TAXATION LAW UP BOC PDF

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1 2 3 TABLE OF CONTENTS J. SCOPE AND LIMITATION OF TAXATION. 16 TAXATION LAW 1 J.1. INHERENT LIMITATIONS .................. 16 I. GENERAL PRINCIPLES OF TAXATION ...........1 J.2. CONSTITUTIONAL LIMITATIONS .....20 A. DEFINITION AND CONCEPT OF K. REQUISITES OF A VALID TAX ................ 27 TAXATION...

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TABLE OF CONTENTS J. SCOPE AND LIMITATION OF TAXATION. 16 J.1. INHERENT LIMITATIONS .................. 16 J.2. CONSTITUTIONAL LIMITATIONS .....20 K. REQUISITES OF A VALID TAX ................ 27 L. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS .............................. 28 L.1. TARIFF .............................................. 28 L.2. TOLL................................................. 28 L.3. LICENSE FEE .................................... 28 L.4. SPECIAL ASSESSMENT ................... 29 L.5. DEBT ................................................ 30 L.6. PENALTY.......................................... 30 M. KINDS OF TAXES ................................... 30 M.1. AS TO OBJECT ................................. 30 M.2. AS TO BURDEN OR INCIDENCE ......31 M.3. AS TO TAX RATES ............................31 M.4. AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX) ................................ 31 M.5. AS TO GRADUATION ...................... 32 A. INCOME TAX SYSTEMS .......................... 33 A.1. GLOBAL TAX SYSTEM ...................... 33 A.2. SCHEDULAR TAX SYSTEM .............. 33 A.3. SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM ........................................... 33 B. FEATURES OF THE PHILIPPINE INCOME TAX LAW ..................................................... 33 C. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX............................................... 34 C.1. CITIZENSHIP OR NATIONALITY PRINCIPLE .............................................. 34 C.2. RESIDENCE PRINCIPLE ................... 34 C.3. SOURCE OF INCOME PRINCIPLE .... 34 D. TYPES OF PHILIPPINE INCOME TAX...... 34 E.1. INSTANCES WHEREBY SHORT ACCOUNTING PERIOD ARISES .............. 34 E.2. WHEN CALENDAR YEAR SHALL BE USED IN COMPUTING TAXABLE INCOME: ................................................................ 35 F. KINDS OF TAXPAYERS ........................... 35 F.1. DEFINITION OF EACH KIND OF TAXPAYER .............................................. 35 F.2. INDIVIDUAL TAXPAYERS ................ 36 F.3. CORPORATIONS .............................. 36 F.4. PARTNERSHIP ................................. 37 F.5. ESTATES AND TRUSTS ................... 37

TAXATION LAW 1 I. GENERAL PRINCIPLES OF TAXATION ...........1 A. DEFINITION AND CONCEPT OF TAXATION .....................................................1 A.1. TAXATION ...........................................1 A.2. TAXES .................................................1 B. UNDERLYING THEORY AND BASIS OF TAXATION .....................................................1 C. NATURE OF THE POWER OF TAXATION ..1 C.1. SCOPE OF TAXATION......................... 2 C.2. EXTENT OF THE LEGISLATIVE POWER TO TAX ........................................ 2 D. ESSENTIAL CHARACTERISTICS OF TAX .................................................................. 3 E. POWER OF TAXATION COMPARED WITH OTHER POWERS .......................................... 4 F. PURPOSE OF TAXATION .......................... 5 F.1. REVENUE-RAISING ............................ 5 F.2. NON-REVENUE/SPECIAL OR REGULATORY ........................................... 5 G. PRINCIPLES OF SOUND TAX SYSTEM..... 6 G.1. FISCAL ADEQUACY ............................ 6 G.2. ADMINISTRATIVE FEASIBILITY ......... 6 G.3. THEORETICAL JUSTICE OR EQUALITY .................................................................. 6 H. THEORY AND BASIS OF TAXATION ......... 6 H.1. LIFEBLOOD THEORY ......................... 6 H.2. NECESSITY THEORY ......................... 6 H.3. BENEFITS-PROTECTION THEORY (SYMBIOTIC RELATIONSHIP) ................... 6 H.4. JURISDICTION OVER SUBJECT AND OBJECTS ................................................... 7 I. DOCTRINES IN TAXATION ........................ 7 I.1. PROSPECTIVITY OF TAX LAWS ........... 7 I.2. NON-RETROACTIVITY OF RULINGS (SEC. 246) ................................................. 7 I.3. IMPRESCRIPTIBILITY .......................... 7 I.4. DOUBLE TAXATION ............................ 8 I.5. ESCAPE FROM TAXATION .................. 9 I.6. EXEMPTION FROM TAXATION ......... 10 I.7. COMPENSATION AND SET-OFF ........12 I.8. COMPROMISE ...................................12 I.9. TAX AMNESTY ...................................12 I.10. CONSTRUCTION AND INTERPRETATION OF: ............................. 13 i

