Taxation Law 2 Reviewer

REVIEW NOTES FOR TAXATION 2 TRANSFER TAXATION

1

decedent and other benefits that accrue to the estate and the heirs, the state collects the tax.

Transfer Taxes •

those imposed upon the gratuitous disposition of private property

•

Under our law, they are taxes levied on the transmission of private properties from a prior decedent to his heirs in the case of estate tax, or from a donor to a donee in the case of donor’s tax.

BA RC O M2 008 -09

Kinds of Transfer Taxes 1. Death / Estate taxes - those levied on the gratuitous transfers of property upon one’s death, formerly comprised of the estate and inheritance taxes: Both taxes are now integrated into one estate tax.

b.) Redistribution of Wealth Theory Estate tax is a contributing factor to the inequalities in wealth and income. The imposition of death tax reduces the property received by the successor bringing about a more equitable distribution of wealth in society. c.) Ability to pay theory The receipt of inheritance places assets in the hands of the heirs and beneficiaries thereby creating an ability to pay the tax and thus, ability to contribute to governmental income; and

2. Gift Taxes - Are imposed on the gratuitous transfers of property during one’s lifetime, formerly comprised of the donor’s and donee’s gift taxes; both taxes are now integrated into a donor’s tax.

d.) Privilege theory or State Partnership theory Inheritance is not a right but a privilege granted by the state and large estates have been acquired only with the protection of the state. The State, as a “passive and silent partner” in the accumulation of property has the right to collect the share which is properly due to it.

I. DEATH / ESTATE TAX

Incidence or burden of estate of tax Three views on who is the taxpayer in estate taxation:

Estate tax •

graduated tax imposed on the privilege of the decedent to transmit property at death and is base on the entire net estate, regardless of the number heirs and relations to the decedent.

•

a “transfer” tax not a property tax.

•

tax on the right to transmit property at death and on certain transfers which are made by the statute the equivalent of testamentary dispositions.

1.

PREDECESSOR – the object of the tax is the property which has been held or accumulated by the deceased and the tax has fallen upon him in the sense it has affected the amount of the property which he could dispose.

2.

SUCCESSOR – the tax is not paid by the predecessor who has no liability till he dies and who is free to ignore the duty if he wishes, while the successor comes into less than he would have, and has no kind of redress.

3.

No Personal Incidence - the estate tax has no personal incidence at all, merely falling upon the estate as such.

Nature of Estate Tax • It is not a direct tax on property nor is it a capitation tax, that is, the tax is laid neither on the property, nor on the transferee or transferor, but on the right of the decedent to transmit his estate. • It is not a property tax but an excise tax.

Law applicable Estate taxation is governed by the statute in force at the time of the death of the decedent.

Purpose and justification of estate tax: The following theories have been advanced to justify death taxation: (BRAP)

Reciprocity There is reciprocity if the foreign country of which the decedent was a citizen or resident at the time of his death:

a.) Benefit-Received Theory For the performance of services rendered by the government in the distribution of the estate of the

1.) Did not impose an estate tax; or 2.) Allowed a similar exemption from estate tax with respect to intangible personal property owned by Filipino citizens residing in that foreign country.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

The gross estate extends to gratuitous transfers made by the decedent during his lifetime which are treated by the law as substitutes for testamentary dispositions. They are transfers inter vivos in form but mortis causa in substance.

Note: 1. Reciprocity applies only when: a.) The property is an intangible; and b.) The decedent is a nonresident alien 2. The following intangibles are deemed located in the Philippines: (an exception to the principle of Res Mobilia Sequuntur Personam and Situs of Taxation)

Rationale for taxability:

BA RC O M2 008 -09

a.) Franchises which must be exercised in the Philippines; b.) Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; c.) Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines; d.) Shares, obligations or bonds issued by any foreign corporation if such shares obligations or bonds have acquired a business situs in the Philippines; and e.) Shares or rights in any partnership, business, or industry established in the Philippines. GROSS ESTATE • the total value of all property, whether real or personal, tangible or intangible belonging to the decedent at the time of his death, situated within or outside the Philippines, where such decedent was a resident or citizen of the Philippines. • In the case of a nonresident alien decedent, it shall include only property situated in the Philippines.

To reach such transfers which are really substitutes for testamentary dispositions and thus prevent the evasion of the estate tax. These transfers are: a.) transfers in contemplation of death (sec.85 b); b.) transfers with retention or reservation of certain rights (sec.85 b); c.) revocable transfers (sec.85 c) d.) transfers of property arising under a general power of appointment ( sec.85 d); and e.) transfers for insufficient consideration (sec.85 g) Note: Transfers by virtue of a bona fide sale of property for an adequate and full consideration in money or money’s worth are excluded and not taxable. INCLUSIONS IN THE GROSS ESTATE (CR2IG DIP) 1) Decedent’s interest at a specific property - To the extent of the interest therein of the decedent at the time of his death. (Sec. 85 A) -

Property Included in the Gross Estate (INCLUSIONS): A. In case of resident citizens, nonresident citizens and resident aliens: 1. Real Property within and without the Philippines; 2. Tangible personal property within and without the Philippines; and 3. Intangible personal property within and without the Philippines. B. In cases of nonresident aliens: 1. Real property within the Philippines; 2. Tangible personal property within the Philippines and; 3. Intangible personal property within the Philippines, unless there is reciprocity in which case, it is not taxable. Note: These are either: A) Properties actually owned at the time of death B) Properties deemed by law to be owned by the decedent under Sec. 85 Inter Vivos Transfers Subject to Estate Tax

2

Ex: partnership interest, dividends

2) Transfer in contemplation of death - A transfer with the thought of death. - The term “in contemplation of death” means that the impelling or controlling motive is the thought of death, regardless of whether the transferor is near the possibility of death or not, which induces the disposition of the property for the purpose of avoiding the tax. - Example: donation was made concurrently with the execution of a will (Vidal de Rocs vs. Posadas, 58 Phil 108)  Circumstances taken into account in determining in whether the transfer was made in contemplation of death: A.) Age and state of health of the decedent at the time of the gift; B.) Length of time between the gift and the date of death; and C.) Concurrent making of a will or making a will within a short time after the transfer. Note: Check the factual settings before and at time of death because proximity to death is not always conclusive.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 

Examples of motives precluding the category of a transfer in contemplation of death:

a.) b.) c.) d.) e.)

To relieve the donor from the burden of management; To save income or property taxes; To settle family litigated and unlitigated disputes; To provide independent income for dependents; To see the children enjoy the property while the donor is alive; To protect the family from hazards of business operations; To reward services rendered

g.)

BA RC O M2 008 -09

f.)

Note: The THREE (3) YEAR PRESUMPTION provides that any transfer of a material part of his property in the nature of a final disposition or distribution thereof made by the decedent within three years prior to his death without such adequate and full consideration shall, unless shown to the contrary, be deemed to be have been made in contemplation of death. This provision, however, has been already deleted in Sec. 100 (b) now sec. 85 (B) of the Tax Code by PD No. 1705. Under BIR Ruling No. 261 September 2, 1987, the law does not specify the number of years prior to a decedent’s death within which a transfer can be considered in contemplation of death. Note: In relation to transfers with retention of rights which are made in contemplation of death – if the right of retention by the Decedent is co-terminous with his lifetime. - Ex: X has a house and lot which he transferred to Y a) with the condition that X will use it while X lives - Effect: Still part of estate of X as he has control over it b) with the condition that X will use it only for 10 years and then X dies before 10 years - Effect: Not part of the estate of X as he is not the actual owner 3.) Transfer with retention or reservation of certain rights - This contemplates the instances where the owner transfers his property during his lifetime but still retains economic benefits (the possession or enjoyment of the property or the power to designate the person who may exercise such rights). - It includes: A. Transfer without retention of interest but intended to take effect at or after the decedents death. - Example: donations mortis causa.

3

B. Transfer with retention of interest in respect to: - 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. And such interest is retained by the decedent for his life or for any period which does not in fact end before his death. C. Transfer with reversionary interest, wherein there is a possibility that the transferred property may return to the decedent or his estate or that it may become subject to a power of disposition by the decedent. - Ex: A transfers his property to B in naked ownership and to C in usufruct throughout C’s lifetime subject to the condition that if C predeceases A, the property shall return to A. If A dies during C’s lifetime, the value of the reversionary interest of A at death is included in his gross estate. 3.) Revocable transfer - the decedent has full control of disposition of property - even if the control is not exercised, it is enough that it is exists - A transfer where: a.) The decedent or in conjunction with any other person has reserved the right to alter, amend, revoke, or terminate; or b.) Any such power is relinquished in contemplation of the decedent’s death. The power to alter, amend or revoke shall be considered to exist on the date of the decedent’s death even though: a.) the exercise of the power is subject to a precedent giving of notice; or b.) The alteration, amendment or revocation takes effect only upon the expiration of a stated period after the exercise of the power. If the notice has not been given or the power has not been exercised on or before the decedent’s death, such notice or the power shall be considered to have been given or exercised on the date of the decedent’s death. 4.)

Transfer of property under a general power of appointment

- A transfer where the donor of the power of appointment authorizes the donee of such power to designate any person he chooses to be given the right over the appointed property. - The transferee may choose freely any person who will own the property after he dies - Rationale: the will of the transferee is followed; hence, part of transferee’s estate

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 * Note: the decedent is the transferee in this provision General power of appointment vs. special power of appointment: A.) A power is general, when it authorizes the donee of the power to appoint any person he pleases including himself, thus having a full dominion over the property as if he owned it. BA RC O M2 008 -09

B.) It is special when, the donee can appoint only among a restricted or designated class of persons other than himself. Note: If the power of appointment is general, it makes the appointed property a part of the donee’s property. Under a general power of appointment, title to the property is legally transferred to the donee. Therefore the property shall form part of the gross estate of the donee. 5.) Transfer for insufficient consideration - A transfer that is not a bona fide sale of property for an adequate and full consideration in money or money’s worth. The excess of the fair market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate. -

However, if the purported absolute sale inter vivos by the decedent is shown to be fictitious, then the total value of the property transferred is subject to inclusion in the taxable estate.

- Ex: X owns a house and lot, he wants to help Y so he sells his house worth P5M for only P1M. At the time of X’s death, his house and lot is worth P10M. How much is included in the gross estatre of X? 10-1 = 9M - Ex: X bought a car worth P1.3M. X needed money so he sells his car to Y for only P1M. This is not a transfer for insufficient consideration as this is a bona fide transfer at arm’s length; hence, a valid transfer. 6.) Proceeds of life insurance - Proceeds of life insurance taken by the decedent on his own life shall be included in the gross estate if the beneficiary: A.) Is the estate of the decedent, his executor, or administrator (regardless whether the designation is revocable or irrevocable); or B.) Third person other than the estate, executor, administrator but the designation of the beneficiary is revocable.

4

- Presumption: proceeds are revocable - include in the estate only if it is revocable as the decedent retained control over the proceeds 7.) Prior Interest - Except as otherwise specifically provided therein, subsections (B), (C), (E) of Section 85 referring to transfer in contemplation of death, revocable transfer and proceeds of life insurance respectively 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 the CTRP. NOTE: In most of these transfers the property remains substantially that of the transferor during his lifetime notwithstanding the transfer since he still retains either the “beneficial ownership” or “naked title” to the property. EXCLUSIONS FROM THE GROSS ESTATE 1. Merger of usufruct in the owner of the naked title - ex: X has a house and lot. X gave the title to Z. X also allows Y to use the same and that in case Y dies, the use goes to Z. What are the effects? a) If X dies – include the house and lot in X’s estate b) If Y dies – exclude from the estate of Y as the will of X is being followed, there is a merger of usufruct in Z (the owner of the naked title). 2. Fideicommisary and transmissions from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor - ex: X has a house and lot. In the will of X, Y may have the title to the house and lot but in case Y dies, the property will go to Z. What are the effects? a) If X dies – include as part of X’s estate as he actually owns it b) If Y dies – excluded from the estate of Y as he has no control over its disposition - Ex: X has a house and lot which he wants to give to Y but Y is a minor at the moment so that X institutes T to hold the property in trust for Y until Y reaches the age of majority. X died. The property passed to T. T died. Y reached the age of majority. Effect if T dies: Not part of estate of T. Note: Common reasons for 1 and 2 – the will of the first decedent is followed, the second decedent has no control over the disposition. 3. Transfers to social welfare, cultural, and charitable institutions

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 - Requisites: a) Qualified organization b) Not more than 30% will be used for administrative purposes - Reason: to encourage such transfers 4. Proceeds of insurance not includible in the gross estate of the decedent a) Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. b) Proceeds of a group insurance policy taken out by a company for its employees. c) Proceeds of insurance policies issued by the GSIS to government officials and employees. d) Benefits accruing under the Social Security Act. e) Proceeds of life insurance payable to the heirs of deceased members of the military personnel of the United States Army or Philippine Army under laws administered by the United States Veterans Administration. f) Accident insurance proceeds.

5

F. Retirement benefits of employees of private firms from private pension plans approved by the BIR. G. Amount received for war damages. H. Grants and donations to the Intramuros administration. ALLOWABLE DEDUCTIONS FROM THE GROSS ESTATE - Granted by mere legislative grace - Construed strictly against the taxpayer - Requisites: a) Substantiate the claim for deduction b) Identify the provision granting the deduction. The provision must be clear and definite. RESIDENT DECEDENT A. Ordinary Deductions (ELIT): 1) Funeral Expenses - The amount deductible is equal to 5% of the gross estate or the amount of the actual funeral expenses whichever is lower, but in no case to exceed P200,000;

BA RC O M2 008 -09

5. Separate property of the surviving spouse. Note: In the determination of the gross estate, the nature of the property, whether common property of the spouses, separate or exclusive property either of the deceased or of the surviving spouse, becomes of vital importance. What regime of property relations shall govern the spouses? Under the Civil Code, the husband and wife who got married before August 3, 1988 are governed by the Conjugal Partnership of Gains, while those who got married on or after August 3, 1988 are governed by the Absolute Community of Property, unless a different regime was agreed upon in the marriage settlement. EXEMPTION FROM ESTATE TAX A. The first P200, 000.00 value of the estate (sec. 84 NIRC) B. The merger of the usufruct in the owner of the naked title. C. The transmission from the first heir, legatee, or donee in favor of another beneficiary in accordance with the desire of the predecessor. D. All bequest, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inured to the benefit of any individual and provided that not more than 30% of the said bequest, etc shall be used by such institution for administration purposes. E. Intangible personal property of non-resident aliens under the principle of reciprocity.

- “Actual funeral expenses” are those which were actually incurred in connection with the interment or burial of the deceased and paid for from the estate of said deceased. - Funeral expenses include: a) Costs of coffin, tombstone, mausoleum, and burial lot; b) Funeral parlor fees; c) Mourning clothing of the surviving spouse and the unmarried minor children; d) Costs of obituary notices; and e) Expenses during the wake. - The following cannot be deducted under funeral expenses: a) Cash advances of the surviving spouse and the heirs; b) Expenses paid by the relatives and friends; and c) Expenses after the burial. -

Requisites: a) The expenses must be due to the interment, wake and burial; hence, expenses on the death anniversary are not included b) The expenses must have been shouldered by the estate and not by other people 2) Judicial expenses of the testamentary or intestate proceedings - Requisite: “administration expenses” to those actually incurred in the administration of the estate. - Examples: a) fees of the executor or administrator;

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 b) c) d) e) f)

attorney’s fees; accountant’s fees; court fees; salaries of employees; and All other expense related to the administration of the estate.

Note: This includes “all expenses necessary to settle or preserve the estate” hence, extrajudicial expenses are included. BA RC O M2 008 -09

Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees, or devisees are not allowed as deductions. - ex: expenses to be declared as administrator vs. an oppositor is a personal expense

3) Claims against the decedent’s estate - Debts or obligations of the decedent that is enforceable against the estate provided that the following requisites are met: a) They were contracted in good faith and for an adequate and full consideration in money or money’s worth. b) They must be existing against the estate. c) They must be legally enforceable obligations of the decedent and ought to be enforced by the claimants. d) They must be reasonably certain in amount; and; e) 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.

- ex: X obtained a 3M loan from Y and executed a Real Estate Mortgage over his house and lot worth 5M. X paid 1M. X died. Effect: in the estate of X, include the 5M in the gross estate of X and claim as deduction the unpaid 2M. • Accommodated Loan - Ex: X owns a house and lot worth 5M. Y obtained a 3M loan from Z with X’s house and lot as collateral. Y paid 1M. Z died. X died. Effect: Include in the gross estate of X the 5M as receivable from Y (reason: right of reimbursement); and claim as deduction the unpaid 2M. 6) Casualty Losses (TRECUSO) - They include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties or from robbery, theft or embezzlement. - Requisites for deductibility: a) Losses not compensated by an insurance or otherwise; b) Losses that were not claimed as a deduction for income tax purposes; and c) Losses incurred not later than the last day for payment of the estate tax (6 months from death). d) Include the worth of the property in the gross estate e) File a sworn declaration of the fact of loss within 45 days from its occurrence 7) Unpaid Taxes - Unpaid income tax on income due or received before death of the decedent, and real property taxes, which have accrued prior to the death of the decedent (real property taxes accrued at the beginning of the year but may be paid before or at the end of each quarter) are deductible. -

4) Claims against the insolvent persons - Requisites for deductibility: a) The amount of said claims has been initially included as part of the gross estate; and b) The incapacity of the debtors to pay their obligations is proven and not merely alleged. 5) Unpaid mortgages indebtedness - Requisites for deductibility: a) The fair market value of the property mortgaged without deducting the mortgage indebtedness has been initially included as part of his gross estate; b) The mortgage indebtedness was contracted in good faith and for an adequate and full consideration in money or money’s worth.

