Taxation 2 Ingles
Short Description
Tax Law Reviewer by Micky Ingles...
Description
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ESTATE TAX DONOR’S TAX VALUE‐ADDED TAX PERCENTAGE TAXES EXCISE TAXES DOCUMENTARY STAMP TAXES POWERS OF THE BIR REMEDIES OF THE GOVERNMENT TAXPAYER’S REMEDIES COURT OF TAX APPEALS (RA 9282 AND REVISED RULES OF COURT OF THE CTA) LOCAL TAXATION COMMUNITY TAX REAL PROPERTY TAXATION CUSTOMS AND TARIFFS CODE
1 20 27 53 63 67 69 75 97 103 108 124 126 136
Estate Tax
Estate tax is the tax on the right to transmit property at death and on certain transfers by the decedent during his lifetime which are made by the law equivalent of testamentary dispositions. It accrues upon the death of the decedent. A transmission by inheritance is taxable at the time of the predecessor’s death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary. (Lorenzo v Posadas) The tax is measured by the value of the property transmitted at the time of death, regardless of its appreciation or depreciation. The accrual of the tax is distinct from the obligation to pay the tax.
SEC. 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 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the following schedule…
Over
P200k P500k P2m P5m P10m
But not over P200k P500k P2m P5m P10m
The tax shall be Exempt 0 P15k P135k P465k P1.215m
Plus
Of the Excess Over
5% 8% 11% 15% 20%
P200k P500k P2m P5m P10m
Properties in the Estate SEC. 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. (A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death; SEC. 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
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two 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.
For estate tax purposes, residence refers to the domicile of the person. For residents and citizens, gross estate includes ALL properties, real or personal, tangible or intangible, WHEREVER situated. For non-resident aliens, gross estate includes only properties those situated in the Philippines. o Except with respect to INTANGIBLE personal property, its inclusion to the gross estate is the subject to the rule of reciprocity. If the foreign country of the non-resident alien does not impose a transfer tax of any character on the IPP of Filipinos not residents of that foreign country; or The foreign country of the non-resident alien allows a similar exemption from transfer tax in respect of IPP owned by Filipinos not residents of that foreign country, Then IPPs of the non-resident alien here are exempt from the estate tax. o Reciprocity must be total. If any of the two states or countries collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, reciprocity does not apply. (CIR v Fisher) o Reciprocity in exemption does not require the “foreign country” to possess international personality. (CIR v Campos Rueda) The following, among others, are intangible personal properties located in the Philippines: 1. Franchise which must be exercised in the Philippines 2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws 3. Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines 4. Shares, obligations or bonds issued by ay foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines, and 5. Shares or rights in any partnership, business or industry in the Philippines.
Properties not in the estate There may be properties which at the time of the decedent’s death are not in the estate because they were transferred by him during his lifetime. These transfers are: 1. Transfers in contemplation of death, 2. Revocable transfers, 3. Transfers under a general power of appointment, and 4. Transfers for an insufficient consideration. Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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The values of these properties will be included in the determination of the gross estate for estate tax purposes. As such, the gross estate, for purposes of the estate tax, may exceed the actual value of his assets at the time of his death as it includes the value of transfers of property by him during his lifetime that partake of the nature of testamentary dispositions. These kinds of transfers have the following in common: o They are ostensible transfers, usually with the purpose to evade the estate tax o They are extension of interests o If the transfers are in fact for a bona fide consideration, then they will not form part of the gross estate (this proviso is present in all the provisions regarding these transfers) o
Transfers in contemplation of 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 bonafide sale for an adequate and full consideration in money or money's worth.
A transfer in contemplation of death is a transfer motivated by the thought of death, although death may not be imminent. The following are examples of circumstances which may be taken into consideration in determining whether the transfer was made in contemplation of death: o We can look at the age and state of health of the decedent at the time of the transfer (is he terminally ill?) o Length of time between the transfer and the date of the death. o Concurrent making of a will or making of a will within a short time after the transfer. But again, in the case of a bona fide sale for an adequate and full consideration in money or money’s worth, the value of the property transferred will not be considered in determining the gross estate.
Revocable transfers (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 exerciseable) 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), t o 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 his death.
A revocable transfer is a transfer where the terms of the enjoyment of the property may be altered, amended, revoked or terminated by the decedent. It is sufficient that the decedent had the power to revoke, though he did not exercise the power to revoke. Again, the same rule with bona fide sales applies.
Transfers under a General Power of Appointment Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (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.
A power of appointment refers to the right to designate the person or persons who will succeed the property of a prior decedent. A general power of appointment is one which may be exercised in favor of anybody. o Carles donated property to Andres, with a provision that Andres can transfer the property to anyone. Andres transferred it to Iker. The property should be included in the gross estate of Andres. A limited power of appointment is one which may be exercised only in favor of a certain person or persons designated by the prior decedent. o Carles donated property to Andres, with a provision that Andres should transfer the property to Iker, and only Iker. The value of the property should not be included in the gross estate of Andres. In order that property passing under a power of appointment may be included in the gross estate of the transferor, the power of appointment must be a general power of appointment. Again, the bona fide sale rule applies.
(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 of 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.
In the transfers in contemplation of death, revocable transfer, or transfer under a GPA, the value to include in the gross estate will be determined under the following rules: o If the transfer was in the nature of a bona fide sale for an adequate and full consideration in money or money’s worth, no value will be included in the gross estate; o If the consideration received on the transfer was less than adequate and full, the value to include in the gross estate will be the excess of the fair market value at the time of the decedent’s death over the consideration received; o If there was no consideration received on the transfer (donation mortis causa), the value to include in the gross estate will be the fair market value of the property at the time of the decedent’s death. When looking at transaction, ask yourself, “was the consideration insufficient?” a. If yes, then add the balance of the FMV at the time of death and the consideration. b. If no, then it was a bona fide sale. Don’t add the value to the gross estate.
Analysis of the cases of Zapanta, Tuason, Dizon and Vidal de Roces Voluntary/Compulsory Heir
Time between transfer and
Will?
Remarks
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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death Zapanta
Compulsory
None
Yes
Tuason
Voluntary
3 years
Yes
Dizon
Compulsory
1 day
No
Vidal de Roces
Voluntary
9 months
Yes
Not considered advances. Considered as advances, because the donees became legatees in the will. Considered advances. The donee is a compulsory heir. Considered advances. Donees were legatees in the will
When it comes to transfers done during the lifetime of a decedent, there is a disputable presumption that the transfers are in contemplation of death if the recipients are compulsory heirs. o The government presumes that one is transferring property beforehand to escape the estate tax, and instead pay the lower donor’s tax. o The case of Zapanta showed that the presumption is disputable. There, the Court considered the gifts as not advances even if the recipients were compulsory heirs. The reason for this was the condition imposed upon the recipients by the decedent (they had to pay the decedent a certain amount of rice and money during his lifetime). It showed that the transfer was not in contemplation of death, because the decedent in fact, would benefit from the transfer. o The presence of a will also plays a part. In the cases of Tuason and Vidal de Roces, the Court considered the transfers as advances because a will was made making the transferees legatees. This played a part in the Court’s impression that there was an intention of the decedent to minimize his gross estate. o Thus, when looking at cases like these, the totality of all the factors and facts must be taken into consideration. Does the government always want to consider a transfer an advance (to be covered by the estate tax)? Not necessarily. There are instances where they will argue for it to be considered under the donor’s tax.
Life Insurance Proceeds (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.
Proceeds of life insurance are paid by the insurance company directly to the beneficiary. Proceeds of insurance under policies taken out by the decedent upon his life shall constitute part of the gross estate if the beneficiary is: 1. The estate of the decedent, his executor or administrator; or 2. A third person (not those in #1), and the designation of the beneficiary is revocable. The Insurance Code states that the designation of a beneficiary is generally revocable. o Except of course, when the policy states that the designation is irrevocable. In such cases, the proceeds are not considered as part of the decedent’s estate.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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So, gross estate is made up of: 1. The decedent’s interests at the time of his death 2. Transfers made during his lifetime (in contemplation of death, revocable, and under a GPA), and 3. Life insurance proceeds 4. Some other stuff required by law to be included in the gross estate in order to allow deductions (claims against insolvent persons, unpaid mortgage, value of the family home, and the retirement benefits under RA 4917) Valuation of the gross estate SEC. 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.
The properties comprising the gross estate shall be valued based on the FMV as of the time of death. In case of real property, the fair market value shall be: 1. The FMV as determined by the Commissioner; or 2. The FMV as shown in the schedule of values fixed by the Provincial and City Assessors o Whichever is HIGHER In case of personal property recently acquired by the decedent, the purchase price may indicate the FMV. o In case of personal property not recently acquired, there should be some evidence of the FMV. For shares of stock, the FMV shall depend on whether the shares are isted or unlisted in the stock exchange. o If unlisted Common shares – based on their book value Preferred shares – based on their par value o If listed The mean between the highest and lowest quotation on the date of death; If none, then the date nearest the death. For use of usufruct, there 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.
Computation for the net estate The basic equation to determine the net taxable estate is (gross estate – deductions) The complication arises when the decedent is married at the time of his death. We’ll tackle that later. First, let’s take a look at the deductions. Deductions The deductions from the gross estate are: 1. Ordinary deductions a. Expenses, losses, indebtedness, taxes, etc: i. Funeral expenses ii. Judicial expenses of testamentary or intestate proceedings iii. Claims against the estate Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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iv. Claims against the insolvent persons v. Unpaid mortgage or indebtedness on property vi. Taxes paid vii. Losses b. Transfer for public use c. Vanishing deductions 2. Special deductions a. Family home b. Standard deduction of P1,000,000 c. Medical expenses d. Amounts received by heirs under RA 4917. These deductions are allowed for a citizen or resident of the Philippines. Non-resident aliens are not entitled to special deductions.
Ordinary deductions Funeral expenses (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);
The deduction of funeral expenses is the o Amount of actual funeral expenses, or o An amount equal to 5% of the gross estate, whichever is LOWER, But not to exceed P200,000. “Funeral expenses” includes: 1. Mourning apparel of the surviving spouse and the unmarried minor children of the deceased bought and used on the occasion of the burial 2. Expenses for the deceased wake’s 3. Publication charges for death notices 4. Telecommunication expenses incurred in informing relatives of the deceased 5. Cost of burial plot, tombstones, monument or mausoleum (BUT NOT THEIR UPKEEP) 6. Interment and/or cremation fees and charges, and 7. All other expenses incurred for the performance of the rites and ceremonies incident to interment These aren’t deductible: o Expenses incurred AFTER the interment o Expenses borne or defrayed by relatives and friends The cut-off point is interment. Thus, the expenses for the 9th day, thank you cards, 40th day aren’t included. When some of the items which are actual funeral expenses are covered by a memorial plan, the value of the memorial plan must be included in the gross estate. o The value of the memorial plan plus other actual funeral expenses will give an aggregate which will be compared with the 5% limitation and with P200k.
Judicial expenses of the testamentary/intestate proceedings (b) For judicial expenses of the testamentary or intestate proceedings;
These are the expenses incurred during the settlement of the estate, o BUT not beyond the last day prescribed by law for the filing of the estate tax return (within 6 months from the date of death), or the extension period allowed. These judicial expenses include 1. Fees of the executor or administrator 2. Attorney’s fees
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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3. Court fees 4. Accountant’s fees 5. Appraiser’s fees 6. Clerk hire 7. Costs of preserving and distributing the estate 8. Costs of storing or maintaining property of the estate 9. Brokerage fees for selling property of the estate Expenses on extrajudicial settlement of the estate are allowed as deductions. They come within the meaning of administration expenses. o The notarial fee paid for the extrajudicial settlement is deductible since such settlement effected a distribution of the decedent’s estate to his lawful heirs. (CIR v CA & Pajonar) In that case, the notarial fees and the guardianship fee of the attorney were considered deductibles. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible. Expenses for the improvement and renovation of the decedent’s residential house were allowed as a deductible. (Testate Estate of Felix de Guzman v de Guzman-Carillo) o Admin expenses should be those which are necessary for the management of the estate, for protecting it against destruction or deterioration, and possible for the production of fruits. Attorney’s fees paid by the heirs to their respective lawyers arising from conflicting claims are not deductible as judicial expenses. These shall be separately borne by them.
Claims against the estate 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;
“Claims” means debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could not have been reduced to simple money judgments. o In other words, if enforceable against him when he was alive, the obligations will be claims against his estate when he shall be dead. o So, an obligation that has prescribed during his lifetime, or that was unenforceable against him, will not be a claim against his estate when he shall be dead. Requisites: 1. The liability must represent a personal obligation of the deceased at the time of his death (except unpaid obligations incurred incident to his death and unpaid medical expenses classified as a deduction), 2. The liability was contracted in good faith and for adequate and full consideration, 3. The claim must be a debt or claim which is valid in law and enforceable in court 4. The indebtedness must not have been condoned by the creditor during the lifetime of the decedent, or the actions to collect must not have prescribed. Regarding the 4th requisite, if the debts were condoned AFTER the decedent’s death, the debts are deductible, following the date-of-death valuation rule. (Dizon v CTA) If the claim arose out of a debt instrument, the debt instrument must be notarized. o EXCEPT for loans granted by financial institutions where notarization is not part of the business practice or policy of the institution. If the loan was contracted within 3 years before the death of the decedent, the admin or executor must submit a statement showing the disposition of the proceeds of the loan.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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If a monetary claim against the decedent did not arise out of a debt instrument, the requirement of a notarized debt instrument does not apply. There is no requirement to add the amount to the gross estate (as compared to claims against insolvent persons/mortgage). This is a DIRECT DEDUCTION.
Claims against insolvent persons (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;
Claims against insolvent persons are deductions from the gross estate o SUBJECT to the condition that the full amounts of the receivables are first included in the gross estate. The deduction from the gross estate will be the uncollectible portion.
Unpaid mortgage or indebtedness on property (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…When a person leaves property encumbered by a mortgage or indebtedness, his gross estate must include the fair market value of the property, undiminished by the mortgage or indebtedness.
The mortgage or indebtedness will be claimed as a deduction from the gross estate. o Pique died leaving real property with a FMV of P1m, subject to a mortgage in the amount of P600k. Before he can deduct the P600k, he has to include the total FMV of his property to the gross income. If the loan is merely an accommodation loan, where the proceeds of the loan went to another person, the value of the unpaid loan must be included in the receivable of the estate. In the cases of claims against insolvent persons and unpaid mortgage/indebtedness on property, it is imperative that the values of each are first added to the gross estate. o These are called zero-sum computations. They don’t really benefit the heirs because these transactions weren’t supposed to be part of the gross estate anyway.
Taxes Taxes are deductions from the gross estate if such taxes accrued prior to the decedent’s death. Those that accrued after the decedent’s death are not deductions from gross estate. These taxes can NOT be deducted: 1. Income tax on income received after death 2. Property taxes not accrued before death 3. Estate tax Losses 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 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.
Losses are deductible from the gross estate if: 1. Arising from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement 2. Not compensated by insurance or otherwise
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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3. Not claimed as a deduction in an income tax return of the estate subject to income tax 4. Occurring during the settlement of the estate, and 5. Occurring before the last day for the payment of the estate tax (6 months after the decedent’s death, or the allowed extension) o
Example: Dude died January 1, 2010. A fire razed his house on March 1, 2010. His estate was settled January 1, 2012. He can claim a deduction (within 6 months!) Dude died January 1, 2010. A fire razed his house on January 1, 2011. He can’t claim a deduction.
Transfers for public use (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.
“Transfers for public use” mean dispositions in a last will and testament, or a transfer to take effect after death, in favor of the Government of the Philippines, or any political subdivision thereof, for exclusively public purposes. You can deduct the value of the property transferred to the government.
Vanishing deductions (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 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.
Property may change hands within a very short period of time by reason of the early death of the owner who received it by inheritance or by donation (gift). To provide relief to the burdened taxpayer, vanishing deductions are allowed to reduce the gross estate. Vanishing deductions are allowed when:
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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1. The present decedent died within 5 years from receipt of the property from a prior decedent or donor; 2. The property on which the vanishing deduction is being claimed must be located in the Philippines 3. The property must have formed part of the taxable estate of the prior decedent, or of the taxable gift of the donor 4. The estate tax on the prior succession or the donor’s tax on the gift must have been finally determined and paid 5. The property must be identified as the one received from the prior decedent or donor, or something acquired in exchange therefore 6. No vanishing deduction on the property was allowable to the estate of the prior decedent How do we compute? Step 1: Get the basis. Either the value of the property in the prior estate/value used for donor’s tax purposes OR the value of the property in the present estate, whichever is LOWER. Step 2: The Step 1 value will be reduced by any payment made by the present decedent on any mortgage or lien on the property (when such mortgage/lien was used as a deduction on the prior dead guy’s estate, or gift of the donor) Step 3: The Step 2 value shall be further reduced by: x Expenses, losses, indebtedness, taxes and transfers for Step 2 value Gross Estate public use This is done to prevent double deduction. Step 4: Look at the chart below and multiply to get the value which you can actually deduct. % If received by inheritance or gift 100 Within one year prior to death of the decedent 80 More than one year but not more than two years 60 More than two years but not more than 3 years 40 More than 3 years but not more than 4 years 20 More than 4 years but not more than 5 years Example Che inherited land from his pop with a fmv of P500k when inherited. Two and a half years later, Che died. The FMV of the land was P600k at that time. The gross estate, on which the land was part, was P2m. deductions from the gross estate (not including the family home, medical expenses, standard deduction or RA 4917 receivable) amounted to P400k. What’s the vanishing deduction? Step 1: Get the lower value. - P500k Step 2: No mortgage mentioned, so P500k x P400k = P100k Step 3: P500k P2m Basis of the vanishing deduction (500k-100k) = P400k Vanishing deduction (60% of P400k) = P240 Special deductions Family Home (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.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
The deduction is an amount equivalent to the current FMV of the decedent’s family home. o BUT the maximum is P1m only. Do not forget to add the amount of the family home to the gross estate. Kasama yan! o Zero-sum? Yes, but only to the extent of P1m. Lugi yung rich folk. The deduction will be allowed when the famly home is certified to be as such by the barangay captain of the locality where it is located. For a person married at the time of death, and who was under a system of conjugal partnership or absolute community, the deduction for the family home is ½ of the FMV, but should not exceed P1m, if such family home was conjugal property or community property. (Remember this!)
Standard deduction (5) Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).
Do not forget to deduct P1m every time! It’s standard!
Medical expenses (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).
All medical expenses incurred (whether paid or unpaid) within ONE YEAR before the death of the decedent shall be allowed as a deduction, PROVIDED, o that the same are duly substantiated with official receipts, and o The total amount, whether paid or unpaid, does NOT exceed P500k. If it’s more than P500k, can you deduct it as a claims against the estate? No. See requisites of claims against the estate.
Amounts receivable under RA 4917 (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.
Retirement benefits received by employees of private firms in accordance with a reasonable benefit plan maintained by the employer are EXEMPT from all taxes, provided that the retiriing employee has been in the services of the same employer for at least 10 years and is not less than 50 years old at the time of his retirement. The amount must: o have been received by the heirs of the decedent-employee as a consequence of the latter’s death, and o included in the gross estate of the descendent. (important!)
Deductions from the gross estate with ceilings Funeral expenses Actual funeral expenses, or 5% of the gross estate; or P200k Medical expenses Actual medical expenses, or P500k Family home FMV, or P1m
Whichever is the LOWEST
Whichever is LOWER Whichever is LOWER
Deductions for a NON-RESIDENT, NOT CITIZEN of the Philippines Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
12
+ amdg Taxation Two (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: (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 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.
A non-resident decedent who was not a citizen of the Philippines at the time of death, with properties within and outside the Philippines, is subject to tax only on his estate within the Philippines. Due to this, the estate in the Philippines is allowed deductions for: 1. Expenses, losses, indebtedness, taxes, etc, computed by: x World expenses, losses, indebtedness, Gross Estate, Philippines Gross Estate, World taxes, funeral expenses, judicial expenses, etc It does not matter where the expenses are paid or incurred. On the total of the items, the formula provided by law will be applied. Moreover, it also doesn’t matter if you can pinpoint specifically where the expenses were incurred, you have to use the formula. 2. Transfers for public use of property in the Philippines 3. Vanishing deduction on property in the Philippines A non-resident, not citizen is NOT allowed: 1. Deduction for family home 2. Standard deduction 3. Deduction for medical expenses
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
4. Deduction for amount receivable under RA 4917 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.
No deduction shall be allowed for a non-resident alien unless the executor, administrator or anyone of his heirs, includes in the return required to be filed under Sec. 90 the value at the time of the decedent’s death that part of his gross estate not situated in the Philippines. (Needed for the formula specified above)
Net Estate Computation of Married Persons Section 85 (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. Section 86 (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.
