Tax

TABLE OF CONTENTS
GENERAL PRINCIPLES 1
INCOME TAXATION 26
............................................................................................................................. Annexes to Income Tax 99
TRANSFER TAXES 116
........................................................................................................................................... Estate Taxes 116
......................................................................................................................................... Donors Taxes 129
VALUE-ADDED TAX 133
........................................................................................... Amendments to Value-Added Tax (Annex) 144
TARIFF AND CUSTOMS CODE 147
.............................................................................................................. Annexes to Tariff and Customs 159
TAX REMEDIES UNDER THE NIRC 164
...................................................................................................... Related Revenue Regulations (Annex) 195
LOCAL TAXATION 205
......... Specific Provisions on The Taxing and Other Revenue-Raising Powers of Local Government Units 223
COURT OF TAX APPEALS 226
............................................................................................................ Taxpayer Bill of Rights (Annex) 234
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TAXATION LAW
GENERAL PRINCIPLES
GENERAL PRINCIPLES
Power of Taxation
TAXATION. defined. power by which the
sovereign through its law-making body raises
revenue to defray the necessary expenses of the
government. It is a way of apportioning the costs
of the government among those who in some
measure are privileged to enjoy its benefits and
must bear its burdens.
Nature of the Taxing Power (ILL)
1. It is an inherent attribute of sovereignty
t he power of t axat i on i s i nherent i n
sovereignty as an incident or attribute thereof,
being essential to the existence of every
government. It exi sts apart from the
constitution and without being expressly
conferred by the people.
BASIS OF TAXATION (Lifeblood Theory)
The power of taxation is essential because
the government can neither exist nor endure
without taxation. Taxes are the lifeblood of the
government and their prompt and certain
availability is an imperious need (Bull vs. United
States G.R. No.5270, Jan.15, 1910). The collection
of taxes must be made without hindrance if
the state is to maintain its orderly existence.
The governments ability to serve and protect
the people depends largely upon taxes. Taxes
are what we pay for a civilized society (CIR vs.
Algue, G.R.No 28896 Feb. 17, 1988).
POWER OF TAXATION EXERCISED
The power of taxation is sometimes called the
power to destroy. Therefore it should be
exercised with caution to minimize injury to
the propriety rights of a taxpayer. It must be
exercised fairly, equally, and uniformly, lest
the tax collector kill the hen that lays the
golden egg. And in order to maintain the
general publics trust and confidence in the
Government this power must be used justly
and not treacherously. It does not conform to
the sense of justice for the Government to
persuade the taxpayer to lend it a helping
hand and later on to penalize him for duly
answering the urgent call.
THEORIES ON TAXATION
Necessity Theory
Taxes proceed upon the theory that the
existence of the government is a necessity;
that it cannot continue without the means to
pay its expenses; and that for those means, it
San Beda College of Law 1
2008 CENTRALIZED BAR OPERATIONS
EXECUTIVE COMMITTEE
VISMARCK UY over-all chair, APRIL CABEZA chair academics operations, ALDEAN LIM chair hotel operations,
AYN SARSABA vice chair for operations, ANTHONY PURGANAN vice chair for academics,
RONALD JOHN DECANO vice chair for secretariat, KARLA FUNTILA vice chair for finance,
JEFFREY GALLARDO vice chair for edp, ULYSSES GONZALES vice chair for logistics
TAXATION LAW
IRIS VICTORIA MERIN subject chair
MARK JULIUS ESTUR assistant chair
DICT V. UNTAYAO edp
MARIEL MAILOM general principles, MAUREEN ROSE OBON income taxation, MARK JULIUS ESTUR estate
taxation, MINERVA JIMENEZ donors tax and court of tax appeals, MARK ANTHONY DIZON, value added tax,
ARLENE ALDAY and NELSON SALVA JR. tax remedies, MAUREEN SEYMOUR JAVIER local taxation and real
property taxation, JULIUS BABALCON tariff and customs code, ROWENA MUTIA tables and annexes
MEMBERS: Maria Evitha Abante, Aldren Abrigo, Herbert Abugan, Julian Adarlo, James Agustin, Karren Amparo,
Mary Joy Aquino, Aileen Artificio, Ray John Bangi, Jennifer Bautista, Vincent Cablao, Raul Canon, Jay Martin Celzo, John
Ray Concepcion, Maureen De Castro, Ramon Alfredo Dela Cruz, Karla Funtila, Kathryn Joy Hautea, Irene May Junio,
Erwin Legaspi, Precious Angela Lledo, Micael Ortiz Luis, Katherine Jane Manarang, Masha Mariano, Leonardo Mendoza
II, Joanne Mosquera, Sol Pejo, Ryan Pingol, Donelle Jay Quilates, Diana Rabanal, Mariflor Reyes, Deepee Salazar, Ralph
Jerome Salvador, John Zernan Sambahon, Lauren Rose Tanyag, Maria Joy Toledo, Jan Reiner Uy, Jennylyn Valencia,
Cristiellane Valerio and Sherwin P. Pascua
has a right to compel all citizens and property
within its limits to contribute.
Taxation is a power emanating from necessity.
It is a necessary burden to preserve the
State's sovereignty and a means to give the
citizenry an army to resist an aggression, a
navy to defend its shores from invasion, a
corps of civil servants to serve, public
improvements designed for the enjoyment of
the citizenry and those which come within the
State's territory, and facilities and protection
which a government is supposed to provide.
(Phil. Guaranty Co., Inc. vs. CIR G.R. No.22074, Apr.
30, 1965)
Benefits-Protection/Reciprocity Theory
The power of the State to demand and
receive taxes is based on the reciprocal
duties of support and protection. The citizen
supports the State by paying the portion from
his property that is demanded in order that he
may, by means thereof, be secured in the
enjoyment of the benefits of an organized
society.
Thi s theory spawned the Doctri ne of
Symbiotic Relationship (CIR vs. Algue, G.R. No.
28896 Feb. 17, 1988) Every person who is able
must contribute his share in the burden of
running the government. The government for
its part is expected to respond in the form of
tangible and intangible benefits intended to
improve the lives of the people and enhance
their material and moral values.
2. It is legislative in character such power is
exclusively vested in the legislature except
when the Constitution provides otherwise.
This is based upon the principle that taxes
are a grant of the people who are taxed, and
the grant must be made by the immediate
representatives of the people. And where the
people have laid the power, there it must be
exercised. (Cooley)
SCOPE OF LEGISLATIVE TAXING POWER
(PAPKASM)
1. Person, property, occupation, excises or
privileges to be taxed provided they are
within the taxing jurisdiction. The taxing
authority can select the subjects of
taxation.
2. Amount or rate of tax
3. Purposes for which taxes shall be levied
provided they are for public purposes
4. Kind of tax to be collected
5. Apportionment of the tax (whether the tax
shall be general or limited to a particular
locality or partly general and partly local)
6. Situs of taxation
7. Method of collection
IS THE POWER TO TAX THE POWER TO
DESTROY?
Marshall laid down the rule that the Power to
tax is the power to destroy. According to
Cooley, this is because such power includes
the power to regulate even to the extent of
prohibition or destruction. Cooley also
emphasized that this should be used to
describe not the purposes for which the taxing
power may be utilized but the degree of vigor
with which the taxing power may be employed
in order to raise revenue.
According to Justice Cruz, the power to tax
includes the power to destroy if it is used
validly as an implement of the police power in
di scouragi ng and i n effect, ul ti matel y
prohibiting certain things or enterprises
inimical to the public welfare. But where the
power to tax is used solely for the purpose of
raising revenues, the modern view is that it
cannot be allowed to confiscate or destroy.
According to Holmes, the Power to tax is not
the power to destroy while the Supreme Court
sits because of the constitutional restraints
placed on a taxing power that violate
fundamental rights. Although the power to tax
is almost unlimited, it must not be exercised in
an arbitrary manner. If the abuse is so great
so as to destroy the natural and fundamental
rights of the people, it is the duty of the
judiciary to hold such an act unconstitutional.
POWER OF JUDI CI AL REVI EW I N
TAXATION
As long as the legislature, in imposing a tax,
does not violate applicable constitutional
limitations or restrictions, it is not within the
province of the courts to inquire into the
wisdom or policy of the exaction, the motives
behind it, the amount to be raised or the
persons, property or other privileges to be
taxed.
The courts power in taxation is limited only to
the application and interpretation of the law.
3. I t i s subj ect to consti tuti onal and
inherent limitations.
2 MEMORY AID IN TAXATION LAW
General Principles
Purposes and Objectives of Taxation
1. Revenue to raise funds or property to
enable the State to promote the general
welfare and protection of its citizens.
2. Non-Revenue (PR2EP)
a. Promotion of general welfare
b. Regulation
c. Reduction of social inequality possible
through progressive system of taxation
where the object is to prevent the undue
concentration of wealth in the hands of a
few individuals.
d. Encourage economi c growth by
granting incentives or exemptions in order
to encourage investments
e. Protectionism taxes sometimes provide
prot ect i on t o l ocal i ndust ri es l i ke
protective tariffs and custom duties
Taxation distinguished from Police Power
and Eminent Domain
TAXATION
POLICE
POWER
EMINENT
DOMAIN
Purpose
To raise
revenue
To promote
public welfare
through
regulations
To facilitate
the taking of
private
property for
public use
Amount of Exaction
No limit Limited to the
cost of
regulation,
issuance of
the license or
surveillance
No exaction
but private
property is
taken by the
State for
public purpose
Benefits received
No special or
direct benefit
is received by
the taxpayer
merely
general
benefit of
protection
No direct
benefit is
received; a
healthy
economic
standard of
society is
attained
A direct benefit
results in the
form of just
compensation
to the property
owner
Non-impairment of Contracts
Contracts
may not be
impaired
Contracts
may be
impaired
Contracts may
be impaired
Transfer of Property Rights
Taxes paid
become part
of public
funds
No transfer
but only
restraint in its
exercise
Transfer is
effected in
favor of the
State
Scope
All persons,
property and
excises
All persons,
property,
rights and
privileges
Only upon a
particular
property
Aspects of Taxation
1. Levy or imposition of the tax (tax legislation)
enactment of tax laws or statutes; includes
the determination of the persons, property or
excises to be taxed, the sum or sums to be
raised, the due date thereof and the time and
manner of levying and collecting taxes.
2. Enforcement or tax administration (tax
administration) collection of taxes already
levied. Collection (including assessment)
consists of the manner of enforcement of the
obligation on the part of those who are taxed.
Basic Principles of A Sound Tax System
/Canons of Taxation (FAT)
1. Fiscal Adequacy sources of government
r evenue must be suf f i ci ent t o meet
government expenditures and other public
needs.
2. Administrative Feasibility tax laws must
be capable of being effectively enforced.
3. Theoretical Justice a sound tax system
must be based on the taxpayers ability to pay
(Ability to Pay Theory). Our laws mandate
that taxes must be reasonable, fair, just, and
conscionable. The Constitution provides that
taxation must be uniform and equitable and
that the State must evolve a progressive
system of taxation.
Taxes
DEFINITION: enforced proportional contributions
from the persons and property levied by the law-
making body of the State by virtue of its
sovereignty for the support of government and for
public needs.
E S S E N T I A L C H A R A C T E R I S T I C S
(ATTRIBUTES) OF A TAX (SLEP4)
1. It is levied by the state which has jurisdiction
over the person or property
2. It is levied by the law making (legislative)
body of the state
3. It is an enforced contribution not dependent
on the will of the person taxed, not a contract
but a positive act of the government
4. It is generally payable in money
5. It is proportionate in character taxes must
be based on ability to pay in accordance with
the constitutional mandate to Congress to
evolve a progressive system of taxation
6. It is levied on persons and property
7. It is levied for public purpose/s
REQUISITES OF A VALID TAX (JAPUL)
1. That either the person or property taxed be
within the jurisdiction of the taxing authority
2. That the assessment and collection of certain
kinds of taxes guarantee against injustice to
individuals, especially by providing notice and
opportunity for hearing
3. Should be for a public purpose
4. The rule of taxation shall be uniform
5. The tax must not impinge on the inherent and
Constitutional limitations on the power of
taxation
CLASSIFICATION OF TAXES
1. As to subject matter or object:
a. Personal, poll or capitation tax of a
fixed amount imposed upon persons
residing within a specified territory,
whether citizens or not, without regard to
their property, occupation or business in
whi ch they may be engaged (ex.
Community tax).
b. Property tax imposed on property,
whether real or personal, in proportion
ei ther to i ts val ue or some other
reasonable rule of apportionment (ex.
Real estate tax).
c. Excise or Privilege charge imposed
upon the performance of an act, the
enjoyment of a privilege or engaging in an
occupation, profession or business (ex.
Donors tax).
2. As to who bears the burden:
a. Direct tax which is demanded from the
person who also shoulders the burden of
the tax; the taxpayer is directly or
primarily liable which he cannot shift to
another. Both the incidence (liability) for
the payment of the tax as well as the
impact (burden) of the tax falls on the
same person. (i.e. Income tax).
b. Indirect tax wherein the incidence or
liability for the payment falls on one
person but the burden can be shifted or
passed on to another (ex. VAT).
3. As to purpose:
a. General, fiscal or revenue tax
imposed for the general or ordinary
purposes of the Government, to raise
revenue for governmental needs (ex.
income tax)
b. Special or regulatory tax imposed for
a special purpose, to achieve some social
or economic ends irrespective of whether
revenue is actually raised or not (ex.
customs duties)
4. As to determination of amount:
a. Specific tax of a fixed amount imposed
by the head or number or by some
standard of weight or measurement; it
requires no valuation other than a listing
or classification of the objects to be taxed.
b. Ad Valorem (Value) tax of a fixed
portion of the value of the property with
respect to which the tax is assessed; it
requires the intervention of assessors or
appraisers to estimate the value of such
property before the amount due from
each taxpayer can be determined.
5. As to taxing authority:
a. National levied by the National
Government
b. Local levied by the local government
6. As to rate:
a. Progressive or graduated taxes
whereby the tax rate increases as the tax
base or bracket increases.
b. Regressive taxes whereby the tax rate
decreases as the tax base increases.
General Principles
c. Proportionate based on a fixed
percentage of the amount of the property,
receipts or other basis to be taxed.
TAXES DISTINGUISHED FROM OTHER
IMPOSITIONS
Tax and Special Assessment
Imposed on persons,
property and excises
Levied only on land
Personal liability
attaches on the
person assessed in
case of non-payment
Cannot be made a personal
liability of the person
assessed
Not based on any
special or direct
benefit
Based wholly on benefit
Levied and paid
annually
Exceptional both as to time
and locality
Exemption granted by
Art. VI, Sec 28 (3) of
the 1987 Constitution
is applicable
Exemption does not apply.
N.B. If property is exempt
from Real Property Tax, it is
also exempt from Special
Assessment.
Tax and License Fee
Based on the power
of taxation
Emanates from police power
The purpose is to
generate revenue
The purpose is regulatory
Amount is unlimited Amount is limited to the cost
of (1) issuing the license,
and (2) inspection and
surveillance
Normally paid after
the start of a business
Normally paid before
commencement of business
Taxes, being the
lifeblood of the State,
cannot be
surrendered except
for lawful
consideration
License fee may be with or
without consideration
Non-payment does
not make the
business illegal but
may be a ground for
criminal prosecution
Non-payment makes the
business illegal
Tax and Debt
An obligation imposed
by law
Created by contract
Due to the
government in its
sovereign capacity
May be due to the
government but in its
corporate capacity
Payable in money Payable in money, property
or services
Does not draw
interest except in
case of delinquency
Draws interest if stipulated
or delayed
Not assignable Assignable
Not subject to
compensation or set-
off
Subject to compensation or
set-off
TAXES DISTINGUISHED FROM OTHER
IMPOSITIONS
Non-payment is
punished by
imprisonment except
in poll tax
No imprisonment in case of
non-payment (Art. III, Sec.
20 1987 Constitution)
Imposed only by
public authority
Can be imposed by private
individual
Tax and Toll
Enforced proportional
contributions from
persons and property
A sum of money for the use
of something, a
consideration which is paid
for the use of a property
which is of a public nature;
e.g. road, bridge
A demand of
sovereignty
A demand of proprietorship
No limit as to the
amount of tax
Amount of toll depends upon
the cost of construction or
maintenance of the public
improvement used
Imposed only by the
State
May be imposed by:
1. Government
2. Private individuals or
entities
Tax and Penalty
Enforced proportional
contributions from
persons and property
Sanction imposed as a
punishment for violation of a
law or acts deemed
injurious; violation of tax
laws may give rise to
imposition of penalty
Intended to raise
revenue
Designed to regulate
conduct
May be imposed only
by the government
May be imposed by:
(1) Government
(2) Private individuals or
entities
Tax and Tariff
All embracing term to
include various kinds
of enforced
contributions upon
persons for the
attainment of public
purposes
A kind of tax imposed on
articles which are traded
internationally
Tax and Compromise Penalty
Basic imposition on
persons, property and
excises
Collected as a compromise
in cases involving violations
of the Tax Code, rules or
regulations.
Tax and Subsidy
Levied by the law-
making body of the
State for the support
of the government
and for public needs.
A legislative grant of money
in aid of a private enterprise
deemed to promote the
public welfare.
Tax and Revenue
A source of revenue
of the government.
A broad term that includes
not only taxes but income
from other sources as well.
COMPENSATION OR SETOFF OF TAXES
General Rule: Taxes cannot be the subject of
compensation or set-off because the government
and the taxpayer are not creditors and debtors of
each other. Obligations in the nature of debts are
due to the government in its corporate capacity
while taxes are due to the government in its
sovereign capacity. (Philex Mining vs. CIR CTA Case
No.5200 Aug.21, 1998)
Exceptions:
1. Solutio Indebiti Compensation takes place
by operation of law, where the government
and the taxpayer are in their own right
reciprocally debtors and creditors of each
other, and that the debts are both due and
demandable. This is in consequence of
Articles 1278 and 1279 of the Civil Code.
(Domingo vs. Garlitos G.R. No. 18994, June 29, 1963)
2. If the case involves local government
taxes.
Doctrine of Equitable Recoupment where the
refund of a tax illegally or erroneously collected or
overpaid by a taxpayer is barred by prescription, a
tax presently being assessed against a taxpayer
may be recouped or setoff against the tax whose
refund is now barred by prescription. (UST vs.
Collector G.R. No. 570 June 23, 1953)
The doctrine is NOT followed in the Philippines
because of the lifeblood theory.
TAXPAYERS SUIT
A case where the act complained of directly
involves the illegal disbursement of public funds
derived from taxation. (Justice Melo, dissenting in
Kilosbayan, Inc vs. Guingona, Jr. G.R.No. 113375, May 5,
1994)
Taxpayers have locus standi for they are parties in
interest to be prejudiced or benefited by the avails
of the suit but not if executive acts do not involve
the use of public funds. (Gonzales vs. Marcos G.R. No.
21897 Oct. 22, 1963)
The plaintiff in a taxpayers suit is in a different
category from the plaintiff in a citizens suit. In the
former, the plaintiff is affected by the expenditure
of public funds, while in the latter, plaintiff is but
the mere instrument of the public concern. (David
vs. Macapagal-Arroyo 489 SCRA 160)
REQUISITES FOR TAXPAYERS SUIT
1. The tax money is being extracted and spent in
violation of specific Constitutional protections
against abuses of legislative power;
2. That public money is being deflected to any
improper purpose (Pascual vs. Secretary of Public
Works G.R.No.10405 Dec. 29, 1960); and
3. That the peti ti oner seeks to restrai n
respondents from wasting public funds
through the enforcement of an invalid or
unconstitutional law.
Inherent Limitations
These proceed from the very nature of the taxing
power itself. These are: (SPINE)
1. territoriality or situs of taxation
2. public purpose
3. international comity
4. non-delegability of the taxing power and
5. tax exemptions of the government.
1. TERRITORIALITY OR SITUS OF TAXATION
Situs of taxation is the place or authority
that has the right to impose and collect taxes
(CIR vs. Marubeni Corp. G.R. No. 137377 Dec. 18,
2001). 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.
General Rule: A state may not tax
property lying outside its borders or lay an
excise or privilege tax upon the exercise or
enjoyment of a right or privilege derived from
the laws of another state and therein
exercised or enjoyed (51 Am. Jur. 87-88). Tax
laws do not operate beyond the jurisdictional
limits of a country.
Reasons:
a. Taxation is an act of sovereignty which
could only be exercised within a countrys
territorial limits.
b. This is the result of the concept that taxes
are paid for the protection and services
provided by the taxing authority which
could not be provided outside the
territorial boundaries of the taxing state.
Factors that determine the situs
a. Kind or classification of the tax being
levied
b. Situs of the thing or property taxed
c. Citizenship of the taxpayer
d. Residence of the taxpayer
e. Source of the income taxed
f. Situs of the excise, privilege, business or
occupation being taxed
Situs of the Subject of Tax
General Principles
a. Persons poll, capitation or community
taxes are based upon the residence of
the taxpayer, regardless of the source of
income or location of the property of the
taxpayer.
b. Property
1) Real property Real estate is
subject to taxation only in the state
where it is located whether the owner
is a resident or non-resident (51 Am.
Jur. 458). This is the principle of lex rei
sitei.
Reasons:
a) The taxing authority has control
because of the stationary and
fixed character of the property.
b) The pl ace wher e t he r eal
pr oper t y i s si t uat ed gi ves
protection to the real property,
hence the property or its owner
should support the government
of that place.
2) Tangible personal property the
modern rule is that it is taxable in the
state where it has actual situs; where
it is physically located although the
owner resides in another jurisdiction
(51 Am. Jur. 467).
Reason: The pl ace where the
tangible personal property is found
gives it protection.
3) Intangible Personal Property
General Rule: The situs is at the
domicile of the owner. This is in
accordance with the principle of
mobilia sequuntur personam or
movables follow the person.
Exceptions:
a) When the property has acquired
a business situs in another
jurisdiction; or
b) When the law provides for the
situs of the subject of tax;
Example: For purposes of estate
and donors taxes, the following
intangible properties are deemed
to have a situs in the Philippines:
(a) Franchise which must be
exercised in the Philippines;
(b) Shares, obligations or bonds
issued by any corporation
organized or constituted in
t h e P h i l i p p i n e s i n
accordance with its laws;
(c) Shares, obligations or bonds
by any foreign corporation
eighty-five percent (85%) of
the business of which is
located in the Philippines;
(d) Shares, obligations or bonds
i ssued by any f or ei gn
corporation if such shares,
obligations or bonds have
acquired a business situs in
the Philippines; and
(e) Shares or rights in any
partnership, business or
industry established in the
Philippines (Sec. 104, NIRC)
4) Income Factors that determine the
situs of income tax:
a. Nationality or citizenship of the
taxpayer;
b. Residence or domicile of the
taxpayer; and
c. Source of the income
General Principles of Income
Taxation in the Philippines
Except when otherwise provided in
this Code:
a. A citizen of the Philippines
residing therein is taxable on all
income derived from sources
w i t h i n a n d w i t h o u t t h e
Philippines;
b. A nonresident citizen is taxable
only on income derived from
sources within the Philippines;
c. An individual citizen of the
Philippines who is working and
deriving income from abroad as
an overseas contract worker is
taxable only on income derived
f r o m s o u r c e s wi t h i n t h e
Philippines: Provided, That a
seaman who is a citizen of the
Philippines and who receives
compensat i on f or ser vi ces
rendered abroad as a member of
the complement of a vessel
e n g a g e d e x c l u s i v e l y i n
i nternati onal trade shal l be
treated as an overseas contract
worker;
d. An alien individual, whether a
resident or not of the Philippines,
is taxable only on income derived
Philippines;
e. A domestic corporation is taxable
on all income derived from
sources within and without the
Philippines; and
f. A foreign corporation, whether
engaged or not in trade or
business in the Philippines, is
taxable only on income derived
Philippines. (Sec. 23 NIRC)
5) Excise or Privilege the power to
levy an excise upon the performance
of an act or the engaging in an
occupation does not depend upon the
domicile of the person subject to the
excise nor upon the physical location
of the property and in connection with
the act or occupation taxed, but
depends upon the place wherein the
act is performed or occupation
engaged in (Allied Thread vs. City Mayor of
Manila G.R. No.40296 Nov. 21, 1984)
6) Gr a t ui t ous Tr a ns f e r t h e
transmission of property from a donor
to a donee or from a decedent to his
heirs may be subject to taxation in
the state where the transferor is
(was) a citizen or resident, or where
the property is located.
2. PUBLIC OR GOVERNMENTAL PURPOSE -
purpose affecting the inhabitants of the state
or taxing district as a community and not
merely as individuals and is designed to
support the services of government for some
of the recognized objects of the country.
Tests in Determining Public Purpose
a. Duty Test whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty of
the State as a government to provide.
b. Promotion of General Welfare Test
whether the proceeds of the tax will
directly promote the welfare of the
community in equal measure.
3. INTERNATIONAL COMITY
The property or income of a foreign state or
government may not be the subject of
taxation by another.
Reasons:
a. In par parem non habet imperium. As
between equals there is no sovereign.
(Doctrine of Sovereign Equality)
b. The rule of international law that a foreign
government may not be sued without its
consent so that it is useless to impose a
tax which could not be collected.
c. The concept that when a forei gn
sovereign enters the territorial jurisdiction
of another, it does not subject itself to the
jurisdiction of the other.
4. NON-DELEGABILITY OF THE TAXING
POWER
General Rule: The power of taxation being
purely legislative, Congress cannot delegate
the power to others. This limitation arises from
the doctrine of separation of powers among
the three branches of government.
Exceptions:
a. Delegation to the President The
Constitution expressly allows Congress to
authorize the President to fix within
specified limits and subject to such
limitations and restrictions as it may
impose, tariff rates, import or export
quotas, tonnage and wharfage dues and
other duties or imposts. (Sec. 28 [2] Art. VI)
b. Delegation to local governments
Each local government unit shall have the
power to create its own sources of
revenues and to levy taxes, fees and
charges subject to such guidelines and
limitations as the Congress may provide,
consistent with the basic policy of local
autonomy. Such taxes, fees and charges
shall accrue exclusively to the local
government (Sec. 5 Art. X, 1987 Constitution)
c. Delegation to administrative agencies
also known as the power of subordinate
legislation. The delegation must comply
with the completeness test and the
existence of sufficiently determinate
standards test (Pelaez vs. Auditor General G.R.
No. 23825 Dec. 24, 1965.) It should only be
f o r t a x a d m i n i s t r a t i o n o r
implementation.
Non-delegable legislative powers
(cannot be delegated to administrative
agencies):
1. Selection of the property to be taxed
2. Determination of the purposes for
which taxes shall be levied
3. Fixing of the rate of taxation
4. Rules of taxation in general (1 Cooley
196)
IS THE POWER GRANTED TO THE
PRESIDENT TO INCREASE THE VAT RATE TO
12% under RA 9337, AN UNDUE DELEGATION
OF POWER?
NO. It is not a delegation of legislative power. It is
simply a delegation of ascertainment of facts upon
which enforcement and administration of the
increase rate under the law is contingent. No
discretion will be exercised by the president. Thus,
it is a ministerial duty of the President to
immediately impose the 12% rate upon the
existence of any of the conditions specified by the
General Principles
Congress. The 12% VAT rate was made effective
by Congress on February 1, 2006.
5. EXEMPTION OF THE GOVERNMENT
Properties of the national government as well
as those of the local government units are not
subject to tax, otherwise it will result in the
absurd situation of the government taking
money from one pocket and putting it in
another (Cooley as cited in Board of Assessment Appeals
of Laguna vs. CTA).
Other Reasons:
a. To levy a tax upon public property would
render necessary new taxes on other
public property for the payment of the tax
so laid and thus, the government would
be taxing itself to raise money to pay over
to itself.
b. So that the functions of the government
shall not be unduly impeded (51 Am. Jur.
550-51)
c. To reduce the amount of money that has
to be handled by the government in the
course of its operations (Maceda vs. Macaraig
G.R. No. 88291 June 8, 1993)
However, the Constitution is silent on
whether Congress is prohibited from taxing
the properties of the agencies of the
government. Therefore, nothing can prevent
Congr ess f r om decr eei ng t hat even
i nst r ument al i t i es or agenci es of t he
government perf ormi ng government al
functions may be subject to tax. (MCIAA vs.
Marcos G.R. No. 120082 Sep. 11, 1996)
Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately
and directly exercises its government powers.
(Infantry Post Exchange vs. Posadas G.R. No. 33403 Sept.
4, 1930)
Rules:
a. Administrative Agencies performing:
1) Governmental functions tax exempt
unless the law expressly provides
otherwise [Sec. 32(B)(7)]
2) Proprietary functions taxable unless
exempted by law [Sec. 27(C)]
b. Government-owned and -controlled
corporations
General Rule: Since they are performing
proprietary functions, they are subject to
taxation. Their income is taxable at the
rate imposed upon corporations or
associations engaged in similar business,
industry, or activity.
Except: GSIS, SSS, PHIC and PCSO
[Sec. 27(C), NIRC as amended by RA 9337]
NOTE: PAGCOR used to be exempt but
effective July 1, 2005, RA 9337 removed
the exemption.
c. Government Educational Institutions
1) Propert y act ual l y, di rect l y and
exclusively used for educational
purposes exempt from property or
real estate tax but i ncome of
whatever kind and character from any
of their properties, real or personal,
regardless of the disposition, is
taxable (Sec. 30, last par., NIRC)
2) Income received by them as such is
exempt from taxes. However, their
income from any of their activities
conducted for profit regardless of the
disposition is taxable (Sec. 30, last par.,
NIRC)
Constitutional Limitations
Note: Constitutional grant is not necessary in the
exercise of the power of taxation. It is an inherent
power of the Sate. Constitutional provisions are
mere limitations of the power.
1. DUE PROCESS OF LAW (Art. III, Sec. 1, 1987
Constitution)
Any deprivation is with due process if it is
done:
a. Under the authority of a law that is valid
or of the Constitution itself, the tax statute
is within the Constitutional authority of
Congress to pass, and that it must be
reasonabl e, fai r and j ust. Thi s i s
Substantive Due Process which limits
the governments law and rule making
powers.
b. After compliance with fair and reasonable
methods of procedure prescribed by law,
with notice or hearing or at least an
opportuni ty to be heard whenever
necessary. This is Procedural Due
Process which limits the actions of
judicial and quasi-judicial bodies.
In addition as held in Pepsi Cola vs. Mun.
of Tanauan G.R. No.31156 Feb. 27, 1976:
Due process in taxation requires:
1) Tax must be for public purpose
2) Imposed within territorial jurisdiction
3) No arbitrariness or oppression in
a) assessment
b) collection
Due process in taxation does NOT require:
1) Determination through judicial inquiry of
a) Property subject to tax
b) Amount of tax to be imposed
2) Notice and hearing as to
a) Amount of tax
b) Manner of apportionment
2. EQUAL PROTECTION (Art. III, Sec.1, 1987
Constitution)
Equal protection neither requires equal rates
of taxation on different classes of property, nor
prohibits unequal taxation so long as the
inequality is not based upon arbitrary
classification. It merely requires that all
persons subjected to such legislation shall be
treated alike, under like circumstances and
conditions, both in the privileges conferred
and in the liabilities imposed (Cooley as cited in
Sison, Jr. vs. Ancheta G.R. No. 59431 July 25, 1984)
The power to select subjects of taxation and
apportion the public burden among them
includes the power to make classifications.
For the classification to be valid, the following
requisites must concur:
a. I t must be based on subst ant i al
distinctions;
b. It must apply both to present and future
conditions;
c. It must be germane to the purposes of the
law; and
d. It must apply equally to all members of
the same class. (Ormoc Sugar Company vs.
Treasurer of Ormoc G.R. No. 23794 Feb.17, 1968)
3. UNIFORMITY AND EQUITABILITY (Art. VI,
Sec. 28 [1], 1987 Constitution)
Uniformity all taxable articles or properties
of the same class shall be taxed at the same
rate. (City of Baguio vs. De Leon G.R.No. 24756 Oct.
31, 1968)
Different articles or other subjects may be
taxed at different rates provided that the rate
is uniform on the same class everywhere. (De
Villata vs. Standley G.R. No. 8154 December 20, 1915)
Equity requires that such apportionment be
more or less just in the light of the taxpayers
ability to shoulder the tax burden, usually
measured in terms of wealth, and, if
warranted, on the basis of the benefits he
receive from the government. Taxation may
be uniform but inequitable where the amount
is excessive or unreasonable.
4. PROGRESSIVE SYSTEM OF TAXATION
(Art. VI, Sec. 28 [1], 1987 Constitution)
Progressive System of Taxation means that
as the resources of the taxpayer become
higher, his tax rate likewise increases. This is
exemplified by the income tax rate which
i ncreases as the net taxabl e i ncome
increases.
It is based on the ability to pay and in
implementation of the social justice principle
that the more affluent should contribute more
for the communitys benefit.
The Constitution does not really prohibit
regressive taxes. What it simply provides is
that Congress shall evolve a progressive
system of taxation. This is a mere directive
upon Congress, not a justiciable right. (Tolentino
vs. Secretary of Finance, G.R. No. 115455, August 25,
1994)
In case of VAT, it is an antithesis of
progressive taxation. By its very nature, it is
regressive. The principle of progressive
taxation has no relation with the VAT System
inasmuch as the VAT paid by the consumer or
business for every goods bought or services
enjoyed is the same regardless of income.
Nevertheless, the Constitution does not
prohibit the imposition of indirect taxes like the
VAT. The Constitutional provision has been
interpreted to mean simply that direct taxes
are to be preferred and as much as possible,
indirect taxes should be minimized.
5. NON-IMPAIRMENT CLAUSE (Art. III, Sec. 10,
1987 Constitution)
The obligation of a contract is impaired when
its terms or conditions are changed by law or
by a party without the consent of the other,
thereby weakening the position or rights of the
latter. (Edwards vs. Kearney, 96 US 607)
Examples:
a. When a tax exemption based on a
contract is revoked by a later taxing
statute (Cassanova vs. Hord GR No. 3473 March
22, 1907);
b. A taxpayer enters into a compromise with
the BIR; this cannot be impaired without
violating the Constitution.
Rationale:
When the State grants an exemption on the
basis of a contract, consideration is presumed
to be paid to the State, and the public is
supposed to receive the whole equivalent
therefrom.
Rules:
a. When the exemption is bilaterally agreed
upon between the government and the
taxpayer it cannot be withdrawn without
violating the non-impairment clause.
General Principles
b. When it is unilaterally granted by law
and the same is withdrawn by virtue of
another law no violation.
c. When the exemption is granted under a
franchise may be revoked because
under the Constitution, a franchise is
subject to amendment, alteration, or
repeal by Congress when the common
good so requires. (Art. XII, Sec. 11, 1987
Constitution)
6. NONI MPRI SONMENT FOR NON
PAYMENT OF POLL TAX (Art. III, Sec. 20, 1987
Constitution)
A poll tax is imposed on persons without any
qualification. An example is the community tax
under Sec. 162 of the LGC which provides
that a person or corporation which does not
own any real property, does not receive any
income, or even a minor may be permitted to
pay basic community tax and be issued a
community tax certificate.
One cannot be imprisoned for non-payment of
poll tax because payment thereof is not
mandatory. Payment is merely permissive; it
cannot be imposed compulsorily upon
taxpayers.
While a person may not be imprisoned for
non-payment of pol l tax, he may be
imprisoned for non-payment of other kinds
of taxes where the law so expressly so
provides.
7. BILLS TO ORIGINATE FROM THE HOUSE
OF REPRESENTATIVES (Art. VI, Sec. 24, 1987
Constitution)
It is not the law but the revenue bill which is
required by the Constitution to originate
exclusively in the House of Representatives.
A bill originating in the House may undergo
such extensive changes in the Senate that the
result may be a rewriting of the whole.
The Constitution simply means that the
initiative for filing the bills must come from the
House, on the theory that, elected as they are
from the districts, the members of the House
can be expected to be more sensitive to the
local needs and problems. (Tolentino vs. Secretary
of Finance G.R. No. 115455, August 25, 1994)
8. VETO POWER OF THE PRESIDENT (Art. VI,
Sec. 27 [2], 1987 Constitution)
9. PRESIDENTS POWER TO TAX (Art. VI, Sec.
28 [2], 1987 Constitution)
The president may increase tariff rates as
authorized by law even for revenue purposes
only. (Garcia vs. Executive Secretary GR No. 101273
July 3, 1992)
10. TAXATION AND FREEDOM OF THE PRESS
(Art. III, Sec. 4, 1987 Constitution)
There is curtailment of press freedom and
freedom of thought and expression if a tax is
levied in order to suppress this basic right and
impose a prior restraint. (Tolentino vs. Secretary of
Finance, supra)
However, if the fee imposed is not for the
exercise of a privilege but only for the purpose
of defraying part of the cost of registration, the
Constitution is not violated.
11. TAXATION AND FREEDOM OF RELIGION
(Art. III, Sec. 5, 1987 Constitution)
A Municipal license tax on the sale of bibles
and religious articles by a non-stock, non-
profit missionary organization at minimal profit
constitutes curtailment of religious freedom
and worship which is guaranteed by the
Constitution. (American Bible Society vs. City of Manila
G.R. No. L-9637 April 30, 1957)
Income of such organizations from any
activity conducted for profit or from any of
their property, real or personal, regardless of
the disposition made of such income, is
taxable.
12. TAX EXEMPTI ON OF PROPERTI ES
ACTUALLY, DIRECTLY AND EXCLUSIVELY
USED FOR RELIGIOUS, CHARITABLE AND
EDUCATIONAL PURPOSES (Art. VI, Sec. 28
[3], 1987 Constitution)
The foregoing provision exempts religious and
educational institutions from real estate tax.
Test of Exemption: It is the use of the
property and not ownership.
Nature of Use: The properties must be
actually, directly and exclusively used for
the purposes mentioned.
Exclusive is defined as possessed and
enjoyed to the exclusion of others; debarred
f rom part i ci pat i on or enj oyment ; and
exclusively is defined, in a manner to
exclude; as enjoying a privilege exclusively.
If real property is used for one or more
commercial purposes, it is not exclusively
used for the exempted purposes but is subject
to taxation. The words dominant use or
principal use cannot be substituted for the
words used exclusively without doing
violence to the Constitutions and the law.
Solely is synonymous with exclusively.
(Lung Center of the Philippines vs. Quezon City, G.R. No.
144104, June 29, 2004)
Scope of Exemption: The exemption is not
limited to property actually indispensable for
religious, charitable or educational purpose. It
extends to facilities which are incidental to or
reasonably necessary for the accomplishment
of said purposes. (Abra Valley College vs. Aquino
G.R. No. L-39086 June 15, 1988.)
13. TAX EXEMPTION GRANTED TO NON-
STOCK NON-PROFI T EDUCATI ONAL
INSTITUTIONS (Art. XIV, Sec. 4 [3], [4], 1987
Constitution)
NOTE: Congress is authorized to grant similar
exempti ons to propri etary educati onal
institutions subject to limitations provided by
law.
The exemption covers income, property, and
donors taxes and custom duties.
Exemption also covers interest income of
Non-stock Non-profit Educational Institution
from bank deposits, deposit substitutes,
treasury bills and other government bonds
and foreign currency deposits. These are
exempted from the 20% final withholding tax
without need of certificate of tax exemption
provided that the interest income is used
act ual l y, di rect l y and excl usi vel y f or
educational purposes. (San Beda Law Journal,
March 2007, St. Marys College of Quezon City, June 17,
2005).
General Rule: To be exempt, the revenue
and assets must be used actually, directly
and exclusively for educational purposes.
However, as to income derived from activities
conducted by them for profit, there are
different views:
a. According to the majority view, the
Constitution has not made any distinction
with respect to the source of the
revenues; it merely distinguished with
respect to the utilization. Thus, even if the
income does not proceed from any school
related activity it may be subject to
exemption so long as it is actually, directly
and exclusively used for educational
purposes. And as the Constitution is the
basic and paramount law to which all
laws must conform, the NIRC provision
(last par., Sec. 30) must yield to the former.
b. According to the minority view, the
exemption does not extend to income
derived by these educational institutions
from thei r property or acti vi ti es
conducted by them for profit regardless of
the disposition made of such income
because of the provision in the NIRC
holding such income taxable (Last par., Sec.
30). But where the transaction is an isolated one, the
exemption still applies. (Manila Polo Club vs. CTA
G.R. No. L-10854 January 27, 1960)
Note: Section 30 of the NIRC speaks of
the source of income while the 1987
Constitution refers to the use of the
income.
14. APPROPRIATION OF PUBLIC MONEY (Art.
VI, Sec. 29[2], 1987 Constitution)
Reasons:
a. Requirement that taxes can only be
levied for a public purpose.
b. In consonance with the inviolable
principle of separation of the Church and
State.
What the Constitution prohibits is the use of
public money or property for the benefit of any
priest, etc. as such. When so employed in the
armed forces, any penal institution, or
government orphanage or leprosarium, they
ma y r e c e i v e t h e i r c o r r e s p o n d i n g
compensations for services rendered in their
non-religious capacity without violating the
Constitutional prohibition.
15. VOTING REQUIREMENT ON GRANT OF
TAX EXEMPTIONS (Art. VI, Sec. 28[4], 1987
Constitution)
Reason: The requirement is obviously
intended to prevent indiscriminate grant of tax
exemptions.
The phrase a majority of all the members of
the Congress means at least ! plus 1 of all
the members voting separately.
In granting tax exemptions, an absolute
majority of the members of Congress is
required, while in cases of withdrawal of such
tax exemption, a relative majority is sufficient.
Tax amnesties, condonations and refunds are
in the nature of tax exemptions, such being
the case, a law granting them requires the
vote of an absolute majority.
A constitutional grant of exemption may be
selfexecuting or may require an act of
Congress for i ts operati on. Where a
Const i t ut i onal pr ovi si on gr ant i ng an
exemption is self-executing, the legislature
can neither add nor detract from it. It may,
however, prescribe a procedure to determine
whether a cl ai mant i s enti tl ed to the
Constitutional exemption.
16. MUNICIPAL TAXATION (Art. X, Sec. 5, 1987
Constitution)
Delegation of legislative taxing power to local
governments is justified by the necessary
implication that the power to create political
corporations for purposes of local self-
government carries with it the power to confer
on such local government agencies the
authority to tax. (Pepsi Cola vs. Municipality of
Tanauan G.R. No. L-31156 Feb.27, 1976)
Despite the grant of taxing power, judicial
admonition is given to the effect that the tax
so levied must be for a public purpose,
uniform, and must not transgress any
constitutional provision or be repugnant to a
General Principles
controlling statute. (Villanueva vs. City of Iloilo G.R.
No. L-26521 Dec. 28, 1968)
17. NONIMPAIRMENT OF THE SUPREME
COURTS JURISDICTION OVER TAX
CASES (Art. VIII, Sec. 2 and 5, 1987 Constitution)
18. SPECIAL FUND (Art. VI, Sec. 29 [3], 1987
Constitution)
19. NECESSITY OF AN APPROPRIATION
BEFORE MONEY MAY BE PAID OUT OF
THE PUBLIC TREASURY (Art. VI, Sec. 29 [1],
1987 Constitution)
20. CONSTITUTIONAL REQUIREMENT ON
THE SUBJECT AND TITLE OF BILLS (Art.
VI, Sec. 26 [1], 1987 Constitution)
21. PROVISIONS REGARDING ALLOTMENTS
TO LOCAL GOVERNMENTS (Art. X, Sec. 6,
1987 Constitution)
Double Taxation
DOUBLE TAXATION (DUPLICATE TAXATION)
means taxing the same property twice when it
should be taxed only once (CIR vs. Solid Bank Corp.
G.R. No 148191 Nov. 25, 2003) It has also been
defined as taxing the same person twice by the
same jurisdiction over the same thing (Victoria
Milling vs. Mun. of Victoria, Negros Occidental G.R. No.
L-21183 Sept. 27, 1968).
NO PROHI BI TI ON AGAI NST DOUBLE
TAXATION.
According to the Supreme Court (Villanueva vs. City of
Iloilo, G.R. No. L-26521 December 28, 1968) there is no
constitutional prohibition against double taxation in
the Philippines. It is something not favored, but is
nevertheless permissible.
KINDS OF DOUBLE TAXATION
1. Direct Duplicate Taxation / Obnoxious
double taxation in the objectionable or
prohibited sense. This violates the equal
protection clause of the Constitution, hence
prohibited.
Elements:
a. The same property or subject matter is
taxed twice when it should be taxed only
once
b. Both taxes are levied for the same
purpose
c. Imposed by the same taxing authority
d. Within the same jurisdiction
e. During the same taxing period
f. Covering the same kind or character of
tax (Villanueva vs. City of Iloilo, supra)
2. Indirect Duplicate Taxation is permissible
double taxation. This is allowed if the taxes
are of different nature or character imposed
by different taxing authorities. Generally, it
extends to all cases in which there is burden
of two or more pecuniary impositions. The
absence of one or more of the above-
mentioned elements makes the double
taxation indirect.
Example: A Filipino citizen who received
dividend income from the United States. The
dividend being remitted to him is taxed in the
United States and at the same time taxed in
the Philippines. There is double taxation but it
is not prohibited because the taxes are
imposed by different taxing authorities.
INTERNATIONAL JURIDICAL DOUBLE
TAXATION
Thi s i s defi ned as the i mposi ti on of
comparable taxes in two or more states on
the same taxpayer in respect of the same
subject matter and for identical periods.
The rationale for doing away with double
taxation is to encourage the free flow of goods
and services and the movement of capital,
technology and persons between countries,
conditions deemed vital in creating robust and
dynamic economies. Foreign investments will
only thrive in a fairly predictable and
reasonable international investment climate
and the protection against double taxation is
crucial in creating such a climate. (Commissioner
of Internal Revenue vs. S.C. Johnson and Son, Inc. G.R.
No.127105, June 25, 1999)
METHODS OF REDUCING THE RIGORS OF
DOUBLE TAXATION (CD RET)
1. Tax credits There is no exact legal
definition of tax credits however it can be
defined by its ordinary usage based on
existing laws to wit:
a. Tax credit is an alternative remedy to a
refund of overpaid taxes which may be
applied to offset tax liabilities.
b. Tax credits shall mean credits against
taxes and/or duties equal to those
actually paid on raw materials used in
manufacturing the export products.
c. A reward or incentive granted to certain
t axpayer s f or sat i sf yi ng cer t ai n
requirements prescribed by an incentive
law.
In Blacks Legal Dictionary, Tax Credit is
defined as an amount subtracted from an
individuals or entitys tax liability to arrive at
the total tax liability.
Tax Credits are granted in lieu of the inability
of the government to give cash refund to its
taxpayers. Tax Credit Certificates are given in
lieu of cash which in turn can be used by the
holder thereof to settle his or her obligation
with the government.
Example: In income taxation, foreign taxes
imposed and paid on income earned by a
resident citizen or domestic corporation from
sources within a foreign country may, under
certain limitations, be claimed as tax credit
against the Philippine tax on the same
income. (Sec. 34 [C] [4] [a] and [b], NIRC)
2. Tax deductions tax write-off or reduction in
the gross amount on which a tax is calculated
Example: Our estate tax law provides for the
so-called vanishing deduction (Sec. 86 [A]
[2], NIRC). This involves property previously
taxed upon transfer from a prior decedent,
and the recipient (present decedent), dies
within 5 years, who then transfers the same
property to another. Deduction is therefore
allowed on the subsequent transfer.
3. Reduction of the Philippine income tax
rate
Example: Tax Sparing Rule the dividend
earned by a NRFC within the Phil. is reduced
by imposing a lower rate of 15% (in lieu of the
35%), on the condition that the country to
which the NRFC is domiciled shall allow a
credit against the tax due from the NRFC,
which taxes are deemed to have been paid in
the Phil. (Sec.28 [B] [5] b) (CIR vs. Procter & Gamble
G.R. No 66838 December 2, 1991)
4. Tax Exemptions a grant of immunity to
particular persons or corporations from the
obligation to pay taxes.
Example: Exempt transfers under estate and
donors taxation:
a. If the decedent at the time of his death or
the donor at the time of the donation was
a citizen and resident of a foreign country
which at the time of his death or donation
did not impose a transfer tax of any
character, i n respect of i ntangi bl e
personal property of citizens of the
Philippines not residing in that foreign
country, or
b. If the laws of the foreign country of which
the decedent or donor was a citizen and
resident at the time of his death or
donation allows a similar exemption from
transfer or death taxes of every character
or description in respect of intangible
personal property owned by citizens of
the Philippines not residing in that foreign
country. (Sec 104 NIRC)
5. Tax treaties Agreement between two
countries specifying what items of income will
be taxed by the authorities of the country
where the income is earned.
Methods resorted to by a tax treaty in order to
eliminate double taxation:
a. The tax treaty sets out the respective rights to
tax by the state of source or situs and by the
state of residence with regard to certain
classes of income or capital. In some cases,
an exclusive right to tax is conferred in one of
the contracting states; however, for other
items of income or capital, both states are
given the right to tax although the amount of
tax that may be imposed by the state of
source is limited.
b. The state of source is given a full or limited
right to tax together with the state of
residence. In this case, the treaty makes it
incumbent upon the state of residence to
allow relief in order to avoid double taxation.
There are 2 ways under the 2
nd
method:
1) The 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 be taken into account in determining
the rate of tax applicable to the taxpayers
remaining income or capital. (This may be
done using the tax deduction method
which allows foreign income taxes to be
deducted from gross income, in effect
exempting the payment from being further
taxed.) The focus here is on the income
or capital itself.
2) The credit method although the
income or capital which is taxed in the
state of source is still taxable in the state
of residence, the tax paid in the former is
credited against the tax levied in the
latter. (CIR v. S.C Johnson and Son G.R. No.
127105, June 25,1999) The focus is on the
tax.
MOST FAVORED NATION CLAUSE IN TAX
TREATIES
The purpose of the most favored nation clause is
to grant to the contracting party treatment not less
favorable than that which has been or may be
granted to the MOST FAVORED among other
countries. The most favored nation clause is
intended to establish the principle of equality of
international treatment by providing that the
citizens or subjects of the contracting nations may
enjoy the privileges accorded by either party to
those of the most favored nation.
General Principles
Forms of Escape From Taxation
There are 6 basic forms of escape: (SE2CAT)
1. SHIFTING
The transfer of the burden of tax by the
original payer or the one on whom the tax was
assessed (i mpact of taxati on/statutory
taxpayer) or imposed to another or someone
else (incidence of taxation).
Direct tax cannot be shifted a tax cannot
be shifted when it is purely personal or when
it has no relation to any business dealings of
the taxpayer. (Schultz and Harris, American Public
Finance)
Impact of Taxation point on which tax is
originally imposed or the one on whom the tax
is formally assessed.
Incidence of Taxation point on which the
tax burden finally rests or settles down.
Illustration: Value added tax. The seller is
required by law to pay tax, but the burden
is actually shifted or passed on to the
buyer.
Kinds of shifting
a. Forward shifting when the burden of
tax is transferred from a factor of
product i on t hrough t he f act ors of
distribution until it finally settles on the
ultimate purchaser or consumer
b. Backward shifting when the burden is
transferred from the consumer through
the factors of distribution to the factors of
production
c. Onward shifting when the tax is
shifted 2 or more times either forward or
backward
2. TAX EVASION A term that connotes fraud
through the use of pretenses and forbidden
devices to lessen or defeat taxes. (Yutivo Sons
Hardware vs. CTA GRN L-13203 January 28, 1961)
A scheme used outside of those lawful means
and when availed of, it usually subjects the
taxpayer to further or additional civil or
criminal liabilities. (CIR vs. Estate of Benigno Toda Jr.
GR No. 78583 March 26, 1990.)
Factors of Tax Evasion:
a. The end to be achieved, i.e. payment of
less than that known by the taxpayer to
be legally due, or paying no tax when it is
shown that the tax is due.
b. An accompanying state of mind which is
described as being evil, in bad faith,
willful, or deliberate and not coincidental.
c. A course of action which is unlawful.
Proof of tax evasion:
a. Failure to declare for taxation purposes
true and actual income derived from
business for 2 consecutive years. (Republic
vs. Gonzales, G.R. No. L-17962)
b. Substantial under-declaration of income
in the tax returns of the taxpayer for 4
consecut i ve year s coupl ed wi t h
intentional overstatement of deductions.
(CIR vs. Reyes, 104 PHIL 1061)
TAX
AVOIDANCE
TAX EVASION
Validity Legal and not
subject to
criminal penalty
Illegal and subject
to criminal penalty
Effect Minimization of
taxes
Almost always
results in absence
of tax payments
3. TAX EXEMPTION is the grant of immunity
to particular persons or corporations or to
persons or corporations of a particular class
from a tax which persons or corporations
generally within the same state or taxing
district are obliged to pay. (51 Am. Jur. 503)
Kinds of Tax Exemption
a. As to manner of creation:
1) Express or affirmative exemption
expressly granted by organic or
statute law
2) Implied or exemption by omission
when particular persons, property or
excises are deemed exempt as they
fall outside the scope of the taxing
provision itself
b. As to extent:
1) Total absolute immunity
2) Partial one where a collection of a
part of the tax is dispensed with
c. As to object:
1) Personal granted directly in favor of
certain persons
2) Impersonal granted directly in favor
of a certain class of property
d. As to source:
1) Constitutional immunities from
taxation that originate from the
Constitution
2) Statutory those which emanate from
legislation
3) Contractual agreed to by the taxing
authority in contracts lawfully entered
into by them under enabling laws
4) Treaty
5) Licensing Ordinance
EFFECTS/ BENEFITS OF TAX EXEMPTIONS:
a. Deduction for income tax purposes
b. Claims for refund
c. Tax amnesty
d. Condonation of unpaid tax liabilities
NATURE OF THE POWER TO GRANT TAX
EXEMPTION
Like the inherent power to tax, the power to
exempt is an attribute of sovereignty for the
power to prescribe who or what property shall
be taxed implies the power to prescribe who
or what property shall not be taxed.
Municipal corporations have no inherent
power to tax. But the moment the power to
impose tax is granted, they also have the
power to grant exemption unless forbidden by
the Constitution or law.
NATURE OF TAX EXEMPTION
a. An exemption from taxation is a mere
personal privilege of the grantee.
b. I t i s gener al l y r evocabl e by t he
government unless the exemption is
founded on a contract which is protected
from impairment.
c. It implies a waiver on the part of the
Government of its right to collect what
otherwise would be due to it and
prejudicial thereto. (Commissioner vs. Bothelo
Shipping G.R. No.216330, June 29, 1967)
N.B. Tax Exempt persons are still required to
keep books of accounts for examination for
purposes of ascertaining compliance with the
conditions under which they have been
granted tax exemptions or tax incentives
(Sec. 235 NIRC, last par.)
CONSTRUCTION OF TAX EXEMPTIONS
General Rule: Exemptions are not favored
and are construed strictissimi juris (by the
most strict right or law) against the taxpayer.
(Comm. of Customs vs. Phil. Acetylene G.R. No. L-22443
May 29, 1971)
Exemptions are highly disfavored in law and
he who claims tax exemption must be able to
justify his claim or fight (Afisco Insurance Corporation
vs. Court of Appeals, G.R. No. 112675, Jan. 25, 1999)
PRINCIPLE OF STRICTISSIMI JURIS
Laws gr ant i ng t ax exempt i on ar e
construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption
is the exception. The law does not look with
favor on tax exemptions and that he who
would seek to be thus privileged must justify it
by words too plain to be mistaken and too
categorical to be misinterpreted. (SeaLand Service
vs. CA G.R. No. 57828 June 14, 1993)
REASONS FOR THE APPLICATION OF STRICTISSIMI
JURIS
a. Lifeblood theory
b. To minimize differential treatment and
foster impartiality, fairness and equality of
treatment among taxpayers (Maceda vs.
Macaraig)
c. Taxati on i s a hi gh prerogati ve of
sovereignty whose relinquishment is
never presumed (Luzon Stevedoring vs. CA
G.R. No 58897 Dec. 3, 1987)
EXCEPTIONS TO STRICTISSIMI JURIS
a. When the statute granting exemption
provides for liberal construction thereof
b. In case of special taxes relating to special
cases and affecting only special classes
of persons
c. If exemptions refer to the public property
d. In cases of exemptions granted to
religious, charitable and educational
institutions or their property
e. In cases of exemptions in favor of the
government, its political subdivisions or
instrumentalities
REVOCATION OF TAX EXEMPTIONS
Since taxation is the rule and exemption is the
exception, the exemption may thus be
withdrawn at the pleasure of the taxing
authority. (Mactan Cebu Intl Airport Authority vs.
Marcos, supra)
RESTRICTIONS ON REVOCATION
a. Nonimpairment clause Where the
exemption was granted to private parties
based on material consideration of a
mut ual nat ur e, i t t hen becomes
contractual and is covered by the non-
impairment clause of the Constitution.
b. Adherence to form I f t he t ax
exemption is granted by the Constitution,
its revocation may be effected through
constitutional amendment only.
c. Where the tax exemption grant is in the
form of a special law and not by a general
law even if the terms of the general act
are broad enough to include the codes in
the general law unless there is manifest
intent to repeal or alter the special law.
(Province of Misamis Oriental vs. Cagayan Electric
Power and Light Co. Inc GRN No. 45355 Jan. 12,
1990)
General Principles
NATURE OF TAX REFUNDS
Tax refunds are in the nature of tax
exemptions. They are regarded as in
derogation of sovereign authority and to be
construed strictissimi juris against the person
or entity claiming the exemption. The burden
of proof is upon him who claims the
exemption in his favor and he must be able to
justify his claim by the clearest grant of
organic or statute law (Commissioner of Internal
Revenue vs. Court of Appeals, G.R. No. 104151 March
10, 1995)
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
and are willing to reform a chance to do
so.
RULES ON TAX AMNESTY
1. Tax amnesty
a. like tax exemption, it is never favored
nor presumed
b. const r ued st r i ct l y agai nst t he
taxpayer (must show compl ete
compliance with the law)
2. Gover nment not est opped f r om
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 bl ock subsequent cor r ect
appl i cat i on of t he st at ut e. The
government i s 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 parti cul ar accused and not the
character of the acts charged in the
information.
Tax amnesty
Tax
exemption
Immunity from all criminal, civil
and administrative liabilities
arising from non payment of
taxes
Immunity
from civil
liability only
Applies only to past tax periods,
hence retroactive application
Prospective
application
Rule III Section 6.4 of Department Order
No. 29-07 provides for the filing of the tax
amnesty return together with the SALN
(statement of assets, liabilities and networth)
and the payment of the tax amnesty within
six (6) months from the effectivity of said
order. The said order became effective last
September 6, 2007. Thus, qualified taxpayers
have until March 6, 2008 to avail of the said
tax amnesty program.
Note: Under RMC 29-2008 and Department
Order No. 11-08, it is clarified that the last day
of availing benefits under RA 9480, otherwise
known as Tax Amnesty Act of 2007, shall be 6
months from November 7, 2007 or on May 5,
2008. Effectivity of DOF Department Order
29-07 commenced on November 7, 2007.
DOCTRINE OF IMPRESCRIPTIBLY
As a rule, taxes are imprescriptible as they
are the lifeblood of the government. However,
tax statutes may provide for statute of
limitations.
The rules that have been adopted are as
follows:
a) National Internal Revenue Code
ASSESSMENT
If a Tax return is
filed on or before
the due date
Within three (3) yrs
from due date
If a Tax return is
filed after due
date
Within three (3) yrs
from date of actual
filing
No return is filed
or the return filed
is false or
fraudulent
Within ten (10) yrs
from discovery of the
failure to file the return
or the filing of false or
fraudulent return.
COLLECTION
If a Tax
return is
filed
Within three (5) yrs from
receipt of notice of
assessment.
No return is
filed or the
return filed
is false or
fraudulent
Within ten (10) yrs from
discovery of the failure to
file the return or the filing of
false or fraudulent return
without need of an
assessment.
b) Tariff and Customs Code
It does not express any general statute of
limitation. It provides, however, that
when articles have entered and passed
free of duty or final adjustment of duties
made, with subsequent delivery, such
entry and passage free of duty or
settlement of duties will, after the
expiration of one (1) year, from the date
of the final payment of duties, in the
absence of fraud or protest, be final and
conclusive upon all parties, unless the
liquidation of import entry was merely
tentative. (Sec 1603, TCC)
c) Local Government Code
Local taxes, fees, or charges shall be
assessed within five (5) years from the
date they become due.
In case of fraud or intent to evade the
payment of taxes, fees or charges the
same may be assessed within ten (10)
years from discovery of the fraud or
intent to evade payment.
They shall also be collected either by
administrative or judicial action within five
(5) years from date of assessment (Sec.
194, LGC)
4. CAPITALIZATION The reduction in the price
of the taxed object equal to the capitalized
value of future taxes which the purchaser
expects to be called upon to pay.
5. TAX AVOIDANCE The exploitation by the
taxpayer of legally permissible alternative tax
rates or methods of assessing taxable
property or income, in order to avoid or
reduce tax liability.
Tax avoidance is the tax saving device within
the means sanctioned by law. This method
should be used by the taxpayer in good faith
and at arms length. (CIR vs. Estate of Benigno Toda
Jr. G.R. No. 30554 Feb.28.1983.)
A taxpayer has legal right to decrease the
amount of what would otherwise be his taxes
or altogether avoid them by means which the
law permits. (Delpher Trades vs. IAC G.R. No. 69259
Jan. 26, 1988)
Example: Availing of all deductions allowed
by law or refraining from engaging in activities
subject to tax.
6. TRANSFORMATION The manufacturer or
producer upon whom the tax has been
imposed, fearing the loss of his market if he
should add the tax to the price, pays the tax
and endeavors to recoup himself by improving
his process of production, thereby producing
his units at a lower cost.
Tax Laws
NATURE OF TAX LAWS
1. Not political in character
2. Civil in nature, not subject to ex post facto law
prohibitions
3. Not penal in character
CONSTRUCTION OF TAX LAWS
1. Legislative intention must be considered
Tax statutes are to receive a reasonable
construction with a view to carrying out their
purpose and intent (51 Am. Jur. 361).
2. Where there is doubt In every case of
doubt, in tax statutes imposing payment of
tax, laws are construed strictly against the
government and liberally in favor of the
taxpayer (Manila. Railroad vs. Collector of Customs
G.R. No. 10214 Nov.4, 1915). Taxes, being
burdens, are not to be presumed beyond what
the statute expressly and clearly declares.
3. Where language is plain Rule of strict
construction against the government does not
apply where the language of the tax law is
plain and there is no doubt as to the
legislative intent (51 Am. Jur. 368). The words
employed are to be given their ordinary
meaning.
4. Where taxpayer claims exemption
Exemptions are construed strictly against the
one who asserts the claim of exemption.
Public purpose is always presumed.
5. Provisions of the taxing act are not to be
extended by implication.
6. Tax laws are special laws and prevail over
general laws.
APPLICATION OF TAX LAWS
General Rule: Tax laws are prospective in
operation.
Exception: While it is not favored, a statute may
nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative
intent (Cebu Portland Cement vs. Coll. G.R. No. 18649, Feb.
27, 1965).
KINDS OF PROVISIONS OF TAX LAWS
1. Mandatory those provisions intended for
the security of the citizens or which are
designed to insure equality of taxation or
certainty as to the nature and amount of each
persons tax.
2. Directory those provisions designed merely
for the information or direction of officers or to
secure methodical and systematic modes of
proceedings.
Importance of Distinction
The omission to follow mandatory provisions
renders invalid the act or proceeding to which it
General Principles
relates while the omission to follow directory
provisions does not involve such consequence.
SOURCES OF TAX LAWS
1. Constitution
2. Legi sl at i on or st at ut es, i ncl udi ng
presidential decrees and executive orders on
taxation and tax ordinances, tax treaties and
conventions with foreign countries
3. Administrative rules and regulations,
rulings and opinions of tax officials
particularly the CIR, including opinions of the
Secretary of Justice
Authority of the Secretary of Finance to
promulgate rules and regulations
T h e Se c r e t a r y o f F i n a n c e , u p o n
recommendation of the Commissioner, shall
promulgate all needful rules and regulations
for the effective enforcement of the provisions
of the NIRC (Sec. 244, NIRC).
The statute that is being administered may
not be altered or added to by the exercise of a
power to make regulations thereunder.
Requisites for validity and effectivity of
regulation
a. They must not be contrary to law and the
Constitution (Art. 7, Civil Code).
b. They must be published in the official
Gazette (Lim vs. Central Bank, Sec. 79-B and 551
Rev. Adm. Code).
Force and Effect of Regulations
Such regulations once established and found
to be in consonance with the general
purposes and objects of the law have the
force and effect of law and so they must be
applied and enforced (De Guzman vs. Lontok G.R.
No. 45958 July 22, 1939).
Administrative Rulings and Opinions
Rulings are less general interpretations of
tax laws at the administrative level which are
issued by tax officials in the performance of
their assessment functions. They are usually
rendered by the CIR on request of taxpayers
to clarify certain provisions of a tax law. These
rulings may be revoked by the Secretary of
Finance if the latter finds them not in
accordance with law.
The Secretary of Finance has the power to
revoke, repeal or abrogate the acts of his
predecessors in office. The construction of the
statute by those administering it is not binding
on their successors if thereafter the latter
becomes satisfied that a different construction
should be given.
NonRetroactivity of Repeal
Any revocation, modification or reversal of
any of the rules and regulations or any of the
rulings or circulars promulgated by the CIR
cannot be given retroactive effect when such
will be prejudicial to the taxpayer but it shall
be retroactive in the following cases:
a. Wher e t he t axpayer del i ber at el y
misstates or omits material facts from his
return or in 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
(Sec. 246, NIRC).
Opinions they have the character of
substantive rules and are generally binding
and effective if not otherwise contrary to law
and the Constitution. These are also given by
the Secretary of Justice.
4. Judicial Decisions decisions of the
Supreme Court applying or interpreting
exi st i ng t ax l aws are bi ndi ng on al l
subordinate courts and have the force and
effect of law. They form part of the legal
system of the Philippines (Art. 8 Civil Code).
They constitute evidence of what the law
means (People vs. Licera G.R. No. L-39990 July 22,
1975).
Not all sources of tax laws require publication
in the Official Gazette. The following require
publication as a condition for their effectivity:
statues, including those of local application
and private laws, presidential decrees and
executive orders and administrative rules and
regulations if their purpose is to enforce or
implement existing law, pursuant to a valid
delegation (Taada vs. Tuvera GR. No. L-63915,
April 24, 1985).
Interpretative regulations and those which are
merely internal in nature need not be
published.
Consequently, in the BIR, the following do not
require publication for purposes of effectivity:
1. Revenue Memorandum Orders
2. Revenue Memorandum Circulars
3. Revenue Administrative Orders
4. BIR rulings
5. Tax Treatises and conventions with foreign
countries tax treatises comprehend two
objectives: (a) to avoid double taxation in
cases where the income is taxed twice and
(b) to eliminate or minimize tax evasion
through the adopti on of exchange of
information scheme whereby the signatory
countries undertake to furnish each other, on
a mutual basis, information on the taxable
income and/or activities of any of their
nationals or residents.
PRINCIPLE OF LEGISLATIVE APPROVAL OF AN
ADMINISTRATIVE INTERPRETATION THROUGH
REENACTMENT
Where a statute is susceptible of the meaning
placed upon it by a ruling of the government
agency charged with its enforcement and the
legislature thereafter reenacts the provision
without substantial change, such action is to some
extent confirmatory that the ruling carries out the
legislative purpose.
RULE OF NO ESTOPPEL AGAINST THE GOVERNMENT
General Rule: The Government is not estopped
by the mistakes or errors of its agents; erroneous
application and enforcement of law by public
officers do not bar the subsequent correct
application of statutes (E. Rodriguez, Inc. vs. Collector,
G.R. No. L-23041, July 31, 1969).
Exception: In the interest of justice and fair play,
as where injustice will result to the taxpayer (See
CIR vs. CA, G.R. No. 117982, Feb. 6, 1997; CIR vs. CA,
G.R. No. 107135, Feb. 3, 1999).
Agencies Involved in Tax Administration and
Enforcement
Tax administration refers to the manner and
procedure of assessing and collecting or enforcing
tax liabilities.
BUREAU OF INTERNAL REVENUE It is
t he admi ni st r at i ve agency of t he
government charged with the primary
function of administration of the national
internal revenue laws and regulations. For
administrative purposes, the BIR is under
the executive supervision and control of the
Department of Finance which oversees the
administration of national taxes in the
Philippines. (Sec. 2, NIRC)
CONCEPT OF BUREAU OF INTERNAL
REVENUE ISSUANCES
Revenue Regulations (RRs) are issuances
signed by the Secretary of Finance, upon
recommendation of the Commissioner of Internal
Revenue, that specify, prescribe or define rules
and regulations for the effective enforcement of
the provisions of the National Internal Revenue
Code (NIRC) and related statutes
Revenue Memorandum Orders (RMOs) are
issuances that provide directives or instructions;
prescribe guidelines; and outline processes,
operations, activities, workflows, methods and
procedures necessary in the implementation of
stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations,
except auditing.
Revenue Memorandum Rulings (RMRs) are
rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to
the provisions of the Tax Code and other tax laws,
as applied to a specific set of facts, with or without
est abl i shed pr ecedent s, and whi ch t he
Commissioner may issue from time to time for the
purpose of providing taxpayers guidance on the
tax consequences in specific situations. BIR
Rulings, therefore, cannot contravene duly issued
RMRs; otherwise, the Rulings are null and void ab
initio
Revenue Memorandum Circular (RMCs) are
issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules,
regulations and precedents issued by the BIR and
other agencies/offices.
Revenue Bulletins (RB) refer to periodic
issuances, notices and official announcements of
the Commissioner of Internal Revenue that
consolidate the Bureau of Internal Revenue's
position on certain specific issues of law or
administration in relation to the provisions of the
Tax Code, relevant tax laws and other issuances
for the guidance of the public.
BIR Rulings are official positions of the Bureau to
quer i es r ai sed by t axpayer s and ot her
stakehol ders rel ati ve to cl ari fi cati on and
interpretation of tax laws
Powers and Duties of the BIR
a. Assessment and collection of all national
internal revenue taxes, fees, and charges.
b. Enforcement of all forfeitures, penalties, and
fines connected therewith.
c. Execution of judgments in all cases decided in
its favor by the Court of Tax Appeals and the
ordinary courts.
d. Giving effect to and administering the
supervisory and police powers conferred to it
by this Code or other laws. (Sec. 2, NIRC)
e. Recommend to the Secretary of Finance all
needful rules and regulations for the effective
enforcement of the provisions of the NIRC.
(Sec. 245, NIRC)
Organization of the BIR
The BIR is under one (1) chief known as the
COMMISSIONER OF INTERNAL REVENUE and
General Principles
four (4) assistant chiefs known respectively as the
Deputy Commissioners.
The Bureau consists of National Office and Field
Service.
a. National Office- its function is confined to
general direction, guidance and control of the
entire operations of internal revenue service,
national policy formulation and program
pl anni ng f or ef f i ci ent and ef f ect i ve
implementation of internal revenue law and
regulations. It consists of the Commissioner
and four (4) Deputy Commissioners.
b. Field Service- the BIR operates under a
decentralized system through which is
primarily charged with the operational activities
of the Bureau.
(1) Regional offices (RO) - for effective
administration and control, the Philippines
has been divided into Regional offices
which directly execute and implement the
national policies and programs prescribed
by the National Office for the enforcement
of internal revenue laws. Each office is
headed by a Regional Director.
Powers and duties of Regional Director
a. i mpl ement l aws, pol i ci es, pl ans,
programs, rules and regulations of the
department or agencies in the regional
area
b. administer and enforce internal revenue
laws, rules and regulations, including
the assessment and collection of all
internal revenue taxes, charges and
fees
c. i ssue l etters of authori ty for the
examination of taxpayers within the
region
d. provi de economi cal , effi ci ent and
effective service to the people in the
area
e. coordinate with regional offices or the
departments, bureaus and agencies in
the area
f. coordinate with local government units
in the area
g. exercise control and supervision over
the officers and employees within the
region
h. perform such other functions as may be
provided by law and may be delegated
by the Commissioner.
(2) Revenue District Offices (RDO) - under
the ROs and headed by revenue district
officers who are under the direct control
and supervision of the Regional Director.
These offi ces i mpl ement programs,
methods and procedures necessary for
effi ci ent, effecti ve, and economi cal ,
assessment and collection of internal
revenue taxes in the revenue district.
Composition of RDOs
a. Field men and examiners performing
assessment work
b. Collection agents and clerks performing
collection work
Duties of Revenue District Officers and
other Internal Revenue Officers
a. ensure t hat al l l aws, rul es and
regulations affecting national internal
revenue are faithfully executed and
complied with, and to aid in the
prevention, detection and punishment of
frauds or delinquencies in connection
therewith
b. Examine the efficiency of all officers and
empl oyees of the BIR under hi s
supervision, and to report in writing to
the Commissioner through the Regional
Di r ect or, any negl ect of dut y,
i ncompet ency, del i nquency, or
malfeasance in office of any internal
revenue officer of which he may obtain
knowledge with a statement of all the
facts and any evidence sustaining each
case.
Authority of Revenue District Officers
(RDO)
a. examine taxpayers within the jurisdiction
of the district in order to collect the
correct amount of tax
b. recommend the assessment of any
deficiency tax due in the same manner
that the said acts could have been
performed by the Revenue Regional
Director himself (Section 13 NIRC)
POWERS OF THE COMMISSIONER:
1. Exclusive and original jurisdiction to interpret
the provisions of the NIRC and other tax laws
subject to review by the Secretary of Finance
(Sec. 4, NIRC)
2. Decide disputed assessments, refunds of
internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other
matters arising under this Code or other laws
or portions thereof administered by the
Bureau of Internal Revenue subject to
exclusive appellate jurisdiction of the CTA (Sec.
4, NIRC)
3. Obtain information, and to summon, examine,
and take testimony of persons in ascertaining
the correctness of any return, or in making a
return when none has been made, or in
determining the liability of any person for any
internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance (Sec. 5,
NIRC)
4. Make assessments and prescribe additional
requirements for tax administration and
enforcement (Sec. 6, NIRC)
I. Power to interpret the provisions of the
NIRC and other tax laws
This power shall be the exclusive and original
jurisdiction of the Commissioner, subject to
review by the Secretary of Finance. (Sec. 4,
NIRC)
II. Power to decide tax cases
The Commissioner shall decide disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties
imposed in relation thereto, or other matters
arising under this Code or other laws or
portions thereof administered by the Bureau of
Internal Revenue subject to exclusive
appellate jurisdiction of the Court Tax
Appeals (Sec. 4, NIRC)
Disputed Assessment refers to a tax
assessment that is administratively protested
within 30 days from the date the taxpayer
received the assessment. It includes protested
assessments wherein the administrative
protest is denied in whole or in part, or is not
acted upon by the BIR within 180 days from
the submission of all the required documentary
evidence, and the taxpayer adversely affected
by the decision or inaction appealed the same
to the CTA within 30 days from receipt of the
decision, or from the lapse of the 180-day
period. Pending appeal, such assessments
shall continue to be considered as a disputed
assessment.
The opinion or ruling of the Commissioner of
Internal Revenue, the agency tasked with the
enforcement of tax laws, is accorded much
weight and even finality where there is no
showing that it is patently wrong, particularly in
a case where the findings and conclusions of
the internal revenue commissioner were
subsequent l y aff i rmed by t he CTA, a
specialized body created for the exclusive
purpose of reviewing tax cases, and the Court
of Appeals (Afisco Insurance Corp., et al v. CA, G.R.
No. 112675, Jan. 25, 1999)
Rulings which merely embody administrative
opinions on queries submitted do not have the
force and effect of laws (Alexander Howden and Co.,
Ltd. V. Collector of Internal Rev., G.R. No. L-19392,
April 14, 1965)
III.Power to obtain information, and to
summon, examine, and take testimony of
persons
In ascertaining the correctness of any return,
or in making a return when none has been
made, or in determining the liability of any
person for any internal revenue tax, or in
collecting any such liability, or in evaluating tax
compliance, he is authorized to:
1. Examine any book, paper, record or other
data which may be relevant or material to
such inquiry.
2. Obtain on a regular basis information from
any person other than the person whose
internal revenue tax liability is subject to
audit or investigation, or from any office or
officer of the government, its agencies and
instrumentalities including BSP and
GOCCs any information such as but not
l i mi t ed t o, cost s and vol umes of
production, receipts or sales and gross
income of taxpayers, names, addresses
and financial statements of corporations.
3. Summon the person liable for tax or
required to file a return, or any officer or
employee of such person, or any person
having possession, custody, or care of the
books of accounts to appear before the
Commissioner and to produce such books
and to give testimony.
4. Take testimony of the person concerned,
under oath.
5. Cause revenue officers and employees to
make a canvass from time to time of any
revenue district or region. (Sec. 5, NIRC)
IV. Power to make assessments and prescribe
a d d i t i o n a l r e q u i r e me n t s f o r t a x
administration and enforcement (Sec. 6,
NIRC).
The Commissioner shall have:
1. Authority to examine returns and
determine tax due.
However, any ret urn, st at ement or
declaration filed in any office authorized to
receive the same shall not be withdrawn
but the same may be modified, changed or
amended within three 3 years from the date
of such filing PROVIDED that no notice for
audi t of such ret urn, st at ement or
declaration has in the meantime been
actually served upon the taxpayer. (Section
6(A) NIRC)
2. Authority to make assessment based on
the Best Evidence Obtainable in the
following cases:
a. if a person fails to file a return or other
document at the time prescribed by law;
or
b. he willfully or otherwise files a false or
fraudulent return or other document.
By t he us e of t hi s met hod, t he
Commissioner makes or amends the
return from his own knowledge and from
such information as he can obtain
General Principles
t hrough t est i mony or ot herwi se.
Assessments made as such are deemed
prima facie correct and sufficient for all
legal purposes. (Section 6(B) NIRC)
3. Authority to conduct inventory-taking,
surveillance and prescribe presumptive
gross sales and receipts
INVENTORY TAKING may be made at
any time during the taxable year as a basis
for assessment.
SURVEILLANCE conducted if there is
reason to believe that a person is not
declaring his correct income, sales or
receipts for internal revenue tax purposes.
The findings may be used as a basis for
assessing the taxes for other months or
quarters of the same or different taxable
years. Such assessment shall be deemed
prima facie correct.
PRESUMPTIVE GROSS SALES AND
RECEIPTS if it is found that a person has
failed to issue receipts and invoices or
when there is reason to believe that the
books of accounts do not correctly reflect
the declarations made or to be made in the
return, the Commissioner, after taking into
account the sales, receipts, income or other
taxable base of other persons engaged in
similar business under similar situations or
after considering other relevant information,
may prescribe a minimum amount of such
gross receipts, sales and taxable base, and
such amount so prescribed shall be prima
facie correct for purposes of determining
the internal revenue tax liabilities of such
person. (Sec 6(C) NIRC)
4. Authority to terminate taxable period
Commissioner has the authority to
terminate the period in the any of the
following cases:
a. retiring from business subject to tax
b. intending to leave the Philippines
c. intending to remove his property
therefrom
d. intending to hide or conceal his property
e. performing any act tending to obstruct
the proceedings for the collection of tax
for the past or current quarter or year
f. Performing any act tending to render the
same totally or partly ineffective unless
s u c h p r o c e e d i n g s a r e b e g u n
immediately. (Sec 6(D) NIRC)
5. Authority to prescribe Real property
Values
Commissioner is authorized to divide the
Philippines into different zones or areas
and shall upon consultation with competent
appraisers, determine the fair market value
(FMV) of real properties located in each
zone or area.
For purposes of computing any internal
revenue tax, the value of the property shall
be whichever is higher of: (1) the FMV as
determined by the Commissioner OR (2)
the FMV as shown in the schedule of
values of the Provincial and City Assessors.
(Sec 6(E) NIRC)
6. Authority to inquire into bank deposits
As a rule, Commissioner is not allowed.
except:
a. determining the gross estate of a
decedent
b. in case of taxpayer who has filed an
application for compromise of his tax
liability by reason of financial incapacity.
(Sec 6(F) NIRC)
7. Authority to accredit and register tax
agents
Commissioner shall accredit and register
based on their professional competence,
integrity and moral fitness, individuals and
general professional partnerships and their
representatives who prepare and file tax
returns, reports and other papers with, or
who appear before the BIR for taxpayers.
(Sec 6(G) NIRC)
8. Authori ty to prescri be addi ti onal
p r o c e d u r e o r d o c u m e n t a r y
requirements. (Sec 6(H) NIRC)
Authority of the Commissioner to Delegate
Power
Commissioner may delegate powers vested in him
to any or such subordinate officials with the rank
equivalent to a division chief or higher, subject to
such limitations and restrictions as may be
imposed under rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
Except with the following powers:
a. power to recommend the promulgation of
rules and regulations
b. power to issue rulings of first impression or to
reverse, revoke, or modify any existing ruling
of the Bureau
c. power to compromise or abate any tax liability
d. power to assign or reassign internal revenue
officers to establishments where articles
subject to excise tax are produced or kept. (Sec
7 NIRC)
Provided that an internal revenue officer:
Assigned to any establishment where articles
subject to excise tax are produced or kept,
shall in no case stay in his assignment for
more than 2 years.
Assigned to perform assessment or collection
functions shall not remain in the same
assignment for more than 3 years.
Agents and Deputies for Collection of National
Internal Revenue Taxes
a. the Commissioner of Customs and his
subordinates with respect to the collection of
national internal revenue taxes on imported
goods
b. the head of the appropriate government office
and his subordinates with respect to the
collection of energy tax
c. Banks duly accredited by the Commissioner
with respect to the receipt of payments of
internal revenue taxes authorized to be made
through banks. (Section 12 NIRC)
BUREAU OF CUSTOMS It is the
administrative agency of the government
charged with the administration of the tariff
and customs laws and regulations. For the
collection of national internal revenue on
imported articles, the Commissioner of
Customs and his subordinates, together
with the heads of appropriate government
offices and their subordinates and duly
authorized banks are constituted agents of
the Commissioner of Internal Revenue. It is
also under the supervision of the Secretary
of Finance.
General Duties, Powers, and Jurisdiction of
the BOC:
1. The assessment and collection of the lawful
revenues from imported articles and all other
dues, fees, charges, fines and penalties
accruing under the tariff and customs laws.
2. The prevention and suppression of smuggling
and other frauds upon the customs.
3. The supervision and control over the entrance
and clearance of vessels and aircraft engaged
in foreign commerce.
4. The enforcement of tariff and customs laws
and other laws, rules, and regulations relating
to tariff and customs administration.
5. The supervision and control over the handling
of foreign mails arriving in the Philippines, for
the purpose of the collection of the lawful duty
on the dutiable articles thus imported and the
prevention of smuggling through the medium
of such mails
6. The supervision and control over 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. Exclusive jurisdiction over seizure and
forfeiture cases under the tariff and customs
laws. (Sec. 601, TCC)
Territorial Jurisdiction of the BOC
a. Extent The BOC has the right of
supervision and police authority over all seas
within the jurisdiction of the Philippines, and
over all coasts, ports, airports, harbors, bays,
rivers and inland waters whether navigable
from the sea or not. (Sec. 603 TCC)
b. Exception When a vessel becomes subject
to seizure by reason of an act done in
Philippine waters in violation of the tariff and
customs laws, a pursuit of such vessel begun
within the jurisdictional waters may continue
beyond the maritime zone and the vessel may
be seized on the high seas.
LOCAL GOVERNMENT it is primarily in
charge of the assessment and collection of
the taxes it imposed within its jurisdiction
(local and real property taxes).
Whenever the power to impose and collect a tax
or other revenue is exercised under the Local
Government Code, that power shall be exercised
by the:
a. Sangguniang Panlalawigan in the case of
provinces,
b. Sangguniang Panlungsod in the case of
cities,
c. Sangguni ang Bayan i n t he case of
municipalities, or
d. Sangguniang Barangay in the case of
barangays through an appropriate ordinance.
ORDINARY COURTS The Regional Trial
Courts or the Metropolitan and Municipal
Trial Courts, as the case may be, are given
jurisdiction over civil and criminal actions
for the collection of internal revenue taxes
and customs duties in cases which are not
within the appellate jurisdiction of the Court
of Tax Appeals. The ordinary courts have
j u r i s d i c t i o n o v e r n o n - d i s p u t e d
assessment s. They are al so gi ven
jurisdiction over cases involving local taxes
and special taxes not administered by the
BIR and the BOC.
COURT OF TAX APPEALS It was
created by Congress as a centralized court
specializing in tax cases.
Composition of the CTA The CTA consists of a
presiding Justice and 5 Associate Justices each of
whom shall be appointed by the President upon
nomination of the Judicial and Bar Council. (R.A.
1125 as amended by R.A. 9282)
General Principles
In appropriate cases, the Court shall sit en banc,
or in two Divisions of three (3) justices each,
including the presiding justice, who shall be the
Chairman of its First Division. (A.M. No. 05-11-07-
CTA)
SUPREME COURT In tax cases, as in
other cases, it is the court of last resort to
which an appeal or petition for review may
be taken by the party adversely affected by
a ruling, order or decision of the CA, CTA or
RTC. Furthermore, the SC has exclusive
appellate jurisdiction in all cases involving
the constitutionality or validity of any law, or
those involving the legality of any tax,
impost, assessment or toll, or any penalty
imposed in relation thereto (Secs. 1, 5 [2],
Constitution).
! END OF GENERAL PRINCIPLES "
TAXATION LAW
INCOME TAXATION
INCOME TAXATION
Definitions and Principles
Definitions and Principles
Income It is a flow of service rendered by
capital by the payment of money from it or any
benefit rendered by a fund of capital in a relation
to such fund through a period of time (Madrigal vs.
Rafferty, G.R. No. 12287, Aug. 8, 1918).
An income is an amount of money coming to a
person or corporation within a specified time,
whether as payment for services, interest or profit
from investment. Unless otherwise specified,
income means cash or its equivalent (Conwi vs.
Commissioner; G.R. No. 48532 August 31, 1992).
Income includes earnings, lawfully or unlawfully
acquired, without consensual recognition, express
or implied, of an obligation to repay and without
restriction as to their disposition (James vs. U.S., 366
U.S. 213).
Tests in Determining Income
1. Flow of Wealth Test The determining factor
for the imposition of income tax is whether
any gain was derived from the transaction.
2. Realization Test there is no taxable income
until there is a separation from capital of
something of exchangeable value, thereby
supplying the realization or transmutation
which would result in the receipt of income.
3. Claim of right doctrine a taxable gain is
conditioned upon the presence of a claim of
right to the alleged gain and the absence of a
definite unconditional obligation to return or
repay that which would otherwise constitute a
gain.
Principle of Constructive Receipt of
Income - Income which is credited to the
account of or set apart for a taxpayer and
which may be drawn upon by him at any time
is subject to tax for the year during which so
credited or set apart, although not then
actually reduced to possession.
4. Economic-Benefit Principle Test any
economic benefit to the employee that
increases his net worth, whatever may have
been the mode by which it is effected, is
taxable.
Income Taxation
EXECUTIVE COMMITTEE
TAXATION LAW
DICT V. UNTAYAO edp
Capital vs. Income (Madrigal vs. Rafferty supra.)
Income Capital
All wealth, which
flows into the
taxpayer other than
as a mere return of
capital.
Fund or property, existing
at an instant of time,
which can be used in
producing goods or
services
Flow of Wealth Fund or property
Service of wealth Wealth
Fruit Tree
Income is subject to
tax
Return of capital is not
subject to tax
REQUISITES FOR INCOME TO BE TAXABLE
1. There must be a gain or profit
2. The gain must be realized or received
3. The gain must not be excluded by law or
treaty from taxation
Income Classified as to Source
1. Income from sources within the Philippines
2. Income from sources without the Philippines
3. Income from sources partly within and partly
without the Philippines
Taxable Income - The term taxable income
means the pertinent items of gross income
specified in this Code, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by this Code
or other special laws.
Types of Taxable Income
1. Compensation Income income which is
derived from the rendering of services under
an employer-employee relationship.
2. Professional Income fees derived from
engaging in an endeavor requiring special
training as professional as a means of
livelihood, which includes, but is not limited to,
the fees of CPAs, doctors, lawyers, engineers
and the like.
3. Business Income gains or profits derived
from rendering services, selling merchandise,
manufacturing products, farming and long-
term construction contracts
4. Passive Income income in which the
taxpayer merely waits for the amount to come
in. It includes, but is not limited to, interest
income, royalty income, dividend income,
winnings and prizes.
5. Capital Gain gain from dealings in capital
assets
INCOME TAX
tax on all yearly profits arising from property,
possessions, trade or business, or as a tax on a
persons income, emoluments, profits and the like
(61 CJS 1559)
It is the tax on income, whether gross or net (27
Am. Jur. 308).
Tax on income, or that which increases the net
worth of the taxpayer from sources other than the
mere return of capital.
Characteristics of Philippine Income Tax Law
1. It is a direct tax tax burden is borne by the
income tax recipient upon whom the tax is
imposed.
2. Progressive tax tax rate increases as the
tax base increases. Based on the ability to
pay principle.
3. Comprehensi ve syst em adopt s t he
citizenship principle, the residence principle,
and the source principle.
4. Semi-schedular or semi-global
5. American in origin
Income Tax Systems
GLOBAL TAX
SYSTEM
SCHEDULAR
TAX SYSTEM
SEMI-SCHEDULAR SEMI-
GLOBAL TAX SYSTEM
N
A
T
U
R
E
All items of
deductions
and
personal
and
additional
exemptions
if any are
deducted
from all
items of
gross
income. No
classificatio
n of income.
Income is
classified
into
different
types
upon
which the
tax rate
applicable
is based.
Adopted
by the
Philippines
by virtue
of BP. No.
135.
GLOBAL as to
compensation
income, business or
professional income,
capital gain and
passive income not
subject to final tax,
and other income.
SCHEDULAR as to
passive income
subject to final tax,
capital gains from
sale and transfer of
shares of domestic
corporations and
sale of real
properties.
This is the system
adopted by R.A.
8424.
R
E
T
U
R
N
S
One income
tax return
Separate
return is
filed for
the
appropriat
e type of
income
received.
One income tax
return for global tax
items.
Different sets of
returns for scheduler
tax items.
GLOBAL TAX
SYSTEM
SCHEDULAR
TAX SYSTEM
SEMI-SCHEDULAR SEMI-
GLOBAL TAX SYSTEM
R
A
T
E
S
One set of
tax rates
Graduated
or flat
income tax
rate.
Graduated tax rates
for global tax items.
Final tax at
preferential rates for
scheduler tax items.
T
A
X
B
A
S
E
Gross
Income
Either
gross
income or
net
income
Either gross or net
Criteria in Imposing Philippine Income Tax
1. Citizenship Principle A citizen of the
Philippines is subject to Philippine income tax:
(a) on his worldwide income, if he resides in
the Philippines; or (b) only on his income from
sources within the Philippines, if he qualifies
as nonresident citizen.
2. Residence Principle a resident alien is
liable to pay income tax on his income from
sources within the Philippines but exempt
from tax on his income from sources outside
the Philippines.
3. Source Principle an alien is subject to
Philippine income tax because he derives
income from sources within the Philippines.
Thus, a nonresident alien is liable to pay
Philippine income tax on his income from
sources within the Philippines such as
dividend, interest, rent, or royalty, despite the
fact that he has not set foot in the Philippines.
Classification of Taxpayers
Classification of Taxpayers
TAXPAYER
The term "taxpayer" means any person subject to
tax imposed by this Title.
Summary:
A. Individuals
a. citizens
1. resident citizens (RC)
2. non-resident citizens (NRC)
b. aliens
1. resident aliens (RA)
2. non-resident aliens (NRA)
i. Engaged in trade or business
within the Phils. (NRAETB)
ii. not engaged in trade or business
w i t h i n t h e P h i l i p p i n e s
(NRANETB)
iii. alien individual employed by
Regional or Area Headquarters
and Regi onal Oper at i ng
Headquarters of Multinational
Companies
iv. alien individual employed by
offshore banking units
v. alien individual employed by
petroleum service contractor and
subcontractor
B. Corporations
a. Domestic (DC)
b. Foreign
1. resident foreign corporation (RFC)
2. non-resident foreign corporation
(NRFC)
C. Estates
D. Trusts
E. Partnerships
a. General Professional Partnership
b. General Co-partnership
Income Taxation
Individuals
1. Citizen
a. Resident
A citizen of the Philippines residing
therein is taxable on all income derived
from sources within and without the
Philippines
b. Non-Resident
Non-resident Citizen They are taxed
for income derived from sources within
the Philippines. A nonresident citizen is
taxable only on income derived from
sources within the Philippines.
Means, a Filipino citizen:
a. who establishes to the satisfaction
of the Commissioner the fact of
his physical presence abroad with
a definite intention to reside
therein;
b. who leaves the Philippines during
the taxable year to reside abroad,
either as an immigrant or for
employment on a permanent
basis;
c. who works and derives income
f r o m a b r o a d a n d wh o s e
employment thereat requires him
to be physically present abroad
most of the time during the
taxable year;
d. who is previously considered as a
non-resident and who arrives in
the Philippines at anytime during
the taxable year to reside thereat
permanently shall be considered
non-resident for the taxable year
i n whi ch he arri ves i n t he
Philippines with respect to his
income derived from sources
abroad until the date of his arrival
[Sec.22 (E), NIRC]
NOTE: An overseas contract worker
(OCW) is taxable only on income
derived from sources within the
Philippines [Sec. 23 (B) (C)].
A seaman is considered as an OCW
provided the following requirements
are met:
1. r ecei ves compensat i on f or
services rendered abroad as a
member of the complement of a
vessel; and
2. Su c h v e s s e l i s e n g a g e d
exclusively in international trade.
An individual citizen of the Philippines
who is working and deriving income from
abroad as an overseas contract worker is
taxable only on income derived from
sources within the Philippines
A seaman who is a citizen of the
Ph i l i p p i n e s a n d wh o r e c e i v e s
compensation for services rendered
abroad as a member of the complement
of a vessel engaged exclusively in
international trade shall be treated as an
overseas contract worker.
Based on the above provisions, there are
three (3) types of nonresident citizens,
namely: (1) immigrants; (2) employees of
a foreign entity on a permanent basis;
and (3) overseas contract workers.
Immigrants and employees of a foreign
entity on a permanent basis are treated
as nonresident citizens from the time they
depart from the Philippines. However,
overseas contract workers must be
physically present abroad most of the
time during the calendar year to qualify as
nonresident citizens.
The taxpayer shall submit proof to the
Commissioner to show his intention of
l eavi ng t he Phi l i ppi nes t o resi de
permanently abroad or to return to and
reside in the Philippines as the case may
be for purpose of this Section.
2. Alien
An alien individual, whether a resident or not
of the Philippines, is taxable only on income
derived from sources within the Philippines.
1. Resident alien for income derived from
Means an individual whose residence
is within the Philippines and who is not
a citizen thereof [Sec.22 (F), NIRC].
One who comes to the Philippines for
a definite purpose which in its nature
would require an extended stay, and
makes his home temporarily in the
country becomes a resident alien.
Length of stay i s i ndi cati ve of
intention. An alien who shall have
stayed in the Philippines for more than
one year by the end of the calendar
year is a resident alien.
2. Non-resident alien engaged in trade or
business within the Philippines.
(NRAETB) - For income derived from
sources within the Philippines. Means an
individual whose residence is not within
the Philippines and who is not a citizen
thereof [Sec.22 (G)].
Engaged in trade or business
The term trade or business includes the
performance of the functions of a public
office [Sec. 22 (S)]. It shall not include
performance of services by the taxpayer
as an employee [Sec. 22 (CC)].
A non-resident alien individual who shall
come to the Philippines and stay therein
for an aggregate period of more than 180
days during any calendar year shall be
deemed a non-resident alien doing
business in the Philippines Section 22(G)
notwithstanding [Sec. 25(A)(1)]
3. Non-resident alien not engaged in
t r ade or busi ness wi t hi n t he
Philippines (NRANETB). For income
der i ved f r om sour ces wi t hi n t he
Philippines.
Special Individuals Individuals
whether Filipino or alien employed
by:
a. Regional or area headquarters and
regional operating headquarters of
mul ti nati onal compani es i n the
Philippines.
b. Offshore banking units established in
the Philippines
c. Foreign Service contractor or sub-
contractor engaged in petroleum
operations in the Philippines.
Corporation
WHO ARE TAXABLE AND FOR WHAT?
Domestic
The term "domesti c", when appl i ed to a
corporation, means created or organized in the
Philippines or under its laws.
Foreign
The term "foreign", when applied to a corporation,
means a corporation which is not domestic.
RESIDENT NATIONALITY DOMICILE
Used to
describe a
corporation
organized
under the
laws of a
foreign
country,
which is
engaged in
trade or
business in
the
Philippines.
Determined by
the application
of control test
nationality of
a corporation
is dependent
on the
nationality of
its controlling
shareholders
or members.
Place fixed by the
law creating or
recognizing them,
and which, in the
absence thereof,
shall be understood
to be the place
where their legal
representation is
established or
where they exercise
their principal
functions.
1. Domesti c Corporati on creat ed or
organized in the Phils. or under its laws [Sec.
22(C), NIRC]
It is taxable for income derived from sources
within and without the Philippines.
2. Resident Foreign Corporation engaged in
trade or business within the Philippines [Sec.
22(H), NIRC]
within the Philippines.
3. Non-resident Foreign Corporation not
engaged in trade or business within the
Philippines [Sec. 22(I), NIRC]
within the Philippines.
Special types of Corporations
a. Proprietary educational institutions and non-
profit hospitals
b. Domestic depositary bank (foreign currency
deposit units)
c. Resident international carriers
d. Offshore banking units
e. Regional or Area Headquarters and Regional
Operating Headquarters of multinational
companies
f. Non-resident cinematographic film owners,
lessors or distributors
g. Non-resident owners or lessors of vessels
chartered by Philippine nationals.
h. Non-resident lessors of aircraft, machinery
and other equipment.
A CORPORATION INCLUDES:
1. Partnerships, no matter how created or
organized;
2. Joint-stock companies;
3. Joint accounts (cuentas en participacion)
4. Associations; or
5. Insurance companies [Sec. 22 (B), NIRC]
A CORPORATION EXCLUDES:
1. General professional partnerships;
2. Joint venture or consortium formed for the
purpose of undertaking construction projects
Income Taxation
or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating or consortium agreement under a
service contract with the Government.
CORPORATIONS EXEMPT FROM INCOME TAXATION
UNDER THE NIRC:
1. Those enumerated under Sec. 30.
Exempt corporations are subject to income
tax on their income from any of their
properties, real or personal, or from any other
activities conducted for profit, regardless of
the disposition made of such income. They
are only exempt for income realized as
such.
2. With respect to GOCCs:
General Rule: these corporations are taxable
as any other corporation.
Except:
a. GSIS
b. SSS
c. PHIC
d. PCSO
NOTE: PAGCOR is now subject to tax under
R.A. No. 9337.
3. Regional or Area Headquarters under Sec.
22 (DD) not subject to income tax
Regional operating headquarters under

