II.

NATIONAL TAXATION (NATIONAL INTERNAL REVENUE CODE OF 1997, as

amended. EXCLUDE amendments introduced by R.A. No. 10963 or the Tax
Reform for Acceleration and Inclusion Law) ............................................................. 49
A. Organization and Functions of the Bureau of Internal Revenue .................... 49
1. Rule-making authority of the Secretary of Finance .....................................................................49
2. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue ..............51
a) Powers and duties of the Bureau of Internal Revenue ......................................................51
b) Power of the Commissioner to interpret tax laws and to decide tax cases .............52
c) Non-retroactivity of rulings .............................................................................................................53
B. Income Tax .................................................................................................................... 55
1. Definition, Nature and General Principles ........................................................................................55
a) Income Tax systems – Global, Schedular and Semischedular or Semi-Global
Taxpayer’s income ................................................................................................................................55
b) Features of the Philippine Income Tax Law ............................................................................55
c) Criteria in imposing Philippine income tax .............................................................................55
d) Types of Philippine income taxes .................................................................................................55
e) Taxable period ........................................................................................................................................56
f) Kinds of taxpayers.................................................................................................................................56
2. Income Tax ........................................................................................................................................................56
a) Definition, Nature and General Principles ................................................................................57
b) Income .........................................................................................................................................................57
(1) Definition and nature ..................................................................................................................57
(2) When income is taxable .............................................................................................................58
i. Existence of income .............................................................................................................58
ii. Realization of income .........................................................................................................58
iii. Recognition of income ........................................................................................................59
iv. Cash method of accounting versus Accrual method of accounting ............59
(3) Tests in determining whether income is earned for tax purposes .....................59
i. Realization test.......................................................................................................................59
ii. Claim of right doctrine or doctrine of ownership, command or control..60
iii. Economic benefit test, doctrine of proprietary interest ...................................60
iv. Severance test .........................................................................................................................60
v. All events test..........................................................................................................................60
c) Classification of income......................................................................................................................60
d) Situs of Income Taxation ...................................................................................................................60
3. Gross Income....................................................................................................................................................61
a) Definition ...................................................................................................................................................61
b) Concept of income from whatever source derived ..............................................................62
c) Gross income vis-à -vis net income vis-à -vis taxable income ..........................................63
d) Classification of income subject to tax........................................................................................65
(1) Compensation income ................................................................................................................65
(2) Fringe benefits ................................................................................................................................65
(3) Professional income.....................................................................................................................66
(4) Income from business .................................................................................................................66
(5) Income from dealings in property........................................................................................66
(6) Passive investment income......................................................................................................77
(7) Prizes and awards .........................................................................................................................88
(8) Annuities, proceeds from life insurance or other types of insurance ................90
(9) Pensions, retirement benefit or separation pay............................................................91
 (10) . Income from any source whatever .................................................................................. 91
e) Exclusions from gross income ........................................................................................................ 94
(1) Rationale for the exclusions .................................................................................................... 94
(2) Taxpayers who may avail of the exclusions .................................................................... 94
(3) Exclusions distinguished from deductions and tax credits .................................... 94
(4) Exclusions under the Constitution....................................................................................... 95
(5) Exclusions under the Tax Code .............................................................................................. 95
(6) Exclusions under special laws............................................................................................. 106
4. Deductions from Gross Income ........................................................................................................... 107
a) General rules......................................................................................................................................... 107
b) Return of capital ................................................................................................................................. 108
c) Itemized deductions ......................................................................................................................... 108
d) Optional Standard Deduction ...................................................................................................... 133
e) Personal and Additional Exemptions (see page 117)
f) Items not deductible ......................................................................................................................... 135
5. Income Tax on Individuals .................................................................................................................... 137
a) Income Tax on Resident Citizens, Non-resident Citizens and Resident Aliens.. 140
(1) Coverage – Income from all sources within and without the Philippines;
exceptions ...................................................................................................................................... 140
(2) Taxation on compensation income................................................................................... 141
i. Inclusions – monetary and nonmonetary compensation ............................. 141
ii. Exclusions – Fringe benefits subject to tax; De Minimis benefits; 13th
month pay and other benefits and payments specifically excluded from
taxable compensation income .................................................................................... 141
iii. Deductions ............................................................................................................................ 141
b) Income Tax on Non-Resident Aliens Engaged in Trade or Business....................... 153
c) Income Tax on Non-Resident Aliens Not Engaged in Trade or Business .............. 153
d) Individual Taxpayers Exempt from Income Tax ................................................................ 153
(1) Senior citizens ............................................................................................................................. 154
(2) Minimum wage earners .......................................................................................................... 155
(3) Exemptions granted under international agreements ........................................... 156
6. Income Tax on Corporations ................................................................................................................ 156
a) Income Tax on Domestic Corporations and Resident Foreign Corporations ..... 159
(1) Regular tax .................................................................................................................................... 159
(2) Minimum Corporate Income Tax (MCIT) ...................................................................... 160
(3) Branch Profit Remittance Tax ............................................................................................. 163
(4) Allowable deductions .............................................................................................................. 163
i. Itemized deductions (see page 108)
ii. Optional Standard Deductions (see page 133)
(5) Taxation of Passive Income (see page 164)
(6) Taxation of Capital Gains (see page 164)
b) Income Tax on Non-Resident Foreign Corporations ....................................................... 164
c) Income Tax on Special Corporations ....................................................................................... 164
(1) Domestic Corporations ........................................................................................................... 164
i. Proprietary educational institutions and hospitals ......................................... 164
ii. Non-profit hospitals ......................................................................................................... 165
iii. Government-owned or controlled corporations, agencies or
instrumentalities ............................................................................................................... 167
iv. Depository banks (foreign currency deposit units) ........................................ 167
(2) Resident Foreign Corporations .......................................................................................... 167
 i.
International carriers doing business in the Philippines ............................. 167
ii.
Off-shore banking units .................................................................................................. 168
iii.
Resident depository banks (foreign currency deposit units) ..................... 168
iv.
Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies ............................................................................................... 168
(3) Improperly Accumulated Earnings Tax (IAET) .......................................................... 169
(4) Exemptions from Tax on Corporations .......................................................................... 170
(5) Tax on other Business Entities: General Partnerships, General Professional
Partnerships, Co-ownerships, Joint Ventures and Consortia .............................. 172
7. Filing of Returns and Payment of Income Tax ............................................................................. 178
a) Definition of a Tax Return and Information Return ......................................................... 178
b) Period within which to file Income Tax Return of Individuals and
Corporations ......................................................................................................................................... 178
c) Persons liable to file Income Tax Returns ............................................................................. 179
(1) Individual taxpayers ................................................................................................................. 179
i. General rule and exceptions......................................................................................... 179
ii. Substituted filing ................................................................................................................ 180
(2) Corporate taxpayers ................................................................................................................. 180
d) Where to file Income Tax Returns ............................................................................................. 180
e) Penalties for Non-filing of Returns ............................................................................................ 181
8. Withholding of taxes ................................................................................................................................. 181
a) Concept of withholding taxes ....................................................................................................... 181
b) Kinds of Withholding Taxes .......................................................................................................... 183
C. Transfer Taxes .......................................................................................................... 187
1. Estate Tax........................................................................................................................................................ 189
a) Basic principles, concept, and definition................................................................................ 189
b) Nature, purpose, and object .......................................................................................................... 189
c) Time and transfer of properties.................................................................................................. 190
d) Classification of decedent............................................................................................................... 190
e) Gross estate and net estate............................................................................................................ 190
f) Determination of gross and net estate .................................................................................... 190
g) Items to be included in the gross estate ................................................................................. 192
h) Deductions and exclusions from estate .................................................................................. 200
i) Tax credit for estate taxes paid to a foreign country ....................................................... 206
j) Exemption of certain acquisitions and transmissions .................................................... 206
k) Estate tax return ................................................................................................................................. 207
2. Donor’s Tax .................................................................................................................................................... 210
a) Basic principles, concept and definition ................................................................................. 210
b) Nature, purpose and object ........................................................................................................... 212
c) Requisites of a valid donation ...................................................................................................... 212
d) Transfers which may be constituted as donation.............................................................. 213
(1) sale/exchange/transfer of property for insufficient consideration (see page
199)
(2) condonation/remission of debt .......................................................................................... 213
(3) transfer for less than adequate and full consideration .......................................... 213
e) Classification of donor ..................................................................................................................... 214
f) Determination of gross gift............................................................................................................ 214
g) Composition of gross gift ................................................................................................................ 215
h) Valuation of gifts made in property .......................................................................................... 215
i) Tax credit for donor’s taxes paid to a foreign country .................................................... 216
 j) Exemption of gifts from donor’s
tax . ............................................................................................................................................................. 216
k) Persons liable ....................................................................................................................................... 219
D. Value-Added Tax (VAT) ...........................................................................................221
1. Concept of VAT-taxable transactions ............................................................................................... 221
2. Characteristics of VAT-taxable transactions ................................................................................ 221
3. Elements of VAT-taxable transactions ............................................................................................ 222
4. Impact and incidence of tax .................................................................................................................. 224
5. Tax credit method ...................................................................................................................................... 225
6. Destination Principle / Cross Border Doctrine........................................................................... 225
7. Persons liable ............................................................................................................................................... 226
8. Imposition of VAT ...................................................................................................................................... 227
a) On sale of goods or properties ................................................................................................... 228
b) On importation of goods................................................................................................................. 232
c) On services............................................................................................................................................. 233
9. Transactions deemed sale...................................................................................................................... 236
10. Change or cessation of status as VAT-registered person ..................................................... 237
11. Zero-rated and effectively zero-rated sales of goods or properties................................. 238
12. VAT-exempt transactions....................................................................................................................... 244
a) VAT exempt transactions; in general; enumeration ........................................................ 244
13. Input and Output tax................................................................................................................................. 251
a) Definition ................................................................................................................................................ 251
b) Sources of input tax........................................................................................................................... 252
c) Persons who can avail of input tax credits ........................................................................... 254
d) Determination of output/input tax; VAT payable; excess input tax credits........ 254
(1) Determination of output tax................................................................................................. 254
(2) Determination of creditable input tax ............................................................................ 255
(3) Allocation of input tax on mixed transactions ............................................................ 255
(4) Determination of the output tax and VAT payable and computation of VAT
payable or excess tax credits ............................................................................................... 255
e) Substantiation of input tax credits ............................................................................................ 256
14. Refund or tax credit of excess input tax.......................................................................................... 256
a) Who may claim for refund/apply for issuance of tax credit certificates ............... 256
b) Period to file claim/apply for the issuances of tax credit certificates .................... 259
c) Manner of giving refunds ............................................................................................................... 263
d) Destination principle/Cross-border doctrine (see page 225)
15. Invoicing Requirements .......................................................................................................................... 263
a) In general................................................................................................................................................ 263
b) In “deemed sale” transactions ..................................................................................................... 264
c) Consequences of issuing erroneous VAT invoice or VAT official receipt ............. 264
16. Filing of returns and payment ............................................................................................................. 264
17. Withholding of final VAT on sales to government..................................................................... 266
E. Percentage Taxes (concept and nature only) ....................................................267
F. Excise Tax (concept and nature only) .................................................................269
G. Documentary Stamp Taxes (concept and nature only) ..................................270
H. Tax Remedies under the NIRC ...............................................................................271
1. General Concepts ........................................................................................................................................ 271
a) Assessment ............................................................................................................................................ 271
(1) Requisites of a valid assessment........................................................................................ 272
 b) Tax delinquency as distinguished from Tax deficiency .................................................. 276
c) Jeopardy assessment ........................................................................................................................ 277
d) Prescriptive period for assessment .......................................................................................... 277
(1) General rule ................................................................................................................................... 279
(2) False or fraudulent returns and non-filing of returns............................................. 283
(3) Suspension of the running of statute of limitations ................................................. 284
2. Civil penalties, additions to the tax.................................................................................................... 285
a) Surcharge ................................................................................................................................................ 285
b) Delinquency interest and deficiency interest ...................................................................... 287
c) Compromise penalty......................................................................................................................... 287
3. Assessment process and reglementary periods ......................................................................... 287
a) Letter of Authority and Tax Audit.............................................................................................. 287
b) Notice of Informal Conference ..................................................................................................... 289
c) Issuance of Preliminary Assessment Notice; general rule and exceptions .......... 289
d) Issuance of Formal Letter of Demand and Final Assessment Notice....................... 290
e) Disputed Assessment ....................................................................................................................... 291
4. Collection ........................................................................................................................................................ 292
a) Requisites ............................................................................................................................................... 292
b) Prescriptive periods; suspension of running of statute of limitations ................... 292
I. Taxpayer’s remedies ............................................................................................... 293
1. Protesting an assessment ....................................................................................................................... 294
a) Period to file protest ......................................................................................................................... 294
b) Form, content, and validity of protest ..................................................................................... 294
c) Submission of supporting documents ..................................................................................... 295
d) Effect of failure to file protest ...................................................................................................... 296
e) Decision of the Commissioner on the protest filed ........................................................... 296
(1) Effect of failure to appeal ....................................................................................................... 298
2. Compromise and abatement of taxes ............................................................................................... 299
3. Recovery of Tax Erroneously or Illegally Collected .................................................................. 304
a) Tax refund as distinguished from Tax credit ....................................................................... 305
b) Grounds, requisites and period for filing a claim for refund or issuance of a tax
credit certificate .................................................................................................................................. 305
c) Statutory basis and proof of claim for refund or tax credit .......................................... 309
d) Proper party to file claim for refund or tax credit ............................................................. 311
J. Government remedies ............................................................................................ 314
1. Administrative remedies ........................................................................................................................ 314
a) Tax lien ..................................................................................................................................................... 314
b) Distraint and levy ............................................................................................................................... 315
c) Forfeiture of real property ............................................................................................................ 319
d) Suspension of business operation ............................................................................................. 320
e) Non-availability of injunction to restrain collection of tax ........................................... 320
2. Judicial remedies – civil or criminal action (see page 426 onwards)

K. LOCAL TAXATION [LOCAL GOVERNMENT CODE (LGC) OF 1991, as

amended] ................................................................................................................... 271
L. Local government taxation .................................................................................... 326
1. Fundamental principles........................................................................................................................... 326
2. Nature and source of taxing power ................................................................................................... 327
a) Grant of local taxing power under the LGC ........................................................................... 327
III. TARIFF AND CUSTOMS CODE OF THE PHILIPPINES (P.D. No. 1464), as amended
by the CUSTOMS MODERNIZATION AND TARIFF ACT (Republic Act No. 10863,
which took effect on June 16, 2016) ...........................................................................387
A. Tariff and duties .................................................................................................................................................. 387
1. Definitions ...................................................................................................................................................... 387
2. Kinds or Classification of Duties ......................................................................................................... 387
a) Ordinary/regular duties ................................................................................................................. 387
(1) Ad valorem (Exclude: Methods of Valuation) ............................................................. 387
(2) Specific............................................................................................................................................. 387
b) Special duties........................................................................................................................................ 387
3. Flexible tariff clause .................................................................................................................................. 388
B. Accrual and Payment of Tax and Duties ................................................................................................. 392
1. General Rule .................................................................................................................................................. 392
a) Taxable Importations ....................................................................................................................... 392
b) Prohibited Importations................................................................................................................. 392
c) De Minimis Importations (Small Value Importations) ................................................... 394
d) Conditionally-Free and Duty-Exempt Importations ........................................................ 396
2. Goods Declaration ...................................................................................................................................... 401
a) Filing of Goods Declaration ........................................................................................................... 401
b) Provisional Goods Declarations .................................................................................................. 402
c) Relief Consignments ......................................................................................................................... 402
d) Misdeclaration, Misclassification, and Undervaluation in Goods Declarations . 403
(1) Definition and distinction ...................................................................................................... 403
(2) Imposition of Surcharges ....................................................................................................... 403
C. Unlawful Importation or Exportation (Exclude: Penalties).......................................................... 404
1. Technical smuggling and Outright smuggling ............................................................................. 404
2. Other fraudulent practices .................................................................................................................... 405
D. Remedies ... ............................................................................................................................................................. 406
1. Government ................................................................................................................................................... 406
a) Administrative/extrajudicial ....................................................................................................... 406
(1) Search, seizure, forfeiture, arrest ...................................................................................... 412
b) Judicial ..................................................................................................................................................... 413
2. Taxpayer ......................................................................................................................................................... 414
a) Protest ...................................................................................................................................................... 415
b) Abandonment....................................................................................................................................... 416
c) Abatement and refund..................................................................................................................... 417

IV. JUDICIAL REMEDIES [R.A. No. 1125, as amended, and the Revised Rules of the
Court of Tax Appeals (CTA)] .........................................................................................426
A. Jurisdiction of the CTA ..................................................................................................................................... 426
1. Exclusive appellate jurisdiction over civil tax cases ................................................................ 427
a) Cases within the jurisdiction of the court en banc............................................................ 427
b) Cases within the jurisdiction of the court in divisions ................................................... 428
2. Criminal cases .............................................................................................................................................. 430
a) Exclusive original jurisdiction ..................................................................................................... 430
b) Exclusive appellate jurisdiction in criminal cases ............................................................ 431
B. Judicial procedures ............................................................................................................................................ 431
1. Judicial action for collection of taxes ................................................................................................ 431
a) Internal revenue taxes ..................................................................................................................... 431
 b) Local taxes .............................................................................................................................................. 432
(1) Prescriptive period.................................................................................................................... 432
2. Civil cases ........................................................................................................................................................ 433
a) Who may appeal, mode of appeal, effect of appeal ........................................................... 433
(1) Taking of evidence ..................................................................................................................... 438
(2) Motion for reconsideration or new trial ........................................................................ 439
b) Appeal to the CTA, en banc ............................................................................................................ 439
c) Petition for review on certiorari to the SC ............................................................................ 441
3. Criminal cases ............................................................................................................................................... 442
a) Institution and prosecution of criminal actions ................................................................. 442
(1) Institution of civil action in criminal action ................................................................. 442
b) Appeal and period to appeal ......................................................................................................... 442
(1) Solicitor General as counsel for the people and government officials sued in
their official capacity ................................................................................................................ 442
c) Petition for review on certiorari to the SC ............................................................................ 443
 BUREAU OF INTERNAL REVENUE
ORGANIZATION AND FUNCTIONS OF THE
BUREAU OF INTERNAL REVENUE (BIR)
RULE-MAKING AUTHORITY OF
SECRETARY OF FINANCE
The Secretary of Finance, upon recommendation of
the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement
of the provisions of NIRC (Sec. 244, NIRC).
General principles on the rule-making power
1. Rules and regulations, as well as administrative
opinions and rulings, ordinarily should deserve
weight and respect by the courts.
2. All such issuances must not override, but must
remain consistent and in harmony with the law
they seek to apply and implement.
3. Administrative rules and regulations are
intended to carry out, neither to supplant nor to
modify, the law (CIR v. CA, G.R. No. 108358,
January 20, 1995).
Specific Provisions to be Contained in Rules and
Regulations
Rules and regulations must contain provisions
specifying, prescribing, or defining: (SLE2D RIDES)
1. The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions to discover
persons and property liable to national
internal revenue taxes, and the manner their
lists and records of taxable persons and taxable
objects shall be made and kept.
2. The forms of labels, brands or marks to be
required on goods subject to excise tax, and the
manner how the labeling, branding or marking
shall be effected.
3. The condition and manner for goods intended
for export, which if not exported would be
subject to an excise tax, shall be labeled,
branded or marked.
4. The conditions to be observed by revenue
officers respecting the institutions and conduct
of legal actions and proceedings;
5. The conditions under which goods intended for
storage in bonded warehouses shall be
conveyed thither, their manner of storage and
method of keeping entries and records, also the
books to be kept by Revenue Inspectors and
the reports to be made by them in connection
with their supervision of such houses.
6. The conditions under which denatured alcohol
may be removed and dealt in, the character and
quantity of the denaturing material to be used,
49
the manner in which the process of denaturing
shall be effected, so as to render the alcohol
suitably denatured and unfit for oral intake, the
bonds to be given, the books and records to be
kept, the entries to be made therein, the
reports to be made to the CIR, and the signs to
be displayed in the business or by the person
for whom such denaturing is done or by whom,
such alcohol is dealt in.
7. The manner in which revenue shall be
collected and paid, the instrument, document
or object to which revenue stamps shall be
affixed, the mode of cancellation, the manner in
which the proper books, records, invoices and
other papers shall be kept and entries therein
made by the person subject to the tax, as well
as the manner in which licenses and stamps
shall be gathered up and returned after serving
their purposes.
8. The conditions to be observed by revenue
officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and
other transfers mortis causa, as well as on gifts
and such other rules and regulations which the
CIR may consider suitable for the enforcement
of the said Title III.
9. The manner tax returns, information and
reports shall be prepared and reported and the
tax collected and paid, as well as the conditions
under which evidence of payment shall be
furnished the taxpayer, and the preparation
and publication of tax statistics.
10. The manner in which internal revenue taxes,
such as income tax, including withholding tax,
estate and donor's taxes, value-added tax,
other percentage taxes, excise taxes and
documentary stamp taxes shall be paid
through the collection officers of the BIR or
through duly authorized agent banks which are
hereby deputized to receive payments of such
taxes and the returns, papers and statements
that may be filed by the taxpayers in
connection with the payment of the tax:
Provided, however, that notwithstanding the
other provisions of the NIRC prescribing the
place of filing of returns and payment of taxes,
the CIR may, by rules and regulations require
that the tax returns, papers and statements and
taxes of large taxpayers be filed and paid,
respectively, through collection officers or
through duly authorized agent banks: Provided,
further, that the CIR can exercise this power
within 6 years from the approval of R.A. 7646
or the completion of its comprehensive
computerization program, whichever comes
earlier: Provided, finally, that separate venues
for the Luzon, Visayas and Mindanao areas may
be designated for the filing of tax returns and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
payment of taxes by said large taxpayers (Sec.
245, NIRC).
Various Kinds of Revenue Issuances by the CIR
1. Revenue Regulations (RRs) – issuances signed
by the Secretary of Finance (SoF), upon
recommendation of the CIR, that specify,
prescribe or define rules and regulations for
the effective enforcement of the provisions of
the Tax Code.
2. Revenue Memorandum Orders (RMOs) -
issuances signed by the CIR that provide
directives or instructions; prescribe
guidelines; and outline processes, operations,
activities, workflows, methods and procedures
necessary in the implementation of stated
policies, goals, objectives, plans and programs
of the BIR in all areas of operations, except
auditing.
3. Revenue Memorandum Circulars (RMCs) -
issuances signed by the CIR which publish
pertinent and applicable portions, as well as
amplifications, of laws, rules, regulations, and
precedents issued by the BIR and other
agencies/offices.
4. Revenue Administrative Orders (RAOs)-
issuances signed by the CIR that cover subject
matters dealing strictly with the permanent
administrative set-up of the BIR, more
specifically, the organizational structure,
statements of functions and/or responsibilities
of BIR offices, definitions and delegations of
authority, staffing and personnel requirements
and standards of performance.
5. Revenue Delegation of Authority Orders
(RDAOs) - issuances signed by the CIR which
refer to functions delegated by the CIR to
revenue officials in accordance with law.
6. Revenue Special Orders (RSOs) – administrative
order issued by the CIR assigning revenue
officers and employees of the BIR to special
duties which shall not exceed 1 year.
7. BIR Rulings – official positions of the CIR to
queries raised by taxpayers and other
stakeholders relative to clarification and
interpretation of tax laws. Rulings may come in
different forms:
a. BIR Rulings
b. VAT Rulings
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
c. Rulings issued by International Tax Affairs
Division (ITAD); and
d. Rulings issued thru delegated authorities
or unnumbered rulings
8. Revenue Audit Memorandum Orders (RAMOs) –
declarations of audit programs of the BIR for a
specific taxable year signed by the CIR.
9. Revenue Memorandum Rulings (RMRs) –
rulings, opinions and interpretations signed by
the CIR with respect to the 1997 Tax Code as
amended, as applied to a specific set of facts,
with or without established precedents, for
guidance of taxpayers.
10. Revenue Bulletins (RBs) – periodic issuances,
notices and official announcements of the CIR
that consolidate the BIR’s position on certain
issues, for the guidance of the public signed by
the CIR.
11. Revenue Travel Assignment Orders (RTAOs) –
issued by the CIR transferring, assigning or re-
assigning revenue officers or employees to
other or special duties connected with the
enforcement or administration of revenue laws
as the exigencies of the services may require.
Limit: Revenue officers assigned to perform
assessment or collection functions shall not
remain in the same assignment for more than 3
years.
Large Taxpayer
A large taxpayer is anyone who satisfies any of the
following criteria:
1. For VAT - Business establishment with VAT
paid or payable of at least P100,000 for any
quarter of the preceding taxable year;
2. For Excise Tax - Business establishment with
excise tax paid or payable of at least P1 million
for the preceding taxable year;
3. For Corporate Income Tax - Business
establishment with annual income tax paid or
payable of at least P1 million for the preceding
taxable year; and
4. For Withholding Tax - Business establishment
with withholding tax payment or remittance of
at least P1 million for the preceding taxable
year.
The Secretary of Finance, upon recommendation of
the CIR, may modify or add to the above criteria for
determining a large taxpayer after considering such
50
 BUREAU OF INTERNAL REVENUE
factors as inflation, volume of business, wage and
employment levels, and similar economic factors.
The penalties prescribed under Sec. 248 of the
NIRC shall be imposed on any violation of the rules
and regulations issued by the Secretary of Finance,
upon recommendation of the CIR, prescribing the
place of filing of returns and payments of taxes by
large taxpayers (Sec. 245, NIRC).
JURISDICTION, POWER
AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE
Powers and duties of the BIR [JEnAReS]
1. Assessment and collection of all national
internal revenue taxes, fees and charges;
2. Enforcement of all forfeitures, penalties and
fines;
3. Execution of judgments in all cases decided in
its favor (by the CTA and regular courts);
4. Give effect and administer the supervisory and
police powers conferred to it by the NIRC and
other laws;
5. Recommend to the Secretary of Finance all
needful rules and regulations for the effective
enforcement of the provision of the NIRC.
Chief Officials of the BIR
The BIR is headed by the CIR and 6 Deputy
Commissioners, who lead the following divisions:
1. Operations group
2. Legal Inspection Group
3. Resource and Management Group
4. Information Systems Group
5. Prosecution Group
6. Special Concerns Group
Q: Is the BIR authorized to collect estate tax
deficiencies by the summary remedy of levy
upon and sale of real properties of the decedent
without first securing the authority of the court
sitting in probate over the supposed will of the
decedent? (1998 Bar)
A: YES, the BIR is authorized to collect estate tax
deficiency through the summary remedy of levying
upon and sale of real properties of a decedent
without the cognition and authority of the court
sitting in probate over the supposed will of the
deceased because of the collection of estate tax is
executive in character. As such the estate tax is
exempted from the application of the statute of
non-claims, and this is justified by the
necessity of government funding, immortalized in
the maxim that taxes are the lifeblood of the
51
government (Marcos v. CIR, G.R. No. 120880, June 5,
1997).
Powers of the Commissioner
1. Power to interpret tax laws and to decide cases
(Sec. 4, NIRC);
2. Power to obtain information and to
summon/examine and take testimony of
persons (Sec. 5, NIRC);
Q: What are the purposes of these powers?
A:
1. To ascertain correctness of the return;
2. To make a return when none has been made;
3. To determine liability of any person for any
internal revenue tax;
4. To collect such liability;
5. To evaluate tax compliance.
Q: What is the scope of such powers? [SO-Ass2-
Sex]
A:
1. To examine any book, paper, record, or other
data which may be relevant or material to such
inquiry;
2. To obtain any information (costs, volume of
production, receipts, sales, gross income) on a
regular basis, from any person other than the
person under investigation and any office or
officer of the national/local government;
3. To summon the following to produce records
and to give testimony:
a. The person liable for tax or required to file a
return;
b. Any officer or employee of such person;
c. Any person having in his possession, custody
and care the books of accounts, accounting
records of entries related to the business of
such taxpayer.
4. Power to make assessments and prescribe
additional requirements for tax administration
and enforcement (Sec. 6, NIRC);
5. Power to assign internal revenue officers and
other employees (Secs. 16 and 17, NIRC);
6. Power to suspend the business operations of a
taxpayer for vialations of VAT rules (Sec. 115,
NIRC)
Q: When can the CIR suspend the business
operation of a taxpayer?
A:
1. In the case of VAT-registered person:
a. Failure to issue receipts or invoices;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
a. Failure to file a VAT return as required
under Sec. 114; or
b. Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipts for the taxable
quarter.
2. Failure of any person to register as required
under Sec. 236:
The temporary closure of the establishment
shall be for the duration of not less than 5 days
and shall be lifted only upon compliance with
whatever requirements prescribed by the CIR
in the closure order (Sec. 115 NIRC).
The CIR is also authorized: (TInDER PRIM)
1. To terminate taxable period for reasons
provided in the NIRC;
2. To make or amend return in case taxpayer fails
to file a return or files a false or fraudulent
return;
3. 3.To examine returns and determine tax due;
4. To prescribe any additional requirements for
the submission or preparation of financial
statements accompanying tax returns;
5. To inquire into bank deposits of
a. Decedent to determine his gross income;
b. A taxpayer who filed application to
compromise payment of tax liability by
reason of financial incapacity;
c. A specific taxpayer or taxpayers subject of
a request for the supply of tax information
from a foreign tax authority pursuant to an
international convention or agreement on
tax matters to which the Philippines is a
signatory or a party of. Provided, that the
information obtained from the banks and
other financial institutions may be used by
the BIR for tax assessment, verification,
audit and enforcement purposes;
6. To delegate powers vested upon him to
subordinate officials with rank equivalent to
Division Chief or higher, subject to limitations
and restrictions imposed under the rules and
regulations.
7. To prescribe real property values;
8. To take inventory of goods of any taxpayer, and
place any business under observation or
surveillance IF there is reason to believe that
such is not declaring his correct income, sales
or receipts for tax purposes;
9. To register tax agents.
Q: What are the powers of the BIR which cannot
be delegated?
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
A: [RICA]
1. To Recommend promulgation of rules and
regulations by the Secretary of Finance;
2. To Issue rulings of first impression or to
reverse, revoke or modify any existing rule
of the BIR;
3. GR: To Compromise or abate any tax
liability;
XPN: The Regional Evaluation Board may
compromise assessments involving
deficiency taxes of P500,000 or less and
minor crime violations.
4. To Assign or reassign internal revenue
officers to establishments where articles
subject to excise tax are kept.
Q: Will errors or mistakes of administrative
officials bind the government as to the
collection of taxes?
A: GR: Errors or mistakes of administrative officials
(including the BIR) should never be allowed to
jeopardize the financial position of the government.
Reason: Taxes are the lifeblood of the nation
through which the government agencies continue
to operate and with which the State effects its
functions for the welfare of its constituents (CIR v.
Citytrust and CTA, G.R. No. 106611, July 21, 1994).
XPN: For the purpose of safeguarding taxpayers
from any unreasonable examination, investigation
or assessment, our tax law provides a statute of
limitations in the collection of taxes. Thus, the law
on prescription, being a remedial measure, should
be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law
on prescription should perforce be strictly
construed (CIR v. Goodrich Philippines Inc., G.R No.
104171, February 24, 1999).
NOTE: In the Citytrust case, which involves a claim
for refund, the error or neglect was the failure of
the Solicitor General to present its evidence, as
counsel for the CIR, due to the unavailability of the
necessary records from BIR, prompting the
Solicitor to submit the case for decision without
presenting any evidence. While in Goodrich, the
error committed refers to the neglect of the BIR to
make assessment within the 3-year period as
required in Sec. 203, NIRC.
Powers of the Commissioner to interpret tax
laws and to decide tax cases
52
 BUREAU OF INTERNAL REVENUE
The power to interpret the provisions of NIRC and
other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.
The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or
other matters arising under the NIRC or other laws
or portions thereof administered by the BIR is
vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax
Appeals (Sec. 4, NIRC).
Power to interpret
a) The NIRC, and
b) Other tax laws.
Power to decide on
a) Disputed assessments,
b) Refunds of internal revenue taxes,
c) Fees or other charges, and penalties imposed in
relation thereto,
d) Other matters arising under the nirc or other
laws or portions thereof administered by the
BIR.
Q: On January 27, 2017, Ramon, the comptroller
of Vantage Point, Inc., executed a document
entitled “Waiver of the Statute of Limitations” in
connection with the BIR’s investigation of the
tax liabilities of the company for 2012.
However, the Board of Directors of Vantage
Point, Inc., did not adopt a board resolution
authorizing Ramon to execute the waiver.
On October 14, 2017, Vantage Point, Inc.,
received a preliminary assessment notice from
the BIR indicating its deficiency withholding
taxes for the year 2012. Vantage Point, Inc.,
filed its protest. On October 30, 2017, the BIR
issued a formal letter of demand and final
assessment notice. Vantage Point, Inc., again
filed a protest. The CIR denied the protests and
directed the collection of the assessed
deficiency taxes.
Accordingly, Vantage Point, Inc., filed a petition
for review in the CTA to seek the cancellation
and withdrawal of the assessment on the
ground of prescription.
a. What constitutes a valid waiver of the
statute of limitations for the assessment
and collection of taxes? Explain your
answer.
53
b. Has the right of the Government to assess
and collect deficiency taxes from Vantage
Point, Inc. for the year 2012 prescribed?
Explain your answer. (2017 Bar)
A:
a. Generally, a valid waiver of the statute of
limitations for the assessment and collection of
taxes must be executed by the taxpayer and
accepted by the BIR prior to the expiration of
the period which it seeks to extend. The same
must also be executed by the taxpayer or his
duly authorized representative, or in the case
of a corporation, it must be signed by any of its
responsible officers (CIR v. Kudos Metal
Corporation, G.R. No. 178087, May 5, 2010).
Such requirements must be met considering
that a waiver of the statute of limitations under
the NIRC, to a certain extent, is a derogation of
the taxpayers right to security against
prolonged and unscrupulous investigations
and must therefore be carefully and strictly
construed. (Philippine Journalists, Inc. v. CIR,
G.R. No. 162852, December 16, 2004).
b. YES, the final assessment was issued beyond
the three-year prescriptive period to make an
assessment. (Section 203, NIRC). The Waiver
did not extend the three-year prescriptive
period since it was executed after the
expiration of such period.
Non-retroactivity of rulings
The rulings of the BIR are not retroactive. Any
revocation, modification, or reversal of any of the
rules and regulations promulgated or any of the
rulings or circulars promulgated by the CIR shall
not be given retroactive application if it will be
prejudicial to the taxpayers, except in the following
cases:
1. Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
2. Where the facts subsequently gathered by the
BIR are materially different from the facts on
which the ruling is based; or
3. Where the taxpayer acted in bad faith (Sec. 246,
NIRC).
NOTE: If the revocation is due to the fact that the
regulation is erroneous or contrary to law, such
revocation shall have retroactive operation as to
affect past transactions, because a wrong
construction of the law cannot give rise to a vested
right that can be invoked by a taxpayer.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Q: XYZ Corporation, an export oriented
company, was able to secure a BIR Ruling in
June 2005 that exempts from tax the
importation some of its raw materials. The
ruling is of first impression, which means the
interpretation made by the CIR is one without
established precedents. Subsequently,
however, the BIR issued another ruling which in
effect would subject to tax such kind of
importation. XYZ Corporation is concerned that
said ruling may have a retroactive effect, which
means that all their importations done before
the issuance of the second ruling could be
subject to tax.
a. What is a BIR Ruling?
b. What is required to make a BIR ruling of
first impression a valid one?
c. Does a BIR ruling have a retroactive effect,
considering the principle that tax
exemptions should be interpreted strictly
against the taxpayer? (2007 Bar)
companies are not covered by the new law.
Relying on this ruling, DEF Printers did not pay
said tax. Subsequently, however, the BIR
reversed the ruling and issued a new one
stating that the tax covers printing companies.
Could the BIR now assess DEF Printers for back
taxes corresponding to the years before the
new ruling? Reason briefly. (2004 Bar)
A: NO. Reversal of a ruling shall not be given a
retroactive application if said reversal will be
prejudicial to the taxpayer. Therefore, the BIR
cannot assess DEF printers for back taxes because
it would be violative of the principle of non-
retroactivity of rulings and doing so would result in
grave injustice to the taxpayer who relied on the
first ruling in good faith (Sec. 246, NIRC; CIR v.
Burroughs, Inc., 142 SCRA 324[1986]).

A:
a. A BIR ruling is an administrative interpretation
of the Revenue Law as applied and
implemented by the Bureau. They can be relied
upon by taxpayers and are valid until
otherwise determined by the courts or
modified or revoked by a subsequent ruling or
opinion. They are accorded great weight and
respect, but not binding on the courts
(Commission v. Ledesma, L-17509, January 30,
1970).
b. A BIR ruling of first impression, to be a valid
ruling, must be issued within the scope of
authority granted to the CIR, and not
contravene any law or decision of the SC (CIR v.
Michel Lhuillier Pawnshop, Inc., G.R. No. 150947,
July 15, 2003; Sec. 7, NIRC).
c. A BIR ruling cannot be given retroactive effect
if it would be prejudicial to the taxpayer. Sec.
246 of the NIRC provides for retroactive effect
in the following cases:

1. Where the taxpayer deliberately misstates

or omits material facts from his return or
any document required of him by the BIR;
2. Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the rulings is based; or
3. Where the taxpayer acted in bad faith (Sec.
246, NIRC).

Q: Due to an uncertainty whether or not a new

tax law is applicable to printing companies, DEF
Printers submitted a legal query to the BIR on
that issue. The BIR issued a ruling that printing

UNIVERSITY OF SANTO TOMAS 54

2019 GOLDEN NOTES
 INCOME TAXATION

INCOME TAXATION 1. Direct tax– Tax burden is borne by the income

recipient upon whom the tax is imposed. It is a
DEFINITION, NATURE AND tax demanded from the very person who, it is
GENERAL PRINCIPLES intended or desired, should pay it (i.e income tax,
donor’s tax, estate tax). On the other hand,
Income taxation is in the nature of an excise taxation indirect tax is a tax demanded in the first
system, or taxation on the exercise of privilege, the instance from one person in the expectation and
privilege to earn yearly profits from various sources. intention that he can shift the burden to someone
It is a system that does not provide for the taxation of else (i.e. value-added tax [“VAT”], where the
property (Domondon, 2013). seller is liable to pay the output VAT, but shifts
the burden to the buyer).
Income tax systems 2. Progressive tax– Tax base increases as the tax
rate increases. It is founded on the “ability to
1. Global tax system – System employed where the pay” principle.
tax system views indifferently the tax base and 3. Comprehensive – It adopted the citizenship
generally treats in common all categories of principle, the residence principle and the source
taxable income of the individual (Tan v. Del principle.
Rosario, Jr., 237 SCRA 324, 331). 4. Semi-schedular or semi-global taxsystem
2. Schedular tax system – System employed where (Mamalateo, 2014).
the income tax treatment varies and is made to
depend on the kind or category of taxable Criteria in imposing Philippine income tax
income of the taxpayer (Tan v. Del Rosario, Jr.,
237 SCRA 324, 331). 1. Citizenship or nationality principle– A citizen of
3. Semi-schedular or semi-global tax system – All the Philippines is subject to Philippine income
compensation income, business or professional tax
income, capital gain, passive income, and other a. On his worldwide income, if he resides in the
income not subject to final tax are added Philippines;
together to arrive at the gross income. After b. Only on his income from sources within the
deducting the allowable deductions and Philippines, if he qualifies as a non-resident
exemptions from the gross income, the taxable citizen.
income is subjected to one set of graduated tax
rate for individual or normal corporate income 2. Residence or domicile principle–A resident alien
tax rate for corporation (Mamalateo, 2014). is liable to pay Philippine income tax on his
income from sources within the Philippines but
Schedular Treatment vs. Global Treatment (1994 is exempt from tax on his income from sources
Bar) outside the Philippines.
3. Source principle – An alien is subject to
Philippine income tax because he derives income
SCHEDULAR
GLOBAL TREATMENT from sources within the Philippines. A non-
TREATMENT
resident alien or non-resident foreign
Different tax rates Unitary or single tax rate
corporation is liable to pay Philippine income tax
Different categories of No need for classification
on income from sources within the Philippines,
taxable income as all taxpayers are
despite the fact that he has not set foot in the
subjected to a single tax
Philippines (Mamalateo, 2014).
rate
Usually used in Applied to corporations
Note: Only resident citizens and domestic
income taxation of
corporations are taxable on worldwide
individuals
income.
(Business income, (Business income,
professional income, professional income, Types of Philippine income tax [MC2F3 – BINGOS]
passive income, passive income, illegal
illegal income) income) 1. Minimum corporate income tax (MCIT)
You cannot add all of All of them are added 2. Capital gains tax on sale or exchange of unlisted
them together, due to together and subjected to shares of stock of a domestic corporation
different tax rates. a single tax rate. classified as capital asset
3. Capital gains tax on sale or exchange of real
Features of the Philippine Income Tax Law property located in the Philippines classified as
capital asset

UNIVERSITY OF SANTO TOMAS

55 FACULTY OF CIVIL LAW
 LAW ON TAXATION
4. Final withholding tax on certain passive 1. When the corporation is newly organized
investment incomes and commenced operations on any day
5. Final withholding tax on income payments made within the year
to non-resident individuals or corporations 2. When the corporation changes its
6. Fringe benefit tax (FBIT) accounting period
7. Branch profit remittance tax 3. When a corporation is dissolved
8. Improperly accumulated earnings tax (IAET) 4. When the Commissioner of Internal
9. Normal corporate income tax on corporations Revenue, by authority, terminates the
10. Graduated income tax on individuals, or taxable period of a taxpayer (NIRC, Sec.
11. Optional income tax of 8% for individuals 6[D]).
12. Special income tax on certain corporations 5. In case of final return of the decedent and
such period ends at the time of his death
Taxable Period
Kinds of Taxpayers:
Taxable period is a period within which the net
income is computed as a whole for income tax 1. Individuals
purposes. a. Citizen
i. Resident Citizen (RC)
Kinds of taxable periods ii. Non-Resident Citizen (NRC)
b. Aliens
1. Calendar period i. Resident Alien (RA)
The 12 consecutive months starting from ii. Non-Resident Alien (NRA)
January 1 and ending December 31. (1) Engaged in Trade or Business
(NRA-ETB)
Instances when calendar year shall be the (2) Not Engaged in Trade or Business
basis for computing net income (NRA-NETB)
iii. Special Alien
1. When the taxpayer is an individual c. Special class of individual employees
2. When the taxpayer does not keep books of i. Minimum wage earner
account
3. When the taxpayer has no annual 2. Corporations
accounting period a. Domestic
4. When the taxpayer is an estate or a trust b. Foreign
i. Resident foreign corporation (RFC)
NOTE: Taxpayers other than a corporation are ii. Non-resident foreign corporation
required to use only the calendar year. (NRFC)
c. Joint venture and consortium
The final adjustment return shall be filed on or d. Partnership
before the fifteenth (15th) day of April.
3. Estates
2. Fiscal period 4. Trusts
It is a period of 12 months ending on the last day
of any month other than December (NIRC, Sec. 22 Importance of knowing the classification of
[Q]). taxpayers

NOTE: The final adjustment return shall be filed In order to determine the applicable [GREED]
on or before the fifteenth (15th) day of the fourth 1. Gross income
(4th) month following the close of the fiscal year. 2. Income tax Rates
3. Exclusions from gross income
3. Short period 4. Exemptions
GR: The taxable period, whether it is a calendar 5. Deductions
year or fiscal year always consists of 12 months.
INCOME TAX
XPN: Instances when the taxpayer may have a
taxable period of less than 12 months: Income tax is a tax on all yearly profits arising from
property, profession, trade, or business, or a tax on
person’s income, emoluments, profits and the like

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
56
 INCOME TAXATION

(Fisher v. Trinidad, G.R. No. L-19030, October 20, contract worker (OCW) is taxable only on
1922). income from sources within the Philippines;
4. An alien, (RA or NRA), is taxable only on income
It is generally regarded as an excise tax. It is not within the Philippines;
levied upon persons, property, funds, or profits but 5. A domestic corporation (DC) is taxable on all
on the privilege of receiving said income or profit. income derived within and without the
Philippines;
Purposes of income tax 6. A foreign corporation, (engaged or not in trade
or business in the Philippines), is taxable only on
1. To provide large amounts of revenues income derived from sources within the
2. To offset regressive sales and consumption taxes Philippines.
3. To mitigate the evils arising from the inequality
in the distribution of income and wealth which Income
are considered deterrents to social progress by a
progressive scheme of taxation (Madrigal v. Income refers to all wealth which flows into the
Rafferty, G.R . No. 12287, August 8, 1918). taxpayer other than as mere return of capital. It
includes the forms of income specifically described
State partnership theory as gains and profits, including gains derived from the
sale or other disposition of capital assets (R.R. No. 2,
It is the basis of the government in taxing income. It Sec. 36).
emanates from its partnership in the production of
income by providing the protection, resources, Income is a flow of service rendered by capital by
incentive and proper climate for such production payment of money from it or any benefit rendered by
(CIR v. Lednicky, G.R. Nos. L-18169, L-18262 & L- a fund of capital in relation to such fund through a
21434, July 31, 1964). period of time (Madrigal v. Rafferty, G.R. No. 12287,
August 8, 1918).
Income tax vs. Property tax
Income vs. Capital (1995 Bar)
BASIS INCOME TAX PROPERTY
TAX CAPITAL INCOME
Incidence The incidence of The incidence Constitutes the Any wealth which flows
an income tax of a property investment which into the taxpayer other
falls on the tax is on the is the source of than a mere return of
earner. property itself. income capital
Who pays The earner pays The owner of Is the wealth Is the service of wealth
the tax income tax. the property Is the tree Is the fruit
pays the Fund Flow
property tax. Return or recovery Income is subject to
How Income tax is Property tax is of capital is not income tax
measured measured by measured by subject to income
the amount of the value of the tax
income property at a (Madrigal v. Rafferty, 38 Phil. 414)
received over a specific date.
period of time. Objects being taxed in income taxation
Frequency Income is taxed Property may
of taxation only once. be taxed on a 1. Fruit of Capital
recurring basis. 2. Fruit of Labor
3. Fruit of Labor and Capital combined
General Principles
Q: Assuming Mr. R withdraws money from his
Except when otherwise provided in the NIRC: bank account, is it income?

1. A RC is taxable on all income derived from A: NO, because income is other than a mere return of
sources within and without the Philippines; capital.
2. A NRC is taxable only on income derived from
sources within the Philippines; Income held in trust for another
3. An individual citizen who is working and
deriving income from abroad as an overseas

UNIVERSITY OF SANTO TOMAS

57 FACULTY OF CIVIL LAW
 LAW ON TAXATION
As a general rule, income held in trust for another is
not taxable since the trustee has no free disposal of
the amount thereof except if the income under trust
may be disposed of by the trustee without limitation
or restriction (North American Consolidated v. Burnet,
286 U.S. 417).
When income is taxable
The following are important considerations to
discover whether or not there is income for tax
purposes:
1. Existence of income
2. Realization of income
3. Recognition of income
4. Methods of accounting
The important considerations are discussed in
details below.
1. Existence of income
A primary consideration in income taxation is
that there must be income before there could be
income taxation (Domondon, 2013).
Receipts not considered as income
a. Advance payments or deposits for payments;
Advances are not revenues of the period in
which they are received but as revenue of the
period or periods in which they are earned.
b. Property received as compensation but
subject to forfeiture;
c. Assessments for additional corporate
contributions;
d. Increments resulting from revaluation of
property;
Until the revalued property is disposed of
there is no income realized.
e. Parent’s share in the accumulated and
current equity on subsidiaries’ net earnings
prior to distribution;
f. Money earmarked for some other persons not
included in gross income;
g. Money or property borrowed;
Borrowed money has to be repaid by the
debtor. On the other hand, the creditor does
not receive any income upon payment
because it is merely a return of capital.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
58
h. Increase in net worth resulting from
adjusting entries (Domondon, 2013).
Q: Mr. X borrowed ₱10,000 from his friend Mr. Y
payable in one year without interest. When the
loan became due, Mr. X told Mr. Y that he (Mr. X)
was unable to pay because of business reverses.
Mr. Y took pity on Mr. X and condoned the loan.
Mr. X was solvent at the time he borrowed the
₱10,000 and at the time the loan was condoned.
Did Mr. X derive any income from the
cancellation or condonation of his indebtedness?
Explain. (1995 Bar)
A: NO. Mr. X did not derived any income from the
cancellation or condonation of his indebtedness.
Since it is obvious that the creditor merely desired to
benefit the debtor in view of the absence of
consideration for the cancellation, the amount of the
debt is considered as a gift from the creditor to the
debtor and need not be included in the latter’s gross
income.
Security advances and security deposits paid by a
lessee to a lessor
The amount received by the lessor as security
advances or deposits is not considered income
because it will eventually be returned to the lessee;
hence the lessor did not earn, gain, or profit
therefrom (Tourist Trade and Travel v. CIR, CTA Case
No. 4806, January 19, 1996).
2. Realization of income
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met:
a. The earning process is complete or virtually
complete
b. An exchange has taken place (Manila
Mandarin Hotels, Inc. v. CIR, CTA Case No.
5046, March 24, 1997).
NOTE: Mere increase in the value of property is not
considered as income for tax purposessince it is an
unrealized increase in capital.
Q: Mr. Castillo is a resident Filipino citizen. He
purchased a parcel of land in Makati in 1970 at a
consideration of ₱1 million. In 2011, the land had
a fair market value of ₱20 million. Mr. Ayala
offered to buy the same for ₱20 million. Is Mr.
Castillo liable to pay for income tax in 2011 based
on the offer to buy by Mr. Ayala? (2011 Bar)
 INCOME TAXATION
A: NO. Mr. Castillo is not liable for income tax in 2011
ws for income tax attaches only if there is a gain
realized resulting from a closed and completed
transaction (Madrigal v. Rafferty, G.R. No. L12287,
August 7, 1918).
Increase in the net worth of a taxpayer
4. Methods of accounting
The increase in the net worth of a taxpayer is
taxable if it is the result of the receipt of
unreported or unexplainable tax income.
However, if they are merely shown as correction
of errors in its entries in its books relating to its
indebtedness to certain creditor which had been
erroneously overstated or listed as outstanding
when they had in fact been duly paid, they are not
taxable.
NOTE: If and when there are substantial
limitations or conditions under which payment is
to be made, such does not constitute
constructively realized.
3. Recognition of income
When income considered received for Philippines
income tax purposes:
a. If actually or physically received by taxpayer;
or
b. If constructively received by taxpayer.
Actual vis-a-vis constructive receipt
1. Actual receipt – income may be actual receipt
or physical receipt.
2. Constructive receipt – occurs when money
consideration or its equivalent is placed at the
control of the person who rendered the
service without restriction by the payor (Sec.
4.108-4, R.R. 16-2005).
The income is credited to the account of the
taxpayer and set apart for him which he can
withdraw at any time without restrictions
and/or conditions although not yet actually
received by him physically or reduced to his
possession is already taxable to him.
Examples of income constructively received:
[BITIS]
a. Deposits in banks which are made available
to the seller of services without restrictions
b. Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for services
rendered
59
c. Transfer of the amounts retained by the
payor to the account of the contractor
d. Interest coupons that have matured and are
payable but have not been encashed
e. Undistributed share of a partner in the
profits of a general professional partnership
Accounting methods for tax purposes comprise a
set of rules for determining how to report income
and deductions.
As a general rule, the law does not provide for a
specific method of accounting to be employed by
the taxpayer. The law only authorizes the CIR to
employ particular method of accounting of
income where:
a. The taxpayer does not employ a method for
computing income, or
b. The taxpayer’s method for accounting does
not clearly reflect the income (Domondon, 205,
citing Sec. 43 of NIRC).
Cash method versus accrual method of
accounting
In cash method, income is recognized only upon
actual or contructive receipt of cash payments or
property but no deductions are allowed from the
cash income unless actually disbursed through an
actual or contructive payment in cash or
property. Stated otherwise, income is earned
when cash is collected, and expense is incurred
when cash is dibursed.
Meanwhile, in accrual method, income is
recognized in the period it is earned, regardless of
whether it has been received or not. In the same
manner, expenses are accounted for in the period
they are incurred and not in the period they are
paid (Domondon, 2013). Amounts of income
accrue when the right to receive them become
fixed, when there is a created enforceable
liability. Similarly, liabilities are accrued when
fixed and determinable in amount, without
regard to indeterminacy merely of time of
payment (CIR v. Isabela Cultural Corp., G.R. No.
172231, February 12, 2007).
Tests in determining whether income is
earned for tax purposes
1. Realization test – There is no taxable income
unless income is deemed realized. Revenue is
generally recognized when both conditions
are met:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
a. The earning process is complete or
virtually complete; and
b. An exchange has taken place (Manila
Mandarin Hotels, Inc. v. CIR, CTA Case No.
5046, March 24, 1997).
2. Claim of Right Doctrine / Doctrine of
Ownership, Command, or Control – A
taxable gain is conditioned upon the presence
of a claim of right to the alleged gain and the
absence of a definite unconditional obligation
to return or repay. (CIR v. Javier, G.R. 78953)
3. Economic - Benefit test / Doctrine of
Proprietary Interest – Taking into
consideration the pertinent provisions of law,
income realized is taxable only to the extent
that the taxpayer is economically benefited.
4. Severance test – Income is recognized when
there is separation of something which is of
exchangeable value (Eisner v. Macomber, 252
US 189).
5. All Events test
Requisites:
a. Fixing of a right to income or liability to
pay; and
b. Availability of the reasonable accurate
determination of such income or liability.
Q: Isabela Cultural Corporation (ICC) incurred
professional fees for legal services that pertain
to the 1984 and 1985. ICC did not claim
deductions for said expenses in 1984 and 1985
since the cost of the services was not yet
determinable at that time. It claimed deductions
only in 1986 when ICC received the billing
statements for said services. BIR, however,
contends that since ICC is using the accrual
method of accounting, expenses for professional
services that accrued in 1984 and 1985, should
have been declared as deductions from income
during the said years and the failure of ICC to do
so bars it from claiming said expenses as
deduction for the taxable year 1986. Decide.
A: The expenses should have been claimed as
deductions in 1984 and1985. For a taxpayer using
the accrual method, the accrual of income and
expense is permitted when the all-events test has
been met.
The all-events test requires the right to income or
liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy.
However, the test does not demand that the amount
of income or liability be known absolutely, only that
a taxpayer has at his disposal the information
necessary to compute the amount with reasonable
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60
accuracy. The amount of liability does not have to be
determined exactly; it must be determined with
"reasonable accuracy."
The propriety of an accrual must be judged by the
facts that a taxpayer knew, or could reasonably be
expected to have known, at the closing of its books
for the taxable year. Accrual method of accounting
presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing
the accrual of an item of income or deduction. From
the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for
its legal services. The failure to determine the exact
amount of the expense during the taxable year when
they could have been claimed as deductions cannot
thus be attributed solely to the delayed billing of
these liabilities by the firm. For one, ICC, in the
exercise of due diligence could have inquired into
the amount of their obligation to the firm, especially
so that it is using the accrual method of accounting.
For another, it could have reasonably determined
the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time
legal consultant (CIR v. Isabela Cultural Corp., G.R. No.
172231, February 12, 2007).
Classification of income
As to source:
1. Gross income and taxable income from sources
within the Philippines
2. Gross income and taxable income from sources
without the Philippines
3. Income partly within or partly without the
Philippines
Refer to discsussions on “Classification of income
subject to tax.”
Situs of income taxation
Income from sources within the Philippines
1. Interests derived from sources within the
Philippines
2. Dividends from domestic and foreign
corporations, if more than 50% of its gross
income for the three-year period ending with
the close of the taxable year prior to the
declaration of dividends was derived from
sources within the Philippines
3. Compensation for services performed within the
Philippines
 INCOME TAXATION

4. Rentals and royalties from properties located in a. Produced in Income purely within
the Philippines or any interest in such property whole within and
including rentals or royalties for the use of or for sold within
the privilege of using within the Philippines b. Produced in Income purely without
intellectual property rights such as trademarks, whole without
copyrights, patents, etc. and sold without
5. Gains on sale of real property located in the c. Produced within Income partly within and
Philippines and sold without and partly without
6. Gains on sale of personal property other than d. Produced without Income partly within and
shares of stock within the Philippines and sold within and partly without
7. Gains on sale of shares of stock in a domestic Dividend income
corporation from: Income within
a. Domestic
Income from sources without the Philippines Corporation
b. Foreign
1. Interest and dividends derived from sources Corporation – If
other than those within the Philippines for the 3-year
2. Compensation for services performed outside period preceding
the Philippines the declaration of
3. Rentals and royalties from properties located dividend, the ratio
outside the Philippines or any interest in such of such Entirely without
property including rentals or royalties for the corporation’s Phil Proportionate*
use of or for the privilege of using outside the income to the Entirely within
Philippines intellectual property rights such as world (total) was:
trademarks, copyrights, patents, etc. - Less than
50%
Income derived partly within and partly without - 50% to 85%
the Philippines - More than
85%
Gains, profits, or incomes other than those
enumerated above shall be allocated or apportioned *Formula (Proportionate)
to sources within or without the Philippines Phil. Gross Income x Dividend received =
Income within
Summary rules on determination of situs Entire Gross Income
according to kinds of income
GROSS INCOME
KINDS OF INCOME TAX SITUS
Service or Place of performance of Except when otherwise provided, gross income
compensation service means all income derived from whatever source,
income including but not limited to the following items:
Rent Location of property (real [CG2I- R2DAP3]
or personal)
Royalties Place of use of intangibles 1. Compensation for services in whatever form
Merchandising Place of sale paid, including, but not limited to fees, salaries,
Gain on sale of Place of sale wages, commissions and similar items
personal property 2. Gross income derived from the conduct of trade
purchased and not or business or the exercise of a profession
produced 3. Gains derived from dealings in property
Gain on sale of real Location of property 4. Interests
property 5. Rents
Mining income Location of the mines 6. Royalties
Farming income Place of farming activities 7. Dividends
Gain on sale of Income within the 8. Annuities
domestic stock Philippines 9. Prizes and winnings
Interest Residence of the debtor 10. Pensions and
Gain on sale of Place of activity that 11. Partner’s distributive share from the net income
transport document produces the income of the general professional partnership (NIRC,
Sec. 32 [A])
Manufacturing:

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61 FACULTY OF CIVIL LAW
 LAW ON TAXATION
NOTE: The above enumeration of gross income
under NIRC is NOT exclusive.
Concept of income from whatever source derived
“Income from whatever source” includes all
income not expressly excluded or exempted from the
class of taxable income, irrespective of the voluntary
or involuntary action of the taxpayer in producing
the income (Gutierrez v. CIR, CTA Case No. 65, August
31, 1955).
Therefore, the source is immaterial – whether
derived from illegal, legal, or immoral sources, it is
taxable. As such, income includes the following
among others:
1. Treasure fund;
2. Punitive damages representing profit lost;
3. Amount received by mistake;
4. Cancellation or condonation of the taxpayer’s
indebtedness;
5. Receipt of usurious interest;
6. Illegal gains;
7. Taxes paid and claimed as deduction
subsequently refunded;
8. Bad debt recovery.
Q: Is money received under payment by mistake,
income subject to income tax?
A: Income paid or received through mistake may be
considered as “income from whatever source
derived” irrespective of the voluntary or involuntary
action of the taxpayer in producing income.
Moreover, under the “claim of right doctrine,” the
recipient even if he has the obligation to return the
same has a voidable title to the money received
through mistake (Gutierrez v. CIR, CTA Case No. 65,
August 31, 1955).
Q: Congress enacted a law imposing a 5% tax on
the gross receipts of common carriers. The law
does not define the term “gross receipts.” Express
Transport a bus company has time deposits with
ABC Bank. In 2007, Express Transport earned ₱1
million interest, after deducting the 20% final
withholding tax from its time deposits with the
bank. The BIR wants to collect a 5% gross
receipts tax on the interest income of Express
Transport without deducting the 20% final
withholding tax. Is the BIR correct? (2006 Bar)
A: YES. The term "Gross Receipts" is broad enough
to include income constructively received by the
taxpayer. The amount withheld is paid to the
government on its behalf, in satisfaction of
withholding taxes. The fact that it did not actually
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
62
received the amount does not alter the fact that it is
remitted in satisfaction of its tax obligations. Since
the income withheld is an income owned by
Express Transport, the same forms part of its
gross receipts (CIR v. Solidbank Corp., G.R. No. 148191,
November 25, 2003).
Q: Explain briefly whether the following items
are taxable or non-taxable:
1. Income from jueteng;
2. Gain arising from expropriation of
property;
3. Taxes paid and subsequently refunded
4. Recovery of bad debts previously
charged off;
5. Gain on the sale of a car used for personal
purposes. (2005 Bar)
A:
1. Taxable. Gross income includes "all income
derived from whatever source" (Sec. 32[A],
NIRC), which was interpreted as all income not
expressly excluded or exempted from the class
of taxable income, irrespective of the voluntary
or involuntary action of the taxpayer in
producing the income. Thus, the income may
proceed from a legal or illegal source such as
from jueteng. Unlawful gains, gambling
winnings, etc. are subject to income tax. The
NIRC stands as an indifferent neutral party on
the matter of where the income comes from (CIR
v. Manning, G.R. No. L-28398, August 6, 1975).
2. Taxable. Sale, exchange or other disposition of
property to the government of real property is
taxable. It includes taking by the government
through condemnation proceedings (Gonzales v.
CTA, G.R. No. L-14532, May 26, 1965).
3. Taxable if the taxes were paid and subsequently
claimed as deduction and which are
subsequently refunded or credited. It shall be
included as part of gross income in the year of
the receipt to the extent of the income tax benefit
of said deduction (NIRC, Sec. 34 C [1]). However,
it is not taxable if the taxes refunded were not
originally claimed as deductions.
4. Taxable under the tax benefit rule. Recovery of
bad debts previously allowed as deduction in the
preceding years shall be included as part of the
gross income in the year of recovery to the extent
of the income tax benefit of said deduction (NIRC,
Sec. 34 E [1]). This is sometimes referred as the
Recapture Rule.
NOTE: “Tax benefit rule” refers to the principle
that if a taxpayer recovers a loss or expense that
was deducted in a previous year, the recovery
must be included in the current year’s gross
 INCOME TAXATION

income to the extent that it was previously

deducted (Black, 2004).

5. Taxable. Since the car is used for personal

purposes, it is considered as a capital asset hence
the gain is considered income (NIRC, Sec. 32 A [3]
and Sec. 39 A [1]).

Gross income vis-à-vis net income vis-à-vis

taxable income

Net income taxation

Net income taxation is a system of taxation where the

income subject to tax may be reduced by allowable
deductions.

Taxable income or net income

This refers to 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 special laws.

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63 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Distinguish gross income from net income

BASIS GROSS INCOME NET INCOME

As to Allows no deductions Allows deductions
deductions
As to Grants no exemptions Grants exemptions
exemptions
As to tax base Gross Income Net Income
Advantages/ Simplifies the income tax system Confusing and complex process of filing
Disadvantages income tax return
Substantial reduction in corruption and tax Vulnerable to corruption on account of
evasion since the exercise of discretion, to margin of discretion in the grant of
allow or disallow deductions, is dispensed deductions
with
More administratively feasible Provides equitable reliefs in the form of
deductions, exemptions and tax credit
Does away with wastage of manpower and Tax audit minimizes fraud
supplies

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 INCOME TAXATION
Q: Lao is a big-time swindler. In one year he was
able to earn ₱1 Million from his swindling
activities. When the CIR discovered his income
from swindling, the CIR assessed him a deficiency
income tax for such income. The lawyer of Lao
protested the assessment on the following
grounds:
a. The income tax applies only to legal income,
not to illegal income;
b. Lao’s receipts from his swindling did not
constitute income because he was under
obligation to return the amount he had
swindled, hence, his receipt from swindling
was similar to a loan, which is not income,
because for every peso borrowed he has a
corresponding liability to pay one peso; and
c. If he has to pay the deficiency income tax
assessment there will be hardly anything left
to return to the victims of the swindling. How
will you rule on each of the three grounds for
the protest? (1995 Bar)
A:
a. Sec. 32 of the NIRC includes within the purview
of gross income all income from whatever source
derived. Hence, the illegality of the income will
not preclude the imposition of the income tax
thereon.
b. When a taxpayer acquires earnings, lawfully or
unlawfully, without the consensual recognition,
express or implied, of an obligation to repay and
without restriction as to their disposition, he has
received taxable income, even though it may still
be claimed that he is not entitled to retain the
money, and even though he may still be adjudged
to restore its equivalent. To treat the embezzled
funds as not taxable income would perpetuate
injustice by relieving embezzlers of the duty of
paying income taxes on the money they enrich
themselves with, by embezzlement, while honest
people pay their taxes on every conceivable type
of income (James v. U.S., 202 US 401).
c. The deficiency income tax assessment is a direct
tax imposed on the owner which is an excise on
the privilege to earn an income. It will not
necessarily be paid out of the same income that
was subjected to the tax. Lao’s liability to pay the
tax is based on him having realized a taxable
income from his swindling activities and will not
affect his obligation to make restitution.
Payment of the tax is a civil obligation imposed
by law while restitution is a civil liability arising
from a crime.
The tax implication when there is exchange of
services without compensation is that both parties
are taxable as if both each sold their services.
65
Self-help income is the amount saved for doing a
work by the taxpayer himself instead of hiring
someone to do the work. Self-help income is exempt
from tax. e.g.A person wants to repaint his house.
Instead of hiring a painter, that person did the
painting job himself to save money.
Classification of income subject to tax
The following are income subject to tax:
1. Compensation income
2. Fringe benefits
3. Professional income
4. Income from business
5. Income from dealings in propery
6. Passive investment income
7. Annuities, proceeds from life insurance or
other types of insurance
8. Prizes and awards
9. Pensions, retirement benefit or separation pay
10. Income from any source whatever
The classifications of income subject to tax are
discussed in detail below.
Compensation income
Compensation income includes all remuneration for
services rendered by an employee for his employer
unless specifically excluded under the NIRC (R.R. 2-
98, Sec. 2.78.1).
Refer to “Taxation on compensation income” for
further discussion.
Fringe benefits
Fringe benefit is any good, service or other benefit
furnished or granted by an employer, in cash or in
kind, in addition to basic salaries, to an individual
employee, except a rank and file employee, such as
but not limited to:
[HEV-HIM-HEEL]
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver and
others
5. Interest on loans at less than market rate to the
extent of the difference between the market rate
and the actual rate granted
6. Membership fees, dues and other expenses
athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
9. Educational assistance to the employee or his
dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows (NIRC, Sec. 33 [B];
R.R. 3-98, Sec. 2.33 [B])
Refer to “Taxation on compensation income” for
further discussion.
Professional income
Professional income refers to the fees received by a
professional from the practice of his profession,
provided that there is no employer-employee
relationship between him and his clients.
The existence or nonexistence of employer-
employee relationship is material to determine
whether the income is a compensation income or
professional income. If the employer-employee
relationship is present, then it is considered
compensation income. Otherwise, it is a professional
income.
For purposes of taxation, there is no deduction
allowed against compensation income, whereas
allowable deductions may be made from
professional income.
NOTE: Professional income shall be subject to
creditable withholding tax rates prescribed (R.R. No.
2-98).
Income from business
Business income refers to income derived from
merchandising, mining, manufacturing, and farming
operations.
NOTE: Business is any activity that entails time and
effort of an individual or group of individuals for
purposes of livelihood or profit.
Gross income derived from business
The term “gross income” derived from business shall
be equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold. In
the case of taxpayers engaged in the sale of service,
“gross income” means gross receipts less sales
returns, allowances and discounts (NIRC, Sec. 27 [A]).
Cost of goods sold
It includes all business expenses directly incurred to
produce the merchandise, to bring them to their
present location and use such as invoice cost of the
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66
goods sold, for a trading concern, or cost of
production for a manufacturing concern.
Cost of services
All direct costs and expenses necessarily incurred to
provide the service required by the customers and
clients including:
1. Salaries and employee benefits of personnel,
consultants, and specialists directly rendering the
service; and
2. Cost of facilities directly utilized in providing the
service (NIRC, Sec. 27 E [4]).
Income from dealings in property
Types of properties from which income may be
derived
1. Ordinary assets – refer to properties held by the
taxpayer used in connection with his trade or
business which includes the following: [SOUR]
a. 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;
b. Property held by the taxpayer primarily for sale
to customers in the ordinary course of trade or
business;
c. Property used in the trade or business of a
character which is subject to the allowance for
depreciation provided in the nirc; and
d. Real property used in trade or business of the
taxpayer.
Examples of ordinary assets
a. The condominium building owned by a
realty company, the units of which are for
rent or for sale.
b. Machinery and equipment of a
manufacturing concern subject to
depreciation
c. The motor vehicles of a person engaged in
transportation business.
2. Capital assets – include property held by the
taxpayer (whether or not connected with his
trade or business) other than SOUR above.
Examples of capital assets
a. Jewelry not used for trade or business
b. Residential houses and lands owned and
used as such
c. Automobiles not used in trade or business
d. Stock and securities held by taxpayers other
than dealers of securities
 INCOME TAXATION

Construction and interpretation of capital assets business, shall be considered

as ordinary assets.
The general rule has been laid down that the codal
definition of a capital asset must be narrowly
construed while the exclusions from such definitions Taxpayers All real properties acquired in
must be interpreted broadly (Tuazon v. Lingad, 58 habitually the course of trade or
SCRA 176). engaged in the business shall be considered
real estate as ordinary assets.
Q: Distinguish “capital asset” from “ordinary business
asset” (2003 Bar) Taxpayers not Real properties whether land,
engaged in the building, or other
A: “Capital assets” include property held by the real estate improvements, which are
taxpayer whether or not connected with his trade or business used or being used or have
business, but the term does not include any of the been previously used in the
following, which are consequently considered trade or business shall be
“ordinary assets”: considered as ordinary
assets.
1. Stock in trade of the taxpayer or other property of Taxpayer It will not result in the
a kind which would be properly included in the changing reclassification of real
inventory of the taxpayer if on hand at the close of business from property from ordinary to
the taxable year; real estate to capital asset.
2. Property held by the taxpayer primarily for sale non-real estate
to customers in the ordinary course of trade or business
business; Taxpayers All real properties originally
3. Property used in the trade or business of a originally acquired by them shall
character which is subject to the allowance for registered to be continue to be treated as
depreciation provided in sec. 34 (f) of the nirc; or engaged in the ordinary assets.
4. Real property used in trade or business of the real estate
taxpayer. business but
failed to
GUIDELINES IN DETERMINING WHETHER A subsequently
REAL PROPERTY IS A CAPITAL ASSET OR operate
ORDINARY ASSET Abandoned and It shall continue to be treated
Real estate All real properties acquired idle real property as ordinary assets.
dealer are ordinary assets. Real property No effect on the classification
Real estate All real properties which are: subject of of the property in the hands of
developer - Acquired whether involuntary the involuntary seller.
developed or undeveloped; transfer
- Held by the real estate (including
developer primarily for sale expropriation or
or for lease in the ordinary foreclosure sale)
course of trade or business
or which would be included Significance of determining whether the capital
in the inventory of the asset is ordinary asset or capital asset
taxpayer if on hand at the
close of the taxable year; They are subject to different rules. There are special
and rules that apply only to capital asset transactions, to
- Used in trade or business, wit:
whether in the form of land,
building, or improvements 1. Holding period rule
shall be considered as 2. Capital loss limitation
ordinary assets 3. Net capital loss carry-over (NELCO)
Real estate lessor All real properties whether
land and/or other Q: State with reason the tax treatment of the
improvements, which are for following in the preparation of annual income
lease/rent or being offered tax returns: Income realized from sale of:
for lease/rent, or for use or
being used in the trade or a. Capital assets; and

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67 FACULTY OF CIVIL LAW
 LAW ON TAXATION
b. Ordinary assets. (2005 Bar) NOTE: Gain is the difference between the proceeds
of the sale or exchange and the acquisition value of
A: the property disposed by the taxpayer.
a. Generally, income realized from the sale of
capital assets are not reported in the income tax Ordinary income vs. Ordinary loss
return as they are already subject to final taxes
(capital gains tax on real property and shares of ORDINARY INCOME ORDINARY LOSS
stocks not traded in the stock exchange). What It includes the gain The loss that may be
are to be reported in the annual income tax derived from the sale sustained from the sale
return are the capital gains derived from the or exchange of or exchange of ordinary
disposition of capital assets other than real ordinary asset. asset.
property or shares of stocks in domestic
corporations, which are not subject to final tax. Capital gain vs. Capital loss
b. Income realized from sale of ordinary assets is
part of Gross Income, included in the Income Tax CAPITAL GAIN CAPITAL LOSS
Return (NIRC, Sec. 32 A [3]). It includes the The loss that may be
gain derived from sustained from the sale or
Q: May capital asset be reclassified as ordinary the sale or exchange of an asset not
asset? exchange of an connected with the trade or
asset not business.
A:YES. Property initially classified as capital asset connected with
may thereafter be treated as an ordinary asset if a the trade or Capital loss may not exceed
combination of the factors indubitably tends to show business. capital gains when used as a
that the activity was in furtherance of or in the course deduction to income.
of the taxpayer’s trade or business.
Ordinary gain vs. Capital gain
Q: In January 1970, Juan bought 1 hectare of
agricultural land in Laguna for ₱100,000. This ORDINARY CAPITAL GAIN
property has a current fair market value of ₱10 GAIN
million in view of the construction of a concrete A gain derived A gain derived from the sale or
road traversing the property. Juan agreed to from the sale or exchange of capital assets or
exchange his agricultural lot in Laguna for a one- exchange of property whether or not
half hectare residential property located in ordinary assets connected with the trade or
Batangas, with a fair market value of ₱10 million, such as SOUR business of the tax payer other
owned by Alpha Corporation, a domestic than SOUR
corporation engaged in the purchase and sale of
real property. Alpha Corporation acquired the Actual gain vs. Presumed gain
property in 2007 for ₱9 million. What is the
nature of the real properties exchanged for tax
ACTUAL GAIN PRESUMED GAIN
purposes – capital or ordinary asset? (2008 Bar)
Excess of the The law presumes that the
selling price seller of real property
A: The one-hectare agricultural land owned by Juan
over the cost of classified as capital asset
is a capital asset because it is not a real property used
the asset realized gains, which is taxed
in trade or business. The one-half hectare residential
at 6% of the selling price or fair
property owned by Alpha Corporation is an ordinary
market value, whichever is
asset because the owner is engaged in the purchase
higher.
and sale of real property (NIRC, Sec. 39; RR 7-03).
Difference between treatment of capital gains
Computation of the amount of Gain or Loss
and losses between individuals and corporations
Gains derived from dealings in property mean all
income derived from the disposition of property BASIS INDIVIDUAL CORPORATION
whether real, personal or mixed for: Availability Holding period No holding
of holding available period
1. Money, in case of sale period
2. Property, in case of exchange The Capital gains and
3. Combination of both sales and exchange, which percentages of losses are taxable
results in gain gain or loss to to the extent of
be taken into 100%

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68
 INCOME TAXATION

Extent of account shall actually

Recog be the ff.: earned
-nition 100% - if the (presumed
(Taxabi capital assets gains)
-lity) have been held
for 12 months XPN:
or less; and Disposition of
50% - if the shares not
capital asset traded in the
has been held stock
for more than exchange or
12 months thru initial
Non- Non- public
deductibility of deductibility of offering
Net Capital Net Capital losses As to holding GR: Holding Holding
losses period period is period is
XPN: If any immaterial considered.
Deductibi Capital losses domestic bank or
-lity of are allowed trust company, a XPN:
capital only up to the substantial part Disposition of
losses extent of the of whose shares not
capital gains; business is the traded in the
hence, the net receipt of stock
capital loss is deposits, sells exchange or
not deductible. any bond, thru initial
debenture, note public
or certificate or offering
other evidence of As to Net Loss Not allowed Could be
indebtedness Carry Over availed
issued by any
corporation Holding period rule (long term capital gain vis-à-
(including one vis short term capital gain)
issued by a
government or Where the taxpayer held the capital asset sold for
political more than 12 months, the gain derived therefrom is
subdivision) taxable only to the extent of 50%. Consequently, if
Availability NCLCO NCLCO not the taxpayer held the capital asset sold for a year or
of NCLCO allowed allowed less, the whole gain shall be taxable. The same also
applies to capital loss. It is a form of tax avoidance
Capital gains subject to final tax vs. capital gains since the taxpayer can exploit it in order to reduce
reported in the income tax return his tax due (NIRC, Sec. 39 [B]).

BASIS SUBJECT TO REPORTED NOTE: Holding period does not find application in
FINAL TAX IN THE ITR the case of disposition of:
As to There is a The capital
deductions fixed rate for gains are 1. Shares of stock; and
the tax aggregated 2. Real property considered as capital asset,
with other whether the seller is an individual, trust, estate
income to or a private corporation.
constitute
gross income Only individual taxpayers can avail of the holding
subject to period rule. It is not allowed to corporations.
deductions
As to actual GR: It does There must be Net Capital Gain and Net Capital Loss
gains not matter actual capital
whether or gains earned Net capital gain is the excess of the gains from sales
not capital or exchanges of capital assets over the losses from
gains are such sales or exchanges. Net capital loss is the excess

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69 FACULTY OF CIVIL LAW
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of the losses from sales or exchanges of capital assets
over the gains from such sales or exchanges.
Recognition of gain or loss in exchange of
property
GR: Upon the sale or exchange of property, the entire
amount of the gain or loss shall be recognized.
XPN: Instances where no gain or loss is recognized:
1. 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;
2. A shareholder exchanges stock in a corporation
which is a party to the merger or consolidation
solely for the stock of another corporation, also a
party to the merger or consolidation;
3. A security holder of a corporation which is party
to the merger or consolidation exchanges his
securities in such corporation solely for stock
securities in another corporation, a party to the
merger or consolidation; or
4. If property is transferred to a corporation by a
person in exchange for stock or unit of
participation in such a corporation, as a result of
such exchange said person gains control of said
corporation, provided that stocks issued for
services shall not be considered as issued in
return for property.
“No gain or loss shall be recognized” means that if
there is a gain it shall not be subject to tax and if
there is a loss it shall not be allowed as a deduction.
Q: When is gain or loss not recognized in cases of
transfer of shares of stock of corporation in
exchange of property?
A: The requisites for the non-recognition of gain or
loss are as follows:
a. The transferee is a corporation;
b. The transferee exchanges its shares of stock for
property/ies of the transferor;
c. The transfer is made by a person, acting alone or
together with others, not exceeding four
persons; and
d. As a result of the exchange, the transferor, alone
or together with others, not exceeding four,
gains control of the transferee (CIR v. Filinvest
Development Corporation, G.R. Nos. 163653 and
167689, July 19, 2011).
Merger or consolidation for purposes of taxation
Merger or consolidation means:
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1. Ordinary merger or consolidation, or
2. The acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock provided that:
a. A merger or consolidation must be
undertaken for a bona fide business
purpose and not solely for the purpose
of escaping the burden of taxation
b. In determining whether a bona fide
business purpose exists each and every
step of the transaction shall be
considered and the whole transaction
or series of transactions shall be treated
as a single unit
In determining whether the property transferred
constitutes a substantial portion of the property of
the transferor, the term “property” shall be taken to
include the cash assets of the transferor
Capital Loss Limitation Rule
Losses from sale or exchanges of capital assets shall
be allowed only up to the extent of the gains from
such sales or exchanges (NIRC, Sec. 39 (C)).
Thus, under this capital loss limitation rule, capital
loss is deductible only up to the extent of capital gain.
The taxpayer can only deduct capital loss from
capital gain. If there is no capital gain, then no
deduction is allowed because you cannot deduct
capital loss from ordinary gain.
Rationale:To allow the deduction of non-business
(capital) losses from business (ordinary) income or
gain could mean the reduction or even elimination of
taxable income of the taxpayer through personal,
non-business related expense, resulting in
substantial losses of revenue to the government
(Mamalateo, 2014).
Where the capital loss limitation rule will not
apply:
- If a bank or trust company is incorporated under
the laws of the Philippines,
- a business whose substantial part is the receipt of
deposits,
- sells any bond, debenture, note or certificate or
other evidence of indebtedness issued by any
corporation, with interest coupons or in
registered form,
- any losses resulting from such sale shall not be
subject to the above limitations and shall not be
included in determining the applicability of such
limitation to other losses (NIRC, Sec. 39 [C]).
 INCOME TAXATION

Q: Can you deduct ordinary loss from ordinary
gain and from capital gain?
A: YES in both cases. Ordinary loss may be deducted
from ordinary gain while only from certain types of
capital gain may ordinary loss be deducted.
Rule on Matching Cost
Tax treatment of capital gains and losses
1. From Sale of Stocks of Corporations
a. Stocks Traded in the Stock Exchange –
subject to stock transaction tax of ½ of 1%
on its gross selling price
b. Stocks Not Traded in the Stock Exchange –
subject to capital gains tax.

Under this rule, only ordinary and necessary
expenses are deductible from gross income or
ordinary income. Capital loss is a non-business
connected expense as it can be sustained only from
capital transactions. To allow that capital loss as a
deduction from ordinary income would run counter
to the rule on matching cost against revenue.
Net Capital Loss Carry Over (NCLCO)
2. From Sale of Real Properties/Land and/or
Buildings in the Philippines – capital gain
derived is subject to capital gains tax but no loss
is recognized because gain is presumed.
NOTE: the NIRC speaks of real property with
respect to individual taxpayers, estate and trust
but only speaks of land and/or building with
respect to domestic corporations.

If any taxpayer, other than a corporation, sustains in
any taxable year a net capital loss, such loss (in an
amount not in excess of the net income for such year)
shall be treated in the succeeding taxable year as a
loss from the sale or exchange of a capital asset held
for not more than 12 months (NIRC, Sec. 39 [D]).
Rules with regard to NCLCO
Gains from sale to the government of real
property classified as capital asset
The taxpayer has the option to either:
a. Include as part of gross income subject
allowable deductions and personal
exemptions, then subject to the schedular
tax; or

1. NCLCO is allowed only to individuals, including NOTE: This is not available to a

estates and trusts. corporate taxpayer.
2. The net loss carry-over shall not exceed the net
income for the year sustained and is deductible b. Subject to final tax of 6% on capital gains
only for the succeeding year. (Sec. 24 [D], NIRC).
3. The capital assets must not be real property or
stocks listed and traded in the stock exchange. 3. From Sale of Other Capital Assets– the rules on
4. Capital asset must be held for not more than 12 capital gains and losses apply in the
months. determination of the amount to be included in
gross income subject to the graduated rates of 5-
NCLCO vs Net Operating Loss Carry Over 32% for individuals and the normal corporate
(NOLCO) income tax of 30% for corporations, and not
subject to capital gains tax.
BASIS NCLCO NOLCO
As to Arises from Arises from Capital gains from sale of shares of stock not
source capital ordinary traded in the stock exchange
transactions transactions
meaning meaning involving A final tax at the rate of fifteen percent (15%) is
involving capital ordinary asset imposed. (Sec. 24, R.A. 10963)
asset
As to Can be availed of Can be availed of by NOTE: What is controlling is whether or not the
who by individual individual and shares of stock are traded in the local stock exchange
can taxpayer only corporate taxpayer and not where the actual sale happened(Del Rosario
avail v. CIR, CTA, Case No. 4796, December 1, 1994).
As to May be carried Allows carryover of
period over only in the operating loss in 3 Persons liable to pay capital gains tax on the sale
of next succeeding succeeding taxable of shares of stock not traded in the stock
carry- taxable year years or 5 years, in exchange
over the case of mining
companies 1. Individuals – both citizens and aliens

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71 FACULTY OF CIVIL LAW
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2. Corporations – both domestic and foreign 3. Non-deductibility of losses on wash sales and
3. Estates and Trusts short sales.
4. Gain from sale of shares of stock in a foreign
Rules in determining the selling price of the corporation is not subject to capital gains tax but
shares disposed to graduated rates either as capital gain or
ordinary income depending on the nature of the
1. In case of cash sale — the selling price is the total trade of business of the taxpayer.
consideration as indicated in the deed of sale;
2. If the consideration is partly in money and partly Q: As to tax implication, distinguish shares of
in kind — the selling price is the cash or money stocks not listed and traded through stock
received plus the fair market value of the exchange from those listed and traded through
property received; stock exchange (2008, 2011 Bar)
3. In case of exchange — the selling price is the fair
market value (FMV) of the property received; A:
4. If the FMV of the shares of stock disposed is higher
than the amount of amount and/or fair market NOT LISTED LISTED AND
value of the property received, the excess of the AND TRADED TRADED
FMV of the shares of stock disposed over the As to Income Business
amount of money and the FMV of the property, nature
shall be deemed a giftsubject to the donor’s As to kind Capital gains tax Percentage tax
tax(R.R. 6-2008). of tax
5. In the case of shares of stock not listed and As to rate Not over ½ of 1%, if
traded in the local stock exchange, the value of ₱100,000 = 5% before TRAIN
the shares of stock at the time of sale shall be the In excess of Law was
FMV. In determining the value of the shares, the ₱100,000 = 10%, passed
Adjusted Net Asset Method shall be used If before TRAIN
whereby all assets and liabilities are adjusted to law was passed
FMV. The net of adjusted asset minus the
liability values is the indicated value of the 15% final tax, if
equity. covered by the 6/10 of 1%
6. The appraised value of real properties shall be TRAIN Law
the highest of the three: As to tax Net capital gain Gross selling
a. FMV determined by the Commissioner, base price
b. FMV as shown in the schedule of values
fixed by provincial and city assessors, or Q: What is the effect if the sale is made by a dealer
c. FMV as determined by independent in securities?
appraiser (R.R. 6-2013).
A: The shares of stock (whether listed and traded in
NOTE: The basis of determining the Capital Gains the local stock exchange, listed but not traded in the
Tax (CGT) is the capital gain and not the fair market local stock exchange, or not listed) shall be treated as
value. ordinary assets and the ordinary gain, if any, from
the sale or transfer thereof shall be subject to the
The above rules apply to DC, RFC, and NRFC. graduated income tax rates in the case of an
individual seller, or to the normal corporate income
Important features as regards capital gains from tax, in the case of corporate seller.
sale of shares of stock
Q: John, US citizen residing in Makati City, bought
1. No capital loss carry-over for capital losses shares of stock in a domestic corporation whose
sustained during the year (not listed and traded shares are listed and traded in the Philippine
in a local stock exchange) shall be allowed but Stock Exchange at the price of ₱2 Million. A day
capital losses may be deducted on the same after, he sold the shares of stock through his
taxable year only. favorite Makati stockbroker at a gain of
2. The entire amount of capital gains and capital ₱200,000.
loss (not listed and traded in a local stock
exchange) shall be considered without taking a. Is John subject to Philippine income tax on
into account the holding period irrespective of the sale of his shares through his
the type/kind of taxpayer. stockbroker? Is he liable for any other tax?

