TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
COVERAGE OF TAXATION LAW REVIEW
I. Basic Principles of Constitutional
Limitations
a) Due process clause which
could be either substantive
due process and
procedural due process
clause
b) Equal protection clause
Read:
 Ormoc Sugar Central vs.
City Treasurer 22 SCRA
603
 Tiu vs. CA 301 SCRA 178
c) Article III sec. 1 of the
1987 Constitution – non-
impairment clause
d) Article III sec. 5 – freedom
of religion
e) Article III sec. 20 – non-
payment of poll tax
f) Article VI sec. 28 par. 2 –
flexible tariff clause
g) Article VI sec. 28 par. 3 –
exemption from real
property tax
Read:
 Herrera vs. Quezon City 3
SCRA 186
 Abra vs. Hernando 107 SCRA
104
 Abra Valley vs. Aquino 52
SCRA 106
 Philippine Lung Center vs.
Quezon City 433 SCRA 119
h) Article VI sec. 28 par. 4 –
qualified majority in tax
exemption
i) International double
taxation
 CIR vs. Johnson 309 SCRA
87
j) Doctrine of equitable recoupment
k) Doctrine of Set-off or compensation in
taxation
 Republic vs. Mambulao 4 SCRA 622
 Domingo vs. Garlitos 8 SCRA 443
 Francia vs. IAC 162 SCRA 753
 Caltex vs. COA 208 SCRA 726
 Philex vs. CIR 294 SCRA 687
II. Income Tax Law
Section 22-26 of the National Internal
Revenue Code
a) Read in the commentaries or magic
notes the different kinds of:
1. Income Taxpayers
2. Income Taxes
3. Sources of Income sec. 42 of NIRC
- Income Taxpayers
a) Individuals
b) Corporation
c) Estates and Trusts –
-Individuals are classified
 Resident Citizens sec. 23 (A), sec
24 (A) (a)
 Non-Resident Citizens sec 23 (B),
24 (A) (b) 22 (E)
 Overseas Contract Workers Sec.
23 (C), 24 (A) (b)
 Resident Aliens Rev. Reg. sec 5,
23 (D), 24 (A) (c)
 Non-Resident Aliens Engaged in
trade or business sections 25 (A)
(1)
 Non-Resident Aliens Not Engaged
in trade or business sec. 25 (B)
 Aliens Employed in Multi-
National Corporations sec. 25 (C)
and Rev. Reg. 12-2001
 Aliens Employed in Offshore
Banking Units sec 25 (D)
 Aliens Employed in petroleum
Service Contractors &
Subcontractors sec. 25 (E)
-Corporate Income Taxpayers
 Domestic Corporations sec. 23 (E),
and sec 27 of NIRC
 Resident Foreign Corporations sec. 22
(H) and (28)A
 Non-Resident Foreign Corporations
sec. 22 (1) and 28 (B)
-Estates and Trusts sec. 60-66 of NIRC
Different Kinds of Income Tax
1. Net Income Tax secs. 24 (A), 25
(A) (1), 26, 27 (A) (B) (C), 28 (A) up
to 3rd par. 31 and 32 (A)
2. Gross Income Tax secs. 25 (B) first
part and 28 (B) (1)
3. Final Income Taxes sec. 57 (A)
4. Minimum Corporate Income Tax
of 2% of the Gross Income secs.
27 (E), 28 (A) (2)
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 TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
5. Improperly Accumulated Earnings
Tax of 10% of its taxable income
sec. 29 NIRC Rev. Reg. 2-2001
 Optional Corporate Income Tax of
15% of its gross income sections
27 (A) 4th to 10th par. And 28 A(1)
but only up to the 4th paragraph
-Proceed to section 42 and 23 of the
NIRC
 NDC vs. Comm 151 SCRA 472
 Comm. Vs. IAC 127 SCRA 9
-Then go to sec. 39 of NIRC
 Calazans vs. Comm. 144 SCRA
664 RR 7-2003
-Then proceed to sec. 24 (A), 25 (A)
(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),
28 (A) (6) and sec 51 (D)
-Then continue to sec 24 B 1, 25
B,C,D,E; 27 (D) (1)
-Then go to se. 24 (B) (2) sec. 73
 Comm. Vs. Manning 66 SCRA 14
 Anscor vs. Comm. 301 SCRA 152
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4);
28 (A) (7) (D); 32 B (7) (a)
- Then you go to sec. 24 C, 25A (3); 25 B,
C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5)
(C) RA 7717 sec. 127 NIRC
- Then you go to sec. 24 D (1); 25 (A) (3);
25 (B) last par. 27 (D) (5)
 China Bank vs. Court of Appeals 336
SCRA ___; RR 7-2003
-Upon reading sec. 24 (D) (2) read RR 13-
1999
-Upon reading sec. 27 (A) go to sec. 22 (B)
 Batangas vs. Collector 102 Phil. 822
 Evangelista vs. Collector 102 Phil 140
 Reyes vs. Comm. 24 SCRA 198
 Ona vs. Bautista 45 SCRA 74
 Obillos vs. Comm 139 SCRA 436
 Pascua vs. Comm. 166 SCRA 560
 Afisco vs. Comm. 302 SCRA 1
-Upon reading sec. 27 (C) of NIRC see RA
9337 then go to sec. 32 (B) (7) (b) of NIRC,
sec. 133 par (o) of LGC, sec. 154 of the LGC.
 Pagcor vs. Basco 197 SCRA 52
 Mactan vs. Cebu 261 SCRA 667
 LRT vs. City of Manila 342 SCRA 692
-Proceed to sections 27 (D) (1), 27 (D) (2),
27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 (B)
(5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B) (5)
(b)
 Marubeni vs. CIR 177 SCRA 500
 Proctor & Gamble vs. Comm 160 SCRA
560
 Same case Proctor and Gamble on the
Motion for Reconsideration 204 SCRA
377
 Wonder vs. Comm 160 SCRA 573
-Proceed to sec. 27(D) (5)
then sections 27 (E) and 28 (A) (2)
-Go to sec. 28 (A) (3) read RR 15-2002
-Go to sec. 28 (A) (4) see RA 9337
-Then see sec 28 (A) (5) see Marubeni vs.
Comm 177 SCRA 500
-Proceed to sec. 28(B) (5) (a) and sec 32 (B)
(7) (a)
 Read Mitsubishi vs. Comm 181 SCRA
214
-Then go to sec. 29 and Rev. Reg. 2-2001
-Upon reading sec. 32 (B) 1 and 2, read sec.
85 par (e), sec. 108A and sec. 123 of the
NIRC
-Proceed to sec. 33 read Rev. Reg. 3-98
-then go to sec. 34 (A) (1) (a) see Aguinaldo
vs. Comm. 112 SCRA 136, RR 10-2002
-Under Sec. 34 (B) read RR 13-2000
-Upon reading sec. 49 read Banas vs. CA
325 SCRA 259 and Filipina vs. Comm. 316
SCRA 480
-Upon reading sec. 60-66, read Ona vs.
Bautista 45 SCRA 74
III. Estate Tax
-Sections 84-97 see sec. 104
-Upon reading sec. 85 (B) read Vidal
de Roces vs. Posadas 58 Phil. 108
Dizon vs. Posadas 57 Phil 465
-Sec. 85 (G) compare with sec. 100
-sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos vs.
Sandiganbayan 273 SCRA 47
IV. Donors Tax Law
- Sections 98-104
- G and Cumulative methods of filing
donor’s tax returns sections 99 (A), 103
(A) (1) and RR 2-2003
- Sections 100 and 85 (9)
V. Value Added Tax
- Sections 105-115
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 TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
-Read RA 9337
-Read ABAKADA vs Comm.
GR 168056, Sept. 1, 2005
VI. Remedies Under the Internal Revenue
Code
-Sections 202-229
-RR 12-99
 Phoenix vs Comm 14 SCRA 52
 Basilan vs. Comm. 21 SCRA 17
 Yabut vs. Flojo 115 SCRA 278
 Union Shipping vs. Comm 185 SCRA
547
 Comm. vs. TMX 205 SCRA 184
 Comm. vs. Philamlife 244 SCRA
 Comm. vs. CA & BPI 301 SCRA 435
 BPI vs. Comm. 363 SCRA 840
-Prescription sections 203 and 222 of
NIRC, sec. 194 of the LGC, sec. 270 of
the LGC, sec. 1603 of Tariff and
Customs Code
-Protest sec. 228 of NIRC and RR 12-99
sec. 195 of LGC, 252 LGC, sec. 2313 of
Tariff & Customs Code and RA 7651
- Under sec. 150 of the LGC read the
following:
 Phil. Match vs. Cebu 81 SCRA 99
 Allied Thread vs. Manila 133
SCRA 338
 Sipocat vs. Shell 105 Phil. 1263
 Iloilo Bottles vs. Iloilo City 164
SCRA 607
VIII. Real Property Tax
- Sections 197-294
- Sec. 235
 LRT vs. Manila 342 SCRA 692
 Cebu City vs. Mactan 261 SCRA 667
IX. Tariff & Customs Code
- Special Customs Duty sec. 301-304 of
TCC
- Regukar Customs Duty sec. 104 of TCC
- RA 7631
X. Court of Tax Appeals
- RA 1125 as amended by RA 9282

VII. Local Taxation

- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read Bulacan
vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-128
-Under sec. 133 (e) read Palma vs.
Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron
198 SCRA 82
-Under 133 (i) read First Holdings Co.
vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO
322 SCRA 805
-Under 137 read sec. 193 of LGC
 Misamis vs. Cagayan de Oro 181
SCRA 38
 Reyes vs. San Pablo City 305
SCRA 353
 Meralco vs. Laguna 306 SCRA
750
 PLDT vs. Davao City 363 SCRA
522

- Co-relate sec. 139 and 147 of LGC

- Under sec. 140 of the LGC see sec.
125 of the Internal Revenue Code

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TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -

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 TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
Rules in the Classroom:
1. do not be absent
 if you are absent, you have to
transcribe what happened in class when
you were out.
 The next meeting you attend class,
consider yourself a resident of balic-balic,
babalikbalikan ka sa recit.
 Exception: if you get married.
2. read the assignment. Wag zapote ang
aral.
3. holiday – make up class probably on a
Sunday
4. allowed to glance at your notes, wag lang
pahalata/garapal
5. materials:
 codal
 commentaries (any author will do)
 magic notes (Sababan Lecture and
Q&A)
 Book stand
Coverage of Taxation Law Review:
1. Basic Principles including Constitutional
Provisions
2. Income Tax
3. Estate Tax
4. Donor’s Tax
5. Remedies
6. Local Tax
7. Real Property Tax
8. Tariff and Customs Code
9. Court of Tax Appeals
10. VAT (although not part of the coverage of
the Bar Exams, questions have been asked
since 1999)
 Title 5,6 and 7 are always included in the
coverage
 No computations in the bar
 There are only 1 or 2 questions in the Bar
about Basic Principles
 What are the favorite topics in the Bar?
→ 12 questions on Income Tax
→ 8-10 questions on remedies
→ 8-10 questions allocated to the 7 topics
BASIC PRINCIPLES:
► Taxation is an inherent power of the
State.
Q: What do you mean by INHERENT?
A: The power to tax is not provided for in
the law, statute or constitution; it depends on
the existence of the state. No law or
legislation for the exercise of the power to
tax by the national government.
Q: Do local governments exercise this
inherent power?
A: No. Only the National Government
exercises the inherent power to impose
taxes.
Q: The taxing power of local governments is
a DELAGATED power. Delegated by whom?
A: Delegated by Congress through law in
case of autonomous regions, and delegated
by the constitution in case of LGUs not
considered an autonomous region.
► Cities, provinces and municipalities →
power granted under Art. X Sec. 5&6 of the
Constitution
► Autonomous Regions → power conferred
by Congress through law. Art. X Sec. 20 #2
of the Constitution is a non-self-executing
provision. Thus the power is granted by
Congress because said provision requires an
enabling law.
► Article X, Section 5 is self-executing thus
the power is granted by the constitution.
CONSTITUTIONAL LIMITATIONS
Due Process Clause
Q: why is it a limitation to the power to tax?
A: The due process clause as a limitation to
the power to tax refers both to substantive
and procedural due process. Substantive due
process requires that a tax statute must be
within the constitutional authority of
Congress to pass and that it be reasonable,
fair and just.
Procedural due process, on the other
hand, requires notice and hearing or at least
the opportunity to be heard.
Ex: On Substantive Due Process- when the
Congress passes a law exempting the 13th
month pay from tax but with the concurrence
only of the majority of the quorum – law
would be invalid because the Constitution
provides that any grant of tax exemption
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 TAXATION LAW REVIEW NOTES
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shall be passed with the concurrence of the
majority of all the members of the Congress.
Q: Does it follow that the adverse party must
always be notified?
A: No. As a rule, notice and hearing or the
opportunity to be heard is necessary only
when expressly required by law. Where there
is no such requirement, notice and the
opportunity to be heard are dispensable.
Ex. Before Oct. 1, 1995, you can secure a
TRO without notifying the adverse party. If
you are a suspect in a criminal case, you have
the right to have an opportunity to be heard
(if there is a law).
Before July 1, 1998, no notice need be
given to a party declared in default. After the
amendment, the party declared in default has
to be notified of subsequent proceedings
albeit without the right to participate therein.
In the case of a search warrant, the
person to be searched was not notified. The
person searched cannot claim that there was
a violation of due process because there is no
law requiring that the person to be searched
should be notified.
Regarding delinquent tax payers,
before levy, there must be notice.
REASON:
No provision of law requires notice to the
adverse party. If the adverse party is notified,
he may abscond. Thus, in adversarial
proceedings, in connection with procedural
due process, the adverse party need not be
notified all the time.
Equal Protection Clause
► As a rule, taxpayers of the same footing
are treated alike, both as to privileges
conferred and liabilities imposed. Difference
in treatment is allowed only when based on
substantial distinction. Difference in
treatment not based on substantial
distinction is frowned upon as “class
legislation.” This is violated when taxpayers
belonging to the same classification are
treated differently form one another; and
taxpayers belonging different classifications
are treated alike.
Requirements of Reasonable Classification:
1) There must be substantial distinctions
that make a real difference.
2) It must be germane or relevant to the
purpose of the law.
3) The distinction or classification must
apply not only to the present but also
to future situations.
4) The distinction must apply to
persons, things and transactions
belonging to the same class.
Ex: In one case, a tax ordinance was
assailed on the ground that the ordinance
failed to distinguish a worker form casual,
permanent or temporary. The SC said that
the ordinance was invalid because of the
failure to state the said classification.
In PEOPLE v. CAYAT the Supreme Court
mandated the requisites for a valid
classification.
TIU v. COURT OF APPEALS (301 SCRA 278)
Q: what happened in the city of Olonggapo?
A: The Congress, with the approval of the
President, passed RA 7227, an act
creating the conversion of the military
bases into other productive uses.
Q: Who was the President at that time?
A: President Ramos
Q: What were signed?
A: RA 7227, EO 97 and EO 97-A
→ The first led to the creation of the
Subic Special Economic Zone (SSEZ). The
latter set the limitations and boundaries
of the application of the incentives (no
taxes, local and national, shall be
imposed within SSEZ. In lieu thereof, 3%
of the Gross Income shall be remitted to
the national gov’t) to those operating
their businesses within the said area.
Q: Who are the petitioners and what was
their contention?
A: The petitioners are Filipino businessmen
who are operating their business outside
the secured area. The petitioners
contended that the law in question was
violative of their right to equal protection
of laws since they are also Filipino
businessmen.
H: The Supreme Court ruled that there
was no violation since the classification
was based on a substantial distinction.
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 TAXATION LAW REVIEW NOTES
- ATTY. FRANCIS J. SABABAN -
The element invoked here is element
#1 that there must be substantial
distinction in the classification of
taxpayers on whom the tax will be
imposed.
The Court observed that those foreign
businessmen operating within the
secured area have to give a larger capital
to operate in the secured area (to spur
economic growth and guarantee
employment).
ORMOC SUGAR CENTRAL vs. CIR
Q: What did the municipality of Ormoc do?
A: The City Council of Ormoc passed a
Municipal Ordinance No.4 imposing upon
any and all centrifugal sugar milled at the
Ormoc Sugar Central a municipal tax on
the net sale of the same to the United
States and other foreign countries.
Q: Did the owner accept this imposition?
A: No. the tax due was paid under protest,
then filed a complaint against the City of
Ormoc.
H: The Supreme Court said there was a
violation of the equal protection clause.
The element invoked here was element
#3, that it must be applicable to both
present and future circumstances. The
Supreme Court said that one must go to
the provision itself, in the case at bar,
there was a violation of element #3
because the law was worded in such a
way that it only applies to Ormoc Sugar
Central alone and to the exclusion of all
other sugar centrals to be established in
the future.
TAKE NOTE: People vs. Cayat
Freedom of Religion
It Involves 3 Things:
1. freedom to choose religion
2. freedom to exercise one’s religion
3. prohibition upon the national
government to establish a national religion
Q: Which one limits the power to tax?
A: Prohibition upon the national government
to establish a national religion because this
will require a special appropriation of money
coming from the national treasury which is
funded by the taxes paid by the people.
Non-impairment Clause
Q: What are the sources of obligation in the
Civil Code?
A: Law, Contracts, Quasi-Contracts, Delict,
Quasi-Delict.
Q: What is the obligation contemplated in
this limitation?
A: Those obligations arising from contracts.
General Rule: The power to tax is pursuant
to law, therefore, the obligation to pay taxes
is imposed by law, thus the non-impairment
clause does not apply.
► You have to determine first the source of
obligation:
1. If the law merely provides for the
fulfillment of the obligation then the law is
not the source of the obligation.
2. When the law merely recognizes or
acknowledges the existence of an obligation
created by an act which may constitute a
contract, quasi-contract, delict, and quasi-
delict, and its only purpose is to regulate
such obligation, then the act itself is the
source of the obligation, not the law.
When the law establishes the obligation
and also provides for its fulfillment, then the
law itself is the source of the obligation
Q: So, in what instance does the non-
impairment of contracts clause becomes a
limitation to the power to tax?
A: it is when the taxpayer enters into a
compromise agreement with the government.
In this instance, the obligation to pay the tax
is now based on the contract between the
taxpayer and the government pursuant to
their compromise agreement.
Take Note: the requirement for its
application: the parties are the government
and private individual.
Poll Tax
Q: What is a poll tax?
A: It is a tax of a fixed amount on individuals
residing within a particular territory, whether
citizens or not, without regard to their
property or to the occupation in which they
may be engaged.
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It is a tax imposed on persons without
any qualifications. persons may be allowed to
pay even if they are not qualified as to age or
property ownership.
Example of Poll Tax: Community Tax
Certificate under Section 162 of the Local
Government Code.
Q: Why is it a limitation to the power to tax?
A: It is a limitation to the power to tax
because Congress is prohibited from passing
a law penalizing with imprisonment a person
who does not pay poll tax. (funds for sending
a person to jail is taken from the national
treasury which is funded by the taxes paid by
the people)
Exemption from payment of Real Estate
Tax
Q: What is the requirement for exemption
from payment of real property tax under the
1935, 1973 and 1987 Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution –
Cemeteries, churches and parsonages or
convents appurtenant thereto, and all lands,
buildings and improvements used
EXCLUSIVELY for RELIGIOUS, CHARITABLE or
EDUCATIONAL purposes shall be exempt for
taxation.
Art. 8, Sec. 17 (3), 1973 Constitution –
charitable institutions, churches, parsonages
or convents appurtenant thereto, mosque,
and non-profit cemeteries, and all lands,
buildings, and improvements ACTUALLY,
DIRECTLY, and EXCLUSIVELY used for
RELIGIOUS and CHARITABLE purposes shall
be exempt from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution –
charitable institutions, churches, and
parsonages or convents appurtenant thereto,
mosque, non-profit cemeteries, and all lands,
buildings, and improvements ACTUALLY,
DIRECTLY and EXCLUSIVELY used for
RELIGIOUS, EDUCATIONAL and CHARITABLE
purposes shall be exempt from taxation.
HERRERA v. QC-BOARD OF ASSESSMENT
(1935 Constitution)
Q: What is involved in this case?
A: A charitable institution, St.
Catherine’s Hospital. The hospital was
previously exempt from taxation until it
was reclassified and subsequently
assessed for the payment of real property
tax.
The contention of the respondent is
that the hospital was no longer a
charitable institution because it accepts
pay-patients, it also operates a school for
midwifery and nursing, and a dormitory.
Since it is not exclusively used for
charitable purposes it is not exempt from
taxation.
H: The Court ruled that petitioner is not
liable for the payment of real estate
taxes. It is a charitable institution, thus
exempt from the payment of such tax.
The hospital, schools and dormitory
are all exempt fro taxation because they
are incidental to the primary purpose of
the hospital.
NOTE: this arose during the 1935
Constitution.
“Exempted by virtue of incidental
purpose” was merely coined by the Supreme
Court. Thus, it does not apply to other taxes
except Real Estate Tax.
PROVINCE OF ABRA v. HERNANDO
Q: What is involved in this case?
A A religious institution was involved in
this case, the Roman Catholic Bishop of
Bangued, Inc. (bishop filed declaratory
relief after assessed for payment of tax).
The respondent judge granted the
exemption from taxes of said church
based only on the allegations of the
complaint without conducting a
hearing/trial. The assistant prosecutor
filed a complaint contending that
petitioner was deprived of its right to due
process.
SC: the Court ordered that the case be
remanded to the lower court for further
proceedings. The Court observed that the
cause action arose under the 1973
Constitution, not under the 1935
Constitution (note the difference). Tax
exemption is not presumed. It must be
strictly construed against the taxpayer and
liberally construed in favor of the
government.
ABRA VALLEY COLLEGE INC. v. AQUINO
Q: What is involved in this case?
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 TAXATION LAW REVIEW NOTES
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A: An educational institution is involved
in this case. The ground floor of the
school was leased to Northern Marketing
Corp., a domestic corporation. The 2nd
floor thereof was used as the residence of
the school director and his family.
The Province of Abra now contends
that since the school is not exclusively
used for educational purposes, the school
is now liable to pay real estate tax.
H: The Court held that the school is
PARTIALLY liable for real estate tax.
1. Residence – exempt by virtue of
incidental purpose; justified because
it is necessary.
2. Commercial – not exempt because it
is not pursuant to the primary
purpose; not for educational
purposes.
Q: is the doctrine in the case of Herrera the
same with this case?
A: NO. in the Herrera case, the exemption
was granted to all the real property (hospital,
school and dorm). But in this case, the
Supreme Court made a qualification. The
Supreme Court said it depends.
NOTE: both cases arose under the 1935
Constitution despite having been decided in
1988.
Q: At present, do we still apply the
exemption from tax by virtue of the Doctrine
of Incidental Purpose?
A: Not anymore. The cause of action in said
case arose under the 1935 Constitution and
it does not apply to the provisions of the
1987 Constitution.
PHILIPPINE LUNG CENTER v. QUEZON CITY
Q: What is involved in this case?
A: A charitable institution, a hospital. It
is provided in the charter of the Lung
Center of the Philippines is a charitable
institution. However, part of its building
was leased to private individuals and the
vacant portion of its lot was rented out to
Elliptical Orchids. Respondent contends
that since the hospital is not used
actually, directly, an d exclusively for
charitable purposes, it is liable to pay real
estate taxes.
H: The Supreme Court held that the
petitioner is liable to pay tax for those
parts leased to private individuals for
commercial purposes. For the part of the
hospital used for charitable purposes
(whether for pay or non-pay patients),
petitioner is exempt from payment of real
estate tax.
NOTE: petitioner contended that the profits
derived from the lease of its premises were
used for the operation of the hospital. The
Court held that the use of the profits does
not determine exemption, rather it is the use
of the property that determines exemption.
The case of Herrera does not apply
because said case arose under the 1935
Constitution and the present case arose
under the 1987 Constitution. The
requirements for exemption are different. In
the 1935 Constitution, the property must be
EXCLUSIVELY used for religious, educational
or charitable purposes. Under the 1987
Constitution, the property must be used
ACTUALLY, DIRECTLY, and EXCLUSIVELY for
religious, educational and charitable
purposes.
Q: Was the doctrine laid down in Abra Valley
affirmed in the Lung Center case?
A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the 1935
Constitution. The Supreme Court reiterated
the ruling in the Abra Valley case which arose
under the 1935 Constitution. The Supreme
Court made a qualification, it held that it
depends on whether or not the use is
incidental to the primary purpose of the
institution.
NOTE: at present, “exemption from tax by
virtue of incidental purpose” is not applicable
to all taxes including real estate tax.
COMM v. SC JOHNSON and SONS, INC.
Important :
1. international double taxation
2. importance of international tax treaty
3. implication of most favored nation
clause
Q: What is the corporation involved in this
case?
A: A domestic corporation (DC).
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SC Johnson and Sons, Inc. entered
into a license agreement with SC Johnson
and Sons U.S.A (Non-Resident Foreign
Corp, NRFC) whereby the former was
allowed to use the latter’s trademark and
facilities to manufacture its products. In
return, the DC will pay the NRFC royalties
as well as payment of withholding tax.
A case for refund of overpaid
withholding tax was filed. Apparently, the
DC should have paid only 10% under the
most favored nation clause.
H: The Supreme Court coined the term
International Double Taxation or
International Juridical Double Taxation.
Q: What prompted the SC to coin such
term?
A: Because a single income (tax royalties
paid by a DC) was subjected to tax by two
countries, the Philippines income tax and
the U.S. tax.
International Juridical Double Taxation
applies only to countries where the tax
liabilities of its nationals are imposed on
income derived from sources coming
from within and without.
Q: Is there an instance where
international double taxation does not
apply?
A: Yes. If it involves nationals of
countries wherein the tax liability is
imposed only from income derive from
sources within and not including those
derived from sources without.
(Ex: Switzerland)
→ The controversy in the case at bar
involves the income tax paid in the
Philippines.
After paying 25%, the US firm
discovered that they are entitled to 10%
under the most favored nation clause.
The question is: was the tax paid under
similar circumstances with that of the RP-
West Germany Treaty?
The CTA and Court of Appeals ruled
that it was paid under similar
circumstances. The phrase referred to the
royalties in payment of income tax. The
Supreme Court ruled that the lower
courts’ interpretation of the phrase was
erroneous. Rather, the phrase applies to
the application of matching credit.
Q: What is matching tax credit?
A: RP-Germany Treaty provides for that
20% of the tax paid in the Philippines
shall be credited to their tax due to be
paid in Germany.
The 10% does not apply because there
is no matching credit. Thus, there is no
similarity in the circumstances.
EQUITABLE RECOUPMENT AND DOCTRINE
OF SET-OFF
Equitable Recoupment
This doctrine provides that a claim for
refund barred by prescription may be allowed
to offset unsettled tax liabilities. This is not
allowed in this jurisdiction, because of
common law origin. If allowed, both the
collecting agency and the taxpayer might be
tempted to delay and neglect the pursuit of
their respective claims within the period
prescribed by law.
Q: What is the doctrine of Equitable
Recoupment?
A: When the claim for refund is barred by
prescription, the same is allowed to be
credited to unsettled tax liabilities.
(Sir gives an illustration found in page 3 of
magic notes)
Q: Is the rule absolute? Reason
A: Yes, the rule is absolute. The rationale
behind this is to prevent the taxpayer and
government official from being negligent in
the payment and collection of taxes.
(furthermore, you have to be honest for this
to work, hence, the government is preventing
corruption)
There is no exception at all otherwise, the
BIR would be flooded with so many claims.
Set-off
Presupposes mutual obligation between
the parties. In taxation, the concept of set-
off arises where a taxpayer is liable to pay
tax but the government, for one reason or
another, is indebted to the said taxpayer.
Q: What do you mean by SET-OFF?
A: This presupposes mutual obligations
between the parties, and that they are mutual
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creditors and debtors of each other. In
taxation, the concept of taxation arises where
a taxpayer is liable to pay taxes but the
government, for one reason or another, is
INDEBTED to said taxpayer.
REPUBLIC v. MAMBULAO LUMBER CO.
Q: What is the liability of Mambulao?
A: They are liable to pay forest charges
(under the old tax code).
NOTE: under our present tax code, the NIRC,
we do not have forest charges as the
same was abolished by President Aquino.
Q: What did the lumber company do?
A: The lumber company claimed that
since the government did not use the
reforestation charges it paid for
reforestation of the denuded land covered
by its license, the amount paid should be
reimbursed to them or at least
compensated or applied to their liability
to pay forest charges.
H: The Court ruled that the reforestation
charges paid is in the nature of taxes.
The principle of compensation does
not apply in this case because the parties
are not mutually creditors and debtors of
each other. A claim for taxes is not a
debt, demand, contract or judgment as is
allowed to be set-off under the statute of
set-off which is construed uniformly, in
the light of public policy, to exclude the
remedy in connection or any
indebtedness of the State or any
municipality to one who is liable for
taxes. Neither are they a proper subject
for recoupment since they do not arise
out of contract or the same transaction
sued on.
General Rule: no set-off is admissible against
demands for taxes levied in general or local
governmental purposes.
Reason: Taxes are not in the nature of
contracts or debts between the taxpayer and
the government, but arises out of a duty to,
and are positive acts of the government to
the making and enforcing of which, the
consent of the individual is not required.
Taxes cannot be the subject matter of
compensation.
DOMINGO v. GARLITOS
Q: What is being collected in this case?
A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes
anymore because the same was abolished
by Lolo Macoy.
Q: Who is the administratrix?
A: The surviving spouse.
Q: What did the surviving spouse do?
A: The surviving spouse suggested that
the compensation to which the decedent
was entitled to as an employee of the
Bureau of Lands be set-off from the estate
and inheritance taxes imposed upon the
estate of the deceased.
H: Both the claim of the government for
estate and inheritance taxes and the
claim of the (intestate) for the services
rendered have already become overdue
hence demandable as well as fully
liquidated, compensation therefore takes
place by operation of law, in accordance
with Art. 1279 and 1290 of the Civil Code
and both debts are extinguished to the
concurrent amount.
Compelling Reason: Congress has
enacted RA 2700, allocating a certain sum
of money to the estate of the deceased.
FRANCIA v. IAC
Q: This happened in what city?
A: Pasay City
Q: What is the tax being collected? Who is
collecting the same?
A: Payment for real estate taxes for the
property of Francia. It appears that
petitioner was delinquent in the payment
of his real estate tax liability. The same is
being collected by the Treasurer of Pasay.
Q: What is the suggestion of petitioner?
A: Suggested that the just compensation
for the payment of his expropriated
property be set-off from his unpaid real
estate taxes. (the other part of his
property was sold at a public auction)
H: The factual milieu of the case does
not justify legal compensation.
The Court has consistently ruled that
there can be no off-setting of taxes
against the claims that the taxpayer may
have against the government. A taxpayer
cannot refuse to pay a tax on the ground
that the government owes him an
amount.
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Internal Revenue taxes cannot be the
subject of compensation because the
government and the taxpayer are not
mutually creditors and debtors of each
other, and a claim for taxes is not a debt,
demand, contract or judgment as is
allowed to be compensated or set-off.
Furthermore, the payment of just
compensation was already deposited with
PNB Pasay, and the taxes were collected
by a local government, the property was
expropriated by the national government.
(diff parties, not mutual creditors and
debtors of each other.)
CALTEX PHIL v. COA
Q: What is being collected?
A: Caltex’s contribution to the Oil Price
Stabilization Fund (OPSF).
COA sent a letter to Caltex asking the
latter to settle its unremitted collection
stating that until the same is paid, its
claim for reimbursement from the OPSF
will be held in abeyance.
Q: Why is Caltex entitled to reimbursement?
A: Because of the fluctuation of the oil
prices in the Middle East and Europe.
Caltex wanted to off-set its unremitted
collection from its reimbursements.
H: The Court did not allow the set-off,
and reiterated its ruling in the case of
Mambulao and Francia. Furthermore, RA
6952 expressly prohibits set-off from the
collection of contributions to the OPSF.
The Court likewise stated that Caltex
merely acted as agent of the government
in collecting contributions for the OPSF
because such is being shouldered by the
consumers when they purchase
petroleum products of oil companies,
such as Caltex.
Taxation is no longer envisioned as a
measure merely to raise revenues to
support the existence of the government.
Taxes may be levied for regulatory
purposes such as to provide means for
the rehabilitation and stabilization of a
threatened industry which is vested with
public interest, a concern which is within
the police power of the State to address.
PHILEX MINING CORP v. COMM
The petitioner is liable for the payment of
excise taxes, which it wanted to be set-off
from its pending claim for a VAT Input
credit/refund.
The Court did not allow set-off. Taxes
cannot be the subject of compensation for
the simple reason that the government and
taxpayer are not mutual creditors and
debtors of each other. Taxes are not debts.
Furthermore, in the instant case, the
claim for VAT refund is still pending. The
collection of a tax cannot await the results of
a lawsuit against the government.
DOUBLE TAXATION
Double taxation is allowed because there
is no prohibition in the Constitution or
statute.
Obnoxious double taxation is the
synonym of double taxation.
Elements of Double Taxation:
1) Levied by the same taxing authority
2) For the same subject matter
3) For the same taxing period and
4) For the same purpose
There is no double taxation if the tax is
levied by the LGU and another by the national
government. The two (2) are different taxing
authorities.
LGUs are expressly prohibited by the
provisions of RA 7160 or the LGC of 1991
from levying tax upon: (1) the National
Government; (2) its agencies and
instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant to
the provisions of RA 8424 of the Tax Reform
Act of 1997, can levy tax upon GOCCs,
agencies and instrumentalities (Section 27
c)), although income received by the
Government form:
1) any public utility or
2) the exercise of any essential
governmental function
is exempt from tax.
KINDS OF INCOME TAXPAYERS
Q: Generally, how many kinds of income
taxpayers are there?
A: Under section 22A of NIRC, there are
three (3), namely:
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1. individual;
2. corporate;
3. estate and trust.
I. INDIVIDUAL TAXPAYER
Q: How many kinds of individual taxpayers
are there?
A: There are seven (7). Namely:
1. Resident Citizen (§23A and 24A);
2. Nonresident Citizen (§23B and 24A);
3. OCW and Seaman (§23C and 24A);
4. Resident Alien (§22F, 23D and 24A);
5. Nonresident Alien Engaged in Trade
or Business (§22G, 23D and 25A)
6. Nonresident Alien NOT Engaged in
Trade or Business (§22G, 23D and
25B)
7. Aliens Engaged in Multinational
Companies, Offshore Banking Units,
Petroleum Service Contractors
(§25C,D and E)
Resident Citizen (RC)
Q: How many types of RC?
A: There are two (2), namely:
1. RC residing in the Philippines; and
2. Filipino living abroad with no
intention to reside permanently
therein.
Q: If you are abroad, and you have the
intention to permanently reside therein, can
you still be considered a RC?
A: Yes. If such intention to permanently
reside therein was not manifested to the
Commissioner and the fact of your physical
presence therein, you may still be considered
a RC.
OCW and Seamen
OCW was used and not OFW in the CTRP,
because the classification shall cover only
those Filipino citizens working abroad with a
contract. TNTs are not covered.
A Filipino seaman is deemed to be an
OCW for purposes of taxation if he receives
compensation for services rendered abroad
as a member of the complement of a vessel
engaged exclusively in international trade.
Consequently, if he is not a member of
the complement or even if he is but the
vessel where he works is not exclusively
engaged in international trade, said seaman
is not deemed to be an OCW. He is either a
RC or a NRC depending on where he stays
most of the time during the taxable year.
If he stays in the Philippines most of the
time during the taxable year, he is
considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you
are not the one being referred to.
The importance of ascertaining whether
or not a seaman is a RC or a NRC, is that if he
is a RCm he is taxable on ALL income derived
from all sources within and without. If he is a
NRC, he is taxable only on income derived
form sources within the Philippines.
Q: What is the significance of using OCW?
A: It only covers Filipinos who works abroad
with a contract. It does not cover TNTs.
Q: What is the status of a TNT?
A: Since they are not covered by this
classification, they are considered RC
because they work abroad without a contract
and they have not manifested their intention
to permanently reside abroad. (distinguish
from an immigrant)
Requirements for a seaman to be considered
an OCW:
1. must be a member of the compliment of
a vessel;
2. the vessel must be exclusively engaged in
international trade or commerce.
Resident Alien (RA)
An individual whose residence is within
the Philippines and who is not a citizen
thereof.
Intention to reside permanently in the
Philippines is not a requirement on the part
of the alien.
The requirement under RR#2 is that he is
actually present in the Philippines, neither a
sojourner, a traveler, not a tourist.
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Whether he’s a transient or not is
determined by his intent as to the nature and
length of his stay.
Q: Is the intention to permanently reside in
the Philippines necessary?
A: No, so long as he is not a sojourner,
tourist or a traveler.
Non-Resident Alien Engaged in Trade or
Business (NRAETB)
A foreigner not residing in the Philippines
but who is engaged in trade or business here.
RR 2-98 has expanded the coverage of
the term, “engaged in trade or business” to
include the exercise of a profession.
Furthermore, by the express provision of the
law, a NRA who is neither a businessman nor
a professional but who come to and stays in
the Philippines for an aggregate period of
more than 180 days during any calendar year
is deemed to a NRAETB in the Philippines.
Q: How many types?
A: There are three (3) types, namely:
1. NRA engaged in trade or business
(25a1);
2. NRA who practices a profession
(Revenue Regulation 2-98);
3. foreigner who comes and stays in the
Philippines for an aggregate period of
MORE THAN 180 days during any
calendar year.
Q: What is the status of a Chinese who stays
here for 200 days in 2001?
A: NRAETB
Q: Suppose he stayed here for 100 days in
2000 and another 100 days in 2001?
A: He is not a NRAETB. To be considered as
such, he must stay for an aggregate period of
more than 180 days during a calendar year.
Q: What is the income tax applicable to said
taxpayer?
A: Net Income Tax (NIT) on all its income
derived form sources within the Philippines.
Non-Resident Alien Not Engaged in
Trade or Business
Q: How many kinds?
A: Only one.
The reason why the NRANETB are
included in any income tax law is because
they may be deriving income form sources
within the Philippines.
They are subject to tax based on their
GROSS INCOME received form all sources
within the Philippines.
Aliens Employed by Regional or Area
Headquarters & Regional Operating
Headquarters of Multinational
Companies/ Aliens Employed by
Offshore Banking Units (Aliens
Employed by MOP)
► Status: either a RA or NRA depending on
their stay here in the Philippines.
► Their status may either be RA or NRA
because Section 25 C and D does not
distinguish.
► Liable to pay 15% from Gross Income
received from their employer
► Income earned from all OTHER sources
shall be subject to the pertinent income tax,
as the case may be.
Aliens Employed in Multinational and
Offshore Banking Units
Q: How are they classified?
A: If they derived income from other sources
aside from their employer, you may classify
them either as RA, NRAETB, or NRANETB.
Aliens Employed in Petroleum Service
Contractors and Subcontractors
► Status: ALWAYS NRA. If they derive
income from other sources, such income
shall be subject to the pertinent income tax,
as the case may be.
► Income derived or coming from their
employer shall be subject to a tax of 15% of
the gross.
II. CORPORATE TAXPAYER
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1. Domestic Corporation (DC) – created
or organized under Philippine laws.
2. Resident Foreign Corporation (RFC) –
corporation created under foreign
law, and engaged in trade or
business.
3. Nonresident Foreign Corporation
(NRFC) – created under foreign law,
and NOT engaged in trade or
business.
Q: What are deemed corporations under the
NIRC?
A: The term corporation shall include
partnerships, no matter how created or
organized, joint stock companies, joint
accounts, associations, or insurance
companies, but DOES NOT includes general
professional partnerships and a joint venture
or consortium formed of the purpose of
undertaking construction projects or
operations pursuant to or engaging in
petroleum, coal, geothermal or consortium
agreement under a service contract with the
Government.
1. Partnerships and others no matter how
created
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies
CIR v. COURT OF APPEALS
The phrase no “matter how created or
organized” was interpreted.
Even if the partnership was pursuant to
law or not, whether nonstick, nonprofit, it is
still deemed a corporation.
Reason: because of the possibility of
earning profits form sources within the
Philippines.
Q: Are partnerships always considered
corporations? Is there no exception?
A: General Rule: a partnership is a
corporation.
Exception: General Professional Partnerships
(GPP)
Q: What is a GPP?
A: It is a partnership formed by persons for
the sole purpose of exercising their
profession, no part of the income of which in
derived from any trade or business. (what if a
partner has other businesses not related to
the GPP? > read section 26 quoted hereunder)
Two (2) Kinds of GPP formed for:
1) Exercise of a profession – not a
corporation; exempt from Corporate
Income Tax (CIT)
2) Exercise of a profession and engaged
in trade or business – a corporation;
subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a
corporation
exception: GPP
exception to the exception: if the GPP
derives income from other sources, it is
considered a corporation, thus liable to pay
corporate income tax.
Rule:
1. if the income is derived from other
sources and such income is subject to NET
INCOME TAX, it is not exempt and it is
considered a corporation.
2. if the income is derived from other
sources and such income is subject to FINAL
INCOME TAX, it is still EXEMPT and it is not
deemed a corporation. ( separate return for
this. It will not reflect in the GPP’s ITR)
» This is pursuant to the fact that FIT will
not reflect in the ITR of the GPP since the
withholding agent is liable for the payment of
the FIT.
Q: What is the importance of knowing
whether the corporation is exempt or not?
A: To determine their tax liability. This is
important to determine the tax liability of the
individual partners of the GPP.
► Section 26 (1st paragraph) provides: “a
GPP as such shall not be subject to the Net
Income Tax…” however, “…persons engaging
in business as partners in a GPP shall be
liable for income tax only in their separate
and individual capacities.”
In short, each partner will be paying NIT,
and the distributive shares they will be
receiving from the net income of the GPP will
be included in the gross income of the
partner.
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Q: If the GPP is deemed a corporation, will the
partners have to pay for the income tax?
A: No. as far as the share of the GPP is
concerned, it is considered a taxable dividend
which is subject to FIT.
Q: Is a joint venture a corporation?
A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do we
have?
A: Three, namely Corporation X, Y, and X+Y.
the joint venture has a separate and distinct
personality from the two corporations.
Q: When is a joint venture not considered a
corporation?
A: It is not deemed a corporation when it is
formed for the purpose of undertaking a
(“construction?) project or engaging in
petroleum, gas, and other energy operations
pursuant to “?” or consortium agreement
under a service contract with the
government.
Domestic Corporation
Is one created or organized in the
Philippines or under its laws.
Taxable on all income derived from
sources within or without the Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade or
business in the Philippines.
Taxable for income derived within the
Philippines.
Non-Resident Foreign Corporation
Foreign corporations not engaged in
trade or business in the Philippines.
Taxable for income derived within the
Philippines.
Both DC and RFC are liable for the
payment of the following:
1) NIT – Net Income Tax
2) FIT – Final Income Tax
3) 10% income tax on corporations with
properly accumulated earnings.
4) MCIT (Minimum Corporate Income
Tax) of 2% of the Gross Income
5) Optional Corporate Income Tax of
15% of the Gross Income
A NRFC is liable for payment of the ff:
1) GIT- Gross Income Tax
2) FIT – Final Income Tax
III. TRUST AND ESTATE
Q: How many for each?
A: Seven (7) kinds for each because the trust
or estate will be determined by the status of
the trustor, grantor, or creator, or of the
decedent.
The status of the estate is determined by
the status of the decedent at the time of his
death; so an estate, as an income taxpayer
can be a citizen or an alien.
When a person who owns property dies,
the following taxes are payable under the
provision of income tax law:
1) Income Tax for Individuals – to cover
the period beginning January to
the time of death.
2) Estate Income Tax – if the property is
transferred to the heirs.
3) If no partition is made, Individual or
Corporate Income Tax, depending
on whether there is or there is no
settlement of the estate. If there
is, depending on whether the
settlement is judicial or
extrajudicial.
Judicial Settlement
1) During the pendency of the
settlement, the estate through the
executor, administrator, or heirs is
liable for the payment of ESTATE
INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the judicial
settlement, when the decision of the
court shall have become final and
executory, the heirs still do not divide
the property, the following
possibilities may arise:
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a) If the heirs contribute to the
estate money, property or industry
with the intention to divide the
profits between and among
themselves, an UNREGISTERED
PARTNERSHIP is created and the
estate becomes liable for payment
of CIT (Evangelista vs. Collector
(102 Phil 140))
b) If the heirs without contributing
money, property or industry to
improve the estate, simply divide
the fruits thereof between and
among themselves, a CO-
OWNERSHIP is created and
Individual Income Tax (IIC) is
imposed on the income derived by
each of the heirs, payable in their
separate and individual capacity
(Pascual vs. COMM (165 scra 560)
and Obillos vs. COMM (139 SCRA
436))
Extrajudicial Settlement and if NO Settlement
Some possibilities may arise. The income
tax liability depends on whether or not the
unregistered partnership or co-ownership is
created.
Trust
Trusts can be created by will, by contract
or by agreement. The status of a trust
depends upon the status of the grantor or
trustor or creator of the trust. Hence, a trust
can also be a citizen or an alien.
Q: Where the trust earns income and such
income is not passive, who among the parties
mentioned is liable for payment of income
tax thereon?
A: The TRUST itself, through the trustee or
fiduciary but only if the trust is irrevocable.
If it is revocable, or for the benefit of the
grantor, the liability for the payment of
income tax devolves upon the trustor himself
in his capacity as individual taxpayer.
KINDS OF INCOME TAX
Q: How many kinds of income tax?
A: There are Six (6), namely:
1. Net Income Tax (NIT);
2. Gross Income Tax (GIT);
3. Final Income Tax (FIT);
4. Minimum Corporate Income Tax of
2% of the Gross Income (MCIT)
5. Income Tax on Improperly
Accumulated Earnings subject to 10%
of the Taxable Income;
6. Optional Corporate Income Tax of
15% on the Gross Income
I. NET INCOME TAX
Q: what is the formula?
A: Gross Income – Deductions and Personal
Exemptions = Taxable Income
Taxable Income x Tax Rate = Net
Income
Taxable Net Income – Tax Credit =
Taxable Net Income Due
Net Income means Gross Income less
deductions and
Formula:
GI
- deductions
Net Income
x Tax Rate
Income Tax Due
Q: What is the rate?
A: Individual: 32%
Corporation: 35%
NOTE: the formula allows for deduction,
personal exemptions and tax credit.
Q: What are the other terms for NIT?
A: NIRC:
a. taxable income
b. gross income (wlang kasunod)
→ only income tax from improperly
accumulated earnings does not use this term.
1. CFA: “to be included in the gross
income”
2. Revenue Regulations and Statutes:
a. ordinary way of paying income
tax;
b. normal way of paying income tax .
Characteristics:
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Q: Who are not liable to pay NIT?
A: 1. NRANETB (liable for GIT);
2. NRFC (GIT also);
3. With certain modifications, AEMOP, if
they derive income from other
sources;
Q: Is the taxable net income subject to
withholding tax?
A: It is subject to withholding tax if the law
says so.
Q: What if the law is silent?
A: If the law is silent, it is not subject to
withholding tax.
Q: What is another term for withholding tax?
A: It is also known as the creditable
withholding tax system under the income tax
law.
Q: Do we have to determine if there is an
actual gain or loss?
A: Yes because the formula for deductions,
etc.
Q: If you fail to pay, will you be held liable?
A: Yes, you will be held liable.
II. GROSS INCOME TAX (GIT)
Q: What is the formula?
A: Gross Income x Rate
Q: How many taxpayers pay by way of the
gross?
A: There are two (2)
individual - NRANETB
corporation - NRFC
NOTE: the formula does not allow any
deduction, personal exemptions and tax
credit.
Characteristics:
► NRANETB and NRFC, though not engaged
in trade or business, are liable to pay by way
of the gross for any income derived in the
Philippines. While not engaged in trade or
business, there is a possibility that they may
earn income in the Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax
because the persons liable are foreigners.
This rule is ABSOLUTE
NOTE: there are two (2) ways of paying taxes
depending on which side of the bench you
are.
III. FINAL INCOME TAX (FIT)
Q: What is the formula?
A: (Each Income) x (Particular Rate)
Unlike in the gross income tax where you
add all the income from all the sources and
multiply the sum thereof by the rate of 25%
or 35%, as the case may be, in final income
tax, you cannot join all the income in one
group because each income has a particular
rate.
Q: What is the rate?
A: 35% as the case may be.
NOTE: like GIT, the formula does not allow
deductions, personal exemptions, and tax
credit.
Characteristics:
Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT
provided the requisites for its application are
present.
Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to
pay NIT or else there will be double taxation.
NOTE: as time passed by, the number of FIT
increased.
► before 1979 – proceeds from the sale of
real property not exempt, it is subject to NIT
or GIT, as the case may be.
after 1979 – capital gains tax. Proceeds
from the sale of real property is exempt.
Q: If you fail to pay, will you be liable?
A: No. the withholding agent is liable to pay
FIT.
► Case of Juday, Richard and Regine
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Reason: to discourage corporations from
► For one to be liable for the payment of claiming too many deductions.
NIT, the income must be derived on the basis
of an employer – employee relationship. V. OPTIONAL CORPORATE INCOME TAX

