Taxation Law - Ateneo

ATENEO CENTRAL BAR OPERATIONS 2007
Taxation Law
SUMMER REVIEWER

Advisers: Atty. Serafin Salvador, Atty. Michael Dana Montero, Atty. Gaudencio Mendoza; Head: Julie Ann B.
Domino, Juan J. P. Enriquez III; Understudies: Rachelle T. Sy, Aldwin Mendoza, Timothy John Batan
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PART I GENERAL PRINCIPLES

TAXATION power inherent in every sovereign
State to impose a charge or burden upon persons,
properties, or rights to raise revenues for the use and
support of the government to enable it to discharge
its appropriate functions

SCOPE OF TAXATION
TAXATION IS:
Unlimited,
Far-reaching,
Plenary
Comprehensive
Supreme

STAGES OF TAXATION: (LAP)
1. Levy
2. Assessment
3. Payment

Basic Principles of a Sound Tax System
1. Fiscal Adequacy
2. Theoretical Justice
3. Administrative Feasibility

INHERENT LIMITATIONS (SPING)
1) Situs or territoriality of taxation
2) Must be for a Public purpose
Test is whether proceeds will be
used for something which is the
duty of the State to provide.
Legislature is not required to
adopt a policy of all or none.
Incidental benefit to individual
does not defeat exemption
3) International comity
Property of a foreign State of
government may not be taxed by
another
4) Non-delegability of the taxing power
Contemplates power to
determine kind, object, extent,
amount, coverage, and situs of
tax;
Distinguish from power to assess
and collect
Exemptions: (a) presidential
taxing powers; (b) local
governments
5) Exemptions of Government agencies
Taking money from one pocket
to the other
Applies only to entities exercising
government functions (acta jure
imperii)

CONSTITUTIONAL LIMITATIONS
A. Direct
1) Due process
Should not be harsh, oppressive,
or confiscatory (Substantive)
By authority of valid law
(Substantive)
Must be for a public purpose
(Substantive)
Imposed within territorial
jurisdiction (Substantive)
No arbitrariness in assessment
and collection (Procedural)
Right to notice and hearing
(Procedural)
2) Equal protection
All persons subject to legislation
shall be treated alike, under like
circumstances and conditions
both in privileges conferred and
liabilities imposed.
Power to tax includes power to
classify provided:
(a) Based on substantial
distinction
(b) Apply to present and future
conditions
(c) Germane to purpose of law
(d) Apply equally to all members of
the same class
3) Non-impairment clause
Rules
(a) When government is party to
contract granting exemption
cannot be withdrawn
without violating non-
impairment clause
(b) When exemption generally
granted by law withdrawal
does not violate
(c) When exemption granted
under a franchise may be
revoked; Consti provides that
franchise is subject to
amendment, alteration, or
repeal by Congress.
4) Must be uniform and equitable
Taxation Law Summer Reviewer
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Uniform: all articles or properties
of the same class taxed at same
rate
Equity: apportionment must be
more or less just in the light of
taxpayers ability to shoulder tax
burden
5) Non-imprisonment for non-payment
of poll tax
Taxpayer may be imprisoned for
non-payment of other kinds of
taxes where the law so expressly
provides.
6) Congress shall evolve a progressive
system of taxation
As resources of the taxpayer
becomes higher, his tax rate
likewise increases (ex. Income
tax)
Constitution does not prohibit
regressive taxes; this is a
directive upon Congress, not a
justiciable right.
7) All appropriation, revenue or tariff bills shall
originate exclusively in the House of
Representatives, but the Senate may
propose or concur with amendments
It is the bill, not the law, that must
originate from House; bill may undergo
extensive changes in Senate
Rationale: members of House are more
sensitive to local needs.
8) Freedom of religion
Activities simply and purely for
propagation of faith are exempt (e.g. sale
of bibles and religious articles by non-
stock, non-profit organization at minimal
profit).
Tax is unconstitutional if it operates as a
prior restraint on exercise of religion
Income even of religious organizations
from any activity conducted for profil or
from any of their property, real or
personal, regardless of disposition of
such income, is taxable
9) Freedom of press/expression
Tax that operates as a prior restraint
invalid.
If fee is only for purpose of defraying cost
of registration and not for exercise of
privilege, no violation.
10) Charitable institutions, churches, and
parsonages or convents appurtenant thereto,
mosques and non-profit cemeteries and all
lands, buildings and improvements
ACTUALLY, DIRECTLY and EXCLUSIVELY
USED for charitable, religious and
educational purposes shall be exempt from
taxation
Pertains only to real estate tax.
Test of exemption: actual use of the
property, not ownership
Use of word exclusively means
primarily rather than solely.
Exemption extends to property incidental
to or reasonably necessary for the
accomplishment of the purposes
mentioned.
11) Tax exemption of all revenues and assets of
(a) non-stock, non-profit educational
institutions
(b) used ACTUALLY, DIRECTLY AND
EXCLUSIVELY for educational
purposes
Exemption covers income, property,
donors tax, and customs duties
(distinguish from previous which pertains
only to property tax)
Revenue must both be (a) derived from
an activity in pursuance of educational
purpose; and (b) proceeds must be used
for the same purpose (ex. hospital
adjunct to medical school tax exempt)
(ex. Interest income not exempt).
Income exempt provided it is used for
maintenance or improvement of
institution.
Distinguish from tax treatment of (a)
proprietary educational institutions
(Preferential Tax); and (b) government
educational institutions (exempt, ex. UP)
12) Delegated authority of President to impose
tariff rates, import and export quotas,
tonnage and wharfage dues
delegated by Congress
through a law
subject to Congressional limits and
restrictions
within the framework of national
development program
13) Law granting tax exemption (includes
amnesties, condonations and refunds) shall
be passed with concurrence of Congress -
majority of all members voting separately
Relative majority (majority of quorum) is
sufficient to withdraw exemption.
14) No use of public money or property for
religious purposes except if priest is assigned
to armed forces, penal institutions,
government orphanage or leprosarium
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15) Special purpose - special fund for said
purpose, balance goes to general funds
16) Veto power of the President - revenue/tariff
bill
17) Power of review of the SC
18) Power of Local Government to create their
own sources and levy taxes, fees, charges
19) Just share of local government in national
revenue which shall be automatically
released.
20) Tax exemption of all revenues and assets of
(a) proprietary or cooperative educational
institutions
(b) subject to limitations provided by law
21) Tax exemption of grants, endowments,
donations or contributions USED
ACTUALLY, DIRECTLY and EXCLUSIVELY
for educational purposes

CIR v. CA (298 SCRA 85)

Facts: YMCA is a non-stock, non-profit institution,
which conducts various programs and activities
beneficial to the public pursuant to its religious,
educational and charitable objective. In 1980, YMCA
earned an income of more than P600K from leasing
out a portion of its premises to small shop owners
and P47K from parking fees.

Issue: Is the rental income from real property owned
by the YMCA subject to income tax?

Held: YES, the exemption claimed by YMCA is
expressly disallowed by the last paragraph of then
27 of the NIRC. Furthermore, Art. XIV, 4 (3) of the
Constitution only exempts YMCA from property taxes
NOT income tax. YMCA cannot be considered as an
educational institution within the purview of the
above-cited article. The term educational institution
under the Education Act of 1982 refers to schools.
The school system is synonymous with formal
education, which refers to hierarchically structured
and chronologically graded learnings organized and
provided by the formal school system and for which
certification is required in order for the learner to
progress through grades or more to higher levels.
Nothing in the Articles of Incorporation or By-Laws of
the YMCA suggests that it is an educational
institution.

Classification of Taxes
A. As to subject matter of object
1) personal, poll, capitation tax
(a) fixed amount
(b) individuals residing within specified
territory
(c) without regard to their property,
occupation or business
Ex. Community Tax (Cedula)
2) property tax
(a) imposed on property, real or personal
(b) in proportion to its value or other
reasonable method of apportionment
Ex. Real estate tax
3) excise, privilege tax - (different from the
excise tax in Taxation II)
(a) imposed upon performance of an act, the
enjoyment of a privilege or the engaging
in an occupation, profession or business
Ex. Income tax, VAT, estate tax, donors tax
B. As to who bears the burden
1) Direct the tax is imposed on the person
who also bears the burden thereof
Ex. Income tax, community tax, estate tax
2) Indirect imposed on the taxpayer who
shifts the burden of the tax to another
Ex. VAT, specific tax, percentage tax,
customs duties
C. As to determination of amount
1) Specific tax imposed and based on a
physical unit of measurement, as by head,
number, weight, length or volume
Ex. Tax on distilled spirits, fermented
liquors, cigars
2) Ad Valorem - tax of a fixed proportion of the
value of property with respect to which the
tax is assessed; requires intervention of
assessor.
Ex. Real estate tax, excise tax on cars, non-
essential goods
D. As to purpose
1) General, fiscal or revenue - imposed for the
general purpose of supporting the
government
Ex. Income tax, percentage tax
2) Special or regulatory - imposed for a
special purpose, to achieve some social or
economic objectives
Ex. Protective tariffs or customs duties on
imported goods intended to protect local
industries
E. As to authority imposing the tax
1) National - imposed by the national
government
Ex. National internal revenue taxes, custom
duties
2) Municipal or local - imposed by the
municipal corporations or local governments
Ex. Real estate tax, occupation tax
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F. As to graduation of rate (Three systems of
taxation)
1) Proportional - based on a fixed percentage
of the amount of the property, income or
other basis to be taxed
Ex. Real estate tax, VAT, percentage tax
2) Progressive or graduated - tax rate
increases as the tax base or bracket
increases
Ex. Income tax, estate tax, donors tax
3) Regressive - tax rate decreases as the tax
base increases
4) Degressive - increase of rate is not
proportionate to the increase of tax base
SITUS OF TAXATION - the place of taxation, the
country that has the power to levy and collect the
tax.

TAX DISTINGUISHED FROM POLICE POWER

TAX POLICE POWER (in
the form of a FEE)
Purpose Raise revenue Exercise to promote
public welfare through
regulation
Amount of
exaction
No limit Limited to the cost of
regulation, issuance
of license, or
surveillance
Superiority
of
contracts
Contracts may
be impaired
unless (a)
government is
party to
contract
granting
exemption; or
(b) involves
franchise
Contracts may be
impaired
Transfer
of
property
rights
Taxes paid
form part of the
public funds
Allows merely the
restraint on the
exercise of property
rights

TAX DISTNGUISHED FROM EMINENT DOMAIN

TAX EMINENT DOMAIN
Purpose Raise
revenue
The taking of
property for public
use
Compensation Payment of Just compensation
taxes accrue
to the general
benefit of the
citizens of the
taxing State
is given the owner
of the expropriated
property
Persons
affected
Applies to all
persons,
property and
excises that
may be
subject
thereto
Only particular
property is
comprehended

TAX DISTINGUISHED FROM LICENSE FEE

TAX LICENSE FEE
Source Exercise of
Taxing power
Emanate from the police
power of the State
Purpose Raise
revenue
Regulation
Object Persons,
property and
privilege
Right to exercise a
privilege
Amount no limit only necessary to carry
out regulation

Distinction lies in the primary purpose:
License fee if primary purpose is to
regulate and the excess of the amount
collected from the cost to carry out the
regulation is minimal and incidental.
Tax if primary purpose, or at least one of
the real and substantial purposes is to
raise revenue.
If amount is too high for regulation, it would
be a tax; unless imposed on non-useful
occupations or businesses.

Purpose of distinction: limitations and
exemptions apply only to one and not to the
other (ex. Exemption from taxation does not
include exemption from fee)

TAX DISTINGUISHED FROM DEBT

TAX DEBT
Source Law; legal
obligation
Based on contract
Personal Assignable
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Generally not
subject to
compensation/set-
off
May be the subject
of
compensation/set-
off
Imprisonment is
sanction for non-
payment
No imprisonment
for non-payment

GENERAL RULE: Taxes cannot be the subject of
compensation or set-off
* A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or
greater than the tax being collected. The collection of
tax cannot await the results of a lawsuit against the
government.

Reasons:
a) lifeblood theory
b) taxes are not contractual obligation (absence
of consent of taxpayer)
c) taxpayer and government are not mutual
debtors and creditors of each other

EXCEPTIONS:
1) Both claims already became overdue and
demandable as well as fully liquidated there
must have already been an act of appropriation
by the government (legislative) of funds for
payment of the debt.
2) Tax overpayment (BIRs obligation to refund or
set-off arises from time tax was paid)
3) If the case involves local government taxes

TAX DISTINGUISHED FROM SPECIAL
ASSESSMENT

TAX SPECIAL
ASSESSMENT
Imposed
on
persons,
properties, etc.
Only on land
Why
imposed
regardless of
public
improvement
Public improvement
that benefits the land
Purpose Support of
government
Contribution to cost
of public
improvement
When
imposed
Regular exaction Exceptional as to
time and locality
Basis Necessity Benefits obtained

TAX DISTINGUISHED FROM TOLL

TAX TOLL
Kind of
demand
Demand of
sovereignty
Demand of
ownership
Purpose support of
government
Collection for the
use of property
Amount no limit depends
on need of the
government
Fair return of the
cost of the property
or improvement

TAX DISTINGUISHED FROM CUSTOMS DUTY

TAX CUSTOMS
DUTY
Coverage More comprehensive
than customs duty
kind of tax
Object Persons, prop, etc goods imported
or exported

DOCTRINE OF EQUITABLE RECOUPMENT
1) refund of a tax illegally or erroneously collected
or overpaid by a taxpayer
2) such tax refund is barred by prescription
3) tax presently being assessed against a taxpayer
4) may be recouped or set-off against the tax barred
by prescription
not allowed in Philippines, reason - LIFE BLOOD

CONCEPT OF DOUBLE TAXATION
Kinds of Double Taxation
A. DIRECT DUPLICATE
taxing same person, property or right
twice
for the same purpose
by the same taxing authority
within the same jurisdiction or taxing
district
within the same taxable period
and they must be of the same kind or
character of tax
B. INDIRECT DUPLICATE
Exists if any of the elements for Direct
taxation is not present

No constitutional prohibition on double taxation.
However, where there is direct duplicate taxation
then there may be violation of the constitutional
precepts of equal protection and uniformity in
taxation.
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TAX TREATY AS A MODE OF ELIMINATING
DOUBLE TAXATION:
1) EXEMPTION METHOD the income or capital
which is taxable in the state of source or situs is
exempted in the state of residence, although in
some instances it may taken into account in
determining the rate of tax applicable to the tax
payers remaining income or capital (ex. Tax
Sparing Credit scheme)
2) CREDIT METHOD the tax paid in the state of
source is credited against the tax levied in the
state of residence
Afisco Insurance Corp v. CA (G.R. No. 112675,
Jan. 25, 1999)

Petitioners are local non-life insurance corps. Which
formed a pool in order to enter into a Reinsurance
Treaty with a German company. BIR assessed
deficiency taxes against the pool on the ground that
it is considered a partnership taxable as a corp.
Petitioners insist that the pool is a mere agent, not
acting on its own and therefore, cannot be taxed as a
corp., there being no risk undertaken by the pool, no
common fund and no control exercised by its board in
the management of its fund.

Issue (1) : Is the Pool Taxable as a Corp?

Held (1): YES. Pursuant to 24 of the NIRC, the
pool is included within the definition of domestic
corps. Which comprises even unregistered
partnerships and associations. In this case, the
ceding cos. Entered into an association that would
handle all business under the Treaty. It has a
common fund and an executive board to manage its
affairs. Moreover, even if the pool itself did not issue
any policies on its own, its work was indispensable to
the business of the ceding companies and the
German Co,

Issue (2): Is there double taxation?

Held(2): NO. Double taxation means taxing the
same person twice by the same jurisdiction for the
same thing. The pool is a taxable entity distinct from
the individual corporate entities of the ceding
companies. The tax on its income is obviously
different from the tax on the dividends received by
the said companies.

Power to Tax Involves Power to Destroy [Chief
Justice Marshall, McCullough v. Maryland, 4 L.Ed.
579 (1819)]

The imposition of a valid tax could not be judicially
restrained merely because it would prejudice a
taxpayers property. As long as the power to tax
does not violate any constitutional or statutory
provisions, said power can be a power to destroy.

But for all its plenitude, the power to tax is not
unconfined as there are restrictions. Adversely
effecting as it does property rights, both the due
process and equal protection clauses of the
Constitution may properly be invoked to invalidate in
appropriate cases a revenue measure. If it were
otherwise, there would be truth to the dictum that the
power to tax involves the power to destroy. The web
or unreality spun from Justice Marshalls famous
dictum was brushed away by one stroke of Mr.
Justice Holmes pen, thus: The power to tax is not
the power to destroy while this Court sits. So it is in
the Philippines. [Reyes v. Almanzor (1991), citing
Sison v. Ancheta (1984); Obillos v. CIR (1985)].

Tax Avoidance (Tax Minimization) tax saving
device that is legally permissible

Tax Evasion (Tax Dodging) connotes fraud
through the use of pretenses and forbidden devices
to lessen or defeat taxes; must be willful and
intentional.

CIR vs. The Estate of Benigno Toda, GR No.
147188, Sept. 14, 2004

Facts: This Court is called upon to determine in
this case whether the tax planning scheme adopted
by a corporation constitutes tax evasion that would
justify an assessment of deficiency income tax.
CIC authorized Toda, Jr., President and owner
of 99.991% of its issued and outstanding capital
stock, to sell the Cibeles Building and the two
parcels of land on which the building stands for an
amount of not less than P90M. Toda then
purportedly sold the property for P100 M to Rafael
Altonaga, who, in turn, sold the same property on
the same day to RMI for P200M. These 2
transactions were evidenced by Deeds of Absolute
Sale. For the sale of the property to RMI, Altonaga
paid capital gains tax in the amount of P10M.
CIC filed its corporate annual ITR for the year
1989, declaring, among other things, its gain from
the sale of real property in the amount of
P75,728.021. Toda sold all his shares. He died 3
yrs. later.
The BIR sent an assessment notice

and
demand letter to the CIC for deficiency income tax
for the year 1989 in the amount of P79,099,999.22,
representing the tax, surcharge, & interest on the
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NATURE OF TAX AMNESTY
1) general or intentional overlooking by the State of
its authority to impose penalties on persons
otherwise guilty of evasion or violation of a
revenue or tax law
2) partakes of an absolute forgiveness or waiver of
the Government of its right to collect
3) to give tax evaders, who wish to relent & are
willing to reform a chance to do so
RULES ON TAX AMNESTY
1) Tax amnesty
(a) like tax exemption, never favored nor
presumed
(b) construed strictly against the taxpayer (must
show complete compliance with the law)
2) Government not estopped from questioning the
tax liability even if amnesty tax payments were
already received
Reason: Erroneous application and
enforcement of the law by public officers do
not block subsequent correct application of
the statute. The government is never
estopped by mistakes or errors of its agents.
Basis: Lifeblood Theory
3) Defense of Tax amnesty, like insanity, is a
personal defense.
Reason: Relates to the circumstances of a
particular accused and not the character of
the acts charged in the information

PART II THE NATIONAL INTERNAL REVENUE
CODE OF 1997

TITLE I. ORGANIZATION AND FUNCTION OF THE
BUREAU OF INTERNAL REVENUE (BIR)

POWERS AND DUTIES OF THE BIR (ACEEGA)
1) Assessment and Collection of national internal
revenue:
(a) taxes
(b) fees
(c) charges
2) Enforcement of all
(a) forfeitures
(b) fines and
(c) penalties
connected therewith
3) Execution of all judgments decided in BIRs favor
by
(a) the Court of Tax Appeals (CTA) and
(b) the ordinary courts
4) Give effect to and Administer the supervisory and
police powers conferred to it by NIRC or by other
laws. (Sec. 2)

Officials of the BIR
1) one chief - Commissioner of Internal Revenue
(Commissioner)
2) four assistant chiefs - Deputy Commissioners
(Sec. 3)
*E.O. 430 (July 28, 1997) designates each of the
4 Deputy Commissioners to head the following
functional groups:
(a) Operations group
(b) Legal Enforcement Group
(c) Information Systems Group
(d) Resource Management Group

Powers of the Commissioner
A. Power to interpret tax law and decide tax
cases (Sec 4)
1) Interpret provisions of NIRC and other tax
laws subject to review by the Secretary of
Finance
2) Decide:
(a) disputed assessments
(b) refunds of internal revenue taxes, fees
and charges
(c) penalties imposed in relation thereto
(d) other matters arising from NIRC or other
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laws or portions thereof administered by
the BIR subject to the exclusive appellate
jurisdiction of the CTA

B. Power to obtain information, summon,
examine and take testimony of persons (Sec.
5)
1) For the Commissioner to ascertain:
(a) correctness of any return or in making a
return where none has been made
(b) liability of any person for any internal
revenue tax or in correcting such liability
(c) tax compliance

The Commissioner is authorized:
2) to Examine any relevant Book, paper, record
or other data
3) to Obtain any Information (costs, volume of
production, receipts, sales, gross income,
etc), on a regular basis from:
(a) any person other than the person under
investigation or
(b) any office or officer of the national/local
government, government agencies and
instrumentalities (Bangko Sentral,
GOCCs)
4) To Summon
(a) the person liable for tax or required to file
a return or
(b) any officer or employee of such person
or
(c) any person having in his
possession/custody/ care
1. the books of accounts
2. accounting records of entries relating
to the business of the person liable
for tax or any other person

5) to Produce such books, papers, records and
other data and to give testimony
6) to take the Testimony of the person
concerned, under oath as may be relevant to
the inquiry
7) To cause revenue officers and employees to
make a Canvass of any revenue district or
region
nothing in Section 5 shall be construed as
granting the Commissioner the authority to
inquire into bank deposits other than as provided
for under Sec. 6 (F) of the Code (authority to
inquire into bank deposits).

C. Power to make assessments, prescribe
additional requirements for tax administration
and enforcement (Sec. 6)
1) Examination of returns and determination of
tax due -
(a) After a return has been filed the
Commissioner or his representative may
authorize
i. the Examination of any taxpayer;
and
ii. the Assessment of the correct
amount of tax;
(b) Failure to file a return shall not prevent
the Commissioner from
authorizing the examination of any
taxpayer;

Any tax or deficiency tax so assessed shall be
paid upon notice and demand from the
Commissioner or his representative.

Any return, statement or declaration filed in any
authorized office shall not be withdrawn; but
within THREE YEARS from date of filing, the
same may be modified, changed or amended;
provided that no notice for audit or investigation
of such return, has in the meantime, been
actually served upon the taxpayer.

2) Failure to submit required returns and other
documents
If a person
(a) fails to file a required return or report at
the time prescribed or
(b) Willfully or otherwise files a false or
fraudulent return,
The Commissioner shall Make or Amend the
return from
(a) his own knowledge or
(b) from such information as he can obtain
through testimony or otherwise
which shall be prima facie correct and sufficient
for all legal purposes

3) Inventory-taking, Surveillance, Presumptive
Gross Sales
(a) Commissioner may, at any time during
the taxable year
1. order the Inventory taking of goods
of any taxpayer; or
2. may place the business operations of
any person (natural/juridical) under
Observation or Surveillance
if there is reason to believe that such
person is not declaring his correct
income, sales or receipts for tax
purposes.
The findings may be used as basis for
assessing the taxes and shall be deemed
prima facie correct.
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(b) Commissioner may prescribe a Minimum
amount of gross receipts, sales and
taxable base (taking into account the
sales and income of other persons
engaged in similar business) :
1. When a person has failed to issue
receipts as required by Sec. 113
(Invoice requirements for VAT-
registered persons) and Sec. 237
(Issuance of Receipts or Commercial
Invoices); or
2. When the books of accounts or
records do not correctly reflect the
declarations made or required to be
made in a return,
such minimum amount shall
be prima facie correct

4) Terminate taxable period -
Commissioner shall declare the tax period of
a taxpayer terminated and send notice to the
taxpayer of such decision with a request for
immediate payment of the tax, when it has
come to the knowledge of the Commissioner:
(RIRHO)
(a) that a taxpayer is Retiring from business
subject to tax or
(b) is Intending to leave the Philippines or
(c) to Remove his property therefrom or
(d) to Hide or conceal his property or
(e) is performing any act tending to Obstruct
the proceedings for the collection of tax

5) Prescribe Real Property Values -
The Commissioner is authorized to:
(a) divide the Philippines into different zones
or areas and
(b) determine the fair market value of real
properties located in each zone or area
For tax purposes, the value of the property
shall be whichever is higher of:
(a) Fair market value as determined by the
Commissioner; or
(b) Fair market value as shown in the
schedule of values of the provincial and
city assessors.

6) Authority to Inquire into Bank Deposit -
Notwithstanding R.A. 1405 (Bank Secrecy
Law) the Commissioner is authorized to
inquire into the Bank deposits of:
(a) a decedent to determine his gross estate
(b) a taxpayer who has filed an application to
compromise payment of tax liability by
reason of financial incapacity

The taxpayers application for compromise
shall not be considered unless he waives in
writing his privilege under RA 1405 and other
general or special laws. Such waiver shall
authorize the Commissioner to inquire into
his bank deposits.

7) Authority to Register tax agents -
(a) The Commissioner shall Accredit and
Register, individuals and general
professional partnerships and their rep.
who prepare and file tax returns and
other papers or who appear before the
BIR
(b) The Commissioner shall create national
and regional accreditation boards

Those who are denied accreditation may
appeal the same to the Sec. of Finance who
shall rule on the appeal within 60 days from
receipt of such appeal. Failure of the Sec. of
Finance to rule on the appeal within the said
period shall be deemed as approval for
accreditation.

8) Authority to Prescribe Additional
Requirements-
The Commissioner may prescribe the
manner of compliance with any documentary
or procedural requirement for the submission
or preparation of financial statements
accompanying tax returns.

D. Authority to delegate power (Sec. 7)

The Commissioner may delegate the powers vested
in him to subordinate officials with rank equivalent to
Division Chief or higher, subject to
limitations/restrictions imposed under the rules and
regulations EXCEPT, (the following powers shall
NOT be delegated): (RIR CoA A)
1) power to Recommend the promulgation
of rules and regulations by the Sec. of
Finance
2) power to Issue rulings of first impression
or to Reverse, revoke, modify any
existing rule of the BIR
3) power to Compromise or Abate any tax
liability

EXCEPT, the regional evaluation board
may compromise:
(a) assessments issued by regional
offices involving deficiency taxes of
P500,000 or less; and
(b) minor criminal violations as may be
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determined by the rules

Regional Evaluation Board is composed
of:
i. Regional Director as Chairman
ii. Asst. Regional Director
iii. Heads of the Legal, Assessment and
Collection Div.
iv. Revenue District Officer having
jurisdiction over the taxpayer

4) power to Assign or reassign internal
revenue officers to establishments where
articles subject to excise tax are kept

E. Assignment of Internal Revenue Officers
(Secs. 16 &17)

The Commissioner may assign/ reassign internal
revenue officers:
1) involved in excise tax functions as often as the
exigencies of revenue service may require;
provided that he shall in no case stay in his
assignment for more than 2 years (Sec. 16)
2) without change in rank and salary, to other or
special duties connected with the enforcement
and administration of internal revenue laws as
the exigencies of the service may require;
provided that officers assigned to perform
assessment or collection functions shall not
remain in the same assignment for more than 3
years; assignment of officers and employees to
special duties shall not exceed 1 year (Sec. 17)

F. Internal Revenue Districts (Sec. 9)
The Commissioner, with approval of the Sec. of
Finance, shall divide the Philippines into such
number of revenue districts for administrative
purposes. Each district shall be under the supervision
of a Revenue District Officer.

Duties of the Commissioner: (PASO)
1) To Prescribe, provide and distribute to the proper
officials the requisite licenses, internal revenue
stamps, labels, all other forms, certificates,
bonds, records, invoices, books, receipts,
instruments and appliances used in administering
laws falling within the jurisdiction of BIR
2) To Acknowledge payment of any tax under this
Code expressing
a) the amount paid and
b) the particular account for which payment
was made (Sec. 8)
3) To Submit reports to the appropriate committee
of Congress upon its request and in aid of
legislation, which information or report shall
include, but not be limited to:
(a) industry audits
(b) collection performance data
(c) status reports in criminal actions initiated
against persons
(d) taxpayers returns
provided, any return or information which can
be associated with or identifies, directly or
indirectly a particular taxpayer, shall be
furnished to the appropriate committee of
Congress only when sitting in Executive
Session, unless the taxpayer consents in
writing to such disclosure
4) Submit reports to the Oversight Committee
through the Chairman of the Committee on Ways
and Means of the Senate and House of
Representatives, on the exercise of his powers of
abatement and compromise of taxes (Sec. 204)
every 6 months of each calendar year. (Sec. 20)

NATIONAL INTERNAL REVENUE TAXES: (Sec.
21) (I VEE DOO)
1) Income tax
2) Estate and Donors tax
3) Value-Added tax
4) Other percentage tax
5) Excise tax
6) Documentary stamp tax
7) Such Other taxes as are or hereafter may be
imposed and collected by the BIR

TITLE II. TAX ON INCOME

DEFINITION OF TERMS
1) Person an individual, a trust, estate or corp.
2) Corporation include partnerships (distinguish
between ordinary and general professional
partnership)
3) General professional partnership
partnerships formed for the sole purpose of
exercising their common profession, no part of its
income being derived from engaging in any trade
or business
4) Shares of stock includes shares of stock of a
corp., warrants & options to purchase shares of
stock, as well as units of participation in a
partnership (except gen. professional
partnership), joint stock companies, joint
accounts, joint ventures taxable as corp.,
associations & recreation or amusement clubs &
mutual fund certificates
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5) Taxpayer any person subject to tax
6) Taxable Year can either be calendar year (Jan
1 to Dec 31), or the fiscal year
7) Fiscal Year an accounting period of 12 months
ending on the last day of any month other than
December (ex. Feb 1 to Jan 31)
8) Paid or incurred (cash method) or Paid or
accrued (accrual method) payment actually
made or if not paid, actually liable for the
expense

TAXABLE INCOME

REQUISITES FOR INCOME TO BE TAXABLE:
1) There must be a gain or addition to net worth
2) The gain must be realized or received, actually or
constructively; recipient must have complete
dominion
3) The gain must not be excluded by law or treaty
from taxation

Note:
Not recognized as income - when funds
were merely entrusted/held money in trust (with
obligation to return) to taxpayer because
taxpayer acquires no control and does not
receive economic benefit from it.
Proceeds of embezzlement/swindling are
income because embezzler/swindler already
has complete dominion over them and can use
such for his economic benefit.
Increase in the value of property is not
recognized as income; this only constitutes
an unrealized increase which becomes taxable
income only upon disposition and realization of
gains. Same situation for stocks and stock
dividends.
Deposit with no interest does not produce
income for the depositary; there is no flow of
wealth.
In a debt/loan situation it is important to
determine whether there was an original
intention to pay/consensual recognition of an
obligation to repay.
If yes, then the liability that
results just offsets the increase in
assets of the taxpayer borrower;
therefore, no increase in net worth
and no income derived from the
debt/loan.
If no (as in the case of a
swindler/estafa), the proceeds will
be considered as income and
therefore taxable in the hands of
the borrower swindler.
Income can be realized actually and
constructively.
Assignment of Income Doctrine Ex: A is
entitled to his salary of P10m but assigns it to B
for unknown reasons. In this case, both A and
B realize income. A constructively received
income (because he was able to assign thus
has complete control/dominion over it) and B
actually received it. The income is taxable in
the hands of both A and B.
Doctrine of Constructive Receipt Ex: A was
informed that his check dated December 16 is
already available and he can get it anytime. A
did not get the check until January 30. In this
case, A constructively received income in
December and is taxable in that taxable period.
Not recognized as income if proceeds are
merely a return of capital. Ex. Creditor lends
debtor x amount. Debtor repays x amount plus
y interest. Creditor does not have income on x
amount as this is merely return on capital; he
has income only with respect to the amount of
y interest.

COMPUTATION OF TAXABLE INCOME

1) Taxpayer earning purely compensatory
income
Gross Compensation
less : Personal Exemption
premium payments on health and/or
hospital insurance amounting to P2,400
per year
equals: Taxable income

2) Taxpayer doing business, whether individual
or corporation (domestic or FC doing
business)
Gross Revenue/Sales
less: Cost of Sales
equals: Gross Income
less : Allowable Deductions
equals: Taxable Income
for individuals, an additional deduction for
personal exemptions is allowed

Situs of Taxation is the place or authority that has the
right to impose and collect taxes (CIR v. Marubeni
Corp). The state where the subject to be taxed has a
situs may rightfully levy and collect the tax. The situs
is necessarily in the state which has jurisdiction or
which exercises dominion over the subject in
question.

SOURCES OF INCOME
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ITEM SOURCE
Interest Residence of the debtor
Compensation for
personal services
Place of performance
Rent and royalty Location of property
Gain from sale of
real property
Location of property
Gain from sale of
personal property
Place of sale
Gain from sale of
shares of stock of
domestic
corporation
Philippine source
Dividend income (a) From a domestic corp.
deemed income from within
Phil.
(b) From a foreign corp.
deemed income from without
provided more than 50% of the
corp.s worldwide income is not
derived from Phil. sources

Allocation of Unallocated Deductions (partly Phil.
partly foreign)

GI, Philippines x Unallocated = Phil deductions
GI, Worldwide deductions

GI, Outside Phil x Unallocated = Foreign
GI, Worldwide deductions deductions

Income from sale of personal property derived from
sources partly within and partly without the Phils.

Gain from sale of personal property produced in
whole or in part in one country and sold in another
country, where one of the countries is the Philippines
is income derived from sources partly within and
partly outside the Philippines.

Gains from the purchase of personal property within
and sold without the Philippines or the purchase of
personal property without and its sale within the
Philippines shall be treated as derived entirely from
sources within the country in which it was sold.

GENERAL PRINCIPLES OF INCOME TAXATION
IN THE PHILIPPINES

Taxpayer Tax Base Taxable on
income
Resident Citizen Taxable
Income
Within and
without the
Philippines
Nonresident Citizen Taxable
Income
Within the
Philippines
Resident Alien Taxable
Income
Within the
Philippines
Nonresident Alien
engaged in trade or
business
Taxable
Income
Within the
Philippines
Nonresident Alien not
engaged in trade or
business
Gross
Income
Within the
Philippines
General Professional
Partnership
Taxable
Income
Within
or/and
without the
Philippines
(depending
on
classification
of individual
partner)
Estate and Trust Taxable
Income
Same basis
as an
individual
(depending
on
classification
of decedent,
if estate,
trustor, if
trust)
Domestic Corporation Taxable
Income
Within and
Without the
Philippines
Resident Foreign
Corporation
Taxable
Income
Within the
Philippines
Non-resident Foreign
corporation
Gross
Income
Within the
Philippines

*Taxable Income = Gross income (less) Deductions
(less) Personal and additional exemptions

*Gross Income = all income derived from whatever
source

TYPES OF INCOME TAXATION UNDER THE NIRC
1) Net Income Tax/Taxable Income (GI
Deductions Exemptions)
2) Gross Income Tax (All income from whatever
source)
3) Final Income Tax (On passive income and capital
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gains)
4) Fringe Benefits Tax (amount of benefits to
Managerial and Supervisory Employee paid by
Employer; Ee is taxed but burden is on Er)
5) Capital Gains Tax (Real property and stocks not
traded in stock market)
6) Optional Corporate Income Tax
7) Minimum Corporate Income Tax (2% of GI)
8) Improperly Accumulated Earnings Tax
9) Preferential Rates (for special corporations)
10) Branch Profit Remittance Tax

TYPES OF TAXPAYERS

A. Individuals

Kinds of Individuals
1) Resident Citizen
2) Nonresident Citizen = citizen of the
Philippines who:
(a) Establishes the fact of his physical
presence abroad with a definite intention
to reside therein
(b) Leaves the Philippines during the taxable
year to reside abroad, as immigrant or for
employment on a permanent basis
(c) Works & derives income from abroad &
whose employment requires him to be
physically present abroad most of the
time (i.e. not less than 183 days) during
the taxable year
(d) Previously considered as nonresident
citizen & arrives in the Philippines at any
time during the taxable year to reside
permanently in the Philippines
3) Resident Alien
4) Nonresident Alien
a) Those engaged in trade or business in
the Philippines who come and stay in the
Philippines for an aggregate period of
more than 180 days during any calendar
year
b) Those not engaged in trade or business
in the Philippines, which include non-
resident aliens whose stay in the
Philippines is 180 days or less
c) Aliens employed by regional or area
headquarters and regional operating
headquarters of multinational companies
in the Philippines
d) Aliens employed by offshore banking
units
e) Aliens employed by petroleum
contractors and subcontractors

TYPES OF INCOME
1) General (part of gross income, subject to 5-
32%)
a) Compensation Income
b) Income from Business
c) Income from Exercise of Profession
2) Special Types of Income (not part of gross
income, subject to final tax)
a) Interests, royalties, prizes and other
winnings subject to final tax (Passive
Income)
b) Cash & property dividends (does not
include stock dividends; these are
realized only upon their subsequent sale)
(Passive Income)
c) Capital gains from sale of real property
d) Capital gains from sales of shares of
stock not listed in the stock exchange
e) Capital gains from sale of shares of stock
listed in stock exchange (subject to
percentage tax

B. Estates and Trusts

Estate: property, rights and obligations of a
person which are not extinguished by his death
and those that accrues thereto; taxed in the same
way as an individual provided it is irrevocable and
earns income; what is taxed is not the property
that constitutes the trust (this was already subject
to donors tax) but the income of such property.

Trust: arrangement created by agreement under
which title to property is passed to another for
conservation or investment with the income and
the corpus/principal distributed in accordance
with the directions of the creator; to be taxable as
a separate entity, grantor must have absolutely
and irrevocably given up control and benefit over
the trust.

C. Corporation

A corporation shall include partnerships, no matter
how created or organized. Joint stock companies,
joint accounts, associations, and insurance
companies
But does not include, for the purpose of
imposing ordinary 35% corporate income tax:
o general professional partnerships
o joint venture or consortium formed for the
purpose of undertaking construction
projects or engaging in petroleum, coal,
geothermal & other energy operations
pursuant to an operating or consortium
agreement under a service contract with
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the govt.

General Types:
1) Domestic Corporation is created or
organized in the Philippines or under its laws
2) Foreign Corporation is organized and
existing under the laws of a foreign country
(a) Resident foreign corporation foreign
corp. engaged in trade or business within
the Philippines
(b) Nonresident foreign corporation
foreign corp. not engaged in trade or
business within the Philippines

D. Partnerships
Kinds of Partnerships
1) General Professional Partnerships
Established solely for purpose of exercising
common profession and not part of income
derived from engaging in trade or business.
As an entity, it is not subject to income tax.
Partners are liable for income tax on their
distributive share (computed by dividing net
income of GPP). Each partner shall report his
distributive share as part of his gross income.
2) Taxable/Business/Ordinary Partnership
All other partnerships no matter how created
or organized.
Includes unregistered joint ventures and
business partnerships.
Taxable as an entity ordinary corporate
income tax.
Joint ventures are not taxable as
corporations when its purpose if a)
undertaking construction projects; b)
engaged in petroleum, coal and other energy
operation under a service contract with the
government.
Partners are considered stockholders;
therefore, their distributive share is taxed as
dividends.

TAX ON CORPORATIONS
I. DOMESTIC CORPORATIONS
A. In general

On taxable income from all
sources within and without
the Philippines
32% (2000-2005)
35% (2006-2008)
30% (2009
onwards)

B. Optional Gross Income Taxation

Effective Jan. 1, 2000: the President (upon
recommendation of the Sec of Finance) may
allow corporation an option to be taxed at 15% of
gross income after the ff. conditions are
satisfied:

Tax effort ratio 20% of
GNP
Ratio of IT collection to total tax
revenue
40%
VAT tax effort 4% of GNP
Ratio of Consolidated Public
Sector Financial Position
(CPSFP) to GNP
0.9%
Ratio of Cost of Sales to Gross
Sales from all sources
Does not
exceed 55%

The election of the option shall be irrevocable
for 3 consecutive taxable years during which the
corp. is qualified under the scheme

Gross Income = Gross Sales
( - ) Sales returns,
discounts and
allowances
( - ) Cost of goods sold

Cost of Goods Sold
Trading and Merchandising Concern
Invoice cost plus import duties and
freight in transporting goods to the place
where actually sold, including insurance
while in transit
Manufacturing concern
Cost of production of finished goods (raw
materials, direct labor and manufacturing
overhead, freight cost, insurance
premiums, and other costs to bring the
raw materials to the factory)

If taxpayer is engaged in sale of service:
Gross Income = Gross receipts
allowances and
discounts

C. Special Types of Domestic Corporations

Proprietary
educational
institutions and
hospital which are
10% On related trade,
business or activity;
35% (2006) if total
gross income from
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nonprofit

unrelated trade,
business, or activity
exceed 50% of total
income
GOCC, Agencies
and
Intrumentalities,
including
PAGCOR

32%
(2000-
2005)
35%
(2006)
Same tax rate upon
their taxable
income in a similar
business, industry,
or activity
GSIS/ SSS / PHIC
/ PCSO
Exempt
Depository Banks 10% On interest income
from foreign
currency
transactions
including interest
income from
foreign loans

Proprietary Educational Institutions & Hospitals
(non-profit)

Proprietary educational institution any
private school maintained & administered by
private individuals or groups with an issued
permit to operate from DECS, or CHED or
TESDA
Taxable at 10% on taxable income, except on
certain passive income (which are subject to final
tax)
Predominance Test: if GI from unrelated
trade/business/other activity > 50% of the total GI
from all sources, ENTIRE taxable income shall
be subject to the REGULAR corporate tax rate
(35% Effective 2006)
Distinguish from non-profit non-stock educational
institutions which are exempt from tax on
revenues and assets Actually, Directly and
Exclusively used for educational purposes (See
above for discussion).

GOCCs

General Rule: all corporations, agencies, or
instrumentalities owned or controlled by the govt.
are taxable.

Exceptions:
1) GSIS
2) SSS
3) PHIC
4) PCSO

D. Rule for Corporations Exempt from Taxation

General Rule: those enumerated under section 30
are exempt.

Exception: exempted corporations are subject to
income tax on their income from any of their
properties, real or personal, or from any activities
conducted for profit regardless of the disposition
made of such income.
Ex. Non-stock, non-profit religious
organization is exempt from 35% ordinary
income tax on corporations (by virtue of
section 30 which uses as such) and from all
property tax (by virtue of Constitution,
provided ADE use for its religious purpose).
However, if it derives income from its
property or conducts an activity that is for
profit (even if the proceeds will be used for
the religious purpose), the proceeds will be
taxable.
Ex. For educational institutions, the
proceeds, to be exempt, must be both a)
realized from educational activities and b)
used for educational activities.

E. Minimum Corporate Income Tax (MCIT)

1. MCIT Rate = 2% of gross income (GI)

When to begin/apply MCIT? Beginning on the
4
th
taxable

year immediately following the year in
which such corporation commenced its business
operation
(Commencement of Business Operation:
Upon Issuance of BIR Certificate of
Registration)

Imposed when on the 4
th
taxable year, 2% of
the corporations GI is greater than 35% of its TI.

Example: for 2006 calendar year
GI = P500,000 2% of GI = P10,000
TI = P27,000 35% of TI = P9,450
2006 IT = P10,000

Rationale: This is designed to prevent
corporations from escaping being taxed by
including frivolous expenses in their statement of
income (Ex. Over statement of depreciation
expense)

2. Carry Forward of Excess Minimum Tax
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Excess of MCIT over the normal income tax shall
be carried forward & credited against normal
income tax for the 3 succeeding years

Example: (proceeding from above example)

Situation A: If regular income tax (35% of taxable
income) is greater than MCIT (2% of GI) Pay
Regular Income Tax

For 2007 calendar year:
GI = P500,000 2% of GI = P10,000
TI = P50,000 35% of TI = P17,500

Income Tax payable for 2007
= 17,500 (Regular Income Tax) 550 (MCIT
Carry Forward from 2006: 10,000-9450)
= 16,950

NOTE: You can deduct MCIT Carry Forward only if
Regular Income Tax is greater than MCITY

Situation B: If regular income tax is less than
MCIT Pay MCIT

For 2007 calendar year:
GI = P500,000 2% of GI = P10,000
TI = P20,000 35% of TI = P7,000

Income Tax payable for 2007
= 10,000

NOTE: MCIT carry forward as of 2007 is already
3,550 (550 from 2006 and 3,000 from 2007).
So if in 2008, Regular Income Tax is already
greater than MCIT, you may deduct 3,550
from payable Regular Income Tax.

3. Relief from MCIT
MCIT may be suspended by the Sec of
Finance when corporations losses are due
to:
(a) prolonged labor dispute
(b) force majeure
(c) legitimate business reverses

4. Gross Income (for purposes of applying
MCIT)
Gross Income = Gross Sales
discounts & allowances
( - ) Cost of Goods sold

If taxpayer is engaged in sale of service:
Gross Income = Gross Receipts
discounts and
allowances
( - ) Cost of Services

*means all direct costs and expenses
necessarily incurred to provide the services
required by the customers including:
a) salaries and employee benefits of
personnel, consultants and specialists
directly rendering the service;
b) costs of facilities directly utilized in
providing the service such as depreciation or
rental of equipment used and costs of
supplies

II. RESIDENT FOREIGN CORPORATION

A. In General (the rest is the same as domestic
corp.)

On taxable income from all
sources within the
Philippines.
32% (2000-2005)
35% (2006-2008)
30% (2009 onwards)

B. MCIT - same as domestic corp.

C. Special types of resident foreign corporations:
International Air
carriers
2.5% On Gross Philippine
Billings (see case of Air
Canada vs. CIR infra)
International
Shipping
2.5% On Gross Philippine
Billings
Offshore
banking units
10% Any interest income
derived from foreign
currency loans granted
to residents other than
offshore banking units
or local commercial
banks, including local
branches of foreign
banks that may be
authorized by the BSP
to transact business
with offshore banking
units
Offshore
banking units
Exempt Income derived by
offshore banking units
authorized by the BSP,
from foreign currency
transactions with
nonresidents, other
offshore banking units,
local commercial
banks, including
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branches of foreign
banks that may be
authorized by the BSP
to transact business
with offshore banking
units.
Regional/Area
Headquarters
Exempt
Regional
Operating
Headquarters of
Multinational
companies
10% On taxable income
Gross Philippine Billings
For international air carriers, refers to gross
revenue derived from carriage of persons,
excess baggage, cargo, and mail originating
from the Philippines in a continuous and
uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of
the ticket or passage document
Provided, tickets revalidated, exchanged
and/or indorsed to another international
airline form part of the GPB if the passenger
boards a plane in a port or point in the
Philippines
o If the ticket is indorsed to another airline,
the GPB will be charged to the
transferee/indorsee
Provided, for a flight which orginates in the
Philippines but transshipment (transfer) of
passenger takes place at any port outside
the Philippine on another airline, only the
aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment shall
form part of the GPB.
o Note: Transfer of airline company, not
transfer of aircraft
GPB rule in the NIRC is a departure from the
old rule which emphasized where tickets
were bought.
Now we adopt the originating rule meaning
to form part of GPB, passenger/cargo must
originate from the Philippines
Does not apply to domestic corporations (Ex.
PAL)
Carrier must be an alien resident corporation;
if its not, then it will be subject to 35% tax on
GI as non-resident alien corporation.
Does not apply to offline carriers
o On line carriers: those with landing rights
in the Philippines
o Off line carriers: those without landing
rights but may nevertheless be selling
tickets in the Phil subject to tax
treatment of ordinary resident foreign
corporation
Whats controlling is the amount stated in the
ticket and not the actual purchase value.

Air Canada vs. CIR, CTA Case No. 6572, Dec. 22,
2004

It is evident that the definition of Gross Philippine
Billings under Section 28(A)(3)(a) of the 1997 Tax
Code covers the gross revenue derived from the
carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and
uninterrupted flight irrespective of the place or sale
or issue and the place of payment of the ticket or
passage document. To originate would mean to
cause the beginning of; to start (a person or thing) on
a course or journey; to begin, start. In other words,
the flights carrying the passengers must have
originated or started from the Philippines. Verily,
petitioner, being an off-line international carrier, as
authorized to operate by the CAB and having no
flights originating from the Philippines in a continuous
and uninterrupted flight, cannot be taxed pursuant to
Section 28(A)(3)(a) of the 1997 Tax Code, that is,
based on their Gross Philippine Billings.
However, although petitioner Air Canada is not
liable to pay the tax as an international air carrier
(2.5% on gross Phil. Billings), it is still liable to pay
income tax as a resident foreign corporation.
Under Section 22 of the 1997 Tax Code, the term
resident foreign corporation applies to a foreign
corporation engaged in trade or business within the
Philippines, while the term non-resident foreign
corporation applies to a foreign corporation not
engaged in trade or business within the Philippines.
However, with regard to the term doing or engaged
in business, there is no fixed or specific criterion as
what constitutes doing or engaging in business. In
the case of The Mentholatum Co., Inc., et al. vs.
Mangiliman, et al., 72 PHIL 524, the Honorable
Supreme Court had thoroughly and clearly explained
the term in this way:
There is no specific criterion as to what
constitutes doing or engaging in or transacting
business. Each case must be judged in the light of
its peculiar environmental circumstances. The term
implies continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some
of the functions normally incident to, and in
progressive prosecution of commercial gain or for the
purpose and object of the business organization.
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In order that a foreign corporation may be
regarded as doing business, there must be continuity
of conduct and intention to establish a continuous
business, such as the appointment of a local agent,
and not one of a temporary character. In other
words, a foreign airline company selling tickets in the
Philippines through their local agents, whether liaison
offices, agencies or branches, as in the case at bar,
shall be considered as resident foreign corporation
engaged in trade or business in that country for such
activities show continuity of commercial dealings or
arrangements and performance of acts or works or
the exercise of some functions normally incident to
and in progressive prosecution of commercial gain or
for the purpose and object of the business
organization.
Branch Profit Remittance Tax
BPRT shall be imposed on any profit remitted
by a branch to its head office.
Distinguish between a branch and a
subsidiary
o If branch, subject to BPRT
o If subsidiary amounts received by
non-resident foreign corporation would
be treated as dividends it becomes
part of its Gross Income from within
taxable at 35%
Branch will first be subjected to ordinary
corporate tax as a resident foreign
corporation (35%). Afterwards, the profits for
remittance shall then be subject to 15%
BPRT. (Because branch assumes
personality of an RFC and is therefore
taxable as such)
Any remittance, so long as you can trace it
from a branch to the foreign parent
corporation subject to BPRT
o Ex. X foreign corp. has both regional
headquarters and branch in Philippines.
Instead of remitting straight to X, branch
pays amount to regional headquarters
supposedly for administrative support
services The amount paid for the
services will still be subject to BPRT
because the tax is imposed on any form
of remittance, direct or indirect.

