportion or percentage of the benefit which is subject to the fringe benefit tax. Valuation of Fringe Benefits (1) if the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for. (2) if the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 6(E) of the Code(Authority of the Commissioner to Prescribe Real Property Values) (3) if the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property. Taxation of Fringe Benefit of NRANEIB 25% fringe benefit tax shall be imposed on the grossed-up monetary value of the fringe benefit. Tax base shall be computed by dividing the monetary value of the fringe benefit by 75% Taxation of Fringe Benefits Received by: (1) an alien individual employed by regional or area headquarters or regional operating headquarters of a multinational company; (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed by a foreign service contractor of by a foreign service Alyssa Africa

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subcontractor engaged in petroleum operations in the Philippines; and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees 15% Fringe Benefit Tax on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by 85% Taxation of Fringe Benefit Received by Employees in Special Economic Zones Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% of 15% as provided above. Fringe Benefits Subject to Fringe Benefit Tax (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and the actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employer or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. (1) Housing Privilege 2. De Minimis Benefits i. Definition Those of relatively small value and offered or furnished as a means of promoting the health, goodwill, contentment and efficiency of an

Taxation Law

employee, and those furnished for the convenience of the employer. ii. Enumeration of De Minimis Benefits List of “De Minimis” Benefits which are exempt from income and fringe benefits tax: a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees; b) Monetized value of vacation and sick leave credits paid to government officials and employees; c) Medical cash allowance to dependents of employees not exceeding Php750 per employee per semester or Php125 per month; d) Rice subsidy of Php1,500 or one (1) sack of 50kg. rice per month amounting to not more than Php1,500; e) Uniform and clothing allowance not exceeding Php5,000 per annum; f) Actual yearly medical benefits not exceeding Php10,000 per annum; g) Laundry allowance not exceeding Php300 per month; h) Employee achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding Php10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; i) Gifts given during Christmas and major anniversary celebrations not exceeding Php5,000 per employee per annum; j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage; and, k) Benefits received by an employee by virtue of a collective bargaining agreement (“CBA”) and productivity incentive schemes provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed ten thousand pesos (Php10,000.00) per employee per taxable year. All other benefits given not included in the enumeration above shall not be considered de minimis benefits and shall be subject to withholding tax on compensation income. (Enumeration now exclusive) The amount of “de minimis” benefits conforming to the ceiling herein prescribed shall not be considered in determining the P82,000.00 ceiling of Alyssa Africa

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'other benefits' excluded from gross income under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the “de minimis” benefits over their respective ceilings prescribed by these regulations shall be considered as part of “other benefits” and the employee receiving it will be subject to tax only on the excess over the P82,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the P82,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the SMW. (Revenue Regulations 5-2011, as amended) RR. No. 3-98 dated May 21, 1998 RR No. 8-00 dated August 21, 2000 RR No. 10-00 dated December 14, 2000 RR No. 05-08 dated April 17, 2008 RR No. 5-11 dated March 16, 2011 RR No. 8-12 dated May 11, 2012 RR No. 1-15 dated January 1, 2015

Taxation Law

L. Deductions from Gross Income 1. Expenses i. Sec. 34(A) of the NIRC Section 34. Deductions from Gross Income – Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Section (M) hereof, in computing taxable income subject to income tax under Section 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the following deductions from gross income: (A) Expenses – (1) Ordinary and Necessary Trade, Business or Professional Expenses. – (a) In General. – There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that Alyssa Africa

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are directly related to or in furtherance of the conduct of his title or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals, public policy, or public order shall in no case be allowed as a deduction. (b) Substantiation Requirements – No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. (c) Bribes, Kickbacks and Other Similar Payments. – No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or –controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. (2) Expenses Allowable to Private Educational Institutions. – In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27(B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or (b) to deduct allowable depreciation thereof under Subsection (F) hereof. 1. RR No. 10-02 dated July 10, 2002

Taxation Law

Section 1. Coverage – These regulations shall cover entertainment amusement and recreation expenses of the following taxpayers: a. Individuals engaged in business, including taxable estates and trusts; b. Individuals engaged in the practice of profession; c. Domestic corporations; d. Resident foreign corporations; e. General professional partnerships including its members

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Section 2. Definition of Terms Representation Expenses – expenses incurred by a taxpayer in connection with the conduct of his trade, business or exercise of profession, in entertaining, providing amusement and recreation to, or meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting event, and similar events or places. NOT fixed representation allowances subject to withholding tax on wages. In case ii. Sec. 36(A) of the NIRC Section 36. Items not Deductible – (A) General Rule – In computing net income, no deduction shall in any case be allowed in respect to (1) Personal, living or family expenses; (2) Any amount paid out of new buildings or for permanent improvements, or betterments made to increase the value of any property or estate. This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under Subsection (G)(1) of Section 34 of this Code; (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4)Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate when the taxpayer is directly or indirectly a beneficiary under such policy. iii. Sec. 45 of the NIRC Alyssa Africa

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Section 45. Period for which Deductions and Credits Taken. – The deductions provided for in this Title shall be taken for the taxable year in which “paid or accrued” or “paid or incurred,” dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period. CIR vs. Isabela Cultural Corporation (2007) Facts: Issue: Held: CIR vs. General Foods (2003) Facts: Issue: Held: Atlas Consolidated Mining & Dev’t Corp (1981) Facts: Issue: Held: H. Tambunting Pawnshop, Inc. vs. CIR (2013) Facts: Issue: Held: 2. Interest i. Sec. 34(B) of the NIRC Section 34. Deductions from Gross Income (B) Interest – (1) In General. – The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer’s otherwise allowable deduction for interest expense shall be reduced by 42% of the interest income subject to final tax: Provided, That effective January 1, 2009, the percentage shall be 33%.

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(2) Exceptions. – No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the case basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36(B); or (c) If the indebtedness is incurred to finance petroleum exploration. (3) Optional Treatment of Interest Expense. – At the option of the taxpayer, interest incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. ii. Sec. 36 of the NIRC Section 36. Items not Deductible – (A) General Rule. – In computing net income, no deduction shall in any case be allowed in respect t to – Sky Internet vs. CIR Facts: Issue: Held: iii. RR NO. 13-00 dated November 20, 2000 iv. Tax Arbitrage Rule/Scheme CIR vs. Vda. De Prieto (1960) Facts: Issue: Held:

CIR vs. Vda De Prieto (1960) Facts: Issue: Held:

Paper Industries Corporation of the Philippines vs. CA (1995) Facts: Issue: Held: Alyssa Africa

3. Taxes i. Sec. 34(C) of the NIRC (C) Taxes. – (1) In General. – Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession, trade or business, shall be allowed as deduction, except: (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this Subsection (relating to credits for taxes of foreign countries); (c) Estate and donor’s taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (2) Limitations on Deductions. – In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. (3) CIR vs. Lednicky (1964) Facts: Issue: Held:

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4. Losses 1. Sec. 34(D) of the NIRC ii. Casualty Losses

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RMO 31-09 dated October 16, 2009 iii. Net Operating Loss Carry-Over 1. RR No. 14-01 dated August 27, 2001

ii. RR No. 12-13 dated July 12, 2013

Paper Industries Corporation of the Philippines vs. CA (1995) Facts: Issue: Held: 5. Bad Debts i. Sec. 34(E) of the NIRC (E) Bad Debts. – (1) In General. – Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36(b) ii. RR No. 5-99 Philippine Refining Company vs. CA (1996) Fernandez Hermanos vs. CIR (1969) 6. Depreciation i. Sec. 34(F) of the NIRC ii. RR No. 12-12 dated October 12, 2012 Basilan Estates, Inc. vs. CIR (1967) 7. Depletion 1. Sec. 34(G) of the NIRC 8. Charitable and Other Contributions i. Sec. 34(H) of the NIRC ii. Secs. 3 and 5-8 of RR No. 13-98 dated December 8, 1998 iii. Sec. 13(C) of RR No. 2-03 dated December 16, 2002 iv. RMC No. 86-2014 dated December 5, 2014 9. Research and Development i. Sec. 34(l) of the NIRC 10. Pension Trusts i. Sec. 34(J) of the NIRC 11. Optional Standard Deduction i. Sec. 34(L) of the NIRC ii. Secs. 1 to 7 of RR NO. 16-08 dated November 26, 2008 iii. RR no. 2-10 dated February 18, 2010 iv. Sec. 5 of RR No. 2-14 dated January 24, 2014 12. Additional Requirements for Deductibility i. Sec. 34(K) Alyssa Africa

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M. Gains and Losses from Sale or Exchange of Property 1. Capital Gains and Losses i. Capital Assets vs. Ordinary Assets 1. Sec. 39 of the NIRC Jardine Davies vs. CIR Facts: Issue: Held: 2. Secs. 1 to 3 of RR No. 7-03 dated February 11, 2003 3. Sec. 22(Z) of the NIRC ii. Loss Limitation Rule iii. Holding Period Rule iv. Net Capital Loss Carry-over Rule Calasanz vs. CIR (1986) Facts: Issue: Held: China Banking Corporation vs. CA (2000) Facts: Issue: Held: 2. Determination of Gain or Loss i. Sec. 40 of the NIRC ii. Cost Basis Depending on Mode Acquisition iii. Tax Free Exchange 1. Merger or Consolidation 2. Transfers to Controlled Corporation 3. Sec. 40(C)(2) of the NIRC 4. RR No. 18-01 dated November 13, 2001 5. RMR No. 1-01 dated November 29, 2001 6. RMR No. 1-02 dated April 25, 2002 7. RR No. 6-2008 dated April 22, 2008 8. RMO 17-2016 dated May 5, 2016 Delpher Trades Corporation vs. IAC (1988) Alyssa Africa

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CIR vs. Filinvest Development Corporation (2011) CIR vs. Rufino (1987) 3. Loss from Wash Sales of Stocks or Securities i. Sec. 38 of the NIRC ii. Sec. 7 (c.6) of RR No. 6-08 dated April 22, 2008

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N. Situs Rules 1. Sec. 42 of the NIRC Section 42. Income from Sources within the Philippines. – (A) Gross Income From Sources within the Philippines. – The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests. – Interests derived from sources within the Philippines, and interests on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise; (2) Dividends – The amount received as dividends: (a) From a domestic corporation; and (b) From a foreign corporation, unless less than 50% of the gross income of such foreign corporation for the 3year 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 as determined under the provisions of this Section; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources; (3) Services – Compensation for labor or personal services performed in the Philippines; (4) Rentals and Royalties – Rentals and royalties from property located in the Philippines or from any interest in such property including rentals and royalties for – (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design, or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines, any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial, or commercial knowledge or information; (d) The supply of any assistance that in ancillary and subsidiary to, and is furnished as a means of enabling the application or Alyssa Africa

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enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as in mentioned in paragraph (c);

National Development Company vs. CIR (1987) Facts: The National Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The purchase price was to come from the proceeds of the bonds issued by the Central Bank. Payments were properly made and the vessels were eventually completed and delivered to NDC in Tokyo. Interest payments, however, were remitted by NDC without withholding taxes. The Commissioner held NDC liable for said taxes. Issue: Whether or not the Japanese shipbuilders were to be held liable for tax on interest remitted to them. Held: Yes, the Japanese shipbuilders must be held liable. Section 37 of the Tax Code states that: Sec. 37. Income from sources within the Philippines – (a) Gross income from sources within the Philippines. – The following items of gross income shall be treated as gross income from sources within the Philippines; (1) Interest. – Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise; NDC argues that they should not be subject to tax because the signing of the contract, payment of the price, and delivery were all done in Tokyo. The law however, does not speak of activity but of “source,” which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila. As the Tax Court put it: It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business

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within the Philippines is not planted upon the condition that 'the activity or labor — and the sale from which the (interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of nonresident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond, note or other interest-bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.) Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing under the laws of the Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the balance of the contract price of the twelve (12) ocean-going vessels purchased and acquired by it from the Japanese corporations, including the interest on the principal sum at the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100113, CTA Records; par. 11, Partial Stipulation of Facts.) And pursuant to the terms and conditions of these promisory notes, which are duly signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the purchase price of the aforesaid vessels. The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized and existing under the laws of the Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue Code.) The interest paid Alyssa Africa

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by petitioner, which is admittedly a resident of the Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest derived from sources within the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal Revenue Code. It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the undertaking signed by the Secretary of Finance in each of the promissory notes that: Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of the Philippines, the due and punctual payment of both principal and interest of the above note. There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any doubt concerning this question must be resolved in favor of the taxing power. Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such undertaking was made by the government in consonance with and certainly not against the following provisions of the Tax Code: Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership (companies colectivas), in whatever capacity acting, including lessees or mortgagors of real or personal capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and employees of the Government of the Philippines having control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or categorical gains, profits and income of any nonresident alien individual, not engaged in trade or business within the Philippines and not having any office or place of business therein, shall (except in the cases provided for in subsection (a) of this section) deduct and withhold from such annual or periodical gains, profits and income a tax to twenty (now 30%) per centum thereof: ...

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Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to taxation under this Title not engaged in trade or business within the Philippines and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in section fifty-three a tax equal to thirty (now 35%)per centum thereof, and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section:.... Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without diminution of its taxing power under existing laws. In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws. The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus: Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.) In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, the Court quoted with approval the following regulation of the BIR on the responsibilities of withholding agents: In case of doubt, a withholding agent may always protect himself by withholding the tax due, Alyssa Africa

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and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding, the withholding agent may thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations). "Strict observance of said steps is required of a withholding agent before he could be released from liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon exemption from taxation; hence, an exempting provision should be construed strictissimi juris." CIR vs. British Overseas Airways Corporation (1987) Facts: BOAC is a British Government-owned corporation existing under the laws of the United Kingdom. It operates air transportation service and sells transportation tickets over the routes of the other airline members of the Interline Air Transport Association. BOAC had no landing rights for traffic purposes in the Philippines, nor was it granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB). Hence, it did not carry passengers/cargo to or from the Philippines, but during the period when it was assessed by the CIR, it maintained a general sales agent in the Philippines – Wamer Barnes and Company, Ltd. and later Qantas Airways. The CIR assessed BOAC for deficiency income taxes covering the years 1959-1971 which BOAC paid under protest on the ground that it must not be subject of income tax as the service was not performed by BOAC in the Philippines. Issues: Whether or not the sale of tickets in the Philippines by BOAC constitutes income from Philippine sources, and is therefore, taxable; and Whether or not during the fiscal years in question BOAC is a resident foreign corporation doing business in the Philippines or has an office or place of business in the Philippines. Held: Under Section 20 of the 1977 Tax Code:

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(h) the term resident foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein. (i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business within the Philippines and not having any office or place of business therein It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines.

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Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws. The Tax Code defines "gross income" thus: "Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interests, rents, dividends, securities, or thetransactions of any business carried on for gain or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3]; Emphasis supplied) The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words 'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws." Income means "cash received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it means something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6 The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7 Did such "flow of wealth" come from "sources within the Philippines", The source of an income is the property, activity or service that produced the income. 8 For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case,

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the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties entering into the relationship. 9 True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so considered. " The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the Alyssa Africa

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income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.13 It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now taxed as follows: ... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code). Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross Philippine billings," thus: ... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail provided the cargo or mail originates from the Philippines. ... The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2-½ % tax on gross Philippine billings is an income tax. If it had been intended as an excise or percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.

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CIR vs. Juliane Baier-Nickel (2006) Facts: Juliane Baier-Nickel is a non-resident German citizen is the president of JUBANITEX, Inc., a domestic corporation engaged in manufacturing, marketing, buying or acquiring, holding, importing and exporting, selling and disposing embroidered textile products. In 1995, Juliane received sales commission from the corporation from which 10% was withheld and remitted to the BIR. Later on, she claimed a refund over the said amount contending that it was not income taxable in the Philippines because it was compensation for her services rendered in Germany and therefore, not considered as income form sources outside of the Philippines. Issue: Whether or not the respondent’s sales commission income is taxable in the Philippines.

Held: The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive: The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from "sources within the United States" and suggest an investigation into the nature and location of the activities or property which produce the income. If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income should be from "sources within the United States." If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be from "sources within the United States." If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive.

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Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations. The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations and to make the test of taxability the "source," or situs of the activities or property which produce the income. The result is that, on the one hand, nonresident aliens and nonresident foreign corporations are prevented from deriving income from the United States free from tax, and, on the other hand, there is no undue imposition of a tax when the activities do not take place in, and the property producing income is not employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident within the jurisdiction, or the property or activities out of which the income issues or is derived must be situated within the jurisdiction so that the source of the income may be said to have a situs in this country. The underlying theory is that the consideration for taxation is protection of life and property and that the income rightly to be levied upon to defray the burdens of the United States Government is that income which is created by activities and property protected by this Government or obtained by persons enjoying that protection. 16 The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered.17 The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the

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income. There is therefore no merit in petitioner’s interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income. Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to establish the factual circumstances showing that her income is exempt from Philippine income taxation. The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency of evidence to prove that the services she rendered were performed in Germany. Though not raised as an issue, the Court is clothed with authority to address the same because the resolution thereof will settle the vital question posed in this controversy.23 The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi jurisagainst the taxpayer.24 To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation.

CIR vs. CTA (1984) Facts: Smith Kline and French Overseas Company is a multinational firm domiciled in Philadelphia, Pennsylvania licensed to do business in the Philippines. It is engaged in the importation, manufacture and sale of pharmaceutical drugs and chemicals. In 1971, it filed its income tax return and paid the corresponding taxes. The next year, however, Smith Kline learned that it’s income tax liability was greatly reduced by reason of overpayment. Smith Kline filed a petition with the CTA for the refund of the overpayment or grant of a tax credit. Issue: Whether or not Smith Kline is entitled to refund or grant of tax credit.

Held: The governing law is found in section 37 of the old National Internal Revenue Code, Alyssa Africa

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Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the National Internal Revenue Code of 1977 and which reads: SEC. 37. Income form sources within the Philippines. — xxx xxx xxx (b) Net income from sources in the Philippines. — From the items of gross income specified in subsection (a) of this section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the Philippines. xxx xxx xxx Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the deductions to be made to determine the net income from Philippine sources: SEC. 160. Apportionment of deductions. — From the items specified in section 37(a), as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income. The overhead expenses incurred by the parent company in connection with finance, administration, and research and development, all of which direct benefit its branches all over the world, including the

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Philippines, fall under a different category however. These are items which cannot be definitely allocated or Identified with the operations of the Philippine branch. For 1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. In his petition for review, the Commissioner does not dispute the right of Smith Kline to avail itself of section 37(b) of the Tax Code and section 160 of the regulations. But the Commissioner maintains that such right is not absolute and that as there exists a contract (in this case a service agreement) which Smith Kline has entered into with its home office, prescribing the amount that a branch can deduct as its share of the main office's overhead expenses, that contract is binding. The Commissioner contends that since the share of the Philippine branch has been fixed at $77,060, Smith Kline itself cannot claim more than the said amount. To allow Smith Kline to deduct more than what was expressly provided in the agreement would be to ignore its existence. It is a cardinal rule that a contract is the law between the contracting parties and the stipulations therein must be respected unless these are proved to be contrary to law, morals, good customs and public policy. There being allegedly no showing to the contrary, the provisions thereof must be followed. On the other hand, Smith Kline submits that the contract between itself and its home office cannot amend tax laws and regulations. The matter of allocated expenses which are deductible under the law cannot be the subject of an agreement between private parties nor can the Commissioner acquiesce in such an agreement. Smith Kline likewise submits that it has presented ample evidence to support its claim for refund. To this end, it has presented before the Tax Court the authenticated statement of Peat, Marwick, Mitchell Alyssa Africa

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and Company to show that since the gross income of the Philippine branch was P7,143,155 ($1,098,617) for 1971 as per audit report prepared by Sycip, Gorres, Velayo and Company, and the gross income of the corporation as a whole was $6,891,052, Smith Kline's share at 15.94% of the home office overhead expenses was P1,427,484. We hold that Smith Kline's amended 1971 return is in conformity with the law and regulations. The Tax Court correctly held that the refund or credit of the resulting overpayment is in order. O. Estates and Trusts 1. Taxable Trusts and Estates i. Sec. 60(A) of the NIRC Section 60. Imposition of Tax – (A) Application of Tax. – The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including: (1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of a will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; (3) Income received by estates and deceased persons during the period of administration or settlement of estate; and (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. 2. Employee’s Trust i. Sec. 60(B) of the NIRC Section 60. Imposition of Tax – (B) Exception. – The tax imposed by this Title shall not apply to employee’s trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributors are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable

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year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees; Provided, That any amount actually distributed to any employee or distribute shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

the provident plan in the amount of P300,000 that do not qualify as tax-exempt separation or retirement benefits. Of this amount, P60,000 constitutes a return of her contribution to the provident fund. The entire amount of P240,000 that Ms. M received in excess of her contribution is subject to income tax on the part of Ms. M in the year so distributed.

