TAX_Taxation Law 4

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Fair market value

It is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy, taking into consideration all uses to which the property is adopted and might in reason be applied. The criterion established by the statute contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers. (ALLIED BANKING CORPORATION vs. QUEZON CITY GOVERNMENT 2005)

Preparation of fair market values

(1) The city or municipal assessor shall prepare a schedule of FMVs for the different classes of real property situated in their respective LGUs for the enactment of an ordinance by the sanggunian concerned; and (2) The schedule of FMVs shall be published in a newspaper of general circulation in the province, city or municipality concerned or the posting in the provincial capitol or other places as required by law. (LOPEZ vs. CITY OF MANILA 1999)

Fundamental Principles of Real Property Taxation

(1) Appraisal at the current and fair market value prevailing in the locality where the property is situated; (2) Classification of the property for assessment on the basis of its actual use; (3) Assessment on the basis of uniform classification; (4) Appraisal, assessment, levy and collection shall not be let to a private person; (5) Appraisal and assessment shall be equitable.

Sales Analysis Approach, Income Capitalization Approach, Reproduction cost approach

Approaches in estimating the fair market value of real property for real property tax purposes. (ALLIED BANKING CORPORATION vs. QUEZON CITY GOVERNMENT 2005)

Sales Analysis Approach

It is an approach in estimating the fair market value of real property for real property tax purposes where the sales price paid in actual market transactions is considered by taking into account valid sales data accumulated with the Registrar of Deeds, notaries public, appraisers, brokers, dealers, bank officials, and various sources stated under the Local Government Code. (ALLIED BANKING CORPORATION vs. QUEZON CITY GOVERNMENT 2005)

Income Capitalization Approach

It is an approach in estimating the fair market value of real property for real property tax purposes where the value of an income-producing property is no more than the return derived from it. An analysis of the income produced is necessary in order to estimate the sum which might be invested in the purchase of the property. (ALLIED BANKING CORPORATION vs. QUEZON CITY GOVERNMENT 2005)

Reproduction Cost Approach

It is an approach in estimating the fair market value of real property for real property tax purposes and is used exclusively in appraising man-made improvements such as buildings and other structures, based on data on such materials and labor costs to reproduce a new replica of the improvement. (ALLIED BANKING CORPORATION vs. QUEZON CITY GOVERNMENT 2005)

Property exempt from the payment of real property tax under the Local Government Code

(1) Real property owned by the Republic or any of its political subdivisions except when the beneficial use thereof has been granted to a taxable person for a consideration or otherwise; (2) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings and improvements ADE used for REC purposes; (3) Machineries and equipment, ADE used by local water districts and GOCCs engaged in the supply and distribution of water and generation and transmission of electric power; (4) Real property owned by duly registered cooperatives; (5) Machinery and equipment used for pollution control and environmental protection.

Importation and the Jurisdiction of the Bureau of Customs to enforce the provisions of the TCCP

Importation and the jurisdiction of the Bureau of Customs to enforce the provisions of the TCCP including seizure and forfeiture BEGINS when the conveying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein. Importation and the jurisdiction of the Bureau of Customs to enforce the TCCP and to make seizures and forfeitures are DEEMED TERMINATED upon payment of the duties, taxes and other charges due upon the agencies, or secured to be paid, at the port of entry and the legal permit for withdrawal shall have been granted, except if the articles are free of duties, taxes and other charges, in which case, it is until they have legally left the jurisdiction of the customs. (SEC. 1202 TCCP)

The flexible tariff clause

It is a provision in the Tariff and Customs Code, which implements the constitutionally delegated power to the President of the Philippines, in the interest of the national economy, general welfare and/or national security upon recommendation of the NEDA (a) to increase, reduce or remove existing protective rates of import duty, provided that, the increase should not be higher than 100% ad valorem; (b) to establish import quota or to ban imports of any commodity, and (c) to impose additional duty on all imports not exceeding 10% ad valorem, among others.

Customs duties

It is the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from or exported to a foreign country. (NESTLE PHILS. vs. CA 2001)

Special customs duties

These are additional import duties imposed on specific kinds of imported articles under certain conditions. Under the Tariff and Customs Code (TCCP), they include the anti-dumping duty, the countervailing duty, the discriminatory duty, and the marking duty, and under the Safeguard Measures Act (SMA) additional tariffs as safeguard measures. They are imposed for the protection of consumers and manufacturers, as well as Philippine products.

