BUREAU OF INTERNATIONAL REVENUE

BIR ORGANIZATIONAL STRUCTURE (Sec. 3, NIRC)

I. National Office – Its function is confined to the general direction, guidance and
control of the entire operations of internal revenue service, national policy
formulation and program planning for efficient and effective implementation of
internal revenue law and regulations.

The BIR is headed by the Commissioner of Internal Revenue and six (6) Deputy
Commissioners, each of whom heads the following:
A. Operations Group
B. Legal and Inspection Group
C. Resources and Management Group
D. Information System Group
E. Prosecution Group
F. Special Concerns Group

Note: The two more Deputy Commissioners were appointed in 2003 as head of
the Prosecution Group and the Special Concerns Group.

II. Field Service – the BIR operates under a decentralized system primarily
charged with the operational activities of the Bureau.

A. Regional Offices (RO) – for effective administration and control, the

Philippines has been divided into Regional offices which directly execute and
implement the national policies and programs prescribed by the National
Office for the enforcement of internal revenue laws. Each office is headed by
a Regional Director.

Powers and duties of Regional Director

1. Implements laws, policies, plans, programs, rules and regulations,
including the assessment and collection of all internal revenue taxes,
charges, and fees;
2. Issues letters of authority for the examination of taxpayers within the
region;
3. Provides economical, efficient and effective service to the people in the
area;
4. Coordinates with local government units in the area;
5. Exercises control and supervision over the officers and employees within
the region;
6. Performs such other functions as may be provided by law and may be
delegated by the Commissioner.

B. REVENUE DISTRICT OFFICES (RDO) – under the ROs and headed by the
revenue district officers who are under the direct control and supervision of

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 the Regional Director. These offices implement programs, methods, and
procedures necessary for efficient, effective, and economical assessment and
collection of internal revenue taxes in the revenue district.

Composition of RDOs
1. Field men and examiners performing assessment work.
2. Collection agents and clerks performing collection work.

Duties of Revenue District Officers and other Internal Revenue

Officers
1. Ensure that all laws, rules and regulations affecting national internal
revenue are faithfully executed and complied with, and to aid in the
prevention, detection and punishment of frauds or delinquencies in
connection therewith;
2. Examine the efficiency of all officers and employees of the BIR under
his supervision and to report in writing to the Commissioner through
the Regional Director, any neglect of duty, incompetency, delinquency,
of malfeasance in office of any internal revenue officer of which he may
obtain knowledge with a statement of all the facts and any evidence
sustaining each cases.

Authority of Revenue District Officers

1. Examine taxpayers within the jurisdiction of the district in order to
collect the correct amount of tax;
2. Recommend the assessment of any deficiency tax due in the same
manner that the said acts could have been performed by the Revenue
Regional Director himself. [Sec. 13, NIRC]

Agents in the Collection of taxes (Sec. 12, NIRC)

1. Commissioner of Customs and his subordinates with respect to the collection of
VAT and excise tax on imported goods;
2 Heads of appropriate government office and his subordinates with respect to the
collection of energy tax;
3. Authorized agent banks, with respect to the receipt of payments of internal
revenue taxes authorized to be made through banks

Powers and Duties of BIR (Sec. 2, NIRC)

1. To assess and collect national internal taxes, fees, and charges;
2. To enforce all forfeitures, penalties and fines connected with the assessment and
collection of taxes, fees, and charges;
3. To execute judgment in all cases decided in its favor by the CTA and the ordinary
courts;
and
4. To effect and administer the supervisory and police power conferred upon it by
the Tax Code and other special law.

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Power and Duties of BIR (Sec.2, NIRC)
1. To asses and collect national internal taxes , fees, and charges;
2. To enforce all forfeitures, penalties and fines connected with the assessment and
collection of taxes fees, and charges;
3. To execute judgment in all cases decided in its favor by the CTA and the ordinary
courts; and
4. To effect and administer the supervisory and police power conferred upon it by
the Tax Code and other special laws.

POWER OF THE COMMISSIONER OF INTERNAL REVENUE

1. Power to interpret tax laws (Sec. 4, NIRC);

2. Power to decide tax cases (Sec. 4, NIRC);
3. Power to obtain information, and to summon/examine and take testimony of
persons (Sec. 5, NIRC);
4. Power to make assessments and prescribe additional requirements for tax
administration and enforcement. (Sec. 6, NIRC);

A. Power to Interpret Tax Laws

The power to interpret the provisions of the National Internal Revenue Code and
the other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance. (Sec. 4, par. 1,
NIRC)

B. Power to Decide Tax Cases

The Commissioner has the power to decide the following:
1. Disputed assessments;
2. Refunds of internal revenue taxes;
3. Penalties imposed in relation thereto; or
4. other matters arising under the NIRC or other laws administered by the BIR

Note: The foregoing are subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals.

C. Power to Obtain Information, and to Summon/Examine and Take Testimony

of Persons

Purposes of the power:

1. To ascertain the correctness of any return;
2. To make a return when none has been made;
3. To determine the liability of any person for any internal revenue tax;
4. To collect from any person liability for any internal revenue tax;
5. To evaluate tax compliance

Extent of the Power under Section 5 (CITES)

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 1. To cause revenue officers and employees to make a Canvass from time to
time of the revenue district or region and inquire after and concerning:
a. All persons who may be liable to pay internal revenue taxes and
b. All persons owning or having the care management or possession of any
object with respect to which a tax is imposed.

2. To obtain, on a regular basis, Information from:

a. any person other than the person whose internal revenue tax liability is
subject to audit or investigation; or
b. from any office or officer of the national and local governments, government
agencies and instrumentalities including BSP and GOCC

Such information includes (but not limited to) the following:

i. Cost and volume production;
ii. Receipts or sales and gross incomes of taxpayers;
iii. The names addresses and financial statements of corporations, mutual
fund companies, insurance companies, regional operating headquarters of
multinational companies, joints accounts, associations, joint ventures or
consortia or registered partnerships and their members.

3. To take the Testimony of the person concerned, under oath as may be

relevant or material to the inquiry.

4. To Examine any book, paper, record, or other data which may be relevant or
material to such inquiry;

5. To Summon the:
a. Person liable for tax; or
b. Person required to file a return; or
c. Officer or employee of such person; or
d. Any person having possession, custody or care of books of accounts and
other accounting records containing entries relating the business of the
person liable for tax; or
e. Any other person.

D. Power of the Commissioner to Make Assessments

Extent of the Power under Section 6:

1. Examination of returns and determination of tax due
After a return has been filed, the Commissioner or his duly authorized
representative may authorize the examination of the taxpayer and the assessment
of the correct amount of taxes.

The tax or any deficiency so assessed shall be paid upon notice and demand from
the Commissioner or his duly authorized representative.

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 Confidentiality rule: Although Section 71 provides that tax return shall constitute
public records, it is necessary to know that these are confidential in nature and may
not be inquired into in unauthorized cases under pain of penalty provided for in
Section 270.

Exceptions: Inquiry into the income tax returns of taxpayers may be authorized:
a. When the inspection of the return is authorized upon the written order of the
President of the Philippines
b. When inspection is authorized under Finance Regulation No. 33
c. When the production of the tax return is material evidence in a criminal case in the
result
d. When the production or inspection thereof is authorized by the taxpayer himself
(Aban, Law of basic Taxation in the Philippines)
e. When there is a request for exchange of information by a foreign tax authority
pursuant to an international convention or agreement on tax matters to which the
Philippines is a signatory or a party of upon the order of the President of the
Philippines (RA No. 10021, Exchange of Information on Tax Matters Act of 2009,
Section 4) Note: See Annex for a Summary of RA No. 10021
f. Congressional Oversight Committee in aid of legislation (Aban, Law of Basic
Taxation in the Philippines).

Withdrawal of Return, Statement, or Declaration

General Rule: Any return, statement, or declaration filed in any office authorized to
receive the same shall not be withdrawn.
Exception: A turn, statement or declaration may be modified changed or amended
provided that:
a. It is done within 3 years from filing of the return; and
b. No notice of audit or investigation of such return has been served upon the
taxpayer.

2. Authority to make assessments based on the Best Evidence Obtainable

The Commissioner may use the BEST EVIDENCE OBTAINABLE to assess the
proper deficiency tax in the following cases:
a. When a report required by law as a basis of assessment has not been filed within
the time fixed by laws, rules and regulations; or
b. There is reason to believe that the report is false, incomplete or erroneous.

Noted: By using the best evidence obtainable. The Commissioner may MAKE or
AMEND the return from his own knowledge. The assessment made by the
Commissioner is prima facie presumed correct. The burden of proof to show the
incorrectness or inaccuracy of such assessment or its details lies with the taxpayer,
contrary to the usual presumption of good faith and innocence.

Best evidence obtainable – any data record, papers, documents, or any evidence
gathered by internal revenue officers from government offices or agencies,

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 corporations, employers, clients or patients, tenants, lessees, vendees and from all
other sources, with whom the taxpayer had previous transactions or from whom he
received any income, after ascertaining that a report required by law as basis for the
assessment of any internal revenue tax has not been filed or when there is reason to
believe that any such report is false incomplete or erroneous. (Llamado, Philippine
Income Tax 2004)

3. Authority to conduct inventory-taking, surveillance and to prescribe

Presumptive Gross Sales and Receipts
If there is reason to believe that the taxpayer is not declaring his correct income,
sales or receipts for internal revenue tax purposes, the Commissioner may:
a. Order inventory-taking of goods of any taxpayer as basis of his internal revenue
tax liabilities;
b. Place the business operations of any person, natural or juridical, under
observation or surveillance;

Presumptive Gross Sales or Receipts – When (1) a person fails to issue receipts
or invoice or (2) there is reason to believe that the book of accounts or other
records do not correct reflect the declarations made or to be made in a return
required to be filed under the provision of The 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 the purposes of determining the internal revenue tax
liabilities of such person.

4. Authority to terminate taxable period

When is tax period terminated?
a. The taxpayer is retiring from business subject to tax;
b. The taxpayer is intending to leave the Philippines;
c. The taxpayer is intending to remove his property therefrom or to hide or
conceal his property;
d. The taxpayer is performing an act tending to obstruct the proceedings for
collection of the tax for past or current quarter or year or to render the same
totally or partly ineffective.

Effect of termination of tax period: The tax shall be due and payable
immediately and shall be subject to all the penalties prescribed unless it is paid
within the time fixed in the demand made by the Commissioner.

5. Authority to prescribe real property values

The Commissioner is authorized to divide the Philippines into different zones or
areas and upon consultation with competent appraisers from the private and public
sectors, determine the fair market value of real properties located in each zone or
area.

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 For purposes of computing any internal revenue tax the value of the property shall
be (whichever is higher)
a. Fair Market value as determined by the Commissioner (referred to as the zonal
value);
b. Fair market value as shown in schedule of values for the Provincial and City
Assessors (FMV per tax declaration)

6. Authority to inquire into bank deposits General Rule: The Commissioner

cannot inquire into the bank deposits of the taxpayer.
Exceptions:
a. A decedent to determine his gross estate;
b. Any taxpayer (tp) who has filed an application to compromise his tax liability by
reason of his financial incapacity to pay his taxes.

Condition: The tp must execute a waiver in writing which shall constitute

authority of the Commissioner to inquire into bank deposit of the taxpayer.

c. A specific taxpayer or taxpayers subject of a request for the supply of tax

information from a foreign tax authority pursuant to an international convention
or agreement on tax matters to which the Philippines is a signatory or a part of.

Condition: The requesting foreign tax authority is able to demonstrate the

forseeable relevance of certain information required to be given to the request.
(RA No. 10021, Exchange of Information on Tax Matters Act of 2009, Sec. 3)
Note: See Annex for Summary of RA No. 10021

7. Authority to accredit and register tax agents

Criteria for accreditation of tax agents

a. Professional competence;
b. Integrity;
c. Moral fitness

Persons qualified to be tax agents

a. Individuals;
b. General professional partnerships and their representatives.

Authority to prescribe additional procedural and documentary requirements.

The Commissioner may prescribe the manner of compliance with any documentary
or procedural requirement in connection with the submission or preparation of
financial statements accompanying the tax return.

Net Worth Method – the method is an extension of the basic accounting principle:
assets minus liabilities equals net worth, the taxpayer’s net worth is determined at
the beginning and at the end of the same taxable year. The increase or decrease

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 in net worth is adjusted by adding all non-deductible items and subtracting
therefrom non-taxable receipts.(Aban, Law of Basic Taxation in the Philippines)

Conditions for the use of the Net Worth Method:

a. That the taxpayer’s books of accounts do not clearly reflect his income, or the
taxpayer has no books, or if he has books he refuses to produce them, or that
the few records that he had were destroyed. ( Aban, Law Basic Taxation in the
Philippines, p. 190)
b. That there is evidence of a possible source or sources of income to account for
the increases of net worth or expenditures
c. That there is fix starting point or opening net worth
d. That the circumstances are such that the method does reflect the taxpayer’s
income with reasonable accuracy and certainty and proper and just additions of
personal expenses and other non-deductible expenditures were made and
correct fair and equitable credit adjustments were given by way of eliminating
non-taxable items. (Aban, Law of basic Taxation in the Philippines)

Authority of the Commissioner to Delegate Power

General Rule: The Commissioner may delegate the power vested in him to any
subordinate official with the rank equivalent of division chief or higher.

Exceptions (the following cannot be delegated):

1. Power to recommend the promulgation of rules or regulations by the Secretary of
Finance;
2. Power to issue rulings of first impressions or to reverse, revoke, modify ant existing
ruling of the Bureau.
3. Power to compromise or abate any tax liability.

Exceptions to the exception:

a. Assessments issued by the regional office involving basic deficiency taxes of P500,
000.00 or less; and
b. Minor criminal violations discovered by regional and district officials, may be
compromised by the REGIONAL EVALUATION BOARD

4. Power to assign or re-assign internal revenue officers to establishments where

articles subject to excise tax are produced or kept. (Republic of the Philippines vs.
Hizon, G.R. No. 130430 Dec. 13, 1990)

Authority to Make Arrest and Seizures

The Commissioner, the Deputy Commissioner, the Revenue Regional Directors, the
Revenue District Officers, and other internal revenue officers shall have the authority to
make arrests and seizures for the violation of penal law, rules or regulation administered
by the Bureau of Internal Revenue.

Any Person arrested shall be brought before a court, there to be dealt with by law. [Sec.
15, NIRC]

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Assignment of Internal Revenue Officers
1. Those involve in excise tax functions
The Commissioner shall assign internal revenue officers involved in excise tax
functions to establishments or places where articles subject to excise tax are kept.

Limitation of Assignment: An internal revenue officer assigned to such

establishment shall in no case stay in his assignment for more than 2 years.

2. Assignment to other special duties

The Secretary of Finance through the recommendation of the Commissioner, assign
or re assign internal revenue officers and employees of the Bureau of Internal
Revenue without change in their official rank and salary, to special duties connected
with the enforcement and administration of revenue laws as the exigencies of the
service may require.

Limitation of the Assignment:

a. Internal revenue officers assigned to perform assessment or collection function
shall not remain in the same assignment for more than 3 years;
b. Assignment of internal revenue officers or employees to special duties shall not
exceed 1 year.

Source of Internal Revenue (Sec.21, NIRC)

1. Income Tax – a tax on the yearly profits arising from property, profession, trades,
and officers
2. Estate Tax – a tax levied upon the transfer of the net estate of a decedent to his
heirs. (Sec. 84)
3. Donor’s Tax – an excise tax imposed on the transfer of property by way of gift inter
vivos.
4. Valued Added Tax – an indirect tax which is imposed on the increase in the worth,
merit or importance of goods properties, or services, and not on the total value of the
goods or services being sold or rendered.
5. Percentage Tax – a tax imposed on a fixed ratio between the gross sales or receipt
and the burden imposed upon the taxpayer.
6. Excise Tax – a tax imposed upon the performance of an act, the enjoyment of a
privilege or the engaging in an occupation. It may refer to a tax upon property for the
privilege to enjoy the same.
7. Documentary Stamp Tax – An excise upon the privilege, opportunity or facility
offered at exchanges for transaction of the business. It is an excise upon facilities
used in the transaction of the business.
8. Such other taxes as are or hereafter may be imposed or collected by the BIR.

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COMPLIANCE REQUIREMENTS

A. KEEPING OF BOOK ACCOUNTS AND RECORDS

Book of Accounts and Records

1. Taxpayers with gross quarterly sales, earnings, receipts or output of P50,000 or
less – simplified form of bookkeeping records duly authorized by the secretary of
Finance.
2. Taxpayers with gross quarterly sales, earnings, receipts or output exceeding P
50,000 but not more than P150,000 – journal and ledger or their equivalent
3. Taxpayers with gross quarterly sales, earnings receipts or output exceeding P
150,000 – book of accounts examined and audited by an independent certified
public accountant and their income tax return shall be accompanied by:
a. Certified balance sheets
b. Profit and loss statements
c. Schedule listing income-producing properties and the corresponding income
therefrom and other relevant statements (Sec. 232A)

Subsidiary books – All corporations, companies, partnerships, or persons keeping the

books of accounts may, at their option, keep subsidiary books as the needs of their
business may require provided that where such subsidiaries are kept, they shall form
part of the accounting system of the taxpayer and shall be subject to the same rules and
regulations as to their keeping, translation, production and inspection as are applicable
to the journal and the ledger.

Note: Before using said books of accounts, as well as receipts and invoices, they must
be presented to the Revenue District Office where the principal place of business of the
taxpayer is located, for approval and registration. (Llamado, Philippine Income Tax)

Languages in which books are to be kept:

a. Native language
b. English
c. Spanish

If in addition to said book or records the taxpayer keeps other books or records in a
language other than the above-mentioned, they shall make a true and complete
translation of all the entries. The keeping of such books or records in any language
other than the above-mentioned is prohibited. (Sec. 234, NIRC)

Preservation and Examination of Book of Accounts

All the Books of account shall be preserved for a period of three (3) years beginning
from the last entry in each book.

General Rule: The book of accounts shall be subject to examination and inspection
only once every taxable year.

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Exceptions:
1. Fraud, irregularity, or mistakes, as determined by the Commissioner;
2. The taxpayer request reinvestigation;
3. Verification of compliance with withholding tax laws and regulations:
4. Verification of capital gains tax liabilities
5. In the exercise of the Commissioner’s power under Section 5[B] to obtain
information from other person’s, in which case, another or separate examination
may be made.

Place of Inspection:
1. Taxpayer’s office or place of business; or
2. In the office of the Bureau of Internal Revenue

Note: All corporations, partnerships or persons that retire from business shall submit
their books of accounts to the Commissioner or any of deputies for examination
within 10 days from the date of retirement or within such period of time, after which
the books of accounts shall be returned.

Books of accounts and other pertinent records of tax exempt organizations or

grantees of tax incentives shall be subject to examination by the Bureau of Internal
Revenue for purposes of ascertaining compliance with conditions under which they
have been granted tax exemptions or tax incentives, and their tax liability, if any.

B. ADMINISTRATIVE PROVISIONS
Registration Requirements
Every person subject to any internal revenue tax shall register once with the RDO:
1. Within 10 days from date of employment;
2. On or before the commencement of business; or
3. Before payment of the tax due; or
4. Upon filing of a return, statement, or declaration as required in the NIRC.

Contents of the Registration

The contents of the registration are the following:
1. Taxpayers’ name,
2. Style,
3. Place of residence,
4. Business, and
5. Such other information as may be required by the commissioner in the form
prescribed therefore. (Section 236)

Note: A person maintaining a head office, branch or facility shall register with the
Revenue District Offices having jurisdiction over the head office, branch or facility.

A facility may include but not limited to sales, outlets places of production,
warehouses or storage places.

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Annual Registration Fee
P500 for every separate or district establishment or place of business, including
facility types where sales transactions occur
The following are not liable to the registration for:
1. Cooperative
2. Individuals earning purely compensation income, whether locally or abroad, and
3. Overseas workers.

Registration of Each Type of Internal Revenue Tax

Every person who is required to register with the BIR shall register each type of
internal revenue tax for which he is obligated, shall file a return and shall pay such
taxes, and shall update such registration for any changes. (Sec. 236 C)

Transfer of Registration
In case a registered person decides to transfer his place of business or his head
office or branches, it shall be his duty to update his registration status by filing an
application for registration information update in the form prescribed therefore. (Sec
236 D)

Cancellation of Registration
The registration of any person who ceases to be liable to a tax type shall be
cancelled upon filling with the Revenue District Office where he is registered, an
application for registration information update. (Sec. 236 F NIRC)

Taxpayer’s Identification Number

Any Person required to make, render or file a return, statement, or other document
shall be supplied with or assigned a taxpayer’s identification number.

Only one identification number shall be given a person required to have one. Any
person who shall secure more than one identification number shall be criminally
liable.

Issuance of Receipts or Sales or Commercial Invoices

General Rule: All Persons subject to an internal revenue tax shall, for each sale and
transfer of merchandise or for services rendered issue duly registered receipts or
sales commercial invoices showing:
1. Date of transaction
2. Quantity
3. Unit cost
4. Description of the merchandise or the nature of service.

Note: For VAT receipts and invoices, RA No. 9337 requires additional information.
(See the Chapter on VAT for the Enumeration of such information)

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 Exception: No receipts shall be issued to the purchaser, costumer or client at the
time of the transaction;

The duplicate shall be kept and preserved by the issuer in his place of business for a
period of three years from the close of the taxable year.

Printing of the Receipts

All persons who are engaged in business shall secure from the Bureau of Internal
Revenue an authority to print receipts or sales or commercial invoices before a
printer can print the same.

The receipts must be:

1. Serially numbered;
2. Include the name, business style of the Taxpayer;
3. Include the Taxpayers Identification Number;
4. Include the business address of the person or entity to use the same.

All persons who print receipt are sales or commercial invoices shall maintain a
logbook/register of taxpayers who availed of their printing services. The logbook or
register shall contain the following information:
1. Name and TIN of persons or entities for whom the receipts or sales or
commercial invoices were printed;
2. Number of booklets, number of sets per booklet, number of copies per set and
the serial numbers of the receipts or invoices in each booklet.

C. RULES AND REGULATIONS

The Secretary of Finance may promulgate, upon recommendation of the
Commissioner, all needful rules and regulations for the effective enforcement of the
Tax Code. (Sec. 244, NIRC)

Kinds of BIR Interpretative Rulings (RAO No. 01-03)

1. Ruling of First Impressions – refer to rulings, opinions, and interpretation of the
Commissioner with respect to the tax code and other tax laws without
established precedent and which are issued in response to a specific request for
ruling filed by the taxpayer with the Bureau. The term also includes reversal,
modification or revocation of any existing ruling.

What is required to make a BIR ruling of first impression a valid one?

a. Must not be against the law
b. It must be issued only by the Commissioner of the Internal Revenue
(Philippine Bank of Communications vs. CIR, G.R. No. 112024, January 28,
1999)

2. Ruling with Established Precedents – reiteration of previous rulings, opinions and

interpretations of the Commissioner, as delegated to a duly authorized internal

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 revenue officer in response to specific request for ruling filed by a taxpayer with
the BIR.
3. Revenue Memorandum Order
4. Revenue Bulletins (RB)
5. Revenue Travel Assignment Orders (RTAO)
6. Revenue Special Order (RSO)
7. Revenue Memorandum Circulars (RMC)
8. Revenue Memorandum Order (RMO)
9. Revenue Audit Memorandum Orders (RAMO)
10. Revenue Delegation Authority Orders (RDAO)
11. Revenue Administrative Orders (RAO)

Requisites for the Validity of Administrative Rule

1. Consistent and in harmony with the law;
2. Reasonable
3. Useful and necessary
4. Published in the Office Gazette

The issuance of a revenue regulation authorized by statute has the force and effect
of law.

The Secretary of Finance has the power to affirm, reverse, modify or set aside the
issuances and ruling of the BIR concerning the implementation and application of
the provisions of the National Internal Revenue Code.

Non- Retroactivity of Ruling

General Rule: Any revocation, modification, or reversal of any of the rules or
regulations or any of the ruling or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification or reversal will be
prejudicial to taxpayers.

Exception:
1. Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue;
2. Where the facts subsequently gather by the BIR are materially different from the
facts on which the ruling was based;
3. Where the taxpayer acted in bad faith.

STATUTORY OFFENSES AND PENALTIES

ADDITIONS TO THE TAX

General provisions

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1. If the withholding agent is the government, the employee thereof responsible
for the withholding and remittance of the tax shall be personally liable for the
additions to the tax.
2. The term “person” includes an officer or employee of a corporation who as such
officer, employee or member is under a duty to perform the act in respect of
which the violation occurs. (Sec. 247)

Civil Penalties
 Civil penalties and interests in addition to all taxes, fees, and charges, are
imposed under the NIRC. The amount so added to the tax is collected at the
same time, in the same manner and as part of the tax.
 Tax laws imposing penalties for delinquencies are intended to hasten tax
payments by punishing evasion or neglect of duty in respect thereof.
 The penalty and interest are not penal in nature but compensatory for the
concomitant use of the funds by the taxpayer beyond the date when he is
supposed to have paid them to the government.

When are Civil Penalties imposed?

A. 25% penalty shall be imposed in the following:
1. Failure to file any return and pay the tax due thereon as required under the
provisions of the Code or regulations on the date prescribed.
2. Filing a return with an internal revenue officer other than those with whom
the return is required to be filled; or
3. Failure to pay the deficiency within the time prescribed for its payment in the
notice of assessment; or
4. Failure to pay the full or part of the amount of tax shown on any return
required to be filed under the provisions of the Code or rules and regulations
or the full amount of tax due for which no return is required to be filed on or
before the date prescribed for its payment.

B. 50% penalty in case of the following:

1. Willful neglect to file a return within the period prescribed;
2. False or fraudulent return.

Note: Substantial underdeclaration of taxable sales, receipts, or income or a

substantial overstatement of deductions shall constitute prima facie evidence of a
false or fraudulent return.

Substantial Underdeclaration – failure to report sales, receipts, or income in an

amount exceeding 30% of that declared per return.

Sustantial Overstatement of Deductions – claim of deductions in an amount

exceeding 30% of actual deductions.

Compromise Penalty – a certain amount of money which the taxpayer pays to

compromise a tax violation. It is paid in lieu of a criminal prosecution.

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 Compromise penalty may not be imposed in the absence of showing that the
taxpayer consented thereto.
 In case the taxpayer reneges on his conformity to the payment of the
suggested compromise, the Commissioner may NOT collect the compromise
penalty thru an action in court or by distraint and levy. This is because
compromised penalty is neither a tax delinquency. The remedy of the
Commissioner is to file a criminal action against the taxpayer for the tax
violation.

Interest
In General: There shall be assessed and collected on any unpaid amount of tax,
interest at the rate twenty percent (20%) per annum from the date prescribed for
payment unit the amount is fully paid.

A. Deficiency Interest – Any deficiency in the tax due shall be subject to 20% per
annum deficiency interest. (Interest is assessed on the deficiency, not the whole
tax due).

B. Delinquency Interest – In case of failure to pay:

1. The amount of 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 surcharge or interest there on the due date appearing on
the notice and demand of the Commissioner, there shall be assessed and
collected on the unpaid amount, interest at the rate of 20% per annum unit
the amount is fully paid, which interest shall form part of the tax.

C. Interest on Extended Payments – If any person is qualified and elects to pay

in installment but fails to pay the tax or any installment on or before the date
prescribed, there shall be assessed and collected interest at the rate 20% per
annum on the tax or deficiency tax or part thereof unpaid from the date of notice
and demand unit it is paid.

Failure to File Certain Information Return

General Rule: Failure to file an information return, statement or list, or keep
record, or supply any information required on the date prescribed therefore, the
taxpayer shall be liable to pay one thousand pesos for each such failure. The
aggregate amount for all such failures during the calendar years shall not exceed
twenty-thousand pesos (P 20,000).

Exception: Failure is due to reasonable cause and not to willful neglect.

CRIMES, OTHER OFFENSES AND FORFEITURES

General Provisions
1. A person convicted of a crime penalized by the NIRC shall be subject to the
penalties imposed by the Code in addition to the payment of taxes. The

16
 payment of the tax due after apprehension shall not constitute a valid defense
in any prosecution for violation for the forfeiture of untaxed articles.
2. Any person who willfully aids or abets in the commission of the crime of another
shall be liable in the same manner as the principal.
3. If the offender is not a citizen of the Philippines he shall be deported
immediately after sentence without further proceeding for deportation.
4. If the offender is a public officer or employee:
a. Maximum penalty shall be imposed;
b. Dismissal from public office;
c. Perpetually disqualified from holding any public office, to vote, and to
participate in any election
5. If the offender is a certified public accountant, his certificate as a certified public
accountant shall upon conviction, be automatically revoked or cancelled.
6. In case of associations, partnerships or corporation the penalty imposed on the
partner, branch manager, treasurer, officer-in-charge and employees
responsible for the violation.

Liability of a Person who Attempts to Evade or Defeat the Tax

1. In addition to other penalties provided by law, upon conviction, fine of P30,000
to P100,000 and
2. Imprisonment of two to four years.

Note: The Conviction or acquittal not be a bar to the filing of a civil suit for the
collection of taxies. (Sec. 254)

Penal Liability of Corporations

 The penalties shall be imposed upon the responsible corporate officers,
partners, or employees.
 The corporation, association or general co-partnership shall be punished by a
fine of not less than fifty thousand pesos (P 50,000) but not more than one
hundred thousand pesos (P 100,000).

Declaration under Penalties of Perjury

Any declaration, return and other statements shall, in lieu of an oath, contain a
written statement that they are made under the penalties of perjury. (Sec. 267
NIRC)

OTHER PENAL PROVISION

Penalty for Second or Subsequent Offenses – Maximum penalty prescribed for
the offense.

What is the penalty to be imposed if there is no specific penalty provided by

the law?
Any person who violates any provision of this Code or any rule or regulation
promulgated by the Department of Finance, for which no specific penalty is
provided by the law, shall, upon conviction for each act or omission, be punished

17
by the fine of not more than one thousand pesos (P1,000) or suffer imprisonment
of not more than six (6) months, or both. [Sec.275]

Subsidiary Penalty
 The subsidiary penalty shall be imposed if the person convicted for violation of
any of the provisions of this Code HAS NO PROPERTY with which to meet the
fine imposed upon him by the court, or is unable to pay such fine.
 Subsidiary personal liability – rate of one (1) day for each Eight pesos and fifty
centavos (P8.50) subject to the rules established in Article 39 of the Revised
Penal Code.

Prescriptive Period
The prescriptive period for violation of the provisions of the Tax Code is 5 years
commencing from the day of the commission of the violation of the law, and if the
same be not known at the time, from the discovery thereof and the institution of
judicial proceeding for its investigation and punishment.

When is the prescriptive period for violation of NIRC reckoned?

The five-year prescriptive period for violation of any provision of the Tax Code
provided for under Section 354 (now Section 281) thereof should be reckoned from
the date of the final notice and demand for payment of the deficiency taxes that the
cause of action on the part of the BIR accrued. This is because prior to the receipt
of the letter-assessment, no violation has yet been committed by the taxpayers.
(Dizon, Q&A in Taxation citing Lim, Sr. vs. Court of Appeals, G.R. Nos. 48134-37,
October 18, 1990)

Is judicial proceeding necessary before the running of prescription begins?

There must be a judicial proceeding for the investigation and punishment of the tax
offense before the five (5) year limiting period begins to run. As Section 354 stands
in the statute book (and to this day it has remained unchanged) it would indeed
seem that the tax cases are practically imprescriptible for as long as the period
from the discovery and institution of judicial proceedings for its investigation and
punishment, up to the filing of the information in court does not exceed five (5)
years (lbid.)

Interruption of Prescriptive Period

1. When proceedings are instituted against the guilty persons and shall begin to
run again if the proceedings are dismissed for reasons not constituting
jeopardy;
2. When the offender is absent from the Philippines.

Informer’s Reward
1. For Violations of the National Internal Revenue Code

18
 Amount of Reward: Ten percent (10%) of the revenues surcharges or fees
recovered and/or fine or penalty imposed and collected or One million Pesos
(P1,000,000) per case, whichever is lower.

The same amount of reward shall also be given to an informer where the
offender has offered to compromise the violation of law accepted by the
Commissioner and collected from the offender.

Requisites:
a. Person gives a definite and sworn information;
b. Such information is not yet in the possession of the BIR;
c. Such information leads to the discovery of frauds upon the internal revenue
laws or violations of any of the provisions thereof.
d. There must be recovery of revenues, surcharges and fees.
e. The information is given by persons not disqualified to receive the reward.

Persons Disqualified:
a. Internal revenue official or employee
b. Other public official or employee
c. Within the sixth degree of consanguinity

2. For discovery and Seizure of Smuggled Goods

Amount of Reward: Cash reward equivalent to 10% of the fair market value of
the smuggled and confiscated goods or One million pesos per case, whichever
is lower, shall be given to persons instrumental in the discovery and seizure of
such smuggled goods.

Note: Cash rewards of informers shall be subject to income tax collected as a

final withholding at the rate of 10%.

All the public officials, whether incumbent or retired, who acquired the
information in the course of the performance of their duties during their
incumbency, are prohibited from claiming informer’s reward.

Republic Act No. 10021

Exchange of Information on tax Matters
Acts of 2009 (signed March 8, 2012)

Summary of features:
1. Authorizes the Commissioner to require into:
a. Bank deposits; and
b. Other related information
 Held by financial institutions

19
  To supply information to a requesting foreign tax authority pursuant to a
convention or agreement to which the Philippines is a signatory or a part
to
 Subject to specific requirements as to the relevance of the tax information
requested.

2. Allows the foreign tax authority to examine income tax returns of taxpayers upon
order of the President
 Subject to rules and regulations on necessity and relevance as may be
promulgated

3. Penalizes officers/ employees of the BIR for unlawful divulgence of information

obtained under this Act to persons other than the requesting foreign tax authority

4. Seeks to provide sanctions for officers of banks and financial institutions for
witfull refusal to supply information.

Relevant Provisions:
Section 3. Authority to the Commissioner of Internal Revenue to inquire into Bank
Deposit Accounts and Related Information Held by Financial Institutions. –Section
6(F) of Republic Act No. 8424, as amended, otherwise known as the national
Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“(F) Authority of the Commissioner to inquire into Bank Deposit Accounts and Other
Related Information held by Financial Institutions.-xxx
“(1) xxx
“(2) xxx
xxx
(3) A specific taxpayer or taxpayers subject of a request for the supply of
tax information from a foreign tax authority pursuant to an international convention or
agreement on tax matters to which the Philippines is a signatory or a part of
Provided That the information obtained from the banks and other financial
institutions may be used by the Bureau of Internal Revenue for tax assessment,
verification, audit and enforcement purposes.

“In case of request from a foreign tax authority for tax information held by banks and
financial institutions, the exchange of information shall be done in a secure manner
to ensure confidentiality thereof under such rules and regulations as may be
promulgated by the Secretary of Finance upon recommendation of the
Commissioner.

“The commissioner shall provide the tax information obtained from banks and
financial institutions pursuant to a convention or agreement upon request of the
foreign tax authority when such requesting foreign tax authority has provided the
following information to demonstrate the foreseeable relevance of the information to
the request:

20
 “(a) The identity of the person under examination or investigation;
“(b) A statement of the information being sought including its nature and
the form in which the said foreign tax authority prefers to receive the
information from the Commissioner;
“(c) The tax purpose for which the information is being sought;
“(d) Grounds for believing that the information requested is held in the
Philippines or is in the possession or control of a person within the
jurisdiction of the Philippines;
“(e) To extent known, the name and address of any person believed to be
in possession of the requested information;
“(f) A statement that the request is in conformity with the law and
administrative practices of the said foreign tax authority, such that if
requested information was within the jurisdiction of the said foreign tax
authority then it would be able to obtain the information under its law or in
the normal course of administrative practice and that it is conformity with
convention or international agreement; and
“(g) A statement that the requesting foreign tax authority has exhausted all
means available in its own territory to obtain the information, except those
that would give rise to disproportionate difficulties.

“The Commissioner shall forward the information as promptly as possible to the

requesting foreign tax authority. To ensure a prompt response, the Commissioner
shall confirm receipt of a request in writing to the requesting tax authority and shall
notify the latter of deficiencies in the request, if any, within sixty (60) days from the
receipt of the request.

‘if the commissioner is unable to obtain and provide the information within ninety (90)
days from the receipt of the request, due to obstacles encountered in furnishing the
information or when the bank or financial institution refuses to furnish the
information, he shall immediately inform the requesting tax authority of the same,
explaining the nature of the obstacles encountered or the reasons of refusal.”

“The term ‘foreign tax authority’, as used herein, shall refer to the tax authority or tax
administration of the requesting State under the tax treaty or convention to which the
Philippines is a signatory or a party of.”

Section 4. Allowing a Foreign Tax Authority to Income Tax Returns of Taxpayers in

the Philippines. – Section 71 of Republic Act No. 8424, as amended, otherwise
known as the national internal Revenue Code of 1997, is hereby amended to read
as follows:

SEC. 71. Disposition of Income Tax Returns, Publication of Lists of Taxpayers and
Filers.-
xxx

21
 xxx

“Income tax returns of specific taxpayers subject of a request for exchange of

information by a foreign tax authority pursuant to an international convention or
agreement on tax matters to which the Philippines is a signatory or a party of, shall
be open to inspection upon the order of the President if the Philippines under rules
and regulations as may be prescribed by the secretary of Finance , upon
recommendation of the Commissioner.”

Section 5. Authority of the commissioner of the Internal Revenue to supply

information to Foreign tax Authority Which is at his Disposal.- Section 270 of
Republic Act No. 8424, as amended, otherwise known as the national internal
Revenue of 1997, is hereby amended to read as follows:

“SEC. 270. Unlawful Divulgence of Information. – xxx

“Any officer or employee of the Bureau of Internal Revenue who divulges or makes
known in any other manner to any person other than the requesting foreign tax
authority information obtained from banks and financial institutions pursuant to
section 6(F), knowledge of information acquired by him in the discharge of his official
duties shall upon conviction, be punished by a fine of not less than Fifty thousand
pesos (P50,000) but not more than One hundred thousand pesos (P100,000), or
suffer imprisonment of not less than two(2) years but not more than five (5) years, or
both.”

Section 6. Willful refusal to supply Information.- Any officer, owner, agent, manager,
director or officer-in charge of any bank or financial institution within the purview of
this Act who, being require in writing by the Commissioner , willfully, refuses to
supply the required information shall be punished by a fine of not less than Fifty
thousand pesos (P50,000) but not more than One hundred thousand pesos
(P100,00), or suffer imprisonment of not less than two (2) years but not more than
five (5) years, or both.

Section 7. Obligation to maintain Confidentiality of information Received.- Any

information received by a foreign tax authority from the Bureau of Internal Revenue
pursuant to an International Convention or agreement on tax matters shall be treated
by the authority as absolutely confidential in nature in the same manner as
information obtained by the latter under its laws and shall be disclosed only to
persons or authorities, including courts and administrative bodies, involves in the
assessment or collection of, the enforcement or prosecution in respect of, or the
determination of appeals in relation to, the taxes covered by such conventions of
agreements.

Section 8. Notice to Taxpayers. – A taxpayer shall be duly notified in writing by the

Commissioner that a foreign tax authority is requesting for exchange of information
held by financial institutions pursuant to a tax convention or agreement to which the

22
Philippines is a signatory or a party of, under such rules and regulations as may be
prescribed by the secretary of Finance upon recommendations of the
Commissioner.

RR No. 10-2012
Salient Provisions of “ Exchange of Information Regulations”
(issued on October 06, 2010)

1. The Commissioner is authorized to obtain any information, including but not

limited to bank deposits and other related information held by financial
institutions, as may be required to respond to a request hereunder.(Sec.2)
2. Once the information is gathered pursuant to a request for exchange of
information hereunder, the BIR is likewise authorized to use, for tax assessment,
verification, audit and enforcement purposes, any such information obtained from
financial institutions. (Sec. 3)
3. The Commissioner is designated as the competent authority for the purpose of
exchanging information hereunder. Any such exchange on information shall not
constitute an unlawful divulgence of information under the Tax Code of 1997.
(Sec.4)
4. In addition to the seven (7) matters required to be contained in a request for
exchange of information, RR 10-2012 also requires “a statement that the
requesting foreign tax authority is also allowed under its domestic laws to
exchange or furnish the information subject of the request (Sec.7)
5. A taxpayer shall be duly notified in writing by the commissioner that a foreign tax
authority is requesting for exchange information within 60 days from receipt of
said request.( Sec. 10)

23
DEFINITION AND PRINCIPLES

INCOME – all such gains or profits from whatever source. It is a flow or service
rendered by capital by the payment of money from it or any benefit rendered by a fund
of capital in relation to such fund through a period of time (Madrigal v. Rafferty, G.R.
No. 12287, August 8, 1918).

