Critical Areas in Taxation. Doc

7/30/2019 Critical Areas in Taxation. Doc

1/41

CRITICAL AREAS IN TAXATION

Atty. Vic C. MamalateoSept. 11, 2009San Sebastian College of Law-Recoletos

GENERAL PRINCIPLES OF TAXATION

ASPECTS OF TAXATION Levy: Congress or LGU (Tax Policy) Assessment and collection: BIR or BOC (Tax

Administration) Payment: Taxpayer (Tax Compliance)

BASIS OF TAXATION Lifeblood Theory : Existence of government is a necessity.

Without taxation, no government can exist or endure.Governments ability to serve and protect the peopledepends largely on taxes. This theory is used to justify thesummary nature of remedies in the collection of taxes. Noinjunction shall be issued by any court to restrain thecollection of taxes, except the CTA.

Benefits-Protection Theory (Symbiotic Relationship) : Taxesare what we pay for a civilized society. Without taxes,government would be paralyzed for lack of the motivepower to activate and operate it. Every person who is ableto must contribute his share in the running of government,

and government is expected to respond in the form oftangible and intangible benefits to improve the lives of thepeople and enhance the values of their property.

Taxes are positive acts of government and are not contractual. Taxes are fixed by law and are not subject to contract

between the taxpayer and the tax officer, except whenthere is an actual compromise. If such agreements aremade, they cannot serve to defeat or discharge the taxliability that the law fixes as the full amount of the tax.

The acceptance of any amount by employees or officials,

which does not constitute full payment of the amount fixedby law, is no ground or reason for the claim for exemptionby the taxpayer from liability for the remaining amount due(CIR v. McGrath, 1 SCRA 639).

If the fee is designed to raise substantially more than the cost ofthe regulation to which it purports to be an incident, its purposeis to raise revenue. If it is a fee attached to a particular provisionfor regulation and appears to be imposed to cover the cost ofthat regulation, and does substantially only that, then it is merelyfor the cost-paying part of the regulatory measure (City of Iloilo

v. Villanueva, 105 Phil 337).

The license fees charged therein are not merely for regulationbut for revenue, because the fee of P24 per annum charged forevery apartment far exceeds the expense of issuing thelicense, plus the cost of inspection or police surveillance, andother incidental expenses.

1


2/41

QUASI-LEGISLATIVE FUNCTION OF BIR

Rule-making power must be confined to details for regulating the

mode or proceedings in order to carry into effect the law as ithas been enacted, and it cannot be extended to amend orexpand the statutory requirements or to embrace matters notcovered by the statute. Administrative regulations must alwaysbe in harmony with the provisions of the law because anyresulting discrepancy between the two will always be resolved infavor of the basic law (LBP v. CA, 327 Phil 1047 (1996).

An administrative agency issuing regulations may not enlarge,alter or restrict the provisions of law it administers, and it cannotengraft additional requirements not contemplated by thelegislature. The plain meaning rule (verba legis) should be

applied where the words of the statute are clear, plain and freefrom ambiguity and they must be given their literal meaning andapplied without attempted interpretation (CIR v. Central LuzonDrug Corp, GR 159647, Apr 15, 2005).

Any revocation, modification or reversal of any of the rules andregulations promulgated by the DOF Secretary or any of therulings or circulars promulgated by the CIR shall not be givenretroactive application, if the revocation, modification or reversalwill be prejudicial to the taxpayers, except:

Where taxpayer deliberately misstates or omitsmaterial facts

Where the facts subsequently gathered by BIR arematerially different from the facts on which the rulingis based

Where the taxpayer acted in bad faith (Sec. 246,NIRC)

Where a regulation is revoked, the revocation shall be madeprospectively. However, if the revocation is due to the fact thatthe regulation is erroneous or contrary to law, the revocation isretroactive so as to affect past transactions. A wrong

construction of the law cannot give rise to a vested right that canbe invoked by a taxpayer (Hilado v. CIR, 100 Phil 288)

SPECIAL LAWS PREVAIL OVER GENERAL LAWS

The demand to pay overpaid refund by the BIR is a deficiencyfranchise tax assessment. Hence, the right to assess (3 years)and to collect (5 years) the same is governed by the Tax Coderather than by provisions of the Civil Code (6 years). Tax Code isa special law which must prevail over the Civil Code, a general

law (Guagua Electric Light Plant Co. v. CIR, 19 SCRA 790).

RA 7716 imposes VAT on all franchise grantees exceptelectricity, water and gas. PAGCOR, a GOCC, claimed exemptionfrom all taxes, direct and indirect, based on its Charter, PD 1869.SC ruled in favor of PAGCOR. The repeal or modification of PD1869, a special law, by a subsequent general law (RA 7716) must

2


3/41

be express and not just implied (CIR v. Acesite Hotel Corp, GR147295, Feb 16, 2007). [NOTE: RA 9337 (Nov 1, 2005) repealedincome tax exemption of PAGCOR.]

PRINCIPLE OF ESTOPPEL

The government is not bound by the errors committed byits agents. In the performance of its government functions,the State cannot be estopped by the neglect of its agentsand officers. Although the government may generally beestopped thru the affirmative acts of public officers actingwithin their authority, their neglect or omission of publicduties should not produce that effect.

Taxes are the lifeblood of the nation thru which thegovernment agencies continue to operate and with whichthe State effects its functions for the welfare of itsconstituents. The errors of administrative officers should

never be allowed to jeopardize the governments financialposition, especially where the amount involves millions ofpesos (CIR v. CTA, 234 SCRA 348).

Defense of reliance in good faith on rulings of CIR requiringno withholding tax on reinsurance premiums may free thetaxpayer from payment of penalties, but would notexculpate it from liability to pay the tax (Phil Guaranty Cov. CIR, 13 SCRA 775; Intra-Strata Assurance Corp v.Republic, GR 156571, July 9, 2008).

On Aug 30, 1989, CIC, domestic corp owned by Benigno Toda,sold the Cibeles property (land and building) to Altonaga, close

business associate of Toda, for P100 M. On the same day,Altonaga sold the property to RMI for P200 M. He later on paidthe 5% capital gains tax on the sale (P10 M). CIC filed ITR anddeclared income of P75,728.

During the investigation by BIR, it was found out that on May 4,1989, RMI paid P40 M to CIC and reflected as Investments in itsbooks. On July 31, 1989, RMI another P40 M. BIR Letter ofAuthority was not served to Altonaga for he left for the U.S.A.

During the CTA hearing, CIC admitted the sales are part of taxplanning scheme.

In 1990, Toda sold his shares in CIC to Choa for P12.5 M. 3 years

later, he died. In 1994, BIR sent deficiency income tax assessment and demand

letter. As owner of CIC is new, BIR issued FAN to Estate of B.Toda. FAN was protested, which CIR denied.

CTA ruled in favor of Estate of Toda. BIR failed to prove fraud. CA affirmed CTA decision, reasoning that CTA is better situated

to determine the correctness, propriety and legality ofassessment.

SC reversed CA decision. All 3 factors in tax evasion are present.

Estate admitted Altonaga was mere conduit. Making it appear there were 2 sales cannot be considered

as legitimate tax planning. Sale to Altonaga was more to mitigate tax liability rather

than for legitimate business purpose. To allow transaction is to sanction circumvention of laws

(CIR v. Estate of Toda, GR 147188, Sept 14, 2004)

3


4/41

Hope Luxury, Premium More and Champion were considered aslocal cigarette brands subject to ad valorem tax of 20-45%. OnJuly 1, 1993, or 2 days before the effectivity of RA 7654, CIRissued RMC 37-93, reclassifying above local brands to foreignbrands subject to 55% tax. Copy of RMC was sent to Fortune

Tobacco via telefax but it was addressed to no one in particular.On July 15, 1993, Fortune Tobacco received by ordinary mailcertified copy of RMC.

Respondent sought review of RMC but was denied by BIR. OnJuly 30, 1993, BIR assessed deficiency ad valorem tax.Respondent went to CTA on petition for review.

CTA ruled CIR failed to observe due process of law in issuing RMC37-93, as there was no prior notice and hearing.

SC ruled that when the administrative rule goes beyond merelyproviding for the means that can facilitate or render leastcumbersome the implementation of a law but substantially adds

to or increases the burden of those governed, it behooves theagency to accord at least to those directly affected a chance tobe heard, and thereafter to be informed, before that newissuance is given the force and effect of law (CIR v. CA, CTA andFortune Tobacco Corp, 1996).

INCOME TAX

INCOME TAX Tax on all yearly profits arising from property, professions,

trades or offices, or as a tax on a persons income,emoluments, profits and the like (Fisher v. Trinidad).

Income tax is a direct tax on actual or presumed income,gain or profit (gross or net) of a taxpayer received, accruedor realized during the taxable year that is not exempt.

The law existing at the time of the transaction shall beapplied.

WITHHOLDING TAX It is not an internal revenue tax but a mode of collecting

income tax in advance on income of the recipient ofincome thru the payor of income. [NOTE: Sec. 21, NIRC

enumerates various internal revenue taxes.] There are 2 types of withholding taxes, namely: (1) final

withholding tax (on income paid to resident or non-resident); and (2) creditable withholding tax (on incomepaid to resident).

FINAL WITHHOLDING TAX

FINAL WITHHOLDING INCOME TAX

How much tax is withheld? -- FWT withheld by the payor ofincome (e.g., 20% FWT on interest income on bankdeposits) represents FULL payment of income tax due onsuch income of the recipient.