Gross estate The gross estate of a decedent who was married and who was under the system of absolute community of property during the marriage consists of: 1. The EXCLUSIVE properties of the decedent, and 2. The COMMUNITY properties The exclusive properties are: 1. Property acquired during the marriage by gratuitous title (inheritance/donation) by either spouse, and the fruits as well as the income thereof a. Unless the donor, testator or grantor states that they will be part of the community property 2. Property for personal and exclusive use of either spouse a. But jewelry will form part of the community property 3. Property acquired BEFORE the marriage by either spouse who have legitimate descendants by a former marriage, and the fruits as well as the income of such property
Community property will consist of all properties owned by the spouses at the time of the celebration marriage or acquired thereafter (presumed to belong to the community) o The family home constituted by the husband and wife is community property. Proceeds of life insurance taken out by the decedent on his own life, when includible in the gross estate, will be exclusive property if the premiums were paid out of exclusive funds. o They will be community property if the premiums were paid out of community funds. A claim against an insolvent person will be included in the gross estate as exclusive or community depending on whether the claim is for exclusive or community property. Deductions from gross estate The same rules and ceilings which were discussed on the part of deductions will apply The following are the community/conjugal deductions: 1. Funeral expenses and judicial expenses 2. Special deductions of family home, standard deduction, medical expenses and amounts receivable under RA 4917 3. Those obligations contracted during the marriage which are presumed to have benefited the family (debts incurred during the marriage, etc) The following are exclusive deductions: Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
1. Debts before the marriage by either spouse that did NOT redound to the benefit of the family 2. Support of the illegitimate children of either spouse 3. Liabilities incurred by either spouse of a crime So, how do we get the net estate of a married person? Step 0: Know which are community/conjugal and which are exclusive Step 1: Get the net conjugal estate (gross conjugal estate – conjugal deductions) Step 2: Get the decedent’s share (net conjugal estate/2) Step 3: Get the gross estate of the decedent (decedent’s share + exclusive properties) Step 4: Get his net estate (gross estate of the decedent – exclusive & special deductions) Step 5: Once you reach step 4, yun na yon! That’s the decedent’s taxable estate. Mao, a citizen and resident of the Philippines, was married under the system of absolute community of property during the marriage. He died leaving the following properties and obligations: Real properties inherited from his father 10 years ago and before the marriage P200k Real property received as a gift from the mother 7 years ago, during the marriage P1.115m Cash – income from the property received as gift P5k Real property owned by Mrs. Mao before the marriage P300k The family home P500k Medical expenses P70k Funeral expenses P50k Judicial expenses for settlement of estate P100k Obligations incurred during the marriage P150k Debt of Mao before the marriage P120k Step 0: Determine what are conjugal/community and what are exclusive Step 1: Get the net conjugal estate (gross conjugal estate – conjugal deductions) (P200k1 + P300k2 +500k3) - (P50k4 + P100k5 + P150k6) = P700k Step 2: Get the decedent’s share (Step 1’s NCE/2) P700k/2 = P350k Step 3: Get the gross estate of the decedent (decedent’s share + exclusive properties) P350k + P1.115m7 + P5k8 = P1.47m Step 4: Get his net estate (Gross estate decedent – exclusive deductions & special deductions) P1.47m – (P120k9 + P250k10 + P70k11 + P1m12) = P30k 1 2 3 4 5 6 7 8 9
Real property inherited from the father Real property owned by Mrs. Mao before the marriage Value of the family home Funeral expenses Judicial expenses Obligations incurred during the marriage Real property gift from mom during marriage Income from the gift debt before marriage
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
Step 5: The net taxable estate is P30k. Check the schedular rate, and you’ll find out that his estate is tax exempt! Tips: Do not forget the limitations and ceilings imposed by the general rule of deductions. o Family home only up to P1m. o Funeral expenses only up to P200k – whatever’s lower of the actual expense and 5% of the gross estate (exclusive + conjugal) o Medical expenses not to exceed P500k Remember that only ½ of the family home is counted as a special deduction (since half belongs to the still living spouse). o And also remember that if the value of the family home (once halved) is above P1m, the deduction allowed is still P1m because of the ceiling imposed by law. Don’t forget to subtract the standard deduction. It’s not usually given as part of the facts but you still have to deduct that. Medical expenses are special deductions and are deducted from the gross estate of the decedent. Funeral deductions are conjugal deductions and are deducted from the gross conjugal/community estate. Exemption from Estate Tax 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 insures 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.
The following are exempt from estate tax: 1. Merger of usufruct in the owner of the naked title 2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommisary 3. Transmission from the 1st heir, legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor, and 4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income inures to the benefit of any individual, provided that not more than 30% of the said bequests, devises, legacies or transfers shall be used by such institutions for the administration purposes
Tax Credit for Foreign Estate Tax 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 10 11 12
½ the value of the family home Medical expenses Standard deduction! Don’t forget!
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (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.
To minimize the onerous effect of taxing the same property twice, a tax credit against Philippine estate tax is allowed for estate taxes paid to foreign countries.
One foreign country What you paid to the foreign country Tax Credit Limit = Net foreign estate Entire Net Estate
x
Tax here in the Philippines
Between what you paid to the foreign country and the tax credit limit here, you choose whatever’s lower as what you can credit. See example in donor’s tax part.
If tax is paid to 2 or more foreign countries: Limitation A: see above Limitation B: Tax Credit Limit = Total foreign net estate Entire Net Estate
x Tax here in the Philippines
Between limitation A and B, you choose whatever’s lower as your credit.
Admin Provisions 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.
A notice of death must be filed within two months after the decedent’s death: 1. In all cases of transfers subject to tax, or 2. When exempt, the value of the estate exceeds P20,000
SEC. 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, 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) 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
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two 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.
An 1. 2. 3.
estate tax return is required to be filed when the estate is: Subject to estate tax, Exempt from estate tax, but the gross estate exceeds P200,000 Regardless of the amount of the gross estate, where the said gross estate consists of registered or registerable property, motor vehicle or shares of stock, or other similar property for which clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee. The return shall be under oath and shall include the following: 1. Value of the gross estate at the time of the decedent (for non-resident aliens, the value of the gross estate here in the Philippines) 2. Deductions allowed from the gross estate 3. Whatever’s necessary to establish the correct estate tax If the estate tax return shows that the gross estate exceeds P2,000,000, it should be accompanied by a statement certified by a CPA. See codal. The estate tax return should be filed within 6 months after the decedent’s death. o The BIR can extend this, but not more than 30 days. A return need not be complete in all particulars. It is sufficient if it complies substantially with the law. There is substantial compliance when: o The return is made in good faith and is not false or fraudulent; o It covers the entire period involved; and o It contains information as to the various items of income, deductions and credits with such definiteness as to permit the computation and assessment of the tax. (CIR v Gonzales) Where the return was made on the wrong form, it was held that the filing thereof did not start the running of the period of limitations, and where the return was very deficient, there was no return at all. (same case)
SEC. 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 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.
Estate tax shall be paid at the time the return is filed. The Commissioner may extend the payment of such tax. o It should not exceed 5 years in case of judicial settlement, and 2 years if extrajudicial settlement.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
18
+ amdg Taxation Two
The running of the period of limitation for assessment shall be suspended for the period of such extension. The estate tax shall be paid by the executor or administrator before delivery to any beneficiary of his distributive share of the estate. o Where there are two or more executors, all of them are severally liable for the payment of the estate tax. (CIR v Gonzales) o The inheritance tax, although charged against the account of each beneficiary, should be paid by the executor or administrator. o Such beneficiary shall be subsidiarily liable for the payment of such tax to the extent of his share Claims for income tax need not be filed with the committee on claims and appraisals in the course of testate proceedings, and the amount thereof may be collected after the distribution of the decedent’s estate among his heirs, who shall be liable in proportion to their share in the inheritance. (Government v Pamintuan) The government, in collecting unpaid taxes accruing before the death of the decedent, has two ways of collecting the said taxes. (CIR v Pineda) 1. By going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. 2. By subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate. (or, go against one heir for the entire tax, subject to the heirs right of contribution from his co-heirs.) o
Miscellaneous Provisions 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. SEC. 93. Definition of Deficiency. - As used in this Chapter, the term "deficiency" means: (a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amounts so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax; or (b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, 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, refunded or otherwise repaid in respect of such tax. 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. 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 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 non payment 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.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
19
+ amdg Taxation Two SEC. 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. SEC. 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 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.
Donor’s Tax SEC. 98. Imposition of Tax. (A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99. (B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.
Gifts and donor’s tax will be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of property by gift o The property can be real or personal, tangible or intangible o The transfer can be in trust or otherwise o The gift can be direct or indirect The donor’s tax shall not apply unless and until there is a completed gift. The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the donee; it is completed by the delivery, either actually or constructively, of the donated property to the donee. Thus, the law in force at the time of the perfection/completion of the donation shall govern the imposition of the donor’s tax. (RR 02-03)
Gross gifts SEC. 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 count
There are two kinds of donors (similar to estate tax): 1. The resident or citizen of the Philippines, and 2. The non-resident, not citizen of the Philippines If the donor is a resident or a citizen of the Philippines, gross gifts would consist of: 1. Real estate, regardless of location 2. Tangible personal property, regardless of location 3. Intangible personal property, regardless of location If the donor is non-resident, not citizen of the Philippines, gross gifts would consist of:
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
20
+ amdg Taxation Two
1. Real estate located in the Philippines 2. Tangible personal property located in the Philippines 3. Intangible personal property located in the Philippines, subject to the “reciprocity clause” (Similar to the rules for estate tax, see discussion there for what constitutes intangible property) a. If donor at the time of the donation was a citizen and resident of a foreign country which at the time of the donation did not impose a transfer tax of any character in respect of intangible personal property of Filipino citizens not residing in that country, or b. If the laws of the foreign country of which the donor was a citizen and resident at the time of donation allow a similar exemption from transfer taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that country
A donation made by a corporation to the heirs of a deceased office out of gratitude for his past services is subject to the donee’s gift tax. It is not subject to deduction for the value of said services which do not constitute a recoverable debt. (Pirovano v CIR, the heirs here wanted to consider it remuneratory so it won’t be taxed as a gift. In this case, the donees were the ones who were made liable to pay, not the donor) Prior to RA 7166, a donation for a political candidate was subject to donor’s tax. (ACCRA v CIR, wherein the ACCRA partners claimed that political and electoral contributions were not subject to donor’s tax) o But now, under RA 7166, contributions duly reported to the BIR are not subject to any donor’s tax.13 o Segue to election taxes: so what happens to the money given to the candidate? (RR 7-2011, Feb 8, 2011) GR: The money given to the candidate will NOT go into his taxable income, as long as it is utilized in his campaign. HOWEVER, unutilized/excess campaign funds shall be subject to income tax. Moreover, any candidate (winner or loser) must file with the COMELEC his/her statement of expenditures. If not, he/she will be precluded from using such expenditures as deductions from his/her campaign contributions. As such, the entire amount of such contributions will be directly subject to income tax. o 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. (RR 8-2009, Oct 22, 2009) 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. (RR 8-2009)
Also to be considered as gifts are the following: 1. Transfers for insufficient consideration 2. Cancellation of indebtedness Transfers for insufficient consideration
13 Sec 13 xxx 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.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
21
+ amdg Taxation Two SEC. 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 a gift, and shall be included in computing the amount of gifts made during the calendar year.
A transfer of real/personal property will be considered a donation/gift and subject to the donor’s tax when: 1. The transfer was for less than adequate and full consideration, 2. Such transfer was effective during his life time (inter vivos), and 3. Other than real property in Sec 24 (d), i.e. the property was not subject to final capital gain’s tax (capital asset). In cases like this, the amount by which the value of the property exceeded the consideration received shall be considered a donation. o Mos sold to Jango for P100k a property which had a FMV of P280k. the P180k will be considered a donation and thus subject to the tax. With re: #3, what are the implications if the real property sold was a capital asset as against an ordinary asset? o For example, the real property had a cost of P100, a FMV of P200, but sold for only P170. If it were classified as a capital asset, it will be taxed 6% of the FMV (remember, the base is either the consideration or the FMV, whichever is higher). If it were classified as an ordinary asset, it will be taxed twice. First, it will be taxed for income tax purposes (tax base of P70). Second, it will be taxed for donor’s tax (tax base of P30). In this case, donor’s tax will be attracted unwittingly.
Cancellation of indebtedness If a creditor desires to benefit a debtor, and without any consideration therefore, cancels the debt (and the debtor “accepts”), the amount of the debt is a donation by the creditor to the debtor. Value of the gifts SEC. 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.
The fair market value of the property donated/given at the time of the donation shall be the value of the gross gifts.
Deductions from gross gifts SEC. 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 the 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 nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
22
+ amdg Taxation Two 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.
These “exemptions of certain gifts” should be taken to mean the deductions allowed by law to arrive at the taxable net gifts. The deductions allowed for a resident or citizen donor: 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 Only to the extent of P10,000 Remember, this article only covers gifts of a parent to his/her child, not a parent to his future son-in-law/daughter-in-law. If the gift is given to a future son-in-law/daughter-in-law, no deductions will be allowed because the latter are considered strangers. (ouch naman!) 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 3. Gifts in favor of educational and/or charitable, religious, cultural or social welfare corporations, institutions, accredited NGOs, trust or philanthropic organizations, research institutions or organizations, provided that not more than 30% of said gifts shall be used by such donee for administration purposes The entity must be: i. Non-stock ii. Paying no dividends iii. Governed by trustees who receive NO compensation iv. Devoting ALL its income to the accomplishment of the purpose enumerated in its AOI
Deductions from the gross gifts by husband and wife For deductions from gross gifts made by husband and wife, out of community/conjugal property, each donor has his or her own deductions. Their donations will be distributed equally among them. (1/2) o However, if what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donor’s tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of the Philippines. Each of the spouses is entitled to a maximum deduction of P10,000 for donation on account of marriage. Example Husband and wife donated P400k to son and daughter-in-law, on account of marriage out of community property. How do we break this down? Gross by Father P200k
Mother P200k
gift
Gross gift to
Deduction
Kind donee
Son P100k
P10k
Daughter-inlaw P100k
None
Nonstranger Stranger
Son P100k
P10k
Daughter-in-
none
Nonstranger Stranger
of
Net Gift
Donor’s Tax
90k
Tax Rate (see schedule) Exempt
100k
30%
30k
90k
exempt
0
100k
30%
30k
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
0
23
+ amdg Taxation Two
law P100k Deductions for a non-resident, not citizen donor (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.
Same as the resident or citizen donor EXCEPT that they aren’t allowed deductions for gifts on account for marriage
Other deductions The BIR ahs allowed the following as deductions from gross gifts to arrive at net gifts: 1. Encumbrance on the property donated, if assumed by the donee 2. Those specifically provided by the donor as a diminution of the property donated. Example Lhizavhel donated land which was subject to a mortgage to Chlahrihvel. The FMV of the land was P1m, but the mortgage was P400k. Chlahrihvel agreed to assume the mortgage, hence the deduction of P400k is allowed. The net gift is P600k. Tax rates Payable by Donor SEC. 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:
Over P100k 200k 500k 1m 3m 5m 10m
But not over P100k 200k 500k 1m 3m 5m 10m
The tax shall be Exempt 0 2k 14k 44k 204k 404k 1.004m
Plus
Of Excess over
2% 4% 6% 8% 10% 12% 15%
P100k 200k 500k 1m 3m 5m 10m
(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.
The tax rate for donors are illustrated in the table above. However, if donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. 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 4th degree of relationship. Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger. (RR 0203)
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
24
+ amdg Taxation Two
The basic tax formula is as follows: On the first donation of a calendar year Gross gifts Less: Deductions from these gross gifts Net Gifts X Donor’s tax rate Donor’s tax due on the net gifts On a subsequent donation in the same calendar year Gross gifts made on this date Less: Deductions from these gross gifts Net gifts made on this date Plus: All prior net gifts given with the same calendar year Aggregate net gifts Donor’s tax on aggregate net gifts Less: Donor’s tax on all prior net gifts within the same calendar year Donor’s tax due on the net gifts of this date
Example Mr. and Mrs. Lumbat are Filipino residents. On Jan 3, 2010, they donated a lot with a FMV of P2m to their child, Zombie, and his wife, Honka Monka on account of their marriage. On June 3, 2010, they donated P200k to Mr. Lumbat’s brother, Piggie Boy. Jan 3, 2010 Gross gifts made: To Zombie, To Honka Monka, Total Deduction: For account of marriage Net gifts made Donor’s tax
June 3, 2010 Gross gifts made: To Piggie Boy Total Deduction: Net gifts made on this date Add: All prior net gifts within the year Aggregate net gifts Donor’s tax on aggregate net gifts Less: Donor’s tax on all prior net gifts within the
Mr. Lumbat Non-stranger
Stranger
Total
500k 500k 0
500k 500k 1m 10k
500k 500k 10k
490k 13,600 (use schedule)
500k 150,000 (use 30%)
100k 100k 0
990k 163,600
Mrs. Lumbat Non-stranger
Total
500k 500k 0
500k 500k 1m 10k
500k 500k 10k
490k 13,600 (use schedule)
500k 150,000 (use 30%)
990k 163,600
100k 100k
100k 100k
0
100k
100k
100k 100k 100k
Stranger
100k
0
490k
500k
490k
500k
590k
500k
490k
600k
19,400
150,000
13,600
180,000
13,600
150,000
13,600
150,000
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
25
+ amdg Taxation Two year Donor’s Tax Due
5,800
0
5,800
0
30,000
30,000
Donor’s Tax Return SEC. 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 se 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. (B) Time and Place of Filing and Payment. - The return of the donor required in this Section shall be filed within thirty (30) days after the date the gift is made and the tax due thereon shall be paid at the time of filing. Except in cases 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 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.
The donor’s tax return must be filed within 30 days after the date of the donation. On all donations of one date, only one donor’s tax return is required. In case of husband and wife as donor’s the donor’s tax return of the husband will be apart of the donor’s tax return of the wife. Where to file? See codal. When and where to pay? The donors tax will be paid at the time the return is filed, and with the office where the return is filed.
Donor’s tax credit (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 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.
Only resident or citizen donors are allowed donor’s tax credit. Why? Because they are the only ones taxed worldwide. A non-resident non-citizen is not taxed for his donations in foreign jurisdictions. For a foreign donor’s tax paid to a foreign country, a credit is allowed to reduce the Philippine donor’s tax to pay, under the formula: Foreign donor’s tax paid = xxxx Limit: x Net foreign gifts Net gifts, worldwide
Philippine Donor’s Tax
= xxxx
Allowed tax credit is whichever is lower of the foreign donor’s tax paid and the limit. Example Mr. Aquino donated property to Jojo here in the Philippines, net gift value of P200k. He also donated to Pele in Brazil, net gift value of P300k. In Brazil, he paid a tax of P10k. They are both relatives of Mr. Aquino. Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
26
+ amdg Taxation Two
Foreign donor’s tax paid = P10k Donor’s tax supposed to be paid worldwide, without the credit = P14,000. Credit is: 300k 500k
x
P14,000 = 8,400
So choose what’s lower between the tax paid abroad and the credit limitation. So, it’s P8,400. That’s the tax credit. Mr. Aquino has to pay P5,600 na lang. If two foreign countries Limitation A: Foreign donor’s tax paid to the foreign country x Philippine donor’s tax Net gifts, foreign country Net gifts, world Allowed tax credit = whatever’s lower Limitation B (by totals) Total of foreign donor’s taxes paid to the foreign countries x Philippine donor’s tax Net gifts, outside the Phil Net gifts, world Allowed tax credit = whatever’s lower Tax credit to apply is whatever is lower between Limitation A and Limitation B
Value-Added Tax TITLE IV VALUE-ADDED TAX CHAPTER I IMPOSITION OF TAX SEC. 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 Republic Act No. 7716.
VAT is imposed on any person who: 1. Sells, barters or exchanges goods or properties in the course of trade or business; or 2. Sells services in the course of trade or business; or 3. Imports goods, whether or not in the course of trade or business. The VAT is a tax on consumption, levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and the importation of goods into the Philippines. o 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 or properties or services. Is VAT really a tax on the value-added? o Yes. Consider this: A sells to B a piece of wood. Price: P100 Tax (10% for this example): P10. Total: P110.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
27
+ amdg Taxation Two
B then makes the wood into a fine chair, and he sells it to C. Price: P150. Tax: P15 Total: P165. B has an output tax of P15, and an input of P10. He has a P5 NET VAT payable (output-input). Ok, fine, but where do we see the tax on the “value added” by B? We see that in the level of the price level. By applying his skills and labor, B made a chair out of the wood that he bought from A. From P100, the price increased to P150. There was a P50 increase from the value added by B. And applying the VAT on this P50, it results into the same amount, which is P5. This proves that the tax is really on the “value added”.
How do we know if the transaction is subject to VAT? What are the elements? 1. It must be done in the ordinary course of trade or business 2. There must be a sale, barter, exchange, lease of goods or properties, or rendering of service in the Philippines. 3. It is not VAT-exempt or VAT zero-rated. o If all three are present, then the transaction is subject to the 12% VAT. Absence of one will not make the transaction subject to VAT. But remember that importations are subject to VAT, whether or not in the course of trade or business. As it is a tax on the transaction, there is no need whatsoever for there to be a taxable gain (unlike in income tax). It is not required by either law or jurisprudence. o In fact, the NIRC and in CIR v CA and COMASERCO state that non-stock, nonprofit organizations are subject to the VAT, as long as the service is done for a fee or remuneration. In his comment, Sir said that Comaserco would have escaped liability from VAT if they pressed the point that they were doing the services not in the course of business.
Ordinary course of trade or business Sec. 105 The phrase "in the course of trade or 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 or 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 course of trade or business.
It means the regular conduct or pursuit of a commercial or an economic activity. o It also includes transactions incidental thereto. o It covers any person regardless whether or not the person engaged therein is a nonstick, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or a government entity. There should be o a commercial or economic activity, and o regularity in the action. Regular involves more than one isolated transaction. It requires repetition and continuity of action.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
28
+ amdg Taxation Two
However, if the taxpayer is a non-resident alien, there is no need for the regularity of conduct. Services rendered by them in the Philippines are considered as being in the course of trade or business, and thus, subject to the VAT. o This is an exception to the “regularity” requirement. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. (CIR v Magsaysay, wherein a company sold property to another. SC said no VAT since seller was not involved in the business of selling property) When determining if this element/requisite exists, be mindful of the following: o Was the transaction done regularly? Or isolated? o Was it incidental thereto? o Is the taxpayer a non-resident alien? (Because if he is, the transaction need not be regular.) Between an automobile shop who sells 5 parcels of land and a real estate dealer who sold a parcel of land, both will be subject to VAT. The automobile shop because of its regular conduct, and the real estate dealer because of the nature of his business (“pursuit of a commercial or economic activity”, which takes the quantitative approach.) This provision notwithstanding, an importation of goods for personal use is still subject to VAT because of Section 107. o This is an exception to “pursuit of a commercial or economic activity” requirement
For the next part, we’ll go by tax rates. First, we’ll look at those taxed at 12% (Usual VATable and Importations) Next, those taxed at 0%. And then finally, the exempt transactions. Sale, lease, etc of goods or rendering of services Let’s take up sale of goods or properties first. SEC. 106. Value-Added Tax on Sale of Goods or Properties. (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 twelve percent (12%) 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.
In dealing with this element, you’re dealing with two questions: o Is this a normal sale? o If not, is this at least a transaction which are deemed sales by law (Sec. 106 (b)? Generally, the VAT rate is 12% on the gross selling price or gross value in money of the goods, properties sold, bartered or exchanged. o We say “generally” because there are some transactions which are subject to 0% or tax exempt, but we’ll take those later. For sale of goods or properties, the tax base is the gross selling price.
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. (D) Determination of the Tax. Sales Returns, Allowances and Sales Discounts. - The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given.