An income is an amount of money coming to a person or corporation within a specified

time, whether as payment for services, interest or profit from investment. Unless
otherwise specified, income means cash or its equivalent (Conwi vs. Commissioner;
G.R. No. 48532 august 31, 1992).

Income includes, earnings, lawfully or unlawfully acquired, without consensual

recognition, express or implied, of an obligation to repay and without restriction as to
their disposition (James vs. U.S., 366 U.S. 213).

Nature of Philippine Income Tax

1. Direct tax – tax burden is borne by the income tax recipient upon whom the tax is
imposed.
2. Progressive tax – tax rate increases as the tax base increases. It is founded on the
ability to pay principle.
3. Comprehensive system – adopts the citizenship principle, the residence principles,
and the source principle.
4. Semi-schedular or semi-global – taxable income (i.e. gross income less allowable
deductions and exemptions) is subjected to one graduated tax rates ( if an
individual) or normal corporate income tax rate ( if a corporation); Passive
investment incomes subject to final tax and capital gains from sale of shares of
stocks of a domestic corporation and real properties remain subject to different sets
of tax rates and covered by different tax returns.
5. American in origin- Great weight should be given to the construction placed upon a
revenue law, whose meaning is doubtful, by the department charge by its execution
(Madrigal vs. Rafferty, supra).

Test in determining income

1. Flow of Wealth Test – determining whether a gain was derived from the
transaction.

2. Realization Test – no taxable income until there is a separation from the capital of
something of exchangeable value, thereby supplying the realization of transmutation
which would result in the receipt of income.

3. Claim of Right Doctrine – a taxable gain is conditioned upon the presence of a

claim of right to the alleged gain and the absence of a definite unconditional

24
 obligation to return or repay. It causes the taxpayer to recognize income even
though they do not have a fixed right to the income.

For the income to qualify as being received their must be a receipt of cash or
property that ordinarily constitutes income rather than loans or gifts or deposits that
are returnable; the taxpayer needs unlimited control on the use of disposition of the
funds, and the taxpayer must hold and treat the income as its own.

Principle of Constructive Report of Income – Income which is credited to the

account of or set apart for a taxpayer and which may be drawn upon by him at any
time is subject to a tax for the year during which so credited or set apart although not
then actually reduced to possession.

4. Economic Benefit Principle Test – any economic benefit to the employee that
increases his net worth, whatever may have been the mode by which it is effected, is
taxable

5. Severance Test Theory – income is recognized when there is separation of

Something which is of exchangeable value thereby supplying the realization or

transmutation which would result in the receipt of income. (Eisner vs. Macomber,
252 us189)

6. All events Test – For income or expense to accrue, this test requires; (1) fixing of a
right to income or liability to pay; and (20 the availability of the reasonable accurate
determination of such income or liability. The amount of liability does not have to be
determined exactly; it must be determined with “reasonable accuracy”. (CIR vs.
Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007)

Capital vs. Income ( Madrigal vs. Rafferty, supra)

Income Capital
Fund or property, existing at an instant of
All wealth other than as a mere return of
time, which can be used in producing
capital
goods or services
Flow of Wealth Fund or property
Service of Wealth Wealth
Income is subject to tax Return of Capital is not subject to tax
Fruit Tree

Requisites for taxability of income

1. There must be a gain or profit;
2. The gain must be realized or received;
3. The gain must not be excluded by law or treaty from taxation.

25
Types of Taxable Income
1. Compensation Income – income derived from the rendering services under an
employer –employee relationship.
2. Professional Income – fees derive from engaging in an endeavor requiring special
training as professional as a means of livelihood, which includes, but is not limited
to, the fees of CPAs, doctors, lawyers, engineers and the like.
3. Business Income – Gains or profits derived from rendering services, selling
merchandise, manufacturing products, farming and long- term construction
contracts.
4. Passive Income – Income in which the taxpayer merely waits for the amount to
come in, which includes, but is not limited to, interest income, royalty income,
dividend income, winnings and prizes.
5. Capital Gain – gain from dealings in capital assets.

General Principles of Income Taxation (Sec. 23, NIRC)

1. A citizen of the Philippines, residing therein in taxable on all income derived from
sources within and without the Philippines.
2. A Non Resident citizen is taxable only on income derived from sources within the
Philippines.
3. An individual citizen of the Philippines who is working and deriving income from
abroad as an Overseas Filipino Worker is taxable only on income from sources
within the Philippines: Provided that a seaman who is a citizen of the Philippines and
receives compensation abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract worker.
4. An alien individual whether a resident or not of the Philippines is taxable only on
income derived from sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within and
without the Philippines.
6. A foreign corporation whether engaged or not in trade or business in the Philippines
is taxable only on income derived from sources within the Philippines.

Criteria of Imposing Philippine Income Tax

1. Citizenship Principle – A citizen taxpayer is subject to income tax:
a. On his worldwide income, if he resides in the Philippines ,or
b. Only on his income from sources within the Philippines if he qualifies as non-
resident citizen
2. Residence Principle – a resident alien is liable to pay income tax on his income
from sources within the Philippines but exempt from tax on his income from sources
outside the Philippines.
3. Source Principle – a non resident alien is subject to Philippine income tax because
he derives income from sources within the Philippines such as dividend, interest,
rent, or royalty

Classification of Sources of Income (Sec. 42, NIRC)

1. Income from sources within the Philippines;

26
2. Income from sources without the Philippines;
3. Income from sources partly within and partly without the Philippines.

Factors in determining the source of income

1. Interest – Residence of the debtor
2. Dividends – Residence of the corporation paying the dividend
3. Services – Place of performance of the Service
4. Rentals and royalties- Location of Property or interest in such property
5. Sale of real property – Location of the property
6. Sale of personal property

General Rule:
a. Personal Property PURCHASED within and sold without or purchased without
and sale within – Country in which sold
b. Personal property PRODUCED (in whole or in part) by the taxpayer within and
sold without or produced(in whole or in part) without and sold- Sources partly
within and partly without the Philippines

Exception: Sale of Shares of Stock in a Domestic Corporation shall be treated as

derived entirely from sources within the Philippines regardless of where said shares
are sold.

CLASSIFICATION OF TAXPAYERS

TAXPAYER – means any person subject to tax imposed by this Title

I. Individual
A. Citizen
1. Resident Citizen (RC)
2. Non Resident Citizen (NRC)
3. Filipinos occupying managerial and/or technical positions employed by
RHQ and ROH of multinational Companies; by OBU’s; or petroleum
service contractor and subcontractor
4. Minimum Wage Earner

B. Aliens
1. Resident aliens (RA)
2. Non resident aliens (NRA)
a. Engaged in trade or business within the Philippines (NRA-ETB)
b. Not engaged in trade or business within the Philippines(NRA-
NETB)
c. Alien individual employed by Regional or Area Headquarters and
Regional Operating Headquarters of Multinational Companies
d. Alien individual employed by offshore banking units
e. Alien individual employed by petroleum service contractor and
subcontractor

27
 II. Corporations
A. Domestic (DC)
 Special Domestic Corporations
1. Proprietary Educational Institutions and Non – Profit Hospitals
2. GOCC’s agencies or instrumentalities
3. Domestic Depositary Banks (Foreign Currency Deposit Units)

B. Foreign
1. Resident foreign corporation(RFC)
 Special Resident Foreign Corporations
a. International Carriers
b. Offshore Banking units authorized by the BSP
c. Resident Depositary Banks (Foreign Currency Deposits Units)
d. Regional or area Headquarters of Multinational Companies
e. Regional Operating Headquarters of Multinational Companies
2. Non - resident foreign corporation (NRFC)
 Special Non-Resident Foreign Corporation
a. Non –resident
Cinematographic Film
Owners, Lessors or Distributors
b. Non –resident Owner or Lessor of Vessels, Chartered by
Philippine Nationals
c. Non – resident Owner or Lessor of Aircraft and other equipment

III. Estates
IV. Trusts
V. Partnerships
A. General Professional Partnership
B. Taxable or business Partnership
C. General Co-partnership

INDIVIDUALS
A. Resident Citizen (RC)- citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the Philippines

B. Non - Resident Citizen(NRC) – tax on income derived from sources within the
Philippines which includes a Filipino citizen(WELP)
1. Who establishes to the satisfaction of the commissioner the fact of his
physical presence abroad with a definite intention to reside therein;
2. Who leaves the Philippines during the taxable year to reside abroad, either as
an immigrant or for employment on a permanent basis;
3. Who works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the
taxable year;

28
 Notes:
 Exception: OFW (See Discussion Below)
 The phrase most of the time means at least 183 (365 ÷ 2) days. His
presence abroad however, need not be continuous. (Mamalateo,
Philippine Income taxation p.27)
4. Who is previously considered as a non-resident and who arrives in the
Philippines at anytime during the taxable year to reside thereat permanently
shall be considered non-resident for a taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the
date of his arrival [sec.22(E),NIRC]

Overseas Filipino Worker (OFW) is an individual who is physically present

abroad most of the time during the taxable only on income derived from
sources within the Philippines [sec.23 (B) (C)].
Note: To be considered as an OFW they must be duly registered as such
with the POEA. (RR No. 1-2011)
Seaman is considered as an OFW provided the following requirements are
met:
a. Receives compensation for services rendered abroad as a member of the
complement of a vessel; and
b. Such vessel is engaged exclusively in international trade.

Note: The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad or to return
to and reside in the Philippines as the case may be.

C. Resident Alien(RA) – an individual whose residence is within the Philippines

and who is not a citizen thereof is taxable only

On income derived from sources within the Philippines [Sec.22 (F), NIRC]
 One who come to the Philippines for a definite purpose which in its nature
would require an extended stay, and makes his home temporarily in the
country becomes a resident alien.
 Length of stay is indicative of intention (alien who shall have stayed in the
Philippines for more than one year by the end of the calendar year is a
resident alien)

D. Non –Resident Alien Engaged in Trade or Business (NRA –ETB) – an

individual whose residence is not within the Philippines and who is not a citizen
thereof but doing business therein is taxable only on income from sources within
(Sec.22 (G),NIRC)
 The term trade or business includes the performance of the functions of a
public office (Sec. 22 [S], NIRC) but excludes performance of services by
the taxpayer as an employee (Sec.22[CC].
 A NRA who shall come to the Philippines and stay for an aggregate period
of more than 180 days during any calendar year shall be deemed a non-

29
 resident alien doing business in the Philippines Sec. 22(G) not
withstanding [Sec. 25 (A) (1) NIRC]

E. Non- Resident Alien Not Engaged in trade or Business (NRA-NETB) – an

individual whose residence is without the Philippines and who is not a citizen and
not doing business therein is liable for income derived from sources within the
Philippines.

F. Special Classes of Individual Employees

Alien individuals, and their Filipino counterparts, employed by:
1. Regional headquarters and regional operating headquarters of multinational
companies in the Philippines;
2. Offshore banking units established in the Philippines;
3. Foreign service contractor or sub-contractor engaged in the petroleum
operations in the Philippines.

CORPORATIONS
A. Domestic Corporation (DC) – a corporation created or organized in the
Philippines or under its laws and is liable for income from sources within and
without. [Sec. 2(C), NIRC]

B. Resident Foreign Corporation (RFC) – a corporation which is not domestic and

engaged in trade or business in the Philippines is liable for income from sources
within.

The term “doing business” include:

1. Soliciting orders, service contracts, opening offices, whether called “liaison”
offices or branches;
2. Appointing representatives or distributors domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totaling one
hundred eighty (180) days or more;
3. Participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines;
4. Any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object of
the business organization; (RA No. 7042, Foreign Investments Acts of 1991,
Section 3d)

In order that a foreign corporation may be regarded as doing business within a

State, there must be continuity of conduct and intention to establish a
continuous business, such as the appointment of a local agent, and not one of
a temporary chapter (CIR vs. British Overseas Airways Corporation, G. R. No.
L-65773-74 April 30, 1087.)

30
C. Non-Resident Foreign Corporation (NRFC) – a corporation which is not
domestic and not engaged in trade or business in the Philippines is liable for
income from sources within [Sec 22(|), NIRC]

D. Special Type of Corporations

1. Property educational institutions and non-profits hospitals;
2. GOCC’s, agencies or instrumentalities
3. Domestic depositary bank (foreign currency deposit units);
4. Resident on-line international air carries;
5. Offshore banking units;
6. Regional or Area Headquarters and Regional Operating Headquarters of
multinational companies;
7. Non-resident cinematographic film owners, lessors or distributors;
8. Non-resident owner or lessors of vessels chartered by Philippine nationals;
9. Non-resident lessors of aircraft, machinery and other equipment.\

Corporation Includes
1. Partnerships, no matter how created or organized;
2. Joint-stock companies;
3. Joint accounts (cuentas en participation)
4. Associations;
5. Insurance companies [Sec. 22 (B), NIRC]

Corporation Excludes
1. General professional partnerships;
2. Joint venture or consortium formed for the purposed of :
 Undertaking construction projects; or
 Engaging in petroleum, coal, geothermal and other energy operation pursuant
to an operating or consartium agreement under a service contract with the
Government.

Corporations Exempt from Income Tax

1. Those enumerated under Sec. 30.
 Exempt corporations are subject to income tax on their income from any of
their properties, real or personal or from any other activities conducted for
profit, regardless of the disposition made of such income. They are only
exempt for income realized as such.”
2. With respect to GOCC’s
General Rule: these corporations are taxable as any other corporation.

Exceptions:
a. Government Service Insurance System;
b. Social Security System;
c. Philippine Health Insurance Corporation;
d. Philippine Charity Sweepstakes Office

31
 Note: PAGCOR is now subject to tax under R.A. No. 9337.

3. Regional or Area Headquarters under Sec. 22 (DD) – they are exempted

because they do not earn or derive income from the Philippines

Note: Regional Operating Headquarters under Sec. 22(EE) shall pay a tax of
10% of their taxable income.

ESTATES AND TRUSTS

A. Estate refers to the mass of properties left by deceased person.

Rules on taxability of Estate

When a person who owns property dies, the following taxes are payable under
the provisions of the income tax law:
1. Income tax for individuals under Sec. 24 and 25 (to cover the period
beginning January to the time of death);
2. Estate income tax under Sec.60 if the estate is under administration or judicial
settlement.

For Estate under Judicial Settlement

1. During the Pendency of the Settlement
General Rule: subject to income tax in the same manner as individuals

Exceptions:
a. Entitlement to personal exemption is limited only to P20,000;

Note:
1st VIEW – Republic Act No. 9504 amended the Tax Code increasing the
basic personal exemption amounting to Fifty thousand pesos (P50,000) for
each individual taxpayer. Estates and trusts are considered in Tax Code as
individual taxpayers and therefore the exemption allowed to them should also
be increased from P20,000 to P50,000.
2nd VIEW – Tax exemptions are strictly constructed. Section 62 of NIRC
explicity provides that the exemption allowed to estates and trusts is P
20,000.

b. No additional exemption is allowed;

c. Distribution to the heirs during the taxable year of estate income is
deductable from the taxable income of the estate (distributed income shall
form part of the respective heir’s taxable income)

Where no such distribution to the heirs is made during the taxable year when
the income is earned, and such income is subjected to income tax payment
by the estate, the subsequent distribution thereof is no longer taxable on the
part of the recipient.

32
Summary
The taxable year is 2011.

Distributions were made in 2011

Taxpayer in 2011
Corpus or principal of the estate NONE
Income in 2010 NONE
Income in 2011 HEIR
Retention by the estate of the income of ESTATE
2011

2. Termination of Judicial Settlement (where the heirs still do NOT divide the
property)
If the heirs contribute to the estate money, property, or industry with intention
to divide the profits between/among them, an unregistered partnership is
created and the estate becomes liable for the payment of corporate income
tax (Evangelista vs. Collector, G. R. No. L-9996, October 15 1957; Oña vs.
Commissioner. G.R. No. L-19342, May 25, 1972)

If the heirs without contributing money, property or industry to improve the

estate, simply divide the fruits thereof between/among themselves, a co-
ownership is created, and individual income tax is imposed on the income
received by each of heir, payable in their separate and individual capacity
(Pascual vs. Commissioner, GR No. L-78133, October 18 1988; Obittos vs.
Commissioner, GR No. L-68118, October 29, 1985).

For Estates NOT under Judicial Settlement

Pending the extrajudicial settlement, either of the following situations may arise,
the effect would be the same as termination of judicial settlement where heirs still
do not divide the property as provided above.

B. Trusts
A right to the property, whether real or personal, held by one person for the
benefit of another.

When Trusts Taxable:

1. Trust income is to be accumulated;
2. Trust income is to be distributed currently by the fiduciary to the beneficiaries;
3. Income collected by a guardian of an infant which is to be held or distributed
as the court may be direct;
4. Trust in which the fiduciary may, at his discretion, either distribute or
accumulate the income.

33
Rule on Taxability of the income of a Trust
General Rules:
1. If income is distributed to beneficiaries, the beneficiaries shall file and pay the
tax;
2. If income is to be accumulated or held for future distribution, the trustee or
beneficiary shall file and pay the tax

Exceptions:
1. In a revocable trust, the income of the trust will e returned by the grantor;
2. In a trust where the income is held for the benefit of the grantor, the income of
the trust becomes income of the grantor;
3. In a trust administered in a foreign country, the income of the trust,
undiminished by any amount distributed to the beneficiaries shall be taxed to
the trustee.

Irrevocable Trusts – irrevocable both as to corpus and as to income

 The trust itself, through the trustee or fiduciary, is liable for the payment of
income tax.
 Taxed exactly in the same way as estates under judicial settlement and its
status as an individual is that of the trustor.
 It is entitled to the minimum personal exemption (P20,000.00) and distribution
of trust income during the taxable year to the beneficiaries is deductible from
the trust’s taxable income.

Revocable Trusts – the trustor, not the trust itself, is subject to the payment of
income tax on the trust income.

Consolidation of Income of Two or More Trust

 Where two or more trust are created by the same grantor, and the beneficiary
in each instance is the same person, the fiduciaries shall file a separate return
for, and pay the income tax of, each trust, but the commissioner of the
Internal Revenue shall cause the income tax to be computed on the
consolidate tax income of the several trusts, allowing one exemption only of
P20,000.00.
 The income tax computed on the consolidated taxable income shall be
allocated between the several trusts in proportion to their respective taxable
income.

Summary
Income Is Taxpayer
For the benefit of the grantor GRANTOR
Retained by the trust FIDUCIARY
Distributed to beneficiary BENEFIARY

Employees’ Trust is exempted provided:

34
 1. Employees’ trust must be part of a pension, stock bonus or profit sharing plan
of the employer for the benefit of some or all of his employees;
2. Contributions are made to the trust by such employer, or such employees, or
both;
3. Such contributions are made for the purpose of distributing to such
employees both the earnings and principal of the fund accumulated by the
trust; and
4. The trust instrument makes it possible for any part of the trust corpus or
income to be used for or diverted to, purposes other than the exclusive
benefit of such employees ( Sec. 60B,NIRC)

Tax exemption is likewise to be enjoyed by the income of the pension trust

otherwise, taxation of those earnings would result in a diminution of
accumulated income and reduce whatever the trust beneficiaries would
receive out of the trust fund (Commissioner vs. Court of Appeals, Court of
Tax Appeals and GGL Retirement Plans, GR No. 95022 March 23, 1992).

Any amount actually distributed to any employee or distribute shall be taxable

to him in the year in which so distributed to the extent that it exceeds the
amount contributed by such employee or distribute.

Table of Comparison Between Taxable Estates and Taxable Trusts

Taxable Estate Taxable Trust
The taxable income shall be determined
in the same way as that of individuals, but
with
The taxable income shall be  A special deduction for any
determined in the same way as that of amount of income paid, credited or
individuals, but with a special deduction distributed to the heirs.
for any amount of income paid,  A special deduction for any
credited or distributed to the heirs. amount of the income applied for
the benefit of the grantor.
The exemption is 20,000 The exemption is 20,000
The income tax rates for individuals The income tax rates for individuals
apply. There is a creditable withholding apply. There is a creditable withholding
tax on the heir of 15%. tax on the heir of 15%.
The income tax returns shall be filed if The income tax returns shall be filed if the
the gross income is P20,000 or more gross income is P20,000 or more and the
and the tax paid by the executor or tax paid by fiduciary.
administrator.

PARTNERSHIPS
Kinds of Partnership under the NIRC
A. General Professional Partnerships (GPP) – formed by persons for the sole purpose
of exercising a common profession and no part of the income of which is derived
from engaging in any trade or business. [Sec. 22 (B), NIRC].

35
B. Taxable OR Business partnership:
1. All other partnerships no matter how created or organized;
2. Includes unregistered joint ventures and business partnerships
 However, unregistered joint ventures are not taxable as corporation when:
a. Undertaking construction projects;
b. Engaged in petroleum, coal and other energy operation under a service
contract with the government.
C. General Co-Partnerships (GCP) – partnerships, which are by law assimilated to be
within the context of, and so legally contemplated as corporations.

Partnership itself is subject to corporate taxation while individual partners are

considered stockholders and, therefore, profits distributed to them by the partnership
are taxable as dividends.

The taxable income for a taxable year, after deducting the corporate income tax
imposed therein, shall be deemed to have been actually or constructively received
by the partners in the same taxable year and shall be taxed to them in their
individual capacity whether actually distributed or not [Sec. 73(D), NIRC]

Liability of a Partnership

1. General Professional partnership – not subject to income tax, but are required to file
returns of their income for the purpose of furnishing information as to the share of
each partner in the net gain or profit, which each partner shall include in his
individual return.
 Partnership acts as withholding agent;
 Net income (income for distribution) shall be computed in the same manner as a
corporation and the return is filed on or before April 15 of each year.
 The partners themselves are liable for the payment of income tax in their
individual capacity computed on their distributive shares of the partnership profit.

2. Taxable or business Partnership – income tax is computed and taxed like that of a
corporation which is required to file a quarterly corporate income tax return due on or
before April 15 of the following year.

Liability of a Partner
Share Of A Partner in GGP Share of A Partner In Taxable or Business
Partnership
If net income, it shall form part of the gross If net income, it shall be treated as
income of each partner based on his dividend, and shall be subject to a final tax
agreed ratio subject to 10% creditable, as follows:
withholding tax. a. RC, NRC, RA – 10%
b. NRA-ETB – 20%
c. NRA-NETB – 25%

36
 If net loss, it may be taken by the If net loss it may be taken by the individual
individual partner in his return of income partner in his return of income
Payment made to a partner for services Payments made to a partner for services
rendered shall be considered as ordinary rendered shall be considered as
business income subject to Sec. 24A compensation income subject to Sec.24
(Effective January 1, 1982) (A)

Note: As a result of the application of the “Constructive Receipt” of dividends by the

partners of a business partnership, they are placed at a disadvantage position vis-à-vis
the stockholders of a corporation, who would be subject to the 10% dividends tax only
when there is an actual declaration of dividends and payment thereof.

Compared to their counterpart partners of a GPP, the partners of a business partnership

are placed at an even more disadvantageous position because there is a second-tier of
taxation imposed on their shares of the partnership profit. (Mamalateo, Philippine
Income Tax, 2004 ed, P.42)

CO-OWNERSHIP
There is co-ownership when:
1. Two or more heirs inherit an undivided property from a decedent;
2. A donor makes a gift of an undivided property in favor of two or more donees.

It is NOT TAXABLE when the activities are limited merely to the preservation of the co-
owned property BUT co-owners are liable for income tax in their separate and individual
capacities

It is TAXABLE when the income of the co-ownership is invested by the co-owners in

business creating a partnership.

TAX ON INDIVIDUALS

TAXABLE INCOME
Pertinent items of gross income specified in the NIRC, less deduction and/or personal
and additional exemptions, if any (Sec. 31, NIRC).

EXEMPTION OF MINIMUM WAGE EARNERS (MWEs)

Minimum Wage Earners - worker in the private sector paid the statutory minimum
wage OR an employee in the public sector

With compensation income of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned

MWEs shall be exempt from the payment of income tax on their taxable income. The
holiday pay, overtime pay, night shift differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt from income tax.

37
Income Subject to Graduated Rates
On the taxable income, OTHER than PASSIVE INCOME AND CAPITAL GAINS which
are subject to FINAL TAX, derived for each taxable year by:
1. Resident Citizen (RC) from all sources within and without;
2. Non-resident citizen (NRC) including OCW from all sources within;
3. Resident alien (RA) from all sources within;
4. Non – resident alien engaged ion trade or business (NRA-ETB) from sources within;
(Sec.24[a],NIRC)

Note: NRA-NETB is the only individual taxpayer not subject to the graduated rates. All
income (except capital gains) received by a NRA-NETB from sources within are
considered as gross income subject to 25% final withholding tax and no deductions are
allowed.
Tax Formula
Gross Compensation Income
Less: Personal Exemptions
Premium Payment on Health and/or
Hospitalization Insurance (if qualified)
Net compensation Income
Add; Net business Income or
Net Professional Income
Other Income
Taxable Income subject to graduated rates

Net Business income or Net Professional Income

Gross Business Professional Income
Less; Itemized deduction or optional standard deduction (OSD)
Net business /Professional Income

Income Subject to Graduated Rates:

1. Compensation Income;
2. Business & professional income;
3. Capital gains not subject to final tax;
4. Passive income not subject to final tax;
5. Other income;

Graduated Tax Table – Top marginal rate shall be 32% effective January 1, 2000

Income Over But Less Than Tax Due Plus Of Excess Over
10,000 5% - -
10,000 30,000 500 10% 10,000
30,000 70,000 2,500 15% 30,000
70,000 140,000 8,500 20% 70,000
140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
500,000 125,000 32% 500,000

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CONSOLIDATED RULES ON PASSIVE INCOME SUBJECT TO FINAL TAX
“Final Tax” means tax withheld from source, and the amount receive by the income
earner is net of the tax already. The tax withheld by the income payor is remitted by him
to the BIR. The income having been tax-paid already, it need not be included in the
income tax return at the end of the year.

A. Interest Income
1. From any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds similar arrangements.

Deposit substitute – shall mean an alternative form of obtaining funds from the
public (20 or more lenders) other than deposits

Final Tax Rate:

RC,NRC,RA,NRA-ETB – 20%
NRA-NETB-25%

Exception: If the loan is granted by a foreign government, or an international or

regional financing institution established by governments, the interest income of
the lender shall not be subject to the final withholding tax.

Note:
 The above rule of interests only applies if the interest income is derived from
banks. If the interest income is derived from a source other than a bank (e.g.,
interest paid on 5-6 business), then the graduated rates shall apply.
 Interests must be derived from a bank located within the Philippines to be
considered as passive income.
 If the bank from which the interest is derived is located outside the Philippines:
a. Graduated rates- in the case of an RC
b. Exempt- NRA-NETB NRC, RA, NRA-ETB.

2. From a depository bank under the expanded Foreign Currency Deposit System

Final Tax Rates:

RC, RA - 7½
NRC, NRA-ETB, NRA-NETB – exempt

Note: Only residents individuals are subject to this tax

3. From long-term deposit or investment in the form of:

a. Savings,
b. Common or individual trust fund,
c. Deposit substitutes,
d. Investment management accounts and

39
 e. Other investments evidenced by certificates in such form prescribed by the
BSP.

Final Tax Rates:

RC,NRC,RA,NRA-ETB
Held for 5 years or more – exempt

In case of pretermination, where the holding period was:

4 years to less than 5 years – 5%
3 years to less than 4 years – 12%
Less than 3 years – 20%
NRA-NETB – 25%

B. Royalties
1. Royalties in General (e.g.patents and franchises) – Fixed sum either in cash or
property equivalent, to be paid at a definite period for the used or enjoyment of a
thing or right

Final Tax Rate:

RC,NRC,RA,NRA-ETB – 20%
NRA-NETB-25%

2. Exception: From books literary works and musical compositions.

Final Tax Rate:

RC,NRC,RA,NRA-ETB – 10%
NRA-NETB-25%

Note:
 Royalties must be derived from the sources within the Philippines to be
considered as passive income.
 If royalty is derived from sources outside the Philippines
a. graduated rates – in the case of an RC,
b. exempt – NRA-NETB NRC,RA, NRA-ETB

C. Prizes and Winnings

Prizes – result of efforts
Winnings- Products of change or luck

Note: In case of doubt, a game is deemed to be one of change

Prizes exceeding P10,000; Winnings are not subject to P10,000 Limitation

Final Tax Rate:

RC,NRC,RA,NRA-ETB – 20%
NRA-NETB-25%

40
 Exception: PCSO and lotto winnings are NOT subject to final tax

Note: Prizes amounting to P10,000 or less, although exempt from final tax, are to be
included in gross income and subject to the graduated rates.

D. Dividends
Dividends – distribution are made by a corporation to its stakeholders out of its
earnings OR profits and payable to its stakeholders, whether in money or in
property.

Where a corporation distributes all of its assets in complete or partial liquidation or

dissolution, the gain realized or loss

Sustained by stockholders whether individual or corporate, is a taxable income or

deductible loss, as the case may be. (Sec. 73(A) NIRC)

The reckoning point is the same of declaration and NOT the time of payment of
dividends as it is taxable whether actually or constructively received.

Dividends declared are considered to have been made from the recently
accumulated profits. The previously accumulated profits NOT declared as dividend
may be subjected to improperly accumulated earnings tax if accumulation was done
to evade taxation.

Tax on income is different from tax on dividends; therefore, there is no double

taxation (Afisco Insurance Corporation vs. Court of Appeals G.R. No. 112675, Jan.
25, 1999)

1. Cash and or property dividends from a domestic corporation or from a joint stock
company, insurance or mutual fund companies and regional operating
headquarters of multinational companies.
2. Share in the distributable net income after tax of taxable or business partnership.
3. Share in the net income after tax of an association, a joint account, or a joint
venture or consortium taxable as corporation of which he is a member or co-
venturer.

Final Tax Rate:

RC,NRC,RA, - 10%
NRA-ETB – 20%
NRA-NETB-25%

4. Cash and/ or property dividends from a foreign corporation.

41
 Tax Rates:
RC- graduated rates
NRC, RA (if considered from sources within) – graduated rates

Note: The above rule with respect to NRC and RA is subject to Sec. 42(A)(2)(b)
of the NIRC which provides that: If for the 3-year period preceding the declaration
of such dividend, the ratio of such corporation’s Philippine income to the
world(total-within and without) income is:
a) Less than 50% - entirely without
b) 50% or more – proportionate:

Formula:
Philippine Gross Income x Dividend
Received
Entire Gross Income
= Income Within

Note: The receipt of stock dividend is NOT taxable.

Stock dividends, strictly speaking, represent capital and do not constitute income to
its recipient. So that the mere issuance thereof is not subject to income tax as they
are nothing but enrichment through increase in value vs. capital investment.

Exceptions ( When stock dividends taxable):

a. These shares are later redeemed for consideration by the corporation or
otherwise conveyed by the stockholder to the extent of such consideration;
b. The recipient is other than the stakeholder;
c. A change in the stakeholder’s equity results by virtue of the stocks dividend
issuance. (Vitug and Acosta, pp.99-102)
d. Dividends declared in the guise of treasury stock dividend to avoid the effects of
income taxation (CIR vs. Manning, 66 SCRA 14)
e. Stock dividend is taxable to usufructuary

Proceeds from redemption of shares is:

a. NOT TAXABLE, if its such is original capital subscription or initial capital
investment as it is considered not as an income but a mere return of capital;
b. TAXABLE, if from other than initial capital investment, as the proceeds of
redemption is additional wealth.

F. Capital Gains
Note: Please see rules on Capital Gains and Losses below.

SPECIAL CLASSES OF INDIBVIDUAL EMPLOYEES

Individual whether FILIPINO or ALIEN employed by:

42
1. Regional or area headquarters and regional operating headquarters of
multinational companies in the Philippines.
2. Offshore banking units established in the Philippines;
3. Foreign Service contractor or sub-contractor engaged in petroleum operations in
the Philippines.

Note: Multinational Company – a foreign firm or entity engaged in the international

trade with affiliates or subsidiaries or branch offices in the Asia-Pacific region and or
other foreign markets.

Tax Rate: 15%

Tax Base: Gross income received as salaries, wages, annuities, compensation,

remuneration and other emoluments, such as honoraria and allowances.

Does Not Apply To: rank-and-file employees of said establishments.

Reason: only alien individuals occupying managerial and technical positions in said
establishments are subject to the 15% final income tax under RR No. 2-98.

Note: The term “technical positions” is limited only to positions which are:
1. Highly technical in nature;
2. Where there are no Filipinos who are competent, able and willing to perform the
services for which aliens are desired. (RMC No. 41-2009)

The same tax treatment shall apply to Filipinos employed and occupying the same
positions as those of aliens employed by these multinational companies, offshore
banking units and petroleum service contractors and subcontractors.

Note: Regardless of whether or not there is an alien executive occupying the same
position. (RMC No. 41-2009)

1. 15% Final income tax; or

Test to be met by Filipino to be allowed the option to be taxed at 15% (RR

No. 11-2010)
a. Position and Function Test – must occupy managerial and technical position
AND actually exercise managerial and technical functions pertaining thereto;
b. Compensation Threshold Test – must have received, or is due to receive
under a contract of employment, a gross annual taxable compensation of at
least Php975,000 (whether or not actually received) and,
c. Exclusively Test – the Filipino managerial and technical employee must be
exclusively working for the RHQ or ROHQ as a regular employee and not just
as a consultant or contractual personnel.

2. Regular income tax rate on taxable compensation income (RR No. 12-01)

43
Note: For other sources within the Philippines, income shall be subject to pertinent
income tax (graduated tax rates, final tax on passive income, capital gains
depending whether a citizen or an alien), as the case may be

CONSOLIDATED RULES ON CAPITAL GAINS AND LOSSES

Ordinary Assets
1. Stock in trade of the taxpayer or other properties of a kind which would properly
be included in the inventory of the taxpayer (examples: supplies on hand,
merchandise inventory)
2. Property held by the taxpayer primarily for sale to costumers in the ordinary
course of business(examples: subdivision lots by a real estate developer,
groceries by a retail store and office equipment)
3. Personal property used in trade or business subject to depreciation (examples:
delivery truck, store and office equipment)
4. Real property used in trade or business (examples: warehouse, factory, office
building)

Treatment of Ordinary Gains and Losses

1. Ordinary gains are included in the gross income
2. Ordinary losses are deductible from gross income

Capital Assets – include all property held by the taxpayer whether or not connected
in trade or business but not including those enumerated above as ordinary assets.

Capital Assets OR Ordinary Asset?

1. A taxpayer originally registered as engaged in real estate business shall continue
to consider its realties for sale as ordinary asset notwithstanding the fact that it
subsequently failed to operate its business;
2. Real property used by an exempt corporation in its exempt business shall not be
considered used for business purposes and shall be considered as capital asset;
3. Real property not used in trade or business shall be treated as capital asset;
4. A taxpayer changing business from real estate to non real estate shall not result
in reclassification of property held by it from ordinary asset to capital asset;
5. Abandoned and idle properties of taxpayer engaged or previously engaged in
real estate business shall continue to be treated as ordinary asset;
6. Involuntary transfer has no effect on the classification of such real property in the
hands of the involuntary seller;
7. Property purchased for future use in the business, although this purpose is later
thwarted by circumstances beyond taxpayer’s control, does not lose its character
as ordinary asset.

THEREFORE, it can be said that once an ordinary asset, always an ordinary asset.

44
Note: Properties classified as ordinary assets for being used in business by
taxpayer engaged in business other than real estate business are automatically
converted into capital assets upon showing that the same have not been used in
business for more than two (2) prior to the consummation of the taxable transactions
involving said properties.

Treatment of CAPITAL Gains and Losses

1. Capital gains derived from sale of stocks of a domestic corporation are subject to
capital gains tax.
2. A capital gain is derived from sale of real property in the Philippines is subject to
capital gains tax but NO loss is recognized because gain is presumed.
3. For other capital assets, the rules on capital gains and losses apply in the
determination of the amount to be included in gross income and NOT subject to
capital gains tax.

Note: The rules on capital gains and losses shall apply only if the transaction on
capital asset is either a sale or exchange.

Kinds of Capital Assets

1. Shares of stocks of a Domestic corporation not listed and traded through a stock
exchange
2. Real property in the Philippines not falling under the enumeration of ordinary
assets
3. Other capital assets

Note: Not all capital gains are subject to capital gains ta. Capital gains under number
1and 2 above are subject to capital gains tax while number 3 above is included in
the gross income subject to graduated rates for individuals and normal corporate
income tax for corporations.

A. Capital Gains and Losses – sale of Shares of Stock of a Domestic

Corporation (subject to capital gains tax)

Coverage it involves the sale of shares of stock of a domestic corporation which

is not listed and not traded in the stock exchange by a non dealer in securities.
What is controlling is whether or not the shares of stock are traded in the local
stock exchange and not where the actual sale happened. (Del Rosario vs.
Commissioner, CTA Case No. 4796, December 1, 1994).

If the stock is traded in the stock exchange, it is NOT subject to capital gains tax
BUT to stock transaction tax of ½ of 1% on its gross selling price.

If the sale is made by the dealer in securities, the resulting gain or loss is
considered as ordinary to graduated rates (5-32%) for individuals and normal
corporate income tax (30%) for corporations.

45
 Tax Base: Net Capital Gains on a per transaction basis (gross selling price or
consideration less cost of adjusted basis).

Basis of the Selling Price (BIR Ruling 146-98):

1. The selling price (SP) shall be the fair market value (FMV) of the shares of
stock transferred or exchange;
2. If traded through local stock exchange- FMV is the actual SP;
3. If not traded but listed in one or more stock exchanges- FMV is the highest
selling price on the day nearest to the day of sale, transfer or exchange;
4. If not listed – FMV shall be the book value nearest the valuation date

Tax Rates:
1. 5% of the first P100,000;
2. 10% for the amount in excess of P100,000;

Person Liable:
1. Individuals – citizen or alien (RC, NRC, NRA-ETB, NRA-NETB);
2. Corporation – Domestic or foreign (DC, RFC, NRFC);
3. Other taxpayers such as estate, trust, trust funds, and pension among others.

Important Features:
1. No capital loss carry-over for capital losses sustained during the year (not
listed and traded in the local stock exchange) shall be allowed but capital
losses may be deducted on the same taxable year only.
2. The entire amount of capital gain and capital loss (not listed and traded in
local stock exchange) shall be considered without taking into account the
holding period irrespective of the type/kind of taxpayer.
3. Non-deductibility of losses on wash sales and short sales
4. Gains from sale of shares of stock in foreign corporation are NOT subject to
capital gains stock but graduated rates either as capital gain or ordinary
income depending on the nature of the trade or business of the taxpayer.

B. Capital Gains and Losses – Sale or Other Disposition of Real Property (subject
to capital gains stock)

Coverage: It involves the sale or either disposition of real property classified as

asset located in the Philippines by a non-dealer in real estate.
If the sale is made by a dealer in securities or if the real property is an ordinary
asset, the resulting gains or loss is considered as ordinary subject to graduated
rates (5-32%) for individuals and normal corporate income tax (30%) for
corporations.

Tax Base: The higher between:

1. The gross selling price; and

46
2. Prescribed zonal value of real properties as determined by a Commissioner
OR the fair market value as shown in the schedule of values of the Provincial
or City Assessors whichever is higher.

Gain or loss is immaterial, there being a conclusive presumption of gain.

Tax Rate: 6%

Notes:
 The taxpayer has the option to treat the capital gain as subject to 6% capital
gains tax or to the graduated rates (5-32%) IF the buyer of real property
classified as real asset is the government or any of its political subdivisions
or agencies, or GOCC
 In case of sale of real property which is subject to the right of redemption
(l.e., extrajudicial sale of capital assets initiated by banks, finance and
insurance companies), the final tax is due to the expiration of the redemption
period without the mortgagor having exercise right to redeemed.
 In this case the capital gains tax shall b based on the bid price of the
highest bidder
 In case the mortgagor exercise his right of redemption within one year
from the issuance of the certificate of sale, no capital gains tax shall be
imposed because no capital gain was derived by the mortgagor and no
sale or transfer of real property occurred.