6

Income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax cannot be deducted because they are chargeable to the income of the estate.

- except: estate tax because estate tax liability is determined at the time of death B. Vanishing / Alternating Deduction Or Property Previously Taxed - an amount allowed to reduce the taxable estate of a decedent where the property was: a. received by him from prior decedent by gift, bequest, devise or inheritance, or b. transferred to him by gift, has been the object of previous transfer deduction.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 -

VANISHING DEDUCTION: because the rate of deduction gradually diminishes and entirely vanishes depending upon the time interval between the two (2) successive transfers.

-

ALTERNATING DEDUCTION: because the present decedent’s estate cannot claim it if the prior decedent’s estate claimed it

a.

Factors necessary in vanishing deduction, these are; There are two (2) deceased persons and the first is donor; and The second decedent dies within five (5) years after death of the prior decedent or in the case of gifts decedent – donee dies within the same period after date of the gift.

BA RC O M2 008 -09

b.

the the the the

- Rationale: The deduction operates to ease the harshness of successive taxation of the same property within a relatively short period of time. Requisites for deductibility: 1. The present decedent must have acquired the property by inheritance or by donation. 2. The property must have been acquired within five (5) years prior to the death of the present decedent 3. The property must have formed part of the gross estate of the prior decedent if acquired by inheritance, or the taxable gift of the donor if acquired by donation. 4. The estate tax or the donor’s tax, as the case may be, must have been paid on the previous transfer. 5. The property must be identified as the one received from the prior decedent or from the donor, as the case may be. 6. The estate of the prior decedent must not have previously availed of the vanishing deduction on the subject property. Procedure in computing vanishing deductions: 1. Value taken of property previously taxed Less:Mortgage paid by the present decedent on property previously mortgaged by prior decedent / donor, if any (Ist deduction) = Initial basis 2. Initial basis divided by the value of the gross estate of present decedent X Expenses, and transfer for public purpose =2nddeduction 3. Initial Basis Less: 2nd deduction Final Basis Multiplied by rate deduction (sec.86 (A.2), NIRC) Vanishing Deduction

7

C. Transfers For Public Use - Requisites: 1. The disposition must be testamentary in character. 2. To take effect after death. 3. In favor of the government of the Philippines, or any political subdivision thereof. 4. Exclusively for public purpose. 5. Included in the gross estate Query: If in a will the property was bequeathed to a city and an NGO, are the tax effects the same? No. a) City - included in the gross estate and claimed as deduction b) NGO – excluded from the gross estate and subject to the limitation that not more than 30% must be used for administrative purposes D. Family Home - Refers to the dwelling house, including the land on which it is situated, where the husband and wife, or an unmarried person who is the head of the family and members of their immediate family resides as certified by the Barangay Captain of the locality. -

For the purpose of availing of a family home deduction to the extent provided by law, a person may constitute only one family home.

-

The amount deductible is equivalent to the current fair market value of the decedent’s family home if said current fair market value exceeds P1,000,000, the excess shall be subject to estate tax.

- Requisites to be deductible: a. The family home must be the actual residential home of the decedent and his family at the time of his death. (Decedent is married and has dependents or is a head of family with dependents.) b. Such fact must be certified by the Barangay Captain of the locality where the family is situated. c. The total value of the family home must be included in the gross estate of the decedent. d. The allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate not exceeding P1, 000,000. E. Standard Deduction Of P1, 000,000.00 - on top of other deductions, unlike the optional standard deduction which is in lieu of other deductions; hence, it does not include the P 200,000 exemption F. Medical Expenses - Requisites: a. Must be incurred by the decedent within one (1) year

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 prior to his death b. Must be duly substantiated by receipts; and c. Must not exceed P500, 000 *Opinion of JB: medical expense must be related to the cause of death as it is the estate that is being settled. Otherwise, if not related, it is a personal expense. BA RC O M2 008 -09

G. Amounts Received By Heirs Under RA 4917 From The Decedent’s Employer As A Consequence Of The Death Of The Decedent–Employee, Provided That Such Amount Is Included In The Gross Estate Of The Decedent. - retirement benefits - Requisite: include in gross estate H. NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL / COMMUNITY PROPERTY. - Requisite: Include the entire amount in the gross estate then deduct the share of the surviving spouse - Ex: H owns a car worth 1M and a house and lot worth 5M W owns a truck worth 2M and jewelry worth 10M H and W owns a conjugal lot worth 20M H died. Gross estate of H: Exclusive 5 M house and lot 1M car _________ 6M Total gross estate = 26 M

Conjugal 20 M lot _______ 20 M

Then claim as deduction the 10M, which is the ½ share of the surviving spouse in the conjugal lot. - Ex: H and W died simultaneously. In computing the gross estate of H and W, their shares ½ shares as to the conjugal lot may immediately be split as there is no surviving spouse left. I) Tax Credit For Estate Tax Paid To A Foreign Country - The estate tax imposed by the tax code shall be credited with the amount of any estate tax paid to a foreign country. - Concept: if a property located in the Philippines was already subjected to estate tax abroad and the same property is also subjected to estate tax in the Philippines, the foreign tax paid is allowed to reduce his Philippine estate tax - Purpose: minimize the effect of international double taxation - applicable only to residents and citizens, not to NRA since he is taxed only on his properties within the Philippines; hence, the NRA will not be made to pay estate taxes twice for his property located abroad = no international double taxation = no tax credit. (Sec. 86 (E)(2))

8

1. Prove that the foreign estate tax has been paid 2. Prove reciprocity : that in the decedent’s foreign country, a similar tax credit is given to Filipinos Limitations on tax credit: A.)The tax credit limit for estate taxes paid to one foreign country is determined by the following: TAX CREDIT LIMIT= Decedent’s Net Estate situated in a foreign country x Phil. Estate tax of the Entire net estate B.) The tax credit limit for estate taxes paid to two or more countries is determined as follows: TAX CREDIT LIMIT = Decedent’s net estate situated outside of the Phil Estate tax of Entire net Estate

X Phil.

Note: 1.) Under limitation A the allowable tax credit is the lower amount between the tax credit limit and the estate tax paid to the foreign country. 2.) Under limitation B the allowable tax credit is the lower amount between the tax credit limit computed under (A) and that computed under (B) B.) IF DECEDENT IS A NON – RESIDENT ALIEN The deductions allowed to citizens or residents of the Philippines are also extended to a non-resident alien decedent with respect to his estates situated in the Philippines at the time of his death. In case of deductions for expenses, losses, indebtedness and taxes, the amount of the allowable deduction is limited only to the proportion of such deductions with the value of such part of his gross estate which at the time of his death, is situated in the Philippines, bears to the value of his entire gross estate wherever situated. (Sec. 86 (B)) Formula: Allowable deduction of non-resident estate = Philippine Gross Estate Entire Gross estate

x Deductions Claimed

As a prerequisite to the deduction, it must be included in the return required to be filed the value at the time of his death, of that part of the gross estate of the non-resident

- Requisites: Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

9

not situated in the Philippines, to determine the ratable portion of the deduction for expenses allowable.

approved by the Sec. of Finance, upon recommendation of the Insurance Commissioner

Valuation of Property The estate shall be appraised at its fair market value (FMV) at the time of death of the decedent (Sec.88, NIRC). This is regardless of any subsequent contingency affecting the estate. (Lorenzo vs. Posadas, 64 Phil. 353)

Filing of Notice of Death

BA RC O M2 008 -09

1. Real Property - higher amount of : a) FMV as determined by the Commissioner - This is the zonal value (of the land) as fixed by the CIR, and can be obtained from the BIR website or regional office b) FMV fixed by the provincial or city assessor - This is the value as shown in the tax declaration of the property - Use this amount for real properties with no zonal values (i.e. real properties other than land such as buildings and improvements) * Note : The law does not state that the prevailing market rate or the consideration as a basis for determining the FMV * Note: If there are no improvements in the property, get a Certificate of No-improvement, (which you can get only after obtaining a Certificate of Non-tax delinquency) and attach these to the estate tax return. 2. Personal Properties a) Shares of Stock - book or par value at the time of death, and can be obtained by writing a letter of inquiry, asking for a formal certification from the corporation which issued the shares of stock as to the value of such stock at the time of death of the decedent b) Inventories - value as stated in the invoices (i.e.: price at purchase); or the prevailing market rate (ask for the value from those engaged in the same business); or if value cannot be definitely ascertained, state the approximate reasonable value (but this will be subject to the discretion of the BIR inspector)

Where the gross value of the estate exceeds P 20,000 although exempt, the executor, administrator, or any of the legal heirs shall give, within 2 months after the decedent’s death or within like period after the executor or administrator qualifies as such, a written notice thereof, to the Commissioner of Internal Revenue. (Sec. 89, NIRC) - Contents of the letter: 1. The fact that the decedent died 2. Residence of the decedent 3. Date of death - Effect of failure to file notice: subject to penalty not lower than P1,000 * Note: Filing with the nearest Revenue District Office is sufficient compliance. Filing of Return and Payment of Tax 1.) By whom? • An estate tax return under oath is required by law to be filed by the executor, administrator, or any of the legal heirs: a.) Where the gross value of the estate exceeds P200,000 though exempt from the estate tax; or b.) Regardless of the gross value of the estate, where the said estate consists of registered or registrable real property, such as real property (land, bank accounts, others with definite records), 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.

c) Motor vehicles - these depreciate 20% per year from purchase - Hence, motor vehicles are fully liquidated and has no estate tax liability after 5 years but include in the gross estate placing zero as the amount (to secure a tax clearance therefor)

2.) When to file? • The return shall be filed within 6 months from the decedent’s death. • The Commissioner shall have the authority to grant, in meritorious cases, a reasonable extension not exceeding 30 days for filing the return.

3. Right to Usufruct, use or habitation; or annuity - probable life of the beneficiary shall be taken into account, in accordance with the latest basic mortality table, to be

3.) Where to file? Except in cases where the Commissioner otherwise permits, the return shall be filed with:

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 * if the decedent is a resident a) an authorized agent bank b) Revenue District Officer c) Revenue Collection Officer d) duly authorized treasurer of the city or municipality where the decedent was domiciled at the time of his death, or

* Note: To avoid the imposition of penalties while there is no extra/judicial settlement yet, any heir may file a sworn declaration to the BIR stating the fact of death, that the estate has not yet been settled and the list of the properties included in the estate, as basis for payment of estate tax.

BA RC O M2 008 -09

-

* if the decedent is a non-resident a) with the Revenue District Office where his executor/administrator is registered b) with the Revenue District Office having jurisdiction over the residence of the executor/administrator e) with the Office of the Commissioner if the decedent has no executor or administrator 4.) Copies: The return shall be filed in triplicate, two (2) for the BIR and one (1) copy for the taxpayer. 5.) When to Pay Pay the estate tax at the time you will file your estate tax return. (Pay as you file system) 6.) Extension for Payment: - allowed in meritorious cases when the Commisioner finds that the payment of the esate tax on the due date would impose undue hardships upon the estate or any heir : At most 2 years – if estate extrajudicially settled At most 5 years – if estate judicially settled - NOTE: The taxpayer must not be guilty of a) negligence b) intentional disregard of the rules and regulations, or c) fraud - the taxpayer may also be required to pay a bond not exceeding double the amount of tax and with such sureties, as the Commissioner deems necessary

10

If Gross Estate >2M, additional requirement: must submit a certificate of an independent CPA stating: 1. itemized assets of the decedent with corresponding gross value at the time of his death; or if NRA, that part of his gross estate situated in the Philippines 2. itemized deductions from the gross estate 3. amount of tax due, whether paid or still due and outstanding

Liability for Payment of Estate Tax •

Primarily Liable : Executor or administrator - before delivery to any beneficiary of his distributive shares. After due payment, the executor or administrator shall be discharged from personal liability.

•

Subsidiarily Liable : Beneficiary - to the extent of his distributive share, liable for the portion of the estate tax as his distributive share bears to the value of the total net estate.

NOTE: There are two ways the government may enforce collection of estate taxes from the decedent’s heirs: 1. It can collect from all the heirs the amount of the estate tax proportionate to the inheritance they received. 2. It can subject properties of the estate which are in the hands of the heirs/transferees to the payment of the tax. (CIR vs. Pineda, 21 SCRA 105) NOTE: The heirs have a solidary obligation to settle the estate. Hence, the BIR can collect from or sue any of the heirs, but only up to the amount of that heir’s share in the hereditary estate. This is without prejudice to such heir’s right of reimbursement from his co-heirs of their share in the payment of the estate tax. (CIR vs. Pineda, 21 SCRA 105) Measures to Insure Payment of Estate Tax

* Note: The filing of the estate tax return is not sufficient to obtain a tax clearance, the administrator/executor/heir must submit additional documents to determine the correctness of the values stated by him in the estate tax return. - such as the title of the land, tax declaration of the land and its improvements or Certificate of No-improvement, vicinity map to fix the exact location and zonal value, etc. (Read: Revenue Memorandum Order 15-2003)

a. 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 as shown. (Sec.94) - by the court requiring the executor/administrator to submit an inventory of properties of the estate, these properties are to be distributed only after payment of estate taxes and receipt of

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 clearance by the Commissioner or his duly authorized representative - NOTE: The approval of the probate court is not required before estate taxes may be collected. The enforcement and collection of taxes are executive in nature. (Marcos II vs. CA, 273 SCRA 47) b. Registers of Deeds shall not register in the Registry of Property any document transferring real property any document transferring real property or real right therein or any chattel mortgage, by way of gift inter vivos or mortis causa, legacy or inheritance, unless certification from the commissioner that the tax has been paid and the y shall immediately notify the Commissioner, Regional Director, Revenue District Officer, or Revenue collection Officer or treasurer of the city or municipality where their officer are located, of the non-payment of the tax discovered by them. (Sec. 95) - before the properties are transferred in the name of the heirs, a Certificate Authorizing Registration (CAR) must be shown BA RC O M2 008 -09

c. Any lawyer notary public, or any Government Officer who, by reason of his official duties, intervenes in the preparation or acknowledgement of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, etc., with copies of such documents and any information whatsoever, which may facilitate the collection of the aforementioned tax. (Sec. 95) - ex: deed of extrajudicial settlement, deed of donation d. Neither shall a debtor of a deceased pay his debts to the heirs, legatees, executor or administrator of his creditor, unless a certification of the Commissioner that the tax fixed has 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. (Sec. 95) - else: debtor may be personally liable for the payment of the lost tax, like a withholding agent who fails to withhold taxes e. Corporations, sociedad anonima, partnerships, business or industry organized in the Philippines shall not transfer in their books any shares obligations, bonds or rights by way of gift inter vivos or mortis causa, legacy or inheritance to the new owner unless a certification from the Commissioner that the taxes fixed and due thereon have been is shown; (Sec. 97) - obligation of corporate secretary f. 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 joint deposit account unless the Commissioner has certified that the estate taxes imposed thereon have been paid. However, the

11

administrator of the estate or any of the heirs of the decedent may, upon authorization by the Commissioner of Internal Revenue withdraw an amount not exceeding P 20,00 without the said certification . (Sec. 97) - 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. Otherwise, the joint depositor will be liable for perjury (Sec. 267). - joint accounts covered by this rule include “and” and “and/or” accounts, but do not include an account subject to a Survivorship Agreement with a survivor-take-all feature (because there is an automatic transfer of right to the survivor; hence, not included in gross estate of the joint depositor who died – tax avoidance scheme) g. The estate tax together with interest, penalties, and costs that may accrue in addition thereto constitutes a lien upon all property and rights to property belonging to the taxpayer. The lien attaches when the taxpayer neglects or refuses to pay after demand. (Sec. 219) h. In judicial settlement of estates, the court is required to furnish the commissioner of Internal Revenue a certified copy of the schedule of participation and the court order approving the same within 30 days after its promulgation. (Sec. 91(b)); i. The estate tax shall be paid by the executor or administrator before delivery to any beneficiary his distributive share of the estate (Sec. 91 (c)). He may be discharged from personal liability for deficiency in the estate tax only after written application to the commissioner and upon determination that no such deficiency appears. (Sec. 92) NOTE: Additional Readings 1. Revenue Regulation 2-2003 2. Revenue Memorandum Order 15-2003 TAX TIPS: Avoidance of Estate Tax Liability 1. Maximize your claims for deductions such as the use of the transfers falling under the exclusions from gross estate. 2. Donate properties to your relatives as the tax rates for donor’s taxes are lower than for estate taxes. 3. Estate Planning (Section 40 (c), NIRC) - execute a Deed of Exchange; the properties of at most 5 persons in exchange for shares of stock in order to obtain control of the corporation (more than 51% ownership) - this exchange is not taxable for income tax purposes

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

12

- more tax savings if real properties are exchanged - the properties in the deed will no longer be part of the gross estate as it is now owned by the corporation - the stock shares will be included in the gross estate but the tax would be lower as the value at time of death might still be the same original value at the time of exchange; on the other hand, if there was no exchange the estate tax for the land would be higher as the value of the land at time of death will be higher than at the time of the acquisition.

not a tax on the property as such because its imposition does not rest upon general ownership.

4. Set up a living trust - Trust: obligation imposed by a person regarding his property - Create an irrevocable trust over your properties so that they will not form part of your gross estate when you die. This is because the Irrevocable Trust is a new taxpayer created. - Ex: grandfather (Grantor) during his lifetime would like to give certain properties to his grandchild. Until he reaches the age of maturity, the properties will be held in trust by X (trustee) for the grandchild (Beneficiary).