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
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
29
+ amdg Taxation Two
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. o In other words, the gross selling price includes everything that the buyer pays the seller, except the VAT which is shifted to the buyer. For example, Toby sold a shirt to Carlo. The quoted selling price was P100, but there were freight charges of P50. The gross selling price is P150. You apply the VAT to P150. o While the law says the VAT is based on the gross selling price, “gross selling price” does not mean gross sales. The law and regulations allo downward adjustments for: Sales returns and allowances; Sales discounts agreed upon at the time of the sale indicated in the sales invoice, and availed of by the buyer. (1) 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.
Goods or properties 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 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. This is not an exclusive list. What is a sale? A sale is the transfer of ownership of property in consideration of money received or to be received. What are transactions deemed sales? (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.
By virtue of law, the following are considered sales in the course of trade or business, and is subject to the VAT: a. 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; b. Distribution or transfer of inventory to shareholders or investors as share in the profits of the VAT-registered persons; (Property Dividends) c. Distribution or transfer of inventory to creditors in payment of debt;
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d. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and e. Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. o For example, Johnson & Johnson gave Atty. Montero baby powder. That’s a deemed sale by virtue of “transfer of goods originally intended for sale” o With number 4 (letter e), Atty. Salvador says that capital goods are included in the valuation o Take note of this! Possible multiple choice question! (E). Authority of the Commissioner to Determine the Appropriate Tax Base. - The Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection (B) hereof, or where the gross selling price is unreasonably lower than the actual market value.
The CIR shall determine the appropriate tax base in cases where transactions are deemed sales, or where the gross selling price is unusually lower than the actual market value.
Now let’s look at sale of service and use or lease of properties. 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 (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds or 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, resthouses, 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, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; 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 the taxable quarter for the services performed or to be performed for another person, excluding value-added tax.
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Any sale or exchange of services in the course of trade or business, including the use or lease or properties, shall be subject to the VAT. To be defined as “sales of services”, the services: o Should be rendered in the Philippines, o Can be any and all kinds of services rendered to others (provided there is no employer-employee relationship); o There is a fee, remuneration or consideration. Sale of services in the course of trade or business includes those performed or rendered by: a. construction and service contractors b. stock, real estate, commercial, customs and immigration brokers c. lessor of property, whether personal or real d. warehousing services e. lessor or distributors of cinematographic films f. persons engagedin milling, processing, manufacturing or repacking of goods for others g. proprietors, operators, or keepers of hotels, motels, resthouses, pension houses, inns, resorts h. proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers i. dealers in securities j. lending investors k. 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 (keep this in mind for when we take up percentage tax) l. 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 Philippines (same here) m. sales of electricity by generation companies, transmission and distribution companies n. services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees, except those under Section 119 of the NIRC o. non-life insurance companies (except their crop insurances), including surety, fidelity and bonding companies p. similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties Also included are: a. The lease or use of or right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand and other like property or right; b. The lease or the use of, or the right to use of 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 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 enumerated in letter (b) hereof or any such knowledge or information as is mention (c) e. The supply of services by a non-resident 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 non-resident person;
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f.
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; g. The lease of motion picture films, tapes, and discs, h. The lease or 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 or lease or licensing agreement was executed if the property is leased or used in the Philippines The list not exhaustive. However, exhibition of movies is not subject to VAT, but subject to amusement tax imposed by local government units. (CIR v SM Prime) For the sale or exchange of services, including the use or lease of properties, the VAT rate is 12% of the gross receipts. Gross receipts means cash or its equivalent actually received or constructively received (not including the VAT) as: o Payments on the contract price, compensation, service fee, rental or royalty; Note: royalty includes services as to investment, training and education (Philamlife CA GR SP 31283, April 25, 1995) o Payments or materials supplied with the services; and o Deposits of advanced payments on the contract for services. For example, Lionel was a building contractor. He spent P50m for materials and P30mfor labor. The taxable gross receipts is P80m, the whole of which is VATable by 12%. o Constructive receipt occurs when the money consideration or its equivalent is placed in the control of the person who rendered the service without restriction by the payor. (like a bank deposit; issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for the services rendered) Are reimbursements subject to VAT? (See RMC 9-2006 for more details on this) o If the reimbursable expenses advanced by brokers on behalf of their customers are receipted with the broker’s VAT OR, then it’s vatable. o But if no receipt given (only a non-vat acknowledgment receipt), the same shall not form the gross receipts of the broker and shall not be subject to the VAT on the part of the broker. However, the third-party must provide an OR in the name of the customer.
VAT on Importation of Goods 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 (12%) 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.
Every importation of goods shall be subject to the VAT, whether the importation is for sale or use in business, or for personal use. The imported goods shall be subject to 12% VAT. The tax base is:
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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o
o
the total value used by the Bureau of customs in determining tariff and customs duty, plus customs duties, excise tax (if any), and other charges prior to the removal of the goods from customs custody; OR based on the landed cost, when the customs duties are determined on the basis of the quantity or volume of the goods. By “landed cost” is meant the invoice cost, freight, insurance, customs duties, excise tax (if any), and other charges prior to the removal of the goods from customs custody.
(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.
This article deals with technical importation. When a person who was exempt from the VAT on his importation subsequently sells (transfers or exchanges) in the Philippines such imported article to a non-exempt person or entity, the purchaser (transferee or assignee) will be required to pay the VAT. o Xavi is a tax-exempt entity who imported stuff. He then sold it to Diego, a nonexempt entity. Diego has to pay for the VAT. But Diego can claim the VAT paid as creditable input taxes. The VAT of an importation should be paid prior to the releae of the goods from customs custody. If it’s subject to both excise tax and VAT, he has to pay both prior to the release. A seller of goods or services who imports stuff can claim the VAT paid on importations during a taxable period as input taxes creditable against the output taxes on the sales of the same period.
Before tackling zero-rated and exempt transactions, let’s have an overview of the VAT system. Understanding VAT is a matter of perspective. We first have to know WHO we are talking about. Remember that in the VAT system, the burden of paying the VAT is passed on to the buyer. (A sells to B; B pays the 12% VAT on it.) o But B can recover the amount he paid to A by selling the shirt to C, since C will pay the 12% on the VAT. The biggest difference of zero-rated/effectively zero-rated transactions and VAT-exempt transactions is the ability to recover VAT already paid to the seller. o Why do we look at the input tax and not the output tax? Because the input tax is what we all seek to recover, that’s what we paid for. Output tax doesn’t come out of our own pockets because we can pass that burden to our buyers. o In zero-rated transactions, there is total relief for the purchaser from the burden of the tax since he does not have input VAT and in effect, because VAT is at 0%, it does not have output VAT. o In exempt transactions, there is only partial relief because the purchaser is not allowed any tax refund or credit for input taxes paid. In normal VAT transactions, the VAT paid to A can be recovered by selling it to C. We are talking about B. A sells to B VAT TAXABLE (let’s use
B sells to C VAT TAXABLE
B paid A P10 as VAT. But he recovered the P10 by
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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10% to simplify things) P100 P10 (VAT) P110
selling the product to C. In his sale to C, he received P15 which covered the P10 he paid A. So, in essence, he recovered the P10 he paid A. What if the transaction of B to C is VAT ZERO-RATED? A sells to B B sells to C B paid A P10 as VAT. But, his transaction to C was VAT TAXABLE (let’s use VAT ZERO-RATED zero-rated. So he didn’t 10% to simplify things) receive anything from C P100 P150 to offset his VAT payment P10 (VAT) P0 to A. P110 P150 He has an output of O, and an input of 10. He can use the 10 as a tax credit by applying for a tax credit certificate with the BIR. What if the transaction A sells to B VAT TAXABLE (let’s use 10% to simplify things) P100 P10 (VAT) P110
P150 P15 P165
of B to C is VAT EXEMPT? B sells to C VAT EXEMPT P150 P0 P150
B paid A P10 as VAT. But, his transaction to C was exempt. So he didn’t receive anything from C to offset his VAT payment to A. He has an output of O, and an input of 10. However, unlike a zerorated transation, he can NOT use the excess of 10 to offset his VAT payment to A. He can’t recover.
So, if we were B, and we had a choice… what should our next sale transaction be – normal VATable, zero-rated, or exempt? o Clearly, we won’t go for exempt, because we won’t recover the VAT we paid to our suppliers (A). But what do you do with the unrecovered VAT in exempt transactions? It’ll be considered as cost, so deductible item. o It’s a toss-up between going for normal VATable transactions and zero-rated transactions. In both these cases, we will recover the VAT we paid to our suppliers. It will just depend on different factors. If we go for a zero-rated transaction, do we want to go through the hassle of having to deal with the BIR and paying the fees? If we go for the normal VATable, the recovery would be quicker. But this would mean we’d have to keep track of the VAT paid to us
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and then have to pay the net VAT payable to the government. And what if our line of business is really engaged in exporting (zerorated), should we go to the trouble of looking for buyers here in the Philippines if that’s not our main line of business anyway? Zero-rated/Effective zero rated transactions For goods Sec 106 (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. - The term "export sales" means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local exportoriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and (5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws. (6) The sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or international air transport operations (added by RA 9337) (b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale" means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.
For goods, a rate of 0% of the gross selling price will be applied if: 1. Export sale; or 2. Foreign currency denominated sale; or 3. Sales to persons or entities whose exemption under special laws, or international agreements to which the Philippines is a signatory (effective zero rated sales) Export sales means: o the sales and actual shipments or exportations of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, and o paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the BSP. The following are also within the meaning of export sales (possible MCQ!): a. sales of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of said buyer’s goods and paid for in acceptable foreign currency and accounted for in accordance with BSP rules and regulations b. sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed 70% of total annual production c. sale of gold to the BSP d. those considered export sales under EO 226 and other special laws e. sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations
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While an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regarded in law as foreign soil. Thus, sales by suppliers from outside the ecozone to this separate customs territory are deemed as exports and treated as export sales. (CIR v Sekisui) Foreign currency denominated sales means o sales to nonresidents of goods assembled or manufactured in the Philippines, o for delivery to residents in the Philippines, and o paid in acceptable foreign currency and accounted for in accordance with BSP rules and regulations. o This does not apply to automobiles and non-essential goods subject to excise taxes. Under the cross-border principle of the VAT system, no VAT shall be imposed to form part of the cost of goods destined outside of the territorial border of the taxing authority. (CIR v Seagate)
For services Sec 108 (B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT- registered persons shall be subject to zero percent (0%) rate. (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; (4) Services rendered to vessels engaged exclusively in international shipping; and (5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country (RA 9337) (7) Sale of power or fuel generated through renewable sources of energy such as, but no limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen cells. (RA 9337)
For services performed in the Philippines, a rate of 0% of the gross receipts will be applied in the following instances: 1. From processing, manufacturing or repacking of goods, a. For other persons doing business outside the Philippines, b. The goods are subsequently exported, c. The services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP 2. Services other than processing, manufacturing or repacking of goods, rendered to a: a. Person engaged in business conducted outside the Philippines, or b. non-resident person not engaged in business who is outside the Philippines when the services are performed i. the consideration is paid in acceptable foreign currency and accounted for in accordance with the blah blah blah of the BSP 3. Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such services to zero rate; 4. Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; 5. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of total annual production;
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6. Transport of passengers and cargo by air and sea vessels from the Philippines to a foreign country, and 7. Sale of power or fuel generated through renewable sources of energy Services other than processing, manufacturing, or repacking of goods must likewise be performed outside the Philippines. (CIR v Bumeister and Wain, wherein the recipient of the services was the Consortium who was deemed doing business within the Philippines) In CIR v American Express, AMEX had a branch in the Philippines (AMEX-Phil) who collected receivables from the Philippine customers of AMEX-Hong Kong. SC held that AMEX-Phil qualified for zero-rating. It fell under Section 108 (b) (2) (Performed services in the Philippines for a person doing business outside the Philippines and paid in acceptable foreign currency) The VAT system generally follows the “destination principle” (exports are zero-rated whereas imports are taxed). o However, there is an exception in the form of services performed in the Philippines for a recipient doing business outside the Philippines (since the service is still done here). (CIR v Wain) To be exempt from the destination principle under Section 108(b)(1) and (2), the service must be o Performed in the Philippines, o For a person doing business outside the Philippines, and o Paid in acceptable foreign currency accounted for in accordance with BSP rules. Effectively-zero rated sales usually come from special laws and international agreements o RA 7227, RA 7916, Asia Development Bank, Embassies, etc According to RR 16-2005, PEZA enterprises have to register first with the BIR to get effectively zero rated benefits. If not, it will just be deemed exempt. (BIR Ruling DA 736-2006, check if still applicable)
Difference between zero-rated and effectively zero-rated transactions (CIR v Seagate) Zero-rated transactions refer to the export sale of goods and supply of services. The seller of such transactions charges no output tax, but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. This is for the benefit of the seller. Effectively zero-rated transactions refer to the sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate. Such rate does not yield any tax chargeable against the purchaser. This is for the benefit of the purchaser. In both zero-rated and effectively zero-rated transactions, the seller who charges zero output tax can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. Exempt Transactions 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 a kind 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; (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);
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (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; (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, Culture and Sports (DECS) and 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 Asia-Pacific 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 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; (n) Sales by non-agricultural, non- electric and non-credit 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 VAT-registered; (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 five hundred thousand pesos (P1,919,500) and below, house and lot and other residential dwellings valued at Two million five hundred thousand pesos (P3,199,200) and below: Provided, That not later January 31, 2009 and every three years thereafter, the amounts herein stated shall be adjusted to their present value using the Consumer Price Index, as published by the NSO; (q) Lease of a residential unit with a monthly rental not exceeding Eight thousand pesos (P12,800); Provided, That not later January 31, 2009 and every three years thereafter, the amounts herein stated shall be adjusted to their present value using the Consumer Price Index, as published by the 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) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; (t) importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations’ (u) services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; and (v) 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 amount of One million five hundred thousand pesos (P1,919,500): Provided, That not later January 31, 2009 and every three years thereafter, the amounts herein stated shall be adjusted to their present value using the Consumer Price Index, as published by the 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. (RA 9337)
VAT-exempt transactions refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. A VAT-registered person may elect that the exemptions shall not apply to his sales of goods or properties or services. o But one the election is made, it shall be irrevocable for a period of three years counted from the quarter when the election was made. EXCEPT for franchise grantees of radio and TV broadcasting whose annual gross receipts for the preceding year do not exceed P10m. In their case, the option becomes perpetually irrecovable. (RR 4-2007) It’ll be too lengthy if RR 16-05 will be replicated here. Instead, I’ll just add those parts which further explain the statutory enumeration above. Note: the new threshold values are based on RR 16-2011. Re (a): the term “livestock” does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets. Re (b): “Specialty feeds” refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets. Re (g): laboratory services are exempted. But if the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. Re (h): Educational services do not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepEd, CHED or Tesda. Re (j): this only refers to RAHQs. ROHQs are subject to zero-rated sales. (?) Re (l): importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT. o Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. It the cooperative is not the producer (like a trader), then only those sales to its members shall be exempted from VAT. (RR 4-2007) Re (p): If the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business BUT the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer’s main business. o “Low-cost housing” refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium. o “Socialized housing” refers to housing programs and projects covering houses and lots or home lots only undertaken by the Government or the private sector for the underprivileged and homeless citizens. o If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,919,500. Re (q): Lease of residential units where the monthly rental per unit exceeds P12,800 but the aggregate of such rentals of the lessor during the year do not exceed P1,919,500 shall likewise be exempt from VAT. However, it shall be subjected to the 3% percentage tax. o So, less than P12.8k/month -> exempt o More than P12.8k/month but less than P1.9195m/year -> 3% Percentage tax. o More than P10k/month and more than P1.9195m/year -> 12% VAT.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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“Residential units” shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places. Motels are not included. o “Units” refer to an apartment unit in case of apartments, house in the case of houses, per person in the case of dorms, boarding houses and bed spaces, and per room in case of rooms for rent. Re (s): the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of 150 tons and above, including engine and spare parts of said vessels. o Importation of life-saving equipment, safety and rescue equipment and communication and navigational safety equipment, steel plates and other metal plates including marine-grade aluminum plates, used for shipping transport operations shall be exempt. It will be subject to the Domestic Shipping Development Act of 2004. o Same thing with the importation of capital equipment, machinery, spare parts, life-saving and navigational equipment, steel plates and other plates to be used in the construction, repair, etc of any merchant marine vessel operated or to be operated in the domestic trade. Re (t): said fuel, goods and supplies should be used exclusively or should pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any other port in the Philippines unless the docking or stopping at any other Philippine port is for the purpose of unloading passenger and/or cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad. o If any portion of such fuel, goods or supplies is used for purposes other than that mentioned, such shall be subject to 12% VAT. (yari ka boy!) Re (u): services of such banks, non-bank financial intermediaries performing quasibanking functions, and other non-bank financial intermediaries , like money changers or pawnshops, are subject to percentage tax. (RR 4-2007) Re (v): for purposes of the P1.5m threshold, the husband and the wife shall be considered separate taxpayers. However, the aggregation rule for each taxpayer shall apply, for instance, if a professional, aside from the practice of his profession also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sale shall not be included in determining the threshold. Note: the sale of electricity is now VAT-able Is copra exempt? Yes! It’s considered a “food product.” Are the fees, per diems, honoraria or allowances given to directors of corporations exempt? o YES, exempt since not considered derived from an economic or commercial activity. Said fees are remunerations paid in the exercise of a right of an owner in the management of the corporation. o Not even liable for 3% percentage tax. (RMC 77-2008, Dec 9, 2008) Is the transfer of real estate from one real estate dealer to another real estate dealer exempt? o No. Exemption from VAT has been deleted. (Atty. Salvador’s syllabus) o
SEC. 110. Tax Credits. (A) (1) the (a)
Creditable Input Tax. Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on following transactions shall be creditable against the output tax: Purchase or importation of goods:
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (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, except automobiles, aircraft and yachts. (b) Purchase of services on which a value-added tax has been actually paid. (2) The input tax on domestic purchase of goods or properties 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 value-added tax prior to the release of the goods from the custody of the Bureau of Customs. Provided, that the input tax on goods purchases or imported in calendar month for use on trade or business for wich deduction is allowed under this Code, shall be spread evenly over the month of acquisition and the 59 succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000): Provided, however, that if the estimated useful life of the capital good is less than 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 licensee upon payment of the compensation, rental, royalty or free.
The input tax credit on importation of goods or local purchases of goods, properties or services by a VAT-registered person shall be creditable: 1. To the importer upon payment of VAT prior to the release of goods from customs custody, 2. To the purchaser of the domestic goods or properties upon consummation of the sale, or 3. To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee. (RR 16-2005) An input tax means the VAT due or paid by a VAT-registered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of his trade or business. o It shall also include the transitional input tax and the presumptive input tax. o It also includes input taxes which Can be directly attributed to transactions subject to the VAT, and A ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. Any input tax on the following transactions evidence by a VAT invoice or official receipt by a VAT-registered person in accordance with Sections 113 and 237 of the Tax Code shall be creditable against the output tax: 1. Purchase or importation of goods a. For sale, or b. For conversion into or intended to form part of a finished product for sale, including packaging materials, or c. For use as supplies in the course of business, or d. For use as raw materials supplied in the sale of services, or e. For use in trade or business for which deduction for depreciation or amortization is allowed under the Tax Code 2. Purchase of real properties for which a VAT has actually been paid, 3. Purchase of services in which a VAT has actually been paid, 4. Transactions “deemed sale”, 5. Transitional input tax, 6. Presumptive input tax, 7. Transitional input tax credits.
Rule on capital goods Section 110 (A) proviso. Provided, that the input tax on goods purchases or imported in calendar month for use on trade or business for wich deduction is allowed under this Code, shall be spread evenly over the month of
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two acquisition and the 59 succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000): Provided, however, that if the estimated useful life of the capital good is less than 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 licensee upon payment of the compensation, rental, royalty or free.
Capital goods or properties refer to goods or properties o with estimated useful life of more than one year and o which are treated as depreciable under the income tax law, o used directly or indirectly, in the production or sale of taxable goods or services. If the input tax on capital goods purchased or imported in a calendar month does NOT exceed P1m, the input tax will be allowed in the month of purchase. If the aggregate acquistion cost of such goods in a calendar month, excluding the VAT, exceeds 1m: o If the estimated life is 5 years or more, the input tax will be evenly spread over the month of acquisition and the 59 succeeding months. o If the estimated life is less than 5 years, the input tax will 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 asset. For construction in progress (CIP) o CIP is the cost of construction which is not yet completed. It is considered a purchase of services, the value of which will be determined based on the progress billins. o Input taxes on such transaction will be recognized in the moth that payment was made. o In case of contract for the sale of service where only labor will be supplied by the contractor and the materials will be purchased by the contractee from other suppliers, input tax on the labor will be recognized in the month that payment was made based on progress billings. Input tax on the purchase of materials will be recognized at the time when the materials were purchased. An asset acquired in installment for an acquisition cost of more than P1m, excluding the VAT, will be subject to the amortization of input tax despite the fact that the monthly payments/installments may not exceed P1m. o When an asset with an unamortized input tax is retired from business, the unamortized input tax will be closed against the output taxes on the taxable period in which it is retired.
Input tax allocation and mixed transactions (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 VAT-registered 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.
In crediting input tax, you have to look at three things: 1. Those which can be directly attributed to transactions subject to VAT, and 2. Those which cannot be directly attributed to either a VAT taxable or VAT-exempt transaction. For these cases, the input tax shall be pro-rated to the VAT taxable and
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit. 3. Sales to the Government because you can’t credit input tax arising from sales to the Government since sales to the Government is subject to final withholding VAT. RR 16-2005 states: o All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit; provided, that input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government (or any of its political subdivisions, etc) shall not be credited against output taxes arising from sales to non-Government entities. o If any input tax cannot be directly attributed to either a VAT taxable or VATexempt transaction, the input tax shall be pro-rated to the VAT taxable and VATexempt transactions and only ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit.
