2018-lumbera-notes.pdf

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UPDATES IN TAXATION Atty. Rizalina V. Lumbera (For 2018 Bar Examinations)

PART 1 : NATIONAL INTERNAL REVENUE CODE A. INCOME TAXATION I. VIP: Taxability of income depends on the KIND

OF TAXPAYER, SOURCE OF INCOME, AND KIND OF INCOME. II. HOW DO WE DETERMINE INCOME FROM SOURCES WITHIN THE PHILIPPINES? (Section 42, NIRC)

THE FOLLOWING INCOME ARE FROM SOURCES WITHIN: (1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation, of residents, corporate or otherwise; (2) Dividends. - The amount received as dividends:

(a) from a Domestic Corporation (DC); and (b) from a Foreign Corporation (FC), unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. (3) Services.- Compensation for labor or personal services performed in the Philippines; (4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property; (5) Sale of Real Property - Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property - Gains; profits and income from the sale of personal property:

Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. III. QUESTIONS TO ASK IN INCOME TAXATION:

Did you receive anything? ( in cash or in kind/ legal or illegal source) 2. If you did, is it income? 3. If income, is it taxable? 4. If it were taxable, what kind of tax and what rate of tax do we impose? 1.

IV. WHO ARE THE INCOME TAXPAYERS (TX)?

(A). INDIVIDUALS ​

​(1). CITIZENS ​ ​ ​

(A). RESIDENT CITIZENS; ​ ​(B). NON-RESIDENT CITIZENS; ​

​

​

(2). ALIENS ​

​

​

(A). RESIDENT ALIENS; ​

​ ​

​

​(B). NON-RESIDENT ALIENS; ​ (​ I). NON-RESIDENT ALIENS ​

​

ENGAGED

IN T/B;

​

​(II).

NON-RESIDENT

ALIENS

NOT

ENGAGED IN T/B

​

​

​

NOTE:

ESTATES AND TRUSTS ARE TREATED

AS INCOME TAXPAYERS;

​

(B). CORPORATIONS "Corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government.

"General Professional Partnerships" (GPP) are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business; PARTNERSHIPS ARE TREATED AS CORPORATE TAXPAYERS WHICH ARE FURTHER CLASSIFIED

INTO

PARTNERSHIPS

(GPP) OR GENERAL (GCP). A GPP IS EXEMPT

PARTNERSHIPS PAYMENT

OF

GENERAL

INCOME

TAXPAYER, WHILE A

TAX

AS

PROFESSIONAL

A

COFROM

COPORATE

GCP IS LIABLE FOR INCOME

TAX.

(1).

(DC): "domestic", when applied to a corporation, means created or organized in the Philippines or under its laws; ​

DOMESTIC

CORPORATIONS

​

​

(2). FOREIGN CORPORATIONS (FC): "foreign", when applied to a corporation, means a corporation which is not a domestic corporation; ​

​

(A). RESIDENT FOREIGN CORPORATIONS (RFC): "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines. (B).

NON-RESIDENT

FOREIGN

(NRFC): 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business within the CORPORATIONS

Philippines.

V. TAXABILITY CORPORATE TX

KINDS OF TX

OF

SOURCE OF INCOME

W/IN

INDIVIDUAL

AND

KINDS OF INCOME AND TAXES

ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B)

W/OUT

CG ON SALE CG ON SALE OF OF S OF S RP ( located (not traded) in the Phils)

(C)

(D)

INDIVIDUALS (including estates and trusts) RC NRC RA NRAETB NRANETB

KINDS OF TX

NIT FWT NIT FWT NIT FWT NIT FWT GIT/FT (25%)

SOURCE OF INCOME

W/IN

W/OUT

FWT FWT FWT FWT FWT

FWT FWT FWT FWT FWT

KINDS OF INCOME AND TAXES

ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B)

(C)

(D)

NIT NIT

FWT FWT

FWT FWT FWT

FWT N/A N/A

CG ON SALE OF S OF S

CG ON SALE OF RP

CORPORATIONS ( including GCP) DC RFC NRFC

GIT/FT

ADDITIONAL TAXES FOR CORPORATIONS INTERCORPORATE DIVIDENDS TAX (ICDT) DC RFC

D-D Exempt D-RFC Exempt

NRFC

D-NRFC 15% FT

MCIT

IAET

BPRT

2% OF GI 10% FWT N/A 2% OF GI N/A 15% FWT N/A

N/A

N/A

VI. INDIVIDUAL TAXPAYERS:

Resident citizens (RC): TX

SOURCE OF INCOME

W/IN

W/OUT

RC

a.

KINDS OF INCOME AND TAXES ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

CG ON SALE OF S OF S

CG ON SALE OF RP

(A)

(B)

(C)

(D)

NIT

FWT

FWT

FWT

All income within and without other than passive income under (B), capital gains on sale of SoS (C), and CG on sale of RP (D): NIT

b.

Passive income (PI) from within the Phils. Final Tax

​

​ ​

​Interest on bank deposits (peso currency): ​

​20%

​Interest on bank deposits (foreign currency): 7​ .5% ​ I​ nterest on long term deposits not pre​

terminated for 5 yrs: EXEMPT ​ ​Royalties: ​20% except for literary and musical compositions 10% ​ ​PCSO/LOTTO winnings: ​EXEMPT PRIZES AND WINNINGS: ​20% except prizes and winnings of P 10,000.00 or less which are subject to NIT; PRIZES AND AWARDS EXCLUDED FROM COMPUTATION OF GI: NO TAX 1.

2.

Prizes and awards in sports competitions sanctioned by the national sports commission; Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements but only if the recipient was selected without any action on his part to enter the contest or proceeding and the recipient is not required to render substantial future services as a condition to receiving the prize or award;

Passive income (PI) from outside the Phils. - all PI received by a resident citizen from outside of the Philippines are subject to Net Income Tax (NIT), not FWT; c.

d.

Dividends: 1. Issued by DC – 10% Final Tax 2. Issued by FC – NIT Sale of Shares of Stocks treated as capital assets 1. Gains from Sale of capital shares of stocks - Capital Gains Tax (CGT) (FWT) if not traded thru the local stock exchange. If traded thru the stock exchange, ½ of 1% of the GSP (percentage tax under Section 127 of the NIRC); 2. Gains from Sale of shares of stocks classified as ordinary asset - NIT Note: ​Sale of shares of stocks in a foreign corporation, all gains are subject to NIT; ​Sale of shares of stocks in DC and FC, in case of loss ( ex: if sold for insufficient consideration), if untraded thru the local stock exchange, impose donor’s or estate tax on the difference bet the FMV and the consideration. However, if sold thru the local stock exchange, % tax plus donor’s or estate tax. (Basis: Section 24 C in relation to Sections 85, 100, 127 NIRC);

e. Sale of Real Property 1. If the property is within the Philippines and capital in character whether sold at a gain or loss - 6% CGT (FWT). Otherwise, NIT if it is an ordinary asset. 2. If the property is outside the Philippines it is always subject to NIT whether ordinary or capital asset. 3. If property (whether located within or outside of the Philippines) is sold for insufficient consideration and not property described in Section 24(D), impose donor’s tax (Section 100) or estate tax (Section 85g); Exemption from CGT for sale of real property: Requisites [Sec 24 (D)(2), NIRC]: The real property must be the actual principal residence of the taxpayer/seller; ii. Seller must inform the BIR of his intention to avail of the exemption (within 30 days from sale); iii. Seller must build or purchase another principal residence within 18 months from sale; iiii. Proceeds from the sale should be used in building/purchasing new principal residence v. 6% CGT will be applied proportionately to proceeds not used for new principal residence. i.

Non-Resident Citizen (NRC) The term "nonresident citizen" means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. TAXABILITY: SOURCE OF INCOME

TX

W/IN

W/OUT

NRC

a.

b.

KINDS OF INCOME AND TAXES ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B)

(C)

(D)

NIT

FWT

FWT

FWT

CG ON SALE CG ON OF S OF S SALE OF RP

All income WITHIN ONLY other than passive income under (B), on CG on sale of SoS (C) and CG on sale of RP (D): NIT; All income from without the Philippines are EXEMPT from TAX; Passive income (PI) from within the Phils. Final Tax

​

​ ​

​Interest on bank deposits (peso currency): ​

​20%

​Interest on bank deposits (foreign currency): 7​ .5% ​ I​ nterest on long term deposits not pre​

terminated for 5 yrs: EXEMPT ​ ​Royalties: ​20% except for literary and musical compositions 10% ​ ​PCSO/LOTTO winnings: ​EXEMPT PRIZES AND WINNINGS: ​20%

except prizes and winnings of P 10,000.00 or less which are subject to NIT; PRIZES AND AWARDS EXCLUDED FROM COMPUTATION OF GI: NO TAX 1. Prizes and awards in sports competitions sanctioned by the national sports commission; 2. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements but only if the recipient was selected without any action on his part to enter the contest or proceeding and the recipient is not required to render substantial future services as a condition to receiving the prize or award; Passive income from outside the Phils. - all PI received by a non- resident citizen from outside of the Philippines are EXEMPT FROM TAX; c.

Dividends: i. Issued by DC – 10% Final Tax ii. Issued by FC – NIT

d. Sale of Shares of Stocks treated as capital assets i. Gains from Sale of capital shares of stocks - Capital Gains Tax (CGT) (FWT) if not traded thru the local stock exchange. If traded thru the stock exchange, ½ of 1% of the GSP (percentage tax under Section 127 of the NIRC); ii. Gains from Sale of ordinary shares of stocks in a domestic corp.- NIT e. Sale of Real Property If the property is within the Philippines and capital in character - 6% CGT (FWT). Otherwise, NIT if it is an ordinary asset. ii. If the property is outside the Philippines it is not subject to tax whether ordinary or capital asset; i.

iii. If property (whether located within or outside of the Philippines) is sold for insufficient consideration and not property described in Section 24(D), impose donor’s tax (Section 100) or estate tax (Section 85g); Exemption from CGT for sale of real property: Requisites [Sec 24 (D)(2), NIRC]: The real property must be the actual principal residence of the taxpayer/seller; ii. Seller must inform the BIR of his i.

intention to avail of the exemption (within 30 days from sale); iii. Seller must build or purchase another principal residence within 18 months from sale; iiii. Proceeds from the sale should be used in building/purchasing new principal residence; v. 6% CGT will be applied proportionately to proceeds not used for new principal residence; Resident Alien (RA) (Taxability is the same as nonresident citizen; See discussions in Number 2 above on NRC); SOURCE OF INCOME

TX

W/IN

KINDS OF INCOME AND TAXES ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B)

(C)

(D)

NIT

FWT

FWT

FWT

W/OUT

RA

CG ON SALE CG ON OF S OF S SALE OF RP

Non-Resident Alien ETB (NRAETB) (Taxability is the same as non-resident citizen except for Dividends from a domestic corporation which is subject to 20% FWT); TX

SOURCE OF INCOME

W/IN NRAETB

W/OUT

KINDS OF INCOME AND TAXES ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B)

(C)

(D)

NIT

FWT

FWT

FWT

CG ON SALE CG ON OF S OF S SALE OF RP

A nonresident alien individual who shall

come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines’. ​Indicators that an alien is engaged in ​

Trade or Business in the Philippines: stay in the Philippines for an aggregate period of more than 180 days in a calendar year; ➢ principle of habituality in entering into commercial transactions in Phils; ➢ appointment of agents in the Phils; ➢ hiring of employees in the Phils; ➢ putting up a branch in the Phils; ➢

Non-Resident Alien Not ETB (NRANETB)

TX

SOURCE OF INCOME

W/IN NRANETB

W/OUT

KINDS OF INCOME AND TAXES ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B) GIT/FT

CG ON SALE CG ON SALE OF OF S OF S RP (C)

(D)

FWT

FWT

All income plus PI are subject to GIT (Final Tax) of 25%. For aliens employed in OBUs, MNCs, and petroleum service contractors ( Section 25 C,D,E), the preferential tax treatment of GIT 15% shall be applied provided that the Filipino counterpart of such aliens is given the option to be taxed at GIT 15%; CGT on sale of SoS and CGT on

sale of RP, same as other individual taxpayers; NOTE: If the NRA’s Filipino counterpart is given the option to be taxed at 15% on the gross income instead of GIT 25%, the alien may also be taxed at the same rate of 15% GIT. It is not necessary that the Filipino counterpart should exercise the option. It is enough that there is an option. The tax is imposed on the gross income including fringe benefits without deductions and in the nature of final tax. FBT rate is either at 25% or 15% depending the on applicable rate for the TX; If the Filipino opted to use GIT 15% instead of NIT, fringe benefits shall be subject to 15% instead of FBT rate of 32%. Exemption from 6% CGT on Sale of Real Property All kinds of individual taxpayers can avail of the exemption from payment of CGT for sale of real property, except corporate taxpayers. Question: Is an alien exempt from the payment of CGT for sale of real property? Answer: • Resident aliens, under certain circumstances (succession, ownership of condominium units and former

Filipino citizens), are allowed by Phil. laws to own real property. • Apply same rules to NRA engaged in trade/business • NRA not engaged in trade/business there is a further limitation They must be among those enumerated in Sec. 25 (c), (d), (e) of the NIRC; a. those employed by Regional Area/Operational Headquarters of Multinational Companies b. those employed by Offshore Banking Units c. those employed by Petroleum Service Contractors and Subcontractors (Preferential Tax Treatment under Sec. 25, NIRC) Summary of rules on individual taxpayers: Among all individual taxpayers, only RC is taxed for income within and outside the Phils; b. All kinds of taxpayers are similarly taxed for income within EXCEPT: • NRA engaged in t/b- 20% Final tax on cash and property dividends • NRA not engaged in t/b are taxed on the gross income; c. All kinds of individual taxpayers are subject to CGT on sale of shares of stock; d. All kinds of individual taxpayers may be exempt from 6% CGT on sale of real property; a.

VII. CORPORATE TAXPAYERS:

A. DOMESTIC CORPORATION (DC): Corporation incorporated in accordance with Philippine Laws;

TX SOURCE OF INCOME

W/IN DC

W/OUT

KINDS OF INCOME AND TAXES ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B)

(C)

(D)

NIT (30%)

FWT

FWT

FWT

CG ON SALE CG ON SALE OF S OF S OF RP

ADDITIONAL TAXES FOR DC INTER-CORPORATE MCIT (in DIVIDENDS TAX IAET BPRT lieu of NIT) (ICDT) DC DC-DC Exempt 2% OF GI 10% FWT N/A

Additional notes: a.

MCIT is in lieu of 30% corporate net income tax while IAET is in addition to all other

taxes imposed upon the corporation. MCIT is imposed beginning the 4th year following the commencement of its operations; b. Prizes and Winnings of DC, if any, are subject to NIT and considered as income in the ordinary course of its trade or business. Note however that generally juridical entities do not have winnings in games of chances; c. Unlike individuals, interest income from long term deposits of DC are not exempt from FWT; d. Dividends received by a DC from another DC are exempt from tax. These are called Intercorporate dividends; e. IAET is in addition to corporate taxes and imposed on corporations which retain earnings beyond reasonable business needs; EXEMPT CORPORATIONS UNDER SECTION 30 OF NIRC: The following organizations shall not be taxed under this Title ( MEANING EXEMPT FROM NIT) in respect to income received by them AS SUCH: 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 benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non- stock corporation organized by employees providing for the payment of 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 benefit of its members; 5. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; 6. Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder, or individual; 7. Civic league or organization not organized for profit but operated 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, and fees collected from members for 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; Notwithstanding the provisions in the preceding paragraphs, income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. VIP: ​In determining entitlement to tax exemption, two tests are applied: organizational test and operational test. Organizational test requires that the corporation or association’s constitutive documents exclusively limit its primary purpose to those described in Sec. 30 of the 1997 Tax Code.

Operational test requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purpose specified in Sec. 30 of the 1997 Tax Code. "A corporation or association fails to meet this test if substantial part of its operation are considered "activities conducted for profit." TAX EXEMPTIONS OF VARIOUS INSTITUTIONS

FACTS: Institution occupies real property. Part of the property is leased to KFC/MCDONALD’S. 1. GOVERNMENT AGENCIES (Example: PNP) General Rule: Government agencies are exempt from payment of taxes as long as they are directly performing government functions Exception: If income of agency is in the exercise of proprietary functions, it is subject to tax and treated as an ordinary corporation subject to corporate income tax of 30%. GOCC’s are considered as ordinary corporations and subject to tax, except SSS, PHIC, PCSO, GSIS, and Local Water Districts; EXAMPLE: PNP earns money from collection of license fees. a. Is this income? Yes. b. Is this taxable? No.

Rentals paid by KFC. a. Is this income? Yes. b. Is this taxable? Yes. X donates P500,000 to PNP. a. Is this income on the part of PNP? Yes, but it is not subject to income tax [Sec 32 (B) (3), NIRC excludes gifts, bequests, devises from gross income]. b.

c.

Is the donation subject to estate/donor’s tax? No. Transfers for public use are exempt from estate or donor’s tax ( Sections 86 and 101 of the Tax Code) Can X deduct the donation from gross income If X were a compensation income earner, he cannot claim as deduction. Reason: There are only 3 allowable kinds of deductions for compensation income earners (personal exemptions, additional exemptions & premiums on health/hospitalization insurance). Donations are not among them. If X were an individual engaged in trade or business, the entire amount may be deducted, provided priority project of the government. If not priority project, then donor can claim as deduction up to 10% of its taxable income prior to this deduction ( if individual) or 5% of its taxable income prior to this deduction ( if corporation) (Section 34h, NIRC);

Should PNP decide to deposit in a bank the funds from license fees, rentals, and the gift of P 500,000.00, thereby earning interest income of 2% per annum, is the interest from bank deposit income and taxable? Is it income? YES. IS IT TAXABLE? YES, last paragraph of Section 30 NIRC states that income of whatever kind and character from an activity conducted for profit shall be subject to income tax (FWT of 20%); Payment of Real Estate Tax - government agencies directly performing government functions are exempt. Under the Local Government Code of 1991, real properties owned by the government and any of its agencies or instrumentalities shall be exempt from real property tax except when the beneficial use thereof pertains to non-exempt entity. NOTE: It is the beneficial use of the property that exempts the government agency from payment of tax. Thus, PNP is exempt from RPT as provided in the Local Government Code of 1991. 2. GOVERNMENT EDUCATIONAL INSTITUTIONS (GEI) such as public elementary school, public high school, state colleges (Example: PUP) PUP earns money from tuition fees. a. Is it income? Yes

b.

Is it taxable? No. Sec. 30, NIRC exempts from tax, income by the institution when it is “realized as such.”

Rental fee received from KFC a. Is it income? Yes. b. Is it taxable? Yes. The last paragraph of Sec. 30, NIRC provides that income from any activity conducted for profit regardless of the disposition shall be subject to tax. X donated P500,000 to PUP. a. Is it income on the part of PUP? Yes, but not subject to income tax. (same reason as government agencies). b. Is it subject to estate/donor’s tax? No. Section 86/101 of the tax code on transfer for public use; Can X deduct the donation from gross income? Same rules as government agencies. Should GEI decide to deposit in a bank the funds from tuition fees, rentals, and the gift of P 500,000.00, thereby earning interest income of 2% per annum, is the interest from bank deposit income and taxable? Is it income? YES. b. IS IT TAXABLE? YES, last paragraph of Section 30 NIRC states that income of whatever kind and character from an activity conducted for profit shall be subject to income tax; a.

Real Property Tax (RPT) - As long as the property is ACTUALLY, DIRECTLY and EXCLUSIVELY used for educational purpose, it is exempt from payment of RPT. Under the Local Government Code of 1991, real properties actually, directly and exclusively used for educational, religious, and charitable purpose shall be exempt from real property tax. Real properties owned by the government and any of its agencies or instrumentalities shall be exempt from real property tax except when the beneficial use thereof pertains to non-exempt entity.

3. NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS (NSNPEI) A. Previous Rules: All income from facilities within campus operated and maintained by the school shall be exempt from tax ( canteen, dormitory, and bookstore as ancillary services). However, they shall be subject to internal revenue taxes on income from trade, business or activity, the conduct of which is not related to the exercise or performance by such institutions of their educational purposes or functions ( ie. Rental payment from their building/premises). The interest income from currency bank deposits and yield from deposit substitutes instruments actually, directly, and exclusively in pursuance of their purposes as an educational institution are exempt from the 20% final tax and 7 ½ % tax on

interest income under the expanded foreign currency deposit system upon compliance of certain conditions; B. AS OF JULY 26, 2016 : Revenues pursuant to educational purpose and used ADE for educational purpose ARE EXEMPT; MEANING SOURCE IS IMPORTANT; RMO 44-2016 issued on July 26, 2016; CIR vs St. Paul College of Makati (GR 215383, 08 March 2017); It is clear and unmistakable from the constitutional provision that NSNPEIs are constitutionally exempt from tax on all revenues derived in pursuance of its purpose as an educational institution and used actually, directly and exclusively for educational purposes. This constitutional exemption gives the non-stock, non-profit educational institutions a distinct character. And for the constitutional exemption to be enjoyed, jurisprudence and tax rulings affirm the doctrinal rule that there are only two requisites: (1) The school must be non-stock and non-profit; and (2) The income is actually, directly and exclusively used for educational purposes. There are no other conditions and limitations. C. AS OF 09 NOVEMBER 2016: REGARDLESS OF SOURCE AS LONG AS REVENUES ARE ADE USED FOR EDUCATIONAL PURPOSE, EXEMPT FROM TAX. SECTION 30 (in so far as NSNPEI) is declared CONTRARY TO CONSTITUTION

G.R. No. 196596, November 09, 2016 – CIR v. DE LA SALLE UNIVERSITY, INC.; G.R. No. 198841 - DE LA SALLE UNIVERSITY INC., v. CIR; G.R. No. 198941 – CIR v. DE LA SALLE UNIVERSITY, INC., Respondent. ISSUE: (1) income tax on rental earnings from restaurants/canteens and bookstores operating within the campus; (2) value-added tax (VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease contracts. When a NSNPEI proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. When it also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted from RPT. So long as the Assets or Revenues are used actually, directly and exclusively for educational purposes, they are exempt from duties and taxes. The Constitution DOES NOT require that the revenues and income must be sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues is unqualified by any reference to the source of revenues. So long as the revenues and income are used actually, directly and exclusively for educational purposes, then said revenues and income shall be exempt from taxes and duties.

