Taxation Law 1 - Notes Co: Less: Deductions

TAXATION LAW 1 – NOTES CO
NORMAL CORPORATE INCOME TAX (NCIT) Carry Forward of Excess MCIT

• It refers to the use of regular domestic income tax • Any excess of the MCIT over the normal tax shall
rates on the corporate taxable income of 30% on be carried forward and credited against the normal
net taxable income. tax immediately for three succeeding taxable years.
Gross Income Optional Gross Income Tax/ Gross Corporate

Less: Deductions Income Tax (GCIT)
______________________ • OGIT of 15% based on the gross income.
= Net Income • It is only an option. Election of the GCIT needs to be
Multiply: (Fixed or Graduated Rate) % approved by the President, upon recommendation
______________________ of the Secretary of Finance.
= Taxable Income • It is available only to firms whose ratio of cost of
sales to gross sales or receipts from all sources do
MINIMUM CORPORATE INCOME TAX (MCIT) not exceed 55%
• DC and RFC shall be taxed with 2% based on gross • Once elected, it shall be irrevocable for 3
income and not on their taxable income if said consecutive taxable years during which the
corporations: corporation is qualified under the scheme.
a. Incurred a net loss or zero taxable income, or a
normal income tax that is lesser than minimum IMPROPERLY ACCUMULATED EARNINGS TAX
income tax • Domestic corporations and closely-held
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b. Beginning on the 4 taxable year immediately corporations are subject to 10% improperly
following the taxable year which such accumulated earnings tax on their improperly
corporation commenced business operations accumulated earnings (accumulation not within
the reasonable needs of the business).
• Gross Income for purposes of computing MCIT • It shall apply to every corporation formed or availed
a. As to sale of goods – it shall mean gross sales for the purpose of avoiding the income tax with
less sales returns, discounts and allowances respect to its shareholders or the shareholders of
and cost of goods sold. any other corporation, by permitting earnings and
b. As to sale of services – it shall mean gross profits to accumulate instead of being divided or
receipts less sales returns, allowances, distributed.
discounts and cost of services.
• Justified reasons for retaining earnings:
• The MCIT shall be paid in the same manner a. Expansion
prescribed for the payment of the normal corporate b. Acquisition of another related business
income tax which is on a quarterly and on a yearly c. Additional working capital
basis.
Reasonable Needs of the Business
• A taxpayer who is liable to MCIT and at the same • The immediate needs of the business, including
time Expanded Withholding Tax (EWT) may deduct reasonably anticipated needs.
the latter from former if there is still an excess EWT, • In order to determine whether profits are
he may request for tax credit or refund of tax accumulated for the reasonable needs, it must be
withheld. shown that the controlling intention of the taxpayer
is manifest at the time of accumulation, not
• Instances when Secretary of Finance is authorized subsequently, which are mere afterthoughts.
to suspend the imposition of MCIT on a corporation Furthermore, the accumulated profits must be used
that suffers losses: within a reasonable time after the close of the
a. Losses on account of prolonged labor dispute taxable year
b. Because of force majeure
c. Because of legitimate business reverses
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Prima facie instances of accumulation of profits DEDUCTIONS

beyond the reasonable needs of a business • These are business expenses and losses which the
1. Investment of substantial earnings and profits of the law allows to reduce gross business income to
corporation in unrelated business or in stock or arrive at net income subject to tax
securities in unrelated business • The items of amounts allowed as deductions
2. Investment in bonds and other long term securities represent the expenses (reduction of wealth) of the
3. Accumulation of earnings in excess of 100% of taxpayer (other than personal expenses and capital
paid- up capital, not otherwise intended for the expenditures) in earning the income (increase of
reasonable needs of the business wealth) subject to tax as well as reasonable living
expenses.
Prima facie evidence to show purpose of
accumulation is Tax evasion or Tax avoidance Requisites before deductions are allowed
The fact that: 1. There must be specific provision of law allowing the
a. Any corporation is a mere holding company or an deductions, since deductions do not exist by
investment (mutual fund) company implication.
b. The earnings or profits of a corporation are 2. The requirements of deductibility must be met
permitted to accumulate beyond the reasonable 3. There must be proof of entitlement to the
needs of the business (R.R. No. 2-2001, Sec. 7). deductions.
The burden of proof to establish the validity of
• IAET not applicable to the following: claimed deduction is on the taxpayer. This is
a. Publicly-held corporations consistent with the rule that tax exemptions must be
b. Banks and other non-bank financial strictly construed against the taxpayer and liberally
intermediaries in favor of the State.
c. Insurance companies 4. The deductions must not have been waived.
d. Taxable partnerships 5. The withholding and payment of tax required must
e. General professional partnerships be shown
f. Non-taxable joint ventures
g. Enterprises duly registered with the Philippine General rules in claiming deductions
Economic Zone Authority under R.A. 7916, and 1. Deductions must be paid or incurred in connection
enterprises registered pursuant to the Bases with the taxpayer’s trade, business or profession.
Conversion and Development Act of 1992 2. Deductions must be supported by adequate receipts
under R.A. 7227, as well as other enterprises or invoices (except standard deduction).
duly registered under special economic zones 3. The withholding and payment of tax required must
declared by law which enjoy payment of be shown.
special tax rate on their registered operations
or activities in lieu of other taxes, national or Any income payment which is otherwise deductible shall
local (R.R. 2-2001, Sec. 4) be allowed as a deduction from gross income only if it is
shown that the income tax required to be withheld has
Improperly Accumulated Taxable Income been paid to the BIR (Sec. 2.58.5, RR 2- 98).
• It means taxable income adjusted by:
a. Income exempt from tax; Where no withholding made but still deductible
b. Income excluded from gross income; A deduction will also be allowed in the following cases
c. Income subject to final tax; and where no withholding of tax was made:
d. The amount of net operating loss carry-over a. The payee reported the income and the withholding
deducted; agent/taxpayer pays the tax, including the interest
incident to the failure to withhold the tax, and
And reduced by the sum of: surcharges, if applicable, at the time of the original
a. Dividends actually or constructively paid; and audit and investigation;
b. Income tax paid for the taxable year
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b. The recipient/payee failed to report the income on Deductions that can be claimed by a corporation
the due date thereof, but the withholding • Domestic Corporations and Resident Foreign
agent/taxpayer pays the tax, including the interest Corporation may opt between the OSD OR the
incident to the failure to withhold the tax and Itemized Deductions
surcharges, if applicable, at the time of the original • Except Non-Resident Foreign Corporation which is
audit and investigation; subject to final tax on its gross income from sources
c. The withholding agent erroneously underwithheld within the Philippines.
the tax but pays the difference between the correct
amount and the amount of tax withheld, including ITEMIZED DEDUCTIONS
the interest, incident to such error, and surcharges, • These are allowed deductible ordinary and
if applicable, at the time of the original audit and necessary expenses paid or incurred during the
investigation (Sec. 2.58.5, RR 2-98). taxable year. As a rule, these deductions require
supporting documents to justify the reduction from
Persons who are NOT ALLOWED to claim gross income.
deductions from gross income
• NRA-NETB and NRFC are subject to final tax on 1. Expenses
their gross income derived from sources within the 2. Interest
Philippines, hence, no deductions allowed to them. 3. Taxes
• RC, NRC, and RA whose income is purely 4. Losses
compensation income are also not entitled to such. 5. Bad debts
6. Depreciation
EXEMPTION ALLOWABLE 7. Depletion of Oil and Gas Wells and Mines
DEDUCTION 8. Charitable and other Contributions
An immunity or privilege, A subtraction from gross 9. Research and Development
a freedom from a charge income 10. Contributions to Pension Trust
or burden to which others
are subjected OPTIONAL STANDARD DEDUCTION
Generally receipts which Not receipts, but are • It is a fixed percentage deduction which is allowed
are excluded from taxable expenditures which are to certain taxpayers without regard to any
income permitted to be subtracted expenditure. This is in lieu of the itemized
from income to determine deduction.
the amount subject to tax • The optional standard deduction is an amount not
Theoretical personal, Reduction of wealth which exceeding:
family and living helped earn the income a. 40% of the gross sales or gross receipts of a
expenses of an individual subject to tax, such as qualified individual taxpayer; or
ordinary and necessary b. 40% of the gross income of a qualified
expense corporation
Deductions that can be claimed by an individual Itemized Deduction vs. Optional Standard Deduction
1. With gross compensation income from employer- Itemized Deduction Optional Standard
employee relationship ONLY: Deduction
a. Personal and additional exemptions; It must be substantiated It requires no proof of
b. Premium payments on health and/or by receipts expenses incurred
hospitalization insurance (PHHI) because the allowable
2. With gross income from business or practice of deduction is a percentage
profession: not exceeding 40% of
a. OSD or itemized deductions gross sales or receipts or
b. Personal and additional exemptions gross income as the case
c. PHHI may be.
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ITEMIZED DEDUCTIONS a. Wages, salaries, commissions, professional