Sec. 22(EE) shall pay a tax of 10% of
their taxable income.
Estates and Trusts
ESTATE refers to the mass of properties left by a
deceased person.
RULES ON TAXABILITY OF ESTATE
When a person who owns property dies, the
following taxes are payable under the provisions
of the income tax law:
1. Income tax for individuals under Sec. 24 and
25 (to cover the period beginning January to
the time of death);
2. Estate income tax under Sec. 60 if the estate
is under administration or judicial settlement.
ESTATES UNDER JUDICIAL SETTLEMENT
A. During the Pendency of the Settlement
General Rule: An estate under judicial
settlement is subject to income tax in the
same manner as individuals. Its status is the
same as the status of the decedent prior to
his death.
Exceptions:
1. The entitlement to personal exemption is
limited only to P20, 000.
2. No additional exemption is allowed.
3. The distribution to the heirs during the
t axabl e year of est at e i ncome i s
deductible from the taxable income of the
estate. Such distributed income shall form
part of the respective heirs taxable
income.
Where no such distribution to the heirs is
made during the taxable year when the
income is earned, and such income is
subjected to income tax payment by the
estate, the subsequent distribution
thereof is no longer taxable on the part of
the recipient.
SUMMARY
TAXPAYER
Distribution in the current year
out of the corpus of the estate
NONE
Distribution in current year out
of income in the previous year
NONE
Distribution in current year out
of income of the current year
HEIR
Retention by the estate of the
income of 2008
ESTATE
B. Termination of The Judicial Settlement
(Where The Heirs Still Do Not Divide The
Property)
1. If the heirs contribute to the estate
money, property, or industry with intention
to divide the profits between/among
them, an unregistered partnership is
created and the estate becomes liable for
the payment of corporate income tax
(Evangelista vs. Collector, G.R. No. L-9996, October
15, 1957; Oa vs. Commissioner, G.R. No.
L-19342, May 25, 1972).
2. If the heirs, without contributing money,
property or industry to improve the
estate, simply divide the fruits thereof
between/among themsel ves, a co-
ownership is created, and individual
income tax is imposed on the income
received by each of the heirs, payable in
their separate and individual capacity
(Pascual vs. Commissioner, GR No. L-78133,
October 18, 1988; Obillos vs. Commissioner, GR No.
L-68118, October 29, 1985).
ESTATES NOT UNDER JUDICIAL SETTLEMENT
Pending the extrajudicial settlement, either of the
following situations may arise:
1. If the heirs contribute money, property, or
industry to the estate with the intention of
di vi di ng t he pr of i t s bet ween/ among
themselves, an unregistered partnership is
created and the estate becomes liable for the
payment of corporate income tax; or
2. If the heirs, without contributing money,
property or industry to the estate, simply
divide the fruits thereof between/among
themselves, a co-ownership is created and
income tax is imposed on the income
received by each of the heirs, payable in their
separate and individual capacity.

TRUSTS
TRUST A right to the property, whether real or
personal, held by one person for the benefit of
another.
WHEN TRUSTS ARE TAXABLE ENTITIES:
1. The income of a trust, which is to be
accumulated.
2. Income of the trust which is to be distributed
currently by the fiduciary to the beneficiaries.
3. Income collected by a guardian of an infant
which is to be held or distributed as the court
may direct
4. A trust in which the fiduciary may, at his
discretion, either distribute or accumulate the
income.
RULES ON TAXABILITY OF THE INCOME OF A TRUST
1. The income of the trust for the taxable year,
which is to be distributed to the beneficiaries
fi l i ng and payment of tax l i e on the
beneficiaries.
2. The income of the trust which is to be
accumulated or held for future distribution
whether consisting of ordinary income or gain
from the sale of assets included in the
"corpus" of the estate filing of return and
payment of tax become the burden of the
trustee or fiduciary.
Exceptions:
a. In the case of a revocable trust, the
income of the trust will be returned by the
grantor.
b. In a trust where the income is held for the
benefit of the grantor, the income of the
trust becomes income to the grantor.
c. In the case of trust administered in a
foreign country, the income of the trust;
undiminished by any amount distributed
to the beneficiaries shall be taxed to the
trustee.
IRREVOCABLE TRUSTS (irrevocable both as to
corpus and as to income)
Trust itself, through the trustee or fiduciary, is

liable for the payment of income tax.
Taxed exactly in the same way as estates

under judicial settlement and its status as an
individual is that of the trustor.
It is entitled to the minimum personal

exemption (P20,000) and distribution of trust
income during the taxable year to the
beneficiaries is deductible from the trusts
taxable income.
REVOCABLE TRUSTS the trustor, not the trust
itself, is subject to the payment of income tax on
the trust income.
SUMMARY
INCOME IS TAXPAYER
For the benefit of the grantor GRANTOR
Retained by the trust FIDUCIARY
Distributed to beneficiary BENEFICIARY
SUMMARY OF TAX RULES
TAXABLE ESTATE TAXABLE TRUST
The taxable income
shall be determined in
the same way as that
of individuals, but with
! a special
deduction for any
amount of income
paid, credited or
distributed to the
heirs.
The taxable income shall
be determined in the same
way as that of individuals,
but with
! A special deduction for
any amount of income
paid, credited or
distributed to the heirs.
! A special deduction for
any amount of the
income applied fro the
benefit of the grantor.
The exemption is
20,000
The exemption is 20,000
The income tax rates
for individuals apply.
There is a creditable
withholding tax on the
heir of 15%.
The income tax rates for
individuals apply. There is a
creditable withholding tax
on the heir of 15%.
The income tax return
shall be filed (if the
gross income is
P20,000 or more) and
the tax paid by the
executor or
administrator.
The income tax return shall
be filed(if the gross income
is P20,000 or more) and
the tax paid by the executor
or administrator.
Income Taxation
EXEMPTION OF EMPLOYEES TRUST
Provided:
1. the employees trust must be part of a
pension, stock bonus or profit sharing plan of
the employer for the benefit of some or all of
his employees;
2. contributions are made to the trust by such
employer, or such employees, or both;
3. such contributions are made for the purpose
of distributing to such employees both the
ear ni ngs and pr i nci pal of t he f und
accumulated by the trust; and
4. That the trust instrument makes it impossible
for any part of the trust corpus or income to
be used for or diverted to, purposes other
than the exclusive benefit of such employees
(Sec. 60B, NIRC).
Tax exemption is likewise to be enjoyed

by the income of the pension trust;
otherwise, taxation of those earnings
woul d r esul t i n a di mi nut i on of
accumul at ed i ncome and r educe
whatever the trust beneficiaries would
receive out of the trust fund (Commissioner vs.
Court of Appeals, Court of Tax Appeals and GCL
Retirement Plans, GR No. 95022, March 23, 1992).
Any amount actually distributed to any

employee or distributee shall be taxable
to him in the year in which so distributed
to the extent that it exceeds the amount
contri buted by such empl oyee or
distributee.
Partnership and Co-ownership
KINDS OF PARTNERSHIP FOR TAX PURPOSES UNDER
THE NIRC
1. General Professional Partnerships (GPP) -
formed by persons for:
a. the sole purpose of exercising a common
profession and
b. No part of the income of which is derived
from engaging in any trade or business.
[Sec. 22 (B), NIRC].
2. Taxable OR Business Partnership:
All other partnerships no matter how

created or organized.
It includes unregistered joint ventures and

business partnerships.
However, joint ventures are not taxable

as corporations when:
a. undertaking construction projects;
b. engaged in petroleum, coal and other
energy operation under a service
contract with the government.
3. General co-partnerships (GCP)
They are partnerships, which are by law

assimilated to be within the context of,
and so l egal l y cont empl at ed as
corporations.
The partnership itself is subject to

corporate taxation.
The individual partners are considered

stockholders and, therefore, profits
distributed to them by the partnership are
taxable as dividends.
The taxable income for a taxable year,

after deducting the corporate income tax
imposed therein, shall be deemed to have
been actually or constructively received
by the partners in the same taxable year
and shall be taxed to them in their
individual capacity whether actually
distributed or not [Sec. 73(D), NIRC].
LIABILITY OF A PARTNERSHIP:
1. General Professional Partnership
They are not subject to income tax, but are
required to file returns of their income for the
purpose of furnishing information as to the
share of each partner in the net gain or profit,
which each partner shall include in his
individual return.
The part nershi p shal l act as t he

withholding agent.
The net income (income for distribution)

shall be computed in the same manner as
a corporation. Date of filing of the return
is April 15 of each year.
2. Taxable or Business Partnership
The income tax of this type of Partnership is
computed and taxed like that of a corporation.
This kind of partnership, like a regular
corporation, is also required to file a quarterly
corporate income tax return. Filing and
payment of quarterly return is within 60 days
after the end of each quarter while the annual
return is on or before April 15 of the following
year.
LIABILITY OF A PARTNER:
1. Share of a partner in general professional
Partnership
a. Each partner shall report as gross income
(business income) his distributed share
actually or constructively received in the
net income of the partnership. (Sec. 26,
NIRC) [The same share shall be subject
to creditable withholding tax of 10%.]
They are liable in their separate and
individual capacity.
b. Share of a partner in the loss of a general
professional partnership may be taken by
the individual partner in his return of
income.
c. Each partner in a general professional
partnership shall, report as gross income
his distributed share in the net income of
the GPP, based on his agreed ratio,
whether he, avails of itemized or optional
standard deduction.
d. Payments made to a partner of a GPP for
services rendered shall be considered as
ordinary business income subject to Sec.
24A (Effective January 1, 1982)
2. Share of a partner in Taxable or Business
partnership
a. Share of a partner in the net income of a
taxable or business partnership (dividend)
shall be subject to a final tax as follows.
Resi dent Ci ti zen, Non-resi dent

Citizen and Resident Alien (2000 and
onward) 10% (Sec. 24B2)
Non-resident Alien engaged in trade

or business 20% (Sec. 25 A2)
Non-resident alien not engaged in

trade or business 25% (Sec. 25B)
b. Share of a partner in the loss of a taxable
or business partnership maybe taken by
the individual partner in his return of
income.
c. Payments made to a partner of a
business or taxable partnership for
services rendered shall be considered as
compensation income subject to Sec.
24(A).
Notes:
1. Partnerships are not subject to Improperly
Accumulated Earnings Tax because the
partners therein are taxed whether or not the
income is distributed to them.
2. A general professional partnership is not
subject to income tax. Persons engaging in
business as partners in a general professional
partnership shall be liable for income tax only
in their separate and individual capacities.
For purposes of computing the distributive
share of the partners, the net income of the
partnership shall be computed in the same
manner as corporation. Each partner shall
report as gross income his distributive share,
actually or constructively received, in the net
income of the partnership.
CO-OWNERSHIP
There is co-ownership:
a. When two or more heirs inherit an undivided
property from a decedent.
b. When a donor makes a gift of an undivided
property in favor of two or more donees.
When Co-ownership is not subject to tax
a. When the co-ownerships activities are limited
merely to the preservation of the co-owned
property. In such a case, the co-ownership, as
such, is not subject to tax.
b. The co-owners are liable for income tax in
their separate and individual capacities.
When Co-ownership is subject to tax
When the income of the co-ownership is invested
by the co-owners in business, the co-owners have
in effect constituted themselves into a partnership.
In such a case, the co-ownership shall be subject
to tax as a corporation.
Kinds of Income Taxes Under The NIRC
Kinds of Income Taxes Under The NIRC
SUMMARY:
1. Net Income Tax
2. Gross Income Tax
3. Capital Gains Tax
4. Optional Corporate Income tax
5. Minimum Corporate Income Tax
6. Improperly Accumulated Earnings Tax
7. Preferential Rates or Special Rates of Income
Tax
8. Withholding Taxes
Income Taxation
Taxation on Individuals
Taxable Income - refers to pertinent items of
gross income specified in the NIRC, less
deducti on and/or personal and addi ti onal
exemptions, if any, authorized to such types of
income by the national internal revenue code or
other special laws.
INCOME SUBJECTED TO GRADUATED RATES
On the taxable income, other than passive income
and capital gains which are subject to final tax,
derived for each taxable year by:
a. resident citizen from all sources within and
b. a non-resident citizen including overseas
contract workers from all sources within the
Philippines
c. a resident alien from all sources within the
Philippines
d. non-resident alien engaged in trade or
business from sources within the Philippines.
Tax Formula
Gross Compensation Income
Less: Personal Exemptions
Premium Payments on Health and/ or
H o s p i t a l i z a t i o n I n s u r a n c e ( i f
qualified)
NET COMPENSATION INCOME
Add: Net Business Income or
Net Professional Income
Other income
TAXABLE INCOME SUBJECT TO GRADUATED
RATES
Net Business Income and Net Professional
Income
Gross Business/Professional Income
Less: Itemized deduction or optional standard
deduction
NET BUSINESS OR PROFESSIONAL INCOME
Sources of Income subject to graduated rate
1. Compensation income
2. Business and professional income
3. Capital gains not subject to final tax
4. Passive income not subject to final tax
5. Other income
Graduated Tax Table - Effective January 1, 1999,
top marginal rate shall be 33% and effective
January 1, 2000 the rate shall be 32%.
INCOME
OVER
BUT
LESS
THAN
TAX PLUS
OF
EXCESS
OVER
10,000
30,000
70,000
140,000
250,000
500,000
10,000
30,000
70,000
140,000
250,000
500,000
5%
500
2,500
8,500
22,500
50,000
125,000
10%
15%
20%
25%
30%
32%
10,000
30,000
70,000
140,000
250,000
500,000
Resident Citizen, Non-Resident Citizen, Resident Aliens
The following are income subject to tax:
Income subject to Graduated Rates
Passive Income
Capital Gains Tax

PASSIVE INCOME APPLICABLE TO RESIDENT
CITIZEN, NON-RESIDENT CITIZEN, RESIDENT
ALIENS
1. Interest income
a. From any currency bank deposit and yield
or any other monetary benefit from
deposit substitutes and from trust funds
and similar arrangements.
deposit substitutes" shall mean an
alternative form of obtaining funds
from the public [the term 'public'
means borrowing from twenty (20) or
more individual or corporate lenders at
any one time] other than deposits,
through the issuance, endorsement, or
acceptance of debt instruments for the
borrowers own account, for the
purpose of relending or purchasing of
receivables and other obligations, or
financing their own needs or the
needs of their agent or dealer.
Tax Rate: 20%
EXCEPTION: if the depositor has an
employee trust fund or accredited
retirement plan, such interest income,
yield or other monetary benefit is
exempt from the final withholding tax.
Under P.D. 27 on land reform, the
landowner is exempt from income tax
on the interest on the price of the land
which the tenant-purchaser pays him.
b. From a depository bank under the
expanded foreign currency deposit
system except non-resident individuals
Tax Rate:
RC and RA 7!%
NRC and NRA-ETB exempt
If the loan is granted by a foreign
government, or an international or
r egi onal f i nanci ng i nst i t ut i on
established by governments, the
interest income of the lender shall not
be subject to the final withholding tax.
c. From long-term deposit or investment in
the form of savings, common or individual
t r ust f unds, deposi t subst i t ut es,
investment management accounts and
ot her i nvest ment s evi denced by
certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP).
Tax Rate:
Held for 5 years or more exempt
4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%
2. Royalties
a. From books, literary works and musical
compositions - Tax Rate: 10%
b. Ot her royal t i es (e. g. pat ent s and
franchises) - Tax Rate: 20%
3. Prizes and other winnings
a. Prizes exceeding 10,000 shall be subject
to tax -Tax rate: 20%
b. Exempt from/not subjected to final tax:
Philippine charity sweepstakes and lotto
winnings
Prizes amounting to P10,000 or less
(Prize exempt from final tax but subject to
graduated tax rate)
Notes:
1. Prizes are results of efforts while winnings
are products of chances and luck. A game
of chance is that which depends more on
chance or hazard than on skill or ability. In
case of doubt, a game is deemed to be
one of a chance.
2. Winnings from horse races are subject to
10% tax. (Section 126 NIRC)
3. Winnings from jueteng and other illegal
gambling are subject to 20% final tax.
4. To be subject to final tax of 20%, the
royalties must be in the nature of passive
income and not in the actual pursuit and
performance of primary purpose.
4. Cash and/or Property Dividends
Dividends - are distributions made by a
corporation to its shareholders out of its
earnings or profits and payable to its
shareholders, whether in money or in other
property. Where a corporation distributes all
of its assets in complete liquidation or
dissolution, the gain realized or loss sustained
by the stockholders whether individual or
corporate, is a taxable income or deductible
loss, as the case may be. (Section 73(A) NIRC)
SOURCE OF
DIVIDEND
TAX RATE
from a domestic
corporation or from a
joint stock company,
insurance or mutual
fund companies and
regional operating
headquarters of
multinational
companies, or on the
share of an individual in
the distributable net
income after tax of a
partnership (except a
general professional
partnership) of which he
is a partner, or on the
share of an individual in
the net income after tax
of an association, a joint
account, or a joint
venture or consortium
taxable as a corporation
of which he is a member
or co-venturer.
6% beginning January
1, 1998
1, 1999
1, 2000
Note: The tax on
dividends shall apply on
income earned on or
after beginning January
1, 1998 (effectivity of
NIRC). Income forming
part of retained earnings
as of December 31,
1997 shall not, even if
declared or distributed
on or after January 1,
1998 be subject to this
tax.
From foreign
corporations
For RC:
5-32%
For NRC and RA:
If considered sources
within - 5%-32%
If without - exempt
See Section 42 (A) (2)
N I R C - d i v i d e n d s
received from a foreign
corporation considered
gr oss i ncome f r om
sour ces wi t hi n t he
Philippines unless less
than 50% of the gross
income of such FC for
t he 3 year per i od
ending with the close
of its taxable year
p r e c e d i n g t h e
declaration of such
dividends was derived
from sources within the
Phi l i ppi nes. (Cor r el at e
Section 42 with Section 23)
Income Taxation
Notes:
1. The reckoning point of the tax is the time
of declaration and not the time of
payment of dividends. It is taxable
whet her act ual l y or const ruct i vel y
received. This is to prevent Improperly
Accumulated Earnings tax by declaring
dividends but delaying the payment.
Moreover, upon declaration, dividends
are already considered in determining the
selling price of stocks. Therefore, it is
already income on the part of the
stockholder
2. Dividends declared are considered to
have been made from the recently
accumulated profits. The previously
accumulated profits not declared as
dividends may be subjected to improperly
accumulated earnings tax if accumulation
was done to evade taxation.
3. Tax on income is different from tax on the
dividends therefore there is no double
taxation (Afisco Insurance Corporation vs. Court of
Appeals G.R. No.112675, Jan. 25, 1999)
4. Under Section 16 of the Corporation Law,
no corporation may make or declare any
dividend except from the surplus profits
arising from its business. Any dividend
therefore, whether cash or stock,
represents surpl us profi ts. They
represent profits, and the delivery of the
certificate of stock covering said dividend
is equivalent to payment of said profits.
Said shares may be sold independently of
the original shares, just as the offspring of
a domest i c ani mal may be sol d
independently of its mother. (Bachrach vs.
Seifert and Elianoff, G.R. No L-1592 Sept. 20,
1949)
STOCK DIVIDEND - refers the transfer of surplus
to capital account.
ARE PROCEEDS FROM REDEMPTION OF
SHARES SUBJECT TO TAX?
It depends on what source of dividend.
a. If its source is the original capital subscription
upon establishment of the corporation or from
initial capital investment in an existing
enterprise, its redemption to the concurrent
value of acquisition may not invite the
application of final tax on dividends- not a
income but a mere return of capital
b. If from stock dividend declarations other than
as initial capital investment, the proceeds of
redemption is additional wealth - a gain and
therefore taxable.
Notes:
1. Even if a stock dividend is a profit, it is still
unrealized until disposed since it has been
converted to capital.
2. Redempt i on of shar es- r epur chase,
reacquisition of stock by corporation which
issued the stock is exchange for property
whether or not the acquired stock in cancelled
retired or held in the treasury. Essentially, the
corporation gets back some of its stock,
distributes cash or property to the shareholder
in payment for the stock, and continues in
business as before. (CIR vs. Court of Appeals G.R.
No. 104151 March 10, 1995).
3. Under the NIRC, the net capital gain from
disposition of shares, such redemption is
subject to capital gains tax. Thus, if the
redemption of stock is not subject to final tax
on dividends, the gains derived therefrom are
subject to capital gains.

CAPITAL GAINS
1. from sale of shares of stock
Not listed or listed but not traded in the stock
exchange. Note: If traded in the stock
exchange - subject to stock transaction tax
(percentage tax)
shares of stock of a domestic corporation
sold by a non-dealer in securities
Tax Base: net capital gains (the higher of
the gross selling price or consideration
less cost or adjusted basis). The law
speaks of net capital gains for the taxable
year. Thus, all transactions for the taxable
year must be taken into account including
the capital losses in arriving at the taxable
gain.
Tax Rate:
5% for the first P100,000
10% for the amount in excess of
P100,000
Notes:
1. While it is true that only those shares
of stock, which are listed may be
traded in the local stock exchange, it
does not necessarily follow that listed
shares may only be traded in the
local stock exchange. They may be
sol d out si de t he l ocal st ock
exchange. What is controlling is
whether or not the shares of stock
are t raded i n t he l ocal st ock
exchange (Del Rosario vs. Commissioner,
CTA Case No. 4796, December 1, 1994).
2. If the stocks are listed and traded in a
local stock exchange, it is subject to
stock transaction tax of ! of 1% on
its gross selling price.
3. Gains from sale of shares of stock in
a foreign corporation are NOT subject
to the final tax but to graduated rates
either as capital gain or ordinary
income depending on the nature of
the trade or business of the taxpayer.
4. On August 30, 2005, BIR issued
RMC No. 43-2005. Accordingly, sale
of shares of stock through the stock
exchange (1) where the sale is pre-
arranged or (2) the buyer/s is
predetermined or (3) where public is
in effect excluded by any means from
taking part in the trading is subject to
capital gains tax (5% or 10%) and not
to stock transaction tax (1/2 of 1%). It
i s submi t t ed by compl ai ni ng
industries that this RMC lacks legal
basis. This RMC was revoked with
finality.
Note: Recently, BIR again issued same
cont ent s i n a recent RMC and DOF
suspended the same and is still subject to the
l egal i t y of BI R s RMC t ak i ng i nt o
consideration the complaints of industries but
BIR proposed that this tax concept will
increase revenue for the government.
2. From sale of real property
Classified as capital asset
Located in the Philippines
Not sold by a dealer in real estate
Gain or loss is immaterial, there being a
conclusive presumption of gain
Tax Base: The higher between the gross
selling price and current fair market value
as determined by the Commissioner.
Tax Rate: 6% of the tax base.
EXCEPTION: Sale of the principal residence
by an individual
Principal Residence refer to the dwelling
house, including the land on which it is
situated, where the husband or wife or an
unmarried individual, whether or not qualified
as head of the family, and members of his
family reside. Actual occupancy of such
principal residence shall not be considered
interrupted or abandoned by reason of the
individuals temporary absence therefrom due
to travel or studies or work abroad or such
other similar circumstances. Such principal
residence must be the dwelling house in
which whenever absent, the said individual
intends to return (RR No. 14-00; November 20,
2000).
Requisites:
A. Sale or disposition of the old actual
principal residence;
B. By natural persons, citizens or aliens.
However, under the Constitution, aliens
are prohi bi ted from acqui ri ng real
property located in the Philippines but if
they own condominium units, they may
avail of the exemption upon sale of such
property;
C. The proceeds of which is utilized in (a)
acquiring or (b) constructing a new
principal residence within eighteen (18)
calendar months from date of sale or
disposition;
D. Notify the Commissioner within thirty (30)
days from the date of sale or disposition
through a prescribed return of his
intention to avail the tax exemption;
E. Can be availed of only once every ten
(10) years;
F. The historical cost or adjusted basis of his
old principal residence sold, exchanged
or disposed shall be carried over to the
cost basis of his new principal residence;
and
G. If there is no full utilization, the portion of
the gains presumed to have been
realized shall be subject to capital gains
tax.
Notes:
1. If the buyer of real property classified as
capital asset is the government or any of
its political subdivisions or agencies, or to
gover nment owned or cont r ol l ed
corporations, the tax liability shall be
subject either to the graduated rates
(5-32%) or 6% final tax at the option of
the taxpayer.
2. In case of sale of real property which is
subject to the right of redemption such as
extrajudicial foreclosure sale of capital
assets initiated by banks, finance and
insurance companies, the final tax is due
upon the expiration of the redemption
period.
3. In relation to definition of capital asset,
the real property that is subject to capital
gains tax is one which is not used in trade
or business or not connected thereto.
4. If the taxpayer constructed a new
residence and then sold its old house, is
this still exempted from capital gains tax?
The law is clear that the proceeds should
be used in acquiring and constructing a
new principal residence. Therefore, the
old residence should first be sold before
acqui ri ng or constructi ng the new
residence and not vice-versa. (Dizon Tax
reviewer)
Income Taxation
ALIENS MAY ACQUIRE REAL PROPERTIES IN
THE PHI LI PPI NES under the fol l owi ng
instances:
a. An alien who is a legal or compulsory heir may
acquire land through succession. Ascendants,
spouse and children whether legitimate or
illegitimate are legal heirs.
b. Aliens may have acquired real properties
before adoption of the 1935 constitution
c. aliens may acquire condominium units subject
to 60-40% limit
d. Former natural born Filipino citizens may
acquire real properties under BP. 185 and R.A.
8179.
Non-Resident Engaged in Trade or Business
1. Dividends -
Tax Rate 20%
A. For cash or property dividends from
Domestic Corporation, or from a joint
stock company, or from an insurance or
mutual fund company or from a regional
operating headquarter of a mutual fund
company or from a regional operating
headquarter of multinational company
B. For share of a non-resident alien
individual in the distributable net income
after tax of a partnership except general
professional partnership, of which he is
a partner.
C. share of a non-resident alien individual
in the net income after tax of an
association, joint account, or joint
venture taxable as corporation of which
he is a member or co-venturer
If from a foreign corporation - Tax rate
5-32% (Section 24, Section 25A1 NIRC) if
sources within the Philippines.
See Section 42 (A) (2) NIRC- dividends
received from a foreign corporation
considered gross income from sources
within the Philippines unless less than
50% of the gross income of such FC for
the 3 year period ending with the close
of its taxable year preceding the
declaration of such dividends was
derived from sources within the Philippines.
2. S u b j e c t t o f i n a l t a x o f 2 5 %- f o r
cinematographic films and similar works.
3. Royalties, Prizes, other winnings, interest
income, capital gains, and interest on long
term deposit or investment in banks - see rules
as to resident citizen, non-resident citizen,
resident alien.
Non-Resident Alien Not Engaged in Trade or Business
A non-resident alien not engaged in trade or
business is taxed at the rate of 25% of the gross
income. No deductions are allowed.
Capital gain rules are applicable to nonresident
alien not engaged in trade or business. - see
capital gains topic to resident citizen, non-resident
citizen, resident alien.
Subject to 5-10% capital gains tax on sale of
stocks of domestic corporations not listed and
traded in the local stock exchange.
Subject to 6% final tax on the sale of real property
in the Philippines
All other income from within the Philippines is
subject to a final tax of 25% on its gross amount.
Individuals Especially Employed
Special Individuals Individuals whether
Filipino or alien employed by:
a. Regional or area headquarters and regional
operating headquarters of multinational
companies in the Philippines.
b. Offshore banking units established in the
Philippines
c. Foreign Service contractor or sub-contractor
engaged in petroleum operations in the
Philippines.
Multinational Company - a foreign firm or entity
engaged in international trade with affiliates or
subsidiaries or branch offices in the Asia-Pacific
Region and other foreign markets.
Tax Rate: 15%
Tax Base: Gross income received as salaries,
wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and
allowances.
The same tax treatment shall apply to Filipinos
employed and occupying the same positions as
those of aliens employed by these multinational
companies, offshore banking units and petroleum
service contractors and subcontractors.
For other sources within the Philippines, income
shal l be subj ect to perti nent i ncome tax
(graduated tax rates, final tax on passive income,
capital gains depending whether a citizen or an
alien), as the case may be.
Allowable Deductions to Individuals
Allowable Deductions to Individuals
DEDUCTIONS
1. Business Expenses and Expenses from
Practice of Profession deductible only
from gross business income and professional
i ncome, r espect i vel y but not f r om
compensation income. The expenses to be
deducted may either be itemized deductions
OR the optional standard deduction.
2. Special deduction for actual premium
payments for health and/or hospitalization
insurance taken by an individual taxpayer
provided that the following requisites are met:
a. The taxpayers family gross income does
not exceed P250,000 in a taxable year.
b. The amount deductible should only be
limited to P2,400 per family or P200 per
month.
c. In case of a married taxpayer, this can
only be claimed by the spouse claiming
the additional exemption.
3. Personal Exemptions are fixed at arbitrary
amounts intended to substitute for personal
and living expenses. They are roughly the
equi val ent of the taxpayer s mi ni mum
subsistence and those of his dependents
(Madrigal vs. Rafferty, supra).
Kinds of Personal Exemptions
a. Personal Exemptions
Single
P20,000 Single individual or married
individual, judicially decreed legally separated
without qualified independent children.
Head of the Family
P25,000 Head of the family or married
individual judicially decreed legally separated
with qualified dependent children.
Head of the Family is an unmarried or legally
separated person with one or both parents, or
one or more brothers or sisters, or one or
more legitimate, recognized natural or legally
adopted children living with and dependent
upon the taxpayer for their chief support; and
Chief support means more than one-half of
the requirements for support.
a. Where such brother/sister or children are
not more than 21 years of age, unmarried
and not gainfully employed, or where
such dependents regardless of age, are
incapable of selfsupport because of
mental or physical defect.
b. Parents, brothers, sisters and senior
ci t i zen l i vi ng/ dependent upon t he
taxpayer, whether relative or not, may
qualify the taxpayer, to the personal
exemption of P25,000 as head of the
family but not to the additional exemption
of P8,000.
Married
P32,000 For each legally married individual.
b. Additional Exemption for Dependents
P8,000 For each of the qualified
dependent children not exceeding four (4)
in number.
The additional exemption refers only to
qualified dependent children such as
legitimate, recognized natural, illegitimate
and legally adopted.
The proper claimant of the additional
exemption is 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; or
3. Husband explicitly waived his right of
the exemption in favor of his wife in
the withholding exemption certificate.
Income Taxation
Parents and dependents qualify the
taxpayer to the personal exemption of
P25,000 as head of the family but not to
the additional exemption of P8,000.
NOTE: NRAETB may deduct personal
exemption (not additional exemption), but only
to the extent allowed by his country to
Filipinos not residing therein, and shall not
exceed t he af or ement i oned amount s
(reciprocity rule). NRANETB cannot claim any
personal or additional exemptions.
RECIPROCITY RULE
Requisites:
a. The country of which he is a subject or
citizen has an income tax law; and
b. The income tax law of his country allows
personal exemptions to citizens of the
Philippines not residing therein, but
deriving income therefrom;
c. The personal exemption shall be equal to
that allowed by the income tax law of his
country to a citizen of the Philippines not
residing therein but deriving income
therefrom, or the amount provided in the
National Internal Revenue Code to
citizens of the Philippines, whichever is
lower.
A SENIOR CITIZEN is:
a. any resident citizen of the Philippines
b. at least sixty 60 years old, including those
who have retired from both government
offices and private enterprises, and
c. Has an income of not more than Sixty
thousand pesos (P60,000) per annum
subject to the review of the National
Economic Development Authority (NEDA)
every three years.
SENIOR CITIZENS DISCOUNT (R.A. 9257)
R.A. 9257 (Expanded Seniors Act) in
February 2004, which specifically provides
that the 20% discount shall be allowed only as
a deduction from gross income of the
establishment for the taxable year the
discount is granted.
Tax deduction based on the net cost of
the goods sold or services rendered
(Section 4 of R.A. 9257)
Availment of establishments of sales
discounts as deduction from gross
income:
a. Onl y por t i on of gr oss sal es
excl usi vel y used, consumed or
enjoyed by the senior citizen shall be
eligible for the deductible sales
discounts.
b. Gross sel l i ng pri ce and sal es
discount must be separately indicated
in the official receipt or sales invoice
issued by the establishment for the
sale of goods or services to the
senior citizen
c. Only the actual amount of the
discount granted or a sales discount
not exceeding 20% of the gross
selling price can be deducted from
the gross income, net of value added
tax, if applicable, for income tax
purposes, and from gross sales or
gross receipts of the business
enterprise concerned, for VAT or
other percentage tax purposes.
d. The discount can only be allowed as
deduction from gross income for
same taxable year that the discount
is granted
e. The business establishment giving
the sales discounts qualified senior
citizen
f. Onl y sel ect ed est abl i shment s
mentioned in R.R. No. 4-2006 may
claim the said discount granted as
deduction from gross income
Requisites:
a. Employment shall have to continue
for a period of at least 6 months
b. Annual taxable income of the senior
citizen does not exceed the poverty
level as may be determined by the
NEDA thru the NSCB. Senior Citizen
to submit sworn certification that his
annual taxable income does not
exceed poverty level.
c. In addition, expenses otherwise
deductible may be allowed as a
deduction only if the tax required to
be deducted and withheld therefrom
has been paid to the BIR.
DOCTRINES
1. The term cost in Section 4(A) of RA
7432 refers to the amount of the 20%
d i s c o u n t e x t e n d e d b y p r i v a t e
establishments to senior citizens in their
purchase of medicines. [Bicolandia Drug
Corporation (Formerly Elmas Drug Corp. vs. CIR,
492 SCRA 159]
2. There is a difference between the
treatment of the 20% discount; it is
considered as tax credit under the Old
Senior Citizens Act and Tax Deduction
under the Expanded Senior Citizens Act.
(Carlos Superdrug Corp vs. DSWD, DOF, and DOJ
G.R. No. 166494 June 29, 2007)
NOTE:
Under Section 4 of the new law, RA 9257
(Expanded Senior Citizens Act of 2003), the
20% sales discount granted to senior citizens
may be claimed as a TAX DEDUCTION
based on the net cost of the goods sold or
services rendered: Provided, That the cost of
the discount shall be allowed as deduction
from gross income for the same taxable year
that the discount
is granted. Provided, further, That the total
amount of the claimed tax deduction net of
VAT if applicable, shall be included in their
gross sales receipts for tax purposes and
shall be subject to proper documentation and
to the provisions of the Tax Code.
Revenue Regulations No. 04-06 dated
December 12, 2005 provides for the following
conditions before establishments may deduct
the said sales
discounts from their gross income:
(1) Only that portion of the gross sales
EXCLUSIVELY USED, CONSUMED OR
ENJOYED BY THE SENIOR CITIZEN
shall be eligible for the deductible sales
discount.
(2) The gross selling price and the sales
di scount MUST BE SEPARATELY
INDICATED IN THE OFFICIAL
RECEIPT OR SALES INVOICE issued
by the establishment for the sale of
goods or services to the senior citizen;
(3) Only the actual amount of the discount
granted or a sales discount not exceeding
20% of the gross selling price can be
deducted from the gross income, net of
value added tax, if applicable, for income
tax purposes, and from gross sales or
gross receipts of the business enterprise
concerned, for VAT or other percentage
tax purposes.
(4) The discount can only be allowed as
deduction from gross income for the
same taxable year that the discount is
granted.
(5) The business establishment giving sales
discounts to qualified senior citizens is
required to keep separate and accurate
record of sales, which shall include the
name of the senior citizen, TIN (removed
by BIR Revenue Regulations No. 01-07
dated December 4, 2006), OSCA ID,
gross sales/receipts, sales discount
granted, dates of transactions and invoice
number for every sale transaction to
senior citizen.
(6) Only the following business
establishments which granted sales
discount to senior citizens on their sale
of goods and/or services may claim the
said discount granted as deduction from
gross income, namely:
(a) Ho t e l s a n d s i mi l a r l o d g i n g
establishments;
(b) Restaurants;
(c) Recreation centers;
(d) Theaters, cinema houses and concert
halls, circuses, carnivals and other
similar places of culture, leisure, and
amusement;
(e) Drug stores, hospital pharmacies,
medical and optical clinics and similar
e s t a b l i s h me n t s d i s p e n s i n g
medicines;
(f) Medical and dental services in private
facilities;
(g) Domestic air and sea transportation
companies;
(h) Public land transportation utilities;
and
(i) Funer al par l or s and s i mi l ar
establishments.
c. Change of Status
1. If the taxpayer should marry or should
have additional dependents during the
t axabl e year, he may cl ai m t he
corresponding exemptions in FULL for
such year.
2. If the taxpayer should die during the
taxable year, his estate may claim the
corresponding exemptions as if he died
at the close of such year.
3. If the spouse or any dependent should
die or any dependent should marry or
become twenty-one years old during the
year, or shoul d become gai nf ul l y
employed, the taxpayer may claim the
exemptions as if the spouse or dependent
died or as if such dependent married,
became twenty one years old or
became gainfully employed at the
close of such year.
4. For any other event and for which there
are no specific rules applicable from the
above-mentioned, the status of the
taxpayer at the end of the year shall
determi ne hi s exempti ons (stri ctl y
construed against the taxpayer).
Examples:
became legally separated can only

claim P 20,000
2 5 y e a r s o l d c h i l d b e c a me
i ncapaci t at ed cannot cl ai m
additional exemption
Income Taxation
Premium Payments on Health and/or Hospitalization
Insurance
Amount of pr emi um on heal t h and/ or
hospitalization paid by an individual taxpayer
(head of family or married), for himself and
members of his family during the taxable year.
Requisites for Deductibility:
1. Insurance must have actually been taken;
2. The amount of premium deductible from gross
income does not exceed P2,400 per family or
P200 per month during the taxable year;
3. That said family has a gross income of not
more than P250,000 for the taxable year;
4. In case of married individual, only the spouse
claiming additional exemption shall be entitled
to this deduction.
Who May Avail Of The Deduction?
1. I ndi vi dual t axpayer s ear ni ng pur el y
compensation income during the year.
2. Individual taxpayer earning business income
or in practice of his profession whether
availing of itemized or optional standard
deductions during the year.
Corporations
Corporations
A CORPORATION INCLUDES:
1. Partnerships, no matter how created or
organized;
2. Joint-stock companies;
3. Joint accounts (cuentas en participacion)
4. Associations; or
5. Insurance companies [Sec. 22 (B), NIRC].
A CORPORATION EXCLUDES:
1. General professional partnerships;
2. Joint venture or consortium formed for the
purpose of undertaking construction projects;
and
3. Joint venture or consortium for engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating or
consortium agreement under a service
contract with the Philippine Government.
Domestic Corporation
Classes of taxes imposed on a domestic
Corporation
1. Normal Tax
3. Final Tax
5. Gross Income Tax
6. Improperly Accumulated Earnings Tax
1. Net Income Tax Formula (Normal Tax)
Tax Rates: 35%, as amended
Tax Base: Net Taxable Income
NET INCOME TAX FORMULA:
Gross Sales
Less: Sales Returns
Sales Allowances
Sales Discounts
NET SALES
Less: Cost of Goods Sold
GROSS INCOME FROM SALES
Add: Incidental income/ Other Income
NORMAL TAX GROSS INCOME
Less: Allowable deductions
NET TAXABLE INCOME
x Applicable tax rate
INCOME TAX PAYABLE
R.A. 9337 amended the income tax rate of
corporations from 32% to 35% effective July
1, 2005 but will be reduced to 30% on
January 1, 2009.
Same rules as those imposed on individuals
3. Final Tax
Same rules as those imposed on individuals
MINIMUM CORPORATE INCOME TAX
[Section 27 (E)]
MCIT is imposed on domestic and resident
foreign corporations:
a) Whenever such corporation has zero or
negative taxable income; or
b) Whenever the amount of MCIT is greater
than the normal income tax due from
such corporation determined under
Section 27[A].
Tax Rate: 2%
Tax Base: Gross income except income
exempt from income tax and income subject
to final withholding tax
LIMITATIONS:
1. The MCIT shall apply only to domestic
and resident foreign corporations subject
to the normal corporate income tax
(income tax rates under Sec 27[A] of the
CTRP).
2. In case of a domestic corporation whose
operations or activities are partly covered
by the regular income tax system and
partly covered under a special income tax
syst em, t he MCI T shal l appl y on
operations covered by the regular
corporate income tax system.
In computing for the MCIT due from a resident
foreign corporation, only the gross income
from sources within the Philippines shall be
considered for such purpose
MCIT FORMULA:
Gross Sales
Less: Sales Returns
Sales Allowances
Sales Discounts
NET SALES
Less: Cost of Goods Sold
MCIT GROSS INCOME
x 2%
MCIT PAYABLE
FORMULA FOR QUARTERLY INCOME TAX
DUE (as amended)
NORMAL TAX
HIGHER
MCIT HIGHER
Normal Income tax Minimum Corporate
Income tax
Less: Quarterly MCIT
payments of
the current
taxable year
Less: Quarterly
MCIT
payments of
the current
taxable year
Quarterly Income tax
payments of the
current Taxable year
Quarterly Income tax
payments of the
current Taxable year
Expanded
Withholding taxes in
the current year
Expanded
the current year
Expanded
the prior year
Expanded
the prior year
Excess in the MCIT in
the prior year/s
(subject to the
prescriptive period
allowed for its
creditability)
QUARTERLY
INCOME TAX DUE
QUARTERLY
INCOME TAX DUE
Cost of Goods Sold shall include all

business expenses directly incurred to
produce the merchandise to bring them to
their present location.
Gross income - If apart from deriving

i ncome from these core busi ness
activities there are other items of gross
income realized or earned by the
taxpayer during the taxable period which
are subject to the normal corporate
income tax, the same items must be
included as part of the taxpayers gross
income for computing MCIT. This means
that the term gross income will also
i ncl ude al l i tems of gross i ncome
enumerated under Section 32(A) of the
Tax Code, as amended, except income
exempt from income tax and income
subject to final withholding tax described
(RR. No. 12-2007).
When does MCIT commence?
MCIT i s i mposed upon any domesti c
corporation beginning the fourth taxable year
in which such corporation commenced its
business operations.
The t axabl e year i n whi ch busi ness
operations commenced shall be the year
when the corporation registers with the BIR
not when the corporation started commercial
operation.
Income Taxation
How much tax is payable by a corporation
on its fourth taxable year?
The higher between the normal tax and the
minimum corporate income tax.
CARRY FORWARD OF THE EXCESS MINIMUM TAX:
1. Any excess of MCIT over the normal
income tax can be carried forward on an
annual and quarterly basis.
2. The excess can be credited against the
normal income tax due in the next 3
immediately succeeding taxable years.
3. Any amount of the excess MCIT which
cannot be credited against the normal
income tax due in the next 3-year period
shall be forfeited.
4. In the year to which the excess is carried
forward, the normal tax should be higher
than the MCIT.
5. The maximum amount that can be
deducted is the amount of the normal tax
for the year in which the excess MCIT is
claimed as credit.
RELIEF FROM MCIT:
The Secretary of Finance is authorized to
suspend the imposition of the MCIT upon
submission of proof by the applicant
cor por at i on t hat t he cor por at i on
sustained substantial losses on account of
the following (Memorandum No. 6-2002):
a. prolonged labor dispute;
b. force majeure; or
c. legitimate business reverses.
Substantial losses from a prolonged
labor dispute" means losses arising from
a strike staged by the employees which
lasted for more than six (6) months within
a taxable period and which has caused
the temporary shutdown of business
operations.
Force majeure" means a cause due to
an irresistible force as by "Act of God" like
lightning, earthquake, storm, flood and
the like. This term shall also include
armed conflicts like war and insurgency.
Legitimate business reverses" shall
include substantial losses sustained due
to fire, robbery, theft, or embezzlement, or
f or ot her economi c r easons as
determined by the Secretary of Finance.
ENTITIES EXEMPT FROM MCIT:
1. Domesti c corporati ons engaged i n
proprietary educational institutions;
hospital operations which are non-profit;
business as depository banks under the
system;
4. Resident foreign corporations engaged in
business of international carrier;
business as offshore banking units;
busi ness as r egi onal oper at i ng
headquarters; and
7. Firms that are under special income tax
rate system such as PEZA law, Bases
Conversion Act and firms enjoying
income tax holiday incentives.
AMENDMENTS TO MCIT (RR No. 12-2007)
MCIT APPLIES TO QUARTERLY INCOME
TAX RETURNS
The computation and the payment of MCIT,
shall likewise apply at the time of filing the
quarterly corporate income tax as prescribed
under Section 75 and Section 77 of the Tax
Code, as amended.
The final comparison between the normal
income tax payable by the corporation and
the MCIT shall be made at the end of the
taxable year and the payable or excess
payment in the Annual Income Tax Return
shall be computed taking into consideration
corporate income tax payment made at the
time of filing of quarterly corporate income tax
returns whether this be MCIT or normal
income tax.
MEANING OF GROSS INCOME
EXPANDED
If apart from deriving income from these core
business activities there are other items of
gross income realized or earned by the
taxpayer during the taxable period which are
subject to the normal corporate income tax,
the same items must be included as part of
the taxpayers gross income for computing
MCIT. This means that the term gross
income will also include all items of gross
income enumerated under Section 32(A) of
the Tax Code, as amended, except income
exempt from income tax and income subject
to final withholding tax described
MANNER OF FILING AND PAYMENT
The minimum corporate income tax (MCIT)
shall be paid in the same manner prescribed
for the payment of the normal corporate
income tax which is on a quarterly and on a
yearly basis. It shall be covered by a tax
return designed for the purpose which will be
submitted together with the corporation's
annual final adjustment income tax return.
Domestic corporations shall be required to
pay the minimum corporate income tax on a
quarterly basis, pursuant to the provisions of
Sec. 75 and Sec. 77 of the Code in relation to
Section 245 of the same Code, as amended.
5. GROSS INCOME TAX
Tax Rate: 15% optional rate beginning
January 1, 2000
Tax Base: Gross Income
Available only to firms whose ratio of cost of
sales to gross sales or receipts from all
sources does not exceed fifty-five percent
(55%).
Shall be irrevocable for three (3) consecutive
years during which the corporation is qualified
under the scheme.
Aut hor i zed by t he Pr esi dent upon
recommendation by the Secretary of Finance
(Note: The President has not given any
authority yet)
Condi t i ons pr ecedent t o gr ant of
Presidents authority:
a) Tax effort ratio of 20% of GNP
b) Income tax collection/total revenues is
equal to 40%
c) VAT tax effort of 4% of GNP
d) Consolidated public sector financial
position/GNP is equal to 0.9%
IMPROPERLY ACCUMULATED EARNINGS
TAX (IAET) RR NO. 2-2001
DEFINITION: Improperl y accumul ated
earnings (IAE) are the profits of a corporation
that are permitted to accumulate instead of
being distributed by a corporation to its
shareholders for the purpose of avoiding the
income tax with respect to its shareholders or
the shareholders of another corporation.
Tax Rate: 10%
Tax Base: Improperly Accumulated Taxable
Income (in addition to other taxes).
Rationale behind IAET: If the earnings and
profits were distributed, the shareholders
would then be liable to income tax thereon,
whereas if the distribution were not made to
them, they would incur no tax in respect to the
undistributed earnings and profits of the
corporation. Thus, a tax is being imposed:
a. in the nature of a penalty to the
c o r p o r a t i o n f o r t h e i mp r o p e r
accumulation of its earnings, and
b. as a form of deterrent to the avoidance of
tax upon shareholders who are supposed
to pay dividends tax on the earnings
distributed to them by the corporation.
Coverage:
1. imposed on improperly accumulated
taxable income earned starting January
1, 1998
2. Domestic corporations as defined under
the Tax Code;
3. Corporations which are classified as
closely-held corporations.
Those corporations at least fifty
percent (50%) i n val ue of t he
outstanding capital stock or at least
fi fty percent (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 twenty (20) individuals.
Domestic corporations not falling
under the aforesaid definition are,
therefore, publicly-held corporations.
Rul es f or det er mi ni ng whet her a
corporation is closely held in stock
ownership basis:
1. Stock ownership by individuals:
Stock owned directly or indirectly by or for
a corporation, partnership, estate or trust
s hal l be c ons i der ed as owned
proportionately by its shareholders,
partners or beneficiaries
2. Family and partnership ownership
An individual shall be deemed to own the
stock directly or indirectly, by or for his
family, or by or for his partner
For this purpose, the family of an
individual includes his brothers or sisters
whether of the whole or half blood,
s p o u s e , a n c e s t o r s , a n d l i n e a l
descendants.
3. Option to Acquire Stocks
Each one of a series of option shall be
considered option to acquire such stock.
4. Constructive ownership as actual
ownership.
Corporations exempted from the coverage
(B- PEN- GIFT)
1. Publiclyheld corporations (Sec. 29)
2. Banks and other non-banks financial
intermediaries (Sec. 29);
3. Insurance companies (Sec. 29);
4. Taxable partnerships [deemed to have
actually or constructively received the
taxable income under Sec. 73(D)];
5. General prof essi onal part nershi ps
(exempt; taxable against the partners);
Income Taxation
6. Non- taxable joint ventures;
7. Enterprises duly registered with the
Philippine Economic Zone Authority
(PEZA) under R.A. 7916, and enterprises
regi st ered pursuant t o t he Bases
Conversion and Development Act of 1992
under R.A. 7227, as well as other
enterprises duly registered 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; and
8. Foreign corporations [RR No. 02-2001]
Evidence of purpose to avoid income tax:
1. The fact that any 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.
Instances indicative of purpose to avoid
income tax upon shareholders (UBE)
a. Investment of substantial earnings
and profits of the corporation in
unrelated business or in stock or
securities of unrelated business;
b. Investment in bonds and other long-
term securities;
c. Accumulation of earnings in excess
of 100% of paid-up capital, not
otherwise intended for the reasonable
needs of the business as defined in
these Regulations.
2. The fact that the earnings or profits of a
corporation are permitted to accumulate
beyond the reasonable needs of the
business shall be determinative of the
purpose to avoid the tax upon its
shareholders or members unless the
corporation, by the clear preponderance
of evidence, shall prove the contrary.
Reasonable Needs of the Business
The accumulated or undistributed earnings
shall not be subject to IAET if it is necessary
to meet the reasonable needs of the
business.
IMMEDIACY TEST - The reasonable needs of
the business are the:
a. Immediate needs of the business; and
b. Reasonably anticipated needs
Proof Required:
a. An immediate need for the accumulation
of the earnings and profits; or
b. A direct correlation of anticipated needs
to such accumulation of profits.
The following constitutes reasonable needs
of the business. (PLACES)
a. Al l owance for the i ncrease i n 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;
b. Earnings reserved for definite corporate
expansion projects or programs as
approved by the Board of Directors or
equivalent body;
c. Reser ved f or bui l di ng, pl ant s or
equipment acquisition as approved by the
Board of Directors or equivalent body;
d. Reserved for compliance with any loan
covenant or pre-existing obligation
established under a legitimate business
agreement;
e. Earnings required by law or applicable
regul ati ons to be retai ned by the
corporation or in respect of which there is
legal prohibition against its distribution;
f. In the case of subsidiaries of foreign
corporations in the Philippines, all
undi stri buted earni ngs i ntended or
reserved for investments within the
Phi l i ppi nes as can be proven by
corporat e records and/ or rel evant
documentary evidence.
The controlling intention of the taxpayer is that
whi ch i s mani f est ed at t he t i me of
accumulation, not subsequently declared
intentions, which are merely the product of
afterthought. A speculative and indefinite
purpose will not suffice.
Definiteness of plan/s coupled with action/s
taken towards its consummation is essential.
PRIMA FACIE INSTANCES of beyond
reasonable needs of a business
a. investment of substantial earnings and
profits of the corporation in unrelated
business or in stock or securities of
unrelated business;
b. investment in bonds and other long-term
contracts; and
c. Accumulation of earnings in excess of
100% of paidup capital, not otherwise
intended for the reasonable needs of
business.
IAET FORMULA
Taxable Income for the current year
Add: Income exempt from tax
Income excluded from gross income
Income subject to final tax
Amount of net operating loss carry-
over (NOLCO) deducted
TOTAL
Less: Income tax paid/payable for the
taxable year
Dividends actually or constructively
paid
Amount reserved fro the reasonable
needs of the business
IMPROPERLY ACCUMULATED TAXABLE
INCOME
x IAET RATE (10%)
I MP R OP E R LY A C C U MU L AT E D
EARNINGS TAX (IAET)
Limitation
The profit that has been subjected to IAET
shall no longer be subjected to IAET in later
years even if not declared as dividend.
However, profits which have been subjected
to IAET, when declared as dividends, shall be
subject to tax on dividends except in those
instances where the recipient is not subject
thereto.
6. Government Owned and Control l ed
Corporations
GENERAL RULE:
All corporations, agencies, or instrumentalities
owned or controlled by the GOVERNMENT
are capitalize and shall pay such rate of tax
upon their taxable income as are imposed on
domestic corporations engaged in a similar
business, industry, or activity.
EXCEPTIONS:
a. Government Service Insurance System
(GSIS)
b. Social Security System (SSS)
c. Philippine Health Insurance Corporation
(PHIC)
d. Philippine Charity Sweepstakes Office
(PCSO)
Resident Corporations
Classes of Taxes imposed upon a resident
corporation
a. Normal Tax
b. Capital Gains Tax
c. Final Tax on Passive Income
d. Minimum Corporate Income Tax
e. Gross Income Tax
f. Branch Profit Remittance Tax
1. Normal Tax
Same rules with domestic corporations but
the income taxable must be from within the
Philippines.
Tax Rate: 35%
Tax Base: Net Taxable income
In order that a foreign corporation may be
regarded as doing business within a St at e,
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 (CIR vs. British
Overseas Airways Corporation, G.R. No. L-65773-74
April 30, 1987.)
Same rules on domestic corporations
3. Final Tax on Passive Income
Same rules on domestic corporations.
INTERCORPORATE DIVIDENDS
Di vi dends recei ved f rom a domest i c
corporation exempt
Dividends received from a foreign corporation
- if from sources within subject to 35% tax
If from sources outside - exempt
Section 42 (A)(2) NIRC- dividends received
from a foreign corporation considered gross
income from sources within the Philippines
unless less than 50% of the gross income
of such FC for the 3 year period ending
with the close of its taxable year preceding
the declaration of such dividends was
derived from sources within the Philippines
but only in an amount which bears the same
ratio to such dividends as the gross income of
the corporation for such period derived from
sources within the Philippines bears to its
gross income from all sources. (Correlate Section
42 with Section 23 NIRC)
Same rules on domestic corporations
2. Gross Income Tax
A resident foreign corporation is granted the
privilege to opt to be taxed at 15% on gross
income under the same conditions as
domestic corporations.
3. Branch Profit Remittance Tax
Any profit remitted by a branch to its head
office
Tax Rate: 15%
Income Taxation
Tax Base: Total profit applied or earmarked
for remittance without any deduction for the
tax component thereof.
EXCEPTION: those activities which are
registered with the Philippine Economic Zone
Authority (PEZA).
FORM: Applies whether remitted actually or
constructively [ING Bank (Manila Branch) vs.
Commissioner, CTA Case No. 6071, March
11, 2002].
Rationale
To equalize the tax burden on foreign
corporations maintaining, on one hand, local
branch offices, and organizing, on the other
hand, a subsidiary domestic corporation
where at least a majority of all the latters
shares of stock are owned by such foreign
cor por at i ons, t he 15% br anch pr of i t
remittance tax is imposed on the profit
actually remitted by the Philippine branch to
its head office (Bank of America N.T. and S.A. vs.
Court of Appeals et. al., G.R. No. 103106 July 21,
1994).
SINGLE ENTITY CONCEPT
It is stated as a general rule, that the head office
of a foreign corporation is the same juridical entity
as its branch in the Philippines following the
single entity concept. The income from sources
within the Philippines of the foreign head office
shall thus be taxable to the Philippine branch. But
when the head office of a foreign corporation
independently and directly invested in a domestic
corporation without the funds passing through the
Philippine branch, the taxpayer with respect to the
tax on dividend income would be the non-resident
foreign corporation itself and the dividend income
shall be subject to the tax similarly imposed on
non-resident foreign corporation (Marubeni Corporation
vs. Commissioner, 177 SCRA 500).
Income treated as branch profit
Interests, dividends, rents, royalties, including
remuneration for technical services, salaries,
wages premiums, annuities, emoluments or other
fixed or determinable annual, periodic or casual
gains, profits, income and capital gains received
by a foreign corporation during each taxable year
from all sources within the Philippines shall not be
treated as branch profits unless the same are
effectively connected with the conduct of its trade
or business in the Philippines.
Non-Resident Corporations
Classes of taxes imposed on a non-resident
corporation
a. Capital Gains Tax
b. Final Tax on Passive Income
c. Final Tax on (other) Gross Income from
Same rul es on resi dent f orei gn
corporation.
The non-resident foreign corporation cannot
own real properties in the Philippines, which is
the reason why there is no provision for
capital gains tax on sale or disposition of real
properties.
2. Final Tax on Passive Income
Interest on foreign loans 20% on or
after August 1, 1986
Any interest income from transactions
with depositary banks under FCDs shall
be exempt from income tax.
INTERCORPORATE DIVIDENDS (cash and/
or property)
Received from a domestic corporation -
15%, as long as the country in which the
nonresident foreign corporation is domiciled
allows a tax credit for taxes deemed paid in
the Philippines equivalent to 20% or does not
impose tax on dividends.
20% represents the difference between the
regular income tax of 35% on corporations
and the 15% tax on dividends. It is the
amount of tax forgone by the Philippine
government in favor of the non-resident
corporation. THIS IS THE TAX SPARING
RULE
If the country within which the NRFC is
domiciled does NOT allow a tax credit, a final
withholding tax at the rate of 35% is imposed
on the dividends received from a domestic
corporation.
TAX SPARING CREDIT
A credit granted by the residence country for
foreign taxes that for some reason was not
actually paid to the source country but that
would have been paid under the countrys
normal tax rules.
For the purpose of encouraging foreign
investors to conduct business in the country.
3. Final Tax on (other) Gross Income from
Tax Rate: 35%
Tax Base: gross income received from all
sources within the Philippines, such as
interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums),
annuities, emoluments or other fixed or
determinable annual, periodic or casual gains,
profits and income, and capital gains
EXCEPT capital gains resulting from the sale
of shares of stock of a domestic corporation
not listed and traded through a local stock
exchange, held as a capital asset.
Special Corporations
1. Proprietary Educational Institutions and
Non-profit Hospitals.
Tax Rate: 10%
Tax Base: on net income except on income
subject to capital gains tax and passive
income subject to final tax within and without
the Philippines.
If the gross income from unrelated trade,
business or other activity exceeds fifty percent
(50%) of the total gross income derived by
such educational institutions or hospitals from
all sources, the tax of 35% shall be imposed
on the entire taxable income.
Unrelated trade, business or other
activity' means any trade, business or other
acti vi ty, the conduct of whi ch i s not
substantially related to the exercise or
performance by such educational institution or
hospital of its primary purpose or function.
"Proprietary educational institution" is any
private school maintained and administered
by private individuals or groups with an issued
permit to operate from the Department of
Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or
t he Techni cal Educat i on and Ski l l s
Development Authority (TESDA), as the case
may be, in accordance with existing laws and
regulations.
2. Depository Banks (Foreign Currency
Deposit Units) [Sec. 27 (D) (3) as amended by R.A.
9294 (2004)]
Tax Rate: Exempt from all taxes, except net
income from such transactions as may be
specified by the Secretary of Finance, upon
recommendation by the Monetary Board to be
subject to the regular income tax payable by
banks.
EXCEPTION: Interest income from foreign
currency loans granted by such depository
banks under said expanded system to
residents other than offshore units in the
Philippines or other depository banks under
the expanded system shall be subject to a
final tax at the rate of 10%.
Tax coverage: ONLY income derived by a
depository bank under the expanded foreign
currency deposi t system from forei gn
currency transactions with:
a. Nonresidents
b. Offshore banking units in the Philippines
c. Local commerci al banks i ncl udi ng
branches of foreign banks that may be
authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with
foreign currency deposit system units
d. Other deposi tory banks under the
system.
Special Resident Corporations
1. International Carriers
Tax Rate: 2.5%
Tax Base: Gross Philippine Billings
International Air Carrier. refers to a foreign
airline corporation doing business in the
Philippines having been granted landing rights
in any Philippine port to perform international
air transportation services/activities or flight
operations anywhere in the world. Offline
carrier refers to an international air carrier
having no flight operations to and from the
Philippines (Sec. 2 R.R. No. 15-2002)
"Gross Philippine Billings" refers to the
amount of:
1. 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
2. gross revenue from tickets revalidated,
exchanged and/or indorsed to another
international airline form part of the Gross
Philippine Billings if the passenger boards
a plane in a port or point in the
Philippines
Income Taxation
3. That for a flight which originates from the
Phi l i ppi nes, but t ransshi pment 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 Gross Philippine
Billings.
A foreign airline company selling tickets in the
Philippines through their local agents shall be
considered as resident foreign corporation
engaged in trade or business in the country.
The absence of flight operations within the
Philippine territory cannot alter the fact that
the income received was derived from
activities within the Philippines. The test of
taxability is the source, and the source is that
activity which produced the income (Air Canada
vs. CIR CTA Case No. 6572).
International Shipping Gross Philippine
Billings" means Gross revenue whether for
passenger, cargo or mail originating from the
Philippines up to final destination, regardless
of the place of sale or payments of the
passage or freight documents.
2. Offshore Banking Units authorized by the
Bangko Sentral ng Pilipinas (BSP) [Sec. 28
(A) (4) as amended by RA 9294 (2004)]
recommendation of the Monetary Board to be
banks.
EXCEPTION: 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, shall be subject only to a final
tax at the rate of 10%.
Tax Coverage: ONLY income derived by
offshore banking units from foreign currency
transactions with:
1. Nonresidents
2. Other offshore banking units
3. Local commerci al banks i ncl udi ng
offshore banking units
3. Resident Depository Bank (Foreign
Currency Deposit Units) [Sec. 28 (D)(7)(b) as
amended by RA 9294 (2004)]
recommendation of the Monetary Board to be
banks.
EXCEPTION: Interest income from foreign
currency loans granted by such depository
banks under said expanded system to
residents other than offshore units in the
Philippines or other depository banks under
the expanded system shall be subject to a
final tax at the rate of 10%.
Tax Coverage: ONLY income derived by a
depository bank under the expanded foreign
currency deposi t system from forei gn
currency transactions with:
Nonresidents
Offshore banking units in the Philippines
Local commerci al banks i ncl udi ng
foreign currency deposit system units
Other deposi tory banks under the
system
4. Regional or Area Headquarters and
Regional Operating Headquarters of
Multinational Companies
Exempt from all kinds of local taxes, fees, or
charges imposed by a local government unit
e x c e p t r e a l p r o p e r t y t a x o n l a n d
improvements and equipment.
Regional or Area Headquarters (RHQ)
An office whose purpose is to act as an
administrative branch of a multinational
company engaged in international trade which
pr i nci pal l y ser ves as a super vi si on,
communications and coordination center for
its subsidiaries, branches or affiliates in the
Asia-Pacific Region and other foreign markets
and which does not ear or derive income in
the Philippines. Not subject to income tax
Regional Operating Headquarters (ROHQ)
Foreign business entity which is allowed to
derive income in the Philippines by performing
qualifying services to its affiliates, subsidiaries
or branches in the Philippines, in the Asia-
Pacific Region and in other foreign markets.
Tax Rate: 10%
Tax Base: Taxable income from within the
Philippines
ROHQ may engage in the following activities:
a. general administration and planning
b. business planning and coordination
c. sourci ng and procurement of raw
materials and
d. components
e. corporate finance advisory services
f. marketing control and sales promotion
g. training and personnel management
h. logistic services
i. research and development services and
product
j. development
k. technical support and maintenance
l. data processing and communications,
and
m. business development.
Special Non-Resident Foreign Corporations
1. Non- resi dent ci nemat ographi c f i l m
owners, lessors or distributors
Tax Rate: 25%
Tax Base: Gross income from all sources
within the Philippines
2. Nonresident Owner or Lessor of Vessels
Chartered by Philippine Nationals
Tax Rate: 4.5%
Tax Base: Gross rentals, lease or charter
fees from leases or charters to Filipino
citizens or corporations, as approved by the
Maritime Authority
3. Nonresident Owner or Lessor of Aircraft,
Machineries and Other Equipment
Tax Rate: 7.5%
Tax Base: Gross rentals or fees
Exempt Corporations (Sec. 30 NIRC)
1. Labor, agricultural or horticultural organization
not organized principally for profit;
2. Mutual savings bank not having a capital
stock represented by shares and cooperative
bank without capital stock organized and
operated for mutual purposes and without
profit;
3. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or a mutual
aid association or a non-stock corporation
organized by employees providing for the
payment for life, sickness, accident, or other
benefits exclusively to the members of such
society, order or association, or non-stock
corporation or their dependents;
4. Cemetery company owned and operated
exclusively for the benefit of its members;
5. Non-stock corporati ons or associ ati on
organized and operated exclusively for
religious, charitable, scientific, athletic or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
shall belong to or inure to the benefit of any
member, organizer, officer or any specific
person;
6. Business league, chamber of commerce, or
board of trade, not organized for profit and no
part of the net income of which inures to the
benefi t of any pri vate stockhol der or
individual;
7. Civic league or organization not organized for
profit but operated exclusively for the
promotion of social welfare;
8. A non-stock and non-profit educational
institution;
9. Government educational institution;
10. Farmers or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely
of assessments, dues or fees collected from
members for the sole purpose of meeting its
expenses; and
11. Farmers, fruit growers or like association
organized and operated as a sales agent for
the purpose of marketing the products of its
members and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by them.
EXCEPTION: Exempt corporations are subject to
income tax on their income from any of their
properties, real or personal, or from any of their
activities conducted for profit, regardless of the
disposition made of such income.
The phrase any of their activities conducted for
profit does not qualify the word properties. This
makes i ncome f rom t he propert y of t he
organization taxable, regardless of how that
income is used whether for profit or for lofty non-
profit purposes [CIR vs. Court of Appeals. G.R. No.
124043. Oct. 14, 1998].
Income Taxation
Gross Income
Gross Income
GROSS INCOME
Means all income derived from whatever source
(except those excluded or exempted by law),
including but not limited to the following (Sec. 32):
(CART-DRIP-GPP)
a. Compensation;
b. Annuities;
c. Rents;
d. Gross income from profession, trade or
business;
e. Dividends;
f. Royalties;
g. Interests;
h. Prizes and winnings;
i. Gains from dealings in property;
j. Pensions; and
k. Partners share in the net income of the
general professional partnership
The definition provided in Sec. 32 is different

from the limited meaning of Gross Income for
purposes of Gross Income Tax, which means
Gross Sales less Sales Returns, Discounts,
and Allowances and Cost of Goods Sold.
Items of Inclusions (Sec. 32A)
The enumeration is not exclusive:
Compensation means all remunerations for
services performed by an employee for his
empl oyer under an empl oyer - empl oyee
relationship unless specifically excluded by the
Code. It is included ONLY when the taxpayer is
subject to Net Income Tax.
Requisites:
1. personal services were actually rendered;
2. payment was made for such services; and
3. payment was reasonable
Gains from Profession, Trade, or Business
business is any activity that entails time and
effort of an individual or group of individuals for
purposes of livelihood or profit.
Business income refers to income derived from
merchandising, manufacturing, mining, and
farming operations.
Professional income refers to the fees
received by a professional from the practice of his
profession, provided that there is no employer-
employee relationship between him and his
clients.
Sale of Goodwill Gain or loss from a sale of
goodwill results only when the business, or part of
it, to which the goodwill attaches is sold, in which
case the gain or loss will be determined by
comparing the sale price with the cost or other
basis of assets, including goodwill. It is immaterial
that goodwill may never have been carried on the
books as an asset, but the burden of proof is on
the taxpayer to establish the cost or fair market
value of the goodwill sold (Sec. 47, Rev. Reg. 2).
Gains from Dealings in Property (Ordinary
Assets Only)
These include all income derived from the
disposition of property (real, personal or
mixed)
a. For money in case of sale;
b. For property in case of exchange; or
c. From a combination of both sale and
exchange, which results in gain because of
the difference between the taxpayers
investments of what he disposed of and the
amount or value of what he received.
Dealings in Property
A. SALE OR EXCHANGE
The sale or exchange of property must be
consummated not just perfected
SALE OF
PROPERTY
EXCHANGE OF PROPERTY
Delivery of
goods for
money
Delivery of goods for goods
received
Tax
Formula:
Selling price
(in terms of
money)
Less: Cost
GAIN OR
LOSS
Tax Formula:
Fair market value of the
property received in exchange
Less: Cost
GAIN OR LOSS
Requisites:
a. The property received in
exchange is essentially
different from the property
disposed of.
b. The property received has
a market value.
COST BASIS
MODE OF
ACQUISITION
COST BASIS
Purchase Purchase price
Inheritance Fair market value as of
the date of acquisition
Gift Value in the hands of
the donor
Less than full and
adequate
consideration
Amount paid by the
transferee
CAPITAL GAIN CAPITAL LOSS
The gain derived
from the sale or
exchange of capital
assets.
The loss incurred
from the sale or
exchange of capital
assets.
NET CAPITAL GAIN NET CAPITAL LOSS
The excess of the
gains from sales/
exchanges of capital
assets over the gains
from such sales/
exchanges.
The excess of the
losses from sales or
exchanges of capital
assets over the gains
from such sales or
exchanges.
B. CAPITAL ASSETS vs. ORDINARY ASSETS
Under the Tax Code, there is no definition for
the term "capital assets." The Tax Code only
provides for the meaning of ordinary assets:
ORDINARY ASSETS CAPITAL ASSETS
Definition
a. Stock in trade of
the taxpayer or
other properties
of a kind which
would properly
be included in the
inventory of the
taxpayer;
b. Property held by
the taxpayer
primarily for sale
to customers in
the ordinary
course of
business;
c. Property used in
trade or business
and subject to
depreciation; and
d. Real property
used in trade or
business.
Include all property
held by the taxpayer
whether or not
connected in trade or
business but not
including those
enumerated above as
ordinary assets.
Treatment of Gains and Losses
" Ordinary gains
are included in
the gross income
" Ordinary losses
are deductible
from gross
income
" Capital gains
derived from sale
of stocks of a
domestic
corporation are
subject to capital
gains tax.
" Capital gains
derived from sale
of real property in
the Philippines is
subject to capital
gains tax. No
loss is
recognized
because gain is
presumed.
" For other capital
assets, the rules
on capital gains
and losses apply
in the
determination of
the amount to be
included in gross
income.
Income Taxation
C. KINDS OF CAPITAL ASSETS
Shar es of st ocks of a domest i c

corporation
Real property in the Philippines not falling

under the enumeration of ordinary assets.
Other capital assets.