TABLE OF CONTENTS F.6. CO-OWNERSHIP.............................. 37 G. INCOME TAXATION................................ 37 G.1. DEFINITION ...................................... 37 G.2. NATURE .......................................... 37 G.3. GENERAL PRINCIPLES .................... 38 H. INCOME.................................................. 38 H.1. DEFINITION ...................................... 38 H.2. NATURE .......................................... 38 I. GROSS INCOME ...................................... 43 I.1. DEFINITION ....................................... 43 I.2. CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED .............. 43 I.3. GROSS INCOME VIS-À-VIS NET INCOME VIS-À-VIS TAXABLE INCOME ...44 I.4. CLASSIFICATION OF INCOME AS TO SOURCE ..................................................44 I.5. SOURCES OF INCOME SUBJECT TO TAX .........................................................44 SOURCE RULES IN DETERMINING INCOME FROM WITHIN AND WITHOUT ................... 66 SITUS OF INCOME TAXATION ................68 EXCLUSIONS FROM GROSS INCOME ........68 (A) EXCLUSIONS UNDER THE CONSTITUTION ...................................... 69 (B) EXCLUSIONS UNDER THE TAX CODE (SEC. 32, NIRC) ....................................... 69 (C) UNDER SPECIAL LAWS ..................... 72 DEDUCTIONS FROM GROSS INCOME ....... 73 ITEMIZED DEDUCTIONS ........................ 74 EXPENSES .............................................. 74 INTEREST ............................................... 78 TAXES .................................................... 80 LOSSES ................................................... 82 BAD DEBTS.............................................84 DEPRECIATION ......................................85 CHARITABLE AND OTHER CONTRIBUTIONS....................................86 CONTRIBUTIONS TO PENSION TRUSTS 87 DEDUCTIONS UNDER SPECIAL LAWS ... 87 OPTIONAL STANDARD DEDUCTION .....88 EXEMPT CORPORATIONS ...................... 91 TAXATION OF RESIDENT CITIZENS, NONRESIDENT CITIZENS AND RESIDENT ALIENS .................................................................... 93 TAXATION ON COMPENSATION INCOME . 95

TAXATION OF BUSINESS INCOME/INCOME FROM PRACTICE OF PROFESSION ..........................................98 TAXATION OF PASSIVE INCOME............98 TAXATION OF CAPITAL GAINS.............. 101 TAXATION OF NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS ........ 105 GENERAL RULES.................................. 105 CASH AND/OR PROPERTY DIVIDENDS .............................................................. 105 CAPITAL GAINS .................................... 106 NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS .............................. 106 INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX............................................. 107 SENIOR CITIZENS ................................. 107 MINIMUM WAGE EARNERS ................. 107 EXEMPTIONS GRANTED UNDER INTERNATIONAL AGREEMENTS (SEC. 32(B)) .................................................... 107 TAXATION OF DOMESTIC CORPORATIONS .................................................................. 107 TAX PAYABLE ....................................... 107 REGULAR TAX ...................................... 107 MINIMUM CORPORATE INCOME TAX (MCIT) ................................................... 108 CORPORATIONS EXEMPT FROM THE MCIT: (BIPTENG) .................................... 112 ALLOWABLE DEDUCTIONS ...................... 112 ITEMIZED DEDUCTIONS........................ 112 TAXATION OF PASSIVE INCOME .............. 112 PASSIVE INCOME SUBJECT TO TAX...... 112 PASSIVE INCOME NOT SUBJECT TO TAX ............................................................... 113 TAXATION OF CAPITAL GAINS ................. 114 INCOME FROM SALE OF SHARES OF STOCK.................................................... 114 INCOME FROM THE SALE OF REAL PROPERTY SITUATED IN THE PHILIPPINES .......................................... 114 TAX ON PROPRIETARY EDUCATIONAL INSTITUTIONS AND NON-PROFIT HOSPITALS................................................ 114