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2019 GOLDEN NOTES
72
 INCOME TAXATION
b. If John directly sold the shares to his best
friend, a US citizen residing in Makati, at a
gain of ₱200,000, is he liable for Philippine
income tax? If so what is the tax base and
rate?
A:
a. NO. The gain on the sale or disposition of shares
of stock of a domestic corporation held as capital
assets will not be subjected to income tax if
these shares sold are listed and traded in the
stock exchange (NIRC, Sec. 24 [C]).
However, the seller is subject to the percentage
tax of ½ of 1% of the gross selling price (NIRC,
Sec. 127 [A]).
b. YES. The sale of shares of stocks of a domestic
corporation held as capital, not through a
trading in the local stock exchange, is subject to
capital gains tax based on the net capital gain
during the taxable year. The tax rate is 15%.
Q: Federico, a Filipino citizen, migrated to the
United States some six years ago and got a
permanent resident status or green card. Should
he pay Philippine income tax on the gains he
derived from the sale in the New York Stock
Exchange of shares of stock in PLDT, a Philippine
corporation? (2011 Bar)
A: YES. The gain from the sale of shares of stock in a
domestic corporation shall be treated as derived
entirely from sources within the Philippines,
regardless of where the said shares are sold (NIRC,
Sec. 42[E]).
General rule on shares of stocks
Transaction Tax Treatment
Sold by a Treated as an ordinary asset
dealer in whose ordinary gains and losses
securities are subject to regular income tax.
Sold by an If sold through LSE: subject to
individual stock transaction tax of 50% of 1%
non-dealer (0.50%)
in securities If not sold through LSE: treated as
a capital asset
If domestic stocks were sold:
Subject to 15% capital gains tax
based on net gain
If foreign stocks were sold: Subject
to regular income tax (also subject
to capital loss limitation rule,
holding period rule, and net
capital loss carry over). Only gain
73
from sources within the
Philippines is subject to capital
gains tax.
A Not subject to income tax. Excess
corporation of price above par is not
selling its considered as an income.
own stocks
May be subject to percentage tax
on initial public offerings.
Corporation If sold through LSE: subject to
selling stock transaction tax of 50% of 1%
stocks of (0.50%)
another If not sold through LSE: treated as
corporation a capital asset
If domestic stocks were sold:
Subject to 15% capital gains tax
If foreign stocks were sold: Subject
to regular income tax (NOT subject
to capital loss limitation rule,
holding period rule, and net
capital loss carry over)
Capital gains realized from the sale of real
property/ land and/or buildings
Treatment of sale or disposition of real property
located in the Philippines treated as capital asset
A final tax of 6% shall be imposed based on the
higher amount between:
1. The gross selling price; or
2. Whichever is higher between the current fair
market value as determined by:
a. Zonal Value – prescribed zonal value of real
properties as determined by the CIR; or
b. Assessed Value – the fair market value as
shown in the schedule of values of the
Provincial and City assessors (NIRC, Sec. 24
D [1]).
Actual gain or loss is immaterial since there is a
conclusive presumption of gain.
As regards transactions affected by the 6% capital
gain tax, the NIRC speaks of real property with
respect to individual taxpayers, estate and trust but
also speaks of land and/or building with respect to
domestic corporations.
NOTE: The above discussion ofCGT on sale or
disposition of real properties shall apply only to
domestic corporations, since foreign corporations
(RFC and NRFC) cannot own properties in the
Philippines.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Tax treatment if property is not located in the
Philippines
Gains realized from the sale, exchange or other
disposition of real property not located in the
Philippines by resident citizens or domestic
corporations shall be subject to ordinary income
taxation (RR 7-2003, Sec. 4. [F]) but subject to foreign
tax credits.
Such income may be exempt in the case of non-
resident citizens, alien individuals and foreign
corporations (RR 7-2003, Sec. 4. [F]).
Transactions covered by the “presumed” capital
gains tax on real property
It covers:
1. Sale;
2. Exchange; or
3. Other disposition, including pacto de retro and
other forms of conditional sales (NIRC, Sec. 24 D
[1]).
NOTE: “Sale, exchange, or other disposition”
includes taking by the government through
expropriation proceedings.
Q: Hopeful Corporation obtained a loan from
Generous Bank and executed a mortgage on its
real property to secure the loan. When Hopeful
Corporation failed to pay the loan, Generous
Bank extrajudicially foreclosed the mortgage on
the property and acquired the same as the
highest bidder. A month after the foreclosure,
Hopeful Corporation exercised its right of
redemption and was able to redeem the
property. Is Generous Bank liable to pay capital
gains tax as a result of the foreclosure sale?
Explain. (2014 Bar)
A: NO. In a foreclosure of a real estate mortgage, the
capital gains tax accrues only after the lapse of the
redemption period because it is only then that there
exists a transfer of property. Thus, if the right to
redeem the foreclosed property was exercised by
the mortgagor before the expiration of the
redemption period, as in this case, the foreclosure is
not a taxable event (See RR No. 4-99; Supreme
Transliner, Inc. v. BPI Family Savings Bank, Inc. G.R.
No. 165617, February 25, 2011).
Q: The Department of Agriculture (DA), through
its Secretary, executed a Deed of Assignment of a
parcel of land in favor of the Bureau of Fisheries
and Aquatic Resources (“BFAR”) without any
monetary consideration. By virtue of the Deed,
BFAR applied for the issuance of a land title in its
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
74
own name. Is the assignment subject to CGT or
regular corporate income tax?
A: NO. While the conveyance of property by the DA
in favor of the BFAR was pursuant to a Deed of
Assignment, the assignment was made without
monetary consideration. Hence, it is not subject to
CGT. Neither is it subject to the regular corporate
income tax since the DA and the BFAR, which are
both government agencies exercising purely
governmental functions when the Deed was
executed, are exempt from such regular corporate
income tax. (See BIR Ruling No. 229-2017 dated 15
May 2017).
Q: Manalo, Filipino citizen residing in Makati
City, owns a vacation house and lot in Tagaytay,
which he acquired in 2000 for ₱15 million. On
Jan. 10, 2013, he sold said real property to
Mayaman, another Filipino residing in Quezon
City for ₱20 million. On Feb. 9, 2013, Manalo filed
the capital gains return and paid ₱1.2 million
representing 6% capital gains tax. Since Manalo
did not derive any ordinary income, no income
tax return was filed by him for 2013. After the tax
audit conducted in 2014, the BIR officer assessed
Manalo for deficiency income tax computed as
follows: ₱5 million (₱20million less ₱15 million)
x 30%= ₱1.5 million, without the capital gains tax
paid being allowed as tax credit. Manalo
consulted a real estate broker who said that the
₱1.2 million capital gains tax should be credited
from the ₱1.5 million deficiency income tax.
a. a. Is the BIR officer’s tax assessment correct?
Explain.
b. b. If you were hired by Manalo as his tax
consultant, what advice would you give him
to protect his interest? Explain. (2008 Bar)
A:
a. NO. The BIR officer’s tax assessment is wrong
for two reasons. First, the rate of income tax
used is the corporate income tax although the
taxpayer is an individual. Second, the
computation of the gain recognized from the
sale did not consider the holding period of the
asset. The capital asset having been for more
than 12 months, only 50% of the gain is
recognized (Sec. 39B, NIRC).
b. I will advise him to ask for the issuance of the
final assessment notice and request for the
crediting of the capital gains tax paid against the
income tax due. The taxpayer should explain
that the capital gains tax was paid in good faith
because the property sold is a capital asset and
considering that what was paid is also an income
 INCOME TAXATION
tax it should be credited against the income tax
assessment on the ground of equity. Once the
final assessment is made, I will advise him to
protest within 30 days from receipt, invoking
the holding period and the wrong tax rate used.
Q: A corporation, engaged in real estate
development, executed deeds of sale on various
subdivided lots. One buyer, after going around
the subdivision, bought a corner lot with a good
view of the surrounding terrain. He paid ₱1.2
million, and the title to the property was issued.
A year later, the value of the lot appreciated to a
market value of ₱1.6 million, and the buyer
decided to build his house thereon. Upon
inspection, however, he discovered that a huge
tower antenna had been erected on the lot
frontage totally blocking his view. When he
complained, the realty company exchanged his
lot with another corner lot with an equal area but
affording a better view. Is the buyer liable for
capital gains tax on the exchange of the lots?
(1997 Bar)
A: YES. The buyer is subject to capital gains tax on
the exchange of lots on the basis of prevailing fair
market value of the property transferred at the time
of the exchange or the fair market value of the
property received, whichever is higher (NIRC, Sec. 21
[E]).
Real property transactions subject to capital gains
tax are not limited to sales. It also includes exchanges
of property unless exempted by a specific provision
of law.
Q: A, a doctor by profession, sold in the year 2000
a parcel of land which he bought as a form of
investment in 1990 for ₱1 million. The land was
sold to B, his colleague and at a time when the
real estate prices had gone down, for only
₱800,000 which was then the fair market value
of the land. He used the proceeds to finance his
trip to the United States. He claims that he should
not be made to pay the 6% final tax because he
did not have any actual gain on the sale. Is his
contention correct? (2001 Bar)
A: NO. The 6% capital gains tax on sale of a real
property held as capital asset is imposed on the
income presumed to have been realized from the
sale, which is the fair market value or selling price
thereof, whichever is higher (NIRC, Sec. 24 [D]).
Actual gain is not required for the imposition of the
tax but it is the gain by fiction of law which is taxable.
Thus, capital gains tax is imposed even though the
sale results in net loss.
75
Q: In Jan. 1970, Juan bought 1 hectare of
agricultural land in Laguna for ₱100,000. This
property has a current fair market value of ₱10
million in view of the construction of a concrete
road traversing the property. Juan agreed to
exchange his agricultural lot in Laguna for a one-
half hectare residential property located in
Batangas, with a fair market value of ₱10 million,
owned by Alpha Corporation, a domestic
corporation engaged in the purchase and sale of
real property. Alpha Corporation acquired the
property in 2007 for ₱9 million.
a. What is the nature of real properties
exchanged for tax purposes – capital asset or
ordinary asset? Explain.
b. Is Juan Gonzales subject to income tax on the
exchange of property? If so, what is the tax
based and rate? Explain.
c. Is Alpha Corporation subject to income tax on
the exchange of property? If so, what is the
tax base and rate? Explain. (2008 Bar)
A:
a. The one hectare agricultural land owned by Juan
Gonzales is a capital asset because it is not a real
property used in trade or in business. The one
half hectare residential property owned by
Alpha Corporation is an ordinary asset because
the owner is engaged in the purchase and sale of
real property (Sec. 39, NIRC, Revenue
Regulations No. 7-03).
b. YES. The tax base in a taxable disposition of a
real property classified as a capital asset is the
higher between two values; the fair market
value of the property received in exchange and
the fair market value of the property exchanged.
Since the fair market value of these two
properties is the same, the said fair market value
should be taken as the tax base which is P10
Million. The income tax rate is 6 % (Sec. 24D (1)
NIRC).
c. YES. The gain from the exchange constitutes an
item of gross income, and being a business
income, it must be reported in the annual
income tax return of Alpha Corporation. From
the pertinent items of gross income, deductions
allowed by law from gross income can be
claimed to arrive at the net income which is the
tax base for the corporate income tax rate of
30% (Sec. 27 A and Sec. 31 NIRC).
Q: Sps. Salvador are the registered owners of a
parcel of land. The Republic, represented by the
DPWH filed a Complaint before the RTC for the
expropriation of a portion of said parcel of land
for the construction of a highway. The RTC
rendered judgment in favor of the Republic
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
condemning the subject property. The RTC
likewise directed the Republic to pay
respondents consequential damages equivalent
to the value of the capital gains tax and other
taxes necessary for the transfer of the subject
property in the Republic's name. The RTC
reasoned that the payment of capital gains tax
and other transfer taxes is but a consequence of
the expropriation proceedings. Is the RTC correct
in awarding consequential damages to the Sps.
Salvador as the payment for capital gains tax?
A: No. It is settled that the transfer of property
through expropriation proceedings is a sale or
exchange within the meaning of Sections 24(D) and
56(A) (3) of the NIRC, and profit from the transaction
constitutes capital gain. Since capital gains tax is a tax
on passive income, it is the seller, or respondents in
this case, who are liable to shoulder the tax.
In fact, BIR Ruling No. 476-2013 has constituted the
DPWH as a withholding agent tasked to withhold the
6% final withholding tax in the expropriation of real
property for infrastructure projects. As far as the
government is concerned, the capital gains tax in
expropriation proceedings remains a liability of the
seller, as it is a tax on the seller's gain from the sale of
real property. (Republic of the Philippines,
represented by the DPWH, vs. Spouses Salvador, G.R.
No. 205428, June 7, 2017, Del Castillo, J.)
Sale of Principal Residence
Principal residence – refers to the dwelling house,
including the land on which it is situated, where the
individual and members of his family reside, and
whenever absent, the said individual intends to
return. Actual occupancy is not considered
interrupted or abandoned by reason of temporary
absence due to travel or studies or work abroad or
such other similar circumstances (RR No. 14-00).
NOTE: The address shown in the ITR is conclusively
presumed as the principal residence. If the taxpayer
is not required to file a return, certification from
Barangay Chairman or Building Administrator (for
Condominium units) shall suffice.
Sale of principal residence by an individual
Asale of principal residence by an individual is
exempt from capital gains tax provided the following
requisites are present:
1. Sale or disposition of the old actual principal
residence;
2. By a citizen or resident alien;
UNIVERSITY OF SANTO TOMAS
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76
3. Proceeds from which is fully utilized in
acquiring or constructing a new principal
residence within 18 calendar months from the
date of sale or disposition;
4. Notify the CIR within 30 days from the date of
sale or disposition through a prescribed return
of his intention to avail the tax exemption;
5. Can be availed of once every 10 years;
6. The historical cost or adjusted basis of his old
principal residence shall be carried over to the
cost basis of his new principal residence;
7. If there is no full utilization, the portion of the
gains presumed to have been realized shall be
subject to capital gains tax; and
8. The 6% capital gains tax due shall be deposited
with an authorized agent bank subject to release
upon certification by the RDO that the proceeds
of the sale have been utilized (R.R. No. 14-00).
Q: Mr. H decided to sell the house and lot wherein
he and his family have lived for the past 10 years,
hoping to buy and move to a new house and lot
closer to his children’s school. Concerned about
the capital gains tax that will be due on the sale
of their house, Mr. H approaches you as a friend
for advice if it is possible for the sale of their
house to be exempted from capital gains tax and
the conditions they must comply with to avail
themselves of said exemption. How will you
respond? (2015 Bar)
A: Mr. H may avail the exemption from capital gains
tax on sale of principal residence by natural persons.
Under the law, the following are the requisites:
1. proceeds of the sale of the principal residence
have been fully utilized in acquiring or
constructing new principal residence within 18
calendar months from the date of sale or
disposition;
2. The historical cost or adjusted basis of the real
property sold or disposed will be carried over to
the new principal residence built or acquired;
3. The Commissioner has been duly notified,
through a prescribed return, within 30 days
from the date of sale or disposition of the
person’s intention to avail of the tax exemption;
and
4. Exemption was availed only once every 10
years.
Q: If the taxpayer constructed a new residence
and then sold his old house, is the transaction
subject to capital gains tax?
A: YES. Exemption from capital gains tax does not
find application since the law is clear that the
proceeds should be used in acquiring or constructing
 INCOME TAXATION

a new principal residence. Thus, the old residence

should first be sold before acquiring or constructing
the new residence.

Passive investment income

Passive income refers to income derived from any

activity in which the taxpayer has no active
participation or involvement.

Q: What is meant by “income subject to final tax?”

(2001 Bar)

A: Income subject to final tax refers to an income

wherein the tax due is fully collected through the
withholding tax system. Under this procedure, the
payor of the income withholds the tax and remits it
to the government as a final settlement of the income
tax due on said income. The recipient is no longer
required to include the item of income subjected to
“final tax” as part of his gross income in his income
tax returns.

Example: Interest income from bank deposits. The

bank (payor) deducts and/or withholds the final
withholding tax from the interest income. The bank
is required to remit the tax to the government. On the
other hand, the taxpayer need not declare the
interest income in his/her income tax return.

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77 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Summary rules on the tax treatment of certain passive income as applied to individuals

NRA- NRA –
RC NRC RA
ETB NETB
Within
Sources Of Income and Within Within Within Within
without
NATURE OF INCOME TAX RATE
INTEREST
On interest on currency bank deposits, yield or other monetary
benefits from deposit substitutes, trust funds and similar
arrangements
20% 20% 20% 20% 25%
XPN:
If the depositor has an employee trust fund or accredited
retirement plan, such interest income, yield or other monetary
benefit is exempt from final withholding tax.
Interest income under the Expanded Foreign Currency Deposit
System
15% Exempt 15% Exempt Exempt
NOTE: If the loan is granted by a foreign government, or an
international or regional financing institution established by
government, the interest income of the lender shall not be subject
to the final withholding tax.
Interest Income from long-term deposit or investment in the Held for:
form of savings, common or individual trust funds, deposit 5 years or more – exempt
substitutes, investment management accounts and other 4 years to less than 5 years – 5% Exempt
investments evidenced by certificates in such form prescribed by 3 years to less than 4 years – 12%
the BSP (RR. 14-2012) Less than 3 years – 20%
DIVIDEND
Dividend from a DC or from a joint stock company, insurance or
mutual fund company and regional operating headquarters of a
multinational company; or on the share of an individual in the 10% 10% 10% 20% 20%
distributable net income after tax of partnership (except that of a
GPP) of which he is a partner, or on the share of an individual in
the net income after tax of an association, a joint account or joint
venture or consortium taxable as a corporation of which he is a
member of co-venturer
ROYALTY INCOME
Royalties on books, literary works and musical composition 10% 10% 10% 10% 10%
Other royalties (e.g. patents and franchises) 20% 20% 20% 20% 25%
PRIZES AND WINNINGS
Prizes exceeding ₱10,000 20% 20% 20% 20% 25%
Winnings 20% 20% 20% 20% 25%
Winnings from Philippines Charity sweepstakes and lotto
winnings which are less than 10,000 pesos
Exempt Exempt Exempt Exempt Exempt
Otherwise, follow 20%

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
78
 INCOME TAXATION

Summary rules on the tax treatment of certain passive income as applied to corporations(NIRC, Sec. 27
[D])

NATURE OF INCOME DC RFC NRFC

Interests from any currency bank deposits, yield, or any other 20% 20% Shall be considered
monetary benefits from deposit substitutes and from trust fund as part of gross
and similar arrangement and Royalties derived from sources income subject to
within the Philippines 35% NCIT.

NOTE: Interest income or yield earned by DC from sources

outside the Philippines shall not be subject to final tax of 20% but
included in the gross income and subject to NCIT.
Interest Income derived under expanded foreign currency 15% 15% Exempt
deposit system
Interestderived by depositary bank under the expanded foreign 10% 10% Exempt
currency deposit system from foreign currency loans granted to
residents other than offshore banking units (OBUs)

NOTE: If granted to nonresidents, OBUs, local commercial banks

or branches foreign banks authorized by BSP to transact business
– EXEMPT
Interest received by NRFC on foreign loans(NIRC, Sec. 28 [5a]) – – 20%
Dividends received from Domestic Corporation (Inter-corporate Exempt Exempt 15% (subject to tax
Dividend) credit sparing rule)

UNIVERSITY OF SANTO TOMAS

79 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Interest income
It is the amount of compensation paid for the use
of money or forbearance from such use.
Tax-exempt interest income [FIL2D]
1. From bank deposits. The recipient must be any
following tax exempt recipients:
a. Foreign government;
b. Financing institutions owned, controlled
or financed by foreign government
2. Regional or international financing
institutions established by foreign
government (nirc, sec. 25 a [2]);
3. On loans extended by any of the above
mentioned entities;
4. On bonds, debentures, and other certificate of
indebtedness received by any of the above
mentioned entities;
5. On bank deposit maintained under the
expanded foreign currency deposit;
6. From long term investment or deposit with a
maturity period of 5 years or more.
NOTE: In order to avail exemption under item no.
4, the recipient must be a non-resident alien or
non-resident foreign corporation. Otherwise, it is
subject to final tax of 15%.
Long-term deposits or investments
Certificate of time deposit or investment in the
form of savings, common or individual trust funds,
deposit substitutes, investment management
accounts or other investments, with maturity of
not less than 5 years, the form of which shall be
prescribed by the Bangko Sentral ng Pilipinas
(BSP) and issued by banks (not by nonbank
financial intermediaries and finance companies) to
individuals in denominations of ₱10,000 and other
denominations as may be prescribed by the BSP
(NIRC, Sec. 22 [FF]).
Deposit substitute
This is an alternative form of obtaining funds from
the public other than deposits, through the
issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account, for
the purpose of re-lending or purchasing of
receivables and other obligations, or financing
their own needs or the needs of their agent or
dealer (NIRC, Sec. 22 [Y]).
In order for an instrument to qualify as a deposit
substitute, the borrowing must be made from
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
80
twenty (20) or more individual or corporate
lenders at any one time. The mere flotation of a
debt instrument is not considered to be a public
borrowing and is not deemed a deposit substitute,
if there are only 19 or less individual or corporate
lenders at any one time (R.R. 14-2012).
Foreign currency deposit system
It refers to the conduct of banking transactions
whereby any person whether natural or judicial
may deposit foreign currencies forming part of the
Philippine international reserves, in accordance
with the provisions of RA 6426, An Act Instituting a
Foreign Currency Deposit System in the
Philippines, and for other purposes.
Interest income subject to 15% final tax
If the interest is received by an individual taxpayer
(except nonresident individual) from a depository
bank under the expanded foreign currency deposit
system, it shall be subject to a final tax at the rate of
15% of such income (NIRC, Sec. 24 [B][1]).
Nonresident citizen and Nonresident alien are
exempt from payment of the 15% final tax on
interest income under the expanded foreign
currency deposit system.
Meanwhile, interest income derived by a domestic
corporation and resident foreign corporation from
a depository bank under the expanded foreign
currency deposit system (EFCDS) shall be subject
to final income tax rate of 7.5%. Correspondingly,
interest income received by NRFC shall be exempt.
Interest income subject to 10% final tax
Interest derived from foreign currency loans
granted by depositary banks to residents (DC or
RFC) other than offshore banking units in the
Philippines or other depositary banks under the
expanded system shall be subject to 10% final tax.
NOTE: If the loan is granted to nonresidents, OBUs,
or local commercial banks, including branches of
foreign banks authorized by the BSP to transact
business, it shall be EXEMPT.
“Interest Income subject to Final Withholding
Tax (20%)” vs. “Income subject to Gross
Receipts Tax (5%) on banks”
5% GROSS
20% FWT ON
RECEIPTS
INTEREST INCOME
TAX ON BANKS
 INCOME TAXATION
It is an income tax It is a business tax
under Title II of the (percentage tax)
NIRC (Tax on Income). under Title V (Other
Percentage Taxes).
FWT is imposed on the Gross Receipts Tax
gross interest income (GRT) is measured by
realized in a taxable a certain percentage
year. on the gross receipts
or earnings.
FWT is a withholding GRT is not a
tax. withholding tax.
NOTE: The 20% final tax withheld on a bank’s
passive income should be included in the
computation of GRT (China Banking Corporation v.
CIR, G.R. No. 175108, February 27, 2013).
Q: Maribel, a retired public school teacher,
relies on her pension from the GSIS and the
Interest Income from a time deposit of
₱500,000 with ABC Bank. Is Maribel liable to
pay any tax on her income?
A: YES. Maribel is exempt from tax on the pension
from the GSIS (Sec. 28 b [7] F, NIRC). However, with
her time deposit, the interest she receives thereon
is subject to 20% final withholding tax.
Q: In 2007, spouses Renato and Judy Garcia
opened peso and dollar deposits at the
Philippine branch of the Hong Kong Bank in
Manila. Renato is an overseas worker in Hong
Kong while Judy lives and works in Manila.
During the year, the bank paid interest income
of ₱10,000 on the peso deposit and US$1,000 on
the dollar deposit. The bank withheld final
income tax equivalent to 20% of the entire
interest income and remitted the same to the
BIR.
a. Are the interest incomes on the bank
deposits of spouses Renato and Judy
Garcia subject to income tax? Explain.
b. Is the bank correct in withholding the
20% final tax on the entire interest
income? Explain. (2008 Bar)
A:
a. YES. The interest income from the peso bank
deposit is subject to 20% final withholding tax.
The interest income from the dollar deposit is
subject to 7.5% final withholding tax but only
on the portion of the interest attributable to
Judy or $500. The interest on the dollar deposit
attributable to Renato, a non-resident is
exempt from income tax (Sec. 24B(1) NIRC).
b. NO. Only the interest income on a peso deposit
is subject to 20%. The interest income from a
81
dollar deposit is subject to 7.5% if the earner is
a resident individual (Sec. 24B NIRC).
Q: What is the tax treatment of the following
interest on deposits with:
a. BPI Family Bank?
b. A local offshore banking unit of a foreign
bank? (2005 Bar)
A:
a. It is a passive income subject to a withholding
tax rate of 20%.
b. It is a passive income subject to final
withholding tax rate of 7.5% (Sec. 24 [B][1],
NIRC).
Both interests are not to be declared as part of
gross income in the income tax return.
Q: On 2004, Edison (Bataan) Cogeneration
Corporation [EBCC] received from the CIR a
Formal Letter of Demand and Final Assessment
Notice assessing EBCC of deficiency Final
Withholding Tax (FWT) for taxable year 2000.
Upon the CIR’s inaction to the letter-protest
filed by EBCC, the latter elevated the case to the
CTA. The CTA Division held, among others, that
EBCC was not liable for the deficiency FWT
assessment on interest payments on loan
agreements for taxable year 2000 since its
liability for interest payment became due and
demandable only on 2002. The CIR contended
that EBCC was liable to pay the interest from the
date of the execution of the contract on 2000,
not from the date of the first payment on 2002,
as the loan agreement clearly indicated that the
interest was to be paid separately from the
principal. The decision of the CTA Division was
affirmed by the CTA en banc. Is EBCC liable for
deficiency FWT for the year 2000?
A: No, EBCC's liability for interest payment became
due and demandable starting 2002. The obligation
of EBCC to deduct or withhold tax arises at the time
an income is paid or payable, whichever comes
first, and considering further that under the RR 02-
98, the term "payable" refers to the date the
obligation becomes due, demandable or legally
enforceable, the CTA en banc correctly ruled that
EBCC had no obligation to withhold any taxes on
the interest payment for the year 2000 as the
obligation to withhold only commenced on June 1,
2002, and thus cancelling the assessment for
deficiency FWT on interest payments arising from
EBCC' s loan from Ogden. (Edison (Bataan)
Cogeneration Corporation vs. CIR, G.R. No. 201665 &
201668, August 30, 2017, Del Castillo, J.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Dividend income
Dividend is any distribution made by a corporation
to its shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in
other property.
Kinds of dividends
1. Cash dividend – paid in given sum of money
2. Property dividend – one paid in corporate
property such as bonds, securities or stock
investments held by the corporation, not its
own stock. They are taxable to the extent of the
fair market value of the property received at
the time of distribution.
3. Stock dividend – one paid by a coporation
with its own stock.
Stock dividends, strictly speaking, represent
capital and do not constitute income to its
recipient. So that the mere issuance thereof is
not subject to income tax as they are nothing
but enrichment through increase in value of
capital investment. In a loose sense, stock
dividends issued by the corporation, are
considered unrealized gain, and cannot be
subjected to income tax until that gain has been
realized. Before the realization, stock
dividends are nothing but a representation of
an interest in the corporate properties
(Commissioner v. ANSCOR, G.R. No. 108576,
January 20, 1999).
XPNs:
a. Change in the stockholder’s equity,
right/interest in the net assets of the
corporation;
b. Recipient is other than the shareholder;
c. Cancellation or redemption of shares of
stock;
d. Distribution treasury shares;
e. Dividends declared in the guise of treasury
stock dividend to avoid the effects of
income taxation; and
f. Different classes of stock were issued.
NOTE: A stock dividend does not constitute
taxable income if the new shares did not confer
new rights nor interests than those previously
existing, and that the recipient owns the same
proportionate interest in the net assets of the
corporation (RR No. 2, Sec. 252).
4. Scrip dividend – one that is paid in the form or
promissory notes
UNIVERSITY OF SANTO TOMAS
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5. Indirect dividend – one made through the
exercise of right or other means of payment, e.g.
Cancellation orcondonation of indebtedness
6. Liquidating dividend – one resulting from the
distribution by a corporation of all its property or
assets in compete liquidation or dissolution. It is
generally a return of capital, and hence, it is not
income. However, it is taxable income with respect
to the excess of amount received over cost of the
shares surrendered (Dimaampao, 2015).
Inter-corporate dividends
There is inter-corporate dividend when a dividend
is declared by one corporation and received by
another corporation which is a stockholder to the
former.
The following rules shall apply:
1. Dividends received from DC
a. Dividends received by a DC and RFCfrom a
domestic corporation shall not be subject
to tax (NIRC, Sec. 27 [D][4]);
Rationale:The law assumes that the
dividends received will be incorporated to
the capital which will eventually be taxed
when the corporation gets income from its
use of the capital.
b. Dividends received by a NRFCfrom a DC
shall be subject to 15% FWT. This is
known as the tax sparing rule (NIRC, Sec.
28 [B][5][b]).
Tax sparing rule
Under this rule, the dividends received
shall be subject to 15% FWT, provided,
thatthe country in which the corporation is
domiciled either (i) allows a tax credit of
15% against the taxes due from the foreign
corporation for taxes deemedpaidor (ii)
does not impose income tax on such
dividends(CIR v. Wander Philippines Inc.,
G.R. No. L-68375, April 15, 1988);
otherwise, the dividend shall be subject to
30%.
The phrase “deemed paid” “tax credit”
does not mean tax credit actually granted
by the foreign country. There is no
statutory provision or revenue regulation
requiring “actual grant”.
 INCOME TAXATION

The 15% represents the difference joint venture or consortium

between the NCIT of 30% on corporations taxable as corporation for which
and the 15% tax on dividends. he is a member or co-venturer
2. Dividends received from a foreign Exempt Inter-corporate dividends received
corporation: from tax from domestic corporation by
another domestic corporation and
a. Dividends received by a DCfrom a foreign resident foreign corporation
corporation shall be subject to 30% NCIT; (Tabag, 2015)
1.
b. Dividends received byRFC and NRFCfrom a Summary of tax treatment of dividend received
foreign corporation shall be subject to from domestic corporation
30% NCIT, IF the income of the foreign
corporation is derived from sources within TAXABLE (TAX RATE) /
the Philippines; IF the said income is RECIPIENT
EXEMPT
derived from sources outside the DC / RFC Tax exempt
Philippines, the dividends received shall RC, NRC, RA 10%
be exempt from tax. NRA – ETB 20%
NRA – 25%
In determining whether income is derived NETB
from sources within or without the Philippines, NRFC 30% subject to preferential treaty
the ratio of the foreign corporation’s Philippine tax rate
gross income to the world gross income within
the 3-year period preceding the declaration of
Dividend received from foreign corporation
such dividend should be considered.
Dividend received from foreign corporation is
PHILIPPINE GROSS subject to Philippine income tax if at least 50% of
SOURCE OF
INCOME = % WORLD the world (total) income of the foreign corporation
INCOME
GROSS INCOME must be derived from the Philippines for three
Less than 50% Entirely without years preceding the declaration of such dividend
50 - 85% Proportionate (Dimaampao, 2015).
(partly within;
partly without) Q: Does tax on income and dividends amount to
More than 85% Entirely within double taxation?

TAX TREATMENT OF DIVIDEND INCOME A: NO. Tax on income is different from tax on
dividend because they have different tax basis
Subject 1. Dividends from foreign
(Afisco Insurance Companies v. CA, G.R. No. 1123675,
to basic corporation
January 25, 1999).
tax 2. Share in the income of a GPP
Subject 1. Cash and/or property dividends Q: What are disguised dividends in income
to final actually or constructively taxation? (1994 Bar)
tax receieved by individuals from
domestic corporation or from a A: Disguised dividends are those income payments
joint stock company, insurance made by a domestic corporation, which is a
or mutual fund company and subsidiary of a non-resident foreign corporation, to
regional operating the latter ostensibly for services rendered by the
headquarters of multinationals latter to the former, but which payments are
2. Inter-corporate dividends disproportionately larger than the actual value of
received from domestic the services rendered. In such case, the amount
corporation by non-resident over and above the true value of the service
foreign corporation rendered shall be treated as a dividend, and shall be
3. Share of an individual in the subjected to the corresponding tax on Philippine
distributable net income after sourced gross income. E.g. Royalty payments under
tax of a partnership (other than a corresponding licensing agreement.
a GPP) which he is a partner
4. Share of an individual in the net Q: Suppose the creditor is a corporation and the
income (after tax) of an debtor is its stockholder, what is the tax
association, joint account, or a

UNIVERSITY OF SANTO TOMAS

83 FACULTY OF CIVIL LAW
 LAW ON TAXATION
implication in case the debt is condoned by the
corporation?
A: This may take the form of indirect distribution of
dividends by a corporation. On the part of the
stockholder whose indebtedness has been
condoned he is subject to 10% final tax, on the
masked dividend payment. On the part of the
corporation, said amount cannot be claimed as
deduction. When the corporation declares
dividends, it can be considered as interest on
capital therefore not deductible.
Q: BBB, Inc., a domestic corporation, enjoyed a
particularly profitable year in 2014. In June
2015, its Board of Directors approved the
distribution of cash dividends to its
stockholders. BBB, Inc. has individual and
corporate stockholders. What is the tax
treatment of the cash dividends received from
BBB, Inc. by the following stockholders: (2015
Bar)
a. A resident citizen
b. Non-resident alien engaged in trade or
business
c. Non-resident alien not engaged in trade or
business
d. Domestic corporation
e. Non-resident foreign corporation
A:
a. A final withholding tax of 10% shall be imposed
upon cash dividends actually or constructively
received by a resident citizen from BBB, Inc,
(Sec. 24(b)(2), NIRC).
b. A final withholding tax of 20% shall be imposed
upon cash dividends actually or constructively
received by a non-resident alien engaged in
trade or business from BBB, Inc. (Sec. 24(a)(2),
NIRC).
c. A final withholding tax equal to 25% of the
entire income received from all sources within
the Philippines, including the cash dividends
received from BBB, Inc. (Sec. 25(b), NIRC).
d. Dividends received by a domestic corporation
from another domestic corporation, such as
BBB, Inc., shall not be subject to tax (Sec.
27(d)(4), NIRC).
e. Dividends received by a non-resident foreign
corporation from a domestic corporation are
generally subject to an income tax of 30% to be
withheld at source (Sec. 28 (b)(1), NIRC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
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However, a final withholding tax of 15% is imposed
on the amount of cash dividends received from a
domestic corporation like BBB, Inc. if the tax
sparing rule applies (Sec. 28(B)(5)(b), NIRC).
Pursuant to this rule, the lower rate of tax would
apply if the country in which the non-resident
foreign corporation is domiciled would allow as a
tax credit against the tax due from it, taxes deemed
paid in the Philippines of 15% representing the
difference between the regular income tax rate and
the preferential rate.
Q: Fred, was a stockholder in the Philippine
American Drug Company. Said corporation
declared a stock dividend and that a
proportionate share of stock dividend was
issued to Fred. The CIR, demanded payment of
income tax on the aforesaid dividends. Fred
protested the assessment made against him and
claimed that the stock dividends in question are
not income but are capital and are, therefore,
not subject to tax. Are stock dividends income?
A: NO. Stock dividends are not income and are
therefore not taxable as such. A stock dividend,
when declared, is merely a certificate of stock
which evidences the interest of the stockholder in
the increased capital of the corporation. A
declaration of stock dividend by a corporation
involves no disbursement to the stockholder of
accumulated earnings and the corporation parts
with nothing to its stockholder. The property
represented by a stock dividend is still that of the
corporation and not of the stockholder. The
stockholder has received nothing but a
representation of an interest in the property of the
corporation and as a matter of fact, he may never
receive anything, depending upon the final
outcome of the business of the corporation (Fisher
v. Trinidad, G,R, No. L-21186, February 27, 1924).
Q: The JV was tasked to develop and manage
FDC’s 50% ownership of its PBCom Office
Tower Project “the Project”. FDC paid its
subscription by executing a Deed of Assignment
of its rights and interests in the Project worth
₱5.7M in favor of the JV. The BIR assessed
deficiency income tax on the gain on the
supposed dilution and/or increase in the value
of FDC’s shareholdings in FAC. Did the BIR
properly impute deficiency income taxes to FDC
which was supposedly incurred by it as a
consequence of the dilution of its shares in FAC?
A: NO. The mere appreciation of capital is not
taxable. Gain is realized upon disposition. No
deficiency income tax can be assessed on the gain
on the supposed dilution and/or increase in the
 INCOME TAXATION

value of FDC’s shareholdings in FAC (CIR v. Filinvest

Development Corporation, G.R. Nos. 163653 &
167689, July 19, 2011).

Q: Is the redemption of stocks of a corporation

from its stockholders as well as the exchange of
common with preferred shares considered as
“essentially equivalent to the distribution of
taxable dividend” making the proceeds thereof
taxable?

A: YES. The general rule states that a stock dividend

representing the transfer of surplus to capital
account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to
make the distribution and cancellation or
redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or
cancellation of the stock shall be considered as
taxable income to the extent it represents a
distribution of earnings or profits accumulated.

The redemption converts into money the stock

dividends which become a realized profit or gain
and consequently, the stockholder’s separate
property. Profits derived from the capital invested
cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the
existence of any business purpose for the
redemption (CIR v. CA, G.R. No. 108576, January 20,
1999).

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85 FACULTY OF CIVIL LAW
 LAW ON TAXATION

Summary of Rules on Dividends

SOURCE OF DIVIDENDS
RECIPIENT DC RFC NRFC
RC 10% final tax Regular income tax (0-32%) Regular income tax (0-32%)
RA 10% final tax Less than 50% of income of RFC/NRFC is from PH: Non-
taxable Income from sources outside PH are not taxable for
RA, NRC, NRAETB, and NRANETB)
NRC 10% final tax
If 50%-85% of income of RFC/NRFC is from PH, a proportion
NRAETB 20% final tax of the income is considered as income within the Philippines,
subject to regular income tax (or 25% final tax for
NRANETB).
NRANETB 25% final tax
If more than 85% of income of RFC/NRFC is from PH, entire
dividend income is considered as income within the
Philippines, subject to regular income tax (or 25% final tax
for NRANETB).
DC Exempt (intercorporate Same rule for RFCs and Regular corporate income
dividends) NRFCs (see below) tax (30%)
RFC Exempt (intercorporate Less than 50% of income of RFC/NRFC is from PH: Non-
dividends) taxable Income from sources outside PH are not taxable for
RFC and NRFC)

If 50%-85% of income of RFC/NRFC is from PH, a proportion

NRFC 30% subject preferential of the income is considered as income within the Philippines,
treaty tax rate subject to regular income tax (or 30% final tax on gross
income for NRFC).

If more than 85% of income of RFC/NRFC is from PH, entire

dividend income is considered as income within the
Philippines, subject to regular income tax (or 30% final tax
on gross income for NRFC).

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 INCOME TAXATION

Royalty income recognized as income at the time it is applied. The

purpose of security deposit is to ensure contract
No definition was provided for royalty income compliance. It is not income to the lessor until the
under the NIRC. Nonetheless, Webster Dictionary lessee violates any provision of the contract.
defined the same as a share of the earnings as from
invention, book or play, paid to the inventor, writer, Rent is subject to special rate
etc. for the right to make, use or publish the same
(Tabag, 2015). 1. Those paid to non-resident owner or lessor of
vessels chartered by Philippine national – 4.5%
Morever, in Universal Food Corporation vs. CA, 1970, of gross rentals (NIRC, Sec. 28 B [3])
it was defined to be the compensation for the use of 2. Those paid to non-resident owner or lessor of
a patented invention. aircraft, machineries and other equipment –
7.5% of gross rental or fees (NIRC, Sec. 28 B [4])
Tax treatment of royalty income
Items considered as additional rent income
Subject to Royalties on books, other literary
10% final works and musical composition Additional rent income may be grouped into 2:
tax from sources within the 1. Obligations of Lessors to 3rd parties assumed by
Philippines. the lessee:
Subject to Royalties derived from sources
20% final within the Philippines other than a. Real estate taxes on leased premises
tax royalties subject to 10% to final b. Insurance premiums paid by lessee on
tax. property
Subject to Royalties derived by RC and DC c. Dividends paid by lessee to stock-holders
basic tax from sources without the of lessor-corporation
Philippines. d. Interest paid by lessee to holder of bonds
(Tabag, 2015) issued by lessor-corporation

Rent vs. Royalty 2. Value of permanent improvement made by

lessee on leased property of the lessor upon
BASIS RENT ROYALTY expiration of the lease
As to Must be Need not be
reporting reported as reported Lease of personal property
part of gross since subject Rental income on the lease of personal property
income to final tax. located in the Philippines and paid to a non-
As to tax rate Regular Final tax resident taxpayer shall be taxed as follows:
progressive
tax if NRC NRA
individual Vessel 4.5% 25%
Aircraft, 7.5% 25%
Rental income machineries and
other equipment
Rental income is a fixed sum, either in cash or in Other assets 30% 25%
property equivalent, to be paid at a definite period
for the use or enjoyment of a thing or right. All Tax treatment of leasehold improvements by
rentals derived from lease of real estate or lessee
personal property, of copyrights, trademarks,
patents and natural resources under lease. Recognized methods in reporting the value of
permanent improvement
Prepaid rent
Where the lease contract provides that the lessee
Prepaid or advance rental is taxable income to the will erect a permanent improvement on the rented
lessor in the year received, if received under a claim property and after the term of the lease, the
of right and without restriction as to its use, improvement shall become the property of the
regardless of method of accounting employed. lessor, the lessor may, at his option, report the
income therefrom upon either of the following
NOTE: Security deposit applied to the rental of methods:
terminal month or period of contract must be

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87 FACULTY OF CIVIL LAW
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1. Outright Method – the fair market value of the Tax treatment of advance rental/long term
building or improvement shall be reported as lease
additional rent income at the time when such
building or improvements are completed; and If the advance payment by the lessee is really a loan
2. Spread Out Method – allocate over the life of the to the lessor, or anoption money for the property or
lease the estimated book value of such a security deposit for the faithful performance of
buildings or improvements at the termination certain obligations of the lessee, the lessor realizes
of the lease and report as additional rent for no taxable income in the year the advance payment
each year of the lease an aliquot part thereof in is received. If the advance payment is, in fact, a
addition to the regular rent income. prepaid rental, there is taxable income to the lessor
whether the latter is using the cash or accrual
NOTE: With the outright method it would only be method of accounting.
counted for 1 rental payment unlike with the
spread out method it would be distributed to the FORMS OF
TAX WHEN
remaining term of the lease contract. ADVANCE
TREATMENT TAXABLE
PAYMENT
Q: X leased his vacant lot in Binondo to Y for a A loan to the G.R.: Non-
term of 10 years at an annual rental of lessor from taxable
₱600,000. The contract provides that Y will put the lessee
up a building on the lot and after 10 years, the XPN: If the
building will belong to X. The building was lessee violates
erected at a cost of ₱6,000,000 and has an the terms of
estimated useful life of 30 years. Assuming the the contract
fair value of the completed building is the same An option G.R. Non-
as the construction cost, what is the total money for the taxable
income of X if he opts to report his income on property
the leasehold improvements using: XPN: If the
lessee violates
a. Outright method the terms of
b. Spread out method the contract
A security G.R.: Non-
A: deposit to taxable
a. If X reports his income on the improvements in the insure the
year it was completed, his total rental income shall faithful XPN: If the
be: performance lessee violates
FMV of the building in ₱6,000,000 of the lease the terms of
the year of completion the contract
Add: Annual rental 600,000 A security G.R.: Non- Taxable at the
Total rental income ₱6,600,000 deposit which taxable time it is
restricts the applied
b. If X reports his income on the improvements using lessor as to its XPN: Security
the spread out method, his total rental income shall use deposit applied
be: to rental shall
Cost of the building ₱6,000,000 be subject tom
Less: Accumulated depreciation at VAT at the time
the end of lease term of its
(₱6,000,000/30 years x 10 years) 2,000,000 application
Book value of the building at the Prepaid rental Taxable In the year it
expiration of lease ₱4,000,000 without is received
restriction as irrespective of
Divided by: Lease term 10 to its use the
accounting
Annual income of X on method
the improvement ₱400,000 employed by
Regular rental income 600,000 the lessor
Total annual rental income ₱1,000,000
Prizes and awards

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2019 GOLDEN NOTES
88
 INCOME TAXATION

It refers to amount of money in cash or in kind b. The recipient is not required to render
received by chance or through luck and is generally substantial future services as a condition
taxable except if specifically mentioned under the to receiving the prize or award.
exclusion from computation of gross income under
Sec. 32[B] of NIRC. 2. All prizes and awards granted to athletes in
local and international sport competitions and
Tax treatment for prizes and winnings tournaments whether held in the Philippines or
abroad and sanctioned by their national sports
Generally, prizes exceeding ₱10,000 and other associations
winnings from sources within the Philippines shall
be subject to 20% final withholding tax, if received NOTE: The national sports association referred
by a citizen, resident alien or non-resident engaged to by law that should sanction said sport activity
in trade or business in the Philippines. If the is the Philippine Olympic Committee.
recipient is a non-resident alien not engaged in
trade or business in the Philippines, the prizes and 3. Prizes that winning inventors receive from the
other winnings shall be subject to 25% final nationwide contest for the most innovative New
withholding tax. If the recipient is a corporation and Renewable Energy Systems jointly
(domestic or foreign), the prizes and other sponsored by the PNOC and other organizations
winnings are added to the corporation’s operating for during the first ten years reckoned from the
income and the net income is subject to 30% date of the first sale of the invented products,
corporate income tax. provided that such sale does not exceed
₱200,000 during any twelve-month period (R.A.
RECIPIENTS TAX RATES No. 7459, Sec. 5 and 6; BIR Ruling 069-2000).
Citizen, resident alien or Subject to 20%
non-resident engaged in final Summary of tax treatment of prizes and other
trade or business in the withholding tax winnings
Philippines
Non-resident alien not Subject to 25% Exemp 1) Prizes and award made primarily in
engaged in trade or business final t from recognition of
in the Philippines withholding tax tax •Religious, charitable;
Corporation (domestic or Subject to 30% •Scientific;
foreign) corporate •Educational artistic, literary; or
income tax •Civic achievement.

Prizes and winning subject to income tax
1. Prizes derived from sources within the
Philippines not exceeding ₱10,000 are
included in the gross income.
2. Winnings derived from sources within the
Philippines is subject to final tax on passive
income except PCSO and lotto winnings which
are tax exempt.
3. Prizes and winnings from sources outside the
Philippines
Prizes and awards exempt from income tax
1. Prizes and awards made primarily in
recognition of religious, charitable, scientific,
educational, artistic, literary, or civic
achievement provided, the following
conditions are met:
a. The recipient was selected without any
action on his part to enter the contest or
proceeding; and
Provided the recipient was:
a) Selected without any action on his
part to enter the contest or proceeding
(not constituting gains from labor); and
b) Not required to render substantial
future services as a condition to receive
the prize/award.
2) All prizes and awards granted to
athletes in local and international
sports competitions and tournaments,
whether held in the Philippines or
abroad and sanctioned by their
respective national sports association
3) PCSO/Lotto winnings (except NRA-
NETB)
Subjec 1) Prizes and Other winnings derived by
t to resident citizens and domestic
basic corporation from sources without the
tax Philippines.
2) Prizes and Winnings received by
corporation from sources within the
Philippines

UNIVERSITY OF SANTO TOMAS

89 FACULTY OF CIVIL LAW
 LAW ON TAXATION
3) Prizes received by individuals from
sources within the Philippines
amounting to P10,000 or more
Subjec 1) Prizes received by individuals
t to (except NRA-NETB) from sources
20% within Philippines exceeding ₱10,000
final 2) Other winnings from sources within
tax the Philippines regardless of amount
(Other than PCSO and Lotto winnings)
Subjec Prizes and other winnings (including
t to PCSO and Lotto winnings) received by
25% NRA-NETB
final
tax
(Tabag, 2015)
Annuities, proceeds from life insurance and
other types of insurance
Annuity
It refers to the periodic installment payments of
income or pension by insurance companies during
the life of a person or for a guaranteed fixed period
of time, whichever is longer, in consideration of
capital paid by him.
The portion representing return of premium is not
taxable while that portion that represents interest
is taxable.
NOTE: The portion of annuity net of premiums is
taxable being interest or earnings of the premium
and not return of capital.
Q: X purchased a life annuity for ₱100,000
which will pay him ₱10,000 a year. The life
expectancy of X is 12 years. How much is
excluded from the gross income of X?
A: The ₱100,000 is excluded from the gross income
of X since it represents a return of premiums which
is not income but a return of capital.
Proceeds of life insurance
GR: Amounts received under a life insurance,
endowment, or annuity contact, whether in a single
sum or in installments, paid to the beneficiaries
upon the death of the insured are excluded from the
gross income of the beneficiary.
XPNs:
1. If such amounts, when added to amounts
already received before the taxable year under
such contract, exceed the aggregate premiums
or considerations paid, the excess shall be
included in the gross income.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
90
NOTE: However, in the case of a transfer for a
valuable consideration by assignment or
otherwise, of a life insurance, endowment or
annuity contract or any interest therein, only
the actual value of such consideration and the
amount of the premiums and other sums
subsequently paid by the transferee are
exempt from taxation.
2. Interest payments thereon if such amounts are
held by the insurer under an agreement to pay
interest shall be taxable. If paid to a transferee
for a valuable consideration, the proceeds are
not exempt.
NOTE: The life insurance proceeds must be
paid by reason of the death of the insured.
Payments for reasons other than death are
subject to tax up to the excess of the premiums
paid.
Any policy loans or borrowings made on the policy
shall be deducted as advances from the life
insurance proceeds received upon death.
Recipients of non-taxable life insurance
proceeds
Proceeds of life insurance policies paid to
individual beneficiaries upon the death of the
insured are exempt. Also, it has been held that
proceeds of life insurance policies taken by a
corporation on the life of an executive to indemnify
it against loss in case of his death do not constitute
taxable income (El Oriente Fabrica de Tabacos v.
Posadas, G.R. No. 34774, September 21, 1931).
Difference between the tax treatment of life
insurance proceeds under income and estate
taxation
In estate taxation, the concept of revocability or
irrevocability in the designation of the beneficiary
is necessary to determine whether the life
insurance proceeds are included in the gross estate
or not. However, if the appointed beneficiary is the
estate, executor or administrator, the proceeds
shall be included from the gross estate.
NOTE: Under the Insurance Code, the insured shall
have the right to change the beneficiary he
designated in the policy, unless he has expressly
waived this right in said policy. Notwithstanding
the foregoing, in the event the insured does not
change the beneficiary during his lifetime, the
designation shall be deemed irrevocable (R.A.
10607, Sec. 11).
 INCOME TAXATION
On the other hand, in income taxation, there is no
need for the determination of revocability or
irrevocability of the beneficiary for purposes of
exclusion of such proceeds from the gross income.
They are non-taxable regardless of who the
recipient is.
Q: ABC Corp. took two insurance policies
covering the life of its employee, Y. The first
insurance designated W, wife of Y as the
beneficiary; while in the second insurance, it
was ABC Corp. which was the designated as the
irrevocable beneficiary. In both insurances, it
was ABC Corp. paying the premiums. Y died.
a. Do the proceeds form part of the taxable
income of the recipients?
b. Are the proceeds part of the taxable estate
of the deceased?
A:
a. NO. The proceeds are not part of the taxable
income of the recipients. Section 32(B)(1)
expressly excludes from income taxation
proceeds of life insurance. This is based on the
theory that such proceeds, for income tax
purposes, are considered as forms of
indemnity. Thus, they are non-taxable
regardless of who the recipient is.
b. NO. The proceeds of the two policies are
excluded as part of the gross estate. For estate
tax purposes, the determining factor on
whether the proceeds of insurance shall be
excluded in the gross estate is when the
designation of the beneficiary is made
irrevocable. Pursuant to the amendment
introduced by R.A. 10607 approved on August
15, 2013, the second paragraph of Sec. 11 of the
Insurance Code now reads “Notwithstanding
the foregoing, in the event the insured does not
change the beneficiary during his lifetime, the
designation shall be deemed irrevocable”.
Thus, since the Y did not exercise his right to
change W as his beneficiary, the designation is
deemed irrevocable and hence, the proceeds of
the insurance not taxable.
Pensions, retirement benefit or separation pay
It refers to amount of money received in lump sum
or on staggered basis in consideration of services
rendered given after an individual reaches the age
of retirement.
Pension being part of gross income is taxable to the
extent of the amount received except if there is a
BIR approved pension plan (NIRC, Sec. 32 B [6]).
91
The amounts that do not qualify as exclusions are
considered as part of income subject to tax
(Domondon, 2013).
Refer to “Exclusions from Gross Income” for further
discussion.
Income from any whatever source
“Income from whatever source derived”implies
that all income not expressly exempted from the
class of taxable income under our laws form part of
the taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the
income. The source of the income may be legal or
illegal.
Examples of “income from whatever source
derived” which form part of the taxable income
of the taxpayer
1. Gains arising from expropriation of
property which would be considered as
income from dealings in property;
2. Gains from gambling;
3. Gains from embezzlement or stealing
money;
4. Gains, money or otherwise derived from
extortion, illegal gambling, bribery, graft
and corruption, kidnapping, racketeering,
etc.
Rationale: These are taxable because title is
merely voidable.
5. In stock options, the difference between
the fair market value of the shares at the
time the option is exercised and the option
price constitutes additional compensation
income to the employee (Commissioner v.
Smith, 324 U.S. 177).
6. Money received under solutio indebiti
Rationale:Under the claim of right doctrine,
the recipient, even if he has the obligation to
return the same, has a voidable title to the
money received through mistake.
7. Condonation of indebtedness for a
consideration.
Rationale: This is because when a creditor
cancels a debt as part of a business transaction,
the debtor is enriched or receives financial
advantages thereby increasing his net assets,
and thus realizes taxable income.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Condonation of indebtedness
Tax treatment for condonation of indebtedness
1. When cancellation of debt is income. If an
individual performs services for a creditor, who
in consideration thereof, cancels the debt, it is
income to the extent of the amount realized by
the debtor as compensation for his services.
2. When cancellation of debt is a gift. If a creditor
merely desires to benefit a debtor and without
any consideration therefore cancels the amount
of the debt, it is a gift from the creditor to the
debtor and need not be included in the latter’s
income. The creditor is subject to donor’s tax.
3. When cancellation of debt is a capital
transaction. If a corporation to which a
stockholder is indebted forgives the debt, the
transaction has the effect of payment of a
dividend (R.R. No. 2, Sec. 50).
4. An insolvent debtor does not realize taxable
income from the cancellation or forgiveness
(CIR v. Gin Co. 43 F.2d 327).
5. The insolvent debtor realizes income resulting
from the cancellation or forgiveness of
indebtedness when he becomes solvent
(Lakeland Grocery Co. v. CIR, 36 BTA 289).
Q: Mr. Gipit borrowed from Mr. Maunawain
₱100,000.00, payable in 5 equal monthly
installments. Before the first installment
became due, Mr. Gipit rendered general
cleaning services in the entire office building of
Mr. Maunawain, and as compensation therefor,
Mr. Maunawain cancelled the indebtedness of
Mr. Gipit up to the amount of ₱75,000.00. Mr.
Gipit claims that the cancellation of his
indebtedness cannot be considered as gain on
his part which must be subject to income tax,
because according to him, he did not actually
receive payment from Mr. Maunawain for the
general cleaning services. Is Mr. Gipit correct?
Explain. (2014 Bar)
A: NO. Section 50 of Rev. Regs. No. 2, otherwise
known as Income Tax Regulations, provides that if
a debtor performs services for a creditor who
cancels the debt in consideration for such services,
the debtor realizes income to that amount as
compensation for his services. In the given
problem, the cancellation of Mr. Gipit’s
indebtedness up to the amount of ₱75,000.00 gave
rise to compensation income subject to income tax,
since Mr. Maunawain condoned such amount as
consideration for the general cleaning services
rendered by Mr. Gipit.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
92
Recovery of accounts previously written off -
when taxable/when not taxable
“Tax Benefit Rule” or Equitable Doctrine of Tax
Benefit
It is a principle that if a taxpayer recovers a loss or
expense that was deducted in a previous year, the
recovery must be included in the current year's
gross income up to the extent that it was previously
deducted.
Two instances where Tax benefit rule applies
1. Recovery of bad debts
2. Receipt of tax refund or credit
Recovery of bad debts
The recovery of bad debts previously allowed as
deduction in the preceding year or years shall be
included as part of the taxpayer’s gross income in
the year of such recovery to the extent of the
income tax benefit of said deduction.
If the taxpayer did not benefit from deduction of
the bad debt written-off because it did not result in
any reduction of his income tax in the year of such
deduction as in the case where the result of the
taxpayer’s business operation was a net loss even
without deduction of the bad debts written-off, his
subsequent recovery thereof shall be treated as a
mere recovery or a return of capital, hence, not
treated as receipt of realized taxable income.
Receipt of tax refund or credit
If a taxpayer receives tax credit certificate or
refund for erroneously paid tax which was claimed
as a deduction from his gross income that resulted
in a lower net taxable income or a higher net
operating loss that was carried over to the
succeeding taxable year, he realizes taxable income
that must be included in his income tax return in
the year of receipt.
XPN: The foregoing principle does not apply to tax
credits or refunds of the following taxes since these
are not deductible from gross income:
a. Income tax;
b. Estate tax;
c. Donor’s tax; and
d. Special assessments.
General rule on taxation of debts
Borrowed money is not part of taxable income
because it has to be repaid by the debtor. On the
 INCOME TAXATION
other hand, the creditor does not receive any
income upon payment because it is merely a return
of the investment.
James Doctrine
This doctrine provides that even though the law
imposes a legal obligation upon an embezzler or
thief to repay the funds, the embezzled or stolen
money still forms part of the gross income since the
embezzler or thief has no intention of repaying the
money.
Proceeds of stolen or embezzled property are
taxable
The money or other proceeds of the sale or other
disposition of stolen property is subject to income
tax because the proceeds are received under a
“claim of right”.
Source rules in determining income from within
and without
The following are considered as income from
sources within the Philippines:
1. Interest: Residence of the debtor. – The
residence of the obligor who pays the interest
rather than the physical location of the
securities, bonds or notes or the place of
payment, is the determining factor of the
source of interest income. If the obligor or
debtor is a resident of the Philippines, the
interest income is treated as income from
within the Philippines (National Development
Company v. CIR, G.R. No. L-53961, June 30,
1987).
2. Dividends: Residence of the corporation
paying the dividends. – Dividends received
from a domestic corporation or from a foreign
corporation are treated as income from
sources within the Philippines, unless less than
50% of the gross income of the foreign
corporation for the three-year period
preceding the declaration of such dividends
was derived from sources within the
Philippines, in which case only the amount
which bears the same ratio to such dividends
as the gross income of the corporation for such
period derived from sources within the
Philippines bears to its gross income from all
sources shall be treated as income from
sources within the Philippines.
3. Services: Place of performance of the
service. – If the service is performed in the
Philippines, the income is treated as from
sources within the Philippines, regardless of
93
the residence of the payor, of the place in which
the contract for service was made, or of the
place of payment.
4. Rentals and royalties: Location or use of the
property or interest in such property. – If
the property is located or used in the
Philippines, the rent or royalties are income
from sources within the Philippines.
5. Sale of real property: Location of real
property. – If the real property sold is located
within the Philippines, the gain is considered as
income from the Philippines.
6. Sale of personal property:Place where the
sales contract was consummated. –
It depends:
a. Personal property produced within and sold
without, or produced without and sold
within the Philippines
– Any gain, profit, or income shall be
treated as derived partly from sources
within and partly from sources without the
Philippines.
b. Purchase of personal property within and
sale without, or purchase without and sale
within the Philippines
–Any gain, profit, or income shall be
treated as derived entirely from sources
within the country in which sold.
c. Shares of stock in a domestic corporation
– Gain, profit, or income is treated as
derivedentirelyfrom sources within the
Philippines, regardless of where said
shares are sold (Mamalateo, 2014).
Refer to previous discussion on “Situs of Income
Taxation.”
Q: ABC, a domestic corporation, entered into a
software license agreement with XYZ, a non-
resident foreign corporation based in the U.S.
Under the agreement which the parties forged
in the U.S., XYZ granted ABC the right to use a
computer system program and to avail of
technical know-how relative to such program.
In consideration for such rights, ABC agreed to
pay 5% of the revenues it receives from
customers who will use and apply the program
in the Philippines. Discuss the tax implication of
the transaction. (2010 Bar)
A:The amount payable under the agreement is in
the nature of a royalty. The term royalty is broad
enough to include compensation for the use of an
intellectual property and supply of technical know-
how as a means of enabling the application or
enjoyment of any such property or right (Sec 42(4)
NIRC). The royalties paid to the non-resident US
Corporation, equivalent to 5% of the revenues
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION

derived by ABC for the use of the program in the “Exclusion from gross income” vs. “deductions
Philippines, is subject to a 30% final withholding from gross income”
tax, unless a lower tax rate is prescribed under an
existing tax treaty (Sec 28(B)(1) NIRC). DEDUCTION
EXCLUSION FROM
FROM GROSS
GROSS INCOME
Exclusions from gross income INCOME
It refers to a flow of wealth It refers to amounts
Exclusions from gross income refer to the flow of to the taxpayer which are which the law
wealth to the taxpayers which are not considered not treated as part of gross allows to be
part of gross income for purposes of computing the income, for purposes of deducted from
taxpayer’s taxable income due to the following: computing the taxpayer’s gross income in
taxable income, due to the order to arrive at
1. It is exempted by the fundamental law or by following reasons: net income.
statute; a. It is expressly
2. It does not come within the the definition of exempted from income
income. tax by the fundamental
law or statute;
The exlcusion of income should not be confused b. It is subject to another
with the reduction of gross income by application kind of internal
of allowable deductions. Exclusions are not taken revenue tax; and
into account in determining gross income, c. It does not come within
however, deductions are subtracted from the gross the definition of income
income (Tabag, 2015). as when the amount
received represents
Construction of exclusions return of capital.
Pertains to the computation Pertains to the
Exclusions are in the nature of tax exemptions, thus of gross income computation of net
they must be strictly construed against the income
taxpayer and liberally in favor of the Government. Something received or Something spent or
It behooves upon the taxpayer to establish them earned by the taxpayer paid in earning
convincingly. which do not form part of gross income
gross income
Rationale for exclusion Example of an exclusion Example of a
from gross income is deduction is
There are exclusions from the gross income either proceeds of life insurance business rental
because they: received by the beneficiary
upon the death of the
1. Represent return of capital; insured which is not an
2. Are not income, gain or profit; or income or 13th month pay of
3. Are subject to another kind of internal revenue an employee not exceeding
tax; ₱82,000 which is an income
4. Are income, gain or profit that is expressly not recognized for tax
exempt from income tax under the purposes
Constitution, Tax treaty, NIRC, or general or a
special law. Difference among exclusions, deductions and
tax credit
Taxpayers who may avail of exclusions
EXCLUSIONS DEDUCTIONS TAX CREDIT
All kinds of taxpayers – individuals, estates, trusts Incomes These are It refers to
and corporations, whether citizens, aliens, received or included in foreign taxes
whether residents or non-residents may avail of earned but are the gross paid
the exclusions. not taxable income but beforehand
because of are later but are
Rationale: The excluded receipts are not exemption by deducted to claimed as
considered as income for tax purposes (Domondon, virtue of a law arrive at net credits
2013). or treaty; hence, income against
not included in Philippine
the income tax to

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
94
 INCOME TAXATION

computation of arrive at the “Gift” is any transfer not in the ordinary course of
gross income. tax due and business which is not made for full and adequate
payable consideration in money or money’s worth. The
giver is called the donor and the recipient is called
Exclusions under the constitution the donee.

Income derived by the Government or its political Q: If Mr. Generous gave a gift to Ms. Gorgeous
subdivisions from the exercise of any essential what are the tax implications?
government function
A: Mr. Generous, the donor is subject to donor’s tax
Income derived by the Government or its political while Ms. Gorgeous the donee is not subject to
subdivision is exempt from gross income, if the donee’s tax. Donee’s tax has been abolished by P.D.
source of the income is from any public utility or 69. The value of the gift received by Ms. Gorgeous is
from the exercise of any essential governmental not included in the computation of gross income
functions. pursuant to Sec. 32(B)(3), NIRC, gifts, bequest and
devises are excluded from gross income.
Exclusions under the NIRC
Bequest and Devise
Items that are excluded in gross income and
exempt from gross income taxation [GLAM-RIC] Bequest is a gift of personal property and devise is a
1. Gifts, bequests and devises gift of real property. Both are donations mortis
2. Life insurance proceeds causa. The giver is either known as the testator or
3. Amount received by insured as return of decedent while the recipient may be the heirs or
premium beneficiaries.
4. Retirement benefits, pensions, gratuities, etc.
5. Income exempt under treaty Tax implications of a Bequest and Devise
6. Compensation for injuries or sickness
7. Miscellaneous items. (13P2IG3) The estate of the testator or the decedent is subject
to estate tax, while the heirs or beneficiaries are not
a. 13thmonth pay and other Benefits; required to pay donee’s tax as the same was already
b. Prizes and awards abolished. The value of the bequest and/or the
c. Prizes and awards in sports competitions devise received by the heirs or beneficiary/ies
d. Income derived by foreign government is/are not included in the computation of their
e. Income derived by the government or its gross income since gifts, bequest and devises are
political subdivisions excluded from gross income (NIRC, Sec. 32 [B]).
f. GSIS, SSS, Medicare and other
contributions Donation inter vivos and mortis causa
g. Gains from the sale of bonds, debentures
or other certificate of indebtedness Regardless of whether the donation is inter vivos or
h. Gains from redemption of shares in mutual mortis causa, it is excluded from gross income for it
fund (NIRC, Sec. 32 [B]) is not product of capital or industry. Furthermore,
the property is already subject to donor’s or estate
The exclusions are discussed in detail below. taxes as the case may be.

GIFTS, BEQUESTS AND DEVISES Gift Tax Test

The value of property acquired by gift, bequest,
devise, or descent is excluded from gross income.
Provided, however, that income from such
property, as well as gift, bequest, devise or descent
of income from any property, in cases of transfers
of divided interest, shall be included in gross
income.
When a person gives a thing or right to another and
it is not a “legally demandable obligation,” then it is
treated as a gift and excluded from gross income.
However, if there is a legally demandable obligation
to give such as for services rendered by one to the
donor or due to his merits, the amount received is
taxable income to the recipient.

NOTE: The consideration is based on pure Q: Quiroz worked as chief accountant of a

liberality and is already subject to donor’s or estate hospital for 45 years. When he retired at the age
tax as the case may be. Moreover, there is no of 65, he received retirement pay equivalent to
income. 2 months salary for every year of service as

UNIVERSITY OF SANTO TOMAS

95 FACULTY OF CIVIL LAW
 LAW ON TAXATION
provided in the hospital BIR approved
retirement plan. The Board of Directors of the
hospital felt that the hospital should give Quiroz
more than what was provided for in the
hospital’s retirement plan in view of his loyalty
and invaluable services for 45 years. Hence, it
resolved to pay him a gratuity of ₱1 million over
and above his retirement pay. The CIR taxed the
₱1 million as part of the gross compensation
income of Quiroz who protested that it was
excluded from income because (a) it was a
retirement pay, and (b) it was a gift.
Is Quiroz correct in claiming that the additional
₱1 million was gift and therefore excluded from
income?
A: NO. The amount received was in consideration
of his loyalty and invaluable services to the
company which is clearly a compensation income
received on account of employment. Under the
employer’s ‘motivation test,’ emphasis should be
placed on the value of Quiroz services to the
company as the compelling reason for giving him
the gratuity; hence it should constitute a taxable
income. The payment would only qualify as a gift if
there is nothing but ‘good will, esteem and
kindness’ which motivated the employer to give the
gratuity (Stonton v. U.S., 186 F. Supp. 393).
Q: C is a creditor of D. The debt is condoned by
C. What is the tax implication of the
condonation of debt?
A: For D, that amount is a remuneratory donation
and is subject to income tax. It is not a gift because
it started from an obligation and not from pure
liberality of the donor. C should pay donor’s tax if
the amount condoned is more than ₱100,000.00.
Q: C lends D ₱150,000.00 but D failed to pay the
debt. C told D that D should work in C’s
Restaurant and part of D’s salary will be applied
to the obligation. What is the tax implication
there?
A: For D, it is fruit of labor and it is subject to income
tax. For C, since he pays the salary of D, it is not
subject to tax; it is a deductable item. It is a business
expense and therefore it is an allowable deduction.
Q: C lends D ₱250,000.00 but D failed to pay the
debt. D is a government employee. C told D that
D’s wife and daughter should work in C’s
Restaurant and part of their salary will be
applied to the obligation. What is the tax
implication?
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A: The wife and daughter should pay income tax
because it is fruit of labor. They should also pay
donor’s tax because they gave D ₱250,000.00. For
C, since he pays the salary of D, it is not subject to
tax; it is a deductable item. It is a business expense
and therefore it is an allowable deduction. For D,
there is no tax because payment of obligation is not
taxable.
Q: Capt. Canuto is a member of the Armed
Forces of the Philippines. Aside from his pay as
captain, the government gives him free
uniforms, free living quarters in whatever
military camp he is assigned, and free meals
inside the camp. Are these benefits income of
Capt. Canuto? Explain. (1995 Bar)
A: NO. The free uniforms, free living quarters and
the free meals inside the camp are not income to
Capt. Canute because these are facilities or
privileges furnished by the employer for the
employer’s convenience which are necessary
incidents to proper performance of the military
personnel’s duties.
Life insurance proceeds
Life insurance is insurance on human life and
insurance appertaining thereto or connected
therewith (IC, Sec. 179).
Conditions for the exclusion of life insurance
proceeds from gross income [ProHeDS]
1. Proceeds of life insurance policies;
2. Paid to the Heirs or beneficiaries;
3. Upon the Death of the insured;
4. Whether in a single Sum or otherwise.
Rationale for the exclusion of the proceeds from
life insurance
They are not considered as income because they
partake the nature of an indemnity or
compensation rather than gain to the recipient. Life
insurance proceeds also serve the same purpose as
nontaxable inheritance.
Exceptions to the rule that the amount of the
proceeds of life insurance should be excluded
from the gross income [ASV-PPC]
1. If there is an Agreement between the insured
and the insurer to the effect that the amount
shall be withheld by the insurer under an
agreement to pay interest thereon, the interest
held by the insurer pursuant to that agreement
 INCOME TAXATION
is the one taxable but not the principal amount
(NIRC, Sec. 32 B [1]).
2. Where the life insurance policy is used to
Secure a money obligation
3. Where the life insurance policy was
transferred for a Valuable consideration
4. The recipient of the insurance proceeds is a
business Partner of the deceased and the
insurance was taken to compensate the
partner-beneficiary for any loss in income that
may result as the death of the insured partner
5. The recipient of the insurance proceeds is a
Partnership in which the insured is a partner
and the insurance was taken to compensate the
partnership for any loss in income that may
result from the dissolution of the partnership
caused by the death of the insured partner
6. The recipient of the life insurance proceeds is a
Corporation in which the insured was an
employee or officer (R.R. No. 2, Sec. 62).
Interest earned on the proceeds from life
If such amounts of the life insurance proceeds are
held by the insurer under an agreement to pay
interest thereon, the interest payments shall be
included in the gross income (NIRC, Sec. 32 [B][1]).
Designation of the beneficiary
In determining income tax, life insurance proceeds
are always considered as exclusions regardless of
whether the beneficiary is designated as revocable
or irrevocable. The designation is material only in
determining the gross estate of the decedent to
determine his gross estate.
Q: Suppose the employer insures the life of his
employee and the one paying the premiums on
that life insurance policy is the employer. If the
employee dies:
a. Are the proceeds of the life insurance policy
excluded from the gross income?
b. Will the proceeds form part of the estate of
the decedent and therefore subject to estate
tax?
c. Assuming the designation of the 3rd person
in the policy is silent whether his
designation is revocable or irrevocable,
what is the rule?
A:
a. YES. The manner of designation or the name of
the beneficiary is immaterial. The amount of
the proceeds is excluded from the gross
income.
97
b. It depends. If the heirs, estate, administrator or
executor is designated as beneficiary, the
proceeds form part of the estate whether the
designation is revocable or irrevocable.
If the person designated is a 3rd person (which
includes the employer,) the proceeds form part
of the estate if the designation is revocable. If
the designation is irrevocable, the proceeds
will not be included in the gross estate.
c. It shall be considered as revocably designated.
However, if the insured fail to exercise his right
to change the beneficiary during his lifetime,
then the designation shall be deemed
irrevocable. Under Sec. 11 of the Insurance
Code of the Philippines, as amended by R.A.
10607, the insured has the right to change the
beneficiary he designated in the policy, unless
he has expressly waived this right in said
policy. Notwithstanding the foregoing, in the
event the insured does not change the
beneficiary during his lifetime, the designation
shall be deemed irrevocable.
Q: On 30 June 2000, X took out a life insurance
policy on his own life in the amount of
₱2,000,000.00. He designated his wife, Y, as
irrevocable beneficiary to ₱1,000,000.00 and
his son, Z, to the balance of ₱1,000,000.00 but,
in the latter designation, reserving his right to
substitute him for another. On 01 September
2003, X died and his wife and son went to the
insurer to collect the proceeds of X’s life
insurance policy. Are the proceeds of the
insurance subject to income tax on the part of Y
and Z for their respective shares? Explain.
(2003 Bar)
A: NO. The law explicitly provides that proceeds of
life insurance policies paid to the heirs or
beneficiaries upon the death of the insured are
excluded from gross income and is exempt from
taxation. The proceeds of life insurance received
upon the death of the insured constitute a
compensation for the loss of life, hence a return of
capital, which is beyond the scope of income
taxation (Section 32(B)(1), NIRC).
Q: Noel is a bright computer science graduate.
He was hired by HP. To entice him to accept the
job, he was offered the arrangement that part of
his compensation package would be an
insurance policy with a face value of ₱20
million. The parents of Noel are made the
beneficiaries of the insurance policy. Will the
proceeds of the insurance form part of the
income of the parents of Noel and be subject to
income tax? (2007 Bar)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
A: NO. The proceeds of life insurance policies paid
to the heirs or beneficiaries upon the death of the
insured are not included as part of the gross income
of the recipient. There is no income realized
because nothing flows to Noel’s parents other than
a mere return of capital, the capital being the life of
the insured (Sec. 32 [B][1], NIRC).
Amounts received under life insurance
contracts under life insurance endowment or
annuity contracts
Endowment –The insurer agrees to pay a sum
certain to the insured if he outlives a designated
period. If he dies before that date, the proceeds are
to be paid to the designated beneficiary.
Treatment of proceeds received under
endowment policies
If the insured dies and the beneficiary receives the
life insurance proceeds, these are not taxable
income because they are excluded from gross
income as proceeds from life insurance.
If the insured does not die and survives the
designated period, the amount pertaining to the
premiums he paid are excluded from gross income,
but the excess shall be considered part of his gross
income.
Q: Suppose A obtained an endowment policy
valued at ₱1 million. He paid premiums
amounting to ₱800,000. Upon maturity, he
received ₱1 million, what amount is taxable?
A: The amount of ₱200,000 is taxable. The
difference between the value of the insurance and
the actual premiums paid forms part of A’s gross
income.
Q: Mario worked his way through college. After
working for more than 2 years in X Corporation,
Mario decided to retire and avail of the benefits
under the very reasonable retirement plan
maintained by his employer. On the day of his
retirement on April 30, 1985, he received his
endowment insurance policy, for which he was
paying an annual premium of ₱1,520 since
1965, also matured. He was then paid the face
value of his insurance policy in the amount of
₱50,000. Is his ₱50,000 insurance proceeds
exempt from income taxation?
A: The ₱50,000 insurance proceeds is not totally
exempt from income tax. The excluded amount is
that portion which corresponds to the premiums
that he had paid since 1965. At the rate of ₱1,520
per year multiplied by twenty (20) years which was
UNIVERSITY OF SANTO TOMAS
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98
the period of the policy, he must have paid a total of
₱30,400 (₱1,520 x 20 years). Accordingly, he will be
subject to report as taxable income the amount of
₱19,600 (NIRC, Sec. 28).
Return of premium paid
Conditions for the exclusion of the return of
premium paid from gross income
1. Amount received by insured;
2. As a return of premium paid by him;
3. Under a life insurance, endowment or annuity
contract;
4. Either:
a. During the term;
b. At the maturity of the term mentioned in
the contract; or
c. Upon surrender of the contract.
NOTE: The amount returned is not income but
mere return of capital.
Return of premium v. Life insurance proceeds
The difference lies in cases where the insured in a
life insurance contract survives. In order that life
insurance proceeds may be totally exempt from
income taxation, the insured must die. If he
survives, there is only a partial exemption, i.e., only
the portion of the proceeds representing return of
premiums previously paid is excluded, being a
mere return of capital.
Retirement Benefits, Pensions, Gratuities, etc.
Retirement benefits, pensions, gratuities, etc.
that are excluded from gross income [7FRUGS2]
1. Retirement benefits under R.A. 7641
2. Social security benefits, retirement gratuities,
pensions and other similar benefits received by
resident or non-resident citizens or resident
alien from Foreign government agencies and
other institutions, private or public
3. Retirement received by officials and employees
of private firms, whether individual or
corporate, in accordance with a Reasonable
private benefit plan maintained by the
employer
4. Benefits from the US Veterans Administration
5. GSIS benefits
6. SSS
7. Separation pay
Salient features of R.A. 7641, amending the
Labor Code with regard to the retirement pay of
 INCOME TAXATION
qualified employees in the absence of any
retirement plan
1. Where the retirement plan is established in
the CBA or other applicable employment
contract –Any employee may be retired
upon reaching the retirement age
established in the CBA or other applicable
employment contract.
In case of retirement, the employee shall be
entitled to receive such retirement benefits as
he may have earned under existing laws and
any CBA and other agreements: Provided,
however, that an employee's retirement
benefits under any collective bargaining and
other agreements shall not be less than those
provided by the law.
2. In the absence of a reasonable private
benefit plan or agreement providing for
retirement benefits of employees in the
establishment
a. Optional – the conditions are:
i. An employee upon reaching the age of
60 years or more but not beyond 65;
ii. Who has served at least 5 years in the
said establishment;
iii. May retire and shall be entitled to
retirement pay equivalent to ½ month
salary for every year of service, a
fraction of at least 6 months being
considered as one whole year.
b. Mandatory – the conditions are:
i. An employee upon reaching the age of
beyond 65 years which is the
compulsory retirement age;
ii. Who has served at least 5 years in the
said establishment;
iii. May retire and shall be entitled to
retirement pay equivalent to ½ month
salary for every year of service, a
fraction of at least 6 months being
considered as one whole year (RA
7641, Retirement Pay Law).
Reasonable Private Benefit Plan (RPBP)
Pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit of
some or all his officials or employees, wherein
contributions are made by such employer for the
officials or employees, or both, for the purpose of
distributing the earnings and principal of the fund
thus accumulated, any part of which shall not be
used or diverted to any purpose other than for the
99
exclusive benefit of the said officials and employees
(NIRC, Sec. 32 B [6]a).
Conditions in order to avail the exemption
under a RPBP [Approved-10-50-once]
1. The RPBP must be approved by the BIR;
2. The retiree must have been in the service of
same employer for at least 10 years at the time
of retirement;
3. The private employee or official must be at
least 50 years old at the time of his retirement;
and
4. The benefits under the RPBP must have been
availed of only once.
NOTE: Once the benefits under the RPBP have
been availed of, the retiree can no longer avail of the
same exemption for the second time under another
RPBP but can avail exemption under another
ground such as SSS or GSIS benefits.
Meaning of the phrase “shall not have availed of
the privilege under a retirement benefit plan of
the same or another employer” under Sec.
32(B)(6)(a) of the NIRC
It means that the retiring official must not have
previously received retirement benefits from the
same or another employer who has a qualified
retirement benefit plan (BIR Ruling No. 125-98).
Q: Ma. Isabel Santos was the Human Resource
Manager of Servier Philippines, Inc. (Servier)
since 1991. In 1998, Santos suffered a sudden
attack of “alimentary allergy”. She fell into coma
and was confined in the hospital. After a year of
medical treatment, evaluation disclosed that
she has not recovered mentally and physically.
Servier was constrained to terminate the
services of Santos effective 31 August 1999.
Servier paid disability retirement benefits but
withheld a portion for taxation purposes. Under
the retirement plan of Servier, employees are
barred from claiming from additional benefits
on top on that provided for in the Plan. Santos
was 41 years of age at the time of her
termination. Under the circumstances, was the
withholding of a portion of the retirement
benefits proper?
A: YES. Pursuant to the NIRC provisions on
exclusion, retirement benefits received in
accordance with a reasonable private benefit plan
maintained by the employer (under R.A. No. 4917)
are exempted provided that the retiring official or
employee has been in the service of the same
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
employer for at least 10 years and is not less than
50 years of age at the time of his retirement.
Here, Santos was qualified for disability retirement.
At the time of her retirement, she was only 41 years
of age; and had been in the service for more or less
8 years. As such, the above exclusion is not
applicable for failure to comply with the age and
length of service requirements. Therefore, Servier
cannot be faulted for deducting a portion from
Santos’ total retirement benefits for taxation
purposes (Santos v. Servier Philippines, Inc., G.R. No.
166377, 28, November 2008).
Retirement benefits paid by an employer which
does not have a private benefit plan but has an
existing CBA providing for retirement benefits
of employees are excluded from income tax
It is excluded provided that the minimum age
requirement and the length of service are met.
Under RA 7641, the actual retirement age may even
be lower than 60 years of age, pursuant to the CBA
or other applicable employment contract which is
deemed the law between the parties Thus, for
purposes of determining the taxability of
retirement benefits received by retiring employees,
the retirement age is that age established in the
CBA or other applicable employment contract.
However, if the CBA or other applicable
employment contract does not provide for a
retirement age, the minimum requirement of 50
years provided for under Section 32 (B)(6)(a), of
the 1997 NIRC, as amended, shall apply in order to
qualify for the exemption granted therein (BIR
Ruling No. SB [041] 603-2009, September 22, 2009).
Q: Mel received from his first employer,
₱20,000 as retirement benefit and was
subsequently employed by another employer.
After rendering 10 years, Mel retired from his
second employer and received ₱50,000.
Payment was made under a BIR approved
retirement plan. Is the said amount taxable or
not?
A: YES. It is taxable because the benefit of
exemption can only be availed of once.
Q: If the second employer is a Government
entity (assuming Mel was employed by the
DPWH), would your answer be the same?
A: NO. According to R.A. 8291 (The GSIS Act of
1997), all benefits he received are tax exempt,
including retirement gratuity.
Q: Mario worked his way through college. After
working for more than 2 years in X Corporation,
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Mario decided to retire and avail of the benefits
under the very reasonable retirement plan
maintained by his employer. On his retirement,
he received ₱400,000 as retirement benefit. Is
Mario’s ₱400,000 retirement benefit subject to
income tax?
A: YES. Mario’s ₱400,000 retirement benefit is
subject to income tax. To be exempt, the retirement
pay must have been extended to an employee who
is at the service of his employer for at least 10 years.
The amount cannot be considered as separation
pay that would have exempted benefits from
income tax since it was Mario who had decided to
retire instead of being required to do so.
Conditions in order that separation pay may be
excluded from gross income
1. Amount received by an official, employee or by
his heirs;
2. From the employer; and
3. As a consequence of separation of such official
or employee from the service of the employer:
a.
Because of death, sickness
or other physical disability;
or
b. For any cause beyond the
control of the official or
employee (NIRC, Sec 32 B
[6] b).
Causes beyond the control of the employee
1. Retrenchment
2. Cessation of business
3. Redundancy (R.R. 2-98, Sec. 2 b
[2])
Q: Who will be the recipient of separation pay if
the cause of separation is death, physical
disability or sickness? (2007 Bar)
A:
1. In case of death, the estate unless there is a
designated beneficiary.
2. In case of physical disability or sickness, the
employee is the recipient of the separation pay.
Tax treatment for separation pay
Separation pay is not taxable irrespective of the age
of the employee, length of service, number of
benefits received or the recipient thereof (NIRC,
Sec. 32 B [6] b).
Terminal leave pay
 INCOME TAXATION
Terminal leave pay is the amount received arising
from the accumulation of sick leave or vacation
leave credits. (Commutation of leave credits)
Q: Bernardo, a retired employee of the SC filed a
request with the SC for the refund of the amount
of ₱59,502 which were deducted from his
terminal leave pay as withholding tax. The
Court said that the terminal leave pay of
Bernardo, which he received by virtue of his
compulsory retirement, can never be
considered as part of his salary subject to
income tax. Hence, Bernardo’s request was
granted. Is terminal leave pay subject to income
tax?
A: NO. Since terminal leave pay is applied for by an
officer or employee who has already severed his
connection with his employer and who is no longer
working, it necessarily follows that the terminal
leave pay or its cash equivalent is no longer
compensation for services rendered. Therefore, it
cannot be received by the said employee as salary.
It is one of those excluded from gross income and is
therefore not subject to tax (Re: Request of Atty.
Bernardo Zialcita, AM 90-6-015-SC, October 18,
1990).
Q: A, an employee of the Court of Appeals,
retired upon reaching the compulsory age of 65
years. Upon compulsory retirement, A received
the money value of his accumulated leave
credits in the amount of ₱500,000.00. Is said
amount subject to tax? Explain. (1996 Bar)
A: NO. The commutation of leave credits, more
commonly known as terminal leave pay, i.e., the
cash equivalent of accumulated vacation and sick
leave credits given to an officer or employee who
retires, or separated from the service through no
fault of his own, is exempt from income tax.
Compulsory retirement is considered as cause
beyond the control of the employee. Hence, all
benefits received are tax exempt (BIR Ruling 238-
91 dated November 8, 1991; Commissioner v. CA and
Efren Castaneda, GR No. 96016, October 17, 1991;
Re: Request of Atty. Zialcita for Reconsideration,
A.M. No. 90-6-015-SC, October 18, 1990).
Q: Assuming it does not form part of the
terminal leave pay, as when it is given annually
to the employee, wherein the vacation or sick
leave may be converted into cash. What is the
tax treatment of the cash equivalent of such
vacation leave credits?
A: It depends.
101
1. For private employees – vacation leaves are
exempt from tax up to 10 days while sick leaves
are always taxable.
2. For government employees – both vacation and
sick leaves are tax exempt irrespective of the
number of days.
Tax treatment of sick leave credits
They are taxable irrespective of the number of days.
This applies if the sick or vacation leave credits do
not form part of the compulsory retirement benefit.
Q: Jacobo worked for a manufacturing firm. Due
to business reverses the firm offered voluntary
redundancy program to reduce overhead
expenses. Under the program an employee who
offered to resign would be given separation pay
equivalent to his 3 months basic salary for
every year of service. Jacobo accepted the offer
and received ₱400,000 as separation pay under
the program.
After all the employees who accepted the offer
were paid, the firm found its overhead is still
excessive. Hence it adopted another
redundancy program. Various unprofitable
departments were closed. As a result, Kintanar
was separated from the service. He also
received ₱400,000 as separation pay.
a. Did Jacobo derive income when he
received his separation pay?
b. Did Kintanar derive income when he
received his separation pay? (1995 Bar)
A:
a. YES. Because his separation from employment
was voluntary on his part in view of his offer to
resign. What is excluded from gross income is
any amount receivedby an official or employee
as a consequence of separation of such official
or employee from the service of the employer
for any cause beyond the control of the said
official or employee (NIRC, Sec 28).
b. NO. Because his separation from employment
is due to causes beyond his control. The
separation was involuntary as it was a
consequence of the closure of various
unprofitable departments pursuant to the
redundancy program.
Q: Z, a Filipino immigrant living in the United
States for more than 10 years. He is retired and
came back to the Philippines a balikbayan.
Every time he comes to the Philippines, he stays
here for about a month. He regularly receives a
pension from his former employer in the United
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
States, amounting US$1,000 a month. Does the
US$1,000 pension become taxable because he is
now residing in the Philippines?
A: NO. The law provides that pensions received by
resident or non-resident citizens of the Philippines
from foreign government agencies and other
institutions, private or public, are excluded from
gross income (NIRC, Sec. 32 B [6] c).
Q: X, an employee of ABC Corporation died. ABC
Corporation gave X’s widow an amount
equivalent to X’s salary for one year. Is the
amount considered taxable income to the
widow? Why? (1996 Bar)
A: NO. Any amount received by an official or
employee or by his heirs from the employer as a
consequence of separation of such official or
employee from the service of the employer because
of death sickness or other physical disability or for
any cause beyond the control of the said official or
employee are excluded from gross income (Sec.
32(B), NIRC).
Q: A Co., a Philippine corporation, has two
divisions manufacturing and construction. Due
to the economic situation, it had to close its
construction division and lay-off the employees
in that division. A Co. has a retirement plan
approved by the BIR, which requires a
minimum of 50 years of age and 10 years of
service in the same employer at the time of
retirement. There are 2 groups of employees to
be laid off:
1. Employees who are at least 50 years of age
and has at 10 years of service at the time of
termination of employment.
2. Employees who do no meet either the age or
length of service A Co. plans to give the
following:
a. For category (A) employees – the
benefits under the BIR approved plan
plus an ex gratia payment of one month
of every year of service.
b. For category (B) employees – one
month for every year of service.
For both categories, the cash equivalent of
unused vacation and sick leave credits. A Co.
seeks your advice as to whether or not it will
subject any of these payments to WT. Explain
your advice. (1999 Bar)
A:For category A employees, all the benefits
received on account of their separation are not
UNIVERSITY OF SANTO TOMAS
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102
subject to income tax, hence no withholding tax
shall be imposed. The benefits received under the
BIR-approved plan upon meeting the service
requirement and age requirement are explicitly
excluded from gross income. The ex gratia payment
also qualifies as an exclusion from gross income
being in the nature of benefit received on account
of separation due to causes beyond the employees’
control (Section 32(B), NIRC). The cash equivalent
of unused vacation and sick leave credits qualifies
as part of separation benefits excluded from gross
income (CIR v. Court of Appeals, GR No. 96O16,
October 17, 1991).
For category B employees, all the benefits received
by them will also be exempt from income tax, hence
not subject to withholding tax. These are benefits
received on account of separation due to causes
beyond the employees’ control, which are
specifically excluded from gross income (Section
32(B), NIRC).
Income exempt under tax treaty
Income of any kind, to the extent required by any
treaty obligation binding upon the Government of
the Philippines is exempt from tax(NIRC, Sec. 32 B
[5]).
NOTE: Public policy recognizes the principles of
reciprocity and comity among nations.
Reasons for granting tax exemption through a
treaty
1. Reciprocity
2. To lessen the rigors of international juridical
double taxation
Examples of tax treaties entered into by the
Philippines
1. RP-Japan Tax Treaty
2. RP-US Tax Treaty
3. RP-France Tax Treaty
4. RP-Switzerland Tax Treaty
5. RP-Netherlands Tax Treaty
Most Favored Nation Clause
This grants to the contracting party treatment not
less favorable than which has been or may be
granted to the most favored among other countries.
It allows the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to
which the country ofresidence ofsuch taxpayer is
also a party; provided that the subject matter of
taxation is the same as that in the tax treaty under
which the taxpayer is liable (CIR v. SC Johnson and
 INCOME TAXATION
Son Inc., G.R. No. 127105, June 25, 1999).
Compensation for injuries or sickness
Kinds of compensation for injuries or sickness
that may be excluded from gross income
1. Amounts received through accident or health
insurance or Workmen’s Compensation Act as
compensation for personal injuries or sickness
2. Amounts of any damages received whether by
suit or agreement on account of such injuries
or sickness (NIRC, Sec. 32 B [4]).
NOTE: They are mere compensation for injuries or
sickness suffered and not income. It is intended to
make the injured party whole as before the injury.
Q: JR was a passenger of an airline that crashed.
He survived the accident but sustained serious
physical injuries which required
hospitalization for 3 months. Following
negotiations with the airline and its insurer, an
agreement was reached under the terms of
which JR was paid the following amounts:
₱500,000 for his hospitalization; ₱250,000 as
moral damages; ₱300,000 for loss of income
during the period of his treatment and
recuperation. In addition, JR received from his
employer the amount of ₱200,000 representing
the cash equivalent of his earned vacation and
sick leaves. Which if any, of the amounts are
subject to income tax? (2005 Bar)
A: The amount of ₱200,000 that JR received from
his employer is subject to income tax, except the
money equivalent of 10 days unutilized vacation
leave credits which is not taxable. Amounts of
vacation allowances or sick leave credits which are
paid to an employee constitute compensation (RR
2-98, as amended by R.R. 10-2000, Sec. 2.78 A [7]).
The amounts that JR received from the airline are
excluded from gross income and not subject to
income tax because they are compensation for
personal injuries suffered from an accident as well
as damages received as a result of an agreement on
account of such injuries (NIRC, Sec. 32 B [4]).
Q: A was hospitalized for two months because of
car accident. B, the person who hit him gave
₱22,000, A’s two months salary. Is that ₱22,000
taxable?
A: NO. It is not part of gross income. It is salary
actualized given not by the employer and it is
compensation for injuries sustained.
103
Q: In the problem above, If the salary actualized
is given by the employer, is it taxable?
A: If it is given by the employer as backwages, it is
taxable.
Q:Ms. A and her minor children instituted an
action for damages arising from a crime.The
Court awarded them with actual, consequential,
moral and exemplary damages. Separately, Ms.
A also instituted a civil case for the annulment
of a sale of real property. The Court granted the
annulment of the sale with damages and
ordered the transfer of the subject property to
A. Are the damages awarded by the Court
claissified as taxable income?
A: It depends. Pursuant to Section 32 (B) (4) of the
Tax Code, compensatory damages, actual damages,
moral damages, exemplary damages, attorney’s
fees, and the cost of the suit are excluded from gross
income. However, consequential damages
representing loss of the victim’s earning capacity
are not excluded from gross income. Such
consequential damages are mere replacements of
income which would have been subjected to tax, if
earned. Thus, only the consequential damages is
subject to income tax. (See BIR Ruling No. 026-2018
dated 18 January 2018).
Q: What is the income tax implication in the
following insurances?
a. Life Insurance
b. Fire Insurance
c. Accident Insurance
A:
a. Life Insurance beneficiaries are not liable for
income tax
b. Fire insurance is not taxable because it is a
mere return of capital.
c. Accident insurance is not taxable because it is
considered compensation for injuries
sustained.
Profit actualized
Profit actualized is always taxable as compared to
salary actualized wherein we need to qualify who
paid the salary.
Miscellaneous items
13th month pay and other benefits
Gross benefits received by officials and employees
of public and private entities may be excluded from
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
gross income provided that the total exclusion shall
not exceed P82,000. The excess would be
considered as part of the compensation income of
the employee where it is subject on a schedular rate
(NIRC, Sec. 32 B [7] e).
NOTE: The amount of ₱30,000, specifically
referring to the general amount of 13th month pay
and other benefits as one of the exclusions from
gross compensation income received by an
employee, is increased to ₱82,000 (R.A. No. 10653,
implemented by R.R.3-2015). Accordingly, the
amount of ₱82,000 shall ONLY apply to the 13 th
month pay and other benefits, and in no case apply
to other compensation received by an employee
under an employer-employee relationship such as
basic salary. It shall apply to the 13th month pay and
other benefits paid or accrued beginning January
1, 2015(RR 3-2015). However, the P80,000 also
includes amount given in excess of the de minimis
benefits.
Prizes and awards including those in sports
competition
Requisites in order for prizes and awards be
exempted from tax
1. Primarily in recognition of Scientific, Civic,
Artistic, Religious, Educational, Literary, or
Charitable achievement [SCAR-CEL]
2. The recipient was selected without any action
on his part to enter the contest or proceeding;
and
3. He is not required to render substantial future
services as condition to receiving the prize or
award.
Q: JM, received a prize of ₱100,000 for winning
the on-the-spot peace poster contest sponsored
by the Lions Club. Is the award included in the
gross income of JM for tax purposes?(2000 Bar)
A: NO. It is not included. It is subject to a final tax of
20% for the amount is in excess of ₱10,000,
otherwise it would be included in his gross income
and subjected to a scheduler rate (NIRC, Sec. 24 B
[1]).
NOTE: The prize constitutes a taxable income for it
was made primarily in recognition of his artistic
achievement which he won due to an action on his
part to enter the contest (NIRC, Sec. 32 B [7] c).
Q: Q won ₱2,500 as part of the Palanca Award
for an outstanding short story. She was also
named MVP of the Varsity volleyball team and
was given a trophy and ₱10,000. Finally, she
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
104
received a Fellowship Award from the
University of California to pursue a master’s
degree in American literature. The fellowship is
for $10,000 plus free board and lodging. Should
Q include these awards and fellowship in her
gross income? (1993 Bar)
A: The first award granted to Q, a Palanca award,
requires submission of literary works. Hence, this
is included in the gross income because it fails to
meet the legal requirement that the recipient was
selected without any action on his part to enter the
contest or proceeding.
In the second award, Q did not file any application
to enter into any contest. The award was given to
her in recognition for her outstanding performance
in the field of sports. However, the recognition in
the field of sports is not among those stated under
Sec. 28 B [8] e, to wit: “Prizes and awards made
primarily in recognition of religious charitable,
scientific, educational, artistic, literary, or civic
achievement”. Therefore, this is subject to tax and
should be included in her gross income.
The fellowship award of $10,000 is however,
excluded from her income as she was selected
without any action on her part and the same was
given to her in recognition of her literary and
educational achievement, presumably without her
being required to render future services for the
grantor.
Requisites for the exclusion of prizes and
awards in sports competition from gross
income [PATS]
1. All Prizes and awards;
2. Granted to Athletes;
3. In local and international sports Tournaments
and competitions; and
4. Sanctioned by their national sports
associations (NIRC, Sec. 32 B [7] d).
NOTE: National sports associations are those duly
accredited by the Philippine Olympic Committee.
The sports competitions and tournaments are
whether held in the Philippines or abroad.
Q: Mr. A, a citizen and resident of the
Philippines, is a professional boxer. In a
professional boxing match held in 2013, he won
prize money in United States (US) dollars
equivalent to ₱300,000,000.
a. Is the prize money paid to and received by
Mr. A in the US taxable in the Philippines?
Why?
 INCOME TAXATION

b. May Mr. A's prize money qualify as an
exclusion from his gross income? Why?
c. The US already imposed and withheld
income taxes from Mr. A's prize money.
How may Mr. A use or apply the income
taxes he paid on his prize money to the US
when he computes his income tax liability
in the Philippines for 2013? (2015 Bar)
A:
a. YES. Under the NIRC, the income within and
without of a resident citizen is taxable. Since
Mr. A is a resident Filipino citizen, his income
worldwide is taxable in the Philippines.
b. NO. Under the law, all prizes and awards
granted to athletes in local and international
sports competitions whether held in the
Philippines or abroad and sanctioned by their
national sports association are excluded from
gross income. However, in this case, there is no
showing that the boxing match was sanctioned
by the Philippine National Sports Commission.
Therefore, the prize money is not excluded.
c. Mr. A may avail of tax credit against his tax
liability in the Philippines for taxes paid in
foreign countries. He has to signify in his
income tax return his desire to avail of the tax
credit.
Q: A won ₱100,000 in a competition sanctioned
by the national sports association. Give the tax
implication/s as to the recipient as well as to the
donor/contributor.
Neither is the BIR correct in collecting the donor’s
tax from Ayala Land Corporation. The law is clear
when it categorically stated “That the donors of
said prizes and awards shall be exempt from the
payment of the donor’s tax.”
Income derived by foreign government
For an income derived by foreign government from
investments in the Philippines be exempted from
tax:
1. It must be an income derived from investments
in the Philippines;
2. It must be derived from BOnds, Loans or other
Domestic securities, Stocks or Interests on
deposits in banks; [BOLDSI] and
3. The recipient of such income from investment
in the Philippines must be a:
a. foreign government;
b. financing institutions owned, controlled or
financed by foreign government; or
c. regional or international financing
institutions established by foreign
government (NIRC, Sec. 32 B [7]).
NOTE: The exclusion may be premised either on
the principle of comity or upon the principle of
reciprocity.
Income derived by the government or its
political subdivisions from the exercise of any
essential government function