TAX SPARING CREDIT
Tax reduced by the Philippines should be
fully applied or credited to the tax on dividend
income received by the non-resident foreign
corporation imposed by the country of its
domicile. This serves as an incentive by
reducing their tax liability in the Philippines
and in their residence countries.
Ex. Domestic corporation paid cash dividend
to non-resident foreign corporation (NRFC)
organized in Brazil. This shall form part of
NRFCs income therefore taxable also in
Brazil. The dividend received shall only be
taxed at 15% in the Phils (instead of 35%) if
Brazil will reduce/credit at least 20% of the
tax imposed in the Phils. from its tax imposed
in Brazil. [See Section 28(5)(b)]
If Brazil will credit/reduce less than 20% or
will not credit any amount, then the Phils will
tax the dividend at 35% (ordinary income
tax).
Phils. cannot give more than 15% tax credit
because the law only allows such.
III. NONRESIDENT FOREIGN CORPORATION
A. In General

Gross Income from all sources
within the Philippines (except
Capital Gains on sale of
domestic shares subject to final
tax)
32% (2000-2005)
35% (2006-2008)
30% (2009
onwards)

Gross Income includes interest, dividends,
rents, royalties, salaries, premiums (except
reinsurance prem.), annuities, emoluments or
other fixed/determinable annual,
periodic/casual gains, Capital Gains (not
subject to FT)

NON-RESIDENT FOREIGN CORPORATION
Cinematographic
Film owner, lessor
or distributor
25% On gross income
Owner or lessors
of vessel charted
by Philippine
nationals
4.5% On gross income
Owner or lessors
of aircraft,
machineries and
other equipment
7.5% On gross income

INCOME TAX RATES

I. INDIVIDUALS

A. In general
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Graduated rates of 5 to 32%.

B. Passive Income Please see exhibit

Capital Gains from Sale of Real Property
Final tax on gross selling price or current fair
market value, whichever is higher.
Imposed upon capital gains presumed to
have been realized from the sale, exchange,
or other disposition of real property located in
the Philippines, including pacto de retro sales
and other forms of conditional sales.
Law presumes a gain, hence, even if the sale
was at a loss (bought for 2M, sold for 1M),
CGT will still be imposed on entire proceeds
of the disposition; law does not talk about the
net gain, it only considers gross selling
price/FMV whichever is higher.
Refers to real property held as capital asset
(not used for business/investment) as
opposed to ordinary asset (used in ordinary
course of business).
Special Rule for disposition to government
o Taxpayer has option of treating the
proceeds as (a) taxable income (5-32%
on net gain) or as capital gains (6% final
tax on FMV/gross selling price).
o If second option is chosen: 6% final tax
shall be based on actual consideration
and not FMV since the former is usually
lower than FMV (BIR Ruling).
o If the disposition took nature of
expropriation (no meeting of the minds,
not voluntary), transaction is not subject
to CGT. Net gain (if any) will be treated
as part of GI. Includes disposition by
judicial order and other forms of forced
disposition.
Rule for Exchange
o FMV of the property exchanged/given up
shall be basis of CGT. (Ex. A exchanges
property worth 1M for Bs property worth
2M CGT on A will be based on 1M,
CGT on B will be based on 2M)
Exception on Principal Residence
o Gains presumed to have been realized
from sale or disposition of principal
residence, the proceeds of which is fully
utilized in acquiring new principal
residence within 18 months from
disposition shall be exempt from CGT.
o Can be availed only once every 10 years.
o If the new principal residence is cheaper
than old (meaning there is no full
utilization of the proceeds), the difference
will be subject to CGT.
o Exemption does not include exchange of
principal residence for a new principal
residence subject to rules on
exchange above.

C. Special Tax Rates for Aliens Please see
exhibit

II. CORPORATIONS

A. In general
2006-2008 35%
2009-onwards 30%

B. Passive Income and other income Please see
exhibit

C. Tax rate for Resident Foreign Corporation
Please see exhibit

D. Tax rate for special types of Resident Foreign
Corporation Please see exhibit

IMPROPERLY ACCUMULATED EARNINGS TAX
( IAET )
(Sec. 29, as implemented by Rev. Reg. 2-2001
which prescribes rules governing the imposition of
IAET)

A. Rule
There is imposed for each taxable year, in
addition to other taxes, a tax equal to 10% of the
improperly accumulated taxable income of
domestic and closely-held corporations
formed or availed of for the purpose of avoiding
the income tax with respect to its shareholders or
the shareholders of any other corporation, by
permitting the earnings and profits of the
corporation to accumulate instead of dividing
them among or distributing them to the
shareholders (Ex. Holding company).

B. Rationale
If the earnings and profits were distributed, the
shareholders would then be liable for income tax;
if the distribution were not made to them, they
would incur no tax in respect to the undistributed
earnings and profits of the corporation. It is a tax
in the nature of a penalty to the corporation for
the improper accumulation of its earnings, and a
deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends
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tax on the earnings distributed to them.

C. Exception
The use of undistributed earnings and profits for
the reasonable needs of the business would
not generally make the accumulated or
undistributed earnings subject to the tax. What is
meant by reasonable needs of the business
is determined by the Immediacy Test.

Immediacy Test It states that the
reasonable needs of the business are the
1) immediate needs of the business; and
2) reasonably anticipated needs (Ex.
Expansion)

How to prove the reasonable needs of
the business: The corporation should prove
that there is
1) an immediate need for the accumulation
of the earnings and profits; or
2) a direct correlation of anticipated
needs to such accumulation of profits.

D. Composition: The following constitute
accumulation of earnings for the reasonable
needs of the business: (ILL ABE)
1) Allowance for the increase in the
accumulation of earnings up to 100% of the
paid-up capital of the corporation as of
Balance Sheet date, inclusive of
accumulations taken from other years;
2) Earnings reserved for definite corporate
expansion projects or programs requiring
considerable capital expenditure as approved
by the Board of Directors or equivalent body;
3) Earnings reserved for building, plants or
equipment acquisition as approved by the
Board of Directors or equivalent body;
4) Earnings reserved for compliance with any
loan covenant or pre-existing obligation
established under a legitimate business
agreement;
5) Earnings required by law or applicable
regulations to be retained by the corporation
or in respect of which there is legal
prohibition against its distribution;
6) In the case of subsidiaries of foreign
corporations in the Philippines, all
undistributed earnings intended or reserved
for investments within the Philippines as can
be proven by corporate records and/or
relevant documentary evidence.

E. Covered Corporations: Only domestic and
closely-held corporations are liable for IAET.

1. Closely-held corporations are those:
a) at least 50% in value of the outstanding capital
stock; or
b) at least 50% of the total combined voting power
of all classes of stock entitled to vote is owned
directly or indirectly by or for not more than 20
individuals. Domestic corporations not falling
under the aforesaid definition are, therefore,
publicly-held corporations.

F. Exempt Corporations: The IAET shall not apply
to the following corporations:
(BIG-PEN-T)
1) Banks and other non-bank financial
intermediaries;
2) Insurance companies;
3) Publicly-held corporations;
4) Taxable partnerships;
5) General professional partnerships;
6) Non- taxable joint ventures; and
7) Enterprises that are registered:
(a) with the Philippine Economic Zone
Authority (PEZA) under R.A. 7916;
(b) pursuant to the Bases Conversion and
Development Act of 1992 under R.A.
7227; and
(c) under special economic zones declared
by law which enjoy payment of special
tax rate on their registered operations or
activities in lieu of other taxes, national or
local.

G. Period for Payment of Dividend/IAET: The
dividends must be declared and paid or issued
not later than one year following the close of
the taxable year, otherwise, the IAET, if any,
should be paid within fifteen (15) days
thereafter.

H. Determination of Purpose to Avoid Income
Tax
1) The fact that a corporation is a mere holding
company or investment company shall be
prima facie evidence of a purpose to avoid
the tax upon its shareholders or members

A holding or investment company is a
corporation having practically no activities except
holding property, and collecting the income
therefrom or investing the same; and

2) where the earnings or profits of a corporation
are permitted to accumulate beyond the
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reasonable needs of the business.

I. Prima facie instances of accumulation of
profits beyond the reasonable needs of a
business and indicative of purpose to avoid
income tax upon shareholders

1) Investment of substantial earnings and profits
of the corporation in unrelated business or
in stock or securities of unrelated business;
2) Investment in bonds and other long-term
securities; and
3) Accumulation of earnings in excess of 100%
of paid-up capital, not otherwise intended
for the reasonable needs of the business.
The controlling intention of the taxpayer is
that which is manifested at the time of
accumulation. A speculative and indefinite
purpose will not suffice. The mere recognition
of a future problem or the discussion of
possible and alternative solutions is not
sufficient. Definiteness of plan/s coupled with
action/s taken towards its consummation is
essential.

Cyanamid Phils. vs. CA, GR No. 108067, Jan. 20,
2000
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. A Debt-to-Equity ratio (Current
Assets over Current Liabilites) of 2:1 is indicative of
the liquidity of a corporation, and further
accumulation would expose it to the IAET.

I. GROSS INCOME

All income derived from whatever source, including
(but not limited to the following items) (GRIP CARD
GPP)
1) Gross income derived from the conduct of trade
or business or the exercise of a profession
2) Rent Income
3) Interest Income
4) Prizes & winnings
5) Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions & similar items
6) Annuities
7) Royalties
8) Dividend Income
9) Gains derived from dealings in property
10) Pensions
11) Partners distributive share from the net income
of the GPP (distributive share from ordinary
partnerships is taxable as dividends; in this case,
the ordinary partnership has already been subject
to ordinary corporate income tax)

All income from whatever source derived
Recovery of damages (compensation for
injury; from tortious acts)
Not
taxable
Recovery of items previously deducted
from gross income (return of capital)
Taxable
Forgiveness of indebtedness (if effect of
entire transaction is a reduction of
purchase price of property acquired in
prior year)
Not
Taxable
Income derived form illegal business
(gain)
Taxable
Recovery of lost earnings Taxable

BIR Ruling #017-2003
The transfer of land made by a person to another in
payment of services rendered in the form of attorneys
fees shall be considered as part of the gross income
of the latter valued at either the fair market value or
the zonal valuation, whichever is higher, in the
taxable year received.

II. EXCLUSIONS FROM GROSS INCOME (GIRL
CRM)

1) Gifts, Bequests & devises
But, income from such property shall be
included in GI
Must be characterized by disinterested
generosity and pure liberality
Difficult to establish gift situations if there is
an Er-Ee relationship (A bonus/assistance as
recognition of service rendered is not
exempt)
If given under a) constraining force of any
moral or legal duty or b) from the incentive of
c) an anticipated benefit of an economic
nature or where it is a return for services
rendered, proceeds cannot qualify as a gift.
Most critical consideration is the givers
intention or motive.
Can be a gift if given on account of filial
relationship.
2) Income Exempt under Treaty
To the extent required by any treaty
obligation binding upon the Phil govt.
3) Amount Received by Insured as Return of
Premium
Under life insurance, endowment, or annuity
contracts, received either during the term or
at the maturity of the terms or upon surrender
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of the contract
4) Life Insurance
Proceeds of life insurance policies paid to the
heirs/beneficiaries upon the death of the
insured
If such amounts are held by the insurer under
an agreement to pay interest, the interest
payments shall be included in the GI
Insured must die to avail of total exemption. If
he survives, there/s only partial exemption
to the extent that the proceeds constitute
return of capital (total amount of premiums
paid).
5) Compensation for Injuries or Sickness
Received through Accident/Health Insurance
or Workmens Compensation Act, as
compensation for personal injuries/sickness
+ amount of damages received on account of
such injuries/sickness
Damages will be exempt only if they arise
together with personal injury; however, if
damages only amount to return of capital, it
is exempt (Ex. Damages from car accident
exempt only if claim includes compensation
for personal injury. If no personal injury,
damages for car wreckage will only be
exempt to the extent of the amount of the
actual damage return of capital)
Must be physical injury, not injury to rights.
6) Retirement Benefits, Pensions, Gratuities
Forms
a) RA 7641 or Reasonable Private
Benefit Plan
o See below for rules
b) Amount received as a consequence
of separation for any cause beyond
control (death, sickness or other
physical disability)
o Sickness must be job threatening
must render taxpayer
incapable of working (Ex. Does
not include STD)
o Benefits from separation due to
retrenchment come under
exemption (no choice/option; but
if the Ee avails of an optional
early retirement plan, he cannot
reason that he was separated for
reasons beyond his control,
therefore, he cannot claim
exemption of the benefits on this
ground but he can claim
under other grounds such as
RPBP or RA 7641.
c) Benefits received from a foreign
government by resident of non
resident citizens or aliens who reside
permanently in the Philippines
d) Veterans benefits
e) Benefits under SSS
f) Benefits received from GSIS

2 Options under paragraph (a), Section
32(B)(6)
g) RA 7641
o Conditions: (i) at least 60 years old;
(ii) 5 years of service at time of
retirement
o Availed if there is no reasonable
private benefit plan (benefits under
this option is less)
o Limted exemption: month salary
for every year of service. In RPBP,
all is excludable.
h) Reasonable Private Benefit Plan
o Conditions: (i) at least 50 yrs old; (ii)
in the service of same employer for
at least 10 years at time of retirement
o Must be approved by BIR
o A pension, gratuity, stock bonus or
profit-sharing plan maintained by an
ER for the benefit of some or all of
his officials/employees, wherein
contributions are made by such ER
for the officials/employees, or both,
for the purpose of distributing to such
officials & employees the earnings &
principal of the fund thus
accumulated; & provided in the plan
that no part of the income shall be
used for/be diverted to any purpose
other than for the exclusive benefit of
the said officials & employees
Service must be continuous.
You can avail of the benefits only once
(once youve availed of RPBP, you cannot
avail of another RPBP); but you can avail of
exemption under another ground
o Ex. A government employee can claim
exemption for retirement benefits
received from the GSIS even after
availing of RPBP taxpayer can claim
RPBP after qualifying as a private
employee then under GSIS proceeds
exemption after qualifying as a
government employee
o Ex. Employee can claim exemption
under RPBP then later claim on the
ground that the amount he received is a
consequence of his separation in a
subsequent job for any cause beyond his
control
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Terminal Leave Pay: amount paid for the
commutation of leave credits
o Excludable only for government
employees (this exemption does not find
support in NIRC but is backed by SC
decision and BIR Ruling #143-98)

7) Miscellaneous Items
(a) income derived by foreign government (from
investments in Philippines in loans, stocks,
bonds or other domestic securities)
Refers only to passive income. If the
foreign government engages in trade,
income is taxable.
(b) income derived by govt./its political
subdivisions (from public utility or exercise
essential governmental function)
Key: Income should accrue to
government; if the income is retained by
the public utility, it is not exempt look
at charter of political subdivision/GOCC
to determine whether its income accrues
to the government or not.
(c) prizes, awards in sports competition
sanctioned by national sports associations
whether held in Philippines or abroad
Contemplates a particular competition,
not a cumulative achievement (Ex.
Sportsman of the year award does not
qualify for exemption)
(d) prizes & awards
in recognition of religious, charitable,
scientific, educational, artistic, literary or
civic achievement, but only if:
recipient was selected without any action
on his part
recipient not required to render
substantial future services as a condition
of receiving the prize/award
Example: Nobel prize award
Construed strictly, take note of 7
categories. It does not include athletic
achievement.
Contemplates a rational selection
process; cannot just be randomly
selected.
(e) 13
th
month pay & other benefits (i.e.
productivity incentives & Christmas bonus)
Total exclusion shall not > P30,000
(f) GSIS, SSS, Medicare, Pag-ibig contributions
& union dues of individuals
(g) Gains form the sale of bonds, debentures or
other certificates of indebtedness with a
maturity of more than 5 years
(h) Gains from redemption of shares in mutual
fund

BIR Ruling #125-98
The phrase shall not have availed of the privilege
under a retirement benefit plan of the same or
another ER found in Sec. 32 (B) (6) (a) of the Tax
Code means that the retiring official or EE must not
have previously received retirement benefits from the
same or another employer who has a qualified
retirement benefit plan.

BIR Ruling #143-98
The terminal leave pay of government employees
whose employment is coterminous is exempt since it
falls within the meaning of the phrase for any cause
beyond the control of the said official or EE found in
Sec. 32(B) of the CTRP.

SPECIAL TREATMENT OF FRINGE BENEFIT

A. Fringe Benefit

Any good, service or other benefit furnished or
granted in cash or in kind by an employer to an
individual employee (except rank and file employees)
such as, but not limited to the ff:
1) housing
2) expense account
3) vehicle of any kind
4) household personnel (such as maid, driver &
others)
5) interest on loan at less than market rate to the
extent of the difference between the market rate
& actual rate granted
6) membership fees, dues & other expenses borne
by the employer for the employee in social &
athletic clubs or other similar organizations
7) expenses for foreign travel
8) holiday & vacation expenses
9) educational assistance to the employee or his
dependents
10) life or health insurance & other non-life insurance
premiums or similar amounts in excess of what
the law allows

B. Nature of FBT

Final tax imposed on the grossed-up monetary value
of fringe benefit furnished/granted to the EE by the
ER, whether an individual or corp. (payable by the
employer)
Effective 1/1/98 34%
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1/1/99 33%
1/1/00 32%

Fringe benefit is an income of the employee subject
to Fringe Benefit Tax but is payable by the Employer.
Er can deduct FBT from its taxable income.

Fringe benefits are only for corporate
officers/management. For rank and file, it is called an
allowance. Allowances (benefits to rank and file) are
not subject to FBT.

C. Fringe Benefits not subject to FBT

(a) FB authorized & exempted from tax under
special laws
(b) Contributions of ER for the benefit of the
employee to retirement, insurance &
hospitalizations benefit plan
(c) Benefits given to the rank & file employees,
whether granted under a CBA or not
(d) De minimis benefits

De Minimis benefits
a) Monetized unused vacation leave credits of
private employees not exceeding 10 days
during the year and monetized value of leave
credits paid to government officials and
employees
b) Medical cash allowance to dependents of
employees not exceeding P750 per semester
or P125 per month
c) Rice subsidy of P1,000 or 1 sack of 50 kg
rice amounting to not more than P1,000
d) Uniform and clothing allowance not
exceeding P3,000 per year
e) Actual yearly medical benefits not exceeding
P10,000
f) Laundry allowance of P300 per month
g) Employee achievement awards, for length of
service or safety achievement in the form of
tangible personal property other than cash or
gift certificate, with an annual monetary value
not exceeding P10,000 received by the
employee under an established written plan
which does not discriminate in favor of highly
paid employees
h) Christmas and major anniversary
celebrations not exceeding P5,000 per
employee per annum
i) Flowers, fruits, books or similar items given
to employees under special circumstances
on account of illness, marriage, birth of a
baby, etc
j) Daily meal allowance of overtime work not
exceeding 25% of basic minimum wage

CONVENIENCE OF THE EMPLOYER RULE
When a fringe benefit is given solely for the
convenience of the employer, the fringe
benefit is exempt from FBT because the
employee does not recognize income from
the benefit.
Ex. Expenditure on housing of engineer
within factory premises is not subject to
FBT
General Rule: If housing is located
outside, it is subject to FBT.
Exception: If the nature of the Ers
business is hazardous to health of
Ee, housing can be located outside
the factory without being subject to
FBT.
Ex. If employee is given housing allowance in
cash, this will constitute compensation of
the employee (income from whatever
source). However, if it qualifies as a Fringe
Benefit, then it will be subject to FBT and
the burden is shifted to Er (Tax on Ee,
Burden on Er)

III. DEDUCTION FROM GROSS INCOME

Defined as: Items or amounts which the law allow
to be deducted from gross income in order to
arrive at the taxable income.
The basic principle governing deductions from
gross income apply to all taxpayers.
Because deductions are strictly construed
against the taxpayer, one seeking a deduction
must point to some specific provisions of the
statute in which that deduction is authorized &
must be able to prove that he is entitled to the
deduction which the law allows.
Adequate records should be kept to support the
deductions.
The deduction claimed must have been
subjected to withholding tax, if required.
Deductions for income tax purposes partake of
the nature of tax exemptions; hence, if tax
exemptions are to be strictly construed, then it
follows that deductions must be STRICTLY
construed.
He must be able to prove that he is entitled to the
deduction authorized or allowed. (Atlas
Consolidated Mining & Devt. Corp. vs. CIR,
January 12, 1981)

WHO MAY AVAIL OF THE DEDUCTIONS?
1) Individuals
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(a) citizen
(b) resident alien
(c) non-resident alien doing business in the
Philippines
(d) member of GPP
2) Corporations
(a) domestic corp.
(b) resident foreign corp.
(c) proprietary educational institutions &
hospitals
(d) GOCCs

WHO CANNOT AVAIL OF DEDUCTIONS FROM
GROSS INCOME:
1. Citizens and resident aliens whose income is
purely compensation income (except for
premium payments on health and/or
hospitalization insurance);
2. Non-resident aliens not engaged in trade or
business in the Philippines; and
3. Non-resident foreign corporation

THE FOLLOWING ARE THE ALLOWABLE
DEDUCTIONS FROM GROSS INCOME BASED ON
CLASSES OF TAXPAYER:
1. Individuals with gross income from employee-
employer relationship only (gross income only):
o Premium payments on health and/or hospital
insurance (if requisites are complied with)
o Personal exemptions and additional
exemptions

2. Individuals with gross income from business or
practice of profession:
o Optional Standard Deduction (OSD) OR
Itemized deductions
o Optional Standard Deductions 10% of the
gross income. May be availed only by
individuals (except nonresident aliens) who
are not purely compensation income earners.
This is in lieu of the itemized deductions.
o Premium payments on health and/or hospital
insurance (if requisites are complied with)
o Personal and additional exemptions

3. Corporations
o Itemized Deductions

4. Estates and Trusts
Section 62 of the NIRC

ITEMIZED DEDUCTIONS/ ALLOWABLE
DEDUCTIONS SEC. 34 (BELT DID CRP)
1) Bad Debts
2) Expenses
3) Losses
4) Taxes
5) Depreciation
6) Interest
7) Depletion of oil & gas wells & mines
8) Charitable & other contributions
9) Research & Development
10) Pension trusts

1. EXPENSES (SEC 34A)

1) Ordinary & necessary trade, business or
professional expenses only
REQUISITIES FOR DEDUCTIBILITY:
a. Must be ordinary AND necessary (both
must be complied with)
b. Must be paid or incurred during the
taxable year
c. Must be paid or incurred 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
reasonable allowance for:
1. salaries, wages & other forms of
compensation for personal services
actually rendered (including grossed-
up monetary value of FB); but the
final tax should have been paid
2. travel expenses in pursuit of trade,
business/ profession
3. rentals &/or other payments as
lessee, user or possessor
4. entertainment, amusement &
recreation expenses directly
connected to the devt., mgt. &
operation & conduct of trade,
business/ profession
> The Regulations impose a limit of
0.50% of net sales (gross sales less sales
returns/allowances & sales discounts) for
taxpayers engaged in sale of goods or
properties; or 1% of net revenue (gross
revenue less discounts) for those engaged in
sale of services, including exercise of
profession and use or lease of properties.
(RR No. 10-02)

EXPENSES TO BE DEDUCTIBLE:
- Amount must be reasonable.
- Amount must be substantiated.
- It is not contrary to law, public policy or morals.
- Tax required to be withheld must have been paid to
the BIR

2) Substantiation Requirements: sufficient
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evidence (i.e. official receipts, financial
statements or other adequate records) to
substantiate:
(a) amt. of expense deducted
(b) direct connection/relation of the expense
to the development, management
operation &/or conduct of the trade,
business or profession of the taxpayer

3) Bribes, Kickbacks & Other Similar Payments:
not deductible

Ordinary expense normal or usual in relation
to the taxpayers business and the surrounding
circumstance.
Necessary expense appropriate and helpful in
the development of taxpayers business and are
intended to minimize losses or to increase profits.
These are the day to day expenses.
While illegal income will form part of the income
of the taxpayer, expenses which constitute bribe,
kickback, and other similar payment, being
against law and public policy are not deductible
from gross income (Sec. 34A1c).
Business expense expenditure related to the
business that is deductible in the year incurred, in
the same taxable year.
Capital expense expenditure that improves or
adds to the value of your property or equipment.
Not immediately deductible. It is deductible over
time, such as in the form of depreciation.

Expenses allowable to private educational
institutions: In addition to the expenses
allowable as deductions, a private educational
institution has the option to elect either:
(a) to deduct as expense those otherwise
considered as capital outlays of
depreciable assets for the expansion of
school facilities
(b) to capitalize asset & deduct allowance
for depreciation

2. INTEREST

Requisites for deductibility, as implemented
by Rev. Reg. 13-2000
(a) there must be an indebtedness
(b) there should be an interest expense paid
or incurred upon such indebtedness
(c) indebtedness must be that of the
taxpayer
(d) indebtedness must be connected with
the taxpayers trade, business or
exercise of profession
(e) interest expense must have been paid or
incurred during the taxable year
(f) interest must have been stipulated in
writing
(g) interest must be legally due
(h) interest payment arrangement must not
be between related taxpayers
(i) interest must not be incurred to finance
petroleum operations
(j) in case of interest incurred to acquire
property used in trade, business or
exercise of profession, the same was not
treated as a capital expenditure
(k) the interest id not expressly disallowed
by law to be deducted from gross income
of the taxpayer.

GENERAL RULE ON DEDUCTION
- The amount of interest expense
paid or incurred within a taxable year
of indebtedness in connection with
the taxpayers trade, business, or
exercise of profession shall be
allowed as a deduction from the
taxpayers gross income.

LIMITATION ON DEDUCTION
Interest expense shall be reduced by an amt.
equal to the ff. % of interest income
subjected to FT:
1/1/00 38%
1/1/06
1/1/09
42% (RA9337)
33%
Example: Year 2006
Int. exp. = P2,000 Int. income subjected to
FT = P1,500
Deduct as int. exp.: P2,000 - (P1,500 x 42%)
= P1,370

The objective of the limitation is to discourage tax
arbitrage on back to back loans, the proceeds of
which are invested in income earning interest that
is subject to 20% final tax.

Tax arbitrage- is a method of borrowing without
entering into a debtor/creditor relationship, often
to resolve financing and exchange control
problems. In tax cases, back-to-back loan is used
to take advantage of the lower rate of tax on
interest income and a higher rate of tax on
interest expense deduction.

DEDUCTIBLE INTEREST EXPENSE:
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1. interest on taxes, such as those paid for
deficiency or delinquency, since taxes are
considered indebtedness (provided that the
tax is a deductible tax, except in the case of
income tax). However, fines, penalties, and
surcharges on account of taxes are not
deductible. The interest on unpaid business
tax shall not be subjected to the limitation on
deduction.
2. Interest paid by a corporation on scrip
dividends.
3. Interest on deposits paid by authorized banks
of the BSP to depositors, if it is shown that
the tax on such interest was withheld.
4. Interest paid by a corporate taxpayer who is
liable on a mortgage upon real property of
which the said corporation is the legal or
equitable owner, even though it is not directly
liable for the indebtedness.

NON-DEDUCTIBLE INTEREST
(a) interest paid in advance through discount
or otherwise(in case of cash basis
taxpayer)
allowed as deduction in the year the
debt is paid
if indebtedness is payable in
periodic amortizations, int. is
deducted in proportion of the amt. of
the principal paid.
(b) payments made:
1. between members of a family
(include only brothers & sisters,
spouse, ancestors, & lineal
descendants)
2. between an individual & a corp. more
than 50% in value of outstanding
stock is owned by such individual
(except in case of distributions in
liquidation)
3. between 2 corps. more than 50% in
value of outstanding stock owned by
same individual, if either one is a
personal holding co. or a foreign
holding co. during the taxable yr.
preceding the date of sale/exchange
4. between grantor & fiduciary of any
trust
5. between Fiduciary of a trust & the
fiduciary of another if same person is
a grantor to each trust
6. between Fiduciary & a beneficiary of
a trust
7. indebtedness is incurred by a service
contractor to finance petroleum corp.
8. interest on preferred stock which in
reality is dividend
9. interest on unpaid salaries and
bonuses
10. interest calculated for cost keeping
on account of capital or surplus
invested in business which does not
represent charges arising under
interest-bearing obligation
11. interest paid when there is no
stipulation for the payment thereof

OPTIONAL TREATMENT OF INTEREST
EXPENSE
- at the option of taxpayer, interest
incurred to acquire property used in trade
or business may be allowed as:
(a) as expense (deduction)
(b) as capital expenditure

3. TAXES
- -the term taxes refers to national and local
taxes, and means TAXES PROPER, hence,
no deductions are allowed for:
o a. Interests
o b. surcharges
o c. penalties or fines incident to
delinquency (sec. 80, Rev. Reg. 2)

DEDUCTIBLE TAXES
- All taxes, national, or local, paid or incurred
during the taxable year in connection with the
taxpayers profession, trade or business, are
deductible from gross income.

REQUISITES FOR DEDUCTIBILITY:
a. it must be paid or incurred within the
taxable year
b. it must be paid or incurred in
connection with the taxpayers trade,
profession or business
c. it must be imposed directly on the
taxpayer
d. it must not be specifically excluded
by law from being deducted from the
taxpayers gross income

NON-DEDUCTIBLE TAXES
(a) Philippine income tax (but FBT can be
deducted from gross income RR 8-98))
(b) income tax imposed by authority of any
foreign country (except when the
taxpayer signifies his desire to avail of
the tax credit for taxes of foreign
countries)
(c) estate & donors taxes
(d) taxes assessed against local benefits of
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a kind tending to increase the value of
the property assessed
(e) final taxes, being in the nature of income
tax
(f) special assessments

Taxes, when refunded or credited, shall be
included as part of GI in the year of receipt to
the extent of income tax benefit of said
deduction. (Tax Benefit Rule)
For NRAETB and RFC, taxes paid or
incurred are allowed as deductions only if
and to the extent that they are connected
from income within the Philippines.
Exceptions to the rule that only such persons
on whom the tax is imposed by law can claim
deduction thereof:
a. taxes of shareholder upon his
interest as such and paid by the
corporation without
reimbursement from him, can be
claimed by the corporation as
deduction.
b. A corporation paying the tax for
the holder its bonds or other
obligation containing a tax-free
covenant clause cannot claim
deduction for such taxes paid by
it pursuant to such covenant.

LIMITATIONS ON DEDUCTIONS
In case of a nonresident alien individual
engaged in trade/business in the Philippines,
taxes to be deducted shall be allowed only if
& to the extent that they are connected with
income from sources w/in the Philippines

Tax Credit: a right of an income taxpayer to
deduct from income tax payable the foreign
income tax he has paid to his foreign country
subject to limitation.

WHO CAN CLAIM?
1. Citizen
2. Domestic Corp
3. Member of GPP
4. Beneficiary of an estate or trust

WHO CANNOT CLAIM?
1. Alien individual (except resident
aliens deriving income from within &
without the Phils., if there is
reciprocity)
2. Foreign Corp.

Limitation of Credit (Substantiation
Requirements)
-The tax credit shall be allowed only
if the taxpayer establishes to the satisfaction of
the Commissioner the following:
a. The total amount of the income derived
from sources without the Philippines;
b. The amount of income derived from each
country, the tax paid or incurred to which is
claimed as a credit under said paragraph, such
amount to be determined under rules and
regulations prescribed by the Secretary of
Finance; and
c. All other information necessary for the
verification and computation of such credits.
What amount may be taken as tax credit: The
amount of tax credit allowed is equivalent to the
tax paid or incurred to a foreign country during
the taxable year but NOT TO EXCEED THE
FOLLOWING LIMITS:
Per Country Limitation Amount of credit to tax
paid/incurred to any country shall not exceed
same proportion of the tax against which such
credit is taken

Income from outside the Phils (per country)
Divided by Phil. Income
Subtotal
Multiplied by: TOTAL income from ALL sources
Limitation per country

Global Limitation Total amount of credit shall
not exceed same proportion of tax which such
credit is taken

Total income from OUTSIDE the Phils.
Divided by total income from ALL sources
Subtotal
Multiplied by Philippine Income
Global Limitation

WHEN CREDIT FOR TAXES MAY BE TAKEN:
- The credit for taxes provided by Section
34(C)(3) to (7) may ordinarily be taken either
in the return for the year in which the taxes
accrued or on which the taxes were paid,
dependent upon whether the accounts of the
taxpayer are kept and his returns filed upon
the accrual basis or upon cash receipts and
disbursements.

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DIFFERENCES:
Deduction: included in the gross income but later
deducted.
Exclusion: not included in the computation of gross
income. Refers to income received or earned but is
not taxable as income because of exemption by
virtue of a law or treaty.
Tax Credit: paid beforehand and is deducted from the
tax liability of the taxpayer.

Example:
Particulars Net
Income
Actual Foreign
Tax Paid in
Philippine
Peso
Phil
Income
Tax due at
32%
Country A P50,000 P18,000
Country B 40,000 P11,000
Phil-
source
income
110,000
Total NI
all
P200,000 P29,000 P64,000

A. PER COUNTRY LIMITATION
Country A : [(50,000/200,000 x 64,000)] = 16,000
Country B : [(40,000/200,000 x 64,000)] = 12,800
** maximum tax credit limit

B. GLOBAL LIMITATION
[(90,000/200,000 x 64,000)] =
P28,800

Computation of Allowable tax credit
Tax Due on P200,000
at 32%
P64,000
Less: Allowable Foreign Tax Credit
Country A P16,000
Country B 11,000 27,000
Tax Still Due P37,000
** Cannot exceed maximum tax credit limit
NOTE: For limitation A, Country A, 16K is lower than
the actual; Country B, 11K (actual) is the lower
amount; get the total of all per country amounts. For
limitation B, 28.8K is lower than the total of the actual
amount. Comparing the total of limitation A vs. B, the
former is the lower amount so that is the allowable tax
credit.

4. LOSSES

Requisites for deductibility of ordinary loss
(a) loss must be of the taxpayer
(b) actually sustained during the taxable
year
(c) not compensated for by insurance or
other forms of indemnity
(d) incurred in trade, business or profession
OR property connected w/ trade,
business or profession lost through fires,
storm, shipwreck, or other casualties OR
from robbery, theft or embezzlement
(e) evidenced by a completed transaction
(f) not claimed as a deduction for estate tax
purposes
(g) notice of loss must be filed with the BIR
within 45 days from the date of discovery
of the casualty or robbery, theft or
embezzlement

No loss shall be allowed as a deduction
for income tax purposes if such loss has
been claimed as a deduction for estate
tax purposes.
The taxpayers failure to record in his
books the alleged loss proves that the
loss had not been suffered, hence, not
deductible. (City Lumber Vs. Domingo
and CA, January 30, 1964).

Category and Types of Losses
1. Ordinary Losses

a. incurred in trade or business, or practice of
profession

NET OPERATING LOSS CARRY-OVER (NOLCO)
- Refers to the excess of allowable deductions over
gross income of the business for any taxable year,
which has not been previously offset as deduction
from gross income.
REQUIREMENTS:
1. the taxpayer was not exempt from income tax in
the year of such net operating loss;
2. the loss was not incurred in a taxable year during
which the taxpayer was exempt from income tax, and
3. there has been no substantial change in the
ownership of the business or enterprise.

There is no substantial change in the ownership of
the business when:
a. not < 75% in nominal value of outstanding
issued shares is held by same persons
b. not < 75% of paid up capital of corp. is
held by same persons

(a) Net operating loss of a business shall be
carried over as deduction from GI for the
next 3 consecutive taxable yrs.
immediately ff. the yr. of such loss
- the 3 year period shall continue to
run notwithstanding that the
corporation paid its taxes under
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MCIT, or that the individual availed of
the 10% Optional Standard
Deduction

(b) Net Operating Loss = excess of
allowable deduction over the GI

(c) For mines other than oil & gas wells, if
loss incurred in any of the 1st 10 yrs. of
operation, carry-over for the next 5 yrs.

b. of property connected with the trade,
business, or profession, if the loss arises
from fires, storms, shipwreck or other
casualties, or from robbery, theft or
embezzlement

Total Destruction- the replacement cost to
restore the property to its normal operating
condition, but in no case shall the deductible
loss be more than the net book value of the
property as a whole, immediately before
casualty.

Partial Destruction- the excess over the net
book value immediately before the casualty
should be capitalized, subject to depreciation
over the remaining useful life of the property.

2. Special Types of Losses
(a) Capital Losses deductions allowed only
to the extent of the gains from such sales
or exchanges of capital assets (does not
apply to banks and trust companies)
a. losses from sale or exchange
of capital assets
b. losses resulting from securities
becoming worthless and which
are capital assets
c. losses from short sales of
property
d. losses due to failure to
exercise privilege or option to
buy or sell property
(b) Losses from wash sales of stock or
securities
30 days before and after the date of
the sale, the taxpayer has acquired
or has entered into a contract or
option so as to acquire, substantially
identical stock/securities
General rule: not deductible unless
claim is made by a dealer in
stock/securities & made in ordinary
course of business
(c) Wagering Losses - allowed only to the
extent of the gains from such losses
(d) Abandonment Losses
In case of abandoned petroleum
operations, accumulated
expenditures incurred prior to 1/1/79
allowed as deduction only from
income derived from same contract
area; notice of abandonment shall be
filed with Commissioner
In case of abandoned producing
well, unamortized cost &
undepreciated costs of equipment
directly used, allowed as deduction
in the yr. of abandonment
(e) Losses from Illegal Transactions - not
deductible
(f) Losses due to voluntary removal of
building incident to renewal or
replacements deductible expense from
gross income
(g) Loss of useful value of capital assets due
to charges in business conditions
deductible expense only to the extent of
actual loss sustained (after adjustment
for improvement, depreciation, and
salvage value)
(h) Losses from sales or exchanges of
property between related taxpayers
Not deductible as provided under
Section 36 of the NIRC but the gains are
taxable
(i) Losses of Farmers deductible if
incurred in the operation of farm
business
(j) Loss in shrinkage in value of stock if
the stocks of the corporation become
worthless, the cost or other basis may be
deducted by the owner in the taxable
year in which the stocks became
worthless. Any amount claimed as a loss
on account of shrinkage in value of the
stock through fluctuation in the market or
otherwise cannot be deducted from gross
income

5. BAD DEBTS
- debts due to the taxpayer actually
ascertained to be worthless and charged
off during the year.

Actually ascertained to be worthless -
Worthlessness is not determined by an
inflexible formula or slide rule calculation but
upon the exercise of sound business
judgment. The determination of
worthlessness must depend upon the
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particular facts and circumstances of the
case. It must be uncollectible even in the
future. (Collector v. Goodrich International
Rubber Co., 21 SCRA 1336)

1..Existing indebtedness due to the taxpayer which
must be valid and legally demandable,
2. Connected with the taxpayers trade, business
or practice of profession,
3. Must not be sustained in a transaction entered
into between related parties,
4. Actually ascertained to be worthless and
uncollectible as of the end of the taxable year, and
5. Actually charged off in the books of accounts
of the taxpayer as of the end of the taxable year.

Recovery of bad debts previously allowed
as deduction in the preceding yrs. shall be
included as part of gross income in the yr. of
recovery to the extent of the income tax
benefit of such deduction (Tax Benefit
Rule)
Ascertainment of Worthlessness:
Proof of two facts:
a. taxpayer did in fact ascertain the debt
to be worthless in the year for which
the deduction was sought;
b. that in so doing, he acted in good faith
(Collector Vs. Goodrich, December 22,
1967)
depends upon the facts and the
circumstances of the case
good faith does not require that the
taxpayer be an incorrigible optimist
but on the other hand, he may not
be unduly pessimistic

6. DEPRECIATION
- gradual diminution in the service or useful
value of tangible property due from
exhaustion, wear and tear and normal
obsolescence.
- also applies to amortization of intangible
assets, the use of which in trade or business
is of limited duration.

A reasonable allowance for the exhaustion, wear
& tear of property used in the trade or business;
to cause plant elements or the plant as a whole
to suffer diminution in value
(a) In case of property held by one person for life
w/ remainder to another person, deduction is
computed as if the life tenant were the
absolute owner of the property & allowed to
life tenant
(b) In case of property held in trust, deduction
apportioned between the income
beneficiaries & trustees

a. The allowance for depreciation must be
reasonable.
b. It must be for property used for
employment in trade or business or out
of its not being used temporarily during
the year.
c. The allowance must be charged off.
d. Schedule on the allowance must be
attached to the return.

1) Methods of Depreciation
(a) straight-line method =

cost - salvage value
estimated life
example: cost=15,000; SV=5000;
est. life=5 years
15,000 - 5,000 = 2,000
5 years

(b) declining balance method =

cost - accumulated depreciation x rate
estimated life

example: rate 200%
year 1 -- 15,000 - 0 x 200% = 6,000
5

year 2 -- 15,000 - 6000 x 200% = 3,600
5

(c) sum of years digits method

= nth period x (cost - salvage value)
sum of the years digits

example: SYD: 5+4+3+2+1 = 15

year 1 -- 5/15 x (15,000 - 5,000) = 3,333.33
year 2 - 4/15 x (15,000 - 5,000) = 2,666,67

2) Special Types of Depreciation
(a) Petroleum operations
i. Depreciation of all properties directly
related to production of petroleum
shall be allowed under straight-line
or declining-balance (DB) method
ii. May shift from DB method to SL
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method
iii. Useful life: 10 yrs. or shorter life as
may be permitted by Commissioner
iv. Useful life of prop. not used directly:
5 yrs. under straight-line method
(b) Mining operations
i. depreciation on all properties in
mining operations other than
petroleum operations at the normal
rate if expected life is 10 yrs or less.
ii. if expected life is > 10 yrs.,
depreciate over any no. of yrs. bet. 5
yrs. & the expected life

Depreciation deductible by non-resident aliens
engaged in trade/business or non-resident
corporation only when such property is located in
the Philippines

The BIR and the taxpayer may agree in writing
on the useful life of the property to be
depreciated. The agreed rate may be modified if
justified by facts or circumstances. The change
shall not be effective before the taxable year on
which notice in writing by certified mail or
registered mail is served by the party initiating.

7. DEPLETION OF OIL & GAS WELLS & MINES

The reduction of cost or value of natural
resources such as oil & gas wells, & mines as the
resources are converted into inventories.

No further allowance is granted if the allowance
for depletion = the capital invested

(1) Intangible exploration & development
drilling costs:
a) deduct in the yr. incurred if incurred for
non-producing wells & mines
b) deduct in full OR capitalize & amortize
of incurred for producing wells & mines
in same contract area
(2) Intangible costs in petroleum operations:
no salvage value & incidental to &
necessary for dwelling of wells &
preparation of wells for the production of
petroleum
(3) Election to deduct exploration &
development expenditures for mining
corps.
(a) deduct as cost
(b) deduct as adjusted basis
provided, total amt.
deductible shall not exceed
25% of NI
actual exploration & development
expenditures net of 25% of NI shall
be carried forward to succeeding yrs.
until fully deducted
exploration expenditures =
pd/incurred for the purpose of
ascertaining the existence, location,
extent, or quality of any deposit of
ore/other mineral & pd/incurred
before the beginning of the
development stage of the
mine/deposit
development expenditures =
paid/incurred during development
stage of the mine or other natural
deposits
(4) Depletion of Oil and Gas wells and mines
deductible by a non-resident alien
or foreign corporation only in respect of
oil and gas wells or mines located in the
Phils.

8. CHARITABLE & OTHER CONTRIBUTIONS

(a) Contributions subject to limitations
i. Contributions or gifts actually paid or made
w/in the taxable yr.:
ii. to or for the use of the govt. or its agencies or
any political subdivision, exclusively for public
purpose
iii. or, to accredited domestic
corps./associations organized & operated
exclusively for:
(1) religious
(2) charitable
(3) scientific
(4) youth & sports development
(5) cultural or educational purposes
(6) for the rehabilitation of veterans
(7) to social welfare institutions
(8) to NGOs
iv. no part of NI inures to the benefit of any
private stockholder or individual
for individual: not > 10% of taxable
income before deducting the charitable
contributions
for corporation: not > 5 % of taxable
income before deducting the charitable
contributions

(b) Contributions deductible in full
i. Donations to the govt. to finance, to
provide for, or to be used in undertaking
priority activities in education, health, youth &
sports development, human settlements,
science & culture & in economic development
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according to National Priority Plan determined
by NEDA
If not in accordance w/ annual priority
plan, donation is subject to limitations in
(1) above
ii. Donations to certain foreign institutions
or international organizations - in pursuance
or compliance with agreements, treaties, or
commitments entered into by Phil. govt. &
foreign institutions/international organizations
iii. Donations to accredited NGOs
Organized & operated exclusively for
scientific, educational, character-building
& youth & sports development, health,
social welfare, cultural or charitable
purposes or combination thereof (no part
of NI inures to the benefit of any private
individual)
W/in 15th of the 3rd month after the close
of the taxable yr., makes utilization
directly for the active conduct of activities
constituting the purpose/function of the
org., unless pd. is extended
Administrative expense should not be >
30% of total expenses
Upon dissolution, assets would be distributed to
another nonprofit domestic corp. organized for
similar purpose or to the state for public purpose
or to another org. to be used in same purpose as
the dissolved corp.

a. the contribution or gift must be actually
paid.
b. it must be given to the organizations
specified in the code.
c. the net income of the institution must not
inure to the benefit of any private
stockholder or individual.

(c) VALUATION of property donated other than
money: acquisition cost

9. RESEARCH AND DEVELOPMENT

Paid or incurred by a taxpayer during the taxable
yr. in connection w/ his trade, business or
profession as ordinary & necessary expenses w/c
are not chargeable to capital account; allowed as
deduction during the taxable yr. when
pd./incurred

REQUISITES FOR DEDUCTIBILITY AS
EXPENSE:
a. paid or incurred during the taxable year
b. ordinary and necessary expenses in
connection with trade business or profession
c. not chargeable to capital account

Requisites for amortization of certain R&D
expenditures (treated as deferred expenses):
(1) paid/incurred by the taxpayer in
connection w/ his trade/business
(2) not treated as expense
(3) chargeable to capital acct. but not
chargeable to property of a character w/c
is subject to depreciation/depletion
(4) amortized over a period of not < 60
months as may be elected by the
taxpayer

LIMITATIONS ON DEDUCTIONS not
applicable to, EXCLUSIONS:
(1) Any expenditure for the acquisition or
improvement of land, or for the important
of prop. to be used in connection w/ R&D
of a character subject to depreciation &
depletion
(2) Any expenditure paid/ incurred for the
purpose of ascertaining the existence,
location, extent, or quality of any deposit
of ore or other mineral, including oil or
gas (exploration exp.)

10. PENSION TRUSTS (past service cost)

Pension Trust Contributions a deduction applicable
only to the employer on account of its contribution to
a private pension plan for the benefit of its employee.
This deduction is purely business in character.

Established or maintained by employer to provide for
the payment of reasonable pensions to his
employees.
Normal Cost the contributions during the
taxable year to cover the pension liability
accruing during the taxable year. Allowed as a
deduction under Sec. 34(A)(1) as expenses in
general.
Past Service Cost amount in excess of the
above contribution (covering pension liability
pertaining to old employees which accrued during
the years previous to the establishment of the
pension trust); allowed as deduction only if:
(a) such amount not been allowed as a
deduction
(b) apportioned in equal parts over 10
consecutive years beginning w/ the yr. in w/c
the transfer/payment is made (Sec. 34[J])

a. The employer must have established a
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pension or retirement plan to provide for the
payment of reasonable pensions to his
employees;
b. The pension plan is reasonable and
actuarially sound;
c. It must be funded by the employer;
d. The amount contributed must be no longer
subject to the control and disposition of the
employer;
e. The payment has not yet been allowed as a
deduction; and
f. The deduction is apportioned in equal parts
over a period of 10 consecutive years
beginning with the year in which the transfer
of payment is made.

Summary rules on Retirement Benefits Plan/
Pension Trust
1. EXEMPT FROM INCOME TAX employees
trust under Sec. 60(B)
2. EXCLUSION FROM GROSS INCOME
amount received by the employee from the fund
upon compliance of certain conditions under Sec.
32(B)(6)
3. DEDUCTION FROM GROSS INCOME
a. amounts contributed by the employer
during the taxable year into the pension plan to
cover the pension liability accruing during the
year considered as ordinary and necessary
expenses under Sec. 34(A)(1).
b. 1/10 of the reasonable amount paid by the
employer to cover pension liability applicable to
the years prior to the taxable year, or so paid to
place the trust in a sound financial basis
deductible under Sec. 34 (J).

11. PREMIUM PAYMENTS ON HEALTH AND/OR
HOSPITALIZATION INSURANCE-
an amount of premium on health and or
hospitalization paid by an individual taxpayer
(head of family or married), for himself and
members of his family during the taxable
year.

a. Insurance must have actually been
taken;
b. The amount of premium deductible from
gross income does not exceed P2400
per family or P200 per month during the
taxable year;
c. That said family had a gross income of
not more than P250,000 for the taxable
year;
d. In case of married individuals, only the
spouse claiming additional exemption
shall be entitled to this deduction.

Who may Avail of this deduction:
1. Individual taxpayers earning purely
compensation income during the year.
2. Individual taxpayers earning business
income or in practice of his profession
whether availing of itemized or optional
standard deductions during the year.

12. OPTIONAL STANDARD DEDUCTION (OSD)
a. Applicable to any individual, except a
nonresident alien
b. Taxpayer may elect to pay a standard
deduction in an amount not exceeding 10%
of GI
a. Such election should be signified in his return
& shall be irrevocable for the taxable year for
which the return was made
Individual is not required to submit his financial
statements

A. ADDITIONAL REQUIREMENT FOR
DEDUCTIBILITY OF CERTAIN PAYMENTS -
tax required to be deducted/withheld has been
paid to BIR

B. NON-DEDUCTIBLE ITEMS

Specific Items Under Section 36:
1. Personal, living or family expenses
2. Amounts paid out for new buildings or for
permanent improvements or betterments made to
increase the value of any property or estate (not
applicable to intangible drilling & development
costs incurred in petroleum operation)
3. Amounts expended in restoring property or in
making good the exhaustion thereof for w/c an
allowance is or has been made
4. Premiums on life insurance policy when the
taxpayer is directly/indirectly a beneficiary under
such policy
5. No deduction shall be allowed in Losses from
Sales or Exchanges of Property
directly/indirectly:
a) between members of a family (include only
brothers & sisters, spouse, ancestors, &
lineal descendants)
b) between an individual & a corp. more than
50% in value of outstanding stock is owned
by such individual (except in case of
distributions in liquidation)
c) between 2 corps. more than 50% in value of
outstanding stock owned by same individual,
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if either one is a personal holding co. or a
foreign holding co. during the taxable yr.
preceding the date of sale/exchange
d) between grantor & fiduciary of any trust
e) between Fiduciary of a trust & the fiduciary of
another if same person is a grantor to each
trust
f) between Fiduciary & a beneficiary of a trust

A person is said to be financially interested in the
taxpayers business if he is a stockholder thereof or
he is to receive as his compensation a share of the
profits of the business.

