Tax Risk Management
(Tax Avoidance)
1
Tax Avoidance Outline
I. Introduction
II. Organization of Business
III. Income Tax
I. Taxable Income
II. Deductible Expenses
III. Minimum Corporate Income Tax
IV. Withholding Taxes
V. Value Added Tax
VI. Civil Remedies
2
Distinction between “tax evasion” and “tax
avoidance”
“’Evasion’ and ‘avoidance’ are sometimes used as
synonyms in connection with tax matters. A useful
distinction may, however, be drawn between
them. ‘Evasion’ should be applied to the escape
from taxation accomplished by breaking the law –
deliberate omission to report a taxable item, for
example. The term ‘avoidance’ is then available to
cover escaped accomplished by legal procedures
which may be contrary to the intent of the tax
law’s sponsors but nevertheless do not violate the
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Escape of Taxation
Revenue to No revenue to
government government
Through process Through process Evasion
of exchange of production
Shifting Capitalization Transformation Legitimate Illegitimate
Forward Backward Intentional Unintentional
4
Tax Avoidance vs. Tax Evasion
- A legal presumption under Section 247 that a
substantial under declaration of sales or overstatement of
deductions are prima facie evidence of false or fraudulent
return (30% of actual declaration)
• As to Tax Avoidance Tax Evasion
prescription • 3 years from date • 10 years from date
of filing of discovery
• As to penalty • Deficiency interest • Surcharge of 50%
of 20% • 20% deficiency
interest
• As to burden of • Rests on taxpayer • Rests on BIR to
proof to contest BIR support BIR findings
finding
5
General Approach and Strategies in Tax
Planning
• Timing of income and deduction
• Characterization and/or conversion of income
• Shifting of income and allocation of deduction
• Selecting the appropriate accounting method
• Use of excess tax credits
6
Specific Year End Tax Planning
Options and Strategies
1. Avoiding the improperly accumulated earning
2. Getting relief from Minimum Corporate Income
Tax
3. Net Operating Loss Carry Over
4. Option of Income Tax Carry Over or Income
Tax Payment
5. Tax Abatement
6. Inventory at the End
7
As to TAX Avoidance TAX Evasion
Prescription 3 years date of 10 years for the
filling date discovered
As to Penalty Deficiency Interest Surchange 50%
of 20%
20% deficiency
interest
Bender of Taxpayer BIR
Proof
8
Choice of Business Organization
[Link]
[Link]
[Link]
[Link] Venture
9
Individual – Barangay Micro Business
Enterprise
Department Order No. 17-04
GUIDELINES TO IMPLEMENT THE
REGISTRATION OF BARANGAY MICRO
BUSINESS ENTERPRISE AND THE
AVAILMENT OF TAX INCENTIVES UNDER
R.A. 9178, OTHERWISE KNOWN AS THE
“BARANGAY MICRO BUSINESS ENTERPRISE
(BMBEs) ACT OF 2002”
10
Who Can Register as a BMBE – One can
register as a BMBE if it is a business entity or
enterprise, whether operated as a sole
proprietorship or a corporation, partnership,
cooperative or association, organized /
incorporated and existing under Philippine laws:
(a) Engaged in the production, processing or
manufacturing of products or commodities,
including agro-processing, trading and services,
and which activities are barangay-based and
micro-business in nature and scope: Provided,
That “services” shall exclude those rendered by (I)
natural persons who are duly licensed by the
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government after having passed the government
licensure examination in connection with the
exercise of one’s profession, and (ii) juridical
persons such as partnerships or corporations
engaged in consultancy, advisory and similar
services where the performance of such services
are essentially carried out through licensed
professionals;
(b) Whose total assets, real or personal,
inclusive of those arising from loans but exclusive
of the land on which the particular business
entity’s office, plant and equipment are situated,
shall not be more than Three Million Pesos
(P3,000,000.00) 12
Exemption from Income Tax – A duly
registered BMBE shall be exempt from income
arising purely from its operations as such BMBE:
Provided, That this income tax exemption shall
not apply to the following:
(a) Interest, including those from any
currency bank deposit and yield or any other
monetary benefit from deposit substitutes and
from trust funds and similar arrangements;
(b) Royalties;
(c) Prizes and other winnings;
(d) Cash and/or property dividends;
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(e) Capital gains from the sale of shares of
stock not traded through the stock exchange;
(f) Capital gains from the sale of other
disposition of real property;
(g) The share of an individual in the net income
after tax of an association, a joint account, or a joint
venture or consortium;
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(h) The share of an individual in the
distributable net income after tax of a taxable
partnership of which he is a partner;
(i) Income from the practice of profession
received directly from the clients or from the
professional partnership of which the individual is
a partner
(j) Compensation; and
(k) All other forms of passive income and
income from revenues not effectively connected
with or arising from operations of the BMBEs as
such.