ii. RMC 39-14 dated May 12, 2014 Illustrations. Situation No. 1. Non-contributory Pension Plan. ABC Labor Union represents all the daily paid employees of VCC Corporation. As a result of their collective bargaining agreement, ABC Labor Union and VCC Corporation established a provident fund. The plan sets forth the terms and conditions of membership therein and the benefits to be provided. Under the terms of the agreement, VCC Corporation is obligated to establish a trust fund and to make contributions thereto at specified rates. The daily paid employees of VCC Corporation are not allowed to contribute to the provident plan. a. The provident fund distributed dividends to the covered employees. As a result, the entire amount of the dividends is subject to the income tax on the part of the covered employees in the year so distributed. b. Mr. Q, an employee covered by the provident plan, resigned from the VCC Corporation. He received benefits from the provident plan that do not qualify as tax-exempt separation or retirement benefits. These benefits are subject to the income tax on the part of Mr. Q to the extent of the entire amount received in the year so distributed. Situation No. 2 Contributory Pension Plan – Same facts as Situation No. 1, except that in this situation, the daily paid employees of VCC Corporation are allowed to contribute up to P20,000 each year to the provident plan. a. The provident fund distributed dividends to the covered employees. The dividends do not constitute a return of the employees’ voluntary contributions. As a result, the entire amount of the dividends is subject to income tax on the part of the covered employees in the year so distributed. b. Ms. M, an employee covered by the provident plan, contributed a total of P60,000 to the provident fund. Upon her resignation from VCC Corporation, she received benefits from Alyssa Africa

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Ossorio Pension Foundation, Inc., vs. CA (2010) Facts: Miguel J. Ossorio Pension Foundation, Incorporated was organized to hold and administer employees’ trust or retirement funds for the benefit of the employees of Victorias Milling Company. Ossorio claims that the income earned by the trust fund is tax exempt under Section 53(b) of the NIRC. On March 25, 1992, Osorio invested part of the employees’ trust fund to purchase a lot in the Madrigal Business Park – its share in the lot being 49.59% with VMC. Later on, the lot was sold to meet the needed funds to pay the retirement to Metrobank. Metrobank, as withholding agent, withheld the tax on the sale. Ossorio claims that it should not have been taxed, hence, the income tax paid should have been refunded. The BIR claims otherwise. Issues: Whether or not the Petitioner is estopped from claiming that the Employees’ Trust fund is the beneficial owner of the 49.59% of the lot and Whether or not they have sufficiently established that the fund is entitled to tax exemption for its share in the proceeds of the sale of the lot. Held: The Employees’ Trust Fund co-owned the lot as proved by the notarized Memorandum of Agreement of the parties though the Deed of Absolute Sale is in the name of VMC. Petitioner’s Articles of Incorporation state the prupose for which the corporation was formed: To hold legal title to, control, invest and administer in the manner provided, pursuant to applicable rules and conditions as established, and in the interest and for the benefit of its beneficiaries and/or participants, the private pension plan as established for certain employees of Victorias Milling Company, Inc., and other pension plans of Victorias Milling Company affiliates and/or subsidiaries, the pension funds and assets, as well as accruals, additions and increments thereto, and such amounts as may be set aside or

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accumulated for the benefit of the participants of said pension plans; and in furtherance of the foregoing and as may be incidental thereto.43(Emphasis supplied) Petitioner is a corporation that was formed to administer the Employees' Trust Fund. Petitioner invested P5,504,748.25 of the funds of the Employees' Trust Fund to purchase the MBP lot. When the MBP lot was sold, the gross income of the Employees’ Trust Fund from the sale of the MBP lot was P40,500,000. The 7.5% withholding tax of P3,037,500 and broker’s commission were deducted from the proceeds. In Commissioner of Internal Revenue v. Court of Appeals,44 the Court explained the rationale for the tax-exemption privilege of income derived from employees’ trusts: It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law. 3. Taxable Income i. Section 61 of the NIRC SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that: (A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year. (B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, Alyssa Africa

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which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary. (C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. 1. Deductions 2. Trust administered in foreign country 4. Exemption allowed to Estates and Trusts i. Section 62 of the NIRC Section 62. Exemption Allowed to Estates and Trusts. – For the purpose of the tax provided for in this Title, there shall be allowed an exemption of P20,000 from the income of the estate or trust. 5. Revocable Trusts i. Section 63 of the NIRC Section 63. Revocable Trusts. – Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor. 6. Income for Benefit of Grantor i. Section 64 of the NIRC Section 64. Income for Benefit of the Grantor – (A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income any be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of

Taxation Law

the income of the trust shall be included in computing the taxable income of the grantor. (B) As used in this Section, the term ‘in the discretion of the grantor’ means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question. 7. Other Matters i. Sections 65 and 66 of the NIRC Section 65. Fiduciary Returns. – Guardians, trustees, executors, administrators, receivers, conservators and all person or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of P20,000 or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section. Section 66. Fiduciaries Indemnified Against Claims for Taxes Paid. – Trustees, executors, administrators and other fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries. P. Returns and Payments of Tax under the NIRC 1. Individual Income Tax Returns i. Section 51 SEC. 51. Individual Return. (A) Requirements. (1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return: Alyssa Africa

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(a) Every Filipino citizen residing in the Philippines; (b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and (d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines. (2) The following individuals shall not be required to file an income tax return: (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income; (b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return. (c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and (d) A minimum wage earner as defined in section 22 (HH) of this Code or an individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. (3) The foregoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (4) The income tax return shall be filed in duplicate by the following persons: (a) A resident citizen - on his income from all sources; (b) A nonresident citizen - on his income derived from sources within the Philippines; (c) A resident alien - on his income derived from sources within the Philippines; and (d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within the Philippines.

Taxation Law

(B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner. (C) When to File. (1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year. (2) Individuals subject to tax on capital gains; (a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(C)shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and (b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition. (D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. (E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax. (F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns. Alyssa Africa

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(G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him. ii. Section 56 SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporations. (A) Payment of Tax. (1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (2) Installment of Payment. - When the tax due is in excess of P2,000, the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. (3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required: Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification

Taxation Law

of his compliance with the requirements for such exemption. In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments. No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. (B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner. As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon this 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) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise repaid in respect of such tax. iii. Section 74 Section. 74. Declaration of Income Tax for Individuals. (A) In General. - Except as otherwise provided in this Section, every individual subject to income tax under Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. In general, 'self-employment income' consists of the earnings derived by the individual from the practice of profession or conduct Alyssa Africa

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of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax. The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration filed during the taxable year under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in Subsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before April 15 of the following calendar year when the final adjusted income tax return is due to be filed. (C) Definition of Estimated Tax. - In the case of an individual, the term 'estimated tax' means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates. iv. Substituted Filing 1. RR No. 03-02 dated March 22, 2002, as amended 2. Corporate Tax Returns i. Section 52 Section 52. Corporation Returns. – (A) Requirements. – Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer,

Taxation Law

and shall be sworn to by such officer and by the treasurer or assistant treasurer. (B) Taxable Year of Corporation. – A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code. (C) Return of Corporation Contemplating Dissolution or Reorganization. – Every corporation shall, within 30 days after the adoption by the corporation of a resolution or plan for its dissolution; or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission; or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by the rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission. (D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24(C), 25(A)(3), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c), shall file a return within 30 days after each transaction and a final consolidated return of all transactions during the taxable year on or before the 15th day of the 4th month following the close of the taxable year. ii. Section 53 Section 53. Extension of Time to File Returns. – The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code. Alyssa Africa

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iii. Section 56 Section 56. Payment and Assessment of Income Tax for Individuals and Corporations. (A) Payment of Tax. (1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. (3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required: Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption. In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment

Taxation Law

shall be paid within (30) days from the receipt of such payments. No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. (B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner. As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon this 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) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise repaid in respect of such tax. iv. Section 75 Section 75. Declaration of Quarterly Corporate Income Tax. – Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than 60 days from the close of each of the first 3 quarters of the taxable year, whether calendar or fiscal year. v. Section 76 Section 76. Fiscal Adjustment Return. – Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during Alyssa Africa

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the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of the tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. vi. Section 77 Section 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. – (A) Place of Filing. – Except as the Commissioner otherwise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required in Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or palce where its main books of accounts and other date from which the return is prepared are kept. (B) Time of Filing the Income Tax Return. – The corporate quarterly declaration shall be filed within 60 days following the close of each of the first 3 quarters of the taxable year. The final adjustment return shall be filed on or before the 15 th day of April, or on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be. (C) Time of Payment of the Income Tax. – The income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Section 75 and 76 shall be paid at the time of the declaration or return is filed in a manner prescribed by the Commissioner. vii. Section 52(C) Section 52. Corporation Returns. –

Taxation Law

(C) Return of Corporation Contemplating Dissolution or Reorganization. – Every corporation shall, within 30 days after the adoption by the corporation of a resolution or plan for its dissolution; or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission; or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by the rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission. 3. Creditable Withholding Tax vs. Final Withholding Tax i. Section 57 of the NIRC Section 57. Withholding of Tax at Source. (A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A) (3), 25(B), 25(C), 25(D), 25(E), 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B) (3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. (B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the Alyssa Africa

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income tax liability of the taxpayer for the taxable year. (C) Tax-free Covenant Bonds. - In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines. ii. RR No. 2-98 Section 2.57 Withholding of Tax at Source (A) Final Withholding Tax. – Under the final withholding tax system 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 on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The Payee is not required to file an income tax return for the particular income. The finality of the withholding tax is limited only to the payee’s income tax liability on the particular income. It does not extend to the payee’s other tax liability on said income, such as when the said income is further subject to a percentage tax. For ex., if a bank receives income subject to final withholding tax, the same shall be subject to a percentage tax. (B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on the said income. The income recipient is still required to file an income tax return, as prescribed in Section 51 and Section 52 of the NIRC, as amended, to report the income and/or pay the

Taxation Law

difference between the tax withheld and the tax due on the income. Taxes withheld on income payment covered by the expanded withholding tax and compensation income are creditable in nature. CREBA vs. Romulo (2010) Facts: CREBA is an association of real estate developers and builders in the Philippines. Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 298, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets. Issue: Whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs 2-98, 6-2001 and 72003, is unconstitutional. Held: No Blurring of Distinctions Between Ordinary Assets and Capital Assets RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.72 The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows: FWT

a) The amount of income tax withheld by the withholding agent is constituted as a Alyssa Africa

CWT

a) Taxes withheld on certain income payments are intended to equal or at least approximate the tax due Page 104

full and final payment of the income tax due from the payee on the said income.

of the payee on said income.

b)The liability for payment of the tax rests primarily on the payor as a withholding agent.

b) Payee of income is required to report the income and/or pay the difference between the tax withheld and the tax due on the income. The payee also has the right to ask for a refund if the tax withheld is more than the tax due.

c) The payee is not required c) The to income recipient is still required file an incometo file an income tax return, as tax return prescribed for in Sec. 51 and Sec. 52 of the the particular NIRC, as amended.74 income.73 As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioner’s contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424. Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary assets.75 The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer’s act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence of the withholding tax method of tax collection. Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the

Taxation Law taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly, the due process requirement applies to the power to tax.79 The CWT does not impose new taxes nor does it increase taxes.80 It relates entirely to the method and time of payment.

4. Withholding on Wages i. Sections 78 to 82 SEC. 78. Definitions. - As used in this Chapter: (A) Wages. - The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid: (1) For agricultural labor paid entirely in products of the farm where the labor is performed, or (2) For domestic service in a private home, or (3) For casual labor not in the course of the employer's trade or business, or (4) For services by a citizen or resident of the Philippines for a foreign government or an international organization. If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one -half (1/2) of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages. (B) Payroll Period. - The term 'payroll period'means a period for which payment of wages is ordinarily made to the employee by his employer, and the term 'miscellaneous payroll period'means a payroll period other than, a daily, weekly, biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period. (C) Employee. - The term 'employee' refers to any individual who is the recipient of wages and includes an officer, employee or elected official of Alyssa Africa

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the Government of the Philippines or any political subdivision, agency or instrumentality thereof. The term 'employee' also includes an officer of a corporation. (D) Employer. - The term 'employer' means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that: (1) If the person for whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term 'employer' (except for the purpose of Subsection(A) means the person having control of the payment of such wages; and (2) In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership or foreign corporation not engaged in trade or business within the Philippines, the term 'employer' (except for the purpose of Subsection(A) means such person. SEC. 79. Income Tax Collected at Source. (A) Requirement of Withholding. - Except in the case of a minimum wage earner as defined in Section 22(HH) of this Code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (B) Tax Paid by Recipient. - If the employer, in violation of the provisions of this Chapter, fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer; but this Subsection shall in no case relieve the employer from liability for any penalty or addition to the tax otherwise applicable in respect of such failure to deduct and withhold. (C) Refunds or Credits. (1) Employer. - When there has been an overpayment of tax under this Section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer. (2) Employees. -The amount deducted and withheld under this Chapter during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section

Taxation Law

24(A) of this Title. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) months from the fifteenth (15 th) day of April. Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the threemonth period to the date the refund of credit is made. Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of countersignature by the Chairman, Commission on Audit or the latter's duly authorized representative as an exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292, otherwise known as the Administrative Code of 1987. (D) Personal Exemptions.(1) In General. - Unless otherwise provided by this Chapter, the personal and additional exemptions applicable under this Chapter shall be determined in accordance with the main provisions of this Title. (2) Exemption Certificate. (a) When to File. - On or before the date of commencement of employment with an employer, the employee shall furnish the employer with a signed withholding exemption certificate relating to the personal and additional exemptions to which he is entitled. (b) Change of Status. - In case of change of status of an employee as a result of which he would be entitled to a lesser or greater amount of exemption, the employee shall, within ten (10) days from such change, file with the employer a new withholding exemption certificate reflecting the change. (c) Use of Certificates. - The certificates filed hereunder shall be used by the employer in the determination of the amount of taxes to be withheld. (d) Failure to Furnish Certificate. - Where an employee, in violation of this Chapter, either fails or refuses to file a withholding exemption certificate, the employer shall withhold the taxes prescribed Alyssa Africa

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under the schedule for zero exemption of the withholding tax table determined pursuant to Subsection (A) hereof. (E) Withholding on Basis of Average Wages. - The Commissioner may, under rules and regulations promulgated by the Secretary of Finance, authorize employers to: (1) Estimate the wages which will be paid to an employee in any quarter of the calendar year; (2) Determine the amount to be deducted and withheld upon each payment of wages to such employee during such quarter as if the appropriate average of the wages so estimated constituted the actual wages paid; and (3) Deduct and withhold upon any payment of wages to such employee during such quarter such amount as may be required to be deducted and withheld during such quarter without regard to this Subsection. (F) Husband and Wife. - When a husband and wife each are recipients of wages, whether from the same or from different employers, taxes to be withheld shall be determined on the following bases: (1) The husband shall be deemed the head of the family and proper claimant of the additional exemption in respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholding exemption certificate. (2) Taxes shall be withheld from the wages of the wife in accordance with the schedule for zero exemption of the withholding tax table prescribed in Subsection (D)(2)(d) hereof. (G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in trade or business in the Philippines shall be subject to the provisions of this Chapter . (H) Year-end Adjustment. - On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year.

Taxation Law

SEC. 80. Liability for Tax. (A) Employer. - The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit. (B) Employee. - Where an employee fails or refuses to file the withholding exemption certificate or wilfully supplies false or inaccurate information thereunder, the tax otherwise required to be withheld by the employer shall be collected from him including penalties or additions to the tax from the due date of remittance until the date of payment. On the other hand, excess taxes withheld made by the employer due to: (1) Failure or refusal to file the withholding exemption certificate; or (2) False and inaccurate information shall not be refunded to the employee but shall be forfeited in favor of the Government. SEC. 81. Filing of Return and Payment of Taxes Withheld. - Except as the Commissioner otherwise permits, taxes deducted and withheld by the employer on wages of employees shall be covered by a return and paid to an authorized agent bank; Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation, where the principal office is located. The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government. The taxes deducted and withheld by employers shall be held in a special fund in trust for the Government until the same are paid to the said collecting officers. SEC. 82. Return and Payment in Case of Government Employees. - If the employer is the Government of the Philippines or any political Alyssa Africa

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subdivision, agency or instrumentality thereof, the return of the amount deducted and withheld upon any wage shall be made by the officer or employee having control of the payment of such wage, or by any officer or employee duly designated for the purpose. 5. Time of Withholding i. Section 2.57 of RR No. 2-98, as amended by RR No. 12-001 ii. 3. Section 2.78 and 2.83 of RR No. 2-98 Section 2.78 Withholding Tax on Compensation – The withholding of tax on compensation income is a method of collecting the income tax at source upon receipt of the income. It applies to all employed individuals whether citizens or aliens, deriving income from compensation for services rendered in the Philippines. The employer is constituted as the withholding agent ING Bank vs. CIR (2015) Facts: ING Bank is a foreign banking corporation incorporated in Netherlands and duly authorized by BSP to operate as branch with full banking authority in the Philippines. While a petition for review by ING Bank was pending for deficiency documentary stamp tax, deificency withholding tax on accured bonuses and deficiency onshore tax liabilities and immunities, ING filed a Manifestation and Motion stating that it availed of the government’s tax amnesty program under RA 9480 with respect to the deficient documentary stamp tax and deficiency onshore tax liabilities and immunities and privileges. Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses accruing to its officers and employees during taxable years 1996 and 1997. It maintains its position that the liability of the employer to withhold the tax does not arise until such bonus is actually distributed. It cites Section 72 of the 1977 National Internal Revenue Code, which states that "[e]very employer making payment of wages shall deduct and withhold upon such wages a tax," and BIR Ruling No. 555-88 (November 23, 1988) declaring that "[t]he withholding tax on the bonuses should be deducted upon the distribution of the same to the officers and employees[.]" Since the supposed bonuses were not distributed to the officers and employees in 1996 and 1997 but were distributed in the succeeding year when the amounts of the bonuses were finally determined, petitioner ING Bank

Taxation Law

asserts that its duty as employer to withhold the tax during these taxable years did not arise. Issue: Whether or not petitioner ING Bank may validly avail itself of the tax amnesty granted by RA 9480 and whether it is liable for deficiency withholding tax on accrued bonuses for the taxable years 1996 to 1997. Held: Under the National Internal Revenue Code, every form of compensation for personal services is subject to income tax and, consequently, to withholding tax. The term "compensation" means all remunerations paid for services performed by an employee for his or her employer, whether paid in cash or in kind, unless specifically excluded under Sections 32(B)83 and 78(A)84 of the 1997 National Internal Revenue Code.85 The name designated to the remuneration for services is immaterial. Thus, "salaries, wages, emoluments and honoraria, bonuses, allowances (such as transportation, representation, entertainment, and the like), [taxable] fringe benefits[,] pensions and retirement pay, and other income of a similar nature constitute compensation income"86 that is taxable. Hence, petitioner ING Bank is liable for the withholding tax on the bonuses since it claimed the same as expenses in the year they were accrued. The tax on compensation income is withheld at source under the creditable withholding tax system wherein the tax withheld is intended to equal or at least approximate the tax due of the payee on the said income. It was designed to enable (a) the individual taxpayer to meet his or her income tax liability on compensation earned; and (b) the government to collect at source the appropriate taxes on compensation.87 Taxes withheld are creditable in nature.88Thus, the employee is still required to file an income tax return to report the income and/or pay the difference between the tax withheld and the tax due on the income.89 For over withholding, the employee is refunded.90Therefore, absolute or exact accuracy in the determination of the amount of the compensation income is not a prerequisite for the employer’s withholding obligation to arise.