Who is the taxpayer? -- Income payee (or recipient ofincome) does not report income subjected to FWT in hisincome tax return, although income is reflected in his

4


5/41

audited financial statements for the year. However, he isnot allowed to claim any tax credit on income subjected toFWT.

Who files return and pays tax? -- Withholding agent filesthe withholding tax return, which includes the FWT

deducted from the income of payee, and pays the tax tothe BIR. There is no Certificate of Tax Withheld issued toincome payee.

No Certificate of Tax Withheld (BIR Form 2307) is attachedto the income tax return of recipient of income because hedoes not claim any tax credit in his tax return.

INCOME TAX SYSTEMS

GLOBAL TAX SYSTEM (Total gross income less total deductionstimes applicable rate of tax)

Compensation income not subject to FWT Business and/or professional income Capital gains not subject to FWT Passive investment income not subject to FWT Other income not subject to FWT

SCHEDULAR TAX SYSTEM (Type of income less cost, if allowed= gross income, or GSP or FMV times applicable rate of tax)

Compensation income subject to FWT Capital gains subject to FWT Passive investment income subject to FWT Other income subject to FWT

The Philippines adopted the semi-global or semi-schedular taxsystem. Either the global or schedular system, or both systems,may apply on income of a taxpayer, depending on nature ofincome.

FORMULA

GLOBAL SYSTEM Gross sales Less: Cost of sales Gross income

Less: Deductions PAE (for ind.) Net taxable income Multiplied by applicable rate (graduated or flat) Income tax due Less: Creditable WT Balance

SCHEDULAR SYSTEM Gross selling price or fair market value, whichever is higher times

applicable tax rate = Tax due (real property)

Gross selling price less cost or adjusted basis = Capital gaintimes applicable tax rate = Tax due (shares of dom corp)

Gross income times applicable rate = Tax due (passive invincome)

NATURE OF ASSET

5


6/41

ORDINARY ASSET (Taxed under global system)

CAPITAL ASSET

(Taxed under schedular or global tax system) Inventory if on hand at end of taxable year (mfr or dealer) Stock-in-trade primarily held for sale or for lease in the course of

trade or business (dealer in securities or realty) Asset used in trade or business, subject to depreciation Real property used in trade or business

All other assets, whether or not used in trade or business, otherthan the above-stated ordinary assets (Sec. 39, NIRC)

Guidelines in determining nature of asset: If taxpayer is engaged in real estate business (either as

dealer, developer or lessor), real property is ordinary asset.If registered with HLURB or HUDCC, taxpayer is habituallyengaged in real estate business; if not registered, he isdeemed engaged in real estate business if he has at leastsix (6) transactions, regardless of amount.

If he is not engaged in real estate business, real propertycurrently or previously used in trade or business isconsidered as ordinary asset.

Property classified as ordinary asset for being used in

business by taxpayer other than person engaged in realestate business is automatically converted into capitalasset, if not used in business for more than two (2) yearsprior to the consummation of taxable transaction involvingsaid property (Rev Regs. No. 7-2003, Dec 27, 2002)

KINDS OF TAXPAYERS

INDIVIDUAL

CITIZEN Resident Taxable on worldwide income Non-resident immigrant, permanent worker; OFW

[most of the time during the taxable year = morethan 183 days]

ALIEN Resident Non-resident

Engaged in trade or business (more than 180days in the Phil)

Not engaged in trade or business (180 days or

less stay in Phil) CORPORATION

DOMESTIC Organized under Phil laws; taxable onworldwide income

FOREIGN Organized under laws of a foreign country;taxable only on income from sources within the Philippines

Resident (e.g., Phil branch of foreign corporation)

6


7/41

Non-resident TEST: Law of incorporation determines type of

corporation; ownership of shares is not important.

KINDS OF TAXPAYERS

CO-OWNERSHIP Each co-owner is taxed individually on his distributive

share. Before extra-judicial partition of estate: co-ownership After extra-judicial partition of estate: If co-owner

allows his share to be held in common with his co-heirs under a single management for profit, there isan unregistered partnership (Ona v. CIR, 1972).

Transfer of property from father to children : Aftercompleting installments on 2 lots, father transferred rightsto 4 children. After 1 year, they sold property at profit andpaid tax on capital gain (Obillos v. CIR)

Isolated transactions of unimproved properties : Petitionersbought 2 lots in 1965 and 3 lots in 1966. In 1968, sold 2lots at profit, and in 1970, sold 3 lots at profit (Pascual v.CIR, 1988)

PARTNERSHIP Lease of properties under common management : 3 sisters

borrowed money from father, bought 24 properties and

leased them for 15 years, and appointed brother tomanage; corporation includes partnerships, no matter howcreated or organized (Evangelista v. CIR)

PARTNERSHIPS

EXEMPT General professional partnership (GPP)

Revenue comes from exercise of common profession

only Partners shall report their share of partnership profits

in their individual tax returns, whether distributed ornot

Joint venture undertaking construction activity or energy-related activities with operating contract with thegovernment

TAXABLE Business partnerships, no matter how created or

organized, other than those mentioned above

RESIDENT FOREIGN CORPS

TAXABLE Ordinary branch of a foreign corporation in the Phil: 30% x

net income from income sources within the Phil

7


8/41

PEZA- & SBMA-registered branch: exempt from 15%BPRT

Regional operating headquarters (ROHQ): 10% x netincome from sources within the Phil arising from sale ofservices

Offshore banking unit (OBU) and foreign currency depositunit (FCDU): 10% x interest income on forex loans toresidents

International carriers by air or water: GPB (outbound trip)x 2.5%

Foreign contractor or sub-contractor engaged in petroleumoperations in the Phil: 8% x gross income

EXEMPT (not engaged in business in the Phil) Representative office Regional headquarters (RHQ)

JOINT VENTURE

Insurance pool or clearing house An insurance pool or clearing house, composed of 41 non-life

insurance corporations, whose role was limited to its principalfunction of allocating and distributing the risks arising from theoriginal insurance among the signatories to the treaty or themembers of the pool on their ability to absorb the risks ceded aswell as the performance of incidental functions, such as records,maintenance, collection and custody of funds, and which did not

insure or assure any risk in its own name, was treated as apartnership or association subject to tax as a corporation.

Article 1767 of the Civil Code recognizes the creation of acontract of partnership when two or more persons bindthemselves to contribute, money, property, or industry to acommon fund, with the intention of dividing the profits amongthemselves. Its requisites are mutual contribution to a commonstock, and a joint interest in the profits (AFISCO Insurance Corpet al. vs. Commissioner, G.R. No. 112675, Jan. 25, 1999).

JOINT VENTURE

Agreement to manage and operate mine denominated asPower of Attorney

Philex Mining Corporation entered into an agreementdenominated as Power of Attorney with Baguio Gold MiningCorporation to manage and operate the latters mining claim. Inmanaging the project, Philex made advances of cash andproperty. The mine suffered continuing losses resuling inPhilexs withdrawal as manager and cessation of mineoperations.

A Compromise with Dation in Payment was executed by the

parties, where Baguio Gold admitted its liabilities to Philex andagreed to pay the same.

Philex wrote off in the books the remaining outstandingindebtedness of Baguio Gold by charging a portion of the amountto allowances and reserves that were set up in 1981 and aportion to the 1982 operations. The amount allocated to 1982

8


9/41

was deducted from the 1982 gross income as loss on settlementof receivables.

The BIR disallowed the deduction for bad debt and assessedPhilex deficiency taxes because the advances are Philexsinvestment in a partnership with Baguio Gold for the exploitation

and development of the mine. The totality of the circumstances and the stipulations in the

parties agreement indubitably lead to the conclusion that apartnership was formed between the parties.

First, it does not appear that Baguio Gold was unconditionallyobligated to return the advances made by Philex under theagreement.

Second, the Tax Court correctly observed that it was unlikely fora business corporation to lend hundreds of millions to anothercorporation with neither security nor collateral or a specific deedevidencing the terms and conditions of such loans. The parties

also did not provide for a specific maturity date for the advancesto become due and demandable, and the manner of paymentwas unclear.

Third, the strongest indication that Philex was a partner is thefact that it would receive 50% of the net profits ascompensation under the agreement (Philex Mining Corporationvs. Commissioner, G.R. No. 148187, Apr. 16, 2008).

SOURCES OF INCOME

Interest Interest from sources within Phil and interest on

bonds and obligations of residents, corporate or otherwise Dividend From domestic corporation and from foreign

corporation, unless less than 50% of gross income of foreigncorporation for 3 years prior to declaration of dividends wasderived from sources within the Phil; hence, apply only ratio ofPhil-source income to gross income from all sources

Services Place where services are performed, except in caseof international air carrier and shipping lines which are taxed at2.5% on their Gross Phil Billings. Revenues from (outbound) tripsoriginating from the Phil are considered as income from sourceswithin the Philippines, while revenues from inbound trips are

treated as income from sources outside the Philippines. Rentals and royalties Location or use of property or property

right in Phil Sale of real property Located in the Philippines Sale of personal property Located in the Philippines Gain from sale of shares of stocks of a domestic

corporation is ALWAYS treated as income from sources withinthe Philippines.