15
Place of Registration – The Office of the
Treasurer of each City or Municipality shall
register BMBEs and issue a certificate of Authority
(CA) to enable the BMBE to avail of Certificate
incentives under the Act; Provided that only one
Certificate of Authority shall be issued for each
BMBE and only by the Office of the Treasurer of
the Treasurer of the City of Municipality that has
jurisdiction over the principal place of business of
the BMBE.
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Individual
Maintain Main Business in the City and at the
same time a Poultry, Piggery or Fishpond in the
Province.
Individual
Exchange Real Property to share of stocks a Real
Estate Development Corporation
Partnership
Change the General Partnership to Corporation
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Corporation
1. Form Subsidiaries
Mother
Company
Subsidiary Subsidiary Subsidiary
Corporation Corporation Corporation
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2. Form a Foundation of the Mother
Company
3. Form a Holding Company
4. Joint Venture
a. Real Estate Development
b. Construction
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c. Non-Stock, Non-Project Organization
and One Stock Corporation in a Tax
heaven
Stock
Corporation
Non-Stock Non-Stock
Non-Profit Non-Profit
Organization Organization
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General Strategies in TAX Planning
1. Timing of Income and deduction
2. Shifting of Income
3. Conversion of Income
4. Allocation of Deductions
5. Selecting the appropriate accounting
methods
6. Use of excess TAX Credit
7. Monitoring of Input TAX
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Classification of Accounts
1. Ordinary Gain Classified to Capital Gain
2. Business Simultaneously, Construction
Personal Real Estate Projects
3. Sales Return of Merchandize
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Selecting the Appropriate
Accounting Methods
Use of excess TAX Credit
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Income Splitting with Family Members
What is Income Splitting?
Income splitting is having income that normally
would be taxed in the hands of the highest-income
family member taxed at lower rates in the hands
of a lower-income family member. Tax may even
be eliminated if the family member has very little
or no income.
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Tax Avoidance on Income
Utilization of other persons or entities
Establishment of several entities
corporations, partnership, or
proprietorships, by a person by making
it appear that sales are made by the
different entities created when in fact
such are only made by one person;
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Allocating income and expenses
to other persons in order to reduce
or minimize taxes by a controlling
person; and
Establishment of registered
partnership or corporation, using
dummy partners or stockholders.
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TAX AVOIDANCE ON DEDUCTIBLE
EXPENSES
A taxpayer engaged in business or in the
practice of profession shall choose either
the optional or itemized.
OPTIONAL STANDARD DEDUCTION
A maximum of 10% of their gross income
shall be allowed as deduction in lieu of the
itemized deduction.
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ITEMIZED DEDUCTION
There shall be allowed as deduction from gross
income all the ordinary and necessary expenses
paid incurred during the taxable year in carrying
on or which are directly attributable to, the
development, management, operation and/or
conduct of the trade, business or exercise of a
profession including a reasonable allowance for
salaries, travel, rental and entertainment
expenses.
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Method of Recording
1. Manual Methods of Recording
2. Computerization Method of
Recording
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Revenue Related Transaction
1 – Sell of goods / or services to customers
2 – Discount at the time of sole
3 – Discount after certain period
4 – Goods Return
5 – Charges against sole
6 – Write off of receivable as uncollectible
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7 – Net Income
Purchases
1. Philippine Institute of Price Increase
Certified Public
Accountants
2. Billing more than once for Duplicate Invoice
the same purchase
3. Billing goods not ordered Multiple invoice for
or shipped the same items
4. Establishing dummy Two or more
vendors suppliers purchase
5. Purchasing goods for Invoice with valid
personal use purchase order
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Requirements for Deductibility
• Ordinary and necessary; paid and incurred during
the taxable year in carrying on;
• The expenses must not be contrary to public
policy, such as,
1. BRIBES, KICKBACKS AND OTHER
PAYMENTS MADE DIRECTLY OR
INDIRECTLY TO AN OFFICIAL OR
EMPLOYEE OR THE NATIONAL OR LOCAL
GOVERNMENT
2. BRIBES OR KICKBACK PAID TO A PRIVATE
CORPORATION, GENERAL PROFESSIONAL
PARTNERSHIP,
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EXPENSES IN GENERAL
(1) A reasonable allowance for salaries, wages,
services forms of compensation for personal
services actually rendered
(2) A reasonable allowance for travel expenses,
here and abroad, while away from home in the
pursuit of trade, business or profession;
(3) A reasonable allowance for rentals and/or
other payments which are required as a
condition for the continued use of profession,
for purposes of the trade, business or
profession
(4) A reasonable allowance for entertainment,
amusement and recreation expenses during
the taxable year
33
REVENUE REGULATIONS
NO. 10-2002
Authorizing the Imposition of a Ceiling
on “Entertainment, Amusement and
Recreational Expense”
34
Exclusions: For Entertainment Expenses
a. Expenses which are treated as compensation or
fringe benefits for services rendered under an
employer-employee relationship
b. Expenses for charitable of fund-raising events;
c. Expenses for bonafide business meeting of
stockholders, partners or directors;
d. Expenses for attending or sponsoring an employee
to a business league or professional organization
meeting;
e. Expenses for events organized for promotion,
marketing and advertising including concerts,
conferences, seminars, workshop, conventions,
and other similar events; 35
CEILING ON ENTERTAINMENT,
AMUSEMENT, AND RECREATION EXPENSE
Actual entertainment, amusement and
recreation expenses paid or incurred within the
taxable year by the taxpayer, but in no case
shall such deduction exceed ½ of 1% of net
sales (I.e., gross sales less sales
returns/allowances and sales discounts) the
taxpayers engaged in sale of goods or
properties; or 1% of net revenue (l.e., gross
revenue less discounts) for taxpayers engaged
in sale of services.