A: As to the recipient of the award, it is exempt from Income derived by the Government or its political
income tax. As to the contributor/donor of the subdivision is exempt from gross income, if the
award, it is exempt from donor’s tax not based on source of the income is from any public utility or
the NIRC but on R.A. 7549. Contributor/donor is from the exercise of any essential governmental
allowed to claim it as a deduction from gross functions.
income based on R.A. 7549.
Q: Onyoc, an amateur boxer, won in a boxing Government Owned and Controlled
competition sponsored by the Gold Cup Boxing Corporations (GOCC)
Council, a sports association duly accredited by
the Philippine Boxing Association. Onyoc GOCCs performing:
received the amount of ₱500,000 as his prize
which was donated by Ayala Land Corporation. 1. Governmental Function:
The BIR tried to collect income tax on the GR: Government agencies performing
amount received by Onyoc who refuses to pay. governmental functions are tax exempt
Decide. (1996 Bar) XPN: Unless expressly taxed

A: The prize will not constitute a taxable income to
Onyoc, hence the BIR is not correct in imposing the
income tax. R.A. 7549 explicitly provides that “All
prizes and awards granted to athletes in local and
international sports tournaments and competitions
in the Philippines or abroad and sanctioned by their
respective national sports association shall be
exempt from income tax.”
2. Proprietary Functions: subject to tax
XPN: Unless expressly exempted
NOTE: Under Sec. 27 (c) of RA 8424 the following
corporations have been granted exemptions:
1. Government Service Insurance System
2. Social Security System

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105 FACULTY OF CIVIL LAW
 LAW ON TAXATION
3. Philippine Health Insurance Corporation
4. Philippines Charity Sweepstakes Office
Q: X Rural Bank and Y Rural Bank are the
constituent banks in a Plan of Consolidation
Agreement and Articles of Consolidation. The
constituent banks did not previously avail of or
enjoy the five-year tax exemption granted
under RA No. 7353 or the Rural Banks Act of
1992. The consolidated bank, Z Rural Bank,
was issued a Certificate of Authority to operate
as a rural bank under RA No. 7353. Is Z Rural
Bank, a bank formed through consolidation,
entitled to tax exemption under RA No. 7353?
A: YES. Rural banks created and organized under
the provisions of RA No. 7353 are exempt from the
payment of all taxes, fees and charges (except
corporate income tax and local taxes) for a period
of five years from the date of commencement of
operations. Rural banks formed through
consolidation may still enjoy the tax exemption for
the entire period of five years from the date of
commencement of operations in case any or both
of the constituent banks did not avail this
exemption, or for the remaining period in case the
tax exemption was availed. (See BIR Ruling No.
272-2017 dated 7 June 2017).
Gains from the sale of bonds, debentures or
other certificate of indebtedness
The bonds, debentures or other certificate of
indebtedness sold, exchanged or retired must be
with a maturity of more than 5 years.
Gains from redemption of shares in a mutual
fund company
Mutual fund company means an open-end and
close-end investment company as defined under
the Investment Company Act (NIRC, Sec.22 [BB]).
Exclusions under special laws
Statutory income tax exemptions
1. PD 87, Oil Exploration and Development Act, as
amended by PD 1354
2. EO 226, The Omnibus Investment Code of
1987, as amended
3. RA 3538, the exemption of salaries paid in
dollars to non-Filipino citizens for services
rendered to the Ford Foundation
4. RA 6938, Cooperative Code of the Philippines,
as amended by RA 1176, 8241 and 8424
5. RA 7482, Senior Citizens Act as amended by RA
9257
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
106
6. RA 7929, Urban Development and Housing Act
of 1992
7. RA 8502, Jewelry Industry Development Act of
1998
8. RA 8282, which exempts income of the SSS
form income taxation
9. RA 8479, An Act Deregulating the Downstrean
Oil Industry and For Other Purposes
10. RA 9182, The Special Purpose Vehicle Act
11. R.A. 9505, PERA Act of 2008
Personal Equity and Retirement Account
(PERA)
PERA refers to the voluntary retirement account
established by and for the exclusive use and benefit
of the contributor for the purpose of being invested
solely in PERA investment products in the
Philippines (R.A. 9505, Sec. 3).
Contributors
A contributor may be any person with the capacity
to contract and who possesses a tax identification
number. The contributor establishes and makes
contributions to a PERA.
PERA Investment Products
It may be a unit investment bust fund, mutual fund,
annuity contract, insurance pension products, pre-
need pension plan, shares of stock and other
securities listed and traded in a local exchange,
exchange-traded bonds or any other investment
product or outlet which the concerned Regulatory
Authority may allow for PERA purposes.
Regulatory Authority
It refers to the Bangko Sentral ng Pilipinas (BSP) as
regards banks, other supervised financial
institutions and trust entities, the Securities and
Exchange Commission (SEC) for investment
companies, investment houses stockbrokerages
and pre-need plan companies, and the Office of the
Insurance Commission (OIC) for insurance
companies.
Requirement in order to qualify as PERA
investment product
To qualify as a PERA investment product, the
product must be non-speculative, readily
marketable, and with a track record of regular
income payments to investors.
Requirement for tax-exemption
 INCOME TAXATION

The concerned Regulatory Authority must first
approve the product before being granted tax-
exempt privileges by the BIR.
Income earned from investments
reinvestments of the PERA
All income earned from the investments and
reinvestments of the maximum amount allowed
herein are tax exempt.
taxpayer. This is consistent with the rule that
tax exemptions must be strictly construed
against the taxpayer and liberally in favor of
the State.
and
4. The deductions must not have been waived.
5. The withholding and payment of tax required
must be shown (Domondon, 2013).
General rules in claiming deductions

Maximum annual PERA contribution allowed by 1. Deductions must be paid or incurred in

this Act connection with the taxpayer’s trade, business,
or profession.
MAXIMUM ANNUAL PERA
CONTRIBUTORS
CONTRIBUTIONS Matching concept of deductibility
If the contributor ₱100,000 or its equivalent in
is single any convertible foreign This posits that the deductions must, as a
currency at the prevailing general rule, “match” the income, i.e. helped
rate at the time of the actual earn the income (Domondon, 2013).
contribution
If the contributor Each of the spouses shall be Ordinary and necessary expenses must have
is married entitled to make a maximum been paid or incurred during the taxable year
contribution of one hundred for it to be deductible from gross income.
thousand pesos (₱100,000) Further, the deduction shall be taken for the
or its equivalent in any taxable year in which 'paid or accrued' or 'paid
convertible foreign currency. or incurred.' Otherwise, the expenses are
OFW Double the allowable barred as deductions in subsequent years (CIR
maximum amount v. Isabela Cultural Corporation, G.R. No. 172231,
February 12, 2007).
DEDUCTIONS FROM GROSS INCOME
2. Deductions must be supported by adequate
These refer to items or amounts authorized by law receipts or invoices (XPN: standard
to be subtracted from pertinent items of gross deduction).
income to arrive at the taxable income. 3. The withholding and payment of tax required
must be shown.
Nature of deductions
Any income payment which is otherwise
The items of amounts allowed as deductions deductible shall be allowed as a deduction from
represent the expenses (reduction of wealth) of the gross income only if it is shown that the income
taxpayer (other than personal expenses and capital tax required to be withheld has been paid to
expenditures) in earning the income (increase of the BIR (Sec. 2.58.5, RR 2-98).
wealth) subject to tax as well as reasonable living
expenses. Where no withholding made but still deductible

Requisites before deductions are allowed
1. There must be specific provision of law
allowing the deductions, since deductions do
not exist by implication.
2. The requirements of deductibility must be met.
Refer to discussions on itemized deductions for
the requirements of each deduction.
3. There must be proof of entitement to the
deductions. The burden of proof to establish
the validity of claimed deduction is on the
A deduction will also be allowed in the following
cases where no withholding of tax was made:
1. The payee reported the income and the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure to
withhold the tax, and surcharges, if applicable,
at the time of the original audit and
investigation;
2. The recipient/payee failed to report the
income on the due date thereof, but the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure to

UNIVERSITY OF SANTO TOMAS

107 FACULTY OF CIVIL LAW
 LAW ON TAXATION
withhold the tax and surcharges, if applicable,
at the time of the original audit and
investigation; or
3. The withholding agent erroneously
underwithheld the tax but pays the difference
between the correct amount and the amount of
tax withheld, including the interest, incident to
such error, and surcharges, if applicable, at the
time of the original audit and investigation
(Sec. 2.58.5, RR 2-98).
Persons who are NOT ALLOWED to claim
deductions from gross income
NRA-NETB and NRFC are subject to final tax on
their gross income derived from sources within the
Philippines, hence, no deductions allowed to them.
NOTE: A RC, NRC, and RA whose income is purely
compensation income are also not entitled to such
deductions.
Deductions that can be claimed by a personnel, consultants and specialists
corporation
Domestic Corporations (DC) and Resident Foreign
Corporation (RFC) may opt between the OSD OR
the Itemized Deductions, except Non-Resident
Foreign Corporation (NRFC) which is subject to
final tax on its gross income from sources within
the Philippines.
Return of capital (cost of sales or services)
The amount representing return of capital should
be deducted from the proceeds from the sales of
assets and should not be subject to income tax. Cost
of goods purchased for resale, with proper
adjustment for opening and closing inventories are
deducted from gross sales in computing gross
income (Rev. Reg. 2, Sec. 65).
The mere return of capital is allowed as deduction
from gross income in order to arrive at income
subject to tax. While in general, the nomenclature
of “cost of sales or cost of solds good” is applied, the
return of capital have different components
depending upon the nature of the business being
taxed (Domondon, 2013).
Cost of goods sold (CGS)
CGS shall include the purchase price or cost to
produce the merchandise and all expenses directly
incurred in bringing them to their present location
and use.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
108
For trading or merchandising concern, CGS
means the invoice cost of goods sold, plus import
duties, freight in transporting the goods to the place
where the goods are actually sold, including
insurance while the goods are in transit.
For manufacturing concern, CGS means all costs
incurred in the production of the finished goods
such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the
raw materials to the factory or warehouse. The
term may be used interchangeably with "cost of
goods manufactured and sold".
Cost of services (COS)
COS means all direct costs and expenses necessarily
incurred to provide the services required by the
customers and clients including:
1. Salaries and employee benefits of
directly rendering the service, and
2. Cost of facilities directly utilized in
providing the service such as depreciation
or rental of equipment used and cost of
supplies.
NOTE: COS shall not include interest expense
except in the case of banks and other financial
institutions (RR 16-08).
Itemized Deductions under TRAIN (Sec. 34)
Except for taxpayers earning compensation income
arising from personal services rendered under an
employer-employee relationship where no
deductions shall be allowed other than premium
payments on health and/or hospitalization
insurance, in computing taxable income subject to
income tax there shall be allowed the following
deductions from gross income:
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable and other contributions
9. Research and development
10. Contributions to pension trusts
The itemized deductions are discussed in detail
below.
 INCOME TAXATION
EXPENSES
There shall be allowed as deduction from gross
income
1. All the ordinary and necessary expenses
2. Paid or incurred during the taxable year
3. In carrying on or which are directly
attributable to, the development,
management, operation and/or conduct of the
trade, business or exercise of a profession (Sec.
34[a], NIRC).
Requisites for deductibility of expenses (in
general)
[D-STROWN]
1. Paid or incurred during the taxable year;
2. The expense must be substantiated by proof;
(substantiation rule)
3. The expense must be incurred in trade or
business carried on by the taxpayer (must be
directly attributable to the development,
management, operation, and or conduct of
trade or business of the taxpayer, or in the
exercise of the taxpayer’s profession);
4. The expense must be reasonable;
5. The expense must be ordinary and necessary;
6. If subject to withholding taxes, proof of
payment to bir; and
7. Expenses must not be against public policy,
public moral or law such as bribes, kickbacks,
for immoral purposes.
Ordinary expenses - It is any expense that is
normal or usual in relation to the taxpayer’s
business and the surrounding circumstances
(General Electric, Inc. v. Collector, CTA Case No.
1117, July 14, 1963).
Necessary expenses - is one which is appropriate
and helpful in the development of taxpayer’s
business and is intended to minimize losses or to
increase profits (Ibid.).
Test to determine whether or not an expense is
ordinary and necessary
If they are directly attributable to the development,
management, operation, and or conduct of trade or
business of the taxpayer, or in the exercise of the
taxpayer’s profession, including:
1. Reasonable allowances for salaries, wages and
other compensation for personal services
actually rendered, including gross monetary
value of fringe benefits;
109
2. Travel expenses in pursuit of trade or
business;
3. Rental and other payments for the continued
use or possession of property, for the purpose
of trade, business or profession; and
4. Entertainment, amusement and recreation
expenses during the taxable year.
Ordinary expenses versus capital expenditures
Ordinary expenses are those which are common to
incur in trade or business. On the other hand,
capital expenditures are those incurred to improve
assets and benefits for more than 1 taxable year.
Ordinary expenses are usually incurred during a
taxable year and benefits such taxable year.
Substantiation rule
The taxpayer shall substantiate the expense being
deducted with sufficient evidence such as official
receipts or other adequate records showing:
1. The amount of the expense being deducted;
and
2. The direct connection or relation of the
expense being deducted to the development,
management, operation and/or conduct of the
trade, business or profession of the taxpayer
(Sec. 34 (A)(1)(B), NIRC).
Q: When there are no receipts to prove a
deduction, can the taxpayer still claim it as a
deduction?
A:YES. The lack of supporting vouchers, receipts,
and other documentary proof however may be
excused under Sec. 235 of the NIRC, the provision
which requires the preservation of the books of
accounts and other accounting records for a period
of 3 years from the date of last entry (Basilan
Estates v. CIR, G.R. No. L-022492, September 5,
1967).
Cohan rule
Under this principle, taxpayers may use estimates
when they can show that there is some factual
foundation on which to base a reasonable
approximation of the expense, they can prove that
they had made a deductible expenditure but just
cannot prove how much that expenditure was
(Cohan v. CIR, 39 F (2d) 540).
It is the use of estimates or approximations of the
amount of cash and other assets where the
taxpayer lacks adequate records.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
NOTE: If there is showing that expenses have been
incurred but the exact amount thereof cannot be
ascertained due to the absence of receipts and
vouchers of the expenditures involved, the BIR will
make an estimate of deduction that may be
allowable in computing the taxpayer's taxable
income bearing heavily against the taxpayer whose
inexactitude is of his own making. That
disallowance of 50% of the taxpayer’s claimed
deduction is valid (RMC 23-2000).
Examples of ordinary and necessary expenses
1. Salaries, wages and other forms of
compensation for personal services actually
rendered
2. Travelling expenses
3. Rental expenses
4. Entertainment, amusement and recreation
5. Advertising and promotional expenses
6. Cost of materials and supplies
7. Repairs
Q: MC, a contractor who won the bid for the
construction of a public highway, claims as
expense, facilities fee which according to them
is standard operating procedure in
transactions with the government. Are these
expenses allowable as deduction from gross
income?
A: NO. The alleged facilitation fees which they
claims as standard operating procedure in
transactions with the government comes in the
form of bribes or “kickback” which are not allowed
as deductions from gross income as they are illegal
(NIRC, Sec. 34 A [1] c).
Q: OXY is the president and CEO of ADD
Computers, Inc. When OXY was asked to join
the government service as director of a bureau
under the Department of Trade and Industry,
he took a leave of absence from ADD. Believing
that its business outlook, goodwill and
opportunities improved with OXY in the
government, ADD proposed to obtain a policy
of insurance on his life. On ethical grounds, OXY
objected to the insurance purchase but ADD
purchased the policy anyway. Its annual
premium amounted to ₱100,000. Is said
premium deductible by ADD Computers, Inc.?
(2004 Bar)
A: NO. The premium is not deductible because it is
not an ordinary business expense. The term
"ordinary" is used in the income tax law in its
common significance and it has the connotation of
being normal, usual or customary (Deputy v. Du
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
110
Pont, 308 US 488 [1940]). Paying premiums for the
insurance of a person not connected to the
company is not normal, usual or customary.
Another reason for its non-deductibility is the fact
that it can be considered as an illegal compensation
made to a government employee. This is so
because if the insured, his estate or heirs were
made as the beneficiary (because of the
requirement of insurable interest), the payment of
premium will constitute bribes which are not
allowed as deduction from gross income (Sec.
34[A][1][c], NIRC).
Even if the company was made the beneficiary,
whether directly or indirectly, the premium is not
allowed as a deduction from gross income (Sec.
36[A][14], NIRC).
Q: Masarap Food Corporation (MFC) incurred
substantial advertising expenses in order to
protect its brand franchise for one of its line
products. In its income tax return, MFC included
the advertising expense as deduction from
gross income, claiming it as an ordinary
business expense. Is MFC correct? Explain.
(2009 Bar)
A: NO. The protection of taxpayer’s brand franchise
is analogous to the maintenance of goodwill or title
to one’s property which is in the nature of a capital
expenditure. An advertising expense, of such
nature does not qualify as an ordinary business
expense, because the benefit to be enjoyed by the
taxpayer goes beyond one taxable year (CIR v
General Foods Inc. 401 SCRA 545).
Q: Freezy Corporation, a domestic corporation
engaged in the manufacture and sale of ice
cream, made payments to an officer of Frosty
Corporation, a competitor in the ice cream
business, in exchange for said officer’s
revelation of Frosty Corporation’s trade
secrets. May Freezy Corporaton claim the
payment to the officer as deduction from its
gross income? Explain. (2014 Bar)
A: NO. Payments made in exchange for the
revelation of a competitor’s trade secrets is
considered as an expense which is against law,
morals, good customs or public policy, which is not
deductible (3M Philippines, Inc. v. CIR, G.R. No.
82833, September 26, 1988).
Also, the law will not allow the deduction of bribes,
kickbacks and other similar payments. Applying
the principle of ejusdem generis, payment made by
Freezy Corporation would fall under “other similar
 INCOME TAXATION
payments” which are not allowed as deduction
from gross income (Section 34(A)(l)(c), NIRC).
Q: How can the taxpayer prove that the
expense has been paid or incurred during the
taxable year?
A: It is a basic requirement that all expenses must
be substantiated by original copy of receipts or in
the absence thereof, a taxpayer can still prove that
the claimed deduction was really paid or incurred
by providing other evidence such as certified true
copies of the official receipts in case of loss,
payment vouchers and checks.
Q: Amounts of income accrue where the right to
receive them become fixed, where there is
created an enforceable liability. Similarly,
liabilities are accrued when fixed and
determinable in amount, without regard to
indeterminacy merely of time of payment. For a
taxpayer using the accrual method, when do the
facts present themselves in such a manner that
the taxpayer must recognize income or
expense? (2012 Bar)
A: The accrual of income and expense is permitted
when the ALL-EVENTS TEST has been met. This
test requires: (1) fixing of a right to income or
liability to pay, and (2) the availability of the
reasonable accurate determination of such income
or liability. The all-events test requires the right to
income or liability be fixed, and the amount of such
income or liability be determined with reasonable
accuracy (CIR v. Isabela Cultural Corporation, G.R.
No. 172231, February 12, 2007).
Q: When is “all-events” test applicable?
A: It is applicable when:
1. A person who uses the cash method where
all sales have been fully paid by the buyers
thereof;
2. A person who uses the installment sales
method, where the full amount of
consideration is paid in full by the buyer
thereof within the year of sale;
3. A person who uses the accrual method,
whereby an expense is deductible for the
taxable year in which all the events had
occurred which determined the fact of the
liability and the amount thereof could be
determined with reasonable accuracy;
4. A person who uses the completed method,
whereby the construction project has
been completed during the year the
contract was signed.
111
Salaries, wages and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe
benefit tax which tax should have been paid
Requisites before an employer can deduct
compensation payments to employees
1. The payments must be reasonable.
2. They are, in fact, payments for personal
services rendered (Rev. Reg. 2, Sec. 70).
NOTE: Reasonable and true compensation is only
such amount as would ordinarily be paid for
services like enterprises in like circumstances.
Inclusions in compensation for services which
are allowed as deductions from gross income
1. Wages, salaries, commissions,
professional fees, vacation-leave pay,
retirement pay, and other compensation
2. Bonuses in good faith
3. Pensions and compensation for injuries
if not compensated for by insurance or
otherwise
4. Grossed-up monetary value of fringe
benefit provided for, as long as the final
tax imposed has been paid. The fringe
benefit must have been granted to
managerial and supervisory employees,
otherwise it cannot be availed as
deduction.
Q: What are the requisites for deductibility of
bonus? (2006 Bar)
A:
1. The payment of the bonus is made in good
faith for additional compensation;
2. It must be for personal services actually
rendered; and
3. The bonus when added to salaries is
“reasonable” when measured by the
amount and quality of the services
performed with relation to the business of
the particular taxpayer.
Bonuses to employees made in good faith and as
additional compensation for the services actually
rendered by the employees are deductible,
provided such payments, when added to the
stipulated salaries, do not exceed a reasonable
compensation for the services rendered (Kuenzle &
Streiff, Inc. v. CIR, G.R. No. L-18840, May 29, 1969).
Bonuses given to corporate officers out of sale of
corporate land are not deductible as an ordinary
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
business expenses in the absence of showing what
role said officers performed to effectuate said sale.
The taxpayer must show that personal services had
been rendered and that the amount was
reasonable (Aguinaldo Industries Corporation v.
CIR, G.R. No. L-29790, February 25, 1982).
The following conditions may be taken into
consideration:
1. The payment made in good faith
2. The character of the taxpayer’s business; e.g.
the volume and amount of its net earnings; its
locality; the type and extent of the services
rendered; the salary policy of the corporation
3. The size of the particular business
4. The employees’ qualification and
contributions to the business venture
5. General economic conditions (C.M. Hoskins &
Co., Inc. v. CIR, G.R. No. L-24059, November 28,
1969)
Q: Gold and Silver Corporation gave extra 14 th
month bonus to all its officials and employees
in the total amount of ₱75 million. When it filed
its corporate income tax return the following
year, the corporation declared a net operating
loss. When the income tax return of the
corporation was reviewed by the BIR the
following year, it disallowed as item of
deduction the ₱75 million bonus the
corporation gave its officials and employees on
the ground of unreasonableness. The
corporation claimed that the bonus is an
ordinary and necessary expense that should be
allowed. If you were the CIR, how will you
resolve the issue? (2006 Bar)
A: I will rule against the deductibility of the bonus.
The extra bonus is not normal to the business and
unreasonable. Giving an extra bonus at a time that
the company suffers operating losses is not a
payment done in good faith and is not normal to
the business, hence unreasonable and would not
qualify as ordinary and necessary expense.
Q: Noel is a bright computer science graduate.
He was hired by Hewlett Packard. To entice him
to accept the job, he was offered the
arrangement that part of his compensation
would be an insurance policy with a face value
of ₱20 million. The parents of Noel are made the
beneficiaries of the insurance policy. Can the
company deduct from its gross income the
amount of the premium?
A: YES, the premiums paid are ordinary and
necessary business expenses of the company. They
UNIVERSITY OF SANTO TOMAS
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112
are allowed as a deduction from gross income so
long as the employer is not a direct or indirect
beneficiary under the policy of insurance. Since the
parents of the employee were made the
beneficiaries, the prohibition for their deduction
does not exist (NIRC, Sec. 36 A [4]).
Travelling/transportation expenses
Requisites for its deductibility
1. Reasonable and necessary expenses;
2. Incurred or paid while away from home; and
3. In pursuit of trade, business or profession.
NOTE: Travelling expense includes transportation,
meals and lodging (RR No. 2).
“Away from home”
It means away from the location of the employee’s
principal place of employment regardless of where
the family residence is maintained.
Rules in deducting travel expenses
1. The employer cannot claim as a deduction the
excess over the cost of a business plane ticket
or its equivalent, whether paid directly by the
employer to the airline company or
reimbursed to the employee.
2. Deductions to be claimed by the employer for
the allowance which are pre-computed by the
employer on a daily basis, or reimbursement
for the cost of meals and lodging in foreign
trips by the employee for the pursuit of
employer’s trade or business may not exceed;
a. $150 per day for trips to US, Australia,
Canada, Europe, Middle East and Japan;
b. $100 per day for other places.
3. Reimbursement for travel taxes, airport fees
and other charges, if duly receipted or
substantiated, may be deducted by the
employer as business expenses.
4. Subject to the above rules, expenses incurred
in attending two foreign professional
conventions a year shall constitute a
deductible expense.
NOTE: These maybe considered as fringe benefit
subject to fringe benefits tax. In such cases, it is
deductible from the employer’s gross income
(Domondon, 2009).
Costs of materials
Materials and supplies are deductible only to the
amount actually consumed or used in the
 INCOME TAXATION
operation during the taxable year, provided that
the cost of such materials and supplies has not
been deducted in determining the net income for
any previous year.
Methods utilized to determine materials used
1. Actual consumption method or
inventory method
2. Direct purchase method
Q: Assuming the taxpayer purchases materials
but has no record of consumption, is it
deductible?
A: YES, provided the net income is clearly reflected
by direct purchase method.
If a taxpayer carries incidental materials or
supplies on hand for which no record of
consumption is kept or of which physical
inventories at the beginning and end of the year are
not taken, it will be permissible for the taxpayer to
include in his expenses and deduct from gross
income the total cost of such supplies and
materials as were purchased during the year for
which the return is made, provided the net income
is clearly reflected by this method (Section 67, RR
2).
Rentals and/or other payments for use or
possession of property
Requisites for its deductibility
1. Payment was made as a condition to the
continuous use of or possession of the
property;
2. Taxpayer has not taken or is not taking title to
the property or has no equity other than that
of a lessee, user or possessor;
3. Property must be used in the trade or
business; and
4. The withholding tax must have been withheld
and paid.
Inclusions in rental expense
1. Aliquot part of the amount used to acquire
leasehold over the number of years the
lease will run
2. Taxes and other obligations of the lessor
paid by the lessee
3. Annual depreciation of the cost of the
leasehold improvements introduced by
the lessee over the remaining period of the
lease, or over the life of the improvements,
whichever period is shorter.
113
NOTE: It is NOT the cost of the leasehold
improvements but only its annual depreciation that
is considered as rental expense.
Repairs and maintenance
Repairs are allowed as deduction when it is minor
and ordinary, and keeps the asset in its ordinary
working condition. Major and extraordinary
repairs are capitalized and included in determining
depreciation expense because they tend to prolong
the life of the asset.
EXPENSES UNDER LEASE AGREEMENTS
Expenses under the lease agreement which
may be allowed as deductions by the lessor
Since the rentals are considered as income of the
lessor (owner of the property), such lessor may
deduct all ordinary and necessary expenses paid or
incurred during the taxable year to the earning of
the income (RR No. 19-86, Sec. 2.01).
Among such deductions may be cost of repairs and
maintenance, salaries and wages of employees
attendant to such lease, interest payment, property
taxes, etc.
Where a leasehold is acquired for business
purposes for a specified sum, the purchaser may
take deduction in his return for an aliquot part of
such sum each year, based on the number of years
the lease will run.
Taxes paid by a tenant to or for a landlord for
business property are additional rent and
constitute a deductible item to the tenant and
taxable income to the landlord; the amount of the
tax being deductible by the latter.
The cost of leasehold improvements are NOT
considered business expenses since they are
capital investments.
In order to return to such taxpayer his investment
of capital, an annual deduction may be made from
gross income of an amount equal to the cost of such
improvements divided by the number of years
remaining of the term of the lease, and such
deduction shall be in lieu of a deduction for
depreciation. If the remainder of the term of lease
is greater than the probable life of the building
erected, or of the improvements made, this
deduction shall take the form of an allowance for
depreciation (Section 74, RR No. 2).
Expenses for professionals
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Examples of expenses for professionals
1. Supplies expense
2. Expenses paid in the operation and repair of
transportation equipment used in making
professional calls
3. Membership dues to professional associations
or societies and subscriptions to journals
4. Office rentals
5. Utilities expense for water and electricity
consumed in connection with the exercise of
the profession
6. Communication expense
7. Expenses for hiring employees or office
assistants
8. Expenses incurred for books, furniture and
professional instruments and equipment with
short useful life
NOTE: Those of a permanent character are not
allowable as deductions.
Entertainment/representation expenses
Requisites to avail of this deduction
1. Paid or incurred during the taxable year
2. Directly connected to the development,
management, and operation of the business,
trade or profession of the taxpayer; or directly
related to or in furtherance of the conduct of
its trade, business or exercise of a profession
3. Not contrary to law, morals, good customs,
public policy or public order
4. Must not constitute as a bribe, kickback, or
other similar payment
5. Duly substantiated by adequate proof or
receipt
6. Withholding tax, if any, should have withheld
therefrom and paid
Q: Who may claim Entertainment, amusement
and recreation expenses?
A:
1. Individuals engaged in business, including
taxable estates and trusts
2. Individuals engaged in practice of profession
3. Domestic corporation
4. Resident foreign corporation
5. General professional partnerships, including
its members
Ceiling or limitation on the amount allowed as
entertainment, amusement and recreation
expense
UNIVERSITY OF SANTO TOMAS
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114
Entertainment, amusement and recreation
expense shall be allowed as a deduction from gross
income but in no case shall exceed:
1. For taxpayers engaged in sale of goods or
properties – 0.50% of net sales (i.e., gross
sales less sales returns or allowances and
sales discounts)
2. For taxpayers engaged in sale of services,
including exercise of profession and use or lease
of properties – 1% of net revenue (i.e., gross
revenue less discounts)
3. For taxpayers deriving income from both sale of
goods and services – the allowable deduction
shall in all cases be determined based on an
apportionment formula taking into
consideration the percentage of the net
sales/net revenue to the total net sales/net
revenue, but which in no case shall exceed the
maximum percentage ceiling provided (Sec. 5,
RR 10-2002).
Apportionment Formula:
Net sales/net revenue x Actual Expense
Total Net sales and revenue
Q: What are included as entertainment,
amusement and recreation expenses?
A: They include representation expenses and/or
depreciation or rental or public order; expense
relating to entertainment facilities.
NOTE: “Representation expenses” shall refer to
expenses incurred by a taxpayer in connection
with the conduct of his trade, business or exercise
of profession, in entertaining, providing
amusement and recreation to, or meeting with, a
guest or guests at a dining place, place of
amusement, country club, theater, concert, play,
sporting event and similar events or places.
If the taxpayer is the registered member of a
country, golf, or sports club, the presumption is
that the expenses are fringe benefits subject to the
FBT unless the taxpayer can prove these are
actually representation expenses (Ingles, 2015).
“Entertainment facilities” shall refer to a yacht,
vacation home or condominium; and any other
similar item of real or personal property used by
the taxpayer primarily for the entertainment,
amusement, or recreation of guests or employees
(RR 10-2002, Sec. 2).
To be considered an entertainment facility, it must
be owned or form part of the taxpayer’s trade,
business, or profession for which he claims
depreciation or rental expense.
 INCOME TAXATION
A yacht is considered an entertainment facility if its
use is not restricted to specified officers or
employees. If the yacht is restricted to them, it
would be a fringe benefit, subject to the FBT.
Expenses that are not considered
entertainment, amusement and recreation
expenses
1. Expenses which are treated as compensation
or fringe benefits for services rendered under
an employer-employee relationship
2. Expenses for charitable or fund-raising events
3. Expenses for bona fide business meeting of
stockholders, partners or directors
4. Expenses for attending or sponsoring an
employee to a business league or professional
organization meeting
5. Expenses for events organized for promotion,
marketing and advertising including concerts,
conferences, seminars, workshops,
conventions, and other similar events
6. Other expenses of similar nature (RR 10-2002,
Sec. 3)
Advertising and Promotional Expenses
Requisites for the deductibility of advertising
and promotional expenses [Sub-pro-ser]
1. Substantiated with sufficient evidence;
2. All payments for the purchase of
promotional giveaways, contest prizes
or similar material must be properly
receipted; and
3. All payments for services such as radio
and TV time, print ads, talent fees,
advertising expense or know-how must
be subjected to withholding tax.
Kinds of advertising and their deductibility
1. Advertising to stimulate the CURRENT sale of
merchandise or use of services are deductible
as business expenses, provided the amount
incurred is reasonable.
2. Advertising designed to stimulate the FUTURE
sale of merchandise or use of services must be
spread over a reasonable period of time that it
help earn the income
Ratio: Matching concept of deductibility
3. Advertising to promote the sales of SHARES OF
STOCK or to create a corporate image is not
deductible as an advertisement (Domondon,
2009).
Expenses paid to advertising firms to promote sale
of capital stock for acquisition of additional capital
115
is not deductible from taxable income. Efforts to
establish reputation are akin to acquisition of
capital assets, and therefore, expenses related
thereto are not business expense but capital
expenditures (Atlas Consolidated Mining &
Developmet Corporation v. CIR, G.R. No. L-26911,
January 27, 1981)
Q: Algue, Inc. is a domestic corporation engaged
in engineering, construction and other allied
activities. Philippine Sugar Estate Development
Company (PSEDC) appointed Algue as its agent,
authorizing it to sell its land, factories and oil
manufacturing processes. Pursuant to said
authority and through the joint efforts of the
officers of Algue, they formed the Vegetable Oil
Investment Corporation, inducing other
persons to invest in it. This new corporation
later purchased the PSEDC properties. For this
sale, Algue received as an agent a commission of
₱125,000 and from this commission the
₱75,000 promotional fees were paid to the
officers of Algue. Is the promotional expense
deductible?
A: YES. The promotional expense paid by PSEDC to
Algue amounting to ₱75,000 is deductible for it was
reasonable and not excessive. Algue proved that
the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the
payees in inducing investors and prominent
businessmen to venture in an experimental
enterprise (Vegetable Oil Investment Corporation)
and involve themselves in a new business requiring
millions of pesos (CIR v. Algue, G.R. No. L-28896
February 17, 1988).
Political Campaign Expenses
Rule on deduction and withholding of
campaign expenditures
All individuals, juridical persons and political
parties, with respect to their income payments
made as campaign expenditures and/or purchase
of goods and services intended as campaign
contributions are constituted as withholding
agents for purposes of the creditable tax withheld
on income payments (R.R. No. 8-2009).
NOTE: A creditable income tax at the rate of 5%
shall be withheld on income payments made by
political parties and candidates of local and
national elections of all their campaign
expenditures, and income payments made by
individuals or juridical persons for their purchases
of goods and services intended to be given as
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
campaign contribution to political parties and
candidates (R.R. No. 8-2009).
Training Expenses
Grants for manpower training and special studies
given to rank-and-file employees pursuant to a
program prepared by the labor-management
committee for development skills identified as
necessary by the appropriate government agencies
shall entitle the business enterprise to a special
deduction from gross income equivalent to fifty
percent (50%) of the total grants over and above
the allowable ordinary and necessary business
deductions for said grants under the NIRC (RA No.
6071, Sec. 7[2]; RMC No. 102-90, Sec. 1).
Other business expenses allowed by special
laws as deductions
1. Discounts granted by establishments for
senior citizens and PWDs (RR 8-2010 and RR 5-
2017);
2. Expenses incurred by a private health and
non-health facility, establishment, or
institution, in complying with the Expanded
Breastfeeding Promotion Act of 2009 – up to
twice the actual amount incurred (RA 10028);
3. Expenses incurred in training schemes
pursuant to the Jewelry Industry Development
Act of 1998 – additional 50% of actual amount
incurred (RA 8502);
4. Expenses incurred for adopting a school based
on the Adopt-a-School program – additional
50% of actual amount incurred (RA 8525);
5. A lawyer or professional partnerships
rendering actual free legal services, as defined
by the Supreme Court, shall be entitled to an
allowable deduction from gross income, the
amount that could have been collected for the
actual free legal services rendered up to ten
percent (10%) of gross income derived from
the actual performance of the legal profession,
whichever is lower (RA 9999).
INTEREST
The amount of interest
1. paid or incurred
2. within a taxable year
3. on indebtedness
4. in connection with the taxpayer's
profession, trade or business
shall be allowed as deduction from gross income
(Sec 34 (B), NIRC).
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Requirements under the NIRC for interest to be
deductible
1. There must be an indebtedness
2. The indebtedness must be that of the taxpayer
3. The interest must be legally due and stipulated
in writing
4. The interest must be paid or incurred during
the taxable year
5. The indebtedness must be connected with the
taxpayer’s trade, business, or exercise of
profession
6. The interest arrangement must not be
between related taxpayers
7. The allowable deduction have been reduced by
an amount equal to 33% of the interest income
subject to tax (NIRC, Sec. 34[B][1] as amended
by R.A. 6337).
Q: How is interest as a deduction from gross
income defined? (1992 Bar)
A: Interest shall refer to the payment for the use or
forbearance or detention of money, regardless of
the name it is called or denominated. It includes the
amount paid for the borrower’s use of money
during the term of the loan, as well as for his
detention of money after the due date for its
repayment (R.R. 13-2000, Sec. 2[a]).
Q: What are the deductible interest expenses?
A: Interest:
1. On taxes, such as those paid for deficiency or
delinquency, since taxes are considered
indebtedness (provided that the tax is a
deductible tax.) However, fines, penalties, and
surcharges on account of taxes are not
deductible. The interest on unpaid business
tax shall not be subjected to the limitation on
deduction
2. Paid by a corporation on scrip dividends
3. On deposits paid by authorized banks of the
BSP to depositors, if shown that the tax on such
interest was withheld
4. Paid by a corporate taxpayer, liable on a
mortgage upon real property of which the said
corporation is the legal or equitable owner,
even though it is not directly liable for the
indebtedness
Non-deductible Interest Expense
1. Interest on preferred stock, which in reality is
dividend
2. Interest on unpaid salaries and bonuses
3. Interest calculated for cost keeping
 INCOME TAXATION
4. Interest paid where parties provide no
stipulation in writing to pay interest
5. If the indebtedness is incurred to finance
petroleum exploration
6. Interest paid on indebtedness between
related taxpayers
7. Interest on indebtedness paid in advance
through discount or otherwise and the
taxpayer reports income on cash basis
NOTE: Interest is allowed as a deduction in the
year the indebtedness is paid, not when the
interest was paid in advance. If the indebtedness is
payable in periodic amortizations, the amount of
interest which corresponds to the amount of the
principal amortized or paid during the year shall
be allowed as deduction in such taxable year.
Related Taxpayers
1. Members of the same family, brothers and
sisters, whether in full or half blood, spouse,
ancestors and lineal descendants
2. Stockholders and a corporation, when he holds
more than 50% in value of its outstanding
capital stock, except in case of distribution in
liquidation
3. Corporation and another corporation, with
interlocking stockholders
4. Grantor and fiduciary in a trust
5. Fiduciary of a trust and fiduciary in another
trust, if the same person is a grantor with
respect to each trust
6. Fiduciary of a trust and beneficiary of such
trust
Arm’s length interest rate
It is the rate of interest which was charged or
would have been charged at the time the
indebtedness arose in independent transaction
with or between unrelated parties under similar
circumstances.
Theoretical interest is not deductible
It is not deductible because:
1. It is not paid or incurred for it is merely
computed or calculated;
2. It does not arise from interest bearing
obligation (PICOP v. CA, G.R. Nos. 106949-
50;84-85, December 1, 1995).
Q: Does the CIR have the power to impute
theoretical interest?
117
A: NO. CIR’s powers of distribution, apportionment
or allocation of gross income and deductions under
Section 43 of the NIRC and Section 179 of RR No. 2
does not include the power to impute “theoretical
interests” to the controlled taxpayer’s transactions.
There must be proof of actual receipt or realization
of income (CIR v. Filinvest Development
Corporation, G.R. Nos. 163653 & 167689, July 19,
2011).
Interest paid in advance
Interest paid in advance through discount or
otherwise in case of cash basis taxpayer is allowed
as deduction in the year the debt is paid.
Optional treatment of interest expense on
capital expenditure
Interest incurred to acquire property used in trade,
business or profession may be allowed either:
1. Treated as capital expenditure, i.e., it forms
part of the cost of the asset; or
2. As a deduction (Sec. 34 [B][2], NIRC).
NOTE: Interest paid in advance, interest
periodically amortized and interest incurred to
acquire property used in trade or business is also
treated the same, the taxpayer can deduct it as an
outright deduction or capital expenditure.
Interest periodically amortized
If indebtedness is payable in periodic
amortizations, interest is deducted in proportion
to the amount of the principal paid.
Interest expense incurred to acquire property
for use in trade / business / profession
Q: Is the interest on loans used to acquire
capital equipment or machinery deductible
from gross income? (1999 Bar)
A: YES. The law gives the taxpayer the option to
claim it as a deduction or treat it as capital
expenditure interest incurred to acquire property
used in trade, business or exercise of a profession
(Section 34 [B][3], NIRC).
Reduction of interest expense/interest
arbitrage
Limitation on the amount of deductible interest
expense
The taxpayer’s otherwise allowable deduction for
interest expense shall be reduced by an amount
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
equal to 33% of the interest income subject to final
tax (Sec. 34 [B][1], NIRC).
This is to safeguard from tax arbitrage schemes.
This limitation on the deductibility of interest
expense was legislated to specifically address the
tax arbitrage arising from the difference between
the 20% final tax on interest income and the
normal corporate income tax rate under which
interest expense can be claimed as a deduction.
This limitation shall apply regardless of whether or
not a tax arbitrage scheme was entered into by the
taxpayer or regardless of the date of the interest
bearing loan and the date when the investment
was made, for as long as, during the taxable year,
there is an interest expense incurred on one side
and an interest income earned on the other side,
which interest income had been subjected to final
withholding tax.
NOTE: The rate of interest limitation is actually the
difference between the normal corporate income
tax and the 20% final tax as a percentage of the
NCIT rate, rounded off. Thus under the 30% NCIT,
(30%-20%) / 30% = 33.33%.
Tax arbitrage
It is a strategy which takes advantage of the
difference in tax rates or tax systems as the basis
for profit.
TAXES
Taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade or
business, shall be allowed as deduction xxx (Sec 34
C, NIRC).
Examples of taxes which are deductible
1. Import duties
2. Business licenses, excise and stamp taxes
3. Local government taxes such as real property
taxes, license taxes, professional taxes,
amusement taxes, franchise taxes and other
similar impositions
Q: In 2006, Sally, a fruit market operator
received an assessment for customs duties for
her imported market equipment in the amount
of ₱75,000. Believing that the amount is
excessive, she paid the same under protest.
Because of the assurances from her retained
CPA that she stands a good chance of being able
to secure a refund of ₱50,000 she did not deduct
the same anymore from her income tax return.
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She deducted only the ₱25,000 which she
believed was due from her. She received the
refund amounting to P50,000 in 2008. What
should have been the proper tax treatment of
the payment of ₱75,000 in 2006?
A: Sally should have deducted the total ₱75,000
customs duties in 2006. When she received the
refund of ₱50,000 in 2008, she should have
included the amount as part of her income. Under
the tax benefit rule, taxes allowed as deductions,
when refunded or credited shall be included as
part of gross income in the year of receipt to the
extent of the income tax benefit of said deduction.
Limitation on the deduction
In the case of NRAETB and RFC, the deductions for
taxes shall be allowed only if and to the extent that
they are connected with income from sources
within the Philippines (Sec. 34 [C][2], NIRC).
Requisites for deductibility of taxes
1. Payments must be for taxes;
2. Tax must be imposed by law on, and payable
by the taxpayer;
3. Paid or incurred during the taxable year in
connection with taxpayer’s trade, business or
profession; and
4. Taxes are not specifically excluded by law from
being deducted from the taxpayer’s gross
income.
When to claim deductions for taxes
GR: Taxes may be deducted only on the year it was
paid or incurred.
XPN: In the case of contingent tax liability, the
obligation to deduct arises only when the liability
is finally determined.
Non-deductible taxes
Taxes not allowed as deduction from gross income
to arrive at taxable income:
1. Income tax provided under the NIRC
(Philippine income tax)
2.
GR: Income taxes imposed by authority of any
foreign country
XPN: When the taxpayer does not signify in his
return his desire to avail of the tax credit.
3. Estate tax and donor’s taxes
 INCOME TAXATION

4. Special assessments - taxes assessed against TAX

TAX CREDIT
local benefits of a kind tending to increase the DEDUCTION
value of property assessed. Subtracted Income before
5. Stock transaction tax - Taxes on sale, barter, Tax due
from tax
exchange of shares of stock listed and traded Income upon
through the local stock exchange or through The taxpayer’s
which tax
initial public offering. Reduces tax liability
liability is
6. Final taxes peso for peso
computed
7. Presumed capital gains tax
8. VAT Persons entitled to claim tax credit

Treatments of surcharges / interests / fines for 1. Resident citizens

delinquency 2. Domestic corporations (Sec. 34 C [3][a], NIRC)
3. Members of a GPP
These are not considered as taxes, hence they are 4. Beneficiary of an estate or trust (Sec. 34
not allowed as deductions. However, interest on [C][3][b], NIRC)
delinquent taxes is deductible as they considered
as interest on indebtedness and not as taxes (CIR v. Persons not entitled to claim tax credit
Palanca, Jr., 18 SCRA 496).
1. Alien individuals, whether resident or non-
Treatment of special assessment residents
2. Foreign corporation, whether resident or non-
Special assessments are deductible as taxes where residents
these are made for the purpose of maintenance or 3. Non-resident citizen including overseas
repair of local benefits, if the payment of such contracted workers and seamen
assessment is ordinary and necessary in the
conduct of trade, business or profession. Limitations when claiming tax credit

Where the assessments are made for the purpose
of constructing local benefits tending to increase
the value of the property assessed, the payments
are in the nature of capital expenditures that are
not deductible.
Tax credit vis-a-vis deduction
Treatment to income taxes paid in foreign
countries
The taxpayer may either claim it as:
1. Foreign tax credits against Philippine income
tax due of citizens and domestic corporations;
or
2. A deduction from gross income of citizens and
domestic corporations.
1. The amount of the credit in respect to the tax
paid or incurred to any country shall not
exceed the same proportion of the tax against
which such credit is taken, which the
taxpayer’s taxable income from sources within
such country bears to his entire taxable
income.
2. The total amount of the credit shall not exceed
the same proportion of the tax against which
such credit is taken, which the taxpayer’s
income from sources without the Philippines
taxable under Title II of the NIRC (Tax on
Income) bears to his entire taxable income for
the same taxable year (Sec. 34 [C][4], NIRC).
Q: Are taxes paid and subsequently refunded
taxable or non-taxable? (2005 Bar)

Foreign tax credit
It is the right of an income taxpayer to deduct from
income tax payable the foreign income tax he has
paid to a foreign country subject to certain
limitations. This is to avoid the rigors of indirect
double taxation, although not prohibited by the
Constitution for being violative of the due process,
results to a tax being paid twice on the same subject
matter or transaction.
Tax credit vs. Tax deduction
A: Taxable only if the taxes were paid and claimed
as deduction and which are subsequently refunded
or credited. It shall be included as part of gross
income in the year of the receipt to the extent of the
income tax benefit of said deduction (Sec. 34[C][1],
NIRC). Not taxable if the taxes refunded were not
originally claimed as deductions.
LOSSES
1. Actually sustained during the taxable year, and

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119 FACULTY OF CIVIL LAW
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2. Not compensated for by insurance or other
forms of indemnity shall be allowed as
deductions:
a. If incurred in trade, profession or business;
b. Of property connected with the trade,
business or profession, if the loss arises
from fires, storms, shipwreck, or other
casualties, or from robbery, theft or
embezzlement (Sec. 34 (D), NIRC).
Requisites for deductibility
The requisites for deductibility of a loss are:
[TAE-TIE-C45]
1. Loss belongs to the taxpayer
2. Actually sustained and charged off during the
taxable year
3. Evidenced by a closed and completed
transaction
4. Not compensated by insurance or other forms
of indemnity
5. Not claimed as a deduction for estate tax
purposes in case of individual taxpayers
6. Must be connected with taxpayer’s trade,
business or profession or incurred in any
transaction or incurred by an individual in any
transaction entered into for profit though not
connected with his trade, business or
profession
7. If it is casualty loss, it is evidenced by a
declaration of loss file within 45 days with the
bir
Types of losses
1. Ordinary losses – incurred in trade, profession
or business.
These are losses that are incurred by a taxable
entity as a result of its day to day operations
conducted for profit or otherwise (Domondon,
2013).
2. Casualty losses – The loss is of property
connected with trade, business or profession
arising from fire, storm, shipwreck or other
casualty, or from robbery, theft or
embezzlement.
These are the loss or physical damage suffered
by property used in trade, business or the
profession that results from unforseen
identifiable events that are sudden, unexpected
and unusual in character (Domondon, 2013).
A declaration of loss must be filed with the BIR
within 45 days after the date of event.
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Measurement of casualty loss
1. Total loss – Actual loss is the book value of
the asset.
2. Partial loss – Book value or cost to restore
the asset to its normal operating condition,
whichever is lower.
Actuall loss shall be reduced by insurance
recovery or any form of indemnity. Any excess
of cost to restore over the book value shall be
capitalized (Tabag, 2015).
Q: X, a travelling salesman in Sulu. In the course
of his travel, a band of MNLF seized his car by
force and used it to kidnap a foreign missionary.
The next day, the military and the MNLF band
had a chance encounter which caused X’s car to
be a total wreck. Can X deduct the value of his
car from his income as casualty loss? (1993 Bar)
A: It depends. If X is an employee of a company, he
cannot deduct the losses incurred since an
individual taxpayer who derives income from
compensation is allowed only personal and
additional deductions and the reasonable
premiums for health and hospitalization insurance.
If X is engaged in trade or business, he can deduct
the value of the car from his gross income provided
he can recover only up to the amount of the casualty
loss that does not exceed its book value, and that it
is not compensated by insurance or otherwise.
3. Net Operating Loss Carry-over (NOLCO)
This refers to the excess of allowable
deduction over gross income of the business in
a taxable year. The net operating loss of the
business or enterprise for any taxable year
immediately preceding the current taxable
year, which had not been previously offset as
deduction from gross income shall be carried
over as a deduction from gross income for the
next 3 consecutive taxable years immediately
following the year of such loss; provided that:
a. The taxpayer was not exempt from income
tax in the year of such net operating loss;
and
b. There has been no substantial change in
the ownership of the business or
enterprise.
NOTE: NOLCO is on a first-in first-out basis.
“Substantial change in ownership of the
business or enterprise”
 INCOME TAXATION
The 75% equity rule (or ownership or interest
rule) shall only apply to transfer or assignment
of the taxpayer’s net operating losses as a
result of or arising from the said taxpayer’s
merger or consolidation or business
combination with another person.
The transferee or assignee shall not be entitled
to claim the same as a deduction from gross
income except when as a result of the said
merger, consolidation or combination, the
shareholders of the transferor/assignor, or the
transferor gains control of:
1. At least 75% or more in nominal value of
the outstanding issued shares or paid up
capital of the transferee/assignee, if a
corporation;
2. At least 75% or more interest in the
business of the transferee/assignee, if not
a corporation (75% equity rule) (R.R. 14-
2001, Sec. 2.4).
Determination of whether or not there is
substantial change in ownership
Substantial change in ownership shall be
determined on the basis of any change in the
ownership in said business or enterprise
arising from or incident to its merger,
consolidation, or combination with another
person. It shall be determined as of the end of
the taxable year when NOLCO is to be claimed
as deduction (RR 14-2001, Sec. 5.1).
Q: In case of mines other than oil and gas wells,
NOLCO shall be allowed for what period?
A: A net operating loss during the first 10 years of
operation shall be allowed as NOLCO for the next 5
years.
Persons entitled to deduct NOLCO from
gross income
1. Individuals engaged in trade or business
or in the exercise of his profession
2. Domestic and Resident foreign
corporation subject to the normal income
tax or preferential tax rates
3. Estates and trusts
Effect of NOLCO when the corporate
taxpayer is subject to MCIT
The running of the 3-year period for the
expiry of NOLCO is not interrupted by the fact
that such corporation is subject to MCIT in any
taxable year during such 3-year period.
121
However, such corporation cannot enjoy the
benefit of NOLCO for as long as it is subject to
MCIT in any taxable period.
An individual who claims the 40% OSD cannot
claim deduction of NOLCO simultaneously.
Even if NOLCO was not claimed, the 3-year
period shall continue to run (RR 14-2001).
Who are not qualified to avail NOLCO?
1. OBUs for a foreign banking
corporation and FCDU of a domestic
banking corporations
2. Enterprise registered with the BOI
enjoying the Income Tax Holiday
Incentive
3. PEZA-registered enterprise
4. SBMA-registered enterprise
5. Foreign corporations engaged in
international shipping or air carriage
business in the Philippines
6. Any person, natural or juridical,
enjoying exemption from income tax
(RR 14-2001)
4. Capital losses - Losses from sale or exchange of
capital assets. It is deductible to the extent of
capital gains only.
Q: What is the rationale for the rule prohibiting
the deduction of capital losses from ordinary
gains? Explain. (2003 Bar)
A: It is to insure that only costs or expenses
incurred in earning the income shall be deductible
for income tax purposes consonant with the
requirement of the law that only necessary
expenses are allowed as deductions from gross
income. The term “necessary expenses”
presupposes that in order to be allowed as
deduction, the expense must be business
connected, which is not the case insofar as capital
losses are concerned. This is also the reason why all
nonbusiness connected expenses like personal,
living and family expenses, are not allowed as
deduction from gross income (Section 36(A)(1) of
the 1997 NIRC).
Refer to discussions on “Dealings in property” for
further discussion.
Securities becoming worthless
If securities become worthless during the taxable
year and are capital assets, the loss resulting
therefrom shall be considered as a loss from the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION

sale or exchange, on the last day of such taxable

year, of capital assets (Section 34 (D), NIRC).

Losses from shares of stock, held as capital asset,

which have become worthless during the taxable
year shall be treated as capital loss as of the end of
the year. However, this loss is not deductible
against the capital gains realized from the sale,
barter, exchange or other forms of disposition of
shares of stock during the taxable year, but must be
claimed against other capital gains. For the 5% and
10% net capital gains tax to apply, there must be an
actual disposition of shares of stock held as capital
asset, and the capital gain and capital loss used as
the basis in determining net capital gain, must be
derived and incurred respectively, from a sale,
barter, exchange or other disposition of shares of
stock (RR No. 06-08).

NOTE: Securities becoming worthless refer to

shares when offered for sale or requested for share
redemption, no amount can be realized by the
owner of the share (RR No. 06-08).

Q: Are worthless securities deductible from

gross income for income tax purposes? (1999
Bar)

A: Worthless securities, which are ordinary assets,

are not allowed as deduction from gross income
because the loss is not realized. However, if these
worthless securities are capital assets, the owner is
considered to have incurred a capital loss as of the
last day of the taxable year and therefore,
deductible to the extent of capital gains. This
deduction, however, is not allowed to a bank or
trust company (Sec. 34 [D][4], [E][2], NIRC).

5. Special Losses

a. Wagering losses – deductible only to the

extent of gain or winnings deemed to only
apply to individuals (Sec. 34 [D][6], NIRC)
b. Losses on wash sales of stocks

Wash sale - A sale of stock or securities where

substantially identical securities are acquired
or purchased within 61-day period, beginning
30 days before the sale and ending 30 days
after the sale.

GR: Losses from wash sale are not deductible

since these are considered as artificial loss.

XPN: Whentaxpayer is a dealer in securities, and

the transaction from which the loss resulted was
made in the ordinary course of business of such
dealer, the loss is deductible in full.

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 INCOME TAXATION

LOSSES RULES ON DEDUCTIBILITY

Deductible, net of indemnity
Ordinary losses
N.B. May be deducted from capital gains
Capital losses Deductible to the extent of capital gains only
Deductible – if worthless securities are capital assets (except where the taxpayer is
Securities becoming a bank or trust company)
worthless
Non-deductible - If worthless securities are ordinary assets
GR Losses from wash sale are not deductible
Losses on wash sales
XPN When taxpayer is a dealer in securities, and the transaction from which the loss
of stocks / securities
resulted was made in the ordinary course of business of such dealer, the loss is
deductible in full.
Wagering losses Deductible only to the extent of wagering gains.
Deductible for the next 3 consecutive years following the year of such loss. Provided
that:
i. The taxpayer was not exempt from income tax in the year of such net operating
loss; and
NOLCO ii. There has been no substantial change in the ownership of the business or
enterprise.

N.B. A net operating loss during the first 10 years of operation shall be allowed as
NOLCO for the next 5 years in case of mines other than oil and gas wells,
i. When a contract area where petroleum operations are undertaken is partially or
wholly abandoned, all accumulated exploration and development expenditures
pertaining thereto shall be allowed as a deduction.
ii. When a producing well is subsequently abandoned, the unamortized costs
Abandonment losses
thereof, as well as the undepreciated costs of equipment directly used therein,
in petroleum
shall be allowed as a deduction in the year of abandonment.
operations
Note: If such abandoned well is re-entered and production is resumed, or if such
equipment or facility is restored into service, the said costs shall be included as part
of gross income in the year of resumption or restoration.

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123 FACULTY OF CIVIL LAW
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Non-deductible losses
1. Losses not incurred in trade, profession or
business or in any transaction entered into
profit;
2. Losses from sales or exchanegs of property
entered into between related taxpayers (not
deductible as provided under Section 36 of the
NIRC but the gains are taxable;
3. Losses from exchanges of property in a
coprporate readjustment;
4. Losses from illegal transactions;
5. Loss on voluntary removal of building on land
purchased with a view to erect another
building. Such loss shall form part of the cost of
the new building to be erected (Tabag, 2015).
Marcelo doctrine
A loss in one line of business is not permitted as a
deduction from gain in another line of business
(Marcelo Steel Corporation v. CIR, G.R. No. L-12401,
October 31, 1960).
BAD DEBTS
These are debts due to the taxpayer actually
ascertained to be worthless and charged off in the
books of the taxpayer within the taxable year except
those:
1. Not connected with trade, business or
profession; and
2. Between related taxpayers (Sec 35 (E),
NIRC).
Bad debts refer to debts resulting from the
worthlessness or uncollectibility, in whole or in
part, of amount due to the taxpayer by others,
arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered (RR 5-99, Sec. 2).
NOTE: A mere recording in the taxpayer’s books of
account of estimated uncollectible accounts does
not constitute a write-off of the said receivable,
hence, it shall not be a valid basis for its deduction
as a bad debt expense.
Bad Debt Theory
Absence of creditor is not bad debt.
Requisites for deductibility [UST-CAR]
1. The debts are uncollectible despite diligent
effort exerted by the taxpayer;
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To prove that the taxpayer exerted diligent
efforts to collect the debts:
a. Sending of statement of accounts;
b. Sending of collection letters;
c. Giving the account to a lawyer for
collection; and
d. Filing a collection case in court.
2. Existing indebtedness subsisting due to the
taxpayer which must be valid and legally
demandable;
3. Connected with the taxpayer’s trade, business
or practice of profession;
4. Actually charged off in the books of accounts of
the taxpayer as of the end of the taxable year;
5. Actually ascertained to be worthless and
uncollectible as of the end of the taxable year;
and
NOTE: In lieu of requisite No. 5, the BSP, thru
its Monetary Board, shall approve the writing
off of said indebtedness from the banks’ books
of accounts at the end of the taxable year (RR
5-1999).
In no case may a receivable from an insurance
or surety company be written off from the
taxpayer’s books and claimed as bad debts
deduction unless such company has been
declared closed due to insolvency or for any
such similar reason by the Insurance
Commissioner (RR 5-1999).
6. Must not be sustained in a transaction entered
into between related parties.
Related parties
1. Members of the same family (brothers and
sisters, whether whole or half-blood; spouse,
ancestors, and lineal descendants)
2. An individual and a corporation more than fifty
percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly,
by or for such individual
3. Two corporations more than fifty percent
(50%) in value of the outstanding stock of each
of which is owned, directly or indirectly, by or
for the same individual
4. The grantor and a fiduciary of any trust
5. The fiduciary of a trust and the fiduciary of
another trust of the same person is a grantor
with respect to each trust
6. A fiduciary of a trust and a beneficiary of such
trust
 INCOME TAXATION
NOTE: Relatives by affinity and collateral relatives
other than brothers and sisters are not considered
related parties.
Q: What factors will determine whether or not
the debts are bad debts? (2004 Bar)
A: The factors to be considered include, but are not
limited to, the following:
1. The debtor has no property or visible
income;
2. The debtor has been adjudged bankrupt or
insolvent;
3. There are numerous debtors with small
amounts of debts and further action on the
accounts would entail expenses exceeding
the amounts sought to be collected;
4. The debt can no longer be collected even in
the future; and
5. Collateral shares have become worthless.
NOTE: "Worthless" is not determined by an
inflexible formula or slide rule calculation, but upon
the exercise of sound business judgment. In order
that debts be considered as bad debts because they
have become worthless, the taxpayer should:
a. Ascertain the debt to be worthless in the year
for which the deduction is sought; and
b. Act in good faith in ascertaining the debt to be
worthless (CIR v. Goodrich International Rubber
Co., G.R. No. L-22265, December 22, 1967).
Testimony of a CPA as substantial evidence for
the deductibility of a claimed worthless debt
Mere testimony of a CPA explaining the
worthlessness of said debts is seen as nothing more
than as a self-serving exercise which lacks probative
value. Mere allegations cannot prove the
worthlessness of such debts (Philippine Refining Co.
v. CA, G.R. No. 118794, May 8, 1996).
Deductibility of “reserves for bad debts” from
gross income for income tax purposes
Bad debts must be charged off during the taxable
year to be allowed as deduction from gross income.
The mere setting up of reserves will not give rise to
any deduction (Sec. 34 [E], NIRC).
Effect of recovery of bad debts
That recovery of bad debts previously allowed as
deduction in the preceding years shall be included
as part of the gross income in the year of recovery
to the extent of the income tax benefit of said
125
deduction (Sec. 34 [E], NIRC). This is also known as
the tax benefit rule.
DEPRECIATION
There shall be allowed as a depreciation deduction
a
1. Reasonable allowance for the exhaustion, wear
and tear (including reasonable allowance for
obsolescence)
2. Of property used in the trade or business (Sec. 34
[F], NIRC).
Depreciation is the gradual diminution in the useful
value of tangible property resulting from
exhaustion, wear and tear and obsolescence
(Domondon, 2013).
Requisites for deductibility
1. The property subject to depreciation must be
property withlife of more than 1 year.
2. The property depreciated must be used in
trade, business, or exercise of a profession.
3. The depreciation must have been charged off
during the taxable year.
4. The depreciation method used must be
reasonable and consistent.
5. A depreciation schedule should be attached to
the income tax return.
Person entitled to claim depreciation expense
The person entitled to claim depreciation expense is
the person who sustains an economic loss from the
decrease in property value due to depreciation
which is usually the owner. Non-resident aliens and
foreign corporations are allowed to deduct only
when the property is located within the Philippines
(Sec. 34 [F], NIRC).
Depreciable and non-depreciable assets for tax
purposes
1. Depreciable assets:
a. Only property that is used for trade,
business or exercise of a profession or held
for the production of income;
b. All kinds of tangible property (other than
land) with life of more than 1 year and do
not form part of the stock in trade that are
part of the inventory;
c. All kinds of intangible property (other than
shares of stock) with life of more than 1
year;
d. Subject to exhaustion within a
determinable period of time, that is it has a
limited useful life.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
2. Non-depreciable assets:
a. Land, apart from the improvements of
physical development added to it, cannot
be depreciated;
b. Inventories or stock in trade;
c. Personal effects or clothings, except
customes used in theatrical business;
d. Bodies of minerals subject to depletion;
e. Automobiles and other transportation
equipment used solely by the taxpayer for
pleasure;
f. Building used solely by the taxpayer as his
residence, and the furniture or furnishing
used in said building;
g. Intangibles, the use in trade, business or
exercise of profession is not of limited
duration.
Q: Is depreciation of goodwill deductible from
gross income? (1999 Bar)
A: Goodwill may or may not be subject to
depreciation.
GR: Depreciation for goodwill is not allowed as
deduction from gross income. While intangibles
maybe allowed to be depreciated or amortized, it is
only allowed to those intangibles whose use in the
business or trade is definitely limited in duration
(Basilan Estates, Inc. v, CIR, 21 SCRA 17). Such is not
the case with goodwill.
XPN: If the goodwill is acquired through capital
outlay and is known from experience to be of value
to the business for only a limited period (Sec. 107,
RR No. 2). In such case, the goodwill is allowed to be
amortized over its useful life.
Methods for computing depreciation allowance
under NIRC
1. Straight line method – The annual depreciation
charge is calculated by allocating the amount to
be depreciated equally over the number of
years of the estimated useful life of the tangible.
It results in a constant charge over the useful
life;
2. Declining balance method – accelerated method
of depreciation which writes off a relatively
larger amount of the asset’s cost nearer the
start of its useful life than that of the straight
line;
3. Sum of the years digit method – accelerated
method of depreciation expense in the earlier
years and lower charges in the later years;
4. Any other method which may be prescribed by
Department of Finance upon recommendation
of the CIR.
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Determination of depreciation method
The BIR and the taxpayer may agree in writing on
the useful life of the property to be depreciated
subject to modification if justified by facts or
circumstances. The change shall not be effective
before the taxable year on which notice in writing
by certified mail or registered mail is served by the
party initiating. However, if there is no agreement
and the BIR does not object to the rate and useful life
being used by the taxpayer, the same shall be
binding.
Method to be used in depreciation of properties
used in petroleum operations
It may either be straight line or declining balance
method with a useful life of 10 years or shorter, as
allowed by the CIR.
NOTE: If the property is not directly related to
production, depreciation is for 5 years using
straight line method (Sec. 34 F[4], NIRC).
Method to be used in depreciation of properties
used in mining operations other than
petroleum operations
1. At the normal rate of depreciation if the
expected life is less 10 years or less; or
2. Depreciated over any number of years
between 5 years and the expected life if the
latter is more than 10 years and the
depreciation thereon is allowed as
deduction from taxable income.
Provided, that the contractor notifies the CIR at the
beginning of the depreciation period which
depreciation rate allowed will be used.
Q: What is the annual depreciation of a
depreciable fixed asset with a cost of ₱100,000
having a salvage value of ₱10,000 and an
estimated useful life of 20 years under the
straight line method?
A: The annual depreciation is ₱4,500 computed as
follows: Acquisition cost less salvage value, then
divide the difference by its useful life. [100,000 –
10,000 = 90,000] then [90,000 / 20 = 4,500]
Q: Z purchased fully depreciated machineries
and entered the machineries in his books at
₱120,000. Based on the independent appraisal
and engineering report, Z assigned to the
machineries an economic life of 5 years.
Adopting the straight-line method, Z claimed a
depreciation deduction of ₱24,000 in his
 INCOME TAXATION

income tax return. Is the deduction proper,
considering that in the hands of the original
owner, the said machineries were already fully
depreciated? (1983 Bar)
A: YES. The starting point for the computation of
the deductions for depreciation is the reasonable
cost of acquiring the asset and its economic life. The
fact that the machineries were already depreciated
by its original owner does not matter. Z is allowed a
depreciation allowance for the exhaustion, wear
and tear (including reasonable allowance for
obsolescence) of the machineries which he is using
in his trade or business (Sec. 34 [F], NIRC).
DEPLETION OF OIL AND GAS WELLS AND MINES
Depletion refers to the deduction form gross income
arising from the exhaustion of natural resources like
mines and oil and gas wells as a result of production
or severance from such mines or wells.
public purposes, or to accredited domestic
corporations, or
b. Associations organized and operated
exclusively for religious, charitable, scientific,
youth and sports development, cultural or
educational purposes or for the
rehabilitation of veterans, or
c. To social welfare institutions, or to
nongovernment organizations
2. In accordance with rules and regulations
promulgated by the secretary of finance, upon
recommendation of the commissioner,
3. No part of the net income of which inures to the
benefit of any private stockholder or individual
4. In an amount not in excess of
a. 10% in the case of an individual, and
b. 5% in the case of a corporation, of the
taxpayer's taxable income derived from
trade, business or profession (Sec 34 (H),
NIRC).

Conditions for deductibility: (COILE) Requisites for deductibility [AW-SEA]

a. The method allowed under the rules and
regulations prescribed by the Secretary of
Finance is cost depletion method;
b. Can be availed of by oil and gas wells and mines;
c. The basis of cost depletion is the capital
invested in the mine which is the accumulated
exploration and development expenses;
d. When the allowance shall equal the capital
invested no further allowance shall be granted;
e. In case of RFC, allowance for depletion shall be
authorized only in respect to oil and gas wells
and mines located in the Philippines.
Persons who may avail deduction for depletion
Annual depletion deductions are allowed only to
mining entities which own an economic interest in
mineral deposits (RR 5-76, Sec. 3).
1. The contribution or gift must be actually paid;
2. It must be paid within the taxable year;
3. It must be given to the organization specified
by law;
4. It must be evidenced by adequate receipts or
records; and
5. The amount of charitable contribution of
property other than money shall be based on
the acquisition cost of said property.
Contributions that are deductible in full
These are: [GAFA]
1. Donations to the Government of the
Philippines, or political subdivisions including
fully-owned government corporation to be
used exclusively in undertaking priority
activities in: [CHEESHY]

Economic interest a. Culture

b. Health
It means interest in minerals in the place of c. Economic Development
investment therein or secured by operating or d. Education
contract agreement for which income is derived, e. Science
and return of capital expected, from the extraction f. Human Settlement
of mineral. g. Youth and Sports development

CHARITABLE AND OTHER CONTRIBUTIONS 2. Donations to foreign institutions and

international organizations in compliance with
1. Contributions or gifts actually paid or made treaties and agreements with the Government.
within the taxable year, 3. Donations to accredited NGO’s
a. To, or for the use of the Government of the a. Exclusively for: [C2HES2Y-RC]
Philippines or any of its agencies or any i. Cultural
political subdivision thereof exclusively for ii. Charitable

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127 FACULTY OF CIVIL LAW
 LAW ON TAXATION
iii. Health
iv. Educational
v. Scientific
vi. Social welfare
vii. Character building &youth and sports
Development
viii. Research
ix. Any combination of the above
b. Donation must be utilized not later than
the 15th day of the 3rd month following the
close of taxable year;
c. Administrative expense must not exceed
30% of the total expenses;
d. Upon dissolution, assets shall be
transferred to another non-profit domestic
corporation or to the State.
4. Donations of prizes and awards to Athletes (RA
7549, Sec. 1)
Donations that are deductible in FULL under
special laws
Donations to:
1. The Integrated Bar of the Philippines (IBP) (PD
81)
2. Development Academy of the Philippines (PD
205)
3. Aquaculture Department of the Southeast Asian
Fisheries and Development Center (SEAFDEC)
(PD 292)
4. National Social Action Council (PD 294)
5. National Museum, Library and Archives (PD
373)
6. University of the Philippines and other state
colleges and universities
7. Philippine Rural Reconstruction Movement
8. The Cultural Center of the Philippines (CCP)
9. Trustees of the Press Foundation of Asia
10. Humanitarian Science Foundation
11. Artesian Well Fund (RA 1977)
12. International Rice Research Institute
13. National Science Development Board (now the
DOST) and its agencies and to public or
recognized non-profit, non-stock educational
institutions (RA 3589)
14. Ministry of Youth & Sports Development (PD
604)
15. Social Welfare, Cultural & Charitable Institution
(PD 507)
16. Museum of Philippine Costumes (PD 1388)
17. Intramuros Administration (PD 1616)
18. Lungod ng Kabataan (PD 1631)
19. Foster child agencies (RA 10165)
Gifts and donations to the University of the
Philippines shall be exempt from donor’s tax and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
128
the same shall be allowable as a deduction up to
150% of the value of the donation (RA 9500).
Contributions to the National Book Trust Fund shall
likewise be exempt from donor’ tax and the same
shall be allowable as a deduction up to 150% of the
value of the donation (RA 9521).
Donations that are subject to limitation
1. Donations that are not in accordance with the
priority plan
2. Donations whose conditions are not complied
with
3. Donations to the Government of the Philippines
or political subdivision exclusive for public
purposes
4. Donations to domestic corporations organized
exclusively for:
a. Scientific
b. Educational
c. Cultural
d. Charitable
e. Religious
f. Rehabilitation of veteran
g. Social welfare
Limitations on deductions
Amount deductible shall not exceed:
1. For individuals - 10% of taxable income before
contributions
2. For corporations - 5% of taxable income before
contributions (Sec. 34 [H][1], NIRC)
RESEARCH AND DEVELOPMENT EXPENDITURE
1. Taxpayer may treat research or development
expenditures,
2. Which are paid or incurred by him during the
taxable year
3. In connection with his trade, business or
profession as:
a. Ordinary and necessary expenses, which
are not chargeable to capital account, and
shall be allowed as deduction during the
taxable year when paid or incurred, or
b. Deferred expenses
- Paid or incurred by the taxpayer in
connection with his trade, business or
profession;
- Not treated as ordinary expenses; and
- Chargeable to capital account but not
chargeable to property of a character
which is subject to depreciation or
depletion (Sec. 34(I), NIRC).
 INCOME TAXATION
Period for amortizing the deferred research
and development expenditures
In computing taxable income,
- Such deferred expenses shall be allowed as
deduction,
- Ratably distributed over a period of not less than
60 months (beginning with the month in which
the taxpayer first realizes benefits from such
expenditures).
Research and development expenditures that
are not deductible
Any expenditure:
1. For the acquisition or improvement of land or
for the improvement of property to be used in
connection with research and development
subject to depreciation and depletion; and
2. Paid or incurred for the purpose of ascertaining
the existence, location, extent or quality of any
deposit of ore or other mineral including oil or
gas (Sec. 34 [I][3], NIRC).
PENSION TRUSTS
1. An employer establishing or maintaining a
pension trust
2. To provide for the payment of reasonable
pensions to his employees
3. Shall be allowed as a deduction (in addition to
the contributions to such trust during the
taxable year to cover the pension liability
accruing during the year, allowed as a
deduction for ordinary and necessary
expenses)
4. A reasonable amount transferred or paid into
such trust during the taxable year in excess of
such contributions,
5. But only if such amount:
a. Has not theretofore been allowed as a
deduction, and
b. Is apportioned in equal parts over a period
of 10 consecutive years beginning with the
year in which the transfer or payment is
made (Sec. 34 (J), NIRC).
Requisites for deductibility [P-FRANC]
1. The employer must have established a pension
or retirement plan to provide for the payment
of reasonable pensions to his employees
2. It must be funded by the employer
3. The pension plan is reasonable and actuarially
sound
4. The deduction is apportioned in equal parts
over a period of 10 consecutive years beginning
129
with the year in which the transfer or payment
is made
5. The payment has not yet been allowed as a
deduction
6. The amount contributed must no longer be
subject to the control and disposition of the
employer
Deductible payment to pension trusts
1. Employer’s current liability – amount
contributed during the taxable year shall be
treated as an ordinary and necessary expense
2. Employer’s liability for past services – 1/10 of
the reasonable amount paid to cover pension
liability applicable to the preceding 10 years
NOTE: When an employer makes a contribution to
his employee’s Personal Equity and Retirement
Account (PERA), the employer can claim this
amount as a deduction but only to the extent of the
employer’s contribution that would complete the
maximum allowable PERA contribution of an
employee (RR 2011-17, with RA 9505).
Q: When can an employer claim as deduction the
payment of reasonable pension?
A: If the employer contributes to a private pension
plan for the benefit of its employee.
Q: Are the following expenses deductible from
gross income:
a. Employer’s contribution to the Christmas
fund of his employees
b. Contribution to the construction of a chapel
of a university that declares dividends to its
stockholders
c. Premiums paid by the employer for the life
insurance of his employees
d. Contribution to a newspaper fund for needy
families when such newspaper organizes a
group of civic spirited citizens solely for
charitable purposes. (1968 Bar)
A:
a. YES. Under No. 27 RAMO 1-87 subject to the
condition that the contribution does not exceed
½ month’s basic salary of all the employees. It
is part of the ordinary and necessary expenses.
b. NO, part of the net income of the university
inures to the benefit of its private stockholders
(Sec. 34 [H], NIRC).
c. NO, for the beneficiary is the employer (Sec. 36
[A][4], NIRC).
d. NO, contributions to a newspaper fund for
needy families are not deductible for the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
reason that the income inures to the benefit of
the private stockholder of the printing
company.
Q: On December 6, 2001, LVN Corp. donated a
piece of vacant lot situated in Mandaluyong City
to an accredited and duly registered non-stock,
non-profit educational institution to be used by
the latter in building a sports complex for
students.
May the donor claim in full as deduction from its
gross income for the taxable year 2001 the
amount of the donated lot equivalent to its fair
market value/zonal value at the time of the
donation? (2002 Bar)
Taxpayers who claim deductions for expenses, the
amounts of which are subject to withholding tax,
must prove that said deductions were in fact
subjected to proper withholding. If no withholding
was made, then claimed deductions will not be
allowed (Sec. [34][K], NIRC).
No deductions shall be allowed notwithstanding
payments of withholding tax at the time of the audit
investigation or reinvestigation/reconsideration in
cases where no withholding of tax was made (RR
12-2013).
SPECIAL DEDUCTIONS
Special deductions allowable under the NIRC

A: NO. Donations and/or contributions made to 1. Private proprietary educational institutions –In
qualified institutions consisting of property other addition to the expenses allowed as deduction,
than money shall be based on the acquisition cost they have the option to treat the amount
of the property. The donor is not entitled to claim utilized for the acquisition of depreciable assets
as full deduction the fair market value/zonal value for expansion of school facilities as:
of the lot donated (Sec. 34 [H], NIRC). a. Outright expense (the entire amount is
deducted from gross income); or
Q: The Filipinas Hospital for Crippled Children is b. Capital asset and deduct only from the
a charitable organization. X visited the hospital gross income an amount equivalent to its
and gave ₱100,000 to the hospital and ₱5,000 to depreciation every year (Sec. 34 [A][2],
a crippled girl whom he particularly pitied. A NIRC).
crippled son of X is in the hospital as one of its
patients. X wants to exclude both the ₱100,000 2. Estates and trusts can deduct the:
and the ₱5,000 from his gross income. Discuss. a. Amount of income paid, credited or
(1993 Bar) distributed to the heirs/beneficiaries; and
b. Amount applied for the benefit of the
A: If X is earning from compensation income, he grantor (Sec. 61, NIRC).
could not deduct either the ₱100,000 and the
₱5,000. If he is earning from trade or business, he 3. Insurance companies can deduct:
could deduct the ₱100,000 if the hospital is
accredited as a institution. If not, then no deduction TYPE OF
SPECIAL DEDUCTIONS
is allowed. INSURANCE
1. Net additions, if any,
However, he could not deduct the ₱5,000 because required by law to be
to qualify for exemption, the charitable made within the year to
contribution must be given to accredited reserve funds;
organizations or associations (Sec. 34 [H][1], NIRC). 2. Sum paid on the policy
within the year and
Q: On the part of the contributor, are Non-Life
annuity contracts other
contributions to a candidate in an election than dividends, provided
allowable as a deduction from gross income? that the released reserve
(1998 Bar) be treated as income for
the year of release (Sec. 3
A: The contributor is not allowed to deduct the [A], NIRC).
contributions because the said expense is not 1. Amounts repaid to policy
directly attributable to the development, holders on account of
management and/or operation and/or conduct of Mutual premiums previously paid
trade or business or profession. marine by them;
insurance 2. Interest paid upon those
Additional requirements for deductibility amounts between the date
of ascertainment and the

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
130
 INCOME TAXATION

date of its payment (Sec. 37 Aid Services for Practicing Lawyers, under BAR
[B], NIRC). Matter No. 2012, issued by the SC.
Mutual 1. Portion of the premium
insurance – deposits returned to the 6. Deductions under the Expanded Senior Citizen
mutual fire policy holders; Act of 2003
and mutual 2. Portion of the premium a. Deduction from gross income of private
employer’s deposits retained for the establishments for the 20% sales discount
liability and payment of losses, granted to senior citizens on the sale of goods
mutual expenses and reinsurance and/or services
workmen’s reserve (Sec. 37 [C], NIRC). b. Additional deduction from gross income of
compensation private establishments for compensation
and mutual paid to senior citizens.
casualty
insurance Tax treatment of senior citizens discount
Amount actually deposited
with officers of the With the effectivity of RA 9257 on 21 March 2004,
Government of the there is now a new tax treatment for senior citizens'
Assessment discount granted by all covered establishments.
Philippines pursuant to law
Insurance This discount should be considered as a deductible
as addition to guarantee or
reserve funds (NIRC, Sec. 37 expense from gross income and no longer as tax
[D]). credit (CIR v. Central Luzon Drug Corp., G.R. No.
159610, 2008).
Deductions under special laws
Persons who could avail of the deduction for the
1. Special dedutions for productivity bonus and 20% senior citizens discount
manpower training under the Productivity
Incentives Act of 1990 1. Resident citizens and domestic corporations;
2. Deductions for training expenses of qualified and
jewelry enterprises 2. Non-resident citizens, aliens (whether
3. Deductions under the Adopt-a-School Act of residents or not) and foreign corporations,
1998 from their income arising from their profession,
4. Deductions under the Magna Carta for Persons trade or business, derived from sources within
with Disability the Philippines.
5. Deduction under Free Legal Assistance Act of
2010 Establishments that can claim the discounts
granted as deduction
Free Legal Assistance Act of 2010
1. Hotels and similar lodging establishments
A lawyer or professional partnerships rendering 2. Restaurants
actual free legal services, as defined by the SC, 3. Recreation centers
shall be entitled to an allowable deduction from 4. Theaters, cinema houses, concert halls,
the gross income. circuses, carnivals and other similar places of
culture, leisure and amusement
Deduction would be the amount that could have 5. Drug stores, hospitals, pharmacies, medical and
been collected for the actual free legal services optical clinics, and similar establishments
rendered or up to 10% of the gross income dispensing medicines
derived from the actual performance of the legal 6. Medical and dental services in private facilities
profession, whichever is lower. 7. Domestic air and sea transportation companies
8. Public land transportation utilities
Condition for it to be availed of as a deduction 9. Funeral parlors and similar establishments
from gross income
Conditions in order for establishments to avail
It shall be deductible provided that the actual the 20% sales discounts as deduction from gross
free legal services contemplated shall be income
exclusive of the minimum 60-hour mandatory
legal aid services rendered to indigent litigants 1. Only that portion of the gross sales exclusively
as required under the Rule on Mandatory Legal used, consumed or enjoyed by the senior citizen

UNIVERSITY OF SANTO TOMAS

131 FACULTY OF CIVIL LAW
 LAW ON TAXATION
shall be eligible for the deductible sales
discount.
2. The gross selling price and the sales discount
must be separately indicated in the official
receipt or sales invoice issued by the
establishment from the sale of goods or services
to the senior citizen.
3. Only the actual amount of the discount on a
sales discount not exceeding 20% of the gross
selling price can be deducted from the gross
income, net of value-added tax, if applicable, for
income tax purposes, and from gross sales or
gross receipts of the business enterprise
concerned, for VAT or other percentage tax
purposes.
4. The discount can only be allowed as deduction
from gross income for the same taxable year
that the discount is granted.
5. The business establishment giving sale
discounts to qualified senior citizens is required
to keep separate and accurate record of sales,
which shall include the name of the senior
citizen, OSCA ID, gross sales/receipts, sales
discounts granted, dates of transaction and
invoice number for every sale transaction to
senior citizen.
6. Only those establishments selling any of the
qualified goods and services to a Senior Citizen
where an actual discount was granted can claim
the deductions.
7. The seller must not claim the optional standard
deduction during the taxable year (Sec. 7, RR 7-
2010).
Additional deduction from gross income of
private establishments for compensation paid
to senior citizens
Private establishments employing senior citizens
shall be entitled to additional deduction from their
gross income equivalent to 15% of the total amount
paid as salaries and wages to senior citizens
provided the following are present:
1. Employment shall have to continue for a period
of at least 6 months;
2. Annual taxable income of the senior citizen does
not exceed the poverty level as may be
determined by the NEDA thru the National
Statistical Coordination Board (NSCB). For this
purpose, the senior citizen shall submit to his
employer a sworn certification that his annual
taxable income does not exceed the poverty level
(R.R. 7-2010, Sec. 12).
Sales on discounts on (PWD)
PWDs are entitled to claim at least 20% discount.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
132
1. The following establishments relative to the
sale of goods or services for their exclusive use
or enjoyment:
a. Hotels and similar lodging establishments
and restaurants;
b. Sports and recreation centers;
c. Theatres, cinema houses, concert halls,
circuses, carnivals and other similar places
of culture, leisure and amusement;
d. Drugstore regarding purchase of
medicines;
e. Medical and dental privileges in
government facilities such as but not
limited to diagnostic and laboratory fees
including professional fees of attending
doctors in private facilities, subject to
guidelines to be issued by the DOH, in
coordination with the PHIC
f. Domestic air and sea transportation based
on the actual fare except promotional fare.
If the promotional fare discount is higher
than the 20% discount privilege, the pwd
may choose the promotional fare and
should no longer be entitled to the 20%
discount privilege; and
g. Land transportation privileges in bus fares
such as ordinary, aircon fares and on public
railways such as LRT, MRT, PNR and such
other similar infrastructures that will be
constructed, established and operated by
public or private entity.
Toll fees of skyways and expressways are
likewise subject to 20% discount which can be
availed of only by a person with disability
owning the vehicle (Rev. Reg. 1-2009).
Provided, however, that the foregoing
privileges granted to PWDs shall not be claimed
if the said PWD claims a higher discount as may
be granted by the commercial establishment
and/or existing laws or in combination with
other discount program/s.
Thus, if a PWD is also a senior citizen, he can
only claim one 20% discount on a particular
sales transaction.
2. Conditions for Availment by establishments of
sales discounts as special deduction from gross
income:
a. Allowed as deduction from gross income
for the same taxable year when the
discount is granted;
b. Only that portion of the gross sales
exclusively used, consumed, or enjoyed by
the PWD shall be eligible for the deduction
 INCOME TAXATION

c. Only the actual amount of the sales
discount granted or a sales discount not
exceeding 20% of the gross selling price or
gross receipt can be deducted from the
gross income, net of VAT, if applicable, for
income tax purposes and from gross sales
or receipts of the business enterprise
concerned, for VAT or other percentage tax
purposes and shall be subject to proper
documents under pertinent provisions of
the tax code;
d. The business establishment giving sales
discount to qualified person with disability
is required to keep separate and accurate
record of sales, which shall include the
name of the PWD, ID Number, gross
sales/receipts, sales discounts granted,
date of transactions and invoice number for
every sale transaction to PWD.
Optional Standard Deduction
OSD is a fixed percentage deduction which is
allowed to certain taxpayers without regard to any
expenditure. This is in lieu of the itemized
deduction.
The optional standard deduction is an amount not
exceeding:
1. 40% of the gross sales or gross receipts of a
qualified individual taxpayer; or
2. 40% of the gross income of a qualified
corporation (Sec. 34 [L], NIRC).
Illustration:
A corporation has gross sales of ₱1M, sales return
of ₱25k, cost of goods sold of ₱600k, rental income
of ₱275k and with an itemized deductions of
₱200,000.
“cost of service” in case of individual seller of
services, is not allowed to be deducted for purposes
of determining the basis of the OSD pursuant to RA
9504 (RR 16-2008).
Itemized Deductions vs. OSD
ITEMIZED OPTIONAL STANDARD
DEDUCTIONS DEDUCTION
It must be It requires no proof of
substantiated expenses incurred because
by receipts. the allowable deduction is a
percentage not exceeding
40% of gross sales or
receipts or gross income as
the case may be
The election to claim either the OSD or itemized
deductions must be signified in the income tax
return filed for the first quarter of the taxable year.
Unless the corporation signified in his return his
intention to elect optional standard deduction, it
shall be considered as having availed itself of the
itemized deduction.
Once the election is made, the same type of
deduction must be consistently applied for all
succeeding quarters and in the annual income tax
return. In other words, the choice shall be
irrevocable for the taxable year for which the return
is made.
NOTE: A taxpayer who is required but fails to file
the quarterly income tax return for the first quarter
shall be deemed to have elected to avail of itemized
deductions for the taxable year.
Persons who may avail of the OSD under the
NIRC

OSD ITEMIZED 1. Individuals

Gross Sales 1,000,000 1,000,000 a. Resident citizens (RC)
Rental Income 275,000 275,000 b. Non-resident citizens (NRC)
TOTAL REVENUE 1,275,000 1,275,000 c. Resident aliens (RA)
Less: Sales Returns 25,000 25,000
Cost of goods 600,000 600,000 2. Corporations
sold a. Domestic (DC)
GROSS INCOME 650,000 650,000 b. Resident foreign corporations (RFC)
Less: Deductions
OSD (650k x 260,000 3. Partnerships
40%) 4. Estates and trusts
Itemized 200,000
TAXABLE INCOME 390,000 450,000 An individual who avails of the OSD is not required
Rate of Taxos 30% 30% to submit final statements provided that said
INCOME TAX DUE 117,000 135,000 individual shall keep such records pertaining to his
gross sales or gross receipts.
NOTE: It should be emphasized that the “cost of
sales” in case of individual seller of goods, or the

UNIVERSITY OF SANTO TOMAS

133 FACULTY OF CIVIL LAW
 LAW ON TAXATION
A corporation is still required to submit its
financial statements when it files its annual income
tax return and keep such records pertaining to its
gross income.
Persons who may not avail of the OSD
1. Non-resident aliens, (NRA) whether or not
engaged in trade or business in the Philippines;
and
2. Non- resident foreign corporations (NRFC)
Following the new income tax forms as prescribed
in RR 2-2014, the following are not entitled to avail
the OSD:
Corporation, partnerships and other non-
individuals:
1. Exempt under the NIRC and other special laws,
with no other taxable income;
2. With income subject to special or preferential
tax rates;
3. With income subject to special or preferential
tax rates, plus income subject to income tax
under Sec. 27(A) and Sec. 28 (A)(1)of the NIRC;
4. Juridical entities whose taxable base is gross
revenue or receipts (e.g. special RFC; non-
resident foreign corporations [NRFC]; special
NRFC).
Q: In 2012, Dr. K decided to return to his
hometown to start his own practice. At the end
of 2012, Dr. K found that he earned gross
professional income in the amount of
P1,000,000.00; while he incurred expenses
amounting to P560,000.00 constituting mostly
of his office space rent, utilities, and
miscellaneous expenses related to his medical
practice. However, to Dr. K’s dismay, only
P320,000.00 of his expenses were duly covered
by receipts. What are the options available for
Dr. K so he could maximize the deductions from
his gross income? (2015 Bar)
A: Dr. K may opt to use the optional standard
deduction (OSD) in lieu of the itemized deduction.
OSD is a maximum of 40% of gross receipts during
the taxable year. Proof of actual expenses is not
required, but Dr. K shall keep such records
pertaining to his gross receipts.
Determination of OSD allowed for individuals,
corporations, and GPPs
INDIVIDUAL
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
134
It depends on the accounting method used by the
taxpayer in recognizing income and deductions:
1. Accrual basis – the OSD shall be based on the
gross sales during taxable year.
2. Cash Basis – the OSD shall be based on the
gross receipts during the taxable year.
NOTE: Costs of sales or costs of services are not
allowed to be deducted for purposes of
determining the basis of the OSD in case of an
individual taxpayer.
For other individual taxpayers allowed by law to
report their income and deductions under a
different method of accounting, the gross sales or
gross receipts shall be determined in accordance
with the said acceptable method of accounting
(RR 16-2008).
CORPORATION
In case of a corporation, the basis of the OSD is
the gross income. Sales returns, discounts and
allowances and cost of goods (or cost of services)
are deducted from the gross receipts to arrive at
gross income. The method of accounting is not
taken into consideration unlike in the case of an
individual.
GENERAL PROFESSIONAL PARTNERSHIP
1. For purposes of computing the distributive
share of the partners, the net income of the
GPP shall be computed in the same manner as
a corporation. As such, a GPP may claim either
the itemized deductions allowed under Sec. 34
or in lieu thereof, it can opt to avail of the OSD
allowed to a corporation.
2. If the GPP avails of itemized deductions under
Sec. 34 of the NIRC in computing net income, the
partners may still claim itemized deductions
on their net distributive share that have not
been claimed by the GPP.
The partners, however, are not allowed to
claim OSD on their share of net income
because the OSD is a proxy for all items of
deductions allowed in arriving at taxable
income.
3. If the GPP avails of OSD in computing net
income, the partners may no longer claim
further deductions from their net distributive
share, whether itemized or OSD (RR 2-2010).
 INCOME TAXATION

Items not deductible

In computing net income, no deduction shall in any

case be allowed in respect to:

1. Personal, living or family expenses

– These are personal expenses and not related
to the conduct of trade or business.
2. Any amount paid out for new buildings of for
permanent improvements, or betterments
made to increase the value of any property or
estate
– These are capital expenditures added to the
cost of the property and the periodic
depreciation is the amount that is considered as
deductible expense.