Employer – Employee Relationship Q: Under what section is this found?

(3 Cs): A: Section 27A 4th paragraph and Section 28
1. contract; A(1) 4th paragraph.
2. control;
3. compensation; Q: Is this applicable now?
A: No. this is not yet implemented.
► However, in the case of celebrities, there
is no employer – employee relationship, they Q: To what kind of taxpayer does this apply?
are merely receiving royalties. Royalties are A: To DC and RFC.
subject to final withholding tax, thus the
agent is liable to pay. (so, distinguish nature Q: What kind of taxes are applicable or
of income, whether royalty or compensation) imposed upon the 1st five individual
taxpayers?
RULE: A: Only two (2) kinds are applicable out of
1. for NIT, whether or not subject to the six (6) kinds of income taxes.
Creditable Withholding Tax (CWT), the 1. NIT;
taxpayer is always liable if he fails to 2. FIT;
pay.
2. for GIT and FIT, absolute liability to Q: What kind of income tax will apply to
pay is upon the withholding agent. AEMOP?
A: Generally, only one kind, 15% FIT with
Q: Why is it that the rate of withholding is respect to income derived from their
always lower, and why is it that the rate of employer.
GIT and FIT is always equal?
A: Income from other sources:
1. NIT allows deductions; 1. Determine the status of the AEMOP;
2. GIT and FIT do not allow deductions. a. NIT
b. FIT
Q: Do you have to determine whether there 2. NRANETB
is an actual loss or gain? a. GIT
A: No need to determine because the b. FIT
formula does not allow deductions. Gain is
presumed. No liability for final withholding Q: What kind of income tax applies to DC?
tax except for the sale of shares of stock. (?) A: Only four (4) kinds will apply out of the
six (6)
IV. MINIMUM CORPORATE INCOME TAX 1. NIT
(MCIT) 2. FIT
3. MCIT
Q: What is the formula? 4. Improperly Accumulated Earnings
A: Gross Income x 2%
Q: May all of these be applied
Q: Who pays this tax? simultaneously?
A: DC and RFC only. A: No. only the NIT, FIT and Improperly
Accumulated Earnings be applied
Q: May it be applied simultaneous with NIT? simultaneously. NIT and MCIT cannot be
A: No. there must be a computation of the applied simultaneously. Only one will apply,
NIT first then apply which ever is higher. The whichever is higher between the two.
MCIT is paid in lieu of the NIT.
Q: What kind of tax will apply to NRFC?

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A: Out of the six (6) kinds, only two (2) will
apply:
1. GIT
2. FIT
Q: What is the significance of knowing the
classification of these taxpayers?
A:
1. to determine the kind of income tax
applicable to them;
2. to determine their tax liability.
Q: Under Section 23, who are liable for
income within and income without?
A: Only
1. RC
2. DC
► The rest of the taxpayers will be liable for
income coming from sources within.
► Income from sources without, no liability,
therefore exempt.
NOTE: The income taxpayer is not a RC or a
DC. Determine if the income came from
sources within or without to know the
taxpayer’s liability.
► If the facts are specific, do not qualify
your answer. Answers must be responsive to
the question.
Q: Is section 42 relevant to all the taxpayers?
A: NO. SECTION 42 IS NOT MATERIAL TO
ALL taxpayers, particularly the RC and DC
because these two are liable for both income
within and without.
► Section 42 is applicable only to taxpayers
who are liable for income within, the rest of
the taxpayers are otherwise exempt.
Q: Section 42(A)(1) provides for how many
kinds of interests?
A: It establishes two (2) kinds of interests,
namely:
1. interest derived from sources within
the Philippines.
2. interest on bonds, notes or other
interest bearing obligations of
residents, corporate or otherwise.
Q: What is the determining factor in order to
know if the income is from within?
A:
1. location if the bank is from within the
Philippines (pursuant to a Revenue
Reg.)
2. residence of the obligor (whether an
individual or a corp.) – contract of
loan with respect to the interest
earned thereon.
► For example the borrower is a NRAETB,
he borrowed money from a RA. The interest
earned by the loan will be considered as an
income without. RA is not liable to pay tax
since RA is liable only for income within,
therefore exempt from paying the tax.
NATIONAL DEVELOPMENT CO. v. CIR
F: The National Development Company
(NDC) entered into a contract with several
Japanese shipbuilding companies for the
construction of 12 ocean-going vessels.
The contract was made and executed in
Tokyo.
The payments were initially in cash
and irrevocable letters of credit.
Subsequently, four promissory notes were
signed by NDC guaranteed by the
Government.
Later on, since no tax was withheld
from the interest on the amount due, the
BIR was collecting the amount from NDC.
The NDC contended that the income
was not derived from sources within the
Philippines, and thus they are not liable
to withhold anything. NDC said that since
the contract was entered into and was
executed in Japan, it is an income
without.
H: The government’s right to levy and
collect income tax on interest received by
a foreign corporation not engaged in
trade or business within the Philippines is
not planted upon the condition that the
activity or labor and the sale from which
the income flowed had its situs in the
Philippines. Nothing in the law (Section
42(1)) speaks of the act or activity of
nonresident corporations in the
Philippines, or place where the contract is
signed. The residence of the obligor who
pays the interest rather than the physical
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location of the securities, bonds or notes
or the place of payment is the
determining factor of the source of the
income. Accordingly, if the obligor is a
resident of the Philippines, the interest
paid by him can have no other source
than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm,
becomes a stockholder of two corporations, a
DC and a RFC, and both corporations
declared dividends, what is the liability of the
Indonesian firm if the same received the
dividends?
A:
1. Dividends received from DC: the
Indonesian firm is liable to pay taxes.
NRFC, under the law, is liable if the
income is derived from sources
within. (Sec 42a)
2. Dividends received from RFC: the
Indonesian firm’s liability will depend
on amount of gross income from
sources within the Philippines.
The NRFC will be liable to pay income tax if
the following requisites are present:
1. at least 50% is income from sources
within;
2. the 1st requisite is for the three (3)
preceding taxable years from the time
of declaration of the dividends.
► In the absence of any or both
requisites, the income will be considered
from sources without, thus exempting the
Indonesian firm from payment of income tax.
Q: Same scenario, but this time the shares of
stock of the two corporations were being
disposed off. What is the tax liability of the
Indonesian firm?
A:
1. sale of shares of stock of DC: the
Indonesian firm will be liable for the
payment of taxes because the income
is from sources within.
2. sale of shares of stock of RFC: the
liability will depend on where the
shares of stock were sold. (mejo
Malabo sa notes, please be guided
accordingly)
Q: Filipino Executive, assigned to Hong
Kong, receiving two salaries, one from the
Philippines, the other from HK. The
performance of the job was in HK. Is he liable
for both salaries?
A: No, he is not liable for the two incomes.
His status is an OCW (note facts: working in
HK under contract). The compensation he
received is not subject to tax pursuant to
Section 42(c). Compensation for labor or
personal services performed in the
Philippines is considered an income within.
When it comes to services, it is the place
where the same is rendered which is
controlling. In the case at bar, the services
were rendered abroad, thus it is an income
derived from sources without, irrespective of
the place of payment.
Q: Suppose a DC hired a NRFC to advertise
its products abroad. What is the liability of
the NRFC? Will there be a withholding tax
imposed?
A: The income is derived from sources
without since the services in this case were
performed abroad. As such, the NRFC is not
liable and therefore exempt from the
payment of tax. If the NRFC is not subject to
NIT, then it is not also subject to withholding
tax.
Q: What is the controlling factor?
A: The controlling factor is the place where
the services were performed and not where
the compensation therefore was received.
RENTALS AND ROYALTIES
►income from sources within
Q: Granted by who?
A: NRFC
Q: Suppose you are the franchise holder, how
much is the withholding?
A: 35% (GIT)
Q: if the franchise is granted by RFC, how
much is the withholding?
A: 10% (NIT) and in some cases 15%
Section 42(4) MEMORIZE FOR RECIT
(CEKSTTM)
a. right of, or the right to use
copyright, patents, etc
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b. industrial, commercial,
scientific equipment
c. supply of knowledge
d. supply of services by
nonresident
e. supply of technical assistance
f. supply of technical advice
g. right to use: motion picture
films, etc.
Q: What is the rule as regards the sale of real
property?
A: Gains, profits, and income from the sale
of real property located within the Philippines
considered income within.
Q: What about the sale of personal property,
what is the rule?
A: Determine first if the property is
produced or merely purchased.
1. it the property is manufactured in the
Philippines and sold abroad, or vice-
versa, it is an income partly within
and partly without.
2. if the property is purchased,
considered derived entirely from the
sources within the country where it is
sold.
EXCEPTION: shares of stock of domestic
corporation, it is an income within wherever
it is sold.
COMMISSIONER v. IAC
Q: What is the issue here?
A: They cannot determine if the business
expense was incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is not
sure, will you disallow the deduction?
A: No. determine it pro rata.
Formula: GI from within
GI from without
Example: 100,000
1,000,000
= 10%
► Hence, 10% is the ratable share in the
deduction. If the deduction being asked is
100,000 not all of it will be allowed. Only
10,000 or 10% of 100,000 will be allowed
as deduction.
CAPITAL GAINS AND LOSSES
Section 39
Q: What is capital asset?
A: Capital asset is an asset held by a
taxpayer which is not an ordinary asset.
The following are ordinary assets:
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 trade or business;
3. property used in trade or business of
a character which is subject to the
allowance for depreciation provided in
subsection 1.
4. real property used in trade or
business of the taxpayer.
All other property not mentioned in the
foregoing are considered capital assets.
Q: What is a capital gain? What is a capital
loss?
A: Capital gains are gains incurred or
received from transactions involving property
which are capital assets. Capital losses are
losses incurred from transactions involving
capital assets.
Q: What is ordinary gain? Ordinary loss?
A: Ordinary gains are those received from
transactions involving ordinary assets.
Capital losses are losses incurred in
transactions involving ordinary assets.
Q: What is the relevance of making a
distinction?
A: It is relevant because Section 39B,C, and
D apply to capital assets only.
1. time when property was held (39B)
(holding period applies only to
individuals);
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)
I. CAPITAL ASSETS
Q: What is the holding period?
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A: If capital asset is sold or exchanged by an
individual taxpayer, only a certain percentage
of the gain is subject to income tax.
It is the length of time or the duration of
the period by which the taxpayer held the
asset.
Q: What is the requirement?
A:
1. the taxpayer must be an individual.
Section 39B states “in case of a
taxpayer, other than a corporation..”
2. property is capital in nature.
Q: What is the term?
A: 100% if the capital asset has been held
for not more than 12 months; (short term)
50% if the capital asset has been held for
more than 12 months. (long term)
NOTE: the holding period applies to both
gains and losses.
Q: Do you include capital gains in your ITR?
A: General rule: yes, include in ITR.
EXCEPT:
1. gains in sales of shares of stock not
traded in stock exchange(section 24);
2. capital gains from sale of real
property(section 24).
Q: When will the holding period not apply?
A:
1. property is an ordinary asset
2. taxpayer is a corporation
3. sale of real property considered as
ordinary asset
II. LIMITATION ON CAPITAL LOSSES
►synonymous to 34D & loss capital rule
► this applies to individual and corporate
taxpayer
Q: What is the loss limitation rule?
A: Pursuant to Section 39 C, losses from
sales or exchange of capital assets may be
deducted only from capital gains, but losses
from the sale or exchange of ordinary assets
may be deducted from capital or ordinary
gains. (applies to individual and corporation)
Q: In connection with 34 D, Losses in
Allowable Deduction, what is the rationale
behind this rule?
A: If it is otherwise, it will run counter with
the rule that the loss should always be
connected with the trade or business, capital
losses are losses not connected to the trade
or business, thus it is not deductible
Q: what is your remedy?
A: 39 D, net capital loss carry-over
Q: What is the rationale in allowing ordinary
loss to be deducted from either the
capital gains or ordinary gains?
A: It is already included in ITR, the gross
income less deductions hence it already
carries with it the deduction
TAKE NOTE: Normally if the loss is an
ordinary loss there is no carry over.
Except: a. 34D3
b. if the loss is more than GI
III. NET CAPITAL LOSS CARRY-OVER
Q: What are the requirements?
A:
1. taxpayer is an individual;
2. paid in the immediately succeeding
year;
3. applies only to short term capital
gain;
4. capital loss should not exceed net
income in the year that it was
incurred.
Q: How does net capital loss carry-over differ
from net operating loss carry-over under
Section 34 D (3)?
A: Under the net capital loss carry-over rule,
the capital loss can be carried over in the
immediate succeeding year. In net operating
loss carry-over rule, capital loss can be
carried over to the next three (3) succeeding
calendar year following the year when the
loss was incurred.
NOTE: only 15% of the loss will be carried
over, if the loss is greater than the gains.
► In net operating loss carry-over there is
an exception to the 3 year carry-over period.
In case of mines other than oil and gas wells,
the period is up to 5 years.
Q: What is a short sale?
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A: Sale of property by which the taxpayer
cannot come into the possession of the
property. EX: shares
CALAZANS v. CIR
F: The taxpayer inherited the property
fro her father and at the tie of the
inheritance it was considered a capital
asset. In order to liquidate the
inheritance, the taxpayer decided to
develop the land to facilitate the sale of
the lots.
I: Was the property converted to
ordinary asset?
H: The conversion from capital asset to
ordinary asset is allowed because Section
39 is silent.
Q: Are you allowed to convert ordinary asset
to capital asset?
A: General rule: it is not allowed. Read
Revenue Regulation 7-2003
The case at bar still applies despite of the
issuance of said Revenue Regulation.
Q: What is the conversion prohibited in the
Revenue Regulation?
A: Conversion of real estate property.
Q: What is the rationale?
A: Section 24 D – final income tax of 6% if
the real estate is capital asset. If it is an
ordinary asset, it will be subject to income
tax of 32% for individual taxpayer, and 35% if
the taxpayer is a corporation.
Q: What are the properties involve in the RR
7-2003?
A: 1. those property for sale by the realtors
2. real property use in trade or business
not necessary realtors
Q: That is the conversion allowed by the
Revenue Regulation? Is there an instance
when an ordinary asset may be converted to
capital asset?
A: Yes, provided that the property is an
asset other the real property, and it has been
idle for two (2) years.
SECTION 24
TAX ON INDIVIDUALS
Q: What is the tax mentioned in section 24?
A: NIT
Q: What is taxable income?
A: (memorize section 31) it is the pertinent
items of gross income specified in the NIRC,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the NIRC or other
laws. It refers to NIT because it allows
deductions.
Q: What do you mean by the phrase “other
than B, C, and D”?
A: It means that if the elements of passive
income are present, the taxpayer has to pay
FIT.
Q: Who are the taxpayers mentioned in
section 24?
A:
1. RC
2. NRC
3. OCW
4. RA
► Additionally, under Section 25, NRAETB
Q: What is the tax liability of NRAETB?
A: Section 25(1) NRAETB is subject to
income tax in the same manner as those
individuals mentioned in Section 24.
Q: What about Domestic Corporations?
A:
1. Sec. 27 A,B, and C
2. Sec. 26- GPP is not subject to income
tax.
Q: What about Resident Foreign
Corporations?
A: Sec 28(l) it is subject to 35% Net Income
Tax
Q: What about Non Resident foreign
Corporation and Non Resident Alien not
engaged in Trade or Business?
A: Not Subject to Net Income Tax but they
are liable for Gross Income tax.
Q: Do legally married husband and wife need
to file separately or jointly?
A: It depends if:
1. Pure compensation income- separate
2. Not Pure compensation income- joint
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Q: Does it apply to all individuals?
Passive Income A: No! It does not apply to 10 NRFC and NRA
Interest, Royalties, prizes and Other winnings and NRAETB because they are liable to GIT.