36
If the taxpayer is deriving income from both sale
goods/properties and services, the allowable
entertainment , amusement and recreation
expense shall in all cases be determined bases
on an appointment formula taking into
consideration the percentage of the net
sales/net revenue to the total net which in no
case shall exceed the maximum percentage
ceiling of Entertainment Expense
37
APPOTIONMENT FORMULA:
NET SALES/NET REVENUE X ACTUAL EXPENSES
TOTAL NET SALES AND NET REVENUE
38
ILLUSTRATION: ERA Corporation is engaged in
the sale of goods and services with net sales/net
revenue of P200,000 and P100,000, respectively.
The actual entertainment, amusement and
recreation expense for the taxable quarter totaled
to P3,000.
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*Appointment Formula
Sales of Goods (P200,000 x 0.50%)
Sales of Services (P100,000 x 1%)
**Maximum Percentage Ceiling
Sale of Goods (P200,000 x 0.50%)
Sale of Services (P100,000 x 1%)
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SHIFTING TO OTHER EXPENSES
Shifted the amount of the entertainment,
amusement and recreation expense to
any other expense in order to avoid being
subjected to the ceiling.
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REQUISITES for DEDUCTABILITY of
INTEREST EXPENSE:
a. These must be an indebtedness;
b. There should be an interest expense paid or
incurred upon such indebtedness;
c. The indebtedness must be that of the
taxpayer;
d. The indebtedness must be connected with
the taxpayer’s trade, business or exercise of
profession;
e. The interest expense must have been paid
or incurred during the taxable year;
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REQUISITES for DEDUCTABILITY
of INTEREST EXPENSE:
A. These must be an indebtedness;
B. There should be an interest expense
paid or incurred upon such
indebtedness;
C. The indebtedness must be that of the
taxpayer;
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REQUISITES for DEDUCTABILITY
of INTEREST EXPENSE:
D. The indebtedness must be connected
with the taxpayer’s trade, business or
exercise of profession;
E. The interest expense must have been
paid or incurred during the taxable year;
44
REQUISITES for DEDUCTABILITY
of INTEREST EXPENSE:
F. The interest must have been stipulated in
writing;
G. The interest must be legally due;
H. The interest payment arrangement must
not between related taxpayers;
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INTEREST
In General
The amount of interest paid or incurred within
the taxable year on indebtedness in
connection with the taxpayer profession,
trade or business shall be allowed as
deduction from gross income: Provided,
however, that the taxpayer’s otherwise
allowable deduction for interest expense shall
be reduced by an amount equal to the
following percentages of the interest income
subjected to final tax:
46
Forty two percent (42%) beginning
November 1, 2005
Thirty three percent (33%) beginning
January 1, 2009
47
Example:
Assume that a taxpayer incurred in 2006,
interest expense amounting to P100,000.
This is “OTHERWISE ALLOWABLE
DEDUCTION FOR INTEREST EXPENSE”
but it will reduced by an amount equal to
the prescribed percentage of interest
income subjected to the final tax.
