Taxation Law

2019 Bar Examinations Last Minute Lecture

• The Most Common Question in Income Taxation
• IS A LIABLE FOR INCOME TAX?
• What to look for in a question
• Classification of the Taxpayer
• Source of Income
• Realized Income – tax liability for income tax attaches
only if there is a gain realized resulting from a closed
and complete transaction ( Madrigal v. Rafferty)

Income Taxation
 Classification of the Individual Taxpayers
Resident Citizen Taxable Within and Without
NRC, RA, OCW, NRA-ETB, NRA-NETB Taxable Within the Philippines
Minimum Wage Earners
Purely Exempt from income tax

MWE with additional "compensation income

exceeding tax-exempt thresholds of:
Prior to 2018: P82,000
Train Law: P90,000
with additional "business income
Still considered MWE (Soriano vs.
Secretary of Finance
Income as MWE - Exempt
Business Income - Taxable

Income Taxation
 Classification of Corporate Taxpayers
Domestic Corporation Taxable Within and Without
RFC, NRFC Taxable Within the Philippines

Further Classification
• Ordinary Corporation – subject to RCIT of 30%
• Special Corporation – Preferential Tax Rate of 10%
• Proprietary Educational Institutions
• Non-profit Hospitals
• If the gross income from unrelated trade, business or other
activity exceeds 50% of the total gross income, the tax
prescribed shall be 30%

Income Taxation
• Exempt Organizations
• General Professional Partnerships - partnerships formed by
persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business.
• Joint Ventures or Consortium organized for the following
purposes:
• Construction projects;
• Engaged in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the Government

Income Taxation
Gross Income means all income derived from whatever source
Exclusions:
• Tax Exempt Fringe Benefit
• If the grant is required by the nature of, or necessary to the
trade, business or profession of the employer
• If the grant is for the convenience of the employer.
• De minimis
• Conforming to the ceiling
• Tax Exempt
• Not Included in the P90,000 thresold
• In excess of the ceiling
• Subject to tax only on the excess over P90,000
• Tax exempt 13th Month Pay and Other Benefits
• Beginning Jan 1, 2018 – P90,000

Income Taxation
Gross Income means all income derived from whatever source
Exclusions:
• Life Insurance
• General Rule: Exempt from tax since it is a mere
reimbursement for the loss of life
• Exemption:
• The beneficiary was chosen for a valuable consideration
• The interest earned on the insurance policy
• Insurance Premium
• Return of Premium – Exempt
• In Excess – Income
• Premiums on life insurance covering the life of an employee
paid by the employer is taxable income to the employee, where
the insured employee, directly or indirectly is the beneficiary
under the policy

Income Taxation
Gross Income means all income derived from whatever source
Exclusions:
• Life Insurance
• General Rule: Exempt from tax since it is a mere
reimbursement for the loss of life
• Exemption:
• The beneficiary was chosen for a valuable consideration
• The interest earned on the insurance policy
• Insurance Premium
• Return of Premium – Exempt
• In Excess – Income
• Premiums on life insurance covering the life of an employee
paid by the employer is taxable income to the employee, where
the insured employee, directly or indirectly is the beneficiary
under the policy

Income Taxation
Gross Income means all income derived from whatever source
Exclusions:
• Retirement Benefits received under Republic Act. No. 7641 – ½
salary for every year of service:
• Retiring employee must satisfy the dual condition of both
minimum age (Age 60) and minimum service years (5years)
• Retirement Benefits, Pensions, Gratuities Etc. received by officials
and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plant maintained by
employer: Provided
• That the retiring official or employee has been in the service of
the same employer for at least ten (10) years;
• At least fifty (50) years of age at the time of his retirement; and
• That the benefits granted shall be availed of by an official or
employee only once.

Income Taxation
Gross Income means all income derived from whatever source
Exclusions:
• Retirement Benefits, Pensions, Gratuities Etc. received by officials
and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plant maintained by
employer: Provided
• That the retiring official or employee has been in the service of
the same employer for at least ten (10) years;
• At least fifty (50) years of age at the time of his retirement; and
• That the benefits granted shall be availed of by an official or
employee only once.

Income Taxation
Deductions are the amounts, which the law allows to be deducted from
gross income in order to arrive at net income. Oh the other hand,
exclusions are something received or earned by the taxpayer that do
not form part of gross income.

The Most Common Question in Allowable Deductions

IS THE CLAIM OF DEDUCTION PROPER?