Example ABC Corporations has the following sales during the month: To private entities subject to 12% - P100,000 Export sales - P100,000 Exempt goods - P100,000 To the Gov’t - P100,000 Total - P400,000 The following input taxes were passed on by its VAT suppliers: On taxable goods 12% - P5,000 On the exports - P3,000 On sale of exempt goods - P2,000 On sale to government - P4,000 On depreciable capital good, - P20,000 Not attributable to any specific activity (60 month amortization) From the facts, we can see that only the input tax on the depreciable capital good can not be allocated to any specific activity. To get the input tax for that, you have to pro-rate it among the transactions, using the following equation: Specific transaction14 Total Sales Output
Input Allocated
X
Unallocated
Amount of input tax not directly attributable to any activity
Total
Creditable
Net Vat Payable15
Excess Input
Refund/ Creditable16
Unrecoverable17
12%
12k
5k
5k
10k
10k
2k
0
0
0
0%
0
3k
5k
8k
8k
0
8k
8k
0
Exempt
0
2k
5k
7k
0
0
0
0
7k
Gov’t
12k
4k
5k
9k
7k18
5k
0
0
2k
14 15 16 17 18
Either the VATable, export, exempt or the gov’t Math column. Output Tax – Creditable Tax Law column. Sec 112 Total input – Creditable Tax Why 7? Because 5% has been withheld by the Gov’t.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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The input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost or expense.
(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 VAT-registered 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. (RA 9361) (C) Determination of Creditable Input Tax. - The sum of the excess input tax carried over from the preceding month or quarter and the input tax creditable to a VAT-registered person during the taxable month or quarter shall be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale. The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of Internal Revenue but also those filed with other government agencies, such as the Board of Investments the Bureau of Customs.
If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. (Known as the Net VAT payable) If the input tax inclusive of input tax carried over from the previous quarter exceeds the output tax, the excess input tax shall be carried over to the succeeding quarter or quarters, o Provided, that any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes. (this is where you can get input tax credit or refunds) o In other words, any input tax, attributable to zero-rated sales may be: Refunded, or Credited against other internal revenue taxes of the VAT taxpayer.
Transitional and Presumptive Input Tax Credits SEC. 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to two percent (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.
Taxpayers who become VAT-registered persons upon exceeding the minimum turnover of P1.5m in any 12-month period, or who voluntarily register even if their turnover does not exceed P1.5m (except franchise grantees of radio and tv broadcasting whose threshold is P10m) shall be entitled to a transitional input tax on the invonetory on hand as of the effectivity of their VAT registration, on the following: 1. Goods purchase for resale in their present condition 2. Materials purchased for further processing, but which have not yet undergone processing, 3. Goods which have been manufactured by the taxpayer 4. Goods in process for sale, or 5. Goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person. (RR 16-2005) The transitional input tax shall be a. 2% of the value of the beginning inventory on hand, or b. actual VAT paid on such goods, materials and supplies whichever is HIGHER.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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The transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. (Fort Bonifacio Development Corp v CIR) During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. (FBDC v CIR) There is no transitional input tax on capital goods or on supplies. (Reyes, 2009 Edition)
(B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent(4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. As used in this Subsection, the term "processing" shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.
Presumptive input tax credits are given for those engaged: o In the processing of sardines, mackerel and milk; and o In manufacturing refined sugar, cooking oil and packed noodle-based instant meals The rate is 4% of the gross value in money. They are given this 4% presumptive input tax because the goods used in the said enumeration are VAT-exempt.
Refunds or Tax Credits on Input Tax SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (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, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales: Provided, finally, that for a person making sales that are zero-rated under Section 108(B)(6), the input taxes shall be allocated ratably between his zero-rated and non-zero-rated sales. (B) Cancellation of VAT Registration. - A person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes. (C) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of compete documents in support of the application filed in accordance with Subsection (A) hereof. 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 affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty dayperiod, appeal the decision or the unacted claim with the Court of Tax Appeals.(D) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit.
There are three instances where one can avail of a VAT refund: 1. When there is excess input VAT versus output VAT; 2. Zero-rated and effectively-zero rated sales
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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3. Cessation of business For zero-rated and effectively zero-rated sales of goods, properties or services, the application should be filed within 2 years after the close of the taxable quarter when such sales were made. o The two year period is reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not. (CIR v Mirant Pagbilao Corp) o Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. Take note of CIR v Aichi, 2010: o The CIR has 120 days, from the date of the submission of the complete documents within which to grant or deny the claim for refund/credit of input vat. o In case of full or partial denial by the CIR, the taxpayer’s recourse is to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days. Hence, if filed with CTA before the 120-day period expires, CTA will dismiss for prematurity. If filed with CTA after the 150-day (120 + 30 days), CTA will dismiss for being late. o Weird because it will dismiss even if still within 2 years. o This only applies to credit input tax refunds. For cessation of business, a VAT-registered person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Sec. 106 (C), may within 2 years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which he may use in payment of his other internal revenue taxes. o Provided, that he shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized. More on cessation of business or change of status as VAT-registered person (RR 162005): o Subject to output tax: Change of business activity from VAT taxable to VAT-exempt status. Approval of a request for cancellation of registration due to reversion to exempt status. o Not subject to output tax: Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. The goods or properties will not be considered sold, bartered, etc. Change in the trade or corporate name of the business. Merger or consolidation of corporations. The unused input tax of the dissolved corporation shall be absorbed by the surviving or new corporation.
Withholding of creditable value-added tax (C) Withholding of Creditable Value-Added Tax. - The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of five percent (5%) of the gross thereof: Provided, That the payment for lease or use of
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two properties or property rights to nonresident owners shall be subject to ten percent (12%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent. The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made.
The VAT is withheld in two instances: 1. In sales of goods and services to the Gov’t (5% withheld by the government) 2. In payment for lease or use of properties to nonresident owners (12% withheld by the lessee) In transactions with the government, the 5% final withholding VAT shall represent the net VAT payable for the seller. The remaining 7% accounts for the standard input VAT for sales of goods or services to the government or any of its political subdivisions, in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. o Should actual input VAT attributable to sales to government exceed 7% of gross payments, the excess may form part of the sellers’ expense or cost. o If the actual input VAT attributable to sale to government is less than 7%, the difference should be counted as income. Kaka sells to the Government something for P100. The VAT is P12. The P5 is withheld by the government, so the Government only pays him P107. o In this scheme, the government assumes that your input VAT will be 7%. If it is 7%, then all is well. But if the input VAT is higher than 7 (in Kaka’s case, for example it was P10), then the excess of P3 will be treated as an expense. It will form part of the expense column in the income statement. But if the input VAT is smaller than 7% (for example, Kaka only spent P5), then there is income on Kaka’s side, this will form part of his income. In both instances, Kaka will lose or be benefited only by 30% (rate of income tax) because it will form part of his income and subject to the income tax. In transactions with non-residents, 12% will be withheld with respect to the following payments: 1. Lease or use of properties or property rights owned by non-residents, and 2. Other services rendered in the Philippines by non-residents. o The government did this as a matter of enforcement. How will the Government run after the VAT of a non-resident, right? So, they just make the payors withholding agents. Jhunabhel lives in the condo owned by non-resident Tevez. Jhunabhel will withhold P12 of the total amount of the lease of P112. Jhunabhel will only pay Tevez P100. o The one who remits the 12% to the government, when he files his return can state that he is entitled to an input tax credit. In Jhunabhel’s case, she can ask for the input tax credit of P12.
VAT on the sale of real property in installments by a real estate dealer A sale on installment of real property by a real estate dealer shall be subject to the 12% VAT of the gross selling price. A real estate dealer is any person engaged in the business of buying, developing, selling, exchanging real property as principal and holding himself out as a full or part-time dealer of real estate. The gross selling price is whichever is highest of the: o Consideration in the deed of sale, o Zonal value, per CIR; and Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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The fair market value per real property declaration with the provincial or city assessor. When the initial payments do not exceed 25% of the selling consideration in the deed of sale, the steps are: 1. Multiply the gross selling price by 12% (VAT) 2. Get the VAT on the installment payment received, using the formula below: x Computed VAT in Collection on the consideration (no VAT) Agreed consideration (no VAT) Step 1 Initial payments are the payments o which the seller received before and upon the execution of the instrument of sale, and o payments which he expects or is scheduled to receive in cash or property (other than evidence of indebtedness of the purchaser) during the taxable year of the sale or disposition. o It will include more than the down payment in the year of sale. o It will not include the amount of mortgage on the real property sold which was already there at the time of sale and which was assumed by the buyer, EXCEPT when such mortgage exceeds the cost or other basis of the property to the seller, in which case the excess shall form part of the initial payments. For example, the mortgaged assumed by the buyer was P600k, and the cost to the seller was just P500k. The P100k excess will be included as “initial payments” If the initial payments exceed 25% of the selling price, the transaction shall be considered a cash sale with a VAT at the time of the sale. Take note that it is the agreed consideration which is used to determine the initial payments, while it is the highest among the consideration, zonal value and FMV which is used for the computation of the VAT. o
VAT on Lease All forms of property for lease, whether real or personal, are liable to VAT except when gross annual sales do not exceed P1.5m, in which case they will be exempt. (See discussion on VAT-exempt) Lease of property shall be subject to VAT regardless of the place where the contract of lease or licensing agreement was executed if the property leased or used is located in the Philippines. See also rules just mentioned when lessor is a non-resident. In a lease contract, the advance payment by the lessee may be: 1. A loan to the lessor from the lessee, or 2. Option money for the property, or 3. Security deposit to insure the faithful performance of certain obligations of the lessee to the lessor, or 4. Pre-paid rental. o If the advanced payment is #1, 2 or 3, not subject to VAT. o If the advanced payment is #4, then such payment is taxable to the lessor in the month when it was received, irrespective of the accounting method employed by the lessor. o If the security deposit (#3) is applied to rental, then it shall be subject to VAT at the time of its application. VAT Registration Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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Every taxpayer subject to the VAT must register with the BIR as a VAT taxpayer and pay an annual registration fee of P500 for every separate and distinct establishment, including facility types where the business is conducted. Every taxpayer not subject to VAT but subject to the excise tax or percentage tax must register with the BIR and pay an annual registration fee of P500 for every separate and distinct establishment where the business is conducted. o VAT exempt persons under Section 109 who did not opt to be registered as VAT taxpayers must register as non-VAT taxpayers.
Mandatory Registration Sec 236 (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 VAT if: a) His gross sales or receipts for the past 12 months, other than those that are exempt under Section 109(A) to (U) have exceeded One Million Five Hundred Thousand Pesos (P1,500,000); or b) There are reasonable grounds to believer that his gross sales or receipts for the next 12 months, other than those that are exempt under Section 109 (A) to (U), will exceed One Million Five Hundred Thousand Pesos (P1,500,000); 2) Every person who becomes liable to be registered under paragraph (1) of this Subsection shall register with the Revenue District Office 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.
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 VAT if: 1) His gross sales or receipts for the past 12 months, other than those exempt under Section 109 (A) to (U), have exceeded P1.5m; or 2) There are reasonable grounds to believe that his gross sales or receipts for the next 12 months, other than those exempt under Section 109 (A) to (U), will exceed P1.5m If a person who is mandated to register does not, he shall: o Be liable to pay the tax as if he were a VAT-registered person, and o Without the benefit of input tax credits.
Optional registration (H) Optional Registration for Value-Added Tax of Exempt Person. (1) Any person is not required to register for VAT under Subsection (G) hereof may elect to resiter for VAT by registering with the Revenue District Office that has jurisdiction over the head office of that person, and 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 years. For purposes of Title IV of this Code, any person who has registered VAT as a tax type in accordance with the provisions of Subsection (C) hereof shall be referred to as “Vat-registered person” who shall be assigned only one Taxpayer Identification Number (TIN).
Any person who is not required to registered as a VAT taxpayer may register for the VAT. He, however, cannot cancel his registration for the next three years.
Cancellation of VAT registration (G) Cancellation of VAT registration. (1) A VAT-registered person may cancel his registration for VAT if: (a) he makes written application and can demonstrate ot the commissioner’s satisfaction that his gross sales or receipts for the following 12 months, over than those that are exempt under Section 109 (A) to (U), will not exceed one million five hundred thousand pesos (P1,500,000), or (b) he has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve months.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two The cancellation of registration will be effective from the first day of the following month.
Read codal na lang. Hehe.
Compliance Requirements SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. "(A) Invoicing Requirements. - A VAT-registered person shall issue: "(1) A VAT invoice for every sale, barter or exchange of goods or properties; and "(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. "(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The following information shall be indicated in the VAT invoice or VAT official receipt: "(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); "(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax: Provided, That: "(a) The amount of the tax shall be shown as a separate item in the invoice or receipt; "(b) If the sale is exempt from value-added tax, the term "VAT-exempt sale" shall be written or printed prominently on the invoice or receipt; "(c) If the sale is subject to zero percent (0%) value-added tax, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt; "(d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt: "Provided, That the seller may issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale. "(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and "(4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser, customer or client. "(C) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons subject to the valueadded tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of Finance.
A VAT-registered person shall issue: 1. A VAT invoice for every sale, barter or exchange of goods or properties; and 2. A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services If the sale is exempt from VAT, the term “VAT-exempt sale” shall be written or printed prominently on the invoice or receipt If the sale is subject to 0%, the term “zero-rated sale” shall be written or printed prominently on the invoice or receipt If the sale involves some which are subject to VAT and some which are zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between the taxable, exempt and zero-rated components o The calculation of the VAT on each portion of the sale shall be shown on the invoice or receipt. o But the seller may issue separate invoices or receipts for the taxable, exempt and zero-rated components of the sale The date of the transaction, quality, unit cost and description of the goods or properties or nature of the services must also be indicated. o Input tax cannot be credited against output tax when supported by an undated official receipt or invoice. (Nesic Philippines Inc v CIR, May 6, 2010) When the sale is P1000 or more to a VAT-registered person, the name, business style, address and TIN of the purchaser, customer or client must also be placed in the receipt or invoice.
Issuing Erroneous VAT invoice or VAT official receipt Section 113(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt. –
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (1) If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification Number (TIN), followed by the word “VAT”: “(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to: “(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and “(ii) A 50% surcharge under Section 248 (B) of this code; “(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this Code. “(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term “VAT-exempt Sale", the issuer shall be liable to account for the tax imposed in Section 106 or 108 as if Section 109 did not apply. "(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may continue to issue VAT invoices and VAT official receipts for the period July 1, 2005 to December 31, 2005, in accordance with Bureau of Internal Revenue administrative practices that existed as of December 31, 2004.
If a person is NOT a VAT-registered person issues an invoice or receipt showing his TIN followed by the word “VAT”, the issuer shall be: 1. Liable for the percentage tax due on his transaction 2. Liable for the VAT, without credit for any input tax, and 3. Subject to a 50% surcharge. o VAT shall be recognized as an input tax credit to the purchaser under Section 110, provided the requisite information required in invoices or receipts are shown on the invoices or receipts. If a VAT-registered person issues a VAT invoice or official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term “VATexempt sale”, he shall be subject to the VAT, as if Section 109 on exempt transactions did not apply. o Meaning, he has to pay the VAT. If the VAT is erroneously billed in the invoice, the total invoice amount shall be presumed to be comprised of the gross selling price/gross receipts plus the correct amount of the VAT. o The output tax shall be computed by multiplying the total amount in the invoice by a fraction using the rate of VAT as the numerator and 100% plus the rate of the VAT as the denominator. RR 8-99 says that penalties for violation of the requirement that output tax on sale of goods and services should not be separately indicated in the sales invoice or official receipt. o The amount appearing in the sales invoices/receipts is thus deemed inclusive of the Value-Added Tax due thereon. o The penalty for violation of the said requirement is a fine of not less than One Thousand Pesos (P 1,000) but not more than Fifty Thousand Pesos (P50,000), and imprisonment of not less than two (2) years but not more than four (4) years.
Return and Payment of VAT Sec. 114. Return and Payment of Value-Added Tax. "(A) In General. - Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis. "Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches. "(B) Where to File the Return and Pay the Tax. - Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or municipal Treasurer in the Philippines located within the revenue district where the taxpayer is registered or required to register.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly gross sales or receipts within 25 days following the close of the taxable quarter using the latest version of Quarterly VAT Return. The VAT-registered persons shall pay the VAT on a monthly basis.
Power of the Commissioner SEC. 115. Power of the Commissioner to Suspend the Business Operations of a Taxpayer. - The Commissioner or his authorized representative is hereby empowered to suspend the business operations and temporarily close the business establishment of any person for any of the following violations: (a) In the case of a VAT-registered Person. (1) Failure to issue receipts or invoices; (2) Failure to file a value-added tax return as required under Section 114; or (3) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or receipts for the taxable quarter. (b) Failure of any Person to Register as Required under Section 236. The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted only upon compliance with whatever requirements prescribed by the Commissioner in the closure order.
Percentage Taxes
Generally, percentage taxes are based on gross receipts. The percentage taxes are payable by the seller of the services, o EXCEPT the overseas communications tax, which is payable by the user of the facilities of the seller. The term “gross receipts” means cash actually or constructively received. o Receivables, although income thereon is earned already, are not yet taxable. o There are no deductions from gross receipts to arrive at the taxable gross receipts.
Three percent (3%) percentage tax SEC. 116. Tax on Persons Exempt From Value-Added 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. (RA 9337)
What are the requisites to be considered under the 3% Percentage Tax? 1. Gross annual sales or receipts do NOT exceed P1.5, 2. Transaction is NOT under Section 109 (A)-(U), 3. NOT VAT-registered, and 4. NOT under any specific percentage tax. The 3% percentage tax is imposed on persons who are exempt from the VAT because their gross annual sales or receipts do not exceed P1.5m. It is based on gross sales or receipts, without any deduction. Persons who are otherwise subject to the 3% percentage tax may opt to be under the VAT system by registering with the BIR as a VAT taxpayer. o When so registered, they shall be subject to the rules on VAT on their domestic and export sales. Why register?! The VAT system has input credit. Percentage tax does not.
Tax on domestic carriers 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, air or water, for the transport of passengers, except owners of bancas and owner of animal-drawn two wheeled vehicle, and keepers of garages shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two 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 cities P 2,400 2. Provincial 1,200 Public utility bus Not exceeding 30 passengers Exceeding 30 but not exceeding 50 passengers Exceeding 50 passengers
3,600 6,000 7,200
Taxis 1. Manila and other cities 2. Provincial
P 3,600 2,400
Car for hire (with chauffer) Car for hire (without chauffer)
3,000 1,800
A common carrier is a person, corporation, firm or association, engaged in the business of carrying or transporting passengers or goods, or both, by land, water, or air, for compensation, offering services to the public, and shall include transportation contractors. o Common carriers can either be subject to percentage tax (“common carrier’s tax”) or VAT. o For those under the common carrier’s tax, the rate is 3% of gross receipts. What constitute gross receipts? o See footnote.19 Those subject to percentage tax are: 1. Cars for rent or hire driven by the lessee (rent-a-car) 2. Transportation contractors, including persons who transport passengers for hire; 3. Other domestic carriers by land for transport of passengers (except owners of bancas and animal-drawn two-wheeled vehicles), and 4. Keepers of garages A garage is a closed shelter for automobilies, a business establishment where automobiles are repaired, stored, etc. Those subject to VAT are: 1. Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire; 2. Other domestic common carriers by land relative to their transport of goods or cargoes; 3. 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 Philippines.
19 RR 15-2011 (July 20, 2011) “Gross receipts" shall include, but shall not be limited to, the total amount of money or its equivalent representing the contract or ticket prize, excess baggage fees, freight/cargo fees, mail fees, rental, penalties, deposit applied as payments, advance payments and other service charges and fees actually or constructively received during the taxable quarter from the passage of persons, excess baggage, cargo and/or mail, originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the passage documents.
Provided, that ticket revalidated, exchanged and/or endorsed to another international airline shall likewise form part of the gross receipts if the passenger boards a plane in a port or point in the Philippines. Provided, further, that for a flight which originates from the Philippines, but where transshipment of passenger takes place at any port 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 Receipts.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
The transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country is subject to 0% VAT. Under the law, certain common carriers have statutory minimum quarterly gross receipts (jeepneys, etc).
VAT or Percentage Tax on DOMESTIC Carriers Common carrier by LAND: Transporting goods or cargoes Transporting passengers Common carriers by AIR or SEA: From one point in the Philippines to another point in the Philippines Transporting goods or cargoes Transporting passengers From one point in the Philippines to a point outside the Philippines Transporting goods or cargoes Transporting passengers
12% VAT 3% Common Carrier’s tax
12% VAT 12% VAT 0% VAT 0% VAT
Percentage tax on International carriers SEC. 118. Percentage Tax on International Carriers. (A) International air carriers doing business in the Philippines shall pay a tax of three percent (3%) of their quarterly gross receipts. (B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts.
International air carriers and international shipping carriers doing business in the Philippines shall pay a tax equivalent to 3% of their gross receipts from shipping outgoing from the Philippines.
Franchise tax SEC. 119. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000.00), subject to Section 236 of this Code, a tax of three percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this Section shall have an option to be registered as a value-added taxpayer and pay the tax due thereon: Provided, further, That once the option is exercised, said option shall be irrevocable. The grantee shall file the return with, and pay the tax due thereon to the Commissioner or his duly authorized representative, in accordance with the provisions of Section 128 of this Code, and the return shall be subject to audit by the Bureau of Internal Revenue, any provision of any existing law to the contrary notwithstanding.
The franchise tax is: 1. On gross receipts covered by the law granting the franchise; 2. At the following rates: a. On radio and/or television broadcasting companies whose annual gross receipts of the preceding year did not exceed P10m: 3% b. On gas and water utilities: 2% Those whose annual gross receipts of the preceding year exceeded P10m shall be subject to the VAT. o If the gross receipts do not exceed P10m, they may opt to be registered under VAT, but once they choose to, it cannot be revoked.
Overseas communications tax SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the Philippines. (A) Persons Liable. - There shall be collected upon every overseas dispatch, message or conversation transmitted from the Philippines by telephone, telegraph, telewriter exchange, wireless and other communication equipment
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two service, a tax of ten percent (10%) on the amount paid for such services. The tax imposed in this Section shall be payable by the person paying for the services rendered and shall be paid to the person rendering the services who is required to collect and pay the tax within twenty (20) days after the end of each quarter. (B) Exemptions. - The tax imposed by this Section shall not apply to: (1) Government. - Amounts paid for messages transmitted by the Government of the Republic of the Philippines or any of its political subdivisions or instrumentalities; (2) Diplomatic Services. - Amounts paid for messages transmitted by any embassy and consular offices of a foreign government; (3) International Organizations. - Amounts paid for messages transmitted by a public international organization or any of its agencies based in the Philippines enjoying privileges, exemptions and immunities which the Government of the Philippines is committed to recognize pursuant to an international agreement; and (4) News Services. - Amounts paid for messages from any newspaper, press association, radio or television newspaper, broadcasting agency, or newstickers services, to any other newspaper, press association, radio or television newspaper broadcasting agency, or newsticker service or to a bona fide correspondent, which messages deal exclusively with the collection of news items for, or the dissemination of news item through, public press, radio or television broadcasting or a newsticker service furnishing a general news service similar to that of the public press.