Dumping duty

It is an additional special duty amounting to the difference between the export price and the normal value of such product, commodity or article imposed on the importation of a product, commodity or article of commerce into the Philippines at less than its normal value when destined for domestic consumption in the exporting country, and such exportation is causing or is threatening to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing the like product. (SEC. 301 (S) (5), TCC, as amended by RA 8752 "ANTI-DUMPING ACT OF 1999")

When anti-dumping duty is imposed

(1) A product, commodity or article of commerce is exported into the Philippines at a price less than its normal value when destined for domestic consumption in the exporting country; and (2) Such exportation is causing or is threatening to cause material injury to a domestic industry, or materially retards the establishment of a domestic industry producing the like product. (SEC. 301 (S) (5), TCC, as amended by RA 8752 "ANTI-DUMPING ACT OF 1999")

Imposing authority for the anti-dumping duty

The Secretary of Trade and Industry, in case of NON-AGRICULTURAL product, commodity, or article or the Secretary of Agriculture, in case of AGRICULTURAL product, commodity or article, after formal investigation and affirmative finding by the Tariff Commission. (SEC. 301 (A) TCCP as amended by RA 8752 "ANTI-DUMPING ACT OF 1999")

Countervailing duties

Additional customs duties imposed on any product, commodity or article of commerce which is granted, directly or indirectly by the government in the country of origin or exportation, of any kind or form of specific subsidy upon its production, manufacture or exportation, and the importation of such subsidized product, commodity, or article has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry. (SEC. 302 TCCP as amended by SEC. 1 R.A. NO. 8751) The countervailing duty is equivalent to the value of the specific subsidy.

The imposing authority for the countervailing duties

Secretary of Trade and Industry, in case of NON-AGRICULTURAL product, commodity, or article or the Secretary of Agriculture, in case of AGRICULTURAL product, commodity or article, after formal investigation and affirmative finding by the Tariff Commission. Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. (SEC. 301 (A) TCCP as amended by RA 8752 "ANTI-DUMPING ACT OF 1999")

Marking duties

Additional customs duties equivalent to 5% ad valorem imposed on foreign articles (or on its containers if the article itself cannot be marked) not marked in any official language of the Philippines, in a conspicuous place as legibly, indelibly and permanently in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin. The Commissioner of Customs imposes the marking duty.

Payment under protest of a ruling or decision of the Collector of Customs whereby liability for duties, taxes, fees, or other charges are determined, except the fixing of fines in seizure cases and the taxpayer could not obtain refund

(1) By presenting to the Collector at the time when payment is made, or within 15 days thereafter a written protest setting forth his objection to the ruling or decision in question, together with his reasons therefor. (2) No protest shall be considered unless payment of the amount due after final liquidation has first been made and the corresponding docket fee. (SEC. 2308 TCC)

Fundamental principles of local taxation

(1) Taxation shall be UNIFORM in each LGU; (2) Taxes, fees, charges and other impositions shall be EQUITABLE and based as far as practicable on the taxpayer's ABILITY TO PAY, levied and collected for PUBLIC PURPOSES, is not unjust, excessive, oppressive or confiscatory, and is not contrary to law, public policy, national economic policy or in restraint of trade; (3) The levy and collection shall in no case be LEFT to any private person; (4) The revenue collected shall INURE solely to the benefit of the LGU levying the tax, fee, charge or other imposition unless otherwise specifically provided; (5) Each LGU shall as far as practicable evolve a PROGRESSIVE system of taxation.

Improperly accumulated earnings

These are earnings or profits of a corporation, which are permitted to accumulate instead of being divided by a corporation to its shareholders for the purpose of avoiding the income tax on dividends with respect to its shareholders or the shareholders of another corporation. If the income were divided and distributed they would have been taxed as dividends. In addition to other income taxes, there is imposed for each taxable year on the improperly accumulated taxable income of each corporation, an IAET equal to 10% of the improperly accumulated taxable income. (SEC. 29 (A) NIRC OF 1997)

Corporations exempt from the IAET

(1) Publicly-held corporations; (2) Banks and other nonbank financial intermediaries; (3) Insurance companies. (SEC. 29 (B) (2) NIRC OF 1997)

(1) THE IMMEDIACY TEST, (2) THE "2 TO 1" RATIO, (3) THE BARDAHL FORMULA

The tests to determine justified accumulation of earnings and not subject to tax.