RULES ON SHARES OF STOCKS OF A
DOMESTIC CORPORATION
SELLER IS A
DEALER
IN SECURITIES
SELLER IS NOT A DEALER
IN SECURITIES
LISTED AND
TRADED IN
THE STOCK
EXCHANGE
NOT LISTED
OR LISTED
BUT NOT
TRADED IN
STOCK
EXCHANGE
! Stock treated
as ordinary
asset
! Ordinary
gain is
subject to
graduated
income tax
rates for an
individual OR
to normal
corporate
income tax in
case of a
corporate
seller or
transferor
! Subject to
stock
transaction
tax
! Tax Rate:
! of 1%
! Tax Base:
Gross
selling price
or gross
value in
money of
the shares
of stock
sold or
transferred
! Subject to
final capital
gains tax
! Tax Rate:
- 5% for
gains not
exceeding
P 100,
000
- 10% on
any
amount
exceeding
P 100,000
! Tax Base:
Net capital
gains.
Reflected in the
annual income
tax return
Tax is withheld
by the
stockbroker
who effected
the sale
Reflected in
the annual
capital gains
tax return.
WHO ARE LIABLE FOR CAPITAL GAINS TAX?
1. Individual taxpayer, citizen or alien
2. Corporate taxpayer, domestic or foreign
3. Other taxpayers such as estate, trust, trust
funds and pension among others
EXCEPTIONS TO THE TAX:
1. Gains derived by dealers in securities;
2. All other gains which are specifically exempt
from income tax under existing investment
incentives and other special laws.
BASIS FOR COMPUTING GAIN OR LOSS (BIR Ruling
146-98):
The fair market value (FMV) of the sale of

shares not traded but listed in the stock
exchange is the highest closing price on the
day the shares were sold, transferred or
exchanged.
When no sale is made in the stock exchange,

the FMV shall be the highest selling price on
the day nearest to the day of sale, transfer or
exchange.
For shares not listed in the exchange, the

FMV shall be the book value nearest the
valuation date
The above rules shall be used in computing for
the net capital gain/loss for disposition of shares.
IMPORTANT FEATURES:
1. Sale of shares of stock of a domestic
corporation listed and traded in a local stock
exchange and that of initial public offering
shall be subject to Percentage Tax (Business
Tax)
2. Capital losses sustained during the year (not
listed and traded in a local stock exchange)
shall be allowed as a capital loss deductible
on the same taxable year only (no carry-over)
3. The entire amount of capital gain and capital
loss (not listed and traded in a local stock
exchange) shall be considered without taking
into account the holding period irrespective of
the type/kind of taxpayer (all 100%)
4. Non-deductibility of losses on wash sales.
RULES ON REAL PROPERTY LOCATED IN
THE PHILIPPINES
SELLER IS A
REAL ESTATE
DEALER
SELLER IS NOT A REAL
ESTATE DEALER
PROPERTY
IS TREATED
AS CAPITAL
ASSET
PROPERTY IS
AN
ORDINARY
ASSET
! Stock treated
as ordinary
asset
! Ordinary
gain is
subject to
graduated
income tax
rates for an
individual
OR to
normal
corporate
income tax in
case of a
corporate
seller or
transferor
! Subject to
capital
gains tax
! Tax Rate:
6%
! Tax Base:
the higher
between
the gross
selling
price or
fair market
value
! Stock
treated as
ordinary
asset
! Ordinary
gain is
subject to
graduated
income tax
rates for an
individual
OR to
normal
corporate
income tax
in case of a
corporate
seller or
transferor
OTHER CAPITAL ASSETS
REQUISITES FOR RECOGNITION OF CAPITAL GAIN/
LOSS:
1. The transaction must involve property
classified as capital asset except:
Real property in the Philippines held as
capital asset
Shares of a domestic corporation
2. The transaction must be a sale or exchange
or one considered as equivalent to a sale or
exchange.
SALE OR EXCHANGE OF CAPITAL ASSETS:
The following are considered as sale or exchange
of capital assets:
1. Retirement of bonds;
2. Short sales of property;
3. Failure to exercise privilege or option to buy
or sell property;
4. Securities becoming worthless;
5. Distribution in liquidation of corporations; and
6. Readjustment of interest in a general
professional partnership.
Rules on Capital Gains and Losses
INDIVIDUAL CORPORATION
Holding Period
The percentages of gain
or loss to be taken into
account shall be the
following:
a. 100% if the capital
assets has been held
for 12 mos. or less;
and
b. 50% if the capital
asset has been held
for more than 12
mos.
Capital gains and
losses are recognized
to the extent of 100%.
(There is no holding
period)
Non-deductibility of
Net Capital losses
Capital losses are
allowed only to extent of
the capital gains; hence,
the net capital loss is not
deductible.
Capital losses are
allowed only to extent
of the capital gains;
hence, the net capital
loss is not deductible.
Exception: If any
domestic bank or trust
company, a substantial
part of whose business
is the receipt of
deposits, sells any
bond, debenture, note
or certificate or other
evidence of
indebtedness issued
by any corporation
(including one issued
by a government or
political subdivision)
Net Capital Loss Carry
Over
Allowed
If any taxpayer, other
than a corporation,
sustains in any taxable
year a net capital loss,
such loss (in an amount
not in excess of the net
income for such year)
shall be treated in the
succeeding taxable year
as a loss from the sale
or exchange of a capital
asset held for not more
than twelve (12) months.
Not allowed
Income Taxation
Tax-Free Exchanges and Other Exempt Transactions
SUMMARY OF TAX TREATMENT OF GAINS/
LOSSES IN THE EXCHANGE OF PROPERTIES:
GENERAL RULE: Upon the sale or exchange of
property, the entire gain or loss, as the case may
be, shall be recognized. [Sec. 40 (C) 1]
EXCEPTIONS:
GAINS AND LOSSES
ARE NOT
RECOGNIZED
GAIN IS RECOGNIZED
LOSS IS NOT
! Exchange of
property solely in
kind in pursuance
of corporate
mergers and
consolidations.
! Exchange by a
person of his
property for stocks
in a corporation as
a result of which
said person, alone
or together with
others not
exceeding four (4)
persons, gains
control of said
corporation.
! Transactions
between related
taxpayers (Sec.36)
! Illegal transactions
(Sec. 96 R.R. 2)
! Wash sales by non-
dealers of securities
and when not subject
to the stock transfer
tax.
! Sales and
exchanges that are
not arms-length
! Exchanges of
property, not solely in
kind, in pursuance of
corporate mergers
and consolidation.
TAX FREE EXCHANGES:
Tax consequence: Exempt donors tax as there
is no intent to gain, exempt from capital gains tax,
exempt from VAT as the transaction is not
engaged in trade or business.
Sales or exchanges resulting in non-recognition of
gains or losses:
1. Exchange solely in kind in legitimate mergers
and consolidation includes:
a. Between the corporations which are
parties to the merger or consolidation
(property for stocks);
b. Between a stockholder of a corporation
party to a merger or consolidation and the
other party corporation (stock for stock);
c. Bet ween a secur i t y hol der of a
corporat i on part y t o a merger or
consol i dati on and the other party
corporation (securities for securities).
2. Transfer to a controlled corporation
exchange of property for stocks resulting in
acquisition of corporate control by a person,
alone or together with others not exceeding
four.
"Merger" or "consolidation", when used in this
Section, shall be understood to mean:
a) the ordinary merger or consolidation, or
b) the acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock:
Requisites:
1. undertaken for a bona fide business
purpose and
2. not solely for the purpose of escaping the
burden of taxation:
Bona fide purpose
In determining whether a bona fide business
purpose exists, each and every step of the
transaction shall be considered and the whole
transaction or series of transaction shall be
treated as a single unit:
Transfer of substantial portion
I n det ermi ni ng whet her t he propert y
transferred constitutes a substantial portion of
the property of the transferor, the term
property shall be taken to include the cash
assets of the transferor.
Control means ownership of stocks in a
corporation amounting to at least 51% of the total
voting power of all classes of stocks entitled to
vote.
EXCHANGE NOT SOLELY IN KIND
Exchange not solely in kind this means that
there are other considerations given other than
those mentioned under transactions solely in kind.
In this case, gain is recognized but not the loss.
For The Other Items of Gross Income
Interest Income amount of compensation paid
for the use of money, goods, or credit or
forbearance from such use.
INCOME PAYMENT TAX RATE PAYEE
Interest from any
currency deposit, yield
or any other monetary
benefit from deposit
substitutes and from
trust funds and similar
arrangements derived
from Philippine
sources
20% DC, RFC,
Citizens, RA,
NRAETB
Interest from long term
deposit or investment
in the form of savings,
common or individual
trust funds,
substitutes, investment
management accounts
and other investments
evidenced by
certificates in such
form prescribed by
BSP.
5% - 4- less
than 5 years
12%- 3 to
less than 4
years
20%- less
than 3 years
(depends on
the number
of years of
the holding
period)
Citizens, RA,
NRAETB
Interest income from
FCDU deposits
7.5% DC, RFC,
Citizens and
RA
Interest from foreign
currency loans granted
by FCDUs to residents
other than OBUs
banks or other
depositary under the
expanded system
10% Residents-
whether
individuals or
corporations
Interest from foreign
currency loans granted
by OBUs to residents
other than OBUs or
local commercial
banks, including
branches of foreign
banks that may be
authorized by BSP to
transact business with
OBUs
10% Residents-
whether
individuals or
corporations
Interest income on
foreign loans
contracted on or after
August 1, 1986
Any interest income
from transactions with
depositary banks
under FCDs
20%
EXEMPT
NRFC
For non-
residents
whether
individuals or
corporations
Rental Income amount or compensation paid
for the use or enjoyment of a thing or a right and
implies a fixed sum or property amounting to a
fixed sum to be paid at a stated time for the use of
the property.
Scope: All amount or property received from
lease contract, whether used in business or not.
Rent income excluded from gross income
1. Those paid to nonresident owner or lessor of
vessels chartered by Philippine nationals -
4.5% of gross rentals.
2. Those paid to nonresident owner or lessor of
aircraft, machineries and other equipment
7.5% of gross rentals or fees.
Items considered as rental income
a. Agreed amount per month or per year.
b. Obligations of lessor to third parties which the
l essee under t akes t o pay as f ur t her
consideration of the lease, such as:
i. Real estate taxes on leased premises
paid by the lessee to the government.
ii. Insurance premiums paid by lessee on
policy covering leased property.
iii. Dividends paid by lessee to stockholders
of lessor-corporation, in lieu of rent.
iv. Interest paid by lessee to holder of bonds
issued by lessor-corporation, instead of
rent.
If in the nature of prepaid rentals

(advance rental), the entire amount
thereof is taxable income to the lessor in
the year received, if so received under a
claim of right and without restriction as to
its use, and whether the lessor is on the
cash or accrual method of accounting.
If in the nature of a loan, no taxable income to

the lessor when received.
Security deposit applied to the rental of the

terminal month or period of contract must be
recognized as income at the time it is applied.
If in the nature of security deposit for

compliance by the lessee of the terms of the
contract, it is not income to the lessor. Income
will only be realized in the event that the
lessee violates any provision of the contract.
Value of permanent improvements made by

lessee on leased property that will become
the property of the lessor upon the expiration
of the lease. The lessor shall report this
income under any of the following methods:
a. At t he t i me when such bui l di ngs
improvements are completed, the fair
market value thereof, (Outright Method),
or
b. He may spread over the life (or remaining
period) of the lease, the estimated
Income Taxation
depreciated value of such buildings or
improvements at the termination of the
lease and report as income for each year
of the lease, an aliquot part thereof.
(Spread-out Method)
Royalties Like rent, royalties are payments for
the use of property. It involves not only the use of
the property but also its exhaustion. It includes
earnings from copyrights, patents, trademarks,
formulas and natural resources under lease.
Royalty is a valuable property that can be
developed and sold on a regular basis for a
consideration; in which case, any gain derived
therefrom is considered as and active business
income subject to normal corporate income tax
(BIR Ruling No. 57-2000).
When are royalties included in the gross
income?
It is included in the gross income if the royalties
are derived from sources outside the Philippines;
hence, do not constitute passive income.
When are royalties excluded from the gross
income?
It is excluded if it is derived from all sources within
the Philippines because it is subject to final
withholding tax.
Are the tax rates imposed on royalties
absolute?
NO. If the recipient of the royalty paid by a
domestic corporation is either a non-resident alien
not engaged in trade or business or a non-
resident corporation, a lower tax rate may be
allowed under an existing treaty.
What is the most-favored nation clause in
tax treaties?
It means that 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.
Dividends A corporate profit set aside, declared
and ordered by the directors of a corporation to be
paid to stockholders on demand or at a fixed time.
Under the Tax Code, it means any distribution
made by a corporation to its stockholders, whether
in money, property, or stocks, out of its earnings
and profits that accrued since March 1, 1913.
Includes:
1. Dividends that do not constitute passive
income.
2. Only dividend issued by a foreign corporation
to an individual taxpayer (citizen or alien) is
included in the computation of gross income.
Excluded from gross income for purposes of
income taxation:
Dividends considered as passive income and
those exempt from tax:
1. Di vi dend r ecei ved f r om a domest i c
corporation by resident citizen, non-resident
citizen and resident alien:
1998 6% Final tax
1999 8% Final tax
2000 10% Final tax
corporation by a non-resident alien engaged
in business in the Philippines Final tax of
20%
corporation by another domestic corporation
and resident foreign corporation (Inter-
corporate dividends) Income tax exempt
corporati on by a non-resi dent forei gn
corporation, under certain conditions Final
tax of 15%
FORMS and TREATMENT:
1. Cash, property and scrip dividends
SUMMARY RULES ON DIVIDENDS
TAXPA
YER
DIVIDEND
PAID BY A
DOMESTIC
CORPORA
TION
DIVIDEND PAID BY A
FOREIGN
CORPORATION
RC 10% 5- 32%
NRC 10%
Source within- 5-32%
Source without-
EXEMPT
Note: Section 42(A)
NIRC in correlation
with Section 23 NIRC.
RA 10%
Source without-
EXEMPT
Note: Section 42(A)
NIRC in correlation
NRA-
ETB
20%
Source without-
EXEMPT
Note: Section 42(A)
NIRC in correlation
TAXPA
YER
DIVIDEND
PAID BY A
DOMESTIC
CORPORA
TION
DIVIDEND PAID BY A
FOREIGN
CORPORATION
NRA-
NETB
25%
Source within-25%
Source without-
EXEMPT
Note: Section 42(A)
NIRC in correlation
DC EXEMPT *35%
RC EXEMPT
Source within- 35%
Source without-
EXEMPT
Note: Section 42(A)
NIRC in correlation
NRC
15% - w/
tax sparing
35% - w/o
tax sparing
Source within-35%
Source without-
EXEMPT
Note: Section 42(A)
NIRC in correlation
Notes:
1. RAMO 1-2000 covers applications for tax
treaty relief and includes claims or
requests for tax exemption, preferential
tax treaty rate, refund, or credit of taxes
for the following income or to be derived
from tax treaties and one of which covers
dividends.
General rule: For payments that are
made to foreign corporations and alien
individuals in case:
There is tax treaty- use the tax treaty
rates subject to application for tax
treaty relief;
There is no tax treaty- then we follow
the tax code rate as provided.
2. If resident of tax treaty country, the tax
treaty rates under the existing tax treaty
between Philippines and country of
residence of the payee will apply.
2. Stock dividends
General Rule: NOT taxable because this is
only paper profit
Exceptions (Sec. 73[B], 1997 NIRC):
a. there is redemption or cancellation;
b. the transaction involves stock dividends;
and
The time and manner of the transaction
makes it essentially equivalent to a
distribution of taxable dividends. (see
Commissioner vs. Court of Appeals, Court of Tax
Appeals and ANSCOR, G.R. No. 108576, Jan. 30,
1999)
The r eci pi ent i s ot her t han t he
shareholder (Bachrach vs. Seifert, G.R. No.
L-2659, October 12, 1950)
Change in the stockholders equity
results by virtue of the stock dividend
issuance.
a. Liquidating dividends when a
corporation distributes all of its assets in
complete liquidation or dissolution, the
gain realized or loss sustained by the
stockhol der, whether i ndi vi dual or
corporati on, i s taxabl e i ncome or
deductible loss, as the case may be. (Sec.
73[A]); not a dividend income. The
transaction is considered a sale or
exchange of property between the
corporation and the stockholder.
b. Indirect dividend (i.e. renunciation of
dividend) same as cash dividend
Annuities These refer to annuity policies sold
by i nsurance compani es, whi ch provi de
installment payments for life, or for a guaranteed
fixed period of time whichever is longer.
The portion of each annuity payment that
represents return of premium is not taxable while
that portion that represents interest is taxable.
Annuities which are not exempt from tax are
If an annuity is exclusion, then it is not to be
But if it fails to comply with the requirements
of a tax-exempt annuity, then the same is
taxable and included in the computation of
gross income.
Prizes and winnings amount of money in cash
or in kind received by chance or through luck and
are generally taxable except if specifically
mentioned under the exclusions from the
computation of gross income under Sec. 32 (B).
SUMMARY RULES FOR PRIZES AND
WINNINGS FROM SOURCES WITHIN
TAX
PA-
YER
PRIZES &
WINNINGS
AMOUNTING
TO 10,000 OR
LESS
PCSO &
LOTTO
WIN-
NINGS
ALL OTHER
PRIZES AND
WINNINGS
MORE THAN
10,000
RC,
NRC,
RA,
NRA-
ETB
5-32% EXEMPT 20%
Income Taxation
income taxation:
Those considered passive income and exempt
from income tax:
i. Prizes derived within the Philippines and is
over P 10,000;
ii. Winnings derived within the Phils except
PCSO and lotto winnings (Sec. 24 [B] [1])
Exempt subject to the following conditions:
o Pri zes and awards made pri mari l y i n
recognition of religious, charitable, scientific
educati onal , arti sti c, l i terary, or ci vi c
achievement but only if:
The recipient was selected without any
action on his part to enter the contest or
proceeding; and
The recipient is not required to render
substantial future services as a condition
to receiving the prize or award
o All prizes and awards granted to athletes in
local and international sports competitions
and tournaments whether held in the
Philippines or abroad and sanctioned by their
national sports associations (Sec.32 [B]).
Pension amount of money received in lump
sum or on staggered basis in consideration of
services rendered. This is given after the
individual reaches the age of retirement. It is
taxable to the extent of the amount received
except if there is an approved pension plan by the
Bureau of Internal Revenue.
income taxation:
1. R.A. 4917 Requisites:
a. Retiree has been employed for at least 10
yrs. by same employer
b. At least 50 yrs. old at the time of
retirement
c. Avails of the benefit only once
d. The private benefit plan is approved by
the BIR (RR 2-98)
2. R.A. 7641 Requisites:
a. Firm has no private retirement trust plan
b. Retiree is at least 60 yrs. of age
3. Also EXCLUDED are monetized value of
retirees accumulated vacation leave (VL) and
sick leave (SL) subject to the following rules:
a. Compulsory retirement (60 yrs. for
private corp.; 65 yrs. for Government.;
70 yrs. for Judiciary) retirement and
monetized value of accumulated VL and
SL
b. Optional retirement (10 yrs. of service
and 50 yrs. of age) retirement and
monetized value of accumulated VL up
to 10 days only (excess of VL and all SL
is taxable)
4. Amount received by employee or heirs as a
consequence of separ at i on due t o
circumstances beyond the control of the
employee (Sec. 32 [6] [b])
Partners share in the net income of a GPP:
a. It is only the partners share in the net income
of GPP which is included in the gross income
because the GPP is not taxable as an entity.
b. The share of a partner in the distributable net
income after tax of an ordinary partnership of
which he is a partner is subject to final income
tax and is not included in the computation of
gross income.
Income from other sources Embraces all
income not expressly exempted within the class of
taxable income under the law, irrespective of the
voluntary or involuntary action of the taxpayer in
producing the gains, and whether derived from
legal or illegal sources, such as:
a. Gains arising from expropriation of property
which constitute income from dealings in
property;
b. Income derived from illegal sources, such as
gambl i ng, t hef t , embezzl ement , and
smuggling;
c. Compensation for damages if it represents
payment for loss of expected profits such as
damages from patent infringement suit;
(damages to compensate property are not
taxable because they are treated as a mere
return of capital).
d. Bad debts previ ousl y charged-off but
afterwards recovered;
TAX BENEFIT RULE
Bad debts claimed as deduction in the
preceding year(s) but subsequently recovered
shall be included as part of the taxpayers
gross income in the year of such recovery to
the extent of the income tax benefit of said
deduction.
o Contest awards and prizes for
commercial or non-commercial contests;
and
o Taxes previously deducted as an expense
and subsequently refunded.
Nontaxable tax refunds
1. Philippine Income tax, except fringe
benefit tax
2. Estate or donors tax
3. Special assessment
4. Income tax paid or incurred to a
foreign country, if the taxpayer
claimed a credit for such tax in the
year it was paid or incurred.
5. Stock transaction tax
The refund of these taxes is not taxable
because such taxes are not deductible
from the gross income.
e. Cancellation of indebtedness
Taxable income if the creditor cancels

the debt as a consideration of the
services performed by the debtor to the
creditor.
A gift if the creditor cancels the debt

without any consideration.
A capital transaction if the corporation

forgives the debt of its stockholder, it has
the effect of payment of an indirect
dividend.
Exclusions
Exclusions
Under the 1997 Tax Code, the term exclusions
refer to items that are not included in the
determination of gross income either because:
a) they represent return of capital or are not
income, gain or profit;
b) they are subject to another kind of internal
revenue tax; or
c) they are income, gain or profits that are
expressly exempt from income tax under the
Constitution, tax treaty, Tax Code, or a general
or special law.
ITEMS OF EXCLUSIONS (Sec. 32[B])
(MAC-GIRL)
1. Life Insurance
2. Amount received by insured as return of
premium
3. Gifts, bequests, and devises
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities
7. Miscellaneous items
1. Proceeds of life insurance paid by reason
of the death of the insured to his estate or to
any beneficiary (individual, partnership, or
corporation, but not a transferee for a
valuable consideration), directly or in trust.
This is considered as indemnity rather than as
gain or profit.
Note: If such amounts are held by the insurer
under an agreement to pay interest thereon,
the interest payments shall be included in
gross income.
2. Return of insurance premium if such
amounts (when added to amounts already
received before the taxable year under such
contracts) exceed the aggregate premiums or
considerations paid (whether or not paid
during the taxable year), then the excess shall
be included in the gross income.
However, in the case of a transfer for a
valuable consideration, by assignment or
otherwise, of a life insurance, endowment or
annuity contract, or any interest therein, only
the actual value of such consideration and the
amount of the premiums and other sums
subsequently paid by the transferee are
exempt from taxation. No loss is realized on
surrender of a life insurance policy for its
surrender value.
What are excluded in case of a transfer for
a valuable consideration?
a) Actual value of consideration
b) Premiums and other sums subsequently
paid by the transferee.
ON THE PART OF THE INSURANCE
COMPANIES
The net additions, if any required by law to be
made within the year to reserve funds and
sums other than dividends paid within the
year on policy and annuity contracts may be
deducted from gross income.
However, released reserve shall be treated as
income for the year of release.
Mutual insurance companies (fire and
mutual employers liability) in case of
these companies requiring members to make
premium deposits to provide for losses and
expenses, said companies shall not return
as income any portion of the premium
deposit returned to their policyholders but
Income Taxation
shall return as taxable income all income
received by them from all sources plus
portion of the premium deposits as are
retained by companies for purposes other
than the payments of losses and expenses
and reinsurance reserves.
Mutual marine insurance gross

premiums collected and received by
them, less amount paid for reinsurance,
are included as return of gross income.
Assessment Insurance Companies

may deduct from their gross income the
actual deposit of sums with officers of the
Government of the Philippines pursuant
to law, as additions to guarantee or
reserve funds.
3. Gift, bequest or devise are excluded but
not the income from such property. If the
amount received is on account of services
rendered, whether constituting a demandable
debt or not, or the use of the opportunity to
use capital, the receipt is income. (Pirovano vs.
Commissioner, G.R. No. 15865 July 31, 1965)
They are subject to estate and donors tax.
1. Compensation for personal injuries or
sickness, whether by suit or agreement
4. Note: The phrase personal injuries
should be given a restrictive meaning to
refer only to physical injuries. The theory
for this is that recoupment on account of
such losses is not income, since it is not
derived from capital, from labor or from
both combined. And the fact that the
payment of compensation for such loss
was voluntary does not change its
e x e mp t s t a t u s . I t wa s i n f a c t
compensation for a loss, which impaired
petitioners capital.
5. Income exempt under Treaty
6. Retirement benefits, pension, gratuities,
etc.
a. those derived under R.A. 7641 (pertains
to private firms without retirement trust
fund);
b. those received by officials and employees
of private employers in accordance with a
reasonable private benefit plan;
Requisites:
(1) in the service of the same employer
for at least 10 years;
(2) at least 50 years old;
(3) must be availed of only once; and
(4) plan approved by the BIR (RR 2-98).
c. separati on pay because of death,
sickness, or other physical disability or for
any cause beyond the control of the
official or employee (e.g. retrenchment,
redundancy or cessation of business);
The phrase for any cause beyond the control
of said official or employee connotes
involuntariness on the part of the official or
employee; separation must not be asked or
initiated by the official or employee.
a. social security benefits, retirement
gratuities, pensions and other similar
benefits received by citizens and aliens
who come to reside permanently here
from foreign government agencies and
other institutions, private or public;
b. benefits due to residents under the laws
of the U.S. administered by the U.S.
Veterans Administration;
c. SSS benefits; and
d. GSIS benefits.
7. Miscellaneous items
Passive income derived in the Philippines by:
a. Forei gn government s and f orei gn
gover nment cont r ol l ed f i nanci ng
institutions;
b. I ncome der i ved f r om Phi l i ppi ne
government and its subdivisions;
c. Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary, or
civic achievement.
Requisites:
a. recipient was selected without any
action on his part; and
b. Recipient is not required to render
substantial future services.
d. Prizes and awards granted to athletes in
sports competitions and sanctioned by
their national sports association:
a. 13th month pay and other benefits up
to P30,000.00;
b. GSIS,SSS, Medicare and union dues
of individuals;
c. Ga i n s d e r i v e d f r o m b o n d s ,
debentures, or other certificate of
indebtedness with a maturity of more
than 5 years; and
d. Gains from redemption of shares in
Mutual Fund.

RULES ON FARMING
Who are farmers?
All individuals, partnerships or corporations that
cultivate, operate or manage farms for gain or
profit, either as owners or tenants are farmers.
Method of Accounting Used
a) Cash method
b) Accrual method
Rules on computation of taxable income from
farming
a. A farmer distinguishes between livestock and
farm products raised and sold, and livestock
and farm products purchased and sold.
For l i vest ock and f ar m pr oduct s
purchased and sold, the measure of
gross income is the profit from the sale;
For livestock and farm products raised
and sold, the measure of gross income is
the selling price.
b. Expenses of raising livestock and farm
products are deductions from gross income
c. Proceeds of crop or livestock insurance
constitute gross income
d. A farmer on the accrual method of accounting
considers inventories at the beginning and at
end of the taxable year.
Deductions
Deductions
DEDUCTIONS IN GENERAL
What are Deductions?
Items or amounts which the law allows to be
deducted from gross income in order to arrive at
the taxable income.
BASIC PRINCIPLES
a. The taxpayer seeking a deduction must point
to some specific provisions of the statute
authorizing the deduction.
b. He must be able to prove that he is entitled to
the deduction authorized or allowed. (Atlas
Consolidated Mining and Devt. Corp. vs. Commissioner,
G.R. No. L-26911, January 21, 1981)
c. Any amount paid or payable which is
otherwise deductible from, or taken into
account in computing gross income or for
which depreciation or amortization may be
allowed, shall be allowed as deduction only if
it is shown that the tax required to be
deducted and withheld therefrom has been
paid to the BIR. [Sec. 34(K), NIRC]
d. 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 also be strictly
construed.
Note: For applicable expenses that are subjected
to withholding taxes, tax rules provide that the
withholding agent must first withhold to the income
payment in order to be allowed as deduction to
the gross income. (See discussion on withholding
taxes and itemized deduction topics)
Taxpayers Who Cannot Avail Of Deductions
from Gross Income
a. Citizens and resident aliens whose income is
purely compensation income (except for
premium payments on health and/or
hospitalization insurance);
b. Non-resident aliens not engaged in trade or
business in the Philippines; and
c. Non-resident foreign corporation
S UMMARY RUL E S ON CL AI MABL E
DEDUCTIONS
1. Individuals
a. with gross compensation income from
employer-employee relationship only
(1) premium payments on health and/or
hospitalization insurance
(2) personal and additional exemptions
b. gross income from business or practice of
profession
(1) Optional Standard Deduction (OSD)
(2) Itemized deductions
(3) Premium payments on health and/or
hospitalization insurance
(4) Personal and additional exemptions
2. Corporations
Itemized Deductions
Income Taxation
EXCLUSION vs. DEDUCTION vs. PERSONAL
EXEMPTION
EXCLUSION DEDUCTION
PERSONAL
EXEMPTION
REFER TO FLOW OF
WEALTH WHICH ARE
NOT TREATED AS
PART OF GROSS
INCOME BECAUSE:
(1) exempted by
the fundamental
law; (2) exempted
by statute; (3) do
not come within
the definition of
income
Refer to the
amounts
which the law
allows to be
subtracted
from gross
income in
order to arrive
at net income
Are arbitrary
amounts
allowed by
law to an
individual
taxpayer,
theoretically
to provide for
personal and
living
expenses
Generally a
receipt which is
excluded from
taxable income.
Pertains to the
computation of
gross income
Is not a
receipt but is
generally an
expenditure
which is
permitted to
be subtracted
from income
to determine
the amount
subject to tax.
Pertains to the
computation
of net income.
It is an
immunity or
privilege, a
freedom of
charge or
burden to
which other
are subjected.
Something earned
or received by the
taxpayer which do
not form part of
gross income
Something
spent or paid
in earning
gross income
Theoretical
provision of
law for the
personal and
living
expenses of
the individual.
Kinds of Deduction
1. Optional Standard Deductions (OSD)
2. Special Deductions
3. Itemized Deductions
OPTIONAL STANDARD DEDUCTION
Deduction, in lieu of the itemized deductions, is
merely a privilege that may be enjoyed by certain
individual taxpayers.
Rules:
a) OSD is available only to citizens or resident
aliens; thus non-resident aliens are not
entitled to claim the optional standard
deduction
b) The standard deduction is optional; i.e.,
unless the taxpayer signifies in his return his
intention to elect this deduction, he is
considered as having availed of the itemized
deductions;
c) Such election, when made by the qualified
taxpayer, is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years;
d) The amount of standard deduction is limited
to ten percent (10%) of the taxpayers gross
income.
e) OSD is not available against compensation
income arising out of an employer-employee
relationship.
f) Proof of actual expenses is not required, but
the taxpayer should keep records pertaining
to his gross income
Since an individual in business or in the practice
of profession is required to file quarterly income
tax returns, can he choose the Optional Standard
Deduction in his quarterly returns and then choose
the itemized deductions in his annual income tax
return, or vice versa?
YES, the Optional Standard Deduction or Itemized
Deductions is against the gross income of the
year. Quarterly income tax returns are only interim
computations on the taxable income for the year.
TAX FORMULA
FROM
MANUFACTURING
OR MERCHANDISING
CONCERN
FROM SALE OF
SERVICES
Gross Sales
Less: Cost of Sales
Add: Incidental Income
if any
GROSS INCOME FOR
OSD
Gross Receipts
Less: Direct Cost of
services
Add: Incidental Income if
any
GROSS INCOME FOR
OSD
SPECIAL DEDUCTIONS
Private proprietary educational institutions [Sec.
34 (A) (2)] in addition to the expenses allowed
as deduction:
# to deduct expenditures otherwise considered
as capital outlays of depreciable assets
incurred during the taxable year for the
expansion of school facilities, or
# to deduct allowance for depreciation thereof
Insurance companies (Sec. 37) can deduct the
following:
# Net additions required by law to be made
within the year to reserve funds.
# Sums other than dividends paid within the
year on policy and annuity contracts.
Estates and trusts (Sec. 61):
# Amount of income paid, credited or distributed
to the heirs/beneficiaries.
# Amount applied for the benefit of the grantor.
ITEMIZED DEDUCTIONS (D-BIRD-CLEPTD)
a) ordinary and necessary expenses;
b) interests;
c) taxes;
d) losses;
e) bad debts;
f) depreciation of property;
g) depletion of oil and gas wells and mines;
h) charitable and other contributions;
i) research and development;
j) pension trust contributions of employees; and
k) premium payments on heal th and/or
hospitalization insurance. (This is the only
deduction which a compensation income
earner may claim as a deduction.)
Note:
1. The above enumeration are not allowed
deductions from gross income of:
a. those earning purely compensation
income
b. non-resident alien not engaged in trade or
business
c. non-resident foreign corporation
2. In computing taxable income, no deduction
shall in any case be allowed for:
a. personal, living and family expenses
b. any amount paid out for new buildings or
f or per manent i mpr ovement s or
betterments made to increase the value
of any property or estate
c. any amount expended in restoring
pr oper t y or i n maki ng good t he
exhaust i on t her eof f or whi ch an
allowance is or has been made
d. premiums paid on any life insurance
policy covering the life of any officer or
employee, or of any person financially
interested in any trade or business
carried on by the taxpayer, individual or
corporate when the taxpayer is directly or
indirectly a beneficiary under such policy
and no deduction shall be allowed for -
i. losses from sales or exchanges of
property
ii. interest expense
iii. bad debts
Where the transaction is between related
taxpayers
Itemized Deductions
[Allowable Deductions (Sec. 34)]
Itemized Deductions [Allowable Deductions (Sec. 34)]
Ordinary and Necessary Trade, Business and
Professional Expenses
Requisites Of Business Expense To Be
Deductible:
a) ordinary and necessary;
b) paid or incurred within the taxable year;
c) paid or incurred in carrying on a trade or
business;
d) substantiated with official receipts or other
adequate records which reflect the amount
being deducted and connection or relation of
expense to business/trade;
e) if subject to withholding taxes, have been
properly withheld and remitted on time to the
BIR;
f) Not contrary to law, public policy or morals
Income Taxation
g) Must be reasonable (when the expense is not
lavish, extravagant or excessive under the
circumstances.
ORDINARY AND NECESSARY
Necessary Expense appropriate and helpful in
the development of taxpayer's business and are
intended to minimize losses or to increase profits.
These are the day-to-day expenses.
Ordinary Expense normal or usual in relation to
the taxpayers business and the surrounding
circumstances.
KINDS OF BUSINESS EXPENSES
1. Compensation for Personal Services
Requisites for deductibility:
a. Personal services actually rendered
b. Compensation paid is for such services
rendered.
c. Must be reasonable
Test of reasonableness:
If same amount will be paid for similar
services by similar enterprise under similar
circumstance
Deductible expenses under compensation
for personal services
a. Salaries, wages, commissions,
professional fees, vacation-leave pay,
retirement pay and other compensation.
b. Bonuses are deductible expenses if paid
in good faith as additional compensation
for services rendered.
Bo n u s e s not s ubj e c t e d t o
withholding tax during the year
they were claimed as an expense,
the same should be disallowed.
(ING Bank N.V. Manila Branch vs.
Commissioner of Internal Revenue CTA Case
No. 6187 dated August 9, 2004)
TEST FOR DEDUCTIBILITY OF
BONUS (2006 BAR)
1. The payment must be made in
good faith;
2. The character of the taxpayers
business;
3. The volume and amount of its net
earnings;
4. Its locality;
5. The type and extent of the
services rendered;
6. The s al ar y pol i c y of t he
corporation;
7. The si ze of t he par t i cul ar
business;
8. The employees qualification and
contributions to the business
venture, and
9. General economic conditions
(CM Hoskins & Co. v. CIR 30 SCRA
434 1969).
c. Pensions and compensation for injuries, if
not compensated for by insurance or
otherwise.
d. Grossed-up monetary value (GMV) of
fringe benefit provided for, as long as the
final tax imposed has been paid.
If final income tax thereon had not been
paid, as where the fringe benefit is
granted to a rank-and-file, then the
employer, as taxpayer, cannot avail of this
deduction.
2. Traveling Expenses
a. Incurred or paid while away from home.
b. In the pursuit of trade or business.
What constitute traveling expenses?
Includes transportation, meals and
lodging (Sec. 65, 66, RR No. 2)
TRAVELING
EXPENSE AS
FRINGE BENEFIT
TRAVELING EXPENSE
AS BUSINESS
EXPENSE
- granted to
rank-and-file
- on account of
foreign trip
- final tax must
be paid
- granted to any
employee
- covers trip in the
Philippines or abroad
- must be incurred
away from home in
pursuit of trade or
business
When is a traveling expense deductible?
Transportation from Office to Home and
Home to Office NOT deductible
Transportation from Main Office to Branch
Office DEDUCTIBLE
If trip is combined pleasure and business,
expenses should be allocate
3. Rentals
a. Made as a condition to the continued use
of, or possession of property;
b. Taxpayer has not taken or is not taking
title to the property or has no equity other
than that of a lessee, user or possessor;
c. Property must be used in trade or
business; and
d. It is subjected to withholding tax of 5%
otherwise it shall be disallowed as a
deduction.
Items considered as rental expense (Lease
Agreements)
1. Where leasehold is acquired for business
purposes for a specified sum, the
purchaser may take deduction for an
aliquot part of such sum each year based
on the number of years the lease will run.
2. Taxes and other obligations of the lessor
paid by the lessee under the contract of
lease, constitutes additional rent expense
which the lessee corporation may deduct
from gross income.
3. The cost of leasehold improvements may
be recovered by the lessee over the
remaining term of the lease, or over the
life of the improvements, whichever
period is shorter.
Amounts paid for the "right of occupancy"
sometimes called "goodwill", do not qualify as
rental deduction because they are in the
nature of capital advance to secure the lease
of the premise it is similar to a purchased
goodwill.
Leasehold Improvements made by lessee
If lessee makes permanent improvement (i.e.
building) on land being leased, cost is held to
be a capital investment and NOT deducted as
a business expense.
An annual deduction may be made from
Gross Income of an amount equals to cost
divided by number of years remaining in the
term of lease or useful life of improvement,
whichever is shorter, which shall be in lieu of
depreciation expense.
4. Entertainment, Amusement and Recreation
a. Expense is directly connected to the
development, management and operation
of the trade, business, or profession of
the taxpayer;
b. Expense is directly related to or in
furtherance of the conduct of trade,
business, or profession;
c. Expense is reasonable;
d. Expense is not contrary to laws, morals
and public policy or public order;
e. Not paid directly or indirectly to an official
or employee of the national government,
or any local government unit or any
GOCC or of a foreign government, or to a
private individual, or corporation, or
general professional partnership, or a
similar entity, if it constitutes a bribe,
kickbacks or other similar payments; and
f. It must be substantiated with sufficient
evidences such as official receipts or
adequate records indicating the amount
of expense, date and place of expense,
purpose of expense, professional or
business relationship of expense, and
name of person or company entertained
with contact details.
The deduction shall not exceed such ceilings
as the Sec. of Finance may, by Rules and
Re g u l a t i o n s , p r e s c r i b e u p o n t h e
recommendation of the CIR
- For taxpayers engaged in sale of
goods/properties 0.50% of net
sales
- For taxpayers engaged in sale of
services - 1% of net revenues
- For taxpayers engaged in both sale of
goods/properties and services - net
sales or net revenues / total net
sales and net revenues x EAR
expenses.
Exclusions from EAR expenses:

a. expenses which are treated as
compensation or fringe benefits;
b. expenses for charitable or fund
raising events;
c. expenses for bona fide business
meeting of stockholders, partners or
directors;
d. expenses for attending or sponsoring
an employee to a business league or
professional organization meeting;
e. expenses for events organized for
promotion, marketing and advertising
including concerts, conferences,
seminars, workshops, conventions
and other similar events; and
f. Other expenses of similar nature.
5. Cost of Materials and Supplies
Nature: Deductible only to the amount
actually consumed or used in operation during
the year.
6. Repairs
Minor or ordinary repairs - deductible from
gross income because it keeps the assets in
its ordinary working condition.
Major or extraordinary repairs - are not
deductible since major repairs tend to prolong
the life of the asset
7. Expenses Allowed to Private Educational
Institutions
Purpose: To achieve improvements in
educational activities and expansion of school
facilities.
Option, either [Sec. 34 (A)(2)]:
1. Deduc t ex pendi t ur es ot her wi s e
consi der ed as capi t al out l ays of
Income Taxation
depreciable assets incurred for the
expansion of school facilities; or
2. Deduct al l owance for depreci ati on
thereof.
8. Miscellaneous
a. Organization costs are amortized over the
life of the corporation.
b. Cost of defending a civil suit affecting the
business is deductible, irrespective of the
success of the defense. Judgment or
other binding adjudication, on account of
damages f or pat ent i nf ri ngement ,
personal injuries, or other causes, are
deductible when the claim is adjudicated
and paid.
PAID OR INCURRED DURING THE TAXABLE
YEAR
Cash basis expense is deductible in the year
paid
Accrual upon accrual thereof, although it is paid
at a later period
Prepaid only the amount corresponding to the
current period may be deducted from gross
income.
WITHHOLDING TAXES HAVE BEEN PAID
The obligation of the payor to deduct or withhold
the tax arises at the time an income payment is
PAID or PAYABLE or ACCRUED or recorded as
an expense or asset whichever is applicable in
the payors books, WHICHEVER COMES FIRST
(Section 2.57.4 of RR 2-98 as amended by Section 4 of R.R.
12-2001).
When expense deemed accrued:
all events have occurred which determine the

liability
The amount of liability can be determined with

reasonable accuracy.
Taxpayer must show that the economic

performance test has been met.
PAID OR INCURRED IN CARRYING ON A
TRADE OR BUSINESS
Must be paid in connection with the conduct of
trade or business, or the exercise of profession by
the taxpayer, or attributable to the development,
management, or operation of the trade business
or profession.
SUBSTANTIATED WITH RECEIPTS
Lack of receipts excused the lack of
support i ng vouchers, recei pt s and ot her
documentary proof, however, may be excused
under Sec. 337 (now Sec. 235) of the Tax Code.
This provision requires the preservation of the
books of accounts and other accounting records
for a period of three (3) years from the date of last
entry (Basilan Estates vs. Commissioner G.R. No. L-22492
September 5, 1907).
COHAN RULE
Applies only if the taxpayer has successfully
shown that it is usual and necessary in the trade
to entertain and to incur similar kinds of
expenditures, there being evidence to show the
amounts spent and the persons entertained,
though not itemized. In such a situation, deduction
of a portion of expenses incurred might be allowed
even if there are no receipts or vouchers. Absence
of invoices, receipts or vouchers, particularly lack
of proof of items constituting the expense is fatal
to the allowance of deduction (Gancayco vs. Collector,
G.R. No. 13325 Apr. 20, 1961).
NOT CONTRARY TO LAW, PUBLIC POLICY OR
MORALS
While illegal income will form part of 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 34 (A) (1)(c)].
Interest
This refers to the payment for the use or
forbearance or detention of money, regardless of
the name it is called or denominated. It includes
the amount paid for the borrower's use of money
during the term of the loan as well as for his
detention of money after the due date for its
repayment (R.R. 13-2000).
Requisites for Deductibility (R.R. No. 13-2000)
a) There must be an indebtedness;
b) The indebtedness must be that of the
taxpayer;
c) The interest must be legally due
d) The interest must be stipulated in writing;
e) The interest expense must have been paid or
incurred during the taxable year;
f) The indebtedness must be connected with the
taxpayer's trade, business or exercise of
profession;
g) The interest arrangement must not be
between related taxpayers as provided under
Sec. 36(B) of the NIRC;
h) The interest is not expressly disallowed by
law to be deducted from gross income of the
taxpayer.
i) The amount of interest deducted from gross
income does not exceed the limit set forth in
the law
j) The taxpayer is liable to pay interest on the
indebtedness
k) Must not be incurred to finance petroleum
operations
l) In case of interest incurred to acquire property
used in trade, business or exercise of
profession, the same was not treated as
capital expenditure.
THERE MUST BE AN INDEBTEDNESS
A bona fide debt is one which arises from a
debtor-creditor relationship based upon a valid
and enforceable obligation to pay a fixed or
determinable sum of money. The basic test of the
existence of a debtor-creditor relationship is
whether the debtor is under unconditional
obligation to repay the creditor. In deciding
whether a relationship represents a bona fide
debt, a fact and circumstances approach which
exami nes t he subst ant i ve nat ure of t he
relationship on a case-to-case basis is employed
(Philex Mining Corporation vs. Commissioner, CTA Case No.
5200, August 21, 1998).
Rule on interest on Business Taxes
Interest incurred or paid by the taxpayer on all
unpaid business related taxes shall be fully
deductible from gross income and shall not be
subject to limitation on deduction heretofore
mentioned. Thus, such interest expense incurred
or paid shall not be diminished by the percentage
of interest income earned which had been
subjected to final withholding tax (Rev. Reg. No.
13-2000)
THE DEBT MUST BE THAT OF THE TAXPAYER
Interest on real estate mortgage interest paid
by the taxpayer on a mortgage upon real estate of
which he is the legal or equitable owner, even
though the taxpayer is not directly liable upon the
bond or not secured by such mortgage, may be
deducted as interest on his indebtedness.
THE INTEREST MUST BE LEGALLY DUE
If there exists no obligation or where the obligation
is unenforceable, interest paid thereon is not
deductible. An obligation is an unconditional and
legally enforceable obligation for the payment of
money (Collector vs. Prieto, 109 Phil. 592)
THE INTEREST MUST BE STIPULATED IN
WRITING
The interest must have been stipulated in writing.
Where there is absence of stipulation in writing
concerning interest, interest is properly denied
(Limpan Investment Corporation vs. Collector, CTA Case No.
1397, Dec. 11, 1967)
NOT BETWEEN RELATED TAXPAYERS
Who are related taxpayers?
a. Between members of the family; Family
includes only the brothers, sisters (whether by
the whole or half blood), spouse, ancestors,
and lineal descendants of the taxpayer.
b. Between an individual and a corporation more
than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for
such individual;
c. between two corporations more than 50% in
value of the outstanding stock of each of
which is owned, directly or indirectly, by or for
the same individual, if either one of such
corporations, with respect to the taxable year
of the corporation preceding the date of the
sale of exchange was a personal holding
company or a foreign personal holding
company;
d. Between the grantor and a fiduciary of any
trust;
e. Between the fiduciary of a trust and the
fiduciary of another trust if the same person is
a grantor with respect to each trust;
f. Between a fiduciary of a trust and a
beneficiary of such trust.
The fact that the President of one corporation is
the Chairman of the Board of another does not
mean that he has controlling ownership of such
corporations. Evidence must be adduced to show
the percentage of ownership of the common
officer on the outstanding capital stock of such
corporations (Oranbo Realty Corp. vs. CIR, CTA Case No.
5222, April 7, 1997)
Arms length interest rate rate of interest
which was charged or would have been charged
at the time the indebtedness arose in independent
transaction with or between unrelated parties
under similar circumstances.
NOT EXPRESSLY DISALLOWED BY LAW
An individual taxpayer reporting income on the
cash basis incurs an indebtedness on which an
interest is paid in advance through discount or
otherwise [Sec.34(B)2a]:
allowed as a deduction in the year the

indebtedness is paid
If the indebtedness is payable in periodic

amortization, the amount of interest which
Income Taxation
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed as deduction in such taxable year.
Interest paid on indebtedness between related
taxpayer [Sec.34(B)2b]
If the indebtedness is incurred to finance
petroleum exploration [Sec.34(B)2c]
In case of interest incurred to acquire property
used in trade, business or exercise of profession,
the same was not treated as capital expenditure
(R.R. 13-2000).
DOES NOT EXCEED THE LIMIT SET BY LAW
Rules on Deductibility of Interest Expense
General Rule: The entire amount of interest
expense paid or incurred within a taxable year of
indebtedness in connection with the taxpayer's
trade, business or exercise of profession shall be
allowed as a deduction from the taxpayer's gross
income.
Limitation: The amount of deductible interest
shall be reduced by an amount equal to 42%
(effective November 1, 2005) of interest income
earned which had been subjected to final
withholding tax, provided rate shall be 33%
effective January 1, 2009.
The limitation applies whether or not a tax
arbitrage scheme was entered into by the
taxpayer or regardless of the date of the
interest-bearing loan and the date the
investment was made for as long as during the
taxable year, an interest expense was incurred on
one side and an interest earned on the other side
which income was subjected to final tax.
Aim of the Limitation: To discourage so-called
back-to-back loans where a taxpayer secures a
loan from a bank, turns around and invests the
loan proceeds in money market placements. By
imposing a limit as to the amount of interest
expense that can be deducted from gross income,
the previous practice of tax arbitrage was
absolutely nullified.
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.
When is the 42% limit not applicable?
Interest fully deductible interest incurred or
paid on all unpaid BUSINESS-related taxes shall
be fully deductible from gross income and shall
not be subject to the limitation on deduction.
Thus, such interest shall not form part of the
expense that is to be diminished by 42% of
interest income subjected to final tax, provided the
rate shall be 33% effective January 2009.
SUMMARY
DEDUCTIBLE
INTEREST
EXPENSES
NON-DEDUCTIBLE
INTEREST EXPENSES
! 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.
! Interest paid by a
corporation on
scrip dividends
! Interest on
deposits paid by
authorized banks
of the Bangko
Sentral ng
Pilipinas to
depositors, if it is
shown that the tax
on such interest
was withheld
! 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
! An individual taxpayer
reporting income on
the cash basis incurs
an indebtedness on
which an interest is
paid in advance
through discount or
otherwise:
o allowed as a
deduction in the
year the
indebtedness is
paid
o If the indebtedness
is payable in
periodic
amortization, the
amount of interest
which corresponds
to the amount of
the principal
amortized or paid
during the year
shall be allowed as
deduction in such
taxable year.
! Interest paid on
indebtedness between
related taxpayer
! If the indebtedness is
incurred to finance
petroleum exploration
! Interest on preferred
stock, which in reality
is dividend
! Interest on unpaid
salaries and bonuses
! Interest calculated for
cost keeping on
account of capital or
surplus invested in
business which does
not represent charges
arising under interest-
bearing obligation
! Interest paid when
there is no stipulation
for the payment
thereof
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred to
acquire property used in trade, business, or
exercise of profession may be allowed as a
deduction or treated as capital expenditure [Sec.
34(B)(3), NIRC].
Doctrines
1. A domestic corporation, the interest earned by
a bank f r om depos i t s and s i mi l ar
ar r angement s ar e subj ect ed t o f i nal
withholding tax of 20%- the interest income it
receives on the amounts that it lends are
always net of the 20% withheld tax (CIR vs. BPI
492 SCRA 551).
2. The express inclusion of interest income in
taxable gross receipts creates a presumption
that the entire amount of the interest income,
without any deduction is subject to gross
receipts.
Taxes
Requisites for Deductibility
1. Payments must be for taxes
2. Tax must be imposed by law on, and payable
by the taxpayer (direct tax)
3. Paid or incurred during the taxable year must
be in connection with taxpayers trade,
business or profession; and
4. Taxes are not specifically excluded by law
from being deducted from the taxpayers
gross income.
PAYMENTS MUST BE FOR TAXES
The word taxes means taxes proper and no
deduction should be allowed for amounts
representing interest, surcharge, or penalties
incident to delinquency.
Note: In Sec.4(c) of RR. No. 13-2000, interest
paid on delinquent business related taxes is
deductible from gross income. Hence, determine
first which kind of tax upon which an interest on
delinquency is imposed. If it is a business tax (e.g.
excise, VAT, percentage), interest is deductible. If
it is an interest on income tax delinquency, interest
is not deductible.

IMPOSED BY LAW UPON THE TAXPAYER
Taxes are deductible as such only by the persons
upon whom they are imposed by law. Indirect
taxes, like the VAT, passed on by sellers are not
deductible by the buyers fro their gross income.
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 requirement that only such
persons on whom the tax is imposed by law can
claim deduction thereof:
1. 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.
2. 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.
NOT SPECIFICALLY EXCLUDED BY LAW
Taxes Not Deductible
1. Philippine income tax;
2. foreign income tax, if taxpayer avails of the
foreign tax credit;
3. estate and donors tax;
4. special assessments and taxes assessed
against local benefits of a kind that tends to
increase the value of the property assessed;
5. excess electric consumption tax;
6. final taxes, being in the nature of income tax.
INCOME TAX PAID IN FOREIGN COUNTRIES
Alternative treatments for income taxes paid in
foreign countries:
a. Claim as foreign tax credits against Philippine
income tax due of citizens and domestic
corporations.
b. Claim as deduction from gross income of
citizens and domestic corporations;
Taxes allowed as deductions, when refunded or
credited, shall be included as part of gross income
in the year of receipt to the extent of the income
tax benefit of said deduction (Tax Benefit Rule).
FOREIGN INCOME TAX CLAIMED AS TAX
CREDIT
Tax Credit 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 Tax Credit:
a. resident citizens of the Philippines
b. resident aliens under the principle of
reciprocity
c. domest i c cor por at i ons whi ch i ncl ude
partnerships except general professional
partnership
d. beneficiaries of estates and trusts
e. members of general professional partnerships
Who Are Not Entitled To Tax Credit:
a. non-resident citizens
Income Taxation
b. aliens, whether residents or non-residents
c. foreign corporations, whether residents or
non-residents
Reason: foreign tax credits are allowed for
income derived from sources outside the
Philippines, which as taxable in the Philippines.
These taxpayers are subject to Philippine income
tax only on income derived from sources within
the Philippines.
BIR requirements include proof of:
a. total amount of income derived from foreign
sources;
b. the amount of income derived from each
country, the foreign tax paid or incurred, which
is claimed as a credit; and
c. All other information necessary for the
verification and computation of such credit.
FORMULA FOR COMPUTING LIMITATION
Limit A: Per country limitation
Taxable income from
foreign country
x Phil. Income tax
Taxable income from
all sources
Limit B: Over-all limitation
Taxable income from
outside sources
x Phil. Income tax
Taxable income from
all sources
Rules:
One foreign country the allowed credit is the
lower between limit A and the foreign income tax
paid.
Two or more foreign countries determine first
the lower between limit B and the total foreign
income taxes paid. Then compare it with limit the
result applying limit A, the lower amount is the
allowed credit.
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 basis.
LIMITATIONS ON CREDIT FOR FOREIGN TAXES:
1. The amount of credit in respect to the taxes
paid or accrued to any country shall not
exceed the same proportion of the tax against
which such credit is taken, which the
taxpayers net income from sources within
such country taxable under Title II (Income
Tax) bears to his entire net income for the
same taxable year; and
2. The total amount of the credit shall not
exceed the same proportion of the tax against
which such credit is taken, which the
taxpayers net income from sources without
the Philippines taxable under Title II (Income
Tax) bears to his entire net income for the
same taxable year.
Losses
Refer to such losses which are not compensated
by insurance and do not come under the category
of bad debts, inventory losses, depreciation, etc.,
and which arise in taxpayer's profession, trade or
business.
General Classifications
1. Those incurred in a trade or business for profit
2. Those incurred in any transaction entered into
for profit though not connected with his trade,
business or profession;
3. Casualty losses that arise from fire, storm,
shipwreck, or other casualty, or from theft or
robbery, even though not connected with the
trade or business of the taxpayer.
REQUISITES FOR DEDUCTIBILITY
1. Losses by individual, when deductible:
a) The loss must be that of the taxpayer
b) Actually sustained and charged off during
the taxable year;
c) Evidenced by a close and completed
transaction;
d) Not claimed as a deduction for estate tax
purposes; and
e) Not compensated for by insurance or
other form of indemnity;
f) In the case of individual, the loss must be
connected with his trade, business or
profession or incurred in any transaction
entered i nto for profi t though not
connected with his trade, business or
profession;
g) Notice of loss must be filed with the BIR
(i.e. within 45 days) from the DATE OF
OCCURRENCE OR DISCOVERY of the
c a s u a l t y o r r o b b e r y, t h e f t o r
embezzlement.
2. Losses by corporations, when deductible:
If such losses are actually sustained and
charged off wi t hi n t he year and not
compensated for by insurance or otherwise
3. Losses by non-resident aliens and foreign
corporations, when deductible:
a) Losses sustained in business or trade
conducted within the Philippines
b) Losses of property within the Philippines
arising from fires, storms, shipwreck, or
other casualty and from robbery, theft or
embezzlement
c) Losses actually sustained in transactions
entered into for profit in the Philippines,
although not connected with their trade or
business.
LOSS MUST BE OF THE TAXPAYER
The loss is personal to the taxpayer and is not
transferable or usable by another. The loss of
predecessor partnership is not deductible by a
successor corporation. The loss of the parent
company may not be deducted by its subsidiary.
But the loss of the branch within or outside the
Philippines is deductible from the gross income of
the head office located in the Philippines, since
the branch is only an extension of its head office
and there is only a single entity.
SUSTAINED AND CHARGED OFF DURING THE
TAXABLE YEAR
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 Court of Tax Appeals, G.R. No. L-18611,
January 30, 1964).
EVIDENCED BY CLOSED AND COMPLETED
TRANSACTION
A loss is actually sustained if it is evidenced by a
completed transaction. There should be an
identifiable event that fixes the loss thus:
When a loss results from a sale, the

consummation of the sale is the identifiable
event which fixes the loss, and the deduction
should be claimed in the year the sale was
consummated. A sale is consummated when
there is delivery.
A loss from theft is ordinarily deductible in the

year of theft;
A loss from embezzlement is deductible in the

year in which the embezzlement took place, if
the owner of the property cannot recover from
the property anymore.
NOT CLAIMED AS DEDUCTION FOR ESTATE
TAX PURPOSES
The taxpayer cannot claim double benefits arising
from the same casualty loss for income tax and
estate tax purposes. He can only choose one.
NOT COMPENSATED BY INSURANCE
As a general rule, the loss is deductible in the year
the loss happens. However, if the loss is
compensated by insurance or otherwise, the loss
is postponed to a subsequent year in which it
appears that no compensation at all can be had,
or there is a remaining net loss (or there is no full
compensation). The rule is that loss deduction will
be denied, if there is a measurable right to
compensation for the loss, with ultimate collection
reasonably clear. So where there is reasonable
ground for reimbursement, the taxpayer must
seek his redress and may not secure a loss
deduction until he establishes that no recovery
may be had. In other words, the taxpayer must
first exhaust his remedies to recover or reduce his
loss (Plaridel Surety and Insurance Co. v. Collector, G.R. No.
L, 21520 December 11, 1967).
NOTICE OF LOSS FILED
Substantiation requirement
File a sworn declaration of loss with the nearest
RDO. The sworn declaration of loss shall contain
the following:
1. the nature of the event giving rise to the loss
and the time of its occurrence;
2. a description of the damaged property and its
location;
3. items needed to compute the loss; and
4. Amount of insurance or other compensation
received or receivable.
Evidence to support these items should be
furnished, if available (Manotok Realty Inc. vs. CIR, CTA
Case No. 5485, October 18, 1999).
When is a loss non-deductible despite the
concurrence of requisites?
In case of related taxpayers.
Income Taxation
CATEGORY AND TYPES OF LOSSES
1. Ordinary Losses
Incurred in trade or business, or
practice of profession and losses of
property connected with trade or
business or profession, if due to
casualty, etc.
Net Operating Loss CarryOver (NOLCO)
This refers to the excess of allowable
deductions over gross income of the business
for any taxable year, which had not been
previously offset as deduction from gross
income.
It can be carried over as a deduction from
gross income for the next 3 consecutive years
immediately following the year of such loss.
REQUISITES FOR DEDUCTIBILITY OF
NOLCO
a. Three-year period
General Rule: The net operating loss of
the business or enterprise for any taxable
year immediately preceding the current
taxable year, which had not been
previously offset as deduction from gross
income shall be carried over as a
deduction from gross income for the next
three (3) consecutive taxable years
immediately following the year of such
loss.
Exception: any net loss incurred in a
taxable year during which the taxpayer
was exempt from income tax shall not be
allowed as a deduction under NOLCO
b. There is no substantial change in
ownership
NOLCO shall be allowed only if there has
been no substantial change in the
ownership of the business or enterprise in
that:
Not less than 75% in nominal value of
outstanding issued shares, if the
busi ness i s i n t he name of a
corporation, if held by or on behalf of
the same persons; or
Not less than 75% of the paid-up
capital of the corporation, if the
busi ness i s i n t he name of a
corporation, is held by or on behalf of
the same person
Taxpayers Entitled to Deduct NOLCO from
Gross Income.
Any individual (including estates and trusts)
engaged in trade or business or in the
exercise of his profession, and domestic and
resident foreign corporations subject to the
normal income tax (e.g. manufacturers and
traders) or preferential tax rates under the
Code (e.g. private educational institutions,
hos pi t al s , and r egi onal oper at i ng
headquarters)
Special Rule in case taxpayer is an
individual - An individual who claims the 10%
opti onal standard deducti on shal l not
simultaneously claim deduction of the
NOLCO. Further, the three-year reglementary
period shall continue to run notwithstanding
the fact that the aforesaid individual availed of
the 10% optional standard deduction during
the said period.
Special Rule in case taxpayer is a
corporation - Corporations cannot enjoy the
benefit of NOLCO for as long as it is subject
to MCIT in any taxable year. The three-year
reglementary period on the carry-over of
NOLCO shall continue to run notwithstanding
the fact that the corporation paid its income
tax under the "Minimum Corporate Income
Tax" computation.
EXCEPTIONS (Who are not entitled to
deduct NOLCO):
1. Offshore Banking Unit (OBU) of a foreign
banki ng corporat i on, and Forei gn
Currency Deposit Unit (FCDU) of a
domestic or foreign banking corporation,
duly authorized as such by the Bangko
Sentral ng Pilipinas (BSP);
2. An enterprise registered with the Board of
Investments (BOI) with respect to its BOI-
registered activity enjoying the Income
Tax Holiday incentive. Its accumulated
net operating losses incurred or sustained
during the period of such Income Tax
Holiday shall not qualify for purposes of
the NOLCO;
3. An ent erpri se regi st ered wi t h t he
Philippine Economic Zone Authority
(PEZA), pursuant to R.A. No. 7916, as
amended, with respect to its PEZA-
r egi st er ed busi ness act i vi t y. I t s
accumul at ed net operat i ng l osses
incurred or sustained during the period of
its PEZA registration shall not qualify for
purposes of the NOLCO;
4. An enterprise registered under R.A. No.
7227, otherwise known as the Bases
Conversion and Development Act of
1992, e.g., SBMA-registered enterprises,
with respect to its registered business
activity. Its accumulated net operating
losses incurred or sustained during the
period of its said registered operation
shall not qualify for purposes of the
NOLCO;
5. For ei gn cor por at i ons engaged i n
international shipping or air carriage
business in the Philippines; and
6. In general, any person, natural or
juridical, enjoying exemption from income
tax, pursuant to the provisions of the
Code or any special law, with respect to
its operation during the period for which
the aforesaid exemption is applicable. Its
accumul at ed net operat i ng l osses
incurred or sustained during the said
period shall not qualify for purposes of the
NOLCO.
RULES FOR MINES OTHER THAN OIL AND
GAS WELLS
For mines other than oil and gas well, net
operating loss incurred in any of the first ten
years of operation may be carried over for the
next 5 years immediately following the year
of such loss. The entire amount of loss shall
be carried over the first of the 5 taxable years
following the loss, and any portion of such
loss, which exceeds the taxable income of
such first year, shall be deducted in like
manner from taxable income of the next
remaining 4 years.
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 the taxpayer was exempt
from income tax; and
(3) There has been no substantial change in
the ownershi p of the busi ness or
enterprise.
There is no substantial change in the
ownership of the business when:
(a) not less than 75% in nominal
value of the outstanding issued
shares is held by or on behalf of
the same persons; or
(b) Not less than 75% of the paid up
capital is held by or on behalf of
the same person.
Note: The 3year period shall continue to run
notwithstanding that the corporation paid its
taxes under MCIT, or that the individual
availed the 10% OSD.
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. Capital Losses (Losses are deductible
only to the extent of capital gains)
a. Losses from sale or exchange of capital
assets
b. Losses resul ti ng from securi ti es
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
3. Special Kinds Of Losses
a. Wagering losses - deductible only to the
extent of gain or winnings [Sec. 34 (D) (6)];
deemed to apply only to individuals.
b. Losses on wash sales of stocks - not
deductible because these are considered
to be artificial loss.
Wash sales a sale or other disposition
of stock or securities where substantially
identical securities are acquired or
pur chased wi t hi n 61- day per i od,
beginning 30 days before the sale and
ending 30 days after the sale (Sec. 38).
Elements of Wash Sales:
(1) The sale or other disposition of stock
resulted to a loss;
(2) There was an acquisition or contract
or option for acquisition of stock or
securities within 30 days before the
sale or 30 days after the sale; and
(3) The stock or securities sold were
substantially the same as those
acquired within the 61-day period.
Is there an exception to the rules on
losses from wash sales?
YES. If the taxpayer is a dealer in
securities, and the transaction from which
the loss resulted, was made in the
ordinary course of the business of such
dealer, the loss is deductible in full.
What is a short sale?
Short sale - means any sale of a security
which the seller does not own or any sale
which is consummated by the delivery of
a security borrowed by, or for the account
of the seller. A person shall be deemed to
own a security if:
(1) he or his agent has title to it
Income Taxation
(2) he has purchased or has entered into
an unconditional contract, binding on
both parties thereto, to purchase it
and has not yet received it
(3) he owns a security convertible into or
exchangeable for it and has tendered
such security for conversion or
exchange
(4) he has an option to purchase or
acquire it and has exercised such
option; or
(5) He has r i ght s or war r ant s t o
subscribe to it and has exercised
such rights or warrants provided
however, that a person shall be
deemed to own securities only to the
extent he has a net long position in
such securities (SEC Reg Code RA
8799) .
c. Abandonment losses in petroleum
operation and producing well
(1) In case a contract area where
petroleum operations are undertaken
is partially or wholly abandoned, all
accumul at ed expl or at i on and
development expenditures pertaining
thereto shal l be al l owed as a
deduction.
(2) I n case a pr oduci ng wel l i s
abandoned, the unamortized cost
thereof, as well as the undepreciated
cost of equipment directly used
therein, shall be allowed as deduction
in the year the well, equipment or
facility is abandoned.
d. Losses due to voluntary removal of
bui l di ng i nci dent t o r enewal or
replacements - deductible expense from
gross income.
e. 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)
f. Losses from sales or exchanges of
property between related taxpayers
as provided for under Sec. 36 (B) of the
NIRC, losses of this nature is not
deductible but gains are taxable.
g. Losses of farmers if incurred in the
operation of farm business, it is deductible.
h. Loss in shrinkage in value of stock if
the stock of the corporation becomes
worthless, the cost or other basis may be
deducted by the owner in the taxable year
in which the stock 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.
Bad Debts
Shall refer to those debts resulting from the
worthlessness or uncollectibility, in whole or in
part, of amounts due the taxpayer by others,
arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered.
REQUISITES FOR DEDUCTIBILITY (R.R. No. 5-99 as
amended by R.R. No. 25-2002 dated November 19, 2002)
a) Existing indebtedness due to the taxpayer
which must be valid and legally demandable;
b) Connected with the taxpayer's trade, business
or practice of profession;
c) Must not be sustained in a transaction
ent ered i nt o bet ween rel at ed part i es
enumerated under Section 36(B) of Tax Code;
d) Actually ascertained to be worthless and
uncollectible as of the end of the taxable year;
and
e) Actually charged off in the books of accounts
of the taxpayer as of the end of the taxable
year.
ASCERTAINED TO BE WORTHLESS AND
UNCOLLECTIBLE
What does actually ascertained to be
worthless means?
In general, a debt is not worthless simply because
it is of doubtful value or difficult to collect.
Worthlessness is not determined by an inflexible
formula or slide rule calculation but upon the
exercise of sound business judgment. The
determination of worthlessness in a given case
must depend upon the particular facts and the
circumstances of the case.
The factors to be considered include, but are not
limited to the following:
a) The debtor has no property nor visible income;
b) The debtor has been adjudged bankrupt or
insolvent;
c) Collateral shares have become worthless; and
d) There are numerous debtors with small
amounts of debts and further action on the
accounts would entail expenses exceeding the
amounts sought to be collected
Is good faith enough?
NO. There are two (2) requisites before a taxpayer
may charge off and deduct a debt. He must
ascertain the debt to be worthless in the year for
which the deduction is sought, and that in doing
so, he acted in good faith. However, good faith on
the part of the taxpayer is not enough. He must
show also that he had reasonably investigated the
relevant facts and had drawn a reasonable
inference from the information thus obtained by
him. Where a taxpayer has failed to attach to his
tax returns a statement showing the propriety of
the deductions therein made for alleged bad
debts, the account written off will be disallowed
(Collector vs. Goodrich International Rubber G.R. No. L-22265
December 22, 1967).
When is there good faith?
There are two requisites before a taxpayer may
charge off and deduct a debt. He must ascertain
the debt to be worthless in the year for which the
deduction is sought, and that in doing so, he acted
in good faith. However, good faith on the part of
the taxpayer is not enough. He must show also
that he had reasonably investigated the relevant
facts and had drawn a reasonable inference from
the information thus obtained by him. Where a
taxpayer has failed to attach to his tax returns a
statement showing the propriety of the deductions
therein made for alleged bad debts, the account
written off will be disallowed (Collector vs. Goodrich
International Rubber Co., 21 SCRA 1336).
General rule: The determi nati on by the
Commissioner of Internal Revenue as to the
worthlessness of bad debt is adequate:
Exceptions:
In no case may a receivable from an

insurance or surety company be written off
from the taxpayers books and claimed as bad
debts deduction UNLESS such company has
been declared closed due to insolvency or for
any such similar reason by the Insurance
Commissioner (R.R. No. 25-2002).
In case of banks, the Commissioner of

Internal Revenue shall determine whether or
not bad debts are worthless and uncollectible
i n t he manner pr ovi ded under RR
5-99.Without prejudice, the taxpayer shall
submit to the BSP/Monetary Board the written
approval of the writing off of the indebtedness
from banks books of accounts at the end of
the taxable year (R.R. No. 25-2002).
Equitable Doctrine of Tax Benefit
A recovery of bad debts previously deducted from
gross income constitutes taxable income if in the
year the account was written off, the deduction
resulted in a tax benefit (Tax Benefit Rule).
ACTUALLY CHARGED OFF AT THE END OF
TAXABLE YEAR
This phrase means that the amount of money lent
by the taxpayer (in the course of his business,
trade or profession) to his debtor had been
recorded in his books of account as a receivable
has actually become worthless as of the end of
the taxable year, that the said receivable has been
cancelled and written-off from the said taxpayer's
books of account. A mere recording in the
taxpayer's books of account of estimated
uncollectible accounts does not constitute a write-
off of the said receivable, hence, shall not be a
valid basis for its deduction as a bad debt
expense. In no case may any bad debt deduction
be allowed unless the facts pertaining to the
money or property lent and its cancellation or
write-off from the taxpayer's accounting records,
after having been determined that the same has
actually become worthless, have been complied
with by the taxpayer (Sec. 2, RR 5-99 as amended by RR
25-02).
What is the rule if the debts due to a taxpayer
arise out of securities?
The debts due a taxpayer may arise out of
securities held. BUT in a case where securities
are ascertained to be worthless and charged off
within the taxable year, and are capital assets, the
loss to the taxpayer (other than a bank or trust
company incorporated under the laws of the
Philippines a substantial part of whose business is
the receipt of deposits) will not be treated as bad
debts, but as capital loss on the last day of the
taxable year. The date that the securities were
written off is immaterial [Sec. 34 (E) (2)].
Depreciation
The gradual diminution in the service or useful
value of tangible property due from exhaustion,
wear and tear and normal obsolescence. The term
also applies to amortization of intangible assets,
the use of which in trade or business is of limited
duration.
a) The allowance for depreciation must be
reasonable.
b) It must be for property arising out of its use in
the trade or business, or out of its not being
used temporarily during the year.
c) The allowance must be charged off within the
taxable year.
d) Schedule on the allowance must be attached
to the return.
Income Taxation
ALLOWANCE FOR DEPRECIATION MUST BE
REASONABLE
Agreement as To Useful Life on Which
Depreciation Rate Is Based
The Bureau of Internal Revenue 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.
Special Types of Depreciation:
1. Petroleum Operations
Depreciation of all properties directly

related to production of petroleum shall
be allowed under straight-line (SL) or
declining balance (DB) method
May shift from DB to SL method
Useful life: 10 years or shorter life as

allowed by the Commissioner
Useful life of property not directly related

to production: 5 years under straightline
method
2. Mining Operations
Depreciation on all properties in mining

oper at i ons ot her t han pet r ol eum
operations at the normal rate if expected
life is less than 10 years.
If expected life is more than 10 years,

depreciation shall be any number of years
between 5 years and the expected life.
3. Depreciation deductible by non-resident
aliens engaged in trade/business or non-
resident corporation only when such
property is located in the Philippines.
PROPERTY USED IN TRADE OR BUSINESS
There shall be allowed as a depreciation
deduction a reasonable allowance for the
exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in
the trade or business. The rationale for this is that
property gradually approaches a point where its
usefulness is exhausted.
What if the property is used in business and
for personal purposes?
The depreciation expense must be pro-rated;
only the portion attributable to business use is
deductible.
From the evidence, it appears that the car of the
petitioner was used more for business than for
personal purposes. He was, and is until now, a
law practitioner, a law professor in two law schools
and was, during the year in question, engaged in
business as an importer. He had only one car at
the time. Consequently, " of the value of the
depreciation of the car may be considered as
business related, while # thereof represents non-
deductible personal expense. The same is true as
regards the salary of petitioners driver (Jamir vs.
Collector, CTA Case No. 443, November 28, 1959).
What if the property was not being used
temporarily during the year?
Depreciation is allowed not only on depreciable
property that is used in the trade, business or
profession of the taxpayer, but also on depreciable
property that is not being used temporarily during
the year (Conwell Bros. Co. vs. Collector, CTA Case No.
411).
ALLOWANCE CHARGED OFF DURING THE
TAXABLE YEAR-SCHEDULE OF ALLOWANCE
ATTACHED TO THE RETURN
Who can claim depreciation expense?
The person who sustains an economic loss from
the decrease in property value due to depreciation
gets the deduction. Ordinarily, this is the person
who owns and has a capital investment in the
property.
Nonresident alien or Foreign Corporation
A reasonable allowance for the deterioration of
property arising out of its use or employment, in
trade or business, shall be permitted only when
such property is located within the Philippines.
Property Held by One Person for Life with the
Remainder to another Person
The deduction shall be computed as if the life
tenant was the absolute owner of the property
and, as such, the expense shall accrue to him.
Property Held in Trust
Allowable deduction shall be apportioned between
the income beneficiaries and the trustees in
accordance with the pertinent provisions of the
instrument created or in the absence of such
provisions, on the basis of the trust income
allowable to each.
Methods of Depreciation
The term "reasonable allowance" shall include
(but not limited to) an allowance computed in
accordance with the regulations prescribed by the
Department of Finance under any of the following
methods:
a) Straight-line method
b) Declining-balance method
c) Sum of the years-digit method
d) Any other method which may be prescribed
by t he Depart ment of Fi nance upon
recommendation of the Commissioner of
Internal Revenue.
Depletion of Oil and Gas Wells and Mines
Exhaustion of natural resources as in mines, oil,
and gas wells. The natural resources are called
wasting assets. As the physical units
representing such resources are extracted and
sold, such assets move towards exhaustion.
Known as cost of depletion allowance for mines,
oil gas wells and other natural deposits starting
calendar year 1976 and fiscal year beginning July,
1975.
To Whom Allowed:
Only mining entities owning economic interest in
mineral deposits.
Economic interest means interest in minerals in
the place of investment therein or secured by
operating or contract agreement for which income
is derived, and return of capital expected, from the
extraction of mineral.
Mere economic or pecuniary advantage to be
derived by production by one who has no capital
investment in the mineral deposit does not amount
to economic interest.
Features:
1. Intangible exploration and development drilling
cost in petroleum exploration shall be treated
either as:
a. revenue expenditures; or
b. capital expenditures
2. The total amount deductible for exploration
and development expenditures shall not
exceed 50% of net income from mining
operation. The excess shall be carried forward
to the succeeding year until fully deducted.
Charitable and Other Contributions
Contributions and donations of a taxpayer may be
deductible in full, or deductible, but subject to
limitations.
a) The contribution or gift must be actually paid
or made to the Philippine government or any
political subdivision thereof exclusively for
public purposes, or any of the accredited
domestic corporation or association specified
in the Tax Code;
b) It must be made within the taxable year
c) It must not exceed 10% (individual) or 5%
(corporation) of the taxpayers taxable income
before charitable contributions.
d) It must be evidenced by adequate receipts or
records
e) The amount of charitable contribution of
property other than money shall be based on
the acquisition cost of said property.
Deductible In Full
Deductible Subject
To Limitation
1
Recipient is a foreign or
international
organization with an
agreement with the
Philippine Government
on deductibility, or in
accordance with special
law.
Non-government
Organizations
Deductible In Full
Deductible Subject
To Limitation
2
Recipient is an
accredited non-
government
organization, organized/
operated for (purposes):
a. Scientific
b. Educational
c. Cultural
d. Character
e. building/youth
and sports
development
f. Charitable
g. Social welfare
h. Health
i. Research
And satisfying the
following conditions:
The donation must be
utilized not later than
the 15th day of the 3rd
month following the
close of its taxable year
The administrative
expense must not
exceed 30% of total
expenses.
Upon dissolution,
assets must be
distributed to another
non-profit domestic
corporation or to the
state.
Recipient is an
accredited domestic
corporation or
association
organized/operated
for (purposes):
a. Scientific
b. Educational
c. Cultural
d. Youth and sports
development
e. Charitable
f. Social welfare
g. Religious
h. Rehabilitation of
Veterans
If the conditions in
Table A is not
complied with:
Subject to
limitation:
a. Individual - 10%
taxable income
from trade
business or
profession before
contribution
b. Corporation - 5%
taxable income
from trade
business or
profession before
contribution
Income Taxation
Deductible In Full
Deductible Subject
To Limitation
3
Recipient is:
a. Government of the
Philippines
b. Any of its agencies
or political
subdivision
c. Any fully-owned
government
corporation
For priority activity in:
1. Science
2. Education
3. Culture
4. Health
5. Economic
Development
6. Human Settlement
7. Youth and Sports
Development
Recipient is:
a. Government of the
Philippines
b. Any of its
agencies or
political
subdivisions
For a non-priority
activity in any of the
areas mentioned in A,
and exclusively for a
public purpose.
PAID OR MADE TO ENTITIES SPECIFIED
UNDER THE TAX CODE NOT TO EXCEED 10%
(INDIVIDUAL) OR 5% (CORPORATION) OF
TAXABLE INCOME
For the accredited NGO: Not later than the 15th
day after the close of the taxable year in which the
contribution is received, makes utilization directly
for the active conduct of its activities consisting of
the purposes or functions for which it is organized
and operated; administration expenses do not
exceed the level prescribed by the Secretary of
Finance and not exceeding 30% of the total
expenses; the assets, in the event of dissolution,
would be distributed to another non-profit
domestic corporation organized for similar
purposes, or to the State for public use, or to be
distributed by a court to another organization to be
used in such manner that will accomplish the
general purposes of the dissolved corporation.
IF PROPERTY IS CONTRIBUTED, MUST BE
BASED ON ACQUISITION COST
Imposed in order to stop the practice of some
unscrupulous taxpayers of contributing property
based on its fair market value to foundations for
purposes of claiming huge deductions as
charitable contributions deductible in full.
Research and Development
Research and development costs are for
improvements of processes and formula as well
as the development of improved or new products.
Research and development costs may be
expenditures:
a. For acquisition or improvements of property
subject to depreciation or depletion used in
research and development;
b. Other research and development costs.
TAX TREATMENT
Either as:
1. Revenue Expenditures
Requisites:
a. Paid or incurred during the taxable year;
b. Ordinary and necessary expenses in
connect i on wi t h t rade busi ness or
profession; and
c. Not chargeable to capital account.
2. Deferred Expenses
Requisites:
a. Paid or incurred in connection with trade,
business, or profession;
b. Not treated as expense; and
c. Chargeable to capital account but not
char geabl e t o pr oper t y subj ect t o
depreciation or depletion.
Amount deductible:
If treated as a deferred expense, the research and
development shall be amortized over a period of
not less than 60 months.
Exclusion from Research And Development
Expenditures:
1. Any expenditure for the acquisition or
improvement of land or for the improvement of
property to be used in connection with
research and devel opment subj ect t o
depreciation and depletion.
2. Any expenditure paid or incurred for the
purpose of ascertaining the existence, location,
extent or quality of any deposit of ore or other
mineral including oil or gas.
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.
a) The employer must have established and
funded a pension or retirement plan to provide
for the payment of reasonable pensions to his
employees;
b) The pensi on pl an i s reasonabl e and
actuarially sound;
c) The amount contributed must be no longer
subject to the control and disposition of the
employer;
d) The payment has not yet been allowed as a
deduction; and
e) The deduction is apportioned in equal parts
over a period of 10 consecutive years
beginning with the year in which the transfer
or payment is made.
PENSION OR RETIREMENT PLAN
ESTABLISHED AND FUNDED BY EMPLOYER
Kinds of Private Retirement Benefit Plans
a. Trusteed plan
b. Non-trusteed plan/insured plan
Premiums paid by employer for the life

insurance plans in accordance with R.A. No.
7641 can be claimed by employer as
deductible business expense
Insurance premiums paid by an employer

client-company for group plan are deductible
as business expense under Section 34(A) of
Tax Code.
REASONABLE AND ACTUARIALLY SOUND
Reasonable Private Benefit Plan [R.A. No. 4917
and Section 32(B)(6)(a) of the Tax Code]
- means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer
for the benefit of some or all of his officials or
employees, wherein contributions are made
by such employer for officials or employees or
both for the purpose of distributing to such
officials and employees the earnings and
principal of the fund thus accumulated, and
wherein it is provided in said plan that at no
time shall any part of the corpus or income of
the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of
the said officials and employees.
NOTE: Section 6 of R.R. No. 1-68 as amended by
R.R. No. 1-83 which implement R.A. No. 4917
provides that before availing of the privilege, a
certificate of tax exemption for reasonable private
benefit plan must be obtained.
Summary of Rules on Retirement Benefit
Plans/ 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)
The rules in the law on deduction for pension
payments to employees apply to a pension plan
that is funded. An employer does not provide for
pension for his employees in his initial years of
operations. A pension plan is usually set up after
some years of operations have gone by, when the
employer is already financially capable of
providing benefits to his employees. Since the
benefits from any pension plan consider the length
of service of the employee, the plan should
consider the services of the employees who were
already with the employer even before the plan
was set up. Such past services will require a lump
sum payment to the pension fund; this is called
past-service cost. For each year after the
pension plan was set up, there should be payment
to the fund for pension for the services rendered
during the year by the employees. This is called
present service cost.
LIMITATIONS ON DEDUCTIONS
Contribution made to a pension trust may be
claimed as deduction in the following manner:
a. amount contributed for the present service
cost- 100% deductible
b. Amount contributed for the past service
cost- 1/10 of the amount contributed is
deductible in the year the contribution is made,
the remaining balance will be amortized
equally over 9 consecutive years.
NON-DEDUCTIBLE EXPENSES
Specific Items (Section 36):
1. Personal, living or family expenses because
these are personal expenses;
2. Amount paid out for new buildings or for
permanent improvements, or betterment
made to increase the value of any property or
est at e - because t hese ar e capi t al
expenditures except that intangible drilling
and development cost incurred in petroleum
operations are deductible;
3. Amount expended in restoring property or in
making good the exhaustion thereof for which
Income Taxation
an allowance has been made because
these are capital expenditures;
4. Premiums paid on any life insurance policy
covering the life of any officer or employee, or
of any person financially interested in any
trade or business carried on by the taxpayer,
individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such
policy because these are items not normally
subject to income tax and therefore not
deductible.
5. Losses from sales or exchanges of property
between related taxpayers.
Tax Consequences under Sec. 36 (B):
The following are not deductible:
1. Interest expense [Sec. 34 (B)(2)]
2. Bad debts [Sec. 34 (E)(1)]
3. Losses from sales or exchanges of
property [Sec 36 (B)]
Situs/Source of Income
Situs/Source of Income
A. C L A S S I F I C AT I O N O F I N C O M E
ACCORDING TO SOURCE
a. Income derived from sources within the
Philippines
b. Income derived from sources without
the Philippines
c. Income derived from source partly
within and partly without the Philippines
B. GROSS INCOME FROM SOURCES WITHIN
THE PHILIPPINES
1. interests
2. dividends
a. From domestic corp.
b. from foreign corp. (unless less than
50% of the gross income of such
foreign corp. for the 3-yr. period
ending with the close of the taxable
year preceding the declaration of
such dividends was derived from
sources within the Philippines) only
in an amount which bears the same
ratio to such dividends as the gross
income of the corporation for such
period derived from sources within
the Philippines bears to its gross
income from all sources.
3. services (compensation for labor/personal
services)
4. rentals and royalties (from property or use
of property located in Philippines or
interest therein)
Including:
a. use of or the right or privilege to use
in the Philippines any copyright,
patent, design or model, plan, secret
f or mul a or pr ocess, goodwi l l ,
trademark, trade brand or other like
property or right
b. use of or the right or privilege to use
in the Philippines any industrial,
commercial or scientific equipment
c. suppl y of sci ent i f i c, t echni cal ,
industrial or commercial knowledge
or information
d. supply of any assistance that is
ancillary and subsidiary to, and is
furnished as a means of enabling the
application or enjoyment of, any such
property/right in (a) such equipment
or (b) in knowledge/information in (c)
e. supply of services by a nonresident
person or his employee in connection
wi th the use of property/ri ghts
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
t e c h n i c a l ma n a g e me n t o r
administration of any scientific,
industrial or commercial undertaking,
venture, project or scheme
g. the use of or the right to use:
motion picture films
films or video tapes for use in

connection with TV
tapes for use in connection with

radio broadcasting
5. Gains, profits and income from the sale of
real property located in the Philippines
6. Gains, profits, and income from the sale
of personal property as determined in
Subsection E of Section 42, NIRC.
GENERAL RULE: Gains, profits, and income
from the sale of personal property, subject to
the following rules:
PLACE OF
PURCHASE
PLACE
OF SALE
TREATMENT
Philippines Abroad Income from
without
Abroad Philippines Income from within
EXCEPTION:
1. Gain from the sale of shares of stock in a
domestic corporation - treated as derived
ent i r el y f r om sour ces wi t hi n t he
Philippines regardless of where the said
shares are sold.
2. Gains from the sale of personal property:
o produced (in whole or in part) by the
taxpayer within and sold without the
Philippines, or
o produced (in whole or in part) by the
taxpayer without and sold within the
Philippines
Treated as derived partly from sources
within and partly from sources without the
Philippines.
ALLOWABLE DEDUCTIONS FROM GROSS
INCOME FROM SOURCES WITHIN THE
PHILIPPINES
GENERAL RULE:
Deductions: expenses, losses and other
deductions properly allocated thereto and a
ratable part of expenses, interests, losses and
other deductions effectively connected with
the business/trade conducted exclusively in
the Philippines which cannot definitely be
allocated to some items or class of GI. Such
deduct i ons are al l owed onl y i f f ul l y
substantiated by all information necessary for
its calculation.
Ratable part formula
Philippines Gross
Income
X Unallocated
Expenses
Worldwide Gross
Income
EXPENSES TO BE ALLOCATED TO
INCOME FROM WITHOUT
Exception: No deduction for interest paid/
incurred abroad is allowed unless the
indebtedness was actually incurred to provide
funds for use in connection with the conduct
or operati on of trade/busi ness i n the
Philippines
C. GROSS I NCOME 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
ser vi ces per f or med wi t hout t he
Philippines
4. Rental or royalties from property located
without the Philippines or from any
interest in such property including
rentals/royalties for the use of or for the
privilege of using without the Philippines,
patents, copyrights, secret processes
and formulas, goodwill, trademarks,
trade brands, franchises and other like
properties
5. Gains, profits and income from the sale
of real property located without the
Philippines
ALLOWABLE DEDUCTIONS FROM GROSS
INCOME FROM SOURCES WITHOUT THE
PHILIPPINES
Gross Income from
Without the Phils.
X Unallocated
Expenses
Worldwide Gross
Income
EXPENSES TO BE ALLOCATED TO
INCOME FROM WITHOUT
Deductions: expenses, losses and other
deductions properly apportioned or allocated
thereto and a ratable part of expenses,
interests, losses and other deductions which
cannot definitely be allocated to some items
or class of gross income.
D. INCOME FROM SOURCES PARTLY WITHIN
AND PARTLY WITHOUT THE PHILIPPINES
1. Items of gross income in (A) and (B)
above shall be allocated or apportioned to
sources within or without the Philippines.
Gross Income
(within and without the Philippines)
Less: Deductions
Taxable Income
2. Deductions where items of gross income
are separately allocated to sources within
the Philippines and in case of GI derived
from sources partly within and partly
without the Philippines - expenses, losses
and ot her deduc t i ons pr oper l y
apportioned or allocated thereto and a
ratable part of expenses, interests, losses
and other deductions which cannot
Income Taxation
definitely be allocated to some items or
class of Gross Income.
3. Gains, profits and income from the sale of
personal property produced by the
taxpayer within and sold without the
Philippines or produced by the taxpayer
without and sold within the Philippines
shall be treated as derived partly from
4. Gains, profits and income from the
purchase of personal property within and
sold without the Philippines or from the
purchase of personal property without
and sold within the Philippines, shall be
treated as derived entirely from sources
within the country in which sold.
5. Gain from sales of shares of stock in a
domestic corporation shall be treated as
derived entirely from sources within the
Philippines regardless of where the said
shares are sold.
6. Transfer by a nonresident alien or a
foreign corporation to anyone of any
shares of stock issued by a domestic
corporation shall not be made in its book,
unless:
a. Transferor filed a bond with the
Commissioner, or
b. Commissioner certified that the taxes
imposed and due on the gain realized
have been paid.
It is the duty of transferor and the corporation
to advise the transferee of the requirements.
Accounting Methods
Accounting Methods
Accounting Periods
GENERAL RULE
Taxable income is computed upon the basis of
taxpayers annual accounting period (fiscal or
calendar year) in accordance with the method of
accounting employed.
If no method of accounting is employed or
method does not clearly reflect the income,
computation shall be made in accordance
with such method as the opinion of the
Commissioner clearly reflects the income.
Taxable income is computed based on
calendar year if:
1. accounting period is other than a fiscal
year;
2. taxpayer has no accounting period;
3. taxpayer does not keep books; or
4. taxpayer is an individual.
Fiscal year: accounting period of 12 months
ending on the last day of any month other
than December
Calendar year: accounting period from
January 1 to December 31
PERIOD FOR ITEM OF INCOME
ITEMS OF
GROSS INCOME
DEDUCTIONS AND
CREDITS
As a
general
rule
Included in the
gross income for
the taxable year in
which received by
the taxpayer,
unless, under
methods of
accounting
permitted under
Section 43, any
such amounts are
to be properly
accounted for as of
a different period.
Taken for the taxable
year in which "paid or
accrued" or "paid or
incurred", dependent
upon the method of
accounting the basis
of which the net
income is computed,
unless in order to
clearly reflect the
income, the
deductions should be
taken as of a different
period.
In case
of
death
of the
tax-
payer
included in
computing taxable
income 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
includible in
respect of such
period or a prior
period
Taken for the taxable
year in which "paid or
accrued" or "paid or
incurred", dependent
upon the method of
accounting the basis
of which the net
income is computed,
unless in order to
clearly reflect the
income, the
deductions should be
taken as of a different
period.
CHANGE OF ACCOUNTING PERIOD
If a taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar
year, from calendar year to fiscal year, or from one
fiscal year to another, the net income shall, with
the approval of the Commissioner, be computed
on the basis of such new accounting period,
subject to the provisions of Section 47.
Methods of Accounting
CASH METHOD
Recognition of income and expense dependent on
inflow or outflow of cash
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:
# Interest or rent income earned but not yet
received.
# Rent expense accrued but not yet paid
# Wages due to workers but remain unpaid