C. PERSONAL EXEMPTION AND OPTIONAL
STANDARD DEDUCTION (OSD)

Personal Exemption

Single Married Individual (or judicially
declared as legally separated without any
dependent)
P20,000
Head of Family (unmarried or legally
separated with qualified dependent/s)

25,000
Each married individual
32,000
Each dependent (not exceeding 4)
8,000

Head of Family

1) an unmarried/legally separated
man/woman with
(a) One or both parent
(b) One or more brothers or sister
(c) One or more legitimate, recognized
natural/legally adopted children

2) Who are living with & dependent upon
him for their chief support
3) Where such brothers/sisters/children are:
(a) Not more than 21 years old
(b) Unmarried, and
(c) Not gainfully employed
(d) Or, where such children,
brothers/sister, regardless of age,
are incapable of self support
because of mental or physical defect

An illegitimate child is within the meaning
of a recognized natural child.
Under the provision on additional
exemption for dependents, illegitimate
children are specifically included under the
term dependents.
A senior citizen, whether relative or not,
lliving with the taxpayer or not, can be
classified as a dependent to make a taxpayer
a head of a family not exceeding 4 (RA 7432)
In case of married individuals, where only
1 of the spouses is deriving gross income,
only such spouse shall be allowed additional
exemption.
Chief support means more than one half
of the requirements for support.
Parents, brothers, and sisters, who are
qualified dependents may entitle the taxpayer
to the personal exemption of P25,000 as
head of the family but not to the additional
exemption of P8,000.

Note:
Personal and additional exemptions are
available only to business income and
compensation income earners.
> Non-resident aliens engaged in trade or
business (NRAETB) may be entitled to personal
exemptions subject to reciprocity:
1. country from which he is a citizen has an
income tax law; and
2. the income tax law of his country allows
personal exemption to citizens of the Philippines not
residing therein but deriving income therefrom and
not to exceed the amount allowed in NIRC.
3. the personal exemption shall be equal to that
allowed by the income tax law of the country to a
citizen of the Philippines not residing therein, or the
amount provided in the NIRC, whichever is LOWER.

ADDITIONAL EXEMPTION
P8,000 for EACH of the qualified dependent
children not exceeding 4 in number.

Qualified dependent children legitimate,
recognized natural, illegitimate and legally
adopted

The proper claimant of the additional
exemption would be the husband, being the
head of the family except under the following
cases:
1. husband is unemployed
2. husband is working abroad like an
OFW or a seaman
3. husband explicitly waived his right
of the exemption in favor of his wife in the
withholding exemption certificate.

Senior Citizen is:
1. any resident citizen of the PHilippines
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2. at least sixty 60 years old, including those
who have retired from both government
offices and private enterprises, and
3. has an income of not more than sixty
thousand pesos per annum subject to the
review of the National Economic
Development Authority(NEDA) every three
years.

NRAETB may deduct personal exemption (but
NOT additional exemption), but only to the extent
allowed by his country to Filipinos not residing
therein, and shall not exceed the aforementioned
amounts.
NRANETB cannot claim any personal or
additional exemption.

a. Dependent = legitimate/illegitimate/legally
adopted child chiefly dependent upon & living
with the taxpayer if such dependent is not >
21 years old, unmarried & not gainfully
employed OR if such dependent regardless
of age is incapable of self-support because of
mental/physical defect
i. For married individuals, claimed by only 1
of the spouses
ii. For legally separated spouses, claimed
only by the spouse who has custody of the
children; may be claimed by both as long
as they have custody of the children but
total amount claimed by both shall not
exceed the maximum allowed
b. Change of Status
i. The death of the taxpayer during the
taxable year shall not affect the amount
of personal and additional exemptions
his estate can claim, as if he died at the
end of such year
ii. If the taxpayer got married or should
have additional dependent (child born
within the year) during the taxable year,
he may claim the corresponding personal
exemptions in full for such year
iii. If the spouse should die or any of the
dependents become twenty one years of
age, or become gainfully employed
during the taxable year, the taxpayer
may still claim the same exemptions as if
he/she died, or became twenty one years
old or became gainfully employed at the
close of such year.

NOTE:
Individuals not entitled to personal and additional
exemptions:
d. Non-resident alien NOT engaged in trade
or business
e. Alien individual employed by Regional or
Area Headquarters of Multinational
Companies
f. Alien Individual employed by Offshore
Banking Units
g. Alien Individual employed by Pertroleum
Service Contractor and Subcontractor

Deduction for Estate or Trust - P20,000

F. SPECIAL RULES ON INSURANCE
COMPANIES

1. Income & Deductions of Insurance
Companies
a. Special deductions: net additions
required by law to reserve funds & the
sums other than dividends paid w/in the
yr. on policy & annuity contracts;
released reserve treated as income for
the yr. of release
b. Mutual Insurance Companies
Shall not report as income premium
deposits returned to policyholder
Report income received from all
other sources plus such portion of
premium deposits retained by the
companies for purposes other than
payment of losses & expenses &
reinsurance reserves
c. Mutual Marine Insurance Companies
Include in gross income, gross
premiums collected & received by
them less amounts paid for
reinsurance; include as deductions
amounts repaid to policyholders on
account of premiums previously paid
by them & interest paid upon those
amounts between the ascertainment
& payment thereof
d. Assessment Insurance Companies
Deduct from gross income the actual
deposit of sums w/ the officers of the
Phil. governmentt as additions to
guarantee or reserve funds

G. CAPITAL GAINS & LOSSES

1. Definitions - No definition in the Code for
capital assets. Only Ordinary assets are defined
a. ORDINARY ASSETS:
(a) stock in trade of taxpayer
(b) property which would properly be
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included in an inventory of the
taxpayer, if on hand
(c) merchandise inventory
(d) depreciable assets used in the
trade/business
(e) real property used in trade/business

b. CAPITAL ASSETS property held by
the taxpayer (whether or not connected with
his trade or business)

Hence, capital assets are property of a
taxpayer other than ordinary assets.

c. NET CAPITAL GAIN gains > loss from
sales/ exchanges of capital assets

d. NET CAPITAL LOSS loss > gains from
sales/ exchanges of capital assets

2. Percentage taken into account
Taxpayer other than a corporation
(Individuals, estates and trusts)
- - 100% if the capital asset is held for more
than 12 months
- - 50% if the capital asset is held for less than
12 months
- Note:
GR: for purposes of computing capital loss
and capital gain, the actual holding period
is taken into account.
Exception: If securities become worthless
during the taxable year and are capital
assets, the loss resulting therefrom shall be
considered as a loss from the sale or
exchange, on the last day of such taxable
year, of capital assets.

3. Limitation on Capital Loss
Allowed only to the extent of the gains
from such sales or exchanges, hence,
the net capital loss is not deductible.

Example: Gains P 5,000
Losses 15,000
NCL P10,000
In this case, only P5,000 can be claimed as
deduction (to the extent of the gain)

Exception: Losses from such sale incurred
by a domestic bank/trust co. substantial
part of business is receipt of deposits, sell
any bond, debenture, note or certificate or
other evidence of indebtedness issued by
any corp, w/ int. coupons or in registered
form (including one issued by the
government or political subdivision)

4. Net Capital Loss Carry-over
a. Corporations cannot carry over a net
capital loss
b. If net capital loss is sustained in any
taxable yr., such loss is treated in the
succeeding taxable yr. as a loss from the
sale/exchange of a capital asset held for not
more than 12 mos. (100% deduction)
c. Such net capital loss that should be carried
over should not exceed the net income for
the year Incurred (prior years net income)
d. Example: NI in 1996 = P6,000
NCL in 1996 = 10,000
treated as a loss in 1997(100%) = P6,000
only since it should not exceed the net
income of the taxable yr. w/c the loss was
incurred
Net income should be understood as
TAXABLE income according E.O. 37

5. Retirement of Bonds, Debentures, Notes or
Certificates or other evidences of
indebtedness
Tax Base: Amount received by the holder
for such transaction
These transactions result in capital gain or
loss although there is no sale of capital assets

6. Gain or Loss from Short Sales of Property
a. Considered as gains & losses from
sales/exchanges of capital assets
b. Gains & Losses attributable to failure to
exercise privileges or options to buy or
sell property = capital gains/losses

Note:
Short sale is a transaction in which the seller
sells securities which he does not own and,
therefore, cannot himself supply the securities for
delivery, in expectation of the decline in their
price.

Option to buy or sell property:
Example: Suppose X Inc. owns real property
worth Php 10 M. Y gives X Inc. Php 2M as option
money for a 2-year option period. Before the 2
year period ends, Y exercised the option and
bought the property. What will the tax treatment?
It will be subject to 6% capital gains tax under
Section 27 (D) (5). Section 39 (F) or the provision
on the failure to exercise privilege will not apply.

Suppose the same situation above but Y fails to
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exercise his option. What will be the tax
treatment?
In that case, the option money will be a capital
gain for X and a capital loss for Y.

Note: the property subject of option need not
be a capital asset. The law does not say if it
should be an ordinary or capital asset. It only
says attributable to a property.

H. DETERMINATION OF AMOUNT &
RECOGNITION OF GAIN OR LOSS

1. Computation of Gain or Loss
a. GAIN = amt. realized > basis/adjusted
basis for determining gain (in other words,
selling price or proceeds > cost)
b. LOSS = basis/adjusted basis for
determining loss > amt. realized (cost >
selling price/proceeds)
c. AMOUNT REALIZED = money received +
fair market value of the property (other
than money, if any) received

Mode of
Acquisition
Basis for determining gain/loss
from sale/disposition of
property
Purchase cost of property acquired on/after
3/1/1913
Inheritance fair market value as of the date
of acquisition (at the time of
death)
Gift the cost to the donor or to the
previous owner who did not
acquire it by gift; BUT, if such
basis > FMV at the time of the gift,
the basis shall be such FMV for
the purpose of determining the
loss
Acquired for
less than
adequate
consideration
amount paid by the transferee
if property
acquired where
G/L is not
recognized
Same as the basis of property,
stock/securities exchanged
(1) increased by:
dividends
amt. of any gain
recognized by the
exchange
(2) decreased by:
money received
fair market value of the
other property received
liability assumed by the
transferee

2. Exchange of property
a. GENERAL RULE: the entire amount of
the gain or loss shall be recognized upon
the sale or exchange of property
b. EXCEPTION: no gain or loss is
recognized (tax-free exchanges)
(1) If in pursuance to a plan of merger or
consolidation
(a) a corporation exchanges property
solely for stocks in a corp. (both
parties to merger/consolidation)
(b) shareholder exchanges stock in a
corp. for the stock of another
corp. (both corps. are parties to
the merger/consolidation)
(c) security holder of a corp.
exchanges his securities in such
corp. solely for stock or securities
in another corp. (both corps. are
parties to the
merger/consolidation)
(2) If property is transferred to a corp. by
a person in exchange for stock/unit of
participation in such corp. of w/c as a
result of such exchange such person,
alone/together w/ others, not exceeding 4
persons, gains control of said corp.
(stocks issued for services shall not be
considered as issued in return for
property)
o Control is ownership of stocks in a
corporation possessing at least 51%
of the total voting power of all
classes of stocks entitled to vote.

BASIS: same as the basis of
property, stock/securities exchanged
(a) decreased by:
money received
fair market value of the other
property received
(b) increased by:
amount treated as dividend
amount of any gain recognized
by the exchange
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property received as boot shall have
the FMV as basis
if part of the consideration to the
transferor, the transferee of property
assumes a liability of the
transferor/acquires from the latter
property subject to a liability, such
assumption shall be treated as
money received by the transferor on
the exchange
if transferor receives several kinds of
stock/securities, Commissioner is
authorized to allocate the basis
among the several classes of
stocks/securities
basis of the prop. transferred in the
hands of the transferee: same as
would be in the hands of the
transferor increased by the amt. of
the gain recognized to the transferor
on the transfer

Note:
- Transferors basis is Section 40 (C) (5) (a)
while transferees basis is Section 40 (C) (5)
(b).
- Boot is any cash or property given in
addition to the shares of stock received by a
transferor in a tax-free exchange.
- When there is no boot, the basis is the
transferors property given up because the
rules provided that the basis would be the
same basis as the property given up by the
transferor. In this kind of transaction, the rule
is always the transferors basis.
- When there is boot, the basis is the same
as transferors basis minus boot increased by
the recognized gain.

IV. SOURCES OF INCOME

* The need to identify the situs of the income arises
only when the taxable entity is merely taxed on
income within. Hence, when the taxable entity is an
individual resident citizen or a domestic corporation,
the situs becomes irrelevant since they are taxed on
worldwide income.

A. GROSS INCOME FROM SOURCES WITHIN THE
PHILIPPINES

Income Test of Source of Income
Interests Residence of Debtor
Dividends a) from domestic corp. income
within
b) from foreign corp.

income within, if :
> 50% of the Gross Income of
such foreign corp. for the 3-
yr. period ending w/ the close
of the taxable yr. prior to the
declaration of dividends (or
for such part of such period
as the corporation has been
in existence) was derived
from sources w/in the
Philippines

Extent:
Phil Gross Income x Dividend
=Income Total Gross Income
within

Income without, if
< 50% of the Gross Income of
such foreign corp. for the 3-
yr. period ending w/ the close
of the taxable yr. prior to the
declaration of dividends was
derived from sources w/in the
Philippines.
Therefore, nothing of such
dividends forms part of
income within
Services
(Compensation
for
labor/personal
services)
Place of performance of service
Rentals Location of the property/interest
in such property
Royalties Place of use or location of
intangibles (such as patents,
trademarks, etc.) giving rise to
royalties
Gain on sale of
Real property
Location of property
Gain on sale of
Personal
Property other
than shares of
stock in a
domestic
corporation
purchased in
one country and
sold in another
Place of Sale
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Gain on sale of
shares of stock
in a domestic
corporation
Philippines regardless of where
sold

ROYALTIES (from property or use of property
located in Philippines), includes:
(a) use of/the right/privilege to use in the
Philippines any copyright, patent, design or
model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right
(b) use of/the right to use in the Philippines any
industrial, commercial or scientific equipment
(c) supply of scientific, technical, industrial or
commercial knowledge or information
(d) supply of any assistance that is ancillary &
subsidiary to, & is furnished as a means of
enabling the application or enjoyment of, any
such property/right in (a) above, such
equipment in (b) above or knowledge/info in (c)
above
(e) supply of services by a nonresident person/his
employees in connection with the use of
prop./rights belonging to, or the installation or
operation of any brand, machinery or other
apparatus purchased from such nonresident
person
(f) technical advice, assistance or services
rendered in connection with technical
mgt./admin. Of any scientific, industrial or
commercial undertaking, venture, project or
scheme
(g) the use of or the right to use:
i. motion picture films
ii. films or video tapes for use in connection
with TV
iii. tapes for use in connection with radio
broadcasting

Taxable Income from Sources Within the Phils.
1. General Rule
Gross Income [GI] (within the Philippines)
( - ) Deductions (attributable to GI within)
= Taxable Income

by attributable is meant that the expense can
be identified as the expense that generated the
income. For instance, if ABC Corp.
manufactures clothes and sells it in the Phils.,
and sells shoes in the US. The cost of
manufacturing the clothes are attributable to
the income generated from selling the clothes.
Since the income from the sale of clothes is
income within, then the expense for
manufacturing them must be deducted from
gross income within. However, the cost of
selling the shoes may not be deducted from
income within since it is not attributable to
income within. Rather, it is specifically
attributable to income without.

2. Deductions: expenses, losses & other deductions
properly allocated thereto & a ratable part of
expenses, interests, losses & other deductions
effectively connected w/ the business/trade
conducted exclusively w/in the Philippines which
cannot definitely be allocated to some items or
class of gross income
Such deductions shall be allowed
only if fully substantiated by all info
necessary for its calculation

3. EXCEPTION: no deduction for interest
paid/incurred abroad shall be allowed unless
Indebtedness was actually incurred
Indebtedness must be that of the taxpayer
Interest must be legally due and stipulated in
writing
Interest must be paid or incurred during the
taxable year
Indebtedness must be in connection w/ the
conduct or operation of trade/business in the
Philippines

B. GROSS INCOME FROM SOURCES WITHOUT
THE PHILIPPINES
1) Interests (other than those derived from
sources within the Philippines)
2) Dividends (other than those derived from
sources within the Philippines)
3) Compensation for labor or personal services
performed w/o the Philippines
4) Rentals or royalties from property located
w/o the Philippines or from any interest in
such property including rentals/royalties for
the use of or for the privilege of using w/o
the Philippines, patents, copyrights, secret
processes & formulas, goodwill, trademarks,
trade brands, franchises & other like
properties
5) Gains, profits & income from the sale of real
property located w/o the Philippines

Tip: The foregoing enumeration is merely the
reverse of the enumeration of gross income
from sources within the Philippines. Hence,
so long as you know which income are
considered as income within, all else are
income without.

Taxable Income from Sources Without the
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Philippines
1. General Rule
Gross Income (without the Philippines)
( - ) Deductions (attributable to GI without)
= Taxable Income

2. Deductions: expenses, losses & other deductions
properly apportioned/allocated thereto & a ratable
part of expenses, interests, losses & other deductions
w/c cannot definitely be allocated to some items or
class of gross income

C. INCOME FROM SOURCES PARTLY WITHIN
AND PARTLY WITHOUT THE PHILIPPINES.

These are:
1. Income from services rendered partly within
and partly without;
2. Income from sale of personal property
produced (in whole or in part) within and sold
without the Philippines; and
3. Income from sale of personal property
produced (in whole or in part) without and
sold within the Philippines.

Personal Property Income
Produced here and sold
without
party within, partly
without
Produced here and sold
here
Income within
Produced abroad and
sold here
Income partly within,
partly without
Purchased without and
sold within
Income within
Purchased within and
sold without
Income without
Purchased within and
sold within
Income wiithin
Taxpayer sells it abroad
through a sales office
Income partly within,
partly without

As for unallocated expenses, meaning those which
are not entirely attributable to either income within or
without, such expenses shall be allocated using the
following formula:

Income
within
Deductions
-----------------
----------
x Unallocated
expense
= from
Worldwide
Income
income
within

ACCOUNTING PERIOD & METHODS OF
ACCOUNTING

A. ACCOUNTING PERIODS

1. General Rule (Sec. 43): Taxable income is
computed upon the basis of taxpayers
annual accounting period (fiscal or calendar
year) in accordance with the method of
accounting employed
2. If no method of accounting employed or
method does not clearly reflect the income,
computation shall be made in accordance w/
such method as the opinion of the
Commissioner clearly reflects the income.
3. taxable income is computed based on
calendar year if:
(a) accounting period is other than a fiscal
year
(b) taxpayer has no accounting period
(c) taxpayer does not keep books
(d) taxpayer is an individual
4. fiscal year: accounting period of 12 months
ending on the last day of any month other
than December
5. calendar year: accounting period from
January 1 to December 31

B. PERIODS IN WHICH ITEMS OF GROSS
INCOME INCLUDED (Sec. 44)

1. Amount of all items of gross income shall be
included in the gross income for the taxable
year in which received by the taxpayer,
unless, any such amounts are to be properly
accounted for in a different period under
methods of accounting permitted
2. In case of death of taxpayer include for the
taxable year in which falls the date of his
death, all amounts which accrued up to the
date of his death, if not otherwise properly
includible in respect of such period or a prior
period

C. PERIOD FOR WHICH DEDUCTION AND
CREDITS TAKEN (Sec. 45)
Income
without
Deductions
---------------
------------
x Unallocated
expense
= from
Worldwide
Income
income
without
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1. Deductions provided in this Title shall be
taken for the taxable year in which paid or
accrued or paid or incurred, dependent
upon the method of accounting upon the
basis of which the net income is computed,
unless, in order to reflect the income,
deductions should be taken as of a different
period.
2. In case of death of taxpayer: deductions
allowed for the taxable period in which falls
the date of his death, amounts accrued up to
the date of his death if not otherwise properly
allowable in respect of such period or a prior
period

D. CHANGE OF ACCOUNTING PERIOD (Sec. 46)
1. Kinds of changes:
(a) from fiscal year to calendar year
(b) from calendar year to fiscal year
(c) from one fiscal year to another fiscal
year
2. effect of change: net income shall, with the
approval of the Commissioner, be computed
on the basis of the new accounting period,
subject to Sec. 47 on Final or Adjustment
Returns for a Period of Less Than 12 Months
(as discussed below)

E. METHODS OF ACCOUNTING

1. CASH METHOD - recognition of income and
expense dependent on inflow or outflow of
cash (meaning, you recognize the income
when you actually receive the cash payment
for the sale, and you recognize the expense
when you actually pay cash for the expense)

2. ACCRUAL METHOD - method under which
income, gains and profits are included in
gross income when earned whether received
or not, and expenses are allowed as
deductions when incurred, although not yet
paid. It is the right to receive and not the
actual receipt that determines the inclusion of
the amount in gross income

Examples:
(a) interest or rent income earned but not yet
received
(b) rent exp. accrued but not yet paid
(c) wages/salaries due but remaining unpaid

Illustration:

A leases an office space at P1M per year and
lease payments are made on a yearly basis and
are due every January 5. A leased out the space
to X on January 1, 2004. However, X will only
pay rent for one year on January 5, 2005. For
the year 2004, A should recognize income of
P1M as of December 31, even if he will receive
payment only on January 5 because the he is
considered to have earned the P1M already for
allowing X to actually use the space for the year
2004.

F. ACCOUNTING FOR LONG-TERM
CONTRACTS

1. Long-term contracts: building, installation or
construction contracts covering a period in
excess of 1 yr
2. Persons whose gross income is derived in
whole or in part from such contracts shall
report such income upon the basis of
percentage of completion
3. The return should be accompanied by a
return certificate of architects or engineers
showing the percentage of completion during
the taxable year of the entire work performed
under the contract
4. Deductions from gross income: all
expenditures made during the taxable year
on account of the contract, account being
taken of the material and supplies on hand at
the beginning and end of the taxable period
for use in connection with the work under the
contract but not yet so applied.
5. Amended return may be permitted/required
by the Commissioner: if upon completion of
contract, taxable income has not been clearly
reflected for any year(s)

This provision takes into account that certain
businesses, like construction, takes more than a
year for a project to be completed. As such, it is
not practical (from the point of view of the
government) to wait until the project is finished
before the income arising therefrom is actually
reported and taxed. Hence, income is spread
over the years where the construction is in
progress, and the allocation is made on the basis
of percentage of completion.

Illustration:

ABC Corp. entered into a contract with X whereby the
former agreed construct a condominium for the latter
to be completed in 5 years for a fee of P10M. For the
first year of construction, ABC Corp was able to
construct 30% of the condominium. It will therefore
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declare a gross income of P3M computed as follows:

P 10 M
x 30%
P 3 M

INSTALLMENT BASIS

1. SALES OF DEALERS IN PERSONAL
PROPERTY
Under Rules and Regulations (R&R)
prescribed by the Sec. of Finance, upon
recommendation of the Commissioner: a
person who regularly sells or otherwise
disposes of personal property on the
installment plan may return as income
therefrom in any taxable year that
proportion of the installment payments
actually received in that year, which the
gross profit realized or to be realized
when payment is completed, bears to the
contract price.

Example: Sale in 1997 payable in 2 equal
annual installments. How to compute for
income:

Contract Price/ Installments
Receivable P100,000
Cost 75,000
(GP) P 25,000

* installments payable in 2 equal annual
installments

GP/Contract Price ratio = 25T/100T = 25%
Collections in 1997 = P50T
Income for 1997 = P50T x 25% = P12,500

2. SALES OF REALTY AND CASUAL SALES
OF PERSONALTY

1) in cases of:
(a) casual sale or other casual
disposition of personal property
(other than inventory on hand of the
taxpayer at the close of the taxable
year) for a price > P1,000, or
(b) sale or other disposition of real
property, if in either case the initial
payments do not exceed 25% of the
selling price
2) how may income be returned: same as
in sales of dealer in personal property
above
initial payments: payments received in
cash or property other than evidence of
indebtedness of the purchaser during the
taxable period in which the sale or other
disposition is made

3. SALES OF REAL PROPERTY
CONSIDERED AS CAPITAL ASSET BY
INDIVIDUALS

1) individual who sells of disposes of real
property, considered as capital asset & is
otherwise qualified to report the gain
under (2) above may pay the capital
gains tax in installments under R&R to be
promulgated by the Sec. of Finance,
upon recommendation of the
Commissioner
2) capital asset: property held by the
taxpayer (whether or not connected with
his trade or business) but does not
include:
(a) stock in trade of taxpayer
(b) property which would properly
included in inventory, if on hand
(c) merchandise inventory
(d) depreciable assets used in the
trade/business
(e) real property used in trade/business

4. CHANGE FROM ACCRUAL TO
INSTALLMENT BASIS

1) taxpayer must be entitled to benefits
under 1 (sales of dealers in personal
property)
2) in computing income for the year of
change or any subsequent year:
amounts actually received during any
such year on account of sales or other
dispositions of property made in any prior
year shall not be excluded

G. ALLOCATION OF INCOME AND DEDUCTIONS

1) Applicable to: cases of 2 or more
organizations, trades or businesses (w/n
incorporated & w/n organized in the
Philippines) owned or controlled
directly/indirectly by the same interest
2) Commissioner is authorized to distribute,
apportion or allocate gross income or
deductions between or among such
organization, trade or business, if he
determines that such distribution,
apportionment or allocation is necessary in
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order to prevent evasion of taxes or clearly to
reflect the income of any such organization,
trade or business

RETURNS AND PAYMENT OF TAX

Tax Return- This is a report made by the taxpayer to
the BIR of all gross income received during the
taxable year, the allowable deductions including
exemptions, the net taxable income, the income tax
rate, the income tax due, the income tax withheld, if
any, and the income tax still to be paid or refundable.

I. INDIVIDUAL RETURN

A. WHO ARE REQUIRED TO FILE AN ITR:
I. Individual
1) Filipino citizen residing in the Philippines
2) Filipino citizen residing outside the
Philippines, on his income from sources
within the Philippines
3) Alien residing in the Philippines, on
income derived from sources within the
Philippines
4) Nonresident alien engaged in trade or
business or in the exercise of profession
in the Philippines
5) An individual (citizen/alien) engaged in
business or practice of a profession
within the Philippines regardless of the
amount of gross income
6) Individual deriving compensation income
concurrently at any time during the
taxable year
7) Individual whose pure compensation
income derived from sources within the
Philippines exceeds P60,000.
II. Taxable Estate and Trust
III. General Professional Partnership
IV. Corporation
1. Not exempt from Income tax
2. Exempt from income tax under
Section 30 of the NIRC but has not shown
proof of exemption.

B. WHO ARE NOT REQUIRED TO FILE AN
ITR: (but may be required to file an
information return pursuant to Rules and
Regulations prescribed by the Sec. of
Finance, upon recommendation of the
Commissioner)
An individual whose gross income does not
exceed his total personal and additional
exemptions
An individual whose compensation income
derived from one employer does not exceed
P 60,000 and the income tax on which has
been correctly withheld
An individual whose income has been
subjected to final withholding tax (alien
employee as well as Filipino employee
occupying the same position as that of the
alien employee of regional headquarters and
regional operating headquarters of
multinational companies, petroleum service
contractors and sub-contractors and
offshore-banking units, non-resident aliens
not engaged in trade or business)
Those who are qualified under substituted
filing. However, substituted filing applies
only if all of the following requirements are
present
the employee received purely compensation
income (regardless of amount) during the
taxable year
the employee received the income from only
one employer in the Philippines during the
taxable year
the amount of tax due from the employee at
the end of the year equals the amount of tax
withheld by the employer
the employees spouse also complies with all
3 conditions stated above
the employer files the annual information
return (BIR Form No. 1604-CF)
the employer issues BIR Form No. 2316 (Oct
2002 ENCS version ) to each employee.

SUBSTITUTED FILING - is when the employers
annual return may be considered as he substitute
Income Tax Return of employee inasmuch as the
information provided in his income tax return would
exactly be the same information contained in the
employers annual return.

SUBSTITUTED FILING OF INCOME TAX
RETURNS BY EMPLOYEES RECEIVING PURELY
COMPENSATION INCOME, REQUISITES:
1. The employee receives purely compensation
income (regardless of amount) during the taxable
year.
2. The employee receives the income only from one
employer during the taxable year.
3. The amount of tax due from the employee at the
end of the year equals the amount of tax withheld by
the employer.
4. The employees spouse also complies with all 3
conditions stated above.
5. The employer files the annual information return.
6. The employer issues BIR form 2316

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INDIVIDUALS NOT QUALIFIED FOR
SUBSTITUTED FILING:
1. Individuals deriving compensation from two or
more employers concurrently or successively during
the taxable year.
2. Employees deriving compensation income
regardless of the amount, whether from a single or
several employers during the calendar year, the
income tax of which has not been withheld correctly
resulting to collectible or refundable return
3. Employees whose monthly gross compensation
income does not exceed P5,000 or the statutory
minimum wage, whichever is higher, and opted for
non-withholding of tax on said income.
4. Individuals deriving other non-business, non-
profession-related income in addition to
compensation income not otherwise subject to final
tax.
5. Individuals receiving purely compensation income
from a single employer although the income tax of
which has been correctly withheld, but whose spouse
falls under 1 to 4 above.
6. Non-resident aliens engaged in trade or business
in the Philippines deriving purely compensation
income, or compensation income and other non-
business, non-profession-related income.

Non-filing of ITR, for employees who are qualified for
the substituted filing shall be OPTIONAL for the
taxable year 2001, the returns fro which shall be filed
on or before April 15, 2002. Thereafter, substituted
filing where applicable shall be MANDATORY.

Joint Certification- It is a sworn statement made by
the employer and employee, which serve the
following purposes:
1. It contains the employees consent that BIR
form 1604CF may be considered his substituted
return, in lieu of BIR Form No 1700, which the
employee no longer filed.
2. It contains the employers certification that
he has reported the employees income to the BIR
and that he has remitted the taxes on the employees
income, as indicated in BIR Form 1604-CF.
3. It serves as a proof of financial capacity in
case the employee decides to apply for a bank loan
or credit car, or for any other purpose, as if he had in
fact filed a BIR Form 1700.

Individuals required to file an information return:
Individuals not required to file an income tax
return may nevertheless be required to file an
information return pursuant to rules and regulations
prescribed by the Secretary of Finance upon
recommendation of the Commissioner.

C. WHERE TO FILE
Except in cases where the Commissioner
otherwise permits:
1) Authorized agent bank
2) Revenue District Officer
3) Collection Agent
4) Duly authorized Treasurer of the
city/municipality in w/c such person has
his legal residence/principal place of
business in the Philippines, or
5) Office of Commissioner, if there be no
legal residence/ place of business in the
Philippines

D. WHEN TO FILE:
1) for any individual (compensation,
business, professional income)
on or before April 15 of each year
covering income for preceding
taxable year
example: individuals income from
Jan. to Dec. 1997, shall be filed on or
before April 15, 1998
2) individual subject to capital gains tax
(a) sale/exchange of shares of stock not
traded thru a local stock exchange:
within 30 days after each
transaction
(b) sale/disposition of real property
within 30 days following each sale
or other disposition

HUSBAND AND WIFE
File 1 return for the taxable yr., if ff.
requisites complied :
1) Married individuals (citizens, resident
or nonresident aliens)
2) Do not derive income purely from
compensation
If impracticable to file 1 return: each
spouse may file a separate return but the
returns shall be consolidated by the
Bureau for purposes of verification for the
taxable yr.

UNMARRIED MINOR
Income of unmarried minors derived from
property received by the living parent
shall be included in the return of the
parent, except:
1) when donors tax has been pd. on
such property, or
2) when transfer of such property is
exempt from donors tax

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PERSONS UNDER DISABILITY
If unable to make a return, return may be
made by:
1) duly authorized agent or
representative
2) guardian, or
3) other person charged w/ the care of
his person/property
principal & his rep. or guardian assumes
responsibility of making the return &
incurs penalty for erroneous,
false/fraudulent returns
an individuals name signed in the return
is prima facie evidence for all purposes
that the return was actually signed by
such individual

II. CORPORATION RETURNS
A. WHO IS REQUIRED TO FILE AN ITR:
Every corporation subject to tax, except
foreign corp. not engaged in
trade/business in the Philippines.
REQUIREMENTS: File in duplicate a true
& accurate quarterly income tax return &
final/adjustment return
Taxable year: fiscal or calendar (corp.
shall not change accounting period w/o
prior approval by the Commissioner)

B. RETURN OF CORPORATION
CONTEMPLATING DISSOLUTION/
REORGANIZATION
Which corporation? Every corporation,
including a corporation w/c has been
notified of possible involuntary dissolution
by the SEC, or for its reorganization
within 30 days after the adoption by the
corp. of a resolution/plan for its dissolution
or for the liquidation of the whole/any part
of its capital stock:
1) render a correct return
2) verified under oath
3) set forth the terms of such
resolution/plan & such other
information as the Sec. of Finance,
upon recommendation of the
Commissioner, shall, by Rules and
Regulations, prescribe
prior to issuance by the SEC of Certificate
of Dissolution/Reorganization:
dissolving/reorganizing corporation shall
secure a certificate of tax clearance from
BIR to be submitted to the SEC

BPI vs. CIR, GR No. 38504, April 14, 2000
It was held that the 30-day period is counted from
the approval of the SEC of the corporations adopted
authority to dissolve.

C. RETURN ON CAPITAL GAINS REALIZED
FROM SALE OF SHARES OF STOCK NOT
TRADED IN PSE
File a return within 30 days after each
transaction
AND, a final consolidated return of all
transactions must be filed on or before
15th day of the fourth month following the
close of the taxable yr.

D. EXTENSION OF TIME TO FILE RETURNS
Commissioner may, in meritorious cases,
grant a reasonable extension of time for
filing returns of income (or final &
adjustment returns in case of corps.) This
is exceptional and in case of calamity only
based on precedents.

E. RETURNS OF GENERAL PROFESSIONAL
PARTNERSHIPS
each GPP shall file in duplicate, a return of
its income (except items under exclusions
from gross income)
set forth:
1) items of gross income & of deductions
allowed
2) names of partners
3) TIN
4) Share of each partner

F. PAYMENT OF TAX
1) IN GENERAL: Who shall pay?
(a) Total amount of tax shall be paid
by the person subject thereto
at the time the return is filed
(b) For tramp vessels:
Filed & paid before departure by: the
shipping agents &/ or the husbanding
agents; in their absence, captains
failure to do so: Bureau of Customs
is authorized to hold the vessel &
prevent departure until proof of
payment of tax is presented or a
sufficient bond is filed to answer for
the tax due

2) INSTALLMENT PAYMENT (for individuals
only)
If tax due > P2,000, the taxpayer,
other than a corp., may elect to pay
in 2 equal installments:
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(a) 1st inst. pd. at the time the
return is filed
(b) 2nd inst. paid on/before July
15 ff. the close of calendar yr.
(c) If any inst. is not pd. on fixed
date, whole amount of the tax
unpaid becomes due &
payable + delinquency
penalties

3) PAYMENT OF CAPITAL GAINS TAX
Paid on the date the return is filed
No payment is required if the seller
submits proof of his intention to avail
of exemption provided by law
In case of failure to qualify for
exemption, the tax due shall
immediately become due & payable
+ penalties
If tax has been paid, and seller
submits proof of intent w/in 6 mos.
From the registration of the
document transferring real property,
he shall be entitled to a refund upon
verification of his compliance with
requirements for such exemption
If taxpayer elects to report gain by
installments, tax due shall be paid
w/in 30 days from such receipt of
payments
No registration of document
transferring real prop. Unless
Commissioner/duly authorized
representative certified that such
transfer has been reported & tax due
has been paid

4) ASSESSMENT & PAYT. OF DEFICIENCY
TAX
After return is filed, Commissioner
shall examine & assess the correct
amt. of tax
Any deficiency shall be paid upon
notice & demand of Commissioner
Deficiency means:
a. tax imposed > amount shown by
the taxpayer upon his return
amount shown in the return
shall be increased by
amount previously assessed
as a deficiency & decreased
by amounts previously
abated, credited, returned/
otherwise repaid
b. if:
1. no amt. is shown upon the
return as the tax, or
2. no return is made, then:
the amt. by w/c tax exceeds
the amts. previously assessed
as a deficiency; but such
amounts previously
assessed/collected w/o
assessment shall first be
decreased by the amts.
previously abated, credited,
returned or otherwise repaid
in respect of such tax

Withholding of Creditable Tax at Source:
Sec. of Finance may require the w/holding of a tax by
payor-corp., on income payable to natural/juridical
persons, residing in the Philippines, at rate of not
more than 1% but not more than 32%, which shall be
credited against the income tax liability for the taxable
year

Most favored nation clause Royalty income
paid by a domestic corporation to a non-resident
foreign corporation which is a resident of a
Contracting State with which the Philippines has
an effective tax treaty is generally subject to 15%
final withholding tax, but the rate may be reduced
to 10% for certain royalty payments or under the
most-favored-nation-clause of the tax treaty, such
as the Philippines-US Tax Treaty.
The purpose of the clause in a tax treaty is to
grant to the other Contracting State a tax
treatment that is no less favorable than that
which is granted to the most favored among
other countries.
It means each party to the treaty pledges that
any tax concession given to any other treaty
country will also be extended to the other party to
the treaty; that is, it will not grant more favorable
terms to other treaty countries without granting
the same concession to the treaty partner
involved.

ESTATES AND TRUSTS

SEPARATE TAXABLE ENTITIES Sec. 60 (A):
1. Estates of deceased persons under administration
or settlement;
2. Trusts where the income is to be accumulated or
held for future distribution by the fiduciary;
3. Trusts where the income may be either
accumulated or distributed at the discretion of the
fiduciary, and
4. Trusts where the income which is to be distributed
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currently by the fiduciary or is collected by a guardian
of an infant to be held or distributed as the court may
direct.

REQUISITIES FOR THE TAXABILITY OF TRUST:
1. it should be an irrevocable trust;
2. tax must be imposed on the income of the trust,
and
3. the trust retains the income

REVOCABLE TRUST
A revocable trust is one where, under the trust
treatment, the power to revest in the grantor title
to the property transferred to the trust or any part
of the corpus of such trust is vested:
a. in the grantor, either alone or in
conjunction with any person not having
substantial adverse interest in the disposition of
such part of the corpus, or the income therefore;
or
b. in any person not having a substantial
adverse interest in the disposition of such part of
the corpus or the income therefrom
- in short, it is a trust where the title can revest
back to the grantor anytime
- not taxable as an entity because the income
forms part of the income of the grantor

NOTE:
An estate is taxable as a separate entity
when it is already subject to a judicial
proceeding
A trust is taxable as a separate entity if the
trust is irrevocable. This is because the
grantor has absolutely given up the corpus
and any incidents thereto. In this case, the
grantor has no control over the corpus of the
trust. The benefits of the trust will not to go
the grantor. The grantor has transferred the
income earning property to a beneficiary. He
has absolutely given up the incidents of it. If
there is a condition that provides that a
portion shall be reserved for the grantors
medical expenses (for example), this
condition does not convert the irrevocable
trust to a revocable trust. But that portion is
taxable income of the grantor. If it is a
revocable trust, then the whole income or he
property is taxable on the part of the grantor.
An irrevocable trust is where the grantor has
unconditionally parted with all the incidents of
ownership.
If the transfer is revocable, the entire income
shall be taxable in the hands of the grantor.

Income Liable for Tax
Income accumulated in trust for
the benefit of unborn or
unascertained person or persons
with contingent interest, and
income accumulated or held for
future distribution under the
terms of the will or trust

Estate or Trust
Income to be distributed currently
by the fiduciary to the
beneficiaries, and income
collected by a guardian of an
infant which is to be held or
distributed as the court may
direct

Beneficiary

Income received by estates of
deceased persons during the
period of administration or
settlement of estates
Fiduciary or
Beneficiary,
depending upon
the amounts
which are
property paid or
credited
Incom which, in the discretion of
the fiduciary, may be either
distributed to the beneficiaries or
accumulated
Fiduciary or
beneficiary,
depending upon
the amounts
which are
property paid or
credited
Revocable trusts Grantor
Income for the benefit of the
grantor
Grantor

IMPOSITION OF TAX
A. Application of tax:
1) Applies to income of estates or of any
kind of property held in trust, including:
(a) income accumulated in trust:
1. for the benefit of unborn/
unascertained person(s) w/
contingent interests
2. held for future distribution under the
terms of the will or trust
(b) income:
1. to be distributed currently by the
fiduciary to the beneficiaries
2. collected by a guardian of an infant
to be held or distributed as the court
may direct
(c) income received by estates of deceased
persons during the period of
administration or settlement of the estate
(d) income which, in the discretion of the
fiduciary, may be either distributed to
beneficiaries or accumulated

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2) Exception:
Employees trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer
for the benefit of all or some of his employees:
(a) if contributions are made to the trust by
the employer/employees, or both for the
purpose of distributing to such
employees the earnings + principal of the
fund accumulated by the trust in
accordance w/ such plan
(b) if under the trust instrument, it is
impossible, at any time prior to the
satisfaction of all liabilities w/ respect to
employees under the trust, for any part of
income to be used for/diverted to,
purposes other than for the exclusive
benefit of his employees (any amount
distributed to employees shall be taxable
in the yr. so distributed)

B. Consolidation of Income of 2/more trusts:
1) Requisites:
(a) 2/more trusts exist
(b) creator of the trust in each instance is the
same person
(c) beneficiary in each instance is the same
2) tax computed on such consolidated income
3) proportion of each tax be assessed &
collected from each trustee

C. Taxable Income
1) Computed in same manner & on the same
basis as in the case of an individual,
EXCEPT:
(a) deduction allowed: amount of income of
the estate/trust for the taxable yr. w/c is
to be distributed currently by the fiduciary
to the beneficiaries & the amt. of the
income collected by a guardian of an
infant w/c is to be held./distributed as the
court may direct
1. amt. allowed as deduction is
included as TI of the beneficiaries,
whether distributed or not
2. amt. allowed as deduction under
this subsection will not be allowed
as deduction under (b) hereof
(b) additional deduction: amt. of the income
of the estate/trust for its taxable yr.,
properly paid/credited during such yr. to
any legatee, heir or beneficiary applies to
cases of :
1. income received by estates of
deceased person during the
period of administration or
settlement of the estate
2. income w/c, in the discretion of the
fiduciary, may be either
distributed to the beneficiary or
accumulated
3. amt. deducted is included in TI of
the legatee, heir or beneficiary
2) for trust administered in a foreign country:
deductions in a) and b) not allowed provided,
the amt. of income included in the return of
said trust shall not be included in computing
the income of the beneficiaries

D. Exemption Allowed to Estates and Trusts:
P20,000

E. Revocable Trusts
1) Requisites: the power to re-vest in the
grantor title to any part of the corpus of the
trust is vested-
(a) in the grantor either alone/ in conjunction
w/ any person not having a substantial
adverse interest in the disposition of
such part of the corpus/income
therefrom
(b) in any person not having a substantial
adverse interest in the disposition of
such part of the corpus/income
therefrom
2) effect: the income of such trust shall be
included in computing the taxable income of
the grantor

F. Income for Benefit of Grantor
1) Requisites: where any part of the income
of a trust is, or in the discretion of the
grantor/any person not having a
substantial adverse interest in the
disposition of such part of the income
(a) may be held/accumulated for future
distribution to the grantor
(b) may be distributed to the grantor
(c) may be applied to the payment of
premiums upon policies of insurance
on the life of the grantor
2) Effect: such part of the income be
included in computing the taxable income
of the grantor

G. Fiduciary Returns
1) Who shall make the return?
(a) Guardians
(b) Trustees
(c) Executors
(d) Administrators
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(e) Receivers
(f) Conservators
(g) All persons/corp.
2) File, in duplicate, a return of the income of
the person, trust, or estate for whom or
which they act in case such person, trust,
or estate has a gross income = P20,000 or
over during the taxable yr.

OTHER INCOME TAX REQUIREMENTS

A. RETURN OF INFORMATION OF BROKERS
Brokers(individual/corp./gen. pawnshop) shall
render a correct return duly verified under oath,
showing names of customers for whom such
person, corp. or duly registered gen. co-
partnership. has transacted any business, w/
such details as to the profits, losses or other info

B. RETURN OF FOREIGN CORPORATIONS
1) Any attorney, accountant, fiduciary, bank,
trust co., financial institution or other person,
who aids, assists, counsels or advises in, or
w/ respect to, the formation, organization or
reorganization of any foreign corp., shall file
a return w/in 30 days
2) Such return shall be in the form prescribe &
set forth under oath, to the full extent of the
info w/in the possession or knowledge or
under the control of the person required to
file the return

C. DISPOSITION OF IT RETURNS, PUBLICATION
OF LISTS OF TAXPAYERS & FILERS
1) After the assessment, the returns, w/ the
corrections made by the Commissioner, shall
be filed in the Office of the Commissioner &
shall constitute public records & be open to
inspection as such upon order of the Pres.
2) Commissioner may cause, each yr., to
publish the lists containing the names &
addresses of such persons who have filed IT
returns

D. SUIT TO RECOVER BASED ON
FALSE/FRAUDULENT RETURNS
1) If tax is collected under an assessment that
the list, statement or return is
false/fraudulently made, it cannot be
recovered by any suit unless it is proved that
the said list, statement or return was not false
nor fraudulent & did not contain any
understatement or undervaluation
2) Not applicable to statements or returns made
or to be made in good faith regarding annual
depreciation of oil or gas wells & mines

E. DISTRIBUTION OF DIVIDENDS/ASSETS BY
CORPS.
Dividends = any distribution made by a corp. to
its SH out of its earnings or profits & payable to
its SH, whether in money or in other property
1. Gain/loss sustained by SH for any liquidating
dividends received is a taxable income or a
deductible loss (as the case may be)
2. Stock Dividends representing the transfer of
surplus to capital account shall not be subject
to tax.
3. Amt. distributed in redemption or cancellation
of stock is taxable income to the extent that it
represents a distribution of earnings/profits
4. Net income of a partnership after deducting
the corporate income tax shall be deemed to
have been actually or constructively received
by the partners in the same taxable yr. &
shall be taxed to them in their individual
capacity, whether actually distributed or not

DECLARATION OF INCOME TAX BY
INDIVIDUALS
A. In general:

Filing of declaration of estimated income for current
taxable yr.:
INDIVIDUAL receiving: Income from
self-employment (as sole source) or
Combined w/ salaries, wages &
other fixed/ determinable income
On/before
April 15 of
same taxable
yr.
NONRESIDENT CITIZEN for:
Income from w/in the Philippines;
NONRESIDENT ALIEN not
engaged in trade/business in the
Philippines.
Not required
to file

B. RETURN & PAYMENT OF ESTIMATED
INCOME TAX BY INDIVIDUALS
1) Paid in 4 installments
2) 1st installment: paid at the time of
declaration
3) 2nd & 3rd installment: paid on Aug. 15 &
Nov. 15 of current yr.
4) 4th installment: paid on/before Apr. 15 of the
ff. calendar yr. when final adjusted income
tax is due to be filed

Estimated Tax means the amt. which the
individual declared as income tax in his final
adjusted & annual income tax return for the
preceding taxable yr. minus the sum of the
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credits allowed against the said tax
If during the current taxable yr., the taxpayer
reasonably expects to pay a bigger IT, he
shall file an amended declaration during any
interval of installment payment dates

C. DECLARATION OF QUARTERLY INCOME TAX
1) Every corp. shall file in duplicate a quarterly
summary declaration of its GI and deductions
on a cumulative basis for the preceding
quarter(s) upon w/c the IT shall be levied,
collected & paid
2) The tax shall be decreased by the amt. of tax
previously pd./ assessed during the
preceding quarters & shall be paid not less
than 60 days from the close of each of the
first 3 quarters of the taxable yr., whether
calendar/fiscal yr.

D. FINAL ADJUSTMENT RETURN
1) Every corp. liable to tax shall file a final
adjustment return covering the total taxable
income for the preceding calendar/fiscal yr.
2) If sum of the quarterly tax payments is not
equal to the total tax due on the entire
taxable income of that yr., the corp. shall
either:
(a) pay the balance of tax still due
(b) carry-over the excess credit
(c) be credited or refunded w/ the excess
amt. paid, as the case may be

Example: 1997

Cumulative
Taxable Income
Tax
@35%:
Payable
(each Q)
Q1: P300,000; Q2:
P 1,000,000; (sum
of TI of Q1 & Q2);
Q3:P 2,000,000
105,000
350,000
700,000
105,000
245,000
350,000
Q4: P 2,500,000
(final adjustment
return)
875,000 175,000

E. PLACE & TIME OF FILING & PAYMENT OF
QUARTERLY CORPORATE INCOME TAX
1) The quarterly income tax declaration & the
final adjustment return shall be filed with:
(a) authorized agent banks
(b) Revenue District Officer
(c) Collection Agent
(d) Duly authorized Treasurer

2) Where?
(a) of the city/municipality having jurisdiction
over the location of the principal office of
the corp. filing the return
(b) or place where its main books of
accounts & other data from w/c the return
is prepared are kept

3) Time of Filing of IT Return

Corp.
quarterly
declaration
W/in 60 days ff. the close of the first
3 quarters of the taxable yr.
Final
adjustment
return
On/before the 15th day of April
(calendar yr.) On/before the 15th
day of the 4th mo. after the close of
the taxable yr. (fiscal yr.)

4) Time of Payment of IT: Income tax is paid at
the time of the filing of the declaration or
return

WITHHOLDING TAX ON WAGES

A. DEFINITIONS.
1) Wages means all remuneration (other than
fees paid to a public official) for services
performed by an employee for his employer,
including the cash value of all remuneration
paid in any medium other than cash,
(a) shall not include remuneration paid for:
1. agricultural labor paid entirely in
products of the farm where the labor
is performed
2. domestic service in a private home
3. casual labor not in the course of the
employers trade or business
4. services by a citizen or resident of the
Philippines for a foreign government
or an international organization
(b) if remuneration paid by an employer to
an employee for services performed
during or more of any payroll period of
not more than 31 consecutive days
constitutes wages, then all remuneration
pd. by such employer to such employee
for such period shall be deemed to be
wages
2) Payroll period means a period for which
payment of wages is ordinarily made to the
employee by his employer; miscellaneous
payroll period means a payroll period other
than a daily, weekly, biweekly, semi-monthly,
monthly, quarterly, semi-annual, or annual
period
3) Employee refers to any individual who is the
recipient of wages & includes an officer,
employee or elected official of the Philippine
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Government; includes an officer of a corp.
4) Employer
(a) the person for whom an individual
performs or performed any service, of
whatever nature, as the employee of
such person
(b) the person having control of the payment
of such wages
(c) person paying wages on behalf of a
nonresident alien individual, foreign
partnership/corp.

