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-Proceed to section 42 and 23 of the NIRC NDC vs. Comm 151 SCRA 472 Comm. Vs. IAC 127 SCRA 9 -Then go to sec. 39 of NIRC Calazans vs. Comm. 144 SCRA 664 RR 7-2003 -Then proceed to sec. 24 (A), 25 (A) (1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and sec 51 (D) -Then continue to sec 24 B 1, 25 B,C,D,E; 27 (D) (1) -Then go to se. 24 (B) (2) sec. 73 Comm. Vs. Manning 66 SCRA 14 Anscor vs. Comm. 301 SCRA 152 -Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); 28 (A) (7) (D); 32 B (7) (a) Then you go to sec. 24 C, 25A (3); 25 B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 sec. 127 NIRC Then you go to sec. 24 D (1); 25 (A) (3); 25 (B) last par. 27 (D) (5) China Bank vs. Court of Appeals 336 SCRA ___; RR 7-2003 -Upon reading sec. 24 (D) (2) read RR 13-1999 -Upon reading sec. 27 (A) go to sec. 22 (B) Batangas vs. Collector 102 Phil. 822 Evangelista vs. Collector 102 Phil 140 Reyes vs. Comm. 24 SCRA 198 Ona vs. Bautista 45 SCRA 74 Obillos vs. Comm 139 SCRA 436 Pascua vs. Comm. 166 SCRA 560 Afisco vs. Comm. 302 SCRA 1 -Upon reading sec. 27 (C) of NIRC see RA 9337 then go to sec. 32 (B) (7) (b) of NIRC, sec. 133 par (o) of LGC, sec. 154 of the LGC. Pagcor vs. Basco 197 SCRA 52 Mactan vs. Cebu 261 SCRA 667 LRT vs. City of Manila 342 SCRA 692 -Proceed to sections 27 (D) (1), 27 (D) (2), 27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5) (b) Marubeni vs. CIR 177 SCRA 500 Proctor & Gamble vs. Comm 160 SCRA 560 Same case Proctor and Gamble on the Motion for Reconsideration 204 SCRA 377 Wonder vs. Comm 160 SCRA 573 -Proceed to sec. 27(D) (5) then sections 27 (E) and 28 (A) (2) -Go to sec. 28 (A) (3) read RR 15-2002 -Go to sec. 28 (A) (4) see RA 9337 -Then see sec 28 (A) (5) see Marubeni vs. Comm 177 SCRA 500 -Proceed to sec. 28(B) (5) (a) and sec 32 (B) (7) (a) Read Mitsubishi vs. Comm 181 SCRA 214 -Then go to sec. 29 and Rev. Reg. 2-2001 -Upon reading sec. 32 (B) 1 and 2, read sec. 85 par (e), sec. 108A and sec. 123 of the NIRC -Proceed to sec. 33 read Rev. Reg. 3-98 -then go to sec. 34 (A) (1) (a) see Aguinaldo vs. Comm. 112 SCRA 136, RR 10-2002 -Under Sec. 34 (B) read RR 13-2000 -Upon reading sec. 49 read Banas vs. CA 325 SCRA 259 and Filipina vs. Comm. 316 SCRA 480 -Upon reading sec. 60-66, read Ona vs. Bautista 45 SCRA 74 III. Estate Tax -Sections 84-97 see sec. 104 -Upon reading sec. 85 (B) read Vidal Posadas 58 Phil. 108
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II. Income Tax Law Section 22-26 of the National Internal Revenue Code a) Read in the commentaries or magic notes the different kinds of: 1. Income Taxpayers 2. Income Taxes 3. Sources of Income sec. 42 of NIRC - Income Taxpayers a) Individuals b) Corporation c) Estates and Trusts -Individuals are classified Resident Citizens sec. 23 (A), sec 24 (A) (a) Non-Resident Citizens sec 23 (B), 24 (A) (b) 22 (E) Overseas Contract Workers Sec. 23 (C), 24 (A) (b) Resident Aliens Rev. Reg. sec 5, 23 (D), 24 (A) (c) Non-Resident Aliens Engaged in trade or business sections 25 (A) (1) Non-Resident Aliens Not Engaged in trade or business sec. 25 (B) Aliens Employed in Multi-National Corporations sec. 25 (C) and Rev. Reg. 122001 Aliens Employed in Offshore Banking Units sec 25 (D) Aliens Employed in petroleum Service Contractors & Subcontractors sec. 25 (E) -Corporate Income Taxpayers Domestic Corporations sec. 23 (E), and sec 27 of NIRC Resident Foreign Corporations sec. 22 (H) and (28)A Non-Resident Foreign Corporations sec. 22 (1) and 28 (B) -Estates and Trusts sec. 60-66 of NIRC Different Kinds of Income Tax 1. Net Income Tax secs. 24 (A), 25 (A) (1), 26, 27 (A) (B) (C), 28 (A) up to 3rd par. 31 and 32 (A)
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Coverage of Taxation Law Review: 1. Basic Principles including Constitutional Provisions 2. Income Tax 3. Estate Tax 4. Donors Tax 5. Remedies 6. Local Tax 7. Real Property Tax 8. Tariff and Customs Code 9. Court of Tax Appeals 10. VAT (although not part of the coverage of the Bar Exams, questions have been asked since 1999) Title 5,6 and 7 are always included in the coverage No computations in the bar There are only 1 or 2 questions in the Bar about Basic Principles What are the favorite topics in the Bar? 12 questions on Income Tax 8-10 questions on remedies 8-10 questions allocated to the 7 topics
Q: What do you mean by INHERENT? A: The power to tax is not provided for in the law, statute or constitution; it depends on the existence of the state. No law or legislation for the exercise of the power to tax by the national government. Q: Do local governments exercise this inherent power? A: No. Only the National Government exercises the inherent power to impose taxes. Q: The taxing power of local governments is a DELAGATED power. Delegated by whom? A: Delegated by Congress through law in case of autonomous regions, and delegated by the constitution in case of LGUs not considered an autonomous region. Cities, provinces and municipalities power granted under Art. X Sec. 5&6 of the Constitution Autonomous Regions power conferred by Congress through law. Art. X Sec. 20 #2 of the Constitution is a non-self-executing provision. Thus the power is granted by Congress because said provision requires an enabling law. Article X, Section 5 is self-executing thus the power is granted by the constitution. CONSTITUTIONAL LIMITATIONS Due Process Clause Q: why is it a limitation to the power to tax? A: The due process clause as a limitation to the power to tax refers both to substantive and procedural due process. Substantive due process requires that a tax statute must be within the constitutional authority of Congress to pass and that it be reasonable, fair and just. Procedural due process, on the other hand, requires notice and hearing or at least the opportunity to be heard. Ex: On Substantive Due Process- when the Congress passes a law exempting the 13 th month pay from tax but with the concurrence only of the majority of the quorum law would be invalid because the Constitution provides that any grant of tax exemption shall be passed with the concurrence of the majority of all the members of the Congress. Q: Does it follow that the adverse party must always be notified? A: No. As a rule, notice and hearing or the opportunity to be heard is necessary only when expressly required by law.
LRT vs. Manila 342 SCRA Cebu City vs. Mactan 261
IX. Tariff & Customs Code Special Customs Duty sec. 301-304 of TCC Regukar Customs Duty sec. 104 of TCC RA 7631 Rules in the Classroom: 1. do not be absent if you are absent, you have to transcribe what happened in class when you were out. The next meeting you attend class, consider yourself a resident of balic-balic, babalikbalikan ka sa recit. Exception: if you get married.
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Q: Which one limits the power to tax? A: Prohibition upon the national government to establish a national religion because this will require a special appropriation of money coming from the national treasury which is funded by the taxes paid by the people. Non-impairment Clause Q: What are the sources of obligation in the Civil Code? A: Law, Contracts, Quasi-Contracts, Delict, Quasi-Delict. Q: What is the obligation contemplated in this limitation? A: Those obligations arising from contracts. General Rule: The power to tax is pursuant to law, therefore, the obligation to pay taxes is imposed by law, thus the non-impairment clause does not apply. You have to determine first the source of obligation: 1. If the law merely provides for the fulfillment of the obligation then the law is not the source of the obligation. 2. When the law merely recognizes or acknowledges the existence of an obligation created by an act which may constitute a contract, quasi-contract, delict, and quasidelict, and its only purpose is to regulate such obligation, then the act itself is the source of the obligation, not the law. When the law establishes the obligation and also provides for its fulfillment, then the law itself is the source of the obligation Q: So, in what instance does the non-impairment of contracts clause becomes a limitation to the power to tax? A: it is when the taxpayer enters into a compromise agreement with the government. In this instance, the obligation to pay the tax is now based on the contract between the taxpayer and the government pursuant to their compromise agreement. Take Note: the requirement for its application: the parties are the government and private individual. Poll Tax Q: What is a poll tax? A: It is a tax of a fixed amount on individuals residing within a particular territory, whether citizens or not, without regard to their property or to the occupation in which they may be engaged. It is a tax imposed on persons without any qualifications. persons may be allowed to pay even if they are not qualified as to age or property ownership.
Q: is the doctrine in the case of Herrera the same with this case? A: NO. in the Herrera case, the exemption was granted to all the real property (hospital, school and dorm). But in this case, the Supreme Court made a qualification. The Supreme Court said it depends. NOTE: both cases arose under the 1935 Constitution despite having been decided in 1988. Q: At present, do we still apply the exemption from tax by virtue of the Doctrine of Incidental Purpose? A: Not anymore. The cause of action in said case arose under the 1935 Constitution and it does not apply to the provisions of the 1987 Constitution. PHILIPPINE LUNG CENTER v. QUEZON CITY Q: What is involved in this case? A: A charitable institution, a hospital. It is provided in the charter of the Lung Center of the Philippines is a charitable institution. However, part of its building was leased to private individuals and the vacant portion of its lot was rented out to Elliptical Orchids. Respondent contends that since the hospital is not used actually, directly, an d exclusively for charitable purposes, it is liable to pay real estate taxes. H: The Supreme Court held that the petitioner is liable to pay tax for those parts leased to private individuals for commercial purposes. For the part of the hospital used for charitable purposes (whether for pay or non-pay patients), petitioner is exempt from payment of real estate tax. NOTE: petitioner contended that the profits derived from the lease of its premises were used for the operation of the hospital. The Court held that the use of the profits does not determine exemption, rather it is the use of the property that determines exemption. The case of Herrera does not apply because said case arose under the 1935 Constitution and the present case arose under the 1987 Constitution. The requirements for exemption are different. In the 1935 Constitution, the property must be EXCLUSIVELY used for religious, educational or charitable purposes. Under the 1987 Constitution, the property must be used ACTUALLY, DIRECTLY, and EXCLUSIVELY for religious, educational and charitable purposes. Q: Was the doctrine laid down in Abra Valley affirmed in the Lung Center case? A: Yes. The Supreme Court unconsciously applied a doctrine laid down by the 1935 Constitution. The Supreme Court reiterated the ruling in the Abra Valley case which arose under the 1935 Constitution. The Supreme Court made a qualification, it held that it depends on whether or not the use is incidental to the primary purpose of the institution. NOTE: at present, exemption from tax by virtue of incidental purpose is not applicable to all taxes including real estate tax. COMM v. SC JOHNSON and SONS, INC. Important : 1. international double taxation 2. importance of international tax treaty 3. implication of most favored nation clause Q: What is the corporation involved in this case? A: A domestic corporation (DC). SC Johnson and Sons, Inc. entered into a license agreement with SC Johnson and Sons U.S.A (NonResident Foreign Corp, NRFC) whereby the former was allowed to use the latters trademark and facilities to manufacture its products. In return, the DC will pay the NRFC royalties as well as payment of withholding tax. A case for refund of overpaid withholding tax was filed. Apparently, the DC should have paid only 10% under the most favored nation clause.
Obnoxious double taxation is the synonym of double taxation. Elements of Double Taxation: 1) Levied by the same taxing authority 2) For the same subject matter 3) For the same taxing period and 4) For the same purpose There is no double taxation if the tax is levied by the LGU and another by the national government. The two (2) are different taxing authorities. LGUs are expressly prohibited by the provisions of RA 7160 or the LGC of 1991 from levying tax upon: (1) the National Government; (2) its agencies and instrumentalities; (3) LGUs (sec.113(o)). The National Government, pursuant to the provisions of RA 8424 of the Tax Reform Act of 1997, can levy tax upon GOCCs, agencies and instrumentalities (Section 27 c)), although income received by the Government form: 1) any public utility or 2) the exercise of any essential governmental function is exempt from tax. KINDS OF INCOME TAXPAYERS Q: Generally, how many kinds of income taxpayers are there? A: Under section 22A of NIRC, there are three (3), namely: 1. individual; 2. corporate; 3. estate and trust.