ACCOUNTING FOR LONG TERM CONTRACTS
'long-term contracts' mean building, installation
or construction contracts covering a period in
excess of one (1) year.
How is income reported?
Persons whose gross income is derived in whole
or in part from such contracts shall report such
i ncome upon the basi s of percentage of
completion.
There should be deducted from such 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.
The Return
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 contract.
If upon completion of a contract, it is found that
the resulting taxable net income has not been
clearly reflected for any year or years, the
Commissioner may permit or require an amended
return.
INSTALLMENT BASIS
1. Sales of Dealers in Personal Property
Under rules and regulations prescribed by the
Secretary 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 total contract price.
2. Sales of Realty and Casual Sales of
Personality
In cases of:
a) casual sale or other casual disposition of
personal property (other than property of
a kind which would properly be included
in the inventory of the taxpayer if on hand
at the close of the taxable year), for a
price exceeding One thousand pesos
(P1,000), or
b) sale or other disposition of real property, if
in either case the initial payments do not
exceed twenty-five percent (25%) of the
selling price
How income reported?
In the same manner as in sales of dealer in
personal property above.
What does initial payment mean?
The payments received in cash or property
other than evidences 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.
An individual who sells or disposes of real
property, considered as capital asset, and is
otherwise qualified to report the gain
therefrom under (2) above may pay the
capital gains tax in installments under rules
and regulations to be promulgated by the
Secretary of Finance, upon recommendation
of the Commissioner.
Change from Accrual to Installment Basis
If a taxpayer entitled to the benefits of Subsection
(1) elects for any taxable year to report his taxable
income on the installment basis, then in
computing his income for the year of change or
Income Taxation
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.
Allocation of Income and Deductions
In the case of two or more organizations, trades or
businesses (whether or not incorporated and
whether or not organized in the Philippines)
owned or controlled directly or indirectly by the
same interests, the Commissioner is authorized to
distribute, apportion or allocate gross income or
deductions between or among such organization,
trade or business, if he determined that such
distribution, apportionment or allocation is
necessary in order to prevent evasion of taxes or
clearly to reflect the income of any such
organization, trade or business.
Withholding Taxes
Withholding Taxes
General Concepts
This practice which is also known as taxation at
source, refers to the requirement that taxes
imposed or prescribed by the NIRC are to be
deducted and withheld by the payor-corporations
and/or persons from payments made to payees-
corporation and/or persons for the former to pay
the same directly to the BIR. Thus, the taxes are
collected practically at the time the transaction is
made or when the taxable act occurs.
WITHHOLDING TAXES HAVE BEEN PAID
The obligation of the payor to deduct or withhold
the tax arises at the time an income payment is
PAID or PAYABLE or ACCRUED or recorded as
an expense or asset whichever is applicable in
the payors books, WHICHEVER COMES FIRST
(Section 2.57.4 of R.R. 2-98 as amended by Section 4 of R.R.
12-2001).
Remedies of withholding agent if expense is
disallowed (R.R. 2-98 as amended by R.R. 14-2002):
a. Pay the tax due thereon, including the interest
incident to failure to withhold tax, and
surcharges, if applicable, at the time of the
audi t i nvest i gat i on or rei nvest i gat i on/
reconsideration provided the payees reported
the income.
b. Pay the amount that should have been
withheld, including the interest incident to the
failure to withhold the tax, and surcharges if
appl i cabl e, at t he t i me of t he audi t
i n v e s t i g a t i o n o r r e i n v e s t i g a t i o n /
reconsideration if the payees did not report
the income and pay the tax.
c. In case of under withholding, pay the
difference between the correct amount and
the amount of tax withheld, including the
i nt erest , i nci dent t o such error, and
surcharges if applicable, at the time of audit
i n v e s t i g a t i o n o r r e i n v e s t i g a t i o n /
reconsideration.
If above remedies are availed of, the expenses
not previously subjected to withholding tax
will be allowed as a deduction for income tax
purposes.
Section 6 of R.R. 17-2003: items for deduction
representing return of capital such as those
pertaining to purchase of raw materials
forming part of finished product or purchases
of goods for resale, shall be allowed as
deductions upon the withholding agents
payment of the basic withholding tax and penalties
incident to non-withholding or underwithholding.
Is withholding tax a type of tax?
Withholding tax is not a tax, although there is a
word tax in it. Rather, it is a manner of collecting
a kind of tax (advance payment of tax due) which
may be INCOME TAX, VAT, PERCENTAGE TAX,
etc. In two natures: final withholding tax and
creditable withholding tax (Large Taxpayers Quick Guide,
Volume II by Large Taxpayers Assistance Division I, May
2006).
Rationale:
1. To provide the taxpayer a convenient manner
to meet his probable income tax liability.
2. To ensure the collection of the income tax
which could otherwise be lost or substantially
reduced through the failure to file the
corresponding returns.
3. To improve the governments cash flow.
4. To minimize tax evasion, thus resulting in a
more efficient tax collection system.
Kinds:
1. Withholding Tax at Source:
a. Final Withholding Tax
b. Creditable Withholding Tax (Expanded
withholding tax)
2. Wi t hhol di ng Tax on Compens at i on
(Withholding Tax on Wages and Fringe
Benefit Tax )
3. Withholding Tax on Creditable Value-Added
Tax
4. Withholding of Percentage Tax
The Withholding Agent
What taxes are required to be withheld?
Subject to rules and regulations the Secretary of
F i n a n c e ma y p r o mu l g a t e , u p o n t h e
recommendation of the Commissioner, requiring
the filing of income tax return by certain income
payees, the final tax on passive income, capital
gains tax on sales on shares of stocks and real
properties, fringe benefit tax and the 10% tax on
cash rewards of informers shall be withheld by
payor-corporation and/or person and paid in the
same manner and subject to the same conditions
as returns and payment of taxes withheld at
source (Section 57 (A) NIRC).
How are taxes withheld and remitted to the
BIR?
Taxes deducted and withheld by withholding
agents shall be covered by a return and paid to,
except in cases where the Commissioner
otherwise permits, an authorized agent bank,
revenue district officer, collection agent, or duly
authorized treasurer of the city or municipality
where the withholding agent has his legal
residence or principal place of business, or where
the withholding agent is a corporation, where the
principal office is located.
The taxes deducted and withheld by the
withholding agent shall be held as a special fund
in trust for the government until paid to the
collecting officers (Section 58A NIRC).
Role of Withholding Agent
In the operation of the withholding tax system, the
withholding agent is the payor, a separate entity
acting no more than an agent of the government
for the collection of tax in order to ensure its
payments; the payor is the taxpayer - he is the
person subject to tax imposed by law; and the
payee is the taxing authority.
May a withholding agent in such capacity,
deemed a taxpayer?
No. The withholding agent is merely a tax
collector, not a taxpayer.
An income taxpayer covers all persons who derive
taxable income. If a withholding agent was
assessed for deficiency withholding tax under the
Code, as such, it is being held liable in its capacity
as a withholding agent and not its personality as a
taxpayer (Commissioner of Internal Revenue vs. Court of
Appeals G.R. No. 104151 March 10, 1995).
I s t axpayer answer abl e f or t he non-
performance of the withholding agent?
NO. Unless there is collusion and bad faith on the
part of the taxpayer. The taxpayer could not be
deemed to have evaded the tax had the
withholding agent performed its duty.
Note: As a matter of business administration,
certain mechanical details of the withholding
process may be handled by representatives of the
employer. Thus, in the case of a corporate
employer with branch offices, the branch manager
or other representative may actually, as a matter
of internal administration, withhold the tax or
prepare the statements required under the law.
Neverthel ess, the l egal responsi bi l i ty for
withholding, paying and returning the tax and
furnishing such statements rests with the
corporate employer (R.R. 2-98, as amended).
Persons required to deduct or withhold
a) In general, any juridical person, whether or not
engaged in trade or business.
b) An individual, with respect to payments made
in connection with his trade or business.
c) However, insofar as taxable sale, exchange or
transfer or real property is concerned,
individual buyers who are not engaged in trade
or business are also constituted as withholding
agents.
d) All government offices including GOCCS as
wel l as provi nci al , ci ty and muni ci pal
governments and barangays.
Nature of Withholding Agents Liability:
The wi t hhol di ng agent i s di r ect l y and
independently liable for the correct amount of the
tax that should be withheld from the dividend
remittance (Commissioner vs. Procter and Gamble, G.R. No.
66838, December 2, 1991).
Consequences for Failure to Withhold:
1. Liable for surcharges and penalties;
2. Liable upon conviction to a penalty equal to
the total amount of the tax not withheld, or not
accounted for and remitted (Sec. 251, 1997
NIRC); and
3. Any income payment which is otherwise
deductible from the payors gross income will
not be allowed as a deduction if it is shown
that the income tax required to be withheld is
not paid to the BIR (Sec. 2.58.5, R.R. No. 2-98).
Income Taxation
Withholding Tax Source
FINAL WITHHOLDING
TAX SYSTEM
CREDITABLE
WITHHOLDING TAX
SYSTEM
AMOUNT OF TAX COLLECTED
The amount of income
tax withheld by the
withholding agent is
constituted as a full
and final payment of
the income due from the
payee on the said
income [Sec. 2.57 (a), R.R.
No. 2-98].
Taxes withheld on
certain income
payments are intended
to equal or at least
approximate the tax
due from the payee on
the said income.
WHO IS PRIMARILY LIABLE
The liability for payment
of the tax rests primarily
on the payor as the
withholding agent.
Liability rests upon the
taxpayer
NEED TO FILE A RETURN
The payee is not
required to file an
income tax return for
the particular income.
The income recipient is
still required to file an
income tax return and/
or pay the difference
between the tax
withheld and the tax
due on the income.
COVERAGE
! All income subject to
final taxes (e.g.
passive, gross
income of NRA-
NETB)
! Fringe benefit
! Informers reward to
persons instrumental
in the discovery of
violations of the
NIRC and the
discovery and
seizure of smuggled
goods.
! Those income
payments covered
by the expanded
withholding tax (R.R.
2-98)
Examples:
- Professional
fees, talent fees
- Fees paid to
medical
practitioners
- Income
payments to
partners of GPP
FINAL WITHHOLDING TAX
1. It is constituted as a full and final payment of
the income tax due from the payee on a
particular type of income subject to final
withholding tax (FWT).
The finality of the withholding tax is limited
only to the payees income tax liability and
does not extend to other taxes that may be
imposed on said income.
2. The income subjected to final income tax is no
longer subject to the net income tax;
otherwise, there would be a violation of
prohibited double taxation.
3. The liability for the payment of the tax rests
primarily on the payor as withholding agent.
4. The payee is not required to file an income tax
return for the particular income subjected to
FWT. It is the withholding agent who files the
return.
5. The rate of the final tax is multiplied to the
gross income. Thus, deductions and/or
personal and additional exemptions are not
allowed.
Time to Withhold Tax at Source:
Arises at the time an income is paid or payable,
whichever comes first. The term payable refers
to the date the obligation becomes due,
demandable or legally enforceable (Sec. 2.54.4 R.R.
No. 2.98).
E X E MP T I ON S F R OM C R E D I TA B L E
WITHHOLDING TAX (Large Taxpayers Quick Guide
Volume II by Large Taxpayers Assistance Division I, May
2006):
1. National Government and its instrumentalities,
i ncl udi ng provi nci al , ci ty or muni ci pal
governments
2. Persons enjoying exemption from payment of
income taxes pursuant to the provisions of
any law, general or special, such as but not
limited to the following:
a. sale of real property by corporation
registered and certified by HLURB or
HUDCC as engaged in social housing
project where the selling price of house
and lot or lot only does not exceed P
300,000 or such adjusted amount of
selling price for socialized housing as
may later be determined and adopted by
HLURB, as provided under R.A. No. 7916
and Omnibus Investment Code of 1987
b. corporation registered with BOI and
enjoying tax exemption from income tax
provided under R.A. No. 7916 and
Omnibus Investment Code of 1987
3. Corporations which are exempt from income
tax under Section 30 of NIRC
However, income payments arising from any
activity which is conducted for profit or
income derived from real or personal property
shall be subjected to withholding tax as prescribed
in existing regulations.
NOTE: Payments to PAGCOR are subjected to
withholding tax.
Tax-Free Covenant BOND [Sec. 57(C)]
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 equal

to 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 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 [Sec. 58 (d)]
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).
Return on Creditable Withholding Tax
The income payor who withheld a creditable
income tax should file a return and pay the tax
withheld
a. Withholding tax on compensation income
a. Monthly return within ten (10) days after
the close of the month
b. Annual return On or before January 31
of the succeeding year
b. Expanded withholding tax
Monthly return within ten (10) days after
the close of the month
Annual return on or before March 1 of
the succeeding year
Withholding Tax on Compensation
The method of collecting the income tax at source
upon receipt of the income. It applies to all
employed individuals whether citizens or aliens,
deriving income from compensation for services
rendered in the Philippines. The employer is
constituted the withholding agent.
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; and
3. There must be a payroll period.
What Constitutes compensation?
a. Salaries and wages
b. Commissions
c. Tips
d. Allowances
e. Bonuses
f. Fringe Benefits of rank and file employees
Withholding Tax on Compensation Income -
The income recipient (i.e., employee) is the
person liable to pay the income tax, yet to improve
the collection of compensation income of
employees, the State requires the employer to
wi t hhol d t he t ax upon payment of t he
compensation income.
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 employer's 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. Amount received by the insured as return of
premium
9. Compensation for injuries and sickness
11. Thirteenth (13th) month pay and other
benefits
12. GSI S, SSS, Ph i l h e a l t h a n d o t h e r
contributions,
FRINGE BENEFIT TAX
it is a final withholding tax imposed on the grossed
up monetary value of fringe benefit furnished,
granted or paid by the employer to the employee,
except rank and file employees, whether such
Income Taxation
employer is an individual, professional partnership
or corporation, regardless of whether the
corporation is taxable or not, or the government
and its instrumentalities.
BASIC RULES
1. Fringe benefit given to a rank and file
employee (whether under a collective
bargaining agreement or not) is not subject to
the fringe benefit tax.
2. Fringe benefit given to a supervisory or
managerial employee is subject to the fringe
benefit tax.
3. De minimis benefit, whether given to rank and
file employee or to supervisory or managerial
employee is not subject to the fringe benefit
tax.
What is the tax implication if the employer
gives fringe benefits to rank-and-file
employees?
Fringe benefits given to a rank-and-file employee
are treated as part of his compensation income
subject to income tax and withholding tax on
compensation income, which must be withheld
and deducted by hi s empl oyer from the
compensation income of his employee.
Who pays the Fringe Benefit Tax?
The employer but he is allowed by law to deduct
FBT as a business expense in determining his
taxable income.
Taxable Fringe Benefits
What are fringe benefits?
TWO VIEWS:
A. Only those benefits specifically enumerated in
the Tax Code and R.R. No. 3-98. All other
benefits are subject to regular WTW.
B. Fringe benefits subject to FBT are NOT
LIMITED only to those explicitly mentioned in
the Tax Code and R.R. No. 3-98.
FRINGE BENEFIT means any good, service, or
other benefit furnished or granted by an employer,
in cash or in kind, in addition to basic salaries, to
an individual employee (except rank and file
employees) such as, but not limited to the
following:
1. Housing
General Rule: The value to the employee of
quarters and meals given by the employer
shall be added to his compensation subject to
withholding.
Excepti on: i f l i vi ng quarter/meal s are
furnished to an employee for the convenience
of the employer.
2. Expense Account
Fi xed and vari abl e transportati on,
representation and other allowances as a
general rule, subject to FBT if NON-
RANK, but not taxable if incurred or
reasonably expected to be incurred by
employee in the performance of his
duties, subject to the following conditions:
a. these are ordinary and necessary in
the pursuit of employers business
and paid or incurred by employee;
b. These expenses are liquidated or
substantiated by receipts or other
adequate documentation.
3. Vehicle of any kind
4. Household personnel, such as maid, driver
and others
Expenses for the NRF employees which
are borne by the employer for household
personnel, such as salaries of household
help, personal driver of the employee, or
other similar personal expenses (like
payment for homeowners association
dues, garbage dues, etc.) shall be taxable
as fringe benefits.
5. Interest on loan at less than market rate to
the extent of the difference between the
market rate and actual rate granted.
If the employer lends money ton his NRF
employee free of interest or a rate lower
than 12% such interest foregone by the
employer or the difference of the interest
assumed by the NRF employee and the
rate of 12% shall be treated as taxable
fringe benefit.
The benchmark interest rate of 12%
remains in effect until revised by a
subsequent regulation.
The rule shall apply to installment
payments or loans with interest rate lower
than 12% starting January 1, 1998.
6. Membershi p f ees, dues and ot her
expenses borne by the employer for the
employee in social and athletic clubs and
similar organizations
Borne by NRF employee in social and
athletic taxable fringe benefit of the NRF
employee in full.
7. Expenses for foreign travel
Fi xed and vari abl e transportati on,
representation and other allowances as a
general rule, subject to FBT if NON-
RANK, but not taxable if incurred or
reasonably expected to be incurred by
employee in the performance of his
duties, subject to the following conditions:
a. These are ordinary and necessary in
the pursuit of employers business
and paid or incurred by employee;
b. These expenses are liquidated or
substantiated by receipts or other
adequate documentation.
8. Holiday and vacation expenses
Holiday and vacation expense of the NRF
employee borne by his employer shall be
treated as taxable fringe benefit.
9. Educational assistance to the employee or
his dependents;
For NRF
General Rule: taxable fringe benefit
Exception:
a. Education/study is directly connected with
employers trade or business; and
b. With a written contract that employee
shall remain employed with the employer
for a period of time mutually agreed upon
by the parties.
In case of NRFs dependents, the same is
taxable fringe benefit, except when the
assi st ance was pr ovi ded t hr ough a
competitive scheme under the scholarship
program of the company employer.
10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows.
General rule: Life or health insurance and
other non-life insurance are taxable fringe
benefit
Exception:
The cost of premiums borne by the
employer for the group insurance of his
NRF employees ; and
Contributions of the employer for the
benefit of NRF employee to the SSS,
GSIS, and similar contributions arising
from provisions of any existing law.
STOCK OPTIONS ARE SUBJECT TO FRINGE
BENEFIT The basis is the difference between
the fair market value and the exercise price at the
time of exercise.
TAX RATES AND BASE
Tax Base: The grossed up monetary value (GMV)
of the fringe benefit
GMV OF THE FRINGE BENEFIT
REPRESENTS:
1. The whole amount of income realized by the
employee which includes the net amount of
money or net monetary value of property
which has been received; plus
2. The amount of fringe benefit tax thereon
otherwise due from the employee but paid by
the employer for and in behalf of the
employee.
GMV of the fri nge benefi t shal l be
determined by dividing the monetary value of
the fringe benefit by the Grossedup divisor.
The Grossedup divisor is the difference
between 100% and the applicable rates.
YEAR
GROSSED UP
DIVISOR
RATE
1998 66% 34% FWT
1999 67% 33% FWT
2000 onwards 68% 32% FWT
EMPLOYEE
GROSSED
UP DIVISOR
RATE
Citizen, RA,
NRA-ETBL
68%
32%
FWT-
2000 and
onwards
NRA-NETB 75% 25%FWT
Individuals employed by
RHQ or
RAHQ; OBU; Foreign
service contractor or
foreign service
subcontractor engaged
in petroleum operations
in the Philippines
85% 15%FWT
Individuals working in
special economic zones
FRINGE BENEFITS NOT SUBJECT TO FBT
1. Fringe benefits not considered as gross
income
a. if it is required or necessary to the
business of the employer; or
b. If it is for the convenience or advantage of
the employer.
2. Fringe Benefit that is not taxable under Sec.
32 (B) Exclusions from Gross Income
3. Fringe benefits not taxable under Sec. 33
Fringe Benefit Tax:
a. Fringe benefits which are authorized and
exempted under special laws, such as the
13th month pay and other benefits with
the ceiling of P30,000;
Income Taxation
b. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit
plans;
c. Benefits given to the rank and file
employees, whether granted under a
collective bargaining agreement or not;
and
d. De minimis benefits benefits which
are relatively small in value offered by the
employer as a means of promoting
goodwill, contentment, and efficiency of
employees
The term Rank and File Employees
shall mean all employees who are holding
neither managerial nor supervisory
position as defined in the Labor Code.
In the case of rank and file employees,
fringe benefits other than those excluded
from gross income under the Tax Code
and other special laws, are taxable under
the individual normal tax rate.
MANAGERIAL/
SUPERVISORY
EMPLOYEES
RANK AND FILE
EMPLOYEES
COMPENSATION/SALARIES/WAGES
It is subject to
income tax
It is subject to income tax
FRINGE BENEFITS
Subject to fringe
benefit tax
Part of compensation and
subject to income tax,
subject to exceptions
DE MINIMIS BENEFITS
Income but not
compensation
hence not taxable
Income but not
compensation hence not
taxable
DE MINIMIS BENEFITS NOT SUBJECT TO FBT
(R.R. No. 8-2000 and 10-2000):
1. Monetized unused vacation leave credits of
PRIVATE employees not exceeding (10) days
during the year and the monetized value of
leave credits paid to government officials and
employees
General Rule: Paid VL and SL are

subject to FBT for NRF
Exception:
Monetized value of unutilized VL credits
of 10 days or less are NOT SUBJECT TO
WTW OR FBT
However, monetization of SL credits even
if not exceeding 10 days are subject to
TAX.
2. Medical cash allowance to dependents of
employees not exceeding P750.00 per
employee per semester or P125 per month;
To be considered de minimis medical allowance,
the following conditions must concur:
1. The amount given to the EE shall be for his
own medical expense;
2. The amount actually given and actually spent
shall not exceed P10,000 in any given
calendar year;
3. The EE must fully substantiate with or in his
name the medical allowance to be granted
(As amended by RR 5-08, Rice subsidy is in
the amount of P1,500.00);
4. Rice subsidy of P1,000.00 or one (1) sack of
50kg. rice per month amounting to not more
than P1,000.00 (As amended by RR 5-08,
uniform and clothing allowance not exceeding
P4,000 per annum);
5. Uniform and clothing allowance not exceeding
P3,000 per annum;
6. Actual yearly medical benefits not exceeding
P10,000 per annum;
7. Laundry allowance not exceeding P300 per
month;
8. Employees achievement awards e.g. for
length of service or safety achievement, which
must be in the form of a tangible personal
property other than cash or gift certificate,
with an annual monetary value of not
exceeding P10,000 received by the employee
under an established written plan which does
not discriminate

in favor of paid employees;
9. Gifts given during Christmas and major
anniversary celebrations not exceeding
P3,000 per employee per annum;
10. Flowers, fruits, books or similar items given to
employees under special circumstances;
11. Daily meal allowance for overtime work not
exceeding 25% of the basic minimum wage.
Note: Revenue Regulations No. 5-2008 further
amended RR Nos. 2-98 and 3-98, as last
amended by RR No. 10-2000, with respect to de
minimis benefits" not subject to withholding tax, for
rank and file employees as well as managerial
employees, as follows:
(a) Rice subsidy of P1,500 or one(1) sack of 50 kg
rice per month amounting to not more than
P1,500.00; and
(b) Uniform and clothing allowance not exceeding
P4, 000 per annum.
NOTE: These are not considered as compensation.
De minimis benefit exceeds the ceiling prescribed:
If given to managerial/supervisory employee
a. The excess is within the P30,000 limit under
Sec. 32(b)(7)(e) of the NIRC - the excess is
not taxable
b. The excess is beyond the P 30,000 limit
excess subject to FBT
If given to rank and file employee
a. The excess is within the P30,000 limit under
Sec. 32(b)(7)(e) of the NIRC - the excess is
not taxable
b. The excess is beyond the P30,000 limit
excess is taxable as salary or compensation
income.
Representation and Transportation Allowance
(RATA) and Personnel Economic Relief Allowance
(PERA) are not subject to Income Tax and
Withholding Tax. Additional Compensation
Allowance (ACA) is part of other benefits under
Sec. 32(b)(7)(e) of the Tax Code of 1997 which
are excluded from gross compensation income
provided the total amount of such benefits does
not exceed P30,000. It is also not subject to
withholding tax pending its formal integration into
basic pay.
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 employer's 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. Amount received by the insured as return of
premium
9. Compensation for injuries and sickness
11. Thirteenth (13th) month pay and other
benefits
12. GSI S, SSS, Phi l heal t h and ot her
contributions
Withholding of Percentage Tax
Bureaus, offices, instrumentalities of the
government, including GOCCs as well as their
subsidiaries, provinces, cities, municipalities
making any money payment to private individuals,
corporations, partnership or association are
required to deduct and withhold taxes due from
the payees on account of such money payment.
Returns and Payments
Returns and Payments
Filing of Tax Return 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.
PERSONS REQUIRED TO FILE INCOME TAX
RETURN:
A. Individual
1. Resident citizen;
2. Non-resident citizen on income from
within the Phil.;
3. Resident alien on income from within the
Phil.;
4. NRAETB on income from within the Phil.
5. An individual (citizens/aliens) engaged in
business or practice of a profession within
the Phil. regardless of the amount of
gross income;
6. Individual deriving compensation income
concurrently from two or more employers
at any time during the taxable year; and
Income Taxation
7. Individual whose pure compensation
income derived from sources within the
Phil. exceeds P60, 000.
Individuals Exempt from Filing Income Tax
Return:
1. Individual whose gross income does not
exceed total personal and additional
exemptions;
2. I ndi vi dual wi t h r espect t o pur e
compensation income derived from
sources within the Philippines, the income
tax on which has been correctly withheld;
3. Individual whose sole income has been
subjected to final withholding income tax;
and
4. Individual who is exempt from income tax.
I ndi vi dual s Requi r ed To Fi l e 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
Fi nance upon recommendati on of the
Commissioner.
Special Rules
Return of Husband and Wife:
File one (1) return for the taxable year if

the following requisites are complied;
a. Married individuals (citizens, resident
or nonresident aliens)
b. Do not derive income purely from
compensation.
If impracticable to file one return: each

spouse shall file a separate return of
income but the return so filed shall be
consolidated by the Bureau for the
purpose of verification for the year.
Unmarried Minor:
Income of unmarried minors derived from

property received by the living parent
shall be included in the return of the
parent, except:
a. when donors tax has been paid on
such property, or
ii. when transfer of such property is
exempt from donors tax.
Persons under Disability:
If a taxpayer is unable to make his own return,
it may be made by his:
a. duly authorized agents;
b. representative;
c. by guardian; or
d. other person charged with the care of his
person or property;
Who will assume the responsibility of
making the return and incurring penalties
pr ovi ded f or er r oneous, f al se or
fraudulent return.
B. Taxable Estate and Trust
Estate and Trust with gross income of

P20,000
Return is filed by the fiduciary
The ITR shall be filed on or before April

15
C. General Professional Partnership
The income tax return shall be signed

and filed by the principal officer of the
partnership.
The ITR shall be filed on or before April

15
Each GPP shall file in duplicate, a return

of its income (except those income
exempt)
Shall set forth:

a. i t ems of gr os s i nc ome and
deductions allowed;
b. names of partners;
c. TIN; and
d. Address and share of each partner.
D. Corporation
1. Not exempt from income tax; and
2. Exempt from income tax under Sec. 30 of
NIRC but has not shown proof of
exemption.
3. Corporation subject to tax having existed
during the taxable year, whether with
income or not;
4. Corporation in the process of liquidation
or receivership;
5. Insurance company doing business in the
Philippines or deriving income therein;
and
6. Foreign corporation having income from
within the Philippines
How is the return of the Corporation filed?
The return shall be filed by the president,
vice-president or other principal officer, and
shall be sworn to by such officer and by the
treasurer or assistant treasurer.
Substituted Filing
Substituted filing is when the employers
annual return may be considered as the
substitute Income Tax Return (ITR) of employee
inasmuch as the information provided in his
income tax return would exactly be the same
information contained in the employers annual
return.
How Is Substituted Filing Different From
Non-Filing?
Substituted Filing an individual taxpayer

although required under the law to file his
income tax return, will no longer have to
personally file his own income tax return.
But instead the employers annual information
return filed is considered the substitute
income tax return of the employee inasmuch
as the information in the employers return is
exactly the same information contained in the
employees return.
Non-filing applicable to certain types of

individual taxpayers who are not required
under the law to file an income tax return.
E x a mp l e : e mp l o y e e wh o s e p u r e
compensation income does not exceed
P60,000 and has only one employer for the
taxable year and whose tax withheld is
equivalent to his tax due.
Substituted filing of Income tax Returns by
Employees Receiving Purely Compensation
Income [Section 4, R.R. No. 3-2002; RMC 01-03]
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 employee's spouse also complies with all
three (3) conditions stated above;
5. The employer files the annual information
return (BIR Form No. 1604-CF); and
6. The employer issues BIR Form 2316 (Oct 2002
ENCS) version to each employee.
Individuals Not Qualified For Substituted Filing
(Still Required To File):
1. Individuals deriving compensation from two
or more empl oyers concurrentl y 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 (i.e. tax due is
not equal to the tax withheld) resulting to
collectible or refundable return;
3. Empl oyees whose mont hl y gr oss
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.
Note: Non-filing of ITR, for employees who are
qualified for the substituted filing shall be
OPTIONAL for the taxable year 2001, the returns
for which shall be filed on or before April 15, 2002.
Thereafter, substituted filing where applicable
shall be MANDATORY (Sec 5 R.R. No. 3-2002).
Requirement of Banks for Submission of an
ITR for Loan or Credit Card Applications:
Banks may require the submission of BIR Form
No. 1700 (for employees not entitled to substituted
filing of ITR). However, for employees entitled to
substituted filing of ITR, the submission of the
Joint Certification will suffice.
Joint Certification - It is a sworn statement made
by the employer and employee, which serve the
following purposes:
1. It contains the employee's consent that BIR
Form No. 1604CF may be considered his
substituted return, in lieu of BIR Form No.
1700, which the employee no longer filed.
2. It contains the employer's certification that he
has reported the employee's income to the
BIR and that he has remitted the taxes on the
employee's income, as indicated in BIR Form
No. 1604-CF.
3. It serves as proof of financial capacity in case
the employee decides to apply for a bank loan
or a credit card, or for any other purpose, as if
he had in fact filed a BIR Form No. 1700.
Income Taxation
TIME AND PLACE OF FILING
INDIVIDUALS CORPORATION
Where to file
1. Legal residence -
authorized agent
bank; Revenue
District Officer;
Collection agent or
duly authorized
treasurer;
2. Principal place of
business; or
3. Office of the
Commissioner
Non-large taxpayer
authorized agent banks
within its RDO where
enrolled
Large taxpayers
Electronic Filing and
Payment System
(EFPS).
When to File
Purely Compensation
- substituted filing of
tax
Purely trade business
or professional
income
Annual Return
- April 15
Quarterly Return
Q1 April 15
Q2 August 15
Q3 November 15
Capital Gains Tax
Shares of Stock
1. Within 30 days after
each transaction.
2. On or before April
15 for final and
consolidated return.
Real Property
Within 30 days
following each sale or
disposition
Annual Income Tax
Returns (BIR Form 1702 )
on or before the 15th
day of the 4th month
following the close of
the taxable year
Quarterly Income Tax
Returns (BIR Form
1702Q)
within 60 days after
the end of each first
three quarters
Capital Gains Tax
Shares of Stock
1. Within 30 days after
each transaction.
2. On or before April 15
for final and
consolidated return.
Real Property
Within 30 days following
each sale or disposition
MANNER OF PAYMENT
GENERAL RULE: By pay-as-you-file-system,
the income tax shown on the return should be
paid at the time the return is filed.
EXCEPTION: Individuals may in two equal
installments if the income tax due on the annual
return exceeds Two thousand pesos (P2,000).
First Installment At the time the return is filed
Second Installment On or before July 15,
following the close of the calendar year.
Any creditable withholding tax shall be
credited against the tax due, or the first
installment of the tax, if the taxpayer desires
to pay on installment.
Extension of Time to File Return:
The Commissioner may on meritorious cases
grant a reasonable extension of time for filing
income tax return and may subject the imposition
of twenty (20) percent interest per annum from the
original due date.
ELECTRONIC FILING AND PAYMENT SYSTEM
(EFPS) Large taxpayers shall e-file their final
adjustment income tax returns for the calendar/
fiscal year and
Large taxpayers shall e-pay their taxes on or
before the 15
th
day of the fourth month
following the close of the taxable year.
The taxpayer must be enrolled in the EFPS
Electronic signatures of the taxfiler shall be
affixed in the return
The taxpayer that will e-pay shall enroll with
any authorized agent bank where he intends
to pay
Who is a large taxpayer? (As amended by R.R.
10-2007)
A taxpayer who satisfies any of the following
criteria
Value Added Tax Business establishment
with VAT paid or payable of at least One
hundred thousand pesos (P100,000) for any
quarter of the preceding taxable year.
Excise Tax Business establishment with the
excise tax paid or payable of at least One
million pesos (P1,000,000) for the preceding
taxable year.
Cor por at e I ncome Tax Busi ness
establishment with the annual income tax paid
or payable of at least One million pesos
(P1,000,000) for the preceding taxable year.
Withholding Tax Business establishment
with a withholding tax payment or remittance
of at least One million pesos (P1,000,000).
corporations with paid-up capital stock of Ten
Million Pesos (P10,000,000.00) and above;
Corporations with complete computerized
system; and
All government bidders pursuant to Executive
Order No. 398 as implemented by R.R.
3-2005. It should be emphasized, however,
that non-stock non-profit corporations are
excl uded f r om t he cover age of t hi s
regulations.
REPORTORIAL REQUIREMENTS (R.R. No.
21-2002)
Financial statements shall be composed of the
balance sheet, income statement, statement of
retained earnings, statement in changes in
financial position, and schedules attached to the
aforementioned statements. Submission of the
mentioned statements is mandatory even if there
is no income, retained earnings, etc.
All financial statements filed with accompanying
auditors certificate shall show the comparative
figures of the current year and the previous year.
Thus, financial statements with no required
auditors certificate need not be presented in
comparative format.
The independent CPA who audited the records
and certified the FS of taxpayer, equally as
taxpayer, has the responsibility to maintain and
preserve copies of audited and certified Financial
Statements for a period of 3 years from due
date of filing the annual ITR or the actual date
of filing, whichever comes later.
Taxpayers are hereby mandated to maintain
books and records that would reflect the
reconciling items between Financial Statements
figures and/or data with those reflected/presented
in the filed Income Tax Return (ITR). The
recording and presentation of the reconciling
items in such books and records shall be done in
such a manner that woul d faci l i tate the
understanding by the examiners/auditors of the
Bureau of Internal Revenue tasked to undertake
audit/investigation functions, providing in sufficient
detail the computation of the differences and the
reasons therefore ai med at bri ngi ng i nto
agreement the International Financial Reporting
Standards (IFRS) and ITR figures (RR No. 8-2007).
Return of Corporations Contemplating Dissolution/
Reorganization
Every corporation shall, within thirty (30) days
after the adoption by the corporation of a
resolution or plan for its dissolution, or for the
liquidation of the whole or any part of its capital
stock, including a corporation which has been
notified of possible involuntary dissolution by the
Securities and Exchange Commission, or for its
reorganization, render a correct return to the
Commissioner, verified under oath, setting forth
the terms of such resolution or plan and such
other information as the Secretary of Finance,
upon recommendation of the commissioner, shall,
by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall,
prior to the issuance by the
Securities and Exchange Commission of the
Certificate of Dissolution or Reorganization, as
may be defined by rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of
Internal Revenue which certificate shall be
submitted to the Securities and Exchange
Commission.
DEADLINES FOR FILING AND PAYMENT
Remittance Of Final Income Taxes Withheld On
Fringe Benefits Paid To Employees Other Than
Rank And File.
Filing Via EFPS
On or before the fifteenth (15th) day of the month
following the end of the calendar quarter in which
the fringe benefits were granted to the recipient.
Manual Filing
On or before the tenth (10th) day of the month
following the end of the calendar quarter in which
the fringe benefits were granted to the recipient.
Monthly Remittance of Taxes Withheld on
Compensation
Filing via EFPS
Group A - Fifteen (15) days following end of the
month
Group B - Fourteen (14) days following end of the
month
Group C - Thirteen (13) days following end of the
month
Group D - Twelve (12) days following end of the
month
Group E - Eleven (11) days following end of the
month
Except for taxes withheld for the month of
December which shall be filed on or before
January 20th of the succeeding year
Manual Filing
following the month the withholding was made,
except for taxes withheld for the month of
January 15 of the succeeding year
Monthly Remittance of Income Taxes Withheld
(Expanded) [Except for Transactions Involving
Onerous Transfer of Real Property Classified
as Ordinary Asset]
Filing via EFPS
month
month
month
month
month
Income Taxation
January 20th of the succeeding year
Manual Filing
Monthly Remittance of Final Income Taxes
Withheld
Monthly Remittance Of Final Income Taxes
Withheld On Interest Paid And Yield On
Deposit Substitutes Trust, Etc.
Filing via EFPS
month
month
month
month
month
Manual Filing
Annual Information on Income Taxes Withheld
On Compensation and Final Withholding Taxes
On or before January 31 of the year following the
calendar year in which the compensation payment
and other income payments subjected to final
withholding taxes were paid or accrued.
Annual Information on Creditable Income
Taxes Withheld (Expanded)/Income Payments
Exempt From Withholding Tax
On or before March 1 of the year following the
calendar year in which the income payments
subjected to expanded withholding taxes or
exempt from withholding tax were paid.
Annexes to Income Tax
Annexes to Income Tax
Republic Act No. 9257
Expanded Senior Citizens Act of 2003
(With R.R. No. 4-2006, December 2, 2005; R.R. No. 1-2007, December 4, 2006)
Who is a senior citizen or elderly?
" any resident citizen of the Philippines
" at least sixty (60) years old
Is a senior citizen required to pay income tax?
A senior citizen is exempted from the payment of
individual income taxes; Provided, that their
annual taxable income does not exceed the
poverty level as determined by the National
Economic and Development Authority (NEDA) for
that year
Annual Taxable Income of a resident senior
citizen shall refer to the annual gross
compensation, business and other income
received by a resident senior citizen during each
taxable year from all sources as defined in Section
31 of the Tax Code.
Availment of Income Tax Exemption
1. He must be qualified as such by the
Commissioner or RDO of the place of his
residence
2. File an Annual Information Return indicating
that his annual taxable income does not
exceed the poverty level as determined by the
NEDA.
3. If qualified, his name shall be recorded by the
RDO in MASTER LIST OF TAX EXEMPT
SENIOR CITIZENS.
NOTE: A senior citizen who is a compensation
income earner subject to a withholding tax and
whose annual taxable income exceeds the
poverty level is also entitled to substituted filing
under R.R. No. 2-98 as amended.
TAX LIABILITIES
1. Income Tax if the annual taxable income
exceeds the poverty level.
2. Final tax on passive income (same rules with
resident citizens).
3. Capital gains tax same rules with resident
citizens).
4. VAT
5. Self-employed, or engaged in business, or
practice of profession
6. Gross annual sales or receipts exceeds P1,
500,000 or the adjusted amount under section
109 (1) V of the Tax code.
7. 3% Percentage tax if not subject to VAT.
8. Donors Tax
9. Estate Tax
10. Excise Tax on certain goods
11. Documentary stamp tax
Availment of the Head of the Family Status by
Benefactors
Who is a Benefactor?
Any person whether related to the senior citizens
or not who takes care of him/her as a dependent;
Requisites:
1. The senior citizen whose annual taxable
income does not exceed the poverty level
must be dependent upon the benefactor for
his chief support.
2. Regi st ered by t he benef act or as hi s
dependent and himself/herself as benefactor.
3. Benefactor entitled only to P25,000 basic
personal exemptions.
4. In the ITR, the benefactor must indicate the
name, birthday and OSCA ID Number of the
senior citizen.
How is a senior citizen treated under the tax
law?
The senior citizen shall be treated as dependents
provided for in the National Internal Revenue
Code, as amended, and as such, individual
taxpayers caring for them, be they relatives or not
shall be accorded the privileges granted by the
Code i nsof ar as havi ng dependent s are
concerned.
Is the discount granted by establishments to
senior citizens deductible?
YES. The establishment may claim the discounts
granted as tax deduction based on the net cost of
the goods sold or services rendered;
Requisites:
a. Only portion of gross sales exclusively used,
consumed or enjoyed by the senior citizen
shall be eligible for the deductible sales
discounts.
b. Gross selling price and sales discount must
be separately indicated in the official receipt
or sales invoice issued by the establishment
for the sale of goods or services to the senior
citizen
c. Only the actual amount of the discount
granted or a sales discount not exceeding
20% of the gross selling price can be
deducted from the gross income, net of value
added tax, if applicable, for income tax
purposes, and from gross sales or gross
receipts of the business enterprise concerned,
for VAT or other percentage tax purposes.
d. The discount can only be allowed as
deduction from gross income for same
taxable year that the discount is granted.
e. The business establishment giving the sales
discounts to qualified senior citizen is required
to keep separate and accurate record of
sales, which shall include the name of the
senior citizen, OSCA ID, gross sales/receipts,
sales discounts granted, dates of transactions
and invoice number for every sale transaction
to senior citizen.
f. Only selected establishments mentioned in
R.R. No. 4-2006 may claim the said discount
granted as deduction from gross income.
Establishments which can claim the discounts
granted as deductions
1. Hotels and similar lodging establishments.
2. Restaurants
3. Recreation centers
4. Theaters, cinema houses, concert halls,
circuses, carnivals and other similar places of
culture, leisure and amusement.
5. Drug stores, hospital pharmacies, medical
and optical clinics and similar establishments
dispensing medicines.
6. Medical and dental services in private
facilities.
7. Domest i c ai r and sea t ransport at i on
companies.
8. Public land transportation utilities.
9. Funeral parlors and similar establishments.
Are the salaries and wages paid to senior
citizen-employees deductible?
YES. Private entities that will employ senior
citizens as employees upon effectivity of this Act
shall be entitled to an additional deduction from
their gross income, equivalent to fifteen percent
(15%) of the total amount paid as salaries and
Income Taxation
wages to senior citizens subject to the provision of
Section 34 of the National Internal Revenue Code,
as amended:
Conditions
1. That such employment shall continue for a
period of at least six (6) months
2. The annual income of a senior citizen does
not exceed the poverty level as determined by
the National Economic and Development
Authority (NEDA) for that year.
3. In addition, expenses otherwise deductible
may be allowed as a deduction only if the tax
required to be deducted and withheld
therefrom has been paid to the BIR.
REALTY TAX HOLIDAY
Indi vi dual s or non-government i nsti tuti ons
establishing homes, residential communities or
retirement villages solely for the senior citizens
shall be accorded the following:
1. Realty tax holiday for the first five (5) years
starting from the first year of operation;
2. Priority in the building and/or maintenance of
the provincial or municipal roads leading to
the aforesaid home, residential community or
retirement village.
Republic Act No. 9480
An Act Enhancing The Revenue Administration and Collection by
Granting an Amnesty on All Unpaid Internal Revenue Taxes
Imposed by The National Government for Taxable Year 2005 and
Prior Years
(With Department Order No. 29-07; RMC No. 55-2007, August 8, 2007; RMC No.
69-2007, November 5, 2007;RMC No. 90-2007, December 3, 2007; RMC No.
19-2008, February 22, 2008)
COVERAGE
Taxes Covered
All national internal revenue taxes for the taxable
year 2005 and prior years, with or without
assessments duly issued therefore, that have
remained unpaid as of December 31, 2005.
1. income tax
2. estate tax
3. donors tax
4. capital gains tax
5. value added tax
6. other percentage taxes
7. excise taxes
8. documentary stamp taxes
NOTE: In case of donors tax and capital gains
tax, only cases that have underdeclarations/
undervaluations and were already issued with
Certificate Authorizing Registration (CAR) by the
BIR are covered.
Taxes NOT Covered
1. Withholding taxes and
2. Taxes passed-on and already collected from
the customers for remittance to the BIR
To Whom Available
1. Individuals, whether resident or nonresident
citizens, or resident or nonresident aliens;
2. Estates and trusts;
3. Corporations;
4. Cooperatives and tax exempt entities that
have become taxable as of December 31,
2005; and
5. Other juridical entities including partnerships.
NOTE: An individual taxpayer in his/her own
capacity shall be treated as a different taxpayer
when he acts as administrator/executor of the
estate of a deceased taxpayer.
To Whom NOT Available
1. Withholding agents with respect to their
withholding tax liabilities;
2. Those with pending cases
a) Under the jurisdiction of the PCGG
b) Involving violations of the Anti-Graft and
Corrupt Practices Act
c) Involving violations of the Anti-Money
Laundering Law
d) For tax evasion and other criminal
offenses under the NIRC and/or the RPC
3. Issues and cases which were ruled by any
court (even without finality) in favor of the BIR
prior to amnesty availment of the taxpayer.
(e.g. Taxpayers who have failed to observe or
follow BOI and/or PEZA rules on entitlement
to Income Tax Holiday Incentives and other
incentives).
4. Cases involving issues ruled with finality by
the Supreme Court prior to the effectivity of
R.A. No. 9480 (e.g. DST on Special Savings
Account)
5. Taxes passed-on and col l ect ed f rom
customers for remittance to the BIR.
6. Delinquent Accounts/Accounts Receivable
considered as assets of the BIR/Government,
including self-assessed tax.
Are cases subject of criminal complaint filed
with the DOJ still covered by the Tax
Amnesty?
YES, except cases filed under the RUN AFTER
TAX EVADER (RATE) Program of the BIR and
other cases involving tax evasion initiated and
instituted with the approval of the Commissioner
of I nt er nal Revenue or hi s aut hor i zed
representatives, pursuant to Section 220 of the
National Internal Revenue Code of 1997, as
amended.
In case of estate under administration, who is
the person liable to avail of the tax amnesty?
In case of estate under administration, the one
that should avail of the tax amnesty for the estate
is the administrator/executor of the estate, in
representation of the estate.
In case of estate not under administration,
who is the person liable to avail of the tax
amnesty?
In case of estate not under administration, the
persons liable to avail of the tax amnesty shall be
the estate and the heirs.
AVAILMENT AND PAYMENT OF AMNESTY
How to Avail Tax Amnesty
Accomplish three (3) copies of the required forms
and submit the same to the BIR
Proceed to the Authorized Agent Bank (AAB) and

pay the Amnesty Tax using the Payment Form (BIR
Form NO. 0617).
File the Tax Amnesty Return, Notice of Availment and

SALN with either the AAB or RDO
Forms to be submitted are:
" Notice of Availment of Tax Amnesty
" Statement of Assets, Liabilities and Networth
(SALN)
" Tax Amnesty Return (BIR Form No. 2116)
" Payment Form (BIR Form No. 0617)
Forms may be photocopied. Two (2) copies shall
be filed with the BIR, one (1) copy shall remain
with the taxpayer.
NOTE: An individual taxpayer, seeking to avail of
the tax amnesty and who at the same time is an
executor or administrator of the estate of a
deceased taxpayer who would also like to avail of
the tax amnesty, shall file two (2) separate
amnesty tax returns, one for himself as a taxpayer
and the other in his capacity as executor or
administrator of the estate of the decedent with
respect to the revenue and other income earned
or received by the estate.
When and Where to File and Pay
When: The return, SALN and the payment of the
amnesty tax for those availing themselves of the
tax amnesty shall be made within six months
starting from the effectivity of the IRR.
Note: Under RMC 29-2008 and Department Order
No. 11-08, it is clarified that the last day of availing
benefits under R.A. No. 9480, otherwise known as
Tax Amnesty Act of 2007, shall be 6 months from
November 7, 2007 or on May 5, 2008. Effectivity
of DOF Department Order 29-07 commenced on
November 7, 2007.
Where:
Residents
Revenue District Officer (RDO)/Large Taxpayer
District Office of the BIR which has jurisdiction
over the legal residence or principal place of
business of the taxpayer, as the case may be.
Non-residents
Commissioner of the BIR, or with any RDO.
Duties of the Revenue District Officer
1. The Revenue District Officer shall issue an
acceptance of payment form authorizing an
authorized agent bank, or in the absence
thereof, the collection agent or municipal
treasurer concerned, to accept the amnesty
tax payment.
2. At the option of the taxpayer, the RDO may
assist the taxpayer in accomplishing the forms
and computing the taxable base and the
amnesty tax payable, but may not look into,
question or examine the veracity of the entries
contained in the Tax Amnesty Return,
Statement of Assets, Liabilities and Networth,
or such other documents submitted by the
taxpayer.
Full Compliance
The Acceptance of Payment Form, the Notice of
Availment, the SALN, and the Tax Amnesty Return
shall be submitted to the RDO, which shall be
received only after complete payment. The
completion of these requirements shall be
deemed full compliance with the provisions of R.A.
No. 9480.
Tax Amnesty Rates
1. Tax amnesty rate of five percent (5%) based
on:
" NETWORTH as of December 31, 2005,
as declared in the SALN as of the said
Income Taxation
period by qualified taxpayers who have
no previously filed statements of
assets and liabilities/balance sheet as
of December 31, 2005,
" RESULTING INCREASE IN NETWORTH
by amending such previously filed
statements to include undeclared assets
and/or liabilities by qualified taxpayers
who have filed with BIRs authorized
agents their SALN/balance sheet
together with their income tax returns
for taxable year 2005.
" TOTAL DECLARED NETWORTH as of
December 31, 2005 by taxpayers who
have previously filed their SALN as of
December 31, 2005 and have no
additional assets to declare, but still
wish to avail of the tax amnesty
OR
2. The absolute minimum amnesty payment,
whichever is higher, in accordance with the
following schedule:
ENTITIES RATES
INDIVIDUALS
Citizens, resident or
nonresident aliens,
Trusts and Estates
5% or P50,000.00
whichever is higher
CORPORATIONS
Subscribed capital of
above P50 Million
5% or P500,000.00
whichever is higher
Subscribed capital
of above P20 Million up
to P50 Million
5% or P250,000.00
whichever is higher
Subscribed capital of
P5 Million to P20 Million
5% or P100,000.00
whichever is higher
With subscribed capital
of below P5 Million
5% of P25,000.00
whichever is higher
OTHERS
Other juridical entities
including, but not limited
to, cooperatives and
foundations, that have
become taxable as of
December 31, 2005
5% or P50,000.00
whichever is higher
Taxpayers who filed
their balance sheet/
SALN, together with
their income tax returns
for 2005, and who
desire to avail of the tax
amnesty under this act
shall amend such
previously filed
statements by including
still undeclared assets
and/or liabilities
5% based on
resulting increase
in networth or the
minimum absolute
amounts of
amnesty tax
prescribed above,
whichever is higher.
For taxpayers who had been filing their correct
networth and have no additional asset to
declare further, but would like to participate in
the amnesty program, will they be allowed to
do so?
In cases where the taxpayer decides to avail but
does not declare additional assets or decides that
he/it should not make any amendments of his/its
networth as December 31, 2005, he/it can avail of
the amnesty program by paying five percent (5%)
of the total declared networth as of Balance Sheet
date in 2005 or the prescribed minimum absolute
amount, whichever is higher.
STATEMENT OF ASSETS, LIABILITIES AND
NETWORTH
What to Declare in the SALN
1. Assets within or without the Philippines,
whether real or personal , tangi bl e or
intangible, whether or not used in trade or
business
" Property other than the money shall be
valued at the cost at which the property
was acquired
" Foreign currency assets and/or securities
shall be valued at the rate of exchange
prevailing as of the date of the SALN;
2. All existing liabilities which are legitimate and
enforceable, secured and unsecured, whether
or not incurred in trade or business; and
3. The networth of the taxpayer, which shall be
the difference between the total assets and
total liabilities.
Presumption of Correctness of the SALN
The SALN as of December 31, 2005 shall be
considered as true and correct.
Exceptions:
1. Where the amount of declared networth is
understated to the extent of thirty percent
(30%) or more as may be established in
proceedings within one (1)-year following the
date of filing of the Tax Amnesty Return and
the SALN, by, or at the instance of parties
other than the BIR or its agents.
2. When f i ndi ngs of or admi s s i on i n
congressional hearings or proceedings in
administrative agencies of the government,
and in courts, prove that there is at least thirty
percent (30%) underdeclaration.
In lieu of the SALN, can taxpayers be allowed
to file a Balance Sheet for purposes of tax
amnesty availment?
While the Balance Sheet may be equivalent to the
SALN, the regulations have prescribed a specific
SALN format to be filled-up and submitted for
purposes of availment. Thus, in the availment of
the tax amnesty, the Balance Sheet should be
converted to the SALN format as provided by the
BIR in the SALN form.
May husband and wife be allowed to submit
only one SALN? Would they be separately
liable for the minimum amount of amnesty tax
if they avail of the amnesty?
No. They have to submit two separate SALNs
reflecting their exclusive properties and liabilities
as well as their respective shares in the conjugal
properties and liabilities.
Will individuals engaged in business submit
two SALNs - one strictly for business-related
assets/liabilities/networth and another one for
non-busi ness rel ated assets/ l i abi l i ti es/
networth?
An individual taxpayer/availer shall submit only
one SALN or Balance Sheet presenting the assets
and liabilities and networth into two major groups
which are those that are classified as business-
related and those that are non-business related.
In the case of a representative office in the
Philippines of a foreign corporation which is
only required to file audited statements of
receipts and disbursements, what would be
the content of the SALN to be filed?
The resident foreign corporation shall report
assets and liabilities and networth related to the
business in the Philippines and the amnesty tax
shall be the 5% of the total declared Philippine
networth or 5% of the resulting increase in
Philippine networth, whichever is applicable, or
the minimum absolute amount, whichever is
higher.
What would be used as basis in determining
the minimum amnesty payment of a local
branch of a foreign corporation where the
subscribed capital stock is not determinable
for this purpose?
The basis of the 5% shall be the networth or
increase in networth of the branch located in the
Philippines, whichever is applicable, and the
amnesty tax payable is whichever is higher
between the resulting product therefrom and the
minimum absolute amount prescribed by the Tax
Amnesty Law where the subscribed capital refers
to the assigned capital in the Philippine Branch
lodged in the account Due to Head Office.
IMMUNITIES AND PRIVILEGES
1. The taxpayer shall be immune from the
payment of taxes as well as additions thereto,
and the appurtenant civil, criminal or
administrative penalties under the National
Internal Revenue Code of 1997, as amended,
arising from the failure to pay any and all
internal revenue taxes for taxable year 2005
and prior years.
2. The taxpayers Tax Amnesty Return and the
SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that
pertain to taxable year 2005 and prior years,
insofar as such proceedings relate to internal
revenue taxes, before judicial, quasi-judicial
or administrative bodies in which he is a
defendant or respondent, and except for the
purpose of ascertai ni ng the networth
beginning January 1, 2006, the same shall not
be examined, inquired or look into by any
person or government office. However, the
taxpayer may use this as a defense,
whenever appropriate, in cases brought
against him.
3. The books of accounts and other records of
the taxpayer for the years covered by the tax
amnesty availed of shall not be examined:
Provided, That the Commissioner of Internal
Revenue may authorize in writing the
examination of the said books of accounts
and other records to verify the validity or
correctness of a claim for any tax refund, tax
credit (other than refund or credit of taxes
withheld on wages), tax incentives, and/or
exemptions under existing laws.
Immunities and Privileges NOT available
a) Where the person failed to file a SALN and
the Tax Amnesty Return, or
b) Where the amount of networth as of
December 31, 2005 i s proven to be
understated to the extent of thirty percent
(30%) or more.
OFFENSES AND PENALTIES
Penalties
1. Any person who, having filed a statement or
Tax Amnesty Return under this Act, willfully
understates his networth to the extent of thirty
percent (30%) or more shall, upon conviction,
be subject to the penalties of perjury under
the Revised Penal Code.
2. The willful failure to declare any property in
the statement and/or in the Tax Amnesty
Return shall be deemed a prima facie
evidence of fraud and shall constitute a
ground upon which attachment of such
property may be issued in favor of the BIR to
answer for the satisfaction of any judgment
that may be acquired against the declarant.
3. In addition to the penalties provided in
paragraphs (1) and (2) above, immediate tax
fraud investigation shall be conducted to
collect all taxes due, including increments,
and to criminally prosecute those found to
have willfully evaded lawful taxes due.
4. In the case of associations, partnerships, or
corporations, the penalty shall be imposed on
the partner, president, general manager,
Income Taxation
branch manager, treasurer, officer-in-charge
and employees responsible for the violation.
5. Any person who makes an unl awf ul
divulgence of the Tax Amnesty Return or the
SALN shall be penalized by a fine of not less
than Fifty thousand pesos (P50,000.00) and
imprisonment of not less than six years but
not more than ten (10) years.
6. If the offender is an officer or employee of the
BIR or any government entity, he/she shall
likewise suffer an additional penalty of
perpetual disqualification to hold public office,
to vote and to participate in any public
election.
Unlawful Divulgence of Tax Amnesty Return
and Statement of Assets, Liabilities and
Networth
Gen. Rule: It shall be unlawful for any person
having knowledge of the Tax Amnesty Return and
SALN filed pursuant hereto, to disclose any
information relative to such declaration and
statement, and any violation hereof shall subject
the offender to the penalties under this Act:
Exceptions:
1. The Commissioner of Internal Revenue may
disclose the content of the Tax Amnesty
Return and SALN upon the request of
Congress pursuant to and in accordance with:
" In aid of legislation [Sec.20 (A), NIRC].
" Congressional Oversight Committee (Sec.
290, NIRC)
2. Publication of list of taxpayers and filers by
the Commissioner.
Tax Rates for Individuals
GENERAL CATEGORIES
CITIZENS ALIENS
RESIDENTS NON-RESIDENTS RESIDENTS NRAEBT NRANEBT
SOURCES OF INCOME
WITHIN and
WITHOUT
THE PHILS.
WITHIN THE
PHILIPPINES
WITHIN THE
PHILS.
WITHIN
THE PHILS
WITHIN THE
PHILIPPINES
NATURE OF INCOME TAXABLE BASE/ TAX RATE
Compensation, Business,
Trade, Profession (including
casual gains, profits, income,
and capital gains, prizes of
P10,000 or less). Does not
include those income subject
to final tax and/or special tax
treatment
Taxable Income
(Gross Income less Allowable Deductions)
5% - 34% (1998)
- 33% (1999)
- 32% (2000 onwards)
(Normal Tax Rate)
Gross Income
(Entire income,
no deductions)
(All sources
within the Phil.)
25%
Interest from any currency

bank deposit and yield or
any other monetary benefit
from deposit substitute and
from trust funds and similar
arrangements,
Royalties (other than from

books, literary works and
musical compositions)
Prizes (except amounting

to P10,000 or less) and
other winnings
Gross Income (within) 20% Final Withholding Tax (FWT)
Royalties on books, as well
as other literary works and
musical composition
Gross Income (within) 10% FWT
Interest income from
depository bank under the
expanded foreign currency
deposit system (FCDS)
Gross income
(within) 7.5%
FWT (Exchange
Rate to be used
shall be the
opening rate on
remittance day)
Any income from
transaction with
depositary banks
under the
expanded FCDS
or OBU Exempt
[Sec. 27(D)(3)] [Sec.
28(A)(4)]
Gross
Income
(within)
7.5% FWT
Any income from transactions
with depository bank under the
expanded FCDS or ODU
Exempt [Sec.(27)D(3)] [Sec.
28(A)(4)]
GENERAL CATEGORIES
CITIZENS ALIENS
Interest income from long-
term deposit or deposit in the
form of savings, common or
individual trust funds, deposit
substitute investment
management accounts in
denomination of P10, 000 or
as prescribed by the BSP.
Interest on long term deposit - Exempt
In case of Pretermination:
Number of years lapsed before pretermination:
Holding Period
4 yrs. to less than 5 yrs. - 5%
3 yrs. to less than 4 yrs. - 12%
Less than 3 yrs. - 20%
Gross Income
(Entire income,
no deductions)
(All sources within
the Phil.) 25%
CASH AND/OR PROPERTY
DIVIDENDS ACTUALLY OR
CONSTRUCTIVELY RECEIVED
from a domestic corp.;
from a joint stock company,

insurance or mutual fund
companies;
on the share of an
individual in the
distributable net income
after tax of a taxable
partnership; or
On the share on the net

income after tax of an
association, joint account,
or a joint venture or
consortium taxable as a
corporation.
Gross income (within)
Final Withholding Tax Year
6% - 1998
8% - 1999
10% - 2000 onwards
(Tax on dividends shall apply on income earned
on or after Jan. 1, 1998. Sec. 73(c) provides that
dividends distributed are deemed made from
most recently accumulated profits)
Gross
Income
(within) 20%
FWT
Capital gains on sale of
shares of stock not traded in
a domestic stock exchange
Net capital gains (within)
Not over P100,000 5% Final Tax
Amount in Excess of P100,000 10% Final Tax
Capital gains on shares of
stocks of Foreign
Corporation with principal
place of business outside
Philippines
Taxable on the
normal tax rate
Not taxable Not taxable
Dividends from Foreign
Corporation
Taxable, provided the following requisites are present:
(1) More than 50% of the Gross Income of the foreign corporation was derived
from sources within the Philippines;
(2) The coverage for the determination of the income was for the three-year
period ending with the close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the corporation has been in
existence).
Taxable only in the amount which bears the ratio to the dividends as the gross
income of the corporation for such period derived from sources within the
Philippines bears to gross income from all sources.
Capital gains from sale or
other disposition of real
property located in the
Philippines
1. 6% Final Tax on the Gross Selling Price or FMV whichever is higher
2. If sold to the government or any of its political subdivision or agencies or to
GOCC, 6% Final Tax or Normal Tax Rate, at the option of taxpayer.
3. If proceeds is from disposition of principal residence and is fully utilized in
acquiring or constructing a new principal residence within 18 months from the
date of disposition, (date of notarization) the capital gain is exempt from the
capital gains tax subject to the following conditions.
a. Historical cost or adjusted basis of property sold is carried over to the new
principal residence;
b. The commissioner is notified within 30 days from the date of disposition of
the taxpayers intention to avail of the tax exemption;
c. Tax exemption can only be availed of once every 10 years; and
d. Unutilized portions of the proceeds are subject to capital gains tax to be
computed proportionately. The tax on the unutilized portion shall be paid
within 30 days after the expiration of the 18-month period.
Note: Aliens are not allowed to own real property subject to exceptions ( see
income tax topic as discussed )
Cinematographic film and
similar works
Individual Normal Tax Rate shall apply
Gross Income
(within) 25%
Gross Income
(within) 25%
Income Taxation
GENERAL CATEGORIES
CITIZENS ALIENS
Proprietary educational
institution/ Hospital
Individual Normal Tax Rate shall apply N.A.
Fringe Benefit
Grossed up monetary value of
fringe benefit furnished or granted to
the employee (except rank and file)
Tax Rate Grossed Up
Divisor Year
34% FWT 66% 1998
33% FWT 67% 1999
32% FWT 68% 2000
onwards
In the case of aliens, the tax rates to be
applied on fringe benefit shall be as follows:
1. NRANEBT 25%
2. Aliens employed by regional HO 15 %
3. Aliens employed by OBU 15%
4. Aliens employed by Petroleum Service
5. Contractors and Subcontractors
NOTE:
Gross up divisor is the difference between

100% and the applicable rates.
In general, a non-resident alien individual

who shall come to the Philippines and
stay therein for an aggregate period of
more than one hundred eighty days
during any calendar year shall be deemed
as non-resident alien doing business in
the Philippines. Exceptions are the
following: (a) Alien Individuals Employed
by Regional or Area Headquarters and
Regional Operating Headquarters of
Multinational Companies; (b) Alien
Individuals Employed by Offshore Banking
Units; and (c) Alien Individuals employed
by Petroleum Service Contractor and
Subcontractor.
Tax Rates for Corporations
GENERAL
CATEGORIES
DOMESTIC CORPORATIONS
FOREIGN CORPORATIONS
RESIDENT
FOREIGN
CORPORATIONS
NON-RESIDENT
CORPORATIONS
In general, including GOCCs, agencies or
instrumentalities (EXCEPT GSIS, SSS, PHIC, AND
PCSO) engaged in a similar business, industry or
activity. PAGCOR is no longer exempt (R.A. 9337).
(Existing under the
laws of the foreign
country, engaged in
trade or business
within the
Philippines)
(Not engaged in
trade or business
in the Philippines)
SOURCES OF INCOME ALL SOURCES WITHIN THE PHILS. WITHIN THE PHILS.
NATURE OF INCOME TAXABLE BASE/RATE
In General
TAX INCOME
35% (Normal Domestic Rate)
34% - 1998
33% - 1999
32% - 2000- July 1, 2005
{ 35%- November 1, 2005 - Dec 31, 2008
{ 30%- January 1, 2009 onwards
A.Transition Period
1. For Corporations adopting the fiscal year
accounting period, income and expenses shall be
deemed to have been earned and spent equally
for each month of the period.
2. Taxable Income x No. of Mos. Covered x Tax
12 Mos. by the tax rate rate
B.Government or its Political Subdivision
Income derived from any public utility or from the
exercise of any essential government function
accruing to the Government of the Phil. or to any
political subdivision thereof is excluded from gross
income [Sec. 32(B)(7)(b)]
TAXABLE INCOME
Same as Normal
Domestic Rate
GROSS INCOME
Same as Normal
Domestic Rate
GENERAL CATEGORIES DOMESTIC CORPORATIONS
FOREIGN CORPORATIONS
RESIDENT
FOREIGN
CORPORATIO
NS
NON-RESIDENT
CORPORATIONS
Optional Corporate Tax GROSS INCOME - 15% N.A.
Interest on currency bank deposit
and yield or any other monetary
benefit from deposit substitutes
and from trust funds and similar
arrangements royalties
Gross Income ( within ) 20% FWT
Interest Income on foreign
loans contracted on or after
Aug. 1, 1986 (20% FWT)
Income derived under the
expanded FCDS
1. Gross interest income derived by a domestic
corporation and a resident foreign corporation
from a depositary bank 7.5% FWT.
2. Income derived by a depository bank from
foreign currency transactions with local
commercial banks including branches of
foreign banks, other depositary banks, and
residents 10% Final Tax.
Any income from
transaction with depository
banks under FCDS shall be
exempt from income tax
Inter-corporate dividends and
income from a taxable partnership
Dividends received by a
domestic corporation from
another domestic corporation
shall not be subject to tax.
Dividends
received from a
domestic
corporation not
subject to tax.
Dividend received from a
domestic corp.
15% FWT, Provided foreign
law allows taxpayer clause,
otherwise it will be subject
to the normal domestic rate
Capital Gains from the sale of
shares of stocks not traded in the
local stock exchange.
Net Capital Gain
Not over P100,000 5%
Excess of P100,000 10%
Capital Gains Realized from the
Disposition of Land and/or
Buildings
Gross Selling Price or FMV whatever is higher 6% Final Tax
Minimum Corporate Income Tax
(MCIT) Please refer to Table C
Gross Income 2% MCIT N.A.
Improperly Accumulated Earnings
(IAE) Tax. Please refer to Table C
Improperly Accumulated Taxable
Income 10% tax (in addition to
other income taxes)
N.A.
Comparative Table on MCIT, IAET and NOLCO
TYPE OF TAX/
DEDUCTIONS
MINIMUM CORPORATE INCOME
TAX (MCIT)
IMPROPERLY
ACCUMULATED
EARNINGS TAX
(IAET)
Net Operating Loss Carry-
Over
Characteristics
Imposed upon any domestic
corporation beginning the fourth
taxable year immediately following the
taxable year in which the corporation
commenced its business registration.
Imposed whenever such
corporation has zero or negative
taxable income or whenever the
amount of MCIT is greater than the
normal income tax due from such
corporation
(in lieu or corporate income tax)
MCIT shall apply on operations
covered by the regular income tax
system
The computation and the payment
of MCIT shall likewise apply at the
time of filing the quarterly corporate
income tax as prescribed under
Section 75 and Section 77 of the Tax
Code, as amended. (R.R. No. 12-2007)
A tax equal to 10% of
the improperly
accumulated taxable
income of
corporations formed
or availed of for the
purpose of avoiding
the income tax with
respect to its
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.
(added to other taxes
imposed upon the
corporation)
NOLCO shall be carried over as
a deduction from gross income
for the next 3 consecutive
taxable years immediately
following the year of such loss;
Provided however, that any net
loss incurred in a taxable year
during which the taxpayer was
exempt from income tax shall
not be allowed as a deduction;
Provided further, that NOLCO
shall not be allowed as a
deduction if there has been a
substantial change in the
ownership of the business or
enterprise, such that:
25% or more change is
substantial;
24% or less non-substantial.
Income Taxation
TYPE OF
TAX/
DEDUCTIONS
TAX (MCIT)
IMPROPERLY
ACCUMULATED
EARNINGS TAX (IAET)
Net Operating Loss Carry-Over
Tax Base
2% of the Gross Income
Gross Income means gross sales
less sales returns, discounts and
allowances and cost of goods
sold.
Gross sales shall include only
sales contributory to income
taxable.
Cost of Goods Sold shall include
all business expenses directly
incurred to produce the
merchandise to bring them to their
present location and use.
Cost of Goods Manufactured
means all costs of production of
finished goods, such as raw
materials used direct labor and
manufacturing overhead, freight
cost, insurance premiums and
other costs incurred to bring the
raw materials to the factory or
warehouse.
Cost of services means all direct
costs and expenses necessarily
incurred to provide the services
required by the customers and
clients including:
a. salaries and employee benefits
of personnel, consultants and
specialists directly rendering
the service; and
b. the cost of facilities directly
utilized in providing the service
such as depreciation or rental
of equipment used and cost of
supplies;
Provided however, that cost of
services shall not include
interest expense except in the
case of banks and other
financial institutions.
TAXABLE INCOME
Additions:
Income exempt from Tax
Income excluded from
Gross Income
Income subject to final
Tax
Amount of NOLCO
deducted
Deductions:
Income tax paid/payable
for the taxable year
Dividends actually or
constructively paid/issued
from the applicable years
taxable income
Amount reserved for the
reasonable needs of the
business
Net operating loss of the
business or enterprise which had
not been previously offset as
deduction from Gross Income
Applicability
Domestic Corporations
Resident Foreign Corporation

subject to normal incorporate
income tax
as defined under the Tax
Code classified as
closely-held corporations.
Closely-held
corporations are those
corporations at least 50%
in value of the
outstanding capital stock
or 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.
not falling under the
definition are publicly-
held corporations.
Those subject to normal Income
Tax
TYPE OF
TAX/
DEDUCTIONS
TAX (MCIT)
IMPROPERLY
ACCUMULATED
EARNINGS TAX (IAET)
Net Operating Loss Carry-Over
Exceptions
MCIT shall not be imposed upon
the following:
1. Domestic Corporations
operating as proprietary
educational institutions subject
to 10% on their taxable
income;
2. Domestic Corporations
engaged in Hospital
Operations which are non
profit subject to 10% on their
taxable income
3. FCDUs subject to final income
tax of 10%
4. Firms under special income
tax regime (PEZA and BCDA
registered entities)
Resident Foreign Corporations

1. Resident Foreign Corporations
engaged in business as
international carrier
2. OBUs
3. Resident Foreign Corporations
engaged in business as
regional operating
headquarters
4. Firms under special income
tax regime
Not applicable to:
Banks and other non-

bank financial
intermediaries
Insurance Companies
Publicly-held
Corporations
Taxable Partnerships
General Professional
Partnerships
Non-taxable joint
ventures
Enterprises duly
registered 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.
Taxpayers not entitled to deduct
NOLCO:
OBU and FCDU
BOIregistered enterprise
enjoying income tax holiday.
The accumulated net operating
losses incurred or sustained
during the period of the Income
Tax Holiday shall not qualify for
purposes of NOLCO.
PEZA registered entities
Enterprise registered under the

Bases Conversion and
Development Act of 1992
Foreign Corporations engaged

in international shipping or air
carriage business in the
Philippines
In general, any person, natural

or juridical, enjoying exemption
from income tax with respect to
its operation during the period
for which the exemption is
applicable. Its accumulated net
operating losses incurred or
sustained during the period of
its said registered operation
shall not qualify for purposes of
NOLCO.
Summary of Rules for Exempt Corporations
EXEMPTION FROM INCOME TAX
KINDS OF
INSTITUTIONS
SOURCE OF
INCOME
EXEMPTED? LEGAL BASIS
Government
Agencies
Income from
performance of
government functions
Exempted
Sec 32 (B) (7) (b) NIRC - Income derived from any
public utility or from the exercise of any essential
governmental function is exempt from tax.
Income from other
sources
Taxable
Sec. 30 NIRC (last paragraph) - all income realized from
activities conducted for profit is subject to income tax.
EDUCATIONAL INSTITUTIONS
Government
Educational
Institution
Income from tuition fee Exempted Sec 30 NIRC - Income received from tuition fee is
excluded being income received as such. However,
under the last paragraph all income realized from
Income from other
sources
Taxable
Non-stock,
non-profit
Educational
Institution
Income from tuition fee Exempted
Art. XIV, Sec. 4(3), 1987 Constitution - all revenues and
assets ADE used for educational purposes shall be
exempt from payment of taxes and duties.
Income from other
sources
Non-Taxable
Proprietary
Educational
Institution
Income from tuition fee Taxable Sec. 27(B), NIRC - If the income from an unrelated
trade or activity exceeds 50% of the total gross income,
it will be treated as an ordinary domestic corporation,
subject to 35% income tax. Otherwise, a 10% tax shall
be imposed.
Income from other
sources
Taxable
RELIGIOUS AND CHARITABLE INSTITUTIONS
Charitable
Institutions
Income received as a
charitable institution
Exempted
Sec. 30(E), NIRC exempts such institution from income
tax with respect to income realized as such. However,
under the last paragraph, all income realized from
Income from other
sources
Taxable
Income Taxation
KINDS OF
INSTITUTIONS
SOURCE OF
INCOME
EXEMPTED? LEGAL BASIS
Religious
Institutions
Income received as a
religious institution
Exempted
Sec. 30(E), NIRC exempts such institution from income
tax with respect to income realized as such. However,
under the last paragraph, all income realized from
Income from other
sources
Taxable
NOTE: Even if the income from other sources is used to improve the facilities of these institutions, the
income realized from such sources is still taxable since the last paragraph of Sec. 30, NIRC provides
that such income, regardless of the disposition made of such income, shall be subject to tax.
TAX EFFECTS ON DONATIONS
From donees point of view:
KIND OF
INSTITUTION
IS IT SUBJECT TO INCOME
TAX?
IS IT SUBJECT TO
DONORS TAX?
IS IT SUBJECT TO ESTATE TAX?
Government
Agencies
Sec. 32(B) (3), NIRC Such
donation is exempted from
gross income and is not
subject to taxation.
Sec. 101 (A) (2), NIRC
exempts such gift from
payment of donors tax.
Sec. 86 (A) (3), NIRC - all transfers
to or for the use of the government
for exclusively public purposes are
exempt from such tax.
Government
Educational
Institutions
Sec. 101(A) (2), NIRC
Sec. 86 (A)(3), NIRC - all transfers to
or for the use of the government for
exclusively public purposes are
exempt from such tax
Non-stock,
non-profit
Educational
Institutions
Art. XIV, Sec. 4(3), 1987
Constitution - all revenues and
assets ADE used for
educational purposes shall be
exempt from payment of
taxes and duties.
Art. XIV, Sec. 4(3), 1987
Constitution - all revenues
and assets ADE used for
educational purposes shall
be exempt from payment
of taxes and duties.
Art. XIV, Sec. 4(3), 1987 Constitution
- all revenues and assets ADE used
for educational purposes shall be
exempt from payment of taxes and
duties.
Proprietary
Educational
Institutions
Sec. 27(B), NIRC - If the
income from an unrelated
trade or activity exceeds 50%
of the total gross income, it will
be treated as an ordinary
domestic corporation, subject
to 35% income tax.
Otherwise, a 10% tax shall be
imposed.
Sec. 101(A)(3), NIRC
payment of donors tax
Provided that, not more
than 30% shall be used for
administration purposes.
Art. XIV, Sec. 4(3), 1987 Constitution
- all revenues and assets ADE used
for educational purposes shall be
exempt from payment of taxes and
duties.
Charitable
Institutions
Sec. 101(A) (2), NIRC
Sec. 87(B), NIRC - the donation will
not be subject to tax; Provided that
not more than 30% of the same shall
be used for administration purposes
Religious
Institutions
Sec. 101(A) (2), NIRC
Sec. 87(B), NIRC - the donation will
not be subject to tax provided that
not more than 30% of the same shall
be used for administration purposes
From donors point of view
KINDS OF
INSTITUTIONS
CAN THE DONOR DEDUCT THE DONATION FROM HIS TAXABLE INCOME? It
depends.
If donor is compensation income earner
If donor is engaged in trade or
business
Government Agencies
There can be no deduction. There are only 3
kinds of allowable deductions for compensation
income earners* and a donation is not included
among such deductions.
Sec 34(H)(2)(a) NIRC - amount of
donation may be deducted entirely
KINDS OF
INSTITUTIONS
CAN THE DONOR DEDUCT THE DONATION FROM HIS TAXABLE INCOME? It
depends.
If donor is compensation income earner
If donor is engaged in trade or
business
Government
Educational InstitutionThere can be no deduction. There are only 3
kinds of allowable deductions for compensation
income earners
#
and a donation is not included
among such deductions.
Sec 34(H)(2)(a) NIRC - amount of
donation may be deducted entirely
Non-stock, non-profit
Educational Institution
Sec 34(H) (1) NIRC - a portion of the
amount of donation may be deducted
(5% if donor is a corporation; 10% if
donor is an individual)
Proprietary
Educational Institution
Charitable Institution
There can be no deduction. There are only 3
kinds of allowable deductions for
compensation income earners* and a donation
is not included among such deductions.
Sec 34(H) (1) NIRC - a portion of the
amount of donation may be deducted (5%
if donor is a corporation; 10% if donor is an
individual.
Religious Institution
# Allowable deductions for compensation income earners:
1. personal exemptions
2. additional exemptions
3. premiums on health or hospitalization insurance
EXEMPTION FROM REAL ESTATE TAX
KINDS OF
INSTITUTIONS
EXEMP
TED?
LEGAL BASIS FOR EXEMPTION
Government Agencies Yes
LGC - all lands, buildings and improvements ACTUALLY DIRECTLY
and EXCLUSIVELY (ADE) used for educational purposes are exempted
from RET
Government
Educational Institutions
Yes
LGC - all lands, buildings and improvements ADE used for educational
purposes are exempted from RET
Non-stock Non-profit
Educational Institutions
Yes Art. XIV, Sec. 4(3), 1987 Constitution - revenues and assets ADE used
for educational purposes shall be exempt from taxes and duties
Proprietary Educational
Institutions
Yes
LGC - lands, buildings and improvements ADE used for educational
purposes are exempted from taxes
Charitable Institutions Yes
Art. VI, Sec. 28(3), 1987 Constitution - lands, buildings and
improvements ADE used for religious purposes are exempt from
payment of RET
Religious Institutions Yes
Art. VI, Sec. 28(3), 1987 Constitution - lands, buildings and
improvements ADE used for charitable purposes are exempt from
payment of RET
Income Taxation
Preferential Tax Treatment on Certain Individuals
GENERAL
CATEGORIES
CITIZENS ALIENS
SOURCE OF
INCOME
ALL SOURCES WITHIN THE PHILS
WITHIN THE
PHILS
WITHIN THE
PHILS
WITHIN THE
PHILS
15% Final
Withholding
Income Tax
(FWIT)
A tax rate of 15% is imposed on gross income
(salaries, wages, etc.) received by every Filipino
employee occupying the same position as an
alien employed by any of the following:
a.Multinational company which is foreign firm or
entity engaged in international trade with
affiliates or subsidiaries or branch offices in
the Asia Pacific Region & other foreign
markets as follows:
i. Regional or Area Headquarters
ii. Regional Operating Headquarters (Sec. 25 [c])
b.Offshore Banking Units (Sec. 25 [d])
c. Foreign petroleum service contractor or sub-
contractor (Sec.25 [e]).
A TAX RATE OF 15% IS IMPOSED ON GROSS
INCOME (SALARIES, WAGES, ANNUITIES,
COMPENSATION, REMUNERATION, OTHER
EMOLUMENTS SUCH AS HONORARIA AND
ALLOWANCES) OF ALIEN INDIVIDUAL
EMPLOYED BY:
a. Regional or Area Headquarters (Sec.25 [c])
b. Regional Operating Headquarters (Sec.25
[c])
c. Offshore Banking Units (OBUs)
established in the Philippines (Sec. 25 [d])
d. Foreign petroleum service contractor or
subcontractor engaged in Petroleum
Operations in the Philippines (Sec. 25 [e])
Foreign
Source
Compensation
. Income not
subject to
income tax
1.Regardless of the period of stay in the
Philippines, foreign source (compensation
income) is not taxable if received by any of
the following non-resident citizen.
a.Immigrant (Sec.22 [E,2])
b.Foreign-based employee on a permanent basis
(Sec. 22 [E,2])
c. Overseas Contract Worker, including overseas
seaman (Sec. 23 [c])
2.A Filipino employed as Philippine Embassy/
Consultant service personnel of the Philippine
Embassy/Consulate is not to be treated as a
non-resident citizen, hence, his income is
taxable.
NOT TAXABLE
Preferential Tax Treatment on Certain Corporations
(Special Corporations)
#
DOMESTIC CORPORATION FOREIGN CORPORATIONS
1. Educational Institution
2. Hospital
RESIDENT FOREIGN CORPORATION
NON-RESIDENT
FOREIGN CORP.
1.A NON-STOCK, NON-PROFIT
EDUCATIONAL INSTITUTION is EXEMPT
from Income Tax on its Revenue as
educational institution and from the
operation of ancillary activities located
within the school premises, such as:
a.Cafeteria/canteen
b.Dormitories
c. Bookstores
d.School Bus
e.Hospitals
f. Pharmacies or Drugstores and from
banks deposits subject to certain
condition (1987 Constitution).
1.INTERNATIONAL CARRIER within the
Philippines 2.5% of Gross Phil. Billings
(Sec. 28 [3a])
2.OFFSHORE BANKING UNIT (OBU)
Income derived by OBU from foreign
currency transaction with local
commercial bankers, including branches
of foreign bank, including any interest
income derived from foreign currency
loans granted to residents.
Final Tax 10% of amount of interest
income
#
with respect to income derived by
OBU from certain foreign currency
transactions EXEMPT
1.CINEMATOGRAPHIC
FILM OWNER,
LESSOR OR
DISTRIBUTOR
25% of gross
income within the
Phil.
2.OWNER OR LESSOR
OF SEA VESSEL
CHARTERED BY
PHILIPPINE
NATIONALS 4.5%
of gross rental,
lease or charter
fees
DOMESTIC CORPORATION FOREIGN CORPORATIONS
1. Educational Institution
2. Hospital
RESIDENT FOREIGN
CORPORATION
NON-RESIDENT
FOREIGN CORP.
2.PROPRIETARY/ PROFIT ORIENTED EDUCATIONAL
INSTITUTION, AND NON-STOCK, NON-PROFIT
HOSPITAL
a.10% OF THE TAXABLE INCOME - If gross
income from unrelated trade business or
other activity does not exceed 50% of the
total gross income derived from all sources
b.Regular Domestic Rate - If gross income
from unrelated trade business or other
activity exceeds 50% of the total gross
income derived from all sources (Sec. 27 [b]).
3.Regardless of the proportion explained in item
No. 2(a) and (b) a profit oriented hospital will
be treated as an ordinary domestic corporation,
hence subject to the Normal Domestic Rate.
3.BRANCHES (Except those
registered with PEZA). Any profit
remitted to the head office (total
profit applied or earmarked for
remittance without any deduction
for the tax component thereof).
15% - FWT
4.REGIONAL OR AREA
HEADQUARTERS not subject to
Income Tax
5.REGIONAL OPERATING
HEADQUARTERS 10% of the
taxable income (within)
3.OWNER OR
LESSOR OF
AIRCRAFT,
MACHINERIES AND
OTHER
EQUIPMENT
7.5% of gross
rentals or fees
within the Phil.
# There is no Minimum Corporate Income Tax (MCIT) imposable for these Special Corporations
Comparative Table of Income Tax Provisions Between
The NIRC and RA 9337
1997 NIRC
(Old Rules)
R.A. 9337 and Consolidated Revenue Regulations
(New Rules and Amendments)
1. Income Tax Rates on Domestic Corporations
Section 27(A), NIRC:
1998 34%
1999 33%
2000 32%
Section 1(A), R.A. 9337:
November 1, 2005 December 31, 2008 35%
January 1, 2009 onwards 30%
NOTE: Taxable income within and without the Philippines
2. Government-Owned and Controlled Corporations, Agencies or Instrumentalities
Section 27(C), NIRC:
As a rule: All corporations, agencies or
instrumentalities owned or controlled by
the Government are subject to income tax.
Except: GSIS, SSS, PHIC, PCSO, and
PAGCOR
Section 1(a), R.A. 9337:
As a rule: All corporations, agencies or instrumentalities
owned or controlled by the Government are subject to income
tax
Except: GSIS, SSS, PHIC, and PCSO
NOTE: PAGCOR is now subject to income tax
3. Income Tax Rates on Resident Foreign Corporations
Section 28(A)(1), NIRC:
1998 34%
1999 33%
2000 32%
Section 2, R.A. 9337:
NOTE: Taxable income within the Philippines
4. Income Tax Rates on Non-resident Foreign Corporations
Section 28(b)(1), NIRC:
1998 34%
1999 33%
2000 32%
NOTE: Taxable income within the Philippines
Income Taxation
1997 NIRC
(Old Rules)
R.A. 9337 and Consolidated Revenue Regulations
(New Rules and Amendments)
5. Income Tax on Certain Income Received by Non-resident Foreign Corporations
Section 28 (5)(b), NIRC:
A final withholding tax at the rate of 15% is
hereby imposed on the amount of cash
and/or property dividends received from a
domestic corporation, which shall be
collected and paid provided in Section 57
(a) of this Code, subject to the condition
that the country in which the non-resident
foreign corporation is domiciled shall allow
a credit the tax due from the non-resident
foreign corporation taxes deemed to have
been paid in the Philippines equivalent to
20% for 1997, 19% for 1998, 18% for
1999, 17% thereafter, which represents
the difference between the regular
income tax of 35% in 1997, 34% in 1998,
33% in 1999, and 32% thereafter on
corporations and the 15% tax on
dividends as provided in this
subparagraph.
A final withholding tax at the rate of 15% is hereby imposed on
the amount of cash and/or property dividends received from a
domestic corporation, which shall be collected and paid
provided in Section 57 (a) of this Code, subject to the
condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit the tax due from
the non-resident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to 20% which
represents the difference between the regular income tax
of 35% and the 15% tax on dividends as provided in this
subparagraph. PROVIDED, that effective January 1, 2009,
the credit against the tax due shall be equivalent to 15%,
which represents the difference between the regular
income tax of 30% and the 15% tax on dividends.
Effect on the Tax Sparing Rule:
17% was increased to 20% for the application of 15% tax

sparing rule (i.e. 35% less 20%)
Starting January 1, 2009 it will be 15% (i.e. 30% less 15%)
Applicable to intercorporate dividends payable TO non-

resident foreign corporations.
6. Deductions from Gross Income
Section 34(b)(1), NIRC:
The amount of interest paid or incurred
within a taxable year on indebtedness in
connection with the taxpayers profession,
trade or business shall be allowed as
deduction from gross income, PROVIDED,
however, that the taxpayers otherwise
allowable deduction for interest expense
shall be reduced by an amount equal to
the following percentages of the interest
income subject to final tax:
41% beginning January 1, 1998
The amount of interest paid or incurred within a taxable year
on indebtedness in connection with the taxpayers profession,
trade or business shall be allowed as deduction from gross
income, PROVIDED, however, that the taxpayers otherwise
allowable deduction for interest expense shall be reduced by
42% of the interest income subjected to final tax; PROVIDED,
that effective January 1, 2009, the percentage shall be 33%.
Effect on Allowable Interest Expense:
Interest expense deductible shall be reduced by 42% of the

interest income subjected to final tax.
Starting January 1, 2009, it will be 33%.