B. LIABILITY FOR TAX
1) EMPLOYER:
(a) liable for withholding & remittance of the
correct amt. of tax
(b) if failed to withhold & remit, employer is
liable for the tax + penalties & additions
to the tax

2) EMPLOYEE:
(a) If fails to file withholding exemption cert.
or supplies inaccurate/false info, the tax
shall be collected from him + penalties or
additions to the tax
(b) Excess taxes w/held by the employer shall not be
refunded if due to:
1. failure or refusal to file the w/holding
exemption certificate
2. false & inaccurate information

C. STATEMENTS & RETURNS
1) Requirements
(a) employer shall furnish EE on/before Jan.
31 of the succeeding yr. or on the same
day of last payment made (if employment
is terminated), a written statement
confirming the wages paid by the
employer to employee
1. Annual Information Returns
(b) employer shall submit an annual
information return to the Commissioner
containing:
1. a list of employees
2. total amt. of compensation income of
each EE
3. total amt. of taxes w/held during the
yr.
4. With copies of statement referred to in
(A) above
2) Extension of Time
Commissioner may grant the ER a
reasonable extension of time to furnish &
submit the statements & returns required

Withholding Tax on Compensation:
Every employer must withhold from
compensation paid, an amount computed in
accordance with the regulations.
Exception:
Where such compensation income of an
individual:
1. Does not exceed the statutory minimum
wages; or
2. Five thousand pesos (5,000) monthly
(60,000 a year)
- whichever is higher

Elements of Withholding on Compensation:
1. There must be an employer-employee relationship
2. There must be payment of compensation or wages
for services rendered
3. There must be a payroll period
Compensation Exempted:
1. Remunerations received as an incident of
employment
2. Remunerations paid for agriculture labor
3. Remunerations paid for domestic services
4. Remunerations for casual not in the course of an
employers trade or business
5. Compensation for services of a citizen, resident of
the Philippines, for a foreign government or an
international organization
6. Damages
7. Life insurance
8. An amount received by the insured as return of
premium
9. Compensation for injuries and sickness
10. Income exempt under treaty
11. 13
th
month pay and other benefits
12. GSIS, SSS, Philhealth and other contributions

Tax Free Covenant Bonds

Covenant Bonds bonds, mortgages, deeds of trust
and other similar obligations of domestic/resident
foreign corporation, which contain a
contract/provision by which the obligor agrees:
1. to pay any portion of the tax imposed upon the
obligee;
2. to reimburse the obligee for any portion of the tax,
or
3. to pay the interest without deduction for any tax
which the obligor may be required/permitted to pay or
to retain therefrom.

Obligor shall deduct and withhold a tax =
30% of the interest and other payments
whether interest or other payments are
payable annually or at a shorter period;
whether bonds, securities, obligations had
been/will be issued/ marketed and the
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interest and other payments paid within and
without the Philippines if the interest or other
payment is payable to a non-resident alien or
a citizen or resident of the Philippines.

Income of Recipient
- Income which any creditable tax is required
to be withheld at source shall be included in
the return of its recipient.
- The excess of the amount of tax withheld
over the tax due on his return shall be
refunded to him, subject to Section 204
(abatement, refund/credit taxes)

TITLE III. ESTATE TAX AND DONORS TAX

CHAPTER I- ESTATE TAX

Nature and Definition

An EXCISE TAX on the rights of transmitting property
at the time of death and on the privilege that a person
is given in controlling to a certain extent the
disposition of his property to take effect upon death

A tax imposed upon the privilege to transmit property
at the time of death; the tax should not be construed
as a direct tax on the property of the decedent
although the tax is based thereon

ESTATE TAX FORMULA

Gross Estate (Sec. 85)
Less: (1) Deduction (Sec. 86)
(2) Net share of the surviving spouse in the
CP
----------------------------------------------------------------------
Net Taxable Estate
X Tax rate (Sec. 84)
-----------------------------------------------------------------------
Estate Tax due
Less: Tax Credit (if any) Sec. 86 [E] or 110 [B]
----------------------------------------------------------------------
Estate Tax Due, if any

A. GROSS ESTATE includes (Sec. 85)

Residents and Non-
resident citizen,
resident alien decedent
Non-Resident
Alien Decedent
All properties, real or
personal, tangible or
intangible, wherever
situated
Only properties situated
in the Philippines
provided that, with
respect to the intangible
personal property, its
inclusion in the gross
estate is subject to the
rule of reciprocity
provided for under Sec
104 of the NIRC

ITEMS OF GROSS ESTATE: (DT RALIC)
1) Decedent's Interest
2) Transfer in Contemplation of Death
3) Revocable Transfer
4) Property Passing Under General
Power of Appointment
5) Proceeds of Life Insurance
6) Prior Interests
7) Transfers for Insufficient Consideration

DECEDENTS INTEREST
To the extent of the interest in property of the
decedent at the time of his death

Transfer in Contemplation of Death

TRANSFER IN CONTEMPLATION OF
DEATH, Transfers impelled by the thought of
an impending death (i.e., the motivating
factor or controlling motive is the thought of
death), without regard of the state of health
of the transferor

Transfers deemed in contemplation of
death: transfers involving retention or
reservation of certain rights.

Transfers made before the decedents
death wherein decedent retained:
a. the possession or enjoyment of,
or the right to the income of the
property;
b. the right either alone or in
conjunction with any person, to
designate the person who shall
possess or enjoy the property or
its income EXCEPT bona fide
sales for an adequate and full
consideration in money or
moneys worth

REVOCABLE TRANSFER
A transfer whereby the terms of enjoyment of
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the property may be altered, amended, revoked
or terminated by the decedent alone or in
conjunction with any other person, or where any
such power is relinquished in the contemplation
of the decedents death. It is enough that the
decedent had the power to alter, amend or
revoke though he did not exercise such power
EXCEPT bona fide sales for an adequate and full
consideration in money or moneys worth

Property Passing Under General Power of
Appointment

What is a GENERAL POWER OF
APPOINTMENT? The power to designate,
without restrictions, the persons who shall
receive, succeed to, possess or enjoy the
property or its income received from the estate
of a prior decedent

How is a general power of appointment
exercised?

The GPA is exercised by:
a) will
b) deed executed in
contemplation of death
c) deed under which he has
retained for his life or for any
period which does not in fact end
before his death
The possession or
enjoyment of, or the right
to the income from, the
property or
The right, either alone or
in conjunction with any
person to designate the
persons who shall
possess or enjoy the
property or the income
therefrom EXCEPT bona
fide sales for an
adequate and full
consideration in money
or moneys worth

PRIOR INTERESTS
All transfers, trusts, estates, interests, rights,
powers and relinquishment of powers made,
created, arising, existing, exercised or
relinquished before or after the effectivity of the
NIRC.

Proceeds of Life Insurance

PROCEEDS FROM LIFE INSURANCE
FORM PART OF THE GROSS ESTATE
ONLY WHEN:
o the beneficiary is the estate,
executor or administrator,
whether the designation is
revocable or irrevocable
o the beneficiary is other than the
estate, executor or administrator
AND the designation is
revocable

TRANSFERS FOR INSUFFICIENT
CONSIDERATION
Amount includible in the gross estate is the
excess of the FMV at the time of death over the
value of consideration received

Exclusions from the Gross Estate

ACQUISITIONS AND TRANSFERS
EXPRESSLY DECLARED AS EXEMPT:
o Merger of the usufruct in the
owner of the naked title
o Transmission or delivery of the
inheritance or legacy by the
fiduciary heirs or legatee to the
fiduciary
o Transmission from the first heirs,
legatees or donees in favor of
another beneficiary in
accordance with the desire of the
testator
o All bequests, devises, legacies,
or transfers to social welfare,
cultural or charitable institutions
Provided, not more than
30% of the value given is
used for administrative
purposes
Proceeds from life insurance where the
beneficiary is other than estate, executor
or administrator AND the designation is
irrevocable
SSS death benefits
Properties held in trust by the decedent
Benefits received by beneficiaries
residing in the Philippines under laws
administered by the US Veterans
Administration
Separate or exclusive properties of the
surviving spouse
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Valuation

1. Real Property

FMV as determined by the Commissioner
OR the FMV shown in schedule of values
fixed by the assessors, whichever is HIGHER
No zonal value: use the FMV in the latest tax
declaration.

2. Shares of Stock

Listed shares: average of the highest and
lowest quotation at date of death (or the date
nearest to the date of death, if no quotation is
available at the time of death)
Unlisted Shares
Common stocks: use BOOK VALUE
Preferred stocks: use PAR VALUE

3. Personal Property

Valued at FMV

Special Rules on Intangible Properties

INTANGIBLE PERSONAL PROPERTIES
WITH SITUS IN THE PHILIPPINES
(SECTION 104)
1. Franchise which must be exercised
in the Philippines.
2. Shares, obligations or bonds issued
by any corporation or sociedad
anonima organized or constituted in
the Philippines in accordance with its
laws,
by any foreign corporation 85% of
the business of which is located in
the Philippines,
by any foreign corporation, if such
shares, obligations or bonds have
acquired a business situs in the
Philippines,
5. Shares, rights in any partnership
business or industry established in
the Phil.

RECIPROCITY CLAUSE ON INTANGIBLE
PERSONAL PROPERTY OF A DECEDENT
WHO IS NON-RESIDENT ALIEN, WITH A
SITUS IN THE PHILIPPINES (SECTION
104). THE INTANGIBLES SHALL NOT
FORM PART OF THE GROSS ESTATE IF:
The decedent at that time of his death
was a citizen and resident of a foreign
country which at the time of his death
1. did not impose a transfer tax or
death tax of any character
2. in respect of the intangible
personal property of citizens of
the Philippines not residing in
that foreign country; or

The law of the foreign country of which
the decedent was a citizen and resident
a the time of his death:
1. allow a similar exemptions from
transfer taxes or death taxes of
every character
2. in respect of the intangible
personal property owned by
citizens of the Philippines not
residing in that foreign country.

B. DEDUCTIONS FOR ESTATE OF A CITIZEN OR
A RESIDENT (Revenue Regulations 2-2003
and Sec. 86):

1) Expenses, Losses, Indebtedness, and
Taxes:
(a) actual funeral expenses or five percent
(5%) of the gross estate whichever is
lower (not exceeding P200,000)
(b) judicial expenses of the testamentary or
intestate proceedings
(c) claims against the estate
(d) claims against insolvent persons
included in the gross estate
(e) unpaid mortgages or indebtedness upon
property
(f) unpaid taxes
(g) losses incurred during the settlement of
the estate

2) Transfers for Public Use-to the government
of the Republic of the Philippines or any
political subdivision thereof, exclusively for
public purposes

3) Vanishing deductions

4) Family Home

5) Standard Deduction -- P1,000,000

6) Medical Expenses

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7) Amount Received by Heirs under RA 4917

8) Net Share of the surviving spouse in the
Conjugal Property

(1) ORDINARY DEDUCTIONS

A. Funeral expenses

FUNERAL EXPENSES are costs which are
actually incurred in connection with the interment
or burial of the deceased.

EXAMPLES OF FUNERAL EXPENSES:

a) The mourning apparel of the surviving
spouse and unmarried minor children of the
deceased bought and used on the occasion
of the burial;
b) Expenses for the deceaseds wake, including
food and drinks;
c) Publication charges for death notices;
d) Telecommunication expenses incurred in
informing relatives of the deceased;
e) Cost of burial plot, tombstones, monument or
mausoleum but not their upkeep. In case the
deceased owns a family estate or several
burial lots, only the value corresponding
to the plot where he is buried is deductible;
f) Interment and/or cremation fees and
charges; and
g) All other expenses incurred for the
performance of the rites and ceremonies
incident to interment.

EXAMPLES OF NON-DEDUCTIBLE FUNERAL
EXPENSES:

a) Expenses incurred after the interment,
such as for prayers, masses,
entertainment, or the like are not
deductible.
b) Any portion of the funeral and burial
expenses borne or defrayed by relatives
and friends of the deceased are not
deductible.

Substantiation Requirements:

o The expenses must be duly supported by
receipts or invoices or other evidence to
show that they were actually incurred
(RR 2-2003)

B. Judicial Expenses

What are JUDICIAL EXPENSES for estate
taxation?

o These deductible items are expenses
incurred during the settlement of the
estate but not beyond the last day
prescribed by law, or the extension
thereof, for the filing of the estate tax
return.

Judicial Expenses should be supported by a
sworn statement of account issued and signed by
the creditor.

EXAMPLES OF JUDICIAL EXPENSES

(1) Fees of executor or administrator
(2) Attorneys fees
(3) Court fees;
(4) Accountants fee;
(5) Appraisers fee;
(6) Clerk hire;
(7) Cost of preserving and distributing the
estate;
(8) Brokerage fees for selling property of the
estate.

CIR v. CA 328 SCRA 666
Expenses incurred in the extrajudicial settlement
of the estate must be necessary costs toward the
settlement of the case
Attorneys fees to be deductible should essential
to the collection of assets, payment of debts or
the distribution of the estate

C. Claims against the Estate

Debts or demands of a pecuniary nature which could
have been enforced against the deceased in his
lifetime and could have been reduced to simple
money judgments.

SOURCES OF CLAIMS AGAINST THE
ESTATE:
1) Contract;
2) Tort; or
3) Operation of Law


a) A personal obligation of the deceased
existing a the time of his death except
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unpaid obligations incurred incident to his
death such as unpaid funeral expenses and
unpaid medical expenses which are classified
under a different category of deductions,
b) Contracted in good faith and for adequate
and full consideration in money or money's
worth,
c) Must be a debt or claim which is valid in law
and enforceable in court,
d) Must not have been condoned by the
creditors or the action must not have
prescribed.
e) Duly substantiated

Substantiation in case of Loans or other Similar
Indebtedness:

a) notarized at the time incurred, except loans
from financial institutions where notarization
not part of business practice or policy
b) A statement under oath executed by the
administrator or executor of the estate
reflecting the disposition of the proceeds of
the loan if said loan was contracted within three
(3) years prior to the death of the decedent

D. Claims against Insolvent Persons

Condition for deductibility: The value of
decedents interest in the claim is included in the
gross estate and the incapacity of the debtors to
pay their obligation is proven.

E. Unpaid Mortgage

CONDITIONS FOR DEDUCTIBILITY:

o The value of the decedents interest over
the property encumbered is included as
part of the gross estate undiminished by
the amount of mortgage
o The deduction shall be limited to the
extent that the mortgage was contracted
bona fide and for an adequate
consideration

Other Rules in Respect to Unpaid Mortgage

o Determine the recipient or beneficiary of
the loan which must be verified;
o If merely an accommodation made by
decedent, then balance of loan
considered as receivable and part of GE
o If there is a legal impediment to
recognize the same as receivable of the
estate, the unpaid obligation shall not be
allowed as a deduction from the GE

F. Taxes

What taxes are deductible?
Income taxes, real estate or property taxes due at the
time of death which were unpaid as of the time of
death

TAXES NOT DEDUCTIBLE:
1. estate taxes
2. income tax on income received after
death
3. property taxes not accrued before death

G. Losses

1. REQUISITES FOR DEDUCTIBILITY:
1. Losses should arise from fire, storm,
shipwreck, or other casualty, robbery,
theft or embezzlement;
2. Losses should not be compensated by
insurance or otherwise;
3. Losses should not be claimed as
deduction in the income tax return of the
taxable estate;
4. The losses should occur during the
settlement of the estate; AND that
5. The losses should occur before the last
day for the payment of the estate tax
(last day to pay 6 months after the
decedents death)

(2) TRANSFER FOR PUBLIC USE

2. REQUISITES FOR DEDUCTIBILITY:
1) the disposition is in the last will and
testament
2) to take effect after death
3) in favor of the government of the
Philippines or any political subdivision
thereof
4) exclusive for public purpose
5) the value of property given is included in
the gross estate

3. The transfer also contemplates bequests,
devices, or transfers to social welfare, cultural
and charitable institutions

(3) VANISHING DEDUCTIONS (Property
Previously Taxed)

Nature and Purpose

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VANISHING DEDUCTIONS are deductions
allowed for properties which were already
subjected to transfer taxes (e.g., estate and donors
tax). The purpose is to minimize the effect of
double taxation within a short period of time since
the same property will be again subjected to tax in
the form of estate tax.

1. Present decedent acquired the property
by inheritance or donation within 5 yrs
prior to his death
2. The property must have formed part of
the GE of previous decedent or the
taxable gift of the donor
3. Estate tax on the prior estate or the
donors tax must have been paid
4. It must be the same property received
from previous decedent or donor
5. Estate of previous decedent or donor
have not previously availed of vanishing
deduction
6. The property must be located in the
Philippines

(4) FAMILY HOME

It is the dwelling house, including the land on which it
is situated, where the husband and wife, or a head of
the family, and members of their family reside as
certified by Barangay Captain of the locality.

The family home is deemed constituted on the house
and lot from the time it is actually occupied as a
family residence and is considered as such for as
long as any of its beneficiaries actually resides
therein.

o Actual occupancy of the house or house
and lot as the family residence shall not
be considered interrupted or abandoned
in such cases as the temporary absence
from the constituted family home due to
travel or studies or work abroad, etc.

o The family home is generally
characterized by permanency, that is, the
place to which, whenever absent for
business or pleasure, one still intends to
return.

CONDITIONS FOR THE ALLOWANCE OF
FAMILY HOME AS DEDUCTION FROM THE
GROSS ESTATE-

1) The family home must be the actual
residential home of the decedent and his
family at the time of his death, as
certified by the Barangay Captain of the
locality where the family home is
situated;
2) The total value of the family home must
be included as part of the gross estate of
the decedent; and
3) Allowable deduction must be in an
amount equivalent to the current fair
market value of the family home as
declared or included in the gross estate,
or the extent of the decedents interest
(whether conjugal/community or
exclusive property), whichever is lower,
but not exceeding 1 Million.

Note that:
o The family home must be part of the
properties of the absolute community or
of the conjugal partnership, or of the
exclusive properties of either spouse,
depending upon the classification of the
property (family home), and the property
relations prevailing on the properties of
the husband and wife. It may also be
constituted by an unmarried head of a
family on his or her own property.

o For purposes of availing of a family home
deduction to the extent allowable, a
person may constitute only one family
home.

(5) STANDARD DEDUCTIONS

A deduction in the amount of One million pesos
(1,000,000) shall be allowed as an additional
deductions without need of substantiation

Full amount shall be allowed as deduction for the
benefit of the decedent

(6) MEDICAL EXPENSES

o Medical cost incurred within the one year
prior to the death of the decedent
o Up to a maximum amount of 500,000,
whichever is lower
o Any excess over 500,000 cannot be
deductible as claims against the estate
o It must be duly substantiated with official
receipts for services rendered
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o Any amount incurred within one year from
death in excess of P500,000 CANNOT be
claimed as a deduction under claims against
estate.

(7) Amount Received by Heirs under RA 4917

o Amount received by the heirs from the
decedents employer as a consequence of
death of the decedent employee in
accordance with RA4917
o Provided, such amount is included in the
gross estate of the decedent.

(8) Net Share of the surviving spouse in the
Conjugal Property
After deducting the allowable deductions
(only the ordinary deductions) appertaining to the
conjugal or community properties included in the
gross estate, the share of the surviving spouse
must be removed to ensure that only the
decedents interest in the estate is taxed.

SPECIAL RULES FOR NONRESIDENT ALIENS
(for property situated in the Philippines)

ALLOWABLE DEDUCTIONS:

A. Expenses, Losses, Indebtedness and
Taxes
Only the proportion of the total
expenses, losses indebtedness and
taxes which the value of such part
bears to the value of his entire GE
wherever situated:

Estate situated in the Phils X expenses, losses = allowable
Total estate everywhere indebtedness,taxes deduction

B. Property Previously Taxed (vanishing
deductions in the properties in the
Philippines)
C. Transfers for Public Use

OTHER CONSIDERATIONS

Net Share of the surviving spouse in the
Conjugal Property-deducted from the net
estate of the decedent
To be allowed deductions for a non-resident
alien, executor/administrator/ any heir must
include in the return to be filed, the value of
the gross estate not situated in the
Philippines
No deduction shall be allowed in the case of
a nonresident not a citizen of the Philippines,
unless the executor, administrator, or anyone
of the heirs, as the case may be, includes in
the return required to be filed under Section
90 the value at the time of his death of that
part of the gross estate of the nonresident
not situated in the Philippines.

ESTATE TAX CREDIT

ESTATE TAX CREDIT is a remedy against
international double taxation to minimize the onerous
effect of taxing the same property twice

Who may avail of tax credits?

o Only the estate of a citizen or resident alien
at the time of the death can claim tax credit
for any estate taxes paid to a foreign country

What amount of tax credit may be claimed?
Formulas:
Limitation A:
For estate taxes paid to one foreign country
Allowable Final Tax Credit =
The lower amount between:
a. Tax actually paid to the foreign country,
and

b. the amount derived from this formula:

Net gifts, foreign country x Phil. estate tax
Net gifts, world

For estate taxes paid to 2 or more foreign
countries the lower amount between
limitation A and limitation B.

a. Limitation A (per country):
- the lower amount between the
actual foreign taxes paid to each country and
the amount derived from the forumula below:

Net gifts, foreign country x Phils. estate tax
Net gifts, world

b. Limitation B (by total):
- the lower amount between the sum
of the actual taxes paid to ALL foreign
countries and the answer to the formula
below:

Net gifts, foreign country x Phils. estate tax
Net gifts, world

EXEMPTION FROM ESTATE TAX (Sec. 84 and
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87):

1) First P200,000.00 value of the net estate

2) Merger of usufruct in the owner of the naked
title

Example
A died leaving a fishpond; naked title to B,
his son, and usufruct to C, another son, for
life. C died a year later. The fishpond will
be included in the gross estate of A, being
the owner. Upon the death of C, the
usufruct will be merged into the owner of
the naked title B who shall become the
absolute owner thereof. The transfer from
C to B is exempt from estate tax.

3) Transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicommissary

The substitution must not go beyond one
degree from the heir originally instituted
The fiduciary or first heir must be both
living at the time of the testators death

Example
A dies and leaves in his will a lot to his
brother B who is entrusted with the
obligation to transfer the lot to C, a son of
A when A reaches legal age. B is the
fiduciary heir and C is the
fideicommissary. The transfer from A to
B is subject to estate tax. But the
transmission or delivery to C upon
reaching legal age shall be exempt from
estate tax.

4) Transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the desire of the predecessor

5) Bequests, devises, legacies or transfers to
social welfare, cultural and charitable
institutions,
no part of the net income of which inures
to the benefit of any individual:
Provided not more than 30% of the
transfers shall be used by such
institutions for administration purposes

J. COMPLIANCE REQUIREMENTS

(1) Persons liable to pay estate tax

The person primarily liable is the estate
itself, through the executor and administrator.
When there are 2 or more executors or
administrators, all of them are severally liable
for the payment of tax.

The heir or beneficiary has a subsidiary
liability for the payment of that portion of the
estate which his distributive share bears to
the value of the net estate. The extent of his
liability shall not, however, exceed the value
of his share in the inheritance.

(2) Procedures

1) Filing of Notice of death
(a) Who files: the executor, administrator or
any of the legal heirs,
(b) When to file: within 2 months after the
decedent's death, or within a like period
after qualifying as such executor or
administrator
(c) To whom filed: Commissioner.

2) Filing of Estate Tax Returns
When to file: within six (6) months from
the decedent's death; except, the
Commissioner, in meritorious cases,
grants a reasonable extension not
exceeding 30 days for filing the return

Mandatory filing of estate tax returns in
all cases of:
o transfers subject to the tax
imposed herein
o transfers though exempt from tax,
where the gross value of the estate
exceeds P200,000
o regardless of the gross value, the
estate consists of registered or
registrable property for which a
clearance from the Bureau of
Internal Revenue is required for
the transfer of ownership in the
name of the transferee

Where to file:
o Authorized agent bank
o Revenue district officer
o Duly authorized city or municipal
treasurer of the place of
decedents domicile
o If there is no legal residence in the
country, with the Commissioner
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3) Payment of Tax: Time of Payment
(a) General Rule: at the time the return is filed
by the executor, administrator or the heirs
but before delivery of the distributive share
in the inheritance to any heir or beneficiary.

(b) Exception: when the Commissioner finds
that payment on due date would impose
undue hardship upon the estate or any of
the heirs, he may extend the time for
payment of such tax:
1. not to exceed 5 years, in case the
estate is settled through the courts;
or
2. 2 years in case the estate is settled
extrajudicially
In which case it shall be paid on or before
expiration of the extension and running of
the Statute of Limitations for assessment
shall be suspended for the period of any
such extension.

The Commissioner may require a bond not
exceeding double the amount of the tax
and with such sureties as the
Commissioner deems necessary when an
extension for payment is granted.

(c) Restrictions as to Extension of Time to
Pay:
o no extension shall be allowed
when taxes are assessed by
reason of : 1) negligence, 2)
intentional disregard of rules and
regulations, 3) fraud on the part of
the taxpayer

4) Distribution of Estate
Upon payment, the administrator shall
deliver the distributive share in the
inheritance to any heir or beneficiary. The
estate tax clearance issued by the
Commissioner or the Revenue District
Officer having jurisdiction over the estate
will serve as the authority to distribute the
remaining/distributable properties/share in
the inheritance to the heir or beneficiary.

In case of installment payments, the
clearance shall be released only with
respect to the property the corresponding
tax has been paid.

CHAPTER II- DONOR'S TAX

Definition and Subject

A tax on the privilege of transmitting ones
property or property rights to another or
others without adequate and full valuable
consideration.

The subject of donors tax is the gift or
donation. Article 725 of the Civil Code
defines a gift or donation as an act of
liberality whereby a person disposes
gratuitously of a thing or right in favor of
another who accepts it. Thus, the following
are the REQUISITES OF VALID GIFT OR
DONATION SUBJECT TO DONORS TAX:
1. Capacity of the donor
2. Intent to donate
3. Delivery of the subject gift, whether
actual or constructive
4. Acceptance by the donee

THERE ARE TWO (2) KINDS OF
DONATIONS:

1. Donation inter vivos: a donation
made between living persons;
perfection is at the moment when the
donor knows of the acceptance of
the donee (exception: donations of
immovable
1
properties); subject to
donors tax

2. Donation mortis causa: a donation
which takes effect upon the death of
the donor; subject to estate tax

The law in force at the time of the perfection
or completion of the donation shall govern
the imposition of the donors tax. ( Sec 11 RR
2-2003 )
Note: Any contribution in cash or in kind to
any candidate, political party, or coalition of

1
Must be in a public document specifying therein the
property donated. The acceptance may be made in
the same Deed of Donation or in a separate public
document, but it shall not take effect unless it is done
during the lifetime of the donor. If the acceptance is
made in a separate instrument, the donor shall be
notified thereof in an authentic form, and this step
shall be noted in both instruments.

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parties for campaign purposes shall be
governed by the Election Code as amended.
(Sec 99 C of the NIRC).

PROPERTIES INCLUDED:

1. citizens or residents of the Philippines all
properties located not only within the
Philippines but also in foreign countries
2. non-resident alien all real and tangible
properties within the Philippines, and
intangible personal property, unless there is
reciprocity, in which case it is not taxable.
- See reciprocity rules in the estate
taxes for intangible properties (Section 104
NIRC)

Applicability of Laws Governing the Imposition of
Donors Tax
The donors tax applies to a completed gift.
The transfer is perfected from the moment
the donors knows of the acceptance by the
donee; it is completed by the delivery, either
actual or constructively, of the donated
property to the donee. The law in force at the
time of the perfection/completion of the
donation shall govern the imposition of
donors tax based on the FMV of the
property.

A GIFT THAT IS INCOMPLETE
BECAUSE OF RESERVED POWERS,
BECOMES COMPLETE WHEN
EITHER:
the donor renounces the power;
or
his right to exercise ceased
because of the happening of
some event or contingency or
the fulfillment of some condition,
other than the death of the
donor.
A. Gross Gifts
Gifts may be real or personal properties.
Personal properties may be tangible,
intangible or mixed.

ITEMS DEEMED GIFTS OR DONATIONS:
o Where property, other than a real
property
2
that has been subjected to

2
Note that in the case of real properties considered
as capital assets, the difference between the FMV
and the actual value received in transfers for less
than the adequate or full consideration shall not be
the final capital gains tax, is
transferred for less than an adequate
and full consideration in money or
moneys worth, then the amount by
which the fair market value of the
property at the time of the
execution of the Contract to Sell or
execution of the Deed of Sale which
is not preceded by a Contract to Sell
exceeded the value of the agreed
or actual consideration or selling
price shall be deemed a gift, and
shall be included in computing the
amount of gifts made during the
calendar year.
Real property considered
capital assets under the Tax
Code are exempted from this
rule (Sec. 100 in relation to
Sec. 24 (D) NIRC).

o Debt condoned or remitted

o Transfers made in trust for another
person

o Renunciation by the surviving
spouse of his/her share in the
conjugal partnership or absolute
community after the dissolution of
the marriage in favor of the heirs of
the deceased spouse or any other
person; whereas, a general
renunciation by an heir, including the
surviving spouse, of his/her share in
the hereditary estate left by the
decedent is not subject to donors
tax, unless specifically and
categorically done in favor of
identified heir/s to the exclusion or
disadvantage of the other co-heirs in
the hereditary estate. (Sec. 11, Rev.
Reg. 2-2003)

See Estate of Fidel Reyes,
CTA Case No. 6747, Jan. 16, 2006
where the repudiation by the heirs
of an inheritance was held not to be
a donation.

subject to donors tax. The rationale is that under
Section 24 (d), the FMV itself, if higher than the gross
selling price, is the base for the computation of
capital gains tax. In essence, what the seller avoids
in the payment of donors tax, it pays for the capital
gains tax.
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Valuation:
o Personal property: FMV at the time
of donation

o Real Property: FMV as determined
by the Commissioner or the FMV in
the latest schedule of values of the
provincial or city assessor, whichever
is HIGHER

OBJECT OF TAXATION:
The donors tax shall be imposed to the transfer
of property by gift, whether the transfer is in trust or
otherwise, whether the gift is direct or indirect, and
whether the property is real or personal, tangible or
intangible. The computation of donors tax is on a
cumulative basis over a period of one calendar year.

B. Computation of Tax

1. On the 1
st
donation of the year

Gross Gift xx
Less: deductions/exemptions xx___
Net gift xx
X tax rate xx___
Donors tax xx

===========
2. On subsequent donation during the year

Gross Gift xx
Less: deductions/exemptions xx___
Net gift xx
Add: prior net gift xx___
Aggregate net gifts xx
X tax rate xx___
Donors tax on aggregate gift xx
Less: prior donors tax paid xx___
Donors tax on this date xx

===========

C. Rates of Tax

1. Donee is a Stranger to the Donor

Rate: 30%
Who is a stranger: A STRANGER IS A
PERSON WHO IS NOT A:
1) Brother, sister (whether by whole
or half-blood), spouse, ancestor
and lineal descendant
2) Relative by consanguinity in the
collateral line within the 4th degree
of relationship

A legally adopted child is entitled to
all the rights and obligations provided
by law to legitimate children, and
therefore, donation to him shall not
be considered as donation made to
stranger.

Donation made between business
organizations and those made
between an individual and a
business organization shall be
considered as donation made to a
stranger.

2. Donee is NOT a Stranger to the Donor

Rate: Graduated Rates

D. EXEMPTION FROM GIFT TAX (SEC. 101)
Exemptions are not to be treated as
exclusions from the gross gifts of the donor.
They partake the nature of deductions and
are, therefore, deductible from gross gifts in
order to arrive at the taxable net gifts.

1) Made by a Resident
(a) Dowries or gifts made on account of
marriage before its celebration or within
one year thereafter by parents to each of
their legitimate, recognized natural, or
adopted children to the extent of the first
P10,000

Note: Both parents may make dowries
and gifts made on account of marriage.
Each parent shall be entitled to the
exemption above. This has the effect of
splitting the value of the gift into half for
both spouses so each spouse can claim
the exemption. However, both spouses
must file separate returns because the
husband and wife are considered as
distinct entities for purposes of donors
tax. (Sec. 12 RR-2-2003) However,
where there is failure to prove that the
donation was actually made by both
spouses, the donation is taxable as an
exclusive act of the husband, without
prejudice to the right of the wife to
question the validity of the donation
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without her consent pursuant to the
provisions of the Civl Code and the
Family Code.

(b) Gifts made to the National Government
or any entity created by any of its
agencies which is not conducted for
profit, or to any political subdivision of the
said Government

(c) Gifts in favor of an non profit educational
and/or charitable, religious, cultural or
social welfare corporation, institution
accredited non-government organization,
trust or philanthropic organization or
research institution or organization;
provided, not more than 30% shall be
used by such donee for administration
purposes.

WHAT IS A NON-PROFIT
EDUCATIONAL AND/OR CHARITABLE
CORPORATION? It is one which is
incorporated as a non-stock entity paying
no dividends, governed by trustees who
received no compensation, and devoting
all its income to the accomplishment and
promotion of the purposes enumerated in
its Articles of Incorporation

(d) Encumbrances on the property donated if
assumed by the donee in the deed of
donation

(e) Donations made to entities as exempted
under special laws.

(f) Donations to persons not strangers of not
more than P100,000 per year (Sec.
99[A])

In order to be exempt from donors tax and to claim
full deduction of the donation given to qualified donee
institutions duly accredited by the Philippine Council
for NGO Certification, Inc.(PCNC), the donor
engaged in business shall give a notice of donation
on every donation worth at least Fifty Thousand
Pesos (P50,000) to the Revenue District Office(RDO)
which has jurisdiction over his place of business
within thirty (30) days after receipt of the qualified
donee institutions duly issued Certificate of Donation,
which shall be attached to the said Notice of
Donation, stating that not more than thirty percent
(30%) of the said donation/gifts for the taxable year
shall be used by such accredited non-stock, non-
profit corporation/NGO institution (qualified-donee
institution) for administration purposes pursuant to
the provisions of Section 101(A)(3)and (B)(2) of the
Code (RR 2-2003).

Abello vs. CIR, GR No. 120721, Feb. 23, 2005

Facts: During the 1987 national elections,
petitioners, who are partners in the ACCRA law firm,
contributed P882,661.31 each to the campaign funds
of Senator Edgardo Angara, then running for the
Senate. The BIR assessed each of the petitioners for
their contributions. Petitioners questioned the
assessment, claiming that political or electoral
contributions are not considered gifts under the
NIRC, and that, therefore, they are not liable for
donors tax. The claim for exemption was denied by
the Commissioner.
On appeal, the CTA ordered the Commissioner
to desist from collecting donors taxes from the
petitioners. The CA reversed and set aside the CTA
decision, ordering the petitioners to pay donors tax,
reasoning as follows:
The NIRC, as amended, provides:
Sec. 91. Imposition of Tax.
a) There shall be levied, assessed,
collected, and paid upon the transfer by
any person, resident, or non-resident, of
the property by gift, a tax, computed as
provided in Section 92.
b) The tax shall apply whether the transfer
is in trust or otherwise, whether the gift is
direct or indirect, and whether the
property is real or personal, tangible or
intangible.
Pursuant to the above-quoted provisions of law,
the transfer of property by gift, whether the transfer is
in trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or personal,
tangible or intangible, is subject to donors or gift tax.
A gift is generally defined as a voluntary transfer of
property by one to another without any consideration
or compensation therefore.
In the instant case, the contributions are
voluntary transfers of property in the form of money
from private respondents to Sen. Angara, without
considerations therefor. Hence, they squarely fall
under the definition of donation or gift.
As correctly pointed out by the Solicitor General:
The fact that the contributions were given to be
used as campaign funds of Sen. Angara does not
affect the character of the fund transfers as donation
or gift. There was thereby no retention of control
over the disposition of the contributions. There was
simply an indication of the purpose for which they
were to be used. For as long as the contributions
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were used for the purpose for which they were
intended, Sen. Angara had complete and absolute
power to dispose of the contributions. He was fully
entitled to the economic benefits of the contributions.
Issue1: What is the definition of a transfer of
property by gift?
Held1: The NIRC does not define transfer of
property by gift. However, Article 18 of the Civil
Code, states: In matters which are governed by the
Code of Commerce and special laws, their deficiency
shall be supplied by the provisions of this Code.
Thus, reference may be made to the definition of a
donation in the Civil Code. Article 725 of said Code
defines donation as: . . . an act of liberality whereby
a person disposes gratuitously of a thing or right in
favor of another, who accepts it.
Donation has the following elements: (a) the
reduction of the patrimony of the donor; (b) the
increase in the patrimony of the donee; and, (c) the
intent to do an act of liberality or animus donandi.
The present case falls squarely within the
definition of a donation. Petitioners each gave
P882,661.31 to the campaign funds of Senator
Angara, without any material consideration. All three
elements of a donation are present. The patrimony
of the four petitioners were reduced by P882,661.31
each. Senator Angaras patrimony correspondingly
increased by P3,530,645.24. There was intent to do
an act of liberality or animus donandi was present
since each of the petitioners gave their contributions
without any consideration.

Issue2: Since animus donandi or the intention to
do an act of liberality is an essential element of a
donation, petitioners argue that it is important to look
into the intention of the giver to determine if a political
contribution is a gift.
Held2: Untenable. First of all, donative intent is a
creature of the mind. It cannot be perceived except
by the material and tangible acts which manifest its
presence. This being the case, donative intent is
presumed present when one gives a part of ones
patrimony to another without consideration. Second,
donative intent is not negated when the person
donating has other intentions, motives or purposes
which do not contradict donative intent. The Court
was not convinced that since the purpose of the
contribution was to help elect a candidate, there was
no donative intent. Petitioners contribution of money
without any material consideration evinces animus
donandi. The fact that their purpose for donating was
to aid in the election of the donee does not negate
the presence of donative intent.

Issue3: Petitioners maintain that the definition of
an electoral contribution under the Omnibus
Election Code is essential to appreciate how a
political contribution differs from a taxable gift.
Section 94(a) of the said Code defines electoral
contribution as follows: The term contribution
includes a gift, donation, subscription, loan, advance
or deposit of money or anything of value, or a
contract, promise or agreement to contribute,
whether or not legally enforceable, made for the
purpose of influencing the results of the elections but
shall not include services rendered without
compensation by individuals volunteering a portion or
all of their time in behalf of a candidate or political
party. It shall also include the use of facilities
voluntarily donated by other persons, the money
value of which can be assessed based on the rates
prevailing in the area. Since the purpose of an
electoral contribution is to influence the results of the
election, petitioners again claim that donative intent is
not present.
Held3: Petitioners attempt to place the barrier of
mutual exclusivity between donative intent and the
purpose of political contributions. The Court
reiterated that donative intent is not negated by the
presence of other intentions, motives or purposes
which do not contradict donative intent.
Petitioners would distinguish a gift from a political
donation by saying that the consideration for a gift is
the liberality of the donor, while the consideration for
a political contribution is the desire of the giver to
influence the result of an election by supporting
candidates who, in the perception of the giver, would
influence the shaping of government policies that
would promote the general welfare and economic
well-being of the electorate, including the giver
himself.
Petitioners attempt is strained. The fact that
petitioners will somehow in the future benefit from the
election of the candidate to whom they contribute, in
no way amounts to a valuable material consideration
so as to remove political contributions from the
purview of a donation. Senator Angara was under no
obligation to benefit the petitioners. The proper
performance of his duties as a legislator is his
obligation as an elected public servant of the Filipino
people and not a consideration for the political
contributions he received. In fact, as a public
servant, he may even be called to enact laws that are
contrary to the interests of his benefactors, for the
benefit of the greater good.
In fine, the purpose for which the sums of money
were given, which was to fund the campaign of
Senator Angara in his bid for a senatorial seat,
cannot be considered as a material consideration so
as to negate a donation.

2) Made by a Nonresident Alien
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(a) Gifts made to the National Government
or any entity created by any of its
agencies which is not conducted for
profit, or to any political subdivision of the
said Government

(b) Gifts in favor of an non profit educational
and/or charitable, religious, cultural or
social welfare corporation, institution
accredited non-government organization,
trust or philanthropic organization or
research institution or organization;
provided, not more than 30% shall be
used by such donee for administration
purposes

E. Net Gift

The net economic benefit from the transfer
that accrues to the donee.

Accordingly, if a mortgaged property is
transferred as a gift, but imposing upon the
donee the obligation to pay the mortgage
liability, then the net gift is measured by
deducting from the fair market value of the
property the amount of mortgage assumed.

F. Donors Tax Credit
A situation may arise when the property given
as a gift is located in a foreign country and
the donor may be subject to donors tax twice
on the same property by the Philippine
government and by the foreign government
where the property is situated.

Who are entitled to claim credits: only
resident or citizen donors (resident citizens,
non-resident citizens, and resident aliens)

Limitations on Tax Credit:
The amount of the credit in respect to the tax
paid to any country shall not exceed the
same proportion of the tax against which
such credit is taken, which the decedents net
gifts situated within such country taxable
under the NIRC bears to his entire net gift;
and

The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken, which the
decedents net gift situated outside the
Philippines taxable under the NIRC bears to
his entire net gift.

Formulas:
Limitation A:
For donors taxes paid to one foreign country
Allowable Final Tax Credit =
The lower amount between:
a. Tax actually paid to the foreign country,
and

b. the amount derived from this formula:

Net gifts, foreign countryx Phil. donors tax
Net gifts, world

For donors taxes paid to 2 or more foreign
countries the lower amount between
limitation a and limitation b.

a. Limitation A (per country):
- the lower amount between the
actual foreign taxes paid to each country and
the amount derived from the forumula below:

Net gifts, foreign country x Phils. donors tax
Net gifts, world

b. Limitation B (by total):
- the lower amount between the sum
of the actual taxes paid to ALL foreign
countries and the answer to the formula
below:
Net gifts, foreign country x Phils. donors tax
Net gifts, world

G. Special Rules on Husband and Wife

Husband and wife are considered as
separate and distinct taxpayers for purposes
of the donors tax.

However, if what was donated is a conjugal
or community property and only the husband
signed the deed of donation, there is only
one donor for donors tax purposes, without
prejudice to the right of the wife to question
the validity of the donation without her
consent pursuant to the pertinent provisions
of the Civil Code of the Philippines and the
Family Code of the Philippines.

H. Compliance Requirements (Sec. 103)

1) Who are liable to file donors tax return?
Every person, whether natural or
juridical, resident or non-resident, who
transfers or causes to transfer property
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by gift, whether in trust or otherwise,
whether the gift is direct or indirect and
whether the property is real or personal,
tangible or intangible.

2) When to file donors tax
The donors tax return shall be filed
within 30 days after the date the gift is
made

3) When to pay the tax
Pay at the time of filing (pay-as-you-file
system)

TITLE VIII REMEDIES

PART I. REMEDIES AVAILABLE TO THE
GOVERNMENT

In General
1. Compromise (Sec. 204)
2. Distraint - actual and constructive (Sec. 205-
208)
3. Levy (Sec. 207b)
4. Tax lien (Sec. 219)
5. Civil Action (Sec. 221)
6. Criminal Action (Sec. 221-222)
7. Forfeiture of Property (Sec. 224-225)
8. Suspension of business operations in
violations of VAT (Sec. 115)
9. Enforcement of administrative fine
the remedies of disraint and levy as well
as collection by civil and criminal actions
may in the discretion of the
Commissioner, be pursued singly or
independently of each other, or all of
them simultaneously.

No court shall have the authority to grant an
injunction to restrain the collection of any national
internal revenue tax, fee , or charge imposed by the
NIRC (Sec. 218)
Justification: lifeblood theory

EXCEPTION: Injunction may be issued by the CTA in
aid of its appellate jurisdiction under Sec. 11 of RA
1125, as amended by RA 9282 (when in the
opinion of the Court the collection may jeopardize
the interest of the Government and/or the taxpayer,
the Court any stage of the proceeding may suspend
the said collection and require the taxpayer either to
deposit the amount claimed or to file a surety bond
for not more than double the amount with the Court.)

Prescription
Prescriptive Periods
1) Assessment of Tax Liability
3 years from the following, whichever
comes later (Sec. 203):
1. the last day prescribed by law for
filing the return (when filed on or
before such date), or
2. the day when the return was
actually filed (when filed after the
last day prescribed).
10 years after the discovery of the
falsity, fraud or omission in case of:
1. false or fraudulent return with
intent to evade tax, or
2. failure to file a return (Sec. 222 a)

The following are covered by the general rule
(Sec. 203):
false return-filed with no intent to
evade tax
fraudulent return-filed with intent to
evade tax

within the period agreed upon, when
both the Commissioner and the
taxpayer have agreed in writing, before
the expiration of the period in Sec. 203
for the assessment of tax, to an
assessment after such time. Such
period agreed upon may be extended
by written agreement before the
expiration of such agreed upon period.
(Sec.222 b)

SUSPENSION OF PRESCRIPTIVE
PERIODS: (Sec. 223)
1) Periods suspended:
(a) periods for assessment in Sec.
203 and 222
(b) beginning of distraint or levy
(c) proceeding in court for collection

2) Grounds for suspension of
prescriptive periods: [ PLORP ]
a) Commissioner is Prohibited
from making the assessment or
beginning distraint or levy or a
proceeding in court and for 60
days thereafter
b) Taxpayer requests for
Reinvestigation which is granted
c) Taxpayer cannot be Located in
the address given in the return
filed, except if the taxpayer
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informs the Commissioner of a
change in address the
prescriptive period will not be
suspended
d) When the warrant is duly served
upon the taxpayer and no
Property could be located
e) When the taxpayer is Out of the
Phils.

Compromise
Definition

A contract whereby the parties, by
reciprocal concessions, avoid
litigation or put an end to one already
commenced. (Art. 2028, New Civil
Code)

REQUISITES:
o The taxpayer have a tax
liability
o There must be an offer (by
the taxpayer of an amount to
be paid by the taxpayer)
o There must be an
acceptance (by the
Commissioner or the
taxpayer as the case may
be) of the offer in the
settlement of the original
claim

When may taxes be compromised?
1. A reasonable doubt as to the validity of the
claim against the taxpayer exists:
The delinquent account or
disputed assessment is one
resulting from a jeopardy
assessment
3
; or
The assessment seems to be
arbitrary in nature, appearing to
be based on presumptions and
there is reason to believe that it
is lacking in legal and/or factual
basis

3
A jeopardy assessment is a tax assessment made
by an authorized Revenue Officer without the benefit
of complete or partial trial in light of the ROs belief
that assessment and collection of tax will be
jeopardized by the delay caused by the taxpayers
failure to 1) comply with audit and investigation
requirements and 2) substantiate any or all claims,
deductions or credits in his return.
2. The financial position of the taxpayer
demonstrates a clear Inability to pay the
assessed tax. (Sec. 204 A) in such case, the
taxpayer should waive the confidentiality
privilege on bank deposits under RA 1405
(Sec 6 (F)(2) NIRC).
The corporation ceased
operation or is already dissolved;
The taxpayer is suffering from
earning deficit resulting to an
impairment in the original capital
by at least 50%
The taxpayer is suffering from a
net worth deficit computed by
deducting total liabilities form
total assets, taken from the latest
audited financial statements
The taxpayer is a compensation
earner with no other sources of
income and the familys gross
monthly compensation does not
exceed (P 10,500/month if
single; P 21,000/month if
married) and that it appears that
the taxpayer possesses no other
leviable/distrainable assets,
other than his family home;
The taxpayer has been granted
by the SEC or by any competent
tribunals a moratorium or
suspension of payments to
creditors or otherwise declared
bankrupt or insolvent (Sec 3, RR
7-2001).

In general, the taxpayer's criminal liability
arising from his violation of the pertinent
provision of the Code may be settled
extrajudicially instead of the BIR
instituting against the taxpayer a criminal
action in Court.

A compromise in extra-judicial settlement
of the taxpayer's criminal liability for his
violation is consensual in character,
hence, may not be imposed on the
taxpayer without his consent. Hence, the
BIR may only suggest settlement of the
taxpayer's liability through a compromise.
(RR 012-99)

CASES NOT SUBJECT TO COMPROMISE:
1. Withholding tax cases
2. Criminal tax fraud cases
3. criminal violations already filed in court
4. Delinquent accounts with duly approved
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schedule of installment payments
5. cases where final reports of
reinvestigation or reconsideration have
been issued resulting to reduction in the
original assessment and the taxpayer is
agreeable to such decision
6. Cases which become final and executory
after final judgment of a court (Sec 2 RR
7-2001).

Power to Compromise
o Who has the Power to Compromise?
The Commissioner of Internal
Revenue with respect to criminal
and civil cases arising from
violations of the tax code (Sec 7c
and 204).

The power to compromise is vested
in the CIR. The NIRC allows the
Commissioner of Internal Revenue to
compromise the civil as well as
criminal cases arising thereunder. No
similar provision exists, vis-a-vis the
Collector or Commissioner of
Customs, in regard to violations of
the Tariff and Customs Code.
(People vs. Desiderio L-20805,
November 29, 1965).

If an offer of compromise is
rejected by the taxpayer, the
compromise penalty cannot be
enforced thru an action in court or by
distraint and levy. The CIR should
file a criminal action if he believes
that the taxpayer is criminally liable
for violation of the tax law as the only
way to enforce a penalty.
(Commissioner vs. Abad, L-19627,
June 27, 1968).

o LIMITATIONS FOR COMPROMISE OF TAX
LIABILITY: (Sec. 204A)
1. Minimum compromise rate:
a) In case of financial incapacity,
10% of basic assessed tax
b) In other cases, 40% of basic
assessed tax
2. Compromise subject to approval of
Evaluation Board (composed of
Commissioner and 4 Deputy
Commissioners):
a) when basic tax involved exceeds
P1,000,000 or
b) where the settlement offered is
less than the prescribed
minimum rates

o Extent of the Commissioners Discretion to
Compromise Criminal Violations
1. Before the complaint is filed with the
prosecutors office: the CIR has full
discretion to compromise except
those involving fraud
2. After the complaint is filled with the
prosecutors office but before the
information is filed with the court: the
CIR can still compromise provided
the prosecutor must give consent
3. After information is filed with the
court: the CIR is no longer permitted
to compromise with or without the
consent of the Prosecutor (People
vs. Magdaluyo, April 20, 1961)

This is more so when the court
has rendered a final judgment.
As a mere agent of the
Government, the Commissioner
is not authorized to accept
anything less than what is
adjucated in favor of the
government by virtue of such
final judgment, the government
has already acquired a vested
rights.

o Nature of a Compromise in Extrajudicial
Settlement of the Taxpayers Criminal
Liability for his Violation
It is consensual in character,
hence; may not be imposed on
the taxpayer without his consent.
The BIR may only suggest
settlement of his tax liability
through a compromise. The
extra-judicial settlement and the
amount of the suggested
compromise penalty should
conform with the schedule of
compromise penalties provided
under the relevant BIR
regulations or orders.

Remedy in Case the Taxpayer Refuses or
Fails to Abide the Tax Compromise
1. Enforce the Compromise
If it is a judicial compromise, it can
be enforced by mere execution. A
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judicial compromise is one where a
decision based on the compromise
agreement is rendered by the court
on request of the parties
Any other compromise is
extrajudicial and like any other
contract can only be enforced by
court action
2. Regard it as rescinded and insist upon
original demand (Art 2041, Civil Code)

Other Consideration on Compromise
Agreements
o Compromise Penalty
It is the amount of money which the
taxpayer pays to compromise tax
violations. This is paid in lieu of
criminal prosecution. A taxpayer
cannot be compelled to pay a
compromise penalty if he does not
want to pay, in which case the CIR
must institute a criminal action.

o When may taxes be abated or cancelled?
[ UJ ]
1. The tax or any portion thereof appears to be
Unjustly or excessively assessed; or
2. The administration and collection costs
involved do not Justify the collection of the
amount due (Sec. 204 B)

Abatement vs. Compromise
In Abatement, theres a cancellation of the
entire tax liability, while compromise involves
a mere reduction of the tax.

