Taxation Law 2 (TaxRev

Tax2 Reviewer

Alf Bambi Carlos Deli Jonah Ron Rybi She TR

Special Acknowledgment to: Alf, Erika, Jovit, Maki, Ron, She

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ESTATE TAX Q: What is an Estate Tax? A: An estate tax is a tax on the privilege of transmitting property at death which is measured by the value of the property at the time of the death of the decedent. Estate tax is the tax on the right to transmit property at death and on certain transfers by the decedent during his lifetime which are made by law the equivalent of testamentary dispositions. (De Leon) Q: When does the estate tax accrue? A: It accrues at the time of death irrespective of whether the heirs took possession or enjoyment of the property. Q: What does Estate Tax include? A: property transmitted at death and lifetime transfers bur regarded as testamentary dispositions. Q: Suppose X, a decedent died, leaving 3 heirs (A, B, C). X had 3 apartments (M, N, O). Each of his heirs inherited at least one of the decedents apartments (i.e., A took M apartment, B took N) Is the estate tax payable by A, B, and C? A: No. Estate tax is a transfer of a net estate to the heirs but not a transfer of the net estate to a specific heir. Q: How does the net estate complement income taxation? A: Estates are also taxpayers. What is not caught in life shall be caught in death. Q: What is the concept of gross estate? A: It includes all properties of the decedent, real or personal, tangible or intangible (when resident or citizen). But in case of non resident alien, it includes all those within and if the situs is here in the Phils. Q: Is it accurate to say that only the assets owned by the decedent at the time of his death would form the gross estate that assets or interests of 3rd parties would not form the gross estate? A: No. Gross estate includes not only assets of decedent at the time of his death but also lifetime transfers (such as transfers in contemplation of death, revocable transfers). Q: Who pays the estate tax?

A: The administrator is the taxpayer of the estate tax. In the case of Estate of Juliana de Gabriel, SC ruled that when an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator who has the legal obligation to pay and discharge the debts of the estate and to perform the orders of the court. In the first place, the administrator pays using the funds of the estate. Q: What if the estate administrator has been granted a clearance as the estate has already been distributed, who pays? A: The heirs are liable to estate tax, even if the estate has already been distributed.

Decedents Interest Q: What is the decedents interest? A: Sec. 85 (A) Decedents Interest. To the extent of the interest therein of the decedent at the time of his death.

Q: If the decedent was entitled to a year end bonus paid on December but he died on July. The bonus was paid on December. Would the bonus be part of the gross estate? A: No, because it did not accrue at the time of the decedents death. But it is an income of an estate but not a part of the gross estate. Q: Suppose decedent is a contractor. He has a building contract. He did a flyover. The contractor is to be paid in two years by 4 installments but before the payment of the 3rd installment, he died. What would be part of his estate? A: The payment for the 3rd and 4th installment did not accrue at the time of the death but after the death. It will not form part of the gross estate because the law says the value at the time of death, the property at the time of death. It would form part of the estate not for estate tax purposes. It goes to the estate as income of the estate subject to income tax, not part of the

estate for estate tax purposes. Q: X is a consultant of a corporation. He was paid on a monthly basis. He gets his salary regardless of services actually rendered. He died in May but the salary was paid in July. Would it form part of the estate? A:

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Q: How about dividends declared and paid after the decedents death, would they be part of the gross estate? A: No. It is an income of the estate but not part of the gross estate for estate tax purposes. In dividends, what is important is the date of declaration of the dividends, not the date of the receipt of the dividends. Q: A and B opened a joint account (A or B) where either A or B may withdraw. B died. Would this be a part of Bs estate? A: Yes, but in order for A to claim the whole amount for himself, A would have to show that B was stripped of his right over the account and such was transferred to A after his death Q: A and B opened a joint account (A and B) where either A or B may withdraw. B died. Would this be a part of Bs estate? A: Q: A, B, C bought a property, so they co-own it. However, it was C who paid the purchase price. C died. Is the part of Cs estate, the whole or 1/3 of the property? A: Only 1/3 because of the co-ownership existing between them, except if it is shown that C actually own the entire interest. Other evidence could be shown in order to prove decedents interest.

Transfer in Contemplation of Death Q: What is a transfer in contemplation of death? A: It means that it is the thought of death, as a controlling motive, which induces the disposition of the property. Q: Are transfers in contemplation of death transfers in expectation of death? A: No, its not the general expectation of death, since every person would die. Q: Supposing you have a ballroom dancer, a very healthy guy. He goes ballroom dancing every night. He tells his daughter that he will be giving his land because he may die anytime. Ten days after, he die. Is that a transfer in contemplation of death? A: Yes, that would be a donation mortis causa or a transfer in contemplation of death because of the proximity of the date of giving and the date of

death. (Bar Ops Stenographic Notes)

Q: Supposing X was suffering from lung cancer. X tells his daughter that he is giving to her his property because he was ill. X died two years after. Is that a transfer in contemplation of death as against the previous case of 5 days after? A: That would still be transfer in contemplation of death because the impelling motive was the thought of death, as he was terminally ill. (Bar Ops Stenographic Notes) Q: Supposing a decedent, A, the father, suffering from mental impairment but still sane enough to execute a transfer, transfers the property. A tells his son, Im transferring this to you because Im mentally ill, I may soon become insane. Not only did he become insane, he died. Would that be a transfer in contemplation of death? A: No, because it was not in contemplation of death. It was in contemplation of an incapacity, not death. (Bar Ops Stenographic Notes) Q: Supposing X gives property to Y and tells Y that X is giving this property to Y so that Y can improve his life. Thirty days after X died. Could that be transfer in contemplation of death? A: No because death was never the impelling cause, never the controlling motive, never the particular concern that prompted the transfer. If the reason for the transfer is the thought of better living, the thought of a good life, it would not be in contemplation of death. (Bar Ops Stenographic Notes) Q: What is the basic reason why a transfer in contemplation of death (or the passing of title during the lifetime of the decedent) part of the gross estate? A: Since it is really a testamentary disposition. Q: Give an example of a transfer in contemplation of death? A: For instance X was very ill when he made the transfer, it is important that X knew that he was very ill so that it could be considered in contemplation of death. When the decedent made the transfer with the belief that he is healthy, it could not be considered in contemplation of death. Death must be the compelling motive. (US vs. Wells) Q: How is a transfer in consideration of death made? A: Sec. 85 (B) x x x by trust or otherwise.

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Q: X told Y that he may die soon so he left a very expensive car to Y. Is this considered a transfer in contemplation of death? A: Yes, because there is a thought of death. Q: What is the transfer was made without the decedent knowing that he is ill, is it a transfer in contemplation of death? A: No, the decedent should have knowledge of his ill condition. Q: A, 70 years old and suffering from cancer, has a real property having a fair market value of P10M, but he sold it for P9M telling the buyer that he is going to die. He died afterwards. Is it a transfer in contemplation of death? A: No, because there is an adequate consideration. This consideration takes it away from the gross estate.

Revocable Transfer Q: What is a revocable transfer? A: Yung bigay na bawi You give but you retain control, possession, and enjoyment. What you have given under the scheme forms part of the gross estate. (Bar Ops Stenographic Notes) Q: Are revocable transfers considered as part of the gross estate? A: Yes, because these are considered as not having left the decedent/grantor. Q: Suppose that A gave property to B under a revocable trust. Ten days before his death he said to the beneficiary and to the trustee that he is very ill and he may die soon so he is revoking his power to revoke. He died. B considered this as an irrevocable trust contending that it is not part of the gross estate. Would that form part of the gross estate? A: Yes, because when he revoke the power to revoke, he revoke it in contemplation of death. Q: Suppose Dad made a revocable transfer to son but Son paid Dad P8M. The property is valued at P9M. Dad died. Is it part of his estate? A: No because there is an adequate consideration which means that it left the estate.