fees, vacation-leave pay, retirement pay, and
1. GENERAL BUSINESS EXPENSES other compensation
• All the ordinary and necessary expenses paid or b. Bonuses in good faith
incurred during the taxable year in carrying on or c. Pensions and compensation for injuries if not
which are directly attributable to the compensated for by insurance or otherwise
- development d. Grossed-up monetary value of fringe benefit
- management, provided for, as long as the final tax imposed
- operation and/or – conduct of the trade, business has been paid. The fringe benefit must have
or exercise of a profession been granted to managerial and supervisory
employees, otherwise it cannot be availed as
• Requisites for deductibility of expenses deduction.
a. Paid or incurred During the taxable year;
b. The expense must be Substantiated by proof; Requisites for deductibility of bonus
c. The expense must be incurred in Trade or a. The payment of the bonus is made in good faith for
business carried on by the taxpayer (must be additional compensation;
directly attributable to the development, b. It must be for personal services actually rendered;
management, operation, and or conduct of and
trade or business of the taxpayer, or in the c. The bonus when added to salaries is “reasonable”
exercise of the taxpayer’s profession); when measured by the amount and quality of the
d. The expense must be Reasonable; services performed with relation to the business of
e. The expense must be Ordinary and necessary; the particular taxpayer.
f. If subject to Withholding taxes, proof of
payment to BIR; and 1B. Travelling Expenses
g. Expenses must Not be against public policy, • Requisites for its deductibility
public moral or law such as bribes, kickbacks, a. Reasonable and necessary expenses;
for immoral purposes. b. Incurred or paid while away from home; and
c. In pursuit of trade, business or profession.
• Ordinary expenses - It is any expense that is
normal or usual in relation to the taxpayer’s NOTE: Travelling expense includes transportation,
business and the surrounding circumstances meals and lodging (R.R. No. 2).
(General Electric, Inc. v. Collector, CTA Case No.
1117, July 14, 1963). “Away from home”
• It means away from the location of the employee’s
• Necessary expenses - is one which is appropriate principal place of employment regardless of where
and helpful in the development of taxpayer’s the family residence is maintained.
business and is intended to minimize losses or to
increase profits • Rules in deducting travel expenses
1. The employer cannot claim as a deduction the
1A. Salaries and Wages excess over the cost of a business plane ticket
• Requisites before an employer can deduct or its equivalent, whether paid directly by the
compensation payments to employees employer to the airline company or reimbursed
a. The payments must be reasonable. to the employee.
b. They are, in fact, payments for personal 2. Deductions to be claimed by the employer for
services rendered (Rev. Reg. 2, Sec. 70). the allowance which are pre-computed by the
employer on a daily basis, or reimbursement
• Inclusions in compensation for services which for the cost of meals and lodging in foreign
are allowed as deductions from gross income trips by the employee for the pursuit of
employer’s trade or business may not exceed;
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a. $150 per day for trips to US, Australia, used, although the lessor may be required to report
Canada, Europe, Middle East and Japan; the amount when received.
b. $100 per day for other places.
3. Reimbursement for travel taxes, airport fees 1E. Repairs and maintenance
and other charges, if duly receipted or • Repairs are allowed as deduction when it is minor
substantiated, may be deducted by the and ordinary, and keeps the asset in its ordinary
employer as business expenses. working condition. Major and extraordinary repairs
4. Subject to the above rules, expenses incurred are capitalized and included in determining
in attending two foreign professional depreciation expense because they tend to prolong
conventions a year shall constitute a deductible the life of the asset.
expense.
1F. Deductible Leasehold Improvements
1C. Cost of Materials • When a lessee constructed an improvement on the
• Materials and supplies are deductible only to the leased property, the costs of such improvement
amount actually consumed or used in the operation shall be depreciated over the life of the
during the taxable year, provided that the cost of improvement or the term of the lease contract
such materials and supplies has not been deducted whichever period is shorter. The computed
in determining the net income for any previous year. depreciation expense is allowed as deduction from
gross income.
Methods utilized to determine materials used
a. Actual consumption method or inventory method 1G. Representation Expenses
b. Direct purchase method • These are entertainment, amusement and
recreation expenses incurred or paid during the
1D. Rent Expenses year that are directly connected to the development,
• These are expenses incurred for the continued use management and operation of the trade, business
or possession of property to which the taxpayer has or profession of the taxpayer.
not taken or is not taking title to or in which he has
no equity other than that of a lessee, user or • Requisites for its deductibility
possessor. a. Directly connected to the development,
management, and operation of the business,
• Requisites for its deductibility trade or profession of the taxpayer; or directly
a. Payment was made as a condition to the related to or in furtherance of the conduct of its
continuous use of or possession of the trade, business or exercise of a profession
property; b. Not contrary to law, morals, good customs,
b. Taxpayer has not taken or is not taking title to public policy or public order
the property or has no equity other than that of c. Duly substantiated by adequate proof or receipt
a lessee, user or possessor; d. It must be limited to the ceiling requirement
c. Property must be used in the trade or
business; Ceiling or limitation on the amount allowed as
d. The creditable withholding tax of 5% must have entertainment, amusement and recreation expense
been withheld and paid. • Entertainment, amusement and recreation expense
shall be allowed as a deduction from gross income
• On Cash Basis, Rent is deductible when incurred but in no case shall exceed:
and paid. 1. For taxpayers engaged in sale of goods or
• On Accrual Basis, Rent is deductible when liability properties – 0.50% of net sales (i.e., gross
is incurred during the period of use. sales less sales returns or allowances and
sales discounts)
• An advance payment (prepaid rental) is not 2. For taxpayers engaged in sale of services,
deductible expense of the lessee until the period is including exercise of profession and use or
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lease of properties – 1% of net revenue (i.e., Limitation on the amount of deductible interest
gross revenue less discounts) expense
3. For taxpayers deriving income from both sale • The taxpayer’s otherwise allowable deduction for
of goods and services – the allowable interest expense shall be reduced by an amount
deduction shall in all cases be determined equal to 33% of the interest income subject to final
based on an apportionment formula taking into tax.
consideration the percentage of the net
sales/net revenue to the total net sales/net Interest Expense deductible in full
revenue, but which in no case shall exceed the 1. The business has no interest income subject to
maximum percentage ceiling provided 20% FWT
2. The interest expense is paid in favor of the
Expenses that are not considered entertainment, government.
amusement and recreation expenses
1. Expenses which are treated as compensation or Deductible Interest Expenses
fringe benefits for services rendered under an 1. Interest on taxes, such as those paid for deficiency
employer-employee relationship or delinquency, since taxes are considered
2. Expenses for charitable or fund-raising events indebtedness (provided that the tax is a deductible
3. Expenses for bona fide business meeting of tax.) However, fines, penalties, and surcharges on
stockholders, partners or directors account of taxes are not deductible. The interest on
4. Expenses for attending or sponsoring an employee unpaid business tax shall not be subjected to the
to a business league or professional organization limitation on deduction
meeting 2. Interest paid by a corporation on scrip dividends
5. Expenses for events organized for promotion, 3. Interest on deposits paid by authorized banks of the
marketing and advertising including concerts, BSP to depositors, if shown that the tax on such
conferences, seminars, workshops, conventions, interest was withheld
and other similar events 4. Interest paid by a corporate taxpayer, liable on a
6. Other expenses of similar nature mortgage upon real property of which the said
corporation is the legal or equitable owner, even
2. INTEREST EXPENSE though it is not directly liable for the indebtedness
• The cost of money incurred within a taxable year on
indebtedness in connection with the taxpayer’s Non-deductible Interest Expense
profession, trade or business. 1. Interest on preferred stock, which in reality is
• It shall refer to the payment for the use or dividend
forbearance or detention of money, regardless of 2. Interest on unpaid salaries and bonuses
the name it is called or denominated. It includes the 3. Interest calculated for cost keeping
amount paid for the borrower’s use of money during 4. Interest paid where parties provide no stipulation in
the term of the loan, as well as for his detention of writing to pay interest
money after the due date for its repayment 5. If the indebtedness is incurred to finance petroleum
exploration
• Requisites for deductibility 6. Interest paid on indebtedness between related
a. There must be an indebtedness stipulated in taxpayers
writing 7. Interest on indebtedness paid in advance through
b. The indebtedness must be that of the taxpayer in discount or otherwise and the taxpayer reports
connection with the trade, business or profession income on cash basis
c. The interest must have been paid or accrued
during the taxable year Related Taxpayers
d. The interest payment must not be in favor of a 1. Members of the same family, brothers and sisters,
relative whether in full or half blood, spouse, ancestors and
lineal descendants
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2. Stockholders and a corporation, when he holds 3. Privilege and license tax