What To Remember:
• Taxpayers earning compensation income are not allowed to claim
deductions.
• Capital Expenditures does not qualify as an ordinary business
expense because the benefit to be enjoyed by the taxpayer goes
beyond one taxable year (CIR v. General Foods, Inc.)

Allowable Deductions
• All Events Test – is a test applied in the realization of income and
expense by an accrual-basis taxpayer. The test requires:
• The fixing of a right to the income or liability to pay
• The availability of reasonably accurate determination of such
income or liability, to warrant the inclusion of the income or
expense in the gross income or deductions during the taxable
year. (CIR v. Isabela Cultural Corporation)
• Limitations
• Entertainment, Amusement and Recreation Expense aka
Representation Expense
• Amount Deductible – lower amount between:
• Actual
• ½ of 1% of Net Sales – Sale of Goods or Properties
• 1% of Net Revenue – Sale of Services

Allowable Deductions
• Limitations
• Organizational and pre-operating expenses are considered
capital expenditures. However, upon start of commercial
operations, it can be amortized over 60 months
• For Interest expense arising from loans, deductible amount
shall be reduced by 33% of the interest subject to final tax
• Non-Deductible Interest
• Interest paid to persons classified as related taxpayers
• If the indebtedness is incurred to finance petroleum
exploration
• Interest on preferred stock

Allowable Deductions
• Limitations
• Net Operating Loss Carry-Over
• The net operating loss of the business or enterprise for any
taxable year shall be carried over as deduction from gross
income for the next 3 consecutive taxable years
immediately following the year of such loss
• Requisites for Deductibility:
• At the time of incurring loss, the taxpayer must
not be exempt from income tax;
• There is no substantial change in ownership of the
business or enterprise in that -
• In the case of a corporation, not less than
75% of outstanding issued shares and/or paid
up capital is held by the same persons

Allowable Deductions
• Limitations
• Optional Standard Deduction – election when made in a return
shall be irrevocable for the taxable year for which the return
was made
• 40% of Gross Sales/Gross Receipts – Individuals
• 40% of Gross Income – Corporations/Partnerships
• The partners comprising the General Professional Partnership
(GPP) can no longer claim further deduction from their
distributive share in the net income of the GPP and are not
allowed to avail of the 8% income tax rate option since their
distributive share from the GPP is already net of cost and
expenses (RR 8-2018)
• IF the partner derives other income distinct from the share
in the net income of the GPP, the deduction that can be
claimed from the other income would either be Itemized
Deduction or OSD.

Allowable Deductions
• Limitations
• Cost incurred for the expansion of school facilities of
Proprietary (Private) Educational Institutions may its option:
• Capitalized and claim depreciation as deduction; or
• Claim as outright expense.

Allowable Deductions
Estate Tax
 Composition of the Estate Tax

Decedent Gross Estate

Citizen or Resident Alien Property wherever situated

Real Property situated in the Philippines

Tangible personal property situated in the
Nonresident Alien Philippines
Intangible personal property with situs in the
Philippines, unless excluded on the basis of
*reciprocity

*Reciprocity Clause:
• When the foreign country, where such NRA is a resident and
citizen

Estate Tax
Reciprocity Clause – No tax shall be imposed with respect to intangible
personal properties of a NRA situated in the Philippines:
• When the foreign country, where such NRA is a resident and
citizen, does not impose transfer tax with respect to intangible
personal properties of Filipino Citizens not residing in that
country; or
• When the foreign country imposes transfer taxes, but grants
similar exemption with respect to intangible personal properties
of Filipino Citizens not residing in that Country.

Valuation of Gross Estate

• In General – Fair Market Value upon death
• Personal Properties – FMV
• Real Property – the higher amount between, FMW and Zonal Value

Estate Tax
Property Relationship Between Spouses
• Based on agreement
• By operations of law
• Before the effectivity of the New Family Code (Aug. 3, 1988),
apply Conjugal Partnership of Gains
• On or after effectivity of the NFC, apply Absolute Community
of Property.
Property ACoP CPG
Properties acquired before marriage Common Exclusive
Properties acquired during marriage
From exclusive property Exclusive Exclusive
From common property Common Common
Obtained from labor Common Common
From Gratuitous Transfer Exclusive* Exclusive
Fruits or income on properties
ACoP: The Fruit shall follow the source
CPG: All Fruits are common
Personal Properties Exclusive* Exclusive