Other intangible property Mobilia sequuntur personam

Gross Phil Billings (GPB)

INTERNATIONAL AIR CARRIER From Phil to foreign destination (outbound trip)

Revenue from carriage of passengers, excesscargo and mail originating from the Phil in acontinuous and uninterrupted flight is incomefrom sources within the Phil, regardless ofplace of issue or payment of ticket

9


10/41

Transhipment of passenger in another countryon another foreign airline: GPB tax appliesonly on aliquot portion of revenue on Philippineleg (Phil to foreign country)

From foreign country to the Phil (inbound trip)

This is treated as income from foreign sources;hence, exempt from Phil income tax INTERNATIONAL SHIPPING LINE

Revenue for carriage of cargoes from Phil to finalforeign destination is taxable. No similar rule ontranshipment of passenger or cargo of internationalair carrier

Revenue for carriage of cargoes from foreign countryto Phil is treated as foreign-source income; hence,exempt from income tax

INCOME

INCOME means cash or its equivalent coming to a person withina specified period, whether as payment for services, interest orprofit from investment. It covers gain derived from capital, fromlabor, or from both combined, including gain from sale orconversion of capital assets. In its broad sense, income means allwealth that flows into the taxpayer other than as mere return ofcapital.

Return of capital (e.g., payment of liability) is exempt fromincome tax.

To be taxable, there must be income, gain or profit; gain isreceived, accrued or realized during the year; and it is notexempt from income tax under the Constitution, treaty or law.

Mere increase in the value of property does not constitutetaxable income. It is not yet realized during the year.

Transfer of appreciated property to the employee forservices rendered is taxable income. All requisites aboveare present.

TEST IN DETERMINING INCOME

Severance or Realization test There must be separation from capital of something of

exchangeable value (e.g., sale of asset). Stock dividend isnot income.

Claim of right doctrine CIR v. Javier, 199 SCRA 824 (Mellon Bank case where

$1,000 was erroneously remitted as $1,000,000) Economic benefit test or equivalent of cash doctrine

Stock option given to the employee: taxable compensationincome is excess of FMV over exercise price

Income from whatever source All income not expressly exempted from income,

irrespective of voluntary or involuntary action of taxpayerin producing income, whether it comes from legal or illegalsource

NATURE OF INCOME

10


11/41

COMPENSATION INCOME Existence of employer-employee relationship

BUSINESS AND/OR PROFESSIONAL INCOME NO employer-employee relationship

CAPITAL GAIN Real property in the Phil and shares of stock of domestic

corporation (taxed under schedular tax system) Other sources of capital gain (taxed under global tax

system) PASSIVE INVESTMENT INCOME

Interest, dividend, and royalty income OTHER INCOME

Prizes and winnings All other income, gain or profit not covered by the above

classes

COMPENSATION INCOME

Compensation income falling within the meaning of statutoryminimum wage(SMW) under R.A. 9504, effective July 6, 2008, asimplemented by Revenue Regulations No. 10-2008 dated July 8,2008, shall be exempt from income tax and withholding tax.

Holiday pay, overtime pay, night shift differential pay, andhazard pay earned by Minimum Wage Earner (MWE) shalllikewise be covered by the above exemption.

However, an employee who receives/earns additional

compensation such as commissions, honoraria, fringe benefits,benefits in excess of the allowable statutory amount of P30,000,taxable allowances and other taxable income other than theSMW, holiday pay, overtime pay, hazard pay and night shiftdifferential pay shall not enjoy the privilege of being a MWE and,therefore, his/her entire earnings are not exempt from incometax and withholding tax.

COMMISSION INCOME

Commissions paid for marketing services rendered abroad for aPhilippine company is considered foreign-source income. Thesource of the income is the property, activity or service thatproduced the income. Place where services are rendereddetermines taxation. Since taxpayer is an alien, she is taxedonly on income from sources within the Philippines.

The fact that recipient of commission income is President andmajority stockholder of the Philippine company does not alter thesource of income. There are only two ways by which thePresident and other members of the Board can be grantedcompensation apart from reasonable per diems: (1) when there

is a provision in the by-laws fixing their compensation; and (2)when the stockholders agree to give it to them. If none of theseconditions are present, commission income cannot beautomatically attributed to petitioners position in the company(Juliane Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)

Documents faxed to Philippine company bearing instructions asto sizes, designs and fabrics to be used in finished products and

11


12/41

sample sales orders relayed to clients abroad are not enough toshow services were performed abroad. Said documents mustshow that instructions or orders ripened into concluded orcollected sales in Germany (CIR v. Baier-Nickel, GR No. 153793,Aug 29, 2006).

ONSHORE AND OFFSHORE INCOME

Construction and installation works were done in the Philippinesby a Phil contractor; hence, income is from sources within thePhilippines.

However, some pieces of equipment and supplies for NDC projectand ammonia storage tanks and refrigeration units were

completely designed and engineered in Japan. All services forthe design, fabrication, engineering and manufacture ofmaterials and equipment under Japanese Yen portion were madeand completed in Japan; hence, they are exempt from Philincome tax on the part of the foreign corporation.

Onshore and offshore service income from turn-key contract on aproject in the Phil is divisible (CIR v. Marubeni Corp, GR No.137377, Dec 18, 2001).

INTEREST INCOME

TYPES OF INTEREST INCOME Subject to FWT: Interest income on bank deposits, deposit

substitutes, trust and other similar arrangements 20% FWT peso deposit 7.5% FWT foreign currency deposit

NOT subject to FWT: All other interest income or financingincome

Exempt income: Long-term deposit or investment by individuals

Taxable income: Preferential tax rate Pre-termination of long-term

deposit by individual (20%: 1- less than 3 yrs; 12%: 3yrs-less than 4 yrs; 5%: 4 yrs-less than 5 yrs); andinterest on foreign loan (20%)

Regular tax rate All other cases (graduated rates of5% to 32% for individuals and 30% for corporations)

DIVIDEND INCOME

REQUISITES FOR DIVIDEND DECLARATION Presence of retained earnings No prohibition to declare dividend in loan agreement

Declaration of dividend by Board of Directors

TYPES OF DIVIDENDS Taxable

Cash dividend Property dividend

Exempt

12


13/41

Stock dividend (except when there is change inproportionate interest among stockholders and thereis subsequent cancellation or redemption of sharesdeclared as stock dividend)

Liquidating dividend distribution of assets tostockholders is not truly dividend that must comefrom Retained Earnings of the corporation. Excess offair market value over cost shall be taxed under theglobal tax system.

Intra-corporate dividend: Exempt from tax Corporation paying dividend: Domestic corporation Recipient of dividend: Another domestic corporation or

resident foreign corporation Dividend paid to non-resident foreign corporation

Corporation paying dividend: Domestic corporation Recipient of dividend

Foreign head office makes direct investment in Philcompany: 15% FWT

Phil branch of foreign corporation makes investmentin Phil company: Exempt from income tax

Tax-sparing provision If country of residence of foreign corporation will

allow credit not only of the 15% tax actually paid butalso the 15% tax deemed paid to the Phil govt 15%FWT; otherwise, 30%.

If foreign country does not impose income tax ondividend paid by foreign corporation 15% FWT

Dividends are prima facie the income of the owner of the stockas of the date of declaration of the dividend and are taxable tosuch owner. But where the record owner has sold the stockunder an escrow agreement under which title is to be retained byhim, the dividends received by such owner and applied inreduction of the purchase price are not taxable to him.

While there is transfer of the shares of stock/securities to theBorrower pursuant to the Securities Borrowing and Lending (SBL)

Agreement, the Lender retains certain rights accruing to theshares of stock/securities lent, such as the right to receive cash,stock dividends or interest which the Borrower is obliged tomanufacture or reimburse to the Lender during the borrowingperiod. These cash, stock dividends or interest which theBorrower is required to manufacture or reimburse to the Lenderare otherwise referred to as "Manufactured Dividends orBenefits". The Lender may likewise retain voting rights over theloaned shares of stock/securities while in the possession of theBorrower, if mutually agreed upon by the parties.

Receipt of the Manufactured Dividends or Benefits shall not be

a taxable income of the Lender since it just representsdividends/other benefits that the lender would have received hadthe share not been loaned pursuant to SBL agreement. However,the payment of such amount by the Borrower shall not be a taxdeductible expense. On the other hand, the receipt of (actual)cash dividend from the issuing company by the Borrower or

13


14/41

Buyer shall be subject to the provisions of existing laws (e.g.,final withholding tax of 10% on gross dividend paid to a citizen).

EXCLUSIONS

Life insurance proceeds Amount received by insured as return of premium Gifts, bequests and devises Compensation for injuries or sickness Income exempt under treaty

NDC v. CIR, 1987 : Interest on PNs issued re purchase ofvessels is subject to tax; undertaking signed by Sec. ofFinance has no inhibition to collect disputed tax. NDC isnot one being taxed; it is only a withholding agent.

Retirement benefits, pensions, gratuities R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)

Interest income of employee trust fund or accreditedretirement plan is exempt from FWT (CIR v. GCLRetirement Plan, 207 SCRA 487)

Amount received as a consequence of separation becauseof death, sickness or other physical disability or for anycause beyond the control of employee

Tax exemption applies to salary or cash equivalent ofaccumulated leave credits, such as terminal leave pays ofretiring government employees which are considered notpart of gross salary (CIR v. Castaneda, 1991).

COA alleged that DBP is actual owner of the trust fund and itsincome because:

DBP made the contribution to the Fund Trustees of the Fund are merely administrators DBP employees only have an inchoate right to the Fund

DBP responded that the Trustees received and collected incomeand profit from the Fund and they maintained separate books forthat purpose. The principal and income will not revert to DBP,even if trust is subsequently modified or terminated.

SC ruled that the beneficiaries of the Fund are the DBP officialsand employees who will retire. It is not always necessary that

the beneficiaries should be named or even be in existence at thetime the trust is created in his favor, provided they aresufficiently certain or identifiable.