Persons Liable:
1. Individuals – citizen or alien (RC, NRC, NRA-ETB, NRA-NETB);
2. Corporation – Domestic or (DC,)
3. Other taxpayers such as estate and trust

Note: Regarding the transactions affected by the 6% capital gains tax, the NIRC
speaks of real property with respect to individual taxpayers, estate and trust On
the other hand, NIRC speaks only on land and building with respect to domestic
corporations. (Sec. 24 (D) (1); Sec. 27 (D) (5))

Exemption of Sale of the Principal Residence by an Individual

Principal Residence: refer to the dwelling house, including the land on which it
is situated, where the individual of his family reside, and whenever absent, the
said individuals return to return. Actual occupancy is not considered interrupted
or abandoned by reasons of temporary absence due travel or studies of work
abroad or such other similar circumstances (RP No. 14-00; November 20, 2000)

General Rule: The address shown in the ITR is conclusively presumed as the
principal residence

47
Exception: If not required to file a return, certification from Barangay Chairman
or Building Administrator (for condominium units) shall suffice.

Requisites:
1. Sale or disposition of the old actual principal residence;
2. By a citizens or a resident aliens;
3. Proceeds of which is FULLY utilized in acquiring or constructing a new
principal residence within 18 calendar months from date of sale or
disposition;
4. Notify the Commissioner within 30 days from the date of sale or disposition
through a prescribed return of his intention to avail the tax exeption;
5. Can be availed of only once every ten (10) years:
6. The historical cost or adjusted basis of his old principal residence shall be
carried over to the cost basis of his new principal residence; and
7. The 6% capital gains tax due shall be deposited with an authorized agent
bank subject to release upon certification by the RDO that the proceeds of
the sale shall be utilized.

Note: If there is no full utilization, the portion of the gains presumed to have
been realized shall be subject to capital gains tax. The GSP or FMV at the time
of sale, whichever is higher, shall be multiplied by a fraction which the unutilized
amount bears to the gross selling price in order to determine the taxable portion;
and

Formula:
Utilized (Higher of Taxable
Amount x GSP or = Portion
GSP FMV)

Note:
 If the taxpayer constructed a new residence and then sold his old house, the
transaction does not fall under the exemption because the law is clear that
the proceeds is used in acquiring and constructing a new residence.
Therefore, the old residence should first be sold before acquiring or
constructing a new residence and not vice-versa. (Dizon, Q&A in Taxation)
 If the land is leased, only the dwelling house can be treated as principal
residence.
 However, where both the owner of the land and owner of the dwelling
house actually reside in the said dwelling house, then both said land and
dwelling house shall be treated as their Principal residence.
 If the principal residence id co-owned, the exemption applies only to the
extent of his proportionate share.
 ONLY a RC, NRC and RA is entitled to exemption from payment of capital
gains tax in case of sale of Principal residence A NRA is not entitled to the
exemption.

48
 Reason: RR No. 13-99 as amended by RR 14-00 (Rules governing
exemption of sale of principal residence from capital gains tax) did not
include nonresident aliens in the definition of natural persons covered
therein. It defined a natural person as a citizen or resident alien individual
taxable under Sec. 24 of the NIRC. (Dizon, Q & A in Taxation)

Aliens may acquire REAL PROPERTIES in the Philippines under the

following instances:
1. Alien who is legal and compulsory heir may acquire land through succession.
2. Aliens may have acquired real properties before adoption of the 1935
constitution.
3. Aliens may acquire condominium units subject to 6o-40% limit;
4. Former natural born Filipino citizens may acquire real properties under
BP,185 and R.A. 8179.

C. Capital Gains and Losses –Other Capital Assets (NOT subject to capital
gains tax)

Coverage: it involves sale or exchange or one considered as equivalent to

sale or exchange of property classified as capital asset except:
1. Shares of a domestic corporation;
2. Real property in the Philippines held as capital asset.

Note: the sale or exchange of property must be consummated not just be

perfected.

Tax Formula:
For sale of property
Selling price (in terms of money)
Less: Cost
GAIN OR LOSS

For exchange of property

FMV of the property received in exchange
Less: Cost
GAIN OR LOSS

The property received in exchange must have a market value and essentially
different from the property disposed of.

Tax Base: Net Capital Gains (excess of the gains from the sale/exchanges of
capital assets over the gains from such sales/exchanges).

Tax Treatment and Rate: Net capital gains are included in the gross income
subject to graduated rates (5-32%) for individuals and normal corporate
income tax (30%) for corporations.

49
 Rules on Capital Gains and Losses
1. Holding Period
The percentages of gain or loss to be taken into account shall be the
following:

100% - if the capital asset has been held for 12 mos. or less and;

50% - if the capital asset has been held for more than 12 mos.

Note: The holding period applies only to individuals

2. Non-Deductibility of Net Capital Loss (“Loss Limitation Rule”)

General Rule: capital losses are allowed only to extent of capital gains;
hence, the net capital loss is NOT deductible

Exception: if a domestic bank or trust company. If the taxpayer is a

corporation, capital gains and losses are recognized to the extent of 100%, a
substantial part of whose business is the receipt of deposits, sells any bond,
debenture, note or certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or political subdivision),
any loss shall NOT be included in determining the applicability of the
limitation.

3. Net Capital loss Carry-Over

If any taxpayer, other than a corporation, sustain in any taxable year a net
capital loss, such loss (in an amount not in excess of the net income for such
year)shall be treated in the succeeding taxable year as a loss from the sale or
exchange from a capital asset held from not more than twelve (12) months.

Note: The rule on net capital loss carry-over for the next succeeding year
applies only to individuals. NO carry-over allowed for corporations.

The following are considered as sale or exchange of capital assets:

1. Retirement of bonds;
2. Short sales of property;
3. Failure to exercise privilege or option to buy or sell property;
4. Securities becoming worthless;
5. Distribution in liquidation of corporations; and
6. Readjustment of interest in a general professional partnership.

TAX ON CORPORATION
OUTLINE OF THE TAXES ON CORPORATIONS
1. Normal Income Tax
2. Capital Gain Tax
3. Final Tax on Passive Income

50
4. Minimum Corporate Income Tax
5. Gross Income
6. Improperly Accumulated Earnings Tax (IAET)
7. Branch Profit Remittance Tax
8. Final Tax on (other) Gross Income From Sources Within the Philippines

A. NORMAL CORPORATE INCOME TAX (NCIT)

Corporations Liable: DC and RFC

Tax Rates: 30% effective Jan. 1, 2009
Net Income Tax Formula

Gross Sales
Less: Sales Returns
Sales Allowances
Sales Discounts
------------------------------------------------------------------------------------------------------------
NET SALES
Less: Cost of Goods Sold
------------------------------------------------------------------------------------------------------------
GROSS INCOME FROM SALES
Add: Incidental Income/Other Income
------------------------------------------------------------------------------------------------------------
NORMAL TAX GROSS INCOME
Less: Allowable deductions
------------------------------------------------------------------------------------------------------------
NET TAXABLE INCOME
Multiplied by: Applicable tax rate
------------------------------------------------------------------------------------------------------------
NET INCOME TAX DUE
=============================================================

B. CAPITAL GAINS TAX

Corporation Liable: DC, RFC, NRFC, same rules as those imposed on
individuals

There is no provision for capital gains tax on sale or disposition of real properties
for RFC and NRFC because foreign corporations cannot own real properties in
the Philippines.

C. FINAL TAX ON PASSIVE INCOME

Corporation Liable: DC, RFC, NRFC, Same rules as those imposed on
individuals

Rules on Inter-corporate Dividends:

1. Received by a DC

51
 a. From a Domestic Corporation- exempt
b. From a Foreign Corporation – 30% regular corporate income tax

Note: Foreign income tax paid or withheld on such dividend may be credited
against the Philippine income tax due.

2. Received by a RFC
a. From a domestic corporation – exempt
b. From a Foreign Corporation:
i. If from sources within – 30%
ii. If from sources without – exempt, as a general rule

Note: Dividends received by a RFC from a FC are not automatically exempt from

taxation. Sec. 42(A)(2)(b) of the NIRC which provides that: If for the 3-year period
preceding the declaration of such dividend, the ratio of such corporation’s
Philippine gross income to the world gross income (total-within and without) is:
a. 50% or more – entirely within
b. Less than 50% - proportionate

Formula:
Philippine Gross Income
------------------------------- x Dividend
Received Entire Gross Income

= Dividends derived from within

3. Received by a NFRC from a Domestic Corporation

General Rule: It is subject to final tax of 15%, as long as the country is which
the NFRC is domiciled allows a tax credit for taxes “deemed paid” in the
Philippines equivalent to 15% or does not impose tax on dividends.

The fact that the country in which the NFRC is domiciled does not imposed
any tax on the dividends received by such corporation should be held as a full
satisfaction of the condition for the availment of the 15% final Tax. (CIR v
Wander Philippines Inc., G.R. No. L-68375 April15, 1988)

Exception: It is subject to final tax of 30% if the country within which the
NRFC is domiciled does NOT allow a tax credit.

Rationale: For the purpose of encouraging foreign investors to conduct

business in the country.

52
 Tax Sparing Rule: The 15% represents between the regular income tax of
30% on corporations and the 15% tax on dividends. It is the amount of tax
forgone by the Philippine government in favor of the non-resident corporation.

Note: The same rule on dividends under Sec. 42(A)(2)(b) received by a RFC
from a FC applies to the dividends received by a NRFC from a FC

D. MINIMUM CORPORATE INCOME TAX (MCIT)

Corporation Liable: DC and RFC
Tax Rate: 2%
Tax Base: Gross income EXCEPT income except from income tax and income
subject to final withholding tax

Conditions:
1. If taxable income is negative ; or
2. If MCIT is greater than NCIT due

Limitations:
1. MCIT does NOT apply if the DC or RFC is not subject to NCIT;
2. For DC whose operations are partly covered by the NCIT and partly covered
under a special income tax system, the MCIT shall apply on operations
covered by the NCIT;
3. For RFC, only the gross income from sources within the Philippines shall be
considered.

MCIT FORMULA for Sale of Goods

Gross Sales
Less: Sales Returns
Sales Allowances
Sales Discounts
-----------------------------------------------------------------------------------------------------------
NET SALES
Less: Cost of Goods Sold
------------------------------------------------------------------------------------------------------------
MCIT GROSS INCOME
Multiplied by : 2%
------------------------------------------------------------------------------------------------------------
MCIT PAYABLE

MCIT FORMULA for Sale of Services

Gross Sales
Less: Sales Returns
Sales Allowances

53
 Sales Discounts
-----------------------------------------------------------------------------------------------------------
NET SALES
Less: Cost of Services
------------------------------------------------------------------------------------------------------------
MCIT GROSS INCOME
Multiplied by : 2%
------------------------------------------------------------------------------------------------------------
MCIT PAYABLE

Cost of Goods Sold – include all business expenses directly incurred to

produced the merchandise and bring them to their present location such as direct
labor, direct materials, and overhead expenses

Cost of Services – all direct costs and expenses necessarily incurred to provide
the services required by the costumers and clients including:
1. Salaries and employee benefits of personnel, consultants and specialists
directly rendering the service; and
2. Cost of facilities directly utilized in providing the service

Gross Income – include all items of gross income enumerated under Section
32(A) of the Tax code, as amended, except income exempt from income tax and
income subject to final withholding tax described (RR. No. 12-2007)

When does MCIT commence?

MCIT is imposed beginning the fourth taxable year immediately following year in
which such corporation commenced its business operations, which is the year
when the corporation registers with the BIR and NOT when the corporation
started commercial operation.

Rules on Carry Forward of the Excess MCIT

1. The excess of the MCIT over the NCIT can be carried forward on an annual
and quarterly basis;
2. It can be credited against the NCIT due in the nest 3 immediately succeeding
taxable years;
3. Any excess not credited in the next 3 years shall be forfeited;
4. Carry forward (annually or quarterly) is possible only if NCIT is greater than
MCIT;
5. The maximum amount that can be credited is up to the amount of the NCIT.

Illustration:
A domestic corporation had the following data on computations of the normal
corporate income tax (NCIT) and the minimum corporate income tax (MCIT)
for five years.

Year4 Year5 Year6 Year7 Year8

54
 MCIT 80k 50k 30k 40k 35k
NCIT 20k 30k 40k 20k 70k

The excess MCIT over NCIT carry-forward is shown below:

Year4 Year5 Year6 Year7 Year8

MCIT 80k 50k 30k 40k 35k
NCIT 20k 30k 40k 20k 70k

NCIT is n/a n/a 40k n/a 70k higher

Less:
MCIT
Carry-
Forward (40K)* (20k)
(20k)
From Y4
From Y5
From
Y7

Tax due 80k 50k 0 40k 30k

 Arrow pointing downwards means that the NCIT is higher so that there can be an
excess MCIT carry-forward against it.
 The Figure with asterisk (*) – Cannot carry-forward an amount higher than NCIT,
hence only the 40k of the excess of the 60k form Year 4 was may be carried
forward against the NCIT in Year6. The unused 20k remaining from Year4
cannot be used in Year8 was beyond three years from Year4.

Imposition of MCIT may be suspended if substantial losses are sustained

due to any of the Following (Memorandum No. 6-2002)
1. Prolonged labor dispute- losses arising from a strike by the employees for
more than 6 months within a taxable period causing temporary shutdown of
business operations
2. Force majeure - Cause due to an irresistible force as by “act of god” like
lightning, earthquake, storm, flood and the like; also include armed conflicts
like wars and insurgency
3. Legitimate business reverses – includes substantial losses sustained due
to fire, robbery, theft, or embezzlement, or for other economic reasons as
determined by the Secretary of Finance

Entities Exempt from MCIT:

55
1. Domestic proprietary educational institutions;
2. Domestic non-profit hospital;
3. Domestic depository banks under the expanded foreign currency deposit system;
4. Resident foreign international carrier;
5. Resident foreign offshore banking units;
6. Resident regional operating headquarters; and
7. Firms enjoying special income tax rate under the PEZA law, bases Conversation
Act and those enjoying income tax holiday incentives.

The entities enumerated above are exempt from MCIT because they are not
subject to NCIT.

Note: MCIT shall likewise apply to the quarterly corporate income tax but the
final comparison between the NCIT due and the MCIT shall be made at the end
of the taxable year taking into consideration quarterly tax payment made (RR.
No. 12-2007).

E. GROSS INCOME TAX

Corporation Liable: DC and RFC

Tax Rate: 15% optional rate beginning Jan.1, 2000

Tax Base: Gross Income

Available only to firms whose ratio or cost of sales to gross sales or receipts from
all sources does not exceeds from 55%.

It is irrevocable from 3 consecutive years during which the corporation is qualified

under the scheme.

Authorized by the President upon recommendation by the Secretary of Finance

Note: No authority has been given by the President

Conditions Precedent to Grant of President’s Authority:

1. Tax effort ratio = 205 of GNP
2. Income Tax collection/total revenues = 40%
3. VAT tax effort = 4% 0f GNP
4. Consolidated public sector financial position/GNP = 0.9%

F. IMPROPERLY ACCUMULATED EARNINGS TAX (IET)

Corporation Liable: DC

Improperly Accumulated Earnings – profits of a corporation that are permitted

to accumulate instead of being distributed to its shareholders for the purpose of
avoiding the income tax with respect to its shareholders of another corporation.

56
Tax Rate: 10%

Tax Base: Improperly Accumulated Taxable Income (in addition to other taxes).

IAET FORMULA
Taxable Income for the current year
Add: Income exempt from tax
Income excluded from gross income
Income subject to final tax
Amount of NOLCO deducted
------------------------------------------------------------------------------------------------------------
TOTAL
Less: Income tax paid/payable for the taxable year
Dividends actually or constructively paid
Amount reserved for the reasonable needs of the business
-----------------------------------------------------------------------------------------------------------
IMPROPERLY ACCUMULATED TAXABLE INCOME
Multiplied by: IAET RATE (10%)
-----------------------------------------------------------------------------------------------------------
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

Rationale: If profits were distributed, shareholders would be liable to income tax

thereon, whereas if there is no distribution, they would incur no tax in respect to
the undisputed earnings and profits of the corporation. Thus, a tax is being
imposed:
1. As penalty for the improper accumulation of its earnings, and
2. As form of deterrence to the avoidance of tax upon shareholders who are
supposed to pay dividends tax.

Coverage: Imposed on improperly accumulated tax income earned starting Jan.

1, 1998 of domestic corporations and closely-held corporations.

Closely-held corporations – at least 50% in value of the outstanding capital

stock or at least 50% of the total combined voting power of all classes of stocks
entitled to vote is owned directly or indirectly by or for more than 20 individuals.

Corporations Exempted from IAET (PET – NI – B)

1. Publicly-held corporations (Sec. 29) – domestic corporations NOT falling
under the definition of closely-held corporations. (RR No. 02-01, Sec. 4)
2. Banks and other non-banks financial intermediaries (Sec. 29)
3. Insurance companies (Sec. 29)
4. Taxable partnership [deemed to have or constructively received the taxable
income under Sec.73(D)];
5. General professional partnerships (exempt; taxable against the partners);

57
6. Non-taxable joint ventures;
7. Enterprises duly registered with the Philippine Economic Zone Authority
(PEZA) under R.A. 7916, and enterprises registered pursuant to the Bases
Conversion and Development Act of 1992 under R.A 7227, as well as other
enterprises duly registered under economic zones declared by law which
enjoy payment of special tax rate on their registered operations of activities in
lieu of other taxes, national or local; and
8. Foreign corporations [RR No. 02-2001]
Note:
a. For nos. 1-3: exempted without qualification;
b. For nos. 4-7: qualification that IAE must be for the reasonable needs of
the business should be satisfied;
c. For no. 8 not covered.

Evidence of purpose to avoid income tax:

1. Being a mere holding or investment company is a prima facie evidence of a
purpose to avoid the tax upon its shareholders as indicated by the following:
a. Investment of substantial earnings and profits of the corporation in
unrelated business or in stock or securities of unrelated business;
b. Investment in bonds and other long term securities;
c. Accumulation of earnings in excess of 100% of paid capital, not otherwise
intended for the reasonable needs of the business.
2. Accumulation of profits beyond the reasonable needs of the business
UNLESS the contrary is proven by clear preponderance of evidence.

Immediacy Test – the reasonable needs of the business are the immediate and
reasonably anticipated needs supported by a direct correlation of anticipated
needs to such accumulation of profits.

What constitutes reasonable needs of the business? (PLACES)

1. Allowance for the increase of accumulation of earnings up to 100% of the
Paid-up capital;
2. Earnings reserved for definite corporate Expansion approved by the Board of
Directors or equivalent body;
3. Reserved for buildings, plants or equipment Acquisition as approved by the
Board of Directors or equivalent body;
4. Reserved for Compliance with any loan covenant or pre-existing obligation;
5. Earnings required by Law or applicable regulations to be retained;
6. In case of Subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved for investment within the
Philippines.

THE CONTROLLING INTENTION OF THE TAXPAYER is that which is

manifested at time of accumulation, not subsequently declared intentions, which
are merely the product of afterthought. A speculative and indefinite purpose will
not suffice.

58
 Definiteness of plan/s coupled with action/s taken towards its consummation is
essential.

Limitation: The profit that has been subjected to IAET shall be no longer
subjected to IAET in later years even if not declared as dividend. However,
profits which have been subjected to IAET, when declared as dividends, shall be
subject to tax on dividends except in those instances where the recipient is not
subject thereto.

Period for Payment of Dividend/Payment of IAET

Dividend must be declared and paid or issued not later than 1 year following the
close of taxable year.
Otherwise, IAET (if any) should be paid within 15 days thereafter. (RR No. 02-01,
Sec. 6)

G. BRANCH PROFIT REMITTANCE TAX

Corporation Liable: RFC
It covers any profit actually or constructively remitted by a branch to its head
office.

Tax Rate: 15%

Tax Base: Total profit applied or earmarked for remittance without any deduction
for the tax component thereof.

Exception: those activities which are registered with the Philippine Economic
Zone Authority (PEZA).

Rationale: To equalize the tax burden on foreign corporations maintaining, on

one hand, local branch offices, and organizing on the other hand, a subsidiary
domestic corporation (Bank of America N.T. and S.A. vs. Court of Appeals et. Al.,
G.R. No. 103106 July 21, 1994).

Single Entity Concept:

As general rule, the head office of a foreign corporation is the same juridical
entity as its branch in the Philippines.

But when the head office of a foreign corporation independently and directly
invested in a domestic corporation without the funds passing through the
Philippine branch, the taxpayer with respect to the tax on dividend income would
be the non-resident foreign corporation itself and the dividend income shall be
subject to the tax similarly imposed on non-resident foreign corporation
(Marubeni Corporation vs. Commissioner 177 SCRA 500)

Income Treated as Branch Profit

59
 Interest, dividends, rents, royalties including remuneration for technical services
salaries, wages, premiums, annuities, emoluments or other fixed or
determinable, annual, periodic or casual gains, profits income and capital gains
received by a foreign corporation during each taxable year from all sources within
the Philippines shall not be treated a branch profits UNLESS the same are
EFFECTIVELY CONNECTED with the conduct of its trade and business in the
Philippines. Conversely, the income is not subject to BPRT if not effectively
connected with the conduct of its business within the Philippines. (Attribution
Rule)

Note: If income is not effectively connected with the conduct of the corporation’s
business within the Philippines, then the corporation is liable for the 30% NCIT.
H. TAX ON (other) GROSS INCOME FROM SOURCES WITHIN THE
PHILIPPINES
Corporation Liable; NRFC
Rationale: a NRFC is not subject to NCIT on its taxable income but instead
subject to final tax on gross income without the benefit of any deduction.

Tax Rate: 30%, effective Jan. 1, 2009

Tax Base: gross income received from all sources within the Philippines, such as
interest, dividends, rents, royalties, salaries, premiums, (except reinsurance
premiums), annuities, emoluments or other fixed or determinable annual, periodic
or casual gains, EXCEPT capital gains resulting from the sale of share of stock of
a domestic corporation not listed and traded through a local stock exchange held
as a capital asset.

GOVERNMENT OWNED AND CONTROLLED CORPORATIONS (GOCC)

General Rule: The rules governing domestic corporations engaged in a similar

business, industry, or activity shall apply.

Exceptions:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)

SPECIAL DOMESTIC CORPORATIONS

1. Proprietary Educational Institutions and Non-profit Hospital

Tax Rates
General Rule: 10%

Requisites for applicability of 10% Rate:

a. Stock and non-profit institutions;

60
 b. Private educational institutions;
c. Gross income from unrelated trade, business, activity does not exceed 50%
of gross income from all sources;
d. For educational institutions, issued a permit to operate from DECS, CHED, or
TESDA (Sababan, Taxation Law review, 2008 ed)

Exceptions:
a. 30% IF the gross income from unrelated trade, business or other activity
exceeds 50% of the total gross income derived from all sources
b. Exempt IF a non stock non-profit educational institution

Tax Base: net income EXCEPT on income subject to capital gains tax and
passive income subject to final tax within and without the Philippines.

Unrelated trade, business or other activity – undertaking that are NOT

substantially related to the exercise or performance such educational institution
or hospital of its primary purpose or function.

Proprietary educational institution – any private school maintained and

administered by a private individuals or groups with an issued permit to operate
from the department of Education (DepEd), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development Authority
(TESDA).

2. Depository Banks (Foreign Currency Deposit Units), [Sec. 27 (D) (3) as

amended by
R.A. 9294 (2004)

Tax Rate: 10%

General Rule: Exempt from all taxes on income derived under the Expanded
Foreign Currency Deposit System (EFCDS) from foreign currency transactions
with:
a. Non-residents
b. Offshore Banking Units
c. Local commercial banks, including branches of foreign banks that may be
authorized by the BSP to transact business with foreign currency deposit
system units; and
d. Other depositary banks under the EFCDS

Exceptions:
a. Net income from such transactions as may be specified by the Secretary of
finance, upon recommendation by the Monetary Board to be subject to the
regular income tax payable by banks;
b. Final tax of 10% on interest income from foreign currency loans granted by
such depository banks under said expanded system to:

61
 i. Residents other than offshore units in the Philippines; or
ii. Other depository banks under the expanded system.
Note: income of NONRESIDENTS, whether individual or corporation, from
transactions with depositary banks under FCDS is EXEMPT from final tax.

SPECIAL RESIDENT FOREIGN CORPORATIONs

1. International Carriers

Tax Rate: 2.5%

Note: However there are bilateral tax treaties which the Philippines has
concluded with other contracting states that may have different tax treatments
with respect to income and rates of taxes. (Mamalatec, Philippine Income
Tax.,2004 ed., p11.)

Tax Base: Gross Philippine Billings

Note: Sec. 28 (A) (3) (a) only applies to an international air carrier which is a
RFC. If the international air carrier is a domestic corporation or a NRFC (i.e.,
offline air carrier) then it shall be subject to the 30% NCIT or the 30% final tax on
gross income, respectively. (Sababan, Taxation Law Review, 2008 ed.)

International Air Carrier – foreign airline corporation doing business in the

Philippines having been granted landing rights in any Philippine Port to perform
international air transportation services/activities or flight operations anywhere in
the world (Sec. 2 R.R. No. 15-2002)

Gross Philippine Billings (for international air carrier) includes:

a. Gross revenue derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective and document.

Requisites:
i. The persons, excess baggage, cargo and the mail must be originating in
the Philippines;
ii. In a continuous and uninterrupted flight or shipment; and
iii. Irrespective of the place of sale or issue and the place of payment of the
ticket of the passage document.

Note:
In case of a stopover, it is still considered as uninterrupted if the stopover does
not exceed 48 hours.

The place of sale shall only be material in case requisites (1) (2) above are not
present (Sababan, Taxation Law Review, 2008 ed)

62
 b. Gross revenue from tickets revalidated, exchange and or endorsed to another
international airline from part of the gross Philippine Billings if the passenger
board a plane in a port or point in the Philippines.

c. For a flight which originates from the Philippines, but transshipment of the
passenger takes place at any port outside the Philippines or another airline,
only the aliquot portion of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall from part of Gross
Philippine Billings.

A foreign airline company selling tickets in the Philippines through their local
agents shall be considered as RFC engaged in trade or business in the
country. The absence of flight operations within the Philippine territory cannot
alter the fact that the income received was derived from the activities within
the Philippines. The text of taxability is the source and the source is that
activity which produced the income. (Air Canada vs. CIR, CTA Case No.
6572, December 22, 2004)

To reiterate, the correct interpretation of the above provisions [Sec.28 (A) (1)
and Sec. 28 (A) (3) (a)] is that if an international air carrier maintains flights to
and from the Philippines, it shall be taxed at the rate of 2 ½ % of its Gross
Philippine Billings, while international air carriers that do not have flights to
and from the Philippines but nonetheless earn income from other activities in
the country (such as having general sale of passage documents) will be taxed
at the rate of 32% of such income. (South African Airways v. CIR, G.R. No.
180356, 16 February 2010)

Gross Philippine Billings (for international shipping) – gross revenue

whether or passenger, cargo or mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of the passage or freight
documents.

2. Offshore Banking Units authorized by the ESP [Sec. 28 (A) (4) as amended
by RA 9294 (2004)]

Offshore Banking Unit shall mean a branch, subsidiary or affiliate of a foreign

banking corporation which is duly authorized by the BSP.

Tax Rate: 10%

General Rule: Exempt from all taxes on income derived under the expanded
Foreign Currency Deposit System (EFCDS) from foreign currency transaction
with:
a. Non-residents;
b. Offshore Banking Units; and

63
 c. Local commercial banks, including branches of foreign banks that may be
authorized by the BSP to transact business with foreign currency deposit
system units.

Exception: It is subject to final tax of 10% on interest income derived from

foreign currency loans granted to residents other than offshore banking units or
local commercial banks, including local branches of foreign banks that may be
authorized by the BSP to transact business with offshore banking units.

Note: Income of NONRESIDENTS, whether individual or corporation, from

transactions with OBUs is EXEMPT from final tax.

3. Resident Depository Bank (FCDU) [Sec. 28 (D) (7) (b) as amended by RA

9294 (2004)]

Note: Same Rules as Discussed Above under Special Domestic Corporations

no.2

4. Regional on Area Headquarters of Multinational Companies

Tax Rate: EXEMPT from Income Tax

Note: also exempt from all kinds of Local Taxes, Fees, or Charges imposed by a
local government unit except real property tax on land improvements and
equipment.

Regional or Area Headquarters (RHQ) – an office whose purpose is to act as

an administrative branch of a multinational company engaged in international
trade which principally serves as a supervision, communications and
coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific
Region and other foreign markets and which does not derived income in the
Philippines.

5. Regional Operating Headquarters of Multinational Companies

Tax Rate: 10%

Tax Base: Taxable income from within the Philippines

Regional Operating Headquarters (ROHQ) – foreign business entity which is

allowed to derive income in the Philippines by performing qualifying services to
its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific
Region and in other Foreign markets and may engage in the following activities:
a. General Administration and planning;
b. Business planning and coordination;
c. Sourcing and procurement of raw materials and components;

64
 d. Corporate finance advisory services;
e. Marketing, control and sales promotion;
f. Training and personnel management;
g. Logistic services;
h. Research and development services and product development;
i. Technical support and maintenance;
j. Data processing and communications, and
k. Business development

SPECIAL NON – RESIDENT FOREIGN CORPORATION

1. Non-resident cinematographic Film Owners, Lessors or Distributors

Tax Rate: 25%

Tax Base: Gross income from all sources within the Philippines

2. Non-resident Owner or Lessor of Vessels Chartered by Philippine Nationals

Tax Rate: 4.5%

Tax Base: Gross rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Authority.

3. On-resident Owner or Lessor of Aircraft and Machineries and Other Equipment

Tax Rate: 7.5%

Tax Base: Gross rentals or fee

EXEMPT CORPORATIONS
1. Labor, agricultural or horticultural organization not organized principally for profit;
2. Mutual savings bank not having a capital stock represented by shares and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit;
3. A beneficiary society, order or association, operating for the exclusive benefits of
the members such as fraternal organization operating under the lodge system, or
a mutual aid association or a non-stock corporation organized by employees
providing for the payment for life, sickness, accident, or other benefits exclusively
to the members of such society, order or association, or non-stock corporation or
their dependents;
4. Cemetery company owned and operated exclusively for the benefits of its
member;
5. Non-stock corporations or association organized and operated exclusively for
religious, charitable, scientific, athletic or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any specific person;

65
6. Business league, chamber of commerce, or board of trade, not organized for
profit and no part of the net income which inure to the benefit of any private
stockholder or individual;
7. Civic league or organization not organized for profit but operate exclusively for
the promotion of social welfare;
8. A non-stock and non-profit educational institution;
9. Government educational institution;
10. Farmers or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like
organization of a purely local character, the income of which consists solely of
assessments, dues or fees collected from members from the sole purpose of
meeting its expenses; and
11. Farmers, fruit growers or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning back
to them the proceeds of sales, less the necessary selling expenses on the basis
of the quantity of produce finished by them.

Note: exempt corporations are subject to income tax on their income from any of
their properties, real or personal, from any of their activities conducted for profit,
regardless of the disposition made of such income [CIR vs. Court of Appeals. G.R.
No. 124043. Oct. 14, 1998]

RULES ON EXCHANGE OF PROPERTY

General Rule: upon the sale or exchange of property, the entire gain or loss, as the
case may be, shall be recognized. [Sec. 40 (C) 1]

Exceptions:
No gain or loss is recognized in:
1. Exchange of property solely in kind in pursuance of corporate mergers and
consolidations.
2. Exchange by a person of his property for stocks in a corporation as a result of
which said person, alone or together with others not exceeding four (4) persons,
gains controlled of said corporation.

Control – ownership of stocks in a corporation amounting to at least 51% of the total

voting power of all classes of stocks entitled to vote.
Note: This rule does not contemplate momentary control Otherwise the exchange
might not be considered tax free.

Exchange solely in Kind – an exchange of property with property with no money

involved.
(e.g., shares of stock exchange for shares of stock) (Domondon, Taxation Volume 2,
2009 ed)

66
Note: Technical there is no tax exemption even if the exchange is solely in kind. The
exemption refers only to the INITIAL EXCHANGE. Where the parties to the
exchange subsequently dispose of the property they received as a result of the
exchange, then a gain or loss would be recognized. There is merely a deferral of
the income tax. (Domondon, Taxation Volume 2, 2009 ed)

Gain is recognized but loss is NOT in: (l WARN)

1. Transactions between Related taxpayers (Sec. 6)
2. Illegal transactions (Sec. 96, R.R.2)
3. Wash sales by non-dealers of securities and when not subject to the stock
transfer tax.
4. Sale and exchanges that are NOT Arms length.
5. Exchanges of property, NOT solely in kind in pursuance of corporate mergers
and consolidation.

Exchange SOLELY IN KIND in legitimate mergers and consolidation includes:

1. Between the corporation which are parties to the merger or consolidation
(property of stocks);
2. Between a stockholder of a corporation party to a merger or consolidation and
the other party corporation (stock for stock);
3. Between a security holder of a corporation party to a merger or consolidation and
the other party corporation (securities for securities).

Note: stocks issued for services shall not be considered as issued in return to
property.

Merger or consolidation – means the ordinary merger or consolidation, OR the

acquisition by one corporation of all or substantially all the properties of another
corporation solely for stock undertaken for a bona fide business purpose and not
solely for the purpose of escaping the burden of taxation.

Bona fide purpose – each and every step of the transaction shall be considered
and the whole transaction or series of transaction shall be treated as a single unit.

RULES ON EXCHANGING OF PROPERTY NOT SOLELY IN KIND

Exchange not solely in kind – exchanges of property for shares of stock or

securities PLUS money and/or other property including assumption of liability.

1. If the INDIVIDUAL, a shareholder, a security holder or a corporation receives not

only stock or securities but also money and/or property:
a. The gain, if any, shall be recognized in the amount not in excess of the sum
of the money and fair market value of such other property received.
b. However, any loss is not recognized

67
 Note: in case of a shareholder, if the money and/or other property received has
the effect of a distribution of a taxable dividend there shall be taxed as dividend to
the shareholder an amount of the gain recognized not in excess of his
proportionate share of the undistributed earnings or profits of the corporation; The
remainder, if any, of the gain recognized shall be treated as a capital gain.

2. If the TRANSFEROR CORPORATION receives not only stock permitted to be

received without the recognition of gain or loss but also money and/or property,
then
a. If the corporation receiving such money and/or other property distributes it in
pursuance of the plan of merger or consolidation, no gain to corporation shall
be recognized from the exchange,
b. Otherwise, the gain, if any, but not the loss to the corporation shall be
recognized but in an amount not excess of the sum of such money and the
fair market value of such other property so received which is not distributed.
3. If the taxpayer receives stock or securities PLUS ASSUMPTION OF
LIABILITIES:
a. Then such assumption or acquisition shall NOT be treated as money and/or
other property, and the exchange is considered as an exchange solely in
kind;
b. However, if the amount of the liabilities assumed plus the amount of the
liabilities to which the property is subject exceed the local of the adjusted
basis of the property transferred, then such excess shall be considered as a
gain from the sale of exchange of a capital asset or of property which is not a
capital asset.

COMPUTATION OF THE AMOUNT OF GAIN OR LOSS

GAIN – amount realized from the sale or disposition exceeds the basis
LOSS – amount realized from the sale or disposition is less than the basis

Money received in the sale or disposition

Plus : FMV of the property received
---------------------------------------------------------------
Amount REALIZED
Less: Basis of the property sold or disposed
---------------------------------------------------------------
GAIN or LOSS from the sale or disposition

1. Original basis of the property to be transferred

a. The cost thereof in the case of property acquired on or after March 1, 1913, if
such property was acquired BY PURCHASED; or
b. The fair market price or value as of the date of acquisition, if the same was
acquired BY INHERITANCE ;or
c. If the property was acquired BY GIFT, the basis shall be the same as if it
would be in the hands of the donor or the last preceding owner by whom it
was not acquired by gift,

68
 Except: if such basis is greater than the FMV at the time of the gift then, for
the purpose of determining LOSS (only), the basis shall be such FMV;or

d. If the property was acquired FOR LESS THAN AN ADEQUATE

CONSIDERATION in money or money’s worth, the basis of such property is
the amount paid by the transferee for the property; or
e. The substituted basis, if the property was acquired in a previous TAX FREE
EXCHANGE.

2. Substituted basis of stock or securities received by the transferor in cases of

tax-free exchanges

Original basis of the stock or securities received

I. ESS
1. Money received(including the liability assumed by the transferee of property
or the amount of the liability on the property)
2. FMV of other property received
ADD
1. Amount treated as Dividend
2. Amount of any Gain recognized on the exchange
-----------------------------------------------------------------------------------------------------------
SUBSTITUTED BASIS of the stocks or securities

Note: The property received as “boot” shall have as basis its fair market value:

Boot – money received or and other property received in excess of the stock or
securities received by the transferor on a tax-free exchange.

If the transferor receives several kinds of stock or securities, the Commissioner is

hereby authorized to allocate the basis among the several classes of stocks or
securities.

3. Substituted basis of the property transferred in the hands of the transferee

The basis of the property transferred in the hands of the transferee shall be the
same as it would be in the hands of the transferor increased by the amount of the
gain recognized to the transferor on the transfer.

4. Basis for determining gain or loss on a subsequent sale or disposition of

property subject of the tax free exchange.
Same with substituted basis of stock or securities received by the transferor in cases
of tax-free exchanges. And substituted basis of the property transferred in the hands
of the transferee ([b]and [c] above). (Rev Reg No. 6-2008)
5. Basis of the stock or securities received by the transferor where taxpayers
exchanges property plus assumption of liabilities.

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Same with substituted basis or stock or securities received by the transferor in cases
of tax-free exchanges above

GROSS INCOME

Gross Income – all income derived from whatever source except those excluded or
exempted by law), including but not limited to the following (Sec. 32, NIRC): (CARG-
DRIP-GPP)
1. Compensation;
2. Annuities;
3. Rents;
4. Gross income from the profession, trade or business;
5. Dividends;
6. Royalties;
7. Interests;
8. Prizes and winning;
9. Gains from dealings in property;
10. Pensions; and
11. Partner’s share in the net income of the general professional partnership

Note: Gross Income under Sec. 32 is different from the limited meaning of Gross
Income for purposes of Gross Income Tax, which means Gross Sales less Sales
Returns, Discounts, and Allowances and Cost of Goods Sold.

The definition of gross income is broad enough to include all passive income subject
to specific rates or final taxes. HOWEVER, since these passive incomes are already
subject to different rates and taxed finally at source, they are no longer included in
the computation of gross income, which determines taxable income. (CIR v. PAL,
GR. No. 160528, October 9, 2006)

Concept of Income from whatever source derived – all income not expressly
excluded or exempted from the class of taxable income, irrespective of the voluntary
or in voluntary action of the taxpayer in producing the income. (Gutierrez v. CIR,
CTA Case No. 65, Aug. 31, 1995)

Note: The source of income may be legal or illegal (Domondon, Taxation Volume 2,
2009 ed.)

ITEMS OF INCLUSION
A. Compensation
 All remunerations for services performed by an employee for his employer
under an employer-employee relationship UNLESS
 Specifically excluded by the Codes.

Requisites:
1. Personal services actually rendered;

70
 2. Payment made for such services; and
3. Payment was reasonable

B. Annuities
 Refer to annuity polices sold by insurance companies, which provide
installment payments for life, or for a guaranteed fixed period of time
whichever is longer.
 The portion representing return of premium is not taxable while that
portion that represents interest is taxable.
 Failure to comply with the requirements of a tax-exempt annuity makes it
taxable and included in the gross income.

C. Rents
 Amount or compensation paid for the use or enjoyment of a thing or a right
and implies a fixed sum or property amounting to a fixed sum to be paid at
a stated time for the use of the property.
 SCOPE: all amount or property received from lease contract, whether
used in business or not.
 Prepaid or advanced rental is taxable income to the lessor in the year
receive, if so receive under a claim of right and without restriction as to its
use, and regardless of method of accounting employed.
 Security deposit applied to the rental or the terminal month of period of
contract must be recognized as income at the time it is applied.
 If security deposit is to ensure contract compliance, it is not income to the
lessor UNTIL the lessee violates any provision of the contract.
 Method of reporting the value of permanent improvements introduced by
the lessee.
1. Outright method – recognized as income to lessor at the time when
such buildings improvements are completed at fair market value.
2. Spread out method – the lessor spread over the life (or remaining
period) of the lease, the estimated depredated value of such buildings
or improvement at the termination of the lease and report as income
for each year of the lease, an aliquot part thereof.