Interest NOTE: if the depositary is a Non resident it is

Q: Bank Interest, what is the requirement?
A: The bank must be located in the Phils.
because the income must be derived from
sources w/in.
Q: Do you include this in your ITR?
A: No! because it is subject already to FIT.
The bank is the one liable for the payment of
this.
exempt
► Resident citizen is liable to pay tax for
bank interest earned abroad (NIT)
Q: If the money earns interest in abroad who
is liable?
A: RC and DC only by NIT, the rest are
exempt. No FIT abroad because we do not
have withholding agent abroad.

NOTE: Liability for NIT, GIT, and MCIT will Q: MCIT applies to DC and RFC in relation to
depend on the elements present. bank interest?
A: If the bank interest is derived abroad, RFC
Q: Who are liable for bank interest? is exempt but DC is liable.
A: Impose NIT if it is higher than the MCIT,
1. RC } otherwise apply MCIT if it’s higher than the
2. NRC} Sec. 24 B1 NIT
3. RA }
4. NRAETB Prizes
5. NRANETB Sec. 25 (25%)
6. AEMOP Requirements:
7. DC 1. Prizes must be derived from sources
8. RFC w/in the Phils.
9. NRFC 2. it must be more than P 10,000

Q: What is the rate of interest? Q: Who are liable? (FIT)

A: FIT of 20% A:
1. RC
Q: Is there a lower rate? 2. NRC
A: 7 ½ % if under EFCDS 3. OCW
4. RA
Q: What if the depositor is non resident 5. NRAETB
alien? 6. AEMOP (RC, NRAETB)
A:
-W/in – FIT Not Liable
- W/out- exempt 1. NRANETB- liable for GIT at 25 %
2. AEMPOP (NRANETB- GIT)
Q: What is the rule on pre- termination? 3. DC- NIT 27 D is silent
A: If it is pre terminated before 5th year a FIT 4. RFC NIT law is silent 28A7a
shall be imposed on the entire income and 5. NRFC subject to GIT
shall be deducted and withheld by the
depositary bank from the proceeds of the Q: When can we apply NIT in Prizes?
long term deposit based on the remaining A: 1. When the taxpayer is RC, RFC and DC
maturity thereof 2. For DC and RC it must be derived
a. 4 yrs to less than 5 yrs – 5% from income abroad RFC it must be
b. 3 yrs to less than 4 yrs- 12% derived from income w/in
c. Less than 3 yrs- 20% 3. amount is more than P10,000

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NOTE: If the prize is derived from sources
w/in but it is below P 10,000 it is not subject Q: You are a writer for Snoop Dogg are you
to tax. If derived from sources abroad, most liable for FIT? What if for April Boy?
of them are exempt except for RC and DC A: Liable for NIT if Income abroad like a
who are liable w/in and w/out. writer for Snoop. While FIT if for April Boy.

Q; Is it possible for RC and DC to pay MCIT? Q: Who are liable (FIT)?

A: Yes if MCIT is higher than NIT. A:
1. RC
Winnings 2. NRC
3. OCW
Q: Do we apply the P10, 000 req.? 4. RA
A: No, we do not apply it only applies to 5. NRAETB
prizes. It must not pertain to illegal 6. AEMOP (RC, NRAETB)
gambling.
Not Liable?
► Thus, the only requirement is it must be 1. NRANETB
derived from income w/in. 2. AEMOP
3. DC
Q: Who are liable? (FIT) 4. RFC
A: 5. NRFC
1. RC
2. NRC NOTE: Lower rate of 10% applies to all except
3. OCW NRANETB
4. RA
5. NRAETB Q: When do we apply NIT to Royalties?
6. AEMOP (RA, NRAETB) A:
1. TP is RC or DC
Not liable to FIT? 2. Income is from w/out
1 NRANETB- GIT 3. TP is RF and income is w/in
2 AEMOP (NRANETB- GIT)
3 DC- law is silent NIT ► If income is from sources abroad all are
4 RFC- law is silent exempt except RC and DC
5 NRFC- GIT
Dividends
Q: When does NIT apply to winnings?
A: ► Confined with cash and/or property
1. If Taxpayer is DC or RC dividends.
2. Income is derived abroad
3. Taxpayer is RFC and income w/in. Q: What are dividends?
A: Any distribution made by Corporation to
NOTE: If income abroad, most TP are exempt its stockholders outside of its earnings or
except DC and RC profits and payable to its stockholders
whether in money or in property (Sec. 73)
Q: MCIT applies when?
A: It is higher than the NIT COMM. vs. MANNING
Q: Where did it come from?
Royalties A: shares come from another shareholder
Q: What are the dividends included?
Requirement: A: Sec. 24 refers to cash or property
► The income is from w/in dividend
H: For stock Dividends to be exempt it must
► Rate? 20%. Lower rate? 10% on books, come from the profit of the corporation.
literary works and musical compositions.

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Stock Dividends → it is the transfer of the Q: Determine the tax liability of the
surplus profit from the authorized capital following?
stocks. A:
1. DC a Stockholder of DC= Exempt
Q: Assuming that there are 5 Incorporators, 2. RFC stockholder of DC= Exempt also
the Corporation has a P5 M Authorized 3. DC stockholder of RF= Liable for NIT.
Capital stock. It distributed 1 M stock
dividends, is it taxable? Capital Gains From Sale of Shares of Stock
A: NO, the dividends did not go to the Stock Not Traded (§24C)
holder but to the Auth Capital Stock. Only
cash and Prop Stock go to the Stock holder. 1. Subj to FIT
2. Determine whether there is a loss or a
► Sec 24 B does not mention stock gain because the tax is impose upon
dividends because it is not subject to FIT but the net capital gains realized from the
it is subject to NIT under Section 73. sale, barter, or exchange or other
disposition of the shares of stock in a
Q: Is there an exception when stock domestic corp.
dividends are not taxable? 3. It is uniformly imposed on all
A: YES, if the shares of stocks are cancelled taxpayer
and redeemed meaning it was reacquired by 4. not subj to w/holding tax.
the corp.
Requirements:
ANSCOR CASE 1. Shares of stock of a DC
→the stockholders cannot escape the 2. It must be capital asset
payment of taxes 3. must not be traded in the stock
market
Requirement:
Gen Rule- the dividends must be distributed ► 25 R last part: Capital Gains realized by
by a DC. NRANETB in the Phils. from the sale of shares
Except- Regular operating- always a foreign of stock in any DC and real prop shall be
corp. subj. to the income tax prescribed under Sub
sec (c) and (d) of Sec. 24.
► What rate: 10% FIT
► SEC. 24 B 1&2: If the elements are
Q: Who are liable? present NRANETB and NRFC are liable to pay
A: GIT.
1. RC
2. NRC Except: under 24 C for NRANETB. What do
3. OCW you mean by the phrase “ the provisions of
4. RA 39 notwithstanding”?
5. NRAETB
6. AEMOP (RC, NRAETB) ► It refers to the holding period. When it
comes to capital gains from sale of shares of
Not liable? stock not traded and capital gains from the
1. NRANETB sale of real prop. The holding period does
2. AEMOP not apply because the basis will be those
3. DC provided in 24 C & D and not under 39B (GSP
4. RFC or FMV)
5. NRFC
ELEMENT #1 The share is a share in DC
► Shares of association and partnership is
taxable Q: What if the share is from foreign corp?
A: Determine the income considered. If
income w/in read Sec. 42 (E)

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► If the shares sold are that of a foreign
corp it is subj to the ff rules:
a. sold in the Phils= its income w/in
b. sold in abroad= w/out
c. Shares of stock in a Dc is always
considered an income w/in regardless where
it was sold.
Q: Shares of Foreign Corp sold in Phils.
Who’s liable? What tax?
A: Not subj to FIT because one of the
elements is not present . Shares not being
that of a DC.
Hence: a) RC, NRC, OCW, NRAETB, AEMOP
(RA, NRAETB) will pay NIT. DC and RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign Corporation sold
abroad?
A: It will be considered an income w/out.
Thus:
most of them will be exempt
except RC and DC liable to pay NIT
ELEMENT # 2 NOT TRADED OR SOLD IN
THE STOCK MARKET
► if sold in the stock market- it is not subj
to FIT
► if sold in the stock market, it will be subj
to percentage tax, in lieu of NIT.
ELEMENT # 3 It must be a capital asset.
Q: When is it considered an ordinary asset?
A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary
course of trade or business
2. to all other assets, it will be
considered a capital asset
NOTE: if all elements are present it will be
subj to FIT
If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT
except NRFC and NRANETB
2. Ordinary assets of foreign corporations
a. Income within if sold in the Phils:
most will pay except NRANETB
and NRFC
b. Income w/out if sold abroad: most
will be exempt except RC and DC
MCIT
Q: When is a RFC subj to NIT?
A:
1. Sale of shares of stock of a Foreign
corp in the Phil.
2. sale of shares of stock of DC which
are ordinary asset
► DC and RFC are subj to MCIT which may
be imposed if the NIT is lower than the
MCIT2% MCIT will be imposed if MCIT is
higher than NIT.
Capital Gains From Sale of Real Property
(§24D)
► In 39 B the holding period does not apply
because the basis of income tax is the gross
selling price (GSP) or the Fair market value
(FMV) whichever is higher- 6% FIT
Requirements:
1. The real prop must be sold w/in the
Phils and located in the Phils.
2. It must be a capital asset
3. The seller must be an individual,
estate or trust or a DC
► RFC not liable for FIT but liable to pay NIT
if all the elements are present.
► NRFC liable to pay GIT and not FIT
► NRANETB liable to pay FIT are all
elements are present.
ELEMENT # 3 The real prop must be a
capital asset
Q: When considered a capital asset?
A: Read R.R. 7- 2003
Q: Ordinary asset- shall refer to all real
property specifically excluded from the
definition of capital asset under Sec. 39
A: Other property not mentioned are capital
asset.
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Q: What if all the elements are not present?
A:
most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT
Q: May a RC be liable to pay NIT even if all
the elements are present?
A: YES, disposition made to the Govt. Thus,
the taxpayer has the option of paying 32%
NIT or 6% FIT
Q: Which is more advantageous?
A: It depends determine first if there’s a loss
or a gain.
If there’s a gain choose to be taxed at 6%
FIT. In this case the gain is always presumed.
If there’s a loss choose to be taxed at 32%
because losses may be considered an
allowable deduction .
Other transactions are covered:
1. sale
2. barter
3. exchange
4. other disposition
NOTE: If the prop is under mortgage contract
and the mortgagee is a bank or financial inst,
the FIT does not apply because the property
is not yet transferred because there’s a
period of redemption
If after a year the mortgagor failed to
redeem the property that is the only time that
the FIT will apply because there’s now a
change of ownership. If redeemed w/in 1 yr
period FIT will not apply because there’s no
change of ownership.
If the mortgagee is an individual the FIT is
imposed whether or not there is a transfer of
ownership.
Exceptions (§24(D2))
Q: What if the prop being sold was a movie
house, can he claim for the exception?
A: the prop covered by the exemption is a
residential lot
Q: Who can claim the exemption?
A: Only the taxpayer mentioned in Sec. 24
Requirements:
1. The purpose of the seller is to acquire
new residential real prop
2. the privilege must be availed of w/in
18 mos. From the sale
3. Comm. must be informed w/in 30
days from the date of sale with the
intention to avail of the exemption
4. the adjusted basis or historical cost of
the residence sold shall be carried
over to the new residence.
5. the privilege must be availed only
once every 10 yrs
6. Certification of the brgy. Capt where
the taxpayer resides that indeed the
prop sold is the principal residence of
the tax payer (RR 13- 99)
Q: What if the property is worth 10 M and it
was sold only for 2M, what will happen to the
unused portion or profit?
A: If the proceeds are not fully utilized, the
portions of the gain is subj to FIT
SEC. 27A RATES OF INCOME TAX
Q: How many income taxes are paid by a
DC?
A:
1. NIT
2. MCIT
3. FIT
4. 10%Improperly Accumulated
Earnings
5. Optional corporate income tax of 15%
of the gross
► DC liable for five, but the optional is not
yet applicable so only 4.
Q: How many can be applied simultaneously?
A: ONLY 3
1. NIT, FIT and 10% IAE
2. MCIT, FIT, 10% IAE
SEC. 27 (B) PROPRIETARY EDUCATIONAL
INST. & HOSP.
Who are the taxpayers?
1. Non- Profit Proprietary Educl. Inst and
2. Non Profit Proprietary Hospital
Q: What if the school or hospital is non
profit only, is it exempt?
A: No, subject to 10% on their taxable
income except those covered by subsection
(D)
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PROVIDED that gross income from
unrelated business, trade or activity must not
exceed 50% of its total gross income derived
by such educational inst or hospital from all
sources
Requirements:
1. It is a private school or hospital
2. it is stock corp
3. it is non profit
4. that gross income from unrelated
business, trade or activity must not
exceed50% of its total gross income
derived by such educational inst or
hospital from all sources
5. has permit to operate from DECS,
TESDA, or CHED
Q: What do you mean by unrelated trade
business or activity?
A: It means any trade, Business, or activity
which is not substantially related to the
exercise or performance by such entity of its
primary purpose or performance
Q: May a school or hospital be exempt from
paying tax? What are the req?
A:
1. It must be non- stock and non- profit
2. the assets property and revenues
must be used actually, directly, and
exclusively fro the primary purpose
Q: Under what law? Is it the constitution or
the NIRC which provides fro the exemption?
A: It is under Sec. 30 of NIRC and not
under Sec.4 Art. 14 of the Constitution. The
provision of the NIRC is the specific law
which prevails over the Constitution which is
the general law.
→ exempt from all taxes and custom
duties
Q: What about exemption from real
property tax?
A: Art. 6 Sec. 28 of the Constitution:
charitable institution churches, ….and all
lands buildings, actually directly and
exclusively used for religious, charitable, and
educational purposes shall be exempt from
taxation.
→ Not Sec. 4 of Art. 14 of the
Constitution.
Q: You donated a property to a school will
you be liable for donor’s tax?
A: not liable if it falls under Sec. 101 (3) of
the NIRC
REQ. FOR EXEMPTION TO DONORS TAX:
1. it must be non-stock, non-profit
educational inst.
2. not more than 30% of the prop donated
shall be used by such donee for admin
purposes.
3. paying no dividends
4. governed by trustees who don’t receive
any compensation
5. devoting all its income to the
accomplishment and promotion of the
purposes stated in its Articles of
Incorporation
Q: What about exemption from VAT?
A: Sec. 109 (m) of R-VAT
Q: What about exemption fro Loc Gov Code?
A: If its non-stock, non-profit educational
inst. It may be exempted from local taxation.
Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the Consti.
SEC. 23: GOCC, AGENCIES, INST of the
GOVT.
GEN RULE: Subj to tax.
EXCEPTIONS:
1. GSIS
2. SSS
3. PHIC
4. PCSO
► PAGCOR no longer included.
Q: If the GOCC is not one of those
enumerated does it follow all of its income is
automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived
from any public utility or from the exercise of
essential government function accruing to
the Govt of the Phils or to any political subd.
Are therefore exempt from income tax.
Therefore, even if the GOCC is one of
those enumerated under Sec. 27 it may still
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be exempt under Sec. 32 b7b if its
performing governmental function
NOTE: Pagcor vs. Basco case
Q: What is the difference between Sec. 27 C
and 32 b7b?
A:
1. Sec 27 C exempts those enumerated
without any qualification.
2. Sec. 32b7b qualification must concur
before it may be exempted.
Q: Can the government impose tax on itself?
A: It depends on who the taxing authority is.
If the taxing authority is the National Govt. as
a rule, YES.
Exceptions
1. those entities enumerated under §27 C
2. those GOCC falling under §32b7b
If the taxing authority is the local
government units, as a rule NO. LGU’s are
expressly prohibited from levying tax
against: (Sec 133(o)
1. National Govt.
2. Its agencies and instrumentalities
3. local government units
Exception: Sec 154 of LGC says that LGU’s
may fix rate for the operation of public
utilities owned and maintained by the within
their jurisdiction.
PAL CASE July 20 2006
H: The SC used 133 (o)an exception to
pay tax, real estate tax, imposed by City
of PAranaque on NAIA. The SC said that
the airport is not an agency or GOCC but
mere instrumentality of the Govt.
This is Gross ignorance of the law Sec.
133 (o) is for local taxation not real
property taxation which is the one
involved in the present case.
NOTE: Mactan- Cebu Airport case
SEC. 27 D(1)
Q: How many possible incomes were
mentioned?
A: Two (2): bank interest and royalties
REQ:
1. Bank interest must be received by a
Domestic Corp
2. Royalties derived from sources within
Q: When it comes to bank interest, what is
the difference if the taxpayer is an individual
or corporation?
A: If individual, they may be exempt from
the payment of interest in case of long term
deposit except NRANETB
If DC, they are not exempt from long tem
deposit.
Q: What about royalties?
A: If individual, have a lower rate of 10%on
books, other literary and musical
compositions. DC have no lower preferential
rate.
SEC 27 D2: CAPITAL GAINS FROM SALE OF
SHARES NOT TRADED
SEC 27 D3: EFCDS
Q: What is the expanded foreign currency?
A: It is a bank authorized by the BSP to
transact business in the Philippine Currency
as well as acceptable foreign currency or
both.
Q: What is the tax to be paid?
A: Normally it is NIT because it is subj under
Sec 27 D3 and 28 A
Q: Who is the income earner?
A: Depositary banks
Q: Exempt from what kind of transaction?
A: From foreign currency transaction. If it
involves foreign currency transaction it is not
exempt but subject to 35 % NIT
Q: Who are the other parties?
A:
1. Off shore banking units
2. branches of foreign banks
3. local commercial bank
4. Other depositary banks under EFCDS
5. Non- residents
► if the above enumeration are the parties,
then depositary bank will be exempt from
paying the NIT
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Foreign Currency Loan
Q: Who is the lender? Borrower?
A: Lender- EFCDS
Borrower- RC
EXEMPT
Offshore banking units
Other depositary banks under EFCDS
► exemption of NR from EFCDS:
Q: Who is the income earner?
A: Non Residents whether individual
Corporations
Q: Derived from whom?
A: Depositary Bank under EFCDS
NOTE: Sec. 24 B Nonresident exempt from
bank interest under EFCDS
A: NO, imposed in lieu of the NIT, whichever
is higher.
Q: What is the Rationale?
A: to prevent corporations from claiming too
many deductions
Q: When will it be imposed?
A:
1. On the 4th year immediately ff the year
in which such corp commenced its
business.
2. When the MCIT is higher than the NIT
or
Q: What is the carry over rule?
A: Sec 27 E2 states the carry over rule.
► In order to avail: only in the year where
the MCIT is greater than the NIT.
Sec 28 A1

Q: What is the difference between 24 b1 Q: What Kinds of taxes are paid by the RFC?
from 27 D3 A: NIT
A: In 24 B1, NR is exempt only from bank MCIT
interst derived from EFCDS while 27D3
exempts NR from any income from
transactions with depositary bank under Sec. 28 B2 MCIT on RFC
EFCDS
► same with Sec. 27
SEC. 27 D(4)- Inter-corporate dividends-
exempt Sec. 28 A3- INTL CARRIER

27 D5 Capital Gains from sale of Real Kind:

Prop. 1. Air carrier
2. ships
Q: What is the tax?
A: 6% FIT ► An intl. carrier doing business in the
Phils. shall pay 2 ½ % on its Gross Phil Billings
Q: What is the difference if the seller is an (GPB)
individual and a DC?
A: Individual can sell all kinds of real Q: Is 28 A3 the Gen. rule or the Exception?
property A: It is the general rule because it is under
DC can only dispose land and/or 28 A3
buildings.
► GPB is in the nature of FIT, applies only if
SEC 27 (E) MCIT all the requirements are present.

Q: Applicable to whom? ► RFC will be liable for NIT, hence a RFC

A: DC and RFC engaged in common carriage does not pay
GPB but NIT
Q: Can it be applied simultaneously with
NIT? ► Income without: EXEMPT

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International Carrier:
► GPB refers to the amount of revenue
derived from: carriage of persons, excess
baggage, cargo and mail originating from the
Phils in a continuous and uninterrupted
flight, irrespective of the place of sale or
issue and the place of payment of the tickets
or passage document.
REQ:
1. Originating from the Phils.
2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale or
issue and the place of the payment of
tickets or passage document.
Q: Do you consider landing rights to
determine liability? (RR 15-2002)
A:
1. If originates from the Phils and has
landing rights- ONLINE- RFC
2. No landing rights- OFFLINE- NRFC
Q: If there are stopovers, is it still
uninterrupted?
A: YES, provided that the stopover does not
exceed 48 hrs.
Q: When will the place of sale of tickets
matter as to the taxpayers liability?
A: The place of tickets is material only if the
two other elements are not present to be able
to know if its subj to NIT or exempt.
Revalidated, exchanged or indorsed tickets
if purchased outside, it is income without,
hence exempt
Transshipment
REQ:
flight originates from the Phils
transshipment of passenger takes place
at any port outside the Phils.
the passenger transferred on another
airline
Q: How do you apply GPB?
A: Only the aliquot portion of the cost of the
ticket corresponding to the leg flown from
the Phils to the point of transshipment shall
from part of the GPB.
Q: Is it liable for the whole flight?
A:
From the Phils to the point of
transshipment, it is income w/in
From transshipment to final destination,
its income w/out- EXEMPT
International Shipping
► GPB means gross revenue whether from
passenger, cargo, mail
REQ:
it must originate from the Phils.
up to final destination
- regardless of the place of sale or
payments of passenger or freight documents

REQ: Sec28 A(4) OFF SHORE BANKING UNITS

1. The passenger boards a plane in a
port or point in the Phils. OBU’s
2. The tickets must be revalidated, 1. only acceptable foreign currencies
exchanged, or indorsed to another 2. always a foreign corporation (subj to
airline. NIT) except #3
3. Exempt if income is derived by the
Q: What if it’s the same airline but different OBU from EFCDS
plane? 4. Parties:
A: GPB does not apply, it must be to another a) local commercial banks
airline b) Foreign bank branch
c) Non Residents
Q: What if it did not originate from the d) OBU in the Phils.
Phils.?
A: Determine if its income within or without. Difference with EFCDS:
if ticket was purchased in the Phils. it is EFCDS
income within hence apply NIT

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1. Acceptable foreign currency, Phil.
Currency or both
2. Can be a domestic or foreign
corporation
3. Exempt if income derived by DC or
RFC from EFCDS
4. Parties:
a) local commercial banks
b) Foreign bank branch
c) Non Residents
d) OBU in the Phils
e) Other banks under EFCDS
FOREIGN CURRENCY LOAN
► 10% FIT
If: Lender- OBU
Borrower- Resident Citizen
EXCEPT:
1. OBU
2. Local Commercial Banks
Transactions of Non Residents:
1. Income earner: Non- Residents
2. Lender: OBU’s
NOTE: Non resident exempt from
transactions with OBU’s and EFCDS
SEC. 28 A5 TAX ON BRANCH PROFITS,
REMITTANCES
► profits based on the total profits applied
or earmarked fro remittance remitted by a
branch to its head office
► Subj to 15% tax
Except: those activities which are registered
with PEZA
NOTE: Interests, Dividends, Rents, Royalties
including remuneration for technical
sevices, salaries, wages, premiums,
annuities, emoluments, or casual gains,
profits, income and capital gains received
by a foreign corporation during each
taxable year from all sources within shall
not be treated as branch profits UNLESS
the same are effectively connected with
the conduct of its trade or business.
Branch Profit Remittance
Two ways to receive income (FC)
1. Branch
2. Subsidiaries
NOTE:
1. When a FC establishes branch, it is
always a FC
2. When a FC establishes DC, it is a RFC
Q; It is in addition to NIT- Why?
A: NIT because it is RFC
Q; What kind of tax is imposed under 28 A5?
A: 15% FIT
Q: How do you apply the rate?
A: multiplied to the total profit applied or
earmarked for remittance w/o deductions
It applies for branches that are:
1. the profit remitted is effectively
connected with the conduct of its
trade or business in the Phils.
2. One not registered with PEZA
MARUBENI CASE
F: A branch was established with AG&P,
there was investment with AG&P
Q: Did the petitioner participate with the
negotiation?
A: NO
Q: What did the petitioner pay?
A: 15% Branch Profit Remittance Tax (BPRT)
10% Intercorporate Dividends
Q: What’s the issue?
A: Petitioner maintains that there was
overpayment of taxes, thus the same was
asking for a refund of tax erroneously
paid.
Q: Is is subj to FIT?
A: NO, exempt if petitioner is RFC
H: -not correct to pay 15%
To be liable for BPRT
1. It is a RFC
2. Branch did not participate in negotiations
SEC. 28 A6a
► Regional or area headquarters (Sec. 22
DD) shall not be subject to tax exempt from
income tax if the requisites are present.
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Q: What are the requisites?
A:
1. the HQ do not earn or derive income
from the Phils.
2. Acts only as supervisory,
communications, coordinating centre
for their affiliates, subsidiary or
branches in the Asia- Pacific Region
and other foreign markets.
► As a Gen Rule: the above transaction is
Exempt
EXCEPTION: Income from such transaction
as may be specified by the secretary of
Finance, upon recommendation by the
Monetary Board to be subject to regular
income tax payable by any banks.

SEC. 28 A6b 2. Interest income from foreign currency

loans
► Regional Operating HQ are taxable and
liable to pay 10% taxable income. ► granted by depository bank under said
EFCDS to others shall be subject to 10% FIT
► Regional Operating HQ is a branch
established in the Phils by a multinational Exempt if granted to:
company engaged in any of the services: 1. Other OBU in the Phils, and
1. Gen. Administration and Planning 2. Other depository bank under the
2. Business Planning and Coordination EFCDS
3. Sourcing and procurement of Raw » SEC. 28 A7c: Capital Gains from
materials and components. Shares of Stocks not Traded in the
4. Corporate Finance and Advisory Stock exchange
Services » 5% or 10% as the case maybe
5. Marketing Control and sales
promotion SEC 28A7d: INTERCORPORATE DIVIDENDS
6. Training and personal management
7. logistic services ► DC- RFC= EXEMPT, not subj to tax
8. research and development services
and product development SEC 28 B1
9. technical support and maintenance
10. data processing and communication Q: What kind of tax?
and business development A: 35% GIT on the ff income
1. Interest
Rationale: Why liable? Because the claim for 2. Dividends
exemption of resident airlines shall be 3. Rents
minimized 4. Royalties
5. Salaries
SEC. 28A7a Interests and Royalties: 6. Premiums( except reinsurance
premiums)
► 20%FIT 7. annuities
8. emoluments
► Interests under EFCDS= 7 ½ % 9. Other fixed and determinable Gains,
profits and income.
Sec. 28A7b Income derived under EFCDS
SEC 28 B2 Non Resident Cinematographic
1. Income derived from foreign currency film owner, lessor or distributor
transactions with:
a) Non Residents ► liable for 25% GIT
b) OBU
c) Local commercial bank SEC 28 B3 Non Resident owner or lessor of
d) Foreign bank branches Vessels chartered by Philippine Nationals.
e) Other depository bank under the
EFCDS ► liable for 4 ½ GIT