NOTE: Shall not apply to intangible drilling and

development costs incurred in petroleum
operations which are deductible under
Subsection (G)(1) of Sec. 34 of the NIRC.

3. Any amount expended in restoring property or

in making good the exhaustion thereof for
which an allowance is or has been made (Major
Repairs)
4. Premiums paid on any life insurance policy
covering the life of any officer or employee, or
of any person financially interested in any trade
or business carried on by the taxpayer,
individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such
policy (Sec. 36 [A], NIRC)

NOTE: A person is said to be financially

interested in the taxpayer’s business, if he is a
stockholder thereof or if he receives as
compensation his share of the profits of the
business.

5. Interest expense, bad debts, and losses from

sales of property between related parties
6. Bribes, kickbacks and other similar payments
7. Items where the requisites for deductibility are
not met

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135 FACULTY OF CIVIL LAW
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SUMMARY OF RULES ON DEDUCTIONS WITH LIMITS

LIMIT
Transportation Cost of the plane ticket. Any excess is disallowed
$150 per day for trips to US, Australia, Canada, Europe, Middle East and Japan; $100
Travel Allowance
per day for other places.
Engaged in sale of goods or properties
Entertainment, – 0.50% of net sales (i.e., gross sales less sales returns or allowances and sales
Amusement, And discounts)
Recreational Engaged in sale of services, including exercise of profession and use or lease of
Expense properties
– 1% of net revenue (i.e., gross revenue less discounts)
The allowable deduction have been reduced by an amount equal to 33% of the
Interest Expense
interest income subject to tax
In the case of NRAETB and RFC, the deductions for taxes shall be allowed only if and
Taxes to the extent that they are connected with income from sources within the
Philippines
Capital Losses Deductible up to the extent of capital gains
Wageriing Losses Deductible only to the extent of wagering gains.

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 INCOME TAXATION

INCOME TAX ON INDIVIDUALS permanently abroad or to

return to and reside in the
Classes of individual taxpayers: Philippines (Sec. 22 [E], NIRC).
1. Citizen ALIENS
a. Resident Citizen (RC)
RA NRA
b. Non-Resident Citizen (NRC)
i. Overseas Contract Worker (OCW) An individual An individual whose residence
ii. Seaman whose is not within the Philippines
residence is and who is not a citizen thereof
2. Aliens within the (Sec. 22 [G], NIRC)
a. Resident Alien (RA) Philippines
b. Non- Resident Alien (NRA) but who is not
i. Engaged in Trade or Business (NRA-ETB) a citizen
ii. Not Engaged in Trade or Business (NRA- thereof (Sec.
NETB) 22 [F], NIRC)
c. Special Aliens Engaged in NOT engaged
trade or in trade or
3. Special class of individual employees business business
Minimum wage earner An alien who An alien who
stays in the stays in the
CITIZENS Philippines Philippines for
RC NRC for an 180 days or
aggregate less (Sec. 25
A citizen of the A citizen of the Philippines
period of [B], NIRC)
Philippines who:
more than
who stays in a. Establishes to the 180
the Philippines satisfaction of the CIR the days(Sec. 25
without the fact of his physical presence [A], NIRC)
intention of abroad with a definite
transferring intention to reside therein; SPECIAL CLASS OF INDIVIDUAL EMPLOYEES:
his physical b. Leaves the Philippines MINIMUM WAGE EARNER
presence during the taxable year to Refers to a worker in the private sector paid the
abroad reside abroad, either as an statutory minimum wage or to an employee in
whether to immigrant or for the public sector with compensation income of
stay employment on a not more than the statutory minimum wage in
permanently permanent basis; the non-agricultural sector where he is assigned.
or temporarily c. Works and derives income
as an overseas from abroad and whose Significance of classifying an alien as a resident
contract employment thereat or a non-resident
worker requires him to be
physically present abroad BASIS RA NRA
most of the time during the ETB NETB
taxable year; 0% - 50%35% 25% of
d. Has been previously Tax 35% schedular gross
considered as a nonresident treatment schedular rate income
citizen and who arrives in rate
the Philippines at any time Entitled Entitled Not
during the taxable year to Personal subject to entitled
reside permanently in the exemption the rule on
Philippines. (Note: Treated reciprocity
as NRC with respect to
income derived from Special classes of aliens under NIRC
sources abroad until the
date of his arrival) Special aliens are individuals with
managerial/highly technical positions working in:
NOTE: Taxpayer shall submit [ROP]
proof to the CIR to show his
intention of leaving the
Philippines to reside

UNIVERSITY OF SANTO TOMAS

137 FACULTY OF CIVIL LAW
 LAW ON TAXATION
1. Regional or area headquarters and regional insurance (xxx)
operating headquarters of multinational __________
companies established in the Philippines Net Compensation Income xxx
2. Offshore banking units (OBU) established in the Add: Net business income or xxx
Philippines. OBUs are foreign banks allowed to Net professional income xxx
operate in the Philippines and to conduct Other income xxx
foreign currency transactions __________
3. Petroleum service contractors and sub- Taxable income subject to
contractors in the Philippines graduated rates xxx

NOTE: When a special alien leases a property, he

shall be taxed under NRA-EBT and NRA-NEBT,
depending on the number of stay because the 15%
applies only to his compensation income.

Special aliens are not required to submit ITR

because the obligation to file income ITR rests upon
his employer.

Two instances where alternative taxation may

be applied

1. Filipino considered as special alien

2. When a taxpayer’s capital asset is sold to the
Government (Involuntary Sale or Expropriation)

Alternative taxation for Filipino considered as

special alien

When a Filipino is considered as a special alien

because he is employed and occupying the same
position as those of aliens employed by
multinational companies, he may:

1. Avail of the 15% tax rate without deduction

(GIT);

Meaning of seamen as contemplated in the law

They should be working in a ship engaged

exclusively in international trade or commerce. If
engaged only in local trade or commerce, they are
just considered as normal employees.

Formula in determining taxable income

The term taxable income means the pertinent items

of gross income specified in this Code, less the
deductions and/or personal and additional
exemptions, if any, authorized for such types of
income by this Code or other special laws. (Sec. 31,
NIRC)

Gross Compensation Income xxx

Less: Personal exemptions
(xxx)
Premium payment on health
and/or hospitalization

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 INCOME TAXATION

General Principles and Applicable Tax Rates

INCOME DERIVED FROM GROSS OR NET RATE

SOURCES
INDIVIDUAL TAXPAYER IS A:
Within the Outside the Gross Income Taxation
Philippines Philippines (GIT) or Net Income
Taxation (NIT)

Employee: NIT ;
RC √ √ Businessman: NIT/GIT, if 0-35%
he availed of the OSD

NRC √ X NIT 0-35%

OCW/Seaman √ X NIT 0-35%

Employee: GIT
RA √ X 0-35%
Businessman: GIT

NIT
NRA-EBT √ X 0-35%

GIT
NRA-NEBT √ X 25%

Special Alien √ X GIT 15%

Estate Under Judicial NIT 0-35%

√ √
Settlement

Irrevocable Trust √ √ NIT 0-35%

Co-owners √ √ NIT 0-35%

UNIVERSITY OF SANTO TOMAS

139 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Graduated rates applicable to the income of 3,000,000
individuals pesos
Basis of IT Net taxable Gross
INCOME BRACKET APPLICABLE TAX income sales/receipts,
RATE and other non-
Not over ₱250,000 Tax operating
+ income
exempt
Allowed Allowable Allowed
20% of
but not deductions itemized reduction of
Over the
over deductions or only 250,000
₱250,00 + excess
₱400,00 Optional pesos from an
0 over
0 Standard individual
₱10,000
Deduction whose income
25% of (OSD) comes purely
but not
Over the from business
over
₱400,00 ₱30,000 + excess or practice of
₱800,00
0 over profession
0
₱30,000 Business tax Percentage If qualified, not
30% of Tax or VAT subject to PT
but not the Required 1 . If itemized: If qualified, no
Over
over ₱130,00 excess financial FS – if gross FS required
₱800,00 +
₱2,000,0 0 over statements is less than 3
0
00 ₱800,00 million pesos;
0 Audited FS –
32% of if gross is
but not the more than 3
Over
over ₱490,00 excess million
₱2,000,0 +
₱8,000,0 0 over
00
00 ₱2,000, 2 . If OSD, no
000 FS
35% of required
the
Over INCOME TAX ON RESIDENT CITIZENS, NON-
₱2,410, excess
₱8,000,0 + RESIDENT CITIZENS AND RESIDENT ALIENS
000 over
00
₱8,000,
000 Coverage
(Sec. 24 [A] [2], TRAIN)
1. A citizen of the Philippines residing therein is
What are the salient features of both the taxable on all income derived from sources
graduated and the 8% income tax rates? (RMC within and without the Philippines;
50-2018) 2. A nonresident citizen is taxable only on income
derived from sources within the Philippines;
Particulars Graduated 8% IT rates 3. An individual citizen of the Philippines who is
IT rates working and deriving income from abroad as an
Applicability In general, May be availed OFW is taxable only on income derived from
applicable to only by sources within the Philippines: Provided, that a
all individuals qualified seaman who is a citizen of the Philippines and
individuals who receives compensation for services
engaged in the rendered abroad as a member of the
business or complement of a vessel engaged exclusively in
practice of international trade shall be treated as an
profession overseas contract worker;
whose gross 4. An alien individual, whether a resident or not of
sales/receipts the Philippines, is taxable only on income
and other non- derived from sources within the Philippines
operating (Sec. 23, NIRC).
income does
noe exceed

UNIVERSITY OF SANTO TOMAS

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 INCOME TAXATION

The general rule is that resident citizens are taxable
on income from all sources within and without the
Philippines. Whereas, nonresident citizens,
overseas contract workers, seamen who are
members of the complement of a vessel engaged
exclusively in international trade, resident aliens,
and nonresident aliens are taxable only on income
from sources within the Philippines.
Q: Ms. C, a resident citizen, bought ready-to-
wear goods from Ms. B, a nonresident citizen.
a. If the goods were produced from Ms. B’s
factory in the Philippines, is Ms. B’s income
from the sale to Ms. C taxable in the
Philippines? Explain.
b. If Ms. B is an alien individual and the goods
were produced in her factory in China, is Ms.
B’s income from the sale of the goods to Ms.
C taxable in the Philippines? Explain. (2015
Bar)
Requisites for taxability of compensation
income [SAR]
1. Personal services actually rendered
2. Payment is for such services rendered
3. Payment is reasonable
Payment for the services rendered by an
independent contractor
Payment for the services of an independent
contractor is not classified as compensation income
since there is no employer-employee relationship.
The income of the independent contractor is
derived from the conduct of his trade or business,
which is considered as business income and not
compensation income.
Q: Give an instance that payment is made for
services rendered yet it may not qualify as
compensation income.

A: A: The share of a partner in a general professional

a. YES. The income of Ms. B from the sale of ready-
to-wear goods to Ms. C is taxable. A nonresident
citizen is taxable only on income derived from
sources within the Philippines. In line with the
source rule of income taxation, since the goods
are produced and sold within the Philippines,
Ms. B’s Philippine-sourced income is taxable in
the Philippines. (Sec. 23, NIRC)
b. YES. But only a proportionate part of the
income. Gains, profits and income from the sale
of personal property produced by the taxpayer
without and sold within the Philippines, shall be
treated as derived part. (Sec. 42 [E], NIRC).
Taxation on Compensation Income
partnership. The general partner rendered services
and the payment is in the form of a share in the
profits is not within the meaning of compensation
income because it is derived from the exercise of
profession classified as professional income.
Inclusions in Compensation Income
1. Monetary compensation
a. Regular salary/wage
b. Separation pay/retirement benefit not
otherwise exempt
c. Bonuses, 13th month pay, and other
benefits not exempt
d. Director’s fees

Compensation income includes all remuneration for 2. Non-monetary compensation

services rendered by an employee for his employer Fringe benefit not subject to tax
unless specifically excluded under the NIRC (R.R. 2-
98, Sec. 2.78.1). Exclusions from Compensation Income

The name by which the remuneration for services is 1. Fringe benefit subject to tax
designated is immaterial. Thus, salaries, wages, 2. De minimis benefit
emoluments, honoraria, allowances, commissions 3. 13th month pay and other benefits and
(i.e. transportation, representation, entertainment payments specifically excluded from taxable
and the like); fees including director’s fees, if the compensation income
director is, at the same time, an employee of the
employer/ corporation; taxable bonuses and fringe The above exclusions are discussed in detail below
benefits except those which are subject to the fringe
benefits tax; taxable pensions and retirement pay; Deductions from Compensation Income
and other income of a similar nature constitute
compensation income (R.R. 2-98, Sec. 2.78.1). 1. Personal exemptions
2. Additional exemptions
The test is whether such income is received by
virtue of an employer-employee relationship. Fringe Benefits

UNIVERSITY OF SANTO TOMAS

141 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Fringe benefit is any good, service or other benefit but requires the use of
furnished or granted by an employer in cash or in independent judgment.
kind, in addition to basic salaries, to an individual Rank-and- Employees who are holding
employee, except rank and file employee, such as file neither managerial nor
but not limited to: employees supervisory position.

[HEV-HIM-HEEL] Nature of a fringe benefit tax (FBT)

1. Housing FBT is a final withholding tax imposed on the

2. Expense account grossed-up monetary value (GMV) of fringe
3. Vehicle of any kind benefit furnished, granted or paid by the employer
4. Household personnel such as maid, driver and to the employee, except rank and file employees
others (R.R. 3-98, Sec. 2.33 [A]).
5. Interest on loans at less than market rate to the
extent of the difference between the market Grossed-up Monetary Value
rate and the actual rate granted
6. Membership fees, dues and other expenses This represents the whole amount of income
borne by the employer for the employee in realized by the employee, which includes the net
social and athletic clubs or other similar amount of money or net monetary value of
organizations property which has been received, plus the amount
7. Holiday and vacation expenses of fringe benefit tax thereon otherwise due from the
8. Expenses for foreign travel employee but paid by the employer for and in
9. Educational assistance to the employee or his behalf of his employee (R.R. 3-98, Sec. 2.33).
dependents
10. Life or health insurance and other non-life Computing for the GMV
insurance premiums or similar amounts in It shall be determined by dividing the monetary
excess of what the law allows (Sec. 33 [B], NIRC; value of the fringe benefit by the grossed-up divisor.
R.R. 3-98, Sec. 2.33 [B]) The grossed-up divisor is the difference between
100% and the applicable individual tax rates.
Tax treatment for fringe benefits
Thus:
If the benefit is not tax-exempt and the recipient is:
1. A rank and file employee – the value of such GROSSED-
fringe benefit shall be considered as part of the FBT
EMPLOYEE UP
compensation income of such employee RATE
DIVISOR
subject to tax payable by the employee. Citizen, RA, NRA-
2. A managerial or supervisory employee – the 65% 35%
EBT
value shall not be included in the NRA-NEBT 75% 25%
compensation income of such employee
Special alien and any
subject to tax. The fringe benefit tax (FBT) is
Filipino employees
payable by the employer on behalf of the
who are employed
employee (Sec. 33, NIRC).
and occupying the
85% 15%
same position as
Difference among Managerial, Supervisory and
those occupied or
Rank-and-File Employees
held by the special
alien employees.
Employees who are given
powers or prerogatives to lay Employees in special
down and execute management economic zones
Managerial (Clark Special
policies and/or to hire, transfer, 25%/
employees Economic Zone and 75%/ 85%
suspend, lay-off, recall, 15%
discharge, assign or discipline Subic Special
employees. Economic and Free
Employees who effectively Trade Zone)
recommend such managerial
Supervisory If the fringe benefit is granted or furnished in:
actions, if the exercise of such
employees
authority is not merely
routinary or clerical in nature 1. Money, or is directly paid for by the employer –
the value is the amount granted or paid;

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 INCOME TAXATION

2. Property other than money and ownership is
transferred to the employee – the value of the
fringe benefit shall be equal to the fair market
value of the property as determined in
accordance with the authority of the
Commissioner to prescribe real property
values (zonal valuation);
3. Property other than money BUT ownership is
NOT transferred to the employee – the value of
the fringe benefit is equal to the depreciation
value of the property (R.R. 3-98, Sec 2.33).
NOTE: These guidelines are only used in instances
where there are no specific guidelines. For
example, there are specific guidelines for the
valuation of real property and automobiles.
FBT is not an additional tax on the employer.
Rather, the employer can claim the fringe benefit
and the FBT as a deductible expense from his gross
income. The deduction for the employer is the
grossed-up monetary value of the fringe benefit.
(Sec. 32 [B] [3], NIRC)
Salaries and wages of managerial or
supervisory employee, not subject to FBT
Basic salary of managerial or supervisory employee
is excluded and not subject to FBT because it is part
of his compensation income.

Purpose behind Fringe Benefit Tax

The FBT is a measure to ensure that an income tax
is paid on fringe benefits. If they were given in cash,
an income is automatically withheld and collected
by the government. An additional compensation
which is given in non-cash form is virtually untaxed.
Such a situation has caused inequity in the
distribution of the tax burden. The FBT can enhance
the progressiveness and fairness of the tax system
(Dimaampao, 2011).

Q: Who is required to pay the Fringe Benefit

Tax? (2003 Bar)

A: It is the employer who is legally required to pay

an income tax on the fringe benefit. The fringe
benefit tax is imposed as a final withholding tax
placing the legal obligation to remit the tax on the
employer, such that, if the tax is not paid, the legal
recourse of the BIR is to go after the employer. Any
amount or value received by the employee as a
fringe benefit is considered tax paid hence, net of
the income tax due thereon. The person who is
legally required to pay (same as statutory incidence
as distinguished from economic incidence) is that
person who, in case of non-payment, can be legally
demanded to pay the tax.

Reasons why the Fringe Benefit Tax is collected

from the employer

Valuation of benefits is easier at the level of the

firm. The problem of allocating the benefits among
individual employees is avoided. Collection of the
FBT is also ensured because the FBT is withheld at
the source and does not depend on the self-
declaration of the individual (Dimaampao, 2011).

Fringe Benefit Tax as a deductible expense

UNIVERSITY OF SANTO TOMAS

143 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Compensation Income vs. Fringe Benefit
As part of gross income of an
employee
As to who should pay the tax
NOTE: The person who is legally
required to pay is that person who,
in case of non-payment, can be
legally demanded to pay the tax.
As to taxpayers covered
As to treatment
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
COMPENSATION INCOME
Part of the gross income of an
employee
The employee is liable to pay the tax
on his income earned.
Managerial, supervisory, and rank-
and-file employees
Subject to creditable withholding
tax – the employer withholds the tax
upon the payment of the
compensation income.
144
FRINGE BENEFIT
GR: Not reported as part of the
gross income of an employee
XPN: Fringe benefits given to a
rank-and-file employee are
included in his gross income
The employer pays the fringe
benefit tax on behalf of the
employee.
Managerial and supervisory
employees
Subject to final withholding tax
 INCOME TAXATION
Fringe benefits exempt from fringe benefits tax
1. Fringe benefits which are authorized and
exempted from tax under the NIRC or special
laws
(e.g. separation benefits which are given to
employees who are involuntarily separated from
work)
2. Contributions of the employer for the benefit of
the employee to retirement, insurance and
hospitalization benefit plans
3. Benefits given to the rank and file employees,
whether granted under a collective bargaining
agreement or not
4. De minimis benefits, whether given to rank and
file employees or to supervisory or managerial
employees(Sec 32 [3], NIRC)
5. Fringe benefits granted to employee as
required by the nature of, or necessary to the
trade, business or profession of the employer
6. Fringe benefits granted for the convenience of
the employer (Employer’s Convenience Rule)
(Sec. 33 [A], NIRC)(Sec. 32, NIRC; R.R. 3-98, Sec.
2.33 [C])
NOTE: Although a fringe benefit may be exempted
from the FBT, it may still fall under a different tax
under another law, such as the compensation
income tax or the like.
Convenience of the Employer Rule
An exemption from taxation is granted to benefits
which are given to the employee for the exclusive
benefit or convenience of the employer.
Requirements for the application of the
convenience of the employer rule where the
employer furnished living quarters
Such shall not be considered as part of the
employee’s gross compensation income if:
a. It is furnished in the employer’s business
premises, and
b. Employee is required to accept such lodging as
a condition of his employment (No. 2.2, RAMO
No. 1-87).
Requirements for the application of the
convenience of the employer rule in case of free
meals
Such shall not be considered as part of the
employee’s gross income if:
145
a. Furnished to the employee during his work
day; or
b. To have the employee available for work
during his meal period (No. 2.3, RAMO, 1-87).
Benefits which are considered necessary to the
business of the employer or are granted for the
convenience of the employer
1. Housing privilege of military officials of the
Armed Forces of the Philippines, consisting of
officials of the Philippine Army, Philippine
Navy and Philippine Air Force
2. A housing unit which is situated inside or
adjacent to the premises of a business of
factory – it is considered adjacent to the
premises if it is located within the maximum 50
meters from the perimeter of the business
premises
3. Temporary housing for an employee who stays
in a housing unit for 3 months or less
4. The use of aircraft (including helicopters)
owned and maintained by the employer
5. Reasonable business expenses which are paid
for by the employer for the foreign travel of his
employee for the purpose of attending business
or conventions
6. A scholarship grant to the employee by the
employer, if the education or study involved is
directly connected with the employer’s trade,
business or profession, and there is a written
contract between them that the employee is
under obligation to remain in the employ of the
employer for a period of time that they have
mutually agreed upon
7. Cost of premiums borne by the employer for
the group insurance of his employees
8. Expenses of the employee which are
reimbursed, if they are supported by receipts
in the name of the employer and do not partake
the nature of a personal expense of the
employee
9. Motor vehicles used for sales, freight, delivery
service and other non-personal uses (R.R. 3-98)
Q: X was hired by Y to watch over Y’s fishponds
with a salary of ₱10,000. To enable him to
perform his duties well, he was also provided a
small hut, which he could use as his residence in
the fishponds. Is the fair market value of the use
of the small hut by X a “fringe benefit” that is
subject to the 35% tax imposed by Sec. 33 of the
NIRC? (2001 Bar)
A: NO. X is neither a managerial nor a supervisory
employee. Only managerial or supervisory
employees are entitled to a fringe benefit subject to
the FBT. Even assuming that he is a managerial or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
supervisory employee, the small hut is provided for
the convenience of the employer, hence does not
constitute a taxable fringe benefit (Sec. 3, NIRC).
(Sec. 33, NIRC)
Housing privilege subject to FBT
1. Employer leases residential property for use of
the employee;
2. Employer owns a residential property and
assigns the same for the use by the employee;
3. Employer purchases a residential property on
installment basis and allows use by the
employee;
4. Employee purchases a residential property and
transfers ownership to the employee;
5. The employee provides a monthly fixed
amount for the employee to pay his landlord.
Housing privilege exempt from FBT
1. Housing privilege of military officials of the
Armed Forces of the Philippines consisting of
officials of the Philippine Army, Philippine
Navy, and Philippine Air Force (Sec. 2.33 [D] [1]
[f], NIRC);
NOTE: Benefit to said officials shall not be
treated as taxable fringe benefit in accordance
with the existing doctrine that the State shall
provide its soldiers with necessary quarters
which are within or accessible from the
military camp so that they can readily be on call
to meet the exigencies of their military service.
2. A housing unit which is situated inside or
adjacent to the premises of a business or
factory;
NOTE: A housing unit is considered adjacent to
the premises if it is located within the
maximum 50 meters from the perimeter of the
business premises.
3. Temporary housing for an employee who
stays in a housing unit for three (3) months or
less (R.R. 3-98, Sec. 2.33 [D] [1] [g]).
Expenses treated as taxable fringe benefits
1. Expenses incurred by the employee but which
are paid by his employer;
2. Expenses paid for by the employee but
reimbursed by his employer;
3. Personal expenses of the employee (like
purchases of groceries for the personal
consumption of the employee and his family
members, salaries of household personnel,
UNIVERSITY OF SANTO TOMAS
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146
etc.) paid for or reimbursed by the employer to
the employee, whether or not the same are duly
receipted for in the name of the employer;
4. Membership fees, dues, and other expenses
borne by the employer for his employee, in
social and athletic clubs or other similar
organizations shall be treated as taxable fringe
benefits of the employee in full
Expenses treated as non-taxable fringe benefits
1. Expenditures incurred by the employee and
paid by his employer but are duly receipted for
and in the name of the employer, and such do
not partake the nature of a personal expense
attributable to the said employee.
2. Expenditures paid for by the employee and
reimbursed by his employer but are duly
receipted for and in the name of the employer,
and such do not partake the nature of a
personal expense attributable to the said
employee.
3. Representation and transportation allowances
which are fixed in amounts and are regularly
received by the employees as part of their
monthly compensation income.
4. Business expenses which are paid for by the
employer for foreign travel of his employees in
connection with business meetings or
conventions (R.R. 3-1998).
Motor vehicle subject to fringe benefit tax
A motor vehicle shall be subjected to fringe benefits
tax whenever the employer:
1. Purchases vehicle in employee’s name,
regardless of usage of vehicle;
2. Provides employee cash for vehicle purchase;
3. Purchases car on installment in the name of the
employee;
4. Shoulders a portion of the purchase price;
5. Owns and maintains a fleet of motor vehicle for
the use of the business and employees;
6. Leases and maintains a fleet of motor vehicles
for the use of the business and employees.
XPN: The use of aircraft (including helicopters)
owned and maintained by the employer shall be
treated as business use and not be subject to the
fringe benefits tax.
Interest on loan at less than market rate
If the employer lends money to his employees free
of interest or at a rate lower than 12%, such interest
foregone by the employer or the difference of the
 INCOME TAXATION
interest assumed by the employee and the rate of
12% shall be treated as fringe benefit.
The rule shall apply to installment payments or
loans with interest rate lower than 12% (R.R. 3-98,
Sec. 2.33 [D] [5]).
Expenses for foreign travel
GR: Fixed and variable transportation,
representation and other allowances are subject to
FBT.
XPN: They are subject to FBT if incurred or
reasonably expected to be incurred by the
employee in the performance of his duties, subject
to the following conditions:
1. Ordinary and necessary in the pursuit of
employer’s business and paid or incurred by
employee; and
2. Liquidated or substantiated by receipts or
other adequate documentation (R.R. 3-98, Sec.
2.33 [D] [7] [c]).
Educational assistance to the employee or his
dependents
GR: The cost of the educational assistance to the
employee which is borne by the employer shall be
treated as taxable fringe benefit.
XPN: A scholarship grant shall not be treated as
taxable fringe benefit if:
1. Education/study is directly connected with
employer’s trade, business or profession;
2. There is written contract that the employee
shall remain employed with the employer for a
period of time mutually agreed upon by the
parties; and
3. The educational assistance extended to the
dependents of the employee was provided
through a competitive scheme(R.R. 3-98, Sec.
2.33 [D] [9] [b]).
Life or health insurance
GR: The cost of life or health insurance and other
non-life insurance premiums borne by the
employer are taxable fringe benefits.
XPNs:
1. Contributions of the employer for the benefit of
employee to the SSS, GSIS, or similar
contributions arising from provisions of any
existing law;
147
2. The cost of premiums borne by the employer
for the group of insurance of employees (R.R. 3-
98, Sec. 2.33 [D] [10]).
Stock Options
The difference between the fair market value and the
exercise price at the time of exercise of stock options
are subject to FBT.
NOTE: Employees receive stock options as part of
their payment for the services they rendered to
their employer, which entitles them to buy their
employer’s shares of stock at an agreed price.
De Minimis Benefits
These are facilities or privileges furnished or
offered by an employer to his employees
(managerial, supervisory or rank and file) that are
of relatively small value and are offered or
furnished by the employer merely as a means of
promoting the health, goodwill, contentment and
efficiency of his employees.
Q:Mapagbigay Corporation grants all its
employees (rank and file, supervisors, and
managers) 5% discount of the purchase price of
its products. During an audit investigation, the
BIR assessed the company the corresponding
tax on the amount equivalent to the courtesy
discount received by all the employees,
contending that the courtesy discount is
considered as additional compensation for the
rank and file employees and additional fringe
benefit for the supervisors and managers. In its
defense, the company argues that the discount
given to the rank and file employees is a de
minimis benefit and not subject to tax. As to its
managerial employees, it contends that the
discount is nothing more than a privilege and its
availment is restricted.
Is the BIR assessment correct? (2016 Bar)
A: NO. The 5% discount of the purchase price of its
products, so-called “courtesy discounts” on
purchases, granted by Mapagbigay Corporation to
all its employees (rank and file, supervisors, and
managers) otherwise known as “de minimis
benefits,” furnished or offered by an employer to
his employees merely as a means of promoting the
health, goodwill, contentment, or efficiency of his
employees, are not considered as compensation
subject to income tax and consequently to
withholding tax. (Rev. Regs. 2-98, Sec. 2.78.1[A][3],
as amended by RR No. 8-2000, RR No. 5-2008, RR No.
10-2008, RR No. 5-2011, and RR No. 8-2012).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
As such, de minimis benefits, if given to
supervisors and managerial employees, they are
also exempt from the fringe benefits tax.

Q:What are de minimis benefits and how are

these taxed? Give three (3) examples of
deminimis benefits. (2015Bar)

A: De minimis fringe benefits and their

respective ceiling amounts
As per R.R. 2-98 and 3-98, as amended by R.R. 5-
2008, 5-2011, 5-2011, 8-2012, and 1-2015, de
minimis benefits include:

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 INCOME TAXATION
Monetized unused vacation leave credits of
employees
Medical cash allowance to dependents of
employees
Rice subsidy
Uniforms and clothing allowances
Actual medical assistance, e.g. medical allowance
to cover medical and healthcare needs, annual
medical/executive check up, maternity
assistance, and routine consultations
Laundry allowance
Employee achievement awards under an
established written plan which does not
discriminate in favor of highly paid employees
(e.g. for length of service or safety achievement)
Gifts given during Christmas and major
anniversary celebrations
Daily meal allowance for overtime work
Benefits received by virtue of Collective
Bargaining Agreement (CBA) and productivity
incentive scheme
149
Qualify:
1. Private employees:
a. Vacation leave - exempt up to 10 days
b. Sick leave – always taxable
2. Government employees:
Vacation and sick leave are always tax
exemptregardless of the number of days.
Not exceeding ₱750 per semester or ₱125 per
month
₱1,500 or one sack of 50-kg rice per month
amounting to not more than P1,500
Not exceeding ₱5,000 per annum (R.R. 8-2012)
Not exceeding ₱10,000 per annum
Not exceeding ₱300 per month
In the form of tangible personal property other than
cash or gift certificate with an annual monetary
value not exceeding ₱10,000
Not exceeding ₱5,000 per employee per annum
Not exceeding 25% of the basic minimum wage on a
per region basis
Not exceeding ₱10,000 per employee per annum
(R.R. 1-2015)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
All other benefits given by employers, which are not
included in the above enumeration shall NOT be
considered as de minimis benefits, and hence, shall
be subject to income tax, as well as to withholding
tax on compensation income. The benefits provided
in the Regulations shall apply to income earned
starting the year 2011(R.R. 5-2011).
NOTE: Flowers, fruits, books, similar items given to
employees under special circumstances (e.g. on
account of illness, marriage, birth of baby, etc.) are
now taxable.
gifts in cash or in kind and other benefits of
similar nature actually received by officials and
employees of both government and private
offices.
In no case shall the exemption apply to other
compensation received by an employee under an
employer employee relationship, such as basic
salary and other allowances (R.A. No.10653 as
clarified by R.R. 3-2015).

De minimis benefits in excess of respective

ceilings

The amount of benefits exceeding their respective

ceilings shall be considered as part of “other
benefits” under Sec. 32[B][7][e] of the NIRC.

Under Sec. 32 [B][7][e] of the NIRC, 13th month pay

and other benefits are excluded from gross income,
provided that they do not exceed ₱82,000. Any
excess thereof is considered part of the
compensation income of an individual, hence,
subject to income tax.

13th Month Pay and other Benefits

The 13th month pay and other benefits are excluded

from gross income, provided that they do not
exceed ₱82,000. Any excess thereof is considered
part of the compensation income of an individual,
hence, subject to income tax (Sec. 32 [B] [7] [e],
NIRC).

NOTE: The amount of ₱30,000, specifically referring

to the total amount of 13th month pay and other
benefits as one of the exclusions from gross
compensation income received by an employee, is
increased to ₱82,000(R.A. No. 10653).

The amount of ₱82,000 shall apply to the 13th month

pay and other benefits paid or accrued beginning
January 1, 2015(R.R. 3-2015, Sec. 3).

The threshold amount of P82,000 shall apply to

the 13th-month pay and other benefits which
covers only the following:

1. Thirteenth-month pay equivalent to the

mandatory one month basic salary of officials
and employees of the government, (whether
national or local), including government-owned
or -controlled corporations, and or private
offices received after the 12th-month pay; and
2. Other benefits, such as Christmas bonus,
productivity-incentive bonus, loyalty award,

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 INCOME TAXATION

Summary of tax implications of employees

Fixed salary – Taxable

Other Benefits (ECOLA, 13th month pay, Christmas Bonus,
Transportation/Representation allowances, tips, etc) – the 1st ₱82,000.00 is
SALARY exempted from income tax, any excess is taxable.
Transportation/Representation allowances
o If there is liquidation, not taxable.
o If there is no liquidation, taxable.
If paid or availed of as salary of an employee who is on vacation or on sick leave
notwithstanding his absence from work, it constitutes taxable compensation.
(R.R. 6-82)

Monetized value of unutilized vacation leave credits of private employees (RR 2-98)
SICK LEAVE/
VACATION 10 days or below – not taxable
LEAVE/SERVICE Any excess over 10 days is taxable
INCENTIVE LEAVE
(SIL) Sick leave credits of private employees - Always taxable
Vacation and sick leave credits of government employees - Always tax-exempt
Service Incentive Leave - Not taxable

It is only taxable if voluntarily availed of by the employee.

If due to any cause beyond the control of the official or employee, it is not
taxable.
The phrase “for any cause beyond the control of the said official or employee”
connotes involuntariness on his/her part.
Examples of involuntary separation:
a. Death
b. Sickness
c. Disability
SEPARATION PAY d. Reorganization
e. Company at the brink of bankruptcy
2nd, 3rd, 4th ad infinitum separation pay is not taxable as long as the employee is
not at fault.
Any payment received on account of dismissal constitutes compensation
regardless of whether the employer is legally bound by contract, statute, or
otherwise, to make such payment. (Sec. 2.78.1(B)(1)(b), R.R. 2-98)
Financial assistance with the condition that you have to leave the company – that
amount is taxable.

BACKWAGES Taxable because it is income actually given by the employer

Generally, retirement benefits are tax-exempt because they are mere provisions
for the person’s impending state of unemployment.
The following retirement benefits are tax-exempt:
a. SSS or GSIS retirement pays;
b. Optional Retirement Plan - Retirement pay due to old age under R.A. 7641,
subject to the following conditions:
RETIREMENT
i. The retirement program is approved by the BIR Commissioner;
BENEFITS
ii. It must be a reasonable benefit plan, i.e., it must be fair and equitable for
the benefit of all employees.
iii. The retiree should have been employed for at least 10 years in the said
company;
iv. The retiree should have been 50 years old at the time of retirement; and
v. It should have been availed of for the first time.

UNIVERSITY OF SANTO TOMAS

151 FACULTY OF CIVIL LAW
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DBP Case – Tax free means, the company will shoulder the taxes

NOTE: It does not include pre-terminated annuity and gratuity programs (they
are taxable except if the employee is more than 60 years old).

TERMINAL LEAVE They are not taxable regardless of whether the recipient is a government or private
PAYMENTS employee.

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 INCOME TAXATION

previous discussions on capital gains under

INCOME TAX ON NON-RESIDENT ALIENS
“Dealings in Property.”
ENGAGED
IN TRADE OR BUSINESS
Q: Assuming X, a resident citizen, married and
has 4 qualified dependents. In 2009, he earned a
Non-Resident Aliens Engaged in Trade or Business
monthly compensation income of ₱25,000. In
are taxed on their income derived from all sources
addition to his compensation income, he earned
within the Philippines in the same manner as an
₱150, 000 as net income from his retail business.
individual citizen or a resident alien individual,
How much is his taxable income for the year
subject to the schedule rate of 5-32% and are
2009?
granted Personal and Additional Exemptions,
subject to the rule of reciprocity.
A: X’s taxable income for the year 2009 is ₱300,000
computed as follows:
A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period
Gross Income (₱25,000 x 12) ₱300,000
of more than one hundred eighty (180) days during
Less:
any calendar year shall be deemed a nonresident
Basic Personal exemption (50,000)
aliendoing business in the Philippines.
Additional Exemption (25K x 4) (100,000)
PHHI ---------
Q:Patrick is a successful businessman in the
United States and he is a sole proprietor of a
____________
supermarket which has a gross sales of $10
million and an annual income of $3 million. He
Net Compensation Income
went to the Philippines on a visit and, in a party,
150,000
he saw Atty. Agaton who boasts of being a tax
Add: Net business income 150,000
expert. Patrick asks Atty. Agaton: if he (Patrick)
decides to reacquire his Philippine citizenship
____________
under RA 9225, establish residence in this
Taxable income ₱300,000
country, and open a supermarket in Makati City,
will the BIR tax him on the income he earns from
NOTE: Premium payment on health and/or
his U.S. business? If you were Atty. Agaton, what
hospitalization insurance cannot be availed of since
advice will you give Patrick? (2016 Bar)
the family gross income is more than ₱250,000 for
the taxable year.
A: I will advise Patrick that if he reacquires his
Philippine citizenship and establish residence in
Q: How much is his income tax payable?
the Philippines, he shall be considered as a
resident citizen subject to tax on incomes derived
A: From the taxable income of ₱300,000, the income
from sources within or without the Philippines.
tax payable is ₱65,000.
[NIRC of 1997, Sec. 23 (A)] Consequently, the BIR
could now tax him on his income derived from
Over ₱250,000 ₱50,000+30% of the
sources without the Philippines which is the income
but not over excess over ₱250,000
he earns from his U.S. business (Domondon).
P500,000
INCOME TAX ON NON-RESIDENT ALIENS NOT
ENGAGED IN TRADE OR BUSINESS Q: Assume that X is a non-resident alien not
engaged in trade or business. He earned gross
Non-Resident Aliens Not Engaged in Trade or income in the amount of ₱1.5 million from his
Business are taxed on their income received from all one-night concert in the Philippines. How much
sources within the Philippines as interest, cash will he pay for his income tax?
and/or property dividends, rents, salaries, wages,
premiums, annuities, compensation, remuneration, A: X must pay ₱375,000 as income tax (₱1,500,000
emoluments, or other fixed or determinable annual x 25%). Since X is a non-resident alien not engaged
or periodic or casual gains, profits, and income, and in trade or business, his gross income within the
capital gains, a tax equal to twenty-five percent Philippines is subject to 25% final tax and is not
(25%) of such income. allowed any deductions.

Capital gains realized from the sale of shares of INDIVIDUAL TAXPAYERS EXEMPT
stock in any domestic corporation and real property FROM INCOME TAX
shall be subject to capital gains tax. Refer to

UNIVERSITY OF SANTO TOMAS

153 FACULTY OF CIVIL LAW
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The following individuals are exempt from income
tax:
1. Senior Citizens
A senior citizen is any Filipino citizen who is a
resident of the Philippines, and who is sixty (60)
years old or above. It may apply to senior citizens
with “dual citizenship” status, provided they prove
their Filipino citizenship and have at least six (6)
months residency in the Philippines (Sec. 2, R.R. 7-
2010).
Income tax of senior citizens
G.R.:Qualified senior citizens deriving returnable
income during the taxable year, whether from
compensation or otherwise, are subject to income
tax and are required to file their income tax returns
and pay the tax as they file the return.
XPNs:
1. If the returnable income of a senior citizen is in
the nature of compensation income but he
qualifies as a minimum wage earner under R.A.
9504;
2. If the aggregate amount of gross income
earned by the senior citizen during the taxable
year does not exceed the amount of his
personal exemptions (basic and additional);
XPNs to the XPN:
The exemption of senior citizens from income
tax will not extend to all types of income earned
during the taxable year. Hence, they can still be
liable for other taxes such as:
a. The 20% final withholding tax on interest
income from any currency bank deposit,
yield and other monetary benefit from
deposit substitutes, trust fund and similar
arrangements; royalties (except on books,
as well as other literary works and musical
compositions, which shall be imposed a
final withholding tax of 10%); prizes
(except prizes amounting to P10,000 or
less which shall be subject to income tax at
the rates prescribed under Sec. 24(A) of the
NIRC, and other winnings (except
Philippine Charity Sweepstakes and Lotto
winnings) (Sec. 24 [B][1], NIRC);
b. The 7.5% final withholding tax on interest
income from a depository bank under the
expanded foreign currency deposit system
(Sec. 24 [B][1], NIRC);
c. If the senior citizen will pre-terminate his
5-year long-term deposit or investment in
the form of savings, common or individual
UNIVERSITY OF SANTO TOMAS
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154
trust funds, deposit substitutes, investment
management accounts and other
investments evidenced by certificates in
such form prescribed by the Bangko Sentral
ng Pilipinas before the fifth year, he shall be
subject to the final withholding tax imposed
on the entire income, depending on the
holding period of the deposit or
investment. If held for a period of:
Four years to less than five years — 5%
Three years to less than four years —
12%; and
Less than three years — 20%
d. The 10% final withholding tax –
i. On cash and/or property dividends
actually or constructively received
from a domestic corporation or from
a joint stock company, insurance or
mutual fund company and regional
operating headquarters of a
multinational company; or
ii. On the share of an individual in the
distributable net income after tax of
a partnership (except a general
professional partnership) of which
he is a partner; or
iii. On the share of an individual in the
net income after tax of an
association, a joint account, or a joint
venture or consortium taxable as a
corporation of which he is a member
or a co-venturer(Sec. 24 [B][2],
NIRC);
e. Capital gains tax from sales of shares of
stock not traded in the stock exchange (Sec.
24 [C], NIRC; and
f. The 6% final withholding tax on presumed
capital gains from sale of real property,
classified as capital asset, except capital
gains presumed to have been realized from
the sale or disposition of principal
residence (Sec. 24 [D], NIRC).
Requirements in order for senior citizen to avail
tax exemption
1. He must be qualified as such by the CIR or RDO
of the place of his residence;
2. He must file a Sworn Statement on or before
January 31 of every year that his annual taxable
income for the previous year does not exceed
the poverty level as determined by the National
Economic and Development Authority (NEDA)
thru the National Statistical Coordinating Board
(NSCB);
 INCOME TAXATION
3. If qualified, his name shall be recorded by the
RDO in the Master List of Tax-Exempt Senior
Citizens for that particular year, which the RDO
is mandatorily required to keep.
2. Minimum Wage Earners
A minimum wage earner is a worker in the private
sector paid the statutory minimum wage, or to an
employee in the public sector with compensation
income of not more than the statutory minimum
wage in the non-agricultural sector where he/she is
assigned (Sec. 22 [HH], NIRC, as amended by R.A.
9504).
Minimum wage earners shall be exempt from the
payment of income tax on their taxable income.
Holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum
wage earners shall likewise be exempt from income
tax (Sec. 24 [A] [2], NIRC, as amended by R.A. 9504).
However, minimum wage earners receiving “other
benefits” exceeding P82,000 limit shall be taxable
on the excess benefits,
Statutory Minimum Wage
It refers to the rate fixed by the Regional Tripartite
Wage and Productivity Board, as defined by the
Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment
(DOLE) (Sec. 22 [GG], NIRC, as amended by R.A.
9504).
NOTE: Effective June 2, 2016, the daily minimum
wage rate in NCR for non-agricultural sector is
P491 (P481.00 basic wage+ P10.00 COLA) (National
Wages and Productivity Commission Per Wage Order
No. NCR-20).
Q: R.A. 9504 was approved and took effect on 6
July 2008. The law granted MWEs exemption
from payment of income tax on their minimum
wage, holiday pay, overtime pay, night shift
differential pay and hazard. On 24 September
2008, the BIR issued RR 10-2008 implementing
the provisions of R.A. 9504. Decide the
following:
a. Whether an MWE is exempt for the entire
taxable year 2008 or from 6 July 2008 only;
b. Whether an MWE who becomes non-MWE
during the year still qualifies for the
exemption;
c. Whether Sections 1 and 3 of RR 10-2008 are
consistent with the law in providing that an
MWE who receives other benefits in excess
155
of the statutory limit of P30,000 (Now at
P90,000) is no longer entitled to the
exemption provided by R.A. 9504.
A:
a. The MWE is exempt for the entire taxable year
2008. As it stands, the calendar year 2008
remained as one taxable year for an individual
taxpayer. Therefore, RR 10-2008 cannot
declare the income earned by a minimum wage
earner from 1 January 2008 to 5 July 2008 to be
taxable and those earned by him for the rest of
that year to be tax-exempt. To do so would be to
contradict the NIRC and jurisprudence, as
taxable income would then cease to be
determined on a yearly basis.
NOTE: The above ruling that the MWE
exemption is available for the entire taxable
year 2008 is premised on the fact of one's status
as an MWE during the entire year of 2008.
b. When the wages received exceed the minimum
wage anytime during the taxable year, the
employee loses the MWE qualification.
Therefore, wages become taxable as the
employee ceased to be an MWE. But the
exemption of the employee from tax on the
income previously earned as an MWE
remains. The improvement of one's wage
cannot justly operate to make the employee
liable for tax on the income earned as an MWE.
c. Sections 1 and 3 of RR 10-2008 add a
requirement not found in the law by effectively
declaring that an MWE who receives other
benefits in excess of the statutory limit of
P30,000 is no longer entitled to the exemption
provided by R.A. 9504.
R.A. 9504 is explicit as to the coverage of the
exemption: the wages that are not in excess of
the minimum wage as determined by the wage
boards, including the corresponding holiday,
overtime, night differential and hazard pays.
The minimum wage exempted by R.A. 9504 is
distinct and different from other payments
including allowances, honoraria, commissions,
allowances or benefits that an employer may
pay or provide an employee.
The treatment of bonuses and other benefits
that an employee receives from the employer in
excess of the P30,000 (now at 90,000) is
taxable. The treatment of this excess cannot
operate to disenfranchise the MWE from
enjoying the exemption explicitly granted by
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
R.A. 9504(Soriano v. Secretary of Finance, G.R.
Nos. 184450, 184508, 184538 & 185234, January
24, 2017).
3. Persons exempted under international
agreement
Those employed by Foreign
Embassies/Diplomatic Missions
Only the following shall be exempt from Philippine
income tax:
1. Diplomatic agents who are not nationals or
permanent residents of the Philippines;
2. Members of family of the diplomatic agent
forming part of his/her household who are not
Philippine nationals;
3. Members of the administrative and technical
staff of the mission together with members of
their families forming part of their respective
households who are not nationals or
permanent residents of the Philippines;
4. Members of the service staff of the mission
who are not nationals or permanent residents
of the Philippines; and
5. Private servants of members of the mission
who are not nationals or permanent residents
of the Philippines (RMC No. 31-2013 citing
Vienna Convention on Dimplomatic Relations).
INCOME TAX ON CORPORATIONS
A corporation for income tax purposes shall:
1. Include:
a. Partnerships
b. Joint stock companies
c. Joint accounts (cuentasen participacion)
d. Associations, or
e. Insurance companies
2. Not include:
a. General Professional Partnerships (GPP)
NOTE: The distributive share of each
partner in a general professional
partnership shall form part of partner’s
gross income in its individual tax returns
subject to graduated income tax rates.
a service contract with the government
(Sec. 22 [B], NIRC).
Kinds of corporation under the NIRC
1. Domestic Corporations (DC) – a corporation
created or organized in the Philippines or under
its laws and is liable for its income from sources
within and without (Sec. 22 [C], NIRC)
2. Resident Foreign Corporation (RFC) – a
corporation which is not domestic and is
engaged in trade or business in the Philippines
and is liable for income from sources within the
Philippines
3. Non-resident Foreign Corporation (NRFC) – a
corporation which is not domestic and not
engaged in trade or business in the Philippines
and is liable for income from sources within and
without
4. Special Types of Corporations – those
corporations subject to different tax rates
1. Special RFC
a. Domestic depositary banks (foreign
currency deposit units)
b. International carriers
c. Offshore banking units
d. Regional or Area Headquarters and
Regional operating Headquarters of
multinational companies
2. Special NRFC
a. Non-resident cinematographic film
owners, lessors or distributors
b. Non-resident owners or lessors of
vessels chartered by Philippine
nationals
c. Non-resident lessors of aircraft,
machinery and other equipment
Q: Weber Realty Company, which owns a 3-
hectare land in Antipolo entered into a JOINT
VENTURE AGREEMENT (JVA) with Prime
Development Company for the development of
said parcel of land. Weber Realty as the owner of
the land contributed the land to the Joint
Venture and Prime Development agreed to
develop the same into a residential subdivision
and construct residential houses thereon. They
agreed that they would divide the lots between
them.

b. A joint venture or consortium formed for
purposes of undertaking construction
projects
c. or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating or consortium agreement under
Does the JVA entered into by and between
Weber and Prime create a separate taxable
entity? (2007 Bar)
A: NO. Since the arrangement between Weber
Realty Co. and Prime Development Co. is for the
purpose of undertaking a construction project,

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156
 INCOME TAXATION

there is no separate taxable entity pursuant to Sec.

22 [B] of the NIRC.

The term 'corporation' shall include partnerships,

no matter how created or organized, joint-stock
companies, joint accounts
(cuentasenparticipacion), association, or insurance
companies, but does not include general
professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum,
coal, geothermal and other energy operations
pursuant to an operating consortium agreement
under a service contract with the Government (Sec.
22[B], NIRC).

UNIVERSITY OF SANTO TOMAS

157 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Kinds of corporate taxpayers and their rates (2008 Bar)

TAXABILITY OF INCOME
DERIVED FROM SOURCES
CORPORATE TAXPAYER IS A:
Within the Outside the TAX BASE RATE
Philippines Philippines
DC Net taxable 30%
√ √
income
RFC Net taxable 30%
√ X
income
NRFC √ X GROSS income 30%
Special Domestic Corporations Net taxable
1. Proprietary educational income 10%
institutions
XPN: Those whose gross
income from unrelated
sources exceeds 50% of
√
their total gross income √
2. Non-profit hospitals 10%
3. Government-owned or 30%
controlled corporations
including the PCSO
4. Exempt government
Tax-exempt
institutions
Special Resident Foreign GROSS income
Corporation 2 ½% of Philippine
1. International carrier gross billings
10% of gross
2.
Offshore banking units income
3.
Branch profit √ X 15% of
remittances remittances
4. Regional area Tax-exempt
headquarters 10%
5. Regional operating
headquarters
Special Non-resident Foreign GROSS income
Corporation
1. Cinematographic film 25% of gross
owner/lessor/distributor income
2. Lessor of machinery,
equipment, aircraft and √ X
7 ½% of gross
others income
3. Lessor of vessels
chartered by Philippine 4 1/2 % of gross
nationals income
(Sec 27 and 28, NIRC)

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 INCOME TAXATION

INCOME TAX ON DC AND RFC
DC is a corporation created or organized in the
Philippines or under its laws and is liable for its
income from sources within and without (Sec. 22
[C], NIRC).
Outline of taxes imposed on DC
1. Normal corporate income tax (NCIT)
- 30% of taxable income from all sources within
and without the Philippines
2. Minimum corporate income tax (MCIT)
- 2% of gross income, if MCIT applies
3. Gross income tax (Optional corporate income
tax)
- 15% of gross income, if qualified
4. Improperly Accumulated Earnings Tax
- 10% of improperly accumulated earnings
5. Final tax on passive income
RFC is a corporation organized, authorized, or
existing under the laws of any foreign country,
engaged in trade or business within the Philippines
(Sec. 28 [A][1], NIRC).
NOTE: The general rule is that RFC shall be liable for
a 30% income tax on their income from within the
Philippines, except for resident foreign
corporations that are international carriers which
shall be taxed at 2 ½% on their Gross Philippine
Billings. (Sec 28 [A][3], NIRC).
Outline of taxes imposed on RFC
Normal corporate income tax (NCIT) or Regular
Tax
An income tax of thirty percent (30%) shall be
imposed upon the taxable income derived during
the taxable year from all sources within and without
the Philippines for DC while from all sources within
the Philippines for RFC.
Illustration:
Gross Sales
Less: Sales Returns/Allowances/Discounts
Cost of Goods Sold/Cost of Services
___________________________________________
Gross Income
Less: Allowable Deductions
___________________________________________
Taxable Income
x 35%
___________________________________________
NCIT due
Gross Income
It includes all items enumerated under Sec. 32 [A] of
the NIRC, except income exempt from income tax
and income subject to final withholding tax (R.R. 12-
2007).
Cost of Goods Sold (COGs) in general
It includes all business expenses directly incurred to
produce the merchandise and bring them to their
present location and use.

1. NCIT Cost of Goods Sold (COGs) for Trading or

– 30% of taxable income from sources within Merchandising
the Philippines (Sec. 28 [A], NIRC)
This shall include the invoice cost of the goods sold,
2. MCIT plus import duties and freight in transporting the
– 2% of gross income, if MCIT applies goods to the place where they are actually sold,
including insurance while the goods are in transit.
3. GIT (Optional corporate income Tax)
- 15% of gross income, if qualified Cost of Goods Sold (COGs) for a Manufacturing
Concern
4. Final tax on passive income
5. Interest from deposits and yields and royalties This shall include all costs of production of finished
6. Capital gains from sale of shares not traded in goods, such as raw materials used, direct labor and
the stock exchange manufacturing overhead, freight cost, insurance
7. Income derived under the Expanded Foreign premiums and other costs incurred to bring the raw
Currency Deposit System materials to the factory or warehouse.
8. Inter-corporate dividends
9. Branch profit remittance tax Cost of Goods Sold (COGs) for a Service Concern
(Cost of Services)
Regular Tax

UNIVERSITY OF SANTO TOMAS

159 FACULTY OF CIVIL LAW
 LAW ON TAXATION
This shall mean all direct costs and expenses
necessarily incurred to provide the services
required by the customers and clients, including
salaries and employee benefits of personnel,
consultants and specialists directly rendering the
service, and cost of facilities directly utilized in
providing the service, such as depreciation or rental
of equipment used and cost of supplies.
Optional Gross Income Tax (Optional Corporate
Income Tax)
The President, upon the recommendation of the
Secretary of Finance may, effective January 1, 2000,
allow domestic corporations the option to be taxed
at 15% of gross income, subject to the following
conditions:
1. A tax effort ratio of 20% of GNP;
2. A ratio of 40% of income tax collection to total tax
revenue;
3. A VAT tax effort of 4% of GNP;
4. A 0.9% ratio of Consolidated Public Sector
Financial Position to GNP.
NOTE: No authority yet has been given by the
President. Thus, the optional gross income tax is
still not implemented.
Q: What are the other conditions for the
availability of Optional Gross Income Tax? (Sec.
27 [A], NIRC)
A:
1. The optional tax is available only to firms
whose ratio of cost of sales/services to
gross sales/receipt does not exceed 55%:
Cost of sales/services
Gross sales/receipts <=55%
Sales/receipts
2. The election of the gross income tax option
by the corporation shall be irrevocable for
three (3) consecutive taxable years during
which the corporation is qualified under
the scheme;
3. Recommendation from the Secretary of
Finance; and
4. Approval of the Office of the President.
NOTE: Gross income and cost of goods sold for
purposes of Optional Gross Income Tax is the same
as defined in MCIT.
Minimum Corporate Income Tax
Concept and rationale of MCIT
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
160
MCIT is a new concept introduced by R.A. 8424 to
the Philippine taxation system. It came about as a
result of the perceived inadequacy of the self-
assessment system in capturing the true income of
corporations.
Congress intended to put a stop to the practice of
corporations which, while having large turnovers,
report minimal or negative net income resulting in
minimal or zero income taxes year in and year out,
through under-declaration of income or over-
deduction of expenses otherwise called tax shelters.
The MCIT serves to put a cap on such tax shelters.
As a tax on gross income, it prevents tax evasion and
minimizes tax avoidance schemes achieved through
sophisticated and artful manipulations of
deductions and other stratagems. Since the tax base
was broader, the tax rate was lowered(Chamber of
Real Estate and Builders’ Association, Inc. v. Hon.
Executive Secretary, G.R. No. 160756, March 9, 2010).
Q: What is the purpose of MCIT? (2001 Bar)
A: The imposition of the MCIT is designed to
forestall the prevailing practice of corporations of
over claiming deductions in order to reduce their
income tax payments.
Nature of MCIT
The MCIT is equal to 2% of the gross income of the
corporation at the end of the taxable quarter,
except income exempt from income tax and income
subject to final withholding tax.
Being a minimum income tax, a corporation should
pay the MCIT whenever its normal corporate
income tax (NCIT) is lower than the MCIT, or when
the firm reports a net loss in its tax return.
Conversely, the NCIT is paid when it is higher than
the MCIT (J.,Dimaamapo, 2015).
Therefore, the taxable due for the taxable year will
be NCIT (30% of taxable income)or MCIT (2% of
gross income), whichever is HIGHER.
Illustration:
1) A domestic corporation in its 4 th year of
operations had a gross income of ₱300,000 and net
taxable income of ₱100,000. How much is the
income tax due for the year?
MCIT (₱300,000 x 2%) ₱ 6,000
NCIT (₱100,000 x 30%) ₱30,000
Income tax due – NCIT ₱30,000
(whichever is higher)
 INCOME TAXATION
2) A domestic corporation in its 4th year of
operations had a gross income of ₱400,000 and net
taxable income of ₱20,000. How much is the
income tax due for the year?
MCIT (₱400,000 x 2%) ₱8,000
NCIT (₱20,000 x 30%) ₱6,000
Income tax due – MCIT ₱8,000
(whichever is higher)
Q: What is the gross income for purposes of
computing MCIT?
A:
1. As to sale of goods – it shall mean gross sales less
sales returns, discounts and allowances and
cost of goods sold.
2. As to sale of services – it shall mean gross
receipts less sales returns, allowances,
discounts and cost of services.
Imposition of MCIT
The MCIT shall be imposed:
a. If taxable income is zero;
b. If taxable income is negative; or
c. If MCIT is greater than the NCIT due (Sec. 27
[E], NIRC).
Coverage of the MCIT (2001 Bar)
The MCIT covers domestic and resident foreign
corporations which are subject to the 30% (effective
Januray 1, 2009) normal corporate income tax;
hence, corporations which are subject to special
corporate taxes do not fall within the coverage of
the MCIT.
The minimum corporate income tax is a proxy for
the normal corporate income tax of 30%, not the
special corporate taxes paid by a corporation. For
instance, a proprietary educational institution may
be subject to a regular corporate income tax of 10%
(depending on its dominant income), but it is
exempt from the imposition of MCIT because the
latter is not intended to substitute special tax rates.
So is with PEZA enterprises, CDA enterprises etc.
Q: When shall the MCIT commence to be
imposed on a corporation?
A: The MCIT is imposed beginning on the fourth
taxable year immediately following the year in
which the corporation commenced its business
operations. For purposes of the MCIT, the taxable
year in which business operations commenced shall
be the year in which the domestic corporation
registered with the Bureau of Internal Revenue
161
(BIR), regardless of whether the corporation is
using the calendar year or fiscal year.
Firms which were registered with BIR in 1994 and
earlier years shall be covered by the MCIT beginning
January 1, 1998 (Sec. 27 [E][1], NIRC; RR No. 9-98;
Dimaampao, J. 2015; Manila Banking Corporation v.
CIR, G.R. No. 168118).
NOTE: Recognizing the birth pangs of businesses
and the reality of the need to recoup initial major
capital expenditures, MCIT commences only on the
4th taxable year.
Q: When is MCIT reported and paid?
A: The MCIT shall be paid in the same manner
prescribed for the payment of the normal corporate
income tax which is on a quarterly and on a yearly
basis. The taxpayer shall pay the MCIT whenever it
is greater than the regular or normal corporate
income tax.
The MCIT shall likewise apply to the quarterly
corporate income tax but the final comparison
between the NCIT payable by the corporation and
the MCIT shall be made at the end of the taxable
year. The payable or excess payment in the Annual
Income Tax Return shall be computed taking into
consideration corporate income tax payment made
at the time of filing of quarterly corporate income
tax return, whether this be MCIT or normal income
tax (R.R. 12-2007).
Q: Can MCITbe allowed as a deduction from
gross income?
A: No. Since MCIT is an estimate of the normal
income tax, it cannot be claimed as a deduction.
Q: CREBA assails the constitutionality of MCIT on
the contention that it violates due process. Is the
imposition of MCIT unconstitutional?
A: No, the imposition of MCIT is not violative of due
process for the following reasons:
1. MCIT is imposed on gross income and not on
capital. Thus, it is not arbitrary or confiscatory.
2. It is not an additional tax imposition but is
imposed in lieu of normal net income tax and
only if said tax is suspiciously low.
3. There is no legal objection to a broader tax base
or taxable income resulting from the
elimination of all deductible items and, at the
same time, reduction of the applicable tax rate.
In as much as deductions are a matter of
legislative grace, Congress has the power to
condition, limit or deny deductions from gross
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
income in order to arrive at the net that it Carry-forward of the excess of MCIT
chooses to tax (CREBA, Inc. v. Romulo, G.R. No.
160756, March 9, 2010). 1. The excess of MCIT over the NCIT shall be
carried forward on an annual or quarterly
Q: KKK Corp. secured its Certificate of basis.
Incorporation from the Securities and Exchange 2. The excess shall be credited against the NCIT
Commission on June 3, 2013. It commenced due for the three (3) immediately succeeding
business operations on August 12, 2013. In April taxable years.
2014, Ms. J, an employee of KKK Corp. in charge 3. Any excess not credited in the next three years
of preparing the annual income tax return of the shall be forfeited.
corporation for 2013, got confused on whether 4. Carry forward (annually or quarterly) is
she should prepare payment for the regular possible only if MCIT is greater than NCIT.
corporate income tax or the minimum corporate 5. The maximum amount that can be credited is
income tax. only up to the amount of the NCIT, there can be
no negative NCIT.
a. As Ms. J's supervisor, what will be your
advice? Illustration:
b. What are the distinctions between regular A domestic corporation had the following data on
corporate income tax and minimum computations of the NCIT and MCIT for five years:
corporate income tax? (2015 Bar)
YEAR YEAR YEAR YEAR YEAR
A: 4 5 6 7 8
a. As Ms. J’s supervisor, I will advise that KKK MCIT 80k 50k 30k 40k 35k
Corp. should prepare payment for the regular NCIT 20k 30k 40k 20k 70k
corporate income tax and not the minimum Excess: (60k) (20k) (20k)
corporate income tax (MCIT). Under the NIRC,
MCIT is only applicable beginning the 4th NCIT 40k 70k
taxable year following the commencement of higher
business operation (Sec. 27 [e][1], NIRC).
Less:
b. The distinctions between regular corporate Excess
income tax and the minimum corporate income of
tax are the following: MCIT
i. As to taxpayer: Regular corporate income
From (40k)
tax applies to all corporate taxpayers while
Year 4
minimum corporate income tax applies to
From (20k)
domestic corporations and resident foreign
Year 5
corporations.
From (20k)
ii. As to tax rate: Regular corporate income
Year 7
tax is 30% while minimum corporate
Tax 80k 50k 0 40k 30k
income tax is 2%.
Due:
iii. As to tax base: Regular corporate income
tax is based on the net taxable income while
NOTE: While only 40k out of ₱60k excess MCIT in
minimum corporate income tax is based on
Year 4 was used in Year 6, the unused₱20k cannot
gross income.
be used because Year 8 was beyond three years from
iv. As to period of applicability: Regular
Year 4.
corporate income tax is applicable once the
corporation commenced its business
Suspension of the imposition of MCIT
operation, while minimum corporate
income tax is applicable beginning on the
Since certain businesses may be incurring genuine
4th taxable year following the
repeated losses, the law authorizes the Secretary of
commencement of business operations.
Finance, upon recommendation of the BIR, to
v. As to imposition: The minimum corporate
suspend the imposition of MCIT if a corporation
income tax is imposed whenever it is
suffers losses due to any of the following:
greater than the regular corporate income
tax o the corporation (Sec. 27 [A] and [E],
1. Prolonged Labor Dispute – losses arising from a
NIRC; RR No. 998).
strike staged by the employees which lasted for

UNIVERSITY OF SANTO TOMAS

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162
 INCOME TAXATION
more than 6 months within a taxable period
and which has caused the temporary shutdown
of business operations;
2. Force Majeure – a cause due to an irresistible
force as by ‘Act of God’ like lightning,
earthquake, storm, flood and the like, and shall
also include armed conflicts like war or
insurgency;
3. Legitimate Business Reverses – include
substantial losses due to fire, theft or
embezzlement or for other economic reason, as
determined by the Secretary of Finance (Sec. 27
[E][3], NIRC; RR. No. 9-98, Sec. 2.27 [E]
[4][b,c,d]).
MCIT Limitations
1. MCIT does not apply on the first 3 years of
business operation of a corporation;
2. MCIT is not applicable to DC or RFC not subject
to NCIT;
Domestic proprietary educational
institutions subject to 10% tax;
Domestic non-profit hospital subject to
10% tax;
Domestic depository banks under the
expanded foreign currency deposit system
otherwise known as FCDUs;
Resident foreign international carrier
subject to tax at 2 ½% of their Gross
Philippines Billings;
Resident foreign offshore banking units;
Resident foreign regional operating
headquarters; and
Firms enjoying special income tax rate
under the PEZA Law (R.A. 7916), Bases
Conversion and Development Act of 1992
(R.A. 7227) and those enjoying income tax
holiday incentives (R.R. 9-98, Sec. 2.27
[E][8])
However, the related income from
unregistered activities (or those not
covered by the tax incentives) is subject to
MCIT.
4. For domestic corporation, whose operations
are partly covered by NCIT and partly covered
under a special income tax system, MCIT shall
apply only on operations covered by NCIT;
5. For resident foreign corporation, MCIT is
applicable only to gross income from sources
within the Philippines.
6. When, by authority of the Secretary of Finance,
the imposition of the MCIT is suspended upon
submission of proof by the applicant
corporation that the corporation sustained
substantial losses
a. on account of a prolonged labor dispute; or
163
b. because of “force majeure”; or
c. because of legitimate business reverses;
Applicability of MCIT where a corporation is
governed party under NCIT and partly under a
special income tax system
In the case of a domestic corporation whose
operations or activities are partly covered by the
normal income tax system (subject to 30% NCIT)
and partly covered under a special income tax
system, the MCIT will apply only on operations
covered by the regular income tax system. For
example, if a BOI-registered enterprise has a
"registered" and an "unregistered" activity, the
MCIT shall apply to the unregistered activity (R.R. 9-
98).
Branch Profit Remittance Tax
Any profit remitted by branch office of a
multinational corporation to its head office is
subject to 15% final tax based on total profits
applied or earmarked for remittance without
deduction for the tax component. A branch is
classified as a resident foreign corporation. As such,
it is subject to income tax at the rate of 30% on its
net income derived within the Philippines. Such
income items include interest, dividends, rents,
royalties, including remuneration for technical
services, salaries, wages, premiums, annuities,
emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital
gains received during each taxable year from all
sources within the Philippines.
For purposes of branch profit remittance, income
items which are not effectively connected with the
conduct of its trade or business in the Philippines
are not considered branch profits. To be ‘effectively
connected’, it is not necessary that the income be
derived from the actual operation of the branch’s
trade or business. It is sufficient that the income
arises from the business activity in which the
branch is engaged. The 15% final tax should
exclude profits on activities registered with PEZA
(Tabag, 2015).
Allowable Deductions
DC and RFC are allowed to claim deductions either
the OSD or itemized deductions. The election to
claim OSD or itemized deductions must be signified
in the income tax return filed for the first quarter of
the taxable year. Once the election is made, it shall
be irrevocable for the taxable year for which the
return is made.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Refer to previous discussions on “Deductions from
Gross Income.”
Taxation on Passive Income and Capital Gains
Refer to previous discussions on “Passive Income” and
“Dealings in Property.”
INCOME TAX ON NON-RESIDENT
FOREIGN CORPORATIONS
A foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to
30% of the gross income during such taxable year
from all sources within the Philippines except
capital gains from sale of shares of stock not traded
in the stock exchange (Sec. 28 [B][1], NIRC).
Outline of taxes imposed on a Non-Resident
Foreign Corporation (NRFC):
1. NCIT – 30% on gross income from sources
within the Philippines (NIRC, Sec. 28 [B])
2. Non-resident Cinematographic Film owner,
lessor or distributor – 25% of its gross income
from all sources within the Philippines
3. Non-resident owner or lessor of vessels
chartered by Philippine nationals – 4.5% of
gross rentals, lease, or charter fees
4. Non-resident owner or lessor of aircraft,
machineries and other equipment – 7.5% of
gross rentals or fees
5. Interest on foreign loans – 20% of interest
6. Intercorporate Dividends – 15% of dividends
received from Domestic Corporation
7. Capital Gains from Sale of Shares of Stock not
traded in the Stock Exchange – 5-10% of
capital gains
NOTE: A casual activity in the Philippines by a
foreign corporation does not amount to engaging in
trade or business in the Philippines for income tax
purposes. For such a foreign corporation to be
considered engaged in trade or business, business
transactions must be continuous (N.V. Reederij v.
CIR, G.R. No. L-46029, June 23, 1998).
INCOME TAX ON SPECIAL CORPORATIONS
The following are special corporations under the
NIRC:
1. Domestic Corporation
a. Proprietary educational institutions and
hospital
b. Non-profit hospital
c. Government-owned or controlled
corporations, agencies or instrumentalities
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
164
d. Depository banks (foreign currency
deposit units).
2. Resident Foreign Corporation
a. International carrier doing business in the
Philippines.
b. Off-shore banking units.
c. Resident depository banks (foreign
currency deposit units).
d. Regional or Area Headquarters and
Regional Operating Headquarters of
Multinational Companies
Proprietary educational institution
It is any private school maintained and
administered by private individuals or groups with
an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the
Technical Education and Skills Development
Authority (TESDA), as the case may be, in
accordance with existing laws and regulations.
They are not tax-exempt but are rather taxed at a
preferential rate of 10% on their taxable income,
except on certain passive incomes which are subject
to final tax.
10% Preferential Rate
Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit
hospitals as charitable institutions under Section
30(E) and (G). The effect of the introduction of
Section 27(B) is to subject the taxable income of two
specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit
hospitals, among institutions covered by Section 30,
to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under
the last paragraph of Section 30 in relation to
Section 27(A)(1).
The only qualifications for hospitals are that they
must be (1) proprietary; and (2) non-profit.
“Proprietary” means private, following the
definition of a “proprietary educational institution”
as “any private school maintained and administered
by private individuals or groups” with a government
permit. “Non-profit” means no net income or asset
accrues to or benefits any member or specific
person, with all the net income or asset devoted to
the institution’s purposes and all its activities
conducted not for profit (CIR v. St. Luke’s Medical
Center, Inc., G.R. No. 195909, 195960, September 26,
2012).
 INCOME TAXATION

Predominance test 3. No part of its net income or asset shall belong

to or inure to the benefit of any member,
If the gross income from unrelated organizer, officer or any specific person.
trade/business/other activity exceeds 50% of the
total gross income from all sources, the entire
taxable income of the proprietary educational
institution shall be subject to the regular corporate
tax rate of 30%.

Unrelated trade/business/activity of a
proprietary educational institution

The trade, business or other activity of a proprietary

educational institution is unrelated when the
conduct of which is not substantially related to the
exercise or performance by such educational
institution of its primary purpose or function.

NOTE: Related activities include auxiliary activities

such as school-owned canteen, cafeteria, dormitory
and bookstore within the school premises (BIR
Ruling 237-87, December 16, 1987).

Difference in the tax treatment between a

proprietary educational institution and a non-
stock non-profit educational institution

Proprietary educational institutions which are non-

profit shall pay a tax of 10% on their taxable
income, except on certain passive incomes which
are subject to final tax: Provided, that if the gross
income from unrelated trade, business or other
activity exceeds 50% of the total gross income
derived from all sources, the entire taxable income
of the proprietary educational institution shall be
subject to the regular corporate tax rate of 30% (Sec.
27 [B], NIRC).

A non-stock non-profit educational institution is

exempt from tax on its revenues and assets
actually, directly and exclusively used for
educational purposes (Sec. 30, NIRC).

Non-Profit Hospitals

A nonstock-nonprofit hospital that is operated for

charitable and social welfare purposes is exempt
from income tax under Section 30 (E) and (G) of the
NIRC. However, as provided in St. Luke's Medical
Center, Inc. vs CIR (2011), the nonstock-nonprofit
hospital must satisfy the following requisites in
order to be entitled to the exemption from income
tax:

1. It is a nonstock corporation;
2. It is operated exclusively for charitable
purposes; and

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165 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Tax on Proprietary Non-Profit Educational Institutions and Non-Profit Hospitals

30% 10% EXEMPT

Private, non-profit hospitals and educational
institutions whose gross income from
unrelated trade, business or other activity
exceeds 50% of total gross income from all
sources.
Hospitals and educational institutions claiming
to be proprietary non-profit but do not meet
the definition thereof.
Private, non-profit hospitals
and educational institutions
whose gross income from
unrelated trade, business or
other activity does not
exceed 50% of total gross
income from all sources.
Organized and operated
exclusively for charitable
purposes and no part of its
net income or asset shall
belong to or inure to the
benefit of any member,
organizer, officer or any
specific person.