For NSNPEI, the last paragraph of Section 30 of NIRC is without force and effect for being contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purpose. We make this declaration in the exercise of and consistent with our duty to uphold the primacy of the Constitution. THIS RULING APPLIES ONLY TO NSNPEI as provided in the Constitution, AND DOES NOT COVER the other exempt organizations under Section 30 of the Tax Code. PREVIOUS RULES Type of Income Tuition Fees

CURRENT RULES Taxability

Income as such, NO TAX (Sec 30) ALL THESE TYPES OF INCOME ARE NOT SUBJECT TO TAX.

THE CONSTITUTION PROVIDES THAT ALL REVENUES AND ASSETS, LAND, BUILDINGS, AND IMPROVEMENTS OF NSNPEI ACTUALLY, DIRECTLY AND EXCLUSIVELY USED FOR EDUCATIONAL PURPOSE SHALL BE EXEMPT FROM TAX; IN SO FAR AS NSNPEI IS CONCERNED, SECTION 30 IS DECLARED UNCONSTITUTIONAL. THUS, SECTION 30 DOES NOT APPLY TO NSNPEI; Rental Income

NIT ( last par Sec 30)

Income from operating For the operation of a canteen inside a canteen the campus, the income therein being incidental to the operations of the school is exempt;

Income from bookstore Not subject to income tax since operation from bookstore is an ancillary activity the conduct of which is carried out within the school premises Income dormitories

from Not subject to income tax provided the dormitory is within the campus as the same is an ancillary activity. However, income from dormitory located outside of school premises shall be subject to income tax already.

Income from These are already subject to income concessionaires of the tax and treated as income from an canteen and operators of activity conducted for profit the dormitory. pursuant to the last paragraph of Section 30, NIRC. Interest Income on bank FWT (last par Sec 30) deposits

X donated P500,000 to the institution. a. Is it income on the part of the institution? Yes but it is not subject to tax [Sec. 32 (B)(3), NIRC] b. Is it subject to estate/donor’s tax? No, provided that not more than 30% is used for administration purposes. . (Section 87 and 101 of the Tax Code) c. Can X deduct the amount of the donation from his gross income? i. If X were a compensation income earner, he cannot deduct. Reason: There are only 3 allowable kinds of deductions for compensation income earners (personal exemptions, additional exemptions & premiums on health/hospitalization insurance). Donations are not among them. ii. If X were an individual engaged in trade or business, up to the extent of 10% of the amount of taxable

iii.

income prior to this deduction may be deducted; If X were a corporation, up to the extent of 5% of the amount of taxable income prior to this deduction may be deducted

Real Estate Tax - Such institution is exempt from payment of RET (BASIS: LGC and Constitution) Under the Local Government Code of 1991, real properties actually, directly and exclusively used for educational, religious, and charitable purpose shall be exempt from real property tax. 4. PROPRIETARY INSTITUTIONS

EDUCATIONAL

a. Income tax: General Rule: Proprietary Educational institutions are not exempt from tax unless there is a law providing for an exemption. Sec 27(B) NIRC in relation to the Constitution: If the income from unrelated trade/activity (ut/a)exceeds 50% of the total income, it is treated as an ordinary corporation taxable at the rate of 30%. Otherwise, it is subject to a preferential rate of 10%. NOTE: The exemption from income tax is not absolute but dependent on the income from unrelated trade or activity. b. If X donates P500,000 to the institution:

i. Is it income on the part of the institution? Yes, but not included in computation of the gross income, therefore not taxable. [Sec. 32 (B)(3), NIRC] ii. Is it subject to estate/donor’s tax? No, provided that not more than 30% is used for administration purposes. iii. Can X deduct the amount of the donation from his gross income? It depends. If X were a compensation income earner, he cannot deduct. There are only 3 allowable kinds of deductions for compensation income earners (personal exemptions, additional exemptions & premiums on health/hospitalization insurance). Donations are not among them. If X were an individual engaged in trade or business, up to the extent of 10% of the amount of taxable income may be deducted; If X were a corporation, up to the extent of 5% of the amount of taxable income may be deducted; c. Should PEI decide to deposit in a bank the funds from tuition fees, rentals, and the gift of P 500,000.00, thereby earning interest income of 2% per annum, is the interest from bank deposit income and taxable?

Is it income? YES. ii. IS IT TAXABLE? YES, applying Section 27, the entire income from these activities maybe taxed at 30% or 10%. 30% if income from uta exceeds 50% of its total income and 10% if uta does not exceed 50% of its total income; i.

d. Real Estate Tax - The institution is exempt from payment of RET (Local Government Code of 1991). Under the Local Government Code of 1991, real properties actually, directly and exclusively used for educational, religious, and charitable purpose shall be exempt from real property tax. 5. CHARITABLE/ RELIGIOUS INSTITUTIONS NOTE: The Constitutional provision regarding charitable/religious institutions is limited only to exemption from RET. The exemption is based on the ACTUAL USE of the property not ownership. The term “educational” does not refer to those managed by the religious institutions but to the carrying on by these institutions of educational purpose incidental to its primary purpose. (i.e. catechism, church daycare centers, etc.) 1. Money received as a charitable/religious institution a. Is it income? Yes. b. Is it taxable? No. Sec. 30, NIRC

exempts income by the institution if it is “realized as such.” 2. Rental fee received from KFC a. Is it income? Yes. b. Is it taxable? Yes. The last paragraph of Sec. 30, NIRC provides that income from any activity conducted for profit regardless of the disposition shall be subject to tax. 3. X donated P500,000 to the institution. a. Is it income on the part of the institution? Yes, but it is not subject to tax as gifta bequests nd devises are items of exclusions.[Sec. 32 (B)(3), NIRC] b. Is it subject to estate/donor’s tax? No, provided that not more than 30% is used for administration purposes. c. Can X deduct the amount of the donation from his gross income? It depends. i. If X is a compensation income earner, he cannot deduct. There are only 3 allowable kinds of deductions for compensation income earners (personal exemptions, additional exemptions & premiums on health/hospitalization insurance). Donations are not among them. ii. If X is an individual engaged in trade or business, 10% of the taxable income prior to this deduction may be deducted

iii.

If X is a corporation, 5% of the taxable income prior to this deduction may be deducted

Real Estate Tax - The institution is exempt from payment of RET (Local Government Code of 1991). Under the Local Government Code of 1991, real properties actually, directly and exclusively used for educational, religious, and charitable purpose shall be exempt from real property tax. REQUIREMENTS FOR EXEMPTION under Section 30 (e): 1.

2.

Organization must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans; It should meet the ff tests: Organizational Test-corporation’s documents exclusively limit its purposes to par e of Section 30; Operational Test- regular activities of the corporation be exclusively devoted to the accomplishment of the purposes in par (e), Section 30;

3.

All the net income or assets of the corporation or association must be devoted to its purpose/s and no part of its net income or asset accrues to or benefits any member or specific person;

4.

It must not be a branch of a foreign non-stock nonprofit corporation.

Validity of Tax Exemption/Revalidated Exemption: 3 years from date of effectivity specified in the certificate/ruling; • Renewable in nature subject to submission of documents and approval of BIR; • Failure to file ITR results to cancellation of tax exemption certificate beginning the taxable year when ITR was not filed; •

DEFINITIONS: ​NON-STOCK NONPROFIT/INUREMENT under Section 30 NIRC “Non-stock”: no part of income is distributed as dividends and any profit as incident of operations, shall be used for furtherance of its purpose; “Non- profit”: no net income or asset accrues to or benefits any member, with all net income or asset devoted to purpose and all its activities conducted not for profit; NOTE: For exemption to apply as NSNP corporation under Section 30, NIRC, its earnings/assets “shall not INURE to the benefit of any trustee, officer, member, or specific person” Considered as “INUREMENT” 1. Payment of compensation, salaries, honorarium to trustees or organizers; 2. Payment of exorbitant or unreasonable compensation to employees; 3. Provision of welfare aid/financial assistance to

members; 4. Donation to any person/entity; 5. Purchase of goods/services in excess of FMV from an entity where trustee, officer has an interest; 6. Upon dissolution, assets are distributed to trustees, organizers, officers, members COMPARATIVE TABLE : TAXABILITY/EXEMPTION OF VARIOUS ORGANIZATIONS: CI/RO /Charitable Hospital RPT

IT

EXEMPT: provided ADE used for charitable, religious, educational purpose

NSNPEI

EXEMPT: provided ADE used for charitable, religious, educational purpose

PEI and Hospital

GOVT Agency/GEI

EXEMPT: provided ADE used for charitable, religious, educational purpose

EXEMPT: unless beneficial use pertains to non-exempt entity

Income from governmental functions are INCOME ADE used EXEMPT: income as SUBJECT TO 10% OR EXEMPT; Income from such but income from for EDUCATIONAL 30% NIT. If income from proprietary functions are PURPOSES, NO properties or from UTA does not exceed 50% subject to tax; If GEI, activity conducted for INCOME TAX (CIR of total income, NIT of income as such EXEMPT VS ST. PAUL profit regardless of 10%; if income from UTA but income from properties COLLEGE MAKATI; disposition shall be exceeds 50% of total or from activity conducted CIR VS. DE LA subject to tax income, NIT of 30% for profit regardless of SALLE disposition shall be subject UNIVERSITY) to tax GIFTS/Donations RECEIVED BY THESE INSTITUTIONS are NOT SUBJECT TO IT; bequests, and devises are items of exclusions from gross income

Gifts/Donations are Gifts/Donations are Deductible from GI of Deductible from GI of donor; Ind (purely donor; Ind (purely compensation income compensation income earner, no deduction); earner, no deduction); Ind (business income Ind (business income earner, up to 10% of earner, up to 10% of taxable income prior to taxable income prior to this deduction); Corp ( this deduction); Corp up to 10% of taxable ( up to 10% of taxable income prior to this income prior to this deduction deduction

ET/DT

EXEMPT: Transfer of property mortis causa or intervivos, provided not more than 30% of the gift is used for administration purposes;

EXEMPT: Transfer of property mortis causa or intervivos, provided not more than 30% of the gift is used for administration purposes;

Gifts,

NOT DEDUCTIBLE from Gross Income of donors

DEDUCTIBLE in full provided for priority projects, otherwise we apply the 10%/5% restriction

Subject to ET/DT

EXEMPT: No qualification

B. RESIDENT FOREIGN CORPORATION (RFC): Corporation incorporated in accordance with any law other than the Philippines and engaged in trade or business in the Philippines; TX SOURCE OF INCOME

W/IN

W/OUT

RFC

KINDS OF INCOME AND TAXES ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B)

(C)

(D)

NIT

FWT

FWT

N/A

INTERCORPORATE DIVIDENDS RFC

D-RFC Exempt

MCIT

IAET

CG ON SALE OF S OF S

CG ON SALE OF RP

BPRT

2% OF GI N/A 15% FWT

1. A foreign corporation is not subject to CGT on sale of real property because under the Constitution, they are not allowed to own real property in the Philippines. 2. Indicators that a FC is engaged in Trade or Business in the Philippines: ➢ principle of habituality in entering into commercial transactions in Phils; ➢ appointment of agents in the Phils; ➢ hiring of employees in the Phils; ➢ putting up a branch in the Phils;

C. NON-RESIDENT FOREIGN CORPORATION (NRFC): Corporation incorporated in accordance with any law other than the Philippines and not engaged in trade or business in the Philippines; TX

SOURCE OF INCOME

W/IN

W/OUT

NRFC

KINDS OF INCOME AND TAXES ALL INCOME OTHER THAN (B), ( C ), (D)

PASSIVE INCOME

(A)

(B)

CG ON SALE OF S OF S

GIT/FT (30%)

CG ON SALE OF RP

(C)

(D)

FWT

N/A

ADDITIONAL TAXES FOR CORPORATIONS INTERCORPORATE DIVIDENDS NRFC

DC-NRFC 15% FT

MCIT IAET BPRT

N/A

N/A

N/A

A. NRFC is taxable on the gross income and subject to Final Tax of 30%; B. All income and PI are subject to Final Tax of 30%; C. Inter-corporate dividends received by a NRFC from DC are subject to FT of 15%; D. MCIT and NIT are not applicable to NRFC; E. CGT on sale of real property is not applicable to NRFC; F. All taxes due from NRFC are final taxes;

VIII. INCLUSIONS, EXCLUSIONS, DEDUCTIONS:

INCLUSIONS:

GROSS INCOME DEFINED (CGDIRAP): Except when otherwise provided, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership EXCLUSIONS: 1.

Proceeds of Life Insurance Policy: Facts: X is the employee of Y. X insures his own life and pays premium of P5,000 annually. Beneficiaries are his wife and children (W & C). Policy states that if X pays premium for the next 20 years, he will get: Proceeds: P1M; Interest 10%; and Return of Premium (ROP) Tax Effects/Consequence:

1.

2.

Can X deduct premium from computation of gross income? No. X is a compensation income earner and premium for life insurance is not among those allowed as deductions; The policy states that if X survives to be 60 years old, he may receive the proceeds, interest, and ROP. a.

If X survives, are the above-enumerated items considered as income? The proceeds of P1M and the 10% interest are considered income. ROP, being mere return of capital, is not. Taxable? Only the 10% interest is taxable since proceeds of life insurance policies are among the items of exclusions in Sec. 32(B), NIRC.

b.

Assuming X dies and the proceeds are received by W & C, will this be considered as income on their part? Yes, except for the ROP (Reason: If X had lived, he would have received it as mere return of capital). Included in the computation of gross income? Only the 10% interest is taxable since proceeds of life insurance policies are among the items of exclusions in Sec. 32(B), NIRC.

3.

When X dies, will the above-enumerated items be included in the computation of the gross estate? There are 2 sets of rules:

a.

b.

If the beneficiary is the EXECUTOR/ADMINISTRATOR of the ESTATE, it will be INCLUDED in the computation of estate, whether the assignment of beneficiary is revocable or not. If the beneficiary is anyone other than those in (a): • Revocable assignment- include in the computation of gross estate • Irrevocable assignment- exclude in the computation of gross estate As long as the decedent has control over the proceeds, it will be included in the computation of the gross estate.

Facts: X is the employee of Y. Y insured X’s life. Premium was paid by Y and he was also the beneficiary and will receive proceeds: P1M +10% interest +ROP. Tax Effects/Consequence: 1.

Can Y deduct premium payments as business expense? No. This is not a legitimate business expense. In addition Section 36, provides that premiums on life insurance taken by the employer insuring the life of his employees wherein directly or indirectly he is the beneficiary is NOT DEDUCTIBLE.

2.

3.

If X dies and Y gets proceeds, is this income on the part of Y? Yes, except the ROP. However, only the 10% interest is taxable. ROP and the amount of P1M are the first 2 items of exclusion under Sec. 32 (B), NIRC. Are the proceeds included in the computation of X’s gross estate? No. X did not have any interest over the proceeds. In fact, the only participation of X is his life.

Facts: X is the employee of Y. X took a life insurance but premium payments were made by Y. X’s wife and children (W & C) were the assigned beneficiaries. Proceeds are as follows: P1M +10% interest +ROP. Tax Effects/Consequence: 1. Is it income on the part of X? Yes, the premium paid by employer Y is considered as income on the part of X. Is it taxable? If X is: • Managerial/supervisory employee Fringe benefit tax • Rank and file employee - Net income tax 2. Can Y deduct the premium payments from the computation of gross income? No, unless Y pays for the life insurance of ALL of his employees. If X gets singled out, Y can never deduct because it is not a necessary business expense.

3. If X dies and the proceeds go to W & C, is this income on the part of W & C? Yes, except for ROP. However, only the 10% interest is taxable (income tax). Will this be included in the computation of the gross estate of X? Apply the rules on revocable/irrevocable assignment of beneficiaries. NOTE: Proceeds of accident insurance: For purposes of income tax, proceeds of accident insurance are not income and not taxable as they are merely reimbursements for the damage resulting from the accident. In case of death however and for purposes of estate tax, they are generally speaking excluded from the computation of the gross estate unless one of the risks insured against is the death of the insured by accident in which case, the insurance maybe considered as a life insurance. In this instance also, for purposes of income tax, they shall still be excluded from the computation of gross income. 2.

Gifts, Bequests, and Devises Income on the part of the recipient donee/heir/recipient but not forming part of the taxable income as this is an item of exclusion from the gross income of the donee/heir/recipient. If however, the property received realizes income, then the income of the property forms part of the gross income of the taxpayer; INCOME TAX

DT/ET

GENERAL RULE: Subject to DT/ET

GIFTS INTER VIVOS/MORTIS CAUSA

Income but excluded from computation of Gross Income: NO TAX If gift in favor of educational, religious, charitable inst: NO DT/ET provided not more than 30% of the gift is used for administration purposes

If gift in favor of political parties/candidates for campaign purposes: NOT SUBJECT TO INCOME TAX/DONOR’s TAX provided: 1. received during official campaign period; 2. fully utilized for authorized campaign expenditures; 3. SOCE is filed by winning or losing candidate; 4. 5% CWT withheld and remitted to BIR;

If gift in favor of govt: NO DT/ET

Income exempt under a treaty 4. Damages Damages compensation for physical injuries/disability or death, or for causes beyond the control of the employee and only those actually resulting therefrom are excluded from computation of the gross income. Attorney’s fees and costs of suit are only excluded if the amount awarded is equivalent to the actual expense incurred. This shall not be considered as income and not taxable because it is a mere reimbursement of the expense. Any amount in excess of the actual expense is considered taxable income. Moral, exemplary, and any other type of damages are taxable. 3.

ONLY ACTUAL DAMAGES ARE EXCLUDED.

Other types of damages are INCLUDED in the GI and TAXABLE. Rule: Any payment for reparation of damage is excluded; 5.

Income Exempt under a Treaty;

6.

Retirement Benefits The Labor Code requires the employer to contribute to a valid retirement fund. The contribution is deductible since it is necessary in carrying on the trade/business. If the employee is also allowed to contribute (contributory retirement fund), the employee’s contribution is not deductible since it is not among the allowable deductions for compensation income earners.

If the employee retires and receives retirement benefits: Tax treatment: the retirement benefits are income but among the items of exclusions listed in Sec. 32(B), NIRC hence, NOT TAXABLE. It is not considered compensation provided that: 1. The employee is at least 50 years old; 2. Employed with the same employer for at least 10 years; and 3. The fund must be used for the benefit of the employee and no other purpose. What if the fund is contributory? If the employee contributes to the fund, only the interest/profits will be considered as income but excluded from

the computation of gross income therefore, not taxable. His contributions will be considered as mere return of capital, hence, not income. Example: The retirement plan provides that if the employee renders x years of service and he dies, he shall be considered as retired as if he retired alive. The heirs will receive the retirement benefits. Tax Treatment: ​ 1. Is it income on the part of the heirs? Yes. Is it taxable? No. The benefits are among the items of exclusions from gross income. 2. Is it part of the employee’s gross estate? Yes, provided that it will later on be deducted from the gross estate. 3.

Why do we have to add first before we deduct? Gross estate is defined as the value of ALL the property of the deceased, real or personal, tangible or intangible. ​NOTE: Benefits received from SSS, GSIS,

Pag-Ibig and PhilHealth , US Veteran’s Act • Not income • Not compensation • Not taxable (The employees contributions are not deductible) NOTE: All retirement benefits of government employees are INCOME but EXCLUDED from GI; NO TAX; 6. Prizes and Awards

a. Prizes and awards in sports competitions sanctioned by the national sports commission; b. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements but only if the recipient was selected without any action on his part to enter the contest or proceeding and the recipient is not required to render substantial future services as a condition to receiving the prize or award; 7. Miscellaneous Items. (a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments; (b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. (c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:

(i) The recipient was selected without any action on his part to enter the contest or proceeding; and
 (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. (e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed eighty-two thousand pesos (P82,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; 
 (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; 
 (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and 
 (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, That

every three (3) years after the effectivity of this Act, the President of the Philippines shall adjust the amount herein stated to its present value using the Consumer Price Index (CPI), as published by the National Statistics Office. (f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code.

IX. TAX TREATMENT OF EMPLOYEE BENEFITS:

Fringe Benefits, De Minimis Benefits, and Compensation for Managerial/Supervisory/Rank and File/ Minimum Wage Earners (MWE’s) these are all benefits given by an employer to an employee - the benefits must be in relation to the employer’s business -

-

Compensation - All the basic benefits given by the employer to the employee

Fringe Benefits - Any benefit given to a managerial/supervisory employee above all benefits given to other employees. De Minimis Benefits – Privileges of small value provided by the employer to an employee;

DE MINIMIS BENEFITS (DMB) (AS AMENDED BY RR 1-2015) MONETIZED UNUSED VL (private sector)

10 DAYS

MONETIZED VL/SL (government)

no limit

MEDICAL CASH ALLOWANCE TO DEPENDENTS OF EMPLOYEES

NOT EXCEEDING P 750/EMPLOYEE/SEM OR P 125/MO

RICE SUBSIDY

P 1,500/MO OR ONE SACK OF RICE OF 50KG/MO ( P 1,500.00)

UNIFORM/CLOTHING ALLOWANCE P 5,000/YEAR (PER RR 8-2012) ACTUAL MEDICAL ASSISTANCE

NOT EXCEEDING P 10,000/YEAR

LAUNDRY ALLOWANCE

NOT EXCEEDING P 300/MO

ACHIEVEMENT AWARDS

NOT EXCEEDING P 10,000/YEAR

GIFTS GIVEN DURING CHRISTMAS/ANNIVERSARY CELEBRATIONS

NOT EXCEEDING P 5,000/EMPLOYEE/YEAR

DAILY MEAL ALLOWANCE FOR OT/NIGHT/GRAVEYARD SHIFT

NOT EXCEEDING 25% OF BASIC MINIMUM

NEW (2015): BENEFITS RECEIVED NOT EXCEEDING BY AN EMPLOYEE PURSUANT TO P10,000.00/YR/EMPLOYEE (PER RR 1CBA AND PRODUCTIVITY 2015) INCENTIVE SCHEME NOTE: IF NOT PART OF ABOVE LIST

NOT DE MINIMIS, IE, TAXABLE/SUBJECT TO WT

The amount of ‘de minimis’ benefits conforming to the ceiling herein prescribed shall not be considered in determining the P 82,000.00 ( amount as amended by RA 10653 February 2015) ceiling of ‘other benefits’ excluded from gross income under Section 32(b)(7)(e) of the Code. Provided that, the excess of

the ‘ de minimis’ benefits over the irrespective ceilings prescribed by these regulations shall be considered as part of ‘other benefits’ and the employee receiving it will be subject to tax only on the excess over the P82,000.00 ceiling. Provided, further , that MWEs receiving ‘other benefits’ exceeding the P 82,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the SMW. Any amount given by the employer as benefits to its employees, whether classified as “ de minimis” benefits or fringe benefits, shall constitute as deductible expense upon such employer. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the BIR. Statutory Minimum Wage (SMW): (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each region shall determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income tax for this purpose. Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise be covered by the above exemption. Other benefits in excess of P 82,000.00 shall be subject to tax;

MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income FROM OTHER SOURCES earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax. Fringe Benefit defined.