Abatement
THE COMMISSIONER MAY ABATE OR
CANCEL A TAX LIABILITY WHEN:
1. the tax or any portion thereof appears
to be unjustly or excessively assessed
(Sec 204 (b))
o when the filing of the
return/payment is made at the
wrong venue
o when the taxpayers mistake in
payment of his tax is due to
erroneous written official advice
of a revenue officer
o when the taxpayer fails to file the
return and pay the tax on time
due to substantial losses from
prolonged labor dispute, force
majure, legitimate business
reverses, provided, the
abatement shall only cover the
surcharges and the compromise
penalty and not the interest
imposed under Sec. 249
o when the assessment is brought
about or the result of taxpayers
non-compliance with the law due
to a difficult interpretation of said
law
o when the taxpayer fails to file the
return and pay the correct tax on
time due to circumstances
beyond his control, provided, the
abatement shall cover only the
surcharges and the compromise
penalty and not the interest
imposed under Sec 249
o late payment of the tax under
meritorious circumstances (Sec.
2, RR 13-2001)
2. the admission and collection costs
involved do not justify the collection of
the amount due (Sec 204 (b)
3. Abatement of penalties on assessment
confirmed by the lower court but
appealed by the taxpayer to a higher
court
4. Abatement of penalties on withholding
tax assessment under meritorious
circumstances
5. Abatement of penalties on delayed
installment payment under meritorious
circumstances
6. abatement of penalties on assessment
reduced after reinvestigation but
taxpayer is still contesting reduced
assessment
7. such other circumstances which the
Commissioner may deem analogous to
the enumerations above (Sec. 3, RR
13-2001)

Distraint (Only For Personal Property)

O Definition and Nature

It is the seizure by the government of
personal property, tangible or intangible to
enforce the payment of taxes on the goods,
chattels or effects of the taxpayer including
other personal property of whatever
character. The property may be offered in a
public sale if taxes are not voluntarily paid. It
is a summary remedy.

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The warrant is a summary procedure
forcing the taxpayer to pay. The receipt
of a warrant may or may not partake the
character of a final decision. If it is an
indication of a final decision, the taxpayer
may appeal to the CTA within 30 days
from service of the warrant.

Types of Distraint

A. Actual Distraint
There is taking of possession of the personal
property from the taxpayer by the
government. Physical transfer of possession
is not always required. This is true in case of
intangible property such as stocks and
credits.
Resorted to only when the taxpayer becomes
delinquent.
There is actual seizure of the property of the
delinquent taxpayer.
Resorted to when there is actual delinquency
in tax payment.

B. Constructive Distraint
There may be no actual delinquency.
Taxpayer is prohibited from disposing of the
property and must preserve the same

ACTUAL DISTRAINT CONSTRUCTIVE
DISTRAINT
Made only on the
property of a
delinquent taxpayer
made on the property of
any taxpayer, whether
delinquent or not
there is taking or
possession
the taxpayer is merely
prohibited from disposing of
his property
Effected by leaving a
list of distrained
property or by service
of a warrant of distraint
or garnishment
Effected by requiring the
taxpayer to sign a receipt of
the property or by the
revenue officer preparing
and leaving a list of such
property
an immediate step for
collection of taxes
not necessarily an
immediate step for
collection of taxes
Both
Are summary remedies for the collection
of taxes
Refer only to personal property
Cannot be availed of where the amount
of the tax involved is not more than P
100

REQUISITES FOR THE EXERCISE OF THE
REMEDY OF DISTRAINT:
The taxpayer must be delinquent (except in
constructive distraint) in the payment of taxes
There must be a subsequent demand for its
payment
The taxpayer must have failed to pay the tax
at the time required; and
The period within which to assess or collect
the tax has not yet prescribed.

Distraint of Personal Property (Actual Distraint)

WHO MAY EFFECT
DISTRAINT
AMOUNT
INVOLVED
Commissioner or his duly
authorized representative
In excess of
P1,000,000
Revenue District Officer (Sec.
207(a))
P1,000,000 or
less

PROPERTY SEIZED OR DISTRAINED:
a) goods, chattels, effects and other personal
property
b) including stocks and other securities, debts,
credits, bank accounts, interests in and rights
to personal property

PROCEDURE FOR THE ACTUAL DISTRAINT OR
GARNISHMENT
1) Report on the Distraint (Commencement of
distraint proceedings)
a) by the distraining officer
1. submitted within 10 days from receipt of
the warrant
2. submitted to the Revenue District Officer
and to the Revenue Regional Director
b) by the Revenue Regional Director - a
consolidated report, as may be required by
the Commissioner
The order of Distraint may be lifted by the
Commissioner or his representative (Sec.
207 A)

2) Service of Warrant of Distraint
Procedure with respect to:
(a) Goods, effects, chattels and other personal
property
1. a copy of an account of the property
distrained, signed by the officer, shall be
left either with the owner or the person
from whom the property was taken or at
the dwelling or place of business of such
person and with someone of suitable age
and discretion
2. together with a statement of the sum
demanded
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3. and also a note of the time and place of
sale
(b) Stocks and other Securities
1. serving a copy of the warrant upon the
taxpayer AND upon the president,
manager, treasurer or other responsible
officer of the issuing corporation,
company, association
(c) Debts and Credits
1. leaving a copy of the warrant with the
person owing the debts or having in his
possession such credits or his agent
the warrant shall be sufficient authority to
the person served to pay to the
Commissioner the amount of such debts
or credits
(d) Bank accounts (garnishment)
1. serve a warrant of garnishment upon the
taxpayer AND upon the president,
manager, treasurer or other responsible
officer of the bank
2. bank shall turn over to the Commissioner
so much of the bank accounts as may be
sufficient (Sec.208)

3) Posting of Notice (Sec. 209)
Notice specifying the time and place of sale
and the articles distrained.
The posting shall be made in not less than 2
public places in the city or municipality where
the distraint is made.
One of the places for posting of such notice
is the Office of the Mayor of such city or
municipality.

4) Sale of Property Distrained

CONSTRUCTIVE DISTRAINT
1) When may this occur? [ HORRID ] (Sec. 206)
a) taxpayer is Delinquent
b) taxpayer is Retiring from any business
subject to tax
c) taxpayer is Intending to leave the Phil. or to
Remove his property therefrom
d) taxpayer Hides or conceals his property
e) taxpayer performs any act tending to
Obstruct the proceedings for collection of any
tax due

2) Procedure
(a) Require the taxpayer or any person having
possession/control of the property to
1. sign a receipt covering property
distrained; and
2. obligate himself to preserve the same
intact and unaltered; and
3. not to dispose of the property in any
manner, without the express authority of
the Commissioner.
(b) Where taxpayer or person in possession
refuses to sign:
distraining officer shall prepare a list of
the property distrained
in the presence of 2 witnesses
leave a copy in the premises where the
property is located
= after which the said property shall be
deemed to have been placed under
constructive distraint (Sec. 206)

Note:
- Constructive distraint is an additional
remedy because the government can resort
to it while the remedy of actual distraint is not
yet available, meaning the assessment
process is still to be done.

LEVY (ONLY ON REAL PROPERTY)

The seizure of real property of the taxpayer and
interests or rights to such property for the
satisfaction of taxes due from the delinquent
taxpayer to enforce the payment thereof. The
property may be offered in a public sale, if after
seizure, the taxes are not voluntarily paid.

When may Levy be effected?
It is effected by issuing a warrant of levy and giving a
written notice to the taxpayer and the Register of
Deeds, after which the real property shall be sold at a
public sale to satisfy the tax obligation of the
taxpayer.
When exercised: before, simultaneously or
after the distraint of personal property
belonging to the taxpayer

Procedure of Levy on Real Property
Prepare Certificate of Levy
(a) Internal revenue officer shall prepare a duly
authenticated certificate showing:
the name of taxpayer
amounts of tax and penalty due
(b) Enforceable as a legal execution throughout
the Philippines
(c) officer shall write upon the certificate a
description of the property upon which levy is
made
written notice of levy shall be mailed or served
upon
1. the delinquent taxpayer, or
if he is absent from the Philippines, to his
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agent or manager if the business in
respect to which the liability arose, or
if there be no agent, to the occupant of
the property.
2. the Register of Deeds where the property is
located (Sec. 207[B])
Advertisement of the time and place of sale,
which shall contain
a) The amount of tax and penalties due
b) Name of the taxpayer
c) Short description of the property to be sold
the advertisement shall be made within 20 days
after the levy, and the same shall be for a period
of at least 30 days. It shall be effected by:
a) posting a notice at the main entrance of the
municipal building or the city hall and in
public and conspicuous place in the barrio or
district where the property is located
b) by publication once a week for 3 consecutive
weeks in newspaper of general circulation in
the municipality or city where the property is
located (Sec. 213)
Sale
Awarded to the highest bidder
In case the proceeds of the sale exceeds the
claim and costs of sale, the excess shall be
turned over to the owner of the property.
At any time before the day fixed for the sale,
the taxpayer may discontinue all proceedings
by paying the taxes, penalties, and interests.

DISTRAINT VS. LEVY

DISTRAINT LEVY
refers to personal
property
involves real property
forfeiture of the property
in favor of the
government is not
provided
Forfeiture authorized if (
215):
There is no bidder or
If the highest bid is
insufficient to pay
the taxes, penalties
and costs
There is no right of
redemption on the
personal property
There is a right of
redemption in case of
real property levied upon
and sold or forfeited to
the government
Both:
summary remedies for collection
cannot be availed of where amount involved
do not exceed P100

Redemption of Property Sold
Within 1 year from the date of sale, the
property may be redeemed by the delinquent
taxpayer or anyone from him, upon the
payment of the taxes, penalties and interest
thereon from the date of delinquency to the
date of sale together with interest on
purchase price at 15% per annum from the
date of sale to the date of redemption. (Sec.
214)
The taxpayer-owner shall not be deprived of
possession of said property and shall be
entitled to rents and other income until the
expiration of the period for redemption.

Forfeiture to the Government
If there is no bidder in the public sale or if the
amount of the highest bid is insufficient to
pay the taxes, penalties and costs, the real
property shall be forfeited to the Government
(Sec. 215)

Further Distraint and Levy
The remedy of distraint and levy may be
repeated if necessary until the full amount of
the tax delinquency due including all
expenses is collected from the taxpayer.
(Sec 217)
Otherwise, a clever taxpayer who is also able
to conceal most of the valuable part of his
property would escape payment of his tax
liability by sacrificing an insignificant portion
of his holdings.

TAX LIEN
It is a legal claim or charge on property, either
real or personal, established by law as a security
in default of the payment of taxes (51 AmJur
881). Generally, it attaches to the property
irrespective of ownership or transfer thereof.

o Nature- a lien in favor of the Government of the
Philippines when a person liable to pay a tax
neglects or refuses to do so upon demand
o Duration- lien exists from the time assessment is
made by the Commissioner until paid, with
interests, penalties and costs that may accrue in
addition thereto
o Extent- upon all property and rights to property
belonging to the taxpayer
o Effectivity against third persons- only when notice
of such lien is filed by the Commissioner in the
Register of Deeds in the province/city where the
property is situated (Sec. 219)

Superior to judgment claim of private
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property
Attaches not only from the time the warrant was
served BUT from the time tax was due and
demandable (from the time when the assessment
was made [Sec. 219]).

LIEN DISTRAINT
Directed against the
property subject to the
tax
Need not be directed
against the property
subject to tax
Regardless of the owner
of the property
Property seized must be
owned by the taxpayer

CIVIL ACTIONS
For tax remedy purposes, these are actions
instituted by the government to collect
internal revenue taxes. It includes filing by
the government with the probate court claims
against the deceased taxpayer.

Resorted to when the tax liability becomes final and
unappealable, or when the decision of the
Commissioner becomes final or executory. When:
A tax is assessed and the assessment becomes
final and unappealable because the taxpayer
fails to file an administrative protest with the BIR
within 30 days from the receipt of the
assessment.
When an administrative protest filed by the
taxpayer against the assessment is
o denied, in whole and in part or
o Is not acted upon within 180 days from
submission of the documents, and
o The taxpayer adversely affected by the
decision or inaction fails to file an appeal
with the CTA within 30 days from receipt
of said decision or from the lapse of the
180 day period.

Where to File
1) Court of Tax Appeals- where the principal
amount of taxes and fees exclusive of
charges and penalties claimed is one million
pesos and above
2) RTC, Mun. TC, Metro TC- where the
principal amount of taxes and fees, exclusive
of charges and penalties claimed is less than
P1,000,000.00 (Sec 7[c], RA 9282)
The approval of the CIR is essential in civil
cases (Sec. 220). However under Sec. 7 of
NIRC, the Commissioner may delegate such
power to a Regional Director.

Defenses which are Precluded by Final and
Executory Assessment
Invalidity or illegality of the assessment and
Prescription of the governments right to
assess

CRIMINAL ACTIONS
The judgment in the criminal cases shall not
only impose the penalty but shall also order
the payment of taxes subject of the criminal
case as finally decided by the Commissioner
(Sec 205)
Resorted not only for the collection of the
taxes but also for the enforcement of
statutory penalties of all sorts.

Where to file
1) Court of Tax Appeals- on criminal offenses
arising from violations of the NIRC or TCC and
other laws administered by the BIR and the BOC,
where the principal amount of taxes and fees,
exclusive of charges and penalties claimed is
P1,000,000.00 and above.
2) RTC, Mun. TC, Metro TC- on criminal offenses
arising from violations of the NIRC or TCC and
other laws administered by the BIR and the BOC,
where the principal amount of taxes and fess
exclusive of charges and penalties claimed is
less than P1,000,000.00 or where there is no
specified amount claimed (Sec 7[b], RA 9282)

Acquittal of the taxpayer in criminal case does
not exonerate him from liability to pay Taxes
Under the Penal Code the civil liability is incurred by
reason of the offender's criminal act. Stated
differently, the criminal liability gives birth to the civil
obligation such that generally, if one is not criminally
liable under the Penal Code, he cannot become
civilly liable thereunder. The situation under the
income tax law is the exact opposite. Civil liability to
pay taxes arises from the fact, for instance, that one
has engaged himself in business, and not because of
any criminal act committed by him. The criminal
liability arises upon failure of the debtor to satisfy his
civil obligation. The incongruity of the factual
premises and foundation principles of the two cases
is one of the reasons for not imposing civil indemnity
on the criminal infractor of the income tax law.
(Republic vs. Patanao).

While there can be no civil action to enforce
collection before the assessment procedures
provided in the Code have been followed, there is no
requirement for the precise computation and
assessment of the tax before there can be a criminal
prosecution under the Code. (Ungab vs. Cusi L-
41919-24, 30 May 1980, 97 SCRA 877)
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Effect of Subsequent Satisfaction of Civil Liability
The subsequent satisfaction of civil liability by
payment or prescription does not extinguish
the taxpayers criminal liability.

No Subsidiary Imprisonment
In case of insolvency on the part of the
taxpayer subsidiary imprisonment cannot be
imposed as regards the tax which he is
sentenced to pay. However, it may be
imposed in cases of failure to pay the fine
imposed. (Sec 280)

Criminal Action May be Filed during the
Pendency of an Administrative Protest in the BIR
It is not a requirement for the filing thereof
that there be a precise computation and
assessment of the tax, since what is involved
in the criminal action is not the collection of
tax but a criminal prosecution for the violation
of the NIRC. Provided, however, that there is
a prima facie showing of a willful attempt to
evade taxes.
An assessment of a deficiency is not
necessary to a criminal prosecution for willful
attempt to defeat and evade the income tax.
A crime is complete when the violator has
knowingly and willfuly filed a fraudulent return
with intent to evade and defeat the tax. The
perpetration of the crime is grounded upon
knowledge on the part of the taxpayer that he
has made an inaccurate return, and the
government's failure to discover the error and
promptly to assess has no connections with
the commission of the crime. (Ungab v. Cusi,
L-41919-24, 30 May 1980, 97 SCRA 877)
See also CIR vs. Pascor Realty, GR No.
128315, June 29, 1999, which reached the
same conclusion as in Ungab.
HOWEVER, in the case of CIR vs. CA, CTA,
& Fortune Tobacco (GR No. 119761, Aug.
29, 1996), the CIR held a contrary position

CIVIL AND CRIMINAL ACTIONS:
1. Must be brought in the name of the Government
of the Philippines
2. Conducted by legal officers of the BIR
3. In case of actions for recovery of taxes or
enforcement of a fine, penalty or forfeiture, must
be filed with the approval of the Commissioner
(Sec. 220)

FORFEITURE: (SEC. 224-225)

Divestiture of property without compensation, in
consequence of a default or offense.

forfeited property shall not be destroyed until
at least 20 days from seizure

ENFORCEMENT OF REMEDY OF FORFEITURE:
Personal Property Seizure and sale or
destruction of specific
forfeited property
Real Property Judgment of
condemnation and sale
Distille spirits, liquors,
cigars, cigarettes
manufactured, products
of tobacco and apparatus
used for their production
Upon forfeiture, may be
destroyed by order of the
CIR where the sale may
be injurious to public
health or prejudicial to
law enforcement
Other articles subject to
excise tax which have
been manufactured or
removed in violation of
the Code, dies for
printing or making fake
revenue stamps and
labels
Upon forfeiture may be
sold or destroyed at the
discretion of the CIR.
Forfeited property shall
not be destroyed until at
least 20 days from
seizure

Effect of the Forfeiture of Property
The effect is to transfer the title to the specific
thing from the owner to the government. All
the proceeds in case of a sale goes to the
coffers of the government. The provisions in
the Code which entitles the taxpayer to the
balance of the proceeds in excess of the tax
liability is entirely inapplicable to forfeited
property. It relates solely to the sale of
property distrained to pay taxes of
delinquents and the disposition of the
proceeds thereof. (US v. Surla, 20 Phil 163).
There is a great difference between a seizure
under forfeiture and a seizure to enforce a
tax lien. In the former all the proceeds
derived from the sale of the thing forfeited
are turned over to the Collector of Internal
Revenue; in the latter the residue of such
proceeds over and above what is required to
pay the tax sought to be realized, including
expenses, is returned to the owner of the
property. (Bank of Phil. Island v. Trinidad, 42
Phil 220).

ASSESSMENT AND COLLECTION

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Letter of Authority
The letter of authority is an official document that
empowers a Revenue Officer to examine and
scrutinize a taxpayers books of accounts and
other accounting records, in order to determine
the taxpayers correct internal revenue tax
liabilities

- WHO ISSUES LOA:
o CIR for those units reporting
directly under him
o Regional Directors for taxpayers
covered by his particular region. If
the CIR has already issued an LA to
investigate a particular taxpayer, the
Regional Director shall desist from
issuing another LA for the same
taxpayer.

WHERE NO LETTER OF AUTHORITY
NEEDED:
- - Cases involving civil/criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the enforcement services,
and
- - policy cases under audit by the special
teams in national offices

PRE-ASSESSMENT STAGE
STEP 1: Notice of Informal Conference
- - a written notice informing a taxpayer that
the findings of the audit conducted on his
books of accounts and accounting records
indicate that additional taxes or deficiency
assessments have to be paid
- - If, after the culmination of an audit, a
Revenue Officer recommends the imposition
of deficiency tax assessments, this
recommendation is communicated by the
Bureau to the taxpayer concerned during an
informal conference called for this purpose,
the taxpayer shall have 15 days from receipt
of the notice of informal conference to
explain his side.

STEP 2: Informal Conference
- MATTERS TAKEN UP:
- 1. Discussion on the merits of the
assessment
- 2. Attempt of taxpayer to convince the
examiner to conduct a re-investigation and or
re-examination
- 3. Evaluate if the submission of the waiver of
the SOL is necessary evaluation may
extend beyond 3 years
- 4. Taxpayer to advise the examiner if position
paper

JEOPARDY ASSESSMENT: a tax
assessment made by an authorized revenue
officer without the benefit of a complete or
partial audit if the officer believes that the
assessment and collection will be
jeopardized by the delay caused by the
taxpayers failure to:
a. comply with audit and investigation
requirements to present his books of
accounts and or pertinent records
b. substantiate all or any of the
deductions, exemptions or credits
claimed in his return.
- it is usually when statutory prescriptive
periods for the assessment or collection of
taxes are about to lapse due to taxpayers
fault.

STEP 3: Issuance of Pre-Assessment Notice
(PAN)
- - Communication issued by the Regional
Assessment Division or any other concerned
BIR office, informing a taxpayer who has
been audited of the findings of the Revenue
Officer, following the review of these findings.
The assessment shall be in writing, and
should inform the taxpayer of the law and the
facts on which the assessment is made;
otherwise, the assessment is void.
- - If the taxpayer disagrees with the findings in
the PAN, he has 15 days to file a written
reply contesting the proposed assessment.

WHEN PAN NO LONGER REQUIRED:
a. mathematical errors
b. discrepancy has been
determined between tax withheld
and amount actually remitted by
the withholding agent
c. when a taxpayer who opted to
claim a refund or tax credit of
excess creditable withholding tax
for a taxable period was
determined to have carried over
and automatically applied the
same amount claimed against
the estimated tax liabilities for
the taxable quarter or quarters of
the succeeding taxable year, or
d. when the excise tax due has not
been paid, or
e. when an article locally purchased
or imported by an exempt person
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has been sold, traded, or
transferred to a non-exempt
person

BURDEN OF PROOF:
- There is a presumption of
correctness and good faith on the
part of the CIR, thus, the burden lies
on the taxpayer. Otherwise, the
finding of the CIR will be conclusive
and he will assess the taxpayer. The
same is true even if the CIR is
wrong, if the taxpayer does not
controvert it (Cagayan Robina Sugar
Milling V. CA)
Reasons:
> lifeblood theory
> presumption of
regularity in the performance of
public functions

Note: assessments by the BIR must
have on its face the law and facts
upon which the presumption is
made.

FORMAL ASSESSMENT STAGE

Notice of Assessment is a formal letter of
demand where a declaration of deficiency taxes
is issued to a taxpayer who fails to respond to a
pre-assessment notice within the prescribed
period of time, or whose reply to the PAN was
found to be without merit. This is commonly
known as the Final Assessment Notice. An
assessment contains not only a computation of
under declaration of taxable sales, receipts or
income, OR a substantial overstatement of
deductions
- - Failure to report sales, receipts, or income
in an amount exceeding 30% of that declared
per return, and a claim of deductions
exceeding 30% of actual deductions
constitute substantial under declaration or
over declaration.
- - The state cannot be estopped by the
neglect of its agents and officers. The rule of
estoppel cannot be invoked by the taxpayer
in order to preclude the collection of taxes
that is rightfully due the government.

What Constitutes an Assessment?
There is no form for an assessment, it can be
written anywhere as long as it is signed by
the BIR. Any notice sent to the taxpayer
demanding the tax liability is an assessment.

GENERAL RULE: Taxes are self-assessing and do
not require the issuance of an assessment notice in
order to establish the tax liability of a taxpayer.
Exceptions:
1. Tax period of a taxpayer is terminated (sec.
6d, NIRC)
2. Deficiency tax liability arisinf from a tax audit
conducted by a BIR (sec 56b, NIRC)
3. Tax lien (sec. 219, NIRC)
4. Dissolving Corporation (sec. 52c, NIRC)

Requisites of a valid assessment:
1. in writing
2. must state the facts and law upon which it is
based (Sec. 228)

Assessments Prima facie correct
Tax assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has the
duty to prove otherwise. (Sy Po v. CTA, GRN L-
81446 August 18, 1988.)

Assessment Discretionary on the part of
Commissioner
Since the office of the Commissioner of Internal
Revenue is charged with the administration of
revenue laws, which is the primary responsibility of
the executive branch of the government, mandamus
may not lie against the Commissioner to compel him
to impose a tax assessment not found by him to be
due or proper for that would be tantamount to a
usurpation of executive functions. (Meralco Securities
vs. Savellano, L-36181 and L-36748, Oct. 23, 1992).

Void vs. Illegal Assessment
An assessment is illegal and void when the assessor
has no power to act at all. It is erroneous when the
assessor has the power but errs in the exercise of
that power.
It is settled in our jurisdiction that where an
assessment is illegal and void, the remedy of a
taxpayer, who has already paid the realty tax under
protest, is to sue for refund in the competent court.
On the other hand, where the assessment is merely
erroneous, his recourse is to file an appeal in the
Provincial Board of Assessment Appeals within 60
days from receipt of the assessment. (GR L-24213
March 13, 1968)

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PRESCRIPTIVE PERIODS FOR THE
ASSESSMENT AND COLLECTION OF TAXES
Rationale
The periods are designated to secure the
taxpayers against unreasonable investigation
after the lapse of the period prescribed. They
are also beneficial to the government
because tax officers will be obligated to act
promptly.

Rules on Prescription
When the tax law itself is silent on
prescription, the tax is imprescriptible
When no return is required, tax is
imprescriptible
N.B. Remedy of taxpayer is to file a return
Defense of prescription is waivable

Prescriptive Period for the Assessment of Taxes
a) General Rule:
3 years after the date the return is due or
filed, whichever is later (Sec 203)

b) Exceptions:
failure to file return: 10 years from date of
discovery of the omission to file the return
(Sec 222A)
False or fraudulent return with intention to
evade the tax: 10 years from the date of the
discovery of the falsity or fraud (Sec 222A)
Nothing in Sec 222A shall be construed to
authorize the examination and investigation
or inquiry into any tax return filed in
accordance with the provisions of any tax
amnesty law or decree
Fraud must be alleged and proved as a fact.
It must be the product of a deliberate intent to
evade taxes. It may be established by the:
1. intentional and substantial
understatement of the tax liability by
the taxpayer (substantial
underdeclaration of income; >30% of
that declared [Sec. 248])
2. intentional and substantial
overstatement of deductions of
exemptions (>30% of the actual
deductions [Sec. 248])
3. recurrence of the above
circumstances
Falsity constitutes a deviation from the truth
due to mistake, carelessness or
ignorance.
There is fraud in the following cases:
Fraud must be the product of
a deliberate intent to evade
taxes (Jalandoni V.
Republic)
Simple statement that return
filed was not fraudulent does
not disprove existence of
fraud (Tayengco V.
Collector)
Substantial under-
declarations of income for six
consecutive years
demonstrate fraudulence of
returns (Perez V. CTA)
Presence of fictitious
expenses, with no evidence
presented, proves existence
of fraud (Tan Guan V. CIR)

No Fraud in the following cases:
mere understatement in the tax
return will not necessarily imply fraud
(Jalandoni V. Republic)
Sale of real property for less than
FMV is not necessarily a false return
( CIR v.Ayala Securities)
Fraud is a question of fact and the
circumstances constituting fraud
must be alleged and proved in the
trial court (CIR v. Ayala Securities)
Farud is never imputed and the
courts never sustain findings of fraud
upon circumstances that only create
suspicion ( CIR v. Javier)
Mistakes of revenue officers on three
different occasions remove element
of fraud ( Aznar V. CTA and
Collector)

Agreement in writing to the extension of the
period to assess between the CIR and the
taxpayer before the expiration of the 3 year
period. The extension period agreed upon
can further be extended by a subsequent
written agreement made before the
expiration of the extended period previously
agreed upon. (Sec. 222(b))
Written waiver or renunciation of the
original 3 years limitation, signed by the
taxpayer.

Notice of the assessment is released, mailed or
sent to the taxpayer also within the 3 year period.
It is not required that the notice be received by
the taxpayer within the prescribed period. But the
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sending of the notice must clearly be proven.
(Basilan Estate v. CIR, 21 SCRA 17).

Amendment of Return
If the amended return is substantially
different from the original return, the
prescriptive period shall be counted from the
filing of the amended return. But the said
period shall run from the filing of the original
return, if the same is sufficiently complete to
enable the CIR to make proper assessment (
CIR v. Phoenix Assurance Co.)
Within 3 years from the date of such filing,
the same may be modified, changed or
amended, provided that no notice for audit or
investigation of such return, statement, or
declaration has in the meantime been
actually served upon the taxpayer.
Effect of filing a wrong return: the 10 year
prescriptive period for cases where returns
are not filed applies.

Prescriptive Period for the Collection of Taxes
5 years from assessment or within period for
collection agreed upon in writing before
expiration of the 5 year period (Sec 222)
10 years after discovery in case of false or
fraudulent return with intent to evade or failure to
file return, without need for an assessment (Sec
222)

Prescriptive Period where the Governments
Action is on a Bond which the Taxpayer Executes
in order to Secure the Payment of his Tax
Obligation
10 years under Art. 1144(1) of the Civil Code
and not 3 years under the NIRC. In this case
the taxpayers failed to pay the installments
due despite demand. Hence, the
Government sued on the bond which is a
separate and distinct obligation of the parties
thereto. The action is for the enforcement of
a contractual obligation. (Republic v.
Araneta, GR No. L-14142, May 30, 1961)

Grounds for Suspension of the Running of the
Statute of Limitation
1. when the CIR is prohibited from making the
assessment or beginning the distraint or levy
or a proceeding in court, and for 60 days
thereafter
2. when the taxpayer requests for a
reconsideration which is granted by the CIR
3. when the taxpayer cannot be located in the
address given by him in the return, unless he
informs the CIR of any change in his address
4. when the warrant of distraint or levy is duly
served and no property is located
5. when the taxpayer is out of the Philippines
(Sec. 223)

A Tax Return is Considered Filed for Purposes of
Starting the Running of the Period of Limitation
The return is valid- it has complied
substantially with the requirements of the law
The return is appropriate- it is a return for the
particular tax required by law.
a defective tax return is the same as if no
return was filed at all.

Prescriptive Period for the Violation of Any
Provision of the Tax Code (Sec. 281)
should be filed 5 years from the (1) day of the
commission of the violation of the law, and if
the same shall be not known, from the (2)
discovery thereof and the institution of the
judicial proceedings for its investigation and
punishment (Lim v. CA 190 SCRA 616)
1. Charge is failure or refusal to pay deficiency
income-committed only after the finality of
the assessment coupled with the taxpayers
willful refusal to pay the taxes within the
allotted period
2. Charge is filing of false or fraudulent return
with intent to evade the assessment- in
addition to the fact of discovery, there must
be a judicial proceedings for the
investigation and punishment of the tax
offense before the 5 year prescriptive period
begins to run.

WHEN TAX DEEMED COLLECTED:
1. By summary remedies when the
Government avails of the summary
method of distraint and levy
procedure
2. By judicial remedies by filing a
complaint through the proper court

Note: if the decision of the CIR on
protested assessment is appealed to the
CTA, the collection of tax is considered
begun when the Government filed its
answer to the taxpayers petition for
review. (Fernandez Hermanos v. CIR)

INFORMERS REWARD
-Persons instrumental in the discovery of
violations of the NIRC and in the discovery and
seizure of smuggled goods

REQUISITES TO QUALIFY FOR THE REWARD:
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1. Person is not an internal revenue official or
employee, public official, or employee or relative
within the 6
th
degree of consanguinity
2. Voluntarily gives definite and sworn information:
a. not yet in the possession of the BIR
b. leading to discovery of frauds
c. resulting in the discovery of revenue,
surcharges and fees, and/or, conviction of
the guilty party
d. not refer to a case already pending or
previously investigated or examined by the
CIR or his agents or the SOF or his agents

Amount of Reward
- - 10% of the revenues, surcharges or fees
recovered and/or fine/penalty imposed, or
P1,000,000, whichever is LOWER.
- - the cash rewards shall be subject to income
tax at the rate of 1-%

Note:
Status offering rewards must be
liberally construed in favor of
informers and with regard to the
purpose for which they are intended,
with mere technicality yielding to the
substantive purpose of the law
Same amount shall be given if the
offerender offered to compromise
and such offer has been accepted
and collected by the CIR
If no revenue, surcharge, or fees be
actually collected, such person is not
entitled to a reward
For discovery and seizure of
SMUGGLED GOODS -> the cash
reward is 10% of the FMV of the
smuggled and confiscated goods, or
P1,000,000, whichever is lower.

PART II. REMEDIES AVAILABLE TO THE
TAXPAYER
General Remedies

1. Administrative
A. Before payment of taxes
a) protest of assessment
Filing a petition for reconsideration or
reinvestigation within 30 days from receipt of
assessment.
Within 60 days from filing, all relevant
documents should be filed, otherwise
assessment becomes FINAL and cannot be
appealed (Sec 228)
Submission of documents within the 60 days
period is optional to the taxpayer. The
relevant supporting documents mentioned in
the law refers to such documents which the
taxpayer feels would be necessary to support
his protest and not what the Commissioner
feels should be submitted, otherwise the
taxpayer would always be at the mercy of the
BIR which may require production of such
documents which taxpayer could not
produce. (Standard Chartered Bank v. CTA,
Case No. 5696, Aug. 16, 2001)
A protest is a vital document which is a
formal declaration of resistance of the
taxpayer. It is a repository of all arguments. It
can be used in court in case of administrative
remedies have been exhausted. It is also the
formal act of the taxpayer questioning the
official actuations of the CIR. This is
equivalent to a pleading.
b) Entering into a compromise (Sec. 204)

CHARACTERISTICS OF A VALID PROTEST:
1. It is made in writing, and addressed to the
Commissioner of Internal Revenue
2. It contains information as specified in RR12-85
3. It states the facts, applicable law, rules and
regulations or jurisprudence on which his protest
is based, otherwise the protest shall be
considered void and without force and effect.
4. It is filed within the period prescribed by law.

B. After payment of taxes
a) Claim for refund or tax credit
Within 2 years from the date of payment
regardless of any supervening cause
(Sec. 228)

2. Judicial Relief
A. Civil Action
a) Appeal to the CTA
within 30 days from receipt of the decision on
the protest or from the lapse of the 180
days inaction of the Commissioner (Sec.
228)
Within the 30 day period to appeal, the
taxpayer mat file several motions for
reconsideration with the Commissioner
instead of at once filing his petition for
review before the CTA. The subsequent
motion for reconsideration tolls the
running of the prescriptive period. The
prescriptive period begins to run again
when the taxpayer receives the letter
denying its request/motion for recon. He
then only has the remainder of the
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original 30-day period to appeal to the
CTA. (Surigao Electric Co. vs. CA, 1974)
A division of the CTA shall hear the appeal.
(sec. 11, RA 1125)
b) Action to contest forfeiture of chattel
at any time before the sale or destruction
thereof, to recover the same, and upon
giving proper bond, enjoin the sale; or
after the sale and within 6 months, an action
to recover the net proceeds realized at
the sale (Sec 231)
c) Action for damages
against a revenue officer by reason of any
act done in the performance of official duty
(Sec 227)

3. Criminal Action
a) Against erring BIR officials and employees
b) Injunction
When the CTA in its opinion the
collection by the BIR may jeopardize the
taxpayer. Court may require deposit of
an amount or surety bond for not more
than double the amount
with the enactment of RA 9282, the
CTA has now jurisdiction over criminal
cases

Denial of Protest:
1. Direct Denial
The decision of the Commissioner or his duly
rep shall (a) state the facts, applicable law, rules and
regulations or jurisprudence on which his protest is
based, otherwise the protest shall be considered void
and without force and effect, in which case the same
shall not be considered a decision a disputed
assessment and (b) that the same is his final
decision. (sec. 3.1.5, RR 12-99)

2. Indirect Denial
a. Commissioner did not rule on the taxpayers MR of
the assessment it was only when respondent
received summons on the civil action for the
collection of deficiency income tax that the period to
appeal commenced to run. (CIR vs. Union Shipping
Corp.)
b. Referral by the Commissioner of request for
reinvestigation to the Solicitor General (Republic vs.
Lim Tian Teng Sons)
c. Reiterating the demand for immediate payment of
the deficiency tax due to taxpayers continued refusal
to execute waiver (CIR vs. Ayala Securities Corp.)
d. Preliminary collection letter may serve as
assessment notice (United Intl Pictures vs. CIR)

Acts of BIR Commissioner Considered as Denial
of Protest which serves as a Basis for Appeal to
CTA
filing by the BIR of a civil suit for collection of
the deficiency tax (CIR v. Union Shipping
Corp. 185 SCRA 547)
indication to the taxpayer by the
Commissioner in clear and unequivocal
language of his final denial. (CIR v. Union
Shipping Corp)
BIR demand letter reiterating his previous
demand to pay, sent to taxpayer after his
protest of the assessment (Surigao Electric
Co. Inc. v. CTA, 57 SCRA 523)
The actual issuance of a warrant of distraint
and levy in certain cases cannot be
considered as final decision on a disputed
settlement (CIR v. Union Shipping Corp)

Protest of Assessment:
1. File a request for reinvestigation or
reconsideration within 30 days from receipt of the
assessment
request for reinvestigation-
a plea for re-evaluation of an assessment
on the basis of newly discovered or
additional evidence that a taxpayer
intends to present in the reinvestigation.
Involves a question of fact or law or both.
request for reconsideration-
a plea for re-evaluation of the
assessment on the basis of existing
records without need of additional
evidence. Involves a question of fact or
law or both. (Revenue Regulation No.
12-85)

2. Within 60 days from filing of protest, all relevant
supporting documents should have been
submitted, otherwise, the assessment shall
become FINAL (cannot be appealed). (Sec. 228)

Appeal of Protest to the CTA (Judicial Relief):
(Sec. 228)
1. Grounds:
a) if the protest is denied in whole or in part
or
b) is not acted upon within 180 days from
submission of documents
2. Appellate Court: Court of Tax Appeals
3. Period to appeal:
a) within 30 days from receipt of decision
denying the protest or
b) 30 days from the lapse of 180 day period
4. Effect of failure to appeal: the decision shall be
final, executory and demandable (NOTE: See
Lascona doctrine which gives the taxpayer the
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option either to appeal to the CTA or to await the
decision of the CIR.)

If taxpayer is not satisfied with the CTA Divisions
ruling,
1. He may first file a motion for recon before the
same division of the CTA within 15 days from notice
thereof. (sec. 11, RA1125)
2. Then, a party adversely affected by a resolution of
a division of the CTA on a motion for recon may file a
petition for review with the CTA en banc. (sec. 18, RA
1125)

If the taxpayer is not satisfied with the decision of the
CTA en banc, a party adversely affected may file with
the SC a verified petition for review on certiorari
pursuant to Rule 45 of the Rules of Court. (sec. 19,
RA 1125)

REGLEMENTARY PERIODS IN INCOME TAX
IMPOSED BY LAW UPON THE TAXPAYER
(Pursuant to RR 12-99, Sec 228 and Rules of
Court)

FILING OF CLAIM FOR TAX REFUND OR TAX
CREDIT
Parties Entitled to Refund

GR: The person entitled to ask for a refund is the
taxpayer who paid the same

Exceptions:
Case Who is
entitled to
ask for
refund
Reason
Where tax
has been
shifted
The taxpayer
(even if tax
has been
actually
shifted by the
taxpayer to his
customers as
in sales tax
and even if
the tax has
been billed as
a separate
item in the
invoice) (CIR
vs. American
Rubber)
Because the sales tax
is imposed directly on
the seller as an
occupation tax for
selling Once
recovered, the seller
must hold the
refunded taxes in trust
for the individual
purchasers who
advanced payment
thereof and whose
name must appear on
his records
Where
payer is
not the
taxpayer
(e.g.
theater
owners
who paid
illegal
municipal
taxes billed
to and
collected
from
theater
goers)
Theater goers
are not
entitled to
claim refund
of such taxes
(Medina vs.
City of
Baguio)

Where
payer is
withholding
agent
Withholding
agent (CIR vs.
Procter &
Gamble)
"Taxpayer" is any
person subject to tax
imposed by this title
(income tax). The
withholding agent is
BIR makes a tax assessment
If taxpayer is not satisfied with the assessment file a
protest within 30 days from the receipt thereof
Submit supporting documents within 60 days from date of the filing
of the protest
If protest is denied, elevate the matter to the CIR within 30 days
from the receipt of the decision of the CIRs duly authorized
representative
Appeal to the Division of CTA within 30 days from the receipt of the final
decision of CIR or his duly authorized representative (taxpayer has the
option to appeal straight to CTA upon receipt of the decision of CIR
[Lascona doctrine])
Appeal to the SC within 15 days from the receipt of the CTA en banc decision
Appeal to the CTA en banc from receipt of the decision of CTA division
(after denial by CTA division of motion for reconsideration)
If the CIR or his rep fails to act on the protest within 180 days from date
of submission by taxpayer, the latter may appeal within 30 days from
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directly and
independently liable
for the correct amount
of tax that should be
withheld, and of
deficiency
assessments,
surcharges and
penalties
Where
donor's tax
was
assumed
by donee
Donee is the
proper party to
claim refund
of the donor's
tax (even if
the tax was
advanced by
the donor)

What is the nature of as a claim for refund?
It partakes of the nature of an exemption and is
strictly construed against the claimant. He burden of
proof is on the taxpayer claiming the refund that he is
entitled to the same (CIR v. Tokyo).

When are there erroneously paid, or illegally
assessed or collected taxes?
Taxes are erroneously paid when a taxpayer pays
under a mistake of fact, such as, he is not aware of
an existing exemption in his favor at the time that
payment is made. Taxes are illegally collected when
payments are made under duress.

When may taxes be refunded or credited?
1. Grounds for Tax refunded or credited:
[EPWroSUn]
a) Taxes erroneously or illegally received
b) Penalties imposed without authority
c) Any sum alleged to have been
excessively or in any manner wrongfully
collected
d) Refund the value of internal revenue
stamps when returned in good condition
by the purchaser
e) Redeem or change unused stamps
rendered unfit for use and refund their
value upon proof of destruction, in the
discretion of the Commissioner
2. Procedure for credit/refund
a) taxpayer files in writing with the
Commissioner a claim for credit or refund
b) filed within 2 yrs after the payment of the
tax or penalty
no suit or proceeding shall begun
after the expiration of the said 2 yrs
regardless of any supervening cause
that may arise after the payment
c) a return filed showing an overpayment
shall be considered a written claim for
credit or refund
3. Suit or proceeding for refund
a) a claim for refund or credit has been filed
with the Commissioner
b) the suit may be maintained whether or
not such tax/penalty/sum has been paid
under protest
c) in any case, suit must be filed within 2
yrs. from date of payment of the
tax/penalty regardless of any
supervening cause that may arise after
payment
d) the Commissioner may, even without a
written claim, refund or credit a tax,
e) where on the face of the return upon
which payment was made, payment
appears to be erroneous. (Sec. 204 C,
229)
4. Tax Credit Certificate
a) may be applied against any internal
revenue tax, EXCEPT withholding taxes
b) original copy is surrendered to the
revenue officer
c) no tax refund will be given resulting from
availment of incentives granted by law
where no actual payment was made
(Sec. 204 C)
5. Forfeiture of cash refund/tax credit
a) Forfeiture of refund in favor of the
government when a refund check or
warrant remains unclaimed or uncashed
within 5 yrs. from date of mailing or
delivery
b) Forfeiture of Tax Credit-a tax credit
certificate which remains unutilized after
5 yrs. from date of issue, shall be invalid,
UNLESS revalidated. (Sec. 230)

Commencement of 2-year period under Sec.
204(3) and 229

Case 2-year
period starts
from
Notes
If the tax sought
to be refunded
is illegally or
erroneously
collected
From date tax
was paid
(CIR v
Victorias
Milling)

If the tax is paid
in installment or
only in part
From date of
the last or
final
There is no
payment until
the whole/entire
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installment or
payment
(CIR vs.
Prieto; CIR v
Palanca; CIR
v. TMX
Sales)
tax liability is
fully paid
If the taxpayer
merely made a
deposit
From
conversion of
the deposit to
payment
(Union
Garment v
Coll)
Merely making
a deposit is not
equivalent to
payment until
the amount is
actually applied
to the specific
purpose for
which it was
deposited
If tax has been
withheld from
source (through
the withholding
tax system)
From date it
falls due at
the end of the
taxable year
(Gibbs vs
CIR) He is
deemed to
have paid his
tax liability
when the
same falls
due at the
end of the
taxable year
(Aguilar vs.
CA)
A taxpayer who
contributes to
the withholding
tax system
performs and
extinguishes
his tax
obligation for
the year
concerned. In
other words, he
is paying his
tax liabilities for
that year.
Corporate
taxpayer
At the
earliest, on
the date of
the filing of
the adjusted
final return
(ACCPA
Investment
vs. CA)
The 2-yr
period
provided in
Sec 229
should be
computed
from the time
of filing of the
Adjusted
Return or
Annual ITR
and final
payment of
It is only then
that the
corporation can
ascertain
whether it
made profits or
incurred losses
in its business
operations
income tax
(CIR vs. TMX
Sales)
If tax was not
erroneously or
illegally paid but
the taxpayer
became entitled
to refund
because of
supervening
circumstances
From the
date the
taxpayer
becomes
entitled to
refund and
not from the
date of
payment (CIR
vs. Don
Pedro Central
Azucarera)
Before the right
to refund or
credit arises,
there is
absolutely no
basis to file a
claim with the
CIR or
commence a
suit in court

Payment Under Protest is NOT Necessary under
NIRC
A suit or proceedings for tax refund may be
maintained whether or not such tax, penalty or
sum has been paid under protest or duress (Sec.
229)
Similarly, payment under protest is not necessary
in refund for local taxes. (Sec. 196 LGC),
however, under protest is necessary to claim for
(a) real property taxes (Sec. 252 LGC)
(b) custom duties (Sec 2308 TCC)

Suspension of the 2 yr Prescriptive Period
1) there is a pending litigation between the govt &
the taxpayer
2) CIR in that litigated case agreed to abide by the
decision of the SC as to the collection of taxes
relative thereto (Panay Electric Co. v. Collector, May
28, 1858)

Interest on Tax Refunds
General Rule
Government cannot be required to pay
interest on taxes refunded to the taxpayer in
the absence of a statutory provision clearly or
expressly directing or authorizing such
payment. (CIR v. Sweeney, 106 Phil 59)
Exception
1) When the CIR acted with patent arbitrariness.
Arbitrariness presupposes inexcusable or
obstinate disregard of legal provisions. (CIR v.
Victoria Milling, L-19667, Nov. 29, 1966)
2) Under Sec. 79 (c)(2) with respect to income
taxes withheld on the wages of the EEs

In case of the CIRs final denial of the claim
for refund, the 30 days period to appeal with
the CTA must be within the 2 yr preemptory
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period for instituting a judicial action

TITLE IX. COMPLIANCE REQUIREMENTS

Examination and inspection of all books and
records shall be made only once in a taxable
year, EXCEPT:
1. Fraud, irregularity or mistakes, as determined by
the Commissioner
2. The taxpayer requests reinvestigation.
3. Verification of compliance with withholding tax laws
and regulations
4. Verification of capital gains tax liabilities
5. In the exercise of the Commissioners power to
issue an access letter. (sec. 235)

Every person subject to any internal revenue tax
shall register once with the appropriate Revenue
District Officer:
- Within ten days from date of employment, or
- On or before the commencement of
business, or
- Before payment of any tax due, or
- Upon filing of a return, statement or
declaration as required under the Code (sec.
236)

Non-Retroactivity of Rulings (Sec. 246, NIRC)
Any revocation, modification or reversal of any of
the rules and regulations promulgated in accordance
with the preceding Sections or any of the rulings or
circulars promulgated by the Commissioner shall not
be given retroactive application if the revocation,
modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or
omits material facts from his return or any document
required of him by the BIR;
(b) Where the facts subsequently gathered by
the BIR are materially different from the facts on
which the ruling is based; or
(c) Where the taxpayer acted in bad faith.

TITLE X. STATUTORY OFFENSES & PENALTIES

CHAPTER I- ADDITIONS TO THE TAX
(Sec. 247-252)

Definitions
Increments to the basic tax incident due to
the taxpayers non-compliance with certain
legal requirements.
Surcharge, defined. A surcharge is a civil
penalty imposed by law as an addition to the
main tax required to be paid. It is not a
criminal penalty but a civil administrative
sanction provided primarily as safeguard for
the protection of the State revenue and to
reimburse the government for the expenses
of investigation and the loss resulting from
the taxpayers fraud. A surcharge added to
the main tax is subject to interest.

General Provisions
1) The additions to the tax or deficiency tax apply
to all taxes, fees and charges imposed in this
Code.
2) The amount so added to the tax shall be
collected at the same time, in the same
manner and as part of the tax.
3) If the withholding agent is the Government or
any of its agencies, political subdivisions or
instrumentalities, or a government-owned or -
controlled corporation, the employee
responsible for the withholding and
remittance of the tax shall be personally
liable for the additions to the tax.
4) The term person, includes an officer or
employee of a corporation who as such
officer, employee or member is under a duty
to perform the act in respect of which the
violation occurs.

Additions to Tax
1. Civil Penalties (Sec. 248)
A) Penalty: 25% of the amount due, in addition to
the tax required to be paid.
In case of the following: RIDT (lets get RID of
Tax)
a) Failure to file any Return and pay the tax
on the date prescribed; or
b) Filing a return with an Internal revenue
officer other than those with whom the
return is required to be filed, unless
otherwise authorized by the
Commissioner; or
c) Failure to pay the Deficiency tax within
the time prescribed for its payment in the
notice of assessment; or
d) Failure to pay on or before the date
prescribed for its payment:
1. the full or part of the amount of
Tax shown on any return
required to be filed;
2. the full amount of tax due for
which no return is required to be
filed.

B) Penalty: 50% of the tax or of the deficiency
tax, in case any payment has been made on the
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basis of a return before the discovery of the
falsity or fraud.
In case of: [ FiFa ]
a) Willful neglect to File the return within
the period prescribed; or
b) False or fraudulent return is willfully
made, in case any payment has
been made on the basis of such
return before the discovery of the
falsity or fraud.
Prima facie evidence of a false or
fraudulent return as determined by the
Commissioner pursuant to the rules and
regulations promulgated by the Sec. of
Finance:
1. substantial under declaration of
taxable sales, receipts or income
- failure to report sales, receipts
or income in an amount
exceeding 30% of that declared
per return
2. substantial overstatement of
deductions - claim of deductions
in an amount exceeding 30% of
actual deductions

2. Interest (Sec. 249)
A) There shall be assessed and collected an
Interest at 20% per annum on any unpaid
amount of tax
B) OR higher rate prescribed by rules and
regulations from the date prescribed for
payment until the amount is fully paid.
C) FROM the date prescribed for its payment
until the full payment.
(a) Deficiency Interest in the tax due
(b) Delinquency Interest. - In case of failure
to pay:
1. tax due on any return required to be
filed, or
2. tax due for which no return is
required, or
3. A deficiency tax, or any surcharge or
interest thereon on the due date
appearing in the notice and
demand of the Commissioner.
D) Interest shall form part of the tax.

Bureau of Internal Revenue Ruling #019-2003
Pursuant to Section 249 of the 1997 Tax Code,
the imposition of interest on delinquency is
mandatory. (Jamora vs. Meer, 74 Phil. 22) The
imposition of interest is but a just compensation
to the state for the delay in the payment of the
tax, and for the concomitant use by the taxpayer
of funds that rightfully should be in the
government's hands

Interest on Extended Payment.
1) any person who is qualified and elects to
pay the tax on installment but fails to pay
the tax, or any installment, or any part on
or before the date prescribed; or
2) where the Commissioner has authorized
an extension of time within which to pay
a tax or a deficiency tax or any part
thereof,
3) from the date of notice and demand until
it is paid.