TAXATION LAW
TRANSFER TAXES
TRANSFER TAXES
Estate Taxes
Estate Taxes
DEFINITION: an excise tax on the right 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.
The transfer of the net estate of every decedent
whether resident or non-resident of the Philippines
is subject to the estate tax (RR 2-2003)
ESTATE TAX FORMULA
Gross Estate (Sec. 85)
Less: (1) Deductions (Sec. 86)
(2) Net share of the SS in the CPP
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
ESTATE TAX RATE
The entire value of the net estate is divided into
brackets and each rate is imposed on the
corresponding bracket. The application of rates
prescribed below shall apply to estate taxes falling
due or have accrued beginning January 1, 1998,
effectivity date of RA 8424, otherwise known as
the Tax Reform Act of 1997.
Table showing the tax on each bracket and
cumulative total tax for the entire net estate.
OVER
BUT NOT
OVER
TAX
SHALL
BE
PLUS
OF THE
EXCESS
OVER
P200,000 EXEMPT
P200,000 500000 5% P200,000
500000 2000000 P15,000 8% 500000
2000000 5000000 135000 11% 2000000
5000000 10000000 465000 15% 5000000
10,000,000
and over
1215000 20% 10000000
Transfer Taxes
EXECUTIVE COMMITTEE
TAXATION LAW
DICT V. UNTAYAO edp
Gross Estate
The gross estate consists of the following:
a. Properties Physically in the Estate
These properties may refer to those real
estate or real property such as land and
buildings, tangible personal properties and
other intangible personal properties.
b. Properties Not Physically in the Estate
These are properties which at the time of the
decedents death are not physically in the
estate because they were transferred by the
decedent during his lifetime. The following
shall be included in the computation of gross
estate if transferred under circumstances
qualifying as:
a. Transfers in contemplation of death
b. Revocable transfers
c. Transf er under general power of
appointment
DECEDENTS GROSS ESTATE INCLUDES (Sec.
85)
RESIDENT 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 intangible
personal property, its
inclusion in the gross
estate is subject to the
rule of reciprocity
provided for under
Section 104 of the NIRC.
THE LAW THAT GOVERNS THE IMPOSITION OF ESTATE
TAX
The statute in force at the time of death of the
decedent shall govern estate taxation.
The estate tax accrues as of the death of the
decedent and the accrual of the tax is distinct from
the obligation to pay the same. Upon the death of
the decedent, succession takes place and the
right of the State to tax the privilege to transmit the
estate vests instantly upon death (R.R. 2-2003).
INTANGIBLE PERSONAL PROPERTIES WITH SITUS IN
THE PHILIPPINES (Sec. 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;
foreign corporation eighty-five per centum
(85%) of the business of which is located in
the Philippines;
foreign corporation, if such shares, obligations
or bonds have acquired a business situs in
the Philippines; and
5. Shares or rights in any partnership, business
or industry established in the Philippines.
EXCEPTIONS:
Reciprocity Clause under Sec. 104 of the NIRC:
1. If the decedent at the time of his death was a
citizen and resident of a foreign country, who
at the time of his death:
a. did not impose a transfer tax or death
tax of any character;
b. In respect of intangible personal
property of citizens of the Philippines not
residing in that foreign country; or
2. If the laws of the foreign country of which the
decedent was a citizen and resident at the
time of his death:
a. allow a similar exemption from transfer
taxes or death taxes of every character;
b. In respect of intangible personal
property owned by citizens of the
Philippines not residing in that foreign
country.
VALUATION OF THE GROSS ESTATE
The properties comprising the gross estate shall
be valued based on their fair market value at the
time of death.
PROPERTY VALUATION
1)Real
Property
WHICHEVER IS HIGHER of fair
market value:
a) as determined by the
Commissioner; or
b) as shown in the schedule of
values fixed by the provincial
and city assessors (zonal
valuation)
2)Shares of
Stock
Unlisted/
Not Traded
Common
shares
Preferred
shares
Listed/
Traded
- book value
- par value
- Arithmetic mean between the
highest and lowest quotation at a
date nearest the valuation date
(date of death), if none is
available on the date of death
itself.
PROPERTY VALUATION
3)Right to
usufruct,
use or
habitation,
as well as
that of
annuity
- the probable life of the beneficiary
in accordance with the latest
basic standard mortality table, to
be approved by the Secretary of
Finance, upon recommendation
of the Insurance Commissioner
shall be taken into account.
4)Personal
property
- Whether tangible or intangible,
appraised at FMV. Sentimental
value is practically disregarded.
Note: If recently acquired by
decedent, purchase price may
indicate FAIR MARKET VALUE
Valuation Rules of Properties Not Physically in The
Estate
1. If the transfer was in the nature of a bona fide
sale for an adequate and full consideration in
money or moneys worth
NO VALUE
2. If the consideration received on the transfer
was less than adequate and full
EXCESS of the FMV of the property at
the time of decedents death over
CONSIDERATION received
3. If there was no consideration received
(Donation Mortis Causa)
FMV of the property at the time of
decedents death
Illustration:
Case 1 Case 2 Case 3
A
Fair market value at
the time of transfer
50000 50000 50000
B
Consideration
received
50000 30000 0
C
Fair market value at
the time of death
100000 100000 100000
The value to
include in the
gross estate
none 70000 100000
NOTE:
Compare (a) and (b) to determine the

ADEQUACY of the consideration
(b) and (c) to determine the VALUE to include

in the gross estate
Inclusions in the Gross Estate (GRID-LIP)(Sec. 85)
1. TRANSFER UNDER GENERAL POWER OF
APPOINTMENT
Power of appointment - is the right to designate
the person or persons who shall enjoy and
possess certain property from the estate of a
prior decedent.
Classification:
a. GENERAL - when it authorizes the donee
(decedent) to appoint any person he
pleases including himself, thus having full
dominion over the property as though he
owned it.
b. SPECIAL - when the donee (decedent) can
appoint only among a restricted or
designated class of persons other than
himself.
NOTE: The extent or degree of control which
the decedent has over a property determines
the character of the power of appointment.
The general power of appointment may be
exercised by the decedent:
1. by will;
2. by deed executed in contemplation of his
death; or
3. by deed under which he has retained for
his life or for any period not ascertainable
without reference to his death or for any
period which does not in fact end before
his death:
a. the possession or enjoyment of, or the
right to the income from the property;
or
Transfer Taxes
b. 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.
Exception: bona fide sale for an adequate and
full consideration in money or moneys worth.
2. REVOCABLE TRANSFER
A revocable transfer is a transfer by trust or
otherwise, where the enjoyment thereof
was subject at the date of his death to any
change through the exercise of a power (in
whatever capacity exercisable) by:
a. decedent alone;
b. by the decedent in conjunction with
any other person without regard to
when or f rom what source t he
decedent acquired such power, to
alter, amend, revoke or terminate; or
c. where any such power is relinquished
in contemplation of the decedents
death other than a bona fide sale for
an adequate and full consideration in
money or moneys worth.
The power to alter, amend, or revoke shall
be considered to exist on the date of the
decedents death even though the
exercise of the power is subject to a
precedent giving of notice or even though
the alteration, amendment or revocation
takes effect only on the expiration of a
stated period after the exercise of the
power, whether or not on or before the date
of the decedents death notice has been
given or the power has been exercised.
In such cases, proper adjustment shall be
made representing the interests which
would have been excluded from the power
if the decedent had lived, and for such
purpose if the notice has not been given or
the power has not been exercised on or
before the date of his death, such notice
shall be considered to have been given, or
the power exercised, on the date of his
death.
NOTE: It is enough that the decedent had the
power to alter, amend or revoke even though
he did not exercise such power.
3. TRANSFER IN CONTEMPLATION OF DEATH
a. A transfer motivated by the thought of
impending death although death may not
be imminent; or
b. A transfer, by which the decedent retained
for his life, or for any period, which does
not in fact end before his death:
1. the possession or enjoyment of, or the
right to the income from the property,
or
2. The right, either alone or in conjunction
with any person, to designate the
person who shall possess or enjoy the
property or the income therefrom.
Presence of any of these indicators will
determine if the transfer is in contemplation of
death: (1) health condition and age of
transferor; (2) to whom the transfer was made;
and (3) period of time between the time of
transfer and time of death.
4. PROCEEDS OF LIFE INSURANCE
Proceeds of life insurance taken by the
decedent on his own life shall be included in
the gross estate if the beneficiary is:
a. the estate of the decedent, his executor or
administrator (regardless of whether the
designation is revocable or irrevocable); or
b. A third person other than the estate,
executor or administrator where the
designation of the beneficiary is revocable.
Under the Insurance Code, a designation of a
beneficiary is revocable, unless stated
expressly as irrevocable.
5. T RANS F E RS F OR I NS UF F I CI E NT
CONSIDERATION
Transfers for insufficient consideration refer to
transfers, trusts, interests, rights or powers
(denominated as transfer in contemplation of
death, revocable transfer and property passing
under general power of appointment) made,
created, exercised or relinquished for a
consideration in money or moneys worth, but is
not a bona fide sale for an adequate and full
consideration in money or moneys worth.
The value to be included in the gross estate is
the excess of the fair market value of the
property at the time of the decedents death
over the consideration received. This is
applicable in cases of:
transfers in contemplation of death,
revocable transfers and
t r ansf er s under gener al power of

appointment,
made for a consideration, but is not a bona fide
sale for an adequate and full consideration in
money or moneys worth.
6. PRIOR INTERESTS
All transfers, trusts, estates, interests, rights,
powers and relinquishment of powers made,
created, ari si ng, exi sti ng, exerci sed or
relinquished before or after the effectivity of the
NIRC.
PROPERTY RELATIONS BETWEEN HUSBAND AND WIFE
The property relations between the spouses shall
be governed by contract (marriage settlement)
executed before the marriage.
In the absence of such contract, or if the contract is
void:
a. On marriages contracted before August 3,
1988, the system of conjugal partnership of
gains shall govern;
b. On marriages contracted on or after August 3,
1988 (effectivity of the Family Code of the
Phi l i ppi nes) , t he syst em of absol ut e
community of property shall govern.
EXEMPT TRANSMISSIONS (Sec. 87)
1. The merger of usufruct in the owner of the
naked title;
2. Fideicommissary substitution;
3. The transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the will of the predecessor;
and
4. All bequests, devices, legacies or transfers to
soci al wel fare, cul tural and chari tabl e
institutions provided that:
a. no part of the net income of which inures
to the benefit of any individual and
b. no more than 30% of the said bequests,
legacies, or transfers shall be used by
such i nsti tuti ons for admi ni strati on
purposes
The following shall not be taxed (examples under
special laws):
(a) Amounts received for war damages;
(b) Amounts received from the US Veterans
Administration;
(c) Benefits received from the GSIS and SSS
(d) Retirement benefits of employees of private
firms; and
(e) Intangible personal property of a non-resident
decedent, not a citizen of the Philippines, as
provided in the reciprocity clause of the estate
tax law.
Deductions On Gross Estate Applicable To Resident
Aliens And Citizens (R.R. No. 2-2003)
The following are deductible from the gross estate
of citizens and resident aliens: (VET FAST ME
RASH)
1. Vanishing deduction;
2. Expenses, losses, indebtedness, taxes, etc.
(ordinary deductions) ;
3. Transfer for public use;
4. Family home;
5. Standard deduction equivalent to one million
pesos (P1,000,000);
6. Medical expenses;
7. Amounts received by heirs under RA 4917
(Retirement Benefits); and
8. Net share of the surviving spouse in the
conjugal or community property.
1.
ORDINARY DEDUCTIONS
a. FUNERAL EXPENSES
The amount deductible is the lowest among
the following:
1. actual funeral expenses;
2. 5% of the gross estate; or
3. P200,000.
It includes the following:
1. Mourning apparel of the surviving spouse
and unmarried minor children of the
deceased, bought and used in the
occasion of the burial;
2. Expenses of the wake preceding the
burial including food and drinks;
3. Publication charges for death notices;
4. Telecommunication expenses in informing
relatives of the deceased;
5. Cost of burial plot, tombstone monument
or mausoleum but not their upkeep. In
case deceased owns a family estate or
Transfer Taxes
several burial lots, only the value
corresponding to the plot where he is
buried is deductible;
6. Interment fees and charges; and
7. All other expenses incurred for the
performance of the ritual and ceremonies
incident to the interment.
Expenses incurred after the interment, such
as for prayers, masses, entertainment, or the
like are not deductible. Any portion of the
funeral and burial expenses borne or defrayed
by relatives and friends of the deceased are
not deductible. Amount of funeral expenses
must be reasonable.
Actual funeral expenses shall mean those
which are actually incurred in connection with
the interment or burial of the deceased. The
expenses must be duly supported with
receipts or invoices or other evidence to show
that they were actually incurred.
NOTE: When some items are covered by a
memorial plan, the value of the memorial plan
must be included in the GROSS ESTATE
before computing for the allowable deduction
for funeral expense
b. JUDICIAL EXPENSES OF THE TESTAMENTARY OR
INTESTATE PROCEEDINGS
Expenses allowed as deduction under this
category are those incurred in the:
1. inventory-taking of assets comprising the
gross estate,
2. administration,
3. payment of debts of the estate; and
4. distribution of the estate among the heirs.
In short, 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.
Any unpaid amount for costs and expenses
claimed under judicial expenses should be
supported by sworn statement of account
issued and signed by creditor. Judicial
expenses may include:
A. fees of executor or administrator
B. attorneys fees
C. court fees
D. accountant fees
E. appraisers fees
F. clerk hire
G. costs of preserving and distributing the
estate
H. costs of storing or maintaining property of
the estate and
I. brokerage fees for selling property of the
estate
ATTORNEYS FEES DEDUCTIBLE
Attorneys fees in order to be deductible from
gross estate must be essential to the
collection of assets, payment of debts, or
distribution of the property to the person
entitled to it. The services for which the fees
are charged must relate to the proper
settlement of the estate. (CIR vs. Court of Appeals
G.R. No. 123206, March 22, 2000)
c. CLAIMS AGAINST THE ESTATE
The word "claims" is generally construed to
mean 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.
Claims against the estate or indebtedness in
respect of property may arise out of:
1. Contract;
2. Tort; or
3. Operation of Law.
Requisites:
1. The liability represents a personal
obligation of the deceased existing at the
t i me of hi s deat h, except unpai d
obligations incurred incident to his death
such as unpaid funeral expenses (i.e.,
expenses incurred up to the time of
interment) and unpaid medical expenses
which are classified under a different
category of deductions;
2. The liability was contracted in good faith
and for adequate and full consideration in
money or money's worth;
3. The claim must be a debt or claim which
is valid in law and enforceable in court;
and
4. The indebtedness must not have been
condoned by the creditor or the action to
collect from the decedent must not have
prescribed.
NOTE: If claim arose out of a debt
instrument:
a. debt instrument must be NOTARIZED
b. if contracted within 3 years before the
death of the decedent, the administrator
or executor shall submit a statement
showing the disposition of the proceeds
of the loan
SUBSTANTIATION OF CLAIMS
All unpaid obligations and liabilities of the
decedent at the time of his death (except
unpaid funeral or medical expenses which are
deductible under a different category) are
allowed as deductions from gross estate
provi ded t he f ol l owi ng requi rement s/
documents are complied with/submitted:
1. SIMPLE LOANS (including advances)
a. The debt instrument must be duly
n o t a r i z e d a t t h e t i me t h e
indebtedness was incurred except for
loans granted by financial institutions
where notarization is not part of the
busi ness practi ce/pol i cy of the
financial institution-lender.
b. Duly notarized certification from the
creditor as to the unpaid balance of
the debt, including interest as of the
time of death
c. Proof of financial capacity of the
creditor to lend the amount at the
time the loan was granted, as well as
latest audited balance sheet with
detailed schedule of its receivable
showing unpaid balance of the
decedent-debtor.
d. Statement under oath executed by
administrator or executor of the
estate reflecting the disposition of the
proceeds of the loan if said loan was
contracted with three (3) years prior
to the death of the decedent.
2. NPAID OBLIGATIONS arose from
purchase of goods or services
a. Pertinent documents evidencing the
purchase of goods or services, such
as sales invoices/delivery receipts, or
contract for the services agreed to be
rendered, as duly acknowledged,
executed and signed by decedent
debtor and creditor and statement of
account given by the creditor as duly
received by the decedent debtor.
b. Duly notarized certification from the
creditor as to the unpaid balance of
the debt, including interest as of the
time of death.
c. Certified true copy of the latest
audited balance sheet of creditor with
a detailed schedule of its receivable
showing the unpaid balance of the
decedent - debt or. Mor eover, a
certified true copy of the updated
latest subsidiary ledger/records of the
debt of the debtor-decedent should
likewise be submitted.
d. CLAIMS AGAINST INSOLVENT PERSONS
Requisites:
1. The amount thereof has been initially
included as part of his gross estate (for
otherwise they would constitute double
deductions if they were to be deducted);
and
2. The incapacity of the debtors to pay their
obligation is proven.
Example: X owes Y (decedent) P100,
000. Y died without X paying the debt.
The estate of Y will include the credit of X.
In the event of subsequent payment by X
after the estate tax has already been
paid, there is no effect on the amount of
estate tax but the payment shall be
treated as income of the estate.
In income taxation, bad debts previously
written off but subsequently collected are
considered gross income under the Tax
Benefit Rule.
e. UNPAID MORTGAGE
Requisites:
1. Value of decedents interest in the
property mortgaged, undiminished by
such mortgaged or indebtedness is
included in the value of the gross estate
but not including any income tax upon
income received after the death of the
decedent, or property taxes not accrued
before his death, or any estate tax
2. When founded upon a promise or
agreement, the unpaid mortgage or
indebtedness must have been contracted
bona fide and for an adequate and full
consideration in money or moneys worth.
In case unpaid mortgage payable is being

claimed by the estate, verification must
be made as to who was the beneficiary of
the loan proceeds.
If the loan is found to be merely an

accommodation loan where the loan
proceeds went to another person, the
value of the unpaid loan must be included
as a receivable of the estate.
If there is a legal impediment to recognize

the same as receivable of the estate, said
unpaid obligation/ mortgage payable shall
not be allowed as a deduction from the
gross estate.
In all instances, the mortgaged property,

to the extent of the decedent's interest
therein, should always form part of the
gross taxable estate.
f. TAXES
Taxes which have accrued as of or before the
death of the decedent which were unpaid as
of the time of death.
The following are not deductible:
1. income tax on income received after
death;
2. property taxes not accrued before death;
and
3. estate tax.
Transfer Taxes
NOTE: For estate tax purposes: the unpaid
taxes must have accrued before the death of
the decedent regardless of whether or not it
was incurred in connection with trade or
business.
In case of refund of the estate tax paid, the
amount shall be considered as income of the
estate.
g. LOSSES
Requisites:
1. It should arise from fire, storm, shipwreck,
or other casualty, robbery, theft or
embezzlement;
2. Not compensated by i nsurance or
otherwise;
3. Not claimed as deduction in an income
tax return of the taxable estate;
4. Occurring during the settlement of the
estate; and
5. Occurring before the last day for the
payment of the estate tax (last day to pay:
six months after the decedents death).
NOTE: Casualty loss can be allowed as
deduction in one instance only, either for
income tax purposes or estate tax purposes.
2.
TRANSFER FOR PUBLIC USE
Requisites:
1. The disposition is in a last will and testament;
2. To take effect after death;
3. In favor of the government of the Phiippines
or any political subdivision thereof; and
4. For exclusive public purpose.
NOTE: This should also include bequests, devices,
or transfers to social welfare, cultural and
charitable institutions.
3.
VANISHING DEDUCTION
DEFINITION: The deduction allowed from the gross
estate for properties that were subject to donors
or estate taxes. It is called vanishing deduction,
because the deduction allowed diminishes over a
period of 5 years.
PURPOSE: To lessen the harsh effects of double
taxation in the broad sense considering that the
property has been previously subjected to estate
tax when the prior decedent died.
Requisites:
1. The present decedent died within 5 years
from receipt of the property from a prior
decedent or donor;
2. The property must be l ocated i n the
Philippines;
3. The property formed part of the taxable estate
of the prior decedent, or of the taxable gift of
the donor;
4. The estate tax or donors tax on the gift must
have been finally determined and paid;
5. The property must be identified as the one
recei ved from the pri or decedent, or
something acquired in exchange therefore;
and
6. No vanishing deduction on the property was
allowable to the estate of the prior decedent.
Steps in the computation of vanishing
deduction:
a. Determine the basis of the vanishing
deduction:
1. Initial value
value of the property in the prior

estate (or value used for donors tax
purposes) OR value of such property
in the present estate, WHICHEVER
IS LOWER
NOTE: Where the property referred to
consists of two or more items, the
aggregate of such item by item lower of
two values shall be the initial basis
2. Value in no. 1 shall be reduced by any
payment made by the present decedent
on any mortgage or lien on the property,
where such mortgage or lien was a
deduction from the gross estate of the
prior decedent, or gift of the donor
3. The value as reduced in (2) shall be
further reduced by an amount equal to:
Value as reduced in no. 2 x ELIT *
Gross Estate
* expenses, losses, indebtedness, etc. and
transfers for public use not including family
home, st andard deduct i on, medi cal
expenses and amounts received under
R.A. No. 4917.
b. On the computed basi s of vani shi ng
deduction in (a), apply the applicable rate as
follows:
The rate of deduction depends on the period
from the date of transfer to the death of the
decedent, as follows:
PERIOD DEDUCTION
Within 1 year 100%
PERIOD DEDUCTION
More than 1 year but not more
than 2 years
80%
More than 2 years not more than 3
years
60%
More than 3 years not more than 4
years
40%
More than 4 years but not more
than 5 years
20%
TREATMENT IF IN THE DETERMINATION OF
ESTATE TAX, A MORTGAGE OR OTHER LIEN
WAS ALLOWED
Where a deduction was allowed of any mortgage
or other lien in determining the donors tax, or the
estate tax of the prior decedent, which was paid in
whole or in part prior to the decedents death, then
the deduction allowable shall be reduced by the
amount so paid.
DEDUCTION FROM VANISHING DEDUCTION
The vanishing deduction shall be reduced by an
amount which bears the same ratio to the
amounts of expenses, losses, indebtedness and
taxes, transfers for public use as the amount of
property previously taxed bears to the value of the
decedents estate.
4.
FAMILY HOME
FAMILY HOME
It is a dwelling house, including the land on which
it is situated, where the husband and wife, or head
of family and members of their family reside, as
certified to by the 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 (Article 152 and 153 of Family Code).
Conditions:
1. The fami l y 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 decedent's interest
(whether conjugal/community or exclusive
property), whichever is lower, but not
exceeding P1,000,000
5.
STANDARD DEDUCTION
A deduction in the amount of One Million Pesos
(P1,000,000) shall be allowed as an additional
deduction without need of substantiation.
The full amount of P1,000,000 shall be allowed as
deduction for the benefit of the decedent.
STANDARD DEDUCTION
Sec. 86 (A)(5)
OPTIONAL
STANDARD
DEDUCTION
Sec. 34 (L)
Deduction in addition to
the other deductions
Deduction in lieu of
itemized deductions
Amount of deduction:
P1,000,000
Amount of deduction:
10% of gross income
Available to resident
citizens, non-resident
citizens and resident
aliens
Applies to all
individual taxpayers
except non-resident
aliens
6.
MEDICAL EXPENSES
Any amount of medical expenses incurred

within one year from death in excess of Five
Hundred Thousand Pesos (P500,000) shall
no longer be allowed as a deduction.
Neither can any unpaid amount thereof in

excess of the P500,000 threshold nor any
unpaid amount for medical expenses incurred
prior to the one-year period from date of death
be allowed to be deducted from the gross
estate as claim against the estate.
Examples: cost of medicines, hospital bills,

doctors fees, etc incurred, whether paid or
unpaid within 1 year before the death of the
decedent shall be allowed as long as properly
substantiated.
NOTE: It should be duly substantiated with
receipts for services rendered by decedents
attending physicians, invoices, statements of
account duly certified by the hospital and such
other documents in support thereof and provided,
Transfer Taxes
further, that the total amount thereof, whether paid
or unpaid, does not exceed P500,000.00
7.
AMOUNTS RECEIVED BY HEIRS UNDER
REPUBLIC ACT NO. 4917
Any amount received by the heirs from the
decedent's employer as a consequence of the
death of the decedent-employee in accordance
with Republic Act No. 4917 is allowed as a
deduction provided that the amount of the
separation benefit is included as part of the gross
estate of the decedent.
R.A. No. 4917 contemplates retirement benefits of
employees in the private sector.
Requisites:
1. Employee is at least 50 years old at the time
of retirement;
2. Employee has rendered at least 10 years of
continuous service in favor of the same
employer;
3. Such benefit is availed only once;
4. Retirement plan is duly approved by the BIR;
and
5. The fund shall not be used by the employer
for any purpose other than for the benefit of
the employees.
8.
NET SHARE OF THE SURVIVING SPOUSE IN
THE CONJUGAL PARTNERSHIP OR
COMMUNITY 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 decedent's
interest in the estate is taxed.
CAPITAL OF SURVIVING SPOUSE OF DECEDENT
TREATED FOR ESTATE TAX
The capital of surviving spouse of a decedent
shall not be deemed part of his or her gross
estate.
INCOME TAX ESTATE TAX
Claim for Deductions
Full deduction as long
as taxpayer is engaged
in trade/business
No distinction
Purpose of Transfer
No specific purpose
required
Exclusively for public
purpose
Deductions FROM Gross Estate Applicable To Non-
Resident Aliens
The following are deductible from the gross estate
of non-resident aliens:
1. Expenses, losses, indebtedness and taxes
(ELIT) (ordinary deductions)
Formula:
Tax Credit = Phil. Gross
Limit Estate X World ELIT
World Gross
Estate
2. Transfer for public use
3. Vanishing deduction on property in the
Philippines.
4. Conjugal share of the surviving spouse
SUMMARY RULES ON DEDUCTIONS FROM
GROSS ESTATE:
FE JE CAE CAIP UM UT CL
RC $ $ $ $ $ $ $
NRC $ $ $ $ $ $ $
RA $ $ $ $ $ $ $
NRA In proportion to the value of the estate
located in the Philippines as against the
total estate
SD FH ME RA
4917
TPU CS of
SS
VD
RC $ $ $ $ $ $ $
NRC $ $ $ $ $ $ $
RA $ $ $ $ $ $ $
NRA % % % % $ $ In prop.
Where:
$ Applicable/Allowed
% Not Applicable/Not Allowed
FE Funeral Expenses
JE Judicial Expenses
CAE Claims against the Estate
CAIP Claims against Insolvent Persons
UM Unpaid Mortgage
UT Unpaid Taxes
CL Casualty Loss
SD Standard Deduction
FH Family Home
ME Medical Expenses
TPU Transfers for Public Use
VD Vanishing Deduction
CS of SS Conjugal Share of Surviving
Spouse
NOTE: Non-resident aliens cannot deduct the
following from the gross estate:
Standard deductions
Family home
Medical expenses
Retirement benefits
Estate Tax Credit
A tax credit is granted for estate taxes paid to a
foreign country on the estate of citizens and
resident aliens subject to the following limitations:
Purpose: To provide a relief from too onerous a
taxation of the taxable estate outside the
Philippines
1. One foreign country only
The tax credit is whichever is lower between:
1. Estate tax actually paid to the foreign
country
2. Tax Credit Limit =
NTE, foreign country X Phil. estate
NTE, world tax
(NTE - Net Taxable Estate)
2. More than one foreign country
The credit shall be that which is the lower
amount between Limit A and Limit B.
Limit A. Whichever is lower between:
Estate tax paid to a foreign country
Tax Credit Limit =
NTE, foreign country X Phil. estate
NTE, world tax
Limit B. whichever is lower between:
Total of estate taxes paid to all foreign
countries
Tax Credit Limit =
NTE outside Phil. X Phil. estate tax
NTE, world
Settlement of The Estate Tax
A.
FILING
NOTICE OF DEATH TO BE FILED
In all cases of transfers subject to tax, or where,
though exempt from tax, the gross value of the
est at e exceeds P20, 000, t he execut or,
administrator or any of the legal heirs, within two
months after the decedents death, or within a like
period after qualifying as such executor or
administrator, shall give a written notice thereof to
the Commissioner (Sec. 89).
REPORTORIAL REQUIREMENTS
A. In all cases of transfers subject to tax, or
where, though exempt from tax, the gross
value of the estate exceeds P20,000
- Executor, administrator, or any legal
heirs, as the case may be, within 2
months after decedents death, or within a
like period after qualifying as such
executor or administrator, shall GIVE
WRI TTEN NOTI CE THEREOF TO
COMMISSIONER (Section 89 NIRC).
B. In all cases of transfers subject to tax, or
where, though exempt from tax, the gross
value of the estate exceeds P200,000, or
regardless of the gross value of the estate,
where the said estate consists of registered or
registrable property such as real property,
motor vehicle, shares of stock, or other similar
property for which clearance from BIR is
required as a condition precedent to such
transfer of ownership
- Executor or administrator or any of legal
heirs, as the case may be shall file A
RETURN UNDER OATH IN DUPLICATE
(Section 90 NIRC).
AN ESTATE TAX RETURN IS REQUIRED TO BE FILED
1. when the estate is subject to estate tax; or
2. when the estate is not subject to estate tax
but the gross estate exceeds P200,000; or
3. regardless of the amount of the gross estate,
where the gross estate consists of registered
or registrable property such as motor vehicle
or shares of stock or other similar property for
which clearance from the BIR is required as a
condition precedent for the transfer of
Transfer Taxes
ownership thereof in the name of the
transferee.
CONTENTS OF ESTATE TAX RETURN
The following shall be set forth in the return:
a. The value of the gross estate of the decedent
at the time of his death, or in case of non-
resident, not a citizen of the Philippines, of that
part of his gross estate situated in the
Philippines;
b. The deductions allowed from gross estate in
determining the estate
c. Such part of information as may at the time is
ascertainable and such supplemental data as
may be necessary to establish the correct
taxes.
TIME FOR FILING THE ESTATE TAX RETURN
The estate tax return shall be filed within six (6)
months after the death of the decedent.
Ext ensi on: The Commi ssi oner may, i n
meritorious cases, grant an extension of not
exceeding thirty (30) days for the filing of the
estate tax return.
WHEN THE GROSS ESTATE EXCEEDS P2, 000,000,
THE ESTATE TAX RETURN SHALL BE ACCOMPANIED
BY A STATEMENT WHICH IS CERTIFIED BY AN
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
STATING
1. the itemized assets of the decedent with its
corresponding gross value at the time of his
death, or in the case of a non-resident, not
citizen of the Philippines, that part of his gross
estate situated in the Philippines;
2. the itemized deductions from the gross estate;
3. The amount of tax due, whether paid or still
due and outstanding.
B.
PAYMENT
PAYMENT OF THE ESTATE TAX DUE
The estate tax due shall be paid at the time when
the estate tax return is filed (Pay as you file
system)
When the Commissioner finds that the payment of
the estate tax on the due date would impose
undue hardships upon the estate or any heir:
a. the payment of the estate tax may be
extended for a period not to exceed five (5)
years if there is a judicial settlement of the
estate; or
b. The payment of the estate tax may be
extended for a period not to exceed two (2)
years if there is an extrajudicial settlement of
the estate.
CONDITIONS FOR THE GRANT OF EXTENSION
1. The taxpayer is not guilty of negligence,
intentional disregard of the rules and
regulations, and fraud.
2. The executor or admi ni strator or the
beneficiary may be required to furnish a
bond in such amount not exceeding double
the amount of tax and with such sureties as
the Commissioner deems necessary.
NOTE: In case the available cash is not sufficient
to pay its total estate tax liability, the estate may
be allowed to pay tax by installment (Sec. 9F, R.R.
No. 2-2003).
The estate may be allowed to pay the tax by
installment and a clearance shall be released only
with respect to the property the corresponding/
computed tax on which has been paid. Therefore,
there may be many clearances as there are many
properties released.
LIABILITY FOR PAYMENT
The estate tax shall be paid by the executor or
administrator before delivery of the distributive
share in the inheritance to any heir or beneficiary.
It is the primary obligation of the executor or
administrator to pay the estate tax due but the heir
or beneficiary has subsidiary liability for the
payment of that portion of the estate which his
distributive share bears to the value of the total
net estate [Sec. 9 (G), R.R. No. 2-2003].
I f t her e ar e t wo or mor e execut or s or
administrators, all of them shall be severally liable
for the payment of the tax. The estate tax
clearance will serve as authority to distribute the
remaining/distributable properties/share in the
inheritance to the heir or beneficiary.
If there is no executor or administrator appointed,
qualified and acting within the Philippines, then
any person in actual, or constructive possession
of any property of the decedent.
An heir is liable for the assessment as an heir and
as holder-transferee of property belonging to the
estate/taxpayer. As an heir, he is individually
answerable for the part of the tax proportionate to
the share he received from the inheritance (CIR vs.
Pineda G.R. No. L-22734, September 15, 1967).
No judge shall authorize the distribution of the
est at e unl ess a cer t i f i cat i on f r om t he
Commissioner that the tax has been paid is shown
(Sec. 94).
Register of Deeds shall not register in the Registry
of Property any document transferring real
property or real rights therein or any chattel
mortgage, by way of gifts inter vivos or mortis
causa, legacy or inheritance, unless a certification
from the Commissioner that the tax actually due
thereon had been paid is shown, and they shall
immediately notify the Commissioner, Regional
Director, Revenue District Officer or Revenue
Collection Officer or Treasurer of the city or
municipality where their offices are located, of the
non-payment of tax discovered by them (Section 95
NIRC).
Any lawyer, notary public, or any government
officer, who, by reason of his official duties,
intervenes in the preparation or acknowledgment
of documents regarding partition or disposal of
donation inter vivos or mortis causa, legacy or
inheritance, shall have the duty of furnishing the
Commissioner, Regional Director, Revenue
District Officer or Revenue Collection Officer of the
place where he may have his principal office, with
copies of such documents and any information
whatsoever which may facilitate the collection of
the estate tax (Section 95 NIRC).
A debtor of the deceased shall not pay his debts
to the heirs, legatee, executor or administrator of
his creditor, unless the certification of the
Commissioner that the estate tax imposed by
NIRC has been paid is shown, but he may pay the
executor or judicial administrator without said
certification if the credit is included in the inventory
of the estate of the deceased (Section 95 NIRC).
If after payment of the estate tax, new obligations
of the decedent shall appear, and the persons
interested shall have satisfied them by order of the
court, they shall have a right to the restitution of
the proportional part of the tax paid (Section 96
NIRC).
No shares or other forms of securities shall be
transferred in the books of any corporation,
partnership, business or industry organized in the
Philippines, unless a similar certification by the
Commissioner is shown (Sec. 97).
When a bank has knowledge of the death of a
person who maintained a joint account, it shall not
allow any withdrawal by the surviving depositor
without the above certification (Sec. 97).
Provided: that the administrator of the estate or
any one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an
amount not exceeding twenty thousand pesos
(P20, 000) without the said certification.
There is nothing in the Tax Code and in the
pertinent remedial law provisions that imply the
necessity of the probate court or estate settlement
of courts approval of the States claim for estate
taxes before the same can be enforced and
collected by the BIR. On the contrary, under
Section 94, it is the probate or settlement court
which is bidden not to authorize the delivery of the
distributive share to any interested party without a
certification from the CIR showing the payment of
the estate tax (Marcos II vs. Court of Appeals, G.R. No.
120880, June 5, 1997).
STATUTE OF NON-CLAIMS DOES NOT BAR
CLAIMS OF GOVERNMENT
Section 5, Rule 86 of the Rules of Court, the
statute of non-claims does not bar government for
unpaid taxes, still within the period of limitation
prescribed in the NIRC (Vera vs. Fernandez, G.R. No.
L-31364, March 30, 1979).
COLLECTION OF TAX FROM THE HEIRS
An estate or inheritance tax, whether assessed
before or after the death of the deceased, can be
collected from the heirs even after the distribution
of the properties of the decedent (Palanca vs.
Commissioner of Internal Revenue, G.R. No. 16661, January
31, 1962).
The Government has two ways of collecting taxes
due from the estate.
a. By going after all the heirs and collecting from
each one of them the amount of the tax
proportionate to the inheritance received, or
b. Pursuant to the lien created by Section 219 of
the Tax Code upon all property and rights to
property belonging to the taxpayer for unpaid
income tax, is by subjecting said property of
the estate which is in the hands of an heir or
transferee to the payment of the tax due the
estate (CIR vs. Pineda, G.R. No. L 22734, September
15, 1967).
C.
PLACE OF FILING OF ESTATE TAX RETURN
AND PAYMENT
a. In case of resident decedent, the administrator
shall register the estate of the decedent and
secure a new TIN therefore from the Revenue
District Office (RDO) where the decedent
was domiciled at the time of his death and
shall file the estate tax return and pay the
corresponding estate tax with the Accredited
Agent Bank, Revenue Di stri ct Offi cer,
Collection Officer, or duly authorized Treasurer
of the city or municipality where the decedent
was domiciled at the time of his death,
whichever is applicable, following prevailing
collection rules and procedures.
b. In case of non-resident decedent, whether
non-resident citizen or non-resident alien, with
executor or administrator in the Philippines, the
estate tax return shall be filed with and the TIN
for the estate shall be secured from the RDO
where such executor or administrator is
registered.
If not registered, filed with and the TIN of
estate shall be secured from the RDO having
j u r i s d i c t i o n o v e r t h e e x e c u t o r o r
administrators legal residence.
c. In case of non-resident decedent having no
executor or administrator in the Philippines, the
Transfer Taxes
estate tax return shall be filed with and TIN for
the estate shall be secured from the Office of
the Commissioner.
Note: The Commissioner may continue to
exercise his power to allow a different venue/place
in filing of tax returns.
Donors Taxes
Donor!s Taxes
DEFINITION: A tax on the privilege of transmitting
ones property or property rights to another or
others without adequate and full valuable
consideration.
DONORS TAX ESTATE TAX
Tax on privilege to
transfer property during
ones lifetime
Tax on privilege to
transfer property upon
ones death
Generally imposed on
Donations Inter Vivos
Generally imposed on
Donations Mortis Causa
Coverage Of The Tax (Sec. 104)
RESIDENT &
NON-RESIDENT
CITIZEN,
RESIDENT
ALIEN DONOR
NON-RESIDENT ALIEN
DONOR
All properties,
real or personal,
tangible or
intangible,
wherever
situated.
Only properties situated in the
Philippines provided that, with
respect to intangible personal
property, its inclusion in the
gross estate is subject to the
rule of reciprocity provided
for under Section 104 of the
NIRC.
Requisites:
1. Capacity of the donor;
2. Donative intent (intention to donate);
3. Delivery, whether actual or constructive, of the
subject gift;
4. Acceptance by the donee.
DONATIVE INTENT
Donative Intent is a creature of mind. It cannot be
perceived except by the material and tangible acts
that manifests its presence. Hence, it is presumed
to exist when one gives a part of ones patrimony
to another without consideration. It is not negated
when the person donating has other intentions,
motives, or purposes that do not contradict
donative intent (Abello, Concepcion, Regala and Cruz vs.
CIR G.R. No. 120721).
LAW THAT GOVERNS THE IMPOSITION OF DONORS
TAX
The law in force at the time of the completion of
donation shall govern the imposition of donors tax
(R.R. 2-2003) .
When Donors Tax Applies
The donors tax shall not apply unless and until
there is a completed gift. The transfer is perfected
from the moment the donor knows of the
acceptance by the donee; it is completed by the
delivery, either actually or constructively, of the
donated property to the donee.
When Incomplete Gift Becomes Complete
A gift that is incomplete because of reserved
powers becomes complete when either:
1. the donor renounces the power; or
2. his right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of some
condition, other than because of the donor's
death.
Renunciation by the surviving spouse of
his/her share in the conjugal partnership
or absol ut e communi t y af t er t he
dissolution of the marriage in favor of the
heirs of the deceased spouse or any
other person/s is subject to donor's tax.
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 donor's 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, R.R. No.
2-2003).
DONATION OF IMMOVABLE PROPERTY TO BE
VALID
In order for a donation of an immovable property
to be valid, it must be made 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
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 (R.R. 2-2003).
Notes:
1. Where property, other than a real property
that has been subjected to 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 gift, and shall be
included in computing the amount of gifts
made during the calendar year.
2. Net gifts mean the net economic benefits 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
liabilities, then the net gift is measured by
deducting from the fair market value of the
property the amount of mortgage assumed.
TAX RATES
A. If the donee is a stranger, the rate of tax shall
be 30% of the net gifts.
NET GIFT
The net economic benefit from the transfer that
accrues to the donee.
STRANGER - a person who is not a brother,
sister, spouse, ancestor and lineal descendant,
or a relative by consanguinity in the collateral
line within the 4
th
civil degree.
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.
Donat i on made bet ween busi ness

organizations and those made between an
individual and a business organization
shall be considered as donation made to a
stranger.
B. If the donee is not a stranger- 2% to 15%, the
donors tax shall be computed based on the
tax table as indicated below.
Over
But not
over
Tax
shall be
Plus
Of the
excess
over
100000 Exempt
100000 200000 0 2% 100000
200000 500000 2500 4% 200000
500000 1M 14000 6% 500000
1M 3M 44000 8% 1M
3M 5M 204000 10% 3M
5M 10M 404000 12% 5M
10M 1.04M 15% 10M
FORMULA (ON A CUMULATIVE BASIS OVER A PERIOD
OF ONE CALENDAR YEAR):
1. ON THE 1
ST
DONATION OF THE YEAR
GROSS GIFTS XXX
LESS: DEDUCTIONS FROM GROSS GIFTS XXX
NET GIFTS XXX
X TAX RATE %
DONORS TAX ON THE NET GIFTS XXX
2. ON DONATION OF A SUBSEQUENT DATE DURING
THE YEAR
GROSS GIFTS MADE ON THIS DATE XXX
LESS: DEDUCTIONS FROM GROSS GIFTS XXX
NET GIFTS XXX
ADD: ALL PRIOR NET GIFTS WITHIN THE
YEAR XXX
AGGREGATE NET GIFTS XXX
X TAX RATE %
DONORS TAX ON AGGREGATE NET GIFTS XXX
LESS: DONORS TAX ON ALL PRIOR NET
GIFTS XXX
DONORS TAX ON THE NET GIFTS ON THIS
DATE XXX
NOTES:
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 provision of the
Civil Code of the Philippines and Family Code of
the Philippines (R.R. 2-2003). Husband and wife are
considered separate and distinct taxpayers for
purposes of donors tax.
VALUATION OF GIFTS OF PROPERTY
The fair market value of the property given at the
time of the gift shall be the value of the gift.
INTANGIBLE PERSONAL PROPERTIES WITH A SITUS IN
THE PHIL. AND INSTANCES WHEN TRANSFER OF
INTANGIBLE PERSONAL PROPERTY OWNED BY A
CITIZEN AND RESIDENT OF A FOREIGN COUNTRY IS NOT
Transfer Taxes
SUBJECT TO DONORS TAX (SAME AS IN ESTATE TAX
SUBJECT TO THE RECIPROCITY RULE) (Sec. 104)
DONATIONS EXEMPT FROM PAYMENT OF
DONORS TAX
1. Gifts made by a resident:
a. Dowries or gifts made on account of
marriage and before its celebration or
within one year thereafter by parents to
each of their legitimate, illegitimate or
adopted children to the extent of the first
P10,000;
Requisites:
a. made on account of marriage
b. made before the celebration of
marriage or within one year
thereafter
c. made by the parents to each of
their legitimate, recognized natural,
or adopted children
d. to the extent of the first ten
thousand pesos (P10,000.00)
b. Gifts made to or for the use of 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; and
c. Gifts in favor of educational, charitable,
religious, cultural or social welfare
corporation, institutions, foundations,
trust or philanthropic organization,
research institution or organization,
accredited non-government organization
(NGO). Provided, that not more than
30% of said gifts shall be used by such
donee for administration purposes.
2. Gifts made by a non-resident not a citizen of
the Phil.:
a. same as (b) above; and
b. Same as (c) above except accredited
non-government organization (NGO).
CONTRIBUTIONS FOR ELECTION CAMPAIGN
Any contribution in cash or in kind to any
candidate, political party or coalition of parties for
campaign purposes shall be governed by the
Election Code as amended. The application of the
rates as provided above is imposed on donations
made beginning January 1, 1998 (Section 99, NIRC of
1997, R.R. 2-2003).
Donation having the following elements: a.
reduction of patrimony of the donor; b. increase in
patrimony of the donee; c. the intent to do an act
of liberality or animus donandi. Contributions for
electoral campaign falls squarely within the
definition of donation and therefore taxable.
Congress approved RA 7166 on November 25,
1991, providing in Section 13 thereof, that
political/electoral contributions, duly reported to
the Commission on Elections, are not subject to
payment of any gift tax.
DONATION MADE BY CORPORATION TO A
DECEASED OFFICER OUT OF GRATITUDE
FOR PAST SERVICES
A donation made by a corporation to the heirs of
the deceased officer out of gratitude for his past
services is subject to the donees gift tax, Past
servi ces, rendered wi t hout rel yi ng on a
coetaneous promise, express or implied, that such
services would be paid for in the future, do not
constitute cause or consideration that would make
a conveyance of property anything else but a gift
or donation.
MERGER AND TRANSFER TO MEMBER
BENEFICIARIES- NO DONATIVE INTENT
A merger between parent company and its wholly
owned subsidiary where no shares are to be
issued is not subject to donors tax because there
is no intention to donate on the part of any of the
parties.
There can be no donative intent on the part of the
transferor in a transfer of properties to the
member beneficiaries, considering that a person
or entity cannot donate properties the ownership
of which belongs to themselves. Thus, a transfer
from one subsidiary to another pursuant to a
worldwide reorganization of a group of companies
is not subject to donors tax.
Donations under Adopt-A-School Program
donors tax exempt
Donations under the Adopt-a-School program as
provided in the Adopt-a-School Act of 1998 (R.A.
8525)
Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, accredited non-
government organization, trust or
philanthropic organization or research
institution or organization donors tax exempt
To be exempt it is required that not more than
30% of said gifts shall be used by such donee for
administration purposes.
A NON-PROFIT EDUCATIONAL AND/OR CHARITABLE
CORPORATION, INSTITUTION, ACCREDITED NON-
GOV E RNME NT ORGANI Z AT I ON , T RUS T OR
PHI LANTROPHI C ORGANI ZATI ON, RESEARCH
INSTITUTION OR ORGANIZATION IS ONE:
1. incorporated as a non-stock entity;
2. pays no dividends;
3. governed by trustees who receive no
compensation; and
4. devotes all its income whether students fees
or gifts, donations, subsidies or other forms of
philanthropy to the accomplishment and
promotion of the purposes enumerated in its
Articles of Incorporation.
TAX CREDIT FOR DONORS TAXES PAID TO A
FOREIGN COUNTRY
1. Donor was a Filipino citizen or resident alien
at the time of foreign donation
2. Donor s t axes of any charact er and
description are imposed and paid by the
authority of a foreign country.
LIMITATION ON TAX CREDIT
1. 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 NIRC bears to his entire net
gift; and
2. 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.
FORMULA OF TAX CREDIT LIMITS
1. for donors taxes paid to one foreign country
Net Gift situated
In a foreign country x Philippine Donors Tax
Entire net gift (PDT)
= Tax credit Limit
for donors taxes paid to two or more foreign
country
Net Gift outside the Philippines x PDT
Entire net gift
= Tax credit limit
The allowable tax credit is the lower amount
between the tax credit limit under (a) and (b)
Return, Filing, and Payment
An individual who makes any transfer by gift,
except those which are exempt form donors tax
shall, for purpose of the said tax, make a return
under oath in duplicate.
Contents of the Return:
Any person making a donation (whether direct or
indirect) unless the donation is specifically exempt
under the Code or other special laws is required,
or every donation, to accomplish under oath a
donors tax return in duplicate which shall set
forth:
1. Each gift made during the calendar year which
is to be included in computing net gifts;
2. The deductions claimed and allowable
3. Any previous net gifts made during the same
calendar year
4. The name of the donee
5. Relationship of the donor to the donee;
6. Such further information as the Commissioner
may require (Section 103 NIRC, RR 2-2003)
TIME FOR FILING OF RETURN AND PAYMENT OF THE
DONORS TAX
The donors tax return is filed and the donors tax
due is paid within thirty (30) days after the date
the gift is made (Pay as you file system).
PLACE OF FILING AND PAYMENT
Unless the Commissioner otherwise permits, the
return shall be filed and tax paid to an authorized
agent bank, revenue district officer, revenue
collection officer or duly authorized treasurer of
the city or municipality where the donor was
domiciled at the time of the transfer, or if there be
no legal residence in the Philippines, with the
Office of the Commissioner.
In the case of gifts made by a non-resident, the
return may be filed with the Philippine Embassy or
Consulate in the country where he is domiciled at
the time of transfer, or directly with the Office of
the Commissioner. For this purpose, the term
Office of the Commissioner shall refer to the
Revenue District office (RDO) having jurisdiction
over the BIR national office Building (R.R. 2-2003).
NOTE: The filing of a notice of donation is not
required, unlike in estate tax where notice of death
is required.
! END OF TRANSFER TAXES "
Transfer Taxes
TAXATION LAW
(Title IV of NIRC, as amended by RA 9337,
and other implementing rules and regulations
VALUE-ADDED TAX
VALUE-ADDED TAX
NATURE AND CHARACTERISTICS OF VAT
VAT is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties
or services in the Philippines and on importation of
goods into the Philippines. The seller is the one
statutorily liable for the payment of the tax but the
amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods,
properties or services.
This rule shall likewise apply to existing contracts
of sale or lease of goods, properties or services at
the time of the effectivity of RA 9337.
" However, in the case of importation, the
importer is the one liable for the VAT (R.R. No.
16-2005 Sec. 4.102-2).
The VAT is an indirect tax.
TRANSACTIONS COVERED BY VAT (CESI)
1. Sale of Commodities or Goods (in the course
of trade or business only)
2. Exportation (in the course of trade or business
only)
3. Sale of Services (in the course of trade or
business only)
4. Importation (whether or not in the course of
trade or business)
PERSONS LIABLE FOR VAT
Any person who, in the course of trade or
business, sells, barters, exchanges, leases goods
or properties, renders services, and any person
who imports goods shall be subject to the value-
added tax (VAT) imposed in Sections 106 to 108
of the National Internal Revenue Code, as
amended by R.A. 9337.
However, in the case of importation of taxable
goods, the importer, whether an individual or
corporation and whether or not made in the
course of trade or business, shall be liable to VAT
imposed in Section 107 of the Tax Code (R.R. No.
16-2005 Sec. 4.105-1).
Definition of terms (R.R. No. 16-2005):
Person refers to any i ndi vi dual , trust,
partnership, corporation, joint venture, co-
operative or association.
Taxable person refers to any person liable for
the payment of VAT, whether registered or
registrable in accordance with Section 236, Tax
Code.
VAT-registered person refers to any person
who is registered as a VAT taxpayer under Section
236 of the Tax Code. His status as a VAT-
registered person shall continue until the
cancellation of such registration.
Taxable Sale refers to the sale, barter,
exchange and/or lease of goods or properties
including transactions deemed sale and the
performance of service for a consideration
whether in cash or in kind, all of which are subject
to tax under Sections 106 and 108, Tax Code.
IN THE COURSE OF TRADE OR BUSINESS
The regular conduct or pursuit of a commercial or
an economic activity, including transactions
incidental thereto, by any person regardless of
EXECUTIVE COMMITTEE
TAXATION LAW
DICT V. UNTAYAO edp
whether or not the person engaged therein is a
non-st ock, nonprof i t pri vat e organi zat i on
(irrespective of the disposition of its net income
and whether or not it sells exclusively to members
or their guests), or government entity.
Therefore, if the disposition of goods or services is
NOT in the course of trade or business, then it is
not subject to VAT; except with respect to
importation.
The r ul e of r egul ar i t y, t o t he cont r ar y
notwithstanding, services as defined in the Tax
Code, rendered in the Philippines by non-resident
foreign persons shall be considered as being in
the course of trade or business.
Importation is subject to VAT regardless of
whether or not it is in the course of trade or
business
The reason for the rule is to protect our local or
domestic goods or articles and to regulate the
entry or introduction of foreign articles to our local
market. Regulation is one of the purposes of
taxation.
The following transactions, however, are deemed
sales pursuant to Section 106 (B) of the Tax
Code: (TDCR)
a. Transfer, use, consumption not in the course
of business of goods or properties originally
intended for sale or for use in the course of
business (i.e. when a VAT-registered person
withdraws goods from his business for his
personal use);
b. Distribution or transfer to:
1. Shareholders or investors as share in the
profits of VAT-registered person; and
2. Creditors in payment of debt or obligation.
c. Consignments 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
d. Retirement from or cessation of business with
respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as
of the date of such retirement or cessation,
whether or not the business is continued by
the new owner or successor. The following
circumstances shall, among others, give rise
to transactions deemed sale:
1. Change of ownership of the business.
There is a change in the ownership of the
business when a single proprietorship
incorporates, or the proprietor of a single
proprietorship sells his entire business;
and
2. Dissolution of a partnership and creation
of a new partnership which takes over the
business.
Change or Cessation of Status as VAT-
registered Person
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. The goods or properties used
in business or those comprising the stock-in-
trade of the corporation, having a change in
corporate control, will not be considered sold,
bartered or exchanged despite the change in
the ownership interest in the said corporation.
(2) Change in the trade or corporate name of the
business;
(3) Merger or consolidation of corporations. The
unused input tax of the dissolved corporation,
as of the date of merger or consolidation,
shall be absorbed by the surviving or new
corporation.
VAT-EXEMPT TRANSACTIONS
These refer to the sale of goods or properties and/
or services and the use or lease of properties that
is NOT subject to output tax and the seller is NOT
allowed any tax credit of input tax on purchases.
The person making the exempt sale of goods,
properties or services shall not bill any output tax
to his customers because said transaction is not
subject to VAT (R.R. No. 16-2005 Sec. 4.109-1).
Section 109, NIRC, as amended by Republic Act
9337 provi des f or t he f ol l owi ng 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 food for human
consumption; and breeding stock and genetic
materials therefor.
Products classified under this paragraph shall
be considered in their original state even if
they have undergone the simple process of
preparation or preservation for the market
such as freezing, drying, salting, broiling,
roasting, smoking or stripping. Polished and/
or husked rice, corn grits, raw cane sugar and
mol asses and ordi nary sal t shal l be
considered in their original state;
2. Sale or importation of fertilizers; seeds,
seedlings, and fingerlings; fish, prawn,
l i vestock and poul try feeds, i ncl udi ng
ingredients, whether locally produced or
imported, used in the manufacture of finished
feeds (except specially made feeds for race
horses, fighting cocks, aquarium fish, zoo
ani mal s and ot her ani mal s general l y
considered as pets);
3. Importation of personal and household effects
belonging to residents of the Philippines
Value-Added Tax
returning from abroad and non-resident
citizen coming to resettle in the Philippines:
PROVIDED, that such goods are exempt from
customs duty 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 vehi cl e, vessel , ai rcraft,
machinery, 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
Commissioner of Internal Revenue that such
persons are actually coming to settle in the
Philippines and that the change of residence
is bona fide;
5. Services subject to the percentage taxes
under Title V of the NIRC;
6. Services by agricultural contract growers and
milling for others of palay into rice, corn into
grits and sugar cane into raw sugar;
7. Medical, dental, hospital and veterinary
ser vi ces except t hose r ender ed by
professionals.
Laboratory services are exempted. If the
hospital operates a pharmacy or drug store,
the sale of drugs and medicine is subject to
VAT.
8. Educational services rendered by private
educational institutions duly accredited by the
DepED, CHED and TESDA;
9. Services rendered by individuals pursuant to
an employer-employee relationship;
10. Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as
s u p e r v i s o r y, c o mmu n i c a t i o n s a n d
coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income from
the Philippines;
11. Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws except those under Presidential Decree
No. 529;
12. Sales by agricultural cooperatives duly
registered with the Cooperative Development
Authority (CDA) to their members as well as
sale of 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
excl usi vel y i n t he product i on and/ or
processing of their produce;
Sale by agricultural cooperatives to non-
members can only be exempted from VAT if
the producer of the agricultural products sold
is the cooperative itself. If the cooperative is
not the producer (e.g., trader), then only those
sales to its members shall be exempted from
VAT; It is to be reiterated however, that sale or
importation of agricultural food products in
their original state is exempt from VAT
irrespective of the seller and buyer thereof,
pursuant to Subsection (a) hereof (Sec. 14, R.R.
04-2007)
13. Gross receipts from lending activities of credit
or multi-purpose cooperatives duly registered
with the CDA;
14. Sales by non-agricultural, non-electrical and
non-credit cooperatives duly registered with
the CDA: Provided, that the share capital
contribution of each member does not exceed
P15, 000 and regardless of the aggregate
capital and net surplus ratably distributed
among the members.
Importati on by these cooperati ves 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. Sale of real properties not primarily held for
sale to customers or held for lease in the
ordinary course of trade or business; or real
property utilized for low-cost housing and
socialized housing as defined by R.A. No.
7279 (Urban Development and Housing Act of
1992) and other related laws, residential lot
valued at P1.5 million and below and house
and lot and other residential dwellings valued
at P2.5 million and below;
However, even if the real property is not
primarily held for sale to customers or held for
lease in the ordinary course of trade or
business but the same is used in the trade or
business of the seller, the sale thereof shall
be subject to VAT being a transaction
incidental to the taxpayers main business (Sec.
14, R.R. 04-2007).
17. Lease of residential unit with a monthly rental
not exceeding P10,000;
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 and
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;
20. Importation of fuel, goods and supplies by
persons engaged in international shipping or
air transport operations;
21. Services of banks, non-bank financial
intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries; and
22. Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of P1,
500,000.
23. Importation of life-saving equipment, safety
and rescue equipment and communication
and navigational safety equipment, steel
plates and other metal plates including
marine-grade aluminum plates, used for
shipping transport operations; provided, that
the exemption shall be subject to the
provisions of Section 4 of Republic Act. No.
9295, otherwise known as The Domestic
Shipping Development Act of 2004 (Sec. 14,
04-2007);
24. Importation of capital equipment, machinery,
spare parts, lifesaving and navigational
equipment, steel plates and other metal plates
including marine-grade aluminum plates to be
used in the construction, repair, renovation or
alteration of any merchant marine vessel
operated or to be operated in the domestic
trade. Provided, that the exemption shall be
subject to the provisions of Section 19 of
Republic Act. No. 9295, otherwise known as
The Domestic Shipping Development Act of
2004 (Sec. 14, 04-2007)
ValueAdded Tax on Goods or Properties
MEANING OF GOODS OR PROPERTIES
The term goods or properties refer to all
intangible and tangible objects which are capable
of pecuniary estimation and shall include, among
others: (RPEMT)
1. Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
2. The right or privilege to use patent, copyright,
design or model, plan, secret formula or
process, goodwill, trademark, trade brand, or
other like property or right;
3. The right or privilege to use in the Philippines
of any industrial, commercial, or scientific
equipment;
4. The right or privilege to use motion pictures
films, tapes, and discs;
5. Radio, television, satellite transmission and
cable transmission time.
RATE AND BASE OF TAX
There shall be levied, assessed and collected on
every sale, barter or exchange of goods or
properties, a valueadded tax equivalent to 12%
of the gross selling price or gross value in
money of the goods or properties sold, bartered
or exchanged, such tax to be paid by the seller or
transferor
The effectivity date of the increase in VAT rate is
February 1, 2006.
GROSS SELLING PRICE (GSP)
Means the total amount of money or its equivalent
which the purchaser pays or is obligated to pay to
the seller in consideration of the sale, barter, or
exchange of the goods or properties, excluding
VAT. The excise tax, if any, on such goods or
properties shall form part of the GSP.
In the case of sale, barter or exchange of real
property subject to VAT, gross selling price shall
mean the consideration stated in the sales
document or the fair market value, whichever is
higher. If the VAT is not billed separately in the
document of sale, the selling price or the
consideration stated therein shall be deemed to
be inclusive of VAT (Sec. 14, RR 04-2007).
Note: Sales discounts and sales returns and
allowances are allowable deductions from the
Gross Selling Price.
Zero-Rated Sales of Goods or Properties: a
taxable transaction for VAT purposes, but shall not
result in any output tax. However, the input tax on
purchases of goods, properties or services,
related to such zero-rated sale, shall be available
as tax credit or refund.
The following sales by VAT-registered persons
shall be subject to zero percent (0%) rate (RR
16-2005 Sec. 4.106-5): (FEST)
1. Foreign Currency Denominated Sale;
2. Export Sales;
3. Sale to persons or entities which is VAT
exempt under special laws or international
agreements to which the Philippines is a
signatory; and
4. Transactions subject to zero-rated (0%) as
provided in Section 108(B) of NIRC, as
amended by RA 9337.
EXPORT SALES
1. The sale and actual shipment of goods from
t he Phi l i ppi nes t o a f orei gn count ry,
irrespective of any shipping arrangement that
Value-Added Tax
may be agreed upon which may influence or
determine the transfer or ownership of the
goods so exported, paid for in acceptable
foreign currency or its equivalent in goods or
services, and accounted with the rules and
regulations of the BSP.
2. The sale of raw materials or packaging
materials to non-resident buyer for delivery to
resident local export-oriented enterprise to be
used i n manuf act ur i ng, pr ocessi ng,
packaging, or repacking in the Philippines of
the said buyers goods, paid for in acceptable
foreign currency and accounted for in
accordance with the rules and regulations of
BSP.
3. Sale of raw materials or packaging materials
to an export-oriented enterprise whose export
sales exceed 70% of total annual production.
4. Sale of gold to the BSP.
5. Those considered export sales under EO No.
226 (Omnibus Investment Code of 1987) and
other special laws.
CONSIDERED EXPORT SALES UNDER E.O. 226
Shall mean the Philippine port F.O.B. value
determined from invoices, bills of lading,
inward letters of credit, landing certificates,
and other commercial documents, of export
products exported directly by a registered
export producer to another export producer, or
to an export trader that subsequently exports
the same; PROVIDED, that sales of export
products to another producer or to an export
trader shall only be deemed export sales
when actually exported by the latter, as
evidenced by landing certificates or similar
commer ci al document s; PROVI DED
FURTHER, that without actual exportation the
f o l l o w i n g s h a l l b e c o n s i d e r e d
CONSTRUCTI VELY EXPORTED f or
purposes of these provisions: (BERD)
a. sal es t o bonded manuf act ur i ng
war ehous es of ex por t - or i ent ed
manufacturers;
b. sales to export processing zones;
c. sal es to regi stered export traders
operating bonded trading warehouses
suppl yi ng r aw mat er i al s i n t he
manufacture of export products under
guidelines to be set by the board in
consultation with the BIR and Bureau Of
Customs;
d. sales to diplomatic missions and other
agencies and/or instrumentalities granted
tax immunities, of locally manufactured,
assembl ed or repacked product s,
whether paid for in foreign currency or
not.
6. Sale of goods, supplies, equipment and fuel
to persons engaged in international shipping
or international air transport operations;
Provided, that the same is 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 port in the Philippines;
Provided, further, that if any portion of such
fuel, goods or supplies is used for purposes
other than that mentioned in this paragraph,
such portion shall be subject to 10% VAT.
FOREIGN CURRENCY DENOMINATED SALE
Means the sale to non-resident of goods, except
those mentioned in Section 149 and 150 of the
NIRC, assembled or manufactured in the
Philippines for delivery to a resident in the
Philippines, paid for in acceptable foreign currency
and accounted for in accordance with the rules
and regulations of the BSP.
Sales 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 of the government paid
for in convertible foreign currency and accounted
for in accordance with the rules and regulations of
the BSP shall also be considered export sales
(R.R. No. 16-2005).
SALE TO PERSONS OR ENTITIES DEEMED
TAX EXEMPT UNDER SPECIAL LAW OR
INTERNATIONAL AGREEMENT
Sales of goods or property to persons or entities
who are tax-exempt under special laws or
international agreements to which the Philippines
is a signatory, such as, Asian Development Bank
(ADB) and International Rice Research Institute
(IRRI) shall be effectively subject to zero-rate.
PEZA REGISTERED ENTERPRISE GIVEN THE
OPTION
PEZA registered enterprise is given the option to
choose between two fiscal incentives (a) 5%
preferential tax rate on its gross income under the
said law or (b)income tax holiday provided under
E.O. 226 or Omnibus Investment Code of 1987,
as amended.
While an ecozone is geographically within the
Philippines, it is deemed a separate customs
territory and is regarded in laws as foreign soil.
Sales by supplies outside the borders of the
ecozone to this separate customs territory are
deemed exports and treated as export sales (CIR
vs. Seksui Jushi Phils, Inc. 496 SCRA 206).
EFFECTIVELY ZERO-RATED SALE OF GOODS
OR PROPERTIES
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.
Value-Added Tax on Sale of Services
MEANING OF SALE OR EXCHANGE OF SERVICES
Means the performance of all kinds of services in
the Philippines for others for a fee, remuneration
or consideration, whether in kind or in cash (R.R.
No. 16-2005 Sec. 4.108-1).
GROSS RECEIPTS (R.R. No. 16-2005, Sec. 4.108-4)
Refers to the total amount of money or its
equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposit 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. The following are
examples of constructive receipts:
1. Deposit in banks which are made available to
the seller of services without restrictions;
2. Issuance by the debtor of a notice to offset
any debt or obligation and acceptance thereof
by the seller as payment for services
rendered; and
3. Transfer of amounts retained by the payor to
the account of the contractor.
There shall be levied, assessed and collected, a
value added tax equivalent to 12% of the gross
receipts derived from the sale or exchange of
services, including the use or lease of properties.
February 1, 2006.
Zero-Rated Transactions or Services
A zerorated transaction is a taxable transaction
for VAT purposes, which shall not result in any
output tax. However, the input tax on purchases of
goods, properties or services, related to such
zero-rated sale, shall be available as tax credit or
refund. The following services by VAT-registered
persons shall be subject to zero percent (0%) rate:
1. Processing, manufacturing or repacking of
goods for other persons doing business
outside the Philippines, which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the BSP;
2. Se r v i c e s o t h e r t h a n p r o c e s s i n g ,
manufacturing or repacking 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, the consideration for which is paid
for in acceptable foreign currency and
accounted for in accordance with the rules
and regulations of the BSP;
3. Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively subjects
the supply of such services to 0% rate;
4. Services rendered to persons engaged in
i nternati onal shi ppi ng or ai r transport
operations, including leases of property for
use thereof; provided, however, that the
services referred to herein 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,
the same being subject to 10% VAT under
Sec 108 of the Tax Code;
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 of 3% based
on their gross receipts as provided for in Sec
118 of the Tax Code but shall not to be liable
to VAT; and
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;
provided, however, that zero-rating shall apply
strictly to the sale of the 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.
Value-Added Tax
Value-Added Tax on Legal Services
* R.A. 9337 Expanded Value-Added Tax
ARE LAWYERS LIABLE FOR VAT?
YES. RA 9337 clearly provided that sale of legal
services by a lawyer or a law firm shall be subject
to VAT effective November 1, 2005. There was an
elimination of the exemption from VAT of legal
services, deleting the old Section 109 (BB) of RA
9238.
Practice of law is a privilege burdened with
conditions. Congress has expressed in clear
terms that all professionals should be subject to
VAT and practice of law cannot be exempted from
said tax on the ground that it is not considered as a
business.
An individual can practice his law profession either
personally or through general professional
partnership. A lawyer who practices his profession
may be subject to or exempt from VAT.
A lawyer practicing his profession is

subject to VAT if:
a. Ther e i s no empl oyer - empl oyee
relationship between him and the person
to whom he provides the legal service;
and
b. His gross receipts for the next 12 months
exceed P1.5 million.
Otherwise, he is exempt from VAT.
There shall be levied, assessed and collected, a
value added tax equivalent to 12% of the gross
receipts derived from the sale or exchange of
services, including the use or lease of properties.
February 1, 2006.
Zero percent (0%) tax rate shall apply to the
following:
1. Legal services 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, the consideration
for which is paid for in acceptable foreign
currency and accounted with the rules and
regulations of the BSP;
Payment of professional fee must be in
acceptable foreign currency and accounted for
in accordance with BSP rules.
2. Legal services rendered to persons or entities
whose exemption under special laws or
i nternati onal agreements to whi ch the
Philippines is a signatory effectively subjects
the supply of such services to 0% rate; and
(Payment of professional fee in foreign
currency is not required.)
3. Legal services rendered to persons engaged
in international shipping or international air
transport operations, including leases of
property for use thereof.
(Payment of professional fee in foreign
currency is not required.)
EFFECTIVELY ZERO-RATING
One of the conditions for zero-rating is that the

VAT receipt issued by the lawyer must
prominently show the words Zero-Rated
Sales so that the buyer thereof will not utilize
any input tax assumed to have been passed
on to him.
With respect to legal services rendered to

persons engaged in international shipping or
international air transport operations, they are
subject to VAT at zero percent. The VAT
receipt to be issued by the lawyer must also
show the words Zero-rated Sales.
Value-Added Tax on Importations
VAT ON IMPORTATION OF GOODS
VAT is imposed on goods brought into the
Philippines, whether for use in business or not.
The tax shall be based on the total value used by
the BOC in determining tariff and customs duties,
plus customs duties, excise tax, if any, and other
charges, such as postage, commission and similar
charges, prior to the release of the goods from
customs custody.
WHO PAYS THE VAT ON IMPORTATION OF GOODS AND
WHEN?
It is the IMPORTER who pays the VAT PRIOR TO THE
RELEASE of such goods from the customhouse.
Importer refers to any person who brings goods
into the Philippines, whether or not made in the
course of trade or business. It includes non-
exempt persons or entities who acquire tax-free
imported goods from exempt persons, entities or
agencies.
WHAT IS THE TAX BASE?
The imported goods shall be subject to 12% VAT
rate:
1. Based on total value used by the BOC in
determining tariff and customs duties, plus
customs duties, excise taxes, if any, and other
charges such tax to be paid by the importer
prior to the release of such goods from
customs custody (Section 5, R.A. 9337).
2. In case of valuation used by the BOC in
computing customs duties is based on
volume or quantity of the imported goods,
the landed cost shall be the basis for
computing VAT. Landed cost consists of the
invoice amount, customs duties, freight,
insurance and other charges and also excise
tax, if any.
Same rule applies to technical importation of
goods sold by a person located in a Special
Economic Zone to a customer located in a
customs territory (R.R. No. 16-2005 Sec. 4.107-1).
TRANSFER OF GOODS BY TAX-EXEMPT
PERSON
When a person who was exempt from VAT on his
importation subsequently sells, transfers, or
exchanges in the Philippines such imported article
to a non-exempt person or entity, the purchaser,
transferee or assignee shall be required to pay the
VAT.
VAT ON IMPORTATION AS INPUT TAX
A seller of goods or services who imports goods,
materials, supplies or depreciable assets can
claim the VAT paid on importations as input taxes
creditable against the output taxes on his sales.
Tax Credit and Refund
WHO CAN AVAIL OF THE INPUT TAX CREDIT?
The input tax credit on importation of goods or
local purchases of goods, properties or services
by a VAT registered person shall be creditable:
a. To the importer upon payment of VAT prior to
the release of goods from customs custody;
b. To the purchaser of the domestic goods or
properties upon consummation of the sale; or
c. To the purchaser of services or the lessee or
licensee upon payment of the compensation,
rental, royalty or fee (R.R. No. 16-2005, Sec.
4.110-2).
TAX FORMULA
Output Tax
Less: Input Tax
Value-Added Tax Payable
If the amount of input tax is greater than the
amount of output tax, the resulting amount is
treated as Tax Credit or Refund.
"OUTPUT TAX" means the value-added tax due
on the sale or lease of taxable goods or properties
or services by any person registered or required to
register under Section 236 of the NIRC (Sec.110
1997 NIRC as amended).
"INPUT TAX" means the value-added tax due
from or paid by a VAT-registered person in the
course of his trade or business on importation of
goods or local purchase of goods or services,
including lease or use of property, from a VAT-
registered person. It shall also include the
transitional input tax determined in accordance
with Section 111 of the NIRC (Sec.110 1997 NIRC as
amended).
The following input taxes when evidenced by VAT
invoice or official receipt issued by a VAT-
registered person shall be creditable against the
output tax:
1. VAT paid in the course of trade or business on
the purchase or importation:
a. For sale;
b. For conversion into or intended to form
part of the finished product for sale,
including packaging materials;
c. For use as supplies in the course of
business; or
d. For use in the course of trade or business
for which deduction for depreciation or
amortization is allowed for income tax
purposes (capital goods)
2. VAT paid on the purchase of real property;
3. VAT paid on the purchase of services;
4. Transactions deemed sale;
5. Transitional Input tax;
6. Presumptive Input tax; and
7. Transitional input tax credits allowed under
the transitory and other provisions of these
regulations (R.R. No. 16-2005, Sec.4.110-1).
HOW IS INPUT TAX CREDITABLE DURING THE TAXABLE
MONTH OR QUARTER DETERMINED?
(R.R. No. 16-2005, Sec. 4.110-5)
Adding all creditable input taxes during the month
or quarter plus any amount of input tax carried-
over from the preceding month or quarter,
reduced by the amount of claim for VAT refund or
Value-Added Tax
tax credit certificate (whether filed with BIR, with
Department of Finance, Board of Investments or
the BOC) and other adjustments, such as
purchase returns or allowances, input tax
attributable to exempt ales and input tax
attributable to sales subject to final VAT
withholding.
DETERMINATION OF OUTPUT TAX AND VAT PAYABLE
AND THE COMPUTATION OF VAT PAYABLE OR EXCESS
TAX CREDITS (R.R. No. 16-2005, Sec. 4110-6)
1. Output tax
a. Output tax is determined by multiplying
the gross selling price or gross receipts
by the VAT rate.
b. Where the basis for computing output tax
is either the gross selling price or gross
receipts, but the amount of VAT is
erroneously billed in the invoice, the total
invoice amount is presumed to be
comprising of gross selling price/gross
receipts plus the correct VAT. Hence, the
output tax is determined by multiplying
the total invoice amount by fraction using
rate of VAT as numerator and 100% plus
VAT rate as denominator.
c. The input tax that can be claimed by the
buyer shall be the corrected amount of
VAT.
2. VAT payable
Output tax less input tax to arrive at VAT

payable on a monthly VAT declaration
and the quarterly VAT returns, subject to
limitations prescribed by the regulations.
VAT PAYABLE IN EXCESS OUTPUT OR
EXCESS INPUT TAX
1. If at the end of any taxable quarter the output
tax exceeds the input tax, the excess shall be
paid by the VAT-registered person (R.R. No.
16-2005, Sec. 4.110-7).
2. If the input tax inclusive of input tax carried
over from the previous quarter exceeds the
output tax, the excess input tax shall be
carried over to the succeeding quarter or
quarters; Provided, however, that any input
tax attributable to zero-rated sales by a VAT-
registered person may at his option be
refunded or applied for a tax credit certificate
which may be used in the payment of internal
revenue taxes, subject to the limitations as
may be provided for by law, as well as, other
implementing rules (R.R.No. 16-2005, Sec 4.110-7
as amended by R.R. No. 2-2007, Sec. 2).
* The amendment was pursuant to RA 9361
amending Sec 110(B) NIRC removing the 70%
cap.
WITHHOLDING OF CREDITABLE INPUT TAX
In the case of VAT on Government Purchases:
a. Sale of goods and services to government is
subject to 10% VAT
b. Government deducts and withholds a final
VAT of 5%
c. For payments to lease or use of properties or
property rights owned by non-residents;
servi ces rendered t o l ocal i nsurance
companies, with respect to reinsurance
premiums payable to non-residents; other
services rendered in the Philippines by non-
residents- withholding is 10%
If actual input VAT exceeds 5% of gross

payments, the excess may form part of the
sellers cost; and
If actual input VAT is less than 5% of gross

payments, the difference must be treated as
income of the seller.
CLAI MS FOR REFUND/ TAX CREDI T
CERTIFICATE OF INPUT TAX
1. Zero-rated and Effectively Zero-rated sales
of goods, properties or services
a. Input tax that may be subject to claim
shall exclude the portion of input tax that
has been applied to output tax.
b. The application should be filed within 2
years after the close of the taxable
quarter when such sales were made.
c. In case of zero-rated sales, payments for
the sales must have been made in
accept abl e f or ei gn cur r ency dul y
accounted for in accordance with BSP
rules and regulations.
d. If both zero-rated or effectively zero-rated
and taxable or exempt and the amount of
creditable input tax due cannot be directly
and entirely attributed to any one of the
transactions, ONLY PROPORTIONATE
share of input taxes allocated to zero-
rated or effectively zero-rated sales can
be claimed for refund or issuance of tax
credit certificate.
e. If engaged in transport of passenger and
cargo by air or sea vessels from
Philippines to a foreign country, input
taxes allocated RATABLY BETWEEN
ZERO-RATED AND NON-ZERO RATED
sale (subject to regular rate, final
withholding VAT and Vat-exempt sales).
2. Sec. 10, R.A. 9337
Capital goods provision as provided in
Section 112 (B), NIRC has been withdrawn
Option to apply for refund/tax credit
certificate of capital goods has been
withdrawn.
3. Cancellation of Registration
Cancelled registration due to retirement
from or cessation of business, or due to
changes in or cessation of status, a VAT
registered person may, within 2 years
from date of cancellation, apply for the
issuance of a tax credit certificate for any
unused input tax which he may use in
payment of his other internal revenue
taxes; Provided, however, that he shall be
entitled to a refund if he has no internal
revenue tax liabilities against which the
tax credit certificate may be utilized.
4. Where to file the claim for refund/tax credit
certificate
It shall be filed with the appropriate BIR
office (Large Taxpayers Service [LTS] or
Revenue District Office [RDO]) having
jurisdiction over the principal place of
business of the taxpayer;
Provided, however, that direct exporters
may also file their claim for tax credit
certificate with the One Stop Shop Center
of the Department of Finance;
Provided, finally, that the filing of the claim
with one office shall preclude the filing of
the same claim with another office.
5. Period within which refund or tax credit
certificate/refund of input taxes shall be
made
Commissioner of Internal Revenue shall

grant the claim within 120 days from date
of submission of complete documents in
support of the application filed.
In case of full or partial denial of the

claim, taxpayer may appeal to the Court
of Tax Appeals within 30 days from
receipt of said denial, otherwise decision
shall become final.
However, if no action on the claim after

t he 120day peri od f rom dat e of
submission of application with complete
documents, taxpayer may appeal to CTA
within 30 days from lapse of the 120 day
period
6. Manner of giving refund
Refunds shall be made upon warrants

drawn by the CIR or by his duly
authorized representative without the
necessity of being countersigned by the
Chairman, Commission on Audit (COA),
t h e p r o v i s i o n o f t h e Re v i s e d
Administrative Code notwithstanding;
Provided, that refunds shall be subject to
post audit by the COA (R.R. No. 16-2005,
Sec. 4.112-1).
Filing of Return and Payment of VAT
WHO FILES VAT RETURN?
Every person liable to pay VAT shall file a
quarterly return of the amount of his quarterly
gross sales or receipts within 25 days following
the close of the taxable quarter.
Taxable year shall mean the quarter that is
synchronized to the income tax quarter of the
taxpayer (i.e. calendar or fiscal year).
WHEN TO FILE VAT RETURN?
Deadline Monthly VAT Return (BIR 2550M)
Manual Filing
Not later than the 20th day following the end of
each month
Filing Through eFPS
Group A - within twenty five (25) days following
the end of the month
Group B - within twenty four (24) days following
Group C - within twenty three (23) days following
Group D - within twenty two (22) days following
Group D - within twenty one (21) days following
Deadline Quarterly VAT Returns (BIR 2550Q)
Within twenty five (25) days following the close of
taxable quarter of the taxpayer (for manual filing).
Within thirty (30) days following the close of
taxable quarter of the taxpayer (for taxpayers
under the jurisdiction of the LTS and for filing
through eFPS)
WHERE TO FILE AND PAY?
The monthly VAT declaration and quarterly return
shall be filed with, and VAT due thereon paid to:
a. An Authorized Agent Bank (AAB) under the
jurisdiction of the Revenue District Office/BIR
Office where the taxpayer (head office of the
business establishment) is required to be
registered.
b. In cases where AAB are no duly accredited
agent banks within the municipality or city, to
the RDO, Collection Agent or duly authorized
Treasurer of the Municipality or City where
such taxpayer (head office of the business
establishment) is required to be registered;
c. The quarterly VAT return and the monthly
VAT declaration, where no payment is
involved, shall be filed with the RDO/LTDO/
Large Taxpayers Assistance Division (LTAD),
Collection Agent, duly authorized Municipal/
Value-Added Tax
City Treasurer of Municipality/City where the
taxpayer (head office of the business
establishment) is registered or required to be
registered.
d. Taxpayers filing via EFPS shall comply with
the provisions of the EFPS Regulations;
e. Only one consolidated quarterly VAT return or
monthly VAT declaration covering the results
of operation of the head office as well as the
branches of all lines of business subject to
VAT shall be filed by the taxpayer, for every
return period, with the BIR office where said
taxpayer is required to be registered (R.R. No.
16-2005, Sec. 4.114-1)
Who Are Required To File VAT Returns
Every person or entity who in the course of

his trade or business, sells or leases goods,
properties and services subject to VAT, if the
aggregate amount of actual gross sales or
r ec ei pt s ex c eed One Mi l l i on Fi v e
Hundred Thousand Pesos (P 1,500,000.00)
for any twelve month period
A person required to register as VAT taxpayer

but failed to register
A person who imports goods
Professional practitioners
Professional Practitioners (PPs) are formerly

classified as non-VAT taxpayers and were
exempt from the Value-Added Tax and
Percentage taxes under Section 109 of the
National Internal Revenue Code (hereinafter
referred to as the Code), until December 31,
2002. Prior to this date, they were subject
only to Income Tax under Section 24 of the
Code. Effective January 1, 2003, however, by
virtue of Republic Act Nos. 7716 and 9010,
whi ch were i mpl emented by Revenue
Regulation Nos. 1-2003 and 3-2003, services
of PPs are also subject to either VAT or 3%
Percentage Tax. Pursuant to Revenue
Regul ati ons No. 16-2005, servi ces of
Professional Practitioners are subject to VAT if
g r o s s p r o f e s s i o n a l f e e s e x c e e d
P1,500,000.00 for a 12-month period and
subject to 3% Percentage Tax if gross
professional fees total P1,500,000.00 and
below for a 12-month period.
"Professional Practitioners" include the
following:
Certified Public Accountants
Insurance Agents (Life & Non-life)
Other Professional Practitioners required
to pass the government examination
Others
Short Period Return
Any person who retires from business with due
notice to the BIR office where the taxpayer (head
office) is registered or whose VAT registration has
been cancelled shall file a final quarterly return
and pay the tax due thereon within 25 days from
the end of the month when the business ceases to
operate or when VAT registration has been
officially cancelled; Provided, however, that
subsequent monthly declarations/quarterly returns
are still required to be filed if the results of the
winding up of the affairs/business of the taxpayer
reveals taxable transactions (R.R. No. 16-2005, Sec.
4.114-1[C]).
TAX ON PERSONS EXEMPT FROM VAT
If exempt under Sec. 109(1)(V) NIRC from
payment of VAT and NOT VAT-registered,
taxpayers shall pay a tax equivalent to 3% of his
gross monthl y sal es or recei pts; except
cooperatives who are exempt from the 3% gross
receipts tax herein imposed.
REGISTRATION
1. MANDATORY
Any person who, in the course of trade or
business, sells, barters, or exchanges goods
or properties or engages in the sale or
exchange of services shall be liable to register
if:
a. His gross sales or receipts for the past 12
months, other than those that are exempt
under Sec. 109 (1) (A) to (U) of the Tax
Code, have exceeded P1,500,000.00; or
b. There are reasonable grounds to believe
that his gross sales or receipts for the
next 12 months, other than those that are
exempt under Sec. 109 (1)(A) to (U) of
the Tax Code, will exceed P1,500,000.00.
2. OPTIONAL
Any person who is VAT-exempt may elect to
be VAT-registered by registering with the RDO
that has jurisdiction over the head office of
that person, and pay the annual registration
fee of P 500.00 for every separate and distinct
establishment.
Any person who is VAT-registered but enters
into transactions which are exempt from VAT
(mixed transactions) may opt that the VAT
apply to his transactions which would have
been exempt under Sec. 109(1) of the Tax
Code, as amended.
Any person who elects to registeroptional
registrationshall not be allowed to cancel
his registration for the next 3 years EXCEPT
franchise grantees of radio and/or television
broadcasting who registered optionally which
their VAT-registration shall be irrevocable.
CANCELLATION OF VALUE-ADDED TAX
REGISTRATION
General Rule : The registration of any person
who ceases to be liable to a tax type shall be
cancelled upon filing with the Revenue District
Office where he is registered, an application for
regi strati on i nformati on update i n a form
prescribed therefor;
A VAT-regi stered person may cancel hi s
registration for VAT if:
(a) He makes written application and can
demonst r at e t o t he Commi ssi oner ' s
satisfaction that his gross sales or receipts for
the following twelve (12) months, other than
those that are exempt under Section 109 (A)
TO (U), will not exceed One million five
hundred thousand pesos (P1,500,000); or
(b) He has ceased to carry on his trade or
busi ness, and does not expect t o
recommence any trade or business within the
next twelve (12) months.
The cancellation of registration will be effective
from the first day of the following month (Sec. 236
(F), NIRC as amended).
Annexes
(Amendments to Value-Added Tax)
Amendments to Value-Added Tax (Annex)
Revenue Regulations No. 02-2007
VAT PAYABLE. - Sec. 4.110-7 of RR No. 16-2005
is hereby amended to read as follows:
SEC. 4.110-7. VAT Payable (Excess Output) or
Excess Input Tax.
Xxx xxx xxx.
(b) If the input tax inclusive of input tax carried
over from the previous quarter exceeds the output
tax, the excess input tax shall be carried over to
the succeeding quarter or quarters; Provided,
however, that any input tax attributable to zero-
rated sales by a VAT-registered person may at his
option be refunded or applied for a tax credit
certificate which may be used in the payment of
internal revenue taxes, subject to the limitations
as may be provided for by law, as well as, other
implementing rules.
SALE OF REAL PROPERTIES
Sale of real property on installment plan means
sale of real property by a real estate dealer, the
initial payments of which in the year of sale do not
exceed twenty-five (25%) of the gross selling
price.
Sale of real property by a real estate dealer on
a deferred payment basi s not on the
installment plan means sale of real property, the
initial payments of which in the year of sale
exceed twenty-five percent (25%) of the gross
selling price.
Initial payments means payment or payments
which the seller receives before or upon execution
of the instrument of sale and payments which he
expects or is scheduled to receive in cash or
property (other than evidence of indebtedness of
the purchaser) during the taxable year when the
sale or disposition of the real property was made.
It covers any down payment made and includes
all payments actually or constructively received
during the year of sale, the aggregate of which
determines the limit set by law.
NOTE: Initial payments do not include the
amount of mortgage on the real property sold
except when such mortgage exceeds the cost or
other basis of the property to the seller, in which
case the excess shall be considered part of the
initial payments.
Also excluded from the initial payments are notes
or other evidence of indebtedness issued by the
purchaser to the seller at the time of the sale.
GROSS SELLING PRICE
In the case of sale, barter or exchange of real
property subject to VAT, gross selling price shall
mean the consideration stated in the sales
document or the fair market value whichever is
higher. If the VAT is not billed separately in the
document of sale, the selling price or the
consideration stated therein shall be deemed to
be inclusive of VAT.
Value-Added Tax
If the sale of real property is on installment plan
where the zonal value/fair market value is higher
than the consideration/selling price, exclusive of
the VAT, the VAT shall be based on the ratio of
actual collection of the consideration, exclusive of
the VAT, against the agreed consideration,
exclusive of the VAT, appearing in the Contract to
Sell/Contract of Sale applied to the zonal value/
fair market value of the property at the time of the
execution of the Contract to Sell/Contract of Sale
at the inception of the contract. Thus, since the
output VAT is based on the market value of the
property which is higher than the consideration/
selling price in the sales document, exclusive of
the VAT, the input VAT that can be claimed by the
buyer shall be the separately-billed output VAT in
the sales document issued by the seller.
Therefore, the output VAT which is based on the
market value must be billed separately by the
seller in the sales document with specific mention
that the VAT billed separately is based on the
market value of the property.
VAT-EXEMPT TRANSACTIONS
1. Sales by agricultural cooperatives duly
registered and in good standing with the
Cooperative Development Authority (CDA) to
their members, as well as sale of 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.
Sale by agricultural cooperatives to non-
members can only be exempted from VAT if
the producer of the agricultural products sold
is the cooperative itself. If the cooperative is
not the producer (e.g., trader), then only those
sales to its members shall be exempted from
VAT;
It is to be reiterated however, that sale or
importation of agricultural food products in
their original state is exempt from VAT
irrespective of the seller and buyer thereof,
pursuant to Subsection (a) hereof.
The following sales of real properties are
exempt from VAT, namely:
Sale of real properties not primarily held
for sale to customers or held for lease in
the ordinary course of trade or business.
However, even if the real property is not
primarily held for sale to customers or held for
lease in the ordinary course of trade or
business but the same is used in the trade or
business of the seller, the sale thereof shall
be subject to VAT being a transaction
incidental to the taxpayers main business.
2. Importation of life-saving equipment, safety
and rescue equipment and communication
and navigational safety equipment, steel
plates and other metal plates including
marine-grade aluminum plates, used for
shipping transport operations; Provided, that
the exemption shall be subject to the
provisions of Section 4 of Republic Act. No.
9295, otherwise known as The Domestic
Shipping Development Act of 2004;
3. Importation of capital equipment, machinery,
spare parts, lifesaving and navigational
equipment, steel plates and other metal plates
including marine-grade aluminum plates to be
used in the construction, repair, renovation or
alteration of any merchant marine vessel
operated or to be operated in the domestic
trade. Provided, that the exemption shall be
subject to the provisions of Section 19 of
Republic Act. No. 9295, otherwise known as
The Domestic Shipping Development Act of
2004;
INPUT TAX ON MIXED TRANSACTIONS
Claims for VAT refund/Tax Credit Certificate (TCC)
with the Bureau of Internal Revenue, Board of
Investment, and One-Stop-Shop and Duty
Drawback Center of the Dept. of Finance should
be deducted from the Allowable input tax that is
attributable to zero-rated sales.
ISSUANCE OF TAX CREDIT CERTIFICATES
FOR UNUTILIZED ADVANCE VAT PAYMENTS.
Sec. 8.229-1 is hereby added to the provisions of
RR 16-2005, to read as follows:
SEC. 8.229-1. Issuance of Tax Credit
Certificate for Unutilized
Advance VAT Payments.
The advance payments made by the seller/owner
of refined sugar and importer/miller of wheat/flour
shall be allowed as credit against their output tax
on the actual gross selling price of refined sugar/
flour. However, advance payments which remains
unutilized at the end of taxpayers taxable year
where the advance payment was made, which is
tantamount to excess payment, may, at the option
of the owner/seller/taxpayer or importer/miller/
taxpayer, be available for the issuance of TCC
upon application duly filed with the BIR by the
seller/owner or importer/miller within two (2) years
from the date of filing of the 4th quarter VAT return
of the year such advance payments were made,
or if filed out of time, from the last day prescribed
by law for filing the return.
Advance VAT payments which have been the
subject of an application for the issuance of TCC
shall not be allowed as carry-over nor credited
against the output tax of the succeeding quarter/
year.
Advanced VAT payments whi ch remai ned
unutilized for more than one (1) year prior to the
effectivity of these regulations may, at the option
of the seller/owner of the refined sugar or
importer/miller of wheat/flour, be the subject of
application for TCC to be filed within two (2) years
from the date of filing of the last quarterly VAT
return where the unutilized advance VAT
payments appeared, or if filed out of time, from the
last day prescribed by law for filing the return.
Issuance of TCC shall be limited to the unutilized
advance VAT payment and shall not include
excess input tax. Issuance of TCC for input tax
attributable to zero-rated sales shall be covered
by a separate application for TCC following
applicable rules.
REVENUE REGULATIONS NO. 11-2007 issued
on August 28, 2007 suspends until further notice
the implementation of Revenue Regulations (RR)
No. 6-2007 entitled Consolidated Regulations on
Advance Value-Added Tax on the Sale of Refined
Sugar, Amending and/or Revoking All Revenue
Issuances Issued to this Effect, and for Other
Related Purposes.
The suspension aims to give time to both the
Bureau of Internal Revenue and the sugar
industry to thresh out unclear provisions in RR No.
6-2007, and to introduce improved version of the
Regulations to properly address the problems of
the sugar industry and collectthe correct taxes due
from them.
Prescribing the Rules on the Advance Payment of
Value Added Tax/Percentage Tax on the Transport
of Naturally Grown and Planted Timber Products
The VAT on the transport of naturally grown and
planted timber products shall be paid in advance
by the owner/seller to the Bureau of Internal
Revenue (BIR) through the Authorized Agent
Banks (AABs), or to the Revenue Collection
Officers (RCOs) or deputized City or Municipal
Treasurers, in places where there are no AABs,
before transporting them from place of production
or concession.
Owners/sellers of naturally grown and planted
timber products, whether natural or juridical, who
are holders of the following permits issued by, or
agreements entered into with, the Department of
Environment and Natural Resources (DENR), are
liable to pay the advance VAT on naturally grown
and planted timber products harvested prior to its
transport for purposes of consummating a sale :
a. Timber License Agreements
b. Industrial Forest Management Agreements
c. Tree Farm Lease Agreements
d. Agro- Forestry Farm Lease Agreements
e. Private Forest Development Agreements
f. Socialized Industrial Forest Management
Program
g. Community- Based Forest Management
Program
h. Timber Cutting/ Salvage & Related Permits
Naturally grown and planted timber products
harvested from industrial tree plantations and in
private lands covered by existing land titles and
approved land applications are also subject to
advance VAT.
The owner/concessionaire/seller of the naturally
grown or private timber products shall not allow
any transport of said timber products from the
cutting area without the advance payment of the
VAT. Absence of proof of payment of advance
VAT will authorize the agents of DENR and BIR to
hold in abeyance transport/sale of naturally grown
and planted timber products.
In addition to the input tax credits allowed under
section 110 of the code, the amount of advance
VAT payments made by sellers/owners of naturally
grown and planted timber products shall be
allowed as credits against their output VAT on the
actual gross selling price of the timber products. In
the case of advance 3% percentage tax, the
advance payment shall be credited to the monthly/
quarterly percentage tax return. The certificate of
advance payment of the VAT or percentage tax
issued shall be attached to the monthly VAT
declaration/quarterly vat return or percentage tax
return to support the claim for credit of advance
VAT or percentage tax payment.
! END OF VALUE-ADDED TAX "
Value-Added Tax
TAXATION LAW
TARIFFS AND CUSTOMS
CODE OF THE PHILIPPINES
TARIFF AND CUSTOMS CODE
Definitions
TARIFF customs duties, toll or tribute payable
upon merchandise to the Government.
This means a book of rates; a table or catalogue
drawn usually in alphabetical order containing the
names of several kinds of merchandise with the
duties to be paid for the same as settled by
authority or agreed upon between several states
that hold commerce together (Matic, Taxation in the
Phil).
CUSTOM DUTIES Tax assessed upon
merchandise from or exported to a foreign country
(Garcia vs. Executive Sec., G.R. No. 101273, July 3, 1992).
These are duties which are charged upon
commodities on their being imported into or
exported out of a country (1 Cooley 73).
ARTICLES- when used with reference to
importation, includes goods, wares and in general
anything that may be made subject to importation
or exportation (Sec. 3514, TCC).
NOTE: Customs and tariffs are synonymous with
one another. They both refer to the taxes imposed
on imported or exported wares, articles, or
merchandise.
IMPORTED ARTICLES SUBJECT TO DUTY
All articles, when imported from any foreign
country into the Philippines, shall be subject to
duty upon each importation, even though
previously exported from the Philippines (Sec. 100,
TCCP).
Exceptions:
1. Exemptions under the TCCP;
2. Exemptions granted to government agencies,
instrumentalities or GOCCs with existing
contracts, commitments, agreements, or
obligations with foreign countries;
3. Exemptions of international organizations
pursuant to agreements or special laws; and
4. Exemptions granted by the Pres. of the Phil.
upon recommendation of NEDA (Sec. 105,
TCCP).
LIABILITY OF IMPORTATIONS WITHIN THE SUBIC
SPECIAL ECONOMIC ZONE
Importations of registered businesses and
enterprises within the Subic Special Economic
Zone in EXCESS of their registered business or
authorized business activity consisting of raw
materials, capital goods and equipment shall be
deemed brought into and sold within the customs
territory, and therefore subject to the payment of
taxes and customs duties in accordance with
existing customs and tax laws (Sec 1. E.O. 660, RMC
No. 20-2008).
LIABILITY OF IMPORTER FOR CUSTOM DUTIES
A PERSONAL DEBT whi ch can be