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Elements:
1. Chartered to Filipino Citizens or
Corporations
2. Approved by MARINA
SEC. B(4) Non Resident Owner or Lessor of
Aircraft, Machiniries, and other
Equipments.
► liable for 7 1/2 % GIT
SEC 28 b5a Interest on Foreign Loans
► Must be read with Sec. 32 B7a
Interest on Foreign Loans, if the lender is
1. NRFC liable to 20% FIT
2. Foreign Govt. Exempt because it is an
exclusion (Sec 32 b7a: income derived
by a foreign gov’t from investments in
the Phils on loans, stocks, bond, and
other domestic securities or from
interest on deposits in banks by:
a) Foreign govt.
b) Financing inst owned controlled or
enjoying, refinancing from foreign
govt; and
c) Inter nation or Regional financial
inst established by foreign govt.
COMMISIONER OF INTERNAL REV. vs.
MITSUBISHI METAL CORP. (180 SCRA 214)
F: Atlas Mining entered into a Loan and Sales
Contract with Mitsubishi Metal Corp. ( A
Japanese Corp.) for the purposes of
projected expansion of the productivity
capacity of the former’s mines in Cebu.
The contract provides that Mitsibushi will
extend a loan to Atlas in the amount 20
M dollar, so that Atlas will be able install
a new concentrator for copper
production.
-Mitsubishi to comply with its
obligation, applied for a loan from
Export- Import Bank of Japan (Exim Bank)
and from consortium of Japanese banks.
Pursuant to the contract Atlas paid
interst to Mitsubishi where the
corresponding 15% tax thereon was
withheld and only remitted to the Govt.
Subsequently Mitsubishi filed a claim
for tax credit requesting that the same be
used as payment for its existing liabilities
despite having executed a waiver and
disclaimer of its interest in favor of Atlas
earlier on. It is the contention of
Mitsubishi that it was the mere agent of
Exim Bank which is a financing inst
owned and controlled by the Japanese
Govt.
The status of Eximbank as a
government controlled inst became the
basis of the claim fro exemption by
Mitsubishi for the payment of interest on
loans.
I: WON Mitsubishi is a mere agent of
Eximbank
H: NO. The contract between the parties does
not contain any direct reference to Exim
Bank, it is strictly between Mitsubishi as
creditor and Atlas as the seller of copper.
The bank has nothing to do with the sale
of copper to Mitsubishi. Atlas and
Mitsubishi had reciprocal obligations-
Mitsubishi in order to fulfill its obligations
had to obtain a loan, in its independent
capacity with Exim bank. Laws granting
exemption from tax are construed strictly
against the taxpayer and liberally in favor
of the taxing authority.
SEC. 28 D5 b INTERCORPORATE
DIVIDENDS:
► FIT 15% imposed on the amount of cash
and or prop dividends received from a
domestic corporation.
SUBJ TO THE CONDITION: the country where
the NRFC is domiciled allows a credit against
the tax due from the NRFC taxes deemed
paid or deemed to have been paid in the
Phils.
Gen rule: 35 % FIT
Exception: 15% under the “tax deemed paid
rule/ reciprocity rule/ tax sparring rule”
JHONSONS CASE
2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for
income within and income without
2nd : countries liable only for income within.
MARUBENI Case: 2 Issues
1. Is the payment of 10% FIT correct?
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- No because it was a branch and RFC but
still Marubeni was NRFC under the old law
which is liable to pay 35%, but SC said liable
only to 25% because of the tax treaty
► You cannot refund right away → 15%
BPRT and 10% Inter-corporate Dividends tax
has different basis
In P&G who are involved
- DC (P&G Phil) and NRFC (P&G US)
- DC declares dividends to NRFC
- 35% was withheld and remitted to the BIR
What did they discover? (after paying)
- they discovered that they are liable only
for 15% so they have a refund of 20%
Q: In the 1st case did the SC allowed the
refund?
A: NO, denial anchored on 2 grounds:
1. One claiming for refund was not the
proper party
2. There was a showing or proof as to
the existence of the “tax deemed
paid” rule
Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
1. Income tax is FIT: the withholding
agent is the proper party because he
is liable to pay said taxes
2. actual proof of payment not
necessary, what is necessary is the
law of the domicile of the country
providing fro tax credit equal to 20%
of the tax deemed paid.
Q: What is the rate if the law is silent?
A: 35% FIT
► The rate will only be 15% if there’s a law
recognizing the same but this refers to the
case of those belonging to the first category.
WANDER CASE
Q: Who are the parties?
A: DC(Wander) and FC (Glaxo)- they
belong to different categories
The BIR tried to collect 35% because
the law is totally silent about the tax
credit
H: The SC said that the tax should be 15%
which applies 2 instances:
1. Foreign law do not provide for tax
credit- 35%
2. law provides but the law is silent- 15%
3. law is silent because there is no law-
15%
4. law is silent because there’s no law
because the subj matter is not
taxable- 15%
SEC. 29 IAET
Q: What is the rate?
A: 10% of the gross income (taxable income)
► It is imposed upon the improperly
accumulated taxable income of the
corporation
Q: Applies to what Corp?
A: to DC only under RR 2- 2001( classified as
closely held corporations)
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel the
corporation to declare dividends.
Q: Why?
A: because if profits are distributed to the
shareholders, they will be liable for the
payment of Dividends tax. Now, if the profits
are undistributed the shareholders will not
incur liability on taxes with respect to the
undistributed profits of the Corp.
- In a way it is in the form of deterrent to
the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the
earnings distributed to them.
Q: What is taxable income?
A: SEC. 31 defines taxable income as the
pertinent items of gross income specified in
this Code, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by this
Code or other special law
Q: When not liable to pay IAET?
A: There are 2 groups of DC exempt from
payment of IAET (RR2-2001)
A) Corporations failure to declare dividends
because of reasonable needs of business
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► reasonable needs means are construed to
mean immediate needs of the business
including reasonable anticipated needs
Q: What constitutes reasonable accumulation
of the corporation’s earnings? Examples?
A:
1. allowance for the increase in the
accumulation of earnings up to 100%
of the paid- up capital of the
corporation.
2. earnings reserved for the definite
corporate expansion projects or
programs approved by the Board
3. Earnings reserved fro buildings,
plants, or equipment, acquisition
approved by the Board
4. Earnings reserved for compliance with
any loan agreement or pre- existing
obligations
5. Earnings required by law or other
applicable statutes to be retained.
6. In case of subsidiaries of foreign
corporation, all undistributed
earnings or profits intended or
reserved for investments
NOTE: the corporations belonging in the 1st
group are normally liable but they can show
that the accumulation of earnings is justified
for reasonable needs of business, they incur
no liability and exempt from payments of the
same.
B) Corporations which are exempt whether or
not it is for reasonable needs of the business:
1. Banks, and other non- bank financial
intermediaries.
2. Insurance companies
3. Publicly- held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non- taxable joint- ventures
7. Enterprises registered with
a) PEZA
b) Bases Conversion Devt Act of 1992
(RA 9227)
c) Special Economic Zone declared by
law
Q: What is a closely- held corporations?
A: Those corporation at least 50% in value of
the outstanding capital stock or at least 50%
of the total combined voting power all
classes of stock entitled to vote is owned
directly, or indirectly by or for not more than
20 individuals
NOTE: Publicly held Corp. has more than 20
shareholders
Q: What is the time for paying this tax?
A: Calendar Year: Jan 25, 2005- Dec 31,
2005. Today is 2006. You have 1 year to
declare after the close of the taxable year.
2006 is the grace period. You will pay on
January 2007.
Q: If you’re not mentioned to be exempted,
will you still be liable?
A: No, if you invoke adjustments
SEC 30. EXEEMPTIONS FROM TAX ON
CORPORATIONS
► Determine the Corporations’ exemptions
under Sec. 30 27 C and 22B.
1. Sec 30, the corporations shall not be
taxed under this title (tax on income)
in respect to income receive by them
as such.
2. Sec 27, the corporations enumerated
are always exempt. Thus exemption is
unconditional
3. Sec 22B GPP, as a general rule is not a
corporation
4. except if it earns income from other
business
► Joint Venture w/ service contract w/
government not a corporation, otherwise, it
is liable.
Assignment: Sec. 35
August 21, 2006 – Midterms
August 14, 2006
Q: What is the reason for not including the
corporations exempt under section 27C and
Section 22B under Section 30?
A: Because there is an exemption which
does not apply to all exempt corporation.
The exemption under Section 30 is not
absolute while the exemption under Section
27 C is absolute and without any conditions.
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In addition, Section 22B provides that a joint
venture is generally taxable unless it has a
service contract with the government, a
generally taxable corporation cannot be
joined with the group as generally not
taxable corporation. General Professional
Partnership is exempt but the exemption is
not the same as provided by Section 30.
TAKE NOTE: Las Paragraph of Section 30.
► exemption to the exemption: income of
whatever kind and character of the foregoing
organizations from:
1. any of their properties, real or
personal;
2. any activities conducted for profit
► regardless of the disposition of said
income, shall be subject to tax.
Q: Enumerate the exempt corporations
under Section 30; What is the requirement?
A:
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 purpose and without profit;
3. a beneficiary society, order or
association, operating for the
exclusive benefit of the members
such as fraternal organization
operating under lodge system. (lodge
system: operating world wide) or a
mutual old association or a non-stock
corporation:
a. organized by employees;
b. providing for the payment of life,
sickness, accident or other exclusive
benefits to its employees and their
dependents;
4. Cemetery (a) company owned and (b)
operated exclusively for the benefit of
its members;
5. Non-stock corporation or association
organized and operated exclusively
for Religious, Charitable, Scientific,
Artistic or Cultural purposes, or for
the Rehabilitation of Veterans
(RCSACR), no part of its net income or
asset shall belong ot or inure to the
benefit of any member, organizer,
officer, or any specific person;
6. Business league, chamber of
commerce, or Board of trade, (a) not
organized for profit and (b) no part of
the net income of which inures to the
benefit of any stock holder or
individual;
7. Civil league or organization not
organized for profit but operated
exclusively for the promotion of social
welfare.
CIR vs. YMCA
Q: What is the basis of Manila BIR for the
imposition of the tax?
A: last paragraph of Section 30, because
YMCA was conducting an activity for
profit.
F: the CTA and the CA invoked the doctrine
laid down in Herrera and Abra Valley case
which involves an exemption from the
payment of Real property Tax.
H: The SC revised the ruling. YMCVA is
liable to pay income tax applying the last
paragraph of Section 30.
YMCA Is exempt from the payment of
property tax, but not to income tax on
rentals from its property.
The tax code specifically mandates
that the income of exempt organizations
(under section 30) from any of their
properties, real or personal, shall be
subject to tax, including the rent income
of the YMCA from its real prop.
8. a non-stock and non profit educational
institution;
9. gov’t educational institution;
10. Farmer’s or other mutual typhoon or
fire insurance company, mutual ditch
or irrigation company, or like
organization of a purely local
character, the income of which
consists solely of assessment, dues
and fees, collected from members for
the sole purpose of meeting its
expenses;
11. Farmer’s, fruit grower’s 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
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the proceeds of sales, less the
necessary selling expenses on the
basis of the quantity of produce
finished by them.
TAKE NOTE: income of sales agent is exempt.
Section 31: TAXABLE INCOME
CHAPTER VI: COMPUTATION OF GROSS
INCOME
SECTION 32: GROSS INCOME
Q: What is the tax treatment? Are these
taxable income? Are these included in the
gross income? Is it included in the ITR? Is it
subject to NIT?
A: Sec. 32 A answers the questions.
Q: What is the income tax referred to here?
A: NIT. The section refers only to the
payment of NIT. It speaks of the NIT.
Q: If the is mentioned under Section 32 A,
does it follow that it is automatically included
in the GIT?
A: No, Section 32 A states “Except when
otherwise provided in this title”
Q: What are the income that are not
included, not subject to NIT?
A:
1. Income that are subject to FIT.
2. Income that are considered an
exclusion; and
3. Income that are exempt.
Q: When do you not apply Sec. 32 A?
A: it applies to all except:
1. NRANETB
2. NRFC
» they do not pay NIT, they pay by way of
GIT.
Q: What are included in the Gross income?
A:
1. Compensation for services in whatever
form paid including but nor limited to
fees, salaries, wages, commissions, and
similar items. [Sec. 32 A (1)]
Q: What is compensation?
A: all remuneration for services performed
by an employee for his employer under an
employer-employee relationship.
TAKE NOTE: compensation is included in the
ITR if the taxpayer is not liable for NIT. Thus,
if subject to NIT, included in the ITR.
Q: Is there an instance where the salaries of
a RC is not included in the ITR?
A: Yes, if the salary is subject to FIT, like
when the RC is employed in Multinational,
offshore banking, and petroleum companies.
2. Gross Income derived from the
conduct of trade or business or the
exercise of a profession; [Sec. 32 A (2)]
Q: What is the income tax here?
A: NIT, included in the ITR.
3. Gains derived from dealings in
property. [Sec. 32 A (3)]
Q: Did the law distinguished?
A: No, the law did not distinguished between
real and personal property.
TAKE NOTE:
1. Sale of real property
2. Sale of shares of stock (personal prop.)
► if the elements are present, subject to
FIT. Thus, it is not included in the ITR, the
withholding agent will be responsible for this.
Q: Income form the sale of property, do you
include this in the ITR?
A: it depends
a. if subject to FIT, not included.
Withholding agent accomplish the forms
→ subject to FIT if the following elements
are present:
1. it is a capital asset;
2. located in the Phil.: and
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR.
→ Elements are not present, like when
the real prop. is an ordinary asset or when it
is capital asset if the taxpayer is RFC.
TAKE NOTE: R-R 17-2003
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► Real property sale subject to FWT, the
buyer accomplishes the ITR.
4. interest; [Sec. 32 A (4)]
Q: What interest is being referred to here?
A: interest which is included in the
computation of gross income is interest
earned from lending money and interest from
bank deposit which does not constitute
passive income.
Bank interest from sources, without or
abroad.
Q: Bank interest from Solid Bank, is it
included in the ITR?
A: No, because it is included or considered
an income within, thus subject to FIT. Thus,
not included in the ITR.
5. Rents. [Sec. 32 A (5)]
► subject to NIT, included in the ITR.
6. Royalties; [Sec. 32 A (6)]
Q: What is being referred to here?
A: royalties which does not constitute
passive income. Royalties derived from
income without. – subject to NIT. Thus not
included in the ITR.
Q: Who are the taxpayers?
A: Liable from income w/in and w/out and
the rest are exempt.
1. RC
2. DC
7. Dividends. [Sec. 32 A (7)]
Q: What kind of dividends?
A: one that does not constitute a passive
income.
TAKE NOTE:
1. DC individual taxpayer = FIT
2. DC – DC & RFC = EXEMPT
3. DC – NRFC = FWT
► only dividends issued by a FC to an
individual taxpayer (RC OR RA) is included in
the computation of the gross income. Thus,
included in the ITR.
8. Annuities. [Sec. 32 A (8)]
Q: What kind of annuities?
A: annuities which are not exempt from tax
are included in the computation of the gross
income. (included in the ITR)
9. Prizes and Winnings [Sec. 32 A (9)]
Q: What kind of prizes and winnings?
A:
a. those that does not constitute passive
income; and
b. those that are not considered as an
exclusion. Thus, exempt.
Passive Income
1. Prizes – derived from sources within
and over 10,000.00
2. Winnings – derived from sources
within.
Exempt:
a. winnings: PCSO and Lotto winnings.
b. prizes:
► those primarily for recognition of
(1)religious, (2)charitable, (3)scientific,
(4)educational, (5)artistic, (6)literary, (7)civic
achievement are exempt PROVIDED:
1. the recipient was selected without any
action on his part to enter the contest
or proceedings; and
2. the recipient is not required to render
substantial future services as a
condition to receiving the prize or
award.
► prizes and awards granted to athletes are
also exempted provided:
1. local or international sports
competition or tournament;
2. held in the Philippines or abroad; and
3. sanctioned by the national sports
association.
Q: When is a prize subject to NIT?
A: 1. when derived from income without;
2. when less than 10,000.00;
3. when the income earner is a DC or RC.
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Q: When is winning subject to NIT?
A: 1. When derived from income without;
2. when the income earner is a DC or
RC.
10. Pensions [Sec. 32 A (10)]
Q: What kind of pension?
A: Included in the gross income if not
exempt
» never subject to fit (?)
11. Partner’s distributive share from the
net income of the general professional
partnership (GPP).
Q: What is being referred to?
A: GPP exempt from payment of corporate
income tax
► shares of partners subject to NIT – Sec.
26
SEC 32 B EXCLUSIONS FROM GROSS
INCOME
Q: What do you mean by exclusions? Are
these exempt from income tax?
A: these are not included in the gross
income, THUS, exempt.
TAKE NOTE: Exemptions, exclusions,
deductions, have the same characteristics →
all tax do not apply.
1. Life insurance [Sec. 31 B (1)]
Q: What is the requirement?
A: only one requirement for exemption: that
the proceeds of the life insurance be payable
upon the death of the insured.
Q: Does it matter who the beneficiary is or
paid in a lump sun or single sum?
A: No. it does not matter.
Exception: amounts held by the insurer under
an agreement to pay interest thereon, the
interest payment shall be included in the
gross income.
2. Amount received by insured as
return of premium [Sec. 32 B (2)]
Q: if the insurance is payable within a certain
time, say 10 years and thereafter the insured
did not die, how much will be excluded?
A: only the amount received by the insured
as a return of the premiums.
Ex. 1 M – 100 thousand = capital
It is exempt (100K)
900K is taxable.
Q: Why is it excluded?
A: because the amount received merely
represents a return of capital.
Q: is this subject to Estate Tax under Sec. 85
E? do we have the same requirement?
A: no, the requirement for exemption is not
the same under Section 85 E.
3. Proceeds of life insurance: decedent
insured himself, inclusion or exclusion
will depend on who the beneficiary is.
a. the beneficiary is the estate.
» subject to Estate tax, included in the
gross estate regardless of whether or not
the designation of the beneficiary is
revocable or irrevocable.
b. the beneficiary is a third person other than
the estate.
b.1 Revocable Designation → subject to
estate tax, included in the gross estate.
Reason: because of the insured’s power
to modify or change the beneficiary.
b.2 Irrevocable Designation → not subject
to Estate tax, not included in the gross
estate.
Reason: the insured loses the power to
control, modify and change the
beneficiary.
Q: Is it subject to VAT?
A: 1. Non-life insurance – yes, subject to
VAT under 108 (A).
2. Life insurance – NO, subject to
percentage tax under Sec. 123 of the Tax
Code.
4. Gifts, Bequest and Devises [Sec. 32
B (3)]
Q: Why is the donee exempt from income
tax?
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A: Because the law classify it as an
exclusion, not important to know whether
property is real or personal.
What is exempted is the “value of
property acquired by gift, bequest or devise”
TAKE NOTE:
A. GIFTS are excluded because they are
subject to donor’s tax.
B. BEQUEST and DEVISE are excluded
because they are subject to ESTATE tax.
Q: what is included in the gross income?
A: income from such property.
► gift, bequest, devise or descent of income
from any property in case of transfers of
divided interest.
5. Compensation for injuries or
sickness [Sec. 32 B (4)]
Q: is this the same as those provided under
the workmen’s compensation act (wca)?
A: YES. There are 3 groups:
a. Health or accident insurance or those
under workmen’s compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and
sickness.
Q: What does injury include?
A: The term injury includes death, even if
not injured, if the person dies this will be
available.
Q: when will the damages recovered be
exempt?
A: General Rule: all damages awarded are
tax exempt.
Exception: damages representing loss of
income.
Q: Why is it considered an exclusion?
A: because this is just an indemnification for
the injuries or damages suffered.
6. Income exempt under a treaty [Sec.
32 B (5)]
Q: What is excluded?
A: income of any kind required by treaty
binding upon the Phil. Government.
7. Retirement benefits, pensions,
gratuities [Sec. 32 B (6)]
Q: Why do we need to distinguish retirement
pay, separation pay and terminal leave pay?
A: because they have different requirements
for exemption.
Q: What is retirement pay?
A: the sum of money received upon reaching
the maximum age of employment.
a. Under RA4917 (with Retirement Plan)
1. the private benefit plan is approved
by the BIR (RR2-98);
2. the retiring official or employee has
been in the service of the same
employer for the last 10 years;
3. he is at least 50 years old at the time
of retirement; and
4. the official or employee avails
himself/herself of the benefit only
once.
b. Under RA7641 (without retirement plan)
1. the retiring official employee is at
least 60 years old but not more than
65 years old;
2. the employee or official must have
served the company for at least 5
years;
» entitled to 15 days salary and ½ of the
13th month pay for every year of service.
TAKE NOTE: the retirement benefits under
RA4917 and RA7641 are exempt from
income tax provided the requirements are
present.
SEC. 32 B(6)(c)
► retirement benefits given by foreign
government, foreign corporation, public as
well as private to RC, NRC, RA residing
permanently in the Philippines - exempt
without further qualifications – automatic
exclusions.
SEC. 32 B(6)(d,e,f)
► retirement benefits given by the
Philippine Gov’t through the GSIS, SSS and
PVAO are exempt without further
qualifications = automatic exclusions.
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August 21, 2006.
- midterms 6-8 pm until sec 32 B(6) NIRC.
August 28, 2006.
ANSWERS = MIDTERMS
► Gross Income include both capital and
ordinary gains, Sec. 31 says gross income-
deductions, that which is ordinary loss.
- may be deducted from capital gains and
ordinary gains.
Q: What is separation pay?
A: on given when one is terminated from the
service because of (1) illness, (2)death, (3)
physical incapacity or injury, or (4) causes
beyond the control of the employee.
Q: Are there any requirement for separation
pay granted by foreign gov’t or corp?
A: None, the separation pay granted by the
aforementioned institutions are exempt
without further qualifications (“other similar
benefits”).
Q: is separation pay an exclusion, therefore,
exempt?
A: No.
GENERAL RULE: Separation pay not
exempt (?)
Exception:
1. Automatic exclusions, thus exempt if due
to:
a. illness
b. death
c. physical incapacity or injury.
2. Conditional exclusion
a. causes beyond the control of the
employee- excluded
b. within employee’s control – included.
Examples:
1. registration – CBA provides separation
pay, within the control = included.
2. installation of labor saving devises or
bankruptcy – beyond the control =
excluded.
Q: What is terminal leave pay?
A: the accumulated vacation leave and sick
leave benefits converted to cash or money to
be given either every year or upon retirement
or separation.
Terminal Leave Pay granted upon retirement
or separation:
» uder PD220, TLP in the Gov’t or in the
Private Sector shall be exempt from
income tax if given or granted upon
retirement or separation.
TLP granted on a yearly basis:
1. employee in the private sector:
a. accumulated sick leave – subject
to income tax.
b. Accumulated vacation leave: if
more than 10 days (meaning 11
pataas) – subject to income tax;
»If 10 days or less – exempt.
2. Gov’t Employee:
» governing law: EO 291 of Pres. Estrada,
RMC 16-2000.
Rule: Gov’t workers (both officers or non-
officers) granted TLP on a yearly basis →
exempt from income tax.
→ there is no qualification as to vacation or
sick leave.
► Take Note of 3 cases.
» be reminded of EO 291, Sec. 2. 78.2
par. 97, RR2-98, RR16-200 (3).
Case of Zialcita
► retired from DOJ, contention: TLP should
be exempt from income tax pursuant to the
old law.
SC: on a different ground – TLP is exempt
because it is similar to Retirement pay, thus
exempt but the ruling’s application is limited
only to DOJ employees.
Borromeo case:
► Same as the Zialcita case
Issues: WON the TLP is subject to income tax
and WON COLA and RATA are included?
SC: RULED TLP is Exempt!
Modified: the rule applies not only to DOJ
officers but also to CSC commissioners.
COMMISSIONER v. CASTAÑEDA
- Castañeda –DFA officer in Phil. Embassy in
England.
1. TLP is exempt.
2. Ruling applies to DFA officers.
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Q: Does the rule or decision applies to Gov’t
officials only?
A: No. PD220: Exemption applies to both
private and public sectors(?)
it does not matter if TLP is vacation or
sick leave.
RR2-98, Sec. 2.78.1 par. (a)(7)
» JAN, 1998 – the rule applies to both
private and public sectors.
EO291 (SEPT., 2000)
» Officer in gov’t receiving TLP is always
exempt whether or not vacation or sick leave
is granted.
Modified RR2-98:
» TLP will only apply to private sectors
» if granted on a yearly basis – may be
subject to tax: VACATION LEAVE
1. MORE THAN 10 DAYS = TAXABLE
2. LESS THAN 10 DAYS = EXEMPT
8. Miscellaneous items (Sec. 32 B (7)
(a) income derived by foreign Gov’t
[Sec. 32 B (7) (a)]
Q: What kind of income?
A:
1. investments in:
a. loans
b. stocks
c. bonds
d. other domestic securities
2. interest from deposits in Banks in the
Philippines.
Q: Who are income earners?
A:
1. foreign government
2. financing institutions owned,
controlled or enjoying re-financing
from foreign gov’ts; and
3. int’l or regional financial institutions
established by foreign gov’ts
(established in the Philippines)
TAKE NOTE: if plain foreign corp., subject to
FIT 20%.
EXAMPLES of exclusions:
a. Brunei Gov’t earns interest by depositing
money in Makati Bank – Exclusion.
b. SMC- Stock dividends to 3. Brunei Gov’t.
exclusion
c. Income derived by the Gov’t or its
political subdivisions (Sec. 32 B (7) (b)
a. exercise of public utility
b. exercise of any essential gov’t
function.
» accruing to the gov’t.
d prizes and awards (Sec. 32 B 7 c)
» primarily for religious, charitable,
scientific, educational, artistic, literary or
civic achievements:
1. recipient was selected without any
action on his part to enter the contest
or proceedings;
2. the recipient was not required to
render substantial future services as a
condition to receive the prize or
award.
D. prizes and awards in sports (Sec. 32B 7 d)
1. granted to athletes;
2. local or int’l competitions;
3. held here or abroad;
4. sanctioned by the nat’l sports associations.
E. 13th month pay and other benefits (Sec.
32B 7 e)
Q: Do you include Christmas bonus in your
ITR?
A: No, because the law says 13th month pay
and “other benefits”/”similar benefits” – xmas
bonus is included in the category.
Q: Who can increase the 30,000 limit?
A: The Sec. of Finance.
Q: Applicable to whom?
A:
1. gov’t; and
2. Private institutions.
F. GSIS, SSS, Medicare and other contributions
(Sec. 32 B 7 f)
► must be deducted from the GI not NIT
because it is an exclusion.
-creditable withholding tax is an exclusion-
must be deducted first from the GI before
you compute the NIT. Otherwise, you are
including in the GI something that is
excluded from the same.
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G. Gains from the Sale of bonds, debentures,
or other Certificate of indebtedness. (Sec. 32
B 7 g)
Q: Why 5 years?
A: certificate of indebtedness is similar to
Bank Interest in a long term deposit.
- Sec. 32 B 7 g is similar or the same as 24 B
in long term deposit.
H. Gains from redemption of shares in
mutual fund (Sec. 32 B 7 h)
1. Fiscal Year – means an accounting period
of 12 months ending on the last day of any
month other than December.
2. Calendar year – a period of 12 months
beginning on January and ending on
December.
Q: Business expense incurred in February
2006, is it possible to include it for April
2006?
A: yes, it is possible or it is possible if fiscal
year is employed, if it falls under the fiscal
year and all the elements are present.
- related to trade or business.
REASON: Capital loss has no connection to
the trade or business.
TAKE NOTE:
► for taxpayers liable for income within and
without (RC & DC)), they can claim
deduction for expenses incurred within
and without.
► for taxpayers who are liable only for
income within, they can claim a deduction
for expenses incurred within the
Philippines.
Sec. 34 A EXPENSES
1. For those business expenses not
enumerated under A. You need to prove that
it is an ordinary and necessary expense.
2. For those enumerated under A, all you
have to prove is that it is incurred during the
taxable year.
Feb. 12, 2007 (Sec. 34 A, Expenses)
Q: Did the law define what is reasonable?
A: No. for salaries and wages all that is
required by law is for it to be reasonable.
- for other forms of compensation, there
must be services actually rendered.
AGUINLDO Case
F: involves a corporation engaged in selling
fish nets, and the corporation have a land
sold through a broker.
►there was substantial profits gained from
the sale of a land which was sold by a broker.
The profit was in turn given to the workers as
special bonus.
►the corporation claimed the bonus as a
deduction.
ISSUE: Should the deduction be allowed?
H: The SC did not allow the deduction, for
other forms of compensation, it must be
made or given for services actually rendered.
►in this case, it was proven that the sale was
not made by the employees, no effort or
services actually rendered by them because
the sale was made through a broker.
►
Q: Reasonable Travel Expenses, What is the
requirement?
A:
1. Travel must be in pursuit of business,
trade or profession.
2. Travel expense while away from home.
Q: Is there a travel expense which was not in
pursuit of business?
A: yes, those which are considered as fringe
benefits (FB), expenses for foreign travel is
considered a FB only if it is not in pursuit of
the trade or business.
Q: can you claim it under Sec. 34 A (1)(a)(ii)?
A: No, you can claim it under Sec. 34 A
(1)(a)(i) last paragraph.
Q: Reasonable Allowances for rentals for
meralco bills, requirements?
A:
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1. required as a condition for the
continued use or possession, for the
purpose of the trade, business or
possession of the property.
2. taxpayer has not taken any title or no
equity other than a lessor.
Q: Reasonable allowance for entertainment,
amusement and recreation expenses, what is
the requirement?
A:
1. connected with the development,
management, and operation of the trade
(DOM);
2. Does not exceed the limits or ceiling
set by the Secretary of Finance; and
3. Not contrary to law, morals, good
customs, public policy or public order.
Q: How about bribe, kickbacks, and other
similar payments
A: even without this provisions, kickbacks will
not pass the requirement of (i) ordinary and
(ii) necessary hence not deductible
EXPENSES ALLOWABLE TO PRIVATE
EDUCATIONAL INSTITUTION
Q: Why only private educational institution is
mentioned and no other taxpayers?
A: it refers to section 27 for Private
Educational Institution given to the
educational institution.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for capital outlays not
deductible as business expense
EXCEPTION: Private Educ. Institution can
claim it under Sec. 34 A (2)
BUSINESS EXPENSE vs. ALLOWANCE FOR
DEPRECIATION
BUSINESS EXPENSE
1. No carry-over
2. can be claimed for one year only.
3. if the amount of capital outlay is
substantial, it cannot accommodate all of the
expenses incurred.
ALLOWANCE FOR DEPRECIATION
1. There is carry over
2. you can claim it for a longer period
depending on the life span of the property.
3. it can accommodate all of the expenses
incurred.
 taxpayer’s allowable deduction for
interest expense shall be deducted by an
amount equal to 42% (RR 10-2000) of the
interest income subject to FIT.
Q: Who claims this deduction?
A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
►interest on debt - when one borrows money
to finance his business interest in connection
with the taxpayer’s profession trade or
business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a)
►a borrower or taxpayer can claim the
interest paid in advance as itemized
deduction when he filed his income tax
return (ITR) depending on whether or not the
principal obligation has been paid.
1. if the entire amount or entire principal
obligation has been paid – the entire amount
of interest can be claimed as itemized
deduction.
2. if only ½ of the obligation had been paid,
then the entire amount of ½ of that interest
can be claimed as a deduction.
3. if no payment had been paid on the
principal obligation, the advance interest paid
cannot be claimed as a deduction on the
years that it was paid.
REQUIREMENTS FOR REDISCOUNTING OF
PAPERS:
1. incurred within the taxable year.
2. individual taxpayer reporting income on a
cash basis.
 No deduction shall be allowed in respect
to the following interest:
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1. if within the taxable year an individual
taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest
is paid in advance or through discount or
otherwise.
2. if both taxpayer and the person to whom
the payments has been made or is to be
made are persons specified under Sec. 36 (B):
a. member of a family
b. bet. an individual and a corp., more than
50% in advance of the outstanding stock of
which is owned directly or indirectly by or for
such individual;
c. Bet. 2 corp., more than 50% in value of the
outstanding stock of each of which is owned,
directly or indirectly, by or for the same
individual.
d. bet. the grantor and a fiduciary of any
trust;
e. bet. the fiduciary of a trust and the
fiduciary of another trust if the same person
is a grantor with respect to each trust; or
f. bet. a fiduciary of trust and a beneficiary of
such trust.
Q: Who are not allowed to claim interest
under sec 36 B?
A: interest incurred between related parties.
Q: What if half-brother?
A: not allowed to claim deduction for interest.
TAKE NOTE: interest incurred from the
exploration of petroleum refers not just in
interest incurred on loan of money but also
interest incurred for installment payments.
Q: Who are related parties?
A: individuals and corporations.
OPTIONAL TREATMENT OF INTEREST
EXPENSE:
1. interest incurred to acquire property used
in trade, business or exercise of profession
can be claimed a an itemize deduction…
a. on interest; or
b. depreciation (as capital expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in a
bank so that it will warn interest. (RR13-
2000)
ILLUSTRATION:
1. loan of 1M from a bank with an interest of
20%
2. 20% of 1M is Php200,000 but you cannot
claim this whole amount as a deduction.
3. when you deposited the 1M in the bank, it
earned a bank interest subject to FIT worth
Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
5. Php200K-4,200= Php195,800/ this is the
amount you can claim as a deduction.
34 C TAXES:
REQUISITES:
1. taxes must paid or incurred within the
taxable year
2. it must be incurred in connection with
trade or business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7
Q: Where should it be deducted?
A:
1. if claimed as a deduction, it should be
deducted from the gross income;
2. if claimed as a tax credit, it should be
deducted from the Net Income Tax due
(bottom of the formula)
MERCURY DRUG CASE
- Discount of senior citizens
SC: discount claimed by senior citizens shall
create a tax credit and must be deducted at
the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
►tax deduction is allowed if the taxes were
paid or incurred within the taxable year and it
must be connected to the trade, business or
profession of the tax payer.
Q: Who are entitled to claim it?
A: those liable to pay NIT. (Tax credit only for
NIT)
Q: What is a tax credit?
A: refers to the taxpayer’s right to deduct
from the income tax due the amount of
tax the taxpayer paid to foreign country,
subject to limitations.
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Q: What is the tax credit being referred to
under 34 C (3)?
A: credit against taxes for taxes of foreign
country.
Q: What are the other tax credit under the
code?
A:
1. RA 6452 – selling goods and commodities
to senior citizens, the discount claimed is
treated as a tax credit.
2. income tax paid to foreign country.
3. Input tax on Vat
4. Creditable w/holding tax system under NIT
5. Tax credit certificate.
Q: Who are allowed to claim it?
A: RC and DC only.
Q: suppose you paid the 100K NIT to US, can
you claim as a deduction the whole 100K?
what is the formula?
►same procedure for (1) income tax paid to
foreign country; (2) estate tax paid to foreign
country; and (3) Donor’s tax paid to foreign
country.
A: Formula:
STEP 1
GI from sources w/in
NIT: _____________________
GI from entire world
STEP 2
Quotient x RATE = amount w/c can be
claimed as a deduction
A: you cannot claim the whole 100K, you can
only claim the product of the quotient times
the rate
TAKE NOTE: deduct at the bottom of the
formula ( sa computation ng GI)
Q: Suppose you are a RC, you pay NIT to US,
will you be able to claim it as a tax
deduction?
A: 1. generally, you can claim it as tax credit.
2. you can claim under Sec. 34 C (1) b
►if the taxpayer did not signify in his return
his intention to avail himself of the benefit of
tax credit for taxes paid to foreign country.
►taxes incurred not related to the trade or
business, you have the option to:
a. claim it as tax credit; or
b. claim it as a deduction
►law gives you this privilege.
Q: When is taxes not allowed as a deduction?
A: Sec. 34 C (1)
1. Income tax;
2. Income tax imposed by authority of
any foreign country;
3. Estate and Donor’ tax; and
4. taxes assessed against local benefits of
a kind tending to increase the value of
the property.
Q: Who are not allowed to claim deductions?
A: Under 34 C (3) - NRC, NRA; and N/RFC
TAKE NOTE:
1. NRAE and NFC – allowed deduction only if
and to the extent that they are connected
with income from sources within the Phils.
2. Taxes that had been allowed as deduction
but are later in refunded should be treated as
part of the gross income during the year that
it is received (34 1 last paragraph)
Q: Which would you choose? Tax credit or
deduction?
A: tax credit because it is deducted from the
taxable income while deductions are
deducted from the GI.
FORMULA: GI-DEDUCTION = NET INCOME x
RATE = TAXABLE NET INCOME – TAX CREDIT)
34 D LOSSES
Q: Is always a requirement that it is incurred
in pursuit of trade, bus. or profession?
A: No. Sec. 34 D(1) provides for 2 kinds of
losses:
a. incurred in pursuit of trade, bus. or
profession;
b. property connected with t,b,p, if the
loss arises from fire, storms, shipwrecks
or other casualties or from robbery, theft
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or embezzlement (arising from natural
calamity). B. CAPITAL LOSS – NET CAPITAL LOSS
CARRY OVER ( # 2 above)

Q: What is the requirement?