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 INCOME TAXATION
Government Owned or Controlled Corporations
GR: All corporations owned or controlled by the
government are taxed in the same manner that
domestic private corporations are taxed.
XPNs:
1. Government Service Insurance System
(GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation
(PHIC)
4. Philippine Charity Sweepstakes Office
(PCSO)
5. Local Water District (LWD) (R.A. 10026
amending Section 27 [c] of NIRC)
Under Sec. 32 (B)(7) of the NIRC, even if the GOCC is
not one of those enumerated under Sec. 27 (C), it
may still be exempt if it is performing
governmental function. Thus, income derived from
any public utility or from the exercise of any
essential government function accruing to the
Government of the Philippines or to any political
subdivision shall be exempt from income tax.
NOTE: PAGCOR is no longer exempt from
corporate income tax as it has been effectively
omitted from the list of GOCCs that are exempt
from the payment of the income tax. PAGCOR’s
income from gaming operations is subject only to
5% franchise tax under PD No. 1869, while its
income from other related services is subject to
corporate income tax pursuant to PD No. 1869 in
relation to RA No. 9337. SC clarified that RA No.
9337 did not repeal the tax privilege granted to
PAGCOR under PD No. 1869, with respect to its
income from gaming operations. What RA No. 9337
withdrew was PAGCOR's exemption from
corporate income tax on its income derived from
other related services, previously granted under
Section 27(C) of RA No. 8424.(PAGCOR v. BIR, G.R.
No. 215427, December 10, 2014).
Depository Banks (Foreign Currency Deposit
Units)
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with local
commercial banks, including branches of foreign
banks that may be authorized by the
BangkoSentral ng Pilipinas (BSP) to transact
business with foreign currency depository system
units and other depository banks under the
expanded foreign currency deposit system,
including interest income from foreign currency
loans granted by such depository banks under said
167
expanded foreign currency deposit system to
residents, shall be subject to a final income tax at
the rate of ten percent (10%) of such income.
International Carrier Doing Business In The
Philippines
An international carrier refers to foreign airline
corporation doing business in the Philippines
which has landing rights in any Philippine port to
perform international air transportation services
or flight operations anywhere in the world. They
shall be taxed at 2.5% on their Gross Philippine
Billings (GPB) unless it is subject to preferential
rate or exempt from tax on the basis of applicable
tax treaty/international agreement to which the
Philippines is a signatory or on the basis of
reciprocity, such that an international carrier,
whose home country grants income tax exemption
to Philippine carries, shall likewise be exempt from
income tax imposed under the NIRC.
Reciprocity may be invoked by an international
carrier as basis for GBP Tax exemption when its
Home Country grants income tax exemption to
Philippine carriers.
The domestic law of the Home Country granting
exemption shall cover income taxes and shall not
refer to other types of taxes that may be imposed
by the relevant taxing jurisdiction. The fact that the
tax laws of the Home Country provide for
exemption from business tax, such as gross sales
tax, in respect of the operations of Philippine
carriers shall not be considered as valid and
sufficient basis for exempting an international
carrier from Philippine income tax on account of
reciprocity.
Reciprocity requires that Philippine carriers
operating in the Home Country of an international
carrier are actually enjoying the income tax
exemption (RR 15-2013).
Q: What is Gross Philippine Billings? (2005 Bar)
A: It refers to the amount of gross revenue realized
from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of
the place of sale or issue and the place of payment
of the ticket or passage document(Dimampao,
2015).
Off-line international carrier is subject to
corporate income tax
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
An off-line airline having a branch office or a sales
agent in the Philippines which sells passage
documents for compensation or commission to
cover off-line flights of its principal or head office,
or for other airlines covering flights originating
from Philippine ports or off-line flights, is not
considered engaged in business as an
international air carrier in the Philippines and
is, therefore, not subject to Gross Philippine
Billings Tax provided for in Section 28(A)(3)(a) of
the Code nor to the three percent (3%) common
carrier's tax under Section 118(A) of the same
Code. This provision is without prejudice to
classifying such taxpayer under a different category
pursuant to a separate provision of the same Code
(RR 15-2002).
Sec. 28 (A) (3) (a) of the 1997 NIRC does not, in any
categorical term, exempt all international air
carriers from the coverage of Sec. 28 (A) (1) of the
1997 NIRC.
The general rule is that resident foreign
corporations shall be liable for a 30% income tax on
their income from within the Philippines, except for
resident foreign corporations that are international
carriers that derive income "from carriage of
persons, excess baggage, cargo and mail originating
from the Philippines" which shall be taxed at 2
1/2% of their Gross Philippine Billings. An
international carrier with no flights originating
from the Philippines, does not fall under the
exception.
To reiterate, if an international air carrier
maintains flights to and from the Philippines, it
shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers
that do not have flights to and from the Philippines
but nonetheless earn income from other activities
in the country will be taxed at the rate of 30% of
such income (South African Airways v.
Commissioner of Internal Revenue, February 16,
2010; Air Canada v. CIR, G.R. No. 169507, January 11,
2016).
NOTE: An offline carrier is "any foreign air carrier
not certificated by the [Civil Aeronautics] Board,
but who maintains office or who has designated or
appointed agents or employees in the Philippines,
who sells or offers for sale any air transportation in
behalf of said foreign air carrier and/or others, or
negotiate for, or holds itself out by solicitation,
advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such
transportation. (Civil Aeronautics Board Economic
Regulation No. 4, chap. I, sec. 2(b) cited in Air
Canada v. CIR, G.R. No. 169507, January 11, 2016)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
168
Offshore Banking Units
OBU is a branch, subsidiary or affiliate or a foreign
banking corporation located in an Offshore
Financial Center which is duly authorized by the
BSP to transact offshore banking business in the
Philippines. OBUs are allowed to provide all
traditional banking services to non-residents in any
currency other than Philippine national currency.
OBUs are forbidden to make any transactions in
Philippine Peso. Banking transactions to residents
are omitted and restricted (Tabag, 2015).
Income Exempt from Tax
Income derived from
1. Nonresidents
2. Foreign currency transactions with local
commercial banks,
3. Foreign currency transactions with branches
of foreign banks authorized by the BSP
4. Foreign currency transactions with OBUs in the
Philippines
Income subject to 10% Final Tax
Interest income derived from foreign currency
loans granted to residents other than OBUs or local
commercial banks (Ibid).
Resident Depository Banks (Foreign Currency
Deposit Units)
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with local
commercial banks, including branches of foreign
banks that may be authorized by the BangkoSentral
ng Pilipinas (BSP) to transact business with foreign
currency depository system units and other
depository banks under the expanded foreign
currency deposit system, including interest income
from foreign currency loans granted by such
depository banks under said expanded foreign
currency deposit system to residents, shall be
subject to a final income tax at the rate of ten
percent (10%) of such income.
ROHQ and RHQ Of Multinational Companies
Income tax rate of ROHQ is 10% of net income.
ROHQ is a branch established in the Philippines
which is engaged in any of the following qualifying
services:
- General administration and planning;
- Business planning and coordination;
 INCOME TAXATION
- Sourcing/procurement of raw materials
and components;
- Corporate finance advisory services;
- Marketing control and sales promotion;
- Training and personnel management;
- Logistics services;
- Research and development services, and
product development;
- Technical support and maintenance;
- Data processing and communication; and
- Business development.
RHQ is a tax exempt entity. It is a branch
established in the Philippines and which
headquarters do not earn or derived income from
the Philippines and which act as supervisory,
communications and coordinating center for its
affiliates, subsidiaries, or branches in the Asia-
Pacific region and other foreign markets (Tabag,
2015).
Improperly Accumulated Earnings of
Corporation
Domestic corporations and closely-held
corporations are subject to 10% improperly
accumulated earningstax on their improperly
accumulated earnings(Sec. 29 [A], NIRC).
Closely-held Corporations
These are corporations, at least 50% in value of the
outstanding capital stock of which or at least 50%
of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly
by or not more than 20 individuals (R.R. 2-2001, Sec.
4).
NOTE: Corporations outside the above definition
are considered publicly-held corporations.
Q: What consists of “Improperly Accumulated
Earnings”?
A: These are the profits of a corporation that are
accumulated, instead of distributing them to its
shareholders, for the purpose of avoiding the
income tax with respect to its shareholders or the
shareholders of another corporation (R.R. 2-2001,
Sec. 2).
Formula:
Taxable Income during the current year
Add:
Income exempt from tax
Income excluded from gross income
Income subject to final tax
169
NOLCO deducted
Less:
Income tax paid/payable during the year
Dividends actually or constructively paid
Amount reserved for the reasonable needs
of the business
_____________________________________________________
Improperly Accumulated Earnings
x 10%
_____________________________________________________
Improperly Accumulated Earnings Tax (IAET)
Touchstone of the liability
It is the purpose behind the accumulation of the
income and not the consequences of the
accumulation. Thus, if the failure to pay dividends
is due to some other causes, such as the use of
undistributed earnings and profits for the
reasonable needs of the business, such purpose
would not generally make the accumulated or
undistributed earnings subject to the tax. However,
if there is a determination that a corporation has
accumulated income beyond the reasonable needs of
the business, IAET shall be imposed (Dimaampao, J.,
2015).
Rationale:IAET is imposed in the nature of a penalty
to the corporation for the improper accumulation
of its earnings and as a form of deterrent to the
avoidance of tax upon shareholders who are
supposed to pay dividends tax on the earning
distributed to them by the corporation. If the
earnings and profits were distributed, the
shareholders would be liable for tax on dividends
(Commissioner v. Ayala Securities Corp., 101 SCRA
231).
Q: How can the “reasonable needs” of the
business be determined in order to justify an
accumulation of earnings? (2010 Bar)
A: IMMEDIACY TEST
To determine the “reasonable needs” of the
business in order to justify an accumulation of
earnings, the Courts of the United States have
invented the so-called “Immediacy Test” which
construed the words “reasonable needs of the
business” to mean the immediate needs of the
business, and it was generally held that if the
corporation did not prove an immediate need for
the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of
the business, and the penalty tax would apply
(Manila Wine Merchants, Inc. v CIR, G.R. No. 26145,
February 20, 1984).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
In order to determine whether profits are
accumulated for the reasonable needs, it must be
shown that the controlling intention of the
taxpayer is manifest at the time of accumulation,
not subsequently, which are mere afterthoughts.
Furthermore, the accumulated profits must be
used within a reasonable time after the close of the
taxable year (Cyanamid Philippines, Inc. v. CA, G.R.
No. 108067, January 20, 2000).
NOTE: Once the profit has been subjected to IAET,
the same shall no longer be subjected to IAET in
later years even if not declared as dividend.
Notwithstanding the imposition of the IAET,
profits which have been subjected to IAET, when
finally declared as dividends shall nevertheless be
subject to tax on dividends imposed under the
NIRC, except in those instances where the recipient
is not subject thereto (R.R. 2-2001, Sec. 5).
Q: What constitute accumulation of earnings
for the reasonable needs of the business?
A:
1. Allowance for the increase in accumulation of
earnings up to 100% of the paid-up capital
The basis of the 100% threshold of retention
(considered within the reasonable needs of the
business) shall be the paid-up capital or the
amount contributed to the corporation
representing the par value of the shares of
stock. Any excess capital over and above the
par (APIC/Premium) shall be excluded (RMC
No. 35-2011),
2. Earnings reserved for definite corporate
expansion approved by the Board of Directors
or equivalent body
3. Reserved for building, plant or equipment
acquisition as approved by the Board of
Directors or equivalent body
4. Reserved for compliance with any loan
covenant or pre-existing obligation
5. Earnings required by law or applicable
regulations to be retained
6. In case of subsidiaries of foreign corporations
in the Philippines, all undistributed earnings
intended or reserved for investments within
the Philippines (R.R. No. 2-2001, Sec. 3)
Prima facie instances of accumulation of profits
beyond the reasonable needs of a business
1. Investment of substantial earnings and profits
of the corporation in unrelated business or in
stock or securities in unrelated business
UNIVERSITY OF SANTO TOMAS
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170
2. Investment in bonds and other long term
securities
3. Accumulation of earnings in excess of 100% of
paid-up capital, not otherwise intended for the
reasonable needs of the business (R.R. No. 2-
2001, Sec. 7)
Prima facie evidence to show purpose of
accumulation is Tax evasion or Tax avoidance
The fact that:
1. Any corporation is a mere:
a. Holding company – one having practically
no activities except holding property and
collecting income therefrom or investing
therein; or
b. Investment (mutual fund) company – when
activities of the company further include
or consist substantially of buying and
selling stocks, securities, real estate, or
other investment properties so that
income is derived not only from
investment yield but also from profits
upon market fluctuations.
2. The earnings or profits of a corporation are
permitted to accumulate beyond the
reasonable needs of the business (R.R. No. 2-
2001, Sec. 7).
IAET not applicable to the following:
1. Publicly-held corporations (Sec. 29 [B][2],
NIRC)
2. Banks and other non-bank financial
intermediaries
3. Insurance companies
4. Publicly-held corporations
5. Taxable partnerships
6. General professional partnerships
7. Non-taxable joint ventures
8. Enterprises duly registered with the Philippine
Economic Zone Authority under R.A. 7916, and
enterprises registered pursuant to the Bases
Conversion and Development Act of 1992
under R.A. 7227, as well as other enterprises
duly registered under special economic zones
declared by law which enjoy payment of
special tax rate on their registered operations
or activities in lieu of other taxes, national or
local (R.R. 2-2001, Sec. 4)
Exemptions from Tax on Corporations
The following organizations shall not be taxed in
respect to income received by them as such: (Sec.
30, NIRC)
 INCOME TAXATION
1. Labor, agricultural or horticultural
organization, not organized principally for
profit;
a. Provincial fairs and like associations of a
quasi-public character designed to
encourage development of better
agricultural and horticultural products
through a system of awards, prizes and
premiums, and whose income derived
from gate receipts, entry fees, donations,
etc. is used exclusively to meet necessary
expenses of upkeep and operation are thus
exempt.
b. The holding of periodical race meets by
associations, the profits from which inure
to the benefit of their stockholder are not
tax exempt. Similarly, corporations
engaged in growing agricultural or
horticultural products or raising livestock
or similar products for profits are subject
to tax (R.R. No. 2, Sec. 25).
2. Mutual savings banks and cooperative banks,
either domestic or foreign, provided that:
a. No capital represented by shares;
b. Earnings, less only the expenses of
operating, are distributable wholly among
the depositors;
c. It is operated for mutual purposes and
without profit
NOTE: If the deposits are made
compulsory under contract between the
bank and the depositors and is operated
for speculation rather for savings, the bank
is not qualified as a mutual savings bank.
3. Fraternal Beneficiary Society, Order or
Association, provided that:
a. It must be operated under lodge system or
for the exclusive benefit of the members of
society, with parent and local
organizations which are active;
b. There must be an established system of
payment to its members or their
dependents of life, sick, accident or other
benefits;
c. No part of the net income inures to the
benefit of the stockholders/members
4. Cemetery Companies, provided that:
a. It must be owned and operated exclusively
for the benefit of their owners;
b. It is not operated for profit.
5. Religious, Charitable, Scientific, Athletic or
Cultural Corporations, provided that:
171
a. It is organized and operated for one or
more specified purposes;
b. No part of the net income inures to the
benefit of the any private stockholder or
individual
St. Luke’s Medical Center, Inc. fails to meet an
indispensable requirement under Section
30(E) –operated exclusively for charitable
purposes – to be completely tax exempt from
all its income. It admitted paying patients from
which profit is derived. (CIR v. St. Luke’s
Medical Center, Inc., 682 SCRA 66)
6. Business, Chamber of Commerce, or Board of
Trade, provided that:
a. It is an association of persons having some
common business interest;
b. Its activities are limited to work for such
common interests;
c. Not engaged in a regular business for
profit;
d. No part of the net income inures to the
benefit of any private stockholder or
individual
7. Civic league, provided that:
a. It is not organized for profit but operated
exclusively for purposes beneficial to the
community as a whole. In general,
organizations engaged in promoting the
welfare of mankind;
b. Sworn affidavit filed with the BIR showing
the following:
i. Character of the league or
organization
ii. Purpose for which it was organized
iii. Actual activities
iv. Sources of income and disposition
thereof, and
v. All facts relating to the operation of the
organization which affects it right to
exemption.
vi. The copy of articles of incorporation,
by laws and financial statements
should be attached to the sworn
affidavit
8. Non-stock, Non-Profit Educational Institutions;
9. Government Educational Institutions;
10. Mutual Fire Insurance Companies and like
Organizations;
Requisites for exemption:
a. Income is derived solely from
assessments, dues and fees collected from
members;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
b. Fees collected from members are for the
sole purpose of meeting its expenses
To be exempt from income tax, Sec. 30(E)
of the NIRC requires that a charitable
institution must be “organized and
operated exclusively” for charitable
purposes. Likewise, to be exempt from
income tax, Sec. 30 (G) requires that the
institution be “operated exclusively” for
social welfare (CIR v. St. Luke’s, G.R. Nos.
195909 and 195960, September 26, 2012).
11. Farmers, Fruit Growers or like Associations;
Requisites for exemption:
a. Formed and organized as sales agent for
the purpose of marketing the product of its
members
b. No net income to the members
c. Proceeds of the sale shall be turned over to
them less necessary selling expenses on
the basis of the quantity of goods produced
by them
The income of whatever kind and character of
the foregoing organizations from any of their
properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be
subject to tax imposed under the NIRC.
The foregoing exempt corporations have common
requisites for exemption:
[PrInSE]
1. Not organized and operated principally for
profit;
2. No part of the net income inures to the benefit
of any member or individual;
3. No capital is represented by shares of stock;
and
4. Educational or instructive in character.
The moment they invest their income or receive
income from their properties, real or personal
conducted for profit, such income derived from
those properties is subject to tax.
NOTE: If religious, charitable or social welfare
corporations derive income from their properties
or any of their activities conducted for profit,
income tax shall be imposed on said items of
income irrespective of their disposition (CIR v.
YMCA, G.R. No. 124043, October 14, 1998).
However, in case of non-stock, non-profit
educational institution, as long as the income is
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
172
actually, directly and exclusively used for
educational purpose, such income is exempt as
provided for in Art. XIV, Sec. 3 of the 1987
Constitution.
[See further discussion under General Principles –
Constitutional Limitations]
Other corporations exempt from income tax
under Special Laws
1. Cooperatives under R.A. 6938, the Cooperative
Code of the Philippines
NOTE: Since interest from any Philippine
currency bank deposit and yield or any other
monetary benefit from deposit substitutes are
paid by banks, cooperatives are not required to
withhold the corresponding tax on the interest
from savings and time deposits of their
members. Moreover, the amendment in Article
61 of R.A. 9520, specifically providing that
members of cooperatives are not subject to
final taxes on their deposits, affirms the
interpretation of the BIR that Section 24 (B)(1)
of the NIRC does not apply to cooperatives and
confirms that such ruling carries out the
legislative intent (Dumaguete Cathedral
Cooperative v. CIR, G.R. No. 182722, January 22,
2010).
2. Foundations created for scientific purposes
under Sec. 24 of R.A. 2067, an Act to Integrate,
Coordinate, and Intensify Scientific and
Technological Research and Development and
to Foster Invention
Tax on General Partnerships
Classifications of partnerships for tax purposes
1. General professional partnerships
2. Business partnership
Q: Distinguish between the income tax liability
of “X”, a general professional partnership
engaged in the practice of law and “Y”, as a
general partnership engaged in a logging
concession. (1981 Bar)
A:
GENERAL BUSINESS
PROFESSIONAL PARTNERSHIP/
PARTNERSHIP GENERAL
(GPP) PARTNERSHIP
Formed by persons Formed by persons for
for the sole purpose the sole purpose of
of exercising their
 INCOME TAXATION

common profession, engaging in any trade or taxable year after deducting the corresponding
no part of income of business corporate income tax. A partner’s distributive
which is derived share is already being subjected to a final tax;
from engaging in any hence, it is no longer needed to be reported in each
trade or business partner’s individual tax return.
NOT ataxable entity Considered as a
corporation hence a NOTE: In a business partnership, there is no
taxable entity and its constructive receipt of distributive share in the net
income is taxable as income.
such
The distributive The share of an Q: Do co-heirs who own inherited properties
share of the partners individual in the which produce income automatically be
in the net income is distributable net income considered as partners of an unregistered
reportable and after tax of a general corporation hence subject to income tax?
taxable as part of the partnership is subject to
partner’s gross a final tax A: NO, for the following reasons:
income subject to the
scheduled rates a. The sharing of gross returns does not of itself
NO need to file an Must file an income tax establish a partnership, whether or not the
income tax return return persons sharing them have a joint or common
but an information right or interest in any property from which
return the returns are derived. There must be an
NOT subject to Taxed once on its unmistakable intention to form a partnership
double taxation income and again when or joint venture (Obillos, Jr. v. CIR, 139 SCRA
being taxed only once the share in the profits 436).
of the partners is b. There is no contribution or investment of
distributed; then taxed additional capital to increase or expand the
as dividends inherited properties, merely continuing the
dedication of the property to the use to which
Registration of partnership it had been put by their forebears (Ibid.).
c. Persons who contribute property or funds to a
Registration of a partnership is immaterial for common enterprise and agree to share the
income tax purposes. It is taxable as long as the gross returns of that enterprise in proportion
following requisites concur: [AI] to their contribution, but who severally retain
the title to their respective contribution, are
1. There is an agreement, oral or writing, to not thereby rendered partners. They have no
contribute money, property, or industry to a common stock capital, and no community of
common fund; and interest as principal proprietors in the
2. There is an intention to divide the profits. business itself from which the proceeds were
derived (Pascual v. CIR, 166 SCRA 560).
Treatment of loss in case the partnership
resulted in a loss NOTE: The income from the rental of the house,
boughtfrom the earnings of co-owned properties,
Results of operation of a partnership shall be shall be treated as the income of an unregistered
treated in the same way as a corporation. In case of partnership to be taxable as a corporation because
loss, it will be divided as agreed upon by the of the clear intention of the co-owners to join
partners and shall be taken by the individual together in a venture for making money out of
partners in their respective returns. rentals.

NOTE: The partners shall be entitled to deduct Tax on General Professional Partnerships
their respective shares in the net operating loss
from their individual gross income. GPP not subject to income tax

Distributive share of a partner in the net
income of a business partnership
It is equal to each partner’s distributive share of the
net income declared by the partnership for a
GPP are not subject to income tax but are required
to file information returns for its income for the
purpose of furnishing information as to the share in
the net income of the partnership, which each
partner should include in his individual return.

UNIVERSITY OF SANTO TOMAS

173 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Partners shall be liable for income tax in their
separate and individual capacities.
GPP is only required to file a return for its income,
except income exempt under Sec. 32 (B) of the NIRC,
setting forth the items of gross income and of
deductions allowed, and the names, Taxpayer
Identification Numbers (TIN), addresses and
shares of each of the partners (Sec. 55, NIRC).
Partners shall nonetheless be liable for income tax
in their separate and individual capacities.
Computation of net income
For purposes of computing the distributive share
of the partners, the net income of the partnership
shall be computed in the same manner as a
corporation (Sec. 26, NIRC).
Each partner shall report his distributive share in
the net income of the partnership as gross income
in his separate return, whether actually or
constructively received.
Q: A, B, and C, all lawyers, formed a partnership
called ABC Law Firm so that they can practice
their profession as lawyers. For the year 2012,
ABC Law Firm received earnings and paid
expenses, among which are as follows:
Earnings:
1. Professional/legal fees from various
clients;
2. Cash prize received from a religious
society in recognition of the exemplary
service of ABC Law Firm;
3. Gains derived from sale of excess
computers and laptops
Payments:
1. Salaries of office staff;
2. Rentals for office space;
3. Representation expenses incurred in
meetings with clients
a. What are the items in the above-mentioned
earnings which should be included in the
computation of ABC Law Firm’s gross
income? Explain.
b. What are the items in the above-mentioned
payments which may be considered as
deductions from the gross income of ABC
Law Firm? Explain.
c. If ABC Law Firm earns net income in 2012,
what, if any, is the tax consequence on the
part of ABC Law Firm insofar as the
payment of income tax is concerned? What,
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
174
if any, is the tax consequence on the part of
A, B, and C as individual partners, insofar
as the payment of income tax is concerned?
(2014 Bar)
A:
a. The three (3) items of earnings should be
included in the computation of ABC Law Firm’s
gross income. The professional/legal fees from
various clients is included as part of gross
income being in the nature of compensation for
services (Section 32 [A][1], NIRC). The cash
prize from a religious society in recognition of
its exemplary services is also included there
being no law providing for its exclusion. This is
not a prize in recognition of any of the
achievements enumerated under the law
hence, should form part of gross income
(Section 32 [B][7][c], NIRC). The gains from sale
of excess computers and laptops should also be
included as part of the firm’s gross income
because the term gross income specifically
includes gains derived from dealings in
property (Section 32 [A][3], NIRC).
b. The law firm being formed as general
professional partnership is entitled to the same
deductions allowed to corporation (Section 26,
NIRC). Hence, the three (3) items of deductions
mentioned in the
problem are all deductible, they being in the
nature of ordinary and necessary expenses
incurred in the practice of profession (Section
34 [A], NIRC). However, the amount deductible
for representation expenses incurred by a
taxpayer engaged in sale of services, including
a law firm, is subject to a ceiling of 1% of net
revenue (RR No. 10-2002).
c. The net income having been earned by the law
firm which is formed and qualifies as a general
professional partnership, is not subject to
income tax because the earner is devoid of any
income tax personality. Each partner shall
report as gross income his distributive shares,
actuality or constructively received, in the net
income of the partnership. The partnership is
merely treated for income tax purposes as a
pass-through entity so that its net income is not
taxable at the level of the partnership bur said
net income should be attributed to the
partners, whether or not distributed to them,
and they are liable to pay the income tax based
on their respective taxable income as
individual taxpayers (Section 26, NIRC).
ESTATES AND TRUSTS
Estate
An estate refers to the mass of properties left by a
deceased person.
 INCOME TAXATION
NOTE: The income that is subject to income
taxation is the “income received by estates of the
deceased persons during the period of
administration or settlement of the estate (Sec. 60
[A][3], NIRC).
Income taxation for estates
GR: Subject to income tax in the same manner as
individuals. The tax imposed by Title II, Tax on
Income, of the NIRC of 1997, upon individuals shall
also apply to income of estates and trusts (Sec. 60
[A], NIRC).
XPN:
Distribution to the heirs during the taxable year of
estate income is deductible from the taxable
income of the estate (BIR Ruling 233-86).
NOTE: The distributed income shall form part of
the respective heir’s taxable income. Deduction is
allowed only when the distribution is made during
the taxable year when the income is earned.
Taxes payable under the income tax law when a
person dies
1. Income Tax for individuals from January to
the time of death (Secs. 24, 25, NIRC).
2. Income Tax of the estate, if the estate is under
administration or judicial settlement (Sec. 60,
NIRC).
Trusts
A trust is a right to the property, whether real or
personal, held by one person for the benefit of
another. It is:
A confidence given by a person, the grantor
(creator);
Reposed in one person who is called fiduciary
(trustee);
For the benefit of another who is called the
cestui que trust (beneficiary);
Regarding property given by the grantor
(creator) to the fiduciary (trustee) for the
benefit of the cestui que trust (beneficiary).
Classifications of trust for tax purposes [TIP]
1. Taxable and tax-exempt trust
2. Irrevocable trust and revocable trust
3. Trust administered in the Philippines and trust
administered in a foreign country
Income taxation for trusts
175
GR: Subject to income tax in the same manner as
individuals. The tax imposed by Title II, Tax on
Income, of the NIRC of 1997, upon individuals shall
also apply to income of estates and trusts (Sec. 60
[A], NIRC).
XPNs:
Distribution to the beneficiaries during the taxable
year of trust income is deductible from the taxable
income of the trust. Deduction is allowed only when
the distribution is made during the taxable year
when the income is earned (Sec. 61 [A], NIRC).
NOTE: However, such deduction shall be included
in computing the taxable income of the
beneficiaries, whether distributed to them or not.
Person required to file and to pay the income
tax
GR: If the income:
1. Is distributed to beneficiaries, the
beneficiaries shall file and pay the tax.
2. Is to be accumulated or held for future
distribution, the trustee or beneficiary shall
file and pay the tax.
XPNs:
1. In a revocable trust, the income of the trust will
be returned to the grantor (Sec. 63, NIRC).
2. In a trust where the income is held for the
benefit of the grantor, the income of the trust
becomes income of the grantor (Sec. 64, NIRC).
3. In a trust administered in a foreign country, the
income of the trust, administered by any
amount distributed to the beneficiaries shall be
taxed to the trustee (Sec. 61 [C], NIRC).
Q: Johnny transferred a valuable 10-door
commercial apartment to a designated trustee,
Miriam, naming in the trust instrument Santino,
Johnny's 10-year old son, as the sole
beneficiary. The trustee is instructed to
distribute the yearly rentals amounting to
P720,000.00. The trustee consults you if she has
to pay the annual income tax on the rentals
received from the commercial apartment.
a. What advice will you give the trustee?
Explain.
b. Will your advice be the same if the
trustee is directed to accumulate the
rental income and distribute the same
only when the beneficiary reaches the
age of majority? Why or why not? (2009
Bar)
A:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
a. I will advise Miriam that the yearly rental
income distributed annually qualifies as a
deduction in computing the net income of the
trust. And since net income is zero after such
deduction, there is nothing to be paid as annual
income tax due from the trust. (Sec. 61[A],
NIRC).
b. NO. The trust may now have net income
determined at the end of each year as a result
of accumulating its income instead of
distributing the same to the beneficiary. The
tax is payable by the trust, as represented by
the trustee, on the basis of such net income.
(Sec. 61[A], NIRC).
Employee’s trust
Employee’s trusts are tax-exempt, provided:
1. Employee’s trust must be part of a pension,
stock bonus or profit sharing plan of the
employer for the benefit of some or all of his
employees;
2. Contributions are made to the trust by such
employer, or such employees or both;
3. Such contributions are made for the purpose of
distributing to such employees both the
earnings and principal of the fund accumulated
by the trust; and
4. The trust instrument makes it impossible for
any part of the corpus or income to be used for
or diverted to, purposes other than the
exclusive benefit of such employees (Sec. 60[B],
NIRC).
Q: In the case of the employee’s trust which
forms part of a pension, stock bonus or profit
sharing plan of an employer for the benefit of
some or all of his employees, wherein
contributions are made to the trust by the
employer or employees, or both, for the
purpose of distributing to such employees the
earnings and principal of the fund accumulated
by the trust in accordance with such plan, what
is the tax treatment of
a. The contributions made to the trust by the
employer?
b. The retirement benefit paid to the
employee under the retirement trust?
c. The income earned by the employee’s
retirement funds which are held in trust?
d. The amount actually distributed to a non-
retiring employee during the year?
A:
a. The contribution made to the pension trust by
the employer may be allowed as a deduction
against his gross income. (Sec. 34 [J], NIRC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
176
b. The retirement benefit received by the
employee from the retirement fund of the trust
shall be excluded in his gross income and, thus,
exempted from the withholding tax. (Sec. 32
[B][6][a], NIRC).
c. The income earned by the retirement funds of
private employees held by the trustor in their
behalf shall be exempted from income tax. (Sec.
60 [B], NIRC).
d. The amount actually distributed to the
employee shall be taxable to him in the year in
which so distributed to the extent that it
exceeds the amount contributed by such
employee. (Sec. 60 [B], NIRC).
Pension trust
Tax exemption is likewise to be enjoyed by the
income of the pension trust; otherwise, taxation of
those earnings would result in a diminution of
accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund
(CIR v. CA, G.R. No. 95022, March 23, 1992).
Any amount received by an employee as retirement
benefits shall be excluded from gross income
subject to conditions set forth under Sec. 32 [B] of
the NIRC.
Income of trust not subject to tax but
considered as income of grantor subject to tax
Any part of the income of a trust, which is, or in the
discretion of the grantor or of any person not
having a substantial adverse interest in the
disposition of such part of the income may be:
1. Held or accumulated for future
distribution to the grantor;
2. Distributed to the grantor;
3. Applied to the payment of premiums upon
policies of insurance on the life of the
grantor.
Tax on Co-Ownerships
As a rule, co-ownership is tax exempt. It becomes
taxable if it is converted into an unregistered
partnership. It is converted into partnership if the
properties and income are used as common fund
with the intention to produce profits. If after
partition, the shares of the heirs are held under a
single management for profit making, unregistered
partnership is formed (Ona v. CIR, 45 SCRA 74).
A joint purchase of land, by two, does not constitute
a co-partnership in respect thereto, nor does an
agreement to share the profits and losses on the
 INCOME TAXATION
sale of land create a partnership; the parties are
only tenants in common. Where the transactions
are isolated, in the absence of other circumstances
showing a contrary intention, the case can only give
rise to a co-ownership (Pascual v. CIR, 166 SCRA
560).
Co-heirs who own inherited properties which
produce income should not automatically be
considered as partners of an unregistered
partnership or corporation subject to income tax.
REASONS: Sharing of gross returns does not by
itself establish a partnership; there must be an
unmistakable intention to form a partnership or
joint venture. There is no contribution or
investment of additional capital to increase or
expand the inherited properties, merely continuing
the dedication of the property to the use to which it
had not been put by their forbears (Obillos Jr. v. CIR,
139 SCRA 436).
Co-ownership is not taxable if the activities of the
co-owners are limited to the preservation of the
property and the collection of income. In such case,
the co-owners shall be taxed individually on their
distributive share in the income of the co-
ownership.
Co-owners investing the income in a business
for profit
If the co-owners invest the income in a business for
profit they would constitute themselves into a
partnership and such shall be taxable as a
corporation.
Q: Brothers A, B, and C borrowed a sum of
money from their father which amount
together with their personal monies was used
by them for the purpose of buying real
properties. The real properties they bought
were leased to various tenants. The BIR
demanded the payment of income tax on
corporations, real estate dealer’s tax, and
corporation residence tax. However, A, B. and C
seek to reverse the letter of demand and be
absolved from the payment of taxes in question.
Are they subject to tax on corporations?
A: YES. As defined in the NIRC, the term
“corporation includes partnership, no matter how
created or organized”. This qualifying expression
clearly indicates that a joint venture need not be
taken in any of the standard form, or conformity
with the usual requirements of the law on
partnerships, in order that one could be deemed
constituted for the purposes of the tax on
177
corporations (Evangelista v. Collector of Internal
Revenue, G.R. No. L-9996, October 15, 1957).
Q: Pascual and Dragon bought 2 parcels of land
from Bernardino and 3 from Roque. Thereafter,
the first two were sold to Meirenir
Development Corporation and the remaining
were sold to Reyes and Samson. They divided
the profits between the two (2) of them. The
Commissioner contended that they formed an
unregistered partnership or joint venture
taxable as a corporation under the Code and its
income is subject to the NIRC. Is there an
unregistered partnership formed?
A: NONE. The sharing of returns does not in itself
establish a partnership whether or not the sharing
therein has a joint or common right or interest in
the property (NCC, Art. 1769). There is no adequate
basis to support the proposition that they thereby
formed an unregistered partnership. The two
isolated transactions whereby they purchased
properties and sold the same few years thereafter
did not make them partners. The transactions
were isolated. The character of habituality
peculiar to business transactions for the purpose of
gain was not present (Pascual and Dragon v. CIR,
G.R. No. 78133, October 18, 1988).
Q: On March 2, 1973, Joe Obillos Sr. transferred
his rights under contract with Ortigas Co. to his
4 children to enable them to build residences on
the lots. TCTs were issued. Instead of building
houses, after a year, Obillos children sold them
to Walled City Securities Corporation and Olga
Cruz Canda. The BIR required the children to
pay corporate income tax under the theory that
they formed an unregistered partnership or
joint venture. Are they liable for corporate
income tax?
A: NO. The Obillos children are co-owners. It is an
isolated act which shows no intention to form a
partnership. It appears that they decided to sell it
after they found it expensive to build houses. The
division of profits was merely incidental to the
dissolution of the co-ownership, which was in the
nature of things a temporary state (Obillos, Jr. v.
CIR, G.R. No. L-68118, October 29, 1985).
Tax on Joint Ventures and Consortiums
Joint Venture is a commercial undertaking by two
or more persons, differing from a partnership in
that it relates to the disposition of a single lot of
goods or the completion of a single project. Joint
venture or consortium, in general, is taxable as
corporation (Tabag, 2015).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
However, a joint venture or consortium formed for CORPORATE INDIVIDUAL
the purpose of undertaking construction projects CO-VENTURER CO-VENTURER
is not considered as corporation under Section 22 The respective The respective
of the NIRC provided: share in the share in the joint
joint venture venture profit is
a. The joint venture was formed for the purpose profit is considered as
of undertaking a construction project; and considered as dividends
b. Should involve joining/pooling of resources by dividends income received
licensed local contracts; that is, licensed as Taxable
income by an individual
general contactor the Philippine Contractors Joint
received by a taxpayer from a
Accreditation Board (PCAB) of the Department Venture
DC from a DC. DC.
of Trade and Industry (DTI); Hence, it shall Consequently, it
c. The local contractors are engaged in be treated as shall be subject
construction business; and inter-corporate to 10% final
d. The joint venture itself must likewise be duly dividend which withholding tax.
licensed as such by the Philippines Contractors is tax exempt.
Accreditation Board (PCAB) of the Department The respective The respective
of trade Industry (DTI). share in the share in the joint
joint venture venture profit
Joint ventures involving foreign contractors may profit shall be shall be subject
also be treated as a non-taxable corporation only included in the to creditable
if the member foreign contractor is : Non- computation of withholding tax.
taxable the corporate Consequently,
a. covered by a special license as contractor by the Joint venturer’s the same be
PCAB of the DTI; and Venture taxable income included in the
b. the construction project is certified by the subject to computation of
appropriate Tendering Agency (government normal the individual
office) that the project is a foreign corporate taxpayer’s
financed/internationally-funded project and income tax of taxable income.
that international bidding is allowed under 30%.
the Bilateral Agreement entered into by and (Tabag, 2015)
between the Philippine Government and the
foreign/ international financing institution FILING OF RETURNS AND PAYMENT OF
pursuant to the implementing rules and INCOME TAX
regulations of Republic Act No. 4566 otherwise
known as Contractor’s License Law. Income Tax Return (ITR)
A report made by the taxpayer to the BIR of all gross
Absent any one the aforesaid requirements, the income received during the taxable year, the
joint venture or consortium formed for the allowable deductions including exemptions, the net
purpose of undertaking construction projects shall taxable income, the income tax rate, the income tax
be considered as taxable corporations. due, the income tax withheld, if any, and the income
tax still to be paid or refundable (Domondon, 2013).
In addition, the tax-exempt joint venture or
consortium as herein defined shall not include PERIOD TO FILE INCOME TAX RETURN OF
those who are mere suppliers of goods, services or INDIVIDUALS AND CORPORATIONS
capital to a construction project.
Basic Tax
The member to a Joint Venture not taxable as
corporation shall each be responsible in reporting The return of any individual required to file the
and paying appropriate income taxes on their same shall be filed on or before April 15th day of
respective share to the joint ventures profit (RR 10- each year covering income for the preceding
2012). taxable year.

Tax treatment of the co-venturer’s share in the However, individuals who are self-employed or in
joint venture profit practice of a profession are required to file and pay
estimated income tax every quarter as follows:

1. First Quarter return - April 15

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
178
 INCOME TAXATION
2. Second Quarter return - August 15
3. Third Quarter return - November 15
4. Final adjusted (annual) return - April 15 of the
succeeding year (same with 1st quarter return)
DC and RFC
1. First, Second and Third Quarter returns – 60
days after the close of each of the first 3
quarters of the taxable year
2. Final adjusted (annual) return – On or before
April 15 following the taxable year
Final Withholding Tax on Passive Income
(Manual Filing)
1. January to November – 10th day of the month
following the month the withholding was made
2. December – January 15 of the succeeding year
Capital Gains Tax
a) Shares of stock
1. Ordinary Return – 30 days after each
transaction
2. Final Consolidated Return – on or before
April 15 of the following year
b) Real Property – 30 days following each sale or
other disposition (Sec. 51 [C] [2], NIRC)
PERSONS LIABLE TO FILE INCOME TAX RETURN
Individual TaxpayersAYERS
GR: The following individuals are required to file an
income tax return:
1. Every Filipino citizen residing in the
Philippines;
2. Every Filipino citizen residing outside the
Philippines, on his income from sources within
the Philippines;
3. Every alien residing in the Philippines, on
income derived from sources within the
Philippines; and
4. Every nonresident alien engaged in trade or
business or in the exercise of profession in the
Philippines. (Sec. 51 [A] [1], NIRC)
The following are also required to filed ITR:
1. A citizen of the Philippines and any alien
individual engaged in business or practice of
profession within the Philippines, regardless of
the amount of gross income;
2. An individual deriving compensation
concurrently from two or more employers at
any time during the taxable year; and
179
3. An individual whose pure compensation
income derived from sources within the
Philippines exceeds Sixty thousand pesos
(P250,000). (RMC 50-2018)
XPNS: The following individuals shall not be
required to file an income tax return:
1. An individual whose gross income does not
exceed his total personal and additional
exemptions for dependents;
2. Individual taxpayer receiving purely
compensation income, regardless of amount,
from only one employer in the Philippines for
the calendar year, the income tax of which has
been withheld correctly by said employer
(Substituted Filing);
3. An individual whose sole income has been
subjected to final withholding tax;
4. A minimum wage earner or an individual who
is exempt from income tax (Sec. 51, NIRC).(Sec.
51 [A] [2], NIRC)
NOTE: Individuals not required to file an income
tax return may nevertheless be required to file an
information return.(Sec. 51 [A] [3], NIRC)
Special Rules
a) ITR of married individuals
Married individuals, whether citizens, resident or
non-resident aliens, who do not derive income
purely from compensation, shall file a return for the
taxable year to include the income of both spouses.
Where it is impracticable to file one return, each
spouse may file a separate return of income but the
returns so filed shall be consolidated by the Bureau
for purposes of verification for the taxable year
(Sec. 51 [D], NIRC).
b) Income of unmarried minors/children
GR: The income of unmarried minors derived from
property received from a living parent shall be
included in the return of the parent.
XPNs:
1. When the donor’s tax has been paid on such
property; or
2. When the transfer of such property is exempt
from donor’s tax (Sec. 51 [E], NIRC).
c) Filing a return for a disabled taxpayer
If the taxpayer is unable to make his own return, the
return may be made by his:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
1. Duly authorized agent; b. Required. A resident alien is taxable only on
2. Representative; income derived from sources within the
3. Guardian; or Philippines (Sec. 51A [1][c], NIRC).
4. Other person charged with the care of his c. Required. A resident citizen who is earning
person or property, the principal and the purely compensation income from two
representative or guardian assuming the employers should file income tax return. If the
responsibility of making the return and compensation income is received concurrently
incurring penalties provided for erroneous, from two employers during the taxable year,
false or fraudulent returns (Sec. 51 [F], NIRC). the employee is not qualified for substituted
filing.
Substituted filing d. Not required. Under the law, all minimum
wage earners in the private and public sector
Substituted filing applies only if all of the following shall be exempt from payment of income tax
requirements are present: (Sec. 51A [2][d], NIRC in relation to R.A. No.
9504).
1. The employee received purely compensation e. Not required. Under the law, an individual
income (regardless of amount) during the whose sole income has been subjected of final
taxable year; withholding tax pursuant to Sec. 57(A), NIRC,
2. The employee received the income from only need not file a return. What he received is a tax
one employer in the Philippines during the paid income (Sec. 51A [2][c], NIRC).
taxable year;
3. The amount of tax due from the employee at Corporate Taxpayers
the end of the year equals the amount of tax
withheld by the employer; General Professional Partnership (GPP)
4. The employee’s spouse also complies with all 3
conditions stated above; Every GPP shall file, in duplicate, a return of its
5. The employer files the annual information income, except items excluded from gross income,
return (BIR Form No. 1604-CF); setting forth the items of gross income and the
6. The employer issues BIR Form No. 2316 to deductions allowed, and the names, TIN, addresses
each employee. and shares of each of the partners (Sec. 55, NIRC).

Q: Indicate whether each of the following Corporation

individuals is required or not required to file an
income tax return:
a. Filipino citizen residing outside the
Philippines on his income from sources
outside the Philippines.
b. Resident alien on income derived from
sources within the Philippines.
c. Resident citizen earning purely
compensation income from two employers
within the Philippines, whose income taxes
have been correctly withheld.
d. Resident citizen who falls under the
classification of minimum wage earners.
e. An individual whose sole income has been
subjected to final withholding tax. (2015
Bar)
A:
a. Not required. The income of a non-resident
Filipino citizen is taxable only on income
sourced within the Philippines. Accordingly, his
income from sources outside the Philippines is
exempt from income tax (Sec. 51A [1][b], NIRC).
Every corporation subject to tax shall render a
return which shall be filed by the president, vice-
president or other principal officer, and shall be
sworn to by such officer and by the treasurer or
assistant treasurer. (Sec. 52, NIRC).
Returns of Corporations contemplating
Dissolution or Reorganization
Within thirty (30) days after the adoption of a
resolution or plan for its dissolution, or for the
liquidation of the whole or any part of its capital
stock, including a corporation which has been
notified of possible involuntary dissolution by the
SEC of for its reorganization, shall render a correct
return to the CIR, verified under oath, setting forth
the items of such resolution or plan and such other
information (Sec. 52 [C], NIRC).
Taxable Estate and Trust
The fiduciary shall file a return if gross income is at
least P20,000 (Sec. 65, NIRC).

WHERE TO FILE INCOME TAX RETURN

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
180
 INCOME TAXATION
Except in cases where the Commissioner otherwise
permits, the return shall be filed with any of the
following:
1. Authorized agent bank,
2. Revenue District Officer,
3. Collection Agent or
4. Duly authorized city of municipal
Treasurer in which such person has his
legal residence or principal place of
business, or if there be no legal residence
or principal place of business, with the
Office of the Commissioner.
For non-resident citizens, the return shall be filed
with the
1. Philippine Embassy, or
2. nearest Philippine Consulate, or
3. be mailed directly to the CIR (Sec. 51 [B], NIRC).
Confidentiality rule with respect to tax returns
filed with the BIR
Although Sec. 71 of the NIRC provides that the tax
returns shall constitute public records, it is
necessary to know that these are confidential in
nature and may not be inquired into in
unauthorized cases, under the pain of penalty
provided for in Sec. 270 of the NIRC.
NOTE: For conviction of each act or omission, the
penalty of fine of not less than ₱50,000 but not
more than ₱100,000 or imprisonment of not less
than 2 years but not more than 5 years, or both.
Instances when inquiry into the income tax
returns of taxpayers may be authorized
Inquiry into the ITR of taxpayers may be had when:
1. The inspection of the return is authorized upon
the written order of the President of the
Philippines;
2. The inspection is authorized under Finance
Regulation No. 33 of the Secretary of Finance;
3. The production of the tax return is a material
evidence in a criminal case, where the
Government is interested in the result;
4. The production or inspection thereof is
authorized by the taxpayer himself.
PENALTIES FOR NON-FILING OF RETURNS
There shall be imposed, in addition to the tax
required to be paid, a penalty equivalent to:
a. 25% of the amount due
181
- Failure to file any return on the date
prescribed
- Filing of return with an internal revenue
officer other than those with whom the
return is required to be filed
b. 50% of the tax due
- Willful neglect to file the return within the
period prescribed
WITHHOLDING TAX
Concept of Withholding Taxes
Taxes imposed or prescribed by the NIRC are to be
deducted and withheld by the payor-corporations
and/or persons for the former to pay the same
directly to the BIR. Hence, the taxes are collected
practically at the same time the transaction is made
or when the taxable transaction occurs. It is
taxation at source(Domondon, 2013).
The withholding tax system is embedded in the
income tax system in the Philippines to ease the
administration and collection of taxes. It is not a
“separate” kind of tax as withholding tax is simply a
way of collecting tax from the source (Ingles, 2015).
Importance of Withholding Taxes
In the operation of the withholding tax system, the
payee is the taxpayer– the person on whom the tax
is imposed, while the payor, a separate entity, acts
no more than an agent of the government for the
collection of the tax in order to ensure its payment.
The duty to withhold is different from the duty to
pay income tax. Indeed, the revenue officers
generally disallow the expenses claimed as
deductions from gross income, if no withholding
tax as required by law or regulations was withheld
and remitted to the BIR within the prescribed dates
(Mamalateo, 2008).
Purpose of the Withholding Tax System
1. Provide the taxpayer a convenient manner to
meet his probable income tax liability.
2. Ensure the collection of the income tax which
would otherwise be lost or substantially
reduced through the failure to file the
corresponding returns.
3. Improve the government’s cash flow.
4. Minimize tax evasion, thus resulting in a more
efficient tax collection system. (CREBA vs.
Romulo, 9 March 2010)
When to withhold
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
It arises at the time an income payment is paid or
payable or accrued or recorded as an expense or
asset, whichever is applicable in the payor’s books,
whichever comes first (R.R. 2-98, Sec. 2.57.4, as
amended by R.R. 12-2001).
The term “payable” refers to the date the obligation
becomes due, demandable or legally enforceable
(R.R. 2-98, Sec. 2.57.4, as amended by R.R. 12-2001).
Withholding agent
A withholding agent is a separate entity acting no
more than an agent of the government for the
collection of tax in order to ensure its payments.
A withholding agent is explicitly made personally
liable under Sec. 251 of the NIRC for the payment of
the tax required to be withheld, in order to compel
the withholding agent to withhold the tax under
any and all circumstances. In effect, the
responsibility for the collection of the tax as well as
the payment thereof is concentrated upon the
person over whom the Government has
jurisdiction (Filipinas Synthetic Fiber Corporation v.
CA, et al., G.R. Nos. 118498 & 124377, October 12,
1999).
NOTE: In applications for refund, the withholding
agent is considered a taxpayer because if he does
not pay, the tax shall be collected from him (CIR v.
P&G, G.R. No. L-66838, December 2, 1991).
The withholding agent is liable for the correct
amount of the tax that should be withheld. The
withholding agent is, moreover, subject to and
liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be
finally found to be less than the amount that should
have been withheld under the law. Given this
responsibility, a withholding agent can validly
claim for tax refund.
Persons required to withhold taxes
The withholding taxes shall be withheld by the
person having control over the payment and who at
the same time claims the expenses. The following
persons are constituted as withholding agents:
1. Juridical person, whether or not engaged in
trade or business;
2. Individuals, with respect to payments made in
connection with his trade or business;
3. Individual buyers, whether or not engaged in
trade or business insofar as taxable sale,
exchange or transfer of real property is
concerned; and
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
182
4. All government offices including GOCCs as well
as provincial, city and municipal governments
and barangay (R.R. 2-98, Sec. 2.57.3).
Withholding agent in case the employer is the
Government of the Philippines
If the employer is the Government of the
Philippines or any of its political subdivision,
agency or instrumentality thereof, the return of the
amount deducted and withheld upon any wage
shall be made by the officer or employee having
control of the payment of such wage, or by any
officer or employee duly designated for the purpose
(Sec. 82, NIRC).
Duties and Obligations of the withholding agent
1. Register – To register within 10 days after
acquiring such status with the RDO having
jurisdiction over the place where the business
is located
2. Deduct and withhold – To deduct tax from all
money payments subject to withholding tax
3. Remit the tax withheld – To remit tax withheld
at the time prescribed by law and regulations
4. File Annual Return – To file the corresponding
Annual Information Return at the time
prescribed by law and regulations
5. Issue Withholding Tax Certificates – To furnish
Withholding Tax Certificates to recipient of
income payments subject to withholding
Consequences for Failure to Withhold
1. Liable for surcharges and penalties;
2. Liable upon conviction to a penalty equal to the
total amount of the tax not withheld, or not
accounted for and remitted (Sec. 251, NIRC);
and
3. Any income payment which is otherwise
deductible from the payor’s gross income will
not be allowed as a deduction if it is shown that
the income tax required to be withheld is not
paid to the BIR (R.R. 18-2013, Sec. 2).
Q: In case of failure by the withholding agent to
perform his duty to withhold and remit tax, is
the taxpayer absolved of liability?
A: The liability of the withholding agent is
independent from that of the taxpayer. The former
cannot be made liable for the tax due because it is
the latter who earned the income subject to
withholding tax. The withholding agent is liable
only insofar as he failed to perform his duty to
withhold the tax and remit the same to the
government. The liability for the tax, however,
 INCOME TAXATION
remains with the taxpayer because the gain was
realized and received by him. x xx [The taxpayer]
remains liable for the payment of tax as [he] shares
the responsibility of making certain that the tax is
properly withheld by the withholding agent, so as
to avoid any penalty that may arise from the non-
payment of the withholding tax due. (RCBC vs. CIR,
G.R. No. 170257, 7 September 2011)
Kinds of withholding taxes
1. Final withholding tax (FWT)
- The amount of tax withheld is full and final;
- The liability for payment of the tax rests
primarily on the withholding agent as
payor;
- In case he fails to withhold, the withholding
agent will be laible for the deficiency;
- The payee is not required to file any income
tax return for the particular income;
- The finality of the withheld tax is limited on
that particular income and will not extend to
the payee’s other tax liability (Ingles, 2015).
2. Creditable withholding tax (CWT)
- Taxes withheld on certain income payments
are intended to equal or at least
approximate the tax due of the apyee on said
income;
- Creditable tax must be withheld at source,
but shoud still be included in the tax return
of the recipient;
- The liability to withhold arises upon the
accrual, not upon the actual remittance. The
purpose of the withholding tax is to compel
the agent to withhold under all
circumstances (Ingles, 2015).
Three types of CWTs:
a. Expanded withholding tax (EWT) - a kind of
withholding tax which is prescribed only for
certain payors and is creditable against the
income tax due of the payee for the taxable
quarter year.
The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the withholding of tax on the items of income
payable to natural or juridical persons
residing in the Philippines, by payor-
corporation/persons as provided for by law, at
the rate of not less than one percent (1%)but not
more than thirty-two percent (32%), which shall
be credited against the income tax liability of
the taxpayer for the taxable year.
183
b. Withholding tax on compensation (WTC) –
applies to all employed individuals whether
citizens or aliens deriving income from
compensation for services rendered in the
Philippines.
The employer is considred the withholding
agent. Every employer making payments of
wages shall deduct from and withhold tax,
excep for MWEs. Employer shall be liable if he
fails to withhold and remit.
Nature of withholding tax on the income of
government employees
The withholding tax on compensation income of
government employees is creditable in
nature. Thus, pursuant to Sec. 79 (C)(2) of the NIRC,
the amount deducted and withheld during any
calendar year, shall be allowed as a credit to the
recipient of such income against the tax imposed
under Sec. 24 (A).
Obligation of an employer required to deduct
and withhold a tax
An employer shall furnish to each employee in
respect of his employment during the calendar
year, on or before January 31 of the succeeding
year, or if his employment is terminated before the
close of such calendar year, on the same day of
which the last payment of wages is made, a written
statement confirming the wages paid by the
employer to such employee during the calendar
and the amount of tax deducted and withheld in
respect of such wages.
He shall also submit to the Commissioner on or
before January 31 of the succeeding year, an
annual information return containing a list of
employees, the total amount of compensation
income of each employee, the total amount of taxes
withheld therefrom during the year, accompanied
by copies of the statement referred to in the
preceding paragraph, and such other information
as may be deemed necessary.
c. Withholding Tax on Government Money
Payments – withheld by government offices
and instrumentalities, including government-
owned or controlled corporations and local
government units, before making any payments
to private individuals, corporations,
partnerships and/or associations
i. Percentage Taxes – taxes withheld by National
Government Agencies (NGAs) and
instrumentalities, including government-
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
owned and controlled corporations (GOCCs)
and local government units (LGUs), before
making any payments to non-VAT-registered
taxpayers/suppliers/payees
ii. Value Added Taxes (VAT) – taxes withheld by
National Government Agencies (NGAs) and
instrumentalities, including government-
owned and controlled corporations (GOCCs)
and local government units (LGUs), before
making any payments to VAT-registered
taxpayers/suppliers/payees on account of
their purchases of goods and services.

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 INCOME TAXATION

Creditable Withholding Tax vs. Final Withholding Tax

CWT FWT
As to income Compensation Income Passive incomes
subject of the Professional/talent fees Fringe benefits
system Rentals
Cinematographic film rentals and other
payments
Income payments to certain contractors
As to whether or The income is required to be included in the The recipient may not report the said
not income should gross income in ITR. income in his gross income because
be reported as the tax withheld constitutes final and
part of the gross full settlement of the tax liability.
income
As to the effect of The tax withheld can be claimed as a tax The tax withheld cannot be claimed as
the tax withheld credit or may be deducted from the tax due tax credit.
or payable.
As to filing of ITR The earner is required to file an ITR. If the only source of income is subject
to final tax, the earner may no longer
file an ITR. However, with the new
income tax forms (R.R. 2-2014),
taxpayers need to declare those
income subjected to final tax in their
ITR.

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185 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Filing of Withholding Tax Return

Taxes deducted and withheld by withholding

agents shall be covered by a return and paid to,
except in cases where the Commissioner otherwise
permits, an authorized agent bank, revenue district
officer, collection agent or duly authorized
Treasurer of the city or municipality where the
withholding agent has his legal residence or
principal place of business, or where the
withholding agent is a corporation, where the
principal office is located.

The taxes deducted and withheld by the

withholding agent shall be held as a special fund in
trust for the government until paid to the collecting
officers.

The return for final withholding tax shall be filed

and the payment made within 25 days from the
close of each calendar quarter, while the return for
creditable withholding taxes shall be filed and the
payment made not later than the last day of the
month following the close of the quarter during
which withholding was made: Provided, that the
Commissioner, with the approval of the Secretary
of Finance, may require these withholding agents to
pay or deposit the taxes deducted or withheld at
more frequent intervals when necessary to protect
the interest of the government (Sec. 58 [A], NIRC).

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 TRANSFER TAX – ESTATE TAX

TRANSFER TAX
Kinds of Transfer Taxes under the NIRC
These are taxes imposed upon the privilege of
passing ownership of property without any 1. Estate tax
valuable consideration (Domondon, 2014). 2. Donor’s tax

Transfer Tax vs. Income Tax

TRANSFER TAX INCOME TAX

Upon What Privilege to transfer property Privilege to earn income
Imposed
Rates are lower: Rates are higher:
Estate tax – 6% Individual income – 20% to 35%
Rates Applicable Donor’s Tax
– 6% in excess of 250,000 pesos
Exemptions Lesser exemptions More exemptions

Estate Tax vs. Donor’s Tax

ESTATE TAX DONOR’S TAX

Upon death of decedent (mortis causa) During the lifetime of the donor (inter
Transfer takes place between natural vivos)
Nature of transfer
persons only Transfer takes place between natural
and juridical persons
No more exemption; Repealed by the 250,000
Amount exempt
TRAIN Law
Rate of tax 6% uniform tax rate 6% uniform tax rate
Grant of exemption Sec. 87, NIRC Sec. 101, NIRC
Sec. 86, NIRC GR: None

XPN: Encumbrance on the property

Grant of deductions donated, if assumed by the donee and
amount specifically provided by the
donor as a diminution of the property
donated may be claimed as deduction
GR: Notice of donation is not required

Notice of death to the Commissioner not
required anymore as repealed by TRAIN
Law
Notice requirement
XPNs:
1. Donations to NGO worth at least
P50,000. Provided, not more than
30% of which will be used for
administration purposes.
2. Donation to any candidate, political
party, or coalition of parties

NOTE: Notice is required in the given

exceptions in order for the donation to be
exempt from donor’s tax and to claim full
deduction of the donation given to
qualified donee.
Notice of death to the Commissioner, not
Notice, when filed
required
1. A transfer subject to estate tax A transfer subject to donor’s tax
2. Estate consists of registered or
Filing of return
registrable property, regardless of
value of gross estate

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187 FACULTY OF CIVIL LAW
 LAW ON TAXATION
ESTATE TAX
1. Value of the gross estate
2. Deductions under Sec. 86, NIRC
3. Other pertinent information
If Gross Estate exceeds P5M, certified by
a CPA as to assets, deductions, tax due,
Contents of return whether paid or not
Within 1 year from death of decedent,
except in meritorious cases where an
Time of filing
extension not exceeding 30 days is
Return
granted by the Commissioner. (Sec. 90,
NIRC)
Payment of tax due Pay as you file
GR: Extension of payment is not allowed
DONOR’S TAX
1. Each gift made during the calendar
year which is to be included in
computing net gifts
2. The deductions claimed and
allowable
3. Any previous net gifts made during
the same calendar year
4. The name of the donee
Such further information as may be
required by rules and regulations made
pursuant to law.
Within 30 days after donation was
made. No extension allowed.
Pay as you file
None

XPN: When it would impose undue

hardship upon the estate or any of the
heirs, extension may be allowed but not to
exceed 5 years in case of judicial
settlement or 2 years in case of extra-
judicial settlement.

Payment by Installment – if the available

Extension of cash of the estate is insufficient to pay the
payment tax due, payment by installment shall be
allowed within two (2) years from when it
should be paid without penalty and
interest.

XPNs to the XPN: When taxpayer is guilty

of:
1. Negligence
2. Intentional disregard of rules and
regulation
4. Fraud
Requirement for Bond not exceeding double the amount of
grant of extension the tax and with such sureties as the
of payment Commissioner deems necessary

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 TRANSFER TAX – ESTATE TAX

Q: Are donations inter vivos and donations A: YES, it is in the nature of a tax exemption. Settled
mortis causa subject to estate tax? (1994 Bar) is the rule that the power to tax includes the power
to grant an exemption.
A: GR: Donations inter vivos are subject to donor's
tax while donations mortis causa are subject to NATURE, PURPOSE AND OBJECT
estate tax.
Nature of estate tax
XPN: If the transferor's control over the
property donated inter vivos extends up to the It is not a tax on property because their imposition
death of the donor, such transfers in does not rest upon general ownership but rather
contemplation of death, revocable transfers, are they are privilege tax since they are imposed on the
subject to estate taxes. act of passing ownership of property (Domondon,
2009).
ESTATE TAX
Characteristics of estate tax [TANG-DEP]
BASIC PRINCIPLES, CONCEPT AND DEFINITION
1. It is a transfer tax.
Estate tax is an excise tax imposed upon the 2. It is an ad valorem tax.
privilege of transmitting property at the time of 3. It is a national tax.
death and on the privilege that a person is given in 4. It is a general tax.
controlling to a certain extent the disposition of his 5. It is a direct tax.
property to take effect upon death. Estate tax laws 6. It is an excise tax.
rest in their essence upon the principle that death
is the generating source from which the taxing Requisites for imposition of estate tax [DAD]
power takes its being, and that it is the power to
transmit or the transmission from the dead to the 1. Death of decedent
living on which the tax is more immediately based 2. Successor is alive at the time of decedent’s
(Lorenzo v. Posadas, 64 Phil 353). death
3. Successor is not disqualified to inherit
Inheritance tax is a tax imposed on the legal right
or privilege to succeed to, receive or take property Purpose and object of estate tax
by or under a will, intestacy law, or deed, grant or
gift becoming operative at or after the death 1. To generate additional revenue for the
(Lorenzo vs. Posadas, 64 Phil. 353). government
2. To compensate the government for the
NOTE: Presently, there is no inheritance tax protection given to the decedent that enabled
imposed by law. P.D. No. 69 passed on November him to prosper and accumulate wealth.
24, 1972, effective January 1, 1973, abolished the 3. Remove the disparity in the tax treatment of a
inheritance tax for failure to meet one of the sale and transfer by death.
requisites of a sound tax system, which is
administrative feasibility. NOTE: Generally, the purpose of the estate tax is to
tax the shifting of economic benefits and enjoyment
Estate planning is the manner by which a person of property from the dead to the living.
takes step to conserve the property to be
transmitted to his heirs by decreasing the amount Theories on the purposes of estate tax
of estate taxes to be paid upon his death.
It is based on the power of the
It is considered as lawful because, “the legal right of Benefits- State to demand and receive taxes
a taxpayer to decrease the amount of what protection on the reciprocal duties of support
otherwise would be his taxes or altogether avoid and protection.
them by means which the law permits, cannot be The State, as a passive and silent
doubted” (Delpher Trades Corporation v. IAC, et al. Privilege or partner in the privilege of
G.R. No. 73584, January 28, 1988). State- accumulating property, has the
partnership right to collect the share which is
Q: A law was passed by Congress abolishing properly due it.
estate tax. Is the law valid? The receipt of inheritance is in the
Ability to Pay nature of unearned wealth which
creates the ability to pay the tax

UNIVERSITY OF SANTO TOMAS

189 FACULTY OF CIVIL LAW
 LAW ON TAXATION
The receipt of inheritance
contributes to the widening
inequalities in wealth. Through
Redistributio
estate tax, the value received by
n of wealth
the successor is reduced and
brings said value into the coffers
of the government.
or intangible, wherever situated: Provided,
however, That in the case of a nonresident
decedent who at the time of his death was not a
citizen of the Philippines, only that part of the entire
gross estate which is situated in the Philippines
shall be included in his taxable estate (Sec. 86,
TRAIN Law).

TIME AND TRANSFER OF PROPERTIES Gross estate based on citizenship and residency

The properties and rights are transferred to the Decedent Gross Estate
successors at the time of death(Art. 777, Civil Code). All properties, real or personal,
wherever situated
The statute in force at the time of death of the RC, RA
Intangible personal property
decedent governs the imposition of the estate tax.
wherever situated
Estate tax accrues at the time of death of decedent. Real property situated in the
As such, succession takes place and the right of the Philippines
state to tax vests instantly. The tax is to be Tangible personal property
NRA
measured by the value of the estate as it stood at situated in the Philippines
the time of the decedent’s death regardless of any Intangible personal property
postponement of actual possession or any
subsequent increase or decrease in value (Lorenzo All properties, real or personal
v. Posadas, 64 Phil 353). situated in the Philippines
Tangible personal property
CLASSIFICATION OF DECEDENT NRC located in the Philippines
Intangible personal property
Individuals liable to pay estate tax:
situated in the Philippines (Sec.
1. Resident citizens (RC)
2. Non-resident citizens (NRC) 86, R.A. 10963)
3. Resident alien (RA) (R.A. 10963)
4. Non-resident alien (NRA)
Q: Is there a need to disclose properties outside
NOTE: Only natural persons can be held liable for the Philippines?
estate tax. Domestic and foreign corporations
cannot be liable because they are not capable of A: YES, whether resident or non-resident. A
death. resident decedent is taxed on properties within or
without. On the other hand, while a non-resident
GROSS ESTATE AND NET ESTATE decedent is taxed only on properties within the
Philippines, it is a requirement that his estate tax
Gross Estate Net Estate return should disclose the value of his gross estate
The total value of all The value of the gross outside the Philippines in order to avail of the
property, real or estate since it is taxed allowable deductions (Sec. 86 (D), NIRC).
personal, tangible or at a flat rate.
intangible, the actual Intangible personal property deemed situated
and beneficial in the Philippines
ownership of which
was in the decedent at 1. Franchise which must be exercised in the
the time of his death Philippines;
(Sec. 85, NIRC). 2. Shares, obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance
DETERMINATION OF GROSS AND NET ESTATE
with its laws; (domestic corporation)
3. Shares, obligations or bonds by any foreign
Determination of gross estate
corporation 85% of its business is located in
the Philippines;
The value of the gross estate of the decedent shall
4. Shares, obligations or bonds issued by any
be determined by including the value at the time of
foreign corporation if such shares, obligations
his death of all property, real or personal, tangible

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190
 TRANSFER TAX – ESTATE TAX
or bonds have acquired a business situs in the
Philippines;
5. Shares or rights in any partnership, business or
industry established in the Philippines (Sec.
104, NIRC).
NOTE: These intangible personal properties are in
effect exceptions to the Latin maxim of mobilia
sequuntur personam. This enumeration is
significant only for non-resident alien because they
are the only set of taxpayers where the situs of the
property is considered in determining whether
their property shall form part of the gross estate or
not.
Q: When shall intangible personal properties of
a nonresident alien be excluded from the gross
estate?
A: Said properties shall be excluded on the basis of
reciprocity. No donor’s or estate tax shall be
collected in respect of intangible personal
property:
1. Total exemption
– If the decedent at the time of his death or the
donor at the time of the donation was a citizen
and resident of a foreign country which at the
time of his death or donation did not impose a
transfer tax of any character, in respect of
intangible personal property of citizens of the
Philippines not residing in that foreign country,
or
2. Partial exemption
– If the laws of the foreign country of which the
decedent or donor was a citizen and resident at
the time of his death or donation allows a
similar exemption from transfer or death taxes
of every character or description in respect of
intangible personal property owned by citizens
of the Philippines not residing in that foreign
country (Sec. 104, NIRC).
NOTE: Reciprocity in exemption does not require
the “foreign country” to possess international
personality in the traditional sense (i.e., compliance
with the requisites of statehood). Thus, Tangier,
Morocco (Collector v. Campos-Rueda, 42 SCRA 23)
and California, a state in the American Union
(Collector v. de Lara, 102 Phil 813) were held to be
foreign countries within the meaning of Section
104.
Q: For purposes of estate and donor’s tax, do we
adhere to mobilias equuntur personam?
A: NO.
191
GR: The situs of an intangible property is
determined by the domicile or residence of the
owner. This is known as the principle of “mobilia
sequuntur personam.”
XPN: The principle is not controlling
a) when it is inconsistent with the express
provisions of statute, or
b) When justice does not demand that it should
be, as when the property has in fact a situs
elsewhere (Mamalateo, 2014).
Q: Will shares of stock issued by a foreign
corporation in favor of a non-resident form part
of the gross estate?
A: YES, if 85% of the business of the foreign
corporation who issued the stocks is located in the
Philippines or if it is considered to have obtained
business situs in the Philippines (Section 104,
NIRC).
Instances where amount of the gross estate is
significant
1. Estate tax returns showing a gross value
exceeding Two million pesos (P5,000,000) shall
be supported with a statement duly certified to
by a Certified Public Accountant containing the
following:
a. Itemized assets of the decedent with their
corresponding gross value at the time of his
death, or in the case of a nonresident, not a
citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
b. Itemized deductions from gross estate
allowed in Section 86; and
c. The amount of tax due whether paid or still
due and outstanding (Sec. 90 [A], NIRC).
2. The value of the gross estate not situated in the
Philippines of a decedent who is a nonresident
alien must be included in the estate tax return
in order to be allowed to claim deductions
(Sec.86[D], NIRC).
Basis for the valuation of gross estate
PROPERTY VALUATION
Whichever is higher between the:
1. Fair market value as determined
by the Commissioner (zonal
Real
property value) or
2. Fair market value as shown in the
schedule of values fixed by the
provincial and city assessors
If there is an improvement, the value
of improvement is the construction
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
cost per building permit or the fair
market value per latest tax
declaration
Fair market values is the price at
which any seller will sell and any
buyer will buy both willingly without
any force or intimidation. It is the
price which a property will bring
when it is offered by one who desires
to buy and one who is not compelled
to sell.
Personal Whether tangible or intangible,
property appraised at FMV. “Sentimental
value” is practically disregarded.
Unlisted
1. Unlisted common - book value
2. Unlisted preferred - par value
Shares of
stock Listed – Closing rate AT THE TIME of
death. If none is available, the FMV is
the arithmetic mean between the
highest and lowest quotation at a date
nearest the date of death.
In determining the book value of
common shares, the following shall
not be considered:
1 . Appraisal surplus
2 . The value assigned to preferred
shares, if there is any
Right to Shall be taken into account the
usufruct, probable life of the beneficiary in
use or accordance with the latest basic
habitation, standard mortality table, to be
as well as approved by the Secretary of Finance,
that of upon recommendation of the
annuity Insurance Commissioner.
Determination of net estate
Q: How is the net estate determined?
A: The same rule as the gross estate and afterwards
subtracting the allowable deductions from the
gross estate.
NOTE: Before you can arrive at the value of the net
estate, you have to determine first the value of
gross estate.
Q: Tong Siok, a Chinese billionaire and a
Canadian resident, died and left assets in China
valued at P80 billion and in the Philippines
assets valued at P20 billion. For Philippine
estate tax purposes the allowable deductions
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2019 GOLDEN NOTES
192
for expenses, losses, indebtedness, and taxes,
property previously taxed, transfers for public
use, and the share of his surviving spouse in
their conjugal partnership amounted to P15
billion. Tong's gross estate for Philippine estate
tax purposes is? (2011 Bar)
A: P20 billion. Being a non-resident alien, the estate
tax to be paid will be based on his properties
situated in the Philippines. The deductions are not
included since the question pertains to gross estate,
not the net estate.
NOTE: Gross estate tax isadding all those included
and deducting the exclusions while net estate is
arrived at after subtracting the allowable
deductions from the gross estate.
Estate tax formula:
GROSS ESTATE
(Less) 1. Deductions
2. Net share of surviving spouse
__________________________________________________________
NET ESTATE
(Multiply) Tax rate
__________________________________________________________
ESTATE TAX DUE
(Less) Tax credit, if any
ESTATE TAX DUE AND PAYABLE
ITEMS TO BE INCLUDED IN THE GROSS ESTATE
[DIGRI-PLS]
1. Decedent's interest
2. Transfer in contemplation of death
3. Revocable transfer
4. Property under general power of
appointment
5. Proceeds of life insurance
6. Prior interests
7. Transfers for insufficient consideration
8. Share of the Surviving Spouse (Sec 85,
NIRC)
NOTE: Nos. 2, 3, 4 and 7are properties not
physically in the estate (these have already been
transferred during the lifetime of the decedent but
are still subject to payment of estate tax). Although
these properties are inter vivos in form, they are
treated as mortis causa in substance. Note that
transfers made for a bona fide consideration shall
not be included in the gross estate.
Items above are discussed in detail below.
Decedent’s interest
 TRANSFER TAX – ESTATE TAX
This refers to the extent of equity or ownership
participation of the decedent on any property
physically existing and present in the gross estate,
whether or not in his possession, control or
dominion. It also refers to the value of any interest
in property owned or possessed by the decedent at
the time of his death (Tabag, 2015).
The decedent’s interest includes any interest
including its fruits, having value or capable of being
valued, transferred by the decedent at his death.
Rental income from buildings and dividends from
investments, interest on bank deposits which have
accrued at the time of his death qualify as
decedent’s interest which should be included in the
gross estate.
Q: Jose Ortiz owns 100 hectares of agricultural
land planted with coconut trees. He died on May
30, 1994. Prior to his death, the government, by
operation of law, acquired under the
Comprehensive Agrarian Reform Law all his
agricultural lands except 5 hectares. Upon the
death of Ortiz, his widow asked you how she will
consider the 100 hectares of agricultural land
in the preparation of the estate tax return. What
advice will you give her? (1994 Bar)
A: The 100 hectares of land that Jose Ortiz owned
but which prior to his death on May 30, 1994 were
acquired by the government under CARP are no
longer part of his taxable gross estate, with the
exception of the remaining 5 hectares which under
Sec. 78(a) of the NIRC still forms part of "decedent's
interest".
Q: Is 13th month pay included in the gross
estate? How about Christmas bonus?
A: Both 13th month pay and Christmas bonus are
not included in the gross estate as these are subject
to income tax. Moreover, these are not income of
the estate as they were earned while the decedent
was still alive.
Q: If the decedent is a partner in a partnership,
will his interest in the partnership considered
as part of his gross estate?
A: YES. The decedent’s interest in the partnership
at the time of his death shall form as part of his
gross estate. His contributions and his share in the
partnership’s profits and surplus shall be included
in his gross estate.
Transfer in contemplation of death
193
It is a transfer motivated by the thought of an
impending death regardless of whether or not
death is imminent.
This takes place:
1. When the decedent has, at any time, made a
transfer in contemplation of or intended to take
effect in possession or enjoyment at or after
death; or
2. When decedent has, at any time, made a transfer
under which he has retained for his life or for a
period not ascertainable without reference to
his death or any period which does not in fact
end before his death:
a. Possession, enjoyment or right to income
from the property; or
b. The right, either alone or in conjunction with
any other person, to designate the person
who will possess or enjoy the property or
income therefrom.
XPN: In case of a bona fide sale for an adequate and
full consideration in money or money’s worth.
NOTE: The concept of transfer does not constitute
any transfers made by a dying person. It is not the
mere transfer that constitutes a transfer in
contemplation of death but the retention of some
type of control over the property transferred. In
effect, there is no full transfer of all interests in the
property inter vivos.
5 instances which constitutes transfer in
contemplation of death according to Prof.
Thomas Matic
1. Secondary Life Estate – Retention by the grantor
for life of the right to enjoy the income or the
fruits of the property transferred in trust
constitute what is called reservation of a
primary life estate. There is no question in this
case that the property would be included in the
gross estate of the grantor upon his death.
Illustration:
A creates a trust to pay the income to himself for
life, remainder to B or his estate.
Since enjoyment of the property remains, in A,
the transferor, throughout his lifetime, the value
of the entire property is included in A’s estate at
death.
2. Interests Analogous to Life Estates – where the
decedent had transferred certain shares of stock
to his daughter “subject to your giving me the
first dividends on these P15,000,” and part of
the P15,000 was still unpaid when the decedent
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
died, it was held that the entire value of the
securities was properly included in the
decedent’s gross estate since he had retained
the income for a period which did not in fact end
before his death.
3. Discharging Legal obligation to transferor – a
transfer with the right retained to have the
income used to discharge a legal obligation of
the transferor or otherwise for his pecuniary
benefit is equivalent to a reservation of the right
to the income. Thus, where a man created a trust
with the provision that the income should be
paid to his life for her “support and
maintenance”, remainder to their children, it
was held that the property was includible in his
gross estate. But there is no inclusion required if
the grantor’s dependent is free to use the
income for any purpose without restriction, the
reason being that inclusion is required only
where the transfer relieves the grantor of his
duty to support.
4. Right Retained Alone or with another to
designate who shall enjoy property or income
therefrom
The situation contemplated here usually occurs
when the settlor or grantor designates himself
as trustee or co-trustee with another.
5. Retention of Power to distribute or accumulate
trust income – where the grantor, either alone
as trustee or as co-trustee with others, reserved
the power to accumulate or distribute income
and exercised such power by accumulating and
adding income to principal and this power he
held until the moment of his death with respect
to both the original principal as well as the
accumulated income, this requires the inclusion
in the decedent settlor’s gross estate.
NOTE: A bona fide sale for an adequate and full
consideration in money or in money’s worth is a
transfer not considered in contemplation of death
and not part of the gross estate.
Q: Mr. Agustin, 75 years old and suffering from
an incurable disease, decided to sell for
valuable and sufficient consideration a house
and lot to his son. He died one year later.
In the settlement of Mr. Agustin's estate, the BIR
argued that the house and lot were transferred
in contemplation of death and should therefore
form part of the gross estate for estate tax
purposes. Is the BIR correct? (2013 Bar)
A: The BIR is not correct. Pursuant to Section
85(B) of the NIRC, properties that are transferred
in contemplation of death form part of the gross
estate of the decedent. An exception to this is a bona
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
fide sale for an adequate and full consideration in
money. Therefore, the house and lot which Mr.
Agustin sold to his son for a valuable and sufficient
consideration should not be considered as forming
part of Mr. Agustin’s gross estate.
Q: A, aged 90 years and suffering from incurable
cancer, on August 1, 2001 wrote a will and, on
the same day, made several inter-vivos gifts to
his children. Ten days later, he died. In your
opinion, are the inter-vivos gifts considered
transfers in contemplation of death for
purposes of determining properties to be
included in his gross estate? (2001 Bar)
A: Yes. When the donor makes his will within a
short time of, or simultaneously with, the making of
gifts, the gifts are considered as having been made
in contemplation of death (Roces v. Posadas, 58 Phil.
108). Obviously, the intention of the donor in
making the inter-vivos gifts is to avoid the
imposition of the estate tax and since the donees
are likewise his forced heirs who are called upon to
– inherit, it will create a presumption juris tantum
that said donations were made mortis causa, hence,
the properties donated shall be included as part of
A's gross estate.
Circumstances to consider in determining that
the transfer is in contemplation of death:
1. Age of the decedent at the time the transfers
were made
2. Decedent’s health, as he knew it at or before the
time of the transfers
3. The interval between the transfers and the
decedent’s death
4. The amount of property transferred in
proportion to the amount of property retained
5. The nature and disposition of the decedent
6. The existence of a general testamentary
scheme of which the transfers were a part
7. The relationship of the donee(s) to the
decedent
8. The existence of a desire on the part of the
decedent to escape the burden of managing
property by transferring the property to others
9. The existence of a long established gift-making
policy on the part of the decedent
10. The existence of a desire on the part of the
decedent to vicariously enjoy the enjoyment of
the donees for the property transferred
11. The existence of the desire by the decedent of
avoiding estate taxes by means of making inter
vivos transfers of property (Estate of Oliver
Johnson v. Commissioner, 10 T.C. 680)
194
 TRANSFER TAX – ESTATE TAX
12. Concurrent making of will or making a will
within a short time after the transfer (Roces v.
Posadas, 58 Phil. 108).
Motives which negate transfer in contemplation
of death:
1. To relieve the donor from the burden of
management
2. To save income taxes or property taxes
3. To settle family litigated and unlitigated
disputes
4. To provide independent income for
dependents
5. To see the children enjoy the property while
while the donor is alive
6. To protect family from hazards of business
operations
7. To reward services rendered
Q: On April 9, 1928, Felix Dison made a gift inter
vivos, transferring 22 tracts of land, in favor of
his son Luis Dizon. Luis formally accepted the
donation in writing on April 17 and such
acceptance was acknowledged before a notary
public on April 20, 1928. On April 21, 1928,
Felix Dison died. Is the donation inter vivosor
mortis causa?
A: The transfer is inter vivos in form but mortis
causa in substance; it is a transfer in contemplation
of death (Dison v. Posadas, 57 Phil. 465).
Q: On March 10 and 12, 1925, Esperanza
Tuazon, by means of public documents, donated
certain parcels of land situated in Manila to
Concepcion and Elvira, who accepted the same.
On January 5, 1926, the donor died without any
forced heir and in her will which was admitted
to probate, she bequeathed to each of the said
donees the sum of P5,000. After the estate had
been distributed among the instituted legatees
and before delivery of their respective shares,
the appellee herein, as CIR, ruled that the
appellants, as donees and legatees, should pay
as deficiency inheritance tax. Are these
donations mortis causa, thus should be
included as part of the gross estate?
A: YES. These donations are inter vivosbut made in
contemplation of death, thus, considered as
donation mortis causa. The concurrent making of a
will or making a will within a short time after the
transfer shows clearly the intention of the donor in
making the said donations inter vivos in order to
avoid imposition of estate tax. We refer to the
allegations that such transmissions were effected
in the month of March, 1925, that the donor died in
195
January, 1926, and that the donees were instituted
legatees in the donor's will which was admitted to
probate. It is from these allegations, especially the
last, that we infer a presumption juris tantum that
said donations were made mortis causa(Roces v.
Posadas, 58 Phil. 108).
Revocable transfer
It is a transfer by trust or otherwise, where the
enjoyment thereof was subject at the date of his
death to any change through the exercise of a power
to alter or amend or revoke or terminate such
transfer by:
1. Decedent alone;
2. By the decedent in conjunction with any other
person (without regard to when or from what
source the decedent acquired such power), to
alter, amend, revoke or terminate; or
3. Where any such power is relinquished in
contemplation of the decedent’s death other
than a bone fide sale for an adequate and full
consideration in money or money’s worth
(Sec. 85(C)(1), NIRC).
Power to alter, amend or revoke considered to
exist on the date of decedent’s death even
though:
1. The exercise of the power is subject to a
precedent giving of notice; or
2. The alteration, amendment or revocation
takes effect only on the expiration of a stated
period for the exercise of the power, whether
or not on or before the date of the decedent’s
death
a. Notice has been given
b. The power has been exercised.
In such cases, proper adjustment shall be made
representing the interest which would have been
excluded from the power if the decedent had lived,
and for such purpose if notice has not been given or
the power has not been exercised on or before the
date of his death, such notice shall be considered to
have been given, or the power exercised on the date
of his death (Sec. 85(C)(2), NIRC).
NOTE: Revocable transfer is part of the gross estate
of the decedent because the transferor can revoke
the transfer any time, such person wields
tremendous amount of power such that he can
revoke the transfer as if none was actually made.
Q: Is it necessary that the decedent should have
exercised such right?
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
A: GR: No. It is sufficient that the decedent has the General Power of Appointment (GPA) vs.
power to revoke, though he did not exercise such Special Power of Appointment (SPA)
power.
GPA SPA
XPN: In case of a bona fide sale for an adequate and Donee appoints
full consideration in money and money’s worth. Donee has the
successor to the
power to appoint
As to property within a
Transfer not revocable, thereby not subject to any person he
nature limited group or
estate tax when: chooses or enjoy
class of persons
the property
according to the
1. The decedent’s power could only be exercised without restriction
will of the donor
with the consent of all parties having an Makes appointed
interest in the transferred property and if the property, for all
power adds nothing to the rights the parties Not includible in
As to intents, the
possess under local law (Lober v. United States, the gross estate of
tax property of the
346 US 335). the donee when he
implica donee; thus, forms
2. When the decedent has been completely dies
-tions part of the gross
divested of the power at the time of his death estate
(ibid.) Donee holds the
3. Where the exercise of the power by the Donee holds the
appointed property
decedent was subject to a contingency beyond appointed
As to with all the
the decedent’s control which did not occur property in trust
effects attributes of
before his death (Hurd v. Commissioner or under the
ownership under
160F(2)610). concept of a
the concept of an
4. The mere right to name trustees. Neither is the trustee
owner
grantor’s limited power to appoint himself as
trustee under conditions which did not exist at Properties passing under a GPA forms part of
his death (24 Am Jur. 2d, p 790). decedent’s estate through:

Q: Mr. Mayuga donated his residential house 1. Will

and lot to his son and duly paid the donor's tax.
In the Deed of Donation, Mr. Mayuga expressly
reserved for himself the usufruct over the
property for as long as he lived. Describe the
donated property from the taxation
perspective. (2013 Bar)
A: The property will form part of Mr. Mayuga's
gross estate when he dies. Applying Section
85(B)(1) of the NIRC, the donated property will still
form part of the gross estate of the decedent when
in the deed of donation, the donor “has retained for
his life or for any period which does not in fact end
before his death the possession or enjoyment of, or
the right to the income from the property.”
Therefore, the property will form part of Mr.
Mayuga’s gross estate when he dies because he
donated the property in contemplation of death.
Property under General Power of Attorney
2. Deed executed in contemplation of death, or
intended to take effect in possession or
enjoyment at, or after his death
3. Deed under which he has retained for his life or
for any period not ascertainable without
reference to his death or for any period which
does not in fact end before his death:
a. The possession, enjoyment or right to
income from the property; or
b. The right to designate the person who will
possess or enjoy the property or income
therefrom (Sec. 85[D], NIRC).
Q: What is the reason for inclusion of the said
property in the donee’s gross estate?
A: The power of the donee to dispose the said
property through power of appointment is
equivalent to an act of dominion, which is an
essential attribute of ownership.

It is the right to designate by will or deed, without
restrictions, the persons who shall succeed to the
property of the prior decedent. The appointment
could be in favor of anybody, including himself, his
estate, his creditors, or the creditors of his estate.
Q: What properties passing under GPA are not
included as part of a decedent’s gross estate?
A: Those properties transferred under a bona fide
sale for an adequate and full consideration in
money or money’s worth.