General Power of Appointment Q: What is a general power of appointment? A: It refers to the right of the decedent to designate any person including himself who shall

enjoy or possess certain property from the estate. (De Leon) Q: Why is the general power of appointment part of the gross estate? A: It would form part of the estate because it could have been his property. He could give it to himself and therefore, under our estate tax law, it was as if that property was given to himself at the time of his death. Q: What are the requisites for the taxability of appointed property? A: The value of the appointed property is includible in the gross estate of the decedent if the following requisites are present:

1. The existence of general power of appointment

2. An exercise of such power by the decedent by will or by deed

3. The passing of the property by virtue of such exercise (De Leon)

Q: How is a general power of appointment made? A: Sec. 85 (D) provides:

1. by will 2. by deed in contemplation of death 3. by deed to take effect at death 4. by deed where decedent retained for

himself several rights pertaining to his property

Q: What are the rights that the decedent retained for himself in a general power of appointment? A: As provided in Sec. 85 (D)

1. possession or enjoyment of the property 2. income or fruits of the property 3. right to designate the person who may

have right to possession, enjoyment, or to the fruits.

Q: Can the decedent designate or appoint any person in the general power of appointment such that he may appoint even himself despite the fact that this property was transferred to the donee? A: Yes, the decedent may be appointed if he wanted to, so this is why it is part of the decedents estate. Q: What is the difference between a special from a general power of appointment? A: It is general when it authorizes the decedent to appoint any person he pleases, including himself, thus having as full dominion over the property as though he owned it.

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It is special when he can appoint only among a restricted or designated class of persons other than himself. (De Leon) Q: Are properties transferring under a special power of appointment part of the gross estate? A: No. because the decedent is restricted to a specific or special class of persons, which means that he cannot even appoint himself.

Proceeds of Life Insurance Q: Are proceeds of life insurance part of gross estate? A: Yes, but, as provided in Sec 85 (E), only to the extent of the amount receivable by the estate of the deceased , his executor, or administrator. Q: Suppose A got an insurance policy where Y was designated as a revocable beneficiary, but A died. Is the proceeds part of the estate? A: The proceeds do not belong to the estate, but to Y. However, the mere fact of revocability only makes it part of the Estate, there it is taxable. To be irrevocable, it must be expressly stated.

Transfers for Insufficient Consideration Q: In a transfer for insufficient consideration, suppose A transferred a property worth P10M to B, B paid A P2M, what forms part of As gross estate? A: P8M is part of Gross estate for purposes of computing the net estate. In gift situation, the excess is considered as the gift, taxable. Q: Are all transfers for insufficient consideration part of the gross estate? A: No, for this kind of transfer to be included in the gross estate, the transfer must also be in contemplation of death, otherwise, the excess would be considered as a gift. Q: What would be the tax treatment if the transfer for insufficient consideration pertains to a real property that is a capital asset? A: It would not be subject to estate tax, but to provisions of Sec. 24 (D) (6% of fair market value or gross selling price, whichever is higher). Q: Suppose A owned a property worth P10M, then he transferred this property to B. The next day, A died. After 3 months, B sold this property for P50M. What would be the value included in the estate?

A: It would be the P10M the value of the property as the time of the decedents death since the law says that it should be the value of the property at the time of death.

Deductions

1. Funeral Expenses

Q: Suppose text messages were made to inform the death of the deceased, would it be deductible? A: Yes. Sec. 86 (A) provides x x x by deducting from the value of the gross estate: (1) (a) For actual funeral expenses, or in an amount equal to 5% of the gross estate, whichever is lower, but in no case to exceed P200,000. The term funeral expenses is not confined to its ordinary or usual meaning. They include: Telecommunication expenses incurred in informing relatives of the deceased. (De Leon) Q: During As funeral, B, his relative, paid all the funeral expenses. Are these expenses deductible? A: No, because expenses must come from the estate. Q: Are monuments and tombstones deductible as funeral expenses? A: The test to be deductible is that it should pertain to the expenses preceding the burial. If these were made after the burial it would not be deductible as funeral expenses. Q: Suppose funeral expenses costs P1.5M, however, 5% of the gross estate is 500k, Can the P1M excess be deductible as a claim against the estate? (Note: the P1M is not deducted as a funeral expense but rather an indebtedness of the estate) A: No. Otherwise, it would violate the statutory limitation. Moreover, for indebtedness to be deducted, it must be incurred prior to the death.

2. Judicial Expenses of Estate Settlement Q: Suppose a CPA was hired to look for the decedents assets, P10k was paid for such services. Is it deductible? A: Yes, as long as it is important for the settlement of the estate. Sec. 86 (1) (b) For judicial expenses of the testamentary or intestate proceedings.

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Q: Suppose A was designated by the probate court as an administrator of the decedents estate. However, as a condition for the office, the probate court required A to post a bond having a premium amount worth P30k, is this amount deductible to the estate? A: No. This is not for the settlement of the estate but in the nature of a qualification for office. Q: Suppose an heir hired a lawyer to protect his interest in the estate. He spend P100k. Is it deductible? A: No, not an expense for the settlement of the estate. The Supreme Court ruled that attorneys fees incurred by the heirs in asserting their rights in the estate are not expenses essential to the settlement of the estate. Only expenses essential to the proper settlement of the estate are deductible. Q: Supposing that notarial fees were paid for the extrajudicial settlement of the estate, would this be deductible? A: Yes. In CIR vs. Pajonar, the Supreme Court ruled that expenses necessary for the settlement of the estate should be deducted, although the Tax Code specifies judicial expenses

3. Claims against the Estate Q: The estate is indebted to A, but the debt instrument was notarized a week before the decedents death. May this debt instrument used as a valid deduction? A: No. Law looks at it only as a manufactured document. To be deductible, it must be duly notarized at the time the indebtedness was incurred. Sec. 86 (A) (1) (c) For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within 3 years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. Q: What if the loan is contracted within 3 years prior to the death of the deaceased? A: The administrator or executor required to submit a statement showing the disposition of the proceeds of the loan. Q: What is the purpose of this within 3 year rule?

A: To avoid fabrication. Q: Can funeral expenses exceeding P200,000 be deducted as claims against the estate? A: No, it cannot be claimed as a deduction. 4. Bad Debt Deduction Sec 86 (A) (1) (d) For claims of the deceased against insolvent persons where the value of the decedents interest therein is included in the value of the gross estate Q: What is the requirement in this deduction? A: You have to put the uncollectible receivables in the estate before getting a claim. Also, you cannot just claim that an indebtedness is insolvent. You must show that the debtor is financially incapable of paying. (Bar Ops Stenographic Notes) Q: What is the tax benefit in including the bad debt (or insolvent claim) and then deducting it? A:

5. Unpaid Mortgages Sec. 86 (e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedents interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate. Q: What do deductions for unpaid mortgages include? A: It includes the mortgaged property undiminished by indebtedness in the gross estate. This means that you have to include the mortgage property in the gross estate undiminished by the indebtedness before claiming the unpaid mortgages as a deduction because the fair market value of the property could be much higher than the mortgage indebtedness.

6. Losses Sec. 86 (e) x x x There shall be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft, or embezzlement, (fortuitous event), when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a

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deduction for income tax purposes in a income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax.

7. Any Indebtedness

Tax

Q: Are taxes deductible to the estate? A: Yes, Sec. 86 (e) provides for any unpaid mortgages upon, or any indebtedness. Indebtedness includes tax. Q: What taxes are deductible? A: Taxes accruing before the death. Sec 86 (e) x x x but not including any income tax upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax.

Unpaid Subscriptions

Q: During the lifetime of the decedent, he subscribed to a corporation. Worth P1M, but he simply paid 25%. Suddenly the corporation became financially unstable. The Board of Directors issued a call/ pay up. Decedent died before paying up. Would the 75% be considered a claim against the estate for indebtedness? A: Yes, this is a valid claim against the estate.

8. Vanishing Deduction

Q: What is the rule with regard to Vanishing Deduction as provided in Sec. 86 (A) (2)? A: There must be a prior decedent transferor and a current decedent transferee who died within 5 years after the death of the transferor. Q: Suppose A had properties here and abroad. A died. B inherited these properties. Later B died. Which is deductible? A: Only properties situated in the Philippines. Sec. 86 (A) (2) x x x any property forming a part of the gross estate situated in the Philippines.

9. Transfer for Public Use Q: Suppose decedent made a transfer in favor of a NGO, is it deductible as transfer for public use? A: No. it should be for the government, not for a non-government organization.