Note: No income accrues to the lessor, if the improvements are

subject to removal by the lessee. (Dizon, Q & A in Taxation)
 Rents EXCUDED from gross income:
1. Those paid to non-resident owner of lessor of vessels chartered by
Philippines nationals – 4.5% of gross rentals.
2. Those paid to non-resident owner or lessor of aircraft, machineries and
other equipment – 7.5% of gross rental or fees.
 Items considered as rental income:
1. Agreed amount per month or per year.
2. Obligations of lessor to third parties which the lessee undertakes to
pay as further consideration of the lease, such as:

71
 a. Real estate taxes on leased premises paid by the lessee
b. Insurance premiums paid by lessee on policy covering leased
property
c. Dividends paid by lessee to stockholders of lessor-corporation in
lieu of rent.
d. Interest paid by lessee to holder of bonds issued by lessor-
corporation instead of rent.
D. Gross Income From Profession, Trade Or Business
 “BUSINESS” is any activity that entails time and effort of an individual or
group of individuals for purposes or livelihood or profit.
 Business income refers to income derived from merchandizing, mining,
manufacturing, and farming operations.
 Professional income refers to the fees received by a professional from the
practice of his profession, provided that there is no employer-employee
relationship between him and his clients.
E. Dividends
 It means any distribution made by a corporation to its stockholders,
whether in money, property, or stocks, out of its earnings and profits.
 Only dividend issued by a foreign corporation to an individual taxpayer,
(citizen or alien) is included in the computation of gross income since
those issued by a domestic corporation are subject to final tax.
Stock Dividends

General Rule: not taxable as there is a mere transfer of surplus to capital

account.

Excemptions:
1. When there is redemption of cancellation equivalent to distribution of
taxable dividends (Sec.73 [B], 1997 NIRC);and
2. It gives the shareholder an interest different from that which his former
stock represented
3. The recipient is other than the shareholder.
4. Dividends declared In the guise of treasury stock dividend to avoid the
effects of income taxation (CIR v. Manning, 66 SCRA 14)
5. Stock dividend is taxable to usufructuary
When a corporation distributes all of its assets in complete or partial liquidation or
dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporation, is taxable income or deductible loss, not a dividend
income as it is considered a sale or exchange of property between the
corporation and the stockholder.

Note: While liquidation gains are characterized as gains from sale or exchanges
of shares, they are still subject to the ordinary income tax rates provided under
Sec. 24 (A) (1)(c), 25 (A)(1)and (E), 28 (A)(1) and (2) and (B)(1)of the NIRC,
depending o the status of the stockholder, and not to the 5%/10% final tax on
capital gains (Dizon, Q & A in Taxation)

72
Summary Rules on Dividends (Cash Property, Scrip)

Taxpayer Dividend Paid Dividend paid By A

By a domestic foreign Corporation
Corporation
RC 10% 5%-32%(33%)
NRC 10% Source within -5-32%
(33%) Source without
EXEMPT

Note: Section 42(A)

NIRC in relation with
Section 23 NIRC
RA 10% Source within 5%-
32%(33%) Source
without EXEMPT

Note: Section 42(A)

NIRC in relation with
Section 23 NIRC
NRA-ETB 20% Source within -5-32%
(33%) Source without
EXEMPT

Note: Section 42(A)

NIRC in relation with
Section 23 NIRC
NAR-ETB 25% Source within 25%
Source without EXEMPT

Note: Section 42(A)

NIRC in relation with
Section 23 NIRC
DC EXEMPT 30%
RFC EXEMPT Source within 30%
Source without EXEMPT

Note: Section 42(A)

NIRC in relation with
Section 23 NIRC
NRFC 15% - w/ tax Source within
sparing 30% Source without
30%- w/o tax EXEMPT
sparing Note: Section 42(A)
NIRC in relation with

73
 Section 23 NIRC
F. Royalties
 It is the payment for the use and exhaustion of property such as earnings
from copyrights, patents, trademarks, formulas and natural resources
under lease
 Included in the gross income IF derived from sources outside the
Philippines because those from sources within are subject to final
withholding tax
 If the recipient of the royalty paid by a DC Is either a NRA-NETB or NRFC,
a lower tax rate may be allowed under an existing treaty
 If the tax payer is a NRA-NETB or a NRFC, the royalty is not included
since these tax payers are liable by way of gross income tax (Sababan,
Taxation Law Review, 2008 ed.)
G. Interests
 Amount of compensation paid for the use of money, goods, or credit or
forbearance from such use.
Income Payment Tax Rate Payee
Interest from any currency 20% DC, RFC, RC, NRC.
deposit, yield or any other RA, NRA, ETB
monetary benefit from
deposit substitutes and
from trust funds and similar
arrangements derived from
Philippines sources
Interest from long term Holding Period RC, NRC, RA, NRA-
deposit or investment in the 5% - 4 to less ETB
form of savings, common or than 5 years
individual trust funds, 12% - 3 to less
substitutes, investment than 4 years
management accounts and 20% - less than
other investments 3 years
evidenced by certificates in
such form prescribed by
BSP
Interest income from FCDU 7.5% RC, RA, DC, RFC
deposits
Interest from foreign 10% RC, RA, DC, RFC
currency loans granted by
FCDUs to residents other
than OBUs or other
depositary under the
expanded system
Interest from foreign 10% RC, RA, DC, RFC
currency loans granted by
OBUs to residents other

74
 than OBUs or local
commercial banks,
including branches of
foreign banks that may be
authorized by BSP to
transact business with
OBUs
Interest income on foreign 20% NRFC
loans contracted on, or
after August 1, 1986

Any interest income from EXEMPT NRC, NRA, NRFC

transactions with depository
banks under FCDs

Note:
Interests from LOANS are always included in the gross income.

BANK INTERESTS are included if they are derived from sources without the
Philippines (i.e bank is located outside the Philippines).If the bank interests are
derived from sources within the Philippines, then it is excluded since it is subject
to final income tax (7.5%). (Sababan, Taxation Law Review, 2008 ed.)

H. Prizes and Winnings

 Refers to amount of money in cash or in kind received by chance or
through luck and are generally taxable except if specifically mentioned
under the exclusions from the computation of gross income under Sec. 32
(B)
 Prizes derived from sources within not exceeding 10,000 is included in the
gross income; if over 10,000 it is subject to final tax o passive income.
 Winnings (not subject to the P10,000 limitation) from sources within is
subject to final tax on passive income EXEMPT PCSO and lotto winnings
that are tax exempt
 Prizes and winnings from sources without is included in the gross income

Summary rule for prizes and winnings

Taxpayer Prizes Amounting To PCSO And Lotto All Other Winnings
10,000 Or Less Winnings and Prizes More
Than P10,000
RC, NRC, RA, 5-32% EXEMPT 20%
NRA-ETB

I. Gains From Dealings In Property Considered As Ordinary Asset

 Includes all income derived from the disposition of property (real, personal
or mixed) for;
1. Money in case of sale;

75
 2. Property, in case of exchange; or
3. Combination of both sale and exchange which result in gain because
of the difference between the taxpayer’s investment of what he
disposed of and the amount or value what he received.
J. Pensions
 Refer to amount of money received in lump sum or of staggered basis in
consideration of services rendered given after an individual reaches the
age of retirement.
 Taxable to the extent of the amount received except if there is a BIR
approved pension plan.

K. Partner’s Distributive Share in the Net Income of GPP

 GPP is not taxable as an entity but the partner’s share in the net income of
GP is included in the gross income
 Share of a partner in the distributable net income after tax of a business
partnership is subject to final income tax and is NOT included in the gross
income.
 Sale of Goodwill – Gain or loss from a sale of goodwill results only when
the business, or part of it, t o which the goodwill attaches is sold, in which
case the gain or loss will be determined by comparing the sales price with
the cost or other basis of assets, including goodwill. It is immaterial that
goodwill may never have been carried on the books as an asset, but the
burden of proof is on the taxpayer to establish the cost or fair market value
of the goodwill sold (Sec. 47, Rev. Reg. 2)
 Income from Other Sources – embraces all income not expressly
exempted within the class of taxable income under the law, irrespective of
the voluntary or involuntary action of the taxpayer in producing the gains,
and whether derived from legal or illegal sources, such as:
1. Gains arising from expropriation of property constituting as income
from dealings in property;
2. Income derived from illegal sources, such as gambling, theft,
embezzlement, and smuggling;
3. Compensation for damages if t represents payment for loss of
expected profits such as damages from patent infringement suit;
4. Bad debts previously charged-off but afterwards recovered under the
tax benefit rule.
 Non – taxable Tax Refunds
1. Philippine Income Tax, EXCEPT fringe benefits tax
2. Estate or donor’s tax
3. Special assessment
4. Income tax paid or incurred to a foreign country if the taxpayer claimed
a credit for such tax in the year it was paid or incurred
5. Stock transaction tax
6. The refund of these taxes is not taxable because such taxes are not
deductible from the gross income, hence where is no tax benefit

76
  Cancellation of Indebtedness
1. Taxable income- if the creditor cancels the debt as a consideration of
the services performed by the debtor to the creditor.
2. A gift – If the creditor cancels the debt without any consideration.
3. A capital transaction – If the corporation forgives the debt of its
stockholder, it has the effect of payment of an indirect dividend.

SUMMARY RULES on Gross Income from Sources WITHIN the Philippines (Sec.
42, NIRC)
1. Interests – (a) interest derived from sources within (location of the bank), or (b)
residence of the debtor
2. Dividends – amount received as dividend from a domestic corporation or from a
foreign corporation (subject to the 50% rule)

50% rule: If for the 3-year period preceding the declaration of such dividend, the
ratio of such corporation’s Philippine gross income to the world gross income (total –
within and without) is:
 50% or more – Entirely within
 Less than 50% - proportionate

Formula:
Philippine Gross Income
------------------------------- x Dividend
Received Entire Gross Income

= Dividends derived from within

3. Services – services performed in the Philippines

4. Rents and Royalties – in case of rentals, those properties located in the
Philippines. In case of royalties, on properties used in the Philippines.
5. Sale of Real Property – sale of real property located in the Philippines
6. Sale of Real Property – in case of sale of personal property, the following rules
apply:
a. Production and Sale
 Produced in whole within and sold within – income purely within
 Produced in whole without and sold without – income purely without
 Produced within or sold without – income partly within and income partly
without
 Produced without and sold within – income partly within and partly without

b. Buy and Sell (No Production)

Place of Market Rule (place of sale) applies
Exception: If the personal property sold is shares of stock of DOMESTIC
corporation, the income is purely within even the seller sell it abroad

77
Gross Income from Sources WITHOUT the Philippines (Sec. 42, NIRC)
1. Interests other than those derived from sources within the Philippines
2. Dividends other than those derived from sources within the Philippines
3. Compensation for labor or personal services performed without the Philippines;
4. Rents and Royalties from property located without the Philippines or from any
interest in such property including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents, copyrights, secret processes and
formulas, goodwill trademarks, trade brands, franchises and other like properties;
and
5. Gains profits and income from the sale of real property located without the
Philippines
6. Sale of Personal Property – in case of sale of personal property, the same rules
under No. 6 of the immediately preceding discussion on Income from Sources Within
apply.

EXCLUSIONS

Exclusions
Items not included in the determination of gross income either because:
1. They are represent return of capital or are not income, gain or profit;
2. They are subject to another kind of internal revenue tax; or
3. They are income, gain or profits that are expressly exempt from income tax under
the constitution, tax treaty, tax code or a general or special law.

Note: Exclusions are in the nature of tax exceptions and it behooves upon the taxpayer
to establish them convincingly (CIR v. Mitsubishi, 181 SCRA 214)

Items of Exclusions (Sec. 32 [B])

(MAC-GIRL)
1. Life Insurance
2. Amount received by insured as return of premium
3. Gifts, bequests, and devices
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities
7. Miscellaneous Items

A. PROCEEDES OF LIFE INSURANCE

Paid by reason of the death of the insured to his estate or to any beneficiary
(individual, partnership. or corporation. But not a transferee for a valuable
consideration) directly or in trust

Reason: considered as indemnity rather than as gain or profit.

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 If such amounts are held by the insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross income

Note: When the insured outlives the policy, the proceeds from life insurance less the
total amount of premiums paid should be included in the gross income since death is
an essential element for the exclusion.
Life Insurance Proceeds are NOT excluded in the following instances:
1. Where the life insurance policy is used to secure a money obligation
2. Where the life insurance policy was transferred for a valuable consideration (Sec.
62, Rev. Reg. No. 2)

B. RETURN OF INSURANCE PREMIUM

Reason: premiums paid amounts to a return of capital

If the total premium returns exceed the aggregate premiums paid, the excess shall
be included in the gross income.

In case of a transfer for a valuable consideration of a life insurance, endowment or

annuity contract, or any interest therein, only the actual value of such consideration
and the amount of the premiums and other sums subsequently paid by the
transferee are exempt from taxation.

No loss is realized on surrender of a life insurance policy for its surrender value.

Endowment – The insurer agrees to pay a sum certain to the insured if he outlives a
designated period; if he dies before that date, the proceeds are to be paid to the
designated beneficiary.

Note:
1. If the insured dies, and the beneficiary receives the life insurance proceeds these
are not taxable income because they are excluded from gross income.
2. If the insured does not die and survives the designated period:
a. The amount pertaining to the premiums he paid are excluded from gross
income; and
b. The excess shall be considered part of his gross income (Domondon,
Taxation Volume 2, 2009 ed)

Annuity – the aleatory contract of life annuty binds the debtor to pay an annual
pension or income during the life of one or more determine persons in consideration
of a capital consisting of money or other property whose ownership is transferred to
him at once with the burden of the income.

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C. GIFT, BEQUEST, OR DEVISE
Reason: consideration is pure liberality and is already subject to estate and donor’s
tax
Note: Gifts are excluded because they are subject to DONOR’S tax; Bequest and
Devise are excluded because they are subject to ESTATE tax

Income from the property received as gift is subject to income tax.

If the amount received is on account of service rendered the receipt is income

(Pirovano vs, Commissioner, G.R. No. 15865 July, 31, 1965)

Test to determine if there is a gift:

1. When a person gives to another a thing or right on account of the latter’s merits
or of the services rendered by him to the donor, provided they do not constitute a
demandable debt or
2. When the gift imposes upon the donee a burden which is less than the value of
the thing given (Domondon, Taxation Volume 2, 2009 ed)

D. COMPENSATION FOR INJURIES OR SICKNESS (whether by suit or

agreement)

Reason: This is just an indemnification for the injuries or damages suffered.

 Personal injuries refer only to physical injuries hence, it does not include
damages arising from libel or slander.
 The face that payment was voluntary does not change its exempt status.
 Damage under the Civil code (Art..2179) are also excluded from the gross
income provided that it is received on account of injury of sickness.
 Amounts received as compensation for lost income are TAXABLE because
they would have been taxable income had the taxpayer not been injured or sick
and regularly earned the same. (Dizon, Q & A in Taxation)

E. INCOME EXEMPT UNDER TREATY

Reason: Public policy and comity between the Philippines and various countries.

F. RETIREMENT BENEFITS, PENSION, GRATITUES

a. Retirement benefits under RA 4917 where:
a. Retiree employed by the same employer for at least 10 years
b. Retiree at least 50 years old
c. Avails of the benefit only once
d. BIR approved private benefit plan
b. Retirement benefits under RA 7641 where:
a. No private retirement plan
b. Must have served the company for at least 5 years
c. Retiree at least 60 years old but not more than 65 years of age at the time of
retirement.

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 c. Monetized value of retiree’s accumulated vacation leave (VL) and sick leave (SL)
subject to the following rules:
a. For compulsory retirement (60 years for private corp; 65 yrs. for government;
70 yrs. for judiciary - ALL)
b. For optional retirement (10 yrs. of service and 50 yrs. of age) – up to 10 days
only while the excess of VL and all SL is taxable.

d. Separation pay due to circumstances beyond the control of the employee

Note: The phrase “causes beyond the control” connotes involuntariness on the
part of the official or employee. The separation from the service of the official or
employee must not be asked or initiated by him. (Sec. 2(b), Rev. Reg. 12-86)

The money value of accumulated leave credits/terminal leaves given to a

retiring government official or employee is not subject to tax.

Reasons:
a. Terminal leave pay is applied for by an employee who is no longer working; it
is no longer compensation for services rendered.
b. Terminal leave pay is applied for by an employee who retires, resigns or is
separated from the service through “no fault of his own”
c. Compulsory retirement may be considered as a cause beyond the control of
the retiring employee.
d. Terminal leave pay may be viewed as a “ retirement gratuity received by
government employees” (Barromeo v. CSC, 199 SCRA 91; CIR v. CA, 203
SCRA 72)
e. Social security benefits retirement gratuities, pensions and other similar
benefits received by citizens and aliens who come to reside permanently here
from foreign government agencies and other institutions, private or public;
Gratuity – An additional benefit or compensation paid in recompense for
previous services rendered or as an inducement to perform additional
services.

Pension – A stated, certain and periodic allowance paid in recompense for

previous services rendered as an inducement to perform additional services.

f. Benefits due to residents under the law of the U.S. administered by the U.S.
Veterans Administration;
g. SSS benefits; and
h. GSIS benefits

G. MISCELLANEOUS ITEMS
1. Passive income derived by;
a. Foreign government
b. Financing institution owned, controlled, or enjoying refinancing from foreign
government; and

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 c. International or regional institutions established by foreign governments.
2. Income derived by the Philippine government; and its subdivision from:
a. Any public utility; or
b. The exercise of any essential governmental function.
3. Prizes and awards made primarily in recognition of religious, charitable scientific,
educational, artistic, literary, or civic achievement.
a. Recipient was selected without any action on his part; and
b. Recipient is not required to renders substantial future services.
4. Prizes and awards granted to athletes in sports competitions and sanctioned by
their national sports association

Note: National Sports Associations are those duly accredited by the Philippine
Olympic Committee (POC)

5. 13th month pay and other benefits up to P30,000;

6. GSIS, SSS, Medicare (now Philhealth) and Pag-ibig contributions and union
dues for individuals;
7. Gains derived from bonds, debentures, or other certificate of indebtedness with a
maturity of more than 5 years; and
8. Gains from redemption of shares in Mutual Fund.

FRINGE BENEFITS TAX

Fringe benefits Tax (FBT) is a final withholding tax imposed on the grossed-up
monetary value(GMV) of fringe benefit furnished, granted or paid by the employer to

The employee, except rank and file employees, whether such employer is an individual,
professional partnership or corporation, regardless of whether the corporation is taxable
or not, or the government and its instrumentalities.

FBT is paid by the employer but he is allowed by law to deduct FBT as a business
expense in determining his taxable income.

Fringe Benefit means any good, service, or other benefit furnished or granted by an
employer, in cash or in kind, in addition to basic salaries, to an individual employee.

It is given instead of an increase in basic pay because it may be discounted or adjusted

downward as the financial condition of the employer dictates.

Tax rates and Base

Tax Base: The grossed up monetary value (GMV) of the fringe benefit

GMV of fringe Benefits Represents:

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1. The whole amount of income realized by the employee which includes the net
amount of money or net monetary value of property which has been received; plus
2. The amount of fringe benefit tax thereon otherwise due from the employee but paid
by the employer for and in behalf of the employee.
3. “GMV” of the fringe benefit shall be determined by dividing the monetary value of the
fringe benefit by the grossed-up divisor. The grossed-up divisor is the difference
between 100% and the applicable rates.

Tax Rates
Year Grossed-up Divisor Rate
1998 66% 34%
1999 67% 33%
2000
68% 32%
onwards
Employee Grossed-up Divisor Rate
Citizen, RA, NRA-ETB 68% 32% FTB (2000 onwards)
NRA-NETB 75% 25% FTB
Individuals employed by
RHQ or RAHQ; OBU;
Foreign service contractor
or foreign service 85% 15% FTB
subcontractor engaged in
petroleum operations in the
Philippines

Basic Rules:
1. Fringe benefit given to a rank and file employee (whether a collective bargaining
agreement or not) is not subject to FBT (fringe benefit tax)

Note: Fringe benefit given to a rank and file employee are treated as part of his
compensation income subject to income tax and withholding tax on compensation.

2. Fringe benefit given to a supervisory or managerial employee is subject to the FBT.

3. De minims benefit, whether given to rank and file employee or to supervisory or
managerial employee is not subject to any tax, whether FBT or Withholding tax on
Compensation.

Note:
Rank and file employees” means all employees who are holding neither
managerial nor supervisory position

Managerial employees refer to those who are vested with powers or prerogatives
to lay down and execute management policies and/or to hire, transfer, suspend, lay-
off, recall discharge, assign or discipline employees.

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 Supervisory employees are those who effectively recommend such managerial
actions if the exercise of such authority is not merely routinary or clerical in nature
but require the use of independent judgment. (RR No. 3-98)

Deduction for the Employer

1. If fringe benefit is given to rank-and-file employee OR to a managerial/supervisory
employee, BUT is NOT subject to FBT, the deduction for the employer is the
MONETARY VALUE OF THE FRINGE BENEFIT.
2. If fringe benefit is given to managerial or supervisory employee and is subject to
FBT, the deduction for the employer is the GRISSED-UP MONETARY VALUE
(GMV) OF THE FRINGE BENEFIT.

Valuation of Fringe Benefit

1. If fringe benefit is granted in money or is directly paid for by the employer.

Value: Amount granted or paid for

2. If fringe benefit granted or furnished in property other than money and ownership is
transferred to employee

Value: FMV of the property

3. If fringe benefit granted or furnished in property other than money but ownership is
not transferred to employee.

Value: Depreciation value of property

Fringe Benefits Subject to Fringe Benefit Tax (FBT)

1. Housing

General Rule: the value to the employee of quarters and meals given by the
employer shall be subject to FBT.

Exception: if living quarter/meals are furnished to an employee for the convenience

of the employer.

Case Monetary Value

Employer leases residential property Monthly rental paid x 50%
Monthly monetary value:
50% of 5% of the higher amount
between:
Employer owns the residential property a. The FMV in the Real Property Tax
Declaration, or
b. The zonal value of the CIR, Divided
by: 12 months

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 Case Monetary Value
Monthly monetary value: 50% of 5% of
Employer purchases the residential
the Acquisition cost, exclusive of interest,
property in installment
divided by 12 months
Employer purchases the residential
Acquisition cost or zonal value whichever
property, with the ownership transferred
is higher
to the employee
Housing unit inside or adjacent (within 50
meters) from the perimeter of the Not a taxable fringe benefit
business premises
Temporary housing for a stay in the
Not a taxable fringe benefit
housing unit for 3 months or less

Note:
1. Housing Privileges of military officials of the AFP consisting of officials of the Phil
Army, Phil Navy and Philippine Air Force shall not be treated as taxable fringe
benefit. (RR No. 3-98)

Reason: The State shall provide its soldiers with necessary quarters which are
within or accessible from the military camp so that they can readily be on call to
meet the exigencies of their military service.

2. A Housing unit which is situated inside or adjacent (50m. from the perimeter of
the business premises) to the premises of a business or factory shall not be
considered as a taxable fringe benefit. (RR No. 3-98)

2. Expense Account
General Rule: fixed and variable transportation, representation and other
allowances are subject to FBT.

Exception: if incurred or reasonably expected to be incurred by employee in the

performance of his duties, subject to the following conditions:
a. Ordinary and necessary in the pursuit of employer’s business and paid or
incurred by employee;
b. Liquidated or substantiated by receipts or other adequate documentation.

Personal expenses of the employee whether paid by the employer or reimbursed

to the employee shall be treated as fringe benefit.

3. Motor Vehicle of any kind

Case Monetary Value

Employer purchases the vehicle in the Acquisition cost

name of the employee

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 Case Monetary Value
Employer furnishes employee with cash
for the purchases of the vehicle, and
Cash received
ownership is placed in the name of the
employee
Employer shoulders a portion of the
amount of the purchase price of the
Amount shouldered by the employer
vehicle and ownership is placed in the
name of the employee
Employer purchases the vehicle in
Acquisition cost, exclusive of interest,
installment and ownership is placed in
(Divided by) : 5 years
the name of the employee
Acquisition cost of all the vehicles not
normally used for sales, freight, delivery
Employer owns a fleet of vehicles for use
service and other non-personal use,
of the business and employees
(Divided by) : 5 years, and (Multiplied by)
: 50%
Rental payments for motor vehicles not
Employer leases a fleet of vehicles for normally used for sales freight, delivery
use of the business and employees service and other non-personal use,
(Multiplied by) : 50%

Notes:
a. The use of aircraft (including helicopters) owned and maintained by the employer
shall not be subject to the fringe benefits tax.
b. The use of yacht whether owned and maintained or leased by the employer shall
be treated as taxable fringe benefit. The value of the benefit shall be based on
the depreciation of a yacht at an estimated useful life of 10 years (RR No. 3-98)

4. Household Expense
Expenses for employees which are borne by the employer for household personnel,
such as salaries of household help, personal driver of the employee, or other similar
personal expenses (like payment for homeowners association dues, garbage dues,
etc.) shall be taxable as fringe benefits.

5. Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted
If the employer lends money to his employee free of interest or a rate lower than
12%, such interest foregone by the employer or the difference of the rate of 12%
shall be treated as taxable fringe benefit.

The rule shall apply to installment payments or loans with interest rate lower than
12% staring January 1, 1998.

6. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs and similar organizations

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7. Expenses for Foreign Travel
General Rule: fixed and variable transportation, representation and other
allowances are subject to PBT.

Exception: if incurred or reasonably expected to be incurred by employee in the

performance of his duties, subject to the following conditions:
a. Ordinary and necessary in the pursuit of employer’s business and paid or
incurred by employee;
b. Liquidated or substantiated by receipts or other adequate documentation.

Inland travel expenses such as expenses for food, beverages and local
transportation expect lodging cost at a hotel or similar establishment amounting to
an average of US$300 or less per day, shall not be subject to fringe benefit tax.
(Reyes, Income Tax Law and Accounting)

In the absence of documentary evidence showing that the employee’s travel abroad
was in connection with business meetings for conventions, the entire cost of the
ticket, including cost of hotel accommodations and other expenses incident thereto
shouldered by the employer shall be treated as taxable fringe benefits. (lbid)

Note: If employee is given a first class airplane ticket, the monetary value of the
benefit is equal to 30% of the cost of the first class airplane ticket.

The full amount of the travelling expenses of the family members of the employee
which are paid for the employer is subject to FBT.

8. Holiday and Vacation Expenses

9. Educational Assistance to the employee or his dependents

General Rule: taxable fringe benefit

Exceptions:
a. Education/study is directly connected with employer’s trade or business;
b. With a written contract that employee shall remain employed with the employer
for a period of time mutually agreed upon by the parties; or
c. The assistance was provided through a competitive scheme under the
scholarship program of the company employer.

Note: The education or study involved must be directly connected with the
employer’s trade, business, or profession and there is a written contract between
them that the employee is under obligation to remain in the employ of the employer
for the period of time that they have mutually agreed upon. (RR No. 3-98)

In such case, the expenditure shall be treated as incurred for the convenience and
furtherance of the employer’s trade or business. (Reyes, Income Tax Law and
Accounting)

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10. Insurance Premium
General Rule: the cost of life or health insurance and other non-life insurance
premiums borne by the employer are taxable fringe benefit.

Exceptions:
a. Cost of premiums borne by the employer for the group insurance of employees;
b. Contributions of the employer for the benefit of employee to the SSS, GSIS, and
similar contributions arising from provisions of any existing law.

Stock Options are Subject to Fringe Benefit

- The basis is the difference between the fair market value and the exercise price at
the time of exercise.

Fringe Benefits Not Subject To FBT

1. Fringe benefits not considered as gross income:
a. If it is required or necessary to the business of the employer; or
b. If it is for the convenience or advantage of the employer.

Convenience of the Employer Rule – grants exemption to the benefits which are
given for the exclusive benefit or convenience of the employer.

2. Fringe Benefit that is not taxable under Sec. 32 (B) – Exclusions from Gross Income
3. Fringe benefits not taxable under Sec. 33 Fringe Benefit Tax:
a. Fringe benefits which are authorized and exempted under special laws, such as
the 13th month pay and other benefits with the ceiling of 30,000;
b. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
c. Benefits given to the rank and file employees whether granted under a collective
bargaining agreement or not; and
d. Deminimis benefits – benefits which are relatively small in value offered by the
employer as a means of promoting goodwill, contentment and efficiency of
employees.

Rationale: If the FMV of any property or a service that otherwise would be a

fringe benefit includible in gross income is so small that accounting for the
property or service would be unreasonable or administratively impractical, the
value is excluded.

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 Managerial / Supervisory Employees Rank And File Employees
Compensation / Salaries / Wages
Subject to Income Tax Subject to Income Tax
Fringe Benefits
Subject to fringe benefit tax (FBT) Forms part of compensation therefore
subject to income tax; Subject to
exceptions
De Minimis Benefits
Income but not compensation, hence not Income but not compensation hence not
taxable taxable

De Minimis Benefits NOT Subject to FBT (R.R. No. 5-2011):

1. Monetized UNUSED vacation leave credits of PRIVATE employees not exceeding
(10) days during the year;

General Rule: Paid vacation leave and sick leave are subject to FBT

Exception:
Monetized value of unutilized VL credits of 10 days or less are NOT subject to FBT.

However, monetization of sick leave credits even if not exceeding 10 days are
subject to TAX.
2. Monetized value of vacation AND sick leave credits paid to GOVERNMENT officials
and employees;
3. Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;
4. Rice subsidy of P1,500 or one (1) sack of 50kg rice per month amounting to not
more than P!,500;
5. Uniform and clothing allowance not exceeding P4,000 per annum;
6. Actual yearly medical benefits not exceeding P10,000 per annum;
7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards e.g. for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value of not exceeding P10,000 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;
9. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25%
of the basic minimum wage on a per region basis.

Note: “Flower, fruits, books or similar items given to employees under special
circumstances”, which had been included in the list of De Minimis benefits in the
previous regulations (RR Nos. 8-2000, 10-2008), was omitted in the latest revenue
regulation, RR No. 5-2011.

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If De Minimis Benefit EXCEEDS the ceiling prescribed
1. If the excess is within the P 30,000 limit under Sec.32(b)(7)(e) [13th Month Pay and
Other Benefits] of the NIRC - the excess is NOT taxable
2. If excess is beyond the P 30,000 limit – taxable

Note: Representation and Transportation Allowance (RATA) and Personnel Economic

Relief Allowance (PERA) are not subject to Income Tax and Withholding Tax. Additional
Compensation Allowance (ACA) is part of “other benefits” under Sec. 32(b)(7)(e) of the
Tax Code of 1997 which are excluded from gross compensation income provided the
total amount of such benefits does not exceed P30,000. It is also not subject to
withholding tax pending its formal integration into basic pay.

PERSONAL & ADDITIONAL EXEMTIONS

Deductions Available To Individuals

1. Business Expenses and Expenses from Practice of Profession – deductible
only from gross business income and professional income, respectively but NOT
from compensation income. The expenses to be deducted may either be itemized
deductions OR the optional standard deduction.
2. Special Deduction for Actual Premium Payments for Health and/or
Hospitalization Insurance taken by an individual taxpayer provided that the
following requisites are met: (Sec. 34(M) NIRC)
a. Insurance must have actually been taken
b. The taxpayer’s family gross income does not exceed P250,000 in a taxable year.
c. The amount deductible should only be limited to P2,400 per family or P200 per
month.
d. In case of a married taxpayer, this can only be claimed by the spouse claiming
the additional exemption.
3. Personal Exemption – fixed and arbitrary amounts intended to substitute for
personal and living expenses. They are roughly the equivalent of the taxpayer’s
minimum subsistence and those of his dependents (Madrigal vs. Rafferty, supra).

Kind Of Personal Exemptions

1. Basic Personal Exemptions [Sec. 35(A)] Caveat: In answering questions on
Personal and Additional Exemptions, take note of the year stated in the problem.
The threshold amounts prior to July 6, 2008 are different. (Refer to other Sources)

There shall be allowed a basic personal exemption of P50,000 for each individual
taxpayer. (Republic Act No. 9504, July 6, 2008)

Note:
 Prior to RA 9504, being a benefactor of a senior citizen quantifies an individual
as head of the family. However, with the amendments of RA 9504, this becomes
insignificant because all compensation income taxpayers, without distinction, are
entitled to personal exemption of P50,000. (For more on Senior Citizens, refer to
the end of this Chapter (Income Taxation), on RA 9994)

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  In the case of Agripino C. Baybay, Sr., vs. Commissioner of Internal Revenue
(CTA Case No. 5280), the Court of Tax Appeals held that the law (Republic Act
No. 7432) provides that the senior citizens shall be treated as dependents as
provided in the NIRC. However, in BIR Ruling [DA-359-04], the BIR opined that
since the case did not reach the Supreme Court, the case therefore did not have
the force and effect of a law under the “doctrine of stare decisis” ordained in
Article 8 of the Civil Code. The CTA decision, according to the BIR must only be
applied pro hac vice (for this occasion).

2. Additional Exemptions [ Sec.32(b)]

There shall be allowed an additional exemption of P25,000 for each dependent child
not exceeding four (4)

Who is a Dependent Child?

A legitimate, illegitimate, or legally adopted child, chiefly dependent upon and living
with the taxpayer. IF such dependent is not more than 21 years old, unmarried and
not gainfully employed. Or if such dependent regardless of age is incapable of self-
support because of mental or physical defect.

Who will claim the additional exemption?

The husband shall be the proper claimant EXCEPT when the husband is
unemployed, working abroad, or explicitly waived his right in the withholding
exemption certificate for ALL dependents.

In case of legally separated spouses, it shall be claimed only by the spouse having
custody.

Summary of Allowance of Personal Exemptions

Individual Taxpayer Basic Personal Additional Exemptions
Exemptions
RC Allowed Allowed
NRC Allowed Allowed
RA Allowed Allowed
NRA-ETB Allowed (reciprocity) Not allowed
NRA-NETB Not allowed Not allowed

Rule on Change of Status

1. If the taxpayer should marry or should have additional dependents during the
taxable year, he may claim the corresponding exemptions in FULL for such year.
2. If the taxpayer should die during the taxable year, his estate may claim the
corresponding exemptions as if he died at the close of such year.
3. If the spouse or any dependent should die or any dependent should marry or
become twenty-one years old during the year, or should become gainfully employed,
the taxpayer may claim the exemptions as if the spouse or dependent died or as if
such dependent married, become twenty one years old or became gainfully
employed at the close of such year.

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4. For any other event and for which there are no specific rules applicable from the
above mentioned, the status of the taxpayer at the end of the year shall determine
his exemptions. (Status-at-the-end-of-the-year Rule) (strictly construed against the
taxpayer)

A. Senior Citizen is:

1. Any resident citizen of the Philippines
2. At least sixty 60 years old, including those who have retired from both
government offices and private enterprises, and

SENIOR CITIZEN’S DISCOUNT (RR No. 7-2010, Implementing R.A. 9994)

1. Only portion of gross sales exclusively used, consumed or enjoyed by the senior
citizen shall be eligible for the deductible sales discounts.
2. Gross selling price and sales discount must be separately indicated in the official
receipt or sales invoice issued by the establishment for the sale of goods or services
to the senior citizen.
3. Only the actual amount of the discount granted or a sales discount not less than
20% whichever is higher, based on the gross selling price can be deducted from the
gross income, net of value added tax, if applicable, for income tax purposes, and
from gross sales or gross receipts of the business enterprise concerned, for VAT or
other percentage tax purposes.
4. The seller must record its sales inclusive of the discount granted.
5. The discount can only be allowed as deduction from gross income for same taxable
year that the discount is granted.
6. The business establishment giving the sales discounts to qualified senior citizen is
required to keep separate and accurate record of sales, which shall include the
name of the senior citizen, OSCA ID, gross sales/receipts, sales discounts granted,
dates of transactions and invoice number for every sale transaction to senior citizen.
7. Only selected establishments mentioned in R.R. No. 7-2010 may claim the said
discount granted as deduction from gross income.
8. The seller must not claim the OSD during the taxable year.

DEDUCTION FROM GROSS INCOME OF PRIVATE ESTABLISHMENTS FOR

COMPENSATION PAID TO SENIOR CITIZENS
Requisites:
1. Employment shall have to continue for a period of at least 6 months
2. Annual taxable income of the senior citizen does not exceed the poverty level as
may be determined by the NEDA thru the NSCB. Senior Citizen to submit sworn
certification that his annual taxable income does not exceed poverty level
3. In addition, expenses otherwise deductible may be allowed as a deduction only if the
tax required to be deducted and withheld therefrom has been paid to the BIR.

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DOCTRINES
1. The term “cost” in Section 4(A) of RA 7432 refers to the amount of the 20% sales
discount extended by private establishments (not 20% of the acquisition cost of the
medicines) to senior citizens in their purchase of medicines, [Bicolandia Drug
Corporation (Formerly Elmas Drug) Corp. vs. CIR, G>R. NO. 142299, June 22,
2006]

2. There is a difference between the treatment of the 20% discount considered as tax
credit under the Old Senior Citizen’s Act and Tax, Deduction under the Expanded
Senior Citizen’s Act. (Carlos Superdrug Corp. vs. DSWD, DOF, and DOJ G.R. No.
166494 June 29, 2007)

3. Contrary to the provision in RA 7432 where the senior citizen’s discount granted by
all covered establishments can be claimed as tax credit, RA 9257 now specifically
provides that this discount should be treated as tax deduction. With the effectivity of
RA 9257 on 21 March 2004, there is now a new tax treatment for senior citizens’
discount granted by all covered establishment. This discount should be considered
as a deductible expense from gross income and no longer as tax credit. (CIR v.
Central Luzon Drug Corporation, G.R. No. 159610, 12 June 2008)

Note: Congress enacted a new law, RA 9994 further amending RA 7432. For more, see
the discussions at the end.

DEDUCTIONS FROM GROSS INCOME

Deductions – Items or amounts which the law allows to be deducted from gross
income in order to arrive at the taxable income.

Basic Principles
1. The taxpayer seeking a deduction must point to some specific provisions of the
statute authorizing the deduction
2. He must be able to prove that he is entitled to the deduction authorized or allowed.
(Atlas Consolidated Mining and Dev’t Corp. vs. Commissioner, G.P. No. L-26911,
January 21, 1981)
3. Any amount paid or payable which is otherwise deductible from or taken into
account in computing gross income or for which depreciation or amortization may be
allowed, shall be allowed as deduction only if it is shown that the tax required to be
deducted any withheld therefrom has been paid to the BIR. [Sec. 34 (K), NIRC]
4. Deductions for income tax exemptions partake of the nature of tax exemptions;
hence, if tax exceptions are to be strictly construed, then it follows that deductions
must also be strictly construed.

Matching Concept for Deductibility – The matching concept for deductibility posits
that the deductions must match the income, (i.e., helped earn the income. ( Domondon,
Taxation Volume 2,2009 ed)

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Summary Rules on Claimable Deductions For Individuals
1. With gross compensation income from employer employee relationship ONLY:
a. Personal and Additional exemptions;
b. Premium payments on health and/or hospitalization insurance
2. With gross income from business or practice of profession:
a. Optional standard deduction (OSD) OR itemized deductions
b. Premium payments on health and/or hospitalization insurance
c. Personal and additional exemptions

For Corporations
1. Optional Standard Deduction OR
2. Itemized Deductions

Exclusions vs. Deductions vs. Personal Exemption

Exclusion Deduction Personal Exemption

Refer to flow of wealth not Refer to the amounts which Are arbitrary amounts
treated as part of gross the law allows to be allowed by law to an
income because exempted subtracted from gross individual taxpayer,
by the Constitution, statute, income in order to arrive at theoretically to provide for
or do not come within the net income personal and living
definition of income expenses
Generally a receipt which is Is not a receipt but is It is an immunity or
excluded from taxable generally an expenditure privilege, a freedom of
income which is permitted to be charge or burden to which
subtracted from income to other are subjected
determine the amount
subject to tax
Something earned or Something spent or paid in Provision of law for the
received by the taxpayer earning gross income personal and living
which do not form part of expenses of the individual
gross income
Allowed for all kinds of Generally allowed for all Allowed ONLY to
taxpayers, whether natural kinds of taxpayers, whether individuals (RC, NRC, RA)
or juridical natural or juridical
May be availed of by a Ma be availed of by a NRA- May be availed of by NRA-
NRA-ETB whether or not ETB whether or not there is ETB only upon the basis of
there is reciprocity reciprocity reciprocity
May be subtracted ONLY May be subtracted from
from income derived from both:
trade, business or exercise a. Compensation income;
of profession or
b. Income derived from
trade, business or exercise
of profession

94
Kinds of Deduction
1. Optional Standard Deductions (OSD)
2. Special Deductions
3. Itemized Deductions

Taxpayers Who CANNOT Avail of Deductions from Gross Income whether OSD or
Itemized Deductions:
1. RC, NRC, and RA whose income is purely compensation income (except for
premium payments on health and/or hospitalization insurance);
2. NRA-ETB cannot avail of the optional standard deductions (except for itemized
deductions) (Sec. 34 [L])
3. NRA-NETB since their gross income from sources within is subject to a final tax of
25%
4. NRFC since their gross income from sources within is subject to final tax of 30%

OPTIONAL STANDARD DEDUCTION (Sec. 34L)

Deduction in lieu of the itemized deductions, is merely a privilege that may be enjoyed
by certain taxpayers

Rules:
1. Rate does not exceed 40%
a. An individual subject to tax under Section 24, other than a non-resident alien,
may elect a standard deduction in an amount not exceeding forty percent (40%
of his gross sales or gross receipt)
b. In the case of a corporation subject to tax under section 27 (A) and 28 (A) (1), it
may elect a standard deduction in an amount not exceeding forty percent (40%)
of its gross income as defined in Section 32, NIRC. (RA 9504)
2. OSD is available only to RC, NRC, RA, DC, and RFC;
3. Unless the taxpayer signifies in his return his intention to elect OSD he is considered
as having availed of the itemized deductions;
4. Such election when made by the qualified taxpayer, is irrevocable for the year in
which made; however, he can change to itemized deductions in succeeding years;
5. A taxpayer may choose the OSD in his quarterly return and then choose itemized
deductions in his annual return;
6. OSD is not available against compensation income arising out of an employer-
employee relationship;
7. Proof of actual expenses is not required, but the taxpayer should keep records
pertaining to his gross income.