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
196
 TRANSFER TAX – ESTATE TAX
Q: In his last will and testament, X bequeathed a
painting to his only son, Z. The will also granted
Z the power to appoint his wife, W, as successor
to the painting in the event of Z’s death. Z died
and W succeeded to the property. Should the
painting be included in the gross estate of Z and
thus be subject to estate tax? (2009 Bar)
A: NO. Only property passing under a general
power of appointment is included in the gross
estate of the decedent. In this case, the painting has
to be transferred by Z only to his wife, W, based on
the will of his father, X. Since the power of
appointment is specific (i.e., only to his wife), such
property should not be included in his gross estate.
Transfer in contemplation of death vs. property
passing under general power of attorney
TRANSFER IN
GENERAL POWER
CONTEMPLA-
OF APPOINTMENT
TION OF DEATH
For his life or any
period not
ascertainable w/o
Effecti At or after death reference to his death
-vity or for any period
which does not in fact
end before his death
Property passed
By trust or
Means under GPA and by
otherwise
will or by deed
Proceeds of life insurance
Proceeds of life insurance forms part of the gross
estate when the beneficiary is:
1. The estate of the decedent, his executor or
administrator taken out by the decedentupon
his own life regardless of whether the
designation is revocable or irrevocable; or
2. A third person, other than the decedent’s
estate, executor, or administrator provided
that the designation is not irrevocable
NOTE: Under the Insurance Code, in the absence of
an express designation, the presumption is that the
beneficiary is revocably designated.
Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his
lifetime, the designation shall be deemed
irrevocable (Sec. 11, R.A. 10607).
Not part of the gross estate when:
a. Proceeds from a life insurance policy is
receivable by a 3rd person (NOT the decedent’s
197
estate, executor or administrator) AND that the
said beneficiary is designated as irrevocable;
b. Where the life insurance was not taken by the
decedent upon his own life even though the
beneficiary is the decedent’s estate, executor, or
administrator;
c. Accident insurance proceeds. NIRC specifically
mentions only life insurance policies;
d. Proceeds of a group insurance policy taken out
by a company for its employees;
e. Proceeds of insurance policies issued by the
GSIS to government officials and employees are
exempt from all taxes;
f. Benefits accruing from SSS law;
g. Proceeds of life insurance payable to heirs of
deceased members of military personnel.
To determine the conjugal or separate
character of proceeds, the following factors are
considered:
1. Policy taken before marriage
– Source of funds determines ownership of the
proceeds of life insurance
2. Policy taken during marriage
a. Beneficiary is estate of the insured
– Proceeds are presumed conjugal; hence,
one-half share of the surviving spouse is
not taxable
b. Beneficiary is third person
– Proceeds are payable to beneficiary even
in premiums were paid out of the conjugal
Q: What if the beneficiary who was irrevocably
designated caused the death of the insured?
A: It is considered revocable unless he acted in self-
defense.
NOTE: The interest of a beneficiary in a life
insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death of
the insured. In such a case, the share forfeited shall
pass on to the other beneficiaries, unless otherwise
disqualified. In the absence of other beneficiaries,
the proceeds shall be paid in accordance with the
policy contract. If the policy contract is silent, the
proceeds shall be paid to the estate of the insured
(Sec. 12, Insurance Code as amended by R.A. 10607,
August 15, 2013).
Q: Suppose an employer takes a life insurance
policy on the life of an employee where the
employer is designated as the beneficiary, what
are its tax implications?
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
A: The premiums paid by the employer will not be
deductible from its employer’s gross income (Sec.
36 [A][4], NIRC). On the part of the employee, it will
not be included in his/her gross income of the
based on Sec. 32(B)(1), NIRC. However, the life
insurance proceeds will form part of the gross
estate of the decedent employee if his designation
is revocable. Conversely, if the designation is
irrevocable, it will not form part of his gross estate.
Q: Ralph Donald, an American citizen, was a top
executive of a U.S company in the Philippines
until he retired in 1999. He came to like the
Philippines so much that following his
retirement, he decided to spend the rest of his
life in the country. He applied for and was
granted permanent resident status the
following year. In the spring of 2004, while
vacationing in Orlando Florida USA, he suffered
a heart attack and died. At the time of his death
he left the following properties:
a. Bank deposits with Citibank Makati and
Citibank Orlando Florida;
b. Rest house in Orlando, Florida;
c. A condominium unit in Makati;
d. Shares of stock in the Phil subsidiary of the
U.S company where he worked;
e. Shares of stock in San Miguel Corporation
and PLDT
f. Shares of stock in Disney World in Florida
g. U.S treasury bonds
h. Proceeds from a life insurance policy
issued by a US corporation.
Which of the foregoing assets shall be included
in the taxable gross estate in the Philippines?
Explain. (2005 Bar)
A: All of the properties enumerated except (h), the
proceeds from life insurance, are included in the
taxable gross estate in the Philippines. Ralph
Donald is considered a resident alien for tax
purposes since he is an American citizen and was a
permanent resident of the Philippines at the time of
his death. The value of the gross estate of a resident
alien decedent shall be determined by including the
value at the time of his death of all property, real or
personal, tangible or intangible, wherever situated
(Sec. 85, NIRC).
The other item, (h) proceeds from a life insurance
policy, may be included in his gross estate only
when it was Ralph Donald who took out the
insurance upon his own life, payable upon his death
to his estate, or when the beneficiary is a third
person other than his estate who is not designated
as an irrevocable beneficiary (Sec. 85[E], NIRC).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
198
Q: If the property insured was destroyed after
the taxpayer’s death, will insurance money still
form part of the gross estate?
A: NO, it will be considered as a receivable of the
estate.
Q: Antonia Santos, 30 years old, gainfully
employed, is the sister of Eduardo Santos. She
died in an airplane crash. Edgardo is a lawyer
and he negotiated with the airline company and
insurance company and they were able to agree
to settlement of P10 million. This is what
Antonia would have earned as somebody who
was gainfully employed. Edgardo was her only
heir.
a. Is the P10 million subject to estate tax?
b. Should Edgardo report the 10 million as
his income being Antonia’s only heir?
(2007 Bar)
A:
a. NO. The estate tax is a tax on the privilege
enjoyed by an individual in controlling the
disposition of her properties to take effect
upon her death. The P10 million is not a
property existing at the time of the decedent’s
death; hence it cannot be said that she
exercised control over its disposition. Since the
privilege to transmit property is not exercised
by the decedent, the estate tax cannot be
imposed thereon.
b. NO. The amount received in a settlement
agreement with the airline company and
insurance company is an amount received from
the accident insurance covering the passenger
of the airline company and is in the nature of
compensation for personal injuries and for
damages sustained on account of such injuries,
which is excluded from the gross income of the
recipient.
Q: On June 30, 2000, X took out a life insurance
policy on his own life in the amount of
P2,000,000. He designated his wife, Y, as
irrevocable beneficiary to P1,000,000 and his
son Z, to the balance of P1,000,000, but in the
latter designation, reserving his right to
substitute him for another.
On September 1, 2003 X died and his wife and
son went to the insurer to collect the proceeds
of X’s life insurance policy.
a. Are the proceeds of the insurance subject to
income tax on the part of Y and Z for their
respective shares? Explain.
 TRANSFER TAX – ESTATE TAX
b. Are the proceeds of the insurance to form
part of the gross estate of X? Explain. (2003
Bar)
A:
a. NO. The law explicitly provides that the
proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the
insured are excluded from gross income and is
exempt from taxation. The proceeds of life
insurance received upon the death of the
insured constitute a compensation for the loss
of life, hence a return of capital, which is
beyond the scope of income taxation (Sec. 32 B
(1), NIRC)
b. Only the proceeds of 1M given to the son, Z,
shall form part of the Gross Estate of X. Under
the NIRC, proceeds of life insurance shall form
part of the gross estate of the decedent to the
extent of the amount receivable by the
beneficiary designated in the policy of the
insurance except when it is expressly
stipulated that the designation of the
beneficiary is irrevocable. As stated in the
problem, only the designation of Y is
irrevocable while the insured/decedent
reserved the right to substitute Z as beneficiary
for another person. Accordingly, the proceeds
received by Y shall be excluded while the
proceeds received by Z shall be included in the
gross estate of X (Sec. 85(E), NIRC).
Prior interest
Prior Interest areall transfers, trusts, estates,
interests, rights, powers and relinquishment of
powers made, created, arising existing, exercised or
relinquished before or after the effectivity of the
NIRC (Sec. 85, NIRC).
Coverage of prior interest
1. Transfers in contemplation of death
2. Revocable transfers
3. Life insurance proceeds to the extent of the
amount receivable by the estate of the
deceased, executor or administrator under
policies taken out by the decedent upon his
own life or to the extent of the amount
receivable by any beneficiary not expressly
designated as irrevocable
Transfers for insufficient consideration
When a transfer is for insufficient consideration,
only the excess of the fair market value of the
property at the time of the decedent’s death over
199
the considerationreceived shall be included in the
gross estate.
This is applicable to:
1. Transfers in contemplation of death
2. Revocable transfers
3. Transfers under GPA
NOTE: The above transfers should be made for a
consideration in money/money’s worth but is not
abona fide sale for an adequate and full
consideration in money and money’s worth.
It is also subject to donor’s tax if there is no
reference to:
1. Revocable transfer
2. Contemplation of death
3. General power of appointment.
NOTE: It is subject to estate tax if the 3 instances
mentioned are present (Sec. 100 in rel. to Sec 85[B],
NIRC).
Q: What is the amount to be included in the
gross estate of the decedent? How about in net
gift in case of transfers for insufficient
consideration subject to donor’s tax?
A: Only the amount in excess of the fair market
value at the time of death over the consideration
received at the time of transfer. In case of transfers
for insufficient consideration subject to donor’s tax,
the amount of the net gift shall be the excess of the
fair market value at the time of transaction over the
consideration received.
Q: Mr. A knows that he is dying, therefore he
sold his car worth P500,000 to his only son for
P300,000. Mr. A died and at the time of his
death, the fair market value of his car is
P550,000. How much is to be included as part
of the gross estate? What if he is not dying and
indeed he is very much alive and kicking?
A: P250,000. This represents the excess of the
FMV at the time of his death which is P550,000 over
the consideration received on the amount of
P300,000.
On the second scenario, the insufficient
consideration shall not be considered as part of the
gross estate because the transfer does not fall
under any of the following: transfer in
contemplation of death, revocable transfer, or
property passing under general power of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
appointment. Hence, the difference of P200,000
(P500K-300K) is subject to gift tax.
Share of the surviving spouse
Q: Is the capital of the surviving spouse
considered part of the gross estate?
A: NO. The capital or paraphernal property of the
surviving spouse is not included in the computation
of the gross estate; it is actually a deduction from
the decedent’s gross estate in order to arrive at the
net estate.
Under Section 85 (H) of the NIRC capital pertains to
the property of the spouses brought into the
marriage. Under the Civil Law capital means
property brought by the husband to the marriage
while the properties brought into the marriage by
the wife is called paraphernal property.
Exclusive properties under the system of
absolute community of properties (ACP):
1. Property acquired during the marriage by
gratuitous title by either spouse, and the
fruits as well as the income thereof, if any,
unless it is expressly provided by the
donor, testator or grantor that they shall
form part of the community property;
2. Property for personal and exclusive use of
either spouse. However, jewelry shall form
part of the community property;
3. Property acquired before the marriage by
either spouse who has legitimate
descendants by a former marriage, and the
fruits as well as the income, if any, of such
property.
Exclusive properties under the system of
conjugal partnership of gains (CPG):
1. That which is brought to the marriage as
his or her own;
2. That which each acquires during the
marriage by gratuitous title (note that the
fruits and income of those acquired by
gratuitous title during marriage shall be
community property);
3. That which is acquired by right of
redemption, by barter or by exchange with
property belonging to only one of the
spouses; and
4. That which is purchased with exclusive
money of the wife or the husband. (Art.
109, Family Code).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
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Q: Can you apply Sec. 85 in separation of
property?
A: No, in that case, there will be no division.
DEDUCTIONS FROM ESTATE
The deductions from the gross estate are:
1. Ordinary deductions [VETS]
a. Expenses, losses, indebtedness, taxes, etc.
(ELIT)[JEF-TULI]
i. Claims against the estate
ii. Claims against insolvent persons
iii. Unpaid mortgage or indebtedness on
property
iv. Taxes
v. Losses
b. Vanishing deduction
c. Transfer for public use
d. Net share of the surviving spouse in the
community or conjugal property
2. Special deductions [FAMS]
a. Family home
b. Standard deduction
c. Amount received by heir under RA 4917
NOTE: NRA cannot avail of the special deductions.
Q: When is deduction not allowed from the
gross estate of NRA?
A: No deduction shall be allowed in the case of a
non- resident decedent not a citizen of the
Philippines, unless the executor, administrator, or
anyone of the heirs, as the case may be, includes in
the return required to be filed under Section 90 of
the Code the value at the time of the decedent’s
death of that part of his gross estate NOT situated
in the Philippines (Sec. 86 (D), NIRC; Sec 7, RR 2-
2003).
Enumerated deductions are discussed in detail
below.
Ordinary deductions
Expenses, losses, indebtedness and taxes (ELIT)
The difference in the treatment of ELIT as
deduction allowed to nonresident decedents is that
in the case of a nonresident not a citizen of the
Philippines, ELIT is allowed such proportion of the
deduction allowed to resident decedents which the
value of such part bears to the value of his entire
gross estate wherever situated
 TRANSFER TAX – ESTATE TAX
Formula for computing ELIT deductible from
the gross estate of NRA decedent
Philippine GE
Deductible
World GE World
X = ELIT from
ELIT
Gross
*GE=gross
Estate
estate
Claims against the estate
Claims are debts or demands of pecuniary nature
which could have been enforced against the
deceased in his lifetime and could have been
reduced to simple money judgments.
Sources of claims:[CTO]
1. Contract
2. Tort
3. Operation of law
Requisites for deductibility:
1. It must be a personal obligation of the deceased
existing at the time of his death except those
incurred incident to his death such as unpaid
funeral expenses and unpaid medical expenses
2. The liability was contracted in good faith and for
adequate and full consideration in money or
money’s worth
3. Debt or claim must be valid and enforceable in
court;
4. Indebtedness notcondoned by the creditor or
the action to collect from the decedent must not
have prescribed (R.R. 2-2003)
5. It must be duly substantiated
NOTE: Unpaid taxes such as income and real estate
taxes that have accrued after the death of the
decedent are not deductible from gross estate as
they are properly chargeable to the income of the
estate (Dela Vina v. Collector, 65 Phil. 620).
Q: BIR issued an Estate Tax Assessment Notice
demanding payment of the deficiency estate tax
against Jose Fernandez’s estate. The
administrator claims that in as much as the
valid claims of creditors against the estate are
in excess of the gross estate, no estate tax was
due.
May the actual claims of the creditors be fully
allowed as deductions from the gross estate of
Jose despite the fact that the claims were
reduced or condoned through compromise
agreements entered into by the estate with its
creditors?
201
A: YES. Under the date-of-death valuation rule,
claims existing at the time of death should be made
the basis of the determination of allowable
deductions. Thus, post-death developments, such
as condonotion in this case, are not material in
determining the amount of the deduction (Dizon, et.
al v. CA, G.R. No. 140944, April 30, 2008).
Who can avail this deduction:
This may be claimed as a deduction by a RC, NRC or
RA decedent provided that:
1. At the time the indebtedness was incurred the
debt instrument was duly notarized; and
2. If the loan was contracted within 3 years before
the death of the decedent, the administrator or
executor shall submit a statement showing the
disposition of the proceeds of the loan (Sec
86[A][1][c], NIRC).
Claims against insolvent persons
Requisites for deductibility:
1. The full amount of the receivables be included
first in the gross estate
2. The incapacity of the debtors to pay their
obligation is proven not merely alleged
NOTE: Judicial declaration of insolvency is not
necessary. It is enough that the debtor’s liabilities
exceeded his assets.
Unpaid mortgage or indebtedness on property
Requisites for deductibility:
1. The value of the property to the extent of the
decedent’s interest therein, undiminished by
such mortgage or indebtedness is included in
the gross estate
2. The mortgage indebtedness was contracted in
good faith and for an adequate and full
consideration in money or money’s worth
NOTE: In case unpaid mortgage payable is being
claimed by the estate, and the loan is found to be
merely an accommodation loan where the loan
proceeds went to another person, the value of the
unpaid loan, to the extent of the decedent’s interest
therein must be included as a receivable of the
estate.
If there is a legal impediment to recognize the same
as receivable of the estate, said unpaid
obligation/mortgage payable shall not be allowed
as a deduction from the gross estate (Section
86(A)(1))(e), NIRC).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Where the decedent owned only one-half of the Requisites for deductibility:
property mortgaged so that only one-half of its
value was included in his estate, only one-half of the A. Allowed as deductions from the gross estate of
mortgage debt was deductible, even though the RC, NRC and RA decedent provided that they:
executor paid the entire debt, the liability of the [DACIP]
decedent being solidary, inasmuch as the executor 1. Were incurred during the settlement of the
would be subrogated to the rights of the mortgagee estate
as against the co-owner and co-mortagagor(Parrot 2. Arise from fire, storm, shipwreck, or other
v. Commissioner, 279 U.S. 870). casualties, or from robbery, theft or
embezzlement
Q: During his lifetime, Mr. Sakitin obtained a 3. Not compensable (no insurance)
loan amounting to P10 million from Bangko 4. Not claimed as a deduction from income tax
Uno for the purchase of a parcel of land located 5. Incurred not later than the last day or any
in Makati City, using such property as collateral extension thereof for payment of the estate
for the loan. The loan was evidenced by a duly tax
notarized promissory note. Subsequently, Mr.
Sakitin died. At the time of his death, the unpaid B. Allowed as deductions from the gross estate
balance of the loan amounted to P2 million. The ofNRA decedent:
heirs of Mr. Sakitin deducted the amount of P2
million from the gross estate, as part of the The same items herein shall be allowed as
"Claims against the Estate." Such deduction was deduction but only the proportion of such
disallowed by the Bureau of Internal Revenue deductions which the value of his gross estate
(BIR) Examiner, claiming that the mortgaged in the Philippines bears to the value of his
property was not included in the computation entire gross estate, wherever situated shall be
of the gross estate. Do you agree with the BIR? deducted.
Explain. (2014 Bar)
Judicial expenses vs. losses
A: YES. Unpaid mortgages upon, or any
indebtedness with respect to property are JUDICIAL EXPENSES LOSSES
deductible from the gross estate only if the value of Allowed deductions Allowed deductions
the decedent’s interest in said property, include only those include those incurred
undiminished by such mortgage or indebtedness, is incurred not later up to the last day
included in the gross estate (Section 86(A)(1)(e)). than the last day prescribed by law or
prescribed by law or any extension thereof
In the instant case, the interest of the decedent in any extension thereof for the payment of
the property purchased from the loan where the for the filingof the estate tax
said property was used as collateral, was not return
included in the gross estate. Accordingly, the 6 months extendible 6 months extendible
unpaid balance of the loan at the time of Mr. to 30 days to:
Sakitin’s death is not deductible as “claims against 2 years
the estate.” (extrajudicial
settlement)
Taxes 5 years (judicial
settlement)
Requisites for deductibility:
NOTE: Casualty loss can be allowed as deduction in
1. Taxes which have accrued as of or before the one instance only, either for income tax purposes
death of the decedent or estate tax purposes.
2. Unpaid as of the time of his death
Vanishing deduction
Taxes NOT deductible:
Vanishing deduction is the deduction allowed on
1. Income tax on income received after death the property left behind by the decedent which was
2. Property tax not accrued before death previously subject to donor’s or estate taxes.
3. Estate tax due from the transmission of his
estate In property previously taxed, there are two (2)
transfers of property. Within a period of 5 years,
Losses the same property has been transferred from the

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
202
 TRANSFER TAX – ESTATE TAX

first to the second decedent or from a donor to the Vanishing deduction

decedent. In such case, the first transfer has been
subject to a transfer tax. The second transfer would Rules in vanishing deductions:
now be subject to a vanishing deduction.
1. The deduction allowed is only in the amount
Purpose finally determined as value of property in
determining the value of the gift, or the gross
To lessen the harsh effects of double taxation estate of prior decedent
2. Only to the extent that the value of such
Requisites for deductibility:[VIPED] property is included in decedent’s gross estate
1. Present decedent died within 5 years from 3. Only if in determining the value of the estate of
receipt of property from a prior decedent or the prior decedent, no deduction was allowed
donor for property previously taxed in respect of the
2. The property formed part of the gross estate property of properties given in exchange
situated in the Philippines of the prior decedent therefore
or was a taxable gift of the donor 4. Where a deduction was allowed of any mortgage
3. The estate tax on the prior succession or donor’s or lien in determining the gift tax, or the estate
tax must have been paid tax of the prior decedent, which were paid in
4. The property must be identified as the one whole or in part prior to the decedent’s death,
received or acquired then the deduction allowable for property
5. No vanishing deduction was allowed on the previously taxed shall be reduced by the amount
same property on the prior decedent’s estate so paid
5. Such deduction allowable shall be reduced by an
Rate of deduction amount which bears the same ratio to the
amounts allowable as deductions for expenses,
This depends on the period reckoned from date of losses, indebtedness, taxes and transfers for
transfer to death of the decedent enumerated public use as the amount otherwise deductible
below: for property previously taxed bears to the value
of the decedent’s estate
PERIOD DEDUCTION 6. Where the property referred to consists of two
1 day to 1 year 100% or more items, the aggregate value of such items
1 year and 1 day to 2 years 80% shall be used for the purpose of computing the
deduction
2 years and 1 day to 3 years 60%
3 years and 1 day to 4 years 40% Transfer for public use
4 years and 1 day to 5 years 20%
More than 5 years No deduction The amount of all bequests, legacies, devises or
allowed transfers to or for the use of the Government of the
Republic of the Philippines, or any political
Formula for computing vanishing deduction: subdivision thereof, for exclusively public
purposes.
Initial Basis (Value of property previously taxed)
LESS: Mortgage debt paid, if any (first deductions) Requisites for deductibility:
--------------------------------------------------------------
New Initial basis 1. The disposition is in a last will and testament
2. To take effect after death
New Initial Basis x (ELIT + Transfers for Public 3. In favor of the government of the Philippines or
Use) any political subdivision thereof
Gross Estate 4. For exclusive public purposes
--------------------------------------------------------------- 5. The value of the property given is included in
Second deduction the gross estate

New Initial basis NOTE: In case of a NRA decedent, the property

LESS: Second deduction
-------------------------------------
Basis for Vanishing Deduction
Multiplied by 100%, 80%, etc. (as the case may be)
-------------------------------------------------
transferred must be located within the Philippines
and included in the gross estate.
Government of Republic of the Philippines vs.
National Government

UNIVERSITY OF SANTO TOMAS

203 FACULTY OF CIVIL LAW
 LAW ON TAXATION
GOVERNMENT OF THE NATIONAL NOTE: Actual occupancy for the house and lot as
PHILIPPINES GOVERNMENT the family residence shall not be considered
Refers to the corporate Refers to the entire interrupted or abandoned in such cases as the
governmental entity machinery of the temporary absence from the constituted family
through which the central government, home due to travel or studies or work abroad, etc.
functions of government as distinguished The family home is generally characterized by
are exercised throughout from the different permanency, that is, the place to which, whenever
the Philippines, including, forms of local absent for business or pleasure, one still intends to
save as the contrary governments. The return (R.R. No. 2-2003).
appears from the context, National
the various arms through Government then is Requisites for deductibility:
which political authority is composed of the
made effective in the three great 1. The family home must be the actual residential
Philippines, whether departments: the home of the decedent and his family at the time
pertaining to the executive, legislative of his death, as certified by the Barangay Captain
autonomous regions, the and judicial (Mactan of the locality where the family home is situated
provincial, city, municipal, Cebu v. Marcos, G.R. 2. The total value of the family home must be
or barangay subdivisions, No. 120082, included as part of the gross estate
or other forms of local September 11, 1996). 3. Allowable deduction must be in the amount
government. equivalent to:
a. The current FMV of the family home as
Sec. 86(A)(3) vs. Sec. 87(D) of the NIRC: declared or included in the gross estate, or
b. The extent of the decedent’s interest
SEC. 86(A)(3) SEC. 87(D) (whether conjugal/community or exclusive
It contemplates transfers It contemplates property), whichever is lower
by a citizen or resident of transfers to social
the Philippines in favor welfare, cultural and 4. The deduction does not exceed P10,000,000
of the Government of the charitable institutions
Philippines or any which are NOTE: NRA decedents are not allowed to avail
political subdivision exemptedfrom estate family home deduction because they are expressly
thereof, for public tax. prohibited by the Constitution from acquiring
purpose which are lands.
deducted from the gross
estate For purposes of availing this deduction, a person
may constitute only one family home.
Net share of the surviving spouse
Standard deduction
The net share of the surviving spouse in the
conjugal partnership property as diminished by the The standard deduction shall be P5,000,000
obligations properly chargeable to such property without need of any substantiation (Sec. 86 (A)(1),
shall be deducted from the net estate of the R.A. 10963).
decedent (Sec. 86[C]).
Standard deduction (SD) vs. optional standard
Special deductions deduction (OSD)

Family home SD in OSD in

ESTATE TAX INCOME TAX
(Sec. 86 (Sec. 34 [L])
It is the dwelling house, including the land where it
[A][5])
is situated where the married person or an
unmarried head of the family and his family resides As to Deduction in Deduction in
nature addition to lieu of itemized
(Art. 152, Family Code).
the other deductions
It is deemed constituted on the house and lot from deductions
the time that it is constituted as a family residence As to Fixed at 40% of gross
and is considered as such so long as any of the amount of P5,000,000 income or gross
beneficiaries actually resides therein (Art. 153, deduction sales/receipts
Family Code). as the case may
be

UNIVERSITY OF SANTO TOMAS

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 TRANSFER TAX – ESTATE TAX

As to Available to Applies to all Transfers for No limit No limit

availability RC, NRC and individual public use
RA taxpayers Vanishing Two 100% down to
except NRA, and deduction transfers 20%
NFC must not be depending on
more than time interval
Amount received under RA 4917 five years between two
apart transfers
Any amount received by heirs from the decedent’s Family home No limit P1,000,000
employer as a consequence of the death of the Standard No limit P1,000,000
decedent-employee in accordance with RA No. deduction
4917 (An Act Providing That Retirement Benefits Medical Incurred P500,000
Of Employees Of Private Firms Shall Not Be Subject expenses (paid or
To Attachment, Levy, Execution, Or Any Tax unpaid)
Whatsoever)shall be allowed as a deduction from within one
the gross estate. year before
the death of
Requisites for deductibility: the decedent
Amounts No limit No limit
1. Amounts received by heirs from decedent’s received
employer; under RA
2. Received as a consequence of death of the 4917
decedent-employee; and
3. Amount is included in the gross estate of the Summary of Deductions as to Applicability to
decedent (Sec. 86[A][7], NIRC). Taxpayers

Summary of Deductions with Limits as to Time Deduction Resident or Non-resident

and Amount Citizen Alien
Funeral Fully Ratable/
Deduction Time Amount expenses deductible proportionate
Funeral Up to the P200,000, 5% Judicial deduction
expenses time of of gross estate, expenses only.
interment or actual Claims (Proportion of
amount against the gross estate in
whichever is estate the Philippines
the lowest Unpaid taxes over the
Judicial Six months No limit Unpaid worldwide
expenses mortgage gross estate)
Claims Incurred No limit – only Claims
against the before the the unpaid against
estate death of the portion at the insolvent
Unpaid taxes decedent time of death. persons
Unpaid Ignore post- Casualty
mortgage death losses
developments. Transfers for Fully Fully
Claims Receivable No limit – public use deductible deductible
against existing at entire Vanishing
insolvent the death of uncollectible deduction
persons the decedent portion may Family home Fully No deduction
be claimed. Standard deductible allowed
Casualty Not later than No limit – only deduction
losses the last day uninsured Medical
or any portion may expenses
extension be deductible
Amounts
thereof for
received
payment of
under RA
the estate tax 4917

UNIVERSITY OF SANTO TOMAS

205 FACULTY OF CIVIL LAW
 LAW ON TAXATION
EXCLUSIONS FROM ESTATE
Excluded from gross estate are those provided for
under NIRC (Sections 85, 86 and 87) and under
special laws.
Exclusions under Sec. 85 and 86 NIRC:
1. Exclusive property (capital/paraphernal) of
surviving spouse (Sec. 85 [H], NIRC);
2. Property outside Philippines of NRA decedent;
3. Intangible personal property in the Philippines
of NRA decedent provided there is reciprocity.
Exclusions under Sec. 87 NIRC:
1. The merger of the usufruct in the owner of the
naked title
2. The transmission or the delivery of the
inheritance or legacy by the fiduciary heir or
legatee to the fideicommissary
3. The transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the desire of the predecessor
4. All the bequests, devises, legacies or transfers to
social welfare, cultural and charitable
institutions, provided no part of the net income
of which inures to the benefit of any individual
and that not more than 30% of the value given
is used for administrative purposes.
Exclusions from estate under special laws:
1. Benefits received by members from the
Government Service Insurance System (PD
1146) and the Social Security System (RA 1161,
as amended) by reason of death
2. Amounts received from the Philippine and
United States governments for damages
suffered during the last war (RA 227)
3. Benefits received by beneficiaries residing in
the Philippines under laws administered by the
U.S. Veterans Administration (RA 360)
4. Grants and donations to the Intramuros
Administration (PD 1616) (Mamalateo, 2014).
TAX CREDIT FOR ESTATE TAXES
PAID IN A FOREIGN COUNTRY
Estate tax credit is a remedy against international
double taxation to minimize the onerous effect of
taxing the same property twice.
Who may avail:
Only the estate of a citizen or a resident alien at the
time of death can claim tax credit for any estate
taxes paid in a foreign country.
UNIVERSITY OF SANTO TOMAS
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206
Limitations in estate tax credit:
1. Per country basis: The amount of the credit in
respect to the tax paid to any country shall not
exceed the same proportion of the tax against
which such credit is taken, which the decedent’s
net estate situated within such country taxable
under the NIRC bears to his entire net estate;
and
2. Overall basis: The total amount of the credit
shall not exceed the same proportion of the tax
against which such credit is taken, which the
decedent’s net estate situated outside the
Philippines taxable under the NIRC bears to his
entire net estate.
EXEMPTION OF CERTAIN
ACQUISITIONS AND TRANSMISSIONS
Transmissions exempted from payment of
estate tax:
1. The merger of usufruct in the owner of the
naked title
E.g. Y died leaving a condominium unit, the
naked title belongs to W and usufruct to F for a
period of 5 years, then F died after two years.
Upon the death of F, the usufruct will merge into
the owner of the naked title W who shall become
the absolute owner of the said condominium
unit. The transfer from F to W is exempt from
estate tax.
2. The transmission or delivery of the inheritance
or legacy by the fiduciary heir or legatee to the
fideicommissary
E.g. X dies and leaves in his will a lot to his
brother, Y, who is entrusted with the obligation
to transfer the lot to Z, a son of X, when Z reaches
legal age. Y is the fiduciary heir and Z is the
fideicommissary. The transfer from X to Y is
subject to estate tax. But the transmission or
delivery to Z upon reaching legal age shall be
exempt from estate tax.
3. The transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the desire of the predecessor
4. All bequests, devises, legacies or transfers to
social welfare, cultural and charitable
institutions, provided that no part of the net
income of which inures to the benefit of any
individual and not more than thirty percent
(30%) of the said bequests, devises, legacies or
transfers shall be used for administration
purposes (Sec. 87, NIRC).
 TRANSFER TAX – ESTATE TAX
NOTE: Bequests, devises, legacies or transfers
made to educational institutions are not included.
ESTATE TAX RETURN
All cases with regard to TRAIN Law must be filed
When estate tax return is filed:
It is filed within 1 year from the decedent’s death.
Extension to file an estate tax return is allowed in
meritorious cases but not to exceed 30 days (Sec.
90, NIRC).
Who files estate tax return:
1. Executor
2. Administrator
3. Any legal heir
Where estate tax return is filed:
1. If resident decedent
– To an authorized agent bank, RDO, Collection
Officer, or duly authorized Treasurer in the city
or municipality where the decedent was
domiciled at the time of his death, or to the
Office of the CIR.
2. If non-resident decedent
– To the RDO or to the Office of the CIR (Sec.
90[D], NIRC).
Contents of estate tax return:
Must be under oath and shall contain the following:
1. The value of the gross state of the decent at the
time of his death or in case of a non-resident,
not a citizen of the Philippines, the part of his
gross estate situated in the Philippines;
2. The deductions allowed from the gross estate
in determining the estate;
3. Such part of the information as may at the time
be ascertainable and such supplemental data
as may be necessary to establish the correct
taxes (Sec. 90[A], NIRC).
NOTE: If the estate tax return shows a gross value
exceeding P5 million, the return shall be supported
with a statement duly certified by a CPA containing
the following:
1. Itemized assets at the time of his death;
2. Itemized deductions to the gross estate; and
3. Amount of tax due, whether paid or still
outstanding.
207
The taxpayer must pay the estate tax upon filing,
under the “Pay as you file system.” Extension to pay
estate tax may be granted if the Commissioner finds
that such payment would impose undue hardships
upon the estate or any heir and shall:
1. Not exceed 5 years in case of judicial
settlement;
2. Not exceed 2 years in case of extrajudicial
settlement.
3. Payment by installment if and only if the
available cash of the estate is insufficient
Requisites for granting extension to pay estate
tax:
1. The request for extension must be filed before
the expiration of the original period to pay
which is within 6 months from death
2. There must be a finding that the payment on
the due date of the estate tax would impose
undue hardship upon the estate or any of the
heirs
3. The extension must be for a period not
exceeding 5 years if the estate is settled
judicially or 2 years if settled extra-judicially
4. The Commissioner may require the posting of
a bond in an amount not exceeding double the
amount of tax to secure the payment thereof
Q: Remedios, a resident citizen, died on
November 10, 2006. She died leaving three
condominium units in Quezon City valued at
P5M each. Rodolfo was her only heir. He
reported her death on December 6, 2006 and
filed the estate tax return on March 30, 2007.
Because she needed to sell one unit of the
condominium to pay for the estate tax she asked
the CIR to give her one year to pay the estate tax
due. The CIR approved the request of extension
of time provided that the estate tax be
computed on the basis of the value of property
at the time of payment of tax.
a. Does CIR have the power to extend the
payment of estate tax?
b. Does the condition that the basis of the
estate tax will be the value at the time of
the payment have legal basis? (2007 Bar)
A:
a. YES. The CIR may allow an extension of time to
pay the estate tax if the payment on the due
date would impose undue hardship upon the
estate or any of the heirs. The extension in any
case, will not exceed 2 years if the estate is not
under judicial settlement of 5 years if it is
under judicial settlement. The CIR may require
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
the posting of a bond to secure the payment of
the tax (Sec. 91[B], NIRC).
b. NO. The valuation of properties comprising the
estate of a decedent is the fair market value as
of the time of death. No other valuation date is
allowed by law (Sec. 88, NIRC).
Effects for granting extension to pay estate
taxes:
1. The amount shall be paid on or before
expiration of the extension and running of the
statute of limitations for assessment shall be
suspended for the period of any of such
extension.
2. The CIR may require a bond not exceeding
double the amount of the tax and with such
sureties as the CIR deems necessary when the
extension of payment is granted.
3. Any amount paid after the statutory due date of
the tax, but within the extension period, shall
be subject to interest but not to surcharge (Sec.
91[B]).
Instances where request for extension of time
to pay estate tax should be denied:
1. Negligence
2. Intentional disregard of rules and regulations
3. Fraud
Who shall pay the estate tax:
1. The executor or administrator, before
delivery to any beneficiary of his distributive
share.
2. The beneficiary, to the extent of his
distributive share in the estate, shall be
subsidiarily liable for the payment of such
portion of the estate tax as his distributive
share bears to the value of the total net estate.
Instances when Certificate of Payment of Tax
from the Commissioner is required:
1. Before a judge shall authorize the executor or
judicial administrator to deliver a distributive
share to any party interested in the estate
2. Before the Register of Deeds shall register in
the Registry of Property any document
transferring real property or real rights therein
or any chattel mortgage, by way of gifts inter
vivos or mortiscausa, legacy or inheritance
3. When a lawyer, by reason of his official duties,
intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation intervivos or
mortis causa, legacy or inheritance
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
208
4. When a notary public, by reason of his official
duties, intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation intervivos or
mortis causa, legacy or inheritance
5. When a government officer, by reason of his
official duties, intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation intervivos or
mortis causa, legacy or inheritance
6. Before a debtor of the deceased pay his debts
to the heirs, legatee, executor or administrator
of his creditor
7. Before a transfer to any new owner in the
books of any corporation,sociedadanonima,
partnership, business, or industry organized or
established in the Philippines any share,
obligation, bond or right by way of gift inter
vivos or mortis causa, legacy or inheritance
8. Before a bank, which has knowledge of the
death of a person who maintained a bank
deposit account alone, or jointly with another,
shall allow any withdrawal from the said
deposit account
Certification not required in the following:
In cases when withdrawal of bank deposit:
1. Has been authorized by the Commissioner;
and
2. The amount does not exceed P20,000.
Liability of a co-depositor who was able to
withdraw funds from the account of a deceased
depositor without paying the estate tax
They shall be held liable for perjury because all
withdrawal slips contain a statement to the effect
that their co-depositors are still living at the time of
the withdrawal by any one of the joint depositors
and such statements are deemed under oath.
Distribution of the estate be made
Upon payment of the estate tax, the administrator
shall deliver the distributive share in the
inheritance to any heir or beneficiary. The estate
clearance tax issued by the CIR or the RDO having
jurisdiction over the estate will serve as the
authority to distribute the remaining/distributive
properties/share in the inheritance of the heir or
beneficiary. In case of installment payments, the
clearance shall be released only with respect to the
property the corresponding tax of which has been
paid (Section 94, NIRC).
The estate tax can be paid in installment in case the
available cash of the estate is not sufficient to pay
 TRANSFER TAX – ESTATE TAX

the total estate tax liability and the clearance shall

be released with respect to the property the
corresponding/computed tax on which has been
paid.

NOTE: There shall, therefore, be as many

clearances (Certificates Authorizing Registration)
as there are many properties releases because they
have been paid for by the installment payments of
the estate tax. The computation of the estate tax,
however, shall always be on the cumulative amount
of the net taxable estate. Any amount paid after the
statutory due date is approved by the
Commissioner or his duly authorized
representative, the imposable penalty thereon shall
only be an interest. Nothing in this paragraph,
however, prevents the Commissioner from
executing enforcement action against the estate
after the due date of the estate tax provided that all
the applicable laws and required procedures are
followed/observed (R.R. No. 2-2003).

Rule on restitution of tax upon satisfaction of

outstanding obligations:

If after the payment of the estate tax, new

obligations of the decedent shall appear, and the
persons interested shall have satisfied them by
order of the court, they shall have a right to the
restitution of the proportional part of the tax paid.

Q: A tax refund was filed by a taxpayer. Pending

said action, taxpayer died. Will the tax refund
form part of his gross estate?

A: It depends. If there is a legal and factual basis, it

will. Otherwise, it will not be included.

Deficiency estate tax

Three situations when deficiency occurs:

1. A return was filed but paid less than the
amount of tax due;
2. A return was filed but did not pay any tax;
3. No return was filed, therefore, no tax was
paid.

Deficiency estate tax vs. delinquency estate tax

Deficiency (Sec. 39, NIRC) arises when tax paid is

less than the amount due while delinquency (Title
X, NIRC) arises when there is either failure to pay
amount due or refusal to pay the tax due.

UNIVERSITY OF SANTO TOMAS

209 FACULTY OF CIVIL LAW
 LAW ON TAXATION
DONOR’S TAX Law governing imposition of donor’s tax

BASIC PRINCIPLES, CONCEPT AND DEFINITION
Donation is an act of liberality whereby a person
(donor) disposes gratuitously of a thing or right in
favor of another (donee) who accepts it (Art. 725,
Civil Code).
Donor’s tax is an excise tax imposed on the
privilege of transferring property by way of a gift
inter vivos based on pure act of liberality without
any or less than adequate consideration and
without any legal compulsion to give.
The law in force at the time of the
perfection/completion of the donation governs the
imposition of donor’s tax (Sec. 11, R.R. 2-2003).
Kinds of donations:
1. Donation inter vivos
A donation made between living persons. Its
perfection is at the moment when the donor
knows the acceptance of the donee. It is subject
to donor’s tax.
2. Donation mortis causa
A donation which takes effect upon the death of
the donor. It is subject to estate tax

Donation inter vivosvs. donation mortis causa

DONATION INTER VIVOS DONATION MORTIS CAUSA

It is not made out of the donor’s It is made in consideration of death, without the
As to generosity, although the subject matter is donor’s intention to lose the thing conveyed or
consideration not delivered at once, or the delivery is to its free disposal in case of survival.
be made post mortem, which is a simple
matter of form and does not change the
nature of the act.
It is perfected upon knowledge of the Being testamentary in nature, it should be
donor of the acceptance of the donee. embodied in a last will and testament (Art. 728,
Such contract is consensual in nature. Civil Code).
As to form
Personal property
a. oral but in writing if value exceeds
P5,000
Real property
– must be in a public instrument
The effect is produced while the donor is The transfer conveys no title or ownership to the
As to still alive. transferee before the death of the transferor, or
effectivity the transferor retains the ownership, full or
naked, of the property conveyed; it is the donor’s
death that determines the acquisition of or the
right to the property.
The transfer is irrevocable. The transfer is revocable before the transferor’s
As to death and revocability may be provided
irrevocability indirectly by means of a reserved power in the
donor to dispose of the property conveyed.
As to Acceptance is a requirement. Being in the form of a will, it is never accepted by
acceptance the donee during the donor’s lifetime.
(Mamalateo, 2014)

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 TRANSFER TAX – DONOR’S TAX
Transfers subject to donor’s tax:
Transfer in trust or otherwise, whether the gift is
direct or indirect and whether the property is real
or personal, tangible or intangible;
1. Include not only the transfer of ownership in
the fullest sense but also the transfer of any
right or interest in property, but less than title;
2. Where property, other than real property
subject to capital gains tax, is transferred for
less than an adequate and full consideration in
money or money’s worth, then the amount by
which the FMV of the property exceeded the
value of the consideration shall, for the
purpose of the donor’s tax, be deemed a gift,
and shall be included in computing the amount
of gifts made during the calendar year.
3. Renunciation by the surviving spouse of
his/her share in the conjugal partnership or
absolute community after the dissolution of the
marriage in favor of the heirs of the deceased
spouse or any other person/s is subject to
donor’s tax;
4. However, general renunciation by an heir,
including the surviving spouse, of his/her
share in the hereditary estate left by the
decedent is not subject to donor’s tax, unless
specifically and categorically done in favor of
identified heir/s to the exclusion or
disadvantage of the other co-heirs in the
hereditary estate.
Reason: In general renunciation, there is no
donation since the renouncer has never
become the owner of the property/share
renounced.
5. Transfers of any right or interest. Transfers
subject to donor’s tax not only include
transactions where there is a transfer of
ownership, but also where there is a transfer
less than title.
Q: In the settlement of the estate of Mr. Barbera
who died intestate, his wife renounced her
inheritance and her share of the conjugal
property in favor of their children. The BIR
determined that there was a taxable gift and
thus assessed Mrs. Barbera as a donor. Was the
BIR correct? (2013 Bar)
A: The BIR is correct that there was a taxable gift
but only insofar as the renunciation of the share of
the wife in the conjugal property is concerned. This
is a transfer of property without consideration,
which takes effect during the lifetime of the wife.
211
But the renunciation of the wife’s share in the
inheritance from her deceased husband is not a
taxable gift, considering that the property is
automatically transferred to the other heirs by
operation of law due to her repudiation of her
inheritance.
Q: A is indebted to B while B is indebted to C. A
paid the debt of B to C. Is this subject to donor’s
tax?
A: YES. This is considered as an indirect donation
in favor of B.
Instances when there is neither a sale,
exchange nor donation:
1. The transfer of stocks in a corporation
organized as a mutual benefit association, to its
members, which transfer is merely a
conversion of the owner-member
contributions to shares of stocks is not subject
to capital gains tax or donor’s tax because it is
neither a sale, exchange nor donation (BIR
Ruling No. 207, July 15, 1987).
2. Similarly, the transfer of property (lands) from
a non-stock, non-profit community association
to its member-beneficiaries, who actually
bought the property, is not subject to donor’s
tax, since the transfer, while without
consideration, is a mere formality to finally
effect the transfer of said property to its real
owners (BIR Ruling No. 412-05, October 4,
2005).
3. Spouses P & Q established a revocable inter
vivos trust (PQ Family trust, represented by P &
Q as its trustee) which holds title to all the
spouses’ real properties, shares of stock and
securities. The transfer of title involves no
actual transfer of ownership from the trustor
to the trustee and is then not subject to donor’s
tax (BIR Ruling No. 416-05, October 6, 2005).
4. The transfer of conjugal properties in favor of
the children pursuant to a court order arising
from the declaration of nullity of marriage of
the parents is not subject to donor’s tax since
there is no donative intent on the part of the
spouses, because the transfer is only in
compliance with the court order. Neither is the
transfer subject to capital gains tax and
documentary stamp tax as the transfer is
considered a delivery of presumptive legitime
(BIR Ruling No. DA-414-06, July 4, 2006.).
5. A company’s act of extending its credit line to
its sister company for the latter’s bank loan, is
not considered a transfer of property by gift
because there is no intention on the part of the
company to donate anything of value, the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
transaction being purely loan accommodation
and for a legitimate purpose which is to
support the sister company. Furthermore, the
company has the right to be indemnified by its
sister company in the event the latter fails to
pay the loan obligation (BIR Ruling No. DA-710-
06, Dec. 14, 2006.) (Paras, pp. 761-762).
NATURE, PURPOSE AND OBJECT
Nature
It is an excise tax on the privilege of the donor to
give or on the transfer of property by way of gift
inter vivos. It is not a property tax (Lladoc v. CIR, 14
SCRA 292).
Q: Your bachelor client, a Filipino residing in
Quezon City, wants to give his sister a gift of
P200,000. He seeks your advice, for purposes of
reducing if not eliminating the donor's tax on
the gift, on whether it is better for him to give all
of the P200,000.00 on Christmas 2001 or to give
P100,000.00 on Christmas 2001 and the other
P100,000.00 on January 1, 2002. Please explain
your advice. (2001 Bar)
A: I would advise him to split the donation. Giving
the P200,000 as a one-time donation would mean
that it will be subject to a higher tax bracket under
the graduated tax structure thereby necessitating
the payment of donor's tax. On the other hand,
splitting the donation into two equal amounts of
P100,000 given on two different years will totally
relieve the donor from the donor’s tax because the
first Pl00, 000 donation in the graduated brackets
is exempt (Sec. 99, NIRC). While the donor’s tax is
computed on the cumulative donations, the
aggregation of all donations made by a donor is
allowed only over one calendar year.
Purpose or object
Two-fold purpose of donor’s tax:
1. To supplement estate tax
2. To prevent avoidance of income tax through
the device of splitting income among
numerous donees who are usually members
of a family or into many trusts, with the donor
thereby escaping the effect of the progressive
rates of income taxation
REQUISITES OF A VALID DONATION
[CIDAF]
1. Capacity of donor to donate
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
212
The donor’s capacity shall be determined as of
the time of the making of the donation (Art.
737, NCC).
2. Donative intent
Donative intent is necessary only in cases of
direct gift. If the gift is indirectly taking place by
way of sale, exchange or other transfer of
property as contemplated in cases of transfers
for less than adequate and full consideration
(Sec. 100, NIRC), not always essential to
constitute a gift.
3. Actual or constructive delivery of gift
There is delivery if the subject matter is within
the dominion and control of the donee.
4. Acceptance by the donee
Acceptance is necessary because nobody is
obliged to receive a gift against his will (Osorio
v. Osorio, 14 Phil. 531).
5. Form prescribed by law
a. In case of real property, donation must be
in a public instrument.
b. If personal property, it may be made:
i. Orally
ii. If the value exceeds P5,000, donation
must be made and accepted in writing
(Art. 748, NCC).
NOTE: The donor’s tax shall not apply unless and
until there is a completed gift. The transfer of
property by gift is perfected from the moment the
donor knows of the acceptance by the donee; it is
completed by the delivery, either actually or
constructively, of the donated property to the
donee(Sec. 11, RR 2-2003).
A transfer becomes complete and taxable only
when, the donor has divested himself of all
beneficial interests in the property transferred and
has no power to recover any such interest in
himself or his estate.
Tax treatment in case of donations made by
spouses
Husband and wife are considered as separate and
distinct taxpayers for purposes of the donor’s tax.
However, if what was donated is a conjugal or
community property and only the husband signed
the deed of donation, there is only one donor for
 TRANSFER TAX – DONOR’S TAX
donor’s tax purposes, without prejudice to the right
of the wife to question the validity of the donation
without her consent (Par. 1., Sec. 12, RR 2-2003).
Q: When does an incomplete gift become a
complete one, subject to donor’s tax?
A: A gift that is incomplete because of reserved
powers becomes complete when either:
1. The donor renounces the power to recover; or
2. His right to exercise the reserved power ceases
because of the happening of some event or
contingency or the fulfillment of some
condition, other than because of the donor’s
death (Ibid).
Elements of remunerative donation:
A person gives to another a thing or right;
1. On account of the latter’s merit or services
rendered by him to the donor; and
2. The giving does not constitute a
demandable debt or when the gift imposes
upon the donee a burden which is less than
the value of the thing given.
NOTE: Donations made by a corporation to its
deceased officer out of gratitude for past services
are subject to donor’s tax. Past services rendered
without relying on a promise, express or implied,
that such services would be paid for in the future do
not constitute a demandable debt. Thus, the
amount given by the corporation to the heirs of the
deceased officer of the corporation as gratitude for
past services rendered by the officer is subject to
donor’s tax.
Q: Are onerous donations subject to donor’s
tax?
A: GR:NO, since there is no gratuitous disposal.
XPNs:
1. Where the transfer is for less than an
adequate and full consideration in money or
money’s worth; or
2. The gift imposes upon the donee a burden
which is less than the value of the thing
given.
NOTE: The excess of the fair market value of the
property over the actual value of the consideration
shall be subject to donor’s tax.
TRANSFERS WHICH MAY BE
CONSTITUTED AS DONATION
[ICL]
213
1. Sale/exchange/transfer of property for
insufficient consideration
2. Condonation/remission of debt
3. Transfer for less than adequate and full
consideration
Condonation/remission of debt
Rule regarding condonation/remission of debt:
If the creditor condones the indebtedness of the
debtor the following rules apply:
1. On account of debtor’s services to the creditor
the same is in taxable income to the debtor.
2. If no services were rendered but the creditor
simply condones the debt, it is taxable gift and
not a taxable income.
Q: Creditors X, Y, and Z condoned the debt of
ABC Corporation pursuant to a court-approved
restructuring. Are the creditors liable for
donor’s tax?
A: NO. The transaction is not subject to donor’s tax
since the condonation was not implemented with a
donative intent but only for business consideration.
The restructuring was not a result of the mutual
agreement of the debtors and creditors. It was
through court action that the debt rehabilitation
plan was approved and implemented (BIR Ruling
DA 028-2005, Jan. 24, 2005).
Q: Juan died leaving his only heirs, his surviving
spouse Maria, and three minor children, Luz,
Vis and Minda. Maria renounced her hereditary
share in the estate of Juan. Is Maria’s
renunciation subject to donor’s tax?
A: NO. The general renunciation by an heir is not
subject to donor’s tax. This is so because the
general renunciation of Maria was not specifically
and categorically done in favor of identified heir/s
to the exclusion or disadvantage of the other co-
heirs in the hereditary estate (Sec. 11, RR 2-2003).
Q: With the given set of facts, what happens
when Maria renounced her share in favor of
Minda who is a special child? Is the
renunciation subject to donor’s tax?
A: YES, the renunciation was specifically and
categorically done in favor of Minda to the
exclusion of Luz and Vis, the other co-heirs in the
estate of Juan (Sec. 11, RR 2-2003).
Transfers for less than adequate and full
consideration
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Rule regarding transfer for less than adequate Explain if the above transactions are subject to
and full consideration: donor's tax. (1999 Bar)

GR: Where a property is transferred for less than
adequate and full consideration in money or
money’s worth, the amount by which the FMV
exceeds the consideration shall be deemed a gift
and be included in computing the amount of gifts
made during the calendar year. It is as if the
property was donated but in order to avoid paying
donor’s tax, the donor opted to transfer the
property for inadequate consideration.
XPN:
A: The first transaction where a lot was sold by A to
her sister-in-law for a price below its fair market
value will not be subject to donor's tax if the lot
qualifies as a capital asset. The transfer for less than
adequate and full consideration, which gives rise to
a deemed gift, does not apply to a sale of property
subject to capital gains tax (Sec. 100, NIRC).
However, if the lot sold is an ordinary asset, the
excess of the fair market value over the
consideration received shall be considered as a gift
subject to the donor's tax.

Where the sale, exchange, or transfer is The sale of shares of stock below the fair market
made in the ordinary course of value thereof is subject to the donor's tax pursuant
business which is: to the provisions of Section 100 of the NIRC. The
- Bona fide excess of the fair market value over the selling price
- Made at arm’s length is a deemed gift.
- Free from any donative intent Q: In 2011, Mr. Vicente Tagle, a retiree, bought
- 10,000 CDA shares that are unlisted in the local
stock exchange for P10 per share. In 2015, the
Where property transferred is real
said shares had a book value per share of P60.
property located in the Philippines
In view of a car accident in 2015, Mr. Tagle had
considered as capital asset, the transfer is
to sell his CDA shares but he could sell the same
not subject to donor’s tax but to a capital
only for P50 per share. The sale is subject to tax
gains tax, which is a final income tax of 6%
as follows: (2012 Bar)
of the fair market value or gross selling
price, whichever is higher, and therefore,
A: 5%/10% capital gains tax on the capital gain
there can be no instance where the seller
from sale of P40 per share (P50 selling price less
can avoid any tax by selling his capital
P10 cost) plus donor’s tax on the excess of the fair
assets below its FMV.
market value of the shares over the consideration.
NOTE:
CLASSIFICATION OF DONOR
Arm’s length transactions are described as
Liable to pay donor’s tax:
those dealings wherein both parties are
independent of each other has no relationship
1. Resident
with the other dealing party. They are acting in
a. Resident citizen (RC)
their own self-interest
b. Non-resident citizen (NRC)
c. Resident alien (RA)
Q: A, an individual, sold to B, her sister-in-law,
d. Domestic corporation (DC)
his lot with a market value of P1,000,000 for
P600,000. A's cost in the lot is P100,000. B is
2. Non-resident
financially capable of buying the lot. A also
a. Non-resident alien (NRA)
owns X Co., which has a fast growing business.
b. Foreign corporation (FC)
A sold some of her shares of stock in X Co. to her
NOTE: A corporation, domestic or foreign, cannot
key executives in X Co. These executives are not
be made liable to pay estate tax, but may be liable
related to A. The selling price is P3, 000,000,
to pay donor’s tax.
which is the book value of the shares sold but
with a market value of P5, 000,000. A's cost in
DETERMINATION OF GROSS GIFT
the shares sold is P1, 000,000. The purpose of A
in selling the shares is to enable her key
GROSS GIFT NET GIFT
executives to acquire a proprietary interest in
All property, real or The net economic
the business and have a personal stake in its
personal, tangible or benefit from the
business.
intangible, that was

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
214
 TRANSFER TAX – DONOR’S TAX
given by the donor to transfer that accrues
the donee by way of to the donee.
gift, without the
benefit of any
deduction (Sec. 104,
NIRC).
NOTE: If a mortgaged property is transferred as a
gift, but imposing upon the donee the obligation to
pay the mortgage liability, then the net gift is
measured by deducting from the fair market value
of the property the amount of mortgage assumed.
Q: Kenneth Yusoph owns a commercial lot
which she bought many years ago for P1 Million.
It is now worth P20 Million although the zonal
value is only P15 Million. She donates one-half
pro-indiviso interest in the land to her son Dino
on 31 December 1994, and the other one-half
pro-indiviso interest to the same son on 2
January 1995.
a. How much is the value of the gifts in 1994
and 1995 for purposes of computing the gift
tax? Explain.
b. The Revenue District Officer questions the
splitting of the donations into 1994 and
1995. He says that since there were only
two (2) days separating the two donations
they should be treated as one, having been
made within one year. Is he correct?
Explain.
c. Dino subsequently sold the land to a buyer
for P 20 Million. How much did Dino gain on
the sale? Explain.
d. Suppose, instead of receiving the lot by way
of donation, Dino received it by inheritance.
What would be his gain on the sale of the lot
for P20 Million? Explain. (1995 Bar)
A:
a. The value of the gifts for purposes of
computing the gift tax shall be P7.5million in
1994 and P7.5million in 1995. In valuing a real
property for gift tax purposes the property
should be appraised at the higher of two values
as of the time of donation which are (a) the fair
market value as determined by the
Commissioner (which is the zonal value fixed
pursuant to Section 16(e) of the NIRC), or (b)
the fair market value as shown in the schedule
of values fixed by the Provincial and City
Assessors. The fact that the property is worth
P20 million as of the time of donation is
immaterial unless it can be shown that this
value is one of the two values mentioned as
provided under Sec. 81 now 88(B) of the NIRC.
215
b. NO, because the computation of the gift tax is
cumulative but only insofar as gifts made
within the same calendar year. There is no legal
justification for treating two gifts effected in
two separate calendar years as one gift.
c. Dino gained an income of 19 million from the
sale. Dino acquires a carry-over basis which is
the basis of the property in the hands of the
donor or P1 million. The gain from the sale or
other disposition of property shall be the
excess of the amount realized therefrom over
the basis or adjusted basis for determining gain
[Sec. 34(a), NIRC]. Since the property was
acquired by gift, the basis for determining gain
shall be the same as if it would be in the hands
of the donor or the last preceding owner by
whom the property was not acquired by gift.
Hence, the gain is computed by deducting the
basis of P1 million from the amount realized
which is P20 million.
d. If the commercial lot was received by
inheritance, the gain from the sale for P20
million is P5 million because the basis is the
fair market value as of the date of acquisition.
The stepped-up basis of P15 million which is
the value for estate tax purposes is the basis for
determining the gain (Sec. 34(b)(2), NIRC).
COMPOSITION OF GROSS GIFT
DONOR GROSS GIFT
All real properties, tangible
RC, NC and RA and intangible personal
properties wherever located
All real properties, tangible,
NRA and intangible properties
located in the Philippines
unless the reciprocity applies
(See previous discussion on intangible properties
deemed situated in the Philippines and the rule on
reciprocity under Estate Tax.)
VALUATION OF GIFTS MADE IN PROPERTY
1. Personal property
- The fair market value of the property given
at the time of the gift shall be the value of
the gross gift.
2. Real property
- The fair market value as determined by the
CIR (zonal value) at the time of donation or
the value fixed by the assessor (assessed
value), whichever is higher (Sec. 102).
If there is no zonal value, the taxable base is the
fair market value that appears in the latest tax
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
declaration. If there is an improvement, the Philippines taxable under the NIRC bears to his
value of the improvement is the construction entire net estate.
cost per building permit and or occupancy
permit plus 10% per year after year of Formula in computing the donor’s tax credit:
construction, or the market value per latest tax
declaration. Lower of actual tax paid and the amounts derived
by computing the tax limits as follows:
Q: Mr. L owned several parcels of land and he
donated a parcel each to his two children. Mr. L Limitation A (per country):
acquired both parcels of land in 1975 for
112,000,000.00. At the time of donation, the fair Net gifts (foreign country) X Phil. Donor’s tax
market value of the two parcels of land, as Net gifts (world)
determined by the CIR, was 112,300,000.00;
while the fair market value of the same Limitation B (by total):
properties as shown in the schedule of values
prepared by the City Assessors was Net gifts (outside Philippines) X Phil. Donor’s tax
112,500,000.00. What is the proper valuation of Net gifts (world)
Mr. L's gifts to his children for purposes of
computing donor's tax? (2015 Bar) NOTE: If there’s only one foreign country, the tax
credit shall be the lower between actual tax paid
A: The valuation of Mr. L’s gift to his children is the and Limitation A. If there are donations in more
fair market value (FMV) of the property at the time than one country, the tax credit shall be the lower
of donation. It is the higher of the FMV as between (a) actual tax paid and (b) lower between
determined by the Commissioner or the FMV as Limitation A and Limitation B.
shown in the schedule of values fixed by the
provincial or city assessors. In this case, for the EXEMPTIONS OF GIFTS FROM DONOR’S TAX
purpose of computing donor’s tax, the proper
valuation is the value prepared by the City Transactions exempt from donor’s tax:
Assessors amounting to P12,500,00.00 because it is
higher than the FMV determined by the CIR. 1. Donation for political campaign purposes (Sec.
99[C], NIRC)
TAX CREDIT FOR DONOR’S TAXES 2. Certain gifts made by residents (Sec. 101[A],
PAID TO A FOREIGN COUNTRY NIRC)
3. Certain gifts made by non-resident aliens Sec.
The donor’s tax imposed by the NIRC upon a donor 101[B], NIRC)
who was a citizen or a resident at the time of 4. Donation of intangibles subject to reciprocity
donation shall be credited with the amount of any (Sec. 104, NIRC)
donor’s taxes of any character and description 5. Donation for athlete’s prizes and awards (RA
imposed by the authority of a foreign country. 7549)
6. Donation under the “Adopt-a-School Program”
Who may avail: (RA 8525)
7. Exemption under other special laws
Only donors who are citizens or residents at the
time of the donation are entitled to claim tax credit. Gifts made by RC, NRC, RA considered exempt
from donor’s tax:
Limitations in estate tax credit:
1. Specific exemption - net gifts of the amount of
1. Per country basis: The amount of the credit in P100,000 or less are exempt
respect to the tax paid to any country shall not 2. Gifts made to or for the use of the National
exceed the same proportion of the tax against Government or any entity created by any of its
which such credit is taken, which the agencies which is not conducted for profit, or to
decedent’s net estate situated within such any political subdivision of the said
country taxable under the NIRC bears to his Government
entire net estate; and 4. Gifts in favor of: [CARTER-CuPS]
2. Overall basis: The total amount of the credit
shall not exceed the same proportion of the tax a. Charitable
against which such credit is taken, which the b. Accredited NGOs
decedent’s net estate situated outside the c. Religious

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2019 GOLDEN NOTES
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 TRANSFER TAX – DONOR’S TAX
d. Trust foundations
e. Educational institutions
f. Research institutions
g. Cultural foundations
h. Philanthropic organizations
i. Social welfare corporations
NOTE: In order to be exempt from donor’s tax and
to claim full deduction of the donation given to
qualified donee institution duly accredited by the
Philippine Council for NGO Certification, Inc.
(PCNC), the donor engaged in business shall give a
notice of donation on every donation worth at least
50,000 to the RDO which has jurisdiction over his
place of business within 30 days after the receipt of
the qualified donee institution’s duly issued
Certificate of Donation, which shall be attached to
the said Notice of Donation, stating that not more
than 30% of said donations/gifts for the taxable
year shall be used by such accredited non-stock,
non-profit corporation/NGO institution for
administration purposes (Domondon, 2008).
Requisites for exemption of dowries
1. The gift is given on account of marriage;
2. The gift is given before the celebration of
marriage or within 1 year thereafter;
3. Donor is the parent or both parents;
4. Donee is the legitimate, recognized natural or
legally adopted child of the donor; and
5. Maximum amount of the exemption is P10,000
for each child that may be claimed by each
parent.
NOTE: Both parents may give dowries and gifts on
account of marriage. Each parent is entitled to the
exemption. This has the effect of splitting the value
of the gift into half for both spouses so each spouse
can claim the exemption. Both spouses must file
separate returns because the husband and the wife
are considered as distinct entities for purposes of
donor’s tax (Sec. 12, RR 2003). However where
there is failure to prove that the donation was
actually made by both spouses, the donation is
taxable as the exclusive act of the husband, without
prejudice to the right of the wife to question the
validity of the donation without her consent
pursuant to the provisions of the Civil Code.
Requisites for the exemption of gifts made to
the CARTER-CuPS
1. Donee is incorporated as a non-stock, non-
profit entity, paying no dividends;
2. Governed by trustees;
3. Trustees receive no compensation;
217
4. Donee devotes all its income, whether
students' fees or gifts, donation, subsidies or
other forms of philanthropy, to the
accomplishment and promotion of the
purposes enumerated in its Articles of
Incorporation; and
5. Not more than 30% of the donation is used for
administrative purposes (Sec. 101, NIRC).
Q: In May 2010, Mr. And Mrs. Melencio Antonio
donated a house and lot with a fair market value
of P10 Million to their sob, Roberto, who is to be
married during the same year to Josefina
Angeles. Which statement below is incorrect?
(2012 Bar)
a. There are four (4) donations made – two (2)
donations are made by Mr. Melencio
Antonio to Roberto and Josefina, and two
(2) donations are made by Mrs. Antonio;
b. The four (4) donations are made by the
Spouses Antonio to members of the family,
hence, subject to the graduated donor’s tax
rates (2%-15%);
c. Two (2) donations are made by the spouses
to members of the family, while two (2)
other donations are made to strangers;
d. Two (2) donations made by the spouses to
Roberto are entitled to deduction from the
gross gift as donation proper nuptias.
A: d. Two (2) donations made by the spouses to
Roberto are entitled to deduction from the gross
gift as donation proper nuptias (Sec. 101, NIRC;
Tang Ho v. Court of Appeals).
Q: The spouses Helena and Federico wanted to
donate a parcel of land to their son Dondon who
is getting married in December, 2015. The
parcel of land has a zonal valuation of
P420,000.00. What is the most efficient mode of
donating the property? (2011 Bar)
A: The spouses should each donate a P110,000.00
portion of the value of the property in 2015 then
each should donate P100,000.00 in 2016.
Q: The Congregation of Mary Immaculate
donated a parcel of land and a dormitory
building located along España St. in favor of
Sisters of the Holy Cross, a group of nuns
operating a free clinic and high school teaching
basic spiritual values. Is the donation subject to
donor’s tax? (2007 Bar)
A: NO. Gifts in favor of educational and/or
charitable, religious, social welfare corporation or
cultural institution, accredited non-government
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
organization, trust or philanthropic organization or
research institution or organization are exempt
from donor’s tax, provided, that, no more than 30%
of the gifts are used for administration purposes.
The donation being in the nature of real property
complies with the utilization requirement (Sec.
101[A][3], NIRC).
Gifts made by NRA exempt from donor’s tax:
1. Specific exemption - net gifts of the amount of
P100,000 or less are exempt
2. Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or to
any political subdivision of the said
Government.
3. Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or
philanthropic organization or research
institution or organization: Provided, however,
That not more than thirty percent (30%) of
said gifts shall be used by such donee for
administration purposes (Sec. 101[B], NIRC).
Rule on donation of intangible personal
properties
Under Sec. 104, the following intangible properties
shall be considered as situated in the Philippines
for estate and donor’s tax purposes:
1. Franchise which must be exercised in the
Philippines;
2. Shares, obligations or bonds issued by any
corporation or sociedadanonimaorganized or
constituted in the Philippines in accordance
with its laws; (domestic corporation)
3. Shares, obligations or bonds by any foreign
corporation 85% of its business is located in
the Philippines;
4. Shares, obligations or bonds issued by any
Foreign corporation if such shares, obligations
or bonds have acquired a business situs in the
Philippines;
5. Shares or rights in any partnership, business or
industry established in the Philippines (Sec.
104, NIRC).
However, no tax shall be collected with respect to
donation of intangible personal property
(Reciprocity Rule):
a. If the donor at the time of the donation was a
citizen and resident of a foreign country which
at the time of the donation did not impose a
transfer tax of any character, in respect of
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
218
intangible personal property of citizens of the
Philippines not residing in that foreign country,
or
b. If the laws of the foreign country of which the
donor was a citizen and resident at the time of
the donation allows a similar exemption from
transfer of every character or description in
respect of intangible personal property owned
by citizens of the Philippines not residing in
that foreign country.
Q: Are donations for political campaign
purposes exempted from donor’s tax?
A: YES. Any contribution in cash or in kind to any
candidate, political party, or coalition of parties for
campaign purposes, reported to COMELEC shall not
be subject to payment of any gift tax (Sec. 99[C],
NIRC; RR 2-2003).
Q: Mr. De Sarapen is a candidate in the
upcoming Senatorial elections. Mr. De Almacen,
believing in the sincerity and ability of Mr. De
Sarapen to introduce much needed reforms in
the country, contributed P500,000.00 in cash to
the campaign chest of Mr. De Sarapen. In
addition, Mr. De Almacen purchased tarpaulins,
t-shirts, umbrellas, caps and other campaign
materials that he also donated to Mr. De
Sarapen for use in his campaign. Is the
contribution of cash and campaign materials
subject to donor’s tax? (2014 Bar)
A: The answer must be qualified. Section 99(C) of
the NIRC explicitly provides that any contribution
in cash or in kind to any candidate, political party
or coalition of parties for campaign purposes shall
be governed by the Election Code, as amended. On
the other hand, Section 13 of the Republic Act No.
7166 specifically states that any provision of law to
the contrary notwithstanding, any contribution in
cash or kind to any candidate or political party or
coalition of parties for campaign purposes, duly
reports to the Commission on Elections
(COMELEC) shall not be subject to the payment of
any gift tax.
Thus, if Mr. De Almacen reported his campaign
contributions of Php 500,000.00 in cash, tarpaulins,
t-shirts, umbrellas, caps, and other campaign
materials to the COMELEC, then the BIR cannot
impose donor’s tax on such contributions.
Conversely, if Mr. De Almacen failed to report these
campaign contributions to the COMELEC, such
contributions would be subject to donor’s tax.
Requirements for exemption from donor’s tax
of athlete’s prizes and awards:
 TRANSFER TAX – DONOR’S TAX
1. The donation must be prizes and awards given
to athletes in local and international
tournaments and competitions;
2. Held in the Philippines or abroad; and
3. Sanctioned by their respective sports
association (Sec. 1, RA 7549).
Q: Levox Corporation wanted to donate P5
million as prize money for the world
professional billiard championship to be held in
the Philippines. Since the Billiard Sports
Confederation of the Philippines does not
recognize the event, it was held under the
auspices of the International Professional
Billiards Association, Inc. Is Levox subject to the
donor's tax on its donation? (2011 Bar)
A: Yes, since the national sports association for
billiards does not sanction the event.
Exemption provided under adopt-a-school
program
Under RA 8525, any aid, help, contribution or
donation provided by an adopting private entity to
a government school, whether elementary,
secondary or tertiary are exempt from donor’s
taxes. The assistance may be in the form of, but not
limited to infrastructure, teaching, and skills
development, learning, support, computer and
science laboratories and food and nutrition.
Exempted from donor’s tax under other special
laws:
1. RA 2707 - Donation to International Rice
Research Institute (IRRI)
2. RA 3676 - Donation to Ramon Magsaysay
Award Foundation (RMAF)
3. RA 3850 - Donation to Philippines Inventors
Convention (PIC)
4. PD 181 - Donation to Integrated Bar of the
Philippines (IBP)
5. PD 205 - Donation to the Development
Academy of the Philippines
6. Donation to social welfare, cultural or
charitable institution, no part of the net income
of which inures to the benefit of any individual,
if not more than 30% of the donation shall be
used by the donee for administration purposes
7. PD 292 - Donation to Aquaculture Department
of the Southeast Asian Fisheries Development
Center of the Philippines
8. RA 8492 - Donation to the National Museum
9. RA 1006 - Donation to the National Library
10. PD 294 - Donation to the National Social Action
Council (NSAC)
219
11. RA 3062 - Donation to the Philippine American
Cultural Foundation
12. Donation to Task Force on Human Settlement
on the donation of equipment, materials, and
services
13. RA 2067 – Donation to Scientific and
Technological Research and Development
14. RA 1606 – Donation to Philippine Government
for Scientific, Engineering and Technological
Research, Invention and Development
15. RA 6847 – Donation to Philippine Sports
Commission
Q:A non-stock, non-profit school always had
cash flow problems, resulting in failure to
recruit well- trained administrative personnel
to effectively manage the school. In 2010, Don
Leon donated P100 million pesos to the school,
provided the money shall be used solely for
paying the salaries, wages, and benefits of
administrative personnel. The donation
represents less than 10% of Don Leon's taxable
income for the year. Is he subject to donor's
taxes? (2011 Bar)
A: Yes, because the donation is to be wholly used
for administration purposes.
PERSON LIABLE
Any person making a donation is required to file
donor’s tax return unless the donation is
specifically exempted under NIRC or other special
laws. He is required for every donation to
accomplish under oath a donor’s tax return in
duplicate (Sec. 98, NIRC).
Time of filing donor’s tax return
Donor’s tax return is filed within 30 days after the
date the donation or gift is made.
Formula in computing taxable donation:
1. On the first donation of the year
Gross Gift
Less: deductions/exemption
------------------------------------------
Net gift
x Tax rate
------------------------------------------
Donor’s tax
2. On subsequent donation during the year
Gross gift
Less: Deductions/exemptions
-------------------------------------------
Net gift
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Add: Prior net gifts For strangers, whether the method to be used is
----------------------- cumulative or splitting, it is immaterial since any
Aggregate net gifts donation made to them is subject to a fixed rate of
x Applicable tax rate 30%.
------------------------------
Donor’s tax on aggregate gifts
Less: prior donor’s tax paid
--------------------------------------------
Donor’s tax payable on this date

Contents of donor’s tax return

The donor’s tax return, which shall be made under

oath, in duplicate, shall set forth the following:

1. Each gift made during the calendar year

which is to be included in computing net
gifts;
2. The deductions claimed and allowable;
3. Any previous net gifts made during the
same calendar year;
4. The name of the donee;
5. Relationship of the donor to the donee; and
6. Such further information as the
Commissioner may require (Sec. 103(A),
NIRC).

Cumulative vs. splitting method

CUMULATIVE SPLITTING
When the donor makes The donor makes
two or more donations two or more
within the same calendar donations during
year, it is required that different calendar
the said donations be years.
included in the return for
the last donation. It will
not amount to double
taxation because the tax
paid for the previous
methods will be
considered as tax credit
for succeeding donations.

Significance of the two methods mentioned

The significance is in relation to donees. For

relatives, the graduated tax rates are applicable
over a period of one year. Hence, by splitting the
donation into different calendar year, the tax base
will be lowered, and hence, the donor’s tax will also
be lower.

When the amount of donation is P10,000,000 or

above, the cumulative method is no longer relevant
since in that case, the rate applicable is 15%, hence,
it is as if the rate is fixed.

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2019 GOLDEN NOTES
220
 VALUE ADDED TAX
VALUE-ADDED TAX
CONCEPT
Value Added Tax (VAT) is a business tax imposed
and collected on every (a) sale, barter, or exchange
of goods or properties (real or personal), (b) lease
of goods or properties (real or personal) or (c)
rendition of services, all in the course of trade or
business, and (d) importation of goods (whether or
not in the course of trade or business). It is an
indirect tax, thus, it can be shifted or passed on to
the buyer, transferee or lessee of goods, properties
or services (Sec. 105, NIRC).
VAT is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties and
services in the Philippines and on importation of
goods into the Philippines. The seller is the one
statutorily liable for the payment of the tax but the
amount of the tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties
or services. This rule shall likewise apply to existing
contracts of sale or lease of goods, properties or
services at the time of the effectivity of RA No. 9337.
However, in the case of importation, the importer is
the one liable for the VAT (RR 16-05).
The current VAT rate is 12% in lieu of R.A. 10963.
Who is liable to pay the VAT?
GR: The seller is the one statutorily liable for the
payment of the tax but the amount of the tax may be
shifted or passed on to the buyer, transferee or
lessee of goods, properties or services.
XPN: In case of importation, the importer is the one
liable for VAT (Sec. 4.105-2, R.R. 16-2005).
If the seller is VAT exempt, there is no need to pay
VAT on his sales. He will have to shoulder the
burden of the VAT passed to him by his suppliers for
his purchases (Ingles, 2015).
Classification of transactions under the VAT
system
1. VAT- taxable transactions
a. Subject to 12% VAT rate
b. Zero-rated transactions
2. Exempt transactions
Advantages in imposing VAT
1. Economic growth
2. Simplified tax administration
3. Promote honesty
221
4. Higher governmental revenues
VAT law is non-violative of the administrative
feasibility principle
The VAT law is principally aimed to rationalize the
system of taxes on goods and services. Thus,
simplifying tax administration and making the
system more equitable to enable the country to
attain economic recovery (Kapatiran ng
MgaNaglilingkodsaPamahalaan v. Tan,
G.R.No.81311, June 30, 1988).
CHARACTERICTICS OF VAT
1. Value added - It is a tax on value added of a
taxpayer arising from the sales of goods,
properties or services during the quarter.
“Value added” is the difference between the
total sales of the taxpayer for the taxable
quarter subject to VAT and his total purchases
for the same period subject also to value added
tax (Mamalateo, 2014).
2. Tax credit or Invoice method - It is collected
through the tax credit method or invoice
method. The input taxes shifted by the sellers to
the buyer are credited against the buyer’s
output taxes when he in turn sells the taxable
goods, properties or services (Sec. 105 and 110
[A], NIRC).
3. Sales tax – VAT is a tax on the taxable sale,
barter or exchange of goods, properties or
services. A barter or exchange has the same tax
consequence as a sale. A sale may be an actual
or deemed sale, or an export sale or local sale
(Mamalateo, 2014). The buyer is informed that
the price includes VAT and the computation is
shown in the official receipt/sales invoice.
4. Broad-based tax on consumption in the
Philippines – It is broad-based because every
sale of goods, properties or services at the levels
of manufacturers or producers and distributors
is subject to VAT. However, the tax burden rests
on the final consumers (Mamalateo, 2014).
5. Excise tax based on consumption – It is a tax
on the privilege of engaging in the business of
selling goods or services, or the importation of
goods.
6. Indirect tax - Tax shifting is always presumed.
It may be shifted or passed on to the buyers,
transferee, or lessee of the goods, properties or
services as part of the purchase price.
7. Ad valorem tax - The amount is based on the
gross selling price or gross value in money of
the goods or properties sold, bartered or
exchangedor on the gross receipts derived from
the sale or exchange of services, including the
use or lease of properties
8. Not a cascading tax. - Tax cascading means that
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
an item is taxed more than once as it makes its
way from production to final retail sale. VAT is
not a cascading tax because it is merely added
as part of the purchase price and not as a tax
because the burden is merely shifted. Thus,
there can be no tax on the tax itself.
9. National tax - Imposed by the national
government.
10. Revenue or general tax
11. Regressive tax – By its very nature, VAT is
regressive tax.
The principle of progressive taxation has no
relation with the VAT system inasmuch as the VAT
paid by the consumer or business for every goods
bought or services enjoyed is the same regardless
of income. In other words, the VAT paid eats the
same portion of an income, whether big or small.
The disparity lies in the income earned by a person
or profit margin marked by a business, such that the
higher the income or profit margin, the smaller the
portion of the income or profit that is eaten by
VAT. A converso, the lower the income or profit
margin, the bigger the part that the VAT eats
away. At the end of the day, it is really the lower
income group or businesses with low-profit
margins that is always hardest hit (ABAKADA Guro
v. Ermita, G.R. No. 168056, September 1, 2005).
Q: Does the Constitution prohibit regressive
taxes?
A: NO, what the Constitution simply provides is that
Congress shall evolve a progressive system of
taxation. The constitutional provision has been
interpreted to mean simply that "direct taxes are to
be preferred and as much as possible, indirect taxes
should be minimized.” The mandate of Congress is
not to prescribe but to evolve a progressive tax
system. This is a mere directive upon Congress, not
a justiciable right or a legally enforceable one. We
cannot avoid regressive taxes but only minimize
them (Tolentino et.al. v. Secretary of Finance, G.R. No.
115455, Oct. 30, 1995).
Q: How is the regressive effect of VAT
minimized?
A: The law minimizes the regressive effects of this
imposition by providing for zero rating of certain
transactions while granting exemptions to other
transactions. The transactions which are subject to
VAT are those which involve goods and services
which are used or availed of mainly by higher
income groups.
ELEMENTS OF VAT-TAXABLE TRANSACTIONS
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
222
The following elements must be present in order for
a transaction to be subjected to 12% VAT:
1. It must be done in the ordinary course of trade
or business;
2. There must be a sale, barter, exchange, lease of
properties, or rendering of service in the
Philippines; and
3. It is not VAT-exempt or VAT zero-rated (Ingles,
2015).
Unlike a direct tax, such as the income tax, which
primarily taxes an individual's ability to pay based
on his income or net wealth, an indirect tax, such as
the VAT, is a tax on consumption of goods, services,
or certain transactions involving the same. The VAT,
thus, forms a substantial portion of consumer
expenditures.
In the course of trade or business (Rule of
Regularity)
It means the regular conduct or pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a non-stock, non-profit private
organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to
members or their guests), or government entity
(Sec. 105, NIRC).
This includes incidental transactions. Thus, the
sale of a VAT taxpayer (engaged in catering
business) of its delivery van or vehicle, while an
isolated event, is considered an incidental
transaction in the course of trade or business. In the
course of its business, MKI bought and eventually
sold its delivery van. Prior to the sale, the van was
part of MKI’s property, plant, and equipment
(Mindanao II Geothermal Partnership v. CIR, G.R. No.
193301, March 11, 2013).
However, the involuntary sale of vessels by a
taxpayer not engaged in the sale of vessels pursuant
to the government policy of privatization is NOT
subject to VAT because the sale was not made the
course of trade or business (CIR v. Magsaysay Lines
Inc., G.R. No. 146984, July 28, 2006).
Two conditions of “in the ordinary course of
trade or business” (CR)
There should be:
1. Commercial or economic activity - It implies
that a transaction is conducted for profit; and
2. Regularity or habituality in the action -
Regularity involves more than one isolated
 VALUE ADDED TAX
transaction and involves repetition and
continuity of action (Ingles, 2015).
XPNs to regularity:
1. Non-resident alien who perform services in the
Philippines are deemed to be making sales in the
course of trade or business, even if the
performance of services is not regular (Sec.
4.105-3, RR 16-2005).
2. Importations are subject to VAT whether in the
course of trade or business or not.
3. Any business where the gross sales or receipts
do not exceed P100,000 during the 12-month
period shall be considered principally for
subsistence or livelihood and not in the course of
trade or business.
Sale, barter, exchange, lease of goods or
properties, or rendering of service in the
Philippines
When there is no sale, barter or exchange of goods
or properties, then no VAT should be imposed.
Thus, when an affiliate provides funds to a taxpayer
who then uses the funds to pay a third party, the
transaction is not subject to VAT, as there was no
sale, barter, or exchange between the affiliate and
the taxpayer. The money was simply given as a dole-
out (CIR v. Sony Philippines, Inc., G.R. No. 178697,
November 17, 2010).
However, if a taxpayer renders service to an affiliate
for a fee (even if the fee is merely to reimburse
costs), the service is subject to VAT. Thus, the
collection of condominium corporations of
association dues and membership fees from its
member condominium-unit owners are subject to
VAT even if receives payments for services rendered
to its affiliates in trust and on reimbursement-of-
cost basis only, without realizing profit (CIR v. CA
and COMASERCO, G.R. No. 125355, March 30, 2000).
Also, the fees collected by toll operators are subject
to VAT as they are engaged in rendering service of
constructing, maintaining and operating
expressways (Diaz v. Secretary of Finance, G.R. No.
193007, July 19, 2011).
NOTE: If the transaction is outside the Philippines,
then it is not subject to VAT.
Q: The Bureau of Internal Revenue (BIR) issued
Rvenue Memorandum Circular (RMC) No. 65-
2012 imposing Value-Added Tax (VAT) on
association dues and membership fees collected
223
by condominium corporations from its member
condominium-unit owners. The RMC’s validity is
challenged before the Supreme Court (SC) by the
condominium corporations. The Solicitor
General, counsel for BIR, claims that association
dues, membership fees, and other assessment/
charges collected by a condominium
corporation are subject to VAT since they
constitute income payments or compensation
for the beneficial services it provides to its
members and tenants. On the other hand, the
lawyer of the condominium corporations argues
that such dues and fees are merely held in trust
by the condominium corporations exclusively
for their members and used solely for
administrative expenses in implementing the
condominium corporations’ purposes.
Accordingly, the condominium corporations, do
not actually render services for a fee subject to
VAT. Whose argument is correct? Decide. (2014
Bar)
A: The lawyer of the condominium corporations is
correct. The association dues, membership fees, and
other assessment/charges do not constitute income
payments because they were collected for the
benefit of the unit owners and the condominium
corporation is not created as a business entity. The
collection is the money of the unit owners pooled
together and will be spent exclusively for the
purpose of maintaining and preserving the building
and its premises which they themselves own and
possess (First e-Bank Tower Condominium Corp., v.
BIR, Special Civil Action No. 121236, RTC Br. 146,
Makati City).
Profit element not required for VAT to be
imposed
VAT is a tax on trasaction, there is no need for a
taxable gain, unlike in the income tax. It is not
required either by law or jurisprudence (Ingles,
2015).
VAT is a tax on transactions imposed at every stage
of the distribution process on the sale, barter,
exchange of goods or property, and on the
performance of services, even in the absence of profit
attributable thereto. The term “in the course of trade
or business” applies to all transactions. Even a non-
stock, non-profit corporation or government entity is
liable to pay VAT for the sale of goods and services
(CIR v. COMASERCO, March 30, 2000).
Q:Commonwealth Management and Services
Corporation (COMASERCO) is an affiliate of
Philippine American Life Insurance Co.
(Philamlife), organized by the latter to perform
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
collection, consultative and other technical
services, including functioning as an internal
auditor of Philamlife and its other affiliates.
COMASERCO rendered service to its affiliates
and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was
paid the cost or expense that it incurred
although without profit. Is COMASERCO liable to
pay VAT?
A: YES, services rendered for a fee even on
reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. It is
immaterial whether the primary purpose of a
corporation indicates that it receives payments for
services rendered to its affiliates on a
reimbursement-oncost basis only, without realizing
profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides
service for a fee, remuneration or consideration,
then the service rendered is subject to VAT. (CIR v.
COMASERCO, March 30, 2000).
IMPACT AND INCIDENCE OF TAX
VAT as an Indirect Tax
The amount of VAT payable may be passed on by the
seller, transferor, or lessor to the buyer, transferee
or lessee. When passed on, the amount of VAT due
forms part of the purchase price of goods or
services. As a result, it is the buyer who bears the
burden of tax, although the one liable to pay it is the
seller.
The VAT, thus, forms a substantial portion of
consumer expenditures as part of the cost of goods
or services purchased. What is transferred in such
instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the
selling price, the seller remains the person primarily
and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the
tax (Contex v. CIR, GR No. 151135, July 2, 2004).
IMPACT (Liability) INCIDENCE (Burden)
The one statutorily The one who bears the
liable for the payment economic burden
of tax, thus, the one (payment) of tax (VAT),
who can avail of a tax the place at which the
refund. tax comes to rest.
The seller upon The tax is shifted to the
whom the tax has final consumer or the
been imposed. He buyer of the goods,
collects the tax and properties, or services
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
224
pays it to the as part of the purchase
government. price.
Effect of VAT being an indirect tax on
Exemptions
If a special law merely exempts a party as a seller
from its direct liability for payment of the VAT, but
does not relieve the same party as a purchaser from
its indirect burden of the VAT shifted to it by its
VAT-registered suppliers, the purchase transaction
is not exempt. It is because VAT is a tax on
consumption, the amount of which may be shifted
or passed on by the seller to the purchaser of the
goods, properties or services (CIR v. Seagate
Technology, G.R. No. 153866, February 11, 2005).
Q: Is VAT a withholding tax?
A: NO. Indirect taxes, like VAT and excise tax, are
different from withholding taxes. To distinguish, in
indirect taxes, the incidence of taxation falls on one
person but the burden thereof can be shifted or
passed on to another person. On the other hand, in
withholding taxes, the incidence and burden of
taxation fall on the same entity, the statutory
taxpayer. The burden of taxation is not shifted to the
withholding agent who merely collects, by
withholding, the tax due from income payments to
entities arising from certain transactions and remits
the same to the government (Asia International
Auctioneers, Inc., v. CIR, G.R. No. 179115, September
26, 2012).
Q: Lily’s Fashion Inc. is registered as a Subic Bay
Freeport Enterprise under R.A. 7227 and a non-
VAT taxpayer. As such, it is exempt from
payment of all local and national internal
revenue taxes. During its operations, it
purchased various supplies and materials
necessary in the conduct of its manufacturing
business. The supplier of these goods shifted to
Lily’s Fashion, Inc. the 10% (now 12%) VAT on
the purchased items amounting to P500,000.
Lily’s Fashion Inc. filed with the BIR a claim for
refund for the input tax shifted to it by the
suppliers. If you were the CIR will you allow the
refund? (2006 Bar)
A: NO. The exemption of Lily’s Fashion Inc. is only
for taxes for which it is directly liable, hence, it
cannot claim exemption for tax shifted to it, which is
not at all considered a tax to the buyer but part of
the purchase price. Lily’s Fashion Inc. is not a
taxpayer in so far as the passed-on tax is concerned
and therefore, it cannot claim for a refund of a tax
 VALUE ADDED TAX

merely shifted to it. Only taxpayers are allowed to provided in the above formula.
file a claim for refund.
DESTINATION PRINCIPLE /
TAX CREDIT METHOD CROSS BORDER DOCTRINE

The input tax shifted by the seller to the buyer is Goods and services are taxed only in the country
credited or deducted against the buyer’s output where they are consumed. Thus, exports are zero-
taxes when he in turn sells the taxable goods, rated, while imports are taxed (Domondon, 2014).
properties or services.
Under the VAT method of taxation, which is invoice- Under the Destination Principle, the goods and
based, an entity can subtract from the VAT charged services are taxed only in the country where these
on its sales or outputs the VAT it paid on its are consumed, and in connection with the said
purchases, inputs and imports (CIR v. Seagate, G.R. principle, the Cross Border Doctrine mandates
No. 153866, Feb. 11, 2005). that NO VAT shall be imposed to form part of the
cost of the goods destined for consumption
Formula: Output Tax –Input Tax = Net VAT Payable or OUTSIDE the territorial border of the taxing
Excess Input Tax authority. Thus, exports are zero-rated, while
Net VAT Payable = Output Tax > Input Tax
imports are taxed.
Excess Input Tax = Output tax < Input Tax
Export processing zones are to be managed as a
separate customs territory from the rest of the
Philippines and, thus, for tax purposes, are
Illustration: For the month of January 2017, Mr. A effectively considered as foreign territory. For this
sells to Mr. B steel cabinets for P112,000. Within the reason, sales by persons from the Philippine
same month, Mr. A purchased steel plates and other Customs Territory to those inside the export
materials to make these cabinets for P56,000. processing zones are already taxed as exports.
Determine Mr. A’s VAT payable. (Atlas Consolidated Mining and Development
Corporation v. CIR, G.R. No. 141104 & 148763, June 8,
To compute for the output tax from 2007).
sale:
Total selling price (equivalent to P112,000 Exception to the destination principle
112%)
Vatable gross sales or receipts Our VAT law clearly provides for an exception to the
(112,000/1.12 to get 100%) 100,000 destination principle; that is, for a zero percent
Output VAT (12% of P100,000) P 12,000 VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency
To compute for the input tax from purchases: and accounted for in accordance with the rules and
regulations of the BSP (Commissioner of Internal
Domestic purchase of good P 56,000
Revenue v. American Express International, Inc., G.R.
(equivalent to 112%)
No. 152609, June 29, 2005).
Vatable gross purchases
(56,000/1.12 to get 100%) 50,000
Consistent with the destination principle, the
Input VAT (12% of P50,000) P 6,000 purchases of goods and services destined for
consumption within an ECOZONE should be free of
To compute for the VAT payable: VAT; hence, no input VAT should then be paid on
Output VAT P 12,000 such purchases. With no input VAT paid, there is
Less: Input VAT 6,000 nothing to be refunded or credited under Sec. 112 of
the NIRC. (Coral Bay Nickel Corp. v. CIR, G.R No.
VAT payable P 6,000
190506, June 13, 2016)
In the same example, if Mr. B is a trader of steel
Q: XYZ Law Offices, a law partnership in the
cabinets, he now has an input tax of P12,000 from
Philippines and a VAT-registered taxpayer,
the purchase of steel cabinets from Mr. A. If Mr. B
received a query by e-mail from Gainsburg
sells it for P168,000, he would be liable to pay the
Corporation, a corporation organized under the
output tax of P18,000. He could reduce the output
laws of Delaware, but the e-mail came from
tax by deducting or crediting his input tax, arriving
California where Gainsburg has an office.
at a VAT payable of P6,000 (P18,000 less P12,000).
Gainsburg has no office in the Philippines and
does no business in the Philippines.
Refer to discussion on Output and Input Tax as

UNIVERSITY OF SANTO TOMAS

225 FACULTY OF CIVIL LAW
 LAW ON TAXATION
XYZ Law Offices rendered its opinion on the
query and billed Gainsburg US$1,000 for the
opinion.
Gainsburg remitted its payment through
Citibank which converted the remitted US$1,
000 to pesos and deposited the converted
amount in the XYZ Law Offices account. What are
the tax implications of the payment to XYZ Law
Offices in terms of VAT?
A: Yes. The payment is subject to VAT but at a zero-
rate. The zero-rating applies because the services
were rendered to a non-resident person who is
engaged in business outside the Philippines,
theconsideration forwhich was paid for in
acceptable foreign currency and accounted for in
accordance with the BSP rules. Consequently, the
law office is entitled to claim the input tax
attributable to such zero-rated sale as a credit
against its output tax or, at its option, apply for
refund or issuance of a tax credit certificate to the
extent that such input tax was not utilized as a credit
against output tax. (Sections 108(B)(2), 110(A)(1)
and 112, NIRC; See also Accenture, Inc. vs. CIR, G.R.
No. 190102, July 11, 2012)
Q: SMZ, Inc., is a VAT-registered enterprise
engaged in the general construction business.
HP International contracts the services of SMZ,
Inc. to construct HP International’s factory
building located in the Laguna Techno Park, a
special economic zone. HP International is
registered with the Philippine Economic Zone
Authority (PEZA) as an ecozone export
enterprise, and, as such, enjoys income tax
holiday pursuant to the Special Economic Zone
Act of 1995.
SMZ, Inc., files an application with the Bureau of
Internal Revenue (BIR) for the VAT zero-rating
of its sale of services to HP International.
However, the BIR denies SMZ, Inc.’s application
on the ground that HP International already
enjoys income tax holiday.
Is the BIR correct in denying SMZ, Inc.’s
application? Explain your answer. (2017 Bar)
A: NO. All sales of goods, properties, and services
made by a VATregistered supplier from the Customs
Territory to an ecozone enterprise shall be subject
to VAT, at zero percent (0%) rate, regardless of the
latter’s type or class of PEZA registration. (Coral Bay
Nickel Corporation v. CIR, G.R. No. 190506, June 13,
2016, citing Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.), Inc., G.R. No.
350154, August 9, 2005, 466 SCRA 221)
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
226
Moreover, under Section 108 (B)(3), of the 1997
NIRC as amended, services rendered to persons or
entities whose exemption under special laws
effectively subjects the supply of such services to
zero percent (0%) rate are considered zero-rated.
Considering the law does not provide for any
additional qualification or disqualification, the BIR
cannot deny the application on the ground that HP
International already enjoys income tax holiday.
An administrative agency may not enlarge, alter or
restrict a provision of law. It cannot add to the
requirements provided by law. To do so constitutes
lawmaking, which is generally reserved for
Congress. (Soriano v. Secretary of Finance, et al., G.R.
No. 184450, 184508, 184538, 185234, January 24,
2017)
PERSONS LIABLE
Persons liable to pay VAT, in general
1. Any person who, in the course of trade or
business,
a. sells, barters, exchanges or leases goods or
properties, or
b. renders services; and
2. Any person who imports goods, whether or not
made in the course of his trade or business
"Person" refers to any individual, trust, estate,
partnership, corporation, joint venture, cooperative
or association.
"Taxable person" refers to any person liable for the
payment of VAT, whether registered or registrable
in accordance with Sec. 236 of the NIRC.
"VAT-registered person" refers to any person who
is registered as a VAT taxpayer under Sec. 236 of the
NIRC. His status as a VAT-registered person shall
continue until the cancellation of such registration
(RR 16-05).
NOTE: Inimportation, it shall be the importer who
shall pay VAT upon release of the goods from the
customs territory. This is an exception to the
general rule requiring a sale before VAT shall be
incurred.
Special considerations to the following persons:
1. Husband and wife – for VAT purposes, shall be
treated as separate taxpayers.
2. Joint ventures – although exempt from income
tax, is liable to value added tax.
3. Government – subject to VAT if they sell goods,
properties or services in the course of trade or
 VALUE ADDED TAX

business or when they perform proprietary
functions. In case of transactions essential for
governmental functions, such are exempt from
VAT.
4. Non-stock, non-profit association – generally,
receipts from association dues or special
assessments from members is not subject to
VAT.
However, the moment the non-stock, non-profit
association engages in any taxable sale of goods
or services, it is liable to VAT where the amount
of its gross sales and/or gross receipts exceeds
P1,919,500, or subject to the 3% percentage tax,
if gross sales and/or gross receipts is
P1,919,500 or less.
Taxable persons must register for VAT
purposes
Any person who, in the course of trade or business,
sells, barters, or exchanges goods or properties, or
engages in the sale or exchange of services, shall be
liable to register for VAT if:
1. Gross sales or gross receipts for the past 12
months have exceeded P1,919,500, other than
those that are exempt under Sec. 109 (A) to (V);
or
2. There are reasonable grounds to believe that
his gross receipts or gross sales in the next 12
months shall exceed P1,919,500, other than
those that are exempt under Sec. 109 (A) to (V)
(Sec. 236(G), NIRC).
from payment of VAT or any OPT (RMC No. 7-
2014).
3. In transactions subject to VAT but became not
subject from VAT because his annual gross sales
do not exceed P1,919,500 (Sec. 109(1)(V),
NIRC). Though not subject from VAT, he shall
pay percentage tax under Section 116.
He should register as a non-VAT taxpayer
unless he opts to become VAT registered under
Section 109(2) of NIRC.
NOTE: A VAT-registered person, regardless
whether his gross sales or gross receipts
exceeds P1,919,500 or not, shall be liable for
VAT. Once VAT-registered, he shall be liable for
VAT on sale of goods or services, regardless of
the amount. If a person is VAT-registered, his
gross sales or gross receipt shall always be
subject to VAT whether or not it exceeds the
P1,919,500 threshold, unless he cancels his
registration.
Any person who is not required to register for
VAT (those whose annual VATable gross sales
or gross receipts do not exceed P1,919,500)
may elect to register for VAT by registering with
the Revenue District Office that has a
jurisdiction over the head office of that person.
Any person who elects to register based on the
above provision shall not be entitled to cancel
his registration for the next three (3) years.
(Sec. 236(H), NIRC)
4. In VAT-exempt transactions under Section
109(1) (A) to (V) of NIRC, regardless of their
annual gross sales.