Taxation II Transfer Taxes (Sections 84 to 104 of the NIRC as implemented by RR No. 2-03) I. Nature of Transfer Taxes Alyssa Africa

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Taxes imposed upon the privilege of passing ownership of property without any valuable consideration. II. Estate Tax A. Nature of Estate Tax 1. Definition An excise tax on the right of transmitting property at the time of death and on the privilege that a person is given in controlling to a certain extent the disposition of his property to take effect upon death. 2. Tax Exempt Net Estate (Section 84) Section 84. Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 (Gross Estate) and 86 (Computation of Net Estate) of every decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net estate, as computed… 3. Minimum and Maximum Rates (Section 84) Over

But Not Over

The Tax Shall Be

Plu

P 200,000

Exempt

P 200,000

500,000

0

5%

500,000

2,000,000

P15,000

8%

2,000,000

5,000,000

135,000

11

5,000,000

10,000,000

456,000

15

10,000,000

And Over

1,215,000

20

4. Accrual of Estate Tax vs. Liability for Payment (Section 3 of RR No. 2-03) Section 3. The Law that Governs the Imposition of Estate Tax. – It is a well-settled rule that estate taxation is governed by the statute in force at the time of the death of the decedent. The estate tax accrues as of the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. The application of the rates herein prescribed and the procedures in determining the estate tax due shall apply to estate taxes falling due or have accrued beginning January 1, 1998, the effectivity date of RA No. 8424, otherwise known as “The Tax Reform Act of 1997.” Accrual of Estate Tax Accrues upon the death of the decedent

Liability for Payment Within 6 months upon the death of the decedent

Taxation Law

B. Composition of the Gross Estate (Section. 104)/ (Section 4 of RR No. 2-03) Section 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously assessed, (or collected without Alyssa Africa

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assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax. RR 02-03 Section 4. Composition of the Gross Estate. – The gross estate of a decedent shall be comprised of the following properties and interest therein at the time of his death, including revocable transfers and transfers for insufficient consideration, etc.: A) Residents and citizens – all properties, real or personal, tangible or intangible, wherever situated. B) Non-resident aliens – only properties situated in the Philippines provided, that, with respect to intangible personal property, its inclusions in the gross estate is subject to the rule of reciprocity provided for under Section 104 of the Code. 1. Residents and Citizens All properties wherever situated. 2. Non-resident aliens All properties situated in the Philippines provided that intangible personal property will be subject to the rule of reciprocity. a. Rule on Reciprocity (Intangibe personal property) 1. Not included in the Gross Estate if: (a) No Law Taxing Citizens of the Philippines not Residing therein - At the time of his death, the laws of the foreign country to which he was a resident citizen did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or (b) Exempted Citizens of the Philippines not Residing therein - At the time of his death, the laws of the foreign country to which he was a resident citizen allows a similar exemption from transfer or death taxes of every character or description in respect of tangible personal property owned by citizens of the Philippines not residing in that foreign country. 2. Included – No reciprocity CIR vs. Campos Rueda (42 SCRA 23) Facts: Antonio Campos Rueda is the administrator of the estate of Estrella Soriano Vda. De Cerdeira. The former was held liable for deficiency estate and inheritance taxes for the transfer of intangible

Taxation Law

personal properties in the Philippines. The decedent is a Spanish national and resident of Tangier, Morocco up to the time of her death. Campos Rueda sufficiently proved that at the transfers by reason of death of movable properties, corporeal or incorporeal were not subject on that date and in said zone to the payment of death tax whatever the nationality of the decedent might have been. The CIR questioned whether the requisites of statehood is necessary to qualify as a “foreign country” within the exemption of Section 122 of the NIRC. Issue: Whether or not the Philippines should recognize the tax exemption imposed by Tangier. Held: Yes, the tax exemption must be recognized. The controlling legal provision as noted is a proviso in Section 122 of the National Internal Revenue Code. It reads thus: "That no tax shall be collected under this Title in respect of intangible personal property (a) if the decedent at the time of his death was a resident of a foreign country which at the time of his death did not impose a transfer tax or death tax of any character in respect of intangible person property of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent was a resident at the time of his death allow a similar exemption from transfer taxes or death taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country." The only obstacle therefore to a definitive ruling is whether or not as vigorously insisted upon by petitioner the acquisition of internal personality is a condition sine qua non to Tangier being considered a "foreign country". Deference to the De Lara ruling, as was made clear in the opening paragraph of this opinion, calls for an affirmance of the decision of the Court of Tax Appeals. It does not admit of doubt that if a foreign country is to be identified with a state, it is required in line with Pound's formulation that it be a politically organized sovereign community independent of outside control bound by penalties of nationhood, legally supreme within its territory, acting through a government functioning under a regime of law. It is thus a sovereign person with the people composing it viewed as an organized corporate society under a government with the legal competence to exact obedience to its commands. It has been referred to as a bodypolitic organized by common consent for mutual Alyssa Africa

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defense and mutual safety and to promote the general welfare. Correctly has it been described by Esmein as "the juridical personification of the nation." This is to view it in the light of its historical development. The stress is on its being a nation, its people occupying a definite territory, politically organized, exercising by means of its government its sovereign will over the individuals within it and maintaining its separate international personality. Laski could speak of it then as a territorial society divided into government and subjects, claiming within its allotted area a supremacy over all other institutions. McIver similarly would point to the power entrusted to its government to maintain within its territory the conditions of a legal order and to enter into international relations. With the latter requisite satisfied, international law do not exact independence as a condition of statehood. So Hyde did opine. What is undeniable is that even prior to the De Lara ruling, this Court did commit itself to the doctrine that even a tiny principality, that of Liechtenstein, hardly an international personality in the sense, did fall under this exempt category. So it appears in an opinion of the Court by the then Acting Chief Justicem Bengson who thereafter assumed that position in a permanent capacity, in Kiene v. Collector of Internal Revenue. As was therein noted: 'The Board found from the documents submitted to it — proof of the laws of Liechtenstein — that said country does not impose estate, inheritance and gift taxes on intangible property of Filipino citizens not residing in that country. Wherefore, the Board declared that pursuant to the exemption above established, no estate or inheritance taxes were collectible, Ludwig Kiene being a resident of Liechtestein when he passed away." Then came this definitive ruling: "The Collector — hereafter named the respondent — cites decisions of the United States Supreme Court and of this Court, holding that intangible personal property in the Philippines belonging to a non-resident foreigner, who died outside of this country is subject to the estate tax, in disregard of the principle 'mobilia sequuntur personam'. Such property is admittedly taxable here. Without the proviso above quoted, the shares of stock owned here by the Ludwig Kiene would be concededly subject to estate and inheritance taxes. Nevertheless our Congress chose to make an exemption where conditions are such that demand reciprocity — as in this case. And the exemption must be honored."

Taxation Law

CIR vs. Fisher (1961) Facts: Walter G. Stevenson was born of British parents and married in Manila to Beatrice Mauricia Stevenson. Walter died in San Francisco California where he previously moved and established their permanent residence. His will was probated in the Superior Court of California with Beatrice as his sole heiress. One of the properties assessed was the 210,000 shares of stocks from Mindanao Mother Lode Mines Inc. California Tax laws only impose inheritance taxes and their Federal laws impose estate taxes with a rule that if the laws where the intangible personal property states a reciprocal provision exempting a non-resident from legacy, succession, or death taxes if the territory of the state in which the non-resident resided allowed similar exemption in respect to intangible personal property of residents of the Territory of State of the United States or foreign state or country of residence of the decedent. The CIR questioned if the rule of reciprocity would apply in this case. Issue: Whether or not the estate can avail itself of the reciprocity proviso embodied in Section 122 of the National Internal Revenue Code granting exemption from the payment of estate and inheritance taxes on the 210,000 shares of stock in the Mindanao Mother Lode Mines Inc. Held: Section 122 of our National Internal Revenue Code, in pertinent part, provides: ... And, provided, further, That no tax shall be collected under this Title in respect of intangible personal property (a) if the decedent at the time of his death was a resident of a foreign country which at the time of his death did not impose a transfer of tax or death tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent was a resident at the time of his death allow a similar exemption from transfer taxes or death taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country." (Emphasis supplied). On the other hand, Section 13851 of the California Inheritance Tax Law, insofar as pertinent, reads:. "SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal property is exempt from the tax imposed by this part if the decedent at Alyssa Africa

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the time of his death was a resident of a territory or another State of the United States or of a foreign state or country which then imposed a legacy, succession, or death tax in respect to intangible personal property of its own residents, but either:. (a) Did not impose a legacy, succession, or death tax of any character in respect to intangible personal property of residents of this State, or (b) Had in its laws a reciprocal provision under which intangible personal property of a nonresident was exempt from legacy, succession, or death taxes of every character if the Territory or other State of the United States or foreign state or country in which the nonresident resided allowed a similar exemption in respect to intangible personal property of residents of the Territory or State of the United States or foreign state or country of residence of the decedent." (Id.) It is clear from both these quoted provisions that the reciprocity must be total, that is, with respect to transfer or death taxes of any and every character, in the case of the Philippine law, and to legacy, succession, or death taxes of any and every character, in the case of the California law. Therefore, if any of the two states collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, the reciprocity does not work. This is the underlying principle of the reciprocity clauses in both laws. In the Philippines, upon the death of any citizen or resident, or non-resident with properties therein, there are imposed upon his estate and its settlement, both an estate and an inheritance tax. Under the laws of California, only inheritance tax is imposed. On the other hand, the Federal Internal Revenue Code imposes an estate tax on nonresidents not citizens of the United States, but does not provide for any exemption on the basis of reciprocity. Applying these laws in the manner the Court of Tax Appeals did in the instant case, we will have a situation where a Californian, who is nonresident in the Philippines but has intangible personal properties here, will the subject to the payment of an estate tax, although exempt from the payment of the inheritance tax. This being the case, will a Filipino, non-resident of California, but with intangible personal properties there, be entitled to the exemption clause of the California law, since the Californian has not been exempted from every character of legacy, succession, or death tax because he is, under our law, under obligation to pay an estate tax? Upon the other hand, if we exempt the Californian from paying the estate tax, we do not thereby entitle a Filipino to be exempt

Taxation Law

from a similar estate tax in California because under the Federal Law, which is equally enforceable in California he is bound to pay the same, there being no reciprocity recognized in respect thereto. In both instances, the Filipino citizen is always at a disadvantage. We do not believe that our legislature has intended such an unfair situation to the detriment of our own government and people. We, therefore, find and declare that the lower court erred in exempting the estate in question from payment of the inheritance tax. We are not unaware of our ruling in the case of Collector of Internal Revenue vs. Lara (G.R. Nos. L-9456 & L-9481, prom. January 6, 1958, 54 O.G. 2881) exempting the estate of the deceased Hugo H. Miller from payment of the inheritance tax imposed by the Collector of Internal Revenue. It will be noted, however, that the issue of reciprocity between the pertinent provisions of our tax law and that of the State of California was not there squarely raised, and the ruling therein cannot control the determination of the case at bar. Be that as it may, we now declare that in view of the express provisions of both the Philippine and California laws that the exemption would apply only if the law of the other grants an exemption from legacy, succession, or death taxes of every character, there could not be partial reciprocity. It would have to be total or none at all. 3. Gross Estate (Sections 85 and 104) Section 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. Section 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift'. Alyssa Africa

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a. Valuation (Section 85 and 88) (Section 5 of RR No. 2-03) Section 85. Gross Estate (A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death; (B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. (C) Revocable Transfer. (1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death. (2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of death.

Taxation Law

(D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. (E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. (F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code. (G) Transfers for Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent. (H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate.

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Section 88. Determination of the Value of the Estate. (A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. (B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is higher of (1) The fair market value as determined by the Commissioner; or (2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. RR 02-03 Section 5. Valuation of the Gross Estate. - The properties comprising the gross estate shall be valued based on their fair market value as of the time of death. If the property is a real property, the fair market value shall be the fair market value as determined by the Commissioner or the fair market value as shown in the schedule of values fixed by the provincial or city assessors, whichever is higher. For purposes of prescribing real property values, the Commissioner is authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers, bot h from the private and public sectors, determine the fair market value of real properties located in each zone or area. In the case of shares of stock, the fair market value shall depend on whether the shares are listed or unlisted in the stock exchanges. Unlisted common shares are valued based on their book value while unlisted preferred shares are valued at par value. In determining the book value of common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there are any. For shares which are listed in the stock exchanges, the fair market value shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available on the date of the death itself. To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest basic

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standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. 1. Real Property Whichever is higher between the fair market value a. as determined by the Commissioner; or b. as shown in the schedule of values fixed by the provincial and city assessors or 2. Personal Property (applicability of RR No. 62013) General Rule: Fair Market Value at the time of Death 3. Shares of Stock Sale, Barter or Exchange of Shares of Stock not Traded Through a Local Stock Exchange 1. Not listed and traded in the local stock exchanges – Fair Market Value at the time of the sale (RR 06-2013) a. Unlisted common shares – book value b. Unlisted preferred shares – par value (RR 02-03) 2. Listed and traded – fair market value shall be the arithmetic mean between the highest and lowest quotation at a date nearest the date of death, if none is available on the date of death itself. (RR 02-03) 4. Usufruct To determine the value of the right to usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest basic standard mortality table, to be approved by the Secretary of Finance, upon recommendation of the insurance Commissioner. (RR 02-03) b. Decedent’s Interest Section 5. Gross Estate (A) Decedent’s Interest – To the extent of the interest therein of the decedent at the time of his death. c. Transfer in Contemplation of Death Section 5. Gross Estate (B) Transfers in Contemplation of Death - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for Alyssa Africa

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his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Concept of Transfer in Contemplation of Death Does not constitute any transfer in contemplation of death but the retention of some type of control over the property transferred. General Rule: The transfer shall be considered as transfer in contemplation of death if, during the lifetime of the decedent he still retained in the property the following: 1. Possession or enjoyment thereof; 2. Right to the income from the property; or 3. Right either alone or in conjunction with any person, to designate a person who shall possess or enjoy the said property or income therefrom. Exception: Bona fide sale for an adequate and full consideration in money or money’s worth. d. Revocable Transfer Section 85. Gross Estate (C) Revocable Transfer. (1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death. (2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such

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cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of death. General: A transfer is a revocable transfer where: a. There is a transfer by trust or otherwise; b. The enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by: i. the decedent alone; ii. the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power, to alter, amend, revoke or terminate; or iii. where any such power is relinquished in contemplation of the decedent’s death Exception: Bona fide sale for an adequate and full consideration of money or money’s worth The power to alter, amend, or revoke is considered to exist on the death of the decedent: 1. Even though the exercise of the power is subject to a predecent of giving notice; or 2. Even though the alteration, amendment, or revocation takes effect only on the expiration of a stated period after the exercise of the power. e. Property Passing Under General Power of Appointment Section 85. Gross Estate (D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Alyssa Africa

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f. Proceeds of Life Insurance Section 85. Gross Estate g. Prior Interest h. Transfers for Insufficient Consideration i. Capital of Surviving Spouse C. Deductions from the Gross Estate (Section 86) (Section 6 of RR No. 2-03) Section. 86. Computation of Net Estate. - For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined: (A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate (1) Expenses, Losses, Indebtedness, and Taxes. - Such amounts (a) For actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed Two hundred thousand pesos (P200,000); (b) For judicial expenses of the testamentary or intestate proceedings; (c) For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan; (d) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate; and (e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, but not including any income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not

Taxation Law

compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91. (2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received: One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate, and only if in determining Alyssa Africa

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the value of the estate of the prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. (3) Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes. (4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1, 000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home must have been the decedent's family home as certified by the barangay captain of the locality. (5) Standard Deduction. - An amount equivalent to One million pesos (P1, 000,000). (6) Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts: Provided, That in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500, 000). (7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent. (B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the Philippines, by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines:

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(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in paragraph (1) of Subsection (A) of this Section which the value of such part bears to the value of his entire gross estate wherever situated; (2) Property Previously Taxed. - An amount equal to the value specified below of any property forming part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received: One hundred percent (100%) of the value if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift, within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death. These deductions shall be allowed only where a donor's tax, or estate tax imposed under this Title is finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in that part of the decedent's gross estate which at the time of his death is situated in the Philippines; and only if, in determining the value of the net estate of the prior Alyssa Africa

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decedent, no deduction is allowable under paragraph (2) of Subsection (B) of this Section, in respect of the property or properties given in exchange therefore. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said paragraph shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under paragraph (2) bears to the value of that part of the decedent's gross estate which at the time of his death is situated in the Philippines. Where the property referred to consists of two (2) or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. (3) Transfers for Public Use. - The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines or any political subdivision thereof, for exclusively public purposes. (C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property shall, for the purpose of this Section, be deducted from the net estate of the decedent. (D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines. (E) Tax Credit for Estate Taxes paid to a Foreign Country. (1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country. (2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entire net estate; and

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(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate.

this subsection shall be computed using the following formula:

SEC. 87 Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed: (A) The merger of usufruct in the owner of the naked title; (B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; (C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and (D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes.

“(2) Property previously taxed - …” “(3) Transfers for Public Use - …” “(4) Net share of the surviving spouse in the conjugal property or community property. -…”

1. Allowed to Residents and Citizens 2. Allowed to Non-Resident Alien (See Also Section 86 D) (D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines. a. Limitation (Section 7 RR No. 2-03) Section 7. Computation of the Net Estate of A Decedent Who is a Non-Resident Alien of the Philippines. – The value of the net estate of a decedent who is a non-resident alien in the Philippines shall be determined by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines the following items of deductions: (1) Expenses, losses, indebtedness, and taxes – That proportion of the total expenses, losses, indebtedness, and taxes which the value of such part bears to the value of his entire gross estate wherever situated. The allowable deduction under Alyssa Africa

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Phil. Gross Estate World Gross Estate

x

Expenses, Losses Indebtedness and Taxes

=

Allowable Deduction

No deduction shall be allowed in the case of a nonresident decedent not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate not situated in the Philippines. 3. Allowable Deductions a. Ordinary Deductions (Expenses, Losses, Indebtedness and Taxes) 1. Funeral Expenses a. Limitation b. Examples c. Items not Deductible d. Substantiation Requirement e. How Computed 2. Judicial Expenses a. Examples b. Limitation CIR vs. CA and Pajonar (2000) Facts: Issue: Whether or not notarial fees form part of judicial expenses deductible from the gross estate. Held: Yes, notarial fees are judicial expenses deductible from the gross estate. Judicial expenses are expenses of administration. Administration expenses, as an allowable deduction from the gross estate of the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the United States to include all expenses "essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to it." In other words, the expenses must be essential to the proper settlement of the estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible. This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas the Court construed the phrase "judicial expenses of the testamentary or

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intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature of a qualification for the office, and not necessary in the settlement of the estate. Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate. Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property during his lifetime should also be considered as a deductible administration expense. PNB provided a detailed accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts which contributed towards the collection of decedent's assets and the subsequent settlement of the estate.

"claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions.

3. Claims Against the Estate a. Requisites for Deductibility i. Simple Loan ii. Unpaid Obligation from Purchase of Goods iii. Court Settlement

D. Exclusion from Net Estate and Exemptions (Sections 86 C and 87)

Dizon vs. CTA (2008) Facts: Issue: Held: We express our agreement with the date-ofdeath valuation rule, made pursuant to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United States. First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation.70 Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term Alyssa Africa

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4. Claims Against Insolvent Persons 5. Unpaid Mortgages, Taxes, and Casualty Losses a. Rules b. Special Deductions 1. Vanishing Deductions a. Requisites for Deductibility 2. Transfers for Public Use 3. Family Home 4. Standard Deduction 5. Medical Expenses a. Limitation b. Substantiation Requirement c. How Computed 6. Amount Received by Heirs Under Republic Act No. 4917

(C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property shall, for the purpose of this Section, be deducted from the net estate of the decedent. Section 87 Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed: (A) The merger of usufruct in the owner of the naked title; (B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; (C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and (D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be

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used by purposes.

such

institutions

for

administration

E. Foreign Estate Tax Credit/s (Section 86 E) (E) Tax Credit for Estate Taxes paid to a Foreign Country. (1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country. (2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entire net estate; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate. F. Notice of Death (Section 89) SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds Twenty thousand pesos (P20,000),the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the decedent's death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner. G. Estate Tax Returns and Payment of Tax (Sections 90 and 91) Section. 90. Estate Tax Returns. (A) Requirements. - In all cases of transfers subject to the tax imposed herein, or where, though exempt from tax, the gross value of the estate exceeds Two hundred thousand pesos (P200,000), or regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth: (1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, Alyssa Africa

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not a citizen of the Philippines, of that part of his gross estate situated in the Philippines; (2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and (3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes. Provided, however, That estate tax returns showing a gross value exceeding Two million pesos (P2, 000,000) shall be supported with a statement duly certified to by a Certified Public Accountant containing the following: (a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines; (b) Itemized deductions from gross estate allowed in Section 86; and (c) The amount of tax due whether paid or still due and outstanding. (B) Time for Filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under the preceding Subsection (A) shall be filed within six (6) months from the decedent's death. A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within thirty (30) days after the promulgation of such order. (C) Extension of Time. - The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. (D) Place of Filing. - Except in cases where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner. Section 91. Payment of Tax. (A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor, administrator or the heirs. (B) Extension of Time. - When the Commissioner finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any

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part thereof not to exceed five (5) years, in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially. In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of the Statute of Limitations for assessment as provided in Section 203 of this Code shall be suspended for the period of any such extension. Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner. If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension. (C) Liability for Payment. - The estate tax imposed by Section 84 shall be paid by the executor or administrator before delivery to any beneficiary of his distributive share of the estate. Such beneficiary shall to the extent of his distributive share of the estate, be subsidiarily liable for the payment of such portion of the estate tax as his distributive share bears to the value of the total net estate. For the purpose of this Chapter, the term 'executor' or 'administrator' means the executor or administrator of the decedent, or if there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent. 1. When Required and Contents 2. Time of Filing / Extension of Time to File 3. Place of Filing 4. Time of Payment/ Extension of Time to Pay 5. CPA Certification

For the purpose of this Chapter, the term 'executor' or 'administrator' means the executor or administrator of the decedent, or if there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent. Estate of Vda. De Gabriel vs. CIR (2004) a. Discharge of Executor or Administrator from Personal Liability (Section 92) SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability therefore, the Commissioner (as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in Section 203 shall not notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. b. Liability of Heirs CIR vs. Pineda (21 SCRA 105) 2. Payment Before Delivery by Executor (Section 94) SEC. 94. Payment before Delivery by Executor or Administrator. - No judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has been paid is shown. Marcos II vs. CA 273 SCRA 47

H. Other Matters 1. Who is Liable to Pay (Section 91 C) (C) Liability for Payment. - The estate tax imposed by Section 84 shall be paid by the executor or administrator before delivery to any beneficiary of his distributive share of the estate. Such beneficiary shall to the extent of his distributive share of the estate, be subsidiarily liable for the payment of such portion of the estate tax as his distributive share bears to the value of the total net estate. Alyssa Africa

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3. Duties of Certain Officers (Section 95) SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax fixed in this Title and actually due thereon had been paid is

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show, and they shall immediately notify the Commissioner, Regional Director, Revenue District Officer, or Revenue Collection Officer or Treasurer of the city or municipality where their offices are located, of the nonpayment of the tax discovered by them. Any lawyer, notary public, or any government officer who, by reason of his official duties, intervenes in the preparation or acknowledgment of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer of the place where he may have his principal office, with copies of such documents and any information whatsoever which may facilitate the collection of the aforementioned tax. Neither shall a debtor of the deceased pay his debts to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the tax fixed in this Chapter had been paid is shown; but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased. 4. Restitution of Tax Upon Satisfaction of Outstanding Obligations (Section 96) Section 96. Restitution of Tax Upon Satisfaction of Outstanding Obligations. - If after the payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid. 5. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights (Section 97) Section 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. - There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or any Alyssa Africa

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one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. PNB vs. Santos (2014) III. Donor’s Tax A. Nature of Donor’s Tax Llandoc vs. CIR (14 SCRA 292) Pirovano vs. CIR (14 SCRA 232) 1. Definition 2. Composition of Gross Gift (Section 98 and 104) Section 91. Payment of Tax. – (A) Time of Payment. – The estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor, administrator of the heirs. (B) Extension of Time. – When the Commissioner finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed 5 years, in case the estate is settled through the courts, or 2 years in case the estate is settled extrajudicially. In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension ,and the running of the Statute of Limitations for assessment as provided in Section 203 of this Code shall be suspended for the period of any such extension. When the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner. If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon

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the payment of the said tax in accordance with the terms of the extension. Section 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the Alyssa Africa

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amounts previously assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax. 3. Tax Exempt Net Gift (Section 99) Section 99. Rates of Tax Payable by Donor. (A) In General. - The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year in accordance with the following schedule: If the net gift is:

(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a 'stranger', is a person who is not a: (1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or (2) Relative by consanguinity in the collateral line within the fourth degree of relationship. (C) Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended. 4. Minimum and Maximum Rates (Section 99)

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5. Who is a stranger and applicable tax rate (Section 99) (B) Tax Payable by Donor if Donee is a Stranger. – When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For the purposes of this tax, a stranger is a person who is NOT a: (1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or (2) Relative by consanguinity in the collateral line within the fourth degree of relationship. 6. Gift Splitting Gift Splitting – This method is a form of tax avoidance wherein the donor makes two or more donations during different calendar years to lower the tax to be paid. B. Composition of the Gross Gifts (Section 104) Section 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal Alyssa Africa

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property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax.