Franchise grantees of telephone and telegraph are subject to the VAT on their gross receipts from their telephone, telegraph, telewriter exchange, wireless and other communication equipment services. (ingoing messages) BUT amounts received from overseas dispatch message or conversation originating form the Philippines (outgoing messages) shall be subject to the overseas communications tax. The OCT is based on the amount paid by the user to the provider of the communication facility, imposed on the person paying for the services rendered, and not on the person rendering the service. o The person rendering the service is merely considered as a tax collector. The OCT is 10% of the amount paid. The OCT shall not apply to: 1. The government of the Philippines or any of its political subdivisions, 2. Diplomatic services, 3. International organizations, and 4. News services.
Tax on banks and non-bank financial intermediaries performing quasi-banking functions SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries. - There shall be a collected tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: Maturity period is 5 years or less - 5% Maturity period is more than 5 years 1% (b) On dividends and equity shares in net income of subsidiaries 0% (c) On royalties, rentals of property, real or personal, profits, from exchange and all other items treated as gross income under Section 32 of this Code 7% (d) On net trading gains within the taxable year on foreign currency, debt securities, derivaties and other similar financial instruments 7% Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long-term and the correct rate of tax shall be applied accordingly. Provided, finally, that the generally accepted accounting principles as may be prescribed by the BSP for the bank or non-bank financial intermediary performing quasi-banking functions shall be likewise be the basis for the calculation of gross receipts. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar banking activities.
The tax base is the gross receipts from sources within the Philippines. Tax rates are: On interest, commissions and discounts from Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: 5% Maturity period is 5 years or less 1% Maturity period is more than 5 years On dividends and equity shares in net 0% income of subsidiaries On royalties, rentals of property, real or 7% personal, profits from exchange and all other items treated as gross income under the income tax law On net trading gains within the taxable year 7% on foreign currency, debt securities, derivaties and other similar financial instruments In case the maturity period is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination Financial intermediaries are persons or entities whose principal functions include the lending, investing, or placement of funds or evidence of indebtedness or equity deposited with them, or otherwise coursed through them, either for their own account or for the account of others. Quasi-banking activities refer to borrowing funds from twenty or more lenders at any one time, through issuance, indorsement or acceptance of debt instruments, or through the issuance of certificates of assignments for the purpose of relending or purchasing receivables and other similar obligations. Tax on other non-bank financial intermediaries SEC. 122. Tax on Other Non-bank Financial Intermediaries. - There shall be collected a tax of five percent (5%) on the gross receipts derived by other non-bank financial intermediaries doing business in the Philippines, from interest, commissions, and discounts from lending activities, as well as income from financial leasing, shall be taxed on the basis of remaining maturities of the instruments from which such receipts are derived, in accordance with the following schedule: Maturity period is 5 years or less 5% Maturity period is more than 5 years 1% Provided, however, That in case the maturity period is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long-term and the correct rate of tax shall be applied accordingly. Provided, finally, that the generally accepted accounting principles as may be prescribed by the SEC for other nonbank financial intermediaries shall likewise be the basis of the calculation of gross receipts. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar financing activities. (RA 9238)
Tax base is the gross receipts from sources within the Philippines Tax rates are: On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: 5% Maturity period is 5 years or less 1% Maturity period is more than 5 years On interests, commissions, discounts and all 5% other items treated as gross income under the Income Tax Law Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
A pawnshop is a non-bank financial intermediary not performing quasi-banking functions. (Tambunting v CIR) o Hence, they are subject to 5% gross receipts tax, and not to VAT. o Same rule with money changers. (RR 10-2004)
Tax on insurance companies SEC. 123. Tax on Life Insurance Premiums. - There shall be collected from every person, company or corporation (except purely cooperative companies or associations) doing life insurance business of any sort in the Philippines a tax of five percent (5%) of the total premium collected, whether such premiums are paid in money, notes, credits or any substitute for money; but premiums refunded within six (6) months after payment on account of rejection of risk or returned for other reason to a person insured shall not be included in the taxable receipts; nor shall any tax be paid upon reinsurance by a company that has already paid the tax; nor upon doing business outside the Philippines on account of any life insurance of the insured who is a nonresident, if any tax on such premium is imposed by the foreign country where the branch is established nor upon premiums collected or received on account of any reinsurance , if the insured, in case of personal insurance, resides outside the Philippines, if any tax on such premiums is imposed by the foreign country where the original insurance has been issued or perfected; nor upon that portion of the premiums collected or received by the insurance companies on variable contracts (as defined in section 232(2) of Presidential Decree No. 612), in excess of the amounts necessary to insure the lives of the variable contract workers. Cooperative companies or associations are such as are conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit.
Insurance companies may be divided into two classes: 1. Non-life insurance companies, and 2. Life insurance companies Non-life insurance companies are subject to VAT. Life insurance companies are subject to a percentage tax called the premium tax, as follows: o Tax base: total life insurance premiums collected (gross receipts), whether in money, notes, credits, or any substitute for money o Tax rate: 5% The follow are exempted from the premium tax: 1. Premiums refunded within 6 months after payment on account of rejection of risk or returned for other reasons to a person insured; 2. Reinsurance premiums paid by a company that has already paid a tax; 3. Premiums collected or received by an y branch of a domestic corp, firm or association doing business in the Philippines on account of any life insurance of an insured who is a non-resident, if any tax on such premiums is imposed by the foreign country where the branch is established; 4. Reinsurance premiums, if the insured of personal insurance resides outside the Philippines, if any tax on such premium is imposed by the foreign country where the original has been issued or perfected; 5. Portion of the premiums collected or received by insurance companies on variable contracts in excess of the amount necessary to insure the lives of variable contract owners.
Tax on agents of foreign insurance companies SEC. 124. Tax on Agents of Foreign Insurance Companies. - Every fire, marine or miscellaneous insurance agent authorized under the Insurance Code to procure policies of insurance as he may have previously been legally authorized to transact on risks located in the Philippines for companies not authorized to transact business in the Philippines shall pay a tax equal to twice the tax imposed in Section 123: Provided, That the provision of this Section shall not apply to reinsurance: Provided, however, That the provisions of this Section shall not affect the right of an owner of property to apply for and obtain for himself policies in foreign companies in cases where said owner does not make use of the services of any agent, company or corporation residing or doing business in the Philippines. In all cases where owners of property obtain insurance directly with foreign companies, it shall be the duty of said owners to report to the Insurance Commissioner and to the Commissioner each case where insurance has been so effected, and shall pay the tax of five percent (5%) on premiums paid, in the manner required by Section 123.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
Every fire, marine or miscellaneous insurance agent authorized under the Insurance Code to procure insurance as he may have previously been authorized to transact on risks located in the Philippines, for companies not authorized to transact business in the Philippines, shall pay a tax equal to twice the tax imposed on life insurance companies. o So, 10%. An owner of property can obtain directly for himself policies in foreign companies but he must report to Insurance Commissioner and to the CIR, and pay a tax of 5% on premiums paid.
Amusement taxes SEC. 125. Amusement Taxes. - There shall be collected from the proprietor, lessee or operator of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and racetracks, a tax equivalent to: (a) Eighteen percent (18%) in the case of cockpits; (b) Eighteen percent (18%) in the case of cabarets, night or day clubs; (c) Ten percent (10%) in the case of boxing exhibitions: Provided, however, That boxing exhibitions wherein World or Oriental Championships in any division is at stake shall be exempt from amusement tax: Provided, further, That at least one of the contenders for World or Oriental Championship is a citizen of the Philippines and said exhibitions are promoted by a citizen/s of the Philippines or by a corporation or association at least sixty percent (60%) of the capital of which is owned by such citizens; (d) Fifteen percent (15%) in the case of professional basketball games as envisioned in Presidential Decree No. 871: Provided, however, That the tax herein shall be in lieu of all other percentage taxes of whatever nature and description; and (e) Thirty percent (30%) in the case of Jai-Alai and racetracks of their gross receipts, irrespective, of whether or not any amount is charged for admission. For the purpose of the amusement tax, the term "gross receipts" embraces all the receipts of the proprietor, lessee or operator of the amusement place. Said gross receipts also include income from television, radio and motion picture rights, if any. A person or entity or association conducting any activity subject to the tax herein imposed shall be similarly liable for said tax with respect to such portion of the receipts derived by him or it. The taxes imposed herein shall be payable at the end of each quarter and it shall be the duty of the proprietor, lessee or operator concerned, as well as any party liable, within twenty (20) days after the end of each quarter, to make a true and complete return of the amount of the gross receipts derived during the preceding quarter and pay the tax due thereon.
Tax base: gross receipts o Embraces all the receipts of the proprietor, lessee or operator of the amusement place. o It also includes income from TV, radio and motion picture rights, if any.
Amusement Place Tax Place for boxing exhibition 10% Place for professional basketball games (which shall be in lieu of all 15% percentage taxes of whatever name and description) Cockpits, cabarets, night or day clubs 18% Jai-alai and race tracks 30% Boxing exhibitions where World or Oriental Championships in any division is at stake shall be exempt from amusement tax if: o One of the contenders is a Pinoy citizen, and o Said exhibitions are promoted by citizens of the Philippines or by a corp or association at least 60% of the capital of which is owned by such citizens. Tax on Winnings SEC. 126. Tax on Winnings. - Every person who wins in horse races shall pay a tax equivalent to ten percent (10%) of his winnings or 'dividends', the tax to be based on the actual amount paid to him for every winning ticket after deducting the cost of the ticket: Provided, That in the case of winnings from double, forecast/quinella and trifecta bets, the tax shall be four percent (4%). In the case of owners of winning race horses, the tax shall be ten percent (10%) of the prizes.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two The tax herein prescribed shall be deducted from the 'dividends' corresponding to each winning ticket or the "prize" of each winning race horse owner and withheld by the operator, manager or person in charge of the horse races before paying the dividends or prizes to the persons entitled thereto. The operator, manager or person in charge of horse races shall, within twenty (20) days from the date the tax was deducted and withheld in accordance with the second paragraph hereof, file a true and correct return with the Commissioner in the manner or form to be prescribed by the Secretary of Finance, and pay within the same period the total amount of tax so deducted and withheld.
Tax base: o If a person wins in horse races and jai-alai, based on his winnings or “dividends” (tax to be based on the actual amount paid to him for every winning ticket, after deducting the cost of the ticket), o If a person owns a winning race horse, based on the price. The tax shall be withheld from the dividends or prize by the operator, manager or person in charge of the horse races or jai-alai.
Tax on Winnings In horse races or jai-alai But if from: double, forecast, quinella and trifecta bets Owner of winning horse
Tax 10% 4% 10%
Tax on Stock Transactions and IPOs (Stock Transaction Tax) SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock Exchange or Through Initial Public Offering. (A) Tax on 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 in securities, a tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor. (B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. - There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed 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: Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty-three and one third percent (33 1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term "closely held corporation" means any corporation at least fifty percent (50%) in value of outstanding capital stock or at least fifty percent (505) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. (2) Family and Partnership Ownerships. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. For purposes of the paragraph, the 'family of an individual' includes only his brothers and sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants. (3) Option. - If any person has an option acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option and each one of a series of options shall be considered as an option to acquire such stock. (4) Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. (C) Return on Capital Gains Realized from Sale of Shares of Stocks. (1) Return on Capital Gains Realized from Sale of Shares of Stock Listed and Traded in the Local Stock Exchange. It shall be the duty of every stock broker who effected the sale subject to the tax imposed herein to collect the tax
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
60
+ amdg Taxation Two and remit the same to the Bureau of Internal Revenue within five (5) banking days from the date of collection thereof and to submit on Mondays of each week to the secretary of the stock exchange, of which he is a member, a true and complete return which shall contain a declaration of all the transactions effected through him during the preceding week and of taxes collected by him and turned over to the Bureau Of Internal Revenue. (2) Return on Public Offerings of Share Stock. - In case of primary offering, the corporate issuer shall file the return and pay the corresponding tax within thirty (30) days from the date of listing of the shares of stock in the local stock exchange. In the case of secondary offering, the provision of Subsection (C)(1) of this Section shall apply as to the time and manner of the payment of the tax. (D) Common Provisions. - Any gain derived from the sale, barter, exchange or other disposition of shares of stock under this Section shall be exempt from the tax imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the regular individual or corporate income tax. Tax paid under this Section shall not be deductible for income tax purposes.
On the sale, barter, exchange or other disposition of shares listed and traded thru a local stock exchange, other than by a dealer in securities o Tax base: gross selling price or gross value in money of the shares sold, bartered, exchanged or otherwise disposed of, o Tax rate: ½ of 1% o Paid by: the seller On the sale, barter, exchange or other disposition thru initial public offering of shares of stock in a closely held corporation, in accordance with the proportion of the shares sold, bartered, exchanged or otherwise disposed of to the total outstanding shares of stock after the listing in the local stock exchange o Up to 25% 4% o 25% - 33.33% 2% o over 33.33% 1% o Paid by: the issuing corporation in primary offering, and the seller in the secondary offering For purposes of tax on initial public offerings, the term “closely-held corporation” means any corporation at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote, is owned directly or indirectly by or for not more than 20 individuals.
Return and payment of percentage taxes SEC. 128. Returns and Payment of Percentage Taxes. (A) Returns of Gross Sales, Receipts or Earnings and Payment of Tax. (1) Persons Liable to Pay Percentage Taxes. - Every person subject to the percentage taxes imposed under this Title shall file a quarterly return of the amount of his gross sales, receipts or earnings and pay the tax due thereon within twenty-five (25) days after the end of each taxable quarter: Provided, That in the case of a person whose VAT registration is cancelled and who becomes liable to the tax imposed in Section 116 of this Code, the tax shall accrue from the date of cancellation and shall be paid in accordance with the provisions of this Section. (2) Person Retiring from Business. - Any person retiring from a business subject to percentage tax shall notify the nearest internal revenue officer, file his return and pay the tax due thereon within twenty (20) days after closing his business. (3) Exceptions. - The Commissioner may, by rules and regulations, prescribe: (a) The time for filing the return at intervals other than the time prescribed in the preceding paragraphs for a particular class or classes of taxpayers after considering such factors as volume of sales, financial condition, adequate measures of security, and such other relevant information required to be submitted under the pertinent provisions of this Code; and (b) The manner and time of payment of percentage taxes other than as hereinabove prescribed, including a scheme of tax prepayment. (4) Determination of Correct Sales or Receipts. - When it is found that a person has failed to issue receipts or invoices, or when no return is filed, 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 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. (B) Where to File. - Except as the Commissioner otherwise permits, every person liable to the percentage tax under this Title may, at his option, file a separate return for each branch or place of business, or a consolidated
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two return for all branches or places of business with the authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality where said business or principal place of business is located, as the case may be.
The taxpayer may file a separate return for each branch or place of business, or a consolidated return for all. General rule: every person liable to pay a percentage tax shall file a monthly return of the amount of his gross receipts and pay the tax thereon, within 20 days after the end of each taxable month. Except: 1. 3% tax within 20 days after the end of the month, except when the tax was a final tax through the withholding tax system 2. Overseas communications tax within 20 days after the end of the quarter 3. Amusement tax within 20 days after the end of the quarter 4. Tax on winnings remitted to the BIR within 20 days from the date withheld 5. Stock transaction tax of ½ of 1% remitted to the BIR within 5 banking days from the date withheld by the broker 6. Stock transaction tax of 4%, 2% and 1% on primary offering, within 30 days from the date of listing in the local stock exchange
Summary of the percentage taxes The tax Tax Base 3% percentage tax Gross sales/ gross receipts Domestic common carrier’s Gross receipts tax (land, for passengers), international common carrier’s tax Franchise tax on: Gross receipts Gas and water facilities Radio and/or broadcasting companies whose gross receipts in the preceding year did not exceed P10m Overseas communications Amount paid tax Tax on banks and non-bank Gross receipts from financial intermediaries lending/financial leasing performing quasi-judicial functions Gross receipts from other gross income items
Tax on other non-bank financial intermediaries
Tax on life insurance companies (premium tax) Tax on agents of foreign insurance companies
Rate 3% 3%
2% 3%
10% 1% and 5%
7%
Dividends
0%
Gross receipts from lending/financial leasing
1% and 5%
Gross receipts from gross income items Premiums collected
5%
Premiums collected
other
5% 10%
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
62
+ amdg Taxation Two
Amusement taxes on: Boxing exhibitions Pro basketball games Cockpits, cabarets and night clubs Jai-alai and race tracks Tax on winnings: Of persons in horse races or jail-alai But if from double, forecast, quinella and trifecta bets Owners of winning horses Stock transaction tax (secondary offering)
Gross receipts
10% 15% 18% 30% 10%
Winnings
4%
Selling price
10% ½ of 1%
Excise Taxes SEC. 129. Goods Subject to Excise Taxes. - Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported. The excise tax imposed herein shall be in addition to the value-added tax imposed under Title IV. For purposes of this Title, excise taxes herein imposed and based on weight or volume capacity or any other physical unit or measurement shall be referred to as "specific tax" and an excise tax herein imposed and based on selling price or other specified value of the good shall be referred to as "ad valorem tax".
Excise taxes are applicable only to 1. Manufacturers, or 2. Importers There are two kinds of excise taxes, namely: 1. Specific tax, and 2. Ad valorem tax Specific taxes are those based on weight or volume capacity or any other physical unit of measurement. Those subject to specific taxes are: 1. Alcohol products - proof liter (Sec 141-143) 2. Tobacco products - kilogram (Sec. 144) 3. Petroleum products - liter and kilogram (Sec. 148) 4. Coal and coke - metric ton (Sec. 151) Ad valorem taxes are those based on the selling price or other specified value of the article. 1. Automobiles – importer’s/manufacturer’s selling price(Sec. 149) 2. Non-essential goods – wholesale price or value of importation (Sec. 150) Jewelry (real or imitation), opera glasses, lorgnettes Perfumes and toilet waters Yachts and other vessels intended for pleasure or sports 3. Other minerals, mineral products and quarry resources – actual market value of gross output (Sec. 151) 4. Cigars – net retail price (Sec. 145) 5. Cigarettes packed by hand or machine – net retail price per pack(Sec. 145) For cigarettes pack by hand or machine, it is actually a “hybrid” because it is ad valorem to the extent of selling price, but specific in its imposition (per pack)
"New brands, as defined in the immediately following paragraph, shall initially be classified according to their suggested net retail price.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
63
+ amdg Taxation Two "'New brand' shall mean a brand registered after the date of effectivity of R.A. No. 8240. "'Suggested net retail price' shall mean the net retail price at which new brands, as defined above, of locally manufactured or imported cigarettes are intended by the manufacturer or importer to be sold on retail in major supermarkets or retail outlets in Metro Manila for those marketed nationwide, and in other regions, for those with regional markets. At the end of three (3) months from the product launch, the Bureau of Internal Revenue shall validate the suggested net retail price of the new brand against the net retail price as defined herein and determine the correct tax bracket under which a particular new brand of cigarette, as defined above, shall be classified. After the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall revalidate the initially validated net retail price against the net retail price as of the time of revalidation in order to finally determine the correct tax bracket under which a particular new brand of cigarettes shall be classified: Provided, however, That brands of cigarettes introduced in the domestic market between January 1, 1997 and December 31, 2003 shall remain in the classification under which the Bureau of Internal Revenue has determined them to belong as of December 31, 2003. Such classification of new brands and brands introduced between January 1, 1997 and December 31, 2003 shall not be revised except by an act of Congress. "'Net retail price', as determined by the Bureau of Internal Revenue through a price survey to be conducted by the Bureau of Internal Revenue itself, or the National Statistics Office when deputized for the purpose by the Bureau of Internal Revenue, shall mean the price at which the cigarette is sold on retail in at least ten (10) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro Manila, the 'net retail price' shall mean the price at which the cigarette is sold in at least five (5) major supermarkets in the region excluding the amount intended to cover the applicable excise tax and the value-added tax. "The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set forth in Annex 'D', including the classification of brands for the same products which, although not set forth in said Annex ID', were registered and were being commercially produced and marketed on or after October 1, 1996, and which continue to be commercially produced and marketed after the effectivity of this Act, shall remain in force until revised by Congress.