more than 50% in value of its outstanding capital 4. Excise tax
stock, except in case of distribution in liquidation 5. Import Duties
3. Corporation and another corporation, with 6. Local Business tax
interlocking stockholders 7. Automobile Registration fees
4. Grantor and fiduciary in a trust 8. Community tax
5. Fiduciary of a trust and fiduciary in another trust, if 9. Municipal tax
the same person is a grantor with respect to each 10. Income tax paid to foreign country if not claimed as
trust tax credit
6. Fiduciary of a trust and beneficiary of such trust
Non-deductible taxes
Interest paid in advance 1. Income tax provided under the NIRC (Philippine
• Interest paid in advance through discount or income tax)
otherwise in case of cash basis taxpayer is allowed 2. GR: Income taxes imposed by authority of any
as deduction in the year the debt is paid. foreign country; XPN: When the taxpayer does not
signify in his return his desire to avail of the tax
Interest periodically amortized credit.
• If indebtedness is payable in periodic amortizations, 3. Estate tax and donor’s taxes
interest is deducted in proportion to the amount of 4. Special assessments - taxes assessed against local
the principal paid. benefits of a kind tending to increase the value of
property assessed.
Optional treatment of interest expense on capital 5. Stock transaction tax - Taxes on sale, barter,
expenditure exchange of shares of stock listed and traded
• Interest incurred to acquire property used in trade, through the local stock exchange or through initial
business or profession may be allowed either: public offering.
a. Treated as capital expenditure 6. Final taxes
b. As a deduction 7. Presumed capital gains tax
8. VAT
3. TAXES
• Taxes paid or incurred within the taxable year in Tax Credit
connection with the taxpayer's profession, trade or • The tax that was withheld by source shall be
business shall be allowed as deduction. applied as a reduction of the tax liability of the
• In the case of non-resident alien individual taxpayer in the taxable year or quarter in which the
engaged in trade or business in the Philippines income was earned or received
and a resident foreign corporation, the
deductions for taxes shall be allowed only if and to Treatment to income taxes paid in foreign countries
the extent that they are connected with income from • The taxpayer may either claim it as:
sources within the Philippines 1. Foreign tax credits against Philippine income tax
due of citizens and domestic corporations; or
• Requisites for deductibility 2. A deduction from gross income of citizens and
a. It must be paid or incurred within the taxable domestic corporations.
year
b. In connection with the taxpayer’s profession, Foreign tax credit
trade or business • It is the right of an income taxpayer to deduct from
c. Tax must be imposed directly upon the taxpayer income tax payable the foreign income tax he has
paid to a foreign country subject to certain
Deductible taxes limitations. This is to avoid the rigors of indirect
1. Documentary Stamp Tax double taxation, although not prohibited by the
2. Occupational Taxes Constitution for being violative of the due process,
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results to a tax being paid twice on the same c. Limit on tax credit computed using total
subject matter or transaction. taxable income from foreign country (as
numerator)
Persons entitled to claim tax credit
1. Resident citizens Requirements for Tax Credit
2. Domestic corporations 1. Documentation of tax that was paid
3. Members of a GPP 2. Clear indication in the tax return that he is claiming
4. Beneficiary of an estate or trust tax credit
Persons not entitled to claim tax credit 4. BAD DEBTS

1. Alien individuals, whether resident or non-residents • It is a claim that becomes worthless or uncollectible
2. Foreign corporation, whether resident or non- arising from money lent or from goods sold or
residents services rendered.
3. Non-resident citizen including overseas contracted • These are debts due to the taxpayer actually
workers and seamen ascertained to be worthless and charged off in the
books of the taxpayer within the taxable year except
Limitations when claiming tax credit those:
1. The amount of the credit in respect to the tax paid 1. Not connected with trade, business or profession;
or incurred to any country shall not exceed the 2. Between related taxpayers
same proportion of the tax against which such credit • It refers to debts resulting from the worthlessness or
is taken, which the taxpayer’s taxable income from uncollectibility, in whole or in part, of amount due to
sources within such country bears to his entire the taxpayer by others, arising from money lent or
taxable income. from uncollectible amounts of income from goods
2. The total amount of the credit shall not exceed the sold or services rendered
same proportion of the tax against which such redit
is taken, which the taxpayer’s income from sources • Requisites for deductibility
without the Philippines taxable under Title II of the a. There must be a valid and subsisting claim
NIRC (Tax on Income) bears to his entire taxable b. The claim must be connected with the
income for the same taxable year profession, trade or business
c. The claim must not be between related parties
Limit of Tax Credit Paid to Foreign Country d. The claim must be actually ascertained to be
worthless and uncollectible as of the end of the
• Formula for One Foreign Country taxable year
Taxable income A claim is ascertained to be worthless when:

from foreign Philippine 1. Debtor becomes insolvent
Tax = country within x Income 2. Debtor disappears
Credit Taxable income tax 3. Debtor died without sufficient properties to
from all sources cover his debts
• Formula for Two or More Foreign Countries e. The claim must be written off within the taxable
• Same formula as above except that the year
allowable tax credit will be the lower of the f. The debts are Uncollectible despite diligent
following: effort exerted by the taxpayer;
a. Actual tax paid to foreign countries
b. Limit on tax credit computed using
individual taxable income from foreign
country (as numerator)
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To prove that the taxpayer exerted diligent Non-depreciable Assets:

efforts to collect the debts: a. Land, apart from the improvements of physical
1. Sending of statement of accounts; development added to it, cannot be depreciated;
2. Sending of collection letters; b. Inventories or stock in trade;
3. Giving the account to a lawyer for c. Personal effects or clothings, except costumes
collection; and used in theatrical business;
4. Filing a collection case in court. d. Bodies of minerals subject to depletion;
e. Automobiles and other transportation equipment
5. DEPRECIATION used solely by the taxpayer for pleasure;
• It is the gradual diminution in the useful value of f. Building used solely by the taxpayer as his
tangible property resulting from exhaustion, ordinary residence, and the furniture or furnishing used in
wear and tear and obsolescence said building;
• There shall be allowed as a depreciation deduction
a. reasonable allowance for the exhaustion, wear Methods for computing Depreciation Allowance
and tear (including reasonable allowance for under NIRC
obsolescence) 1. Straight-line method – The annual depreciation
b. of property used in the trade or business charge is calculated by allocating the amount to be
• For intangible assets such as patents, copyrights depreciated equally over the number of years of the
and franchise, the annual allowance to reduce their estimated useful life of the tangible. It results in a
useful value is called amortization. constant charge over the useful life;
2. Declining balance method – accelerated method
• Requisites for deductibility of depreciation which writes off a relatively larger
a. The property subject to depreciation must be amount of the asset’s cost nearer the start of its
property with life of more than one year. useful life than that of the straight line;
b. The property depreciated must be used in 3. Sum of the years digit method – accelerated
trade, business, or exercise of a profession. method of depreciation expense in the earlier years
c. The depreciation must have been charged off and lower charges in the later years;
during the taxable year. 4. Any other method which may be prescribed by
d. The depreciation method used must be Department of Finance upon recommendation of
reasonable and consistent. the CIR.
e. A depreciation schedule should be attached to
the income tax return. Method to be used in depreciation of properties
f. The depreciable asset must be located in PH if used in petroleum operations
taxpayer is a NRA or FC. • It may either be straight line or declining balance
method with a useful life of 10 years or shorter, as
Depreciable Assets: allowed by the CIR.
a. Only property that is used for trade, business or • If the property is not directly related to production,
exercise of a profession or held for the production depreciation is for 5 years using straight line
of income; method
b. All kinds of tangible property (other than land) with
life of more than one year and do not form part of Method to be used in depreciation of properties
the stock in trade that are part of the inventory; used in mining operations other than petroleum
c. All kinds of intangible property (other than shares operations
of stock) with life of more than one year; § At the normal rate of depreciation if the expected life
d. Subject to exhaustion within a determinable period is less 10 years or less; or
of time, that is it has a limited useful life. § Depreciated over any number of years between 5
years and the expected life if the latter is more than
10 years and the depreciation thereon is allowed as
deduction from taxable income.
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Provided, that the contractor notifies the CIR at the end upon commencement of actual commercial
beginning of the depreciation period which depreciation extraction.
rate allowed will be used.
These two expenditures may, at the option of the
6. DEPLETION taxpayer, be treated as:
• It refers to the deduction form gross income arising a. Part of adjusted basis for depletion cost
from the exhaustion of natural resources like mines b. Deduction to compute taxable income from mining
and oil and gas wells as a result of production or operations
severance from such mines or wells.
• Importance: as the product of the mine is sold, a 7. CHARITABLE AND OTHER CONTRIBUTIONS
gradual sale is being made of the taxpayer’s capital • It is a non-operating expense, but the law allows
interest in the property. The purpose is then, to some contributions or gifts given within the taxable
enable a taxpayer to recover that capital interest year as deductions from gross income.
free of income tax at its cost or on some other
basis. • Requisites for deductibility
a. Taxpayer making the contribution must be
• Requisites for deductibility engaged in a profession, trade or business
• Depletible asset – natural resources: mines, gas b. There must be an actual payment of contribution
and oil wells or gift
• Charged off within the taxable year c. The recipient must be an entity or institution
specified by law
• For Domestic Corporations – oil, gas wells or d. The net income of the institution must not inure
mines located within and without to the benefit of any individual or private
stockholder
• Resident Corporations – gas wells and mines
located within the Philippines Contributions that are deductible in full
1. Donations to the Government of the Philippines, or
• Annual depletion deductions are allowed only to political subdivisions including fully-owned
mining entities which own an economic interest in government corporation to be used exclusively in
mineral deposits. Economic Interest means undertaking priority activities in:
interest in minerals in the place of investment a. Culture
therein or secured by operating or contract b. Health
agreement for which income is derived, and return c. Economic Development
of capital expected, from the extraction of mineral. d. Education
e. Science
Exploration Expenditures f. Human Settlement
• Expenditures paid or incurred before the g. Youth and Sports development
development stage of the mine intended to 2. Donations to Foreign institutions and international
ascertain the existence, location, extent, or quality organizations in compliance with treaties and
of any deposit of ore or other mineral. agreements with the Government.
3. Donations to Accredited NGO’s
Development Expenditures a. Exclusively for:
• Expenditures paid or incurred during the i. Cultural
development stage of the mine or other natural ii. Charitable
deposits. iii. Health
• Development stage shall begin at the time when iv. Educational
deposits or mineral ores are shown to exist in v. Scientific
sufficient commercial quantity and quality and shall vi. Social welfare
vii. Character building & Youth and Sports Dev.
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viii. Research Deferred expenses will be allowed as deduction ratably

