Tax Primer PDF

TAXATION
This review material is a product of the collective efforts of

Dan Peruelo Calica, Vicente Dante Pacao Adan, and Napoleon Camino Reyes.
The authors are responsible for any error or mistake in this review material.
We would therefore appreciate it if you will inform us of any error or mistake which
you have discovered, as well as your other comments and suggestions.
If you find this review material helpful, please feel free to reproduce and
share it with our fellow bar examinees. The pursuit of knowledge and, incidentally, our
drive to pass the bar, should never be unreasonably restrained.
This review material is dedicated to
Class E-2000 of the U.P. College of Law
and to Jonathan Livingston Seagull who said:
The only true law is that which leads to freedom. There is no other.
[Jonathan Livingston Seagull by Richard Bach]
TABLE OF CONTENTS
GENERAL PRINCIPLES OF TAXATION
INCOME TAXATION
51
TRANSFER TAXES
143
ESTATE TAX
144
DONORS TAX
163
TAX REMEDIES
172
LOCAL TAXATION
217
TARIFF AND CUSTOMS CODE
241
The sources of this review material are

the 1987 Constitution, the National Internal Revenue Code of 1997 or
Republic Act No. 8424, the cited cases, several Revenue Regulations and Revenue
Memorandum Circulars, the reviewers of Class E-2000 and Class 1999-A on General
Principles of Taxation and Income Taxation and several other reviewers, the
Comprehensive Review of Taxation by Hector S. De Leon (1998), the Law of Basic
Taxation in the Philippines by Benjamin B. Aban (1994), and
Bar Reviewer in Taxation by Aberlardo T. Domondon.
GENERAL PRINCIPLES OF TAXATION

FUNDAMENTAL PRINCIPLES IN TAXATION
Taxation
Taxation is the inherent power of the sovereign, exercised through the legislature, to
impose burdens upon subjects and objects within its jurisdiction for the purpose of
raising revenues to carry out the legitimate objects of government.
It is also defined as the act of levying a tax, i.e. the process or means by which the
sovereign, through its law-making body, raises income to defray the necessary expenses
of government. It is a method of apportioning the cost of government among those
who, in some measure, are privileged to enjoy its benefits and must therefore bear its
burdens.
Taxes
Taxes are the enforced proportional contributions from persons and property levied by
the law-making body of the State by virtue of its sovereignty for the support of the
government and all public needs.
Essential elements of a tax

1.
It is an enforced contribution.
2.
It is generally payable in money.
3.
It is proportionate in character.
4.
It is levied on persons, property, or the exercise of a right or privilege.
5.
It is levied by the State which has jurisdiction over the subject or object of taxation.
6.
It is levied by the law-making body of the State.
7.
It is levied for public purpose or purposes.
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GENERAL P RINCIPLES OF T AXATION
Purposes of taxation
1.
Revenue or fiscal: The primary purpose of taxation on the part of the government is
to provide funds or property with which to promote the general welfare and the
protection of its citizens and to enable it to finance its multifarious activities.
2.
Non-revenue or regulatory: Taxation may also be employed for purposes of

regulation or control.
a)
Imposition of tariffs on imported goods to protect local industries.
b)
The adoption of progressively higher tax rates to reduce inequalities in wealth

and income.
c)
The increase or decrease of taxes to prevent inflation or ward off depression.
PAL v. Edu, 164 SCRA 320
The legislative intent and purpose behind the law requiring owners of vehicles to pay for
their registration is mainly to raise funds for the construction and maintenance of
highways and, to a much lesser degree, pay for the operating expenses of the
administering agency. It is possible for an exaction to be both a tax and a regulation.
License fees are charges, looked to as a source of revenue as well as a means of
regulation. The fees may properly be regarded as taxes even though they also serve as
an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least
one of the real and substantial purposes, then the exaction is properly called a tax.
Tio v. Videogram, 151 SCRA 208
PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax on the
gross receipts payable to the local government. SC upheld the v alidity of the law ruling
that the tax imposed is not only a regulatory, but also a revenue, measure prompted by
the realization that earnings of videogram establishments of around P600 million
annually have not been subjected to tax, thereby depriving the government of an
additional source of revenue. It is a user tax imposed on retailers for every video they
make available for public viewing. The 30% tax also served a regulatory purpose: to
answer the need for regulating the video industry, particularly the rampant film piracy,
the flagrant violation of intellectual property rights, and the proliferation of pornographic
video tapes.
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Caltex v. Commissioner, 208 SCRA 755
Taxation is no longer a measure merely to raise revenue to support the existence of

government. Taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the State. The oil industry is greatly imbued
with public interest as it vitally affects the general welfare.
Sumptuary purpose of taxation
More popularly known as the non-revenue or regulatory purpose of taxation. While the
primary purpose of taxation is to raise revenue for the support of the government,
taxation is often employed as a devise for regulation by means of which certain effects
or conditions envisioned by the government may be achieved.
For example, government may provide tax incentives to protect and promote new and
pioneer industries. The imposition of special duties, like dumping duty, marking duty,
retaliatory duty, and countervailing duty, promote the non-revenue or sumptuary
purpose of taxation.
Theory and basis of taxation
The power of taxation proceeds upon the theory that the existence of government is a
necessity; that it cannot continue without means to pay its expenses; and that for these
means, it has a right to compel all its citizens and property within its limits to contribute.
The basis of taxation is found in the reciprocal duties of protection and support between
the State and its inhabitants. In return for his contribution, the taxpayer received
benefits and protection from the government. This is the so-called benefits received
principle.
Life blood or necessity theory
The life blood theory constitutes the theory of taxation, which provides that the
existence of government is a necessity; that government cannot continue without means
to pay its expenses; and that for these means it has a right to compel its citizens and
property within its limits to contribute.
In Commissioner v. Algue, the Supreme Court said that taxes are the lifeblood of the
government and should be collected without unnecessary hindrance. They are what we
pay for a civilized society. Without taxes, the government would be paralyzed for lack of
motive power to activate and operate it. The government, for its part, is expected to
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respond in the form of tangible and intangible benefits intended to improve the lives of
the people and enhance their moral and material values.
Illustrations of lifeblood theory

1.
Collection of taxes cannot be enjoined by injunction.
2.
Taxes could not be the subject of compensation or set off.
3.
A valid tax may result in destruction of the taxpayers property.
4.
Taxation is an unlimited and plenary power.
Benefit-received principle
This principle serves as the basis of taxation and is founded on the reciprocal duties of
protection and support between the State and its inhabitants. Also called symbiotic
relation between the State and its citizens.
In return for his contribution, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his property. One is
compensation or consideration for the other; protection for support and support for
protection.
However, it does not mean that only those who are able to and do pay taxes can enjoy
the privileges and protection given to a citizen by the government.
In fact, from the contribution received, the government renders no special or

commensurate benefit to any particular property or person. The only benefit to which
the taxpayer is entitled is that derived from the enjoyment of the privileges of living in
an organized society established and safeguarded by the devotion of taxes to public
purpose. The government promises nothing to the person taxed beyond what may be
anticipated from an administration of the laws for the general good. [ Lorenzo v.
Posadas]
Taxes are essential to the existence of the government. The obligation to pay taxes
rests not upon the privileges enjoyed by or the protection afforded to the citizen by the
government, but upon the necessity of money for the support of the State. For this
reason, no one is allowed to object to or resist payment of taxes solely because no
personal benefit to him can be pointed out as arising from the tax. [ Lorenzo v.
Posadas]
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TAX DIFFERENTIATED FROM OTHER TERMS

Tariff / Duties
The term tariff and custom duties are used interchangeably in the Tariff and Customs
Code or PD No. 1464.
Customs duties, or simply duties, are taxes imposed on goods exported from or
imported into a country. Custom duties are really taxes but the latter term is broader in
scope.
On the other hand, tariff may be used in one of three senses:

1.
A book of rates drawn usually in alphabetical order containing the names of

several kinds of merchandise with the corresponding duties to be paid for the
same; or
2.
The duties payable on goods imported or exported; or
3.
The system or principle of imposing duties on the importation or exportation of

goods.
License or regulatory fee v. tax

1.
License fee is legal compensation or reward of an officer for specific services while a tax
is an enforced contribution from persons or property by the law-making body by virtue
of its sovereignty and for the support of the government and all public needs.
2.
License fee is imposed for regulation, while tax is levied for revenue.
3.
License fee involves the exercise of police power, tax of the taxing power.
4.
Amount of license fee should be limited to the necessary expenses of inspection and
regulation, while there is generally no limit on the amount of the tax to be imposed.
5.
License fee is imposed only on the right to exercise a privilege, while tax is imposed also
on persons and property.
6.
Failure to pay a license fee makes the act or business illegal, while failure to pay a tax
does not necessarily make the act or business illegal.
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Regulatory tax
Examples: motor vehicle registration fee, sugar levy, coconut levy, regulation of nonuseful occupations
PAL v. Edu: This involves the imposition of motor vehicle registration fees which the
Supreme Court ruled as taxes. Fees may be regarded as taxes even though they also
serve as instruments of regulation because taxation may be made the implement of the
States police power. But if the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a tax.
Criteria for determining license fees

1.
Imposition must relate to an occupation or activity which involves the health, morals,
safety and development of the people and which needs regulation for the protection and
promotion of the public interest.
2.
Imposition must also bear a reasonable relation to the probable expenses of regulation,
taking into account the costs of direct regulation as well as the incidental expenses.
Instances when license fees could exceed cost of regulation, control or

administration
1.
When the collection or the license fee is authorized under both the power of taxation
and police power
2.
When the license fee is collected to regulate a non-useful occupation
Special assessment v. tax

1.
A special assessment is an enforced proportional contribution from owners of lands

specially or peculiarly benefited by public improvements.
2.
A special assessment is levied only on land.
3.
A special assessment is not a personal liability of the person assessed; it is limited to the
land.
4.
A special assessment is based wholly on benefits, not necessity.
5.
A special assessment is exceptional both as to time and place; a tax has general
application.
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Republic v. Bacolod Murcia, 17 SCRA 632
A special assessment is a levy on property which derives some special benefit from the
improvement. Its purpose is to finance such improvement. It is not a tax measure
intended to raise revenues for the government. The proceeds thereof may be devoted to
the specific purpose for which the assessment was authorized, thus accruing only to the
owners thereof who, after all, pay the assessment.
Some rules:
An exemption from taxation does not include exemption from a special assessment.
The power to tax carries with it the power to levy a special assessment.
Toll v. tax
1.
Toll is a sum of money for the use of something. It is the consideration which is paid for
the use of a road, bridge, or the like, of a public nature. Taxes, on the other hand, are
enforced proportional contributions from persons and property levied by the State by
virtue of its sovereignty for the support of the government and all public needs.
2.
Toll is a demand of proprietorship; tax is a demand of sovereignty.
3.
Toll is paid for the use of anothers property; tax is paid for the support of government.
4.
The amount paid as toll depends upon the cost of construction or maintenance of the
public improvement used; while there is no limit on the amount collected as tax as long
as it is not excessive, unreasonable, or confiscatory.
5.
Toll may be imposed by the government or by private individuals or entities; tax may be
imposed only by the government.
Tax v. penalty
1.
Penalty is any sanction imposed as a punishment for violation of law or for acts deemed
injurious; taxes are enforced proportional contributions from persons and property
levied by the State by virtue of its sovereignty for the support of the government and all
public needs.
2.
Penalty is designed to regulate conduct; taxes are generally intended to generate

revenue.
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3.
Penalty may be imposed by the government or by private individuals or entities; taxes

only by the government.
Obligation to pay debt v. obligation to pay tax

1.
A debt is generally based on contract, express or implied, while a tax is based on laws.
2.
A debt is assignable, while a tax cannot generally be assigned.
3.
A debt may be paid in kind, while a tax is generally paid in money.
4.
A debt may be the subject of set off or compensation, a tax cannot.
5.
A person cannot be imprisoned for non-payment of tax, except poll tax.
6.
A debt is governed by the ordinary periods of prescription, while a tax is governed by

the special prescriptive periods provided for in the NIRC.
7.
A debt draws interest when it is so stipulated or where there is default, while a tax does
not draw interest except only when delinquent.
Requisites of compensation
1.
That each one of the obligor be bound principally, and that he be at the same time a
principal creditor of the other.
2.
That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind and also of the same quality if the latter has been stated.
3.
That the two debts be due.
4.
That they be liquidated and demandable.
5.
That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtors.
Rules re: set off or compensation of debts
General rule: A tax delinquency cannot be extinguished by legal compensation. This is

so because the government and the tax delinquent are not mutually creditors and
debtors. Neither is a tax obligation an ordinary debt. Moreover, the collection of a tax
cannot await the results of a lawsuit against the government. Finally, taxes are not in
the nature of contracts but grow out of a duty to, and are the positive acts of the,
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government to the making and enforcing of which the personal consent of the taxpayer
is not required. [ Francia v. IAC, 162 SCRA 754 and Republic v. Mambulao Lumber ,
4 SCRA 622]
Exception: SC allowed set off in the case of Domingo v. Garlitos [8 SCRA 443] re.
claim for payment of unpaid services of a government employee vis-a-vis the estate
taxes due from his estate. The fact that the court having jurisdiction of the estate had
found that the claim of the estate against the government has been appropriated for the
purpose by a corresponding law shows that both the claim of the government for
inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable as well as fully liquidated. Compensation therefore
takes place by operation of law.
Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)
Philex Mining Corporation wants to set off its claims for VAT input credit/refund for the
excise taxes due from it. The Supreme Court disallowed such set off or compensation.
Taxes cannot be subject to compensation for the simple reason that the government
and the taxpayer are not creditors and debtors of each other. There is a material
distinction between a tax and a debt. Debts are due to the government in its corporate
capacity, while taxes are due to the government in its sovereign capacity.
SURVEY OF PHILIPPINE TAXES

A.
Internal revenue taxes imposed under the NIRC

1.
Income tax
2.
Transfer taxes
3.
a.
Estate Tax
b.
Donors Tax
Percentage taxes
a.
Value Added Tax
b.
Other Percentage Taxes
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4.
Excise taxes
5.
Documentary stamp tax
B.
Local/Municipal Taxes
C.
Tariff and Customs Duties
D.
Taxes/Tax incentives under special laws
CLASSIFICATION OF TAXES
A S TO SUBJECT MATTER OR OBJECT
1.
Personal, poll or capitation tax

Tax of a fixed amount imposed on persons residing within a specified territory,
whether citizens or not, without regard to their property or the occupation or business in
which they may be engaged, i.e. community tax.
2.
Property tax
Tax imposed on property, real or personal, in proportion to its value or in
accordance with some other reasonable method of apportionment.
3.
Excise tax
A charge imposed upon the performance of an act, the enjoyment of a privilege,
or the engaging in an occupation.
A S TO PURPOSE
1.
General/fiscal/revenue tax
A general/fiscal/revenue tax is that imposed for the purpose of raising public
funds for the service of the government.
2.
Special/regulatory tax
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A special or regulatory tax is imposed primarily for the regulation of useful or
non-useful occupation or enterprises and secondarily only for the purpose of raising
public funds.
A S TO WHO BEARS THE BURDEN

1.
Direct tax
A direct tax is demanded from the person who also shoulders the burden of the
tax. It is a tax which the taxpayer is directly or primarily liable and which he or she
cannot shift to another.
2.
Indirect tax
An indirect tax is demanded from a person in the expectation and intention that
he or she shall indemnify himself or herself at the expense of another, falling finally
upon the ultimate purchaser or consumer. A tax which the taxpayer can shift to
another.
A S TO SCOPE OF THE TA X
1.
National tax
A national tax is imposed by the national government.
2.
Local tax
A local tax is imposed by municipal corporations or local government units
(LGUs).
A S TO THE DETERMINATION OF AMOUNT

1.
Specific tax
A specific tax is a tax of a fixed amount imposed by the head or number or by
some other standard of weight or measurement. It requires no assessment other than
the listing or classification of the objects to be taxed.
2.
Ad valorem tax
An ad valorem tax is a tax of a fixed proportion of the value of the property with
respect to which the tax is assessed. It requires the intervention of assessors or
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appraisers to estimate the value of such property before the amount due from each
taxpayer can be determined.
A S TO GRADATION OR RA TE
1.
Proportional tax
Tax based on a fixed percentage of the amount of the property receipts or other
basis to be taxed. Example: real estate tax.
2.
Progressive or graduated tax

Tax the rate of which increases as the tax base or bracket increases. Example:
income tax.
Digressive tax rate: progressive rate stops at a certain point. Progression halts at
a particular stage.
3.
Regressive tax
Tax the rate of which decreases as the tax base or bracket increases. There is no
such tax in the Philippines.
ASPECTS OF TAXATION
Processes that are included or embodied in the term taxation
1.
Levying or imposition of the tax which is a legislative act.
2.
Collection of the tax levied which is essentially administrative in character.

The first is taxation, strictly speaking, while the second may be referred to as tax
administration. The two processes together constitute the taxation system.
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TAX SYSTEMS
Constitutional mandate
The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. [Section 28(1), Article VI, Constitution]
Tolentino v. Secretary of Finance : Regressivity is not a negative standard for courts

to enforce. What Congress is required by the Constitution to do is to evolve a
progressive system of taxation. This is a directive to Congress, just like the directive to
it to give priority to the enactment of laws for the enhancement of human dignity. The
provisions are put in the Constitution as moral incentives to legislation, not as judicially
enforceable rights.
Progressive system of taxation v. regressive system of taxation
A progressive system of taxation means that tax laws shall place emphasis on direct
taxes rather than on indirect taxes, with ability to pay as the principal criterion.
A regressive system of taxation exists when there are more indirect taxes imposed than
direct taxes.
Regressive tax rates
Tax the rate of which decreases as the tax base or bracket increases. There are no
regressive taxes in the Philippine jurisdiction.
Regressive tax rates should be differentiated from a regressive system of taxation which
exists when there are more indirect taxes imposed than direct taxes.
Three basic principles of a sound tax system

1.
Fiscal adequacy
It means that the sources of revenue should be sufficient to meet the demands
of public expenditures. [ Chavez v. Ongpin, 186 SCRA 331]
2.
Equality or theoretical justice

It means that the tax burden should be proportionate to the taxpayers ability to
pay. This is the so-called ability to pay principle.
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3.
Administrative feasibility
It means that tax laws should be capable of convenient, just and effective
administration.
NATURE AND LIMITATIONS OF THE POWER OF TAXATION

NATURE OF THE POWER OF TAXATION
Nature or characteristics of the States power to tax
1.
It is inherent in sovereignty; hence, it may be exercised although it is not expressly

granted by the Constitution.
2.
It is legislative in character; hence, only the legislature can impose taxes (although the
power may be delegated).
3.
It is subject to Constitutional and inherent limitations; hence, it is not an absolute power

that can be exercised by the legislature anyway it pleases.
Power to tax v. Police power v. Power of eminent domain

TAXATION
POLICE POWER
Power of the State to
enact such laws in
relation to persons and
property as may
promote public health,
safety, morals, and the
general welfare of the
public
EMINENT DOMAIN
take private property
for public use upon
paying to the owner a
just compensation to
be ascertained
according to law
DEFINITION

demand enforced
contributions for public
purposes
Authority
Exercising
the Power
Only the government

or its political
subdivisions
Only the government

or its political
subdivisions
May be granted to
public service
companies of public
utilities
PURPOSE
Enforced contribution is
demanded for the
support of the
government
Use of property is
regulated for the
purpose of promoting
the general welfare
Property is taken for

public use
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Persons
Affected
EFFECT
BENEFITS
RECEIVED
AMOUNT OF
IMPOSITION
Relationship
to the
Constitution
Operates upon a
community or class of
individuals
Money contributed in
the concept of taxes
becomes part of public
funds
Assumed that the
individual receives the
equivalent of the tax in
the form of protection,
and benefits received
from the government
as such
Generally no limit on
the amount of tax that
may be imposed
Subject to certain
Constitutional
limitations
Operates upon a
community or class of
individuals (usually)
No transfer of title, at
most, there is restraint
on injurious use of the
property
Person affected
receives no direct and
immediate benefit but
only such as may arise
from the maintenance
of a healthy economic
standard of society
Amount imposed
should not be more
than that sufficient to
cover the cost of the
license and the
necessary expenses of
regulation
Relatively free from
Constitutional
limitations and is
superior to the
impairment provisions
Operates on an
individual as the owner
of a particular property
Transfer of the right to
property whether it be
ownership or a lesser
right
Person affected
receives the market
value of the property
taken from him
No amount imposed
but rather the owner is
paid the market value
of the property taken
Subject to certain
Constitutional
limitations (e.g. inferior
to impairment of
contracts clause)
Power to tax involves the power to destroy so it must be exercised with caution
Chief Justice Marshall declared that the power to tax is also called the power to destroy.
Therefore, it should be exercised with caution to minimize injury to the proprietary rights
of the taxpayer. It must be exercised fairly, equally and uniformly, less the tax collector
kills 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. [Chief Justice Marshall in McCulloch v. Maryland, reiterated in Roxas
v. CTA, 23 SCRA 276]
Justice Holmes seemingly contradicted the Marshallian view by declaring in Panhandle

Oil Company v. Mississippi that the power to tax is not the power to destroy while
this court sits.
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Domondons reconciliation of Marshall and Holmes
The imposition of a valid tax could not be judicially restrained merely because it would
prejudice taxpayers property.
An illegal tax could be judicially declared invalid and should not work to prejudice a
taxpayers property.
Marshalls view refers to a valid tax while Holmes view refers to an invalid tax.
Power to tax is exclusively legislative in nature
The power to tax is peculiarly and exclusively legislative and cannot be exercised by the
executive or judicial branches of the government. Hence, only Congress can impose
taxes.
Matters within the competence of the legislature

1.
The subject or object to be taxed.
2.
The purpose of the tax so long as it is a public purpose.
3.
The amount or rate of the tax.
4.
The manner, means, and agencies of collection of the tax.
Commissioner v. Santos, 277 SCRA 617 (1997)
The Supreme Court held that it is within the province of the legislature whether to tax
jewelry or not. With the legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects), and situs (place) of
taxation.
It is inherent in the power to tax that the State be free to select the subjects of taxation,
and it has been repeatedly held that inequalities which result from a singling out of one
particular class for taxation, or exemption, infringe no Constitutional limitation.

Power to tax cannot be delegated
The power of taxation, being purely legislative, Congress cannot delegate such power.
This limitation arises from the doctrine of separation of powers among the three
branches of government.
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Exceptions to the non-delegation rule
1.
Delegation to the President
2.
Delegation to local government units
3.
Delegation to administrative agencies
T AXPAYERS SUIT
Taxpayers suit
A case where the act complained of directly involves the illegal disbursement of public
funds derived from taxation.
Taxpayers have locus standi to question the validity of tax measures or illegal
expenditures of public money. In such cases, they are parties in interest who will be
prejudiced or benefited by the avails of the suit.
On the other hand, public officials have locus standi because it is their duty to protect
public interest.
The general rule is that not only persons individually affected but also taxpayers have
sufficient interest of preventing the illegal expenditures of money raised by taxation.
They may, therefore, question in the proper court the constitutionality of statutes
requiring the expenditure of public funds.
But a taxpayer is not relieved from the obligation of paying a tax because of his belief
that it is being misappropriated by certain officials, for otherwise, collection of taxes
would be hampered and this may result in the paralyzation of important governmental
functions.
Lozada v. COMELEC
In this case, the petitioner filed a taxpayers suit to compel the COMELEC to schedule a
special election for vacancies in the Batasang Pambansa. The Supreme Court held that
this is not a taxpayers suit as nowhere is it alleged that tax is being illegally spent.
SC reiterated that it is only when an act complained of, which may include a legislative
enactment of a statute, involves the illegal expenditure of public money that the socalled taxpayer suit may be allowed.
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INHERENT LIMITATIONS
Inherent limitations
1.
Purpose must be public in nature
2.
Prohibition against delegation of the taxing power
3.
Exemption of government entities, agencies and instrumentalities
4.
International comity
5.
Limitation of territorial jurisdiction
Public purpose in taxation
This is one of the inherent limitations of the power to tax and is synonymous to
governmental purpose. A tax must always be imposed for a public purpose,
otherwise, it will be declared as invalid.
The term public purpose has no fixed connotation. The essential point is that the
purpose of the tax affects the inhabitants as a community and not merely as inhabitants.
It has been said that the best test of rightful taxation is that the proceeds of the tax
must be used:
a)
for the support of the government; or
b)
some of the recognized objects of government; or
c)
to promote the welfare of the community.
Effect of incidental benefit to private interest
The purposes to be accomplished by taxation need not be exclusively public. Although

private individuals are directly benefited, the tax would still be valid provided such
benefit is only incidental.
The test is not as to who receives the money, but the character of the purpose for which
it is expended; not the immediate result of the expenditure, but rather the ultimate
results.
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The appropriation of public money to construct a road on a private land is not a public
purpose. [Pascual v. Secretary of Public Works , 110 Phil. 331]
Exceptions to the non-delegation rule

1.
2.
3.
Congress may authorize, by law, the President to fix, within specified limits and subject
to such limitations and restrictions as it may impose:
1.
tariff rates;
2.
import and export quotas;
3.
tonnage and wharfage dues; and
4.
other duties or imposts within the national development program of the

government.
This authorization is embodied in Section 401 of the Tariff and Customs Code which is
also called the flexible tariff clause.
Flexible tariff clause
In the interest of national economy, general welfare and/or national security, the
President, upon recommendation of the National Economic and Development Authority,
is empowered:
1.
To increase, reduce, or remove existing protective rates of import duty, provided

that the increase should not be higher than 100% ad valorem ;
2.
To establish import quota or to ban imports of any commodity; and
3.
To impose additional duty on all imports not exceeding 10% ad valorem .
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The power of local government units to impose taxes and fees is always subject to the
limitations which Congress may provide, the former having no inherent power to tax.
[Basco v. PAGCOR]
Municipal corporations are mere creatures of Congress which has the power to create
and abolish municipal corporations. Congress therefore has power of control over local
government units. If Congress can grant to a municipal corporation the power to tax
certain matters, it can also provide for exemptions or even to take back the power.
With the growing complexities of modern life and the many technical fields of
governmental functions, as in matters pertaining to tax exemptions, delegation of
legislative powers has become the rule and non-delegation the exception. The
legislature may not have the competence, let alone the interest and the time, to provide
direct and efficacious solutions to many problems attendant upon present day
undertakings. The legislature could not be expected to state all the detailed situations
wherein the tax exemption privilege would be restored. The task may be assigned to an
administrative body like the Fiscal Incentives Review Board (FIRB). [ Maceda v.
Macaraig, 196 SCRA 771]
For delegation to be constitutionally valid, the law must be complete in itself and must
set forth sufficient standards.
Certain aspects of the taxing process that are not really legislative in nature are vested
in administrative agencies. In these cases, there really is no delegation, to wit: a) power
to value property; b) power to assess and collect taxes; c) power to perform details of
computation, appraisement or adjustment; among others.
Reasons for exempting governmental entities
Government will be taxing itself to raise money for itself.
Immunity is necessary in order that governmental functions will not be impeded.
What government entities are exempt from income tax?

1.
Government Service Insurance System (GSIS)
2.
Social Security System (SSS)
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3.
Philippine Health Insurance Corporation (PHIC)
4.
Philippine Charity Sweepstakes Office (PCSO)
5.
Philippine Amusement and Gaming Corporation (PAGCOR)
International comity
Courteous, friendly agreement and interaction between nations.
Under international law, property of a foreign State may not be taxed by another State.
Reasons for exception

1.
Sovereign equality of States
2.
When one State enters the territory of another State, there is an implied understanding
that the former does not intend to denigrate its dignity by placing itself under the
jurisdiction of the other State
3.
Immunity from suit of a State
Limitation of a territorial jurisdiction
Tax laws cannot operate beyond a states territorial limits.
Property outside ones jurisdiction does not receive any protection from the state.
CONSTITUTIONAL LIMITATIONS
Constitutional limitations
1.
Due process of law
2.
Equal protection of laws
3.
Rule of uniformity and equity in taxation
4.
Prohibition against imprisonment for non-payment of poll tax
5.
Prohibition against impairment of obligation of contracts
6.
Prohibition against infringement of religious freedom
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7.
Prohibition against appropriation of proceeds of taxation for the use, benefit, or support
of any church
8.
Prohibition against taxation of religious, charitable and educational entities
9.
Prohibition against taxation of non-stock, non-profit educational institutions
10.
Others
a.
Grant of tax exemption
b.
Veto of appropriation, revenue, tariff bills by the President
c.
Non-impairment of the SC jurisdiction
d.
Revenue bills shall originate exclusively from the House of Representatives
e.
Infringement of press freedom
f.
Grant of franchise
Due process of law
There must be a valid law.
Tax measure should not be unconscionable and unjust as to amount to confiscation of

property.
Tax statute must not be arbitrary as to find no support in the Constitution.
Equal protection of laws
All persons subject to legislation shall be treated alike under similar circumstances and
conditions both in the privileges conferred and liabilities imposed.
The doctrine does not require that persons or properties different in fact be treated in
law as though they were the same. What it prohibits is class legislation which
discriminates against some and favors others.
As long as there are rational or reasonable grounds for so doing, Congress may group
persons or properties to be taxed and it is sufficient if all members of the same class are
subject to the same rate and the tax is administered impartially upon them.
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Requisites of a valid classification

1.
It must be based on substantial distinctions which make real differences.
2.
The classification must be germane to the purpose of the law.
3.
The classification must not be limited to existing conditions only but must also apply to
future conditions substantially identical to those of the present.
4.
The classification must apply equally to all members of the same class. [ Tiu v. Court of
Appeals, 301 SCRA 278 (1999)]
Tiu v. Court of Appeals, 301 SCRA 278 (1999)
The Constitutional right to equal protection of the law is not violated by an executive
order, issued pursuant to law, granting tax and duty incentives only to business within
the secured area of the Subic Special Economic Zone and denying them to those who
live within the Zone but outside such fenced in territory. The Constitution does not
require absolute equality among residents. It is enough that all persons under like
circumstances or conditions are given the same privileges and required to follow the
same obligations. In short, a classification based on valid and reasonable standards does
not violate the equal protection clause.
We find real and substantial distinctions between the circumstances obtaining inside and
those outside the Subic Naval Base, thereby justifying a valid and reasonable
classification.
Uniformity v. equity in taxation
Section 28 (c), Article VI of the Constitution provides that the rule of taxation shall be
The concept of uniformity in taxation implies that all taxable articles or properties of the
same class shall be taxed at the same rate. It requires the uniform application and
operation, without discrimination, of the tax in every place where the subject of the tax
is found. It does not, however, require absolute identity or equality under all
circumstances, but subject to reasonable classification.
The concept of equity in taxation requires that the apportionment of the tax burden be,
more or less, just in the light of the taxpayers ability to shoulder the tax burden and, if
warranted, on the basis of the benefits received from the government. Its cornerstone
is the taxpayers ability to pay.
uniform and equitable.
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Prohibition against imprisonment for non-payment of poll tax
No person shall be imprisoned for debt or non-payment of poll tax. [Section 20, Article
III, Constitution]
The non-imprisonment rule applies to non-payment of poll tax which is punishable only
by a surcharge, but not to other violations like falsification of community tax certificate
and non-payment of other taxes.
Poll tax
Poll tax is a tax of fixed amount imposed on residents within a specific territory
regardless of citizenship, business or profession. Example is community tax.
Prohibition against impairment of obligation of contracts
No law impairing the obligation of contracts shall be passed. [Section 10, Article III,
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.
An example of impairment by law is when a later taxing statute revokes a tax exemption
based on a contract. But this only applies when the tax exemption has been granted for
a valid consideration.
A later statute may revoke exemption from taxation provided for in a franchise because
the Constitution provides that a franchise is subject to amendment, alteration or repeal.
Prohibition against infringement of religious freedom
No law shall be made respecting an establishment of religion, or prohibiting the free

exercise thereof.
The free exercise and enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed. No religious test shall be required
for the exercise of civil or political rights. [Section 5, Article III, Constitution]
The payment of license fees for the distribution and sale of bibles suppresses the
constitutional right of free exercise of religion. [ American Bible Society v. Manila ,
101 Phil. 386]
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Prohibition against appropriation of proceeds of taxation for the use, benefit, or

support of any church
Section 29, Article VI, Constitution
1.
No money shall be paid out of the Treasury except in pursuance of an appropriation

made by law.
2.
No public money or property shall be appropriated, applied, paid, or employed directly

or indirectly, for the use, benefit, or support of any church, denomination, sectarian
institution or system of religion, or of any priest, preacher, minister or other religious
teacher, or dignitary as such except when such priest, preacher, minister or dignitary is
assigned to the armed forces, or to any penal institution, or government orphanage or
leprosarium.
3.
All money collected on any tax levied for a special purpose shall be treated as a special
fund and paid out for such purpose only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if any, shall be transferred to the
general funds of the government.
Prohibition against taxation of real property actually, directly and exclusively used
for religious, charitable and educational purposes
Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be
exempt from taxation. [Section 28 (3) , Article VI, Constitution]
This is an exemption from real property tax only.
The exemption in favor of property used exclusively for charitable or educational

purposes is not limited to property actually indispensable therefore, but extends to
facilities which are incidental to and reasonably necessary for the accomplishment of
said purposes. [Abra Valley College v. Aquino, 162 SCRA 106]
Prohibition against taxation of the revenues and assets of non-stock, non-profit

educational institutions
All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such institutions, their
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assets shall be disposed of in the manner provided by law. [Section 4, Article XIV,
Constitution]
This exemption from corporate income tax is embodied in Section 30 of the NIRC which
includes a non-stock, non-profit educational institution.
Note however the last paragraph of Section 30 which states: Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their property, real or personal, or from any of
their activities conducted for profit, regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.
Department of Finance Order 145-85
Non-stock, non-profit educational institutions are exempt from taxes on all their
revenues and assets used actually, directly and exclusively for educational purposes.
However, they shall be subject to internal revenue tax on income from trade, business
or other activity, the conduct of which is not related to the exercise or performance by
such educational institution of its educational purposes or functions.
Interest income shall be exempt only when used directly and exclusively for educational
purposes. To substantiate this claim, the institution must submit an annual information
return and duly audited financial statement. A certification of actual utilization and the
Board resolution or the proposed project to be funded out of the money deposited in
banks shall also be submitted.
Department of Finance Order 137-87
An educational institution means a non-stock, non-profit corporation or association duly

registered under Philippine law, and operated exclusively for educational purposes,
maintained and administered by a private individual or group offering formal education,
and with an issued permit to operate by the DECS.
Revenues derived from and assets used in the operation of cafeteria/canteens,

dormitories, and bookstores are exempt from taxation provided they are owned and
operated by the educational institution as ancillary activities and the same are located
within the school premises.
Commissioner of Internal Revenue v. Court of Appeals, et.al., 298 SCRA 83 (1998)

The Young Mens Christian Association of the Philippines, Inc. (YMCA) was established
as a welfare, educational and charitable non-profit corporation. It conducts various programs
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and activities that are beneficial to the public, especially the young people, pursuant to its
religious, educational and charitable objectives.
In this case, the Supreme Court held that the income derived by YMCA from leasing out
a portion of its premises to small shop owners, like restaurant and canteen operators, and from
parking fees collected from non-members are taxable income.
First, the constitutional tax exemption granted to non-stock, non-profit educational
institutions does not find application because YMCA is not an educational institution. The term
educational institution or institution of learning has acquired a well known technical
meaning. Under the Education Act of 1982, such term refers to schools. The school system is
synonymous with formal education, which refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system and for
which certification is required in order for the learner to progress through the grades or move
to the higher levels. A perusal of the articles of incorporation of YMCA does not show that it
established such a system.
Second, even if it be exempt under Section 30 of the NIRC as a non-profit, non-stock
educational corporation, the income from the rent of its premises and parking fees is not
covered by the exemption, according to the last paragraph of the same section. Section 30
provides that income of whatever kind and character from any of its properties, real or
personal, or from any of its activities for profit are not exempt from income tax.
Finally, Section 28(3), Article VI of the Constitution does not apply as it extends
exemption only from real property taxes not from income taxes.
Taxation of proprietary educational institutions
Proprietary educational institutions, including those cooperatively owned, may likewise

be entitled to such exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for investment. [Section 4 (3), Article XIV,
Constitution]
Under Section 27(B) of the NIRC, proprietary educational institutions and hospitals
which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
for passive incomes which are subject to different tax rates.
Other constitutional limitations

1.
Grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of a
majority of all Members of Congress. [Section 28 (4), Article VI, Constitution]
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2.
Veto of appropriation, revenue, or tariff bills by the President

The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to
which he does not object. [Section 27 (2) Article VI, Constitution]
An item in a bill refers to particulars, details, the distinct and severable parts of a
bill. In budgetary legislation, an item is an individual sum of money dedicated to a
stated purpose. [ Gonzales v. Macaraig, 191 SCRA 452]
3.
Non-impairment of the jurisdiction of the Supreme Court

Congress cannot take away from the Supreme Court the power given to it by the
Constitution as the final arbiter of tax cases.
The Supreme Court shall have the following powers:
Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or

the Rules of Court may provide, final judgments and orders of lower courts in:
All cases involving the legality of any tax, impost, assessment, or
toll, or any penalty imposed in relation thereto . [Section 5 (2) (b),
Article VIII, Constitution]
4.
Revenue bills shall originate exclusively from the House of Representatives

All appropriation, revenue or tariff bills, bills authorizing an increase of the public
debt, bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments. [Section 24,
Article VI, Constitution]
The Constitution simply means that the initiative for the filing of bills must come
from the House of Representatives, 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. It is not the law but the revenue bill which is required by the
Constitution to originate exclusively in the House of Representatives, because a bill
originating in the House may undergo such extensive changes in the Senate that the
result may be a rewriting of the whole, and a distinct bill may be produced. [ Tolentino
v. Secretary of Finance ]
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The Constitution does not also prohibit the filing in the Senate of a substitute bill
in anticipation of its receipt of the bill from the House, as long as action by the Senate is
withheld until receipt of said bill. [ Tolentino v. Secretary of Finance ]
5.
Infringement of press freedom

This limitation does not mean that the press is exempt from taxation. Taxation
constitutes an infringement of press freedom when it operates as a prior restraint to the
exercise of this constitutional right. When the tax is imposed on the receipts or the
income of the press it is a valid exercise of the sovereign prerogative.
6.
Grant of franchise
Tax exemptions included in the grant of a franchise may be revoked by another
law as it is specifically provided in the Constitution that the grant of any franchise is
always subject to amendment, alteration, or repeal by the Congress when the common
good so requires.
SITUS IN TAXATION
Situs of taxation
Literally, situs of taxation means place of taxation. It is the State or political unit which
has jurisdiction to impose a particular tax.
The determination of the situs of taxation depends on various factors including the:
1.
Nature of the tax;
2.
Subject matter thereof (i.e. person, property, act or activity;
3.
Possible protection and benefit that may accrue both to the government and the
taxpayer;
4.
Residence or citizenship of the taxpayer; and
5.
Source of the income.
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Situs of tax on persons (poll tax)
Poll tax may be properly levied upon persons who are inhabitants or residents of the
State, whether or not they are citizens.
Situs of tax on real property
Situs is where the property is located pursuant to the principle of lex rei sitae. This
applies whether or not the owner is a resident of the place where the property is
located.
This is so because the taxing authority has control over the property which is of a fixed
and stationary character.
The place where the real property is located gives protection to the real property,
hence, the owner must support the government of that place.
Lex rei sitae
This is a principle followed in fixing the situs of taxation of a property. This means that
the property is taxable in the State where it has its actual situs, specifically in the place
where it is located, even though the owner resides in another jurisdiction.
With respect to property taxes, real property is subject to taxation in the State where it
is located and taxable only there. Lex rei sitae has also been adopted for tangible
personal property under Article 16 of the Civil Code. A different rule applies to intangible
personal property, specifically, mobilia sequuntur personam .
Situs of tangible personal property
It is taxable in the State where it has actual situs although the owner resides in another
jurisdiction.
As stated above, lex rei sitae has also been adopted for tangible personal property
under Article 16 of the Civil Code.
Situs of taxation of intangible personal property
General rule: Situs is the domicile of the owner pursuant to the principle of mobilia
sequuntur personam . This rule is based on the fact that such property does not admit of
any actual location and that such property receives the protection and benefits of the
law where they are located.
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Exceptions:
1.
When it is inconsistent with the express provisions of the statute
2.
When the property has acquired a business situs in another jurisdiction
Mobilia sequuntor personam
This Latin maxim literally means that the property follows the person. Thus, the place
where the owner is found is the situs of taxation under the rule that movables follow the
person. This is generally where the owner resides.
In taxation, this principle is applied to intangible personal property the situs of which is
fixed by the domicile of the owner. The reason is that this type of property rarely
admits of actual location.
However, there are two exceptions to the rule. One is when it is inconsistent with the
express provisions of a statute. Two, when the interests of justice demand that it
should not be applied, i.e. where the property has in fact a situs elsewhere.
Wells Fargo v. Collector, 70 Phil 325