3. Failure to File Certain Information Returns
(Sec. 250)
A) Penalty: P 1,000 for each failure
B) The aggregate amount for all such failure
shall not exceed P 25,000 during a
calendar year
C) Upon notice and demand by the
Commissioner
D) Unless it is shown that such failure is due
to reasonable cause and not to willful
neglect.
In the case of each failure to
file:
1) information return;
2) statement or list;
3) keep any record;
4) supply any information
E) required by this Code or by the
Commissioner on the date prescribed
thereof.

4. Failure of a Withholding Agent to Collect and
Remit Tax (Sec. 251)
A) Penalty: Amount of the tax not withheld, or
not accounted for and remitted plus other
penalties.
B) Liable only upon conviction
In case of the following:
1. Any person required to withhold,
account for, and remit any tax; or
2. Who willfully fails to withhold such
tax, or account for and remit such
tax; or
3. Aids or abets in any manner to
evade any such tax or the payment
thereof,

5. Failure of a Withholding Agent to Refund
Excess Withholding Tax. (Sec.252)
Penalty: Amount of refund which was not
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refunded to the employee resulting from any
excess of the amount withheld over the tax
actually due on their return plus other
penalties in case any employer/withholding
agent fails or refuses to refund excess
withholding tax.

CHAPTER II- CRIMES, OTHER OFFENSES AND
FORFEITURES

A. General Provisions (Sec. 253)
1. Any person convicted of a crime under this
Code is liable for the payment of the tax and
is subject to the penalties imposed herein.
2. Payment of the tax due after apprehension is
not a valid defense in any prosecution for
violation of any provision of this Code or in
any action for the forfeiture of untaxed
articles.
3. A person is liable in the same manner as the
principal when he:
a) willfully aids or abets in the commission
of a crime penalized herein or
b) causes the commission of any such
offense by another.
4. If the offender is not a citizen of the
Philippines:
a) he shall serve the sentence; and
b) Deported immediately after serving the
sentence without further proceedings
for deportation.
5. If he is a public officer or employee:
a) the maximum penalty prescribed for
the offense shall be imposed; and
b) he shall be dismissed from the public
service and perpetually disqualified
from holding any public office, to vote
and to participate in any election.
6. If the offender is a Certified Public
Accountant, his certificate as a Certified
Public Accountant shall, upon conviction, be
automatically revoked or cancelled.
7. In the case of associations, partnerships or
corporations, the penalty shall be imposed on
the partner, president, general manager,
branch manager, treasurer, officer-in-charge,
and employees responsible for the violation.
8. The fines to be imposed for any violation of
the provisions of this Code shall:
a) not be lower than the fines imposed
herein or
b) twice the amount of taxes, interests
and surcharges due from the taxpayer,
whichever is higher.

C. Crimes
1. Willful attempt to evade or defeat tax.
2. Failure to file return, supply correct and
accurate information, pay tax, withhold and
remit tax and refund excess taxes withheld
on compensation.
3. Penal liability of corporation.
4. Penal liability for making false entries,
records, or reports, or using falsified or fake
accountable forms.
5. Unlawful pursuit of business.
6. Illegal collection of foreign payments.
7. Unlawful possession of cigarette paper in
bobbins or rolls, etc.
8. Unlawful use of denatured alcohol.
9. Shipment or removal of liquor or tobacco
products under false name or brand or as an
imitation of any existing or otherwise known
product name or brand.
10. Unlawful possession or removal of articles
subject to excise tax without payment of the
tax.
11. Failure or refusal to issue receipts or sales or
commercial invoices, violations related to the
printing of such receipts or invoices and other
violations.
12. Offenses relating to stamps.
13. Failure to obey summons.
14. Declarations under penalties of perjury.

D. Other crimes and offenses
1. Misdeclaration or misrepresentation of
manufacturers subject to excise tax.
2. Forfeiture of property used in unlicensed
business or dies used for printing false
stamps, etc.
3. Forfeiture of goods illegally stored or
removed.

Attempt to Evade or Defeat Tax. (Sec. 254)
Penalty, upon conviction:
Fine - P30,000 or 100,000; and
Imprisonment - 2 to 4 years;
Plus other penalties
Who is liable: Any person who willfully
attempts in any manner to evade or defeat
any tax or the payment thereof.
The conviction or acquittal obtained under
this Section shall not be a bar to the filing
of a civil suit for the collection of taxes.

Failure to File Return, Supply Correct and
Accurate Information, Pay Tax, Withhold and
Remit Tax and Refund Excess Taxes Withheld on
Compensation. (Sec. 264)

Crime 1: Willful Omission of Filing and Payment
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Obligations
o Fine - P10,000 or more; and
o Imprisonment - 1 to 10 years;
o Plus other penalties
Person liable: Any person required:
1. to pay any tax,
2. make a return,
3. keep any record, or
4. supply correct and accurate
information,
Nature of Offense: Willful failure to
1. pay tax,
2. make a return,
3. keep the record,
4. supply such correct and accurate
information,
5. withhold or remit taxes withheld,
6. refund taxes withheld on
compensation, at the time or
times required.

Crime 2: Withdrawal of Returns Filed
o Fine - P10,000 - 20,000; and
o Imprisonment - 1 to 3 years;
o Plus other penalties
Person liable: Any person who:
o attempts to make it appear for any
reason that he or another has in fact
filed a return or statement, or
o actually files a return or statement
and subsequently withdraws the
same return or statement after
securing the official receiving seal or
stamp of receipt of an internal
revenue office wherein the same was
actually filed.

Penal Liability of Corporations (Sec 256)

Penalty, upon conviction: Fine - P50,000 -
100,000
o In addition to the penalties
imposed upon the responsible
corporate officers, partners, or
employees.
Who is liable: Any of the following liable
for any of the acts or omissions penalized
under this Code.
1. corporation,
2. association or
3. general co-partnerships

Penal Liability for Making False Entries. Records
or Reports, or Using Falsified or Fake
Accountable Forms (Sec. 257)

Penalty, upon conviction for each act or
omission:
Fine - P50,000 - 100,000; and
Imprisonment - 2 to 6 years;
Special Penalties
1) If Offender is a Certified
Public Accountant, his
certificate shall be
automatically revoked or
cancelled upon conviction.
2) In the case of foreigners,
conviction under this Code
shall result in his immediate
deportation after serving
sentence, without further
proceedings for deportation.

Who is liable:
Any financial officer or
Independent Certified Public
Accountant engaged to examine and
audit books of accounts of taxpayers
under Sec.232 (A)
Any person under his direction.

Offense: FVC
1) Willfully Falsifies any report
or statement bearing on any
examination or audit
2) Renders a report, including
exhibits, statements,
schedules or other forms of
accountancy work which has
not been Verified by him
personally or under his
supervision or by a member
of his firm or by a member of
his staff in accordance with
sound auditing practices, or
3) Certifies financial statements
of a business enterprise
containing an essential
misstatement of facts or
omission in respect of the
transactions, taxable income,
deduction and exemption of
his client; or

E. Prescription of Actions
All violations of any provision of the Code
shall prescribe after five (5) years

CHAPTER III OTHER PENAL PROVISIONS
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Informer's Reward to Persons Instrumental in the
Discovery of Violations of the National Internal
Revenue Code and in Discovery and Seizure of
Smuggled Goods (Sec. 282)

1. Amount of Reward
For Violations of Internal Revenue Code
o 10% of the revenues, surcharges
or fees recovered and/or fine or
penalty imposed and collected or
P1M per case, whichever is
lower. Note that where the
offender has offered to
compromise and his offer has
been accepted, the same
amount of reward shall be given
to the informer.

o No revenue, surcharges or fees
actually recovered or collected:
NO REWARD

For Discovery and Seizure of Smuggled
Goods
o 10% of the FMV of the smuggled
and confiscated goods or P1M
per case, whichever is lower.

The cash rewards of informers subject to
income tax, collected as a final withholding
tax, at the rate of 10%.

2. Persons Entitled to Reward

For Violations of Internal Revenue Code
o Any person, except an internal
revenue official or employee, or
his relative within the sixth
degree of consanguinity.

For Discovery and Seizure of Smuggled
Goods
o Persons instrumental in the
discovery and seizure of
smuggled goods EXCEPT:
all public officials,
whether incumbent or
retired, who acquired
information in the course
of the performance of
their duties during their
incumbency

3. When is a Person Instrumental

A person is instrumental in the discovery
and in collection or seizure when he
voluntarily gives definite and sworn
information
4
:
o not yet in the possession of the
Bureau of Internal Revenue,
o leading to the discovery of frauds
upon the internal revenue laws
and violations of any of the
provisions thereof,
o thereby resulting in the recovery
of revenues, surcharges and
fees and/or the conviction of the
guilty party and/or the imposition
of any fine or penalty.

PART III - LOCAL GOVERNMENT CODE OF 1991
(RA 7160-Effectivity: January 1, 1992)

Book II
Local Taxation and Fiscal Matters

Title I
LOCAL GOVERNMENT TAXATION

CHAPTER 1 - GENERAL PROVISIONS

Sources of Revenues:
1. Internal Revenue Allotment (IRA)
National internal revenue collected and not
applied as hereinabove provided or otherwise
specially disposed of by law shall accrue to the
National Treasury and shall be available for the
general purposes of the Government, with the
exception of the amounts set apart by way of
allotment as provided for under Republic Act No.
7160, otherwise known as the Local Government
Code of 1991. (Sec. 283, NIRC)
Local government units shall have a share in the
national internal revenue taxes based on the
collection of the third fiscal year preceding the current
fiscal year as follows (c) On the third year and
thereafter, 40%... (Sec. 284, RA 7160)

4
Information shall not refer to a case already
pending or previously investigated or examined by
the Commissioner or any of his deputies, agents or
examiners or the Secretary of Finance or any of his
deputies or agents.

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2. 50% share in collections for the ff: (2
nd
par., Sec.
283, NIRC)
a) VAT on sale of goods or properties under Sec.
106, NIRC
b) VAT on sale of services and use or lease or
properties under Sec. 108, NIRC
c) Percentage taxes under Sec. 116, NIRC

I. Power to Create Sources of Revenue

EACH LOCAL GOVERNMENT UNIT HAS THE
POWER TO:
1. create its own sources of revenue and
2. levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy
of local autonomy. (Sec. 129)

Such taxes, fees, and charges shall accrue
exclusively to the local government units. (NOTE: As
distinguished from internal revenue taxes which do
not accrue exclusively to the national government but
are shared to the local governments in the form of
internal revenue allotments. See Title XI, NIRC of
1997)

II. Nature of the Taxing Power of Local
Government Units (LGUs)

1. not inherent
2. exercised only if delegated to them by law or
Constitution
3. not absolute subject to limitations provided for by
law

III. Fundamental Principles

The fundamental principles governing the exercise of
the taxing and other revenue-raising powers of LGUs
are [ U(EPuJul)LIP ]:

(a) Taxation shall be Uniform in each local
government unit;
(b) Taxes, fees, charges and other impositions shall
(EPuJuL):
1) be Equitable and based as far as
practicable on the taxpayer's ability to
pay;
2) be levied and collected only for Public
purposes;
3) not be unJust, excessive, oppressive, or
confiscatory;
4) not be contrary to Law, public policy,
national economic policy, or in the
restraint of trade;
(c) The collection of local taxes, fees, charges and
other impositions shall in no case be Left to any
private person;
(d) The revenue collected shall Inure solely to the
benefit of the local government unit levying the
tax, fee, charge or other imposition unless
otherwise specifically provided herein; and,
(e) Each local government unit shall, as far as
practicable, evolve a Progressive system of
taxation. (Sec. 130)

IV. Local Taxing Authority

The power to impose a tax, fee or charge or to
generate revenue is exercised by the Sanggunian of
the LGU concerned through an appropriate
ordinance. (Sec. 132)

The local chief executive may veto any ordinance of
the sangguniang panlalawigan, panlungsod or bayan
on the ground that it is ultra vires or prejudicial to the
public welfare, stating his reasons therefore in
writing. The local chief executive, except punong
barangay, may veto any particular item of an
appropriations ordinance. (sec. 132 LGC)

He may only veto an ordinance or resolution only
once. The sanggunian may override his veto by two-
thirds vote of all its members, thereby making the
ordinance effective even without the approval of the
local chief executive concerned.

V. Power to Prescribe Penalties for Tax
Violations and Limitations Thereon
1. The Sanggunian is authorized to prescribe fines or
other penalties for violations of tax ordinances
a. in no case shall fines be less than
P1,000 nor more than P5,000
b. nor shall the imprisonment be less than
one month nor more than six months
2. Such fine or other penalty shall be imposed at the
discretion of the court.
3. The Sanggunian Barangay may prescribe a fine of
not less than P100 nor more than P1000.

Power to Adjust Local Tax Rate (Sec. 191 LGC)
- LGUs are authorized to adjust the tax
rates as prescribed herein not oftener
than once every 5 years, and in no case
shall such adjustment exceed 10% of the
rates fixed under the LGC.

Power to Grant Local Exemptions (Sec. 192 LGC)
- LGUs, may through ordinances duly
approved, grant tax exemptions,
incentives or reliefs under such terms and
conditions, as they may deem necessary.
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Tax Exemptions existing before the Effectivity of
the LGC:
Unless otherwise provided by the LGC, tax
exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical,
including GOCCs are hereby withdrawn upon the
effectivity of the LGC except the ff:
1. local water districts,
2. cooperatives duly registered under RA 6938,
non-stock and non-profit hospitals and
3. educational institutions.

Tax Exemptions not applicable to Regulatory
Fees
The power to grant tax exemptions, tax
incentives and tax reliefs shall not apply to regulatory
fees which are levied under the police power of the
LGU.

Tax Exemption Certificate:
Tax exemptions shall be conferred through
the issuance of a non-transferable tax exemption
certificate.

Guidelines for the Granting of Tax Exemptions,
Tax Incentives and Tax Reliefs (Art. 282 [B], Rules
and Regulations Implementing the LGC)

1. On the grant of tax exemptions or tax reliefs:
a. the same may be granted in cases of
natural calamities, civil disturbance, general
failure of crops, or adverse economic
conditions such as substantial decrease in
prices or agricultural or agri-based products.
b. The grant shall be through an ordinance.
c. Any exemption or relief granted to a type
or kind of business shall apply to all business
similarly situated.
d. The same shall take effect only during the
next calendar year for a period not exceeding
12 months as may be provided by the
ordinance.
e. In the case of shared revenue, the
exemption or relief shall only extend to the
LGU granting such exemption or relief.

2. On the grant of tax incentives
a. The same shall be granted only to new
investments in the locality and the ordinance
shall prescribe the terms and conditions
therefore.
b. The grant shall be for a definite period of
not exceeding 1 calendar year.
c. The grant shall be by ordinance passed
prior to the 1
st
day of January of any year.
d. Any grant to a type or kind of business
shall apply to all businesses similarly
situated.

Levying of Local Taxes (Local Tax Ordinance)
REQUISITES:
1. the procedure applicable to local govt ordinances
in general should be observed. (Sec. 187, LGC)
2. Procedural details (Secs. 54, 55, and 59 LGC):
a. necessity of quorum
b. submission for approval by the local chief
executive
c. the matter of veto and overriding the same
d. the publication and affectivity
3. Public hearings are required before any local tax
ordinance is enacted (Sec. 187, LGC)

Within 10 days after their approval, publication
in full for 3 consecutive days in a newspaper of
general circulation. In absence of such newspaper in
the province, city or municipality, then the ordinance
may be posted in at least two conspicuous and
publicly accessible places (Sec. 189 LGC)

Residual Taxing Powers of the LGU (Sec. 186
LGC)

To levy taxes, fees or charges on any base or subject
NOT
a. specifically enumerated in LGC
b. taxed under the provisions of the NIRC,
as amended
c. other applicable laws.

Conditions:
a. That the taxes, fees or charges shall not
be unjust, excessive, oppressive,
confiscatory or contrary to declared national
policy.
b. The ordinance levying such taxes, fees or
charges shall not be enacted without any
prior public hearing conducted for the
purpose.

Limitations of the Residual Power
1. Constitutional limitations on taxing power
2. Common limitations prescribed in Sec. 133 of
LGC
3. Fundamental principles governing the exercise of
the taxing power of the LGUs prescribed under Sec.
130 of the LGC
4. The ordinance levying such residual taxes shall
not be enacted without any prior public hearing
conducted for the purpose and
5. The principle of preemption.

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Principle of Preemption or Exclusion
Where the national govt elects to tax a
particular area, it impliedly withholds from the local
govt the delegated power to tax the same field. This
doctrine principally rests on the intention of
Congress.

Excluded impositions pursuant to the doctrine of
preemption)
1. Taxes which are levied under the NIRC, unless
otherwise provided by LGC of 1991;
2. Taxes, fees, etc. which are imposed under the
TCC;
3. Taxes, fees, etc. the imposition of which
contravenes existing govtal policies or which violates
the fundamental principles of taxation;
4. Taxes, fees and other charges imposed under
special law.

Local Tax Ordinance:
Requirements
1. Satisfy the requirements of procedural and
substantive due process;
2. Public hearing is required with quorum,
voting and approval and/or veto requirements
complied with;
3. Publication of ordinance within 10 days from
approval for 3 consecutive days in a
newspaper of general circulation and/or
posting in at least 2 conspicuous and publicly
accessible places.

VI. COMMON LIMITATIONS ON THE TAXING
POWERS OF LGUS

LGUs CANNOT LEVY: [ IDECTA_BEV_TRELEBI ]
or CADET-VIBE-LIBERTE'
(a) Income tax, except on banks and other financial
institutions;
(NOTE: Since income tax is already imposed
by the National Government under NIRC,
LGUs cannot impose the same even on
banks and other financial institutions. The
exception is referring to the percentage tax
on banks specified income.)
(b) Documentary stamp tax;
(c) Estate Tax, inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise
provided;
(d) Customs duties, registration fees of vessel and
wharfage on wharves, tonnage dues, and all
other kinds of customs fees, charges and dues,
except wharfage on wharves constructed and
maintained by the local government unit
concerned;
(e) Taxes, fees, and charges and other impositions
upon goods carried into or out of, or passing
through, the territorial jurisdictions of local
government units in the guise of charges for
wharfage, tolls for bridges or otherwise,
(f) Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal farmers
or fishermen;
(g) Taxes on business enterprises certified to by the
Board of Investments as pioneer or non-pioneer
for a period of 6 and 4 years, respectively from
the date of registration;
(h) Excise taxes on articles enumerated under the
national Internal Revenue Code, as amended,
and taxes, fees or charges on petroleum
products;
(i) Percentage or VAT on sales, barters or
exchanges or similar transactions on goods or
services except as otherwise provided;
(j) Taxes on the gross receipts of Transportation
contractors and persons engaged in the
transportation of passengers or freight by hire
and common carriers by air, land or water, except
as provided in the Code;
(k) Taxes on premiums paid by way of Reinsurance
or retrocession;
(l) Taxes, fees or charges for the registration of
motor vehicles and for the issuance of all kinds of
Licenses or permits for the driving thereof, except
tricycles;
(m) Taxes, fees, or other charges on Philippine
products actually Exported, except as otherwise
provided;
(n) Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and cooperatives
duly registered under R.A. 6810 and R.A. 6938
(Cooperative Code of the Philippines); and
(o) Taxes, fees or charges of any kind on the
National Government, its agencies and
Instrumentalities, and local government units.

Classification of Common Limitations
1. Taxes which are levied under the NIRC unless
otherwise provided by the LGC
*a, b, c, h, I, j
2. Taxes, fees, etc. which are imposed under the
TCC
*d
3. Taxes, fees and charges where the imposition of
which contravenes existing govtal policies or which
are violative of the fundamental principles of taxation
*e, f, g, k, m, n, s
4. Taxes, fees and charges imposed under special
laws.
* l
Provinces (see chart)
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Provinces (refers to Local Govt. Provisions on Tax)
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SPECIFIC PROVISION ON THE TAXING AND OTHER REVENUE RAISING POWERS OF THE LGU

A. PROVINCES

Type of Tax Rate Exceptions Notes
Tax on Transfer of Real Property
Ownership. The province may
impose a tax on the sale, donation,
barter, or on any other mode of
transferring ownership or title of real
property.
Not more than 50% of
the 1% of the total
consideration or of the
fair market value,
whichever is higher
Sale, transfer or other
disposition of real
property pursuant to R.A.
No. 6657 (CARL).
It shall be the duty of the seller, donor,
transferor or administrator to pay the
tax imposed within 60 days from the
date of the execution of the deed or
from the date of the decedent's death.
Tax on Business of Printing and
Publication. The province may
impose a tax on the business of
persons engaged in the printing
and/or publication of books, cards,
posters, leaflets, handbills,
certificates, receipts, pamphlets, and
others of similar nature.
Not exceeding 50% of
1% of the gross annual
receipts for the
preceding calendar
year.
Newly started business,
the tax shall not exceed
1/20 of 1% of the capital
investment. School texts
or references, prescribed
by the DECS shall be
exempt from the tax.

Franchise Tax. Notwithstanding any
exemption granted by any law or
other special law, the province may
impose a tax on businesses enjoying
a franchise.
Not exceeding 50% of
1% of the gross annual
receipts for the
preceding calendar
year, within its territorial
jurisdiction.
Newly started business,
the tax shall not exceed
1/20 of 1% of the capital
investment.

Tax on Sand, Gravel and Other
Quarry Resources. The province
may levy and collect taxes on
ordinary stones, sand, gravel, earth,
and other quarry resources extracted
from public lands or from the beds of
seas, lakes, rivers, streams, creeks,
and other public waters within its
territorial jurisdiction.
fair market value in the
locality
The permit to extract resources shall be
issued exclusively by the provincial
governor, pursuant to the ordinance of
the sangguniang panlalawigan.
Proceeds distributed as follows:
Province -30% Component City or
Municipality where the quarry
resources are extracted - 30%
Barangay where the quarry resources
are extracted - 40%.
Professional Tax. The province
may levy an annual professional tax
on each person engaged in the
exercise or practice of his profession
At such amount and
reasonable
classification as the
sangguniang
Professionals exclusively
employed in the
government shall be
exempt from the payment
To be paid to the province where
he/she practices his/her profession or
where he/she maintains principal office
in case the practice is in several places
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requiring government examination.
To be paid on or before the 31
st
day
of January. Any person first
beginning to practice a profession
after the month of January must,
however, pay the full tax before
engaging therein.
panlalawigan may
determine but shall in
no case exceed
P300.00.
of this tax. Provided, After payment he/she shall
be entitled to practice his/her
profession in any part of the Phils.
w/out being subjected to any other
national or local tax, license, or fee
for the practice of the profession.
Amusement Tax. The province may
levy an amusement tax to be
collected from the proprietors,
lessees, or operators of theaters,
cinemas, concert halls, circuses,
boxing stadia, and other places of
amusement
the gross receipts from
admission fees.
The holding of operas,
concerts, dramas, recitals,
painting and art
exhibitions, flower shows,
musical programs, literary
and oratorical
presentations, except
pop, rock, or similar
concerts shall be exempt.
Sangguniang panlalawigan may
prescribe the time, manner, terms and
conditions for the payment of tax. In
case of fraud or failure to pay, the
sangguniang panlalawigan may impose
surcharges, interest and penalties. The
proceeds from the amusement tax shall
be shared equally by the province and
the municipality where such
amusement places are located.
Annual Fixed Tax For Every Delivery
Truck or Van of Manufacturers or
Producers, Wholesalers of, Dealers,
or Retailers in, Certain Products.
The province may levy an annual
fixed tax for every truck or any
vehicle used by manufacturers,
producers, wholesalers, dealers or
retailers in the delivery of distilled
spirits, soft drinks, cigars and
cigarettes, and other products as
may be determined by the
sanggunian, to sales outlets, or
consumers, whether directly or
indirectly, within the province.
Amount not exceeding
P500.00.

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B. MUNICIPALITIES

SCOPE: Municipalities may levy taxes, fees and
charges not otherwise levied by provinces. (sec. 142,
LGC)
Tax on Business

The municipality may impose taxes on the following:
a. On manufacturers, assemblers, repackers,
processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits, and
wines or manufacturers of any article of
commerce of whatever kind or nature.
b. On wholesalers, distributors, or dealers in any
article of commerce of whatever kind or nature.
c. On exporters, and on manufacturers, millers,
producers, wholesalers, distributors, dealers or
retailers of the following essential commodities
(where the rate prescribed is only of the
regular rate [Sec. 143 par. c, LGC])

(RW CLAPS C):
1. Rice and corn;
2. Wheat or cassava flour, meat, dairy
products, locally manufactured,
processed or preserved food, sugar, salt
and other agricultural, marine, and fresh
water products, whether in their original
state or not;
3. Cooking oil and cooking gas;

4. Laundry soap, detergents, and medicine;
5. Agricultural implements, equipment and
post-harvest facilities, fertilizers,
pesticides and other farm inputs;
6. Poultry feeds and other animal feeds;
7. School supplies; and
8. Cement.
d. On retailers
e. On contractors and other independent
contractors
f. On banks and other financial institutions,
g. On peddlers engaged in the sale of any
merchandise or article of commerce
h. On any business, which the sanggunian
concerned may deem proper to tax. For
businesses subject to the excise, value-added or
percentage tax, the tax rate shall not exceed 2%
of gross sales of the preceding calendar year.

Rates of Tax within the Metropolitan Manila
Area shall not exceed by 50% the maximum
rates prescribed for a-h. (Sec. 144)

The sanggunian concerned may prescribe a
schedule of graduated tax rates but in no
case shall exceed the rates prescribed in the
LGC.

The tax is payable for every separate or
distinct establishment or place where
business is conducted. (Sec. 146)

The municipality may impose and collect
such reasonable fees and charges on
business and occupation except professional
taxes reserved for provinces. (Sec 147)

SPECIFIC:
Municipalities may im pose such reasonable
rates for the sealing and licensing of weights
and measures as shall be prescribed by the
sangguniang bayan.

Municipalities shall have the exclusive
authority to grant fishery privileges in the
municipal waters. The sanggunian may:

a) Grant fishery privileges to erect fish
corrals, oysters, or other aquatic beds or
bangus fry areas
1. Duly registered organizations and
cooperatives of marginal fishermen
shall have the preferential right;
2. The sanggunian may require a public
bidding pursuant to an ordinance for
the grant of such privilege;
3. Absent of such orgs. and coops or
their failure to exercise their
preferential right, other parties may
participate in the public bidding

b) Grant the privilege to gather, take or
catch bangus fry, prawn fry or fry of other
species and fish from the municipal
waters by nets or other fishing gears to
marginal fishermen free of rental or fee

c) Issue licenses for the operation of fishing
vessels of three (3) tons or less. (Sec.
149)

Payment of Business Taxes:
a. It shall be payable for every separate or
distinct establishment or place where the
business subject to the tax is conducted and
one line of business does not become
exempt by being conducted with some other
business for which such tax has been paid.
b. The tax on a business must be paid by the
person conducting the same.
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c. In cases where a person conducts or
operates 2 or more of the businesses
mentioned in Section 143 of LGC
a. Which are subject to the same rate
of tax, the tax shall be computed on
the combined total gross sales or
receipts of the said 2 or more related
businesses.
b. Which are subject to different rates
of tax, the gross sales or receipts of
each business shall be separately
reported for the purpose of
computing the tax due from each
business.

VII. Situs of Local Taxation
Situs According to the Cases:

Excise Tax not dependent on the domicile of the
taxpayer, but on the place in which the act is
performed or the occupation is engaged in; not upon
the location of the office, but the place where the
place is perfected. (Allied Thread Co., Inc. v. City
Mayor of Manila, L-40296)

Sales Tax it is the place of the consummation of the
sale, associated with the delivery of the things which
are the subject matter of the contract that determines
the situs of the contract for purposes of taxation, and
not merely the place of the perfection of the contract.
(Shell Co., Inc. v. Municipality of Sipocot, Camarines
Sur, 105 Phil 1263)

SITUS ACCORDING TO SECTION 150, LGC

Rule 1: For purposes of collection of the taxes under
Section 143 (tax on business), businesses
maintaining or operating branch or sales outlet
elsewhere shall record the sale in the branch or sales
outlet making the sale or transaction, and the tax
thereon shall accrue and shall be paid to the
municipality where such branch or sales outlet is
located.

Rule 2: In case there is no branch or sales outlet in
the city or municipality where the sale is made, the
sale shall be recorded in the principal office and the
taxes due shall accrue and be paid to such city or
municipality.

Rule 3: The following sales allocation for sales
recorded in the principal office of businesses with
factories, project offices, plants, and plantations:

30% of all sales recorded in the principal
office shall be taxable by the city or
municipality where the principal office is
located; and

70% of all sales recorded in the principal
office shall be taxable by the city or
municipality where the factory, project office,
plant, or plantation is located.

Rule 4: Where the plantation located at a place other
than the place where the factory is located, the above
mentioned 70% shall be divided as follows:
60% to the city or
municipality where the
factory is located; and
40% to the city or
municipality where the
plantation is located.

Rule 5: Where there are 2 or more factories, project
offices, plants, or plantations located in different
localities, the above mentioned 70% shall be prorated
among the localities where the factories, project
offices, plants, and plantations are located in
proportion to their respective volumes of production
during the period for which the tax is due. (Sec. 150)

NOTE: In case of manufacturers or producers which
engage the services of an independent contractor to
produce or manufacture some of their products,
these rules shall apply except that the factory or plant
and warehouse of the contractor utilized for the
production and storage of the manufacturers
products shall be considered as the factory or plant
and warehouse of the manufacturer. (IRR)

The city or municipality where the port of loading is
located shall not levy and collect reasonable fees
unless the exporter maintains in said city or
municipality its principal office, a branch, sales office,
or warehouse, factory, plant or plantation in which
case, the rule on the matter shall apply accordingly.
(IRR)

C. CITIES

The city may levy the taxes, fees, and charges
which the province or municipality may impose.
The tax rates that the city may levy may exceed
the maximum rates allowed for the province or
municipality by not more than 50% except the
rates of professional and amusement taxes.
(Sec. 151)

IRR:
The cities may levy and collect a percentage
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tax on ANY business not otherwise specified in the
LGC or the IRR, at rates not exceeding 3% of the
gross sales or recipts of the preceding calendar year.

D. BARANGAYS

Scope of Taxing Powers. - The barangays may levy
the following taxes and charges, which shall
exclusively accrue to them: [ TOBS ]

(a) Taxes - On stores or retailers with fixed business
establishments with gross sales of receipts of the
preceding calendar year of P50,000.00 or less for
cities and P30,000.00 or less, in the case of
municipalities, rate = not exceeding 1% on gross
sales or receipts.
(b) Service Fees or Charges for services rendered
in connection with the regulations or the use of
barangay-owned properties or service facilities
such as palay, copra, or tobacco dryers.
(c) Barangay Clearance. - No city or municipality
may issue any license or permit for any business
or activity unless a clearance is first obtained
from the barangay where such business or
activity is located or conducted.
(d) Other fees and Charges. - The barangay may
levy reasonable fees and charges: (CRB)
1. On commercial breeding of fighting
Cocks and cockpits;
2. On places of Recreation which charge
admission fees; and
3. On Billboards, signboards, neon signs,
and outdoor ads. (Sec. 152)

VIII. COMMON REVENUE-RAISING POWERS OF
LGUS (Secs. 153-155) [ SPT ]

a. Service Fees and Charges for services rendered
b. Pubic Utility Charges for the operation of public
utilities owned, operated and maintained by
LGUs within their jurisdiction.
c. Toll Fees or Charges for the use of any public
road, pier, or wharf, waterway, bridge, ferry or
telecommunication system funded and
constructed by the LGU concerned.
Exceptions:
1. officers and enlisted men of the AFP and
PNP on mission,
2. post office personnel delivering mail,
3. physically-handicapped, and disabled
citizens who are sixty-five (65) years or
older.

When public safety and welfare so requires, the
sanggunian concerned may discontinue the collection
of the tolls, and thereafter the said facility shall be
free and open for public use.

IX. Community Tax

Cities or municipalities may levy a community tax
(Sec. 156)

A. Individuals Liable to Community Tax - [ IER ]
a. Inhabitant of the Philippines
b. Eighteen years of age or over
c. Regularly employed on a wage or salary basis for
at least 30 consecutive working days during any
calendar year,
or who is engaged in business or occupation,
or who owns real property with an aggregate
assessed value of P1,000.00 or more,
or who is required by law to file an income tax
return

Rate = P5.00 and an annual additional tax of P1.00
for every P1,000.00 of income regardless of whether
from business, exercise of profession or from
property which in no case shall exceed P5,000.00.

In the case of husband and wife, the tax
imposed shall be based upon the total property
owned by them and the total gross receipts or
earnings derived by them. (Sec. 157)

B. Juridical Personalities (Sec. 158)
Corporations, no matter how created or organized,
whether domestic or resident foreign, engaged in or
doing business in the Philippines are also liable to
pay an annual community tax.

Rate = P500.00 and an annual additional tax, which
shall not exceed P10,000.00 in accordance with the
following schedule:
a. For every P5,000.00 worth of real property in the
Philippines owned by it during the preceding year
based on the valuation used for the payment of
real property tax - P2.00; and
b. For every P5,000.00 of gross receipts derived by
it from its business in the Philippines during the
preceding year - P2.00.

The dividends received by a corporation
shall, for the purpose of the additional tax, be
considered as part of the gross receipts or earnings
of said corporation.

C. Those exempt from the community tax are:
1. Diplomatic and consular representatives; and
2. Transient visitors when their stay does not
exceed 3 months.
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D. Place and time of Payment
Place of Payment - place of residence of the
individual, or in the place where the principal
office of the juridical entity is located. (Sec. 160)

Time for Payment - accrues on the 1
st
day of
Jan. of each year which shall be paid not later
than the last day of Feb. of each year

Penalties for Delinquency. - An interest of 24%
per annum from the due date until it is paid shall
be added on the amount due.

A community tax certificate may also be issued to
any person or corporation not subject to the
community tax upon payment of P1.00. (Sec.
162)

Collection of Local Revenues by the Treasurer:
(Sec. 170, LGC)
All local taxes, fees and charges shall be
collected by the provincial, city, municipal or
barangay treasurer, or their duly authorized deputies.

The provincial, city or municipal treasurer
may designate the barangay treasurer or his deputy
to collect local taxes, fees or charges. In case a bond
is required for the purpose, the provincial, city or
municipal government shall pay the premiums
thereon in addition to the premiums of the bond that
may be required under the Code.

PROVINCE OF BULACAN vs. CA (299 SCRA 442)

Facts: The Province passed an Ordinance imposing
a 10% tax on the value of stones, sand and other
quarry resources from public lands. The Provincial
Treasurer levied upon Republic Cement P2.5M for
its extraction of resources from private land.
Issue: Does the province have authority to levy the
tax?
Held: NO. Although 186 of the LGC authorizes
municipal corps. to levy taxes other than those
specifically enumerated therein, the subject
ordinance was quite specific about the fact that the
taxable articles must come from public land.
Moreover, a province may not levy excise taxes on
articles already taxed by the NIRC. The current
Tax Code already imposes a tax on ALL quarry
resources, regardless of origin, hence, the Province
may no longer impose any additional amounts from
Republic Cement.

Presentation of Community Tax Certificate on
Certain Occasions: (Sec. 163, LGC)

A. Individual
1. When an individual subject to the comm. tax
acknowledges any document before a notary
public;
2. Takes the oath of office upon election or
appointment to any position in the
government service;
3. Receives any license, certificate or permit
from any public authority;
4. Pays any tax or fee;
5. Receives any money from any public fund;
6. Transacts other official business; or
7. Receives any salary or wage from any
person or corporation.

The presentation of the CTC shall not be required in
connection with the registration of a voter.

B. Corporation
1. receives any license, certificate or permit
from any public authority;
2. pays any tax or fee;
3. receives any money from any public
fund; or
4. transacts other official business.

The city or municipal treasurer deputizes the
barangay treasurer to collect the community tax in
their respective jurisdictions. (Sec. 164, LGC)

The proceeds of the comm. tax is actually and
directly collected by the city or municipal treasurer
shall accrue entirely to the general fund of the city or
municipality concerned.

Proceeds of the comm. tax collected through the
barangay treasurers shall be apportioned as follows:
50% accrues to the general fund of the city or
municipality concerned; and
50% accrues to the barangay where the tax
is collected.

CHAPTER 3 - COLLECTION OF TAXES

Taxable Period The tax period of ALL local taxes,
fees and charges shall be the calendar year, unless
otherwise provided in the Code.

Accrual of Tax ALL local taxes, fees, and charges
accrue on first day of January of each hear, unless
otherwise provided in the Code.

Time of Payment ALL local taxes, fees, and
charges shall be paid within the first twenty (20) days
of January or of each subsequent quarter, as the
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case may be, unless otherwise provided in the Code.

Surcharges and Penalties on Unpaid Taxes, Fees,
or Charges The sanggunian may impose a
surcharge not exceeding twenty five percent (25%)
per month of the unpaid taxes, fees or charges not
paid on time and an interest at the rate not exceeding
two percent (2%) per month of the unpaid taxes, fees
or charges including surcharges, until such amount is
fully paid but in no case shall the total interest on the
unpaid amount or portion thereof exceed thirty six
(36) months.

Interest on other unpaid revenues On any other
source of revenue, LGUs are authorized to imposed
an interest of a maximum of 2% per month, maximum
of 36 months, on the amount unpaid.

Manner of Payment Such taxes, fees or charges
may be paid in quarterly installments.

COLLECTION OF LOCAL REVENUES BY THE
TREASURER (sec. 170, LGC)
All local taxes, fees and charges shall be
collected by the provincisl, city, municipal or
barangay treasurer, or their duly authorized deputies.
The provincial, city or municipal treasurer may
designate the barangay treasurer or his deputy to
collect local taxes, fees or charges. In case a bond is
required for the purpose, the provincial, city or
municipal government shall pay premiums thereon in
addition to the premiums of the bond that may be
required under the Code.

LOCAL TAX REMEDIES UNDER THE LGC

s LGU TAX REMEDIES OF THE

CIVIL REMEDIES OF THE LGU TO EFFECT
COLLECTION OF TAXES
1. Local Governments Lien Local taxes, fees,
charges and other revenues constitute a lien,
superior to all liens, charges or encumbrances in
favor of any person, enforceable by any appropriate
administrative or judicial action.

2. Civil Remedies
a. by administrative action through distraint of
personal property and by levy upon real property

i. Distraint
seizure or confiscation of assets in
sufficient quantity to satisfy the liability

accounting of distrained goods

publication of the sale of distrained properties

sale

disposition of the proceeds of the sale
by application of such proceeds to the
delinquency and expenses of sale

return of balance to the owner

NOTE: Where the proceeds of the sale are
insufficient to satisfy the claim, other properties may
be distrained.

ii. Levy
delinquency

levy of real property before,
simultaneous or after distraint
of personal property belonging
to delinquent taxpayer

local treasurer shall prepare a
duly authenticated certificate
showing the name of taxpayer
and amount of tax, fee and
penalty due to him

NOTE: Levy shall be effected by writing upon said
certificate the description of the property upon which
levy is made.

b. by judicial action
Either of these remedies or all may be pursued
concurrently or simultaneously at the discretion of the
LGU concerned.

Jurisdiction of courts over local taxation cases:
a. With the amendment brought by RA No. 9282, the
Court of Tax Appeals now has appellate jurisdiction
over local taxation cases decided by the RTC in the
exercise of its appellate or original jurisdiction.

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b. Regular judicial courts are not prohibited from
enjoining the collection of local taxes, subject to Rule
58 (preliminary injunction) of the Rules of Court.

NOTE: Unlike the NIRC, the Local Tax Code does
not contain any specific provision prohibiting courts
from enjoining the collection of local taxes. Such
statutory lapse or intent may have allowed
preliminary injunction where local taxes are involved.
But it cannot negate the procedural rules and
requirements under Rule 58 of the Rules of Court.
(Valley Trading Co. vs. CFI of Isabela, 1989)

PRESCRIPTIVE PERIODS OF ASSESSMENT
1. Local taxes, fees or charges five (5) years from
the date they became due (sec. 194, LGC)
2. When there is fraud or intent to evade the payment
of taxes, fees or charges ten (10) years from
discovery of fraud or intent to evade payment (sec.
194, LGC)

PRESCRIPTIVE PERIOD OF COLLECTION
Local taxes, fees or charges may be collected
within five years from the date of assessment by
administrative or judicial action. No such action shall
be instituted after the expiration of such period. (sec.
194, LGC)

Grounds for the Suspension of the Running of
the Prescriptive Periods
a. The treasurer is legally prevented from the
assessment or collection of the tax;
b. The taxpayer requests for a reinvestigation and
executes a waiver in writing before the expiration of
the period within which to assess or collect; and
c. The taxpayer is out of the country or otherwise
cannot be located. (sec. 194, LGC)

TAX REMEDIES OF THE TAXPAYER

REMEDIES OF THE TAXPAYER IN LOCAL
TAXATION

A. ADMINISTRATIVE

Before assessment
a. Protest against a newly enacted ordinance any
question on constitutionality or legality of tax
ordinance within 30 days from effectivity thereof to
Secretary of Justice (sec. 187, LGC) Such appeal
shall not have the effect of suspending the effectivity
of the ordinance and the accrual and payment of tax.

b. Declaratory relief whenever applicable

After Assessment
a. Protest within 60 days from receipt of
assessment (sec. 195, LGC). Payment under protest
is not necessary.

b. Payment & subsequent refund or tax credit within
2 years from payment of taxto local treasurer (sec.
196, LGC). It is to be noted that, unlike in internal
revenue taxes, the supervening cause applies in local
taxation because th period for the filing of the claims
for refund or credit of local taxes is counted not
necessarily from the date of payment but from the
date of taxpayer is entitled to a tax credit.

c. Right of redemption 1 year from the date of
sale or from the date of forfeiture (sec. 179, LGC)

B. JUDICIAL

1. Court action
- within 30 days after receipt of decision or lapse of
60 days of Secretary of Justices inaction (sec. 187,
LGC)
- within 30 days from receipt when protest of
assessment is denied (sec. 195, LGC)
- if no action is taken by the treasurer in refund cases
and the two year period is about to lapse (sec. 195,
LGC)
- if remedies available does not provide plain, speedy
and adequate remedy.

2. Action for Declaratory Relief

3. Injunction if irreparable damage would be caused
to the taxpayer and no adequate remedy is available.

PART IV - REAL PROPERTY TAXATION
(LGC of 1991)

Definition:
A direct tax on ownership of lands and
buildings or other improvements thereon payable
regardless of whether the property is used or not,
although the value may vary in accordance with such
factor. Under the LGC, it covers the administration,
appraisal, assessment, levy and collection of Real
Property Tax, i.e. tax on land and building and other
structures and improvements on it, including
machineries. (Subject to the definition given by Art.
415 of the Civil Code)

Improvement valuable addition made to a property
or amelioration in its condition amounting to more
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than a mere replacement of parts involving capital
expenditures and labor.

I. CHARACTERISTIC OF REAL PROPERTY TAX:
[LIPAD]
1. Direct tax on the ownership of real property
2. Ad Valorem tax. The value is based on the tax
base
3. Proportion - the tax is calculated on the basis of a
certain percentage of the value assessed
4. Indivisible single obligation
5. Local Tax

II. PROPERTIES LIABLE UNDER REAL
PROPERTY TAX
According to the Local Government Code, Real
Property liable for Real Prop tax are:
1. Land,
2. Buildings
3. Machinery and
4. Other improvements not otherwise exempted
under said code (Sec 232, LGC)

Note: Although the term real property has not been
expressly defined in the LGC, early decisions of the
Supreme Court in Mindanao Bus Co. v City Assessor
of Cagayan de Oro, 6 SCRA `97; Board of
Assessment Appeals v Meralco, 119 PHIL 328;
Manila Electric Co. v Board of Assessment Appeals,
10 SCRA 68) seem to suggest that Art 415 of the
Civil Code could also be controlling.
Real property includes machinery as defined by
the LGC.

Machinery embraces machines, equipment,
mechanical contrivances, instruments,
appliances or apparatus which may or may not
be attached, permanently or temporarily, to the
real property. It includes the physical facilities for
production, the installations and appurtenant
service facilities, those which are mobile, self-
powered or self-propelled, and those not
permanently attached to the real property which
are actually, directly, and exclusively used to
meet the needs of the particular industry,
business or activity and which by their very
nature and purpose are designed for, or
necessary to its manufacturing, mining, logging,
commercial, industrial or agricultural purposes.
(Sec. 199 [o], LGC)

Machinery which are of general purpose use
including but not limited to office equipment,
typewriters, telephone equipment, breakable or
easily damaged containers (glass or cartons),
microcomputers, facsimile machines, telex
machine, cash dispensers, furnitures and
fixtures, freezers, refrigerators, display cases or
racks, fruit juice or beverage automatic
dispensing machines which are not directly and
exclusively used to meet the needs of a
particular industry, business or activity shall not
be considered within the definition of
machinery. (Sec. 290 [o], IRR of RA 7160)

III. CLASSIFICATION OF LAND for purposes of
assessment - Sec 218 (a) [CARMITS]
1. Commercial
2. Agricultural
3. Residential
4. Mineral
5. Industrial
6. Timberland
7. Special
Classification of lands made by respective
sanggunian in accordance with zoning
ordinances and
It is based on actual use.

IV. SPECIAL CLASSES OF REAL PROPERTY (Sec
216, LGC) [HCS LG]
1. HOSPITALS
2. CULTURAL and SCIENTIFIC purposes
3. owned and used by LOCAL WATER
DISTRICTS
4. GOCCs rendering essential public services in
the supply and distribution of water and/or
generation or transmission of electric power.

V. PROPERTIES EXEMPT from real property tax
(Sec. 234) [CWERC]
1. Owned by the REPUBLIC of the PHILS or its
political subdivisions
except: when beneficial use has been
granted to a taxable person
2. Charitable institutions, churches,
parsonages, convents thereto, mosques,
non-profit or religious cemeteries, buildings
and improvements actually directly and
exclusively used for religious, charitable or
educational purposes.
3. Machinery and Equipment actually, directly,
and exclusively used by local Water districts
and GOCCs engaged in the supply and
distribution of water and/or generation and
transmission of electric power
4. Real property owned by duly registered
Cooperatives under RA 6938
5. Machinery & equipment for pollution control
and Environment protection

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Exemptions previously granted, (not falling within the
above enumeration) are withdrawn.

Although powerless to grant RPT exemption,
LGU in MM can exempt the 5% ad valorem
tax on idle lands.
LGUs (within and outside MM) may also
grant condonation which actually partake of
exemption.

Proof of Tax Exemption:
Every person by or for whom real property is
declared who shall claim the exemption shall file with
the provincial, city or municipal assessor within 30
days from date of declaration of real property
sufficient documentary evidence in support of such
claim (i.e. corporate charters, title of ownership,
articles of incorporation, contracts, affidavits, etc.)

Actual Use of Property as Basis for Assessment
(Sec. 217, LGC)
Real property shall be classified, valued and
assessed on the basis of actual use regardless of
where located, whoever owns it, and whoever uses it.
Unpaid realty taxes attach to the property
and is chargeable against the person who had actual
or beneficial use and possession of it regardless of
whether or not he is the owner. To impose the RPT
on the subsequent owner which was neither the
owner nor the beneficial user of the property during
the designated periods would not only be contrary to
law but also unjust. (Estate of Lim v. City of Manila,
GR No. 90639, Feb 21, 1990)

VI. FUNDAMENTAL PRINCIPLES IN Assessment
of REAL PROPERTY TAXES (Sec. 198) [CUANE]
1. CURRENT and fair market value is the basis of
appraisal
2. UNIFORMITY in classification in each local govt
unit should be observed
3. ACTUAL USE of the property should be the basis
of classification
4. appraisal, assessment, levy and collection should
NOT BE LET to any private person.
5. EQUITABLE appraisal and assessment

Types of Real Property Tax:
1. Basic real property tax
2. Special levies:
a. Special Education Fund (SEF) 1%
additional real estate tax to finance
the SEF (Sec. 236, LGC) within
MM area only
b. Additional Ad Valorem on the Lands
not exceeding 5% of the assessed
value of the property (Sec. 236,
LGC)
c. For Public Works on lands
specially benefited by public works,
projects or improvements funded by
the LGU
May be imposed even by
municipalities outside MM
provided:
Special levy shall not exceed
60% of the actual cost of such
projects and improvements,
including the costs of acquiring
land and such other real property
in connection therewith not apply
to lands exempt from basic real
property tax and the remainder
of the land have been donated to
the local government unit
concerned for the construction of
said projects. (Sec. 240, LGC)

What Are Considered as Idle Lands: (Sec. 237,
LGC)
1. Agricultural lands More than 1 hectare if
more than of which remain uncultivated or
unimproved by the owner of the property or
person having legal interest therein.
Not Idle Lands:
Agricultural lands planted to
permanent or perennial crops with at
least 50 trees to a hectare
Lands actually used for grazing
purposes shall likewise not be
considered idle lands

2. Non-Agricultural Lands More than 1,000
sq. m. in area if more than of which remain
uncultivated or unimproved by the owner of
the property or person having legal interest
therein.

Idle Lands Exempt From Tax: (Sec. 238, LGC)
By reason of:
1. force majeure
2. civil disturbance
3. natural calamity
4. or any cause which physically or legally
prevents the owner of the property or person
having legal interest therein from improving
the land

WHO ADMINISTER REAL PROPERTY TAX
1. Provinces
2. Cities
3. Municipalities within Metropolitan Manila
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STEP 1 - DECLARATION OF REAL PROPERTY

1. Declared by Owner or Administrator (Sec 202-
203)

When: once every 3 years during the period
from January 1 to June 30
What: file a sworn declaration with the
assessor with description of the property

IF newly acquired property -
a. files with assessor within 60 DAYS from
date of transfer a
b. SWORN statement containing FMV and
description of property
IF improvement on real property
a. file w/in 60 DAYS upon completion or
occupation (whichever is earlier)
b. SWORN statement containing FMV and
description of property

2. Declared by Provincial / City / Municipal
Assessor (Sec 204)

WHEN only when the person under Sec 202
refuses or fails to make the Declaration within
the prescribed time
No oath by assessor is required

NOTE: IF FILING FOR EXEMPTION (Sec
206)
WHAT person claiming exemptions must file with
assessor sufficient documentary evidence to support
claim
WHEN within 30 days from the date of
DECLARATION of property

IF required evidence is not submitted
within 30 days, the property will be listed
as taxable in the roll
IF proven to be tax-exempt, property will
be dropped from the roll

NOTE: IF PROPERTY DECLARED FOR
THE FIRST TIME (Sec. 222)
If declared for 1st time, real property shall be
assessed for back taxes
a) for not more than 10 yrs prior to the
date of initial assessment
b) taxes shall be computed on the basis
of applicable schedule of values in
force during the corresponding
periods

STEP 2: LISTING OF REAL PROPERTY IN THE
ASSESSMENTROLLS
(Sec 205, 207)

Listing of all Real Property whether taxable
or exempt within the jurisdiction of LGU
o Undivided real property in the
name of the estate or heirs or
devisees
o Corporation, partnership and
association same as individuals
o Owned by the Republic of the
Philippines, its instrumentalities,
political subdivisions, beneficial
use is transferred to a taxable
person in the name of the
possessor

All declarations shall be kept and filed under
a uniform classification system to be
established by the provincial, city or
municipal assessor.