Q: What are deemed corporations under the NIRC? A: The term corporation shall include partnerships, no matter how created or organized, joint stock companies, joint accounts, associations, or insurance companies, but DOES NOT includes general professional partnerships and a joint venture or consortium formed of the purpose of undertaking construction projects or operations pursuant to or engaging in petroleum, coal, geothermal or consortium agreement under a service contract with the Government. 1. Partnerships and others no matter how created 2. Joint Stock Companies 3. Joint Accounts 4. Associations 5. Insurance Companies CIR v. COURT OF APPEALS The phrase no matter how created or organized was interpreted. Even if the partnership was pursuant to law or not, whether nonstick, nonprofit, it is still deemed a corporation. Reason: because of the possibility of earning profits form sources within the Philippines. Q: Are partnerships always considered corporations? Is there no exception? A: General Rule: a partnership is a corporation. Exception: General Professional Partnerships (GPP) Q: What is a GPP? A: It is a partnership formed by persons for the sole purpose of exercising their profession, no part of the income of which in derived from any trade or business. (what if a partner has other businesses not related to the GPP? > read section 26 quoted hereunder) Two (2) Kinds of GPP formed for: 1) Exercise of a profession not a corporation; exempt from Corporate Income Tax (CIT) 2) Exercise of a profession and engaged in trade or business a corporation; subject to CIT TAN v. DEL ROSARIO general rule: a partnership is a corporation exception: GPP exception to the exception: if the GPP derives income from other sources, it is considered a corporation, thus liable to pay corporate income tax. Rule: 1. if the income is derived from other sources and such income is subject to NET INCOME TAX, it is not exempt and it is considered a corporation. 2. if the income is derived from other sources and such income is subject to FINAL INCOME TAX, it is still EXEMPT and it is not deemed a corporation. ( separate return for this. It will not reflect in the GPPs ITR) This is pursuant to the fact that FIT will not reflect in the ITR of the GPP since the withholding agent is liable for the payment of the FIT. Q: What is the importance of knowing whether the corporation is exempt or not?
Judicial Settlement 1) During the pendency of the settlement, the estate through the executor, administrator, or heirs is liable for the payment of ESTATE INCOME TAX (Sex, 60 (3)). If upon the termination of the judicial settlement, when the decision of the court shall have become final and executory, the heirs still do not divide the property, the following possibilities may arise: a) If the heirs contribute to the estate money, property or industry with the intention to divide the profits between and among themselves, an UNREGISTERED PARTNERSHIP is created and the estate becomes liable for payment of CIT (Evangelista vs. Collector (102 Phil 140)) b) If the heirs without contributing money, property or industry to improve the estate, simply divide the fruits thereof between and among themselves, a CO-OWNERSHIP is created and Individual Income Tax (IIC) is imposed on the income derived by each of the heirs, payable in their separate and individual capacity (Pascual vs. COMM (165 scra 560) and Obillos vs. COMM (139 SCRA 436))
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Extrajudicial Settlement and if NO Settlement Some possibilities may arise. The income tax liability depends on whether or not the unregistered partnership or co-ownership is created. Trust Trusts can be created by will, by contract or by agreement. The status of a trust depends upon the status of the grantor or trustor or creator of the trust. Hence, a trust can also be a citizen or an alien. Q: Where the trust earns income and such income is passive, who among the parties mentioned is liable payment of income tax thereon? A: The TRUST itself, through the trustee or fiduciary only if the trust is irrevocable. If it is revocable, or for the benefit of the grantor, liability for the payment of income tax devolves upon trustor himself in his capacity as individual taxpayer. KINDS OF INCOME TAX Q: How many kinds of income tax? A: There are Six (6), namely: 1. Net Income Tax (NIT); 2. Gross Income Tax (GIT); 3. Final Income Tax (FIT); 4. Minimum Corporate Income Tax of 2% of the Gross Income (MCIT) 5. Income Tax on Improperly Accumulated Earnings subject to 10% of the Taxable Income; 6. Optional Corporate Income Tax of 15% on the Gross Income I. NET INCOME TAX not for but the the
Q: How many for each? A: Seven (7) kinds for each because the trust or estate will be determined by the status of the trustor, grantor, or creator, or of the decedent. The status of the estate is determined by the status of the decedent at the time of his death; so an estate, as an income taxpayer can be a citizen or an alien. When a person who owns property dies, the following taxes are payable under the provision of income tax law: 1) Income Tax for Individuals to cover the period beginning January to the time of death.
Q: what is the formula? A: Gross Income Deductions and Personal Exemptions = Taxable Income Taxable Income x Tax Rate = Net Income Taxable Net Income Tax Credit = Taxable Net Income Due Net Income means Gross Income less deductions and Formula: GI - deductions
Q: What are the other terms for NIT? A: NIRC: a. taxable income b. gross income (wlang kasunod) only income tax from improperly accumulated earnings does not use this term. 1. 2. CFA: to be included in the gross income Revenue Regulations and Statutes: a. ordinary way of paying income tax; b. normal way of paying income tax .
Characteristics: Q: Who are not liable to pay NIT? A: 1. NRANETB (liable for GIT); 2. NRFC (GIT also); 3. With certain modifications, AEMOP, if they derive income from other sources; Q: Is the taxable net income subject to withholding tax? A: It is subject to withholding tax if the law says so. Q: What if the law is silent? A: If the law is silent, it is not subject to withholding tax. Q: What is another term for withholding tax? A: It is also known as the creditable withholding tax system under the income tax law. Q: Do we have to determine if there is an actual gain or loss? A: Yes because the formula for deductions, etc. Q: If you fail to pay, will you be held liable? A: Yes, you will be held liable. II. GROSS INCOME TAX (GIT)
For one to be liable for the payment of NIT, the income must be derived on the basis of an employer employee relationship. Employer Employee Relationship (3 Cs): 1. contract; 2. control; 3. compensation; However, in the case of celebrities, there is no employer employee relationship, they are merely receiving royalties. Royalties are subject to final withholding tax, thus the agent is liable to pay. (so, distinguish nature of income, whether royalty or compensation) RULE: 1. 2. for NIT, whether or not subject to Creditable Withholding Tax (CWT), the taxpayer is always liable if he fails to pay. for GIT and FIT, absolute liability to pay is upon the withholding agent.
Q: What is the formula? A: Gross Income x Rate Q: How many taxpayers pay by way of the gross? A: There are two (2) individual - NRANETB corporation - NRFC NOTE: the formula does not allow any deduction, personal exemptions and tax credit. Characteristics: NRANETB and NRFC, though not engaged in trade or business, are liable to pay by way of the gross for any income derived in the Philippines. While not engaged in trade or business, there is a possibility that they may earn income in the Philippines. Q: Is this subject to withholding tax? A: Yes, it is subject to withholding tax because the persons liable are foreigners. This rule is ABSOLUTE NOTE: there are two (2) ways of paying taxes depending on which side of the bench you are. III. FINAL INCOME TAX (FIT)
Q: Why is it that the rate of withholding is always lower, and why is it that the rate of GIT and FIT is always equal? A: 1. NIT allows deductions; 2. GIT and FIT do not allow deductions. Q: Do you have to determine whether there is an actual loss or gain? A: No need to determine because the formula does not allow deductions. Gain is presumed. No liability for final withholding tax except for the sale of shares of stock. (?) IV. MINIMUM CORPORATE INCOME TAX (MCIT)
Q: What is the formula? A: Gross Income x 2% Q: Who pays this tax? A: DC and RFC only. Q: May it be applied simultaneous with NIT? A: No. there must be a computation of the NIT first then apply which ever is higher. The MCIT is paid in lieu of the NIT. Reason: to discourage corporations from claiming too many deductions. V. OPTIONAL CORPORATE INCOME TAX
Q: What is the formula? A: (Each Income) x (Particular Rate) Unlike in the gross income tax where you add all the income from all the sources and multiply the sum thereof by the rate of 25% or 35%, as the case may be, in final income tax, you cannot join all the income in one group because each income has a particular rate.
Q: Under what section is this found? A: Section 27A 4th paragraph and Section 28 A(1) 4 th paragraph. Q: Is this applicable now?
For example the borrower is a NRAETB, he borrowed money from a RA. The interest earned by the loan will be considered as an income without. RA is not liable to pay tax since RA is liable only for income within, therefore exempt from paying the tax. NATIONAL DEVELOPMENT CO. v. CIR F: The National Development Company (NDC) entered into a contract with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The contract was made and executed in Tokyo. The payments were initially in cash and irrevocable letters of credit. Subsequently, four promissory notes were signed by NDC guaranteed by the Government. Later on, since no tax was withheld from the interest on the amount due, the BIR was collecting the amount from NDC. The NDC contended that the income was not derived from sources within the Philippines, and thus they are not liable to withhold anything. NDC said that since the contract was entered into and was executed in Japan, it is an income without. H: The governments right to levy and collect income tax on interest received by a foreign corporation not engaged in trade or business within the Philippines is not planted upon the condition that the activity or labor and the sale from which the income flowed had its situs in the Philippines. Nothing in the law (Section 42(1)) speaks of the act or activity of nonresident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment is the determining factor of the source of the income. Accordingly, if the obligor is a resident of the Philippines, the interest paid by him can have no other source than within the Philippines. Q: Suppose a NRFC, an Indonesian firm, becomes a stockholder of two corporations, a DC and a RFC, and both corporations declared dividends, what is the liability of the Indonesian firm if the same received the dividends? A: 1. Dividends received from DC: the Indonesian firm is liable to pay taxes. NRFC, under the law, is liable if the income is derived from sources within. (Sec 42a) 2. Dividends received from RFC: the Indonesian firms liability will depend on amount of gross income from sources within the Philippines. The NRFC will be liable to pay income tax if the following requisites are present: 1. at least 50% is income from sources within; 2. the 1st requisite is for the three (3) preceding taxable years from the time of declaration of the dividends. In the absence of any or both requisites, the income will be considered from sources without, thus exempting the Indonesian firm from payment of income tax. Q: Same scenario, but this time the shares of stock of the two corporations were being disposed off. What is the tax liability of the Indonesian firm? A: 1. sale of shares of stock of DC: the Indonesian firm will be liable for the payment of taxes because the income is from sources within. 2. sale of shares of stock of RFC: the liability will depend on where the shares of stock were sold. (mejo Malabo sa notes, please be guided accordingly)
Q: What is the significance of knowing the classification of these taxpayers? A: 1. to determine the kind of income tax applicable to them; 2. to determine their tax liability. Q: Under Section 23, who are liable for income within and income without? A: Only 1. RC 2. DC The rest of the taxpayers will be liable for income coming from sources within. Income from sources without, no liability, therefore exempt. NOTE: The income taxpayer is not a RC or a DC. Determine if the income came from sources within or without to know the taxpayers liability. If the facts are specific, do not qualify your answer. Answers must be responsive to the question. Q: Is section 42 relevant to all the taxpayers? A: NO. SECTION 42 IS NOT MATERIAL TO ALL taxpayers, particularly the RC and DC because these two are liable for both income within and without. Section 42 is applicable only to taxpayers who are liable for income within, the rest of the taxpayers are otherwise exempt. Q: Section 42(A)(1) provides for how many kinds of interests? A: It establishes two (2) kinds of interests, namely: 1. interest derived from sources within the Philippines. 2. interest on bonds, notes or other interest bearing obligations of residents, corporate or otherwise.
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CAPITAL GAINS AND LOSSES Section 39 Q: What is capital asset? A: Capital asset is an asset held by a taxpayer which is not an ordinary asset. The following are ordinary assets: 1. stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; 2. property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; 3. property used in trade or business of a character which is subject to the allowance for depreciation provided in subsection 1. 4. real property used in trade or business of the taxpayer. All other property not mentioned in the foregoing are considered capital assets. Q: What is a capital gain? What is a capital loss? A: Capital gains are gains incurred or received from transactions involving property which are capital assets. Capital losses are losses incurred from transactions involving capital assets. Q: What is ordinary gain? Ordinary loss? A: Ordinary gains are those received from transactions involving ordinary assets. Capital losses are losses incurred in transactions involving ordinary assets. Q: What is the relevance of making a distinction? A: It is relevant because Section 39B,C, and D apply to capital assets only. 1. time when property was held (39B) (holding period applies only to individuals); 2. limitations on capital losses (39C); 3. Net Capital Carry-Over (39D) I. CAPITAL ASSETS
Q: What is the rule as regards the sale of real property? A: Gains, profits, and income from the sale of real property located within the Philippines considered income within. Q: What about the sale of personal property, what is the rule? A: Determine first if the property is produced or merely purchased. 1. 2. it the property is manufactured in the Philippines and sold abroad, or vice-versa, it is an income partly within and partly without. if the property is purchased, considered derived entirely from the sources within the country where it is sold.