This case involves the collection of inheritance taxes on shares of stock issued by the
Benguet Consolidated Mining Corporation and owned by Lillian Eye. Said shares were already
subjected to inheritance taxes in California and are now being taxed by Philippine authorities.
Originally, the settled law in the United States is that intangibles have only one situs for
the purpose of inheritance tax the domicile of the decedent at the time of death. But this rule
has, of late, been relaxed. The maxim mobilia sequuntur personam , upon which the rules rests,
has been decried as a mere fiction of law having its origin in considerations of general
convenience and public policy and cannot be applied to limit or control the right of the State to
tax property within its jurisdiction. It must yield to established fact of legal ownership, actual
presence and control elsewhere, and cannot be applied if to do so would result in inesca pable
and patent injustice.
The relaxation of the original rule rests on either of two fundamental considerations:
1.
Upon the recognition of the inherent power of each government to tax persons,
properties and rights within its jurisdiction and enjoying the protection of its
laws; or
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2.
Upon the principle that as to intangibles, a single location in space is hardly

possible, considering the multiple, distinct relationships which may be entered
into with respect thereto.
The actual situs of the shares of stock is in the Philippines, the corporation being
domiciled therein. And besides, the certificates of stock have remained in this country up to the
time when the deceased died in California, and they were in the possession of the secretary of
the Benguet Corporation. The secretary had the right to vote, collect dividends, among others.
For all practical purposes, the secretary had legal title to the certificates of stock held in trust
for Eye. Eye extended in the Philippines her activities re: her intangible personal property so as
to avail herself of the protection and benefits of the Philippine laws.
Collector v. De Lara, 102 Phil 813
The Supreme Court did not subject to estate and inheritance taxes the shares of stock
issued by Philippine corporations which were left by a non-resident alien after his death.
Considering that he is a resident of a foreign country, his estate is entitled to exemption
from inheritance tax on the intangible personal property found in the Philippines. This
exemption is granted to non-residents to reduce the burden of multiple taxation, which
otherwise would subject a decedents intangible personal property to the inheritance tax
both in his place of residence and domicile and the place where those properties are
found.
This is, therefore, an exception to the decision of the Supreme Court in Wells Fargo v.
Collector . This has since been incorporated in Section 104 of the NIRC.
Theories re: situs of income tax

1.
Domicilliary theory
The location where the income earner resides is the situs of taxation. This is
where he is given protection, hence, he must support it.
2.
Nationality theory
The country of citizenship is the situs of taxation. This is so because a citizen is
given protection by his country no matter where he is found or no matter where he
earns his income.
3.
Source law
The country which is the source of the income or where the activity that
produced the income is the situs of taxation.
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Situs of income tax in the Philippines
The situs is where the income is derived.
The source of an income is the property, activity or service that produced the income.
For the source of income to be considered as coming from the Philippines, it is sufficient
that income is derived from an activity within the Philippines. In BOACs cases, the sale
of tickets in the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made in the Philippines. The
flow of wealth proceeded from and occurred in the Philippine territory, enjoying the
protection accorded by the Philippine government; in consideration of such protection,
the flow of wealth should share the burden of supporting the government.
The absence of flight operations to and from the Philippines is not determinative
of the source of income or the situs of income taxation. The test of taxability is the
source of the income and the source is that activity which produced the income. Even if
the tickets sold covered the transport of passengers and cargo to and from foreign
cities, it cannot alter the fact that income from the sale of the tickets was derived from
the Philippines. The word source conveys one essential idea, that of origin, and the
origin of the income is here in the Philippines. [ Commissioner v. BOAC, 149 SCRA
395]
Situs of tax on interest income is the residence of the borrower who pays the interest,
irrespective of the place where the obligation was contracted. If the borrower is a
resident of the Philippines, the interest payment paid by him can have no other source
than within the Philippines.
Multiplicity of situs
Multiplicity of situs, or the taxation of the same income or intangible subject in several
taxing jurisdictions, arises from various factors:
1.
The variance in the concept of domicile for tax purposes;
2.
Multiple distinct relationships that may arise with respect to intangible personal
property; or
3.
The use to which the property may have been devoted all of which may receive
the protection of the laws of jurisdictions other than the domicile of the owner
thereto.
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The remedy to avoid or reduce the consequent burden in case of multiplicity of situs is
either to:
1.
Provide exemptions or allowance of deduction or tax credit for foreign taxes; or
2.
Enter into tax treaties with other States.
DOUBLE TAXATION
Double taxation in the strict sense v. double taxation in the broad sense
In its strict sense, referred to as direct duplicate taxation, double taxation means:
1.
taxing twice;
2.
by the same taxing authority;
3.
within the same jurisdiction or taxing district;
4.
for the same purpose;
5.
in the same year or taxing period;
6.
some of the property in the territory.
In its broad sense, referred to as indirect double taxation, double taxation is taxation
other than direct duplicate taxation. It extends to all cases in which there is a burden of
two or more impositions.
Constitutionality of double taxation
Unlike the United States Constitution, our Constitution does not prohibit double taxation.
However, while it is not forbidden, it is something not favored. Such taxation should,
whenever possible, be avoided and prevented.
In addition, where there is direct double taxation, there may be a violation of the
constitutional precepts of equal protection and uniformity in taxation.
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The argument against double taxation may not be invoked where one tax is imposed by
the State and the other is imposed by the city, it being widely recognized that there is
nothing inherently obnoxious in the requirement that license fees or taxes be exacted
with respect to the same occupation, calling, or activity by both the State and a political
subdivision thereof. And where the statute or ordinance in questions applies equally to
all persons, firms and corporations placed in a similar situation, there is no infringement
of the rule on equality. [ City of Baguio v. De Leon, 25 SCRA 938]
Villanueva v. City of Iloilo, 265 SCRA 528
An ordinance imposing a municipal tax on tenement houses was challenged because the
owners already pay real estate taxes and also income taxes under the NIRC. The
Supreme Court held that there was no double taxation. The same tax may be imposed
by the National Government as well as the local government. There is nothing inherently
obnoxious in the exaction of license fees or taxes with respect to the same occupation,
calling, or activity by both the State and a political subdivision thereof. Further, a license
tax may be levied upon a business or occupation although the land used in connection
therewith is subject to property tax.
In order to constitute double taxation in the objectionable or prohibited sense:

1.
the same property must be taxed twice when it should be taxed once;
2.
both taxes must be imposed on the same property or subject matter;
3.
for the same purpose;
4.
by the same State, Government, or taxing authority;
5.
within the same jurisdiction or taxing district;
6.
during the same taxing period; and
7.
of the same kind or character of tax.
At any rate, there is no constitutional prohibition against double taxation in the

Philippines. It is something not favored but is permissible, provided that some other
constitutional requirement is not thereby violated.
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MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION

Six basic forms of escape from taxation
1.
Shifting
2.
Capitalization
3.
Evasion
4.
Exemption
5.
Transformation
6.
Avoidance
Note: With the exception of evasion, all are legal means of escape.
SHIFTING
Shifting
Shifting is the transfer of the burden of a tax by the original payer or the one on whom
the tax was assessed or imposed to someone else.
It should be borne in mind that what is transferred is not the payment of the tax but the
burden of the tax.
Taxes that can be shifted
Only indirect taxes may be shifted; direct taxes cannot be shifted.
Ways of shifting the tax burden

1.
Forward shifting
When the burden of the tax is transferred from a factor of production through
factors of distribution until it finally settles on the ultimate purchaser or consumer.
Example: Manufacturer or producer may shift tax assessed to wholesaler, who
in turn shifts it to the retailer, who also shifts it to the final purchaser or consumer.
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2.
Backward shifting
When the burden of the tax is transferred from the consumer or purchaser
through the factors of distribution to the factor of production.
Example: Consumer or purchaser may shift tax imposed on him to retailer by
purchasing only after the price is reduced, and from the latter to the wholesaler, and
finally to the manufacturer or producer.
3.
Onward shifting
When the tax is shifted two or more times either forward or backward.
Thus, a transfer from the seller to the purchaser involves one shift; from the
producer to the wholesaler, then to retailer, we have two shifts; and if the tax is
transferred again to the purchaser by the retailer, we have three shifts in all.
Impact and incidence of taxation
Impact of taxation is the point on which a tax is originally imposed. In so far as the law
is concerned, the taxpayer is the person who must pay the tax to the government. He is
also termed as the statutory taxpayer the one on whom the tax is formally assessed.
He is the subject of the tax.
Incidence of taxation is that point on which the tax burden finally rests or settle down. It
takes place when shifting has been effected from the statutory taxpayer to another.
Statutory taxpayer
The statutory taxpayer is the person required by law to pay the tax or the one on whom
the tax is formally assessed. In short, he or she is the subject of the tax.
In direct taxes, the statutory taxpayer is the one who shoulders the burden of the tax
while in indirect taxes, the statutory taxpayer is the one who pay the tax to the
government but the burden can be passed to another person or entity.
Relationship between impact, shifting, and incidence of a tax
The impact is the initial phenomenon, the shifting is the intermediate process, and the
incidence is the result. Thus, the impact in a sales tax (i.e. VAT) is on the seller
(manufacturer) who shifts the burden to the customer who finally bears the incidence of
the tax.
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Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is
the setting or coming to rest of the tax.
T AX EVASION
Tax evasion
Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen
the payment of a tax. It is also known as tax dodging. It is punishable by law.
Tax evasion is a term that connotes fraud through the use of pretenses or forbidden
devices to lessen or defeat taxes. [ Yutivo v. Court of Tax Appeals , 1 SCRA 160]
Example: Deliberate failure to report a taxable income or property; deliberate reduction

of income that has been received.
Elements of tax evasion
Tax evasion connotes the integration of three factors:

1.
The end to be achieved. Example: the payment of less than that known by the
taxpayer to be legally due, or in paying no tax when such is due.
2.
An accompanying state of mind described as being evil, in bad faith, willful

or deliberate and not accidental.
3.
A course of action (or failure of action) which is unlawful.
Evidence to prove evasion
Since fraud is a state of mind, it need not be proved by direct evidence but may be
proved from the circumstances of the case.
In Republic v. Gonzales [13 SCRA 633], the Supreme Court affirmed the assessment
of a deficiency tax against Gonzales, a private concessionaire engaged in the
manufacturer of furniture inside the Clark Air Base, for underdeclaration of his income.
SC held that the failure of the taxpayer to declare for taxation purposes his true and
actual income derived from his business for two (2) consecutive years is an indication of
his fraudulent intent to cheat the government if its due taxes.
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T AX AVOIDANCE
Tax avoidance
Tax avoidance is 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. It is politely called tax minimization and is not punishable by law.
In Delphers Traders Corp. v. Intermediate Appellate Court [157 SCRA 349], the
Supreme Court upheld the estate planning scheme resorted to by the Pacheco family in
converting their property to shares of stock in a corporation which they themselves
owned and controlled. By virtue of the deed of exchange, the Pachecho co-owners
saved on inheritance taxes. The Supreme Court said the records do not point to
anything wrong and objectionable about this estate planning scheme resorted to. The
legal right of the taxpayer to decreased the amount of what otherwise could be his
taxes or altogether avoid them by means which the law permits cannot be doubted.
T AX EXEMPTION
Tax exemption
It is the grant of immunity to particular persons or corporations or to persons or

corporations of a particular class from a tax which persons and corporations generally
within the same state or taxing district are obliged to pay. It is an immunity or privilege;
it is freedom from a financial charge or burden to which others are subjected.
Exemption is allowed only if there is a clear provision therefor.
It is not necessarily discriminatory as long as there is a reasonable foundation or rational

basis.
Rationale for granting tax exemptions
Its avowed purpose is some public benefit or interest which the lawmaking body
considers sufficient to offset the monetary loss entailed in the grant of the exemption.
The theory behind the grant of tax exemptions is that such act will benefit the body of
the people. It is not based on the idea of lessening the burden of the individual owners
of property.
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Grounds for granting tax exemptions
1.
May be based on contract. In such a case, the public which is represented by the
government is supposed to receive a full equivalent therefor, i.e. charter of a
corporation.
2.
May be based on some ground of public policy, i.e., to encourage new industries or to
foster charitable institutions. Here, the government need not receive any consideration
in return for the tax exemption.
3.
May be based on grounds of reciprocity or to lessen the rigors of international double or

multiple taxation
Note: Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear
provision therefor.
Nature of tax exemption

1.
It is a mere personal privilege of the grantee.
2.
It is generally revocable by the government unless the exemption is founded on a

contract which is protected from impairment.
3.
It implies a waiver on the part of the government of its right to collect what otherwise
would be due to it, and so is prejudicial thereto.
4.
It is not necessarily discriminatory so long as the exemption has a reasonable

foundation or rational basis.
Kinds of tax exemption according to manner of creation

1.
Express or affirmative exemption

When certain persons, property or transactions are, by express provision,
exempted from all or certain taxes, either entirely or in part.
2.
Implied exemption or exemption by omission

When a tax is levied on certain classes of persons, properties, or transactions
without mentioning the other classes.
Every tax statute makes exemptions because of omissions.
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Kinds of tax exemptions according to scope or extent
1.
Total
When certain persons, property or transactions are exempted, expressly or
implied, from all taxes.
2.
Partial
When certain persons, property or transactions are exempted, expressly or
implied, from certain taxes, either entirely or in part.
Does provision in a statute granting exemption from all taxes include indirect
taxes?
NO. As a general rule, indirect taxes are not included in the grant of such exemption
unless it is expressly stated.
Nature of power to grant tax exemption

1.
National government
The power to grant tax exemptions is an attribute of sovereignty for the power
to prescribe who or what persons or property shall be taxed implies the power to
prescribe who or what persons or property shall not be taxed.
It is inherent in the exercise of the power to tax that the sovereign state be free
to select the subjects of taxation and to grant exemptions therefrom.
Unless restricted by the Constitution, the legislative power to exempt is as broad
as its power to tax.
2.
Local governments
Municipal corporations are clothed with no inherent power to tax or to grant tax
exemptions. But the moment the power to impose a particular tax is granted, they also
have the power to grant exemption therefrom unless forbidden by some provision of the
Constitution or the law.
The legislature may delegate its power to grant tax exemptions to the same
extent that it may exercise the power to exempt.
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Basco v. PAGCOR (196 SCRA 52): The power to tax municipal corporations
must always yield to a legislative act which is superior, having been passed by the State
itself. Municipal corporations are mere creatures of Congress which has the power to
create and abolish municipal corporations due to its general legislative powers. If
Congress can grant the power to tax, it can also provide for exemptions or even take
back the power.
Chavez v. PCGG, G.R. No. 130716, 09 December 1998
In a compromise agreement between the Philippine Government, represented by the

PCGG, and the Marcos heirs, the PCGG granted tax exemptions to the assets which will
be apportioned to the Marcos heirs. The Supreme Court ruled that the PCGG has
absolutely no power to grant tax exemptions, even under the cover of its authority to
compromise ill gotten wealth cases. The grant of tax exemptions is the exclusive
prerogative of Congress.
In fact, the Supreme Court even stated that Congress itself cannot grant tax exemptions
in the case at bar because it will violate the equal protection clause of the Constitution.
Interpretation of laws granting tax exemptions
General rule
In the construction of tax statutes, exemptions are not favored and are
construed strictissimi juris against the taxpayer. The fundamental theory is that all
taxable property should bear its share in the cost and expense of the government.
Taxation is the rule and exemption is the exemption.
He who claims exemption must be able to justify his claim or right thereto by a
grant express in terms too plain to be mistaken and too categorical to be
misinterpreted. If not expressly mentioned in the law, it must be at least within its
purview by clear legislative intent.
Exceptions
1.
When the law itself expressly provides for a liberal construction thereof.
2.
In cases of exemptions granted to religious, charitable and educational

institutions or to the government or its agencies or to public property because
the general rule is that they are exempt from tax.
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Strict interpretation does not apply to the government and its agencies
Petitioner cannot invoke the rule on stritissimi juris with respect to the interpretation of
statutes granting tax exemptions to the NPC. The rule on strict interpretation does not
apply in the case of exemptions in favor of a political subdivision or instrumentality of
the government. [ Maceda v. Macaraig]
Davao Gulf v. Commissioner, 293 SCRA 76 (1998)
A tax cannot be imposed unless it is supported by the clear and express language of a
statute; on the other hand, once the tax is unquestionably imposed, a claim of
exemption from tax payments must be clearly shown and based on language in the law
too plain to be mistaken. Since the partial refund authorized under Section 5, RA 1435,
is in the nature of a tax exemption, it must be construed strictissimi juris against the
grantee. Hence, petitioners claim of refund on the basis of the specific taxes it actually
paid must expressly be granted in a statute stated in a language too clear to be
mistaken.
Tax remission or tax condonation
The word remit means to desist or refrain from exacting, inflicting or enforcing
something as well as to restore what has already been taken. The remission of taxes
due and payable to the exclusion of taxes already collected does not constitute unfair
discrimination. Such a set of taxes is a class by itself and the law would be open to
attack as class legislation only if all taxpayers belonging to one class were not treated
alike. [Juan Luna Subd. V. Sarmiento, 91 Phil 370]
The condonation of a tax liability is equivalent to and is in the nature of a tax

exemption. Thus, it should be sustained only when expressly provided in the law.
[Surigao Consolidated Mining v. Commissioner of Internal Revenue , 9 SCRA
728]
Tax amnesty
Tax amnesty, being a general pardon 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, partakes of an absolute forgiveness or waiver by the government of
its right to collect what otherwise would be due it and, in this sense, prejudicial thereto.
It is granted particularly to tax evaders who wish to relent and are willing to reform,
thus giving them a chance to do so and thereby become a part of the new society with a
clean slate. [ Republic v. Intermediate Appellate Court, 196 SCRA 335]
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Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted by
statute. The terms of the amnesty must also be construed against the taxpayer and
liberally in favor of the government.
Tax amnesty v. tax condonation v. tax exemption
A tax amnesty, being a general pardon 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, partakes of an absolute forgiveness or waiver by the Government of
its right to collect what otherwise would be due it and, in this sense, prejudicial thereto,
particularly to tax evaders who wish to relent and are willing to reform are given a
chance to do so and therefore become a part of the society with a clean slate.
Like a tax exemption, a tax amnesty is never favored nor presumed in law, and is
granted by statute. The terms of the amnesty must be strictly construed against the
taxpayer and liberally in favor of the government. Unlike a tax exemption, however, a
tax amnesty has limited applicability as to cover a particular taxing period or transaction
only.
There is tax condonation or remission when the State desists or refrains from exacting,
inflicting or enforcing something as well as to restore what has already been taken. The
condonation of a tax liability is equivalent to and is in the nature of a tax exemption.
Thus, it should be sustained only when expressed in the law.
Tax exemption, on the other hand, is the grant of immunity to particular persons or
corporations or to person or corporations of a particular class from a tax which persons
and corporations generally within the same state or taxing district are obliged to pay.
Tax exemption are not favored and are construed strictissimi juris against the taxpayer.
SOURCES , APPLICATION, INTERPRETATION AND ADMINISTRATION

LAWS
OF TAX
SOURCES OF T AX LAWS
Sources of tax laws
1.
Constitution
2.
National Internal Revenue Code
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3.
Tariff and Customs Code
4.
Local Government Code (Book II)
5.
Local tax ordinances/ City or municipal tax codes
6.
Tax treaties and international agreements
7.
Special laws
8.
Decisions of the Supreme Court and the Court of Tax Appeals
9.
Revenue rules and regulations and administrative rulings and opinions
Tax treaty
A tax treaty is one of the sources of our law on taxation. The Philippine Government
usually enters into tax treaties in order to avoid or minimize the effects of double
taxation. A treaty has the force and effect of law.
REVENUE RULES AND REGULATIONS AND A DMINISTRATIVE RULINGS AND OPINIONS

Authority to promulgate rules and regulations and rulings and opinions
The Secretary of Finance, upon recommendation of the Commissioner of Internal

Revenue, shall promulgate needful rules and regulations for the effective enforcement of
the provisions of the NIRC.
This is without prejudice to the power of the Commissioner of Internal Revenue to make
rulings or opinions in connection with the implementation of the provisions of internal
revenue laws, including rulings on the classification of articles for sales tax and similar
purposes.
Purpose of rules and regulations

1.
To properly enforce and execute the laws
2.
To clarify and explain the law
3.
To carry into effect the laws general provisions by providing details of administration
and procedure
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Requisites for validity of rules and regulations
1.
They must not be contrary to law and the Constitution.
2.
They must be published in the Official Gazette or a newspaper of general circulation.
Commissioner v. Court of Appeals, 240 SCRA 368
The authority of the Minister of Finance, in conjunction with the Commissioner of

Internal Revenue, to promulgate rules and regulations for the effective enforcement of
internal revenue rules cannot be controverted. Neither can it be disputed that such rules
and regulations, as well as administrative opinions and rulings, ordinarily should deserve
weight and respect by the courts. Much more fundamental than either of the above,
however, is that all such issuances must not override, but must remain consistent with,
the law they seek to apply and implement. Administrative rules and regulations are
intended to carry out, neither to supplant nor to modify, the law.
La Suerte v. Court of Tax Appeals, 134 SCRA 29
When an administrative agency renders an opinion by means of a circular or

memorandum, it merely interprets existing law and no publication is therefore necessary
for its validity. Construction by an executive branch of the government of a particular
law, although not binding upon courts, must be given weight as the construction came
from the branch of the government which is called upon to implement the law.
Effectivity of revenue rules and regulations
Revenue Memorandum Circular 20-86 was issued to govern the drafting, issuance, and
implementation of revenue tax issuances, including:
1.
Revenue Regulations;
2.
Revenue Audit Memorandum Orders; and
3.
Revenue Memorandum Circulars and Revenue Memorandum Orders.
Except when the law otherwise expressly provides, the aforesaid revenue tax issuances
shall not begin to be operative until after due notice thereof may be fairly assumed.
Due notice of the said issuances may be fairly presumed only after the following
procedures have been taken:
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1.
Copies of the tax issuance have been sent through registered mail to the
following business and professional organizations:
a.
Philippine Institute of Certified Public Accountants;
b.
Integrated Bar of the Philippines;
c.
Philippine Chamber of Commerce and Industry;
d.
American Chamber of Commerce;
e.
Federation of Filipino-Chinese Chamber of Commerce; and
f.
Japanese Chamber of Commerce and Industry in the Philippines.
2.
However, other persons or entities may request a copy of the said issuances.
3.
The Bureau of Internal Revenue shall issue a press release covering the
highlights and features of the new tax issuance in any newspaper of general
circulation.
4.
Effectivity date for enforcement of the new issuance shall take place thirty (30)
days from the date the issuance has been sent to the above-enumerated
organizations.
BIR rulings
Administrative rulings, known as BIR rulings, are the less general interpretation of tax
laws being issued from time to time by the Commissioner of Internal Revenue. They are
usually rendered 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 Commissioner may revoke, repeal or abrogate the acts or previous rulings of his
predecessors in office because the construction of the statute by those administering it
is not binding on their successors if, thereafter, such successors are satisfied that a
different construction of the law should be given.
Rulings in the form of opinions are also given by the Secretary of Justice who is the
chief legal officer of the Government.
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EFFECTIVITY AND VALIDITY OF A T AX ORDINANCE
Tuazon v. Court of Appeals, 212 SCRA 739
If the resolution is to be considered as a tax ordinance, it must be shown to have been

enacted in accordance with the requirements of the Local Government Code. These
would include the holding of a public hearing on the measure and its subsequent
approval by the Secretary of Finance, in addition to the usual requisites for publication
of ordinances in general.
INTERPRETATION AND A PPLICATION OF T AX LAWS

Nature of internal revenue laws
1.
Internal revenue laws are not political in nature.
2.
Tax laws are civil and not penal in nature.
Not political in nature
Internal revenue laws are not political in nature. They are deemed to be the laws of the
occupied territory and not of the occupying enemy.
Thus, our tax laws continued in force during the Japanese occupation.
Hilado v. Collector, 100 Phil 288: It is well known that our internal revenue laws are
not political in nature and, as such, continued in force during the period of enemy
occupation and in effect were actually enforced by the occupation government. Income
tax returns that were filed during that period and income tax payments made were
considered valid and legal. Such tax laws are deemed to be the laws of the occupied
territory and not of the occupying enemy.
Civil, not penal, in nature
Tax laws are civil and not penal in nature, although there are penalties provided for their
violation.
The purpose of tax laws in imposing penalties for delinquencies is to compel the timely
payment of taxes or to punish evasion or neglect of duty in respect thereof.
Republic v. Oasan, 99 Phil 934: The war profits tax is not subject to the prohibition
on ex post facto laws as the latter applies only to criminal or penal matters. Tax laws are
civil in nature.
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Construction of tax laws

1.
Rule when legislative intent is clear

Tax statutes are to receive a reasonable construction with a view to carrying out
their purpose and intent.
They should not be construed as to permit the taxpayer easily to evade the
payment of taxes.
2.
Rule when there is doubt

No person or property is subject to taxation unless within the terms or plain
import of a taxing statute. In every case of doubt, tax statutes are construed strictly
against the government and liberally in favor of the taxpayer.
Taxes, being burdens, are not to be presumed beyond what the statute
expressly and clearly declares.
3.
Provisions granting tax exemptions

Such provisions are construed strictly against the taxpayer claiming tax
exemption.
Application of tax laws
General rule: Tax laws are prospective in operation because the nature and amount of
the tax could not be foreseen and understood by the taxpayer at the time the
transactions which the law seeks to tax was completed.
Exception: While it is not favored, a statute may nevertheless operate retroactively

provided it is expressly declared or is clearly the legislative intent. But a tax law should
not be given retroactive application when it would be harsh and oppressive.
Directory and mandatory provisions of tax laws
Directory provisions are those designed merely for the information or direction of
officers or to secure methodical and systematic modes of proceedings.
Mandatory provisions are those intended for the security of the citizens or which are
designed to ensure equality of taxation or certainty as to the nature and amount of each
persons tax.
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The omission to follow mandatory provisions renders invalid the act or proceeding to
which it relates while the omission to follow directory provisions does not involve such
consequence. [ Roxas v. Rafferty , 37 Phil 958]
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IN GENERAL
Income Tax
Income tax has been defined as a tax on all yearly profits arising from property,
profession, trade or business, or as a tax on a persons income, emoluments, profits and
the like.
It is generally regarded as an excise tax. It is not levied upon persons, property, funds
or profits but upon the right of a person to receive income or profits.
Purposes of income taxation

1.
To provide large amounts of revenues.
2.
To offset regressive sales and consumption taxes.
3.
Together with estate tax, to mitigate the evils arising from the inequalities in the
distribution of income and wealth, which are considered deterrents to social progress, by
imposing a progressive scheme of taxation.
Income
Income, in its broad sense, means all wealth which flows into the taxpayer other than as
a mere return on capital. [Section 36, Revenue Regulations 2]
Income means accession to wealth, gain or flow of wealth.
Conwi v. CTA [213 SCRA 83]: Income may be defined as an amount of money coming
to a person or corporation within a specified time, whether as payment for services,
interest, or profit from investment.
Commissioner v. BOAC [149 SCRA 395]: Income means cash received or its
equivalent. It is the amount of money coming to a person within a specific time. It is
distinct from capital for, while the latter is a fund, income is a flow. As used in our laws,
income is flow of wealth. The source of an income is the property, activity or service
that produces the income. For the source of income to be considered as coming from
the Philippines, it is sufficient that income is derived from activity within the Philippines.
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INCOME T AXATION
IN BOACs case, the sale of tickets in the Philippines is the activity that produces the
income.
Fisher v. Trinidad [43 Phil 973]: Stock dividend is not an income. It merely evidences
the interest of the stockholder in the increased capital of the corporation. An income
may be defined as the amount of money coming to a person or corporation within a
specified time, whether as payment for services, interest, or profit for investment. A
mere advance in the value of property of a person or corporation in no sense constitutes
the income specified in the revenue law. Such advance constitutes and can be treated
merely as an increase of capital. An income means cash received or its equivalent. It
does not mean choses in action or unrealized increments in the value of the property.
Income v. capital
Capital is a fund or property existing at one distinct point of time while income denotes a
flow of wealth during a definite period of time.
The essential difference between capital and income is that capital is a fund or property
existing at one distinct point of time; income is a flow of services rendered by that
capital by the payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time. Capital is wealth, income is the
service of wealth. [Madrigal v. Rafferty, 38 Phil 414]
Capital is the tree while income is the fruit.
SOURCES OF INCOME
What produces income?
The term source of income is not a place but the property, activity or service that
produced the income. In the case of income derived from labor, it is the place where the
labor is performed; in the case of income derived from the use of capital, it is the place
where the capital is employed; and in the case of profits from the sale or exchange of
capital assets, it is the place where the sale or transaction occurs.
Commissioner v. BOAC: The source of an income is the property, activity or service
that produces the income. For the source of income to be considered as coming from
the Philippines, it is sufficient that income is derived from activity within the Philippines.
IN BOACs case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made in
Philippine currency. The site of the source of the income is the Philippines and the flow
of wealth proceeded from and occurred in Philippine territory, enjoying the protection
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INCOME T AXATION
accorded by the Philippine government. Thus, said flow of wealth should share the
burden of supporting the government.
Sources of income
1.
Sources within the Philippines
2.
Sources without the Philippines
3.
Sources partly within and partly without the Philippines
T AXABLE INCOME
Taxable income
The term taxable income means the pertinent items of gross income specified in the
NIRC, less the deductions and/or personal and additional exemptions, if any, authorized
by such types of income by the NIRC or other special laws.
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.
Gain must be realized or received
This implies that not all economic gains constitute taxable income. Thus, a mere
increase in the value of property is not income but merely an unrealized increase in
capital.
When is income considered received?

1.
actual receipt
2.
constructive receipt
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INCOME T AXATION
Income constructively received
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.
To constitute receipt in such a case, the income must be credited to the taxpayer
without any substantial limitation or restriction as to the time or manner of payment or
condition upon which payment is to be made. [Section 52, Revenue Regulations 2]
Limpan Investment Company deemed to have constructively received rental payments in

1957 when they were deposited in court due to its refusal to receive them. [ Limpan v.
CIR, 17 SCRA 703]
Examples of constructive receipt

1.
Interest coupons which have matured and are payable, but have not been cashed.
2.
Defaulted coupons are income for the year in which paid.
3.
Partners distributive share in the profits of a general professional partnership is

regarded as received by the partner, although not yet distributed.
Are the following items income?
Found treasure - YES
Punitive damages - YES
Damages for breach of promise or alienation of affection - YES
Worthless debts subsequently collected - YES
Tax refund NO (but yes if the tax was previously allowed as a deduction and
subsequently refunded or credited, as benefit accrued to the taxpayer; see discussion on
tax as a deductible item)
Non-cash benefits - YES
Income from illegal sources - YES
Psychological benefits of work - NO
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INCOME T AXATION
Give away prizes YES
Scholarships/fellowships YES
Stock dividends - NO
Tests to determine realization of income

1.
Severance test
2.
Substantial alteration of interest test
3.
Flow of wealth test
Severance test
As capital or investment is not income subject to tax, the gain or profit derived from the
exchange or transaction of said capital by the taxpayer for his separate use, benefit and
disposal is income subject to tax.
Substantial alteration of interest test
Income is earned when there is a substantial alteration of the interest of a taxpayer, i.e.
increase in proportionate share of a stockholder in a corporation.
Income to be returnable for taxation must be fully and completely realized. Where there
is no separation of gain or profit, or separation of increase in value from capital, there is
no income subject to tax.
Thus, stock dividends are not income subject to tax on the part of the shareholder for
he had the same proportionate interest in the assets of the corporation as he had
before, and the stockholder was no richer and the corporation no poorer after the
declaration of the dividend.
However, if the pre-existing proportionate interest of the stockholder is
substantially altered, the income is considered derived to the extent of the benefit
received.
Moreover, if as a result of an exchange of stocks, the person received something of

value which are essentially and fundamentally different from what he had before the
exchange, income is realized within the meaning of the revenue law.
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INCOME T AXATION
Flow of wealth test
The essential difference between capital and income is that capital is a fund whereas
income is the flow of wealth coming from such fund; capital is the tree, income is the
fruit. Income is the flow of wealth other than as a mere return of capital.
CLASSES OF INCOME
Kinds of taxable income or gain
1.
capital gain
2.
ordinary gain
a.
business income
b.
compensation income
c.
passive income
d.
other income from whatever source derived i.e. found treasure
Capital gains
Capital gains are gains or income from the sale or exchange of capital assets. These
include:
1.
Income from dealings in shares of stock of domestic corporation whether or not

through the stock exchange;
2.
Income from dealings in real property located in the Philippines; and
3.
Income from dealings in other capital assets other than (a) and (b).
Ordinary gains
Ordinary gains are gains or income from the sale or exchange of property which are not
capital assets.
Business income
1.
Income from trading, merchandising, manufacturing or mining
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INCOME T AXATION
2.
Income from practice of profession
Note: The term trade or business includes the performance of the functions of a public
office. [Section 22(S), NIRC]
Passive income
1.
Passive income from Philippine sources subject to final tax
2.
Passive income from Philippine sources not subject to final tax
3.
Passive income from sources outside the Philippines
Passive income again

1.
Interest income
2.
Rentals/Leases
3.
Royalties
4.
Dividends
5.
Annuities and proceeds of life insurance/other types of insurance
6.
Prizes and winnings, awards, and rewards
7.
Gifts, bequests, and devises
8.
Other types of passive income
A PPROACHES IN INCOME RECOGNITION

Approaches in income recognition
1.
schedular system
2.
global system
Schedular system
The schedular system is one where the income tax treatment varies and is made to
depend on the kind or category of taxable income of the taxpayer.
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Global system
The global system is one where the tax treatment views indifferently the tax base and
generally treats in common all categories of taxable income of the taxpayer.
Schedular system v. global system

1.
Under the schedular treatment, there are different tax rates, while under the global
treatment, there is a unitary or single tax rate.
2.
Under the schedular treatment, there are different categories of taxable income, while
under the global treatment, there is no need for classification as all taxpayers are
subjected to a single rate.
3.
The schedular treatment is usually used in the income taxation of individuals while the
global treatment is usually applied to corporations.
Approach used in the Philippines
Partly schedular and partly global. The schedular approach is used in the taxation of
individuals while the global approach is used in the taxation of corporations.
CLASSES OF INCOME T AXPAYERS

Basis of classification of taxpayers
1.
corporations v. individuals
2.
nationality
3.
residence
Classes of income taxpayers

1.
Individuals
a.
Resident citizens
b.
Non-resident citizens
c.
Resident aliens
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d.
Non-resident aliens
i)
engaged in trade or business in the Philippines, or
ii)
not engaged in trade or business in the Philippines
Note: A non-resident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any calendar year
shall be deemed a non-resident alien doing business in the Philippines. [Section
25(A)(1), NIRC]
2.
3.
Corporations
a.
Domestic corporations
b.
Resident foreign corporations
c.
Non-resident foreign corporations
Special
a.
Proprietary educational institutions and hospitals that are non-profit
b.
Insurance companies
c.
General professional partnerships
d.
Estates and trusts
Note: Estates and trusts are treated as individual taxpayers.
Who is a non-resident citizen?
The term non-resident citizen means:

1.
A citizen of the Philippines who established to the satisfaction of the

Commissioner the fact of his physical presence abroad with a definite intention to
reside therein.
2.
A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
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3.
A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad most of
the time during the taxable year.
4.
A citizen who has been previously considered as a non-resident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines.
Corporation
A corporation, as used in income taxation, includes partnerships, no matter how created

or organized, joint stock companies, joint accounts ( cuentas en participacion), and
associations or insurance companies.
However, it does not include:

1.
a general professional partnership; and
2.
a joint venture or consortium formed for the purpose of undertaking construction

projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract with
the government.
Resident foreign corporation
The term applies to a foreign corporation engaged in trade or business within the
Philippines.
Non-resident foreign corporation
The term applies to a foreign corporation not engaged in trade of business in the
Philippines.
GENERAL PROFESSIONAL PARTNERSHIP V. ORDINARY BUSINESS PARTNERSHIP

General professional partnerships are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business. [Section 22(B), NIRC]
Persons engaging in business as partners in a general professional partnership shall be

liable for income tax only in their separate and individual capacities. [Section 26, NIRC]
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For purposes of computing the distributive share of the partners, the net income of the
partnership shall be computed in the same manner as a corporation. [Section 26, NIRC]
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership. [Section 26, NIRC]
Income of a general professional partnership are deemed constructively received by the

partners. [Section 73(D), NIRC]
Ordinary business partnership
An ordinary business partnership is considered as a corporation and is thus subject to

tax as such.
Partners are considered stockholders and, therefore, profits distributed to them by the
partnership are considered as dividends.
Oa v. Commissioner, 45 SCRA 74 (1972): Unregistered partnership

Although the CFI already approved the project of partition of the estate of Julia Buales
among her surviving spouse, Lorenzo Ona, and her five children, no attempt was made to
divide the properties left by the decedent. Instead, the properties remained under the
management of Lorenzo Ona who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceeds from the sales thereof in real
property and securities. The said incomes are recorded in the books of account kept by Lorenzo
Ona where the corresponding shares of the heirs in the net income for the year are known.
Based on these facts, the Commissioner ruled that the heirs formed an unregistered
partnership which is thus subject to corporate income tax. The Court of Tax Appeals and the
Supreme Court affirmed.
For tax purposes, the co-ownership of inherited properties is automatically converted
into an unregistered partnership the moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to produce profits for the heirs in
proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding.
The reason is simple. From the moment of such partition, the heirs are entitled already
to their respective definite shares of the estate and the incomes thereof, for each of them to
manage and dispose of as exclusively his own without the intervention of the other heirs, and,
accordingly, he becomes liable individually for all taxes in connection therewith. If after such
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partition, he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to his share,
there can be no doubt that, even if no document or instrument were executed, for the purpose,
for tax purposes, at least, an unregistered partnership is formed.
For purposes of the tax on corporations, the NIRC, includes partnerships except
general professional partnerships within the purview of the term corporation.
Note: The income derived from inherited properties may be considered as individual income of
the respective heirs only so long as the inheritance or estate is not distributed or, at
least, partitioned, but the moment their respective known shares are used as part of the
common assets of the heirs to be used in making profits, it is but proper that the income
of such shares be considered as part of the taxable income of an unregistered
partnership.
Gatchalian v. Collector, 102 Phil 140

Plaintiffs contributed money to buy a sweepstakes ticket which subsequently won. The
Supreme Court held that they formed an unregistered partnership. Plaintiffs formed a
partnership of a civil nature since each of them contributed money to a common fund for the
sole purpose of dividing equally the prize which they win.
Pascual v. Commissioner
Petitioners bought two parcels of land in 1965, however, they did not sell the same nor
make any improvements thereon. In 1966, they bought another three parcels of land. It was
only in 1968 that they sold the two parcels of land after which they did not make any additional
or new purchase. The remaining three parcels of land were sold in 1970. Commissioner
assessed them corporate income taxes on the ground that petitioners established an
unregistered partnership engaged in real estate transactions.
The Supreme Court ruled that no unregistered partnership was formed. The sharing of
returns does not itself establish a partnership whether or not the persons therein have a joint or
common right or interest in the property. There must be a clear intent to form a partnership,
the existence of which has the juridical personality different from the individual partners and
the freedom of each party to transfer or assign the whole property.
In this case, there was no showing of intent to form a partnership. The transactions
were isolated; therefore, the character of habituality peculiar to business transactions engaged
for the purpose of gain was not present.
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The essential elements of a partnership are: (1) an agreement to contribute money,
property, or industry to a common fund; and (2) an intent to divide the profits among the
contracting parties.
Unregistered partnership v. co-ownership for tax purposes
If the activities of co-owners are limited to the preservation of the property and the
collection of the income therefrom, in which case, each co-owner is taxed individually on
his distributive share in the income of the co-ownership.
If the co-owners invest the income in business for profit, they would be constituting
themselves into a partnership taxable as a corporation.
Joint venture, how created
A joint venture is created when two corporations, while registered and operating
separately, were placed under one sole management which operated the business
affairs of said companies as though they constituted a single entity thereby obtaining
substantial economy and profits in the operation.
As stated, a joint venture is not taxed as a corporation, just like a general professional
partnership.
GENERAL P RINCIPLES OF INCOME T AXATION IN THE P HILIPPINES

General principles of income taxation in the Philippines
1.
A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines.
2.
A non-resident citizen is taxable only on income derived from sources within the
Philippines.
3.
An individual citizen of the Philippines who is working and deriving income from abroad
as an overseas contract worker is taxable only on income from sources within the
Philippines. Provided, that a seaman who is a citizen of the Philippines and who receives
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.
4.
An alien individual, whether a resident or not of the Philippines, is taxable only on

income derived from sources within the Philippines.
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5.
A domestic corporation is taxable on all income derived from sources within and without
the Philippines.
6.
A foreign corporation, whether engaged or not in trade or business in the Philippines, is

taxable only on income derived from sources within the Philippines.
SOME RULES ON TAXATION OF THE VARIOUS TAXPA YERS

Who are taxed on their global income?
1.
Resident citizens
2.
Domestic corporations
Who are taxed only on their income from sources within the Philippines?
1.
Non-resident citizen
2.
Overseas contract workers
3.
Alien individual, whether a resident or not of the Philippines
4.
Foreign corporation, whether engaged or not in trade or business in the Philippines
Who are taxed based only on their net income?