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TABLE OF CONTENTS TAX ON GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AGENCIES OR INSTRUMENTALITIES ......................... 114 FOR GOCCS: .......................................... 114 FOR INSTRUMENTALITIES AND AGENCIES OF GOVERNMENT: .............. 115 TAXATION OF RESIDENT FOREIGN CORPORATIONS ....................................... 115 GENERAL RULE ..................................... 115 WITH RESPECT TO THEIR INCOME FROM SOURCES WITHIN THE PHILIPPINES .... 116 MINIMUM CORPORATE INCOME TAX .. 116 TAX ON CERTAIN INCOME ........................ 116 TAXATION OF NON-RESIDENT FOREIGN CORPORATIONS ....................................... 118 GENERAL RULE ..................................... 118 TAX ON CERTAIN INCOME .................... 118 IMPROPERLY ACCUMULATED EARNINGS OF CORPORATIONS .............................. 121 TAX EXEMPT CORPORATIONS .................123 TAXATION OF PARTNERSHIPS .................123 CLASSIFICATION OF PARTNERSHIPS FOR TAX PURPOSES .....................................123 TAXATION OF GENERAL PROFESSIONAL PARTNERSHIPS ................................... 125 WITHHOLDING TAX.................................. 126 CONCEPT .............................................. 126 KINDS .................................................... 127 WITHHOLDING OF VAT ........................ 128 FILING OF RETURN AND PAYMENT OF TAXES WITHHELD ................................ 128 FINAL WITHHOLDING TAX AT SOURCE129 CREDITABLE WITHHOLDING TAX ......... 131 TIMING OF WITHHOLDING ....................135

F.1. CONCEPT OF RESIDENCE .............. 139 F.2. RULE OF RECIPROCITY ................. 139 G. GROSS ESTATE VIS-À-VIS NET ESTATE .................................................................. 140 H. DETERMINATION OF GROSS ESTATE AND NET ESTATE (AND COMPOSITION) . 140 J. ITEMS TO BE INCLUDED IN GROSS ESTATE ..................................................... 142 ITEMS TO BE INCLUDED IN THE GROSS ESTATE ..................................................... 142 K. DEDUCTIONS FROM ESTATE .............. 145 K.1 ORDINARY DEDUCTIONS ............... 145 1.A. EXPENSES, LOSSES, INDEBTEDNESS AND TAXES, ETC. (ELIT) ................................................ 145 1. B. PROPERTY PREVIOUSLY TAXED/PPT (SEC. 86(A)(2)) ............. 150 ALSO CALLED AS VANISHING DEDUCTIONS ................................... 150 1. C. TRANSFERS FOR PUBLIC PURPOSE (SEC. 86(A)(3)) ................. 151 1.D. AMOUNTS RECEIVED BY HEIRS UNDER RA 4917 ................................ 151 L. EXCLUSIONS FROM ESTATE................ 153 M. TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY.............................. 155 N. EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS .............................. 157 O. FILING OF NOTICE OF DEATH .............. 157 P. ESTATE TAX RETURN ........................... 157 II. DONOR’S TAX .......................................... 160 A. BASIC PRINCIPLES............................... 160 B. DEFINITION .......................................... 160 C. NATURE ................................................ 161 D. PURPOSE OR OBJECT .......................... 161 E. REQUISITES OF VALID DONATION ....... 161 F. TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION .................. 161 G. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION ................... 162 H. CLASSIFICATION OF DONOR .............. 162 I. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION OF GROSS GIFT) ......................................................... 163