10. Family Home

Sec. 86 (4) The Family Home An amount equivalent to the current market value of the decedents family home: Provided, however, That if the said current fair market value exceeds P1M, the excess shall be subject to estate tax. AS a sine qua non condition for the exemption or deduction, said family home must have been the decedents family home as certified by the barangay captain of the locality. Q: Is the family home of a decedent (civil status: single) deductible? A: Yes, as long as he is the owner. Q: Suppose decedent has 2 family homes, would the choice of one suffice? A: Yes, as long as it was certified by the barangay captain. It must be shown his actual residence. Q: Suppose a wife was legally separated from her husband. The husband retained in his custody the family home. The wife died. Is the family home deductible to the wifes estate? A: Yes, it is within the statutory limitation. Q: Suppose a family home worth P2M was leased for P500k. He rent an apartment at P10k per month. Would the family home deduction apply? A: Yes, as long as it is still his family home. There is no need for actual residence. Q: Suppose the decedent lived in an ancestral house for 5 years. It belong to his mother but was constructed by his uncle. Is it deductible to the decedents estate? A: No, the family home must be owned by the decedent. Q: A, a single decedent, lived with his parents, can his estate claim family home deduction? A: No, in order to avail this deduction he must own the family home. Q: Suppose the decedent has a house in Baguio worth P2M where he lives there for 6 months per year, and the decedent also has a house in Manila worth P10M where he also lives there for 6 months per year, which family home would be deducted? A: Choice of which value to deduct is immaterial as there is a P1M limitation to this deduction.

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Q: What if the family home was bought by conjugal funds, is it deductible? A: Yes, the one-half share of the surviving spouse in the family home is deducted from the gross estate to arrive at the net estate. Q: How about the share of the surviving spouse in the conjugal funds, is it deductible? A: Yes. The surviving spouse exclusive property is not included in the decedent spouses estate. Sec. 85 (H) Capital of the Surviving Spouse The capital of the surviving spouse of a decedent shall not be deemed a part of his or her gross estate.

11. Medical Expenses Sec. 86 (A) (6) Medical expenses incurred by the decedent within one year prior to his death which shall be duly substantiated with receipts: Provided, that in no case shall the deductible medical expenses exceed P500,000.

Q: What if the medical expenses amounts to P1M, would the excess of P500K be claimed as a claim against the estate? A: No, if it is already covered by one category of deductions already, you cant put it under a different category because this would violate the statutory limitations.

Determination of Estate Value Q: How do you value the property? A: Sec. 88 (B) Properties The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is the higher of (1) the fair market value as determined by the Commissioner, or (2) the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. Q: How do you value the jewelry of the decedent? A: By fair market value, by comparing it with other jewelries or with the supplies at the pawnshop. Q: A made a transfer in contemplation of death in 1989. A died in 1999. How do you value property in contemplation of death? A: The value of the property at the time of death (1999).

Q: Suppose at the time of transfer the property was worth P10M, but at the time of death it was P15M. What would be the value? A: P15M because this is the value at the time of death. Sec. 88 (B) The estate shall be appraised at its fair market value as of the time of death. Q: Suppose A gave to B in contemplation of death cash worth P10M. When A died, B only have P5M. What would be included in the gross estate? A: P10M, otherwise the tax provision would be defeated. In the case of cash or money, it should be the value at the time of transfer and not at the time of death.

Computation of Non-resident Alien Decedents

Estate Tax Q: Is the gross estate the same in all kinds of decedents? A: No. (i.e., non resident alien decedent) The property of a non resident alien decedent without the Philippines is not subject to estate tax. Sec. 104 provides x x x where the decedent was a non-resident alien at the time of his death his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his gross estate Q: Are all properties of the non resident alien decedent without the Philippines NOT subject to tax? A: No. Sec. 104 states: x x x considered as situated in the Philippines

1. Franchise which must be exercised in the Philippines

2. Shares, obligations, bonds issued by any domestic corporation

3. Shares, obligations, bonds by any foreign corporation 85% of the business located in the Philippines

4. Shares, obligations, bonds by a foreign corporation having a business situs in the Philippines

5. Shares, rights in any partnership, business, or industry established in the Philippines.

Q: If it is a resident alien decedent, what would be the rule? A: A citizen and alien resident decedent are treated alike. Their properties within and without the Philippines are subject to estate tax.

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Q: Suppose X, an alien, lived in the Philippines. X acquired a car, PLDT shares, IBM shares, savings (3 years), account in PNB Manila, savings in PNB (New York). Then he left for US and acquired similar properties. He lived and died there. What forms part of his estate? A: Q: Same question, at the time of his death, is he a resident or a non-resident? A: Q: Same question but assuming that he died as a non resident alien, what are included in the gross estate? A: IBM shares are not included unless 85% of its business is located in the Philippines. Q: Suppose a non resident alien decent has shares in AOL which have a 100% subsidiary in the Philippines, will it be included in the gross estate? A: No, Equity investment is not doing business in the Philippines. Q: Suppose an American decedent died having a promissory note issued by a Filipino businessman, and the BIR argued that the promissory note has a business situs in the Philippines referring to Sec. 104 (obligations considered as situated in the Philippines), is it part of the estate? A: No. the law speaks of institutions or corporations and not individual obligations (Sec. 104 x x x obligations by any corporation)

Reciprocity Q: When would the intangibles mentioned in Sec. 104 not considered part of gross estate? A: When there is reciprocity. Reciprocity in that section is when the foreign country of the non-resident decedent allows a similar exemption to a non-resident Filipino, meaning the intangibles of the non resident Filipino in that foreign country of the non resident decedent would exempt the intangibles similarly. Q: Although Sec. 104 states five instances where the intangible property of the non resident alien decedent is included in the computation of his estate, are there instances where the computation of the intangible property of the non resident alien decedent would not be included in the estate tax?

A: Yes, if there is reciprocity. Sec. 104 x x x Provided still further, That no tax shall be collected in respect of intangible personal property:

(a) if the decedent at the time of his death was a citizen and resident of the foreign country which at the time of his death

did not impose a transfer tax in respect

of intangible personal property of

citizens of the Philippines not residing in that foreign country.

(Alien country does not tax intangibles of Pinoys not residing there) (b) If the laws of the foreign country of

which the decedent was a citizen and resident at the time of his death allows a similar exemption from transfer or

death taxes in respect of intangible personal property owned by citizens not residing in the Philippines

(Alien country exempts from death tax intangibles of Pinoys not living there)

Q: Can the estate of the non resident alien decedent claim exemption even if there just partial reciprocity? A: No. The Supreme Court held in CIR vs. Fisher: Reciprocity must be total with respect to transfer or death taxes of any and every character. If any of the two states collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, the reciprocity does not work. This is the underlying principle of the reciprocity clauses in both laws.

Exempt Transmissions Sec. 87. Exemption of Certain Acquisitions and Transmissions. The following shall not be taxed:

(A) The merger of usufruct in the owner of the naked title;

(B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary.

(C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and

(D) All bequests, devises, legacies, or transfers to social welfare, cultural, and charitable institutions, no part of the net

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income of which inures to the benefit of any individual: Provided, however, That not more than 30% of the said bequests, devises, legacies, or transfers shall be used by such institutions for administration purposes.

Q: What is the basis for the exemption in Sec. 87 (A) to (C)? A: It is premised on the fact that in all the transfers mentioned, there is really one transmission of property, (i.e.- from the testator to the owner of the naked title; or from the testator to the fideicommissary0 Hence, the exemption from the tax because the property was previously subject thereto. (De Leon) Q: In the merger of the usufruct and the naked title, what if the usufruct die which results to the merger of the usufruct and the naked title, would the transmission be taxable? A: No, it is not taxable because the right of the usufruct is included in the gross estate of the decedent. Q: Suppose A transfers property to trust. This property would be enjoyed by B but the title is given to C. A dies, would the property be part of the estate? A: If it is a revocable trust, it would be a part of As estate. Q: Same question, but what if B dies? A: The value of the usufruct is included in the gross estate of B. See Sec. 88. (A). Q: Same question, but what if B dies ahead of A? A: Sec. 88 (A) also applies.

DONORS TAX Q: What is a donors tax? A: The donors tax is imposed on donations inter vivos or those made between living persons to take effect during the lifetime of the donor. (De Leon) Q: How are donations mortis causa taxed? A: Donations mortis causa or those which are to take effect upon the death of the donor partake the nature of testamentary dispositions, are subject to estate tax. They are considered transfers in contemplation of death. (De Leon) Q: What is the concept of the gift tax?