Q: What is the holding period? A: If capital asset is sold or exchanged by an individual taxpayer, only a certain percentage of the gain is subject to income tax. It is the length of time or the duration of the period by which the taxpayer held the asset. Q: What is the requirement? A: 1. the taxpayer must be an individual. Section 39B states in case of a taxpayer, other than a corporation.. 2. property is capital in nature. Q: What is the term? A: 100% if the capital asset has been held for not more than 12 months; (short term) 50% if the capital asset has been held for more than 12 months. (long term) NOTE: the holding period applies to both gains and losses. Q: Do you include capital gains in your ITR? A: General rule: yes, include in ITR. EXCEPT: 1. gains in sales of shares of stock not traded in stock exchange(section 24); 2. capital gains from sale of real property(section 24). Q: When will the holding period not apply? A: 1. property is an ordinary asset 2. taxpayer is a corporation 3. sale of real property considered as ordinary asset
EXCEPTION: shares of stock of domestic corporation, it is an income within wherever it is sold. COMMISSIONER v. IAC Q: What is the issue here? A: They cannot determine if the business expense was incurred in the Philippines. Q: if you are the BIR, and the taxpayer is not sure, will you disallow the deduction? A: No. determine it pro rata. Formula: GI from within GI from without Example: 100,000 1,000,000
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Q: What is the tax liability of NRAETB? A: Section 25 (1) NRAETB is subject to income tax in the same manner as those individuals mentioned in Section 24. Q: What about Domestic Corporations? A: 1. Sec. 27 A,B, and C 2. Sec. 26- GPP is not subject to income tax. Q: What about Resident Foreign Corporations? A: Sec 28 (l) it is subject to 35% Net Income Tax Q: What about Non Resident foreign Corporation and Non Resident Alien not engaged in Trade or Business? A: Not Subject to Net Income Tax but they are liable for Gross Income tax. Q: Do legally married husband and wife need to file separately or jointly? A: It depends if: 1. Pure compensation income- separate 2. Not Pure compensation income- joint Passive Income Interest, Royalties, prizes and Other winnings Interest Q: Bank Interest, what is the requirement? A: The bank must be located in the Phils. because the income must be derived from sources w/in. Q: Do you include this in your ITR? A: No! because it is subject already to FIT. The bank is the one liable for the payment of this. NOTE: Liability for NIT, GIT, and MCIT will depend on the elements present. Q: Who are liable for bank interst? A: 1. RC } 2. NRC} Sec. 24 B1 3. RA } 4. NRAETB 5. NRANETB Sec. 25 (25%)
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Q: What are dividends? A: Any distribution made by Corporation to its stockholders outside of its earnings or profits and payable to its stockholders whether in money or in property (Sec. 73) COMM. vs. MANNING Q: Where did it come from? A: shares come from another shareholder Q: What are the dividends included? A: Sec. 24 refers to cash or property dividend
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Q: Who are liable? A: 1. RC 2. NRC 3. OCW 4. RA 5. NRAETB 6. AEMOP (RC, NRAETB) Not liable? 1. NRANETB 2. AEMOP 3. DC 4. RFC 5. NRFC Shares of association and partnership is taxable
if sold in the stock market, it will be subj to percentage tax, in lieu of NIT. ELEMENT # 3 It must be a capital asset. Q: When is it considered an ordinary asset? A: 1. When the broker or dealer a. used it in trade or business b. held for sale in the ordinary course of trade or business 2. to all other assets, it will be considered a capital asset NOTE: if all elemts are present it will be subj to FIT If the shares are ordinary asset 1. Ordinary shares in DC- income w/in a. Most of the taxpayer will pay NIT except NRFC and NRANETB 2. Ordinray assets of foreign corporations a. Income within if sold in the Phils: most will pay except NRANETB and NRFC b. Income w/out if sold abroad: most will be exempt except RC and DC MCIT Q: When is a RFC subj to NIT? A: 1. Sale of shares of stock of a Foreign corp in the Phil. 2. sale of shares of stock of DC which are ordinary asset DC and RFC are subj to MCIT which may be imposed if the NIT is lower than the MCIT2% MCIT will be imposed if MCIT is higher than NIT. Capital Gains From Sale of Real Property (24D) In 39 B the holding period does not apply because the basis of income tax is the gross selling price (GSP) or the Fair market value (FMV) whichever is higher- 6% FIT Requirements: 1. The real prop must be sold w/in the Phils and located in the Phils. 2. It must be a capital asset 3. The seller must be an individual, estate or trust or a DC
Q: Determine the tax liability of the following? A: 1. DC a Stockholder of DC= Exempt 2. RFC stockholder of DC= Exempt also 3. DC stockholder of RF= Liable for NIT. Capital Gains From Sale of Shares of Stock Not Traded (24C) 1. 2. Subj to FIT Determine whther there is a loss or a gain because the tax is impose upon the net capital gains realized from the sale, barter, or exchange or other disposition of the shares of stock in a domestic corp. It is uniformily imposed on all taxpayer not subj to w/holding tax.
3. 4.
Requirements: 1. Shares of stock of a DC 2. It must be capital asset 3. must not be traded in the stock market 25 R last part: Capital Gains realized by NRANETB in the Phils. from the sale of shares of stock in any DC and real prop shall be subj. to the income tax prescribed under Sub sec (c) and (d) of Sec. 24. SEC. 24 B 1&2: If the elements are present NRANETB and NRFC are liable to pay GIT. Except: under 24 C for NRANETB. What do you mena by the phrase the provisions of 39 notwithsatanding? It refers to the holding period. When it comes to capital gains from sale of shares of stock not traded and capital gains from the sale of real prop. The holding period does
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NRANETB liable to pay FIT are all elements are present. ELEMENT # 3 The real prop must be a capital asset Q: When considered a capital asset? A: Read R.R. 7- 2003 Q: Ordinary asset- shall refer to all real property specifically excluded from the definition of capital asset under Sec. 39 A: Other property not mentioned are capital asset. Q: What if all the elements are not present? A: most will be liable to pay NIT Except NRANETB and NRFC liable for GIT Q: May a RC be liable to pay NIT even if all the elements are present? A: YES, disposition made to the Govt. Thus, the taxpayer has the option of paying 32% NIT or 6% FIT Q: Which is more advantageous? A: It depends determine first if theres a loss or a gain. If theres a gain choose to be taxed at 6% FIT. In this case the gain is always presumed. If theres a loss choose to be taxed at 32% because losses may be considered an allowable deduction . Other transactions are covered: 1. sale 2. barter 3. exchange 4. other disposition NOTE: If the prop is under mortgage contract and the mortgagee is a bank or financial inst, the FIT does not apply because the property is not yet transferred because theres a period of redemption If after a year the mortgagor failed to redeem the property that is the only time that the FIT will apply because theres now a change of ownership. If redeemed w/in 1 yr period FIT will not apply because theres no change of ownership. If the mortgagee is an individual the FIT is imposed whether or not there is a transfer of ownership. Exceptions (24(D2)) Q: What if the prop being sold was a movie house, can he claim for the exception? A: the prop covered by the exemption is a residential lot Q: Who can claim the exemption? A: Only the taxpayer mentioned in Sec. 24 Requirements: 1. The purpose of the seller is to acquire new residential real prop 2. the privilege must be availed of w/in 18 mos. From the sale 3. Comm. must be informed w/in 30 days from the date of sale with the intention to avail of the exemption 4. the adjusted basis or historical cost of the residence sold shall be carried over to the new residence. 5. the privilege must be availed only once every 10 yrs 6. Certification of the brgy. Capt where the taxpayer resides that indeed the prop sold is the principal residence of the tax payer (RR 13- 99) Q: What if the property is worth 10 M and it was sold only for 2M, what will happen to the unused portion or profit? A: If the proceeds are not fully utilized, the portions of the gain is subj to FIT SEC. 27A RATES OF INCOME TAX Q: How many income taxes are paid by a DC?
DC liable for five, but the optional is not yet applicable so only 4. Q: How many can be applied simultaneously? A: 3 1. NIT, FIT and 10% IAE 2. MCIT, FIT, 10% IAE ONLY
SEC. 27 (B) PROPRIETARY EDUCATIONAL INST. & HOSP. Who are the taxpayers? 1. Non- Profit Proprietary Educl. Inst and 2. Non Profit Proprietary Hospital Q: What if the school or hospital is non profit only, is it exempt? A: No, subject to 10% on their taxable incomeexcept those covered by subsection (D) PROVIDED that gross income from unrelated business, trade or activity must not exceed 50% of its total gross income derived by such educational inst or hospital from all sources Requirements: 1. It is a private school or hospital 2. it is stock corp 3. it is non profit 4. that gross income from unrelated business, trade or activity must not exceed50% of its total gross income derived by such educational inst or hospital from all sources 5. has permit to operate from DECS, TESDA, or CHED Q: What do you mean by unrelated trade business or activity? A: It means any trade, Business, or activity which is not substantially related to the exercise or performance by such entity of its primary purpose or performance Q: May a school or hospital be exempt from paying tax? What are the req? A: 1. It must be non- stock and non- profit 2. the assets property and revenues must be used actually, directly, and exclusively fro the primary purpose Q: Under what law? Is it the constitution or the NIRC which provides fro the exemption? A: It is under Sec. 30 of NIRC and not under Sec.4 Art. 14 of the Constitution. The provision of the NIRC is the specific law which prevails over the Constitution which is the general law. exempt from all taxes and custom duties Q: What about exemption from real property tax? A: Art. 6 Sec. 28 of the Constitution: charitable institution churches, .and all lands buildings, actually directly and exclusively used for religious, charitable, and educational purposes shall be exempt from taxation. Not Sec. 4 of Art. 14 of the Constitution. Q: You donated a property to a school will you be liable for donors tax? A: not liable if it falls under Sec. 101 (3) of the NIRC REQ. FOR EXEMPTION TO DONORS TAX: 1. it must be nonstock, non- profit educational inst. 2. not more than 30% of the prop donated shall be used by such donee for admin purposes. 3. paying no dividends 4. governed by trustees who dont receive any compensation 5. devoting all its income to the accomplishment and promotion of the purposes stated in its Articles of Incorporation Q: What about exemption from VAT? A: Sec. 109 (m) of R-VAT
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Q: If the GOCC is not one of those enumerated does it follow all of its income is automatically subject to tax? A: NO. Under Sec 32. B (7) income derived from any public utility or from the exercise of essential government functionaccruing to the Govt of the Phils or to any political subd. Are therefore exempt from income tax. Therefore, even if the GOCC is one of those enumerated under Sec. 27 it may still be exempt under Sec. 32 b7b if its performing governmental function NOTE: Pagcor vs. Basco case Q: What is the difference between Sec. 27 C and 32 b7b? A: 1. Sec 27 C exempts those enumerated without any qualification. 2. Sec. 32b7b qualification must concur before it may be exempted. Q: Can the government impose tax on itself? A: It depends on who the taxing authority is. If the taxing authority is the National Govt. as a rule, YES. Exceptions 1. those entities enumerated under 27 C 2. those GOCC falling under 32b7b If the taxing authority is the local government units, as a rule NO. LGUs are expressly prohibited from levying tax against: (Sec 133(o) 1. National Govt. 2. Its agencies and instrumentalities 3. local government units Exception: Sec 154 of LGC says that LGUs may fix rate for the operationof public utilities owned and maintained by the within their jurisdiction. PAL CASE July 20 2006 H: The SC used 133 (o)an exception to pay tax, real estate tax, imposed by City of PAranaque on NAIA. The SC said that the airport is not an agency or GOCC but mere instrumentality of the Govt. This is Gross ignorance of the law Sec. 133 (o) is for local taxation not real property taxation which is the one involved in the present case. NOTE: Mactan- Cebu Airport case SEC. 27 D(1) Q: How many possible incomes were mentioned? A: Two (2): bank interest and royalties REQ: 1. Bank interest must be received by a Domestic Corp 2. Royalties derived from sources within Q: When it comes to bank interest, what is the difference if the taxpayer is an individual or corporation? A: If individual, they may be exempt from the payment of interest in case of long term deposit except NRANETB If DC, they are not exempt from long tem deposit. Q: What about royalties? A: If individual, have a lower rate of 10%on books, other literary and musical compositions. DC have no lower preferential rate.
Q: Who is the income earner? A: Non Residents whether individual or Corporations Q: Derived from whom? A: Depositary Bank under EFCDS NOTE: Sec. 24 B Nonresident exempt from bank interest under EFCDS Q: What is the difference between 24 b1 from 27 D3 A: In 24 B1, NR is exempt only from bank interst derived from EFCDS while 27D3 exempts NR from any income from transactions with depositary bank under EFCDS SEC. 27 D(4)- Intercorporate dividends- exempt 27 D5 Capital Gains from sale of Real Prop. Q: What is the tax? A: 6% FIT Q: What is the difference if the seller is an individual and a DC? A: Individual can sell all kinds of real property DC can only dispose land and/or buildings. SEC 27 (E) MCIT Q: Applicable to whom? A: DC and RFC Q: Can it be applied simultaneously with NIT? A: NO, imposed in lieu of the NIT, whichever is higher. Q: What is the Rationale? A: to prevent corporations deductions from claiming too many
Q: When will it be imposed? A: 1. On the 4th year immediately ff the year in which such corp commenced its business.
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An intl. carrier doing business in the Phils. shall pay 2 % on its Gross Phil Billings (GPB) Q: Is 28 A3 the Gen. rule or the Exception? A: It is the general rule because it is under 28 A3 GPB is in the nature of FIT, applies only if all the requirements are present. RFC will be liable for NIT, hence a RFC engaged in common carriage does not pay GPB but NIT Income without: EXEMPT
International Carrier: GPB refers to the amount of revenue derived from: carriage of persons, excess baggage, cargo and mail originitang from the Phils in a continouos and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the tickets or passage document. REQ: 1. 2. 3. Originating from the Phils. Continouos and uninterrupted flight; irrespective of the place of sale or issue and the place of the payment of tickets or passage document.
Q: Do you consider landing rights to determine liability? (RR 15-2002) A: 1. If originates from the Phils and has landing rightsONLINE- RFC 2. No landing rights- OFFLINE- NRFC Q: If there are stopovers, is it still uninterrupted? A: YES, provided that the stopover does not exceed 48 hrs. Q: When will the place of sale of tickets matter as to the taxpayers liability? A: The place of tickets is material only if the two other elements are not present to be able to know if its subj to NIT or exempt. Revalidated, exchanged or indorsed tickets REQ: 1. 2. The passenger boards a plane in a port or point in the Phils. The tickets must be revalidated, exchanged, or indorsed to another airline.