discharged only by payment in full thereof;
EXECUTIVE COMMITTEE
TAXATION LAW
DICT V. UNTAYAO edp
A LIEN upon the imported articles while they

are in custody or subject to the control of the
government. (Sec. 1204, TCCP).
EXTENT OF IMPORTERS LIABILITY
The liability of an importer is limited to the value of
the imported merchandise. In case of forfeiture of
the seized material, the maximum civil penalty is
the forfeiture itself (Mendoza vs. David, GR No. L-9452,
March 27, 1961).
OTHER TYPES OF FEES CHARGED BY THE BUREAU OF
CUSTOMS
Arrastre charge
Wharfage due counterpart of license,
charged not for the use of any wharf but for a
special fund known as the Port Works Fund.
Berthing fee
Harbor fee
Tonnage due
MEANING AND SCOPE OF THE TARIFF AND CUSTOMS
LAWS
Include not only the provisions of the Tariff and
Customs Code of the Philippines (TCCP) and
regulations pursuant thereto, but all other laws
and regulations that are subject to the Bureau of
Customs (BOC) or otherwise within its jurisdiction.
As to its scope, therefore, tariff and customs laws
extend not only to the provisions of the TCCP but
to all other laws as well, the enforcement of which
is entrusted to the BOC.
The Bureau of Customs
Chief Officials Of The Bureau Of Customs:
One Chief or Commissioner of Customs
F o u r As s i s t a n t Ch i e f s o r De p u t y
Commissioner of Customs each one to head:
(a) Customs Revenue Collection Monitoring
Group;
(b) Customs Assessment and Operations
Coordinating Group;
(c) Intelligence and Enforcement Group; and
(d) Internal Administration Group.
Functions of the Bureau of Customs:
1. Assessment and collection of revenues from
imported articles and all other impositions
under the tariff and customs laws;
2. Control smuggling and related frauds;
3. Supervision and control over the entrance and
clearance of vessels and aircraft engaged in
foreign commerce;
4. Enforcement of TCCP and related laws;
5. Supervision and control over the handling of
foreign mails arriving in the Philippines;
6. Supervise and control all import and export
cargoes for the protection of government
revenue; and
7. Exclusive original jurisdiction over seizure and
forfeiture cases under the tariff and customs
laws.
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; and
4. Hold possession of all imported articles until
the duties, taxes and other charges are paid
thereon (Sec. 1206, TCCP).
Exclusive Jurisdiction of the Collector of Customs
cannot be interfered with by regular courts even
upon the allegation of ownership (Commissioner of
Customs vs. Court of Appeals, 481 SCRA 109).
Territorial Jurisdiction of the BOC:
The BOC shall have the right of supervision
and police authority over:
1. All seas within the jurisdiction of the
Philippines; and
2. All coasts, ports, airports, harbors, bays,
rivers and inland waters whether navigable
or not from the sea (1st par, Sec. 603, TCCP).
Jurisdiction Over Premises Used For Customs
Purposes:
The BOC shall have exclusive (a) Control, (b)
Direction and (c) Management of:
1. Customhouses;
2. Warehouses;
3. Offices;
4. Wharves; and
5. Other premises in the respective ports of
entry.
Note: In all cases, the jurisdiction over premises
used for customs purposes is without prejudice to
the general police powers of the city or
municipality and the Philippine Coast Guard in the
exercise of its functions (Sec. 604, TCCP).
Tariffs and Customs Code of The Philippines
DOCTRINE OF HOT PURSUIT
Requisites:
1. Over Vessels
a. An act is done in Phil. waters which
constitutes a violation of the tariff and
customs laws; and
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 Phil.; and
c. With jurisdiction over them at any place
therein for the enforcement of the law (2nd
par. Sec. 603, TCCP).
DOCTRINE OF PRIMARY JURISDICTION:
REGIONAL TRIAL COURTS (RTC) VS.
BUREAU OF CUSTOMS (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 petition for certiorari, prohibition or

mandamus filed with the RTC will lie because
these are in reality attempts to review the
Commissioner's 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. Court of
Appeals, G.R. No. 104604, October 6, 1995).
Customs Duties
WHEN TARIFF AND CUSTOMS APPLY
Only after importation has begun but before
importation is terminated.
Importation begins:
When the carrying vessel or aircraft enters the

jurisdiction of the Phil. with intention to unload
therein.
Importation is deemed terminated:
1. Upon payment of the duties, taxes and other
charges due upon the articles, or secured to
be paid;
2. Legal permit for withdrawal shall have been
granted; or
3. In case the articles are free of duties, taxes
and other charges, until they have legally left
the jurisdiction of the customs (Sec. 1202, TCCP)
INTENTION TO UNLOAD
Even i f not yet unl oaded, and t here i s
unmanifested cargo, forfeiture may take place
because importation has already begun.
OWNER OF IMPORTED ARTICLES
Imported articles into the Philippines shall be held
to be the property of the person to whom the
same are consigned:
1. The holder of a bill of lading duly endorsed by
the consignee therein named;
2. Consigned to order by the consignor;
3. Underwriters of abandoned articles; and
4. Salvors of articles saved from a wreck at sea,
along a coast or in any area of the Phils (Sec.
1203, TCCP).
DISPOSITION OF IMPORTED ARTICLES REMAINING ON
VESSEL AFTER TIME FOR UNLOADING
1. After the expiration of the said period for
discharge; and
2. Not reported for transshipment to another
port, may be:
a. Unladen by the customs authorities; and
b. Stored at the vessels expense.
Unless prevented by causes beyond the vessels
control, such as:
1. port congestion;
2. strikes;
3. riots or civil commotions;
4. failure of vessels gear;
5. bad weather; and
6. similar causes
Note: Articles so stored shall be entered within 30
days, which shall not be extendible from the date
of posting of the notice to claim in conspicuous
places in the BOC. If not entered or not claimed, it
shall be disposed of in accordance with the
provisions of TCCP (Sec. 1210, TCCP).
ARTICLES UNDER TCCP
1. Prohibited from being imported (Prohibited
importation)
a. Absolutely prohibited such as: weapons
of war; gambling devices; narcotics or
prohibited drugs; immoral, obscene or
insidious articles; and those prohibited
under special laws (Sec. 102, TCCP).
b. Qualifiedly prohibited
Where such conditions as to warrant a
lawful importation do not exist, the legal
effects of the importation of qualifiedly
prohibited articles are the same as those
of absolutely prohibited articles (Auyong
Hian vs. CTA, G.R. No. L-28782, September 12,
1974).
2. Conditionallyfree from tariff and customs
duties (conditionallyfree importation)
Those provided in Sec. 105, TCCP;
Those granted to government agencies,
GOCCs with agreements with foreign
countries;
Those given to international institutions
entitled to exemption by agreement or
special laws; and
Those that may be granted by the
President upon NEDAs recommendation.
Returning residents for purposes of
conditionally free importation of personal
and household effects:
(a) Nationals (Filipino)
(b) Who have stayed in the foreign
country
(c) For a period of at least six (6)
months.
Kinds of conditionally free importations of
personal and household effects of
returning residents:
(a) Personal and household effects,
including luxury items brought out of
the Philippines and returned;
(b) Personal and household effects,
except l uxury i tems purchased
abr oad and i mpor t ed t o t he
Philippines;
(c) T h e p u r c h a s e a b r o a d o f
consumabl es, l i vel i hood t ool s
personal and household effects by
Overseas Filipino Workers (OCW)
and Balikbayans;
(d) T h e p u r c h a s e a b r o a d o f
consummabl es, l i vel i hood tool s
personal and household effects by
Overseas Filipino Workers (OCW)
and Balikbayans at Philippine duty
free shops; and
(e) Personal and household effects of
members of Philippine diplomatic
missions including civil or military
attachs.
3. Free from TC duties (duty-free)
Imported goods must be entered in a
customhouse at their port of entry otherwise
they shall be considered as contraband and
the importer is liable for smuggling (See Sec. 101,
TCCP).
All articles when imported from any country
into the Philippines shall be subject to duty
upon each i mport at i on, even t hough
previously exported from the Philippines,
except as otherwise specifically provided for
in the TCCP or other laws.
DRAWBACK
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 Chaco Sons vs. Collector of
Customs, GR No. 7618, March 27, 1913).
IMPORT ENTRY (Sec. 1302,TCCP, as amended by R.A.
No. 9135)
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 from disembarking of last cargo
from vessel.
(1) INFORMAL ENTRY-
a. All imported articles, except importations
admitted free of duty under Subsection
"k", 105 of this Code, shall be subject to a
formal or informal entry.
b. Articles of a commercial nature intended
for sale, barter or hire, the dutiable value
of whi ch i s Two t housand pesos
(P2,000.00) or less, and personal and
household effects or articles, not in
commer ci al quant i t y, i mpor t ed i n
passenger's baggage, mail or otherwise,
for personal use.
(2) FORMAL ENTRY-
The Commissioner may, upon instruction of
the Secretary of Finance, for the protection of
domestic industry or of the revenue, require a
formal entry, regardless of value, whatever be
the purpose and nature of the importation.
A formal entry may be for immediate
consumption, or under irrevocable domestic
letter of credit, bank guarantee or bond
PERSONS AUTHORIZED TO MAKE IMPORT ENTRY (Sec
1301, TCCP, as amended by R.A.7651)
a) by the importer, being the holder of the bill of
lading
b) by a duly licensed customs broker acting
under authority from a holder of the bill or by a
person duly empowered to act as agent or
attorney-in-fact for each holder
c) a party other than the importer, provided said
importer shall himself be required to declare
under oath and under the penalties of
falsification or perjury that the declarations
and statements contained in the entry are true
and correct.
BASIS OF DUTIABLE VALUE (Sec 201, TCCP, as
amended by R.A. No. 9135)
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 plus other costs incurred by the
buyer but not included in the price.
Method Two:
TRANSACTION VALUE OF IDENTICAL
GOODS - 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 - 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.
Method Three:
TRANSACTI ON VALUE OF SI MI LAR
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 - 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.
Method Four:
DEDUCTIVE VALUE - The dutiable value of
the imported goods under this method shall be
the deductive value which shall be based on
the unit price at which the imported goods or
identical or similar imported goods are sold in
the Philippines, in the same condition as when
imported, in the greatest aggregate quantity, at
or about the time of the importation of the
goods being valued, to persons not related to
the persons from whom they buy such goods,
subject to deductions:
(1) Either the commissions usually paid or
agreed to be paid or the additions usually
made for profit and general expenses in
connection with sales
(2) The usual costs of transport and insurance
and associated costs
(3) The costs and charges
(4) Customs duties and other national taxes
Method Five:
COMPUTED VALUE - The dutiable value
under this method shall be the computed value
which shall be the sum of:
(1) The cost or the value of materials and
fabrication or other processing employed
in producing the imported goods;
(2) The amount for profi t and general
expenses equal to that usually reflected in
the sale of goods of the same class or kind
as the goods being valued which are
made by producers in the country of
exportation for export to the Philippines;
(3) The freight, insurance fees and other
t r anspor t at i on expenses f or t he
importation of the goods
(4) Any assist, if its value is not included
under paragraph (1) hereof; and
(5) The cost of containers and packing, if their
values are not included under paragraph
(1) hereof.
Method Six:
FALLBACK VALUE - If the dutiable value
cannot be determined under the preceding
methods descri bed above, i t shal l be
determined by using other reasonable means
and on the basis of data available in the
Philippines.
CLASSIFICATION OF CUSTOM DUTIES
A. Regular Duties those which are imposed
and collected merely as a source of revenue.
1. Ad valorem duty: This is a duty based
on the value of the imported article.
2. Specific duty: This is a duty based on
the dutiable weight of goods (either the
gross weight, legal weight, or net weight).
3. Alternating duties: This is a duty which
alternates ad valorem and specific.
4. Compound Duty: Thi s i s a dut y
consisting of ad valorem and specific
duties.
B. Special duties those which are imposed
and collected in addition to the ordinary
customs duties usually to protect local
industries against foreign competition.
1. Dumping duty
2. Countervailing duty
3. Marking duty
4. Discriminatory duty
NATURE OF SPECIAL CUSTOMS DUTIES
Special customs duties are additional import
duties imposed on specific kinds of imported
articles under certain conditions.
PURPOSE OF SPECIAL CUSTOMS DUTIES
The special customs duties are imposed for the
protection of consumers and manufacturers, as
well as Phil. products from undue competition
posed by foreign-made products.
FLEXIBLE TARIFF CLAUSE
The President may fix tariff rates, import and
export quotas, etc. under TCCP (See Sec. 28, Art. VI,
Constitution and Sec. 401, TCCP).
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
one hundred (100%) percent 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 ten (10%) per cent ad valorem
whenever necessary.
LIMITATIONS IMPOSED REGARDING THE FLEXIBLE
TARIFF CLAUSE
a. Conduct by the Tariff Commission of an
investigation in a public hearing.
The Commission shall also hear the views
and recommendations of any government
office, agency or instrumentality concerned.
The Commission shall submit their findings
and recommendations to the NEDA within
thirty (30) days after the termination of the
public hearings.
Th e NEDA t h e r e a f t e r s u b mi t s i t s
recommendation to the President.
b. 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
f or ei gn count r y f or t he most r ecent
representative period shall be used as bases
(Sec. 401, TCCP).
SPECIAL DUTIES COMPARED
DUMPING DUTY COUNTERVAILING DUTY MARKING DUTY
DISCRIMINA-TORY
DUTY
AS TO NATURE
Imposed upon foreign products with
value lower than their fair market
value to the detriment of local
products.
Imposed upon foreign goods
enjoying subsidy thus allowing them
to sell at lower prices to the
detriment of local products similarly
situated.
Imposed upon
those not properly
marked as to place
of origin of the
goods.
Imposed upon goods
coming from
countries that
discriminate against
Philippine products.
AS TO AMOUNT/RATE
Difference between the actual price
and the normal value of the article.
Equivalent to the bounty, subsidy, or
subvention.
5% ad valorem of
articles.
Any amount not
exceeding 100% ad
valorem of the
subject articles.
AS TO IMPOSING AUTHORITY
1.the Secretary of Trade and
Industry in the case of non-
agricultural product, commodity
or article; or
2.The Secretary of Agriculture in
the case of agricultural product,
commodity or article, after
formal investigation and
affirmative finding of the Tariff
Commission. The decision on
whether or not to impose a
definitive anti-dumping duty
remains with the prerogative of
the Tariff Commission.
1. the Secretary of Trade and
Industry in the case of non-
agricultural product, commodity
or article; or
2. The Secretary of Agriculture in
the case of agricultural product,
commodity or article, after formal
investigation and affirmative
finding of the Tariff Commission.
The decision on whether or not
to impose a definitive
countervailing duty remains with
the prerogative of the Tariff
Commission.
Commissioner of
Customs
President of the
Philippines
The Tariff Commission (TC)
FUNCTIONS OF THE TARIFF COMMISSION
1. Investigative Powers (Sec. 505, TCCP)
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 of the tariff law;
e. the tariff relations between the Philippines
and foreign countries, commercial treaties,
pr ef er ent i al pr ovi si ons, economi c
alliances, the effect of export bounties and
preferential transportation rates;
f. the volume of importations, compared with
domestic production and consumption;
g. conditions, causes, and effects relating to
competition of foreign industries with
those of the Phi l i ppi nes, i ncl udi ng
dumping and cost of production; and
h. 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.
2. Administrative Assistance to the President
and Congress (Sec. 506, TCCP)
a. ascertain conversion costs and costs of
production in the principal growing,
producing or manufacturing centers of the
Phil;
b. ascertain conversion costs and costs of
production in the principal growing,
producing or manufacturing centers of
foreign countries of articles imported into
the Phil.;
c. select and describe representative articles
into the Phil. similar to or comparable with
those locally produced;
d. as c er t ai n i mpor t c os t s of s uc h
representative articles so selected;
e. ascertain the grower's, producers or
manufacturers selling prices in the
pr i nci pal gr owi ng, pr oduci ng or
manufacturing centers of the Phil;
f. ascertain all other facts which will show
t he di f f er ence i n or whi ch af f ect
competition between, articles of the Phil.
and those imported in the principal
markets of the Phil.;
g. ascertain conversion costs and costs of
production including effects of tariff
modifications or import restrictions on
prices in the principal growing, producing
or manufacturing centers of the Phil.;
h. Submit annual reports of these to the
President; copy furnished to NEDA, BSP,
DOF and BOI.
Tax Remedies Under The Tariff and Customs Code
(TCCP)
I.
TAX REMEDIES OF THE GOVERNMENT
C. ADMINISTRATIVE
1. Tax Lien (Sec. 1204, TCCP)
Attaches on the goods, regardless of

ownership, while still in the custody
or control of the Government.
Availed of when the importation is

neither prohibited nor improperly
made.
2. Administrative Fines and Forfeitures
Applied when the importation is

unlawful.
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 (Secs.
2531 and 2530, TCCP).
Under Sec. 2530 (a) of the TCCP, 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 pl ane f or smuggl i ng
operation is sufficient for it to be
deemed to have been used in
smuggling. (Llamado vs. Commissioner of
Customs, G.R. No. L-28809, May 16, 1983)
3. Reduct i on of cust oms dut i es /
compromise
subject to approval of Sec. of

Finance (Secs. 709 and 2316 TCCP)
Seizure, Search, Arrest (Secs. 2205,

2210 and 2211, TCCP)
D. JUDICIAL
This remedy is normally availed of when the
tax lien is lost by the release of the goods.
Civil Action (Sec. 1204, TCCP)
Criminal Action
II.
TAX REMEDIES OF THE TAXPAYER
A. ADMINISTRATIVE
1. Protest
a. Any importer or interested party if
dissatisfied with published value
wi t hi n 15 days f r om dat e 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.
b. Taxpayer within 15 days from
assessment. Payment under protest
is necessary (Secs. 2308 and 2210 TCCP).
2. Refund
a. A written claim for refund may be
submi t t ed by t he i mpor t er i n
abat ement cases on mi ssi ng
packages, def i ci enci es i n t he
contents of packages or shortages
before arrival of the goods in the
Philippines, articles lost or destroyed
after such arrival, dead or injured
animals, and for manifest clerical
errors; and
b. Drawback cases where the goods
are re-exported (Secs. 1701-1708 TCCP).
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,
TCCP).
4. Appeal
Within 15 days to the Commissioner
after notification by Collector of his
decision (Sec. 2313, TCCP).
B. JUDICIAL
1. Appeal
Within 30 days from receipt of decision of

the Commi ssi oner or Secretary of
Finance to the division of the CTA (Sec.
2403 TCCP, Sec. 7 of RA 1125, as amended by Sec.
9 of RA 9282).
Since Sec.11 of RA 1125 as amended by

RA 9282 empowers the Tax Court to
issue injunctions, it would appear that 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 TCCP)
a. expressly (Sec. 1801 TCCP)
b. impliedly
failure to file an import entry
wi t hi n 30 day s f r om t he
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 Bureau of Customs
(BOC)
A.
CUSTOMS PROTEST CASES
DEFINITION: These are cases which deal 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 otherwise, the
action of the collector shall be final and conclusive
against him EXCEPT as to matters collectible for
manifest error in:
a. invoice entry;
b. errors in return of weight; and
c. measure and gauge (Sec. 2309 in relation to Sec.
1707, TCCP)
WHEN CUSTOMS PROTEST NOT REQUIRED
Where 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 exported 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
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; and
6. Protestant must furnish samples of goods
under protest when required (Sec. 2310, TCCP).
REASONS FOR THE AUTOMATIC REVIEW OF DECISIONS
ADVERSE TO THE GOVERNMENT:
1. To protect the interest of the Government;
2. A favorable decision will not be appealed by
the taxpayer and certainly a Collector will not
appeal his own decision; and
3. Lifeblood Theory.
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 are actions 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 (Commissioner of Customs vs.
Manila Star Ferry, Inc., G.R. Nos. 31776-78, October 21,
1993).
SMUGGLING
1. An act of any person who shall:
a. Fraudulently import any article contrary to
law, or
b. Assist in so doing, or
c. Receive, conceal, buy, sell, facilitate,
transport, conceal or sell such article
knowing its illegal importation (Sec. 3601,
TCCP)
d. Export contrary to law (Sec. 3514, TCCP)
2. The Philippines is divided into various ports of
entry entry other than port of entry, will be
SMUGGLING.
PORT OF ENTRY
A domestic port open to both foreign and
coastwise trade including airport of entry (Sec.
3514, TCCP).
ALL articles imported into the Philippines whether
subject to duty or not shall be entered through a
customhouse at a port of entry.
Entry: In Customs law means -
1. the documents filed at the Customs house ;
2. the submission and acceptance of the
documents; or
3. the procedure of passing goods through the
customs house (Rodriguez vs. Court of Appeals) GR
No. 115218, September 18, 1995)
CONTRABAND: Articles of prohibited importations
or exportations (Sec. 3514, TCCP).
EVIDENCE FOR CONVICTION IN SMUGGLING CASES
Mere possession of the article in question
UNLESS defendant could explain that his
possession is lawful to the satisfaction of the court
(Sec. 3601, TCCP).
Payment of the tax due after apprehension is not
a valid defense (Rodriguez vs. Court of Appeals, supra).
THINGS SUBJECT TO CONFISCATION IN SMUGGLING
CASES
Anything that was used for smuggling is subject to
confiscation, like the vessel, plane, etc. (Llamado vs.
Commissioner of Customs, G.R. No. L-28809, May 16, 1983).
Exception: Common carriers that are not
privately chartered cannot be confiscated.
RIGHT OF CUSTOMS OFFICERS TO EFFECT
SEIZURE AND ARREST (Sec. 2205, TCCP)
1. 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.
2. May exercise such powers only in conformity
with the laws and provisions of the TCCP.
Persons having police authority to enforce the
Tariff and Customs Laws and effect searches,
seizures and arrests (Sec. 2203, TCCP)
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
agenc i es when aut hor i z ed by t he
Commissioner of Customs;
3. officials of the BIR in all cases falling within
the regular performance 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.
FORFEITURE OF COMMON CARRIERS
1. Generally, common carriers are not subject to
forfeiture. If the owner has knowledge of its
use in smuggling and was a consenting party,
it may be forfeited.
2. 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 the
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 the means of
conveyance used as aforesaid
GOODS IN CUSTOMS CUSTODY BEYOND REACH OF
ATTACHMENT
Goods in the customs custody pending payment
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 vs. Berdiago, G.R. No. L-29218, October 29, 1976).
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
2. That such declaration, affidavit, invoice, letter
or paper is false (Farolan, Jr. vs. Court of Tax
Appeals, G.R. No. 42204, January 21, 1993).
PLACES WHERE SEARCHES AND SEIZURES
MAY BE CONDUCTED
(a) Enclosures;
(b) Dwelling house (there must be a search
warrant issued by a judge);
(c) Vessels or aircrafts and persons or articles
conveyed therein;
(d) Vehicles, beasts and persons; and
(e) Persons arriving from foreign countries.
NOTE: Burden of proof in seizure or forfeiture is
on the claimant provided that:
1. The PROBABLE CAUSE shall be first shown
for the institution of such proceedings; and
2. That seizure and/or forfeiture was made
under the circumstances and in the manner
described in the TCCP (Sec. 2535, TCCP).
I S MANI FEST REQUI RED ONLY FOR
IMPORTED GOODS?
NO. Articles subject to seizure do not have to be
imported goods. Manifests are also required for
articles found on vessels or aircraft engaged in
coastwise trade (Rigor vs. Rosales, G.R. No. L-33756,
October 23, 1982).
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 was 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. When there is fraud (Sec. 2307, TCCP).
ACQUITTAL IN CRIMINAL CHARGE NOT RES
JUDICATA IN SEIZURE OR FORFEITURE
PROCEEDINGS
Reasons:
1. Criminal proceedings are actions in personam
while seizure or forfeiture proceedings are
actions in rem.
2. Customs compromise does not extinguish
criminal liability (People vs. Desiderio, GR No.
L-20805, November 29, 1965).
NOTE: At any time prior to the sale, the delinquent
importer may settle his obligations with the
Bureau of Customs, in which case the aforesaid
articles may be delivered upon payment of the
corresponding duties and taxes and compliance
with all other legal requirements (Sec. 1508, TCCP)
ABATEMENT
The reduction or non-imposition of customs duties
on certain imported materials as a result of:
1. Damage incurred during voyage;
2. Deficiency in contents packages;
3. Loss or destruction of articles after arrival;
4. Death or injury of animals.
ABANDONMENT
An article is deemed abandoned when the owner,
importer or consignee:
1. Expressly signifies in writing to the Collector
of his intention to abandon;
2. Fails to file an entry within 30 days from the
date of discharge of the last package from the
vessel or aircraft (not extendible); or
3. Fails to claim his importation within 15 days
(not extendible) from the date of posting of the
notice to claim such importation (Sec. 1801,
TCCP).
Effects of Abandonment:
1. Deemed to have renounced all interests and
property rights (par. 2, Sec. 1801, TCCP);
2. Ipso facto deemed the property of the
Government;
3. Disposed of in accordance with the TCCP (par.
1, Sec. 1802, TCCP);
4. Nothing shall mean to relieve the owner from
criminal liability which may arise in connection
with the importation (par. 2, Sec. 1802, TCCP)
FRAUDULENT PRACTICES CONSIDERED AS
CRIMINAL OFFENSES AGAINST CUSTOMS
REVENUE LAWS
1. Unlawful importation;
2. Entry of imported or exported article by
means of any false or fraudulent practices,
invoice, declaration, affidavit, or other
documents;
3. Entry of goods at less than their true weights
or measures or upon a classification as to
quality or value;
4. Payment of less than the amount due;
5. Filing any false or fraudulent claim for the
payment of drawback or refund of duties upon
the exportation of merchandise; or
6. Filing any affidavit, certificate or other
document to secure to him or others the
payment of any drawback, allowance or
refund of duties on the exportation of
merchandise greater than that legally due
thereon (Sec. 3602, TCCP).
FAILURE TO PAY CORRECT DUTIES AND TAXES ON
IMPORTED GOODS
After being subject to post-entry audit and
examination, any person, who is found to have
incurred deficiencies in taxes and duties paid for
imported goods, shall be penalized according to
three (3) degrees of culpability:
(a) Negligence where a deficiency results from
failure, through an act or acts of omission or
commission, to exercise reasonable care and
competence to ensure that a statement is
correct.
(b) Gross Negligence - where a deficiency
results from an act or acts of omission or
commission done with actual knowledge or
wanton disregard for the relevant facts and
with indifference to or disregard for obligations
under the statue.
(c) Fraud When the material false statement or
act in connection with the transaction was
committed or omitted knowingly, voluntarily
and intentionally, as established by clear and
convincing evidence (Sec. 3611, TCCP).
DOCTRINES RELATED TO TARIFF AND
CUSTOMS CODE
1. In Mison vs. Natividad, the Supreme Court
has held that the exclusive jurisdiction of the
Collector of Customs cannot be interfered
with by regular courts even upon the
allegation of ownership (Commissioner of Customs
vs. Court of Appeals 481 SCRA 109).
2. A person arriving in the Philippines with
baggage containing dutiable articles is bound
to declare the same in all respects. Adequate
reporting of dutiable merchandise being
brought into the country is absolutely
necessary for the enforcement of customs
laws and failure to comply with those
requisites is as condemnable as failure to pay
customs fees (Jardeleza vs. People 481 SCRA 638).
3. An administrative penalty imposed on the
person arriving in the Philippines with
undeclared dutiable articles is separate from
and independent of criminal liability for
smuggling under Section 3601 of the Tariff
and Customs Code and for violation of other
provisions in the Tariff and Customs Code
4. Section 3601 of the Tariff and Customs Code
is a penal provision - It was designed to
supplement the existing provisions of the Tariff
and Customs Code against the means
leading up to smuggling, which might render it
beneficial by a substantive and criminal
statement separately providing for the
punishment of smuggling. Smuggling is
committed by any person who (1) fraudulently
imports or brings into Philippines any article
contrary to law (2) assists in so doing any
article contrary to law, or (3) receives,
conceals, buys or sells or in any manner
facilitates the transportation, concealment or
sale of such goods after importation, knowing
the same to have imported contrary to law.
5. The phrase contrary to law in Section 3601
qualifies the phrases imports or brings into
the Philippines and assists in doing and not
the word article The word law includes
regulations having the force and effect of law,
meaning substantive or legislative type rules
as opposed to general statements of policy or
rules of agency, organization, procedures or
positions.
6. Importation consists of bringing an article into
the country from the outside. Importation is
complete when taxable, dutiable commodity is
brought within the limits of the port of entry.
7. The fraud contemplated by law must be
intentional fraud, consisting of deception,
willfully and deliberately dared or resorted to
in order to give up some right. Fraudulent
concealment presupposes a duty to disclose
the truth and that disclosure was not made
when opportunity to speak and inform was
present. Fraud is not confined with words or
positive assertions - It may consist as well of
deeds, acts or artifice of a nature calculated to
mislead another and thus allow one to obtain
undue advantage.
8. The term entry in Customs Law has a triple
meaning (a) the documents filed at Customs
House (b) the submission and acceptance of
those documents; and (c) procedure of
passing goods through the Customs house.
9. The Bureau of Customs exercises exclusive
jurisdiction over seized and forfeited cars - It
is tasked to enforce tariff and supervise and
control customs law and all other laws, rules
and regulations relating to the tariff and
customs administration, and to supervise and
control all import and export cargoes, loaded
or stored in piers, terminal facilities, including
container yards and freight stations, for the
protection of government revenues (Asian
Terminals vs. Bautista-Ricafort 505 SCRA 748).
10. The forfeiture of seized goods in the Bureau
of Customs is a proceeding against the goods
and not against the owner - It is in the nature
of a proceeding in rem, i.e., directed against
the res or imported articles and entails a
determi nati on of the l egal i ty of thei r
importation.
Annexes to Tariff and Customs
Annexes to Tariff and Customs
Procedure In Customs Protest Cases
The Collector acting within his jurisdiction shall cause the imported goods to be entered at the customhouse
&
The Collector shall assess, liquidate, and collect the duties thereon, or detain the said goods if the party
liable does not pay the same
&
The party adversely affected (the protestant) may file a written protest on his foregoing liability with the
Collector within 15 days after paying the liquidated amount (the payment under protest rule applies)
&
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 the Commissioner
' (
If decision is adverse to the
protestant
&
If decision is adverse
to the government
&
protestant
&
to the government
&
Appeal with the Court of
Tax Appeals Division within
30 days from notice
&
Automatic review by
the Secretary of
Finance
&
Appeal with the Court of
Tax Appeals Division within
30 days from notice
&
Automatic review by
the Secretary of
Finance
&
Whether the CTA division
grants or denies wholly or
partially the protest, file a
motion for reconsideration
within 15 days from receipt
of the decision
&
to the government, the
decision shall be final
and executory and is
not appealable
&
within15 days from receipt
of the decision
&
to the government, the
decision shall be final
and executory and is
not appealable.
&
Whether the MR is granted
or denied, wholly or partially,
adverse party shall file an
Appeal with the CTA en
banc within 15 days from
receipt of decision
&
Appeal by certiorari with the
Supreme Court within 15
days from notice
to the protestant,
Appeal with the
Court of Tax Appeals
Division within 30
days from notice
Then follow the
procedure given in 4
th

column.
Whether the MR is granted
or denied, wholly or partially,
Appeal with the CTA en
banc within15 days from
receipt of decision
&
Supreme Court within 15
days from notice
to the protestant,
Appeal with the
Division within 30
days from notice
Then follow the
procedure on the left.
Administrative and Judicial Procedures Relative to
Customs Seizures and Forfeitures
Determination of probable cause and issuance of warrant
&
Actual seizure of the articles
&
Listing of description, appraisal and classification of seized property
&
Report of seizure to the Commissioner of Customs and the Chairman, Commission on Audit
&
Issuance by the Collector of a warrant of detention
&
Notification to owner or importer
&
Formal hearing
&
District Collector renders his decision
' (
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 the Commissioner
' (
protestant
&
to the government
&
protestant
&
to the government
&
Appeal with the Court of Tax
Appeals Division within 30
days from notice
&
Automatic review by
the Secretary of
Finance
&
Appeal with the Court of Tax
Appeals Division within 30
days from notice
&
Automatic review by
the Secretary of
Finance
&
within15 days from receipt of
the decision
&
to the government,
the decision shall be
final and executory
and is not
appealable.
&
within 15 days from receipt of
the decision
&
to the government,
the decision shall be
final and executory
and is not
appealable.
&
Whether the MR is granted or
denied, wholly or partially,
Appeal with the CTA en banc
decision
&
SC within 15 days from notice
to the protestant,
Appeal with the
Court of Tax
Appeals Division
within 30 days from
notice
Then follow the
Whether the MR is granted or
denied, wholly or partially,
Appeal with the CTA en banc
within15 days from receipt of
decision
&
SC within 15 days from notice
to the protestant,
Appeal with the
Court of Tax
Appeals Division
within 30 days from
notice
Then follow the
! END OF VALUE-ADDED TAX "
TAXATION LAW
TAX REMEDIES UNDER THE NIRC
TAX REMEDIES UNDER THE NIRC
Preliminaries
Preliminaries
REMEDY is a method by which a cause of
action can be enforced by law or equity. It is a
procedure or type of action which may be availed
of by the plaintiff as the means to obtain the relief
desired (Florenz D. Regalado, Remedial Law Compendium,
Vol. 1, p. 20).
IMPORTANCE
1. They enhance and support the governments
tax collection.
2. They are safeguards of the taxpayers rights
against arbitrary action.
Authority of Commissioner under Title VIII,
Chapter 1 - Remedies:
a. Compromise the payment of internal revenue
tax.
b. Abate or cancel a tax liability.
c. Credit or refund taxes or penalties, refund
value of internal revenue stamps when they
are returned in good condition by purchaser.
d. In his discretion, redeem or change unused
stamps that have been rendered unfit for use
and refund their value upon proof of
destruction.
The Commissioner shall submit to the Chairmen
of Committee on Ways and Means of both Senate
and House of Representatives, every six (6)
months, a report on the exercise of his powers as
above-mentioned stating the following:
a. names and addresses of taxpayers whose
cases have been subject to abatement or
compromise;
b. amount involved;
c. amount compromised or abated; and
d. reasons for the exercise of power.
The report shall be presented to the Oversight
Committee in Congress that shall be constituted to
determine that said powers were exercised
reasonably and the Government is not unduly
deprived of revenues.
Tax Remedies Under The NIRC
EXECUTIVE COMMITTEE
TAXATION LAW
DICT V. UNTAYAO edp
Assessment of Taxes
Assessment of Taxes
General rule:
Taxes are self-assessing and thus, do not
require the issuance of an assessment notice in
order to establish the tax liability of a taxpayer.
Exceptions: (T2D2)
1. Tax period of a taxpayer is Terminated [Sec.
6(D), NIRC]
2. Deficiency tax liability arising from a tax audit
conducted by the BIR [Sec. 56(B), NIRC]
3. Tax lien [Sec. 219, NIRC]
4. Dissolving corporation [Sec. 52(c), NIRC]
ASSESSMENT a finding by the taxing authority
that the taxpayer has not paid the correct taxes. It
is also a written notice to a taxpayer to the effect
that the amount stated therein is due as a tax and
containing a demand for the payment thereof.
SIGNIFICANCE OF ASSESSMENT ON THE PART OF THE
GOVERNMENT (RSTE)
a. In the proper pursui t of j udi ci al and
extrajudicial Remedies to enforce taxpayer
liabilities and certain matters that relate to it,
such as the imposition of surcharges and
interests
b. In the application of Statute of limitations
c. In the establishment of Tax liens and
d. In estimating the revenues that may be
collected by the government in the coming
year (Mamalateo, Victorino. Reviewer on Taxation,
2004).
IMPORTANCE OF ASSESSMENT ON THE PART OF THE
TAXPAYER
a. Assessment informs the taxpayer that he or
she has tax liabilities (De Leon, NIRC Annotated,
Vol. 2, 2003, p. 422).
b. The issuance of assessment is vital in
determining the period within which to protest
it (CIR vs. Pascor Realty and Devt. Corporation, GR No.
L-128315 June 29, 1999, also cited in De Leon, NIRC
Annotated, Vol. 2, 2003, p. 422).
PRINCIPLES GOVERNING TAX ASSESSMENTS
(PADDD)
1. Assessments are Prima facie presumed
correct and made in good faith. All
presumptions are in favor of tax assessment
(Cagayan Robina Sugar Milling Co. vs. CA, G.R. No.
122451, Oct. 12, 2000);
2. Assessments should not be based on
presumptions no matter how logical the
presumption might be, must be based on
Actual facts (CIR vs. Benipayo, G.R. No. L- 13656,
Jan. 31, 1962);
3. Assessment is Discretionary on the part of
the Commissioner (Meralco Securities Corp. vs.
Savellano, G.R. No. L-36181 and L-36748, Oct. 23,
1992);
4. The authority vested in the Commissioner to
assess may be Delegated but the power to
make final assessments cannot be delegated
(City Lumber, Inc. vs. Domingo, G.R. No. L-18611, June
30, 1964)
5. Assessment must be Directed to the right
party (Republic vs. Dela Rama, G.R. No. L-21108, Nov.
29, 1966).
BURDEN OF PROOF IN PRE-ASSESSMENT
PROCEEDINGS
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 (Cagayan Robina Sugar
Milling Co. vs. Court of Appeals, G.R. No. 122451, October
12, 2000).
Reasons:
a. lifeblood theory
b. presumption of regularity in the performance
of public functions
KINDS OF ASSESSMENT (SIDE)
1. SELF- ASSESSMENT one in which the tax is
assessed by the taxpayer himself.
2. DEFICIENCY ASSESSMENT made by the tax
assessor himself whereby the correct amount
of the tax is determined after an examination
or investigation is conducted.
The liability is determined and assessed for
the following reasons:
a. amount ascertained exceeds that which is
shown as the tax by the taxpayer in his
return;
b. no amount of tax is shown in the return;
and
c. taxpayer did not file any return at all.
3. ILLEGAL AND VOID ASSESSMENT tax assessor
has no power to assess at all.
4. ERRONEOUS ASSESSMENT assessor has
power to assess but errs in the exercise
thereof.
JEOPARDY ASSESSMENT tax assessment made by
an authorized Revenue Officer without the benefit
of complete or partial audit, in light of the Revenue
officers belief that the assessment and collection
of a deficiency tax will be jeopardized by delay
caused by the taxpayers failure to:
Compl y wi t h audi t and i nvest i gat i on

requirements to present his books of accounts
and/or pertinent records, or
Substantiate all or any of the deductions,

exemptions or credits claimed in his return
Assessment may also be:
1. PRELIMINARY ASSESSMENT OR PAN a
pre-assessment, served under any of
the following circumstances:
a. Taxpayer fails to file a return where a
return is required;
b. He files a return but fails to pay the tax;
c. He files a return, pays the tax but
payment is insufficient because certain
deductions claimed are disallowed by the
BIR.
2. FINAL ASSESSMENT OR FAN
- declaration of deficiency taxes issued to a
taxpayer who fails to respond to a PAN
within the prescribed period of time, or
whose reply to the PAN was found to be
without merit.
- must be issued within 3 years from the
time the return was filed unless a waiver
is issued within the 3-year period or there
was a failure to file or there is fraud.
MEANS EMPLOYED IN THE ASSESSMENT OF TAXES
The Commissioner or his duly authorized
representative is authorized to use the following
powers to make assessment (Sec. 6. NIRC): (TIP2
CABE)
1. examination of return and determination of tax
due;
2. use of best evidence obtainable
a. when a report or return required to be
filed shall not be forthcoming within the
time fixed by laws, rules and regulations;
b. When there is a reason to believe that
any such report or return is false,
incomplete or erroneous;
BEST EVIDENCE OBTAINABLE - any
data, record, papers, documents, or any
evidence gathered by internal revenue
off i cers f rom government off i ces/
agencies, corporations, employees,
cl i ents, pati ents, tenants, l essees,
vendees and from all other sources with
whom t he t axpayer had previ ous
transactions or from whom he received
any income (Aban, 2001, p.182)
3. authority to conduct inventory taking,
surveillance and prescribe gross sales and
receipts;
- If there is reason to believe that the
taxpayer is not declaring his correct
income, sales or receipts for internal
revenue purposes
4. authority to terminate taxable period in the
following instances;
a. taxpayer is retiring from business subject
to tax;
b. taxpayer is intending to leave the
Philippines or to remove his property
therefrom or to hide or conceal his
property; and
c. taxpayer is performing any act tending to
obstruct the proceedings for the collection
of taxes.
5. authority to prescribe real property values;
6. authority to inquire into bank deposit accounts
in the following instances;
a. a decedent to determine his gross estate;
and
b. any taxpayer who has filed an application
for compromise of his tax liability by
reason of financial incapability to pay his
tax liability.
7. authority to accredit and register tax agents;
8. Authority to prescribe additional procedural or
documentary requirements.
Assessment Process
PROCEDURE IN THE ISSUANCE OF A
DEFICIENCY TAX ASSESSMENT
(Assessment Process) (R.R. No.12-99)
** NPEFD **
1. ISSUANCE OF A LETTER OF AUTHORITY (LA)
LETTER OF AUTHORITY 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 MAY ISSUE A LETTER OF AUTHORITY?
a. After a return has been filed, the CIR or
his duly authorized representative may
authorize the examination of the books of
any taxpayer and the assessment of the
correct amount of tax (Sec. 6, NIRC).
b. The Revenue Regional Director shall
approve and sign all LAs for all audit
cases within his regional jurisdiction
EXCEPT:
(a) cases involving civil or criminal tax fraud
falling under the jurisdiction of the Tax
Fraud Division of the Enforcement Service
and ;
(b) policy cases under audit by Special Teams
in the National Office (RMO 36-99)
NOTE: It must be served to the concerned
taxpayer within 30 days from its date of
issuance; otherwise, it shall become null and
void. The taxpayer shall then have the right to
refuse the service of this LA unless the LA is
revalidated.
A tax return filed by a taxpayer may be
amended, revised or modified within 3
years from date of such filing; provided,
that no notice for audit, or investigation of
such return, statement or declaration or
letter of authority for investigation has
been actually served upon him (Sec. 6,
NIRC; R.R. No. 12-99).
&
2. AUDIT / TAX INVESTIGATION
A Revenue Officer is allowed only 120 days
from the date of receipt of a LA by the
taxpayer, to conduct the audit and submit the
required report of investigation. If the Revenue
Officer is unable to submit his final report of
investigation, he must then submit a Progress
Report to his Head of Office and surrender the
LA for revalidation.
&
3. DETERMINATION OF TAXPAYERS LIABILITY FOR
DEFICIENCY TAX
Based on his preliminary findings, the
Revenue Officer shall make a report of his
i nvest i gat i on st at i ng hi s f i ndi ngs and
determination of the taxpayers liability for tax
deficiency.
If the taxpayer i s NOT l i abl e, the
assessment process ends.
If the taxpayer is liable, the Revenue
Officer shall state in his report if the
taxpayer agrees to his liability to deficiency
tax.
&
4. NOTICE FOR INFORMAL CONFERENCE
It is 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 the taxpayer DISAGREES to the report, he
shall be informed in writing by the Revenue
District Officer or by the Special Investigation
Division (in case of the BIR National Office) of
the discrepancies for the purpose of Informal
Conference.
The taxpayer shall have fifteen (15) days from
the date of his receipt of the notice for informal
conference to explain his side.
&
5. (A) INFORMAL CONFERENCE
If taxpayer responds within 15 days from
receipt of said notice, an informal conference
will be held.
Purpose of Informal Conference to afford
the taxpayer opportunity to present his
case.
OR
(B) ENDORSEMENT TO THE ASSESSMENT DIVISION
OF THE REVENUE REGIONAL OFFICE TO THE CIR
OR DULY AUTHORIZED REPRESENTATIVE FOR
REVIEW AND ISSUANCE OF TAX ASSESSMENT
If taxpayer fails to respond within 15 days; in
which case, he shall be considered in
DEFAULT. The endorsement is made by the
Revenue District Officer or the Special
Investigation Division of the Revenue Regional
Office or the Chief of Division in the National
Office, as the case may be.
NOTE: If after 5(A) OR after 5(B), there exist
sufficient basis to assess taxpayer for any
deficiency tax, the said Office shall issue to
taxpayer, at least by registered mail, a
Preliminary Assessment Notice.
&
6. ISSUANCE OF PRELIMINARY ASSESSMENT NOTICE
(PAN)
Preliminary Assessment Notice (PAN) a
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.
It must show in detail the law and the facts,
rules and regulations or jurisprudence upon
which the proposed assessment is based.
NOTE:
A. The BIR may opt to issue a PAN once or
twice from which the taxpayer shall have
15 days from receipt thereof to file a letter
contesting the proposed assessment.
These protests are different from the
administrative protests of request for
reinvestigation/ reconsideration which may
only be taken from a Final Assessment
Notice or FAN (may refer to the case of Telesat Inc.
vs. CIR, CTA case No. 6812, January 2, 2006)
B. If the taxpayer fails to respond within 15
days from date of receipt of the PAN, he
shall be considered in DEFAULT, in which
case, a formal letter of demand and
assessment notice shall be caused to be
issued by said Office.
EXCEPTIONS TO THE INFORMAL CONFERENCE AND
THE PRELIMINARY ASSESSMENT NOTICE
(MDCEA)
GENERAL RULE: Pre-assessment notice is
required.
EXCEPTIONS: (MDCEA)
a) When the finding for any deficiency tax is
the result of Mathematical error in the
computation of the tax as appearing on the
face of the return;
b) When a Discrepancy has been determined
between the tax withheld and the 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;
d) When the Excise tax due on excisable
articles has not been paid; or
e) When an Article locally purchased or
imported by an exempt person, such as,
but not limited to, vehicles, capital
equipment, machineries and spare parts,
has been sold, traded or transferred to
non-exempt persons.
&
7. Formal Letter of Demand and Assessment
Notice
must be issued within 3 years from the
time the return was filed UNLESS a waiver
is issued within the 3year period or there
was a failure to file or there is fraud.
Shall inform the taxpayer of the fact of tax
def i ci ency and t hat t he r epor t of
investigation submitted by the Revenue
Officer conducting the audit shall be given
due course.
Shall state the facts, the law, rules and
regulations or jurisprudence on which the
assessment is based; otherwise, the
formal letter of demand and assessment
notice shall be void.
Shall be sent to the taxpayer by registered
mail or by personal delivery.
If sent by personal delivery, the taxpayer
or his duly authorized representative shall
acknowledge receipt thereof in the
duplicate copy of the letter of demand,
showing the following: (a) name (b)
signature (c) designation and authority to
act for and in behalf of taxpayer, if
acknowledged received by a person other
than the taxpayer himself and (d) date of
receipt thereof. (R.R. No. 12-99)
Tax Remedies of The Taxpayer
Tax Remedies of The Taxpayer
REMEDIES BEFORE PAYMENT
(1) ADMINISTRATIVE REMEDIES
a. Protest against Assessment (Sec. 228 of
NIRC and R.R. No. 12-99)
b. Enter into a compromise
(2) JUDICIAL REMEDIES
a. Civil action including appeal to the CTA up
to the SC
(3) SUBSTANTIVE REMEDIES
a. Questioning the constitutionality or validity
of tax statutes or regulations
b. Non-retroactivity of rulings (Sec. 246, NIRC)
c. Failure to inform the taxpayer in writing of
the legal and factual bases of assessment
makes it void (Sec. 228, NIRC)
REMEDIES AFTER PAYMENT
(1) TAX REFUND
(2) TAX CREDIT
Remedies Before Payment
ADMINISTRATIVE REMEDIES
PROTEST 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 administrative remedies have been
exhausted. It is also the formal act of the taxpayer
questioning the official actuation of the CIR. This
is equivalent to a pleading.
The protest may be a:
1. Request for reconsideration a plea for a
re evaluation of an assessment on the basis
of existing records without need of additional
evidence which may involve a question of fact
or law or both.
2. Request for reinvestigation a plea for the
reinvestigation of the assessment on the
basis of the newly-discovered or additional
evidence that a taxpayer intends to present in
the reinvestigation. It may also involve a
question of law or fact or both.
Request for
Reconsideration
Request for
Reinvestigation
Involves re-evaluation
of assessment based
on existing records
Involves presentation of
newly-discovered or
additional evidence
It does NOT toll the
Statute of Limitations
It tolls the Statute of
Limitations
CHARACTERISTICS OF A VALID PROTEST
A protest is considered valid if it satisfies the
following conditions: (WAWFC)
a. in Writing;
b. Addressed to CIR;
c. must be accompanied by a Waiver of the
Statute of Limitations in favor of the
government:
If the request for reconsideration or
reinvestigation is not accompanied by a
valid waiver or there is no request for
reinvestigation that had been granted by
the BIR Commissioner, the taxpayer may
still be held in estoppel and be prevented
f r om set t i ng up t he def ense of
prescription of the Statute of Limitations
on collection when, by his own repeated
request or positive acts, the Government
had been, for good reasons, persuaded
to postpone collection to make the
taxpayer feel that the demand is not
unreasonable or that no harassment or
injustice is meant by the Government
(Bank of the Philippine Islands vs. CIR, G.R. No.
139736, Oct 17, 2005).
d. states the Facts, applicable law, rules and
regulations or jurisprudence on which his
protest is based; otherwise, his protest shall
be considered void and without force and
effect on the event the letter of protest
submitted by the taxpayer is accepted;
e. Contains the following: (NR_PAD_I2SD)
(1) Name of the taxpayer and address for the
immediate past 3 taxable years;
(2) Nature of the Request, specifying the
newly discovered evidence he intends to
present;
(3) Taxabl e Per i ods cover ed by t he
assessment;
(4) Amount and kind of tax involved and the
assessment notice and number;
(5) Date of receipt of assessment notice or
letter of demand;
(6) Itemized statement of the finding to which
the taxpayer agrees(if any) as basis for
the computation of the tax due, which
must be paid immediately upon the filing
of the protest;
(7) Itemized schedule of the adjustments to
which the taxpayer does not agree;
(8) Statements of facts or law in support of
the protest; and
(9) Documentary evidence as it may deem
necessary and relevant to support its
protest, to be submitted 60 days from the
filing thereof.
P R OC E D U R E I N P R OT E S T I N G A N
ASSESSMENT
1. THE TAXPAYER SHALL FILE HIS
PROTEST WITHIN 30 DAYS FROM
R E C E I P T O F T H E F I N A L
ASSESSMENT.
If the taxpayer protest only to some of
the issues raised
- taxpayer must pay the deficiency
tax/taxes attributable to the
undisputed issues inclusive of
interests and surcharges before
an action may be taken on the
disputed issues.
A collection letter shall be issued
calling for the payment of the said
undisputed deficiency tax.
In such case, the prescriptive period
for assessment or collection of the
tax or taxes attributable to the
disputed issues shall be suspended.
2. SUBMISSION OF ALL RELEVANT
SUPPORT I NG DOCUMENT S
WITHIN 60 DAYS
The 60 day period is counted from the
filing of the protest.
Non-submi ssi on of the documents
renders the assessment final, executory
and demandable.
SUPPORTING DOCUMENTS
"Such documents which the taxpayer feels
would be necessary to support his protest and
not what the Commissioner feels should be
submitted, otherwise, 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 vs.
CIR, CTA Case No. 5696, August 16, 2001).
3. ADMINISTRATIVE DECISION ON A
DISPUTED ASSESSMENT
! PROTEST I S DENI ED BY THE
COMMI SSI ONER S AUTHORI ZED
REPRESENTATIVE taxpayer may
elevate the protest to the Commissioner
within 30 days from receipt of the
decision for a request for reconsideration
and that his case is referred to the
Bureaus Appellate Division. Otherwise, it
becomes final and appeal to the CTA may
be taken.
NOTE:
T h e a u t h o r i t y t o ma k e t a x
assessments may be delegated to
s u b o r d i n a t e o f f i c e r s . S a i d
assessment has the same force and
effect as that issued by the CIR
himself if NOT revised or reviewed by
the latter (Oceanic Network Wireless Inc. vs.
Commissioner of Internal Revenue, G.R. No.
148380 Dec. 9, 2005).
Failure to file a position paper that
would embody the grounds for
reconsideration may be construed as
abandonment of r equest f or
reconsideration (Oceanic Wireless Network
Inc. vs. CIR, supra).
! PROTEST IS DENIED IN WHOLE OR IN
PART BY THE COMMISSIONER
Remedy:
Appeal by the taxpayer to the CTA within
30 days from recei pt of deci si on;
OTHERWISE, the assessment shall
become final, executory and demandable:
Provided, however, that if the taxpayer
elevates his protest to the CIR within 30
days from date of receipt of the final
deci si on of CIRs dul y authori zed
representative, the latters decision shall
NOT be considered final, executory and
demandable.
! FAI L URE TO ACT UPON T HE
PROTEST BY THE COMMISSIONER
O R H I S D U LY A U T H O R I Z E D
REPRESENTATIVE WITHIN 180 DAYS
180 day s c ount ed f r om t he
submission by the taxpayer of the
documents in support of the protest.
In cases of inaction, the taxpayer has
two (2) options:
1. he may appeal to the CTA within
30 days from lapse of the 180
day period provided for under
Sec. 228 of the NIRC; or
2. H e m a y w a i t u n t i l t h e
Commissioner decides on his
protest before he elevates the
case.
These options are mutually exclusive
and resort to one bars the application
of the other (Rizal Commercial Banking
Corporation vs. CIR, G.R. No. 168498. April
24, 2007).
NOTE:
Constructive Service of the decision:
a. No response is received from the
taxpayer within the prescribed period
from date of the posting of the mail;
b. The decision is personally served on
the taxpayer or his duly authorized
representati ve, who refused to
acknowledged receipt thereof;
c. By leaving the decision in the
premises of the taxpayer and this fact
of constructive service is attested to,
witnessed and signed by at least two
revenue officers other than the
revenue officer who constructively
served the same. The revenue officer
who constructively served the same
shall make a written report on the
matter which shall form part of the
docket of the case.
! FORMS OF DENIAL
Direct denial of protest
By an administrative decision on a
di sput ed assessment The
decision of the Commissioner or his
duly authorized representative shall:
a. state the facts, the applicable
law, rules and regulations or
jurisprudence on which such
decision is based otherwise, the
decision shall be void, in which
case the same shall not be
considered a decision on a
disputed assessment and
b. that the same is his final decision
(Sec. 3.1.5, R.R. No. 12-99)
Indirect denial of protest
1. formal and final letter of demand from
the BIR to the taxpayer
A final demand letter from the
Bureau of Internal Revenue,
reiterating to the taxpayer the
immediate payment of a tax
deficiency assessment previously
made, is tantamount to a denial
of the taxpayer's request for
reconsi derati on. Such l etter
amounts to a final decision on a
disputed assessment and is thus
appealable to the Court of Tax
Appeals (CTA) (CIR vs. Isabela
Cultural Corp. G.R. No. 135210, July
11, 2001).
A formal letter of demand may be
considered a decision on a
d i s p u t e d o r p r o t e s t e d
assessment. This is the reason
for the rule that the CIR should
ALWAYS indicate in clear and
unequi vocal l anguage what
constitutes his final determination
of the disputed assessment. On
the basis of such statement, the
aggrieved taxpayer would be
able to determine when his right
to appeal to the tax court accrues
(Oceanic Wireless Network Inc. vs. CIR,
supra).
2. Ci vi l col l ect i on can al so be
considered as denial of protest of
assessment as held in the cases of
Yabes vs. Flojo G.R. No. 46954, July
20, 1982 and BIR vs. Union Shipping
Corp G.R. No. 66160. May 21, 1990.
Commissioner did not rule on
the taxpayers motion for
r e c o n s i d e r a t i o n o f t h e
assessment it was only when
r es pondent r ec ei v ed t he
summons on the civil action for
the col l ecti on of defi ci ency
income tax that the period to
appeal commenced t o r un
(Commissioner vs. Union Shipping Corp.)
Preliminary collection letter
may serve as assessment
notice (United International Pictures vs.
Commissioner G.R. No. 110318 Aug. 28,
1996).
3. Issuance of warrant of distraint and
l evy t o enf or ce col l ect i on of
deficiency assessment is tantamount
to outright denial of the request for
reconsideration (Vicente Hilado vs. CIR.
CTA Case 1256. Feb. 25, 1964).
INSTANCES WHEN ASSESSMENT BECOMES
FINAL AND EXECUTORY:
1. Taxpayer fails to respond within 15 days to
the Preliminary Assessment Notice.
2. Taxpayer fails to file a valid protest against the
final notice of assessment within 30 days from
receipt (Dayrit vs. Cruz G.R. No. L-39910, September
26, 1988).
NOTE: A final notice or formal NOTICE of
assessment is different from a final and
executory assessment. The former is an
assessment that becomes the subject of a
protest. It becomes final and executory if no
protest is filed within a period of 30 days from
its receipt (R.R. No. 12-99, 3.1.5, par. 4).
3. Taxpayer fails to appeal to CTA from the
adverse decision of the Commissioner or his
representative on the protest within 30 days
from receipt thereof.
Except if the protest is decided by the
Commissioners representative and taxpayer
elevates it to the Commissioner, in which
case, it is the latters decision that becomes
final and executory if not appealed by the
taxpayer to the CTA.
4. If upon inaction on the protest by the
Commissioner or his representative within
180 days from the submission of the taxpayer
of the supporting documents, taxpayer fails to
appeal to the CTA within 30 days from the
lapse of the 180 day period which is counted
f rom t he submi ssi on of t he requi red
documents.
5. Taxpayer fails to appeal to the Supreme Court
from the adverse decision of the CTA within
15 days.
JUDICIAL REMEDIES
1. Appeal to the Court of Tax Appeals
(Division) within 30 days from receipt of
decision on the protest or from the lapse of
180 days due to inaction of the Commissioner
otherwise it will be final and executory (Sec. 228,
1997 NIRC)
NOTE:
If the taxpayer chooses to wait for
p o s i t i v e a c t i o n o n p a r t o f t h e
Commissioner, then the same could not
result in the assessment becoming final,
executory and demandable. To adopt the
contrary theory will not only sanction
inefficiency, but will likewise condone the
Bureaus inaction (Lascona vs. CIR, CTA Case
No. 5777, Jan. 4, 2000), which was not the
intention of the law.
Provided, further, that should the
taxpayer opt to await the final decision of
the CIR on the disputed assessments
b e y o n d t h e 1 8 0 d a y p e r i o d
abovementioned, the taxpayer may
appeal such final decision to the Court
under Section 3(a), Rule 8 of these Rules
( 3 0 d a y s f r o m r e c e i p t o f t h e
decision) (Revised Rules of CTA, Rule 4, Sec.
3(a)(2) A.M. No. 05-11-07-CTA,Effective December
15, 2005).
2. Appeal to the CTA en banc the party
adversely affected by the CTA Divisions
d e c i s i o n ma y f i l e o n e mo t i o n f o r
reconsideration/new trial within 15 days from
receipt of the decision. If the MR is denied, file
a petition for review with the CTA en banc.
3. Appeal to the Supreme Court within 15
days from the receipt of the decision of the
CTA.
4. By way of special civil action Petition for
certiorari, prohibition and mandamus to the
Supreme Court in cases of grave abuse of
discretion, lack of jurisdiction or excess of
jurisdiction.
5. 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, 1997
NIRC)
6. Action for damages against a revenue officer
by reason of any act done in the performance
of official duty (Sec. 227, 1997 NIRC)
7. Injunction if collection may jeopardize the
interest of the government and/or the
taxpayer.
RULES GOVERNING INJUNCTION
General Rule: Tax collection CANNOT be
restrained by court injunction (Sec. 218, NIRC)
Justification: Lifeblood Theory
Exception: Injunction may be issued by the CTA
in aid of its appellate jurisdiction under RA 1125 (as
amended by RA 9282).
CONDITIONS FOR THE ISSUANCE OF AN INJUNCTION
BY THE COURT OF TAX APPEALS
If, in its opinion, the same may jeopardize the

interest of the government and/or the
taxpayer.
In this instance, the court may require the
taxpayer either to deposit the amount claimed or
file a surety bond for not more than double the
amount with the court.
E F F E CT OF FAI L URE T O AP P E AL
ASESSMENT TO THE COURT OF TAX
APPEALS:
1. The decision or assessment becomes final
and executory.
2. The taxpayer is barred in an action for the
collection of the tax by the government from
re-opening the question already decided;
3. The assessment is considered correct which
may be enforced by summary or judicial
remedies;
4. In a proceeding for collection of tax by judicial
action, the taxpayers defenses are similar to
those of the defendant in a case for the
enforcement of a judgment by judicial action;
and
5. The assessment which has become final and
executory cannot be superseded by a new
assessment.
REGLEMENTARY PERIOD IN INCOME TAX
IMPOSED BY LAW UPON THE TAXPAYER
(Pursuant to Rev. Reg. No. 12-99, Sec. 228 of the 1997 NIRC,,
and RA No. 1125 as amended by RA No. 9282)
BIR makes a tax assessment
&
If taxpayer is not satisfied with the assessment file
a protest within 30 days from 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 receipt of the decision of the
CIRs duly authorized representative officer
&
Appeal to the CTA Division within 30 days from
receipt of final decision of CIR or his duly
authorized representative (the taxpayer has the
option to appeal straight to the CTA upon receipt
of the decision of the CIRs duly authorized
representative)
&
If the CIR or his duly authorized representative
fails to act on the protest within 180 days from
date of submission by taxpayer, the latter may
appeal within 30 days from lapse of the
180-day period with the CTA Division; OR he may
opt to await the final decision of the CIR on the
disputed assessments beyond the 180 day-period
abovementioned, the taxpayer may appeal such
final decision to the Court under Section 3(a),
Rule 8 of these Rules (Revised Rules of CTA, Rule 4,
Sec.3 (a) (2) A.M. No. 05-11-07-CTA, Effective December 15,
2005).
&
The party adversely affected by the CTA Divisions
decision may file one motion for reconsideration/
new trial within 15 days from receipt of decision.
If the MR is denied file a petition for review with
the CTA en banc
&
Appeal to the SC within 15 days from receipt of
the CTA en banc decision under Rule 45 of the
Rules of Court
Remedies After Payment
FILING FOR A CLAIM OF TAX REFUND OR TAX
CREDIT
A. TAX REFUND actual reimbursement of
the tax
B. TAX CREDIT the government issues a
tax credit certificate or a tax credit memo
covering the amount determined to be
reimbursable, can be applied after proper
verification against any sum that may be
due and collectible from the taxpayer.
GROUNDS FOR FILING A CLAIM FOR TAX
REFUND OR TAX CREDIT:
1. Tax is collected erroneously or illegally
2. Penalty is collected without authority.
3. Sum collected is excessive or in any manner
wrongfully collected.
Tax Refund vs. Tax Credit
TAX REFUND TAX CREDIT
The taxpayer asks for
restitution of the money
paid as tax
The taxpayer asks that
the money so paid be
applied to his existing
tax liability
Two-year period to file
claim with the CIR
starts after the
payment of the tax or
penalty
Two-year period starts
from the date such credit
was allowed (in case
credit is wrongly made).
AUTHORITY OF COMMISSIONER UNDER
SECTION 204 (C) NIRC:
1. Credit or refund taxes erroneously or illegally
received;
2. Credit or refund penalties imposed without
authority;
3. Refund the value of internal revenue stamps
when they are returned in good condition by
the purchaser; and
4. In his discretion, redeem or change unused
stamps that have been rendered unfit for use
and refund their value upon proof of
destruction.
REQUISITES OF TAX REFUND OR TAX
CREDIT: (W2P)
1. Claim must be in Writing; mandatory
requirement, necessary because:
a) It is an opportunity for the Commissioner
to correct the errors of his subordinates;
b) To notify the government
2. It must be filed with the Commissioner
within two (2) years after the payment of
the tax or penalty.
NOTE: No suit or proceeding shall be
instituted after the expiration of the said two
(2) years regardless of any supervening
cause that may arise after payment.
3. Show proof of Payment.
Requirement of filing the refund or credit
within 2 years is a condition precedent,
noncompliance bars recovery (Phil. Acetylene
Co., Inc. vs. Commissioner, CTA Case No. 1331,
Nov. 7, 1965)
QUARTERLY INCOME TAXES
In case of OVERPAID QUARTERLY
INCOME TAX FOR CORPORATIONS the
2year period is counted from the date
the final adjustment return is filed after
the end of the taxable year.
NO AUTOMATIC CREDITING of the
overpaid income tax against taxes due in
the succeeding quarters of the following
year for corporations and partnerships
taxable as corporations
THERE IS AUTOMATIC CREDITING and
refund may be claimed in cases of
estates, trusts and individuals for excess
tax payment against the quarterly income
taxes due for the succeeding year .
A return filed showing an overpayment shall be
considered as a written claim for credit or refund.
TAX CREDIT CERTIFICATE one which is
validly issued under the provisions of the Code
and may be applied against any internal revenue
tax, excluding withholding taxes, for which the
taxpayer is directly liable.
ANY REQUEST FOR CONVERSION INTO
REFUND OF UNUTILIZED TAX CREDITS MAY
BE ALLOWED UNDER SEC. 230 subject to the
following:
1. Under Section 230 of NIRC- a tax credit
certi fi cate i ssued, whi ch shal l remai n
unutilized AFTER 5 years from the date of
issue, shall, unless revalidated, be considered
INVALID and shall not be allowed as payment
for internal revenue tax liabilities of the
taxpayer, and the amount covered by the
certificate shall revert to the general fund.
2. The original of the Tax Credit Certificate
showing creditable balance is surrendered to
the appropriate revenue officer for verification
and cancellation; and
3. In no case shall a tax refund be given
resulting from availment of incentives granted
pursuant to special laws for which no actual
payment was made.
RECOVERY OF TAX ERRONEOUSLY OR
ILLEGALLY COLLECTED (Sec. 229):
No suit or proceeding shall be maintained in any
court for the recovery of any national internal
revenue tax hereafter alleged to have been
(Scope of claims for refund): (EWE)
1. Erroneously or illegally assessed or collected;
1. Penalty claimed to have been collected
without authority; and
2. Sum alleged to have been excessively or in
any manner wrongfully collected.
Until a claim for refund or credit has been filed
with the Commissioner; but the suit or proceeding
may be maintained whether or not such tax,
penalty or sum has been paid under protest or
duress.
In no case shall the suit or proceeding be filed
after the expiration of two (2) years from the date
of the payment of the tax or penalty regardless of
any supervening cause that may arise after
payment.
UNDER THE PRESENT LAW, the supervening cause
is NOT considered in determining whether or not
prescription of the taxpayers right to claim the
refund has set in.
EVEN WI THOUT A WRI TTEN CLAI M,
COMMISSIONER MAY REFUND OR CREDIT
TAX where on the face of the return upon which
payment was made, such payment appears to
have been erroneously paid.
Nature of Erroneously Paid or Illegally
Assessed or Collected Taxes taxpayer pays
under a mistake of fact, as when he is not aware
of an existing exemption in his favor at the time
the payment was made.
# In the nature of an exemption from taxation,
strictly construed against the claimant, failure
to discharge such burden is fatal to the claim.
Right to contest tax before or after payment
The taxpayers willingness to pay the tax is no
waiver to raise defense against the taxs legality
(Commissioner of Internal Revenue vs. Gonzales, G.R. No. L-
19495, Nov. 24, 1966).
COMMENCEMENT OF THE TWO (2) YEAR
PERIOD (JURISPRUDENCE)
1. Tax sought to be refunded is illegally or
erroneously collected from the date the
tax was paid (Commissioner vs. Victorias Milling,
G.R. No. L-24108, January 31, 1968).
2. Tax is paid only in installments or only in
part from the date the last or final
installment or payment because for tax
purposes, there is no payment until the whole
or entire tax liability is fully paid (Collector vs.
Prieto, G.R. No. L-11976, August 29, 1961).
3. Taxpayer merely made a deposit counted
from the conversion of the deposit to payment
(Union Garment vs. Collector, CTA Case No. 416,
November 17, 1958)
Merely making a deposit is not equivalent to
payment until the amount is actually applied
to the specific purpose for which it was
deposited.
4. Tax has been withheld from source
(through the withholding tax system)
counted from the date it falls due at the end of
the taxable year
A taxpayer who contributes to the withholding
tax system does not really deposit an amount
to the government, but in truth, performs and
extinguishes his tax obligation for the year
concerned (Gibbs vs. Commissioner, G.R. No.
L-17406, November 29, 1965).
5. End of taxable year vs. Date of the filing of
the final adjusted return from the date
when the final adjusted return was filed.
The rationale in computing this period is the
fact that it is only then that the corporation can
ascertain whether it made profits or incurred
losses in its business operations (ACCRA
Investments vs. Court of Appeals, G.R. No. 96322,
December 20, 1991).
6. Date when quarterly income tax was paid
vs. Date when final adjusted return was
filed from the date when final adjusted
return was filed
The filing of the quarterly income tax return
(Sec. 68) and payment of quarterly income tax
should only be considered mere installments
of the annual tax due (Commissioner vs. TMX Sales,
G.R. No. 83736, January 15, 1992).
7. Date when the final adjustment return was
actually filed (ex. Apr. 2) vs. Last day when
the adjustment return could still be filed
(ex. Apr. 15) from the date the final
adj ust ment ret urn was act ual l y f i l ed
(Commissioner vs. Court of Appeals, G.R. No 117254,
January 21, 1999).
8. 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
(Commissioner vs. Don Pedro Central Azucarera, G.R. No.
L-28467, Feb. 28, 1973).
NOTE: The claim for refund under the law refers
to the:
1. The administrative claim which the taxpayer
should file within two years from payment with
the BIR;
2. The judicial claim that the taxpayer should
commence in the CTA; in case the BIR fails to
act on the action for refund, taxpayer must
commence action for refund before the CTA
within the 2-year period.
WHEN IS THERE WAIVER OF THE
PRESCRIPTION IN AN ACTION FOR REFUND?
If the government failed to plead prescription in a
motion to dismiss or as a defense in its answer to
the petition for review.
EXCEPTION: Taxpayer amends his petition for
review alleging therein a new cause of action and
the government pleads prescription in his answer
to the amended petition for review.
PAYMENT UNDER PROTEST IS NOT
NECESSARY UNDER NIRC
A suit or proceeding for tax refund may be
maintained whether or not such tax, penalty or
sum has been paid under protest or duress (Sec.
229, NIRC).
SUSPENSION OF THE TWO-YEAR
PRESCRIPTIVE PERIOD
1. There is a pending litigation between the
Government and the taxpayer; and
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. vs. Collector,
G.R. No. L-10574, May 28, 1958).
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
(Commissioner vs. Sweeney, G.R. No. L-12178, August 29,
1959).
Exceptions:
1. When the CIR acted with patent arbitrariness.
Arbitrariness presupposes inexcusable or
obstinate disregard of legal provisions
(Commissioner vs. Victorias Milling, G.R. No. L-19667,
Nov. 29, 1966).
2. Under Sec. 79(c)(2) with respect to income
t axes wi t hhel d on t he wages of t he
employees.
Forfeiture of Cash Refund/Tax Credit (Sec. 230
NIRC)
1. Forfeiture of refund in favor of the government
when a refund check or warrant remains
unclaimed or uncashed within five (5) years
from date of mailing or delivery.
2. Forfeiture of Tax Credit a tax credit
certificate which remains unutilized after five
(5) years from date of issue, shall be invalid,
unless revalidated (Sec. 230, 1997 NIRC).
NOTES:
As a general rule, payment under protest is

not required under the NIRC, except when
partial payment of uncontroverted taxes is
requi red under R. R. No. 12-99. The
Commissioner may, even without a written
claim therefor, refund or credit any tax, where
on the face of the return upon which payment
was made, such payment appears clearly to
have been erroneously paid.
In case of the CIRs final denial of the claim

for refund, the 30-day period to appeal with
the CTA must be within the 2-year peremptory
period for instituting judicial action.
OTHER CONSIDERATIONS AFFECTING TAX
REFUNDS:
a) The 2-year prescri pti ve peri od i s not
applicable to input VAT claims for refund
b) Payment under protest is not necessary in
order to obtain refund to internal revenue
taxes.
c) The Commissioner may grant refund or tax
credits even without a written claim if, on the
face of the return upon which payment was
made, the payment appears to have been
clearly erroneous.
d) The partial payment of tax cannot be a basis
for tax refund.
e) The remedy of tax refund cannot be availed of
to revive the right to contest the validity of an
assessment once the same has been lost not
only by failure to appeal but by the lapse of
the reglementary period within which appeal
could have been taken.
EQUITABLE RECOUPMENT IN RELATION TO
TAX REMEDIES not appl i cabl e i n our
jurisdiction because it puts a premium on the
taxpayers neglect to enforce his rights.
It allows a taxpayer whose claim for refund has
been barred due to prescription (lapse of more
than 2 years from date of payment) to recover
said tax by setting off the prescribed refund
against a tax that may be due and collectible to
him.
CORPORATE WITHHOLDING AGENTS in the
Philippines of non-resident foreign corporations
are entitled to claim the refund of excess
withholding tax paid on the income of said
corporations in the Philippines.
REGLEMENTARY PERIODS APPLICABLE TO
TAX CREDIT/REFUND
The taxpayer must file a claim for refund/credit
within 2 years after the payment of tax or penalty
&
In case of inaction by the CIR or his duly
authorized representative and the 2 year period is
about to expire, the taxpayer should appeal to the
CTA division (the appeal must be within the 2-
year period provided above)
Tax Remedies of The Government
Tax Remedies of The Government
TO EFFECT TAX COLLECTION
A. A D M I N I S T R AT I V E R E M E D I E S
(CD_L2F2_SI)
1. Compromise [Sec. 204(A)]
2. Distraint (Actual and Constructive) (Secs.
205-208)
3. Levy [Sec. 207(B)]
4. Tax Lien (Sec. 219)
5. Forfeiture of Property (Secs. 224-225)
6. Suspension of business operations in
violation of VAT (Sec. 115)
7. Giving of reward to Informers who give
information as to tax violations (Sec. 282)
8. Enforcement of Administrative Fines,
surcharges and penalties
B. JUDICIAL REMEDIES (C2)
1. Civil Action (Sec. 221)
2. Criminal Action (Secs. 221 and 222)
C. SUBSTANTIVE REMEDIES (WRSP)
1. Imposition of Withholding tax on certain
income payments [Sec. 57(B)]
2. Issuance of Revenue regulations by
administrative agency (Sec. 245)
3. Failure to obey Summons (Sec 266)
4. Declaration under penalties of Perjury (Sec.
267)
The remedies of distraint 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.
TO CANCEL TAX LIABILITY
A. ADMINISTRATIVE REMEDY
1. Abatement [Sec. 204(B)]
WHEN TAX DEEMED COLLECTED
a. Through summary remedies - when the
Government avails of the summary
method of distraint and levy procedure.
b. Through judicial remedies - by filing of
complaint through the proper court
NOTE: If the decision of the Commissioner 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
vs. CIR, G.R. No. L-24978, Sept. 30, 1969).
To Effect Tax Collection
A. ADMINISTRATIVE REMEDIES
(1)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: (LOA)
1. The taxpayer must have a tax liability;
2. There must be an offer (by the
taxpayer of an amount to be paid by
the taxpayer); and
3. There must be an acceptance (by the
Commissioner or taxpayer as the case
may be) of the offer in the settlement of
the original claim.
A compromise implies mutual agreement. It
cannot be imposed in the absence of a
showing that the taxpayer consented
thereto.
CASES WHI CH MAY BE COMPROMI SED:
(DAC3P)
1. Delinquent accounts;
2. Cases under Administrative Protests;
3. Civil tax cases being disputed before
the courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those
already filed in court or those involving
criminal tax fraud (R.R. No. 30-2002); and
6. Cases covered by Pre-assessment
notices BUT taxpayer is not agreeable
to the findings of the audit office as
confirmed by the review office (Sec. 2, Rev.
Reg. 7-2001).
CASES WHICH MAY NOT BE COMPROMISED:
(WF CD RFE)
1. Withholding tax cases unless the
taxpayer invokes provisions of law that
cast doubt on his obligation to withhold;
2. Criminal tax Fraud cases;
3. Criminal violations already filed in court;
4. Delinquent accounts with duly approved
schedule of installment payments;
5. Ca s e s wh e r e f i n a l r e p o r t s o f
Reinvestigation or reconsideration
have been issued resulting to reduction
in the original assessment and the
taxpayer is agreeable to such decision;
6. Cases whi ch become Fi nal and
executory after final judgment of a court,
where compromise is requested on the
ground of doubtful val i di ty of the
assessment; and
7. Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer (R.R. No. 3002).
OFFICERS AUTHORIZED TO COMPROMISE
1. Commissioner of Internal Revenue
Is authori zed to compromi se
criminal and civil cases arising
from violations of the Tax Code
[Secs. 7(C) and 204, 1997 NIRC]
His power is discretionary and
once exercised by him cannot be
reviewed or interfered with by the
Cour t s ( Ko p p e l , Phi l i p p i ne s v s .
Commissioner, G.R. No. L-1977, September
21, 1950).
2. The Regional Evaluation Board
composed of: (a) the Regional Director
as Chairman, (b) Assistant Regional
Director, the heads of the Legal,
Assessment and Collection Divisions,
and (c) the Revenue District Officer
having jurisdiction over the taxpayer,
as members;
Is authori zed to compromi se

assessment s i ssued by t he
regional offices involving basic
taxes of P500,000 or less, and
mi nor cr i mi nal vi ol at i ons
discovered by regional and
districts officials.
COMMI SSI ONER MAY COMPROMI SE THE
PAYMENT OF ANY INTERNAL REVENUE TAX
WHEN (DI) [Sec. 204 (A), NIRC]
1. There is a reasonable Doubt as to the
validity of the assessment; or
2. The financial position of the taxpayer
demonstrates clear Inability to pay the
assessed tax.
In case of financial incapacity, the
taxpayer should waive in writing
the confidentiality privilege on bank
deposits under RA No. 1405 [Sec. 6
(F) (2), NIRC].
! The offer to compromise a delinquent
account or disputed assessment on the
ground of reasonable doubt as to the
validity of the assessment may be
accepted when it is shown that, among
others:
a. The delinquent account or disputed
assessment resul t ed f rom a
Jeopardy assessment.
Jeopardy Assessment a tax
assessment which was assessed
without the benefit of a complete or
partial audit by an authorized
revenue officer, who has reason to
believe that the assessment and
collection of a deficiency tax will be
jeopardized by delay because of:
(1) The taxpayer s fai l ure to
comply with the audit and
investigation requirements to
present his books of accounts
and/or pertinent records; or
(2) The taxpayer s fai l ure to
substantiate all or any of the
deductions, exemptions, or
credits claimed in his return.
b. 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;.
c. Taxpayers failure to file a request
for reinvestigation/reconsideration
final assessment notice and
there is reason to believe that
assessment is lacking in legal and/
or factual basis; or
d. Taxpayers failure to elevate to the
CTA an adverse decision of the
Commissioner, or his authorized
representative, in some cases,
within 30 days from receipt
thereof and there is reason to
believe that assessment is lacking
in legal and/or factual basis.
! The offer to compromise based on
financial incapacity may be accepted
upon showing that, among others:
a. The corporation ceased operation
or is already dissolved,
Provided, that tax l i abi l i ti es
corresponding to the Subscription
R e c e i v a b l e o r A s s e t s
distributed/ distributable to the
st ockhol ders represent i ng
return of capital at the time of
c es s at i on of oper at i on or
dissolution of business shall NOT
be considered for compromise;
b. The taxpayer, as reflected in its
latest Balance Sheet supposed
to be filed with the Bureau of
Internal Revenue, is suffering
from surplus or earnings deficit
resulting to impairment in the
original capital by at least 50%,
Provided, that amounts payable or
due to stockholders other than
busi ness-rel ated transacti ons
which are properly includible in the
regular "accounts payable" are by
fiction of law considered as part
of capital and not liability, and
Pr ovi ded f ur t her, t hat t he
taxpayer has NO sufficient liquid
asset to satisfy the tax liability;
c. The taxpayer is suffering from a
net worth deficit (total liabilities
exceed total assets), taken from
t he l at est audi t ed f i nanci al
statements,
Provided that in the case of an
individual taxpayer, he has no
other leviable properties under
the law other than his family
home;
d. The taxpayer is a compensation-
income earner with no other
source of income and the familys
gross monthly compensation does
NOT EXCEED P10,500 per month
if single; P21,000 per month if
married, and that it appears that
the taxpayer possesses no other
leviable or distrainable assets,
other than his family home;
e. The taxpayer has been granted by
the SEC or by any competent
t r i bunal a mor at or i um or
suspension of payments to
creditors, or otherwise declared
bankrupt or insolvent (Sec. 3, R.R.
No. 07-2001).
! MINIMUM COMPROMISE RATES (MCR) OF
ANY TAX LIABILITY
1. Under Sec. 204 (A), 1997 NIRC
a. In case of financial incapacity:
MCR = 10% of the basic
assessed tax
b. Other cases:
MCR = 40% of the basic
assessed tax
APPROVAL OF THE COMPROMISE
1. BY THE NATIONAL EVALUATION BOARD
(NEB) COMPOSED OF THE COMMISSIONER
AND FOUR (4) DEPUTY COMMISSIONERS
Cover s ( a) al l compr omi se

settlements where the basic tax
involved exceed P1,000,000 or (b)
for offer of compromise less than
the prescribed minimum rates as
provided under Section 204 (A)
NIRC.
Approval must be by a majority of