Immediacy Test

Under this test of determining justified accumulation, "Reasonable needs of the business" means the immediate needs of the business. If the corporation does not prove an immediate need for the accumulation of the earnings and profits, then the accumulation is not for the reasonable needs of the business and the penalty tax would apply. (CYANAMID PHILIPPINES, INC. vs. CA 2000 citing MANILA WINE MERCHANTS, INC. vs. CIR in turn CITING MERTENS)

The "2 to 1" Ratio

Under this test of determining justified accumulation, the ratio of current assets to current liabilities is used to determine the sufficiency of working capital. Ideally, the working capital should equal the current liabilities and there must be 2 units of current assets for every unit of current liability, hence the so-called "2 to 1" Rule. (CYANAMID PHILIPPINES, INC. vs. CA 2000 citing MANILA WINE MERCHANTS, INC. vs. CIR in turn CITING MERTENS)

The "Bardahl" Formula

A test of determining justified accumulation, which allows retention as working capital reserve, sufficient amounts of liquid assets to carry the company through one operating cycle. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. (CYANAMID PHILIPPINES, INC. vs. CA 2000 citing MANILA WINE MERCHANTS, INC. vs. CIR in turn CITING MERTENS)

Accrual method of accounting

A principal accounting method for recognition of income under which the income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in the gross income. (FILIPINAS FIBER CORPORATION vs. CA 1999)

Requisites of the accrual method of income recognition

(1) The right to receive the income must be valid, unconditional and enforceable, and not contingent upon future time; (2) The amount must be reasonably susceptible of accurate estimate; and (3) There must be a reasonable expectation that the amount will be paid in due course. (FILIPINAS FIBER CORPORATION vs. CA 1999)

Cash method of accounting

A principal accounting method for recognition of income under which the income is to be construed as income for tax purposes only upon actual receipt of the cash payment. It is also referred to as the "Cash Receipts and Disbursements Method" because both the receipt and disbursements are considered. Thus, income is recognized only upon actual receipt of cash payment but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash.

Ordinary assets

It refers to all real properties specifically excluded from the definition of capital assets, namely: (1) Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year; (2) Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; (3) Real property used in trade or business (buildings and/or improvements), of a character which is subject to the allowance for depreciation; (4) Real property used in trade or business of the taxpayer. (SEC. 2, B REV. REGS. NO. 7-2003)

Net loss carry-over vs. Net operating loss carry-over

(1) The source of ________ are capital losses only while the source of ________ are from the ordinary trade and business of the taxpayer; (2) Only taxpayers other than corporations may enjoy ________ while only corporations may enjoy the ________. (SEC. 39 [D], NIRC OF 1997)

Concept of net loss carry-over

Any taxpayer, other than a corporation (individuals including trusts and estates), who sustains in any taxable year a net capital loss from capital transactions involving capital assets (other than real property or shares of stock not listed or traded in the stock exchange), is allowed to treat during the succeeding year such net capital loss as a loss from the sale or exchange of a capital asset, held for more than twelve months. (SEC. 39 [D], NIRC OF 1997)

Net loss carry-over

Net loss carry-over means the deduction from net capital gains of a succeeding year the net capital loss suffered during the prior year. Net operating loss carry-over is the deduction from gross income for the next three (3) consecutive taxable years following the year of such loss, the excess of allowable deduction over the gross income. (SEC. 39 [D], NIRC OF 1997)

Capital assets

It shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets. (SEC. 2 A REV. REGS. NO. 7-2003)

Depreciation

It is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration.

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 TB or P; (3) The same must not be sustained in a transaction entered into between related parties; (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 debt must be actually ascertained to be worthless and uncollectible during the taxable year; (6) The debt is uncollectible despite diligent efforts exerted by the taxpayer; (7) The debt must have been reported as receivables in the income tax return of the current or prior years.

Tax benefit rule

It posits that the recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer's gross income in the year of such recovery to the extent of the income tax benefit of said deduction.

Warrantless search authority of internal revenue officers

Any internal revenue officer in the discharge of his official duties may enter any house, building or place where articles subject to excise taxes are produced or kept, or are believed by him upon reasonable grounds to be produced or kept so far as may be necessary to examine, discover or seize the same. (SEC. 171, 1st par. NIRC OF 1997)

Internal revenue officers authority to make arrests and seizures

Internal revenue officers shall have authority to make arrests and seizures for violation of any penal law or regulation administered by the BIR. Any person so arrested shall forthwith be brought before a court, there to be dealt with according to law. (SEC. 13 NIRC OF 1997) The basis for warrantless search and arrest is the DOCTRINE OF PRIMARY JURISDICTION, which posits that in technical matters where the administrative bodies have obtained expertise, the courts will defer. This is likewise premised on the LIFEBLOOD THEORY, which mandates the immediate collection of taxes to ensure the continued existence of the State.

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