1.
Resident and non-resident citizens
2.
Resident alien and non-resident alien engaged in trade or business in the Philippines
3.
Domestic corporation
4.
Who are taxed based on their gross income?

1.
Non-resident alien not engaged in trade or business in the Philippines
2.
Non-resident foreign corporation
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T REATMENT OF SOME SPECIAL ITEMS
Forgiveness of indebtedness
The cancellation and forgiveness of indebtedness may, dependent upon the

circumstances, amount to:
1.
a payment of income;
2.
a gift; or
3.
a capital transaction.
If, for example, an individual performs services for a creditor who, in consideration
thereof cancels the debt, income to that amount is realized by the debtor as
compensation for his service.
If, however, a creditor merely desires to benefit a debtor and without any consideration
thereof cancels the debt, the amount of the debt is a gift from the creditor to the debtor
and need not be included in the latters gross income.
If a corporation to which a stockholder is indebted forgives the debt, the transaction has
the effect of payment of a dividend. [Section 50, Revenue Regulations 2]
Recovery of amounts previously written off
Considered as income
GUIDE QUESTIONS IN DETERMINING T AXABLE INCOME

1.
Is there a gain or income?
2.
Is the gain or income taxable? Is it excluded or exempt?
3.
What type of income is it: income includible in the gross income, passive income, capital
gains, income derived from other source?
4.
To what class does the taxpayer belong: individual or corporate, citizen or not or
domestic or foreign, resident or not, engaged in trade or business or not?
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TAX ON INDIVIDUALS
P RELIMINARY POINTS ON TAXATION OF INDIVIDUALS
How taxed?
An individual citizen, both resident and non-resident, and an individual resident alien are
taxed similarly.
A non-resident alien engaged in trade or business shall be subject to the same income
tax rates as a citizen and a resident alien.
Thus, only a non-resident alien who is not engaged in trade or business is taxed
differently from the other individual taxpayers.
On what income taxed?
A resident citizen is taxed on all income from sources within and outside the Philippines.
The tax base is net income.
A non-resident citizen is taxed only on income from sources within the Philippines. The
tax base is net income.
An alien, whether resident or not, is taxed only on income from sources within the
Philippines. However, the tax base for a resident alien and non-resident alien engaged in
trade or business is net income while the tax base for a non-resident alien not engaged
in trade or business is gross income.
Types of income taxed

1.
Items of income included in the gross income
2.
Passive income
3.
Capital gains from sale of shares of stock not traded in the stock exchange
4.
Capital gains from the sale or exchange of real property
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T AX ON INDIVIDUAL CITIZEN (RESIDENT AND NON-RESIDENT) AND INDIVIDUAL RESIDENT
A LIEN
Items of income included in the gross income
A schedular rate of five percent (5%) to P125,000 + 32% of excess over P500,000.00
by 01 January 2000 is imposed on items of income of an individual citizen and individual
resident alien which are properly includible in the gross income.
Rates of tax on certain passive income

1.
Interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements 20%
2.
Royalties, except on books, as well as other literary works and musical compositions
20%
3.
Royalties on books, literary works and musical compositions 10%
4.
Prizes over P10,000.00 20%
Note: Prizes less than P10,000.00 are included in the income tax of the individual subject to
the schedular rate of 5% up to P125,000 + 32% of excess over P500,000.00)
5.
Other winnings, except PCSO and lotto, derived from sources within the Philippines
20%
6.
Interest income derived by a resident individual (Note: non-resident citizen not included)
from a depository bank under the expanded foreign currency deposit system 7.5%
7.
Interest income from long-term deposit or investment evidenced by certificates

prescribed by BSP
a.
Exempt if investment is held for more than five years
b.
If investment is pre-terminated, interest income on such investment shall be

subject to the following rates:
20%
if pre-terminated in less than 3 years
12%
if pre-terminated after 3 years to less than 4 years
5%
if pre-terminated after 4 years to less than 5 years
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8.
Cash and/or property dividends

Ten percent (10%) final tax by 01 January 2000 on the following:
a.
Cash and or property dividend actually or constructively received from a

domestic corporation or from a joint stock company, insurance or mutual fund
companies and regional operating headquarters of multinational companies
b.
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
c.
Share of an individual in the net income after tax of an association, joint account,
or a joint venture or consortium taxable as a corporation of which he is a
member or a co-venturer
Capital gains from the sale of shares of stock not traded in the stock exchange
1.
Not over P100,000
5%
2.
Over P100,000
10%
Capital gains from the sale of real property
General rule: A final tax of six percent (6%) is imposed on the gross selling price or
current fair market value, whichever is higher, for every sale or exchange of real
property.
Optional: If the sale is made to the government or any of its political subdivisions or
agencies or to government-owned or-controlled corporations, the taxpayer has the
option to choose from the final tax of six percent (6%) of gross selling price or fair
market value, whichever is higher, or the schedular tax rate of 5% up to P125,000 +
32% of excess over P500,000.
Exception: The sale or disposition of the principal residence of natural persons is

exempt from capital gains tax if certain conditions are met.
Conditions for exemption of gain from sale or exchange of principal residence:
1.
Proceeds are fully utilized in acquiring or constructing a new principal residence

within 18 months from the date of sale or disposition;
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2.
Historical cost or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired;
3.
Notice to the Commissioner of Internal Revenue shall be given within thirty (30)
days from the date of sale or disposition; and
4.
This exemption can only be availed of once every ten years.
If the proceeds of the sale were not fully utilized, the portion of the gain
presumed to have been realized from the sale or disposition shall be subject to capital
gains tax.
GSP or FMV, whichever is higher x Unutilized proceeds/GSP = Taxable Portion
T AX ON NON-RESIDENT A LIEN INDIVIDUAL

Remuneration received by a non-resident alien as president of a domestic company
taxable in the Philippines (Ms. Juliane Baier-Nickel, as represented by Marina Q.
Guzman v. CIR, CTA Case No. 5514 dated 4/29/99)
A consultant, president of a domestic company or person involved with product

development is subject to Philippine income taxation. Any remuneration received would
stem from her employment as company president and thus, negates her allegation that
she is just a sales agent who receives commissions. While petitioner tried to show that
she stayed in the country for less than 180 days, her remuneration in the form of
commissions is still taxable in the Philippines since it is borne by a permanent
establishment in the Philippines.
Non-resident alien engaged in trade or business
A non-resident alien engaged in trade or business shall be subject to the same income
tax rates as a citizen and a resident alien.
Exception: Cash and/or property dividends received by a non-resident alien individual

shall be subject to a final tax of 20%; for citizens and resident aliens, the rate is 10%
beginning in the year 2000.
Non-resident alien not engaged in trade or business
A non-resident alien individual not engaged in trade or business shall pay a tax
equivalent to 25% on all items of income, except for gain on sale of shares of stock in
any domestic corporation and real property which shall be subject to the same rate
applied to other individual taxpayers.
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Gain on sale of shares of stock:

1.
Not over P100,000 5%
2.
Over 100,000 10%
Capital gains tax on sale or disposition of property 6% of GSP or FMV, whichever is

higher.
OTHER INDIVIDUAL T AXPAYERS

1.
Alien individual employed by regional or area headquarters and regional operating

headquarters of multinational companies
2.
Alien individual employed by offshore banking units
3.
Alien individual employed by petroleum service contractor and subcontractor
Note: The salaries, wages, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances received by these individuals and their Filipino
counterparts occupying the same position as these alien individuals shall be subject to
15% tax.
All other income derived by these individuals shall be subject to the same rate as
that of other individual taxpayers.
Regional or area headquarters
A regional or area headquarter is a branch established in the Philippines by multinational

companies and which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets.
Regional operating headquarters
A regional operating headquarter shall mean a branch established in the Philippines by

multinational companies which are engaged in certain specified services, i.e. general
administration and planning, business planning and coordination, sourcing and
procurement of raw materials and components, among others.
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Taxation of OBU employees (BIR Ruling No. 147-98 dated October 16, 1998)
The 15% preferential tax rate shall apply only in cases where an alien concurrently holds
a position similar to that of the Filipino employee. Thus, this preferential tax treatment
shall not apply where the counterpart expatriate is recalled to the head office or
reassigned elsewhere, whether temporarily or otherwise, and only Filipinos are the ones
so employed by an OBU for the time being or where the post vacated by the expatriate
is subsequently assumed by a Filipino to replace the expatriate, as a result of which all
top management posts are now being occupied by Filipinos.
Filipino staff of the ADB subject to 15% preferential tax rate ( NO. 29-99 dated
3/11/99)
Filipino employees occupying managerial or technical positions as those of aliens

employed by the Asian Development Bank (ADB), which is not only a regional or area
headquarters in the Philippines but the headquarters itself, are subject to the
preferential tax rate of 15% on their gross compensation income pursuant to Section 25
( C ) of the NIRC of 1997.
General professional partnerships are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business.
Persons engaging in business as partners in a general professional partnership shall be

liable for income tax only in their separate and individual capacities.
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
The net income of the general professional partnership shall be computed in the same
manner as a corporation for purposes of computing the distributive shares of the
partners.
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TAX ON CORPORATIONS
RATES OF INCOME T AX ON DOMESTIC CORPORATIONS
In General
Rate of tax, in general

1997
1998
1999
2000
35%
34%
33%
onwards 32%
Tax is imposed on taxable or net income.
Optional 15% tax on gross income
The President, upon the recommendation of the Secretary of Finance, may, effective 01
January 2000, allow corporations the option to be taxed at fifteen percent (15%) of
gross income, provided certain conditions are satisfied.
This is available to firms whose ratio of cost of sales to gross sales or receipts from all
sources does not exceed 55%.
Once elected by the corporation, option shall be irrevocable for the three consecutive
years.
Conditions to be satisfied to avail of the 15% optional corporate tax

1.
A tax effort ratio of twenty percent (20%) of Gross National Product (GNP)
2.
A ratio of forty percent (40%) of income tax collection to total tax revenues
3.
A VAT tax effort of four percent (4%) of GNP
4.
A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position to GNP
Some definitions for this purpose
Gross income derived from business shall be equivalent to gross sales less sales
returns, discounts and allowances and cost of goods sold.
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For taxpayers engaged in sale of services, gross income means gross receipts less
sales returns, allowances and discounts.
Cost of goods sold shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
Trading Concern
Cost of goods sold shall include the invoice
cost of the goods sold, plus import duties,
freight in transporting the goods to the place
where the goods are actually sold, including
insurance while the goods are in transit.
Manufacturing Concern
Cost of goods manufactured and sold shall
include all costs of production of finished
goods, such as raw materials used, direct
labor and manufacturing overhead, freight
cost, insurance and other costs incurred to
bring the raw materials to the factory or
warehouse.
Tax rate for proprietary educational institutions and hospitals
10% on taxable income, except on certain passive incomes
The ordinary rate imposed on corporations shall apply to proprietary educational

institutions and hospitals when their gross income from unrelated trade, business or
other activity exceeds 50% of their total gross income derived from all sources.
Unrelated trade, business or other activity
This means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or
hospital of its primary purpose or function.
Proprietary educational institution
A proprietary educational institution is any private school maintained and administered

by private individuals or groups with an issued permit to operate from the DECS, or
CHED, or TESDA, as the case may be.
GOCCs, agencies or instrumentalities
All corporations, agencies, or instrumentalities owned and controlled by the government

shall pay such rate of tax upon their taxable income as are imposed upon corporations
or associations engaged in a similar business, industry, or activity.
Exceptions: GOCCs and instrumentalities not subject to tax are the:
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1.
Government Service Insurance System (GSIS)
2.
Social Security System (SSS)
3.
Philippine Health Insurance Corporation (PHIC)
4.
Philippine Charity Sweepstakes Office (PCSO)
5.
Philippine Amusement and Gaming Corporation (PAGCOR)
Rates on certain passive income subject to final tax

1.
Interest from deposits and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements 20%
2.
Royalties 20%
3.
Interest income derived from a depository bank under the expanded foreign currency
deposit system 7 %
4.
5.
a.
b.
Over P100,000 10%
Tax on income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions 10%
Note: This is different from the interest income. This pertains to the income derived by
a depository bank itself.
Note: Any income of non-residents, whether individuals or corporations, from
transactions with depository banks under the expanded system is exempt from
income tax.
6.
Intercorporate dividends exempt
7.
Capital gains realized from the sale, exchange or disposition of lands and/or buildings
6%
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Sale of corporate real property that has ceased to be used in trade or business
subject to 6% capital gains tax ( No. 21-99 dated 2/25/99)
A final tax of 6% is imposed on the gains presumed to have been realized in the sale,
exchange or disposition of lands and/or buildings which are not actively used in the
business of a corporation and which are treated as capital assets based on the gross
selling price or fair market value, whichever is higher. However, since in the instant case
the taxpayer claimed a depreciation deduction when the building and other
improvements were not used in trade or business, the taxpayer must file and amend its
income tax return and pay the deficiency income tax, if any, plus surcharge and interest,
based on its adjusted taxable income resulting from the disallowance of the depreciation
deduction.
MINIMUM CORPORATE INCOME T AX

Minimum corporate income tax
A minimum corporate income tax of two percent (2%) of the gross income as of the end
of the taxable year is hereby imposed on a corporation subject to income tax, beginning
on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the
regular corporate income tax for the taxable year.
Carry forward of excess minimum tax
Any excess of the minimum corporate income tax over the normal income tax shall be
carried forward and credited against the normal income tax payable for the next three
years immediately succeeding the taxable year in which the minimum corporate income
tax was paid.
Relief from the minimum corporate income tax under certain conditions
The Secretary of Finance may suspend the imposition of the minimum corporate income
tax on any corporation which suffers losses on account of prolonged labor dispute, or
because of force majeure, or because of legitimate business reverses.
Meaning of gross income and cost of goods sold under minimum corporate income
tax compared with meaning of gross income and cost of goods sold under Section
27(A)
Gross Income
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Section 27(A)
Section 27(E) MCIT
equivalent to gross sales less sales returns, discounts and
allowances and cost of goods sold.
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Cost of goods sold
Cost of goods sold for a trading

or merchandising concern
Cost of goods manufactured

and sold for a manufacturing
concern
Gross Income for taxpayers
engaged in sale of service
shall include all business expenses directly incurred to

produce the merchandise to bring them to their present
location and use.
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where
the goods are actually sold, including insurance while the
goods are in transit.
shall include all costs of production of finished goods, such as
raw materials used, direct labor and manufacturing overhead,
freight cost, insurance and other costs incurred to bring the
raw materials to the factory or warehouse.
gross receipts less sales
gross receipts less sales
returns, allowances and
returns, allowances and
discounts.
discounts and cost of
services
Cost of services
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) cost of facilities directly
utilized in providing the service
such as depreciation or rental
of equipment used and cost of
supplies.
For banks, it includes interest
expense.
Note: Definition of gross income for taxpayers engaged in the sale of service includes cost of
services in MCIT but not in the case of the optional 15% tax on gross income [Section
27(A), NIRC].
T AX ON RESIDENT FOREIGN CORPORATIONS

A resident foreign corporation is one organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the Philippines.
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Income tax rate, in general
Rates of tax, in general

1997
1998
1999
2001
35%
34%
33%
onwards 32%
Tax is imposed on taxable or net income.
Optional: 15% of Gross Income
The option to be taxed at fifteen percent (15%) on gross income shall also be available
to resident foreign corporations, subject to the same conditions.
Available to firms whose ratio of cost of sales to gross sales or receipts from all sources
does not exceed 55%.
Once elected by the corporation, option shall be irrevocable for the three consecutive
years.
Minimum corporate income tax on resident foreign corporations
All conditions of the MCIT on domestic corporations also apply to resident foreign
corporations.
Tax rates on specific resident foreign corporations

1.
International Carrier 2 % of Gross Philippine Billings
2.
Offshore Banking Units 10% of income derived from foreign currency transactions with
local commercial banks, including branches of foreign banks that may be authorized by
the BSP to transact business with offshore banking units, including any interest income
derived from foreign currency loans granted to residents
Any income of non-residents, whether individuals or corporations, from
transactions with said offshore banking units shall be exempt from income tax.
3.
Tax on Branch Profits Remittances 15% of total profits applied or earmarked for
remittance without deduction for the tax component thereof
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4.
Regional or area headquarters shall not be subject to income tax
5.
Regional operating headquarters shall be subject to a tax of 10% of their taxable

income
Gross Philippine Billings for international air carrier
Gross Philippine Billings refers to the amount of 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.
Tickets revalidated, exchanged and/or endorsed 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.
For a flight which originates from the Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another airline, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of the Gross Philippine Billing.
Gross Philippine Billings for 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.
Tax on branch profits remittances
Any profit remitted by a branch to its head office shall be subject to a tax of fifteen
percent (15%) which shall be based on the total profits applied or earmarked for
remittance without any deduction for the tax component thereof (except those activities
which are registered with the Philippine Economic Zone Authority).
The following shall not be treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the Philippines:
1.
interests
2.
dividends
3.
rents
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4.
royalties
5.
remuneration for technical services
6.
salaries
7.
wages
8.
premiums
9.
annuities
10.
emoluments
11.
other fixed or determinable annual, periodic or casual gains, profits, income and
capital gains
In Marubeni v. Commissioner , Marubeni-Japan invested directly in AG & P Manila.

Since Marubeni has a branch in the Philippines, AG & P withheld 15% as branch profits
remittance tax from the cash dividends. SC held that the dividends remitted were not
subject to the 15% branch profit remittance tax as they were not income earned by a
Philippine branch of Marubeni-Japan.
In the 15% remittance tax, the law specifies its own tax base to be on the profit
remitted abroad. There is absolutely nothing equivocal or uncertain about the language
of the provision. The tax is imposed on the amount sent abroad, and the law calls for
nothing further. [ Bank of America NT v. Court of Appeals , 234 SCRA 302]
Marubeni v. Commissioner, 177 SCRA 500
Marubeni Corporation is a resident foreign corporation.

A resident foreign corporation is one that is incorporated under the laws of a
foreign country and is engaged in trade or business in the Philippines. Marubeni
Corporation is a foreign corporation duly organized under the laws of Japan and it is
duly licensed to engage in business under Philippine laws. Marubeni Corporation
maintains a branch office to carry out its business in the country.
The equity investments of MC in AG&P are investments of the mother corporation and
not of its branch office.
The investment was in the name of the Marubeni Corporation and therefore, the
stockholder in AG&P is the mother corporation, Marubeni Corporation, and not its branch
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office in the Philippines. Marubeni Corporation, therefore, and not its branch office, is
liable for taxes on dividends earned on its investments.
Branch profit remittance does not include dividends on investments received from other
domestic corporations.
Only profits remitted abroad by a branch office to its head office which are
effectively connected with its trade or business in the Philippines are subject to the 15%
profit remittance tax.
To be effectively connected, it is not necessary that the income be derived
from the actual operation of taxpayer-corporations trade or business; it is sufficient that
the income arises from the business activity in which the corporation is engaged.
The dividends received by Marubeni from AG&P are not income arising from the
business activity in which Marubeni is involved. Accordingly, said dividends if remitted
abroad, are not considered branch profits for purposes of the 15% profit remittance tax.
Note: Test of whether remittance of profit by a branch to its head office comes unde r
the purview of the profit remittance tax, the branch itself should have made the
remittance. In this case, it was not Marubenis branch in the Philippines, but the investee
corporation, AG&P, which directly remitted the dividends to Marubeni of Japan.
Also, only the branch office is the authorized withholding agent for the profit
remittance tax. AG&P, being an investee of Marubeni, erred in withholding the profit
remittance tax from the dividends it remitted to Marubeni.
Interest received by a foreign corporation from Philippine sources not effectively

connected with the conduct of its business not considered branch profits.
(Hongkong-Shanghai Hotels, Ltd. v. CIR, CTA Case No. 5243 dated 4/29/99)
Interest received by a foreign corporation during each taxable year from all sources
within the Philippines is not considered branch profits except when the same is
effectively connected with the conduct of its business. In the instant case, the interest
income from bank placements is not effectively connected with the business of hotel
management, thus, it is excluded form profits subject to the 15% branch profit
remittance tax.
Regional or area headquarters of multinational companies
Regional or area headquarters shall not be subject to income tax.
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Regional operating headquarters of multinational companies
Regional operating headquarters shall pay a tax of ten percent (10%) on their taxable
income.
Tax on certain incomes received by a resident foreign corporation

1.
Interest from deposits and yield or any other monetary benefit from deposit substitutes,
trust funds and similar arrangements and royalties
Interest income from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangem ents and
royalties derived from sources within the Philippines shall be subject to a final income
tax at the rate of twenty percent (20%) of such interest.
However, interest income derived by a resident foreign corporation from a
depositary bank under the expanded foreign currency deposit system shall be subject to
a final income tax at the rate of seven and one-half percent (71/2%) of such interest
income.
2.
Income derived under the expanded foreign currency deposit system

This refers to income derived by a depositary bank under the expanded foreign
currency deposit system from foreign currency transactions with local commercial banks
including branches of foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas to transact business with foreign currency deposit system units and other
depositary banks under the expanded foreign currency deposit system, including interest
income from foreign currency loans granted by such depositary banks under said
expanded foreign currency deposit system to residents.
A final income tax at the rate of ten percent (10%) is imposed on such income.
3.
4.
a.
b.
Over P100,000 10%
Intercorporate dividends
Dividends received by a resident foreign corporation from a domestic corporation
liable to tax under the NIRC shall not be subject to income tax.
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T AX ON NON-RESIDENT FOREIGN CORPORATION
Taxation of a non-resident foreign corporation, in general
Rates of tax, in general

1997
1998
1999
2000
35%
34%
33%
32%
However, the tax is imposed on gross income, not on taxable or net income.
Such gross income may include 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 from the sale of shares of stock not traded in the stock exchange.
Taxation of certain non-resident foreign corporations

1.
Non-resident cinematographic film owner, lessor or distributor 25% of gross income
2.
Non-resident owner or lessor of vessels chartered by Philippine nationals 4% of

gross rentals, lease or charter fees
3.
Non-resident owner or lessor of aircraft, machineries and other equipment 7% of

gross rentals or fees
Non-resident cinematographic film owner, lessor or distributor
A cinematographic film owner, lessor, or distributor shall pay a tax of twenty five
percent (25%) of its gross income from all sources within the Philippines.
Non-resident owner or lessor of vessels chartered by Philippine nationals
A non-resident owner or lessor of vessels shall be subject to a tax of four and one-half
percent (4% ) of gross rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Industry Authority.
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Non-resident owner or lessor of aircraft, machineries and other equipment
Rentals, charters and other fees derived by a non-resident lessor of aircraft, machineries
and other equipment shall be subject to a tax of seven and one-half percent (7%) of
gross rentals or fees.
Tax on certain incomes received by a non-resident foreign corporation

1.
Interest on foreign loans

A final withholding tax at the rate of twenty percent (20%) is hereby imposed on
the amount of interest on foreign loans contracted on or after 01 August 1986.
2.
Intercorporate dividends
A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on
the amount of cash and/or property dividends received by a non-resident foreign
corporation from a domestic corporation, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against the
tax due from the non-resident foreign corporation taxes deemed to have been paid in
the Philippines equivalent to thirty two percent (32%) in the year 2000.
This is the so-called tax sparing rule.
3.
a.
b.
Over P100,000 10%
Tax sparing rule
Involves intercorporate dividends received by a non-resident foreign corporation

from a domestic corporation
Only 15% final withholding tax on cash and/or property dividends is imposed
Provided the country in which the non-resident foreign corporation is domiciled shall
allow a credit against the tax due from the non-resident foreign corporation taxes
deemed to have been paid in the Philippines, which is 32% by 2000 [Sec. 28, (B) (5)
(b)]
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T AX ON IMPROPERLY A CCUMULATED EARNINGS

Imposition of the tax
In addition to the other income taxes, there is hereby imposed for each taxable year on
the improperly accumulated taxable income of each corporation an improperly
accumulated earnings tax equal to ten percent (10%) of the improperly accumulated
taxable income. [Section 29, NIRC]
Corporations subject to improperly accumulated earnings tax
The improperly accumulated earnings tax shall apply to every corporation formed or
availed for the purpose of avoiding the income tax with respect to shareholders or the
shareholders of any other corporation, by permitting earnings and profits to accumulate
instead of being divided or distributed.
Exceptions to improperly accumulated earnings tax
The improperly accumulated earnings tax shall not apply to:

1.
Publicly-held corporations
2.
Banks and other non-bank financial intermediaries
3.
Insurance companies
Evidence of purpose to avoid income tax
Prima Facie Evidence: 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.
Evidence Determinative of Purpose: 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 clear preponderance of evidence, shall prove to the contrary.
The term reasonable needs of the business includes the reasonably anticipated needs
of the business.
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Computation of improperly accumulated taxable income
Taxable income adjusted by:

1.
Income exempt from tax;
2.
Income excluded from gross income;
3.
Income subject to final tax; and
4.
Amount of net operating loss carry-over deducted;
And reduced by the sum of:

1.
Dividends actually or constructively paid; and
2.
Income tax paid for the taxable year.
Coverage
For corporations using the calendar basis, the accumulated earnings tax shall not apply
on improperly accumulated income as of 31 December 1997.
For corporations adopting the fiscal year accounting period, the improperly accumulated
income not subject to this tax shall be reckoned as of the end of the month comprising
the 12-month period of fiscal year 1997-1998.
EXEMPTION OF CERTAIN ORGANIZATIONS

Exemption from tax on corporations
The following organizations shall not be taxed in respect to income received by them as
such:
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,
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or a mutual aid association or a non-stock corporation organized by employees
providing for the payment of 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 corporation or association 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, organizers, 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 benefit of any private
stockholder or individual;
7.
Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
8.
A non-stock, 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, and fees collected from members for the sole purpose of
meetings 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 products finished by them. [Section 30, NIRC]
Income by exempted corporations which are not exempted
Notwithstanding the provisions in the preceding paragraphs, the income of whatever

kind and character of the foregoing organizations 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, shall be subject to tax imposed under this Code. [2nd pargraph,
Section 30, NIRC]
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Thus, the following income of the exempted organizations shall not be exempted:
1.
Income of whatever kind and character from any of their properties, real or
personal
2.
Income from any of their activities conducted for profit
See Commissioner v. CA re. YMCA case in General Principles of Taxation
Commissioner v. CA, CTA & Ateneo de Manila University, 271 SCRA 605
In conducting researches and studies of social organizations and cultural values thru its
IPC, is Ateneo performing the work of an independent contractor and thus taxable for the
contractors tax?
NO. An academic institution conducting researches pursuant to its commitments to
education and ultimately to public service cannot be considered as an independent contractor
when it accepts sponsorships for its research activities from international organizations, private
foundations and government agencies.
The research activity of the IPC is done in pursuance of maintaining Ateneo's university
status and not in the course of an independent business of selling such research with profit in
mind.
It is error to apply the principles of tax exemption without first applying the well-settled
doctrine of strict interpretation in the imposition of taxes it is obviously both illogical and
impractical to determine who are exempted without first determining who are covered by a
provision of the NIRC.
Hornbook doctrine in the interpretation of tax laws:
Statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication.
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GROSS INCOME
Gross income
Gross income means all income derived from whatever source, including (but not limited
to) the following items:
1.
Compensation for services in whatever form paid, including, but not limited to,
fees, salaries, wages, commissions, and similar items;
2.
Gross income derived from the conduct of trade or business or the exercise of a
profession;
3.
Gains derived from dealings in property;
4.
Interests;
5.
Rents;
6.
Royalties;
7.
Dividends;
8.
Annuities;
9.
Prizes and winnings;
10.
Pensions; and
11.
Partners distributive share from the net income of the general professional
partnership.
COMPENSATION FOR SERVICES

Compensation for services
This means all remuneration for services performed by an employee for his employer
under an employer-employee relationship.
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Compensation paid in kind
Compensation may be paid in money or in some medium other than money.
Living quarters or meals
If a person receives a salary as a remuneration for services rendered and, in addition

thereto, living quarters or meals are provided, the value to such person of the quarters
and meals so furnished shall be added to the remuneration paid for the purpose of
determining the amount of compensation subject to withholding.
However, if living quarters or meals are furnished to an employee for the convenience of
the employer, the value thereof need not be included as part of compensation income.
[Section 2.78.1, Revenue Regulations 2-98]
Facilities and privileges of a relatively small value
Facilities are not considered as compensation subject to withholding if such facilities or

privileges are of relatively small value and are offered or furnished by the employer
merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees. [Section 2.78.1, Revenue Regulations 2-98]
Tips and gratuities
Tips or gratuities paid directly to an employee by a customer of the employer which are
not accounted for by the employee to the employer are considered as taxable income
but not subject to withholding.
Fixed or variable transportation, representation and other allowances
In general, fixed or variable transportation, representation and other allowances which

are received by a public officer or employee or officer or employee of a private entity, in
addition to the regular compensation fixed for his position or office, is compensation
subject to withholding.
Any amount paid specifically, either as advancements or reimbursements, for traveling,

representation and other bona fide ordinary and necessary expenses incurred or
reasonably expected to be incurred by the employee in the performance of his duties
are not compensation subject to withholding, if the following conditions are satisfied:
1.
It is for ordinary and necessary traveling and representation or entertainment

expenses paid or incurred by the employee in the pursuit of the trade, business
or profession; and
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2.
The employee is required to account or liquidate for the foregoing expenses in

accordance with the specific requirements of substantiation for each category of
expenses. The excess of actual expenses over advances made shall constitute
taxable income if such amount is not returned to the employer.
Vacation and sick leave allowances
Amounts of vacation allowances or leave credits which are paid to an employee

constitutes compensation. Thus, the salary of an employee on vacation or on sick leave,
which are paid notwithstanding his absence from work constitutes compensation.
However, the monetized value of unutilized leave credits of ten (10) days or less which
were paid to the employee during the year are not subject to income tax.
IMPOSITION OF FRINGE BENEFIT T AX

Imposition of fringe benefit tax
A final tax of 32% effective 01 January 2000 is imposed on the grossed-up monetary
value of fringe benefit furnished or granted to the employee, except rank and file, by
the employer, whether an individual or a corporation.
The fringe benefit tax is paid by the employer.
Grossed-up monetary value is acquired by dividing the actual monetary value of the
fringe benefit by 68% effective 01 January 2000.
Fringe benefit
Fringe benefit means any good, service or other benefit furnished or granted in cash or
in kind by an employer to an individual employee, except rank and file employees, such
as, but not limited to, the following:
1.
Housing;
2.
Expense account;
3.
Vehicle of any kind;
4.
Household personnel, such as maid, driver and others;
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5.
Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
6.
Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
7.
Expenses for foreign travel;
8.
Holiday and vacation expenses;
9.
Educational assistance to the employee or his dependents; and
10.
Life or health insurance and other non-life insurance premiums or similar

amounts in excess of what the law allows.
Fringe benefits which are not subject to FBT

1.
Fringe benefits which are authorized and exempted from tax under special laws.
2.
Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans.
3.
Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not.
4.
De minimis benefits.
5.
Fringe benefit is required by the nature of, or necessary to the trade, business or
profession of the employer.
6.
It is for the convenience or advantage of the employer.
Convenience of the employer rule
Under this rule, allowances furnished to the employee for, and as a necessary incident
to, the performance of his duties are not taxable.
Thus, the value of meals and living quarters given to a driver who is available any hour
of the day when needed by his doctor-employer is not considered income of the said
driver.
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De minimis benefits
These are facilities or privileges furnished or offered by an employer to his employees

that are of relatively small value and are offered or furnished by the employer merely as
a means of promoting the health, goodwill, contentment, or efficiency of his employee.
GROSS INCOME FROM THE CONDUCT OF TRADE OR BUSINESS

Performance of the functions of a public office
The term trade or business includes the performance of the functions of a public office.
[Section 22(S), NIRC]
INTEREST INCOME
Sources of interest income
1.
interest on bank deposit/deposit substitutes/trust fund and similar arrangement
2.
interest from lending/interest income from bonds
3.
interest on uncollected salary
4.
interest on foreign bonds/government bonds
5.
interest on treasury bills
6.
interest earned from deposits maintained under the foreign currency deposit system
7.
interest income of pawnshop operators
Interest income earned by non-stock, non-profit educational institutions
Interest income shall be exempt only when used directly and exclusively for educational
purposes. To substantiate this claim, the institution must submit an annual information
return and duly audited financial statement. A certification of actual utilization and the
Board resolution on the proposed project to be funded out of the money deposited in
banks must also be submitted. [Department of Finance Order 149-95]
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RENTALS
Operating lease
An operating lease is a contract under which the asset is not wholly amortized during
the primary period of the lease, and where the lessor does not rely solely on the rentals
during the primary period for his profits, but looks for the recovery of the balance of his
costs and for the rests of his profits from the sale or re-lease of the returned assets at
the end of the primary lease period.
Finance lease
Also called full payout lease is a contract involving payment over an obligatory period
(also called primary or basic period) of specified rental amounts for the use of a lessors
property, sufficient in total to amortize the capital outlay of the lessor and to provide for
the lessors borrowing costs and profits.
Obligatory period is primary non-cancelable period of the lease which in no case shall be
less than 730 days.
Lessee exercises choice over the asset.
DIVIDEND INCOME
Dividends
Dividends means any distribution made by a corporation to its shareholders out of its
earnings on profits and payable to its shareholders, whether in money or in other
property.
Kinds of dividend income

1.
Cash dividend
2.
Stock dividend/stock rights
3.
Property dividend
4.
Liquidating dividend
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Stock dividend
A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax.
It shall be taxable only if subsequently cancelled and redeemed by the corporation.
It is also taxable if it leads to a substantial alteration in the proportion of tax ownership

in a corporation.
When redemption of stock dividends by a corporation is essentially equivalent to a

distribution of taxable dividends (CIR v. CA, et. al. , G.R. No. 108576 dated
1/20/99)
If the source of the redeemed shares is the original capital subscriptions upon
establishment of the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition would not be income
but a mere return of capital. On the other hand, if the redeemed shares are from stock
dividend declarations, the proceeds of the redemption is additional wealth, for it is not
merely a return of capital, and thus, deemed as taxable dividends.
Dividends paid in property
Dividends paid in securities or other property, in which the earnings of a corporation

have been invested, are income to the recipients to the amount of the full market value
of such property when receivable by individual stockholders.
A dividend paid in stock of another corporation is not a stock dividend, even though the
stock distributed was acquired through the transfer by the corporation declaring the
dividends of property to the corporation the stock of which is distributed as a dividend.
[Section 251, Revenue Regulations 2]
Liquidating dividend
Where a corporation distributes all its assets in complete liquidation or dissolution, the
gain realized or loss sustained by the stockholder, whether individual or corporation, is a
taxable income or deductible loss, as the case may be.
Disguised dividends
These are payments which are equivalent to dividend distribution.
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In the case of excessive payments by corporations, if such payments correspond or bear

a close relationship to stockholdings, and are found to be a distribution of earnings or
profits, the excessive payments will be treated as dividends. [Section 71, Revenue
Regulation 2]
EXCLUSION
Exclusion
Exclusion refers to income received or earned but is not taxable as income because it is
exempted by law or by treaty. Such tax-free income is not to be included in the income
tax return unless information regarding it is specifically called for.
Exclusions from gross income

1.
Proceeds from 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, etc.
7.
Income derived by foreign government
8.
Income derived by the Philippine Government or its political subdivisions
9.
Prizes and awards made primarily in recognition of religious, charitable, scientific,

educational, artistic, literary or civic achievement
10.
Prizes and awards in sports competitions sanctioned by the national sports associations
11.
13th month pay and other benefits not exceeding P30,000.00
12.
GSIS, SSS, Medicare and other contributions
13.
Gains from the sale of bonds, debentures or other certificate of indebtedness
14.
Gains from redemption of shares in mutual fund
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Retirement benefits, pensions, gratuities, etc.
Such exclusions include:

1.
Retirement benefits under RA No. 7641 or a reasonable private benefit plan
2.
Amount received by an official or employee or by his heirs from the employer

due to separation from the service because of death, sickness or other physical
disability or for any cause beyond the control of the official or employee
3.
Social security benefits, retirement gratuities, pensions and other similar benefits
received by resident or non-resident citizens or resident aliens from foreign
government agencies and other institutions, private or public
4.
Payment of benefits to a resident person under the United States Veterans

Administration
5.
Benefits received from or enjoyed under the Social Security System
6.
Benefits received from the Government Service Insurance System, including

retirement gratuity received by government officials and employees
Requisites for exclusion of retirement benefits

1.
It must be received under RA 7641 or in accordance with a reasonable private benefit

plan maintained by the employer.
2.
Retiring employee or official has been in the service of the same employer for at least
ten (10) years and is not less than fifty (50) years of age at the time of his retirement.
3.
Benefits granted under the provision shall be availed of by an official or employee only
once.
Reasonable private benefit plan
It 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, 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.
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Separation pay and amounts received due to involuntary separation
Any amount received by an official or employee or by his heirs from the employer due to
death, sickness or other physical disability or for any cause beyond the control of the
said official or employee is excluded from gross income.
Cause beyond the control of the employee
The phrase for any cause beyond the control of the said official or employee connotes
involuntariness on the part of the official or employee. The separation from the service
of the official or employee must not be asked for or initiated by him. [Section 2.78.1,
Revenue Regulation 2-98] The separation was not of his own making.
Terminal leave pay
Commutation of leave credits or terminal leave pay are given not only at the same time
but also for the same policy considerations governing retirement benefits. Thus, not
being part of the gross salary or income but a retirement benefit, terminal pay is not
subject to income tax. [Commissioner v. Court of Appeals, 203 SCRA 72]
Terminal leave pay is exempt from income tax. [Zialcita case, 190 SCRA 851]
Income derived by a foreign government
Income derived from investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the Philippines by:
1.
foreign governments;
2.
financing institutions owned, controlled, or enjoying refinancing from foreign

governments; and
3.
international or regional financial institutions established by foreign governments.
Income by the Philippine government

1.
Income derived from any public utility or from the exercise of any essential
governmental function
2.
Accruing to the Government or to any political subdivision thereof.
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Prizes and awards in recognition of religious, charitable, scientific, educational,
artistic, literary or civic achievement
1.
Made primarily in recognition of religious, charitable, scientific, educational, artistic,

literary or civic achievement.
2.
The recipient was selected without any action on his part to enter the contest or
proceeding.
3.
The recipient is not required to render substantial future services as a condition to

receiving the prize or award.
Prizes and awards in sports competitions

1.
Prizes and awards must be granted to athletes in local and international sports
competitions and tournaments.
2.
Sports competition or tournament held either in the Philippines or abroad.
3.
Sports competition or tournament must be sanctioned by their natural sports

associations.
DEDUCTIONS
IN GENERAL
Deductions
Deductions are items or amounts which the law allows to be deducted under certain
conditions from gross income in order to arrive at taxable income.
Deduction v. exemption
Deduction is an amount allowed by law to be subtracted from gross income to arrive at

taxable income. Exemption from taxation is the grant of immunity to particular persons
or corporations or to persons or corporations of a particular class from a tax which
others generally within the same taxing district are obliged to pay.
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Deduction v. exclusion
Deduction is an amount allowed by law to be subtracted from gross income to arrive at

taxable income. Exclusion refers to income received or earned but is not taxable as
income because exempted by law or by treaty. Such tax-free income is not to be
included in the income tax return unless information regarding it is specifically called for.
[Section 61, Revenue Regulation 2]
Basic principles governing deductions

1.
The taxpayer seeking a deduction must point to some specific provisions of the statute
authorizing the deduction; and
2.
He must be able to prove that he is entitled to the deduction authorized or allowed.
Kinds of deductions
1.
Itemized deduction which is available to individual and corporate taxpayers
2.
Optional standard deduction which is available to individual taxpayers only, except a

non-resident alien
3.
Special deductions which is available, in addition to the itemized deductions, to certain

corporations, i.e. insurance companies and proprietary educational corporations
Time within which to claim deduction

1.
As a rule, if a taxpayer does not, within any year, deduct certain of his expenses, losses,
interests, taxes, or other charges, he cannot deduct them from the income of the next
or any succeeding year.
2.
If he keeps his books on the cash receipts basis, the expenses are deductible in the year
they are paid.
3.
If on the accrual basis, then in the year they are incurred, whether paid or not.
Who may not avail of deductions from gross income?