Difference with EFCDS: EFCDS 1. Acceptable foreign currency, Phil. Currency or both 2. Can be a domestic or foreign corporation 3. Exempt if income derived by DC or RFC from EFCDS 4. Parties: a) local commercial banks b) Foreign bank branch c) Non Residents d) OBU in the Phils e) Other banks under EFCDS FOREIGN CURRENCY LOAN 10% FIT If: Lender- OBU Borrower- Resident Citizen EXCEPT: 1. OBU 2. Local Commercial Banks Transactions of Non Residents: 1. Income earner: Non- Residents 2. Lender: OBUs NOTE: Non resident exempt from transactions with OBUs and EFCDS SEC. 28 A5 TAX ON BRANCH PROFITS, REMITTANCES profits based on the total profits applied or earmarked fro remittance remitted by a branch to its head office Subj to 15% tax Except: those activities which are registered with PEZA NOTE: Interests, Dividends, Rents, Royalties including remuneration for technical sevices, salaries, wages,
Q: What if its the same airline but different plane? A: GPB does not apply, it must be to another airline Q: What if it did not originate from the Phils.? A: Determine if its income within or without. if ticket was purchased in the Phils. it is income within hence apply NIT
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Sec. 28A7b Income derived under EFCDS 1. Income derived from foreign currency transactions with: a) Non Residents b) OBU c) Local commercial bank d) Foreign bank branches e) Other depository bank under the EFCDS As a Gen Rule: the above transaction is Exempt
Q; It is in addition to NIT- Why? A: NIT because it is RFC Q; What kind of tax is imposed under 28 A5? A: FIT 15%
Q: How do you apply the rate? A: multiplied to the total profit applied or earmarked for remittance w/o deductions It applies for branches that are: 1. the profit remitted is effectively connected with the conduct of its trade or business in the Phils. 2. One not registered with PEZA MARUBENI CASE F: A branch was established with AG&P, there was investment with AG&P Q: Did the petitioner participate with the negotiation? A: NO Q: What did the petitioner pay? A: 15% Branch Profit Remittance Tax (BPRT) 10% Intercorporate Dividends Q: Whats the issue? A: Petitioner maintains that there was overpayment of taxes, thus the same was asking for a refund of tax erroneously paid. Q: Is is subj to FIT? A: NO, exempt if petitioner is RFC H: -not correct to pay 15% To be liable for BPRT 1. It is a RFC 2. Branch did not participate in negotiations SEC. 28 A6a Regional or area headquarters (Sec. 22 DD) shall not be subject to tax exempt from income tax if the requisites are present. Q: What are the requisites? A: 1. the HQ do not earn or derive income from the Phils. 2. Acts only as supervisory, communications, coordinating centre for their affiliates, subsidiary or branches in the Asia- Pacific Regionand other foreign markets. SEC. 28 A6b Regional Operating HQ are taxable and liable to pay 10% taxable income. Regional Operating HQ is a branch established in the Phils by a multinational company engaged in any of the services: 1. Gen. Administration and Planning 2. Business Planning and Coordination 3. Sourcing and procurement of Raw materials and components. 4. Corporate Finance and Advisory Services 5. Marketing Control and sales promotion 6. Training and personal management 7. logistic services 8. research and development services and product development 9. technical support and maintenance
EXCEPTION: Income from such transaction as may be specified by the secretary of Finance, upon recommendation by the Monetary Board to be subject to regular income tax payable by any banks. 2. Interst income from foreign currency loans granted by depository bank under said EFCDS to others shall be subject to 10% FIT Exempt if granted to: 1. Other OBU in the Phils, and 2. Other depository bank under the EFCDS SEC. 28 A7c: Capital Gains from Shares of Stocks not Traded in the Stock exchange 5% or 10% as the case maybe SEC 28A7d: INTERCORPORATE DIVIDENDS DC- RFC= EXEMPT, not subj to tax
SEC 28 B1 Q: What kind of tax? A: 35% GIT on the ff income 1. Interest 2. Dividends 3. Rents 4. Royalties 5. Salaries 6. Premiums( except reinsurance premiums) 7. annuities 8. emoluments 9. Other fixed and determinable Gains, profits and income. SEC 28 B2 Non Resident Cinematographic film owner, lessor or distributor liable for 25% GIT
SEC 28 B3 Non Resident owner or lessor of Vessels chartered by Philippine Nationals. liable for 4 GIT
Elements: 1. Chartered to Filipino Citizens or Corporations 2. Approved by MARINA SEC. B(4) Non Resident Owner or Lessor of Aircraft, Machiniries, and other Equipments. liable for 7 1/2 % GIT
SEC 28 b5a Interest on Foreign Loans Must be read with Sec. 32 B7a
Interest on Foreign Loans, if the lender is 1. NRFC liable to 20% FIT 2. Foreign Govt. Exempt because it is an exclusion (Sec 32 b7a: income derived by a foreign govt
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Q: In 2nd case was there a refund? A: YES, the SC reversed itself 1. 2. Income tax is FIT: the withholding agent is the proper party because he is liable to pay said taxes actual proof of payment not necessary, what is necessary is the law of the domicile of the country providing fro tax credit equal to 20% of the tax deemed paid.
Q: What is the rate if the law is silent? A: 35% FIT The rate will only be 15% if theres a law recognizing the same but this refers to the case of those belonging to the first category. WANDER CASE Q: Who are the parties? A: DC(Wander) and FC (Glaxo)- they belong to different categories The BIR tried to collect 35% because the law is totally silent about the tax credit H: The SC said that the tax should be 15% which applies 2 instances: 1. Foreign law do not provide for tax credit- 35% 2. law provides but the law is silent- 15% 3. law is silent because there is no law- 15% 4. law is silent because thers no law because the subj matter is not taxable- 15% SEC. 29 IAET Q: What is the rate? A: 10% of the gross income (taxable income) It is imposed upon the improperly accumulated taxable income of the corporation Q: Applies to what Corp? A: to DC only under RR 2- 2001( classified as closely held corporations) Q: Is it in the nature of sanction? A: Yes, it is imposed to compel the corporation to declare dividends. Q: Why? A: because if profits are distributed to the shareholders, they will be liable for the payment of Dividends tax. Now, if the profits are undistributed the shareholders will not incur liability on taxes with respect to the undistributed profits of the Corp. In a way it is in the form of detterent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them. Q: What is taxable income? A: SEC. 31 defines taxable income as the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special law Q: When not laible to pay IAET? A: There are 2 groups of DC exempt from payment of IAET (RR2-2001) A) Corporations failure to declare dividends because of reasonable needs of business reasonable needs means are construed to mean immediate needs of the business including reasonable anticipated needs Q: What constitutes reasonable accumulation of the corporations earnings? Examples? A: 1. allowance for the increase in the accumulation of earnings up to 100% of the paid- up capital of the corporation.
JHONSONS CASE 2 Kinds of Categories: 1st : Japan, US, Germany, Phils liable for income within and income without 2nd : countries liable only for income within. MARUBENI Case: 2 Issues 1. Is the payment of 10% FIT correct? - No because it was a branch and RFC but still Marubeni was NRFC under the old law which is liable to pay 35%, but SC said liable only to 25% because of the tax treaty You cannot refund right away 15% BPRT and 10% Intercorporate Dividends tax has different basis In P&G who are involved DC (P&G Phil) and NRFC (P&G US) DC declares dividends to NRFC 35% was withheld and remitted to the BIR What did they discover? (after paying) they discovered that they are liable only for 15% so they have a refund of 20% Q: In the 1st case did the SC allowed the refund?
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NOTE: the corporations belonging in the 1 st group are normally liable but they can show that the accumulation of earnings is justified for reasonable needs of business, they incur no liability and exempt from payments of the same. B) Corporations which are exempt whether or not it is for reasonable needs of the business: 1. Banks, and other non- bank financial intermediaries. 2. Insurance companies 3. Publicly- held corporations 4. Taxable partnerships 5. General Professional Partnerships 6. Non- taxable joint- ventures 7. Enterprises registered with a) PEZA b) Bases Conversion Devt Act of 1992 (RA 9227) c) Special Economic Zone declared by law Q: What is a closely- held corporations? A: Those corporation at least 50% in value of the outstanding capital stock or at least 50% of thetotal combined voting power all classes of stock entitled to vote is owned directly, or indirectly by or for not more than 20 individuals NOTE: Publicly held Corp. has more than 20 shareholders Q: What is the time for paying this tax? A: Calendar Year: Jan 25, 2005- Dec 31, 2005. Today is 2006. You have 1 year to declare after the close of the taxable year. 2006 is the grace period. You will pay on January 2007. Q: If youre not mentioned to be exempted, will you still be liable? A: No, if you invoke adjustments SEC 30. EXEEMPTIONS FROM TAX ON CORPORATIONS Determine the Corporations exemptions under Sec. 30 27 C and 22B. 1. Sec 30, the corporations shall not be taxed under this title (tax on income) in respect to income receive by them as such. 2. Sec 27, the corporations enumerated are always exempt. Thus exemption is unconditional 3. Sec 22B GPP, as a general rule is not a corporation 4. except if it earns income from other business Joint Venture w/ service contract w/ government not a corporation, otherwise, it is liable. Assignment: Sec. 35 August 21, 2006 Midterms August 14, 2006 Q: What is the reason for not including the corporations exempt under section 27C and Section 22B under Section 30? A: Because there is an exemption which does not apply to all exempt corporation. The exemption under Section 30 is not absolute while the exemption under Section 27 C is absolute and without any conditions. In addition, Section 22B provides that a joint venture is generally taxable unless it has a service contract with the government, a generally taxable corporation cannot be joined with the group as generally not taxable corporation. General Professional Partnership is exempt but the exemption is not the same as provided by Section 30. TAKE NOTE: Las Paragraph of Section 30.
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Q: When is winning subject to NIT? A: 1. When derived from income without; 2. when the income earner is a DC or RC. 10. Pensions [Sec. 32 A (10)] Q: What kind of pension? A: Included in the gross income if not exempt never subject to fit (?) 11. Partners distributive share from the net income of the general professional partnership (GPP). Q: What is being referred to? A: GPP exempt from payment of corporate income tax shares of partners subject to NIT Sec. 26
Q: Why is the donee exempt from income tax? A: Because the law classify it as an exclusion, not important to know whether property is real or personal. What is exempted is the value of property acquired by gift, bequest or devise TAKE NOTE: A. GIFTS are excluded because they are subject to donors tax. B. BEQUEST and DEVISE are excluded because they are subject to ESTATE tax. Q: what is included in the gross income? A: income from such property. gift, bequest, devise or descent of income from any property in case of transfers of divided interest. 5. Compensation for injuries or sickness [Sec. 32 B (4)] Q: is this the same as those provided under the workmens compensation act (wca)? A: YES. There are 3 groups: a. Health or accident insurance or those under workmens compensation. b. personal injuries and sickness; and c. Damages to prevent injuries and sickness. Q: What does injury include? A: The term injury includes death, even if not injured, if the person dies this will be available. Q: when will the damages recovered be exempt? A: General Rule: all damages awarded are tax exempt. Exception: damages representing loss of income. Q: Why is it considered an exclusion? A: because this is just an indemnification for the injuries or damages suffered. 6. Income exempt under a treaty [Sec. 32 B (5)] Q: What is excluded? A: income of any kind required by treaty binding upon the Phil. Government. 7. Retirement benefits, pensions, gratuities [Sec. 32 B (6)] Q: Why do we need to distinguish retirement pay, separation pay and terminal leave pay? A: because they have different requirements for exemption. Q: What is retirement pay? A: the sum of money received maximum age of employment. upon reaching the
SEC 32 B EXCLUSIONS FROM GROSS INCOME Q: What do you mean by exclusions? Are these exempt from income tax? A: these are not included in the gross income, THUS, exempt. TAKE NOTE: Exemptions, exclusions, deductions, have the same characteristics all tax do not apply. 1. Life insurance [Sec. 31 B (1)] Q: What is the requirement? A: only one requirement for exemption: that the proceeds of the life insurance be payable upon the death of the insured. Q: Does it matter who the beneficiary is or paid in a lump sun or single sum? A: No. it does not matter. Exception: amounts held by the insurer under an agreement to pay interest thereon, the interest payment shall be included in the gross income. 2. Amount received by insured as return of premium [Sec. 32 B (2)] Q: if the insurance is payable within a certain time, say 10 years and thereafter the insured did not die, how much will be excluded? A: only the amount received by the insured as a return of the premiums. Ex. 1 M 100 thousand = capital It is exempt (100K) 900K is taxable. Q: Why is it excluded? A: because the amount received merely represents a return of capital. Q: is this subject to Estate Tax under Sec. 85 E? do we have the same requirement? A: no, the requirement for exemption is not the same under Section 85 E. 3. Proceeds of life insurance: decedent insured himself, inclusion or exclusion will depend on who the beneficiary is. a. the beneficiary is the estate. subject to Estate tax, included in the gross estate regardless of whether or not the designation of the beneficiary is revocable or irrevocable. b. the beneficiary is a third person other than the estate. b.1 Revocable Designation subject to estate tax, included in the gross estate. Reason: because of the insureds power to modify or change the beneficiary. b.2 Irrevocable Designation not subject to Estate tax, not included in the gross estate.
a. Under RA4917 (with Retirement Plan) 1. the private benefit plan is approved by the BIR (RR2-98); 2. the retiring official or employee has been in the service of the same employer for the last 10 years; 3. he is at least 50 years old at the time of retirement; and 4. the official or employee avails himself/herself of the benefit only once. b. Under RA7641 (without retirement plan) 1. the retiring official employee is at least 60 years old but not more than 65 years old; 2. the employee or official must have served the company for at least 5 years;
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Examples: 1. registration CBA provides separation pay, within the control = included. 2. installation of labor saving devises or bankruptcy beyond the control = excluded. Q: What is terminal leave pay? A: the accumulated vacation leave and sick leave benefits converted to cash or money to be given either every year or upon retirement or separation. Terminal Leave Pay granted upon retirement or separation: uder PD220, TLP in the Govt or in the Private Sector shall be exempt from income tax if given or granted upon retirement or separation. TLP granted on a yearly basis: 1. employee in the private sector: a. accumulated sick leave subject to income tax. b. Accumulated vacation leave: if more than 10 days (meaning 11 pataas) subject to income tax; If 10 days or less exempt. 2. Govt Employee: governing law: EO 291 of Pres. Estrada, RMC 16-2000. Rule: Govt workers (both officers or non-officers) granted TLP on a yearly basis exempt from income tax. there is no qualification as to vacation or sick leave.