ix. Any Combination of the above distributed over a period of not less than 60 months
b. Donation must be utilized not later than the 15th beginning with the month in which the taxpayer first
day of the 3rd month following the close of realizes benefits from such expenditure.
taxable year;
c. Administrative expense must not exceed 30% of Research and development expenditures that are
the total expenses; not deductible
d. Upon dissolution, assets shall be transferred to Any expenditure:
another non-profit domestic corporation or to the 1. For the acquisition or improvement of land or for the
State. improvement of property to be used in connection
4. Donations of prizes and awards to Athletes with research and development subject to
depreciation and depletion; and
Donations that are subject to limitation 2. Paid or incurred for the purpose of ascertaining the
1. Donations that are not in accordance with the existence, location, extent or quality of any deposit
priority plan of ore or other mineral including oil or gas
2. Donations whose conditions are not complied with
3. Donations to the Government of the Philippines or 9. CONTRIBUTION TO PENSION TRUSTS
political subdivision exclusive for public purposes • Pension plan comprises a fund intended to provide
4. Donations to domestic corporations organized retirement benefits to the employee. It is usually set
exclusively for: up after some years of operations when the
a. Scientific employer can already provide benefits to the
b. Educational employee.
c. Cultural
d. Charitable • Requisites for deductibility
e. Religious a. The employer must have established a
f. Rehabilitation of veteran Pension or retirement plan to provide for the
g. Social Welfare payment of reasonable pensions to his
employees
Limitations on deductions b. It must be Funded by the employer
Amount deductible shall not exceed: c. The pension plan is Reasonable and
a. For individuals - 10% of taxable income before actuarially sound
contributions d. The deduction is Apportioned in equal parts
b. For corporations - 5% of taxable income before over a period of 10 consecutive years
contributions beginning with the year in which the transfer or
payment is made
8. RESEARCH AND DEVELOPMENT e. The payment has Not yet been allowed as a
• Continuous development of business products, deduction
goods, and others. f. The amount contributed must no longer be
• Taxpayer may treat research or development subject to the Control and disposition of the
expenditures, which are paid or incurred by him employer
during the taxable year in connection with his trade,
business or profession as: Two General Types of Pensions
a. Ordinary and necessary expenses 1. Defined Benefit Plan – the ER handles and
deductible from the business gross income in manages the fund. The benefits that the retiree
the year the expense are paid or incurred. would receive are defined and normally based on a
b. Deferred expenses chargeable to the capital certain percentage of the salary of the EE eligible to
account but not chargeable to property subject the benefit plan.
to depreciation or depletion. 2. Defined Contribution Plan – The trust fund is
handled by a third party (insurance or bank). The
37
liability of the ER is to contribute the defined or Measurement of casualty loss