“Suggested net retail price” apply to new brands to be introduced. It’s the net retail price at which new brands are intended to be sold on retail in major supermarkets or retail outlets in Metro Manila. “Net retail price” apply to those brands already in the market. It is the price at which the goods are sold on retail in at least 10 major supermarkets in Metro Manila. The classification freeze provision in Sec 145 was the main issue in the case of British American Tobacco v CIR. o To the issues raised by British American Tobacco, the Supreme Court stated “All in all, the classification freeze provision addressed Congress's administrative concerns in the simplification of tax administration of sin products, elimination of potential areas for abuse and corruption in tax collection, buoyant and stable revenue generation, and ease of projection of revenues. Consequently, there can be no denial of the equal protection of the laws since the rational-basis test is amply satisfied.” o The Court, in answering the claim of unfair competition created by the classification freeze, merely stated that the it wasn’t conceived in a hostile attitude against newer brands compared to older brands. And, respecting the wisdom of the Congress as a co-equal branch of the government, the Court could not strike down the provision as unconstitutional, even if it were imperfect. Excise tax is basically an indirect tax imposed on the consumption of a specified list of goods or products. The tax is directly levied on the manufacturer upon removal of the taxable goods from the place of production but in reality, the tax is passed on to the end consumer as part of the selling price of the goods sold. o The main difference with VAT (which is also an indirect tax) is the ability of the buyer to claim a refund. In VAT, zero-rated buyers have express statutory basis which allows them to claim refunds.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
In excise tax, buyers cannot claim refunds because there is no statutory basis. Hence, it is only the statutory taxpayer who can claim a refund (as in the case of Silkair v CIR)
Those exempt from excise taxes or conditional tax-free removal EXEMPTION OR CONDITIONAL TAX-FREE REMOVAL OF CERTAIN ARTICLES SEC. 133. Removal of Wines and Distilled Spirits for Treatment of Tobacco Leaf. - Upon issuance of a permit from the Commissioner and subject to the rules and regulations prescribed by the Secretary of Finance, manufacturers of cigars and cigarettes may withdraw from bond, free of excise local and imported wines and distilled spirits in specific quantities and grades for use in the treatment of tobacco leaf to be used in the manufacture of cigars and cigarettes; but such wines and distilled spirits must first be suitably denatured. SEC. 134. Domestic Denatured Alcohol. - Domestic alcohol of not less than one hundred eighty degrees (180O) proof (ninety percent [90%] absolute alcohol) shall, when suitably denatured and rendered unfit for oral intake, be exempt from the excise tax prescribed in Section 141: Provided, however, That such denatured alcohol shall be subject to tax under Section 106(A) of this Code: Provided, further, That if such alcohol is to be used for automotive power, it shall be taxed under Section 148(d) of this Code: Provided, finally, That any alcohol, previously rendered unfit for oral intake after denaturing but subsequently rendered fit for oral intake after undergoing fermentation, dilution, purification, mixture or any other similar process shall be taxed under Section 141 of this Code and such tax shall be paid by the person in possession of such reprocessed spirits. SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. - Petroleum products sold to the following are exempt from excise tax: (a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner; (b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and (c) Entities which are by law exempt from direct and indirect taxes. SEC. 136. Denaturation, Withdrawal and Use of Denatured Alcohol. - Any person who produces, withdraws, sells, transports or knowingly uses, or is in possession of denatured alcohol, or articles containing denatured alcohol in violation of laws or regulations now or hereafter in force pertaining thereto shall be required to pay the corresponding tax, in addition to the penalties provided for under Title X of this Code. SEC. 137. Removal of Spirits Under Bond for Rectification.- Spirits requiring rectification may be removed from the place of production to another establishment for the purpose of rectification without prepayment of the excise tax: Provided, That the distiller removing such spirits and the rectifier receiving them shall file with the Commissioner their joint bond conditioned upon the payment by the rectifier of the excise tax due on the rectified alcohol: Provided, further, That in cases where alcohol has already been rectified either by original and continuous distillation or by redistillation, no loss for rectification and handling shall be allowed and the rectifier thereof shall pay the excise tax due on such losses: Provided, finally, That where a rectifier makes use of spirits upon which the excise tax has not been paid, he shall be liable for the payment of the tax otherwise due thereon. SEC. 138. Removal of Fermented Liquors to Bonded Warehouse. - Any brewer may remove or transport from his brewery or other place of manufacture to a bonded warehouse used by him exclusively for the storage or sale in bulk of fermented liquors of his own manufacture, any quantity of such fermented liquors, not less than one thousand (1,000) liters at one removal, without prepayment of the tax thereon under a permit which shall be granted by the Commissioner. Such permit shall be affixed to every package so removed and shall be cancelled or destroyed in such manner as the Commissioner may prescribe. Thereafter, the manufacturer of such fermented liquors shall pay the tax in the same manner and under the same penalty and liability as when paid at the brewery. SEC. 139. Removal of Damaged Liquors Free of Tax. - When any fermented liquor has become sour or otherwise damaged so as to be unfit for use as such, brewers may sell and after securing a special permit from the Commissioner, under such conditions as may be prescribed in the rules and regulations prescribed by the Secretary of Finance, remove the same without the payment of tax thereon in cask or other packages, distinct from those ordinarily used for fermented liquors, each containing not less than one hundred seventy-five (175) liters with a note of their contents permanently affixed thereon. SEC. 140. Removal of Tobacco Products Without Prepayment of Tax. - Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be prescribed in the rules and regulations prescribed by the Secretary of Finance. Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, stems, or midribs, and sweepings of tobacco may be sold in bulk as raw material by one manufacturer directly to another without payment of the tax, under such conditions as may be prescribed in the rules and regulations prescribed by the Secretary of Finance. "Stemmed leaf tobacco", as herein used, means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
65
+ amdg Taxation Two
1. 2. 3.
4. 5. 6. 7.
The following are exempt from paying excise taxes, or articles which can be removed, without paying the excise tax, subject to a condition: Wines and distilled spirits for treatment of tobacco leaf, but with prior approval of the Commissioner and with corresponding bond Domestic alcohol of not less than 180 degree proof (or 90% absolute alcohol), when suitably denatured and rendered unfit for oral intake Petroleum products sold to the following are exempt: a. International carriers of Philippine or foreign registery on their use or consumption outside the Philippines, provided that the petroleum products sold to these international carriers shall be stored in a bonded storage tank, or b. Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption, provided that the country of said foreign international carrier exempts from similar taxes petroleum products sold to Philippine carriers, or c. Entities which are by law exempt from direct and indirect taxes Spirits requiring rectification upon filing of a bond Fermented liquors removed by brewers from brewery to a bonded warehouse used exclusively for the storage or sale in bulk of fermented liquors, not less than 1000 liters at one removal Damaged fermented liquor unfit for use removed by brewers upon approval by the Commissioner. The damaged fermented liquor must be in distinct packages different from those used for fermented liquors. Tobacco products entirely unfit for chewing or smoking The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. o In the case of Silkair v CIR, the excise tax was imposed upon Petron as the manufacturer of petroleum products. Silkair was claiming for the refund on the basis of a tax exemption. However, the Court ruled that it was Petron, the statutory taxpayer who was the propert party to claim the tax refund, not Silkair. o The Court noted that even if Petron passed on to a tax-exempt airline the burden of the tax, the additional amount billed to the latter for jet fuel is not a tax but part of the price which the airline had to pay as a purchaser.
Credit for excise tax on goods exported (D) Credit for Excise Tax on Goods Actually Exported. - When goods locally produced or manufactured are removed and actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or parts of any manufactured goods or products, any excise tax paid thereon shall be credited or refunded upon submission of the proof of actual exportation and upon receipt of the corresponding foreign exchange payment: Provided, That the excise tax on mineral products, except coal and coke, imposed under Section 151 shall not be creditable or refundable even if the mineral products are actually exported.
When goods locally produced or manufactured (except coal and coke under sec 151) are removed and actually exported without returning to the Philippines, whether exported in their original state or as ingredient or part of any manufactured goods or products, any excise tax paid on such goods shall be credited or refunded upon submission of actual exportation and upon receipt of the corresponding foreign exchange payment.
Who should pay? (Sec 130-131, didn’t paste the codal, haba eh.) For manufactured goods, the manufacturer or producer. o But, if they are removed without paying the tax, the owner or person having possession thereof shall be liable. For imported goods, the importer or the owner. Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
o
But, for tax-free articles brought or imported by persons exempt from tax which are subsequently sold in the Philippines to non-exempt persons, the purchasers shall be considered the importers and will have to pay the duty and tax due on such importation.
When should the excise taxes be paid? For locally manufactured goods, pay prior to the removal of the article from the place of production. For imported goods, pay prior to the release of the article from customs custody.
Documentary Stamp Taxes SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. - Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party who is not exempt shall be the one directly liable for the tax.
Documentary stamp taxes are paid by the person making, signing, issuing, accepting or transferring the document. o Whenever one party to the taxable document enjoys an exemption from the tax, the other party who is not exempt shall be the one directly liable for the tax.
SEC. 200. Payment of Documentary Stamp Tax. (A) In General. - The provisions of Presidential Decree No. 1045 notwithstanding, any person liable to pay documentary stamp tax upon any document subject to tax under Title VII of this Code shall file a tax return and pay the tax in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (B) Time for Filing and Payment of the Tax. - Except as provided by rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the tax return prescribed in this Section shall be filed within ten (10) days after the close of the month when the taxable document was made, signed, issued, accepted, or transferred, and the tax thereon shall be paid at the same time the aforesaid return is filed. (C) Where to File. - Except in cases where the Commissioner otherwise permits, the aforesaid tax return shall be filed with and the tax due shall be paid through the authorized agent bank within the territorial jurisdiction of the Revenue District Office which has jurisdiction over the residence or principal place of business of the taxpayer. In places where there is no authorized agent bank, the return shall be filed with the Revenue District Officer, collection agent, or duly authorized Treasurer of the city or municipality in which the taxpayer has his legal residence or principal place of business. (D) Exception. - In lieu of the foregoing provisions of this Section, the tax may be paid either through purchase and actual affixture; or by imprinting the stamps through a documentary stamp metering machine, on the taxable document, in the manner as may be prescribed by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. SEC. 201. Effect of Failure to Stamp Taxable Document. - An instrument, document or paper which is required by law to be stamped and which has been signed, issued, accepted or transferred without being duly stamped, shall not be recorded, nor shall it or any copy thereof or any record of transfer of the same be admitted or used in evidence in any court until the requisite stamp or stamps are affixed thereto and cancelled.
When and how to pay? o Return should be filed and the payment made within 10 days after the close of the month when the taxable document was made, signed, issued, accepted or transferred; o In lieu of the above, by buying the required documentary stamp, affixing the stamp on the document and canceling the stamp with indication of the date of cancellation, or imprinting the amount of the required documentary stamp tax on the document with the use of a special machine. What if I fail to stamp the taxable document?
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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o
o
An instrument, document or paper which is required by law to be stamped and which has been signed, issued, accepted or transferred without being duly stamped, shall NOT be recorded, or Any record of transfer of the same be admitted or used in evidence in any court until the requisite stamps shall have been paid. No notary public or officer authorized to administer oaths shall add his jurat or acknowledgment to any document subject to the DST unless the proper documentary stamps are paid.
DST on Original Issue of Shares of Stock SEC. 174. Stamp Tax on Original Issue of Shares of Stock. - On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends, on the actual value represented by each share.
For every original issue of shares of stock, P1 DST is paid for every P200 (or fraction thereof) of the par value of such shares of stock o If without par value, base will be the actual consideration o If stock dividends, the base will be the actual value represented by each share
Example A stock certificate was issued by Safari, Inc with a par value of P500. With the rate of P1.00 on each P200 or fractional part thereof, the tax is P3.00. (500/200 = 2.5, round up to 3. Multiply 3 x P1.) For other, check codal, Sections 173-198. Give some examples of documents not subject to the DST (Section 199, won’t copy it here since it’s quite long, below is some random examples from the code) 1. Insurance policies or annuities made or granted by a fraternal or beneficiary society, order, association, etc operated on the lodge system or local cooperation plan organized and conducted solely by the members for the exclusive benefit of each member and not for profit 2. Certificates of oaths administered to any government official in his official capacity 3. Papers filed in court for and by the government 4. Affidavits of poor folk for the purpose of proving poverty 5. Certificates of lands, not exceeding P200 in assessed value furnished by the municipal treasurer to applicants for registration of title to land 6. Borrowing and lending of securities executed under the Securities Borrowing and Lending Program of a registered exchange or in accordance with regulations prescribed by the appropriate regulatory authority 7. Loan agreements or promissory notes the aggregate of which does not exceed P250,000, executed by an individual for his purchase on installment for his personal use a house, lot, motor vehicle, appliance or furniture 8. Assignment or transfer of any mortgage, lease or policy insurance, if there is no change in the maturity period 9. Fixed income and other securities traded in the secondary market or through an exchange 10. Derivatives 11. Interbranch or interdepartment advances within the same legal entity Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two
12. All forbearances arising from sales or service contracts including credit card and trade receivables 13. Bank deposit without a fixed term or maturity 14. All instruments related to the conduct of business of the BSP 15. Tax-free exchanges (Sec 40(c)2) 16. Interbank call loans with maturity of not more than 7 days to cover deficiency in reserves against deposit liabilities – irrelevant where the document was executed
Powers of the BIR SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance and its powers and duties shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other laws.
The BIR has the power and duty o to assess and collect all taxes, fees and charges, o to enforce all forfeitures, penalties and fines in connection therewith, this includes execution of judgments in all cases decided in its favor
SEC. 3. Chief Officials of the Bureau of Internal Revenue. - The Bureau of Internal Revenue shall have a chief to be known as Commissioner of Internal Revenue, hereinafter referred to as the Commissioner and four (4) assistant chiefs to be known as Deputy Commissioners. SEC. 4. Power of the Commissioner to Interpret Tax Laws and to 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.
When it comes to rulings, the Secretary of Finance can review the rulings of of the CIR or his deputies. o The taxpayer must go to the Sec of Finance within 30 days. (RMC 44-2001) Not sure where you go from here, baka CTA. o In fact, the Secretary of Finance can motu propio review rulings and issuances of the BIR. (BIR Website) When it comes to assessments, refunds, penalties and other matters, recourse should be done to the CTA. o See CTA rules.
SEC. 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 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;
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (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.
The Commissioner is authorized by law to do a whole host of things (see codal) in o ascertaining the correctness of any return, or o making a return when none has been made, or o collecting any such liability, or o evaluating tax compliance, or o in determining the liability of any person for tax. Take note of Sec 5 (b): the BIR can issue access letters addressed to a 3rd party in relation to the investigation of a taxpayer. The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. In fact, the BIR can accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. (Fitness by Design v CIR) The rule on the “best evidence obtainable” applies when a tax report is required by law for the purpose of assessment and it is not available or when the tax report is incomplete or fraudulent. (Sy Po v CTA) The failure of the taxpayers to present their books of accounts for examination is a reason for the CIR to resort to his powers.
SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax Administration and Enforcement. (A) Examination of Returns 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. 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, 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.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (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 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 and 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. (2) Any taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A)(2) 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. (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 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 law or in the normal course of administrative practice and that it is 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. "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 the receipt of the request. If the Commissioner is unable to obtain and provide the information within ninety (90) days from the receipt of the request, due to obstacles encountered in furnishing the information or when the bank or financial institution
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two 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 of 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 submission or preparation of financial statements accompanying the tax returns.
Take note of the amendment by RA 10021 to Subsection F. o Bank deposits can be examined by the CIR, in the following instances: A decedent to determine his gross estate, or Any taxpayer who has filed an application for compromise, or Pursuant to an international convention or tax agreement, which the Philippines is a signatory of. Read with the amendment to Sec 71 and Sec 270.20
SEC. 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; 20
SEC. 71. Disposition of Income Tax Returns, Publication of Lists of Taxpayers and Filers. - After the assessment shall have been made, as provided in this Title, the returns, together with any corrections thereof which may have been made by the Commissioner, shall be filed in the Office of the Commissioner and shall constitute public records and be open to inspection as such upon the order of the President of the Philippines, under rules and regulations to be presented by the Secretary of Finance, upon recommendation of the Commissioner. "The Commissioner may, in each year, cause to be prepared and published in any newspaper the lists containing the names and addresses of persons who have filed income tax returns. "Income tax returns of specific taxpayers subject of a request for exchange of information by 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, shall be open to inspection upon the order of the President if the Philippines under rules and regulations as may be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. SEC. 270. Unlawful Divulgence of Information. - Except as provided in Sections 6(F) and 71 of this Code and Section 26 of Republic Act No. 6388, any officer or employee of the Bureau of Internal Revenue who divulges to any person or makes known in any other manner than may be provided by law information regarding the business, income, or estate of any taxpayer, the secrets, operation, style or work, or apparatus of any manufacturer or producer, or confidential information regarding the business of any taxpayer, knowledge of which was acquired by him in the discharge of his official duties, shall, upon conviction for each act or omission, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000), or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both. "Any officer or employee of the Bureau of Internal Revenue who divulges or makes known in any other manner to any person other than the requesting foreign tax authority information obtained from banks and financial institutions pursuant to Section 6(F), knowledge or information acquired by him in the discharge of his official duties, shall, upon conviction, be punished by a fine of not less than Fifty thousand pesos (P50,000) but not more than One hundred thousand pesos (P100,000), or suffer imprisonment of not less than two (2) years but not more than five (5) years, or both
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (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.
The CIR may delegate the power to assess taxes to his subordinates. (Republic v Hizon) o But he cannot delegate the power: To recommend the promulgation of rules and regulations by the Sec of Finance, To issue rulings of first impression or to reverse, revoke or modify any existing ruling of the bureau, To compromise or abate any tax liability but if P500,000 or less, he can delegate To assign or reassign officers to establishments where excise tax articles are produced or kept.
Tax Assessment SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. (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 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 repre sentative 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
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two 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.
An assessment is an official action by an administrative officer to determine the tax due of the taxpayer. It consists of: o a computation of the amount of tax that must be paid by the taxpayer, o coupled with a demand to pay the tax within a specified period of time. There are two kinds of assessment: 1. Self-assessment (Section 56 (A)) a. This is when the taxpayer files his return and pays 2. Deficiency assessment (Section 56 (B) a. This occurs upon discovery of the BIR that the self-assessment was either deficient, or when no return was made by the taxpayer
1. Tax assessment by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. (Sy Po v CTA) 2. However, assessments cannot be based on mere presumptions on the part of the government. There must be a minimum effort on the government before the presumption of correctness sets in. (CIR v Benipayo, wherein the Court said that a charge of fraud against a taxpayer is a serious one and must be supported by clear and convincing proof). 3. Mandamus does not lie to compel the CIR to impose a tax assessment not found by him to be proper. (Meralco Securities v Savellano, a case where an informer wanted his reward) 4. The assessment must always be addressed to the proper party. Ok, you’ve got a deficiency tax assessment, what happens now? (RR 12-99, Reyes) 1. The revenue officer who audited the taxpayer’s records shall state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency taxes 2. The BIR will inform the taxpayer of the discrepancies and will call the taxpayer for a conference, using a Notice of Informal Conference. a. Taxpayer has 15 days from receipt of the Notice to respond. If he doesn’t, default 3. The finding of the examiner and the response of the taxpayer will be reviewed by the Assessment Division of the Revenue District Officer 4. If there is sufficient basis for an assessment, the BIR will issue a pre-assessment notice (PAN) stating the facts, laws, rules, regs, and jurisprudence on which the proposed assessment is based a. Taxpayer has 15 days from receipt of the PAN to respond. If he doesn’t, default. 5. If the taxpayer is in DEFAULT or his response is NOT meritorious, the BIR will issue a formal letter of demand and assessment. It too will state the facts, laws, etc etc. 6. The taxpayer must file a letter of protest within 30 days thereof. He too should state the laws, facts, etc etc. a. For issues which he did not raise, a collection letter shall be issue telling the taxpayer to pay up. b. For issues protested, the prescriptive period on assessment and collection will be suspended. c. If the taxpayer failed to file a valid protest within the period, the assessment will become final, executory and demandable. (yari ka boy!) Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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7. The taxpayer must submit supporting documents within 60 days from filing his letter of protest. If he doesn’t, assessment shall become… Final. Executory. And. Demandable!!!!!!!! 8. If the protest is denied in whole or in part, appeal to the CTA within 30 days from date of receipt of decision a. But if the denial was by an agent of the Commissioner, protest first to the Commissioner within 30 days. b. If the commissioner or his agent fails to act on the taxpayer’s protest within 180 days from the submission of documents, the taxpayer has to appeal to the CTA within 30 days from the lapse of the 180 day period. If not, yari ka na naman. 9. Within 15 days from receipt of the decision of the CTA, appeal it to the SC. Filing of tax return BIR finds deficiency Notice of Informal Conference (15 days to respond) PAN (15 days to respond) Formal Assessment (30 days to protest) Taxpayer Protest Letter Submit Supporting Documents (60 days from time of protest letter) BIR Decision Appeal to CTA (within 30 days from decision) BIR no decision in 180 days Appeal to CTA (within 30 days from lapse of 180 days)
When is the PAN not needed? (Formal Assessment enough) 1. Any deficiency tax is the result of mathematical error in the computation of the tax evident on the face of the return 2. Discrepancy between the tax withheld and the amount actually remitted by the withholding agent 3. Taxpayer opted to claim a refund or tax credit for excess creditable withholding tax carried it over and automatically applied the amount claimed against the estimated tax liabilities for the taxable quarter of the succeeding taxable year 4. Excise tax due on excisable articles has not been paid 5. When an article locally purchase or imported by an exempt person has been sold, traded or transferred to non-exempt person
Remedies of the Government
The government has the following tax remedies for its tax collection and tax enforcement: 1. Compromise and abatement 2. Tax lien 3. Distraint and levy 4. Forfeiture 5. Civil penalties and interests 6. Civil action 7. Criminal action The government can avail of these remedies of collection when the assessment has become final, executory and demandable. o When does that happen? Um, read the previous section.
Compromise Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The Commissioner may (A) Compromise the Payment of any Internal Revenue Tax, when: (1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or (2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. The compromise settlement of any tax liability shall be subject to the following minimum amounts: For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax. Where the basic tax involved exceeds One million pesos (P1,000.000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners.
The grounds for compromise are: 1. Doubtful validity of the claim against the taxpayer, or 2. Financial incapacity of the taxpayer The BIR and the law allows compromise because “may tulog” (a 70s term that Atty. Montero uses). In other words, the BIR would rather compromise than go to court because there is a chance that once brought to court, they might not collect because of some rabbit that the taxpayer might pull out of his hat. A compromise in extra-judicial settlement of the taxpayer’s criminal liability for his violation is consensual in character, hence, may not be imposed on the taxpayer without his consent. (RR 12-99) The cases which may be compromised are: 1. Delinquent accounts 2. Pending admin cases under admin protest after issuance of final assessment notice to the taxpayer 3. Civil tax cases being disputed before the courts 4. Collection cases filed in courts 5. Criminal violations o EXCEPT if 1) already filed in court or 2) involving criminal tax fraud The following cases can NOT be compromised: 1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayer’s obligation to withhold. (Atty Montero asked why, don’t know why!) 2. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative 3. Criminal violations already filed in court; 4. Delinquent accounts with duly approved schedule of installment payments (taxpayer already given a chance to pay in installments, gusto pang magcompromise, grabe na!); 5. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. (taxpayer already agreed to the reduction, gusto pang magcompromise, sobra na!) 6. Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment This was also the doctrine in Rovero v Amparo 7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer (it’s not the taxpayer who will pay anyway, but the estate) What are the examples for doubtful validity? 1. Delinquent account/disputed assessment resulted from a jeopardy assessment a. Jeopardy assessment is an assessment without the benefit of complete or partial audit by an authorized revenue officer
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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2.
3.