Failure to register as VAT taxpayer Summary of Rules for VAT registration

He shall be held liable to pay the tax as if he is a VAT BUSINESS EFFECT

registered person but he cannot avail of the input Gross sales Mandatory VAT
tax credit for the period that he has not properly exceed registration. Generally
registered (Sec. 236(G), NIRC). P1,919,500 liable to pay 12% VAT.
Gross sales Subject to optional VAT
Persons NOT LIABLE to pay VAT exceed P100,000, registration
but do not exceed If VAT-registered: generally
1. A Non-VAT registered person whose annual P1,919,500. liable to pay 12% VAT.
gross sales or receipts do not exceed If non-VAT registered:
P1,919,500 shall not be liable to VAT, instead, generally liable to pay 3%
he shall be liable for 3% percentage tax (Sec. percentage tax
116, NIRC). Gross sales do not Subject to optional VAT
2. An individual who is a Marginal Income Earner exceed P100,000 registration
(MIE) not deriving compensation as employee (marginal income If VAT-registered: generally
under an Er-Ee relationship, self-employed and earners liable to pay 12% VAT.
deriving gross sales or receipts not exceeding If non-VAT registered:
P100,000 in any 12-month period, and where exempted from VAT and
the activities of such MIE is principally for percentage tax.
subsistence or livelihood, he shall be exempt
IMPOSITION OF VAT

UNIVERSITY OF SANTO TOMAS

227 FACULTY OF CIVIL LAW
 LAW ON TAXATION
When it comes to normal VAT transactons, or those real property tax declaration or the consideration,
subject to 12%, we have three categories: whichever is higher. If the gross selling price is
based on the zonal value or market value of the
NATURE OF TAX BASE property, the zonal or market value shall be deemed
TRANSACTION inclusive of VAT. If the VAT is not billed separately,
1. Sale of goods or Gross Selling Price the selling price stated in the sales document shall
properties be deemed to be inclusive of VAT.
2. Importation of Total landed cost
goods Allowable deductions from gross selling price
3. Sale of services and Gross receipts
use or lease of In computing the taxable base during the month or
properties quarter, the following shall be allowed as
The above are discussed in details below. deductions from gross selling price:
a. Discounts
VAT ON SALE OF GOODS OR PROPERTIES - determined and granted at the time of sale,
- which are expressly indicated in the invoice,
VAT is imposed and collected on - the amount thereof forming part of the gross
sales duly recorded in the books of accounts,
1. every sale, barter or exchange, or - the grant of which is not dependent upon the
2. transactions "deemed sale" happening of a future event

of taxable goods or properties at the rate of 12% of
the gross selling price or gross value in money of the
goods or properties sold, bartered, or exchanged, or
deemed sold in the Philippines (R.R. 16-2005).
NOTE: A transaction is outside the scope of VAT
unless it is made for a valuable consideration.
Transfer of property without valuable
consideration (e.g. gift) is exempt from VAT
(Mamalateo, 2014).
Gross Selling Price
b. Sales returns and allowances for which a
proper credit or refund was made during the
month or quarter to the buyer for sales
previously recorded as taxable sales (R.R. 16-
2005).
NOTE: Senior citizens are entitled to a 20%
discount under R.A. 9257 or the Expanded Senior
Citizens Act of 2003. The tax base thereof shall be
the net sales after the deducting the 20% discount
without requiring the indication of buyer-senior
citzen’s TIN (RR No. 1-2007).

It means the total amount of money or its equivalent Goods or properties

which the purchaser pays or is obligated to pay to
the seller in consideration of the sale, barter or
exchange of the goods or properties, excluding VAT.
The excise tax, if any, on such goods or properties
shall form part of the gross selling price.
Gross selling price in case of sale or exchange of
real property
It is the consideration stated in the sales document
or the fair market value whichever is higher.
The term "fair market value" shall mean
whichever is the higher of:
1. The fair market value as determined by the
Commissioner (zonal value), or
2. The fair market value as shown in schedule of
values of the Provincial and City Assessors
(real property tax declaration).
It refers to all tangible and intangible objects which
are capable of pecuniary estimation and shall
include, among others:
1. Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
2. The right or the privilege to use patent,
copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or
other like property or right;
3. The right or the privilege to use any industrial
commercial or scientific equipment;
4. The right or the privilege to use motion picture
films, films, tapes and discs;
5. Radio, television, satellite transmission and
cable television time.
Note: The above is NOT an exclusive list.

However, in the absence of zonal value, gross selling The VAT accrues upon the consummation of sale of
price refers to the market value shown in the latest goods or properties, regardless of the terms of

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
228
 VALUE ADDED TAX

payment between the contracting parties (Sec. 106
in relation to Secs. 113 and 237 of NIRC). Thus as
soon as the seller issues a VAT invoice, whether the
sale is for cash or on credit, he becomes liable to VAT
on such sale (Mamalateo, 2014).
Only persons engaged in real estate business either
as a real estate dealer, developer or lessors, are
subject to VAT.

Sale of Real Properties

Sale of real properties held primarily for sale to

customers or held for lease in the ordinary course of
trade or business of the seller shall be subject to
VAT.

Sale of residential lot with gross selling price

exceeding P1,919,500, residential house and lot
or other residential dwellings with gross selling
price exceeding P3,199,200, where the instrument
of sale (whether the instrument is nominated as a
deed of absolute sale, deed of conditional sale or
otherwise) is executed on or after July 1, 2012, shall
be subject to 12% VAT (R.R. 16-2005, as amended by
RR 16-2011 and RR 03-2012).

This includes sale, transfer or disposal within a 12-

month period of two or more adjacent residential
lots, house and lots or other residential
dwellingsin favor of one buyer from the same
seller, for the purpose of utilizing the lots, house
and lots or other residential dwellings as one
residential area wherein the aggregate value of the
adjacent properties exceeds P1,919,500, for
residential lots and P3,199,200 for residential house
and lots or other residential dwellings. Adjacent
residential lots, house and lots or other residential
dwellings although covered by separate titles
and/or separate tax declarations, when sold or
disposed to one and the same buyer, whether
covered by one or separate Deed/s of Conveyance,
shall be presumed as a sale of one residential lot,
house and lot or residential dwelling.

This however, does not include the sale of parking

lot which may or may not be included in the sale of
condominium units. The sale of parking lots in a
condominium is a separate and distinct transaction
and is not covered by the rules on threshold amount
not being a residential lot, house & lot or a
residential dwelling, thus, should be subject to VAT
regardless of amount of selling price (RR 13-12).

NOTE: It is only the sale of real properties primarily

held for sale to customers or held for lease in the
ordinary course of trade or business of the seller
which shall be subject to VAT. As such, transactions
involving real properties held as capital asset of
individuals are not subject to VAT. However, it may
give rise to capital gains tax liability.

UNIVERSITY OF SANTO TOMAS

229 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Summary of Rules on Sale of Real Properties

TRANSACTION TAX TREATMENT

Real properties held primarily for sale to customers, in general 12% VAT
Residential lot with gross selling price exceeding P1,919,500 (seller is a 12% VAT
real estate dealer or developer)
Residential lot with gross selling price not exceeding P1,919,500 VAT-exempt, not subject to
(seller is a real estate dealer or developer) percentage tax
Residential house and lot or other residential dwellings exceeding 12% VAT
P3,199,200 (seller is a real estate dealer or developer)
Residential house and lot or other residential dwellings not exceeding VAT-exempt, not subject to
P3,199,200 (seller is a real estate dealer or developer) percentage tax
Residential house and/or lot by a seller not engaged in business Not subject to VAT or OPT.
May be subject to CGT, except sale
of principal residence, which may
be exempt subject to certain
conditions
Commercial place or lot (seller uses property in business) 12% VAT
Real property used in business, taxpayer is not engaged in dealing with 12% VAT (incidental transaction)
real estate

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2019 GOLDEN NOTES
230
 VALUE ADDED TAX
Elements of VAT-taxable sale of goods or properties:
SALE OF GOODS AND PERSONAL PROPERTIES
1. There is an actual or deemed sale, barter or
exchange of goods or personal properties for
valuable consideration;
2. Undertaken in the course of trade or business;
3. For use or consumption in the Philippines; and
4. Not exempt from VAT under Section 109 of
NIRC, special law or international agreement
binding upon the government of the Philippines.
NOTE: Absence of any of the above requisites
exempts the transaction from VAT. However,
percentage taxes may apply (Sec. 116, NIRC).
231
SALE OR EXCHANGE OF REAL PROPERTY
1. The seller executes a deed of sale, including
dacionenpago, barter or exchange, assignment,
transfer, or conveyance, or merely contracts to
sell involving real property;
2. The real property is located within the
Philippines;
3. The seller or transferor is engaged in real estate
business either as a real estate dealer, developer,
or lessor;
4. The real property is an ordinary asset held
primarily for sale or for lease in the ordinary
course of business;
5. The sale is not exempt from VAT under Section
109 of NIRC, special law, or international
agreement binding upon the government of the
Philippines;
6. The threshold amount set by law should be met.
NOTE: Absence of any of the above requisites
exempts the transaction from VAT. However,
percentage taxes may apply under Section 116 of
NIRC.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
The sale of real property subject to VAT shall either Distinctions between sale on installment plan
be in (1) cash basis, (2) installment basis, or (3) and sale on a deferred payment basis
deferred payment basis.
INSTALLMENT PLAN DEFERRED PLAN
Sale on installment plan Initial payments do Initial payments
not exceed 25% of the exceed 25% of the
It means sale of real property by a real estate dealer, gross selling price gross selling price
the initial payments of which in the year of sale do Seller shall be subject Transaction shall be
not exceed 25% of the gross selling price. to output VAT on the treated as cash sale
installment payments which makes the
In this case, the real estate dealer shall be subject to received, including the entire selling price
VAT on the installment payments, including interest interests and penalties taxable in the month
and penalties, actually and/or constructively for late payment, of sale.
received by the seller. actually and/or
constructively
Correspondingly, the buyer of the property can received.
claim the input tax in the same period as the seller The buyer of the Output tax shall be
recognized the output tax. property can claim the recognized by the
input tax in the same seller and input tax
Sale on a deferred payment basis period as the seller shall accrue to the
recognized the output buyer at the time of
It means sale of real property, the initial payments tax. the execution of the
of which in the year of sale exceed 25% of the gross instrument of sale.
selling price. Payments that are Payments that are
subsequent to “initial subsequent to “initial
In this case, the transaction shall be treated as cash payments” shall be payments” shall no
sale which makes the entire selling price taxable in subject to output VAT longer be subject to
month of sale(R.R. 16-2005). output VAT

Output tax shall be recognized by the seller and
input tax shall accrue to the buyer at the time of the
execution of the instrument of sale. Payments that
are subsequent to “initial payments” shall no longer
be subject to output VAT (R.R. 4-2007).
NOTE: Real estate dealer includes any person
engaged in the business of buying, developing,
selling, exchanging real properties as principal and
holding himself out as a full or part-time dealer in
real estate.

Initial payments Transmission of property to a trustee shall not be

It means payment or payments which the seller
receives before or upon execution of the instrument
of sale and payments which he expects or is
scheduled to receive in cash or property (other than
evidence of indebtedness of the purchaser) during
the year when the sale or disposition of the real
property was made. It covers any down payment
made and includes all payments actually or
constructively received during the year of sale, the
aggregate of which determines the limit set by law.
Initial payments do not include the amount of
mortgage on the real property sold except when
such mortgage exceeds the cost or other basis of the
property to the seller, in which case, the excess shall
be considered part of the initial payments.
Also excluded from initial payments are notes or
other evidence of indebtedness issued by the
purchaser to the seller at the time of the sale.
subject to VAT if the property is to be merely held in
trust for the trustor and/or beneficiary. However, if
the property transferred is one for sale, lease or use
in the ordinary course of trade or business and the
transfer constitutes a completed gift, the transfer is
subject to VAT as a deemed sale transaction. The
transfer is a completed gift if the transferor divests
himself absolutely of control over the property, i.e.,
irrevocable transfer of corpus and/or irrevocable
designation of beneficiary.
Sale of scrap materials
Sale of scrap materials by a VAT-registered person
such as empty drums, plastic bags, cartons, and
wood crates; obsolete inventories and fully-
depreciated fixed assets sold at minimal prices or
lower than purchase price are subject to VAT (VAT
Ruling No. 25-92, March 11, 1992).
VAT ON IMPORTATION OF GOODS

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 VALUE ADDED TAX
Importation is an act of bringing goods and
merchandise into a country (Philippines) from a
foreign country.
VAT is imposed on goods brought into the
Philippines, whether for use in business or not,
except those specifically exempted under Section
109(1) of the NIRC.
Purpose: This is to protect our local or domestic
goods or articles and to regulate the entry or
introduction of foreign articles to our local market.
Tax base of VAT on importation
GR: The tax base shall be based on the total value
used by the BOC in determining tariff and customs
duties plus customs duties, excise taxes, if any, and
other charges to be paid by the importer prior to the
release of such goods from customs custody.
(Transaction value)
XPN: In case the valuation used by the BOC in
computing customs duties is based on volume or
quantity of the imported goods, the landed cost shall
be the basis for computing VAT.
Landed cost consists of the invoice amount,
customs duties, freight, insurance and other
charges. If the goods imported are subject to excise
tax, the excise tax shall form part of the tax base.
The same rule applies to technical importation of
goods sold by a person located in a Special Economic
Zone to a customer located in a customs territory
(Sec. 4.107-1, R.R. 16-2005).
Payment of tax on imported goods
The VAT on importation shall be paid by the
importer prior to the release of such goods from
customs custody.
Importer refers to any person who brings goods into
the Philippines, whether or not made in the course
of his trade or business. It includes non-exempt
persons or entities who acquire tax-free imported
goods from exempt persons, entities or agencies.
Beginning and end of importation
Importation begins when the carrying vessel or
aircraft enters the Philippine territory with the
intention to unload therein. Importation is deemed
terminated when the duties, taxes and other charges
due upon the goods have been paid or secured to be
paid at the port of entry or in case the goods are
deemed free of duties, taxes and other charges,
233
when the goods have legally left the jurisdiction of
the Bureau (Sec. 103, CMTA).
Transfer of goods by tax-exempt persons
Consequence if a tax exempt person would
transfer imported goods to a non-exempt
person
The purchaser or transferee shall be considered as
an importer and shall be held liable for VAT and
other internal revenue tax due on such importation
(Sec. 107[B], NIRC).
The tax due on such importation shall constitute a
lien on the goods, superior to all charges/or liens,
irrespective of the possessor of said goods.
Q: Anshari, an alien employee of Asian
Development Bank (ADB) who is retiring soon
has offered to sell his car to you, which he
imported tax-free for his personal use. The
privilege of exemption from tax is recognized by
tax authorities. If you decide to purchase the car,
is the sale subject to tax? Explain. (2005 Bar)
A: YES. The sale is subject to tax. Sec. 107 (B) of the
NIRC provides that “In case of tax-free importation
of goods into the Philippines by persons, entities or
agencies exempt from tax, where the goods are
subsequently, sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be
considered a the importer thereof, who shall be
liable for any internal revenue tax on such
importation.
VAT ON SALE OF SERVICE AND USE OR LEASE OF
PROPERTIES
Sale or exchange of services, as well as the use or
lease of properties, shall be subject to VAT,
equivalent to 12% of the gross receipts (excluding
VAT) (RR 16-2005).
Sale or exchange of services
It means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or
consideration, whether in kind or in cash, including
those performed or rendered by the following:
1. Construction and service contractors;
2. Stock, real estate, commercial, customs and
immigration brokers;
3. Lessors of property, whether personal or real;
4. Transmission of electricity by electric
cooperatives
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Lease of property shall be subject to VAT
regardless of the place where the contract of
lease or licensing agreement was executed if the
property leased or used is located in the
Philippines.
VAT on rental and/or royalties payable to non-
resident foreign corporations or owners for the
sale of services and use or lease of properties in
the Philippines shall be based on the contract
price agreed upon by the licensor and the
licensee. The licensee shall be responsible for
the payment of VAT on such rentals and/or
royalties in behalf of the non-resident foreign
corporation or owner.
Non-resident lessor/owner refers to any
person, natural or juridical, an alien, or a citizen
who establishes to the satisfaction of the
Commissioner of Internal Revenue the fact of
his physical presence abroad with a definite
intention to reside therein, and who
owns/leases properties, real or personal,
whether tangible or intangible, located in the
Philippines.
Rules on advance payments made by lessee
In a lease contract, the advance payment by the
lessee may be: (LOSP)
a. A loan to the lessor from the lessee, or
b. An option money for the property, or
c. A security deposit to insure the faithful
performance of certain obligations of the
lessee to the lessor, or
d. Pre-paid rental.
If the advance payment is either (1), (2), or (3)
of the above, such advance payment is not
subject to VAT. However, a security deposit that
is applied to rental shall be subject to VAT at the
time of its application.
If the advance payment constitutes a pre-paid
rental, then such payment is taxable to the
lessor in the month when received, irrespective
of the accounting method employed by the
lessor.
5. Persons engaged in warehousing services;
6. Lessors or distributors of cinematographic
films;
7. Persons engaged in milling, processing,
manufacturing or repacking goods for others;
8. Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
234
9. Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers;
10. Dealers in securities;
11. Lending investors;
12. Transportation contractors on their transport
of goods or cargoes, including persons who
transport goods or cargoes for hire and other
domestic common carriers by land relative to
their transport of goods or cargoes;
13. Common carriers by air and sea relative to their
transport of passengers, goods or cargoes from
one place in the Philippines to another place in
the Philippines;
14. Sales of electricity by generation, transmission,
and/or distribution companies;
NOTE: That sale of power or fuel generated
through renewable sources of energy such as,
but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and
other emerging energy sources using
technologies such as fuel cells and hydrogen
fuels shall be subject to 0% VAT.
15. Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other franchise
grantees, except franchise grantees of radio
and/or television broadcasting whose annual
gross receipts of the preceding year do not
exceed P10,000,000, and franchise grantees of
gas and water utilities;
Franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the
preceding year do not exceed P10,000,000,
shall have an option to be registered as a VAT
taxpayer and pay the tax due thereon. Once the
option is exercised, said option shall not be
irrevocable. (Sec. 119, NIRC)
16. Non-life insurance companies (except their
crop insurances), including surety, fidelity,
indemnity and bonding companies;and
17. Similar services regardless of whether or not
the performance thereof calls for the exercise or
use of the physical or mental faculties.
This shall likewise include: (LE4SU4)
1. The lease or the use of or the right or privilege to
use any copyright, patent, design or model plan,
secret formula or process, goodwill, trademark,
trade brand or other like property or right;
2. The lease or the use of, or the right to use of any
industrial, commercial or, scientific equipment;
3. The supply of scientific, technical, industrial or
commercial knowledge or information;
4. The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of
enabling the application or enjoyment of any
such property, or right as is mentioned in
subparagraph (2) or any such knowledge or
 VALUE ADDED TAX
information as is mentioned in subparagraph
(3);
5. The supply of services by a non-resident person
or his employee in connection with the use of
property or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus purchased from
such nonresident person;
6. The supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme;
7. The lease of motion picture films, films, tapes
and discs; and
8. The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time.(RR 16-2005).
NOTE: The above list is not exclusive.
Requisites for the taxability of sale or exchange
of services or lease or use of property
(SPaCeVaN)
1. There is a sale or exchange of service or lease or
use of property enumerated in the law or other
similar services;
2. The service is performed or to be performed in
the Philippines;
3. The service is in the course of trade of
taxpayer’s trade or business or profession;
4. The service is for a valuable consideration
actually or constructively received; and
5. The service is not exempt under the NIRC,
special law or international agreement.
NOTE: Absence of any of the requisites renders the
transaction exempt from VAT but may be subject to
other percentage tax under Title V of the NIRC.
Gross receipts
It pertains to the total amount of money or its
equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced payments (1)actually or
(2)constructivelyreceived during the taxable
quarter for the services performed or to be
performed for another person, excluding VAT,
except those amounts earmarked for payment to
unrelated third (3rd) party or received as
reimbursement for advance payment on behalf of
another which do not redound to the benefit of the
payor (service provider).
235
A payment is a payment to a third (3rd) party if
the same is made to settle an obligation of another
person. Such obligation should be evidenced by the
sales invoice/ official receipt issued by the said third
party to the customer/client of the service provider.
An advance payment is an advance payment on
behalf of another if the same is paid to a third (3rd)
party for a present or future obligation of said
customer/client which obligation is evidenced by a
sales invoice/official receipt issued by the creditor
(3rd party) to the customer/client (the
aforementioned another party) for the sale of goods
or services by the former to the latter.
For this purpose, ‘unrelated party’ shall not
include taxpayer’s employees, partners, affiliates
(parent, subsidiary and other related companies),
relatives by consanguinity or affinity within the
fourth (4th) civil degree, and trust fund where the
taxpayer is the trustor, trustee or beneficiary, even
if covered by an agreement to the contrary (Sec. 11,
R.R. 04-2007).
Constructive receipt
It occurs when the money consideration or its
equivalent is placed at the control of the person who
rendered the service without restrictions by the
payor.
Examples of constructive receipts:
1. Deposit in banks which are made available to
the seller without restrictions.
2. Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by
the seller as payment for services rendered.
3. Transfer of the amounts retained by the payor
to the account of the contractor. (RR 16-2005)
Q: Are non-stock, non-profit entities liable to pay
VAT for sale of goods and services?
A: YES. As long as the entity provides service for a
fee, remuneration or consideration, then the service
rendered is subject to VAT (Commissioner v. CA, G.R.
No. 125355, March 30, 2000).
Q: Are toll fees collected by tollway operators
are subject to VAT?
A: YES. First, VAT is imposed on “all kinds of
services” When a tollway operator takes a toll fee
from a motorist, the fee is in effect for the latter’s use
of the tollway facilities over which the operator
enjoys private proprietary rights.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Second, VAT is imposed on “franchise grantees”.
The word “franchise” broadly covers government
grants of a special right to do an act or series of acts
of public concern, and is not limited to legislative
franchises. Tollway operators are, owing to the
nature and object of their business, “franchise
grantees.” The construction, operation, and
maintenance of toll facilities on public
improvements are activities of public consequence
that necessarily require a special grant of authority
from the state.
Third, the public nature of the services rendered by
tollway operators does not exclude such services
from the VATable services. In specifically including
by way of example electric utilities, telephone,
telegraph, and broadcasting companies in its list of
VAT-covered businesses, Section 108 opens other
companies rendering public service for a fee to the
imposition of VAT.
Fourth, on the argument that toll fee is a “user’s tax”
and to impose VAT on toll fees is tantamount to
taxing a tax, it is established that tollway fees are not
taxes. Indeed, they are not assessed and collected by
the BIR and do not go to the general coffers of the
government. Toll fees are collected by private
tollway operators as reimbursement for the costs
and expenses incurred in the construction,
maintenance and operation of the tollways, as well
as to assure them a reasonable margin of income.
(Diaz v. Sec. of Finance, G.R. No. 193007, July 19,
2011).
Q: Are gross receipts derived from sales of
admission tickets in showing motion pictures
subject to VAT?
A: NO. The legislative intent is not to impose VAT on
persons already covered by the amusement tax. The
repeal by the LGC of 1991 of the Local Tax Code
transferring the power to impose amusement tax on
cinema/theater operators or proprietors to the
local government did not grant nor restore the said
power to the national government nor did it expand
the coverage of VAT. Since the imposition of a tax is
a burden on the taxpayer, it cannot be presumed nor
can it be extended by implication. As it is, the power
to impose amusement tax on cinema/theater
operators or proprietors remains with the local
government.
A contrary ruling will subject cinema/theater
operators or proprietors to a total of 40% tax, the
10% (now 12%) VAT being on top of the 30%
amusement tax imposed by the Local Government
Code of 1991, thereby killing the “[goose] that lays
the golden egg[s].”
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
236
The “lease of motion picture films, films, tapes and
discs” under Sec. 108 of the NIRC is not the same as
the showing or exhibition of motion pictures or
films. “Exhibition” is defined as “to show or to
display. x xx To produce anything in public so that it
may be taken in possession”. On the other hand,
“lease” is defined as “a contract by which one
owning such property grants to another the right to
possess, use and enjoy it on specified period of time
in exchange for periodic payment of a stipulated
price, referred as rent.” Thus, the legislature never
intended to include cinema/theater operator
operators or proprietors in the coverage of VAT (CIR
v. SM Prime Holdings, Inc., G.R. No. 183505, February
26, 2010).
TRANSACTIONS DEEMED SALE
There is no actual sale of goods took place but such
transactions are subject to VAT.
In a transaction deemed sale, the input VAT was
already used by the seller as a credit against output
VAT. However, since there was no actual sale, no
output VAT is actually charged to customers.
Consequently, the State will be deprived of its right
to collect the output VAT. To avoid the situation
where a VAT registered taxpayer avail of input VAT
credit without being liable for corresponding output
VAT, certain transactions should be considered
sales even in the absence of actual sale (Tabag,
2015).
The following are transactions deemed sale and
therefore subject to VAT: [CORD]
1. Transfer, use or consumption not in the course
of business of goods or properties originally
intended for sale or for use in the course of
business (i.e., when a VAT-registered person
withdraws goods from his business for his
personal use)
2. Distribution or transfer to:
a. Shareholders or investors as share in the
profits of the VAT-registered persons
NOTE: Property dividends which
constitute stocks in trade or properties
primarily held for sale or lease declared out
of retained earnings on or after January 1,
1996 and distributed by the company to its
shareholders shall be subject to VAT based
on the zonal value or fair market value at
the time of distribution, whichever is
applicable (Sec. 106.7, R.R. 16-2005).
b. Creditors in payment of debt
 VALUE ADDED TAX
3. Consignment of goods if actual sale is not made
within sixty (60) days following the date such
goods were consigned.
NOTE: Consigned good returned by the
consignee within the 60-day period are not
deemed sold.
4. Retirement from or cessation of business with
respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as
of the date of such retirement or cessation,
whether or not the business is continued by the
new owner or successor (Sec. 106 (B) NIRC).
Transactions that are considered retirement or
cessation of business
1. Change of ownership of the business. There is
change in the ownership of the business when a
single proprietorship incorporates; or the
proprietor of a single proprietorship sells his
entire business.
2. Dissolution of a partnership and creation of a
new partnership which takes over the business
(Sec. 4.106-7, R.R. 16-2005).
Consideration in determining whether a CHANGE OR CESSATION OF STATUS AS
transaction is “deemed sale”
Before considering whether the transaction is
“deemed sale”, it must first be determined whether
the sale was in the ordinary course of trade or
business or not. Even if the transaction was
“deemed sale” if it was not done in the ordinary
course of trade or business or was not originally
intended for sale in the ordinary course of business,
the transaction is not subject to VAT (CIR v.
Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006).
Tax base of transactions deemed sale
In cases where a transaction is a deemed sale, barter
or exchange of goods or where the selling price is
unreasonably lower than the actual market value,
the Commissioner shall determine the appropriate
tax base.
NOTE: The gross selling price is unreasonably lower
than the actual market value if it is lower by more
than 30% of the actual market value of the same
goods of the same quantity and quality sold in the
immediate locality on or nearest the date of sale
(Sec. 4 106-7, R.R. 16-2005).
The output tax shall be based on the market value of
the goods deemed sold as of the time of the
237
occurrence of the transactions enumerated above in
numbers 1, 2, and 3.
However, in the case of retirement or cessation of
business, the tax base shall be the acquisition cost or
the current market price of the goods or properties,
whichever is lower.
In the case of a sale where the gross selling price is
unreasonably lower than the fair market value, the
actual market value shall be the tax base (Sec. 4 106-
7, R.R. 16-2005).
Nonetheless, if one of the parties in the transaction
is the government as defined and contemplated
under the Administrative Code, the output VAT on
the transaction shall be based on the actual selling
price (Sec. 7, R.R. 4-2007).
Inventory used for promotions and office
supplies
Goods given for free in the course of trade or
business in order to promote sales efforts are not
considered deemed sale transactions (VAT Ruling
No. 109-88, April 25, 1988).
VAT-REGISTERED PERSON
The following change in or cessation of status of
a VAT registered person are subject to VAT:
1. Change of business activity from VAT taxable
status to VAT-exempt status.
2. Approval of a request for cancellation of
registration due to reversion to exempt status.
3. Approval of a request for cancellation of
registration due to a desire to revert to exempt
status after the lapse of 3 consecutive years
from the time of registration by a person who
voluntarily registered despite being exempt
under Sec 109 (2) of the NIRC.
4. Approval of a request for cancellation of
registration of one who commenced business
with the expectation of gross sales or receipt
exceeding P1,919,500 but who failed to exceed
this amount during the first 12 months of
operations.
The following change in or cessation of status of
a VAT registered person are NOT subject to
Output Tax
1. Change of control in the corporation of as
corporation by the acquisition of
controlling interest of the corporation by
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
another stockholder or group of supply of services. The taxpayer/seller
stockholders. output tax rate is set at shall not bill any
zero. When applied to the output tax on his
The goods or properties used in the business or tax base, such rate sales to his
those comprising the stock-in-trade of the obviously results in no tax customers and
corporation will not be considered sold, chargeable against the corollarily, is not
bartered or exchanged despite the change in the purchaser. allowed any credit
ownership interest. However, the exchange of or refund of the
real estate properties held for sale or for lease, The seller of such input taxes he paid
for shares of stocks, whether resulting to transactions charges no on his purchases.
corporate control or not, is subject to VAT, output tax but can claim a
subject to exceptions provided under Section refund or tax credit This non-crediting
4.106-3 (Sale of real properties) hereof. On the certificate for the VAT of input taxes is
other hand, if the transferee of the transferred previously charged by exempt
real property by a real estate dealer is another suppliers(AT&T transactions is the
real estate dealer, in an exchange where the Communications Services underlying reason
transferor gains control of the transferee- Phils., Inc. v. CIR, G.R. No. why the NIRC
corporation, no output VAT is imposable on the 182364, August 3, 2010). adopted the rule on
said transfer (Sec. 8, R.R. 4-2007). apportionment of
No VAT shall be shifted or tax credits under
2. Change in the trade or corporate name of passed-on by VAT- Section 104(A)
the business. registered sellers or whenever a VAT-
3. Merger or consolidation of corporations. suppliers from the registered taxpayer
Customs Territory on engages in other
The unused input tax of the dissolved their sale, barter or VAT taxable and
corporation, as of the date of merger or exchange of goods, non-VAT taxable
consolidation, shall be absorbed by the properties or services to sales (CIR v. Eastern
surviving or new corporation. the subject registered Telecomm. Phils.,
Freeport Zone Inc., G.R. No.
ZERO-RATED SALES enterprises. 163835, July 7,
2010).
Zero-rated sale by a VAT-registered person is a
taxable transaction for VAT purposes but the sale Simply put, the difference lies in the input tax. In
does not result in any output tax. However, the input VAT-exempt transactions there is no input tax credit
tax on the purchases of goods, properties or services allowed. In the case of 0% rated transaction of a VAT
related to such zero-rated sale shall be available as registered person, the sale of goods or properties is
tax credit or refund. multiplied by 0% thus his output tax is P 0.00. If the
person is VAT registered, he may claim such input tax
To be subject to zero tax-rate, however, the seller as tax credit or refund.
must be a VAT-registered person because if he is not
VAT registered, the transactions entered into by him E.g.: Output tax P 0.00
are exempt from the tax. Less: Input tax 5,000.00
Purpose: To exempt the transaction completely Excess input tax P 5, 000.00
from VAT previously collected since input taxes
passes to him may be recovered as refund or credits BASIS EXEMPT ZERO-RATED
(Ingles, 2015). Nature Not taxable; Transaction is
of removes VAT at taxable for VAT
The zero-rated seller becomes internationally transac the exempt stage purposes
competitive by allowing the refund or credit of input -tion although the tax
taxes that are attributable to export sales (CIR v. levied is 0%
Seagate Technology (Phil.), G.R. No. 153866, Feb. 11, By Need not be a Made by a VAT-
2005). whom VAT-registered registered person
made person
Zero-rated vs. VAT-exempt transactions Input Not subject to May claim input
tax output tax, thus tax credit
ZERO-RATED VAT- EXEMPT cannot claim although the
It generally refers to the In VAT-exempt input tax credit. transaction
export sale of good and sales, the

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
238
 VALUE ADDED TAX

resulted to zero Enhanced VAT Refund System

output tax.
Tax Cannot avail of Can claim or Sales of raw materials to nonresident buyer under
Credit/ tax credit or enjoy tax the aforementioned, sale of raw materials to export-
Refund refund. Thus, credit/refund oriented enterprise whose export sales exceed 70%
may result in (Total Relief) of total annual production, and those under the
increased prices Omnibus Investments Code shall be under 12% VAT
(Partial Relief) and no longer be considered as export sales subject
to 0% VAT rate upon the following:
ZERO-RATED SALE OF GOODS
a. Successful establishment of VAT refund
[FEE] system which grants refunds of creditable
1. Export sales input tax within ninety (90) days
2. Foreign currency denominated sale b. Pending VAT refund claims as of December
3. Effectively zero-rated sales 31, 2017 shall be fully paid in cash by
December 31, 2019
EXPORT SALES
“Considered export sales under EO 226”
The term export sales means: [FINE GO] shall mean the Philippine port F.O.B. value
1. The sale and actual shipment of goods from the determined from invoices, bills of lading,
Philippines to a Foreign country: inward letters of credit, landing certificates,
a. irrespective of any shipping arrangement; and other commercial documents, of export
and products exported directly by a registered
b. paid for in acceptable foreign currency or export producer, or the net selling price of
its equivalent in goods or services and export products sold by a registered export
accounted for in accordance with the rules producer to another export producer, or to an
and regulations of BSP. export trader that subsequently export the
same; Provided, that sales of export products
2. Sale of raw materials or packaging materials by to another producer or to an export trader
a VAT-registered entity to a Non-resident shall only be deemed export sales when
buyer: actually exported by the latter, as evidenced by
a. for delivery to a resident local export- landing certificates or similar commercial
oriented enterprise; documents.
b. used in the manufacturing, processing,
packing, repacking in the Philippines of the Constructive exports
said buyer’s goods;
c. paid for in acceptable foreign currency and a. Sales to bonded manufacturing warehouses
accounted in accordance with the rules of of export-oriented manufacturers
BSP. b. Sales to export processing zones
c. Sales to enterprises duly registered and
3. Registered enterprises within separate custom accredited with the Subic Bay Metropolitan
territory as provided by special laws Authority pursuant to R.A. 7227
4. Registered enterprises within tourism d. Sales to registered export traders operating
enterprise zones as approved by TIEZA bonded trading warehouses supplying raw
5. International shipping or internatinoal air materials in the manufacture of export
transport operations, PROVIDED that: products under guidelines to be set by the
a. Goods, supplies, equipment, and Board in consultation with the BIR and the
fuel shall be used BOC.
b. For international shipping or air e. Sales to diplomatic missions and other
transport operations agencies and/or instrumentalities granted
tax immunities, of locally manufactured,
assembled or repacked products whether
6. Sale of raw material or packaging materials to
paid for in foreign currency or not (Sec.
Export oriented enterprise whose export sales
4.106-5, RR 16-2005).
exceed 70% of total annual production
7. Sale of Gold to BSP
9. The sale of goods, supplies, equipment and fuel
8. Those considered as export sales under the
to persons engaged in International shipping
Omnibus Investment Code of 1987(E.O. 226)

UNIVERSITY OF SANTO TOMAS

239 FACULTY OF CIVIL LAW
 LAW ON TAXATION
or international air transport operations (Sec. A: NO. Royal Mining’s claim is bereft of merit. It is
106[A][2][a], NIRC as amended by RA 9337). the sale of gold (and not silver) to the BSP that is
considered as export sale subject to zero-rated VAT.
Rationale for zero-rating exports sale
FOREIGN CURRENCY DENOMINATED SALE
The Philippine VAT system adheres to the cross
border doctrine, according to which, no VAT shall be The phrase 'foreign currency denominated sale'
imposed to form part of the cost of goods destined means sale to a nonresident of goods, except those
for consumption outside of the territorial border of mentioned in Sections 149 and 150, assembled or
the taxing authority. manufactured in the Philippines for delivery to a
resident in the Philippines, paid for in acceptable
Export sale, when exempt and when zero-rated foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral
RULES ON EXPORT SALES ng Pilipinas (BSP) (Sec. 106[A][2][b], NIRC).
By a Non-VAT registered VAT exempt
NOTE: Section 149 refers to excise tax on
By a VAT registered VATable at 0% (zero
automobiles. Section 150 refers to excise tax on non-
rated)
essential goods.
Q: Is the sale of goods to ecozone, such as PEZA,
Requisites:
considered as export sale?
1. The buyer must be a non-resident;
A: YES. While an ecozone is geographically within
2. The goods sold must be assembled or
the Philippines, it is deemed a separate customs
manufactured in the Philippines;
territory and is regarded in law as foreign soil. Sales
3. Goods sold are to be delivered to a resident of
by suppliers from outside the borders of the
the Philippines; and
ecozone to this separate customs territory are
4. Paid for in acceptable foreign currency and
deemed as exports and treated as export sales.
accounted for in accordance with the rules and
These sales are zero-rated or subject to a tax rate of
regulations of the BSP.
zero percent (CIR v. Sekisui Jushi Philippines, Inc., G.R.
No. 149671, July 21, 2006).
EFFECTIVELY ZERO-RATED TRANSACTION
An ecozone or a Special Economic Zone has been
The term “effectively zero-rated sale of goods and
described as selected areas with highly developed
properties” shall refer to the local sale of goods and
or which have the potential to be developed into
properties by a VAT-registered person to a person
agro-industrial, industrial, tourist, recreational,
or entity who was granted indirect tax exemption
commercial, banking, investment and financial
under special laws or international agreement.
centers whose metes and bounds are fixed or
delimited by Presidential Proclamations. An
Since the buyer is exempt from indirect tax, the
ecozone may contain any or all of the following:
seller cannot pass on the VAT and therefore, the
industrial estates (IEs), export processing zones
exemption enjoyed by the buyer shall extend to the
(EPZs), free trade zones and tourist/recreational
seller, making the sale effectively zero-rated (R.M.C.
centers. The national territory of the Philippines
50-2007).
outside of the proclaimed borders of the ecozone
shall be referred to as the Customs Territory (CIR v.
Effectively Zero-rated vs. Automatic Zero-rated
Toshiba Information Equipment (Phils.), Inc., G.R.. No.
transaction
150154, August 9, 2005).
BASIS EFFECTIVELY AUTOMATIC
Q: Royal Mining is a VAT-registered domestic
ZERO-RATED ZERO-RATED
mining entity. One of its products is silver being
TRANSACTION TRANSACTION
sold to Bangko Sentral ng Pilipinas. It filed a
Refers to sales Refers to export
claim with the BIR for tax refund in the ground
to persons or sales and foreign
that under Section 106 of the NIRC, sales of
entities whose currency
precious metals to Bangko Sentral are
exemption denominated
considered export sales subject to zero-rated Nature
under special sales
VAT. (2006 Bar)
laws or
international
agreements to

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2019 GOLDEN NOTES
240
 VALUE ADDED TAX

BASIS EFFECTIVELY AUTOMATIC enterprises doing business in the Mactan Export

ZERO-RATED ZERO-RATED Processing Zone. Inasmuch as both sales are
TRANSACTION TRANSACTION considered export sales subject to VAT at 0%
which the rate under the National Internal Revenue Code,
Philippines is a as amended, it filed an application for tax
signatory credit/refund of VAT paid for the said period
representing excess VAT input payments. The
An application No need to file an CIR belies the claim for refund. Is the grant of a
for zero-rating application form refund representing unutilized input VAT to
must be filed and to secure BIR Cebu Toyo proper?
and the BIR approval before
Need to approval is the sale is A: YES. Cebu Toyo is engaged in taxable rather than
apply for necessary considered zero- exempt transactions. Taxable transactions are those
zero- before the rated. transactions which are subject to VAT either at the
rating transaction rate of 12% or 0%. In taxable transactions, the seller
may be shall be entitled to tax credit for the VAT paid on
considered purchases and leases of goods, properties or
effectively services. An exemption means that the sale of goods,
zero-rated. properties or services and the use or lease of
Intended to Primarily properties is not subject to VAT (output tax) and the
benefit the intended to be seller is not allowed any tax credit on VAT (input
purchaser who, enjoyed by the tax) previously paid. A VAT-registered purchaser of
not being seller who is goods, properties or services that are VAT exempt,
directly and directly and is not entitled to any input tax on such purchases
For legally liable for legally liable for despite the issuance of a VAT invoice or receipt.
whose the payment of the VAT, making Under the system, a zero rated sale by a VAT-
benefit is the VAT, will such seller registered person, which is a taxable transaction for
it ultimately bear internationally VAT purposes, shall not result in any output tax, but
intended the burden of competitive by the input tax on his purchase of goods, properties or
the tax shifted allowing the services related to such zero-rated sale shall be
by the refund or credit available as tax credit or refund (CIR v. Cebu Toyo
suppliers. of input taxes that Corporation, G.R. No. 149073, February 16, 2005).
are attributable
to export sales. Q: SEAGATE is registered with the PEZA to
Required. The Not required. The engage in the manufacture of recording
buyer, as buyer, as shown components primarily used in computers for
shown by his by his address in export. SEAGATE is a VAT-registered entity. An
Stamping administrative claim for refund of VAT input
address in the the sales invoice
of “zero- taxes with supporting documents was filed with
sales invoice and shipping
rated” on Revenue District Office in Cebu. The
and shipping documents, is
VAT administrative claim for refund was not acted
documents, is located outside
invoice upon by the petitioner prompting the
located outside the Philippines.
or receipt respondent to elevate the case to the CTA. The
the Philippines
merely by CIR contended that since ‘taxes are presumed to
fiction of law. have been collected in accordance with laws and
Results in no tax chargeable against regulations, Seagate has the burden of proof that
the purchaser. the taxes sought to be refunded were
erroneously or illegally collected.
Effect Unfortunately, Seagate failed to do so. Is Seagate
The seller can claim a refund or a tax
credit certificate for the VAT entitled to the refund or issuance of Tax Credit
previously charged by suppliers. Certificate representing alleged unutilized input
VAT paid on capital goods purchased?
Q: Cebu Toyo Corp., an export enterprise, duly
registered with the Philippine Economic Zone A: YES. As a PEZA-registered enterprise within a
Authority pursuant to PD 66 and is also special economic zone, it is entitled to the fiscal
registered with the BIR as a VAT taxpayer. It incentives and benefits provided for in either PD 66
sells 80% of its products to its mother or EO 226 which would not subject Seagate to
corporation, and the rest are sold to various internal revenue laws and regulations, among

UNIVERSITY OF SANTO TOMAS

241 FACULTY OF CIVIL LAW
 LAW ON TAXATION
others. Thus, Seagate enjoys preferential tax
treatment. The VAT on capital goods is an internal
revenue tax from which the entity is exempt.
Although the transactions involving such tax are not
exempt, Seagate as a VAT-registered person,
however, is entitled to their credits.
Since the purchases of Seagate are not exempt from
the VAT, the rate to be applied is zero. Its exemption
under both P.D. 66 and R.A. 7916 effectively subjects
such transactions to a zero rate, because the
ecozone within which it is registered is managed
and operated by the PEZA as a separate customs
territory. This means that in such zone is created the
legal fiction of foreign territory. Under the cross-
border principle of the VAT system being enforced
by the BIR, no VAT shall be imposed to form part of
the cost of goods destined for consumption outside
of the territorial border of the taxing authority. If
exports of goods and services from the Philippines
to a foreign country are free of the VAT, then the
same rule holds for such exports from the national
territory – except specifically declared areas – to an
ecozone (CIR v. Seagate Technology (Phil.), G.R. No.
153866, Feb. 11, 2005).
Q: Acesite is the owner and operator of the
Holiday Inn Manila. It leases a portion of its
hotel’s premises to PAGCOR for casino
operations. Acesite passed VAT on rental
income to PAGCOR, but PAGCOR refused to pay
the passed-on VAT, invoking its franchise which
exempts PAGCOR from tax. Acesite still paid VAT
on the rental income from PAGCOR to the BIR as
it feared the legal consequences of non-payment
of the tax. Acesite belatedly arrived at the
conclusion that its transaction with PAGCOR was
subject to zero rate as it was rendered to a tax-
exempt entity. Acesite filed for a claim for
refund. Should the claim for refund be granted?
A: YES. PAGCOR is exempted from “tax of any kind
or form, income or otherwise, as well as fees,
charges or levies of whatever nature, whether
National or Local”. The exemptions granted in the
franchise for earnings derived from the operations
conducted under the franchise shall inure to the
benefit of and extend to corporations or individual
with whom the Corporation or operator has any
contractual relationship in connection with the
operations of the casinos authorized to be
conducted under PAGCOR’s Franchise. PAGCOR’s
franchise goes one step further by granting tax
exempt status to persons dealing with PAGCOR in
casino operations. By this extension, the legislature
clearly granted exemption also from indirect taxes.
Section 106(A)(2)(c) of the NIRC specifies that sales
to persons or entities whose exemption under
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
242
special laws or international agreements to which
the Philippines is a signatory effectively subjects
such sales to zero-rate. (CIR v. Acesite (Philippines)
Hotel Corporation, G.R. No. 147295, February 16,
2007)
Related case: The payments made by PAGCOR to its
catering service contractor are subject to zero-rated
(0%) VAT (CIR v. Secretary of Justice, G.R. No.
177387, November 9, 2016)
Q: A contractor constructed an office building
for the World Health Organization (WHO). BIR
assessed the contractor of VAT, contending that,
although WHO is exempt, the tax is being
assessed on the contractor, and not on WHO. Is
the BIR correct?
A: NO. As an international organization, WHO
enjoys privileges and immunities such as exemption
from all direct and indirect taxes. The contention of
BIR should be rejected. In context, direct taxes are
those that are demanded from the very person who,
it is intended or desired, should pay them; while
indirect taxes are those that are demanded in the
first instance from one person in the expectation
and intention that he can shift the burden to
someone else. The VAT is of course payable by the
contractor but in the last analysis it is the owner of
the building that shoulders the burden of the tax
because the same is shifted by the contractor to the
owner as a matter of selfpreservation. Thus, it is an
indirect tax. And it is an indirect tax on the WHO
because, although it is payable by the contractor, the
latter can shift its burden on the WHO. (CIR v. John
Gotamco& Sons, Inc., G.R. No. L-31092, February
27,1987, [Modified])
ZERO-RATED SALE OF SERVICE
The following services performed in the Philippines
by VAT- registered persons shall be subject to zero
percent (0%) rate.
1. Processing, manufacturing or repacking goods
for other persons doing business outside the
Philippines which goods are subsequently
exported, where the services are paid for in
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the BSP;
2. Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the
Philippines or to a nonresident person not
engaged in business who is outside the
Philippines when the services are performed,
the consideration for which is paid for in
 VALUE ADDED TAX
acceptable foreign currency and accounted for
in accordance with the rules and regulations of
the BSP i.e. recruitment;
3. Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a
signatory effectively subjects the supply of such
services to 0% rate;
4. Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof; shall only be
exclusively used for international shipping
or air transport operations
5. Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose
export sales exceed 70% of total annual
production;
6. Transport of passengers and cargo by air or sea
vessels from the Philippines to a foreign
country; and
7. Sale of power or fuel generated through
renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel
cells and hydrogen fuels (Sec. 108, NIRC as
amended by R.A. 9337).
8. Registered enterprises within a separate
customs territory as provided for by special
laws
9. Registered enterprises within tourism
enterprise zones as declared by TIEZA
Services other than processing manufacturing,
or repacking of goods (Sec 108 (B)(2)
Requirements to qualify for zero-rating
1. The services other than “processing,
manufacturing or repacking of goods” must be
performed in the Philippines,
2. That the payment for such services be in
acceptable foreign currency accounted for
in accordance with BSP rules, and that
3. The recipient of such services is doing
business outside of the Philippines.
In CIR vs. American Express International, Inc.,
(2005), the Court ruled that the Legislature does not
intend to impose the condition of being "consumed
abroad" in order for services performed in the
Philippines by a VAT-registered person to be zero-
rated. In this case, the taxpayer renders services in
the Philippines and facilitates the collection and
payment of receivables belonging to its non-
resident foreign client, for which it gets paid in
243
acceptable foreign currency inwardly remitted and
accounted for in conformity with BSP rules and
regulations.
In Accenture Inc. vs CIR (2012), the Court ruled that
the recipient of the service must be doing business
outside the Philippines for the transaction to qualify
for zero-rating under Section 108 (B) of the NIRC. To
come within the purview of Section 108 (B) (2), it is
not enough that the recipient of the service be
proven to be a foreign corporation; rather, it must
be specifically proven to be a nonresident foreign
corporation.
Services rendered to persons engaged in
international shipping or international air
transport operations
In order to qualify for zero-rating, the services
rendered by a VAT-registered person to a person
engaged in international air transport operations
must pertain to or must be attributable to the
transport of goods and passengers from a port in the
Philippines directly to a foreign port without
docking or stopping at any port in the Philippines.
Accordingly, the services provided by hotels to their
clients engaged in international air transport
operations pertaining to room accommodations and
food and beverage services should be subject to the
12% VAT. As they are rendered within the hotel's
premises, they have no direct connection with the
transport of goods or passengers, and as such, they
cannot be considered as services directly
attributable to the transport of goods and
passengers from a Philippine port directly to a
foreign port entitled to zero-rating (RMC No. 031-
11).
Q: Are the following transactions subject to VAT?
If yes, what is the applicable rate for each
transaction. State the relevant authority/ies for
your answer.
a. Construction by XYZ Construction Co. of
concrete barriers for the Asian
Development Bank in Ortigas Center to
prevent car bombs from ramming the ADB
gates along ADB Avenue in Mandaluyong
City.
c. Call Center operated by a domestic
enterprise in Makati that handles
exclusively the reservations of a hotel chain
which are all located in North America. The
services are paid for in US$ and duly
accounted for with the BangkoSentral ng
Pilipinas. (2010 Bar)
A:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
a. The transaction is subject to VAT at the rate of input tax credit. Thus a VAT-registered person may
zero percent (0%). ADB is exempt from direct choose to be subjected to rather than exempt from
and indirect taxes under a special law, thereby payment of VAT.
making the sale of services to it by a VAT-
registered construction company effectively Exempt transactions, enumerated
zero-rated (Sec. 108[B][3], NIRC).
b. The sale of services subject to VAT at zero a. Sale or importation of
percent (0%). Zero-rated sale of services i. agricultural and marine food products in
includes services rendered to a person engaged their original state,
in business outside the Philippines and ii. livestock and poultry of
consideration is paid in acceptable foreign a. a kind generally used as, or yielding
currency duly accounted for by the or producing foods for human
BangkoSentral ng Pilipinas (Sec. consumption; and
103[B][2]NIRC). b. breeding stock and genetic
materials therefor
VAT-EXEMPT TRANSACTIONS
Livestock shall include cows, bulls and calves, pigs,
These refer to the sale of goods or properties and/or sheep, goats and rabbits. Poultry shall include
services and the use or lease of properties that is not fowls, ducks, geese and turkey. Livestock or poultry
subject to VAT (output tax) and the seller is not does not include fighting cocks, race horses, zoo
allowed any tax credit of VAT (input tax) on animals and other animals generally considered as
purchases. pets.

The person making the exempt sale of goods, Marine food products shall include fish and
properties or services shall not bill any output tax to crustaceans, such as, but not limited to, eels, trout,
his customers because the said transaction is not lobster, shrimps, prawns, oysters, mussels and
subject to VAT (Sec 4.109-1, R.R. No. 16-2005). clams.

Exempt Party vs. Exempt Transaction Meat, fruit, fish, vegetables and other agricultural
and marine food products classified under this
EXEMPT paragraph shall be considered in their original date
EXEMPT PARTY
TRANSACTION even if they have undergone the simple processes of
A person or entity Involves goods or preparation or preservation for the market, such as
granted VAT exemption services which, by freezing, drying, salting, broiling, roasting, smoking
under the NIRC, special their nature are or stripping, including those using advanced
law or international specifically listed in technological means of packaging, such as shrink
agreement to which RP and expressly wrapping in plastics, vacuum packing, tetra-pack,
is a signatory, and by exempted from the and other similar packaging methods.
virtue of which its VAT under the NIRC,
taxable transactions without regard to the Polished and/or husked rice, corn grits, raw cane
become exempt from tax status of the sugar and molasses, ordinary salt and copra shall be
the VAT. parties in the considered as agricultural food products in their
transactions. original state.
Such party is not Transaction is not
subject to the VAT, but subject to VAT, but Sugar whose content of sucrose by weight, in the dry
may be allowed a tax the seller is not state, has a polarimeter reading of 99.5º and above
refund or credit of input allowed any tax are presumed to be refined sugar.
tax paid, depending on refund or credit for
its registration as a VAT any input taxes paid. Cane sugar produced from the following shall be
or non-VAT taxpayer. presumed, for internal revenue purposes, to be
refined sugar:
Reason for electing VAT registration
(1) product of a refining process,
A VAT-registered person who opted to be subject to (2) products of a sugar refinery, or
VAT may avail of the input tax credit. The input tax (3) product of a production line of a sugar mill
is deducted from the output tax thereby reducing accredited by the BIR to be producing and/or
his tax liabilities but a VAT-registered person who capable of producing sugar with polarimeter
opted to be exempt therefrom cannot avail of the reading of 99.5o and above, and for which the

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
244
 VALUE ADDED TAX
quedan issued therefor, and verified by the Sugar
Regulatory Administration, identifies the same to be
of a polarimeter reading of 99.5º and above.
Bagasse is not included in the exemption provided
for under this section (Sec. 4.109-1(B)(1)(a), R.R.
16-2005).
Refined sugar subject to VAT
Raw Sugar refers to sugar produced by simple
process of conversion of sugar cane without a need
of any of mechanical or similar device such as
muscovado. For this purpose, raw sugar refers only
to muscovado sugar.
Centrifugal process of producing sugar is not in
itself a simple process. Therefore, any type of sugar
produced therefrom is not exempt from VAT (R.R.
No. 13-2013).
b. Sale or importation of
2. fertilizers;
3. seeds, seedlings and fingerlings;
4. fish, prawn, livestock and poultry feeds,
including ingredients, whether locally
produced or imported, used in the
manufacture of finished feeds
a. except specialty feeds for race
horses, fighting cocks, aquarium fish,
zoo animals and other animals generally
considered as pets)
Specialty feeds refers to non-agricultural feeds or
food for race horses, fighting cocks, aquarium fish,
zoo animals and other animals generally considered
as pets.
c. Importation of personal and household
effects belonging to
1. residents of the Philippines returning
from abroad, and
2. non-resident citizens coming to resettle
in the Philippines;
Provided, that such goods are exempt from
customs duties under the Tariff and Customs
Code of the Philippines
Requisites under Sec. 800 of Customs
Modernization and Tariff Act of 2016
1. That the personal and household effects of
returning residents shall neither be in
commercial quantities nor intended for barter,
sale or hire and that the total dutiable value of
which shall not exceed:
245
a. P350,000 – for those who have stayed in a
foreign country for at least 10 yrs, and has
not availed of this privilege within 10 years
prior to arrival
b. P250,000 – for those who have stayed for at
least 5 but not more than 10 yrs and has not
availed of this privilege within 5 years prior
to arrival
c. P150,000 – for those who have stayed for a
period of less than 5 yrs and has not availed
of this privilege within 6 months prior to
arrival;
d. P150,000 – in case of returning OFWs. This
privilege is available once in a given
calendar year.
NOTE: Prior to the amendment of the
Tariff and Customs Code, the ceiling
amount is P10,000.
1. Amount in excess of the above threshold shall
be subject to tax.
d. Importation of
1. professional instruments and
implements,
2. wearing apparel,
3. domestic animals, and
4. personal household effects (except any
vehicle, vessel, aircraft, machinery and
other goods for use in the manufacture
and merchandise of any kind in
commercial quantity)
5. belonging to persons coming to settle in
the Philippines or their families and
descendants who are now residents or
citizens of other countries, such as
OVERSEAS FILIPINO
6. inquantities and of the class suitable to
the profession, rank, or position
7. for their own use and
8. not for sale, barter or exchange,
9. accompanying such persons, or arriving
within a reasonable time
10. upon the production of evidence
satisfactory to the Commissioner of
Internal Revenue, that such persons are
actually coming to settle in the
Philippines and that the change of
residence is bonafide;
e. Services subject to percentage tax
Refer to discussion on percentage tax.
f. Services by
1. agricultural contract growers, and
2. milling for others of
a. palay into rice,
b. corn into grits, and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
c. sugar cane into raw sugar
Agricultural contract growers refer to those persons
producing for others poultry, livestock or other
agricultural and marine food products in their
original state.
g. Medical, dental, hospital and veterinary
services, except those rendered by
professionals
Laboratory services are exempted. If the hospital or
clinic operates a pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
Q: PHILHEALTH, operates a health care delivery
system or a health maintenance organization to
take care of the sick and disabled persons
enrolled in the health care plan, inquired before
the CIR whether the services it provided to the
participants in its health care program were
exempt from the payment of VAT. The
Commissioner issued VAT Ruling 231-88
stating that PHILHEALTH, as a provider of
medical services, was exempt from the VAT
coverage.
Meanwhile, R.A. 7716 (E-VAT Law) took effect,
amending further the NIRC of 1977.
Subsequently, R.A. 8424 (NIRC of 1997) took
effect, substantially adopting and reproducing
the provisions of E.O. 273 on VAT and the E-VAT
law. With the passage of these laws, the BIR sent
PHILHEALTH a Preliminary Assessment Notice
for deficiency in its payment of the VAT and
documentary stamp taxes (DST) for taxable
years 1996 and 1997 and a letter demanding
payment of “deficiency VAT” and DST for taxable
years 1996 to 1997.
PHILHEALTH filed a protest with the
Commissioner but the latter did not take action
on its protest. Consequently, PHILHEALTH
brought the matter to the CTA. The CTA
declared that VAT Ruling 231-88 is void and
without force and effect and ordered it to pay
the VAT deficiency, but canceling the payment
of DST. After a Motion for Partial
Reconsideration, CTA overruled its decision
with respect to the payment of deficiency VAT
and held that PHILHEALTH was entitled to the
benefit of non-retroactivity of rulings
guaranteed under Section 246 of the NIRC, in the
absence of showing of bad faith on its part. Are
the services of PHILHEALTH subject to VAT?
A: YES, PHILHEALTH’s services are not VAT-
exempt. Those exempted from VAT are those
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
246
engaged in the performance of medical, dental,
hospital and veterinary services except those
rendered by professionals. PHILHEALTH is not
actually rendering medical service but merely
acting as a conduit between the members and their
accredited and recognized hospitals and clinics. It
merely provides and arranges for the provision of
pre-need health care services to its members for a
fixed prepaid fee for a specified period of time; that
it then contracts the services of physicians, medical
and dental practitioners, clinics and hospitals to
perform such services to its enrolled members; and
that it enters into contract with clinics, hospitals,
medical professionals and then negotiates with
them regarding payment schemes, financing and
other procedures in the delivery of health
services (CIR v. Philippine Health Care Providers Inc.,
G.R. No. 168129, April 24, 2007).
h. Educational services
1. rendered by private educational
institutions duly accredited by the
a. Department of Education (DepED),
b. the Commission on Higher Education
(CHED), and
c. the Technical Education and Skills
Development Authority (TESDA)
2. and those rendered by government
educational institutions;
Educational services shall refer to academic,
technical or vocational education provided by
private educational institutions duly accredited by
the DepED, the CHED and TESDA and those
rendered by government educational institutions
and it does not include seminars, in-service training,
review classes and other similar services rendered
by persons who are not accredited by the DepED,
the CHED and/or the TESDA.
i. Services rendered by individuals pursuant to
an employer-employee relationship
j. Services rendered
b. by regional or area headquarters
established in the Philippines by
multinational corporations
c. which act as
1. supervisory,
2. communications and
3. coordinating centers for their
a. affiliates,
b. subsidiaries or
c. branches
in the Asia Pacific Region, and
 VALUE ADDED TAX

d. do not earn or derive income from the From lending Exempt Exempt
Philippines activities
From non-lending VAT VAT
k. Transactions which are exempt under activities
international agreements to which the Electric cooperatives VAT VAT
Philippines is a signatory or under special
Non-agricultral, non-
laws except those granted under PD No. 529
lending and
which refers to Petroleum Exploration
multipurpose, non-
Concessionaires under the Petroleum Act of
electric
1949
Contribution per Exempt Exempt
l. Sales by agricultural cooperatives duly member < P15K
Contribution per VAT VAT
registered and in good standing with the
Cooperative Development Authority (CDA) to member > P15K
their members, as well as sale of their *Exempt if referring to agricultural food product at
produce, whether in its original state or its original state.
processed form, to non-members; their (Tabag, 2015)
importation of direct farm inputs,
machineries and equipment, including spare o. Export sales by persons who are not VAT-
parts thereof, to be used directly and registered
exclusively in the production and/or
processing of their produce Rules on Export Sales
By a Non-VAT registered VAT exempt
m. Gross receipts from lending activities by By a VAT registered VATable at 0% (zero
credit or multi-purpose cooperatives duly rated)
registered and in good standing with the
Cooperative Development Authority NOTE: The reason is to encourage exporters of
goods to register as a VAT-registered person with
n. Sales by non-agricultural, non-electric and the BIR to be able to claim unused input tax in the
non-credit cooperatives duly registered with form of refund or tax credit.
and in good standing with the CDA; Provided,
That the share capital contribution of each If he is a VAT-registered person, his export sales are
member does not exceed Fifteen Thousand zero-rated.
Pesos (P15,000.00) and regardless of the
aggregate capital and net surplus ratably p. Sales of real properties, namely:
distributed among the members.
1. Sale of real properties not primarily held
Importation by non-agricultural, non-electric and for sale to customers or held for lease in
non-credit cooperatives of machineries and the ordinary course of trade or business.
equipment, including spare parts thereof, to be used 2. Sale of real properties utilized for low-
by them are subject to VAT. cost housing as defined by RA No. 7279,
otherwise known as the "Urban
Summary rules on cooperatives Development and Housing Act of 1992"
and other related laws, such as RA No.
Sales/Gross Receipts To/From To/From 7835 and RA No. 8763.
by Members Non-
Members "Low-cost housing" refers to housing projects
Agricutural intended for homeless low-income family
Cooperatives beneficiaries, undertaken by the Government or
Own produce Exempt Exempt private developers, which may either be a
(processed or at its subdivision or a condominium registered and
origial state) licensed by the Housing and Land Use Regulatory
Other that own Exempt VAT* Board/Housing (HLURB) under BP Blg. 220, PD No.
produce (i.e. from 957 or any other similar law, wherein the unit
traders) selling price is within the selling price ceiling per
Credit or unit of P750,000.00 under RA No. 7279, otherwise
Multipurpose known as the "Urban Development and Housing Act
Cooperatives

UNIVERSITY OF SANTO TOMAS

247 FACULTY OF CIVIL LAW
 LAW ON TAXATION
of 1992" and other laws, such as RA No. 7835 and residential dwelling, thus, should be subject to VAT
RA No. 8763. regardless of amount of selling price.

3. Sale of real properties utilized for SUMMARY RULES ON SALES OF REAL

socialized housing as defined under RA PROPERTIES
No. 7279, and other related laws, such as Sale not in the ordinary course of
RA No. 7835 and RA No. 8763, wherein the trade or business
price ceiling per unit is P225,000.00 or as In general VAT exempt
may from time to time be determined by Sale of residential lot by a real
the HUDCC and the NEDA and other estate dealer
related laws. Selling price < P1,919,500* VAT exempt
Selling price > P1,919,500 VAT
"Socialized housing" refers to housing programs Sale of residential lot by a non-
and projects covering houses and lots or home lots dealer
only undertaken by the Government or the private Use in business (incidental VAT
sector for the underprivileged and homeless transaction)
citizens which shall include sites and services Not use in business (regardless 6% CGT
development, long-term financing, liberated terms of amount)
on interest payments, and such other benefits in
Sale of residential house & lot
accordance with the provisions of RA No. 7279,
and other residential dwellings
otherwise known as the "Urban Development and
by a real estate dealer
Housing Act of 1992" and RA No. 7835 and RA No.
Selling price < P3,199,200**
8763. "Socialized housing" shall also refer to
Selling price > P3,199,200 VAT exempt
projects intended for the underprivileged and
VAT
homeless wherein the housing package selling price
Sale of residential house & lot
is within the lowest interest rates under the Unified
and other residential dwellings
Home Lending Program (UHLP) or any equivalent
by a non-dealer
housing program of the Government, the private
Use in business (incidental VAT
sector or non-government organizations.
transaction)
4. Sale of residential lot valued of up to Not use in business (regardless 6% CGT
2,000,000 pesos beginning January 1, of amount)
2021 Sale of real property classified as VAT exempt
low cost housing
If two or more adjacent residential lots, house and Sale of real property classified as VAT exempt
lots or other residential dwellings are sold or socialized housing
disposed in favor of one buyer from the same seller, * Apply rules on adjacent lots
for the purpose of utilizing the lots, house and lots ** Apply rules on adjacent house and lots and other
or other residential dwellings as one residential residential dwellings
area, the sale shall be exempt from VAT only if the (Tabag, 2015)
aggregate value of the said properties do not exceed
P1,919,500.00 for residential lots, and q. Lease of residential units with a monthly
P3,199,200.00 for residential house and lots or rental per unit not exceeding fifteen
other residential dwellings. Adjacent residential thousand pesos (15,000), regardless of the
lots, house and lots or other residential dwellings amount of aggregate rentals received by the
although covered by separate titles and/or separate lessor during the year
tax declarations, when sold or disposed to one and
the same buyer, whether covered by one or separate Every 3 years thereafter, the amount shall be
Deed/s of Conveyance, shall be presumed as a sale adjusted to its present value using the Consumer
of one residential lot, house and lot or residential Price Index, as published by the Philippine Statistic
dwelling. Authority. Such adjustment shall be published
through revenue regulations to be issued not later
This however, does not include the sale of parking than March 31 of each year.
lot which may or may not be included in the sale of
condominium units. The sale of parking lots in a The foregoing notwithstanding, lease of residential
condominium is a separate and distinct transaction units where the monthly rental per unit exceeds
and is not covered by the rules on threshold amount P12,800 but the aggregate of such rentals of the
not being a residential lot, house & lot or a lessor during the year do not exceed P1,919,500

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
248
 VALUE ADDED TAX
shall likewise be exempt from VAT, however, the
same shall be subjected to 3% percentage tax.
In cases where a lessor has several residential units
for lease, some are leased out for a monthly rental
per unit of not exceeding P12,800 while others are
leased out for more than P12,800 per unit, his tax
liability will be as follows:
1. The gross receipts from rentals not exceeding
P12,800 per month per unit shall be exempt
from VAT regardless of the aggregate annual
gross receipts.
2. The gross receipts from rentals exceeding
P12,800 per month per unit shall be subject to
VAT if the aggregate annual gross receipts from
said units only (not including the gross receipts
from units leased for not more than P12,800)
exceeds P1,919,500. Otherwise, the gross
receipts will be subject to the 3% tax imposed
under Section 116 of the NIRC.
The term 'residential units' shall refer to
apartments and houses & lots used for residential
purposes, and buildings or parts or units thereof
used solely as dwelling places (e.g., dormitories,
rooms and bed spaces) except motels, motel rooms,
hotels, hotel rooms, lodging houses, inns and
pension houses.
The term 'unit' shall mean:
- an apartment unit in the case of apartments,
- house in the case of residential houses,
- per person in the case of dormitories, boarding
houses and bed spaces; and
- per room in case of rooms for rent (RR 16-11).
Summary of rules on lease of residential units:
Monthly rental VAT exempt and no
P12,800 or less percentage tax
regardless of annual
gross sales
Monthly rental above VAT-exempt under
P12,800 but annual Sec. 109 (W) but
gross sales do not shall pay 3%
exceed P1,919,500 percentage tax under
Section 116 of NIRC
Monthly rental above Subject to VAT
P12,800 and annual
gross sales exceed
P1,919,500
NOTE: Lease of commercial units, regardless of the
amount of monthly rental is subject to VAT unless
the lessor is non-VAT registered and annual gross
receipts < P1,919,500 (Tabag, 2015).
249
Q: X operates a dormitory beside the school
compound. Student bed-spacers are charged
Php 2,500 each per month. X has an average of
40 students every month. Since “Lease” is
VATable, can X pass the 12% VAT to the
students? Why?
A: The lease is VAT exempt because the monthly
rental per student is less than P12,800 regardless of
the total annual aggregate income of X received
during the year.
NOTE: If the rent of an apartment is more than
P12,800 per unit but the aggregate rent income of
the lessor does not exceed P1,919,500, the lessor is
not VATable, but he is subject to the 3% direct
percentage tax (Lim, 2014).
r. Sale, importation, printing or publication of
books and any newspaper, magazine, review,
or bulletin which appears at regular intervals
with fixed prices for subscription and sale
and which is not devoted principally to the
publication of paid advertisements
A newspaper, magazine, review or bulletin must be:
(1) printed or published at regular intervals;
(2) available for subscription and sale at fixed
prices; and
(3) are not principally devoted to the publication of
paid advertisements.
The terms "book", "newspaper", "magazine",
"review" and "bulletin" as used in the provision
refer to printed materials in hard copies. They do
not include those in digital or electronic format or
computerized versions, including but not limited to:
e-books, e-journals, electronic copies, online library
sources, CDs and software (RMC No. 57-2012).
s. Transport of passengers by international
carriers
The transport of cargo by international carriers
doing business in the Philippines shall be exempt
from VAT as the same is subject to Common
Carrier's Tax (Percentage Tax on International
Carriers). International carriers exempt under
Sections 109(1)(S) and 109(1)(E) of the NIRC, as
amended, shall not be allowed to register for VAT
purposes (RR No. 15-15).
Summary of rules for transport of passengers or
cargoes
12% VAT 0% VAT EXEMPT
Domestic International Transport of
transport of transport of passengers
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
passengers or passengers or by fuel, goods and supplies shall be subject to 12%
cargoes by air cargoes by air international VAT.
and sea or sea air and Fuel, When exempt from VAT and when zero-
shipping rated
carriers
NOTE: If Fuel is exempt if imported by persons engaged in
domestic NOTE: NOTE: In international shipping or air transport operations.
transport of Transport case of On the other hand, fuel is zero-rated when sold to
passengers or should be transport of persons engaged in international shipping or
cargoes by done by cargoes, the international air transport operations without
land, the domestic international docking or stopping at any other port in the
common carriers with air or Philippines.
carrier is international shipping
liable to flightssuch as carrier shall v. Services of
percentage PAL, Cebu be subject to 1. banks,
tax on Pacific, etc., 3% 2. non-bank financial intermediaries
common otherwise, percentage performing quasi-banking functions, and
carriers exempt tax on 3. other non-bank financial intermediaries
international subject to percentage tax under Secs. 121
carriers and 122 of the NIRC, such as money
changers and pawnshops

t. Sale, importation or lease of passenger or
cargo vessels and aircraft, including engine,
equipment and spare parts thereof for
domestic or international transport
operations
Provided, that the exemption from VAT on the
importation and local purchase of passenger and/or
cargo vessels shall be limited to those of one
hundred fifty (150) tons and above, including
engine and spare parts of said vessels; Provided,
further, that the vessels to be imported shall comply
with the age limit requirement, at the time of
acquisition counted from the date of the vessel's
original commissioning, as follows: (i) for passenger
and/or cargo vessels, the age limit is fifteen (15)
years old, (ii) for tankers, the age limit is ten (10)
years old, and (iii) For high-speed passenger crafts,
the age limit is five (5) years old; Provided, finally,
that exemption shall be subject to the provisions of
Section 4 of Republic Act No. 9295, otherwise
known as "The Domestic Shipping Development Act
of 2004";
In Tambunting Pawnshop, Inc. vs. CIR, G.R. No.
179085 (2010), since the taxpayer (pawnshop) is a
non-bank intermediary, it is subject to 10% (now
12%) VAT for the tax years 1996-2002; however,
with the levy, assessment and collection of VAT
from non-bank intermediaries being specifically
deferred by law, then taxpayer is not liable for VAT
during these tax years. But with the full
implementation of the VAT system on non-bank
financial intermediaries starting January 1, 2003,
taxpayer is liable for 10% VAT for the said tax year.
And beginning 2004 up to the present, by virtue of
R.A. no. 9238, taxpayer is no longer liable for VAT
but it is subject to percentage tax on gross receipts
from 0% to 5% as the case may be.
Pawnshops are not liable to pay VAT
Pawnshops are not classified as lending investors
and therefore, they are not subject to VAT. They are
subject to percentage tax as imposed on Section 122
of NIRC (Tambunting Pawnshop, Inc., v CIR, G.R. No.
179085, January 21, 2010; R.A. 9238; RMC 74-2005).

u. Importation of fuel, goods and supplies by
persons engaged in international shipping or
air transport operations
Provided, that the said fuel, goods and supplies shall
be used exclusively or shall pertain to the transport
of goods and/or passenger from a port in the
Philippines directly to a foreign port without
stopping at any other port in the Philippines;
Provided, further, that if any portion of such fuel,
goods or supplies is used for purposes other than
that mentioned in this paragraph, such portion of
w. Sale or lease of goods and services to senior
citizens and persons with disability
x. Transfer of property pursuant to Sec. 40(c) of
R.A. 10963
y. Association dues, membership fees, and
other assessments and charges collected by
homeowners associations and condominium
corporations;
z. Sale of gold to the Bangko Sentral ng Pilipinas
aa. Sale of drugs and medicines prescribed for
diabetes, high cholesterol, and hypertension
beginning January 1, 2019

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
250
 VALUE ADDED TAX
bb.Sale or lease of goods or properties or
services other than the transactions
mentioned above wherein the gross annual
sales or receips do not exeed 3,000,000
pesos.
Every three (3) years thereafter, the amount shall be
adjusted to its present value using the Consumer
Price Index, as published by the NSO. Such
adjustment shall be published through revenue
regulations to be issued not later than March 31 of
each year.
For purposes of the threshold of P1,919,500, the
husband and the wife shall be considered separate
taxpayers. However, the aggregation rule for each
taxpayer shall apply. For instance, if a professional,
aside from the practice of his profession, also
derives revenue from other lines of business which
are otherwise subject to VAT, the same shall be
combined for purposes of determining whether the
threshold has been exceeded. Thus, the VAT-exempt
sales shall not be included in determining the
threshold.
Q: State whether the following transactions are:
a) VAT Exempt, b) subject to VAT at 12%; or c)
subject to VAT at 0%:
1. Sale of fresh vegetables by AlingIning at the
Pamilihang Bayan ng Trece Martirez.
2. Services rendered by Jake's Construction
Company, a contractor to the World Health
Organization in the renovation of its offices
in Manila.
3. Sale of tractors and other agricultural
implements by Bungkal Incorporated to
local farmers.
4. Sale of RTW by Cely's Boutique, a Filipino
dress designer, in her dress shop and other
outlets.
5. Fees for lodging paid by students to Bahay-
Bahayan Dormitory, a private entity
operating a student dormitory (monthly fee
P1,500). (1998 Bar)
A:
1. VAT exempt. Sale of agricultural products, such
as fresh vegetables, in their original state, of a
kind generally used as, or producing foods for
human consumption is exempt from VAT (Sec.
109[A], NIRC).
2. VAT at 0%. Since Jake's Construction Company
has rendered services to the World Health
Organization, which is an entity exempted from
taxation under international agreements to
which the Philippines is a signatory, the supply
of services is subject to zero percent (0%) rate
251
(Sec. 108[B][3], NIRC).
3. VAT at 12%. Tractors and other agricultural
implements fall under the definition of goods
which include all tangible objects which are
capable of pecuniary estimation (Sec. 106[A][1],
NIRC).
4. This is subject to VAT at 12%. This transaction
also falls under the definition of goods which
include all tangible objects which are capable of
pecuniary estimation (Sec. 106[A][1], NIRC).
5. VAT Exempt. The monthly fee paid by each
student falls under the lease of residential units
with a monthly rental per unit not exceeding
P12,800 (R.R. 16-2011), which is exempt from
VAT regardless of the amount of aggregate
rentals received by the lessor during the year
(Sec. 109[Q], NIRC, as amended by R.R. 16-2011).
The term unit shall mean per person in the case
of dormitories, boarding houses and bed spaces
(Sec. 4.103-1, R.R. No. 7-95).
OUTPUT AND INPUT TAX
Output Tax
It means the value-added tax due on the sale or
lease of taxable goods or properties or services by
(1) any person registered or (2) required to register
under Sec. 236 of the NIRC (Sec. 110[A][3], NIRC).
Output tax is what the taxpayer-seller passes on to
the purchases. Note that what is output tax for the
seller is input tax to the purchaser(Ingles, 2015).
Output tax may come from:
i. Actual sale
ii. Transaction deemed sales
Input Tax
It means the value-added tax due on or paid by a
VAT-registered person on importation of goods or
local purchase of goods, properties or services,
including lease or use of properties, in the course of
his trade or business. It shall also include the
transitional input tax and the presumptive input tax
determined in accordance with Section 111 of the
NIRC (Sec. 110[A][3], NIRC).
It includes input taxes which can be
1. directly attributed to transactions subject to the
VAT, plus
2. a ratable portion of any input tax which cannot
be directly attributed to either the taxable or
exempt activity (R.R. 16-2005).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Input tax is what is passed on to the
purchaser/taxpayer by the seller. If the purchaser
is VAT-registered person, then he can use the input
tax as credit to the output taxes that he is liable to
remit to the BIR (Ingles, 2015).
Input VAT or input tax represents the actual
payments, costs and expenses incurred by a VAT-
registered taxpayer in connection with his purchase
of goods and services. On the other hand, when that
person or entity sells his/its products or services,
the VAT-registered taxpayer generally becomes
liable for 10% (now 12%) of the selling price as
Output VAT or output tax (CIR v. Benguet
Corporation, G.R. No. 145559, July 14,2006).
Effect of VAT exempt purchases to input tax
VAT exempt transactions cannot be credited for
input tax. However, a transaction which cannot be
directly attributed in either the taxable or exempt
activity, a ratable portion of the input tax may be
credited.
Input tax not a property right under the Due
Process Clause
A VAT-registered person’s entitlement to the
creditable input tax is a mere statutory privilege
which may be limited or removed by law.
Categories of input tax
Final withholding tax credit(Sec. 5%
114[C], NIRC) – is based on the
amount paid to the supplier of
goods or services by the
government and is required to be
withheld by the government to the
BIR (refer to withholding of final
tax on sales to government).
Excess input tax credit(refer to NA
discussion on application on tax
refund or tax credit certificate)
Sources of Creditable Input Tax
Any input tax evidenced by a VAT invoice or official
receipt issued in accordance with Section 113 of the
NIRC on the following transactions shall be
creditable against the output tax:
1. Purchase or importation of goods:
a. For sale; or
b. For conversion into or intended to form
part of a finished product for sale including
packaging materials; or
c. For use as supplies in the course of
business; or
d. For use as materials supplied in the sale of
service; or
e. For use in trade or business for which
deduction for depreciation or amortization
is allowed under NIRC, except automobiles,
aircraft and yachts. (Capital Goods)

TYPE OF INPUT TAX
Input tax on importation of
goods and local purchases of
goods, properties and
services(Sec. 110, NIRC)
Presumptive input tax
credit(Sec. 111[B], NIRC) – may be
calimed by persons engaged in the
business of processing ssardines,
mackerel and milk; manufacturing
refined sugard and cooking oil; and
noodle based instant meals; all of
which are substantially produced
from primary agricultural and
marine food producs, the supply of
which is exempt from VAT
Transitional input tax credit(Sec.
111 [A], NIRC) – may be claimed by
persons who become liable to VAT
for the first time and such
represent input tax on inventories
goodsw, materials and supplies
existing on the date of
commencement of a person’s
status as a taxable person
RATE 2. Purchases of real properties for which a VAT
12% has actually been paid;
standard 3. Purchases of services in which a VAT has
or 0% actually been paid (Sec. 110, NIRC);
4. Transactions “deemed sales”;
4% 5. Presumptive input tax;
6. Transitional input tax credits allowed under
the transitory and other provisions (Sec. 4.110-
1 R.R. 16-2005).
Capital goods (depreciable goods)
Capital goods are those goods or properties
a. with an estimated useful life of more than one
year;
b. which are treated as depreciable under the
2% income tax law;
transition c. and used directly or indirectly in the production
al or 12% or sale of taxable goods or services (Ingles,
actual 2015).
input tax
rate Input tax on capital goods
Aggregate cost exceeds P1M - Where aVAT
registered person purchases or imports capital

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
252
 VALUE ADDED TAX
goods, which are depreciable assets for income tax
purposes, the aggregate acquisition cost of which
(exclusive of VAT) in a calendar month exceeds
P1,000,000, regardless of the acquisition cost of
each capital good, shall be claimed as credit against
output tax in the following manner:
a. If the estimated useful life of a capital good
is five (5) years or more – Input tax shall be
spread evenly over a period of 60 months and
the claim for input tax credit will commence in
the calendar month when the capital good is
acquired.
b. If the estimated useful life of a capital good
is less than five (5) years – Input tax shall be
spread evenly on a monthly basis by dividing
the input tax by the actual number of months
comprising the estimated useful life of the
capital good. Such claim for input tax credit
shall commence in the calendar month that the
capital goods were acquired.
Aggregate cost does not exceed P1M - Where the
aggregate acquisition cost (exclusive of VAT) of the
existing or finished depreciable capital goods
purchased or imported during any calendar month
does not exceed P 1,000,000, the total input taxes
will be allowable as credit against output tax in the
month of acquisition.
Aggregate cost exceeds P1M but acquired in
installment payments - The aggregate acquisition
cost of a depreciable asset in any calendar month
refers to the total price agreed upon for one or more
assets acquired and not on the payments actually
made during the calendar month. Thus, an asset
acquired in installment for an acquisition cost of
more than P 1,000,000.00 will be subject to the
amortization of input tax despite the fact that the
monthly payments/installments may not exceed
P1,000,000.00 (Sec 4.110-3 R.R. No. 16-2005).
SUMMARY RULES ON RECOGNITION
OF INPUT VAT FOR CAPITAL GOODS
Aggregate acquisition for the month > P1M,
exclusive of VAT, and:
Life > 5 years
Input tax shall be spread evenly over such
usefule lfe but not to exceed 60 months.
Life < 5 years
Not a capital asset. Input tax is not allocated.
Aggregate acquisition for the month < P1M,
exclusive of VAT (regardless of useful life):
The related input VAT is not allocated.
Consequently, the total amount of input VAT
shall be treated as tax credit against output VAT
in the month of acquisition.
(Tabag, 2015)
253
NOTE: When an asset with unamortized input tax is
retired from business, the unamortized input tax
will be closed against the output taxes during the
month or quarter when the sale/disposal is made.
Presumptive input tax
It is an input tax credit allowed to persons or firms
engaged in the: [SMM-RCN]
1. processing of:
a. sardines
b. mackerel
c. milk
2. manufacturing of:
a. refined sugar
b. cooking oil
c. packed noodle based instant meals
The allowed input tax shall be equivalent to four
percent (4%) of the gross value in money of their
purchases of primary agricultural products which
are used as inputs to their production (Sec. 111 [B],
NIRC).
They are given this 4% presumptive input tax
because the goods used in the said enumeration are
VAT-exempt (Ingles, 2015).
NOTE: The term 'processing' shall mean
pasteurization, canning and activities which
through physical or chemical process alter the
exterior texture or form or inner substance of a
product in such manner as to prepare it for special
use to which it could not have been put in its original
form or condition.
Transitional input tax
Transitional input tax credit operates to benefit
newly VAT-registered persons, whether or not they
previously paid taxes in the acquisition of their
beginning inventory of goods, materials, and
supplies. During that period of transition from non-
VAT to VAT status, the transitional input tax credit
serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered
taxpayer is obliged to remit a significant portion of
the income it derived from its sales as output VAT.
The transitional input tax credit mitigates this initial
diminution of the taxpayer’s income by affording
the opportunity to offset the losses incurred
through the remittance of the output VAT at a stage
when the person is yet unable to credit input VAT
payments (Fort Bonifacio Development Corporation
v. CIR, 583 SCRA 168).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
These can be availed by taxpayers who become VAT
registered persons upon:
1. Exceeding the minimum turnover of
P1,919,500 in any 12 month period, or
2. Who voluntarily register even if they do not
reach the threshold, except for franchise
grantees of radio and TV broadcasting whose
threshold is P10,000,000)
The said taxpayers shall be entitled to a transitional
input tax on the inventory on hand as of the
effectivity of their VAT registration on the following:
1. Goods purchased for resale in the present
condition;
2. Raw materials - Materials purchased for
further processing but which have not yet
undergone processing;
3. Manufactured goods
4. Goods in process for sale; or
5. Goods and supplies for use in the course of
the taxpayer’s trade or business as a VAT-
registered person (Sec. 4. 110-1(a.), R.R 16-
2005).
The allowed input tax shall be whichever is higher
between:
1. 2% of the value of the taxpayer’s beginning
inventory of goods, materials and supplies; or
2. The actual value-added tax paid on such goods
(Sec.111[A], NIRC).
NOTE: Transitional input tax credit may only be
availed once. It may be carried over to the next
taxing period, until fully utilized.
Prior payment of taxes is not necessary before a
taxpayer could avail of transitional input tax credit.
All that is required from the taxpayer is to file a
beginning inventory with BIR.
A transitional input tax credit is not a tax refund per
se but a tax credit. Section 112 of the NIRC does not
prohibit cash refund or tax credit of transitional
input tax. The grant of a refund or issuance of tax
credit certificate in this case would not contravene
the above provision. The refund or tax credit would
not be unconstitutional because it is precisely
pursuant to section 105 of the old NIRC which
allows refund/tax credit (Fort Bonifacio
Development Corporation vs. CIR, G.R. No. 173425,
January 22, 2013).
Q: Is Transitional Input Tax Credit applicable to
real property?
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
254
A: YES. Under Sec. 105 of the old NIRC (now Sec.
111[A]), the beginning inventory of “goods” forms
part of the valuation of the transitional input tax
credit. Goods, as commonly understood in the
business sense, refer to the product which the VAT-
registered person offers for sale to the public. With
respect to real estate dealers, it is the real properties
themselves which constitute their “goods”. Such real
properties are the operating assets of the real estate
dealer (Ibid.).
PERSONS WHO CAN AVAIL OF
INPUT TAX CREDIT
The input tax credit on importation of goods or local
purchases of goods, properties or services by a VAT-
registered person shall be creditable:
1. To the importer upon payment of the VAT
prior to the release of the goods from the
customs custody;
2. To the purchaser of the domestic goods or
properties upon consummation of the sale; or
3. To the purchaser of the services or the lessee
or the licenses upon payment of the
compensation, rental, royalty or fee (R.R. 16-
2005).
As long as the invoices from the suppliers are issued
in the name of the taxpayer and expenses were
actually incurred by the taxpayer, then the input tax
pertaining to such expenses must be credited to the
taxpayer. Where the money came from to pay these
expenses is another matter all together but it does
not change the fact that input tax has been incurred
(CIR v. Sony Philippines, Inc., G.R. No. 178697,
November 17, 2010).
DETERMINATION OF OUTPUT/INPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX CREDITS
Determination of output tax
In a sale of goods or properties, the output tax is
computed by multiplying the gross selling price by
the regular rate of VAT. For sellers of services, the
output tax is computed by multiplying the gross
receipts by the regular rate of VAT.
In all cases where the basis for computing the
output tax is either the gross selling price or the
gross receipts, but the amount of VAT is erroneously
billed in the invoice, the total invoice amount shall
be presumed to be comprised of the gross selling
price/gross receipts plus the correct amount of VAT.
Hence, the output tax shall be computed by
multiplying the total invoice amount by a fraction
using the rate of VAT as numerator and one hundred
 VALUE ADDED TAX

percent (100%) plus rate of VAT as the

denominator. Accordingly, the input tax that can be Net VAT payable = Output tax >
claimed by the buyer shall be the corrected amount Input tax
of VAT computed in accordance with the formula Excess tax credits = Output tax <
herein prescribed. Input tax
There shall be allowed as a deduction from the
output tax the amount of input tax deductible to NOTE: VAT-exempt transactions do not result to
arrive at VAT payable on the monthly VAT any output or input taxes.
declaration and the quarterly VAT returns (RR 16-
2005). Allocation of input tax on mixed transactions