all the members of the NEB (Sec. 6,
R.R. No. 30-2002)
2. BY THE REGIONAL EVALUATION BOARD
Covers (a) assessments issued by

the Regional Offices involving
basic deficiency taxes of P500,000
or less and (b) for minor criminal
violations discovered by Regional
and District Offices
NATURE OF A COMPROMI SE I N
EXTRAJUDICIAL SETTLEMENT OF THE
TAXPAYERS CRIMINAL LIABILITY FOR
HIS VIOLATION
1. It is CONSENSUAL in character. The
BIR may only suggest settlement of his
tax liability through a compromise.
2. The extra-judicial settlement and the
amount of the suggested compromise
penalty should CONFORM to the
schedule of compromise penalties
provided under the relevant BIR
regulations or orders.
RULES ON COMPROMISE OF CRIMINAL
VIOLATIONS
General Rule: All criminal violations under
the NIRC may be compromised.
Exceptions:
1. Those already filed in court; and
2. Those involving fraud [Sec. 204 (B), 1997
NIRC].
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 filed with
t he Pr osecut or s Of f i ce BUT
BEFORE the information is filed with
t he cour t : The CI R can st i l l
c o mp r o mi s e P ROV I DE D t h e
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, G.R. No. L-16235, April 20, 1961).
This is more so, when the court has
rendered a FINAL JUDGMENT. As a
mere agent of the Government, the
CIR is not authorized to accept
anything less than what is adjudicated
in favor of the Government. By virtue of
such final judgment, the Government
has already acquired a vested right.
COMPROMISE PENALTY an amount of
money t hat t he t axpayer pays t o
compromise a tax violation, in lieu of
criminal prosecution.
NATURE OF COMPROMISE PENALTY:
It is neither a tax nor an administrative

penalty for tax delinquency, thus a
collection suit does not lie.
A taxpayer cannot be compelled to pay

a compromise penalty. If he does not
want to pay, the CIR must institute a
criminal action.
COMPROMISE
COMPROMISE
PENALTY
Amount paid to
settle TPs civil
liability for tax
assessed
Amount paid to
compromise a tax
violation TP has
committed for which he
is subject to criminal
prosecution
Basis: basic tax
assessed
Basis: gross sales or
receipts during the year
or the tax due
Minimum
amount
prescribed:
depends on the
legal grounds
used by TP
Minimum amount
prescribed: depends on
the nature of tax
violation and is
generally NOT less than
P1,000
Both are mutually agreed upon by the

parties.
Compromise penalties cannot be

imposed and collected in the absence of
a valid compromise agreement
REMEDY IN CASE THE TAXPAYER REFUSES OR
FAILS TO ABIDE THE TAX COMPROMISE
1. Enforce the compromise
a. If it is a judicial compromise, it can
be enforced by mere execution.
JUDICIAL COMPROMISE one
where a decision based on the
c ompr omi s e agr eement i s
rendered by the court on request of
the parties.
b. An y o t h e r c o mp r o mi s e i s
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).
(2)DISTRAINT
DEFINITION: It is the seizure by the
government of personal property, tangible
or intangible, to enforce the payment of
taxes.
NATURE OF THE WARRANT OF DISTRAINT/
LEVY
It is a summary, extra-judicial or
administrative enforcement remedy.
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.
TWO TYPES OF DISTRAINT
1. Actual Distraint
2. Constructive Distraint
ACTUAL DISTRAINT
CONSTRUCTIVE
DISTRAINT
Made only on the
property of a
delinquent taxpayer
Made on the
property of any
taxpayer, whether
delinquent or not
Involves the taking of
possession of his
property; physical
transfer is not
required in case of
intangible property
such as stocks and
credit
Involves only a
prohibition to
dispose of his
property
Effected (1) by leaving
a list of distrained
property; OR (2) by
service of a warrant of
distraint or
garnishment
Effected (1) by
requiring the
taxpayer to sign a
receipt of the
property; OR (2)
by preparing and
leaving a list of
such property
An immediate step for
collection of taxes
Not necessarily
Both are summary remedies for the

collection of taxes.
Both refer only to personal property and

cannot be availed of where the amount
of the tax involved is not more than
P100
REQUISITES FOR THE EXERCISE OF THE
REMEDY OF DISTRAINT (D2P2)
1. The taxpayer must be Delinquent
(except in constructive distraint) in the
payment of tax;
2. There must be a subsequent Demand
for its payment (assessment);
3. The taxpayer must fail to Pay the tax at
the time required; and
4. The Period within which to assess or
collect the tax has NOT yet prescribed.
PERSONS WHO SHALL SEIZE AND DISTRAINT
PERSONAL PROPERTY (ACTUAL DISTRAINT)
1. Co mmi s s i o n e r o r h i s d u l y
authorized representatives if the
amount of delinquent tax is more than
P1,000,000
2. Revenue District Officer (RDO) if
the amount of delinquent tax is
P1,000,000 or less (Sec. 207(A), 1997
NIRC)
Duties of the officer serving the warrant
of distraint: (ASL)
1. Make an Account of the personal
properties distrained;
2. Sign the list of personal properties
distrained to which shall be added, a
statement of the sum demanded and
note of the time and place of sale; and
3. Leave either (a) with the owner or
person from whose possession such
personal properties were taken, OR (b)
at the dwelling or place of business of
such person with someone of suitable
age and discretion (Sec. 208, CTRP)
AUTHORITY OF THE COMMISSIONER TO
INQUIRE INTO BANK DEPOSIT ACCOUNTS
Notwithstanding any contrary provision

of RA 1405, the Commissioner is
authorized to inquire into the bank
deposits of:
a. a decedent to determine his gross
estate; or
b. a taxpayer who files an application
to compromi se by reason of
financial incapacity to pay his tax
liability and waives his right under
RA 1405 [Sec. 6 (F), NIRC]
Distraint includes garnishment of

money even in bank deposits because
R.A. 1405 (Bank Secrecy Law) covers
onl y di vul gi ng of i nformati on of
deposits. No inquiry is made on
garnishment for it only earmarks a
portion of the deposits.
GARNISHMENT the taking of personal
properties, usually cash or sums of money,
owned by a delinquent taxpayer which is in
the possession of a third party
PROCEDURE FOR THE ACTUAL DISTRAINT OR
GARNISHMENT (Secs. 207 209, NIRC)
(CS2PS)
1. COMME N C E ME N T OF D I S T R A I N T
PROCEEDINGS
2. SERVICE OF WARRANT OF DISTRAINT
3. SIGNING OF THE RECEIPT BY TAXPAYER
4. POSTING OF NOTICE
5. SALE OF PROPERTY DISTRAINED
I. Commencement of Distraint
Proceedings (Sec. 207, NIRC)
Either by the CIR or his duly authorized
representative; or by the RDO
$
II. Service of Warrant of Distraint (Sec.
208, NIRC)
With respect to:
a. Personal property
1. upon the owner of the goods,
chat t el s, or ot her per sonal
property; OR
2. upon the person from whose
possession such properties are
taken (possessor) OR
3. at the dwelling or place of business
of such person with a person of
suitable age and discretion
b. Stocks and other securities
1. upon the taxpayer; AND
2. Upon the president, manager,
treasurer or other responsible
of f i cer of t he cor por at i on,
company or association which
I SSUED t he sai d st ock and
securities.
c. Bank accounts shall be garnished by
serving a warrant of distraint
1. upon the taxpayer; AND
2. Upon the president, manager,
treasurer, or other responsible
officer of the bank.
NOTE: Upon receipt of the warrant of
distraint, the bank shall turn over to the
Commissioner so much of the bank
accounts as may be sufficient to satisfy
the governments claim
d. Debts and credits
1. persons owing or having in his
possession the debts;
2. or under his control such credits
or upon his agent.
NOTE: The warrant of distraint shall be
sufficient authority to the person owing
the debts or having in his possession
or under his control any credits
belonging to the taxpayer to pay to the
Commissioner the amount of such
debts or credits.
$
III. Taxpayer must sign receipt
$
IV. Posting of Notice (Sec. 209, NIRC)
REQUIREMENTS OF NOTICE:
1. Notice shall specify the time and place
of sale and the articles distrained;
2. The time of sale shall not be less than
20 days after notice to the owner or
possessor of t he propert y AND
publication or posting of such notice;
and
3. The posting shall be made in not less
than two (2) public places in the city or
municipality where the distraint is
made. One place for posting of such
notice is at the Office of the Mayor of
such city or municipality in which the
property is distrained (Sec. 209, NIRC).
$
V. Sale of Property Distrained (Sec. 209,
NIRC)
RULES GOVERNING SALE
1. Sale must be held at the time and
place stated in the notice.
2. It may be conducted by the revenue
officer (RO) OR through a licensed
commodity or stock exchange.
3. If the sale is conducted by Revenue
Officer, it must be held at a public
auction and the property shall be sold
to the highest bidder for CASH.
4. If sale is through a licensed commodity
or stock exchange, it must be with the
approval of the CIR
5. In case of stocks and other securities,
the officer making the sale shall
execute a BILL of SALE, which shall be
delivered to the buyer and to the
corporation, company or association
(CCA) which issued the stocks or other
securities.
** Upon receipt of the copy of the bill of
sale, an entry of transfer should be
made in the CCAs book and a
corresponding certificate of stock shall
be issued if required.
6. Any RESIDUE over and above what is
required to pay the entire claim
i n c l u d i n g e x p e n s e s s h a l l b e
RETURNED to the owner of the
property sold.
* Expenses chargeable upon seizure
shal l i ncl ude onl y t hose act ual
expenses of seizure and preservation
of the property pending the sale and
does not include services of the RO
7. The officer making the sale shall make
a written report of the proceedings to
the CIR within 2 days after the sale (Sec
211).
NOTE: I f at any t i me pr i or t o t he
consummation of the sale, ALL proper
charges are paid to the officer conducting
the sale, all the distrained properties shall
be restored to the owner (Sec. 210, NIRC).
THE TAXPAYERS PROPERTY MAY BE
PLACED UNDER CONSTRUCTI VE
DISTRAINT WHEN HE:
1. is retiring from any business subject to
tax;
2. is intending to:
a. leave the Philippines,
b. remove his property therefrom, or
c. hide or conceal his property
3. Is performing any act tending to
obstruct the proceeding for collecting
the tax due or which may be due from
him (Sec. 206, 1997 NIRC).
Under any of the foregoing instances,
the CIR shall:
1. Declare the Taxpayers (TP) tax
period terminated at any time;
and
2. Shall send TP a notice of such
decision together with request
for immediate payment of the
tax for the period so declared
terminated and the tax for the
preceding year or quarter, or such
portion thereof as may be unpaid.
Said taxes shall be due and payable
immediately and shall be subject to all the
penalties hereafter prescribed unless paid
within the time fixed in the demand made
by the CIR [Sec. 6 (D), NIRC].
PROCEDURE FOR THE CONSTRUCTIVE
DISTRAINT OF PERSONAL PROPERTY (Sec. 206,
NIRC)
I. Taxpayers Obligation to Preserve
CIR shall REQUIRE the taxpayer or any
person having possession or control of
such property:
a. to SIGN a receipt covering the property
distrained and
b. to OBLIGATE himself to:
1. PRESERVE the same intact and
unaltered and
2. NOT to DISPOSE of the same in
any manner whatsoever WITHOUT
t he express aut hori t y of t he
Commissioner of Internal Revenue.
$
II. Remedy when taxpayer did NOT
sign receipt
If the taxpayer or person in possession of
the property refuses or fails to sign the
receipt referred to, the Revenue Officer
effecting the constructive distraint shall:
a. proceed to PREPARE a list of such
property and
b. in the presence of two (2) witnesses
LEAVE a copy thereof in the premises
where the property distrained is
located, after which the said property
shall be deemed to have been placed
under constructive distraint.
PURCHASE BY THE GOVERNMENT AT SALE
UPON DISTRAINT (Sec. 212, NIRC)
The Commissioner or his deputies may
purchase i n behal f of the Nati onal
Government for the amount of taxes,
penalties and cost due thereon when the
amount bid for the distrained property is:
1. NOT equal to the amount of tax; or
2. Very much LESS than the actual
market value of the property offered
for sale.
Property so purchased may be resold
by the CIR or his deputy; the net
proceeds shall be remitted to the
National Treasury and accounted as
internal revenue
(3)LEVY
DEFINITION: It refers to the act of seizure of
real property in order to enforce the
payment of taxes. The property may be
offered in a public sale, if after seizure, the
taxes are not voluntarily paid.
REQUISITES FOR THE EXERCISE OF THE
REMEDY OF LEVY
Same as in the remedy of distraint.
WHEN MAY LEVY BE EFFECTED?
Real property may be levied upon before,
simultaneously, or after the distraint of
personal property belonging to the
delinquent taxpayer [Sec. 207(B), 1997
NIRC]; and the remedy by distraint and levy
may be repeated if necessary until the full
amount, including all expenses, is collected
(Sec. 217, 1997 NIRC).
PROCEDURE OF LEVY ON REAL PROPERTY
(PSAS)
1. Prepare a Certificate of Levy [Sec. 207(b),
NIRC]
2. Service of Notice [Sec. 207(b), NIRC]
3. Advertisement of the time and place of
sale [Sec. 213, NIRC]
4. Sale of real property [Sec. 213, NIRC]
I. Prepare Certificate of Levy
PREPARATION OF A DULY AUTHENTICATED
CERTIFICATE CONTAINING: (DNA)
(1) Description of the property levied;
(2) Name of the taxpayer, and
(3) the Amount of tax and penalty due
from him.
This certificate shall operate with the force
of a legal execution throughout the
Philippines (Sec. 207(B), 1997 NIRC).
$
II. Service of Notice
Service of written notice to:
a. the proper Register of Deeds; AND
b. the delinquent taxpayer; or
c. if he is absent from the Philippines, to
his agent or manager of the business
in respect to which the liability arose; or
d. If none, to the occupant of the property
(Sec. 207(B), 1997 NIRC).
In case the warrant of levy is NOT issued
before or simultaneously with the warrant of
distraint AND the personal property of the
TP is NOT sufficient to satisfy his tax
delinquency, the CIR or his authorized
representative shall, within 30 days after
the execution of the distraint, PROCEED
with the levy on TPs real property [Sec. 207
(B), NIRC]
$
III. Advertisement of the Time and
Place of Sale
The advertisement shall contain: (TP
AND)
1. Amount of tax and penalties due
2. Time and Place of sale
3. Name of the taxpayer against whom
taxes are levied; and
4. 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 effectuated by: (P2)
a. Posting a notice at the main entrance
of the municipal building or city hall and
in a public and conspicuous place in
the barrio or district in which the real
property lies; and
b. Publication once a week for 3 weeks in
a newspaper of general circulation in
the municipality or city where the
property is located (Sec. 213, NIRC)
$
IV. Sale
If TP does not pay his taxes, penalties and
interest before the day fixed for the sale,
the sale shall proceed and shall be held
either at the main entrance of the municipal
building or city hall, or on the premises to
be sold, as the officer conducting the
proceedings shall determine and as the
notice of sale shall specify.
AFTER SALE OF REAL / PERSONAL
PROPERTY PURSUANT TO LEVY /
DISTRAINT (Sec. 213, NIRC)
(1) The return issued by the distraining or
levying officer of the proceedings shall
be entered in the records of the BIR
within 5 days after the sale
(2) The Revenue Collection Officer shall
make out and deliver to the purchaser
a certificate from his records showing
the proceedings of the sale, description
of property sold, name of purchaser
and exact amount of al l taxes,
penalties and interest.
(3) In case proceeds of sale EXCEED the
claim and cost of sale, the excess shall
be turned over to the owner of the
property.
DISTRAINT VS. LEVY
DISTRAINT LEVY
Refers to personal
property
Refers to real
property
Forfeiture by the
government is not
provided
Forfeiture is
authorized
The taxpayer is not
given the right of
redemption with
respect to
distrained personal
property.
The right of
redemption is
granted in case of
real property levied
upon and sold, or
forfeited to the
government.
Both are summary remedies for the

collection of taxes; and cannot be
availed of where the amount of the tax
involved is not more than P100
REDEMPTION OF PROPERTY SOLD
a. Period within 1 year from the date of
sale
b. Who may redeem the delinquent
taxpayer or any one for him
c. To whom made to the Revenue
District Officer
d. How made upon 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, NIRC)
The owner shall not be deprived of
the possession of said property
and shall be entitled to the rents
and other income thereof until the
expiration of the time allowed for
its redemption.
EFFECTS OF REDEMPTION OF PROPERTY SOLD
(1) Such payment shall entitle TP the
delivery of the certificate issued to the
purchaser and a certificate from RDO
that he has redeemed the property.
(2) The RDO shall pay the purchaser the
amount by which such property has
been redeemed and said property shall
be free from lien of such taxes and
penalties (Sec. 214, NIRC).
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.
RESALE OF REAL ESTATE TAKEN FOR TAXES
The CIR shall have charge of any real
estate obtained by the Government in
payment of taxes, penalties or costs arising
under this Code or in compromise or
adjustment of any claim.
The CIR may:
(1) sell and dispose of the same at a
public auction upon giving of not less
than 20 days notice; OR
(2) dispose of the same at a private sale
with the approval of the Secretary of
Finance
In either case, the proceeds of the sale
shall be deposited with the National
Treasury and an accounting of the same
shall be rendered to COA (Sec. 216, NIRC).
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.
Otherwise, a clever taxpayer who is 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 (Sec. 217, NIRC).
(4)TAX LIEN
DEFINITION: It is a legal claim or charge on
pr oper t y, ei t her r eal or per sonal ,
established by law as a security in default
of the payment of taxes (51 Am Jur 881).
Generally, it attaches to the property
irrespective of ownership or transfer
thereof.
EXTENT AND NATURE
The tax, together with interests, penalties,
and costs that may accrue in addition
thereto is a lien upon all property and
rights to property belonging to the
taxpayer.
The lien shall not be valid against any
mortgagee, purchaser, or judgment creditor
until notice of such lien shall be filed by the
Commissioner of Internal Revenue in the
Office of the Register of Deeds of the
province or city where the property of the
taxpayer is situated or located (Sec. 219, 1997
NIRC).
In seizure for the enforcement of a tax lien,
the residue, after deducting the tax liability
and expenses, will go to the taxpayer (Bank
of the Phil. Island vs. Trinidad, G.R. No. 16014,
October 4, 1941).
WHEN DOES IT ATTACH?
Not only from the service of the warrant of
distraint but from the time the tax became
due and payable i.e., from the time when
the assessment was made by CIR (Sec 219,
NIRC).
LIEN VS. DISTRAINT
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
(5)FORFEITURE
DEFINITION: divestiture of property without
compensation, in consequence of a default
or offense.
ENFORCEMENT OF THE REMEDY OF
FORFEITURE
a. Seizure and Sale or destruction of
specific forfeited property in case of
personal property.
b. Judgment of condemnation and sale
in a legal action or proceeding, civil or
criminal, as the case may require, in
case of real property.
c. Destruction upon order by the
Commissioner where the sale may be
injurious to public health or prejudicial
to law enforcement in case of distilled
spirits, liquors, cigars, and cigarettes
manufactured products of tobacco and
apparatus used for their production.
d. Sale or destruction at the discretion of
the CIR in case of other articles subject
t o exci se t ax whi ch have been
manufactured or removed in violation of
the Code, dies for printing or making
fake revenue stamps and labels.
Sal e of f or f ei t ed chat t el s and
removable fixtures shall be effected in
the same manner and under the same
conditions as the public notice and the
time and manner of sale as are
prescribed for sales of distrained
property.
Forfeited property shall not be destroyed
until at least 20 days from seizure (Sec. 225,
NIRC)
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 go to the coffers of the government
(U.S. vs. Surla, G.R. No. 6536, September 2, 1911).
In seizure for the enforcement of a tax lien,
the residue, after deducting the tax liability
and expenses will go to the taxpayer (Bank
of the Phil. Island vs. Trinidad, G.R. No. 16014,
October 4, 1941)
RULES GOVERNING FORFEITURE
(1) 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.
(2) The Register of Deeds shall transfer
ti tl e of forfei ted property to the
Government without necessity of a
court order.
(3) Within 1 year from the date of sale, the
property may be redeemed by the
delinquent taxpayer or any one for him,
upon payment of the taxes, penalties
and interest thereon and cost of sale; if
NOT redeemed within said period, the
forfeiture shall become ABSOLUTE (Sec.
215, NIRC).
(6)SUSPENSION OF BUSINESS
OPERATIONS
The Commissioner or his authorized
representative may suspend the business
operation and temporarily close the
business of a VAT-registered person for
understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipts for the taxable
quarter.
The duration of the temporary closure shall
be for a period of not less than 5 days
and shall be lifted only upon compliance of
whatever requirements imposed by the
Commissioner in the collection order (Sec.
115, NIRC).
(7)INFORMERS REWARD (Sec. 282, NIRC)
A. For violations of the NIRC, a reward of
10% of the revenues, surcharges, or
fees recovered and/or fine or penalty
imposed and collected or P1M per
case, whichever is lower, shall be given
to:
Any person who voluntarily gives
definite and sworn information not yet
in the possession of the BIR
1. leading to the discovery of fraud
upon the Internal Revenue Laws
and/or any violations thereof; or
2. An informer where the offender
has offered to compromise the
violation of law committed by him
and his offer has been accepted
and collected by the CIR. This
excludes an Internal Revenue
Officer/employee or other public
official/employee, or his relative
wi t hi n t he si xt h degr ee of
consanguinity.
NOTE: This shall not refer to a case
already pending or examined by the
CIR.
B. For the discovery and seizure of
smuggled goods a reward of 10% of
t he FMV of t he smuggl ed and
confiscated goods or P1M per case,
whichever is lower, shall be given to
persons instrumental in the discovery
and seizure of such smuggled goods.
NOTE: This does not apply to all public
officials whether incumbent or retired,
who acquired the information in the
course of performance of their duties
during their incumbency.
(8)ENFORCEMENT OF SURCHARGES AND
INTEREST
DEFINITION: increments to the basic tax
incident to the taxpayers non-compliance
with certain legal requirements.
SURCHARGE overcharge or exaction
imposed by law as an addition to the main
tax required to be paid.
A. CIVIL PENALTY / SURCHARGE
It shall be imposed in addition to the
basic tax required to be paid
1. 25% surcharge
a. Failure to file any return and
pay the tax due thereon as
required under the provisions
of this Code or rules and
r egul at i ons on t he dat e
prescribed;
b. Unless otherwise authorized
by the Commissioner, filing a
return with an internal revenue
officer other than those with
whom the return is required to
be filed;
c. Failure to pay the deficiency
tax within the time prescribed
for its payment in the notice of
assessment; or
d. Failure to pay the full or part of
the amount of tax shown on
any return required to be filed
under the provisions of this
Code or rules and regulations,
or the full amount of tax due
for which no return is required
to be filed, on or before the
dat e pr escr i bed f or i t s
payment (Sec. 248).
2. 50% surcharge
a. In case of willful neglect to
file the return within the
period prescribed by the
Code
It will not apply in case a

taxpayer, without notice
from the Commissioner, or
h i s d u l y a u t h o r i z e d
representative, voluntarily
files the said return (only
25% shall be imposed)
50% surcharge shall be

i mposed i n case t he
taxpayer files the return
only after prior notice in
w r i t i n g f r o m t h e
Commissioner or his duly
authorized representative
(Sec. 4.2, R.R. No. 12-99)
b. in case a false or fraudulent
return is willfully made
Prima Facie evidence
substantial underdeclaration
( exceedi ng 30% of t hat
declared) of taxable sales,
receipts or income; or
or a substantial overstatement
(exceeding 30% of actual
deductions) of deductions (Sec.
248)
B. INTEREST 20% per annum or such
higher rate as may be prescribed by
the rules and regulations
a. Deficiency interest (Sec. 249[B]) -
The i nt er est assessed and
collected on any unpaid amount of
tax
20% interest per annum or
such higher rate assessed and
col l ect ed f r om t he dat e
prescribed for its payment until
the full payment thereof.
b. Delinquency interest (Sec. 249[C])
In case of failure to pay:
1. the amount of tax due on
any return required to be
filed;
2. the amount of tax due for
which no return is required
to be filed
3. 20% interest per annum or
s u c h h i g h e r r a t e
prescribed on the unpaid
amount in case of failure
to pay a deficiency tax or
any surcharge or interest
thereon
c. Interest on Extended Payment
(Sec. 249[D])
20% interest per annum or
such higher rate as may be
prescri bed on the tax or
deficiency tax or any part
unpaid if: a person required to
pay tax elects to pay on
installment but fails to pay the
tax or installment; or the CIR
has authorized an extension of
time within which to pay a tax,
deficiency or part thereof.
DEFICIENCY TAX VS.
DELINQUENCY TAX
DEFICIENCY TAX
DELINQUENCY
TAX
Exists when:
1. the amount by which
the tax imposed by
the CIR exceeds the
amount shown as
the tax by the
taxpayer upon his
return;
2. the amount by which
the tax as
determined by the
CIR exceeds the
amounts previously
assessed (or
collected without
assessment) as a
deficiency, if no
amount is shown as
tax by the taxpayer
upon his return or if
no return is made by
the taxpayer
Exists when:
1. the self-
assessed tax
per return
filed by the
taxpayer on
the
prescribed
date was not
paid at all or
was only
partially
paid
2. the
deficiency
tax assessed
by the BIR
became final
and
executory
Can be collected
through administrative
and judicial remedies
but has to go through
the process of filing
the protest against the
assessment by the
taxpayer and denial of
such protest by BIR
Can
immediately
be collected
administratively
through the
issuance of
warrant of
distraint and
levy and by
judicial action
Filing of an action for
collection of a
deficiency tax during
the pendency of the
protest may be the
subject of a motion to
dismiss
Filing of a civil
action for the
collection of
delinquent tax
in the ordinary
court is a
proper remedy.
DEFICIENCY TAX
DELINQUENCY
TAX
Subject to deficiency
interest
Subject to
delinquency
interest and
compromise
penalty
B. JUDICIAL REMEDIES
(1)CIVIL ACTION
DEFINITION: For tax remedy purposes,
these are acti ons i nsti tuted by the
government to COLLECT internal revenue
taxes including the filing by the government
of claims against the deceased taxpayer
with the probate court.
TWO WAYS TO ENFORCE CIVIL LIABILITY
THROUGH CIVIL ACTIONS:
1. By filing a civil case for collection of a
sum of money with proper regular
court; or
2. By filing an answer to the petition for
review filed by TP with CTA.
WHEN RESORTED TO?
1. When a tax is assessed and the
assessment becomes f i nal and
unappealable because the taxpayer
fails to file an administrative protest
with the CIR within 30 days from
receipt; or
2. When a protest against assessment is
filed and a decision of the CIR was
rendered but t he sai d deci si on
becomes f i nal , execut or y, and
demandabl e f or f ai l ure of t he
taxpayer to appeal the decision to
the CTA within 30 days from receipt
of the decision.
3. When the protest is not acted upon
within 180 days from submission of
documents and the taxpayer failed to
appeal with the CTA within 30 days
from the lapse of the 180-day period.
NOTE: Judicial action may be resorted to
even before assessment al t hough
impractical, as stated in Sec. 203, 1997
NIRC, and no proceeding in court
without assessment for the collection of
such taxes shall be instituted after the
expiration of such (3-year) period.
FORM AND MODE OF PROCEEDING (Sec. 220,
NIRC)
1. Civil actions shall be brought in the
name of the Government of the
Philippines
2. It shall be conducted by legal officers of
the BIR.
3. No civil or criminal action for the
recovery of taxes shall be filed in court
wi t h o u t t h e a p p r o v a l o f t h e
Commissioner.
The approval of the CIR is essential in
civil cases. However, under Sec. 7,
1997 NIRC, the Commissioner may
delegate such power to a Regional
Director. Further, the approval by the
Solicitor General for civil actions for
collection of delinquent taxes is
required before they are filed.
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. Regional Trial Court, Municipal Trial
Court, Metropolitan Trial Court
where the principal amount of taxes
and fees, exclusive of charges and
penalties claimed is less than One
million pesos (Sec. 7, R.A. No. 9282).
JURISDICTION
COURTS
AMOUNT OF
TAXES CLAIMED
MTCs, MCTCs,
MeTCs outside Metro
Manila
Amount does not
exceed P300,000
MTCs, MCTCs,
MeTCs within Metro
Manila
Amount does not
exceed P400,000
RTCs outside Metro
Manila
P300,001 to
P999,999
RTCs within Metro
Manila
P400,001 to
P999,999
NOTE: A deci si on on a request for
rei nvest i gat i on i s NOT a condi t i on
precedent to the filing of an action for
collection of taxes already assessed. The
requirement for CIR to rule on disputed
assessments before bringing an action for
collection is applicable ONLY in cases
where the assessment was actually
disputed, adducing reasons in support
thereto (Dayrit vs. Cruz, G.R.No. 39910 Sept. 26,
1988).
DEFENSES PRECLUDED BY FINAL AND
EXECUTORY ASSESSMENTS
a. validity or legality of the assessments;
and
b. prescription of the Governments right
to assess.
(2)CRIMINAL ACTION
TWO COMMON CRIMES PUNISHABLE
UNDER TAX CODE:
a. attempt to evade or defeat tax (Sec. 254)
b. failure to file return, supply correct and
accurate information, pay tax, withhold
and remit tax and refund excess taxes
withheld on compensation (Sec. 255)
The judgment in the criminal case shall not
only impose the penalty but shall also order
the payment of taxes subject of the criminal
c a s e a s f i n a l l y d e c i d e d b y t h e
Commissioner (Sec. 205, NIRC).
FORM AND MODE OF PROCEEDING (Sec. 220)
Same as Civil Action.
WHERE TO FILE:
1. Court of Tax Appeals on criminal
offenses arising from violations of the
NI RC or TCC and ot her l aws
administered by the BIR and the BOC
and fees exclusive of charges and
penalties claimed is One million pesos
and above.
2. Regional Trial Court, Municipal Trial
Court, Metropolitan Trial Court on
criminal offenses arising from violations
of the NIRC or TCC and other laws
administered by the BIR and the BOC,
penalties claimed is less than One
million pesos or where there is no
specified amount claimed (Sec. 7, RA No.
9282).
JURISDICTION
COURTS PENALTY
MTCs, MCTCs,
MeTCs
Imprisonment of 6 years
and below
RTCs Imprisonment of 6 years
and 1 day
IMPORTANT PRINCIPLES ON CRIMINAL
ACTIONS
1. EFFECT OF ACQUITTAL OF THE TAXPAYER
IN A CRIMINAL ACTION
It does NOT necessarily result in the
exoneration of said taxpayer from his
civil liability to pay taxes.
Rationale: The duty to pay tax is
imposed by statute prior to and
independent of any attempt on the part
of the tax payer to evade payment. It is
neither a mere consequence of the
felonious acts charged nor is it a mere
civil liability derived from a crime
(Republic vs. Patanao, GR No. L-14142, May 30,
1961)
The civil liability to pay taxes arises not
because of felony but upon taxpayers
failure to pay taxes. Criminal liability in
taxation arises as a result of ones
liability to pay taxes.
2. EFFECT OF SUBSEQUENT SATISFACTION
OF CIVIL LIABILITY
The subsequent satisfaction of civil
liability by payment or prescription
DOES NOT extinguish the taxpayers
criminal liability.
3. 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, 1997 NIRC).
4. 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 preci se
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 or failure to file the required
return (See Ungab vs. Cusi, GR Nos.
L-41919-24, May 30, 1980 in relation to
Commissioner vs. Court of Appeals, GR No.
119322, June 4, 1996, CIR vs. Pascor Realty
Development Corp., GR No. L-128315, June 29,
1999).
Before anyone is prosecuted for willful
attempt to evade or defeat any tax, the
fact that a tax is due must first be
proved.
5. CRIMINAL ACTION MAY BE FILED DESPITE
THE LAPSE OF THE PERIOD TO FILE A CIVIL
ACTION FOR COLLECTION OF TAXES
When the civil action arising from tax
delinquency has prescribed, the BIR
has only 5 years from assessment
within which to collect the tax through
criminal action in which case, would
prescribe after lapse of 5 years from
discovery of crime AND institution of
proceedings (Sec. 281, NIRC)
To Cancel Tax Liability
A. ADMINISTRATIVE REMEDY
(1)ABATEMENT (also see R.R. No. 15-2006
Abatement Program)
DEFINITION: It means that the entire tax
liability of the taxpayer is cancelled.
GROUNDS:
(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.
INSTANCES WHEN THE TAX LIABILITIES,
PENALTIES AND/OR INTEREST IMPOSED ON THE
TAXPAYER MAY BE ABATED ON THE GROUND
THAT THE IMPOSITION THEREOF IS UNJUST OR
EXCESSIVE: (WESIBLO)
a. Filing of the return/payment of tax at
the Wrong Venue;
b. TPs mistake in payment of tax is due
to Erroneous written official advice of a
Revenue Officer;
c. TPs failure to file the return and pay
the tax on time is due to Substantial
losses from prolonged labor dispute,
force majuere, legitimate business
reverses such as labor strike for more
than 6 months which has caused
temporary shutdown of business,
natural calamity, public turmoil etc.,
Provided that the abatement shall
cover only the surcharge and the
compromise penalty and not the
interest imposed under Sec. 249,
NIRC;
d. Assessment resulted from TPs non-
compliance with the law due to a
difficult Interpretation of said law;
e. TPs failure to file the return and pay
the correct tax on ti me due to
circumstances Beyond his control;
Provided, that abatement shall cover
o n l y t h e s u r c h a r g e a n d t h e
compromi se penal ty but not the
interest;
f. Late payment of tax under meritorious
circumstances; (ex. Failure to beat
bank c ut - of f t i me, s ur c har ge
erroneously imposed, use of wrong tax
form but correct tax amount)
g. Other similar or analogous cases
INSTANCES WHEN THE TAX LIABILITIES,
PENALTIES AND/OR INTEREST IMPOSED ON THE
TAXPAYER MAY BE ABATED ON THE GROUND
THAT THE TAX ADMINISTRATION AND
COLLECTION COSTS ARE MORE THAN THE
AMOUNT SOUGHT TO BE COLLECTED:
(AWARD)
a. Abatement of penalties on assessment
confirmed by the lower court but
Appealed by TP to a higher court;
b. Abatement of penalties on Withholding
tax assessment under meritorious
circumstances;
c. Abatement of penalties on Delayed
installment payment under meritorious
circumstances;
d. Abatement of penalties on assessment
reduced after Reinvestigation but TP is
still contesting reduced assessment;
and
e. Other Analogous instances
COMPROMISE VS. ABATEMENT
COMPROMISE ABATEMENT
Involves a
reduction of the
taxpayers
liability
Involves the cancellation
of the entire tax liability of
a taxpayer
Officers
authorized to
compromise:
CIR and
Regional
Evaluation
Board
Officer authorized to
abate or cancel tax,
penalties and/or interest:
CIR
Grounds:
1. Reasonable
doubt as to
validity of
assessment; or
2. Financial
incapacity of
TP
Grounds:
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.
Prescriptive Periods for the Assessment
and Collection of Taxes
Prescriptive Periods for the Assessment and Collection of Taxes
RATIONALE OF PRESCRIPTIVE PERIODS
Such periods are designated to secure the
taxpayers against possible harassment and
unreasonable investigation after the lapse of the
period prescribed. They are also beneficial to the
government because tax officers will be obliged to
act promptly (CIR vs. Philippine Global Communications, Inc,
G.R. No. 167146, October 31, 2006).
RULES ON PRESCRIPTION
1. When the tax l aw i tsel f i s si l ent on
prescription, the tax is imprescriptible;
2. When no r et ur n i s r equi r ed, t ax i s
imprescriptible;
NOTE: Remedy of taxpayer is to file a return.
3. Defense of prescription is waivable;
4. The law on prescription should be liberally
construed in order to afford protection to TP
while its exceptions should perforce be
strictly construed.
P R E S C R I P T I V E P E R I OD F OR T H E
ASSESSMENT AND COLLECTION OF TAXES
AND VIOLATION OF NIRC
1. ASSESSMENT OF TAXES
General Rule:
Within three (3) years from due date of filing of
return if return is filed on or before due date or
three (3) years from date of actual filing if filed
beyond due date (Sec. 203, 1997 NIRC).
If the return is amended substantially, the
period starts from the filing of the amended
return (CIR vs. Phoenix Assurance Co., Ltd., G.R. No.
L-19127, May 20, 1965).
Exceptions:
1. Failure to file a return: ten (10) years
from the date of the discovery of the
omission to file the return (Sec. 222[A]);
2. False or fraudulent return with intention
to evade the tax: ten (10) years from the
date of the discovery of the falsity or fraud
(Sec. 222 [A]);
3. 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.
NB: The extended period agreed upon can
further be extended by a subsequent
written agreement made before the
expi rat i on of t he ext ended peri od
previously agreed upon (Sec. 222[b]).
2. COLLECTION
a. 5 yrs. from date of assessment (Sec. 222,
NIRC)
b. In case of non-filing, false or fraudulent
return
If proceeding for collection is made
without assessment, 10 years from
discovery (Sec. 222, par. (a), NIRC).
If the BIR choose to make assessment
after discovery of the non-filing, false
or fraudulent return, collection must be
made within 5 years from date of
assessment (Sec. 222, par. (c), NIRC).
c. Agreed period pursuant to agreement in
writing before the expiration of the 5 year
period (Sec. 222, NIRC)
FRAUDULENT RETURN VS. FALSE RETURN
FRAUDULENT
RETURN
FALSE RETURN
It must be alleged and proved as a fact.
It must be the product
of a deliberate intent
to evade taxes.
It constitutes a deviation
from the truth due to
mistake, carelessness or
ignorance.
Established by the
a. Intentional and
substantial
understatement of
tax liability by the
taxpayer;
b. Intentional and
substantial
overstatement of
deductions of
exemptions; and/or
c. Recurrence of the
above
circumstances
There must appear a
design to mislead or
deceive on the part of the
taxpayer, or at least
culpable negligence. A
mistake, not culpable in
respect of its value would
not constitute a false
return (Commissioner of
Internal Revenue vs. Ayala
Hotels, Inc., CA-G.R. SP No.
70025, April 19, 2004).
There is fraud in the following decided
cases:
1. Fraud must be the product of a deliberate
intent to evade taxes (Jalandoni vs. Republic
G.R. No. 18384, Sept. 20, 1965)
2. Simple statement that return filed was not
fraudulent does not disprove existence of
fraud (Tayengco vs. Collector G.R. No. 23766)
3. Substantial underdeclarations of income
for six consecutive five years demonstrate
fraudulence of return (Perez vs. CTA G.R. No.
30403, July 3, 1969)
4. Presence of fictitious expenses, with no
evidence presented, proves existence of
fraud (Tan Guan vs. Commissioner G.R. No. 23676,
Apr. 27, 1967)
However, the courts did not consider the tax
returns filed as false or fraudulent with intent to
evade payment of tax in the following cases:
a. Mere understatement in the tax return will
not necessarily imply fraud (Jalandoni vs.
Republic G.R. No. 18384, Sept. 20, 1965)
b. Sale of a real property for a price less than
its fair market value is not necessarily a
false return (Commissioner vs. Ayala Securities
G.R. No. 29485, Mar. 31. 1976)
c. Fraud is a question of fact and the
circumstances constituting fraud must be
alleged and proved in the trial court
(Commissioner vs. Ayala Securities)
d. Fraud is never imputed and the courts
never sustain findings of fraud upon
circumstances that only create suspicion
(Commissioner vs. Javier G.R. No. 78963, July
31,1991)
e. Mistakes of revenue officers on three
different occasions remove element of
fraud (Aznar vs. CTA and Collector. G.R. No.
20569, Aug. 23, 1974)
NOTE: 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 sending of the
notice must clearly be proven (Basilan Estate, Inc.
vs. Commissioner, GR No. L-22492, September 5, 1967).
3. VIOLATION OF ANY PROVISION OF THE
TAX CODE (Sec. 281, 1997 NIRC)
a. 5 years from the (a) day of the
commission of the violation of the law,
and if the same be not known, from the (b)
discovery thereof and the institution of
t he j udi ci al proceedi ngs f or i t s
investigation and punishment.
The running of prescription shall be
interrupted when proceedings are
instituted against the guilty persons
and shall begin to run again if the
proceedi ngs are di smi ssed f or
reasons not constituting jeopardy.
The term of prescription shall not run
when the offender is absent from the
Philippines. (Sec. 281, NIRC)
b. Illustrative case (Lim vs. Court of Appeals G.R.
Nos. 48134-37, October 18, 1990):
(1) charge is failure or refusal to pay
deficiency income tax committed
onl y af t er t he f i nal i t y of t he
assessment coupl ed wi t h t he
taxpayers willful refusal to pay the
taxes within the allotted period (i.e.
cannot be committed upon filing the
return).
(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
proceeding for the investigation and
punishment of the tax offense before
the 5 year prescriptive period begins
to run.
ASSESSMENT COLLECTION
Return filed on or before due date or filed
beyond due date
3 years
from due date or
from actual filing,
respectively
5 years
from assessment
Filing of false or fraudulent return
10 years
from discovery of
falsity or fraud
5 years
If there is assessment
Non-filing of return
10 years
from discovery of
non-filing
5 years
If there is assessment
In case there is NO ASSESSMENT
In case of false or fraudulent return or non-
filing of return, the BIR may file an ordinary
action to collect even without an assessment.
The period to collect is 10 years, reckoned
from the date of discovery of falsity or fraud or
non-filing.
Period agreed upon/extension of period
If before expiration
of the period of
assessment of tax
as prescribed in
Section 203 NIRC,
both Commissioner
and taxpayer
agreed in writing
after such time-
The period agreed
upon will govern
and may be
extended by
subsequent written
agreement made
before expiration of
period previously
agreed upon.
Any internal revenue tax,
which has been
assessed within the
period agreed upon as
provided for in the
assessment (period
agreed upon in writing
by Commissioner and
taxpayer) Collection
made within period
agreed upon in writing
before expiration of 5
year period but may be
extended by subsequent
written agreements
made before expiration
of period previously
agreed upon.
What is the Prescriptive Period where the
Governments action is on a BOND which
the taxpayer executes in order to secure
the payment of his tax obligation?
Ten (10) years under Art. 1144(1) of the Civil
Code and not three (3) years under the NIRC.
In this case, the Government proceeds by
court action to forfeit a bond. The action is for
the enforcement of a contractual obligation
(Republic vs. Araneta, G.R. No. L-14142, May 30, 1961).
WAIVER OF STATUTE OF LIMITATIONS
DEFINITION: an agreement between TP and BIR
that a period to issue an assessment and collect
taxes due is extended to a date certain (Philippine
Journalists, Inc. v. CIR, G.R. No. 162852, Dec. 16 2004).
NATURE OF WAIVER
It is to a certain extent a derogation of TPs

right to security against prolonged and
unscrupulous investigations and must be
carefully and strictly construed.
It is NOT a waiver of the right to invoke the

defense of prescription.
It is a BILATERAL agreement between TP

and BIR (RMC No. 06-05).
REQUISITES FOR AGREEMENT WAIVING THE 3-YEAR
PERIOD
a. Entered before the expiration of the 3 year
period for assessment of the tax;
b. In writing;
c. Signed by both the taxpayer ;
d. Must specify a definite agreed date between
the BIR and the taxpayer within which the
taxpayer may assess and collect taxes; and
e. Signed and accepted by the CIR or his duly
authorized representative and the date of
acceptance must be indicated ( RMC No.
06-05).
CHARACTERISTICS OF AN INVALID WAIVER:
a. If it does not specify a definite agreed date
between BIR and the TP within which to
formally assess and collect; or
b. If signed only by the RDO and not the CIR
c. Waiver is not complete if copies were not
furnished the TP (Philippine Journalists, Inc. vs. CIR,
supra).
GROUNDS FOR SUSPENSI ON OF THE
RUNNING OF THE STATUTE OF LIMITATIONS
(Sec. 223, NIRC) (PRA_PO)
a. When the CIR is Prohibited from making the
assessment or beginning the distraint or levy
or a proceeding in court, AND for sixty (60)
days thereafter;
b. When t he t axpayer r equest s f or a
Reinvestigation which is granted by the CIR;
NOTE: The only agreement that can suspend
the running of the prescriptive period for
collection of taxes is a WRITTEN agreement
by TP and CIR before the expiration of the 5-
year period, extending the period of limitation
prescribed by law (Mamalateo, Tax Reviewer)
Why does a request for reinvestigation
and not one for reconsideration toll the
running of the Statute of Limitations?
The former, which entails reception and
evaluation of additional evidence, will
take more time than the latter, which will
be limited to the evidence already at hand
(CIR vs. Philippine Global Communications, G.R.
No. 167146, Oct 31, 2006)
c. 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.
d. When the warrant of distraint or levy is duly
served, AND no Property is located; and
e. When the taxpayer is Out of the Philippines
(Sec. 223, 1997 NIRC).
NOTE: A tax return is considered FILED for
purposes of starting the running of the period of
limitations if: (VA)
1. The return is valid it has complied
substantially with the requirements of the law;
and
2. 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.
DOCTRINES
1. Statutes are remedial, or that do not create
new or take away vested rights, do not fall
under the general rule against the retroactive
operation of statues, RA 8424 does not state,
either expressly or by necessary implication,
that pending actions are excepted from the
operation of Section 228, or that applying it to
pending proceedings would impair vested
rights
In case of discrepancy between the law as
amended and its implementing but old
regulation, the former necessarily prevails.
Between Section 228 of the Tax Code and the
pertinent provisions of RR 12-85, the latter
cannot stand because it cannot go beyond the
provision of the law.
Failure to comply with Section 228 does not
only render the assessment void, but also
finds no validation in any provision in the Tax
Code (CIR vs. Reyes, 480 SCRA 382).
2. It is clear that the jurisdiction of the Court of
Tax Appeals has been expanded to include
not only decisions or rulings but inaction as
well of the Commissioner of Internal Revenue.
The decisions, rulings or inaction of the
Commissioner are necessary in order to vest
the Court of Tax Appeals with jurisdiction to
entertain the appeal, provided it is filed within
30 days after the receipt of such decision or
ruling, or within 30 days after the expiration of
the 180-day period fixed by law for the
Commissioner to act on the disputed
assessments. This 30-day period within which
to file an appeal is jurisdictional and failure to
comply therewith would bar the appeal and
deprive the Court of Tax Appeals of its
jurisdiction to entertain and determine the
correctness of the assessments. Such period
is not merely directory but mandatory and it is
beyond the power of the courts to extend the
same.
Petitioner can not now claim that the disputed
assessment is not yet final as it remained not
acted upon by the Commissioner; that it can
st i l l awai t t he f i nal deci si on of t he
Commissioner and thereafter appeal the
same to the Court of Tax Appeals. This legal
maneuver cannot be countenanced. After
availing the first option, i.e., filing a petition for
review which was however filed out of time,
petitioner can not successfully resort to the
second option, i.e., awaiting the final decision
of the Commissioner and appealing the same
to the Court of Tax Appeals, on the pretext
that there is yet no final decision on the
di sput ed assessment because of t he
Commissioner's inaction (Fishwealth Canning
Corporation vs. Commissioner of Internal Revenue C.T.A.
Case No. 7346- C.T.A. EB CASE NO. 223. July 5,
2007).
3. In the normal course, the revenue district
officer sends the taxpayer a notice of
delinquent taxes, indicating the period
covering the amount due including interest,
and the reason for the delinquency. If the
taxpayer disagrees with or wishes to protest
the assessment, it sends a letter to the BIR
indicating its protest, stating the reasons
therefore, and submitting such proof as may
be necessary. That letter is considered as the
taxpayer's request for reconsideration of the
delinquent assessment. After the request is
filed and received by the BIR, the assessment
becomes a disputed assessment on which it
must render a decision. That decision is
appealable to the Court of Tax Appeals for
review (Commissioner of Internal Revenue vs. Isabela
Cultural Corporation).
4. The purpose of the requirement that the
taxpayer shall be informed in writing of the
law and facts on which the assessment is
made, found in second paragraph of Section
228 of the NIRC of 1997, "is to give the
taxpayer the opportunity to refute the findings
of the examiner and give a more accurate and
detailed explanation regarding the proposed
assessment(s)" (Belle Corporation vs. Commissioner of
Internal Revenue, C.T.A. CASE No. 5930, April 4,
2002).
5. It is clear from the second paragraph of
Section 228 NIRC and its rationale that "so
long as the parties are notified and were given
an opportunity to explain their side, the
requirements of due process are satisfactorily
compl i ed wi t h. " There i s subst ant i al
compliance with Section 228 when petitioner
was given an opportunity to protest the said
assessment upon issuance of the assessment
notice. The requirement set forth in Section
228 of the NIRC was, therefore, substantially
complied with. Consequently, the assessment
notices are valid (United Overseas Bank Philippines vs.
Commissioner of Internal Revenue C.T.A. Case No. 6764
-C.T.A. EB CASE NO. 188. January 10, 2007).
Assessment Process
Assessment Process
START
Commissioner issues Letter of Authority
BIR Audit/Tax Investigation
Preliminary Findings
Is taxpayer liable for deficiency tax? ! ASSESSMENT PROCESS ENDS
POST-REPORTING NOTICE/INFORMAL CONFERENCE LETTER
Taxpayer responds within 15 days?
Informal Conference between taxpayer and BIR ! ASSESSMENT PROCESS ENDS
PRE-ASSESSMENT NOTICE (PAN)
Taxpayer responds within 15 days?
Commissioner receives the position paper of the taxpayer ! Assessment Process
FORMAL LETTER OF DEMAND
Taxpayer responds within 30 days? !
PROTEST: Taxpayer shall file protest request for reinvestigation or reconsideration
Taxpayer must submit within 60 days all

documents necessary for reinvestigation !
Commissioner resolves the

assessment based on the documents ! ASSESSMENT PROCESS ENDS
No
Yes
Taxpayer and BIR
come to an agreement
Taxpayer and BIR talk to agree
No
Yes
Commissioner accepts
the explanation
Commissioner rejects the explanation
No
No
Assessment becomes final and
executory. Taxpayer must pay
the government.
Yes
ASSESSMENT BECOMES
FINAL AND EXECUTORY
Taxpayer fails to submit the
documents
Taxpayer submits the documents
Favorable to the
taxpayer
ISSUANCE OF THE COMMISSIONER FINAL DECISION
Appeal to the Court of Tax Appeals if Commissioner

denies the protest or fails to act within
180 days from receipt of documents
Appeal to the Supreme Court
END
Related Revenue Regulations
(Annex)
Related Revenue Regulations (Annex)
Implementing Section 204(B), in Relation to Section 290 of the Tax
Code of 1997, Regarding Abatement or Cancellation of Internal
Revenue Tax Liabilities
SECTION 1.
Scope. Pursuant to Section 244 of the National
Internal Revenue Code of 1997 (Code), these
Regulations are hereby promulgated for the
purpose of implementing Section 204(B), in
relation to Sections 7(c) and 290 of the same
Code, r egar di ng t he aut hor i t y of t he
Co mmi s s i o n e r o f I n t e r n a l Re v e n u e
(Commissioner) to abate or cancel internal
revenue tax liabilities of certain taxpayers based
on any of the following grounds, viz:
i. The tax or any portion thereof appears to be
unjustly or excessively assessed; or
ii. The administration and collection costs
involved do not justify the collection of the
amount due."
Disputed assessments pursuant to the provisions
of Section 228 of the Code and its implementing
rules and regulations, and assessments which are
void from the beginning are not covered by these
Regulations.
SECTION 2.
Instances When The Penalties And/Or Interest
Imposed On The Taxpayer May Be Abated Or
Cancelled On The Ground That The Imposition
Thereof Is Unjust Or Excessive.
2.1 When the filing of the return/payment of the
tax is made at the wrong venue;
2.2 When taxpayer's mistake in payment of his
tax is due to erroneous written official advice
of a revenue officer;
2.3 When taxpayer fails to file the return and pay
the tax on time due to substantial losses from
prolonged labor dispute, force majeure,
legitimate business reverses such as in the
following instances, provided, however, that
the abatement shall only cover the surcharge
and the compromise penalty and not the
interest imposed under Section 249 of the
Code:
2.3.1 Labor strike for more than six (6)
months which has caused the temporary
shutdown of business;
2.3.2 Public turmoil;
2.3.3 Natural calamity such as lightning,
earthquake, storm, flood and the like;
Unfavorable to the taxpayer
If Commissioner does not act on
the protest within 180 days from
receipt of the documents
Taxpayer may appeal to the
Commissioner within 30 days
from receipt of full decision
2.3.4 Armed confl i cts such as war or
insurgency;
2.3.5 Substantial losses sustained due to
fire, robbery, theft, embezzlement;
2.3.6 Continuous heavy losses incurred by
the taxpayer for the last two (2) years;
2 3.7 Liquidity problem of the taxpayer for the
last three (3) years; or
2.3.8 Such other i nstances whi ch the
Commissioner may deem analogous to
the enumeration above.
2.4 When the assessment is brought about or the
result of taxpayer's non-compliance with the
law due to a difficult interpretation of said law;
2.5 When taxpayer fails to file the return and pay
the correct tax on time due to circumstances
beyond his control, provided, however, that
abatement shall cover only the surcharge and
the compromise penalty and not the interest;
2.6 Late payment of the tax under meritorious
circumstances such as those provided
hereunder:
2.6.1 One day late filing and remittance due
to failure to beat bank cut-off time:
2.6.2 Use of wrong tax form but correct
amount of tax was remitted;
2.6.3 Fi l i ng an amended ret urn under
meritorious circumstances, provided,
however, that abatement shall cover
only the penalties and not the interest;
2.6.4 Surcharge erroneously imposed;
2.6.5 Late filing of return due to unresolved
issue on classification/valuation of real
property (for capital gains tax cases,
etc.);
2.6.6 Offsetting of taxes of the same kind, i.e.,
overpayment in one quarter/month is
offset against underpayment in another
quarter/month;
2.6.7 Automatic offsetting of overpayment of
one kind of withholding tax against the
underpayment in another kind;
2.6.8 Late remittance of withholding tax on
compensation of expatriates for services
rendered in the Philippines pending the
i ssuance by t he Secur i t i es and
Exchange Commission of the license to
t he Phi l i ppi ne br anch of f i ce or
subsidiary, provided, however, that the
abat ement shal l onl y cover t he
surcharge and the compromise penalty
and not the interest;
2.6.9 Wrong use of Tax Credit Certificate
(TCC) where Tax Debit Memo (TDM)
was not properly applied for; and
2.6.10 Such other instances which the
Commissioner may deem analogous to
the enumeration above.
2.7 Other cases similar or synonymous thereto.
SECTION 3.
Instances When The Tax Liabilities, Penalties
And/Or Interest Imposed On Taxpayer May Be
Abated Or Cancelled On The Ground That The
Administration And Collection Costs Are More
Than The Amount Sought To Be Collected.
When the administrative and collection costs,
including cost of litigation, are much more than the
amount that may be collected from the taxpayer,
the assessment may be reduced through
abatement, or entirely cancelled pursuant to
Section 204(B) of the Code. The instances that
may fall under this category are the following:
3.1 Abatement of penalties on assessment
confirmed by lower court but appealed by the
taxpayer to a higher court;
3.2 Abatement of penalties on withholding tax
assessment under meritorious circumstances;
3.3 Abatement of penalties on delayed installment
payment under meritorious circumstances;
3.4 Abatement of penalties on assessment
reduced after reinvestigation but taxpayer is
still contesting reduced assessment; and
3.5 S u c h o t h e r i n s t a n c e s wh i c h t h e
Commissioner may deem analogous to the
enumeration above.
Note: For items 3.1 to 3.4 above, the abatement
of the surcharge and compromise penalty shall be
allowed only upon written application by the
taxpayer signifying his willingness to pay the basic
tax and interest or basic tax only, whichever is
applicable under the prevailing circumstance.
SECTION 4.
The Commissioner Has The Sole Authority To
Abate Or Cancel Tax, Penalties And/Or
Interest. The Commissioner has the sole
authority to abate or cancel internal revenue
taxes, penalties and/or interest pursuant to
Section 204(B), in relation to Section 7(c), both of
the Code.
This authority is generally applicable to surcharge
and compromise penalties only, however, in
meritorious instances, the Commissioner may
likewise abate the interest as well as basic tax
assessed, provided, however, that cases for
abatement or cancellation of tax, penalties and/or
interest by the Commissioner shall be coursed
through the following officials:
4.1 The Deputy Commissioner (Operations
Group), who shall constitute a Technical
Working Committee (TWC) for the evaluation
and review of any application for abatement
or cancellation of tax, penalties and/or interest
processed by the Revenue District Office
(RDO) as reviewed by the Regional Office
(RO), or by the Large Taxpayers' Service's
Collection or Audit Division and Large
Taxpayers District Office (LTDO) as reviewed
by the Large Taxpayers Service (LTS), or by
Collection Enforcement Division/Withholding
Agent and Monitoring Division as reviewed by
the Collection Service, or by the Legal
Service, or any other office that has
jurisdiction over the case; and
4.2 The Deputy Commissioner (Legal and
Inspection Group), who shall evaluate the
legal issue involved in the case.
The application for abatement or cancellation of
tax, penalties and/or interest should state the
r easons and causes f or such r equest .
Documentary proofs for the underlying reasons
and causes aforestated should be appended to
the "Application for Abatement or Cancellation of
Tax, Penalties and/or Interest. On the other hand,
denial of the application for abatement or
cancellation of tax, penalties and/or interest
should state the reasons therefor.
SECTION 5.
Processing Time. The application for
abatement or cancellation of tax, penalties and/or
interest should be acted upon by the processing
office and reviewing office within five (5) days from
receipt by said office. The BIR National Office has
thirty (30) days within which to act on the case.
SECTION 6.
Repor t of t he Commi ssi oner t o t he
Congressional Oversight Committee (COC).
The Commi ssi oner shal l submi t t o t he
Congressional Oversight Committee (COC),
through the Chairmen of the Committee on Ways
and Means of both the Senate and House of
Representatives, every six (6) months of each
calendar year, a report on the exercise of his
power to abate or cancel tax liabilities, penalties
and/or interest imposed on taxpayers. In this
regard, all the originating offices which processed
the application for abatement or cancellation of
tax, penalties and/or interest shall likewise
prepare for this activity/process (abatement) all
the reports being prepared in the collection of
taxes under the compromise power of the
Commissioner, unless the Commissioner provides
otherwise.
Revenue Regulation Implementing Sections 7(c), 204(A) and 290
of the National Internal Revenue Code of 1997 on Compromise
Settlement of Internal Revenue Tax Liabilities Superseding
Revenue Regulations Nos. 6-2000 and 7-2001
-and-
Revenue Regulations Implementing Sections 7(c), 204 (A) and 290
of the National Internal Revenue Code of 1997 on Compromise
Settlement of Internal Revenue Tax Liabilities Superseding
Revenue Regulations Nos. 7-2001 and 30-2002
SECTION 2.
CASES WHICH MAY BE COMPROMISED.
e. The following cases may be the subject
matter of compromise settlement:
(a) Delinquent accounts;
(b) Cases under administrative protest after
issuance of the Final Assessment Notice
to the taxpayer which are still pending in
the Regional Offices, Revenue District
Offices, Legal Service, Large Taxpayer
Servi ce (LTS), Col l ecti on Servi ce,
Enforcement Service and other offices in
the National Office;
(c) Civil tax cases being disputed before the
courts;
(d) Collection cases filed in courts;
(e) Criminal violations, other than those
already filed in court or that involving
criminal tax fraud.
g. The following cases are not subject to
compromise:
Withholding tax cases, unless the

applicant-taxpayer invokes provisions of
law that cast doubt on the taxpayers
obligation to withhold;
Criminal tax fraud cases confirmed as

such by the Commissioner of Internal
Revenue or hi s dul y aut hor i zed
representative;
Criminal violations already filed in court;
Delinquent accounts with duly approved

schedule of installment payments;
Ca s e s wh e r e f i n a l r e p o r t s o f
reinvestigation or reconsideration have
been issued resulting to reduction in the
original assessment and the taxpayer is
agreeable to such decision by signing the
required agreement form for the purpose.
On the other hand, other protested cases
shal l be handl ed by the Regi onal
Evaluation Board (REB) or the National
Evaluation Board (NEB) on a case to
case basis;
Cases which become final and executory

after final judgment of a court, where
compromise is requested on the ground
of doubtful validity of the assessment;
and
Estate tax cases where compromise is

requested on the ground of financial
incapacity of the taxpayer.
SECTION 3.
BASIS FOR ACCEPTANCE OF COMPROMISE
SETTLEMENT.
(This section has been amended by RR No.
8-04. The amendment is included in the
following enumeration).
GROUNDS FOR COMPROMISE:
1. Doubtful validity of the assessment.
The offer to compromise a delinquent account
or disputed assessment based on this ground
may be accepted when it is shown that:
a. The delinquent account or disputed
assessment is one resulting from a
jeopardy assessment.
j eopardy assessment - a t ax
assessment which was assessed without
the benefit of complete or partial audit by
an authorized revenue officer, who has
reason to believe that the assessment
and collection of a deficiency tax will be
jeopardized by delay because of the
taxpayers failure to comply with the audit
and investigation requirements to present
his books of accounts and/or pertinent
records, or to substantiate all or any of
the deductions, exemptions, or credits
claimed in his return).
b. 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;
c. The t ax pay er f ai l ed t o f i l e an
administrative protest on account of the
alleged failure to receive notice of
assessment and there is reason to
believe that the assessment is lacking in
legal and/or factual basis;
d. The taxpayer failed to file a request for
reinvestigation/reconsideration within 30
days from receipt of final assessment
notice and there is reason to believe that
the assessment is lacking in legal and/or
factual basis;
e. The taxpayer failed to elevate to the
Court of Tax Appeals (CTA) an adverse
decision of the Commissioner, or his
authorized representative, in some cases,
within 30 days from receipt thereof and
there is reason to believe that the
assessment is lacking in legal and/or
factual basis;
f. The assessments were issued on or after
January 1, 1998, where the demand
notice allegedly failed to comply with the
formalities prescribed under Sec. 228 of
the National Internal Revenue Code of
1997; or
g. Assessments made based on the Best
Evidence Obtainable Rule and there is
reason to believe that the same can be
disputed by sufficient and competent
evidence;
h. The assessment was issued within the
prescriptive period for assessment as
extended by the taxpayers execution of
Waiver of the Statute of Limitations the
validity or authenticity of which is being
questioned or at issue and there is strong
reason to believe and evidence to prove
that it is not authentic; and
i. The assessment is based on an issue
wh e r e a c o u r t o f c o mp e t e n t
jurisdiction made an adverse decision
against the Bureau, but for which the
Supreme Court has not decided upon
with finality (pursuant to RR 8-04).
2. Financial incapacity.
Upon showing that:
A. The corporation ceased operation or is
already dissolved.
Provided that tax liabilities corresponding
to the Subscription Receivable or Assets
di s t r i but ed/ di s t r i but abl e t o t he
stockholders representing return of
capital at the time of cessation of
operation or dissolution of business shall
not be considered for compromise;
B. The taxpayer who is suffering from
surplus or earnings deficit resulting to
impairment in the original capital by at
least 50%, as reflected in its latest
Balance Sheet supposed to be filed with
the Bureau of Internal Revenue.
Provided:
1. that amounts payable or due to
stockholders other than business-
related transactions which are
properly included in the regular
accounts payable are by fiction of
law considered as part of capital and
not liability; and
2. that the taxpayer has no sufficient
liquid asset to satisfy the tax liability;
C. The taxpayer is suffering from a networth
deficit (total liabilities exceed total assets)
taken from the latest audited financial
statements, provided that in the case of
an individual taxpayer, he has no other
leviable properties under the law other
than his family home;
Net wort h def i ci t - comput ed by
deducting total liabilities (net of deferred
cr edi t s and amount s payabl e t o
st ockhol der s/ owner s r ef l ect ed as
l i abi l i ti es, except busi ness rel ated
transactions) from total assets (net of
prepaid expenses, deferred charges, pre-
operating expenses, as well as appraisal
increases in fixed assets).
D. The taxpayer is a compensation income
earner
a. with no other source of income;
b. t h e f a mi l y s g r o s s mo n t h l y
compensation income does not
exceed the levels of compensation
income provided for under Sec. 4.1.1
of these Regulations;
c. i t appear s t hat t he t axpayer
possesses no other leviable or
distrainable assets, other than his
family home;
E. The taxpayer has been declared by any
compet ent t ri bunal / aut hori t y/ body/
government agency as bankrupt or
insolvent.
j. The Commissioner shall not consider
any offer for compromise settlement
on the ground of financial incapacity
of a taxpayer
1. wi th Tax Credi t Certi fi cate
( TCC) , i ssued under t he
National Internal Revenue Code
of 1997 or Executive Order No.
226, on hand or in transit; or
2. with pending claim for tax refund
or tax credit with the Bureau of
Internal Revenue, Department
of Finance One-Stop-Shop Tax
Credi t and Duty Drawback
Center (Tax Revenue Group or
Investment Incentive Group)
and/or the courts; or
3. Wi t h e x i s t i n g f i n a l i z e d
agreement or prospect of future
agreement with any party that
resulted or could result to an
increase in the equity of the
taxpayer at the time of the offer
for compromise or at a definite
future time.
No offer of compromise shall be entertained
unless and until the taxpayer waives in writing
his privilege of the secrecy of bank deposits
under Republic Act No. 1405 or under other
general or special laws.
Presence of circumstances that would place
the taxpayer-applicants inability to pay in
serious doubt can be a ground to deny the
application for compromise based on financial
incapacity of the taxpayer to pay the tax.
SECTION 4.
PRESCRIBED MINIMUM PERCENTAGES OF
COMPROMISE SETTLEMENT.
1. For cases of financial incapacity
10% for
a. taxpayer is
1. an individual whose only source
of income is from employment;
and
2. whose monthly salary, if single, is
P10,500 or less, or if married,
whose salary together with his
spouse is P21,000 per month, or
less; and
3. it appears that the taxpayer
possesses no other leviable/
distrainable assets, other than
his family home
b. taxpayer is an individual without any
source of income;
c. Where the taxpayer is under any of
the following conditions:
1. Zero networth computed in
accordance with Sec. 3.2(c)
hereof;
2. Negative networth computed in
accordance with Sec. 3.2(c)
hereof.
3. Al r e a d y n o n - o p e r a t i n g
companies for a period of three
(3) years or more as of the date
of application for compromise
settlement.
20%
a. Already non-operating companies for
a period of less than 3 years; and
b. Dissolved corporations; and
c. Taxpayer Declared insolvent or
bankrupt
40%
a. taxpayer whose Surplus or earnings
deficit resulting to impairment in the
original capital by at least 50%
2. For cases of doubtful validity
i. A minimum compromise rate equivalent
to forty percent (40%) of the basic
assessed tax.
ii. The taxpayer may, nevertheless, request
for a compromise rate lower than forty
percent (40%): Provided,
1. that he shall be required to submit his
request in writing stating therein the
reasons, legal and/or factual, why he
should be entitled to such lower rate:
2. The same shall be subject to the prior
approval by the NEB.
iii. The prescribed minimum percentages
shall likewise apply in compromise
settlement of assessments consisting
solely of increments, i.e., surcharge,
interest, etc., based on the total amount
assessed.
SECTION 5.
DOCUMENTARY REQUIREMENTS.
! If the application for compromise is premised
on the financial incapacity of a taxpayer who
is a compensation income-earner, applicant
shall submit with his application the following:
a certification from his employer on his
prevailing monthly salary, including
allowances; and
a sworn statement that he has no other
source of income other than from
employment.
! If the application is premised on the financial
incapacity of a person without any source
income, the taxpayer applicant shall submit
with his application a sworn statement that he
derives no income from any source whatever.
! If the application is premised on the financial
incapacity of a taxpayer under the condition of
zero or negative networth, a copy of the
applicant's latest audited financial statements
or audited Account Information Form filed with
t he BI R shal l be submi t t ed wi t h t he
application.
For financial incapacity by reason of
dissolution:
" A copy of the applicant's latest
audited financial statements or
audited Account Information Form
filed with the BIR shall be submitted
with the application; and
" The Notice of Dissolution submitted
to SEC or other similar or equivalent
document shoul d l i kewi se be
submitted.
For situation of financial incapacity in
condition of bankruptcy or insolvency a
copy of the order declaring bankruptcy or
insolvency shall be submitted.
! In all cases of offer based on financial
incapacity, Waiver of the Secrecy of Bank
Deposi t under R.A. 1405 and Sworn
Statement saying that he has no Tax Credit
Certificate (TCC) on hand or in transit or claim
for tax refund or TCC under the National
Internal Revenue Code of 1997 and Executive
Order No. 226 pending in any office shall be
submitted.
SECTION 6.
APPROVAL OF OFFER OF COMPROMISE.
! Except for offers of compromise where the
approval is delegated to the REB pursuant to
the succeeding paragraph, all compromise
settlements within the jurisdiction of the
National Office (NO) shall be approved by a
majority of all the members of the NEB
composed of the Commissioner and the four
(4) Deputy Commissioners.
! All decisions of the NEB, granting the request
of the taxpayer or favorable to the taxpayer,
shal l have t he concur r ence of t he
Commissioner.
! Offers of compromise of assessments subject
to the approval of the Regional Evaluation
Board:
1. Assessments issued by the Regional
Offices involving basic deficiency taxes of
Fi v e Hundr ed Thous and Pes os
(P500,000) or less; and
2. Minor criminal violations discovered by
the Regional and District Offices.
Provided, however, that if the offer of

compromise is less than the prescribed rates
set forth in Sec. 4 hereof, the same shall
always be subject to the approval of the NEB.
The compromise offer may be paid before or

after the approval of the offer of compromise
by the Board (NEB or REB), at the option of
the taxpayer.
Regulation Providing for the Policies, Guidelines and Procedures in
the Implementation of the Expanded One-Time Administrative
Abatement of all Penalties/Surcharges and Interest on
Delinquent Accounts and Assessments
PURPOSE:
1. To provide an opportunity for taxpayers with
delinquent account and assessments and
who were previously not covered by the
abatement program under RR. No. 15-2006,
to settle their existing cases; and
2. To expand the coverage of the Abatement
program under RR No. 15-2006.
SECTION 3.
DEFINITION OF TERMS
a. Delinquent accounts
- the amount of tax due on or before Nov.
30, 2006 from a taxpayer who failed to
pay the same within the time prescribed
for its payment, arising from (1) a self-
assessed t ax or (2) a def i ci ency
assessment issued which has become
final and executory.
b. Assessment, preliminary, disputed or not
- a t ax assessment i ssued or sel f
assessment made on or before Nov. 30,
2006 which has not yet final and
executory.
c. Basic tax assessed
- refers to any of the following:
1. unpaid tax shown on the return filed;
2. tax due shown on the Assessment
Notice and Letter of Demand;
3. unpaid 2
nd
installment income tax;
4. amount of dishonored check; and
5. Deficiency interest, if the assessment
issued was for penalties only
(interest and surcharges).
SECTION 2.
COVERAGE
The following cases shall be covered hereof:
a. delinquent accounts/accounts receivable
cases;
b. income tax 2
nd
installment cases;
c. dishonored checks cases;
d. cases under administrative protest pending in
the Regional Offices (ROs), Revenue District
Offices (RDOs), Legal Service (LS), Large
Taxpayer Service, Collection Service (CS),
Enforcement Service (ES) and other offices in
the National Office (NO);
e. Assessed cases, whether preliminary or final,
disputed or not, as of November 30, 2006;
f. Collection and civil tax cases being disputed
before the Department of Justice and the
courts (e.g., Municipal Trial Court, Regional
Trial Court, Court of Tax Appeal, Court of
Appeals and Supreme Court) including
decided cases which are not yet final and
executory;
In the abovementioned cases, if the
PCGG has an interest and/or there is a
need to coordinate with the PCGG, this
regulation would not apply.
g. Cases with pending request for Compromise
Settlement under Revenue Regulations (RR)
No. 6-2000, RR No. 7-2001 and RR No.
30-2002 as amended by RR No. 8-2004 and
other prior years issuances.
However, request f or compromi se
s e t t l e m e n t p u r s u a n t t o t h e
aforementioned Regulations, where the
amount offered is more than 100% of the
basic tax which has already been
approved shall not be covered by these
Regulations;
h. Cases with pending request for abatement
under RR No. 13-2001. However, request for
abatement pursuant to the aforementioned
RR, which has already been approved shall
not be covered by these Regulations;
i. Fai l ure to wi thhol d Wi thhol di ng Taxes
discovered upon audit;
j. Criminal violations, (except those already filed
in court, those involving criminal tax fraud,
those under the BIR Run After Tax Evaders
Program and tax fraud cases which are the
results of confidential information, unless
allowed to avail by the Commissioner or his
representative on meritorious grounds);
k. Letter Notice Cases;
l. Accounts Payable or Due to BIR account
duly recorded or acknowledged by the
taxpayer in his books of accounts;
m. Taxpayers who have been paying their tax
liabilities through an approved installment
plan subject to the following conditions:
1. they have paid 100% or more of the basic
tax as originally assessed, and
2. they will waive any claim for refund of
what they may have already paid;
n. Government Withholding Agents (e.g. Non-
Governmental Agencies, Government-Owned
and Cont r ol l ed Cor por at i ons, Local
Government Units, etc.) or any delinquent
taxpayers who have already remitted 100% of
the basic withholding tax and was assessed
penal t i es ( sur char ge, i nt er est and
compromise penalties) for late payment.
In this case, the interest assessed shall
be considered as the basic tax which
should be paid to be able to avail of this
Program.
SECTION 4.
WHO MAY AVAIL
! Any person/taxpayer, natural or juridical
where the assessment notice has been
released as of Nov. 30, 2006.
It includes taxpayers who have already
paid any portion of the increments
(surcharge, interest, etc.) on their tax
liabilities; provided, they will waive any
claim for refund of paid amount in excess
of 100% of the basic tax paid.
! Who may not avail:
Taxpayers with existing tax cases on
which the PCGG has/have an interest.
SECTION 5.
PLACE FOR FILING APPLICATION FOR
ABATEMENT OF PENALTIES AND INTETREST
All Applications shall be filed, accepted and
processed with the following offices:
a. Revenue District Office for regional
accounts under its jurisdiction;
b. Assessment Division for RO cases with
administrative protest;
c. Legal Division for RO cases with judicial
protest or for j udi ci al acti on or wi th
Administrative protest involving legal issues;
d. Collection Service for delinquent accounts
under the jurisdiction of the National Office
other than LTS cases;
e. Large Taxpayers Service for large
taxpayers cases under the jurisdiction of the
Large Taxpayers Service;
f. Legal Service for NO cases that are for
judicial action or with judicial protest and/or
administrative protest involving legal issue;
g. Enforcement Service for tax cases
handled by the National Investigation Division
of the NO.
Notwithstanding the said provisions, the

office which has possession of the docket
of the case shall receive and process all
applications for abatement of penalties/
surcharge and interest on delinquent
accounts and assessed tax cases.
SECTION 6.
MODE OF PAYMENT
Upon filing of the application for/acceptance of the
offer to avail of the Abatement Program, the
amount offered in complete settlement of the
delinquent account/assessed tax cases shall be
paid.
Where to pay:
1. With the AABs located within the jurisdiction
of the RDO/LTS/LTDO where the taxpayer is
registered.
2. In the absence of AABs, the payment may be
made to the Revenue Collection Officer/
Deputized Treasurer of the City/Municipality of
the RDO/LTDO that has jurisdiction over the
taxpayer.
Staggered payments of the amounts payable
under the Program may be considered on a
case to case basis in accordance with the
existing Regulations of the Bureau of Internal
Revenue upon approval of the Regional
Director for regional cases, and concerned
Assistant Commissioner (LTS, Collection,
Legal, or Enforcement), for NO cases.
Nonetheless, cases pending in courts shall
not be withdrawn unless the concerned
taxpayer fully pays 100% of the basic tax.
If the amount, as abated, is not paid as
required, the approved staggered payment is
automatically nullified and the delinquent
account or assessment shall be reverted to
the original assessed amount plus the
statutory increments incident to delinquency,
which shall be collected thru the summary
remedies and/or judicial processes provided
for by law.
SECTION 7.
EFFECTIVITY
The Regulations shall remain in force until March
31, 2007 subj ect t o ext ensi on by t he
Commissioner of Internal Revenue on meritorious
grounds.
Regulation Allowing for the Abatement of
Penal t i es/ Surcharges and I nt erest on
Disputed/Litigated Assessments.
Justification: Before an assessment reaches
finality, the liability of the taxpayer is not yet
certain and, therefore, the imposition of penalties
at this stage appears to be unjust and/or makes
the assessment excessive. This paves the legal
avenue for the abatement thereof because
pursuant to Section 204(B) of the Code, as
amended, the Commissioner is authorized to
abate or cancel tax liability and/or the penalties
thereon when the tax or any portion thereof which
appears to be unjustly or excessively assessed, or
the administration and collection costs involved do
not justify the collection of the amount due.
SECTION 1.
PURPOSE.
To give the taxpayers the opportunity to settle their
preliminary or final assessments, disputed/
protested administratively or judicially, by way of
application for payment of basic tax and
abatement or cancellation of all penalties,
including surcharge and interest.
SECTION 2.
COVERAGE.
The following cases, with duly issued Assessment
Notice as of November 29, 2007, involving taxable
year ending December 31, 2005 and prior years,
shall be covered hereof:
a) Cases under administrative protest pending in
the Regional Office, Revenue District Office,
Legal Service, Large Taxpayer's Service
(LTS), Collection Service, Enforcement
Service and other Offices in the National
Office; and
b) Civil tax cases being disputed before the
Department of Justice and the courts, e.g.,
MTC, RTC, CTA, CA and SC, including cases
with decision which are not yet final and
executory.
The following cases, however, shall be

excluded:
a) Cases involving issues decided by
the Supreme Court with finality
unless the issues involved difficult
question of law or issues without
established precedent ruling or
Supreme Court Decision at the time
of the transaction;
b) Cases where t he Presi dent i al
Commission on Good Government
(PCGG) has an interest and/or there
is a need to coordinate with the
PCGG; and
c) Withholding tax cases.
SECTION 3.
PLACE FOR FILING APPLICATION FOR
ABATEMENT OF PENALTIES AND INTEREST.
The application shall consist of the following:
a) Letter request by the taxpayer for abatement
of penalties and interest;
b) Accomplished Application for Abatement Form
(Annex A); and
c) Pre-assessment Notice (PAN) or Final
Assessment Notice (FAN).
To be filed with the:
a. Revenue District Office (RDO) For
Regional Office Cases under the jurisdiction
of the concerned district;
b. Concerned Group of the Large Taxpayers
Service (LTS) For Large Taxpayers Cases
under the jurisdiction of the concerned group
of the Large Taxpayers Service.
! The abatement docket or record consisting of
the Application for Abatement of Penalties
and Interest of basic tax shall, thereafter, be
forwarded to the appropriate Technical
Working Committee (TWC) for its review and
evaluation.
! However, if the case is under judicial
protest, a photocopy of the Application for
Abatement as well as of the payment form
shall be given to the concerned Legal Office
f or i t s i nf or mat i on/ coor di nat i on wi t h
appropriate collecting office/TWC.
SECTION 4.
TIME FOR PAYMENT OF THE 100% BASIC TAX
ASSESSED.
The filing of the application and payment of an
amount equal to 100% of the Basic tax assessed
shall be made not later than February 29, 2008,
unless extended by the Commissioner on
meritorious grounds.
Where to pay:
1. Accredited Agent Bank (AAB) of the RDO/
LTS/Large Taxpayers District Office (LTDO)
that has jurisdiction over the taxpayer.
2. In the absence of an AAB, with the Revenue
Collection Officer/Deputized Treasurer of the
concerned BIR Office that has jurisdiction
over the taxpayer.
SECTION 5
APPROVAL OF ABATEMENT.
The Commissioner has the sole authority to
abate or cancel internal revenue taxes,
penalties and/or interest pursuant to Section
204(B), in relation to Section 7(c), both of the
National Internal Revenue Code of 1997.
Nonetheless, this program covers just the
abatement of penalties and interest.
The processing of the cases shall be coursed
through the following officials:
a. The Deputy Commissioner-Operations
Group, for the evaluation and review of
any appl i cat i on f or abat ement of
taxpayers under the jurisdiction of the
Region; and
b. The Assi st ant Commi ssi oner /
Concerned Head Revenue Executive
Assistant of the LTS, for the evaluation
of application for abatement of taxpayers
under the jurisdiction of the Large
Taxpayers Service.
General rule: The recommendation of the
aforementioned Officials, through their
respective TWCs, shall be the basis of the
approval or disapproval by the Commissioner
of the application.
Exception: With respect to abatement of
penalties and interest on protested/disputed
assessments of taxpayers under the Large
Taxpayer's Service (LTS), the concerned
Officials, through the concerned TWC, shall
first have its recommendation approved or
disapproved by Management Committee
(MANCOM), through a majority vote of all the
members, before the same is elevated to the
Commissioner for appropriate action.
Upon approval by the Commissioner, the tax
case is accordingly terminated through the
issuance of a Termination Letter, and Authority
to Cancel Assessment (ATCA) pertinent to
that portion of the assessment (i.e., the
penalties/interest) abated.
SECTION 6.
PROCESSING TIME.
The application for abatement or cancellation
of penalties and/or interest should be
transmi tted by the concerned Offi ces
mentioned in Sec. 3 hereof to the respective
TWCs within five (5) days from receipt by
said office.
The concerned TWC has fifteen (15) days
within which to act on the case.
" Like RR No. 3-2007, this regulation likewise
provi des f or abat ement of penal t i es/
surcharges and interest but ONLY on
DISPUTED AND LITIGATED ASSESSMENT.
" RR. No. 3-2007 governs abatement of
penal t i es/ surcharges and i nt erest on
del i nquent assessment s WHETHER
DISPUTED OR NOT.
" RR. No. 15-2007 is the most recent
regul ati on governi ng abatement of
penalties/surcharges and interest.
! END OF TAX REMEDIES UNDER NIRC "
TAXATION LAW
LOCAL TAXATION
LOCAL TAXATION
Introduction
Introduction
Basis of Local Power
Each local government unit shall have the power
to create its own sources of revenues and to levy
taxes, fees, and charges subject to such
guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees and charges shall
accrue exclusively to the local governments (Sec.
5, Article X, 1987 Philippine Constitution)
Section 5 does not change the doctrine that
municipal corporations do not possess
inherent powers of taxation. What it does is to
confer municipal corporations a general power
to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a
statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of
local governments has been reduced to the
authority to impose limitations on municipal
powers. Moreover, these limitations must be
consistent with the basic policy of local
autonomy. The important legal effect of Section 5
is thus to reverse the principle that doubts are
resolved against municipal corporations (by Fr.
Joaquin Bernas, Commissioner of the 1986 Constitutional
Commission; The City Government of Quezon City, et al v. Bayan
Telecommunications, Inc., GRN 162015, March 6, 2006).
Under the present constitutional rule, where there
is neither a grant nor a prohibition by statute, the
tax power must be deemed to exist although
Congress may provide statutory limitations and
guidelines. The basic rationale for the current rule
is to safeguard the viability and self-sufficiency of
local government units by directly granting them
general and broad tax powers (Manila Electric
Company vs. Province of Laguna, et al., G.R. No. 131359,
May 5, 1999).
Nevertheless, Congress cannot abolish the local
governments power to tax as it cannot abrogate
what is expressly granted by the fundamental law.
The only authority conferred to Congress is to
provide the guidelines and limitations on the local
governments exercise of the power to tax
(Dimaampao, p. 113).
EXECUTIVE COMMITTEE
TAXATION LAW
DICT V. UNTAYAO edp
Scope/Aspects of Local Taxation
a. Local Government Taxation (Secs. 128-196, Local
Government Code)
b. Real Property Taxation (Secs. 197-283, LGC)
Local
Government
Taxation
Real Property Taxation
Imposition of
license taxes,
fees and other
impositions,
including
community tax
System of levy on real property
imposed on a country-wide
basis but authorizing, to a
limited extent and within certain
parameters, local governments
to vary the rates of taxation
(Vitug, p. 428)
Local Government Taxation
Local Government Taxation
THE LOCAL GOVERNMENT UNIT HAS THE
POWER (Sec. 129, LGC):
a. To create its own sources of revenue and
b. To levy taxes, fees and charges
Nature of the Taxing Power
a. Not Inherent;
b. Exercised by delegation of the Constitution or
law;
c. Not absolute; subject to limitations as may be
imposed by the legislature.
NOTE:
While the system of local government taxation has
changed with the onset of the 1987 Constitution,
the power of local government units to tax is still
limited. As explained in Mactan Cebu International
Airport Authority: The power to tax is primarily
vested in the Congress; however, in our
jurisdiction, it may be exercised by local
legislative bodies, no longer merely be virtue
of a valid delegation as before, but pursuant to
direct authority conferred by Section 5, Article
X of the Constitution. Under the latter, the
exercise of the power may be subject to such
guidelines and limitations as the Congress may
provide which, however, must be consistent with
the basic policy of local autonomy.
Clearly then, while a new slant on subject of local
taxation now prevails in the sense that the former
doctrine of local government units delegated
power to tax had been effectively modified with
Article X, Section 5 of the 1987 Constitution now
in place, .the basic doctrine on local taxation
remains essentially the same (City of Quezon City vs.
Bayan Telecommunications, Inc., G.R. No. 162051).
Fundamental Principles Governing Local
Taxation (Sec. 130, LGC) (P2IE C2U2)
a. Shall be uniform in each local sub-unit;
b. Shall be equitable and based as much as
possible on the taxpayers ability to pay;
c. Levied for public purposes;
d. Shall not be unjust, excessive, oppressive, or
confiscatory;
e. Shall not be contrary to law, public policy,
national economic policy, or in restraint of
trade;
f. Collection of local taxes and other impositions
shall not be let to any person;
g. The revenues collected under the Code shall
inure solely to the benefit of, and subject to
disposition by the LGU levying the tax or other
imposition unless otherwise specifically
provided therein; and
h. Each LGU shall, as far as practicable, evolve
a progressive system of taxation.
Local Taxing Authority (Sec. 132, LGC)
Shall be exercised by the Sanggunian of the LGU
concerned through an appropriate ordinance
LOCAL TAX ORDINANCE (Secs. 187-188, LGC)
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; and
Local Taxation
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.
It is clear from [Sec. 188, LGC and Art. 277, IRR] that
the requirement of publication is MANDATORY
and leaves no choice. The use of the word shall
in both provisions is imperative, operating to
impose a duty that may be enforced (Soco v. Militante,
G.R. No. L-58961 June 28, 1983).
It bears emphasis, that, strict observance of the
said procedural requirement is the only safeguard
against any unjust and unreasonable exercise of
the taxing powers by ensuring that the taxpayers
are notified through publication of the existence of
the measure, and are therefore able to voice out
their views or objections to the said measure (Coca-
Cola Bottlers Phils. Inc. vs. City of Manila, G.R. No. 156252,
June 26, 2006).
The amending law, having been declared as null
and void, in legal contemplation, therefore, does
not exist. As held by this Court in the case of
People v. Lim, if an order or law sought to be
amended is invalid, then it does not legally exist,
there should be no occasion or need to amend it
(Coca-Cola Bottlers Phils. Inc. vs. City of Manila, supra).
Powers
A. Specific Power of LGU to Impose Taxes
B. Common Revenue-Raising Powers of LGUs
C. Power to Levy Community Tax
D. Powers under Miscellaneous Provisions
TAXES AND OTHER
IMPOSITIONS THAT THE LGU
MAY LEVY
PROVINCES (Secs. 134-141, lgc)
1. Tax on Transfer of Real Property
2. Tax on Business of Printing and Publication
3. Franchise Tax
4. Tax on Sand, Gravel and other Quarry
Resources extracted from Public Land
5. Professional Tax
6. Amusement Tax
7. Annual Fixed Tax for every Delivery Truck or
Van of Manuf act ur er s or Pr oducer s,
Wholesalers of, Dealers, or Retailers in,
certain products
MUNICIPALITIES
1. Municipal Taxes taxes on the businesses of
the following (Sec. 143, LGC):
a. On manuf ac t ur er s , as s embl er s ,
repackers, processors, brewers, distillers,
rectifiers, and compounders of liquors,
d i s t i l l e d s p i r i t s , a n d wi n e s o r
manufacturers of any article of commerce
of whatever kind;
b. On wholesalers, distributors, or dealers in
any article of commerce of whatever kind;
c. On exporters, and on manufacturers,
mi l l er s, pr oducer s, whol esal er s,
di stri butors, deal ers or retai l ers of
essential commodities;
d. On retailers;
e. On contractors and other independent;
f. On banks and other financial institutions;
g. On peddlers engaged in the sale of any
merchandise or article of commerce; or
h. On any business, not otherwise specified
in the preceding paragraphs, which the
Sanggunian concerned may deem proper
to tax.
2. Municipal non-revenue fees and charges
The municipality may impose and collect such
reasonable fees and charges on business and
occupation except professional taxes reserved
for provinces (Sec. 147, LGC).
Rates of Tax Within the Metropolitan Manila
Area (Sec. 144, LGC)
Not to exceed by 50% the maximum rates
prescribed in the preceding Section.
Payment of Business Taxes (Sec. 146, LGC)
a. It shall be payable for every separate or
distinct establishment or place where 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.
c. In cases where a person conducts or operates
2 or more of the businesses mentioned in
Section 143 of LGC
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.
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.
CITIES (Sec. 151, lgc)
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 t he rat es of prof essi onal and
amusement taxes.
BARANGAYS (Sec. 152, lgc)
Barangays may levy the following taxes, fees, and
charges which shall accrue exclusively to them:
a. Taxes On stores or retailers with fixed
business establishments with the gross sales
or receipts for the preceding calendar year of
P50,000 or less (for barangays in the cities)
and P30,000 or less (for barangays in
municipalities)
b. Rate not exceeding 1% of such gross sales
or receipts.
c. Service Fees or Charges For services
rendered in connection with the regulation or
the use of barangayowned properties or
service facilities such as palay, copra or
tobacco dryers
d. Barangay Clearance No city or municipality
may issue any license or permit fee for any
business or activity unless a clearance is first
obtained from the barangay where such
business or activity is located or conducted.
e. Other Fees and Charges The barangay
may levy reasonable fees and charges:
1. On commercial breeding of fighting cocks,
cockfights and cockpits;
2. On places of recreation which charge
admission fees; and
3. On billboards, signboards, neon signs and
outdoor advertisements.
COMMON REVENUE-RAISING
POWERS (Secs. 153-155, LGC)
1. Reasonable fees and charges for services
rendered
2. Public utility charges for the operation of public
utilities owned, operated and maintained by
LGUs within their jurisdiction.
3. Toll fees or charges for the use of any public
road, pier or wharf, waterway, bridge, ferry or
tel ecommuni cati on system funded and
constructed by the local government unit
concerned
Exceptions (to # 3):
a. Officers and enlisted men of the AFP and
PNP;
b. Post office personnel delivering mail; and
c. Physically handicapped and disabled
citizens who are sixtyfive (65) years or
older (Sec. 155, LGC).
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 (Section 155,
LGC).
COMMUNITY TAX
I. Who are authorized to levy? Cities or
municipalities may levy a community tax (Section
156, LGC).
II. Who are liable?
A. Individuals Liable (Sec. 157, LGC)
a. Every inhabitant of the Philippines;
b. Un d e r a n y o f t h e f o l l o wi n g
circumstances:
i. 18 years of age or over, who has
been regularly employed on a
wage or salary basis for at least
thirty (30) consecutive working
days during any calendar year; or
ii. Who is engaged in business or
occupation; or
iii. Who owns real property with an
aggregate assessed value of
P1,000 or more; or
iv. Who is required by law to file an
income tax return
B. Juridical Persons (Sec. 158, LGC)
Every corporation no matter how created
or organi zed, whether domesti c or
resident foreign, engaged in or doing
business in the Philippines shall pay an
annual community tax.
Exempted from paying the Community
Tax:
a. D i p l o m a t i c a n d C o n s u l a r
Representatives;
b. Transient visitors when their stay in
the Philippines does not exceed three
(3) months (Section 159, LGC)
III. Tax Rate
A. Individuals P5.00 plus P1.00 for every
P1, 000.00 income regardless of whether
Local Taxation
from business, exercise of profession or
from property which in no case shall
exceed P5, 000.
In case of husband and wi fe, the
additional tax herein imposed shall be
based upon the total property owned by
them and the total gross receipts or
earnings derived by them.
B. Juridical Persons P500 but not
exceeding P10,000 in accordance with the
following schedule:
1. For every P5,000 worth of real
property owned by it during the
preceding year based on the valuation
used for the payment of the real
property tax P2.00.
2. for every P5,000 of gross receipts
or earnings derived by it from its
business in the Philippines during the
preceding year P2.00.
The di vi dends recei ved by a
corporation shall, for the purpose of
the additional tax, be considered as
part of the gross receipts or
earnings of said corporation (Section
158, LGC).
IV. Place of Payment: residence of the individual,
or in the place where the principal office of the
juridical entity is located.
V. Time of Payment: accrues on the 1st day of
January of each year which shall be paid not
later than the last day of February of each
year.
VI. Penalty for delinquency: an interest of 24%
per annum from the due date until it is paid
shall be added to the amount due.
Community Tax Certificate
It is issued to every person or corporation upon
payment of the community tax. It may also be
issued to any person or corporation NOT subject to
the community tax upon payment of P1.00 (Section
162, LGC).
The presentation of the community tax certificate
shall not be required in connection with the
registration of a voter.
Presentation of Community Tax Certificate on
Certain Occasions (Sec. 163, LGC)
A. Individual
1. when an i ndi vi dual subj ect to the
communi t y t ax acknowl edges 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; pays any tax or
fee;
4. receives any money from any public fund;
5. transacts other official business; or
6. receives any salary or wage from any
person or corporation.
B. Corporation
1. receives any license, certificate or permit
from any public authority;
2. pays any tax or fee;
3. receives money from public funds; or
4. transacts other official business.
The city of municipal treasurer deputizes
the barangay treasurer to collect the
communi t y t ax i n t hei r respect i ve
jurisdictions (Sec. 164, LGC).
The proceeds of the community tax
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 community 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.
OTHER POWERS IN THE LGC
Power to Prescribe Penalties for Tax Violations
and Limitations Thereon (Sec. 516, LGC)
Limited as to the amount of imposable fine as

well as the length or period of imprisonment
1. The Sanggunian is authorized to prescribe
fines or other penalties for violations of tax
ordinances, but:
in no case shall fines be less than P1,000

nor more than P5,000 nor shall the
imprisonment be less than one (1) month
nor more than six (6) months.
2. Such fine or other penalty shall be imposed at
the discretion of the court.
3. The Sangguniang Barangay may prescribe a
fine of not less than P100 nor more than P1,
000.00.
Power to Adjust Local Tax Rate (Sec. 197, LGC)
Adjustment of the tax rates as prescribed herein
should not be oftener than once every five (5)
years, and in no case shall such adjustment
exceed ten percent (10%) of the rates fixed under
the LGC.
Power to Grant Local Tax Exemptions (Sec. 192,
LGC)
Local government units may, through ordinances
duly approved, grant tax exemptions, incentives or
reliefs under such terms and conditions, as they
may deem necessary.
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,
Incentives and Reliefs (Art. 282 [b], IRR of 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 of 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. Shall take effect only during the next
calendar year for a period not exceeding
12 months as may be provided in the
ordinance.
e. In the case of shared revenues, 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 therefor.
b. The grant shall be for a definite period 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.
Tax Exemptions Existing Before the Effectivity
of the LGC Has Been Abolished (Sec. 193, LGC)
Unless otherwise provided by the LGC, tax
exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical,
i ncl udi ng government-owned or control l ed
corporations are hereby withdrawn upon the
effectivity of the LGC except the following:
a. Local water districts
b. Cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and
c. Educational institutions.
RESIDUAL TAXING POWER (Sec. 186, LGC)
General Rule: LGUs may exercise the power to
levy taxes, fees or charges on any base or subject.
Exceptions:
1. Specifically enumerated in LGC
2. Taxed under the provisions of the NIRC, as
amended, and
3. Other applicable laws
Conditions in the exercise of residual taxing
powers:
1. That the taxes, fees, or charges shall not be
unjust, excessive, oppressive, confiscatory or
contrary to declared national policy;
2. That 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 on the taxing power of
local government units as prescribed in
Section 133 of the Local Government Code
3. Fundamental principles governing the exercise
of the taxing power by local governments as
prescribed under Section 130 of the LGC,
particularly the requirement that they must not
be unj ust , excessi ve, oppr essi ve,
confiscatory, or contrary to declared national
policy (Section 186, LGC)
4. The requirement prescribed in Section 186 of
the LGC, which directs that the ordinance
levying such residual taxes shall not be
enacted without any prior public hearing
conducted for the purpose
5. The principle of preemption.
Principle of Preemption or Exclusionary
Doctrine
Where the National Government elects to tax a
particular area, it impliedly withholds from the local
government the delegated power to tax the same
field. This doctrine principally rests on the intention
of the Congress. Conversely, should the Congress
allow municipal corporations to cover fields of
taxation it already occupies then the doctrine of
preemption will NOT apply (Victorias Milling Co., Inc. vs.
Municipality of Victorias Negros Occidental, G.R. No. L-21183,
Sept. 27, 1968).
Local Taxation
Excluded impositions pursuant to the doctrine
of preemption:
a. Taxes which are levied under the NIRC, unless
otherwise provided by LGC of 1991;
b. Taxes, fees, etc. which are imposed under the
Tariffs and Customs Code;
c. Taxes, fees, etc., the imposition of which
contravenes existing governmental policies or
which violates the fundamental principles of
taxation;
d. Taxes, fees and other charges imposed under
special law.
Common Limitations on Local Taxing Powers
(Sec. 133, LGC) (C2T2 DRIVE3 NAP2)
These apply to all LGUs and are actually taxes or
impositions which LGC excludes from the taxing
power of local governments.
Local government units cannot levy:
1. Income tax, except on banks and other
financial institutions;
2. Documentary stamp tax;
3. Estate tax, inheritance, gifts, legacies and
other acquisitions mortis causa except as
otherwise provided
4. Customs duties, registration fees of vessels
and wharfage on wharves, tonnage dues and
all other kinds of customs fees, charges and
dues except whar f age on whar ves
constructed and maintained by the local
government unit concerned;
5. Taxes, fees, 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.
6. Taxes, fees or charges on agricultural and
aquatic products when sold by marginal
farmers or fishermen;
7. Taxes on business enterprises certified by the
Board of I nvest ment s as pi oneer or
nonpioneer for a period of 6 and 4 years,
respectively, from the date of registration;
8. Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees or
charges on petroleum products;
9. Percentage or valueadded tax (VAT) on sales,
barters or exchanges or similar transactions
on goods or services except as otherwise
provided herein;
10. 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;
11. Taxes on premi ums pai d by way of
Reinsurance or retrocession;
12. 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 tricycle;
13. Taxes, fees or other charges on Philippine
products actually exported, except as
otherwise provided in the Code;
14. Taxes, fees or charges on Countryside and
bar angay busi ness ent er pr i ses and
cooperatives duly registered under R.A. 6810
and R.A. 6938, (Cooperatives Code of the
Philippines) ; and
15. Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government unit.
Classification of Common Limitations:
1. Taxes which are levied under the NIRC unless
otherwise provided by the LGC
Numbers 1, 2, 3, 8, 9, 10
2. Taxes, fees, etc. which are imposed under the
Tariffs and Customs Code
Number 4
3. Taxes, fees and charges where the imposition
of which contravenes existing governmental
policies or which are violative of the
fundamental principles of taxation
Numbers 5, 6, 7, 11, 13, 14, 15