A: The concept of the gift tax is on the right to transmit. It is imposed on the privileged to transfer property. Q: What are the differences between Estate Tax and Donors Tax? A: Tax rates. And also: In estate tax.

1. transferor is dead 2. transfer mortis causa

In donors tax 1. donor is living 2. life-time transfer

Q: How is donors tax imposed? A: Sec. 98 (B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Q: How do you explain that donors tax supplements estate tax? or income tax? A: The donors tax supplements the estate tax by preventing the avoidance of the latter through the device of donating the property during the lifetime of the deceased. (De Leon) Q: How do you explain that donors tax supplements income tax? A: The donors tax also supplements the income tax. Without the donors tax, the donor may escape the progressive rates of income taxation through the simple expedient of splitting his income among numerous donees. (De Leon) Q: How is a gift tax a downpayment when the donor died? A: The gift tax is a downpayment of the estate tax when the donor dies. Any property given by gift reduces the gross estate upon the decedents death. If there will be no gift tax, then the Estate tax would be avoided. Q: Suppose the donor donated his P30M property. He divided his property into 3 so as to donate it to 3 donees. This property earns an income of P50K. After the donation, the donor has no more income. What is the effect of the gift? A: Q: What is the difference between a gift subject to donors tax and a gift as an item of exclusion in income tax? A: A donors tax is imposed on whatever gift regardless of motive (there must be a donative

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intent). But for a gift to be an item of exclusion, there must be disinterested generosity. Q: What property is contemplated in donors tax? A: real, personal, tangible, intangible. Q: Would donors tax include conceptual or contingent property? A: It could be a conceptual or contingent property as long as you can value it, because if you cannot value it, it cannot be considered as property. (it could be a thing but not a property) Q: Would donors tax include something that could not be valued? (i.e., blood of Kris Aquino ) A: It is not subject to gift tax because it cant be valued. Q: When is there a taxable gift? A: There must be cessation of control by the donor over the property given. Q: Suppose X gave Y a check dated June 30, 2004. On July 8, X died, but Y had not encashed the check. Is there a gift? A: No. there was no cessation of control and dominion on the part of the donor over the property transferred. The Court in Burnett vs. Guggenheim: Taxation is not so much concerned with the requirements of title as it is with actual command over the property taxed. Q: X would give his Bulacan land as a gift to Y provided that Y would give his Laguna land to X as a gift. Is there a taxable gift? A: No. There is no gift because the transfer was with consideration. It is a taxable exchange of property. If it is a capital asset, it is an exchange subject to Sec. 24 (D). Q: Dad owns shares worth P70 per share. Son is engaged in trading securities. Dad told Son to sell his shares for P140/share such that the profit would belong to Son. Is there a taxable gift? A: Q: Same question, but what if there is no filial relationship? A: No gift because it was a transaction in the ordinary course of business. In a purely business transaction, transactions with discounts and bargaining are beyond the scope of gift tax.

Q: A starlet goes to a car shop and the owner of the shop sells a P1.2M car to her for only 200K, is there a taxable gift? A: It could be argued that it may be a business transaction where the starlet should opt to be a model for the car shop. If that is the case, then it is not deemed a gift. Business transactions are beyond gift tax coverage. Q: X mortgaged his property worth P10M for a P10M loan. The following year, X donated this property to Y. Is there a gift? A: Yes if there was an appreciation of the values of the property, there is a gift to the extent of the appreciation of the value. But if the value of the property declined, there is no gift. There could be no gift of liability. Q: X borrowed money from Y but with interest at 1% p.a. The current interest rate in the market is 9%. Could there be a gift in this loan transaction? A: Yes, which the 8% deficiency, as the 1% interest is very nominal. Q: Do gratuitous free loans result in taxable gifts? A: Yes. Court ruled in CIR vs. Dickman: The gift tax is imposed upon the reasonable value of the use of the money lent. The taxable gift that assertedly results from an interest-free demand loan is the value of receiving and using the money without incurring a corresponding obligation to pay interest along with the loans repayment. Q: What is the problem with the Dickman theory? A: If you let your friend borrow your car, or the use of a vacation house, then this would become taxable gifts. Gift tax should not cover necessary conveniences within a familial setting. Q: B rendered services to C worth P10k. C did not pay B. A paid B P20k for Bs services to C. A and C are strangers. What is the gift? A: A made a direct gift to B the excess of P10K worth of services. A made an indirect gift to C when A paid Cs debt. Q: Same question, but what if A made the gift without mentioning Bs services to C. A: the whole P20k is a direct gift to B.

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Q: A tells B that A will give B money if B would do something. A tells C that A will give C money if B will not do anything. B did not do anything. A gave the money to C. Who made the gift? A: B gave the gift. B had control on whether or not the conditions would be fulfilled. It would be the same effect as if B received the money then B gave it to C. B was an indirect donor.

Exemption of Certain Gifts

1. Dowries Sec. 101 provides: The following gifts or donations shall be exempt from the tax provided (1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos. Q: What are the requirements for gifts in consideration of marriage to be exempted from the donors tax? A: It should be

1. given by parent 2. to children 3. given before or within one year from

celebration of marriage 4. limit: first P10,000

Q: If a gift is given after the celebration of marriage, can it be exempted from the tax? A: Yes if given within one year from celebration of marriage Q: Suppose a child gave a donation to his widower father, can this donation be exempted? A: No. the law only contemplates gifts made by a parent to a child not a child to a parent. Q: X will give a property to Y on a condition that Y will marry X. They got married. X gave the property. Is the gift taxable? A: No, the gift is prohibited by law. Q: Dad will give X a gift if X will marry Dads daughter. The BIR taxed the transaction. However, Dad argued that the consideration was the marriage, therefore exempt. Is this exempted? A: It is not exempted. It is not a gift if there is a consideration.

In this case, the consideration of the gift is the marriage. However, there is no valid consideration because marriage is incapable of pecuniary estimation. Q: Suppose Dad makes a donation worth P100,00 but the funds came from the conjugal property, what would be the extent of the exemption? A: In Tang Ho vs. Collector, the Supreme Court ruled that the wife must expressly join the husband in making the gift, and her part cannot be implied. Since the wife did not expressly join the husband in the donation, the donation would be deemed to be made only by the husband, so the exemption would only be P10,000. However, if the wife expressly join the husband in the donation, then they may both claim exemption, so it would be P20,000.

2. Gifts to Government

Sec. 101 (A) (2) Gifts made to or for the use of the National Government or any entity created by an of its agencies which is not conducted for profit, or to any political subdivision of the said Government; Q: If the government agency is for profit, is it covered? A: No, only agencies not conducted for profit.

3. Gifts to Non-Profit Institutions

Q: Suppose Nestle Phils. Gave P200K to students but this would be administered by a NGO. Is this exempt? A: not exempted because the donee is not an institution Q: But what if the donation is in favor of the NGO but the beneficiary would be the student, would this be exempt? A: Yes. Sec. 101 (A) (3), as long as the disposition by the donor was in favor of an institution.

Stranger Rule

Q: What is the stranger rule? A: Sec. 99 (B) Tax Payable by Donor if Donee is a Stranger. When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For purposes of this tax, a stranger is a person who is not a:

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1. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant

2. Relative by consanguinity in the collateral line within the fourth degree of relationship

3. Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code as amended.

Q: Who pays the gift tax? A: donors liability, but the donee can assume the liability. Q: Suppose A donated a property to B but B is obliged to pay the donors tax. Would it still be a gift? A: Yes, there is a gift as long as the burden to pay the tax is less than the value of the property. Q: A corporation donates to X, X donates to the corporation, is there a difference in the tax consequence? A: No difference, stranger rule applies in both cases.

Gifts to/by Aliens Q: Suppose a non-resident gives a gift to a resident. When will it be a taxable gift? A: Non resident is subject to pay donors tax if the property is located in the Philippines. Q: Suppose US corporation has a subsidiary in RP, US corporation donated its shares of stock to the employees of RP subsidiary, is the donation subject to donors tax? A: It is not subject to tax because the shares of stock pertains to US corporation that is not doing business in the Philippines. (See Sec. 104) Q: In the same situation, suppose the President of RP subsidiary donated its shares of stock to employees of US corporation, is the donation subject to donors tax? A: It is subject to tax because the shares of stock pertains to RP subsidiary that is doing business in the Philippines. Also a subsidiary has a personality separate from its parent. (See Sec. 104)

VALUE-ADDED TAX Q: What are the requisites for liability to VAT?