"Fringe benefit" means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

Fringe Benefits Not Subject to FBT – The following fringe benefits are not subject to FBT of 32% based on the grossed up monetary value: (1) Fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner; KINDS OF EMPLOYEES

EMPLOYEE BENEFITS Basic Pay

M/S

C (NIT) C (NIT)

R/F

MWE

OT/HP/HP/NSD

SMW(Exempt)

Specific Rules:

exempt

DMB

OTHER BENEFITS

w/in limits

excess

w/in 82k limit

excess

exempt

transfer to 82k limit

exempt

FB

exempt

exempt

C (NIT)

exempt

exempt

SUBJECT TO NIT

(1). Table is not applied if benefit is furnished for the convenience of the employer or necessary in trade or business of the employer; (2). If DMB received exceeds the limits provided by law, the excess shall be treated as other benefits which if not exceeding the 82k limit shall be exempt from payment of tax; (3). If other benefits exceed the 82k limit, the same shall be treated as FB in the case of a M/S employee and C in the case of a R/F employee. In the case of an MWE whose other benefits exceed the 82k limit, the excess shall be subject to NIT; (4). If an MWE has income derived from trade or business or any income other than SMW, the SMW, OT/HP/HP/NSD, DMB within limits, and other benefits within 82k limit, shall still be exempt from tax. Income from other sources together with excess of 82k, if any, shall be subject to NIT; NOTE: If the employee is one of the NRAs not engaged in trade/business under Sec. 25 (c), (d), (e), NIRC, there is no distinction between fringe benefits and compensation income because they are taxed on the gross. If the benefit is either (1) furnished for the convenience of the employer or (2) necessary to the trade or business of the employer, it is not income, not compensation, not fringe benefits and not taxable.

Fringe Benefit Tax is NOT imposed on the following: 1.

2.

3.

Rank and file employees – they do not receive fringe benefits NRA not engaged in t/b under Sec 25 (c), (d), (e) NIRC – they are taxed on the gross at the rate of either 25% or 15%. Filipino counterpart of the NRA under Sec 25 NIRC who chooses to be taxed at the rate of GIT 15%;

INFORMER’S REWARD: ​Forms part of the gross income of the taxpayer

informant and subject to income tax TIPS AND GRATUITIES PAID BY CLIENTS and NIGHT SHIFT DIFFERENTIAL: If paid directly by clients to employees, income and subject to tax on the part of employee but cannot be subjected to withholding tax by the employer; 2. If paid to the employer by reason of service rendered by employees, income, taxable on the part of the employee but subject to withholding by the employer; 3. Night shift differential, income and subject to tax on the part of the employee who is not an MWE but subjected to withholding tax by the employer; 1.

COMPENSATION FOR DEATH, PHYSICAL INJURIES, PHYSICAL DISABILITY PAID BY EMPLOYER TO EMPLOYEE OR HIS HEIRS, OR FOR CAUSES BEYOND THE CONTROL OF EMPLOYEE Not income as mere compensation for the damage or loss of life; 2. Separation pay for retrenchment, redundancy, or any labor saving device is income but not subject to tax due to causes beyond control of employee; 3. Backwages in case of illegal dismissal, income and subject to tax; 4. Separation pay in case of non-reinstatement of employee due to strained relation between employer and employee after illegal dismissal, income but not taxable for cause beyond the control of the employee; 5. Award of moral, exemplary and nominal damages in illegal dismissal cases, are income but if strictly interpreted, should be subject to tax. In liberal interpretation, these are exempt due to causes beyond control of employee. However, exemptions are strictly construed against taxpayer claimant; 1.

EXAMPLES OF INCOME NOT SUBJECT TO IT: GENERAL RULE: ​all income subject to income tax (CGDIRAP):; Exception: ​unless specifically excluded from computation of GI or exempted by law;

income from without of NRC, NRAETB, NRANETB, RFC, AND NRFC; b. income of GPP’s, Joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government; c. gains from sale of assets (capital or ordinary) of NRC,NRAETB,NRANETB,RFC,NRFC which properties are located outside of the Philippines; d. Sale of real property located in the Philippines treated as capital asset shall be exempt from CGT of 6%, provided the ff requisites are complied with: a.

The exemption applies to all kinds of individual TX only, not to corporate TX; vi. The real property sold must be the actual principal residence of the taxpayer/seller; vii. Seller must inform the BIR of his intention to avail of the exemption (within 30 days from sale); viii. Seller must build or purchase another principal residence within 18 months from sale; ix. Proceeds from the sale should be used in building/purchasing new principal residence

6% CGT will be applied proportionately to proceeds not used for new principal residence. e. interest on time or long term bank deposits in local banks which TX did not pre-terminate for a period of five(5) years), applicable only to individuals; f. PCSO/LOTTO winnings; g. Prizes and awards in sports competitions sanctioned by the national sports commission; h. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements but only if the recipient was selected without any action on his part to enter the contest or proceeding and the recipient is not required to render substantial future services as a condition to receiving the prize or award; i. Dividends issued by a DC in favor of another DC; j. Dividends issued by a DC in favor of a RFC; k. Proceeds of Life Insurance policy received by the insured, heirs, beneficiary but interest shall be subject to IT; l. Proceeds of property insurance to reimburse damage to property; m. Proceeds of medical, health and accident insurance to reimburse hospitalization expenses, sickness, or injury sustained; n. Return of premium; o. Gifts, bequests, devises, but the same shall be subject to ET or DT depending on the mode of transfer; x.

Income exempt under a treaty; q. Actual damages as compensation for death, sickness, or injury. All other damages shall be subject to IT; r. Statutory minimum wage of Minimum Wage Earners (MWE); SMW of employees including HP,HP, OP, NSD shall be exempt from income tax. The law is very clear on its intent without any further qualifications, thus, the BIR Issuance, providing that a MWE who receives other benefits in excess of P 82,000.00 OR deriving income from other sources, is NULL AND VOID. Soriano et.al. vs DOF and CIR, et.al. ( 184450/184508/184538/185234), 24 January 2017 s. Managerial/supervisory employees for DMB within limits and 13th month pay and other benefits not exceeding P 82k; note: if prior to jan 1 2015, limit for 13th month pay and other benefits is P 30k; t. Employee benefits furnished by the employer for the convenience of the employer or necessary for the trade of business of the employer; u. Separation pay for causes beyond the control of the employee ( redundancy, retrenchment, illegal dismissal and in lieu of reinstatement); backwages, and damages in labor cases are subject to IT; compensation of loss of earning capacity, subject to IT; v. Retirement benefits from GSIS,SSS, US Veterans Act; p.

Retirement benefits from private retirement plan maintained by the employer provided employee is at least 50 yrs old, with continuous service of 10 yrs, avails of retirement only once with the employer, the retirement plan is approved by BIR; x. Retirement benefits if without retirement plan maintained by the employer provided employee is at 60 yrs old with continuous service of 20 yrs; y. Benefits received from Pag-ibig and Philhealth; z. Campaign contributions received by political parties or candidates ( winning or losing) if not fully utilized by the party or candidate; aa. Association dues paid by homeowners in a subdivision: exempt from IT provided the following requisites are complied with: (1). HOA is duly constituted as defined under RA 9904; (2). LGU issues a certificate stating the basic community services and facilities supplied by HOA and that LGU’s lack of resources to provide, such as basic services which redound to the benefit of all HOA members, ie, security, street and vicinity lights , maintenance, repairs and cleaning of streets, garbage collection/disposal; (3). HOA shows proof that income and dues are used for basic services; w.

But association dues paid by homeowners in a condominium corporation are subject to IT and VAT; bb. De Minimis Benefits (DMB)within limits received by all kinds of employees;

X. TAXABILITY OF CERTAIN TRANSACTIONS:

1. SPECIAL ALLOWANCE OF THE JUDICIARY (SAJ) (withholding taxes) ( RMC 58-2014) ​a. SAJ of judges of equivalent rank of RTC and

CA; b. Special Allowance in an amount equivalent to SAJ not included in number 1; c. Additional allowance given to judiciary and employees; 2. TAXABILITY OF STOCK OPTION PLANS ( RMC 79-2014) ​

KINDS: a. Equity Settlement Option: option to purchase shares of stocks at a specific price and specific date or period; b. Cash Settlement Option: no actual shares of stocks transferred but a person is given the right to obtain the difference between the actual FMV and the nominal value of the shares at a specific date or period; ​RULES: 1. If with Employer-employee relationship: • Without payment of price: employer cannot claim as deduction; • *With payment of price: treated as taxable capital gains on the part of employer; • Subject to DST;

​2. Sale, Barter, or Exchange of Option:

Treated as sale, barter, or exchange of stocks untraded thru the local stock exchange subject to CGT; • If sold, bartered, or exchanged w/o consideration, treated as donation subject to donor’s tax; •

3. Exercise of the Option by the Employees: a. Rank and File: Difference between book value/FMV (whichever is higher) at exercise of option AND price at grant date, is treated as compensation subject to income tax and withholding taxes; b. Supervisory/ Managerial Employees: Difference between book value/FMV (whichever is higher) at exercise of option AND price at grant date, is treated as fringe benefit subject to FBT; c. Difference between book value/FMV (whichever is higher) at exercise of option AND price at grant date, is treated as additional consideration subject to withholding taxes; 4. If granted not to an employee or a supplier of goods/services: Equity Settlement Option: difference between book value/FMV (whichever is higher) at exercise of option AND price at grant date, is treated as donation subject to donor’s tax; 3. Sale of Jewelry/ Gold/Metallic Minerals to NRANETB/NRFC (RR 5-2013)

a. Subject to Advance payment of business/income taxes and actual payment of excise tax by those who sell jewelry, gold and other metallic minerals to NRANETB/NRFC who come to PHILS for short period of time (e.g., as advertised in newspapers); b. Advance payment to be credited for Sale of Gold: • Income Tax: ​ 5% on gross payment; • VAT (12% on GSP)/% Tax (3% on gross sales) • ExciseTax-2% c. Advance Payment for Sale of Jewelry: • Income Tax • VAT/% Tax d. NRANETB/NRFC to maintain records of transactions; e. Hotels/Venue to report to BIR of “buying event” 4. Real Estate Service Practitioners and Other Professionals (RR 10-2013) CWT: 15% if the gross income for the current year exceeds P720,000; and 10%, if otherwise, on professional fees, talent fees, etc., for services rendered by individuals engaged in the practice of profession or callings, such as: • Designers; • Real estate service practitioners (i. e. real estate consultants, real estate appraisers and real estate brokers) requiring government licensure examination given by the Real Estate Service pursuant to Republic Act No.

•

9646; All other profession requiring government licensure examination regulated by the Professional Regulations Commission, Supreme Court, etc. xxx” ( i.e. lawyers, doctors, dentists )

•

CWT: 10% on gross commissions of • customs; • insurance; • stock; • immigration, • commercial brokers; • agents of professional entertainers; •

5. Self-Employed Professionals (RR 4-2014) TRO against implementation of RR 4-2014: • April, 2014: TRO for lawyers; • June 3, 2014: TRO for doctors; • June, 2014: TRO for accountants; • July, 2014: TRO for dentists; Requirements on Self-Employed Professionals: • Register and pay the annual registration fee (ARF) with the RDO/LTDO; • Submit an affidavit (rates, manner of billings, and the factors considered in determining service fees upon registration and every year thereafter on or before January 31); • Register books of accounts and official appointment books ( names of clients/date/time) of their practice of profession /occupation/calling; • Register sales invoices and official receipts (VAT or non-VAT) before using them in any

•

transactions; For pro-bono cases, issue a BIR registered receipt, duly acknowledged by client showing a discount of 100% as substantiation of the “pro-bono’ service;

6. WT for Medical Practitioners ( RR 14-2013) “Medical Practitioners” include doctors, nurses, medical technologists, allied health services, dentists, and other practitioners who are not under an employer-employee relationship; Paid by Hospitals/HMO’s to medical practitioners: 15% WT if the income payments for current year exceeds P 720,000; 10%, if otherwise; • Duty of Hospitals/Clinics/HMO’s: withhold all the taxes due; • Hospitals/Clinics/HMO’s should not allow practitioners to directly accept payments from patients who were confined to hospitals. All payments of professional fees are coursed thru the hospital; Exception: - If there is proof that no fee was charged and paid by patient; - Joint sworn declaration by practitioner and patient (forming part of records of hospital); - Administrator of hospital informs RDO that practitioner refuses to execute sworn statement; •

•

•

Hospitals are required to submit list of practitioners who did not charge any fee from patients and whose charges are paid by patients directly to hospitals; Hospital is required to submit to RDO, sworn statement executed by the president/managing partner of the corporation/company/hospital/clinic as to the complete and updated list of medical practitioners accredited with them.

7 . “TIANGGES” or “Privilege Stores” (RR 162013) “Privilege Store” Defined: stall not permanently fixed to the ground; • normally set up in places like shopping malls, hospitals, office buildings, hotels, villages or subdivisions, churches, parks, streets and other public places; • Purpose is selling a variety of goods/services for short durations of time or during special events (including festivals, fiestas, etc.); • If any business activity is for a cumulative period of more than fifteen (15) days: NOT CONSIDERED AS “PRIVILEGE STORE” and treated as an individual habitually engaged in t/b should be registered as regular TXs’ with invoices/receipts; •

Parties and Obligations:

a. “Exhibitor” or “Organizer”: • primary lessee of the entire space where the operations of privilege stores are held by virtue of a lease contract and who subsequently sub-leases the same to the privilege store operators; Obligations: 1. 5% expanded WT on rentals; remitted 10th day of ff month; 2. Keep Books of Accounts and Issue Receipts ( if sales do not exceed P 50,000.00 – simplified bookkeeping) (3). Submit List of Sales within Five (5) Days after the privilege store operation b. “Privilege Store Operator” • individual leasing from the lessor/owner or subleasing from the “exhibitor” or “organizer” a space upon which privilege stores are erected; •

Obligations: (1) Deduct EWT (5%) on rental payments; (2) File ITR (15 April); (3) Submit Information Statement on Privilege Store Activities. (4) Keep Books of Accounts and Issue Receipts/Sales or Commercial Invoices. If less than P 50,000.00 simplified bookkeeping; (5) Submit List of Sales on Privilege Store Activities to the Exhibitor/Organizer ( within 5 days from operations);

c. IF NOT CLASSIFIED AS “Privilege Stores Operators” (Regular Taxpayers): Obligations: (1). EWT on Rental Payments to Exhibitor/Organizer for Sub-Leased Spaces or Lessor/Owner of Leased Property; (2) Keep Books of Accounts and Issue Receipts/Sales or Commercial Invoices; (3) File Income, Withholding, Business (Percentage or Value Added) and Other Tax Returns, and Pay the Correct Amount of Taxes; (4) File Other Information Returns and include CWT on rentals; 8. Association Dues/HOAs (Villages and Subd’s) (MC 9-2013) •

•

RA 9904: Income and dues of HOAs are tax exempt provided they are used in providing for cleanliness, safety, security, and other basic services of members including maintenance of facilities; New Rule: Income and dues of HOAs are exempt from income tax, VAT, and % tax, provided: (1). HOA is duly constituted as defined under RA 9904; (2). LGU issues a certificate stating the basic community services and facilities supplied by HOA and that LGU’s lack of resources to provide, such as basic services which redound to the benefit of all HOA

members, ie, security, street and vicinity lights , maintenance, repairs and cleaning of streets, garbage collection/disposal; (3). HOA shows proof that income and dues are used for basic services; •

•

Gratuitous Donations to HOA’s (MC 53-2013): SUBJECT to Donor’s Tax; NOT SUBJECT to Income Tax; Onerous Donations in Exchange for Goods, Services or Use or Lease of Properties: (MC 53-2013) TREATMENT: charges from activity in exchange for the performance of a service, use of properties or delivery of an object are SUBJECT to INCOME TAX and VAT or % TAX;

9. On-line Stores (MC 55-2013) •

•

Kinds (as to their participating parties): 1. Business to Consumer (“B2C”): selling goods and services to final consumers; 2. Consumer to Consumer (“C2C”); and 3. Business to Business (“B2B”): job recruitment, online advertising, credit, sales, market research, technical support, procurement and different types of training. Common Types: 1. Online shopping or online retailing – sale directly to consumers over the internet without an intermediary service; 2. Online intermediary service – 3rd party

that offers intermediation services between two trading parties receiving commission. Intermediary service provider (ISP) is a merchandiser/retailer if: • ISP controls such collection of buyers’ payments, and receives commission from the merchant/retailer; • ISP markets multiple products for its own account; 3. Online advertisement/classified ads – uses internet to deliver marketing messages to attract customers; 4. Online auction –conducted through the internet via an online service provider; the seller sells the product or service to the person who bids the highest price. •

Requirements: 1. Register the business at the Revenue District Office (RDO); 2. Secure ATP; 3. Register books of accounts; 4. Issue OR’s and invoices;

10. Marginal Income Earners ( MC 7-2014) Marginal Income Earner (MIE) : individual (self-employed without any compensation income) whose business does not realize gross sales or receipts exceeding P100,000in any I2month period; Activities are principally for subsistence or livelihood, such as but not limited to:

Agricultural – Growers/produce(farmers/fishermen selling directly to consumers); – Small sari-sari stores; – Carinderias; – Drivers/operators of single unit tri-cyle; – Excluding licensed professionals, consultants, artists, sales agents, brokers; –

Requirements/Rules: • Registration with BIR (Form 1901); • Sworn Statement of Income for the year; • NSO Certified or local civil registry BC; • Exempt from Annual Registration Fee; • Registration of books of account ( simplified); • Issuance of principal registered receipts; • Filing of ITR and Payment of annual income tax; • Exemption from business taxes; 11. CGT on sale/barter of S of S (Capital Asset) (RR 6-2013) VALUE of SoS: Use Adjusted Net Asset Method whereby all assets and liabilities of corp are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated value of the equity; VALUE of real property is the HIGHEST OF: • FMV (BIR Commissioner); OR • FMV (Tax Declaration); OR • FMV ( Independent Appraiser). Determination of value of shares:

Step 1: ​FMV of RP is HIGHEST OF: ​MV per Tax Declaration ​ ​ ​ ​ ​ ​Zonal Valuation ​ ​ ​ ​ ​ ​Independent Appraiser Step 2: ​Difference between Book Value and FMV = Adjustment; Step 3: ​Adjusted net value of shares = (value of assets per AFS + adjustment) less liabilities 12. Payouts of Employee Pension Plans ( RMC 392014) •

Income of pension plans ( distributed as pension, as stock bonus, or pension) : all dividends received by employee are subject to income tax;

Payouts representing share of employees: not taxable- just a return of capital; __________________________________________ __________________________________________ _ •

XI. DEDUCTIONS FROM GROSS INCOME

Itemized Deductions (Sec. 34 NIRC): Take note that Sec. 34 pertains only to items related to the trade/business of the taxpayer. Requisites of Deductibility of Items under Section 34 of the Tax Code:

​

(1). Necessary in Trade or Business of the taxpayer; ​(2). Actually paid or incurred; ​(3). Reasonable in amount; and ​(4). Supported by documents.

The following are not allowed to claim any kind of deduction: Taxpayers or income subject to Gross Income Tax (GIT) 2. Income subject to Final Withholding Tax 1.

Comparison between OSD in income taxation and SD for estate taxation: Optional Standard deduction(Income Tax) OSD is in lieu of other deductions from gross income. 40% of gross income (after cost of sales/service) may be deducted

Standard deduction (estate tax) Standard Deduction is in addition to other deductions from the gross estate Maximum amount of P 1M may be deducted

SUMMARY OF ALLOWABLE DEDUCTIONS: (1). Individual earning purely compensation income (CIE): (a) personal exemptions (PE), (b). additional exemptions (AE) , and ©. premium on health and hospitalization insurance (PHHI) (2). Individual engaged in trade or business (SEI) or exercise of profession (SEP): ​PE, AE, PHHI, plus Itemized deductions under

Section 34; OR PE, AE, plus Optional Standard deduction (OSD) Notes:

a. Individuals who are non-resident aliens not engaged in trade or business are not allowed deductions as they are subject to Gross Income Tax. b. Non-resident aliens engaged in trade or business are allowed personal exemptions subject to reciprocity rule. c. All kinds of individual taxpayers are not allowed to claim for deductions on income which are subject to final withholding taxes such as passive income, capital gains on sale of shares of stocks and real property; (3). Individuals earning compensation + exercise of profession; compensation plus trade or business; compensation, exercise of profession, trade or business; (MIE); (4). Corporate taxpayers ​

Itemized deductions under Section 34 OR OSD. Non-resident foreign corporations which are subject to gross income tax are not allowed to claim any deduction. Income of all kinds of corporate taxpayers which are subject to final withholding taxes such as passive income, capital gains on sale of shares of stocks and real property, are not subject to deductions. (5). Deductions (Table) TX

Type of Allowed Deductions

CIE

PE, AE, PHHI

SEP/SEI/MIE PE, AE, + OSD or PE, AE, +ID CORPORATION

OSD or ID

ITEMIZED DEDUCTIONS (A). BUSINESS EXPENSES: Illegal expenses are not deductible whether business is legal or illegal; 2. Legitimate expenses whether business is legal or illegal are deductible; 3. Capital expenditures are not deductible, in lieu thereof, depreciation expense is allowed; 4. “Ordinary” means commonly incurred, necessary means appropriate and helpful to the taxpayer or intended to realize profit or to minimize loss; 5. Rentals on lease of property provided taxpayer does not acquire interest other than as a mere possessor, thus rentals on lease to own scheme are not deductible as they are capital expenditures already; 6. Real estate tax on the property leased and shouldered by the lessee is deductible expense on the part of the lessee BUT treated as taxable income on the part of the lessor; 7. Cost of improvements introduced by lessee in an ordinary asset are not deductible expense on the part of the lessee as these are capital investment on his part but maybe depreciated by the lessee; 8. Travel and transportation expenses or expenses while away from home incurred by employers and given to employees pursuant or trade or business when necessary and reasonable; 9. Advertising expenses designed to stimulate the current sale of merchandise or use of services 1.

are deductible business expenses; Examples of non-deductible business expenses: compensation to public relations firm for services rendered in carrying on campaign to sell additional capital stock; 2. expenses relating to recapitalization and reorganization of corporation; 3. promotion or marketing expenses which are tantamount to purchase of goodwill; 4. bribes and kickbacks; 5. expenses for major repairs are not deductible but expenses for minor repairs are deductible; 6. personal and living expenses of the taxpayer as they are already allowed to claim for personal and additional exemptions; 7. advertising expenses/marketing expenses designed to stimulate the future sale of merchandise or use of services as these are already considered as capital outlay; 1.