1. Residents and Citizens 2. Non-resident Alien a. Rule on Reciprocity 3. Corporations 4. Valuation of Gifts made in Property (Section 102) Section 102. Valuation of Gifts Made in Property. – If the gift is made in property, the fair market value thereof at the time of the gift shall be considered the amount of the gift. In case of real property, the provisions of Section 88 (B) shall apply to the valuation thereof. Personal Property – Fair Market Value (Section 88B) Real Property: whichever is higher of (1) Fair Market Value as determined by the Commissioner; or (2) Fair Market Value as shown in the schedule of values fixed by the Provincial and City Assessors 5. Exemption of Certain Gifts (Section 101)

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Section. 101. Exemption of Certain Gifts. - The following gifts or donations shall be exempt from the tax provided for in this Chapter: (A) In the Case of Gifts Made by a Resident. (1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000): (2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and (3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of this exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. (B) In the Case of Gifts Made by a Nonresident not a Citizen of the Philippines. (1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. (2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization:Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. (C)Tax Credit for Donor's Taxes Paid to a Foreign Country. (1) In General. - The tax imposed by this Title upon a donor who was a citizen or a resident at the Alyssa Africa

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time of donation shall be credited with the amount of any donor's tax of any character and description imposed by the authority of a foreign country. (2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated within such country taxable under this Title bears to his entire net gifts; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor's net gifts situated outside the Philippines taxable under this title bears to his entire net gifts. a. Residents and Citizens b. Non-residents Aliens c. Corporations C. Other Matters 1. Rule on Political Contributions [99C] Section 99. Rates of Tax Payable by Donor – (C) Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended. Secs. 13 and 14 RA No. 7166 RA No. 7166 Section 13. Authorized Expenses of Candidates and Political Parties. – The agreement amount that a candidate or registered political party may spend for election campaign shall be as follows: 1. For Candidates. – P10.00 for President and Vice-President; and for other candidates P3.00 for every voter currently registered in the constituency where he filed his certificate of candidacy: Provided, That a candidate without any political party and without support from any political party may be allowed to spend P5.00 for every such voter; and 2. For Political Parties. – P5.00 for every voter currently registered in the constituency or constituencies where it has official candidates. Any provision of law to the contrary notwithstanding any contribution in cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the Commission shall not be subject to the payment of any gift tax.

Taxation Law

Section 14. Statement of Contributions and Expenditures; Effect of Failure to File Statement. – Every candidate and treasurer of the political party shall, within 30 days after the day of the election, file in duplicate with the offices of the Commission the full, true and itemized statement of all contributions and expenditures in connection with the election. No person elected to any public offices shall enter upon the duties of his office until he has filed the statement of contributions and expenditures herein required. The same prohibition shall apply if the political party which nominated the winning candidate fails to file the statement required herein within the period prescribed by this Act. Except candidates for elective barangay office, failure to file the statements or reports in connection with electoral contributions and expenditures are required herein shall constitute an administrative offense for which the offenders shall be liable to pay an administrative fine ranging from P1,000.00 to P30,000.00 in the discretion of the Commission. The fine shall be paid within 30 days from receipt of notice of such failure; otherwise, it shall be enforceable to a writ of execution issued by the Commission against the properties of the offender. It shall be the duty of every city or municipal election registrar to advise in writing, by personal delivery or registered mail, within 5 days from the date of election all candidates residing in his jurisdiction to comply with their obligation to file their statements of contributions and expenditures. For the commission of a second or subsequent offense under this section, the administrative fine shall be from P2,000.00 to P60,000.00 in the discretion of the Commission. In addition, the offender shall be subject to perpetual disqualification to hold public office. RR No. 7-2011 dated February 16, 2011

Section 100. Transfer for Less Than Adequate and Full Consideration. – Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed as a gift, shall be included in computing the amount of gifts made during the calendar year. Philamlife vs. SOF, GR No. 210987 dated November 24, 2014 3. Manner of Computing the Donor’s Tax (Sec. 12 RR No. 2-03) 4. Tax Credit for Donor’s Taxes paid to a Foreign Country [Sec. 101 (C)] 5. Renunciation of share in the conjugal partnership or absolute community; and, hereditary estate (Sec. 11 RR No. 2-03) 6. Capacity to Buy Spouses Evono vs. DOF, CTA EB Case No. 705 dated June 4, 2011 D. Filing and Payment of Returns (Sec. 103) / (Sec. 13 RR No. 2-03) 1. Requirements Section 103. Filing of Return and Payment of Tax. – (A) Requirements. – any individual who makes any transfer by gift (except those which, under Section 101, are exempt from the tax provided for in this Chapter) shall, for the purpose of the said tax, make a return under oath in duplicate. The return shall set forth: (1) Each gift made during the calendar year which is to be included in computing net gifts; (2) The deductions claimed and allowable; (3) Any previous net gifts made during the same calendar year; (4) The name of the donee; and (5) Such further information as may be required by rules and regulations made pursuant to law

RMC 30-2016 dated March 14, 2016 Abello vs. CIR, GR No. 120721 dated February 23, 2005 2. Transfer for Less than adequate and full consideration (Sec. 100) (RR No. 6-2008 on shares of stock as amended by RR 6-2013) Alyssa Africa

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2. Time and Place of Filing Section 103. Filing of Return and Payment of Tax. – (B) Time and Place of Filing and Payment. – The return of the donor required in this Section shall be filed within 30 days after the date the gift is made and the tax due thereon shall be paid at the time of

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filing. Except in case where the Commissioner otherwise permits, the return shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of the gifts made by a nonresident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the Commissioner. Section 13 (RR No. 2-03) … For this purpose, the term “OFFICE OF THE COMMISSIONER” shall refer to the Revenue District Office (RDO) having jurisdiction over the BIR-National Office Building which houses the Office of the Commissioner, or presently, to the Revenue District Office No. 39 – South Quezon City. 3. Notice of Donation – Exemption from Donor’s Tax (RR No. 2-03) Section 13. Filing of Returns and Payment of Donor’s Tax – (C) Notice of Donation by a Donor Engaged in Business. – In order to be exempt from donor’s tax and to claim full deduction of the donation given to qualified donee institutions duly accredited by the Philippine Council for NGO Certification, Inc. (PCNC), the donor engaged in business shall give a notice of donation on every donation worth at least P50,000.00 to the Revenue District Officer which has jurisdiction over his place of business within 30 days after receipt of the qualified donee institution’s duly issued Certificate of Donation, which shall be attached to the said Notice of Donation, stating that not more than 30% of the said donation/gifts for the taxable year shall be used by such accredited non-stock, non-profit corporation/NGO institution (qualified-donee institution) for administration purposes pursuant to the provisions of Section 101(A)(3) and (B)(2) of the Code. Value-Added Tax (Sections 105-115 of the NIRC, amended by RA Nos. 9337 and 10378; Implemented by RR No. 16-05 as amended by RR Nos. 4-07 and RR No. 16-2011) Alyssa Africa

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I. Preliminary Matters a. Nature and characteristic of VAT in general Sec. 4.105.-2 of RR No. 16-05 Section 4.105-2. Nature and Characteristics of VAT. – VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA No. 9337. However, in the case of importation, the importer is the one liable for the VAT. CIR vs. Magsaysay Lines (2006) Facts: The National Development Corporation decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and 5 of its ships. The NMC shares and the vessels were offered for public bidding but under the condition that the highest bidder will pay VAT of 10% on the value of the vessels. Magsasay Lines offered and was awarded the ships. Payment of VAT was then secured through a Letter of Credit by the bidders. Later on, bidders filed a formal request for a ruling on whether or not the sale of the vessels was subject to VAT with the BIR. The parties came to an agreement that should no favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for the payment of VAT. BIR ruled that the sale of the vessels was subject to VAT. Private respondents moved for the reconsideration of the VAT Ruling but it was denied. In the CTA, the CIR argued that the sale of the vessels is among those transactions “deemed sale.” The CTA ruled that the sale of a vessel was an “isolated transaction,” not done in the ordinary course of NDC’s business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of trade or business. The CTA further held that the sale of the vessels could not be “deemed sale,” and thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of RR No. 5-87.

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Issue: Whether or not the sale of the vessels is subject to VAT. Held: No, it is not subject to VAT. VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT).17 The final purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption, yet assuages the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability. Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations,19 the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court, should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. CIR vs. Seagate Technology (Phils) (2005) Facts: Seagate Technology Philippines is a VAT and PEZA registered entity and is operating from Alyssa Africa

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the Special Economic Zone in Naga, Cebu. Business companies operating under the said zone are exempt from all internal revenue taxes including VAT. Seagate filed VAT returns for April 1, 1998 to June 30, 1999. An administrative claim for refund of VAT input taxes were filed by Seagate to which Seagate received no final action. The CTA granted the claim for refund and was affirmed by the CA on the ground that neither Section 109 of the Tax Code nor Secs,. 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly filed the administrative judicial claims for tis refund within the 2 year prescriptive period. Issue: Whether or not respondent is entitled to refund or issuance of Tax Credit Certificate representing unutilized input VAT paid on capital goods purchased for the period April 1, 1998 to June 30, 1999. Held: Yes, it is entitled. Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business 29 as they pass along the production and distribution chain, the tax being limited only to the value added 30 to such goods, properties or services by the seller, transferor or lessor.31 It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. 32 As such, it should be understood not in the context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on consumption.33 In either case, though, the same conclusion is arrived at. If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40 passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. 41 If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.42 Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead be refunded44 to the taxpayer or credited45 against other internal revenue taxes.

Taxation Law

Concurring Opinion of Justice Abad – Fort Bonifacio Development Corp. vs. CIR (2012) A value added tax is a form of indirect sales tax paid on products and services at each stage of production or distribution, based on the value added at that stage and included in the cost to the ultimate consumer. To illustrate how VAT works, take a lumber store that sells a piece of lumber to a carpentry shop for P 100.00. The lumber store must pay a 12% VAT or P 12.00 on such sale but it may charge the carpentry shop P 112.00 for the piece of lumber, passing on to the latter the burden of paying the P 12.00 VAT. When the carpentry shop makes a wooden stool out of that lumber and sells the stool to a furniture retailer for P150.00 (which would now consists of the P 100.00 cost of the lumber, the P 50.00 cost of shaping the lumber into a stool, and profit), the carpentry shop must pay a 12% VAT of P 6.00 on the P 50.00 value it added to the piece of lumber that it made into a stool. But it may charge the furniture retailer the VAT of P 12.00 passed on to it by the lumber store as well as the VAT of P 6.00 that the carpentry shop itself has to pay. Its buyer, the furniture retailer, will pay P 150.00, the price of the wooden stool, and P 18.00 (P 12.00 + P 6.00), the passed-on VAT due on the same. When the furniture retailer sells the wooden stool to a customer for P 200.00, it would have added to its P 150.00 acquisition cost of the stool its mark-up of P 50.00 to cover its overhead and profit. The furniture retailer must, however, pay an additional 12% VAT of P 6.00 on the P 50.00 addon value of the stool. But it could charge its customer all the accumulated VAT payments: the P 12.00 paid by the lumber store, the P 6.00 paid by the carpentry shop, and the other P 6.00 due from the furniture retailer, for a total of P 24.00. The customer will pay P 200.00 for the stool and P 24.00 in passed-on 12% VAT. Now, would the furniture retailer pay to the BIR the P 24.00 VAT that it passed on to its customer and collected from him at the store’s counter? Not all of the P 24.00. The furniture retailer could claim a credit for the P 12.00 and the P6.00 in input VAT payments that the lumber store and the carpentry shop passed on to it and that it paid for when it bought the wooden stool. The furniture retailer would just have to pay to the BIR the output VAT of P 6.00 covering its P 50.00 mark-up. This payment rounds out the 12% VAT due on the final sale of the stool for P 200.00. Alyssa Africa

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When the VAT law first took effect, it would have been unfair for a furniture retailer to pay all of the 10% VAT (the old rate) on the wooden stools in its inventory at that time and not be able to claim deduction for any tax on sale that the lumber store and the carpentry shop presumably passed on to it when it bought those wooden stools. To remedy this unfairness, Section 105 of the NIRC granted those who must pay VAT for the first time a transitional input tax credit of 8% of the value of the inventory of goods they have or actual value-added tax paid on such goods when the VAT law took effect. The furniture retailer would thus have to pay only a 2% VAT on the wooden stools in that inventory, given the transitional input VAT tax credit of 8% allowed it under the old 10% VAT rate. b. VAT as an indirect Tax Contex vs. CIR (2004) Facts: Issue: Whether or not the exemption from all local and national internal revenue taxes provided in RA No. 7227 covers the VAT paid by petitioner, a Subic Bay Freeport Enterprise on its purchases of supplies and materials. Held: While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund. At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures. Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately

Taxation Law

to the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax. It may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioner’s purchases did exist, petitioner is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer. Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT erroneously passed on to the latter. c. Persons Liable (Sec. 105) Section 105. Persons Liable. – Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA No. 7716. The phrase “in the course of trade and business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit, private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. i. Persons liable in general Alyssa Africa

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CIR vs. CA and Commonwealth Management Services (2000) Facts: Issue: Whether or not COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon. Held: Yes, COMASERCO is liable to pay VAT. Contrary to COMASERCO's contention Section 105 of the Tax Code clarifies that even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profitoriented. The definition of the term "in the course of trade or business" present law applies to all transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services. Sec. 108 of the National Internal Revenue Code of 1997 defines the phrase "sale of services" as the "performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project." 11 On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 01098 12 emphasizing that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax. Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments

Taxation Law

for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT. ii. Who are required to register for VAT (Sec. 236 G) (Sec. 9.236-1 of RR No. 16-05, consider threshold under RR No. 16-2011) Section 236. Registration Requirements (G) Persons required to Register for Value-added Tax. – (1) Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or exchange of services, shall be liable to register for value-added tax if: (a) His gross sales or receipts for the past 12 months, other than those that are exempt under Section 109 (A) to (V), have exceeded P1,500,000.00; or (b) There are reasonable grounds to believe that his gross sales or receipts for the next 12 months, other than those that are exempt under Section 109(A) to (V), will exceed P1,500,000.00. (2) Every person who becomes liable to be registered under paragraph 1 of this Subsection shall register with the Revenue District Officer which has jurisdiction over the head office or branch of that person, and shall pay the annual registration fee prescribed in Subsection (B) hereof. If he fails to register, he shall be liable to pay the tax under Title IV as if he were a VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered. RR No. 16-05 Section 9.236-1 Registration of VAT Taxpayers. (a) In general. – Any person who, in the course of trade or business, sells, barters, exchanges goods or properties, or engaged in the sale of services subject to VAT imposed in Secs. 106 and 108 of the Tax Code shall register with the appropriate RDO using the appropriate BIR forms and pay an annual registration fee in the amount of P500 using BIR Form No. 0605 for every separate or distinct establishment or place of business (save a warehouse without sale transactions) before the start of such business and every year thereafter on or before the 31st day of January. Alyssa Africa

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“Separate or distinct establishment” shall mean any branch or facility where sale transactions occur. “Branch” means a fixed establishment in a locality which conducts sales operation of the business as an extension of the principal office. “Principal place of business” refers to the place where the head or main office is located as appearing in the corporation’s Articles of Incorporation. In the case of an individual, the principal place of business shall be the place where the head or main office is located and where the books of accounts are kept. “Warehouse” means the place or premises where the inventory of goods are withdrawn for delivery to customers, dealers or persons acting in behalf of the business. Any person who maintains a head or main office and branches in different places shall register with the RDO which has jurisdiction over the place wherein the main or head office or branch is located. However, the registration fee shall be paid to any accredited bank in the Revenue District where the head office or branch is registered provided that in areas where there are no accredited banks, the same shall be paid to the RDO, collection agent, or duly authorized treasurer of the municipality where each place of business or branch is situated. Each VAT-registered person shall be assigned only one TIN. The branch shall use the 9 digit TIN of the Head Office plus a 3 digit Branch Code. “VAT Registered Person” refers to any person registered in accordance with this section. “VAT Registrable Person” refers to any person who is required to register under the provisions of this section but failed to register. (b) Mandatory: Any person who, in the course of trade or business, sells, barters or exchanges goods or properties or engages in the sale or exchange of services shall be liable to register if: i. His gross sales or receipts for the past 12 months, other than those that are exempt under Sec. 109(1)(A) to (U) of the Tax Code, have exceeded P1,500,000.00; or ii. There are reasonable grounds to believe that his gross sales or receipts for the next 12 months, other than those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, will exceed P1,500,000.00. Every person who becomes liable to be registered under paragraph (1) of this subsection shall register with the RDO which has jurisdiction over the head office or branch of that person, and

Taxation Law

shall pay the annual registration fee prescribed in subsection 9.236-1(a) hereof. If he fails to register, he shall be liable to pay the output tax under Secs. 106 and/or 108 of the Tax Code as if he were a VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered. Threshold under RR No. 16-2011 for Sale of Residential Lot, Sale of House and Lot, Lease of Residential Unit and Sale or Lease of Goods or Properties or Performance of Services covered by Section 109 (P), (Q) and (V) of Tax Code of 1997 Section 1 Background. Sections 109(P), (Q) and (V) of the Tax Code of 1997, as amended provides that the amounts stated therein shall be adjusted to their present values using the Consumer Price Index as Published by the NSO. Using the following formula/information: Value (Current Year) Value Base Year

=

CPI (Current Year) CPI (Base Year)

Value Base Year 2005 The adjusted threshold amounts, rounded off to the nearest hundred are as follows: Section

Amount in Pesos (2005)

Section 109 (P) Section 109 (P) Section 109 (Q) Section 109 (V)

1,500,000

Adjusted threshold amounts 1,919,500.00

2,500,000

3,199,200.00

10,000

12,800.00

1,500,000

1,919,500.00

iii. Optional VAT Registration (Sec. 236 H) (Sec.9.236-1 of RR No. 16-05, consider threshold under RR No. 16-2011) Section 236. Registration Requirements (H) Optional Registration for Value-Added Tax of Exempt Person. (1) Any person who is not required to register for value-added tax under Subsection (G) hereof may elect to register for value-added tax by registering with the Revenue District Office that has a jurisdiction over the head office of that person, and Alyssa Africa

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paying the annual registration fee in Subsection (B) hereof. (2) Any person who elects to register under this Subsection shall not be entitled to cancel his registration under Subsection (F) (2) for the next three (3) years. For purposes of Title IV of this code, any person who has registered value-added tax as a tax type in accordance with the provisions of Subsection (C) hereof shall be referred to as a "VAT-registered person" who shall be assigned only one Taxpayer Identification Number (TIN). (RR. No. 16-05 and Threshold Refer to Previous Subsection) d. Meaning of the phrase “in the course of trade of business” (Sec. 105) The phrase “in the course of trade and business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit, private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity. Sec.4.105-3 of RR No. 16-05 Section 4. 105-3. Meaning of “In the Course of Trade or Business”. – The term “in the course of trade or business” means the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Non-resident persons who perform services in the Philippines are deemed to be making sales. CIR vs. Magsaysay Lines (2006) Facts: The National Development Corporation decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and 5 of its ships. The NMC shares and the vessels were offered for public bidding but under the condition that the highest bidder will pay VAT of 10% on the value of the vessels. Magsasay Lines offered and was awarded

Taxation Law

the ships. Payment of VAT was then secured through a Letter of Credit by the bidders. Later on, bidders filed a formal request for a ruling on whether or not the sale of the vessels was subject to VAT with the BIR. The parties came to an agreement that should no favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for the payment of VAT. BIR ruled that the sale of the vessels was subject to VAT. Private respondents moved for the reconsideration of the VAT Ruling but it was denied. In the CTA, the CIR argued that the sale of the vessels is among those transactions “deemed sale.” The CTA ruled that the sale of a vessel was an “isolated transaction,” not done in the ordinary course of NDC’s business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in the course of trade or business. The CTA further held that the sale of the vessels could not be “deemed sale,” and thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or Section 4 of RR No. 5-87. Issue: Whether or not the sale of the vessels is subject to VAT. Held: No, it is not subject to VAT. VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT).17 The final purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption,18 yet assuages the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability. Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 Alyssa Africa

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of the Tax Code and its subsequent incarnations,19 the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court, should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. Mindanao II Geothermal Partnership vs. CIR (2013) Facts: Issue: Held: Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, 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 1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions incidental thereto." Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for VAT. CIR vs. Sony Phils, Inc. (2010) e. Exceptions to the Rule of Regularity Section 105. ...”The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident

Taxation Law

foreign persons shall be considered as being rendered in the course of trade or business.” 1. Nonresident foreign corporations 2. Importation f. Output Tax vs. Input Taxes i. Sources of Input Tax (Sec. 110 A) SEC. 110. Tax Credits. A. Creditable Input Tax. (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: (a) Purchase or importation of goods: (i) For sale; or (ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or (iii) For use as supplies in the course of business; or (iv) For use as materials supplied in the sale of service; or (v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code. (b) Purchase of services on which a value-added tax has been actually paid. (2) The input tax on domestic purchase or importation of goods or properties by a VATregistered person shall be creditable: (a) To the purchaser upon consummation of sale and on importation of goods or properties; and (b) To the importer upon payment of the valueadded tax prior to the release of the goods from the custody of the Bureau of Customs. Provided, that the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code shall be spread evenly over the a month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P 1, 000, 000): Provided, however, That if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, that in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or Alyssa Africa

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license upon payment of the compensation, rental, royalty or free. (3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows: (a) Total input tax which can be directly attributed to transactions subject to value-added tax; and (b) A ratable portion of any input tax which cannot be directly attributed to either activity. The term "input tax" means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VATregistered person. It shall also include the transitional input tax determined in accordance with Section 111 of this Code. The term "output tax" means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of this Code. ii. Excess Output or Input Tax (Sec. 110 B) (B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the Vatregistered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. Provided, however, That any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112. iii. Rule on Input Tax on Capital Goods (Sec.110A) (Sec.4.110-3 of RR No. 16-05) Section 110 A … Provided, that the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code shall be spread evenly over the a month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P 1, 000, 000): Provided, however, That if the estimated useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, that in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty or free.