A: The following conditions must be satisfied: 1. There must be a sale, barter, exchange

or other disposition in the Philippines. 2. The sale must be of taxable goods,

properties or services. 3. The sale must be made by a taxable

person in the course or furtherance of his/its business. (De Leon)

Q: What is the meaning of in the course of business? A: Sec. 105 par. (3) The phrase in the course of trade or business means the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non stock, non profit private

organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Q: How do you compute this tax? A: 10% as the tax rate. The law says you multiply 1/11 times the gross selling price, if the tax is already part of the invoice amount. If it is not part of the invoice amount, just get 10% of the gross selling price. Q: What are gross receipts? A: Sec. 108 (A) (last par.) The term gross receipts means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental, or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for services performed or to be performed for another person, excluding value-added tax. Q: Can a non profit corporation conduct an activity for business? A: Yes. The law says commercial or economic activity but it does not necessarily mean a profit seeking activity. Q: Suppose DOJ renders an opinion by request of DENR. Later DENR paid the lawyers of DOJ due to this opinion. Is it subject to tax? A: No, this is not an economic or commercial activity but simply a performance of governmental functions, and the government cannot tax itself. Q: Who is the person liable to pay this tax?

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A: The following are liable: 1. any person who in the ordinary course

of business sells, barters, or exchanges goods or properties

2. any person engaged in the sale or exchange of services including the lease or use of properties in the ordinary course of business

3. in case of importation, the importer who imports the goods.

but the burden can be shifted to the buyer. (Bar Ops Stenographic Notes) Q: What is covered by the term "goods and property"? A: any goods and property capable of pecuniary estimation Q: A donates his property to B. Is this subject to VAT? A: No, VAT contemplates a transaction with a consideration. Q: If it is a sale for an insufficient consideration, is it subject to VAT? A: You can argue both ways Q: Suppose a property owner is required to sell his property to the government, is it subject to VAT? A: No. A forced sale or expropriation is not a sale in the course of business. A sale in VAT refers to voluntary sale in pursuit of business.

Incidental and Isolated Transactions Q: What is the concept of "incidental to the business"? A: It is when the transaction is not the main purpose of the business but somehow related to it. It is subject to VAT. Q: What is the difference between isolated transactions and incidental transactions? A: Isolated transactions are not subject to VAT but incidental transactions are subject to VAT. Q: Suppose a real estate dealer sold a parcel of land which is not a part of the bundle of the property he is selling, is it subject to VAT? A: No. This is not a transaction incidental to the business but rather an isolated transaction as the property was not held for sale to the customers. Q: MWSS entered a contract with concessionaires where the latter would operate

the formers waterworks. The contract provides that at the end of the stipulated term, the concessionaires are required to sell the operation back to MWSS. BIR argued that it was an incidental sale. MWSS argued that it was an isolated sale. A: It is an isolated sale because the concessionaries are not in the business of selling business operations. It may not be incidental because the operation had already ceased.

Transactions Deemed Sale

Q: What are the transactions deemed sale? A: as provided in Sec. 106 (B) A:

1. 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.

2. Distribution or transfer to: a. Shareholders or investors as

share in the profits of the VAT-registered persons

b. Creditors in payment of debt 3. Consignment of goods if actual sale is

not made within 60 days following the date such goods were consigned

4. Retirement from or cessation of business with respect to inventories of taxable goods existing as of such retirement or cessation.

Q: Why is there transactions deemed sale? A: To lessen the impact of input taxes or else it would be prejudicial to the government. Q: What would be the tax basis for the transactions deemed sale? A: In transactions deemed sale, the fair market value is deemed the gross selling price. Q: Suppose you are engaged in a construction supply. A customer bought 150 bags of cement worth P50,000. You gave him 5 bags as promotion. Do you consider the 5 additional bags taxable? A: It is not taxable because it is not different from a gift. It is not a sale. Q: What is the rule regarding the consignment of goods? A:

1. Goods are sold within 60 days a sale, subject to VAT

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2. Goods are sold after 60 days a transaction deemed sale, subject to VAT

3. Withdrawn within 60 days no transaction

Q: In a partnership engaged in selling goods, what if one of the partners die, would there be any tax consequence? A: when one of the partners die, there is a retirement or cessation of business, it is subject to VAT as a transaction deemed sale. Q: Same question, what would be subject to VAT? A: the inventory of the retired firm would be deemed sold for VAT purposes.

Importation

Q: What are the requisites of importation to be subject to VAT? A: Q: In the case of P550,00 threshold requirement, does this apply to importation? A: Q: Is there a necessity that the importation be in the course of business? A: No. When you talk of importation, Sec. 105 dispenses of the in the course of business requirement. Q: X imports a computer for his personal use, is it subject to tax? A: Yes because it need not to be for business. Q: Suppose a foreign corporation engage in selling machineries has a branch (a domestic corporation) here in the Philippines. Buyer told branch that he would buy. Branch told the Parent. Parent delivered the machineries. Who is the importer? A: Consider the invoice, whoever is stated there as an importer is the importer. Consider also the fact that the parent and the branch are one and the same juridical person and that it is the buyer who made the importation possible. Q: Who is the importer if the imported goods were delivered by a tax exempt entity? A: The purchaser. Sec. 107 (B) In the case of tax-free importation of goods into the Philippines by persons, entities,

or agencies exempt from tax where such goods

are subsequently sold, transferred, or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees, or recipients shall be considered the importers

thereof, who shall be liable for any internal

revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. Q: What is the tax base for importation? A: Sec 107 - Based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus custom duties, excise taxes, if any, and other charges.

Sale of Real Property Q: What are the requisites for sale of real property subject to tax? A: There must be a

1. sale or lease 2. in the ordinary course of business 3. gross annual receipts exceed P550k 4. offered primarily for sale or lease

Sec. 106 (A) (1) (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business. Q: If you sell your house, and you are a real estate dealer, is it subject to VAT? A: no, it excludes capital assets. Q: Suppose you sold a lot for the right of way, is the sale subject to VAT? A: No. Selling for a right of way is not primarily for sale. It is a forced sale. Q: If you have a property and then you leased it to a foreigner for $100K for the entire year. Would it be subject to VAT? A: Yes even if paid in foreign currency because it is not a foreign denominated sale.

Sale of Services/Lease of Property Q: What are the requirements for the taxability of sale of services? A: In all instances gross annual receipts should exceed P550,000.

1. service for others 2. for a fee 3. in the Philippines

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Q: Suppose you work in China but the payment is made in the Philippines, is this sale of service subject to VAT? A: No, it should be performed in the Philippines. Q: Suppose you work for A, but you did not charge anything, would that be subject to VAT? A: No, because there is no consideration. Q: Suppose you own a motor shop. Your car was repaired in your shop. Would that be subject to tax? A: No, because law says service for others. Q: Same question but the spare parts were supplied by Toyota, what would be subject to VAT? A: VAT here only applies to the sale of the spare parts. Q: Suppose Y entered into a contract of lease of container vans, would that be subject to VAT? A: Yes under the provisions of Sec. 108 x x x from the sale or exchange of services, including the use or lease of properties. (this means that the requirements for the taxability of sale of service also applies to the lease of property) Q: What does the law contemplate for a fee? A: It is the charges for services rendered. Whatever is the fee arrangement would be subject to VAT even if it be a return to VAT. Q: Suppose a company is engaged in the services on a no-profit, reimbursement-of-cost-only basis, is it subject to VAT? A: Yes. SC held in CIR vs. CA, COMASERCO, that it is immaterial whether profit is derived from rendering service as even non profit institutions and the government may be subject to it. Moreover, there is a valid consideration or fee, which is the reimbursement-of-cost basis. Q: Suppose that a contractor advanced costs for labor and materials. Then the contractor bills the owner P1.6 M including the advance payment. Is the total amount of payment subject to VAT even when there is just a mere reimbursement of cost or return to capital? A: No, the mere reimbursement of cost is not subject to VAT. COMASERCO case does not apply because when the contractor adds the advance cost in the total amount of payment, the contractor is not charging you, but it was a mere

reimbursement. It is not for a fee but only for

reimbursing. There is no VAT with regard to the advances of the contractor. Q: Is any reimbursable item subject to VAT? A: Not all reimbursable items are strictly considered as fees. The COMASERCO case should be construed strictly. If the amount is strictly a reimbursible item, it is a mere return or capital. Sec 106 (D) (2) The value of goods sold and subsequently returned x x x may be deducted from the gross sales or receipts for the quarter in which a refund is made x x x.