- For tax purposes, the term has a much wider meaning, it includes:

- The tax is imposed without reference to the death of the donor unlike in the case of estate tax. • Donation / Gift - an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it.

a. any transfer in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. (Sec. 98) b. any transfer of property by gift, except in forced sales and in the sale of real property which is a capital asset, for less than and adequate and full consideration in money or money’s worth. (Sec. 100)

BA RC O M2 008 -09

c. Condonation or remission of debt, where the creditor merely desires to benefit a debtor and without any consideration therefore cancels the debt.

DISTINCTION BETWEEN DONOR’S AND ESTATE TAX DONOR’S TAX Tax on the privilege to transmit property during the lifetime of the donor Tax rates are lower (2 to 15) Exemption is only P 100,000.00 Notice of donation is generally not required Extension of payment is not provided Payable within 30 days from the date of gift Imposed on the net gift

ESTATE TAX Tax on the privilege to transmit property upon one’s death Tax rates are higher (5 to20) Tax exemption is P200,000.00 Notice of death is required Extension of payment may be granted by the Commissioner of Internal Revenue Payable within 6 months from the date of death Imposed on the net estate

II. DONOR’S TAX / GIFT TAX A. NATURE - It is an excise (privilege) tax, imposed on the privilege of the donor to give or on the privilege of the done to receive. It is

Requisites Of A Taxable Gift: 1.) CAPACITY of the donor to make the donation; 2.) DONATIVE INTENT or INTENT on the part of the donor to make a gift; 3.) DELIVERY, whether actual or constructive, of the gift; and 4.) ACCEPTANCE of the gift by the donee. Note: A. The donee, unlike the donor need not be capacitated. B. donor’s tax applies now to both natural and juridical persons. C. donative intent must be present in direct gift but with respect to indirect gift, e.g. transfer of property for less than an adequate and full consideration, donative intent is superfluous. Thus, donative intent is not always essential to constitute a gift. D. In Abello vs. CIR (Feb. 25, 2005), donative intent is evidenced by a reduction of patrimony of one and an increase in patrimony to the other. Purposes Of Gift Tax 1.) The gift tax was enacted originally to supplement the estate and inheritance taxes by preventing their avoidance through the taxation of gifts inter vivos. 2.) The donor’s tax is also intended to prevent the avoidance of income tax through the device of splitting income among numerous/different donees with the donor

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 thereby escaping the effect of the progressive rates of income taxation. Kinds Of Gift Taxes: 1. Donor’s tax or tax levied on the act of giving; it supplements the estate tax; and 2. Donee’s tax or tax levied on the act of receiving; it was formerly the counterpart of the inheritance tax, which has been integrated into an estate tax. BA RC O M2 008 -09

*Both taxes have now been integrated into a donor’s tax. Parties To A Donation: 1. Donor - the Person who disposes of his property or right. 2. Donee - the Person who receives the property or right.

13

strangers 3.) donations made between business organizations are considered donations made to strangers (RR 2-2003) Note: Donees who have no blood relation to the donor are considered strangers to the donor, such as those made to one’s in-laws or to juridical persons. 2. Value of the Gift - the higher the value of the gift, the higher the gift taxes C. DEDUCTIONS / EXEMPTIONS FROM GIFT TAX 1. Gifts Made by a Resident:

Properties Included In The Term “Gift” (A). In the case of resident citizens, non-resident citizens and resident aliens: 1. Real property within and without the Philippines. 2. Tangible personal property within and without the Philippines; and 3. Intangible personal property within and without the Philippines. (B.) In the case of non-resident aliens: 1. Real property within the Philippines. 2. Tangible personal property within the Philippines. 3. Intangible personal property within the Philippines, unless there is reciprocity in which case, it is not taxable. Note: The specific items includible in the “gross estate” are applicable to and are embraced by the term “gift”. B. FACTORS AFFECTING LIABILITY FOR GIFT TAXES 1. Relationship of the donor and the donee a) when the donee is considered a stranger to the donor, the donor’s tax shall be 30% of the net gifts. b) when the donee is a relative of the donor, the tax shall be based on the 2-15% table under Sec. 99(A). •

Stranger 1.) one who is not a : (a) brother/sister (whole or half blood), spouse, ancestor and lineal descendant (b) relative by consanguinity in the collateral line within the fourth degree of relationship 2.) donations made between individuals and business organizations are considered donations to

a.) Dowries or gifts made on account of marriage before its celebration or within one year thereafter by parents to each of their legitimate, illegitimate or adopted children to the extent of the first P10,000.00. Requisites: 1. The donation must be given on account of marriage. 2. The parent must give it to his child. 3. The child must be either the legitimate, recognized natural or legally adopted child of the donor, and; 4. It must be given before or one year after the celebration of the marriage. b.) Gifts made to or for the use of the National Government or any of its agencies which is not conducted for profit, or to any political subdivision of the said government. c.) Gifts in favor of educational, charitable, religious, cultural or social welfare corporation, institutions, foundations, trust or philanthropic organization, research institution or organization, or accredited non-government organization. Provided, that no more than 30% of said gifts shall be used by such donee for administration purposes. Note: For purposes of exemption, a non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization is defined as: • school, trust or university and/ or charitable corporation, foundation trust or philanthropic organization and/ or research institution or organization incorporated as a non-stock entity: • paying no dividends. • governed by trustees who receive no compensation; and

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 •

devoting all its income to the accomplishment and promotion of the purposes enumerated in its articles of incorporation.

14

D. TAX TREATMENT OF PROPERTIES TRANSFERRED FOR LESS THAN FULL / ADEQUATE CONSIDERATION General Rule: The amount by which the FMV of the property exceeded the value of the consideration shall be deemed a gift

Note: Only donations made to non-stock, non-profit educational institutions are exempt from gift taxes as although Article 14 of the Constitution states that proprietary educational institutions may be given the same privileges subject to a guideline; as a guideline, the NIRC does not provide for such exemption to them. BA RC O M2 008 -09

2. Gifts made by a Non-Resident Alien a.) Gifts made to or for the use of the National Government or any entity created by of its agencies which is not conducted for profit, or to any political subdivision of the said government. b.) Gifts in favor of educational, charitable, religious, cultural or social welfare corporation, institution, foundations trust or philanthropic organization, research organization or institution; Provided, that no more than 30% of said gifts shall be used by such donee for administration purposes. Note: doesn’t include accredited NGO Note: 1. Intangible personal property in the gross gift of a NONRESIDENT ALIEN donor shall be taxable in the Philippines, if the PRINCIPLE OF RECIPROCITY is not cognizable. 2. Intangible personal properties considered situated in the Philippines. • • • • •

Franchise which must be exercised in the Philippines Shares of stocks issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws. Shares of stocks issued by any foreign corporation 85% of the business of which is situated in the Philippines. Shares of stock issued by a foreign corporation, if such shares, obligations, or bonds, have acquired a business situs in the Philippines; and Shares or rights in any partnership, business or industry established in the Philippines.

Exception: real properties classified as capital assets (not used in business) as there were already subjected to Capital Gains Tax E. TAX TREATMENT OF POLITICAL CONTRIBUTIONS - 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; hence, this is not subject to gift tax (report to COMELEC?) F. TAX CREDIT FOR DONOR’S TAXES PAID TO A FOREIGN COUNTRY 1. Donor was a Filipino citizen or resident alien, at the time of foreign donation 2. Donor’s taxes of any character and description are imposed and paid by the authority of a foreign country. Limitations: A.) For donor’s tax paid to one foreign country; The amount of tax credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which credit is taken which the net gifts situated within such country taxable under the National Internal Revenue Code bears to his entire net gift, and B.) For donor’s tax paid to two or more foreign countries: 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 gift situated outside the Philippines taxable under the National Internal Revenue Code bears to his entire net gift.

Formula: 1. Donor’s Tax Paid to 1 Foreign Country Tax Credit Limit = Net gift situated in a foreign country X Phil. Donor’s Tax Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Entire net gifts

15

- the law in force at the time of the perfection / completion of the donation shall govern the imposition of donor’s tax. A donation is considered as completed FOR TAX PURPOSES at the time the donee accepts the gift.

2. Donor’s Taxes paid to 2 or more Foreign Countries J. ADMINISTRATIVE PROVISIONS Tax Credit Limit = 1. Filing of notice of donation

BA RC O M2 008 -09

Net gifts outside the Philippines X Phil. Donor’s Tax

Note: •

•

Entire net gifts

Under limitation A the allowable tax credit limit is the LOWER AMOUNT between the tax credit limit and the gift tax paid to the foreign country. Under limitation B the allowable tax credit is the LOWER AMOUNT between the tax credits; limit computed under A and that computed Under B.

Note: Void Donations Are Not Subject To Donor’s Tax Such as: • Between husband and wife, even if the relationship has not been solemnized. • Between persons guilty of adultery or concubinage. • Between those found guilty of the same criminal offenses. • Between those made to a public officer or his wife, descendants, ascendants by reason of his office. Note: Effects Of General And Specific Renunciation - An heir’s general renunciation of inheritance in favor of a co-heir is not subject to donor’s tax, but if it is specifically renounced in favor of a co-heir to the exclusion of others, it shall be subject to donor’s tax.

General Rule: Filing of notice of donation is not required Exception: if the donor wishes to claim exemption from tax and the donee is an organization under Sec.101(A3) and Sec. 101 (B2) Requisites to be exempt from gift tax : 1. Donor is engaged in business 2. Donee is any of the organizations mentioned under Sec. 101(A3) and Sec. 101 (B2) 3. Donor must give notice to the RDO on every donation worth at least P50,000. 4. The notice must be given within 30 days from the issuance by the donee of a Certificate of Donation. 5. The certificate of Donation must be attached to the notice. 2. Filing of Donor’s Tax Return - within 30 days after the completion of the gift - donation is completed FOR TAX PURPOSES at the time the donee accepts the gift - Contents: 1. Gifts made during the calendar year 2. Deductions claimed and allowed 3. Previous net gifts made during the year 4. Name of the done 5. Relationship of the donor and the done 6. Other information as may be required

Note: Renunciation of a surviving spouse of his/her share in the conjugal partnership or absolute community after dissolution of marriage - whether made in favor of the heirs of the deceased spouse or in favor of a third person, the same is subject to donor’s tax

3. Payment of Donor’s Tax - pay as you file the tax return - Note: if the donor’s tax was paid for the transfer, there is no more need to subject the transfer again to estate tax. Applying the Back Tax Theory, there is no tax that remained unpaid regarding this transfer.

G. NET GIFT - the total amount of gifts less the allowable deductions and specific exemptions. - the total net gifts made during the SAME calendar year is used as basis for computing the donor’s tax

4. Extensions For Payment Of Donor’s Tax - the NIRC does not provide for any extension for payment of gift tax, as it is presumed that if you can donate, you still have sufficient properties to pay for the tax. Unlike in estate tax where extension is granted, because the payment of the tax may cause undue hardship on the heirs specifically for nonliquid properties which requires time to be sold first to be converted into cash for payment of the estate tax.

H. VALUATION - the gift tax is based on the fair market value of the gift at the time it was given I. LAW APPLICABLE

TAX TIPS : Avoidance of Gift Taxes

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Execute a Deed of Extra-judicial Settlement with simultaneous general renunciation of all inheritance (by operation of law, the renounced inheritance will go to the co-heirs anyway). PROBLEMS ON DOWRY DEDUCTION 1. A is the child of H and W January – A got married, H and W gave him P2,000 March – H and W gave A P2,000 April – H and W gave A another P2,000 Can the parents claim dowry deduction even if these were made on a staggered basis? BA RC O M2 008 -09

- Yes, provided these were made on account of marriage, before the marriage or 1 year thereafter. 2. January - A married B and was given dowry February – B died December – A married C and was given dowry Can the parents of A still claim dowry deduction even if it was claimed already for the January dowry? - There is no rule on the matter yet but it is submitted that as it was made on account of 2 different marriages, the deduction for the December dowry may be made. 3. A and C are the children of H and W January - A married B, given dowry February – C married D, given dowry Can H and W claim dowry deduction for both? -Yes, as the dowries were given to different children 4. H and W jointly donated to their child A 1M on account of his marriage to B. Show computation. For each of H and W the computation is: 500,000 – to A 250,000 - to B 250,000 A 250,000 -10,000 240,000 *2 to 15% 3, 600

B 250,000 _______ 250,000 * 30% 75,000

16

the right of W to question the validity of the donation without her consent. PROBLEMS 1. Donations made by X January – 300,000 to his brother April – 400,000 to his sister August – 500,000 to his mother Compute donor’s tax: a) For January donation = 300,000 * (percentage in the 2 to 15% table) = tax b) For April Donation = (300,000 + 400,000) * (2 to 15% table) = tax c) For August Donation = (300,000 + 400,000 + 700,000) * (2 to 15% table) = tax less tax paid for January and April 2. X wants to give Y 200,000, will there be tax savings to X if he will donate one time the amount of 200,000 or should he split by donating 100,000 on December 2007 and 100,000 on January 2008? - It depends if X and Y are relative or not. a) relatives – yes, there will be savings as under the table in Section 99, the first 100,000 is exempt from Donor’s tax. No donor’s tax will then be paid for both donations. b) strangers – nom there will be no tax savings. A flat rate if 30% is imposed on donations made between strangers; hence, the same amount of P60,000 donor’s tax will be paid whether made one time or split. 3. X died and left 1M each to his heirs A, B, C. The heirs agreed to settle extrajudicially. a) A renounced his inheritance in favor of B. Is there liability for donor’s tax? - Yes, this is a case of waiver. A is deemed to have accepted the property before he gave it to B as one cannot give what one does not own. A specific renunciation is taxable. b) A renounced his share without specifying a co-heir who will receive the same. Is there liability for donor’s tax?

Note: Do not deduct the first 100,000 in case of doneerelatives as this is incorporated already in the table under Section 99.

- No donor’s tax because as if A never inherited anything from X and the transfer was made directly from X to B and C.

General Rule: H and W are considered separate and distinct taxpayers for purposes of donor’s tax. Exception: What was donated is a conjugal property and only H signed. There is only one donor, without prejudice to

VALUE ADDED TAX A.

Value Added Tax - Indirect Tax

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

17

- It is not the tax itself which is shifted or passed but it is the E. Zero rating vs. Exemption burden to pay the tax a. A zero-rated scale is taxable transaction, but does not  Why? Tax is Personal. Seller is still liable, only that the result in an output tax while an exempted transaction economic burden is shouldered by the buyer. is not subject to the output tax; b. The input VAT on the purchases of VAT-registered person with zero-rated sales may be allowed as tax B. Transactions Subject to VAT (ISBEL) credits or refunded while the seller in an exempt a. Importation – whether or not in the regular course of transaction is not entitled to any input tax on his business purchases despite the issuance of a VAT invoice or b. Sale receipt; and conducted in the c. Persons engaged in transactions which are zero-rated, c. Barter being subject to VAT, are required to register while regular course registration is option for VAT-exempt persons. d. Exchange of business e. Lease F. Tax Credits a. Transitional Input Tax Credits (Sec. 111(A), * The phrase “in the course of business” means the regular conduct NIRC, as amended by RA 9337) or pursuit of a commercial or an economic activity, including b. Presumptive Input Tax Credits (Sec. 111(B), transactions incidental thereto, by any person regardless of whether NIRC, as amended by RA 9337) or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. TAX ADMINISTRATION AND ENFORCEMENT * VAT becomes due when the following conditioned concur: A. Tax Administration: Its general concepts is the power of the Bureau of Internal a. There is sale, barter, exchange, transfer or similar Revenue (BIR) to enforced and administer transactions, either for nominal or valuable consideration, taxes. intended to transfer ownership of, or title to, articles imported, milled, produced or manufactured; and B. Government agencies involved in tax administration b. The sale is consummated, not merely perfected, in the the BIR and Bureau of Customs are tasked Philippines. The place where the title to the thing passes to implement revenues laws as the case determines the place of delivery or tax situs. may be. C. Specific Characteristics of VAT C. The Bureau of Internal Revenue a. Consumption Based Tax a. Composition Functions - the person who last consumes the product absorbs - The Bureau of Internal Revenue shall have the effect of VAT a chief to be known as Commissioner of Internal Revenue, hereinafter referred to as 1. Destination Principle the Commissioner and four (4) assistant - Goods are destined to be consumed in the chiefs to be known as Deputy Philippines Commissioners. (Sec. 3, NIRC) 2. Cross-border principle b. Powers and Duties - Goods going out of the Philippines shall not be i. In general subjected to tax since these goods are not destined to be consumed in the Phils. The Bureau of Internal Revenue shall be under the supervision and control of the *VAT is imposed only on whatever value was added. Department of Finance and its powers and duties shall comprehend the assessment D. Exempt Transactions (Sec. 109, NIRC, as amended and collection of all national internal by RA 9337) revenue taxes, fees, and charges, and the BA RC O M2 008 -09

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 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. (Sec. 2, NIRC) ii. Specific 1. Interpret tax laws and decide cases (Sec.4, NIRC)

BA RC O M2 008 -09

- 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.

-

18 the Bureau has the power to issue rules and issuances as the case may be but subject to the following rule:

SEC. 246. Non-Retroactivity of Rulings. Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases: (a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; (b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) Where the taxpayer acted in bad faith. 2. Examination of Books of Accounts (Sec. 5, NIRC) the Bureau has the power to examine books of accounts of every person (taxpayer) engaged in a business a.

a.