Notes:
1. In the filing of the quarterly income tax returns, the taxpayer may opt to use either
the itemized deduction or the OSD. The taxpayer is, thus, NOT allowed to use a
HYBRID method of claiming its/his deduction for one taxable year. (Sec. 7, RR, 16-
2008)
2. A GPP may avail of the OSD of 40% of its gross income in computing its net income,
since under Sec. 26 “For purposes of computing the distributive share of the

95
 partners, the net income of the GPP shall be computed in the same manner as a
corporation.”
a. If the GPP uses the OSD in computing its net income distributable to the
partners, the partner’s shall not be allowed any deductions from such share
(whether OSD or itemized deductions), since the OSD which the GPP claimed is
in lieu of the itemized deductions allowed in computing taxable income; it will
answer for both the items of deduction allowed to the GPP and its partners.
b. If the GPP uses the itemized deductions in computing its net income, the
partners may only avail of the other itemized deductions which are in the nature
of ordinary and necessary expenses for the practice of profession which were not
claimed by the GPP. The partners cannot claim the OSD against their share in
the net income since the OSD is in lieu of the items deductions claimed by both
the GPP and its partners. (R.R. No. 2-2010)

Summary of Allowance of Optional Standard Deductions

Individual Taxpayer Optional Standard Deduction
RC Allowed
NRC Allowed
RA Allowed
NRA-ETB Not Allowed
NRA-NETB Not Allowed

Reason: they are taxed on Gross income

DC Allowed
RFC Allowed
NRFC Not Allowed

Reason: they are taxed on Gross income

Resident Aliens employed by and who Not Allowed
receive compensation income from:
1. Regional or area headquarters or Reason: they are taxed on Gross income
regional operating headquarters of
multinational corporations
established in the Philippines
2. Offshore banking units established
in the Philippines
3. Petroleum service contractors and
subcontractors in the Philippines.

SPECIAL DEDUCTIONS
Private proprietary educational institutions [Sec. 34 (A) (2)] – in addition to the
expenses allowed as deduction, it has the option to treat the amount utilized for the
acquisition of depreciable assets for expansion of school facilities as:
1. Outright expense (the entire amount is deducted from gross income); OR
2. Capital asset and deduct only from the gross income an amount equivalent to its
depreciation for the year

96
Insurance Companies (Sec. 37) can deduct the following:
1. Net additions required by law to be made within the year to reserve funds; AND
2. Sums other than dividends paid within the year on policy and annuity contracts.

Estates and trusts (Sec. 61) can deduct the following:

1. Amount of income paid, credited or distributed to the heirs/beneficiaries; AND
2. Amount applied for the benefit of the grantor.

ITEMIZED DEDUCTIONS (BIRD² CLE P²T)

1. Ordinary and necessary Expenses;
2. Interests;
3. Taxes;
4. Losses;
5. Bad debts;
6. Depreciation of property ;
7. Depletion of oil and gas wells and mines;
8. Charitable and other contributions;
9. Researched and development;
10. Pension trust contributions of employees; and
11. Premium payments on health and/or hospitalization insurance. (This is the only
deduction which compensation income earner may claim as a deduction)

KINDS OF ITEMIZED DEDUCTIONS

A. Ordinary and Necessary Trade, Business, and Professional Expenses

Requisites for Deductibility

1. It must be ordinary and necessary

Necessary Expense – appropriate and helpful in the development of taxpayer’s

business and are intended to minimize losses or to increase profits. These are
the day-to-day expenses.

Ordinary Expense – normal or usual in relation to the taxpayer’s business and

the surrounding circumstances

Note: If the expenses are EXTRAORDINARY, the expenditures shall be

capitalized for which depreciation allowance may be claimed.

2. It must be paid or incurred within the taxable year;

Effect of ACCRUAL METHOD of Accounting

The requisite that it must have been paid or incurred during the taxable year is
further qualified by Sec. 45 of the NIRC which states that: “(t)he deduction
provided for in this Title shall be taken for the taxable year in which ‘ paid of

97
 accrued’ or ‘paid or incurred’ dependent upon the method of accounting upon
the basis of which the net income is computed x x x”.

The accrual method relies upon the taxpayer’s right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue where
the rights to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time of payment.

For a taxpayer using the accrual method, he determinative question is, when do
the facts present themselves in such a manner that the taxpayer must recognize
income or expense? The accrual of income and expense is permitted when the
ALL-EVENTS TEST has been met. This test requires (1) fixing of a right to
income of liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability

The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy.

3. It must be reasonable (not lavish, extravagant or excessive under the

circumstances)
4. Must be paid in connection with the conduct of trade or business or the exercise
of profession by the taxpayer, or attribute t o the development, management, or
operation of the trade business or profession.
5. It must be substantiated with adequate proofs;

Lack of receipts excused – the lack of supporting vouchers, receipts and other
documentary proof, however, may be excused under Sec. 337 (now Sec. 235) of
the Tax Code. This provision requires the preservation of the books of accounts
and other accounting records for a period of three (3) years from the date of last
entry (Basilan Estates vs. Commissioner G.R. No. L-22492 September 5, 1907)

Cohan Rule Principle – If there is showing that expenses have been incurred
but the exact amount thereof cannot be ascertained due to the absence of
documentary evidence, it is the duty of the BIR to make an estimate of deduction
that may be allowed in computing the taxpayer’s taxable income bearing heavily
against the taxpayer whose inexactitude is of his own making.

Note: The Cohan Rule is subject to the 50-50 limit on the claim of deductions.

6. If subject to withholding taxes, have been properly withheld and remitted on time
to the BIR;

98
 7. Not contrary to law, public policy or morals.

While illegal income will form part of income of the taxpayer, expenses which
constitute bribe, kickback and other similar payment, being against law and
public policy are not deductible from gross income [Sec 34 (A) (1) (c)],

Note: Interestingly, although the payments of illegal bribes or kickback are non-
deductible expenses, expenses incurred in an illegal activity are generally
deductible of they are ordinary, necessary are reasonable (CIR vs. Sullvan, et
al.,AFTR 2d 1158 )

Kinds of Business Expenses

1. Compensation for Personal Services

Requisites for Deductibility:

a. Personal services actually rendered;
b. Compensation paid is for such services rendered;
c. Must be reasonable (if same amount will be paid for similar services by
similar enterprise under similar circumstance)

Factors in determining reasonableness of compensation for services:

a. Type and extent of services rendered
b. Qualifications of employees
c. Volume or amount of taxpayer’s earnings
d. Compensation policy of the taxpayer; and
e. General Economic Conditions (BIR Ruling, 1959)

It includes –
a. Salaries, wages, commissions, professional fees, vacation-leave pay,
retirement pay and other compensation;
b. Bonuses are deductible expenses IF paid in good faith as additional
compensation for services rendered AND subjected to withholding tax
c. Pensions and compensation for injuries, if not compensated for by insurance
or otherwise; and
d. Grossed-up monetary value (GMV) of fringe benefit provided for, as long as
the final tax imposed has been paid.

Test for Deductibility of Bonus

a. Payment made in good faith;
b. Character of the taxpayer’s business;
c. Volume and amount of its net earnings;
d. Its locality;
e. Type and extent of the services rendered;
f. Salary policy of the corporation;

99
 g. Size of the particular business;
h. Employees’ qualification and contributions to the business venture; and
i. General economic conditions (CM Hoskins & Co. v. CIR 30 SCRA 434 1969).

2. Travelling Expenses
Requisites for Deductibility;
a. Incurred or paid while away from home;
b. In the pursuit of trade or business.
c. Must be reasonable and necessary

Note:
The term away from home means away from the location of the employee’s
principal place of employment regardless of where the family residence is
maintained like business trips.

It includes transportation, meals

3.

Page 78

Requisites:
1. Employer – employee relationship;
2. Payment of compensation or wages for service rendered; and
3. Payroll period

Compensation Includes:
1. Salaries and wages
2. Commissions
3. Tips
4. Allowances
5. Bonuses
6. Fridge benefits of rank and file employees

Compensation Exempted:
1. Remunerations received as an incident of employment
2. Remunerations paid for agriculture/labor
3. Remunerations paid for domestic services
4. Remunerations for casual not in course of an employer’s trade or business.
5. Compensation for services of a citizen, resident of the Philippines, for a foreign
government or an international organization
6. Damages
7. Life insurance

100
 8. Amount received by the insured as return of premium
9. Compensation for injuries and sickness
10. Income exempt under treaty
11. Thirteenth (13th) month pay and other benefits
12. GSIS, SSS, Philhealth and other contributions

Final Withholding Tax System Creditable Withholding Tax System

Amount of Tax Collected
Constituted as a full and final payment of Intended to equal or at least approximate
the income due from the payee on the the tax due from the payee on the said
said income [Sec. 2.57 (a), R.R. No. 2- income
98]
Who is primarily liable
Liability rest primarily on the withholding Liability rest upon the taxpayer
agent
Need to File a Return
Payee is not required to file an income Income recipient is still required to file an
tax return for the particular income income tax return and/or pay the
difference between the tax withheld and
the tax due on the income
Coverage
a. All income subject to final taxes Those income payments covered by the
(e.g. passive, gross income of expanded withholding tax (R.R. 2-98)
NRA-NETB) Examples: Professional fees, talent fees
b. Fringe benefit Fees paid to medical practitioners
c. Informer’s reward to persons Income payments to partners of GPP
instrumental in the discovery of
violations of the NIRC and the
discovery and seizure of
smuggled goods

A. WITHHOLDING TAX ON CREDITABLE TAX

B. WITHHOLDING TAX ON PERCENTAGE TAX
Bureau, offices, instrumentalities of the government, including GOCC’s as well as
their subsidiaries, provinces, cities, municipalities making any money payment to
private individuals, corporations, partnership or association are required to deduct
and withhold taxes due from the payees on account of such money payment.

Remedies of withholding agent if expense is disallowed (R.R. 2-98 as amended by

R.R. 14-2002):
1. Pay the tax due thereon, including the interest incident to failure to withhold tax, and
surcharges, if applicable, at the time of the audit investigation or
2. Reinvestigation provided the payees reported the income
3. Pay the amount that should have been withheld, including the interest incident to the
failure to withhold the tax, and surcharges if applicable at the time of the audit

101
 investigation or reinvestigation. If the payees did not report the income and pay the
tax.
4. In case of under withholding, pay the difference within the correct amount and the
amount of tax withheld including the interest, incident to such error and surcharges
if applicable at the time of the audit investigation or reinvestigation.

If above remedies are availed of the expenses NOT previously subjected to withholding
tax will be allowed as a deduction for income tax purposes.
Section 6 of R.R. 17-2003: items for deductions representing return of capital such as
those pertaining to purchase of raw materials forming part of finished products or
purchased of goods for resale, shall be allowed as deduction upon the withholding
agent’s payment of the basic withholding tax and penalties incident to non-withholding
or under withholding.

TAX RETURN AND PAYMENT

Tax Return – This is a report made by the taxpayer to the BIR of all gross income
received during the taxable year, the allowable deductions including exemptions, the net
taxable income, the income tax rate, the income tax due, the income tax withheld, if
any, and the income tax still to be paid or refundable.

Persons Required to File Income Tax Return (ITR)

1. INDIVIDUAL
Individuals Required to File ITR
a. RC on income from within and without
b. NRC on income from within
c. RA on income from within
d. NRAETB on income from within
e. Individual (citizens/aliens) engaged in business or practice of a profession within
the Phil. Regardless of the amount of gross income;
f. Individual deriving compensation income concurrently from two or more
employers at any time during the taxable year; and
g. Individual whose pure compensation income derived from sources within the
Phil. Exceeds P60,000.

Individuals EXEMPT from filing of ITR

a. Individual whose gross income does not exceed total personal and additional
exemptions;
b. Individual with respect to pure compensation income derived from sources
within the Philippines, the income tax which has been correctly withheld;
c. Individual whose sole income has been subjected to final withholding income
tax; and
d. Individual who is exempt from income tax.

 Under RA 9504 effective July 6, 2008, minimum wage earners are granted full
tax exemption by exempting them from the payment of income tax.

102
 Note: Individuals not required to file an income tax return may nevertheless be
required to file an information return.

Special rules
Return of Husband and Wife
File one (1) return for the taxable year if the following requisites are complied;
a. Married individuals (citizens, resident or non-resident aliens)
b. Do not derive income purely from compensation.

If impracticable to file one return: each spouse shall file separate return of
income but the return so filed shall be consolidated by the Bureau for the
purpose of verification for the year.

Unmarried Minor
Income of unmarried minors derived from property received by the living parent
shall be included in the return of the parent, except:
a. When donor’s tax has been paid on such property, or
b. When transfer of such property is exempt from donor’s tax.

Persons under Disability:

If a taxpayer is unable to make his own return, it may be made by his:
a. Duly authorized agents;
b. Representative;
c. By guardian; or
d. Other person charged with the care of his property who will assume the
responsibility of making the return and incurring penalties provided for
erroneous, false or fraudulent return.

2. TAXABLE ESTATE AND TRUST

The fiduciary shall file a return if gross income is at least P20,000 on or before
April 15

3. GENERAL PROFESSIONAL
PARTNERSHIP
The income tax return shall be signed and filed in duplicate, by the principal
officer on or before April 15 and shall set forth:
a. Items of gross income and deductions allowed
b. Name, address and share of each partners;
c. TIN

4. CORPORATION
The following shall make return and filed by the president, vice-president or other
principal officer, and shall be sworn to by such officer and by the treasurer or
assistant treasurer.
a. Not exempt from income tax;

103
 b. Exempt from income tax under Sec. 30 of NIRC but has NOT shown proof of
exemption;
c. Corporation subject to tax having existed during the taxable year, whether
with income or not;
d. Corporation in the process of liquidation or receivership;
e. Insurance company doing business in the Philippines or deriving income
therein; and
f. Foreign Corporation having income from within the Philippines.

SUBSTITUTED FILING
Substituted filing- is when the employer’s annual return may be considered as the
“substitute” Income Tax Return (ITR) of the employee in as much as the information
provided in his income tax return would exactly be the same information contained in
the employer’s annual return.

Non-filing – applicable to certain types of individual taxpayers who are not required
under the law to file an income tax return.

Substituted Filing of Income Tax Returns by Employees Receiving Purely

Compensation Income [Sec. 4, R.R. No. 3-2002; RMC 01-03]

Requisites:
1. Employee receives purely compensation income (regardless of amount);
2. The income is only from one employer
3. Amount tax due from the employee equals the amount of tax withheld by the
employer;
4. Employee’s spouse also complies with all three (3) conditions stated above;
5. Employees files the annual information return (BIR form no. 1604-cf); and
6. Employers issues bir form 2316 (oct 2002 encs) version to each employee.

Individuals NOT Qualified for Substituted Filing (Still Required to File):

1. Individuals deriving compensation from two or more employers concurrently or
successively;
2. Employees deriving compensation income, the income tax of which has not been
withheld correctly.
3. Employees whose monthly gross compensation income does not exceed P5,000
or the statutory minimum wage, whichever is higher, and opted for non
withholding of tax on said income;
4. Individuals deriving other non-business, non-profession-related income in
addition to compensation income not otherwise subject to final tax;
5. Individuals receiving purely compensation income from a single employer
although the income tax of which has been correctly withheld, but those spouse
falls under 1 to 4 above;
6. NRA-ETB deriving purely compensation income, or compensation income and
other non-business, non-profession-related income.

104
Note: Non-filing of ITR, for employees who are qualified for the substituted filing
shall be

OPTIONAL for the taxable year 2001, the returns for which shall be filled on or
before April 15, 2002. Thereafter, substituted filing where applicable shall be
MANDATORY (Sec. 5 R.R. No. 3-2002).

Requirement of Banks for Submission of an ITR for Loan or Credit card

Applications:
Banks may require the submission of the BIR Form No. 1700 (for employees not
entitled to substituted filing of ITR). However, for employees entitled to substituted
filing of ITR, the submission of the Joint Certification will suffice.

Joint Certification – It is a sworn statement made by the employer and employee,

which serve the following purposes:
1. It contains the employee’s consent that BIR Form No. 1604CF may be
considered his substituted return, in lieu of BIR Form No. 1700, which the
employee no longer filed.
2. It contains the employer’s certification that he has reported the employee’s
income to the BIR and that has remitted the taxes on the employees income as
indicated in BIR Form No. 1604 CI
3. It serves as proof of financial capacity in case the employee decides to apply for
a bank loan or a credit card , or for any other purpose, as if he had in fact filed a
BIR Form No. 1700.

MANNER OF PAYMENT
General Rule: “Pay-as-you-file-system”, the income tax shown on the return should
be paid at the time the return is filed.

Exception: Individual may pay into equal installments if the income tax due on the
annual return exceeds Two thousand pesos (P2,000).

First Installment – At the time the return is filed.

Second Installment – On or before July 15, following the close of the calendar year.

Any creditable withholding tax shall be credited against the tax due, or the first
installment of the tax, if the taxpayer desires to pay on installment.

Extension of Time to File Return:

The Commissioner may be meritorious cases grant a reasonable extension of time
for filing income tax return and may subject the imposition of twenty (20) percent
interest per annum from the original due date.

ELECTRONIC FILING AND PAYMENT SYSTEM (EFPS)

105
 Large taxpayer shall e-file their final adjustment income tax returns for the
calendar/fiscal year and shall e-pay their taxes on or before the 15 th day of the
fourth month following the close of the taxable year.
 The taxpayer must be enrolled in the EFPS
 Electronics signatures of the tax filer shall be affixed in the return
 The tax payer that will e-pay shall enroll with any authorized agent bank where
he intends to pay

Who is a large taxpayer? (As amended by R.R. 10-2007)

A taxpayer who satisfies any of the following criteria

 Value Added Tax – Business establishment with VAT paid or payable of at least
One Hundred Thousand Pesos (P100,000) for any quarter of the preceding
taxable year.
 Excise Tax – Business establishment with the excise tax paid or payable of at
least One Million Pesos (P1,000,000) for the preceding taxable year.
 Corporate Income Tax – Business establishment with the excise tax paid or
payable of at least One Million Pesos (P1,000,000) for the preceding taxable
year.
 Withholding Tax – Business establishment with a withholding tax payment or
remittance of at least One Million pesos (P1,000,000).
 Corporation with paid-up capital stock of Ten Million Pesos (P10,000,000) and
above;
 Corporation with complete computerized system; and
 All government bidders pursuant to Executive Order No. 398 as implemented by
R.R. 3-2005. It should be emphasized, however, that non-stock non-profit
corporations are excluded from the coverage of this regulations.

Reportorial Requirements (R.R. No. 21-2002)

Submission of Financial Statement (FS) is mandatory even if there is no income.
 FS shall be composed of the balance sheet, income statement, statement of
retained earnings, statement in changes in financial position, and scheduled
attached to the aforementioned statements
 FS filed WITH accompanying auditor’s certificate shall show the comparative
figures of the current year and the previous year
 The independent CPA who audited the records and certified the FS of taxpayer,
equally as taxpayer, has the responsibility to maintain and preserve copies of
audited and certified FS for a period of 3 years from due date of filing, whichever
comes later.

Taxpayers are mandated to maintained books and records that would reflect the
reconciling items between FS figures and/or data with those reflected/presented in
the filed Income Tax Return (ITR).

Statement of Management Responsibility (RR 3-2010)

106
 Since the Annual Income Tax Return is primarily the responsibility of the
management of the taxpayer, this shall be accompanied by a statement of
management responsibility
 All taxpayers requires to file annual income tax return under the NIRC, as
amended, shall be required to submit a statement of management’s responsibility
(in the form indicated in the Revenue Regulation)
 Aside from individual Taxpayer, President and Managing Partner, the CEO and
the CFO or any officer performing similar functions regardless of their
designation are also required to affix their signatures in the said Statement.
 In the case of a foreign corporation with branch office in the Philippines, the
Statement shall be signed by its local manager who is in charge of its operations.

Returns of Corporations Contemplating Dissolution/Reorganization

Within thirty (30) days after the adoption of a resolution or plan for its dissolution, or
for the liquidation of the whole or any part of its capital stock, or notified possible
involuntary dissolution by the SEC or for its reorganization, shall render a correct
return to the Commissioner, verified under Oath, setting forth the terms of such
resolution or plan and such other information.

Prior to the issuance by the SEC of the Certificate of Dissolution or Reorganization,

shall secure a certificate of tax clearance from the BIR.

107
 EXEMPTIONS
OPTIONAL
TAX BASE
STANDARD
INCOME TAXPAYER (Taxable TAX RATES PERSONAL ADDITIONAL DEDUCTIONS
DEDUCTION
Source)
INDIVIDUAL
General Rule: NO
Exception: Premium
5% - 32% on taxable income Payments
YES YES
arising from employer-employee on Health and/or
relationship Hospitalization NO
All sources Insurance
Resident Citizen (RC) (Philippine and YES YES
Foreign) (NOTE: Deductible
5% - 32% on taxable income firstly form RATE: 40% of
YES YES
arising from business and other compensation income, his gross sales
income excess from other or gross
income) receipts
General Rule: NO
5% - 32% on taxable income Exception: Premium
arising from employer-employee payments on Health
relationship and/or Hospitalization
Income from YES YES NO
Non-Resident Citizen Insurance
sources within
(NRC)
the Philippines
5% - 32% on taxable income
arising from business and other YES
income YES YES YES

General Rule: NO
Exception: Premium
5% - 32% on taxable income payments on Health
NO
arising from employer-employee and/or Hospitalization
Income from relationship YES YES Insurance
Resident Alien (RA) sources within
5% - 32% on taxable income
the Philippines
arising from business and other
YES YES YES YES
income
General Rule: NO
Non-Resident Alien Exception: Premium
Income from 5% - 32% on taxable income YES
Engaged in Trade and payments on Health
sources within arising from employer-employee NOTE: by NO
Business NO and/or Hospitalization
the Philippines relationship reciprocity
(NRA-ETB) Insurance

108
 TAX BASE EXEMPTIONS OPTIONAL
INCOME TAXPAYER (Taxable TAX RATES DEDUCTIONS STANDARD
PERSONAL ADDITIONAL
Source) DEDUCTION
5% - 32% on taxable income YES
arising from business and other NOTE: by
income reciprocity NO YES NO
25% derive from business
Non-Resident Alien NOT Income from
Gross Income Derive From
Engaged in Trade and sources within NO NO NO NO
Business – equivalent to gross
Business (NRA-NETB) the Philippines
sales less returns, discounts and
allowances and cost of goods sold.
Special Classes of
Individual Employees
(Whether Filipino or Alien)
employed by: 15 % Gross Income received as
1) Regional Area salaries, wages, annuities,
Headquarters or compensation, remuneration, and
Regional Operating other emoluments, such as
Headquarters in the honoraria and allowances.
Income from
Philippines NOTE: For other sources within the
sources within NO NO NO NO
2) Offshore Banking units Philippines, Income shall be subject
the Philippines
established in the to pertinent income tax (graduated
Philippines; tax rates, final tax on passive
3) Foreign service income, capital gains depending
Contractors or whether a citizen or an alien), as
subcontractors the case may be
engaged in petroleum
operations in the
Philippines
Passive Income subject to final Tax
1) 20% - from any currency
deposit and yield or other
monetary benefit from deposit
substitute and from trust funds
and similar arrangements.
N/A N/A N/A N/A
2) 7.5% - from depository bank
RC, NRC, RA Interest Income
under the expanded
foreign currency deposit
system (FCDS) and an
offshore banking unit (OBU)

109
 TAX BASE EXEMPTIONS OPTIONAL
INCOME TAXPAYER (Taxable TAX RATES PERSONAL ADDITIONAL DEDUCTIONS STANDARD
Source) DEDUCTION
(exception: NRC)
3) From Long-term deposit or
investment
a) Held for more than 5 yrs –
Exempt
b) 4 yrs less than 5 yrs – 5%
c) 3 yrs less than 4 yrs. -12%
d) Less than 3 yrs. – 20%
1) 20% - from any currency
deposit and yield or other
monetary benefit from
deposit substitute and from
trust funds and similar
arrangements.
2) EXEMPT - From
depository bank under the
expanded foreign currency
deposit system (FCDS) and
N/A
NRA-ETB an offshore banking unit N/A N/A N/A
(OBU)
3) From Long-term deposit or
investment
a) Held for more than 5 yrs
–Exempt
b) 4 yrs less than 5 yrs – 5%
c) 3 yrs less than 4 yrs.
-12%
d) Less than 3 yrs. – 20%

1) 25% - from any currency

deposit and yield or other
monetary benefit from
NRA-NETB deposit substitute and from N/A N/A N/A N/A
trust funds and similar
arrangements.
2) EXEMPT - From a

110
 EXEMPTIONS OPTIONAL
TAX BASE
INCOME TAXPAYER TAX RATES DEDUCTIONS STANDARD
(Taxable Source) PERSONAL ADDITIONAL
DEDUCTION
depository bank under the
expanded foreign currency
deposit system (FCDS) and
an offshore banking unit
(OBU)
3) 25% - From Long-term
deposit or investment
1) 20% -Royalties in General
2) 10% - From books, literary
RC,NRC,RA,NRA-ETB works and musical N/A N/A N/A N/A
compositions

Royalties 1) 25% -Royalties in General

2) 25% - from books, literary
NRA-NETB works and musical N/A N/A N/A N/A
compositions

20% on prizes exceeding

P10,000 and winnings (not
subject to the P10,000 limit).
RC,NRC,RA,NRA-ETB N/A N/A N/A N/A
Prizes and Winnings
NOTE: Prizes less than P10,000
subject to graduated rates
NRA-NETB 25% on prizes N/A N/A N/A N/A
1) Cash/ Property
Dividends from
RC,NRC,RA Domestic N/A N/A N/A N/A
Corporations
2) Share in the 10% Final Tax
distributable net
income after tax
of a taxable or
business
NRA-ETB 20% Final Tax N/A N/A N/A N/A
partnership,
3) Share in the net
income after tax
of an

111
 EXEMPTIONS OPTIONAL
TAX BASE
INCOME TAXPAYER TAX RATES PERSONA ADDITIONA DEDUCTIONS STANDARD
(Taxable Source)
L L DEDUCTION
TAX ON CORPORATIONS
association, a joint
account, or a joint
venture or consortium
NRA-NETB taxable as a 25% Final Tax N/A N/A N/A N/A
corporation of which
he is a member or co-
venture.
RC Cash/Property Graduated Rates N/A N/A N/A N/A
Dividend from Foreign If considered as from source
NRC, RA Corporations within- graduated rates N/A N/A N/A N/A
RC,NRC,RA Graduated Rates N/A N/A N/A N/A
Cinematographic Film
and Similar Works
NRA-ETB, NRA-NETB 25% Final Tax N/A N/A N/A N/A
TAX ON CORPORATIONS
1) NCIT – 30% (effective January 1,
2009) on the taxable income
2) Capital Gains Tax
3) Final Tax on Passive Income –
same rules as those imposed on
individuals
4) MCIT – 2% Gross Income
YES, if taxed
EXCEPT income exempt from
under NCIT YES, if taxed
Domestic Corporations Philippine and Foreign income tax and income subject to N/A N/A
otherwise, under NCIT
(DC) Source final withholding tax
NO otherwise, NO
5) Effective January 1, 2000, The
President through the Secretary
of Finance may allow DC the
option to be taxed at B of Gross
Income.
6) IAET - 10% on improperly
accumulated taxable income (in
addition to other taxes)
Special domestic Corporations
1) Propriety Educational General Rule: 10% of the net N/A N/A NO NO

112
 EXEMPTIONS OPTIONAL
INCOME TAX BASE
TAX RATES PERSONA ADDITIONA DEDUCTIONS STANDARD
TAXPAYER (Taxable Source)
L L DEDUCTION
Institutions and Non-
profit Hospitals
income except those subject capital
gains tax and passive income subject to
final tax (stock, non-profit plus other
requisites above discussed)

Exceptions:
a) 30 % IF the gross income from
unrelated trade, business or other
activity exceeds 50% of the total
gross income derived from all
sources;
b) Exempt if non stock non- profit
PRIVATE educational institution
and hospital

General Rule: Exempt from all taxes,

except net income from such
transactions as may be specified by the
Secretary of Finance, upon
recommendation by the Monetary Board
to be subject to the regular income tax
payable by banks.
2) Depository Banks
N/A N/A NO NO
(FCDS)
Exceptions: Final tax of 10% on interest
income from foreign currency loans
granted by such depository banks under
said expanded system to residents other
than offshore units in the Philippines or
other depository banks under the
expanded system.
Resident Foreign 1) NCIT – 30% (effective January 1, YES, if taxed
YES, if taxed
Corporation – 2009) on the taxable income under NCIT
Philippine source only N/A N/A under NCIT
engaged in trade or 2) Capital Gains Tax otherwise, NO
otherwise, NO
business (RFC) 3) Final Tax on Passive Income

113
 EXEMPTIONS OPTIONAL
TAX BASE
INCOME TAXPAYER TAX RATES DEDUCTIONS STANDARD
(Taxable Source) PERSONAL ADDITIONAL DEDUCTION
4) MCIT – 2% Gross Income
EXCEPT income exempt
from income tax and income
subject to final withholding
tax
5) Effective January 1, 2000,
The President through the
Secretary of Finance may
allow DC the option to be
taxed at B of Gross Income.
6) BRANCH PROFIT
REMITTANCE TAX – 15% of
total profit applied or
earmarked for remittance
without any deduction for tax
component thereof
Special Resident Foreign Corporations
1) Internal Carriers 2.5% on Gross Philippine Billings
General Rule: Exempt

Exception: It is subject to final

tax of 10% on interest income
derived from foreign currency
loans granted to residents other
than offshore banking units or NO NO
2) Off Shore Banking Units local commercial banks,
authorized by BSP including local branches of
foreign banks that may be
authorized by the BSP to
transact business with offshore
banking units.
General Rule: Exempt from all
taxes, except net income from
such transactions as may be
3) Resident Depository Bank specified by the Secretary of
(FCDU) Finance, upon recommendation NO NO
of the Monetary Board to be
subject to the regular income tax
payable by banks.

114
 EXEMPTIONS OPTIONAL
TAX BASE
INCOME TAXPAYER TAX RATES DEDUCTIONS STANDARD
(Taxable Source) PERSONAL ADDITIONAL
DEDUCTION
Exception: It is subject to final
tax of 10% on interest income
from foreign currency loans
granted by such depository
banks under said expanded
system to residents other than
offshore units in the Philippines
or other depository banks under
the expanded system
4) Regional or Area
EXEMPT NO NO
Headquarters
5) Regional Operating 10% of the taxable income from
NO NO
Headquarters sources within the Philippines
1) 30% final tax on gross
income
Non- resident Foreign 2) Capital Gains Tax except
Philippine Source
Corporation – not engaged in capital gains tax on sale or N/A N/A NO NO
only
trade or business (NRFC) disposition of real properties
Special non-resident Foreign Corporation
1) Non-resident
Cinematographic Film
25% of the taxable income from
Owners, Lessors or
sources N/A N/A NO NO
Distributors
4.5 % on Gross rentals, lease or
2) Non-resident Owner or
charter fees from leases or
Lessor of Vessels
charters to Filipino Citizens or
Chartered by Philippine
corporations, as approved by the N/A N/A NO NO
Nationals
Maritime Authority

3) Non-resident owner or
Lessor of Aircraft and
7.5% on Gross rental or Fee N/A N/A NO NO
Other Equipment

115
116
 REPUBLIC ACT NO. 9504
June 17, 2008
AN ACT AMENDING SECTION 22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT NO.
8424, AS AMENDED OTHERWISE KNOWN AS THE NATIONAL INTERNAL
REVENUE OF 1997

SEC. 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended by adding the
following definition after Subsection (FF) to read as follows:

“SEC. 22, Definitions. – when used in this Title

“(A) x x x.

“x x x

“(FF) x x x

“(GG) the ‘statutory minimum wage’ earner shall refer to rate fixed by the
Regional Tripartite Wage Productivity Board, as defined by the Bureau of Labor
and Employment Statistics (BLES) of the Department of Labor and Employment
(DOLE)

“(HH) the term ‘minimum wage earner’ shall refer to a worker in the private sector
paid by the statutory minimum wage, or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in the non-
agricultural sector where he/she assigned.”

SEC. 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:

“SEC. 24 Income Tax Rates.-

“(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of
the Philippines. –

“(1) x x x:

“x x x; and

“(c) On the taxable income defined in the Section 31 of this code, other than
income subject to tax under Subsections (B), (C) and (D) of this Section, derived
for each taxable year from all sources within the Philippines by an individual alien
who is a resident of the Philippines. “(2) Rates of tax on Taxable Income of
Individuals. – The Tax shall be computed in accordance with and at the rates
established in the following schedule:

117
 Not over P10,000 5%
Over P10,000 but not over P30,000 P500+10% of the excess over P10,000
Over P30,000 but not over P70,000 P2,500+15% of the excess over
P30,000
Over P70,000 but not over P140,000 P8,500+20% of the excess over
P70,000
Over P140,000 but not over P250,000 P22,500+25% of the excess over
P140,000
Over P250,000 but not over P500,000 P50,000+30% of the excess over
P250,000
Over P500,000 P125,000+32% of the excess over
P500,000

“For married individuals, the husband and wife, subject to the provision of
section51 (D) hereof, shall compute separately their individual income of tax
based on their respective total taxable income: Provided, that if any income
cannot be definitely attributed to or realized by either of the spouses, the same
shall be divided equally between the spouses for the purpose of determining their
respective taxable income.

“Provided, That minimum wage earners as defined in Section 22 (HH) of this

Code shall be exempt from the payment of the income tax on their taxable
income: Provided further, that the holiday pay, overtime pay, night shift
differential pay and hazard pay received by such minimum wage earners shall
likewise be exempt from income tax.

“x x x.”

SEC. 3. Section 34 (L) of republic act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997 is hereby amended to read as follows:

“SEC. 34. Deductions from Gross Income.

- Except for taxpayers earning compensation income arising from personal
services rendered under an employer-employee relationship where no
deductions shall be allowed under this Section other than under Subsection
(M)hereof, in computing taxable income subject to income tax under Sections
24(A); 25(A); 26; 27(A); (B), (C); and 28(A)(1), there shall be allowed the
following deductions from the gross income:

“ (A) Expenses. –

“x x x.

“(L) Optional Standard Deduction – in Lieu of the deductions allowed under the
preceding Subsections, an individual subject to tax under Section 24, other than

118
 a non-resident alien, may elect a standard deduction in an amount not
exceeding forty percent (40%) of his sales or gross receipts, as the case may
be. In the case of a corporation subject to tax under section 27(A) and 28(A) (1),
it may elect a standard deduction in an amount not exceeding forty percent
(40%) of its gross income as defined in Section 32 of this Code. Unless the
taxpayer signifies in his return his intensions to elect the optional standard
deduction, he shall be considered as having availed himself of the deductions
allowed in the preceding Subsections. Such election when made in the return
shall be irrevocable for the taxable year for which the return is made: Provided,
that an individual who is entitled to and claimed for the optional standard shall
not be required to submit with his tax return such financial statements otherwise
required under this Code: Provided, further; That except when the
Commissioner otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, or the said corporation shall keep
such records pertaining to his gross income as define d in section 32 of this
Code during the taxable year, as may be required by the rules and regulations
promulgated by the secretary of Finance, upon recommendation of the
Commissioner.

“(M) x x x.”

“x x x.”

SEC. 4. Section 35(A)and (B) of Republic Act No. 8424, as amended, otherwise known
as the National Revenue Code of 1997, is hereby amended to read as follows:

“SEC. 35. Allowance of Personal Exemption for individual Taxpayer. –

“(A) In General. – For purposes of determining the tax provided in Section 24(A)
of this title, there shall be allowed a basic personal exemption amounting to Fifty
thousand pesos (P50,000) for each individual Taxpayer.

“In case of married individual where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption.

“(B) Additional Exemption for Dependents.

- There shall be allowed an additional exemption of twenty-five thousand pesos
(P25,000) for each dependent not exceeding four (4).

“The additional exemption for dependents shall be claimed by only one of the
spouses in the case of married individuals.

“In case of legally separated spouses, additional exemptions may be claimed

only by the spouse who has custody of the child or children:

119
 Provided, That the total amount of additional exemptions that may be claimed by
both shall not exceed the maximum additional exemptions herein allowed.

“For purposes of this Subsection, a “dependent” means a legitimate, illegitimate

or legally adopted child chiefly dependent upon and living with the taxpayer if
such dependent is not more than twenty one (21) years of age, unmarried and
not gainfully employed or if such dependent, regardless of age, is incapable of
self support because of mental or physical effect.

“x x x.”

SEC. 5 Section 5 (A) (2) of Republic Act No. 8424, as amended, otherwise known as
the National Revenue Code of 1997, is hereby amended to read as follows:

“ SEC. 51. Individual Return.-

“(A) Requirements. –

“(1) Except as provided in paragraph (2) of this Subsection, the following

individuals are required to file an income tax return:

“(a) x x x;

“ x x x.

“(2) The following individuals shall not be required to file an income tax return:

“(a) x x x;

“(b) An individual with respect to pure compensation income, as defined in

Section 32(A)(1), derived from such sources within the Philippines, the income
tax on which has been correctly withheld under the provisions of Section 79 of
this Code: Provided, that an individual deriving compensation concurrently from
two or more employers at any time during the taxable year shall file an income
tax return;

“(c) x x x; and

“(d) A minimum wage earner as defined in section 22(HH) of this Code or an

individual who is exempt from income tax pursuant to the provisions of this Code
and other laws, general or special.

“x x x.”

SEC. 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the
National Revenue Code of 1997, is hereby amended to read as follows:

120
 “ Section 79. Income Tax Collected at Source. –

“(A) Requirement of Withholding. – Except in the case of a minimum wage earner

as defined in Section 22(HH) of this Code, every employer making payment of
wages shall deduct and withhold upon such wages a tax determined in
accordance with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner:

“x x x.”

SEC. 7. Separability Clause. – If any provisions of this Act is declared an invalid or

unconstitutional, other provisions hereof which are not affected thereby shall continue to
be full force and effect.

SEC. 8. Repealing Clause. – Any law presidential decree or issuance, executive order,
letter of instruction, administrative order, rule or regulation contrary to or inconsistent
with any provision of this Act as hereby amended or modified accordingly.

SEC. 9. Effectivity Clause. – This Act shall take fifteen (15) days following its
publication in the official Gazette or in at least two (2) newspaper of general circulation.

REPUBLIC ACT NO. 9994

EXPANDED SENIOR CITIZENS ACT OF 2010

(With R.R. No. 7-2010, July 20, 2010)

Who is a Senior Citizen or elderly?

1. Any resident citizen of the Philippines, and
2. At least sixty (60) years old

Is a senior citizen required to pay income tax?

As a general rule, yes either the income is derived from compensation or otherwise.

Exceptions:
1. If the income is in the nature of compensation income but he qualifies as a minimum
wage earner under R.A. 9504, he shall be exempt, subject to the rule under RR No.
10-2008.
2. If the aggregate amount of gross income earned during the taxable year does not
exceed the amount of his personal exemptions (basic and additional)

Annual Taxable income of a resident senior citizen – shall refer to the

compensation, business and other income received by a resident senior citizen during
each taxable year from all sources as defined in section 31 of the Tax Code.

121
Availment of Income Tax Exemption
1. He must be qualified as such by the Commissioner or RDO of the place of his
residence
2. File a Sworn Statement on or before January 31, of every year that his annual
taxable income in the previous year does not exceed the poverty level as
determined by the NEDA
3. If qualifies his name shall be recorded by the RDO in MASTER LIST OF TAX
EXEMPT SENIOR CITIZENS

Note: a senior citizen who is compensation income earner subject to a withholding tax
and whose annual taxable income exceeds the poverty level is also entitled to
substituted under R.R. No. 2-98 as amended.