STEP 3: APPRAISAL AND VALUATION OF REAL
PROPERTY
(Sec 212-214, 224-225)

How to determine Fair Market Value:
FOR LAND
1. Assessor of the province/city or municipality may
summon the owners of the properties to be affected
and may take depositions concerning the property, its
ownership amount, nature and value. (sec. 213,
LGC)
2. Assessor prepares a schedule of FMV for different
classes of properties
3. Sanggunian enacts an ordinance
4. The schedule of FMV is published in a newspaper
of general circulation in the province city or
municipality concerned or in the absence thereof
shall be posted in the provincial capitol city or
municipal hall places therein (sec.212, LGC)

FOR MACHINERY
1. For Brand New machinery : FMV is acquisition
cost
2. In all other cases:
FMV = Remaining eco. life X Replacement cost
Estimated eco. life

STEP 4: DETERMINE ASSESSED VALUE (Sec
218)
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Procedure
1. take the schedule of FMV
2. Assessed value = FMV X Assessment level
3. Tax = Assessed value X Tax rate

STEP 5: PAYMENT AND COLLECTION OF TAX

WHEN January 1 of every year (Sec 246)
tax shall constitute as superior lien (Sec
246)
HOW a. basic real prop tax in 4 equal installments
(Mar 31,Jun 30,Sep 30, Dec 31)
b. special levy - governed by ordinance

NOTE: INTEREST for LATE PAYMENT
- two percent (2%) each month on unpaid amt.
until the delinquent amt is paid.
- provided in no case shall the total interest
exceed thirty-six (36) months

NOTE: FOR ADVANCE and PROMPT
PAYMENT
a) advance payment - discount not exceeding
20% of annual tax (Sec 251, LGC)
b) prompt payment - discount not exceeding 10%
of annual tax due(Art 342 IRR)

Collection of Tax (Sec.247, LGC)
The collection of the real property tax with interest
thereon and related expenses and the enforcement if
the remedies provided by the LGC or any applicable
laws shall be the responsibility of the city or municipal
treasurer concerned.

The city or municipal treasurer my deputize the
barangay treasurer to collect all taxes on real
property located in the barangay provided the
barangay treasurer is properly bonded.

WHO COLLECTS The provincial, city, municipal or
barangay treasurer

PERIOD WITHIN WHICH TO COLLECT (Sec 270):
within five (5) yrs from the date they become due
within ten (10) yrs. from discovery of fraud, in case
there is fraud or intent to evade

Period of prescription shall be SUSPENDED
when: (Sec 270, LGC)
1. local treasurer is legally prevented to collect tax
2. the owner of prop requests for reinvestigation
and writes a waiver before expiration of period to
collect
3. the owner of the prop is out of the country or
cannot be located

REMEDIES IN REAL PROPERTY TAXATION

Tax Remedies of the Local Government to Effect
Collection of Taxes

A. Administrative

1. Lien (Sec. 257, LGC) superior to all liens,
charges or encumbrances and is enforceable
by administrative or judicial action. It is
extinguished only upon payment of tax and
other expenses.
2. Levy (Sec. 258, LGC)

Issuance of Warrant by the LGU treasurer
(on or before or simultaneously with the
institution of civil action for collection of
delinquent tax)

Advertise Sale or Auction (within 30 days
after service of warrant) by posting and
publication

Sale

Report of Sale (within 30 days after sale)
Preparation of Certificate of Sale (containing
the name of the purchaser, description of the
property, amount of delinquent tax and its
interests, expenses)

Redemption (within 1 year from date of sale)

Issuance of Final Deed to Purchaser (upon
the delinquent taxpayers failure to redeem)

The proceeds of the sale in excess of the
delinquent tax, the interest due thereon and
the expenses of sale shall be remitted to the
owner of real property or person having legal
interest.

3. Distraint (Sec. 254, LGC) - with notice of
delinquency posted and published. Personal
property may be distrained to effect payment.

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4. Purchase of property by local treasurer
for want of bidder (Sec. 263, LGC) in
case there is no bidder for the real property
advertised or if the highest bid for an amount
insufficient to pay the RPT and other costs.

B. Judicial

Civil Action (Sec. 266, 270, LGC) filed by the local
treasurer within 5 or 10 years as provided in Sec. 270
of the LGC.

Prescriptive Periods for the Collection of RPT

1. Basic RPT and any other tax levied under the
title on RPT five years from the date they
became due. (Sec. 270, LGC)
2. When there is fraud or intent to evade the
payment of taxes ten years from discovery
of the fraud or intent to evade payment.

GROUNDS FOR THE SUSPENSION OF THE
RUNNING OF THE PRESCRIPTIVE PERIODS:
1. The treasurer is legally prevented from the
assessment or collection of the tax;
2. The taxpayer requests for a reinvestigation
expiration of the executes a waiver in writing
before the expiration of the period within
which to assess or collect; and
3. The taxpayer is out of the country or
otherwise cannot be located (Sec.270, LGC)

Tax Remedies of the Taxpayer

A. Administrative

1. Protest

Pay the Tax under Protest

File Written Protest with Local Treasurer
(within 30 days from payment of tax)

Treasurer Decides
(within 60 days from receipt of protest)

Approved Denied

Apply for Tax Refund Appeal with the LBAA
or Tax Credit (in case of denial of protest
or inaction of the treasurer
after the lapse of 60 days)

Appeal with the CBAA
(w/in 30 days from receipt of
adverse decision by LBAA)

Appeal to CTA (within 30 days
from receipt of adverse
decision rendered by CBAA)

2. Claim for Tax Refund or Credit (Sec. 253,
LGC)
a. The taxpayer may file a written claim for
refund or credit with the provincial or city
treasurer within 2 years from the date the
taxpayer is entitled to such reduction or
adjustment.
b. Provincial or city treasurer should decide the
claim within 60 days from receipt of the
claim.
c. In case of denial of refund or credit, appeal to
LBAA within 30 days as in protest case.

3. Redemption of Real Property (Sec. 261,
LGC)
a. Within 1 year from the date of sale, the
owner of the delinquent real property, or
person having legal interest or his
representative, shall have the right to redeem
the property upon payment to the local
treasurer the ff:
a. Amount of delinquent tax
b. Interest thereon
c. Expenses of sale from date of
delinquency to date of the sale
d. Interest of not more than 2% per
month on the purchase price from
date of sale to date of redemption

b. A certificate of redemption shall be issued,
and the certificate of sale issued to the
purchaser shall be invalidated.

Remedy against the Assessment/Appeal
1
st
: within 60 days from notice of assessment of
provincial, city or municipal assessor to
LBAA
(Sec. 226, LGC)
2
nd
: within 30 days from receipt of decision of
LBAA to CBAA (sec. 230, LGC)
3
rd
CBAA to CTA en banc
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4
th
CTA en banc to SC.

Appeals in Real Property Taxation
Provincial, City or Municipal Assessor

Within 60 days
Owner/Person with legal interest
must file:
1. Written Petition under Oath
2. With Supporting Documents

Local Board of Assessment Appeals
(LBAA should decide within 120 days from receipt of
petition)

Within 30 days from receipt of
decision from LBAA,
dissatisfied party may appeal to CBAA

Central Board of Assessment Appeals

Party adversely affected by
LBAAs decision may appeal
with CTA within 30 days
from receipt of decision.

CTA (En BANC)

Within 15 days

Supreme Court

Condonation Real Property Taxes

1. By Sanggunian

RPT may be condoned wholly or partially in a
given LGU when:
a. There is general failure of crops;
b. There is substantial decrease in the
price of agricultural or agri-based
products; or
c. There is calamity.

2. By the President of the Philippines
When public interest so requires

B. Judicial

1. Court Action appeal of CBAAs decision to CTA
en banc;

2. Suit assailing validity of tax;

3. Recovery of refund of taxes paid (Sec. 64, PD
464)

4. Suit to declare invalidity of tax due to
irregularity in assessment and collection;

5. Suit assailing the validity of tax sale (Sec. 83,
PD 464 and Sec. 267, LGC)

VALUE-ADDED TAX

Nature and Characteristics
Value added is the value that a producer adds to
his raw materials or purchases (other than labor)
before selling the new or improved product or
service
VAT is an indirect tax levied on goods and
services; not on persons, and ultimately paid by
consumers in the form of higher prices
VAT is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties
and services in the Philippines and on
importation of goods into the Philippines.
Seller is the one statutorily liable for the payment
of the tax but the amount of the tax may be
shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services.
In the case of importation, the importer is the one
liable for the VAT
Apply to existing contracts of sale or lease of
goods, properties or services at the time of
effectivity of RA No. 7716 (9337).

Person refers to any individual, trust, estate,
partnership, corporation, joint venture, cooperative or
association

Taxable person refers to any person liable for
payment of VAT, whether registered or registrable in
accordance with Sec. 236 of the Tax Code

VAT-registered person refers to any person who is
registered as a VAT taxpayer under Sec. 236 of the
Tax Code. His status shall continue until the
cancellation of such registration.

Taxable sale refers to the sale, barter, exchange
and/or lease of goods or properties, including
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transactions deemed sale and the performance of
service for a consideration, whether in cash or in kind

Definition of in the course of trade or business
(Rule of Regularity)
o The regular conduct or pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person
engaged therein is a non-stock, nonprofit
private organization or government entity
o Non-resident persons who perform services
in the Philippines are deemed to be making
sales in the course of trade or business, even
if the performance of services is not regular

Incidental to the principal business
o Something necessary, appertaining to, or
depending upon another which is termed the
principal, something incident to the main
purpose.

Exceptions to the rule of regularity
1. Any business where the gross sales or receipt do
not exceed P100,000 during any 12-month period
shall be considered principally for subsistence or
livelihood and not in the course of trade or
business
2. Services rendered in the Philippines by non-
resident foreign persons shall be considered as
being rendered in the course of trade or
business.

CIR v.Magsaysay Lines, Inc. et al Gr. No. 146984
(2006)
FACTS:
Pursuant to a government program of
privatization, NDC decided to sell to private
enterprise all of its shares in its wholly-owned
subsidiary the National Marine Corporation(NMC).
The NDC sold in one lot its NMC shares and five of
its ships.
ISSUE:
Whether or not the sale of the five vessels is subject
to VAT?
HELD:
The court ruled that the sale was not in the ordinary
course of the trade or business of NDC and is
sufficient to declare the sale as outside the coverage
of VAT.
DOCTRINE:
Any sale, barter or exchange of goods or services
not in the course of trade or business is not
subject to VAT.

Gross Selling Price: the total amount of money or
its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of sale,
barter or exchange of the goods or properties,
excluding the VAT. The excise tax, if any, of such
goods or properties shall form part of the gross
selling price.

Zero-rated transactions
1. Export sales
The sale and actual shipment of goods
from the Philippines to a foreign country
Section 105. Persons liable
1. Any person who, in the course of trade or
business
o Sells, barters, or exchanges goods or
properties (seller or transferor)
o Leases goods or properties (lessor)
o Renders services (service provider)
2. imports goods (importer)
Sec 106. VAT on Sale of Goods or
Properties
Goods: all tangible and intangible objects
which are capable of pecuniary
estimation.
Includes:
o Real properties held primarily for
sale to customers or held for lease
in the ordinary course of business
o the right or the privilege to use
patent, copyright, design or model,
plan, secret formula or process,
goodwill, trademark, trade brand
or other like property or right
o the right or the privilege to use in
the Philippines of any industrial,
commercial or scientific equipment
o the right or the privilege to use
motion picture films, film tapes
and disc
o radio, television, satellite
transmission and cable television
time
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i. Irrespective of any shipping
arrangement
ii. Paid for in acceptable foreign
currency or its equivalent in
goods or services
iii. Accounted for in accordance with
the rules and regulations of the
BSP
Sale of raw materials or packaging
materials by a VAT-registered entity to a
nonresident buyer
i. for delivery to a resident local
export-oriented enterprise
ii. Used in the manufacturing,
processing, packing, repacking
in the Philippines of the said
buyers goods
iii. Paid for in acceptable foreign
currency
iv. Accounted for in accordance with
the rules and regulations of the
BSP
Sale of raw materials or packaging
materials to export-oriented enterprise
whose export sales exceed 70% of total
annual production
Sale of gold to the BSP
Those considered export sales under the
Omnibus Investment Code of 1987
The sale of goods, supplies, equipment
and fuel to persons engaged in
international shipping or international air
transport operations
i. Limited to goods, supplies,
equipment and fuel pertaining to
or attributable to the transport of
goods and passengers from a
port in the Philippines directly to
a foreign port without docking or
stopping at any other ports in the
Philippines

Export sales
Zero-rated if made by VAT-registered
persons
Exempt sales if made by person not VAT-
registered
Origin Principle: only national taxpayers
would be exposed to the tax, without
distinguishing between transactions
consumed locally or abroad. Export taxable,
imports exempt. Situs: country of production
Destination Principle: VAT is imposed in
the country in which the products or services
are actually consumed or used. Exports
exempt, imports taxable. Situs: country of
consumption
Cross boarder doctrine: No VAT shall be
imposed to form part of the cost of goods
sold destined for consumption outside of the
territorial boarder of the taxing authority.
Actual shipment of the goods from the
Philippines to a foreign country is a
precondition of an export sale following the
destination principle being adhered to by our
VAT system

CIR v. American Express International, Inc. GR.
No. 152609 (2006)
The Supreme Court voided the Cross boarder
doctrine.
The court mentioned that the law neither makes a
qualification nor adds a condition in determining the
tax situs of a zero-rated service. Under this criterion,
the place where the service is rendered determines
the jurisdiction to impose the VAT. Performed in the
Philippines, such service is necessarily subject to its
jurisdiction, for the State necessarily has to have a
substantial connection to it, in order to enforce a
zero rate. The place of payment is immaterial;
much less is the place where the output of the
service will be further or ultimately used.

Sales to export-oriented enterprise
Seller complies with other requirements like
registration with the BOI and the PEZA
The entirety of the sales to such enterprise that is
to be zero-rated, not only a proportion to the
actual exports made by such enterprise

Omnibus Investment Code: following sales,
without actual exportation are considered
constructively exported:
Sales to bonded manufacturing warehouses
of export-oriented manufacturers
Sales to registered PEZA enterprises
Sales to registered export traders operating
bonded trading warehouses supplying raw
materials used in the manufacture of export
products
Sales to diplomatic missions and other
agencies and/or instrumentalities granted tax
immunities, of locally manufactured,
assemble, or repacked products, whether
paid for in foreign currency or not

RMO No. 9-2000
Sales of goods, properties, or services made
by a VAT-registered supplier to a BOI-
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registered exported shall be accorded
automatic zero-rating

RMC No. 74-99
Sales made by a VAT-registered supplier to
a PEZA-registered enterprise is subject to
zero-percent VAT.
However, if the VAT registration of the PEZA-
registered enterprise is an erroneous
registration, it is not entitled to input taxes on
its purchases from its supplier

2. Foreign Currency Denominated Sale (Internal
Exports)
Sale to a nonresident of goods, except those
mentioned in Section 149(automobiles) and
150 (non-essential goods),
Assembled or manufactured in the
Philippines
For delivery to a resident in the Philippines
Paid for in acceptable foreign currency
Accounted for in accordance with the rules
and regulations of the BSP
Sale of locally manufactured or assembled
goods for household and personal use to
Filipinos abroad and other non-residents of
the Philippines as well as returning Overseas
Filipinos under the Internal Export Program
paid for in convertible foreign currency,
and accounted for in accordance with the
rules and regulations of the BSP shall be
considered export sales

3. Sales to persons or entities whose exemption
under special laws or international
agreements to which the Philippines is a
signatory
Refer to exemptions granted under special
laws or treaties which are extended not only
to the grantee but also to its supplier of
goods
Effectively zero-rated sale of goods and
properties: refer to the local sale of goods
and properties by a VAT-registered person to
a person or entity who was granted indirect
tax exemption under special laws or
international agreement
Transactions which, although not involving
actual export, are considered as constructive
export shall be entitled to the benefit of zero-
rating

Transactions deemed sale
1. Transfer, use or consumption not in the course of
business of goods or properties originally
intended for sale or for use in the course of
business.
Transfer of goods or properties not in the
course of business can take place when
VAT-registered person withdraws goods
from his business for personal use
2. Distribution or transfer to:
i. Shareholders or investors share in the
profits of VAT-registered person
Property dividends which
constitute stocks in trade or
property primarily held for sale or
lease declared out of RE on or
after Jan.1, 1996 and distributed
by the company to its
shareholders shall be subject to
VAT based on the zonal value or
fair market value at the time of
distribution, whichever is
applicable.
ii. Creditors in payment of debt or obligation
3. Consignment of goods if actual sale is not made
within 60 days following the date such goods
were consigned
Consigned goods returned by the
consignee within the 60-day period are
not deemed sold
4. Retirement from or cessation of business with
respect to inventories of taxable goods existing
as of such retirement or cessation
Change of ownership of the business
(when a single proprietorship
incorporates or the proprietor of a single
proprietorship sells his entire business
Dissolution of a partnership and creation
of a new partnership which takes over
the business

Not subject to output VAT
The VAT shall not apply to goods or properties
existing as of the occurrence of the following:
1. Change of control of a corporation by the
acquisition of the controlling interest of such
corporation by another stockholder or group of
stockholders.
2. Change in the trade or corporate name of the
business
3. Merger or consolidation of corporations.

Changes in or Cessation of Status of a VAT
registered Person
1. subject to output VAT
a. change of business activity from VAT
taxable status to VAT-exempt status
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b. approval of a request for cancellation of
registration due to reversion to exempt
status
c. approval of a request for cancellation of
registration due to a desire to revert to
exempt status after the lapse of 3
consecutive years from the time of
registration by a person who voluntarily
registered despite being exempt under
Sec 109 (2) of the Tax Code
d. approval of a request for cancellation of
registration of one who commenced
business with the expectation of gross
sales or receipt exceeding P1,500,000
but who failed to exceed this amount
during the first 12 months of operations
2. not subject to output VAT
a. change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder
or group of stockholders
b. change in the trade or corporate name of
the business
c. merger or consolidation of corporations

Allowable deductions from gross selling price
a) discounts determined and granted at the time
of sale (expressly indicated in the invoice)
b) sales returns and allowances for which a
proper credit or refund was made during the
month or quarter to the buyer for sales
previously recorded as taxable sales

Sale of Real Properties
o sale of real properties held primarily for sale
to customers or held for lease in the
ordinary course of trade or business of
the seller shall be subject to VAT
o real estate dealer shall be subject to VAT on
the installment payments, including penalties
and interest (real properties on the
installment plan)
o sale of residential lot exceeding P1,500,000,
residential house and lot or other residential
dwellings exceeding P2,500,000, where the
instrument of sale was executed on or after
July 1, 2005, shall be subject to VAT (house
and lot is taxable though not in the ordinary
course of business)
o installment sale of residential house and lot
or other residential dwellings exceeding
P1,000,000 where the instrument was
executed prior to July 1, 2005, shall be
subject to VAT
o sale of real property on installment plan:
sale of real property by a real-estate dealer,
the initial payments of which in the year of
sale do not exceed 25% of the gross selling
price.
o In the case of sale on the deferred-
payment basis, the transaction shall be
treated as cash sale which makes the entire
selling price taxable in the month of sale
(sale of real property where the initial
payment exceeds 25% of the gross selling
price.
o Initial payments: covers any down payment
made and includes all payments actually or
constructively received during the year of
sale
o Real estate dealer: includes any person
engaged in the business of buying,
developing, selling, exchanging real
properties as principal and holding himself
out as a full or part-time dealer in real estate
o Transmission of property to a trustee shall
not be subject to VAT if the property is to be
merely held in trust for the trustor and/or
beneficiary

SEC. 107 VAT ON IMPORTATION OF GOODS
VAT is imposed on goods brought into the
Philippines, whether for use in business or
not
Tax base = total value used by BOC in
determining tariff and customs duties +
custom duties + excise tax + other charges
(postage, commission, and similar charges,
prior to the release of the goods from
customs custody
If the valuation used is based on volume or
quantity of the imported goods, the landed
cost shall be the basis for computing VAT.
Landed cost = invoice amount + customs
duties + freight + insurance + other charges
(excise tax shall form part of the tax base)
the said tax shall be paid by the importer
prior to the release of such goods from
customs custody.
Importer: refers to any person who brings
goods into the Philippines, whether or not
made in the course of his trade or business.
Includes non-exempt persons or entities who
acquire tax-free imported goods from exempt
persons, entities or agencies
Sale, transfer, or exchange of imported
goods by tax-exempt persons: In the case
of goods imported by VAT-exempt persons,
entities or agencies which are subsequently
sold, transferred or exchange in the
Philippines to non-exempt persons or
entities, the latter shall be considered the
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importers thereof and shall be liable for VAT
due on such importation.
Importation begins when the carrying vessel
or aircraft enters the jurisdiction of the
Philippines with intention to unload therein
Importation is deemed terminated upon
payment of the duties, taxes and other
charges due upon the articles, or secured to
be paid, at the port of entry and the legal
permit for withdrawal shall have been
granted

SEC 108. VAT ON SALE OF SERVICE AND USE
OR LEASE OF PROPERTIES

1. Sale or exchange of service, as well as the
use or lease of properties shall be subject to
12% VAT
2. Sale or Exchange of Service: the
performance of all kind of services in the
Philippines for others for a fee, remuneration
or consideration, whether in cash or in kind
i. Construction and service contract
ii. Stock, real estate, commercial,
customs and immigration brokers
iii. Lessors of property, whether
personal or real
iv. Persons engaged in warehouse
services
v. Lessors or distributors of
cinematographic film
vi. Persons engaged in milling,
processing, manufacturing, or
repacking goods for others
vii. Proprietors, operators, or keepers of
hotels, motels, rest houses, pension
houses, inns, resorts, theaters, and
movie houses
viii. Proprietors or operators of
restaurants, refreshment parlors,
cafes and other eating places,
including clubs and caterers
ix. Dealers in securities
x. Lending investor
xi. Transportation contractors on their
transport of goods or cargoes,
including persons who transport
goods or cargoes for hire and other
domestic common carriers by land
relative to their transport of goods or
cargoes
xii. Common carriers by air and sea
relative to their transport of
passenger, goods, or cargoes from
one place in the Philippines to
another place in the Philippines
xiii. Sales of electricity by generation,
transmission, and/or distribution
companies
xiv. Franchise grantees of electric
utilities, telephone and telegraph,
radio and/or broadcasting television
and all other franchise grantees
except franchise grantees of radio
and/or television broadcasting whose
annual gross receipt of the preceding
year do not exceed P10,000,000 and
franchise grantees of gas and water
utilities
xv. Non-life insurance companies
(except their crop insurances),
including surety, fidelity, indemnity
and bonding companies
xvi. Similar services regardless of
whether or not the performance
thereof calls for the exercise or use
of the physical or mental faculties
3. Sale or exchange of service shall also
include:
i. Lease or the use of or the right or
privilege to use any copyright,
patent, design or model, plan, secret
formula or process, goodwill,
trademark, trade brand, or other like
property or right
ii. The lease or the use of, or the right
to use any industrial, commercial or
scientific equipment
iii. The supply of scientific, technical,
industrial or commercial knowledge
or information
iv. The supply of any assistance that is
ancillary and subsidiary to and
furnished as a means of enabling the
application or enjoyment of any such
property, or right as is mentioned in
subparagraph (b) hereof or any such
knowledge or information as is
mentioned in subparagraph (c)
hereof
v. The supply of services by a non-
resident person or his employee in
connection with the use of property
or rights belonging to, or the
installation or operation of any brand,
machinery, or other apparatus
purchased from such nonresident
person
vi. The supply of technical advise,
assistance or services rendered in
connection with technical
management or administration of any
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scientific, industrial or commercial
undertaking, venture, project or
scheme
vii. The lease of motion picture films, film
tapes, and discs
viii. The lease or use of, or the right to
use, radio, television, satellite
transmission and cable television
time
4. Lessors of property all forms of property
for lease, whether real or personal, are liable
to VAT
5. real estate lessor: includes any person
engaged in the business of leasing or
subleasing real property
i. regardless of the place where the
contract of lease or licensing
agreements was executed if the
property leased or used is located
in the Philippines
ii. VAT on rental and/or royalties
payable to non-resident foreign corp
or owners for the sale of services
and use or lease of properties in the
Philippines shall be based upon on
the contract price agreed upon by
the licensor and the licensee
6. non resident lessor/owner: any person,
natural or juridical, an alien, or a citizen who
establishes to the satisfaction of the CIR the
fact of physical presence abroad with definite
intention to reside therein, and who
owns/leases properties, real or personal,
whether tangible or intangible, located in the
Philippines
7. Advance payment:
i. A loan to the lessor from the lessee,
or
ii. An option money for the property, or
iii. A security deposit to insure the
faithful performance of certain
obligations of the lessee to the
lessor, or
iv. Pre-paid rental
If the advance payment is for the faithful
performance of certain obligations of the
lessee, it is not subject to VAT
A security deposit that is applied to rental
shall be subject to VAT at the time of its
application
If the advance payment constitutes a pre-
paid rental, then such payment is taxable
to the lessor in the month when received,
irrespective of the accounting method
employed by the lessor
8. warehousing service: rendering personal
service of a warehouseman such as
i. engaging in the business of receiving
and storing goods for compensation
ii. receiving goods and merchandise to
be stored in his warehouse for hire;
or
iii. keeping and storing goods for others,
as a business and for use
9. miller: a person engaged in milling for others
(except palay into rice and corn into corn
grits, and sugarcane into raw sugar) is
subject to VAT on sale of services.
Cash: VAT shall be based on his gross
receipts for the month or quarter
Receives a share of the milled products
instead of cash: VAT shall be based on
the actual market value of his share
Sale by the owner or miller of his share
of the milled product (except rice, corn
grits and raw sugar) shall be subject to
VAT)
10. all receipts from service, hire, or operating
lease of transportation equipment not subject
to the percentage tax on domestic carriers
and keepers of garages shall be subject to
VAT
11. common carries: refers to persons,
corporations, firms or associations engaged
in the business of carrying or transporting
passengers or goods or both, by land, water
or air for compensation, offering services to
the public and shall include transportation
contractors
12. common carriers by land with respect to
their gross receipts from the transport of
passengers including operators of taxicabs,
utility cars for rent or hire driven by the
lessees, and tourist buses used for the
transport of passengers shall be subject to
percentage tax
13. domestic common carriers by air and sea are
subject to 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
14. sale of electricity by generation,
transmission, and distribution companies
shall be subject to 12% vat on their gross
receipts (sale of power or fuel generated
through renewable sources of energy
such as biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
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hydrogen fuels shall be subject to 0%
VAT)
15. generation companies: refers to persons or
entities authorized by the ERC to operate
facilities used in the generation of electricity.
16. Gross receipts (sale of electricity):
i. Total amount charged by generation
companies for the sale of electricity
and related ancillary services; and/or
ii. Total amount charged by
transmission companies for
transmission of electricity and related
ancillary services; and/or,
iii. Total amount charged by distribution
companies and electric cooperatives
for distribution and supply of
electricity and related electric
services. The universal charged
passed on and collected by
distribution companies and electric
cooperatives shall be excluded from
the computation of the GR
17. dealers in securities and lending
investors: subject to VAT on the basis of
their gross receipts. For dealer in securities,
the term gross receipts means gross
selling price less cost of the securities
sold
18. service of franchise grantees of telephone
and telegraph, radio and/or television
broadcasting, toll road operations and all
other franchise grantees, except gas and
water utilities, shall be subject to VAT
radio and/or television broadcasting:
annual gross receipt of the preceding
year do not exceed P10,000,000 shall
not be subject to VAT but 3%
percentage tax.
Gas and water utilities: subject to 2%
franchise tax on their gross receipts
Telephone and telegraph: subject to
VAT on their gross receipts derived from
their telephone, telegraph, telewriter
exchange, wireless and other
communication equipment services
Amounts received for overseas
dispatch, message, or conversion
originating from the Philippines are
subject to percentage tax and hence
exempt from VAT
19. non-life insurance companies: including
surety, fidelity, indemnity and bonding
companies are subject to VAT
not liable to premium tax under Sec. 23
(percentage tax) of the Tax Code
gross receipts: total premiums collected,
whether paid in money, notes, credits or
any substitute for money
non-life reinsurance premiums are
subject to VAT
insurance and reinsurance commissions,
whether life or non-life, are subject to
VAT
Vat due from the foreign reinsurance
company is to be withheld by the local
insurance company and to be remitted to
the BIR
20. pre-need companies: the compensation for
their services is the premiums or payments
received from the plan holders
21. health maintenance organizations (HMO)
gross receipts: total amount of money or
its equivalent representing the service
fee actually or constructively received
during the taxable period for the services
performed or to be performed , excluding
VAT

Gross Receipts: total amount of money or its
equivalent representing the contract price,
compensation, service fee, rental or royalty, including
the amount charged for materials supplied with the
services and deposits applied as payments for
services rendered and advance payments actually or
constructively received during the taxable period for
the services performed or to be performed for
another person, excluding VAT.

Constructive receipt: occurs when the money
consideration or its equivalent is placed at the control
of the person who rendered the service without
restrictions by the payor.
Deposit in banks which are made
available to the seller of service without
restrictios
Issuance by the debtor of a notice to
offset any debt or obligation and
acceptance thereof by the seller as
payment for services rendered
Transfer of amounts retained by the
payor to the account of the contractor

Zero-rated sales of service
The following services performed in the Philippines
by a VAT-registered person shall be subject to 0%
VAT rate:
1. processing, manufacturing, or repacking
goods for other persons doing business
outside the Philippines,
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a. which goods are subsequently
exported
b. where the services are paid for in
acceptable foreign currency
c. accounted for in accordance with
the rules and regulations of the BSP
2. services other than processing,
manufacturing, or repacking
a. rendered to a person engaged in
business conducted outside the
Philippines or to a non-resident
person not engaged in business
who is outside the Philippines when
the services are performed [CIR v.
Busmeirter, et al, GR No. 153205
(2007) require performance of
services to nonresident to qualify as
zero-rated.]
b. The consideration of which is paid
for in acceptable foreign currency
c. accounted for in accordance with
the rules and regulations of the BSP
3. services rendered to persons or entities
whose exemptions under special laws or
international agreements to which the
Philippines is a signatory effectively subjects
the supply of such services to zero percent
rate
4. services rendered to persons engaged in
international shipping or air transport
operations, including leases of property for
use thereof
shall not pertain to those made to
common carriers by air and sea relative
to their transport of passengers, goods or
cargoes from one place in the Philippines
to another place in the Philippines
(subject to 12% VAT)
5. services performed by subcontractors
and/or contractors in processing, converting,
or manufacturing goods for an enterprise
whose export sales exceed 70% of the total
annual production
6. transport of passengers and cargo by
domestic air or sea carriers from the
Philippines to a foreign country.
Gross receipts of international air carriers
doing business in the Philippines and
international sea carriers doing business
in the Philippines are still liable to
percentage tax
7. sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal and steam, ocean
energy, and other emerging sources using
technologies such as fuel cells and
hydrogen fuels.
Zero rating shall apply strictly to the sale
of power or fuel generated through
renewable sources of energy, and shall
not extend to the sale of services related
to the maintenance or operation of plants
generating said power

Effectively Zero-Rated Sale of Services: refer to
the local sale of services by a VAT-registered person
to a person or entity who was granted indirect tax
exemption under special laws or international
agreement (limited to 3, 4, 5)
Concerned taxpayer must seek prior
approval or prior confirmation from the
appropriate offices to the BIR so that a
transaction is qualified for effectively
zero-rating
Without an approved application for
effective zero-rating, the transaction
otherwise entitled to zero-rating shall be
considered exempt

SEC 109. VAT EXEMPT TRANSACTIONS
Refer to the sale of goods or properties
and/or services and the use or lease of
properties that is not subject to VAT and the
seller is not allowed any tax credit of VAT on
purchases
Exempt transactions:
1. sale or importation of agricultural and
marine food products in their original state,
livestock and poultry of a kind generally
used as, or yielding or producing foods for
human consumption; and breeding stock
and genetic materials thereof
Livestock: cows, bulls and calves, pigs,
sheep, goats and rabbits
Poultry: fowls, ducks, geese and turkey
Does not include fighting cocks, race
horses, zoo animals and other animals
generally considered as pets
Marine food products: fish and
crustaceans, such as but not limited to,
eels, trout, lobster, shrimps, prawns,
oysters, mussels and clams
Meat, fruit, vegetables and other
agricultural and marine food products are
considered in their original state even if
hey undergone the simple process of
preparation or preservation for the
market : freezing, drying, salting, broiling,
roasting, smoking or stripping, shrink
wrappings in plastic, vacuum packing,
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tetra-pack, and other similar packaging
methods
Polished and/or husked rice, corn
grits and raw cane sugar and
molasses, ordinary salt and copra
shall be considered as agricultural
product in their original state
Sugar whose content of sucrose by
weight, in the dry state : parameter
reading of 99.5 and above are presumed
to be refined sugar
Cane sugar produced from the following
shall be presumed to be refined sugar:
o Product of a refining process
o Products of sugar refinery
o Product of a production line of a
sugar mill accredited by the BIR
to be producing and/or capable
of producing sugar with
polarmeter reading of 99.5
Bagasse is not included in the exemption
provided for under this section
2. sale or importation of fertilizers, seeds,
seedlings and fingerlings, fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium
fishes, zoo animals and other animals
generally considered as pets)
3. importation of personal and household
effects
belonging to residents of the
Philippines returning from abroad
and non-resident citizens coming to
resettle in the Philippines
such goods are exempt fro customs
duties under the Tariff and Customs
Code of the Philippines
4. Importation of professional instruments and
implements, wearing apparel, domestic
animals, and personal household effects
(except any vehicle, vessel, aircraft,
machinery and other goods for use in the
manufacture and merchandise of any
kind in commercial quantity)
Belonging to persons coming to
settle in the Philippines
For their own use and not for sale,
barter or exchange,
Accompanying such persons or
arriving within 90 days before or
after their arrival
Upon the production of evidence
satisfactory to the CIR that such
persons are actually coming to
settle in the Philippines
The change of residence is
bonafide
5. services subject to percentage tax
6. services by agricultural contract growers
and milling for others of palay into rice, corn
into grits and sugar into raw sugar
7. medical, dental, hospital and veterinary
services, except those rendered by
professionals
laboratory services are exempted
if the hospital or clinic operates a
pharmacy or drug store, the sale of
drugs and merchandise is subject to
VAT
8. Educational services rendered by private
educational institutions duly accredited by
the DepED, CHED and TESDA and those
rendered by government educational
institutions
Does not include seminars, in-
service training, review classes and
other similar services rendered by
persons who are not accredited by
the DepED, the CHED and/or
TESDA
9. Services rendered by individuals pursuant to
an employer-employee relationship
10. Services rendered by regional or area HQ
established in the RP by multinational
corporations which act as supervisory,
communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia Pacific Region and do
not earn or derive income from the RP
11. Transactions which are exempt under
international agreements to which the RP is
a signatory
12. sales by agricultural cooperatives duly
registered and in good standing with the
CDA to their members, as well as sale for
their produce, whether in its original state or
processed form, to non-members
their importation of direct farm
inputs, machineries and equipment,
including spare parts thereof, to be
used directly and exclusively in the
production and/or processing of
their produce
13. Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered and in good standing with the
CDA
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14. Sales by non-agricultural, non-electric and
non-credit cooperatives duly registered with
and in good standing with the CDA
Share capital contribution of each
member does not exceed 15,000
and regardless of the aggregate
capital and net surplus ratably
distributed among the members
Importation of machineries and
equipment, including spare parts
thereof, to be used by them are
subject to VAT
15. Export sales by persons who are not VAT-
registered
16. The following sales of real properties are
exempt from VAT:
Not primarily held for sale to
customers or held for lease in the
ordinary course of trade or business
Sale of real properties utilized for
low-cost housing
A subdivision or a condominium
registered and licensed by the
HLURB
Undertaken by the govt or
private developers
Unit selling price ceiling:
P750,000
Utilized for socialized housing
Price ceiling per unit: P225,000
Residential lot valued at 1.5M and
below, or house and lot and other
residential dwellings valued at 2.5M
and below
Instrument must be executed on
or after July 1, 2005
If two or more adjacent
residential lots are sold or
disposed in favor of one buyer,
for the purpose of utilizing the
lots as one residential lot, the
sale shall be exempt from VAT
only if the aggregate value of
the lots do not exceed 1.5M
17. Lease of residential units
Monthly RENTAL: not exceeding
P10,000
If the aggregate of such rentals of the
lessor during the year do not exceed
1.5M,: exempt from VAT but subject to
3% percentage tax
GR from rentals exceeding 10T per
month per unit shall be subject to VAT if
the aggregate annual GR from said
units only (not including the GR from
units leased for not more than 10T)
exceeds 1.5M. Otherwise, subject to
3% percentage tax
18. Sale, importation, printing or publication of
books and any newspaper, magazine,
review, or bulletin
which appears at regular intervals
with fixed prices for subscription and
sale
which is not devoted principally to the
publication of paid advertisements
19. Sale, importation, or lease of passenger or
cargo vessels and aircraft, including engine,
equipment and spare parts thereof for
domestic or international transport
operations
Limited to 150 tons and above, including
engine and spare parts of said vessels
Comply with the age limit requirement,
at the time of acquisition counted from
the date of he vessels original
commissioning
o Passenger/cargo vessel: 15
years old
o Tankers: 10 years old
o High-speed passenger crafts: 5
years old

Exemption shall be subject to the
provisions of The Domestic Shipping
Development Act
20. Importation of fuel, goods and supplies by
persons engaged in international shipping or
air transport operations
Shall be used exclusively or shall pertain
to the transport of goods and/or
passengers from a port in the Philippines
directly to a foreign port without stopping
at any other port in the Philippines
21. Services of banks, non-bank financial
intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries subject to percentage tax
such as money changers and pawnshops
22. Sale or lease of goods or properties or the
performance of services other than the
transaction mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed 1.5M.
For purposes of the threshold of 1.5M,
the husband and wife shall be
considered separate taxpayer.
The aggregation rule for each taxpayer
shall apply

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A VAT-registered person may, elect that that the
exemption shall not apply to his sales of goods or
services or properties which is irrevocable for a
period of 3 years.

Credits for Input Tax
Input Tax
The VAT due on or paid by a VAT-registered
person on importation of goods or local
purchases of goods, properties, or services,
including lease or use of properties, in the
course of trade or business
Include the transitional and the presumptive
input tax
Includes input taxes which can be directly
attributed to transactions subject to the VAT
plus a ratable portion of any input taxes
which cannot be directly attributed to either
the taxable or exempt activity
Evidenced by a VAT invoice or official
receipt issued by a VAT-registered person
1. Purchase or impartation of goods
a) For sale ; or
b) For conversion into or intended to
form part of a finished product for
sale, including packaging materials;
or
c) For use as supplies I the course of
business; or
d) For use as raw materials supplied in
the sale of services; or
e) For use in trade or business for
which deduction for depreciation or
amortization is allowed under the
Tax Code
2. Purchase of real properties for which a
VAT has actually been paid
3. Purchases of services in which a Vat has
actually been paid;
4. Transactions deemed sale
5. Transitional input tax
6. Presumptive input tax
7. Transitional input tax credits allowed
under the transitory and other provisions
of these Regulations

Persons who Can Avail of the Input Tax Credit
1. to the importer upon payment of VAT prior to
the release of goods from customs custody
2. To the purchaser of the domestic goods or
properties upon consummation of the sale; or
3. To the purchaser of services or the lessee or
licensee upon payment of the compensation,
rental, royalty or fee

Claim for Input Tax on Depreciable Goods
Requisites:
A VAT-registered person purchases or
imports capital goods (which are depreciable
goods for income tax purposes)
Aggregate acquisition cost of which
(exclusive of VAT) in a calendar month
exceed 1M

Manner of claiming input tax
1. estimated useful life of a capital good is 5
years or more:
a. input tax spread evenly over a period
of 60 months
b. commenced in the calendar month
when the capital good is acquired
2. estimated useful life is less than 5 years:
a. input tax spread evenly on monthly
basis by the actual number of
months comprising the estimated
useful life of the capital good
b. commenced in the calendar month
when the capital good is acquired
Aggregate acquisition cost does not exceed 1M:
total input taxes will be allowable as credit against
output tax in the month of acquisition

Aggregate acquisition cost of a depreciable asset
in any calendar month: refers to the total price
agreed upon for one or more assets acquired and not
on the payments actually made during the calendar
month.

If the depreciable capital good is sold/transferred
within the period of 5 years or prior to the
exhaustion of the amortizable input tax thereon:
entire unamortized input tax on the capital goods
sold, can be claimed as input tax credit during the
month or quarter when the sale or transfer was made
but subject to limitation

Apportionment of Input Tax on Mixed
Transactions
A vat-registered person who is also engaged in
transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject to
VAT as follows:
all the input taxes that can be directly
attributed to transactions subject to VAT may
be recognized for input tax credit
o input taxes which are directly
attributable to Vat taxable sales of
goods and services from the
Government or any of its political
subdivisions, instrumentalities or
agencies, including GOCC shall not
be credited against output taxes
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arising from sales to non-government
entities
if any input tax cannot be directly attributed to
either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated to
the VAT taxable and VAT-exempt
transactions
o only the ratable portion pertaining to
transactions subject to VAT may be
recognized for input tax credit
input tax attributable to VAT-exempt sales
shall not be allowed as credit against the
output tax but should be treated as part of
CGS
for persons engaged in both zero-rated
sales and non-zero rated sales, the
aggregate input taxes shall be allocated
ratably between the zero-rated sale and
non-zero-rated sale

Determination of Input Tax Credit during a
taxable month or quarter
All creditable input taxes during the month or quarter
+ any amount of input taxes carried-over from
preceding month/qtr
- (claim for VAT refund or tax credit certificate)
- (other adjustments purchase returns or
allowances)
- (input tax attributable to exempt sales)
- (input tax attributable to sales subject to final VAT
withholding)
Input Tax Credit

Determination of the Output Tax and VAT payable
and Computation of VAT Payable or Excess Tax
Credit
Computation of output tax
1. Goods or properties: Gross selling price x
VAT rate
2. Sellers of service: Gross receipts x VAT
rate

VAT payable computation:
Output Tax
- Input Tax
Vat payable

VAT Payable (Excess Output) or Excess Input Tax
If at the end of any taxable quarter the output tax >
the input tax: the excess shall be paid by the VAT-
registered person
Ex. Output tax 100
Input tax (80)
VAT Payable 20

Transitional/Presumptive Input Tax Credits
A. Transitional Input Tax Credits on
Beginning Inventories (2%)
o Taxpayers who became VAT-registered
persons upon exceeding the minimum
turnover of 1.5M in any 12-month period
o Voluntarily register even if their turnover
does not exceed 1.5M (except franchise
grantees of radio and television
broadcasting whose threshold is 10M.
Entitled to a transitional input tax on the
inventory on hand as of the effectivity of their
VAT registration
1. goods purchase for resale in their
present condition;
2. Materials purchased for further
processing, but which have not yet
undergone processing;
3. goods which have been
manufactured by the taxpayer;
4. goods in process for sale;
5. goods and supplies for use in the
course of the taxpayers trade or
business as a VAT-registered person
TIT = 2% of the value of the beginning inventory on
hand or actual VAT paid on such goods, materials
and supplies, whichever is higher
o such amount shall be creditable against the
output tax of VAT-registered person
o value allowed for income tax purposes on
inventories shall be the basis for the
computation of the 2% TIT, excluding goods
that are exempt from VAT

B. Presumptive Input Tax Credits (4%)
Covered: Persons or firms engaged in the
processing of sardines, mackerel, and milk and in
the manufacturing refined sugar, cooking oil and
packed noodle-based instant meals
Rate: 4% of the gross value in money of their
purchases of primary agricultural products which
are used as inputs to their production
Creditable: against the output tax
Processing: pasteurization, canning and
activities which through physical or chemical
process alter the exterior texture or form or inner
substance of a product in such a manner as to
prepare it for special use to which it could not
have been put in its original form or condition

Claims for Refund/Tax Credit Certificate of Input
Tax
1. Zero-rated and Effectively Zero-rated Sales
of goods, Properties or services
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o Vat-registered person may apply for the
issuance of a TCC/refund of input tax
attributable to such sales
o Input tax that may be subject of the claim
shall exclude the portion of input tax that
has been applied against the output tax
o Application should be filed within 2
years after the close of the taxable
quarter when such sales were made
o In case of zero-rated sales: the
payments for the sales must have been
made in acceptable foreign currency duly
accounted for in accordance with the
BSP rules and regulations
o Taxpayer is engaged in both zero-
rated or effectively zero-rated sales
and in taxable or exempt transactions
and the amount of creditable input tax
due or paid cannot be directly and
entirely attributed to any one of the
transactions: only the proportionate
share of input taxes allocated to zero-
rated or effectively zero-rated sales can
be claimed for refund or issuance of a
TCC
o A person engaged in the transport of
passenger and cargo by air or sea
vessels from the Philippines to a
foreign country: input taxes shall be
allocated ratably between his zero-rated
sales and non-zero-rated sales.
2. Cancellation of VAT registration
Why: due to retirement from or cessation of
business, or due to changes in or cessation
of status under Sec 106(c) of the TAX Code
When: within 2 years from the date of
cancellation
What: apply for the issuance of a TCC for
any unused input tax which he may use in
payment of his other internal revenue taxes
However: shall only be entitled to a refund if
he has no internal revenue tax liabilities
against which the TCC may be utilized
3. Where to file the claim for refund/TCC
o Filed with the appropriate BIR office (LTS
or RDO) having jurisdiction over the
principal place of business of the
taxpayer
o Direct exporters: may file their claim for
TCC with the One Stop Shop Center of
the DOF
o Filing of the claim with one office shall
preclude the filing of the same claim with
another office
4. Period within which refund or TCC of input
taxes shall be made
CIR shall grant a TCC/refund for
creditable input taxes within 120 days
from the date of submission of complete
documents in support of the application
Taxpayer may appeal to the CTA within
30 days from receipt of said denial
If no action on the claim for refund has
been taken by the CIR after the 120 day
period from the date of submission of the
application with complete documents, the
taxpayer ,may appeal to the CTA within
30 days from the laps of the 120-day
period
5. Manner of giving refund
Refund shall be made upon warrants
drawn by the CIR or by his duly
authorized representative without the
necessity of being countersigned by the
Chairman of COA
Refunds under this paragraph shall be
subject to post audit by the COA

COURT OF TAX APPEALS

What is the new law governing the CTA?
RA 9282, an act expanding the jurisdiction of
the CTA, and elevating it to the level of the
Court of Appeals

What is the composition of the CTA and how may
the CTA rule?
CTA shall consist of a Presiding Justice and
five (5) Associate Justice
They may rule as follows:
1. En banc
2. Sitting in 2 divisions, each division
with 3 justices each

What is the quorum?
The affirmative votes of 4 Justices for
sessions En Banc and 2 Justices for
sessions of a Division shall be necessary for
he rendition of a decision or resolution
When the required quorum cannot be
constituted, the Presiding Justice shall
designate any Justice of other Divisions of
the court to sit temporarily therein

What is the APPELLATE JURISDICTION OF THE
CTA?
The CTA shall exercise exclusive appellate
jurisdiction to review by appeal:
1. Decisions of CIR
2. Inaction of CIR
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3. Decisions of RTC on local tax
cases
4. Decisions of Commissioner of
Customs
5. Decisions of CBAA (on exercise of
appellate jurisdiction over RPT tax
cases decided by LBAA)
6. Decisions of DOF on customs
cases elevated to him on
automatic review due to adverse
decision versus the government
7. Decisions of DTI (on non-
agricultural products) and
Department of Agriculture (on
agricultural products) involving
dumping and countervailing
duties

Does the CTA have jurisdiction over criminal
cases?
Yes, the CTA have jurisdiction over the
following cases involving criminal offenses:
1. ORIGINAL - FOR CRIMINAL ACTS
UNDER NIRC AND CUSTOMS
CODE 1M OR ABOVE
Over appeals from the decision of RTC in tax
cases
1. Over petitions for review of the
decision of the RTC in the exercise
of their appellate jurisdiction over tax
cases originally decided by the MTC

Does the CTA have jurisdiction over tax
collection cases?
Yes, the CTA have jurisdiction over the
following cases involving tax collection:
1. ORIGINAL 1M OR ABOVE
Exclusive appellate jurisdiction in tax
collection cases:
1. Over appeals from Decision of RTC
in tax collection cases
2. Over petitions for review of the
decision of the RTC in the exercise
of their appellate jurisdiction over tax
collection cases originally decided by
the MTC

What is the Procedure?
1. Appeal within 30 days from receipt of
decision or period of inaction of CIR, COC,
Secretary of Finance, Secretary of Trade and
Industry or Secretary of Agriculture, or the
CBAA or the RTC:
a. Generally, appeal will be to a
Division
b. Except: appeal by filing a petition for
review to En Banc in case of
decisions of CBAA or RTC in the
exercise of its appellate jurisdiction
2. In case the decision of the Division is
adverse:
a. File MR with same Division within 15
days from notice thereof
3. In case resolution of Division on the MR or
new trial is still adverse:
a. File petition for review with CTA En
Banc
4. IN case the decision of the CTA En Banc is
adverse, file a review on certiorari with the
SC pursuant to Rule 45 of Rules of Court

Where can you appeal a decision of a local
assessment board?
To the Central Board of Assessment Appeals
(CBAA) and not yet to the CTA.
It is only after the CBAA has ruled that an
appeal may be made to the CTA
In which case, the appeal shall be by petition
for review to the CTA En Banc

What is the rule on suspension of collection?
General Rule: no injunction to restrain
collection of taxes
Exception: Under Section 9 of RA 9282,
suspension is allowed when the following
conditions concur:
o It is an appeal to the CTA from a
decision of CIR, COC or the RTC,
provincial, municipal treasurer, or the
Secretary of Finance, Secretary of
Trade and Industry or Secretary of
Agriculture, as the case may be; and
o In the opinion of the Court, the
collection by the aforementioned
government agencies may
jeopardize the interest of the
Government and/or taxpayer
In case of suspension, what is the taxpayer
required to do?
The taxpayer will be required to either
deposit the amount claimed or file a surety
bond for not more than double the amount
with the Court.

PART VI - TARIFF AND CUSTOMS CODE

DEFINITIONS
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1. TARRIF: Custom duties, toll or tribute
payable upon merchandise to govt.
2. CUSTOMS DUTIES: Tax assessed upon
merchandise from or exported to a foreign
country (Garcia v. Executive Sec., 211
SCRA 227 [1992])
3. FLEXIBLE TARIFF: Import duties which are
modified by the President upon investigation
by the Tariff Commission and
recommendation of the NEDA in the interest
of national economy, general welfare and
national security.