Taxation Law

CIR vs. Sony Phils, Inc. (2010) RR No. 16-05 Section 4.110-3 Claim for Input Tax on Depreciable Goods. – Where a VAT-registered person purchases or imports capital goods, which are depreciable assets for income tax purposes, the aggregate acquisition cost of which (exclusive of VAT) in a calendar month exceeds P1,000,000.00 regardless of the acquisition cost of each capital good, shall be claimed as credit against output tax in the following manner: (a) If the estimated useful life of a capital good is 5 years or more – The input tax shall be spread evenly over a period of 60 months and the claim for input tax credit will commence in the calendar month when the capital good is acquired. The total input taxes on purchases or importations of this type of capital goods shall be divided by 60 and the quotient will be the amount to be claimed monthly. (b) If the estimated useful life of a capital good is less than 5 years – The input tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life of the capital good. The claim for input tax credit shall commence in the calendar month that the capital goods were acquired. Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or imported during any calendar month does not exceed P1,000,000, the total input taxes will be allowed as credit against output tax in the month of acquisition; Provided, however, that the total amount of input taxes (input tax on depreciable capital goods plus other allowable input taxes) allowed to be claimed against the output tax in the quarterly VAT Returns shall be subject to the limitation prescribed under Sec. 4.110-7 of these Regulations. The aggregate acquisition cost of a depreciable asset in any calendar month refers to the total price agreed upon for one or more assets acquired and not in the payments actually made during the calendar month. Thus, an asset acquired in installment for an acquisition cost of more than P1,000,000.00 will be subject to the amortization of input tax despite the fact that the monthly payments/installments may not exceed P1,000,000.00. iv. Substantiation of Input (Sec.4.110-8 of RR No. 16-05)

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II. VAT on Goods and Services a. Definition of Goods and Services (Sec. 106 and Sec. 108) "Goods or Properties." The term "goods" or "properties" shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; (b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films, tapes and discs; and (e) Radio, television, satellite transmission and cable television time. The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire another domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the

Taxation Law

Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities. [50] telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under section 119 of this Code, and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity, and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase "sale or exchange of services" shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right; (2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment; (3) The supply of scientific, technical, industrial or commercial knowledge or information; (4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3); (5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person. (6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; (7) The lease of motion picture films, films, tapes and discs; and (8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time. Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. The term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during Alyssa Africa

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the taxable quarter for the services performed or to be performed for another person, excluding valueadded tax. b. VAT Base for Goods and Services (Sec. 106 and Sec. 108) (A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to ten percent (10%) [44] of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent(12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National Government deficit as a percentage of GDP of the previous year exceeds one and onehalf percent (1 1/2%). [45] SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 10 of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,raise the value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and onehalf percent (1 1/2%). c. Meaning of Gross Selling Price and Gross Receipts (Sec. 106 and Sec. 108) The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.

Taxation Law

The term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding valueadded tax. i. Sec. 11 of RR No. 4-07 d. Rules on Sales of Real Property i. Rule on Sales on Installment (RR No. Sec.4.106-3 of RR No. 16-05 as amended by Sec. 3 of RR No. 4-07) ii. See also Rule on Sale of Real Property Use in Business (Sec. 14(I) of RR No. 4-07) iii. Correlate with Sec. 109 on Exempt Sales of Real Property SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax. (A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of or king generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered in their original state; [55] (B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets); (C) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines; Alyssa Africa

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(D) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide; (E) Services subject to percentage tax under Title V; (F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; (G) Medical, dental, hospital and veterinary services except those rendered by professionals. (H) Educational services rendered by private educational institutions, duly accredited by the Department of Education(DepED), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA)and those rendered by government educational institutions; (I) Services rendered by individuals pursuant to an employer-employee relationship; (J) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the AsiaPacific Region and do not earn or derive income from the Philippines; (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529; (L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; (M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;

Taxation Law

(N) Sales by non-agricultural, non- electric and noncredit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15, 000) and regardless of the aggregate capital and net surplus ratably distributed among the members; (O) Export sales by persons who are not VATregistered; (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2, 500, 000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); (Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P10, 000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO); (R) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; (S) Transport of passengers by international carriers; (T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; (U) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; (V) Services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; an (W) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the Alyssa Africa

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amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present With footnote in the book value using the Consumer Price Index, as published by. the National Statistics-Office (NSO); (2) A VAT-registered person may elect that Subsection (1) not apply to its sale of goods or properties or services: Provided, that an election made under this subsection shall be irrevocable for a period of three (3) years from the quarter the election was made. e. VAT on Importations (Sec. 107) SEC. 107. Value-Added Tax on Importation of Goods. (A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) [47] based on the total value used by the Bureau of Customs in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of the value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and onehalf percent (1 ½ %). (B) Transfer of Goods by Tax-exempt Persons. In the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to nonexempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof

Taxation Law

i. Exempt Importations under Sec. 109 ii. Transfer of Goods by Tax-exempt Persons (Sec. 107 B) SEC. 107. Value-Added Tax on Importation of Goods. - (B) Transfer of Goods by Tax-exempt Persons. - In the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. f. Transactions Deemed Sale (Sec. 106 B) SEC. 106. Value-Added Tax on Sale of Goods or Properties. – (B) Transactions Deemed Sale. - The following transactions shall be deemed sale: (1) 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; (2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons; or (b) Creditors in payment of debt; (3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. i. Rationale of Imposition ii. Enumeration – Sec. 4.106-7 RR No. 16-05 iii. Tax Base of Transactions Deemed Sale General Rule: Market Value of the Goods Deemed Soled as of the Time of the Occurrence of the Transactions. Tax Base: Actual Market Value If the Gross Selling Price is unreasonably lower than the fair market value. Retirement or Cessation of Business Tax Base: Acquisition cost or the current market price of the goods or properties, whichever is lower. Alyssa Africa

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g. Rules for Certain Services i. Common Carriers 1. Secs. 108, 109S 116, 117 and 118 Section 108 (B) Subject to Zero Percent Rate: (6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country. Section 109 Exempt Transactions (S) Transport of passengers by international carriers SEC. 116. Tax on Persons Exempt from ValueAdded Tax (VAT). - Any person whose sales or receipts are exempt under Section 109(V) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided, That cooperatives shall be exempt from the three percent (3%) gross receipts tax herein imposed. SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent or hire driven by the lessee, transportation contractors, including persons who transport passengers for hire, and other domestic carriers by land, [81] for the transport of passengers [except owners of bancas] and owners of animal-drawn two wheeled vehicle), and keepers of garages shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts. The gross receipts of common carriers derived from their incoming and outgoing freight shall not be subjected to the local taxes imposed under Republic Act No. 7160, otherwise known as the Local Government Code of 1991. In computing the percentage tax provided in this Section, the following shall be considered the minimum quarterly gross receipts in each particular case: Jeepney for hire 1. Manila and other P 2,400 Cities 1,200 2. Provincial Public utility bus P 3,600 Not exceeding 30 6,000 passengers 7,200 Exceeding 30 but not exceeding 50 passengers P 3,600 Exceeding 50 passengers 2,400 Taxis P 3,000 1. Manila and other Cities 1,800 2. Provincial

Taxation Law

Car for hire (with chauffer) Car for hire (without chauffer)

III. Zero Rated Sales of Goods and Services and VAT Exempt Sales a. Nature of Zero Rated Sales

SEC. 118 Percentage Tax on International Carriers. - [82] (A) International air carriers doing; business in the Philippines on their gross receipts derived from transport of cargo from the Philippines to another country shall pay a tax of three percent (3%) of their quarterly gross receipts. (B) International shipping carriers doing business in the Philippines on their gross receipts derived from transport of cargo from the Philippines to another country shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts.

b. Zero Rated Sale of Goods (Sec. 106)

2. Sec. 4.108-2 Nos. 11 and 12 of RR no. 16-05 Section 4.108-2 Meaning of Sale or Exchange of Services. – The term “sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following: … (11) transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; (12) common carriers by air and sea relative to their transport of passenger, goods or cargoes from one place in the Philippines to another place in the Philippines; 3. Sec. 4.108-3 of RR No. 16-05 ii. Lease of Properties 1. Sec. 4.108-3 of RR No. 16-05 2. Lease of Residential Units – (Sec. 4.109-1 (B) (q) of RR No. 16-05_ 3. Secs. 109q, 109w, 116, 236G and 236H iii. Professional Services iv. Medical Services 1. Sec. 4.109-1 (B)(g) of RR No. 16-05 Philippine Healthcare Providers vs. CIR (2007) v. Cinema Operators/Proprietors CIR vs. SM Prime Holdings, Inc. (2010) vi. VAT on Toll Fees Diaz vs. The Secretary of Finance and CIR (2011) vii. Franchise Grantees (PAGCOR) PAGCOR vs. The BIR (2011) Alyssa Africa

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c. Zero Rated Sale of Services (Sec. 108 B) CIR vs. American Express (2005) CIR vs. Burmeister and Wain (2007) CIR vs. Acesite (2007) d. Automatic zero-rate vs. Effectively zero-rate CIR vs. Seagate Technology (Phils) (2005) CIR vs. Toshiba Information Equipment (2005) e. Destination Principle and Cross Border Doctrine CIR vs. American Express (2005) CIR vs. Toshiba Information Equipment (2005) Revenue Memorandum Circular No. 74-99 f. Zero Rated Sales vs. Exempt Sales CIR vs. Cebu Toyo Corp. (2005) g. Enumeration of Exempt Transactions *Sec. 109) Sec. 4.109-1(B) of RR No. 16-05 h. Exempt Persons vs. Exempt Transactions CIR vs. Seagate Technology (Phils) (2005) IV. Transitional and Presumptive Input Tax Sec. 111 Sec. 4.111-1 of RR No. 16-05 Fort Bonifacio Development vs. CIR (2009) Fort Bonifacio Development vs. CIR (2014) V. VAT Refund a. Compare with Sec. 204 and 229 b. Grounds c. Periods RMC No. 54-2014 RMC No. 57-2013 Contex vs. CIR (2004) Atlas Consolidated Mining vs. CIR (2007) CIR vs. Mirant Pagbilao Corp. (2008) CIR vs. Aichi Forging Company (2010) Facts: On September 30, 2004, respondent Aichi Forging Company of Asia, Inc. filed a claim for refund/credit of input VAT for the period of July 1, 2002 to September 30, 2002 with the petitioner Commissioner of Internal Revenue. On the same day, Aichi likewise filed a Petition for Review with the CTA for the refund/credit of the same.

Taxation Law

In the Petition for Review, Aichi claims that it generated zero-rated sales for the period July 1, 2002 to September 30, 2002 in the amount of P131,791,399.00 which was paid pursuant to Section 106(A)(2)(a)(1),(2) and (3) of the NIRC and for that same period it incurred input VAT amounting to P3,912,088.14 from purchases and importation attributable to its zero-rated sales; and that in its application for refund/credit, it only claimed the amount of P3,891,123.82. The CTA partially granted the petition of the respondent on the ground that Section 112 (A) of the NIRC which states that a VAT-registered person may, within 2 years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales; and that such provision has been lawfully complied with by the respondent except that some documents and claims are not satisfactorily substantiated. CIR filed a Motion for Reconsideration on the ground that the claims were filed beyond the 2 year prescriptive period which expired on September 29, 2004 by reason that 2004 was a leap year and that when the law speaks of a year; it is equivalent to 365 days. Such petition was denied, and the same was affirmed by the CTA En Banc. Issue: Whether or not the period for the filing of the administrative and judicial claims has prescribed. Held: No, the period has not yet prescribed. Section 112 (A) of the NIRC provides a 2 year prescriptive period reckoned from the close of the taxable quarter when the relevant sales or transactions for the filing of a refund/credit of input VAT. In connection with the counting of the period we turn to the Administrative Code which provides that a year is composed of 12 calendar months, as opposed to that provided for in the Civil Code, the former being the later law. Applying this law, it is deemed to expire on September 30, 2004. Hence, it was timely filed. However, while there is timely filing of the claim, there was a violation of Section 112(D) of the NIRC which provides that the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within 120 days from the date of submission of documents. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer may, within Alyssa Africa

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30 days from the receipt of the decision denying the claim, or after the expiration of the 120 day period, appeal the decision or the unacted claim with the Court of Tax Appeals. In this case both administrative and judicial claims were simultaneously filed on September 30, 2004. Respondent clearly did not wait for the CIR decision, or the lapse of the 120 day period. Hence, the filing of the judicial claim with the CTA was found to be premature. The 120 day period is crucial in filing an appeal, which the petitioner failed to observe. The petition in this case is granted. CIR vs. San Roque Power (2013) and other cases Mindanao II Geothermal Partnership vs. CIR (2013) Pilipinas Total Gas, Inc. vs. CIR (2015) Microsoft Phils., Inv. vs. CIR (2011) VI. Other Matters a. Invoicing Requirements (Sec. 113) (Sec. 41113-1 of RR No. 16-05) i. Authority to Print Silicon Phils., Inc. vs. CIR (2011) b. Information which must be contained (Sec. 113) c. Consequences of Issuing Erroneous VAT Invoice (Sec. 113) (RR No. 4.113-4 of RR No. 1605) d. Filing of Monthly and Quarterly VAT Returns and Payment of VAT (Sec. 114) e. Withholding VAT (Sec. 114 C) (Sec. 4.114-2 of RR No. 16-05 as amended by Sec. 22 of RR No. 4-07) i. Government Payments ii. Services Rendered by Non-residents iii. Withholding VAT Returns/Time of Payment f. Power of the Commissioner of Suspend Business Operations (Sec. 5) (Sec. 4-115-1 of RR No. 16-05) g. VAT Exemption of Senior Citizens i. RA No. 9994 h. VAT on Condominium Corporations and Homeowner’s Associations i. RMC Nos. 65-2012 and 9-2013

Taxation Law

REMEDIES UNDER THE NIRC Assessment of Internal Revenue Taxes A. Definition/Nature/effect/Basis Sections 4-7, 203, 222, 223, 228, 232, 235, 266 of the NIRC Section 4. Power of the Commissioner to Interpret Tax Laws and Decide Tax Cases. – The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. The power to decide disputed assessments, refunds, of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code, or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. Section 5. Power of the Commissioner to Obtain Information and to Summon/Examine, and Take Testimony of Persons. - - In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized: (A) To examine any book, paper, record, or other data which may be relevant or material to such inquiry; (B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures of consortia and registered partnerships, and their members; (C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other Alyssa Africa

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person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; (D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; and (E) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed. The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for in Section 6(F) of this Code. SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. (A) Examination of Return and Determination of Tax Due. After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative. Any return, statement of declaration filed in any office authorized to receive the same shall not be withdrawn: Provided, That within three (3) years from the date of such filing, the same may be modified, changed, or amended: Provided, further, That no notice for audit or investigation of such return, statement or declaration has in the meantime been actually served upon the taxpayer. (B) Failure to Submit Required Returns, Statements, Reports and other Documents. When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false,

Taxation Law

incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes. (C) Authority to Conduct Inventory-taking, Surveillance and to Prescribe Presumptive Gross Sales and Receipts. - The Commissioner may, at any time during the taxable year, order inventory-taking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities, or may place the business operations of any person, natural or juridical, under observation or surveillance if there is reason to believe that such person is not declaring his correct income, sales or receipts for internal revenue tax purposes. The findings may be used as the basis for assessing the taxes for the other months or quarters of the same or different taxable years and such assessment shall be deemed prima facie correct. When it is found that a person has failed to issue receipts and invoices in violation of the requirements of Sections 113 and 237 of this Code, or when there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed under the provisions of this Code, the Commissioner, after taking into account the sales, receipts, income or other taxable base of other persons engaged in similar businesses under similar situations or circumstances or after considering other relevant information may prescribe a minimum amount of such gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such person. (D) Authority to Terminate Taxable Period. When it shall come to the knowledge of the Commissioner that a taxpayer is retiring from business subject to tax, or is intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property, or is performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partly ineffective unless such proceedings are begun Alyssa Africa

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immediately, the Commissioner shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid, and said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time fixed in the demand made by the Commissioner. (E) Authority of the Commissioner to Prescribe Real Property Values. - The Commissioner is hereby authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be, whichever is the higher of: (1) The fair market value as determined by the Commissioner; or (2) The fair market value as shown in the schedule of values of the Provincial and City Assessors. (F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and Other Related information held by Financial Institutions. Notwithstanding any contrary provision of Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits and other related information held by financial institutions of: (1) A decedent to determine his gross estate; and (2) Any taxpayer who has filed an application for compromise of his tax liability under Section 204(A) (2) of this Code by reason of financial incapacity to pay his tax liability. In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

Taxation Law

(3) A specific taxpayer or taxpayers subject of a request for the supply of tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party of: Provided, That the information obtained from the banks and other financial institutions may be used by the Bureau of Internal Revenue for tax assessment, verification, audit and enforcement purposes. In case of a request from a foreign tax authority for tax information held by banks and financial institutions, the exchange of information shall be done in a secure manner to ensure confidentiality thereof under such rules and regulations as may be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. The Commissioner shall provide the tax information obtained from banks and financial institutions pursuant to a convention or agreement upon request of the foreign tax authority when such requesting foreign tax authority has provided the following information to demonstrate the foreseeable relevance of the information to the request: (a) The identity of the person under examination or investigation; (b) A statement of the information being sought, including its nature and the form in which the said foreign tax authority prefers to receive the information from the Commissioner; (c) The tax purpose for which the information is being sought; (d) Grounds for believing that the information requested is held in the Philippines or is in the possession or control of a person within the jurisdiction of the Philippines; (e) To the extent known, the name and address of any person believed to be in possession of the requested information; (f) A statement that the request is in conformity with the law and administrative practices of the said foreign tax authority, such that if the requested information was within the jurisdiction of the said foreign tax authority then it would be able to obtain the information under its laws or in the normal course of administrative practice and that it is in conformity with a convention or international agreement; and (g) A statement that the requesting foreign tax authority has exhausted all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties. Alyssa Africa