The Salary Loan Program did not terminate the trust to theFunds trustee. That the DBP Board of Directors confirms theapproval of the SLP by the Funds trustees does not make thefund property of DBP (DBP v. COA, 2004).

Miscellaneous items Income of foreign government, or international or regional

financial institutions owned by foreign governments

Income of government or its political subdivisions from anypublic utility or exercise of governmental function

Atlas Mining Corp borrowed from Mitsubishi Metal Corp anamount to be used for the improvement of the formers copperproduction and the latter agreed to purchase all the copperconcentrates produced from the improved facilities for 15 years.

14


15/41

Mitsubishi turned around and borrowed equivalent amount in Yenfrom Export-Import Bank of Japan, financial institution owned bythe Japanese government, and a consortium of Japanese banks.

SC ruled that when Mitsubishi secured funds, it was on its ownindependent capacity and not as conduit of consortium of

Japanese banks or Eximbank. The sole creditor of Atlas isMitsubishi (not Eximbank) as there was nowhere in the contractcould it be inferred that Mitsubishi acted for and in behalf ofEximbank (CIR v. Mitsubishi Metal Corp, 1990).

Miscellaneous items Prizes and awards

Prizes amounting to P10,000 or less is subject toglobal tax system; more than P10,000 20% FWT

In recognition of religious, charitable, artistic, literaryachievement, etc., he did not enter contest and isnot required to render substantial future services

Granted to athletes in local and international sportscompetitions, sanctioned by their national sportsassociations

13th month pay and other benefits (up to P30,000) Gains from sale of long-term (more than 5 years) bonds,

debentures and other certificates of indebtedness(received by ANY person)

Gains from redemption of shares in mutual fund (sale ofshare by investor is made thru surrender to the mutualfund company)

DEDUCTIONS

BUSINESS EXPENSES 1. The expense must be ordinary and necessary; 2. Paid or incurred during the taxable year; 3. In carrying on or which are directly attributable to the

development, management, operation and/or conduct of the trade, business

or exercise of profession;

Expenses partly for business purposes are apportioned

(Jamir v. CIR); Promotion expenses are for combinedbusiness and medical trip (Zamora v. CIR)

4. Supported by adequate invoices or receipts; 5. Not contrary to law, public policy or morals. Operating

expenses of an illegal or questionable business are deductible, but

expenses of an inherently illegal nature, such as bribery and protection

payments, are not deductible. 6. The tax required to be withheld on the amount paid or

payable is shown to have been paid to the BIR.

An expense is ordinary when it connotes a payment, which isnormal in relation to the business of the taxpayer and thesurrounding circumstances.

15


16/41

An expense is necessary where the expenditure is appropriateor helpful in the development of taxpayers business or that thesame is proper for the purpose of realizing a profit or minimizinga loss.

P9.4 M paid in 1985 for advertising a product was staggering

incurred to create or maintain some form of goodwill for thetaxpayers trade or business or for the industry or profession ofwhich the taxpayer is a member.

Goodwill generally denotes the benefit arising from connectionand reputation, and efforts to establish reputation are akin toacquisition of capital assets. Therefore, expenses related theretoare not business expenses but capital expenditures (CIR vs.General Foods Phi., GR No. 143672, Apr. 24, 2003).

Legal and accountants fees for prior years were not billed incorresponding years (1984-1985). It was paid by taxpayer in

succeeding year (1986) when it was billed by the lawyer andaccountant. Taxpayers uses accrual method of accounting. Accrual of income and expense is permitted when the all events

test has been met. This test requires (1) fixing a right toincome or liability to pay, and (2) the availability of reasonablyaccurate determination of such income or liability. It does not,however, demand that the amount of income or liability beknown absolutely; it only requires that a taxpayer has at itsdisposal the information necessary to compute the amount withreasonable accuracy, which implies something less than an exactor completely accurate amount.

Moreover, deduction takes the nature of tax exemption; it mustbe construed strictly against the taxpayer (Commissioner vs.Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007).

D. Optional Standard Deduction

Privilege is available only to citizens or resident aliens as well ascorporations subject to the regular corporate income tax; thus,non-resident aliens and non-resident foreign corporations are notentitled to claim the optional standard deduction.

Standard deduction is optional; i.e., unless taxpayer signifies in

his/its return his/its intention to elect this deduction, he/it isconsidered as having availed of the itemized deductions;

Such election when made by the qualified taxpayer is irrevocablefor the year in which made; however, he can change to itemizeddeductions in succeeding year(s);

Amount of standard deduction is limited to 40% of taxpayersgross sales or receipts (in the case of an individual) or grossincome (in the case of a corporation). If the individual is on theaccrual basis of accounting for his income and deductions, OSDshall be based on the gross sales during the year. If he employsthe cash basis of accounting, OSD shall be based on his gross

receipts during the year. It should be noted that cost of sales orcost of services shall not be allowed to be deducted from grosssales or receipts of an individual.

A general professional partnership (GPP) may claim either theitemized deductions or in lieu thereof, the OSD allowed tocorporations in claiming the deductions in an amount notexceeding 40% of its gross income. The net income determined

16


17/41

by either the itemized deduction or OSD from the GPPs grossincome is the distributable net income from which the share ofeach share is to be ascertained.

Proof of actual expenses is not required; hence, he is not alsorequired to keep books of accounts and records with respect to

his deductions during the year.

ACCOUNTING METHODS

Cash method Year of receipt or payment determines when income or

expense shall be reported Accrual method

All events test; amounts received in advance (unearnedrevenues) are not treated as revenue of the period in

which received but as revenue of future periods in whichearned (Manila Mandarin Hotels vs. CIR, CTA Case No.5046, Mar 24, 1997).

Installment sales Sale on the installment plan

Initial payments (down payment and all monthlyinstallments in the YEAR OF SALE) do not exceed25% of GSP

Deferred payment sale, not on the installment plan (istaxed like a cash sale)

Initial payments exceed 25% of GSP

Percentage of completion (for long-term construction projects) Crop year method

FILING OF TAX RETURN

SUBSTITUTED FILING OF ITR: No individual income tax return forthe year will be filed by the employee concerned, and theemployer is the one that files the return for him

Applies only to individuals; With only one (1) employer; and Employer correctly withholds the income tax on

compensation income paid to the employee and remits thesame to the BIR

Substituted filing of return does not apply when the conditionsabove are not met, such as when the individual has (a) two ormore employers, or (b) mixed incomes, or the correct WT wasnot deducted from compensation income by the employer, etc.

Individual deriving mixed income, or purely business/professional income, or other income must file his quarterlyincome tax returns (BIR Form 1700 Q) and annual income taxreturn (BIR Form 1700 ) as follows:

Period Due Date for Filing Return

Q1 Return April 15 of same year Q2 Return August 15 of same year Q3 Return November 15 of same year Annual Return April 15 of the following year

17


18/41

A domestic corporation and resident foreign corporation shall filequarterly corporate income tax return (BIR Form 1702 Q) andannual corporate income tax return (BIR Form 1702 as follows:

Q1 Return May 31 of same year

Q2 Return August 31 of same year Q3 Return November 30 of same year Annual Return April 15 of the following year (if on

calendar year), or 15th day of the fourthmonth following the close of the fiscal year (ifon fiscal year).

Computation of the quarterly and annual tax returns ofindividuals (except those receiving purely compensation income)and corporations shall be made on the cumulative basis; i.e.,gross income and deductions are consolidated and the income

tax liability is computed on the consolidated net income, and theincome taxes paid for the preceding quarter(s) are creditedagainst the consolidated income tax due.

REFUND

A taxpayer must do two things to be able to successfully make aclaim for the tax refund of withholding tax on compensationincome: (a) declare the income payments it received as part ofits gross income and (b) establish the fact of withholding.

SC denied the refund claim for the following reasons: The amounts of total taxes withheld for each redundant

employees cannot be verified against the Summary ofGross Compensation and Taxes Withheld for 1995 due tothe fact that this summary enumerates the amounts ofincome taxes withheld on per district/area basis.

The SGV certification cannot be appreciated in PLDTsfavor as the courts cannot verify such claim. Besides, thedocuments from which SGV traced the Alpha List to theMonthly Remittance Returns of Income Taxes have notbeen presented to the court, and this is fatal to PLDT.

The cash salary vouchers for the rank and file employeesdo not have acknowledgment receipts (PLDT v. CIR, GR157264, Jan 31, 2008).

Requisites of claim for refund are: Claim was filed within 2 years under Sec. 230, NIRC; Income upon which taxes were withheld were included in

the return of the recipient; and Fact of withholding is established by a copy of statement

(BIR Form 1743.1) duly issued by payor (withholding agent)to payee, showing amount paid and amount of tax withheld

(RR 6-85). CTA found above requisites were satisfied. Findings of facts of

CTA are entitled to great weight and will not be disturbed onappeal, unless it is shown that the lower court committed grosserror in the appreciation of facts.

18


19/41

Failure of respondent to indicate its option in its annual ITR toavail itself of either tax refund or tax credit is not fatal to itsclaim for refund.

Sec. 76, NIRC offers two options: refund or tax credit. Theoptions are alternative and the choice of one precludes the

other. However, in Philam Asset Mgt v. CIR, this Courtruled that failure to indicate a choice will not bar a validrequest for refund, should this option be chosen by thetaxpayer later on. The requirement is only for the purposeof easing tax administration, particularly the self-assessment and collection aspects.