48
Thus, if in 2006, the taxpayer received
P60,000 interest income on which the final
tax was withheld and remitted to the BIR
by the payor of such income, then the
deductible amount of interest will be
computed as follows:
49
Total interest expense….. P100,000
Less: 42% of P60,000….. 25,200
AMOUNT DEDUCTIBLE …... P 74,800
Exceptions
No deduction shall be allowed in respect
of interest under the following:
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a. If within the taxable year an individual
taxpayer reporting income on the cash
basis incurs an indebtedness on which
an interest is paid in advance through
discount or otherwise.
b. If both taxpayer and the person to whom
the payment has been made or is to be
made are person
1. Between member of the family.
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TAXES
All taxes are deductible except:
1. Income
2. Estate Tax
3. Energy Tax
4. Special Assessment Tax
5. Value Added Tax
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LOSSES
Requisites for the deductibility of losses
1. The loss must be incurred in trade, profession, or
business of the taxpayer, or any transaction entered
into for profit;
2. It must be actually sustained within the taxable year;
3. It must be evidenced by a closed and completed
transaction;
4. It must not be compensated for by insurance or other
form of indemnity; and
5. The taxpayer has filed a sworn declaration of loss
within 45 days after the date of the occurrence of
casualty or robbery, theft, or embezzlement.
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Right Use of NOLCO
NET OPERATING LOSS CARRY OVER
(NOLCO)
A business or enterprise for any taxable
year immediately preceding the current
taxable year. Which had not been
previously offset as deduction from gross
income shall be carried over as a
deduction from gross income for the next
three (3) consecutive years immediately
following the year of such loss.
54
Loss which are not allowed by law to
be deducted from Gross Income.
Loss on voluntary removal of building on
land with the view to erecting another
building;
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Requisites for valid deduction of
bad debts from gross income-
1. There must be an existing indebtedness due to
the taxpayer which must be valid and legally
demandable;
2. The same must be connected with the
taxpayer’s trade, business or practice of
profession;
3. The same must not be sustained in transaction
entered into between related parties
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4. The same must be actually charged off
the books of accounts of the taxpayer
as of the end of the taxable year;
5. The same must be actually charged off
the books of accounts of the taxpayers
as of the end of the taxable year;
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DEPRECIATION
Requisites that must concur the deduction
of Depreciation from Gross Income
• The allowance for depreciation must be
reasonable;
• It must be for property used in the tarde
or business;
• It must be charged off during the
taxable year and
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DEPRECIATION
Mother company
Subsidiary 4 Subsidiary 1
Subsidiary 3 Subsidiary 2
59
RESEARCH AND DEVELOPMENT
EXPENDITURES
Methods of treating research and
development
[Link] deductible as ordinary and
necessary expense
• Research or Development expenditures
paid or incurred by a taxpayer during the
taxable year in connection with his trade,
business or profession and are not
chargeable to capital account may be
deducted as expenses 60
2. Treatment as deferred expenses
• Deferred expenses are allowable as
deduction ratably over a period of no
less than 60 consecutive months
beginning with the month in which the
taxpayer first realizes benefits from the
expenditures.
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REQUISITES FOR DEDUCTIBILITY –
contribution to Pension Plan.
1. Employer must have established a pension
plan
2. Pension plan must be reasonable or
actuarially sound
3. Funded by the employee
4. Amount contributed by the employer must
not be subject to his control
62
CHARITABLE AND OTHER CONTRIBUTION
Corporation or association to whom
contributions or gifts may be made or paid
and claimed as deduction, the amount of
which is subject to limitations.
The limitation is 10% for individual and 5%
for corporations, of the taxable income
derived from trade, business or profession.
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Valuation of deductible contributions
The amount of contributions or property other
than money shall based on the acquisition
cost of the said property.
CONTRIBUTION DEDUCTIBLE IN FULL
• Donation to the Government
• Donation to Certain Foreign Institutions or
International Organizations
• Donation to Accredited Nongovernment
organization
• Donee Institutions 64
Corporation
Group Insurance Employees of Corporation
Cash Surrender Value
Cash
Employees/Officer
65
ITEMS NOT DEDUCTIBLE
1. Personal, living or family expenses;
2. Any amount paid out for new building or for permanent
improvement, or betterment made to increase the value of any
property or estate;
3. Any amount expanded in restoring property or in making good
the exhaustion thereof for which an allowance is or has been
made; or
4. Premiums paid on any life of any officer or employee, or of any
person financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
66
Other Expenses:
1. Non Deductible Expenses to Deductible
Expenses
2. Major Repair to Ordinary Repair
3. Family Corporations
15th & 30 salary officers
4. Inventory obsolescent
5. Other expenses charge to cost of sales
6. Retirement Benefits charge to cost of sales
7. Registered Pension Plan
67
Getting Relief from MCIT
MINIMUM CORPORATE INCOME TAX ON
DOMESTIC CORPORATIONS
(1) Imposition of Tax – A minimum corporate income
tax of two percent (2%) of the gross income as of
the end of the taxable year, beginning on the fourth
taxable year immediately following the year in
which such corporation commenced its business
operations, when the minimum income tax is
greater than normal income tax.