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BUSINESS EXPENSE 1. No carry-over 2. can be claimed for one year only. 3. if the amount of capital outlay is substantial, it cannot accommodate all of the expenses incurred. ALLOWANCE FOR DEPRECIATION 1. There is carry over 2. you can claim it for a longer period depending on the life span of the property. 3. it can accommodate all of the expenses incurred.
24
25
an not
capital
Q: Who are not allowed to claim deductions? A: Under 34 C (3) - NRC, NRA; and N/RFC TAKE NOTE: 1. NRAE and NFC allowed deduction only if and to the extent that they are connected with income from sources within the Phils. 2. Taxes that had been allowed as deduction but are later in refunded should be treated as part of the gross income during the year that it is received (34 1 last paragraph) Q: Which would you choose? Tax credit or deduction? A: tax credit because it is deducted from the taxable income while deductions are deducted from the GI. FORMULA: GI-DEDUCTION = NET INCOME x RATE = TAXABLE NET INCOME TAX CREDIT) 34 D LOSSES Q: Is always a requirement that it is incurred in pursuit of trade, bus. or profession? A: No. Sec. 34 D(1) provides for 2 kinds of losses: a. incurred in pursuit of trade, bus. or profession; b. property connected with t,b,p, if the loss arises from fire, storms, shipwrecks or other casualties or from robbery, theft or embezzlement (arising from natural calamity). Q: What is the requirement? A: 1. Loss actually sustained during the taxable year 2. Not compensated for by insurance or other forms of indemnity. 3. Not claimed as a deduction for estate tax purposes. Q: This is your itemized deduction which can claimed as a deduction from? A: Gross income be
3. carry-over as loss from sale of capital asset in the next succeeding year
NET OPERATING LOSS CARRY REQUIREMENTS: 1.Net operating loss of the business or enterprise incurred w/in the taxable year 2. not previously off-set as a deduction from the GI 3. carried over as a deduction from the GI for the next 3 consecutive taxable years immediately following the year of such loss. Q: Can the period be extended? A: yes, for mines other than oil and gas well. 1. net operating loss w/out the benefit incentives provided by law; 2. incurred in any of the first 10 years of operation. 3. carried over as a deduction from the GI for the next 5 years following such loss. 4. no substantial change in the ownership of the business or enterprise. Q: What is the limit? A: 75% of the nominal value of outstanding shares is held by or on behalf of the same persons/ corporation individual no problem, problem lies with corporations or enterprises. ABANDONMENT LOSSES 1. contract area where petroleum operations are undertaken is partially or wholly abandoned; all (1) accumulated exploration and (2) development expenditures pertaining thereto shall be allowed as a deduction. 2. a producing well is subsequently abandoned: unamortized cost and undepreciated cost of equipment directly used therein shall be allowed as a deduction in the years it was abandoned. TAKE NOTE: 1. if abandoned well is reentered and production is resumed; or
TAKE NOTE: The itemized deduction of losses, however, is not confined to section 34B. it is also found under section 86A (1) (e) which also pertains to deductions available under the estate tax law. Losses within six (6) months after the death of the decedent can be claimed as itemized deduction of losses under Section 34B. However, may be claimed as deduction under estate tax return provided that the same are not claimed as itemized deduction of losses under Section 34B. Q: How many carry-overs do we have under the Code? A: 3. Namely: 1. Section 27 E (32) Carry forward of excess minimum Tax 2. Section 39 D Net Capital Loss Carry- over 3. Section 39 D 3 Net Operating Loss Carry-Over.
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34 G DEPLETION OF OIL and GAS WELLS and MINES only deduction which is a not self executing deduction Q: What is depletion? A: the exhaustion wear and tear of natural resources as in mines, oil, and gas wells the natural resources called wasting assets DEPRECIATION vs DEPLETION 1.involves property 2. ordinary wear and tear of equipments 1. involves natural resources 2. ordinary wear and tear of natural resources
TAKE NOTE: Equipment used in mining operation is deductible in depreciation Q: Method for computing depletion? A: cost depletion method Q: to whom allowed? A: only mining entities owning economic interest in mineral deposits Economic interest: capital investments in mineral deposits 34H CHARITABLE & OTHER CONTRIBUTIONS TAKE NOTE: 1.unique because deducted from the taxable net income and not from the gross income
including
Q: What do you mean by reasonable allowance? A: it shall include, but not limited to, an allowance computed in accordance with rules and regulations
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Q: Suppose Mr. A made a cash donation of P1M. How much can he claim as a deduction? A: First determine the taxable income of Mr A since he is an individual, he can only deduct 10% of his taxable income. Q: What if the Donee is not one of those mentioned under the law, can he claim a deduction? A: No. TAKE NOTE: Donee is never an individual. Q: If the Donor is a pure compensation income earner and he donates P100,000 to the church, can he claim it as a deduction? A: No. pure compensation income earner can only claim a deduction under Sec 34 M Q: If Donee is the Philippine Government, what is the requirement? A: it must be made exclusively for public purposes Q: What if the Donee is a province? A: there must be a qualification that it is for public purpose Q: If the Donee is a Domestic Corporation, what is the requirement? A: no part of its income inures to the benefit of any private shareholder or individual Q: What are those contributions which can be deductible in full? A: 1.Donations to the Government no conflict with partial (different requirement) Partial donated for exclusively public purposes Full, used in undertaking priority activities of NEDA 2.Donations to certain Foreign Institutions or International Organizations in compliance with agreement, treaties or commitment entered into by the Philippine Government and such donees 3.Donations to Accredited Non government organizations Non government organization, profit domestic corporation non
at the election of the taxpayer, the following shall or may be treated as deferred expenses: a. paid or incurred by the taxpayer in connection with his trade, business or profession; b. not treated as expenses under par 1 and c. chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion Q: How to compute taxable income: A: deferred expenses shall be allowed as deduction ratably distributed over a period of not less than 10 months as may be elected by the taxpayer (beginning with the month the taxpayer first realizes benefits from expenditures.) the election or option may be exercised for any taxable year after the effectivity of the code but not later than the time prescribed by law for filing the return for such taxable year. LIMITATION ON DEDUCTION Q: When not deductible? A: 1.Any expenditure for the (1) acquisition or improvement of land or (2) for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion and office site 2. Any expenditure paid or incurred for the purpose of undermining the existence, location, extent or quality of any deposit of one or other mineral including oil or gas. not for mineral exploration 34 J PENSION TRUST Q: Claimed by Whom? A: the employer Q; What is a Pension Trust contribution? A: a deduction applicable only to employer on account of its contribution to a private pension plan for the benefit of its employee deduction is purely business in character. Q: Requisites? A:
REQUIREMENTS: 1. organized and operated exclusively for scientific, research, educational, character building and youth and sport development, health, social welfare, cultural or charitable purposes or a combination thereof 2. no part of the net income of which inures to the benefit of any private individual
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allowed as a deduction only if shown that the tax required to be deducted and withheld there from has been paid to the BIR in accordance with Section 58 and Section 81 34 L OPTIONAL STANDARD DEDUCTION KINDS OF DEDUCTIONS: 1.Itemized deduction 2.Optional Standard Deduction 3.Personal /Additional Deduction OPTIONAL STANDARD DEDUCTION: can be availed of by an individual who may elect a standard deduction in an amount not exceeding 10% of his gross income may apply in lieu of the other deductions under Section 34 the taxpayer must signify in his return his intention to elect the optional standard deduction, otherwise, he shall be considered as having availed of the itemized deduction. Q: Who can claim this deduction? A: all individual taxpayers except non resident alien not engaged in trade or business (NRANETB) Reason: he is not liable to pay by way of the NIT, thus, follows he cannot claim this deduction because he is liable to pay by way of GIT. TAKE NOTE: can co-exist with personal and / or additional exemption 34 M PREMIUM PAYMENTS ON HEALTH AND /OR HOSPITALIZATION INSURANCE OF AN INDIVIDUAL TAXPAYER for (1) Health and /insurance (2) Hospitalization REQUIREMENTS: 1. amount of premiums, paid by taxpayer for himself and members of his family, 2. amount of premiums should not exceed (1) P2,400 per family or (2) P200 a month 3. gross income of the family for the taxable year is not more than P250,000 Q: Who can avail of this deduction? A: 1.individual taxpayer earning purely compensation income during the year; 2. individual taxpayer availing itemized or optional standard deduction; and 3. individual taxpayer earning both compensation income and income from business SECTION 35 ALLOWANCE FOR PERSONAL EXEMPTION FOR INDIVIDUAL TAXPAYER Q: When do we apply this? A: apply if individual taxpayer is paying by way of NIT Q; Who are taxpayer? A: those mentioned under Section 24 (A) 1. RC 2. NRC 3. OCW 4. RA all can claim both personal and additional exemption Q: Why not include NRAETB? Can the latter exemption? claim any
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such
TAKE NOTE: always choose the higher amount of exemption if you are filing a return covering the period within which the change of status occurred 1. if the taxpayer should (1) marry or (2) have additional dependents during the taxable year, he may claim the corresponding exemption in full for the year. Illustration: 1.Single Jan 1, 2005 2.Married June 1, 2005 on April 15, 2006 status: legally married can claim P 32,000 2. if the taxpayer should die during the taxable year, estate can claim personal exemption. Illustration 1.Jan. 25, 2005 taxpayer married w/ one child can claim on April 15, 2006 P32,000+ P8,000
IN DONORS TAX Relatives includes relatives by consanguinity within the 4 th civil code. Nephew is a stranger and relative ang nephew. 2) individual and corporations Gen. Rule: NO DEDUCTION Except: distribution in liquidation or less than 50% of the outstanding capital stock 3) 4) 5) 6) Two corporations Grantor or Fiduciary Two fiduciaries of two trust Fiduciary and beneficiary of trust
Sec. 37 Special provisions regarding deductions of insurance companies. Codal Provisions Section 38: Losses From Wash Sales of Stock or Securities Q: What is a wash sale? A: It is a sales or other disposition of stock securities where substantially identical securities are purchased within 61 days, beginning 30 days before the sale and ending 30 days after the sale. Q: What period? A: 61 day period beginning 30 days before and ending 30 days after the sale Q: Jan 20 you purchased share of stock, and disposed of the same on Feb 5, 2005. Is this a wash sale? A: No Q: If it is a loss in wash sale, happens? A: General Rule: (Sec 131 RR No. 2) gains from wash sale are taxable but losses are non-deductible Exception: unless claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer Q: Reason why losses in wash sale cannot be deducted? A: 1. to avoid too much speculation in the market 2. taxpayer not telling the truth, because he may say he incurred a loss instead of a gain Section 40. Determination of Amount and Recognition of Gain or Loss GENERAL RULE: This is totally irrelevant if the income is subject to fit. In fit gain is presumed. EXCEPT: sale of shares of stock where you have to determine actual gain or loss Q: When is there a gain? A: excess of the amount realized over the basis or adjusted basis for determining gain. (amount realized from the sale or other disposition of property) Q: When is there a loss? A: the amount realized is not in excess of B or AB Illustration: 1987 Bar (Juan dela Cruz sold jewelry for 300,000 ) contract of sale amount realized is 300,000 Q: What will be the basis of the gain? A: Sec. 40 B (1), property was acquired Cost: purchase price + expenses by purchase
} P40,000
In this case, as if the change of status occurred at the close of taxable year. If taxpayers spouse or child dies within the taxable year or the dependents became (1) gainfully employed (2) got married or (3) became 21 as if the change as status occurred at the close of taxable year. Illustration: 1. Taxpayers tragic story wife died Jan. 25, 2005 and child died the next day then another child eloped and get married. 2. Taxpayer despite the tragedy can claim ton of money on April 15, 2006. P 32,000 P 16,000 (8,000 per child) 48,000 Section 36. Items not Deductible 36 A. General Rule: In computing net income, no deduction shall be allowed: (1) Personal, living or family expenses not related to trade or business (2) Section 36 A (2) and Section 36 A (3) General Rule: No deductions allowed for 1. Any amount paid out for new buildings or for permanent improvements, or betterments, made to increase the value of any property or estate 2. Any amount expanded in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. Exceptions: 1. Option granted to Private Educational Institution to deduct the same as capital outlays. TAKE NOTE: Amount paid for new buildings, can be deducted if it involves intangible drilling and development cost incurred in petroleum operations (Sec 34 6 (A) PREMIUMS PAID ON LIFE INSURANCE POLICY : 1. 2. covering the life of any officer or employee or any person financially invested in any trade of business carried on by the taxpayer. taxpayer is directly or indirectly the beneficiary under such policy.