Failure of respondent to present in evidence the 1998 ITR is notfatal to its claim for refund.

CTA denied claim for 1997 tax credit of PERF because itfailed to submit its 1998 ITR.

PERF attached its 1998 ITR to its motion for

reconsideration. The ITR is part of the records of the caseand clearly showed that income taxes were not claimed astax credit in 1998.

Technicalities should not be used to defeat substantiverights, especially those that have been held as a matter ofright.

The CAs reliance on Rule 132, Sec. 34 of Rules of Evidenceis misplaced. This provision should be taken in the light ofRA 1125; proceedings therein shall not be governed strictlyby technical rules of evidence.

No one shall unjustly enrich oneself at the expense of

another. This applies not only to individuals but to theState as well. In the field of taxation where the Stateexacts strict compliance upon its citizens, the State mustlikewise deal with taxpayers with fairness and honesty.The harsh power of taxation must be tempered withevenhandedness (CIR v. PERF Realty Corp., GR 163345,July 4, 2008).

ESTATE TAX

Death is the generating source of the power to tax (Lorenzo v.

Posadas). No manual or physical transfer of the property isrequired for the estate tax to accrue.

The law in force at the time of death of the decedent governs.Transfer of ownership over the property of the decedent is byoperation of law.

Residence refers to the permanent home, the place to whichwhenever absent, for business or pleasure, one intends to return,and depends on facts and circumstances, in the sense thatdisclose intent (Corre v. Tan Corre). It is not necessarily theactual place of residence at the time of death.

The estate shall be appraised at its fair market value at the time

of death. Real property: fair market value/zonal value as

determined by the CIR Shares of stocks: fair market value as shown in the

audited financial statements closest to the date of death ofthe decedent

19


20/41

Estate tax return shall be filed and the tax due must be paidwithin six (6) months from date of death

WHO IS THE DECEDENT AND WHAT PROPERTIES FORM PART OFHIS GROSS ESTATE?

Resident decedent: Citizen or resident alien

Include in his gross estate all properties, real orpersonal, tangible or intangible, regardless oflocation (within or without the Philippines)

Non-resident decedent: Non-resident alien Include in his gross estate all real and tangible

personal properties located in the Philippines For intangible properties, use the principle ofmobilia

sequuntur personam Taxation of intangibles followsthe residence or domicile of the owner, except forcertain intangible properties mentioned in Sec. 104,NIRC, which have situs in the Philippines.

INTANGIBLE PROPERTIES THAT HAVE SITUS IN THE PHILIPPINES(Sec. 104, NIRC):

Franchise which is exercised in the Philippines Shares, obligations or bonds issued by any corporation

organized in the Philippines Shares, obligations or bonds issued by any foreign

corporation, 85% of the business of which is located in thePhil, or if such properties have acquired business situs inthe Phil (Wells Fargo case)

Shares or rights in partnership, business or industryestablished in the Philippines

DECEDENTS GROSS ESTATE (Sec. 85, NIRC) Decedents interest (in property owned or possessed) Transfers in contemplation of death Revocable transfers Property passing under a general power of appointment Proceeds of life insurance Transfers for insufficient consideration

Capital of the surviving spouse shall not form part of the estateof the deceased spouse

Gross estate: Conjugal Exclusive

Total Real property Personal property

Less: Deductions: Funeral expenses (5% x gross estate, not to exceed

P200,000) Claims against the estate (debt instrument was notarized &

statement of disposition of loan proceeds, if deathoccurred within 3 years)

Unpaid taxes and mortgages Medical expenses (incurred within 1 year prior to death,

not to exceed P500,000) Family home (equal to FMV of decedents family home) not

to exceed P1 Million Standard deduction (P1 Million) Properties previously taxed (vanishing deduction) Transfers for public use (to government or political

subdivision)

20


21/41

Amount received by heirs under RA 4917, provided suchamount is part of gross estate

Share of the surviving spouse (50% of net conjugal estate) Net Taxable Estate Estate tax due (First P200,000 is exempt; 5% from P200,001; and

20% on over P10 M)

REQUISITES OF PROPERTY PREVIOUSLY TAXED (VANISHINGDEDUCTION)

Death Identity of the property Inclusion of the property (in gross estate or gross gift) Previous taxation of the property (estate tax or gift tax) No previous vanishing deduction on the property (to

preclude application of vanishing deduction on sameproperty more than once).

Percentage of deduction decreases over a period of 5 yearsor 20% reduction every year

FORMULA FOR DETERMINING AMOUNT OF VANISHINGDEDUCTION

Value taken of property previously taxed (as declared in priordecedents gross estate)

Less: Mortgage debt paid (1st deduction) Initial basis Divided by the value of gross estate of present decedent = __%

Multiplied by expenses, indebtedness, etc and transfers forpublic purposes

Equals 2nd deduction Initial basis less 2nd deduction = Final basis multiplied by

applicable rate of vanishing deduction (within 1 year, 100%; 2years, 80%; 3 years, 60%; 4 years, 40%; and 5 years, 20%) =

Amount of vanishing deduction deductible from the estate ofsecond decedent

DONORS TAX

Donors Tax is a tax on the privilege to transfer property from aliving person to another living person.

It is an excise tax, and not a property tax. It is imposed on the donor of property. Donees tax was already abolished and incorporated into

donors tax. Purposes of donors tax

To supplement estate tax To prevent avoidance of income tax thru the device of

splitting income Donation of property must be accepted by the donee in the same

or another document. Sale or exchange of property for less than adequate and full

consideration is subject to donors tax, except where theproperty is subject to capital gains tax, such as real propertylocated in the Phil and shares of stock of a domestic corporation.

Donated property must be valued at fair market value at thetime of the donation.

21


22/41

Transfer of property may be in trust or otherwise, direct orindirect.

Transfer becomes complete and taxable only when the donor hasdivested himself of all beneficial interest in himself or his estate.

Donors tax rates:

Donee is member of the family First P100,000 of net gift is exempt 2% on P100,001 to P200,000 15% on amount over P10 M

Donee is a stranger 30% of net gift Stranger is a person who is not a (a) brother or sister (whether

by whole or half-blood), spouse, ancestor, and lineal descendant;or (b) relative by consanguinity in the collateral line within thefourth degree of relationship.

Donors tax return shall be filed and the donors tax paid within30 days from date of donation. Each donor-spouse must file a

return. Donor

Individual Citizen and resident alien Taxable on all properties,

regardless of location Non-resident alien Taxable on property located in

the Phil Corporation

Domestic corporation and resident foreigncorporation Taxable on all properties, regardless oflocation

Non-resident foreign corporation Taxable onproperty located in the Phil

Donation of conjugal property to a child Made by both spouses TWO donations Made by one spouse only (Tang Ho v. Board of Tax Appeals

[now CTA]) ONE donation

Cumulative computation of donors tax is required for the secondand succeeding donations by the same donor to members of thefamily during the calendar year, but no cumulative computationof donors tax is required for donations to strangers because it is

subject to a flat rate of 30%. Exempt donations

To Phil government for scientific, engineering, etc purposes To social welfare, cultural, and charitable organizations,

not more than 30% shall be used for administrationpurposes

To IRRI and Ramon Magsaysay Awards Foundation To National Museum and National Library To Intramuros Administration

Donation propter nuptias P10,000, provided donation is madewithin one year before or after the wedding of child

BUSINESS TAXES VAT (Title IV, NIRC)

Taxable transactions Sale or lease of goods or properties Sale of services

22


23/41

Importation of goods

Formula Output Tax Less: Input Tax

VAT Payable/(Excess Input Tax)

NON-VAT/EXEMPT FROM VAT Transaction is subject to Other Percentage Tax (Title V, NIRC);

VAT will no longer be imposed. Tax is imposed on Gross Receiptsor Gross Income

VAT is imposed in addition to Excise Tax (Title VI, NIRC) Some transactions are not subject to any kind of business tax --

VAT or OPT (e.g., sale of agri food products in its original state;sale of books; etc)

VALUE ADDED TAX

CHARACTERISTICS OF VAT Tax on value added of taxpayer Transparent form of sales tax VAT must be separately

indicated in the VAT invoice or receipt Broad-based tax on consumption of goods, properties and

services in the Phil Indirect tax Tax is collected thru the tax credit method

Output tax on sales less input tax on purchases

No cascading of taxin VAT system Tax-inclusive method is adopted by the Phil VAT is

deemed included in total invoice amount in VAT invoice orreceipt

Destination principle tax imports, zero-rate exports

TAXABLE PERSONS Seller of goods or properties

Goods or properties are consumed or forconsumption in the Phil

In the course of trade or business

Sales of goods or properties are not exempt fromVAT

Seller of services Listed services are performed or to be performed in

the Phil In the course of trade or business For a valuable consideration Services are not exempt from VAT

Importer of goods Whether done in the course of his trade or business

or for personal consumption

SPECIAL TYPES OF PERSONS Husband and wife are separate taxpayers Joint venture undertaking construction or engaged in

energy-related projects is subject to VAT, although exemptfrom income tax

Government

23


24/41

Governmental function: Exempt from VAT Proprietary function: Subject to VAT

Non-stock, non-profit association Association dues and special assessments; guest

fees and fees for use of facilities exempt from VAT

Income from operating restaurant, boutique or shopor for leasing facilities -- taxable

Seller of real properties is subject to VAT Seller executes a document of sale (DAS or CTS) Real property is located in the Philippines Seller is engaged in real estate business either as dealer,

developer or lessor Real property is held primarily for sale or for lease in the

ordinary course of trade or business

Sale is not exempt from VAT However, Rev. Regs. No. 4-2007 (Feb 2007) provides that if the

real property sold is used in his trade or business, saidtransaction is subject to VAT, being incidental to the mainbusiness of the taxpayer, who is a VAT-registered taxpayerengaged in other types of business.