TAX LIABILITIES
1. Income tax, unless he qualifies as MWE or if the annual gross income does not
exceed the personal exemptions.
2. Final tax on passive income (same rules with residents citizens).
3. Capital gains tax same rules with resident citizens).
4. VAT, if:
a. Self-employed, or engaged in business, or practice of profession; and
b. Gross annual sales or receipts exceeds P1,500,000 or the adjusted amount
under section 109 (1) V of the Tax Code.
5. 3% Percentage tax if not subject to VAT.
6. Donor’s Tax
7. Estate Tax
8. Excise Tax on certain goods
9. Documentary Stamp Tax

Availment of the Head of the Family Status by Benefactors

Who is Benefactor?
Any person whether related to the senior citizens or not who provides care or who gives
any form of assistance to him/her, and on whom the senior citizen is dependent for
primary care and material support , as Certified by the City or Municipal Social Welfare
and Development Officer (C/MSWDO).

Requisites:
1. Benefactor entitled to P50,000 basic personal exemptions.
- A Senior Citizen who is not gainfully employed, living with and dependent upon
his benefactor for chief support, although treated as a dependent under the Act,
will not entitle the benefactor to claim the additional personal exemption of
P25,000.
2. In the ITR, the benefactor must indicate the name, birthday and OSCA ID Number of
the senior citizen.

Is the Discount granted by establishments to senior citizens deductible?

122
YES. The establishment may claim the discounts granted as tax deduction based on the
net cost of the goods sold or services rendered.

The discounts granted shall be treated as ordinary and necessary expenses deductible
from the gross income of the seller falling under the category of itemized deductions,
and can only be claimed if the seller does not opt for the OSD during the Taxable
quarter/year.

Requisites:
1. Only portion of Gross sales exclusively used, consumed or enjoyed by the senior
citizen shall be illegible for the deductible sales discounts.
2. Gross selling Price and sales discount must be separately indicated in the official
receipt or sales invoice issued by the establishment for the sale of goods or services
to the senior citizen.
3. Only the actual amount of the discount granted or a sales discount not less than
20% whichever is higher, based on the gross income, net of value added tax, if
applicable, for income tax purposes, and from gross sales or gross receipts of the
business enterprise concerned, for VAT or other percentage tax purposes.
4. The seller must record its sales inclusive of the discount granted.
5. The discount can only be allowed as deduction from gross income for same taxable
year that the discount is granted.
6. The business establishment giving the sales discounts to qualified senior citizen is
required to keep separate and accurate record of sales, which shall include the
name of the senior citizen, OSCA ID, gross sales/receipts, sales discounts granted,
dates of transactions and invoice number for every sale transaction to senior citizen.
7. Only selected establishments mentioned in R.R. No. 7-2010 may claim the said
discount granted as deduction from gross income.

Establishment/Goods and Services which can claim the discounts granted as

deductions
1. Drugstores, hospitals, pharmacies, medical and optical clinics, and similar
establishment dispensing medicines
2. Attending Physicians in private hospitals, medical facilities, outpatient clinic and
home health care services
3. Licensed Professional, health workers providing home health care services
4. Medical and dental services, diagnostic and laboratory fees in all private hospitals,
medical facilities, outpatient clinic and home health care services
5. Public land transportation Utilities
6. Domestic air and sea Transportation Companies
7. Hotels and similar lodging establishments; restaurants; Recreation centers
8. Theaters, cinema houses, concert halls, circuses, carnivals and other similar places
of culture, leisure and amusement.
9. Funeral parlors and burial services.

Are the salaries and wages paid to senior citizen-employees deductible?

123
YES. Private entities employing senior citizens as employees shall be entitled to an
additional deduction from their gross income, equivalent to fifteen (15%) percent of
the total amount paid as salaries and wages to senior citizens subject to the provision o
Section 34 of the National Internal Revenue Code, as amended.

Conditions:
1. That such employment shall continue for a period of at least six (6) months
2. The annual income of a senior citizen does not exceed the poverty level as
determined by the national Economic and Development Authority (NEDA) for that
year.

REALTY TAX HOLIDAY

Individuals or non-government institutions caring for or establishing homes, residential
communities or retirement villages solely for the senior citizens shall be accorded the
following:
1. Realty tax holiday for the first five (5) years starting from the first year of operation;
2. Priority in the construction or maintenance of provincial or municipal roads leading to
the aforesaid home, residential community or retirement village.

VALUE ADDED TAX

GENERAL PRINCIPLES

VAT – is a tax on consumption levied on the sale, barter, exchange or lease of goods or
properties or services in the Philippines and on importation of goods into the
Philippines.

CHARACTERISTICS OF PHILIPPINE VAT

1. It is an indirect tax. The amount of tax maybe shifted or passed on by the seller
to the buyer
 Impact of taxation – on the seller upon whom the tax has been imposed
 Incidence of Tax – on the final consumer, the place at which the tax comes
to rest.
2. It is a tax on value added of the taxpayer.
VALUE ADDED: Total taxable sales during the taxable quarter subject to VAT
LESS Total taxable purchases for the same period subject also to VAT.

3. It is a transparent form of sales tax.

Transparent – the law requires that the tax be shown as a separate item in the
VAT invoice or receipt.

4. It is broad-based tax on consumption of goods, properties or service in the

Philippines.

124
 Broad based - there is a VAT on every stage of the taxable sales of goods,
properties or services.

5. It is collected through the Tax credit method (sometimes called as the invoice
method)
 The input tax shifted by the seller to the buyer is credited against the buyer’s
output taxes when he in turn sells the taxable goods, properties or services.

6. It does NOT CASCADE (tax on tax), hence no tax pyramiding.

Cascading- tax passed by the previous seller, which is now a component of gross
selling price/receipts of the seller, is being taxed.

Reason: Because VAT allows a seller to credit his input taxes (which is equivalent
to the output taxes of previous seller) from his output taxes. Hence, no tax on tax.

7. VAT lost in the early stages may be recovered under the catching-up principle or
under the recoupment principle.

8. It adopts the “tax-inclusive method”.

9. It follows the Destination Principle/Cross Border Doctrine.

Cross Border Doctrine or Destination Principle – no VAT shall be imposed to

form part of the cost of the goods destined for consumption outside the territorial
border of the taxing authority.
 Exports are zero-rated because these goods shall be consumed outside the
Philippines, while, generally, imports are subject to regular VAT rate because
they are for consumption in the Philippines.

VAT Person – refers to any person liable for the payment of VAT, whether
registered or registrable. He engages in transactions liable to VAT (Secs. 106-
108, NIRC) and whose annual sales exceeds P1.5M.
 VAT registrable person - any person who is requires to register but failed to
do so. As a form of penalty, he shall NOT be entitled to claim any input tax
credit, although he is liable to output tax in his taxable sales.

VAT-Exempt Person - Not liable to pay VAT.

He either:
1. Engages only in VAT-exempt transactions under Section 109(1)(A to U) NIRC,
regardless of their annual gross sales (but in sale in residential real property or
lease of residential property, the specific threshold set by the law should not be
exceeded)
 He is exempted from VAT and percentage tax under Section 116, NIRC.

125
  Real estate seller of residential house and lot valued at P2.5 or less shall
NOT pay VAT neither percentage tax (Sec. 109(1)(P), NIRC), or
2. Engages in transactions liable to VAT but becomes exempted from VAT because
his annual gross sales do NOT exceed P1.5M (Sec. 109(1)(V), NIRC).
 Though VAT-exempt, he shall pay percentage tax under Section 116.
 A residential unit lessor with a monthly rental exceeding P10,000 (specific
threshold) but whose annual gross rental’s do not exceed P1.5M (general
threshold) shall NOT pay VAT but shall pay percentage Tax. (Sec.109(1)(Q),
NIRC).
 He should register as a VAT-exempt person unless he opts to register as VAT
person under Section 109(2), NIRC).

Notes:
 VAT-exempt sales shall not be included in determining the threshold.
 Registration does not determine taxability. (See discussion under
REGISTRATION below)

TRANSACTIONS LIABLE TO VAT (CESI)

1. Sale of Commodities or Goods 9in the course of trade or business) under Section
106, NIRC
2. Exportation (in the course of trade or business)
3. Sales of Services (in the course of trade or business) under Section 108, NIRC
4. Importation (whether or not in the course of trade or business)

In the course of Trade or Business – regular conduct or pursuit of a commercial or

an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a 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 guest), or government entity. (Sec. 105,
NIRC)
 Services rendered in the Philippines by non-resident foreign persons shall be
considered as being in the course of trade or business.

Input Tax – the VAT due from or paid by a VAT registered person in the course of
his trade or business of importation of goods or local purchase of goods or services,
including lease or use of property, from VAT-registered person. It includes the
transitional input tax and the presumptive input tax. (Sec. 110A, NIRC)

Output Tax- the VAT due on the sale or lease of taxable goods or properties or
services by any person registered or required to register under VAT. (Sec. 110A,
NIRC)

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 VAT Formula:

Output Tax (during taxable quarter)

Less: Input Tax during taxable quarter)
---------------------------------------------------------
Value-Added Payable (VAT)

1. If at the end of any taxable quarter, the value-added tax is positive amount (the
output tax exceeds the input tax; such amount is also called as EXCESS
OUTPUT TAX), then it is the VAT payable by the VAT-registered person;
2. Otherwise, such that the input tax, inclusive of input tax carried over from the
previous quarter, exceeds the output tax, the excess input TAX shall be carried
over to the succeeding quarter or quarters;

 Any input tax attributable to zero- rated sales by a VAT-registered person may
at his option be refunded or applied for a tax credit certificate which may be
used in the payment of any internal revenue taxes, subject to the limitations as
may be provided for by law, as well as, other implementing (Sec. 110N, NIRC,
R.R. No. 16-2005, Sec. 4 110-7 as amended by R.R. No. 202007, Sec. 2)

TRANSACTIONS OF SPECIAL VAT PERSONS

1. Husband and Wife
 For VAT purpose, they shall be treated as separate taxpayers.
 But the “aggregation rule” shall apply to each spouse.
 Aggregation Rule – a spouse who derives income not only form his practice
of profession but also from other lines of trades/ businesses which are
otherwise subject to VAT, the transactions shall be aggregated for purposes of
determining the threshold amount.

2. Joint Venture
An unincorporated joint venture undertaking construction activity or engaged in
energy-related activities with operating contract with the government, although
exempt from income tax, is liable to VAT. (Mamalateo, value added Tax, 2007 e.,
p.45)

3. General Professional Partnership (GPP)

A professional may practice his profession:
a. Personal capacity or
b. Through a gpp.

Rules:
a. An individual who practice in individual capacity shall pay VAT if his annual
gross receipts exceed P1.5M; otherwise he shall be liable to the 3%
percentage tax.

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 b. An individual who practice thru GPP shall no longer be liable to VAT on their
shares of partnership profits from the GPP. GPPs whose gross annual
receipts exceed P1.5M are the ones liable for VAT.

4. Government
b. Performance of essential governmental functions – exempt from VAT.
c. Performance of their proprietary functions – liable to pay VAT

5. Non – Stock, Non – Profit Association

c. Receipts come purely from association dues or special assessments from
members – exempt from VAT.
d. Once it engages in any taxable sale of goods or services (i.e operating a
restaurant) – liable to pay VAT

6. Real Estate Dealer, Developer or Lessor

Sale of real property held primarily for sale or for lease is subject to VAT only if:
a. Made by a real estate dealer and
b. The gross selling price exceeds the threshold prescribed by law

Exception: sale of real property that expressly exempted from VAT (See VAT
Exempt Transactions)

Note: See Sale of Real Property for the threshold amounts.

7. Importer
VAT is incurred when there is a taxable sale (actual or deemed). Thus, generally, it
is the seller who shall pay the output tax on his taxable sales. However, in case of
importation, it shall pay VAT upon release of the goods from the customs territory.
This is an exception to the general rule requiring a sale before VAT shall be
incurred. (Mamalateo , p.44)

SOURCES OF FRAUD UNDER THE VAT SYSTEM

1. Non-registration of business (especially small or medium sized);
2. Underreporting of gross sales or receipts;
3. Non-remittance to the tax administration f the tax that has been paid to the taxpayer
by its customers;
4. Use of false invoices (to abuse the crediting of input taxes);
5. Representation of domestic sales as exports (to benefit from zero-rating);
6. Claim of VAT credits for non-creditable purchases.

VAT SALES OF GOODS OR PROPERTIES

TAX BASE AND TAX RATE: 12% of the gross selling price or gross value in money of
the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor.

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Gross selling price refers to the total amount of money or its equivalent which the
purchaser pay or is obligated to pay including any excise tax, to the seller in
consideration of the sale, barter or exchange of the goods or properties excluding VAT
(Sec. 106 NIRC)

ALLOWABLE DEDUCTIONS FROM GROSS SELLING PRICE

1. Sales discounts determined and granted at the time of the sale expressly indicated
in the invoice;
2. Sales returns and allowances for which a proper credit or refund was made

Goods or Properties means all tangible and intangible objects which are capable of
pecuniary estimation and shall include, among others: (TEMPR)
1. Real properties primarily for sale to customers or held for lease in the ordinary
course of trade or business;
2. The right or privilege to use patent, copyright, design or model plan, secret formula
or process, goodwill trademark, trade band, or other like property or right;
3. The right or privilege to use in the Philippines of any industrial, commercial or
scientific equipment.
4. The right or privilege to use motion pictures films, tapes, and discs; ad
5. Radio, television, satellite transmission and cable transmission time. (Sec. 106,
NIRC)

REQUISITES FOR TAXABILITY OF SALE OF GOODS AND PERSONAL

PROPERTIES
1. There is an actual or deemed sale, barter or exchange of goods or personal
properties for a valuable consideration;
2. The sale is in the course of trade or business or exercise of profession in the
Philippines;
3. The goods or properties are located in the Philippines and are for use or
consumption therein; and
4. The sale is not exempt from VAT under Section 109, NIRC, special law, international
agreement binding upon the government of the Philippines.

Note: Absence of any of the above requisites EXEMPTS the transaction from VAT.
However, percentage taxes may apply.

REQUISITES FOR TAXABILITY OF SALE OR EXCHANGE OF REAL PROPERTY

1. The seller executes a deed of sale, including dacion en pago, barter or exchange,
assignment, transfer, or conveyance, or merely contract to sell involving real
property;
2. The real property is located within the Philippines;
3. The seller or transferor is a real estate dealer;
4. The real property is an ordinary asset – held primarily for sale or for lease in the
ordinary course of business; and
5. The sale is not exempt from VAT under the Section 109, NIRC, special law or
international agreement binding upon the government of the Philippines.

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6. The threshold amount set by the law should be met.

Note: Absence of any of the above requisites EXEMPTS the transaction from VAT.
However, percentage taxes may apply under Section 116, NIRC.

For purchase of domestic goods and services to be considered as capital goods or

properties, three requisites must concur:
1. Useful life of goods or properties must exceed one year;
2. Said goods or properties are treated as depreciable assets; and,
3. Goods or properties must be used directly or indirectly in the production or sale of
taxable goods and services. (Kepco Philippines Corp. vs CIR, G,R. No. 179356,
December 14, 2009 )

SALE OF REAL PROPERTIES (Revenue Regulations No. 4-2007)

SALE OF REAL PROPERTY COVERED BY VAT:

1. Residential lot with gross selling price exceeding P1.5 million;
2. Residential house and lot or other residential dwellings with gross selling price
exceeding P2.5 million.

Note: Whether the instrument is nominated as a deed of absolute sale, deed of

conditional sale or otherwise.

Gross selling price (in case of sale or exchange of real property) – the consideration
stated in the sales document of the fair market value whichever Is higher. If the VAT is
not billed separately in the document of sale, the selling price or the consideration
stated therein shall be deemed to be inclusive of VAT.

Initial Payments – payment or payments which the seller receives before or upon
execution of the instrument of sale and payments which he expects or is scheduled to
receive in cash or property (other than evidence of indebtedness of the purchaser)
during the year when the sale or disposition of real property was made.

MODES OF SALE OF REAL PROPERTY BY A REAL ESTATE DEALER

1. On Installment Plan –
 A sale which has initial payments NOT exceeding twenty-five percent (25%) of
the gross selling price.
 The real estate dealer shall pay VAT on installment, payments, including interest
and penalties, actually and/or constructively received by the seller.
2. On a Deferred Payment Basis (Not On Installment Plan ) –
 A sale which has initial payments exceeding twenty-five percent (25%) of the
gross selling price.
 The transaction shall be treated a cash sale which makes the entire selling price
taxable in the month of the sale.

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DISTINCTIONS BETWEEN SALE ON INSTALLMENT PLAN AND SALE ON A
DEFERRED PAYMENT BASIS
Installment Plan Deferred Plan
Initial payments do not exceed 25% of the Initial payments exceed 25% of the gross
gross selling price selling price
Seller shall be subject to output VAT on Transaction shall be treated as cash sale
the installment payments received, which makes the entire selling price
including the interest s and penalties for taxable in the month of sale
late payment actually and/or constructively
received
The buyer of the property can claim the Output tax shall be recognized by the
input tax in the same period as the seller seller and input tax shall accrue to the
recognized the output tax buyer at the time of the execution of the
instrument of sale
Payments that are subsequent to “initial Payments that are subsequent to “initial
payments” shall be subject to output VAT payments” shall no longer be subject to
output VAT

TRANSACTIONS DEEMED SALE OF GOODS AND PROPERTIES (TDCR)

 Or Deemed sales apply only to sale of goods and properties and not to sale and
exchange of services.
 By No actual sale but there shall deemed sale by operation of law.

Rationale: To recapture the input tax that was claimed by the buyer in the month of the
purchase.

The following are transactions deemed sales: (TDCR)

1. Transfer , use, consumption not in the course of business of goods or properties
originally intended for sale or for use in the course of business (i.e when a VAT-
registered person withdraws goods from his business for his personal use);
2. Distribution or transfer to:
a. Shareholders or investors share in the profits of VAT-registered person; or
b. Creditors in payment of debt or obligation:
Requisites:
i. The VAT-registered person distributing or paying is a domestic corporation;
ii. What is being declared or paid is either real property owned by the company
or shares of stocks owned in another company; and
iii. The domestic corporation is either a real estate dealer (in case of real
property) or dealer in securities (in case of shares of stocks.
Rationale: Only real estate dealers and dealer in securities are liable for payment of
VAT in case of sale, barter, or exchange of real property of share of stocks under Sec.
106 and 108 respectively.

3. Consignments of goods if actual sale is not made within 60 days following the date
such goods were consigned.

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 Exeption: If the consigned goods were physically returned by the consignee within
the 60 day period;

4. Retirement from or cessation of business with respect to all goods on hand, whether
capital goods, stock in trade, supplies or materials as of the date of such retirement
or cessation. (sec. 106B, NIRC)
a. Change of ownership of a business where:
i. Single proprietorship incorporates;
ii. Proprietor of single proprietorship sells his business
b. Dissolution of a partnership and creator f a new partnership which takes own
the business. (R.R. No. 1605, Sept. 1, 2005)

NON-TAXABLE TRANSACTIONS
The VAT shall not apply to goods or properties existing as of the occurrence of the
following as they are mere changes in form and not in substance:
1. Change of control of a corporation by the acquisition of the controlling interest of
such corporation by another stockholder or group of stockholders.
2. Change in trade name or corporate names of business; or
3. Merger or consolidation of corporations. (Mamalateo, Value Added Tax, 2007
ed.p.65)

VAT ON THE SALE OF SERVICE AND USE OR LEASE OF PROPERTIES USED

TAX BASE AND TAX RATE: 12% of the gross receipts derived from the sale or
exchange of services, including the use or lease of properties. (Sec.108, NRC)

Gross receipts refers to the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposit applied as payments for
services rendered and advance payments actually or constructively received during the
taxable period for the services performed or to be performed for another person,
excluding VAT

Constructive receipt occurs when the money consideration or its equivalent is p aced at
the control of the person who rendered the service without restrictions by the payor.

“SERVICES” – The term ‘sale or exchange of services’ means the performance of all
kinds of services in the Philippines for a fee, remuneration or consideration, whether in
kind or in cash. (please refer to Sec. 108 NIRC of R.R. No. 16-2005 for the complete
list)
 However, franchise grantees of radio and/or television broadcasting whose annual
receipt of the preceding year do not exceed P10,000,000 AND franchise grantees of
gas and water utilities are not subject to VAT

Requisites for the Taxability of Sale of Exchange of Services:

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1. There is a sale or exchange of service or lease or use of property enumerated in the
law or other similar services;
2. The service is performed or to be performed in the Philippines.
3. The service is n the course of the taxpayer’s trade or business or profession ;
4. The service is for a valuable consideration actually or constructively received; and
5. The service is NOT exempt under the Tax Code, special law or international
agreement.

Note: Absence of any of the requisites renders the transaction EXEMPT from VAT but
maybe subject to other percentage tax under Title V of the Tax Code.

Categories of Services
1. Professional/ technical consultancy;
2. Transfer of technology;
3. Lease or use of intangible property; or
4. Lease or use of tangible property

Note: Non-life Insurance policies are subject to VAT while life insurance policies are
VAT exempt but subject to 5% premium tax under Section 123, NIRC.

Legal Services
Are lawyers liable for VAT?
YES. RA. 9337 clearly provided that sale of legal services by a lawyer or a law firm
shall be subject to VAT effective November 1, 2005. There was an elimination of the
exemption from VAT of legal services, deleting the old Section 109 (BB) of RA 9238.

An individual can practice his law profession either personally or through general
professional partnership. A lawyer who practices his profession may be subject to or
exempt from VAT.

A lawyer practicing his profession is subject to VAT if:

1. There is no employer-employee relationship between him and the person to whom
he provides the legal service; and
2. His gross receipts for the next 12 months exceed P1.5 million.
Otherwise, he is exempt from VAT.

TAX BASE AND TAX RATE: 12% of the gross receipts derived from the sale or
exchange of services, including the use or lease of properties.
 The affectivity date of the increase in VAT rate from 10% to 12% is FEBRUARY 1,
2006

Automatic Zero-Rating Sales for Legal Services in the following cases:

1. Legal services rendered to a person engaged in business conducted outside the
Philippines or to a non-resident person not engaged in business who is outside the
Philippines when the services are performed, the consideration for which is paid for
in acceptable foreign currency and accounted with the rules and regulation of the

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 BSP;(Payment of professional fee must be in acceptable foreign currency and
accounted for in accordance with BSP rules)
2. Legal services rendered to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory effectively
subjects the supply of such service 0% rate; and (Payment of professional fee in
foreign currency is not required.)
3. Legal services rendered to persons engaged in international shipping or international
air transport operations, including leases of property for use thereof. (Payment of
professional fee in foreign currency is not required.)
 In these cases, the lawyer benefits from the zero-rated sales.

VAT ON IMPORTATION OF GOODS

TAX BASE AND TAX RATE: 12% based on:

1. Total value used by the BOC in determining tariff and customs duties, plus
customs duties, excise taxes, if any and other charges;
2. Landed Cost in case valuation used by the BOC is based on volume and quantity.
Landed cost consist of the invoice amount, customs duties, freight, insurance and
other charges and also excise tax, if any. (Sec, 107, NIRC)
 Same rule applies to technical importation of goods sold by a person located in a
Special Economic Zone to a customer located in a customs territory (R.R. No.
16-2005 Sec. 4.107-1)
 When and by whom paid: The VAT on importation shall be paid by the importer
prior to the release of such goods from customs custody.

Importer refers to any person who brings goods into the Philippines, whether or not
made in the course of trade or business. It includes a non-exempt persons or entities
who acquire tax-free imported goods from exempt persons, entities or agencies.

Transfer of Goods By Tax-Exempt Importer

Where the importer is exempt from VAT and such goods imported were subsequently
sold, transferred or exchanged in the Philippines to a non-exempt person or entity, the
non-exempt purchaser, transferee or recipient shall be considered as the importer and
shall be liable for VAT due such importation.

Technical Importation – Sale of goods by a PEZA registered enterprise to a buyer from

the customs territory shall be treated as a technical importation. Such buyer shall be
treated as an importer thereof and shall be imposed with the corresponding import
taxes.

ZERO-RATED SALES OF VAT REGISTERED PERSONS

 Sales which are zero-rated shall result to zero (0) output tax since the tax rate
applied to the tax base is zero percent (0%). Since the output tax is zero, the seller
shall pay NO VAT.

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  However, as an advantage, the seller shall be entitled to an input tax which he may
credit against his zero output tax giving rise to an excess input tax.

Note: The seller must be a VAT-registered person to make his export sales zero-rated.

 If he is a not VAT-registered person (he registered as VAT-exempt), then his export

sales shall be merely VAT-exempt under (Sec. 109(1)(O), disallowing him to claim
his unused creditable input taxes attributable to export sales in the form of refund or
tax credit.

ILLUSTRATION OF ZERO-RATED SALE:

Zero Output Tax

Less: Amount of Input Tax
Excess input tax from zero-rated sales

 At the option of the taxpayer may be:

1. Carried over to the succeeding quarters; OR
2. Refunded against other internal revenue taxes. (Sec. 110B,NIRC)

Object of zero-rated sales: To make exporters more globally competitive by imposing

them no VAT and allowing them to credit their input taxes against any internal revenue
taxes.

KINDS OF ZERO-RATED SALES

A. As to object of the sale:
1. Zero-rated sales of goods or properties by VAT-registered persons under Sec.
106A2, NIRC
2. Zero-rated sales of services by VAT-registered persons under Sec. 108B, NIRC.

B. As to how the transaction shall be subject to zero-rating.

1. Automatically Zero-Rated Sales.
2. Effectively Zero-Rated Sales.

I. As to object of the sale:

A. Zero-Rated Sales of Goods or Properties (EFI) (Sec. 106 A2, NIRC)
1. Export Sales (ANEGEI)
a. The sale and actual shipment of goods from the Philippines to a foreign
country (actual export sale)
b. The sale of raw materials or packaging materials to non-resident buyer for
delivery to resident local export-oriented enterprise to be used in
manufacturing, processing, packaging, or repacking in the Philippines of
the said buyer’s goods;

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 Note: Subsections (a) & (b) must be paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations
of BSP.

c. Sale of raw materials or packaging materials to an export-oriented

enterprise whose export sales exceed 70% of total annual production;
d. Sale of gold to the BSP;
e. Those “considered export sales under EO No. 226”(Omnibus
Investment Code of 1987) and other special law;

Without actual exportation the following shall be considered

CONSTRUCTIVELY EXPORTED for purposes of these provisions:
(BERD)
i. Sales to Bonded manufacturing warehouses of export-oriented
manufactures;
ii. Sales to Export processing zones;
iii. Sale to Registered export trades operating bonded trading
warehouses supplying raw materials in the manufacture of export
products under guidelines to be set by the board in consultation with
the BIR and BOC;
iv. Sales to Diplomatic Missions and other agencies and/or
instrumentalities granted tax immunities, of locally manufactured,
assembled or repacked products, whether paid for in foreign currency
or not. (Mamalateo, Value Added Tax, 2007 ed.,p.98)

“ Considered export sales under EO 226” is expanded to make sales

of goods and services by a VAT-registered in the customs territory to
ecozone and Freeport enterprises AUTOMATICALLY ZERO-RATE.
(RR 4.106-5, RR No. 4-2007)

f. Sale of goods, supplies, equipment and fuel TO persons engaged

exclusively in international shipping or international air transport
operations.
 Goods subject to zero-rating are attributable to the transport of goods
and passengers from a port in the Philippines. directly to a foreign port,
or vice versa, without docking or stopping at any other port in the
Philippines
 “without docking or stopping at any other port in the
Philippines”- an international airline that makes a stopover in a Phil.
port to unload passengers and/or cargoes from a foreign destination or
to pick up passenger and/or cargoes for foreign destination is deemed
NOT to have docked or stopped at any other port in the Phils. (Sec. 4,
106-5, RR No. 4-2007, Feb. 7, 2007)

2. Foreign Currency Denominated Sales

a. Sale to non-resident (refers to balikbayan)

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 b. Of goods assembled or manufactured in the philippines except
automobiles (sec. 149, nirc) and non-essential goods (sec. 150, nirc)
c. For delivery to a resident in the Philippines.
d. Paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the bsp.

3. Sales TO Persons or Entities deemed tax-exempt under Special Law or

International Agreement
Such as the Asian Development Bank (ADB) and International Rice Research
Institute (IRRI) which shall be effectively subject to zero-rate.

Note: Nos. 1and 2 are considered as automatically zero-rated sales while

No.3 is an effectively zero-rated sale.

B. Zero-Rated Sales of Services (Sec.108B, NIRC) (POSIST-R)

1. Processing, manufacturing or repacking of goods for other persons doing
business outside the Philippines, which goods are subsequently exported;
2. Services other than those mentioned in the preceding paragraph rendered to
a person engaged in business conducted Outside the Philippines or to a non-
resident person not engaged in business who is outside the Philippines when
the services are performed;

Note: Numbers (1) & (2) must be paid for in acceptance foreign currency and
accounted for in accordance with the rules and regulations of the BSP;

3. Services rendered to persons or entities whose exemption under Special laws

or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to 0% rate;
4. Services rendered to persons engaged exclusively in International shipping or
air transport operations, including leases of property for use thereof;
5. Services performed by Subcontractors and/ or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales
exceed 70% of the total annual production;
6. Transport of passengers and cargo by domestic air or sea carriers from the
Philippines to a foreign country; and
7. Sale of power or fuel generated through Renewable sources of energy such
as, but not limited to, biomass, solar, wind, hydropower, geothermal and
steam, ocean energy, and other emerging sources using technologies such
as fuel cells and hydrogen fuels;
 The sale of power or fuel is the one being subject to 0% and not the
operation or maintenance of such energy sources.

PEZA- Registered Enterprise given the option

PEZA registered enterprise is given the option to choose between two fiscal
incentives (a) 5% preferential tax rate on its gross income under the said law or

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 (b) income tax holiday provided under E.O. 226 or Omnibus Investment Code of
1987, as amended.

While an ecozone is geographically within the Philippines, it is deemed as

separate customs territory and is regarded in laws as foreign soil. Sales by
supplies outside the boarders of the ecozone to this separate customs territory
are deemed exports and treated as export sales (Commissioner of Internal
Revenue vs. Seksui Jushi Phils. Inc. G. R. No. 149671, July 21, 2006.)

II. As to how the transaction shall be subject to zero-rating

Automatically Zero-Rated Effectively Zero-Rated
A zero-rated sale generally refers to the Effectively zero-rated sales shall refer
export sale of goods properties and to the local sale of goods, properties
supply of services by a VAT registered and supply of services by a VAT-
person. registered person to a person or entity
who was granted indirect tax exemption
under special laws or international
agreements,
I.E. sale of VAT-registered person to
ADB or IRRI
No need to file an application form and An application for zero-rating must be
to secure BIR approval before the sale. filled in and approved by the BIR before
The sale is zero-rated automatically the transaction may be considered
effectively zero-rated
Sales to registered ecozones and Sales to foreign embassies and its
Freeport zones enterprises are personnel’s are effectively zero-rated
automatically zero-rated ( RR No. 4- provided that
2007, Feb. 7, 2007) 1. The sale has been made to the
embassies in their official capacities;

3. Important of personal and household effects belonging to residents of the Philippine

returning from abroad and non-resident citizen coming to resettle in the Philippines:
PROVIDED, that such goods are exempt from customs duty under the Tariff and
Customs Code of the Philippines;

4. Importation of professional instruments and implements, wearing apparel, domestic

animals, and personal household effects;

Requisites to be VAT-Exempt:
d. Belonging to persons coming to settle in the Philippines
e. For their own use and not for sale, barter or exchange
f. Accompanying such persons or arriving within 90 days before or after their arrival
g. Satisfactory evidence is given to the CIR that such persons are actually coming to
settle in the Philippines and the change of residence is bona fide

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 h. Except any vehicle, Vessel, Aircraft, machinery, other goods for use in the
manufacture and merchandise of any kind in commercial quantity.

5. Services subject to the percentage taxes under Title V of the NIRC;

 Sections 116-127 enumerates entities those which are liable to percentage tax,
hence VAT exempt.

6. Services by agricultural contract growers and milling for others of palay into rice corn
into grits and sugar cane into raw sugar;

7. Medical, dental, hospital and veterinary services except those rendered by

professionals;
 Laboratory services are exempted because it is a hospital service.
 The sale of medicines by the pharmacy of a hospital or clinic to its in-patients is
considered hospital service: hence, VAT exempt. If the sale of medicine is made to
an out-patient, such sale is subject to VAT. (Mamalateo, Value Added Tax;
2007ed., pp. 163 and 274)
 The services rendered by Health Maintenance Organizations (HMOs), which do
not provide medical and/or hospital services but merely arranges for the same, are
NOT VAT-exempt.

8. Educational services rendered by private educational institutions duly accredited by

the DepED, CHED and TESDA and those rendered by government educational
institutions;

9. Services rendered by individuals pursuant to an employer-employee relationship;

10. Services rendered by regional or area headquarters established in the Philippines by

multinationals corporations;

11. Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws except those under Presidential
Decree No. 529 (Petroleum Exploration Concessionaires under the Petroleum Act of
1949)

12. Sales by agricultural cooperatives of food and non-food products (whether in original
or processed form) duly registered and in good standing with the Cooperative
Development Authority (CDA) to:
a. THEIR members shall be VAT- exempt whether or not the cooperative is the
producer of the goods; or
b. NON-MEMBERS shall be VAT-exempt only if the cooperative is the producer;
 Importation of direct farm inputs, machineries and equipment, including spare
parts thereof, to be used directly and exclusively in the production and/or
processing of their produce shall also be exempt. * (Compare with no. 14)

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 Note: Sale or importation of agricultural food products in their original state is exempt
from VAT irrespective of the seller and buyer thereof ( Sec. 109 (1) (A).

Is the sale of marine or agricultural food products in processed form subject to VAT?
Generally, yes except those sold by agricultural cooperatives registered under CDA
(Sec. 109 (1A) correlated to Sec. 109 (1L) NIRC)

13. Gross receipts from lending activities of credit or multi-purpose cooperatives duly
registered and in good standing with the CDA;

14. Sales by a non- agricultural, non-electrical and non-credit cooperatives duly

registered and in good standing with the CDA. Provided that:
a. Share capital contribution of each member does not exceed P 15,000; and
b. Regardless of the aggregate capital and net surplus ratably distributed among
members.
 Importation by these cooperatives of machineries and equipment, including
spare parts thereof, to be used by them are subject to VAT. * (Compare with
no.12)

15. Export sales by persons who are not VAT registered;

 To encourage exporters of goods to register as a VAT person with the BIR to
be able to claim unused input tax in the form of refund or tax credit.
 If he is a VAT-registered, his export sales are zero-rated under 106(A2),
NIRC.

16. Sale of real properties:

 SALES EXEMPTED:
a. Not primarily held for sale to customers or held for lease in the ordinary course of
trade or business;
b. Utilized for low-cost housing;
c. Utilized for socialized housing;
d. Residential lot valued at P1.5 million below;
e. House and lot and other residential dwellings valued at P2.5 million and below; or
f. Two or more adjacent residential lots where the aggregate value does not
exceed P1.5 million
 Even if the real property is not primarily held for sale to customers or held for
lease in the ordinary course of trade or business of the seller, the sale
thereof shall be subject to VAT being a transaction incidental to the
taxpayer’s main business (Sec. 14, R.R. 04-2007)
 Example: VAT-registered person engaged in manufacturing sells his
warehouse which was used in his business, the sale shall be subject to VAT
being an incidental to his business.

17. Lease of residential units, if the monthly rent:

 Does not exceed P10,000 regardless of the aggregate rentals received by the
lessor

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  Exceeds P10,000 but the aggregate rentals received by the lessor do not exceed
P1.5 million, however, the same shall be subject to 3% percentage tax;

Summary Rules:
a. Monthly rental P10,000 or less regardless of annual gross sales + VAT-exempt
and no percentage tax.
 VAT-exempt transactions shall not pay no VAT neither 3% percentage tax
under Section 116, NIRC
b. Monthly rental above P10,000 but annual gross sales do not exceed P1.5M =
VAT-exempt but shall pay 3% percentage tax under Section 116, NIRC.
c. Monthly rental above P10,000 and annual gross sales exceeds P1.5M = there
shall be VAT.

18. Sale, importation, printing or publication of books and any newspaper, magazine,
review or bulletin which appears at regular intervals with fixed prices for subscription
and sale and which is not devoted principally to the publication of paid
advertisements;

19. Sale, importation or lease of passenger or cargo vessels and aircraft, including
engine, equipment and spare parts thereof for domestic or international transport
operations weighing 150 tons and above;

20. Importation of life-saving equipment , safety and rescue equipment, and

communication and navigational safety equipment, steel plates and other metal
plates, used for shipping transpost operations;

21. Importation of capital equipment, machinery, spare parts, life saving and navigational
equipment, steel plates and other metal plates to be used in the construction, repair,
renovation or alteration of any merchant marine vessel operated in the domestic
trade;

22. Importation of fuel, goods and supplies by persons engaged in the international
shipping or air transport operations directly to a foreign port without stopping at any
other port in the Philippines;

23. Services of banks, non-bank financial intermediaries performing quasi-banking

functions, and other non-bank financial intermediaries such as money changers and
pawnshops;
 i.e. PAWNSHOPS – considered as non-bank financial intermediary thus exempted
from VAT but liable to percentage tax (Tambunting Pawnshop, Inc. v. CIR, G.R.
No. 179085,21 January 2010)

24. Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or
receipts do NOT exceed the amount of P1.5M.

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 Note:
 These transactions are exempts from VAT subject to 3% percentage tax under
Section 116, NIRC

Requisites:
a. Sale of taxable goods, properties or services;
b. Said transaction are not VAT-exempt under Section 109(1) (except for sale of
real properties and lease of residential units);
c. The gross receipts and/or annual sales do not exceed P1.5 million.

Distinction between Zero-Rated Sales and VAT-Exempt Sales

Zero-Rated Sales VAT-Exempt Sales
The transaction is completely free of VAT
because the tax rate applied on the tax Exemption only removes the VAT at the
base is zero, hence, the seller charges no exempt stage
output tax
VAT payer can claim and enjoy a credit or VAT payer cannot claim a credit or refund
refund for the input tax. The benefit is for the input tax (which could result to
100% of the tax. (total relief) increased prices of goods or services;
partial relief)
Still considered as “taxable sales” for the Not considered as taxable sales; A person
purpose of measuring turn-over sales VAT who makes only exempt sales is not a
registration is required taxable person for VAT purposes and may
not register VAT
VAT registration is optional

Distinction Between Exempt Transaction and Exempt Party

Exempt Transaction Exempt Party
Involves goods or services which, by their A person or entity granted VAT exemption
nature, are specifically listed in and under the Tax Code, a special law or an
expressly exempted from the VAT under international agreement to which the
the TAX Code, without regard to the tax Philippines is a signatory, and by virtue of
status – VAT-exempt or not – of the party which its taxable transactions became
to the transaction exempt from the VAT

Transaction is not subject to the VAT, but Such party is also not subject to the VAT,
the seller is not allowed any tax refund of but may be allowed a tax refund of or
or credit for any input taxes paid credit for input taxes paid, depending on
its registration as a VAT or non-VAT
taxpayer

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TAX CREDITS

CREDITABLE INPUT TAX

Any input tax on the following transactions evidenced by a VAT invoice or official receipt
issued by a VAT-registered person shall be creditable against output tax:

VAT actually paid for: (IRST3P)

1. Purchase or importation of goods:
a. For sale; or
b. For conversion in to or intended to form part or finished product for sale including
packaging materials; or
c. For use as supplies in the course of business, or
d. For use as raw materials supplied in the sale of services; or
e. For use in trade of business for which deduction for depreciation or amortization
is allowed for income tax purposes (capital goods)
2. Purchase of real properties;
3. Purchase of services;
4. Transaction deemed sale;
5. Transaction input tax;
6. Presumptive input tax;
7. Transactional input tax credits allowed under transitory and other provisions

Who can avail of the input Tax credit?

1. Importer – upon payment of VAT prior to the release of goods from customs
custody:
2. Purchaser of the Domestic Goods or Properties – upon consummation of the
sale and issuance of VAT invoice: or
3. Purchaser of Services or the Lessee or License – upon payment of the
compensation rental, royalty or fee and issuance of VAT official receipt.