A: NET CAPITAL LOSS NET OPERATING
1. Loss actually sustained during the CARRY-OVER LOSS CARRY-OVER
taxable year
2. Not compensated for by insurance or 1. taxpayers is an 1. taxpayer may be
other forms of indemnity. individual only not an individual or
3. Not claimed as a deduction for estate corporation. corp;
tax purposes.
2. involves net capital 2. losses incurred
Q: This is your itemized deduction which can loss or connected with T
be claimed as a deduction from? or B;
A: Gross income
3. carry-over as loss 3. Business losses
TAKE NOTE: from sale of capital not previously off-
► The itemized deduction of losses, asset in the next set as a deduction
however, is not confined to section 34B. it is succeeding year from the GI carried
also found under section 86A (1) (e) which over as such for the
also pertains to deductions available under next 3 consecutive
the estate tax law. years;
►Losses within six (6) months after the death 4. can only be 4. can be deducted
of the decedent can be claimed as itemized deducted from from capital gains
deduction of losses under Section 34B. capital gains. and/or ordinary
However, may be claimed as deduction under gains.
estate tax return provided that the same are
not claimed as itemized deduction of losses
under Section 34B.
NET OPERATING LOSS CARRY
Q: How many carry-overs do we have under REQUIREMENTS:
the Code? 1.Net operating loss of the business or
A: 3. Namely: enterprise incurred w/in the taxable year
1. Section 27 E (32) Carry forward of 2. not previously off-set as a deduction from
excess minimum Tax the GI
2. Section 39 D Net Capital Loss Carry- 3. carried over as a deduction from the GI for
over the next 3 consecutive taxable years
3. Section 39 D 3 Net Operating Loss immediately following the year of such loss.
Carry-Over.
Q: Can the period be extended?
KINDS OF LOSSES AND THEIR CARRY- A: yes, for mines other than oil and gas well.
OVERS: 1. net operating loss w/out the benefit
incentives provided by law;
A. ORDINARY LOSS – NOLCO ( #3 above) 2. incurred in any of the first 10 years of
operation.
Q: Why is there a need for a carry over under 3. carried over as a deduction from the GI
Sec. 34 D # when you can claim the loss from for the next 5 years following such loss.
both capital and ordinary loss? 4. no substantial change in the ownership
A: if the loss exceeds the income for the of the business or enterprise.
taxable year, you cannot deduct the entire
amount of loss from your income for that Q: What is the limit?
year so the excess may be deducted for the A: 75% of the nominal value of outstanding
taxable year following the loss. shares is held by or on behalf of the same
persons/ corporation

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► individual no problem, problem lies with
corporations or enterprises.
ABANDONMENT LOSSES
1. contract area where petroleum operations
are undertaken is partially or wholly
abandoned;
► all (1) accumulated exploration and (2)
development expenditures pertaining thereto
shall be allowed as a deduction.
2. a producing well is subsequently
abandoned:
►unamortized cost and undepreciated cost
of equipment directly used therein shall be
allowed as a deduction in the years it was
abandoned.
TAKE NOTE:
1. if abandoned well is reentered and
production is resumed; or
2. if equipment or facilities are restored into
service in the year of resumption or
restoration and shall amortized or
depreciated.
Q: What is the Tax benefit rule?
A: Last Par. of Sec. 34 E (1): recovery of bad
debts previously allowed as deduction in the
preceding year shall be included as part of
the gross income in the year of recovery to
the extent of the income tax benefits of said
deduction.
Q: What is a Bad Debt?
A: Bad debts shall refer to those debts
resulting from the worthlessness or
incollectibility in whole or in part of amounts
due the taxpayer by others, arising from
money lent or from uncollectible amounts of
income from goods sold and services
rendered.
CHINA BANK VS. CA
► bad debts can only be claimed if pursuant
to a contract of loan
- no bad debts for loss of instruments.
Q: Who claims it?
A: a. creditor
b.money lender
Q: What year can it be claimed?
A: can be claimed in the year it was actually
sit ascertained to be worthless and charged
off, meaning cancelled in the books of
account.
Q: Do you need to file an action before you
can claim?
A: No, all you have to do is prove that you did
exert effort to claim or recover the same.
Q: What cannot be deducted as bad debts?
A:
1. debts not incurred in connection with
the trade, business and profession of
taxpayer.
2. transactions, mered into between
parties mentioned under Section 36 (B)
namely.
a) between members of the family
b) between an individual who owns
more than 30% of outstanding
capital stock of a corporation and
that corporation
c) between two (2) corporations more
that 50% of the outstanding capital
stock of which is owned by or for the
same individual
d) between a grantor and fiduciary of
any trust
e) between two (2) fiduciaries of two (2)
trusts who has the same grantor
f) between a fiduciary of a trust and
above fiduciary of such trust
SECURITIES BECOMING WORTHLESS
1. ascertained to be worthless and
charged off within the taxable year
2. capital asset
3. taxpayer, other than a Bank or trust
company incorporated under Phil. Laws
4. substantial part of business is the
receipt of deposit
5. considered as a loss from the sale of
capital assets on the last day of such
taxable year
34 F DEPRECIATION
Q: What is depreciation?
A: It is the gradual dimension in the service
or useful value of tangible property due from
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exhaustion, wear and tear and normal 1.all properties used in mining operations
obsolescence. other than petroleum operations shall be
computed as follows:
a. if the expected life is ten (10) years or
Q: What kind of property is involved? less – normal rate of depreciation
A: 1. Real property except parcel of land
2. Personal Property
b. if the expected life is more than ten (10)
REQUISITES: years – depreciated over any number of years
1. depreciation deduction must be between five (5) years and the expected life.
reasonable
2. for the exhaustion, wear and tear, REQUIREMENTS:
including reasonable allowance for 1. depreciation is allowed as a deduction
obsolescence from 61; and
3. property used in the trade of business 2. contractor notifies the Commissioner at
the beginning of the depreciation period
Q: What do you mean by “reasonable which depreciation rate shall be used.
allowance”?
A: it shall include, but not limited to, an DEPRECIATION DEDUCTIBLE BY NRAETB OR
allowance computed in accordance with rules RFC
and regulations prescribed by the Secretary ► reasonable allowance for the deterioration
of Finance, upon recommendation of the of property
Commissioner, under any of the following
methods: 1. arising out of its use or employment
1.Straight-line method 2. or non-use in the business, trade or
2.Declining balance method profession
3.Sum-of-the-year-digital method; and 3. property is located in the Philippines
4.any other method which may be
prescribed by the Secretary of Finance 34 G DEPLETION OF OIL and GAS WELLS
upon recommendation of the and MINES
Commissioner ► only deduction which is a not self
executing deduction
DEPRECIATION OF PROPERTIES USED IN
PETROLEUM OPERATIONS Q: What is depletion?
A: the exhaustion wear and tear of natural
1. properties directly related to production resources as in mines, oil, and gas wells
of petroleum ►the natural resources called “wasting
2. allowed under (1) straight line or (2) assets”
declining balance method
3. useful life of properties used or related DEPRECIATION vs DEPLETION
to production of petroleum shall be ten
(10) years or such shorter life as 1.involves property 1. involves natural
may be permitted by the resources
Commissioner. 2. ordinary wear 2. ordinary wear
4. for property not used directly in the and tear of and tear of natural
production of petroleum (1) depreciated equipments resources
under the straight line method, and
useful life is only five (5) years TAKE NOTE:
►Equipment used in mining operation is
DEPRECIATION OF PROPERTIES USED IN deductible in depreciation
MINING OPERATIONS
Q: Method for computing depletion?
ALLOWANCE FOR DEPRECIATION: A: cost depletion method

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Q: to whom allowed? Q: What if the Donee is not one of those
A: only mining entities owning economic mentioned under the law, can he claim a
interest in mineral deposits deduction?
►Economic interest: capital investments in A: No.
mineral deposits
TAKE NOTE: Donee is never an individual.

34H CHARITABLE & OTHER

CONTRIBUTIONS
TAKE NOTE:
1.unique because deducted from the taxable
net income and not from the gross income
►second step of the formula deduction
Q: Who is claiming the deduction?
A: the donor
Q: Who are the Donees?
A: 1.Government of the Philippines or any of
its agencies or any political subdivision
thereof exclusively for public purpose
2. Accredited Domestic corporation or
association organized and operated
exclusively for religions, lion, charitable,
scientific, youth and sports development,
cultural or educational purposes or for
the rehabilitation of veterans, or
to social welfare institution, or to non
government organization and no part of
its net income inures to the benefit of
any private stock holder or individual
Q: How many kinds of deduction?
A: Two (2) kinds:
1.partial deduction
►10% of taxable income in case of an
individual
►5% of taxable income in case of
corporations
2. full /total deduction
Q: Which of the two kinds is the General
Rule?
A: General Rule: Partial deduction
Exception: Total /Full deduction
Q: Suppose Mr. A made a cash donation of
P1M. How much can he claim as a
deduction?
A: First determine the taxable income of Mr A
since he is an individual, he can only deduct
10% of his taxable income.
Q: If the Donor is a pure compensation
income earner and he donates P100,000 to
the church, can he claim it as a deduction?
A: No. pure compensation income earner can
only claim a deduction under Sec 34 M
Q: If Donee is the Philippine Government,
what is the requirement?
A: it must be made exclusively for public
purposes
Q: What if the Donee is a province?
A: there must be a qualification that it is for
public purpose
Q: If the Donee is a Domestic Corporation,
what is the requirement?
A: no part of its income inures to the benefit
of any private shareholder or individual
Q: What are those contributions which can be
deductible in full?
A: 1.Donations to the Government – no
conflict with partial (different
requirement)
►Partial donated for exclusively public
purposes
►Full, used in undertaking priority
activities of NEDA
2.Donations to certain Foreign
Institutions or International Organizations
►in compliance with agreement, treaties
or commitment entered into by the
Philippine Government and such donees
3.Donations to Accredited Non
government organizations Non
government organization, non profit
domestic corporation
REQUIREMENTS:
1. organized and operated exclusively for
scientific, research, educational, character
building and youth and sport development,

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health, social welfare, cultural or charitable
purposes or a combination thereof
2. no part of the net income of which inures
to the benefit of any private individual
3. uses the contributions directly for the
active conduct of the activities constituting
the purpose or function for which it is
organized and operated
4. annual administrative expense does not
exceed 30% of the total expenses and
5. in case of dissolution, the assets of which
would be distributed to:
a) another non profit domestic
corporation organized for similar purpose
or purposes
b) to the state for public purpose
c) distributed by the court to another
organization to be used in such a manner
which would accomplish the general
purpose for within the dissolve
organization was organized
34I RESEARCH AND DEVELOPMENT
►In the old law, this is not allowed as a
deduction. To remedy this, they felt that
those should be a separate deduction for
research and development.
REQUISITES:
►tax payer may treat research and
development expenditures as ordinary and
necessary expenses provided:
1. it is paid or incurred during the taxable
year
2. incurred in connection with trade, business
or profession; and
3. not chargeable to capital account.
Q: Treated as such when?
A: during the taxable year it is paid or
incurred
AMORTIZATION OF CERTAIN RESEARCH AND
DEVELOPMENT EXPENDITURES
►at the election of the taxpayer, the
following shall or may be treated as deferred
expenses:
a. paid or incurred by the taxpayer in
connection with his trade, business or
profession;
b. not treated as expenses under par 1 and
c. chargeable to capital account but not
chargeable to property of a character which
is subject to depreciation or depletion
Q: How to compute taxable income:
A: deferred expenses shall be allowed as
deduction ratably distributed over a period of
not less than 10 months as may be elected by
the taxpayer (beginning with the month the
taxpayer first realizes benefits from
expenditures.)
►the election or option may be exercised for
any taxable year after the effectivity of the
code but not later than the time prescribed
by law for filing the return for such taxable
year.
LIMITATION ON DEDUCTION
Q: When not deductible?
A: 1.Any expenditure for the
(1) acquisition or improvement of land or
(2) for the improvement of property to be
used in connection with research and
development of a character which is
subject to depreciation and depletion and
office site
2. Any expenditure paid or incurred for
the purpose of undermining the
existence, location, extent or quality of
any deposit of one or other mineral
including oil or gas.
► not for mineral exploration
34 J PENSION TRUST
Q: Claimed by Whom?
A: the employer
Q; What is a Pension Trust contribution?
A: a deduction applicable only to employer on
account of its contribution to a private
pension plan for the benefit of its employee
deduction is purely business in character.
Q: Requisites?
A:
1.the employer must have established a
pension or retirement plan to provide for the
payment or reasonable pension of his
employees
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2. pension plan must be reasonable and
actually sound;
3. it must be funded by the employer
4. the amount contributed must no longer be
subject to his control or disposition
5. the amount has not yet been allowed as a
deduction and
6. the amount has or is apportioned in equal
parts over a period of 10 consecutive years
beginning with the year in which the transfer
or payment is made.
34 K ADDITIONAL REQUIREMENTS FOR
DEDUCTIBILITY OF CERTAIN PAYMENTS
►allowed as a deduction only if shown that
the tax required to be deducted and withheld
there from has been paid to the BIR in
accordance with Section 58 and Section 81
34 L OPTIONAL STANDARD DEDUCTION
KINDS OF DEDUCTIONS:
1.Itemized deduction
2.Optional Standard Deduction
3.Personal /Additional Deduction
OPTIONAL STANDARD DEDUCTION:
►can be availed of by an individual who may
elect a standard deduction in an amount not
exceeding 10% of his gross income
► may apply in lieu of the other deductions
under Section 34
►the taxpayer must signify in his return his
intention to elect the optional standard
deduction, otherwise, he shall be considered
as having availed of the itemized deduction.
Q: Who can claim this deduction?
A: all individual taxpayers except non
resident alien not engaged in trade or
business (NRANETB)
Reason: he is not liable to pay by way of the
NIT, thus, follows he cannot claim this
deduction because he is liable to pay by way
of GIT.
TAKE NOTE:
►can co-exist with personal and / or
additional exemption
34 M PREMIUM PAYMENTS ON HEALTH
AND /OR HOSPITALIZATION INSURANCE
OF AN INDIVIDUAL TAXPAYER
► for (1) Health and /insurance
(2) Hospitalization
REQUIREMENTS:
1. amount of premiums, paid by taxpayer
for himself and members of his family,
2. amount of premiums should not exceed
(1) P2,400 per family or (2) P200 a
month
3. gross income of the family for the
taxable year is not more than P250,000
Q: Who can avail of this deduction?
A: 1.individual taxpayer earning purely
compensation income during the year;
2. individual taxpayer availing itemized or
optional standard deduction; and
3. individual taxpayer earning both
compensation income and income from
business
SECTION 35 ALLOWANCE FOR PERSONAL
EXEMPTION FOR INDIVIDUAL TAXPAYER
Q: When do we apply this?
A: apply if individual taxpayer is paying by
way of NIT
Q; Who are taxpayer?
A: those mentioned under Section 24 (A)
1. RC
2. NRC
3. OCW
4. RA
►all can claim both personal and additional
exemption
Q: Why not include NRAETB? Can the latter
claim any exemption?
A: NRAETB is not included because Section 35
A refers to Section 24 A
►NRAETB can claim personal deductions but
not additional exemptions pursuant to Sec 35
D
REQUIREMENTS:
1.NRAETB should file a true and accurate
return
2. the amount to be claimed as personal
exemptions should not exceed the amount
provided for under Philippine Laws
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 TAXATION LAW REVIEW NOTES
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TAKE NOTE:
AEMOP: can be a RA or NRAETB
BASIC PERSONAL EXEMPTIONS:
1. Single individual; or individual judicially
decreed as legally separated with no qualified
dependents.
► 20, 000
2. For head of the family – can be single or
legally separated with qualified dependents.
► 25, 000
3. For each married individual – if only one
of the spouse, earns or derives gross income,
only such spouse can claim the personal
exemption.
►32, 000
Q: Who is the “head of the family”?
A: 1.unmarried or legally separated man or
woman
2. With (1) one or both parties or
(2) With one or more brothers and
sisters
(3) with one or more legitimate,
recognized, natural or legally adopted
children
3. living with and dependents upon him
for their chief support
4. whose such brother or sisters or
children are
(1) not more than 11 years old and
(2) not gainfully employed,
(3) unmarried
5. OR, regardless of age, the same are
incapable of self support because of
mental or physical defect.
Q: Why do we have to determine who the
head of the family is?
A: only legally separated individuals can
claim additional exemptions if they have
qualified dependents.
TAKE NOTE:
►R.A. 7432 and RR 2-98: a senior citizen can
also be a dependent.
Q: Can a widower claim exemptions?
A: exemptions must be strictly construed,
widower not included in the list under
Section 35 A – but can claim under sec
35B
►widower, married or used to be married
MARRIED INDIVIDUALS
►each legally married individuals can claim
the personal exemption. Husband and wife =
P64,000
Q: Who are allowed to claim?
A: Normally , it is the husband who claims
unless he executes a waiver that the wife
will claim the same (RR2-98)
Additional Exemptions: (35B)
-additional exemption of P8,000 for each
dependent not execeeding four (4)
Q: Who can claim the same?
A: 1.Married couples: only one of the
spouses can claim it;
2.legally separated individuals: can be
claimed by the spouse who has custody
of the child or children
►the additional exemption claimed by both
shall not exceed the maximum additional
exemption herein allowed.
Q: Define “dependents”
A: legitimate, illegitimate or legally adopted
child chiefly dependent upon and living
with the taxpayer if such dependent is (1)
not more than 21 years of age, (2)
unmarried, and (3) not gainfully employed
or (4) if such dependent, regardless of age
is incapable of self support because of
mental or physical defect.
Q: What if widower has illegitimate children,
can claim additional exemption?
A: can claim, can be considered as head of
the family w/ dependent
Q: What if the children are temporarily away
from the parents?
A: still considered living with parents, can
claim exemption
CHANGE OF STATUS: (SEC 35 C)
Q: Reckoning Period?
A: end of the year or close of such year when
such change of status occurred.
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TAKE NOTE:
►always choose the higher amount of
exemption if you are filing a return covering
the period within which the change of status
occurred
1. if the taxpayer should (1) marry or (2) have
additional dependents during the taxable
year, he may claim the corresponding
exemption in full for the year.
Illustration:
1.Single Jan 1, 2005
2.Married June 1, 2005 – on April 15, 2006 –
status: legally married can claim P 32,000
betterments, made to increase the value of
any property or estate
2. Any amount expanded in restoring
property or in making good the exhaustion
thereof for which an allowance is or has
been made.
Exceptions:
1. Option granted to Private Educational
Institution to deduct the same as
capital outlays.
TAKE NOTE:
►Amount paid for new buildings, can be
deducted if it involves intangible drilling and
development cost incurred in petroleum
operations (Sec 34 6 (A)

2. if the taxpayer should die during the PREMIUMS PAID ON LIFE INSURANCE
taxable year, estate can claim personal POLICY :
exemption.
1. covering the life of any officer or
Illustration employee or any person financially
1.Jan. 25, 2005 taxpayer married w/ one invested in any trade of business
child carried on by the taxpayer.
can claim on April 15, 2006 2. taxpayer is directly or indirectly the
P32,000+ beneficiary under such policy.
P8,000 } P40,000
LOSSES FROM SALES OR EXCHANGES OF
► In this case, as if the change of status PROPERTY (between related parties)
occurred at the close of taxable year. If
taxpayer’s spouse or child dies within the 1) between family members
taxable year or the dependent’s became (1)
gainfully employed (2) got married or (3) Q: Who is considered the “family of the
became 21 as if the change as status taxpayer?”
occurred at the close of taxable year. A: a. brothers and sister (whole is ½ blood)
Illustration: b. spouses
1. Taxpayer’s tragic story wife died Jan. 25, c. ancestors
2005 and child died the next day then d. lineal descendants
another child eloped and get married. Q: are uncles or nieces included?
2. Taxpayer despite the tragedy can claim ton A: no
of money on April 15, 2006.
P 32,000
P 16,000 (8,000 per child)
48,000 IN DONOR’S TAX
►Relatives includes relatives by
Section 36. Items not Deductible consanguinity within the 4th civil code.
Nephew is a stranger and relative ang
36 A. General Rule: In computing net income, nephew.
no deduction shall be allowed:
(1) Personal, living or family expenses – not 2) individual and corporations
related to trade or business Gen. Rule: NO DEDUCTION
(2) Section 36 A (2) and Section 36 A (3) Except: distribution in liquidation or
General Rule: No deductions allowed for less than 50% of the outstanding
1. Any amount paid out for new buildings capital stock
or for permanent improvements, or

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3) Two corporations
4) Grantor or Fiduciary Q: When is there a gain?
5) Two fiduciaries of two trust A: excess of the amount realized over the
6) Fiduciary and beneficiary of trust basis or adjusted basis for determining
gain. (amount realized from the sale or
Sec. 37 Special provisions regarding other disposition of property)
deductions of insurance companies.
Q: When is there a loss?
Codal Provisions A: the amount realized is not in excess of B
Section 38: Losses From Wash Sales of Stock or AB
or Securities Illustration: 1987 Bar (Juan dela Cruz
sold jewelry for 300,000 ) contract of sale
Q: What is a wash sale? ►amount realized is 300,000
A: It is a sales or other disposition of stock
securities where substantially identical Q: What will be the basis of the gain?
securities are purchased within 61 days, A: Sec. 40 B (1), property was acquired by
beginning 30 days before the sale and ending purchase
30 days after the sale. ►Cost: purchase price + expenses
Q: If there is a gain, is the whole gain subject
Q: What period? to income tax?
A: 61 day period beginning 30 days before A: it depends
and ending 30 days after the sale ►if ordinary asset = 100% is subject to
Q: Jan 20 you purchased share of stock, and income tax
disposed of the same on Feb 5, 2005. Is ►if capital assets
this a wash sale? a. short term(less than 12 months) :
A: No 100% taxable
b. long term (more than 12 months):
Q: If it is a loss in wash sale, happens? 50% taxable
A: General Rule: (Sec 131 RR No. 2)
gains from wash sale are taxable but Q: suppose property sold is a parcel of land
losses are non-deductible will the rule be the same?
Exception: A: No, and it depends
►unless claim is made by a dealer in stock or ►ordinary asset: apply the cost
securities and with respect to a transaction ►capital asset: 6% FMV or selling price
made in the ordinary course of the business which ever is higher
of such dealer
Q: Do we apply the holding period?
Q: Reason why losses in wash sale cannot be A: No, holding period does not apply to the
deducted? sale of real property. This is an absolute
A: 1. to avoid too much speculation rule:
in the market
2. taxpayer not telling the truth, ►If realty is ordinary – holding period
because he may say he incurred does not apply.
a loss instead of a gain ►If realty is capital asset – 6% FMV or
selling price applies.
Section 40. Determination of Amount and
Recognition of Gain or Loss ►Holding period applies only to sale of
personal property which is a capital asset
GENERAL RULE: This is totally irrelevant except sale of shares of stocks.
if the income is subject to fit. In fit gain is
presumed.
►Holding period also do not apply to
EXCEPT: sale of shares of stock where corporations.
you have to determine actual gain or loss

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Q: If the property is acquired through
inheritance, what is the basis?
A: Sec 40 B (2) fair market value or price as
of the date of acquisition.
Q: Suppose it was a sale of personal property,
do we apply the same principles?
A: No.
Q: What if it involves a sale of real property?
A: Apply the same principles
Suppose it was a result of swindling, theft,
robbery or estafa, do we apply the
same principles?
A: Law is silent, take note of the old CIA
ruling on this one
Q: Feb 14, 2006, your GG gave you a jewelry
in Sept your GG breaks up with you. GG
request the jewelry be returned but you
already sold it for P200,000. Will the
entire P200,000 be included in gross
income?
A: Basis: (1) same as if it would be in the
hands of the Donor (FMV as of date of
acquisition); or (2) last owner who did not
acquire the same by gift (cost)
Q: If it involves a parcel of land?
A: apply the same rules Section 40 B (4)
what is the basis?
1. Property was acquired for less
than an adequate consideration in
money or moneys worth: the basis
would be the amount paid by the
transferee for the property.
Q: Section 40 B (5) what is the basis? A: 40 C
(5)
► if the property was acquired in a
transaction where gain or loss is not
recognized (pursuant to a merger or
consolidation plan)
a. corporation, party to a merger or
consolidation, exchanges property
solely for stocks in another
corporation, also a party to the
merger or consolidation
b. is a party to the merger or
consolidation, solely for the stocks of
another corporation also a party to
the merger or consolidation, or
c. Security holder of a corporation,
party to a merger or consolidation,
exchanges his securities solely for
stock or security in another
corporation, also a party to the
merger or consolidation. – person
transfers property to corporation to
gain control
40 C EXCHANGE OF PROPERTY
GENERAL RULE: In sale or exchange of
property, the control amount of gain or loss
shall be recognized.
1. gain is taxable
2. losses are deductible
Exception: If permanent to a merger or
consolidation plan, no gain or loss shall
be recognized
1. gain is exempt
2. losses are not deductible
REQUISITES:
1. the transaction involves a contract of
exchange
2. the parties are members of the
merger or consolidation
3. the subject matter is only limited or
confined with the one provided for by
law
►Merger and Consolidation in corporation
code and tax code are not the same.
►Sec 40 (2) (a)
►a corporation which is a party to a
merger or consolidation, exchanges
property solely for stock in a corporation
which is a party to the merger or
consolidation
Illustration:
Transferor gives 1M
Transferee gives 700,000 = not
taxble gain P300,000
►If other property received by transferee (40
C (3) (a) TRANSFEREE
►if the party receives not just the subject
matter permitted to be received: lie if the
party receives money and /or property,
the gain, if any, but not the loss, shall be
recognized (meaning taxable) but in an
amount not in excess of the sum of the
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money and the FMV of such other 2. loss not deductible
property received.

(40 C (3) (b) TRANSFEROR 40c last paragraph

► the transferee becomes a stockholder,
1.Transferor corporation receives money and parties are not members of the merger
/ or property, distributes it pursuant to the
merger or consolidation plan ►the individual wants to be a shareholder
►no gain to the corporation shall be but does not want to purchase shares but
recognized willing to give up property as a result of
2. Transferor corporation receives money and the exchange , the person gains control
/ or property, does not distribute it pursuant of the corporation
to the merger or consolidation plan
►the gain shall be recognized but in an ►The rule is:
amount not in excess of the sum of such a. gain is exempt
money and the FMV of such other property so b. loss not deductible
received. Requisites:
1. There is A contract of exchange
Q: What is the rule? where property was transferred by
A: 40 C (3) (a) the person in exchange of stock
1. gain taxable or unit of participation in a
2. loss not deductible corporation.
►40 C (3) (b) 2. As a result, the person alone or
It depends on how distributed: together with others (not
1. pursuant to the merger or exceeding of 4 persons) gains
consolidation plan: control of the corporation.
►gain exempt
►loss not deductible Q: What is control?
2. not pursuant to merger or A: ownership of stocks in a corporation
consolidation plan: possessing at least 51% of total voting
►gain taxable power.
►loss not deductible.
Sec 40 B (5)
Sec 40 C (1) (b) ►non applicability of income tax is only
►a shareholder exchanges stock in a temporary
corporation which is a party to a merger
or consolidation, solely for the stock of Reason : Basis will be 40 C (5)
another corporation which is a party to 1. 40 C (5) (a) Transferor
the merger or consolidation ►basis of stock or securities received by
the transferor: same as the basis of the
Sec 40 C (2) (c) property, stock or securities exchanged:
► a security holder of a corporation ►decreased by the (1) money and (2) FMV
which is a party to the merger or of the property received; and
consolidation, exchanges his securities in ►increased by (a) amount treated as
such corporation, solely for stock dividend and (b) amount of gain
securities in another corporation. recognized

►The rule is similar in 40 C (3), (a), (b) and 2. 40 C (5) (b) Transferee
(c) although different property are involve, ►as it would be in the hands of
that is why the last paragraph of 40 C is a transferor increased by the amount of
separate paragraph. gain recognized.