1.
Citizens and resident aliens whose income is purely compensation income.

They are allowed personal and additional exemptions and deduction for premium
payments on health and hospitalization insurance.
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2.
Non-resident aliens not engaged in trade or business in the Philippines
3.
Non-resident foreign corporations
Deductions from gross income

1.
Expenses
2.
Interest
3.
Taxes
4.
Losses
5.
Bad debts
6.
Depreciation
7.
Depletion of oil and gas wells and mines
8.
Charitable and other contributions
9.
Research and development
10.
Pension trusts
11.
Premium payments on health and/or hospitalization insurance of an individual taxpayer
Some rules on deduction
A corporation may avail only of the deductions from (1) to (10); premium payments on
health and/or hospitalization insurance is deductible only by an individual taxpayer.
A corporation may avail only of the itemized deductions; an individual, except a nonresident alien, may elect the itemized deductions or the optional standard deduction.
Thus, the optional standard deduction is not available to corporations.
An individual earning purely compensation income is not allowed itemized deductions,

except premium payments on health and/or hospitalization insurance. In addition, he is
also granted personal and additional exemptions.
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An individual, who earns income other than purely compensation income, is allowed
personal and additional exemptions in addition to the itemized deductions or the
optional standard deduction.
Two kinds of deduction available to individuals, except a non-resident alien

1.
Itemized deductions
2.
Optional standard deduction
Note: Optional standard deduction is not available to corporations.
ORDINARY AND NECESSARY BUSINESS EXPENSES

Business expense v. capital expenses
Business expenses refer to all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on or which are directly attributable to the
development, management, operation and/or conduct of the trade, business or the
exercise of a profession.
Capital expenses are expenditures for extraordinary repairs which are capitalized and
subject to depreciation. These are expenses which tend to increase the value or prolong
the life of the taxpayers property.
Ordinary and necessary expenses
An expense is ordinary when it is commonly incurred in the trade or business of the

taxpayer as distinguished from capital expenditures. The payments, however, need not
be normal or habitual in the sense that the taxpayer will have to make them often. The
payment may be unique or non-recurring to the particular taxpayer affected.
An expense is necessary when it is appropriate and helpful to the taxpayers business or

if it is intended to realize a profit or to minimize a loss.
Requisites for deductibility of business expense

1.
The expenses must be ordinary and necessary.
2.
It must be paid or incurred during the taxable year.
3.
It must be paid or incurred in carrying on any trade or business or profession.
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4.
It must be reasonable in amount.
5.
It must be substantiated by sufficient evidence such as official receipts and other official
records.
6.
It must not be against law, morals, public policy or public order.
Substantiation requirement for business expense
Taxpayer need to substantiate with sufficient evidence, such as official receipts or other
adequate records:
1.
the amount of the expense being deducted; and
2.
the direct connection or relation of the expense being deducted to the

development, management, operation and/or conduct of the trade, business or
profession of the taxpayer.
What are included in business expenses?
Business expenses include:

1.
Salaries, wages and other forms of compensation for personal services actually
rendered, including the grossed-up monetary value of fringe benefit granted
provided the fringe benefit tax has been paid.
2.
Travel expenses, here and abroad, while away from home.
3.
Rentals and/or other payments of property to which the taxpayer has not taken
or is not taking title or in which he has no equity other than that of a lessee, user
or possessor.
4.
Entertainment, amusement and recreation expenses.
Requisites for deductibility of compensation payments

1.
The payments are reasonable.
2.
They are, in fact, payments for personal services actually rendered. [Section 70,
Revenue Regulation 2]
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Treatment of excessive compensation
In the case of excessive payments by corporations, if such payments correspond or bear

a close relationship to stockholdings, and are found to be distribution of earnings or
profits, the excessive payments will be treated as dividends. [Section 71, Revenue
Regulations 2]
If such payments constitute payment for property, they should be treated by the payor
as capital expenditure and by the recipient as part of the purchase price. [Section 71,
Revenue Regulations 2]
Requisites for deductibility of bonuses to employees

1.
The bonuses are made in good faith.
2.
They are given for personal services actually rendered.
3.
They do not exceed a reasonable compensation for the services rendered, when added
to the stipulated salaries, measured by the amount and quality of services performed in
relation to the taxpayers business. [Section 72, Revenue Regulations 2]
In Kuenzle v. CIR [28 SCRA 365] and C.M. Hoskins v. CIR [30 SCRA 434], the
Supreme Court disallowed deductions for bonuses given to the top officers of the
involved corporations for being unreasonable.
Pensions and compensation for injuries
Amounts paid for pensions to retired employees or to their families or others dependent
upon them, or on account of injuries received by the employee, and lump sum amounts
paid or accrued as compensation for injuries are proper deductions as ordinary and
necessary expenses. Such deductions are limited to the amount not compensated for by
insurance or otherwise.
Rules on repairs
Expenses for repairs are deductible if such repairs are incidental or ordinary, that is,
made to keep the property used in the trade or business of the taxpayer in an ordinarily
efficient operating condition.
Repairs in the nature of replacement to the extent that they arrest deterioration and
prolong the life of the property are capital expenditures and should be debited against
the corresponding allowance for depreciation. [Section 68, Revenue Regulations 2]
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Travel expenses
Travel expenses include transportation expenses and meals and lodging of an employee
paid for by the employer. [Section 66, Revenue Regulations 2]
Requisites for deductibility of travel expenses

1.
The expenses must be reasonable and necessary.
2.
They must be incurred or paid while away from home.
3.
They must be paid or incurred in the conduct of trade or business.
Tax home
Tax home is the principal place of business, when referring to away from home.
Rental expense
A reasonable allowance for rentals and/or other payments which are required as a
condition for the continued use or possession, for purposes of the trade, business or
property to which the taxpayer has not taken or is not taking title or in which he has no
equity other than that of a lessee, user or possessor is deductible from the gross
income.
Where a leasehold is acquired for business purposes for a specified sum, the purchaser
may take as a deduction in his return an adequate part of such sum each year, based on
the number of years the lease has to run.
Taxes paid by a tenant to or for a landlord for business property are additional rent and
constitute a deductible rent to the tenant and taxable income to the landlord; the
amount of tax being deductible by the latter.
The cost borne by the lessee in erecting buildings or making permanent improvements
on ground of which he is a lessee is held to be a capital inv estment and not deductible
as a business expense.
Requisites for rental expense

1.
Required as a condition for continued use or possession
2.
For purposes of the trade, business or profession
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3.
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
Entertainment, amusement and recreation expense

1.
Reasonable in amount
2.
Incurred during the taxable period
3.
Directly connected to the development, management, and operation of the trade,

business, or profession of the taxpayer, or that are directly related to or in furtherance
of the conduct of his or its trade, business or profession
4.
Not to exceed such ceiling as the Secretary of Finance may, by rules and regulations,
prescribe
5.
Any expense incurred for entertainment, amusement or recreation which is contrary to

law, morals, public policy, or public order shall in no case be allowed as a deduction
Option to private educational institutions
In addition to the allowable deductions, a private educational institution may, at its

option, elect either:
1.
To deduct expenditures otherwise considered as capital outlays of depreciable

assets incurred during the taxable year for the expansion of school facilities; or
2.
To deduct allowance for depreciation thereof.
Treatment of other expenses

1.
Advertising expense
Not deductible business expense. Efforts to establish reputation are akin to
acquisition of capital assets and, therefore, expenses related thereto are not business
expense but capital expenditures.
2.
Promotional expenses
Same as advertising expense
3.
Litigation expenses
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Litigation expenses that are incurred in the defense or protection of title are
capital in nature and not deductible.
In Gutierrez v. CIR [14 SCRA 34], it was held that litigation expenses defrayed
by a taxpayer to collect apartment rentals and to eject delinquent tenants are ordinary
and necessary expenses in pursuing his business.
INTEREST EXPENSE
Interest
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.
Back-to-back interest
The taxpayers allowable deduction for interest expense shall be reduced by an amount
equal to 38% by 01 January 2000 of the interest income earned by him which has been
subjected to a final tax.
Interest which cannot be deducted

1.
Interest is paid in advance through discount or otherwise by an individual taxpayer

reporting income on the cash basis. Such interest shall be allowed as a deduction in the
year the indebtedness is paid.
2.
Interest between related taxpayers.
3.
If the indebtedness is incurred to finance petroleum exploration.
Requisites for deductibility of interest expense

1.
There must be an indebtedness incurred by the taxpayer in connection with the

taxpayers trade, business or profession.
2.
The interest must have been paid or incurred within the taxable year.
3.
The interest must have been stipulated in writing.
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Optional treatment of interest expense
At the option of the taxpayer, interest incurred to acquire property used in trade,
business or exercise of a profession may be allowed as a deduction or treated as a
capital expenditure.
Delinquency interest on tax payment deductible
For interest to be allowed as deduction from gross income, it must be shown that there
be an indebtedness, that there should be interest upon it, and that what is claimed as
an interest deduction should have been paid or accrued within the year. The term
indebtedness has been defined as an unconditional and legally enforceable obligation
for the payment of money. Within the meaning of that definition, a tax may be
considered as an indebtedness. Hence, interest paid for late payment of the donors tax
is deductible from gross income. [ Commissioner v. Prieto, 109 Phil 592]
T AXES
What taxes are deductible?
As a general rule, all taxes, national or local, paid or incurred with the taxable year in
connection with the taxpayers trade, business or profession are deductible from gross
income.
Taxes means taxes proper and, therefore, no deductions are allowed for amounts
representing interest, surcharges and fines or penalties incident to delinquency.
What taxes are not deductible from gross income?

1.
Philippine income tax
2.
Income taxes imposed by the authority of any foreign country but deduction is allowed
only in the case of a taxpayer who is entitled to tax credit for taxes of foreign countries
but does not avail of the same
3.
Estate and donors taxes
4.
Special assessments or levies assessed against local benefits of a kind tending to

increase the value of the property assessed
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Tax subsequently refunded or credited
Taxes previously 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.
Limitations on deductions for non-resident alien engaged in trade or business and

resident foreign corporation
In the case of a non-resident alien individual engaged in trade or business in the

Philippines and a resident foreign corporation, deductions for taxes shall be allowed only
if and to the extent that they are connected with income from sources within the
Philippines.
Tax credit
Tax credit refers to the taxpayers right to deduct from the income tax due the amount
of tax he has paid to a foreign country subject to limitations.
Tax deduction v. tax credit
In the former, the taxes are deducted from the gross income in computing the net
income, while in the latter, the taxes are deducted from Philippine income tax itself.
In the former, all taxes as a general rule, are allowed as deductions with some
exemptions (enumerated above), while in the latter, only foreign income taxes may be
claimed as credits against Philippine income tax.
Proof of credits
The credits shall be allowed only if the taxpayer establishes to the satisfaction of the
Commissioner the following:
1.
The total amount of income from sources without the Philippines;
2.
The amount of income derived from each country, the tax paid or incurred to
which is claimed as a credit; and
3.
All other information necessary for the verification and computation of such
credits.
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Credit against tax for taxes of foreign countries
Credit may be claimed by a citizen, domestic corporation, members of general

professional partnerships, and beneficiaries of estates and trusts.
An alien individual and a foreign corporation are not allowed to claim credits agains t the
tax for taxes of foreign countries.
Limitations on credit
The amount of the credit taken shall be subject to each of the following limitations:
1.
The amount of the credit in respect to the tax paid or incurred to any country shall not
exceed the same proportion of the tax against which such credit is taken, which the
taxpayers taxable income from sources within such country bears to his entire taxable
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 taxable income from sources without
the Philippines taxable under this Title bears to his entire taxable income for the same
taxable year.
LOSSES
Losses
The term implies an unintentional parting with something of value.
It is used in the income tax law in a very broad sense to comprehend all losses which
are not general or natural to the ordinary course of business.
Requisites for deductibility of loss

1.
The loss must be incurred in the trade, business or profession of the taxpayer.
2.
It must be actually sustained and charged off within the taxable year.
3.
It must be evidenced by a closed and completed transaction.
4.
It must not be compensated for by insurance or other forms of indemnity.
5.
If it is a casualty loss, the taxpayer has filed a sworn declaration of loss within 45 days
after the date of the discovery of the casualty or robbery, theft, or embezzlement.
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Some recognized losses

1.
Ordinary losses/business losses
2.
Casualty losses
3.
Capital losses
4.
Securities becoming worthless
5.
Losses from wash sales or stock or securities
6.
Wagering losses
7.
Abandonment losses
Note: Capital losses and securities becoming worthless are governed by rules on loss from the
sale or exchange of capital assets.
Casualty loss
Loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.
Loss limitation rule for capital losses
Losses from sales or exchanges of capital assets shall be allowed only to the extent of
the gains from such sales or exchanges.
Securities becoming worthless

1.
Securities become worthless during the taxable year
2.
Securities are capital assets
3.
Losses are considered as losses from the sale or exchange, on the last day of such
taxable year, of capital assets
Net operating loss
It means the excess of allowable deduction over gross income of the business in a
taxable year.
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Net operating loss carry-over (NOLCO)
NOLCO shall be carried over as a deduction from the gross income for the next three (3)
consecutive taxable years immediately following the year of loss.
Such loss shall be allowed as a deduction if it had not been previously offset as
deduction from gross income.
However, any net loss incurred in a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction.
NOLCO shall be allowed only if there has been no substantial change in the ownership of
the business or enterprise.
There is no substantial change when:

1.
Not less than 75% in nominal value of outstanding issued shares, if the business
is in the name of a corporation, is held by or on behalf of the same persons; or
2.
Not less than 75% of the paid up capital of the corporation, if the business is in
the name of a corporation, is held by or on behalf of the same persons.
Losses from wash sales of stock or securities
No deduction for loss shall be allowed for wash sales unless the claim is made by a
dealer in stock or securities and with respect to a transaction made in the ordinary
course of the business of such dealer.
Wash sale
A wash sale occurs where it appears that within a period beginning thirty (30) days
before the date of the sale or disposition of shares of stock or securities and ending
thirty (30) days after such date, the taxpayer has acquired (by purchase or exchange) or
has entered into a contract or option to so acquire, substantially identical stock or
securities.
Wagering losses
Losses from wagering shall be allowed only to the extent of gains from such
transactions.
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Abandonment losses
In the event a contract area where petroleum operations are undertaken is partially or
wholly abandoned, all accumulated exploration and development expenditures
pertaining thereto shall be allowed as a deduction.
In case a producing well is subsequently abandoned, the unamortized costs thereof, as

well as the undepreciated costs of equipment directly used therein, shall be allowed as a
deduction in the year such well, equipment or facilitiy is abandoned by the contractor.
BAD DEBTS
Bad Debts
Bad debts are debts due to the taxpayer which are actually ascertained to be worthless
and charged off within the taxable year.
Requisites for deductibility of bad debts

1.
There must be a valid and subsisting debt.
2.
The debt must be actually ascertained to be worthless and uncollectible during the
taxable year.
3.
The debt must be charged off during the taxable year.
4.
The debt must be connected with the trade, business or profession of the taxpayer, and
not sustained in a transaction entered into between related taxpayers.
Diligent efforts to collect
In addition to the four requisites, the taxpayer must show that the debt is indeed
uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he
exerted diligent efforts to collect the debts, via: a) sending of statement of accounts; b)
sending of collection letters; c) giving the account to a lawyer for collection; and d) filing
a collection case in court. [ Philippine Refining Co. v. Court of Appeals , 256 SCRA
667]
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Equitable doctrine of tax benefit
This doctrine holds that a recovery of bad debt previously deducted from gross income
constitutes taxable income if in the year the account was written off, the deduction
resulted in a tax benefit, that is, in the reduction of taxable income of the taxpayer.
DEPRECIATION
Depreciation
Depreciation is the gradual diminution in the useful value of tangible property used in
trade, business or profession resulting form exhaustion, wear and tear, and
obsolescence.
The term is also applied to amortization of the value of intangible assets, the use of
which in trade or business is definitely limited in duration.
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above the cost cannot be claimed and
allowed. [Basilan v. CIR, 21 SCRA 17]
Depreciation is a question of fact
Depreciation is a question of fact and is not measured by theoretical yardstick, but

should be determined by a consideration of actual facts. [ Limpan v. CIR, 17 SCRA 703]
Requisites for deductibility of depreciation

1.
The allowance for depreciation must be reasonable.
2.
It must be for property used in the trade, business or profession.
3.
It must be charged off during the taxable year.
4.
A statement on the allowance must be attached to the return.
Deduction for obsolescence
If the whole or any portion of physical property is clearly shown by the taxpayer as
being affected by economic conditions that will result in its being abandoned at a future
date prior to the end of its natural life, so that depreciation deductions alone would be
insufficient to return the cost at the end of its economic terms of usefulness, a
reasonable deduction for obsolescence, in addition to depreciation, may be allowed.
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Property held for life
In the case of property held by one person for life with remainder to another person,
the deduction shall be computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant.
In case of property held in trust
Allowable deductions shall be apportioned between the income beneficiaries and the
trustees in accordance with the pertinent provisions of the instrument creating the trust,
or in the absence of such provisions, on the basis of the trust income allowable to each.
Certain methods in computing depreciation

1.
The straight line method
2.
Declining balance method
3.
Sum-of-the-year-digit method.
4.
Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner.
Agreement as to useful life on which depreciation rate is based
Where the taxpayer and the Commissioner have entered into an agreement in writing
specifically dealing with the useful life and rate of depreciation of any property, the rate
so agreed upon shall be binding on both the taxpayer and the National Government in
the absence of facts and circumstances not taken into consideration during the adoption
of such agreement. The responsibility of establishing the existence of such facts and
circumstances shall rest with the party initiating the modification.
Where the taxpayer has adopted such useful life and depreciation rate for any
depreciable asset and claimed the depreciation expenses as deduction from his gross
income without any written objection on the part of the Commissioner or his duly
authorized representative, the aforesaid useful life and depreciation rate so adopted by
the taxpayer shall be considered binding.
Depreciation of patent or copyright
In computing a depreciation allowance in the case of a patent or copyright, the capital

sum to be replaced is the cost or other basis of the patent or copyright.
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The allowance should be computed by an apportionment of the cost or other basis of

the patent or copyright over the life of the patent or copyright since its grant, or since
its acquisition by the taxpayer, or since March 1, 1913, as the case may be.
DEPLETION OF OIL AND GAS WELLS AND MINES

Depletion of Oil and Gas Wells and Mines
Depletion is the exhaustion of natural resources like mines and oil and gas wells as a
result of production or severance from such mines or wells.
Determination of amount of depletion cost
In determining the amount of depletion cost allowable, the following three factors are
essential, namely:
1.
the basis of the property;
2.
the estimated total recoverable units in the property; and
3.
the number of units recovered during the taxable year in question.

[Consolidated Mines v. CTA, 58 SCRA 618]
Basis means the amount of the taxpayers capital or investment in the property which he
is entitled to recover tax-free during the period he is removing the mineral in the
deposit.
Intangible cost in petroleum operations
This refers to any cost incurred in petroleum operations which in itself has no salvage
value and which is incidental to and necessary for the drilling of wells and preparation of
wells for the production of petroleum.
Depletion v. depreciation
Both are predicated on the same basic premise of avoiding a tax on capital.
However, depletion is based upon the concept of the exhaustion of a natural resource
whereas depreciation is based upon the concept of the exhaustion of the property, not
otherwise a natural resource, used in a trade or business or held for the production of
income. Thus, depletion and depreciation are made applicable to different types of
assets.
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CHARITABLE AND OTHER CONTRIBUTIONS

Kinds of Charitable Contributions
1.
Ordinary or those which are subject to limitations as to the amount deductible from
gross income.
2.
Special or those which are deductible in full from gross income.
Requisite for deductibility of charitable contributions

1.
The contribution must actually be paid or made to the Philippine government or any
political subdivision thereof or to any of the domestic corporations or associations
specified by the NIRC.
2.
No part of the net income of the beneficiary must inure to the benefit of any private
stockholder or individual.
3.
It must be made within the taxable year.
4.
It must not exceed 10% in the case of an individual and 5% in the case of a corporation
of the taxpayers taxable income (except where the donation is deductible in full) to be
determined without the benefit of the contribution.
5.
It must be evidenced by adequate records or receipts.
Contributions deductible in full

1.
Donations to the Philippine government or to any of its political subdivisions according to

a national priority plan determined by NEDA.
2.
Donations to foreign institutions or international organizations which are fully deductible

in pursuance of or in compliance with agreements, treaties or commitments entered into
by the Philippines or in pursuance of special laws.
3.
Donation to accredited non-governmental organization.
Non-government organization
It means a non-profit domestic corporation:
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1.
Organized and operated exclusively for scientific, research, educational,

character-building and youth and sports development, health, social welfare,
cultural or charitable purposes, or a combination thereof, no part of the net
income of which inures to the benefit of any private individual.
2.
Utilizes the contribution directly for the active conduct of the activities
constituting the purpose or function for which it is organized and operated not
later than the 15th day of the their month after the close of the accredited NGOs
taxable year in which the contribution were received.
3.
Administrative expense shall, in no case, exceed thirty percent (30%) of the total
expenses.
4.
The assets, in the event of dissolution, would be distributed to another non-profit

domestic corporation organized for similar purpose, or to the State for public
purpose, or would be distributed by a court to another organization.
Utilization
Utilization means:
1.
Any amount in cash or kind (including administrative expenses) paid or utilized to

accomplish one or more purposes for which the accredited non-governmental
organization was created or organized.
2.
Any amount paid to acquire an asset used (or held for use) directly in carrying out one
or more purposes for which the accredited non-governmental organization was created
or organized.
Proof of deductions
Contributions or gifts shall be allowable as deductions only if verified under the rules and
regulations prescribed by the Secretary of Finance.
RESEARCH AND DEVELOPMENT

Research and development
A taxpayer may treat research or development expenditures which are paid or incurred
by him during the taxable year in connection with his trade, business or profession as
ordinary and necessary expenses which are not chargeable to capital account. The
expenditures so treated shall be allowed as deduction during the taxable year when paid
or incurred.
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Amortization of certain research and development expenditures
Taxpayer may also elect to treat the following research and development expenditures
as deferred expenses:
1.
Paid or incurred by the taxpayer in connection with his trade, business or

profession;
2.
Not treated as expenses; and
3.
Chargeable to capital account but not chargeable to property of a character

which is subject to depreciation or depletion.
Research and development expenses deductions shall not apply to:

1.
Any expenditure for the acquisition or improvement of land, or for the improvement of
property to be used in connection with research and development of a character which
is subject to depreciation or 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.
P ENSION T RUSTS
Requisites for deductibility of payments to pension trusts
1.
The employer must have established a pension or retirement plan to provide for the
payment of reasonable pensions to his employees.
2.
The pension plan is reasonable and actuarially sound.
3.
It must be funded by the employer.
4.
The amount contributed must no longer be subject to the control or disposition of the
employer.
5.
The payment has not yet been allowed as a deduction.
6.
The deduction is apportioned in equal parts over a period of ten (10) consecutive years
beginning with the year in which the transfer or payment is made.
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A DDITIONAL REQUIREMENT FOR DEDUCTIBILITY OF CERTAIN PAYMENTS
Additional requirement for deductibility of certain payments
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 a deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the Bureau of Internal Revenue.
Limitations or ceilings on itemized deductions
The Secretary of Finance may prescribe limitations or ceilings for any of the itemized
deductions from (1) to (10). This can be done through rules and regulations issued by
the Secretary upon the recommendation of the Commissioner and after a public hearing
has been held for such purpose.
The Secretary shall, for purposes of determining such ceilings or limitations, consider the
following factors:
1.
Adequacy of the prescribed limits on the actual expenditure requirements of each

particular industry; and
2.
Effects of inflation on expenditure levels.
OPTIONAL STANDARD DEDUCTION

Optional Standard Deduction
An individual subject to tax, other than a non-resident alien, may elect a standard
deduction in an amount not exceeding ten percent (10%) of his gross income in lieu
of itemized deductions.
Unless the taxpayer signifies in his return his intention to elect the optional standard
deduction, he shall be considered as having availed himself of the itemized deductions.
Such election when made in the return shall be irrevocable for the taxable year for
which the return is made.
An individual who is entitled to and claimed for the optional standard deduction shall not
be required to submit with his tax return such financial statements otherwise required in
the NIRC.
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DEDUCTIONS ALLOWED ONLY TO INDIVIDUAL TAXPAYERS

Deductions allowed only to individual taxpayers
1.
Personal exemption
2.
Additional exception
3.
Premium payments on health and/or hospitalization insurance
Personal exemptions
Personal exemptions are arbitrary amounts allowed, in the nature of a deduction from
taxable income, for personal, living or family expenses of an individual taxpayer. They
are considered to be the equivalent of the minimum of subsistence of the taxpayer.
Who are allowed personal exceptions?

1.
Citizens
2.
Resident aliens
3.
Non-resident aliens engaged in trade or business in the Philippines under certain

conditions
4.
Estates and trusts, which are treated for purposes of personal exemptions, as a single
individual
Amount of personal exemptions allowed to citizens and resident aliens
P20,000
single person or a married person judicially decreed as legally

separated from his or her spouse with no qualified dependents
P25,000
head of a family
P32,000
married person
Note: Only the spouse deriving taxable income can claim the P32,000 personal exemption; if
both have taxable income, each can claim P32,000 exemption.
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Head of the family
It means an unmarried or legally separated man or woman with one or both parents, or
with one or more brothers or sisters, or with one or more legitimate, recognized natural
or legally adopted children living with and dependent upon him or her for their chief
support.
Such brothers or sisters or children should be not more than 21 years old, unmarried
and not gainfully employed, or where such children, brothers or sisters, regardless of
age, are incapable of self-support because of mental or physical defect.
A head of family is an individual who actually supports and maintains in one household
one or more individuals, who are closely connected with him by blood relationship,
relationship by marriage, or by adoption, and whose right to exercise family control and
provide for these dependent individuals is based upon some moral or legal obligation.
Note: Consider discrepancy between definition of head of family and dependent i.e.
children.
To be a head of a family, one or more legitimate, recognized natural, or
legally adopted children must live with and depend on an unmarried or legally
separated man or woman.
A dependent, on the other hand, may be a legitimate, illegitimate or legally
adopted child.
Both, however, define or qualify different terms.
Living with
The term living with the person giving support does not necessarily mean actual and
physical dwelling together at all times and under all circumstances.
Family
The term family includes an unmarried or legally separated person with:

1.
one or both parents;
2.
one or more brothers or sisters; or
3.
one or more legitimate, recognized natural, or legally adopted children living with
and dependent upon him or her for their chief support.
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Additional exemption
A married person or a head of a family may claim an additional exemption of P8,000 for
each dependent, not exceeding four (4).
The additional exemption shall be claimed by only one of the spouses in the case of
married individuals.
In the case of legally separated spouses, it may be claimed only by the spouse who has
custody of the child or children.
Dependent
Refers only to the legitimate, illegitimate or legally adopted child of the taxpayer
The child is:

1.
living with the taxpayer;
2.
chiefly dependent upon the taxpayer for support;
3.
not more than 21 years of age;
4.
not married; and
5.
not gainfully employed or, even though over 21 years old, incapable of self
support because of mental or physical defect.
Change of status
Taxpayer marries or have additional dependents
Taxpayer dies during the taxable year
If the spouse or any of the dependents dies or if any of such dependent marries,
becomes 21 years old, or becomes gainfully employed
Note: As a general rule, interpret in favor of taxpayer
Personal exemptions to non-resident alien individual
Non-resident alien individual engaged in trade or business
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Entitled only to personal exemption
Amount allowed is limited to exemptions granted to Filipino citizens who are not
residents in the aliens domicile country but not to exceed the amount allowed to
citizens or residents of the Philippines in the NIRC.
Premium payment on health and/or hospitalization insurance of an individual

taxpayer
Premium payments should not exceed P2,400 per family or P200 a month for a taxable
year
Family has a gross income of not more than P250,000 for the taxable year
In the case of married taxpayers, only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
ITEMS NOT DEDUCTIBLE

Items not deductible
1.
Personal, living or family expenses
2.
Capital expenditures
a.
Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate
b.
Any amount expended in restoring property or in making good the exhaustion

thereof for which an allowance is or has been made
3.
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, individually or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy [Section 36, NIRC]
4.
Losses between related taxpayers.
5.
Losses on wash sales
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6.
Illegal expense i.e. bribes, kickbacks, and other similar payments [Section 34(A)(1)(c),
NIRC]
Capital expenditures
1.
Any amount paid out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate
2.
Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made
3.
Cost of defending or perfecting title to property constitutes a part of the cost of the
property and is not a deductible expense
4.
The amount expended for architects services is part of the cost of the building
5.
Expenses of the administration of an estate such as court costs, attorneys fees, and
executors commissions are chargeable against the corpus of the estate and are not
allowable deductions
6.
In case of a corporation, expenses for organization, such as incorporation fees,

attorneys fees and accountants charges are ordinarily capital expenditures, but where
such expenditures are limited to purely incidental expenses, a taxpayer may charge such
items against income in the year in which they are incurred. [Section 120, Revenue
Regulations 2]
Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows
General rule: The cost of life or health insurance and other non-life insurance
premiums borne by the employer for his employee shall be treated as taxable fringe
benefit.
Exceptions
1.
Contribution of the employer for the benefit of the employee pursuant to the
provisions of existing law, i.e. SSS, GSIS, among others.
2.
The cost of premiums borne by the employer for the group insurance of his
employees. [Revenue Regulations 3-98]
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Related taxpayers
1.
Between members of a family (which shall include only his brothers and sisters, spouse,
ancestors and lineal descendants)
2.
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 except in the
case of distributions in liquidation
3.
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
4.
Between the grantor and the fiduciary of a trust
5.
Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust
6.
Between the fiduciary of a trust and a beneficiary of such trust [Section 36(B), NIRC]
Relevant points regarding related taxpayers

1.
Payment of interest is not deductible.
2.
Bad debts are not deductible.
3.
Losses from sales or exchanges of property are not deductible.
CAPITAL GAINS AND LOSSES

Ordinary asset
1.
Stock in trade of the taxpayer or other 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.
2.
Property held by the taxpayer primarily for sale to customers in the ordinary course of
his trade or business.
3.
Property used in the trade or business, of a character which is subject to the allowance
for depreciation.
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4.
Real property used in the trade or business of the taxpayer.
Capital asset
Property held by the taxpayer, whether or not connected with his trade or business,
which is not an ordinary asset.
Ordinary gain or income
Ordinary income or gain includes any gain from the sale or exchange of property which
is not a capital asset.
Capital gain or income
Capital gain or income is any gain from the sale or exchange of a capital asset.
Net capital gain
Net capital gain means the excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges.
Net capital loss
Net capital loss means the excess of the losses from sales or exchanges of capital assets
over the gains from such sales or exchanges.
Three rules on the recognition of capital gains and losses

1.
Holding rule
2.
Loss limitation rule
3.
Net capital loss carry-over rule
Note: The holding and net capital loss carry-over rules apply only to individual taxpayers and
not to corporate taxpayers.
Percentage taken into account or holding rule
In the case of an individual taxpayer, only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset shall be taken into account in
computing net capital gain, net capital loss, and net income:
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100% -
if the capital asset has been held for not more than 12 months
50%
if the capital asset has been held for more than 12 months
Loss limitation rule
Losses from sales or exchanges of capital assets shall be allowed only to the extent of
the gains from such sales or exchanges.
Net capital loss carry-over
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 12 months.
Gains and losses from short sales, etc.
Gains or losses from short sales of property shall be considered as gains or loses from
sales or exchanges of capital assets.
Gains or losses attributable to the failure to exercise privileges or options to buy or sell
property shall be considered as capital gains or losses.
General rule on the recognition of gain or loss upon the sale or exchange of property
The general rule is that the entire amount of the gain or loss, as the case may be, shall
be recognized, i.e. taxable or deductible.
Exceptions
1.
Transactions where gains and losses are not recognized

a.
Exchange of property where the property received is not substantially different

from the property disposed of. [Section 140, Reg. No. 2]
b.
Exchange of property solely in kind in pursuance of corporate mergers and

consolidations.
c.
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 persons,
gains control of said corporation.
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2.
Transactions where gain is recognized but not the loss

a.
Transactions between related taxpayers
b.
Illegal transactions
c.
Exchanges of property, not solely in kind, in pursuance of corporate mergers and

consolidations
Merger or consolidation
Merger or consolidation shall be understood to mean the (a) ordinary merger or

consolidation or (b) the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock.
Such merger or consolidation must be undertaken for a bona fide business purpose and
not solely for the purpose of escaping the burden of taxation.
SOURCES OF TAXATION
Source of income
The term source of income is not a place but the property, activity or service that
produces the income. [ Commissioner v. BOAC]
Dissent of Justice Feliciano in Commissioner v BOAC
The source of income relates not to the physical sourcing of a flow of money or the
physical situs of payment but rather to the property, activity or service which produced
the income. Where a contract for rendition of services is involved, the applicable source
rule may be simply stated as follows: The income is sourced in the place where the
service contracted for is rendered.
Sources of taxation
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
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Gross income from sources within the Philippines
The following items of gross income shall be treated as gross income from sources
within the Philippines:
1.
Interests derived from sources within the Philippines, and interests on bonds,
notes or other interest-bearing obligations of residents, corporate or otherwise.
2.
Dividends received from a domestic corporation and from a foreign corporation,

unless less than 50% of the gross income of such foreign corporation for the
three-year period ending with the close of its taxable year preceding the
declaration of such dividends was derived from sources within the Philippines.
3.
Compensation for labor or personal services performed in the Philippines.
4.
Rentals and royalties from property located in the Philippines.
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 if sold within the
Philippines. [Section 42(A), NIRC]
Interest income
The residence of the obligor who pays the interest, rather than the physical location of
the securities, bonds or notes or the place of payment, is the determining factor of the
source of interest income. [ National Development Corporation v. Commissioner ,
151 SCRA 472]
Gross income from sources without the Philippines
Just the exact opposite of the items of gross income from sources within the Philippines.
[Section 42(B), NIRC]
Income from sources partly within and partly without the Philippines
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 sources within and partly
from sources without the Philippines. [Section 42(E), NIRC]
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Purchase or sale of personal property
Gains, profits and income derived from the purchase of personal property within and its
sale without the Philippines, or from the purchase of personal property without and its
sale within the Philippines shall be treated as derived entirely from sources within the
country in which sold. [Section 42(E), NIRC]
Gain from sale of shares of stock of a domestic corporation
Gain from the sale 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.
The transfer by a non-resident alien or a foreign corporation to anyone of any share of

stock issued by a domestic corporation shall not be effected or made in its book unless:
1.
The transferor has filed with the Commissioner a bond conditioned upon the
future payment by him of any income tax that may be due on the gains derived
from such transfer; or
2.
The Commissioner has certified that the taxes, if any, imposed and due on the
gain realized from such sale or transfer have been paid. [Section 42(E), NIRC]
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

Methods of accounting
General Rule: The taxable income shall be computed upon the basis of the taxpayers
annual accounting period in accordance with the method of accounting regularly
employed in keeping the books of such taxpayer.
Exception: Computations shall be made in accordance with such method as in the

opinion of the Commissioner clearly reflects the income:
a.
If no such method of accounting has been so employed; or
b.
If the method employed does not clearly reflect the income. [Section 43, NIRC]
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Taxable year
Taxable year means the calendar year, or the fiscal year ending during such calendar
year, upon the basis of which the net income is computed.
Accounting periods
1.
Calendar year - January 1 to December 31
2.
Fiscal year an accounting period of twelve (12) months ending on the last day of any
month other than December.
When calendar year used?