BIR Issuances relevant thereto

and

rules

The power to issue regulations is expressly conferred in the Tax Code. Thus, the Secretary of Finance, upon the recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of the Tax Code. (see Sec.244, NIRC). The rules and regulations of the Bureau shall contain, among others, provisions specifying, prescribing or defining the time and manner of canvassing revenue regions, form of labels, conditions to be observed by revenue officers respecting the institutions and conduct of legal actions. (see Sec.245, NIRC)

however before a tax official could inquire into said books of accounts a letter of authority is required.

b. What is “third-party verification rule”? - 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 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

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures of consortia and registered partnerships, and their members; c. Inquiry into bank deposits (Sec 6 {f}), NIRC) General Rule: The Bureau of Internal Revenue has no power to inquire into the bank deposits of a person or taxpayer.

BA RC O M2 008 -09

Exceptions: Notwithstanding any contrary provision of Republic Act No. 1405 and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of: 1) a decedent to determine his gross estate; and (2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A) (2) of this Code by reason of financial incapacity to pay his tax liability. In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405 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. Such limited power of the Commissioner does not conflict with R.A 1405 or the Secrecy of Bank Deposits Law because the provisions of the Tax Code granting this power are an exception to the said legislation. If the bank has knowledge of the death of a person, who maintained a bank deposit account either alone or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the transfer taxes imposed thereon have been paid. However the administrator of the estate or any one of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding twenty thousand pesos (P20, 000.00) without the 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

19

by any one of the joint depositors and such statement shall be under oath by the said depositors. d. Summons persons, take testimony 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: 1. 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 (Sec.5 {c}, NIRC) 2. To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry (Sec.5 {d}, NIRC) 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. 3. Power to assess and prescribe requirements for tax administration a.

Power to examine returns (Sec. 6 {a}, NIRC) 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

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 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. i.

importation of any article subject to excise tax under Title VI of this Code or in the manufacture or repair or sale, of any die for printing, or making of stamps, or labels shall upon conviction for each act or omission, be punished by a fine of not less than Five thousand pesos (P5,000) but not more than Ten thousand pesos (P10,000), or suffer imprisonment of not less than two (2) years and one (1) day but not more than four (4) years, or both. (see Sec.270, NIRC)

Amendment of Returns

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. (Sec. 6 {b}, NIRC)

BA RC O M2 008 -09

ii. Rule on confidentiality of tax returns and exceptions thereto (Sec.71 and 270, NIRC) 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 prescribed 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. (see Sec.71, NIRC) Any internal revenue officer who is or shall become interested, directly or indirectly, in the manufacture, sale or

20

b. Power to make a returns (Sec.6 {b}, NIRC) What is “Best Evidence Obtainable Rule”? -

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.

Power to conduct inventory taking, surveillance and to issue presumptive gross sales/receipts (see Sec.6 {c}, NIRC) 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 the Tax 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

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 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.

BA RC O M2 008 -09

-

-

d. Power to terminate tax period (see Sec. 6 {d}), NIRC) 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 therefore 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. the BIR has the power to terminate tax period under the following instances: • • • •

when the taxpayer conceals his properties with the intention to evade taxes when the taxpayer is leaving the Philippines with the intention to evade taxes when the taxpayer is obstructing proceedings for the collection of taxes when the taxpayer is removing properties with the intention of evading taxes

21 •

when the taxpayer is retiring form business

e. Power to fix real property values (see Sec.6 {e}, NIRC) -

The Commissioner is 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 the higher is 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. Power to accredit tax agents (see Sec.6 {g}, NIRC) 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

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 shall be deemed as approval of the application for accreditation of the appellant. g. Power to prescribe procedural/documentary requirements the BIR has the power to prescribe the manner of filing of a returns

i.

22 Non-delegable powers in relation to Section 16 of NIRC

-

the following are the powers which the Bureau of Internal Revenue cannot delegate: a.

-

h. Power to delegate (see Sec.7, NIRC) The Commissioner may delegate the powers vested in him under the pertinent provisions of the Tax 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:

-

BA RC O M2 008 -09

(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; (d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

as a general rule the power of the BIR to compromise cannot be delegated to other administrative agencies unless in the following grounds: 1. a reasonable doubt as to the validity of the claim against the taxpayer exists 2. financial inability to pay

The compromise settlement of any tax liability shall be subject to the following minimum accounts: a.

For cases of financial inability to pay, a minimum compromise rate equivalent to ten per cent (10%) of the basic tax assessed

b.

For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic tax assessed.

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

the power to compromise

Where the basic tax involved exceeds One million pesos (P 1,000,000.00) 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 Deputy Commissioners. All criminal violations may be compromised except those a. b.

those already filed in court those involving fraud (see Sec. 204 {a}, NIRC)

The taxpayer’s offer to compromise shall not be considered, unless and until he waives in writing his privilege under RA 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into his bank deposits. (see Sec. 6 {f}, NIRC) b. power to abate

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 The BIR may abate or cancel tax liability when: a. b.

the tax or any portion thereof appears to be unjustly or excessively assessed the administration and collection costs involved do not justify the collection of the amount due

BA RC O M2 008 -09

The power to compromise or abate shall not be delegated by the Commissioner, except in the following cases; a.

assessments issued by the regional offices involving basic taxes of P 500,000.00 or less b.

i.

Minor criminal violations. These cases may be compromised by the regional evaluation board. (see Sec.7, NIRC)

Enforcement of police power (see Sec.15, NIRC)

The Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the Revenue District Officers and other internal revenue officers shall have authority to make arrests and seizures for the violation of any penal law, rule or regulation administered by the Bureau of Internal Revenue. Any person so arrested shall be forthwith brought before a court, there to be dealt with according to law. j.

Authority to Abate and Compromise Tax Liabilities (see Sec.6 {f}{2}, 204 in relation to Rev. Regs.30-2002 as amended by RR No.8-2004)

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

23 (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. (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. D. The rule on estoppel in relation to administration a. Against the government

tax

The error made by a tax official in the assessment of his tax liabilities does not have the effect of relieving the taxpayer from the obligation to pay the full amount of his tax liability, for taxes are fixed by law and the government is never estopped to collect the legitimate taxes because of the errors committed by its agents. However, like other principles, the principle of estoppel also admits exceptions in the interest of justice and fair play. The Commissioner is precluded from adopting a position inconsistent with one previously taken where in justice would result therefore or where there has been a misrepresentation. Any mistakes committed by the agents of the sovereign, namely government officials and

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 employees are their own and cannot bind the government, which cannot be placed on estoppel on account of the mistakes of its agents. b. Against the taxpayer E. Assessments and its governing principles BA RC O M2 008 -09

a. Definition The notice and demand for payment of a tax liability should not be confused with assessment relative to real property taxation which refers to the listing and evaluation of taxable real property. b. What constitutes an assessment i. CIR v. Pascor Realty, 29 June 1999 Neither the NIRC nor the revenue regulations governing the protest of assessments provide a specific definition of form of an assessment however the NIRC defines the specific function and effects of an assessment: • • • • •

An assessment must be sent to and received by a tax payer, and must demand payment of the taxes described therein within a specific period. Issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest. An assessment is deemed made only when the collector of Internal Revenue releases or mails or sends such notice to the tax payer. An assessment is not necessary before acriminal charge can be filed. Before an assessment is issued, there is by practice, a pre-assessment notice sent to the tax payer.The tax Payer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him/her is then sent to the tax payer informing the latter specifically and clearly that an assessment has been made against him/her. In contrast, the criminal charge need not go through all this. ii. CIR v. Reyes, G.R. No. 159694, January 27,

2006 Tax payers shall be informed in writing of the law and the facts on which the assessment and the assessment is made; otherwise the assessment shall be void. (2nd paragraph of section 228 is clear and mandatory)

24

c. Kinds of Assessment d. Statute of Limitation on Assessment of Internal Revenue Taxes (Sections 203, 222, NIRC) General rule (sec203) Internal revenue taxes shall be assessed within three years after the last day prescribed for the filing of the return, and no proceeding in court without assessment for the collection of sluch taxes shall begun after the expiration of such period. Exceptions (sec.222) In the case of a false of fraudulent return with intent to evade tax or of failure to file a return, the tax collection may be filed without an assessment at any time within ten years after the discovery of the falsity, fraud or omission: If before the expiration of the time prescribed in the tax codes 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. i. RMO 20-90, Philippine Journalist Inc., v. CIR, G.R. No. 162852, 16 December 2004 Appellate Jurisdiction of the CTA is not limited to cases which involve decisions of the CIR on matters relating to assessments or refunds. The second part of the provision covers other cases that arise out of the NIRC or related laws and administered by the BIR. The wording of the provision is clear and simple. It gives the CTA the Jurisdiction to determine if the warrant of distraint and levy issued by the BIR is valid and to rule if the waiver of stature of limitations was validly effected. 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. The waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription as erroneously held by the CA. It is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due id extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally particularly where the language of the document is equivocal. For the purpose of

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 safeguarding taxpayers from any unreasonable examination, investigation or assessment, out tax law provides a statute of limitation in collection of taxes. Thus the law on prescription, being a remedial measure should be liberally construed in order to afford such protection/

the assessment and collection of tax, as required by the tax code and implementing rules, will not suspend the running thereof. (Exception: section 224) Wherein the statute of limitations on assessment and collection of taxes is considered suspended, when the tax payer request for a reinvestigation which is granted by the commissioner.

ii. CIR v. CA and Carnation, G. R. No. 115712, 25 February 1999 BA RC O M2 008 -09

Finality of findings of facts as a matter of principle, this court will not set aside the conclusion reached by an agency such as the CTA unless there has been an abuse or improvident exercise of authority. By the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise of the subject.

f. Procedure in the process of assessment (Section 228) i. Estate of the Late Juliana Diez Vda. De Gabriel v. CIR, G.R. No. 155541, January 27, 2004 The rule that an assessment is deemed made for the purpose of giving effect to such assessment when the notice is released, mailed or sent to the taxpayer to effectuate the assessment requires that the notice must be sent to the taxpayer, and not merely to a disinterested party. Although there is no specific requirement that the taxpayer should receive that notice within the said period, due process requires at the very least that such notice actually be received.

e. Instances where the running of the prescriptive period is suspended (section 223) i. Republic v. Hizon, 13 December 1999 Sec. 229 of the code mandates that a request for reconsideration must be made within thirty (30) days from the tax payer’s receipt of tax deficiency assessment, otherwise the assessment becomes final, unappealable and, therefore, demandable. The notice of assessment for respondent’s tax deficiency was issued by petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on November 3. 1992, without stating when she received the notice of tax assessment. She explained that she was constrained to ask for a reconsideration in order to avoid the harrrasment of BIR collectors. In all likelihood, she must have been referring to the distraint and levy of her properties by petitioner’s agents which took place of January 12, 1989. Even assuming that she first learned of the deficiency assessment on this date her request for reconsideration was nonetheless filed late since she made it more than 30 days thereafter. Hence, her request for reconsideration did not suspend the running for the prescriptive period provided under section 223. Although the commissioner acted on her request by eventually denying it on August 11, 1994, this is of no moment and does not distract from the fact that the assessment had become demandable ii. BPI v. CIR, G.R. No. 139736, 17 October 2005 The court had consistently ruled in a number of cases that a request for reconsideration by the tax payer without a valid waiver of the prescriptive period for

25

When an estate is under administration, notice must be sent to the administrator of the estate. ii. CIR v. Reyes, G.R. No. 159694, January 27, 2006 The tax payers shall be informed in writing of the law and facts on which the assessment is made otherwise the assessment itself is void. iii. CIR v. BPI, G.R. No. 134062, 17, April 2007 The inevitable conclusion is that BPI’s failure to protest the assessments within the 30-day period provided in the former section 270 meant that they became final and unappealable. Thus, the CTA correctly dismissed BPI’s appeal for lack of jurisdiction. BPI was, from then on barred from disputing the correctness of the assessments or invoking any defense that would reopen the question of its liability on the merits. Not only that. There arose a presumption of correctness when BPI failed to protest the assessments: Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a BIR examiner and approved by his superior offices will not be disturbed. All presumptions are in favor of the correctness of tax assessments.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 iv. PNOC v. Court of Appeals, G.R. No., 109976, April 26, 2005 The defense of prescription of the period for the assessment and collection of tax liabilities shall be deemed waived when such defense was not properly pleaded and the facts alleged and evidenced submitted by the parties were not sufficient to support a finding by the supreme court on the matter – prescription, being a matter of defense, imposes the burden on the taxpayer to prove that the full period of the limitation has expired, and this requires him to positively establish the date when the period started running and when the same was fully accomplished.

BA RC O M2 008 -09

g. Instances when pre-assessment is not required (Section 228) A preassessment notice shall not be required in the following cases: • When any tax deficiency is the result of mathematical error in the computation of the tax as appearing on the face of the return. • When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent. • When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year. • When the excise tax due on exciseable articles has not been paid. • When the article locally purchased or imported by an exempt person has been sold, traded, or transferred to non-exempt persons. h. Governing principles concerning assessment Injunction is not available to restrain the collection of internal revenue taxes. Exception: the Court of Appeals may issue injunctions against administrative collection, when collection could jeopardize the interest of the Government or taxpayer. i. When do we reckon the period when the assessment was made? Internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return.

26

In case where a return is filed beyond the three year period shall be counted form the day the return was filed. j. Is assessment necessary before a taxpayer could be prosecuted for violation of the NIRC? i. Ungab v. Cusi, May 30, 1980 What is involved here is not collection of taxes where the assessment of the commissioner of internal revenue may be reviewed by the court of tax appeals, but a criminal prosecution for violations of the NIRC which is within the recognizance of the CFI. While there can be no civil action to enforce collection before the assessment procedures provided in the code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the code. ii. CIR v. CA, G.R. No. 119322, 4 June 1996 Reading Ungab carefully, the pronouncement therein that deficiency assessment is not necessary prior to prosecution is pointedly and deliberately qualified by the Court with following statement quoted form Guzik v. U. S.: “the crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax.” In plain words, for criminal prosecution to proceed before assessment, there must be a prima facie showing of willful attempt to evade taxes. There was willful attempt to evade tax in Ungab because of the taxpayer’s failure to declare in his income tax return “his income derived from banana saplings.” In the mind of the trial court and the Court of Appeals, Fortune’s situation is quite apart factually since the registered wholesale price of the goods. Approved by the BIR, is presumed to be the actual wholesale price, therefore, not fraudulent and unless and until the BIR has made a final determination of what is supposed to be the correct taxes, the taxpayer should not be placed in the crucible of criminal prosecution. Herein lies a whale of difference between Ungab and the case at bar. iii. CIR v. Pascor Realty, 29 June 1999 The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 of NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222, on the other

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which t make an assessment or to protest the same, or whether interest and penalty may accrue thereon.

BA RC O M2 008 -09

k. Are the procedures outlined in Section 228 of the NIRC retroactive? i. CIR v. Reyes, G.R. No. 159694, January 27, 2006 The general rule is that statutes are prospective. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule against the retroactive operation of statutes. Clearly, Section 228 provides for the procedure in case an assessment is protested. The provision does not create new or take away vested rights. In both instances, it can surely be applied retroactively. Moreover, RA 8424 does not state, either expressly or by necessary implication, that pending actions are excepted from the operation of section 228, or that applying it to pending proceedings would impair vested rights. INTERNAL REVENUE TAX REMEDIES Tax Remedies: Its general concepts Importance: They exist to enhance the Government’s tax collection efforts, they, too, come in as safeguards against arbitrary action. While taxes are the lifeblood of the Government and should be collected without unnecessary hindrance, such collection must nevertheless be made in accordance with law as any arbitrariness will negate the very reason or the Government itself. Classification: 1.

Remedies in favor of the taxpayer A. Administrative (1) Before Payment a. Filing of a petition or request for reconsideration or reinvestigation (Administrative Protest); b. Entering into compromise (2) After Payment a. Filing of claim for tax refund; and

B.

2.