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The Commissioner shall forward the information as promptly as possible to the requesting foreign tax authority. To ensure a prompt response, the Commissioner shall confirm receipt of a request in writing to the requesting tax authority and shall notify the latter of deficiencies in the request, if any, within sixty (60) days from receipt of the request. If the Commissioner is unable to obtain and provide the information within ninety (90) days from receipt of the request, due to obstacles encountered in furnishing the information or when the bank or financial institution refuses to furnish the information, he shall immediately inform the requesting tax authority of the same, explaining the nature of the obstacles encountered or the reasons for refusal. The term "foreign tax authority," as used herein, shall refer to the tax authority or tax administration of the requesting State under the tax treaty or convention to which the Philippines is a signatory or a party of. (G) Authority to Accredit and Register Tax Agents. - The Commissioner shall accredit and register, based on their professional competence, integrity and moral fitness, individuals and general professional partnerships and their representatives who prepare and file tax returns, statements, reports, protests, and other papers with or who appear before, the Bureau for taxpayers. Within one hundred twenty (120) days from January 1, 1998, the Commissioner shall create national and regional accreditation boards, the members of which shall serve for three (3) years, and shall designate from among the senior officials of the Bureau, one (1) chairman and two (2) members for each board, subject to such rules and regulations as the Secretary of Finance shall promulgate upon the recommendation of the Commissioner. Individuals and general professional partnerships and their representatives who are denied accreditation by the Commissioner and/or the national and regional accreditation boards may appeal such denial to the Secretary of Finance, who shall rule on the appeal within sixty (60) days from receipt of such appeal. Failure of the Secretary of Finance to rule on the Appeal within the prescribed period shall be deemed as approval of the application for accreditation of the appellant. (H) Authority of the Commissioner to Prescribe Additional Procedural or Documentary Requirements. - The Commissioner may prescribe the manner of compliance with any documentary or procedural requirement in connection with the

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submission or preparation of financial statements accompanying the tax returns. Section. 7.Authority of the Commissioner to Delegate Power. - The Commissioner may delegate the powers vested in him under the pertinent provisions of this Code to any or such subordinate officials with the rank equivalent to a division chief or higher, subject to such limitations and restrictions as may be imposed under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That the following powers of the Commissioner shall not be delegated: (a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau; (c) The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax liability: Provided, however, That assessments issued by the regional offices involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or less, and minor criminal violations, as may be determined by rules and regulations to be promulgated by the Secretary of finance, upon recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and (d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. Revenue Regulations (RR) No. 12-99 dated September 6, 1999, as amended by RR No. 182013 dated November 28, 2013 http://www.bir.gov.ph/taxpayerrights/taxpayerrig hts.htm Republic Act No. 10021 1. Tax Audit Process 2. Letter of Authority/Audit Notice/Tax Verification Notice Revenue Audit Memorandum Order No. 1-00 Contact with Taxpayer Alyssa Africa

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Arranging for An appointment - Revenue officer must make a telephone or personal call to the taxpayer himself and NOT his representative. Serving of Letter of Authority  Must be served by the Revenue Officer assigned to the case and no one else on the first opportunity to have personal contact with the taxpayer.  What is served: a. Letter of Authority b. Taxpayer’s Bill of Rights  Letter of Authority a. Authorizes or empowers a designated Revenue Officer to examine, verify and scrutinize a taxpayer’s books and records in relation to his internal revenue tax liabilities for a particular period. b. Must be served or presented to the taxpayer within 30 days from date of issue; otherwise, it becomes null and void unless revalidated. c. Taxpayer’s right – to refuse its service if presented beyond the 30 day period depending on the policy set by top management d. How Revalidation Made – by issuing a new Letter of Authority or by just simply stamping the words “Revalidated on _” on the face of the copy of the Letter of Authority issued. Revenue Memorandum Order No. 44-2010 dated May 12, 2010 (NOTE: Contains rules on electronic issuance of letters of authority.) Revenue Memorandum Order No. 69-2010 dated August 11, 2010 (NOTE: Guidelines on the Issuance of Electronic Letters of Authority, Tax Verification Notices, and Memoranda of Assignment) CIR vs. Sony Phils, Inc. G.R. No. 178697, November 17, 2010 Facts: On November 24, 1998, the CIR issued a letter of authority authorizing revenue officers to examine the books of accounts of Sony for the period 1997 and unverified prior years. On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties was issued by CIR. Sony protested and sought re-evaluation. The CTA partially granted the appeal and ordered the withdrawal and cancellation of deficiency

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assessment for value-added tax for 1997 for lack of merit. Hence, the case was raised with the SC. The CIR insists that the LOA, although it states “the period 1997 and unverified prior years,” should be understood to mean the fiscal year ending in March 31, 1998. Issue: Whether or not the Letter of Authority should be understood to mean the fiscal year ending March 31, 1998. Held: No, the Court cannot agree. According to RMO 43-90, a Letter of Authority should cover a taxable period not exceeding 1 taxable year. The practice issuing LOAs covering audit of “unverified prior years” is hereby prohibited. If the audit of a tax payer shall include more than one taxable period, the other periods or years shall be specifically indicated in the LOA. The CIR went beyond the scope of their authority because the deficiency VAT assessment they arrived at was based on records from January to March 1998 or using the fiscal year which ended in March 31, 1998. If the CIR wanted or intended the investigation to include the year 1998, it should have been done so by including it in the LOA or issuing another LOA. The deficiency VAT assessment should have been disallowed. 3. Preservation of Books of Accounts and tax records Section. 235. Preservation of Books and Accounts and Other Accounting Records. - All the books of accounts, including the subsidiary books and other accounting records of corporations, partnerships, or persons, shall be preserved by them for a period beginning from the last entry in each book until the last day prescribed by Section 203 within which the Commissioner is authorized to make an assessment. The said books and records shall be subject to examination and inspection by internal revenue officers: Provided, That for income tax purposes, such examination and inspection shall be made only once in a taxable year, except in the following cases: (a) Fraud, irregularity or mistakes, as determined by the Commissioner; (b) The taxpayer requests reinvestigation; (c) Verification of compliance with withholding tax laws and regulations; (d) Verification of capital gains tax liabilities; and (e) In the exercise of the Commissioner's power under Section 5(B) to obtain information from other Alyssa Africa

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persons in which case, another or separate examination and inspection may be made. Examination and inspection of books of accounts and other accounting records shall be done in the taxpayer's office or place of business or in the office of the Bureau of Internal Revenue. All corporations, partnerships or persons that retire from business shall, within ten (10) days from the date of retirement or within such period of time as may be allowed by the Commissioner in special cases, submit their books of accounts, including the subsidiary books and other accounting records to the Commissioner or any of his deputies for examination, after which they shall be returned. Corporations and partnerships contemplating dissolution must notify the Commissioner and shall not be dissolved until cleared of any tax liability. Any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives shall be subject to examination by the Bureau of Internal Revenue for purposes of ascertaining compliance with the conditions under which they have been granted tax exemptions or tax incentives, and their tax liability, if any. RR No. 17-2013 dated September 27, 2013 RR No. 5-2014 dated July 30, 2014 4. Tax Assessment CIR vs. Pascor Realty (GR No. 128315 dated June 29, 1999) Facts: Issues: (1) Whether or not the criminal complaint for tax evasion can be construed as an assessment; and (2) Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted; Held: (1) No, it cannot be construed as an assessment. Not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments. To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer fails to pay deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20 percent per

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annum, or such higher rates as may be prescribed by rules and regulations, is to be collected form the date prescribed for its payment until the full payment. 12 The issuance of an assessment is vital in determining, the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222, on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon. It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. In the present case, the revenue officers' Affidavit merely contained a computation of respondents' tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers. (2) No, it is not necessary. The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.

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5. Pre-assessment Notice (PAN)/when not required RR 18-2013 3.1.1 Preliminary Assessment Notice (PAN). – If after review and evaluation by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Officer shall issue to the taxpayer, a Preliminary Assessment Notice (PAN) for the proposed assessment. It shall show in detail the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based. If the taxpayer fails to respond within 15 days from the date of receipt of the PAN, he shall be considered in default, in which case a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. If the taxpayer, within 15 days from the date of receipt of the PAN, responds that he/it disagrees with the findings of deficiency tax or taxes, an FLD/FAN shall be issued within 15 days from filing/submission of the taxpayer’s response, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. Requisites of a Valid PAN: 1. Must be issued by the CIR or his duly authorized representative. The duly authorized representatives are: a. Revenue Regional Directors; b. ACIR-LTS; and c. ACIR- Enforcement and Advocacy Service 2. Must be served to the taxpayer personally and if not practicable, by substituted service or by mail; 3. Must be in writing and contain the facts and law on which the proposed assessment is based. 4. The assessment was conducted within the scope and authority given by a valid Letter of Authority. 3.1.2 Exceptions to Prior Notice of the Assessment. – Pursuant to Section 228 of the Tax Code, as amended, a PAN shall not be required in any of the following cases: (i) When the finding for any deficiency tax is the result of the mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or

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(ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (iv) When the excise tax due on excisable articles has not been paid; or (v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to nonexempt persons. In the above-cited cases, a FLD/FAN shall be issued outright. (NOTE: METER – Mathematical Error, Excise Tax, Tax withheld, Exempt person, Refund or tax credit) 6. Notice of Assessment or Formal Assessment Notice (FAN) 7. Deficiency vs. Delinquency Delinquent Tax Deficiency Tax Collection Can be immediately Can be collected also collected through administrative administratively through and/or judicial remedies the issuance of a but has to go through warrant of distrain and the process of levy, and/or judicial action

8. Jeopardy Assessment Sec. 3 (1)(a) of RR No. 30-02 dated December 16, 2002 Jeopardy assessment Refers to a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to Alyssa Africa

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substantiate all or any of the deductions, exemptions, or credits claimed in his return. 9. Power of the Commissioner to assess deficiency tax / best evidence obtainable Revenue Memorandum Circular No. 23-00 dated November 27, 2000 Bonifacia Sy Po vs. CTA (164 SCRA 524) Fitness By Design, Inc. vs. CIR (GR No. 177982 dated October 17, 2008) 10. Rule on Amendment of Returns 11. Power to issue Subpoena Duces Tecum Revenue Memorandum Order No. 045-10 dated May 12, 2010 Revenue Memorandum Order No. 10-13 dated April 17, 2013 Revenue Memorandum Order No. 08-14 dated January 29, 2014 B. Period to assess deficiency tax 1. Prescription a. Rationale/Construction/Interpretation Republic vs. Ablaza (108 Phil 1105) Facts: Issue: Held: b. Ordinary – 3 years from date of filing (Sec. 203, NIRC) c. Extraordinary – 10 years from discovery of fraud, falsity, or omission(see also Sec. 248(B) d. Counting of periods (Art. 13 of NCC vs. Sec. 31 of Revised Admin Code) CIR vs. Primetown Property Group (GR No. 162155, August 28, 2007) e. Rule if wrong returns/amended return CIR vs. Ayala Securities (GR No. L-29485, dated November 21, 1980) Butuan Sawmill, Inc. vs. CTA (GR No. L-20601, February 28, 1966) CIR vs. Phoenix (GR No. L-19727, May 20, 1965) CIR vs. Gonzales (18 SCRA 757) 2. Suspension of prescriptive periods/ exceptions Secs. 203, 222 and 223 NIRC

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Revenue Memorandum Order No. 20-90, as amended by Revenue Delegation Authority Order No. 05-01 dated August 2, 2001 (Execution of waiver of statute of limitations) RMO No. 14-2016 April 4, 2016 Cases on Sec. 222 and 223: Republic vs. Ret (GR No. L-13754 dated March 31, 1962) BPI vs. CIR (GR No. 139736, October 17, 2005) Continental Micronesia, Inc. – Phil. Branch vs. CIR (CTA Case No. 6191, March 22, 2006) Phil. Journalists, Inc. vs. CIR (GR No. 162852, December 16, 2004) Facts: For the calendar year ended December 31, 1994, petitioner Philippine Journalists, Inc. filed an Annual Income Tax and paid the tax due. On August 10, 1995, a revenue officer of the BIR issued a latter of authority to examine the books of the petitioner and other accounting records for internal revenue taxes for the period of January 1, 1994 to December 31, 1994. Upon examination, the petitioner was told that there were tax deficiencies that the latter must pay. In a letter dated August 29, 1997, the petitioner was invited to a formal conference on September 15, 1997 to object and present evidence supporting its objections to the assessment. On September 22, 1997, the petitioner executed a “Waiver of Statute of Limitation” which waived the running of the prescriptive period under Section 223 and 224 of the NIRC and consented to the assessment and collection of taxes which may be found even after the lapse of the period of limitations until the completion of the investigation. On July 2, 1998, the revenue officer submitted an audit report recommending the issuance of the assessment which lowered the original assessment. On March 16, 1990, a preliminary collection letter was sent to the petitioner to pay the assessment within 10 days from receipt. A Final Notice Before Seizure was then issued on November 10, 1990 again to the petitioner, giving it another 10 days to pay the amount. It was received on November 24, 1999. On November 26, 1999, petitioner clarified on how the CIR reached its computation of the tax liability, and requested a 30 day extension but there was no reply. A second follow-up letter was sent by the petitioner but to no avail along with its contest on the assessment. On March 28, 2000, a Warrant of Distraint and/or Levy was issued by the BIR to the Alyssa Africa

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petitioner. Hence, the petitioner filed a petition for review with the CTA which was granted by the CTA. Upon motion for reconsideration by the Commissioner, the CA reversed the CTA ruling. The CA contends that the CTA should not have entertained the petition at all on the ground that there was no valid waiver executed by the petitioner because (1) it does not indicate a definite expiration date; (2) it does not state the date of acceptance by the BIR; and (3) the petitioner was not furnished a copy of the waiver. The judgment was appealed by the petitioner with the SC. Issue: Whether or not there was a valid waiver which extended the three year period of prescription to make an assessment under Section 222 of the Tax Code. Held: No, there is no valid waiver. In order for there to be a valid waiver, RMO No. 20-90 provides the following requisites: (1) the waiver must be in the form identified; and (2) the Commissioner of Internal Revenue or his duly authorized representative must have signed the waiver indicating that the Bureau has accepted and agreed to the waiver with a date of acceptance; and (3) the taxpayer must be furnished a copy of the assessment. As found by the CTA the waiver is not valid and binding because it does not conform with RMO No. 20-90. It did not state a definite agreed date, violating Section 222(b) of the NIRC, and was also not signed by the Commissioner or his duly authorized representative, but by a revenue district officer. Furthermore, the records show that the petitioner was not furnished a copy of the waiver. Waivers must be executed in triplicate under RMO No. 20-90 with the second copy to be sent to the taxpayer. Such requirement is necessary as it not only furnishes the taxpayer with a copy but also gives notice to the acceptance by the BIR and the perfection of the agreement. Hence, the waiver, being incomplete, did not toll nor extend the running of the prescription period. CIR vs. Kudos Metal (GR No. 178087, May 5, 2010) Facts: On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income Tax Return for the taxable year 1998. On September 7, 1999, the BIR served 3 notices of presentation of records to respondent but the latter failed to comply. BIR

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issued a Subpoena Duces Tecum dated September 21, 2006 which was acknowledged in a letter dated October 20, 2000. On December 10, 2001, the accountant of the respondent executed a Waiver of the Defense of Prescription which was notarized on January 22, 2002 and received by the BIR Enforcement Service on January 31, 2002. On February 4, 2002, it was accepted by the Assistant Commissioner of the Enforcement Service. This was followed by a Second Waiver of Defense of Prescription on February 18, 2003 and was received by BIR on February 28, 2003. On August 25, 2003, BIR issued a Preliminary Assessment Notice for the taxable year 1998 against the respondent followed by a Formal Letter of Demand with Assessment Notices for the taxable year 1998, dated September 26, 2003 but received on November 12, 2003. Respondent challenged the assessment by filing a protest on various tax assessments on December 3, 2003. On June 22, 2004, BIR rendered a final Decision for the immediate payment of the tax liabilities. Believing that the government’s right to assess the taxes had prescribed, the respondent filed on August 27, 2004 a petition for review with the CTA. The CTA cancelled the assessment notices and declared that the waiver of the statute of limitations is incomplete and defective for failure to comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90. The same was affirmed by the CTA En Banc. Hence, the petition was elevated to the SC. Issue: Whether or not the government’s right to assess unpaid taxes of respondent prescribed. Held: Yes, the right to assess has prescribed. Section 203 of the NIRC mandates the government to assess internal revenue taxes within 3 years from the last day prescribed by law for the filing of the tax return or the actual date of filing of such return, whichever comes later. Hence, an assessment notice issued after the 3 year prescriptive period is no longer valid and effective except if there is a valid waiver executed under Section 222 of the NIRC which extends the period to assess and collect taxes. In this case, while waivers were executed, they fail to extend the assessment and collection period. RMO 20-90 states that in order for there to be a valid waiver, the following requisites must be present: (1) the waiver must be in the proper form; Alyssa Africa

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(2) the waiver must be signed by the taxpayer himself of his duly authorized representative; (3) the waiver should be duly notarized; (4) the CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and agreed to the waiver; (5) both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed; and (6) the waiver must be executed in three copies, the first to be attached to the docket of the case, the second for the taxpayer, and the third for the office accepting the waiver. The parties in this case failed to do three of these requisites, namely, (1) notarization of the waiver; (2) indication of date of acceptance; and (3) receipt of the respondent of its file copy. Due to said defects there can be no extension and the petition is denied. RCBC vs. CIR (GR No. 170257, September 7, 2011) Aznar vs. CTA (58 SCRA 519) Republic vs. Ker (18 SCRA 208) CIR vs. Suyoc (104 Phil. 819) CIR vs. Phil Global Communication (GR No. 167146, October 31, 2006) CIR vs. United Salvage and Towage (Phils.), Inc. (GR No. 197515 dated July 2, 2014) CIR vs. BASF Coating + Inks Phils., Inc. (GR No. 198677 dated November 26, 2014) CIR vs. Next Mobile, Inc. (GR No. 212825 dated December 29, 2015) C. Requisites of a valid assessment Sec. 3 of RR No. 12-99, as amended by RR No. 18-2013 1. Due Process Collector vs. Benipayo (4 SCRA 182) CIR vs. Enron Subic (GR No. 166387 dated January 19, 2009) CIR vs. Azucena T. Reyes (GR No. 159694, January 27, 2006) A Brown Co., Inc. vs. CIR (CTA Case No. 6357, June 7, 2004) CIR vs. Menguito (GR No. 167550, September 17, 2008) CIR vs. Metro Star Superama, Inc., G.R. No. 185371, December 8, 2010 2. Power of CIR to issue assessments Meralco vs. Savellano (117 SCRA 804)

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Maceda vs. Macaraig (197 SCRA 771)

Revised Rules of the CTA, AM No. 05-11-07-CTA dated November 22, 2005, as amended on September 16, 2008

3. Modes of Service of Assessments 4. When Assessment made Nava vs. CIR (GR No. L-19470, January 30, 1965) Barcelon, Roxas Securities vs. CIR, (GR No. 157064, dated August 7, 2006) II. Protesting an assessment/ Remedy BEFORE payment A. How to protest or dispute an assessment administratively Sec. 228, NIRC Sec. 3.1.5, RR No. 12-99, as amended by RR No. 18-2013 1. When to file protest – within 30 days from receipt of the FAN 2. Where to file 3. Reinvestigation vs. Reconsideration BPI vs. CIR (GR No. 139736, October 17, 2005) 4. Other requirements a. Submission of relevant documents b. Payment of protest not required under the NIRC 5. Effects of filing of the protest 6. Effects of failure to file protest / failure to submit relevant documents Marcos II vs. CA (GR No. 120880 dated June 5, 1997) Republic vs. Ker (18 SCRA 208) Prulife of UK Insurance Corp vs. CIR(CTA Case No. 6774 dated September 11, 2007) ABN-AMRO Savings Bank Corp vs. CIR (CTA Case No. 7089 dated September 10, 2008) CIR vs. First Express Pawnshop (GR Nos. 172045-06 dated June 16, 2009) B. Commissioner of Internal Revenue renders a decision on the disputed assessment Oceanic Wireless Network, Inc. vs. CIR (GR No. 14380, dated December 9, 2005) C. Remedy of the taxpayer Sec. 3.5.1, RR No. 12-99, as amended by RR No. 18-2013 Sec. 228 of the NIRC RA No. 9282, as amended by RA No. 9503 Alyssa Africa

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1. If protest is expressly denied 2. CIR’s actions equivalent to denial of protest 3. CIR fails to act on the protest within 180 days from submission of relevant documents Lascona Land vs. CIR (GR No. 171251, March 5, 2012) RCBC vs. CIR (GR No. 168498, April 24, 2007) 4. Remedy in case CIR files a case or issues a warrant of distraint or levy 5. Effect of failure to protest/appeal on time CIR vs. Concepcion (22 SCRA 1058) Phil. Journalists, Inc. vs. CIR (GR No. 162852, December 16, 2004) 6. Matter appealable to the CTA 7. Appeal to the CTA En Banc / Supreme Court Fishwealth Canning Corp. vs. CIR (GR No. 179343 dated January 21, 2010) Allied Banking Corporation vs. CIR (GR No. 175097 dated February 5, 2010) Republic vs. Lim Tian Teng Sons (GR No. L21731 dated March 31, 1966) ABN-AMRO Savings Bank Corp vs. CIR (CTA Case No. 7089 dated September 10, 2008) Advertising Associates vs. CA (133 SCRA 765) CIR vs. Algue (158 SCRA 9) Yabes vs. Flojo (GR No. L-46954, July 20, 1982) CIR vs. Union Shipping (185 SCRA 547) CIR vs. Isabela Cultural Corp. (GR No. 135210, July 11, 2001) CIR vs. Liquigaz Philippines Corporation, GR No. 215534 dated April 18, 2016 D. Non-retroactivity of rulings (Sec. 246, NIRC) 1. BIR Rulings RR No. 5-2012 2. Rulings of first impression (Sec. 7(B) NIRC) 3. Review/Appeal to Sec. Of Finance (Sec. 4, NIRC) CIR vs. Phil. Healthcare Providers (GR No. 168129, April 24, 2007) CIR vs. Burmeister and Wain GR No. 153205 dated Jaunary22, 2007