contracted periodic contribution as per agreement a. Total Loss – Actual loss is the book value of the
with the administrator. asset.
b. Partial Loss – Book value or cost to restore the
Requirements of the plan asset to its normal operating condition, whichever is
1. Reasonable and actuarially sound lower.
2. Must be approved by the BIR.
d. Net Operating Loss – It means the excess of
10. LOSSES allowable deduction over gross income of the
• It represents reductions of resources due to business in a taxable year. It comprises only of
unintended destruction or deprivation of things. operating expenses and losses that are allowed by
• It is generally allowed as deduction if related to the law as deduction from gross income
business, actually sustained during the taxable year
and not compensated for by insurance or other Operating loss does not automatically equate to
forms of indemnity. Net Loss because a taxpayer may still have other
sources of income.
Kinds of Losses
a. Ordinary Losses – losses usually incurred in e. Net Operating Loss Carry-Over (NOLCO) – his
relation to trade, profession, or business, property refers top the excess of allowable deduction over
used in business, and profit-seeking transaction gross income of the business in a taxable year. The
incidental to business. net operating loss of the business or enterprise for
any taxable year immediately preceding the current
Requisites for deductibility of Ordinary Losses taxable year, which had not been previously offset
a. It must be actually sustained in a closed and as deduction from gross income shall be carried
complete transaction over as a deduction from gross income for the next
b. It must be of the taxpayer and in relation to his three (3) consecutive taxable years immediately
trade, business, or profession following the year of such loss: Provided that:
c. It must not be compensated by insurance or • The taxpayer was not exempt from income tax
other forms of indemnity in the year of such net operating loss; and
d. If the loss resulted from casualty, robbery, theft • There has been no substantial change in the
or embezzlement, it must be reported to the ownership of the business or enterprise.
BIR from 30 to 90 days from date of discovery
NOLCO is on a first-in first-out basis.
b. Capital Losses – Losses incurred in relation to
capital asset transactions. As a rule, these are “Substantial change in ownership of the
deductible only from capital gains. business or enterprise”
The 75% equity rule (or ownership or interest rule)
Holding period shall only apply to transfer or assignment of the
• More than 12 months: 50% deductible taxpayer’s net operating losses as a result of or
• Less than 12 months: 100% deductible arising from the said taxpayer’s merger or
consolidation or business combination with another
c. Casualty Losses - losses due to storm, fire, person.
shipwreck or other casualties of property connected
with profession, trade, or business, or from robbery, The transferee or assignee shall not be entitled to
theft or embezzlement. claim the same as a deduction from gross income
except when as a result of the said merger,
A declaration of loss must be filed with the BIR from consolidation or combination, the shareholders of
30 - 90 days from the date of discovery. the transferor/assignor, or the transferor gains
control of:
38
1. At least 75% or more in nominal value of the 5. Foreign corporations engaged in international
outstanding issued shares or paid up capital of shipping or air carriage business in the
the transferee/assignee, if a corporation Philippines
2. At least 75% or more interest in the business of 6. Any person, natural or juridical, enjoying
the transferee/assignee, if not a corporation exemption from income tax
(75% equity rule)
f. Special Losses
Determination of whether or not there is 1. Wagering losses – deductible only to the
substantial change in ownership extent of gain or winnings deemed to only
Substantial change in ownership shall be apply to individuals
determined on the basis of any change in the 2. Losses on wash sales of stocks
ownership in said business or enterprise arising
from or incident to its merger, consolidation, or Wash sale - A sale of stock or securities where
combination with another person. It shall be substantially identical securities are acquired or
determined as of the end of the taxable year when purchased within 61-day period, beginning 30
NOLCO is to be claimed as deduction days before the sale and ending 30 days after
the sale.
Persons entitled to deduct NOLCO from Gross
Income G.R.: Losses from wash sale are not
1. Individuals engaged in trade or business or in deductible since these are considered as
the exercise of his profession artificial loss.
2. Domestic and Resident foreign corporation
subject to the normal income tax or preferential XPN: When taxpayer is a dealer in securities,
tax rates and the transaction from which the loss
3. Estates and trusts resulted was made in the ordinary course of
business of such dealer, the loss is deductible
Effect of NOLCO when the corporate taxpayer in full.
is subject to MCIT
The running of the three-year period for the expiry
of NOLCO is not interrupted by the fact that such ADMINISTRATIVE PROVISIONS
corporation is subject to MCIT in any taxable year
during such three-year period. However, such INCOME TAX RETURN
corporation cannot enjoy the benefit of NOLCO for 1. It refers to a formal report prepared by the taxpayer
as long as it is subject to MCIT in any taxable or his agent in a prescribed form showing an
period. enumeration of taxable amounts and description of
taxable transactions, allowable deductions, amount
An individual who claims the 40% OSD cannot of tax and tax payable to the government.
claim deduction of NOLCO simultaneously. Even if 2. It is a document which evinces a declaration under
NOLCO was not claimed, the three-year period oath of a taxpayer’s income and its necessary
shall continue to run. computation in arriving to the income tax due to be
paid.
Disqualified to avail NOLCO
1. OBUs for a foreign banking corporation and End result of filing an ITR
FCDU of a domestic banking corporations 1. Tax payable by the taxpayer. The BIR being so
2. Enterprise registered with the BOI enjoying the interested with what the taxpayer will pay.
Income Tax Holiday Incentive
3. PEZA-registered enterprise Persons Liable to file an ITR
4. SBMA-registered enterprise 1. RC with regard to his income from all sources
2. NRC on his income derived within
39
3. RA on his income derived within • For Corporations, they may elect their principal
4. NRA ETB or profession in PH place of business or the place of the legal
residence of the corporation. Generally, a
Individuals NOT REQUIRED TO FILE an ITR corporation elects his principal place of
1. An individual whose gross income does not exceed business (Main branch)
his total personal and additional exemptions for • if taxpayer as no Main branch: Central office of
dependents; the BIR
2. Individual taxpayer receiving purely compensation 2. If there is no authorized bank: to the local
income, regardless of amount, from only one treasurer’s office
employer in the Philippines for the calendar year,
the income tax of which has been withheld correctly NOTE: Rural banks are not allowed to receive payment
by said employer (Substituted Filing); of taxes. In the past, it is the District offices which
3. An individual whose sole income has been receive payment of taxes.
subjected to final withholding tax;
4. A minimum wage earner or an individual who is RULE: “Pay as you file”
exempt from income tax • File and pay if there is payment
5. Individuals receiving purely passive income
6. As an inherent limitation, giving due respect to WHEN TO FILE AND PAY TAXES
international comity 1. Individual Tax Payers
• Calendar Year – on or before April 15 of the
Corporations liable to file an ITR following year for the taxable income of the
1. Every corporation subject to tax shall render a previous year
return which shall be filed by the president, vice-
president or other principal officer, and shall be 2. Individual taxpayers who are Self-Employed or
sworn to by such officer and by the treasurer or in Practice of a Profession
assistant treasurer. XPN: FC-NETB • They are required to file and pay estimated ITR
2. General Professional Partnerships shall file, in every quarter.
duplicate, a return of its income, except items • 1st – on or before April 15
excluded from gross income, setting forth the items • 2nd - on or before August 15
of gross income and the deductions allowed, and • 3rd – on or before November 15
the names, TIN, addresses and shares of each of • 4th – within 60 days after the close of the
the partners quarter
NOTE: Corporations incurring net losses should still file 3. Corporate taxpayers
an ITR. The presumption is that corporations are • Corporations may one of the two following
already in the fourth year of operation. Thus, they are taxable years:
required to pay using the MCIT. a. Calendar Year - when to pay: every first
quarter of the year. It is to be paid on or
Substituted Filing before April 15.
• The filing of ITR was done by the employer because b. Fiscal Calendar – It begins on the day of the
his taxes are presumed to be properly withheld. first operation of the business.
When to pay: on or before the 15th day of
WHERE TO FILE THE ITR the fourth month following the closing of the
1. Regional District Offices of BIR fiscal year
2. Electronic filing system
HOW SHOULD TAXES BE PAID
WHERE TO PAY • It should be paid through cash
1. Authorized banks
40
Installment Payment of Tax Financial Statements Attached to the ITR

• Individual taxpayers are allowed installment
payment of their income tax when the tax due Gross Income is not more Statement of Net Worth
exceeds P 2,000. than P50,000/quarter and Operations
• The taxpayer, other than a corporation, may elect to Gross Income is from No need to submit financial
pay the tax in two equal installments, in which case, P50,000 to P150,000/ statements.
the tax installment dates are as follows: quarter Balance Sheet and Profit
st
a. April 15 – 1 installment on the required date of and Loss Statement
filing and payment Gross Income exceed An accountant is needed.
nd
b. July 15 – 2 installment P150,000 • Balance Sheet
• Profit-and-Loss
Special Rules Statement
1. ITR of married individuals • Comparative Profit-
• Married individuals, whether citizens, resident and-Loss Statement
or non- resident aliens, who do not derive • Schedule of income
income purely from compensation, shall file a producing properties
return for the taxable year to include the and corresponding
income of both spouses. income
• Where it is impracticable to file one return,
each spouse may file a separate return of
income but the returns so filed shall be SUBSTITUTED FILING
consolidated by the Bureau for purposes of • Substituted filing applies only if all of the following
verification for the taxable year. requirements are present:
1. The employee received purely compensation
2. Income of unmarried minors/children income (regardless of amount) during the
• The income of unmarried minors derived from taxable year;
property received from a living parent shall be 2. The employee received the income from only
included in the return of the parent. one employer in the Philippines during the
• If there is no parent: taxable year;
a. Duly authorized agent; 3. The amount of tax due from the employee at
b. Representative; the end of the year equals the amount of tax
c. Guardian; or withheld by the employer;
d. Other person charged with the care of his 4. The employee’s spouse also complies with all
person or property, the principal and the 3 conditions stated above;
representative or guardian assuming the 5. The employer files the annual information
responsibility of making the return and return (BIR Form No. 1604-CF);
incurring penalties provided for erroneous, 6. The employer issues BIR Form No. 2316 to
false or fraudulent returns each employee.
Capital Gains Tax Penalties for non-filing of returns or non-payment of

1. Shares of stock taxes or payment of taxes after due date
a. Ordinary Return – 30 days after each transaction 1. SURCHARGES
b. Final Consolidated Return – on or before April • It is a civil penalty imposed by law in addition to
15 of the following year the main tax required to be paid due to:
2. Real Property – 30 days following each sale or ü Delinquency – the failure on the part of the
other disposition taxpayer to pay the tax due on the date
fixed by law or indicated in the assessment
notice or letter of demand.
41
ü Misrepresentation – it may result from • Basis: tax which was not paid
fraudulent returns reported to the BIR by the • There shall be assessed and collected on any
taxpayer. unpaid amount of tax, interest at the rate of twenty
• The payment of surcharge is mandatory and the percent (20%) per annum, or such higher rate as
BIR cannot waive its payment. may be prescribed by rules and regulations, from
• It is a percentage on top of tax due. the date prescribed for payment until the amount is
fully paid
Classification of Surcharge
a. Simple Neglect - 25% of the amount due a. Deficiency interest – Any deficiency in the tax due
• Failure to file any return and pay the tax due on shall be subject to interest at the rate of 20% per
the date prescribed annum, which interest shall be assessed and
• Filing of return with an internal revenue officer collected from the date prescribed for its payment
other than those with whom the return is until the full payment thereof
required to be filed • It is the amount still due and collectible from the
• Fails to pay the deficiency tax within the taxpayer upon audit or investigation.
prescribed time for its payment in the notice of • It is imposed for failure to pay on the date due in
assessment the notice after investigation or audit
• Failure to pay the full or part of the amount of tax
shown on any return required to be filed under b. Delinquency Interest - There shall be assessed
the provisions of the NIRC or rules and and collected on the unpaid amount, interest at the
regulations, or the full amount of tax due for rate of 20% per annum until the amount is fully paid,
which no return is required to be filed, on or which interest shall form part of the tax, in case of
before the date prescribed for its payment failure to pay:
- Amount of tax due on any return required to be
b. Willful Neglect - 50% of the tax due or of the filed, or
deficiency tax - Amount of tax due for which no return is required,
• Presents false or fraudulent return to the BIR or
• Willful neglect to file the return within the period - Deficiency tax, or any surcharge on interest
prescribed thereon on the due date appearing in the notice and
demand of the CIR
Prima facie evidence of a false or fraudulent return • It is imposed for the failure to pay the tax due on
• Substantial underdeclaration of taxable sales, the date imposed by law.
receipts or income, or
• Substantial overstatement of deductions Deficiency Delinquency
Imposed on the
The BIR Standard delay in payment
Failure to report sales, receipts or income in an amount Shortage of the of taxes due as
exceeding thirty percent (30%) of that declared per Imposed On taxes that should provided in the
return, and a claim of deductions in an amount have been paid Formal
exceeding (30%) of actual deductions, shall render the Assessment and
taxpayer liable for substantial underdeclaration of sales, Notice
receipts or income or for overstatement of deductions. Computed From From the date From the due
prescribed for its date appearing
2. INTERESTS payment until full in the FAN until
• Its imposition is left under the discretion of the BIR, payment of the full payment of
other than the required surcharges tax due the tax due,
• Period of interest: from the date the law requires surcharge and
an individual to pay taxes to the date of actual deficiency
payment interest
42
3. Other Penalties disturbed. Failure to present proof of error in