27

b. Filing of claim for tax credit Judicial (1) Civil action a. Appeal to the Court of Tax Appeals b. Action to contest forfeiture of chattel; and c. Action for Damages (2) Criminal Action Filing of complaint against erring Bureau of Internal Revenue officials and employees

Remedies available to the government

Applicability of the Doctrine Exhaustion of Administrative Remedies No civil or criminal action for the recovery of taxes shall be filed in court without the approval of the Commissioner. (Sec. 220, NIRC)

Remedies Available to Taxpayers A. Before Payment 1. Protest (Section 228, NIRC) Protest is a vital document which is a formal declaration of resistance of the taxpayer. It is a repository of all arguments. It can be used in court in case administrative remedies have been exhausted. It is also the formal act of the taxpayer questioning the official actuation of the CIR. This is equivalent to a pleading. It may be a: Request for reconsideration- a plea for the re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve a question of fact or law or both. Request for reinvestigation- a plea for reinvestigation of an assessment on the basis of newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve question of fact or law or both. Requirements of a valid protest 1. In writing; 2. Addressed to the CIR; 3. Must be accompanied by a waiver of the Statute of Limitations in favor of the government; 4. States the Facts, applicable law rules and regulations and jurisprudence on which his protest

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 is based; otherwise, his protest shall be considered void and without force and effect on the event the letter of protest submitted by the taxpayer is accepted; 5. Contains the following: 1. Name of the taxpayer and address for the immediate past three taxable years; 2. Nature of request whether reinvestigation or reconsideration specifying newly discovered evidence that he intends to present it is a request for reinvestigation; 3. Taxable periods covered by the assessment; 4. Amounts and kind/s of tax involved, and Assessment Notice Number; 5. Date of receipt of assessment notice or letter of demand; 6. Itemized statement of the findings to which the taxpayer agrees, if any, as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first; 7. Itemized schedule of the adjustments with which the taxpayer does not agree; 8. Statement of facts and/or law in support of the protest; and 9. Documentary evidence as it may deem necessary and relevant to support its protest to be submitted within sixty (60) days from the filing of the protest. If the taxpayer fails to comply with this requirement, the assessment shall become final. (Revenue Regulation No. 12-85, dated Nov. 27, 1985.) BA RC O M2 008 -09

Effect of a protest on the period to collect deficiency taxes: The prescriptive period is arrested by the taxpayer's request for re-examination or reinvestigation even if he has not previously waived it (CIR vs. Wyeth, G.R. No. 76281,Sep 30, 1991)

28

The decision of the Commissioner or his duly rep shall (a) state the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise the protest shall be considered void and without force and effect, in which case the same shall not be considered a decision a disputed assessment and (b) that the same is his final decision. (sec. 3.1.5, RR 12-99) B.Indirect Denial a. Commissioner did not rule on the taxpayer’s MR of the assessment – it was only when respondent received summons on the civil action for the collection of deficiency income tax that the period to appeal commenced to run. (CIR vs. Union Shipping b. Referral by the Commissioner of request for reinvestigation to the Solicitor General (Republic vs.Lim Tian Teng Sons) c. Reiterating the demand for immediate payment of the deficiency tax due to taxpayer’s continued refusal to execute waiver (CIR vs. Ayala Securities Corp.) d. Preliminary collection letter may serve as assessment notice (United Int’l Pictures vs. CIR) Acts of BIR Commissioner Considered as Denial of Protest which serves as a Basis for Appeal to CTA: 1. Filing by the BIR of a civil suit for collection of the deficiency tax (CIR v. Union Shipping Corp . 185 SCRA 547) 2. Indication to the taxpayer by the Commissioner in clear and unequivocal language of his final denial. (CIR v. Union Shipping Corp) 3. BIR demand letter reiterating his previous demand to pay, sent to taxpayer after his protest of the assessment (Surigao Electric Co. Inc. v. CTA, 57 SCRA 523) 4. The actual issuance of a warrant of distraint and levy in certain cases cannot be considered as final decision on a disputed settlement (CIR v. Union Shipping Corp) b. Effect of protest filed out of time

Failure of the BIR to act within the 180-day period. If the Commissioner or his duly authorized representative fails to act on the taxpayer’s protest within 180 days from the date of submission by the taxpayer of the required documents in support of his protest, the taxpayer may appeal to the CA within 30 days from the lapse of the 180-day period. Administrative actions taken during the 180-day period. 1. Grant of the Protest 2. Denial of Protest:

The pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court had the effect of temporarily staying the hands of the said Commissioner. If the taxpayer's stand that the pendency of the appeal did not stop the running of the period because the Court of Tax Appeals did not have jurisdiction over the case of taxes is upheld, taxpayers would be encouraged to delay the payment of taxes in the hope of ultimately avoiding the same. Under the circumstances, the running of the prescriptive period was suspended. Deficiency Percentage Taxes must be imposed. (PROTECTOR'S SERVICES, INC., petitioner, vs. CA, G.R. No. 118176, 2000 Apr 12)

A. Direct Denial Remedies from a denial of protest Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 1. Motion for reconsideration 2. Appeal to the Court of Tax Appeals(RA 1125, as amended by RA 9282)

return. This is so because at that point, it can already be determined whether there has been an overpayment by the taxpayer. Moreover, under Sec. 49 (a) by the NIRC (now Sec. 56(a), 1997 NIRC), payment is made at the time the return is filed. (CIR V CA, CTA, BPI, GR No. 117254. January 21, 1999) There is some likelihood that the above rule could apply also to individuals who are self employed (i.e., in business and professional practice) as well as estates and trusts, which are likewise required to file quarterly returns.

2. Compromise B. After Payment BA RC O M2 008 -09

1. Refund (Section 229, NIRC) The Legal Principle of quasi-contracts or solutio indebiti (see Art. 2142 & 2154 of the Civil Code). The Government is within the scope of the principle of solutio indebiti. (CIR vs. Fireman’s Fund Insurance Co.) a.

The prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished.(CIR V PHILAMLIFE, 244 SCRA 446. May 29, 1995)

Must be strictly construed against taxpayer

Grounds for filing a claim for refund: Erroneously or illegally assessed or collected internal revenue taxes;

29

2. In case of Amended Returns 3. In case of taxpayers contemplating dissolution

Taxpayer pays under the mistake of fact, as for instance in a case where he is not aware of the existing exemption in his favor at the time payments were made. A tax is illegally collected if payments are made under duress. 1. 2.

Who has the personality to file a claim for refund? The duty of the withholding agent to withhold the corresponding tax arises at the time of such accrual. The withholding agent/corporation is then obliged to remit the tax to the Government since it already and properly belongs to the Government. If a withholding agent who is personally liable for income tax withheld at source fails to pay said withholding tax, an assessment for said deficiency withholding tax would, therefore, be legal and proper. (FILIPINAS SYNTHETIC FIBER CORP. V CA, GR No.113347. June 14, 1996)

Penalties imposed without authority; and Any sum alleged to have been excessive or in any manner wrongfully collected. The value of internal revenue stamps when they are returned in good condition by the purchaser may also be redeemed. b.

1.

c.

Period within which to file a claim for refund General Rule is two years from the date of payment

The two-year prescriptive period provided in Section 292 (now Section 230 of the Tax Code should be computed from the time of filing the Adjustment Return or Annual Income Tax Return and final payment of income tax.(CIR vs. TMX SALES, G.R. No. 83736, 1992 Jan 15,) The rationale in computing the two-year prescriptive period with respect to the petitioner corporation's claim for refund from the time it filed its final adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in its business operations. The "date of payment", therefore, in ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final adjustment return. (ACCRA vs CA, G.R. No. 96322, 1991 Dec 20) The two-year period for prescription should be counted from the date of payment of the tax, which for actions for refund of corporate income tax should be computed from the time of actual filing of the adjustment return or annual income tax

d.

Is setting-off of taxes against a pending claim for refund allowed? e. Is automatic application of excess tax credits allowed? f. Effect of existing tax liability on a pending claim for refund g. Period of validity of a tax refund/credit 1. Returns are not actionable documents for purposes of the rules on civil procedure and evidence h. Refund and Protest are mutually exclusive remedies

i. Is the taxpayer entitled to claim interest on the refunded tax? General Rule: The Government cannot be required to pay interest on taxes refunded to the taxpayer, unless: 1. The Commissioner acted with patent arbitrariness

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions. (CIR vs. Victorias Milling Corp., Inc. L19607, Nov. 29, 1966.) 2. In case of Income Tax withheld on the wages of employees Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within 3 months from the fifteenth (15th) day of April. Refund or credit after such time earn interest at the rate of 6% per annum, starting after the lapse of the 3-month period to the date the refund or credit is made (Sec 79 (c) (2) 1997 NIRC

1.

BA RC O M2 008 -09

b.

Other Remedies





Action to Contest Forfeiture of Chattel (Sec. 231)

In case of seizure of personal property under claim for forfeiture, the owner desiring to contest the validity of the forfeiture may bring an action: a. Before sale or destruction of the property to recover the property from the person seizing the property or in possession thereof upon filing of the proper bond to enjoin the sale. b. After the sale and within 6 months to recover the net proceeds realized at the sale (see. Sec. 231, 1997 NIRC) Action partakes the nature of an ordinary civil action for recovery of personal property or the net proceeds of its sale which must be brought in the ordinary courts and not the CTA 2.



Redemption of Property Sold (Sec. 214)

Remedies available to the Government A. No Injunction to restrain collection of taxes ( Sec. 218, NIRC) G.R. No Court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee, or charge imposed by the NIRC. EXC: CTA may enjoin the collection of Internal Revenue taxes. REQUISITES: 1. there is a pending case before the CTA (ancillary remedy, not a main cause of action) 2. identify that the collection of tax is prejudicial to the interest of either the TP or government. B. Period within which the government could collect ( Secs. 203, 222, NIRC) Assessment of Tax Liability

30 Three (3)years from the following, whichever comes later: 1. The last day prescribed by law for filing the return 2. The day when the return was actually filed Ten (10) years after the discovery of the falsity, fraud or omission in case of: 1. False or fraudulent return with intent to evade tax, or 2. Failure to file a return Within the period agreed upon, when both the TP and the Commissioner have agreed in writing, before the expiration of the period in Sec. 203 for the assessment of the tax.

CASES: REPUBLIC V. HIZON, DEC. 13, 1999 • Revenue Adm. Order No. 10-95 specifically authorizes the Litigation and Prosecution section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIR’s Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law. • Sec. 7 of NIRC, authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provision of the Code to any subordinate official with the rank equivalent to a division chief or higher. CIR V. JAVIER, JULY 31, 1991 • There was no actual intentional fraud in filing the return. Private respondent’s notation on the tax return was at most an error or mistake of fact or law not constituting fraud, an invitation for investigation and private respondent had literally” laid his cards on the table. PNOC V. CA, APRIL 26, 2005 C. OVERVIEW OF REMEDIES (SECTION 205) 1. Tax Lien (Sec 219, NIRC) 

When a taxpayer neglects or refuses to pay his internal revenue tax liability after demand, the amount so demanded shall be a lien in favor of the government from the time the assessment was made by the Commissioner until paid with interest,

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 penalties, and costs that may secure in addition thereto, upon all property and rights to property belonging to the taxpayer. 



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 Register of Deeds of the province or city where the property of the taxpayer is located. A tax lien created in favor of the government is superior to all other claims and preferences, even to that of a private litigant predicated on a court judgment.

BA RC O M2 008 -09

Extinguishment of Tax Lien 1. Payment or remission of the tax 2. Prescription of the right of the government to assess or collect. 3. Failure to file notice of such lien in the office of register of Deeds, purchases or judgment creditor. 4. Destruction of the property subject to the lien. NOTE: In Nos. 1 and 2, there is no more tax liability while under nos. 3 and 4, the taxpayer is still liable.

2.

31 The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax

Cases that may be compromised 1. 2. 3. 4. 5.

Delinquent accounts Cases under administrative protest Cases disputed before the courts Cases for collection already filed in courts Criminal violations except those already filed, and those involving fraud.

Cases that cannot be compromised 1. 2. 3. 4. 5. 6.

Withholding tax cases Criminal tax fraud cases Criminal cases already filed in court Delinquent accounts with duly approved schedule of installment payments Cases where reduction of payments had already been granted. cases already decided and are final and executory

Compromise of criminal violation CASE: CIR V. NLRC, NOV. 09, 1994 • A tax lien created in favor of the government is superior to all other claims and preferences, even to that of a private litigant predicated on a court judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. 2.

Compromise  CIR may compromise both civil and criminal liability of the taxpayer. REQUISITES: 1. The taxpayer have a tax liability 2. There must be an offer by the taxpayer of an amount to be paid by the taxpayer 3. There must be an acceptance by the Commissioner or the taxpayer as the case may be of the offer in the settlement of the original claim Grounds for compromise 1. A reasonable doubt as to the validity of the claim against the taxpayer exists; or

• • •

In criminal violations, the compromise must be made prior to the filing of the information in court. All criminal violations may be compromised except:

1. 2.

those already filed in court; and those involved in fraud.

Limitations: 1. Minimum compromise rate: a. 10% of the basic tax assessed – in case of financial incapacity. b. 40% of basic tax assessed – other cases. 2. Subject to approval of the Evaluation Board a. When basic tax involved exceeds P1,000,000.00 or b. Where settlement offered is less than the prescribed minimum rates. Delegation of Power to Compromise General Rule: The power to compromise or abate shall not be delegated by the commissioner. Exception: The Regional Evaluation Board may compromise the assessment issued by the regional offices involving basic taxes of P 500,000.00 or less. Remedy in case of failure to comply: The CIR may either:

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

32

a. Enforce the compromise, or b. Regard it as rescinded and insists upon the original demand. 3. 4. 5. 6.

Distraint and/or Levy Civil Action Criminal Action Forfeiture  Implies a divestiture of property without compensation, in consequence of a default or offense. 

It includes the idea of not only losing but also having the property transferred to another with out the consent of the owner and wrongdoer.

BA RC O M2 008 -09

Effect: Transfer the title to the specific thing from the owner to the government. When available: a. No bidder for the real property exposed for sale. b. If highest bid is for an amount insufficient to pay the taxes, penalties and costs. With in two days thereafter, a return of the proceeding is duly made. How enforced: a. In case of personal property – by seizure and sale or destruction of the specific forfeited property. b. In case of real property – by a judgment of condemnation and sale in a legal action or proceeding, civil or criminal, as the case may require. When forfeited property to be destroyed or sold: a. To be destroyed – by order of the CIR when the sale for consumption or use of the following would be injurious to the public health or prejudicial to the enforcement of the law: (at least 20 days after seizure) 1. distilled spirits 2. liquors 3. cigars 4. cigarettes, and other manufactured products of tobacco 5. playing cards 6. All apparatus used in or about the illicit production of such articles. b. To be sold or destroyed – depends upon the discretion of CIR 1. All other articles subject to exercise tax, (wine, automobile, mineral

2.

products, manufactured oils, miscellaneous products, nonessential items a petroleum products) manufactured or removed in violation of the Tax Code. Dies for printing or making IR stamps, labels and tags, in imitation of or purport to be lawful stamps, labels or tags.

Where to be sold: a. Public sale: provided, there is notice given not less than 20 days. b. Private sale: provided, it is with the approval of the Secretary of Finance. Right of Redemption: a. Personal entitled – taxpayer or anyone for him b. Time to redeem – within one (1) year from forfeiture c. Amount to be paid – full amount of the taxes and penalties, plus interest and cost of the sale d. To whom paid – Commissioner or the Revenue Collection Officer e. Effect of failure to redeem – forfeiture shall become absolute. NOTE: The Register of Deeds is duty bound to transfer the title of property forfeited to the government with out necessity of an order from a competent court. 7. Suspension of Business Operations 8. Enforcement of Administrative Fines D. ADMINISTRATIVE REMEDIES IN DETAIL (SECS. 206-217, NIRC) A. DISTRAINT - Seizure by the government of personal property, tangible or intangible, to enforce the payment of faces, to be followed by its public sale, if the taxes are not voluntarily paid. KINDS a. Actual – There is taking of possession of personal property out of the taxpayer into that of the government. In case of intangible property, taxpayer is also diverted of the power of control over the property. b. Constructive – The owner is merely prohibited from disposing of his personal property.

Difference between Actual and Constructive Distraint

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Actual Made on the property only of a delinquent taxpayer. There is actual taking or possession of the property. Effected by having a list of the distraint property or by service or warrant of distraint or garnishment. An immediate step for collection of taxes where amount due is definite.

Constructive May be made on the property of any taxpayer whether delinquent or not Taxpayer is merely prohibited from disposing of his property. Effected by requiring the taxpayer to sign a receipt of the property or by leaving a list of same Such immediate step is not necessary; tax due may not be definite or it is being questioned.

BA RC O M2 008 -09

Requisites: 1. Taxpayer is delinquent in the payment of tax. 2. Subsequent demand for its payment. 3. Taxpayer must fail to pay delinquent tax at time required. 4. Period with in to assess or collect has not yet prescribed. When remedy not available: Where amount involved does not exceed P100. In keeping with the provision on the abatement of the collection of tax as the cost of same might even be more than P100. Procedure: 1. Service of warrant of distraint upon taxpayer or upon person in possession of taxpayer’s personal property. 2. Posting of notice is not less than two places in the municipality or city and notice to the taxpayer specifying time and place of sale and the articles distrained. 3. Sale at public auction to highest bidder 4. Disposition of proceeds of the sale. Who may effect distraint 1. Commissioner or his duly authorized representative 2. Revenue District Officer (RDO)

Amount Involved In excess of P1,000,000.00 P1,000,000.00 or less

How Actual Distraint Effected 1. In case of Tangible Property: a. Copy of an account of the property distrained, signed by the officer, left either with the owner or person from whom property was taken, at the dwelling or place

b. c. 2.

33 of business and with someone of suitable age and discretion Statement of the sum demanded. Time and place of sale.

In case of intangible property: a. Stocks and other securities Serving a copy of the warrant upon taxpayer and upon president, manager, treasurer or other responsible officer of the issuing corporation, company or association. b. Debts and credits 1. Leaving a copy of the warrant with the person owing the debts or having in his possession such credits or his agent. 2. Warrant shall be sufficient authority for such person to pay CIR his credits or debts. c.

Bank Accounts – garnishment 1. Serve warrant upon taxpayer and president, manager, treasurer or responsible officer of the bank. 2. Bank shall turn over to CIR so much of the bank accounts as may be sufficient.

How constructive Distraint Effected 1. Require taxpayer or person in possession to: - Sign a receipt covering property distrained - Obligate him to preserve the same properties. - Prohibit him from disposing the property from disposing the property in any manner, with out the authority of the CIR. 2. Where Taxpayer or person in possession refuses to sign: - Officer shall prepare list of the property distrained. - In the presence of two witnesses of sufficient age and discretion, leave a copy in the premises where property is located. Grounds of Constructive Distraint 1. Taxpayer is retiring from any business subject to tax. 2. Taxpayer is intending to leave the Philippines; or 3. To remove his property there from. 4. Taxpayer hides or conceals his property. 5. Taxpayer acts tending to obstruct collection proceedings. NOTE: 1. Bank accounts may be distrained without violating the confidential nature of bank accounts for no inquiry is made. BIR simply seizes so much of the deposit with out having to know how much the

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

2.

3.

deposits are or where the money or any part of it came from. If at any time prior to the consummation of the sale, all proper charges are paid to the officer conducting the same, the goods distrained shall be restored to the owner. When the amount of the 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 articles, the CIR or his deputy may purchase the distrained property on behalf of the national government.