1.
If the taxpayer chooses the calendar year
2.
If the taxpayer has no annual accounting period
3.
If the taxpayer does not keep books
2.
If the taxpayer is an individual
When Commissioner is authorized to terminate taxable period

1.
When a taxpayer retires from business subject to tax
2.
When he intends to leave the Philippines
3.
When he removes his property from the Philippines
4.
When he hides or conceals his property
5.
When he performs any act tending to obstruct the proceedings for the collection of the
tax for the past or current quarter or year
6.
When he renders the collection of the tax totally or partly ineffective
Methods of accounting
1.
Cash Basis
Income, profits and gains earned by taxpayer are not included in gross income
until received.
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Expenses are not deducted until paid within the taxable year.
2.
Accrual Method
Income, gains and profits are included in the gross income when earned,
whether received or not.
Expenses are allowed as deductions when incurred, although not yet paid.
3.
Mixed/Hybrid
Combination of the cash and accrual method.
4.
Any other method which clearly reflects the income
Cash v. accrual method of accounting
Gains, profits and income are to be included in the gross income for the taxable year in
which they are received by the taxpayer, unless they are included when they accrue to
him in accordance with the approved method of accounting followed by him.
Tax accounting v. financial accounting
While taxable income is based on the method of accounting used by the taxpayer, it will
always differ from accounting income. This is so because of a fundamental difference in
the ends the two concepts serve. Accounting attempts to match cost against revenue.
Tax law is aimed at collecting revenue. It is quick to treat an item as income, slow to
recognize deductions as losses. Thus, tax law will not recognized deductions for
contingent future losses except in very limited situations. Good accounting, on the other
hand, requires their recognition. [Consolidated Mines v. CTA, 58 SCRA 618]
Long-term contracts
The term long term contracts means building, installation or construction contracts
covering a period in excess of one year. [Section 48, NIRC]
Treatment of income from long-term contracts

1.
Percentage of completion basis
2.
Completed contract basis
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Note: Section 48 of the NIRC provides that Persons whose gross income is derive in whole or
in part from such (long term) contracts shall report such income upon the basis of
percentage of completion.
The return should be accompanied by a return certificate of architects or

engineers showing the percentage of completion during the taxable year of the entire
work performed under the contract.
Sales of dealers in personal property
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. [Section
49, NIRC]
Treatment of sales of realty and casual sales of personalty
These include:
1.
Casual sale or other casual disposition of personal property (other than property
included in the inventory at the close of the taxable year) for a price exceeding
P1000; and
2.
Sale or other disposition of real property.
Treated either on installment basis or deferred sales basis.
Installment basis -
Deferred sales basis - if the initial payments exceed 25% of the selling price [Section 49,
NIRC and Section 175, Revenue Regulations 2]
if the initial payments do not exceed 25% of the selling price.
Initial payments
These include 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.
The term initial payments contemplates at least one other payment in addition to the
initial payment. [Section 175, Revenue Regulations 2]
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Termination of leasehold
Lessor who acquires building or improvements made by the lessee after the termination
of the lease has two options in reporting said income:
1.
Lessor may report as income at the time when such buildings or improvements
are completed the fair market value of such buildings or improvements; or
2.
Lessor may spread over the life of the lease the estimated depreciated value of
such buildings or improvements at the termination of the lease and report as
income for each of the lease an adequate part thereof. [Section 49, Revenue
Regulations 2]
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 determines 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. [Section 50, NIRC]
RETURNS AND PAYMENT OF TAX

INDIVIDUAL INCOME T AX RETURNS
Who are required to file individual returns?
1.
Every Filipino citizen residing in the Philippines
2.
Every Filipino citizen residing outside the Philippines, on his income from sources within
the Philippines
3.
Every alien residing in the Philippines, on income derived from sources within the
Philippines
4.
Every non-resident alien engaged in trade or business or in the exercise of a profession

in the Philippines
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Who are not required to file individual returns?
1.
An individual whose gross income does not exceed his total personal and additional
exemptions.
However, a Filipino citizen and any alien individual engaged in business or
practice of profession within the Philippines shall file an income tax return, regardless of
the amount of gross income.
2.
An individual with respect to pure compensation income derived from sources within the
Philippines, the income tax on which has been correctly withheld.
However, an individual deriving compensation concurrently from two or more
employees at any time during the taxable year shall file an income tax return.
Further, an individual whose pure compensation income derived from sources
within the Philippines exceeds P60,000 shall also file an income tax return.
3.
An individual whose sole income has been subjected to a final withholding tax.
4.
An individual who is exempt from income tax pursuant to the NIRC and other laws,
general or special.
Where to file
1.
Authorized agent bank
2.
Revenue District Officer
3.
Collection agent
4.
Duly authorized Treasurer of the city or municipality in which such person has his legal
residence or principal place of business in the Philippines
5.
Office of the Commissioner if there be no legal residence or place of business in the

Philippines
When to file
On or before April 15 of each year covering income from the preceding taxable year
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Thirty (30) days from each transaction and a final consolidated return on or before April
15 covering all stock transactions of the preceding year in case of sale or exchange of
shares of stock not traded through a local stock exchange
Thirty (30) days following each sale or other disposition in case of sale or disposition of
real property
Husband and wife
Married individuals, whether citizens, resident or non-resident aliens, who do not derive
income purely from compensation, shall file a return for the taxable year to include the
income of both spouses.
However, if it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by the BIR for
purposes of verification for the taxable year.
Return of parent to include income of children
The income of unmarried minors derived from property received from a living parent
shall be included in the return of the parent, except:
1.
When the donors tax has been paid on such property; or
2.
When the transfer of such property is exempt from donors tax.
SELF-EMPLOYED INDIVIDUALS
Declaration of income tax for individuals
Every individual subject to income tax, who is receiving self-employment income,

whether it constitutes the sole source of his income or in combination with salaries,
wages and other fixed or determinable income, shall make and file a declaration of his
estimated income for the current taxable year on or before April 15 of the same taxable
year.
Non-resident Filipino citizens with respect to income from without the Philippines and
non-resident aliens not engaged in trade or business in the Philippines are not required
to render a declaration of estimate income tax.
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Self-employment income
Self employment income consists of the earnings derived by the individual from the
practice of profession or conduct of trade or business carried on by him as a sole
proprietor or by a partnership of which he is a member.
Return and payment of estimate income tax by individuals
The amount of estimated income shall be paid in four (4) installments.
Estimated tax
Estimated tax means the amount which the individual declared as income tax in his final
adjusted and annual income tax return for the preceding taxable year minus the sum of
the credits allowed against the said tax.
If, during the current taxable year, the taxpayer reasonably expects to pay a bigger
income tax, he shall file an amended declaration during any interv al of installment
payment dates.
CORPORATE RETURNS
Corporation returns
Every corporation subject to income tax, except foreign corporations not engaged in
trade or business in the Philippines, shall render, in duplicate, a true and accurate:
1.
Quarterly income tax return; and
2.
Final or adjustment return.
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.
A corporation may employ either the calendar year or fiscal year as basis for filing its
annual income tax return.
Every corporation deriving capital gains from the sale or exchange of shares of stock not
traded through a local stock exchange shall file a return within thirty (30) days after
each transaction and a final consolidated return of all transactions during the taxable
year on or before the fifteenth (15th) day of the fourth month following the close of the
taxable year.
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Declaration of quarterly corporate income tax
Every corporation shall file in duplicate a quarterly summary declaration of its gross
income and deductions on a cumulative basis for the preceding quarter or quarters upon
which the income tax shall be levied, collected and paid.
The tax computed shall be decreased by the amount of tax previously paid or assessed
during the preceding quarters and shall be paid not later than sixty (60) days from the
close of each of the first three (3) quarters of the taxable year, whether calendar or
fiscal year.
Final adjustment return
Every corporation liable for tax shall file a final adjustment return covering the total
taxable income for the preceding calendar or fiscal year.
If the sum of the quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable income of that year, the corporation shall
either:
1.
Pay the balance of tax still due; or
2.
Carry over the excess credit; or
3.
Be credited or refunded with the excess amount paid, as the case may be.
Carrying-over or crediting of excess to succeeding quarters
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment return
may be carried over and credited against the estimated quarterly income tax liabilities
for the taxable quarters of the succeeding taxable years.
But this is not automatic. Need to apply for crediting of such excess or tax credit to
succeeding quarters.
P AYMENT AND ASSESSMENT OF INCOME T AX

Payment of tax, in general
The total amount of tax shall be paid by the person subject thereto at the time the
return is filed.
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Installment payment
A taxpayer, other than a corporation, may opt to pay the tax in two equal installments
when the tax due is in excess of two thousand pesos (P2,000).
In such cases, the first installment shall be paid at the time the return is filed and the
second installment on or before July 15 following the close of the calendar year.
Payment of capital gains tax
It shall be paid on the date the return prescribed therefor is filed by the person liable
thereto.
In case the taxpayer elects and is qualified to report the gain by installments, the tax
due from each installment payment shall be paid within thirty (30) days from the receipt
of such payments.
Assessment and payment of deficiency tax
After the return is filed, the Commissioner shall examine it and assess the correct
amount of tax.
The tax or deficiency income tax so discovered shall be paid upon notice and demand
from the Commissioner.
Deficiency
The term deficiency means:

1.
The amount by which the tax imposed by this Title exceeds the amount shown
as the tax by the taxpayer upon his return.
However, the amount so shown on the return shall be increased by the
amount previously assessed (or collected without assessment) as a deficiency,
and decreased by the amount previously abated, credited, returned or otherwise
repaid in respect of such tax; or
2.
If no amount is shown as the tax by the taxpayer upon his return, or if no return
is made by the taxpayer, then the amount by which the tax exceeds the amounts
previously assessed (or collected without assessment) as a deficiency.
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However, such amounts previously assessed or collected without
assessment shall first be decreased by the amounts previously abated, credited,
returned or otherwise repaid in respect of such tax.
WITHHOLDING OF T AX AT SOURCE
Two kinds of withholding
1.
Withholding of final tax on certain incomes
2.
Withholding of creditable tax at source
Fund withheld held in trust by withholding agent
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.
All taxes withheld pursuant to the NIRC and its implementing rules and regulations are
hereby considered trust funds and shall be maintained in a separate account and not
commingled with any other funds of the withholding agent.
ESTATES AND TRUSTS

Taxation of estates and trusts
Income tax imposed upon individuals shall also apply to the income of estates or of any
kind of property held in trust.
The tax shall be computed upon taxable income of the estate or trust and shall be paid
by the fiduciary.
What are the income of the estates or trusts which are included for taxation?
1.
Income accumulated in trust for the benefit of unborn or unascertained person or

persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust.
2.
Income which is to be distributed currently by the fiduciary to the beneficiaries, and

income collected by a guardian of an infant which is to be held or distributed as the
court may direct.
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3.
Income received by estates of deceased persons during the period of administration or

settlement of the estate.
4.
Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
Exception from taxation of estates or trusts
Employees trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees shall be exempt from income
tax:
1.
If contributions are made to the trust by such employer, or employees, or both,

for the purpose of distributing to such employees the earnings and the principal
of the fund accumulated by the trust in accordance with such plan; and
2.
If under the trust instrument, it is impossible, at any time prior to the satisfaction
of all liabilities with respect to employees under the trust, for any part of the
corpus or income to be used for or diverted to purposes other than for the
exclusive benefit of the employees.
However, 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 contributed by such employee or distributee.
Taxable income of estates or trusts
The taxable income of the estate or trust shall be computed in the same manner and on
the same basis as in the case of an individual.
However, there shall be allowed as a deduction in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for the taxable year
which is to be distributed currently by the fiduciary to the beneficiaries, and the amount
of the income collected by a guardian of an infant which is to be held or distributed as
the court may direct, but the amount so allowed as a deduction shall be included in
computing the taxable income of the beneficiaries, whether distributed or not.
In the case of income received by estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income which, in the
discretion of the fiduciary, may be either distributed to the beneficiary or accumulated,
there shall be allowed as an additional deduction in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for its taxable year, which
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is properly paid or credited during such year to any legatee, heir or beneficiary, but the
amount so allowed as a deduction shall be included in computing the taxable income of
the legatee, heir or beneficiary.
The deductions allowed above shall not be allowed in case of a trust administered in a
foreign country.
Exemption allowed to estates and trusts
There shall be allowed an exemption of twenty thousand pesos (P20,000) from the
income of the estate or trust.
Fiduciary returns
Guardians, trustees, executors, administrators, receivers, conservators and all persons

or corporations acting in any fiduciary capacity shall render a return of the income of the
persons, trust or estate for whom or which they act, and be subject to all the provisions
of this Title, which apply to individuals in case such person, estate or trust has a gross
income of twenty thousand pesos (P20,000) or over during the taxable year.
Such fiduciary or person filing the return for him or it, shall take oath that he has
sufficient knowledge of the affairs of such person, trust or estate to enable him to make
such return and that the same is, to the best of his knowledge and belief, true and
correct, and be subject to all the provisions of this Title which apply to individuals.
Fiduciaries indemnified against claims for taxes paid
Trustees, executors, administrators and other fiduciaries are indemnified against the
claims or demands of every beneficiary for all payments of taxes which they shall be
required to make under the provisions of this Title, and they shall have credit for the
amount of such payments against the beneficiary or principal in any accounting which
they make as such trustees or other fiduciaries.
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TRANSFER TAXES
IN GENERAL
Transfer taxes
Transfer taxes are taxes imposed upon the gratuitous disposition of private property.
They are not taxes on property as such because their imposition does not rest upon
general ownership but on the passing of the property.
Kinds of transfer taxes

1.
Estate tax
2.
Donors tax
Presidential Decree No. 69 eliminated the inheritance tax and the donees tax.
Estate tax
Estate tax is the tax on the right to transmit property at death and on certain transfer
which are made by the statute the equivalent of testamentary dispositions.
Tax on gratuitous transfers mortis causa.
Donors tax
It is a tax on gratuitous transfers inter vivos .
It is imposed on the privilege of the donor to give. [ Lladoc v. Commissioner ]
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ESTATE TAX
Estate tax
Estate tax is the tax on the right to transmit property at death and on certain transfers
which are made by the statute the equivalent of testamentary dispositions.
Tax on gratuitous transfers mortis causa.
Estate tax v. inheritance tax
Inheritance tax is a tax on the privilege of inheriting the property of a person upon his
death. Estate tax, on the other hand, is a tax on the privilege of transmitting or
transferring property gratuitously upon ones death.
Nature and object of estate tax
Estate tax is not a property tax. It is a privilege or excise tax.
The object of estate tax is to tax the shifting of economic benefits and enjoyment of
property from the dead to the living.
Four theories re. purpose of estate tax

1.
Benefit-received theory
The tax is in return for the services rendered by the state in the distribution of
the estate of the decedent and for the benefits that accrue to the estate and the heirs.
2.
State-partnership theory
The tax is in the share of the state as a passive and silent partner in the
accumulation of property.
3.
Ability-to-pay theory
The tax is based on the fact that the receipt of inheritance creates an ability to
pay and thus to contribute to governmental income.
4.
Redistribution-of-wealth theory
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The tax is imposed to help reduce undue concentration of wealth in society to
which the receipt of inheritance is a contributing factor.
Incidence of estate taxation

1.
Predecessor
2.
Successor
3.
No personal incidence it merely falls on the estate
Applicable law in estate taxation
Estate taxation is governed by the statute in force at the time of the death of the
decedent. [Section 3, Revenue Regulations 17-93]
28 July 1992 amendments under RA 7499 took effect. Under said law, first P200,000
is exempt from estate taxation and the tax rate ranges from 8% to 35%.
01 January 1998 amendments under the NIRC took effect. Under this law, the first
P200,000 is also exempt but the tax rate only ranges from 5% to 20%.
Date of accrual v. date of payment of estate tax
Section 3, Rev. Reg. 17-93: Accrual of the estate tax as of the date of the death of
the decedent is distinct from the obligation to pay the same.
Lorenzo v. Posadas: The accrual of the tax is to be distinguished from the obligation
to pay the same. The time when the heir legally succeeds to the inheritance may differ
from the time when he actually receives such inheritance. The property belongs to the
heir at the moment of the death of the ancestor as completely as if the latter had
executed and delivered to the former a deed for the same before his death. However, it
does not follow that the obligation to pay the tax arises as of that date. The time for
payment is clearly fixed by law.
Transfers covered by the estate tax

1.
Gratuitous transfers mortis causa
2.
Inter vivos transfers which are treated by the NIRC as substitutes for testamentary
dispositions
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Inter vivos transfers treated as testamentary dispositions
1.
Transfers in contemplation of death
2.
Transfers with retention or reservation of certain rights
3.
Revocable transfers
4.
Transfers of property arising under a general power of appointment
5.
Transfers for insufficient consideration
Inter vivos transfers excluded
Transfers by virtue of a bona fide sale of property for an adequate and full consideration
in money or moneys worth.
Exemption of certain acquisitions and transmissions from estate tax

1.
The merger of the usufruct in the owner of the naked title.
2.
The transmission or delivery of the inheritance or legacy by the fiduciary heirs or legatee
to the fideicomissary.
3.
The transmission from the first heirs, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.
4.
All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inures to the benefit of any individual.
Provided that not more than thirty percent (30%) of the said bequests, devises, legacies
or transfers shall be used for administrative purposes.
Other exemptions from estate tax under special laws

1.
Benefits received by members from the GSIS and the SSS by reason of death.
2.
Amounts received from the Philippines and the U.S. Governments for damages suffered
during the last war.
3.
Benefits received by beneficiaries residing in the Philippines under laws administered by

the U.S. Veterans Administration.
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Exemption to non-resident aliens for intangible personal property
Involves only intangible personal property
Laws of foreign country did not impose transfer tax or allows a similar exemption to
Filipinos not residing in that foreign country
Rationale for exemption to non-resident aliens
A decedents intangible personal property may be subject to transfer taxes both in his
place of domicile or residence and in the place where such property has a situs or is
found. In order to prevent multiplicity of taxation of the same intangible personal
property with a situs in the Philippines left by a non-resident alien decedent, the NIRC
provides that no tax shall be collected as to such property in two instances:
1.
Foreign country does not impose transfer tax; and
2.
Foreign country imposes transfer tax but grants similar exemption.
INTER VIVOS TRANSFERS TREATED AS EQUIVALENT TO TESTAMENTARY

DISPOSITIONS
T RANSFER IN CONTEMPLATION OF DEATH
Transfer in contemplation of death
Any transfer made, by trust or otherwise, by the decedent at any time in contemplation
of death.
The words mean that it is the thought of death, as a controlling motive, which induces
the disposition of the property for the purpose of avoiding the tax
Note that it is contemplation of death and not necessarily of imminent death to which
the statute refers.
Circumstances affecting such transfer
Age and state of health of decedent at time of gift, especially where he was aware of
serious illness
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Length of time between the gift and the date of death
Concurrent making of a will or making a will within a short time after the transfer
Motives which preclude a transfer from being categorized as one made in

contemplation of death
1.
To relieve the donor from the burden of management
2.
To save income or property taxes
3.
To settle family litigated and unlitigated disputes
4.
To provide independent income for dependents
5.
To see the children enjoy the property while the donor is alive
6.
To protect the family from the hazards of business
7.
To reward services rendered
T RANSFERS WITH RETENTION OR RESERVATION OF RIGHTS

Transfers with retention or reservation of rights
Transfers by trust or otherwise:

1.
Without retention of interest, but effect postponed.

Intended to take effect in possession or enjoyment at or after his death; or
2.
With retention of interest to income or right to designate persons to enjoy

property or income.
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
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.
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REVOCABLE T RANSFERS
Revocable transfers
1.
With reserved power to alter, amend, revoke or terminate

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 the decedent alone or by the decedent in conjunction with any other
person to alter, amend, revoke or terminate it.
2.
With such power relinquished

When any such power which would bring the property in the taxable estate is
relinquished in contemplation of the decedents death.
Power to alter, amend or revoke
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.
P ROPERTY P ASSING UNDER A GENERAL P OWER OF A PPOINTMENT

Power of appointment
This refers to a right to designate the person who shall enjoy or possess certain
property from the estate of a prior decedent.
For purposes of estate taxation, the power to dispose of property at death by the
exercise of appointment is the equivalent of ownership. It is a potential source of wealth
to the appointee and the disposition of wealth effected by its exercise or relinquishment
at death is one form of enjoyment of wealth.
Requisites
1.
The existence of a general power of appointment.
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2.
An exercise of such power by the decedent (donee or appointee) by will or by deed in

certain cases.
3.
The passing of the property by virtue of such exercise.
General power of appointment
A power of appointment is general when it authorizes the donee to appoint any person
he pleases, including himself, his spouse, his estate, his executor or administrator, and
his creditor, thus having as full dominion over the property as though he owned it.
Special power of appointment
It is special when the donee can appoint only among a restricted or designated class of
persons other than himself.
Property passing under a general power of appointment
General power of appointment exercised by the decedent:

1.
by will;
2.
by deed executed in contemplation of or intended to take effect in possession or

enjoyment at or after his death;
3.
by deed under which he has retained for his life or 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
b)
the right either alone or in conjunction with any person to designate the
persons who shall enjoy or possess the property or the income therefrom.
T RANSFER FOR INSUFFICIENT CONSIDERATION

Transfer for insufficient consideration
If any one of the transfers, trusts, interests, rights or powers enumerated above is
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.
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In such a case, the excess of the fair market value of the transferred property at the
time of death over the value of the consideration received, shall be included in the gross
estate.
Fictitious sale
If the purported absolute sale inter vivos by decedent is shown to be fictitious, then the
total value of the property transferred is subject to inclusion in the taxable estate.
DETERMINATION OF THE GROSS ESTATE

Gross estate, in general
1.
Resident and non-resident citizen and resident alien

Gross estate includes the value, at the time of the decedents death, of all his
property, real or personal, tangible or intangible, wherever situated.
2.
Non-resident alien
Only that part of the entire gross estate which is situated in the Philippines shall
be included in his taxable estate.
Residence
For the purposes of estate taxation, residence refers to the permanent home, the place
to which whenever absent, for business or pleasure, one intends to return, and depends
on facts and circumstances, in the sense that they disclose intent. It is not necessarily
the actual place of residence.
Action 50, Civil Code: For the exercise of civil rights and the fulfillment of civil
obligations, the domicile of natural persons is the place of their habitual residence.
Velilla v. Posadas: Arthur Moodys residence is still the Philippines. Here, he left the
Philippines because he was a fugitive, not from justice, but from confinement in a leper
colony. To effect an abandonment of ones domicile, there must be a deliberate and
provable choice of a new domicile, coupled with actual residence in the place chosen.
There was no effective abandonment in this case.
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Collector v. Lara: Residence is synonymous with domicile.
Specific items included in the gross estate

1.
Real and personal property, whether tangible or intangible, wherever situated.
2.
Franchise which must be exercised in the Philippines.
3.
Shares, obligations, or bonds issued by any corporation or sociedad anonima organized

or constituted in the Philippines in accordance with its laws.
4.
Shares, obligations, or bonds issued by any foreign corporation 85% of the business of
which is located in the Philippines.
5.
Shares, obligations, or bonds issued by any foreign corporation if such shares,

obligations, or bonds have acquired a business situs in the Philippines.
6.
Shares or rights in any partnership, business or industry established in the Philppines.
7.
Proceeds of a life insurance policy taken out by the decedent upon his own life.
Requisites for inclusion of life insurance

1.
It must be taken out by the decedent upon his own life.
2.
The beneficiary is:

a.
the estate of the deceased, his executor or administrator, irrespective of whether

or not the insured retained the power of revocation; or
b.
other than the decedent, where the insured reserved to himself the power to
change or revoke the name of the beneficiary during his lifetime.
NOTE: If the designation of the beneficiary is irrevocable, then the proceeds of the life
insurance will not be included in the gross estate.
Deductions allowed to the estate of a citizen or a resident

1.
Expenses, losses, indebtedness and taxes
2.
Property previously taxed or vanishing deduction
3.
Transfers for public use
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4.
Family home not exceeding one million pesos (P1,000,000)
5.
Standard deduction equivalent to one million pesos (P1,000,000)
6.
Medical expenses
7.
Amount received by heirs under Republic Act No. 4917 (Retirement benefits of
employees of private firms not subject to levy, attachment, etc.)
8.
Net share of the surviving spouse in the conjugal partnership property
Deductions allowed to non-resident estates

1.
2.
Property previously taxed
3.
4.
Net share of the surviving spouse in the conjugal partnership property
NOTE: To be entitled to deductions, executor, administrator, or anyone of the heirs, as the case
may be, must include in the return required to be filed the value at the time of his death
of that part of the gross estate of the non-resident not situated in the Philippines.

1.
Funeral expenses
2.
Judicial expenses of testamentary or intestate proceedings
3.
Claims against the estate
4.
Claims of the deceased against insolvent persons
5.
Unpaid mortgages upon, or any indebtedness in respect to, property
6.
Casualty losses
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Requisites for funeral expenses
1.
Funeral expenses must be actually paid and incurred by the estate. Expenses must be
duly supported by receipts or invoices or other evidence.
2.
The amount thereof is limited to five percent (5%) of the gross estate or the actual
amount spent, whichever is lower, but in no case to exceed P200,000.
Judicial expenses
These expenses include administration expenses or those actually and necessarily

incurred in the administration of the estate, that is, in the collection of assets, payment
of debts, and distribution among persons entitled to the estate.
Expenses not deductible include those incurred for the individual benefit of the heirs,
legatees or devises.
Requisites for deductibility of claims against the estate

1.
They were contracted in good faith and for an adequate and full consideration in money
or moneys worth.
2.
They must be existing against the estate.
3.
They must be legally enforceable obligations of the decedent and ought to be enforced
by the claimants.
4.
They must be reasonably certain in amount.
5.
At the time the indebtedness was incurred, the debt instrument was duly notarized and,
if the loan was contracted within three (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.
Requisites for deductibility of claims of deceased against insolvent persons

1.
The amount of said claims has been initially included as part of his gross estate.
2.
The incapacity of the debtors to pay their obligations is proven, not merely alleged.
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Requisites for deductibility of unpaid mortgages
1.
The fair market value without deducting the mortgage indebtedness has been initially
included as part of the gross estate.
2.
The mortgage indebtedness was contracted in good faith and for an adequate and full
consideration in money or moneys worth.
Unpaid taxes
Taxes owed by the decedent and unpaid, being debts in favor of the government, are
deductible as a claim against the estate.
However, income taxes upon income received after the death of the decedent, or
property taxes not accrued before his death, or any estate tax, are not deductible
because they are not chargeable to the income of the estate.
Casualty losses
Casualty losses include all losses incurred during the settlement of the estate arising
from fires, storms, shipwreck or other casualties, or from robbery, theft, or
embezzlement.
Requisites for deductibility of casualty losses

1.
There must be a loss arising from fires, storms, shipwreck or other casualties, or from
robbery, theft or embezzlement.
2.
Such loss is not compensated for by insurance or otherwise.
3.
Such loss has not been claimed as a deduction for income tax purposes.
4.
Such loss was incurred not later than the last day for the payment of the estate tax.
Property previously taxed or the vanishing deduction
The deduction, which is commonly referred to as vanishing deduction, is an amount

allowed to reduce the taxable estate of a decedent where property a) received by him
from a prior decedent by gift, bequest, devise, or inheritance, or b) transferred to him
by gift, has been the object of previous transfer taxation. The rate of deduction
gradually diminishes and entirely vanishes depending upon the time interval between
the two successive transfers.
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The deduction operates to ease the harshness of successive taxation of the same
property within a relative short period of time (up to five years) occasioned by the
untimely death of the transferee after the receipt of the property from a prior decedent
or a donor, as the case may be.
Requisites for vanishing deduction

1.
Death
The present decedent died within five (5) years from date of death of the prior
decedent or date of gift.
2.
Identity of property
The property with respect to which deduction is sought can be identified as the
one received from the prior decedent, or from the donor, or as the property acquired in
exchange for the original property so received.
3.
Inclusion of the property

The property must have formed part of the gross estate situated in the
Philippines of the prior decedent, or have been included in the total amount of the gifts
of the donor, made within five (5) years prior to the present decedents death.
4.
Previous taxation of the property

The estate tax on the prior succession, or the donors tax on the gift, must have
been finally determined and paid by the prior decedent or by the donor, as the case may
be.
5.
No previous vanishing deduction on the property

No such deduction on the property, or the property given in exchange therefor,
was allowed in determining the value of the net estate of the prior decedent.
Limitations on amount allowed for vanishing deduction

1.
Value of property is that finally determined for the purpose of the prior estate tax ( or
gift tax) or the value of such property in present decedents gross estate, whichever is
lower.
2.
Deduction for total amount paid, if any, by the present decedent on any mortgage or
other lien on the property.
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3.
Further deduction by an amount which bears the same ratio to the amounts allowed as
deduction and transfers for public use as the amount otherwise deductible for property
previously taxed bears to the value of the decedents gross estate.
4.
Percentage of deduction
100%
80%
60%
40%
20%
within one year

more than one year, but not more than two years
more than two years, but not more than three years
more than three years, but not more than four years
more than four years, but not more than five years
The amount of all bequests, legacies, devises or transfers to or for the use of the
Government of the Republic of the Philippines, or any political subdivision thereof, for
exclusively public purposes.
The transfer must be testamentary in character.
Family home
A deduction is allowed for the decedents family home in an amount equivalent to the
fair market value of the decedents home.
The appraised value shall be the current or fair market value as determined by the
Commissioner or the fair market value as shown in the schedule of values of the
Provincial and City Assessors.
However, if the current fair market value exceeds one million pesos (P1,000,000), the
excess shall be subject to estate tax.
As a sine qua non condition for the exemption or deduction, said family home must have
been the decedents family home as certified by the barangay captain of the locality.
The total value of the family home must be included as part of the gross estate of the
decedent.
Standard deduction
An amount equivalent to one million pesos (P1,000,000).
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Medical expenses
Medical expenses incurred by the decedent within one year prior to his death which shall
be duly substantiated with receipts.
However, such deduction shall not exceed five hundred thousand pesos (P500,000).
Amount received by heirs under Republic Act No. 4917
Any amount received by the heirs from the decedents employer as a consequence of
the death of the decedent-employee in accordance with Republic Act No. 4917 or An Act
Providing That Retirement Benefits of Employees of Private Firms Shall Not Be Subject
to Attachment, Levy, Execution, or Any Tax Whatsoever.
Net share of surviving spouse

1.
The gross estate shall first be determined.
2.
Then all obligations property chargeable to the conjugal property is excluded.
3.
From the balance, the net share (1/2) of the surviving spouse shall be deducted from
the net estate of the decedent for purposes of imposing the estate tax.
ADMINISTRATIVE MATTERS
Valuation of estate
The estate shall be appraised at its fair market value as of the time of death. However,
the appraised value of real property as of the time of death shall be whichever is higher
of a) the fair market value as determined by the Commissioner, or b) the fair market
value as shown in the schedule of values fixed by the Provincial and City Assessors.
Notice of death to be filed
The executor, administrator or any of the legal heirs, as the case may be, shall give a
written notice to the Commissioner of the death of the decedent within two (2) months
after the latters death or within a like period after qualifying as such executor or
administrator:
1.
in all cases of transfers subject to tax; or
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2.
where, though exempt from tax, the gross value of the estate exceeds twenty
thousand pesos (P20,000).
When filing of estate tax returns required

1.
In all cases of transfers subject to estate tax
2.
Where, though exempt from tax, the gross value of the estate exceeds two hundred
thousand pesos (P200,000)
3.
Regardless of the gross value of the estate, where the said estate consists of registered
or registrable property such as real property, motor vehicles, shares of stock or other
similar property for which a clearance from the BIR is required as a condition precedent
for the transfer of ownership thereof in the name of the transferee
Contents of the estate tax return

1.
The value of the gross estate of the decedent at the time of his death, or in case of a
non-resident alien, of that part of his gross estate situated in the Philippines.
2.
The deductions allowed from gross estate.
3.
Such information as may, at the time, be ascertainable and such supplemental data as
may be necessary to establish the correct taxes.
Additional requirements for estate with gross value exceeding two milli on pesos
(P2,000,000)
Estate tax returns showing a gross value exceeding P2,000,000 shall be supported with
a statement duly certified to by a Certified Public Accountant containing the following:
1.
Itemized assets of the decedent with their corresponding gross value at the time
of his death, or in the case of a non-resident alien, of that part of his gross
estate located in the Philippines.
2.
Itemized deductions from gross estate.
3.
The amount of tax due whether paid or still due and outstanding.
When to file estate tax return
Return shall be filed within six (6) months from the decedents death.
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The Commissioner shall have authority to grant in meritorious cases, a reasonable

extension not exceeding thirty (30) days for filing the return.
Place of filing
1.
Authorized agent bank
2.
Revenue District Officer
3.
Collection Officer
4.
Duly authorized Treasurer of the city or municipality in which the decedent was
domiciled at the time of his death
5.
Office of the Commissioner, if the decedent has no legal residence in the Philippines
Payment of tax
Paid at the same time that the return is filed.
When the Commissioner finds that the payment on the due date of the estate tax or of
any part thereof would impose undue hardship upon the estate or any of the heirs, he
may extend the time for payment of such tax or any part thereof not to exceed:
1.
within five (5) years, in case the estate is settled through the courts; or
2.
two (2) years, in case the estate is settled extrajudicially.
Commissioner may, before granting the extension, require the furnishing of a

performance bond in an amount not exceeding double the amount of the tax due
conditioned upon the payment of said tax in accordance with the terms of the extension.
No extension will be granted where the taxes are assessed by reason of:
1.
negligence;
2.
intentional disregard of rules and regulations; or
3.
fraud on the part of the taxpayer.
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Liability for payment
The estate tax imposed shall be paid by the executor or administrator before delivery to
any beneficiary of his distributive share of the estate.
Such beneficiary shall, to the extent of his distributive share of the estate, be subsidiarily
liable for the payment of such portion of the estate tax as his distributive share bears to
the value of the total net estate.
Safeguards in the NIRC for payment of the estate tax

1.
Payment before discharge from personal liability of the executor or administrator.

[Section 92, NIRC]
2.
Judge will not issue authorization to deliver distributive share until certification of
payment shown. [Section 94, NIRC]
3.
Register of Deeds will not register transfer without certification of payment of tax.
[Section 95, NIRC]
4.
Lawyer, notary public or any government officer intervening in the preparation or

acknowledgement of documents regarding partition or disposal of donation inter vivos or
mortis causa, legacy or inheritance, shall furnish the Commissioner of Internal Revenue
of such documents. [Section 95, NIRC]
5.
Debtor shall not pay to heirs, legatees, executor or administrator without certification of
payment of tax. [Section 95, NIRC]
6.
Corporation will not transfer to new owner of shares, bonds, obligations or rights.
[Section 97, NIRC]
7.
Banks: no withdrawal except less than P20,000. [Section 97, NIRC]
Discharge of executor or administrator from personal liability
The executor or administrator, upon payment of the amount of which he is notified,

shall be discharged from personal liability for any deficiency in the tax thereafter f ound
to be due and shall be entitled to a receipt or writing showing such discharge.
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Payment of tax before delivery of distributive share by executor or administrator
No judge shall authorize the executor or judicial administrator to deliver a distributive

share to any party interested in the estate unless a certification from the Commissioner
that the estate tax due has been paid is shown.
Duties of certain officers and debtors

1.
2.
Register of Deeds
a.
The Register of Deeds shall not register in the Registry of Property any document
transferring real property or 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 estate tax due has been paid is shown.
b.
The Register of Deeds shall immediately notify the Commissioner or concerned

BIR officer or local treasurer of the non-payment of the tax discovered by them.
Lawyer, notary public, or any government officer

a.
3.
Any lawyer, notary public, or any government officer who, by reason of his
official duties, intervene in the preparation or acknowledgement of documents
regarding partition or disposal of donation inter vivos or mortis causa, legacy or
inheritance, shall have the duty of furnishing the Commissioner or concerned BIR
officer of the place where he may have his principal office, with copies of such
documents and any information which may facilitate the collection of the estate
tax.
Debtor
a.
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 has been paid is shown.
b.
However, he may pay the executor or judicial administrator without the

certification if the credit is included in the inventory of the estate of the
deceased.
Payment of tax antecedent to the transfer of shares, bonds or rights
There shall not be transferred to any new owner in the books of any corporation,
socieda anonima, partnership, business, or industry organized or established in the
Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa,
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legacy or inheritance, unless a certification from the Commissioner that the estate taxes
due has been paid is shown.
Duty of bank
If the bank has knowledge of the death of a person, who maintained a bank deposit
account alone, or jointly with another, it shall not allow any withdrawal from the said
deposit account, unless the Commissioner has certified that the estate taxes have been
paid.
However, the administrator of the estate or any one of the heirs of the decedent may,
upon authorization by the Commissioner, withdraw an amount not exceeding P20,000
without the said certification.
All withdrawal slips, for this purpose, shall contain a statement to the effect that all of
the joint depositors are still living at the time of withdrawal by any one of the joint
depositors and such statement shall be under oath by the said depositors.
DONORS TAX
IN GENERAL
Donation or gift
In the civil law of property, donation is an act of liberality whereby a person (donor)
disposes gratuitously of a thing or right in favor of another (donee) who accepts it.
[Article 725, Civil Code]
Generally, therefore, a gift is a voluntary transfer of property from one person to

another without any consideration or compensation therefor.
Requisites for a gift

1.
Capacity of the donor
2.
Donative intent or intent on the part of the donor to make a gift
3.
Delivery, whether actual or constructive, of the subject matter of the gift
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4.
Acceptance of the gift by the donee
NOTE: Donative intent is not always essential to constitute a gift. Example is the transfer for
less than adequate and full consideration in money or moneys worth of property, other
than real property classified as capital assets.
Gift tax
Gift tax is the tax imposed on the transfer without consideration of property between
two or more persons who are living at the time the transfer is made; or the tax imposed
on the transfer of property by gift inter vivos without relation to the death of the donor.
Previously, there were two gift taxes, donors and donees gift taxes, but the latter has
been abolished.
Two purposes of gift tax

1.
It was enacted originally to supplement and prevent circumvention of the estate and
inheritance taxes through the taxation of gift inter vivos without which the property
would not be subject to said taxes.
2.
The other purpose is to prevent avoidance of income taxes through the device of
splitting income among numerous donees who are usually members of a family or into
many trusts, with the donor thereby escaping the effect of the progressive rates of
income taxation.
Nature of donors tax
It is an excise tax on the privilege of the donor to give. It is not a tax on property as
such because its imposition does not rest upon general ownership.
Lladoc v. Commissioner: It is not a property tax, but a tax imposed on the transfer of
property by way of gift inter vivos . It is imposed on the privilege of the donor to give.
Section 9, Rev. Reg. 17-93: The donors tax is not a property tax, but a tax imposed
on the transfer of property by way of gift inter vivos.
Applicable law in imposition of donors tax
Section 9, Rev. Reg. 17-93: The donors tax shall not apply unless and until there is a
completed gift. The transfer of property by gift is perfected from the moment the donor
knows of the acceptance by the donee; and completed by the delivery to the donee
either actually or constructively of the donated property. Thus, the law in force at the
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time of the perfection/completion of the donation shall govern the imposition of the
donors tax.
IMPOSITION OF THE DONORS TAX

Imposition of tax
There shall be levied, assessed, collected and paid upon the transfer by any person,
resident or non-resident of the property by gift, a tax.
The tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or intangible.
Nature of the transfers subject to donors tax

1.
Inter vivos
Made between living persons, which is perfected from the moment the donor
knows of the acceptance of the donee. (Article 734, Civil Code)
Transfer of property by gift is between two or more persons who are living at the
time of the transfer or is without relation to the death of the donor.
2.
Direct or indirect gift

Donative intent (intent to donate) must be present in a direct gift of property.
Such an intent followed by a donative act is essential to constitute a gift.
Sale, exchange or any transfer of property, other than capital assets, for less
than an adequate and full consideration constitutes an indirect gift to the extent of the
difference where there is no donative intent to make a gift.
3.
In trust or otherwise
Trust is transfer made by grantor to beneficiary but indirectly as long as transfer
is gratuitous.
When the property is later transferred from the trustee to the beneficiary, it is no
longer subject to estate tax provided that the trust is irrevocable.
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Pirovano v. Court of Appeals
De la Rama Steamship ceded its rights to the insurance proceeds from the life of
Pirovano, its president, to the latters heirs. The Supreme Court held that it is a gift or
donation taxable under the Tax Code. The true consideration for the donation was the
companys gratitude for Pirovanos services, not the services themselves. Hence, no
value can be deducted from the property transferred as a gift because gratitude has no
economic value and does not constitute consideration as used by the Code, capable of
being evaluated in money.
Rates of tax
The tax for each calendar year shall be computed on the basis of the total net gifts
made during the calendar year.
First P100,000 is exempt from donors tax. The tax rates range from 2% to 15%.
Tax payable by donor if donee is a stranger
When the donee or beneficiary is a stranger, the tax payable by the donor shall be thirty
percent (30%) of the net gifts.
Who is a stranger?
For the purpose of this tax, a stranger is a person who is not a:

1.
Brother, sister (whether by whole or half blood), spouse, ancestor and lineal
descendant; or
2.
Relative by consanguinity in the collateral line within the fourth degree of

relationship.
Net gift
Net gift is the total amount of gifts after deducting the exemptions and allowable
deductions.
The donors tax is computed on the basis of the total net gifts made during the calendar
year.
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Properties which are included in the term gift
1.
Real and personal property, whether tangible or intangible, or mixed, wherever situated,
when the donor is a resident or citizen of the Philippines at the time of the donation.
2.
Real and personal property situated in the Philippines when the donor is a non-resident
alien at the time of the donation.
Properties which are excluded

1.
Real and personal property situated outside the Philippines where the donor is a nonresident alien at the time of the donation.
Donation between husband and wife
Such donation during their marriage is void, except:

1.
donations mortis causa; or
2.
moderate gifts which the spouses may give each other on the occasion of any
family rejoicing.
Void donations
Void donations are not subject to donors tax.
However, if you have already paid the donors tax, you only have two (2) years from the
date of payment to ask or file for a claim for a refund, regardless of any supervening
event.
Renunciation of inheritance not a gift
When one of the heirs renounced his share, the same becomes the property of the
persons to whom the benefit is given and is additional inheritance of the latter and not a
donation from the former. Nothing is received by the heir who makes renunciation of his
share.
Contribution for election campaign
The term contribution includes a gift, donation, loan, advance or deposit of money or
anything of value, or a contract, promise or agreement to contribute, whether or not
legally enforceable, made for the purpose of influencing the results of the elections but
shall not include services rendered without compensation by individuals volunteering a
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portion or all of their time in behalf of a candidate or political party. It shall also include
the use of facilities voluntarily donated by other persons, the money value of which can
be assessed based on the rates prevailing in the area.
The NIRC provides that Any contribution in cash or in kind to any candidate, political
Republic Act No. 7166 providing for synchronized national and local elections provides
that Any provision of law to the contrary notwithstanding, any contribution in cash or
party or coalition of parties for campaign purposes shall be governed by the Election
Code, as amended.
kind to any candidate, or political party or coalition of parties for campaign purposes,
duly reported to the Commission, shall not be subject to the payment of any gift tax.
Transfer for less than adequate and full consideration
Where property, other than real property considered as capital assets, 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 exceeded the value of the
consideration shall, for the purpose of the donors tax, be deemed a gift, and shall be
included in computing the amount of gifts made during the calendar year.
Exemption of certain gifts by a resident

1.
Dowries or gifts made on account of marriage and before its celebration or within one
year thereafter by parents to each of their legitimate, recognized natural, or adopted
children to the extent of the first ten thousand pesos (P10,000).
2.
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.
3.
Gifts in favor of an educational and/or charitable, religious, cultural or social welfare

corporation, institution, accredited non-governmental organization, trust or philanthropic
organization, or research institution or organization, provided, however, that not more
than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes.
Recognized natural child
A recognized natural child is one born outside wedlock of parents who, at the time of
the conception of the former, were legally free to marry each other, and is recognized
by one or both parents.
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Non-profit educational and/or charitable corporation, institution, accredited nongovernmental organization, trust or philanthropic organization, or research
institution or organization
A non-profit educational and/or charitable corporation, institution, accredited nongovernmental organization, trust or philanthropic organization, or research institution or
organization is a school, college or university and/or charitable corporation, accredited
non-governmental organization, trust or philanthropic organization, and/or research
institution or organization:
1.
incorporated as a non-stock entity;
2.
paying no dividends;
3.
governed by trustees who receive no compensation; and
4.
devoting 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.
Exemptions allowed to a non-resident alien

1.
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.
2.
Gifts in favor of an educational and/or charitable, religious, cultural or social welfare

corporation, institution, accredited non-governmental organization, trust or philanthropic
organization, or research institution or organization, provided, however, that not more
than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes.
Other deductions
Encumbrance on the property donated if assumed by the donee.
Those specifically provided by the donee as a diminution from the property donated
(e.g. where donation is subject to the condition that the donee would give P10,000 to
charity).
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Tax credit for donors taxes paid to a foreign country
The tax imposed upon a donor who was a citizen or a resident at the time of the
donation shall be credited with the amount of any donors tax of any character and
description imposed by the authority of a foreign country.
Limitations on credit
The amount of the credit taken under this Section shall be subject to each of the
following limitations:
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 estate situated within such country taxable under this Title
bears to his entire net estate.
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 estate situated
outside the Philippines taxable under this Title bears to his entire net estate.
ADMINISTRATIVE MATTERS
Valuation of gifts made in property
Personal property
fair market value at the time of the gift
Real property
whichever is higher of a) the fair market value determined

by the Commissioner or b) the fair market value as shown
in the schedule of values fixed by the Provincial or City
Assessor
Cash
amount of cash
Who must file donors tax return?
Any individual who makes any transfer by gift, except those which are exempt from the
tax, shall make a return under oath in duplicate.
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Contents of return
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.
Such further information as may be required by rules and regulations made pursuant to
law.
Time of filing and payment
The return of the donor shall be filed within thirty (30) days after the date the gift is
made and the tax due thereon shall be paid at the time of filing.
Place of filing and payment
Except in cases where the Commissioner otherwise permits, the return shall be filed and
the tax paid to:
1.
an authorized agent bank;
2.
the Revenue District Officer;
3.
Revenue Collection Officer;
4.
duly authorized Treasurer of the city or municipality where the donor was
domiciled at the time of the transfer; or
5.
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 the transfer,
or directly with the Office of the Commissioner.
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TAX ADMINISTRATION AND ENFORCEMENT
IN GENERAL
Agencies involved in tax administration
1.
Bureau of Internal Revenue
2.
Bureau of Customs
3.
Provincial, city and municipal assessors and treasurers
Bureau of Internal revenue
Headed by the Commissioner and two Deputy Commissioners
Assistant Commissioners and Division Chiefs
Regional Directors
Revenue District Officers
Revenue Enforcement Officers or Examiners
P OWERS OF THE COMMISSIONER OF INTERNAL REVENUE