(2) Carry Forward of Excess Minimum Tax – Any
excess of the minimum corporate income tax over
the normal income tax shall be carried forward and
credited against the normal income tax for the
three (3) immediately succeeding taxable years. 68
CONCEPT OR IMPROMPERLY
ACCUMULATED EARNINGS TAX (IAET)
There is imposed for each taxable
year, a tax equal to 10% of the
improperly accumulated taxable
income of corporations
69
Avoidance of
IMPROPERLY ACCUMULATED
TAXABLE INCOME
Taxable Income Pxxxx
Add:
Income exempt from Tax--------------Pxx
Income excluded from gross Income-xx
Income subject to Final Tax-------------xx
The amount of net operating loss
carry-over deducted-------------------xx
Total additional Adjustment Pxxx
Total Pxxxx
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Less:
Dividends actually
or constructively paid ---------Pxx
Income tax paid
for the taxable year-------------Pxx xx
Amount subject to improperly
accumulated taxable income P xxx
Rate of Tax 10%
Tax on improperly accumulated
Taxable Income--------------------------------------Pxx
71
The following constitute accumulate of earnings for
the reasonable needs of the business:
a. Allowance for the increase in the accumulate of
earnings up to 100% of the paid up capital of the
corporation as of Balance Sheet date, inclusive of
accumulation taken from other years;
b. Earnings reserved for definite corporate expansion
projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or
equivalent body;
72
c. Earnings reserved for buildings, plants or
equipment acquisition as approved by the
Board of Directors or equivalent body;
d. Earnings reserved for compliance with any
loan covenant or pre-existing obligation
established under a legitimate business
agreement
73
Tax Avoidance
in
WITHHOLDING TAXES
74
Types of Withholding Taxes
• Withholding Tax on Gross Compensation
• Expanded or Creditable Withholding Tax
- Service Income
- Purchases of goods
• Final Withholding Tax (Passive Investment
Income)
- Interest, Dividends, Royalties, Prizes,
Winnings and Capital Gain
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• Withholding Tax on Government Money Payment
- Income Tax
- VAT
- Percentage Tax
• Quarterly Withholding Tax
- Individual Engage in Business or Profession
- Corporation
76
Tax Due = Tax Withheld
Example:
Tax Payer A B C
Income Tax
(Jan. to Dec.) 30,000 30,000 30,000
Less Tax
Withheld (Jan. to
Nov.) 28,000 33,000 30,000
Withholding Tax
for December 2,000 None None
Refund Jan. 20 None 3,000 None
77
Other Matters in Withholding Taxes
1. Failure to deduct withholding taxes
pays the surcharge and interest
2. Recruit _______ who are married and
with four (4) dependents
78
Tax Avoidance
in
VALUE ADDED TAX
79
Requirements on Input Tax
A. In General:
• Proof that input tax was incurred in the course of trade
or business.
• Supported by VAT invoice or receipt bearing VAT
number of seller.
• Seller must VAT registered
• Purchaser must also be VAT registered
• Invoice must be in the name of buyer
• Address of buyer is indicated
• Business style of buyer
80
B. TRANSITIONAL AND/OR PRESUMPTIVE
INPUT TAX
• Inventory of unused tax credits duly
accounted in the books and returns
• Inventory of goods filed with the BIR
81
Invoicing Requirements
• The words “VAT EXEMPT SALE”
written or printed prominently if sale is
VAT-exempt
• The words “ZERO-RATED SALE”
written or printed prominently if sale is
subject to zero percent
82
Output Tax exceed Input Tax
a) If at the end of any taxable quarter the
output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person.
Illustration:
For a given taxable quarter ABC Corp. has output VAT
of 100 and input VAT of 80. Since output tax
exceeds the input tax of such taxable quarter, all of
the input tax may be utilized to offset against the
output tax. Thus, the net VAT payable is 100
minus 8=20.
83
Output Tax exceed Input Tax
b) If the input tax inclusive of input tax carried over
from the previous quarter exceeds the output, the
input tax inclusive of input tax carried over from the
previous quarter that may be credited in every
quarter shall not exceed seventy percent (70%) of
the output tax; Provided, that, the excess input tax
shall be carried over to the succeeding quarter or
quarters; Provided however, that any input tax
attributed to zero-rated sales by a VAT-registered
person may at his option be refunded or applied for
a tax credit certificate which may be used in the
payment of internal revenue taxes, subject to the
limitations as maybe provided for by law, as well as,
other implementing rules.