Franchises

Q: Are TV franchises subject to VAT? A: Yes if gross annual receipts exceed P10M.

Zero- Rated vs. Exemption Q: What are the zero-rated sale of goods? A: As provided in Sec. 106 (A) (2). Q: What are the zero-rated sale of services? A: As provided in Sec. 108 (B) Q: What are the distinctions between zero-rating and exemption? A:

1. In zero rating transaction is completely free of VAT Exemption only removes the VAT at the exempt stage

2. In zero rating a VAT-payer can claim and enjoy a credit or refund for the input tax invoiced to him on his purchases Exemption not applicable.

3. In zero rating taxable sales Exemption not taxable sales, may not register with VAT. (De Leon)

Q: Can a person be exempted from VAT? A: VAT does not exempt a person. VAT exempts certain transactions.

Input/Output Q: Can any person claim input VAT? A: No, the seller and buyer must be both VAT registered. Q: How can you explain that the input-output tells us that it is not 10% that is paid to BIR?

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A: The output tax less input tax is actually the tax paid. Law presupposes that the mark-up is the one subject to tax. Q: PLDT sells services subject to VAT. What would be the input tax credit? A: To credit input tax credit, it should be related to the services rendered for purposes of claiming. So in this case PLDT may claim the equipment bought as input tax credit as it is related to the services rendered. Q: Suppose A is a VAT registered person who rents his house to B. B used the house partly for business and partly for residential purposes. What may B claim as input tax credit? A: B may only claim the portion that he used in the business for input tax credit. It must be related to the transaction in order to claim input tax credit. You cannot claim input VAT for personal purposes. Q: Same case, but A did not issue an invoice, may B claim input tax credit? A: No. It is important that there must be an invoice, without it there can be no input-output. Q: What are tax credit certificates? A: It is the certificate applied to claim the input tax credit. With this certificate, a taxpayer may settle his other tax deficiencies except withholding tax, but he must use it within the 5 year period.

OTHER PERCENTAGE TAXES Q: What is a percentage tax? A: A percentage tax is a business tax which is based on a given ratio between the gross sales or receipts and the burden imposed upon the taxpayer. (De Leon) Q: Who are subject to percentage tax? A: Sec. 116 Any person

1. whose sales or receipts are exempt under Sec. 109 (Z) from the payment of VAT

2. who is not a VAT-registered person 3. NOT a cooperative Provided, That

cooperatives shall be exempt from the 3% gross receipts tax herein imposed.

Q: What are the instances when a person is exempt to pay VAT and percentage tax, pay only percentage tax, or pay only VAT?

A: According to 4.112-2, Rev. Regs. No. 7-95 and Rev. Regs. No. 10-2000 (Sir mentioned this anyway):

1. Exempted to pay both gross sales or receipts do not exceed P100,000 during any 12-month period. The presumption is that it is not engaged in business although it is subject to income tax.

2. Pay Percentage Tax exceed P100,000, but do not exceed P550,000.

3. Pay VAT exceed P550,000.

Domestic Carriers Tax

Q: What is covered by the domestic carriers tax? A: Sec. 117 provides:

1. Cars for rent or hire driven by the lessee 2. transportation contractors, including

persons who transport passengers for hire

3. other domestic carriers by land, air, or water, for the transport of passengers

Q: What do they transport? A: Persons or passengers. Q: Are transport of cargoes subject to this percentage tax? A: No, but subject to VAT.

Franchise Tax Q: What franchises covered by the 3% franchise tax? A: As provided by Sec. 119, to all franchises on radio and/or television broadcasting companies, whose annual gross receipts of the preceding year does not exceed P10M. Q: What franchises covered by the 2% franchise tax? A: As provided by Sec. 119, electric, gas, and water utilities, on the gross receipts derived from the business covered by the law granting them. Q: When are franchises covered by VAT (10%)? A: All other franchise grantees except those under Sec. 119 are subject to VAT under Sec. 108 (A). Radio and television companies, however, are given the option to register as VAT taxpayers (Sec. 119). Franchise grantees subject to VAT are no longer liable to pay franchise tax. (De Leon)

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Amusement Tax

Q: Who pays the amusement tax or tax on sinful places? A: Sec. 125 collected from the proprietor, lessee, or operator Q: What does the amusement tax cover? A: admission receipts and other revenues. Sec. 125 (e) par. 2 For the purpose of the amusement tax, the term gross receipts embraces all the receipts x x x. Said gross receipts also include income from television, radio, and motion picture rights, if any. Q: Suppose that there are restaurants in the cockpit, would it also be subject to 18% tax? A: Yes if the owner of the cockpit and the restaurant is the same. Q: If you have a restaurant along Makati Avenue with 24 hour ballroom dancing and singing, is it subject to 10% VAT (for restaurants) or 18% amusement tax (for night clubs)? A: The main point here is the definition of night club. The principal purpose of a night club is to seek pleasure while the principal purpose of a restaurant is to dine. It may be contended that the singing and dancing may only be an incidental purpose. Q: What does gross receipts contemplate? A: It should include everything. There should be no deduction, whatsoever. Gross receipts should be construed in its ordinary meaning.

Sale of Listed and Traded Shares Q: Are the sale through dealers in securities covered by the percentage tax on the sale of listed and traded shares? A: No. Only sale of listed and traded shares in the local stock exchange or through initial public offering . Q: Is the initial public offering covered by the percentage tax of of 1%? A: No, but rather the 2nd and so forth public offerings. Q: What do you understood by closely-held corporations? A: Sec. 127 (B) par. 3 the term closely held corporation means any corporation at least fifty percent in value of the outstanding capital stock or at least fifty percent of the total combined

voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals.

EXCISE TAX Q: What is an excise tax? A: It refers to taxes applicable to certain specified or selected goods or articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported into the Philippines. (De Leon) The excise tax is a privilege tax imposed on the privilege of engaging in the business of manufacturing or producing goods for local consumption or imported in the Philippines. (Bar Ops Stenographic Notes) Q: Who are the persons covered by the excise tax? A: the manufacturer, importer. Q: What is a specific tax? A: The specific tax derives its name from the fact that its rates are of a specific or fixed amount in pesos and/or centavos levied on the articles according to a certain physical unit of

measurement. (De Leon) Q: What is an ad valorem tax? A: It is based on the value or selling price of the manufactured or produced article. The rates or amounts fluctuate as the prices of the articles move up and down. (De Leon) Q: Distinguish specific from ad valorem? A: There are advantages of one against the other.

1. Advantage of Ad valorem a. Ad valorem if there is

inflation, the higher the taxes. b. Specific tax remains the

same even if there is inflation 2. Advantage of Specific

a. The manufacturer may simply undervalue the price to reduce the ad valorem tax

b. Even if the manufacturer undervalue the price, the tax remains the same because the only thing to look at is the quantity of the goods.

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Q: Is there an excise tax that has the qualities of specific and ad valorem tax? A: Excise tax on wine. The tax is per capacity per liter tied to the net retail price. (See Sec. 142) DOCUMENTARY STAMP TAX

Q: What is the documentary stamp tax? A: Documentary stamp tax is a tax on documents, instruments and papers evidencing the acceptance, assignment, sale, or transfer of an obligation, right, or property incident thereto. (De Leon) Q: Is this tax really imposed on the document? A: It is really imposed on the transaction rather than on the document. (De Leon) Q: Who pays the documentary stamp tax? A: The tax is imposed against the person making, signing, issuing, accepting, or transferring the document or facility evidencing the transaction. (De Leon) Q: Who pays the documentary stamp tax if the one who is suppose to pay is exempted? A: the other party Sec. 173 x x x Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for this tax. Q: Does documentary stamp tax apply to documents executed abroad? A: Under the present law, documentary stamp tax would apply to any document, even documents executed abroad as long as the obligation or right over the transaction arises from the Philippine sources or the property is situated in the Philippines. (Bar Ops Stenographic Notes) Sec. 173 Upon documents x x x and transfers of the obligation, right or property incident thereto, there shall be levied x x x the corresponding documentary stamp tax prescribed x x x wherever the document is made x x x when the obligation or right arises from Philippine sources or the property is situated in the Philippines x x x. Q: Suppose A donates to B a property. It was evidenced by a certain document. Is this document subject to documentary stamp tax?