General powers of the Commissioner of Internal Revenue
1.
Interpret tax laws and to decide tax cases.
2.
Obtain information and to summon, examine, and take testimony of persons.
3.
Make assessments and prescribe additional requirements for tax administration and
enforcement.
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Power to interpret tax laws
The power to interpret the provisions of the NIRC and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner.
This power is subject to review by the Secretary of Finance.
Jurisdiction of Commissioner re. tax cases
The Commissioner has the power to decide:

1.
disputed assessments;
2.
refunds of the internal revenue taxes, fees, or other charges;
3.
penalties imposed in relation thereto; or
4.
other matters arising under this Code or other laws or portions thereof
administered by the Bureau of Internal Revenue.
This is subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
Power of the Commissioner to obtain information, and to summon, examine, and

take testimony of persons
Commissioner has power to obtain information and to summon, examine, and take
testimony of persons in:
1.
ascertaining the correctness of any return; or
2.
in making a return when none has been made; or
3.
in determining the liability of any person for any internal revenue tax; or
4.
in collecting any such liability; or
5.
in evaluating tax compliance.
Such power includes:

1.
To examine any book, paper, record or other data which may be relevant or
material to such inquiry.
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2.
To obtain on a regular basis 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 national and local governments, government agencies and
instrumentalities any information.
3.
To summon the person liable for tax or required to file a return, or any officer or
employee of such persons, or any person having possession, custody, or care of
the books of accounts and other accounting records, or any other person, to
appear before the Commissioner or his duly authorized representative.
4.
To take such testimony of the person concerned, under oath, as may be relevant
or material to such inquiry.
5.
To cause revenue officers and employees to make a canvass from time to time
of any revenue district or region and inquire after and concerning persons
therein who may be liable to pay any internal revenue tax.
Power of the Commissioner to make assessments and prescribe additional

requirements for tax administration and enforcement
1.
Examination of returns and determination of the tax due.
2.
Assess the proper tax on the best evidence obtainable.
3.
Conduct inventory-taking, surveillance and to prescribe presumptive gross sales and

receipts
4.
Issue jeopardy assessments and terminate the taxable period.
5.
Prescribe real property values.
6.
Inquire into bank deposit accounts.
7.
Accredit and register tax agents.
8.
Prescribe additional procedural or documentary requirements.
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Examination of returns and determination of the tax due
After the filing of the return, the Commissioner or his duly authorized representative
may authorize the examination of any taxpayer and the assessment of the correct
amount of tax.
However, failure to file a return does not prevent the Commissioner from authorizing the
examination of the taxpayer.
Any return, statement or declaration filed in any office authorized to receive the same
shall not be withdrawn.
However, such may be modified, changed or amended within three (3) years from the
date of their filing provided no notice for audit or investigation for such return,
statement or declaration has been actually served upon the taxpayer.
Assess the proper tax on the best evidence obtainable
A Commissioner is given the power to assess deficiency tax based on the best evidence
obtainable:
1.
when a report required by law as a basis for the assessment of any national
internal revenue tax shall not be forthcoming within the time limit fixed by law or
rules and regulations; or
2.
when there is reason to believe that any such report is false, incomplete or
erroneous.
In Bonifacia Sy Po. V. CTA, the Supreme Court upheld the assessment made by the
Commissioner on the basis of the bottles of wine seized and the sworn statements of
the former employees of the Silver Cup Wine Factory for failure of the latters proprietor
to submit the factorys book of accounts and related records despite repeated demands
by the BIR.

receipts
Commissioner may, at any time during the taxable year, order inventory -taking of goods
of any taxpayer as a basis for determining his internal revenue tax liabilities.
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Commissioner may also place the business operations of any person, natural or juridical,
under observation or surveillance if there is reason to believe that such person is not
declaring his correct income, sales or receipts for internal revenue tax purposes.
Commissioner may also prescribe presumptive gross sales and receipts in the following
instances:
1.
When it is found that a person has failed to issue receipts and invoices in
violation of the NIRC; or
2.
When there is reason to believe that the books of accounts or other records do
not correctly reflect the declarations made or to be made in a return.
Under the presumptive gross sales or receipts method, the Commissioner, after taking
into account the sales, receipts, income, or other taxable base of other persons engaged
in similar situations or circumstances or after considering other relevant information,
prescribe a minimum amount of such gross receipts, sales, and taxable base.
Such amount so prescribed shall be prima facie correct for purposes of determining the
internal revenue tax liabilities of such person.
Issue jeopardy assessments and terminate the taxable period
A jeopardy assessment is one issued by the Commissioner if he believes that the

collection of the tax is in jeopardy due to delay and other causes.
The Commissioner may issue a jeopardy assessment when it comes to his knowledge
that a taxpayer is:
1.
retiring from business subject to tax; or
2.
intending
3.
a.
to leave the Philippines; or
b.
to remove his property therefrom; or
c.
to hide or conceal his property; or
performing any act tending to obstruct the proceedings for the collection of the
tax for the past or current quarter or year or to render the same totally or partly
ineffective.
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In such cases, the Commissioner may assess and collect the tax immediately without the
usual formalities. Among others, the Commissioner shall:
1.
declare the tax period of such taxpayer terminated any time; and
2.
send the taxpayer a notice of such decision together with a request for the
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
prescribed by law, unless paid within the time fixed in the demand made by the
Commissioner.
Prescribe real property values
Commissioner is empowered to divide the Philippines into different zones or areas and
to determine the fair market value of real properties located in each zone or area after
consultation with private and public appraisers.
For purposes of computing any internal revenue tax, the value of the property shall be,
whichever is higher of:
1.
the fair market value as determined by the Commissioner; or
2.
the fair market value as shown by the schedule of values of the Provincial and
City Assessors.
Inquire into bank deposit accounts
Commissioner may inquire into the bank deposits of:

1.
a decedent to determine his gross estate; and
2.
any taxpayer who has filed an application for compromise of his tax liability by
reason of financial incapacity to pay his tax liability.
There is really no conflict with RA 1405 or the Law on Secrecy of Bank Deposits Act in
case of compromises due to the financial inability to pay of the taxpayer since an
application for compromise shall not be considered unless and until the taxpayer waives
in writing his privilege under RA 1405. Such waiver constitutes the authority of the
Commissioner to inquire into the bank deposits of the taxpayer.
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RULE ON ESTOPPEL AND SOME COMPLIANCE REQUIREMENTS

Rule on no estoppel against the government
It is a settled rule of law that in the performance of its governmental functions, the
State cannot be estopped by the neglect of its agents and officers. Nowhere is this more
true than in the field of taxation. [Commissioner v. Procter and Gamble Co. , G.R.
No. 66838, April 15, 1988]
Similarly, estoppel does not apply to deprive the government of its right to raise
defenses even if these defenses are being raised for the first time on appeal.
[Commissioner v. Procter and Gamble Co. , G.R. No. 66838, April 15, 1988]
However, this was reversed in a subsequent resolution issued by the Supreme Court in
the same case. [ Commissioner v. Procter and Gamble Co. , G.R. No. 66838,
December 2, 1991, Resolution)]
Estoppel against the taxpayer
While the principle of estoppel may not be invoked against the government, this is not
necessarily true in the case of the taxpayer.
Some compliance requirements
All corporations, companies, partnerships or persons required by law to pay internal

revenue taxes shall keep a journal and a ledger or their equivalents.
Those earning below P50,000 quarterly may adopt a simplified set of bookkeeping
records.
Those earning more than P150,000 quarterly shall have their books of accounts audited
and examined yearly by independent certified public accountants.
They have option to keep subsidiary books as the needs of their business may require.
All books or records must be in a native language, English or Spanish, If not, translate to
these languages.
All the books of accounts, including the subsidiary books and other accounting records,
shall be preserved for a period beginning from the last entry in such book until the last
day prescribed by Section 203 within which the Commissioner is authorized to make an
assessment.
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Said books and records may be examined only once in a taxable year, with some
exceptions.
ASSESSMENT OF INTERNAL REVENUE TAXES

Tax assessment
An assessment is the official action of an administrative officer in determining the

amount of tax due from a taxpayer, or it may be a notice to the effect that the amount
therein stated is due from a taxpayer as a tax with a demand for payment of the tax or
deficiency stated therein.
An assessment is a finding by the taxing agency that the taxpayer has not paid his
current taxes. It is also a notice to the effect that the amount stated therein is due as
tax and is a demand for payment thereof.
The Local Government Code defines assessment as the act or process of determining
the value of a property or portion thereof subject to tax, including the discovery, listing,
classification, and appraisal of properties.
The BIR assessment is usually embodied in a demand letter or in a BIR form known as
the assessment notice.
Letter of authority
This is the authority issued by the Revenue Regional Director and given to a revenue
officer assigned to perform assessment functions to examine taxpayers within the
jurisdiction of the district in order to collect the correct amount of tax, or to 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.
Kinds of assessment
1.
Self assessment
2.
Deficiency assessment
3.
Illegal and void assessment
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4.
Erroneous assessment
Self assessment
One in which the tax is assessed by the taxpayer himself.
The amount of tax is reflected in the tax return that is filed by him and the tax assessed
is paid at the time he files the return. This system of filing of return and payment of tax
is known as the pay-as-you-file system.
Tax so assessed is known as self assessed tax.
Deficiency assessment
This is an 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 is thereafter assessed for the following reasons:
1.
The amount ascertained exceeds that which is shown as the tax by the taxpayer
in his return;
2.
No amount of tax is shown in the return; or
3.
The taxpayer did not file any return at all.
Illegal and void assessment
This is an assessment wherein the tax assessor has no power to act at all.
Erroneous assessment
This is an assessment wherein the assessor has the power to assess but errs in the
exercise of the power.
Principles governing tax assessments

1.
Assessments are prima facie presumed correct and made in good faith.
2.
Assessments should not be based on presumptions but on actual facts.
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3.
Assessment is discretionary on the Commissioner who cannot therefore be compelled to

assess a tax when he or she believes that there is no basis for such assessment.
4.
The authority vested in the Commissioner to assess taxes may be delegated. However, it
is settled that the power to make final assessments cannot be delegated.
5.
Assessments must be directed to the right party.
Investigative power of the Commissioner; factual basis of assessments
Inasmuch as assessments are based on facts, the Commissioner is given the power to
obtain information which serves as basis for said assessments, and is also given the
means to secure them. [See powers of the Commissioner]
Means employed in the assessment of taxes

1.
Examination of returns and determination of the tax due.
2.
Assess the proper tax on the best evidence obtainable.
3.

receipts
4.
Issue jeopardy assessments and terminate the taxable period.
5.
Prescribe real property values.
6.
Inquire into bank deposit accounts.
7.
Accredit and register tax agents.
8.
Prescribe additional procedural or documentary requirements.
The net worth method
A very effective method of determining taxable income and the deficiency income tax
due thereon is the net worth method or what is otherwise known as the inventory
method of income tax verification.
The method is an extension of the accounting principle: Assets minus liabilities equals
net worth. The taxpayers net worth is determined both at the beginning and at the end
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of the same taxable year. The increase or decrease in net worth is adjusted by adding
all non-deductible items and subtracting therefrom non-taxable receipts.
The legal basis for the use of the net worth method is the authority of the Commissioner
to adopt an accounting method that clearly reflects the income.
Conditions for the use of the net worth method

1.
That the taxpayers books do not clearly reflect his income or the taxpayer has no
books, or if he has books, he refuses to produce them.
2.
That there is evidence of a possible source or sources of income to account for the
increases in net worth or the expenditures.
3.
That there is a fixed starting point or opening net worth.
4.
That the circumstances are such that the method does reflect the taxpayers income
with reasonable accuracy and certainty and proper and just additions of personal
expenses and other non-deductible expenditures were made and correct, fair and
equitable credit adjustments were given by way of eliminating non-taxable items.
Requisites of a valid assessment

1.
Post-reporting notice or notice for an informal conference after the tax audit.
2.
Pre-assessment notice sent to the taxpayer, except in several instances.
3.
The taxpayers shall be informed in writing of the law and the facts upon which the
assessment is made.
4.
Assessment must be made within the prescriptive period.
Pre-assessment notice
This is a notice in writing which is sent to the taxpayer at the address indicated in his
return or at his last known address as stated in his notice of change of address if the
Commissioner or his duly authorized representative finds that taxes should be assessed
against the taxpayer. As such, the taxpayer is first notified of said findings before an
assessment is issued.
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When pre-assessment notice not required
1.
When the finding for any deficiency tax is the result of a mathematical error in the
computation of the tax as appearing on the face of the return;
2.
When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent;
3.
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;
4.
When the excise tax due on excisable articles has not been paid; or
5.
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.
Deficiency v. delinquency
Deficiency is the amount by which the tax due exceeds the sum of the amount of the
tax shown on a taxpayers return plus amounts previously assessed or collected as
deficiency, less any credits, refunds, or other payments due the taxpayer, i.e. the
amount a taxpayer is deficient in his tax payments.
Delinquency is the state of a person upon whom the personal obligation to pay the tax
has been fixed by lawful assessment and he thereafter fails to pay the tax within the
time prescribed by law.
PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION

A SSESSMENT
General Rule
Assessment shall be made within three (3) years after the last day prescribed by law for
the filing of the return or from the day the return was filed in case the return was filed
beyond the period prescribed by law.
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Exceptions
1.
2.
Assessment may be made within ten (10) years after the discovery of the falsity, fraud
or omission in the following cases:
a.
in case of a false or fraudulent return with intent to evade tax; or
b.
failure to file a return.
In case the Commissioner and the taxpayer agree in writing to a different period before
the expiration of the original prescriptive period. The period so agreed upon may be
extended by subsequent written agreement before the expiration of the period
previously agreed upon.
When is assessment deemed made?
It is not the issue date of the demand and/or notice that is the reckoning point in
prescription but rather it is the date when the demand letter is released, mailed or sent
to the taxpayer that constitutes an actual assessment.
The Supreme Court held in a case that so long as the release thereof is effected before
prescription sets in, the assessment is deemed made on time even though the same is
actually received by the taxpayer after the expiration of the prescription period.
[Basilan Estates, Inc. v. Commissioner , 21 SCRA 17] The law does not require that
the demand or notice be received within the prescriptive period.
Important considerations on prescription of the governments right to assess taxes

1.
Date of filing of tax returns
2.
Effect of filing of an amended return
3.
Effect of the filing of a wrong return (as if no return filed, thus, 10-year prescriptive
period)
4.
Period applicable when the law does not require the filing of a return (10-year
prescriptive period unless taxpayer files a return to enable him to avail of the benefit of
the three-year prescriptive period)
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Amended return
The Supreme Court held that where the amended return is substantially different from
the original return, the right of the Bureau of Internal Revenue to assess the tax is
counted from the filing of the amended return. [ Commisioner v. Phoenix Assurance
Co., Ltd., L-19127, May 20, 1965]
False v. fraudulent return
Distinction must be made between false returns due to mistakes, carelessness or

ignorance and fraudulent returns with intent to evade taxes.
The fraud contemplated by law is actual and not constructive. It must amount to
intentional wrong doing with the sole object of avoiding the tax. It necessarily follows
that a mere mistake cannot be considered as fraudulent intent. Thus, if both the
petitioner and the respondent Commissioner committed mistakes in making the entries
in the returns and the assessment respectively under the inventory method of
determining tax liability, it would be unfair to treat the mistakes of the petitioner as
tainted with fraud and those of the respondents tax deficiency for each year from 1946
to 1951, inclusive. [ Aznar v. Commissioner , L-20569, August 23, 1974]
Fraud
Fraud is a question of fact and the circumstances constituting fraud must be alleged and
proved.
Fraud must be a product of a deliberate intent to evade taxes. Hence, mere

underdeclaration does not necessarily imply fraud.
Fraud must be actual, not constructive. It must amount to intentional wrong doing with
the sole purpose of avoiding the tax. A mere mistake cannot be considered as fraudulent
intent.
Waiver of the statute of limitations
Section 222(b) of the NIRC allows the taxpayer and the government to extend by
mutual agreement the prescriptive periods for the assessment and collection of taxes.
Such agreement must be in writing.
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The waiver must be executed by the parties before the lapse of the three-year
prescriptive period. A waiver is ineffectual if it is executed beyond the original
prescriptive period.
The extended period may again be extended provided the new period be agreed upon
before the lapse of the extended period.
Procedure for waiver of prescriptive period under RMO 20-90

1.
Waiver must be in prescribed form
2.
Waiver must be signed by the taxpayer himself or his authorized representative
3.
The Commissioner or his duly authorized agent must sign the waiver indicating the BIRs
acceptance of the waiver
COLLECTION
General Rule
Collection may be instituted within five (5) years following the assessment of the tax.
[Section 222]
Exception
A proceeding in court for collection, without assessment, may be instituted within ten
(10) years after the discovery of falsity, fraud, or omission in the case of a false or
fraudulent return with intent to evade tax or failure to file a return. [Section 222(a),
NIRC]
When does the three-year prescriptive period start to run?
The period of limitation to collect is counted from the assessment of the tax.
Assessment is deemed made at the time the demand or assessment notice has been
sent, released or mailed to the taxpayer.
The actual sending or release to the taxpayer of the assessment notice or demand is,
therefore, necessary in order to determine the actual date when the tax being collected
was assessed.
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When is the tax deemed collected for purposes of the prescriptive period?
Collection through summary remedies is effectuated by summary methods when the

government avails of the distraint and levy procedure.
If collection is to be effected through judicial remedies, the collection of the tax is begun
by the filing of the complaint with the proper court.
However, if the decision of the Commissioner on a protested assessment is appealed to

the Court of Tax Appeals, the collection of the tax is considered begun when the
government files its answer to the taxpayers petition for review.
May there be a judicial action to collect a tax liability even if there is no previous
assessment?
Yes. A proceeding in court for collection without assessment may be instituted within
ten years after the discovery of falsity, fraud, or omission in the case of a false or
fraudulent return with intent to evade tax or failure to file a return. [Section 222(a),
NIRC]
Prescription of the governments right to recover an erroneously refunded tax
Same as the three-year prescriptive period for making assessments. [ Guagua Electric
Co., Inc. v. Commissioner , 19 SCRA 790]
Suspension of the running of the Statute of Limitations
The running of the Statute of Limitations provided in Sections 203 and 222 on the
making of assessment and the beginning of distraint or levy or a proceeding in court for
collection, in respect of any deficiency, shall be suspended under any of the following
circumstances:
1.
When the Commissioner is prohibited from making the assessment or beginning

the distraint or levy or proceeding in court and for sixty (60) days thereafter;
2.
When the taxpayer requests for a reinvestigation which is granted by the

Commissioner;
3.
When the taxpayer cannot be located in the address given by him in the return
filed upon which a tax is being assessed or collected, unless the taxpayer has
informed the Commissioner of any change in address;
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4.
When the warrant of distraint or levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient
discretion, and no property could be located; and
5.
When the taxpayer is out of the Philippines.
Examples when the Commissioner is prohibited from assessing or collecting the tax
1.
The filing of a petition for review in the Court of Tax Appeals from the decision of the
Commissioner on a protested assessment interrupts the running of the prescriptive
period for collection. [ Republic v. Ker & Co., Ltd. , 18 SCRA 207]
2.
When the Court of Tax Appeals enjoins the collection of the tax under Section 11 of RA
1125.
Request for reinvestigation which should be granted or acted upon by the

Commissioner
It should be emphasized that a mere request for reinvestigation without any

corresponding action on the part of the Commissioner does not interrupt the running of
the prescriptive period.
Will an extrajudicial demand on the taxpayer interrupt prescription?
No. Section 22 of the NIRC enumerates the instances when prescription is interrupted.
The serving of an extrajudicial demand is not one of them.
REMEDIES OF THE TAXPAYER

IN GENERAL
Remedies of taxpayer
1.
Remedy before payment of tax: Protest of assessment
2.
Remedy after payment of tax: Claim for tax refund or credit
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P ROTEST OF A SSESSMENT
Procedure
Taxpayer may protest administratively the assessment by filing a request for

reconsideration or reinvestigation within thirty (30) days from receipt of the assessment.
Within sixty (60) days from the filing of the protest, taxpayer shall submit all relevant
supporting documents, otherwise the assessment becomes final.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by the
decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the decision or from the lapse of the one hundred eighty (180)-day period;
otherwise, the decision shall become final, executory and demandable. [Section 228,
NIRC]
Decision of the Court of Tax Appeals may be appealed to the Court of Appeals through a
verified petition for review within fifteen (15) days from receipt of decision of the CTA.
This may be extended for another fifteen (15) days upon proper motion and the
payment of the full amount of the docket fee before the expiration of the reglementary
period. No further extension shall be granted except for the most compelling reason and
in no case to exceed 15 days. [Section 4, Rule 43, Rules of Court]
Decision of the Court of Appeals is appealable to the Supreme Court through a petition
for review by certiorari within fifteen (15) days from receipt of the CA decision.
Disputed assessment
This is an assessment which has been protested by the taxpayer. Its effect is to suspend
the prescriptive period to collect the tax due.
Only disputed assessments are appealable to the Court of Tax Appeals. A taxpayer who
received an assessment and who did not protest such assessment cannot file an appeal
to the Court of Tax Appeals, as the assessment is not disputed.
Decisions of the Regional Director
It should be noted that the Regional Director may also render decisions on protests.
Revenue Regulations 12-85 authorizes appeals to the Court of Tax Appeals from the
decisions of the Regional Directors on administrative protest within the same thirty -day
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period. Section 7 of Republic Act No. 1125, however, mentions only decisions of the
Commissioner.
Be that as it may, it is very well within the perimeter of correct procedure if the
taxpayer, instead of going directly to the Court of Tax Appeals, appeals the Regional
Directors decision to the Commissioner considering that, after all, it is the Commissioner
who has the final authority to decide administrative protests.
Two ways of protesting administratively

1.
Request for reconsideration: This refers to a plea for re-evaluation of an assessment

on the basis of existing records without need of additional evidence. It may involve a
question of fact or law or both.
2.
Request for reinvestigation: This refers to a plea for re-evaluation of an assessment

on the basis of newly-discovered or additional evidence. It may also involve a question
of fact or law or both.
Effect of failure of the taxpayer to file an administrative protest or to appeal the

Commissioners decision to the Court of Tax Appeals
The assessment becomes final and unappealable. As such, it makes the assessed tax
collectible.
CLAIMS FOR REFUND AND CREDIT OF TAXES

Refund v. credit
These are remedies of the taxpayer after payment of the tax.
Both are modes of recovering taxes which are either erroneously or illegally paid to the
government.
Tax refund takes place when there is actually a reimbursement of the tax. In tax credit,
the government applies the amount determined to be reimbursable, after proper
verification, against any sum that may be due and collectible from the taxpayer.
When may claim for refund or credit be filed?

1.
When tax has been erroneously or illegally assessed or collected.
2.
When any penalty is claimed to have been collected without authority.
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3.
When any sum is alleged to have been excessively or in any manner wrongfully
collected. [Section 229, NIRC]
4.
Commissioner is also given the authority to refund the value of internal revenue stamps
when they are returned in good condition by the purchaser and, in his discretion,
redeem or change unused stamps that have been rendered unfit for use and refund
their value upon proof of destruction. [Section 204, NIRC]
Nature of erroneously paid or illegally assessed or collected taxes
There is erroneous payment of taxes when a taxpayer pays under a mistake of fact as
for instance in a case where he is not aware of an existing exemption in his favor at the
time the payment was made. Such payments are held to be not voluntary and,
therefore, can be recovered or refunded.
Taxes are illegally collected when payments are made under duress.
Requisites for refund or credit

1.
A written claim for refund or credit must first be filed with the Commissioner;
2.
The claim for refund or credit must be a categorical demand for reimbursement; and
3.
It must be filed within two years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment.
Note: Payment under protest is not required. Section 229 of the NIRC provides that a suit or
proceeding for refund or credit may be maintained whether or not such tax, penalty, or
sum has been paid under protest or duress.
When payment under protest required

1.
In real property protest cases
2.
Protest in customs cases
Why is a written claim for refund necessary?

1.
To afford the Commissioner an opportunity to correct the action of subordinate officers.
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2.
To notify the government that the taxes sought to be refunded are under question and
that, therefore, such notice should be borne in mind in estimating the revenue available
for expenditure.
Two things to be established before refund or credit is granted

1.
There was an actual collection and receipt by the government of the tax sought to be
recovered. This requires factual proof.
2.
There is legal basis for granting the refund or credit.
Procedure for refund or credit

1.
File claim in writing with the Commissioner. This is a condition precedent before one can
file action with the Court of Tax Appeals for refund or credit.
2.
If claim is denied or is not acted upon by the Commissioner, the taxpayer must file an
appeal to the Court of Tax Appeals within thirty (30) days after receipt of the decision of
the Commissioner.
3.
Both the written claim and the appeal to the Court of Tax Appeals must be filed within
the two-year prescriptive period.
The two-year prescriptive period for overpaid quarterly corporate income tax
In the case of an overpaid quarterly income tax for corporations, the prescriptive period
of two years within which a claim for refund should be filed is counted, not from the
time the corporation files its quarterly income tax return and pays the tax thereon, but
from the date the final, adjustment return is filed after the end of the taxable
year . [Commissioner v. TMX Sales, Inc. , 205 SCRA 184]
Prescriptive period for taxes withheld
In the case of taxes withheld under the withholding tax system, the two-year
prescriptive period for refunds is counted not from the date the tax is withheld and
remitted to the Bureau of Internal Revenue but from the end of the taxable year.
Taxes payable in installments
In cases of taxes which are payable in installments, the two-year prescriptive period is
counted from the payment of the last installment. [ Commissioner v. Palanca, 18
SCRA 496]
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Suspension of the two-year prescriptive period
The period for claiming claims for refund is suspended provided two conditions are
present:
1.
There is a pending litigation between the two parties, i.e. the government and
the taxpayer as to the proper tax to be paid and of the proper interpretation of
the taxpayers charter in relation to the disputed tax; and
2.
The Commissioner in that disputed case agreed to abide by the decision of the
Supreme Court as to the collection of the tax relative thereto. [ Panay Electric
Co. v. Collector, L-10574, May 28, 1958]
Refund without claim
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 made.
Forfeiture of refund and tax credit
A refund check or warrant which shall remain unclaimed or uncashed within five (5)
years from the date said warrant or check was mailed or delivered shall be forfeited in
favor of the Government and the amount thereof shall revert to the general fund.
A tax credit certificate which shall remain unutilized after five (5) years from the date of
issue shall, unless revalidated, be considered invalid.
Equitable recoupment
It is a principle which allows a taxpayer whose claim for refund has been barred due to
prescription to recover said tax by setting off the prescribed refund against a tax that
may be due and collectible from him.
This rule is not applicable in the Philippine jurisdiction.
Legal capacity of withholding agents to claim tax refund
Corporate withholding agents in the Philippines of non-resident foreign corporations are

entitled to claim the refund of excess withholding tax paid on income of said
corporations in the Philippines.
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The Supreme Court ruled that a withholding agent should be allowed to claim the tax
refund because, under the law, it is the one who is held liable for any violation of the
withholding tax law should such a violation occur. [ Commissioner v. Wander Phils.,
Inc., G.R. No. 68378, April 15, 1988]
Interest on tax refunds
The rule on this matter is that the government cannot be required to pay interest on
taxes refunded to the taxpayer. [ Sweeney v. Commissioner , L-12178, August 21,
1959]
Exceptions
1.
When the Commissioner acted with patent arbitrariness. Arbitrariness

presupposes inexcusable or obstinate disregard of legal provisions.
[Commissioner v. Victorias Milling Corp., et.al. , L-19667, November 29,
1966]
2.
In cases of refunds or credits made after three months from April 15 to

employees for any excess of the taxes withheld, the rate of which is six percent
(6%) per annum . [Section 79, NIRC]
COURT OF TAX APPEALS

Law creating the CTA
Republic Act No. 1125
Why was the CTA created?

1.
To have a centralized body well-versed in tax matters a regular court forming part of
the judicial system which could exclusively hear and determine tax cases.
2.
To prevent delay in the disposition of tax cases in view of the backlog of civil and
criminal cases in the regular courts. [ Ursal v. Court of Tax Appeals , 101 Phil 209]
Nature of the CTA

1.
It is a judicial, not merely an administrative, body.
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2.
It is a court of special jurisdiction and, as such, can only take cognizance of such
matters as are clearly within its jurisdiction.
3.
It is not governed strictly by the technical rules of evidence.
Organization, quorum and disposition of cases by the CTA
The CTA is composed of a Presiding Judge and two Associate Judges, each of whom is
appointed by the President from a list of nominees prepared by the Judicial and Bar
Council. Such appointments need no confirmation.
Any two judges of the CTA shall constitute a quorum and the concurrence of two judges
shall be necessary to promulgate any decision thereof. [Sections 1 and 2, RA 1125]
Cases brought before the CTA shall be decided within thirty (30) days after the
submission thereof for decision, which 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. [Section 12, RA 1125]. This requirement, however, is merely directory.
Jurisdiction of the CTA
CTA shall exercises exclusive appellate jurisdiction to review by appeal the following:
1.
Decisions of the Commissioner of Internal Revenue involving disputed

assessments; refunds of internal revenue taxes, fees or other charges; penalties
imposed in relation thereto; or other matters arising under the NIRC or other law
or part of law administered by the Bureau of Internal Revenue.
2.
Decisions of the Commissioner of Customs in cases involving liability for customs

duties, fees or other money charges; seizure, detention or release of property
affected; fines, forfeitures, or other penalties imposed in relation thereto; or
other matters arising under the Customs Law or other law or part of law
administered by the Bureau of Customs. [Section 7, RA 1125]
Jurisdiction over decisions of the Local Board of Assessment Appeals is now lodged with
the Central Board of Assessment Appeals.
Necessity of decisions in order to vest the CTA with jurisdiction
Decisions of either the Commissioner of Internal Revenue or the Commissioner of

Customs is of the essence in appeal of cases to the CTA for it is axiomatic in taxation
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that mere assessments of the Commissioner are not appealable to the CTA. It is settled
that assessments are not decisions of the Commissioner.
In a case, the Supreme Court held that the word decision in Section 7 of RA 1125
means decisions of the Commissioner on the protest of the taxpayer against the
assessments. Definitely, the word does not signify the assessment itself.
[Commissioner v. Villa, L-23988, January 20, 1968]
In much the same way that mere assessments are not appealable, rulings of the
Commissioner are not likewise appealable to the CTA.
Compromise penalties and the CTA
Collection of compromise penalties comes within the scope of Section 7 of RA 1125

which speaks of penalties imposed in relation thereto; and that therefore it follows
that the CTA has jurisdiction thereon. [ U.S. Life Insurance Co. v. Commissioner ,
CTA Case No. 1267, December 29, 1964]
What decision is appealable?
When it constitutes the final action taken by him or his authorized deputies with respect
to the taxpayers liability.
The appealable decision is that letter of denial where the Commissioner not only
demanded payment of the amount assessed but wherein he also gave the warning that
in the even the taxpayer failed to pay the same, the Commissioner would be constrained
to enforce the collection thereof by means of the remedies prescribed by law. [ Surigao
Electric Co. v. Court of Tax Appeals , 57 SCRA 523]
Issuance of a warrant of distraint or levy does not constitute a denial of the protest or a
final action by the Commission on the protest. [ Commissioner v. Union Shipping, 85
SCRA 547]
However, the filing of a judicial action for collection, i.e. criminal and civil action during
the pendency of an administrative protest, constitutes a denial of the protest.
[Commissioner v. Union Shipping] In such a situation, the taxpayer may file an
appeal with the Court of Tax Appeals.
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Whose decisions are appealable?
Decisions of the Commissioner of Internal Revenue are by statutory provision appealable

to the CTA but it appears that under Revenue Regulations 12-85, decisions of the
Regional Director of a revenue region in the BIR are also appealable.
There is a court ruling to the effect that the decisions of Regional Directors may be
appealed to the CTA. [ Fortalez, Jr. v. Collector, Resolution, CTA Case No. 1527,
December 22, 1964]
Appeals in customs cases seem to be limited only to decisions of the Commissioner of

Customs.
Who may appeal to the CTA?
Any person, association or corporation affected by a decision of the Commissioner of

Internal Revenue or the Collector of Customs or any Provincial or City Board of
Assessment Appeals may file an appeal in the CTA.
Collection case in RTC while appeal pending in the Court of Tax Appeals
If the Bureau of Internal Revenue, during the pendency of the appeal in the Court of
Tax Appeals, files a civil action in the RTC for collection of the tax liability, the taxpaye r
may file a motion in the RTC for the dismissal of the case on the ground that there is no
basis for collecting the tax due where the assessment thereof is still under dispute in the
Court of Tax Appeals.
Tax collection not suspended during appeal
An appeal to the CTA from a decision of the Commissioner shall not suspend the
payment or collection of the tax liability of the taxpayer unless a motion to that effect
shall have been presented to the CTA and granted by it on the ground that such
collection jeopardizes the interest of the government and/or the taxpayer.
No injunction to restrain tax collection
General Rule: No court shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge imposed by the NIRC.
[Section 218, NIRC]
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Exception: CTA may suspend or restrain the collection of the tax when, in its opinion,
the collection of the tax may jeopardize the interest of the government and/or the
taxpayer. [Section 11, RA 1125]
Requisites for injunction

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.
The thirty-day prescriptive period of appeal
The thirty-day prescriptive period starts to run from the date the taxpayer receives the
appealable decision of the Commissioner.
The 30-day period is jurisdictional. The failure of the taxpayer to appeal from a decision
of the Commissioner on time renders the assessment final, executory and demandable.
Requests or motions filed by the taxpayer with the BIR for the reconsideration of the
Commissioners decision operate to suspend the running of the prescriptive period of
appeal to the CTA.
However, mere reiterations of previous petitions for reconsideration do not suspend the
running of the prescriptive period. Pro-forma motions, which do not raise new issues,
will not suspend the period.
Non-extendibility of the 30-day period through tax refunds
Where the assessment of a disputed tax has become final and executory on account of
the failure of the taxpayer to appeal within the reglementary 30-day period, the
assessment may no longer be disputed through the simple expedient of paying the
protested tax and then by subsequently claiming it as a refund within the period of two
years from date of payment.
Interlocutory orders
Interlocutory orders of the CTA are not appealable.
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Appeal from decisions of the CTA
One motion for reconsideration may be allowed for decisions of the CTA.
Decisions of the CTA are appealed to the Court of Appeals through a verified petition for
review. [Sections 1 and 5, Rule 43, Rules of Court]
Appeals period is fifteen (15) days from receipt of the decision or judgment. The Court
of Appeals may grant an additional period of fifteen (15) days only within which to the
file the petition for review. No further extension shall be granted except for the most
compelling reasons and in no case to exceed fifteen (15) days. [Section 4, Rule 43,
Rules of Court]
Findings of fact of CTA not reviewable
Findings of fact of the CTA, when supported by substantial evidence, is final.
Damages in CTA proceedings
Section 16 of RA 1125 provides that where an appeal is found to be frivolous or that
proceedings have been instituted merely for delay, the CTA may assess damages
against the appellant in an amount not exceeding P500 which shall be collected in the
same manner as fine or other penalties authorized by law.
REMEDIES OF THE GOVERNMENT

IN GENERAL
Remedies of the government
1.
Tax lien
2.
Compromise
3.
Distraint
4.
Levy
5.
Civil action
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6.
Criminal action
7.
Forfeiture
8.
Suspension of business operations in violations of VAT
9.
Enforcement of administrative fine
T AX LIEN
Tax lien
When a taxpayer neglects or refuses to pay his internal revenue tax liability after
demand, the amount so demanded shall be a lien in favor of the government from the
time the assessment was made by the Commissioner until paid with interest, penalties,
and costs that may accrue in addition thereto, upon all property and rights to property
belonging to the taxpayer. [Section 219, NIRC]
Lien shall not be valid against any mortgagee, purchaser or judgment creditor until
notice of such lien shall be filed by the Commissioner in the Register of Deeds of the
province or city where the property of the taxpayer is located.
COMPROMISE
Compromise v. abatement
Unlike compromise which involves a reduction of the taxpayers liability, abatement of

tax means that the entire tax liability of the taxpayer is cancelled.
Compromise and abatement have different grounds.
Grounds for compromise

1.
A reasonable doubt as to the validity of the claim against the taxpayer exists; or
2.
The financial position of the taxpayer demonstrates a clear inability to pay the assessed
tax.
Grounds for abatement

1.
When the tax or any portion thereof appears to be unjustly or excessively assessed.
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2.
When the administration and collection costs involved do not justify the collection of the
amount due.
Compromise of criminal violations
All criminal violations may be compromised except:

1.
those already filed in court; and
2.
those involving fraud.
Limitations on compromise
For cases of financial incapacity, a minimum compromise rate equivalent to 10% of the
basic assessed tax; and
For other cases, a minimum compromise rate equivalent to 40% of the basic assessed
tax.
Where the basic tax exceeds one million pesos (P1,000,000) or where the settlement
offered is less than the prescribed minimum rates, the compromise shall be subject to
the approval of the Evaluation Board which shall be composed of the Commissioner and
the four Deputy Commissioners.
Delegation of the power of compromise
The Commissioner may delegate his power to compromise to the Deputy Commissioners
and the Regional Directors subject to such limitations and restrictions as may be
imposed under rules and regulations to be promulgated for the purpose.
DISTRAINT AND LEVY

Collection by distraint and levy
Both are summary administrative enforcement remedies and cannot be availed of where
the amount of tax involved is not more than P100.
Distraint is enforced on personal property of the taxpayer while levy is enforced on real
property.
In distraint, forfeiture by the government is not provided, while in levy, forfeiture is

authorized.
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The taxpayer is not given the right of redemption with respect to distrained personal
property, while such right is granted in case of real property levied upon and sold, or
forfeited, to the government.
Levy may be made before, simultaneously or after distraint.
Actual v. constructive distraint
Actual distraint is resorted to when delinquency in the payment sets in, that is, when at
the time required for payment, a person fails to pay his tax obligation. It consists of
actual seizure and distraint of personal property of the taxpayer.
In constructive distraint, no actual delinquency is necessary before it may be resorted

to. It may be availed of in the following instances: a) Taxpayer is retiring from business
subject to tax; b) He intends to leave the Philippines; c) He removes his property
therefrom; d) He hides or conceals his property; or e) He performs any act tending to
obstruct the proceedings for collecting the tax due or which may be due from him. In
addition, constructive distraint may also be resorted to when the taxpayer is already
delinquent.
Constructive distraint is a preventive remedy whose aim is to forestall a possible

dissipation of the taxpayers asset when delinquency takes place.
There are different procedures in enforcing actual and constructive distraint.
How to effect constructive distraint?
It shall be effected by requiring the taxpayer or any person having possession or control
of such property to sign a receipt covering the property distrained and obligate himself
to preserve the same intact and unaltered and not to dispose of the same in any manner
whatever without the express authority of the Commissioner.
If the taxpayer or any other person refuses or fails to sign the receipt, the revenue
officer effecting the constructive distraint shall proceed to prepare a list of such property
and, in the presence of two 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.
Procedure for actual distraint

1.
Commencement of distraint proceedings
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2.
Service of warrant of distraint
3.
Notice of sale of distrained property
4.
Sale of property distrained
Manner of serving warrant of distraint

1.
Goods, chattels, effects or other personal property

The officer serving the warrant of distraint shall make or cause to be made an
account of the goods, chattels, effects or other personal property distrained, signed by
himself, which includes a statement of the sum demanded and note of the time and
place of the sale.
A copy shall be left either with the owner or person from whose possession such
goods, chattels, or effects or other personal property were taken, or at the dwelling of
business of such person and with someone of suitable age and discretion.
2.
Stocks and other securities

Stocks and other securities shall be distrained by serving a copy of the warrant
of distraint upon the taxpayer and upon the president, manager, treasurer or other
responsible officer of the corporation, company or association, which issued the said
stocks or securities.
3.
Debts and credits

Debts and credits shall be distrained by leaving with the person owing the debts
or having in his possession or under his control such credits, or with his agent, a copy of
the warrant of distraint.
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.
4.
Bank accounts
Bank accounts shall be garnished by serving a warrant of garnishment upon the
taxpayer and upon the president, manager, treasurer or other responsible officer of the
bank.
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Upon receipt of the warrant of garnishment, the bank shall turn over to the
Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of
the Government.
Purchase by government at sale upon distraint
The Commissioner or his deputy may purchase the property distrained in behalf of the
National Government when:
1.
the amount bid for the property under distraint is not equal to the amount of the
tax; or
2.
the amount is very much less than the actual market value of the articles offered
for sale.
Property so purchased may be resold by the Commissioner or his deputy.
Procedure on levy of real property