How is Input tax creditable during the taxable month or quarter determined? (R.R.
NO. 16-2005, SEC. 4.110-5)
Adding all creditable input taxes during the month or quarter AND any amount of
input tax carried-over from the preceding month or quarter, REDUCED by the
amount of claim for VAT refund or tax credit certificate (whether filed with BIR, with
Department of Finance Board of Investments or the BOC) and other adjustments
such as purchase returns or allowances, input tax attributable to exempt ales and
input tax attributable to sales subject to final VAT withholding.

Determination of Output Tax and VAT Payable and the Computation of VAT payable
or Excess Tax Credits (R.R. No. 16-2005, Sec. 4110-6)
1. Output Tax
a. Output tax is determined by multiplying the gross selling price or gross
receipts by the VAT rate.
b. Where the basis for computing output tax is either the gross selling price or
gross receipts, but the amount of VAT is erroneously billed in the invoice:

143
  The total invoice amount is presumed to be comprising of gross selling
price/gross receipts plus the correct VAT. Hence, the output tax is
determined by multiplying the total invoice amount by fraction using rate of
VAT as numerator and 100% plus VAT rate denominator.
c. The input tax that can be claimed by the buyer shall be the corrected amount
of VAT.

2. VAT payable
Output tax less input tax to arrive at VAT payable on a monthly VAT declaration
and the quarterly VAT returns, subject to limitations prescribed by the
regulations.

Note: The 70% cap on creditable input tax has already been removed (R.A. No.
9361 amended Sec. 110 (B) NIRC)

TRANSITIONAL INPUT TAX

Transitional input tax on the inventory on hand as of the effectivity of the VAT
registration of taxpayers who:
1. Became VAT – registered persons upon exceeding the minimum turnover of P
1.5 million in any 12-month period; or
2. Voluntarily registers as a VAT payer even if turnover does not exceed P 1.5
million.

Determination of Input Tax: Whichever is higher between:

a. 2% of the value of the beginning inventory on hand; or
b. Actual VAT paid on such goods, materials and supplies

The amount is creditable against the output tax of a VAT- registered person.

Note: Under Section 111 of the NIRC, the beginning inventory of goods forms part
of the valuation of the transitional input tax credit. Goods as commonly understood in
the business sense, refer to the product which the VAT-registered person offers for
sale to the public. With respect to real estate dealers, it is the real properties
themselves which constitute their goods. Such real properties are the operating
assets of the real estate dealer. (Fort Bonifacio Development Corporation vs. CIR,
G.R. Nos. 158885 and 170680, April 2, 2009)

PRESUMPTIVE INPUT TAX

Persons or firms engaged in the: (PM)
1. Processing of sardines, mackerel and milk;
2. Manufacturing refined sugar, cooking oil, and packed noodle-based instant meals.
The presumptive input tax shall be 4% of the gross value in money of their
purchases of primary agricultural products which are used as inputs to their
production.

The amount is creditable against the output tax of a VAT-registered person.

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CLAIMS FOR REFUND/TAX CREDIT CERTIFICATE OF INPUT TAX
1. Zero-rated and Effectively Zero-rated sales of goods, properties or services
a. Input tax that may be subject to claim shall exclude the portion of input tax
that has been applied to output tax.
b. The application should be filled within 2 years after the close of the TAXABLE
quarter when such sales were made.
c. Incase of zero-rated sales, payments for the sales must have been made in
acceptable foreign currency duly accounted for in accordance with BSP rules
and regulations.
d. If engaged in both zero-rated or effectively zero-rated and taxable or exempt
transactions and the amount of creditable input tax due cannot be directly and
entirely attributed to any one of the transactions, ONLY PROPORTIONATE
share of input taxes allocated to zero-rated sales can be claimed for refund or
issuance of tax credit certificate.
e. If engaged in transport of passenger and cargo by air or sea vessels from
Philippines to a foreign country, input taxes allocated RATABLY BETWEEN
ZERO-RATED AND NON-ZERO RATED sale (subject to regular rate, final,
withholding VAT and Vat-exempt sales.)
2. Cancellation of Registration
a. A VAT-registered person may apply for the issuance of credit tax certificate
for any unused input tax WITHIN 2 YEARS FROM THE CANCELLATION OF
REGISTRATION. Such credit tax certificate may be used in the payment of
other internal revenue taxes.
b. Cancellation of Registration due to :
i. Retirement from or cessation of business; or
ii. Change in or cessation of status
c. The taxpayer shall be ENTITLES TO A REFUND if he has no internal
revenue tax liabilities against which the tax credit certificate may be utilized.

3. Manner and Period within Which Refund or Tax Credit or Input Taxes shall be
Made
 Refunds shall be made upon warrants drawn by the Commissioner or by his
duly authorized representative without the necessity of being countersigned
by the Chairman of the Commission of Audit.
 The application for tax credit or refund for creditable input tax shall be
DECIDED by the Commissioner within one hundred twenty (120) days from
the submission of documents in support of the application.
 In case of denial or the inaction of the Commissioner within the period
prescribed, the taxpayer may appeal the decision or unacted claim within30
days from the receipt of the same or after the expiration of 120 days to Court
of Tax Appeals.

145
REGISTRATION

PERSONS WHO ARE REQUIRED TO REGISTER UNDER THE VAT LAW

1. Every persons who is liable for payment of VAT shall register as a VAT Person
Example: Dealer of a ready-to-wear clothes with gross sales over P1.5 M.

2. Every person who is exempted from VAT shall register as a Non-VAT Person/ VAT
Exempt Person, unless he elects to e a VAT person.
Example: Seller of books or dealer of raw eggs, regardless of his gross sales.

3. Every person who is engaged in vatable and exempt transaction must both register
as VAT and non-VAT person.
Example: Seller of books and school supplies (Mamalateo, p. 387)

REGISTRATION AS A VAT PERSON

A. Mandatory: Any person, who in the course of trade of business, sells, barters, or
exchanges of services, is required to register if:
1. His gross sales or receipts for the past 12 months (other than those exempted
under Sec. 109 (1) A to U) will exceed P 1.5M; or
2. There are reasonable grounds to believe that his gross sales or receipts for
the next 12 months (other than those exempted under Sec. 109 (1) A to U)
will exceed P 1.5M
B. Optional: Any VAT-exempt person may elect to register as a VAT person by
paying the annual registration fee.
 He shall not be entitled to cancel his registration as a VAT person for the next
3 years from the quarter when the election was made.
Except: Franchise grantees of radio and TV broadcasting whose annual
gross receipts for the preceding year do not exceed (P10, 000, 000. 00)
whose option is perpetually irrevocable (Sec. 15, RR No. 4-2007, Feb 7,
2007)
 Effect: His transactions which used to be exempted from tax shall be
subjected to VAT.
 Rationale: The VAT-exempt person may incur a large amount of input tax in
excess of his output tax, and such input tax can be credited against any tax
under the NIRC. This crediting shall not be possible unless he exercises such
option.

Note: Registration is an indispensable requirement under our VAT law. However, it

does not determine VAT taxability. A taxable person who is required but failed to
register as a VAT person shall NOT be entitled to claim any input tax in his taxable
sales once he exceeds the limit set by the law.

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 COMPLIANCE REQUIREMENTS

INVOICING REQUIREMENTS
A VAT-registered person shall issue:
1. VAT invoice – for every sale, barter or exchange of goods or properties.
2. VAT official receipt – for every lease of goods or properties and for every sale,
barter or exchange of services.

INFORMATION CONTAINED IN VAT INVOICE OR RECEIPT

1. Statement that the seller is a VAT-registered person followed by his T.I.N.:
2. The total amount paid by the purchaser with the indication that such amount
includes VAT.
 Amount of tax must be shown separately on the receipt
 If the sale is exempt, the term VAT-EXEMPT SALE must be written or printed
prominently on the invoice or receipt
 If the sale is subject to 0% the term ZERO-RATED SALE must be written or
printed prominently on the invoice or receipt.
 If the sale involves goods, properties or services some which are subject to VAT
and some are exempt or zero-rated, the breakdown of the sale price between it
taxable, exempt, and zero-rated components must be shown on the invoice or
receipt.
3. Date of the transaction, quantity, unit cost and description of goods.
4. In case of sales in the amount of P1, 000. 00 or more and the sale is made to a
VAT-registered person, the name, business style, address and TIN of the purchaser.

CONSEQUENCES ERRONEOUS ISSUANCE OF VAT INVOICE OR RECEIPT

If a person who is VAT-registered issues an invoice or receipt showing his TIN, followed
by the word “VAT”, the erroneous issuance shall result to the following:
1. The non-VAT person shall be liable to:
a. The percentage taxes applicable to his transactions;
b. VAT due on transactions under Sec. 106 or 108 of the Tax Code, without the
benefit of any input tax credit; and
c. A 50% surcharge under Sec. 248 (B) of the Tax Code
2. VAT shall be recognized as an input tax credit to the purchaser, provided the
requisite information is shown on the receipt or invoice.

FILING OF RETURN AND PAYMENT OF VAT

WHO ARE REQUIRED TO FILE A VAT RETURN?

1. Every person or entity who in the course of his trade or business, sells or leases
goods, properties and services subject to VAT, if the aggregate amount of actual
gross sales or receipts exceed P1.5 million for any twelve month period;
2. A person required to register as VAT taxpayer but failed to register;
3. Any person who imports goods;
4. Professional practitioners

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  Professional Practitioners (PPs) were formerly exempted from VAT and pays
only income tax.
 However, on January 1, 2003, PPs were also subject to either VAT or 3%
Percentage Tax. (Republic Act Nos. 7716 and 9010, which were implemented by
Revenue Regulation Nos. 1-2003 and 3-2003)
 Services of PPs are subject to:
a. VAT if the gross professional fees exceed P1.5 million for a 12-month period;
or
b. 3% Percentage Tax if the gross professional fees does not exceed 1.5 million
for a 12- month period (Revenue Regulations No. 16-2005)

“Professional Practitioners” include:

1. Certified Public Accountants;
2. Insurance Agents Life & Non- Life
3. Other Professional Practitioners required to pass the government examinations

TIME FOR FILING A RETURN

 Every person liable to pay VAT shall file a;
a. MONTHLY RETURN not later than the 20th day ff. the end of each month;
b. QUARTERLY RETURN of the amount of his quarterly gross sales or receipts
within 25 days following the close of the taxable quarter.
 A VAT-registered person shall pay the value-added tax on a monthly basis.
 Taxable quarter shall mean the quarter that is synchronized to the income tax
quarter of the taxpayer (i.e calendar or fiscal year).

WITHHOLDING OF VALUE-ADDED TAX IN THE CASE OF VAT ON GOVERNMENT

PURCHASES:
 Sale of goods and services to government is subject to 12% VAT
 However, the Government is required to deduct and withhold a final VAT of;
a. 5% for the purchases: OR
b. 12% for payments to lease or use of properties or property rights owned by non-
residents; services rendered to local insurance companies, with respect to
reinsurance premiums payable to non-residents; other services rendered in the
Philippines by non-residents.

If actual input VAT exceeds 5% of gross payments the excess may form part of the
seller’s cost; and
If actual input VAT is less than 5% of gross payments, the difference must be treated as
income of the seller.

CANCELLATION OF VALUE-ADDED TAX REGISTRATION

The registration of any person who ceases to be liable to a tax type shall be cancelled
upon filing with the Revenue District Office where he registered, an application for
registration information update in a form prescribed thereof;

148
A VAT-registered person may cancel his registration for VAT if;
1. He makes written application and can demonstrate to the Commissioner’s
satisfaction that his gross sale or receipts for the following twelve (12) months, other
than those that are exempt under Section 109 (A) to (U), will not exceed P1.5
million; or
2. He has ceased to carry o his trade or business and does not expect to recommence
any trade or business within the next twelve (12) months.
The cancellation of registration will be effective from the first day of the following month.

SUSPENSION OF BUSINESS

General Rule: The Commissioner or his authorized representative is empowered to

suspend the business operations and temporarily close the business establishment of
any person for any of the following violations:
1. In the case of a VAT-registered person-
a. Failure to issue receipts or invoices;
b. Failure to file a VAT return as required; or
c. Understatement of taxable sales or receipts by 30% or more of his correct
taxable sales or receipts for the taxable quarter, and
2. For failure of any person to register as required in Section 236 –

The temporary closure of the establishment for the duration of NOT LESS THAN 5
DAYS shall be lifted only upon compliance with whatever requirements prescribed by
the CIR in the closure order.

Exception: For exporters, although they are required to be VAT-registered, non-

registration will not amount to temporary closure but the penalty shall be that they will
be considered as exempt from VAT, instead of being subject to 0% percent.

UPDATES ON VAT
A. VAT LIABILITY OF TOLLWAY OPERATORS
1. Revenue Memorandum Circular No. 72-2009, December 21, 2009.
a. Basis:
 Sec. 108 (A) of the Tax Code
 Sale of services of FRANCHISE GRANTEES except those excluded under
Sec. 119 of the Tax Code is subject to VAT.
b. Toll way Operators are required to follow the invoicing receipting format
prescribed in RMC No. 40-2005
2. Revenue Memorandum Circular No. 30-2010, March 26, 2010
a. Imposition of VAT on Toll Fees shall be initially imposed on fees collected from
PRIVATE MOTOR VEHICLES effective April 1, 2010.
b. The VAT on toll fees from other transportation vehicles shall be implemented
subsequently

Note: The implementation of the RMC No. 30-2010 was however further
deferred.

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B. EXPANDED SENIOR CITIZENS ACT
 Republic Act No. 9994, signed into law on February 15, 2010
 Section 4 provides that senior citizens are entitled to a grant of 20% discount and
EXCEMPTION FROM VAT on the sale of the following goods and services for
the exclusive use and enjoyment or availment of senior citizens:
1. Purchase of medicines and other essential medical supplies, accessories, and
equipment to be determined by the Department of Health (DOH)
2. Professional fees of attending physicians in all private hospitals, medical
facilities, outpatient clinics, and home health care services;
3. Professional fees of licensed professional healthcare workers providing home
healthcare services;
4. Medical and dental services and diagnostic and laboratory fees in all private
hospitals, medical facilities, outpatient clinics, and home health care services;
 In accordance with rules and regulations to be issued by the DOH, in
coordination with the Philippine Health Insurance Corporation (PhilHealth)
5. Actual Fare for land transportation travel in PUBs, PUJs, Asian Utility Vehicles
(AUVs), shuttle services and public railways including LRT, MRT, PNR;
6. Actual transportation fare for domestic air transport services and sea shipping
vessels and the like;
 Based o actual fare and advanced booking
7. Utilization of services in hotels and similar lodging establishments, restaurants
and recreation centers;
8. Admission fees charged by theaters, cinema houses, and concert halls, circuses,
carnivals, and other similar place of culture, leisure, and amusement.
9. Funeral and burial services for the death of senior citizens.

TRANFERS TAXES
Definition
Taxes imposed upon the gratuitous disposition of private property. They are not
property taxes because their imposition does not rest upon general ownership but rather
they are a privilege tax, imposed on the act of passing ownership of proper.

Kinds of Transfer Taxes

A. Estate Tax
B. Donor’s Tax

Differences between Estate and Donor’s Taxes

Estate Tax Donor’s Tax

Tax on privilege to transfer property upon Tax on privilege to transfer property during
one’s death one’s lifetime
Taxpayer’s Taxpayer’s
1. Individuals Only 1. Individuals; AND
2. Corporations

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Generally imposed on Donations Mortis Generally imposed on Donations Inter
Cause vivos
Tax Rate are relatively higher (5%-20%) Tax rate lower (2% - 15%)
Extension for payments is allowed Extension for payments is not allowed
Exemption from net estate per table is Exemption from net estate per table is
PHP 200,000.00 PHP 100,000.00

The terms “estate” and “gift” subject to tax include real and personal property, whether
tangible or intangible, wherever situated.

Notes:
 Nonresident aliens and foreign corporations are liable only for property within the
Philippines
 All other taxpayers are liable for properties within and without the Philippines

Intangible Personal Properties Deemed Located in the Philippines (Sec.104, NIRC)

1. Franchise which must be exercised in the Philippines;
2. Shares, obligation or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its laws;
3. Shares, obligations or bonds issued by any foreign corporation eighty-five per
centum (85%) of the business of which is located in the Philippines.
4. Shares, obligations or bonds issued by any foreign corporation, if such shares,
obligations or bonds have acquired a business situs in the Philippines; and
5. Shares or rights in any partnership, business or industry established in the
Philippines.

Note: The foregoing enumeration is only relevant to a.) non resident alien; and b.)
foreign corporations since they are liable only for properties within the Philippines
(Sababan Taxation Law Review, 2008 ed. P. 132).

General Rule: Include in the Gross Estate of Gross Gift; thus TAXABLE

Exceptions Reciprocity Clause (Sec. 104, NIRC) – NOT liable/taxable even

intangibles are deemed located at the Philippines when:
1. If the decedent at the time of his death was a citizen and resident of a foreign
country, who at the time of his death.
a. Did not impose a transfer tax or death tax of any character.
b. In respect of intangible personal property of citizen of the Philippines not residing
in that foreign country; or
2. If the laws of the foreign country of which the decedent was a citizen and resident at
the time of his death:
a. Allow a similar exemption from transfer taxes or death taxes of every character
b. In respect of intangible personal property owned by citizens of the Philippines not
residing in that foreign country.

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 ESTATE TAX

DEFINITION
An excise tax on the right or transmitting property at the time of death AND on the
certain transfers which are made by the statute the equivalent of testamentary
dispositions.

NATURE
It is a privilege or excise tax, not a property tax

PURPOSE
To the tax the shifting of economic benefits and enjoyment of property from the dead to
the living.

THEORIES REGARDING THE PURPOSE OF ESTATE TAX

1. Benefit-received theory – The tax is in return of the services rendered by the state
in the distribution of the estate of the decedent and for the benefits that accrue to the
estate end the heirs.
2. State-partnership theory- The tax is in the share of the state as a “passive and
silent partner” in the accumulation of property.
3. Ability-to pay theory – The tax is based on the fact that the receipt of inheritance
creates an ability to pay and thus to contribute to governmental income.
4. Redistribution – of- wealth theory – Tax is imposed to help reduce undue
concentration of wealth in society to which the receipt of inheritance s a contributing
factor.

Note: The approval of the court, sitting in probate, or as a settlement tribunal over the
deceased is not a mandatory requirement in the collection of taxes, (Marcos II vs. CA,
G.R. No. 120880 June 5, 1997)

ESTATE TAX vs. INHERITANCE TAX

Inheritance Tax – An imposition created by law on the privilege to receive property.

(Vera vs. Navarro, 79 SCRA 434)

Note: Presently, there is no inheritance tax imposed by law. Only estate taxes are
imposed
Estate Tax Inheritance Tax
Basis
Tax on the privilege to transfer property Tax on the privilege to receive property
upon one’s death from the deceased
Who pays the tax
Paid by the estate represented by the Paid by the recipients of the properties of
administrator of executor the properties of the estate

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ESTATE TAX FORMULA
Gross Estate (Sec. 85)
Less (1) Deductions (Sec. 86)
(2) Net share of the SS in the CPP
---------------------------------------------------
Net Taxable Estate
Multiplied by: Tax Rate (Sec 84)
---------------------------------------------------
Estate Tax due
Less: Tax Credit [if any] (Sec. 66 [E] or 110 [B])
---------------------------------------------------
Estate Tax Due, if any

ACCRUAL OF ESTATE TAX

The estate tax accrues as of the death of the decedent and the accrual of the tax is
distinct from the obligation to pay the same which is 6 months after the death of the
decedent.

Basis: Article 777 of the Civil Code: The rights to the succession are transmitted from
the moment of the death of the decedent.

LAW THAT GOVERNS THE IMPOSITION OF THE ESTATE TAX

Estate taxation is governed b the statute in force at the time of the death of the
decedent. The estate tax accrues as of the death of the decedent. (Sec. 3, R.R. 02-03)

ESTATE PLANNING
The manner b which a person takes steps to conserve the property to be transmitted to
his heirs by decreasing the amount of estate taxes to be paid upon his death. It is
considered to be lawful tax avoidance if the means are sanctioned by law and executed
in good faith.

SCHEDULE OF TAX RATE

If the net estate is:
OVER But not Over Tax shall be + Of the excess
over
P200,000 EXEMPT
P200,000 500,000 0 5% P200,000
500,000 2,000,000 P15,000 8% P500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000, 10,000,000 465,000 15% 5,000,000
10,000,000 1,215,000 20% 10,000,000
and over

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DETERMINATION OF THE GROSS ESTATE
1. If the decedent is a resident or non-resident citizen, or a resident alien- All
properties, real or personal tangible or intangible, wherever situated.
2. If the decedent is a non-resident alien – Only properties situated in the Philippines
provided that, intangible personal property is subject to the rule of reciprocity
provided for under Section 104 of the NIRC.

GROSS ESTATE SUBJECT TO TAX

General Rule:
Gross estate shall consist of the value of all property, real or personal, tangible or
intangible, wherever situated, of the decedent (except nonresident aliens) to the extent
of the interest of the decedent at the time of his death. It shall include the following:
1. Dividends declared by a corporation before death of stockholder although paid after
death if the decedent was living on the record date.
2. Partnership profits even if paid after death of partner
3. Proceeds of life insurance policy payable to a revocable beneficiary.
4. Right of usufruct if transferable to the heirs.

Exceptions:
Other Properties Included in the Gross Estate
Properties upon which the decedent does not have interest at the time of his death but
still forms part of the gross estate:

A. Transfers in contemplation of death

1. The transfer shall be considered as transfer in contemplation of death if, during
the lifetime of the decedent, he still retained in the property of the following:
a. The possession or enjoyment thereof or
b. The receipt of the income or the fruits notwithstanding the transfer; or
c. The right either alone or in conjunction with any person, to designate person
who shall possess or enjoy the said property or income there from.

Exception: NOT considered transfers in contemplation of death – Bona fide sale

for an adequate and full consideration in money or in money’s worth.

2. The concept of transfer in contemplation of death has a technical meaning.

This does not constitute any transfers made by a dying person. It is not the mere
transfer that constitutes a transfer in contemplation of death but the retention of
some type of control over the property transferred. In effect, there is no full
transfer of all interests in the property inter vivos

B. Revocable transfers
1. A revocable transfer is a transfer b trust or otherwise. Where the enjoyment
thereof was subject at the date of his death to any change through the exercise
of a power (in whatever capacity exercisable) by:
a. The decedent alone;

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 b. The decedent in conjunction with any other person without regard to when or
from what source the decedent acquired such power, to alter, amend, revoke
or terminate; or
c. Where any such power is relinquished in contemplation of the decedent’s
death

Exception: Bona fide sale for an adequate and full consideration in money or
money’s worth

2. Power to alter, amend or revoke is considered to exist on the death of the

decedent.
a. Even though the exercise of the power is subject to a precedent of giving
notice.
b. Even though the alteration, amendment, or revocation taxes effect only on the
expiration of a stated period after the exercise of the power.

Note: Whether or not on or before the decedent’s death:

i. notice has been given or
ii. the power has been exercised

 In such cases, proper adjustment shall be made representing the interest

which would have been excluded from the power if the decedent had
lived.

 For such purpose if notice has not been given or the power has not been
exercised on or before the date of his death, such notice shall be
considered to have been given, or the power exercised, on the date of his
death.

 Only revocable transfer shall be included in the gross estate. Irrevocable

transfers are not included. Why? Revocable transfers are included in the
gross estate because of the tremendous power and control which the
transferor can anytime revoke the transfer, hence there was no transfer
made.

C. Property passing under the general power of appointment

1. Power of appointment – the right to designate the person or persons who shall
enjoy and possess certain property from the estate of a prior decedent.
2. Property over which the decedent held a power of appointment is NOT
INCLUDIBLE in his gross estate UNLESS SUCH POWER IS GENERAL.
a. General Power of Appointment – the decedent must have had a power,
exercisable in favor of himself, his estate, his creditors or creditors of his
estate.
b. A power is NOT general (specific), if it can be exercised only in favor of one
or more designated person or classes of persons exclusive of the decedent,
his estate, his creditors and creditors of his estate, or if it is expressly not

155
 exercisable in favor of the decedent, his estate, his creditors or creditors of
his estate.
3. The general power of appointment may be exercised by the decedent:
a. By will, or
b. By deed executed in contemplation of, or intended to take effect in
possession or enjoyment at, or after his death, or
c. by deed under which he has retained for his life or any period not
ascertainable without reference to his death or for any period which does
not in fact end before his death.
i. The possession or enjoyment or the right to the income from the
property, or
ii. The right either alone or in conjunction with any person to designate
the persons who shall possess or enjoy the property or the income
therefrom.

Exception: Sale for an adequate and full consideration in money or money’s

worth.

4. “Properties passing through general power of appointment” is similar to “transfers

in contemplation of death”. The only difference is that under this provision, the
property was transferred under general power of appointment.

D. Proceeds of life insurance

1. To be subject to estate tax, the following requisites must be present:
a. The decedent takes an insurance policy on his own life, and
b. The amounts are receivable by:
i. The estate, his executor or administrator IRRESPECTIVE of whether
or not insured retained power of revocation;
ii. Any beneficiary designated as revocable
2. The proceeds of life insurance are NOT included in a decedent’s gross estate
hence, not subject to estate tax when:
a. The beneficiary is other than the estate, his executor, or administrator; and
b. The designation is irrevocable

E. Transfers for Insufficient Consideration

1. Transfers for Insufficient Consideration – transfers, trusts, interests, rights or
powers (denominated as transfer in contemplation of death revocable transfer
and property passing under general power of appointment) made created,
exercised or relinquished for a consideration in money or money’s worth. But is
NOT a bona fide sale for an adequate and full consideration in money or money’s
worth.

2. The value to be included in the gross estate is the excess of the fair market
value of the property at the time of the decedent’s death over the consideration
received. This is applicable in cases of:
a. Transfers in contemplation of death,

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 b. Revocable a transfers, and
c. Transfers under general power of appointment

Formula:
FMV of the property at decedent’s death
- Actual consideration received by the decent
-----------------------------------------------------------------
Amount includible in decedent’s gross estate

Valuation of the Gross Estate (Sec. 88, NIRC and Sec. 5, RR 02-03)
1. Real Property
a. FMV as determined by the Commissioner (Zonal Value); or
b. FMV as shown in the schedule of values fixed by the provincial and city
assessors
Note: whichever is HIGHER.

2. Personal Property
General Rule: FMV as of the time of death.
Exception: Shares of Stocks
a. Listed Shares – FMV is the arithmetic mean between the highest and lowest
quotation at the date of death, OR the date nearest the date of death, if none
is available on the date of death itself.
b. Unlisted shares – FMV is dependent on:
i. PREFERRED shares: valued at PAR VALUE
ii. COMMON shares: valued based on BOOK VALUE

Note: In determining the book value of common shares, the ff. shall not be
considered:
 Appraisal surplus
 The value assigned to preferred shares, if there are any.

3. Right to usufruct, use or habitation annuity – the probable life of the

beneficiary in accordance with the latest basic standard mortality table is to be
taken into account, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
4. If there is an improvement – the value of improvement is the construction cost
per building permit of the fair market value per latest tax declaration.

Property Relations between Spouses

The property relations between the spouses shall be governed by contract (marriage
settlement) executed before the marriage.

In the absence of such contract or, if the contract is void:

1. On marriages contracted before august 3, 1988, the system of conjugal
partnership of gains shall govern;

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 2. On marriages contracted on or after August 3, 1988 (effectivity of the Family
Code of the Philippines,) the system of absolute community of property shall
govern.

Note: The capital of the surviving spouse of a decent shall not be deemed a part of
the gross estate. [Sec. 85 (H) NIRC]

Capital under the provisions of the Tax Code should be taken to mean the property
of the spouses brought into marriage. Strictly speaking, capital under the civil law
refers to the property brought by the husband to the marriage while that brought into
marriage by the wife known as the paraphernal property.

The strictissimi juris principle on the interpretation of the exclusion being an

exemption should not be applied; otherwise the result would be absurd. Applies
strictly, the exclusion does not include the property of the wife. Surely this is absurd
if only the separate property of the husband would be excluded. (Abelardo
Domondon, Basic Reviewer in Taxation 2008 ed. P. 966)

EXEMPTIONS FROM THE GROSS ESTATE (B – U – F - F)

1. The merger o usufruct in the owner of the naked title,
2. Fideicommissary substitution;
3. The transmission from the first heir, legatee or done in favor of another
beneficiary, in accordance with the desire of the predecessor;
4. All bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions no part of the net income of which inures to the benefit of
any individual: Provided, however, That not more than 30% of the said bequests,
devises, legacies or transfers shall be used y such institutions for administration
purposes. (Sec. 87, NIRC of 1997)

Deductions from the Gross Estate

A. Citizens and resident Aliens
1. Expenses, Losses, Indebtedness and Taxes (ELIT) or Ordinary Deductions
a. Funeral Expenses
b. Judicial Expenses
c. Claims against the estate
d. Claims against insolvent persons
e. Unpaid mortgages
f. Unpaid taxes
g. Losses
2. Vanishing Deductions
3. Transfer for public use
4. Family home
5. Standard Deduction
6. Medical expenses
7. Amount received by heirs under RA 4719 (Retirement Benefits )
8. Share of surviving spouse in the conjugal

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B. Non – resident Aliens
1. Expenses, losses, indebtedness and taxes (ELIT) (ordinary deductions)

Formula:
Phil. Gross Estate
Allowable = --------------------------- X ELIT
Deduction World Gross Estate

2. Transfer for public use

3. Vanishing deduction on property in the Philippines
4. Conjugal share of the surviving spouse

The following expenses are not allowed as deductions to non – resident

aliens:
1. Family home
2. Standard deduction
3. Hospitalization expenses
4. Retirement pay

A. Ordinary Deductions (ELIT)

1. Actual Funeral Expenses
Deductions Allowed: The actual funeral expenses OR 5% of the gross estate
whichever is lower but not exceeding P 200, 000. 00

Actual funeral Expenses – Those which are actually incurred in connection with
the interment or burial of the deceased. Expenses must be duly supported by
receipts or invoices or other evidence to show that they were actually incurred.

Funeral Expenses Allowed as Deductions (3rd par. Sec. 6 [A][1], Rev. Regs. No.
2-2003)
a. Mourning apparel of the surviving spouse or unmarried minor children of the
deceased bought and used on the occasion of the burial;
b. Expenses for the deceased’s wake, including food and drinks;
c. Publication charges for death notices;
d. Telecommunication expenses incurred informing relatives of the deceased;
e. Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In
case the deceased owns a family estate or several burial lots, only the value
corresponding to the plot where he is buried is deductible;
f. Interment and/or cremation fees and charges; and
g. All other expenses incurred for the performance of the rites and ceremonies
incident to interment.

Funeral Expenses NOT allowed as Deductions

 Expenses incurred after the interment, such as prayers, masses, entertainment
or the like are not deductible. (4th par. Sec. 6 [A][1] RR No. 2-2003)

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 Any portion of the funeral or burial expenses borne or defrayed by relatives and
friends of the deceased are not deductible (Ibid)
 Medical expenses as of the last illness will not form part of funeral expenses butt
should be claimed as medical expenses incurred within 1 year before the death
of the decedent (5th par. Ibid)

2. Judicial Expenses
Judicial Expenses of the Testamentary or Intestate Proceedings – The
expenses include those incurred in:
a. Inventory – taking of assets comprising the gross estate
b. Administration
c. Payment of debts of the estate, and
d. The distribution of the estate among the heirs.

Note:
 It must be incurred during the settlement of the estate but not beyond the last day
prescribed by law, or extension thereof, for the filling of the estate tax return.
 Any deduction for unpaid judicial expenses should be supported by a sworn
statement of account issued and signed by the creditor. (Sec. 6 (A) (2)R.R. 02-
03)

Attorney’s fees
 Attorney’s fees incident to litigation incurred by the heirs in asserting their
respective rights or claims as to who are entitled to the estate left by the
deceased. (Johannes vs. Imperial, G.R. No. L-19153, June 30, 1922)
 Attorney’s fees in order to be DEDUCTIBLE from gross estate must be essential
to the collection of assets, payment of debts, or distribution of the property to the
person entitled to it. The services for which the fees are charged must relate to
the proper settlement of the estate. (CIR vs. Court of Appeals G.R. No. 123206,
March 22, 2000)

Extrajudicial Expenses
 Although the Code and the revenue regulation are silent on deductibility of
extrajudicial expenses, the High Court ruled that since the provision of the Code
on this matter was copied from the laws of the U.S. where extrajudicial expenses
are considered as deduction from the gross estate, then it is proper to consider
them as deduction provided these are incurred for the settlement of the estate of
the deceased (Pajunar v. Commissioner, 328 SCRA 666).
 Notarial fee for extra-judicial settlement and attorney’s fee for guardianship
proceedings are allowable as deductions from gross estate of decedent. (CIR v.
CA G.R. No. 123206, march 22, 2000.)

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Not included as judicial expenses o the testamentary and judicial proceedings
a. Expenditures incurred for the individual benefit of the heirs, devisees or legatees;
b. Compensation paid to a trustee of the decedent’s estate when it appeared that
such trustee was appointed for the purpose of managing the decedent’s real
property for the benefit of the testamentary heir;
c. Premiums paid on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a qualification for the
office and not necessary for the settlement of the estate;
d. Attorney’s fees incident to litigation incurred by the heirs is asserting their
respective rights (Commissioner of Internal Revenue vs. Court of Appeals, et al.,
G.R. No. 123206, March 22, 2000 )

3. Claims Against the Estate

This refers to debts which may arise out of contract, tort or under operation of law
and are properly chargeable and enforceable against the estate.

Requisites:
a. Must be a personal obligation of the deceased EXISTING at the time of
death, except those incurred incident to his death or those medical expenses;
b. Claims must be incurred in good faith and for an adequate consideration in
money or money’s worth;
c. Claims must be valid in law and enforceable in court; and
d. Claims must not have been condoned by the creditor or the action must not
have prescribed.

The date-of-death valuation rule should be applied. Post-death developments

should NOT be considered in determining the net value of the estate (Dizon
v. CTA, G.R No. 140944, April 30, 2008)

Note: If claim arose out of a debt instrument (Substantiation Requirement)

a. Debt instrument must be NOTARIZED
b. If contracted within 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.

4. Claims Against Insolvent Persons r\Requisites:

a. The amount thereof has been initially included as part of his gross estate (for
otherwise they would constitute double deductions if they were to be
deducted); and
b. The incapacity of the debtors to pay their obligation is proven.

5. Unpaid Mortgages
Requisites:
a. The value of the decedent’s interest therein, undiminished such mortgage or
indebtedness, is included in the value of the gross estate;

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 b. The mortgages were contracted bona fide and for an adequate and full
consideration in money or money’s worth.
 In case the loan of the decedent is only an accommodation loan, the value
of the loan must be included as a receivable of the estate (RR No. 2-
2003)

Note: If there is a legal impediment to recognize the same as receivable of

the estate, said unpaid obligation shall not be allowed as deduction
.
6. Unpaid Taxes
Requisites:
a. Taxes which have accrued as of or before the death of the decedent; and
b. Unpaid as of the time of his death, regardless of whether or not it was
incurred in connection with trade or business.

7. Losses
Requisites:
a. Losses incurred during the settlement of the estate;
b. Arising from fires, storms, shipwreck, or other casualties , or from robbery,
theft, or embezzlement;
c. When such losses are not compensated for by insurance or otherwise;
d. At the filing of the estate tax return, such losses have not been claimed as a
deduction for income tax purposes in an income tax return;
e. Losses incurred not later than the last day for the payment of the estate tax
as prescribed by law

Note: Casualty loss can be allowed as deduction in one instance only, either for
income tax purposes.
B. Transfer for Public Use
The amount deductible shall be the entire amount of all bequest, legacies,
devises or transfer to or for the use of the Government, EXCLUSIVELY FOR
PUBLIC PURPOSE.

Requisites:
1. The disposition is in the last will and testament;
2. To take effect after death;
3. In favor of the government of the Philippines or any political subdivision
thereof; and
4. For exclusive public purpose.

Note: This should also include bequests, devices, or transfer to social welfare,
cultural and charitable institutions.

C. Vanishing Deduction Or Property Previously Taxed

1. Vanishing Deductions – The deduction allowed from the gross estates of
citizens, resident aliens and non-resident estates for properties which were

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 previously subject to donors or estates taxes. The deduction is called a
vanishing deduction because the deduction allowed diminishes over a period
of 5 years. It is also known as a deduction of property previously taxed.

Note: In property previously taxed, there are two (2) transfers of the property.

 Within a period of 5 years, the same property has been transferred from
the first to the second decedent of from a donor to the decedent.
 In such a case, the first transfer has been subjected to a transfer tax. The
second transfer would now be subject to a vanishing deduction as
provided in the code.

2. Requisites for Deductibility (DIPIN)

a. Death- the present decedent died within five years from the receipt of the
property from a prior decedent or donor;
b. Identity- The property sought to be deducted is the one received from a
prior decedent or donor
c. Previous determined and paid the donor’s tax on the gift or estate tax on
the prior succession was finally determined and paid
d. Inclusion The property must have formed part of the gross estate situated
in the Philippines of the prior decedent, or the total amount of the gifts of
the donor
e. No previous deduction on the property was allowed to the estate of the
prior decedent.

Conditions for Deductibility:

1. The gift tax or estate tax imposed were finally determined and paid by on
or behalf of such donor or estate of such prior decedent;
2. The deduction allowed is only in the amount finally determined as the
value of such property in determining the value of the gift, or the gross
estate of such prior decedent and
3. Only to the extent that the value of such property is included in the
decedents gross estate, and
4. Only if in determining the value of no deduction was allowed for property
previously taxed in respect of the property or properties given in exchange
therefore.
5. Where a deduction was allowed of any mortgage or lien in determining the
gift tax, or the estate tax of the prior decedent, which were paid in whole or
in part prior to the decedent’s death, then the deduction allowable for
property previously taxed shall be reduced by the amount so paid.
6. Such deduction allowable shall be reduced by an amount which bears the
same ratio to the amounts allowable as deduction for expenses, losses,
indebtedness, taxes, and transfers for public use as the amount otherwise
deductible for property previously taxed bears to the value of the
decedent’s estate.

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 7. Where the property referred to consist of two or more items, the aggregate
value of such items shall be used for the purpose of computing the
deduction.

Formula for Computing Vanishing Deduction (VD)

Step 1:
Value of the Property Subject to VD
(Less) Any Mortgage due on that Property
RESULT 1

Step 2:
Value of the Property
Subject to VD x ELITT = RESULT 2
Value of the Estate

Step 3:
Result 1
(Less) Result 2
Net Value

Step 4:
% of the value
Net x of the property = VANISHING
Value allowed as deduction DEDUCTION

Property previously taxed allowed as a deduction

1. In an amount equal to the following values:
Period prior to the death of the % of the value of the property allowed
decedent as deduction
If the prior decedent died within 1 year 100%
prior to the death of the decedent, or if
the property was transferred to him by
gift within the same period prior to his
death.
If the prior decedent died more than 1 80%
year but not more than 2 years prior to
the death of the decedent, or if the
property was transferred to him by gift
within the same period prior to his death.
If the prior decedent died more than 2 60
years but not more than 3 years prior to
the death of the decedent or if the
property was transferred to him by gift
within the same period prior to his death.
If the prior decedent died more than 3 40%

164
 years but not more than 4 years prior to
the death of the decedent or if the
property was transferred to him by gift to
him by gift within the same period prior to
his death.
If the prior decedent died more than 4 20%
years but not more than 5 years prior to
the death of the decedent or if the
property was transferred to him by gift to
him by gift within the same period prior to
his death.
2. Any property forming a part of the gross estate situated in the Philippines;
3. Of any person who died within 5 years prior to the death of the decedent, or
transferred to the decedent by gift within 5 years prior to his death,
a. Where such property can be identified as having been received by the
decedent from the donor by gift, or from such prior decedent by gift, bequest,
devise or inheritance; or
b. Which can be identified as having been acquired in exchange of the property
so received.

D. Family Home
1. Family Home- the dwelling house, including the land on which it is situated,
where the husband or the wife, or head of the family, and members of their
family reside, as certified by the Barangay Captain of the locality. The family
home is deemed constituted on the house and lot from the time it is actually
occupied as a family residence and is considered as such for as long as any
of its beneficiaries actually reside therein.
 The family home is generally characterized by permanency, which is the
place to which whenever absent for business or pleasure, one still intends
to return.
 The family home must be part of the properties of the absolute community
of property or of the conjugal partnership or, of the exclusive properties of
either spouse depending upon the classification of the property (family
home) and the property relations prevailing on the properties of the
husband and wife.

Conditions for Deductibility:

1. The family home must be the actual residential home of the decedent and his
family at the time of his death, as certified by the Barangay Captain of the
locality where the family home is situated;
2. The total value of the family home must be included as part of the gross estate
of the decedent; and
3. Allowable deduction must be in an amount equivalent to:
a. The current fair market value of the family home as declared or included in
the gross estate, or

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 b. The extent of the decedent’s interest (whether conjugal/community or
exclusive property), whichever is lower, but not exceeding P1,000,000.