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Merger and Consolidation in corporation code and tax code are not the same. Sec 40 (2) (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation Illustration: Transferor gives 1M Transferee gives 700,000 = not P300,000
taxble gain
If other property received by transferee (40 C (3) (a) TRANSFEREE if the party receives not just the subject matter permitted to be received: lie if the party receives money and /or property, the gain, if any, but not the loss, shall be recognized (meaning taxable) but in an amount not in excess of the sum of the money and the FMV of such other property received. (40 C (3) (b) TRANSFEROR 1.Transferor corporation receives money and / or property, distributes it pursuant to the merger or consolidation plan no gain to the corporation shall be recognized 2. Transferor corporation receives money and / or property, does not distribute it pursuant to the merger or consolidation plan the gain shall be recognized but in an amount not in excess of the sum of such money and the FMV of such other property so received. Q: What is the rule? A: 40 C (3) (a) 1. gain taxable 2. loss not deductible 40 C (3) (b) It depends on how distributed: 1. pursuant to the merger or consolidation plan: gain exempt loss not deductible 2. not pursuant to merger or consolidation plan: gain taxable loss not deductible. Sec 40 C (1) (b) a shareholder exchanges stock in a corporation which is a party to a merger or consolidation, solely for the stock of another corporation which is a party to the merger or consolidation Sec 40 C (2) (c) a security holder of a corporation which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock securities in another corporation. The rule is similar in 40 C (3), (a), (b) and (c) although different property are involve, that is why the last paragraph of 40 C is a separate paragraph. Therefore, Sec 40 C (3) (a,b,c) the rule is 1. gain exempt 2. loss not deductible 40c last paragraph the transferee becomes a stockholder, parties are not members of the merger the individual wants to be a shareholder but does not want to purchase shares but willing to give up property as a result of the exchange , the person gains control of the corporation
Q: Section 40 B (5) what is the basis? A: 40 C (5) if the property was acquired in a transaction where gain or loss is not recognized (pursuant to a merger or consolidation plan) a. corporation, party to a merger or consolidation, exchanges property solely for stocks in another corporation, also a party to the merger or consolidation b. is a party to the merger or consolidation, solely for the stocks of another corporation also a party to the merger or consolidation, or c. Security holder of a corporation, party to a merger or consolidation, exchanges his securities solely for stock or security in another corporation, also a party to the merger or consolidation. person transfers property to corporation to gain control 40 C EXCHANGE OF PROPERTY GENERAL RULE: In sale or exchange of property, the control amount of gain or loss shall be recognized. 1. gain is taxable 2. losses are deductible Exception: If permanent to a merger or consolidation plan, no gain or loss shall be recognized
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Use of method as in the opinion of the commissioner clearly reflects the income: 1. no accounting method has been employed 2. the method does not clearly reflect the income Sec 44 Period in which items of Gross Income included and Sec 45 Period for which Deductions and Credit Taken Under Sec 44 amount of all items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer Under Sec 45 deductions shall be taken for the taxable year in which paid or accrued or paid or incurred. Sec 44 and Sec 45 are mentioned in the code because of the death of the person. Illustration: Facts: taxpayer dies in the middle of the year January 1, 2006 June 15, 2006
Q: Sale of Real Property is it important to know if it is a casual sale or regular sale? A: No Requirement: The initial payments do not exceed 25% of the selling price. Q: If the initial payment exceeds 25% what do you call it? A: called deferred sale Q: Consequence?
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51 C (1) NIT Payers using CY two days provided (calendar) 1. on April 15; or 2. before April 15 (January, Feb or March) not December because the calendar year is not yet over Fiscal year: 15th day of the 4th month following the close of the fiscal year. 51 C (2) individuals subject to tax on capital gains Exception: General Rules Sec 58 1. Sale of shares of stocks return filed within 30 days after each transaction and Final consolidated return on or before April 15 2.Sale of Real Property return filed within 30 days following each sale 51 D Husband and Wife 1. Pure compensation income earner separate return RR 3-2000 pure compensation income earner regardless of amount of income not file ITR. 2. Not pure compensation: joint return 51 E. Return of Parent to Include Income of Children unmarried minor receives income from property received from living parent included in the parents ITR. Exception: 1.Donors tax has been paid 2.Property exempt from donors tax 51 F. Persons Under Disability Q: Who makes the return? A: 1.duly authorized agent 2. duly authorized representatives 3. guardians 4.other persons charged with the care of his person or property both incapacitated taxpayer and agent will be liable for: 1.erroneous return 2. false or fraudulent return 51 G Signature Presumed Correct prima facie evidence the return was actually signed by the taxpayer Section 52 Corporation Return go back to Sec 51 A (2) General Rule: Sec 58 Final Income Tax return and creditable withholding tax return is filed monthly Exception: Sale of Shares of Stocks (Sec 51 A (2)) Sale of Real Property RR -17-2003: Sale of Real Property subject to final withholding tax, the buyer is deemed the agent. Sale of Shares of Stocks Q: Reasons for filing Final Income tax or Final Consolidated Return? A: Reasons: 1. FIT whose actual determination of gain or loss 2. in connection with Sec 24 C the basis of the tax is not the gross income but the net capital gains realized. In connection with Sec 40: actual determination of loss or gain file a return within 30 days from date of transaction TAKE NOTE: In all other income subject to FIT, the gains are presumed
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Q: What is the effect of non payment on the date fixed? A: The whole amount of tax unpaid becomes due and demandable together with the delinquency penalties. Payment of capital gains tax : Q: Paid when? A: on the date the return is filed Avail exemption for capital gains: a. no payments shall be required; b. if you fail to qualify for exemption tax due shall immediately become due and payable and subject to penalties c. seller pays tax submit intention or proof of intent within six (6) months from the registration of document transferring Q: when is the real property entitled to refund? A: upon verification of compliance with the requirements for exemption. Report gains on installments under Sec 49 tax due from each installment payment shall be paid within 30 days from the receipt of such payments. No registration of document transferring real property 1. without a certification from commissioner or his duly authorize representative that a. transfer has been reported b. tax has been paid B. Assessment and Payment of Deficiency Tax Return is filed, the commissioner examiner and assess the correct amount of tax tax deficiency discovered shall be paid upon notice and demand from the commissioner. 3 INSTANCES CONTEMPLATED 1. file the return and pay the tax 2. file the return but not pay the tax 3. not file the return and not pay the tax Section 57 Withholding of Tax at Source A. Withholding of Taxes subject to the Rules and Regulations the Section of Finance may promulgate, upon recommendation of commissioner: Require the filing up of certain income tax return by certain income payees. Q: Enumeration is all about what? A; Enumer ation about Final Income Tax Except: Gross Income Tax 1. 25 B (NRANETB) 2. 28 B (NRFC) B. Withholding of Creditable Tax at Source
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35
36
37
38
as
executor
or
Q: If the Net Estate is at least P16,000 will you in form the commissioner? A: yes, the gross is at least 3-4 million SECTION 90 ESTATES TAX RETURNS Q: When required to file return? A: 1.all cases of transfer subject to tax 2.even though exempt, gross value of the estate exceeds P200,000 3.regardless of gross value of the estate, when the same consists of registered or registrable prop such as: 1.real property 2.motor vehicle 3. shares of stocks 4. other similar property where clearance from BIR necessary for transfer of ownership in the name of the transferee return must set forth the following: 1.value of the gross estate at time of death 2.deductions allowed 3.information necessary to establish correct taxes Q: What if Estate is exempt, is it required to file a return? A: General Rule: No Exception: a. gross value exceeds P200,000
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C. Common limitations on the taxing power of the LGUs (133) Under the old law this was 5 of the Local Tax Code.
Q: Why common? A: Because the limitations or prohibitions apply to all LGUs, the provinces, cities, municipalities and barangays. Two Common Crimes (under 133) 1. absolute prohibition 2. relative prohibition It shall be unlawful for the LGUs to collect: I. Income Tax EXCEPT when levied on banks and other financing institutions (133(A)) the term other financing institution shall include money changer, lending investor, pawnshop (131(E)) rate of tax: does not mention rate of tax, so long as it is fair, just and reasonable It cannot be prohibited taxation, because the element of imposed by the same taxing power is not present. One is imposed by the national government and the other is by the LGU. II. Documentary Stamp Tax (133(B)) absolute prohibition III. Estate tax, inheritance, donations inter vivos, donations mortis causa EXCEPT in 135 (133(C)) transfer tax on the transfer of realty to be imposed by provinces and cities (135) NOTE: this is not a real estate tax, this is a local tax. IV. Custom duties, charges or fees for the registration of vessels or ships, wharfages fees and wharage dues EXCEPT if the wharf had been established, maintained and operated by the locality (133(D)) wharfage due is a custom fee imposed on the weight of the cargoes. wharf a pier special levy on public works (240) allows provinces cities and municipalities to impose a special real estate tax known as special levy or public works let us say the municipality established a pier for a minimal value of P10M; out of P10M, under 240, 60% of this may be recovered; the other 40% may be recovered by warfage due. v. Tax, fee or charge for goods or commodities coming out or passing through the territorial jurisdiction even if in the guise of a toll or a fee (133(E)) an absolute prohibition commodities marketed in a public market, lets say in the city of Pasig, where the commodities came from Laguna then to Tanay, Cainta, Taytay; just imagine if each of the towns will impse 1peso for every head of a chicken or 50cents for every bundle of vegetable. PALMA DEVT CORP v. MALANGAS ZAMBOANGA DEL SUR (113 SCRA 572) F: Municipal council passed a tax ordinance entitled police surveillance fee which provide that ALL motor vehicle passing through a particular street in the town proper of Malangas which will lead to the pier or wharf will pay a certain sum of money whether it is camote, copra, palay,or rice. One of the owners of the motor vehicle is Palma Devt Corp. carrying copra, banana and coconut to be loaded in a ship docked at pier of Malangas. The lawyer of petitioner assailed the validity of the ordinance stating that it is a clear violation of 133(E). H: It is not the title of the ordinance which is controlling but it is the essence of the substance of the tax ordinance. The tax ordinance clearly violated 133(E), therefore, the SC had no option but to declare the tax ordinance null and void for being in violation of the law. VI. Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen (133(F))
notice that the constitutional limitations on taxation do not only apply to the national government but also to local government units. B. Definitions (132)
40
41
H:
Q: Why not use the defense that it is owned by the government? A: Because in real estate tax, the defense that it is owned by the government is not a defense. The LGC in 199(B) and in 217, both provisions says that the basis for the imposition of real estate tax is the ACTUAL USE of anybody who is using that (maybe in the concept of usufructuary or in the concept of a lessee, or in the concept of an owner); the basis is not ownership. in 134, the taxes here must not only be imposed by provinces, it may also be imposed by cities in line with 151 those enumerated in 135 to 141. CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS OCCIDENTAL (181 SCRA 38) * This was the prevailing rule for more than 10years from 1988 H: In the franchise or the republic act, there are only two (2) kinds of franchise, one is a franchise which provide for a condition that this tax (referring to the franchise tax) shall be in lieu of all other taxes, and the other franchise is the one which do not provide for such provision; the province or the city can impose local franchise tax if the franchise belong to the second example. REYES v. SAN PABLO CITY (305 SCRA 353) * Here the SC uniformly ruled H: A provision on exemption under 193 dont only refer to exemptions provided for by different statutes, but it includes those which claim exemptions by virtue of the case of Cagayan de Oro (because SC decisions are also laws). PLDT v. DAVAO (363 SCRA 750) F: The franchise holders of Smart and Globe are claiming exemptions from the local franchise tax because they are saying that they are holding a franchise which says that it is a franchise enacted by the house of Congress in 1995 which carries with it an exemption form local franchise tax. H: By the very explicit provision of 193, the removal of exemptions granted by different statutes and also by SC decisions applies only to statutes and decided by the SC on or before Jan. 1, 1992, because 193 says upon effectivity of this law. For exemptions covered by 193 therefore, Smart and Globe are authorized to claim exemptions because the statue (RA 7082) was enacted on 1995. IV. tax on sand, gravel and other quarry resources (138) V. We are through with that in the case of Bulacan professional tax (139) this must be correlated with the tax under 147.