(B). Interest on Loan The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income subject to Tax Arbitrage Rule: the TXs otherwise allowable deduction for interest expense shall be reduced by 33% of the interest income subjected to final tax; (C ). Taxes as deduction: ( income and estate tax)

Income Tax

Estate Tax

Only taxes previously paid may be deducted Taxes which remain unpaid and accruing until (unpaid taxes can never be deducted) the time of death may be deducted from the gross estate The taxes must be in connection with taxpayer’s The taxes need not be in connection with trade/business decedent’s trade or business

(D) Bad Debts/Interest on Loans: ( income and estate tax) Bad debts should be documented, determined to be worthless and completely charged off; Facts: X borrowed P100,000 from Y with 10% interest per annum. Total amount due is P110,000. 1.

2.

X paid Y P110 000. Is it income on the part of Y? Only the 10% interest is income and taxable. Can X deduct the 10% as interest on loan? Yes, provided that the loan was in relation to X’s trade or business and subject further to the 33% limitation of the interest earnings of the said debtor; X was not able to pay Y Tax consequence: Y may declare the P110,000 as bad debt. It will be deductible if: (1) Y is engaged in trade/business and (2) the amount of bad debt is in relation to his trade or business. There are no tax consequences on X. NOTE: There can be no deduction if X and Y are related to each other under Sec. 36(B), NIRC.

3.

If X dies before paying his debt

Tax consequences: Y will have to file a claim during settlement of X’s estate. It will be considered as a claim against the estate (CAE) and the entire amount may be deducted from the estate whether or not the loan is in connection with X’s trade or business. If the estate subsequently pays Y, is it income on his part? Only the interest is income and taxable. • What if prior to X’s death, Y claimed the debt as a deduction (bad debt) and during the settlement of the estate, the court ordered that Y be paid the amount of the loan + interest? Apply the tax benefit rule. •

4.

If Y dies before X pays the debt. Tax consequences: a. The estate of Y should include the debt as part of Y’s gross estate (a debt is an intangible personal property, hence should be included in the gross estate as provided under Section 85 of the NIRC) b. The debt is an allowable deduction from the gross estate of Y as a claim against an insolvent person (CAIP) If the estate of Y is allowed to deduct and X subsequently pays the debt + interest, the tax benefit rule cannot be applied. The payment will form part of the income of the estate subject to Net Income Tax. Remember that the estate is

considered as a taxpayer. (E). Casualty Loss: (income and estate tax) The property subject matter of the loss (1) must not be compensated by insurance and (2) must be lost due to theft, robbery, embezzlement or other natural calamity . The loss is characterized by suddenness; LOSSES IN INCOME TAX

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​LOSSES IN ESTATE TAX

Property lost must be in relation to trade/business of The property lost may or may not be in relation to taxpayer trade/ business of deceased The loss must occur during the taxable period The loss may occur until 6 months after death

NOTE: If the loss of property is previously deducted for income tax purposes, it cannot be deducted for estate tax purposes. NOTE: Tax Benefit Rule applies to: (1). Taxes claimed and allowed as deductions from gross income when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction; (2). Bad debts claimed and allowed as deductions from gross income deducted but subsequently paid or recovered; (3). Casualty losses deducted as such but later recovered;

(F) DEPRECIATION Depreciation is allowed only for taxpayers engaged in trade or business . Depreciation period for personal properties is five (5) years while the period for real properties ranges from 15 to 25 years depending on the economic or useful life of the asset. Rules: (1). A taxpayer who is purely earning purely compensation income is not allowed to claim depreciation as a deduction; (2). In case a taxpayer purchases an asset used in his trade or business, he is not entitled to claim the amount as deductible business expense considering that the same is a capital expenditure, but the taxpayer is allowed to claim depreciation of the asset as a deduction; (3). Under a Build Operate Transfer agreement, the builder is allowed to depreciate the asset until the time of transfer and after transfer, the transferee can also claim depreciation of the asset based on the FMV of the property at the time of acquisition; (4). Under a lease agreement with provision that all permanent improvements shall accrue to the lessor upon end of lease contract, the lessee who is engaged in t/b can claim depreciation of the improvements while the lessor can claim depreciation of the leased property excluding the improvements;

(5). Under a lease to own contract, the lessee who introduces the improvements shall have the right to claim depreciation of the improvements only while the lessor claims depreciation of the leased property only. The lessee cannot claim rentals for the lease as deductible business expenses because he acquires interest other than as a mere possessor of the property; Upon expiration of the contract, the lessee owns the property in full and lessor loses all rights over the property; (G). PREMIUM ON HEALTH AND HOSPITALIZATION INSURANCE (PHHI) This deduction is allowed to both taxpayers who are engaged in trade or business and those who are not engaged in trade or business in the amount of P 2,400.00 per family provide that the gross annual income does not exceed P 250,000.00. (H). RESEARCH AND DEVELOPMENT Expenses for research and development to be deductible from the gross income are limited to those which are related to the trade and business of the taxpayer.

PERSONAL EXEMPTIONS/ADDITIONAL EXEMPTIONS

1. Individual taxpayers regardless of status are entitled to P50,000 personal exemption. Additional exemption is at P 25,000.00 per dependent. . "Dependent" refers to:

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; b. if such dependent child, regardless of age, is incapable of self-support because of mental or physical defect; c. PWD Filipino citizen related by consanguinity within 4th degree of relationship to the TX/benefactor, not gainfully employed, and chiefly dependent upon and living with the TX/benefactor; th d. PWD Filipino citizen related by affinity within 4 degree of relationship to the TX/benefactor, not gainfully employed, and chiefly dependent upon and living with the TX/benefactor; e. Foster child, not more than 12 years of age, living with and dependent to the TX for chief support for at least 12 months during the taxable period and under the supervision of the DSWD; a.

2. The husband shall be the proper claimant of the additional exemption for qualified dependent children unless he explicitly waives his right in favor of his wife in the Application for Registration (BIR Form No. 1902) or in the Certificate of Update of Exemption and of Employer’s and Employee’s Information (BIR Form No. 2305), whichever is applicable . Provided, however, that where the spouse of the employee is unemployed or is a nonresident citizen deriving income from foreign sources, the employed spouse within the Philippines shall be automatically entitled to claim the additional exemptions for children.

3. Personal Exemption Allowable to Nonresident Alien Individual Engaged in Trade or Business in the Philippines (NRAETB). - A nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject - or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens or resident of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title. 4. For purposes of Additional Exemption, a PWD ( required to be a child of claiming parent) and Foster Child ( as far as the foster parent is concerned) may qualify as dependent, subject to the “maximum of four dependents rule”. Senior citizens are not qualified as dependents. 5. The additional exemption for dependent shall be claimed by only one of the spouses in the case of married individuals. 6. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. 7. Change of Status:

If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. ITEMS NOT DEDUCTIBLE ( Section 36 (a))

General Rule. - In computing net income, no deduction shall in any case be allowed in respect to: (1) Personal, living or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under Subsection (G) (1) of Section

34 of the Code. (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. Losses from Sales or Exchanges of Property. In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly – (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust. EXAMPLES OF EXPENSES AND THEIR DEDUCTIBILITY/NON-DEDUCTIBILITY UNDER SECTION 34: a.

b.

Illegal expenses whether business is legal are deductible or illegal but Legitimate expenses whether business is legal or illegal are deductible; Capital expenditures ( expenses to purchase assets, or to make an existing asset) ARE NOT DEDUCTIBLE;

Expenses for major repairs: NOT DEDUCTIBLE; d. Rentals on lease of property provided taxpayer does not acquire interest other than as a mere possessor, thus rentals on lease to own scheme are not deductible as they are capital expenditures already: NOT DEDUCTIBLE; e. Real estate tax on the property leased and shouldered by the lessee is deductible expense on the part of the lessee BUT treated as taxable income on the part of the lessor; f. Cost of improvements introduced by lessee in an ordinary asset are not deductible expense on the part of the lessee as these are capital expenditures on his part but maybe depreciated by the lessee; g. Travel and transportation expenses or expenses while away from home incurred by employers and given to employees pursuant or trade or business when necessary and reasonable are deductible; h. Advertising expenses designed to stimulate/increase the current sale of merchandise or use of services are deductible business expenses; BUT advertising expenses to maintain the sales are NOT DEDUCTIBLE because in the nature of goodwill; i. Compensation to public relations firm for services rendered in carrying on campaign to sell additional capital stock: NOT DEDUCTIBLE j. expenses relating to recapitalization and reorganization of corporation; NOT DEDUCTIBLE k. bribes and kickbacks; NOT DEDUCTIBLE c.

expenses for major repairs are not deductible but expenses for minor repairs are deductible; m. personal and living expenses of the taxpayer NOT DEDUCTIBLE as they are already allowed to claim for personal and additional exemptions; n. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. NOT DEDUCTIBLE; o. Losses from Sales or Exchanges of Property. In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly – l.

Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants; or 2. Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or 3. Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same 1.

individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; 4. Between the grantor and a fiduciary of any trust; or 5. Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or 6. Between a fiduciary of a trust and beneficiary of such trust.

RECOGNITION OF GAINS/LOSSES IN EXCHANGES OF PROPERTY

RULES: (1). All gains and losses realized or incurred in exchanges of ordinary and capital assets are RECOGNIZED; (2). In exchanges of capital assets with gains, the gains are not immediately included in the gross income but first charged against losses sustained in exchanges of capital assets. In recognizing the gains/losses, the taxpayer may apply the concept of holding period ( if held for more than one year- g/l recognized at 50%; if held for less than one year – g/l recognized at 50%); The holding period does not apply to a corporate taxpayer, thus, all gains/losses are recognized at 100%;

(3). After charging the gains against the losses and the taxpayer realizes Net capital gains, the same shall be included in the gross income of the taxpayer. After charging the gains against the losses and the taxpayer realizes net capital loss, then a taxpayer, other than a corporation, is allowed to carry over the same for three succeeding years (NCLCO); (4). In exchanges of ordinary assets with gains, the gains are not immediately included in the gross income of the taxpayer but first charged against losses sustained in exchanges of ordinary assets. Holding period does not apply. After charging the gains versus the losses, if taxpayer realizes net ordinary gains, include the same in the gross income but if the taxpayer realizes net ordinary losses, no carry over will be allowed; (5). Rule Nos. 1 to 4, are not applied in the following instances: (NO GAINS/ NO LOSS RECOGNIZED) ​(a). In case of valid merger and consolidation;

(b). In case a stockholder exchanges property for stocks in a corp wherein he, together with three others, acquires control over the corporation; ©. In wash sales of shares of stocks wherein the taxpayer sells shares of stocks wherein he realized gains, gains are always recognized but in case of loss sustained and 30 days prior to sale or 30 days after the sale, he acquires similar shares of stocks as the ones disposed of and for which sustained losses, ALL LOSSES WILL NOT RECOGNIZED;

(d). In sale of shares of stocks (capital in character), not traded thru local stock exchange, gains are always subject to either 5% or 10% FWT. If traded, gains or loss, the tax is % tax under Section 127 of the NIRC; (e). In sale of real property located in the Philippines (capital in character), whether gains or loss, the taxpayer shall be subject to 6% CGT which is in the nature of FWT. COMPARISON BETWEEN NET CAPITAL LOSS CARRY OVER (NCLCO) AND NET OPERATING LOSS CARRY OVER ( NOLCO)

Rules: (1). NOLCO refers to net operating loss carry over which is applicable only to a corporate taxpayer. If a corporate taxpayer has more deductions than gross income, the corporation sustains net operating losses which maybe carried over for three years. Consequently, if during the succeeding year, the taxpayer realized taxable net income, this maybe reduced by the net operating loss carried over from the previous year; (2). NCLCO refers to net capital loss carry over which is applicable only to individual taxpayers. This results from exchanges of capital assets wherein gains and losses have been recognized such that during the taxable period, after charging all capital losses from the capital gains, the taxpayer may either realize net capital gains (included in the gross income therefore taxable) OR net capital loss ( which maybe carried over for the next year);

(3). NOLCO pertains to expenses and deductions from gross income while NCLCO pertains to exchanges of capital assets; (4). Both NOLCO and NCLCO are not applicable to a pure compensation income earner; COMPARISON OF INCOME TAX, ESTATE TAX AND DONOR’S TAX IN THE TREATMENT OF CAPITAL AND ORDINARY ASSETS [Secs. 100 (Donor’s tax), 85(G) (Estate Tax) and 24(D) (CGT), NIRC]

Transfers for Insufficient Consideration: If real property, capital asset, located in the Phils sold at gain or loss, impose CGT of 6%; b. If any other property or real property other than capital asset, or located outside Phils, gains are subject to NIT; in case of loss, impose either donor’s tax or estate tax. Impose estate tax, if transfer is at the same time is in contemplation of death, pursuant to general power of appointment, or revocable transfer; c. “PAG NAGBENTA NG LUGI, NAMIGAY NG LIBRE”; d. The “libre portion is subject to either donor’s tax (Section 100, NIRC) or estate tax (Section 85g, NIRC). Donor’s tax is imposed on the difference between the FMV at the time of sale versus consideration. Estate tax is imposed on the difference between the FMV at the time of death versus the consideration; a.

Example: ​X has the following real properties all valued at P 3M each.

Within the Philippines: ​

​House and

Lot ​Parlor ​

In the United States: ​Vacation house ​ ​Parlor Tax consequences if each real property was sold at P50,000: • Sale of House and Lot in Phils. - subject to CGT on sale of real property (6%) since it is a capital asset and CGT is tax on the presumed gains realized from the sale • Sale of Parlor located in the Phils. - subject to donor’s tax or estate tax and not NIT since there is no income derived from the sale • Sale of Vacation house in the US - donor’s tax is imposed on the difference between the fair market value of P3M and the consideration of P 50,000; if estate tax is applicable, difference between FMV at the time of death and consideration; • Sale of parlor in the US - donor’s tax is imposed on the difference between the fair market value of P 3M and the consideration of P 50,000; if estate tax is applicable, difference between FMV at the time of death and consideration; ​

•

​

However, if the seller/taxpayer is a nonresident citizen or an alien, the sale of real property outside the Philippines for insufficient consideration is not subject to NIT. The same shall, however, will be subject to donor’s or estate tax taxable in the case of a non-resident citizen and a resident alien;

​Example:

​X has the following personal

properties all valued at P1M each. ​ ​ ​Within the Philippines: ​Car for personal use Car used for the parlor in the Phils. ​

In the United States: ​Car for personal use when on vacation abroad ​ ​Car used for the parlor in the US ​

Tax consequence if each was sold at P50,000 all will be subject to donor’s tax When property other than real property provided under Section 24(B) NIRC is transferred for insufficient consideration, the difference between the consideration and the fair market value at the time of transfer shall be considered as a donation subject to donor’s tax (Section 100) or estate tax (Section 85g). If the seller is a Non-Resident Alien at the time of transfer for insufficient consideration, only the property in the Philippines is taxable. All kinds of donors except NRA are taxable for donations of property within and outside the Philippines. Rules on determining taxability: ​INCOME TAX (source of income determines

taxability)

Taxable Income RC NRC NA NRA Income within the ü ü ü ü Phils. Income outside the ü û û û Phils.

​ESTATE AND DONOR’S TAX (location of the

property determines taxability) RC NRC NA NRA Located within the Phils. Located outside the Phils.

ü

ü

ü

ü

ü

ü

ü

û

Transfers of property not subject to estate tax: (Section 87, NIRC)

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

Sale of Shares of Stocks: Tax treatment if shares of stocks outside the Philippines are sold cheap and seller is NRA, do we impose CGT on shares of stocks outside the Philippines? Unfortunately, that is missing in the law. Correlation with Sec. 85(B) NIRC: If the transfer for insufficient consideration is at the same time in contemplation of death in the nature of a revocable transfer, or property passing under a general power of attorney, CGT and donor’s tax are not imposed. We impose estate tax. Please take note that the transfer occurs during the lifetime of the transferor. What happens if the donor’s tax has been paid and transferor dies later on? • The payment shall be treated as part of the estate. • Upon death, if it is determined that the property was transferred for insufficient consideration and in contemplation of death, it shall be subject to estate tax. Situs of Tax on Intangible Personal Property (from point of view of income, estate and donor’s taxes) Income Tax: ​

General Rule: Mobilia sequuntur personam (movables follow the person) Exceptions: 1. Wells Fargo Bank v. CIR (70 Phil. 325) – shares of stock are also taxable in the situs of their actual location; 2. When the law itself provides for a different situs Example: Section 104, NIRC for estate and donor’s tax purposes; For donor’s tax and estate tax purposes: Apply Section 104 of NIRC subject to Reciprocity Rule B. VALUE ADDED TAX

(A). Transactions covered by Value Added Tax (VAT): ​

(1). Each sale of goods in the course of trade or business; ​(2). Each sale of service in the course of trade or business; ​(3). Each importation of goods whether or not in the course of trade or business. In VAT, real property is considered as goods. IN case of rendition of service not pursuant to employer-employee relationship, the same shall be covered by VAT. (B). Transactions deemed sale in VAT:

There is no actual sale of goods but the law considers the goods sold, thus, subject to VAT, such as: ​

(1). Transfer, use or consumption not in the course of trade or business of goods or properties originally intended for sale or use in the course of trade or business; (2). Distribution or transfer to shareholders or investors as share in the profits of Vat registered person or to creditors in payment of debt; (3).Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and (4). Retirement from or cessation of business with respect to inventories of taxable goods existing as of the time of retirement or cessation; ©. How does VAT work? Output Tax less Input Tax = VAT PAYABLE. IF OUTPUT TAX IS MORE THAN INPUT TAX, VAT PAYABLE; IN CASE INPUT TAX IS MORE THAN THE OUTPUT TAX, TAX CREDIT OR REFUND IS THE AVAILABLE REMEDY FOR THE TAXPAYER. ​

Output tax is the value added tax paid on sales of a vat registered person or entity while input tax is the value added tax on trade and business related purchases of the taxpayer. (D). Rates of VAT:

(1). 12% of the gross sales (sale of goods)/ gross receipts ( sale of service)/ amount fixed by the Bureau of Customs to include excise and % taxes (for importation); (2). Zero Rate; and (3). Exempt Transactions. (E). Distinctions transactions:

between

0%

and

exempt

(1). 0% rated transactions are not subject to VAT at all stages while exempt transactions are not subject to VAT only at a particular stage; (2). In 0% rated transactions, the input tax attributable to the said transaction is allowed to be credited against the output tax while in exempt transactions, the input tax is not allowed to be credited against the output tax. (F) ZERO (0%) RATED TRANSACTIONS: Sections 106 and 108, NIRC Sale of Service: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, rendered to a person engaged in business conducted outside the Philippines or to a nonresident 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 for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; (4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof. (5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and

(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. Sale of Goods: (a) Export Sales. - The term "export sales" means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and (5) Those considered export sales under Executive Order NO. 226, otherwise known as the "Omnibus Investment Code of 1987", and other special laws; and (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations; (b) Foreign Currency Denominated Sale. The phrase "foreign currency denominated sale" means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

G. RELEVANT EXEMPT TRANSACTIONS (Section 109, NIRC) (A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of or king generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered in their original state; (C) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines; (G) Medical, dental, hospital and veterinary services except those rendered by professionals. (I) Services rendered by individuals pursuant to an employer-employee relationship;

(P)

​1. Sale of real properties not primarily

held for sale to customers or held for lease in the ordinary course of trade or business; 2. Real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws; 3. Residential lot valued at P 1,919,500.00 and below; 4. House and lot, and other residential dwellings valued at P 3,199,200.00 and below: (Q) Lease of a residential unit with a monthly rental not exceeding P 12,800.00; (W) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P 1,919,500.00; NOTE: Subject to % Tax at the rate of 3% H. ADMINISTRATIVE CLAIM FOR REFUND OF VAT ( Section 112 of NIRC) (MC 54-2014) •

2:120:30 (VIP Periods)

•

•

•

•

•

Administrative claim for refund of Input VAT on zero rated transactions must be filed two (2) years from close of taxable quarter when sale is made; BIR decides within 120 days from receipt of claim for refund; If not acted upon by BIR, deemed DENIED; Without a decision or an “inaction xxx deemed a denial” of the CIR within the 120 day period, the CTA has no jurisdiction over a petition for review. (CIR vs. San Roque Power Corporation;Taganito Mining Corporation vs. CIR; Philex Mining Corporation vs. CIR; G.R. No. 187485/G.R. No. 196113/G.R. No. 197156. February 12, 2013); After receipt of decision issued by the BIR denying the claim for refund OR in case of nonaction by the BIR, the TX MUST, within THIRTY (30) DAYS from receipt of the actual decision or THIRTY (30) DAYS from expiration of the 120 day period, go to CTA Division for appeal; The 30-day period provided for under Section 112 (C) of the National Internal Revenue Code (NIRC) within which to appeal the decision of the Commissioner of Internal Revenue (CIR) to the Court of Tax Appeals (CTA) need not necessarily fall within the two-year prescriptive period;

III. DONOR’S TAX

A. KEY WORDS: gratuitous, inter vivos, with donative intent, applicable to both individuals and corporations, FMV at the time of gift; B. Taxability is dependent on location (WITHIN OR WTHOUT) of the property; WITHIN WITHOUT ü ü RC ü ü NRC ü ü RA ü û NRA

B. Tax is computed on a calendar year basis but paid 30 days after each gift. As many gifts TX makes in a year, the higher the tax; C. Strangers and Not Strangers Tax Payable by Donor if Donee is a Stranger. When the donee or beneficiary is stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a 'stranger', is a person who is not a: (1) Brother, sister (whether by whole or halfblood), spouse, ancestor and lineal descendant; or

(2) Relative by consanguinity in the collateral line within the fourth degree of relationship. If Donee is not a stranger, we apply the scheduler type of tax ranging from 2% to 15%; D. Transfer for insufficient consideration ( see discussions on correlation with Sec 24(D), 85(G)); E. Campaign Contributions for Political Parties and Candidates ( see previous discussions) F. Renunciation of inheritance specific as to share or as to an heir, subject to donor’s tax. Renunciation which is generic, no donor’s tax component; G. Gross Gifts/ Deductions from Gross Gift DONOR

RC NRC RA NRA

LOCATION of PROPERTY

DEDUCTIONS

WITHIN WITHOUT

Dowries/Gift on Transfer in favor of Transfer in favor of account of Various Organizations Govt marriage ( ( 30% restriction ( exempted in full) P 10,000.00) applies)

ü ü ü ü

ü ü ü û

ü ü ü û

ü ü ü ü

ü ü ü ü

IV. ESTATE TAX

A. KEY WORDS: Mortis Causa, applicable an individual only, FMV at the time of DEATH; B. Taxability is dependent on location (WITHIN OR WTHOUT) of the property;

WITHIN WITHOUT ü ü RC ü ü NRC ü ü RA ü û NRA

C. GROSS ESTATE - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate; D. INCLUSIONS IN THE GROSS ESTATE ( DTRP):

(A) Decedent's Interest; (B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth.