84
Illustration:
For a given taxable quarter XYZ Corp. has output
VAT of 100 and input VAT of 100. Since input
tax exceeds the output tax for such taxable
quarter, the 70% limitations is imposed to
compute the amount of input tax which may
be utilized. The total allowable input tax
which me be utilized is 70% (70% of the
output tax). Thus, the net VAT payable is 100
less 70=30. The unutilized input Tax
amounting to 40 is carried over to the
succeeding month.
85
OUTPUT TAX
Goods 12%
Gross Selling Price x ____________ P xxx
Services
LESS INPUT TAX
Goods
Purchaser Services x 12% __________ Pxx
Supplies
Purchaser of Capital Goods
Acquisition Cost x 12%
Lite of Capital Goods but xx
NOT to exceed 60 months
Presumption Input Tax ___________ xx
Carry over of excess of Input Tax ___________ xx
over the OUTPUT Tax _____
TOTAL INPUT TAX ___________ Pxxx
Limitation of Input Tax: Which
*Output Tax x70% ___________ Pxxx ever is P xxx
lesser
Value Added Tax Payable P xxx 86
Other VAT Methods
1. Vatable Sale to exempt sole
2. Purchase from Non-VAT Source to VAT
Purchase
3. Classify Sole or exempt when in fact
taxable
4. Separated Invoice for other expenses
shouldered by seller to be charged to the
buyer
87
VAT Sale
Invoice Price Freight Marine Packaging
Insurance
88
5. Splinting of Rental Invoice on
Residencial Lease to Two
6. Supplier of Service to Zero Rated Entity
89
Revenue Regulations
No. 2-2007
Amending Certain Provisions
of Revenue Regulations No.
16-2005, Otherwise Known as
the Consolidated Value Added
Tax Regulations of 2005
90
VAT – Payable (Excess Output) or
Excess Input Tax:
• If the input tax inclusive of input tax
carried over from the previous quarter
exceeds the output tax, the excess
input tax shall be carried over to the
succeeding quarter or quarters;
91
Provided, however, that any input tax
attributable to zero-rated sales by a VAT-
registered person may at his option be
refunded or applied for a tax credit
certificate which may be used in the
payment of internal revenue taxes, subject
to the limitations as may be provided for by
laws, as well as, other implementing rules.
92
Revenue Regulation
No. 4-2007
Amending Certain
Provisions of Revenue
Regulations No. 16-2005,
As Amended, Otherwise
Known as the Consolidated
Value-Added Tax
Regulations of 2005. 93
Sale of Real Properties
Sale of residential lot with gross selling price exceeding P1,500,000.00
residential house and lot or other residential dwellings with gross selling
price exceeding P2,500,000.00 where the instrument of sale (whether
the instrument is nominated as a deed of absolute sale, deed of
conditional sale or otherwise) is executed on or after Nov. 1, 2005, shall
be subject to ten percent (10%) output VAT, and starting Feb. 1, 2006,
to twelve percent (12%) output VAT.
Installment sale of residential house and lot or other residential
dwellings with gross selling price exceeding P1,000,000.00, where the
instrument of sale (whether the instrument is nominated as a deed of
absolute sale, deed of conditional sale or otherwise) was executed prior
to November 1, 2005, shall be subject to ten percent (10%) output VAT.
94
Sale of real property on
installment plan
Means sale of real property by a real estate dealer, the initial
payments of which in the year of sale do not exceed twenty-five
(25%) of the gross selling price.
In case of installment sale, the seller shall be subject to output VAT
on the installment payments received, including the interest and
penalties for late payment, actually and/or constructively received,
Correspondingly, the buyer of the property can claim the input tax
in the same period as the seller recognized the output tax.
Installment payments, including interests and penalties, actually
and/or constructively received starting February 1, 2006 shall be
subject to twelve percent (12%) output VAT.
95
Sale of real property on
installment plan
In the case of sale of real properties on a deferred-payment
basis not on the installment plan, the transaction shall be
treated as cash sale which makes the entire selling price
taxable in the month of sale. Output tax shall be recognized
by the seller and input tax shall accrue to the buyer at the
time of the execution of the instrument of sale.
Payments subsequent to “initial payment” shall no longer
be subject to output VAT, in the case of sale on a deferred
payment basis.
96
Meaning of the Term “Gross
Selling Price”
If the VAT is not billed separately in the document
of sale, the selling price or the consideration stated
therein shall be deemed to be inclusive of VAT.
If the gross selling price is based on the zonal
value or market value of the property, the zonal or
market value shall be deemed exclusive of VAT.
Thus, the zonal/market value, net of the output
VAT, should still be higher than the consideration in
the document of sale, exclusive of the VAT.