Note: The excess shall be subject to estate tax.

E. Standard Deduction
A deduction in the amount of One Million Pesos (P1,000,000) shall be allowed as
an additional deduction without need of the substantiation.
The full amount of P1,000,000 shall be allowed as deduction for the benefit of the
decedent.

Difference between Standard Deduction under Sec. 86 (A) (5) and Optional
Standard Deduction (Sec. 34(L)

Standard Deduction Sec. 86 (A) (5) Optional Standard Deduction Sec. 34

(L)
Deduction in addition to the other Deduction in lieu of itemized deductions
deductions
Amount of deduction P1,000,000 Amount of deduction 40% of gross income
(RA 9504)
Available to resident citizens, non-resident Applies to all individual taxpayers except
citizens and resident aliens non-resident aliens

F. Medical Expenses
Conditions for Deductibility:
1. The expenses must have been incurred within one (1) year prior to is death;
2. Must be substantiated with receipts;
3. And it shall in no case exceed five hundred thousand pesos (P500,000)

Note: Medical expenses in exceed in P500,000.00 can no longer ber claim a

deduction under other claims.

G. Retirement Benefits (Amounts Received Under R.A. No. 4917)

Retirement benefits (granted by the private sector to its employees) is allowed as
deduction provided the amount of separation benefit is included as part of the
gross estate of the decedent.

H. Net Share of Surviving Spouse in the Conjugal Partnership or Community

Property
After deducting the allowable deductions appertaining to the conjugal or
community properties included in the gross estate, the share of the surviving
spouse must be removed to ensure that only the decedent interest in the estate
is taxed.

Note: under section 85 (H), the capital of the surviving spouse is considered as
an exclusion (meaning it is not included in the gross estate), in Section 86(C), the

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 share of the surviving spouse in the absolute community/conjugal partnership is
considered a deduction.

Summary Rules on Deductions From Gross Estate:

FE JE CAE CAIP UM UT CL
RC
NRC
RA
NRA In proportion to the value of the estate located in the Philippines as
against total estate.

SD FH ME RB TPU SS VD
RC
NRC
RA
NRA

Where:
 - Applicable/Allowed
X - Not Applicable/Not allowed

FE - Funeral Expenses
JE - Judicial Expenses
CAE - Claims against the Estate
CAIP - Claims against Insolvent Persons
UM - Unpaid Mortgage
UT - Unpaid Taxes
CL - Casualty Loss
SD - Standard Deduction
FH - Family Home
ME - Medical Expenses
RB - Retirement Benefits under RA 4917
TPU - Transfer for Public Use
VD - Vanishing Deduction
SS - Conjugal Share of Surviving Spouse

ESTATE TAX CREDIT

A tax credit against the Philippine estate tax is allowed for the estate tax or taxes
paid to a foreign country or countries.

Limitations:
1. The amount of the credit in respect to the tax paid to any country shall not
exceed the same proportion of the tax against which such credit is taken, which
the decedent’s net estate situated within such country taxable under the NIRC
bears to his entire net estate; (per country basis); and

167
2. The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the decedent’s net estate situated
outside the Philippines taxable under the NIRC bears to his entire net estate.
(overall basis)

PROCEDURE FOR ULTIMATE SETTLEMENT OF ESTATE TAX

A. Filling of Notice of Death
1. When notice of death is filled;
a. When the transferred is subject to tax; or
b. Although exempt, the gross value of the estate exceeds P 20,000.00
2. Not all transfers mortis causa requires a written notice of death to be filled
with the commissioner. It is only when the transfer is subject to tax or when
the gross estate exceeds P20,000.00
3. Period of filling – 2 months after the decedent’s death or within a like period
after qualifying as executor or administrator, the notice must be filed with the
commissioner.

B. Filling of Estate Tax Return

1. When estate tax return is filled:
a. When the gross estate exceeds P200,000.00; or

b. Regardless of the value of the estate, where the estate consists or

registered or registrable properties
 When the gross estate exceeds P2M, the estate tax return shall be
supported by a statement duly certified by a Certified public
Accountant.
 There is an additional requirement of registering the estate and getting
a separate TIN. (Sec.236 (l), (NIRC)

Note: Even if the NONRESIDENT ALIENS are taxable only for

properties situated in the Philippines, for purpose of the estate tax
return, all the properties of such nonresident, whether situated in the
Philippines or outside, shall be included in the return; OTHERWISE,
the estate shall not be allowed to claim any deduction.

2. Period to file:
General Rule: estate tax return must be filled within 6 months from the
decedent’s death.

Exception: In meritorious cases, the Commissioner may grant reasonable

extension not exceeding 30 days.

3. Where to file:
a. Authorized Agent Bank
b. Revenue District Officer
c. Collection Officer

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 d. Duly Authorized Treasurer of the city or municipality where the decedent
was domiciled at the time of his death; or
e. If there be no legal residence in the Philippines, with the Office of the
Commissioner
C. Payment of Tax
1. General Rule: “Pay-as-you-file” system – the time for paying the estate tax is
at the time the return is filed.

Exception: The commissioner may grant an extension of time.

Requisites:
a. The request of the extension must be filled before the expiration of the
original period to pay which is within 6 months from death;

b. There must be finding that the payment on the due date of the estate tax
would impose undue hardship upon the estate or any of the heirs;

c. The extension must be for a period not exceeding 5 years if the estate is
settled judicially or 2 years if settled extra judicially; and

d. The commissioner may require the posting of a bond in an amount not

exceeding double the amount of tax to secure the payment thereof.

Note: When the request for the extension is by reason of negligence,

intentional disregard the rules and regulations, or fraud on the part of the
taxpayer, no extension shall be granted.

Effects of Granting the Extension

a. The running of the statue of limitations for deficiency assessments
provided for in Sec. 203 shall be suspended.
b. Any amount paid after the statutory due date but within the extension
period shall be subject to interest but not to surcharge. (R.R. 02-03)

2. Payment of Estate Tax by Installment

In case the available cash of the estate is not sufficient to pay its total estate
liability, the estate may be allowed to pay the tax by installment and a
clearance shall be released only with respect to the property which has been
paid. (Sec. 9 (E) R.R. 02-03)

3. Persons Liable to Pay:

a. The estate tax shall be paid by the executor or administrator before
delivery to any beneficiary of his distributive share of the estate.
b. The beneficiary shall be subsidiarily liable to the extent of his distributive
share bears to the value of the total net estate.

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SAFEGUARDS IN THE NIRC FOR PAYMENT OF THE ESTATE TAX

Duties of Certain Officers or Debtors

1. Executor or administrator must ensure that payment shall be made of the
amount of which he is notified before he shall be discharged from personal
liability. (Sec. 92, NIRC)
2. Judge will not issue authorization to deliver distributive share until certification of
payment is shown. (Sec. 94, NIRC)
3. Register of Deeds shall not register in the Registry of Property any document
transferring real property or real rights therein without certification from the
Commissioner that the tax actually due thereon had been paid. (Sec. 95, NIRC)
4. Lawyer, notary public, or an government officer, intervening 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, Regional director, Revenue District Officer or
Revenue Collection Officer of such documents. (Sec. 95 NIRC)
5. A debtor of the deceased shall not pay the debts to the heirs, legatee, executor
or administrator of his creditor, unless the certification of the Commissioner that
the estate tax imposed by NIRC 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, NIRC)
6. A corporation will not transfer to new owners of shares, bonds, obligation or
rights without certification from the Commissioner that the tax actually due
thereon had been paid. (Sec. 97, NIRC)
7. When a bank has knowledge of the death of a person who maintained a joint
account, it shall not allow any withdrawal by the surviving depositor without the
above certification. (Sec. 97, NIRC)
Provided that the administrator of the estate or any one (1) of the heirs of the
decedent may, upon authorization by the Commissioner, withdraw an amount not
exceeding twenty thousand pesos (P20,000) without the said cetification.

DONOR’S TAX

Donation- is an act of liberality whereby a person (donor) dispose gratuitously of a

thing or right in favor of another (done) who accepts it

REQUISITES OF A TAXABLE DONATION

1. Capacity of the donor
All persons may contract and dispose of their property may make a donation
(Art. 735, NCC). The donor’s capacity shall be determined as of the time of the
making of the donation (Art. 737, NCC)
2. Donative intent (intention to donate)
Donative intent is necessary only in cases of direct gift. If the gift is indirectly
taking place by way of sale, exchange or other transfer of property as
contemplated in cases of transfers for less than adequate and full consideration
(Sec. 100, NIRC), not always essential to constitute a gift.

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3. Delivery, whether actual or constructive, of the subject gift;
There is delivery if the subject matter is within the dominion and control of the
done.
4. Acceptance by donee.
The acceptance is necessary, because nobody is obliged to receive a gift against
his will. And once the acceptance is made known to the donor, the sill of the
donor and done concur, and the donation, as a mode of transferring ownership,
becomes perfect. (Osorio vs. Osorio, 41 Phil. 531)

Notes:
 Acceptance must be made during the lifetime of the donor or done. If the
donor dies before he learns of the acceptance, the donation does not take
effect.
 An IMMOVABLE DONATION must be made in a public instrument specifying
the property donated. The acceptance must be made in the same deed of
donation or in a separate public instrument, but it shall not take effect unless it
is done during the lifetime of the donor. (Sec. 11, R.R. 02-03)

DEFINITION
Donor’s Tax is an exercised tax imposed on the privilege transfer of property by
way of gift inter vivos based on a pure act of liberality without any or less than
adequate consideration and without any legal compulsion to give.

NATURE
It is an excise tax on the privilege of the donor to give or on the transfer of the
property by way of gift inter vivos. It is not a property tax.

PURPOSES OF GIFT TAX OR DONOR’S TAX

1. To supplement and prevent circumvention of the estate and inheritance taxes
through the taxation of gift inter vivos without which of the property would not be
subjected to tax.
2. To prevent avoidance of income tax through the device of splitting income among
numerous donees who are usually members of a family or into may trusts with
the donor thereby escaping the effect of the progressive rates of income taxation.

APPLICABLE LAW IN DONOR’S TAX

The law in force at the time of the perfection/completion of the donation shall govern
the imposition of the donor’s tax.

WHEN DONOR’S TAX APPLY

The Donor’s Tax shall not be apply unless and until there is a COMPLETED GIFT.

The transfer of property is perfected from the moment the donor knows of the
acceptance of the done; it is completed by delivery, either actually or constructively,
of the donated property of the donated property to the done. (Sec. 11 RR No. 02-03)

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WHEN INCOMPLETE GIFT BECOMES COMPLETE
A gift that is incomplete because of reserve powers becomes complete when either:
1. The donor renounces the power; or
2. His right to exercise the reserved power ceases because of the happening of
some event or contingency or the fulfillment of some condition, other than
because of the donor’s
 Renunciation by the surviving spouse of his/her share in the conjugal
partnership or absolute community after the dissolution of the marriage in
favor of the heirs of the deceased spouse or any other person/s s subject to
donor’s tax.
 General renunciation by an heir, including the surviving spouse, of his/her
share in the hereditary estate left by the decedent is not subject to donor’s
tax, unless specifically and categorically done in the favor of identified heir/s
to the exclusion or disadvantage of the other co-heirs in the hereditary estate
(Sec. 11, R.R. No. 2-2003)

STRANGER vs. RELATIVE

1. Section 99 (B) enumerates who are considered strangers in the negative:
a. A person who is NOT a brother or sister (whether by whole or half blood),
spouse, ancestor, and lineal descendants;
b. A person who is NOT a relative by consanguinity in the collateral line within
the fourth degree of relationship.

Note: A Donation is considered Made to a Stranger when it is:

i. Between Business Organizations;
ii. Between an Individual and a Business Organization. (Sec. 10B, RR 02-03)

2. A relative is taxed according to graduated tax rates in Section 99 (A) while a

stranger is taxed at a fixed rate of 30% as provided in Section 99 (B).

IMPOSITION OF TAX (Sec. 98, NIRC)

There shall be levied, assessed collected and paid upon the transfer by any person,
resident or non-resident of the property by gift, a tax.

The tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or intangible.

BASES OF VALUATION OF PROPERTY (Sec. 102, NIRC, in relation to Sec.

88B)
A. Transfer of Property as a Gift
If the gift is made in property, the fair market value (FMV) at the time will be
considered the amount of gift.
 Real Property taxable base = FMV as determined by the Commissioner
(Zonal Value) or FMV as shown in the latest schedule of values of the
provincial and city assessor (Market Value per Tax declaration), whichever is
higher.

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 If there is no zonal value, the taxable base is the FMV that appears in the
latest tax declaration
 Improvement Value of improvement is the construction cost per building
permit and/or occupancy permit plus 10% per year after year of construction
or the FMV per latest tax declaration

RATES OF TAX
1. Graduated Rates
Over But not Over The Tax Plus Of the
shall be excess over
100,000 Exempt
100,000 200,000 0 2% 100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000
 The tax for each calendar year shall be computed on the basis of total
net gifts in accordance with rates above.
 The graduated tax rates are only applicable if the done is a relative.

2. Fixed Rate
 If the done is a stranger, the tax payable by the donor shall be 30% of the
net gifts.

COMMULATIVE vs. SPLITTING METHOD

1. Cumulative method – when the donor makes two or more donations within
the same calendar year, it is required that the said donations be included in
the return for the last donation.
Illustration:
A donated to his son B in January 2007, P2, 000, 000. In March 2007, A
made another donation to Mr. B in the amount of P1, 000, 000 and in August
2007 in the amount of P500, 000

RETURN NO.1

Date of Donation Amount of Donation Donor’s Tax Paid

January 2007 P2,000,000 P 124,000[44,000 +
(P1,000,000 x.08)]

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 RETURN NO. 2

Date of Donation Amount of Donation Donor’s Tax Paid

March 2007 P2,000,000
ADD: January 2007 P1,000,000
TOTAL P3,000,000 P 204,000 [44,000
DONATION +(P2,000,000 x.08]

LESS: TAX CREDIT P 124,000

(Donor’s Tax on January 2007)
TAX DUE P 80,000

RETURN NO. 3

Date of Donation Amount of Donation Donor’s Tax Paid

August 2007 P 500,000
ADD:
January 2007 P1,000,000
March 2007 P2,000,000
TOTAL DONATION P3,500,000 P 254,000[204,000
+ (P500,000 x.10]

LESS: TAX CREDIT P 204,000

(Donor’s Tax on Jan/Mar 2007)
TAX DUE P 50,000
 Will it not amount double taxation, since the previous donations
were already subjected to donor’s tax? NO.
There is no double taxation. Under the cumulative method, the tax paid for
the previous methods will be considered as tax credit for succeeding
donations.

2. Splitting method - the donor makes two or more donations during different
calendar years;

Significance of the Two Methods

 The significance is in relation to donees. For relatives, the graduated tax rates
are applicable while for strangers, a fixed rate of 30% is applicable.

Exception: when the amount of donation is P10,000,000 or above, the

cumulative method is no longer relevant since in that case the rate
applicable is 15%, hence, it is as if the rate is fixed.

 For strangers, whether the method to be used is cumulative or splitting, it is

immaterial since any donation made to them is subject to a fixed rate of 30%.

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SPECIFIC CASES OF TRANSFERS INTER VIVOS:
1. Donations between spouses
General Rule: Such donation during their marriage is void.
Exceptions:
a. Donations mortis causa
b. Moderate gifts which the spouses may give each other occasion of any
family rejoicing
Note: Void donations are NOT subject to donor’s tax. However, if it was
already paid, taxpayer only have two (2) years from the date of payment to
ask or file for a claim for refund, regardless of any supervening event.

2. Donations by one of the spouses

 If what was donated is a conjugal or community property and only the
husband signed the deed of donation, there is only one donor to donor’s
tax purposes, without prejudice to the right of the wife to question the
validity of the donation without her consent pursuant to the pertinent
provision of the civil code of the Philippines and Family Code of the
Philippines (R.R. 2-2003).
 Husband and wife are considered separate and distinct taxpayers for
purposes of donor’s tax.

3. Donations made to conceived and unborn child

 Such donations may be accepted by those persons who would legally
represent them if they were already born, (Art. 742, NCC)

4. Contribution for election campaign

 The NIRC provides that ‘Any contribution in cash or in kind to any
candidate, political party or coalition of parties for campaign purposes
shall be governed by the Election Code, as amended.”
 Republic Act No. 7166 providing for synchronized national and local
elections provides that “Any provision of law to the contrary
notwithstanding, any contribution in cash or in kind to any candidate, or
political party or coalition of parties for campaign purposes, duly reported
to the Commission, shall NOT be subject to the payment of any gift tax.”

Political Contributions made prior to the passage of RA 7166 on Nov. 25,

1991 were subject to donor’s tax. (Abello v. CIR, G.R. No. 129721,
Feb.23, 2005)

Note: No corporation, domestic or foreign, shall give donations in aid of

any political party or candidate or for purposes of partisan political activity.
(Sec. 36 Corporate Code)

5. Transfer for less than adequate and full consideration

 The property is transferred for less than adequate and full consideration in
money or money’s worth, The amount by which the FMV exceeds the

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 consideration shall be DEEMED A GIFT and be included in computing the
amount of gifts madde during the year.

Exception: Where property transferred is real property located in the

Philippines considered as capital asset, the donor’s tax is NOT applicable
but the FINAL INCOME TAX of 6% of the fair market value or gross selling
price, whichever is lighter.

Reason: The Code considers the transfer as a donation since what

motivated the transferor in transferring the property in his generosity.

 It is as if the property was donated but in order to avoid paying donor’s

tax, the donor opted to transfer the property for inadequate
consideration.

6. Forgiveness of indebtedness
 If the creditor condones the indebtedness of the debtor the following rules
apply:
a. On account of debtor’s services to the creditor the same is in taxable
income to the debtor.
b. If no services were rendered but the creditor simply condones the debt
it is taxable gift not the taxable income.

7. Renunciation of the share of the surviving spouse

 Renunciation by the surviving spouse of his/her share in the CPG or ACP
after the dissolution of the marriage in favor of the heirs of the deceased
spouse or any other person is subject to donor’s tax. (Sec. 11 R.R. 02-03)

8. Renunciation of Inheritance to a co-heir

 A general renunciation of inheritance in favor of a co-heir is NOT a donation
for the purpose of the taxation, unless specifically and categorically done in
favor of identified heir/s to the exclusion of disadvantage of the other co-
heirs in the hereditary estate. The same becomes the property of the co-heir
is treated as an additional inheritance. (Sec. 11 R.R. 02-03

9. Renunciation of inheritance to another person not a co-heir

 In this case there is donation since there is a change in the distribution of
the estate.

10. Life insurance with third person as beneficiary

 There is donation in favor of the beneficiary, not in the sum received by
the heir from the insurer, but in the total amount of premiums that have been
paid by the insured, provided that:
a. All the benefits of which are payable to beneficiaries other than the
insured’s estate and the insured retains no power to change the
beneficiaries;

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 b. Insured relinquishes his assignment, by designation of a new
beneficiary, or otherwise, every power retained by him in a previously
issue policy.
 In this case, an additional gift results everytime a premium is paid by the
insurer

11. Remuneratory donations

 These are donations which compensate past services which do not
constitute demandable debts. These donations are not in consideration of
liberality but of services performed. These then are not subject to gift tax
but rather to income tax.

DONATIONS WHICH ARE TAX EXEMPT

A. Dowries
 Requisites:

1. The gift was made on account of marriage;

2. It was made before or within one year after the celebration of
marriage;
3. Donor is parent
4. Donee is a legitimate, recognized natural, or adopted child of the
donor
5. The amount of the gift exempted is only the extent of the first
P10,000

B. Gifts made to the Government

 Gifts made to or for the use of the National government or any entity
created by any of its agencies which is not conducted for profit or to any
political subdivision of the said Government.

C. Gift in favor of an educational and/or charitable, religious, cultural or

social welfare corporation, institution, accredited non-government
organization or philantrophic organization or research institution:

Requisites:
1. Not more than 30% of the said gift should be used for administrative
purposes;
2. The done must be a non-stock, non-profit organization or institution;
3. The done organization or institution should be governed by trustees who
do not receive dividend;
4. The said done should not be authorized to receive dividend;
5. Said donee devotes all of its income to the accomplished and promotion of
its purposes;
6. The NGO must be accredited by Philippine council for NGO Certification
(R.R. 03-02); and

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 7. The donor engaged in business shall give notice of donation on every
donation worth at least P50,000 to the RDO which was jurisdiction over
his place of business within 30 days after receipt of the qualified donee’s
institution’s duly issued Certificate of Donation.

D. Athlete’s Prizes and Award

The donation must be a prize or award given to athletes:
1. In local and international sports tournaments and competitions;
2. Held in the Philippines or aboard
3. Sanction by their respective national sports associations. (Sec. 1, RA
7594)

E. Encumbrances on the property donated if assumed by the donee

F. Donations made to the following entities exempted under special laws

1. Aquaculture Department of the Southeast Asian fisheries Development
Center of the Philippines
2. Development academy of the Philippines
3. Integrated Bar of the Philippines
4. International Rice Research Institute
5. National Museum
6. National Library
7. National Social Action Council
8. Ramon Magsaysay Foundation
9. Philippine Inventors Commission
10. Philippine American Cultural Foundation
11. Task Force on Human Settlement on the donation of equipment, materials
and services

EXEMPPTION OF GIFTS MADE BY NON-RESIDENTS ALIENS

1. Gifts made to the Government

2. Gift in favor of an educational and/or charitable, religious, cultural or social
welfare corporation, institution, accredited non-government organization or
philanthropic organization or research institution

Tax Credit for Donor’s Tax Paid to Foreign Country (Sec. 101C NIRC)

Limitations to the tax credit:

1. The amount of credit shall not exceed the same proportion of the tax against
such credit is taken, which the net gifts situated within such country taxable
under donor’s tax bears to entire net gifts; (per country basis)

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 2. The amount of the tax credit shall not exceed the same proportion of the tax
against such credit is taken, which the donor’s net gifts situated outside the
Philippines taxable under donor’s tax bears to his entire gifts. (Overall basis)

Note: This tax credit is allowed only for residents and citizens of the Philippines
for the donor’s taxes they paid in a foreign country.

RETURN, FILING AND PAYMENT

A. Filing of Return – Any individual who makes any transfer by gift and are
required to pay tax due shall make a return under oath in duplicate.
1. Each gift made during the calendar year which is to be included in
computing net gifts;
2. Deduction claimed and allowable;
3. Any previous net gifts made during the same calendar year
4. The name of the donee
5. Relationship of the donor to the donee;
6. Such further information as the Commissioner may require (Sec. 103
NIRC, RR 2-2003).

B. Time of Filing - The return shall be filled within thirty (30) days after the
date the gift is made and the tax due thereon shall be paid the time of filing.
(Pay-as-you-file system)

C. Payment of Gift Tax – The donor’s tax is paid upon filing of return. No
extension is allowed as compared to estate tax.

NIRC REMEDIES
OUTLINE OF REMEDIES
REMEDIES OF THE GOVERNMENT
I. Assessment
II. Collection
A. Administrative
1. Tax alien;
2. Distraint of personal property or garnishment of bank deposit
3. Levy of real property
4. Forfeiture
5. Compromise and Abatement
6. Penalties and Fines
7. Suspension of Business Operations
B. Judicial
1. Civil
2. Criminal

REMEDIES OF THE TAX PAYER

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 I. Before Payment
A. Administrative Remedies
1. Protest against Assessment
2. Entering into a compromise
B. Judicial Remedies
1. Appeal to the CTA up to the Supreme Court
II. After Payment
A. Administrative Remedies
1. Claim for Tax Refund or Tax Credit

REMEDIES OF THE GOVERNMENT

The Code provides the Government with two remedies, namely

1. Assessment; and
2. Collection

TWO KINDS OF ASSESSMENT AND COLLECTION:

1. Normal or Ordinary Assessment and Collection (Sec. 203, NIRC) Available to
the government if there was a return filed by the taxpayer and such return is not
false or fraudulent.

When is a return Filed?

 Before the deadline
 On the date of the deadline
 After the deadline

Two Ways of Counting the 3-year Prescriptive Period for Assessment:

1. If return was filed before or on the last day prescribed by law for filing of the return,
the three year period shall be counted from the date of the DEADLINE.
2. If the return was filed beyond the period prescribed by law, the three year period
shall be counted the day the return was filed. [Sec. 203, 1997 NIRC]

Prescriptive Period for Assessment: at anytime within three (3) years:

a. After the last day prescribed by law for the filing of the return; or
b. Where a return is filed beyond the period prescribed by law, the three year period
shall be counted from the day the return was filed; or
c. Where the return was filed before the last day prescribed by law for the filing thereof,
it shall be considered as filed on such last day

Prescribed Period of Collection: The tax code does not provide for a prescriptive
period for the collection of taxes under Section 203.

There are two views regarding the prescriptive period for collection:
a. 1st VIEW: Five (5) years from final assessment. Under the old Code; the prescriptive
period for both normal and abnormal is three (3) years. Under the new Code, the
prescriptive period for abnormal is five (5) years, hence it can be concluded that the

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 prescriptive period for normal is also five years. (Sababan, Taxation Law Review
2008 ed., p.182)
b. 2nd VIEW: Within three (3) years from the issuance of an assessment notice where
there was a return filed. The five (5) year period refers to an instance where there is
an assessment issued on the basis of false or fraudulent return, the absence of a
return. (Sec. 222 (c) in relation to Sec. 222 (a) of the NIRC of 1997) or in the
instance of an extended assessment under sec. 222 (d). The interpretation should
be in favor of the taxpayer in the same category as one who is not “law-abiding,” i.e.
who files a false or fraudulent, who does not file a tax return, etc. (Domondon, Bar
Reviewer in taxation Vol. 1, 2008 ed. Pp. 414-415)

2. Abnormal or Extraordinary Assessment and Collection (Sec.222, NIRC) –This

remedy is resorted to by the government in cases where the taxpayer:
a. Omits or fails to file his return; or
b. The return filed was fraudulent; or
c. The return filed was false.

The government has two remedies (options) under ABNORMAL assessment and
collection:

a. Assess and Collect; or

Prescriptive Period for Assessment: Within ten (10) years from the discovery
of the non-filing of the return or the fraudulent or false return.

Prescriptive Period For Collection:

Five (5) years from the date of final assessment.

b. Collect without assessment through Judicial Action

Prescriptive Period for Assessment: there would be no prescriptive period for
assessment as there is no assessment.

Prescriptive Period for Collection:

Ten (10) years from the date of discovery of the non-filing of the return or the
fraudulent or false return.

Can the BIR just collect without assessment? This was answered by the Supreme
Court in the Fortune Tobacco case where it was held that the BIR can avail on the
remedy of collection without assessment. The BIR is allowed to exercise the option.
(Sababan, Taxation Law Review, 2008 ed., p. 183)

Table of Prescriptive Periods

Normal or Ordinary Abnormal or Collection without
Assessment Extraordinary Assessment
Assessment
Prescriptive Period for Assessment
3 years from the last day

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 prescribed by law for the No prescriptive period for
filing of the return, or if 10 years from discovery assessment when the
filed beyond the period of non filing of return or government opts to
prescribed by law from filing of false or fraudulent collect without
the day the return was return assessment.
filed

Prescriptive Period for Collection

3 years from issuance of
assessment, unless
there is fraud in which
case 5 years; or a period 10 years from discovery
agreed upon between 5 years from the date of of non filing or fraudulent
the Commissioner and final assessment or false return
the taxpayer (which may
be less than 5 years), in
case of an extended
assessment agreed upon
under Sec. 222 (b)

The three year prescriptive period expire on the 1095th day notwithstanding
the fact that within the period there is a leap year which is of 366 days (RMC No.
48-90)

Grounds for suspension of the running of the statute of limitations (PRA

PO)
1. When the CIR is Prohibited from making the assessment or beginning the
distraint or levy or a proceeding in court, AND for sixty (60) days thereafter.

Note: This may happen when there is appending petition for review in the
CTA from the decision on the protested assessment; the filing of such petition
interrupts the running of the prescriptive period for collection. But the filing of
a criminal case for the taxpayer does not suspend the prescriptive period;
such is entirely separate and distinct from the civil action. (Dimaampao, Tax
Principles and Remedies 2002)

2. When the taxpayer requests for a Reinvestigation which is granted by the

CIR;

Notes:
 The above section is plainly worded. In order to suspend the running of
the prescriptive periods for assessment and collection, the request for
reinvestigation must be granted by the CIR. x x x The act of requesting
the investigation alone does not suspend the period. The request should
first be granted, in order to effect suspension. x x x The burden of proof
that the request for reinvestigation has been actually granted shall be on

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 the CIR. Such grant may be expressed in this communications with the
taxpayer or implied from the action of the CIR or his authorized
representative in response to the request for reinvestigation. (BPI v. CIR,
G.R. No. 174942, 07 March 2008, citing CIR v. Suyoc Consolidated
Mining Company, 104 Phil. 819, 1958)
 The only agreement that can suspend the running of the prescriptive
period for collection of taxes is WRITTEN agreement by TP and CIR
before the expiration of the 5-year period, extending period of limitation
prescribe by law (Mamalateo, Tax Reviewer)

Why does the request for the reinvestigation and not one for
reconsideration toll the running of the Statute of Limitations?
The former , which entails reception and evaluation of additional evidence,
will take more time than the latter, which will be limited to the evidence
already at hand (CIR vs. Philippine Global Communications, G.R. No.
167146, Oct 31, 2006)

3. When the taxpayer cannot be located in the Address given by him in return,
UNLESS he informs the CIR of any change in his address.

4. When the warrant of distraint or levy is duly served, AND no Property is

located ; and

Warrant duly served upon:

a. The taxpayer; or
b. His authorized representative; or
c. Member of his household with sufficient discretion.

5. When the taxpayer is Out of the Philippines (Sec. 223, 1997 NIRC).

Note: The reckoning point of prescription would be the date when the
demand letter or notice of assessment is released, mailed or sent to the
taxpayer that constitutes actual assessment (Basilan Estate, Inc. v. CIR, GR
No. L-22492)

In the case of Phoenix v. Commissioner (14 SCRA 52), The SC explained the
following rules in case there is an amendment of the return:
 If the amendment is substantial, the counting of the prescriptive period shall
reckoned on the date the substantial amendment was made.
 If the amendment was a superficial, the counting of the prescriptive period is
still the original period.

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 ASSESSMENT

Assessment – official action of an administrative officer in determining the amount of

tax due from the taxpayer, OR it may be a notice to the effect that the amount therein
stated is due from the taxpayer as a tax with a demand for payment of the tax or
deficiency stated therein (Aban, 2001, p. 175)

General Rule: Taxes are self-assessing and thus, do not require the issueance of an
assessment notice in order to establish the tax liability of a taxpayer.

Exceptions:
1. Tax period of a taxpayer is terminated (Sec. 6D, NIRC)
2. Deficiency tax liability arising from a tax audit conducted by the BIR (Sec. 56B,
NIRC)
3. Tax lien (Sec. 219 NIRC)
4. Dissolving corporation (Sec. 52C, NIRC)

KINDS OF ASSESSMNET (SIDE - J)

1. Self-Assessment – one in which the tax is assessed by the taxpayer himself.
2. Deficiency Assessment – made by the tax assessor himself whereby the correct
amount of the tax is determined after an examination or investigation is conducted.
3. Illegal And Void Assessment – tax assessor has no power to assess at all.
4. Erroneous Assessment – assessor ha power to assess but errs in the exercise
thereof.
5. Jeopardy Assessment - is a tax assessment made by an authorized Revenue
Officer without the benefit of complete or partial audit, in light of the RO’s belief that
the assessment and collection of a deficiency tax will be jeopardized by delayed
cause by the taxpayer failure to:
a. Comply with audit and investigation requirements to present his books of
accounts and/or pertinent records, or
b. Substantiate all or any of the deductions, exemptions or credits claimed in his
return.

MEANS EMPLOYED BY THE COMMISSIONER IN THE ASSESSMENT OF TAXES

The Commissioner or his duly authorized representative is authorized to use the
following powers to make assessment (Sec. 6. NIRC):
1. Examination of return and determination of tax due ;
2. Use of best evidence obtainable
a. When a report of return required to be filed shall not be forthcoming within the
time fixed by laws, rules and regulations;
b. When there is a reason to believe that any such report or return is false,
incomplete or erroneous;

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3. Authority to conduct inventory taking, surveillance and prescribe gross sales and
receipts if there is reason to believe that the taxpayer is not declaring his correct
income, sales or receipts for internal revenue purposes;
4. Authority to terminate taxable period in the following instances:
 Taxpayer is retiring from business subject to tax;
 Taxpayer is intending to leave the Philippines or to remove his property there
from or to hide or conceal his property; and
 Taxpayer is performing any act tending to obstruct the proceedings for the
collection of taxes.
5. Authority to prescribe real property values;
6. Authority to inquire into bank deposit accounts in the following instances:
a. A decedent to determine his gross estate;
b. Any taxpayer who has filed an application for compromise of his tax liability by
reason of financial incapability to pay his tax liability.
c. A specific taxpayer/s subject of a request for the supply of tax information from a
foreign tax authority pursuant to an international convention or agreement on tax
matters to which the Philippines is a signatory or a party of.

Condition:
The requesting foreign tax authority is able to determine the foreseeable relevance
of certain information required to be given to the request. (RA No. 10021, Exchange
of Information on Tax Matters Act of 2009, Sec. 3)

Note: See Annex of Ra 10021 under Tax Administration and Enforcement.

7. Authority to accredit and register tax agents; and
8. Authority to prescribe additional procedural or documentary requirements.

FORMS OF ASSESSMENT
a. Formal Assessment Notice (FAN) – generally, an assessment refers to the formal
assessment notice (BIR Form No. 1708), which is seriously numbered, accountable
form of the government.

Thus, a pre-assessment notice issued by a revenue official preparatory to the

issuance of a formal or final assessment notice as part of the procedural due
process is not, legally speaking, an assessment, even if it contains a computation of
the tax liabilities of a taxpayer and a demand for payment of the computed tax
liabilities. (Reviewer on Taxation, Mamalateo).

b. Informal Written Notice

An assessment may also be in the form of a letter or other less formal
communications to the taxpayer, In order to constitute an assessment, the
notification must contain an outright demand for payment of the amount alleged to
be due (Mamalateo Reviewer on Taxation)

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 ASSESSMENT ON PROCESS
Procedure in the Issuance of a deficiency tax assessment [Sec. 228; Revenue
Regulation 122-99]

I. Issuance of Letter of Authority (LA).

Letter of Authority – an official document that empowers a Revenue officer to
examine and scrutinize a taxpayer’s books of accounts and other accounting records,
in order to determine the taxpayer’s correct internal revenue tax liabilities.

Who may issue letter of authority?

A. Commissioner of Internal Revenue – After a return has been filed, the CIR or
his duly authorized representative may authorized the examined of the books of
any taxpayer and the assessment of the correct amount of tax (Sec. 6, NIRC)

B. Revenue Regional Director – shall approved and signed all LA’s for all audit
case within his regional jurisdiction
Except:
1. Cases involving civil or criminal tax fraud falling under the jurisdiction of the tax
Fraud division of the Enforcement Service and;
2. Policy cases under audit by Special Teams in the National Office (RMO 36-99)

Notes:
 LA must be served to the concerned taxpayer within 30 days from its date of
issuance; otherwise, it shall become null and void. The taxpayer shall then
have the right to refuse the service of this LA unless the LA is revalidated.
 A tax return filed by a taxpayer may be amended, revised or modified within 3
years from date of such filing; provided, that no notice for audit, or
investigation of such return, statement or declaration or letter of authority for
investigation has been actually served upon him (Sec. 8, NIRC; R.R. No. 12-
99).

II. The Revenue Officer conducts audit or tax investigation

A. If the Revenue Officer does not find any deficiency taxes – audit ends;
B. If the Revenue Officer finds that there is a deficiency – he informs the taxpayer
and write in his report whether or not the taxpayer is amenable with his findings.
1. If taxpayer is AMENABLE – taxpayer pays the tax;
2. If taxpayer is NOT amenable – The Revenue Officer shall state in his audit
report that the taxpayer does not agree with his findings. Such report is
submitted to the Revenue District Officer or the Special Investigation Division
9in case of Revenue Regional Office) or to the Chief of Division (in case of
the BIR National Office) for review.

Note: A Revenue Officer is allowed only 120 days from the date of receipt of LA
by the taxpayer, to conduct the audit and submit the required report of the
investigation. If the Revenue Officer is unable to submit his final report of

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 investigation, he must the submit a Progress Report to his Head of Office and
surrender the LA for revalidation.

 Privilege of Last Priority –the audit and investigation of the returns shall be
conducted only when the authorized by the Commissioner, subject to the
condition that the taxpayer pays an amount or additional amount that is higher
by a certain percentage over his last year’s tax payment and the filing of certain
return or supplementary statements that would allow the commissioner to verify
the correctness of the taxpayer’s declarations.

It does not generally apply to the following cases:

a. Where there is a strong evidence showing the commission of fraud;
b. Where verification is necessary to the Commissioner to obtain the information
relevant to the tax liability of another taxpayer;
c. Where the taxpayer requests for a refund or credit of any taxes paid.
(Mamalateo, tax Rights and Remedies, 2005)

III. In case the taxpayer disputes the audit report, the Revenue District Officer
shall inform the taxpayer in writing of the discrepancies for the purpose of an
INFORMAL CONFERENCE.

Notice of an Informal Conference – a written notice informing a taxpayer that the

findings of audit conducted of his books of account and his accounting records
indicate that the additional taxes of deficiency assessment have no paid.

Note: The taxpayer shall have 15 days from the date of receipt of the notice of
informal conference to explain his side.
1. If the taxpayer responds within 15 days, an informal conference will be held.
2. If the taxpayer does not respond, the taxpayer shall be considered in default.

The RDO shall indorse the case to the Assessment Division of the Revenue
Regional Officer or the Commissioner for Review.

IV. Review of the Assessment Division/Commissioner

A. If there is no sufficient basis for assessment – case shall be dismissed;
B. If there is basis for the assessment- a Preliminary Assessment Notice (PAN)
shall be issued

V. Informal Conference
In an Informal Conference the taxpayer is given the opportunity to present his side
of the case. The taxpayer may discuss with the BIR the merits of the assessment be
examined. (Mamalateo, tax rights and Remedies, 2005 ed., p. 633)

VI. Issuance of a Preliminary Assessment Notice (PAN)

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Preliminary Assessment Notice (PAN)- a communication issued by the Regional
Assessment Division, or any other concerned BIR office, informing a taxpayer who
has been audited of the findings of the Revenue Officer, following a review of this
findings.

Note: The taxpayers shall be informed in writing of the law and the facts on which
the assessment is made, otherwise the assessment shall be void. (Sec. 228, NIRC)

Reason: To give the taxpayer the opportunity to refuse the findings of the examiner
and give a more accurate and detailed explanation regarding the assessment(s)
(Sony Philippines vs. Commissioner of Internal revenue CTA Case No. 6185,
October 25, 2004, citing various cases).

The BIR may opt to issue a PAN once or twice from which the taxpayer shall have
15 days from receipt thereof to file a letter contesting the proposed assessment.
These protests are different from the administrative protests or request for
reinvestigation/ reconsideration which can only be taken from the Final Assessment
Notice or FAN (refers to a case of Telesat Inc. vs. CIR, CTA case No. 6812, January
2, 2006)

The taxpayer shall REPLY for the purpose of contesting in writing the finding
contained in the PAN. If the taxpayer fails to respond within 15 days from the date of
the receipt of the PAN, he shall be considered in DEFAULT, in which case, a formal
letter of demand and assessment letter shall be caused to be issued by the said
Office. (Sec. 3.1.2., Revenue Regulation No. 12-99)

A Notice For Informal Conference and PAN is not required in the following :
(METER)
1. When the finding for any deficiency tax is the result of Mathematical error in the
computation of the tax as appearing in the face of the return;
2. When a discrepancy has been determined between the Tax withheld and the
amount actually remitted by the withholding agent;
3. When taxpayer who opted to claim a Refund of tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically apply the same amount claimed against the estimated tax liabilities
for the taxable quarters of the succeeding taxable year,
4. When the Excise tax due on excisable articles has not been paid or;
5. When the article locally purchased or imported by an Exempt person such as but
not limited to vehicles capital equipment, machineries, and spare parts, has been
sold, traded or transferred to non-exempt persons.

Reply Protest
Taxpayer is generally given 15 days Taxpayer is given under the law 30
from receipt of the PAN within which to days from the date of the receipt of the
make his FAN within which to file

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