The absence of profit in the performance of taxableservices does not make such activity for a fee exempt fromVAT (CIR v. COMASERCO, GR 125355, Mar 30, 2000).

Goods or properties must be located in the Philippines andconsumed or destined for consumption in the Phil.

Special economic zones under RA 7916 (PEZA Law) andfreeport zones under RA 7227 (BCDA Law) are treated asforeign territories by fiction of law. Hence, importation ofgoods by a special economic or freeport zone enterpriseshall be exempt from VAT and customs duties and will besubject to VAT and duties only upon their withdrawal fromthe customs custody.

Destination Principle: Export sales of goods are zero-rated (0% VAT) Import of goods into the Phil is taxable at 12% VAT

Tax base for sale of goods or property is Gross Selling Price

(GSP) - the total amount of money or its equivalent, which thepurchaser pays or is obligated to pay to the seller inconsideration of the sale, barter or exchange of the goods orproperties, excluding the VAT.

As a rule, output tax accrues on sale of goods or properties(other than a real property) at the time of sale, when the VATsales invoice is issued, although none or only a part of the grossselling price is paid by the buyer at the time of sale.

Excise tax, if any, shall form part of GSP. Sales discounts determined and granted at the time of sale,

which are expressly indicated in the sales invoice do not form

part of the tax base. Grant of discount must not depend uponthe happening of a future event or the fulfillment of certaincondition. They must be recorded in the books of accounts of theseller.

20% sales discounts to senior citizens under RA 9257 (AmendedSenior Citizens Law) shall be deducted from gross sales beforeapplying the VAT rate.

24


25/41

Sales of goods subject to 0% VAT Actual export sales Deemed export sales

Internal or constructive export sales under BOI law(EO 226) and special laws (RA 7916 and RA 7227)

are automatically zero-rated. Ecozones and freeport zones are deemed

foreign territories by fiction of law (CIR v.Seagate Technology (2005); CIR v. ToshibaInformation Equipment (2005)

For as long as the goods remain within thezone, consumed or destroyed there, they willbe duty-free and tax-free (Coconut Oil RefinersAsso v. Torres (2005)

Effectively zero-rated sales (sales to ADB, embassies,etc) need approval from BIR before sale; otherwise,

sale is exempt. Sales of gold to BSP; but sale of silver or copper is taxable

at 12% VAT Foreign currency denominated sales Sales of goods, supplies, equipment and fuel to persons

engaged in international shipping or international airtransport operations

ZERO-RATED SALE Transaction is completely free of VAT; rate charged by seller is

zero

VAT-registered seller can reclaim input taxes passed on to it bysellers of goods or services from BIR in form of refund or taxcredit

Zero-rated sales are taxable sales for purposes of registration asVAT taxpayer to determine threshold

The words ZERO-RATED SALE must be printed on invoice orreceipt

EXEMPT SALE Exemption removes the VAT at the exempt stage Exempt taxpayer cannot reclaim VAT passed on to it by VAT-

registered sellers; VAT becomes part of the cost of asset orexpense

Exempt sales are not taxable sales for VAT purposes The words EXEMPT SALE must be printed on invoice or receipt 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 formaterials supplied with the services and deposits and advancepayments actually or constructively received during the taxablequarter for the services performed or to be performed foranother person, excluding the VAT, except those amounts

earmarked for payment to unrelated third party or received asreimbursement for advance payment on behalf of another, whichdo not redound to the benefit of the payor.

For sale of services, the test is not whether services have beenperformed or not, but whether amount of compensation or fee isreceived, actually or constructively. The rule is: NO RECEIPT OFPAYMENT, NO VAT LIABILITY.

25


26/41

Sale of medicines by the hospital pharmacy to in-patients isexempt from VAT, but sale to out-patients is subject to 12% VAT(St. Lukes Medical Center v. CTA and CIR, 1998).

Tolling fees received by a hotel for PLDT is not part of its gross

receipts Payment of VAT by the hotel on fees for providing limousine

service to its client is correct. It is not subject to the 3% commoncarriers tax. Claim for tax credit is denied (Manila MandarinHotel v. CIR)

Gross receipts of theatre owner or operator from sales of ticketsto moviegoers are exempt from VAT. Theatres and moviehouses are not included in the enumeration of taxable services inthe VAT law. Our tax laws, past and present, did not adopt morespecific terms for sale or exchange of services to includeshowing of films in public (SM Prime Holdings v. CIR, CTA Case

7079, 2006). PAGCOR is exempt from VAT pursuant to its charter, PD 1869.

Being a special law, PD 1869 prevails over RA 7716, asubsequent general law. To be valid, repeal of special law shouldbe express (CIR v. Acesite Hotel Corp, GR 147295, Feb 16, 2007).

Prescriptive period commences from the close of the taxablequarter when the sales were made and not from the time theinput VAT was paid nor from the time the official receipt wasissued. Thus, when a zero-rated VAT taxpayer pays its input VATa year after the pertinent transaction, said taxpayer only has ayear to file a claim for refund or tax credit of the unutilized

creditable input VAT. The reckoning frame would always be theend of the quarter when the pertinent sales or transaction wasmade, regardless when the input VAT was paid (CIR v. MirantPagbilao Corp, 2008).

NOTE: It appears that the SC strictly interprets the provision ofSec. 112 of the Tax Code, even with respect to sale of services.In other words, where the law does not qualify, it is not for thecourt nor the BIR to so qualify.

DUTIES OF BIR

DUTIES OF BIR To assess and collect taxes To enforce forfeitures, fines and penalties To execute judgments in all cases decided in its favor by

the tax court and ordinary courts To administer supervisory and police powers conferred

upon it by law POWERS OF CIR

To interpret tax laws and regulations To decide disputed assessments and refunds/credits To examine books and records of taxpayers and to assess

correct taxes. When a report required by law is notforthcoming within the time fixed by law or rules, or thereis reason to believe that such report is false, incomplete orerroneous, CIR shall assess proper tax based on bestevidence obtainable

ASSESSMENT CYCLE

26


27/41

Filing of tax return Tax audit by BIR Informal Conference Preliminary Assessment Notice (PAN)

Reply to PAN Final Assessment Notice (FAN) Protest to FAN Supplemental Protest Law prescribes due date 120 days + 120 days

15 days from receipt

3 years or 10 years 30 days from receipt 60 days from filing of protest

BIR ACTION Cancell assessment Deny protest Revise assessment

BIR INACTION Appeal to CTA

Appeal to CTA en banc

180 days from filing of protest, if any, or supplemental protest

30 days from date of receipt of denial of protest or lapse of 180days

15 days from date of receipt; addl 15 days may be granted byCTA after payment of docket fee.

ADMINISTRATIVE REMEDIES

TAX LIEN COMPROMISE AND ABATEMENT DISTRAINT AND/OR LEVY SALE FORFEITURE PENALTIES AND FINES

Surcharge, interest, and compromise penalty TAX CLEARANCE

No distribution of assets before payment of taxliabilities

Unpaid subscription receivable of stockholdersCOMPROMISE

GROUNDS FOR COMPROMISE Reasonable doubt of assessment

27


28/41

Minimum is 40% of basic tax assessed Financial position of taxpayer demonstrates clear inability

to pay assessed tax Minimum is 10% of basic tax assessed Taxpayer waives in writing his bank secrecy privilege

under RA 1405 Where the percentage or amount offered for compromise is

lower than the minimum, it shall be approved by theNational Evaluation Board

ALL CRIMINAL VIOLATIONS MAY BE COMPROMISED, EXCEPTTHOSE ALREADY FILED IN COURT OR INVOLVING FRAUD (Sec.204(A), NIRC)

ABATEMENT

ABATEMENT MEANS ENTIRE TAX LIABILITY IS CANCELLED Tax is unjustly or excessively assessed Administrative and collection costs do not justify collection

of the amount due POWER TO COMPROMISE OR ABATE SHALL NOT BE DELEGATED

BY CIR, EXCEPT: Regional assessments P500T or less Minor criminal violations (Sec. 204(B)& Sec. 7, NIRC)

DISTRAINT, LEVY OR GARNISHMENT

DISTRAINT PERSONAL PROPERTY Actual distraint: Delinquency sets in Constructive distraint

Preventive remedy to forestall possible dissipation ofassets when delinquency takes place

Tax liability has preferential lien over constructivedistraint to answer for judgment lien in favor ofemployees of company for unpaid wages

LEVY REAL PROPERTY GARNISHMENT BANK DEPOSITS

JUDICIAL REMEDIES

Judicial actions Civil action Criminal action

Case to be filed in the name of the Govern-ment of thePhilippines (Sec. 220, NIRC)

No civil or criminal action may be filed without the approval ofthe Commissioner of Internal Revenue

Civil action is resorted to when tax liability becomes collectible

CIVIL ACTION

COLLECTIBILITY OF DELINQUENT TAX Final assessment is not protested within 30 days from date

of receipt (Marcos II v. CIR, 273 SCRA 47), or timelyprotested but BIR conditions for request for reinvestigation

28


29/41

are not complied with by taxpayer (Dayrit v. Cruz; Republicv. Ledesma)

Self-assessed tax shown in the return is not paid within thedate prescribed by law (e.g., 2nd installment)

Protest against assessment is denied by BIR (Basa v.