NOTE that this is an exemption to the rule that a city may increase the rate of the tax under 151 of the LGC, the increase is not allowed. both 139 and 147 are taxes imposed on persons exercising professional calling. Section 139 are to be imposed by provinces and cities are applicable to workers who must pass a government examination (e.g. engineers, physicians, etc) there is a maximum (P300) NOTE: it is not always 300, since the exact amt must be fixed by Section 147 are to be imposed by municipalities and cities are applicable to persons who are working but are not required to take government examinations It does not provide for any amount, the only requirement is that it must be reasonable
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A: The applicable tax is under 143(G) (peddlers tax, one imposed by municipalities and cities. If may dalang sasakyan, yari siya ng province sa tax. NOTE: 135-141, these are taxes that can be imposed by PROVINCES and CITIES. 143-150 are taxes to be imposed by MUNICIPALITIES, which can also be imposed by CITIES. E. Taxes that can Municipalities or Cities I. either be imposed by
IV. Fees for sealing and licensing of weights and measures (148) V. F. Fishery rentals, fees and charges (149) Situs of Tax (150)
Business Tax (143(A-H)) a. manufacturing, repacking, processing, including the manufacturer of permitted liquor and also its dealer b. wholesaling c. exportation d. retailing e. contractors tax f. tax on banking institution and financing institution g. peddlers tax h. the exemption under 133(i)
The tax referred to in here is the business tax on wholesaling and retailing. Q: RFM is manufacturing commodities, one of them is Swift hotdogs, this is being sold not only in Mandaluyong, Metro Manila, but also to the inter country from Batanes to Tawi-tawi. Where should the business tax of wholesaling or the business tax of retailing be paid? Should it be in the principal office (Mandaluyong) or the place where the commodities are sold? A: It will be paid in the place where it had been sold PROVIDED there is a branch office or a sales outlet (150(A)). If it so happens that the company has a factory different from the place where the principal office is located 30% should be pain in the principal office and 70% in the municipality or city where the branch is located. PHIL MATCHES v. CEBU (81 SCRA 99) F: Phil Matches were produced in Nagtahan, Manila. In Cebu city, there was a warehouse where the matches were stored. Many of the customers, by way of wholesale in the warehouse in Cebu City, they came from different towns of the Visayan Region. May the business tax ordinance of Cebu be imposed on those transactions even if the buyers did not come from the territorial jurisdiction of Cebu? H: Since in this case the contract booked and paid, meaning, it was negotiated perfected and consummated in the warehouse where it was located in Cebu City, the Cebu City government has the right to collect business tax. Q: What if there is an agreement that commodities would be delivered and that the buyer would be waiting in some other town, is the answer still the same?
Q: If you have two branches, how many business taxes do you have to pay? A: You pay only one business tax (146) ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA 607) F: Ilo-ilo Bottlers was already paying a business tax on manufacturing under 143(A) to the city government by virtue of a tax ordinance. Later on, they are obliged to pay by virtue of another tax ordinance imposing business tax on wholesaling. Naturally, Ilo-ilo Bottlers argued, how could it be, if you manufacture, it necessary follows that you sell the commodity so, with the payment of the business tax on manufacturing, it carries with it the business of wholesaling. H: NO, you have to determine the marketing system of the company. If wholesaling is also being done in the place of manufacture, the business tax on wholesaling should no longer be paid it should only be the business tax on manufacturing. But if the marketing system of the company provides that wholesaling shall be done in a separate place (maybe several kilometers away), the manufacturer must still pay the business tax on wholesale because now it could be argued that they have the separate business of wholesaling.
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Community Tax (156) In the old days, known as residence tax certificate.
Q: If the Filipino is a resident of a foreign country (NRC), is he liable to pay the community tax certificate? A: NO, because the basis of imposition of this tax is whether or not you are an inhabitant of the Philippines. Meaning you are a resident of the Philippines. Q: What about a foreigner residing in the Philippines (RA)? A: YES. You have to pay unless the foreigner is a transinvestor for not more than 3months. This is applied to both natural and juridical persons.
Requirements: 1. for a natural person at least 18 years of age 2. for corporations upon registration with the SEC Q: What if you become 18 in the month of January or November or December? A: For those who celebrated their birthday before July 1 (that is up to June 30), they are liable to pay the tax, for this year. For those who celebrated their birthday on or after July 1, they are not yet liable to pay this year, but have to wait until next year. Q: Is there a difference for those who reached 18 in the months of Jan-Feb-March and those who reached 18 in the months of April-May-June? A: YES. For those who celebrated birthdays in the months of Jan-Feb-March, they have a grace period of 20days within which to pay. Those who celebrated their 18 th birthday in the month of April-May-June, they do not have any grace period at all, they have to pay the tax immediately. Q: If you have a community tax certificate for this year (2006), can it be used only until December 31, 2006? A: NO. It shall be valid up to April 15, 2007. (163(C)) J. Accrual of the Tax (166) January 1
Power to impose tax: 1. On commercial breeding of fighting cocks, cockfights and cockpits must be for commercial purposes 2. On places of recreation which charge administration fee 3. On billboards, signboards, neon signs and outdoor advertisements especially for the barrios and barangays along the highway 4. For barangay clearance if you want to engage in the business of retailing or wholesaling if barangay captain will not approve that within 7days go to the municipal hall or city hall for approval 5. For the use of barangay property for instance the barangay has a plaza. H. Common Revenue Raising Powers (153-155)
Q: Why common? A: All the LGU could impose the same. But it does not follow that all the provinces, cities, municipalities could impose the same. Only the LGU which operate, establish, maintain the entity If established by the province, it should only be the province. These are: 1. service fee and charges for services rendered 2. public utility charges provided owned, operate and maintained by them 3. toll fees and charges tax or toll for the use of a bridge or a street Padua filed a civil action in the MakatI RTC trying to stop the government form collecting a toll free in the South Express including the North expressway alleging that he is affected as a taxpayer because he is from Paranaque. He argued that if you use the property of the government like a street or a public plaza, you do not pay. He made the analogy, that if you go to Luneta, you do not pay the city government of Manila. The Makati RTC, the CA and SC had a uniform ruling that the operator should be prohibited from collecting further toll fess because if the operator had already recovered his investment and earned an income already, he should be stopped. As argue by the SC, it copied the argument of the lawyer (re: Luneta). NOTE: that Res Judicata do not apply here. When the ruling became final an executory in 1993, the North and South Express were totally dismantled and totally destroyed by the DPWH to give way to the final and executory ruling of the Court, that It should no longer be collected. After several months, the government announced in the radio that the party in the case of Padua, mutually agreed that the collection shall be resumed in order to have money for the maintenance and repair of the highway. Exceptions to 155 (collection of toll fees) 1. members of AFP
Q: What if the tax was only approved in the month of May 2006, do you have to wait until January 2007? A: NO. You have the right to collect that in July 1, because the law is saying that it should be collected in the next succeeding quarter (167) Mayor Binay had a tax ordinance in May, sabi ng mga bata niya: bosing, collect na tayo ng June. Binay: hindi nga pupwede, maghintay pa tayo ng July 1. Q: What if the tax ordinance had been existing for several years already? A: The time of accrual will always be January 1. REMEDIES UNDER THE INTERNAL REVENUE CODE 1. 2. Remedies of the Government Remedies of the Taxpayer
Under the NIRC, assessment and collection have 2 kinds: 1. 2. I. Normal/Ordinary assessment and collection Sec. 203, NIRC Abnormal/Extraordinary assessment and collection Sec. 222, NIRC Normal/Ordinary assessment and collection
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Abnormal/Extraordinary Collection a. assess and collect 5 years from the final assessment b. collect without assessment through judicial action 10 years from date of discovery of none filing, or false, or fraudulent return.
Q: How to apply these periods? A: Annual net income tax return filed by individual using a calendar year. The return should be filed on or before April 15, 2000. It was filed on April 15, 2000. Q Without stating the date of final assessment, can it be collected in 2007? A: Under normal condition, first determine the date of final assessment. If the BIR finally assessed the tax in November 2001, then 2007 is way beyond the 5year period to collect. Count the prescriptive period for collection from the date of final assessment. Q: (same facts) Supposed it was finally assed on March 2003, can it be collected in 2007? A: Yes, because it is within the prescriptive period of 5years. BASILAN v. COMMISSIONER (21 SCRA 17) F: Supposed the notice of assessment was given within the period but it was received by the taxpayer outside the period. I: Whether or not the assessment is within the period of 3 years. H: Yes. It is within the period. If the notice is sent through registered mail, the running of the prescriptive period is stopped. What matters is the sending of the notice is made within the period of prescription. It is the sending of the notice and not the receipt that tolls the prescriptive period. Q: What if the return has been amended, how would you compute the period of assessment? A: NIRC is silent. PHOENIX v. COMMISIONER (14 SCRA 52) If the amendment of the return is substantial as distinguished from superficial, the counting of the prescriptive period is also amended. The prescriptive period shall be reckoned on the date the substantial amendment was made. If the amendment is superficial, the counting of the prescriptive period is still the original period. Procedure for Assessment (Sec. 228, NIRC; RR 1299) Steps of assessment 1. Sec. 228, NIRC (2 steps) 2. RR 12-99 (3 steps) 2 Steps under Sec. 228, NIRC 1. Pre-assessment notice 2. Final assessment notice 3 Steps 1. 2. 3. under RR 12-99 Notice of Informal Conference Preliminary Assessment Notice Formal Letter of Demand and Notice to Pay the Tax
These options are available only if the Assessment is under the Abnormal/Extraordinary Conditions. These are not available under Normal/Ordinary Assessment Prescriptive Period for Collection 1. Normal/Ordinary Collection Sec. 203 did not provide for the prescriptive period for the collection Intention of the author: 5 years from the date of final assessment Reasons: (Sababan agrees with the 5 year prescriptive period) Prescriptive period of collection under 1 st option on Abnormal Assessment is 5 years from final assessment (Sec. 222, par c, NIRC) 1. under the old code of 1939, 1977, and 1985, if the prescriptive period for collection under abnormal is 3 years, then the prescriptive
PROCEDURE (Sec. 228, NIRC; RR 12-99) 1. Upon receipt of the notice of informal conference, file a reply within 15 days from receipt of notice; 2. Failure to file a reply, 2 things may happen: a. BIR will send again the Notice of Informal Conference or b. BIR will send a Preliminary Notice of Assessment
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5.
Q: Is FAN the one appealable to the Court of Tax Appeals (CTA)? A: NO. This is because 228, NIRC and RR 12-99 requires the exhaustion of administrative remedy of protest. After the receipt of FAN or formal demand within 30days must file a protest before the office of the commissioner of internal revenue. FORMS OF PROTEST 1. Local Tax (Sec. 125, Local Government Code (LGC)) 2. Real Property Tax (Sec. 252, LGC) 3. Tariff and Customs Code (Sec. 2313, RA 7651) In all protest under the different codes, payment under protest is only necessary under the Real Estate Tax. RR 12-99 If the taxpayer receives 2 final assessments, one under the Net Income Tax (NIT) and the other in VAT. If the taxpayer dont want to file protest under VAT but want to file a protest under NIT. The taxpayer in order to be allowed to file a protest under the NIT must first pay the VAT where he does not intend to file a protest. This is not payment under protest because, payment under protest is the one mentioned in Real Property Tax under Sec. 252, LGC. Under NIRC, Protest is referred to as: 1. disputing of final assessment or 2. file a motion for reconsideration or reinvestigation Q: What should be done after filing a protest? A: Count 60days is the period to file the necessary documents and receipts in support of the protest. Q: What is the effect of failure to file the supporting documents? A: Failure to file the necessary and supporting documents within the 60day period, to be counted on the day the protest is filed, the final assessment shall become final and executory. On the 51st day you filed the necessary document, you have to count another period, which is 180 days from the day you filed the necessary documents. Relevance of the 180 Days: 180 time given to the BIR to decide the case days is the
YABES v. COMMISSIONER (150 SCRA 278) F: The taxpayer receives a notice of collection while waiting for the decision of his protest. He then filed an appeal with the CTA contending his protest has been denied because he did not receive a decision but receive a notice of collection. Simultaneously, the BIR filed before the CFI an ordinary civil action for the collection of sum of money. When the judge of the CFI, was about to conduct the hearing of the case, the taxpayer filed an injunction with the SC to prohibit the judge of the CFI contending that a single cause of action is pending in two courts, one in the CTA and another in CFI. H: Injunction was granted prohibiting the Judge of the CFI and requiring the Judge to transfer the records to the CTA saying that the remedy made by the taxpayer was the correct remedy. Q: Was the appeal made on time? A: Yes, when the BIR filed an ordinary action, the protest is deemed denied. Hence an appeal is a proper remedy. UNION SHIPPING LINES v. COMMISSIONER F: The taxpayer was waiting for the decision of his protest. But instead, he received a notice of collection. Immediately, he filed a Motion for Reconsideration and Clarification asking whether his protest has been denied. The BIR did not reply or answer but instead filed an Ordinary Civil Action before the CFI. When the taxpayer received summons, he did not answer but instead filed an Appeal before the CTA. I: Whether or not the remedy of Appeal was the correct remedy and Whether or not it was filed on time. H: Yes. The remedy of appeal is the correct remedy and the appeal was filed on time. The reckoning period within which to file an appeal is the time the taxpayer received the summons. While an Appeal is pending before the CTA, the CTA will determine: 1. If the decision was made within 180 days, whether the appeal was made within 30 days from the receipt of the said decision, or 2. if there was no decision after the lapse of 180 days, whether the appeal was made within 30 days upon the expiration or the lapse of the 180day period. Q: Pending appeal with the CTA, can the BIR amend the final assessment? A: 2 SCHOOLS OF THOUGHT: 1. GUERRERO v. COMMISSIONER (19 SCRA 25) 2. BATANGAS v. COLLECTOR (102 PHIL 822) GUERRERO v. COMMISSIONER (19 SCRA 25) H: No. Because it is no longer the disputed assessment. BATANGAS v. COLLECTOR (102 PHIL 822) H: Yes. In order to avoid multiplicity of suits ACCORDING TO JUSTICE VITUG: BATANGAS v. COLLECTOR (102 PHIL 822) IS THE BETTER RULING PROTEST UNDER LOCAL TAX (Sec. 195, LGC) Under NIRC, protest is filed in the Office of the Commissioner Under LGC, protest is filed with the same City or Provincial or Municipal Treasurer who issued the assessment Period to file Protest
Q: Supposed it did not decide the case within 180days? A: Do not invoke the Lascano case because it was rejected by RA 9282 In the Lascano case, before you file an appeal although the 180 days have lapsed, you have to wait for the BIR to take positive action. The case was ruled only by the CTA, hence it is not a law. The jurisdiction of the CTA has been amended by RA 9282. RA 9282 provides that in case of inaction of the commissioner after the lapse of 180days, remedy is to file an appeal. RR 12-99 says that after lapse of 180days but within 30days after 180days, that is the time to file an appeal. Q: Supposed the BIR rule within 180? A: Within 30days from receipt of the decision file an appeal to the CTA sitting in division. Q: Supposed the CTA decided not in your favor? A: File a motion for reconsideration within 15days to the same division deciding the case. Q: Supposed the CTA, in division decided not in you favor? A: File an appeal to the CTA sitting en banc.