BA RC O M2 008 -09

B. LEVY OF REAL PROPERTY - an act of seizure of real property in order to enforce the payment of taxes. The property may be sold at public sale, if after seizure the taxes are not voluntarily paid. NOTE: The requisites are the same as that of distraint. Procedure: 1. International Revenue officer shall prepare a duly authenticated certificate showing a. Name of taxpayer b. Amount of tax and c. Penalty due. - enforceable throughout the Philippines 2. Officer shall write upon the certificate a description of the property upon which levy is made. 3. Service of written notice to: a. The taxpayer, and b. RD where property is located. 4. Advertisement of the time and place of sale. 5. Sale at public auction to the highest bidder. 6. Disposition of proceeds of sale. NOTE: The excess shall be turned over to owner. Redemption of property sold or forfeited a. Person entitled: Taxpayer or anyone for him b. Time to redeem: one year from date of sale or forfeiture - Begins from registration of the deed of sale or declaration of forfeiture. - Cannot be extended by the courts. c. Possession pending redemption: owner not deprived of possession d. Price: Amount of taxes, penalties and interest thereon from date of delinquency to the date of sale together with interest on said purchase price at 15% per annum from date of purchase to date of redemption. Difference between Distraint and Levy Distraint Levy personal property real property forfeiture by government, not forfeiture by government provided authorized where there is no

Taxpayer no given the right of redemption

1. 2.

34 bidder or the highest bid is not sufficient to pay the taxes, penalties and costs. Taxpayer can redeem properties levied upon and sold/forfeited to the government.

Both are summary remedies for collection of taxes. Both cannot be availed of where amount involved is not more than P100.

NOTE: 1. It is the duty of the Register of Deeds concerned upon registration of the declaration of forfeiture, to transfer the title to the property with out of an order from a competent court 2. The remedy of distraint or levy may be repeated if necessary until the full amount, including all expenses, is collected. C. GARNISHMENT Bank Accounts – garnishment 1. Serve warrant upon taxpayer and president, manager, treasurer or responsible officer of the bank. 2. Bank shall turn over to CIR so much of the bank accounts as may be sufficient. E. JUDICIAL REMEDIES IN DETAIL (SEC 220, NIRC) 1. Period within which the action may be filed Civil and Criminal Actions: 1. Brought in the name of the Government of the Philippines. 2. Conducted by Legal Officer of BIR 3. Must be with the approval of the CIR, in case of action, for recovery of taxes, or enforcement of a fine, penalty or forfeiture. A. CIVIL CASES (SECS 203,222,NIRC)  Three (3)years from the following, whichever comes later: 3. The last day prescribed by law for filing the return 4. The day when the return was actually filed  Ten (10) years after the discovery of the falsity, fraud or omission in case of: 3. False or fraudulent return with intent to evade tax, or 4. Failure to file a return  Within the period agreed upon, when both the TP and the Commissioner have agreed in writing, before the expiration of the period in Sec. 203 for the assessment of the tax.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Where to File 1) Court of Tax Appeals- where the principal amount of taxes and fees exclusive of charges and penalties claimed is one million pesos and above 2) RTC, Mun. TC, Metro TC- where the principal amount of taxes and fees, exclusive of charges and penalties claimed is less thanP1,000,000.00 (Sec 7[c], RA 9282)  The approval of the CIR is essential in civil cases (Sec. 220). However under Sec. 7 of NIRC, the Commissioner may delegate suchpower to a Regional Director. BA RC O M2 008 -09





Actions instituted by the government to collect internal revenue taxes in regular courts (RTC or MTCs, depending on the amount involved). It includes filing by the government with the probate court claims against the deceased taxpayer. Resorted to when the tax liability becomes final and unappealable, or when the decision of the Commissioner becomes final or executory. When:

•

A tax is assessed and the assessment becomes final and unappealable because the taxpayer fails to file an administrative protest with the BIR within 30 days from the receipt of the assessment. • When an administrative protest filed by the taxpayer against the assessment is denied, in whole and in part or Is not acted upon within 180 days from submission of the documents, and • The taxpayer adversely affected by the decision or inaction fails to file an appeal with the CTA within 30 days from receipt of said decision or from the lapse of the180 day period. B. CRIMINAL CASES ( TITLE X, NIRC; SEC. 281, NIRC) 

All violations of any provision of the tax code shall prescribe after five (5) years.

NOTE: • When should it commence: The five (5) year prescriptive period shall begin to run from the a. If known, day of the commission of the violation. b. If not known, from the time of discovery and the institution of judicial proceeding for its investigation and punishment. • When is it interrupted: a. When a proceeding is instituted against the guilty person b. When the offender is absent from the Philippines.

•

35

When should it run again: When the proceeding is dismissed for reason not constituting jeopardy.

Where to file 1) Court of Tax Appeals- on criminal offenses arising from violations of the NIRC or TCC and other laws administered by the BIR and the BOC, where the principal amount of taxes and fees, exclusive of charges and penalties claimed is P1,000,000.00 and above. 2) RTC, Mun. TC, Metro TC- on criminal offenses arising from violations of the NIRC or TCC and other laws administered by the BIR and the BOC, where the principal amount of taxes and fess exclusive of charges and penalties claimed is less than P1,000,000.00 or where there is no specified amount claimed (Sec 7[b], RA 9282) CASES: REPUBLIC V. HIZON, DEC. 13, 1999 (re: approval of filing of civil and criminal actions) • Revenue Adm. Order No. 10-95 specifically authorizes the Litigation and Prosecution section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIR’s Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law. • Sec. 7 of NIRC, authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provision of the Code to any subordinate official with the rank equivalent to a division chief or higher. • CIR V. LA SUERTE CIGAR, JULY 04, 1992 (re: participation of the Office of the Solicitor General) • The institution or commencement before a proper court of civil and criminal actions and proceedings arising under the Tax Reform Act which "shall be conducted by legal officers of the Bureau of Internal Revenue" is not in dispute. An appeal from such court, however, is not a matter of right. Section 220 of the Tax Reform Act must not be understood as overturning the long established procedure before this Court in requiring the Solicitor General to represent the interest of the Republic. This Court continues to maintain that it is the Solicitor General who has the primary responsibility to appear for the government in appellate proceedings. •

PNOC V. CA, APRIL 26, 2005

•

LIM V. CA, OCT. 18, 1990 ( re: prescription of criminal actions, Sec, 281, NIRC)

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 •

should be filed 5 years from the (1) day of the commission of the violation of the law, and if the same shall be not known, from the (2) discovery thereof and the institution of the judicial proceedings for its investigation and punishment.

MARCOS II V. CA, JUNE 5, 1997 (re: enforcement of tax liability during pendency of probate proceedings) • The BIR is authorized to collect estate tax deficiency through the summary remedy of the levying upon and sale of properties of a decedent, without the cognition and authority of the court sitting in probate over the supposed will of the deceased, because the collection of estate tax is executive in character. As such the estate tax is exempted from the application of the statute of the non – claims, and this is justified by the necessity of the government finding, immortalized in the maxim that taxes are the lifeblood of the government BA RC O M2 008 -09

E. EFFECTS OF FAILURE TO PAY THE TAX ON TIME: ADDITIONS TO THE TAX (CHAPTER I, TITLE X, NIRC) 1. SURCHARGES- a civil penalty imposed by law as an addition to the main tax required to be paid. It is not a criminal penalty but a civil administrative sanction provided primarily as safeguard for the protection of the State revenue and to reimburse the government for the expenses of investigation and the loss resulting from the taxpayer’s fraud. A surcharge added to the main tax is subject to interest. a. ORDINARY (SEC. 248A, NIRC)

Penalty: 50% of the amount due, in addition to the tax required to be paid a. b.

b.

c. d.

Failure to file any return and to pay the tax due thereon as required by the NIRC or rules. Filing a return with an internal revenue officer other than those with whom the return is required to be fired. Not authorized officer. Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. Failure to pay the full or part of the amount of tax shown on any return, 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. FRAUD PENALTY (SEC. 248B, NIRC)

In case of willful neglect to file the return within the period prescribed by the NIRC or rule. In case a false or fraudulent return is willfully made.

CASE: CIR V. JAVIER, JULY 31, 1991 • There was no actual intentional fraud in filing the return. Private respondent’s notation on the tax return was at most an error or mistake of fact or law not constituting fraud, an invitation for investigation and private respondent had literally” laid his cards on the table. 2. INTEREST- This is an increment on any unpaid amount of tax assessed at the rate of 20% per annum or such higher rate as may be prescribed by the regulations from the date prescribed for payment until the amount is fully paid. Classes of interest 1. 2. 3.

Deficiency interest Delinquency interest Interest on extended payment

Deficiency interest •

Penalty: 25% of the amount due, in addition to the tax required to be paid a.

36

Any deficiency in the tax due shall be subject to the interest of 20% per annum which shall be assessed and collected from the date prescribed for its payment until the full payment thereof.

When delinquency interest imposed? •

Delinquency interest is imposed in case of failure to pay: 1. The amount of the tax due on any return required to be filed; or 2. The amount of tax due for which no return is required; or 3. A deficiency tax or any surcharge or interest thereon on the issue date appearing in the notice and demand of the Commissioner.

•

Rate is 20% per annum until the amount is fully paid which interest shall form part of the tax.

Interest on Extended Payment.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 1) any person who is qualified and elects to pay the tax on installment but fails to pay the tax, or any installment, or any part on or before the date prescribed; or 2) where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, 3) from the date of notice and demand until it is paid. BA RC O M2 008 -09

Compromise Penalty 1. It is a certain amount of money which the taxpayer pays to compromise a tax violation. 2. It is pain in lieu of a criminal prosecution. 3. Since it is voluntary in character, the same may be collected only if the taxpayer is willing to pay them. Failure to File Certain Information Returns (Sec. 250, NIRC) A) Penalty: P 1,000 for each failure B) The aggregate amount for all such failure shall not exceed P 25,000 during a calendar year C) Upon notice and demand by the Commissioner D) Unless it is shown that such failure is due to reasonable cause and not to willful neglect. In the case of each failure to file: 1) information return; 2) statement or list; 3) keep any record; 4) supply any information E) required by this Code or by the Commissioner on the date prescribed thereof. LOCAL TAXATION A. Local Taxation: General Concepts 1. Nature of Local Taxing Power a.

Constitutional Provision (Section 5, Article X) “Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.”

b.

Delegated Power i. City of San Pablo Laguna vs. Reyes, March 25, 1999 “The power to tax is primarily vested in Congress. However, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid

37 delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. The important legal effect of Section 5 is that henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will have to resolved in favor of municipal corporations.”

ii. Meralco vs. Province of Laguna, May 5, 1999 “Prefatorily, it might be well to recall that local governments do not have the inherent power to tax except to the extent that such power might be delegated to them either by the basic law or by statute. Presently, under Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local government units. The 1987 Constitution has a counterpart provision in the 1973 Constitution, which did come out with a similar delegation of revenue making powers to local governments. Under the regime of the 1935 Constitution no similar delegation of tax powers was provided, and local government units instead derived their tax powers under a limited statutory authority. Whereas, then, the delegation of tax powers granted at that time by statute to local governments was confined and defined (outside of which the power was deemed withheld), the present constitutional rule (starting with the 1973 Constitution), however, would broadly confer such tax powers subject only to specific exceptions that the law might prescribe. Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened and made more autonomous, the legislature must still see to it that (a) the taxpayer will not be overburdened or saddled with multiple and unreasonable impositions; (b) each local

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 government unit will have its fair share of available resources, (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.”

resilience in matters of local development on the part of local government leaders.” The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers.”

iii. Mactan Cebu International Airport Authority vs. Marcos, September 11, 1996 “The taxing powers of local government units cannot extend to the levy of, inter alia, “taxes, fees and charges of any kind on the National Government, its agencies and instrumentalities, and local government units”; however, pursuant to Section 232, provinces, cities, and municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, “real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person,” as provided in item (a) of the first paragraph of Section 234.”

-

Extent of the Power of Congress in Local Taxation City Govt. of Quezon City vs. Bayantel, March 6, 2006 “The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy.

BA RC O M2 008 -09

iv. NAPOCOR vs. City of Cabanatuan, April 9, 2003 “In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country’s highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also “dampened the spirit of initiative, innovation and imaginative

38

Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, .the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress." In net effect, the controversy presently before the Court involves, at bottom, a clash between the inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local government’s delegated power to tax under the aegis of the 1987 Constitution.” 2.

Fundamental Principles in the exercise of Local Taxing Power (Sec. 130, LGC)

3.

Exercise of Local Taxing Power

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 B. Common Limitations on the Exercise of Local Taxing Power 1.

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code."

The Principle of Preemption / Exclusionary Rule (Sec. 133, LGC) - If the national government elects to tax a particular subject within a Local Government Unit, it is impliedly withholding the power of LGU to tax the same. - Adopted in the Philippines despite nonprohibition of double taxation unless expressly allowed by Congress.

It is clear that the legislative intent in excluding from the taxing power of the local government unit the imposition of business tax against common carriers is to prevent a duplication of the so-called "common carrier's tax."

BA RC O M2 008 -09

2.

Cases: a. Province of Bulacan vs. CA, November 27, 1998 A province may not levy excise taxes on articles already taxed by the National Internal Revenue Code. It is clearly apparent from Section 151 of the National Internal Revenue Code levies a tax on all quarry resources, regardless of origin, whether extracted from public or private land. Thus, a province may not ordinarily impose taxes on stones, sand, gravel, earth and other quarry resources, as the same are already taxed under the National Internal Revenue Code. The province can, however, impose a tax on stones, sand, gravel, earth and other quarry resources extracted from public land because it is expressly empowered to do so under the Local Government Code. As to stones, sand, gravel, earth and other quarry resources extracted from private land, however, it may not do so, because of the limitation provided by Section 133 of the Code in relation to Section 151 of the National Internal Revenue Code. b.

Petitioner is already paying three (3%) percent common carrier's tax on its gross sales/earnings under the National Internal Revenue Code.[19] To tax petitioner again on its gross receipts in its transportation of petroleum business would defeat the purpose of the Local Government Code. c.

First Philippine Industrial Corp. vs. CA, December 9, 1998 (Section 133j; Local Tax on Common Carriers) There is no doubt that petitioner is a "common carrier" and, therefore, exempt from the business tax as provided for in Section 133 (j), of the Local Government Code, to wit: "Section 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following : xxx

xxx

xxx

39

d.

Palma Development Corp. vs. Municipality of Malangas, October 16, 2003 (Sec. 133e) By express language of Sections 153 and 155 of RA No. 7160, local government units, through their Sanggunian, may prescribe the terms and conditions for the imposition of toll fees or charges for the use of any public road, pier or wharf funded and constructed by them. A service fee imposed on vehicles using municipal roads leading to the wharf is thus valid. However, Section 133(e) of RA No. 7160 prohibits the imposition, in the guise of wharfage, of fees -- as well as all other taxes or charges in any form whatsoever -- on goods or merchandise. It is therefore irrelevant if the fees imposed are actually for police surveillance on the goods, because any other form of imposition on goods passing through the territorial jurisdiction of the municipality is clearly prohibited by Section 133(e). Batangas Power Corp. vs. Batangas City, April 28, 2004 (Section 133g) Sec. 133 (g) of the LGC, which proscribes local government units (LGUs) from levying taxes on BOI-certified pioneer enterprises for a period of six years from the date of registration, applies specifically to taxes imposed by the local government, like the business tax imposed by Batangas City on BPC in the case at bar. Reliance of BPC on the provision of Executive Order No. 226,[18] specifically Section 1, Article 39, Title III, is clearly misplaced as the six-year tax holiday provided therein which

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

BA RC O M2 008 -09

3.

commences from the date of commercial operation refers to income taxes imposed by the national government on BOI-registered pioneer firms. Clearly, it is the provision of the Local Government Code that should apply to the tax claim of Batangas City against the BPC. The 6year tax exemption of BPC should thus commence from the date of BPC’s registration with the BOI on July 16, 1993 and end on July 15, 1999.

operation of the same. Section 133(l) is only for franchise where to grant the same is within the discretion of LGUs. The permit to drive is issued by LTO. 4.

-

Those already covered by the National Internal Revenue Code, i.e. Income tax, Transfer tax, VAT, percentage tax, Excise Tax, Documentary Stamp Tax; Those already covered by the Tariff and Customs Code; - Duties upon products about to be exported and goods passing through territorial jurisdiction cannot be taxed by LGUs.

-

Taxation of the National Government, including its agencies and instrumentalities as we as local government units;

-

Those subjects not within the ambit of real taxation by reason of public policy, i.e. Cooperatives registered under RA 6938 (CDA);

-

Those enjoying privileges as granted by the Board of Investments (Investments Priorities Plan); - Both pioneer and non-pioneer enterprises enjoy such kind of privileges under the Omnibus Investments Code.

-

Taxes on agricultural or aquatic products sold by marginal enterprises;

-

Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles.

-

LTO vs. Butuan – Congress has no intention to delegate issuance of permits to LGUs. The intention of the law is to centralize issuance of permits to drive motor vehicles including tricycles is to monitor the

Time of Payment (Section 167, LGC) Unless otherwise provided in LGC, all local taxes, fees, and charges shall be paid within the first twenty (20) days of January or of each subsequent quarter, as the case may be. The Sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six (6) months.

Local Taxing Power cannot extend to: -

40

5.