• Fine assessments will justify judicial affirmance of said
• Imprisonment assessment. The burden of proof is on the taxpayer
• Both contesting the validity or correctness of an
assessment to prove not only that the
Commissioner of Internal Revenue is wrong but the
ASSESSMENT taxpayer is right.
• Exception: Upon proof that an assessment is
• It is a written notice and demand made by the BIR utterly without foundation, meaning it is arbitrary
on the taxpayer for the settlement of a due tax and capricious. Where the BIR has come out with a
liability that is there definitely set and fixed. “naked assessment” i.e., without any foundation
• An assessment contains the following character, the determination of the tax due is
o Computation of Tax Liabilities without rational basis
o Demand for payment within a prescribed
period Assessment cannot be questioned in courts
o Time when penalties or interests begin • It is appealable to the BIR, after which, the Court of
to accrue against the tax payer Tax appeals may assume jurisdiction upon lapse of
a certain period of inaction by the BIR or the
Requisites for a Valid Assessment decision of the latter is appealed before them.
1. In writing and signed by the BIR;
2. Contains the law and the facts on which the Ways to Contest the Validity of an Assessment
assessment is based; • The taxpayer may dispute or protest the validity of
3. Contains a demand (Formal Letter of Demand and an assessment which may involve the question of
Final Assessment Notice - FLD/FAN) for payment fact or law or both by the following:
within the prescribed period; a. Motion for Reconsideration – taxpayer
4. Must be served on and received by the taxpayer. requests BIR to review the existing records
without the need of additional evidence
Self-Assessment b. Motion for Reinvestigation – taxpayer
• This tax assessment is made by the taxpayer requests BIR to have a second look based on
himself reflecting the amount of tax due in the ITR the newly discovered or additional evidence
which he has to pay at the time of filing his tax c. Motion for Withdrawal – taxpayer requests
return. BIR of Court to remove a tax plea bargain
d. Motion for Cancellation – taxpayer requests
BIR or his duly authorized representative can issue BIR or Court to stop the tax assessment due to
an assessment prescription and violation of due process of law.
• The issuance is done after a return has been filed
and upon discovery of the BIR that the self- Assessment made by the BIR is jurisdictional
assessment was either deficient or when no return • If made by the Regional District Office (RDO): valid
was made by the taxpayer. within the district
• Failure on the part of the taxpayer to file a return • If made by the main office of BIR: valid all over the
shall not prevent the Commissioner from authorizing RP
the examination of any taxpayer.
Amendment of ITR is allowed
Presumption of Correctness • But never to ask the BIR to return his original ITR
• General Rule: Assessments are prima facie filed
presumed correct and made in good faith, with the • An amended ITR may be filed within 3 years from
taxpayer having the burden of proving otherwise. In the time the original return was filed
the absence of any irregularities in the performance
of official duties, an assessment will not be
43
Instances when CIR may make or amend a tax return • Record, data, information, papers, evidence,
• The CIR shall make or amend the return from his etc. in order to determine the proper income
own knowledge and from such information as he tax
can obtain through testimony or otherwise: ü This applies when a taxpayer failed to file
a. In case a person fails to file a required return or an ITR or the ITR is fraudulently filed
other document at the time prescribed by law; • Declaration of presumptive gross income -
b. Willfully or otherwise files a false or fraudulent meaning, the BIR disregards the ITR
return or other document ü If there is a reason to believe that the
records of the business does not reflect
Basis or grounds for deficiency assessment: the true income of the taxpayer
• No ITR filed: resolution will go to the best evidence ü Generally, because the taxpayer does not
obtainable issue pertinent receipts of expenses
• There was no amount declared as tax payable • Income from similar businesses of the same
• If a taxpayer failed to file an ITR but the taxpayer is place
not among those who are not required to file the ü The average income of the tax payer lags
same behind from the other similar businesses
Void Assessment Jeopardy assessment

• An assessment made by a BIR officer without • A delinquency tax assessment made without the
authority or an assessment made in violation of the benefit of a complete or partial investigation by an
law. authorized revenue officer who has reason to
believe that the assessment and collection of a
A Tax Return is a public record because it is filed deficiency tax will be jeopardized by delay caused
with the BIR by the taxpayer’s failure to:
• It is a confidential document because any person a. Comply with audit and investigation
cannot inquire into its details except those officers requirements to present his books of accounts
who have the power to assess a taxpayer and/or pertinent records, or
• In fact, any public personnel divulging details of an b. Substantiate all or any of the deductions,
ITR may be held administratively liable exemptions or credits claimed in his return
• Exception: when confidentiality is set aside • If the taxpayer absconds or tries to conceal
• Waiver on the part of the taxpayer as properties, encumbrances, or performing any act of
authorized by the secretary of finance which the intention is to prevent a proceeding for tax
• Generally, there is an implied waiver if the assessment.
assessment protested in court. • This is the worst assessment that a taxpayer may
receive.
Best evidence obtainable
• Pursuant to CIR’s power to make assessment, the Surprise Audit of Financial Statements
CIR shall assess the proper tax on the best • Books of accounts may be audited by the BIR by
evidence obtainable: reason of assessment only
1. When a report required by law as a basis for • Surveillance of businesses
assessment of any internal revenue tax shall • The State may employ all possible measures to
not be forthcoming within the time fixed by law ensure that an assessment is done properly.
or regulation, or However, only legal means to employ it must be
2. Any such report is false, incomplete or exercised.
erroneous
• The BIR is empowered to access all relevant or The BIR has the power to implement tax laws and
material records and dates pertaining to the tax enforce fines, and others
liability • No court may validly intervene an assessment
44
Assessment Period application of the accreditation , subject to