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II. If the importer-taxpayer wins the case, the government lose the case, Sec. 2313 of TCC as amended by RA 7651, there shall be an automatic review within 15 days. Q: Where should the automatic review be made? A: It depends. Publish the value of the commodity. 1. IF P5 MILLION OR MORE AUTOMATIC REVIEW SHALL BE BEFORE THE SECRETARY OF THE DEPT. OF FINANCE. 2. IF LESS THAN P5 MILLION AUTOMATIC REVIEW SHALL BE BEFORE THE OFFICE OF THE COMMISSIONER Q: Suppose the commissioner decide or did not decide within 30days, what happens? A: If the commissioner reverses the ruling of the collector, the ruling is final and executory. If the commissioner affirms or did not decide within 30days, there shall be an automatic appeal before the sec. of finance. Q: Between the two which will be appealed to the CTA? A: The decision of the secretary which passes through the office of the commissioner (RA 9282) But not all the decision of the secretary which passes the office of the commissioner affirms or did not decide within 30days and appealed before the secretary of finance will appeal to the CTA be allowed. There are 3 instances when the Secretary of Finance renders a decision appealable to the CTA: 1. decision of the Secretary by virtue of automatic review passing through the Commissioner 2. cases of anti-dumping duty, where the antidumping duty was ordered by the Secretary 3. decision of the Secretary of Finance on countervening duty. COMPROMISE (Sec. 204, NIRC) 3 Questions asked in 2004 BAR: 1. May the Government compromise criminal cases and civil cases? 2. Supposed the corporation is already dissolved, can the stockholder be obliged to pay? 3. Suppose the civil case filed by the BIR is final and executor, can it be subject to compromise? CAN THERE BE COMPROMISE IN: 1. CIVIL CASES? YES, IN ANY STAGE OF THE PROCEEDING EXCEPT WHEN THE CIVIL CASE IS ALREADY FINAL AND EXECUTORY BECAUSE IT WILL BE VIOLATIVE OF THE SEPARATION OF POWERS 2. CRIMINAL CASES? YES, EXCEPT: a. IF ALREADY FILED IN COURT (RTC) OR; b. IF IT INVOLVES FRAUD 3. IF THE CORPORATION IS ALREADY DISSOLVED, CAN THE STOCKHOLDER BE HELD LIABLE TO PAY TAX? GENERAL RULE: NO EXCEPT: a. IF IT IS PROVEN THAT THE ASSETS OF THE COPORATION IS TAKEN BY ONE STOCKHOLDER OR; b. IF THE STOCKHOLDER DID NOT PAY HIS UNPAID SUBSCRIPTION Minimum Amount to be Compromised (Sec. 204) 1. If the ground is financial incapacity of the taxpayer, the minimum shall not be less than 10% of the original assessment. 2. If based on other grounds, the minimum amount shall not be lower than 40% of the original assessment. Q: Can it be lower than that prescribed by law? A: As a rule, no. EXCEPT, if allowed by the evaluation board consisting of the:
NOTE: Pursuant to RA 9282, direct appeal to CTA en banc can be made from: 1. Decision of the RTC involving local taxation exercising appellate jurisdiction 2. Decision of the Central Board of Assessment Appeal exercising appellate jurisdiction. PROTEST UNDER REAL PROPERTY TAX (Secs. 226, 230, and 252) Remedy shall be the same Sec. 252, LGC If the taxpayer receives a Notice of Assessment from municipal, city, or provincial treasurer, the remedy is to file a protest but there must be first Payment Under Protest. This is the only instance where payment under protest is necessary Q: How is payment under protest made? A: At the back of the receipt there will be an annotation that there was a payment under protest within 60days from receipt of the notice of assessment within the same treasurer who issued the assessment. Q: If the treasurer rules against the taxpayer, remedy? A: The remedy is to file an appeal to the Local Board of Assessment within 30days from the receipt of the decision. Q: From the decision of the Local Board of Assessment? A: Appeal should be made to the Central Board of Assessment Appeal. Beginning April 23, 2004, the ruling of the Central Board of Assessment Appeal is no longer final. It can now be appealed to the CTA, sitting en banc. PROTEST UNDER THE TARIFF AND CUSTOMS CODE (TCC) (Sec. 2313, as amended by RA 7651) Formerly, the automatic appeal under the TCC applied only to protest; but now a days, the automatic appeal applies to both protest and forfeiture. For Forfeiture Under the Tariff and Customs Code Refers to the Order of the Collector confiscating the imported goods or commodities Doctrine of Primary Jurisdiction If the Collector ordered the forfeiture of the imported commodities the order of the Collector shall be to the exclusion of all government offices and authority. Importer of Chemical, under the TCC, the custom duties is only P27 but the collector says it should be P52. The importer will then file a protest with the Office of the Collector. In the old days, there is an automatic appeal from the decision of the collector under protest. But under RA 7651, the remedy of automatic appeal is applicable to both protest and forfeiture. I. In both cases of protest and forfeiture, if the importer lose the case and the government wins, the remedy is to file an appeal within 15 days before the Office of the Commissioner. From the ruling of the Commissioner, the importer should file an appeal within 30 days before the CTA, sitting in division. From the ruling of the CTA in division, the importer should file an MR within 15 days before the same division hearing the case.
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1. Constructive Distraint The distraining officer shall make a list of the personal property of the property to be distraint in the presence of the owner of the property or the person in possession of the property. The owner shall be requested to sign the receipt. Q: What if the owner refuses to sign the receipt? A: Sec. 206: The distraining officer shall require 2 individuals within the neighborhood with the warning that they should not allow the taxpayer to dispose, transfer, or sell the property subject of distraint. Grounds for Constructive Distraint (Sec. 206): 1. The taxpayer intends to leave the Philippines 2. The taxpayer leaves the Philippines 3. The taxpayer ceases or retires from business 4. The taxpayer obstructs the collection of the tax. THESE GROUNDS ALSO ANSWER THE QUESTION: WHAT ARE THE TAXABLE PERIOD LESSER THAN 12 MONTHS? 2. Distraint of Intangible Property Limited to 3 1. 2. 3. Intangible Properties: Shares of stocks Bank accounts Credits and debits
Share of stocks Warrant of distraint furnished to the taxpayer or the officer of the corporation with the warning that the property is subject of distraint and it should not dispose of it. Bank Accounts
2 Things may happen in a Public Auction: 1. There is a bidder and the bid is enough 2. There is no bidder or the bid is not enough Q: What if there is no bidder or the bid is not enough? A: Forfeiture shall be made (215) 3 Definitions of Forfeiture under the Internal Revenue Code 1. Violation of Excise Tax Law (Sec. 224) 2. If there is no bidder or the bid is not enough (Sec. 215)
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Q: If sold at a private sale, what is the requirement? A: There must be an approval of the Secretary of Finance (216) Q: After sale, if there was deficiency? A: There shall be no further levy, because 215 says that it shall be to the total satisfaction of the taxpayer. Q: After sale, if there was an excess? A: It shall not be returned to the taxpayer but shall be remitted to the national treasury. Sec. 217: this is only true if there was no bidder or the bid was not enough because of the provisions of the Secs. 212, 215, and 216 Sec. 218: no court shall issue an injunction to restrain the collection of tax under this code Determine what kind of injunction is referred to here: 1. Prohibitory referred in Sec. 218 because it restrains the collection of tax. 2. Mandatory Q: Is the provision limited to tax under this code? A: Limited to internal revenue taxes. EXCEPT: CTA (Regular Court) RA 1125 and 9282: CTA is authorized to issue injunction to restrain the collection of taxes or fees collected under other code. Q: Is the rule of distraint or levy the same under local taxation? A: Yes, local tax. 175 for DISTRAINT 176 for LEVY Q: How about real property tax? A: No, distraint is not authorized (256, LGC), because the remedy is only Judicial Action and Levy. Tax Lien Non payment of tax, the government has the right to claim a lien over the property of the taxpayer 1. NIRC Sec. 219, NIRC 2. Local Tax Sec. 173, NIRC 3. Real Property Tax Sec. 257, NIRC Q: Supposed a parcel of land is about to be levied by government, but the same is being foreclosed by mortgagee, which of the 2 obligee, the government or mortgagee shall be preferred? A: 219, last portion: The government is preferred one if the lien is annotated and recorded in registry of deed. In the absence of annotation in registry of deeds, the mortgagee is preferred. the the the the the the
Q: A Filipino taxpayer went to Canada, after 15years he went back, he is being assessed by the BIR under normal assessment. Has the right of the government to asses the tax already prescribed? A: NO. When he went to Canada, the running of the prescribed period is suspended. Q: What if the change of address is within the Philippines, say only from manila to Pasay City, is the running of the prescriptive period suspended? A: In order that the running of the prescriptive period will not be suspended, especially if the change is district office, 223 provides that the taxpayer must send a written notice of change of address to the BIR. In the absence of the written notice, the period will be suspended. Q: Change of address is from Philippines to abroad? A: The period will be suspended. Other Grounds for Suspension: 1. During collection if there is no property found, the period is suspended 2. If the BIR is prohibited from making assessment such when the subject property is under litigation 3. In distraint of levy, the BIR officer cant locate the property CLAIM FOR REFUND (SEC 229) Written 1. 2. 3. 4. 5. claim for refund: Sec. 229, NIRC Sec. 112, VAT Sec. 136, Local Tax Sec. 253, Real Property Tax None except sec. 1603, Tariff and Custom
Q: Do we have the same rule under Local Tax and Real Property Tax? A: NO. Both 173 and 257, the government is always the preferred one. The lien can only be removed by payment of tax, interest and penalty. Sec. 220: approving of filing an ordinary civil action for violation of the internal revenue code The approval must be made by the Commissioner of Internal Revenue HIZON v. REPUBLIC (320 SCRA 574) F: An ordinary civil action for violation of the tax code was filed in the city of San Fernando. But the filing was only approved by the Revenue Regional Director of Central Luzon. The plaintiff opposed the filing in the
Written claim for refund under the input tax (Sec. 112) Period is also 2 years from the close of the taxable quarter when the transaction was made Q: Can we apply 229 to VAT? A: Yes, because there is no conflict. 112 is refund under input tax system. 229 is refund for: 1. errors in payment or; 2. collected without authority; or 3. assessment without authority. The period to claim refund is 2years.
Doctrine of Equitable Recoupment If a taxpayer is entitled to a written claim for refund but the prescriptive period to claim has lapsed, the taxpayer is allowed to credit his written claim for refund which he failed to recover to his existing tax liability.
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1.
2.
Q: Suppose there is a supervening event, and the taxpayer was not able to file a written claim of refund within the period? A: Regardless of supervening event, a written claim for refund must be filed within 2years. Q: Suppose the 2 year period is about to expire and there is no decision yet as to your refund? A: Remedy is to file an appeal before the CTA (deemed a denial) Q: Suppose the BIR decided within 2 years against the refund? A: Appeal within 30days from the decision, provided it is still within the 2 year period. Q: Suppose there is only 21days remaining after receiving the decision, when to file an appeal? A: Within 21days before the end of the 2 year period. A written claim for refund should be filed within 2 years
Sec 204 (c) last phrase: in case of over payment a written claim is not necessary because a return constitutes a written claim for refund. Q: May the commissioner of internal revenue open the bank account of a taxpayer? A: General Rule: NO. EXCEPT: 1. To determine the gross value of the estate; and 2. To enter into a compromise agreement. (under 204(A)) The written claim for refund to determine the gross value of the estate because the taxpayer is already dead In case of compromise, there must be consent
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