Estate Tax
• From Gratuitous Transfer
• *Common if the donor/testator expressly provided that it shall
form part of the community property.
• Personal Property
• *Jewelry shall form part of the community property

Property acquired before the marriage by either spouse who has

legitimate descendants by a former marriage, and the fruits as well as
the income, if any, of such property, shall be excluded from the
Community Property (FC Art.92 Sec.3)

Estate Tax
Ordinary Deductions
Casualty Losses
• Incurred during the settlement period;
• Decedent died before 2018 – within 6 months after death
• Decedent died after 2018 – within 1 year after death
• Not compensated by insurance;
• Not claimed as deduction for income tax purposes;
• Incurred not later than the last day for the payment of the estate tax.

Estate Tax
Ordinary Deductions
Claims Against Insolvent Persons
• Value of the claims is included in the gross estate; and
• The insolvency of the debtor must be established.

Indebtedness or Claims Against the Estate

• Must not have been condoned by the creditors;
• Must have not prescribed.

Unpaid Mortgage
• The fair market value of the mortgaged property undiminished by the
mortgage indebtedness should be included in the gross estate

Unpaid Taxes
• The tax must have accrued before the death of the decedent.

Estate Tax
Transfer for Public Use
• Given to the Government of the Philippines;
• Must be testamentary in character or by of donation mortis causa;
• Exclusively for public purpose.

Vanishing Deductions
• The decedent died within 5years from receipt of the property from a
prior decedent or donor;
• The property must have formed part of the taxable estate of the prior
decedent or the taxable gift of the donor and the transfer tax relative
there have been paid;
• The property on which vanishing deduction is being taken must be
identified as the one received from the prior decedent, or from the
donor.
• No vanishing deduction on the property was allowed to the estate of
the prior decedent

Estate Tax
Special Deductions
• Standard Deduction without any required substantiation is:
• Resident/Citizen Decedent
• P1,000,000 – decedent died before 2018
• P5,000,000 – decedent died after 2018
• Nonresident Alien Decedent
• none – decedent died before 2018
• P500,000 – decedent died after 2018

• Amount Received by heirs under R.A. 4917

• Include such amount in the gross estate

Estate Tax
Special Deductions
• Family Home

Estate Tax
Business Taxes – are those imposed upon onerous transfers such as
sale, barter, exchange and importation

Types of Business Taxes:

1. Other Percentage Tax
2. Value Added Tax
3. Excise Tax
4. Documentary Stamp Tax

Exception:
Any business pursued by an individual where the aggregate gross sale
or receipts do not exceed P100,000 during the any 12 month period.

General Professional Partnerships are subject to Business Taxes (RMC

6-2003)

Business Taxes
Other Percentage Taxes

3% Business Tax on the gross quarterly sales or receipts of persons

who are otherwise subject to the VAT but whose annual sales or gross
receipts do not exceed P3,000,000 (P1,919,500 prior to 2018)

Exempt:
• Cooperatives
• Beginning January 1, 2018, self-employed individuals and
professionals availing of the 8% tax on gross sales.

Business Taxes
Value Added Tax

Business Taxes
Value Added Tax

The following are deemed sale for purposes of VAT:

• Transfer, use or consumption not in the course of business of goods
or properties originally intended for sale or for use in the course of
business;
• Distribution or transfer to shareholders or investors as share in the
profits of the VAT-registered persons, or to creditors in payment of
debt or obligation;
• Consignment of goods if actual sale is not made within 60days
following the date such goods are consigned; and
• Retirement from business, with respect to inventories of taxable
goods existing as of such retirement.

Business Taxes
Value Added Tax

Exempt Transactions - This means the sale of goods, properties or

services and the use or lease of properties are not subject to Output
VAT and the seller or lessor is not allowed to any tax credit on Input
VAT on purchases.