TAXATION LAW 2 I. ESTATE TAX ............................................... 137 A. BASIC PRINCIPLES................................ 137 B. DEFINITION .......................................... 137 C. NATURE ................................................ 137 D. PURPOSE OR OBJECT .......................... 137 E. TIME AND TRANSFER OF PROPERTIES .................................................................. 138 F. CLASSIFICATION OF DECEDENT ..........139 iii

TABLE OF CONTENTS J. VALUATION OF GIFTS MADE IN PROPERTY ............................................... 164 K. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY ......................... 165 L. EXEMPTIONS OF GIFTS FROM DONOR’S TAX ........................................................... 166 M. PERSON LIABLE .................................. 166 N. TAX BASIS ............................................. 167 SUMMARY OF TRANSFER TAXES............ 169 III. VALUE-ADDED TAX (VAT) ........................ 174 A. CONCEPT .............................................. 174 B. CONSTITUTIONALITY OF VAT............... 174 C. CHARACTERISTICS/ELEMENTS OF A VAT-TAXABLE TRANSACTION .................. 174 D. IMPACT OF TAX V. INCIDENT OF TAX .. 176 E. TAX CREDIT METHOD ........................... 176 F. DESTINATION PRINCIPLE ..................... 177 G. PERSONS LIABLE ................................. 177 G. VAT ON SALE OF GOODS OR PROPERTIES ............................................. 178 I. ZERO-RATED SALES OF GOODS OR PROPERTIES, AND EFFECTIVELY ZERORATED SALES OF GOODS OR PROPERTIES ................................................................... 181 J. TRANSACTIONS DEEMED SALE (SEC. 106 (B) ............................................................. 184 K. CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON (SEC 106 C) .. 185 L. VAT ON IMPORTATION OF GOODS ..... 186 M. VAT ON SALE OF SERVICE AND USE OR LEASE OF PROPERTIES ........................... 186 N. ZERO-RATED SALE OF SERVICES....... 189 O. VAT EXEMPT TRANSACTIONS ............ 190 P. INPUT TAX AND OUTPUT TAX, DEFINED .................................................................. 195 Q. SOURCES OF INPUT TAX..................... 195 R. PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT .............................................. 196 S. DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDITS .................................................... 197 S.1. DETERMINATION OF OUTPUT TAX 197 S.2. DETERMINATION OF INPUT TAX CREDITABLE .......................................... 197

S.3. ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS ........................197 S.4. DETERMINATION OF THE OUTPUT TAX AND VAT PAYABLE AND COMPUTATION OF VAT PAYABLE OR EXCESS TAX CREDITS ........................... 197 T. SUBSTANTIATION OF INPUT TAX CREDITS ................................................... 198 U. REFUND OR TAX CREDIT OF EXCESS INPUT TAX (CF REFUND OF ERRONEOUSLY PAID TAXES) .............................................203 V. INVOICING REQUIREMENTS ............... 204 W. FILING OF RETURN AND PAYMENT .. 206 X. WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT .................................... 207 IV. TAX REMEDIES UNDER THE NIRC.......... 221 A. TAXPAYER’S REMEDIES ...................... 221 A. GOVERNMENT REMEDIES .............. 234 V. ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE .............. 236 POWERS OF THE COMMISSIONER .......... 236 ORGANIZATION AND FUNCTION OF THE BIR ............................................................ 238 VI. TAX REMEDIES UNDER THE NIRC......... 240 VI. ORGANIZATION AND FUNCTION OF THE BIR ................................................................ 272 VIII. LOCAL GOVERNMENT CODE OF 1991, AS AMENDED .................................................... 276 C. TAXING POWERS OF MUNICIPALITIES 282 C.1. TAX ON VARIOUS TYPES OF BUSINESSES.........................................282 C.2 CEILING ON BUSINESS TAX IMPOSSIBLE ON MUNICIPALITIES WITHIN METRO MANILA ...................................284 C.3. TAX ON RETIREMENT ON BUSINESS ..............................................................284 C.4 RULES ON PAYMENT OF BUSINESS TAX .......................................................284 C.5. FEES AND CHARGES FOR REGULATION & LICENSING .................284 C.6. SITUS OF TAX COLLECTED ...........285 D. TAXING POWERS OF BARANGAYS .....286 E. COMMON REVENUE RAISING POWERS ..................................................................286 F. COMMUNITY TAX ................................. 287 iv