Republic), or 180-day period lapses and taxpayer failed toappeal to CTA within 30 days from date of receipt of denialof protest or from lapse of 180-day period (Lascona LandCo. v. CIR)

The taxpayers failure to appeal to the CTA in due time made theassessment final and executory (Republic v. Mla Port Service, L-18208, Nov 27, 1964). And when the action for collection of thetax was instituted, the taxpayer was barred from disputing thecorrectness of the assessment or invoking any defense thatwould reopen the question of its tax liability on the merit

(Republic v. Albert, 3 SCRA 717). Otherwise, the period of 30days for appeal to CTA would make little sense (Republic v.Lopez, 7 SCRA 566).

WHO APPROVES? CIR, Regional Director (Arches v. Bellosillo), or Chief, Legal

Division (Republic v. Hizon) Solicitor General, or BIR special attorneys outside Metro

Manila, affirmed by SolGen (Republic v. Domecillo) WHERE FILED?

RTC (less than P1 M basic tax), or CTA (P1 M basic tax or more)

HOW CIVIL ACTION BEGUN? File complaint with RTC (for amount less than P1 M); and File Answer in CTA to taxpayers petition for review and

pray for payment of tax; hence, even if no RTC case wasfiled, right to collect has not prescribed (Mambulao Lumberv. Republic)

CRIMINAL ACTION

Form and Mode of Proceeding in Actions

Civil and criminal actions and proceedings instituted inbehalf of the Government under the authority of this Codeor other law enforced by the BIR shall be brought in thename of the Government of the Philippines and shall beconducted by legal officers of the BIR.

No civil or criminal action for the recovery of taxes or theenforcement of any fine, penalty or forfeiture under thisCode shall be filed in court without the approval of theCommissioner (Sec. 220, NIRC).

According to the OSG, [t]he primary responsibility to conductcivil and criminal actions lies with the legal officers of the BIR

such that it is no longer necessary for BIR legal officers to bedeputized by the OSG or the Secretary of Justice before they cancommence any action under the 1997 Tax Code.

The institution or commencement before a proper court of civiland criminal actions and proceedings arising under the TaxReform Act which shall be conducted by legal officers of theBIR is not in dispute. An appeal from such court, is not a matter

29


30/41

of right. Section 220 of the Tax Reform Act must not beunderstood as overturning the long established procedure beforethis Court in requiring the Solicitor General to represent theinterest of the Republic. This Court continues to maintain that itis the Solicitor General who has the primary responsibility to

appear for the government in appellate proceedings (Resolutionin CIR vs. La Suerte Cigar & Cigarette Factory, G.R. No. 144942,July 4, 2002).

FILING OF CRIMINAL ACTION DURING PENDENCY OF PROTEST Assessment is not necessary to criminal prosecution for

willful attempt to evade tax. Crime is complete when violator has knowingly and

willfully filed fraudulent return with intent to evade tax What is involved here is not collection of taxes where

assessment may be reviewed by RTC, but criminalprosecution for violation of Tax Code

There is no precise computation and assessment of taxbefore there can be criminal prosecution There can be no civil action to enforce collection before

assessment procedures have been followed [Ungab v. Cusi(1980)]

CRIMINAL CHARGE WITHOUT ASSESSMENT Assessment is not necessary before a criminal charge (for

non-filing of return) is filed Criminal charge need only be proved by prima facie

showing of failure to file required return and such fact neednot be proved by an assessment

Issuance of assessment is different from filing of complaintfor criminal prosecution supported by an affidavit executedby the revenue officers showing computation of deficiencytaxes [CIR v. Pascor Realty & Dev Corp (1999)]

For criminal prosecution to proceed before assessment, primafacie showing of willful attempt to evade tax must exist [CIR v.Fortune Tobacco (1997)]

Fortune Tobaccos situation is factually apart from Ungab Registered wholesale price approved by BIR is presumed

the actual selling price Not fraudulent, unless BIR has final determination of what

is the correct tax Preliminary investigation may be enjoined under exceptional

circumstances

REMEDIES OF TAXPAYERS

ADMINISTRATIVE REMEDY BEFORE PAYMENT OF TAX

PROTEST OF ASSESSMENT AFTER PAYMENT OF TAX

TAX CREDIT, OR

REFUND JUDICIAL REMEDY

APPEAL TO COURT OF TAX APPEALS

COUNTING OF PERIOD

TAXABLE YEAR

30


31/41

Normal year (365 days) Leap year (366 days)

If there is a leap year within the prescriptive period (3 years fromfiling of return), a year shall be deemed to have 365 days only(NAMARCO v. Tecson, 29 SCRA 70). Thus, assessment issued on

April 15 of the third year from filing of return shall be treated asinvalid due to prescription. EO 292 (Administrative Code of 1987), being the more recent law

than Civil Code, governs the computation of legal period. Accor-dingly, a year shall be understood to be 12 calendar months; amonth of 30 days, unless it refers to a specific calendar month(CIR vs. Primetown Property Group, GR No. 162155, Aug 22,2007).

COMPLIANCE WITH SEC. 228

BIR disallowed certain itemized deductions and considered somecost items as subject to 5% tax, without indicating factual andlegal bases. During the preliminary stage, BIR informed taxpayerthru preliminary 5-day letter and furnished copy of audit workingpaper. CTA considered assessment as void. CA affirmed CTAdecision.

SC ruled above documents were not valid substitutes formandatory notice in writing of legal and factual bases ofassessment. These steps were mere perfunctory discharge ofCIRs duties in correctly assessing a taxpayer. Just because CIRissued an advice, preliminary letter and final notice does not

necessarily mean taxpayer was informed of law and facts. Lawrequires that they be stated in DL and FAN. Otherwise, theexpress provisions of Art. 228 of NIRC and RR 12-99 would berendered nugatory. The alleged factual bases in the advice,preliminary letter and audit working papers did not suffice.

Moreover, due to the absence of a fair opportunity to beinformed of legal and factual bases of assessment, theassessment is void. Old law merely required taxpayer to benotified of assessment. This was changed in 1998 (CIR vs. EnronSubic Power Corp, GR No. 166387, Jan. 19, 2009).

PROTEST

CIR v. Reyes May 19, 1998 - the heirs of Tancinco received FAN and DL for

deficiency estate tax of P14.91 M, inclusive of penalties. June 1, 1998 - protest was filed on ground that decedent had sold

property in 1990. CIR issued collection letter, followed by Final Notice Before

Seizure dated Dec 4, 1998. WDL was served upon estate. Heirs protested WDL and offered compromise by paying 50% of

basic estate tax. CIR denied offer and demanded P18.03 M;

otherwise, property would be sold. April 11, 2000 - Reyes proposed to pay 100% of basic tax. As tax

was not paid on April 15, 2000, BIR notified Reyes on June 6,2000 that property would be sold at public auction in August,2000.

June 13, 2000 - Reyes filed protest with BIR Appellate Div andoffered to pay estate tax without penalties. Without acting on

31


32/41

protest and offer, CIR instructed CED to proceed with auctionsale.

Reyes filed petition for review with CTA and BIR filed Motion toDismiss on ground that CTA has no jurisdiction; assessment wasalready final and petition was filed out of time.

CTA denied motion. In meantime, BIR issued RR 6-2000 and RMO 42-2000, offering

taxpayers with disputed assessments to compromise cases. Nov 25, 2000 - Reyes filed application for compromise and paid

P1.06 M. While waiting for approval by BIR NEB, Reyes filed withCTA a motion to declare application as perfected compromise,which CTA denied since NEB approval is needed.

Reyes filed for judgment on the pleadings, which was granted.CTA denied the petition.

Reyes filed appeal to CA, which granted petition, saying FAN andDL should have stated the facts and law on which assessment

was based. Since FAN and DL did not state facts and law, assessment was

void and proceedings emanating from them were also void, andany order emanating from them could never attain finality. BIRappealed to SC.

SC ruled that Sec. 228 of Tax Code is clear and mandatory taxpayer shall be informed in writing of the law and facts onwhich assessment is based; otherwise, it is void. Reyes was onlynotified of the findings by the CIR, who merely relied onprovisions of former Sec. 229 prior to its amendment by RA8424.

General rule is that laws apply prospectively. However, statutesthat are remedial, or that do not create new or take away vestedrights, do not fall under the general rule. Since Sec. 228 of TaxCode, as amended by RA 8424, does not state that pendingactions are excepted from the operation of Sec. 228, or thatapplying it to pending proceedings would impair vested rights,said law may be applied retroactively (CIR vs. Reyes, and Reyesvs. CIR, GR Nos. 159694 and 163581, Jan. 27, 2006)

CIR vs. BPI

Oct 28, 1988 CIR assessed petitioner for def. percentage tax

and DST for 1986 Dec 10, 1988 -- BPI replied stating Your def assessments are no

assessments at all As soon as this is explained and clarified ina proper letter of assessment, we shall inform you of thetaxpayers decision on whether to pay or protest theassessment.

June 27, 1991 -- BPI received letter from BIR, stating .. Yourletter failed to qualify as a protest under RR 12-85 still weobliged to explain the basis of the assessments.

July 6, 1991 -- BPI requested a reconsideration of assessments. Dec 12, 1991 -- BIR denied protest, which was received on Jan

21, 1992. Feb 18, 1992 -- BPI filed petition for review in CTA.

Nov 16, 1995 -- CTA dismissed petition for lack of jurisdiction;assessments had become final and unappealable.