1.
Service of warrant of levy
2.
Advertisement of the sale
3.
Public sale of the property under levy or forfeiture of the property to the government for
want of bidder
4.
Redemption of property or consolidation of ownership and title in the purchaser
How to effect levy?
Internal revenue officer shall prepare a duly authenticated certificate showing the name
of the taxpayer and the amount of the tax and penalty due from him.
Such certificate shall operate with the force of a legal execution throughout the
Philippines.
Levy shall be effected by writing upon said certificate a description of the property upon
which levy is made. At the same time, written notice of the levy shall be mailed to or
served upon the Register of Deeds of the province or city where the property is located
and upon the delinquent taxpayer, or if he is absent from the Philippines, to his agent or
manager, or to the occupant of the property in question.
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Advertisement of sale
Posting a notice of sale at least 30 days at the main entrance of the municipal or city
hall and in a public and conspicuous place in the city or municipality where the property
is located
Publication once a week for three weeks in a newspaper of general circulation in the
municipality or city where the property is located
Redemption of real property sold
Delinquent taxpayer have the right to redeem the real property sold by him or any one
for him within one (1) year from the date of sale.
Taxpayer must pay the amount of public taxes, penalties, and interest from the date of
delinquency to the date of sale, together with interest on said purchase price at the rate
of 15% per annum from the date of purchase to the date of redemption.
The owner shall not, however, be deprived of the possession of the said property and
shall be entitled to the rents and other income thereof until the expiration of the time
allowed for its redemption.
Forfeiture to government for want of bidder in sale of real property
Internal revenue officer conducting the sale of real property levied shall declare the
property forfeited to the Government in satisfaction of the claim when:
1.
there is no bidder for real property exposed for sale; or
2.
the highest bid is for an amount insufficient to pay the taxes, penalties and
costs.
Resale of real estate taken for taxes
The Commissioner shall have charge of any real estate obtained by the Government in
payment or satisfaction of taxes, penalties or costs arising under the NIRC or in
compromise or adjustment of any claim thereof.
The Commissioner may, upon giving not less than 20 days notice, sell and dispose of
the said property at public auction or, with the prior approval of the Secretary of
Finance, dispose of the same at private sale.
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FORFEITURE
Forfeiture
The effect of forfeiture is to transfer the title to the specific thing from the owner to the
government.
In case of personal property: The forfeiture of chattels and removable fixtures of

any sort is enforced by seizure and sale or destruction of the specific forfeited property.
In case of real property: The forfeiture of real property is enforced by a judgment of

condemnation and sale in a legal action or proceeding, civil or criminal, as the case may
require.
Forfeiture of property used in unlicensed business or dies used for printing false
stamps, etc.
All chattels, machinery, and removable fixtures of any sort used in the unlicensed
production of articles subject to excise tax shall be forfeited.
Dies and other equipment used for the printing or making of any internal revenue
stamp, label or tag which is in imitation of or purports to be a lawful stamp, label or tag
shall also be forfeited.
Forfeiture of goods illegally stored or removed
Unless otherwise specifically authorized by the Commissioner, all articles subject to

excise tax should not be stored or allowed to remain in a distillery, distillery warehouse,
bonded warehouse or other place where made, after the tax thereon has been paid;
otherwise, all such articles shall be forfeited.
Articles withdrawn from any such place or from customs custody or imported into the
country without the payment of the required tax shall likewise be forfeited.
CIVIL AND CRIMINAL A CTIONS

Civil and criminal actions
Civil and criminal actions and proceedings instituted in behalf of the Government under
the authority of the NIRC or other law enforced by the Bureau of Internal Revenue shall
be brought in the name of the Government of the Philippines and shall be conducted by
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legal officers of the Bureau of Internal Revenue, but no civil or criminal action for the
recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code
shall be filed in court without the approval of the Commissioner. [Section 220, NIRC]
In a fraud assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.
Civil action
Civil action, as a mode of tax collection, is resorted to when a tax liability becomes
collectible.
Collectibility of a tax arises in the following instances:

1.
When a tax is assessed but the assessment becomes final and unappealable
because the taxpayer fails to file an administrative protest.
2.
When a protest against the assessment is filed by the taxpayer and a decision is
rendered by the Commissioner but said decision becomes final, executory and
demandable for failure of the taxpayer to file an appeal.
A civil action may also be filed in order to collect the so-called self assessed tax.
No civil action for the recovery of taxes shall be filed without the approval of the
Commissioner.
Insufficient protest allowing collection case
In Dayrit v. Cruz [L-39910, September 26, 1988], the Supreme Court ruled that the
request for reconsideration cannot be considered as a protest against the assessment.
According to the Supreme Court, the failure of the heirs to substantiate their claim
against the assessment due to the non-submission of their position paper justified the
Commissioner in collecting the estate and inheritance taxes in the settlement
proceedings.
In Republic v. Ledesma [L-19759, February 28, 1969], the Supreme Court held that
the taxpayers failure to dispute the assessment effectively by complying with the
conditions laid down by the Bureau of Internal Revenue provided a legal basis for the
government to collect the taxpayers liability by ordinary civil action.
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Is Commissioner required to rule on a pending protest before filing a collection
case?
No. In Republic v. Liam Tian Teng Sons, Inc. [16 SCRA 584(1966)], the Supreme
Court held that nowhere in the Tax Code is the Commissioner required to rule first on a
taxpayers request for reinvestigation before he can go to court for the purpose of
collecting the tax assessed. According to the Supreme Court, the legislative policy is to
give the Commissioner much latitude in the speedy and prompt collection of taxes
because it is on taxation that the government depends to obtain the means to carry out
its operations.
Note however that a civil or criminal case is tantamount to a denial of the request for
reinvestigation. Thus, the taxpayer may file an appeal with the Court of Tax Appeals.
[Commissioner v. Union Shipping]
Criminal action
The filing of a criminal action is one of the recognized modes of collecting delinquent
taxes. Section 105 of the NIRC further states that the judgment in the criminal case
shall not only impose the penalty but shall also order payment of the taxes subject of
the criminal case as finally decided by the Commissioner.
Criminal action is, however, not resorted to as a collection remedy only. There are other
cases not involving non-payment of taxes where criminal action is utilized.
Important considerations regarding criminal action

1.
No criminal action for the recovery of taxes or the enforcement of a fine shall be filed in
court without the approval of the Commissioner. [Section 220, NIRC]
2.
Criminal actions instituted in behalf of the government under the authority of the NIRC
or other law enforced by the Bureau of Internal Revenue shall be brought in the name
of the government and shall be conducted by legal officers of the Bureau of Internal
Revenue. [Section 220, NIRC]
3.
The acquittal of the taxpayer in a criminal action does not necessarily result in the
exoneration of said taxpayer from his civil liability to pay taxes.
4.
In a criminal action that was instituted against the taxpayer for having filed a false and
fraudulent return and failure to pay taxes, the Supreme Court held that the subsequent
satisfaction of the tax liability by payment or prescription will not operate to extinguish
the taxpayers criminal liability.
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Payment of the tax due after apprehension shall not constitute a valid defense in
any prosecution for violation of any provision of the NIRC or in any action for forfeiture
of untaxed articles. [Section 253, NIRC]
5.
Subsidiary imprisonment is provided for in cases of non-payment of the fine due to the
taxpayers insolvency but not for failure to pay the tax due to the taxpayers insolvency.
Section 280 provides that: If the person convicted for violation of any provisions
of this Code has no property with which to meet the fine imposed upon him by the
court, or is unable to pay such fine, he shall be subject to a subsidiary personal liability.
6.
In Ungab v. Cusi , the Supreme Court held that no assessment is required before a
criminal prosecution. This was modified in a later case, Commissioner v. Court of
Appeals, where the Supreme Court ruled that assessment is necessary before the
criminal prosecution of Fortune Tobacco. The Supreme Court, however, harmonized this
decision with the earlier one. [See later discussion]
7.
In cases of violations committed by associations, partnerships, or corporations, the

penalty shall be imposed on the partner, president, general manager, branch manager,
treasurer, officer-in-charge, and employees responsible for the violation.
Civil liability in tax criminal cases
In ordinary criminal cases, the civil liability is incurred by reason of the offenders
criminal act.
In taxation, the civil liability to pay taxes arises not because of any felony but upon the
taxpayers failure to pay taxes. Criminal liability in taxation arises as a result of ones
liability to pay his taxes. Consequently, the extinction of ones criminal liability does not
necessarily result in the extinguishments of his civil liability to pay taxes.
With regard to the tax proper, the state correctly points out in its brief that the
acquittal in the criminal case could not operate to discharge the petitioner from the duty
to pay the tax since that duty is imposed by statute prior to and independent of any
attempts on the part of the taxpayer to evade payment. The obligation to pay the tax is
not a mere consequence of the felonious acts charged in the information, nor is it a
mere civil liability derived from crime that would be wiped out by the judicial declaration
that the criminal acts charged did not exist. [Castro v. Collector , 4 SCRA 1093]
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Need for assessment before criminal action
Ungab v. Cusi [L-41919-24, May 30,1980}
Quirico Ungab filed a motion to quash the criminal complaints against him in view of his
pending protest against the assessment made by the Bureau of Internal Revenue. The
Supreme Court ruled that his contention is without merit. What is involved here is not
the collection of taxes where the assessment of the Commissioner may be reviewed by
the Court of Tax Appeals but a criminal prosecution for violation of the NIRC which is
within the cognizance of the Court of First Instance (now RTC).
While there can be no civil action to enforce collection before the assessment
procedures in the NIRC have been followed, there is no requirement for the precise
computation of the tax before there can be criminal prosecution under the NIRC.
A crime is complete when the violator has knowingly and willfully filed a fraudulent
return with intent to evade and defeat the tax.
Commissioner of Internal Revenue v. Court of Appeals (1997)
Assessment required before criminal prosecution of Fortune for tax evasion can be
pursued.
The Supreme Court differentiated this case from Ungab v. Cusi by ruling that, even
though this is also a criminal prosecution, there must be a prima facie showing of a
willful attempt to evade taxes before one can proceed with such prosecution. In Ungab,
there was willful attempt to evade taxes while, in the case at bar, there was none, as
Fortune was even paying taxes according to the BIR requirements. Thus, there is still
need for a final determination of the tax due before criminal prosecution can be
commenced against Fortune.
ADDITIONS TO THE TAX

Additions to the tax
Additions to the tax are increments to the basic tax incident to the taxpayers noncompliance with certain legal requirements like the taxpayers refusal or failure to pay
taxes on time and/or violations of taxing provisions in the law.
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What are the additions to the tax?
1.
Civil penalty or surcharge
2.
Interest
3.
Other civil penalties and administrative fines
Civil penalty or surcharge
The civil penalty or surcharge may either be 25% or 50% of the tax depending on the
nature of the violation.
The payment of the surcharge is mandatory and the Commissioner is not vested with
any authority to waive or dispense with the collection thereof.
An extension of time to pay taxes granted by the Commissioner does not excuse
payment of the surcharge.
The 50% surcharge is not a criminal penalty but a civil or administrative sanction
provided primarily as a safeguard for the protection of the State revenue and to
reimburse the government for the heavy expense of investigation and the loss resulting
from the taxpayers fraud.
Cases where the civil penalties or surcharges are imposed

1.
2.
25%
a.
Failure to file any return and to pay the tax due thereon as required by the NIRC
or rules
b.
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.
d.
Failure to pay the full or part of the amount of tax shown on any return, or the
full amount of tax due for which no return is required to be filed, on or before
the date prescribed for its payment.
50%
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a.
In case of willful neglect to file the return within the period prescribed by the
NIRC or rules
b.
In case a false or fraudulent return is willfully made
Substantial underdeclaration or overdeclaration
A substantial underdeclaration of taxable sales, receipts or income, or a substantial

overstatement of deductions shall constitute prima facie evidence of a false or
fraudulent return.
Failure to report sales, receipts or income in an amount exceeding 30% of that declared
per return and a claim of deductions in an amount exceeding 30% of actual deductions
shall render the taxpayer liable for substantial underdeclaration of sales, receipts or
income or for overstatement of the deductions.
Interest
This is an increment on any unpaid amount of tax assessed at the rate of 20% per
annum or such higher rate as may be prescribed by the regulations from the date
prescribed for payment until the amount is fully paid.
Classes of interest
1.
Deficiency interest
2.
Delinquency interest
3.
Interest on extended payment
Deficiency interest
Any deficiency in the tax due shall be subject to the interest of 20% per annum which
shall be assessed and collected from the date prescribed for its payment until the full
payment thereof.
When delinquency interest imposed?
Delinquency interest is imposed in case of failure to pay:

1.
The amount of the tax due on any return required to be filed; or
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2.
The amount of tax due for which no return is required; or
3.
A deficiency tax or any surcharge or interest thereon on the due date appearing
in the notice and demand of the Commissioner.
Rate is 20% per annum until the amount is fully paid which interest shall form part of
the tax.
Interest on extended payment
This is imposed when taxpayer has opted to pay by installment but he fails to pay the
tax or any installment on the prescribed date for payment.
It is also imposed where Commissioner has authorized the extension of the time for
payment of the tax.
Administrative fines or penalties

1.
Failure to file certain information returns
2.
Failure of a withholding agent to collect and remit the tax
3.
Failure of a withholding agent to refund excess withholding tax
STATUTORY OFFENSES AND THEIR PENALTIES

General points re. crimes and offenses
Any person convicted of a crime penalized by the NIRC shall, in addition to being liable
for the payment of the tax, be subject to the penalties imposed in the Code.
Payment of the tax due after apprehension shall not constitute a v alid defense in any
prosecution for violation of any provision of the NIRC or in any action for the forfeiture
of untaxed articles.
Any person who willfully aids or abets in the commission of a crime penalized in the
NIRC or who causes the commission of any such offense by another shall be liable in the
same manner as the principal.
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If the offender is not a Filipino citizen, he shall be deported immediately after serving
the sentence without further proceeding for deportation.
If the offender is a public officer or employee, the maximum penalty prescribed for the
offense shall be imposed and, in addition, he shall be dismissed from the public service
and perpetually disqualified from holding any public office, to vote and to participate in
any election.
If the offender is a Certified Public Accountant, his certificate as a CPA shall, upon
conviction, be automatically revoked or cancelled.
In the case of associations, partnerships or corporations, the penalty shall be imposed

on the partner, president, general manager, branch manager, treasurer, officer-incharge, and employees responsible for the violation.
Give examples of crimes and offenses

1.
Attempt to evade or defeat tax

Any person who willfully attempts in any manner to evade or defeat any tax
imposed under the NIRC or the payment thereof.
2.
Failure to file return, supply correct and accurate information, pay tax, withhold and
remit tax and refund excess taxes withheld on compensation
3.
Unlawful pursuit of business

Any person who carries on any business for which an annual registration fee is
imposed without paying the tax as required by law.
4.
Unlawful possession or removal of articles subject to excise tax without payment of the
tax
5.
Failure or refusal to issue receipts or sales or commercial invoices, violations related to

the printing of such receipts or invoices and other violations
Prescription for violations of any provision of the NIRC
All violations of any provision of the NIRC shall prescribe after five (5) years.
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Prescription shall begin to run from the day of the commission of the violation of the
law, and if the same be not known at the time, from the discovery thereof and the
institution of judicial proceedings for its investigation and punishment.
The prescription shall be interrupted when proceedings are instituted against the guilty
persons and shall begin to run again if the proceedings are dismissed for reasons not
constituting jeopardy.
The term of prescription shall not run when the offender is absent from the Philippines.
When is informers reward given?
An informers reward is given to persons instrumental in the:

1.
discovery of violations of the NIRC; and
2.
discovery and seizure of smuggled goods.
Requisites for informers reward for violations of the NIRC
This may be claimed by any person, except an internal revenue official or employee, or
other public official or employee, or his relatives within the sixth degree of
consanguinity.
Person voluntarily gives definite and sworn information, not yet in the possession of the
Bureau of Internal Revenue. Information should not refer to a case already pending or
previously investigated or examined by the Commissioner or any of his agents.
Information leads to the discovery of frauds upon the internal revenue laws or violations
of any of the provisions thereof.
There is recovery of revenues, surcharges and fees and/or the conviction of the guilty
party and/or the imposition of any fine or penalty. In the reverse, if no revenue,
surcharges or fees be actually recovered or collected, such person shall not be entitled
to a reward.
Reward shall be equivalent to ten percent (10%) of the revenues, surcharges or fees
recovered and/or any fine or penalty imposed and collected or P1,000,000 per case,
whichever is lower.
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The same amount of reward shall be also given to an information where the offender
has offered to compromise the violation of law committed by him and his offer has been
accepted by the Commissioner and collected from the offender.
Discovery and seizure of smuggled goods
To encourage the public to extend full cooperation in eradicating smuggling, a cash

reward equivalent to 10% of the fair market value of the smuggled and confiscated
goods or P1,000,000 per case, whichever is lower.
Reward subject to income tax
The cash rewards of informers shall be subject to income tax collected as a final
withholding tax, at the rate of ten percent (10%).
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IN GENERAL
Two aspects of local taxation
1.
Levy of taxes, fees, charges and other impositions
2.
Real property taxation
POWER TO LEVY TAXES, FEES, CHARGES AND OTHER IMPOSITIONS

P OWER OF LOCAL T AXATION
Power of local taxation not inherent
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. [Section 5, Article X,
Constitution]
The power of local taxation is not inherent and is conferred on local government units
by the Constitution. This is reiterated in Section 129 of the Local Government Code of
1991.
Power is not plenary and absolute as it is subject to guidelines and limitations as may be
provided by Congress.
Basco v. PAGCOR: A municipal corporation has no inherent right to impose taxes. The
power to tax must always yield to a legislative act which is superior for having been
passed by the State itself which has the inherent power to tax. LGU cannot tax
instrumentalities of the National Government, in this case, PAGCOR.
Fees and charges
Fee means a charge fixed by law or ordinance for the regulation or inspection of a
business or activity. [Section 131(i), Local Government Code]
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Charges refer to pecuniary liability, as rents or fees against persons or property. [Section
131(g), Local Government Code]
Authority to grant tax exemption privileges
With the grant of the power of taxation, local government units have also been given
the power to grant tax exemptions corresponding to its taxing powers.
Local government units may, through ordinances duly approved, grant tax exemptions,
incentives or reliefs under such terms and conditions as they may deem necessary.
Withdrawal of tax exemption privileges
Unless otherwise provided in the Local Government Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations, except local water districts, cooperatives
duly registered under Republic Act No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of the Code.
Authority of LGUs to adjust rates of tax ordinances
Local government units shall have the authority to adjust the tax rates as prescribed in
the Local Government Code not oftener than once every five (5) years, but in no case
shall such adjustment exceed 10% of the rates fixed under the Code.
SCOPE AND EXERCISE OF LOCAL T AXING P OWER

Local authority that shall exercise taxing power
The power shall be exercised by the appropriate sanggunian or the sangguniang

panlalawigan in the case of provinces, the sangguniang panlungsod in the case of cities,
the sangguniang bayan in the case of municipalities, or the sangguniang barangay in the
case of barangays, through an appropriate ordinance. [Section 132, Local Government
Code]
The exercise of the power to tax by the local legislative assembly is subject to the veto
power of the local chief executive.
Procedure for approval and effectivity of tax ordinances and revenue measures
1.
Enactment and approval by sanggunian
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The procedure for approval of local tax ordinances and revenue measures shall
be in accordance with the provisions of the Local Government Code. [Section 187, Local
Government Code]
2.
Mandatory public hearings

Public hearings shall be conducted for the purpose prior to the enactment
thereof. [Section 187, Local Government Code]
3.
Publication requirements
Within ten (10) days after their approval, certified true copies of all provincial,
city and municipal tax ordinances or revenue measures shall be published in full for
three (3) consecutive days in a newspaper of local publication or, in the absence of
newspapers of local publication, posted in at least two (2) conspicuous and publicly
accessible places. [Section 188, Local Government Code]
4.
Furnishing of copies to local treasurer

Copies of all provincial, city and municipal tax ordinances or revenue measures
shall be furnished the respective local treasurers for public dissemination. [Section 189,
Local Government Code]
Procedure for protest of tax ordinances
Any question on the constitutionality or legality of tax ordinances or revenue measures

may be raised on appeal within thirty (30) days from the effectivity thereof to the
Secretary of Justice. [Section 187, Local Government Code]
Note: Appeal from where? The provision is not really clear but presumably after going through
the same process of appealing legality of ordinances, i.e. from municipal to provincial
sanggunian before going to the Secretary of Justice. Otherwise, direct appeal to the
Secretary may be made.
The Secretary of Justice shall render a decision within sixty (60) days from the date of
receipt of appeal. [Section 187, Local Government Code]
Such appeal shall not have the effect of suspending the effectivity of the ordinance and
the accrual and payment of the tax, fee, or charge levied therein. [Section 187, Local
Government Code]
Within thirty (30) days after receipt of the decision or the lapse of the 60-day period
without the Secretary of Justice acting upon the appeal, the aggrieved party may file
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appropriate proceedings with a court of competent jurisdiction. [Section 187, Local
Government Code]
No power of control by Secretary of Justice over LGUs
Section 187 of the Local Government Code, which authorizes the Secretary of Justice to
review the constitutionality or legality of a tax ordinance and, if warranted, to revoke it
on either or both grounds is valid, and does not confer the power of control over local
government units in the Secretary of Justice, as even if the latter can set aside a tax
ordinance, he cannot substitute his own judgment for that of the local government
units. [Drilon v. Lim, 235 SCRA 135]
Fundamental principles governing local taxation

1.
Taxation shall be uniform in each local government unit.
2.
Taxes, fees, charges and other impositions shall be equitable and based as much as
possible on the taxpayers ability to pay.
3.
They shall be levied and collected only for public purposes.
4.
They shall not be unjust, excessive, oppressive or confiscatory.
5.
They shall not be contrary to law, public policy, national economic policy, or in restraint
of trade.
6.
The collection of local taxes, fees, charges, and other impositions shall, in no case, be
let to any person.
7.
The revenue collected under the Local Government Code shall inure solely to the benefit
of, and subject to disposition by, the local government unit levying the tax, fee, charge
or other imposition unless specifically provided therein.
8.
Each local government unit shall, as far as practicable, evolve a progressive system of
taxation. [[Section 130, Local Government Code]
Common limitations on the taxing powers of LGUs
Unless otherwise provided herein, the exercise of the taxing powers of provinces , cities,
municipalities, and barangays shall not extend to the levy of the following:
1.
Income tax, except when levied on banks and other financial institutions;
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2.
Documentary stamp tax;
3.
Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa,
except as otherwise provided herein;
4.
Customs duties, registration fees of vessel and wharfage on wharves, tonnage

dues, and all other kinds of customs fees, charges and due, except wharfage on
wharves constructed and maintained by the LGU concerned;
5.
Taxes, fees and charges and other impositions upon goods carried into or out of,
or passing through, the territorial jurisdictions of LGUs in the guise of charges for
wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any
form whatsoever upon such goods or merchandise;
6.
Taxes, fees or charges on agricultural and aquatic products when sold by

marginal farmers or fishermen;
7.
Taxes on business enterprises certified to by the Board of Investments as

pioneer or non-pioneer for a period of six (6) and four (4) years, respectively
from the date of registration;
8.
Excise taxes on articles enumerated in the NIRC, as amended, and taxes, fees or
charges on petroleum products;
9.
Percentage or value-added tax 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 this Code;
11.
Taxes on premiums paid 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 tricycles;
13.
Taxes, fees, or other charges on Philippine products actually exported, except as

otherwise provided herein;
14.
Taxes, fees, or charges on Countryside and Barangay Business Enterprises and

cooperatives duly registered under Republic Act No. 6810 and Republic Act No.
6938, otherwise known as the Cooperative Code of the Philippines;
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15.
Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. [Section 133, Local Government
Code]
Common limitations may be classified into the following categories

1.
Taxes which are levied by the NIRC
2.
Taxes, fees, and charges which are imposed under the Tariff and Customs Code and
other customs laws
3.
Taxes, fees and charges the imposition of which contravenes existing governmental
policies or which are violative of the fundamental principles of taxation
4.
Taxes, fees, and charges imposed under special laws
Scope of taxing power of provinces

1.
Tax on the transfer of real property ownership
2.
Tax on the business of printing and publication
3.
Franchise tax
4.
Tax on sand, gravel and other quarry resources
5.
Professional tax
6.
Amusement tax
7.
Annual fixed tax per delivery truck or van of manufacturers or producers and
wholesalers of, or dealers in, certain products [Section 134-141, Local Government
Code]
Scope of taxing power of municipalities

1.
Taxes, fees, and charges not otherwise levied by provinces
2.
Fees and charges on business and occupation and practice of any profession or calling
3.
Fees for sealing and licensing of weights and measures
4.
Fishery rentals, fees and charges [Section 142-149, Local Government Code]
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Business
Business means trade or commercial activity regularly engaged in as a means of

livelihood or with a view to profit.
Scope of taxing power of cities

1.
The city may levy the taxes, fees, and charges which the province or municipality may
impose. [Section 151, Local Government Code]
Note: The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes.
Scope of taxing power of barangays

1.
Taxes on stores or retailers with fixed business establishments with gross sales or
receipts of the preceding calendar year of P50,000 or less for barangays in the cities and
P30,000 or less for barangays in municipalities
2.
Service fees or charges for services rendered or use of barangay-owned properties or

service facilities
3.
Barangay clearance
4.
other fees and charges [Section 152, Local Government Code]
Other fees and charges by barangays
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 of LGUs

1.
Service fees and charges
2.
Public utility charges
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3.
Toll fees or charges [Section 153-155, Local Government Code]
COMMUNITY T AX
Community tax
The community tax, which replaced the residence tax, is essentially a poll or capitation
tax. It is of a fixed amount imposed upon certain inhabitants of the Philippines without
regard to their property or the occupation in which they may be engaged.
It is imposed both on individuals and juridical persons.
Individuals liable to community tax
Every inhabitant of the Philippines, 18 years of age or over:

1.
who has been regularly employed on a wage or salary basis for at least 30
consecutive working days during any calendar year; or
2.
who is engaged in any business or occupation; or
3.
who owns real property with an aggregate assessed value of P1,000 or more; or
4.
who is required by law to file an income tax return.
Annual community tax for individuals is P5.00 and an annual additional tax of P1.00 for
every P1,000 of income or from property which in no case shall exceed P5,000. [Section
157, Local Government Code]
Inhabitant
Means any person, irrespective of his or her citizenship or nationality, who dwells or
resides in the Philippines for a period exceeding three (3) months.
Juridical persons liable to community tax
Every corporation, no matter how created or organized, whether domestic or resident

foreign, engaged in or doing business in the Philippines, shall pay an annual community
tax of P500.
An annual additional tax of P2.00 shall be imposed for every P5,000 worth of real
property in the Philippines owned by it or for every P5,000 of gross receipts or earnings
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derived by it from its business in the Philippines in the preceding year, but total amount
must not exceed P10,000. [Section 158, Local Government Code]
Who are exempt from community tax?

1.
Diplomatic and consular representatives
2.
Transient visitors when their stay in the Philippines does not exceed three (3) months
[Section 159, Local Government Code]
Accrual and payment of community tax
Community tax shall accrue on the first day of January which shall be paid not later than
the last day of February of each year.
T AX REMEDIES AND A DMINISTRATIVE MATTERS IN LOCAL T AXATION

Accrual of taxes
Unless otherwise provided in the Code, all local taxes, fees, and charges shall accrue on
the first day of January of each year.
New taxes, fees, or charges, or changes in the rates thereof, shall accrue on the first
day of the quarter next following the effectivity of the ordinance imposing such new
levies or rates. [Section 166, Local Government Code]
Tax period and time of payment
Calendar year unless otherwise provided.
Taxes shall be paid within the first twenty (20) days of January or of each subsequent
quarter, as the case may be.
The sanggunian concerned may, for a justifiable reason or cause, extend the time for
payment of such taxes, fees, or charges without surcharges or penalties, but only for a
period not exceeding six (6) months. [Sections 165 and 167, Local Government Code]
Local government 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 appropriate
administrative or judicial action, not only upon any property or rights therein which may
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be subject to the lien but also upon property used in business, occupation or calling, or
exercise of privilege with respect to which the lien is imposed.
The lien is extinguished upon payment of the tax, fee or charge, including the interest
and surcharges. [Section 173, Local Government Code]
Civil remedies for collection

1.
2.
By administrative action
a.
Distraint of personal property
b.
Levy upon real property
By judicial action [Section 174, Local Government Code]
Period of assessment
Local taxes, fees, or charges shall be assessed within five (5) years from the date they
became due. [Section 194(a), Local Government Code]
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. [Section 194(b), Local Government Code]
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. [Section 194, Local Government Code]
Suspension of period of assessment and collection

1.
The treasurer is legally prevented from making the assessment or collection.
2.
The taxpayer requests for a reinvestigation and executes a waiver in writing before
expiration of the period within which to assess or collect.
3.
The taxpayer is out of the country or otherwise cannot be located. [Section 194(d),
Procedure for protest of assessment

1.
Notice of Assessment
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When the local treasurer or his duly authorized representative finds that correct
taxes, fees, or charges have not been paid, he shall issue a notice of assessment stating
the nature of the tax, fee, or charge, the amount of deficiency, the surcharges, interests
and penalties. [Section 195, Local Government Code]
2.
Written protest
Within sixty (60) days from the receipt of the notice of assessment, the taxpayer
may file a written protest with the local treasurer contesting the assessment; otherwise,
the assessment shall become final and executory. [Section 195, Local Government
Code]
3.
Decision
The local treasurer shall decide the protest within sixty (60) days from the time
of its filing. If the treasurer fins the protest to be wholly or partly meritorious, he shall
issue a notice canceling wholly or partially the assessment. However, if the local
treasurer finds the assessment to be wholly or partly correct, he shall deny the protest
wholly or partly with notice to the taxpayer. [Section 195, Local Government Code]
4.
Appeal
The taxpayer shall have thirty (30) days from the receipt of the denial of the
protest or from the lapse of the sixty-day period prescribed within which to appeal with
the court of competent jurisdiction; otherwise, the assessment becomes conclusive and
unappealable. [Section 195, Local Government Code]
Claim for refund or tax credit
Remedy after payment in cases where tax was erroneously or illegally collected.
No case or proceeding shall be maintained in any court for the recovery of any tax, fee,
or charge erroneously or illegally collected until a written claim for refund or credit has
been filed with the local treasurer. [Section 196, Local Government Code]
Written claim for refund or credit must be filed with the treasurer within two (2) years
from the date of payment of the tax, fee or charge or from the date the taxpayer is
entitled to a refund or credit (doctrine of supervening cause therefore applies). [Section
196, Local Government Code]
Note: There is no provision governing the procedure in case the claim for refund or credit is
denied or not acted upon by the local treasurer. The same procedure for protest of
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assessment may be followed and, as such, the taxpayer may appeal with the court of
competent jurisdiction.
REAL PROPERTY TAXATION

IN GENERAL
Real property tax and special levies
1.
Basic real property tax
2.
Additional levy on real property for the Special Education Fund
3.
Additional ad valorem tax on idle lands
4.
Special levy by local government units
IMPOSITION OF REAL P ROPERTY T AX

Real property tax
Real property tax has been defined as a direct tax on the ownership of lands and
Real property tax is a fixed proportion of the assessed value of the property being
Note however that the Supreme Court decided that taxing real property is on the basis
of actual use, even if the user is not the owner of the property.
buildings or other improvements thereon not specially exempted and is payable

regardless of whether the property is used or not, although the value may vary in
accordance with such factor.
taxed and requires, therefore, the intervention of assessors.
Characteristics of real property tax

1.
It is a direct tax on the ownership or use of real property.
2.
It is an ad valorem tax. Value is the tax base.
3.
It is proportionate because the tax is calculated on the basis of a certain percentage of

the value assessed.
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4.
It creates a single, indivisible obligation.
5.
It is a local tax.
6.
It attaches on the property (lien) and is enforceable only against property.
Ad valorem tax
Ad valorem tax is a levy on real property on the basis of a fixed proportion of the value
of the property. [Section 199(c), Local Government Code]
Nature and scope of power to impose realty tax
The taxing power of local governments in real property taxation is a delegated power.
Who has the power to impose realty tax?

1.
provinces
2.
cities
3.
municipalities within the Metro Manila area [Section 232, Local Government Code]
Rates of levy
A province or city or a municipality within the Metro Manila area shall fix a uniform rate
of basic real property tax applicable to their respective localities as follows:
1.
In the case of a province, at the rate not exceeding 1% of the assessed value of
real property; and
2.
In the case of a city or a municipality within the Metro Manila area, at the rate
not exceeding 2% of the assessed value of real property. [Section 233, Local
Government Code]
Fundamental principles governing real property taxation

1.
Real property shall be appraised at its current and fair market value.
2.
Real property shall be classified for assessment purposes on the basis of its actual use.
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3.
Real property shall be assessed on the basis of a uniform classification within each local
government unit.
4.
The appraisal, assessment, levy and collection of real property tax shall not be let to any
private person.
5.
The appraisal and assessment of real property shall be equitable. [Section 197, Local
Government Code]
Real properties subject to tax
Real property tax is imposed on lands, buildings, machineries and other improvements.
The Local Government Code contains no definition of real property.
Improvement
It is a valuable addition made to a property or an amelioration in its condition amounting

to more than a repair or replacement of parts involving capital expenditures and labor
which is intended to enhance its value, beauty, or utility or to adopt it for new or further
purposes. [Section 199(m), Local Government Code]
Machinery
Machinery embraces machines, equipment, mechanical contrivances, instruments,

appliances or apparatus, which may or may not be attached, permanently or
temporarily, to the real property. [Section 199(o), Local Government Code]
Properties exempt from real property taxes

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.
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.
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4.
All real property owned by duly registered cooperatives as provided for under Republic
Act No. 6938.
5.
Machinery and equipment used for pollution control and environmental protection.
Property owned by the Republic of the Philippines and its political subdivisions
MCIA v. Marcos: MCIA, which is a government owned or controlled corporation,

mandated to control, manage and supervise the Mactan International Airport, is not
exempt from real property tax. It is a GOCC and not an instrumentality of the
government.
National Development Company v. Cebu City: It may therefore be stated that tax
exemption of property owned by the Republic of the Philippines refers to properties
owned by the government and by its agencies which do not have separate and distinct
personalities, as distinguished from GOCCs which have separate and distinct
personalities.
Exempt government property
The exemption from tax of property owned by the government obtains even as to
properties owned in a private, proprietary or patrimonial character. The law makes no
distinction between property held in governmental capacity and those possessed in a
proprietary capacity. [ Board of Assessment Appeals of Laguna v. CTA]
Proof of exemptions
Taxpayer claiming exemption must submit sufficient documentary evidence to local

assessor within thirty (30) days from the date of the declaration of real property,
otherwise, it shall be listed as taxable in the Assessment Roll.
A PPRAISAL AND A SSESSMENT

Appraisal
Appraisal is the act or process of determining the value of property as of a specific date
for a specific purpose. [Section 199(e), Local Government Code]
Appraisal of real property
All real property, whether taxable or exempt, shall be appraised at the current and fair
market value prevailing in the locality where such property is situated.
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Declaration of real property

1.
Declaration by owner or administrator once every three years during the period from
January 01 to June 30 [Section 202, Local Government Code]
2.
Declaration of property by assessor when taxpayer refuses or fails for any reason to
make declaration within time prescribed [Section 204, Local Government Code]
3.
Declaration covering acquired real property or improvements within 60 days after the
acquisition of such property or upon completion or occupancy of the improvement,
whichever comes earlier [Section 203, Local Government Code]
4.
Notice of transfer of real property ownership within 60 days from date of transfer
5.
Other administrative requirements
Assessment roll
This is a listing of all real property, whether taxable or exempt, located within the
territorial jurisdiction of the local government unit concerned.
All provincial, city or municipal assessors are required to prepare and maintain in every
province and city an Assessment Roll.
Real property shall be listed, valued and assessed in the name of the owner or
administrator, or anyone having legal interest in the property.
Schedule of fair market values
Local assessor shall prepare a schedule of fair market values for the different classes of
property situated in their respective LGUs for enactment by ordinance of the sanggunian
concerned.
The schedule shall be published in a newspaper of general circulation in the locality or,
in the absence thereof, posting in two conspicuous and publicly accessible places.
Assessment
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Assessment is the act or process of determining the value of a property, or proportion

thereof, subject to tax, including the discovering, listing, classification, and appraisal of
properties. [Section 199(f), Local Government Code]
Assessment level
Assessment level is the percentage applied to the fair market value to determine the
taxation value of the property. [Section 199(g), Local Government Code]
Assessed value
Assessed value is the fair market value of the real property multiplied by the assessment
level. It is synonymous to taxable value. [Section 199(h), Local Government Code]
Fair market value
Fair market value is the price at which a property may be sold by a seller who is not
compelled to sell and bought by a buyer who is not compelled to buy. [Section 199(l),
Reyes v. Almanzor: Both the income approach and the comparative sales approach
are valid methods of ascertaining proper tax. However, in the case at bar, the income
approach should have been used due to the effect of the Rent Control Law on the lease
of the involved properties. The use of the comparative sales approach would lead to
inequitable results.
Actual use as basis for assessment
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. [Section 217, Local
Government Code]
Actual use
Actual use refers to the purpose for which the property is principally or predominantly
utilized by the person in possession thereof. [Section 199(b), Local Government Code]
Classes of real property for assessment purposes

1.
residential
2.
agricultural
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3.
commercial
4.
industrial
5.
mineral
6.
timberland
7.
special
Residential land
Land principally devoted to habitation. [Section 199(u), Local Government Code]
Agricultural land
Land devoted principally to the planting of trees, raising of crops, livestock and poultry,
dairying, salt making, inland fishing and similar aquacultural activities, and other
agricultural activities. [Section 199(d), Local Government Code]
Commercial land
Land devoted principally for the object of profit and is not classified as agricultural,
industrial, mineral, timber, or residential land. [Section 199(i), Local Government Code]
Industrial land
Land devoted principally to industrial activity as a capital investment and is not classified
as agricultural, commercial, timber, mineral or residential land. [Section 199(n), Local
Government Code]
Mineral lands
Lands in which minerals, metallic or non-metallic, exist in sufficient quantity or grade to

justify the necessary expenditures to extract and utilize such materials. [Section 199(p),
Special classes of real property
All lands, buildings, and other improvements thereon actually, directly, and exclusively
used for hospitals, cultural or scientific purposes, and those owned and used by local
water districts, and government-owned and controlled corporations rendering essential
public services in the supply and distribution of water and/or generation and
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transmission of electric power shall be classified as special. [Section 216, Local
Government Code]
Assessment of property subject to back taxes
Real property declared for the first time shall be assessed for taxes for the period during
which it would have been liable but in no case for more than ten (10) years prior to the
date of initial assessment.
Assessment of machinery
The fair market value of a brand new machinery is its acquisition cost.
In other cases, its adjusted value (depreciation).
Assessment appeals
1.
Appeal to the Local Board of Assessment Appeals (LBAA)

Any owner or person having legal interest in the property who is not satisfied
with the action of the local treasurer may, within sixty (60) days from date of receipt of
the written notice of assessment, file a petition under oath with the Local Board of
Assessment Appeals. [Section 226, Local Government Code]
The LBAA shall decide the appeal with one hundred twenty (120) days from the
date of receipt of such appeal. [Section 229, Local Government Code]
3.
Appeal to the Central Board of Assessment Appeals (CBAA)

Owner or person having legal interest may appeal decision of the LBAA to the
CBAA within thirty (30) days from receipt of the decision of the LBAA. [Section 229,
4.
Appeal to the Court of Appeals

Decision of the CBAA may be appealed, through a verified petition for review, to
the Court of Appeals within fifteen (15) days from receipt of CBAA decision. [Rule 43,
Rules of Court]
5.
Appeal to the Supreme Court
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Decision of the Court of Appeals may be appealed, through a verified petition for
review, to the Supreme Court within fifteen (15) days from receipt of decision of the CA.
[Rule 45, Rules of Court]
COLLECTION OF T AX
Date of accrual of tax and tax lien
The real estate tax for any year shall accrue on the first day of January and from that
date it shall constitute a lien on the property which shall be superior to any other lien,
mortgage or encumbrance of any kind whatsoever and shall be extinguished only upon
the payment of the delinquent tax. [Section 246, Local Government Code]
Payment of real property tax in installments
The owner of the real property or the person having legal interest therein may pay the
basic real property tax and the additional tax for the special education fund thereon
without interest in four (4) equal installments; except the special levy, the payment of
which shall be governed by an ordinance of the sanggunian concerned. [Section 250,
Tax discount
In case of payment in advance of the basic real property tax and additional SEF tax,
sanggunian may grant a discount in an amount not exceeding 20% of the annual tax
due. [Section 251, Local Government Code]
Prescriptive periods of collection
The basic real property tax and any other tax levied under the Local Government Code
shall be collected within five (5) years from the date they become due.
In case of fraud or intent to evade payment of the tax, such action may be instituted for
the collection of the same within ten (10) years from the discovery of such fraud or
intent to evade payment.
Interruption of the prescriptive period for collection

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
reinvestigation and executes a waiver in writing before the expiration of the period
within which to collect.
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3.
The owner of the property or the person having legal interest therein is out of the
country or otherwise cannot be located.
Remedies for collection

1.
administrative action through levy
2.
judicial action
REMEDIES OF THE T AXPAYER

Assessment appeals
Discussed above.
Procedure for protest of imposition of real property tax

1.
Payment under protest

No protest shall be entertained unless the taxpayer first pays the tax. [Section
252(a), Local Government Code]
The protest in writing must be filed with the local treasurer within thirty (30)
days from payment of the tax. [Section 252(a), Local Government Code]
Treasurer must decide the protest within sixty (60) days from receipt thereof.
[Section 252(a), Local Government Code]
2.
Appeal to the Local Board of Assessment Appeals (LBAA)

Section 252(d) provides that In the event that the protest is denied or upon the
lapse of the sixty-day period prescribed in subpargraph (a), the taxpayer may av ail of
the remedies as provided for in Chapter 3, Title Two, Book II of this Code, which refers
to the procedure for assessment appeals.
Any owner or person having legal interest in the property who is not satisfied
with the action of the local treasurer may, within sixty (60) days from date of receipt of
the written notice of assessment, file a petition under oath with the Local Board of
Assessment Appeals. [Section 226, Local Government Code]
The LBAA shall decide the appeal with one hundred twenty (120) days from the
date of receipt of such appeal. [Section 229, Local Government Code]
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3.
Appeal to the Central Board of Assessment Appeals (CBAA)

Owner or person having legal interest may appeal decision of the LBAA to the
CBAA within thirty (30) days from receipt of the decision of the LBAA. [Section 229,
4.
Appeal to the Court of Appeals

Decision of the CBAA may be appealed, through a verified petition for review, to
the Court of Appeals within fifteen (15) days from receipt of CBAA decision. [Rule 43,
Rules of Court]
5.
Appeal to the Supreme Court

Decision of the Court of Appeals may be appealed, through a verified petition for
review, to the Supreme Court within fifteen (15) days from receipt of decision of the CA.
[Rule 45, Rules of Court]
Tax refund or credit
Taxpayer may file tax refund or credit when assessment is illegal or erroneous and the
tax is accordingly reduced or adjusted.
File a written claim for refund or credit for taxes and interests with local treasurer within
two (2) years from the date the taxpayer is entitled to such reduction or adjustment.
The treasurer must decide the claim for refund or credit within 60 days from receipt
thereof.
If denied, taxpayer has same remedies as protest. (LBAA, CBAA, CA, SC)
A DDITIONAL LEVIES ON REAL P ROPERTY

Special levies authorized
1.
Additional levy on real property for the special education fund or SEF [Section 235, Local
Government Code]
2.
Additional ad valorem tax on idle lands [Section 236, Local Government Code]
3.
Special levy by local government units [Section 240, Local Government Code]
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Additional levy on real property for the special education fund
A province, city or a municipality within the Metro Manila area may levy and collect an
annual tax of one percent (1%) on the assessed value of real property which shall be in
addition to the basic real property tax.
The proceeds thereof shall exclusively accrue to the Special Education Fund created
under Republic Act No. 5447.
Additional ad valorem tax on idle lands
A province or city or a municipality within the Metro Manila area may levy an annual tax
on idle lands at the rate not exceeding five percent (5%) of the assessed value of the
property which shall be in addition to the basic real property tax .
What are considered idle lands?