Normally Exempt transactions are basic necessities such as:

• Agricultural and marine food products in their original state.
Products which undergone simple processes of preparation or
preservation for the market.
• Sale of roasted chicken on a take out basis is exempt from
VAT as provide for under Section 109(A) of NIRC and as
implemented under RR17-2005. (VAT Ruling 009-07)

Business Taxes
Value Added Tax

Normally Exempt transactions are basic necessities such as:

• Agricultural and marine food products in their original state.
• Marinated, frozen, and vacuum packed boneless milkfish
is subject to 12% VAT. (BIR Ruling No. 348-2011)

• Medical, dental, hospital and veterinary services except those

rendered by professional.
• Hospital bills constitute medical services. The sales made
by the drugstore to the in-patients which are included in
the hospital bills are part of medical bills (not subject to
VAT)

Business Taxes
Value Added Tax

Normally Exempt transactions are basic necessities such as:

• Sale of Real Properties:
• Not primary held for sale to customers or for lease in the
ordinary course of trade or business.
• However, even if the real property is not primary held
for sale or for lease in the ordinary course of trade or
for lease but the same is used in trade and business of
the seller, the sale thereof shall be subject to VAT.

• Primary held for sale to customers or held for lease in the

ordinary course of trade or business, if:
• Residential lot valued at:
• Prior to Jan 1, 2018 – P1,919,500 and below;
• Beg. Jan 1, 2018 – P1,500,000

Business Taxes
Value Added Tax

Normally Exempt transactions are basic necessities such as:

• Sale of Real Properties:
• Utilized for “socialized housing” as defined by law
wherein the price ceiling per unit is P450,000

• Lease of a residential unit with a monthly rental not exceeding

P15,000, regardless of the amount of aggregated rentals
received during the year.
• “unit” shall mean an apartment unit in the case of
apartments, house in the case of residential houses; per
person in the case of dormitories, boarding houses and bed
spaces; and per room in case of rooms for rent. (Sec. 3, RR
16-2011)

Business Taxes
Value Added Tax

Normally Exempt transactions are basic necessities such as:

• Lease of a residential unit with a monthly rental not exceeding
P15,000, regardless of the amount of aggregated rentals
received during the year.
• Where the monthly rental per unit exceeds limit but the
aggregate of such rentals of the lessor during the year do
not exceed P3,000,000 shall likewise be exempt from VAT,
however, the same shall be subjected to 3% percentage tax.
• In case of mixed transactions:
• Gross Receipts from rentals not exceeding limit shall
be exempt from VAT and 3% Percentage Tax
regardless of the aggregate annual gross receipts.

Business Taxes
Value Added Tax

Normally Exempt transactions are basic necessities such as:

• Lease of a residential unit with a monthly rental not exceeding
P15,000 regardless of the amount of aggregated rentals
received during the year.
• In case of mixed transactions:
• Gross Receipts from rentals exceeding limit shall be
subject to VAT if the annual gross receipts from said
units only exceed P3,000,000. Otherwise, the gross
receipts shall be subject to 3% percentage tax.

Business Taxes
Value Added Tax

Business Taxes
Value Added Tax

Business Taxes
Value Added Tax

Zero Rated Sales - the government doesn’t tax its retail sale but allows
credits for the value-added tax (VAT) paid on inputs.

• Sale to Persons or Entities Deemed Tax-exempt under Special Law

or International Agreement (Also Known as Effectively Zero-Rated
Sale)
• Sales of goods or property to persons or entities who are tax-
exempt under special laws, such as:
• Subic Bay Metropolitan Authority (SBMA)
• Philippine Economic Zone Authority (PEZA)
• Sales of goods or property to persons or entities who are tax-
exempt under international agreement, such as:
• Asian Development Bank (ADB)
• International Rice Research Institute (IRRI)

Business Taxes
Value Added Tax

Business Taxes
Value Added Tax

Enhanced Refund System

• Grants refunds of creditable input tax within 90days from the filing
of the vat refund application with the BIR; Provided that, all
applications filed from January 1, 2018 shall be processed and
decided within 90 days from the filing of the vat refund application.
• The 90-day period to process and decide shall start from the filing
of the claim for refund up to the release of payment.
• The claim is considered to have been filed only upon submission of
the official receipts or invoices and other documents in support of
the application.

Business Taxes
Value Added Tax

San Roque Doctrine

• Section 112 of the Tax Code provides that the taxpayer may file an
administrative claim for VAT refund with the BIR within two years
after the close of the taxable quarter when the sales were made or
within two years from the date of cancellation of registration. The
BIR commissioner may grant the claim within 120 days from the
date of submission of complete supporting documents. If the claim
is denied or the BIR commissioner does not act on the claim within
the 120-day period, the taxpayer may appeal the decision or the
unacted claim with the Court of Tax Appeals (CTA) within 30 days
from the receipt of the decision denying the claim or after the
expiration of the 120-day period.