May 27, 1996, CTA denied reconsideration.

32


33/41

On appeal, CA reversed CTAs decision. It ruled Oct 28, 1988notices were not valid assessments because they did not informthe taxpayer of the legal and factual bases therefor. It declaredthe proper assessments were those in May 8, 1991 letter whichprovided the reasons for claimed deficiencies. CIR elevated case

to SC. CIR did not inform BPI in writing of the law and facts on which

assessments were made. He merely notified BPI of his findings,consisting of the computation of the tax liabilities and a demandfor payment within 30 days from receipt. He relied on formerSec. 270, NIRC, prior to its amendment by RA 8424.

In CIR vs.Reyes, GR 159694, Jan 27, 2006, the onlyrequirement was for the CIR to notify or inform the taxpayer ofhis findings. Nothing in the old law required a writtenstatement to the taxpayer of the law and the facts. The Courtcannot read into the law what obviously was not intended by

Congress. That would be judicial legislation. Jurisprudence simply required that assessments contain a

computation of tax liabilities, the amount to be paid plus ademand for payment within a prescribed period.

The sentence the taxpayer shall be informed in writing of thelaw and the facts on which the assessment is made; otherwise,the assessment shall be void. was not in old Sec. 270, but wasonly inserted in Sec. 228 in 1997 (R.A. 8424). The insertedsentence was not an affirmation of what the law required; theamendment by RA 8424 was an innovation and could not bereasonably inferred from the old law.

The Oct 28, 1998 notices were valid assessments, which BPIshould have protested within 30 days from receipt. The Dec 10,1988 reply it sent to BIR did not qualify as a protest, since theletter itself stated we shall inform you of the taxpayersdecision on whether to pay or protest the assessment.

BPIs failure to protest the assessment made it final andexecutory. The assessment is presumed to be correct (CIR vsBPI, GR 134062, Apr 17, 2007).

DENIAL OF PROTEST DIRECT DENIAL

Letter of CIR states in clear terms his denial of protest(Union Shipping v. CIR)

INDIRECT DENIAL Final Notice Before Seizure (preparatory to the issuance of

WDL) constitutes as a decision on the protestedassessment; hence, appealable to the CTA (CIR vs. IsabelaCultural Corp, 361 SCRA 71 (2004)

Issuance by BIR of Warrant of Distraint and Levy (WDL)constitutes a denial of the protest.

INACTION OF COMMISSIONER

The taxpayer has two options: Wait for the decision of the Commissioner on the protest

and file the appeal to the CTA within 30 days from date ofreceipt of the denial of protest; or

33


34/41

File appeal to the CTA within 30 days from lapse of the180-day period (Lascona Land Co vs CIR, CTA Case No.5777, Jan 4, 2000)

BIR appealed CTA decision to CA. In the meantime, RA 9282 was signed by PGMA on Apr 2, 2004,

which provides that inaction of CIR during the 180-day period isconstrued as a denial of protest. Decision of the CTA on Lascona case was reversed by the CA. If

there is no appeal filed within 30 days after the lapse of 180 dayperiod, the matter/decision under protest becomes final. Theword decision in Sec. 228 cannot be strictly ck strictlyconstrued as referring only to decision per se of CIR but shouldbe considered synonymous with disputed assessment (CIR vs.Lascona Land Co, CA GR SP No. 58061, Oct 25, 2005).

CA decision was appealed to SC, where it is still pending.COUNTING OF 180-DAY PERIOD

Since the petitioner did not submit any document in support ofhis protest within sixty days from the filing of its protest, thecounting of the 180-day period was from the filing of the protest.

Accordingly, when respondent failed to render his decision within180 days from the filing of his protest, petitioner has 30 daystherefrom to file an appeal to CTA (Oceanic Wireless Network vs.CIR, CTA Case No. 6111, Nov. 3, 2004)

APPEALS

ADMINISTRATIVE APPEAL DECISION OF REGIONAL DIRECTOR MAY BE

APPEALED TO COMMISSIONER PRIOR EXHAUSTION OF ADM REMEDIES GIVES

ADMINISTRATIVE AUTHORITIES PRIOR OPPORTUNITYTO DECIDE CONTROVERSIES WITHIN THEIRCOMPETENCE (Aguinaldo Industries Corp. v. CIR)

SINCE COMMISSIONER HAS DELEGATED THE POWER TOISSUE ASSESSMENT NOTICES, REGARDLESS OF AMOUNT,TO REGIONAL DIRECTORS, DENIAL OF PROTEST BYREGIONAL DIRECTOR MAY BE APPEALED TO THE CTA

JUDICIAL APPEAL FINAL DECISION OF COMMISSIONER MAY BE

APPEALED TO COURT OF TAX APPEALS Where a taxpayer filed a valid protest within

30 days from date of receipt of assessment andon same day also filed with CTA a petition forreview, there is yet no final decision of CIR onthe protest that is appealable to CTA (MoogControls Corp vs. CIR, CTA Case No. 6700, Oct 18,2004)

CTA DIVISION DECISION IS APPEALED TO CTA EN

BANC COURT OF APPEALS EN BANC DECISION APPEALED

TO SUPREME COURT

PETITION FOR REVIEW

34


35/41

Petitioner maintains that its counsels neglect in not filingpetition for review within reglementary period (due to counselssecretary) was excusable.

The 30-day period to appeal is jurisdictional and failure to complywould bar the appeal and deprive the CTA of its jurisdiction.

Such period is mandatory, and it is beyond the power of thecourts to extend the same (Chan Kian vs CTA, 105 Phil 906(1959).

The options granted to the taxpayer in case of inaction by theCIR is mutually exclusive and resort to one bars the applicationof the other. Petition for review was filed out of time (more than30 days after lapse of 180 days), and petitioner did not file MR orappeal; hence, disputed assessment became final and executory.

After availing of the first option (filing petition for review withCTA), petitioner cannot successfully resort to the second option

(awaiting final decision of CIR on the protest) on the pretext thatthere is yet no final decision on the disputed assessmentbecause of CIRs inaction.

Assessments are presumed to be correct, unless otherwiseproven (RCBC vs CIR, GR No. 168498, Apr 24, 2007).

PRESCRIPTION

The 3-year period within which to assess any deficiency taxcommences after the last day prescribed by law for the filing ofthe ANNUAL income tax return.

For VAT, each taxable quarter shall have its own prescriptive

period. VAT return is filed quarterly and a final return is notrequired at the end of the year.

In case of creditable withholding taxes, the 3-year period shall becounted shall be counted from the last day required by law forfiling monthly remittance return. Each monthly return is alreadya complete return. The annual information return submitted toBIR is just an annual report of income payments and taxeswithheld and is not in the nature of a final adjustment return(HPCO Agridev Corp. vs. CIR, CTA Case No. 6355, July 18, 2002)

Request for reconsideration or clarification on the assessmentmade by the taxpayer does not suspend the running of the

statute of limitations to collect assessed tax. However, requestfor reinvestigation may suspend the running of prescriptiveperiod when it has been granted by CIR (BPI vs. CIR, GR No.139736, Oct 17, 2005)

Mere filing of the protest letter without requesting for areinvestigation does not suspend the running of the prescriptiveperiod to collect (Phil Global Communications vs. CIR, CTA EBCase No. 37, Feb. 2005)

REQUISITES OF WAIVER Waiver must be in the form identified in RMO 20-90;

Expiry date of period agreed upon is indicated in the waiver; Waiver form requires statement of the kind of tax and amount of

tax due; if not indicated in the waiver, there is no agreement; Waiver is signed by taxpayer or his authorized representative. In

case of corporation, waiver is signed by any responsible official. CIR or his authorized representative shall sign waiver indicating

that BIR has accepted and agreed to the waiver;

35


36/41

Date of acceptance by BIR is indicated; Date of execution and acceptance by BIR should be before

expiration of prescriptive period; Waiver is executed in 3 copies; second copy is for taxpayer. Fact

of receipt by the taxpayer should be indicated in the original

copy (Pfizer, Inc. vs. CIR, CTA Case No. 6135, Apr. 21, 2003; FMFDev. Corp. vs. CIR, CTA Case No. 6153, Mar. 20, 2003) Waiver must indicate definite expiration date agreed upon by CIR

and taxpayer Waiver should state date of acceptance by BIR. Without the date,

it cannot be determined whether waiver was accepted beforeexpiration of 3-year period.

Taxpayer must be furnished copy of accepted waiver. UnderRMO 20-90, second copy of waiver is for taxpayer. Fact ofreceipt by taxpayer of his copy should be indicated in the originalcopy (Phil. Journalists vs. CIR, supra).

RMO 20-90 must be strictly construed against the government;they are mandatory in character. More-over, the waiver of thestatute of limitations is not a waiver of the right to invoke thedefense of prescription (CIR vs. FMF Dev Corp, GR No. 167765,June 30, 2008).

LOCAL BUSINESS TAXES The right of local government units to collect taxes due must

always be upheld to avoid severe tax erosion. This considerationis consistent with the State policy to guarantee the autonomy oflocal governments and the object of the LGC that they enjoy

genuine and meaningful local autonomy to empower them toachieve their fullest development as self-reliant communities andmake them effective partners in the attainment of national goals(FELS Energy v. Prov of Batangas).

In interpreting statutory provisions on municipal fiscal powers,doubts will have to be resolved in favor of municipalcorporations. Such policy is also echoed in Sec 5(a) of the LGC,which states that any provision on a power of a localgovernment unit shall be liberall