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Phil. Bank of Communications vs. CIR (GR No. 112024, January 28, 1999) CIR vs. CA (GR No. 117982, February 6, 1997) [read also concurring opinion of Justice Vitug] CIR vs. Filinvest Development Corporation (GR Nos. 163653 and 167689, July 19, 2011) CIR vs. San Roque Power (GR No. 187485 dated February 12, 2013) and other cases CIR vs. San Roque Power (GR No. 187485 dated October8, 2013) and other cases Philamlife vs. Secretary of Finance (GR No. 210987 dated November 24, 2014) Banco De Oro vs. Republic (GR No. 198756, January 13, 2015)

Revenue Memorandum Order No. 42-10 dated May 4, 2010. C. Judicial Remedies Sec. 205 Secs. 220-221, NIRC Republic vs. Hizon (GR No. 130430 December 13, 1997) Mambulao Lumber vs. Republic (132 SCRA 1) Fernandez Hermanos vs. CIR (GR No. L-21551, September 30, 1969) PNOC vs. CIR (GR No. 109976, April 26, 2005) IV. Statutory Offenses and Penalties

III. Remedies Available to the Government A. Prescriptive period to collect Sec. 222, NIRC Republic vs. Hizon (GR No. 130430. December 13, 1997) CIR vs. Hambrecht & Quist Philippines, Inc. (GR No. 169225 November 17, 2010)

A. Civil Penalties / Surcharge / Interest Secs. 247-251, NIRC RR No. 12-99, as amended by RR No. 18-2013 1. Applicable Interest Rate 2. How to compute interest 3. Rules on interest BPI vs. CIR (GR No. 137002, July 27, 2006) Republic Cement Corp. vs. CIR (CTA Case No. 7144, August 2, 2011 – Amended Decision)

B. Administrative remedies / Summary Remedies Secs. 205-217 1. Distraint of personal property Secs. 205-207, 217, 208-209, 210, 212, NIRC Revenue Memorandum Circular No. 5-01 dated February 19, 2001 2. Levy of Real Property Secs. 205-207, 217, 208-209, 213-214, NIRC

4. Deficiency vs. Delinquency Tax 5. Surcharge: 25% or 50% Sec. 248, NIRC Castro vs. CIR (GR No. L-12174, April 26, 1962) Liquigaz Philippines Corporation vs. CIR, CTA EB Case No. 1117 dated September 21, 2015 a. False vs. Fraudulent return

3. Forfeiture Sec. 215, NIRC Castro vs. CIR (GR No. L-12174, April 26, 1962)

c. Mandatory imposition of penalties Phil. Refining Co. vs. CA (GR No. 118794 dated May 8, 1996)

4. Tax lien Sec. 219, NIRC Republic vs. Enriquez (166 SCRA 608) CIR vs. NLRC (238 SCRA 42) Hong Kong Shanghai Bank vs. Rafferty (39 SCRA 145) 5. No injunction to restrain collection of taxes Sec. 218, NIRC Rule 10, Revised Rules of the CTA, AM No. 0511-07-CTA dated November 22, 2005, as amended on September 16, 2008 Alyssa Africa

b. Fraud Assessment

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d. When penalties may be waived Lhuillier Pawnshop vs. CIR (GR No. 166786 dated September 11, 2006) e. Rule on prima facie fraud Sec. 248(B), NIRC Aznar vs.CIR (58 SCRA 519) Javier vs. CIR (199 SCRA 824) B. Crimes / Offenses / Penalties / Forfeitures

Taxation Law

Secs. 220-221, 224-226, NIRC Secs. 253-281, NIRC Revenue Memorandum Circular No. 101-90 dated November 26, 1990 1. Precondition before a criminal case may be filed Ungab vs. Cusi (97 SCRA 877) CIR vs. CA (257 SCRA 200) CIR vs. Pascor Realty (GR No. 128315 dated June 29, 1999) Adamson vs. CA (GR No. 120935, May 21, 2009) 2. Compromise Penalty Nature and enforcement Revenue Memorandum Order No. 7-15 dated January22, 2015 CIR vs. Liangga Bay Logging (GR No. L-35266, January 21, 1991) 3. Elements of tax evasion CIR vs. The Estate of Benigno Toda, Jr. (GR No. 147188, September 14, 2004) 4. Persons liable in case taxpayer is a juridical entity 5. Payment of tax in criminal cases Sec. 253 (a), NIRC Sec. 205 (b) last paragraph Republic vs. Patanao (GR No. L-22356, July 21, 1967) Castro vs. CIR (GR No. L-12174, April 26, 1962) 6. Probable Cause BIR vs CA, GR No. 197590 dated November 25, 2015 7. Crimes under Secs. 254 and 255 8. Civil liability in criminal cases People vs. Galero (CTA Criminal Case No.O-055. September 30, 2009) People vs. Mendez (CTA Criminal Case Nos. O013 &O-015, January 5, 2011) People vs. Kintanar (CTA Criminal Case No. O030 dated August11, 2010) People vs. Santos (CTA Criminal Case No. O012dated January16, 2013) People vs. Spouses Castillo (CTA CTA Criminal Case No. O-219 dated October 7, 2013) 9. Prescription of violations of the NIRC Alyssa Africa

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Lim vs. CA (190 SCRA 616) V. Claims for refund and credit of taxes/Remedy AFTER payment A. Who may file claim for refund/tax credit 1. Basis of Tax Refunds CIR vs. Acesite Phils. (GR No. 147295, February 16, 2007) 2. Taxpayer/withholding agent CIR vs. Procter & Gamble (204 SCRA 377) CIR vs. Smart Communications, Inc. (GR Nos. 179045-46, August 25, 2010) Honda Cars Philippines, Inc. vs. Honda Cars Technical Specialist and Supervisors Union (GR No. 204142 dated November 19, 2014) CIR vs. Philippine Associated Smelting and Refining Corporation, GR No. 186223 dated October 1, 2014 3. Requisites for a valid claim for refund / Creditable Withholding Tax Cases Koppel (Phils) vs. CIR (GR No. L-10550, September 19, 1961) CIR vs. Meralco, GR No. 181459 dated June 9, 2014 CIR vs. Far East Bank GR No. 173854 March 15, 2010 CIR vs. Concepcion (22 SCRA 1058) CIR vs. CA (234 SCRA 348) PNB vs. CIR (GR No. 206019 dated March 18, 2015 CIR vs. PNB, GR No. 180290 dated September 29, 2014 4. Refunds where written claim is not needed Sec. 204 (3), NIRC Sec. 229, NIRC Vda de San Agustin vs. CIR, GR No. 138485, September 10, 2001 5. Refunds of Corporate taxpayers/Irrevocability Rule Sec. 76, NIRC ACCRA Investments vs. CA (204 SCRA 957) CIR vs. TMX Sales (205 SCRA 184) Systra Phils. Inc. vs. CIR (GR No. 176290, September 21, 2007) Sithe Phils. Holdings vs. CIR (CTA Case No. 6274, April 4, 2003)

Taxation Law

BPI-Family Savings Bank, Inc. vs. CA, CTA and CIR (GR No. 122480, April 12, 2000) Philam Asset Management, Inc. vs. CIR (GR Nos. 156637/162004, December 14, 2005) CIR vs. BPI (GR No. 178490, July 7, 2009) Asia World Properties vs. CIR (GR No. 171766, July 29, 2010) IMPSA Construction Corporation vs. CIR (CTA EB Case No. 685, May 24, 2011) CIR vs. Rhombus Energy Incorporated (CTA EB Case No. 803, October 11, 2012) Winbrenner & Inigo Insurance Brokers, Inc. (GR No. 206526 dated January 28, 2015) Republic vs. Team (Phils.) Energy Corporation, (GR No. 188016 dated January 14, 2015) – read also concurring opinion of CJ Sereno 6. Rule in case of Merger/Corporate taxpayers contemplating dissolution Sec. 52 (C), NIRC BPI vs. CIR (GR No. 144653, August 28, 2001) 7. When 2 year period does not apply CIR vs. PNB (GR No. 161997, October 25, 2005) 8. Remedy of the taxpayer Sec. 229, NIRC RA No. 9282, as amended by RA No. 9503 Revised Rules of the CTA, AM No. 05-11-07-CTA dated November 22, 2005, as amended on September 16, 2008 a. CIR renders a decision b. CIR does not render a decision c. Appeal to the CTA 9. Issuance of Tax Credit Certificate Secs.203 (C), 230, NIRC RR No. 05-00 dated July 19, 2000 RR No. 14-11 dated July 29, 2011

1. Why was the CTA created? Philippine Refining Co. vs. CA (256 SCRA 661 2. Weight given to CTA decisions 3. Composition of the Court (No. of Divisions and Justices, the CTA En Banc) 4. Reversal of Decisions of CTA Division 5. Jurisdiction of CTA Division a. Constitutionality/Validity of Regulations/Tax Laws Asia International Auctioneers vs. Parayno GR No. 163445, December 18, 2007. British American Tobbaco vs. Camacho, GR No. 163583, August 20, 2008. St. Paul College vs. of San Rafael, CTA EB Case No. 874 dated May 27, 2013. Philamlife vs. Secretary of Finance (GR No. 210987 dated November 24, 2014) Banco De Oro vs. Republic (GR No. 198756, January 13, 2015) CIR vs. CTA and Petron Corporation, GR No. 207843 dated July 15, 2015 b. Civil/Criminal Cases Adamson vs. CA (GR No. 120935, May 21, 2009) CIR vs. Hambrecht & Quist Philippines, Inc., G.R. No. 169225, November 17, 2010 City of Manila vs. Grecia-Cuerdo, GR No. 175723 dated February 4, 2014. 6. Jurisdiction of CTA EB 7. Suspension of Collection of Tax

a. Tax Credit, Tax Credit Certificate, Tax Debit Memo b. Sources of Tax Credit c. Uses of Tax Credit d. Sale / Assignment of Tax Credit e. Validity, Conversion and Validation f. Forfeiture of Cash Refunds / Tax Credit 10. Erroneously Refunded Tax Guagua Electric Light vs. CIR (GR No. L-23611, April 24, 1967) VI. Jurisdiction of the Court of Tax Appeals Alyssa Africa

RA No. 9282, as amended by RA No. 9503 Revised Rules of the CTA, AM No. 05-11-07-CTA dated November 22, 2005, as amended on September 16, 2008

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8. Appeal to the SC VII. Abatement of Tax / Tax Compromise Secs. 7 and 204, NIRC RR No. 13-01 RR No. 30-02 RR No. 8-04 RR No. 4-12 RR No. 9-13 A. Authority of CIR to abate taxes 1. Grounds for abating taxes and penalties 2. Conditions

Taxation Law

B. Power to compromise 1. Cases that can be compromised 2. Cases that cannot be compromised 3. Timing of payment of amount offered as compromise 4. Basis for acceptance of compromise settlement and rates CIR vs. Azucena T. Reyes (GR No. 159694, January 27, 2006) LOCAL AND REAL PROPERTY TAXATION Republic Act No. 7160, Local Government Code (LGC) of 1991, as amended Implementing Rules and Regulations of the LGC LOCAL TAXATION I. PRELIMINARY MATTERS a. Power to Tax of Local Government Units i. Sec. 5 Art. X, 1987 Constitution (compare with 1935 and 1973 provisions) ii. Sec. 129, LGC Pepsi Cola Bottling vs. Municipality of Tanuan 69 SCRA 460 Mactan Cebu International Airport Authority vs. Marcos – GR No. 120082, Sept. 11, 1996 Manila Electric Company vs. Province of Laguna – GR No. 131359, May 5, 1999 NPC vs. City of Cabanatuan GR No. 149110, April 9, 2003 City Government of Quezon City vs. Bayan Telecommunications – GR No. 162015, March 6, 2006 iii. Local Taxing Authority (Sec. 132) 1. Construction of Tax Ordinances (Sec. 5b) Petron Corp. vs. Mayor Tobias Tiangco – GR No. 158881, April 16, 2008 iv. Procedure for Approval of and Effectivity of Tax Ordinances (Sec. 187) Hagonoy Market vs. Mun. of Hagonoy GR No. 137621, Feb. 6, 2002 v. Publication (Sec. 188) b. Other Preliminary Matters i. Residual Powers of LGUs -Power to Levy Other Taxes, Fees or Charges (Sec. 186) ii. Doctrine of Pre-emption or Exclusionary Rule Alyssa Africa

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Victorias Milling Co., Inc. vs. Municipality of Victorias – L-21183, September 27, 1968 II. GENERAL PROVISIONS a. Scope of taxing powers (Sec. 128) b. Fundamental Principles (Sec. 130) c. Definitions (Sec. 131) d. Common Limitations i. Income Tax 1. Correlate with Sec. 143 (f) ii. Documentary Stamp Tax iii. Transfer Taxes 1. Correlate with Sec. 135 iv. Customs Duties v. Taxes, Fees and Charges (TFC) on Goods Passing Through the Territorial Jurisdiction of LGUs 1. Correlate with Sec. 155 Panaligan vs. City of Tacloban – GR No. L-9319, September 27, 1957 Palma Development Corp vs. Municipality of Malangas – GR No. 152492, October 16, 2003 vi. TFC on products sold by marginal farmers of fishermen 1. Definition of Marginalized Fishermen (Sec. 122) City of Cebu vs. IAC 144 SCRA 710 vii. Taxes on BOI-registered enterprises viii. Excise taxes under the NIRC/TFC on Petroleum Products Petron Corp. Vs. Mayor Tobias Tiangco – GR No. 158881, April 16, 2008 Province of Bulacan vs. CA – GR No. 126232, November 27, 1998 Batangas City vs. Pilipinas Shell Petroleum Corporation – GR No. 187631 dated July 8, 2015. ix. Percentage taxes and VAT Pepsi Cola Bottling vs. Municipality of Tanuan 69 SCRA 460 Matalin Coconut Co, Inc. vs. The Municipal Council of Malabang, Lanao del Sur, GR No. L28138 August 13, 1986 Pelizloy Realty Corp., vs. Province of Benguet, GR No. 183137, April 10, 2013

Taxation Law

x. Taxes on transportation contractors and common carriers First Philippine Industrial Corporation vs. CA – GR No. 125948, December 29, 1998 City of Manila vs. Colet, GR No. 120051, December 10, 2014 xi.Taxes on premiums xii. TFC for registration of motor vehicles and issuance of licenses for driving 1. Correlate with Sec. 458 (3)(vi) of the LGV and Art. 99(a)(3)(vi) of the IRR of the LGC LTO vs. City of Butuan – GR No. 131512, January 20, 2000 xiii. Taxes, Fees, or Charges on Philippine Products Actually Exported; 1. Correlate with Sec. 143 (c) xiv. TFC on CBBEs under RA No. 6810 and RA 6983 xv. TFC on the National Government, its agencies and instrumentalities and LGUs Philippine Fisheries Dev’t Authority vs. CA GR No. 169836, GR No. July 31, 2007 Mactan Cebu International Airport Authority vs. Marcos – GR No. 120082, Sept. 11, 1996 MIAA vs. CA – GR No. 155650, July 20, 2006 MIAA vs. City of Pasay – GR No. 163072, April 2, 2009 City of Davao City vs. RTC – GR No. 127383, August 18, 2005 (To be discussed together with Secs.232 and 234 on Real Property Tax) III. TAXING AND OTHER REVENUE RASING POWERS OF LGUS a. Provinces i. Local Transfer Tax (Sec. 135) ii. Business Tax on Printing and Publication (Sec. 136) iii. Franchise Tax (Sec. 137) NPC vs. City of Cabanatuan GR No. 149110, April 9, 2003 Quezon City vs. ABS-CBN GR No. 166408. October 6, 2008 City of Iriga vs. Camarines Sur III Electric Cooperative, Inc., GR No. 192945, September 5, 2012 Smart Communications vs. City of Davao – GR No. 155491, September 16, 2008 (Also read Alyssa Africa

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decision on Motion for Reconsideration dated July 21, 2009) iv. Tax on Sand, Gravel and Quarry Resources (Sec. 138) Municipality of San Fernando vs. Sta. Romana L-GR No. 30159, Mar. 31, 1987 Province of Bulacan vs. CA – GR No. 126232, November 27, 1998 v. Professional Tax (Sec. 139) Definition of Professionals (Sec. 238 (f) IRR of the LGC) Professional practices his profession in several places (Sec. 228 (b) IRR of LGC) vi. Amusement Tax (Sec. 140) as amended by RA No. 9640 dated May 21, 2009 Pelizloy Realty Corp., vs. Province of Benguet, GR No. 183137, April 10, 2013 (Compare with old case of PBA vs. CA GR No. 119122, August 8, 2000) Alta Vista Golf and Country Club vs. The City of Cebu, GR No. 180235 dated January 20, 2016 vii. Annual Fixed Tax on Delivery Trucks / Vans (Sec. 141) b. Municipalities i. Business Taxes (Sec. 143) Ericsson Telecommunication vs. City of Pasig GR No. 176667, November 22. 2007 Facts: Ericsson Telecommunications, Inc. was assessed a business tax deficiency for the years 1998 and 1999 and was issued an Assessment Notice dated October 25, 2000. Petitioner Ericsson filed protest dated December 21, 2000 claiming that the computation erroneous as the local business tax was based on gross receipts and not on gross revenue on which he was taxed. Another Notice of Assessment was issued to the petitioner by the respondent City of Pasig on November 19, 2001, this time based on business tax deficiencies for 2000 and 2001. A protest was again filed by the petitioner on January 21, 2002. Respondent denied the protest and gave it 30 days within which to appeal the denial. The petitioner filed a petition for review with the RTC for the annulment and cancellation of his deficiency local business taxes. The respondent claims that the RTC has no jurisdiction over the case. This petition was denied. The CA likewise denied the petition.

Taxation Law

Issue: Whether the local business tax on contractors should be based on gross receipts or gross revenue. Held: Section 143 (e) of the Local Government Code provides that in cases of contractors and other independent contractors, the gross receipts for the preceding calendar year shall be used as basis for the imposition of local taxation. The law is clear. The respondent contends that gross revenues and gross receipts are the same, but the law also provides otherwise. Gross receipts include money or its equivalent actually or constructively received in consideration of services rendered or articles sold, exchanged or leased, whether actual or constructive as defined by Section 131 of the Local Government Code, while gross revenue covers money or its equivalent actually or constructively received including the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be received under the International Financial Reporting Standards. Hence, the petitioner is correct when it raised that the respondent committed an error in assessing the petitioner’s local business tax. The petition is granted. Yamane vs. BA Lepanto – GR No 154992, October 25, 2005 City of Manila vs. Coca Cola Bottlers, GR No. 181845, August 4, 2009 Alabang Supermarket Corporation vs. City of Muntinlupa, CTA EB Case No. 386 February 12, 2009 (read also case decided by the CTA Division) Cagayan Electric Power and Light Co., Inc., vs. City of Cagayan de Oro, GR No. 191761, November 14, 2012. Facts: On January 10, 2005, the Sangguniang Panlungsod of Cagayan de Oro passed an ordinance imposing tax on the lease or rental of electric and/or telecommunication posts, poles or towers by pole owners to other pole users at 10% of the annual rental income derived from such lease or rental. In a letter dated March 15, 2005, informed petitioner Cagayan Electric Power and Light Company, Inc. (CEPALCO) of the ordinance. On September 30, 2005, CEPALCO filed a petition for declaratory relief assailing the validity of the ordinance before the RTC of Cagayan de Oro on Alyssa Africa

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the ground that the tax imposed by the disputed ordinance is in reality a tax on income and is therefore prohibited under Section 133 of the Local Government Code. The RTC ruled in favor of the respondent. CEPALCO raised the issue with the appellate court but the latter affirmed the trial court on the ground that the petitioner failed to file a timely appeal to the Secretary of Justice and did not exhaust administrative remedies. Hence, CEPALCO filed a petition for review before the SC. Issues: Whether or not CEPALCO failed to exhaust administrative remedies in questioning the legality of the ordinance; and Whether or not the ordinance violates the LGC. Held: 1. Yes, CEPALCO failed to exhaust administrative remedies. It is important to note that the ordinance is a local revenue measure governed by the Local Government Code. Section 187 of the said Code, states that any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within 30 days from the effectivity thereof to the Secretary of Justice. Looking at the ordinance, it is said to take effect 15 days following its publication in a local newspaper of general circulation for at least 3 consecutive days. CEPALCO not only clearly filed its petition beyond the 30 day period provided in Section 187, it also did not file anything before the Secretary of Justice. Following the periods required by law is a pre-requisite before seeking relief in court for the speedy discharge of judicial functions and is therefore, mandatory for all persons seeking relief on the basis of the ordinance. Failure to appeal is fatal to its cause. Hence, 2. Yes, Section 137 of the LGC states that tax allowed provinces shall not exceed 50% of the 1% of the gross annual receipts. The fact that the ordinance in question imposes a rate of 10% of the annual rental income derived therefrom is obviously more than what the law allows. Therefore, the respondent city made a violation. 1. Catch all provision – Sec. 143 (h) 2. Rates of Tax within Metropolitan Manila (Sec. 144) 3. Retirement of Business (Sec. 145) Mobil Phils. vs. City Treasurer of Makati GR No. 154092, July 14, 2005