Business Taxes
Value Added Tax

San Roque Doctrine

• Section 112 of the Tax Code provides that the taxpayer may file an
administrative claim for VAT refund with the BIR within two years
after the close of the taxable quarter when the sales were made or
within two years from the date of cancellation of registration. The
BIR commissioner may grant the claim within 120 days from the
date of submission of complete supporting documents. If the claim
is denied or the BIR commissioner does not act on the claim within
the 120-day period, the taxpayer may appeal the decision or the
unacted claim with the Court of Tax Appeals (CTA) within 30 days
from the receipt of the decision denying the claim or after the
expiration of the 120-day period.

Business Taxes
Value Added Tax

San Roque Doctrine

• BIR Ruling No. DA-489-03, issued on December 10, 2003 stated
that the taxpayer need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of petition
for review.
• CIR v. Aichi (Oct. 6, 2010). The 120 + 30 day period is not only
mandatory, but also jurisdictional. The non-observance of which
will make the judicial claim premature. It was also clarified that the
phrase “within two years after the close of the taxable quarter when
the zero-rated or effectively zero-rated sales were made” refers to
claims filed with the BIR, and not to appeals filed with the CTA.

Business Taxes
Value Added Tax

San Roque Doctrine

• The Supreme Court held that, as an exception to the mandatory 120
+ 30 day period, a judicial claim for VAT refund which was filed
with the CTA before the lapse of the 120-day period is considered to
have been timely made if such filing occurred on or after Dec. 10,
2003 (date of issuance of BIR Ruling No. DA-489-03) but before
Oct. 6, 2010 (date of promulgation of Aichi case).

Business Taxes
Recovery of Tax Erroneously or Illegally Collected

The claim under Section 229 of the Tax Code refers to:
(1) the administrative claim which the taxpayer must file within two
years with the BIR; and
(2) the judicial claim, which must commence with the CTA within the
two-year period, in case the BIR fails to act on the action for
refund.

Based on the rules on claims presented above,

• CIR effectively has the whole two-year period to evaluate the same
assuming the taxpayer immediately files the said claim.
• the taxpayer has until the end of the two-year period stated in
Section 229 of the Tax Code within which to file a judicial claim.

Remedies
Recovery of Tax Erroneously or Illegally Collected

Based on the rules on claims presented,

• if the CIR actually denies the claim within the two-year period, the
taxpayer should file a judicial claim as well with the CTA, likewise
within 30 days from the receipt of the denial.

Remedies
Recovery of Tax Erroneously or Illegally Collected

Supreme Court has also laid down several rules to determine the
commencement of the two-year period as prescribed under Section 229
of the Tax Code.
• When the tax sought to be refunded is illegally or erroneously
collected, it commences from the date the tax was paid
(Commissioner of Internal Revenue vs. Victorias Milling)
• When the tax is paid only in installments or only in part, it
commences from the date the last or final installment of payment
was made (Collector of Internal Revenue vs. Prieto)
• In case the taxpayer merely made a deposit, it is counted from the
conversion of the deposit to payment (Union Garment vs. Collector
of Internal Revenue).

Remedies
Recovery of Tax Erroneously or Illegally Collected

Supreme Court has also laid down several rules to determine the
commencement of the two-year period as prescribed under Section 229
of the Tax Code.
• In the instance that tax has been withheld from source, it is counted
from the date the withholding tax falls due at the end of the taxable
year (Gibbs vs. Commissioner of Internal Revenue).

Remedies
Protesting Assessment

Protest administratively
• within 30 days from receipt of assessment, by filing a request for
reconsideration or reinvestigation
• submit within 60 days from filing the protest, all relevant
supporting documents have been submitted ; otherwise, the decision
shall become final, executory and demandable.

If the protest is denied in whole or in part, or is not acted upon within

180 days from submission of documents, the taxpayer may appeal to
the Court of Tax Appeals within 30 days from receipt of the decision,
or from the lapse of the 180 day period; other wise, the decision shall
become final, executory and demandable.

Remedies
Protesting Assessment

Taxpayer has the option to appeal in court within 30 days after the
expiration of the 180-day period for Commissioner of Internal Revenue
to act on the disputed assessment or wait for the final decision of the
CIR and appeal the same within 30 days from receipt of the decision
(Lascona Land Co., Inc. vs CIR)

The option to appeal tax assessment in court are mutually exclusive

and resort to one bars the application of the other. (RCBC vs. CIR)

Remedies