A: No. Documentary Stamp tax is a tax on an amount for another amount. There must be a value for another value. (or consideration). The purpose of the tax is to apply the consideration. Since there is no valuable consideration in donations, it cannot be imposed in this case. Q: What would be the tax treatment of a single transaction with multiple documents (example: a loan agreement with a promissory with the note indicating the value of the loan? A: the loan will be treated as one taxable document but the taxed will be based on whichever yields a higher documentary stamp tax. (Bar Ops Stenographic Notes) Q: Supposing the loan agreement has several promissory notes, or mortgage agreements? A: Again, the law will treat this as one taxable transaction, as one taxable document. But the documentary stamp tax will be based on the total value of the loan as supported by the loan documents, whichever will yield a higher documentary stamp tax. (Bar Ops Stenographic Notes) Q: How do you pay a documentary stamp tax? A: Three steps. First you buy documentary stamps. Second, you affix the documentary stamps, and third you cancel the affixed documentary stamp. (Bar Ops Stenographic Notes) Q: What is the effect if the documentary stamps are affixed to the wrong document? A: The Supreme Court ruled that since the tax was paid, the government cannot collect anymore or else it would result to double taxation. If it was done in good faith and there was proof to show the payment of documentary stamp taxes, the fact that it was affixed to the wrong document would not subject the taxpayer to a documentary stamp liability. (Bar Ops Stenographic Notes) Q: Is it valid defense that the credit or the debt instrument is not valid because there is no documentary stamp? A: No, the non-affixture of the documentary stamp would not affect the validity of the document and in that case would not affect the validity of the credit. (Bar Ops Stenographic Notes)

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Q: When do you pay documentary stamp tax? A: Upon execution of the document. (Bar Ops Stenographic Notes) Q: What is the effect of non-payment of this tax? A: Sec. 201 An instrument x x x without being stamped shall

1. not be recorded 2. nor shall it or any copy thereof or any

record of transfer of the same be admitted or used in evidence in any

court 3. No notary public or other officer

authorized to administer oaths shall add his jurat or acknowledgment

Q: What is the remedy for non-payment? A: Require them to pay. Documents are non-admissible until paid. Sec. 201 x x x until the requisite stamp or stamps shall have been affixed thereto and cancelled.

GOVERNMENTS TAX REMEDIES

The Commissioner of Internal Revenue Q: What are the some of the powers and duties of the Commissioner of Internal Revenue (CIR)? A: Sec. 4 The power to interpret the tax x x x. The power to decide disputed assessments, refunds of internal revenue taxes, fee, penalties x x x other matters arising under the NIRC. Q: Can the BIR be compelled to make an assessment? A: No, as a general rule. A tax assessment is discretionary upon the CIR. You cannot compel it since it is discretionary. Q: Is there an instance where the BIR may be compelled to make an assessment? A: Yes, if there is grave abuse of discretion, such as when the BIR found that there was basis to assess and yet it refused to make assessment. Q: Supposing that there is a question of law, and the BIR asked DOJ for its opinion, can DOJs opinion be binding upon the BIR? A: No, because Sec. 4 provides that the power to interpret tax laws shall be under the exclusive and original jurisdiction of the CIR. Q: What is the remedy against BIRs interpretation?

A: Sec. 4 subject to review by the Secretary of Finance. Q: What is the difference between the appeal or review with the Secretary of Finance and the appeal with the Court of Tax Appeals (CTA)? A: Appeal to Secretary of Finance interpretation of tax laws. Appeal to CTA disputed assessments, refunds, other matters arising under the Tax Code. (See Sec. 4)

Remedy of Assessment

Q: What are the tax remedies available to the government? A: The remedies available to the government are to assess and collect. Q: What is an assessment? A: Assessment is a written notice to a taxpayer to the effect that the amount stated therein is due as a tax, and containing a demand for the payment thereof. (De Leon) Q: What is the importance of an assessment? A: Assessment is necessary for the administrative remedies of the government to apply (such as distraint and levy). If there is no assessment, government can only avail judicial remedies. Q: Who generally assesses the tax? A: The taxpayer. Taxes are generally self-assessing because they do not need a letter of demand or assessment notice. The taxpayer is supposed to know how much he should pay as tax and when and where he should pay. (De Leon) Q: So when may the government resort to assessment? A: In case of deficiency taxes for failure to file a return, or for filing a false or fraudulent return; and in cases when the tax period is terminated. (De Leon) Q: Suppose a taxpayer issued a check to pay his debt. The check bounced, so the BIR sent him a notice to make good the check. Is that notice an assessment? A: Yes. Any notice sent to the taxpayer demanding payment of tax liability is an assessment. It need not be in the standard form. A letter form may be an assessment. (Bar Ops Stenographic Notes)

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Q: What is the legal basis of the power to assess? A: BIR has the power to examine and assess taxes after the filing of the tax return. The law also gives BIR certain powers in aid-of-assessment. CIR can get any information from anybody for purposes of ascertaining the liability of the taxpayer. Q: What is the governments right to assess? A: This right exclusively belongs to the BIR, especially the CIR.. It is the right to examine the books of the taxpayer to determine his tax liability. Q: Can the CIR disregard the return and make his own personal assessment? A: Yes, but with conjunction with other information, especially documents from the supplier.

Other Basis of Assessment

1. Best Evidence Obtainable Q: What is the best evidence obtainable? A: CIR can resort to gathering any evidence that will assist him in making a proper assessment on the tax liability of the taxpayer if the taxpayer refuses to submit a tax report or any report he submits is inaccurate. Sec 6 (B) 2nd par. the CIR shall make or amend the return from his own knowledge and from such information as he can obtain through

testimony or otherwise. Q: When would the CIR resort to the best evidence obtainable? A: Sec. 6 (B) provides

1. When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations

2. When there is reason to believe that any such report is

a. False b. Incomplete c. Erroneous

3. In case a person a. Fails to file a required return or

other document at the time prescribed by law

b. Willfully or otherwise files a false or fraudulent return or document

Q: How should evidence be attained? A: Evidence should be attained legally. If it is attained illegally, it is not evidence. Q: Supposing the corporate taxpayer invites the BIR Regional Director to a cocktail party tendered by the corporation. During the party, the BIR official went to the room of the President to make a personal call. In making the call, he saw some documents. Can the documents be the basis of making an assessment of tax liability? A: It cannot be the basis of best evidence obtainable. You cannot make an assessment based on illegally seized evidence. It is not the best evidence obtainable. Still, the old doctrine, there can be no legal fruit from an illegal tree. (Bar Ops Stenographic Notes) Q: May these kinds of assessment be considered correct? A: Yes. Sec. 6 (B) x x x which shall be prima facie correct and sufficient for all legal purposes. Q: What evidence may the BIR acquire in arriving at the best evidence? A: Any evidence that may be obtained by the BIR in making as assessment or in making a return to determine the tax liability of a taxpayer. In the case of Sy Po vs. CA BIR took the testimony of the witnesses, got sample products of the taxpayer, and the books of account. (Bar Ops Stenographic Notes) Q: Can you ask any question in assessing the tax liability? A: No, the testimony that may be taken should only be relevant and material. There should also be a tax inquiry or investigation as provided in Sec. 5 (D).

2. Power of Surveillance Q: What is the power of surveillance of the BIR? A: The BIR can do some surveillance for purposes of arriving at a base for which as assessment can be made. Sec. 6 (C) The CIR may place the business operations of any person under observation or surveillance if there is reason to believe that such person is not declaring his correct income, sales, or receipt for internal revenue tax purposes.

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Q: Suppose BIR conducted a surveillance for the period of January to March, can this surveillance cover the year before such surveillance? A: Yes. The results of the surveillance can be made a basis of assessment for the current taxable year and the prior taxable year. Sec. 6 (C) x x x The findings may be used as the basis for assessing the taxes for the other months or quarters of the same or different taxable years

3. Presumptive Gross Receipts Q: What is the presumptive gross receipts? A: Sec. 6 (C) par. 2 x x x when there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made, CIR, after taking into account the sales, receipts, income, or other taxable base of other persons engaged in similar businesses under similar situations or circumstances or after considering other relevant information, may prescribe a minimum amount of such gross

receipts.