►Therefore, Sec 40 C (3) (a,b,c) the rule is Sec 40 (c) (4) Assumption of Liability
1. gain exempt

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1. Taxpayer, in connection with the
exchanges described – receives
securities or stocks permitted (no
gains recognized) – it is sole
consideration of the same – the other
party assumes liability of the same –
the acquisition of liability not treated
as money and / or other property –
the exchange still falls within the
exceptions.
2. If amount of liabilities assumed +
amount of liabilities to which
property is subjected to exceeds -
adjusted basis of the property
transferred – the excess shall be
considered a gain from the sale of a
capital asset or of property which is
not a capital asset, as the case may
be.
SECTION 41 INVENTORIES
Purpose: Change of inventory to determine
clearly the income of any taxpayer/ to reflect
the true income.
Limitation:
1. once every 3 years
2. approval of the secretary of finance
Section 43 Accounting Periods
1. Fiscal year
2. use of calendar year
a. no annual accounting
b. does not keep books of account
c. individuals
►Use of method as in the opinion of the
commissioner clearly reflects the income:
1. no accounting method has been
employed
2. the method does not clearly reflect
the income
Sec 44 Period in which items of Gross
Income included and Sec 45 Period for
which Deductions and Credit Taken
►Under Sec 44 amount of all items of
gross income shall be included in the
gross income for the taxable year in
which they are received by the taxpayer
►Under Sec 45 deductions shall be taken
for the taxable year in which “paid or
accrued” or “paid or incurred.”
►Sec 44 and Sec 45 are mentioned in the
code because of the death of the person.
Illustration:
Facts: taxpayer dies in the middle of the
year
January 1, 2006 – June 15, 2006
►June 26, 2006 to Dec 31, 2006 the
estate is the taxpayer
►So the income and deductions from Jan
1 to June 25,, included in the
computation
Section 46 Change of Accounting Period
Q: Who is the taxpayer?
A: corporation (taxpayer other than
individual)
Q: What kinds of accounting period?
A: 1.fiscal year
2. calendar year
Q: Changes contemplated?
A: 1. fiscal to calendar
2. calendar to fiscal
3. fiscal to another fiscal
►with the approval of the Commissioner,
net income shall be computed on the
basis of the new accounting period.
Q: Calendar to calendar, correct?
A: not correct statement
Section 47 (A)
Taxpayer: Corporation
1. Fiscal to calendar
► separate final or adjusted return shall
be made for the period between the so
close of the last fiscal year for which the
return was made and (2) the following
Dec 31.
2. Calendar to Fiscal
►separate final or adjusted return shall
be made for the period between the close
of the last calendar year and the date
designated as the close of the fiscal year.
3. Fiscal to fiscal
►separate final or adjusted return shall
be made for the period between the close
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of the former fiscal year and the date A: Yes
designated as the close of the new fiscal
year. Casual Sale has Requirements:
►File return indicating the change in 1. selling price exceeds P1,000
accounting method 2. initial payment not exceeding 25%
selling price
Section 48 Accounting for Long Term
Contracts ►Regular sale no requirements
Case of Bañas
Q: Who are the professionals involved? 1. subject matter
A: applies to architects and engineers 2. sold by way
3. agreement
Q: What is a long term contract? 4. cash deposit
A: it means building, installation or 5. post dated promissory notes
construction contracts covering a period in (installments)
excess of one (1) year. 3. 1st installment promissory note was
disconnected
Q: Basis of income? 4. 2nd installment exchanged with cash -
A: a. persons whose gross income is derived these two exceeds the selling price
in whole or in part from such contract 5. you only compute cash
shall report such income upon the basis
of percentage of consumption. H: Initial payment exceeds 25% installment
basis is not applicable
b. the return shall be accompanied by a
certificate of architects or engineers RR 2; Section 175: In payment by way of
showing the percentage of completion installment promissory note, bills of
exchange and checks will not be considered
c. deduction of expenditures made during in computing the 25% initial downpayment.
the taxable year, on account of the
contract is allowed
Section 50 Allocation of Income and
Section 49 Installment Basis Deductions
►contemplates a seller of the property ►tremendous power of the
Commissioner to allocate the income and
Q: Is it important to know if the property is deduction of several corporations having
personal or real? the same interest.
A: Yes Q: Same interest?
A: stockholders substantially the same
Q: Sale of Real Property is it important to
know if it is a casual sale or regular sale? Q: Limitations?
A: No A: None
►That is why it is a great source of
Requirement: The initial payments do not corruption
exceed 25% of the selling price.
Section 51 Individual Returns
Q: If the initial payment exceeds 25% what do Who are required to file? (ITR)
you call it? 1. RC
A: called deferred sale 2. NRC
3. RA
Q: Consequence? 4. NRAETB – sources within
A: you must pay the whole amount of the tax
Q: Who is not mentioned in Sec 51 but liable
Q: Sale of Personal Property, is it important to to pay by way of NIT?
know if it is a casual or regular sale? A: OCW/ seaman

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1. on April 15; or
Exception: 2. before April 15 (January, Feb or March)
RC OR ALIENS: engaged in trade or practice ► not December because the calendar year is
of profession in Phil. Shall file ITR regardless not yet over
of the amount of gross income.
Fiscal year: 15th day of the 4th month
Q: If OFW is exempt from filing a return, what following the close of the fiscal year.
is he required to file?
A: Information Return 51 C (2) individuals subject to tax on
capital gains
Q: who are not required to file a return? Exception: General Rules Sec 58
A: 1. Sale of shares of stocks
a. an individual whose gross income ►return filed within 30 days after each
does not exceed his total personal transaction and
and additional exemptions for ►Final consolidated return on or before
dependents April 15
b. worker (compensation income 2.Sale of Real Property
earners) regardless of the amount of ►return filed within 30 days following each
compensation shall not required to sale
file ITR because the management files
it. (RR 3-2002) 51 D Husband and Wife
c. individuals whose sole income is 1. Pure compensation income earner –
subject to FIT separate return RR 3-2000 – pure
d. individuals who are exempt from compensation income earner regardless of
income tax amount of income not file ITR.
2. Not pure compensation: joint return
Exception: IT
1. the management files an incorrect 51 E. Return of Parent to Include Income of
return Children
2. the employee has two or more
employer ► unmarried minor receives income from
property received from living parent –
51 A (3) included in the parent’s ITR.
Exception:
A: not required to file ITR may be required to 1.Donor’s tax has been paid
file information return 2.Property exempt from donor’s tax

51 B - Where to file? 51 F. Persons Under Disability

1. authorized agent bank
2. revenue district officer
3. collection agent
4. duly authorized treasurer of the city or
municipality where taxpayer resides or
has principal place of business
5. office of commissioner – if no legal
residence or place of business in Phil
51 C
Q: When to file?
A: filed on or before the 15th day of April
each year
51 C (1) – NIT Payers using CY
►two days provided (calendar)
Q: Who makes the return?
A:
1.duly authorized agent
2. duly authorized representatives
3. guardians
4.other persons charged with the care of
his person or property
►both incapacitated taxpayer and agent
will be liable for:
1.erroneous return
2. false or fraudulent return
51 G Signature Presumed Correct
► prima facie evidence the return was
actually signed by the taxpayer

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Section 52 Corporation Return
►go back to Sec 51 A (2)
General Rule: Sec 58 Final Income
Tax
►return and creditable withholding tax
return is filed monthly
Exception: Sale of Shares of Stocks
(Sec 51 A (2)) Sale of Real Property
►RR -17-2003: Sale of Real Property
subject to final withholding tax, the buyer
is deemed the agent.
Sale of Shares of Stocks
Q: Reasons for filing Final Income tax or Final
Consolidated Return?
A: Reasons:
1. FIT whose actual determination of
gain or loss
2. in connection with Sec 24 C the
basis of the tax is not the gross
income but the net capital gains
realized.
In connection with Sec 40:
►actual determination of loss or gain
►file a return within 30 days from date of
transaction
TAKE NOTE: In all other income subject to
FIT, the gains are presumed
INCOME OF MINORS
Q: Minor below 18: Will it be included in the
Minor’s ITR?
A: it depends
1. income from property received from
parents ► included in parent’s ITR
Except:
a.Donor’s tax paid
b.Property exempt from donor’s tax
2. income from minor’s own industry
►Minor’s ITR accomplished by guardian
or parents
Q: if the individual is exempt from income
tax, can be required to file a return?
A: General Rule: No
Exceptions:
1.engaged in trade or business; or
2.exercise of profession – Sec 51 A (2)
SEC 52 CORPORATION RETURNS
A.Requirements
Taxpayer: DC or RFC (except NRFC)
ITR Filed: 1. TRUE AND ACCURATE
a. quarterly income tax return
b. final or adjusted income tax return
Filed by:
1.President;
2.Vice President
3. Other principal officer
►ITR must be sworn by such officer and the
treasurer or assistant treasurer
B. Taxable Year
1. fiscal; or 2. calendar
► corporation cannot change accounting
method employed without the approval or
prior approval of the commissioner (Sec 47)
C. Return of Corporation Contemplatory
Dissolution or Recognition
1.Within 30 days after:
a. the adoption by the corporation of a
resolution or plan for its dissolution; or
b. liquidation of the whole or any part of
its capital stock, including a corporation
which has been notified of possible
involuntary dissolution by the SEC; or
c. for its reorganization
2.Render a correct return verified under oath
setting form:
a. forms of the resolution or plan;
b. such other information prescribed
3.Secure a tax clearance from the BIR and file
it with the SEC
4.Thereafter, SEC issued a Certificate of
Dissolution or Reorganization.
D. Sale of Stocks – ITR
look at the previous notes about it
Section 53 Extension of Time to File
Returns
Q: To whom granted?
A: Corporations
Grounds: Meritorious case
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►subject to the provisions of Sec 56
Time Extension
Section 54 Returns or Receivers, Trustees
in Bankruptcy or Assignees
►the aforementioned persons shall make
returns of net income as and for such
corporation in the same manner and form
as such organization is required to make.
Section 55 Returns of General Professional
Partnership
► file a return of its income setting forth
1. items of gross income and of
deductions allowed by this title (Title
II – Tax on Income)
2. Names of partners
3. Taxpayer identification number (TIN)
4. address of partners
5. shares of each partners
►GPP is exempt from corporate income tax
Q: Why is the GPP obliged to file a return?
A: to determine the shares of each partners
Section 56 Payment and Assessment of
Income Tax for Individuals and
Corporations
A. Payment of Tax
Q: Who pays the tax of tramp vessels?
A: 1.the shipping agents and or the
husbanding agent
2.in their absence, the captains thereof
►those people are required to file a return
and pay the tax due before departure
Q: What is the effect of failure to file the
return and pay the tax due?
A: 1.Bureau of Customs may hold the vessel
and prevent its departure until:
a. proof of payment of tax is presented;
or
b. a sufficient bond is filed to answer
for the tax due.
Installment Payments
Tax due: more than P2,000
Taxpayer: individuals only (other than
corporation)
Elect to pay the tax in two (2) equal
installments
a. 1st installment: paid at the time the
return is filed
b. 2nd installment on or before July 15
following the close of the calendar
year
Q: What is the effect of non payment on the
date fixed?
A: The whole amount of tax unpaid becomes
due and demandable together with the
delinquency penalties.
Payment of capital gains tax :
Q: Paid when?
A: on the date the return is filed
Avail exemption for capital gains:
a.no payments shall be required;
b. if you fail to qualify for exemption –
tax due shall immediately become
due and payable and subject to
penalties
c. seller pays tax – submit intention or
proof of intent within six (6) months
from the registration of document
transferring
Q: when is the real property entitled to
refund?
A: upon verification of compliance with
the requirements for exemption.
►Report gains on installments under Sec
49 – tax due from each installment
payment shall be paid within 30 days
from the receipt of such payments.
►No registration of document
transferring real property
1. without a certification from
commissioner or his duly authorize
representative that
a. transfer has been reported
b. tax has been paid
B. Assessment and Payment of Deficiency Tax
► Return is filed, the commissioner examiner
and assess the correct amount of tax
►tax deficiency discovered shall be paid
upon notice and demand from the
commissioner.
3 INSTANCES CONTEMPLATED
1. file the return and pay the tax
2. file the return but not pay the tax
3. not file the return and not pay the tax
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Section 57 Withholding of Tax at Source
A. Withholding of Taxes
►subject to the Rules and Regulations the
Section of Finance may promulgate, upon
recommendation of commissioner: Require
the filing up of certain income tax return by
certain income payees.
Q: Enumeration is all about what?
A; Enumer ation about Final Income Tax
Except: Gross Income Tax
1. 25 B (NRANETB)
2. 28 B (NRFC)
B. Withholding of Creditable Tax at Source
►The Sec. of Finance, upon
recommendation of the commissioner
require the withholding of a tax on the
items of income payable to natural or
juridical persons, residing in the Phil, by
payor-corporation/ person… the same
shall be credited against the income tax
liability of the taxpayer for the taxable
year. At the rate of not less than 1% but
not more than 32% thereof.
Q: What is the maximum?
A: Maximum: now 35% pursuant to RA 9337
Q: When will you allow withholding beyond
15%?
A:
For NIT 15% is the maximum
1. FIT – the amount of withholding is
totally
2. GIT - equal to the amount of tax
Tax Free Covenant Bond
►the bonds, mortgages, deeds of trust or
other similar obligations of
DC or RFC
►contains a contract or provision where the
obligor (debtor) agrees to pay the tax
imposed herein
►normally between the creditor and debtor
Q: Who pays the tax?
A: Creditor pays the tax by virtue of an
agreement the debtor assumes the liability
and the creditor is now free from payment of
tax before it can transfer the property to the
buyer.
Section 58 Returns and Payment of Taxes
Withheld at Source
A. Quarterly Returns and Payment of Taxes
Withheld at Source
1. covered by a return and paid to:
a. authorized agent bank
b. revenue district officer
c. collection agent
d. duly authorized treasurer of city or
municipality where withholding agent
has:
1. his legal residence; or
2. principal place of business; or
3. if corporation , where principal
office is located
2.Tax deducted and withheld
►held as a special fund in trust for the
government until paid to the collecting
officers.
3.Return for final withholding tax
►filed and paid within 25 days from the
close of each calendar quarter
4.Return for Creditable withholding taxes
►filed and paid not later than last day of the
month following the close of the quarter
during which withholding was made
5. Commissioner, with approval of Sec
Finance
► require withholding agents to pay or
deposit taxes at more frequent intervals
where necessary to protect the interest of the
government
B. Statement of Income Payments Made and
Taxes Withheld
►Withholding agent shall furnish payee a
written statement showing:
1. income or other payments made by
WHA during such quarter or year and
2. amount of tax deducted and withheld
► statement given simultaneously upon
payment at the request of the payee.
Creditable withholding taxes
1. corporate payee – not later than the
20th day following the close of the
quarter
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2. individuals payee – not later than
March 1 of the following year
Final Withholding taxes
►the statement should be given to the
payee on or before January 31 of the
succeeding year.
C. Annual Information Return
►Withholding agent shall submit to the
commissioner an annual information return
containing :
1. the list of payees and income required
2. amount of taxes withheld from each
payees
3. other pertinent information required
Final Withholding Tax: AIR
►filed on or before January 31 of the
succeeding year
Creditable withholding tax: AIR
►not later than March 1 of the year following
the year for which the annual report is being
submitted
►Commissioner may grant WHA reasonable
extension of time to furnish and submit the
return required herein.
D. Income of Recipient
1. Income upon which any creditable tax
is required to be withheld at source
shall be included in the return of its
recipient.
2. the excess of the amount of tax so
withheld over the tax due on his
return shall be refunded
3. income tax collected at source is less
than the tax due on his return –
difference shall be paid
4. all taxes withheld
1. considered trust fund
2. maintained in separate account
3. not commingled with other funds
of WHA
E. Registration with Register of Deeds
►No registration of any document
transferring real property shall be
effected by the Register of Deeds unless
the commissioner or his duly authorize
representative has certified that the
transfer (1) has been reported and (2) tax
due has been paid
►Register of Deeds requires payment of
tax before transfer of property
Section 59 Tax on Profits Collectible from
Owner of other Persons
►Tax imposed under this title upon gains,
profits and income not falling under the
foregoing and not returned and paid by
virtue of the foregoing
shall be assessed by personal return
Intent and Purpose of this Title
1. All gains, profits and income of a
taxable class shall be charged and
assessed with the corresponding tax.
2. Said tax be paid by the owner of the
gains, profit or income or the person
having the receipt, custody, control or
disposal of the same
Determination of Ownership:
►determined as of the year for which a
return is required to be filed
CHAPTER X: ESTATES AND TRUSTS
Section 60: Imposition of Tax
1. Estate ► property of the decedent
created by an agreement, trust or by
last will and testament
2. Trust ►agreement, contract or last
will and testament
Status:
1. Estate: same status as decedent
2. Trust: same status as the grantor
Income taxpayer is the Estate:
►income of the estate pending partition
or no partition at all:
Three kinds of partition:
1. judicial
2. extra judicial partition
3. or no partition at all
During partition Estate earns income:
1. individual – income tax
2. corporation – corporate income
tax
3. estate (Taxpayer = TP)
a.Impose Income as if TP is individual
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b.Impose income as if TP is corporation ►does not apply if estate is subject to
c.Impose income as if estate itself income or corporate income tax
►depends whether there is a (1) judicial ►it applies if the estate pays itself during
(2)extra judicial partition or (3) no partition at the pendency of the judicial settlement
all
Basis: Sec 60 C
When there is a judicial settlement which is “during the period of administration or
final and executory but no partition: settlement of the estate.”
Two possibilities:
1.Creation of unregistered partnership Taxpayer is a Trust:
►Income of the Estate: corporate income tax Q; When liable to pay income tax?
A: If the trust is revocable (if revocable, Sec
2.Creation of Co-ownership 61 and 62 also apply)
►Income of the Estate: Income tax on
individual Parties:
-co-owner liable in their individual company 1.Grantor /creator /trustor
2.fiduciary / trustee
Ponce Case: 3.beneficiary / Les Qui trust
H: After finality heirs did not divide the
property, the applicable income tax is Q: Who is liable to pay tax:
corporate income tax because they A: If trust revocable:
contributed money to engage in real estate. ► obligation of the trustee
►liability of trust itself and not personal
SECTION 61 TAXABLE INCOME (Important)
“Taxable income of the estate or trust shall Liability of trustee:
be computed in the same manner and on the If trust irrevocable
same basis as ill the use of an individual.” ►obligation of the grantor
►personal liability of the grantor as an
Section 62: Applies during Pendency of individual
Extra Judicial Settlement
Personal Exemption (P20,000) TWO WAYS OF REPORTING INCOME:
Individual ► it will depend whether PURSUANT TO RR2 – (1949)
he/she is classified as single, head of 1. report only once
the family or married (building paid once)
Estate ►regardless 2. after the span of 25 years
(payment of building divided per year)
Special deductions:Income distributed to the
heirs ESTATE TAX:
►if you distribute nothing you cannot 1.Sec 60
claim this special deductions 2.Real Estate Tax
►if there is a distribution, the heir shall 3. Estate Tax
be liable to pay whether individual ►transfer tax impose on the Net Estate
capacity for the transfer of property to the heirs or
►if there is no distribution, heirs are not beneficiary whether real, personal,
liable to pay anything tangible or intangible

►Special deduction not apply if individual tax 3 KINDS OF TRANSFER TAX:

is paid by the Estate itself. 1.Estate Tax
2. Donor’s Tax
Payment: made by executor, administrator, 3. Sec 135 of LGU Transfer of Real
to creditor to preserve the estate Property

Sec. 61 and Sec 62 Q: We don’t have inheritance tax and donees

tax, why?

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A: 1973 Marcos issued P.D. 69
Explain: Sec 84, rate is max of 20% of net
before the rate is 60% plus additional
amount.
►resulted to many gimiks through tax
avoidance scheme, like creating a family
corporation (only taxable is the stockholders
which is exempt)
►Congress enacted RA 7449 decreased 60%
to 35% and then RA 8424 – 35% to 20%
Q: Now is it safe to create a family
corporation?
A: No more.
Q: Now: Iba na ang scheme – which is better
sale or donation?
A:
1.Sale of RP considered capital assets
►6% to 1.5% doc. Tax 7.5 % better
2.Sale of RP considered ordinary asset
►5% to 52% as per use may be
3.Donation if given to all compulsory heir
► relative lower than 20% which is 15%
► stranger: 30% so go with 20%
Q: Who are the taxpayers?
A: Sec 104 Estate and Donors
1.Estate
a. RC
b.NRC
c. RA
d. NRA
2. Donor’s Tax
a. RC
b.NRC
c. RA
d. NRA
e. DC
f. FC
►A corporation cannot die of a natural death.
Q: What is the reason for classifying the
taxpayers?
A:
1. NRA and Estate
2. NRA and FC Donors = property
outside Phil exempt
3. all, other than these 3 – taxable w in
and w/out
Q: Is Section 104 relevant to all taxpayers?
A: No, material only to NRA and FC
Section 104 speaks of intangible personal
property located in the Philippines.
1.Franchise which must be exercised in
the Philippines;
2.S.O.B. issued by a Domestic
corporation;
3.S.O.B. issued by foreign corporation at
least 85% of the business of which is
located in the Philippines. – do not
confuse with 42 (2nd par)
4.S.O.B. of foreign corporation which
acquired a business situs in Phil
5.S.R. in business, partnership or industry
established in the Phils
Q: NRA, German donates SOS of FG to
Filipina gf, is it subject to donor’s tax?
A: it depends (you must qualify)
1.Subject to donor’s tax if:
1.S.O.B. FG at least 85% of business
located in the Phil
2.S.O.B. FG which acquired a business
situs in Phil
2.Exempt
1.personal property outside of Phil; or
2.intangible personal property net taxable
if following requisites concern:
A decedent at the time of his death or the
donor at the time of donation was a citizen
and resident.
1.of a foreign country which at the time of
his death or donation did not impose a
transfer tax of any manner, in respect of
intangible personal property of citizens of
Philippines not residing in that foreign
country; or
2. the laws of the foreign country allows
a similar exemption from transfer or
death taxes of every character or
description in respect of intangible
personal property owned by citizens of
the Philippines not residing in that
foreign country.
Q: What if citizen of one country and resident
of another country will the exemption
apply?
A: No, law requires that he must be a citizen
and resident of the foreign country.
Campos Rueda Case:
F: NRA died – married to Moroccan man, so
she was a Moroccan resident.
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Donated SS in DC – administrator claims
exemption, ground: In Morocco,
intangible personal property of Filipinos
not residing therein is exempt from
transfer tax.
BIR contends: Morocco is not a country
but a colony of Spain.
H: claim granted – even if it is not a full
pledged state, or it’s a mere colony, what
matter is that the foreign law provides for
an exception.
SECTION 84 RATES OF ESTATE TAX
Q: What is the formula for Estate tax?
A: Gross Estate (Sec 85)
- Deductions (Sec 86)
--------------
Net Estate
x Rate
-------------
Taxable net income
- Tax credit
---------------------
Tax due
Gross estate (define) – Sec 104
►gross estate include real and personal
property, whether tangible or intangible,
or mixed, wherever situated
NRA: Decedent / Donor – property
situated outside of Philippines not
included on the gross estate
Section 85 Gross Estate (inclusion)
A.Decedent’s interest
►includes property (1) owned at the time of
death and (2) property not owned at the time
of death
Classic example: Usufruct
Q: if terminated by the death of usufructuary,
is it subject to estate tax?
A: Not subject to estate tax
Reason: Exempt Transmission under
Sec 87 (a)
►merger of the usufruct in the owner of
the naked title
Q: is there a conflict between Sec 88 a and
Sec 87 a? How do you reconcile?
A: No conflict
1.Section 87 a contemplates a situation
where the usufruct is terminated.
2.Section 88a contemplates a usufruct for
a fixed period. Ex contract of lease
Q: How do you determine the value of
usufruct?
A: Sec. 88 a provides to determine the value
of the right of usufruct, take into account
the probable life of the beneficiary.
Q: Why definition of gross estate is longer
than definition of gross gift?
A: transfer occurring after death. estate tax
absolute
Transfer during the life time
►Normally Donor’s tax
However there are exceptions:
1.transfer in contemplation of death (85B)
2.revocable transfer (85 C)
3.transfer for insufficient consideration
B. Transfer in contemplation of death
Roces case:
F: during lifetime, the following document
were instituted or executed simultaneously
1.will and 2. donation
The heirs insisted to pay Donor’s tax,
Posados the collector tried to collect
inheritance tax.
unique thing: Donees were also the heirs in
the last will and testament
Donees wanted to pay donor’s tax because
it is always lower than the estate tax except
when the donee is a stranger
H: this is a transfer in contemplation of death
Dizon Case:
F: Deed of Donation was executed
Dizon died several days thereafter
son claims Donor’s tax
H:Transfers in contemplation of death
Q: What are transfers deemed in
contemplation of death?
A: 1.Property was transferred during the
lifetime but the decedent:
a. retains possession or receive income
or fruits of property; or
b.retains the right to designate persons
who will possess the property or the
right to receive fruits or income
c.Revocable Transfers
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1.revocable transfers are included in the
gross estate
Reason: the decedent retains tremendous
power and control over the property
2.Irrevocable transfers are not included in
the gross estate: exempt
Reason: the decedent losses control over
the property
Notice Not Required because the person has
the control over the property
D. Property passing under general power of
appointment
► same with fidel commissary substitution
3 parties:
1.testator / decedent
2.1st heir
3.2nd heir
TAKE NOTE: To determine whether included
in Estate or not, know who has the choice to
designate the 2nd heir:
►if decedent instructs the 1st heir that he can
transfer the property to whomever he wants
included in gross estate
►1st heir choice – included in gross estate
E. Proceed of Life Insurance
1.Beneficiary is the estate
►included in gross estate whether
designation is revocable or not
2.Beneficiary is 3rd person
► revocable included
►irrevocable not included
F. Prior Interest
►important only due to the codification of
the tax code B,C,E, included whether before
or after the effectivity of the code
G. Transfer for insufficient consideration
Q: Similar provision in Sec 100 (Donor’s tax)
can you apply the two (2) provisions
simultaneously?
A: No, alternative application, one or the
other but not both.
The application will depend on the time of
transfer or motive:
1.If transferred because of impending
death
► estate tax
2.If transfer because of generosity
►Donor’s tax
Q: Parcel of land was sold for less than
adequate consideration (adequate) to
relative for P600,000 when FMV is 1
million pesos. Is this subject to transfer
tax? Is it subject to Donor’s tax?
A: No, Sec 100 provides the property should
be other than real property referred to in
Section 24 (D)
►Not subject to Donor’s tax, the
applicable tax is 6% FIT
Q: Will your answer be the same if SOS are
sold?
A: No, answer not the same, SOS not property
contemplated in Sec 24 D (1)
►in this case, the amount by which the
FMV of prop exceeds the value of the
consideration shall be deemed a gift and
included in the computation of the gross
gift: subject to Donor’s Tax
Q: What is the subject matter in 85 G?
A: paragraphs 85 B, 85 C, 85 D
Sale in good faith as a defense:
1.under Section 100 is not a defense
2. under Section 85 G, it is a defense
H. Capital of Surviving Spouse
►correlate with Sec 86 C
►both speak of legally married individual
►pertains to the separate property of
spouse who survived
►capital used in its generic sense
►surviving spouse may be man or woman
Section 86 (c)
►to determine the limitations of
1. Funeral Expense
2. Whether written notice is required
3. to determine whether gross value is
at least P200,000 (Sec 90)
4.to determine if gross value is at least
42 M
Q: Who are the taxpayers under 86 A?
A: 1.RC
2.NRC
3.RA
Q: Who is the taxpayer under 86 B?
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A: NRA
Q: Why do we need to know this?
A: NRA cannot avail of the following
deductions:
1.family income
2.standard deduction
3.hospitalization
4.retirement pay under RA 4917
A. Deductions Allowed to the Estate of a
Citizen or Resident
1.ELIT (expenses, losses, indebtedness and
taxes)
a) 1.Actual Funeral Expenses; or
2.amount equal to 5% of gross estate
►apply whichever is lower
Limitation:
a)amount equal to 5% of gross estate
should not exceed P200,000 (basis is
the gross value)
b) Judicial Expenses
►no limitation
Pajonar vs Commissioner
I: Whether or not extra-judicial expenses
may be allowed as a deduction
H: This law has been copied from U.S. In US,
expenses to be claimed as a deduction
both judicial and extra judicial expenses.
Claims against the estate
►Estate is the debtor
Requirements:
1.at the time the indebtedness was
incurred the debt instrument was duly
notarized;
2.loan contracted within 3 days before
death;
3.the administrator or executor shall
submit a statement showing the
disposition of the proceeds of the loan
Claims of the deceased against insolvent
person
►Estate is the creditor
Requirement:
►the only requirement is that the (only)
amount of loan is included in the gross
estate
►notarization and certification not required
Unpaid Mortgage, taxes and losses
Q: In unpaid mortgage who is the
mortgagor?
►decedent mortgagor
1. Unpaid mortgage
1.value of the decedent’s interest in the
property is undiminished by such
mortgage;
2.included in the value of the gross
estate;
Illustration:
1 million FMV but mortgage is only
600,000 you include 1 million
2.Estate tax
3.Losses
Requirements:
1.losses incurred during the settlement of
the estate;
2.arising from fire, storms, shipwreck or
other casualties, or from robbery, theft or
unbezzlement
3.losses not compensated by insurance
4.losses not been claimed as a deduction
for income as purpose
5. losses incurred not better than the last
day for the payment of the estate tax
Property Previously Taxed
►Vanishing Deduction Return
Requirement:
1.person acquires the property by virtue of
donation or inheritance
Q: What if acquired through purchase?
A: Not apply, the property must be acquired
by inheritance or donation
2.Estate tax or Donor’s tax already paid by
the Estate of the Decedent (1st par)
3.Any person who died within five (5) years
prior to the death of the decedent
Q: What are the amounts?
A: Prior Decedent died within:
1.5years – 20%
2.4years – 40%
3.3 years -60%
4. 2years – 80%
5. 1 year -100%
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Q: Suppose the person died within 1 year and
it was inherited by son, suppose the son
also died within 1 year or may be 2 years,
should we apply the vanishing
deductions?
A: No more (last par Sec 86 A2)
Transfer for Public Use
►amount of all bequest, legacies, devises
or transfers
Recipient:government or any political
subdivision
►exclusively for public purpose
Take Note: 30% of which not used for
administrative purpose is not a For NRA: No deduction allowed unless
requirement
FAMILY HOME
►amount equivalent to the current FMV of
the Family Home of decedent.
Limit: FMV should not exceeds 1 million
otherwise the excess will be subject to
estate tax.
Requirements: (RR 2-2003)
1.Person is legally married
GR: if single not allowed to claim
Except: if head of the family
2.Family Home actual residence of the
decedent
3.Certification of Barangay Captain of
locality
STANDARD DEDUCTIONS
►automatic: RR 2-2003 no requirement
provided the decedent is the one in 86 (A)
(RC, NRC, RA)
MEDICAL EXPENSES
Requirements:
1.amount not exceeding P500,000
2.medical expenses incurred by the
decedent within one (1) year prior to his
death.
►must be duly substantiated with receipt
RETIREMENT PAY UNDER RA 4917
(RETIREMENT PAY WITH PRIVATE PLAN)
Requirements:
1.plan duly approved by the BIR
2.person at least 50 years old
3. 10 years in service
4. avail only once
TAKE NOTE: This is a deduction in the nature
of exemption, all other retirement plan is
excluded
B. Deductions Allowed to Non resident
Estates
1.ELIT
2.Property Previously taxed
3.Transfers for public use
C. Shares in the Conjugal Property
D. Miscellaneous Provisions
include in the return the value at the time
of his death that part of his gross estate
not situated in the Philippines. For proper
deduction must include E. below
E. Tax Credit for Estate Tax Paid to
Foreign Country
SECTION 87 EXEMPTION OF CERTAIN
ACQUISITION AND TRANSMISSIONS
1. Merger of usufruct in the owner of the
naked title;
2. transmission or delivery of the
inheritance or legacy by the fiduciary heir
or legatee to the fideicommissary;
3. transmission from the first heir, legatee
or legacy donee in favor of another
beneficiary, in accordance with the desire
of the predecessor;
4. All bequest, devises, legacies or transfers
to (1) social welfare (2) cultural and (3)
charitable institution
Requirements:
1.no part of the net income insures to the
benefit of any individual;
2.not more than 30% of donation (BDL)
shall be used by such institutions for
administration purposes.
SECTION 88 DETERMINATION OF THE
VALUE OF THE ESTATE
A.Usufruct
1.Determine value of right of usufruct:
►consider the probable life of the
beneficiary based on the latest Basic
Standard Mortality Table
B.Properties
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►fair market value of the Estate at the time
of death
1.FMV determined by Commissioner
2.FMV schedule of values fixed by the
Provincial or City Assessors
SECTION 89 NOTICE OF DEATH TO BE
FILED
Q: What is the Basis?
A: the gross estate of the person
Q:When is the notice required to be filed?
A: 1.all cases of transfer subject to tax
2.although exempt, when gross values of
the estate exceeds P200,000
Q: When filed?
A: within two (2) months
1. after decedent’s death
2.same period after qualifying as executor
or administrator
►give a written notice
Q: If the Net Estate is at least P16,000 will
you in form the commissioner?
A: yes, the gross is at least 3-4 million
SECTION 90 ESTATES TAX RETURNS
Q: When required to file return?
A: 1.all cases of transfer subject to tax
2.even though exempt, gross value
of the estate exceeds P200,000
3.regardless of gross value of the
estate, when the same consists of
registered or registrable prop such as:
a.real property
b.motor vehicle
c. shares of stocks
d. other similar property where
clearance from BIR necessary for
transfer of ownership in the name of
the transferee
►return must set forth the following:
1.value of the gross estate at time of death
2.deductions allowed
3.information necessary to establish correct
taxes
Q: What if Estate is exempt, is it required to
file a return?
A: General Rule: No
Exception:
a. gross value exceeds P200,000
b.estate contains registrable property
Q: if the estate or gross estate exceeds 2
million, what is the requirement?
A: return must be duly certified by a CPA
B. Time of Filing
►filed within 6 months from decedent’s
death
►within 30 days for filing the return
►within 30 days after promulgation of such
order
1.certified copy of the schedule of partition
and
2.order of court approving the same
C. Extension of Time
Time: 30 days
Grounds: meritorious cases
Who grants: Commissioner
D. Place of filing:
►return shall be filed with:
1.authorized agent bank
2.revenue district officer
3. collection officer
4. duly authorized treasurer
►city or municipality in which decedent
was domiciled at the time of his death
Q: What if non resident?
A: NR with no legal residence here, with the
office of the commissioner.
Q: Let us say there are 3 compulsory heirs,
namely A, B, and C. A renounces his
inheritance coming from the parents, but A
renounces his inheritance in favor of his 2
siblings, brother and sister B and C. Is this
subject to donor’s tax?
A: NO. It is exempt.
Q: But if in the given example, A said “I am
renouncing my inheritance, but I am giving it
to my sister B”, is this subject to donor’s tax?
A: YES. Renunciation is to the disadvantage
of the brother.
TAXATION UNDER THE LOCAL GOVERNMENT
CODE:
1. Local Tax
2. Real Property Tax
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LOCAL TAXATION (§186, 187, then go to
§151, 128 down)
Q: Mayor Binay of Makati ordered the
collection of elevator tax (for elevator in the
city hall). Is the order of Mayor Binay legally
tenable?
A: NO. There should always be a tax
ordinance after conducting a public hearing.
(§186)
tax ordinance
Q: Can BIR collect the tax even in the
absence of a revenue regulation?
A: YES.
Q: Can a province, city, municipality or
barangay collect the tax if there is no tax
ordinance?
A: NO.
Q: Why is it that there should be a tax
ordinance as required by §186?
A: The rationale is not mentioned in §186,
but if you read the other provisions of the
LGC, you will come to set of conclusions of
the reason why there must be a tax
ordinance.
» In most of these provisions, it always say:
one-half if the town or municipality shall
collect a tax of not exceeding 1% of the gross
receipt.
TAKE NOTE: There is no exact amount;
hence, it is the tax ordinance which will fix
the exact amount.
public hearing
In Congress, the requirement is not
absolute (by discretion only). Under local
taxation (last phrase of §186), the
requirement is ABSOLUTE.
REYES vs. SECRETARY (320 SCRA 486)
F: In the municipality of San Juan (just
beside Mandaluyong) there was a tax
ordinance passed. Reyes, a resident,
claims that there was no public hearing
conducted, he maintains that under §186
last phrase, there should always be a
public hearing.
H: The SC said: “yes, that requirement is an
absolute one, but since the petitioner
failed to produce evidence to support his
allegation, if there is no proof presented
other than his own statement, we hereby
rule that the ordinance was passed in
accordance to the procedure mandated
by law”. While it is true that a public
hearing is an absolute requirement, he
who alleges, must prove the same.
Q: If you don’t agree with the validity or the
constitutionality of the tax ordinance, what
will be your remedy?
A: Within 30 days from the effectivity of the
ordinance, the taxpayer should file an appeal
with the office of the Secretary of the DOJ
(§187)
REYES vs. SECRETARY (320 SCRA 486)
F: Reyes asserted the validity and
constitutionality of the tax ordinance only
after the lapse of thirty (30) days (perhaps
his lawyer was thinking that an ordinary
statute may be contested anytime with
the RTC, CA or SC).
H: With regard to a tax ordinance, w have a
specific rule, failure to assail the validity
with the specific period of time, is fatal to
the taxpayer. Since it was filed beyond
the 30day period, we do not disturb the
validity of the ordinance.
Q: Within what period should the Sec. of
Justice decide?
A: Within 60 days from the time the appeal
was filed. Failure to decide within this time,
the taxpayer has the remedy to file an action
with the regular courts.
» If the decision was made within the 60
day period, and receives the decision, his
remedy is to file an appeal within 30days
form the receipt of the decision to court of
competent jurisdiction → RTC.
» Beginning April 23, 2004, from the ruling
of the RTC, pursuant to RA 9282 (the law
uplifting the standards of the CTA), the
ruling of RTC on local tax cases, is
appealable to the CTA en banc.
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 for the barangay or barrio, we have
TWO APPEALS DECIDED BY THE CTA EN BANC: the barangay council.
1. decisions of RTC involving local tax
cases C. Common limitations on the taxing
2. decision of the Central Board of power of the LGU’s (§133)
Assessment Appeals.
» Under the old law this was §5 of the Local
» From CTA en banc, the appeal must be Tax Code.
file with the SC within 15days.
Q: Why common?
» Go to §151: A: Because the limitations or prohibitions
The city could impose the tax already apply to all LGUs, the provinces, cities,
imposed by the province of by the municipalities and barangays.
municipality.
Two Common Crimes (under §133)
Q: What are the numerous taxes imposable 1. absolute prohibition
by the province which a city now allowed to 2. relative prohibition
impose?
A: Those enumerated in §135 to §141 of the It shall be unlawful for the LGUs to collect:
LGC I. Income Tax EXCEPT when levied on banks
and other financing institutions (§133(A))
Reasons why a municipality wanted to be » the term “other financing institution
converted into a city: shall include money changer, lending
1. §151 investor, pawnshop (§131(E))
2. §233 (real estate tax) » rate of tax: does not mention rate of
» In addition, the law says that the city tax, so long as it is “fair, just and
could increase the rate of the tax by not more reasonable”
than 50% of the maximum EXCEPT those » It cannot be “prohibited taxation,
enumerated in §139: because the element of “imposed by the
a) professional tax same taxing power” is not present. One is
b) amusement tax imposed by the national government and
the other is by the LGU.
A. General Principles (§128-130) II. Documentary Stamp Tax (§133(B))
» absolute prohibition
► reiteration of the constitutional tax III. Estate tax, inheritance, donations inter
provisions vivos, donations mortis causa EXCEPT in
§135 (§133(C))
► notice that the constitutional limitations » transfer tax on the transfer of realty
on taxation do not only apply to the national to be imposed by provinces and cities
government but also to local government (§135)
units. NOTE: this is not a real estate tax,
this is a local tax.
B. Definitions (§132) IV. Custom duties, charges or fees for the
registration of vessels or ships, wharfages
fees and wharage dues EXCEPT if the wharf
Local Taxing Authority (§132) had been established, maintained and
 for a province, it is the provincial operated by the locality (§133(D))
board or the provincial council » wharfage due – is a custom fee
(sangguniang panlalawigan) imposed on the weight of the cargoes.
 for a city, we have the city council » wharf – a pier
(sangguniang panlusod) » special levy on public works (§240)
 for the municipality, we have the » allows provinces cities and
municipal council (sangguniang municipalities to impose a special real
pangbayan)