1.
2.
For agricultural lands

a.
One hectare land, one half () of which remain uncultivated or unimproved is

considered idle land.
b.
However, agricultural land with at least 50 planted trees to a hectare or used for
grazing purposes are not considered idle lands.
Non-agricultural lands
a.
Where land is more than 1,000 square meters and one half (1/2) of which
remain unutilized or unimproved, it is considered idle land.
b.
The same is applicable to residential lots in subdivisions which remain unutilized

and unimproved.
Exemption from idle lands tax
Exemptions are given due to:

1.
force majeure;
2.
civil disturbance;
3.
natural calamity; or
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4.
any cause or circumstance which physically or legally prevents the owner or

person having legal interest from improving, utilizing or cultivating the same.
Special levy by local government units
A province, city or municipality may impose a special levy on the lands comprised within
its territorial jurisdiction specially benefited by public works projects or improvements by
the LGU concerned.
The 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.
It shall not apply to lands exempt from basic real property tax and the remainder of the
land, portions of which have been donated to the LGU concerned for the construction of
such projects or improvements.
Need for public hearing and publication before enactment of ordinance imposing special
levy.
Special levy accrue on the first day of the quarter next following the effectivity of the
ordinance imposing the levy. [Section 240, Local Government Code]
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TARIFF AND CUSTOMS CODE

IN GENERAL
Scope of tariff and customs laws
Section 3514 of the Tariff and Customs Code provides that tariff and customs laws
include not only the provisions of the Code itself and regulations pursuant thereto but all
other laws and regulations which are subject to enforcement by the Bureau of Customs
or otherwise within its jurisdiction.
Extend not only to the provisions of the Tariff and Customs Code but to all other laws as
well as Central Bank Circulars, the enforcement of which is entrusted to the Bureau of
Customs.
Division of the Tariff and Customs Code
Book I
Tariff laws
Book II
Customs laws
Customs duties
Customs duties are duties which are charged upon commodities on their being imported
in or exported out of a country.
Garcia v. Executive Secretary: Customs duties, which are assessed at the prescribed
tariff rates, are very much like taxes, which are frequently imposed for both revenue
raising and for regulatory purposes. Thus, it has been held that Custom s duties is the
name given to taxes on the importation and exportation of commodities, the tariff or tax
assessed upon merchandise imported from, or exported to, a foreign country.
Flexible tariff clause
Section 28(2), Article VI, Constitution: The Congress may, by law, authorize the
President to fix within specified limits, and subject to such limitations and restrictions as
it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the national development program of
the Government.
242
T ARIFF AND CUSTOMS CODE
Section 401, Tariff and Customs Code: In the interest of national economy, general
welfare and/or national security, the President upon recommendation of the National
Economic and Development Authority, is empowered:
1.
To increase, reduce, or remove existing protective rates of import duty, provided

that the increase should not be higher than 100% ad valorem ;
2.
To establish import quota or to ban imports of any commodity; and
3.
To impose additional duty on all imports not exceeding 10% ad valorem .
Additional notes:
1.
An order issued by the President pursuant to the flexible tariff clause shall take effect
thirty (30) days after promulgation, except in the imposition of additional duty not
exceeding ten percent (10%) ad valorem which shall take effect at the discretion of the
President.
2.
In the case of imposition of additional duty, the investigation of the Tariff Commission
and recommendation of NEDA are needed.
ARTICLES SUBJECT TO CUSTOMS DUTIES

Goods for customs duty purposes
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,
except as otherwise specifically provided for in this Code or in other laws. [Section 100,
Tariff and Customs Code]
The Code also imposes export tariff and premium duty on certain articles.
Articles, goods or merchandise
Articles when used with reference to importation or exportation includes goods, wares,
and merchandise and in general anything that may be made the subject of importation
or exportation.
Bastida v. Customs Collector: The Revised Administrative Code defines merchandise,

when used with reference to importation or exportation, to include goods, wares and, in
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general, anything that may be made the subject of importation or exportation. Checks,
money orders and dollar bills properly fall within the concept of merchandise as used in
the Revised Administrative Code. U.S. dollars are merchandise. Checks, as bills of
exchange, are negotiable instruments and may be bought and sold like a commodity.
Money orders, also considered as bills of exchange of limited negotiability, possess the
same attributes as other negotiable instruments. Thus, they may also be bought and
sold like checks.
Kinds of goods/merchandise
1.
articles subject to duty
2.
prohibited importations
3.
conditionally-free importations
Articles subject to duty
As a general rule, all articles when imported from a foreign country including those
previously exported from the Philippines are subject to duty unless otherwise specifically
provided in the Code.
Prohibited importations
1.
Dynamite, ammunitions and other explosives, firearms and weapons, except when
authorized by law.
2.
Written or printed articles containing any matter advocating of inciting treason, rebellion
or subversion against the Philippine Government, or forcible resistance to any law of the
Philippines.
3.
Written or printed articles, paintings, or other representations of an obscene or immoral

character.
4.
Articles, instruments, drugs and substances designed and intended to produce unlawful
abortion and printed materials promoting unlawful abortion.
5.
Machines, apparatus or mechanical devices used in gambling.
6.
Lottery and sweepstakes tickets except those authorized by the Philippine Government.
7.
Articles made of precious metal but actual fineness of quality not indicated.
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8.
Any adulterated or misbranded drug in violation of the Food and Drugs Act.
9.
Marijuana, opium poppies, or any other narcotic or synthetic drugs declared habitforming, or preparation thereof, except when authorized by the Philippine Government,
and opium pipes and parts thereof.
10.
All other articles and parts thereof, the importation of which is prohibited by the law or
rules and regulations issued by competent authority.
Conditionally-free importations
Conditionally-free importations are articles which are exempt from import duties upon
compliance with the formalities prescribed in or with regulations promulgated by the
Commissioner of Customs with the approval of the Secretary of Finance.
Enumerate several conditionally-free importations

1.
Aquatic products caught or gathered by fishing vessels of Philippine registry
2.
Equipment for use in the salvage of vessels or aircraft, not available locally, and cost of
repairs excluding the value of the article used, made in foreign countries upon vessels or
aircraft documented, registered or license in the Philippines
3.
Articles brought into the Philippines for repair, processing or reconditioning to be reexported upon completion of the repair, processing or reconditioning
4.
Medals, badges, cups and other small articles bestowed as trophies or prizes, or those
received or accepted as honorary distinction
5.
Personal and household effects belonging to residents of the Philippines returning from
abroad, including jewelry, precious stones and other articles of luxury, which were
formally declared and listed before departure
6.
Personal and household effects and vehicles belonging to foreign consultants and
experts hired by, and/or rendering service to, the government and their staff or
personnel and families
7.
Professional instruments and implements, tools of trade, occupation or employment,

wearing apparel, domestic animals, and personal and household effects belonging to
persons coming to settle in the Philippines or Filipinos and/or their families and
descendants who are now residents or citizens of other countries, such parties
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hereinafter referred to as overseas Filipinos, in quantities and of the class suitable to the
profession, rank or position of the person importing them, for their own use and not for
barter or sale, accompanying such persons, or arriving within a reasonable time
8.
Importation for the use of foreign embassies, legations, and other agencies of foreign
governments according the same privileges to the corresponding agencies of the
Philippines
9.
Imported articles donated to, or for the account of, any duly registered relief
organization, not operated for profit, for free distribution among the needy, upon
certification by the DSWD or DECS, as the case may be
10.
Animals (except race horses), and plants for scientific, experimental, propagation,
botanical, breeding, zoological and national defense purposes
KINDS OF DUTIES
Classification of customs duties
1.
Ordinary or regular customs duties

Imposed and collected merely as a source of revenue.
2.
Special customs duties

Imposed and collected in addition to ordinary customs duties usually to protect
local industries against foreign competition.
Kinds of ordinary or regular customs duties

1.
Ad valorem
The duty is based on the market value or price of the imported article.
2.
Specific
The duty is based on the weight or volume of the imported article.
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Basis of dutiable value
The dutiable value of an imported article subject to an ad valorem rate of duty shall be
the transaction value.
Republic Act No. 8181 mandated the change of basis of the dutiable value from the
home consumption value to the transaction value by 01 January 2000. Before 01
January 2000, export value was used as the basis for the determination of the dutiable
value as a transitional device.
Transaction value
Transaction value is the price actually paid or payable for the goods when sold for
export to the Philippines.
It is adjusted by adding certain expenses to the extent that they are incurred by the
buyer but are not included in the price actually paid or payable for the imported goods,
i.e. commissions and brokerage fees; the value of materials, components, parts and
items incorporated in the imported goods; amount of royalties and license fees; cost of
transport; loading, unloading and handling charges; and cost of insurance.
Export value
Export value is that which, at the time of exportation, the same or identical, like or
similar article is freely offered for sale in the principal export markets of the exporting
country for exportation to the Philippines, in the usual wholesale quantities and in the
ordinary course of trade (excluding internal excise taxes to be remitted or rebated).
Wholesale price in principal export markets of the exporting country.
Home consumption value
Wholesale price of goods in market of exporting country.
Procedure for determination of dutiable value

1.
Determined by the declared value of the imported goods given by the importer.
2.
If Commissioner of Customs has reason to doubt the truth or accuracy of the declaration
or documents provided in support of the declared value of importation, he may require
the importer to give further explanation and submit additional documents.
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3.
4.
If Commissioner still has reasonable doubt as to the accuracy of the declared value after
the explanation and additional documents are given, he may apply two alternative
methods, to wit:
a.
The dutiable value shall be the transaction value of identical goods sold for
export to the Philippines at or about the date of the exportation of the goods
being valued; or
b.
If the dutiable value cannot be determined under the preceding method, it shall
be the transaction value of similar goods sold for export to the Philippines at or
about the date of exportation of the goods being valued.
If still not able to determine the dutiable value:

a.
The unit price at which the imported goods or identical or similar goods are sold
domestically, in the same condition as when imported, in the greatest aggregate
quantity, to persons not related to the seller, at or about the time of the
importation of the goods being valued;
b.
The computed value; or
c.
Any other reasonable means consistent with GATT.
Again, again, again, sequence in determination of value
First, transaction value

Second, transaction value of identical goods
Third, transaction value of similar goods
Fourth, deductive value
Fifth, computed value
Sixth, other reasonable means or fallback value
Identical goods
Identical goods shall mean goods which are the same in all respects, including physical
characteristics, quality and reputation.
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Minor differences in appearances shall not preclude goods otherwise conforming to the
definition from being regarded as identical.
Similar goods
Similar goods shall mean goods which, although not alike in all respects, have like
characteristics and like component materials which enable them to perform the same
functions and to be commercially interchangeable.
Reasonable doubt
Reasonable doubt shall refer to any condition that creates a probable cause to make
the Commissioner of Customs believe in the inaccuracy of the invoice value of imported
goods, as reflected by the importer in his customs declaration, for valuation purposes.
Such condition may include, but is not limited to, any of the following conditions:
1.
If the sale or price is subject to some consideration for which a value cannot be
determined with respect to the goods being valued; or
2.
If part of the proceeds of any subsequent resale, disposal or use of the goods by
the buyer will accrue directly or indirectly to the seller, unless an appropriate
adjustment can be made; or
3.
If the buyer and the seller are related to one another, and such relationship
influenced the price of the goods.
Related sellers and buyers

1.
Officers or directors of one anothers businesses
2.
Legally recognized partners in business
3.
Employer and employee
4.
Any person who directly or indirectly owns, controls or holds five percent (5%) or more
of the outstanding voting stock or shares of both seller and buyer
5.
One of them directly or indirectly controls the other
6.
Both of them are directly or indirectly controlled by a third person
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7.
Together, they directly or indirectly control a third person
8.
Members of the same family including brothers and sisters (whether full or half blood),
spouse, ancestors, and lineal descendants
Basis for dutiable weight for specific customs duties

1.
gross weight
2.
legal weight
3.
net weight
Kinds of special customs duties

1.
Dumping duty
2.
Countervailing duty
3.
Marking duty
4.
Retaliatory or discriminatory duty
Dumping duty
Duty imposed on a specific kind or class of foreign article which is being imported into,
or sold or is likely to be sold for exportation to or in the Philippines at a price les s than
the fair value, the importation or sale of which might injure or retard the establishment
of an industry producing like goods in the Philippines. [Section 301, Tariff and Customs
Code]
Countervailing duty
Duty imposed on articles, upon the production, manufacture or export of which any
bounty or subsidy is directly or indirectly granted in the country of origin and/or
exportation, and the exportation of which into the Philippines will likely injure an
industry in the Philippines or retard or considerably retard the establishment of such
industry. [Section 302, Tariff and Customs Code]
Bounty is the cash award paid to an exporter or manufacturer while subsidy refers to
fiscal incentives, not in the form of direct cash award, to encourage manufacturers or
exporters.
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The duty is equal to the ascertained or estimated amount of the bounty or subsidy.
Marking duty
Duty imposed on imported articles or containers which have not been property marked
in any official language of the Philippines as to indicate the name of the country or
origin of the article. The purpose is to prevent the deception of consumers. [Section
303, Tariff and Customs Code]
The rate is 5% ad valorem.
The articles shall be deemed abandoned upon failure to mark them within thirty (30)
days from notice.
Retaliatory or discriminatory duty
Duty imposed upon articles of a foreign country which discriminates against Philippine
commerce in such a manner as to place it at a disadvantage compared with the
commerce of another foreign country. [Section 304, Tariff and Customs Code]
Drawbacks
A drawback is a device resorted to for enabling a commodity affected by taxes to be

exported and sold in foreign markets upon the same terms as if it had not been taxed at
all. It may be full or partial.
The return of 99% customs paid on imported articles when they are re-exported forming
part of domestically produced articles.
The refund of 99% duty on imported fund when used for propulsion vessels engaged in
the foreign or coastwise trade.
When drawbacks allowed
Drawbacks are allowed on the following commodities:

1.
Fuel used on propulsion vessels;
2.
Petroleum oils and oils obtained from bituminous minerals, etc., eventually used
for generation of electric power and manufacture of city gas; and
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3.
Articles made of imported materials upon the exportation of articles

manufactured or produced in the Philippines subject to certain conditions.
Other customs fees, dues or charges payable

1.
Harbor fees
2.
Wharfage dues
3.
Berthing fees
4.
Storage charges
5.
Arrastre charges
6.
Tonnage dues
7.
Other fees and charges
Harbor fees
Harbor fees are imposed on vessels entering into or departing from a port of entry of
the Philippines.
Wharfage dues
Wharfage dues are assessed against the cargo of a vessel engaged in foreign or
coastwise trade, based on the quantity weight or measure received and/or discharged
by such vessel.
Berthing fees
Berthing fees are assessed against a vessel for mooring or berthing at a pier, wharf, or
river at any port in the Philippines.
Storage charges
Storage charges are assessed on articles for storage in customs premises, cargo sheds
and warehouses.
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Arrastre charges
Arrastre charges are imposed on all imported and exported articles and baggage of
passengers for their handling, receiving and custody.
Tonnage dues
Tonnage dues are paid by the owner, agent, operator or master of a vessel engaged in
foreign trade based on the net tonnage of the vessel or weight of the articles discharged
or laden.
Other fees and charges
Charged and collected for services rendered and documents issued by the Bureau of
Customs.
REQUIREMENTS OF IMPORTATION UNDER THE TARIFF AND CUSTOMS CODE

Liability of importer for duties
The Code provides that all articles imported into the Philippines shall be held to be the
property of the person to whom the same are consigned; and the holder of a bill of
lading duly endorsed by the consignee therein named, or if consigned to order by the
consignor, shall be deemed the consignee thereof. The underwriters of abandoned
articles and the salvors of articles saved from a wreck at sea, along a coast, or in any
area of the Philippines, may be regarded as the consignees. [Section 1203, Tariff and
Customs Code]
Unless otherwise relieved by laws or regulations, the liability for duties, taxes, fees and
other charges attaching on importation constitutes a personal debt due from the
importer to the government which can be discharged only by payment in full of said
duties and charges.
It also constitutes a lien upon the articles imported which may be enforced while such
articles are in custody or subject to the control of the government.
Government importations
All importations by the government for its own use or that of its subordinate branches or
instrumentalities, or corporations, agencies or instrumentalities owned or controlled by
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the government shall be subject to the duties, taxes, fees and charges provided in the
Tariff and Customs Code. [Section 1205, Tariff and Customs Code]
When importation begins and when deemed terminated
Importation begins when carrying vessel or aircraft enters the jurisdiction of the
Philippines with an intent to unload.
Importation terminates upon payment of the duties and other charges due upon the
articles, or secured to be paid, at the port of entry and the legal permit for withdrawal
shall have been granted.
In the case of articles that are free of duties, taxes and other charges, importation is
deemed terminated from the time they have legally left the jurisdiction of the customs.
Entry through customhouse
All articles imported into the Philippines, whether subject to duty or note, shall be
entered through a customhouse at a port of entry. [Section 1201, Tariff and Customs
Code]
A port of entry means a domestic port open to both foreign and coastwise trade,
including airport of entry. [Section 3514, Tariff and Customs Code]
Cargo manifest
All cargo, exported or imported, shall be included in the cargo manifest, except the
ships stores.
Commissioner v. Delgado: The evident purpose of the provision requiring vessels to

declare the correct weight of their cargo is to curb smuggling due to underdeclarations.
Hence, imposing the maximum fine on vessels which grossly fail to comply with the
obligation to declare the correct weight of their cargo truly promotes the spirit and
purpose of the law, since imposing a minimum fine would only embolden would be
smugglers and foster negligence on the part of the master of the vessel in checking the
true weight of the cargo.
Import entry
A declaration to the Bureau of Customs showing the description, value, tariff

classification and other particulars of the imported article to enable the customs
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authorities to determine the correct customs duties and internal revenue taxes due on
the importation.
Person authorized to make an import entry

1.
Importer, being the holder of the bill of lading
2.
A duly licensed customs broker, acting under authority from the holder of a bill of lading
3.
A duly empowered agent or attorney in fact for each holder of a bill of lading
Import entry filed by person other than importer
If filed by a party other than the importer, the importer himself is required to declare
under oath and under penalties of falsification or perjury that the declarations and
statements contained in the entry are true and correct. Such statements constitute
prima facie evidence of knowledge and consent of the importer.
Period for filing of import entry
Within thirty (30) days from the date of discharge of the last package from the vessel.
Abandonment
Abandonment is the renunciation by an importer of all his interests and property rights
in the imported article.
It may be express or implied.
Express abandonment
When the owner, importer or consignee of the imported article expressly signifies in
writing and under oath to the Collector of Customs his intention to abandon his
shipment in favor of the government, within ten days after filing of the import entry, he
shall be relieved from payment of duties, taxes and other charges and expenses.
Article shall be delivered by the owner, importer or consignee at such place which the
Collector designates; failure to comply shall make him liable for expenses that may be
incurred in connection with the disposition thereof.
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Implied abandonment
1.
When the owner, importer, consignee or interested party, after due notice, fails to file
an entry within thirty (30) days, which shall not be extendible, from the date of
discharge of the last package from the vessel or aircraft; OR
2.
Having filed an entry for his shipment, the owner, importer or consignee, or other
interested party fails to claim his importation within fifteen (15) days, which shall not be
extendible, from the date of posting of the notice to claim such importation.
Effects of abandonment
1.
Owner, importer, consignee or other interested party deemed to have renounced all of
his interests and property rights over the articles.
2.
Abandoned article shall be ipso facto deemed the property of the government and shall
be disposed of in accordance with the provisions of the Code.
3.
It does not relieve owner or importer from any criminal liability which may arise from
any violation of law committed in connection with the importation of the abandoned
article.
Smuggling or unlawful importation
Any person who shall fraudulently import or bring into the Philippines, or assist in doing
so, any article, contrary to law, or shall receive, conceal, buy, sell, or in any manner
facilitate the transportation, concealment, or sale of such article after importation,
knowing the same to have been imported contrary to law, shall be guilty of smuggling.
After importation, the act of facilitating the transportation, concealment or sale of the
unlawfully imported article must be with the knowledge that the article was smuggled.
However, upon trial, if the defendant is found to have been in possession of such article,
this shall be sufficient to authorize the conviction unless the defendant explains his
possession to the satisfaction of the court.
Fraudulent practices against customs revenue under Section 3602

1.
Entry of imported or exported articles by means of any false or fraudulent invoice.
2.
Entry of goods at less than the true weight or measure.
3.
Filing of any false or fraudulent entry for the payment of drawbacks or refund of duties.
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Three meanings of term entry

1.
Documents filed at the Customs House
2.
Submission and acceptance of the documents
3.
Procedure of passing the goods through the Customs House
ADMINISTRATION
Who is in charge?
The offices charged with the administration and enforcement of the law are the Tariff
Commission and the Bureau of Customs.
Functions of the Tariff Commission
The Commission shall investigate:

1.
The administration of and the fiscal and industrial effects of the countrys tariff
and customs laws;
2.
The relations between the rates of duty on raw materials and finished or partly
finished goods;
3.
The effects of ad valorem and specific duties and of compound specific and ad
valorem duties;
4.
All questions relative to the arrangement of schedules and classifications of

articles under the tariff law;
5.
The tariff relations between the Philippines and foreign countries, commercial
treaties, etc.;
6.
The volume of importations compared with domestic production and

consumption;
7.
Conditions, causes, and effects relating to competition of foreign industries with

those of the Philippines;
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8.
In general, to investigate the operation of customs and tariff laws and to submit
report of its investigations; and
9.
The nature, composition, and classification of articles for customs revenue and
other related purposes which shall be furnished to NEDA, Board of Investments,
Central Bank, and the Secretary of Finance.
Duties, powers and jurisdiction of the Bureau of Customs

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 all 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.
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 original jurisdiction over seizure and forfeiture cases under the tariff and
customs laws.
TAX REMEDIES
IN GENERAL
Remedies available to the government
1.
Seizure and forfeiture of goods and commodities
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2.
Judicial action against the taxpayer
Cases arising under the tariff and customs code

1.
Customs protest cases or those where the importer questions the legality of the
assessment and collection of customs duties and other fees or charges. The issue
involved in these cases generally relates to the correctness of the appraisal and/or
classification of imported goods.
2.
Seizure and forfeiture cases or those where goods or merchandise are ordered seized by
customs authorities and made subject to the penalty of forfeiture or fine for violation of
the customs laws. Here, the issue involved is the legality of the importation of goods
either because the goods are in themselves prohibited importations or their importation
is effected contrary to law.
CUSTOMS P ROTEST CASES

Procedure on customs protest cases
1.
First of all, the Collector shall cause all articles entering the jurisdiction of his district and
destined for importation through his port to be entered at the customhouse. He shall
cause all such articles to be appraised and classified, and shall assess and collect the
duties, taxes, and other charges thereon, and shall hold possession of all imported
articles upon which duties, taxes, and other charges have not been paid or secured to
be paid, disposing of the same according to law. [Section 1206, Tariff and Customs
Code]
2.
The party adversely affected by the ruling or decision of the Collector whereby liability
for duties, taxes, fees or other charges are determined, may protest such ruling or
decision. [Section 2308, Tariff and Customs Code]
3.
The protest, which must be in writing, is filed with the Collector within fifteen (15) days.
No protest shall be considered unless payment of the amount due after final liquidation
(i.e. computation of the liability) has first been made and the corresponding docket fee
actually paid.
4.
Every protest shall be filed in accordance with rules and regulations promulgated for the
purpose, and shall point out the particular decision or ruling of the Collector to which
exception is taken or objection made, and shall indicate with reasonable precision the
particular ground or grounds upon which the protesting party bases his claim for relief.
[Section 2310, Tariff and Customs Code]
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5.
The scope of a protest shall be limited to the subject matter of a single adjustment or
other independent transaction; but any number of issues may be raised in a protest with
reference to the particular item or items constituting the subject matter of the protest.
Single adjustment refers to the entire content of one liquidation, including all duties,
fees, surcharges or fines incident thereto. [Section 2310, Tariff and Customs Code]
6.
When a protest in form is presented, the Collector shall issue an order for hearing within
fifteen (15) days from receipt of the protest and hear the matter thus presented. Upon
the termination of the hearing, the Collector shall render a decision within thirty (30)
days, and if the protest is sustained in whole or in part, he shall make the appropriate
order, the entry re-liquidated if necessary.
7.
The person aggrieved by the decision or action of the Collector in any matter presented
upon protest may within fifteen (15) days after notification in writing by the Collector of
his action or decision, give written notice to the Collector and one copy furnished to the
Commissioner of his desire to have the matter reviewed by the Commissioner.
Thereupon, the Collector shall forthwith transmit all records of the proceedings to the
Commissioner, who shall approve, modify, or reverse the action or decision of the
Collector and take such steps and make such orders as may be necessary to give effect
to his decision. [Section 2313, Tariff and Customs Code]
8.
If in any case involving the assessment of duties, the Collector renders a decision
adverse to the Government, such decision shall automatically be elevated to, and
reviewed by the Commissioner; and if the Collectors decision would be affirmed by the
Commissioner, such decision shall automatically by elevated to, and be finally reviewed
by, the Secretary of Finance. However, if within thirty (30) days from receipt of the
record of the case by the Commissioner or by the Secretary of Finance, as the case may
be, no decision is rendered by either of them, the decision under review shall become
final and executory. Any party aggrieved by either the decision of the Commissioner or
the Secretary of Finance may appeal to the Court of Tax Appeals within thirty (30) days
from receipt of a copy of such decision. [Section 2315, Tariff and Customs Code]
Incidentally, in cases of appeals to the Court of Tax Appeals from the decisions
of the Secretary of Finance as a consequence of the automatic review by the Secretary
of Finance of decisions emanating from Customs, the thirty-day period of appeal under
Republic Act No. 1125 will necessarily be counted from the receipt of the decision of the
Secretary of Finance.
Automatic review and supervisory authority of Commissioner of Customs and

Secretary of Finance
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If in any case involving the assessment of duties, the Collector renders a decision
adverse to the government, such decision shall automatically be elevated to, and
reviewed, by the Commissioner.
If the Collectors decision would be affirmed by the Commissioner, such decision
shall be automatically elevated to, and finally reviewed, by the Secretary of Finance.
However, if within thirty (30) days from receipt of the record of the case by the
Commissioner or the Secretary of Finance, as the case may be, no decision is rendered
by either of them, the decision under review shall become final and executory.
Any party aggrieved by either the decision of the Commissioner or the Secretary
of Finance may appeal to the Court of Tax Appeals within thirty (30) days from receipt
of a copy of such decision.
Except as provided above, the supervisory authority of the Secretary of Finance
over the Bureau of Customs does not extend to the administrative review of the ruling of
the Commissioner in matters appealed to the Court of Tax Appeals.
Automatic review is intended to protect the interest of the government in the collection
of taxes and customs duties in seizure and protest cases which, without such review,
neither the Commissioner nor the Secretary of Finance would probably know about.
Automatic review as a procedural rule applies to both customs cases and seizure and
forfeture cases incident to smuggling or unlawful importation or exportation.
Likewise, supervisory authority is exercised by the Commissioner on seizure and

forfeiture cases while the case is still pending in the Office of the Collector of Customs
and before the decision of the Collector becomes final.
Burden of proof in protest cases
In protest cases, the protestant has the burden of proving the correctness of his
contention for the issue is not whether the Collector was wrong but whether the
importer is right.
SEIZURE AND FORFEITURE CASES

Nature of seizure and forfeiture proceedings
Proceedings in seizure cases are actions in rem directed against the property seized, not
against the owner thereof.
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Forfeiture proceedings are civil and are not criminal in nature.
A customs seizure and forfeiture case 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. [Commissioner of Customs v. Makasiar , GR No. 79307, August 29,
1989]
Forfeiture is in the nature of proceedings in rem and is directed against the res. The fact
that the owner of the vessel had no actual knowledge that the vessel was illegally used
does not render the vessel immune from forfeiture. This is so because forfeiture action
is against the vessel itself. [ Vierneza v. Commissioner , 24 SCRA 294]
Doctrine of primary jurisdiction over seizure and forfeiture cases
The prevailing doctrine is that the exclusive jurisdiction in seizure and forfeiture cases
vested in the Collector of Customs precludes a regular court from assuming cognizance
of such matter.
It is the settled rule that the Bureau of Customs acquires exclusive jurisdiction over
imported goods, for the purposes of enforcement of the customs laws, from the moment
the goods are actually in its possession or control, even if no warrant of seizure or
detention had previously been issued by the Collector of Customs in connection with
seizure and forfeiture proceedings.
Jurisdiction of the Bureau of Customs
The Bureau of Customs 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. [Section 603,
Tariff and Customs Code]
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. [Section 603, Tariff and Customs Code]
Imported articles which may be subject to seizure for violation of tariff and customs laws
may be pursued in their transportation in the Philippines by land, water, or air and such
jurisdiction exerted over them at any place therein as may be necessary for the due
enforcement of the law.
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In Asaali v. Commissioner [27 SCRA 312], the Supreme Court held as valid the
interception and seizure of a vessel on the high seas, saying that the authority of a
nation within its territory is absolute and exclusive. The power to secure itself from
injury may certainly be exercised beyond the limits of its territory.
Places where searches and seizures may be conducted

1.
Right of police officer to enter inclosure without a warrant, except a dwelling house
2.
Search of dwelling house must be with proper warrant
3.
Right to search vehicles or aircrafts and persons or articles conveyed therein
4.
Right to search vehicles, beasts and persons
5.
Search of persons arriving from foreign countries
Right of police officer to enter inclosure without a warrant
Any person exercising the police powers conferred under said Code may at any time
enter, pass through, or search any land or inclosure or any warehouse, store or other
building, not being a dwelling house.
A warehouse, store or other building or inclosure used for the keeping or storage of
articles does not become a dwelling house within the meaning hereof by reason of the
fact that a person employed as watchman lives in the place, nor will the fact that his
family stays therein with him alter the case.
Search of dwelling house
A dwelling house may be entered and searched only upon warrant issued by a judge of
the court, upon sworn application showing probable cause and particularly describing
the place to be searched and person or thing to be seized.
Right to search vessels or aircraft and persons or articles conveyed therein
It shall be lawful for any official or person exercising police authority under the Tariff
and Customs Code to go aboard any vessel or aircraft within the limits of any collection
district, and to inspect, search and examine said vessel or aircraft and any trunk,
package, box or envelope on board, and to search any person on board the said vessel
or aircraft if under way, to use all necessary force to compel compliance.
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If it shall appear that any breach or violation of the customs and tariff laws of the
Philippines has been committed, whereby or in consequence of which such vessels or
aircraft, or the article, or any part thereof, on board of or imported by such vessel or
aircraft is liable to forfeiture to make seizure of the same or any part thereof.
The power of search hereinabove given shall extend to the removal of any false bottom,
partition, bulkhead or other obstruction, so far as may be necessary to enable the officer
to discover whether any dutiable or forfeitable articles may be concealed therein.
No proceeding herein shall give rise to any claim for the damage thereby caused to
article or vessel or aircraft.
Right to search vehicles, beasts and persons
It shall also be lawful for a person exercising authority as aforesaid to open and examine
any box, trunk, envelope or other container, wherever found when he has reasonable
cause to suspect the presence therein of dutiable or prohibited article or article
introduced into the Philippines contrary to law, and likewise to stop, search and examine
any vehicle, beast or person reasonably suspected of holding or conveying such article
as aforesaid.
Search of persons arriving from foreign countries
All persons coming into the Philippines from foreign countries shall be liable to detention
and search by the customs authorities under such regulations as may be prescribed
relative thereto.
Procedure governing seizure and forfeiture cases

1.
Warrant for detention of property. Bond.

Upon making any seizure, the Collector shall issue a warrant for the detention of
the property; and if the owner or importer desires to secure the release of the property
for legitimate use, the Collector may surrender it upon the filing of a sufficient bond, in
an amount to be fixed by him, conditioned for the payment of the appraised value of the
article and/or any fine, expenses and costs which may be adjudged in the case:
Provided, that articles the importation of which is prohibited by law shall not be released
under bond.
2.
Report of seizure to Commissioner and Chairman, Commission on Audit.
3.
Notification to owner or importer.
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4.
Notification to unknown owner.
5.
Description, appraisal and classification of seized property
6.
Proceedings in case of property belonging to unknown parties
7.
Settlement of case by payment of fine or redemption of forfeited property

Subject to approval of the Commissioner, the district collector may, while the
case is still pending, except when there is fraud, accept the settlement of any seizure
case provided that the owner, importer, exporter, or consignee or his agent shall offer to
pay to the collector a fine imposed by him upon the property, or in case of forfeiture,
the owner, exporter, importer, or consignee or his agent shall offer to pay the domestic
market value of the seized article. The Commissioner may accept the settlement of any
seizure case on appeal in the same manner.
Settlement of any seizure case by payment of the fine or redemption of forfeited
property shall not be allowed in any case where the importation is absolutely prohibited
or where the release of the property would be contrary to law.
8.
Decision or action by collector in protests and seizure cases
9.
Review by Commissioner
The person aggrieved by the decision or action of the Collector in any matter
presented upon protest or by his action in any case of seizure may, within fifteen (15)
days after notification in writing by the Collector of his action or decision, give written
notice to the Collector and one copy furnished to the Commissioner of his desire to have
the matter reviewed by the Commissioner. Thereupon, the Collector shall forthwith
transmit all the records of the proceedings to the Commissioner, who shall approve,
modify or reverse the action or decision of the Collector and take such steps and make
such orders as may be necessary to give effect to his decision.
10.
Notice of decision of Commissioner

Decision of the Commissioner of Customs shall be appealed to the Court of Tax
Appeals within thirty (30) days after receipt of the decision. In case of automatic
reviews, the decision of the Secretary of Finance shall be appealed within the same
period after receipt of the decision of the Secretary.
11.
Supervisory authority of Commissioner and of Secretary of Finance in certain cases
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Automatic review by the Commissioner and Secretary on certain cases.

12.
Authority of Commissioner to make compromise

Subject to the approval of the Secretary of Finance, the Commissioner of
Customs may compromise any case arising under the Code or other laws or part of laws
enforced by the Bureau of Customs involving the imposition of fines, surcharges and
forfeitures unless otherwise specified by law.
Property not subject to forfeiture
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 has no knowledge of or participation in the unlawful act.
However, a prima facie presumption shall exist against the vessel, vehicle or aircraft
under any of the following circumstances:
1.
If the conveyance has been used for smuggling at least twice before;
2.
If the owner is not in the business for which the conveyance is generally used;
and
3.
If the owner is not financially in a position to own such conveyance.
Burden of proof in seizure and/or forfeiture
In all proceedings taken for the seizure and/or forfeiture of any vessel, vehicle, aircraft,
beast or articles under the provisions of the tariff and customs laws, the burden of proof
shall lie upon the claimant. Provided, that probable cause shall be first shown for the
institution of such proceedings and that seizure and/or forfeiture was properly made.
Seizure of other articles
The Commissioner of Customs and Collector of Customs and/or any other customs
officer, with the prior authorization in writing by the Commissioner, may demand
evidence of payment of duties and taxes on foreign articles openly offered for sale or
kept in storage, and if no such evidence can be produced, such articles may be seized
and subjected to forfeiture proceedings.
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Provided, that during such proceedings, the person or entity for whom such articles
have been seized shall be given the opportunity to prove or show the source of such
articles and the payment of duties and taxes thereon.
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TAXATION

This review material is a product of the collective efforts of

GENERAL PRINCIPLES OF TAXATION

TARIFF AND CUSTOMS CODE

The sources of this review material are

GENERAL PRINCIPLES OF TAXATION

Essential elements of a tax

It is generally payable in money.

It is levied on persons, property, or the exercise of a right or privilege.

It is levied by the law-making body of the State.

It is levied for public purpose or purposes.

Non-revenue or regulatory: Taxation may also be employed for purposes of

Imposition of tariffs on imported goods to protect local industries.

The adoption of progressively higher tax rates to reduce inequalities in wealth

The increase or decrease of taxes to prevent inflation or ward off depression.

PAL v. Edu, 164 SCRA 320

Tio v. Videogram, 151 SCRA 208

MABUHAY EDITION 2000

Taxation is no longer a measure merely to raise revenue to support the existence of

Sumptuary purpose of taxation

Theory and basis of taxation

Life blood or necessity theory

MABUHAY EDITION 2000

Illustrations of lifeblood theory

Collection of taxes cannot be enjoined by injunction.

Taxes could not be the subject of compensation or set off.

A valid tax may result in destruction of the taxpayers property.

Taxation is an unlimited and plenary power.

In fact, from the contribution received, the government renders no special or

MABUHAY EDITION 2000

TAX DIFFERENTIATED FROM OTHER TERMS

On the other hand, tariff may be used in one of three senses:

A book of rates drawn usually in alphabetical order containing the names of

The duties payable on goods imported or exported; or

The system or principle of imposing duties on the importation or exportation of

License or regulatory fee v. tax

MABUHAY EDITION 2000

Criteria for determining license fees

Instances when license fees could exceed cost of regulation, control or

When the license fee is collected to regulate a non-useful occupation

Special assessment v. tax

A special assessment is an enforced proportional contribution from owners of lands

A special assessment is levied only on land.

A special assessment is based wholly on benefits, not necessity.

MABUHAY EDITION 2000

Toll is a demand of proprietorship; tax is a demand of sovereignty.

Penalty is designed to regulate conduct; taxes are generally intended to generate

MABUHAY EDITION 2000

Penalty may be imposed by the government or by private individuals or entities; taxes

Obligation to pay debt v. obligation to pay tax

A debt is assignable, while a tax cannot generally be assigned.

A debt may be paid in kind, while a tax is generally paid in money.

A debt may be the subject of set off or compensation, a tax cannot.

A person cannot be imprisoned for non-payment of tax, except poll tax.

A debt is governed by the ordinary periods of prescription, while a tax is governed by

That the two debts be due.

That they be liquidated and demandable.

Rules re: set off or compensation of debts

General rule: A tax delinquency cannot be extinguished by legal compensation. This is

MABUHAY EDITION 2000

Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)

SURVEY OF PHILIPPINE TAXES

Internal revenue taxes imposed under the NIRC