(C) Revocable Transfer. (1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death. (2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the

power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of death. (D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. (E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount

receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. (F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code. (G) Transfers for Insufficient Consideration. If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent. E. EXEMPTIONS FROM ESTATE TAX; SEC. 87

Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed: (A) The merger of usufruct in the owner of the naked title;

(B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; (C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and (D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes. F. DEDUCTIONS ( 14 items) Decedent FE JE CAE CAIP UM UT CL ME RA4917 TPU SD FH VD CSSS

ü NRC ü RA ü NRA In proportion to estate located within û RC

ü ü ü ü ü ü

ü ü ü

ü ü ü

ü ü ü

ü ü ü

ü ü ü

ü ü ü û

ü ü ü ü

ü ü ü û

ü ü ü û

ü ü ü ü

ü ü ü ü

Notes: 1. FE: 5% of gross estate or actual funeral expense but not to exceed P 200,000.00; 2. JE: No limit as to amount referring to actual expense sin the proper administration and settlement of estate; 3. Add to GE before deduction: CAIP, UM, RA 4917;

4. ME: medical expenses within 1 year prior to death but not to exceed P 500,000.00; 5. SD and FH: up to P 1 million per deduction but P 1M for FH chargeable directly to value of FH; 6. CSSS is not one-half of conjugal assets; 7. VD applies to property inherited or received as a gift;

V. REMEDIES UNDER THE NIRC TAX RETURN - a subscribed and sworn statement filed by the taxpayer containing relevant and material information. All taxes under the NIRC are in the nature of self-assessed taxes: Information required in a tax return: (examples) • Name, address and TIN of taxpayer • For INCOME TAX: source of income and deductions allowed • For ESTATE TAX: list of properties in the estate and the deductions allowed If the taxpayer falsifies or forges an entry or files a return fraudulently or in bad faith, he will be criminally liable for PERJURY or FALSIFICATION as the circumstances may apply PLUS DEFICIENCY TAXES. In case of individuals engaged in trade or business, audited financial statements by a CPA are necessary to support the return;

There is no return filed by the TX who was subjected to final withholding tax, but the withholding agent must file the WT return; • In case of CGT, a return is filed 30 days after each transaction •

RULES ON RETURNS OF INDIVIDUALS: INDIVIDUAL RETURNS:

TX

REQUIRED

TO

FILE

(a) Every Filipino citizen residing in the Philippines; (b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and (d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines. INDIVIDUAL TX NOT REQUIRED TO FILE RETURNS: (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income;

(b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return; (c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and (d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. NOTE: The foregoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. INCOME COVERED BY THE RETURNS:

The income tax return shall be filed in duplicate by the following persons: (a) A resident citizen - on his income from all sources; (b) A nonresident citizen - on his income derived from sources within the Philippines; (c) A resident alien - on his income derived from sources within the Philippines; and (d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within the Philippines. Where to File? Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner. When to File? (1) CIE: The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year. (2) CGT: Individuals subject to tax on capital gains;

(a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and (b). From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition. ​3. SEP/SEI/MIE: ​Q1: 15 May ​ ​ ​ ​ 2: 15 August Q ​ ​ ​ ​ 3: 15 October Q ​ ​ ​ ​ R: 15 April of the following year A ​ ​ ​

Husband and Wife: Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year. Return of Parent to Include Income of Children: The income of unmarried minors derived from

properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax. Persons Under Disability: If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns. Signature Presumed Correct: The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him.

RULES ON CORPORATE RETURNS: Requirements: Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.

Taxable Year of Corporation: A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner; Return of Corporation Contemplating Dissolution or Reorganization: Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange: Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5) (c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year. Extension of Time to File Returns: The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code. Returns of General Professional Partnerships: Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners. WHEN: ​Q1,Q2,Q3, on or before 60 days after close of quarter; ​AR: CY on or before 15 April of the following year; ​AR: FY on or before the 15th day of the

fourth month after close of fiscal year Kinds of filing of return: 1. filing in good faith 2. filing in bad faith (fraudulent filing) 3. non-filing SUBSTITUTED FILING applies to a compensation income earner who: is employed only by one employer 2. there is no other form of income but compensation 3. not received any investigation prior to said substituted filing 1.

There are only 2 parties in tax remedies: TAXPAYER and BIR

the

A return may be amended within 3 years from the date of filing of the original return provided that no notice of investigation has ACTUALLY been received by the taxpayer; Sec. 5 to 15 NIRC provide for powers of BIR to determine whether or not the entries in the return are true and correct. When BIR exercises any or all the powers in Sec. 5-15 NIRC and has negative findings, an investigation will be conducted. A Letter of Authority shall first be issued, then by a preliminary assessment notice, and eventually a Final Assessment Notice will be issued.

Preliminary Assessment Notice - is a form of informal conference with the taxpayer and allows the BIR to open his books of account. The taxpayer’s refusal to open books of account will cause the BIR to issue a jeopardy assessment. Final Assessment Notice is later issued; No Preliminary Assessment Notice (PAN) is required (Sec. 228, NIRC): 1.

2.

3.

4.

5.

When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable yr; or When the excise tax due on excisable articles has not been paid; or When an article locally purchased or imported by an exempt person, such as, not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

FINAL ASSESSMENT NOTICE assessment for deficiency tax

(FAN)

–

Guidelines for Execution of Waivers (RMO 14-2016)

• Since the TX is the applicant and the executor of the extension of the period of limitation for its benefit in order to submit the required documents and accounting records, the TX is charged with the burden of ensuring that the waivers of statute of limitation are validly executed by its authorized representative; • The authority of the TX representative who participated in the conduct of audit or investigation shall not be thereafter contested to invalidate the waiver; • The waiver may or may not be notarized. It is sufficient that the waiver is in writing; • Considering that the waiver is a voluntary act of TX, the waiver shall take legal effect and be binding on the taxpayer upon its execution thereof; • TX’s duty to submit waiver to the CIR or officials previously designated in existing issuances or the concerned revenue district officer or group supervisor as designated in the Letter Of Authority/Memorandum of Assignment who shall then indicate acceptance by signing the same. • Waiver shall be executed and duly accepted prior to the expiration of the period to assess or to collect. • TX has the duty to retain a copy of the accepted waiver. • Two (2) material dates that need to be present on the waiver: a) The date of execution of the waiver by the taxpayer or its authorized representative; and b) The expiry date of the period the taxpayer waives the statute of limitations • Before the expiration of the period set on the previously executed waiver, the period earlier set may be extended by subsequent written waiver; DATE OF FILING PRESCRIPTIVE PERIOD 1. Filed on due date

3 years from due date

2. Filed before due date

3 years from due date

3. Fled beyond due date

3 years from actual filing

4. Fraudulent filing

10 yes from discovery of bad faith/fraud

5. Non-filing

10 years from discovery of non-filing

6. WAIVER BY TX: Depends on the agreement of the parties provided that the agreement to extend is executed prior to expiration of the original period of assessment;

Due Dates for filing of Return: Income Tax: ​Individuals: ​ ​April 15th of the following year Corporate taxpayer: ​3 quarterly returns on a cumulative basis - 60 days from the end of the

quarter ​ ​1 final consolidated return filed on: - Calendar year: April 15th - Fiscal year: 15th day of the 4th month following close of fiscal year Estate Tax – 6 months from death Donor’s Tax - 30 days from the donation reckoned from the date of document VAT – 3 quarterly returns plus 1 final consolidated return but with monthly remittances on or before the 10th day of the month covering the transactions for the previous month. GROUNDS FOR SUSPENSION OF PRESCRIPTIVE PERIOD OF ASSESSMENT Taxpayer requests for reinvestigation which is granted by the Commissioner 2. Taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected 3. When the warrant of distraint or levy is duly served upon the taxpayer and no property could be located 4. When the taxpayer is out of the Philippines 1.

The date of issuance AND receipt of notice of assessment is important in determining prescriptive period. Non-filing v. Late Filing

​If the filing of return is beyond the taxable

year, it is equivalent to non-filing If the filing is made within the taxable year but beyond the due date, it is late filing FINAL ASSESSMENT NOTICE: ​

The taxpayer must file an administrative protest within 30 days from receipt of final assessment (non-extendible); It need not be in the form of a pleading and may be a letter for reinvestigation, recomputation or motion for reconsideration • If the taxpayer files beyond the 30-day period, it is automatically denied • If the last day of filing falls on a Saturday, the next business day shall be considered as the last day •

2 KINDS OF PROTEST 1.

2.

Complete – the protest includes all necessary documents Incomplete – the documents may be completed within a period of time as maybe required by the BIR which period shall not exceed 60 days;

The protest may result in: ​

GRANT – end of the process DENIAL ​

​

​

​

​

​

the decision may

be appealed to CTA Division 30 days from receipt of the same ​

​

​

PARTIAL GRANT/DENIAL ​

​

​

NON-ACTION WITHIN 180 DAYS FROM FILING ​ Appeal may be taken at any time from the 181st to the 210th day (30 days from lapse of 180-day period) In case of an incomplete protest, the 180-day period will start to run on the day the required documents are completed (actual receipt of documents by the BIR) If the taxpayer refuses to submit the documents, the 180-day period will not run • If submission of complete documents is made beyond the given period, the 180-day rule will still apply provided that the BIR recognizes the late submission •

If BIR issues a decision granting/denying the protest after the 180-day period and there is already an appeal pending in the CTA division, the appeal shall continue and the taxpayer shall manifest before the CTA that BIR has issued a

decision. Is there a need to file another appeal on the decision of the BIR? There is no need for filing of a new appeal as one is already pending before the CTA. If the BIR decision is in favor of the taxpayer, the taxpayer can withdraw his appeal or inform CTA of BIR decision if protest is denied; INSTANCES WHEN DIRECT APPEAL TO CTA EN BANC IS ALLOWED: 1.

2.

Decisions of RTC in tax collection cases rendered in exercise of its appellate jurisdiction; Decisions of the Central Board of Assessment Appeals in local taxation cases

CTA DIVISION may process ​

​

​

DENY ​

​

​GRANT – ends the

​

​

​

​

​

PARTLY GRANT/DENY to the CTA en banc

​appeal

What is the period to appeal to the CTA en banc? RA 9282 does not provide a period so we follow the Rules of Court (15 days from receipt of decision). In the meantime, the prejudiced party may file a motion for reconsideration or motion for new trial within 15 days from receipt of the unfavorable decision rendered by the Court of Appeals Division. Is the BIR allowed to appeal to the CTA?

The BIR may not appeal its own decision to CTA division but it may appeal the decision of CTA Division to CTA en banc. Either party or both parties may file the appeal to CTA En Banc. What is the effect if the BIR issues a second assessment pending a protest regarding the first assessment? •

•

If the second assessment is substantially the same as the first, there is no need to file another protest If the two assessments are substantially different, another protest is necessary otherwise, the second assessment will become FINAL & EXECUTORY

PRESCRIPTIVE PERIOD FOR COLLECTION OF TAXES: ASSESSMENT (A)

COLLECTION (C)

Return is filed on or before due date

3 years from due date

5 years from receipt of A

Return is filed after due date

3 years from actual filing

5 years from receipt of A

Fraudulent filing of return

10 years from discovery of 5 years from receipt of A fraud/bad faith

Non-filing

10 years from discovery of non- 5 years from receipt of A filing

No assessment is issued by the BIR The BIR may opt not to issue assessment when: 1. return is filed fraudulently; or 2. no return is filed

10 years from discovery of filing of fraudulent return or non-filing

JURISDICTION IN TAX COLLECTION SUIT (apply BP 129 and RA 9282)

MTC and other lower courts

RTC

CTA

Within Metro Manila

P 0.00 to P 400, 000

More than P 400,000 to below P 1 M

P 1M & above exclusive of interest, penalties, surcharges

Outside Metro Manila

P 0.00 to P 300, 000

More than P 300, 000 to below P 1 M

P 1M & above exclusive of interest, penalties, surcharges

Did RA 9282 (CTA Law) amend the Totality Rule under the Rules of Court by giving CTA exclusive original jurisdiction of collection suits involving the amount of at least P 1M exclusive of penalties, surcharges and interests? No. If the case is with the MTC, RTC and other regular courts, we follow the Totality Rule. If the case is originally filed with CTA, we exclude penalties, surcharges and interests. TOTALITY RULE: Where the claims in all the causes of action are principally for recovery of money, the aggregate amount claimed shall be the test of jurisdiction. (Rule 2 Sec. 5[d], Rules of Court) What if the BIR files a collection suit with the court and the taxpayer is still preparing his protest to the assessment? Solution: ​File the protest and answer the complaint. If the answer is not filed, taxpayer may be declared in default and BIR will present

evidence ex-parte which may consequently lead to rendition of judgment in favor of BIR and against the taxpayer which is prejudicial to any possible appeal to the CTA that the taxpayer may avail of in relation to the protest. If answer is filed and without filing a protest, then the assessment becomes final and executory which may be used by the BIR against the taxpayer in the civil action for collection pending before the regular court. •

If there is a pending protest and BIR filed an action for collection, filing of the action will be equivalent to a denial of the protest, and the taxpayer may appeal to CTA division on the basis of the summons and copy of the complaint filed served by the regular court to the taxpayer.

JURISDICTION IN CRIMINAL SUITS A criminal case consists of either: 1. A criminal offense with deficiency tax; or 2. A criminal offense only; If the criminal action results to civil case, we follow the rules on jurisdiction on civil action for collection ; If the criminal case consists of a criminal offense only, criminal procedure will apply and jurisdiction will be determined by the penalty. In criminal offenses with deficiency of tax, both the criminal and civil cases are filed simultaneously. Exoneration however from criminal offense does not exonerate taxpayer from civil liability to pay the tax.

Service of FAN (RR 18-2013 dated Nov 18, 2013) ) a. Personal service to the party at his registered or known address or wherever he may be found. A known address shall mean a place other than the registered address where business activities of the party are conducted or his place of residence. b. If personal service is not practicable, the notice shall be served by substituted service or by mail. Substituted service can be resorted to when the party is not present at the registered or known address under the following circumstances: The notice may be left at the party’s registered address, with his clerk or with a person having charge thereof. If the known address is a place where business activities of the party are conducted, the notice may be left with his clerk or with a person having charge thereof. If the known address is the place of residence, substituted service can be made by leaving the copy with a person of legal age residing therein. If no person is found in the party’s registered or known address, the revenue officers concerned shall bring a barangay official and two (2) disinterested

witnesses to the address so that they may personally observe and attest to such absence. The notice shall then be given to said barangay official. Such facts shall be contained in the bottom portion of the notice, as well as the names, official position and signatures of the witnesses. Should the party be found at his registered or known address or any other place but refuse to receive the notice, the revenue officers concerned shall bring a barangay official and two (2) disinterested witnesses in the presence of the party so that they may personally observe and attest to such act of refusal. The notice shall then be given to said barangay official. Such facts shall be contained in the bottom portion of the notice, as well as the names, official position and signatures of the witnesses. “Disinterested witnesses” refers to persons of legal age other than employees of the Bureau of Internal Revenue. c. Service by mail is done by sending a copy of the notice by registered mail to the registered or known address of the party with instruction to the Postmaster to return the mail to the sender after ten (10) days, if undelivered. A copy of the notice may also be sent through reputable professional courier service. If no registry or reputable professional courier service is available in the locality of the addressee, service may be done by ordinary mail.

The server shall accomplish the bottom portion of the notice. He shall also make a written report under oath before a Notary Public or any person authorized to administer oath under Section 14 of the NIRC, as amended, setting forth the manner, place and date of service, the name of the person/barangay official/professional courier service company who received the same and such other relevant information. The registry receipt issued by the post office or the official receipt issued by the professional courier company containing sufficiently identifiable details of the transaction shall constitute sufficient proof of mailing and shall be attached to the case docket. Service to the tax agent/practitioner, who is appointed by the taxpayer under circumstances prescribed in the pertinent regulations on accreditation of tax agents, shall be deemed service to the taxpayer.” RECEIPT OF FAN NEED NOT BE WITHIN THE PRESCRIPTIVE PERIODS CIR vs GJM Philippines Manufacturing Inc. GR 202695 29 Feb 2016 The prescriptive period for issuance of FAN is 3 years from due date if return is filed on or before due date and if filed beyond due date, 3 years from date of actual filing. When an assessment is made within the prescriptive period, receipt by the taxpayer may or may not be within said period.

It is a requirement that the taxpayer should actually receive the assessment notice, even if beyond the prescriptive period. If the taxpayer denies receipt of FAN, onus probandi has shifts to the BIR to show by contrary evidence that TX indeed received the assessment in the due course of mail. It has been settled that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion, the direct denial of which shifts the burden to the sender to prove that the mailed letter was, in fact, received by the addressee. CIR vs Liquigaz Philippines GR 215534/215557 18 April 2016 When may a Final Decision on Disputed Assessment (FDDA) be declared void, and in the event that the FDDA is found void, what would be its effect on the tax assessment? An assessment is void if the taxpayer is not notified in writing of the facts and law on which it is made. The requirement of informing the taxpayer of the legal and factual bases of the assessment and the decision made against him applies both to the FLD/FAN and the FDDA. The invalidity of FDDA does not necessarily result to the invalidity of the FAN/PAN other— unless the law or regulations otherwise provide. A "decision" differs from an "assessment" and failure of the FDDA to state the facts and law on which it is based renders the decision void-but

not necessarily the assessment. Tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided.

REFUND UNDER THE NIRC: REFUND OF ILLEGALLY ASSESSED, ILLEGALLY COLLECTED, ERRONEOUSLY ASSESSED, ERRONEOUSLY COLLECTED INTERNAL REVENUE TAXES vs SECTION 112:

Refund of Illegally Assessed, Illegally Collected, Erroneously Assessed, Erroneously Collected Internal Revenue Taxes including penalties under Section 229, NIRC Administrative claim for refund should be filed with BIR within 2 years from payment and Judicial claim for refund should be filed with CTA within the same 2 year period from payment. ( CIR vs. Goodyear Phils, Inc., GR 216130, 03 August 2016) SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person, whose sales are zerorated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: XXXXXX

(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) hereof. [73] In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals. SECTION 112

ORDINARY REFUND

2:120:30

2

in case of non-action by the BIR within the 120 There is no non-action or “deemed denial” day period, TX MUST file appeal to CTA within decision; 30 days from expiration of 120 day period;

Administrative claim with BIR filed within 2 Administrative claim with BIR filed within 2 years from close of quarter when TX had the zero years from payment of internal revenue taxes; rated transaction;

Judicial Claim for refund (Appeal to CTA) is a Judicial Claim for refund must be filed within the MUST ( 30 days from expiration of 120 day same 2 year period from payment of internal period in case of non-action OR 30 days from revenue tax actual receipt of BIR decision issued within the 120 day period, if any;

COURT OF TAX APPEALS (CTA) a. Does the CTA EB have jurisdiction over petitions for annulment of judgment rendered by CTA DIV? (CIR vs Kepco Corporation GR 199422 21 June 2016) NO. Revised Rules of the CTA and Rules of Court are silent on this. A direct petition for annulment of a judgment of the CTA to the Supreme Court, meanwhile, is likewise unavailing, for the same reason that there is no identical remedy with the High Court to annul a final and executory judgment of the Court of Appeals. The remedy is to file a petition for certiorari under Rule 65 which can be filed before the Supreme Court and not before the CTA EB; CTA En Banc has no jurisdiction over original petitions for annulment of judgment/decision rendered by CTA Division. b. Can the CTA DIV allow the withdrawal of petition for review filed by TX after full trial on the merits before the CTA DIV? (CIR vs. NIPPON EXPRESS (PHILS.) CORPORATION G.R. No. 212920, September 16, 2015) BIR issued Tax credit certificate pending TX petition for review before the CTA Division. TX filed a motion to withdraw the petition for review.