• It refers to the span of time allowed by the law to the evaluation and approval of the Board;
BIR to investigate a taxpayer’s tax discrepancy to
enforce collection of taxes. 3. He must be of good moral character as certified
under oath by at least two (2) disinterested persons
Date of Filing of ITR Prescriptive Period of who are either members of the Philippine Bar or A
Assessment Certified Public Accountants in good standing.
Before Due Date 3 years from due date
On Due Date 3 years from due date 4. He must not have been charged with and convicted
Beyond Due Date 3 years from actual filing with final judgement of a crime involving moral
If substantially Amended 3 years from the filing of turpitude, or found guilty of any act or omission
the amended return penalized under the Tax Code, or found guilty of
False or Fraudulent Filing 10 years from discovery of aiding or abetting or causing the commission of any
bad faith/fraud such offense by another, and.
Non-Filing 10 years from discovery of
non-filing 5. He must be a citizen of the Philippines.
ACCREDITATION OF TAX AGENTS 6. He must have completed at least six (6) hours per
• To give financial recognition to those engaged in tax year or total of eighteen (18) hours for the three
practice years of continuing professional education (CPE) in
taxation from training/seminars conducted by the
• There is the need for accreditation because
BIR (Ex. Revenue Regions, Revenue District
taxpayers are easily deceived by people pretending
Offices, etc.) or from private institutions (ex.
to be employees of the government in order to
tax/auditing firms, educational or training
solicit money from them.
institutions, professional organization, etc.) where
the number of training hours earned are printed on
Duties of a tax practitioner
the certificates and obtained not more than a year
• Self-assessment of tax
prior to the application/renewal for accreditation.
• Representation as to filing
• Appearance for the taxpayer.
TAX REMEDIES
Qualification of Tax Agents
1. He must be a Certified Public Accountant (CPA)
with current professional license from the • These are procedures or actions available both to
Professional Regulations Commission (PRC). the government to collect taxes and to the taxpayer
to avoid abuses in the payment of taxes
2. If he is not a CPA, he must have obtained at least a • Due to the “lifeblood doctrine,” the government
degree in law, Juris Doctor (JD) or it's equivalent, or applies various tax remedies to collect taxes in
a Bachelor's degree in Arts, Commerce or Business defraying its expenses.
Administration with at least (18) units in accounting • These are afforded by the taxpayer are supported
and/or taxation in a college or university recognized by the “due process of law” if the Constitution.
by DepEd, CHED or in a foreign school of known
repute or one duly recognized by it's government. In 1. Remedies Available to the TAXPAYER
addition, he must be able to demonstrate or present
convincing proof of special competence in tax a. ADMINISTRATIVE PROTEST
matter or tax practice, ex. previously acquired • It is the act by the taxpayer of questioning the
experience; at least (18) credit hours of special validity of the imposition of the corresponding
training, seminars, short ern course, etc. in taxation delinquency increments for internal revenue
obtained not more than one (1) year prior to the taxes as shown in the notice of assessment and
letter of demand.
45
• Before payment, the taxpayer can contest the • Await the final decision of the CIR’s duly
assessment within 30 days from the receipt of authorized representative on the disputed
the notice of assessment. This is made by filing assessment.
a petition for reconsideration or reinvestigation
of the tax assessment against him at the RDO ii. By the CIR
where the assessment was issued. If DENIED
• Prescriptive period provided by law to make • Appeal to the CTA within 30 days from date of
collection by distraint or levy or by a proceeding receipt of the said decision. Otherwise, the
in court is interrupted once a taxpayer protests assessment shall become final, executory and
the assessment and requests for its demandable.
cancellation.
If protest is not acted upon
i. Request for reconsideration — refers to • Appeal to the CTA within 30 days from after
a plea of re-evaluation of an assessment the expiration of the 180-day period; or
on the basis of existing records without • Await the final decision of the CIR on the
need of additional evidence. It may involve disputed assessment and appeal such final
both a question of fact or of law or both. decision to the CTA within 30 days after the
receipt of a copy of such decision.
ii. Request for reinvestigation — refers to
a plea of re-evaluation of an assessment NOTE: These options are mutually exclusive and the
on the basis of newly discovered or resort to one bars the application of the other.
additional evidence that a taxpayer
intends to present in the reinvestigation. It Once filed before the CTA, the taxpayer needs a counsel
may also involve a question of fact or of because the case becomes judicial; in effect, the rules of
law or both. court apply.
Reconsideration Reinvestigation b. TAX COMPROMISE

based on existing records based on newly- • In case of tax assessment, compromise is a
without need of additional discovered or additional contract whereby the parties, by reciprocal
evidence. evidence. concessions, avoid litigation or put an end to
It may involve a question It may involve a question one already commenced.
of fact or law or both. of fact or law or both. • Before payment, the taxpayer may offer an
It does not toll the statute It tolls the statute of amount which is lesser than the amount of tax
of limitations. limitations. liability assessed to him.
• There is a 10% surcharge of the basic
Appeal assessed tax (as opposed to the
i. By RDO/CIR Authorized Representative misconception that there is nothing to pay)
If DENIED
• Appeal to the CTA within 30 days from date of Grounds:
receipt of the said decision; or • Reasonable doubt as to the validity of assessment;
• Elevate his protest through request for • Financial incapacity of the taxpayer
reconsideration to the CIR within 30 days from
date of receipt of the said decision. Cases which may be compromised
1. Delinquent accounts
If protest is not acted upon 2. Cases under Administrative protest after issuance
• Appeal to the CTA within 30 days after the of the Final Assessment Notice to the taxpayer
expiration of the 180-day period; or which are still pending in the RO, RDO, Legal
Service, Large Taxpayer Service, Collection
46
Service, Enforcement Service, and other offices in refund or credit the tax even without a written
the National Office claim.
3. Cases covered by pre-assessment notices but • A return filed showing an overpayment shall be
taxpayer is Not agreeable to the findings of the audit considered as a written claim for credit or
office as confirmed by the review office refund
4. Civil tax cases disputed before the courts
5. Collection cases filed in courts c. Must be a categorical claim for refund or credit;
6. Criminal violations except: • It is for the CIR to afford an opportunity to
• Those already filed in courts; and correct the action of subordinate officers; and
• Those involving criminal tax fraud • To notify the Government that such taxes have
been questioned and the notice should then be
Cases which cannot be compromised borne in mind in estimating the revenue
1. Criminal tax Fraud cases, confirmed as such by the available for expenditure
CIR or his duly authorized representative.
2. Cases where Final reports of reinvestigation or d. Must be filed within 2 years from date of payment of
reconsideration have been issued resulting to the tax or penalty regardless of any supervening
reduction in the original assessment and the cause that may arise after payment. No suit or
taxpayer is agreeable to such decision by signing proceeding shall be instituted after the expiration of
the required agreement form for the purpose. the such period;
3. Cases which become Final and executory after final
judgment of a court, where compromise is e. The taxpayer must present proof of payment of the
requested on the ground of doubtful validity of the tax.
assessment.
4. Estate tax cases where compromise is requested Doctrine of Equitable Recoupment
on the ground of financial incapacity of the taxpayer. • It is a principle which allows a taxpayer, whose
5. Withholding tax cases, unless the applicant – claim for refund has been barred due to
taxpayer invokes provisions of law that cast doubt prescription, to recover said tax by setting off the
on the taxpayer’s obligation to withhold. prescribed refund against a tax that may be due
6. Criminal violations already filed in courts. and collectible from him. Under this doctrine, the
7. Delinquent accounts with duly approved schedule of taxpayer is allowed to credit such refund to his
installment payments (Sec.3, R.R. 30-2002). existing tax liability.
c. TAX REFUND NOTE: Equitable recoupment is allowed only in

• The taxpayer asks for restitution of the money common countries, not in the Philippines. The
paid as tax. There is actual reimbursement. Supreme Court, rejected this doctrine in Collector v.
UST (G.R. No. L-11274, Nov. 28, 1958), since it
Requisites for a claim of tax refund or tax credit may work to tempt both parties to delay and neglect
a. There is tax collected erroneously or illegally, or a their respective pursuits of legal action within the
penalty collected without authority, or a sum period set by law.
excessively or wrongfully collected
NOTE: Payment under protest is not required. 2. Remedies available to the GOVERNMENT
• Taxes are paid generally in money. Thus, it
b. There must be a written claim for refund filed by the can be paid in kind but this is not principally
taxpayer with the CIR done as it will create problems as to its
XPN: administration (contrary to the Canon of
Taxation: Administrative Feasibility)
• When on the face of the return upon which
payment was made, such payment appears a. DISTRAINT OF PERSONAL PROPERTY
clearly to have erroneously paid, the CIR may • It is the seizure by the government of personal
property (tangible or intangible) to enforce the
47
payment of taxes, followed by its public sale if o The total tax, or charge, together with any increment
taxes accruing thereto are not voluntarily paid. thereto incident to delinquency
• This remedy shall not be availed of if the o The expenses of distraint and the cost of
amount of tax involved is not more than P 100. subsequent sale
Kinds of Distraint Rules governing the sale

• The sale must be held at the time and place stated
• Actual Distraint in the notice.
• The government takes possession of the
taxpayer’s personal property and sells the same • It may be conducted by the Revenue Officer or
through public auction to settle the latter’s through a licensed commodity or stock exchange.
unpaid tax liabilities.
• If the sale is conducted by the Revenue Officer, it
Procedure: must be a public auction and the property shall be
• Commencement of distraint proceedings by the CIR sold to the highest bidder for cash.
or his duly authorized representatives or by the
revenue district officer as the case may be • If the sale is through a licensed commodity or stock
• Service of warrant of distraint upon taxpayer or exchange, it must be with the approval of the CIR.
upon any person in possession of the property
• Posting of notice in not less than 2 public places in • In case of stocks and other securities, the officer
the municipality or city and notice to taxpayer making the sale shall execute a bill of sale, which
specifying the time and place of sale and the
shall be delivered to the buyer and to the
articles distrained
• Release of distrained property upon payment prior corporation, company or association which issued
to sale the stocks or other securities. Upon receipt of the
• Sale at public auction to be held not less than 20 copy of the bill of sale, an entry of transfer should
days after notice to the owner or possessor of the be made in the company or association’s book and
property and publication or posting of such notice a corresponding certificate of stock shall be issued
• Purchase by government at sale upon distraint if required.
• Constructive Distraint
• Residue over and above what is required to pay the
• The government prohibits the taxpayer from
entire claim, including expenses, shall be returned
disposing his personal property to enforce
to the owner of the property sold.
collection of taxes.
• The officer making the sale shall make a written