4. 5. 6.
b. These assessments are usually done just before the end of the prescription period. c. Thus, they are called “jeopardy” because the tax is in jeopardy of not being collected at all and the officer is in jeopardy of losing his job. Nag-assess na lang para lang may ma-assess. The assessment seems to be: a. Arbitrary, b. Based on presumptions, and c. There is reason to believe that is lacking in legal/factual basis There is reason to believe that the assessment is lacking in legal and factual basis and taxpayer failed: a. to file an admin protest because of alleged failure to receive notice of assessment, or b. to file a request for reinvestigation reconsideration within 30 days from receipt of final assessment notice, or c. to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof. The assessments were issued on or after January 1, 1998, where the demand notice allegedly failed to comply with the formalities prescribed under Sec. 228 of the National Internal Revenue Code of 1997 Assessments made based on the “Best Evidence Obtainable Rule” and there is reason to believe that the same can be disputed by sufficient and competent evidence The assessment was: a. issued within the period extended by the taxpayer’s execution of Waiver of Statute of Limitations and b. the waiver’s authenticity is being questioned and c. there is strong reason to believe and evidence to prove that it is not authentic.
What are examples of financial incapacity? 1. Corporation ceased or dissolved (but the tax liabilities for the assets distributed to the stockholders as return of capital can not be compromised) 2. Taxpayer has a surplus deficit resulting to capital impairment by at least 50% a. Provided taxpayer has no sufficient liquid asset to satisfy liability b. Provided that amounts payable or due to stockholders other than businessrelated transactions which are properly includible in the regular “accounts payable” are by fiction of law considered as part of capital and not liability 3. Net Worth deficit (for corps), and for an individual, if he has no other leviable properties except his family home 4. Taxpayer is a compensation earner and he has no more leviable assets except his family home 5. Taxpayer declared to be bankrupt by any court/tribunal/authority/body/government agency Minimum Compromise Rates Based on financial incapacity 10% of the basic assessed tax Based on doubtful validity 40% of the basic assessed tax Where the basic tax involved exceeds P1m or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board. The expansion and discussion are based on RR 30-2002. Abatement and Cancellation of Tax Liability Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (B) Abate or Cancel a Tax Liability, when: (1) The tax or any portion thereof appears to be unjustly or excessively assessed; or (2) The administration and collection costs involved do not justify the collection of the amount due. All criminal violations may be compromised except: (a) those already filed in court, or (b) those involving fraud.
Abatement of the penalties and/or interest is allowed when: 1. The taxes or any portion thereof appears to be unjustly or excessively assessed, or 2. The administration and collection costs do not justify the collection of the amount due. What are the instances where there appears to be unjust or excessive assessment? 1. Filing of the return/payment was made at the wrong venue 2. Taxpayer’s mistake in payment of tax was due to erroneous written advice of a revenue officer 3. Taxpayer’s non-compliance is due to a difficult interpretation of said law 4. Failure to pay on time because of substantial losses from prolonged labor disputes, force majeure, legitimate business reverses 5. Failure to pay because of circumstances beyond his control In 4 & 5, the abatement will only cover the surcharge and the compromise penalty, not the interest. 6. Late payment of tax under meritorious circumstances like: One-day late filing in the bank Use of wrong tax form but correct amount of tax was remitted Filing an amended return under meritorious circumstances (here, only penalties are abated, not interest) Surcharge erroneously imposed Late filing due to unresolved issue on classification/valuation of real property (for capital gains) Offsetting of taxes of the same kind Offsetting of one kind of withholding against the underpayment of another kind Late remittance of withholding tax on compensation of expats Wrong use of the Tax Credit Certificate Analogous cases What are the instances where the collection costs are more than the amount sought to be collected (i.e. not worth it)? o Basically, cases where the taxpayer appealed the assessment or is contesting an assessment which had already been reinvestigated and other meritorious circumstances o What’s important is that the abatement of the surcharge and compromise will only be allowed upon written application by the taxpayer that he is signifying his willingness to pay the basic tax and interest or just the basic tax (depending on the circumstances) The expansion and discussion are based on RR 13-2001. Tax Liens
SEC. 219. Nature and Extent of Tax Lien. - If any person, corporation, partnership, joint-account (cuentas en participacion), association or insurance company liable to pay an internal revenue tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner until paid, with interests, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer: Provided, That this lien shall not be valid against any mortgagee purchaser or judgment creditor until notice of such lien shall be filed by the Commissioner in the office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount demanded shall be a lien in favor of the government from the time the assessment was made by the CIR until paid with interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer However, the lien shall not be valid against any mortgagee, purchaser or judgment creditor until notice of such lien is registered in the office of the RD. Well-settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicted on a judgment. (CIR v NLRC)
Distraint and Levvvvvvvvvy!!!!!!! WHAT UP! SEC. 205. Remedies for the Collection of Delinquent Taxes. - The civil remedies for the collection of internal revenue taxes, fees or charges, and any increment thereto resulting from delinquency shall be: (a) By distraint of goods, chattels, or effects, and other personal property of whatever character, including stocks and other securities, debts, credits, bank accounts and interest in and rights to personal property, and by levy upon real property and interest in rights to real property; and (b) By civil or criminal action. Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes: Provided, however, That the remedies of distraint and levy shall not be availed of where the amount of tax involve is not more than One hundred pesos (P100). The judgment in the criminal case shall not only impose the penalty but shall also order payment of the taxes subject of the criminal case as finally decided by the Commissioner. The Bureau of Internal Revenue shall advance the amounts needed to defray costs of collection by means of civil or criminal action, including the preservation or transportation of personal property distrained and the advertisement and sale thereof, as well as of real property and improvements thereon.
Collection by distraint and levy are known as summary, extrajudicial or administrative enforcement remedies. o They are distinguished from remedies of collection by civil and criminal actions, where are judicial in nature. However, the remedies of distraint and levy, as well as collection by civil and criminal action may by be pursued singly or independently of each other or all of them simultaneously. Distraint is enforced on personal property. Levy is enforced on real property.
Let’s talk about distraint. There are two kinds of distraint: o ACTUAL distraint, wherein actual delinquency in tax payment is necessary; and o CONSTRUCTIVE distraint, wherein no actual delinquency is necessary. SEC. 206. Constructive Distraint of the Property of a Taxpayer. - To safeguard the interest of the Government, the Commissioner may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any 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 to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him. The constructive distraint of personal property shall be affected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same ;in any manner whatever, without the express authority of the Commissioner. In case the taxpayer or the person having the possession and control of the property sought to be placed under constructive distraint refuses or fails to sign the receipt herein referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnessed, leave a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint.
Constructive distraint is a preventive remedy of the Government which aims at forestalling possible dissipation of the taxpayer’s assets when delinquency sets in. Again, actual delinquency is not necessary before this can be resorted to.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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Some instances when constructive distraint may be availed of; the CIR believes the taxpayer: o Is retiring from any business subject to tax, o Intends to leave the Philippines o Intends to remove his property from the Philippines o Intends to hide or conceal his property o Performs any act tending to obstruct the proceedings for collecting the tax due. How is constructive distraint effected? o The taxpayer will be required to sign a receipt covering the property distrained and obligate himself to: Preserve it intact and unaltered, and Not dispose of it in any manner, without express authority of the CIR o If the taxpayer refuses, the officer will prepare a list of the properties distrained and will leave a copy thereof in the premises, in the presence of 2 witnesses. Procedure for actual distraint: 1. Commencement of distraint proceedings 2. Service of warrant of distraint 3. Notice of sale of distrained property 4. Release of distrained property, prior to sale 5. Sale of property distrained 6. Purchase by Government at sale upon distraint
Codal provisions for the process, each box corresponds to one step of the process (A) Distraint of Personal Property. - Upon the failure of the person owing any delinquent tax or delinquent revenue to pay the same at the time required, the Commissioner or his duly authorized representative, if the amount involved is in excess of One million pesos (P1,000,000), or the Revenue District Officer, if the amount involved is One million pesos (P1,000,000) or less, shall seize and distraint any goods, chattels or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property of such persons ;in sufficient quantity to satisfy the tax, or charge, together with any increment thereto incident to delinquency, and the expenses of the distraint and the cost of the subsequent sale. A report on the distraint shall, within ten (10) days from receipt of the warrant, be submitted by the distraining officer to the Revenue District Officer, and to the Revenue Regional Director: Provided, That the Commissioner or his duly authorized representative shall, subject to rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, have the power to lift such order of distraint: Provided, further, That a consolidated report by the Revenue Regional Director may be required by the Commissioner as often as necessary. SEC. 208. Procedure for Distraint and Garnishment. - The officer serving the warrant of distraint shall make or cause to be made an account of the goods, chattels, effects or other personal property distrained, a copy of which, signed by himself, shall be left either with the owner or person from whose possession such goods, chattels, or effects or other personal property were taken, or at the dwelling or place of business of such person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and note of the time and place of sale. Stocks and other securities shall be distrained by serving a copy of the warrant of distraint upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the corporation, company or association, which issued the said stocks or securities. Debts and credits shall be distrained by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The warrant of distraint shall be sufficient authority to the person owning the debts or having in his possession or under his control any credits belonging to the taxpayer to pay to the Commissioner the amount of such debts or credits. Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall tun over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government. SEC. 209. Sale of Property Distrained and Disposition of Proceeds. - The Revenue District Officer or his duly authorized representative, other than the officer referred to in Section 208 of this Code shall, according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two (2) public places in the municipality or city where the
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two distraint is made, specifying; the time and place of sale and the articles distrained. The time of sale shall not be less than twenty (20) days after notice. One place for the posting of such notice shall be at the Office of the Mayor of the city or municipality in which the property is distrained. SEC. 210. Release of Distrained Property Upon Payment Prior to Sale. - If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. SEC. 209 (CONTINUED) At the time and place fixed in such notice, the said revenue officer shall sell the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction, to the highest bidder for cash, or with the approval of the Commissioner, through duly licensed commodity or stock exchanges. In the case of Stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and a copy thereof furnished the corporation, company or association which issued the stocks or other securities. Upon receipt of the copy of the bill of sale, the corporation, company or association shall make the corresponding entry in its books, transfer the stocks or other securities sold in the name of the buyer, and issue, if required to do so, the corresponding certificates of stock or other securities. Any residue over and above what is required to pay the entire claim, including expenses, shall be returned to the owner of the property sold. The expenses chargeable upon each seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending ;the sale, and no charge shall be imposed for the services of the local internal revenue officer or his deputy. SEC. 212. Purchase by Government at Sale Upon Distraint. - When the amount bid for the property under distraint is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the national Government for the amount of taxes, penalties and costs due thereon. Property so purchased may be resold by the Commissioner or his deputy, subject to the rules and regulations prescribed by the Secretary of Finance, the net proceeds therefrom shall be remitted to the National Treasury and accounted for as internal revenue.
The procedure for levy of real property is: 1. Commencement of levy proceedings 2. Service of warrant of levy 3. Advertisement for sale 4. Public sale of the property under levy 5. Redemption of property sold 6. Forfeiture to the Government for want of bidder 7. Resale of real estate taken for taxes 8. Further distraint and levy
Codal provisions for the process, each box corresponds to one step of the process (B) Levy on Real Property. - After the expiration of the time required to pay the delinquent tax or delinquent revenue as prescribed in this Section, real property may be levied upon, before simultaneously or after the distraint of personal property belonging to the delinquent. To this end, any internal revenue officer designated by the Commissioner or his duly authorized representative shall prepare a duly authenticated certificate showing the name of the taxpayer and the amounts of the tax and penalty due from him. Said certificate shall operate with the force of a legal execution throughout the Philippines. Levy shall be affected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds for the province or city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question. In case the warrant of levy on real property is not issued before or simultaneously with the warrant of distraint on personal property, and the personal property of the taxpayer is not sufficient to satisfy his tax delinquency, the Commissioner or his duly authorized representative shall, within thirty (30) days after execution of the distraint, proceed with the levy on the taxpayer's real property. Within ten (10) days after receipt of the warrant, a report on any levy shall be submitted by the levying officer to the Commissioner or his duly authorized representative: Provided, however, That a consolidated report by the
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two Revenue Regional Director may be required by the Commissioner as often as necessary: Provided, further, That the Commissioner or his duly authorized representative, subject to rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, shall have the authority to lift warrants of levy issued in accordance with the provisions hereof. SEC. 213. Advertisement and Sale. - Within twenty (20) days after levy, the officer conducting the proceedings shall proceed to advertise the property or a usable portion thereof as may be necessary to satisfy the claim and cost of sale; and such advertisement shall cover a period of a least thirty (30) days. It shall be effectuated by posting a notice at the main entrance of the municipal building or city hall and in public and conspicuous place in the barrio or district in which the real estate lies and ;by publication once a week for three (3) weeks in a newspaper of general circulation in the municipality or city where the property is located. The advertisement shall contain a statement of the amount of taxes and penalties so due and the time and place of sale, the name of the taxpayer against whom taxes are levied, and a short description of the property to be sold. At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the taxes, penalties and interest. If he does not do so, the sale shall proceed and shall be held either at the main entrance of the municipal building or city hall, or on the premises to be sold, as the officer conducting the proceedings shall determine and as the notice of sale shall specify. Within five (5) days after the sale, a return by the distraining or levying officer of the proceedings shall be entered upon the records of the Revenue Collection Officer, the Revenue District officer and the Revenue Regional Director. The Revenue Collection Officer, in consultation with the Revenue district Officer, shall then make out and deliver to the purchaser a certificate from his records, showing the proceedings of the sale, describing the property sold stating the name of the purchaser and setting out the exact amount of all taxes, penalties and interest: Provided, however, That in case the proceeds of the sale exceeds the claim and cost of sale, the excess shall be turned over to the owner of the property. The Revenue Collection Officer, upon approval by the Revenue District Officer may, out of his collection, advance an amount sufficient to defray the costs of collection by means of the summary remedies provided for in this Code, including ;the preservation or transportation in case of personal property, and the advertisement and subsequent sale, both in cases of personal and real property including improvements found on the latter. In his monthly collection reports, such advances shall be reflected and supported by receipts. SEC. 214. Redemption of Property Sold. - Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have the right of paying to the Revenue District Officer the amount of the public taxes, penalties, and interest thereon from the date of delinquency to the date of sale, together with interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of purchase to the date of redemption, and such payment shall entitle the person paying to the delivery of the certificate issued to the purchaser and a certificate from the said Revenue District Officer that he has thus redeemed the property, and the Revenue District Officer shall forthwith pay over to the purchaser the amount by which such property has thus been redeemed, and said property thereafter shall be free form the lien of such taxes and penalties. The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption. SEC. 215. Forfeiture to Government for Want of Bidder. - In case there is no bidder for real property exposed for sale as herein above provided or if the highest bid is for an amount insufficient to pay the taxes, penalties and costs, the Internal Revenue Officer conducting the sale shall declare the property forfeited to the Government in satisfaction of the claim in question and within two (2) days thereafter, shall make a return of his proceedings and the forfeiture which shall be spread upon the records of his office. It shall be the duty of the Register of Deeds concerned, upon registration with his office of any such declaration of forfeiture, to transfer the title of the property forfeited to the Government without the necessity of an order from a competent court. Within one (1) year from the date of such forfeiture, the taxpayer, or any one for him may redeem said property by paying to the Commissioner or the latter's Revenue Collection Officer the full amount of the taxes and penalties, together with interest thereon and the costs of sale, but if the property be not thus redeemed, the forfeiture shall become absolute. SEC. 216. Resale of Real Estate Taken for Taxes. - The Commissioner shall have charge of any real estate obtained by the Government of the Philippines in payment or satisfaction of taxes, penalties or costs arising under this Code or in compromise or adjustment of any claim therefore, and said Commissioner may, upon the giving of not less than twenty (20) days notice, sell and dispose of the same of public auction or with prior approval of the Secretary of Finance, dispose of the same at private sale. In either case, the proceeds of the sale shall be
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two deposited with the National Treasury, and an accounting of the same shall rendered to the Chairman of the Commission on Audit. SEC. 217. Further Distraint or Levy. - The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected.
Forfeiture SEC. 224. Remedy for Enforcement of Forfeitures. - The forfeiture of chattels and removable fixtures of any sort shall be enforced by the seizure and sale, or destruction, of the specific forfeited property. The forfeiture of real property shall be enforced by a judgment of condemnation and sale in a legal action or proceeding, civil or criminal, as the case may require.
The difference between distraint/levy (or collectively, “seizure”) and forfeiture is o In seizure, the residue after deducting tax liability and expenses shall go to the taxpayer. o In forfeiture, all the proceeds of the sale will go to the government.
Civil Penalties and Interest CHAPTER I ADDITIONS TO TAX SEC. 247. General Provisions. (a) The additions to the tax or deficiency tax prescribed in this Chapter shall apply to all taxes, fees and charges imposed in this Code. The Amount so added to the tax shall be collected at the same time, in the same manner and as part of the tax. (b) If the withholding agent is the Government or any of its agencies, political subdivisions or instrumentalities, or a government-owned or controlled corporation, the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for the additions to the tax prescribed herein. (c) the term "person", as used in this Chapter, includes an officer or employee of a corporation who as such officer, employee or member is under a duty to perform the act in respect of which the violation occurs.
Penalties and interests apply to ALL taxes, fees and charges imposed by the NIRC. Tax laws imposing penalties for delinquencies are intended to hasten tax payments by punishing evasions or neglect of duty in respect thereof. It is mandatory to collect penalty and interest at the stated rate in case of delinquency. (PRC v CA)
SEC. 248. Civil Penalties. (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: (1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or (2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or (4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment. (B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any payment has been made on the basis of such return before the discovery of the falsity or fraud: Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for overstatement of deductions, as mentioned herein.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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Civil penalties can be divided into two categories – those with a 25% surcharge, and those with a 50% surcharge. A penalty of 25% on the amount due will be imposed in the following cases: 1. Failure to file any return AND pay the tax due 2. Filing a return with an internal revenue officer other than those with whom the return is required to be filed 3. Failure to pay the deficiency tax within the time prescribed in the notice of assessment 4. Failure to pay the full or part of the amount of tax stated in the return (or full amount when no return is required) on or before the date prescribed for its payment o Note: There is NO 25% surcharge when you file on time, pay the full amount stated in the return, but subsequently find out that the return filed and the amount paid was erroneous. See situation 4.1 and 4.2 below. A penalty of 50% of the deficiency tax will be imposed in the following cases: 1. Willful neglect to file a return within the period prescribed by law 2. False or fraudulent return is willfully made a. Prima facie evidence of a false and fraudulent return when substantial underdeclaration of taxable income or substantial overstatement of deductions (failure to declare an amount exceeding 30% for taxable income or actual deductions) Note on willful neglect: if the taxpayer voluntarily files the return, without notice from the BIR, only 25% surcharge shall be imposed for late filing and late payment of the tax. o But if the taxpayer files the return only after prior notice in writing from the BIR, then the 50% surcharge will be imposed. In other words, no demand on the BIR and the taxpayer pays, albeit late, 25%. With demand by the BIR, 50%. The 25% surcharge for non-payment of the sales tax is not imposable where such nonpayment arose from a legitimate dispute on whether an article is subject or not to the sales tax. (CIR v Republic Cement, wherein Republic Cement’s erroneous payment was based on the original stand of the BIR regarding the classification of cement. CIR should have abated the surcharge. This ruling seems to have been incorporated to RR 13-2001 on abatement) o Where imposition of a tax statute was controversial, taxpayer may not be held liable to pay surcharge and interest. It should be liable only for tax proper and should not be held liable for the surcharge and interest. (Cagayan Electric v CIR) Willful neglect to file the required tax return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal consequences, can not be presumed. (CIR v Air India) o The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to give up some legal right. (Aznar v CTA)
SEC. 249. Interest. (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid. (B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. (C) Delinquency Interest. - In case of failure to pay: (1) The amount of the tax due on any return to be filed, or
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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+ amdg Taxation Two (2) The amount of the tax due for which no return is required, or (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax. (D) Interest on Extended Payment. - If any person required to pay the tax is qualified and elects to pay the tax on installment under the provisions of this Code, but fails to pay the tax or any installment hereof, or any part of such amount or installment on or before the date prescribed for its payment, or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest at the rate hereinabove prescribed on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid.
There are four kinds of interest in this article: o General interest o Deficiency o Delinquency o Extended Payment interest For general, the interest on unpaid taxes is 20% per annum on any unpaid amount of tax from the date prescribed for payment until the amount is fully paid. For deficiency interest, the rate is 20% per annum on any deficiency in the tax due from the date prescribed for its payment until full payment For delinquency interest, 20% per annum on the unpaid amount in case of failure to pay: o Amount of tax due on any return required to be filed, or o Amount of tax due for which no return is required, or o Deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the CIR. For interest on extended payment, the rate is 20% per annum. o This is imposed when a taxpayer is qualified and elects to pay the tax on installment, but fails to pay the tax or any installment thereof, or pays it beyond the period of payment; or o CIR has authorized an extension of time within which pay a tax or a deficiency tax or any part thereof.