Dumping
Duty
Countervailing
Duty
Marking
Duty
Discriminato
ry Duty
Imposing
Authority
Special
Committee
on Anti-
Dumping
(compose
d of Sec.
of Finance
as
Chairman;
Members:
the Sec. of
DTI and
either the
Sec. of
Agriculture
if article in
question is
agri.
Product or
the Sec. of
Labor if
non-agri.)

Sec. of
finance
Commissi
oner of
Customs
President of
the
Philippines

FLEXIBLE TARIFF CLAUSE
The President may fix tariff rates import and export
quotas, etc. under TCC (See Sec. 28, Art. VI,
Constitution and Sec 401, TCC)
1. To increase, reduce or remove existing
protective rates of import duty (including any
necessary change in classification)
The existing rates may be increased
or decreased to any level on one or
several stages but in no case shall
the increased rate of import duty be
higher than a maximum of 100% ad
valorem.
2. To establish import quota or to ban imports of
any commodity, as may be necessary and
3. To impose an additional duty on all imports
not exceeding 10% ad valorem whenever
necessary.

LIMITATIONS IMPOSED REGARDING THE
1. Conduct by the Tariff Commission of an
investigation in public hearing.
The Commission shall also hear the
views and recommendations of any
govt office agency or instrumentality
concerned.
The NEDA thereafter submits its
recommendation to the President.
2. The power of the President to increase or
decrease the rates of import duty within
the abovementioned limits fixed in the
Code shall include the modification in the
form of duty.
In such a case, the corresponding ad
valorem or specific equivalents of the duty
with respect to the imports from the principal
competing foreign country for the most recent
representative period shall be used as bases
(Sec. 401, TCC)

OTHER TYPES OF FEES CHARGED BY THE BOC
1. Arrastre charge
2. Wharfage due- counterpart of license,
charged not for the use of any wharf but
for a special fund- Port Works Fund
3. Berthing fee
4. Harbor fee
5. Tonnage due

Meaning and Scope of the Tariff and Customs
Laws
Includes not only the provisions of the Tariff
and Customs Code (TCC) and regulations
pursuant thereto, but all other laws and
regulations which are subject to the Bureau
of Customs (BOC) or otherwise within its
jurisdiction.
As to its scope: tariff and custom laws extend
not only to the provisions of the TCC but to
all other laws as well, the enforcement of
which is entrusted to BOC.

BUREAU OF CUSTOMS

FUNCTIONS:
1. Assessment and collection of the lawful revenues
from imported articles and all other dues, fees,
charges, fines and penalties accruing under the
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tariff and customs laws.
2. Prevention and suppression of smuggling and
other frauds upon the customs.
3. Supervision and control over the entrance and
clearance of vessels and aircraft engaged in
foreign commerce.
4. Enforcement of tariff and customs laws, rules and
regulations relating to the tariff and customs
administration.
5. Supervision and control over the handling of
foreign mails arriving in the Phils. For the
purpose of the collection of the lawful duty on
dutiable articles thus imported and prevention of
smuggling through the medium of such mails
6. Supervision and control all import and export
cargoes, landed or stored in piers, airports,
terminal facilities including container yards and
freight stations for the protection of government
revenue.
7. Exercise exclusive jurisdiction over seizure and
forfeiture cases under the tariff and customs
laws. (Sec. 602)

JURISDICTION OF COLLECTOR OF CUSTOMS
OVER IMPORTATION OF ARTICLES
1. Cause all articles for importation to be
entered in the customhouse
2. Cause all such articles to be appraised and
classified
3. Assess and collect the duties, taxes and
other charges thereon
4. Hold possession of all imported articles until
the duties, taxes and other charges are paid
thereon (Sec 1206)

TERRITORIAL JURISIDICTION OF THE BOC
1. All the seas within the jurisdiction of the
Phils.
2. All coasts, ports, airports, harbors, bays,
rivers and inland waters whether navigable or
not from the sea (1
st
par., Sec. 603)

APPLICATION OF THE TCC
Only after importation has begun but before
importation is terminated

DURATION OF IMPORTATION:
BEGINNING
When the conveying vessel or aircraft enters
the jurisdiction of the Philippines with the
intention to unload therein
TERMINATION
Upon payment of the duties, taxes, and other
charges due upon the articles, or secured to
be paid at the port of entry and legal permit
for withdrawal shall have been granted
In case the articles are free of duties, taxes
and other charges until they have legally left
the jurisdiction of customs (Sec. 1202)

Intention to Unload
Even if not yet unloaded, and there is
unmanifested cargo forfeiture may take
place because importation has already
begun.

GOODS PROHIBITED FROM BEING IMPORTED
1. Absolutely prohibited
a. Weapons of war
b. Immoral/obscene or insidious
articles
c. Articles for treason
d. Prohibited drugs/narcotics
e. Gambling paraphernalia/devices
f. Those prohibited under Special Laws
(Sec 102 TCC)

2. Qualifiedly prohibited
o Where such conditions as to
warrants a lawful importation do not
exist, the legal effects of the
importation of qualifiedly prohibited
articles are the same as those
absolutely prohibited articles.
(Auyong Hian v. CTA, 59 SCRA 110)

Conditionally-free from tariff and customs duties
Certain imported articles are exempt from
import taxes upon compliance with certain
requirements. These are
1. Those provided for in Sec. 105 of the
TCC;
2. Those granted to government
agencies, GOCC with agreements
with foreign countries;
3. Those given to international
institutions entitled to exemption by
agreement or special law; and
4. Those that may be granted by the
President upon Nedas
recommendation.
Exempt articles under Sec. 105

Article Conditions
Animals and plants For scientific, experimental,
propagation, botanical,
breeding, zoological and
national defense purposes
Aquatic products o caught or gathered by
vessels of Philippine registry
o Not have landed in foreign
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territory, or if landed, solely
for transshipment
Equipment used
for the salvage of
vessels or aircraft
not available
locally
o Bond= 1 x of ascertained
duties, taxes and charges
o Must be exported within 6
months
Costs of repair
made in foreign
country of Phil
vessels or aircraft
o Phil must not have adequate
facilities to make repair
o Vessel was compelled by
weather or casualty to go to a
foreign port of repair
o Excludes value of article
used for repair
Articles brought
into the Philippines
for repair,
processing, or
reconditioning
o to be re-exported upon
completion of the repair,
processing or reconditioning
o Bond = 1 x of ascertained
duties, taxes and charges
Trophies, prizes (
medals, badges,
cups) Those
received as
honorary
distinction

Samples in such
quantity and of
such dimensions
or constructions as
to render them
unsaleable or of
no appreciable
commercial value,
o models not adopted for
practical use, and
o samples not for sale
o marked sample sale
punishable by law
o for purpose of introducing
new product
o imported by person duly
registered and identified to
be engaged in that trade
o Importations authorized by
Sec of Finance
Personal and
household effects
of returning Phil
residents
o formally declared and
listed before departure
and identified under
oath before the
Collector of Customs
when exported from the
Phil by such returning
residents upon their
departure therefrom or
during their stay abroad
o personal and
household effects
including wearing
apparel, articles of
personal adornment
(except luxury items)
toilet articles,
instruments related to
ones profession and
analogous personal or
household effects,
excluding vehicles,
watercraft, aircraft and
animals, purchased in
foreign countries by
residents of the
Philippines which were
necessary, appropriate
and normally used for
their comfort and
convenience during
their stay abroad,
accompanying them on
their return or arriving
within a reasonable
time which, barring
unforeseen and
fortuitous events, in no
case shall exceed 60
days after the owners
return, subject however
to the following
provisions:
1. That the personal and
household effects shall
neither be in
commercial quantities
nor intended for barter,
sale or hire and that the
total dutiable value of
which shall not exceed
P10,000
2. That the returning
resident has not
previously availed of
the privilege under this
section within 365 days
prior to his arrival
3. That a 50% ad valorem
duty across the board
shall be levied and
collected on the
personal and
household effects in
excess of P10,000
Wearing apparel,
articles of personal
adornment, toilet
articles, portable
tools and
instruments,
theatrical
costumes and
similar personal
effects
arriving within a
reasonable time, before
or after the owners,
in use of and necessary
and appropriate for the
wear or use of such
persons according to
their profession or
position
for the immediate
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accompanying
travelers or
tourists in their
baggage
purposes of their
journey and their
present comfort and
convenient.
Personal and
household effects,
vehicles of foreign
consultants and
experts hired or
rendering service
to govt, including
staff and families
Accompany them or
arrive at a reasonable
time
In quantities and kind
necessary and suitable
to the profession, rank
or position
For their own use, NOT
for sale, barter, hire
Collector may require:
written commitment or
bond
Professional
instruments, tools
of trade, wearing
apparel, domestic
animals, personal
and household
effects belonging
to persons coming
to settle in the Phil
and OFW
In quantities and kind
necessary and suitable
to the profession, rank
or position
For their own use, NOT
for sale, barter, hire
Change of residence is
bona fide
Privilege of free entry
was never granted to
them before or qualifies
under LOI 105, 163,
210
Articles used
exclusively for
public
entertainment;
display in public
expos; exhibition
or competition for
prizes; devices for
projecting picture
Must file bond
Exported within 6
months
Not exhibited for profit
Otherwise, confiscation
+penalty
Brought by foreign
film producers for
making or
recording motion
pictures on
location in Phil.

Photographic and
cinematographic
films,
undeveloped,
exposed outside
Phil by resident
Filipinos or Phil.
producing
companies
Must file a bond
Exported within 6
months (unless
extended by the
Collector for another 6
months)
Principal actors are
Filipinos
Affidavit by importer
that the exposed films
are same films
previously exported
Importations used Reciprocity: such foreign
by foreign
embassies,
legations,
agencies of foreign
govt
country must grant
same privilege to Phil.
agencies
Articles for
personal or family
use of members
and attaches of
foreign embassies,
legations, consular
officers and other
reps of foreign
govt
Such privileges must be
accorded in a special
agreement between
Phil and the foreign
country
Privilege may be granted
only upon specific
instructions of Sec. of
Finance which will be
given only upon request
of the DFA
Articles donated to
or for account of
relief organization
Org not for profit
For free distribution to
the needy
Containers,
holders and similar
receptacles
Except those that are
reusable for shipment
or transportation of
goods
Supplies of vessel
or aircraft
For use or consumption
of passengers on board
Any surplus or excess
shall be dutiable
Articles and
salvage after 2
years from filing
protest
Vessels must have
been wrecked or
abandoned in Phil
waters
Coffins or urns
containing human
remains, bones
ashes. Personal
and household
effects of
deceased except
vehicles
Not exceed P10,000
Economic,
technical,
vocational,
scientific,
philosophical,
historical, and
cultural books and
publications

Phil articles
previously
exported and
returned without
increasing value or
improved
condition.
Foreign articles
Note that if a drawback or
bounty was allowed to any Phil
article under this subsection,
upon re-importation article shall
be subject to duty equal to the
bounty or drawback
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previously
exported when
returned after
having been
exported and
loaned for use
temporarily abroad
solely for
exhibition

Foreign container
used in packing
exported Phil
products
Articles and
supplies imported
by and for use of
scheduled airlines
operating under
congressional
franchise
Such articles are not
available locally in
reasonable quantity,
quality and price
Necessary or incidental
to proper operations
Machineries,
equipments, tools
for production,
plants to convert
mineral ores into
saleable form,
spare parts,
supplies,
materials,
accessories,
explosives,
chemicals, transpo
and
communications
facilities imported
by and used by
new mines and old
mines

Aircrafts imported
by agro industrial
companies, spare
parts and
accessories
Such articles are not
available locally in
reasonable quantity,
quality and price
Necessary or incidental
to proper operations
Used in their agri and
industrial operations
Spare parts of
vessels or aircrafts
of foreign registry
engaged in foreign
trade
Brought to Phil as
replacement or for
emergency repair
Spare parts utilized to
secure safety,
seaworthiness, or
airworthiness, enable it
to continue voyage or
flight
Articles for easy
identification
Cannot be repaired
locally
exported from Phil
for repair and
subsequently
reimported
Cost of repair made on
article shall pay 30% ad
valorem
Trailer chassis
imported by
shipping
companies for
handling
containerized
cargo
Bond (1 x) to cover 1
year
Must be properly
identified and
registered with the LTO
Subject to customs
supervision fee
Deposited in Customs
zone when not in use
Upon expiration of
period (1 year or as
extended by
Commissioner) duties
and taxes shall be paid
Personal and
household effects
(including one car)
officer or
employee of DFA,
attach, staff
assigned to Phil
diplomatic mission
abroad, personnel
of Reparations
Missions in Tokyo,
AFP military
personnel in
SEATO, AFP
military personnel
accorded
diplomatic rank on
duty abroad

= returning from
regular
assignment,
reassignment,
dies, resigns or
retires
Car must have been
purchased or ordered
before the mission or
consulate received his
order of recall
The value of personal
and household effects
shall not exceed 30% of
his total salary.

Free from tariff and customs duties
Imported goods must be entered in the
customhouse at their port of entry otherwise
they shall be considered as contraband and the
importer shall be liable for smuggling (sec
1201)
Port of entry means a domestic port open to
both foreign and coastwise trade including
airport of entry. (Sec. 3514)
All articles when imported from any country into
the Philippines shall be subject to duty upon
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each importation, even though previously
exported from the Phils. except as otherwise
specifically provided for in the TCC or other
laws. (sec 1201)

LIABILITY FOR CUSTOMS DUTIES
General Rule: No exemptions from customs
duties
The provisions of general and special laws,
including those granting franchises, to the
contrary notwithstanding, there shall be no
exemptions whatsoever from the payment of
customs duties (Sec. 105, last par.)
EXCEPTIONS:
1. If provided under the TCC (e.g. conditionally-
free importation)
2. Exemptions granted to GOCCs with existing
contracts, commitments, agreements or
obligations with foreign countries
3. Exemptions of international institutions,
associations or organizations pursuant to
agreements and special laws
4. Exemptions granted by the President of the
Phils. Upon recommendation of NEDA in the
interest of national economic development.
(Sec. 1205)

LIABILITY OF IMPORTER FOR CUSTOMS DUTIES
1. A personal debt due from the importer
which can be discharged only by payment in
full of all duties and taxes
2. a lien upon imported articles which may be
enforced while they are in custody or subject
to the control of the government (sec 1204)

EXTENT OF IMPORTERS LIABILITY
limited to the value of the imported merchandise.
In case of forfeiture of the seized materials, the
maximum civil penalty is the forfeiture itself.
(Mendoza v. David, 1 SCRA 791)

PREFERENCE ON THE OWNER OF IMPORTED
ARTICLES FOR CUSTOMS PURPOSES
All articles imported into the Philippines shall be held
to be the property of:
the person to whom the property is
consigned
the holder of the bill of lading duly endorsed
by the consignee therein named
the consignee if consigned to order by the
consignor
the underwriters of the abandoned articles
saved from a wreck at sea, along the coast
or in any area in the Phils.

DUTIABLE IMPORTATION
Articles although previously exported from the
Philippines, become dutiable from the entry of the
vessel or aircraft into the Philippine jurisdiction
until the payment of duties, taxes, and other
charges and the issuance of the permit for the
withdrawal of said goods from the custom
houses.

BASIS OF DUTIABLE VALUE (Sec. 201 TCC, as
amended by RA 9135)

Sec. 201.
Method One. Transaction Value. - The dutiable
value of an imported article subject to an ad valorem
rate of duty shall be the transaction value, which shall
be the price actually paid or payable for the goods
when sold for export to the Philippines, adjusted by
adding:
1. The following to the extent that they are incurred
by the buyer but are not included in the price
actually paid or payable for the imported goods:
Commissions and brokerage fess (except buying
commissions);
Cost of containers;
Cost of containers;
The cost of packing, whether for labor or
materials;
The value, apportioned as appropriate, of the
following goods and services: materials,
components, parts and similar items incorporated
in the imported goods; tools; dies; moulds and
similar items used in the production of imported
goods; materials consumed in the production of
the imported goods; and engineering,
development, artwork, design work and plans
and sketches undertaken elsewhere than in the
Philippines and necessary for the production of
imported goods, where such goods and services
are supplied directly or indirectly by the buyer
free of charge or at a reduced cost for use in
connection with the production and sale for
export of the imported goods;
The amount of royalties and license fees related
to the goods being valued that the buyer must
pay, either directly or indirectly, as a condition of
sale of the goods to the buyer;
2. The value of any part of the proceeds of any
subsequent resale, disposal or use of the
imported goods that accrues directly or indirectly
to the seller;
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3. The cost of transport of the imported goods from
the port of exportation to the port of entry in the
Philippines;
4. Loading, unloading and handling charges
associated with the transport of the imported
goods from the country of exportation to the port
of entry in the Philippines; and
5. The cost of insurance.

All additions to the price actually paid or
payable shall be made only on the basis of objective
and quantifiable data.
No additions shall be made to the price actually
paid or payable in determining the customs value
except as provided in this Section: Provided, That
Method One shall not be used in determining the
dutiable value of imported goods if:
a) There are restrictions as to the disposition or use
of the goods by the buyer other than restrictions
which:
Are imposed or required by law or by
Philippine authorities;
Limit the geographical area in which the
goods may be resold; or
Do not substantially affect the value of the
goods.
b) The sale or price is subject to some condition or
consideration for which a value cannot be
determined with respect to the goods being
valued;
c) Part of the proceeds of any subsequent resale,
disposal or use of the goods by the buyer will
accrue directly or indirectly to the seller, unless
an appropriate adjustment can be made in
accordance with the provisions hereof; or
d) The buyer and the seller are related to one
another, and such relationship influenced the
price of the goods. Such persons shall be
deemed related if:
They are officers or directors of one anothers
businesses;
They are legally recognized partners in business;
There exists an employer-employee relationship
between them;
Any person directly or indirectly owns, controls or
holds five percent (5%) or more of the
outstanding voting stock or shares of both seller
and buyer;
One of them directly or indirectly controls the
other;
Both of them are directly or indirectly controlled
by a
third
pers
on;
Tog
ethe
r
they
directly or indirectly control a third person; or
They are members of the same family, including
those related by affinity or consanguinity up to
the fourth civil degree.

Persons who are associated in business with one
another in that one is the sole agent, sole distributor
or sole concessionaire, however described, of the
other shall be deemed to be related for the purposes
of this Act if they fall within any of the eight (8) cases
above.

(B) Method Two. Transaction Value of
Identical Goods. Where the dutiable value cannot
be determined under method one, the dutiable value
shall be the transaction value of identical goods sold
for export to the Philippines and exported at or about
the same time as the goods being valued. "Identical
goods" shall mean goods which are the same in all
respects, including physical characteristics, quality
and reputation. Minor differences in appearances
shall not preclude goods otherwise conforming to the
definition from being regarded as identical.

(C) Method Three. Transaction Value of
Similar Goods. Where the dutiable value cannot
be determined under the preceding method, the
dutiable value shall be the transaction value of similar
goods sold for export to the Philippines and exported
at or about the same time as the goods being valued.
"Similar goods" shall mean goods which, although
not alike in all respects, have like characteristics and
like component materials which enable them to
perform the same functions and to be commercially
interchangeable. The quality of the goods, their
reputation and the existence of a trademark shall be
among the factors to be considered in determining
whether goods are similar.
If the dutiable value still cannot be determined
through the successive application of the two
immediately preceding methods, the dutiable value
shall be determined under method four or, when the
dutiable value still cannot be determined under that
method, under method five, except that, at the
request of the importer, the order of application of
methods four and five shall be reversed: Provided,
however, That if the Commissioner of Customs
DRAWBACK: It is a device resorted to for
enabling a commodity affected by taxes to be
exported and sold in foreign markets upon the
same terms as if it had not been taxed at all. (Uy
Chiaco Sons vs. Collector of Customs, 24 Phil
562)

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deems that he will experience real difficulties in
determining the dutiable value using method five, the
Commissioner of Customs may refuse such a
request in which event the dutiable value shall be
determined under method four, if it can be so
determined. xxx

CONDITIONS FOR GRANT OF DRAWBACK
1. Imported material was actually used in the
production of article to be exported.
2. Refund or credit shall not exceed 100% of
duties paid on the imported material
3. No determination by NEDA of the
requirement for certification on non-
availability of locally produced or
manufactured competitive substitutes for the
imported material (no local substitute for the
materials)
4. Exportation must be made within 1 year after
importation of material and claim for refund
or credit must be made within 6 months from
exportation
5. When 2 or more result from the used of same
imported material, apportionment shall be
made.
o Every application for drawback must
pay P500 filing, processing, and
supervision fees
o Claims shall be paid by BoC within
60 days after receipt of properly
accomplished claims

TRANSACTION VALUE UNDER RA 8181
It is the invoice value of the goods plus freight,
insurance, costs, expenses.
The Dutiable value of an imported article shall
be the transaction price, which shall be the
price actually paid or payable for the goods
when sold for export to the Phil., adjusted by
adding the ff to the extent that they are incurred
by the buyer but not included in the price paid:
o Commissions and brokerage fees,
costs of containers, costs of packing
o Value of materials, components,
parts and item incorporated in the
importer good
o Royalties and license fees that buyer
paid
o Any part of the proceeds of a
subsequent resale, disposal or use
of good that accrues to the seller;
o Transportation cost from port of
export to port of entry in Phil
o Loading, unloading and handling
charges(arrastre)
o insurance
This replaces the Home Consumption Value as
basis of valuation of goods.

CLASSIFICATION OF CUSTOMS DUTIES
1. Regular duties those which are imposed
ordinarily as a matter of course without order
from the higher authorities and collected
merely as a source of revenue
a. Ad Valorem Duty this is a duty based
on the value of the imported article
b. Specific Duty- this is duty based on the
dutiable weight of goods (either the gross
weight, legal weight or the net weight)
2. Special duties- those which are imposed
and collected in addition to ordinary duties
usually to protect local industries against
foreign competition:
a. Dumping Duty
b. Countervailing duty
c. Marking duty
d. Discriminatory duty

NATURE AND PURPOSE OF SPECIAL CUSTOMS
DUTIES
1. These are additional import duties imposed on
specific kinds of imported articles under certain
conditions
2. These are imposed for the protection of
consumers and manufacturers as well as Phil.
Products from undue competition posed by
foreign made products.
o These cannot be imposed without regular
duties because the law says that it is to
be in addition to such.

SPECIAL DUTIES are:

DUTIES NATURE AMOUNT
/RATE
IMPOSING
Authority
Dumping
Duty
Imposed
on foreign
articles:
a. Being
Difference
between the
actual price
and the
Special
Committee
on Anti-
dumping
IMPORT ENTRY: It is a declaration to the
BOC showing particulars of the imported
article that will enable the customs
authorities to determine the correct duties.
An importer is required to file an import
entry. It must be accomplished at the
moment the last cargo is disembarked from
the vessel.
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importe
d into,
sold or
is likely
to be
sold in
the
Phils.
b. At a
price
less
than its
normal
value
The
importation
or sale of
which
might injure
an industry
producing
like goods
in the Phils.
normal
value of the
article
(extent of
the
underpricing
)
(Sec. of
Finance-
chairman;
members:
Sec of DTI,
Sec. of
Agriculture/
Sec of Labor)
Counterv
ailing
Duty
Imposed
upon
foreign
goods
enjoying
subsidy
thus
allowing
them to sell
at lower
prices to
the
detriment
of local
products
similarly
situated
Equivalent
to the
bounty,
subsidy or
subvention
Sec of
Finance
Marking
Duty
Imposed
upon those
not
properly
marked as
to the place
of origin of
the goods
5% ad
valorem of
articles
Comm of
Custom
Discrimin
atory
Duty
Imposed
upon
goods
coming
from
countries
that
discriminat
Pres. Of the
Phil.
e against
Philippine
products


Sec. 28, ART VI of the 1987 Constitution and Sec.
401, TCC.
The President may fix tariff rates, import and
export quotas, etc. under TCC

1. To increase, reduce or remove existing
protective rates of import duty (including any
necessary change in classification)
the existing rates may be increased or
decreased to any level on one or several
stages but in no case shall be higher
than a maximum of 100% as valorem
2. To establish import quota or to ban imports of
any commodity, as may be necessary
3. To impose an additional duty on all imports
not exceeding 10% ad valorem whenever
necessary

LIMITATION IMPOSED REGARDING THE

1. Conduct by the Tariff Commission of an
investigation in a public hearing
The Commissioner shall also hear the
views and recommendations of any
government office, agency or
instrumentality concerned
The NEDA thereafter shall submits its
recommendation to the President
2. The power of the President to increase or
decrease the rates of import duty within the
abovementioned limits fixed in the Code shall
include the modification in the form of duty.
In such a case the corresponding ad
valorem or specific equivalents of the
duty with respect to the imports from the
principal competing country for the most
recent representative period shall be
used as bases. (Sec 401 TCC)

REQUIREMENT TO KEEP RECORDS (Sec. 3514
TCC, as amended by RA 9135)
All importers are required to keep at their
principal place of business, in the manner prescribed
by regulations to be issued by the Commissioner of
Customs and for a period three (3) years from the
date of importation, all the records of their
importations and/or books of accounts, business and
computer systems and all customs commercial data
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including payment records relevant for the verification
of the accuracy of the transaction value declared by
the importers/customs brokers on the import entry.
All brokers are required to keep at their principal
place of business, in the manner prescribed by
regulations to be issued by the Commissioner of
Customs and for a period of three (3) years from the
date of importation copies of the above mentioned
records covering transactions that they handle.

THE TARIFF COMMISSION

FUNCTION OF THE TARIFF COMMISSIONS
I. Investigative Powers
a) The administration of and the fiscal and
industrial effects of the tariff and customs
laws of this country now in force or which
may hereafter be enacted.
b) The relations between the rates of duty on
raw materials and the finished or partly
finished products.
c) The effects of ad valorem and specific duties
and of compound specific and ad valorem
duties.
d) All questions relative to the arrangement of
schedules and classification of articles in the
several schedules in the tariff law.
e) The tariff relations between the Philippines
and other foreign countries commercial
treaties, preferential provisions, economic
alliances, the effect of export bounties and
preferential transportation rates.
f) The volume of importations compared with
domestic production and consumption; and
g) In general, to investigate the operation of
customs and tariff laws, including their
relation to the national revenues, their effect
upon the industries and labor of the country
and to submit reports of its investigation as
provided. (Sec. 506, TCC)

II. Administrative Assistance to the President and
Congress (Sec. 506, TCC)

Tax Remedies Under the Tariff and Customs
Code (TCC)

REMEDIES OF THE GOVERNMENT TO EFFECT
COLLECTION OF TAXES

I. Administrative/Extrajudicial
1. Tax Lien (Sec. 1508, TCC)
Attaches on the goods, regardless of
ownership, while still in the custody or
control of the Govt.
Availed of when the importation is neither
prohibited nor improperly made.
2. Administrative Fines and Forfeitures
Applied when the importation in unlawful;
And it may be exercised even where the
articles are not or no longer in Customs
custody unless the importation is merely
attempted in which case it may be
effected only while the goods are still
within the Customs jurisdiction or in the
hands of a person who is aware thereof
(Sec. 2531 & 2530 TCC)
Under Sec. 2530 (a) of the TCC, in order
to warrant forfeiture, it is not necessary
that the vessel or aircraft must itself carry
the contraband. The complementary if
collateral use of the Cessna plane for
smuggling operations is sufficient for it to
be deemed to have been used in
smuggling (Llamado v. Comm. Of
Customs, 122 SCRA 118)
3. Reduction of customs
duties/compromise:
Subject to approval of Sec. of finance
(Sec. 709, 2316 TCC)
4. Seizure, Search, Arrest (Sec. 2205, 2210,
2211 TCC)

II. Judicial
this remedy is normally availed of when the tax
lien is lost by the release of the goods

1. Civil action (Sec. 1204 TCC)
2. Criminal action

REMEDIES OF THE TAXPAYER

I. Administrative
1. Protest
Any importer or interested party
dissatisfied with published value within
15 days from date of publication, or
within 5 days from the date the importer
is entitled to refund if payment is
rendered erroneous or illegal by events
occurring after the payment.
Taxpayer - within 15 days from
assessment. Payment under protest is
necessary (Sec. 2308, 2210 TCC)
2. Refund
A written claim for refund may be
submitted by the importer in abatement
cases on missing packages, deficiencies
in the contents of packages or shortages
before arrival of the goods in the
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Philippines, articles lost or destroyed
after such arrival, dead or injured
animals, and for manifest clerical errors
and
Drawback cases where the goods are re-
exported. (Sec. 1701-1708 TCC)
3. Settlement of any seizure by payment of
fine or redemption
BUT this shall not be allowed in any case
where importation is absolutely
prohibited or the release would be
contrary to law or when there is an actual
and intentional fraud (Sec. 2307 TCC)
4. Appeal
Within 15 days to Commissioner after
notification by collector of his decision
(Sec. 2313 TCC)

II. Judicial

1. Appeal
Within 30 days from receipt of decision of
the Commissioner or Secretary of
Finance to the division of the CTA (Sec.
2403 TCC, Sec. 7 RA 1125, as amended
by Sec. 9 RA 9282)
Since Sec. 11 of RA 1125, as amended
by Sec. 9 RA 9282 empowers the tax
court to issue injunctions, it would appear
than an importer may appeal without first
paying the duties, such as in seizure but
not in protest cases.
2. Action to question the legality of seizure
3. Abandonment (Sec. 1801 TCC)
i. expressly (Sec. 1801 TCC)
ii. impliedly
failure to file an import entry within
30 days from the discharge of goods
or
having filed an entry, fails to claim
within 15 days but it shall not be so
effective until so declared by the
collector. (Sec. 1801, as amended
by RA 7651)

TWO KINDS OF PROCEEDINGS IN THE BOC
1. Customs protest cases
2. Customs seizure and forfeiture cases

A. Customs Protest Cases
Definition: These are cases which are solely with
liability for customs duties, fees, and other charges.
NOTE: Before filing a protest there must first be a
payment under protest.

When Customs Protest Applicable
The customs protest is required to be filed
only in case the liability of the taxpayer for
duties, taxes, fees and other charges is
determined and the taxpayer disputes said
liability.

When Customs Protest NOT Required
When there is no dispute, but the claim for
refund arises by reason of the happening of
supervening events such as when the raw
material imported is utilized in the production
of finished products subsequently reported
and a duty drawback is claimed.

REQUIREMENTS FOR MAKING A PROTEST
1. Must be in writing
2. Must point out the particular decision or
ruling of the Collector of Customs to which to
which exception is taken or objection made;
3. Must state the grounds relied upon for relief;
4. Must be limited to the subject matter of a
single adjustment;
5. Must be filed when the amount claimed is
paid or within 15 days after the payment;
6. Protestant must furnish samples of goods
under protest when required.

PROCEDURE ON CUSTOMS PROTEST CASES

1. The Collector acting within his jurisdiction
shall cause the imported goods to be entered
at the customhouse.
2. The Collector shall assess, liquidate, and
collect the duties thereon, or detain the said
goods if the party liable does not pay the
same.
3. The party adversely affected may file a
written protest on his foregoing liability with
the Collector within 15 days after the
liquidated amount (the payment under
protest rule applies)
4. Hearing within 15 days from receipt of the
duly presented protest. Upon termination of
the hearing, the Collector shall decide on the
same within 30 days

IF DECISION IS
ADVERSE TO THE
PROTESTANT
IF DECISION IS
ADVERSE TO THE
GOVERNMENT
Appeal with the
Commissioner within 15
days from notice
Automatic review by
Commissioner
Appeal with CTA division
within 30 days from
notice
Automatic review by Sec.
of Finance
Appeal with the CTA en If decision of
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banc Commissioner or Sec. is
adverse to the protestant,
he may appeal to the
CTA and SC under the
same procedure on the
left.
Appeal by certiorari to
the SC within 15 days
from notice

B. Seizure and Forfeiture Cases
Definition: These refer to matters involving
smuggling. It is administrative and civil in nature and
is directed against the res or imported articles and
entails a determination of the legality of their
importation. These actions are in rem.
Thus, it is of no defense that the owner of the
vessel sought to be forfeited had no actual
knowledge that his property was used
illegally. The absence or lack of actual
knowledge of such use is a defense personal
to the owner himself which cannot in any way
absolve the vessel from the liability of
forfeiture. (Comm. Of Customs v. Manila
Starr Ferry, Inc., 227 SCRA 317)

Smuggling
A. An act of any person who shall:
Fraudulently import any article contrary to
law, or
Assist in so doing, or
Receive, conceal, buy, sell, facilitate or
transport such article knowing its illegal
importation (sec. 3601 TCC)
Export contrary to law (Sec. 3514 TCC)

B. The Philippines is divided into various ports of
entry - entry other than port of entry will be
SMUGGLING.

ALL articles imported into the Philippines
whether subject to duty or not shall be
entered through a customs house at a port of
entry.

ENTRY in Customs law means -
The documents filed at the Customs house
The submission and acceptance of the
documents
The procedure of passing goods through the
customs house (Rodriguez v. CA, Set. 18,
1995)

Evidence for Conviction in Smuggling Cases
Mere possession of the article in question
UNLESS the defendant could explain that his
possession is lawful to the satisfaction of the
court (Sec. 3601 TCC).
Payment of the tax due after apprehension is
not a valid defense (Rodriguez v. CA, 248
SCRA 288)

Things Subject to Confiscation in Smuggling
Cases
Anything that was used for smuggling is
subject to confiscation, like the vessel, plane,
etc. (Llamado v. Comm. of Customs, 1983).
Exception: Common carriers that are not privately
chartered cannot be confiscated.

Right of Customs Officers to Effect Seizure &
Arrest
May seize any vessel. Aircraft, cargo,
article, animal or other movable property
when the same is subject to forfeiture or
liable for any time as imposed under tariff
and customs laws, rules and regulations.
May exercise such powers only in
conformity with the laws and provisions
of the TCC (Sec. 2205)

Common Carriers, Forfeiture
Common carriers are generally not subject to
forfeiture although if the owner has
knowledge of its use in smuggling and was a
consenting party, it may also be forfeited.
If a motor vehicle is hired to carry smuggled
goods but it has no Certificate of Public
Convenience (CPC), It is not a common
carrier. It is thus subject to forfeiture and
lack of personal knowledge of the owner or
carrier is not a defense to forfeiture.

Properties Not Subject to Forfeiture In The
Absence of Prima Facie Evidence -
The forfeiture of the vehicle, vessel or aircraft
shall not be effected if it is established that
the owner thereof or his agent in charge of
Contraband: Articles of prohibited importations
or exportations. (Sec. 3514 TCC)
Port of Entry: A domestic port open to both
foreign and coastwise trade including airport of
entry. (Sec. 3514 TCC)
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the means of conveyance used as aforesaid
has no
knowledge of or participation in the unlawful act:
Provided, however, that a prima facie presumption
shall exist against the vessel, vehicle or aircraft under
any of the following circumstances:
1. If the conveyance has been used for
smuggling at least twice before;
2. If the owner is not in the business for
which the conveyance is generally
used; and
3. If the owner is financially not in the
position to own such conveyance.

DOCTRINE OF HOT PURSUIT
Requisites
1. Over Vessels
a. An act is done in Phil. Waters which
constitutes a violation of the tariff and
custom laws.
b. A pursuit of such vessel began within
the jurisdictional waters which
i. may continue beyond the
maritime zone, and
ii. the vessel may be seized on
the high seas.
2. Over Imported Articles
a. There is a violation of the tariff and
customs laws.
b. As a consequence, they may be
pursued in the Phils
c. With jurisdiction over them at any
place therein for the enforcement of
the law. (2
nd
par. Sec. 603 TCC)

RTC v. BOC
The RTCs do not have jurisdiction over
seizure and forfeiture proceedings conducted
by the BOC and to interfere with these
proceedings. The Collector of Customs has
exclusive jurisdiction over all questions
touching on the seizure and forfeiture of
dutiable goods.
No petitions for certiorari, prohibition or
mandamus filed with the RTC will lie because
these are in reality attempt to review the
Commissioners actuations. Neither replevin
filed with the RTC will issue.
Rationale: Doctrine of Primary Jurisdiction.
Even if a Customs seizure is illegal, exclusive
jurisdiction (to the exclusion of regular courts)
still belongs to the Bureau of Customs. (Jao
v. CA, Oct. 6, 1995)

Goods in Customs Custody Beyond Reach of
Attachment
Goods in the customs custody pending
payments of customs duties are beyond the
reach of attachment. As long as the
importation has not been terminated, the
imported goods remain under the jurisdiction
of the Bureau of Customs. (Viduya v.
Berdiago, 73 SCRA 553)

Persons Having Police Authority To Enforce The
Tariff and Customs Laws and Effect Searches,
Seizures and Arrests
1. Officials of the BOC, district collectors, police
officers, agents, inspectors and guests of the
BOC;
2. Officers of the Phil. Navy and other members
of the AFP and national law enforcement
agencies when authorized by the Comm. Of
Customs;
3. Officials of the BIR on all cases falling within
the regular performances of their duties,
when the payment of internal taxes are
involved
4. Officers generally empowered by law to
effect arrests and execute processes of
courts, when acting under the direction of the
Collector. (Sec. 2203 TCC)

Administrative and Judicial Procedures Relative
to Customs Seizures and Forfeitures
1. Determination of probable cause and
issuance of warrant.
2. Actual seizure of the articles.
3. Listing of description, appraisal and
classification of seized property.
4. Report of seizure to Comm. Of Customs and
the Chairman, Comm. On Audit.
5. Issuance by the Collector of warrant of
detention.
6. Notification to owner or importer.
7. Formal hearing.
8. District collector renders his decisions.

If decision is not
favorable to the
aggrieved owner or
importer
If decision is not
favorable to the
government
Appeal by aggrieved
owner or importer
Automatic review by
Comm.

REQUIREMENTS FOR CUSTOMS FORFEITURE
1. The wrongful making by the owner, importer,
exporter or consignee of any declaration or
affidavit, or the wrongful making or delivery
by the same persons of any invoice, letter or
paper - all touching on the importation or
exportation of merchandise; and
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2. That such declaration, affidavit, invoice, letter
or paper is false. (Farolan, Jr. v. CTA, 217
SCRA 298)

Places Where Searches and Seizures May Be
Conducted
Enclosures
dwelling house (there must be search
warrant issued by a judge)
vessels or aircrafts and persons or articles
conveyed therein
vehicles, beasts or persons
persons arriving from foreign countries

Burden of Proof in Seizure or Forfeiture
claimant (Sec. 2535 TCC)

Requirements for Manifest
A manifest in coastwise trade for cargo and
passengers transported from one place or
port in the Phils. to another is required when
one or both of such places is a port of entry.
(Sec. 906 TCC) Manifests are also required
of vessels from a foreign port. (Sec. 1005
TCC)

Query: Is Manifest Required Only for Imported
Goods?
No. Articles subject to seizure do not have to
be imported goods. Manifests are also required of
articles found on vessels or aircrafts engaged in
coastwise trade (Rigor v. Robles, 117 SCRA 780)

Unmanifested Cargo is Subject to Forfeiture
Whether the act of smuggling is established
or not under the principle of res ipsa loquitur.
It is enough that the cargo is unmanifested
and that there was no showing that payment
of duties thereon had been made for it to be
subject to forfeiture.

Settlement of Forfeiture Cases
General Rule: Settlement of cases by payment of
fine or redemption of forfeited property is allowed.
Exceptions:
1. The importation is absolutely prohibited or
2. The surrender of the property to the person
offering to redeem would be contrary to law,
or
3. Where there is fraud (Sec. 2307 TCC)

Acquittal in Criminal Charge Not Res Judicata in
Seizure or Forfeiture Proceedings
Reasons:
Criminal proceedings are actions in
personam while seizure or forfeiture
proceedings are actions in rem.
Customs compromise does not extinguish
criminal liability (Pp. v. Desiderio, Nov. 26,
1965)

At any time prior to the sale, the delinquent importer
may settle his obligations with the Bureau of Customs
in which case the aforementioned articles may be
delivered upon payment of the corresponding duties
and taxes and compliance with all other legal
requirements. (Sec. 1508 TCC)

Abatement
The reduction or non-imposition of customs
duties on certain imported materials as a
result of;
o Damage incurred during voyage;
o Deficiency in contents package;
o Loss or destruction of articles after
arrival;
o Death or injury of animals.

Fraudulent Practices Considered As Criminal
Offences Against Customs Revenue Laws
Unlawful importation;
Entry of imported or exported article by
means of any false or fraudulent practices,
invoice, declaration, affidavit or other
documents;
Entry of goods at less than their true weights
or measures or upon a classification as to
quality or value;
Payment of less than the amount due.

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PROCEDURE TO PROTEST
CUSTOM COLLECTORS ASSESSMENT

Articles appraised, classified and assessed
Taxpayer agrees with assessment Taxpayer disagrees with assessment
Pays duties, taxes, etc. Files written protest with ruling of Collector (Sec.
2303, TCC)
Within 15 days from receipt of assessment
No protest considered unless amount due is paid
Goods released Collector schedules hearing of protest w/in 15 days
from receipt of protest
Collector renders decision w/in 30 days from
termination of hearing
Protest Denied Protest Granted
Automatic appeal to Customs
Commissioner
(Sec. 2313, TCC)
Appeal to Customs Commissioner w/in
15 days from notice
(Sec. 2313, TCC)
Protest Denied
Protest Denied
Automatic appeal to Sec. of Finance
Commissioner of Customs fails to
render decision w/in 30 days
Protest Affirmed
Assessment final
If unfavorable, appeal to CTA w/in 30
days from receipt of decision
(Sec. 7, RA 1125)
Assessment final
Automatic appeal to Sec. of Finance
reports elevated w/in 5 days from
promulgation or after lapse of 30 days if
no decision
Assessment final
CTA decides w/in 30
days
Appeal to SC w/in 15 days from
notice (Rule 43, ROC)
No appeal assessment final
Protest Affirmed
Articles enter customs house
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EXHIBITS
TAX ON INDIVIDUALS
Type of Income Tax Rate For
Resident Citizen
Rate For Non-
Resident Citizen
(Incl. OCW)
Tax Rate For
Resident Alien
Non-Resident
Alien engaged in
trade / business
Non-Resident
Alien NOT
engaged in trade /
business
Interest from any currency bank
deposit & yield or any other
monetary benefit from deposit
substitutes & from trust funds &
similar arrangements
Royalties (except on books & other
literary works & musical
compositions)
Prizes > P10,000
Other winnings except PCSO &
Lotto
20% Final Tax 20% Final Tax 20% Final Tax 20% Final Tax 25% Final tax
Royalties on books & other literary
works & musical compositions
Final Tax of 10% Final Tax of 10% Final Tax of 10% Final Tax of 10% 25% Final tax
Prizes < P10,000

Schedular rate Schedular rate Schedular rate Schedular rate 25% Final tax
Winnings from PCSO & Lotto exempt exempt Exempt Exempt 25% Final tax
Interest Income received by an
individual (except a nonresident
individual) from a depositary bank
under the expanded foreign
currency deposit system
7.5% Final Tax exempt 7.5% Final Tax Exempt Exempt
Interest income from long term
deposit or investment in the form of
savings, common or individual trust
fund, deposit substitutes, investment
management accounts & other
investments evidenced by
certification in such form prescribed
by the BSP
Exempt from tax Exempt from tax Exempt from tax Exempt from tax 25% Final tax
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Resident Citizen
Rate For Non-
Resident Citizen
(Incl. OCW)
Tax Rate For
Resident Alien
Non-Resident
Alien engaged in
trade / business
Non-Resident
Alien NOT
engaged in trade /
business
Pre-termination of such certificate
before the 5
th
year (i.e. 4 years to
less than 5 years)
5% Final tax on
the entire income
5% Final tax on
the entire income
5% Final tax on
the entire income
5% Final tax on
the entire income
N/A
3 years to less than 4 years 12% 12% 12% 12% N/A
less than 3 years 20% 20% 20% 20% N/A
Cash and/or Property Dividends
from a domestic corp. or from a joint
stock co., insurance or mutual fund
companies & regional operating
headquarters of multinational
companies;
Share of an individual in the
distributable net income after tax of a
partnership (except GPP);
Share of an individual in the net
income after tax of an assn., a joint
account or a joint venture or
consortium taxable as a corp. of w/c
he is a member/co-venturer
10% Final Tax 10% Final Tax 10% Final Tax 20% Final Tax 25% Final tax
Capital gains from sale, barter,
exchange or other disposition of
shares of stock (of domestic corp.)
not traded in the stock exchange

For the first P100,000
5% Final tax on
net capital gains
realized during the
taxable yr:
5% Final tax on
net capital gains
realized during
the taxable yr:
5% Final tax on
net capital gains
realized during the
taxable yr:
5% Final tax on net
capital gains
realized during the
taxable yr:
5% Final tax on net
capital gains
realized during the
taxable yr:
On any amount in excess of
P100,000
10% 10% 10% 10% 10%
Capital gains from sale, exchange
or other disposition of real property
located in Philippines, classified as
capital assets, including pacto de
retro sales & other forms of
conditional sales

6% Final Tax on
the gross selling
price or current
fair market value
or zonal value
whichever is
higher
6% Final Tax on
the gross selling
price or current
fair market
value or zonal
value whichever
is higher
6% Final Tax on
the gross selling
price or current
fair market value
or zonal value
whichever is
higher
6% Final Tax on
the gross selling
price or current
fair market value
or zonal value
whichever is higher
6% Final Tax on
the gross selling
price or current
fair market value
or zonal value
whichever is higher
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Resident Citizen
Rate For Non-
Resident Citizen
(Incl. OCW)
Tax Rate For
Resident Alien
Non-Resident
Alien engaged in
trade / business
Non-Resident
Alien NOT
engaged in trade /
business

CG from sale/disposition of principal
residence by natural persons, the
proceeds of which is fully utilized in
acquiring/constructing a new
principal residence w/in 18 mos. from
date of sale, provided historical
cost/adjusted basis of sold prop be
carried to the new principal
residence built/acquired
Commissioner. Duly notified w/in 30
days from sale Tax exemption can
only be availed once every 10 years
If no full utilization of proceeds of
sale, such portion shall be subject to
CG tax

Exempt from CG
tax

Exempt from CG
tax

Exempt from CG
tax

Exempt from CG
tax

Exempt from CG
tax
**a nonresident alien engaged in trade or business is an individual who shall come to the Philippines & stay therein for an
aggregate period of more than 180 days during any calendar year

TAX ON CORPORATIONS
Type of Income Domestic Corp Resident Foreign Corp Non-Resident Foreign
Interest on currency bank deposits & yield or any other
monetary benefit form deposit substitutes & from trust funds
& similar arrangement
Royalties (similar within the Philippines)
20% Final Tax 20% Final Tax 32%/35% Income Tax
Interest income from a depositary bank under the expanded
foreign currency deposit system (EFCDS)
7.5% Final Tax 7.5% Final Tax Exempt from tax
CG from sale, barter, exchange or other disposition of shares
of stock (of domestic corp.) not traded in the stock exchange
For the first P100,000
5% Final tax on net
capital gains realized
during the taxable yr:
5% Final tax on net
capital gains realized
during the taxable yr:
5% Final tax on net cap.l
gains realized during the
taxable yr:
On any amount in excess of P100,000 10% 10% 10%
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Income derived by depositary bank under the EFCDS from
foreign currency transactions with non-residents, offshore
banking unites in the Philippines, local commercial banks
including branches of foreign banks that may be authorized
by the BSP to transact business with FCDS units & other
depositary banks under the EFCDS
Exempt from Final tax
Part of gross income
subject to 32/%35% corp.
income tax (RA 9294)
Exempt from Final tax
Part of gross income
subject to 32%/35%
corp. income tax (RA
9294)
N/A
Interest income form foreign currency loans granted by such
depository banks under said EFCDS to RESIDENTS
10% Final Tax 10% Final Tax N/A
Inter-corporate dividends (from a domestic corp.) Exempt form tax Exempt form tax 15% Final Tax
* subject to the rule on
tax credit for tax actually
paid and tax deemed
paid. Otherwise, subject
to regular income tax rate
of 32%/35%
CG from sale, exchange or other disposition of lands and/or
buildings which are not used in the business of a corp. & are
treated as capital assets
6% Final tax on gross
selling price or FMV or
zonal value, whichever is
higher
32%/35% income tax 32%/35% income tax

Type of Corporate Taxpayer Tax Rate
International Air Carrier
Gross Phil. Billings = amount of gross revenue derived from carriage of persons, excess baggage,
cargo & mail originating form the Philippines in a continuous & uninterrupted flight, irrespective of the
place of sale/issue & the place of payment of the ticket or passage document; Includes tickets
revalidated, exchanges &/or indorsed to another intl airline if the passenger boards a plane in a
port/point in the Philippines. For a flight which originates from the Philippines but transshipment of
passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment
shall form part of the GPB

International Shipping
Gross Phil Billings = gross revenue whether for passenger, cargo or mail originating from the
Philippines. up to final destination, regardless of the place of sale/ payments of passage of freight
documents
2 % on Gross Phil Billings
Offshore Banking Units Final Tax of 10% on gross income
from transactions with residents
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Branch
Profits remitted (connected with the conduct of its trade/business in the Philippines.) = based on the
total profits applied/earmarked for remittance without any deduction for the tax component thereof
(except those registered with the PEZA)
15% on branch profits remittance
Regional/Area Headquarters of Multinational Cos. = do not earn/derive income from the Philippines. &
w/c act as supervisory, communication & coordinating center for their affiliates, subsidiaries or
branches in the Asia-Pacific Region & other foreign markets

Regional Operating Headquarters of Multinational Companies = engaged in any of the following
services:
a. General Administration & planning
b. Business planning & coordination
c. Sourcing & procurement of raw materials & components
d. Corporate finance advisory services
e. Marketing control & sales promotion
f. Training & personnel mgt.
g. Logistic services
h. Research & development
i. Services & product development
j. Technical support & maintenance
k. Data processing & communication
l. Business development
Exempt from tax

10% of taxable income

Type of Taxpayer Tax Rate
Nonresident cinematographic film owner, lessor or distributor (NOTE: Even to
individuals)
25% of gross income
Nonresident owner or lessor of vessels chartered by the Phil. Nationals 4.5% of gross rentals, lease or charter fees
Nonresident owner or lessor of aircraft, machineries & other equipment 7.5% of gross rentals or fees

Type of Income Tax Rate For Alien Individual Employed By
Regional Or Area
Headquarters & Regional
Operating Headquarters of
Multinational Cos.
Offshore Banking Units Petroleum Service
Contractor &
Subcontractor
Gross Income = Salaries, Wages, Annuities,
Compensation, Remuneration, Other
Emoluments (i.e. honoraria & allowances)
received from such cos. Provided, same tax
15% of gross income 15% of gross income 15% of gross income
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treatment shall apply to Filipinos abroad
employed & occupying same positions in these
companies
** Multinational company = a foreign firm/entity engaged in international trade with affiliates/subsidiaries/branch offices in the Asia
Pacific Region & other foreign markets

Taxation Law
SUMMER REVIEWER

Advisers: Atty. Serafin Salvador, Atty. Michael Dana Montero, Atty. Gaudencio Mendoza; Head: Julie Ann B. Domino, Juan J. P. Enriquez III;
Understudies: Rachelle T. Sy, Aldwin Mendoza, Timothy John Batan
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Taxation Law - Ateneo

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ATENEO CENTRAL BAR OPERATIONS 2007

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