Procedure
report of the proceedings to the CIR within 2 days
It is effected by requiring the taxpayer or any person
after the sale (Sec. 211, NIRC).
having possession of the property:
• To sign a receipt covering the property distrained;
The CIR or his deputy may purchase the property in
• To obligate himself to preserve it intact and
behalf of the National Government for the amount of
unaltered; and
taxes, penalties and cost due thereon when the bid
• Not to dispose of it without the express authority of
amount for the property under distraint is:
the CIR.
o Not equal to the amount of tax; or
o Very much less than the actual market value of the
NOTE: This is done by public auction as well. The
property offered for sale
Register of Deeds where the property is registered must
be notified.
b. LEVY OF REAL PROPERTY
• It is the seizure by the government of immovable
The amount of the property to be auctioned and to
property in order to enforce the payment of
be paid by the delinquent taxpayer would be:
48
taxes. The property may be sold at a public sale c. CIVIL AND CRIMINAL ACTIONS
if, after seizure, taxes are not voluntarily paid. • It does not make tax law penal
• It may be made before, simultaneously or after • Exoneration on the civil liability does not
the distraint of personal property of the same terminate the criminal liability
taxpayer. • No civil or criminal action for the recovery of
• It may be effected by serving upon the taxpayer taxes or the enforcement of any fine, penalty or
a written notice of levy in the form of a duly forfeiture under the NIRC shall be filed in court
authenticated certificate prepared by Revenue without the approval of the CIR.
District Officer containing: • Regional Directors may approve the filing of
1. Description of the property upon which levy is such if this power is expressly delegated to him
made; by the CIR.
2. Name of the taxpayer;
3. Amount of tax and penalty due. Civil Actions
• For tax remedy purposes, these are actions
Procedure: instituted by the government to collect internal
• Preparation of a duly authenticated certificate which revenue taxes in the regular courts after
shall operate with force of a legal execution assessment by CIR has become final and
throughout the Philippines; executory.
• Service of the written notice to the:
o Delinquent taxpayer, or Criminal Actions
o If he is absent from the Philippines, to his • Criminal complaint is instituted to penalize taxpayer
agent or the manager of the business in for the violation of the NIRC, and not to demand
respect to which the liability arose, or payment.
o If there be none, the occupant of the property, • The judgment in the criminal case shall not only
o The Registry of Deeds of the place where the impose the penalty but shall also order payment of
property is located shall also be notified; the taxes subject of the criminal case as finally
• Advertisement of the time and place of sale within decided by the CIR. Thus, a criminal action for
20 days after the levy by posting of notice and by violation of the NIRC constitutes a collection
publication for three consecutive weeks; method.
• Sale at a public auction;
o Redemption of property sold; Within 1 year Two common crimes punishable under the NIRC
from the date of sale, the taxpayer or anyone • Attempt to evade or defeat tax. The conviction or
for him, may pay to the Revenue District Officer acquittal obtained under this Section shall not be a
the total amount of the following: bar to the filing of a civil suit for the collection of
1. Public taxes; taxes
2. Penalties; • Failure to file return, supply correct and
3. Interest from date of delinquency to the date accurate information, pay tax, withhold and
of sale; and remit tax and refund excess taxes withheld on
4. Interest on said purchase price at 15% per compensation.
annum from the date of sale to the date of
redemption. d. FORFEITURE
• Further distraint and levy. • It is the divestiture of property without
compensation, in consequence of a default or
Difference with Distraint and Levy offense. It transfers the title to the specific thing
• In LEVY, the bidder awarded the real property from the owner to the government. Also, there
cannot encumber the same because of the one year would no longer be any further levy for such would
redemption period in favor of the taxpayer be for the total satisfaction of the tax due.
49
• The forfeiture need not be for the whole tax liability Books of Accounts
which will be merely for the amount equivalent to • All corporations, companies, partnerships, or
the fair market value of the property. persons required by law to pay internal revenue
• There is a one year redemption period from the date taxes shall keep a journal and a ledger or their
of such forfeiture for the taxpayer to redeem the equivalent including copies of audited financial
property. reports within 3 years from due date of filing taxes.
• It shall be kept in a native language, English or
BIR is allowed to forfeit the property subject to levy only Spanish or local dialect.
if:
1. There is no bidder; or COLLECTION OF TAXES
2. The bid amount is insufficient to pay the taxes, • By nature, the government’s power to impose taxes
penalties and costs carries with it the power to enforce contribution. As
the lifeblood of the government, taxes are not
e. TAX LIEN optional and the taxpayer thereof must make
• It is a legal claim granted to the government to payment promptly.
secure the proper payment of tax, surcharges, • The power to impose taxes is clothed with the
interests and costs on all property subject to levy or implied authority to devise ways and means to
distraint. accomplish collection in the most effective manner.
• It is enforced by seizure of the property or by sale of Without this implied power, the ends of government
the property. may fail.
• This lien is not valid against any mortgage,
purchaser or judgment creditor until notice of such Requisites of Collection
lien shall be filed by the CIR in the Office of the GR: Collection is only allowed when there is already a
Registry of Deeds of the province of city where final assessment made for the determination of the tax
property of the taxpayer is situated or located. due.
f. POSTING OF BONDS XPN: Judicial action to collect the tax liability is

• In cases where the computation of the required permitted even without an assessment when the
actual tax payment is not readily done and will taxpayer:
cause delays, an agreement shall be made to the • Files a false or fraudulent return with intent to evade
effect that a bond is secured instead of assuring the tax, or
payment of tax that may still be due. • Fails to file a return.
g. REQUIRING PROOF OF FILING ITR Prescriptive periods to collect

• Before a renewal of license to engage in trade, GR: The prescriptive period to collect taxes due is five
business or occupation or practice or profession years from the date of assessment.
can be issued to a taxpayer required by law to file • This stops when the assessment is disputed
an ITR, the same must present to the officer issuing
such license or permit proof that he or it has filed XPNs:
the ITR during the preceding year and that taxes 1. False or fraudulent return with with intent to evade the
due have been paid thereon. tax: within 10 years from discovery without need of
assessment
h. DEPORTATION IN CASE OF ALIENS 2. Failure or omission to file return: within 10 years from
• Any alien is subject to deportation if he knowingly discovery without need of assessment
and fraudulently evades the payment of any tax. 3. Waiver in writing executed before the five-year period
expires: period agreed upon
i. CLOSURE • If the decision became final, the prescriptive period
• It can be imposed on foreign corporations who will start to run; with respect to the filing of the suit,
fraudulently evades the payment of taxes. the prescriptive period is suspended
50

Taxation Law 1 - Notes Co: Less: Deductions

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Taxation Law 1 - Notes Co: Less: Deductions

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TAXATION LAW 1 – NOTES CO

NORMAL CORPORATE INCOME TAX (NCIT) Carry Forward of Excess MCIT

Gross Income Optional Gross Income Tax/ Gross Corporate

Prima facie instances of accumulation of profits DEDUCTIONS

ITEMIZED DEDUCTIONS a. Wages, salaries, commissions, professional

2. Stockholders and a corporation, when he holds 3. Privilege and license tax

Persons not entitled to claim tax credit 4. BAD DEBTS

Taxable income A claim is ascertained to be worthless when:

To prove that the taxpayer exerted diligent Non-depreciable Assets:

viii. Research Deferred expenses will be allowed as deduction ratably

liability of the ER is to contribute the defined or Measurement of casualty loss

Installment Payment of Tax Financial Statements Attached to the ITR

Capital Gains Tax Penalties for non-filing of returns or non-payment of

3. Other Penalties disturbed. Failure to present proof of error in

Void Assessment Jeopardy assessment

Assessment Period application of the accreditation , subject to

Reconsideration Reinvestigation b. TAX COMPROMISE

c. TAX REFUND NOTE: Equitable recoupment is allowed only in

Kinds of Distraint Rules governing the sale

• The officer making the sale shall make a written

f. POSTING OF BONDS XPN: Judicial action to collect the tax liability is

g. REQUIRING PROOF OF FILING ITR Prescriptive periods to collect

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