Taxation Law

4. Payment of Business Taxes (Sec. 146)

February 12, 2009 (read also case decided by the CTA Division)

5. Situs of Tax (Sec. 150) – Where to pay business tax? Shell Co vs. Mun. Of Sipocot – 105 Phil. 1263 Phil. Match vs. City of Cebu – L-30745 – Jan. 1888, 197778 Iloilo bottlers vs. City of Iloilo GR No. 52019 – Aug. 18, 1988 (compare with current LGC provisions and IRR provisions on rolling stores) a. With Branch or Sales Outlet b. No Branch Sales or Outlet c. With Factories, Project Offices, Plants and Plantations d. Plantation Located at a place other than the place where factory is located e. Two (2) or more factories, project offices, plants or plantations in different localities f. See also IRR for rules on rolling stores (See Art. 243 of the IRR of the LGC)

iii. Authority to Grant Tax Exemptions (Sec. 192) iv. Withdrawal of Tax Exemption Privileges (Sec. 193) PLDT vs. City of Davao GR No. 143867, August 22, 2001 NPC vs. City of Cabanatuan GR No. 149110, April 9, 2003 v. Community Tax 1. Who may impose(Sec. 156) 2. Individuals Liable to pay (Sec. 157) 3. Juridical Persons Liable to Community Tax (Sec. 158) 4. Exemptions (Sec. 159) 5. Place of Payment (Sec. 160) 6. Time of Payment (Sec. 161) 7. Community Tax Certificate (Sec. 162) 8. Presentation of CTC on certain occasions (Sec. 163) IV. COLLECTION OF TAXES AND REMEDIES a. Collection of Taxes i. Tax Period and Manner of Payment (Sec. 165) ii. Accrual of Tax (Sec. 166)

6. Fees and Charges (Sec. 147) iii. Time of Payment (Sec. 167) 7. Others (Sec. 148 and Sec. 149) iv. Surcharges and Penalties (Sec. 168) NPC vs. City of Cabanatuan, GR No. 177332 dated October 1, 2014

c. Cities (Sec. 151) d. Barangay i. Tax on retailers (Sec. 152 a) ii. Service Fees or Charges (Sec. 152 b) iii. Barangay Clearance (Sec. 152 c) iv. Other Fees (Sec. 152 b)

v. Interests on Other Unpaid Revenues (Sec. 169) vi. Collection of Local Revenues by Treasurer (Sec. 170)

e. Common Revenue Raising Powers i. Service Fees and Charges (Sec. 154) ii. Public Utility Charges (Sec. 155) iii. Toll Fees or Charges (Sec. 156)

vii.Examination of Books of Accounts and Pertinent Records (Sec. 171)

f. Other Matters i. Public Hearings Necessary? (Art. 324 IRR of the LGC vs. Sec. 187) Figuerres vs. CA, GR No. 119172, March 25, 1999 ii. Authority to Adjust Tax Rates (Sec. 191) Alabang Supermarket Corporation vs. City of Muntinlupa, CTA EB Case No. 386 Alyssa Africa

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b. Remedies of the Government i. Local Government’s Lien (Sec. 173) ii. Civil Remedies (Sec. 174) iii. Distraint (Sec. 175) iv. Levy of Real Property (Sec. 176) v. Advertisement and Sale (Sec. 178) vi. Redemption of Property Sold (Sec. 179) vii. Purchase of Property by LGU for want of bidder (Sec. 181)

Taxation Law

viii. Resale of Real Estate Tax for TFC

Smart Communications, Inc. vs. Municipality of Malvar, GR No. 204429, GR No. 204429 dated February 18, 2014.

ix. Judicial Action (Sec. 183) x.Further Distraint and Levy (Sec. 184) xi. Personal Property Exempt from Distraint or Levy (Sec. 185) C. Taxpayer’s Remedies i. Question Constitutionality of Ordinance (Sec. 187) Drilon vs. Lim GR No. 111249, August 4, 1994 Facts: The Secretary of Justice had, on appeal to him of four oil companies and a taxpayer, declared Ordinance No. 7794, known as the Manila Revenue Code null and void for non-compliance with the prescribed procedure under Section 187 of the Local Government Code. In a petition for certiorari filed by the City of Manila, the RTC revoked the resolution and sustained the ordinance. The RTC likewise declared that Section 187 of the Local Government Code is unconstitutional because it vests in the Secretary of Justice of the power of control over local governments in violation of the policy of local autonomy mandated in the Constitution and of the specific provision therein conferring on the President of the Philippines only the power of supervision over local governments.

ii. Publication (Sec. 188) Coca-Cola Bottlers vs. City of Manila - GR No. 156252, June 27, 2006 iii. Periods of Assessment and Collection (Sec. 194) iv. Protest of Assessment (Sec. 195) San Juan vs. Castro – GR No. 174617, December 27, 2007 PLDT vs. City of Balanga, CTA EB Case No. 413, June 3, 2009 China Banking vs. City Treasurer of Manila, GR No. 204117 dated July 1, 2015 – (jurisdiction issue) v. Appeal to the CTA vi. Claim for Refund (Sec. 196) Alabang Supermarket Corporation vs. City of Muntinlupa, CTA EB Case No. 386 February 12, 2009 (read also case decided by the CTA Division) Mindanao Shopping Destination Corp. Vs. Davao City, CTA AC No. 6, May 31, 2011

Issue: Whether or not Section 187 of the Local Government Code is unconstitutional.

vii. Is injunction available? Angeles City vs. Angeles Electric Corporation, GR No. 166134 dated June 29, 2010.

Held:

REAL PROPERTY TAXATION

No, Section 187 of the LGC is not unconstitutional. While it is true that the said section authorizes the Secretary of Justice to review only the constitutionality or legality of the tax ordinance, and if so, revoke it, it is not unconstitutional because it does not permit the Secretary of Justice to substitute his own judgment or to enact his own measure. The judgment of validity or invalidity is not on the basis of his discretion as to whether or not it is a bad law but rather, to review the measure and determine if the petitioners were acting within the functions provided for them in the law such as following the procedures thereto. The judgment of the RTC is reversed. Cagayan Electric Power and Light Co., Inc., vs. City of Cagayan de Oro, GR No. 191761, November 14, 2012. Alyssa Africa

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I. PRELIMINARY MATTERS a. Definition of Real Property Tax Villanueva vs. City of Iloilo, L-26521, December 28, 1968 b. Who should pay the real property tax? Baguio vs. Busuego, GR No. 29772, September 18, 1980 NPC vs. Province of Quezon, GR No. 171586, July 15, 2009 NPC vs. Province of Quezon, GR No. 171586, January 25, 2010 (Resolution) GSIS vs. City Treasurer and Assessor of Manila, GR No. 186242, December 23, 2009 c. Fundamental Principles (Sec. 198) d. Important Definitions (Sec. 199)

Taxation Law

i. Real Property for RPT Purposes (415 NCC) ii. Machineries Mindanao Bus vs. City Assessor and Treasurer L-17870, Sept. 29, 1962 Facts: The City Assessor of Cagayan de Oro assessed equipment belonging to Mindanao Bus Company. The latter appealed to the Board of Tax Appeals on the ground that the same are not realty but the Board of Tax Appeals of the City sustained the assessment. Hence, the petitioner filed a petition for the review of the assessment with the Court of Tax Appeals. Mindanao Bus Company raised the following contentions: (1) that it is a public utility engaged in transporting passengers and cargoes; (2) that the equipment and machineries assessed are sitting on cement or wooden platforms; (3) that it owns the land where it maintains and operates a garage and repair shop on where these machineries are placed and its TPU trucks are made; and (4) that the subject machines and equipment were never used as industrial equipment to produce finished products for commercial purposes. It concluded that for such reasons the machineries must not be considered as realty subject to tax. The CTA sustained the city assessor’s ruling. Hence, a petition for review of the CTA decision was raised with the SC.

Caltex Philippines, Inc. vs. CBAA – GR No. 50466, May 31, 1982 Facts: Caltex (Philippines) Inc. has machines and equipment located in its gas stations which are located on leased lands. Said machines and equipment consists of underground tanks, elevated tank, elevated water tanks, water tanks, gasoline pumps, computing pumps, water pumps, car washer, car hoists, truck hoists, air compressors and tireflators; all of which were considered by the city assessor as attached and affixed to the tenement hence, subject to real estate tax. The machines and equipment, however, were merely loaned under a lease agreement, and the lessor of the land does not become the owner of these machines and equipment installed. Caltex appealed with the City Board of Tax Appeals which ruled in its favor. The assessor appealed with the Central Board of Assessment Appeals which then reversed the decision of the City Board of Tax Appeals. Due to the circumstances, Caltex filed a petition for review of the decision of the CBAA with the SC. Issue: Whether the pieces of gas station equipment and machinery are subject to realty tax. Held:

Issue: Whether or not the subject machineries are subject to real estate taxes. Held: No, the equipment and machineries are not real estate properties. The respondent bases its ground on par. 5, Art. 415 of the New Civil Code which states that machineries and other receptacles which directly tend to meet the needs of the industry or works are to be considered immovable properties. However, this is not the case of the petitioner. It must be recalled that the main business of the petitioner is the transportation of passengers and cargoes, and that the repair shop where such equipment and machineries are located are merely incidental to the business. Hence, regardless of the existence of the repair shop along with its equipment and machineries, the business will still exist. Therefore, it cannot be said to be regarded as real or immovable property under the aforementioned provision as it does not directly tend to meet the needs of the business. Hence, the equipment and machineries in question are deemed not subject to real estate tax. Alyssa Africa

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Yes, they are subject to realty tax. The provisions of the Assessment Law and the Real Property Tax Code affirmatively resolve this issue. Section 2 of the Assessment Law provides that realty tax is due on real property which includes machinery and other improvements, while Section 38 of the Real Property Tax Code states that ad valorem tax on real property may be imposed by local government units. Section 3 of the latter Code even defines machinery as those attached to real estate, including physical facilities available for production, as well as the installation and appurtenant service facilities, together with all other equipment designed for or essential to its manufacturing industrial or agricultural purposes. Based on the these express provisions of the aforementioned laws, the court holds that because the equipment and machinery are fixtures which are necessary to the operation of the gas station for without them the gas station would be useless, and which have been attached or affixed permanently to the gas station site or embedded therein, they must be deemed as real property

Taxation Law

subject to the Assessment Law and the Real Property Tax Code. Hence, the decision of the CBAA is affirmed. Manila Electric Co. vs. CBAA L-47943, May 31, 1982 Manila Electric Company vs. The City of Assessor and City Treasurer of Lucena City, GR No. 166102 dated August 5, 2015. Actual Use Patalinghug vs. CA, GR No. 104786, January 27, 1994 Appraisal Assessment Assessed Value Appraisal of Real Property (Sec. 201) Sesbreno v. CBAA, 270 SCRA 263 Declaration of Real Property By Owner or Administrator (Sec. 202) In case improvements are made (Sec. 203) By Assessor (Sec. 204) Notification of Transfer of Real Property Ownership (Sec. 208) Assessment of Real Property Preparation of Schedule of Fair Market Values (Sec. 212) Lopez vs. City of Manila, GR No. 127139 February 19, 1999 Classes of Real Property for Assessment (Sec. 215) Special Classes of Real Property (Sec. 216) City Assessor of Cebu City vs. Association de Benevola de Cebu – GR No. 152904, June 8, 2007 Actual Use as Basis for Assessment (Sec. 217) Testate Estate of Concordia Lim vs. City of Manila – GR No. 90639, February 21, 1990) Patalinghug vs. CA, GR No. 104786, January 27, 1994 LRTA vs. CBAA – GR No. 127316, October 12, 2000 Allied Banking Corporation vs. Quezon City Government – GR No. 154126, October 11, 2005 Assessment Levels (Sec. 218) General Revision of Assessments and Property Classification (Sec. 219) Valuation of Real Property (Sec. 220) Alyssa Africa

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Allied Bank vs. Quezon City Government – GR No. 154126, October 11, 2005 Date of Effectivity of Assessment or Reassessment (Sec. 221) Assessment of Property Subject to Back Taxes (Sec. 222) Sesbreno v. CBAA, 270 SCRA 263 Notification of New or Revised Assessment (Sec. 223) Manila Electric Company vs. The City of Assessor and City Treasurer of Lucena City, GR No. 166102 dated August 5, 2015. Appraisal and Assessment of Machinery (Sec. 224) Depreciation Allowance for Machinery (Sec. 225) Condonation of RPT Condonation and Reduction of RPT (Sec. 276) Condonation or Reduction of RPT by President (Sec. 277) IMPOSITION OF REAL PROPERTY TAX Power to Levy Real Property Tax (Sec. 232) Rates of Levy (Sec. 233) Allied Bank vs. Quezon City Government – GR No. 154126, October 11, 2005 Exemptions from RPT (Sec. 234) Proof of Exemption from RPT (Sec. 206) Provincial Assessor of Marinduque vs. CA – GR No. 170532, April 4, 2009 Facts: The Provincial Assessor of Marinduque issued an Assessment Notice dated March 28, 1994 for real property taxes due on Marcopper Mining Corporation’s real properties including its Siltation Dam and Decant System. Respondent Marcopper paid the tax demanded but appealed the assessment before the Local Board of Assessment Appeals on the ground that the property is machinery and equipment used for pollution control and environmental protection exempted from real property taxation under Section 234 (e) of the Local Government Code. The LBAA on November 10, 1995, dismissed the respondent’s appeal for being filed out of time and held that the property is taxable as it is an improvement on the principal real property. Respondent appealed to the CBAA which was likewise denied. In the CA, the decisions of the LBAA and CBAA were reversed in favor of the respondent on the ground that the term

Taxation Law

machinery is broad enough to encompass instruments apparatus and devices functioning together for the actual and direct use for the mining business in which the respondent is engaged in; and that because it complies with the DENR requirement it must be deemed as exempt under Section 234(e) of the Local Government Code. Hence, the petitioner appealed to the SC. Issue: Whether or not the subject property was tax exempt under Section 234(e) of the Local Government Code. Held: No, the property is not exempt from real property tax. Section 234 of the LGC grants exemptions from real property taxation based on ownership, character or usage. In this case, the respondent yields a claim of exemption based on usage but as held in a previous case, and defined in Section 199 of the LGC actual use is “the purpose for which the property is principally or predominantly utilized by the person in possession thereof”, and that before anyone can claim exemption the claim must be supported by evidence under Section 206 of the LGC. The records show no allegation or evidence by the respondent that it is actually, directly or exclusively used for pollution control and environmental protection. While there is a DENR Certification that classifies the structure as primarily used for pollution control of silted materials, such certification only strengthens the proof that it is not machinery but a more or less permanent attachment to real property which meets none of the features of machinery used for pollution control exempted from payment of tax. Hence, the petition is granted. Constitutional Provisions on RPT Exemption Sec. 28, Art. VI Lung Center of the Philippines vs. QC – 433 SCRA 119 Sec. 4(3), Art. XIV Fels Energy, Inc. vs. Province of Batangas GR No. 168557, February 16, 2007 Philippine Fisheries Dev’t Authority vs. CA GR No. 169836, GR No. July 31, 2007 Mactan Cebu International Airport Authority vs. Marcos – GR No. 120082, Sept. 11, 1996 MIAA vs. CA – GR No. 155650, July 20, 2006 Alyssa Africa

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Mactan-Cebu International Airport Authority vs. City of Lapu-Lapu – GR No. 181756 dated June 15, 2015 Provincial Assessor of Marinduque vs. CA – GR No. 170532, April 4, 2009 NPC vs. Province of Quezon, GR No. 171586, July 15, 2009 NPC vs. Province of Quezon, GR No. 171586, January 25, 2010 (Resolution) GSIS vs. City Treasurer and Assessor of Manila, GR No. 186242 December 23, 2009 City of Pasig vs. Republic, GR No. 185023 dated August 24, 2011 Republic vs. City of Paranaque, GR No. 191109 dated July 28, 2012 Angeles University Foundation vs. City of Angeles, GR No. 189999 June 27, 2012 City of Lapu-Lapu vs. PEZA, GR No. 184203 dated November 26, 2014 Additional Levy for SEF (Sec. 235) RPT on Idle Lands (Sec. 236) Coverage of Idle Lands (Sec. 237) Idle Lands Exempt from Tax (Sec. 238) Special Levies (Sec. 240) Ordinance Imposing Special Levy (Sec. 241) Publication and Public Hearing (Sec. 242) Fixing Amount of Special Levy (Sec. 243) Taxpayers Remedies (Sec. 244) Accrual of Special Levy (Sec. 245) IMPOSITION OF REAL PROPERTY TAX Date of Accrual (Sec. 246) Notice of Time of Collection (Sec. 249) Payment of RPT in Installments(Sec. 250) Tax Discount for Advanced Prompt Payment (Sec. 251) REMEDIES Local Government Unit’s Remedies Date of Accrual of Tax (Sec. 246) LGU’s Lien (Sec. 257) Interest on Unpaid RPT (Sec. 255) Period to Collect (Sec. 270) Suspension of Period to Collect Levy on Real Property (Sec. 258) Advertisement and Sale (Sec. 260) Puzon vs. Abelera 169 SCRA 789 Spouses Tan vs. Bantequi GR No. 154027 October 24, 2005 Redemption of Property Sold (Sec. 261) Purchase of Property by the Local Government Units for Want of Bidder (Sec. 263)

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Court Action for Collection (Sec. 266) Taxpayer’s Remedies Action Assailing Validity of Tax Sale (Sec. 267) Action Involving Ownership (Sec. 268) Payment under Protest (Sec. 252) Manila Electric Company vs. The City of Assessor and City Treasurer of Lucena City, GR No. 166102 dated August 5, 2015. Ramie Textile vs. Mathay - 89 SCRA 586 Ty vs. Trampe – GR No. 117577, December 1, 1995 Olivarez vs. Marquez - 438 SCRA 679 NPC vs. Province of Quezon, GR No. 171586, July 15, 2009 NPC vs. Province of Quezon, GR No. 171586, January 25, 2010 (Resolution) Camp John Hay Development Corp. vs. CBAA, GR No. 169234, October 2, 2013. (include concurring opinion of Justice Carpio) NPC vs. Municipal Government of Navotas, GR No. 192300 dated November 24, 2014 City of Lapu-Lapu vs. PEZA, GR No. 184203 dated November 26, 2014 CE Casecnan Water and Energy Company, Inc. vs. The Province of Nueva Ecija, GR No. 196278 dated June 17, 2015. Refunds (Sec. 253) Allied Banking vs. Quezon City Government – GR No. 154126, September 15, 2006 – Motion for Clarification of Decision Assessment Appeals Appeal with the LBAA (Sec. 226) City Government of Quezon City vs. Bayan Telecommunications – GR No. 162015, March 6, 2006 Systems Plus Computer College of Caloocan vs. Local Government of Caloocan, GR No. 146382. August 7, 2003 Fels Energy, Inc. vs. Province of Batangas GR No. 168557, February 16, 2007 Facts: On January 18, 1993, NAPOCOR entered into a lease contract with Polar Energy over diesel engine power barges. The contract was for a period of 5 years with NAPOCOR shouldering all the taxes, import, duties, fees, charges and other levies imposed by the National Government of the Republic of the Philippines. However, on August 7, 1995, Fels Energy, Inc. received an assessment of real property taxes on the power barges from the Provincial Assessor for 1994. Fels reminded NAPOCOR to pay its obligations under the Alyssa Africa

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agreement. On September 7, 1995, NAPOCOR sought reconsideration of the Provincial Assessor but it was denied. NAPOCOR filed a petition with the Local Board of Assessment Appeals for the setting aside of the assessment and the declaration of the barges as non-taxable items. The LBAA denied the petition on August 24, 1996. Fels appealed to the Central Board of Assessment Appeals. On April 6, 2000 the CBAA exempt the barges from real property tax on the ground that the power barges belonged to NPC and was therefore covered by exemptions but it was reversed after a motion for reconsideration. The CA affirmed the ruling of the CBAA. Hence, the petition was elevated to the SC. Issue: Whether or not the barges are exempt from real property taxes; and Whether or not the appeal before the LBAA was time-barred. Held: 1. No, the barges are not exempt from payment of real property tax. Section 234 of the Local Government Code states that machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power are exempt from real property tax. However, upon review of the agreement of NAPOCOR and Polar, it appears that the ownership and operation of the barges remain with Polar. While it is true that NAPOCOR has the responsibility to pay the fees under agreement, because NAPOCOR is exempt from payment, it cannot be compelled to pay, and Fels cannot enjoy such exemption as this privilege does not extend to third persons. 2. Yes, the appeal with the LBAA was timebarred. Under Section 226 of the Local Government Code, the owner or person having legal interest in the property may within 60 days from the date of receipt of written notice of assessment appeal to the Board of Assessment Appeals regarding the assessment of its property. The notice was sent to Fels on August 7, 1995, along with the reminder that within 60 days an appeal must be made. However, NAPOCOR appealed a few months later. LBAA was correct in denying the petition. Hence, the petition is denied. Action by the LBAA (Sec. 229) Appeal to the CBAA (Sec. 229)

Taxation Law

Appeal to the CTA En Banc Effect of Appeal on Payment of RPT (Sec. 231)

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