4. Taxes, fees, and charges imposed under
special laws.
Number 12
Situs of Local Taxation
A. According to 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 sale is perfected (Allied Thread
Co., Inc. vs. City Mayor of Manila, G.R. No.40296 Nov.
21, 1984).
Sal es Tax i t i s t he pl ace of t he
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. vs. Municipality of Sipocot,
Camarines Sur G.R.No.12680 March 20, 1959).
B. According to Sec. 150, LGC
Branch or sales office a fixed place in the
locality which conducts the operation of the
business as an extension of the principal
office.
Principal office the head or the main office
of the business; the city or the municipality
specifically mentioned in the Articles of
Incorporation or official registration papers as
being the official address of said principal
office shall be considered the situs thereof.
1. When there is a branch or sales outlet -
Municipality or city where the branch

or out l et maki ng t he sal e or
transaction is located.
2. When there is no branch or sales outlet-
Municipality or city of principal office

(not in the place of sale)
3. If manufacturer, assembler, contractor,
producer, or exporter (MACPE) with
factory, project office, plant or plantation
(FPPP):
a. 30% of recorded sales in the principal
office: city or municipality where the
principal office is located.
b. 70% of recorded sales in the principal
office: city or municipality where the
FPPP is located.
Pro rata if FPPP are located in

different municipalities or cities in
proporti on to thei r respecti ve
volumes of production.
c. If plantation is located in some place
other than where the factory is
located, the foregoing 70% shall be
subdivided 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.
Collection of Taxes
Tax Period/
Manner
of Payment
(Sec. 165,LGC)
General Rule: Calendar year;
May be paid in QUARTERLY
installments
Accrual of Tax
(Sec. 166,LGC)
GR: 1
st
day of January;
New taxes, fees, charges or
changes in rates thereof 1
st
day
of the quarter next following the
effectivity of the ordinance
imposing such
Time of
Payment
(Sec 167,LGC)
GR: w/in the 1
st
20 days of January
or of each subsequent quarter, as
the case may be.
The period may, for justifiable
reason/ cause, be extended w/out
surcharges or penalties, but only
for a period not exceeding 6
months
Surcharges &
Penalties on
Unpaid Taxes,
Fees, Charges
(TFC) (Sec.
168,LGC)
Surcharge not exceeding 25% of
the amount of TFC including
surcharges, until such amount is
FULLY paid; in no case shall the
total interest on the unpaid amount
or portion thereof exceed 36
months.
Interests on
other Unpaid
Revenues (Sec.
169, LGC)
At the rate not exceeding 2% per
month from the date it is due until it
is paid; in no case shall the total
interest on the unpaid amount or
portion thereof exceed 36 months.
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.
Local Taxation
Local Tax Remedies Under the LGC
TAX REMEDIES OF THE LGUS
CIVIL REMEDIES OF THE LOCAL GOVERNMENT UNITS
(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, in
like manner.
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 Courts (Valley Trading Co. vs.
CFI of Isabela, GR No. 49529, March 31,
1989).
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
&
Advertisement for sale or auction of
the property levied for 30 days
&
Sale
&
Report of the sale to the Sanggunian
&
Delivery to the purchaser of the
certificates of sale
&
Disposition of the proceeds of the
sale by application of such proceeds
to the delinquency and expenses of
sale
&
Return to the taxpayer of any excess
in the proceeds of the sale
&
Redemption of the property within 1
year from date of sale
&
After lapse of the 1 year redemption
periodexecution of the final deed to
the purchaser in case there is failure
to redeem
Note: Levy shall be effected by
writing upon said certificate the
description of the property upon
which levy is made.
Note: The remedies of distraint and
levy may be repeated if necessary
until the full amount due including all
expenses is collected.
Properties Exempt from Distraint and Levy (Sec.
185, LGC):
1. tools and implements necessarily used by the
del i nquent t axpayer i n hi s t r ade or
employment;
2. one (1) horse, cow, carabao, or other beast of
burden, such as the delinquent taxpayer may
select, and necessarily used by him in his
ordinary occupation;
3. his necessary clothing, and that of all his
family;
4. househol d f urni t ure and ut ensi l s f or
housekeeping and used for that purpose by
the delinquent taxpayer, such as he may
select, of a value not exceeding P10,000.00;
5. provisions, including crops, actually provided
for individual or family use sufficient for four
(4) months;
6. t he prof essi onal l i brari es of doct ors,
engineers, lawyers and judges;
7. one fishing boat and net, not exceeding the
total value of P10,000.00, by the lawful use of
which a fisherman earns his livelihood; and
8. Any material or article forming part of a house
or improvement of any real property.
b. by judicial action
Either of these remedies or all may

be pur s ued c onc ur r ent l y 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 Regional Trial Court in the exercise of
its appellate or original jurisdiction.
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.
TAX REMEDIES OF THE
TAXPAYER
ADMINISTRATIVE
Before assessment:
a. Prot est Agai nst a Newl y Enact ed
Ordinance any question on constitutionality
or legality of tax ordinance within 30 days
from effectivity thereof to Secretary of Justice,
who shall render a decision within 60 days
from the date of the receipt of the appeal (Sec.
187, LGC). Such appeal shall not have the
effect of suspending the effectivity of the
ordinance and the accrual and payment of
the tax.
b. Declaratory relief whenever applicable.
After assessment:
a. Protest
IF THERE IS A PROTEST: within 60 days
from receipt of notice of assessment file a
written protest with the local treasurer (Sec. 195,
LGC) . Payment under prot est i s not
necessary.
&
Local Treasurer
!"
If it finds the protest or
in part, he shall issue
a notice canceling
wholly or partly, the
assessment.
If not meritorious, in
whole he shall deny
the protest, wholly or
partly with notice to
the taxpayer.
&
Taxpayer shall have
30 days from receipt
of the denial of the
protest OR from the
lapse of 60 day period
prescribed within
which to appeal with
the court of competent
jurisdiction; otherwise,
the assessment
becomes conclusive
and unappealable.
IF NO PROTEST: the assessment shall
become final and executory.
b. Payment and subsequent refund or tax
credit within 2 years from payment of tax to
local treasurer (Sec. 196, LGC). It is to be noted
that, unlike in internal revenue taxes, the
supervening cause applies in local taxation
because the period for the filing of claims for
refund or credit of local taxes is counted not
necessarily from the date of payment but from
the date the taxpayer is entitled to a refund or
credit.
c. Right of redemption 1 year from the date
of sale or from the date of forfeiture (Sec. 179,
LGC).
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 twoyear 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.
Local Taxation
Prescriptive Periods for The Assessment and Collection
of Local Taxes
PRESCRIPTIVE PERIODS FOR
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 the fraud or intent to
evade the payment (Sec. 194, LGC).
PRESCRIPTIVE PERIOD OF
COLLECTION
Local taxes, fees, or charges may be collected
within five (5) 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).
Fundamentals
REAL PROPERTY TAXATION 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.
The definition describes the real property tax or
realty tax or real estate tax as a tax on
ownership. HOWEVER, it is worthwhile to note
that in one decided case, the SC observed that
the policy of taxing real property is on the basis of
the ACTUAL USE even if the user is not the owner
(Province of Nueva Ecija vs. Imperial Mining Co., Inc., G.R.
No. 59463, Nov. 19, 1982).
Also, under Section 234(a) of the LGC, even if the
real property in question is owned by the
Government, the property becomes taxable if the
beneficial or actual use thereof is transferred for a
consideration or otherwise to a taxable person.
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.
Note: The taxing power of the LGUs in real
property taxation is a delegated power, basis of
which is Section 232 of the LGC.
Who are authorized to Levy Real Estate Taxes?
(Sec. 200, LGC)
1. Provinces
2. Cities
3. Municipalities in Metro Manila Area
Extent of their Powers
They do not only have the power to levy real

estate taxes BUT they may also fix real estate
tax rates. It should be noted that the power to
fix real estate tax rates does not extend to
municipalities, when the only local bodies
authorized to fix tax rates were the provincial
board in the case of province, and the
municipal board or city council in the case of a
municipality or city.
Note: No public hearing shall be required before
the enactment of a local tax ordinance levying the
basic real property tax.
REAL PROPERTY subject to the definition
given by Art. 415 of the Civil Code.
For taxation purposes, the term real property
may include things that should be generally being
regarded as personal property. It is a familiar
phenomenon to see things classed as real
property for purposes of taxation which on general
principle might be considered personal property
(Standard Oil Co. of New York vs. Jamarillo G.R.No. 20898)
IMPROVEMENT - valuable addition made to a
property or amelioration in its condition amounting
to more than a mere replacement of parts
involving capital expenditures and labor.
Characteristics of Real Property Tax
1. Direct tax on the Ownership of real property
2. Ad valorem tax The value is based on the
tax base
3. Proportionate the tax is calculated on the
basis of a certain percentage of the value
assessed
4. Indivisible single obligation
5. Local tax
Fundamental Principles Governing Real
Property Taxation (Sec. 198, LGC)
1. Real property shall be appraised at its
current and fair market value;
2. Real propert y shal l be cl assi f i ed f or
assessment purposes on the basis of actual
use;
3. Real property shall be assessed on the basis
of uniform classification within each LGU;
4. The apprai sal , assessment, l evy and
collection of RP Tax shall not be left to any
private person; and
5. The appraisal and assessment of real
property shall be equitable.
Types of Real Property Tax
1. Basic Real Property Tax
2. Special Levies
BASIC REAL PROPERTY TAX
LGU Rate of Basic Real
Property Tax
1. Province not exceeding 1% of
assessed value
2. City not exceeding 2%
LGU Rate of Basic Real
Property Tax
3. Municipality within
Metro Manila
not exceeding 2%. (Sec.
233, LGC)
Taxing Authority (Sec. 232, LGC)
Ad Valorem Tax a levy on real property
determined on the basis of a fixed proportion of
the value of the property
Special Levies
A. Special Education Fund (SEF) - 1%
additional real estate tax to finance the
special education fund (Sec. 236, LGC);
B. Additional Ad Valorem on Idle Lands - not
exceeding 5% of the assessed value of the
property (Sec. 236, LGC)
- Within Metropolitan Manila area only
C. For Public Works on lands specially
benefited by public works, projects or
i mpr ovement s f unded by t he l ocal
government unit
may be imposed even by municipalities
outside Metro Manila 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 has been donated to the local
government unit concerned for the
construction of said projects (Sec. 240,
LGC).
D. Imposed by Other Laws
Socialized Housing Tax (RA 7279, March 24,
1992) LGUs are authorized to impose an
additional one-half percent (0.5%) on the
assessed value of all lands in urban areas in
excess of Fifty-Thousand pesos, except those
lands which are exempted from the coverage
of RA 7279.
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
Local Taxation
2. Non-Agricultural Lands
More than 1,000 sq m. in area if more than
! of which remain unutilized 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, or
4. Any cause which physically or legally
prevents the owner of the property or person
having legal interest therein from improving,
utilizing or cultivating the same.
Classification of Lands for Purposes of
Assessment (Sec. 215, LGC) (CAR-MITS)
a. Commercial
b. Agricultural
c. Residential
d. Mineral
e. Industrial
f. Timberland
g. Special *
Classification of lands is made by the

respective Sanggunian in accordance with
zoning ordinances; and
It is based on actual use.

* Special Classes of Real Property (Sec. 216,
LGC)
Lands, buildings, and improvements, actually,
directly, and exclusively used for the following
purposes:
1. Hospitals;
2. Cultural and scientific purposes;
3. Owned and used by local water districts;
4. Owned and used by GOCCs rendering
essential public services in the supply and
distribution of water and/or generation or
transmission of electric power.
Question of Tax Exemption (Sec. 234, LGC)
General Rule: No provision in the LGC which
expressly empowers LGUs to exempt real
property from taxes
Exemptions:
a. Exemptions from Real Property Tax (Sec. 234,
LGC)
b. Other Instances
Exemptions from Real Property Tax
1. Real property owned by the Republic of the
Philippines or any of its political subdivisions
except when the beneficial use thereof has
been granted for consideration or otherwise to
a taxable person;
2. Charitable institutions, churches, parsonages,
or convents appurtenant thereto, mosques,
non-profit or religious cemeteries, and all
lands, buildings, and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes;
Note: The tax exemption herein rest on the
premise that they are actually, directly and
exclusively used by said entities or institutions
for their stated purposes and not necessarily
because they are owned by religious,
charitable or educational institutions
3. All machineries and equipment that are
actually, directly and exclusively used by local
water utilities and government-owned or
controlled corporations engaged in the supply
and distribution of water and/or generation
and transmission of electric power;
4. All real property owned by duly registered
cooperatives as provided under R. A. No.
6938; and
5. Machinery and equipment used for pollution
control and environment protection.
Note: Except as herein provided, any exemption
from payment of real property tax previously
granted to, or presently enjoyed by, all persons,
whether natural or j uri di cal , i ncl udi ng al l
government-owned or controlled corporations, are
hereby withdrawn upon the effectivity of the LGC
Other Instances Wherein the LGUs May Grant
Exemptions
1. exempt idle lands from the additional 5% tax
by reason of force majeure, civil disturbance,
natural calamity or any cause or circumstance
which physically or legally prevents the owner
of the property or person having legal interest
therein from improving, utilizing or cultivating
the same (Section 238, LGC);
2. in case of a general failure of crops or
subst ant i al decrease i n t he pri ce of
agricultural or agri-based products, or
calamity in the province, city, or municipality,
the Sanggunian concerned, by ordinance
passed prior to the first day of January of any
year and upon recommendation of the Local
Disaster Coordinating Council, may condone
or reduce, wholly or partially, the taxes and
interest thereon for the succeeding year/s in
the city or municipality affected by the
calamity (Section 276, LGC).
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)
MIAAs Airport Lands and Buildings EXEMPT
MIAAs Airport Lands and Buildings are exempt
from real estate tax imposed by local government.
Portion of that MIAAs leases to private entities are
not exempt from real estate tax, by express
mandate of the Local Government Code, local
governments cannot impose any kind of tax on
national government instrumentalities like the
MIAA (Manila International Airport Authority vs. Court of
Appeals 495 SCRA 591).
Actual Use of Property as Basis for
Assessment (Sec. 217, LGC)
Real Property shall be classified, valued and
assessed on the basis of its actual use regardless
of where located, whoever owns it and whoever
uses it.
ACTUAL USE refers to the purpose for which
the property is principally or predominantly utilized
by the person in possession thereof.
Unpaid realty taxes attach to the property and are
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
real property tax 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 vs. City of Manila, G.R. No. 90639, Feb. 21, 1990).
Procedure in Administration of Real Property Tax
STEP 1
DECLARATION OF REAL PROPERTY
I. Declaration by Owner or Administrator (Sec.
202-203, LGC)
WHEN: once every 3 years during the period
from January 1 to June 30 commencing with
the calendar year 1992
WHAT: file a sworn declaration with the
assessor of the (1) true value of their property
which shall be the current and fair market
value of the property as determined by the
declarant whether previously declared or not;
(2) taxable or exempt; (3) with description of
the property.
A. For newly acquired property:
WHEN: must file with the assessor within
60 days from date of transfer
WHAT: sworn statement containing the
fair market value and description of the
property.
B. For improvement on property:
WHEN: must file within 60 days upon
completion or occupation (whichever
comes earlier)
WHAT: sworn statement containing the
fair market value and description of the
property.
II. Declaration by Provincial / City / Municipal
Assessor (Sec. 204, LGC)
WHEN: only when the person under Sec. 202
of the LGC refuses or fails to make a
declaration within the prescribed time.
No oath by the assessor is required.
If Property is Declared for the First Time (Sec.
222, LGC)
If declared for the first time, real property shall be
assessed for back taxes for not more than 10
years prior to the date of initial assessment.
Taxes shall be computed on the basis of applicable
schedul e of val ues i n f or ce dur i ng t he
corresponding period.
STEP 2
LISTING OF REAL PROPERTY IN THE
ASSESSMENT ROLLS
(Secs. 205, 207, LGC)
Listing of all Real Property whether taxable or

exempt within the jurisdiction of LGU
a. in general it shall be listed, valued and
assessed in the name of the owner,
administrator, or anyone having legal
interest in the property
b. undivided real property in the name of
the estate or heirs or devisees
c. Co r p o r a t i o n , pa r t ne r s hi p, a nd
association same as individuals
d. owned by Republic of the Philippines,
i t s i nst r ument al i t i es, pol i t i cal
subdi vi si on, benef i ci al use i s
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.
Local Taxation
STEP 3
APPRAISAL AND VALUATION OF REAL
PROPERTY
(Secs. 212-214, 219, 224-225, LGC)
Determination of Fair Market Value (FMV)
For land
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)
Assessor prepares a schedule of FMV for

different classes of properties.
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 and in
two other conspicuous public places therein
(Sec. 212, LGC)
General revision of property assessment is

made (Sec. 219,LGC)
Sanggunian enacts a real property tax

ordinance.
For machinery
1. For Brand new machinery: FMV is the
acquisition cost
2. In all other cases:
FMV = Remaining eco. Life X Replacement *
Estimated eco. Life Cost
* or Reproduction Cost
STEP 4
DETERMINE ASSESSED VALUE
(Sec. 218, LGC)
Determine Assessed Value/Taxable Value
Procedure
1. Take the schedule of FMV
2. Assessed Value = FMV x Assessment level
3. Tax = Assessed value x Tax rate
Assessed Level the percentage applied to the
FMV to determine taxable value of real property
STEP 5
PAYMENT AND COLLECTION OF TAX
a. Accrual of Tax: January of every year and
such will constitute as a superior lien (Sec. 246,
LGC).
b. Time and Manner of Payment (Sec. 250, LGC):
1. basic real property tax in 4 equal
installments (on or before March 31, on or
before June 30,on or before September
30, on or before December 30)
2. special levy governed by ordinance
c. Interest for Late Payment (Sec. 255, LGC)
1. two percent (2%) for each month on
unpaid amount until the delinquent
amount is paid
2. provided in no case shall the total interest
exceed thirty-six (36) months
d. For Advance and Prompt Payment
1. Advance payment di scount not
exceeding 20% of annual tax (Sec. 251,
LGC)
2. 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
t her eon and r el at ed expenses, and t he
enforcement of 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 may deputize the
barangay treasurer to collect all taxes on real
property located in the barangay; provided, the
barangay treasurer is properly bonded.
Periods within which to Collect Real Property
Taxes (Sec. 270, LGC)
1. Basic real property tax and any other tax
levied under the title on Real Property
Taxation five (5) years from the date they
became due (Sec. 270, LGC).
2. When there is fraud or intent to evade the
payment of taxes ten (10) years from
discovery of the fraud or intent to evade the
payment.
Grounds for the Suspension of the Running of
the Prescriptive Periods (Sec. 270, LGC) [PRO]
1. The local treasurer is legally prevented from
collecting the tax;
2. The owner of the property or the person
having legal interest therein requests for a
reinvestigation and executes a waiver in
writing before the expiration of the period
within which to collect; and
3. The owner of the property or the person
having legal interest therein is out of the
country or otherwise cannot be located
Real Property Tax Remedies Under the LGC
A. LGUs Tax Remedies
I. Administrative
II. Judicial
B. Taxpayers Remedies
I. Administrative
II. Judicial
TAX REMEDIES OF THE LOCAL
GOVERNMENT TO EFFECT
COLLECTION OF TAXES
I. 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 for
payment.
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 is for an amount insufficient to
pay the real property tax and other costs.
II. JUDICIAL
1. Civil Action (Sec. 266, 270 LGC) filed by
the local treasurer within 5 or 10 years as
provided in Sec. 270 of the LGC
Note: No action for the collection of the tax,
whether administrative or judicial, shall be
instituted after the expiration of such period
stated in Sec. 270, LGC. In case of fraud or
intent to evade payment of the tax, such
action may be instituted for the collection of
the same within 10 years from the discovery
of such.
TAX REMEDIES OF THE
TAXPAYER
I. ADMINISTRATIVE
1. PROTEST (involving questions of fact)
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
&
Apply for Tax
Refund or Tax
Credit
Denied
&
Appeal with the
LBAA in case of
denial of protest OR
inaction of the
treasurer after the
lapse of 60 days
&
Appeal with the
CBAA within 30
days from receipt of
adverse decision by
LBAA
&
Appeal to the CTA
within 30 days
from receipt of
adverse decision
rendered by CBAA
Local Taxation
2. PROTEST (involving purely questions of
law, e.g. constitutionality or legality of
tax ordinance)
A t a x p a y e r ma y q u e s t i o n t h e
constitutionality or legality of an ordinance
on appeal within 30 days from the
effectivity thereof, to the Secretary of
Justice (Section 187, LGC).
An owner of real property who is not
satisfied with the assessment of his
property may, within 60 days from notice of
assessment, appeal to the Board of
Assessment Appeals (Section 226, LGC).
1. 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 two 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.
2. REDEMPTION OF REAL PROPERTY (Sec.
261, LGC)
within 1 yr from the date of the 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 of
the following:
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
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
wi t hi n 60 days f rom not i ce 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
of CBAA to Court of Tax Appeals en banc
4
th
of Court of Tax Appeals en banc to the
Supreme Court.
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 ASSESSMENT APPEALS
(LBAA should decide within 120 days from
receipt of petition)
Within 30 days from receipt of decision from
LBAA, the dissatisfied party may appeal to
CBAA
$
CENTRAL BOARD OF ASSESSMENT APPEALS
Party adversely affected by LBAAa decision
may appeal with the CTA within 30 days from
receipt of decision.
$
CTA (EN BANC)
Within 15 days
$
SUPREME COURT
CONDONATION OF REAL PROPERTY
TAXES
1. By the Sanggunian
Real property taxes may be condoned
wholly or partially in a given local
government unit 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.
II. JUDICIAL
1. Court Action appeal of CBAAs
decision to Court of Tax Appeals en banc.
2. Suit assailing validity of tax; recovery
or refund of taxes paid (Sec. 64, P.D. 464)
3. Suit to declare invalidity of tax
because of irregularity in assessment
and collection (Sec. 64, P.D. 464)
4. Suit assailing the validity of tax sale
(Sec. 83, P.D. 464) (Sec. 267, LGC)
LOCAL TAXATION vs. REAL PROPERTY TAXATION
COMPARISON LOCAL TAXATION REAL PROPERTY TAXATION
1. LGUs
authorized to
exercise
Provinces, Cities, Municipalities and
Barangays
Provinces, Cities and Municipalities in
Metro Manila Area
2. Power or
Authority to
grant tax
exemptions
Expressly provided (Section 192, LGC) Gen. Rule: No power to grant tax
exemptions
Exceptions: (see. Section 234, LGC)
3. Date of Accrual Unless otherwise provided in the LGC, all
local taxes, fees or charges shall accrue on
the 1
st
day of January of each year;
however, new taxes, fees or charges or
changes in the rates thereof, shall accrue
on the 1
st
day of the quarter next following
the effectivity of the ordinance imposing
such new levies or rates (Section 166,LGC)
on the 1
st
day of January
4. Manner of
payment
maybe paid in quarterly installments four equal installments
5. Time of Payment within first 20 days of January or of each
subsequent quarter as the case maybe
1
st
on or before the 31
st
of March
2
nd
on or before 30
th
of June
3
rd
on or before 30
th
of September
4
th
on or before 31
st
of December
Exception: special levy
6. Prescriptive
period of
assessment
within 5 years from the date they become
due
Within 5 years from the date they
become due
7. Prescriptive
period of
collection
within 5 years from the date of assessment
by administrative or judicial action
within 5 years from the date they
become due; within 10 years from the
discovery of fraud or intent to evade
payment
8. Remedies Governments Remedies:
1. Govts lien
2. Civil Remedies:
- administrative action
- judicial action
distraint
levy
collection through judicial action

Taxpayers Remedies:
1.protest by means of appeal to the
2.protest against the assessment
3.claims for refund or tax credit
NOTE: payment under protest is not
necessary
Governments Remedies:
1. Govt.s lien
2. Civil Remedies:
- administrative action
- judicial action
levy
purchase by local treasurer
collection through judicial action

Taxpayers Remedies:
1.protest by means of appeal to the
2.protest against the assessment
3.claims for refund or tax credit
NOTE: payment under protest is
necessary
Local Taxation
Specific Provisions on The Taxing and
Other Revenue-Raising Powers of
Local Government Units
Specific Provisions on The Taxing and Other Revenue-Raising Powers of Local Government Units
Provinces
Type of Tax Rate Exceptions Other Provisions
Tax on transfer of real
property ownership (Sec.
135, LGC)
Tax on the sale, donation,
barter or any other mode
of transferring ownership
or title of real property.
Not more than 50% of
1% of the total
consideration; or fair
market value in case the
monetary consideration
involved in the transfer is
not substantial,
whichever is higher.
Sale, transfer or
other disposition of
real property
pursuant to R.A.
No. 6657
(Comprehensive
Agrarian Reform
Law)
It is the duty of the seller,
donor, transferor or
administrator to tax the tax
imposed.
Payable within sixty (60) days
from the date of execution of
the deed or date of
decedent's death
Printer's or Publisher's
Tax (Sec. 136, LGC)
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.
1. For newly started
business
TAX RATE = 1/20 of
1% of the capital
investment
2. School Texts or
references
prescribed by
DECS shall be
EXEMPT from tax.
No VAT on sale, importation,
printing, publication of
books, newspaper, magazine,
review or bulletin w/c
appears at regular intervals
w/ fixed prices w/c is not
devoted principally to
publication of paid
advertisements (Sec. 109 [y],
NIRC)
Franchise Tax (Sec. 137,
LGC)
Notwithstanding any
exemption granted by any
law or other special law,
the province may impose
a tax on business
enjoying a franchise.
Not exceeding 50% of
1% of the gross annual
receipts for the
preceding calendar
year based on the
incoming receipts, or
realized within its
territorial jurisdiction.
For newly started
business
TAX RATE = 1/20 of 1%
of the capital
investment

Franchise grantees of
telephone telegraph, radio,
TV and all other (except
electric, gas and water
utilities) are subject to 10%
VAT (Sec. 108 [A], NIRC)
Annual Fixed Tax on
Delivery Trucks and
Vans of Manufacturers,
Wholesalers or, Dealers
or Retailers in certain
products (Sec. 141, LGC)
Not exceeding P500 on
every truck, van or
vehicle used in the
delivery or distribution of
merchandise
Manufacturers,
producers,
wholesalers, dealers
and retailers subject to
this tax is exempt from
peddlers tax
Covers distilled spirits, soft
drinks, cigars and cigarettes
and other products, as may be
determined by the Sanggunian
Panlalawigan.
Tax on Sand, Gravel and
Other Quarry Resources
(Sec. 138, LGC)
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
Not more than 10% of the
fair market value in the
locality per cubic meter
The permit to extract resources
shall be issued exclusively by
the provincial governor, pursuant
to the ordinance of the
Sangguniang Panlalawigan.
PROCEEDS OF THE TAX
DISTRIBUTED AS FOLLOWS:
# Province
30%
# Component city of
Municipality where 30%
where the quarry resources
are extracted
# Barangay where the quarry
resources 40% are extracted
Type of Tax Rate Exceptions Other Provisions
Professional Tax (Sec. 139,
LGC)
Annual professional tax on
persons engaged in the
exercise or practice of a
profession requiring
government examination.
At such amount and
reasonable classification
as the Sangguniang
Panlalawigan may
determine, but shall in no
case exceed P300.
Professionals
exclusively employed in
the government shall be
exempt from payment of
this tax AND individuals/
corporation employing a
person subject to
professional tax shall be
required by that person
to pay the professional
tax before employment
and annually thereafter
To be paid on or before the
31
st
of January, in the province
where he practices his
profession or where he
maintains principal office in
case the practice is in several
places. Any person first
beginning to practice a
profession after the month of
January must, however, pay
the full tax before engaging
therein.
Amusement Tax (Sec. 140,
LGC)
Tax on proprietors,
lessees, or operators of
theaters, cinemas, concert
halls, circuses, boxing and
other places of
amusement.
Not more than 30% of 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 from the
payment of
amusement tax
Proceeds from the amusement
tax shall be shared equally by
the province and the
municipality where such
amusement places are located
Municipalities (Section 143, LGC)
TAX ON BUSINESS
Entities/Persons Taxable Tax Rate
# MUNICIPAL TAXES
a. 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
(Sec. 143 [a], LGC)
This is a graduated annual fixed tax, the rate of which is
based on the taxpayer's gross sales or receipts for the
preceding calendar year.
However, when the gross sales or receipts amount to P6,
500,000 or more for the preceding calendar year, the tax
ceases to be a fixed tax. A percentage tax of 37.5% of 1% is
imposed instead.
a. Wholesalers, distributors or dealers in
any article of commerce of whatever kind
or nature (Sec. 143 [b], LGC).
a. Also a graduated annual fixed tax, the rate of which is
based on the gross sales or receipts for the preceding
calendar year.
b. Where the gross sales or receipts, however, amount to P2,
000,000 or more, the tax becomes a percentage tax levied at
a rate not exceeding 50% of 1%.
a. Exporters and manufacturers, millers,
producers, wholesalers, distributors,
dealers or retailers of the following
essential commodities (Sec. 143 [c], LGC):
1. rice and corn;
2. wheat or cassava flour, meat, dairy
pr oduct s, l ocal l y manuf act ur es,
processed or preserved food, sugar,
salt and other agricultural, marine, and
fresh water products, whether in the
original state or not;
3. cooking oil and cooking gas;
4. l aundr y soap, det er gent s, and
medicine;
5. agricultural implements, equipment and
post-harvest faci l i ti es, ferti l i zers,
pesticides and other farm inputs;
6. poultry feeds and other animal feeds;
7. school supplies; and
8. Cement.
At a rate not exceeding onehalf of the rates for sales of articles
mentioned in paragraphs (a), (b) and (d) of Sec. 143 of LGC.
Local Taxation
TAX ON BUSINESS
a. Retailers (Sec. 143 [d], LGC)

The tax on retailers is not a graduated annual fixed tax but an
annual percentage tax imposed at the following rates:
a.On gross sales or receipts for the preceding calendar year
not exceeding P400,000 2%; and
b.On sales or receipts exceeding P400, 000 1%.
a. Contractors and other independent
contractors (Sec. 143 [e], LGC).
Also a graduated annual fixed tax based on the gross receipts
for the preceding calendar year.
However, when the gross receipts amount to 2,000,000 or
more, the contractor's tax becomes a percentage tax. The tax
rate is 50% of 1%.
a. Banks and other financial institutions (Sec.
143 [f], LGC)
The tax is 50% of 1% on their gross receipts of the preceding
calendar year derived from interests, commissions and
discounts from lending activities, income from financial leasing,
dividends, rentals on property and profit from exchange or sale
of property, insurance premium.
a. Peddlers engaged in the sale of any
merchandise or article of commerce.(Sec.
143 [g], LGC).
At a rate not exceeding fifty pesos (P50) per peddler annually.
a. On any business not otherwise specified
above (Sec. 143 [h], LGC)
Provided that on any business subject to excise, valueadded
or percentage tax under the National Internal Revenue Code,
the rate of the tax shall not exceed 2% of gross sales or
receipts of the preceding calendar year.
The Sanggunian concerned may impose a schedule of
graduated tax rates but in no case to exceed the rates
prescribed in Sec. 143 of LGC.
# MUNICIPAL NON REVENUE FEES & CHARGES
Municipalities may impose & collect reasonable fees & charges on business & occupation and, except in
case of professional tax, (w/c only provinces & cities may levy) on the practice of any profession or calling
commensurate w/ the cost of regulation, inspection & licensing before any person may engage in such
business/occupation/practice of such profession or calling. (Sec. 147, LGC)
Barangay (Section 152, LGC)
TAX ON BUSINESS
1. BARANGAY TAXES
On stores or retailers with fixed
business establishments.
With the gross sales or receipts for the preceding calendar year of P50,
000 or less (for barangays in the cities) and P30,000 or less (for
barangay and municipalities) at a rate not exceeding 1% of such gross
sales or receipts.
2. SERVICE FEES OR CHARGES Such reasonable fees or charges for services rendered in connection
with the regulation or the use of barangay owned properties or service
facilities such as palay, copra, or tobacco dryers
3. BARANGAY CLEARANCE Such reasonable fee as the Sanggunian Barangay may impose
4. OTHER FEES AND CHARGES
a. On commercial breeding of
fighting cocks, cockfights and
cockpits
b. On places of recreation which
charge admission fees
c. On billboards, signboards,
neon signs and outdoor
advertisements
The barangay may levy reasonable fees and charges
CITIES
Cities may levy the taxes, fees, and charges which the province or the municipality may impose. There is no
preemption on this score on the part of the provinces and municipalities. (Sec. 151 LGC)
! END OF LOCAL TAXATION "
TAXATION LAW
COURT OF TAX APPEALS
RULES OF COURT APPLY IN TAX CASES
Our Rules of Court apply by analogy or in
suppletory character and whenever practicable
and convenient and shall be liberally construed
in order to promote their objective of securing a
just, speedy and inexpensive disposition of every
action and proceeding. After all, the paramount
consideration remains the ascertainment of
truth [Calamba Steel Center, Inc. (formerly JS Steel
Corporation) vs. CIR GR NO. 151857, April 28, 2005].
DISTRIBUTION OF JURISDICTION WITH
RESPECT TO INTERNAL REVENUE TAXATION
d. DISPUTED ASSESSMENT ISSUES
1. Court of Tax Appeals
2. Supreme Court
e. COLLECTION ISSUES
1. Municipal Trial Court, depending upon the
jurisdictional amount
2. Regional Trial Court, depending on the
jurisdictional amount
3. Court of Tax Appeals, either as original
depending upon amount or appellate
jurisdiction
f. REFUND ISSUES
1. Court of Tax Appeals
2. Supreme Court
Nature and Powers of CTA
NATURE AND WEIGHT
The Court of Appeals is a highly specialized body
specifically created for the purpose of reviewing
tax cases. As a matter of principle, the Supreme
Court will set aside the conclusion reached by
CTA, which is, by the very nature of its function
dedi cat ed excl usi vel y t o t he st udy and
consideration of tax problems and has necessarily
developed an expertise on the subject unless
there has been abuse or grave exercise of
authority (CIR vs. Court of Appeals, CTA, and ADMU
G.R. No. 115349, April 18, 1997).
Because of CTAs expertise, the findings of the
CTA will not ordinarily be reviewed absent a
showing of gross error or abuse on its part. The
findings of fact of the CTA are binding on the
Supreme Court, and in the absence of strong
reasons for the SC to delve into facts, only
questions of law are open for determination
(Philippine Refining Company vs., Court of Appeals G.R. No.
118794, May 8, 1996).
EXECUTIVE COMMITTEE
TAXATION LAW
DICT V. UNTAYAO edp
A well settled doctrine is that findings of facts of
the Court of Tax Appeals are binding on the
Supreme Court and absent any strong reasons for
the Supreme Court to delve into facts, only
questions of law are open for determination. The
factual findings of the CTA are binding on the SC
and can only be disturbed on appeal if not
supported by substantial evidence (CIR vs. Tours
Specialist Inc. G.R. No. 66416, Mar. 21, 1990).
The language used by the Court of Tax Appeals
as to the existence of fraud must be given due
weight and force. The finding of facts of the CTA is
entitled to the highest respect (Raymundo vs. De Joya
G.R. No. L-27733, December 3, 1980).
ELEVATION OF RANK
Shall be of the same level as the Court of
Appeals, possessing all the inherent powers of a
Court of Justice (R.A. No. 9282).
Under RA no. 9282, CTA has been elevated to a
collegiate court. Appeals from its decision (en
banc) shall now be made before the Supreme
Court.
NATURE OF THE CTA
1. Court of special jurisdiction - can act only
in matters where it has exclusive original as
well as in aid of its appellate jurisdiction.
2. Generally, the Supreme Court is bound by
questions of fact as found by the Court of Tax
Appeals
3. CTA proceedings shall not be governed
strictly by technical rules of evidence (R.A.
1125, Sec. 8).
4. The required procedure is unlike that of the
Court of Appeal or the Supreme Court.
It is required to conduct a mandatory pre-
trial, formal trial and receive evidence.
5. Procedure is governed by the Revised Rules
of the Court of Tax Appeals (RRCTA) - AM
No. 05-11-07-CTA which took effect on
December 15, 2005.
I NTERNAL REVENUE MAY PROCEED
WITHOUT RULING FIRST ON REQUEST FOR
RECONSIDERATION
Nowhere in the Tax Code is the Collector of
Internal Revenue required to rule first on a
taxpayers request for reconsideration before he
can go to the court for the purpose of collecting
the tax assessed. On the contrary, the Tax Code
withheld from all courts, except Court of Tax
Appeals under the RA No. 1125, as amended, the
authority to restrain the collection of any national
internal revenue tax, fee, or charge, thereby
indicating the legislative policy to allow the
Collector of Internal Revenue much latitude in the
speedy and prompt collection of taxes.
The requirement for the Commissioner to rule on
disputed assessment before bringing an action for
collection is applicable only in cases where the
assessment was actually disputed, adducing
reasons in support thereto. If the taxpayer did not
actually contest the assessments by stating the
basis thereof, the Commissioner need not rule on
their request. In case of a suit for collection of
internal revenue taxes where the assessment has
already become final and executory, the action to
collect is akin to an action to enforce the judgment
relied upon (Dayrit vs. Cruz G.R. No. L-39910, September
26, 1988).
POWERS
1. to administer oaths;
2. to receive evidence;
3. to summon witnesses by subpoena;
4. to require production of papers or documents
by subpoena duces tecum;
5. to punish contempt;
6. to promulgate rules and regulations for the
conduct of its business;
7. to assess damages against appellant if
appeal to CTA is found to be frivolous or
dilatory;
8. to suspend the collection of the tax pending
appeal;
9. to render decisions on cases brought before
it; and
10. to issue order authorizing distraint of personal
property and levy of real property
NB: Power to issue writs of prohibition and
injunction is supplementary to its appellate
jurisdiction.
COMPOSI TI ON AND APPOI NTMENT OF
MEMBERS
Consists of a Presiding Justice and five (5)

Associate Justices each of whom shall be
appointed by the President upon nomination
by the Judicial and Bar council.
May sit en banc or in two (2) Divisions, each

Division consisting of three (3) Justices. The
Presiding Justice and the most Senior
Associate Justice shall serve as chairmen of
the two respective divisions.
QUORUM
Sessions:
presence of
Decision:
affirmative vote of
EN BANC 4 Justices 4 Justices
Sessions:
presence of
Decision:
affirmative vote of
DIVISION 2 Justices 2 Justices
PROVIDED: when the required quorum cannot be
constituted due to any vacancy, disqualification,
inhibition, disability, or any other lawful cause, the
Presiding Justice shall designate any Justice of
other Divisions of the Court to sit temporarily
therein. (Sec. 2, R.A. 9282)
DISPOSITION OF CASES
Cases shall be decided within 30 days after

submission thereof for decision
Decisions shall be in writing, stating clearly

and distinctly the facts and the law on which
they are based and signed by the judges who
concurred therewith.
Publication of decision in the Official Gazette.
This requirement however, is merely directory

Jurisdiction
JURISDICTION OF CTA -DIVISION
I. EXCLUSIVE APPELLATE JURISDICTION TO
REVIEW BY APPEAL
a. Decisions of the Commissioner of
Internal Revenue
1. i n c as es i nv ol v i ng di s put ed
assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto, or
2. other matters arising under the NIRC
or other laws administered by the
BIR;
b. Inacti on by the Commissioner of
Internal Revenue
1. I n c as es i nv ol v i ng di s put ed
assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto, or
2. other matters arising under the NIRC
or other laws administered by the
BIR, where the NIRC provides a
specific period for action, in which
case the inaction shall be deemed a
denial;
c. Decisions, orders or resolutions of the
RTC
- In local tax cases originally decided or
resolved by them in the exercise of
their original jurisdiction;
d. Decisions of the Commissioner of
Customs
1. In cases involving liability for customs
duties, fees or other money charges,
seizure, detention or release of
property affected, fines, forfeitures or
other penalties in relation thereto, or
2. Or other matters arising under the
Cus t oms Law or ot her l aws
admi ni stered by the Bureau of
Customs.
e. Decisions of the Secretary of Finance
- On customs cases elevated to him
aut omat i cal l y f or r evi ew f r om
decisions of the Commissioner of
Customs which are adverse to the
Government under Section 2325 of
the Tariff and Customs Code;
f. Decisions of the Secretary of Trade and
Industry in the case of nonagricultural
product, commodity or article, and the
Secretary of Agriculture in the case of
agricultural product, commodity or article,
- involving dumping and countervailing
duties under Secs. 301 and 302,
respectively, of the Tariff and Customs
Code, and safeguard measures under
R.A. No. 8800, where either party
may appeal the decision to impose or
not to impose said duties.
II. JURISDICTION OVER CASES INVOLVING
CRIMINAL OFFENSES
a. Exclusive original jurisdiction over all
criminal cases arising from violations of
1. NIRC;
2. Tariff and Customs Code; and,
3. Other laws administered by the BIR or
the Bureau of Customs
Provided however, where:
i. the principal amount of taxes and
fees, exclusive of charges and
penalties claimed is less than one
million pesos (P1,000,000.00) or
ii. Where there is no specified amount
claimed, jurisdiction is by the regular
courts. The jurisdiction of the CTA
shall be appellate.
Any provision of law or the Rules of
Court to the contrary notwithstanding,
t he c r i mi nal ac t i on and t he
corresponding civil action for the
recovery of civil liability for taxes and
penal ti es shal l at al l ti mes be
simultaneously instituted with, and
j oi ntl y determi ned i n the same
proceeding by the CTA, the filing of
the criminal action being deemed to
necessarily carry with it the filing of
the civil action, and no right to reserve
t he f i l i ng of such ci vi l act i on
separately from the criminal action will
be recognized (Sec. 7[b][1] R.A. No.
9282).
b. Exclusive appellate jurisdiction in
criminal offenses
(a) Over appeals from the judgments,
resolutions or orders of the RTC in
their original jurisdiction in criminal
offenses arising from violations of the
NIRC or Tariff and Customs Code and
other laws administered by the BIR or
BOC
(b) Petitions for review of the judgment,
order or resolution of RTC in the
exercise of its appellate jurisdiction
Where the principal amount of taxes
penalties, claimed is P1,000,000 or
where there is no specific amount
claimed.
III. JURISDICTION OVER TAX COLLECTION
CASES
1. Exclusive original jurisdiction in tax
collection cases involving final and
executory assessments for taxes, fees,
charges and penalties.
Provided, in collection cases where the
principal amount of taxes and fees,
exclusive of charges and penalties,
claimed is less than one million pesos
(P1, 000,000.00) shall be tried by the
p r o p e r Muni c i pa l Tr i a l Cour t ,
Metropolitan Trial Court, or Regional
Tri al Court, dependi ng on thei r
respective jurisdiction.
2. Exclusive appellate jurisdiction in tax
collection cases
Over appeal s from the j udgments,
resolutions or orders of the RTC in tax
collection cases originally decided by
them, i n thei r respecti ve terri tori al
jurisdiction.
JURISDICTION OF CTA - EN
BANC
EXCLUSIVE APPELLATE JURISDICTION
Over the following cases:
(a) Decisions or resolutions on motion for
reconsideration or new trial of the CTA in
Division in the exercise of its exclusive
appellate jurisdiction.
(b) Decisions, resolutions or orders of the RTC in
the exercise of its appellate jurisdiction over:
(1) Local tax cases
(2) Tax collection cases and
(3) Cases involving criminal offenses arising
from violations of the NIRC, TCCP and
other laws administered by the BIR.
(c) Decisions, resolutions or orders on motions
for reconsideration or new trial of the CTA
in Division in the exercise of its exclusive
original jurisdiction over (1) tax collection
cases and (2) cases involving criminal
offenses arising from violations of NIRC,
TCCP and other laws.
(d) Deci si ons of t he Cent r al Boar d of
Assessment Appeals (CBAA) in the exercise
of its appellate jurisdiction over cases
involving the assessment and taxation of real
property originally decided by the provincial or
city board of assessment appeals.
PENALTIES IMPOSED IN RELATION THERETO
Includes collection of compromise penalties which
may form part of the tax courts judgment in case
taxpayer express willingness to pay the same.
OTHER MATTERS
Those controversies which can be considered
within the scope of the function of the BIR / BOC
under ejusdem generis rule
Examples of other matters:
1. action for the nullity of distraint and levy
2. questioning the propriety of the assessment
3. declaration of nullity of waivers of Statute of
Limitations executed by the taxpayer, thus
invalidating the assessments issued by the
BIR
4. decision of the Commissioner of Internal
Revenue granting informers reward
CTAS JURISDICTION MAY BE CHALLENGED
AT ANY TIME
Jurisdiction can be challenged at any stage of the
proceedings and for lack of it, the CTA can dismiss
a case ex meru motu (Commissioner of Internal Revenue vs.
Villa, GR No. 23988, January 2, 1968).
Reason: CTA is a court of special jurisdiction, as
such, it can take cognizance only of matters as are
clearly within its jurisdiction (Ibid).
I N S TA N C E S WH E R E C TA H A S N O
JURISDICTION
1. CTA has no power motu propio to review tax
cases.
An appeal by way of Petition for Review must
first be filed before the CTA.
Reason: It can resolve cases only in aid of its
original or appellate jurisdiction.
2. No jurisdiction over questions of unfair
competition involving use of simplified
bookkeeping records
Reason: t hi s does not i nvol ve any
assessment or refund of tax (Ollada vs. Court of
Appeals G.R. No 8878 July 24, 1956)
3. CTA has no appellate jurisdiction over a
decision rendered by the Philippine Ports
Authority
Reason: collection of port charges ceased to
be an administrative function of the Bureau of
Customs.
Appeal
WHEN: PERIOD WITHIN WHICH TO FILE APPEAL TO
CTA
(a) Within 30 days after the receipt of such
decision or ruling or after the expiration of the
period fixed by law for action (Sec. 11,R.A.
No. 1125)
(b) If the protest is denied, taxpayer may appeal
within 30 days from date of receipt of decision
(Sec. 3.1.5 par. 6, R.R. 12-99)
(c) "If the Commissioner or his duly authorized
representative fails to act on the taxpayer's
protest within one hundred eighty (180) days
from date of submission by the taxpayer of
the required documents in support of his
protest, the taxpayer may appeal to the Court
of Tax Appeals within thirty (30) days from the
lapse of the said 180-day period, otherwise,
the assessment shall become final, executory
and demandable" (CIR vs. Lascona Land Co.,
CA-GR SP No. 58061).
SUBJECT OF APPEAL
ONLY A FINAL DECISION IS APPEALABLE TO THE
A decision is appealable when it constitutes the
final action taken by him or his authorized
deputies with respect to the taxpayers liability.
Preliminary collection letters, post reporting

notices and pre-assessment notices are not
appealable, because they are not the final
decision of the Commissioner.
Rather, it is the action taken by the

Commissioner in response to the taxpayers
protest on the assessment that would
constitute an appealable decision
At t i mes t her e i s an exchange of

communication between the taxpayer and the
Commissioner, and the later states that his
action is final, then, period for appeal begins
to run.
Commissioner must state that his decision is

final for period of appeal to run.
Instances when decisions are final:
(1) A demand letter for tax deficiency issued and
signed by an authorized subordinate officer
with the warning that failure to pay would
result to issuance of a warrant of distraint and
levy without further notice (Oceanic Wireless
Network Inc. vs. CIR G.R. No. 148380)
(2) A letter of BIR Commissioner reiterating
previous demand to pay an assessment
(Commissioner vs. Ayala Securities Corp G.R.No. 29485
Mar. 31. 1976)
(3) The filing of a judicial action for collection may
be treated by the taxpayer as a denial of a
protest (Commissioner vs. Union Shipping G.R. No.
66160. May 21, 1990)
However, the issuance of a warrant of

distraint or levy does not constitute a final
action (Commissioner vs. Union Shipping supra)
Instances where CTA would have jurisdiction
even if there is no decision:
(1) If the Commissioner of Internal Revenue has
not acted in a refund case and the two year
prescriptive period is about to expire.
Reason: In fairness to the taxpayer so as not
to deprive him of his day in court.
(2) If the Commissioner of Customs has not
rendered a decision on an application for
refund of internal revenue taxes and the suit
is about to prescribe.
Reason: If the taxpayer waits, then his right
of action prescribes.
WHO MAY APPEAL TO THE CTA
a. Any party adversely affected by a decision
or ruling or inaction of
1. The Commissioner of Internal Revenue
2. The Commissioner of Customs
3. The Secretary of Finance
4. The Secretary of Trade and Industry
5. The Secretary of Agriculture
6. The Central Board of Assessment
Appeals
7. The Regional Trial Courts
b. Stockholders of dissolved corporation
Reason: They could be held personally liable
for the unpaid deficiency assessments of a
dissolved corporation in proportion to their
di st r i but i ve shar es i n t he di ssol ved
corporation (Tan Tiong Bio vs. BIR, G.R. No.
L-15778 April 23, 1962).
c. Government
Reason: The right is available to any party
adversely affected by a decision or ruling or
inaction (Sec. 11, R.A. No. 1125, as amended by RA
9282).
FAILURE TO FILE ON TIME OF A TAXPAYER
CLAIMING FOR REFUND TO RECOVER TAXES
PAID UNDER PROTEST ON THE GROUND OF
ILLEGALITY OF ASSESSMENT NO LONGER
AVAILABLE
Where a taxpayer seeking a refund of taxes
whose request is denied and whose appeal to the
CTA was dismissed for being filed out of time,
sues anew to recover such taxes already paid
under protest, his action is devoid of merit.
For in the same way that the expediency of an
appeal from a denial of a request for cancellation
of warrant of distraint and levy cannot be utilized
to test the legality of an assessment which has
become conclusive and binding on the taxpayer,
so is a claim for refund not available to revive the
right to contest the validity of an assessment
which had become final for failure to appeal the
same on time (CIR vs. Concepcion G.R. No. L-23912,
March 15, 1968).
THIRTY (30) DAY PRESCRIPTIVE PERIOD FOR
APPEAL WITH THE CTA
NATURE OF 30-DAY PERIOD
1. RUNS FROM THE DATE THE TAXPAYER
RECEIVES THE APPEALABLE DECISION
If the taxpayers request for reconsideration
(i.e., the protest is denied or the original
assessment is maintained, the appealable
decision is the decision denying the request
for reconsideration).
2. JURISDICTIONAL
Effects of failure of the taxpayer to appeal
on time:
a. a. renders the action final, executory and
demandable
b. b. assessment is considered correct and
all that is necessary is for the
Commissioner to enforce the collection of
the tax by summary remedies or judicial
action
c. c. Taxpayer in a proceeding for collection
by judicial action may raise only defenses
of absence of jurisdiction, collusion
between the parties or fraud.
3. NON-EXTENDIBLE
After the 30-day period, an assessment may
no longer be disputed through the simple
expedient of paying the protested tax and by
subsequently claiming it as a refund within the
period of two years from date of payment
Reason: He would be doing indirectly what
he could not do directly, that is, open an
assessment that has become final
REQUESTS FOR RECONSIDERATION
Requests or motions for reconsideration,

however, operate to suspend the running of
the period to appeal.
A pro forma request for reconsideration or

one which is directed to the Secretary of
Finance does not suspend the period.
MODES OF APPEAL
A. By filing a petition for review under a
procedure analogous to that provided for
under Rule 42 of the 1997 Rules on Civil
Procedure
decision, ruling, or inaction of the
Commissioner of Internal Revenue,
Commi ssi oner of Cust oms, t he
Secretary of Finance, the Secretary of
Trade and Industry or the Secretary of
Agriculture or the Regional Trial Courts
this appeal shall be heard by a Division
of the CTA
Requirements:
1. Filing of a verified petition for review with
the CTA in 7 legible copies
2. deposit of filing fees
3. proof of service to the adverse party
4. certification of non-forum shopping
5. prior filing of motion of new trial or
reconsideration
15 day period under Rule 42 does not
apply, 30 day period applies
B. By filing a petition for review under a
procedure analogous to that provided for
under Rule 43 of 1997 Rules on Civil
Procedure
decisions or rulings of the Central Board
of Assessment Appeals and the
Regional Trial Courts in the exercise of
its appellate jurisdiction
this appeal shall be heard by the CTA en
banc
Requirements:
1. Filing of verified petition for review in 7
legible copies with the CTA
2. Proof of service of a copy thereof to the
adverse party and on the court or
agency a quo
3. Certification of non-forum shopping
4. Filing of a motion for reconsideration or
new trial when proper
period of appeal is not 15 days under
Rule 43 but 30 days
NEW ISSUES CANNOT BE RAISED FOR THE
FIRST TIME ON APPEAL
General Rule: New issues cannot be raised for
the first time on appeal.
Reason: The court which is supposed to
review would not review but determine and
decide for the first time, a question not raised
at the administrative forum (Commissioner of
Internal Revenue vs. Wander Philippines, Inc. G.R. No.
68375, Apr. 15, 1988)
Exceptions:
a. Defense of prescription
Reason: This is a statutory right (Visayan Land
Transportation vs. Collector CTA Case No. 1119, Sept.30,
1964).
b. Errors of administrative officials
Reason: State can never be in estoppel and
lifeblood theory (Commissioner vs. Procter and Gamble
Phils. Mfg. Corp, G.R. No. 66838, April 15, 1988).
NOTE: However, this was reversed in Supreme
Courts subsequent resolution wherein it was held
that in the absence of explicit statutory provisions
to the contrary, the Government must follow the
same rules of procedure which bind private
parties (Commissioner vs. Procter and Gamble, G.R. No.
66838, December 2, 1991, Resolution).
BURDEN OF TAXPAYERS ON APPEAL TO CTA
It is the burden of taxpayers on appeal to CTA to
prove by a full disclosure of data on his
possession that:
a. The tax assessment is wrong
b. The tax assessment is merely a presumption
and not based on actual facts
c. The correct computation of liability, if any
The burden of proof is on the taxpayer

contesting the validity or correctness of
the assessment to prove not only that the
one who rendered the assailed decision
is wrong but that the taxpayer is right.
Proving that the assessment is wrong is

not enough
Reason:
a. The tax court could settle nothing and
b. The way is open for subsequent assessments
and appeals. The roots of controversy must
be cut (Siy Po vs. Court of Appeals et. al., G.R.No.
L-81446 Aug. 18, 1988)
DISTRAINT OF PERSONAL PROPERTY AND
LEVY OF REAL PROPERTY IF DECISION IS
FAVORABLE TO THE GOVERNMENT
Upon the issuance of any ruling, order or decision
by the CTA favorable to the national government,
the CTA shall issue an order authorizing the BIR,
through the Commissioner:
1. to seize and distraint any goods, chattels, or
effects and the personal property, including
stocks and other securities, debts, credits,
bank accounts, and interests in and rights to
personal property and/or
2. levy the real property of such persons in
sufficient quantity to satisfy the tax or charge
together with any increment thereto incident
to delinquency.
This remedy shall not be exclusive and shall not
preclude the Court from availing of other means
under the Rules of Court.
REMEDIES OF THE PARTY AFFECTED BY THE
DECISIONS OF CTA
A. Any party adversely affected by a ruling,
order or decision of a Division of the CTA
may file a motion for reconsideration or new
trial before the same Division within 15 days
from notice
B. Any party adversely affected by a resolution
of a Division of the CTA on a motion for
reconsideration or new trial may file a
petition for review with the CTA en banc.
C. Any party adversely affected by a decision or
ruling of the CTA en banc may file with the
Supreme Court a verified petition for review
on certiorari pursuant to Rule 45 of the 1997
Rules on Civil Procedure.
Grounds of a motion for new trial
a. Fraud, accident, mistake, or excusable
negligence which ordinary prudence could not
have guarded against and by reason of which
such aggrieved party has probably been
impaired in his rights; or
b. Newly discovered evidence, which he could
not , wi t h reasonabl e di l i gence, have
discovered and produced at the trial and
which, if presented, would probably alter the
result (Section 5, Rule 15, RRCTA).
Where there is a clear showing of entitlement

to refund, the technical rules may be waived
so as to allow a new trial even if the
requisites or grounds are not met, especially
where the failure to present evidence in the
first instance was adequately explained
(Philippine Phospate Fertilizer Corp. vs. CIR, June 28,
2005).
Requisites for motion for new trial based on
newly discovered evidence
a. The evidence was discovered after the trial;
b. Such evi dence coul d not have been
discovered and produced at the trial with
reasonable diligence;
c. It i s materi al , not merel y cumul ati ve,
corroborative or impeaching; and
d. It is of such weight that, if admitted, will
probably change the judgment (Philippine
Phosphate Fertilizer Corp. vs. CIR, June 28, 2005)
No second motion for reconsideration or new
trial
No party shall be allowed to file a second motion
for reconsideration of a decision, final resolution
or order or for new trial (Rule 15, RRCTA).
TAX COLLECTION NOT SUSPENDED DURING
APPEAL
General Rule: No appeal taken to the CTA shall
suspend the payment, levy or distraint, and/or
sale of any property of the taxpayer.
Reason: Lifeblood Theory
Exception: The CTA is empowered to suspend
the collection of internal revenue taxes and
custom duties or grant injunction only upon
showing:
1. That the collection of the tax may jeopardize
the interest of the government and/or the
taxpayer
2. That the taxpayer is willing to deposit the
amount equal to the taxes assessed or to file
a bond amounting to not more than twice the
value of the tax being assessed.
3. That the CTA may issue an injunction only in
the exercise of its appellate jurisdiction.
4. That the appeal is not frivolous or dilatory
Sec. 11 of R.A. No. 1125 as amended by Sec.
9 of R.A. No. 9282 grants CTA power to
suspend collection of tax if such collection
works to serious prejudice of either taxpayer
or government.
However, Sec. 218 of the Tax Code provides
that no court may grant injunction to restrain
collection of any tax, fee or charge imposed
by Tax Code.
The provision in the Tax Code refers to courts
other than the CTA (Blaquera vs. Rodriguez, GR No.
L-11295, March 29, 1958).
Appeal to the CTA does not automatically
suspend collection unless CTA issues
suspension order at any stage of the
proceedings.
How motion to suspend collection of tax is
filed: may be filed together with the petition for
review or with the answer, or in a separate motion
filed by the interested party at any stage of the
proceedings (Section 3, Rule 10, RRCTA)
SIMULTANEOUS FILING OF AN APPLICATION
FOR REFUND OR CREDIT AND INSTITUTION
OF A CASE BEFORE THE CTA ALLOWED
The law fixes the same period of two (2) years for
filing a claim for refund with the Commissioner
and for filing a case with the CTA. The two-year
period for both starts from the date after the
payment of the tax or penalty, or from the
approval of the application for credit.
INTERLOCUTORY ORDER OF CTA NOT
APPEALABLE
A CTA resolution denying a taxpayers motion to
declare a warrant of distraint and levy issued by
the Commissioner of Internal Revenue as illegal is
interlocutory and not appealable (Juan vs. CIR, G.R.
No. 24740 July 30, 1979).
Taxpayer Bill of Rights
(Annex)
Taxpayer Bill of Rights (Annex)
GENERAL AUDI T PROCEDURES AND
DOCUMENTATION
1. When does the audit process begin? The
audit process commences with the issuance
of a Letter of Authority to a taxpayer who has
been selected for audit.
2. What is a 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 accounti ng records, i n order to
determine the Taxpayers correct internal
revenue tax liabilities.
3. Who issues the Letter of Authority? Letter of
Authority, for audit/investigation of taxpayers
under the jurisdiction of National Office, shall
be issued and approved by the Commissioner
of Internal Revenue, while for taxpayers under
the jurisdiction of Regional Offices, it shall be
issued by the Regional Director.
4. When must a Letter of Authority be served? A
Letter of Authority must be served to the
concerned Taxpayer within thirty (30) days
from its date of issuance, otherwise, it shall
become null and void. The Taxpayer shall
then have the right to refuse the service of
this LA, unless the LA is revalidated.
5. How often can a Letter of Authority be
reval i dat ed? A Let t er of Aut hori t y i s
revalidated through the issuance of a new LA.
However, a Letter of Authority can be
revalidated
Only once, for LAs issued in the Revenue
Regional Offices or the Revenue District
Offices; or twice, in the case of LAs issued by
the National Office. Any suspended LA(s)
must be attached to the new LA issued (RMO
38-88).
6. How much time does a Revenue Officer have
to conduct an audit? A Revenue Officer is
allowed only one hundred twenty (120) days
from the date of receipt of a Letter of Authority
by the Taxpayer to conduct the audit and
submit the required report of investigation. If
the Revenue Officer is unable to submit his
final report of investigation within the 120-day
period, he must then submit a Progress
Report to his Head of Office, and surrender
the Letter of Authority for revalidation.
7. How is a particular taxpayer selected for
audit?
Officers of the Bureau (Revenue District
Officers, Chief, Large Taxpayer Assessment
Division, Chief, Excise Taxpayer Operations
Division, Chief, Policy Cases and Tax Fraud
Division) responsible for the conduct of audit/
investigation shall prepare a list of all taxpayer
who fall within the selection criteria prescribed
in a Revenue Memorandum Order issued by
the CIR to establish guidelines for the audit
program of a particular year. The list of
taxpayers shall then be submitted to their
respective Assistant Commissioner for pre-
approval and to the Commissioner of Internal
Revenue for final approval. The list submitted
by RDO shall be pre-approved by the
Regional Director and finally approved by
Assistant Commissioner, Assessment Service
(RMOs 64-99, 67-99, 18-2000 and 19-2000).
8. How many times can a taxpayer be subjected
to examination and inspection for the same
taxable year? A taxpayers books of accounts
shall be subjected to examination and
inspection only once for a taxable year,
except in the following cases:
a. When the Commissioner determines that
fraud, irregularities, or mistakes were
committed by Taxpayer;
b. When the Taxpayer himself requests a re-
investigation or re-examination of his
books of accounts;
c. When there is a need to verify the
Taxpayers compliance with withholding
and other internal revenue taxes as
prescribed in a Revenue Memorandum
Order issued by the Commissioner of
Internal Revenue.
d. When the Taxpayers capital gains tax
liabilities must be verified; and When the
Commissioner chooses to exercise his
power to obtain information relative to the
examination of other Taxpayers (Secs. 5 and
235, NIRC).
9. What are some of the powers of the
Commissioner relative to the audit process?
I n addi t i on t o t he aut hor i t y of t he
Commissioner to examine and inspect the
books of accounts of a Taxpayer who is being
audited, the Commissioner may also:
a. Obtain data and information from private
parties other than the Taxpayer himself
(Sec.5, NIRC); and
b. Conduct inventory and surveillance, and
prescribe presumptive gross sales and
receipts (Sec. 6, NIRC).
10. What is a Notice for Informal Conference?
A Notice for Informal Conference is 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
Offi cer recommends the i mposi ti on of
deficiency assessments, this recommendation
is communicated by the Bureau to the
Taxpayer concerned during an informal
conference called for this purpose. The
Taxpayer shall then have fifteen (15) days
from the date of his receipt of the Notice for
Informal Conference to explain his side.
11. Within what time period must an assessment
be made? An assessment must be made
within three (3) years from the last day
prescribed by law for the filing of the tax
return for the tax that is being subjected to
assessment or from the day the return was
filed if filed late. However, in cases involving
tax fraud, the Bureau has ten (10) years from
the date of discovery of such fraud within
which to make the assessment.
Any assessment issued after the applicable
period are deemed to have prescribed, and
can no longer be collected from the Taxpayer,
unless the Taxpayer has previously executed
a Waiver of Statute of Limitations.
12. What is "Jeopardy Assessment"? A Jeopardy
Assessment is a tax assessment made by an
authorized Revenue Officer without the
benefit of complete or partial audit, in light of
the ROs belief that the assessment and
col l ecti on of a defi ci ency tax wi l l be
j eopardi zed by del ay caused by t he
Taxpayers failure to:
a. Comply with audit and investigation
requirements to present his books of
accounts and/or pertinent records, or
b. Substantiate all or any of the deductions,
exemptions or credits claimed in his
return.
13. What is a Pre-Assessment Notice (PAN)? The
Pre-Assessment Notice is a 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.
If the Taxpayer disagrees with the findings
stated in the PAN, he shall then have fifteen
(15) days from his receipt of the PAN to file a
wri tten repl y contesti ng the proposed
assessment.
14. Under what instances is PAN no longer
required? A Preliminary Assessment Notice
shall not be required in any of the following
cases, in which case, issuance of the formal
assessment notice for the payment of the
taxpayers deficiency tax liability shall be
sufficient:
a. When the finding for any deficiency tax is
the result of mathematical error in the
computation of the tax appearing on the
face of the tax return filed by the
taxpayer; or
b. When a di s c r epanc y has been
determined between the tax withheld and
the amount actually remitted by the
withholding agent; or
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
cl ai med agai nst the esti mated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year;
or
d. When the excise tax due on excisable
articles has not been paid; or
e. When an article locally purchased or
imported by an exempt person, such as,
but not limited to, vehicles, capital
equipment, machineries and spare parts,
has been sold, traded or transferred to
non-exempt persons.
15. What is a Notice of Assessment/Formal Letter
of Demand?
A Notice of Assessment is a declaration of
deficiency taxes 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. The Notice of Assessment shall inform
the Taxpayer of this fact, and that the report of
investigation submitted by the Revenue
Officer conducting the audit shall be given
due course.
The formal letter of demand calling for
payment of the taxpayers deficiency tax or
taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based, otherwise, the formal
l et t er of demand and t he not i ce of
assessment shall be void.
TAXPAYERS OBLIGATIONS AND PRIVILEGES
16. What is required of a taxpayer who is being
audited? A Taxpayer who is being audited is
obliged to:
a. Duly acknowledge his receipt of the
appropriate Letter of Authority upon its
presentation by the Revenue Officer
authorized to conduct the audit by affixing
in the Letter of Authority the name of the
recipient and the date of receipt.
b. Present within a reasonable period of
time, his books of accounts and other
related accounting records that may be
required by the Revenue Officer; and
c. Submit the necessary schedules as may
be requested by the Revenue Officer
within a reasonable amount of time from
his (Taxpayers) receipt of the Letter of
Authority.
17. What is the recourse of a Taxpayer who
cannot submit the documents being required
of him within the prescribed period of time? If
a Taxpayer, believing that he cannot present
his books of accounts and/or other accounting
records, intends to request for more time to
present these documents in order to avoid the
issuance of a Jeopardy Assessment, the
Taxpayer may execute what is referred to as a
Waiver of the Statute of Limitations.
18. What is a Waiver of the Statute of Limitations?
The Waiver of the Statute of Limitations is a
signed statement whereby the Taxpayer
conveys his agreement to extend the period
within which the Bureau may validly issue an
assessment for deficiency taxes. If a Taxpayer
opts to execute a Waiver of the Statute of
Limitations, he shall likewise be, in effect,
waiving his right to invoke the defense of
prescription for assessments issued after the
reglementary period.
No Waiver of the Statute of Limitations shall
be considered valid unless it is accepted by a
duly authorized Bureau official.
19. If a Taxpayer does not agree with the
assessment made following an audit, can he
protest this Assessment? Yes, he can. A
Taxpayer has the right to contest an
assessment, and may do so by filing a letter
of protest stating in detail his reasons for
contesting the assessment.
20. What are the characteristics of a valid
protest? A protest is considered valid if it
satisfies the following conditions:
It is made in writing, and addressed to the
Commissioner of Internal Revenue;It contains
the information, and complies with the
conditions required by Sec. 6 of Revenue
Regulations No. 12-85; to wit:
a. Name of the taxpayer and address for the
immediate past three (3) taxable years.
b. Nature of request whether reinvestigation
or reconsideration specifying newly
discovered evidence he intends to
present if it is a request for investigation.
c. The taxable periods covered.
d. Assessment number.
e. Date of receipt of assessment notice or
letter of demand.
f. Itemized statement of the findings to
which the taxpayer agrees as a basis for
computing the tax due, which amount
should be paid immediately upon the
filing of the protest. For this purpose, the
protest shall not be deemed validly filed
unless payment of the agreed portion of
the tax is paid first.
g. The itemized schedule of the adjustments
with which the taxpayer does not agree.
h. A statement of facts and/or law in support
of the protest.
The taxpayer shall state the facts,
applicable law, rules and regulations or
jurisprudence on which his protest is
based, otherwise, his protest shall be
considered void and without force and
effect on the event the letter of protest
submitted by the taxpayer is accepted,
the taxpayer shall submit the required
documents in support of his protest within
sixty (60) days from date of filing of his
l et t er of pr ot est , ot her wi se, t he
assessment shall become final, executory
and demandable.
It is filed within thirty (30) days from the
Taxpayers receipt of the Notice of
Assessment and f ormal Let t er of
Demand.
21. In the event the Commissioners duly
authorized representative denies a Taxpayers
protest, what alternative course of action is
open to the Taxpayer? If a protest filed by a
Taxpayer be denied by the Commissioners
duly authorized representative, the Taxpayer
may request the Commi ssi oner for a
reconsideration of such denial and that his tax
case be referred to the Bureaus Appellate
Division. The Appellate Division serves as a
"Court", where both parties, i.e. the Revenue
Officer on one hand, and the Taxpayer on the
other, can present testimony and evidence
before a Hearing Officer, to support their
respective claims.
22. What recourse is open to a Taxpayer if his
request for reconsideration is denied or his
protest is not acted?
Shoul d t he Taxpayer s r equest f or
reconsideration be denied or his protest is not
acted upon within 180 days from submission
of documents by the Commissioner, the
Taxpayer has the right to appeal with the
Court of Tax Appeals (CTA).
Any appeal must be done within thirty (30)
days from the date of the Taxpayers receipt
of the Commissioners decision denying the
request for reconsideration or from the lapse
of the 180 day period counted from the
submission of the documents (Sec. 228 of the Tax
Code, as amended).
23. If the Taxpayer is not satisfied with the CTAs
decision, can he appeal the decision to a
higher Court? Yes, he can. Decisions of the
Court of Tax Appeals may be appealed with
the Court of Appeals within fifteen (15) days
from the Taxpayers receipt of the CTAs
decision. In the event that the Taxpayer is
likewise unsatisfied with the decision of the
Court of Appeals, he may appeal this decision
with the Supreme Court.
24. Can a Taxpayer claim a refund or tax credit for
erroneously or illegally collected taxes? Yes,
he can. The Taxpayer may file such a claim
with the Commissioner of Internal Revenue
(Sec. 229, NIRC), within two (2) years from the
payment of the tax or penalty sought to be
refunded. Failure of the Taxpayer to file such
a claim within this prescribed period shall
result in the forfeiture of his right to the refund
or tax credit.
25. If a Taxpayer has filed a claim for refund and
the Bureau has yet to render a decision on
this claim, can the Taxpayer elevate his claim
to the CTA?
Yes, he can, if the two (2) year period stated
above is about to end, and the Commissioner
has yet to render a decision on the claim
(Gibbs v. Collector, L-13453, February 29, 1960).
REMEDIES OF THE BUREAU IN THE AUDIT
P R O C E S S A N D C O L L E C T I O N O F
DELINQUENT ACCOUNTS
26. What means are available to the Bureau to
compel a Taxpayer to produce his books of
accounts and other records? A Taxpayer shall
be requested, in writing, not more than two (2)
times, to produce his books of accounts and
other pertinent accounting records, for
inspection. If, after the Taxpayers receipt of
the second written request, he still fails to
comply with the requirements of the notice,
the Bureau shall then issue him a Subpoena
Duces Tecum.
27. What course of action shall the Bureau take if
the Taxpayer fails to comply with the
Subpoena Duces Tecum? If, after the
Taxpayer fails, refuses, or neglects to comply
with the requirements of the Subpoena Duces
Tecum, the Bureau may:
a. File a criminal case against the Taxpayer
for violation of Section 5 as it relates to
Sections 14 and 266, of the NIRC, as
amended; and/or
b. Initiate proceedings to cite the Taxpayer
for contempt, under Section 3(f), Rule 71
of the Revised Rules of Court.
28. What alternatives are open to Government for
the collection of delinquent accounts?
Once an assessment becomes final and
demandable, the Government may employ
any, or all, of the following remedies for the
collection of delinquent accounts:
a. Distraint of personal property;
b. Levy of real property belonging to the
Taxpayer;
c. Civil Action; and
d. Criminal Action.
29. What is "Distraint of Personal Property"?
Distraint of personal property involves the
seizure by the Government of personal
property - tangible or intangible - to enforce
the payment of taxes, followed by the public
sale of such property, if the Taxpayer fails to
pay the taxes voluntarily.
30. What is "Levy of Real Property"? Levy of real
property refers to the same act of seizure, but
in this case of real property, and interest in or
rights to such property in order to enforce the
payment of taxes. As in the distraint of
personal property, the real property under levy
shall be sold in a public sale, if the taxes
involved are not voluntarily paid following
such levy.
31. In what time period must collection be made?
Any internal revenue tax, which has been
assessed within the period prescribed shall be
collected within three (3) years from date of
assessment. However, tax fraud cases may
be collected by distraint or levy or by a court
proceeding within five (5) years from
assessment of the tax or from the last waiver.
San Beda College of Law
BIBLIOGRAPHY
Aban, Benjamin. Basic Law on Taxation.
Aralar, Reynaldo B. Real Property Tax Law and Jurisprudence. National Bookstore, 2007.
De Leon, Hector S. and De Leon, Jr. Hector M. The National Internal Revenue Code Annotated, Volume
1. Rex Printing Company, Inc., 2003.
De Leon, Hector S. and De Leon, Jr. Hector M. The National Internal Revenue Code Annotated, Volume
2. Rex Printing Company, Inc., 2003.
Dimaampao, Japar B. Basic Approach to Income Taxation. Rex Printing Company, Inc., 2004.
Dimaampao, Japar B. Tax Principles and Remedies. Rex Printing Company, Inc., 2004.
Dizon, Efren Vincent M. Q & A in Taxation., 2006.
Domondon, Abelardo T. Bar Reviewer in Taxation, Volume I. GIC Enterprises and Co., Inc., 2003.
Domondon, Abelardo T. Bar Reviewer in Taxation, Volume II. GIC Enterprises and Co., Inc., 2003.
Mamalateo, Victorino C. Reviewer on Taxation. Rex Printing Company, Inc., 2004.
Mamalateo, Victorino C. Value Added Tax on Legal Services. San Beda Law Journal 2005-2006.
Sababan, Francis J. and Bundac, Lydia A. Taxation Law Reviewer. GB Research and Information Center,
2000.
Vitug, Jose C. and Acosta, Ernesto D. Tax Law and Jurisprudence. Rex Printing Company, Inc., 2000.
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TABLE OF CONTENTS

Regional operating headquarters under

Trust itself, through the trustee or fiduciary, is

Taxed exactly in the same way as estates

It is entitled to the minimum personal

Tax exemption is likewise to be enjoyed

Any amount actually distributed to any

All other partnerships no matter how

It includes unregistered joint ventures and

However, joint ventures are not taxable

They are partnerships, which are by law

The partnership itself is subject to

The individual partners are considered

The taxable income for a taxable year,

The part nershi p shal l act as t he

The net income (income for distribution)

Resi dent Ci ti zen, Non-resi dent

Non-resident Alien engaged in trade

Non-resident alien not engaged in

Income subject to Graduated Rates

Capital Gains Tax

became legally separated can only

Cost of Goods Sold shall include all

Gross income - If apart from deriving

The definition provided in Sec. 32 is different

Shar es of st ocks of a domest i c

Real property in the Philippines not falling

Other capital assets.

The fair market value (FMV) of the sale of

When no sale is made in the stock exchange,

For shares not listed in the exchange, the

If in the nature of prepaid rentals

If in the nature of a loan, no taxable income to

Security deposit applied to the rental of the

If in the nature of security deposit for

Value of permanent improvements made by

Taxable income if the creditor cancels

A gift if the creditor cancels the debt

A capital transaction if the corporation

Mutual marine insurance gross

Assessment Insurance Companies

Exclusions from EAR expenses:

all events have occurred which determine the

The amount of liability can be determined with

Taxpayer must show that the economic

allowed as a deduction in the year the

If the indebtedness is payable in periodic

When a loss results from a sale, the

A loss from theft is ordinarily deductible in the

A loss from embezzlement is deductible in the

In no case may a receivable from an

In case of banks, the Commissioner of

Depreciation of all properties directly

May shift from DB to SL method

Useful life: 10 years or shorter life as

Useful life of property not directly related

Depreciation on all properties in mining

If expected life is more than 10 years,

Premiums paid by employer for the life

Insurance premiums paid by an employer

motion picture films

films or video tapes for use in

tapes for use in connection with

Obligor shall deduct and withhold a tax equal