An appeal may be withdrawn as of right at any time before the filing of the appellee's brief. Thereafter, the withdrawal may be allowed in the discretion of the court. In this case however, CTA DIV should not have granted the motion to withdraw considering that the Decision was rendered by the CTA Division after a full-blown hearing in which the parties had already ventilated their claims. Thus, the findings contained therein were the results of an exhaustive study of the pleadings and a judicious evaluation of the evidence submitted by the parties, as well as the report of the commissioned certified public accountant. Jurisdiction, once acquired, is not lost upon the instance of the parties, but continues until the case is terminated AND cannot be lost by the unilateral withdrawal of the petition. The CTA DIV found that TX was only entitled to refund the reduced amount of P2.6 M since it failed to prove that the recipients of its services were non-residents "doing business outside the Philippines"; hence, Nippon's purported sales do not qualify as 0% necessitating the reduction in the amount of refund claimed. On the other hand, the tax credit certificate provides for the amount of P21,675,128.91 which is, in all, P19,060,832.07 larger than the amount found due by the CTA Division. c. Does CTA have jurisdiction over petitions for certiorari of DOJ resolution rendered in a

preliminary investigation case involving tax and tariff offenses? BOC vs THE HONORABLE AGNES VST DEVANADERA, ACTING SECRETARY, DEPARTMENT OF JUSTICE, et.al G.R. No. 193253, September 08, 2015 CTA has jurisdiction over a special civil action for certiorari questioning an interlocutory order of the RTC in a local tax case. CTA has original jurisdiction over a petition for certiorari assailing the DOJ resolution in a preliminary investigation involving tax and tariff offenses. CA's original jurisdiction over a petition for certiorari assailing the DOJ resolution in a preliminary investigation involving tax and tariff offenses was necessarily transferred to the CTA and that such petition shall be governed by Rule 65 of the Rules of Court, as amended. Accordingly, it is the CTA, not the CA, which has jurisdiction over the petition for certiorari assailing the DOJ resolution of dismissal of the BOC's complaint-affidavit against private respondents for violation of the TCCR. d. What is the remedy in case CTA DIV issues interlocutory orders ( ex: granting motion to declare in default)? Can you file a petition for review before the CTA EB? CIR vs CTA AND CBK POWER COMPANY LIMITED G.R. Nos. 203054-55, July 29, 2015

CTA Order granting motion to declare petitioner as in default and allowing presentation of evidence ex parte, is an interlocutory order as CTA did not finally dispose of the case on the merits but will proceed for the reception of the evidence Even the CTA's subsequent orders denying motion to lift order of default and denying reconsideration thereof are all interlocutory orders since they pertain to the order of default. Since the CTA Orders are merely interlocutory, no appeal can be taken therefrom. Remedy is to file appropriate special civil action for certiorari under Rule 65 before the Supreme Court. Filing a petition for review before the CTA EB is not the proper remedy; e. What is the available remedy in case of BIR’s interpretation of tax provision versus decision on disputed assessment? (i). CIR vs CTA (SECOND DIVISION) AND PETRON CORPORATION G.R. No. 207843, July 15, 2015 CIR's interpretation of a tax provision involves an exercise of her quasi-legislative functions, the proper recourse against the subject tax ruling is a review by the Secretary of Finance and ultimately the regular courts. The power to interpret the provisions of NIRC and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under NIRC or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals (ii). Clark Investors and Locators Association Inc. vs Sec of Finance and CIR GR 200670 July 6 2016 BIR’s act of issuing RR 2-2012 is not in the exercise of any judicial or quasi-judicial capacity, thus, petition for certiorari under Rule 65 of Rules on Civil Procedure is NOT the proper remedy. RR 2- 2012 was issued in the exercise of BIR’s quasi-legislative or rulemaking powers, thus proper remedy is review by Sec of Finance and eventually by regular courts; f. Does CTA, NOT CA, have exclusive appellate jurisdiction over BOC tax collection cases decided by the RTC? Is it proper for CA to refer the appeal to CTA instead of dismissing the notice of appeal for lack of jurisdiction? MITSUBISHI MOTORS PHILIPPINES CORPORATION VS BOC GR 209830 JUNE 17 2015 BOC filed collection case against Mitsubishi before the RTC, Manila. RTC granted Mitsubishi’s demurrer to evidence and dismissed

the collection case. BOC filed a notice of appeal to Court of Appeals. CA, instead of dismissing the notice of appeal for lack of jurisdiction, referred the records of the collection case to the CTA for proper disposition of the appeal taken by respondent. Ruling: CTA has exclusive appellate jurisdiction over tax collection cases originally decided by the RTC. CA has no jurisdiction over respondent’s appeal; hence, it cannot perform any action on the same except to order its dismissal. Therefore, the act of the CA in referring respondent’s wrongful appeal before it to the CTA under the guise of furthering the interests of substantial justice is NOT PROPER; g. What is the jurisdiction of CTA over tariff and customs duties? Commissioner of Customs Vs. Oilink International Corporation 
 G.R. No. 161759. July 2, 2014 CTA: exclusive appellate jurisdiction to review by appeal “ Decisions of the BOC Commissioner in cases involving liability for Customs duties, fees or other money charges; seizure, detention or release of property affected; fines, forfeitures or other penalties imposed in relation thereto; or other matters arising under the Customs Law or other law or part of law administered by the Bureau of Customs; Decision that is appealable to the CTA is a judgment or order of the Commissioner of Customs that is final in nature, not merely an interlocutory order;

h. Is the ruling of the CIR subject to review by the Secretary of Finance under Sec. 4 of the NIRC, and that of the Secretary to the CA via Rule 43?

Philippine American Life and General Insurance Company Vs. Secretary of Finance and the CIR 
 G.R. No. 210987 November 24, 2014 CTA is the proper forum with which to institute the appeal. This is not, and should not, in any way, be taken as a derogation of the power of the Office of President but merely as recognition that matters calling for technical knowledge should be handled by the agency or quasijudicial body with specialization over the controversy. CTA has the power to determine whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court. CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these cases.

VERY IMPORTANT CASES: Does CTA have the power to issue injunction against BIR tax collection cases. What is the requirement for CTA to fix the bond? Tridmaha Marketing Corporation vs CTA et al; GR 215950 20 June 2016; SPOUSES EMMANUEL D. PACQUIAO AND JINKEE J. PACQUIAO vs. THE COURT OF TAX APPEALS - FIRST DIVISION AND CIR G.R. No. 213394, April 06, 2016

CTA has power to fix the surety bond posted by the TX as a condition precedent to suspend the collection case filed by BIR. Fixing the bond five times more than the net worth of TX without conducting a preliminary hearing to ascertain whether there were grounds to suspend the collection of the deficiency assessment is not proper. CTA Division must consider other factors like whether or not the assessment would jeopardize the interest of the taxpayer, or whether the means adopted by the CIR in determining the liability of the taxpayer was legal and valid. In the earlier case of Manny Pacquiao, Supreme Court deems it best to remand the matter involving the petitioner's plea against the correctness of the deficiency assessment to the CTA for the conduct of a preliminary hearing in order to determine whether the required surety bond should be dispensed with or reduced. Absent any evidence and preliminary determination by the CTA, the Court cannot make any factual finding and settle the issue of whether the petitioners should comply with the security requirement under Section 11, R.A. No. 1125. The determination of whether the methods, employed by the CIR in its assessment, jeopardized the interests of a taxpayer for being patently in violation of the law is a question of fact that calls for the reception of evidence which would serve as basis. In this regard, the CTA is in a better position to initiate this given its time and resources. The remand of the case to the CTA on this question is, therefore, more sensible and proper.

PART II: TARIFF AND CUSTOMS DUTIES

(in relation to CTA JURISDICTION) (1). Agencies involved: Department of Trade and Industry (DTI) ​dumping duties for non-agricultural products Department of Agriculture (DA) ​ ​dumping duties for agricultural products Department of Finance (DOF) ​-automatic review of decisions of Commissioner of Customs Bureau of Customs (BOC) (2). Procedure in Protest Cases: ​

​

Examiner issues an Assessment (import/export)

Commissioner of Customs

Rule against taxpayer ​ ​ ​

​Rule for taxpayer

Appeal to CTA division

​Automatic

review by DOF ​ ​within 30 days from receipt of decision denying protest Reverse BOC decision Uphold BOC (end of process) ​

If the BOC files a collection suit for deficiency, see jurisdiction of regular courts and the CTA on the amount. In case of criminal offenses, we follow the same rules provided above under NIRC. (3). Applicable laws: ​

(a). Tariff and Customs Code as implemented by the Bureau of Customs ​(b). All other laws implemented by the BOC (4). Territorial jurisdiction of the Bureau of Customs (a). all seas within the jurisdiction of the Philippines following the archipelagic doctrine (b). all coasts, ports, airports, harbors, bays, rivers and inland waters whether navigable or not from the sea; (5). Transactions covered:

(a). importation of goods (b). exportation of goods ©. transportation of passengers and cargoes into or out of, or within the Philippines (6). Classification of articles under the TCC (a). subject to duty (b). prohibited articles ©. conditionally free from tariff and duties ( Section 105, TCC; governmental agencies and international institutions; granted by President upon NEDA’s recommendation) (d). absolutely free from tariff and duties (7). Kinds of Customs duties: ​(a). regular: ​ad valorem ​specific duty ​ ​ ​alternating duty ​ ​ ​compound duty (b). special: ​dumping ​ ​ ​countervailing ​ ​ ​marking ​ ​ ​discriminatory (8). Flexible Tariff Clause under the constitution Section 28, Article 6, 1987 Constitution subject to limitations under the law; (9). Remedies under the TCC

​

BOC: ​

​Administrative: ​ ​Tax lien ​ ​ ​Fines and forfeitures

Reduction of customs duties

Compromise ​ ​Civil Action ​Criminal Action

Judicial: ​

​

​

​

TAXPAYER: ​Administrative: ​

​Protest

on

published value Protest on assessment (payment under protest) ​ ​Refund Payment of fine or redemption after seizure ​ Appeal to BOC Commissioner from the BOC Examiner

​

​

​Judicial:

​

​

​

​

​

​Appeal to CTA

​

​

​

​

Action to question the legality of seizure ​ ​Abandonment Note: failure to file import entry within 30 days from discharge ​

(10). Procedure in protest cases: ​

​

​

​

(a). Arrival of goods (b). Examiner/Collector issues assessment and collects the tariff and duties ©. Within 15 days pay under protest ands file protest before the Collector/Examiner (d). Hearing within 15 days from receipt of protest; (e). Collector either grants or denies the protest;

Possible procedures: If granted favorable to the importer, review by the Commissioner within 30 days from ​decision by the Collector; If Commissioner upholds the decision of the Collector ( favorable to taxpayer), automatic review by the Dept of Finance; If Commissioner reverses the decision of the Collector ( not favorable to the importer), importer may appeal to the CTA Division within 30 days from receipt of such decision, then file MR. to CTA Division, then appeal to CTA en banc, then petition for review to the SC within 15 days from receipt of the decision of the CTA En Banc; If Collector denies the protest, (favorable to the government), importer appeals to the CTA Division within 30 days from receipt of such decision, then file MR. to CTA Division, then appeal to CTA en banc, then petition for review to the SC within 15 days from receipt of the decision of the CTA En Banc; (11). Procedure in Seizure and Forfeiture - available in case of smuggling which may refer to the following: Prohibited articles; Wrong entry of port; Export of goods contrary to law; Contraband

Notes: ​(a). Common carriers are generally not subject to seizure and forfeiture (b). In the absence of prima facie evidence, if the owner has no knowledge of or did not participate in the unlawful act, the vessel shall not be subjected to seizure and forfeiture; ©. Examples of evidence of knowledge: Use of the vehicle twice for the transaction; Owner is not in the business for which the conveyance is generally used Owner is not in a position to use such conveyance (12). Doctrine of Hot Pursuit If the act committed in violation of the TCC is done within Philippine waters, seizure and forfeiture may be pursued or continued beyond the territorial jurisdiction or the maritime zone and on the high seas; (13). The regular courts have no jurisdiction over seizure and forfeiture cases except for writs of injunction, mandamus, or prohibition. Seizure and protest cases are within the exclusive jurisdiction of the Commissioner of Customs. Ordinary courts do not have jurisdiction over seizure and forfeiture proceedings; (14). Right of Police Officer to Enter Inclosure. Any person exercising the powers under TCC may at anytime enter, pass through, or search any land or inclosure or any warehouse, store or other

building, not being a dwelling house. A warehouse, store or other building or inclosure used for the keeping of storage of articles does not become a dwelling house merely by reason of the fact that a person employed as watchman lives in the place, nor will the fact that his family stays there with him alter the case. (15). Search of Dwelling House. There must be for a Search Warrant issued by a competent court. A dwelling house may be entered and searched only upon warrant issued by a judge or justice of the peace, upon sworn application showing probable case and particularly describing the place to be searched and person or thing to be seized. (16). Right to Search Vessels or Aircrafts and Persons or Articles Conveyed Therein. — It shall be lawful for any official or person exercising police authority to go abroad any vessel or aircraft within the limits of any collection to go aboard any vessel or aircraft within the limits of any collection district, and to inspect, search and examine said vessel or aircraft and any trunk, package, box or envelope on board, and to search any person on board the said vessel or aircraft and to this end to hail and stop such vessel or aircraft if under way, to use all necessary force to compel compliance; and if it shall appear that any breach or violation of the customs and tariff laws of the Philippines has been committed, whereby or in consequence of which such vessels or aircrafts, or the article, or any part thereof, on board of or imported by such vessel or aircraft, is liable to forfeiture, to make seizure of the same or any part thereof.

The power of search shall extend to the removal of any false bottom, partition, bulkhead or other obstruction, so far as may be necessary to enable the officer to discover whether any dutiable or forfeitable articles may be concealed therein. No proceeding herein shall give rise to any claim for the damage caused to article or vessel or aircraft. (16). Right to Search Vehicles, Beasts and Persons. — It shall also be lawful for a person exercising authority to open and examine any box, trunk, envelope or other container, wherever found where he has reasonable cause to suspect the presence therein of dutiable or prohibited article or articles introduced into the Philippines contrary to law, and likewise to stop, search and examine any vehicle, beast or person reasonably suspected of holding or conveying such article as aforesaid. (17). Search of Persons Arriving From Foreign Countries. All persons coming into the Philippines from foreign countries shall be liable to detention and search by the customs authorities under such regulations as may be prescribed relative thereto. (18). SMUGGLING: Seizure and Forfeiture proceedings are available to the BOC in the case of smuggling which may refer to the following: Prohibited articles; Wrong entry of port; Export of goods contrary to law; Contraband;

(19). Common carriers are generally not subject to seizure and forfeiture. In the absence of prima facie evidence, if the owner has no knowledge of or did not participate in the unlawful act, the vessel shall not be subjected to seizure and forfeiture. Presumption of knowledge of the owner of the vessel if (a). vehicle was used twice for the transaction; (b). Owner is not in the business for which the conveyance is generally used and (c). Owner is not in a position to use such conveyance; Conversely, if the vehicle is under a contract of private charter, the assumption is owner is aware that the vessel is used for unlawful act, thus, BOC may subject vessel or vehicle to seizure and forfeiture, unless the owner can prove otherwise. (20). DTI imposes dumping duties for nonagricultural products and DA for agricultural products. In protest cases over special levies by DTI and DA, there is no automatic review by the BOC Comm and Sec of Finance; (21). Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with the intention to unlade therein. Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the articles, or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been granted, or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of Customs.

(22). WHAT ARTICLES ARE SUBJECT TO DUTIES? All articles, when imported to the Philippines, are subject to duty upon each importation, even though previously exported there except as otherwise specifically provided for in the Tariff and Customs Code, as amended, or in other laws. Exemptions / Duty-Free Concessions: Adult Passengers: • Two (2) reams of cigarette or two (2) tins of tobacco • Two (2) bottles of liquor or wine not exceeding one (1) liter per bottle Balikbayan and Overseas Filipino Workers (OFWs) are entitled to a Ten Thousand (10,000,00) Peso duty exemption on their USED personal and household effects. Any excess thereof is subject to an ad valorem duty (Executive Order 206). In addition, OFWs are entitled to duty and tax-free privileges on their USED appliances limited to one of every kind provided the total value does not exceed PHP10,000.00. Any excess is subject to duty and tax. Balikbayan Categories • Filipino citizen who has been continuously out of the Philippines for a period of at least one (1) year from the date of last departure; • A Filipino overseas worker (OFW); or • Former Filipino with foreign passport and members of his family (i.e. spouse and children) who are traveling with him.

NOTE: EXEMPTION OF BALIKBAYAN BOXES INCREASED FROM P 10,000.00 TO P 150,000.00 (RA 10863; 30 May 2016)

Currency Regulations It is illegal for any incoming or outgoing passenger to bring in or out Philippine Pesos in excess of P10,000.00 without prior authoirty from the Bangko Sentral ng Pilipinas. Any violation of this rule may lead to its seizure and civil penalties and / or criminal prosecution. (BSP Circular 98-1995) The transportation of foreign currency or monetary instruments is legal. However, the carrying of foreign currency in excess of US$10,000.00 or its equivalent in other foreign currencies must be declared to a Customs Officer or the Bangko Sentral ng Pilipinas. Prohibited and Regulated (REGARDLESS OF QUANTITY)

Articles

The unlawful importation of prohibited articles (i.e. marijuana, cocaine or any other narcotics or synthetic drugs, firearms and explosives and parts thereof, gun replicas, obscene or immoral articles, adulterated or misbranded articles of food or drugs, gambling outfits and paraphernalia, used clothing and rags – R.A. 4653, elephant / ivory tusk products) or those which violate the Intellectual Property Rights Code, R.A. 8293 (i.e., DVDs, VCDs, other imitation products) and regulated items (i.e., transceivers, controlled chemicals /

substances / precursors) constitute a violation of Philippine Customs Laws and may subject you to criminal procesuctions and / or fines and penalties. Agriculture and Quarantine Regulations Agriculture quarantine restricts the entry of animals, fish and plant products or their byproducts (such as meat, eggs, birds, fruits, etc.). Transport of endangered species and their byproducts is also restricted / prohibited by CITES / DENR regulations. Likewise, export of such products / by-products must be referred to quarantine officers to ensure compliance with Philippine regulations and requirements of country of destination. Failure to obtain prior import and / or export permit from the Philippine Department of Agriculture together with corresponding health sanitary or phytosanitary certificate from country of origin and to declare the same may result to seizure, fines and / or penalties. (23). Import Entry must be filed in the Customhouse within 30 days from the date of discharge of the last package from the vessel, which shall not be extendible. Failure to file the entry constitutes implied abandonment and will result in the ‘ipso facto’ forfeiture of the goods/shipment. (24). Kinds of Import Entry: Informal Entry ​: a. Articles of a commercial nature intended for sale, barter or hire, the dutiable value of which does not

exceed P2,000.00; b. Personal and household effects or articles, not in commercial quantity, imported in passenger’s baggage, mail, or otherwise for personal use. Formal Entry: ​a. Articles of a commercial nature intended for sale, barter, or hire, the dutiable value of which is more than P2,000.00; b. Articles for, which the Collector may, upon the recommendation of the Tariff Commission for the protection of a local industry, or the revenue, require formal entry regardless of value and whatever purpose and nature of the importation. All imported articles are subject to Formal and Informal entry except importation admitted free of duty for the official use of embassies, legation and other agencies of foreign governments who accord like privileges to corresponding agencies of the Philippines. (25). Flexible Tariff Clause under the constitution The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restriction as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government (Article VI, Section 28, paragraph 2)Section 28, Article 6, 1987 Constitution subject to limitations under the law;

(26). In seizure and forfeiture proceedings, the Collector of Customs constitutes tribunal expressly vested by law with the jurisdiction to hear and determine the subject matter of such proceedings without any interference from the regular courts; (27). CIR vs. United Cadiz Sugar Farmers Association Multi-Purpose Coop GR 209776 07 December 2016; Abandonment, Kinds and Effects of. - An imported article is deemed abandoned under any of the following circumstances: (a) When the owner, importer, or consignee of the imported article expressly signifies in writing to the Collector of Customs his intentions to abandon; or (b) When the owner, importer, consignee or interested party after due notice, fails to file an entry within thirty (30) days, which shall not be extendible, from the date of discharge of the last package from the vessel or aircraft, or having filed such entry, fails to claim his importation within fifteen (15) days which shall not likewise be extendible, from the date of posting of the notice to claim such importation. (Emphasis supplied) Any person who abandons an article or who fails to claim his importation as provided for in the preceding paragraph shall be deemed to have renounced all his interests and property rights therein.

An abandoned article shall ipso facto be deemed the property of the Government and shall be disposed of in accordance with the provisions of this Code. ​

​

​

​

​

PART III: LOCAL GOVERNMENT CODE OF 1991

1: ORDINARY LOCAL TAXES Section 129 (LGC OF 1991): Power to Create Sources of Revenue: Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units. Section 130 (LGC OF 1991): Fundamental Principles: The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units: (a) Taxation shall be uniform in each local government unit;

(b) Taxes, fees, charges and other impositions shall: (1) be equitable and based as far as practicable on the taxpayer's ability to pay; (2) be levied and collected only for public purposes; (3) not be unjust, excessive, oppressive, or confiscatory; (4) not be contrary to law, public policy, national economic policy, or in the restraint of trade; (c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; (d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, (e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation. Nature of Local Taxing Power - exercised by the Sanggunian - inherent in the LGU - exercised only if delegated by law or Constitution - subject to limitations provided for by law; - power includes to prescribe penalties or fines for violations of tax ordinance;

- power to adjust local tax rates shall not be oftener than once every five years and in no case to exceed 10% of the rates fixed by the LGC; - grant of exemptions thru ordinances shall nor include regulatory fees: - instance when exemption maybe granted: natural calamities - exemptions should apply to all others similarly situated; - effectivity of exemptions shall be during the next calendar year for a period not exceeding 12 months; - incentives maybe granted on new investments in the LGU; should be for a definite period of time of not more than one (1) year thru an ordinance passed prior to first day of January of the following year and shall be applicable to all similarly situated; - power to tax by LGU is subject to constitutional and inherent limitations; Procedure for Approval and Effectivity of Tax, Ordinances and Revenue Measures; Mandatory Public Hearings: Issue: Validity of Ordinance 1. Public hearings shall be conducted for the purpose prior to the enactment thereof: 2. Any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal;

3. Appeal to the DOJ shall not suspend the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein; 4. Within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. 5. Within ten (10) days after approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue measures shall be published in full for three (3) consecutive days in a newspaper of local circulation: Provided, however, That in provinces, cities and municipalities where there are no newspapers of local circulation, the same may be posted in at least two (2) conspicuous and publicly accessible places. 6. Copies of all provincial, city, and municipal and barangay tax ordinances and revenue measures shall be furnished the respective local treasurers for public dissemination. Important principles in local taxation (a). Residual Taxing Power Power to levy taxes, fees, or charges on any base or subject not specifically enumerated under the LGC and not taxed under the NIRC or any other tax laws

(b). Rule of pre-emption If the national government elects a particular area as subject to taax, it impliedly withholds from the local government unit the delegated power to tax the same fields or area Situs of local taxation ​The same rule as in national taxation shall be

applied to situs of local taxes Taxes covered by the LGC of 1991 (a). Community Tax (b). Ordinary/Regular Local Taxes ©. Real Estate Tax Community tax (a). Individuals 18 years of age; regularly employed on a wage or salary basis for at least thirty (30) days; engaged in trade or business; owns real property with an aggregate assessed value of P1,000.00 or more; required by law to file ITR; Rate: ​P 5.00 plus P1.00 for every P1,000.00 above P5,0000.00 ​

(b). Corporations

P500.00 not to exceed P10,000.00 For every P5,000.00 worth of real property P2.00 For every P5,000.00 worth of gross receipts or earnings P 2.00 ©. Place of payment: ​residence or principal place of business (d). Time of payment: ​first day of January and not later than last day of February; (e). Penalty ​ : ​24% per annum Other Local/Regular Taxes -Imposed on a calendar year basis but paid on a quarterly basis; - Accrues on the first day of January, however, new taxes accrue on the first day of the quarter next following the effectivity of the ordinance; - Payable on the first twenty (20) days of January or of each quarter extendible for six (6) months Taxes imposed by specific LGU: Provinces: ​

Tax on transfer of real property; 2. Tax on Business of printing and publication; 3. Franchise tax; 4. Tax on sand, gravel and other quarry resources from public lands; 5. Professional tax; 6. Amusement tax; 7. Annual fixed tax on delivery truck or van of manufacturers, 1.

producers, retailers, wholesalers in certain products: Municipalities: ​ Taxes on manufacturers, assemblers, re-packers, etc. of any article of whatever kind; 2. Wholesalers, distributors, dealers in any article of commerce; 3. Exporters and on manufacturers, millers, producers, wholesalers, distributors, dealers of essential commodities; 4. Retailers, 5. Contractors; 6. Banks and other financial institutions; 7. Peddlers engaged in the sale of any merchandise or article of commerce; 8. Tax on any business, not otherwise specified above; 9. Tax on business/occupation except professional fees; 10. Business taxes; 1.