97
Meaning of the Term “Gross Selling Price”
If the sale of real property is on installment plan where the zonal
value/fair market value is higher than the consideration/selling
price, exclusive of the VAT, the VAT shall be based on the ratio of
actual collection of the consideration, exclusive of the VAT, against
the agreed consideration, exclusive of the VAT, appearing in the
Contract to Sell/Contract of Sale applied to the zonal value/fair
market value of the property at the time of the execution of the
Contract to Sell/Contract of Sale at the inception of the contract.
Thus, since the output VAT is based on the market value of the
property which is higher than the consideration/selling price in the
sales document exclusive of the VAT, the input VAT that can be
claimed by the buyer shall be the separately-billed output VAT in
the sales document issued by the seller. Therefore, the output VAT
which is based on the market value must be billed separately by
the seller in the sales document with specific mention that the VAT
billed separately is based on the market value of the property.
98
Meaning of the Term “Gross
Selling Price”
Illustration:
ABC Corporation sold a parcel of land to XYZ
Company on July 2, 2006 for P1,000,000.00, plus
the output VAT, with a monthly installment payment
of P10,000.00, plus the output VAT. The zonal
value of the subject property at the time of sale
amounted to P1,500,000.00. Computer for the
output tax due on the installment payment.
99
Meaning of the Term “Gross
Selling Price”
Formula:
Actual collection (exclusive of the VAT) x Zonal value x 12%
Agreed consideration (exclusive of the VAT)
P10,000.00 x P1,500,000.00 = P15,000.00
P1,000,000.00
P15,000.00 x 12% = P1,800.00
Selling price is the amount of consideration in a contract of sale
between the buyer and seller or the total price of the sale which may
include cash or property and evidence of indebtedness issued by the
buyer, excluding the VAT.
100
Transactions Deemed Sale
Nonetheless, if one of the parties in the
transaction is the government as
defined and contemplated under the
Administrative Code, the output VAT on
the transaction shall be based on the
actual selling price.
101
VAT on the Sale of Service and
Use or Lease of Properties
Sale or exchange of service, as well
as the use or lease of properties, shall
be subject to VAT, equivalent to twelve
percent (12%) of the gross receipts
(excluding VAT) starting February 1,
2006.
102
VAT on the Sale of Service and
Use or Lease of Properties
• Domestic common carries by air and sea
are subject to twelve percent (12%) VAT
on their gross receipts from their transport
of passengers, goods or cargoes from one
place in the Philippines to another place in
the Philippines starting Feb. 1, 2006.
103
VAT on the Sale of Service and
Use or Lease of Properties
• Sale of electricity by generation,
transmission, and distribution companies
shall be subject to twelve percent (12%)
VAT on their gross receipts starting Feb. 1,
2006
• Service of franchise grantees
– Twelve percent (12%)
– Starting Feb. 1, 2006
104
VAT on the Sale of Service and
Use or Lease of Properties
• Non-life insurance companies –
– Non-life insurance premiums are subject to
VAT whereas non-life reinsurance premiums
are not subject to VAT, the latter being
already subjected to VAT upon receipt of the
insurance premiums.
105
Gross Receipts
Except those amounts earmarked for payment to
unrelated third (3rd) party or received as reimbursement
for advance payment on behalf of another which do not
redound to the benefit of the payor.
A payment is a payment to a third (3rd) party if the same
is made to settle an obligation of another person, e.g.,
customer or client, to the said third party, which
obligation is evidence by the sales invoice/official
receipt issued by said third party to the obligor/debtor
(e.g., customer or client of the payor of the obligation).
106
Gross Receipts
An advance payment is an advance on behalf of another if
the same is paid to a third (3rs) party for a present or future
obligation of said another party which obligation is evidenced
by a sales invoice/official receipt issued by the
obligee/creditor to the obligor/debtor.
For this purpose “unrelated party” shall not include
taxpayer’s employees, partners, affiliates (parent, subsidiary
and other related companies), relatives by consanguinity or
affinity within the fourth (4th) civil degree, and trust fund
where the taxpayer is the trustor, trustee or beneficiary, even
if covered by an agreement to the contrary.
107
Exempt transactions
Sale by agricultural cooperatives to non-members can
only be exempted from Vat if the producer of the
agricultural products sold is the cooperative itself. If the
cooperative is not the producer (e.g., trader), then only
those sales to its members shall be exempted from VAT.
It is to be reiterated however, that sale or importation of
agricultural food products in their original state is exempt
from VAT irrespective of the seller and buyer thereof.