TABLE OF CONTENTS COMMON LIMITATIONS ON THE TAXING POWERS OF LGUS ...................................288 COLLECTION OF BUSINESS TAX .............289 TAX PERIOD AND MANNER OF PAYMENT ..............................................................289 ACCRUAL OF TAX .................................289 TIME OF PAYMENT ...............................289 PENALTIES ON UNPAID TAXES, FEES OR CHARGES .............................................289 AUTHORITY OF TREASURER IN COLLECTION AND INSPECTION OF BOOKS ..................................................289 TAXPAYER’S REMEDIES ..........................289 PERIODS OF ASSESSMENT AND COLLECTION OF LOCAL TAXES, FEES OR CHARGES .............................................289 PROTEST OF ASSESSMENT ................ 290 CLAIM FOR REFUND OF TAX CREDIT FOR ERRONEOUSLY OR ILLEGALLY COLLECTED TAX, FEE OR CHARGE .... 290 CIVIL REMEDIES BY THE LGU FOR COLLECTION OF REVENUES .................. 290 LOCAL GOVERNMENT’S LIEN FOR DELINQUENT TAXES, FEES OR CHARGES ............................................................. 290 CIVIL REMEDIES, IN GENERAL ............ 290 PROCEDURE FOR ADMINISTRATIVE ACTION ................................................ 290 PROCEDURE FOR JUDICIAL ACTION ... 291 B. REAL PROPERTY TAXATION ............... 291 A. FUNDAMENTAL PRINCIPLES (CAPUE) .............................................................. 291 B. NATURE OF REAL PROPERTY TAX .. 291 C. IMPOSITION OF REAL PROPERTY TAX .............................................................. 292 C.1. COVERAGE ..................................... 292 FOR A PROVINCE, OR A CITY OR MUNICIPALITY WITHIN METRO MANILA .............................................................. 292 SPECIAL LEVY ON IDLE LANDS............ 292 SPECIAL LEVY FOR PUBLIC WORKS .... 292 SPECIAL EDUCATION FUND (SEF) ....... 292 C.2. EXEMPT FROM REAL PROPERTY TAX .............................................................. 292

D. APPRAISAL AND ASSESSMENT OF REAL PROPERTY TAX .......................... 293 D.1. DECLARATION OF REAL PROPERTY .............................................................. 293 D.2. LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS ...........................294 D.3. APPRAISAL AND VALUATION OF REAL PROPERTY ..................................294 D.4. ASSESSMENT OF REAL PROPERTY ..............................................................295 I. ASSESSMENT LEVELS .......................295 II. GENERAL REVISIONS OF ASSESSMENTS AND PROPERTY CLASSIFICATION ..................................295 III. DATE OF EFFECTIVITY OF ASSESSMENT OR REASSESSMENT .....295 IV. ASSESSMENT OF PROPERTY SUBJECT TO BACK TAXES....................................296 V. NOTIFICATION OF NEW OR REVISED ASSESSMENT .......................................296 E. COLLECTION OF REAL PROPERTY TAX ..............................................................296 E.1. SPECIAL RULES ON PAYMENT ......296 I. PAYMENT OF REAL PROPERTY TAX IN INSTALLMENTS ....................................296 II. INTERESTS ON UNPAID REAL PROPERTY TAX .................................... 297 III. CONDONATION OF REAL PROPERTY TAX ....................................................... 297 E.2. REMEDIES OF LGUS FOR COLLECTION OF REAL PROPERTY TAX .............................................................. 297 I. ADMINISTRATIVE .............................. 297 II. JUDICIAL ........................................... 297 F. TAXPAYER’S REMEDIES ................... 297 F.1. ADMINISTRATIVE ...........................298 F.2. JUDICIAL ........................................298 IX. TARIFF AND CUSTOMS CODE OF 1978, AS AMENDED .................................................... 303 A. TARIFF AND DUTIES, DEFINED ........... 303 B. GENERAL RULE: ALL IMPORTED ARTICLES ARE SUBJECT TO DUTY .......... 303 IMPORTATION BY THE GOVERNMENT TAXABLE.............................