Cities: ​ ​Taxes which the province or municipality may impose; Barangays: ​1. Tax on stores/retailers with fixed business establishments with gross sales or receipts for the previous year of P 50,000 or less for barangays in cities and P 30,000 or less for barangays in municipalities;

2. Reasonable fees and charges on commercial breeding of fighting cocks, cockfights and cockpits, on places of recreation with charge admission fees, and on billboards, signboards, neon signs and outdoor advertisements. Common Fees/Charges for LGU’s: 1.

2.

3.

Reasonable fees and charges for services rendered; Public utility charges for operation of public utilities owned, operated and maintained by LGU’s within its jurisdiction; Toll fees for use of any public road, pier, wharf,, waterway, bridge, ferry or telecommunication system funded/constructed by LGU except officers and enlisted men of the AFP/PNP, post office personnel delivering mail, and physically handicapped and disabled citizens who are 65 years old.

Remedies of the LGU in ordinary local taxes • Lien ( administrative) • Distraint or levy (administrative) • Collection Suit ( judicial in character) • These remedies maybe concurrently or simultaneously availed of by the LGU Prescriptive Period for Assessment and Collection of ordinary local taxes ​

​ ASSESSMENT

COLLECTION

5 yrs from due date ( Jan 1 every year)

5 yrs from receipt of Assessment

10 yrs from discovery of fraud or intent to evade payment

5 yrs from receipt of Assessment

Suspension Collection:

of

Periods

of

Assessment

and

The running of the periods of prescription provided in the preceding paragraphs shall be suspended for the time during which: (1) The treasurer is legally prevented from making the assessment of collection; (2) The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and (3) The taxpayer is out of the country or otherwise cannot be located. Procedure in Protest Cases of Local Taxes; Issue: Validity of assessment 1. When the local treasurer or his duly authorized representative finds that correct taxes, fees, or charges have not been paid, he shall issue a notice of assessment stating the nature of the tax, fee, or charge, the amount of deficiency, the surcharges, interests and penalties. 2. Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a written protest with the local treasurer contesting the assessment; otherwise, the assessment shall become final and executory.

3. The local treasurer shall decide the protest within sixty (60) days from the time of its filing. If the local treasurer finds the protest to be wholly or partly meritorious, he shall issue a notice cancelling wholly or partially the assessment. However, if the local treasurer finds the assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the taxpayer. 4. The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from the lapse of the sixty (60) day period prescribed herein within which to appeal with the court of competent jurisdiction otherwise the assessment becomes conclusive and unappealable. Refund of Local Tax: No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date of the payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit. Civil Remedies for Collection of Ordinary Local Taxes: 1. Local Government's Lien

Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which may be subject to the lien but also upon property used in business, occupation, practice of profession or calling, or exercise of privilege with respect to which the lien is imposed. The lien may only be extinguished upon full payment of the delinquent local taxes fees and charges including related surcharges and interest. 2. Civil Remedies The civil remedies for the collection of local taxes, fees, or charges, and related surcharges and interest resulting from delinquency shall be: (a) By administrative action thru distraint of goods, chattels, or effects, and other personal property of whatever character, including stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property, and by levy upon real property and interest in or rights to real property; (b) By judicial action Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of the local government unit concerned. Distraint of Personal Property:

The remedy by distraint shall proceed as follows: (a) Seizure: Upon failure of the person owing any local tax, fee, or charge to pay the same at the time required, the local treasurer or his deputy may, upon written notice, seize or confiscate any personal property belonging to that person or any personal property subject to the lien in sufficient quantity to satisfy the tax, fee, or charge in question, together with any increment thereto incident to delinquency and the expenses of seizure. In such case, the local treasurer or his deputy shall issue a duly authenticated certificate based upon the records of his office showing the fact of delinquency and the amounts of the tax, fee, or charge and penalty due. Such certificate shall serve as sufficient warrant for the distraint of personal property aforementioned, subject to the taxpayer's right to claim exemption under the provisions of existing laws. Distrained personal property shall be sold at public auction in the manner hereon provided for. (b) Accounting of distrained goods: The officer executing the distraint shall make or cause to be made an account of the goods, chattels or effects distrained, a copy of which signed by himself shall be left either with the owner or person from whose possession the goods, chattels or effects are taken, or at the dwelling or place or business of that person and with someone of suitable age and discretion, to which list shall be added a statement of the sum

demanded and a note of the time and place of sale. (c) Publication: The officer shall forthwith cause a notification to be exhibited in not less than three (3) public and conspicuous places in the territory of the local government unit where the distraint is made, specifying the time and place of sale, and the articles distrained. The time of sale shall not be less than twenty (20) days after the notice to the owner or possessor of the property as above specified and the publication or posting of the notice. One place for the posting of the notice shall be at the office of the chief executive of the local government unit in which the property is distrained. (d) Release of distrained property upon payment prior to sale: If at any time prior to the consummation of the sale, all the proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. (e) Procedure of sale: At the time and place fixed in the notice, the officer conducting the sale shall sell the goods or effects so distrained at public auction to the highest bidder for cash. Within five (5) days after the sale, the local treasurer shall make a report of the proceedings in writing to the local chief executive concerned. Should the property distrained be not disposed of within one hundred and twenty (120) days from the date of distraint, the same shall be considered as sold to the local

government unit concerned for the amount of the assessment made thereon by the Committee on Appraisal and to the extent of the same amount, the tax delinquencies shall be cancelled. Said Committee on Appraisal shall be composed of the city or municipal treasurer as chairman, with a representative of the Commission on Audit and the city or municipal assessor as members. (f) Disposition of proceeds: The proceeds of the sale shall be applied to satisfy the tax, including the surcharges, interest, and other penalties incident to delinquency, and the expenses of the distraint and sale. The balance over and above what is required to pay the entire claim shall be returned to the owner of the property sold. The expenses chargeable upon the seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending the sale, and no charge shall be imposed for the services of the local officer or his deputy. Where the proceeds of the sale are insufficient to satisfy the claim, other property may, in like manner, be distrained until the full amount due, including all expenses, is collected. Levy on Real Property a. After the expiration of the time required to pay the delinquent tax, fee, or charge, real property may be levied on before, simultaneously, or after the distraint of personal property belonging to the delinquent taxpayer.

b. the provincial, city or municipal treasurer, as the case may be, shall prepare a duly authenticated certificate showing the name of the taxpayer and the amount of the tax, fee, or charge, and penalty due from him. Said certificate shall operate with the force of a legal execution throughout the Philippines. c. Levy shall be effected by writing upon said certificate the description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the assessor and the Register of Deeds of the province or city where the property is located who shall annotate the levy on the tax declaration and certificate of title of the property, respectively, and the delinquent taxpayer or, if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question. d. In case the levy on real property is not issued before or simultaneously with the warrant of distraint on personal property, and the personal property of the taxpayer is not sufficient to satisfy his delinquency, the provincial, city or municipal treasurer, as the case may be, shall within thirty (30) days after execution of the distraint, proceed with the levy on the taxpayer's real property.

e. A report on any levy shall, within ten (10) days after receipt of the warrant, be submitted by the levying officer to the sanggunian concerned. f. Advertisement and Sale: 1. Within thirty (30) days after the levy, the local treasurer shall proceed to publicly advertise for sale or auction the property or a usable portion thereof as may be necessary to satisfy the claim and cost of sale; 1.

2.

3.

Such advertisement shall cover a period of at least thirty (30) days; It shall be effected by posting a notice at the main entrance of the municipal building or city hall, and in a public and conspicuous place in the barangay where the real property is located, and by publication once a week for three (3) weeks in a newspaper of general circulation in the province, city or municipality where the property is located. The advertisement shall contain the amount of taxes, fees or charges, and penalties due thereon, and the time and place of sale, the name of the taxpayer against whom the taxes, fees, or charges are levied, and a short description of the property to be sold.

4.

5.

6.

At any time before the date fixed for the sale, the taxpayer may stay they proceedings by paying the taxes, fees, charges, penalties and interests. If he fails to do so, the sale shall proceed and shall be held either at the main entrance of the provincial, city or municipal building, or on the property to be sold, or at any other place as determined by the local treasurer conducting the sale and specified in the notice of sale; Within thirty (30) days after the sale, the local treasurer or his deputy shall make a report of the sale to the sanggunian concerned, and which shall form part of his records. After consultation with the sanggunian, the local treasurer shall make and deliver to the purchaser a certificate of sale, showing the proceeding of the sale, describing the property sold, stating the name of the purchaser and setting out the exact amount of all taxes, fees, charges, and related surcharges, interests, or penalties: Provided, however, That any excess in the proceeds of the sale over the claim and cost of sales shall be turned over to the owner of the property.

Redemption of Property Sold pursuant to levy and distraint:

1. Within one (1) year from the date of sale, the delinquent taxpayer or his representative shall have the right to redeem the property upon payment to the local treasurer of the total amount of taxes, fees, or charges, and related surcharges, interests or penalties from the date of delinquency to the date of sale, plus interest of not more than two percent (2%) per month on the purchase price from the date of purchase to the date of redemption. Such payment shall invalidate the certificate of sale issued to the purchaser and the owner shall be entitled to a certificate of redemption from the provincial, city or municipal treasurer or his deputy. 2.

3.

The provincial, city or municipal treasurer or his deputy, upon surrender by the purchaser of the certificate of sale previously issued to him, shall forthwith return to the latter the entire purchase price paid by him plus the interest of not more than two percent (2%) per month herein provided for, the portion of the cost of sale and other legitimate expenses incurred by him, and said property thereafter shall be free from the lien of such taxes, fees, or charges, related surcharges, interests, and penalties; The owner shall not, however, be deprived of the possession of said property and shall be entitled to the rentals and other income thereof until the expiration of the time allowed for its redemption.

4.

In case the taxpayer fails to redeem the property as provided herein, the local treasurer shall execute a deed conveying to the purchaser so much of the property as has been sold, free from liens of any taxes, fees, charges, related surcharges, interests, and penalties. The deed shall succinctly recite all the proceedings upon which the validity of the sale depends.

Purchase of Property By the Local Government Units for Want of Bidder: 1. In case there is no bidder for the real property advertised for sale as provided herein, or if the highest bid is for an amount insufficient to pay the taxes, fees, or charges, related surcharges, interests, penalties and costs, the local treasurer conducting the sale shall purchase the property in behalf of the local government unit concerned to satisfy the claim and within two (2) days thereafter shall make a report of his proceedings which shall be reflected upon the records of his office. 2. It shall be the duty of the Registrar of Deeds concerned upon registration with his office of any such declaration of forfeiture to transfer the title of the forfeited property to the local government unit concerned without the necessity of an order from a competent court. 3. Within one (1) year from the date of such forfeiture, the taxpayer or any of his

representative, may redeem the property by paying to the local treasurer the full amount of the taxes, fees, charges, and related surcharges, interests, or penalties, and the costs of sale. If the property is not redeemed as provided herein, the ownership thereof shall be fully vested on the local government unit concerned. Resale of Real Estate Taken for Taxes, Fees, or Charges: The sanggunian concerned may, by ordinance duly approved, and upon notice of not less than twenty (20) days, sell and dispose of the real property acquired under the preceding section at public auction. The proceeds of the sale shall accrue to the general fund of the local government unit concerned. Personal Property Exempt from Distraint or Levy The following property shall be exempt from distraint and the levy, attachment or execution thereof for delinquency in the payment of any local tax, fee or charge, including the related surcharge and interest: (a) Tools and implements necessarily used by the delinquent taxpayer in his trade or employment; (b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select, and necessarily used by him in his ordinary occupation;

(c) His necessary clothing, and that of all his family; (d) Household furniture and utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer, such as he may select, of a value not exceeding Ten thousand pesos (P10,000.00); (e) Provisions, including crops, actually provided for individual or family use sufficient for four (4) months; (f) The professional libraries of doctors, engineers, lawyers and judges; (g) One fishing boat and net, not exceeding the total value of Ten thousand pesos (P10,000.00), by the lawful use of which a fisherman earns his livelihood; and (h) Any material or article forming part of a house or improvement of any real property. Relevant Provisions of the LGC of 1991:

Section 165. Tax Period and Manner of Payment: Unless otherwise provided in this Code, the tax period of all local taxes, fees and charges shall be the calendar year. Such taxes, fees and charges may be paid in quarterly installments.

Section 166. Accrual of Tax: Unless otherwise provided in this Code, all local taxes, fees, and charges shall accrue on the first (1st) day of January of each year. However, new taxes, fees or charges, or changes in the rates thereof, shall accrue on the first (1st) day of the quarter next following the effectivity of the ordinance imposing such new levies or rates. Section 167. Time of Payment: Unless otherwise provided in this Code, all local taxes, fees, and charges shall be paid within the first twenty (20) days of January or of each subsequent quarter, as the case may be. The sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six (6) months. Section 168. Surcharges and Penalties on Unpaid Taxes, Fees, or Charges: The sanggunian may impose a surcharge not exceeding twenty-five (25%) of the amount of taxes, fees or charges not paid on time and an interest at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees or charges including surcharges, until such amount is fully paid but in no case shall the total thirty-six (36%) months.

Section 169. Interests on Other Unpaid Revenues: Where the amount of any other revenue due a local government unit, except voluntary contributions or donations, is not paid on the date fixed in the ordinance, or in the contract, expressed or implied, or upon the occurrence of the event which has given rise to its collection, there shall be collected as part of that amount an interest thereon at the rate not exceeding two percent (2%) per month from the date it is due until it is paid, but in no case shall the total interest on the unpaid amount or a portion thereof exceed thirty-six (36) months. Section 170. Collection of Local Revenue by Treasurer.: All local taxes, fees, and charges shall be collected by the provincial, city, municipal, or barangay treasurer, or their duly authorized deputies. The provincial, city or municipal treasurer may designate the barangay treasurer as his deputy to collect local taxes, fees, or charges. In case a bond is required for the purpose, the provincial, city or municipal government shall pay the premiums thereon in addition to the premiums of bond that may be required under this Code. __________________________________________

____________________________________

2: REAL PROPERTY TAXATION Fundamental Principles The (1) appraisal and assessment; (2) levy and collection of real property tax shall be guided by the following fundamental principles: (a) Real property shall be appraised at its current and fair market value; (b) Real property shall be classified for assessment purposes on the basis of its actual use; (c) Real property shall be assessed on the basis of a uniform classification within each local government unit; (d) The appraisal, assessment, levy and collection of real property tax shall not be let to any private person; and (e) The appraisal and assessment of real property shall be equitable. Nature: -Article 415 of the Civil Code applies to include improvements; -Direct tax on the ownership -Ad valorem tax; -Proportionate; -Indivisible; -Local tax;

-Idle lands maybe exempt from RET due to valid causes such as force majeure, civil disturbance, natural calamity, or any other reason which prevents the owner from utilizing the property -Exemption from RET shall be based on the actual use not the ownership; -Unpaid RET attaches to the land and not the owner, thus, the remedy of lien available to the government Subject matters covered by Real Property Taxation a.

Appraisal and Assessment by the Assessor’s Office; "Appraisal" is the act or process of determining the value of property as of a specified date for a specific purpose; "Assessment" is the act or process of determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties;

b.

Levy and Collection by the Treasurer’s Office;

Rates of real estate tax: Province: ​ value City: ​ ​ value Municipality: assessed value

​not exceeding 1% of assessed

​

​not exceeding 2% of assessed ​not

exceeding

2%

of

Kinds of Real Estate Tax: ​

​

​

​ ​

ad valorem tax: ​based on a fixed proportion of the value of the property; ​special levies: ​*special education fund (SPF) ​ ​*1% to finance SPF ​*Additional ad valorem on idle lands not exceeding 5% of assessed value of land ​ ​ ​*For public works *Lands benefited by public works ​

Imposed by other laws:

​Socialized housing

tax ​

​

​

​

​

EXEMPTIONS FROM REAL ESTATE TAX (a). real properties owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted for consideration to a taxable person; (b). charitable institutions, churches, parsonages, convents, mosques, or religious cemeteries and all L, B, and I, ADE for religious, charitable, and educational purposes; ©. Machineries and equipment ADE by local water utilities and GOCC’s engaged in supply/distribution of water and/or generation of electric power; ​(d). real properties owned by cooperatives;

(e). machinery and equipment used for pollution control and environment protection. APPRAISAL AND COLLECTION of RPT Section 201. Appraisal of Real Property. - All real property, whether taxable or exempt, shall be appraised at the current and fair market value prevailing in the locality where the property is situated. The Department of Finance shall promulgate the necessary rules and regulations for the classification, appraisal, and assessment of real property pursuant to the provisions of this Code. Section 202. Declaration of real Property by the Owner or Administrator. - It shall be the duty of all persons, natural or juridical, owning or administering real property, including the improvements therein, within a city or municipality, or their duly authorized representative, to prepare, or cause to be prepared, and file with the provincial, city or municipal assessor, a sworn statement declaring the true value of their property, whether previously declared or undeclared, taxable or exempt, which shall be the current and fair market value of the property, as determined by the declarant. Such declaration shall contain a description of the property sufficient in detail to enable the assessor or his deputy to identify the same for assessment purposes. The sworn declaration of real property herein referred to shall be filed with the assessor concerned once

every three (3) years during the period from January first (1st) to June thirtieth (30th) commencing with the calendar year 1992. Section 203. Duty of Person Acquiring Real Property or Making Improvement Thereon. - It shall also be the duty of any person, or his authorized representative, acquiring at any time real property in any municipality or city or making any improvement on real property, to prepare, or cause to be prepared, and file with the provincial, city or municipal assessor, a sworn statement declaring the true value of subject property, within sixty (60) days after the acquisition of such property or upon completion or occupancy of the improvement, whichever comes earlier. Section 204. Declaration of Real Property by the Assessor. - When any person, natural or juridical, by whom real property is required to be declared under Section 202 hereof, refuses or fails for any reason to make such declaration within the time prescribed, the provincial, city or municipal assessor shall himself declare the property in the name of the defaulting owner, if known, or against an unknown owner, as the case may be, and shall assess the property for taxation in accordance with the provision of this Title. No oath shall be required of a declaration thus made by the provincial, city or municipal assessor. Section 205. Listing of Real Property in the Assessment Rolls. -

(a) In every province and city, including the municipalities within the Metropolitan Manila Area, there shall be prepared and maintained by the provincial, city or municipal assessor an assessment roll wherein shall be listed all real property, whether taxable or exempt, located within the territorial jurisdiction of the local government unit concerned. Real property shall be listed, valued and assessed in the name of the owner or administrator, or anyone having legal interest in the property. (b) The undivided real property of a deceased person may be listed, valued and assessed in the name of the estate or of the heirs and devisees without designating them individually; and undivided real property other than that owned by a deceased may be listed, valued and assessed in the name of one or more co-owners: Provided, however, That such heir, devisee, or co-owner shall be liable severally and proportionately for all obligations imposed by this Title and the payment of the real property tax with respect to the undivided property. (c) The real property of a corporation, partnership, or association shall be listed, valued and assessed in the same manner as that of an individual. (d) Real property owned by the Republic of the Philippines, its instrumentalities and political subdivisions, the beneficial use of which has

been granted, for consideration or otherwise, to a taxable person, shall be listed, valued and assessed in the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease. Proof of Exemption of Real Property from Taxation: Every person by or for whom real property is declared, who shall claim tax exemption for such property under this Title shall file with the provincial, city or municipal assessor within thirty (30) days from the date of the declaration of real property sufficient documentary evidence in support of such claim including corporate charters, title of ownership, articles of incorporation, by-laws, contracts, affidavits, certifications and mortgage deeds, and similar documents. If the required evidence is not submitted within the period herein prescribed, the property shall be listed as taxable in the assessment roll. However, if the property shall be proven to be tax exempt, the same shall be dropped from the assessment roll. Classes of Purposes:

Real

Property

for

Assessment

For purposes of assessment, real property shall be classified as residential, agricultural, commercial, industrial, mineral, timberland

or special. The city or municipality within the Metropolitan Manila Area, through their respective sanggunian, shall have the power to classify lands as residential, agricultural, commercial, industrial, mineral, timberland, or special in accordance with their zoning ordinances. Special Classes of Real Property All lands, buildings, and other improvements thereon actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and those owned and used by local water districts, and government-owned or controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special. Actual Use of Real Property as Basis for Assessment Real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. General Revision of Assessment and Property Classification The provincial, city or municipal assessor shall undertake a general revision of real property assessments within two (2) years after the effectivity of this Code and every three (3) years thereafter.