108
Exempt transactions
However, even if the real property is not
primarily held for sale to customer or held for
lease in the ordinary course of trade or
business but the same is used in the trade or
business of the seller, the sale thereof shall
be subject to VAT being a transaction
incidental to the taxpayer’s main business.
109
Capital Goods or Properties
Refers to goods or properties with
estimated useful life greater than one
(1) year and which are treated as
depreciable assets used directly or
indirectly in the production or sale of
taxable goods or services.
110
Construction in progress (CIP)
Is the cost of construction work which is not yet completed.
CIP is not depreciated until the asset is placed in service.
Normally, upon completion, a CIP item is reclassified and
the reclassified asset is capitalized and depreciated.
CIP is considered, for purposes of claiming input tax, as a
purchase of service, the value of which shall be determined
based on the progress billings. Until such time the
construction has been completed, it will not qualify as
capital goods as herein defined, in which case, input tax
credit on such transaction can be recognized in the month
the payment was made; Provided, that an official receipt of
payment has been issued based on the progress billings.
111
Construction in progress (CIP)
In case of contract for the sale of service where only the
labor will be supplied by the contractor and the materials
will be purchased by the contractee from other suppliers,
input tax credit on the labor contracted shall still be
recognized on the month the payment was made based on
a progress billings while input tax on the purchase of
materials shall be recognized at the time materials were
purchased.
Once the input tax has already been claimed while the
construction is still in progress, no additional input tax can
be claimed upon completion of the asset when it has been
reclassified as depreciable capital asset and depreciated.
112
Input tax on Mixed Transactions
Claims for Vat refund/Tax Credit
Certificate (TCC) with the Bureau of
Internal Revenue, Board of Investment,
and One-Stop-Shop and Duty
Drawback Center of the Dept. of
Finance should be deducted from the
allowable input tax that are attributable
to zero-rated sales.
113
Withholding of VAT on Government
Money Payments and Payments to
Non-Residents.
The government of any of its political subdivisions,
instrumentalities or agencies including
government-owned or controlled corporations
(GOCCs) shall, before making payment on
account of each purchase of goods and/or of
services taxed at twelve percent (12%) VAT
pursuant to Secs. 106 and 108 of the Tax Code,
deduct and withhold a final VAT due at the rate of
five percent (5%) of the gross payment thereof.
114
Tax Avoidance
on
CIVIL REMEDIES
115
REMEDIES AVAILABLE TO THE TAXPAYER
UNDER THE TAX CODE IN CONNECTION
WITH THE COLLECTION OF TAXES
(1) Administrative Remedies
(a) Before Payment
1) filing a petition for reconsideration or
reinvestigation
2) entering into compromise
(b) After payment
1) filing of claim for tax refund
2) filing of claim for tax credit 116
(2) Judicial Remedies
(a) Civil action
1) appeal to the Court of Tax Appeals
2) action to contest forfeiture of chattel
3) action for damages
(b) Criminal action
1) filing of criminal complaint against erring
Bureau of Internal Revenue Officials and
employees.
117
GARNISHMENT
“Bank accounts shall be garnished by serving a
warrant of garnishment upon the taxpayer and
upon the president, manager, treasurer or other
responsible officer of the bank. Upon receipt of
the warrant of garnishment, the bank shall turn
over to the Commissioner so much of the bank
accounts as may be sufficient to satisfy the
claim of the Government.”
118
SUSPENSION OF RUNNING OF STATUTE
OF LIMITATIONS (COLLECTION)
1. For sixty (60) days when the taxpayer request
for a reinvestigation, which is granted by the
Commissioner.
2. 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.
3. When the taxpayer is out of the Philippines.
119
MINIMUM COMPROMISE
SETTLEMENT
1) For cases of financial incapacity, a minimum
compromise rate equivalent to ten percent
(10%) of the basic assessed tax; and
2) For other cases, a minimum compromise rate
equivalent to forty percent (40%) of the basic
assessed tax.
120
3) Where the basic tax involved exceeds One
Million Pesos (P1,000,000) or where the
settlement offered is less than the prescribed
minimum rates, the compromise shall be
subject to the approval of the Evaluation
Board which shall be composed of the
Commissioner and the four
121
TAX CREDIT OR REFUND OF TAXES
The Credit Certificate validly issued under the
provisions of the Internal Revenue Code may be
applied against any internal revenue tax,
excluding withholding taxes,
122
TAX CREDIT OR REFUND OF TAXES
No tax credit or refund of taxes or penalties shall
be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or
refund within two (2) years after the payment of
the tax or penalty.
123
OTHER
1. File a Tentative Return to Avoid 25%
surcharge
2. Avoid Refundable Return or carry over
of excess income or VAT
124
Thank You
125