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estate tax known as “special levy or
public works”
» let us say the municipality established
a pier for a minimal value of P10M; out
of P10M, under §240, 60% of this may be
recovered; the other 40% may be
recovered by warfage due.
v. Tax, fee or charge for goods or
commodities coming out or passing through
the territorial jurisdiction even if in the guise
of a toll or a fee (§133(E))
» an absolute prohibition
» commodities marketed in a public
market, let’s say in the city of Pasig,
where the commodities came from
Laguna then to Tanay, Cainta, Taytay; just
imagine if each of the towns will impse
1peso for every head of a chicken or
50cents for every bundle of vegetable.
PALMA DEV’T CORP v. MALANGAS
ZAMBOANGA DEL SUR (113 SCRA 572)
F: Municipal council passed a tax ordinance
entitled “police surveillance fee” which
provide that ALL motor vehicle passing
through a particular street in the town
proper of Malangas which will lead to the
pier or wharf will pay a certain sum of
money whether it is camote, copra,
palay,or rice. One of the owners of the
motor vehicle is Palma Dev’t Corp.
carrying copra, banana and coconut to be
loaded in a ship docked at pier of
Malangas. The lawyer of petitioner
assailed the validity of the ordinance
stating that it is a clear violation of
§133(E).
H: It is not the title of the ordinance which is
controlling but it is the essence of the
substance of the tax ordinance. The tax
ordinance clearly violated §133(E),
therefore, the SC had no option but to
declare the tax ordinance null and void
for being in violation of the law.
VI. Taxes, fees or charges on agricultural
and aquatic products when sold by marginal
farmers or fishermen (§133(F))
Q: Don Antonio Florendo, a person
coming from Pampanga who settled in
Davao City, employed thousands of
workers in the different banana
plantation. Can the LGU impose tax on
the agricultural product which is a
banana?
A: YES. The LGU can impose because
Don Antonio is not a marginal farmer. It
is only prohibited if it is sold by a
marginal farmer.
» Marginal Farmer – a farmer or a
fisherman for subsistence only, whose
immediate members are the immediate
members of the family (§131(P))
VII. Tax, fee or charge on pioneer and non-
pioneer enterprise duly registered with the
board of investments for a period of 6yrs and
4yrs respectively (133(G))
» relative prohibition because after the
period, the LGU concerned may now
impose the tax.
VIII. Excise tax on articles and tax, fees and
charges on petroleum products (§133(G))
» relative prohibition since under
§143(H), it says there that taxes which
are prohibited such as excise tax,
percentage tax and value added tax
nonetheless, the LGU may impose a tax
not exceeding 2% of the gross receipt (for
cities 3%).
» My former student an assistant in the
city legal attorney in a city in Metro
Manila, received a summon from the RTC
(on complaint of a supermarket in Metro
Manila) questioning the validity of the tax
ordinance under §143(H) since the rate
imposed was 3%
I said, “ineng, una file kayo ng motion
to dismiss. Nak ng puta, absent ka na
naman ata eh, you invoke §151 stating
that a city can impose a tax higher than
the rate provided for by law not more
than 50% of the maximum (50% of the
maximum of 2% is 1, therefore, 2+1 is
3%)”
BULACAN v. CA (299 SCRA 442)
*first case decide by the SC which interpreted
both the LGC and the NIRC.
F: The then governor, Obet Panganiban
together with his provincial council
passed an ordinance imposing tax on
quarrying under the provision of §138 of
the LGC. The problem is that the
ordinance applies to ALL entities
quarrying in the province. One of the
taxpayers, Republic Cement obliged to
pay the tax, argued that under §138 of
the LGC, the tax on quarrying on which
the province may be allowed shall only be
with regard to quarrying private land, and
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not only that but under §133(H), there is
a prohibition to impose excise tax and
tax on quarrying under the IRC is an
excise tax.
H: The tax on quarrying allowed to
provincial governments shall only be with
regard to lands which are public lands,
and since this is a private tax on
quarrying refers to a lot without any
distinction. Hence, if the LGC made a
qualification as to the kind of land (where
it says it should be public land), by
implication, it should refer to private land
under §151 (although the law did not
distinguish); and since it is a tax by the
national government, it should be
collected by the BIR (not the LGU), and
also the SC agreed that it is an excise tax
where LGU’s are prohibited from
collecting; thus, the SC declared the tax
ordinance null and void for being contrary
to law.
» Sir, why is it a problem when the law
is clear that under §138, it shall only
apply to public land?
Perhaps the provincial council thought
that the subject matter of the tax
ordinance may be a subject matter
provided in any book including the IRC,
or worse, that it may impose a tax on a
subject matter not mentioned in any
book.
Moral lesson: although a tax
ordinance may be passed even if the
subject matter is not provided for in any
law, it has to comply with the limitations.
PETRON v. PENILLA (198 SCRA 86)
* The facts here arose under the old law
under §5 (now §133) of the local tax code
(PD 231)
F: Petron has a factory/plant in Penilla
where the raw materials petroleum
products are being converted into refined
petroleum products. The municipal
council of Penilla imposed a tax by way of
a tax ordinance saying that they are
invoking the old §19 (now §143(A))
stating that municipalities are authorized
to impose tax of the manufacture of any
commodity, hence, since it is
manufacture of a petroleum product, the
LGU must e authorized. However, Petron
objected since under §5 (now §133(H)),
the prohibition includes the prohibition to
impose excise tax and not only that,
under this par., the tax on petroleum
products is an excise tax. Under this par.,
the law is clear it does not only prohibit
the imposition of tax, fee or charge over
petroleum products.
H: The controlling provision here the old
§19 (now §143(A)) that LGUs are
authorized to impose the business tax for
the manufacturing over any kind of
commodity by and petroleum product is
“any kind of commodity”.
Q: What do you think?
A: I don’t agree with this ruling because
between §133(H) and §143(A), it is the
former which is more specific.
IX. Value added tax and percentage (§133(I)
EXCEPT §143(H)
» Relative prohibition.
X. Tax, fee or charge on common carriers
whether by land, water or air (§133(J))
FIRST HOLDING CO. v.BATANGAS CITY (300
SCRA 661)
* 2nd SC ruling discussing both the IRC and
LGC.
F: This revealed to the public the existence
of 2 very big oil pipelines coming form
Batangas City with a distance of more
than 100km, one going to Pandacan Oil
Depot and the other one is going to Brgy.
Bicutan, Taguig. The Batangas City
council deemed it necessary to impose a
tax on the gross receipt of the 1st holding
company for the operation of the oil
pipeline, but the operator argued that the
oil pipeline is not a common carrier.
H: The SC reasoned out like in the case of
Pajunar v. Comm (328SCRA666), saying
that “we have copied the code of carrier
law form the US where the definition of a
common carrier is one habitually carrying
not only individuals or passengers but
also goods or commodities, and since the
oil pipelines is habitually carrying
petroleum products which is a
commodity, we rule this as a common
carrier which is under §133(J), LGU is
prohibited from imposing tax on common
carriers, and not only that but under
§170 of the LGC, the law is very explicit,
that ALL LGUs are prohibited to impose
percentage tax on common carriers”. With
that, the tax ordinance passed was
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declared null and void for being contrary
to law.
XI. Premiums on re-insurance (§133(K))
» absolute prohibition.
XII. Tax, fee or charge on registration of
motor vehicles and for the issuance of license
and permit for driving thereof EXCEPT
tricycles. (§133(L))
BATUAN CITY v. LTO (322 SCRA 805)
I: Which function was delegated to the LGU?
The LTO registering motor vehicles “or”
the LTFRB granting franchise and
regulation of common carriers?
H: Under §133(L), the function of the LTO is
prohibited, an therefore what may be
delegated to the LGU is the function of
LTFRB.
XIII. Tax, fee or charge on exportation of
products and is actually exported EXCEPT
under §143(C) where the LGU is authorized to
impose business tax on exportation (§133(M))
XIV. Tax, fee or charge on cooperatives
duly registered under the cooperative cod (RA
6938) and Business Kalakalan (RA 6810)
(§133(N))
» A cooperative is exempt from local
tax, provided it is duly registered with the
cooperative code and the cooperative
development authority “or” Business
Kalakalan (not kalkalan)
XV. Tax, fee or charge over the national
government, political subdivisions and
agencies and instrumentalities of the
government (§133(O))
» Relative prohibition since it admits of
an exception under §154 of the LGC
where it says that a LGU may be
authorized to impose a fee or charge for
the operation of a public utility provided
it is owned, maintained and operated by
such LGU.
NAIA v. PARANAQUE (JULY 2006)
H: SC ruled in favor of the airport. Paranaque
being a LGU can’t impose tax on a
government instrumentality. Airport
owned by the government is not an
agency, it being an instrumentality.
Q: May the government tax itself it the
taxing power is the local government?
A: NO. The local government cannot
impose tax on the national government,
and with more reason that it cannot
impose a tax with equal LGU.
D. Taxes that can either be imposed by
Provinces or Cities
I. tax on transfer of realty (§135)
► Note that this is not a real estate tax, this
is a local tax for the simple reason that it is
not provide for under the topic of real estate
tax (§198-280)
► Law says “it should not exceed ½ of 1% of
the consideration” (NOTE: do not use zonal
value since this is used only under the IRC,
not the LGC.
Q: Since all the provinces and cities must
follow the limitation of the rate (not
exceeding ½ of 1%), is it violative of the equal
protection clause?
A: NO, because the sangguninan had to
determine the actual rate considering the
status of the province.
Q: Why is that Makati fix the rate of 75% or
3/4 of 1%?
A: Because cities are authorized to increase
the rate of 50% of the maximum, that is 50%
of ½ is 25% (50+25 is 75%).
NOTE: Do not apply transfer of realty
pursuant to RA 6657 (CARP) → this is the
Comprehensive Agrarian Reform Program →
this is exempt.
II. tax on printing an publication (§136)
► Normally, a province cannot impose this
because the tax on business can only be
imposed by a city or municipality EXCEPT this
one, on printing and publication of
magazines and periodicals.
III. franchise tax (§137)
► The old national franchise tax under the
old tax code was already abolished.
► We still have franchise tax other than this
one, known as national franchise tax →
provided for in the republic act granting
franchise.
Two kinds of Franchise Tax:
1. local franchise tax (under LGC §137)
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2. national franchise tax (provided for in
the statute or republic act authorizing
the franchise)
Q: May LGUs impose local franchise tax?
A: We have to consider here many supreme
court decisions and also §193 of the LGC.
Under §193, it says there “unless
especially provided for in this code,
exemptions granted to natural juridical
persons are hereby withdrawn (abolished)
EXCEPT:
1. local water districts
2. cooperatives registered under the
cooperative code (RA 6938)
3. non-profit and non-stock educational
institution.
BASCO v. PAGCOR (197 SCRA 52)
F: The city council passed a tax ordinance
imposing tax on PAGCOR, an agency of
the government. PAGCOR objected saying
that the local city is prohibited under the
old local authority act to impose tax on
an agency of the government.
H: The SC declared null and void the tax
ordinance saying Manila cannot do that.
CEBU v. MACTAN (261 SCRA 667)
F: Cebu government was trying to collect
real estate tax from the Mactan airport
(note: real property tax is a territorial tax,
meaning it should only be collected
within its territorial jurisdiction). Lawyers
of Mactan airport argued that under
§13(O), Cebu, a LGU, cannot impose tax
on an agency of the government, and
they also invoked the ruling in BASCO.
H: The lawyer of Mactan airport is devoid of
any merit at all, it is 100% erroneous
since the real estate tax is not a local tax,
hence, why invoke a SC ruling and codal
provision which can only be applied to
local tax. Therefore, Mactan airport
should pay Real Property Tax.
► Before the codification in 1991 (to take
effect January 1, 1992), local taxation was
embodied in a separate book known as Local
Tax Code (PD 231) while real property tax
was provided for in a separate book known
as Real Property Tax Code (PD 464)
LRT v. CITY OF MANILA (342 SCRA 692)
F: The Manila city government tried to
collect real property tax but the
management of the LRT said “no you
cannot do that to us since it is exclusively
for public use”.
H: NO, you are not exclusively for public use
since every time a person wants to use
the LRT he has to pay.
Q: Why not use the defense that it is owned
by the government?
A: Because in real estate tax, the defense
that it is owned by the government is not a
defense.
The LGC in §199(B) and in §217, both
provisions says that the basis for the
imposition of real estate tax is the ACTUAL
USE of anybody who is using that (maybe in
the concept of usufructuary or in the concept
of a lessee, or in the concept of an owner);
the basis is not ownership.
► in §134, the taxes here must not only be
imposed by provinces, it may also be
imposed by cities in line with §151 → those
enumerated in §135 to 141.
CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS
OCCIDENTAL (181 SCRA 38)
* This was the prevailing rule for more than
10years from 1988
H: In the franchise or the republic act, there
are only two (2) kinds of franchise, one is
a franchise which provide for a condition
that this tax (referring to the franchise
tax) shall be in lieu of all other taxes, and
the other franchise is the one which do
not provide for such provision; the
province or the city can impose local
franchise tax if the franchise belong to
the second example.
REYES v. SAN PABLO CITY (305 SCRA 353)
* Here the SC uniformly ruled
H: A provision on exemption under §193
don’t only refer to exemptions provided
for by different statutes, but it includes
those which claim exemptions by virtue
of the case of Cagayan de Oro (because
SC decisions are also laws).
PLDT v. DAVAO (363 SCRA 750)
F: The franchise holders of Smart and Globe
are claiming exemptions from the local
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franchise tax because they are saying that
they are holding a franchise which says
that it is a franchise enacted by the house
of Congress in 1995 which carries with it
an exemption form local franchise tax.
H: By the very explicit provision of §193, the
removal of exemptions granted by
different statutes and also by SC
decisions applies only to statutes and
decided by the SC on or before Jan. 1,
1992, because §193 says “upon
effectivity of this law”. For exemptions
covered by §193 therefore, Smart and
Globe are authorized to claim exemptions
because the statue (RA 7082) was enacted
on 1995.
IV. tax on sand, gravel and other quarry
resources (§138)
► We are through with that in the case of
Bulacan
V. professional tax (§139)
► this must be correlated with the tax under
§147.
► NOTE that this is an exemption to the rule
that a city may increase the rate of the tax →
under §151 of the LGC, the increase is not
allowed.
► both §139 and §147 are taxes imposed
on persons exercising professional calling.
► under the IRC, there is also amusement
tax under §125.
PBA v. QUEZON CITY (137 SCRA 358)
F: The city government enacted a tax
ordinance trying to collect amusement
tax including amusement tax on the PBA
(in Araneta, Cubao); but PBA and “no, we
are already paying amusement tax to the
national government through the BIR
because of §125 of the IRC”
H: QC government can no longer collect on
the ground that it is already being
collected by the national government and
secondly, in the enumerations of
amusement under §140, you will never
see professional basketball. Most of all, it
is the intention of the author that it is
only the national government.
*nak ng putang katangahan yan.. the local
tax code PD 231 was enacted in 1974 when
we don’t have any professional basketball..
since professional basketball was born May
1975.
* ano ba dapt tama diyan? → both the
national government and the QC government
can collect. There is no violation of the
prohibited double taxation, because the
taxing powers are different, and not only that
§140 speaks of amusement tax on admission
fee but under §125, it is abut gross receipts.
VII. delivery van (§141)

Section 139 Section 147 Q: What if not a delivery van, but “sako”
are to be imposed are to be imposed lang?
by provinces and by municipalities
cities and cities
are applicable to are applicable to
workers who must persons who are A: The applicable tax is under §143(G)
pass a government working but are (peddler’s tax, one imposed by municipalities
examination (e.g. not required to and cities.
engineers, take government If may dalang sasakyan, yari siya ng
physicians, etc) examinations province sa tax.
there is a It does not provide
maximum (P300) for any amount, NOTE: §135-141, these are taxes that can be
NOTE: it is not the only imposed by PROVINCES and CITIES.
always 300, since requirement is that §143-150 are taxes to be imposed by
the exact amt it must be MUNICIPALITIES, which can also be imposed
must be fixed by reasonable by CITIES.
the ordinance.
E. Taxes that can either be imposed by
VI. amusement tax (§140) Municipalities or Cities