Valuation of Real Property In cases where (a) real property is declared and listed for taxation purposes for the first time; (b) there is an ongoing general revision of property classification and assessment; or (c) a request is made by the person in whose name the property is declared, the provincial, city or municipal assessor or his duly authorized deputy shall, in accordance with the provisions of this Chapter, make a classification, appraisal and assessment or taxpayer's valuation thereon: Provided, however, That the assessment of real property shall not be increased oftener than once every three (3) years except in case of new improvements substantially increasing the value of said property or of any change in its actual use. Date of Effectivity Reassessments

of

Assessment

or

All assessments or reassessments made after the first (1st) day of January of any year shall take effect on the first (1st) day of January of the succeeding year: Provided, however, That the reassessment of real property due to its partial or total destruction, or to a major change in its actual use, or to any great and sudden inflation or deflation of real property values, or to the gross illegality of the assessment when made or to any other abnormal cause, shall be made within ninety (90) days from the date any such cause or causes occurred, and shall take effect at the beginning of the quarter next following the reassessment.

Notification of New or Revised Assessment When real property is assessed for the first time or when an existing assessment is increased or decreased, the provincial, city or municipal assessor shall within thirty (30) days give written notice of such new or revised assessment to the person in whose name the property is declared. The notice may be delivered personally or by registered mail or through the assistance of the punong barangay to the last known address of the person to be served. Remedies Against Assessment/Appraisal of Real Property: Appeal to LBAA/CBAA ​Note: It is the Assessor who issues the

assessment/appraisal of real property; ​

Procedures before LBAA/CBAA: 1. Any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may, within sixty (60) days from the date of receipt of the written notice of assessment, appeal to the Local Board of Assessment Appeals (LBAA) of the provincial or city by filing a petition under oath in the form prescribed for the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal;

2. LBAA shall decide the appeal within one hundred twenty (120) days from the date of receipt of such appeal. The Board, after hearing, shall render its decision based on substantial evidence or such relevant evidence on record as a reasonable mind might accept as adequate to support the conclusion. 3. The secretary of the Board shall furnish the owner of the property or the person having legal interest therein and the provincial or city assessor with a copy of the decision of the Board. 4. In case the provincial or city assessor concurs in the revision or the assessment, it shall be his duty to notify the owner of the property or the person having legal interest therein of such fact using the form prescribed for the purpose. 5. The owner of the property or the person having legal interest therein or the assessor who is not satisfied with the decision of the LBAA, may, within thirty (30) days after receipt of the decision of LBAA , appeal to the Central Board of Assessment Appeals (CBAA), as herein provided. The decision of the Central Board shall be final and executory. 6. Aggrieved party appeals to CTA En Banc within 30 days from the receipt of the decision of the CBAA; 7. Aggrieved party appeals to the Supreme Court from the CTA decision within 15 days from receipt of the prejudicial decision;

Composition of LBAA: (a) The Local Board of Assessment Appeals of the province or city shall be composed of the Registrar of Deeds, as Chairman, the provincial or city prosecutor and the provincial, or city engineer as members, who shall serve as such in an ex officio capacity without additional compensation. (b) The chairman of the Board shall have the power to designate any employee of the province or city to serve as secretary to the Board also without additional compensation. (c) The chairman and members of the Board of Assessment Appeals of the province or city shall assume their respective positions without need of further appointment or special designations immediately upon effectivity of this Code. They shall take oath or affirmation of office in the prescribed form. (d) In provinces and cities without a provincial or city engineer, the district engineer shall serve as member of the Board. In the absence of the Registrar of Deeds, or the provincial or city prosecutor, or the provincial or city engineer, or the district engineer, the persons performing their duties, whether in an acting capacity or as a duly designated officer-in-charge, shall automatically become the chairman or member, respectively, of the said Board, as the case may be. Composition of CBAA:

CBAA shall be composed of a chairman, and two (2) members to be appointed by the President, who shall serve for a term of seven (7) years, without reappointment. Of those first appointed, the chairman shall hold office for seven (7) years, one member for five (5) years, and the other member for three (3) years. Appointment to any vacancy shall be only for the unexpired portion of the term of the predecessor. In no case shall any member be appointed or designated in a temporary or acting capacity. The chairman and the members of the Board shall be Filipino citizens, at least forty (40) years old at the time of their appointment, and members of the Bar or Certified Public Accountants for at least ten (10) years immediately preceding their appointment. Effect of Appeal of Assessment/Appraisal on the Payment of Real Property Tax: Appeal on assessments of real property made under the provisions of this Code shall, in no case, suspend the collection of the corresponding realty taxes on the property involved as assessed by the provincial or city assessor, without prejudice to subsequent adjustment depending upon the final outcome of the appeal.

3. LEVY AND COLLECTION OF REAL PROPERTY TAX Date of Accrual of Tax

The real property tax for any year shall accrue on the first day of January and from that date it shall constitute a lien on the property which shall be superior to any other lien, mortgage, or encumbrance of any kind whatsoever, and shall be extinguished only upon the payment of the delinquent tax. Collection of Tax (CITY OR MUNICIPAL TREASURER) The collection of the real property tax with interest thereon and related expenses, and the enforcement of the remedies provided for in this Title or any applicable laws, shall be the responsibility of the city or municipal treasurer concerned. The city or municipal treasurer may deputize the barangay treasurer to collect all taxes on real property located in the barangay: Provided, That the barangay treasurer is properly bonded for the purpose: Provided, further, That the premium on the bond shall be paid by the city or municipal government concerned. The provincial, city or municipal assessor shall prepare and submit to the treasurer of the local government unit, on or before the thirty-first (31st) day of December each year, an assessment roll containing a list of all persons whose real properties have been newly assessed or reassessed and the values of such properties.

Notice of Time for Collection of Tax The city or municipal treasurer shall, on or before the thirty-first (31st) day of January each year, in the case of the basic real property tax and the additional tax for the Special Education Fund (SEF) or any other date to be prescribed by the sanggunian concerned in the case of any other tax levied under this title, post the notice of the dates when the tax may be paid without interest at a conspicuous and publicly accessible place at the city or municipal hall. Said notice shall likewise be published in a newspaper of general circulation in the locality once a week for two (2) consecutive weeks. Payment of Real Property Taxes in Installments The owner of the real property or the person having legal interest therein may pay the basic real property tax and the additional tax for Special Education Fund (SEF) due thereon without interest in four (4) equal installments; the first installment to be due and payable on or before March Thirty-first (31st); the second installment, on or before June Thirty (30); the third installment, on or before September Thirty (30); and the last installment on or before December Thirty-first (31st), except the special levy the payment of which shall be governed by ordinance of the sanggunian concerned.

The date for the payment of any other tax imposed under this Title without interest shall be prescribed by the sanggunian concerned. Payments of real property taxes shall first be applied to prior years delinquencies, interests, and penalties, if any, and only after said delinquencies are settled may tax payments be credited for the current period. Tax Discount for Advanced Prompt Payment If the basic real property tax and the additional tax accruing to the Special Education Fund (SEF) are paid in advance in accordance with the prescribed schedule of payment, the sanggunian concerned may grant a discount not exceeding twenty percent (20%) of the annual tax due. Payment Under Protest (a) No protest shall be entertained unless the taxpayer first pays the tax. There shall be annotated on the tax receipts the words "paid under protest". The protest in writing must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt. (b) The tax or a portion thereof paid under protest, shall be held in trust by the treasurer concerned.

(c) In the event that the protest is finally decided in favor of the taxpayer, the amount or portion of the tax protested shall be refunded to the protestant, or applied as tax credit against his existing or future tax liability. (d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed in subparagraph (a), the taxpayer may APPEAL TO THE LBAA AND THEN TO CBAA; Repayment/Refund of Excessive RPT Collections When an assessment of basic real property tax, or any other tax, is found to be illegal or erroneous and the tax is accordingly reduced or adjusted, the taxpayer may file a written claim for refund or credit for taxes and interests with the provincial or city treasurer within two (2) years from the date the taxpayer is entitled to such reduction or adjustment. The provincial or city treasurer shall decide the claim for tax refund or credit within sixty (60) days from receipt thereof. In case the claim for tax refund or credit is denied, the taxpayer may avail of the remedy of appeal to LBAA/CBAA Notice of Delinquency in the Payment of the Real Property Tax (a) When the real property tax or any other tax imposed under this Title becomes delinquent,

the provincial, city or municipal treasurer shall immediately cause a notice of the delinquency to be posted at the main hall and in a publicly accessible and conspicuous place in each barangay of the local government unit concerned. The notice of delinquency shall also be published once a week for two (2) consecutive weeks, in a newspaper of general circulation in the province, city, or municipality. (b) Such notice shall specify the date upon which the tax became delinquent and shall state that personal property may be distrained to effect payment. It shall likewise state that any time before the distraint of personal property, payment of the tax with surcharges, interests and penalties may be made in accordance with the next following Section, and unless the tax, surcharges and penalties are paid before the expiration of the year for which the tax is due except when the notice of assessment or special levy is contested administratively or judicially pursuant to the provisions of Chapter 3, Title II, Book II of this Code, the delinquent real property will be sold at public auction, and the title to the property will be vested in the purchaser, subject, however, to the right of the delinquent owner of the property or any person having legal interest therein to redeem the property within one (1) year from the date of sale. Interests on Unpaid Real Property Tax

In case of failure to pay the basic real property tax or any other tax levied under this Title upon the expiration of the periods as provided in Section 250, or when due, as the case may be, shall subject the taxpayer to the payment of interest at the rate of two percent (2%) per month on the unpaid amount or a fraction thereof, until the delinquent tax shall have been fully paid: Provided, however, That in no case shall the total interest on the unpaid tax or portion thereof exceed thirty-six (36) months. Remedies For The Collection Of Real Property Tax For the collection of the basic real property tax and any other tax, the local government unit concerned may avail of the remedies by administrative action thru levy on real property or by judicial action. a. Levy on Real Property. - After the expiration of the time required to pay the basic real property tax or any other tax , real property subject to such tax may be levied upon through the issuance of a warrant on or before, or simultaneously with, the institution of the civil action for the collection of the delinquent tax. The provincial or city treasurer, or a treasurer of a municipality within the Metropolitan Manila Area, as the case may be, when issuing a warrant of levy shall prepare a duly authenticated certificate showing the name of the delinquent owner of the property or person having legal interest therein, the description of the property, the amount of the tax due and the interest

thereon. The warrant shall operate with the force of a legal execution throughout the province, city or a municipality, within the Metropolitan Manila Area. The warrant shall be mailed to or served upon the delinquent owner of the real property or person having legal interest therein, or in case he is out of the country or cannot be located, the administrator or occupant of the property. At the same time, written notice of the levy with the attached warrant shall be mailed to or served upon the assessor and the Registrar of Deeds of the province, city or municipality within the Metropolitan Manila Area where the property is located, who shall annotate the levy on the tax declaration and certificate of title of the property, respectively. The levying officer shall submit a report on the levy to the sanggunian concerned within ten (10) days after receipt of the warrant by the owner of the property or person having legal interest therein. Advertisement and Sale Within thirty (30) days after service of the warrant of levy, the local treasurer shall proceed to publicly advertise for sale or auction the property or a usable portion thereof as may be necessary to satisfy the tax delinquency and expenses of sale. The advertisement shall be effected by posting a notice at the main entrance of the provincial,

city or municipal building, and in a publicly accessible and conspicuous place in the barangay where the real property is located, and by publication once a week for two (2) weeks in a newspaper of general circulation in the province, city or municipality where the property is located. The advertisement shall specify the amount of the delinquent tax, the interest due thereon and expenses of sale, the date and place of sale, the name of the owner of the real property or person having legal interest therein, and a description of the property to be sold. At any time before the date fixed for the sale, the owner of the real property or person having legal interest therein may stay the proceedings by paying the delinquent tax, the interest due thereon and the expenses of sale. The sale shall be held either at the main entrance of the provincial, city or municipal building, or on the property to be sold, or at any other place as specified in the notice of the sale. Within thirty (30) days after the sale, the local treasurer or his deputy shall make a report of the sale to the sanggunian concerned, and which shall form part of his records. The local treasurer shall likewise prepare and deliver to the purchaser a certificate of sale which shall contain the name of the purchaser, a description of the property sold, the amount of the delinquent tax, the interest due thereon, the

expenses of sale and a brief description of the proceedings: Provided, however, That proceeds of the sale in excess of the delinquent tax, the interest due thereon, and the expenses of sale shall be remitted to the owner of the real property or person having legal interest therein. Redemption of Property Sold Within one (1) year from the date of sale, the owner of the delinquent real property or person having legal interest therein, or his representative, shall have the right to redeem the property upon payment to the local treasurer of the amount of the delinquent tax, including the interest due thereon, and the expenses of sale from the date of delinquency to the date of sale, plus interest of not more than two percent (2%) per month on the purchase price from the date of sale to the date of redemption. Such payment shall invalidate the certificate of sale issued to the purchaser and the owner of the delinquent real property or person having legal interest therein shall be entitled to a certificate of redemption which shall be issued by the local treasurer or his deputy. From the date of sale until the expiration of the period of redemption, the delinquent real property shall remain in possession of the owner or person having legal interest therein who shall be entitled to the income and other fruits thereof. The local treasurer or his deputy, upon receipt from the purchaser of the certificate of sale, shall forthwith return to the latter the entire amount

paid by him plus interest of not more than two percent (2%) per month. Thereafter, the property shall be free from lien of such delinquent tax, interest due thereon and expenses of sale. Final Deed to Purchaser In case the owner or person having legal interest fails to redeem the delinquent property as provided herein, the local treasurer shall execute a deed conveying to the purchaser said property, free from lien of the delinquent tax, interest due thereon and expenses of sale. The deed shall briefly state the proceedings upon which the validity of the sale rests. Purchase of Property By the Local Government Units for Want of Bidder In case there is no bidder for the real property advertised for sale as provided herein, the real property tax and the related interest and costs of sale the local treasurer conducting the sale shall purchase the property in behalf of the local government unit concerned to satisfy the claim and within two (2) days thereafter shall make a report of his proceedings which shall be reflected upon the records of his office. It shall be the duty of the Registrar of Deeds concerned upon registration with his office of any such declaration of forfeiture to transfer the title of the forfeited property to the local government unit concerned without the necessity of an order from a competent court.

Within one (1) year from the date of such forfeiture, the taxpayer or any of his representative, may redeem the property by paying to the local treasurer the full amount of the real property tax and the related interest and the costs of sale. If the property is not redeemed as provided herein, the ownership thereof shall be vested on the local government unit concerned.

Collection of Real Property Tax Through the Court AND Prescriptive Period for Assessment and Collection ​

​ ASSESSMENT

COLLECTION

5 yrs from due date ( Jan 1 every year)

5 yrs from receipt of Assessment

10 yrs from discovery of fraud or intent to evade payment

5 yrs from receipt of Assessment

Suspension of Period: The period of prescription within which to collect shall be suspended for the time during which: (1) The local treasurer is legally prevented from collecting the tax; (2) The owner of the property or the person having legal interest therein requests for reinvestigation and executes a waiver in writing before the expiration of the period within which to collect; and (3) The owner of the property or the person having legal interest therein is out of the country or otherwise cannot be located

Action Assailing Validity of Tax Sale No court shall entertain any action assailing the validity or any sale at public auction of real property or rights therein until the taxpayer shall have deposited with the court the amount for which the real property was sold, together with interest of two percent (2%) per month from the date of sale to the time of the institution of the action. The amount so deposited shall be paid to the purchaser at the auction sale if the deed is declared invalid but it shall be returned to the depositor if the action fails. Neither shall any court declare a sale at public auction invalid by reason or irregularities or informalities in the proceedings unless the substantive rights of the delinquent owner of the real property or the person having legal interest therein have been impaired. Payment of Delinquent Taxes on Property Subject of Controversy In any action involving the ownership or possession of, or succession to, real property, the court may, motu propio or upon representation of the provincial, city, or municipal treasurer or his deputy, award such ownership, possession, or succession to any party to the action upon payment to the court of the taxes with interest due on the property and all other costs that may have accrued, subject to the final outcome of the action;

4. REFUND OF LOCAL TAXES Refund of Local Taxes written claim for refund or credit must be filed with the local treasurer two (2) years from the date of the payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit;

5. OTHERS A. Requisites of Tax Delinquency Sale ( LGC of 1991): Corporate Strategies Development Corporation and Rafael R. Prieto Vs. Norman A. Agojo G.R. No. 208740 November 19, 2014. Burden to prove compliance with the validity of the proceedings leading up to the tax delinquency sale of real property is incumbent upon the buyer or the winning bidder. Posting of notice of delinquency at the main hall and in a publicly accessible and conspicuous place in each barangay of the LGU; b. Publication once a week for two (2) consecutive weeks, in a newspaper of general circulation in the province, city, or municipality; c. If Treasurer issues a warrant of levy (WL), mail or serve WL to delinquent owner of the real property or person having legal interest therein, or in case he is out of the country or cannot be located, the administrator or occupant of the property. d. Notice with the attached WL mailed to or served upon the Assessor and the Registrar of Deeds; a.

e.

f.

Within thirty (30) days after service of the WL, the local treasurer shall publicly advertise for sale or auction the property or a usable portion thereof; Advertisement shall be effected by posting a notice at the main entrance of the provincial, city or municipal building, and in a publicly accessible and conspicuous place in the barangay where the real property is located, and by publication once a week for two (2) weeks in a newspaper of general circulation in the province, city or municipality where the property is located.

VERY IMPORTANT CASE DOCTRINE: If issue is

validity of assessment not reasonableness of RPT assessment, ordinary courts ( NOT LBAA, CBAA) have jurisdiction over the issue. NPC vs. MUNICIPAL GOVERNMENT OF NAVOTAS; GR 192300; 24 November 2014 FACTS: NPC entered into a BOT agreement with private corporation covering gas turbine power stations wherein the power stations are in the actual control and supervision of NPC. LGU issues an RPT assessment. NPC argues that the properties are exempt from RPT. Instead of exhausting administrative remedies of filing protest, then appeal to LBAA and CBAA, NPC filed declaratory relief with RTC assailing the validity of assessment NOT the reasonableness or correctness of assessment. RULING:

A. When the legality or validity of the assessment is in question, and not its reasonableness or correctness, appeals to the LBAA, and subsequently to the CBAA, are not necessary. Stated differently, in the event that the taxpayer questions the authority and power of the assessor to impose the assessment, and of the treasurer to collect the real property tax, resort to judicial action ( ORDINARY COURTS) may prosper. In the case at bench, the petitioners are questioning the very authority and power of the assessor, acting solely and independently, to impose the assessment and of the treasurer to collect the tax. These are not questions merely of amounts of the increase in the tax but attacks on the very validity of any increase. If the only issue is the legality or validity of the assessment – a question of law – direct recourse to the RTC is warranted. B. As a rule, administrative remedies (PROTEST, LBAA, CBAA) must first be exhausted before resort to judicial action can prosper, there is a well-settled exception in cases where the controversy does not involve questions of fact but only of law. The proceedings of the LBAA shall be conducted solely for the purpose of ascertaining the facts . . . ." It follows that appeals to this Board (LBAA) may be fruitful only where questions of fact are involved. Again, the protest contemplated under Sec. 252 of R.A. 7160 is needed where there is a question as to the reasonableness of the amount assessed. Hence,

if a taxpayer disputes the reasonableness of an increase in a real estate tax assessment, he is required to "first pay the tax" under protest. Otherwise, the city or municipal treasurer will not act on his protest. C. CTA Division has jurisdiction over decisions of the RTC in petitions for declaratory relief filed by TX assailing the validity of assessment on the ground of exemption from RPT. D. The real property tax for any year shall accrue on the first day of January and from that date it shall constitute a lien on the property which shall be superior to any other lien, mortgage, or encumbrance of any kind whatsoever, and shall be extinguished only upon the payment of the delinquent tax. E. It is the City or Municipal Treasurer’s Office which collects RPT; F. Notice of Time for Collection of Tax. The city or municipal treasurer shall, on or before the thirty-first (31st) day of January each year, post the notice of the dates when the tax may be paid without interest at a conspicuous and publicly accessible place at the city or municipal hall. Said notice shall likewise be published in a newspaper of general circulation in the locality once a week for two (2) consecutive weeks.

G. Payment Under Protest is required in protest of RPT: 30 days from payment of tax and filed before provincial, city treasurer or municipal treasurer, in the case of a municipality within Metropolitan Manila Area. Treasurer decides within 60 days. If denied or after lapse of 60 day period TX may go to LBAA (60 days) then to CBAA (30 days); Question: Is the LGU empowered under the LGC to impose business taxes on persons or entities engaged in the business of manufacturing and distribution of petroleum products? Batangas City vs Pilipinas Shell Petroleum Corporation GR 187631 July 8 2015; Section 133 of the LGC is a specific provision that explicitly withhold from LGUs the power to impose taxes, fees and charges on petroleum products. Strictly speaking, as long as the subject matter of the taxing powers of the LGUs is the petroleum products per se or even the activity or privilege related to the petroleum products, such as manufacturing and distribution of said products, it is covered by the said limitation and thus, no levy can be imposed; Article 232 of LGC defines with more particularity the capacity of a municipality to impose business taxes on businesses except businesses engaged in the production, manufacture, refining, distribution or sale of oil, gasoline, and other petroleum products;

Redemption of property in case of forfeiture: City of Davao vs. Intestate Estate of Amado Dalisay GR 207791 July 15, 2015; Under LGC of 1991, in case of forfeiture of real property (sold at public auction and without any bidder), redemption period of 1 year is reckoned from date of purchase by LGU ( date of auction/sale) of the property for want of any bidder NOT from issuance by LGU of certificate of forfeiture. Forfeiture of tax delinquent properties transpires no later than the purchase made by the city due to lack of a bidder from the public. This happens on the date of the sale, and not upon the issuance of the declaration of forfeiture. _________________________________________ _________________________________________ Table : Remedies under NIRC, LGC of 1991, CMTA (See attached Annex “A” consisting of 10 pages)

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