Surcharges, Interests and Penalties

C. Residual Power to Tax (Sec. 186) - The power of LGU to tax even of not expressly granted by the LGC provided that there is no express prohibition. D. Specific Taxing Units 1. Provinces may tax: i. Transfer of Real Property ownership - Onerous or gratuitous - Preemption rule is not applicable - ½ of 1% ii. Printing and Publication

iii. Franchise Tax - Government franchise, whether primary or secondary, i.e. public utility companies - If the franchise grants tax exemption and the same was executed prior to 1991 LGC, it is deemed revoked by reason of the law’s blanket revocation. - At a rate not exceeding ½ of 1% of the Gross Amount receipt of the preceding calendar year iv. Professional Tax - Those who have passed government licensure examinations are the ones liable - Amount – not exceeding Php 300.00 - Imposed by the city or province where the taxpayer’s principal office is located - With employer-employee relationship – liability to PTR depends on the extent of services provided. If services provided is exclusive to the employer, PTR is not necessary, otherwise, the employee is liable.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

41

4) Levy (Sec. 174 and 176,. LGC) v. Sand and Gravel Tax - Imposed on extraction of sand, gravel and other quarry resources - Not more than 10% of the FMV of what was extracted - Case: Province of Bulacan vs. CA

• Contents of assessment: 1.

BA RC O M2 008 -09

vi. Amusement Tax - As high as 30% - Applies to theaters, cinemas, concert halls, boxing stadiums, circuses and other places of amusements.

vii. Taxes on Delivery trucks 2.

Cities may tax those that may be taxed by a province and a municipality. They may impose a tax rate which is 50% higher than the rates being imposed by provinces and municipalities.

3.

Municipalities i. Business permit ii. Community Taxes iii. May levy taxes, fees, and charges not otherwise levied by provinces (Sec. 142)

REMEDIES IN LOCAL TAXATION A. REMEDIES OF THE GOVERNMENT a.

ADMINISTRATIVE 1) Local Government’s Lien (Sec 173, LGC) 2) Assessment by the Local Treasurer 3) Distraint of goods, chattels or effect and other personal properties of whatever character (Sec. 174 and 175, LGC) a.

Seizure

b.

Accounting of distrained goods

c.

Publication

d.

Release of distrained property upon payment prior to sale

e.

Procedure of sale

f.

Disposition of proceeds

Meralco vs. Barlis (Feb. 1, 2002) - A notice of assessment as provided for in the Real Property Tax Code should effectively inform the taxpayer of the value of a specific property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. The petitioner is also correct in pointing out that the last paragraph of the said notices that inform the taxpayer that in case payment has already been made, the notices may be disregarded is an indication that it is in fact a notice of collection. It could only qualify as a notice of collection if there is an unmistakable demand for payment of back taxes. • Who is entitled to the notice of assessment

1.

Talusan vs. Tayag, (April 04, 2001) - Cases involving an auction sale of land for the collection of delinquent taxes are in personam. Thus, notice by publication, though sufficient in proceedings in rem, does not as a rule satisfy the requirement of proceedings in personam. As such, mere publication of the notice of delinquency would not suffice, considering that the procedure in tax sales is in personam. It was, therefore, still incumbent upon the city treasurer to send the notice of tax delinquency directly to the taxpayer in order to protect the interests of the latter. In the present case, the notice of delinquency was sent by registered mail to the permanent address of the registered owner in Manila. In that notice, the city treasurer of Baguio City directed him to settle the charges immediately and to protect his interest in the property. Under the circumstances, we hold that the notice sent by registered mail adequately protected the rights of the taxpayer, who was the registered owner of the condominium unit. For purposes of the real property tax, the registered owner of the property is deemed the taxpayer. Hence, only the registered owner is entitled to a notice of tax delinquency and other proceedings relative to the tax sale. Not being

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 registered owners of the property, petitioners cannot claim to have been deprived of such notice. In fact, they were not entitled to it. b.

JUDICIAL (Sec. 174, LGC) 1) Civil Action in the court

BA RC O M2 008 -09

2) Filed by Local Treasurer 3) Within 5 years from the date the taxes, fees or charges became due

i. Surcharge – not exceeding 25% of the amount of taxes, fees or charges not paid on time and ii. Interest – not exceeding 2% per month of the unpaid taxes, fees or charges, including surcharges, until such amount is fully paid, BUT in no case shall the total interest on the unpaid amount or portion thereof exceed 36 months. B. REMEDIES OF THE TAXPAYER a.

1.

Drilon vs. Lim, (August 4, 1994) Section 187 authorizes the Secretary of Justice to review only the constitutionality or legality of the tax ordinance and, if warranted, to revoke it on either or both of these grounds. When he alters or modifies or sets aside a tax ordinance, he is not also permitted to substitute his own judgment for the judgment of the local government that enacted the measure. Secretary Drilon did set aside the Manila Revenue Code, but he did not replace it with his own version of what the Code should be. He did not pronounce the ordinance unwise or unreasonable as a basis for its annulment. He did not say that in his judgment it was a bad law. What he found only was that it was illegal. All he did in reviewing the said measure was determine if the petitioners were performing their functions is accordance with law, that is, with the prescribed procedure for the enactment of tax ordinances and the grant of powers to the city government under the Local Government Code. As we see it, that was an act not of control but of mere supervision.

2.

Hagonoy Market Vednors Assn. vs. Municipality of Hagonoy. Bulacan, (February 6, 2002) - Sec. 187, LGC requires that an appeal of a tax ordinance or revenue measure should be made to the Secretary of Justice within 30 days from effectivity of the ordinance and even during its pendency, the effectivity of the

OTHER PROVISIONS • Accrual of the tax – (Sec. 166, LGC)

-

General rule: All local taxes, fees, and charges shall accrue on the 1st day of January of each year.

-

Except: i. Unless otherwise provided in the LGC,

ii. New taxes, fees or charges, or changes in the rates thereof, shall accrue on the 1 st day of the quarter next following the effectivity of the ordinance imposing such new levies or rates Time of payment – (Sec. 167, LGC) -

General Rule: All local taxes, fees and charges shall be paid within the first 20 days of January or of each subsequent quarter, as the case may be.

-

Except: i. Unless otherwise provided by the LGC

ii. The Sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges or penalties, but only for a period not exceeding 6 months. • Surcharges, Interests and Penalties – (Sec. 168, LGC) -

Sanggunian may impose:

ADMINISTRATIVE • Appeal to the Secretary of Justice; Re: newly enacted tax ordinance (Sec. 187, LGC) – Any question on the constitutionality or legality of tax ordinances or revenue measures; Within 30 days from its effectivity.

• Period within which to collect – within 5 years from the date of assessment by administrative or judicial action c.

42

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 assailed ordinance shall not be suspended. In the case at bar, Municipal Ordinance No. 28 took effect in October 1996. Petitioner filed its appeal only in December 1997, more than a year after the effectivity of the ordinance in 1996. Clearly, the Secretary of Justice correctly dismissed it for being time-barred. At this point, it is apropos to state that the timeframe fixed by law for parties to avail of their legal remedies before competent court is not a "mere technicality" that can be easily brushed aside. The periods stated in the section are mandatory. Ordinance No. 28 is a revenue measure adopted by the municipality of Hagonoy to fix and collect public market stall rentals. Being its lifeblood, collection of revenues by the government is of paramount importance. The funds for the operation of its agencies and provision of basic services to its inhabitants are largely derived from its revenues and collections. Thus, it is essential that the validity of revenue measures is not left uncertain for a considerable length of time. Hence, the law provided a time limit for an aggrieved party to assail the legality of revenue measures and tax ordinances.

BA RC O M2 008 -09

3.

Ty vs. Trampe, (December 1, 1995) – Petitioners failed to appeal the assessment of their properties to the Board of Assessment Appeal within sixty (60) days from the date of receipt of the written Notice of Assessment, and if it is true that petitioner, as alleged in their pleadings, was not afforded the opportunity to appeal to the board of assessment appeal, then they could have availed of the provisions of Section 252, of the same R.A. 7160 by paying the real estate tax under protest. Because of petitioner’s failure to avail of either Sections 226 or 252 of R.A. 7160, they failed to exhaust administrative remedies provided for by law before bringing the case to Court. Therefore the filing of this case before this Court is premature, the same not falling under the exception because the issue involved is not a question of law but of fact. • Appeal to the Board of Assessment Appeals (Secs. 226 and 252, LGC) –

-

Sec. 226, LGC – Any owner or person who is not satisfied with the action of the

43 provincial, city or municipal assessor in the assessment of his property; Within 60 days from receipt of the written notice of assessment; Appeal to the BAA of the province or city by filing a petition under oath and copies of the tax declarations and affidavits or documents in support of appeal.

-

Sec. 252 (d), LGC – In the event that the protest is denied or upon the lapse of the 60-day period to decide, the taxpayer may appeal to the BAA. • Protest of the assessment (Sec. 226 and 252, LGC)

-

Pay under protest and such shall be annotated in the tax receipt

-

Protest in writing must be filed within 30 days from payment of the tax to the provincial, city or municipal treasurer, who shall decide the protest within 60 days from receipt.

-

The tax or a portion thereof paid under protest shall be held in trust by the treasurer concerned.

-

Protest decided in favor of taxpayer – the amount or portion of the tax protested shall be refunded to the protestant or applied as tax credit against his existing or future tax liability.

-

Protest denied or upon lapse of the period to decide - appeal to the BAA. • Claim for refund (Sec. 253, LGC)

-

When an assessment of basic real property tax, or any other tax levied is found to be illegal or erroneous and the tax is accordingly reduced or adjusted,

-

The taxpayer may file a written claim for refund or credit of taxes and interests

-

With the provincial or city treasurer

-

Within 2 years from the date the taxpayer is entitled to such reduction or adjustment.

-

The provincial or city treasurer shall decide the claim for refund or credit within 60 days from receipt

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 -

In case the claim is denied, the taxpayer may appeal to the BAA. • Remedies from a denial of the protest and refund

-

-

It should not only be the written claim before the treasurer that must be filed in 2 years but the taxpayer must also be able to file a case in court before the expiration of the 2 year period. There is no appellate remedy from the denial of the treasurer before the regular court but an independent and original action for refund.

BA RC O M2 008 -09

b. JUDICIAL • Questioning Tax Sale REAL PROPERTY TAXATION

44

 Provisions of LGC are applied nationwide but rates imposed are different per LGU ordinance The real property tax has been considered and held to be national, despite the fact that in practice it is local in its imposition and utilization. Justice Vitug points out that: “The real property tax has been considered and held to be a national, not a local tax in Meralco Securities Industrial Corp v. CBAA, 114 SCRA 260. The Court said that realty tax has always been imposed by the national law-making body. The real estate tax is enforced throughout the Philippines and not in a particular political subdivision, although the bulk of the tax proceeds accrue to the various local government units where the property is located. Under the Local Government Code, local government units are mandated to fix a uniform rate of basic real property tax applicable to their respective localities, the proceeds of which exclusively accrue to them. (See Secs. 233 and 271, LGC)”, [Page 479, Tax Law and Jurisprudence, 2000 Edition by Justice Vitug and Judge Acosta].

Real Property Tax, defined A direct tax on ownership of lands and buildings or other improvements thereon Payable regardless of whether the property is used or not, although the value may vary in accordance with such factor.

CHARACTERISTIC OF REAL PROPERTY TAX: 1. Direct tax on the ownership of real property 2. Ad Valorem tax. The value is based on the tax base 3. Proportion - the tax is calculated on the basis of a certain percentage of the value assessed 4. Indivisible single obligation 5. Local Tax

A.

C. Fundamental Principles Governing Appraisal and Assessment of Real Property (Section 198, LGC) 1. Real property shall be appraised at its current and fair market value. 2. Real property shall be classified for assessment purposes on the basis of its actual use. 3. Real property shall be assessed on the basis of a uniform standard within each local government unit. 4. The appraisal, assessment, and collection of real property tax shall not be let to any private person; and 5. The appraisal and assessment of real property shall be equitable.

Governing Law Historical Background: 1. Commonwealth Act No. 470 – Old Assessment Law - since 1920 2. Real Property Tax Code (Presidential Decree No. 464, as amended) - June 1, 1974 3. Local Government Code (Republic Act No. 7160) - January 1, 1992 - The changes however were only on the tax rate ceilings and assessment levels. The Local Government Code covers the administration, appraisal, assessment, levy and collection of Real Property Tax, i.e. tax on land and building and other structures and improvements on it, including machineries. (Subject to the definition given by Art. 415 of the New Civil Code) B. Nature of Real Property Tax – National or Local?  Hybrid of national and local tax

D. Properties Covered (Sec. 232, LGC) 1. Land, 2. Buildings 3. Machinery and 4. Other improvements exempted under said code (Sec 232, LGC)

not

otherwise

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Machinery – embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, selfpowered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes. (Sec. 199 [o], LGC)

BA RC O M2 008 -09

Machinery which are of general purpose use including but not limited to office equipment, typewriters, telephone equipment, breakable or easily damaged containers (glass or cartons), microcomputers, facsimile machines, telex machine, cash dispensers, furnitures and fixtures, freezers, refrigerators, display cases or racks, fruit juice or beverage automatic dispensing machines which are not directly and exclusively used to meet the needs of a particular industry, business or activity shall not be considered within the definition of machinery. (Sec. 290 [o], IRR of RA 7160) Improvements include valuable additions made to a property or an amelioration in its condition, amounting to more than a mere repair or replacement of parts involving capital expenditures and labor, which is intended to enhance its value, beauty or utility or to adopt it for new or further purposes. Note: Although the term real property has not been expressly defined in the LGC, early decisions of the Supreme Court in Mindanao Bus Co. v City Assessor of Cagayan de Oro, 6 SCRA `97; Board of Assessment Appeals v Meralco, 119 PHIL 328; Manila Electric Co. v Board of Assessment Appeals,10 SCRA 68) seem to suggest that Art. 415 of the Civil Code could also be controlling, to wit:. “Art. 415. The following are immovable property: (1) Land, buildings, roads and constructions of all kinds adhered to the soil; (2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; (3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated

therefrom without breaking deterioration of the object;

45 the

material

or

(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; (5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works; (6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included; (7) Fertilizer actually used on a piece of land; (8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant; (9) Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast; (10) Contracts for public works, and servitudes and other real rights over immovable property. “ In Caltex vs. CBAA, May 31, 1982: Machinery and equipment, consisting of underground tanks, elevated tanks, water tanks, gasoline pumps, computing pumps, water pumps, car washer, car and truck hoists, air compressors and similar articles, installed by Caltex (Philippines) Inc. in its gasoline stations, located on leased land, have been held to be real property subject to the tax. (real properties which have characteristics of permanency, the lease is for a long period of time) 2001 BAR QUESTION: Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, they must be placed by the owner of the land and, in addition, must tend to directly meet the

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2

improvements actually, directly and exclusively used for religious, charitable, or educational purposes. - traditional exemptees

needs of the industry or works carried on by the owner. Oil companies, such as Caltex and Shell, install underground tanks in the gasoline stations located in land leased by the oil companies from others. Are those underground tanks, which were not placed there by the owner of the land but by the lessee, considered real property for purposes of real property taxation under the LGC? SUGGESTED ANSWER FROM UP LAW CENTER: Yes. The underground tanks although installed by the lessee, Shell and Caltex, are considered as real property for purposes of the imposition of real property taxes. It is only for purposes of executing a final judgment that these machinery and equipment, installed by the lessee on a leased land, would not be considered as real property. But in the imposition of real property tax, the underground tanks are taxable as necessary fixtures of the gasoline station without which the gasoline station would not be operational. (Caltex v. CBAA, 114 SCRA 296).

c. All pieces of machinery and equipment that are actually, directly, and exclusively used by local water districts, and government – owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power.

BA RC O M2 008 -09

d. All real property owned by duly registered cooperatives as provided for under RA 6938, and e. Machinery and equipment used for pollution control and environmental protection. 2. Section 238, LGC Idle Lands Exempt From Tax: By reason of: a. force majeure b. civil disturbance c. natural calamity d. any cause which legally/physically prevents the owner of the property or person having legal interest therein from improving, utilizing, or cultivating the same

SPECIAL CLASSES OF REAL PROPERTY (Sec. 216, LGC) 1. HOSPITALS 2. CULTURAL and SCIENTIFIC purposes 3. owned and used by LOCAL WATER DISTRICTS 4. GOCCs rendering essential public services in the supply and distribution of water and/or generation or transmission of electric power. E. Properties Exempt 1. Section 234, LGC a. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; - except: when beneficial use thereof is granted to a taxable person - cases of MIAA and MCAA: GOCCs are not automatically exempt from real property tax, depending on its charter giving it exemption - charter enacted after LGC so that the exemption is not revoked b.

Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non profit or religious cemeteries, and all lands, buildings, and

46

What Are Considered as Idle Lands: (Sec. 237, LGC) 1. Agricultural lands – More than 1 hectare if more than ½ of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein. Not Idle Lands: � Agricultural lands planted to permanent or perennial crops with at least 50 trees to a hectare � Lands actually used for grazing purposes 2. Non-Agricultural Lands – More than 1,000 sq. m. in area if more than ½ of which remain uncultivated or unimproved by the owner of the property or person having legal interest therein. Proof of Tax Exemption: Every person by or for whom real property is declared who shall claim the exemption shall file with the provincial, city or municipal assessor within 30 days from date of declaration of real property sufficient documentary

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 evidence in support of such claim (i.e. corporate charters, title of ownership,articles of incorporation, contracts, affidavits, etc.) 3. Constitutional Exemptions - actually, directly, exclusively used for religious, educational and charitable purposes are exempt from real property tax

BA RC O M2 008 -09

Query: To where does the exemption attach? To the property or to the entity? Case: X owns a parcel of land, leased by church. May X claim exemption from Real Property Taxation? Yes, exemption attaches on property as long as exclusively used for religious purchases. Case: School - not subject to Real Property Tax if directly used for educational purposes. A. Has a mansion near the school where the president of the school resides and where guests may be accommodated - incidental, president has to live near school B. Near the school is a hospital where medical students are trained - incidental to operation of the school (Herrera vs. CBAA – use as trainee students) C. Near the school is a men’s dorm, a student center – exempt, incidental to operation of the school D. Near the school is another school building with 2 floors used as classrooms while 2 floors are for commercial stores. - incidental to operation of school (Bishop of Neva Segovia Case – vegetable garden near convent is incidental to convent operation) - that part not used for educational purpose is subject to real property tax - As to the land, pro-rate according to use, onehalf taxed pursuant to Abra Valley College Case

Note: Incidental exemptions promulgated prior to 1987 Constitution – meant, primarily used for the purposes even if not solely. CASES:

47 1. In MIAA v. Paranaque, July 20, 2006, the Court declared the Airport Lands and Buildings of the Manila International Airport Authority exempt from the real estate tax imposed by the City of Parañaque. The Court declared void all the real estate tax assessments issued by the City of Parañaque on the Airport Lands and Buildings of the MIAA, except for the portions that the MIAA has leased to private parties. The Court based its ruling under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs the legal relation and status of government units, agencies and offices within the entire government machinery, under which MIAA is a government instrumentality and not a government-owned or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any kind" by local governments. The only exception is when MIAA leases its real property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in which case the specific real property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by the City of Parañaque. Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public use, are properties of public dominion and thus owned by the State or the Republic of the Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which includes public airports and seaports, as properties of public dominion and owned by the Republic. As properties of public dominion owned by the Republic, there is no doubt that the Airport Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local Government Code. Furthermore, the Court made a distinction between a GOCC and an instrumentality. Thus:

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x A government-owned or controlled corporation must be "organized as a stock or non-stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting shares.

BA RC O M2 008 -09

MIAA is also not a non-stock corporation because it has no members. Since MIAA is neither a stock nor a nonstock corporation, MIAA does not qualify as a government-owned or controlled corporation. Thus, for an entity to be considered as a GOCC, it must either be organized as a stock or non-stock corporation. Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital stock divided into shares, and (2) that it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for nonstock corporations, they must have members and must not distribute any part of their income to said members. 2. In Lung Center of the Philippines vs. Quezon City, June 29, 2004, the Court held that Lung Center of the Philipines, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used

48 altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. However, those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. “Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 enterprise under the business name "Elliptical Orchids and Garden Center." Accordingly, the Court held that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.”

BA RC O M2 008 -09

Analysis: Is Lung Center liable for Real Property Tax? Yes. a. exclusively used means solely used for charitable purposes b. exemption in its charter revoked by new LGC c. incidental exemption no longer recognized d. taxed on orchidarium, canteen, private clinics Query: applicable so that they are taxable?

are the older cases now not now -

-

not clear as to the extent of Lung Center case as to areas which used to be considered as real property tax exempted as incidental If city decides to tax SLU on its hospital, parking lot, etc., use as ground that they should be exempt due to necessity, do not use the word “incidental”

49 4. In DIGITEL vs. Province of Pangasinan, February 23, 2007, the Court ruled that in view of the unequivocal intent of Congress to exempt from real property tax those real properties actually, directly and exclusively used by petitioner DIGITEL in the pursuit of its franchise, respondent Province of Pangasinan can only levy real property tax on the remaining real properties of the grantee located within its territorial jurisdiction not part of the above-stated classification. Said exemption, however, merely applies from the time of the effectivity of petitioner DIGITEL’s legislative franchise and not a moment sooner. 5. In Philippine Fisheries Development Authority vs. Court of Appeals, July 31, 2007, the Court reversed the Court of Appeal’s decision which held that petitioner Philippine Fisheries Development Authority is liable to pay real property taxes on the land and buildings of the Iloilo Fishing Port Complex which are owned by the Republic of the Philippines but operated and governed by the Authority. The Court ruled that the Authority is not a GOCC but an instrumentality of the national government which is generally exempt from payment of real property tax. However, said exemption does not apply to the portions of the IFPC which the Authority leased to private entities. With respect to these properties, the Authority is liable to pay real property tax. The Authority should be classified as an instrumentality of the national government. As such, it is generally exempt from payment of real property tax, except those portions which have been leased to private entities.

3. In LRTA vs. CBAA, October 12, 2000, though the creation of the LRTA was impelled by public service – to provide mass transportation in MM- its operations undeniably partakes of ordinary business. . . Given that it is engage in a service-oriented commercial endeavour, its carriage ways and terminal stations are patrimonial property subject to tax, notwithstanding its claim of being a GOCC.

F. May LGUs grant exemption? Yes

Under its charter, LRT is not exempt from real property tax. Taxation is the rule and exemption is the exception.

- Although powerless to grant RPT exemption, LGU in MM can exempt the 5% ad valorem

Power to Grant Local Exemptions (Sec. 192 LGC) - LGUs, may through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions, as they may deem necessary.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 tax on idle lands.

50

1. The preparation of Schedule of Fair Market Values.

- LGUs (within and outside MM) may also grant condonation which actually partake of exemption. G. Who are liable for the Real Property Taxes 1. Ownership vs. Use Doctrine of Ownership - owner is liable Doctrine of Use - property is exempt due to Use (REC-religious, educational, charitable)

BA RC O M2 008 -09

Actual Use of Property as Basis for Assessment (Sec. 217, LGC) Real property shall be classified, valued and assessed on the basis of actual use regardless of where located, whoever owns it, and whoever uses it. Beneficial User May Be Liable if: * he leased property from the government * he leased property from an exempt owner * use is not exempt from real property tax 2. In Testate Estate of Concordia Lim vs. Manila, February 21, 1990, GSIS foreclosed the property mortgaged by Lim and for failure to redeem, owned by GSIS for the years 1977 to 1978. In 1979, heirs of Lim repurchased the property. Manila sought to levy real property tax on heirs for back taxes covering 1977 and 1978. Who is lible for the back taxes? a. not the heirs because they were not the owners nor beneficial owners at the time b. not GSIS because at the time it was exempt c. beneficial users or those using the property for commercial use must pay however not made liable since not impleaded H.

2. The enactment of Ordinances: a) levying an annual "ad valorem" tax on real property and an additional tax accruing to the SEF. b) fixing the assessment levels to be applied to the market values of real properties; c) providing necessary appropriation to defray expenses incident to general revision of real property assessments; and d) adopting the Schedule of Fair Market Values prepared by the assessors. The preparation of fair market values as a preliminary step in the conduct of general revision was set forth in Section 212 of R.A. 7160, to wit: (1) The city or municipal assessor shall prepare a schedule of fair market values for the different classes of real property situated in their respective Local Government Units for the enactment of an ordinance by the sanggunian concerned. (2) The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality concerned or the posting in the provincial capitol or other places as required by law. The Court also laid down the procedure in computing the real property tax. With the introduction of assessment levels, tax rates could be maintained, although tax payments can be made either higher or lower depending on their percentage (assessment level) applied to the fair market value of property to derive its assessed value which is subject to tax. Moreover, classes and values of real properties can be given proper consideration, like assigning lower assessment levels to residential properties and higher levels to properties used in business. The procedural steps in computing the real property tax are as follows: 1) Ascertain the assessment level of the property 2) Multiply the market value by the applicable assessment level of the property 3) Find the tax rate which corresponds to the class (use) of the property and multiply the assessed value by the applicable tax rates.

Procedure in Real Property Taxation

In Lopez vs. City of Manila, February 19, 1999, the Court discussed the steps to be followed for the mandatory conduct of General Revision of Real Property assessments, pursuant to the provision of Sec. 219, of R.A. No. 7160 which are as follows:

The computation of real property tax is cited below: Market Value Pxxx

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Multiplied by Assessment Level

(x %)

Assessed Value

Pxxx

Multiplied by Rate of Tax

(x %)

Real Property Tax Pxx

BA RC O M2 008 -09

1. Declaration of Real Properties – whose duty? DECLARATION OF REAL PROPERTY It shall be the responsibility of the owner, administrator or their representatives to declare, under oath, the true value of real property, taxable or exempt, within 60 days after the acquisition. The sworn declaration shall be filed once every 3 years before June 30th of the year commencing 1992. The failure or refusal to make that declaration within the prescribed period would authorize the provincial or city assessor to declare the property in the name of the defaulting owner, if known, or against an unknown owner as the case may be, and to assess the property for taxation. (Secs. 201-204 LGC). In the case of Testate Estate of Concordia Lim V. City of Manila, February 21, 1990, it was held that the unpaid tax attaches to the property and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the real property tax on the subsequent owner who was neither the owner nor the beneficial user of the property during the designated periods would not only be contrary to law but also unjust.

a. Owner or Administrator (Secs. 202-203, LGC) When: once every 3 years during the period from January 1 to June 30 What: file a sworn declaration with the assessor with description of the property � IF newly acquired property a. files with assessor within 60 DAYS from date of transfer a b. SWORN statement containing FMV and description of property � IF improvement on real property

51

a. file w/in 60 DAYS upon completion or occupation (whichever is earlier) b. SWORN statement containing FMV and description of property b. Provincial / City / Municipal Assessor (Sec. 204) WHEN only when the person under Sec 202 refuses or fails to make the declaration within the prescribed time. No oath by assessor is required • NOTE: IF FILING FOR EXEMPTION (Sec. 206) WHAT person claiming exemptions must file with assessor sufficient documentary evidence to support claim WHEN within 30 days from the date of DECLARATION of property • IF required evidence is not submittedwithin 30 days, the property will be listed as taxable in the roll • IF proven to be tax-exempt, property will be dropped from the roll • NOTE: IF PROPERTY DECLARED FOR THE FIRST TIME (Sec. 222) If declared for 1st time, real property shall be assessed for back taxes a) for not more than ten (10) years prior to the date of initial assessment b) taxes shall be computed on the basis of applicable schedule of values in force during the corresponding periods *Assessor will compare the entry on file with the Registry of Deeds and the assessment roll in his office. c. building officials Prior to construction of building, as required in procuring building permit. Permit transmitted by building officials to Registry of Deeds. d. Geodetic engineers - For lands surveyed e. Notaries Public - For document notarization, must furnish the assessors a copy 2. Valuation by Assessors Assessment - the act or process of determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. Appraisal - the act or process of determining the value of property as of a specific date for a specific purpose.

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS (Secs. 205, 207) � Listing of all Real Property whether taxable or exempt within the jurisdiction of LGU in the assessment roll. o Undivided real property – in the name of the estate or heirs or devisees o Corporation, partnership and association – same as individuals o Owned by the Republic of the Philippines, its instrumentalities, political subdivisions, beneficial use is transferred to a taxable person – in the name of the possessor BA RC O M2 008 -09

� All declarations shall be kept and filed under a uniform classification system to be established by the provincial, city or municipal assessor. Steps in assessment of Real Property : 1. Listing of all properties subject to the tax; and 2. The valuation of such properties. In Callanta vs. Ombudsman, January 30, 1998, where the issue was whether officials and employees of the Office of the City Assessor may reduce the new assessed values of real properties upon requests of the affected property owners, the Court ruled that forestall the practice of initially setting unreasonably high reassessment values only to eventually change them to unreasonably lower values upon "requests" of property owners, the law gives no such authority to the city assessor or his subalterns.. . Thus, petitioners' unauthorized reduction of the assessed values ineluctably resulted in the local government's deprivation of the corresponding revenues. Lost or reduced revenues undeniably translate into damages or injury within the contemplation of the law. The city government of Cebu, therefore, had every legal right to feel aggrieved and to institute the proceeding against petitioners. 3. Preparation of Schedule of Fair Market Values APPRAISAL AND VALUATION OF REAL PROPERTY (Sec 212-214, 224-225)

52

3. Sanggunian enacts an ordinance. 4. The schedule of FMV is published in a newspaper of general circulation in the province city or municipality concerned or in the absence thereof shall be posted in the provincial capitol city or municipal hall places therein (Sec. 212, LGC) Classification of Land for purposes of assessment - Sec 218, LGC 1. Commercial – land devoted principally for the object of profit and is not classified as agricultural, industrial, mineral, timber, or residential land 2. Agricultural – land devoted principally to the planting of trees, raising of crops, livestock and poultry, dairying, salt making, inland fishing and similar aquacultural activities, and other agricultural activities 3. Residential – land principally devoted to habitation 4.Mineral- lands which minerals, metallic or non-metallic, exist in sufficient quantity or grade to justify the necessary expenditures to extract and utilize such materials 5. Industrial-land devoted principally to industrial activity as capital investment and is not classified as agricultural, commercial, timber, mineral or residential land 6. Timberland 7. Special - Classification of lands made by respective sanggunian in accordance with zoning ordinances. -It is based on actual use. Actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof. For Machinery 1. For Brand New machinery : FMV is acquisition cost 2. In all other cases: FMV = Remaining economic life x Replacement cost DETERMINE ASSESSED VALUE (Sec. 218) Procedure 1. take the schedule of FMV (Fair Market Value) 2. Assessed value = FMV x Assessment level 3. Real Property Tax = Assessed value x Allowable Real Property Tax rate 4.Enactment of a Real Property Tax Ordinance

How to determine Fair Market Value:

Barangays cannot impose realty taxes. Municipalities cannot fix real estate tax rates.

For Land 1. Assessor of the province/city or municipality may summon the owners of the properties to be affected and may take depositions concerning the property, its ownership amount, nature and value. (sec. 213,LGC) 2. Assessor prepares a schedule of FMV for different classes of properties.

Procedure: a.hearing and modification of prepared schedule b.publication c.adoption of the schedule d.adoption of real property ordinance with assessment levels

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Coverage / Types of Real Property Tax: 1. Basic real property tax / Annual Ad Valorem Tax For real property not specifically exempted a.Provinces – not more than 1% of assessed value; b.Cities, Municipalities in MM – not more than 2% of assessed value BA RC O M2 008 -09

2. Special levies: a. Special Education Fund (SEF) - 1% additional real estate tax to finance the SEF (Sec.236) – within MM area only b. Additional Ad Valorem on the Lands – not exceeding 5% of the assessed value of the property (Sec. 236, LGC) c. Special Assessments/ For Public Works - on lands specially benefited by public works, projects or improvements funded by the LGU - May be imposed even by municipalities outside MM provided: - Special levy shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith not apply to lands exempt from basic real property tax and the remainder of the land have been donated to the local government unit concerned for the construction of said projects. (Sec. 240, LGC). Special Levy Requirements for validity: 1. infrastructure project financed by government whereby real property owners benefit from it 2. not more than 60% of actual cost of project 3. not less than five but not more than ten years 4. thru an ordinance a. nature of project b. extent of project c. cost spent d. metes and bounds What may be done: i. levy ad valorem taxes (see above) ii. Fix Assessment levels Assessment level – is the percentage applied to the fair market value to determine the taxable or taxation value of the property. In City Assessor of Cebu City vs. Association of Benevola de Cebu, June 8, 2007, applying Secs. 215-216, of LGC, in line with City Tax Ordinance LXX of Cebu City, the 10% special assessment should be imposed for the Chong Hua

53

Hospital Medical Arts Center (CHHMAC) building which should be classified as “special”. Sec. 216, LGC states that: SEC. 216. Special Classes of Real Property.––All lands, buildings, and other improvements thereon actually, directly and exclusively used for hospitals, cultural or scientific purposes, and those owned and used by local water districts, and government-owned or controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special. iii. Provide for appropriations iv. Adopt Schedule of Fair Market Values Fair Market Value and Assessed Value – What’s the difference? Fair Market Value (FMV) price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy Assessed Value or Assessment Value (AV) fair market value of the real property multiplied by the assessment level. It is synonymous with taxable value. Payment of Tax When: January 1 of every year (Sec 246) The tax shall constitute as superior lien (Sec. 246) How: a. basic real prop tax in 4 equal installments (Mar 31,Jun 30,Sep 30, Dec 31) b. special levy - governed by ordinance Interest for Late Payment - two percent (2%) each month on unpaid amount until the delinquent amt is paid. - provided in no case shall the total interest exceed thirty-six (36) months Advance and Prompt Payment a) advance payment - discount not exceeding 20% of annual tax (Sec 251, LGC) b) prompt payment - discount not exceeding 10% of annual tax due(Art 342 IRR)

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

REVIEW NOTES FOR TAXATION 2 Collection of Tax (Sec.247, LGC) The collection of the real property tax with interest thereon and related expenses and the enforcement of the remedies provided by the LGC or any applicable laws shall be the responsibility of the city or municipal treasurer concerned. The city or municipal treasurer my deputize the barangay treasurer to collect all taxes on real property located in the barangay provided the barangay treasurer is properly bonded. BA RC O M2 008 -09

Who Collects: The provincial, city, municipal or barangay treasurer Period Within Which To Collect (Sec 270): Within five (5) yrs from the date they become due within ten (10) yrs. from discovery of fraud, in case there is fraud or intent to evade Period of prescription shall be SUSPENDED when: (Sec 270, LGC) 1. local treasurer is legally prevented to collect tax 2. the owner of prop requests for reinvestigation and writes a waiver before expiration of period to collect 3. the owner of the property is out of the country or cannot be located

Prepared by TAX LAW COMMITTEE – Adviser: Atty. Jason Barlis, 2008 Chairman: Genevieve Shontogan, V.Chairman: Scarlet Banawol, Members: Kristine Beňas, Marie Mae Buliyat, Wilhelmina Diwa, Feliza Kadatar, Charlene Lagua, Claryll Anne Laminato, Shandra Diane Mappang 2009 Chairman: Norwayne Salman, V.Chairman: Carlo Rimas, Members: Shayne Ann Basco, Lota Marie Buan, Marie Mae Buliyat, Precious Madio, Jefferson Malacas, Karen Moster, Clarence Rimando, Genevieve Shontogan

54