Situations based on RR 12-99 1. Late filing and late payment of the tax; no BIR intervention/demand Rocky forgot to file on April 15. He filed on June 30 after he woke up and realized his error. Penalties: 25% surcharge for late filing and late payment 20% general interest from date due up to time paid Result: Pay the tax due + penalties 2. Tax return filed on time, but filed through an internal revenue officer other than with whom the return is required to be filed. (Paid in the wrong venue) Rocky paid on April 15, but he paid to the wrong agent bank. Penalties: 25% surcharge only No interest charge because he paid on time, just at the wrong place Result: Pay the surcharge (no need to pay the tax due, you paid it na eh) 3. Late filing and late payment due to taxpayer’s willful neglect; i.e. did not file, then BIR notified him to pay by a certain time, and only then did he file and pay his tax. Rocky didn’t file on April 15. He didn’t care until a demand letter was sent to him by the BIR to pay by June 30. He paid on June 30. Penalties: 50% surcharge 20% general interest from date due (not from demand) up to time paid Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
85
+ amdg Taxation Two
Result: Pay tax, plus penalties 4. Penalty or penalties for deficiency tax As a rule, no surcharge is imposed on deficiency tax and on the basic tax. However, if the amount due inclusive of penalties is not paid on or before the due date stated on the demand letter, the corresponding surcharge will be imposed. 4.1 Paid on time, error in computation resulting to deficiency tax. Rocky filed his income tax return on time (April 15) and paid P100,000. Upon pre-audit, it was discovered that there was an error in computation. The correct amount due was P120,000. He was assessed for deficiency income tax in a letter of demand and assessment noticed, telling him to pay by June 30. He did. Penalties: 20% deficiency interest imposed on the deficiency tax from date due up to time paid No surcharge (Note here that the there are no grounds for the imposition of the 25% surcharge) Paid on time, BIR disallowed deductions resulting to deficiency tax. Safari, Inc filed its return and paid on time tax amounting to P100,000. BIR disallowed its deductions, so their taxable income went back up. They were sent a PAN stating that the correct amount due was P170,000. They failed to protest. BIR sent them a formal demand telling them to pay by June 30. They did. Penalties: 20% deficiency interest imposed on deficiency tax from date due up to time paid No surcharge (No statutory basis for imposition of the 25% surcharge) Paid on time, but return found to be false and fraudulent resulting to deficiency tax. McJonald’s, Inc filed its return on time in April 15 and paid P175,000 for its income tax (it declared a P500,000 net taxable income). However, the BIR discovered that it did not report a taxable income of another P500,000 – a clear case of false and fraudulent return. This amounted to a deficiency income tax of another P175,000. They were informed by a PAN, but they failed to protest. A formal letter of demand and assessment notice was issued to them on May 31 demanding them to pay by June 30. They paid. Penalties: 50% surcharge (deficiency tax is the base) 20% deficiency interest imposed on deficiency tax from date due up to time paid 5. Late payment of deficiency tax assessed In general, the deficiency tax assessed shall be paid by the taxpayer within the time prescribed in the notice and demand, otherwise, such payer shall be liable for the civil penalties incident to the late payment. Based on 4.3, the amount due (the deficiency assessed plus the penalties) imposed on McJonald’s was P304,771.67. The corporation did not pay on June 30, the deadline for the payment of the assessment. As such, the corporation shall be considered late in payment of the said assessment. They pay on July 31. Penalties: 25% surcharge on the P304,771.67 (i.e unpaid amount supposed to be paid on June 30) 20% delinquency interest imposed on the P304, 771.67 (i.e. total unpaid amount due on June 30), from the day after the payment was due until time of actual payment Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
86
+ amdg Taxation Two
In a case like this, he feels the full force of the law. First, a 50% surcharge was imposed on him for his fraudulent return, to be computed from the deficiency assessed by the BIR. Second, 20% deficiency interest was also imposed on the deficiency assessed by the BIR. Third, because of his late payment of the deficiency tax and the corresponding penalties, a 25% surcharge is now imposed on him based on the total unpaid amount he was supposed to pay. (Statutory basis? Sec 248 (A)3) Fourth, 20% delinquency interest is imposed on the total unpaid amount he was supposed to pay on June 30. (Note the difference of the base of the two interest impositions: The deficiency interest imposition, computed from April 15 to June 30, is computed based on the deficiency tax. The delinquency interest imposition, computed from July 1 to July 31, is computed based on the total unpaid amount assessed in the May 31 demand, i.e. the deficiency tax plus the penalties) 6. Computation of 20% interest per annum in case of partial or installment payment of a tax liability. (Based on Sec 249) If a taxpayer requests to pay his income tax liability in installment and the request is approved, no 25% surcharge shall be imposed for the late payment of the tax since its deadline for payment has been duly extended. However, 20% interest per annum for the extended payment shall be imposed, computed based on the diminishing balance of the “unpaid amount”, pursuant to Section 249 (D). If the taxpayer’s request for extension of the period within which to pay is made on or before the deadline prescribed for payment of the tax due, no 25% surcharge. But if the request is made after the deadline prescribed for payment, the taxpayer is already late in payment, in which case, the 25% surcharge shall be imposed, even if payment of the delinquency be allowed in partial amortization. Analysis Actual Liability: P10m On April 15 , paid: 1. Late, but unilaterally pays the balance
A
Basis
5m
B
Basis
0
No surcharge 20% interest
2. BIR demands to pay on June 30, paid on June 30
No surcharge 20% deficiency interest
3. BIR demands
25%
surcharge
Filed on time, but error in computation, no BIR demand. Still filed on time and error in computation. BIR demands, but paid on time required by BIR, so 248(A3) no application. BIR demands
25% surcharge 20% interest
Late filing, late payment, no BIR demand.
25% surcharge 20% deficiency interest
Late filing, late payment. BIR demands, but paid on time required by BIR, so 248 (A3) no application.
25%
BIR
surcharge
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
demands
87
+ amdg Taxation Two
to pay on June 30, but paid on July 31
on unpaid amount 20% delinquency interest on unpaid amount
but does NOT pay on time required by BIR, 248 (A3) applies.
on unpaid amount 20% delinquency interest on unpaid amount
but does NOT pay on time required by BIR, 248 (A3) applies.
Analyzing the chart, if you compare situation 1 and situation 2, they are identical, there is no additional violation. Why? o Because surcharge is imposed on deficiency tax (plus penalties), only when it is NOT paid by the date indicated on the demand period. o So, if you pay within the period in the demand letter, you will not incur the additional 25% surcharge on the unpaid deficiency tax (plus penalties). Atty. Montero said the 50% surcharge is a matter of substance. Also note that there is no 25% surcharge when you file and pay on time but it’s subsequently discovered that there was an error. Only the interest will be imposed in that case (Situation 1 above)
Civil Action SEC. 220. Form and Mode of Proceeding in Actions Arising under this Code. - Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the Bureau of Internal Revenue but no civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in court without the approval of the Commissioner.
Basic principle: No civil (or criminal action) for the recovery of taxes shall be filed without the approval of the CIR. The government can collect when the assessment has become final and unappealable. This occurs when: o The taxpayer fails to file an administrative protest with the BIR within 30 days from receipt of assessment o The administrative protest is denied (or not acted upon within 180 days), and he fails to file an appeal with the CTA within 30 days from the receipt of the decision, or from the lapse of the 180 day period
Collection in cases where the assessment is final an unappealable When there is no valid protest, the assessment shall become final and unappealable, and thus the tax shall be collectible. o To be a valid protest, the claim against the assessment must be substantiated. The requirement for the Commissioner to rule on disputed assessments before bringing an action for collection is applicable only in cases where the assessment was actually disputed, adducing reasons in support thereto. (Dayrit v Cruz, wherein the petitioners did not actually contest the assessments by stating the basis – they did not submit the required position paper.) Failure to question the assessments will cause the said assessment to lapse into finality. (Marcos v CA, wherein the Marcoses not only failed to file the required estate tax return, but they also never questioned the assessments served upon them.) Once the assessment is final and executory, an action to collect the tax assessed is akin to an action to enforce a judgment. Hence, there can no longer be any inquiry on merits of the original case. o Thus, raising the defense of prescription in the case for collection is of no merit. (Mambulao Lumber v Republic) Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
88
+ amdg Taxation Two
The taxpayer’s failure to appeal to the CTA in due time made the assessment in question final, executory and demandable. Thus, when the present action for collection was instituted, said taxpayer was already barred from disputing the correctness of the assessment or invoking any defense that would reopen the question of its tax liability on the merits. (Republic v Lim Tian Teng) o A taxpayer who fails to contest the BIR assessment in the CTA cannot contest the same in action to collect. (Basa v Republic) The RTC can acquire jurisdiction over a claim for collection of deficiency taxes only after the assessment made by the CIR has become final and unappealable; not where there is still a pending CTA case. (Yabes v Flojo, wherein the Court ruled that the RTC did not have jurisdiction and thus, must dismiss the case, because there was an appeal to the CTA of the disputed assessment) There is no requirment that the CIR must first rule on the taxpayer’s request for reinvestigation before going to court for the purpose of collecting the tax assessed. (Rep v Lim Tian) o
Criminal action SEC. 205. Remedies for the Collection of Delinquent Taxes. - The civil remedies for the collection of internal revenue taxes, fees or charges, and any increment thereto resulting from delinquency shall be: xxx (b) By civil or criminal action. xxx The judgment in the criminal case shall not only impose the penalty but shall also order payment of the taxes subject of the criminal case as finally decided by the Commissioner. SEC. 220. Form and Mode of Proceeding in Actions Arising under this Code. - Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the Bureau of Internal Revenue but no civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in court without the approval of the Commissioner.
Again, no criminal action for the recovery of taxes shall be filed without the approval of the CIR. The judgment in the criminal case shall not only impose the penalty, but shall also order payment of the taxes subject of the criminal case as finally decided by the Commissioner. Acquittal of taxpayer in a criminal case does not exonerate him from tax liability. His legal duty to pay taxes cannot be affected by his attempt to evade payment. Said obligation is not a consequence of the felonious acts charged in the criminal proceeding, nor is it a mere civil liability arising from a crime that could be wiped out by the judicial declaration of non-existence of the criminal acts charged. (Republic v Patanao) o Civil liability to pay taxes arises from the fact that, for instance, one has engaged himself in business. His civil liability to pay taxes arises not because of any flony but upon the taxpayer’s failure to pay taxes. o The criminal liability arises upon failure of the debtor to satisfy his civil obligation. Computation and assessment of deficiency taxes is not a pre-requisite for criminal prosecution under the NIRC. Hence, protesting an assessment cannot stop criminal prosecution under the NIRC. (Ungab v Cusi) o A criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code. (CIR v Pascor) o A crime is complete when the violator has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the tax. The perpetration of
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
89
+ amdg Taxation Two
the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government’s failure to discover the error and promptly to assess has no connections with the commission of the crime. (Adamson v CA) See discussion on page 97 for prescription of criminal cases.
Prescription of the Government’s Right to Assess & Collect SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) -year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree.
Let’s start with the prescriptive period for assessment. An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. The ultimate purpose of assessment is to ascertain the amount that each taxpayer is to pay. It is a notice to the effect that the amount stated is due as tax and a demand for payment thereof. Assessments made beyond the prescriptive period would not be binding on the taxpayer. (Tupaz v Ulep) General Rule: The right to assess must be done 3 years from: o The day the return was actually filed, or o From the last day for filing the return (if the return was filed before the last day prescribed by law), whichever is later. Why “whichever is later”? This to benefit the government, so they have more time to make the assessment on the taxpayer. Exceptions: 1. False or fraudulent return with intent to evade taxes – within 10 years from discovery of the falsity or fraud 2. Failure or omission to file a return – within 10 years after discovery of failure or omission to file the return 3. Waiver of statute of limitations in writing, which must be made before the expiration of the 3 year period of assessment of taxes – period agreed upon
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
90
+ amdg Taxation Two
Our tax law provides a statute of limitations in the collection of taxes to safeguard taxpayers from any unreasonable examination, investigation or assessment. Thus, it should be liberally construed in order to afford protection to the taxpayers. o As a corollary, the exceptions to the law on prescription should perforce be strictly construed. (CIR v BF Goodrich, wherein the Court said that the negligence or oversight on the part of the BIR with regard to make timely assessments cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to give them peace of mind.) In determining if prescription to assess has indeed set in, the important date to remember is the date when the demand letter or notice is released, mailed or sent by the CIR to the taxpayer. (Basilan Estates v CIR) o Provided the release was effected before prescription sets in, the assessment is deemed made on time – even if the taxpayer actually receives it after the prescriptive period. o However, the fact that the assessment notice was mailed before prescription period sets in must be proved with substantial evidence by the CIR. The presumption that a letter duly directed and mailed was received in the regular course of mail cannot be applied if there is no substantial evidence to prove that the notice was indeed sent. Deficiency income tax assessments cannot be enforced where the tax collector cannot prove that said assessments were served on the taxpayer. (Nava v CIR) o Moreso, if the taxpayer makes a direct denial of receipt of a mailed demand letter, such denial shifts the burden to the Government to prove that such letter was indeed received by the taxpayer. (Republic v CA, 1987). This is an exception to the general rule that there is a presumption of receipt of the demand letter by the taxpayer. (But again, for the presumption to arise, the government has to at least show with substantial evidence that the demand was sent on time.) o If the date on which the assessment is due to prescribe falls on a Saturday, the following day being a Sunday, it is understood that the Government has until the next succeeding business day or Monday within which to assess the tax. (CIR v Western Pacific, ruling probably also applies to dates falling on a national nonworking holiday) Sir’s question: But what if the last day to assess falls on a local holiday – like Quezon City day – is the national government allowed to send the assessment the following work day?
Doctrines regarding returns In order that the filing of a return may serve as the starting point of the period for the making of an assessment, the return must be as substantially complete as to include the needed details on which the full assessment may be made. (Republic v Marsman, wherein Marsman failed to show when the returns were actually made, and assuming that they did file a return, they also failed to show that the return was substantially complete. Hence, the Court ruled that the 10-year period would apply, as there was a ‘failure to file a return.’) If the taxpayer files an amended return which is substantially different from the original return, the period of prescription of the right to issue the deficiency assessment should be counted from the filing of the amended return, and not the original return. (CIR v Phoenix) If the taxpayer files the wrong return, it is as though he filed no return at all. This is true even if all the necessary information was reflected in the erroneous return. In situations Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
91
+ amdg Taxation Two
like this, the 10-year prescriptive period will apply. (Butuan Sawmill v CA, wherein Butuan filed an income tax return for sales tax purposes). It is incumbent upon a taxpayer who wants to avail of the defense of prescription to prove that he indeed submitted a return. If he fails to do so, the conclusion should be that no such return was filed, in which case the Government ahs 10 years within which to make the corresponding assessments. (Taligaman v CIR)
Doctrines regarding fraud, falsity, and the imposition of the 10-year period Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the court. Fraud is never lightly to be presumed because it is a serious charge. Hence, if fraud is not proven, the Government can not use the 10-year period to make the assessment. (CIR v Ayala) o It is not enough that fraud is alleged in the complaint, it must be established. (Republic v Lim De Yu, wherein the BIR was not even sure of the net income of the taxpayer) Claiming fictitious expenses as deductions is a proof of falsity or fraud in the income tax return. (Tan Guan v CTA) There is a difference between “false return” and “fraudulent return.” (Aznar v CTA) o “False return” merely implies deviation from the truth. It’s usually due to mistake, carelessness or ignorance. o “Fraudulent return” implies intentional or deceitful entry with intent to evade the taxes due. o Be it false or fraudulent, what’s the point? Either way, the period to assess will be 10 years anyway. So, why make a distinction? The importance lies in the application of the penalty surcharge. Remember, Aznar also teaches that actual fraud, not constructive fraud, is subject to the 50% penalty surcharge. For the surcharge to apply, it must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. The legal implications of this case are the following: Just because the 10-year period kicks in, it doesn’t necessarily mean that the taxpayer will be slapped with the penalty surcharge. This is what happened in Aznar – the taxpayer was adjudged to have filed a false return, but not a fraudulent one. So, the 10-year period applies, but he wasn’t slapped with the penalty surcharge. If you were the government and you want to use the 10-year period, it will be easier to impute falsity in the part of the taxpayer. Falsity is easier to prove than fraud. The 30% threshold we learned in surcharges doesn’t necessarily apply when it comes to prescription purposes, as it merely raises a presumption of fraud – which must in the end be proven by the government. Speaking of surcharges, the case of CIR v Ayala Securities teaches that collection of surtax on excess profits does not prescribe there being no law providing a prescriptive period therefore. Let’s discuss prescription with collection. SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
92
+ amdg Taxation Two which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) -year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree.
General rule: The prescriptive period to collect the taxes due is 5 years from the date of assessment. Exceptions: 1. False or fraudulent return with intent to evade taxes – within 10 years from discovery without need for prior assessment. The government may file a proceeding in court. 2. Failure or omission to file a return – within 10 years from discovery without need for assessment. 3. Waiver in writing executed before the 5-year period expires – period agreed upon.
The prescriptive period to assess or collect deficiency tax is governed by the NIRC (a special law) and not the Civil Code (a general law). (Guagua v CIR) o The same can be said between the NIRC and the Rules of Court. Hence, claims for taxes may be collected even after the distribution of the decedent’s estate. Claims for estate taxes are exempted from the application of statute of nonclaims. (Vera v Fernandez)
For prescriptive period purposes, the tax is deemed collected if: o If collection is thru summary remedies (distraint and levy), when the government avails of a distraint and levy procedure prescribed under the Code o If collection is thru judicial remedies (civil or criminal), when the government files the complaint with the proper court. A judicial action for the collection of a tax may be initiated by filing of a complain with the proper regular trial court, or where the assessment is appealed to the CTA, by filing an answer to the taxpayer’s petition for review wherein payment of the tax is prayed for. (PNOC v CA, which was a unique case. Read it na lang) The general rule is that there must be an assessment made before collection is resorted to by the government. o The exception is found in Section 222 (A) of the NIRC wherein judicial action to collect the tax liability is permitted without an assessment when the taxpayer files a false or fraudulent return with intent to evade the tax or fails to file a return. Collection must be done within 10 years after the discovery. However, if an assessment is made against the taxpayer, the government cannot avail of Section 222 (A). In Republic v Ret, the Court stated that an assessment against the taxpayer takes the case out of the provisions of Section 222 (A) and places it under Section 222 (C) – or 5 years from the assessment made.
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
93
+ amdg Taxation Two
The period for collecting a tax through a judicial proceeding, in case no return has been filed, is 10 years from the discovery of the omission. A letter by the CIR demanding the amount of a rubber-check previously paid by a taxpayer, should be deemed to be an assessment if it declares and fixes the tax payable against the party thereo and demands the settlement thereof. Hence, the five-year period for collection of the tax due should commence anew from the time said letter of demand was sent to the taxpayer. (Republic v Limaco)
Regular Return was Made Assessment: 3 years Collection: 5 years from assessment
False, Fraudulent or Failure Assessment: 10 years, from discovery Collection: 5 years, from assessment If government does not make an assessment, they can collect within 10 years from discovery. They are, however, limited to purely judicial remedies. (Section 222(A)
Waiver of Statute of Limitations (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) -year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon.
Why go for a waiver? o It’s sometimes advisable to do so to allow the BIR to fix their jeopardy assessments (which are usually excessive.) The taxpayer and the government may extend by mutual agreement in writing the prescriptive period for the assessment and collection of taxes. A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. (Philippine Journalists v CIR) Jurisprudence has given us the essential conditions for a waiver to be valid: o It must be executed by the parties before the lapse of the 3 year prescriptive period for assessment of taxes (Republic v Acebedo). o They must be signed by the CIR or any of his agents. If it isn’t, the waivers are not valid and binding. (CIR v CA, wherein the Court ruled that the waiver is not a unilateral act on the part of the taxpayer.) o It must contain a definite expiration date. (Philippine Journalists v CIR) o It must also contain the date when the waiver was executed (to know whether the waiver was signed within the prescriptive period). o These have been embodied in RMO 20-90, below:
RMO 20-90 1. The waiver must be in proper form prescribed by RMO 20-90. The phrase “but not after_____19__” which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up; 2. The waiver must be signed by the taxpayer himself or his duly authorized representative; 3. The waiver must be duly notarized; 4. The Commissioner of Internal Revenue or the revenue official authorized by him must sign the waiver indicating the BIR’s acceptance and agreement to the waiver. The date of such acceptance by the BIR should be indicated;
Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
94
+ amdg Taxation Two 5. Both the date of execution by the taxpayer and the date of acceptance by the BIR should be prior to 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 in three copies: the original copy to be attached to the docket of the case, the second copy for the taxpayer, and the third copy for the Office accepting the waiver.
o
o
Additionally, the waiver must not reduce the prescriptive period to less than that granted by law to the detriment of the state. It should not diminish the opportunity of the State to collect the taxes due it. (Republic v Lopez). The taxpayer’s waiver of statute of limitations does not cover taxes already prescribed. (Republic v Lim De Yu)
Suspension of Running of Statute of Limitations SEC. 223. Suspension of Running of Statute of Limitations. - The running of the Statute of Limitations provided in Sections 203 and 222 on the making of assessment and the beginning of distraint or levy a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided, that, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines.
The running of the prescriptive period can be suspended in the following situations: 1. When the CIR is prohibited from making an assessment or beginning distraint and levy or a proceeding in court and for 60 days thereafter The periods for assessment and collection are suspended. The filing of a petition for review in the CTA from the decision of the CIR on a protested assessment interrupts the running of the prescriptive period for collection. The pendency of the taxpayer’s appeal in the CTA and in the SC had the effect of temporarily staying the hands of the CIR from collecting. (Republic v Ker) 2. The taxpayer requests for reinvestigation which is granted by the CIR The collection is suspended (the assessment has already been done at this point, so only period to collect is suspended). There is a difference between a request for reconsideration and a request for reinvestigation. (BPI v CIR) o Reconsideration refers to a plea for a re-evaluation of an assessment on the basis of existing records without need of additional evidence. This is basically a mere re-evaluation of existing records. (CIR v Philippine Global) o Reinvestigation refers to a plea for re-evaluation on the basis of newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. o The distinction is essential because the suspension of the period only occurs when the taxpayer requests for a reinvestigation and is granted by the CIR. Why doesn’t a request for reconsideration suspend the period? Because there is nothing which prevents the BIR from collecting – they have all the documents they need. Since no new documents are to be presented in a request for reconsideration, the next step for the BIR is to issue a decision denying the taxpayer’s protest and to initiate proceedings for the collection of the assessed tax, and thus, allow the taxpayer, should it so choose, to contest the assessment before the CTA. A mere request for reinvestigation WITHOUT corresponding action on the part of the CIR will not interrupt the running of the period. The request must be granted by the CIR. o “Granted” means that the government acted upon the request, as seen in Republic v Arache Mickey Ingles Ateneo Law 2012 Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012
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The taxpayer is barred from invoking the defense of prescription because the delay was due to his repeated requests for reinvestigation and for extensions of time to pay, which the government acted upon. (Republic v Arache) o Since this suspends the period (and prejudicial to the taxpayer), the burden of proof that the request was actually granted shall be on the BIR. o However, even when the request for reconsideration or reinvestigation is not accompanied by a valid waiver or there is no request for reinvestigation that had been granted by the BIR, the taxpayer may still be held in estoppel and be prevented from setting up the defense of prescription on collection when, by his own repeated requests or positive acts, the Government had been, for good reasons, persuaded to postpone collection to make the taxpayer feel that the demand is not unreasonable or that no harassment or injustice is meant by the Government, as laid down by the Court in the Suyoc case. (BPI v CIR) In computing whether the collection was done within the period prescribed by law, do this: o (Date of Collection) – (Date of Assessment) – (Period of Reinvestigation)
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