Q: When may the BIR resort to the fixing of the presumptive gross receipt? A: If a certain taxpayer was not reporting the proper sales tax transaction. Q: May the CIR based its assessment on presumption? A: No, only on actual facts. Q: Suppose a Department Store files a return of PhP500,000 sales a month but earns millions, how do you prove the fraudulent act of this taxpayer? A: You could do a comparative review. Review the same taxpayer under similar circumstances to arrive at the minimum gross receipts. Sec. 6 (C) par. 2 after taking into account the sales, receipts, income, or other taxable base of other

persons engaged in similar businesses under

similar situations or circumstances Here it is not based on assumption but on actual facts.

4. Inquiry into Bank Deposit Accounts Q: Can the BIR see the bank accounts of the taxpayer? A: No, as a general rule. However, Sec. 6 (F) authorizes the CIR to inquire into the bank deposits of:

1. a decedent to determine his gross estate 2. any taxpayer who has filed an

application for compromise of his tax liability by reason of financial incapacity to pay his tax liability.

Q: May the BIR asked for the records of the transactions with the Bank? A: Yes. BIR is prohibited to look only at the account of the deposits.

Terminate Taxable Period Q: What is the BIRs authority to terminate taxable period? A: Sec. 6 (D) provides CIR shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated x x x. Q: What are the circumstances when the BIR may terminate the taxable period? A: As provided by Sec. 6 (D):

1. When it shall come to the knowledge of the CIR that a taxpayer is retiring from the business subject to tax.

2. Intending to leave the Philippines 3. Intending to remove his property

therefrom 4. Intending to hide or conceal his

property 5. Performing any act tending to obstruct

the proceedings for the collection of the tax for the past or current quarter or year

6. Performing any act tending to render the proceedings totally or partially ineffective

Period to Assess Q: When must an assessment be made? A: In ordinary assessments, it should be within 3 years. Sec. 203 x x x internal revenue taxes shall be assessed within 3 years after the last day prescribed by law for the filing of the return. In extraordinary assessment, tax may be assessed within 10 years from the discovery of fraud, falsity, or omission.

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Service of Notice of Assessment Q: Supposing,

4/15/99 taxpayer filed his return

4/12/02 assessment was made

4/15/02 3 year-period of assessment lapsed.

5/01/02 taxpayer received the assessment

Is there a valid assessment despite the fact that the notice of assessment was received beyond the period? A: Yes. The law provides that assessment be made within 3 years. It does not require that the taxpayer received such assessment within 3 years. There is a presumption of regularity in the performance of the official government functions that the mail was received within the period. Sec. 203 x x x taxes shall be assessed within 3 years. (no receipt requirement by the taxpayer) Q: Is it necessary that the assessment be received by the taxpayer? A: Yes, it must be received to be binding upon him so as not to result to deprivation of property without due process. Q: Supposing that the BIR sent a notice to the taxpayer, but the taxpayer cannot be located. What would be the effect? A: The assessment period is suspended. Sec. 223 The running of the Statute of Limitations x x x shall be suspended x x x when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected. Q: Supposing that taxpayer has address at 123 Vito Cruz but he informed the BIR of a change in address 123 Corinthian. All assessments were being sent to the Vito Cruz address within the 3 year period. Would that be a valid assessment? A: No. when BIR continues to send assessment notices to an old address after being informed by the tax payer of the change in address, that assessment is no assessment at all. The right to assess may be subject to the three-year period. (Bar Ops Stenographic Notes) Sec. 223 x x x Provided, That, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended.

Q: Suppose the taxpayer changed his address. When he filed his income tax return, he indicated his old address. BIR sent notice of assessment to the old address. Definitely, the taxpayer did not received the notice. Is this a valid assessment? A: Yes, it was the taxpayers fault for not indicating the new address in the tax return. Q: What would be the remedy if the taxpayer changed his address after the filing of the return? A: The taxpayer should modified or amended his return within 3 years from the filing provided that there is no notice of audit or investigation served upon him. Sec. 6 (A) par. 3 Provided that within 3 years from the date of such filing, the same may be modified, changed, or amended: Provided further, That no notice for audit or investigation of such return been actually served upon the taxpayer. Q: Supposing,

4/15/99 return was filed

4/10/02 return was amended, indicating new address

6/10/02 assessment was made and sent to new address

Was the assessment made within the period? A: Yes, if the return was amended, reckon the prescriptive period from the date of the amendment. Q: What if the taxpayer refuses or denies receipt of the assessment, what must the Government do? A: Government must validly prove that the assessment was validly sent and received. Q: How can the BIR argued that there was valid receipt? A: In Nava vs. CIR, SC held that BIR must established that:

1. the letter was properly addressed 2. the letter was mailed

If the BIR established such, it can be presumed that the notice was duly mailed. Q: Can the BIR assess beyond the three-year period? A: Yes, on the ground of fraud, falsity, and failure to file a return.

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Fraud Assessment Q: May the BIR make an assessment anytime even if the year 2030 as long as the BIR says there is fraud? A: No. BIR must prove fraud. If it cannot prove fraud, BIR is limited to the 3 year period. (Bar Ops Stenographic Notes) Q: What fraud must the BIR prove? A: Deliberate, actual fraud. An example would be in the case of Aznar vs. CIR. This case gives you the badges of fraud you have consistent under declaration of income, over claiming of deductions that would be a badge of fraud. It was the failure to declare a substantial portion of the income with intention to deceive. (Bar Ops Stenographic Notes) Q: Supposing,

4/15/99 return was filed

4/15/02 3 year period lapsed

4/14/05 fraud assessment was made

taxpayer did not make any answer. Is the government required to prove fraud? A: No, the fraud assessment became final as it was not contested. Sec. 222 (a) Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. Q: When is there a prima facie evidence of fraud? A: When there are badges of fraud such as substantial underdeclaration of taxable sales, or a substantial overstatement of deductions. Sec. 248 (B) that a substantial under declaration of taxable sales, or a substantial overstatement of deductions, shall constitute prima facie evidence of a false or fraudulent

return. Q: When is there a substantial underdeclaration of taxable receipts and substantial over statement of deductions? A: Sec. 248 (B) x x x, Provided further, That the failure to report sales in an amount exceeding 30% of that declared per return, and a claim of deductions in an amount exceeding 30% of the actual deductions.

Q: If there is a fraud assessment, when may the government collect? A: within 5 years from the fraud assessment. Q: If there is fraud, can the BIR collect without assessment? A: Yes. Sec. 222 (a) In the case of a fraudulent return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed

without assessment. Q: Suppose that BIR discovered fraud in 1999, can the government collect in 2008 even if it did not make any assessment? A: Yes, by judicial action to collect. But it must be commenced within 10 years from discovery. Q: In case of fraudulent returns, does the ten year period prescribed in Sec. 222 apply to criminal actions? A: No, Sec. 222 pertains to the period for actions of collection but not to criminal actions against tax evaders. Q: What is the difference between the period to collect if there is a fraud assessment and the period to collect without an assessment. A: A fraud assessment must be made within 10 years. After such assessment, the government must collect the tax in 5 years. When the government opted to collect without an assessment, the action should be made within 10 years.

Falsity

Q: What is falsity, as distinguished from fraud? A: False Return may be due to mistake, carelessness, or ignorance. It implies deviation from the truth , whether intentional or not. Fraudulent Return made with intent to evade taxes. It implies intentional or deceitful entry with intent to evade the taxes due. (De Leon) Q: Is there a difference of standard between fraud and falsity? A: The standard is the same between the two, the standard as provided in Sec. 248 (B). Sec. 248 (B) Provided, That a substantial underdeclaration of taxable sales x x x or a substantial overstatement of deductions x x x

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shall constitute prima facie evidence of a false and fraudulent return.

The badges of fraud (substantial under declaration of taxables sales or substantial overstatement of deductions) are also made to apply to false returns.

Failure to File a Return

Q: When is there a failure to file a return? A: there is a failure to file a return if, on the basis of the returned file, the BIR cannot make a computation or assessment of tax liability. In short, when you have a return filed which is incomplete to the point

Taxation Law 2 (TaxRev

Documents

Transcript of Taxation Law 2 (TaxRev