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I. Business Tax (§143(A-H))
a. manufacturing, repacking,
processing, including the
manufacturer of permitted liquor and
also its dealer
b. wholesaling
c. exportation
d. retailing
e. contractor’s tax
f. tax on banking institution and
financing institution
g. peddler’s tax
h. the exemption under §133(i)
Q: If you have two branches, how many
business taxes do you have to pay?
A: You pay only one business tax (§146)
ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA
607)
F: Ilo-ilo Bottlers was already paying a
business tax on manufacturing under
§143(A) to the city government by virtue
of a tax ordinance. Later on, they are
obliged to pay by virtue of another tax
ordinance imposing business tax on
wholesaling. Naturally, Ilo-ilo Bottlers
argued, “how could it be, if you
manufacture, it necessary follows that
you sell the commodity so, with the
payment of the business tax on
manufacturing, it carries with it the
business of wholesaling”.
H: NO, you have to determine the marketing
system of the company. If wholesaling is
also being done in the place of
manufacture, the business tax on
wholesaling should no longer be paid it
should only be the business tax on
manufacturing. But if the marketing
system of the company provides that
wholesaling shall be done in a separate
place (maybe several kilometers away),
the manufacturer must still pay the
business tax on wholesale because now it
could be argued that they have the
separate business of wholesaling.
Q: On the business of retailing, should the
business tax of retailing be imposed by the
city or by the municipality “OR” by the
barangay in the city or the barrio in the
municipality?
A: §143(D) must be correlated with §152,
the tax to be imposed by the barangay.
It depends:
a. city
» if the gross receipt of the retailer
exceeds P50T in a minimum of
one year, it is the right and
privilege of a city to impose the
business tax on retailing.
b. barangay
» if the gross receipt of the retailer
did not exceed P50T, it is the
barangay council where the
business of retailing is located.
c. municipality
» if the gross receipt of the retailer
did not exceed P30T within a
period of one year.
d. barrio
» if the gross receipt of the retailer
did not exceed P30T within a
period of one year.
NOTE: These distinctions do not apply in
wholesaling. These are only for retailing.
► Paragraph H: for the imposition of
excise tax, percentage tax and value added
tax, the municipality may impose a tax not
exceeding 2% of the gross receipt (with
regard to a city, it may go as far as 3%)
II. Municipalities in Metro Manila who can
increase their rate (§144)
► Right now there are only two
municipalities:
1. San Juan
2. Pateros
III. Professional Tax (§147)
► we are through with that
IV. Fees for sealing and licensing of weights
and measures (§148)
V. Fishery rentals, fees and charges (§149)
F. Situs of Tax (§150)
► The tax referred to in here is the business
tax on wholesaling and retailing.
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Q: RFM is manufacturing commodities, one
of them is Swift hotdogs, this is being sold
not only in Mandaluyong, Metro Manila, but
also to the inter country from Batanes to
Tawi-tawi. Where should the business tax of
wholesaling or the business tax of retailing
be paid? Should it be in the principal office
(Mandaluyong) “or” the place where the
commodities are sold?
A: It will be paid in the place where it had
been sold PROVIDED there is a branch office
or a sales outlet (§150(A)).
► If it so happens that the company has a
factory different from the place where the
principal office is located → 30% should be
pain in the principal office and 70% in the
municipality or city where the branch is
located.
PHIL MATCHES v. CEBU (81 SCRA 99)
F: Phil Matches were produced in Nagtahan,
Manila. In Cebu city, there was a
warehouse where the matches were
stored. Many of the customers, by way of
wholesale in the warehouse in Cebu City,
they came from different towns of the
Visayan Region. May the business tax
ordinance of Cebu be imposed on those
transactions even if the buyers did not
come from the territorial jurisdiction of
Cebu?
H: Since in this case the contract booked and
paid, meaning, it was negotiated
perfected and consummated in the
warehouse where it was located in Cebu
City, the Cebu City government has the
right to collect business tax.
Q: What if there is an agreement that
commodities would be delivered and that the
buyer would be waiting in some other town,
is the answer still the same?
A: YES, the answer is still the same because
delivery to the carrier is delivery to the buyer
where delivery has been termed within the
territorial jurisdiction of Cebu.
SHELL v. CEBUCOT, CAMARINES SUR (105
PHIL 1063)
F: The petroleum products were purchased
at the motor vehicle traversing the
neighboring towns of Cebucot like Bason,
Dimalaon, all towns in Camarines Norte.
The contract of sale was negotiated and
perfected in different municipalities
where the motor vehicle of Shell was
traveling.
H: Although the oil depot was located in
Cebucot, the said municipality cannot
impose tax on that because the contract
of sale was negotiated and perfected in
the different nearby towns of Camarines.
Q: Is there a conflict with the case of Shell
and Phil Matches?
A: NONE. As a matter of fact, these two
decisions complement each other.
G. Taxing Powers of the Barangay (§152)
► Only a minimal sum (fair and reasonable)
Power to impose tax:
1. On commercial breeding of fighting
cocks, cockfights and cockpits
» must be for commercial purposes
2. On places of recreation which charge
administration fee
3. On billboards, signboards, neon signs
and outdoor advertisements
» especially for the barrios and
barangays along the highway
4. For barangay clearance
» if you want to engage in the business
of retailing or wholesaling → if
barangay captain will not approve that
→ within 7days go to the municipal
hall or city hall for approval
5. For the use of barangay property
» for instance the barangay has a plaza.
H. Common Revenue Raising Powers
(§153-155)
Q: Why common?
A: All the LGU could impose the same. But it
does not follow that all the provinces, cities,
municipalities could impose the same. Only
the LGU which operate, establish, maintain
the entity
If established by the province, it should
only be the province.
These are:
1. service fee and charges
» for services rendered
2. public utility charges
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» provided owned, operate and
maintained by them
3. toll fees and charges
» tax or toll for the use of a bridge or a
street
► Padua filed a civil action in the MakatI
RTC trying to stop the government form
collecting a toll free in the South Express
including the North expressway alleging that
he is affected as a taxpayer because he is
from Paranaque. He argued that if you use
the property of the government like a street
or a public plaza, you do not pay. He made
the analogy, that if you go to Luneta, you do
not pay the city government of Manila.
The Makati RTC, the CA and SC had a
uniform ruling that the operator should be
prohibited from collecting further toll fess
because if the operator had already recovered
his investment and earned an income
already, he should be stopped. As argue by
the SC, it copied the argument of the lawyer
(re: Luneta).
» NOTE: that Res Judicata do not apply
here.
When the ruling became final an
executory in 1993, the North and South
Express were totally dismantled and totally
destroyed by the DPWH to give way to the
final and executory ruling of the Court, that It
should no longer be collected.
After several months, the government
announced in the radio that the party in the
case of Padua, mutually agreed that the
collection shall be resumed in order to have
money for the maintenance and repair of the
highway.
Exceptions to §155 (collection of toll fees)
1. members of AFP
2. members of the PMP
3. post office personnel delivering mail
4. physically handicapped
5. disabled citizens 65 years and older.
I. Community Tax (§156)
► In the old days, known as “residence tax
certificate.
Q: If the Filipino is a resident of a foreign
country (NRC), is he liable to pay the
community tax certificate?
A: NO, because the basis of imposition of
this tax is whether or not you are an
inhabitant of the Philippines. Meaning you
are a resident of the Philippines.
Q: What about a foreigner residing in the
Philippines (RA)?
A: YES. You have to pay unless the foreigner
is a trans-investor for not more than
3months.
► This is applied to both natural and
juridical persons.
Requirements:
1. for a natural person → at least 18
years of age
2. for corporations → upon registration
with the SEC
Q: What if you become 18 in the month of
January or November or December?
A: For those who celebrated their birthday
before July 1 (that is up to June 30), they are
liable to pay the tax, for this year.
For those who celebrated their birthday
on or after July 1, they are not yet liable to
pay this year, but have to wait until next year.
Q: Is there a difference for those who
reached 18 in the months of Jan-Feb-March
and those who reached 18 in the months of
April-May-June?
A: YES. For those who celebrated birthdays
in the months of Jan-Feb-March, they have a
grace period of 20days within which to pay.
Those who celebrated their 18th birthday in
the month of April-May-June, they do not
have any grace period at all, they have to pay
the tax immediately.
Q: If you have a community tax certificate
for this year (2006), can it be used only until
December 31, 2006?
A: NO. It shall be valid up to April 15, 2007.
(§163(C))
J. Accrual of the Tax (§166)
► January 1
Q: What if the tax was only approved in the
month of May 2006, do you have to wait until
January 2007?
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A: NO. You have the right to collect that in
July 1, because the law is saying that “it
should be collected in the next succeeding
quarter” (§167)
► Mayor Binay had a tax ordinance in May,
sabi ng mga bata niya: “bosing, collect na
tayo ng June”.
Binay: “hindi nga pupwede, maghintay pa
tayo ng July 1”.
Q: What if the tax ordinance had been
existing for several years already?
A: The time of accrual will always be January
1.
REMEDIES UNDER THE INTERNAL REVENUE
CODE
1. Remedies of the Government
2. Remedies of the Taxpayer
Remedies of the government:
1. Assessment
2. Collection
Under the NIRC, assessment and collection
have 2 kinds:
1. Normal/Ordinary assessment and
collection – Sec. 203, NIRC
2. Abnormal/Extraordinary assessment
and collection – Sec. 222, NIRC
I. Normal/Ordinary assessment and
collection
► There was a return filed and it
is not fraudulent and not false
II. Abnormal/Extraordinary assessment
and collection
► There was:
1. an omission or failure to file
the return;
2. if there was a return filed, it
was fraudulent, or;
3. the return was false
Q: Is a false and fraudulent return
presumed?
A: NO, false and fraudulent return is not
presumed. The burden of proof to prove that
the return was false and fraudulent lies
against the government through the BIR.
The mere fact that the return is erroneous
will not make the return fraudulent, it must
be proven by the BIR.
Q: Why is it important to know whether the
assessment is under normal or abnormal
condition?
A: It is important to know because the
prescriptive period between normal and
abnormal assessment differ.
Prescriptive Period for Assessment
1. Normal/Ordinary Assessment – 3 years
from the time the return has been filed
(not the payment of the tax) (Sec. 203,
NIRC)
► 3 Ways of filing the return under Sec.
203, NIRC:
1. filed before the deadline (for any tax
under NIRC)
2. filed on the date of deadline
3. filed after the deadline
► 2 Ways of counting the 3 year period of
Assessment:
1. if return is filed before or on the day
of the deadline, the prescriptive
period starts on the date of the
deadline;
2. if return is filed after the deadline, the
prescriptive period starts on the date
the return has been filed.
» For the calendar year of 2004, a return
must be filed and paid for Net Income Tax on
or before April 15, 2005. Since he was not
able to meet the deadline, the taxpayer is
now being assessed for tax due for 2004. To
minimize interest and surcharges, it has been
suggested by the BIR that the taxpayer file a
late return. Supposed he filed his return
covering 2004 on April 1, 2006. In this
example, the reckoning point is the deadline
of April 15, 2005. The starting point of the
counting the 3 yr. period is on the date the
return is filed which is April 1, 2006.
» Suppose it is not a late filing of return,
the counting of the period is on the date of
the deadline which is April 15.
2. Abnormal/Extraordinary Assessment
► the government has 2 options:
a. Assess and Collect
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» the prescriptive period for
“assessment” shall be 10 years from
the discovery of none filing or false or
fraudulent return (Sec. 222, par. o,
NIRC)
» the prescriptive period for
“collection” shall be 5 years from the
date of final assessment (Sec. 222,
par c, NIRC)
b. Collect Without Assessment through
Judicial Action
» since there is “no assessment”
there is no prescriptive period for
assessment
» prescriptive period for “collection”
shall be 10 years from the date of
discovery of none filing of return or
false or fraudulent return.
► These options are available only if the
Assessment is under the
Abnormal/Extraordinary Conditions.
These are not available under
Normal/Ordinary Assessment
Prescriptive Period for Collection
1. Normal/Ordinary Collection – Sec. 203
did not provide for the prescriptive period
for the collection
- Intention of the author: 5 years
from the date of final assessment
Reasons: (Sababan agrees with the 5 year
prescriptive period)
Prescriptive period of collection under
1st option on Abnormal Assessment is
5 years from final assessment (Sec.
222, par c, NIRC)
1. under the old code of 1939, 1977,
and 1985, if the prescriptive
period for collection under
abnormal is 3 years, then the
prescriptive period for collection
under normal is also 3 years. If
now a days, it is 5 years in
abnormal, the prescriptive period
for normal should also be 5 years.
2. to say that there is a prescriptive
period for collection under
Abnormal and there is none under
Normal is too abnormal. It should
be the other way around.
2. Abnormal/Extraordinary Collection
a. assess and collect – 5 years from
the final assessment
b. collect without assessment
through judicial action – 10 years
from date of discovery of none
filing, or false, or fraudulent
return.
Q: How to apply these periods?
A: Annual net income tax return filed by
individual using a calendar year. The return
should be filed on or before April 15, 2000.
It was filed on April 15, 2000.
Q Without stating the date of final
assessment, can it be collected in 2007?
A: Under normal condition, first determine
the date of final assessment. If the BIR finally
assessed the tax in November 2001, then
2007 is way beyond the 5year period to
collect. Count the prescriptive period for
collection from the date of final assessment.
Q: (same facts) Supposed it was finally assed
on March 2003, can it be collected in 2007?
A: Yes, because it is within the prescriptive
period of 5years.
BASILAN v. COMMISSIONER (21 SCRA 17)
F: Supposed the notice of assessment was
given within the period but it was
received by the taxpayer outside the
period.
I: Whether or not the assessment is within
the period of 3 years.
H: Yes. It is within the period. If the notice is
sent through registered mail, the running
of the prescriptive period is “stopped”.
What matters is the sending of the notice
is made within the period of prescription.
► It is the sending of the notice and not the
receipt that tolls the prescriptive period.
Q: What if the return has been amended,
how would you compute the period of
assessment?
A: NIRC is silent.
PHOENIX v. COMMISIONER (14 SCRA 52)
If the amendment of the return is
substantial as distinguished from superficial,
the counting of the prescriptive period is also
amended. The prescriptive period shall be
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reckoned on the date the substantial
amendment was made. If the amendment is
superficial, the counting of the prescriptive
period is still the original period.
Procedure for Assessment (Sec. 228, NIRC;
RR 12-99)
Steps of assessment
1. Sec. 228, NIRC (2 steps)
2. RR 12-99 (3 steps)
2 Steps under Sec. 228, NIRC
1. Pre-assessment notice
2. Final assessment notice
3 Steps under RR 12-99
1. Notice of Informal Conference
2. Preliminary Assessment Notice
3. Formal Letter of Demand and Notice
to Pay the Tax
PROCEDURE (Sec. 228, NIRC; RR 12-99)
1. Upon receipt of the notice of informal
conference, file a reply within 15 days
from receipt of notice;
2. Failure to file a reply, 2 things may
happen:
a. BIR will send again the Notice of
Informal Conference or
b. BIR will send a Preliminary Notice
of Assessment
3. Upon receipt of Preliminary
Assessment Notice (PAN), file a reply
within 15 days from receipt
4. Failure to file a reply will result in
either:
a. BIR will repeat PAN
b. Declare the taxpayer in default,
and send you a Final Assessment
Notice (FAN)
5. Upon receipt of FAN, taxpayer may
file a protest within 30 days.
Q: Is FAN the one appealable to the Court of
Tax Appeals (CTA)?
A: NO. This is because §228, NIRC and RR
12-99 requires the exhaustion of
administrative remedy of protest. After the
receipt of FAN or formal demand within
30days must file a protest before the office
of the commissioner of internal revenue.
FORMS OF PROTEST
1. Local Tax (Sec. 125, Local
Government Code (LGC))
2. Real Property Tax (Sec. 252, LGC)
3. Tariff and Customs Code (Sec. 2313,
RA 7651)
► In all protest under the different codes,
payment under protest is only necessary
under the “Real Estate Tax”.
RR 12-99
► If the taxpayer receives 2 final
assessments, one under the Net Income Tax
(NIT) and the other in VAT. If the taxpayer
don’t want to file protest under VAT but want
to file a protest under NIT. The taxpayer in
order to be allowed to file a protest under the
NIT must first pay the VAT where he does not
intend to file a protest.
► This is not “payment under protest”
because, payment under protest is the one
mentioned in Real Property Tax under Sec.
252, LGC.
Under NIRC, Protest is referred to as:
1. disputing of final assessment or
2. file a motion for reconsideration or
reinvestigation
Q: What should be done after filing a
protest?
A: Count 60days is the period to file the
necessary documents and receipts in support
of the protest.
Q: What is the effect of failure to file the
supporting documents?
A: Failure to file the necessary and
supporting documents within the 60day
period, to be counted on the day the protest
is filed, the final assessment shall become
final and executory.
► On the 51st day you filed the necessary
document, you have to count another period,
which is 180 days from the day you filed the
necessary documents.
Relevance of the 180 Days: 180 days is
the time given to the BIR to decide the case
Q: Supposed it did not decide the case
within 180days?
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A: Do not invoke the Lascano case because
it was rejected by RA 9282
In the Lascano case, before you file an
appeal although the 180 days have lapsed,
you have to wait for the BIR to take positive
action.
The case was ruled only by the CTA,
hence it is not a law. The jurisdiction of the
CTA has been amended by RA 9282.
RA 9282 provides that in case of inaction
of the commissioner after the lapse of
180days, remedy is to file an appeal.
RR 12-99 says that after lapse of 180days
but within 30days after 180days, that is the
time to file an appeal.
Q: Supposed the BIR rule within 180?
A: Within 30days from receipt of the
decision file an appeal to the CTA sitting in
division.
Q: Supposed the CTA decided not in your
favor?
A: File a motion for reconsideration within
15days to the same division deciding the
case.
Q: Supposed the CTA, in division decided
not in you favor?
A: File an appeal to the CTA sitting en banc.
Q: Supposed the CTA en banc decided not in
your favor?
A: File an appeal within 15days from receipt
of decision to Supreme Court.
Q: During the pendency of the protest in the
office of the Commissioner, supposed you
receive a notice of collection, levy and/ or
distraint, what is your remedy?
A:
1. YABES v. COMMISSIONER (150 SCRA
278)
2. UNION SHIPPING LINES v.
COMMISSIONER (185 SCRA 547)
YABES v. COMMISSIONER (150 SCRA 278)
F: The taxpayer receives a notice of
collection while waiting for the decision
of his protest. He then filed an “appeal”
with the CTA contending his protest has
been denied because he did not receive a
decision but receive a notice of collection.
Simultaneously, the BIR filed before the
CFI an “ordinary civil action” for the
collection of sum of money. When the
judge of the CFI, was about to conduct
the hearing of the case, the taxpayer filed
an injunction with the SC to prohibit the
judge of the CFI contending that a single
cause of action is pending in two courts,
one in the CTA and another in CFI.
H: Injunction was granted prohibiting the
Judge of the CFI and requiring the Judge
to transfer the records to the CTA saying
that the remedy made by the taxpayer
was the correct remedy.
Q: Was the appeal made on time?
A: Yes, when the BIR filed an ordinary action,
the protest is deemed denied. Hence an
appeal is a proper remedy.
UNION SHIPPING LINES v. COMMISSIONER
F: The taxpayer was waiting for the decision
of his protest. But instead, he received a
notice of collection. Immediately, he filed
a Motion for Reconsideration and
Clarification asking whether his protest
has been denied. The BIR did not reply or
answer but instead filed an Ordinary Civil
Action before the CFI. When the taxpayer
received summons, he did not answer but
instead filed an Appeal before the CTA.
I: Whether or not the remedy of Appeal was
the correct remedy and Whether or not it
was filed on time.
H: Yes. The remedy of appeal is the correct
remedy and the appeal was filed on time.
The reckoning period within which to file
an appeal is the time the taxpayer
received the summons.
While an Appeal is pending before the CTA,
the CTA will determine:
1. If the decision was made within 180
days, whether the appeal was made
within 30 days from the receipt of the
said decision, or
2. if there was no decision after the
lapse of 180 days, whether the appeal
was made within 30 days upon the
expiration or the lapse of the 180-day
period.
Q: Pending appeal with the CTA, can the BIR
amend the final assessment?
A: 2 SCHOOLS OF THOUGHT:
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1. GUERRERO v. COMMISSIONER (19
SCRA 25)
2. BATANGAS v. COLLECTOR (102
PHIL 822)
GUERRERO v. COMMISSIONER (19 SCRA 25)
H: No. Because it is no longer the disputed
assessment.
BATANGAS v. COLLECTOR (102 PHIL 822)
H: Yes. In order to avoid multiplicity of suits
► ACCORDING TO JUSTICE VITUG:
BATANGAS v. COLLECTOR (102 PHIL 822) is
the better ruling
PROTEST UNDER LOCAL TAX (Sec. 195,
LGC)
► Under NIRC, protest is filed in the Office
of the Commissioner
► Under LGC, protest is filed with the same
City or Provincial or Municipal Treasurer who
issued the assessment
Period to file Protest
 60 days from receipt of assessment
Q: If the treasurer did not decide within a
60day period, remedy?
A: Go to the court of competent jurisdiction
(RTC)
Q: If the RTC decided not in you favor?
A: File an appeal with CTA en banc
(beginning April 23, 2004)
Q: If the CTA decided not in your favor?
A: Appeal to the SC.
NOTE:
Pursuant to RA 9282, direct appeal to CTA en
banc can be made from:
1. Decision of the RTC involving local
taxation exercising appellate
jurisdiction
2. Decision of the Central Board of
Assessment Appeal exercising
appellate jurisdiction.
PROTEST UNDER REAL PROPERTY TAX
(Secs. 226, 230, and 252)
 Remedy shall be the same
Sec. 252, LGC
 If the taxpayer receives a Notice of
Assessment from municipal, city, or
provincial treasurer, the remedy is to
file a protest but there must be first
Payment Under Protest.
- This is the only instance where
payment under protest is
necessary
Q: How is payment under protest made?
A: At the back of the receipt there will be an
annotation that there was a payment under
protest within 60days from receipt of the
notice of assessment within the same
treasurer who issued the assessment.
Q: If the treasurer rules against the taxpayer,
remedy?
A: The remedy is to file an appeal to the
Local Board of Assessment within 30days
from the receipt of the decision.
Q: From the decision of the Local Board of
Assessment?
A: Appeal should be made to the Central
Board of Assessment Appeal.
► Beginning April 23, 2004, the ruling of
the Central Board of Assessment Appeal is no
longer final. It can now be appealed to the
CTA, sitting en banc.
PROTEST UNDER THE TARIFF AND
CUSTOMS CODE (TCC) (Sec. 2313, as
amended by RA 7651)
► Formerly, the automatic appeal under the
TCC applied only to protest; but now a days,
the automatic appeal applies to both protest
and forfeiture.
For Forfeiture Under the Tariff and Customs
Code
► Refers to the Order of the Collector
confiscating the imported goods or
commodities
Doctrine of Primary Jurisdiction
If the Collector ordered the forfeiture of
the imported commodities the order of the
Collector shall be to the exclusion of all
government offices and authority.
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Importer of Chemical, under the TCC, the
custom duties is only P27 but the collector
says it should be P52. The importer will then
file a protest with the Office of the Collector.
In the old days, there is an automatic
appeal from the decision of the collector
under protest. But under RA 7651, the
remedy of automatic appeal is applicable to
both protest and forfeiture.
I. In both cases of protest and forfeiture, if
the importer lose the case and the
government wins, the remedy is to file an
appeal within 15 days before the Office of the
Commissioner.
 From the ruling of the Commissioner,
the importer should file an appeal
within 30 days before the CTA, sitting
in division.
 From the ruling of the CTA in division,
the importer should file an MR within
15 days before the same division
hearing the case.
 From the ruling of the CTA in division,
deciding on the MR, the importer
should file an appeal within 15 days
before the CTA sitting en banc.
 From the CTA en banc, appeal to SC
within 15 days.
II. If the importer-taxpayer wins the case, the
government lose the case, Sec. 2313 of TCC
as amended by RA 7651, there shall be an
automatic review within 15 days.
Q: Where should the automatic review be
made?
A: It depends. Publish the value of the
commodity.
1. IF P5 MILLION OR MORE – AUTOMATIC
REVIEW SHALL BE BEFORE THE
SECRETARY OF THE DEPT. OF
FINANCE.
2. IF LESS THAN P5 MILLION –
AUTOMATIC REVIEW SHALL BE BEFORE
THE OFFICE OF THE COMMISSIONER
Q: Suppose the commissioner decide or did
not decide within 30days, what happens?
A: If the commissioner reverses the ruling of
the collector, the ruling is final and
executory.
If the commissioner affirms or did not
decide within 30days, there shall be an
automatic appeal before the sec. of finance.
Q: Between the two which will be appealed
to the CTA?
A: The decision of the secretary which
passes through the office of the
commissioner (RA 9282)
But not all the decision of the secretary
which passes the office of the commissioner
affirms or did not decide within 30days and
appealed before the secretary of finance will
appeal to the CTA be allowed.
There are 3 instances when the Secretary of
Finance renders a decision appealable to the
CTA:
1. decision of the Secretary by virtue of
automatic review passing through the
Commissioner
2. cases of anti-dumping duty, where the
anti-dumping duty was ordered by the
Secretary
3. decision of the Secretary of Finance
on countervening duty.
COMPROMISE (Sec. 204, NIRC)
3 Questions asked in 2004 BAR:
1. May the Government compromise
criminal cases and civil cases?
2. Supposed the corporation is already
dissolved, can the stockholder be
obliged to pay?
3. Suppose the civil case filed by the BIR
is final and executor, can it be subject
to compromise?
CAN THERE BE COMPROMISE IN:
1. CIVIL CASES?
- YES, IN ANY STAGE OF THE
PROCEEDING
- EXCEPT WHEN THE CIVIL CASE IS
ALREADY FINAL AND EXECUTORY
BECAUSE IT WILL BE VIOLATIVE OF
THE SEPARATION OF POWERS
2. CRIMINAL CASES?
- YES, EXCEPT:
a. IF ALREADY FILED IN COURT
(RTC) OR;
b. IF IT INVOLVES FRAUD
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3. IF THE CORPORATION IS ALREADY
DISSOLVED, CAN THE STOCKHOLDER BE
HELD LIABLE TO PAY TAX?
- GENERAL RULE: NO
- EXCEPT:
a. IF IT IS PROVEN THAT THE
ASSETS OF THE COPORATION
IS TAKEN BY ONE
STOCKHOLDER OR;
b. IF THE STOCKHOLDER DID
NOT PAY HIS UNPAID
SUBSCRIPTION
Minimum Amount to be Compromised (Sec.
204)
1. If the ground is financial incapacity of
the taxpayer, the minimum shall not
be less than 10% of the original
assessment.
2. If based on other grounds, the
minimum amount shall not be lower
than 40% of the original assessment.
Q: Can it be lower than that prescribed by
law?
A: As a rule, no. EXCEPT, if allowed by the
evaluation board consisting of the:
a) commissioner; and
b) deputy commissioner.
Instances when the Final Assessment
becomes final and executor:
1. If the taxpayer did not file the protest
on time
2. Failure to submit the supporting
documents within the 60-day period
3. After the lapse of the 180-day period,
you did not file an appeal within the
30-day period to the CTA
4. An appeal was filed but made beyond
the reglementary period to appeal
METHODS OF COLLECTION (SEC. 205)
1. Judicial Action
a. Civil
b. Criminal
2. Administrative Action
a. Distraint
b. Levy
c. Tax lien
Q: Why is it important to know whether the
final assessment is under normal or
abnormal conditions?
A: It is important because of the
requirement under §222. If the final
assessment becomes final and executory, the
government (BIR) can exercise the remedies
under §205 in any order or simultaneously
(§207). But it is not always the case, because
the right of the government to collect is
limited in case of abnormal
assessment/collection under §222. Under
the second option, the right of the
government is limited to judicial action either
civil or criminal. Administrative remedies
such as distraint, levy, or tax lien is not
available under such condition.
Q: In distraint, levy or tax lien, is the 10 year
period of collection applicable?
A: No, only the 5year period should apply.
Distraint
Kinds:
1. Constructive (Sec. 206)
2. Distraint of Intangible (Sec. 208)
3. Actual (Sec. 207, par. a, and Sec. 209)
1. Constructive Distraint
► The distraining officer shall make a list of
the personal property of the property to be
distraint in the presence of the owner of the
property or the person in possession of the
property.
► The owner shall be requested to sign the
receipt.
Q: What if the owner refuses to sign the
receipt?
A: Sec. 206: The distraining officer shall
require 2 individuals within the neighborhood
with the warning that they should not allow
the taxpayer to dispose, transfer, or sell the
property subject of distraint.
Grounds for Constructive Distraint (Sec. 206):
1. The taxpayer intends to leave the
Philippines
2. The taxpayer leaves the Philippines
3. The taxpayer ceases or retires from
business
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4. The taxpayer obstructs the collection
of the tax.
► THESE GROUNDS ALSO ANSWER THE
QUESTION: WHAT ARE THE TAXABLE PERIOD
LESSER THAN 12 MONTHS?
2. Distraint of Intangible Property
Limited to 3 Intangible Properties:
1. Shares of stocks
2. Bank accounts
3. Credits and debits
Share of stocks
► Warrant of distraint furnished to the
taxpayer or the officer of the corporation
with the warning that the property is
subject of distraint and it should not
dispose of it.
Bank Accounts
► Warrant of distraint furnished to the
taxpayer or the officer of the bank with
the warning that the taxpayer should not
be allowed to withdraw.
Debits and Credits
► Warrant of distraint furnished to the
debtor and creditor
3. Actual Distraint
► Personal property shall be physically
taken by the distraining officer.
► Within 10 days from the receipt of the
warrant, a report of the distraint shall be
submitted to the BIR (Sec. 207, par a last
par.)
► The property subject of distraint shall
be sold at a public auction EXCEPT bank
accounts and debits and credits.
» Notice of sale shall be by posting
in 2 conspicuous place, stating the
date and the place of the sale (No
publication requirement)
► Sec. 211: after the sale and within 2
days, a report shall be made to the BIR
Q: If the property sold is a personal
property, is there a right of redemption?
A: NO. The rule is absolute.
Q: If the property is a personal property, is
there a right of preemption?
A: SEC. 210: Before the scheduled sale, the
taxpayer is allowed to recover the property
by paying all the property by paying all the
proper charges as well as the interest, cost
and penalties.
During the Scheduled Auction Sale, 2 Things
may happen:
1. There is bidder and the bid is enough
2. There is no bidder or there is a bidder
but the bid is not enough
Q: What is the relevance of knowing the
difference?
A: 1. If there is a bidder and the bid is
enough
» In case of insufficiency, there shall be
further distraint to cover the liability.
(§217)
» In case of excess, the excess shall be
returned to the taxpayer.
2. If there is no bidder or the bid is not
enough.
» It will be purchase by the government
and the later sold in a public auction
again (§212)
» In case of insufficiency, no further
distraint, §217 applies only if there was a
bidder.
» In case of excess, the excess shall not
be returned to the taxpayer but shall be
remitted to the national treasury.
Levy
► Other than the delinquent taxpayer,
warrant of levy is served to the register of
deeds having jurisdiction over the real
property (Sec. 213)
► Within 10 days from the receipt of the
warrant, a report of the levy shall be
submitted to the BIR (Sec. 207 (b) last
par)
Notice of Sale in Public Auction:
1. Posting in 2 conspicuous places
2. Publication in newspaper of general
circulation once a week for 3
consecutive weeks.
Q: Is there a right of pre emption?
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A: Yes, §213.
Q: Is there a right of redemption?
A: Yes.
2 Things may happen in a Public Auction:
1. There is a bidder and the bid is
enough
2. There is no bidder or the bid is not
enough
Q: What if there is no bidder or the bid is not
enough?
A: Forfeiture shall be made (§215)
3 Definitions of Forfeiture under the Internal
Revenue Code
1. Violation of Excise Tax Law (Sec. 224)
2. If there is no bidder or the bid is not
enough (Sec. 215)
3. The order of the Collector to
confiscate imported commodities
(Sec. 2313, TCC)
Relevance of the Choice of Words:
► Under sec. 212, the law says
“purchase”
► Under sec. 215, the law says
“forfeiture”
» under 215: the real property shall
be automatically registered in the
name of the Government (forfeiture)
» under 212: the real property is
not automatically registered in the
name of the Government (purchase)
Q: If sold at a private sale, what is the
requirement?
A: There must be an approval of the
Secretary of Finance (§216)
Q: After sale, if there was deficiency?
A: There shall be no further levy, because
§215 says that it shall be to the total
satisfaction of the taxpayer.
Q: After sale, if there was an excess?
A: It shall not be returned to the taxpayer
but shall be remitted to the national treasury.
Sec. 217: this is only true if there was no
bidder or the bid was not enough because of
the provisions of the Secs. 212, 215, and 216
Sec. 218: no court shall issue an injunction
to restrain the collection of tax under this
code
Determine what kind of injunction is referred
to here:
1. Prohibitory – referred in Sec. 218
because it restrains the collection of
tax.
2. Mandatory
Q: Is the provision limited to “tax under this
code”?
A: Limited to internal revenue taxes.
EXCEPT: CTA (Regular Court) → RA 1125 and
9282: CTA is authorized to issue injunction
to restrain the collection of taxes or fees
collected under other code.
Q: Is the rule of distraint or levy the same
under local taxation?
A: Yes, local tax.
» §175 for DISTRAINT
» §176 for LEVY
Q: How about real property tax?
A: No, distraint is not authorized (§256,
LGC), because the remedy is only Judicial
Action and Levy.
Tax Lien
► Non payment of tax, the government has
the right to claim a lien over the property of
the taxpayer
1. NIRC – Sec. 219, NIRC
2. Local Tax – Sec. 173, NIRC
3. Real Property Tax – Sec. 257, NIRC
Q: Supposed a parcel of land is about to be
levied by the government, but the same is
being foreclosed by the mortgagee, which of
the 2 obligee, the government or the
mortgagee shall be preferred?
A: §219, last portion: The government is
the preferred one if the lien is annotated and
recorded in the registry of deed. In the
absence of annotation in the registry of
deeds, the mortgagee is preferred.
Q: Do we have the same rule under Local
Tax and Real Property Tax?
A: NO. Both §173 and §257, the government
is always the preferred one. The lien can only
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be removed by payment of tax, interest and
penalty.
Sec. 220: approving of filing an ordinary civil
action for violation of the internal revenue
code
► The approval must be made by the
Commissioner of Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574)
F: An ordinary civil action for violation of the
tax code was filed in the city of San
Fernando. But the filing was only
approved by the Revenue Regional
Director of Central Luzon. The plaintiff
opposed the filing in the court on the
ground that it should be approved by the
Commissioner and the Revenue RD.
H: Sec. 220 should be read with Sec. 7 of the
NIRC
» General Rule: powers and
functions of the Commissioner may
be delegated but not to a position
lower than a Division Chief
» Under Sec. 7, there are powers
which can not be delegated
a) Power to recommend to the
Secretary of Finance to issue
rules and regulation
b) Power to decide a case of fist
impression
c) Power to enter into a 3. In distraint of levy, the BIR officer
compromise agreement
d) Power to assign BIR officer in
the place of production
subject to income tax
» Since the case does not fall under
the prohibited delegation, the filing of
the case is legal and tenable.
► Decision of the Commissioner of Internal
Revenue (CIR) is appealable to CTA.
Q: When is a decision of the cir appealable
to the Secretary of Finance?
A: §4, on matters of interpretation of tax
laws.
SEC. 223: SUSPENSION OF THE RUNNING
OF PRESCRIPTIVE PERIOD
Q: A Filipino taxpayer went to Canada, after
15years he went back, he is being assessed
by the BIR under normal assessment. Has the
right of the government to asses the tax
already prescribed?
A: NO. When he went to Canada, the running
of the prescribed period is suspended.
Q: What if the change of address is within
the Philippines, say only from manila to Pasay
City, is the running of the prescriptive period
suspended?
A: In order that the running of the
prescriptive period will not be suspended,
especially if the change is district office,
§223 provides that the taxpayer must send a
written notice of change of address to the
BIR.
In the absence of the written notice, the
period will be suspended.
Q: Change of address is from Philippines to
abroad?
A: The period will be suspended.
Other Grounds for Suspension:
1. During collection if there is no
property found, the period is
suspended
2. If the BIR is prohibited from making
assessment such when the subject
property is under litigation
can’t locate the property
CLAIM FOR REFUND (SEC 229)
Written claim for refund:
1. Sec. 229, NIRC
2. Sec. 112, VAT
3. Sec. 136, Local Tax
4. Sec. 253, Real Property Tax
5. None except sec. 1603, Tariff and
Custom
Written claim for refund under the input
tax (Sec. 112)
► Period is also 2 years from the close of
the taxable quarter when the transaction was
made
Q: Can we apply §229 to VAT?
A: Yes, because there is no conflict. §112 is
refund under input tax system.
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§229 is refund for:
1. errors in payment or;
2. collected without authority; or
3. assessment without authority.
► The period to claim refund is 2years.
Doctrine of Equitable Recoupment
► If a taxpayer is entitled to a written claim
for refund but the prescriptive period to
claim has lapsed, the taxpayer is allowed to
credit his written claim for refund which he
failed to recover to his existing tax liability.
Computed from;
a. Individual – counted on the day the
tax has been paid
1. paying by way of withholding tax
system, the reckoning point is the
end of the taxable year.
2. paying by way of installment,
reckoning point is the date the
last installment is paid.
3. if sold to public auction through
distraint or levy, the date the
proceeds is applied to the
satisfaction of the tax liability.
b. Corporation
1. Existing
- 1992, *** v. Commissioner (205
SCRA 184)
- 1995, Commissioner v. Philam life
(244 SCRA 446)
- 1998, Commissioner v. CTA (301
SCRA 435)
2. Non-existing
- 2001, BPI v. Commissioner (363
SCRA 840)
1. Existing – the counting of the
prescriptive period is 2 years on the
day the annual adjusted return is
filed, because it is at that day that the
tax liability is known.
2. Non-existing – the counting of the
prescriptive period should also be
reckoned on the day the annual return
is filed. But the corporation is no
longer required to wait till the taxable
period is over to file the return. Upon
receipt of a notice from the SEC to
dissolve the corporation, within 30
days thereafter, a return should be
filed.
Q: Suppose there is a supervening event,
and the taxpayer was not able to file a written
claim of refund within the period?
A: Regardless of supervening event, a
written claim for refund must be filed within
2years.
Q: Suppose the 2 year period is about to
expire and there is no decision yet as to your
refund?
A: Remedy is to file an appeal before the
CTA (deemed a denial)
Q: Suppose the BIR decided within 2 years
against the refund?
A: Appeal within 30days from the decision,
provided it is still within the 2 year period.
Q: Suppose there is only 21days remaining
after receiving the decision, when to file an
appeal?
A: Within 21days before the end of the 2
year period.
► A written claim for refund should be filed
within 2 years
► Sec 204 (c) last phrase: in case of over
payment a written claim is not necessary
because a return constitutes a written claim
for refund.
Q: May the commissioner of internal revenue
open the bank account of a taxpayer?
A: General Rule: NO. EXCEPT:
1. To determine the gross value of the
estate; and
2. To enter into a compromise
agreement. (under §204(A))
► The written claim for refund to determine
the gross value of the estate because the
taxpayer is already dead
In case of compromise, there must be
consent.
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