Determination of input tax creditable A VAT-registered person who is also engaged in

transactions not subject to VAT shall be allowed to
The amount of input taxes creditable during a recognize input tax credit on transactions subject to
month or quarter shall be determined by adding all VAT as follows:
creditable input taxes arising from the transactions
enumerated under “Sources of input tax” in page 1. All the input taxes that can be directly
during the month or quarter plus any amount of attributed to transactions subject to VAT may
input tax carried-over from the preceding month or be recognized for input tax credit: Provided,
quarter, reduced by the amount of claim for VAT that input taxes which are directly attributable
refund or tax credit certificate (whether filed with to VAT taxable sales of goods and services from
the BIR, the Department of Finance, the Board of the Government or any of its political
Investments or the BOC) and other adjustments, subdivisions, instrumentalities or agencies,
such as purchases returns or allowances, input tax including GOCCs shall not be credited against
attributable to exempt sales and input tax output taxes arising from sales to non-
attributable to sales subject to final VAT government entities, and
withholding. 2. If any input tax cannot be directly attributed to
either a VAT taxable or VAT-exempt
The succeeding table illustrates the computation of transaction, the input tax shall be pro-rated to
output tax, creditable input tax and the resulting net the VAT taxable and VAT-exempt transactions;
VAT payable or excess of tax credits: only the ratable portion pertaining to
transactions subject to VAT may be recognized
BASIS EXAMPLE AMOUNT for input tax credit.
Output Vatable Sale of P12.00
tax gross hanky for Input tax attributable to VAT-exempt sales shall not
sales or total price of be allowed as credit against the output tax but
receipts P112 VAT- should be treated as part of cost of goods sold.
(amount Ex. Amt:
exclusive P100 For persons engaged in both zero-rated sales and
VAT) c (P112/1.12) non-zero-rated sales, the aggregate input taxes shall
VAT rate be allocated ratably between the zero-rated and
(12% or Output tax: non-zero-rated sales (R.R. No. 16-2005).
0%) P100*12%
Input Vatable Purchase of 6.00 Determination of VAT payable or excess tax
tax purchases materials credits
(amount for total
exclusive price of P56 The resulting computation of output tax and
of VAT) x crediting of input tax shall result to either the net
applicable VAT-Ex- VAT payable or excess tax credits.
VAT rate Amt:
P50 Net VAT Payable (NVP) – if at the end of any
(P56/1.12) taxable quarter the output tax exceeds the input tax,
the excess shall be paid by the VAT-registered
Input tax: person.
P50*12%
Net VAT Payable or Excess tax 6.00 Excess Tax Credits (ETC) – If the input tax
credits inclusive of input tax carried over from the previous
(Output tax less Input Tax) quarter exceeds the output tax, the excess input tax

UNIVERSITY OF SANTO TOMAS

255 FACULTY OF CIVIL LAW
 LAW ON TAXATION
shall be carried over to the succeeding quarter or TRANSACTIONS REQUIRED SUPPORT
quarters. for the initial and
succeeding payments
- Provided, that any input tax attributable to b. Installment basis
zero-rated sales by a VAT-registered person Public instrument and
may at his option be refunded or applied for a VAT Official Receipt for
tax credit certificate which may be used in the every payment
payment of internal revenue taxes Input tax on Official receipt showing
- Thus, input tax, attributable to zero-rated sales domestic the information required
may be: purchases of in Sec. 113 and 237 of the
1. Refunded, or service NIRC
2. Credited against other internal revenue taxes Transitional input Inventory of goods as
of the VAT taxpayer (e.g. income tax) tax shown in a detailed list to
be submitted to the BIR
Illustration: Input tax on Required invoices
“deemed sale
PERIOD OUTPUT INPUT NVP OR ETC transaction”
TAX TAX Input tax from Monthly Remittance
Jan. P 12 M P6M NVP P6M payments made to Return of Value Added
Feb. 6M 18 M ETC (P12M) non-residents Tax Withheld (BIR Form
Mar. 6M 18 M ETC (P12M) (such as for 1600) filed by the
Q1 P24 M P 42 M ETC (P18M) services, rentals, or resident payor in behalf of
royalties) the non-resident
For the months of January and February, only the evidencing remittance of
monthly taxes are computed. However, for the VAT due which was
month of March, the accumulated taxes for the first withheld by the payor.
quarter will be aggregated to determine the NVP or Advance VAT on Payment order showing
ETC. sugar payment of the advance
VAT
In the example, the excess tax credit of P18 can be
refunded or credited against the other internal NOTE: Cash register machine tape issued to a
revenue taxes of the taxpayer after the application registered buyer constitute valid proof of official
and approval from the BIR Commissioner. receipt. All purchases covered by invoices/receipts
other than VAT Invoice/VAT Official Receipt shall
SUBSTANTIATION OF INPUT TAX CREDITS not give rise to any input tax. (Sec. 4.113-1(A), R.R.
16-2005).
TRANSACTIONS REQUIRED SUPPORT
Importation of Import entry or other REFUND OR TAX CREDIT OF EXCESS INPUT TAX
goods equivalent document
showing actual payment Who may claim for refund/apply for issuance of
of VAT on imported goods Tax Credit Certificate (TCC):
Input taxes on Invoice showing
domestic information required The following can avail of refund or tax credit:
purchases of goods under Section 113 and
or properties made 237 of the NIRC 1. Zero-rated and effectively zero-rated sales -
in the course of Any VAT-registered person, whose sales are
trade or business zero-rated or effectively zero-rated (Sec. 112
Input tax on [A]).
purchases of real 2. Cessation of business or VAT status - A
property person whose registration has been cancelled
Public instrument (i.e., due to retirement from or cessation of
a. Cash/deferred deed of absolute sale, business, or due to changes in or cessation of
basis deed of conditional sale, status under Section 106(C) of NIRC (Sec.
contract/agreement to 112[B]).
sell, etc.) together with
the VAT invoice for the Requirements to claim for VAT refund
entire selling price and
non-VAT Official Receipt 1. The taxpayer is VAT-registered;

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
256
 VALUE ADDED TAX
2. The taxpayer is engaged in zero-rated or
effectively zero-rated sales;
3. The input taxes are due or paid;
4. The input taxes are not transitional input taxes
as it cannot be claimed as a refund or credit;
5. The input taxes have not been applied against
output taxes during and in the succeeding
quarters;
6. The input taxes claimed are attributable to
zero-rated or effectively zero-rated sales;
7. For zero-rated sales under Section
106(A)(2)(1) and (2); 106(B); and 108(B)(1)
and (2), the acceptable foreign currency
exchange proceeds have been duly accounted
for in accordance with the rules and regulations
of the BSP;
8. Where there are both zero-rated or effectively
zero- rated sales and taxable or exempt sales,
and the input taxes cannot be directly and
entirely attributable to any of these sales, the
input taxes shall be proportionately allocated
on the basis of sales volume; and
9. The claim is filed within two years after the
close of the taxable quarter when such sales
were made (Luzon Hydro Corporation v. CIR, G.R.
No. 188260, November 13, 2013, penned by
Justice Bersamin).
The taxpayer must prove the following for a tax
refund to prosper:
1. That it is a VAT-registered entity;
2. It must substantiate the input VAT paid by
purchase invoices or official receipts
(Commissioner v. Manila Mining Corporation,
G.R. No. 153204, August 31, 2005).
Failure to comply with the invoicing
requirements is a ground to deny a claim for tax
refund or tax credit
In a claim for tax refund or tax credit, the applicant
must prove not only entitlement to the claim but
also compliance with all the documentary and
evidentiary requirement (Eastern
Telecommunication Phils. Inc. v. CIR, G.R. No. 183531,
March 25, 2015).
Section 110(A)(1) of the NIRC provides that
creditable input taxes must be evidenced by a VAT
invoice or official receipt, which must, in turn,
comply with Sections 237 and 238 of the same law,
as well as Section 4.108.1 of RR 7-95. The foregoing
provisions require, inter alia, that an invoice must
reflect, as required by law: (a) the BIR Permit to
Print; (b) the TIN-V of the purchaser; and (c) the
word "zero-rated" imprinted thereon. In this
relation, failure to comply with the said invoicing
257
requirements provides sufficient ground to deny a
claim for tax refund or tax credit (J. R. A. Philippines,
Inc. v. CIR, G.R. No. 171307, August 28, 2013).
Substantiation requirements to be entitled to refund
or tax credit under Sec. 112, NIRC. The claimant’s
duties are two-fold: (a) prove payment of input VAT
to supplier; and (b) prove zero-rated sales to
purchasers. The documents required are VAT
receipt for sale of services or lease of property and
VAT invoice for sale of goods. The words ‘zero-
rated’ must also be stated in the VAT receipt or
invoice. (Western Mindanao Power Corporation v.
CIR, G.R No. 181136, June 13, 2012).
The VAT invoice and VAT receipt should not be
confused as referring to one and the same thing; the
law did not intend the two to be used alternatively.
The taxpayer tried to substantiate its input VAT on
purchases of goods with official receipts and on
purchases of services with invoices. Claim denied.
(KEPCO v. CIR, G.R No. 181858 November 24, 2010).
In one case, the claim for refund/tax credit was
denied because the proof for the zero-rated sale
consisted of secondary evidence like financial
statements. (Luzon Hydro Corp. v. CIR G.R. No.
188260, November 13, 2013).
In another case, the proofs for zero-rated sales of
services were sales invoices. The claim was denied.
(Takenaka Corp.-Philippine Branch v. CIR, G.R No.
193321, October 19, 2016).
Q: Are sales invoices sufficient as evidence to
prove zero-rated sale of services by a taxpayer
thereby entitling him to claim the refund of its
excess input VAT?
A: NO. The claim for refund must be denied on the
ground that the taxpayer had not established its
zero-rated sales of services through the
presentation of official receipts.
As evidence of an administrative claim for tax
refund or tax credit, there is a certain distinction
between a receipt and an invoice.
Section 113 of the NIRC of 1997 provides that a VAT
invoice is necessary for every sale, barter or
exchange of goods or properties, while a VAT official
receipt properly pertains to every lease of goods or
properties, as well as to every sale, barter or
exchange of services.
A "sales or commercial invoice" is a written account
of goods sold or services rendered indicating the
prices charged therefor or a list by whatever name
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement
to sell or transfer goods and services.
A "receipt" on the other hand is a written
acknowledgment of the fact of payment in money or
other settlement between seller and buyer of goods,
debtor or creditor, or person rendering services and
client or customer.
The taxpayer submitted sales invoices, not official
receipts, to support its claim for refund. In light of
the aforestated distinction between a receipt and an
invoice, the submissions were inadequate to comply
with the substantiation requirements for
administrative claims for tax refund or tax credit
(Takenaka Corporation – Philippine Branch vs. CIR,
G.R. No. 193321, October 19, 2016, penned by Justice
Bersamin).
Q: Is a taxpayer located within an ECOZONE,
entitled to the refund of its unutilized input
taxes incurred before it became a PEZA-
registered entity?
A: NO. With the issuance of RMC 74-99, the
distinction under the old rule was disregarded and
the new circular took into consideration the two
important principles of the Philippine VAT system:
the Cross Border Doctrine and the Destination
Principle.
The old VAT rule for PEZA-registered enterprises
was based on their choice of fiscal incentives: (1) If
the PEZA-registered enterprise chose the five
percent (5%) preferential tax on its gross income, in
lieu of all taxes, as provided by Rep. Act No. 7916, as
amended, then it would be VAT-exempt; (2) If the
PEZA-registered enterprise availed of the income
tax holiday under Exec. Order No. 226, as amended,
it shall be subject to VAT at ten percent (10%). Such
distinction was abolished by RMC No. 74-99, which
categorically declared that all sales of goods,
properties, and services made by a VAT-registered
supplier from the Customs Territory to an ECOZONE
enterprise shall be subject to VAT, at zero percent
(0%) rate, regardless of the latter's type or class of
PEZA registration.
Furthermore, Section 8 of R.A. No. 7916 mandates
that PEZA shall manage and operate the ECOZONE
as a separate customs territory. The provision
thereby establishes the fiction that an ECOZONE is a
foreign territory separate and distinct from the
customs territory. Accordingly, the sales made by
suppliers from a customs territory to a purchaser
located within an ECOZONE will be considered as
exportations. Following the Philippine VAT system's
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
258
adherence to the Cross Border Doctrine and
Destination Principle, the VAT implications are that
"no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the
territorial border of the taxing authority"
As such, the purchases of goods and services by the
taxpayer that were destined for consumption within
the ECOZONE should be free of VAT; hence, no input
VAT should then be paid on such purchases,
rendering the taxpayer not entitled to claim a tax
refund or credit.
Verily, if the taxpayer had paid the input VAT, the
proper recourse is not against the Government but
against the seller who had shifted to it the output
VAT (Coral Bay Nickel Corp. vs. CIR, G.R. No. 190506,
June 13, 2016).
Q: May a taxpayer who has pending claims for
VAT input credit or refund, set off said claims
against his other tax liabilities? Explain your
answer. (2001 Bar)
A: NO. Set-off is available only if both obligations are
liquidated and demandable. Liquidated debts are
those where the exact amounts have already been
determined. In the instant case, a claim of the
taxpayer for VAT refund is still pending and the
amount has still to be determined.
A fortiori, the liquidated obligation of the taxpayer
to the government cannot, therefore, be set-off
against the unliquidated claim which the taxpayer
conceived to exist in his favor (Philex Mining Corp. v.
CIR, 294 SCRA 687).
Q: Petitioner X Cola, Inc. (X Cola) failed to
declare certain input taxes in its VAT return for
the 3rd and 4th quarters of 2007. X Cola alleged
overpayment of VAT for the said taxable periods
since the undeclared input taxes were not
credited against output tax.
Since X Cola could not amend its VAT returns
due to the issuance of a BIR Letter of Authority
for 2007, it filed with the BIR claims for refund
of alleged overpaid VAT for the 3rd and 4th
quarters of 2007. The BIR failed to act on the
claims so X Cola filed a Petition for Review with
the CTA. Is X Cola entitled to its claims for
refund?
A: NO. X Cola is not entitled to the refunds as the
amounts claimed represent undeclared input taxes,
not erroneously paid taxes, as contemplated under
Section 229 of the NIRC. Section 229 of the NIRC
allows recovery of any national internal revenue tax
 VALUE ADDED TAX
(including VAT) which was erroneously or illegally
assessed or collected.
X Cola’s input taxes for the 3rd and 4th quarters of
2007 should have been declared in its quarterly VAT
returns so that these could be creditable against the
output tax for the same taxable periods. Since it
failed to report the input taxes in its VAT returns, it
could not offset the undeclared input taxes against
the output VAT. Under RR No. 16-2005, input taxes
must be substantiated and reported in the VAT
returns to be able to claim credit against the output
tax. While X Cola was able to substantiate a portion
of its claims, the input taxes were not reported in its
VAT Returns (Coca-cola Bottlers Phils., Inc. v. CIR,
CTA Case Nos. 7986 & 8028, June 14, 2013).
Period to file claim for refund/apply issuance of
tax credit certificate
The claim, which must be in writing, for both cases,
must be filed within 2 years after the close of the
taxable quarter when the sales were made.
Reckoning point for the Two (2)-year period
1. Zero-rated or effectively zero rated sales –
Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may,
within two (2) years after the close of the
taxable quarter when the sales were made
(Sec. 112(A), NIRC).
The two-year period should be reckoned from
the close of the taxable quarter when the
relevant sales were made pertaining to the
input VAT regardless of whether said tax was
paid or not(CIR vs. Mirant Pagbilao Corporation,
GR 172129, September 12, 2008).
Thus, when a zero-rated VAT taxpayer pays its
input VAT for the purchase from its supplier a
year after the pertinent transaction of its sale to
its purchaser, the said taxpayer only has a year
to file claim for refund or tax credit of the
unutilized creditable input VAT (Ingles, 2015).
In case the taxpayer is engaged in zero-rated
and also in taxable or exempt sale, and the
amount of creditable input tax due or paid
cannot be directly and entirely attributed to any
one of the transactions, it shall be allocated
proportionately on the basis of the volume of
sales.
2. Cessation of business or VAT status - The
person may, within two (2) years from the date
of cancellation, apply for the issuance of a tax
259
credit certificate for any unused input tax
which may be used in payment of his other
internal revenue taxes (Sec. 112(B), NIRC).
SUMMARY OF RULES ON PRESCRIPTIVE
PERIODS FOR CLAIMING REFUND
OR CREDIT OF INPUT TAX
Administrative Claim: Two-Year Prescriptive
Period
Only the administrative claim that must be
filed within the period
GR: The reckoning date is the close of the
taxable quarter when the relevant sales were
made
XPN: From June 8, 2007 to September 12, 2008
the two-year prescriptive period for filing a
claim for tax refund or credit should be counted
from the date of filing of the VAT return and
payment of the tax (Atlas Consolidated Mining
and Dev. Corp v CIR, G.R. No. 141104, June 8,
2007).
Judicial Claim: 120+30 Day Period
Two ways of filing an appeal to the CTA:
a. Within 30 days after the CIR denies
the claim within the 120-day period,
or
b. Within 30 days from the expiration of
the 120-day period if the CIR does not
act within the 120-day period.
GR: The 30-day period to appeal always applies
as it is both mandatory and jurisdictional
XPN: As an exception, premature filing is
allowed only if filed between 10 December 2003
and 5 October 2010, when BIR Ruling No. DA-
489-03 was still in force
NOTE: Late filing is absolutely prohibited.
(Commissioner of Internal Revenue v. Mindanao II
Geothermal Partnership, G.R. No. 191498, January
15, 2014)
NOTE: The rule on a claim for refund or credit of
an erroneously or illegally collected tax under
Section 229 of the NIRC is different. Under such,
both the administrative and judicial claim must
be filed within the two (2)-year prescriptive
period from the date of payment. The claim for
refund or credit and the appeal to CTA may
occur simultaneously.
Period within which BIR Commissioner grants
Tax Credit Certificates/refund for creditable
input taxes
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
The Commissioner may grant TCC/ refund for
creditable input taxes within 120 days from the day
of submission of the complete documents in support
of the application filed (Sec. 112, NIRC; RMC 54-
2014).
The application for VAT refund/tax credit must be
accompanied by complete supporting documents.
In addition, the taxpayer shall attach a statement
under oath attesting to the completeness of the
submitted documents. Upon submission of the
administrative claim and its supporting documents,
the claim shall be processed and no other
documents shall be accepted/required from the
taxpayer in the course of its evaluation. The CIR
shall render a decision based only on the documents
submitted by the taxpayer. The application for tax
refund/tax credit shall be denied where the
taxpayer/claimant failed to submit the complete
supporting documents (RMC 54-2014).
Note that the 120-day period begins to run from the
submission of complete documents supporting the
administrative claim. If there is no evidence
showing that the taxpayer was required to submit –
or actually submitted – additional documents after
the filing of the administrative claim, it is presumed
that the complete documents accompanied the
claim when it was filed (Silicon Philippines, Inc., v.
CIR, G.R. No. 182737, March 2, 2016).
If the claim for VAT is not acted upon by the
Commissioner within 120-day period as required
by law, such inaction shall be deemed a denial of the
application for tax refund or credit.
Effect of failure to submit complete supporting
documents to judicial claim of refund in the CTA
A distinction must be made between administrative
cases appealed due to:
1. Inaction of the CIR or the Commissioner
2. Failure of the taxpayer to submit supporting
documents – If the CIR dismissed an
administrative claim due to the taxpayer's
failure to submit complete documents despite
notice/request, then the judicial claim before
the CTA would be dismissible, not for lack of
jurisdiction, but for the taxpayer's failure to
substantiate the claim at the administrative
level.
When a judicial claim for refund or tax credit in the
CTA is an appeal of an unsuccessful administrative
claim, the taxpayer has to convince the CTA that the
CIR had no reason to deny its claim. It, thus, becomes
imperative for the taxpayer to show the CTA that not
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
260
only is he entitled under substantive law to his claim
for refund or tax credit, but also that he satisfied all
the documentary and evidentiary requirements for
an administrative claim. It is, thus, crucial for a
taxpayer in a judicial claim for refund or tax credit
to show that its administrative claim should have
been granted in the first place.
Consequently, a taxpayer cannot cure its failure to
submit a document requested by the BIR at the
administrative level by filing the said document
before the CTA (Pilipinas Total Gas, Inc. v. CIR, G.R.
No. 207112, December 8, 2015).
Taxpayer must await the lapse of the 120-day
period before taxpayer can appeal to CTA
The second paragraph of Section 112(D) of the NIRC
envisions two scenarios: (1) when a decision is
issued by the CIR before the lapse of the 120-day
period; and (2) when no decision is made after the
120-day period. In both instances, the taxpayer has
30 days within which to file an appeal with the CTA.
As we see it then, the 120-day period is crucial in
filing an appeal with the CTA (CIR v. Aichi Forging
Company of Asia, Inc., GR 184823, October 6, 2010).
Failure to comply with the 120-day waiting period
violates a mandatory provision of law. It violates the
doctrine of exhaustion of administrative remedies
and renders the petition premature and thus
without a cause of action, with the effect that the
CTA does not acquire jurisdiction over the
taxpayer's petition.
One of the conditions for a judicial claim of refund
or credit under the VAT System is compliance with
the 120+30 day mandatory and jurisdictional
periods. Thus, strict compliance with the 120+30
day periods is necessary for such a claim to prosper,
whether before, during or after the effectivity of the
Atlas doctrine, except for the period from the
issuance of BIR Ruling No. DA-489-03 on December
10, 2003 to October 6, 2010 when the Aichi doctrine
was adopted, which again reinstated the 120+30
day periods as mandatory and jurisdictional (CIR v.
Mirant Pagbilao Corp., G.R. No. 180434, January 20,
2016).
Exception to the mandatory and jurisdictional
nature of the 120+30 day period (BIR Ruling No.
DA-489-03 dated December 10, 2003)
1. During the effectivity of BIR Ruling No. DA-489-
03
2. BIR Specific Ruling which misleads a particular
taxpayer to prematurely file a judicial clam with
the CTA;
 VALUE ADDED TAX
As an exception to the mandatory and jurisdictional
120+30 day period, it was emphasized that from the
time of issuance of BIR Ruling No. DA-489-03 on
December 10, 2003 up to its reversal by the Supreme
Court in the Aichi case on October 6, 2010,
taxpayers/claimant need not wait for the lapse of
120-day period before it could seek judicial relief
with the CTA by way of Petition for Review (RMC 54-
2014).
Before and after the aforementioned period (i.e.,
December 10, 2003 to October 6, 2010), the
observance of the 120-day period is mandatory
and jurisdictional to the filing of judicial claim for
refund of excess input VAT (CE Luzon Geothermal
Power Co., Inc. v. CIR, G.R. No. 200841-42, August 26,
2015).
There is no need for a taxpayer to specifically invoke
BIR Ruling No. DA-489-03 to benefit from the same.
As long as the judicial claim was filed between
December 10, 2003 and October 6, 2010, then the
taxpayer would not be required to wait for the lapse
of 120-day period (CIR v. Air Liquide Phils. Inc., G.R.
No. 210646, July 29, 2015).
Remedy in case of CIR’s inaction within 120-day
period or CTA’s denial of claim for TCC/ tax
refund
1. CIR’s inaction - The taxpayer may also appeal
to the CTA within 30 days after the lapse of 120
days from the submission of the complete
documents, if no action has been taken by the
Commissioner.
2. CTA’s denial -The taxpayer may appeal the full
or partial denial of the claim to the Court of Tax
Appeal (CTA) within 30 days from the receipt of
said denial, otherwise the decision shall become
final.
Q: Gangwam Corporation (GC) filed its quarterly
tax returns for the calendar year 2012 as
follows:
First quarter - April 25, 2012
Second quarter - July 23, 2012
Third quarter - October 25, 2012
Fourth quarter - January 27, 2013
On December 22, 2013, GC filed with the Bureau
of Internal Revenue (BIR) an administrative
claim for refund of its unutilized input Value-
Added Tax (VAT) for the calendar year 2012.
After several months of inaction by the BIR on its
claim for refund, GC decided to elevate its claim
directly to the Court of Tax Appeals (CTA) on
April 22, 2014. In due time, the CTA denied the
261
tax refund relative to the input VAT of GC for the
first quarter of 2012, reasoning that the claim
was filed beyond the two-year period prescribed
under Section 112(A) of the National Internal
Revenue Code (NIRC).
a. Is the CTA correct?
b. Assuming that GC filed its claim before the
CTA on February 22, 2014, would your
answer be the same? (2014 Bar)
A:
a. NO. The CTA is not correct. The two-year period
to file a claim for refund refers to the
administrative claim and does not refer to the
period within which to elevate the claim to the
CTA. The filing of the administrative claim for
refund was timely done because it is made
within two years from the end of the quarter
when the zero-rated transaction took place
(Section112 (A), NIRC). When GC decided to
elevate its claim to the CTA on April 22, 2014, it
was after the lapse of 120 days from the filing of
the claim for refund with the BIR, hence, the
appeal is seasonably filed. The rule on VAT
refunds is two years to file the claim with the
BIR, plus 120 for the Commissioner to act and
inaction after 120 days is a deemed adverse
decision on the claim, appealable to the CTA
within thirty (30) days from the lapse of the
120-day period (CIR v. Aichi Forging Company of
Asia, Inc., G.R. No. 184823, October 6, 2010).
b. YES. The two-year prescriptive period to file a
claim for refund refers to the administrative
claim with the BIR and not the period to elevate
the claim to the CTA. Hence, the CTA cannot
deny the refund for reasons that the first
quarter claim was filed beyond the two-year
period prescribed by law. However, when the
claim is made before the CTA on February 24,
there is definitely no appealable decision as yet
because the 120-day period for the
Commissioner to act on the claim for refund has
not yet lapsed. Hence, the act of the taxpayer in
elevation the claim to the CTA is premature and
the CTA has no jurisdiction to rile thereon (CIR
v. Aichi Forging Company of Asia, Inc., G.R. No.
184823, October 6, 2010).
Q: For calendar year 2011, FFF, Inc., a VAT-
registered corporation, reported unutilized
excess input VAT in the amount of Pl ,000,000.00
attributable to its zero-rated sales. Hoping to
impress his boss, Mr. G, the accountant of FFF,
Inc., filed with the BIR on January 31, 2013 a
claim for tax refund/credit. Not having received
any communication from the BIR, Mr. G filed a
Petition for Review with the CTA on March 15,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
2013, praying for the tax refund/credit of the Q: X Corporation enjoys a blanket tax exemption
Pl,000,000.00 unutilized excess input VAT of under PD 1869 (the Charter creating PAGCOR).
FFF, Inc. for 2011. X rents a building from Y where it operates its
casino activities. Y passes to X the VAT on lease
a. Did the CTA acquire jurisdiction over the as required by law. X refused to pay invoking its
Petition of FFF, Inc.? blanket tax exemption. Y paid the subject taxes
b. Discuss the proper procedure and for fear of the legal consequences of non-
applicable time periods for administrative payment of the tax to the BIR. Thereafter, albeit
and judicial claims for refund/credit of belatedly Y realized it should not have paid
unutilized excess input VAT. (2015 Bar) because the transactions it had with X is subject
to “zero-rated” VAT. Immediately, Y filed an
A: administrative claim for tax refund with the CIR,
a. NO. The CTA has not acquired jurisdiction over but the latter failed to resolve in favor of Y. Is the
the Petition of FFF, Inc. because the juridical refusal of the CIR on Y’s claim for refund valid?
claim has been prematurely filed on March 15, Reason.
2013. The Supreme Court ruled that the 30-day
period after the expiration of the 120-day A: NO. The blanket tax exemption of X under PD
period fixed by law for the Commissioner of 1869 applies to both direct and indirect taxes that
Internal Revenue to act on the claim for refund extend to entities and individuals dealing with it in
is jurisdictional and failure to comply would bar its casino operations. Considering that Y paid the tax
the appeal and deprive the CTA of its under a mistake of fact and was not aware at the
jurisdiction to entertain the appeal. time of payment that the transactions it has with X
is “zero-rated”, the invalid payment can be
In this case, Mr. G filed the administrative claim recovered or refunded. The principle of solutio
on January 31, 2013. The petition for review indebiti applies to the Government as well, the basis
should have been should have been filed on thereto is grounded upon the right of recovery of
June 30, 2013. Filing the judicial claim on March money paid through misapprehensions of facts
15, 2013 is premature, thus the CTA did not belongs in equity and in good conscience to the
acquire jurisdiction. person who paid it and the government cannot
enrich itself at the expense of another (CIR v Acecite
b. The administrative claim must be filed with the (Phils.) Hotel Corporation, 516 SCRA 93).
CIR within the two-year prescriptive period.
The proper reckoning period date for the two- Difference between Sec. 112 on refund for VAT
year prescriptive period is the close of the and Sec. 229 on refund of other taxes
taxable quarter when the relevant sales were
made. However, as an exception, are claims SEC. 112 (VAT) SEC. 229
applied only from June 8, 2007 to September 12, (OTHER
2008, wherein the two-year prescriptive period TAXES)
for filing a claim for tax refund or credit of Period is 2 years after the Period is 2
unutilized input VAT payments should be close of the taxable quarter years from the
counted from the date of filing of the VAT return when the sales were made date of
and payment of the tax. payment of
the tax
The taxpayer can file a judicial claim in one of The 30-day period of appeal Period to file an
two ways: (1) file the judicial claim within thirty to the CTA need not administrative
days after the Commissioner of Internal necessarily fall within the claim before
Revenue denies the claim within the 120-day two-year prescriptive period, the CIR AND
period, or (2) file the judicial claim within 30 as long as the judicial claim
days from the expiration of the 120-day period administrative claim before with the CTA
if the Commissioner does not act within the the CIR is filed within the must fall within
120-day period. two-year prescriptive the 2 year
period. This is because Sec. prescriptive
As a general rule, the 30-day period to appeal is 112 (D) of the 1997 NIRC period
both mandatory and jurisdictional. As an mandates that a taxpayer can
exception, premature filing is allowed only if file the judicial claim: (1) only
filed between December 10, 2003 and October within thirty days after the
5, 2010, when the BIR Ruling No. DA-489-03 Commissioner partially or
was still in force. fully denies the claim within

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
262
 VALUE ADDED TAX
the 120-day period, or
(2) only within thirty days
from the expiration of the
120-day period if the
Commissioner does not act
within the 120-day period
(CIR v. San Roque Power
Corporation, G.R. Nos. 187485,
196113, 197156, February 12,
2013)
Manner of Giving Refund
Refund shall be made upon warrants drawn by the
Commissioner or by his duly authorized
representative without the necessity of being
countersigned by the Chairman of Commission on
Audit (COA). Refund shall be subject to post audit by
COA (Sec 112(D) NIRC).
Summary of Rules
Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not
been applied against output tax, with the appropriate
BIR Office-Large Taxpayer or RDO having jursidiction
over the principal place of business of the taxpayer.
Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of
submission of compete documents in support of the
application
In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the
period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals
INVOICING REQUIREMENTS
Invoicing requirements, in general
A VAT-registered person shall issue:
263
1. A VAT invoice for every sale, barter or exchange
of goods or properties; and
2. A VAT official receipt for every lease of goods or
properties, and for every sale, barter or
exchange of services.
Only VAT-registered persons are required to print
their TIN followed by the word "VAT" in their
invoice or official receipts. Said documents shall be
considered as a "VAT Invoice" or VAT
Information required to be indicated on the
VAT invoice or VAT official receipts
1. A statement that the seller is a VAT-registered
person, and the taxpayer's identification
number (TIN);
2. The total amount which the purchaser pays or
is obligated to pay to the seller with the
indication that such amount includes the VAT:
Provided that:
a. The amount of the tax shall be shown as a
separate item in the invoice or receipt;
NOTE: Under R.R. 18-2011 (November 21,
2011), in case of failure to indicate the VAT
as a separate item in the sales invoice or
official receipt, a fine of not less than P1,000
but not more than P50,000 shall, upon
conviction, be collected for each act or
omission in addition to imprisonment of
not less than 2 years but not more than 4
years.
b. If the sale is exempt from value-added tax,
the term "VAT-exempt sale" shall be written
or printed prominently on the invoice or
receipt;
c. If the sale is subject to 0% VAT, the term
"zero-rated sale" shall be written or printed
prominently on the invoice or receipt;
d. If the sale involves goods, properties or
services some of which are subject to and
some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price
between its taxable, exempt and zero-rated
components, and the calculation of the
value-added tax on each portion of the sale
shall be shown on the invoice or receipt:
"Provided, That the seller may issue
separate invoices or receipts for the
taxable, exempt, and zero-rated
components of the sale.
3. The date of transaction, quantity, unit cost and
description of the goods or properties or nature
of the service; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
4. In the case of sales in the amount of P1,000 or
more where the sale or transfer is made to a
VAT-registered person, the name, business
style, if any, address and taxpayer identification
number (TIN) of the purchaser, customer or
client (Sec. 113[B], NIRC).
NOTE: The appearance of the word “zero rated” on
the face of invoices covering zero rated sales
prevents buyers from falsely claiming input VAT
from their purchases when no VAT was actually
paid. If, absent such word, a successful claim for
input VAT is made, the government would be
refunding money it did not collect. Further, the
printing of the word “zero-rated” on the invoice
helps segregate sales that are subject to 12% VAT
from those sales that are zero-rated. Unable to
submit the proper invoices, taxpayer has been
unable to substantiate its claim for refund (Eastern
Telecommunication Phils. Inc. v. CIR, G.R. No. 183531,
March 25, 2015).
The failure to print the word “zero-rated” in the
invoice/receipts is fatal to a claim for credit/refund
of input VAT on zero rated sales (JRA Philippines, Inc.
v. CIR, G.R. No. 177127, October 11, 2010).
Invoicing requirements in deemed sale
transactions
In the case of Sec. 106, (B)(1) [transfer, use or
consumption not in the ordinary course of business of
goods or properties originally intended for sale or for
use in the ordinary course of business], a input tax credit provided that the
memorandum entry in the subsidiary sales journal
to record withdrawal of goods for personal use is
required.
In the case of Sec. 106 (B)(2), [distribution or
transfer to shareholders or creditors] and Sec. 106
(B)(3) [consignment of goods if actual sale is made
within 60 days after the date of such consignment],an
invoice shall be prepared at the time of the
occurrence of the transaction, which should include,
all the information prescribed in Sec. 113-1. The
data appearing in the invoice shall be duly recorded
in the subsidiary sales journal. The total amount of
“deemed sale” shall be included in the return to be
filed for the month or quarter.
In the case of Sec. 106(B)(4), [retirement or
cessation of business], an inventory shall be
prepared and submitted to the RDO who has
jurisdiction over the taxpayer’s principal place of
business not later than 30 days after retirement or
cessation from business.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
264
An invoice shall be prepared for the entire
inventory, which shall be the basis of the entry into
the subsidiary sales journal. The invoice need not
enumerate the specific items appearing in the
inventory, but it must show the total amount. It is
sufficient to just make a reference to the inventory
regarding the description of the goods. However,
the sales invoice number should be indicated in the
inventory filed and a copy thereof shall form part of
this invoice. If the business is to be continued by
the new owners or successors, the entire amount
of output tax on the amount deemed sold shall be
allowed as input taxes. If the business is to be
liquidated and the goods in the inventory are
sold or disposed of to VAT-registered buyers, an
invoice or instrument of sale or transfer shall to
prepared citing the invoice number wherein the tax
was imposed on the deemed sale. At the same time
the tax paid corresponding to the goods sold should
be separately indicated in the instrument of sale
(Sec. 4.113-2, R.R. 16-2005).
Consequences of issuing erroneous VAT invoice
or VAT official receipt
1. In case of non-VAT registered person who issues
a VAT invoice/receipt shall be held liable for:
a. Payment of percentage tax if applicable;
b. Payment of VAT without input tax;
c. 50% surcharge on tax due as provided for
under Sec. 248(B); and
The purchaser shall be allowed to recognize an
invoice/official receipt contains the required
information under Sec. 110 on Tax Credits.
2. In case a VAT-registered who issues a VAT
invoice/official receipt for a VAT-exempt sale
without the words “VAT Exempt Sale,” the
transaction shall become taxable and the issuer
shall be liable to pay VAT thereon. The purchaser
shall be entitled to claim an input tax credit on
his purchase.
FILING OF RETURN AND PAYMENT
Persons required to file a VAT Return
1. Every person or entity who in the course of
trade or business, sells or leases goods,
properties, and services subject to VAT, if the
aggregate amount of actual gross sales or
receipts exceed P1,919,500 for any 12- month
period
2. A person required to register as VAT taxpayer
but failed to register
3. Any person who imports goods
 VALUE ADDED TAX

4. Professional practitioners whose gross fees 1. Cancellation of VAT registration - Any

exceed P1,919,500 for any 12-month period.
Filing of return
Every taxable person is required to account for and
pay VAT by reference to each accounting period
consisting of three months, referred to as a taxable
quarter.
person, whose registration has been cancelled
in accordance with Section 236, shall file and
pay a return within 25 days from the date of
cancellation of registration;
NOTE: Under Section 236 of NIRC, a VAT –
registered person may cancel his registration
for VAT if:

- A VAT declaration for the month (form 2550M)
must be filed within 20 days after the end of the
month concerned
- A VAT return covering the amount of his gross
sales or receipts and purchases for the
prescribed taxable quarter (for 2550Q) must be
filed by the taxable person within 25 days
following the close of the quarter to which it
relates (Sec. 114, NIRC)
Only one consolidated return shall be filed by the
taxpayer for his principal place of business or head
office and all branches (Sec. 114[A], NIRC).
Payment of VAT
a. He makes written application and can
demonstrate to the commissioner’s satisfaction
that his gross sales or receipts for the following
twelve (12) months, other than those that are
exempt under Section 109(A) to (U), will not
exceed P1,919,500 or
b. He has ceased to carry on his trade or
business, and does not expect to recommence
any trade or business within the next twelve
(12) months.
The cancellation of registration will be effective
from the first day of the following month (Sec.
236 (F), NIRC).

VAT must be paid every month. 2. VAT on sale of refined sugar- payable in
advance by the owner/seller to the BIR through
FORM 2550- FORM 2550-Q the sugar refinery. The advance payment must
M be made prior to or upon the issuance of the
Scope Monthly sales Quarterly sales refined sugar release order or similar
and/or and/or receipts instruments. However, the owner-seller may
receipts within 25 days withdraw his refined sugar from the sugar mill
within 20 after the close of or refinery warehouse with advance payment of
days following each taxable the tax if it will not be locally sold but rather for
the end of quarter. use exclusively as raw material in the
month. manufacture of sugar-based food products
The VAT payable intended for zero-rated export (VAT Ruling No.
Accomplished for each calendar 198-90, September 14, 1990).
only for each quarter shall be 3. VAT on sale of flour – The VAT on the sale of
of the first 2 reduced by the flour milled from imported wheat shall be paid
months of total amount of in advance prior to the withdrawal of the
each taxable taxes previously imported wheat from customs custody based
quarter. paid for the on the formulate prescribed in the regulation
preceding 2 (Rev. Regs. No. 29-2003, October 30, 2003).
months and/or the Purchases by flour millers of imported wheat
sum of the from traders shall also be subjected to advance
allowance excess VAT and shall be paid by the flour miller prior
input tax carried to delivery (Sec. 4.114-1 (B) (2), Rev. Regs. No. 16-
over and the VAT 05).
withheld by the
government. Where to File the Return and Pay the Tax
Deadline 20th day of 25th day of
following following calendar GR: It shall be filed with and the tax paid to
month quarter 1. An Authorized Agent Bank (AAB);
2. Revenue Collection Officer (RCO); or
Other special transactions: 3. Duly authorized city or municipal
Treasurer, where such Treasurer is

UNIVERSITY OF SANTO TOMAS

265 FACULTY OF CIVIL LAW
 LAW ON TAXATION
a. Within the Philippines; and
b. Located within the revenue district
where the taxpayer is registered or
required to register (Sec. 114[B]).
XPN: As the Commissioner otherwise permits.
WITHHOLDING OF FINAL VAT
ON SALES TO GOVERNMENT
Rule regarding the withholding of Final VAT on
sales to government
The Government or any of its political subdivisions,
instrumentalities or agencies, including
government owned or controlled corporations
(GOCCs) shall, before making payment on account of
its purchase of goods and/or services taxed at 12%
shall deduct and withhold a final VAT of 5% of the
gross payment. The payment for lease or use of
properties or property rights to nonresident owners
shall be subject to 12% withholding tax at the time
of payment. For purposes of this section, the payor
or person in control of the payment shall be
considered as the withholding agent (Sec. 114(C),
NIRC).
NOTE: The five percent (5%) final VAT withholding
rate shall represent the net VAT payable to the seller
The remaining seven percent (7%) effectively
accounts for the standard input VAT for sales of
goods or services to government or any of its
political subdivisions, instrumentalities or agencies
including GOCCs, in lieu of the actual Input VAT
directly attributable or ratably apportioned to such
sales.
Should actual input VAT attributable to sale to
government exceed seven percent (7%) of gross
payments, the excess may form part of the seller’s
expense or cost.
If actual input VAT attributable to sale to
government is less than 7% of gross payment, the
difference must be closed to expense or cost.
The government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, as
well as private corporations, individuals, estates
and trusts, whether large or non-large taxpayers,
shall withhold ten percent (12%) VAT with respect
to the following payments:
1. Lease or use of properties or property rights
owned by non-residents;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
266
2. Services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; and
3. Other services rendered in the Philippines by
non-residents.
VAT withheld and paid for the non-resident
recipient (remitted using BIR Form No. 1600),
which VAT is passed on to the resident withholding
agent by the non-resident recipient of the income,
may be claimed as input tax by said VAT-registered
withholding agent upon filing his own VAT Return,
subject to the rule on allocation of input tax among
taxable sales, zero-rated sales and exempt sales. The
duly filed BIR Form No. 1600 is the proof or
documentary substantiation for the claimed input
tax or input VAT.
Nonetheless, if the resident withholding agent is a
non-VAT taxpayer, said passed-on VAT by the non-
resident recipient of the income, evidenced by the
duly filed BIR Form No. 1600, shall form part of the
cost of purchased services, which may be treated
either as an "asset" or "expense", whichever is
applicable, of the resident withholding agent.
The VAT withheld shall be remitted within 10 days
following the end of the month the withholding was
made (Sec. 4.114-2, RR. 16-2005).
NOTE: It was held in the case of
AbakadaGuroPartylist v. Ermita, G.R. No. 168056,
September 1, 2005, that the since it has not been
shown that the class subject to the 5% final
withholding tax has been unreasonably narrowed,
there is no reason to invalidate the provision. It
applies to all those who deal with the government.
 PERCENTAGE TAX

PERCENTAGE TAXES (CONCEPT AND NATURE)
As a rule, VAT is imposed on every sale, barter, or
exchange of goods or services and on importations.
However, there are instances where the same does
not apply because the transaction is subject to other
percentage taxes (OPT) as required by the NIRC.
Tax Rates
Percentage tax is a tax imposed on sale, barter,
exchange or importation of goods, or sale of services
based upon gross sales, value in money of receipts
derived by the manufacturer, producer, importer or
seller measured by certain percentage of the gross
selling price or receipts. If the transaction is subject
to OPT, it is no longer subject to VAT. Nonetheless,
OPT as well as VAT may be imposed together with
excise taxes (Tabag, 2015).

COVERAGE BASIS TAX RATE

Persons exempt from VAT under Gross Receipts on sale or lease of goods, properties 3%
Section 109 (W) or services
Domestic carriers and keepers of Gross Receipts on transport of passengers by land 3%
garages (except those thru animal drawn two-wheeled
vehicles)
International Carriers:
International air/shipping carriers Gross Receipts from transport of cargo from the 3%
doing business in the Philippines Philippines to another country
Franchise Grantees:
Gas and water utilities Gross Receipts 2%
Radio and television broadcasting Gross Receipts 3%
companies whose annual gross
receipts of the preceding year do
not exceed P10,000,000 and did
not opt to register as VAT taxpayer
Overseas dispatch, message or Gross Receipts 10%
conversation originating from the
Philippines
Banks and non-bank financing On interest, commissions and discounts from lending activities as well
intermediaries performing quasi- as income from financial leasing, on the basis of remaining maturities
banking functions of instruments maturities of instruments from which receipts are
derived:
• Maturity period is five years or less 5%
• Maturity period is more than five years 1%
On dividends and equity shares and net income of 0%
subsidiaries
On royalties, rentals of property, real or personal, 7%
profits from exchange and all other items treated
as gross income under Sec. 32 of the NIRC, as
amended
On net trading gains within the taxable year of 7%
foreign currency, debt securities, derivatives and
other similar financial instruments
Other non-bank financial Interest, commissions and discounts and all other 5%
intermediaries items treated as gross income under the NIRC, as
amended
Interest, commissions and discounts from lending activities, as well as
income from financial leasing on the basis of remaining maturities of
instruments:
• Maturity period is five years or less 5%
• Maturity period is more than five years 1%
Life Insurance Companies (except Total premiums collected 2%
purely cooperative companies or
associations)
Agents of foreign insurance companies (except reinsurance premium):

UNIVERSITY OF SANTO TOMAS

267 FACULTY OF CIVIL LAW
 LAW ON TAXATION
COVERAGE BASIS TAX RATE
Insurance agents authorized under Total premiums collected 4%
the Insurance Code to procure
policies of insurance for companies
not authorized to transact business
in the Philippines
Owners of property obtaining Total premiums paid 5%
insurance directly with foreign
insurance companies
Proprietor, lessee or operator of the following:
Cockpits Gross receipts 18%
Cabarets, Night or Day Clubs Gross receipts 18%
videoke bars, karaoke bars,
karaoke televisions, karaoke boxes
and music lounges
Boxing exhibitions Gross receipts 10%
Professional basketball games Gross receipts 15%
Jai-alai and race track (operators Gross receipts 30%
shall withheld tax on winnings)
Winnings on horse races Winnings or 'dividends' 10%
Winnings from double forecast/quinella 4%
and trifecta bets
Prizes of owners of winning race horses 10%
Sale, Barter, Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or Through
Initial Public Offering
Sale, barter, exchange or other Gross selling price or gross value in money .60% of gross
disposition of shares of stock listed selling price or
and traded through the Local Stock 6/10 of 1%
Exchange other than the sale by a
dealer of securities [Sec. 127 (A)]
Sale, barter or exchange or other Gross selling price or gross value in money
disposition through initial public
offering (IPO) of shares of stock in Proportion of disposed shares to total outstanding shares after the
closely-held corporations [Sec. 127 listing in the local stock exchange:
(B)] Up to 25% 4%
Over 25% but not over 33 1/3% 2%
Over 33 1/3% 1%
(www.bir.gov.ph)

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2019 GOLDEN NOTES
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 EXCISE TAXes and Documentary Stamp Tax
EXCISE TAX (CONCEPT AND NATURE)
Excise tax is essentially a tax on goods, products
or articles
The term "excise tax" under Title VI of the 1997
NIRC relates to taxes applied to goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported (Separate
opinion of J. Bersamin in CIR v. Pilipinas Shell
Petroleum Corp., G.R. No. 188497, 2014).
Kinds of excise taxes
1. Specific tax - imposed and based on weight or
volume capacity or any other physical unit of
measurement
2. Ad valorem tax - imposed and based on the
selling price or other specified value of the
goods
Two concepts of ‘excise’ tax. As used in the NIRC,
excise taxes refer to taxes applicable to certain
specified goods or articles manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to
things imported into the Philippines. Excise tax is
essentially a tax on property(Sec. 129, NIRC;
Chevron Philippines, Inc. v. CIR, G.R No. 210836
September 1, 2015).
As used in classifying taxes according to tax base,
excise tax is “a tax upon the performance, carrying
on, or exercise of some right, privilege, activity,
calling or occupation. This is derived from
American Jurisprudence. Examples are income tax,
transfer tax, VAT, percentage tax and documentary
stamp tax. The meaning of “excise tax” has
undergone a transformation, morphing from the
Am Jur definition to its current signification in the
NIRC which is a tax on certain specified goods or
articles.
The payment of excise taxes is the direct
liability of the manufacturer or producer
The production, manufacture or importation of the
goods belonging to any of the categories
enumerated in Title VI of the NIRC (i.e., alcohol
products, tobacco products, petroleum products,
automobiles and non-essential goods, mineral
products) are not the sole determinants for the
proper levy of the excise tax. It is further required
that the goods be manufactured, produced or
imported for domestic sale, consumption or any
other disposition. The accrual of the tax liability is,
therefore, contingent on the production,
269
manufacture or importation of the taxable goods
and the intention of the manufacturer, producer or
importer to have the goods locally sold or
consumed or disposed in any other manner. This is
the reason why the accrual and liability for the
payment of the excise tax are imposed directly on
the manufacturer or producer of the taxable goods,
and arise before the removal of the goods from the
place of their production (Separate opinion of J.
Bersamin in CIR v. Pilipinas Shell Petroleum Corp.,
G.R. No. 188497, 2014)
Major classification of excisable articles and
related codal section
1. Alcohol Products (Sections 141-143)
a. Distilled Spirits (Section 141)
b. Wines (Section 142)
c. Fermented Liquors (Section 143)
2. Tobacco Products (Sections 144-146)
a. Tobacco Products (Section 144)
b. Cigars & Cigarettes (Section 145)
c. Inspection Fee (Section 146)
3. Petroleum Products (Section 148)
4. Miscellaneous Articles (Section 149-150)
a. Automobiles (Section 149)
b. Non-essential Goods (Section 150)
5. Mineral Products (Sections 151)
(www.bir.gov.ph)
NOTE: Oil companies are exempt from the payment
of excise tax on petroleum products manufactured
and sold by them to international carriers. Section
135 (a), in fulfillment of international agreement
and practice to exempt aviation fuel from excise tax
and other impositions, prohibits the passing of the
excise tax to international carriers who buys
petroleum products from local
manufacturers/sellers. (CIR v. Pilipinas Shell
Petroleum Corporation, G.R. No. 188497. February
19, 2014).*
*Note: 2017 Edition of the Golden Notes quoted the
2012 decision in CIR v. Pilipinas Shell. A motion for
reconsideration filed by Pilipinas Shell was granted
on 2014 reversing the 2012 ruling. Accordingly, oil
companies are now exempt from the payment of
excise tax on petroleum products manufactured and
sold by them to international carriers.
Pursuant to Section 135(c), petroleum products
sold to entities that are by law exempt from direct
and indirect taxes are exempt from excise tax. The
phrase “which are by law exempt from direct and
indirect taxes describes the entities to whom the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
petroleum products must be sold in order to render
the exemption operative. Section 135(c) should
thus be construed as an exemption in favor of the
petroleum products on which the excise tax was
levied in the first place. The exemption cannot be
granted to the buyers — that is, the entities that are
by law exempt from direct and indirect taxes —
because they are not under any legal duty to pay the
excise tax. (Chevron Philippines, Inc. vs.
Commissioner of Internal Revenue, G.R. No. 210836,
September 1, 2015)
way of sale and does not apply to all conveyances of
real property. Indeed, the fact that Section 196
refers to words "sold", "purchaser" and
"consideration" undoubtedly leads to the
conclusion that only sales of real property are
contemplated therein (CIR v. La Tondeña Distillers,
Inc. (LTDI [now Ginebra San Miguel], G.R. No.
175188, 15 July 2015, Del Castillo, J.).

DOCUMENTARY TAXES
(CONCEPT AND NATURE)

Nature and Persons Liable for the Tax

In General — the documentary stamp taxes under

Title VII of NIRC is a tax on certain transactions. It
is imposed against "the person making, signing,
issuing, accepting, or transferring" the document or
facility evidencing the aforesaid transactions. Thus,
in general, it may be imposed on the transaction
itself or upon the document underlying such act.
Any of the parties thereto shall be liable for the full
amount of the tax due: Provided, however, that as
between themselves, the said parties may agree on
who shall be liable or how they may share on the
cost of the tax.

Exception — whenever one of the parties to the

taxable transaction is exempt from the tax imposed
under Title VII of the Code, the other party thereto
that is not exempt shall be the one directly liable for
the tax (RR 09-00).

Q: Company A entered into a Plan of Merger

with Company B, C and D, with the former being
the surviving corporation. As a result of the
merger, the assets and liabilities of the
absorbed corporations were transferred to
Company B. The CIR imposed Documentary
Stamp Tax upon the transfer of assets, such as
real properties, pursuant to Section 196 of the
NIRC. However, Company B claims that it is
exempt from paying such taxes. Rule.

A: The contention of Company B will prevail over

the claim of the CIR. In reference to Section 196 of
the NIRC, it does not include the transfer of real
property from one corporation to another pursuant
to a merger. that Section 196 would clearly show it
pertains only to sale transactions where real
property is conveyed to a purchaser for a
consideration. The phrase "granted, assigned,
transferred or otherwise conveyed" is qualified by
the word "sold" which means that DST under
Section 196 is imposed on the transfer of realty by

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 TAX REMEDIES UNDER NIRC

TAX REMEDIES UNDER THE NIRC Q: Do all types of taxes require issuance of
assessment?
Remedies of the Taxpayer A:
GR: Internal Revenue Taxes are self-assessing and
These are legal actions which a taxpayer can avail to do not require the issuance of an assessment notice
seek relief from the undue burden or oppressive in order to establish the tax liability of a taxpayer
effect of tax laws, or as means to check possible (Tupaz v.Ulep, 316 SCRA 118). The NIRC follows the
excesses by revenue officers in the performance of pay-as-you-file system of taxation under which the
their duties. taxpayer computes his own tax liability, prepares
the return, and pays the tax as he files the return.
Remedies before payment
1. Administrative remedies XPN:
a. Protest of assessment; 1. When the taxable period of a taxpayer is
i. Reconsideration terminated (Sec. 6 [D], NIRC)
ii. Reinvestigation 2. In case of deficiency tax liability arising from a
b. Compromise; and tax audit conducted by the BIR (Sec. 56 [B], NIRC)
c. Abatement 3. Tax lien (Sec. 219, NIRC)
4. Dissolving corporation (Sec. 52 [c], NIRC)
2. Judicial Remedies 5. Improperly Accumulated Earnings Tax (Sec. 29,
NIRC)
Remedies after payment
1. Administrative remedies Tax Assessment (Deficiency)
a. Tax refund
b. Tax credit Neither the NIRC nor the revenue regulations
2. Judicial remedies governing the protest of assessments provide a
specific definition or form of an assessment.
Remedies of the Government However, the NIRC defines the specific functions
and effects of an assessment. An assessment
These are courses of action provided or allowed by informs the taxpayer that he or she has tax
law to implement the tax laws or enforce tax liabilities. But not all documents coming from the
collection. BIR containing a computation of the tax liability can
be deemed assessments (CIR vs. PASCOR, 309 SCRA
1. Administrative remedies 402).
a. Tax lien
b. Distraint and Levy In the context in which it is used in the NIRC, an
c. Forfeiture of real property assessment is a written notice and demand
d. Suspension of business operation made by the BIR on the taxpayer for the
e. Non-availability of injunction to settlement of a due tax liability that is there
restrain collection of tax definitely set and fixed (Adamson v. CA, 588 SCRA
2. Judicial remedies 27).
a. Ordinary civil action
b. Criminal action Tax assessment is the official action of an officer
authorized by law in ascertaining the amount of tax
ASSESSMENT due under the law from a taxpayer. This action
necessarily involves:
Kinds of assessments 1. The computation of the sum due;
2. Giving notice to that effect to the taxpayaer; and
1. Self-assessment(Section 56[A], NIRC) – When 3. The making, simultaneously with or sometime
the taxpayer computes his own liability, files his after the giving of notice, of a demand upon him
return and pays the tax based on his for the payment of the deficiency stated (Tabag,
computation 2015).
1.
2. Deficiency assessment(Section 56[B], NIRC) – Importance of a tax assessment
this occurs upon discovery of the BIR that the
self-assessment was either deficient or when no TO THE GOVERNMENT TO THE
return was made by the taxpayer (Ingles, 2015). TAXPAYER

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271 FACULTY OF CIVIL LAW
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1. To enforce taxpayer 1. To be informed
liabilities and certain of his liabilities; Q: After examining the books and records of EDS
matters that relate to 2. To determine Corporation, the 2004 final assessment notice,
it, such as the the period to showing basic tax of P1,000,000 deficiency
imposition of protest; interest of P400,000 and due date for payment
surcharges and 3. To determine of April 30, 2007, but without the demand letter,
interests; prescription of was mailed and released by the BIR on April 15,
2. Statute of Limitations; government 2007. The registered letter, containing the tax
3. Establishment of tax claim. assessment, was received by the EDS
liens; and Corporation on April 25, 2007
4. In estimating the
revenues that may be a. What is an assessment notice? What are the
collected. requisites of a valid assessment? Explain

Requisites of a valid assessment (BaD SAWS)
1. In writing and signed by the BIR;
2. Contains the law and the facts on which the
assessment is based (basis must be provided);
3. Contains a demand for payment within the
prescribed period;
4. Must be served on and received by the taxpayer.
The taxpayers shall be informed in writing of the
law and the facts on which the assessment is made;
otherwise, the assessment shall be void.
Moreover, the regulations provide that the Formal
Letter of Demand and Final Assessment Notice
(FLD/FAN) shall be issued by the Commissioner or
his duly authorized representative. The FLD/FAN
calling for payment of the taxpayer's deficiency tax
or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based; otherwise, the assessment
shall be void (RR 18-13).
What Does Not Constitute an Assessment
b. As tax lawyer of EDS Corporation, what legal
defense(s) would you raised against the
assessment? Explain. (2008 Bar)
A:
a. An assessment notice is formal notice to the
taxpayer stating that the amount thereon is due as a
tax and containing a demand for the payment
thereof (Alhambra Cigar and Cigarette Mfg. Co. v
Collector, 105 PR 1337, 1959; CIR v. Pascor Realty
and Development Corp., 309 SCRA 402, 1999). To be
valid, the taxpayer must be informed in writing of
the law and the facts on which assessment is made
(Sec. 228 NIRC).
b. I will question the validity of the assessment
because of the failure to send the demand letter
which contains a statement of the law and the facts
upon which the assessment is based. If an
assessment notice is sent without informing the
taxpayer in writing about the law and facts on which
the assessment is made, the assessment is void (Sec.
228, NIRC; Azucena T Reyes v. CIR, 480 SCRA 382,
2005).

1. the advice of tax deficiency and preliminary Modes of Service

five-day letter given by the CIR to an employee
of taxpayer are not valid substitutes for the 1. Personal service,
mandatory notice in writing of the legal and 2. Service by mail, or
factual bases of the assessment 3. Substituted delivery

2. the revenue officers’ Affidavit-Report, which
was attached to the criminal Complaint filed
with the Department of Justice, does not
constitute an assessment. (CIR vs. PASCOR).
3. A written communication by a revenue officer
of tax liability of the taxpayer, giving him an
opportunity to contest or disprove the BIR
examiner’s findings is not an assessment since
it is yet indefinite. The said recommendation
letter served merely as the prima facie basis for
filing criminal informations for the violation of
the NIRC (Adamson v. CA 588 SCRA 27).
Service to the tax agent/practitioner, who is
appointed by the taxpayer, shall be deemed service
to the taxpayer. (RR 18-2013).
When assessment is made
An assessment is deemed made only when the
Collector of Internal Revenue RELEASES, MAILS OR
SENDSsuch notice to the taxpayer (CIR, v. Pascor
Realty and Development Corporation, et. al. G.R. No.
128315, June 29, 1999).
Principles governing tax assessments (PAD3)

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 TAX REMEDIES UNDER NIRC
1. Prima facie presumed correct and made in good
faith
Assessments are prima facie presumed correct and
made in good faith, with the taxpayer having the
burden of proving otherwise (FELS Energy, Inc. V.
The Province of Batangas, et al., G.R. No. 168557,
February 16, 2007). In the absence of any
irregularities in the performance of official duties,
an assessment will not be disturbed. Failure to
present proof of error in assessments will justify
judicial affirmance of said assessment (ACMDC v. CA,
242 SCRA 289).
The burden of proof is on the taxpayer contesting the
validity or correctness of an assessment to prove
not only that the CIR is wrong but the taxpayer is
right. Otherwise, the presumption in favor of
correctness of tax assessment stands.
Reasons for presumption of correctness of
assessments:
Lifeblood Theory
Presumption of regularity in the performance
of public functions.
The likelihood that the taxpayer will have
access to the relevant information.
The desirability of bolstering the record-
keeping requirements of the NIRC.
When prima facie correctness of a tax assessment
does not apply:
- Upon proof that an assessment is utterly
without foundation, meaning it is arbitrary and
capricious. Where the BIR has come out with a
“naked assessment” i.e., without any foundation
character, the determination of the tax due is
without rational basis (CIR v. Hantex Trading
Co. Inc., G.R, No. 136975, March 31, 2005).
2. Should be based on Actual facts (CIR vs.
Benipayo, G.R. No. L-13656, January 31, 1962);
However, in the absence of the accounting records
of a taxpayer, his tax liability may be determined by
estimation. The CIR is not required to compute such
tax liabilities with mathematical exactness.
Approximation in the calculation of the taxes due is
justified. However, the rule does not apply where
the estimation is arrived at arbitrarily and
capriciously(CIR v. Hantex Trading Co. Inc., G.R, No.
136975, March 31, 2005).
An assessment on estimates is prima facie valid and
lawful where it does not appear to have been
arrived at arbitrarily or capriciously. The burden of
273
proof is upon the complaining party to show clearly
that the assessment is erroneous. Failure to present
proof of error in the assessment will justify the
judicial affirmance of the said assessment (RMC 23-
2000).
3. Discretionary on the part of the Commissioner
Mandamus cannot lie to compel the CIR to impose
deficiency tax assessment. The CIR’s power to
assess is a discretionary one (Meralco v. Sevillano,
G.R. No. L-46245, October 23, 1982).
4. Must be Directed to the right party
An affidavit, which was executed by the revenue
officers stating the tax liabilities of the taxpayer and
attached to a criminal complaint for tax evasion
cannot be deemed a valid assessment, not having
been received by the taxpayer and thus the taxpayer
was not informed of the law and facts in which the
assessment was made (CIR v. Pascor Realty Dev.
Corp., G.R. No 128315, June 19, 1999).
5. The authority vested in the Commissioner to
assess taxes may be Delegated (Sec.7, NIRC).
The authority to make tax assessments may be
delegated to subordinate officers. Said assessment
has the same force and effect as that issued by the
CIR if not revised or reviewed by the latter (Oceanic
Network Wireless Inc. v. CIR, GR 148380, December 9,
2005).
Before the delegated revenue officer can consuct
examination or assessment, there must be a clear
grant of authority. This authority is embodied in a
Letter of Authority (LOA) (CIR vs. Sony Philippines,
Inc. GR No. 178697, November 17, 2010).
Best evidence obtainable
Pursuant to CIR’s power to make assessment, the
CIR shall assess the proper tax on the best evidence
obtainable: (FINE)
1. When a report required by law as a basis for
assessment of any internal revenue tax shall not
be forthcoming within the time fixed by law or
regulation, or
2. Any such report is false, incomplete or
erroneous (Sec. 6(B), NIRC).
This rule applies when a tax report is required by
law for the purpose of assessment and it is not
available or when the report is incomplete or
fraudulent (Sy Po vs. CTA, G.R. No. 81446, August 18,
1988).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
The "best evidence" includes the corporate and
accounting records of the taxpayer who is the
subject of the assessment process, the accounting
records of other taxpayers engaged in the same line
of business, including their gross profit and net
profit sales. Such evidence also includes data,
record, paper, document or any evidence gathered
by internal revenue officers from other taxpayers
who had personal transactions or from whom the
subject taxpayer received any income; and record,
data, document and information secured from
government offices or agencies.
The law allows the BIR access to all relevant or
material records and data in the person of the
taxpayer. It places no limit or condition on the type
or form of the medium by which the record subject
to the order of the BIR is kept. The purpose of the
law is to enable the BIR to get at the taxpayer's
records in whatever form they may be kept. Such
records include computer tapes of the said records
prepared by the taxpayer in the course of business.
The best evidence obtainable may consist of hearsay
evidence, such as the testimony of third parties or
accounts or other records of other taxpayers
similarly circumstanced as the taxpayer subject of
the investigation. As a rule, administrative agencies
such as the BIR are not bound by the technical rules
of evidence (CIR v. Hantex Trading Co., Inc., GR No.
136975, March 31, 2005).
Q: BIR assessed the taxpayer for alleged
deficiency taxes. The assessment was based on
photocopies of 77 Consumption Entries
furnished by an informer, the taxpayer
understated its importations. However, the BIR
failed to secure certified true copies of the
subject Consumption Entries from the Bureau of
Customs since, according to the custodian, the
originals had been eaten by termites. Can the
BIR base its assessment on mere photocopies of
records/documents?
A: NO. While it is true that the CIR can assess
taxpayers based on the “best evidence obtainable,”
such best evidence obtainable does not include
photocopies of of records/documents which are
mere scraps of paper and are of no probative value
as basis for any deficiency income or business taxes
against a taxpayer (CIR v. Hantex Trading Co., Inc., GR
136975, Mar. 31, 2005).
Instances when CIR may make or amend a tax
return
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274
The CIR shall make or amend the return from his
own knowledge and from such information as he
can obtain through testimony or otherwise:
1. In case a person fails to file a required return or
other document at the time prescribed by law;
or
2. Willfully or otherwise files a false or fraudulent
return or other document (Sec. 6(B), NIRC).
When CIR shall compute income for taxation
The CIR shall compute income for taxation in
accordance with the method as in his opinion
clearly reflects income:
1. If no method of accounting was employed by the
taxpayer, or
2. The accounting method employed does not
clearly reflect the income (Sec. 43, NIRC).
Constructive Method of Income Determination
Some of the methods that BIR may use to determine
whether a taxpayer has not reported all of his
income during a particular taxable year are: [PeCaN
BUSTS]
1. Net worth method
2. Cash expenditure method
3. Percentage method
4. Bank deposit method
5. Unit and value method
6. Third party information or access to records
method
7. Surveillance and assessment method
8. Such methods as in the opinion of the BIR
Commissioner clearly reflect the income
Net worth method
A method of reconstructing income which is based
on the theory that if the taxpayer’s net worth has
increased in a given year in an amount larger than
his reported income, he has understated his income
for the year.
It is a method of determining income where a
government can prove with reasonable certainty
the increase of taxpayer’s net worth at a given date
by reasonable inference with independent evidence
such as bank deposits or purchase of assets.
(Holland v. U.S., 348, U.S., 121).
Section 43 of the NIRC allows the CIR to use any
method of computation or accounting which would
more clearly reflect the income of the taxpayer
(Collector v. Avelino, 3 SCRA 57).
 TAX REMEDIES UNDER NIRC

The formula of the taxpayer’s net worth: ASSETS –

LIABILITIES = NET WORTH. His net worth at the
beginning of the taxable year is then compared with
his net worth at the end of the year. Any increase in
the net worth is presumed to be income not
declared for tax purposes.

Presumption: The unexplained increase in net

worth of the taxpayer is derived from taxable
sources.

2. The inference is disputable in the sense that the

taxpayer is not precluded from adducing evidence
to show that the excess were derived from items
which are excluded from gross income.

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TAX DELINQUENCY AND TAX DEFICIENCY

DELINQUENCY TAX DEFICIENCY TAX

When:
(a) Self-assessed tax per return filed by the taxpayer
on the prescribed date was not paid at all or only
partially paid; or
(b) Deficiency tax assessed by the BIR becomes final
and executory and the taxpayer has not paid it within
the period given in the notice of assessment.
(a) The amount by which the tax imposed by law as
determined by the CIR or his authorized
representative exceeds the amount of tax in the
taxpayer’s return; or
(b) If there is no amount of tax in his return, then the
amount by which the tax as determined by the CIR or
his authorized representative exceeds the amounts
previously assessed or collected without assessment
as deficiency (Sec. 56[B], NIRC).

Collection
Can immediately be collected through:
(1) administratively action - the issuance of a
warrant of distraint and levy
(2) judicial action
Civil Action
The filing of a civil action for the collection of the
delinquent tax in the ordinary court is a proper
remedy.
Penalties
Subject to administrative penalties such as 25%
surcharge, interest, and compromise penalty
Cannot be collected immediately as the taxpayer may
file the protest assessment & there should be a denial
of such protest by the BIR
The filing of a civil action at the ordinary court for
collection during the pendency of protest may be the
subject of a motion to dismiss. In addition to a motion
to dismiss, the taxpayer must file a petition for review
with the CTA to toll the running of the prescriptive
period.
Not subject to the 25% surcharge, although subject to
interest and compromise penalty

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 TAX REMEDIES UNDER NIRC

Illustration: It is incumbent upon a taxpayer who wants to

If a taxpayer computes an income tax due of
P2,000,000 and pays only P1,000,000 or none at all,
then there is delinquency tax. However, if a
taxpayer computes an income tax due of
P2,000,000, but the BIR finds out that there are
undeclared income and the correct income tax due
should have been P3,000,000, then there is
deficiency tax.
JEOPARDY ASSESSMENT
A delinquency tax assessment made without the
benefit of a complete or partial investigation by an
authorized revenue officer who has a reason to
believe that the assessment and collection of a
deficiency tax will be jeopardized by delay caused by
the taxpayer’s failure to:
avail of the defense of prescription to prove that
he indeed submitted a return. If he fails to do so,
the conclusion should be that no such return
was filed, in which the Government has 10 years
within which to make the corresponding
assessments (Taligaman Lumber Co., Inc., v. CIR,
G.R. No. L-15716, March 31, 1962).
4. Defense of prescription is waivable, such
defense is not jurisdictional and must be raised
seasonably, otherwise it is deemed waived.
5. Being a remedial measure, it should be
interpreted liberally in order to protect the
taxpayer.
6. If the last day of the period falls on a Saturday, a
Sunday or a legal holiday in the place where the
Court sits, the time shall not run until the next
working day (Sec. 1, Rule 22, ROC).

a. Comply with audit and investigation 3 important prescriptive periods:

requirements to present his books of accounts
and/or pertinent records, or 1. Period to assess tax
b. Substantiate all or any of the deductions, 2. Period to collect tax
exemptions or credits claimed in his return 3. Period to file a criminal action (Mamalateo,
(Sec. 3 (1)(a), R.R. 30-2002). 2014).

NOTE: This is issued when the revenue officer finds

himself without enough time to conduct an
appropriate or thorough examination in view of the
impending expiration of the prescriptive period for
assessment. To prevent the issuance of a jeopardy
assessment, the taxpayer may be required to
execute a waiver of the statute of limitations.

PRESCRIPTIVE PERIOD FOR ASSESSMENT

Basic rules on prescription

1. When the tax law itself is silent on prescription,

the tax is imprescriptible;
2. When no return is required, tax is
imprescriptible and tax may be assessed at any
time as the prescriptive periods provided in
Sec. 203 and 222, NIRC are not applicable.
Remedy of the taxpayer is to file a return for the
prescriptive period to commence.

NOTE: Limitation on the right of the

government to assess and collect taxes will not
be presumed in the absence of a clear
legislation to the contrary.

3. Prescription is a matter of defense, and it must

be proved or established by the taxpayer
relying upon it.

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Date of filing
Prescriptive period of Assessment Prescriptive period of Collection
the return
Before due 3 years from due date 5 years from receipt of FAN by taxpayer;
date
On due date 3 years from due date NOTE: If taxpayer files fraudulent return
Beyond due 3 years from actual filing or did not file any return, the BIR may
date collect without assessment within 10
Fraudulent 10 years from discovery of bad faith/fraud years of filing of fraudulent return or
filing discovery of non-filing
Non-filing 10 years from discovery of non-filing
Waiver by taxpayer: Depends on the agreement of the parties
provided that the agreement to extend is executed prior to the
expiration of the original period of assessment
Source: Pre-week notes in Taxation Law by Atty. Rizalina Lumbera, 2016 Bar Examinations

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 TAX REMEDIES UNDER NIRC
Prescriptive periods for making assessments
GR: The right to assess must be done within 3 years
from the date of:
1. Actual filing of the return, or
2. From the last date prescribed by law for the
filing of such return, whichever is later.
Why “whichever is later”? This is to benefit the
government, so they have more time to make the
assessment on the taxpayer (Ingles, 2015).
XPN:
1. False or fraudulent return with intent to evade
tax: within 10 years from discovery of falsity or
fraud
2. Failure to file any return at all: within 10 years
from discovery of omission to file a return
3. Waiver of statute of limitations in writing,
which must be made before the expiration of the
period of assessment of taxes: period agreed
upon.
NOTE: The period agreed upon may be extended
by subsequent written agreements made before
the period previously agreed upon.
Rationale for Prescriptive Period or Statute of
Limitations for Assessments
This is for the benefit of both the government and
taxpayers. Reasons:
a. The government is benefited because the
officers would be obliged to act properly and
promptly in making assessments.
b. The taxpayers are benefited because after the
lapse of the period of prescription, they would
have a feeling of security against unscrupulous
tax agents who will take advantage of every
opportunity to molest law-abiding citizens.
c. Without such legal defense, the taxpayers would
furthermore be under obligation to always keep
their books and to keep them open for inspection
subject to harassment by unscrupulous tax
agents.
Thus, for the purpose of safeguarding taxpayers
from any unreasonable examination,
investigation or assessment, our tax laws
provide a statute of limitations in the collection
of taxes as well as their assessments (Domondon,
2014, citing several cases).
Determining whether prescription to assess had
set in
279
The important date to remember is the date when
the demand letter or notice is released or mailed
or sent by the CIR to the taxpayer.
Provided the release was effected before the
prescription sets in, the assessment is deemed made
on time, even if the taxpayer actually receives it
after the prescriptive period.
However, the fact that the assessment notice was
mailed before the prescription period sets in must
be proved with substantial evidence by the CIR. The
presumption that a letter duly directed and mailed
was received in the regular course of mail cannot be
applied if there is no substantial evidence to prove
that the notice was indeed sent (Ingles, 2015).
Q: GJM filed its Annual Income Tax Return for
the taxable year 1999 on April 12, 2000. BIR
sent FAN through registered mail on April 14,
2003, well within the 3-year prescriptive period.
GJM however denies having received any FAN.
BIR failed to prove that GJM received the FAN.
Should the assessment be given due course?
A: NO. When an assessment is made within the
prescriptive period, as in the case at bar, receipt by
the taxpayer may or may not be within said period.
But the rule does not dispense with the requirement
that the taxpayer should actually receive the
assessment notice, even beyond the prescriptive
period. If the taxpayer denies having received the
assessment from the BIR, it then becomes
incumbent upon the latter to prove by competent
evidence that such notice was indeed received by
the addressee.
Here, the onus probandi has shifted to the BIR to
show by contrary evidence that GJM indeed
received the assessment in the due course of mail.
While it is true that an assessment is made when the
notice is sent within the prescriptive period, the
release, mailing, or sending of the same must still be
clearly and satisfactorily proved (CIR v. GJM, G.R. No.
202695, February 29, 2016).
Return as the starting point of the prescriptive
period
Tax return refers to the form prescribed by the BIR
showing basic information about the taxpayer and
the computation of his tax liability, which is
required to be filed within the periods prescribed by
law and used as the basis for payment of tax assess
by the taxpayer. Two types of returns are (a)
original and (b) amended return (Mamalateo, 2014).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
In order that the filing of return may serve as the
starting point of the period of the making of
assessment, the return must be substantially
complete as to include the needed details on which
the full assessment may be made.
If the taxpayer files an amended return which is
substantially different from the original return, the
period of prescription of the right to issue the
deficiency assessment should be counted from the
filing of the amended return and not the original
return. To hold otherwise would pave the way for
taxpayers to evade payment of taxes by simply
reporting in their original return heavy losses and
amending the same after the CIR has lost his
authority to assess the proper tax.
Amendment considered Substantial
1. There is under declaration (exceeding 30%
of that declared) of taxable sales, receipts or
income; or
2. There is overstatement (exceeding 30% of
deductions) (Sec. 248 (B), NIRC).
If the taxpayer files the wrong return, it is as
though the taxpayer filed no return at all. This is
true even if all the necessary information was
reflected in the erroneous return. In situations like
this, the 10-year prescriptive period will apply
(Ingles, 2015, citing several cases).
Computation of the three (3) year period
The computation of the three-year period is based
on the Administrative Code, where a "year” shall be
understood to be 12 calendar months.
The Administrative Code of 1987 governs the
computation of legal periods, being the more recent
law than the Civil Code which provides that a year is
equivalent to 365 days whether it be a regular year
or a leap year (CIR v. Primetown Property Group, Inc.,
G.R. No. 162155, August 28, 2007).
Q: A Co., a domestic corporation, filed its 1995
ITR on Apr. 15, 1996 showing a net loss. On Nov.
10, 1996, it amended its 1995 ITR to show more
losses.
After an investigation, the BIR disallowed
certain deductions claimed by A Co., putting A
Co., in a net income position. As a result, on Aug.
5, 1999, the BIR issued a deficiency income
assessment against A Co. A Co., protested the
assessment on the ground that it has prescribed.
Decide. (2002 Bar)
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A: The right of the BIR to assess the tax has not
prescribed. The rule is that internal revenue taxes
shall be assessed within three years after the last
day prescribed by law for the filing of the return
(Sec. 203, NIRC). However, if the return originally
filed is amended substantially, the counting of the
three-year period starts from the date the
amended return was filed (CIR v. Phoenix
Assurance Co., Ltd., 14 SCRA 52).
There is a substantial amendment in this case
because a new return was filed declaring more
losses, which can only be done either (1) in reducing
gross income or (2) in increasing the items of
deductions, claimed.
Q: Mr. Reyes, a Filipino citizen engaged in the
real estate business, filed his 2004 ITR on Mar.
30, 2005. On Dec. 30, 2005, he left the Phil. as an
immigrant to join his family in Canada. After
investigation of said return, the BIR issued a
notice of deficiency income tax assessment on
Apr. 15, 2008.
Mr. Reyes returned to the Phililippines as a
balikbayan on Dec. 8, 2008. Finding his name to
be in the list of delinquent taxpayers, he filed a
protest against the assessment on the ground
that he did not receive a notice of assessment
and the assessment had prescribed. Will the
protest prosper? (2000 Bar)
A: NO. The assessment has not yet prescribed since
the BIR has a period of 3 years from the last day
prescribed by law for the filing of the return.
The return was filed on March 30, 2005, that is,
before the last day prescribed by law for its filing,
hence the law considers it as being filed on the last
day prescribed by law for the filing of the same,
which is April 15, 2005. The assessment issued on
Apr. 15, 2008 is therefore within the three-year
prescriptive period.
Q: Mr. Sebastian is a Filipino seaman employed
by a Norwegian company which is engaged
exclusively in international shipping. He and his
wife, who manages their business, filed a joint
ITR for 1997 on Mar. 15, 1998. After an audit of
the return, the BIR issued on Apr. 20, 2001 a
deficiency income tax assessment for the sum of
P250,000 inclusive of interest and penalty. For
failure of Mr. and Mrs. Sebastian to pay the tax
within the period stated in the notice of
assessment, the BIR issued on Aug. 19, 2001
warrants of distraint and levy to enforce
collection of the tax.
 TAX REMEDIES UNDER NIRC
If you are the lawyer of Mr. and Mrs. Sebastian,
what possible defenses will you raise in behalf of
your clients against the action of the BIR in
enforcing collection of the tax? (2002 Bar)
A: I will raise the defense of prescription. The right
of the BIR to assess prescribes after three years
counted from the last day prescribed by law for the
filing of the income tax returns when the said return
is filed on time (Sec. 203, NIRC).
The last day for filing the 1997 income tax return is
April 15, 1998. Since the assessment was issued
only on Apr. 20, 2001, the BIR's right to assess has
already prescribed on April 15, 2001.
Waiver of the Statute of Limitations
Section 222 (b) of the NIRC provides that the CIR or
her duly authorized representative and the
taxpayer or its authorized representative may
agree in writing as to a specific future date
within which to assess the taxpayer for internal
revenue taxes for a given taxable period, before the
expiration of the period to assess taxes.
The waiver of the Statute of Limitations should not
be construed as a waiver of the right to invoke the
defense of prescription but rather an agreement
between the taxpayer and the BIR to extend the
period to a date certain, within which the latter
could still assess or collect taxes due. The waiver
does not mean that the taxpayer relinquishes the
right to invoke prescription unequivocally (BPI v.
CIR, GR No. 139736, October 17, 2005).
A waiver of the statute of limitation under the NIRC,
to a certain extent, is a derogation of the taxpayer’s
right to security against prolonged and
unscrupulous investigations and must therefore be
carefully and strictly construed (Phil. Journalists,
Inc. v. CIR, G.R. No. 162852, December 16, 2004).
The CIR cannot validly agree to reduce the
prescriptive period to less than that granted by law
because it would result to the detriment of the State.
Such reduction diminishes the Government’s
opportunity to collect taxes (Republic v. Lopez, G.R.
L-18007, March 30, 1967).
The taxpayer’s waiver of statute of limitation does
not cover taxes already prescribed (Republic v. Lim
De Yu, G.R. No. L-17438, April 30, 1964).
Extended Assessment
An assessment issued as a result of the waiver of the
prescriptive period is known as an “extended
assessment”, which has a prescriptive period for
281
collection of five (5) years from the time of
issuance of the assessment.
Guidelines on proper execution of waivers
1. The waiver may be, but not necessarily, in the
form prescribed by RMO No. 20-90 or RDAO No.
05-01. The taxpayer's failure to follow the
aforesaid forms does not invalidate the executed
waiver, for as long as the following are complied
with:
a) The Waiver of the Statute of Limitations
under Section 222 (b) and (d) shall be
executed before the expiration of the period
to assess or to collect taxes. The date of
execution shall be specifically indicated in
the waiver.
b) The waiver shall be signed by the taxpayer
himself or his duly authorized
representative. In the case of a corporation,
the waiver must be signed by any of its
responsible officials;
c) The expiry date of the period agreed upon to
assess/collect the tax after the regular three-
year period of prescription should be
indicated;
2. Except for waiver of collection of taxes which
shall indicate the particular taxes assessed, the
waiver need not specify the particular taxes to be
assessed nor the amount thereof, and it may
simply state "all internal revenue taxes"
considering that during the assessment stage,
the CIR or her duly authorized representative is
still in the process of examining and determining
the tax liability of the taxpayer.
3. Since the taxpayer is the applicant and the
executor of the extension of the period of
limitation for its benefit in order to submit the
required documents and accounting records, the
taxpayer is charged with the burden of ensuring
that the waivers of statute of limitation are
validly executed by its authorized
representative. The authority of the taxpayer's
representative who participated in the conduct
of audit or investigation shall not be thereafter
contested to invalidate the waiver.
4. The waiver may or may not be notarized. It is
sufficient that the waiver is in writing as
specifically provided by the NIRC.
5. Considering that the waiver is a voluntary act of
the taxpayer, the waiver shall take legal effect
and be binding on the taxpayer upon its
execution thereof.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
6. lt shall be the duty of the taxpayer to submit its
duly executed waiver to the CIR or officials
previously designated in existing issuances or
the concerned revenue district officer or group
supervisor as designated in the Letter Of
Authority/Memorandum of Assignment who
shall then indicate acceptance by signing the
same. Such waiver shall be executed and duly
accepted prior to the expiration of the period to
assess or to collect. The taxpayer shall have the
duty to retain a copy of the accepted waiver.
7. Note that there shall only be two (2) material
dates that need to be present on the waiver:
a. The date of execution of the waiver by the
taxpayer or its authorized representative;
and
b. The expiry date of the period the taxpayer
waives the statute of limitations
8. Before the expiration of the period set on the
previously executed waiver, the period earlier
set may be extended by subsequent written
waiver (RMO 14-2016).
Effect of failure to conform to the requirements
of waiver of the statute of limitations
It is invalid and ineffective to extend the
prescriptive period to assess taxes (CIR v. Next
Mobile Inc., G.R. No. 212825, December 07, 2015).
Taxpayer estopped from questioning validity of
waivers
In case a taxpayer executed five waivers and
delivered them to CIR, one after the other and
allowed the latter to rely on them and did not raise
any objection against their validity until he was
assessed, said taxpayer is estopped from
questioning the validity of its waivers. The
application of estoppel is necessary to prevent the
undue injury that the government would suffer
because of the cancellation of assessment of
taxpayer’s tax liabilities (CIR v. Next Mobile Inc., G.R.
No. 212825, December 07, 2015).
Taxpayer is also estopped from questioning the
waiver if it had impliedly admitted the validity of the
said waivers. Had it believed that the waiver was
invalid and that the period to assess had effective
prescribed, the taxpayer could have refused to make
any payment based on any assessment against it
(RCBC v. CIR, G.R. 170257, September 7, 2011).
NOTE: The period to assess can likewise be
suspended under Section 223 of the NIRC. Refer to
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282
“Suspension of prescriptive periods” for complete
discussion.
Q: In 1993, the BIR issued against respondent
assessment notice for deficiency income tax for
1989. A waiver of the defense of prescription
was executed but it was not signed by the
Commissioner or any of his authorized
representatives and did not state the date of
acceptance. Has the right to collect of the
Commissioner prescribed?
A: YES. The Court held that the Commissioner’s
right to collect has prescribed. The period to assess
and collect deficiency taxes may be extended only
upon a written agreement between the
Commissioner and the taxpayer prior to the
expiration of the three-year prescribed period. The
BIR cannot claim the benefits of extending the
period when it was the BIR’s inaction which is the
proximate cause of the defects of the waiver (CIR v.
The Stanley Works Sales (Phils.), Incorporated, G.R.
No. 187589, December 03, 2014).
Q: What is the effect of the execution by a
taxpayer of a "waiver of the statute of
limitations" on his defense of prescription?
(2010 Bar)
A: The waiver of the statute of limitation executed
by a taxpayer is not a waiver of the right to
invoke the defense of prescription. The waiver of
the statute of limitation is merely an agreement
in writing between the taxpayer and the BIR that
the period to assess and collect taxes due is
extended to a date certain. If prescription has
already set in at the time of the execution of the
waiver is invalid, the taxpayer can still raise
prescription as a defense (Phil. Journalists Inc., v.
CIR, GR No. 162852, Dec. 16, 2004).
 TAX REMEDIES UNDER NIRC

FALSE, FRAUDULENT RETURNS AND NON-FILING OF RETURNS

False Return Fraudulent Returns Failure to File a Return

Contains wrong information due Intentional and deceitful with the Omission to file a return in the date
to mistake, carelessness or sole aim of evading the correct tax prescribed by law
ignorance (Aznar v. CTA, G.R. No. L- due
20569, August 23, 1974)
Deviation from the truth, whether Intentional or deceitful entry with Omission can be intentional or not
intentional or not intent to evade the taxes due.
Does not make the taxpayer Filing a fraudulent return will The mere omission is already a
criminally liable make the taxpayer liable for the violation regardless of the
crime of moral turpitude as it fraudulent intent or willfulness of
entails willfulness and fraudulent the individual (CIR vs. Bank of
intent on the part of the individual Commerce, CTA EB Case No. 654,
(Republic v. Marcos II, G.R. Nos. March 14, 2011).
130371 & 130855, August 4, 2009,
595 SCRA 43).
Not subject to 50% penalty Subject to 50% penalty surcharge Not subject to 50% penalty
surcharge surcharge
The tax may be assessed, or a proceeding in court for the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud or omission.

UNIVERSITY OF SANTO TOMAS

283 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Fraud not presumed for neglect to file required
return
Fraud is a question of fact and the circumstances
constituting fraud must be alleged and proved in
the court. Fraud is never lightly to be presumed
because it is a serious charge. Hence, if fraud is not
proven, the Government cannot use the 10-year
period to make the assessment (CIR v. Ayala
Securities Corporation, G.R. No. L-29485, March 31,
1976). Fraud must be established.
Claiming fictitious expenses as deductions is a proof
of falsity or fraud in the income tax return (Tan Guan
v. CTA, G.R. L-23676, April 27, 1967).
An honest mistake as to the valuation of the
property cannot be indicative of fraud (Republic v.
Heirs of Jalandoni, G.R. No. L-18384, September 20,
1965).
Q: What constitutes prima facie evidence of a
false or fraudulent return to justify the
imposition of a 50% surcharge on the deficiency
tax due from a taxpayer? Explain. (2002 Bar)
A: There is a prima facie evidence of false or
fraudulent return when the taxpayer substantially
underdeclared his taxable sales, receipts or income,
or substantially overstated his deductions. The
taxpayer’s failure to report sales, receipts or income
in an amount exceeding 30% of that declared per
return, and a claim of deduction in anamount
exceeding 30% of actual deduction shall render the
taxpayer liable for substantial underdeclaration and
overdeclaration, respectively, and will justify the
imposition of the 50% surcharge on the deficiency
tax due from the taxpayer (Sec. 248, NIRC).
Importance of distinguishing between a “false
return” and a “fraudulent return”
The two returns are different but have the same
prescriptive periods to be assessed, which is 10-
years. The importance in distinguishing the two lies
in the application of the penalty surcharge.
Actual fraud, not constructive fraud, is subject to
50% penalty surcharge. For the surcharge to apply,
it must be intentional fraud.
Negligence, whether slight or gross, is not
equivalent to fraud with intent to evade the tax
contemplated by law (Ingles, 2015).
Just because the 10-year period applies, it doesn’t
necessarily mean that the taxpayer will be penalized
with the 50% surcharge. When a taxpayer files a
UNIVERSITY OF SANTO TOMAS
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284
false return and not a fraudulent one, the 10-year
period applies but the 50% surcharge will not
(Aznar v. CTA, G.R. No. L-20569, August 23, 1974).
Q: Danilo, who is engaged in the trading
business, entrusted to his accountant the
preparation of his income tax return and the
payment of the tax due. The accountant filed a
falsified tax return by underdeclaring the sales
and overstating the expense deductions by
Danilo. Is Danilo liable for the deficiency tax and
the penalties thereon? What is the liability, if
any, of the accountant? Discuss. (2005 Bar)
A: Danilo is liable for the deficiency tax as well as for
the deficiency interest. He should not be held liable
for the fraud penalty because the accountant acted
beyond the limits of his authority. There is no
showing in the problem that Danilo signed the
falsified return or that it was prepared under his
direction. On the other hand, the accountant may be
held criminally liable for violation of the NIRC when
he falsified the tax return by under declaring the
sale and overstating the expense deductions. If
Danny's accountant is a Certified Public Accountant,
his certificate as a CPA shall automatically be
revoked or cancelled upon conviction.
Suspension of Running of Statute of Limitations
Grounds for suspension of the prescriptive period
for both the power to assess and and the power to
collect:[LOW-PARA]
1. When taxpayer cannot be Located in the
address given by him in the return.
XPN: He informs the CIR of any change in his
address thru a written notice to the BIR;
2. When the taxpayer is Out of the Philippines;
3. When the Warrant of distraint and levy is duly
served upon the taxpayer, his authorized
representative or a member of his household
with sufficient discretion and no property is
located;
Only period to collect is suspended.
4. Where the CIR is prohibited from making the
assessment or beginning distraint or levy or a
proceeding in court for 60 days thereafter, such
as where there is a Pending petition for review
in the CTA from the decision on the protested
assessment (Republic v. Ker & Co., GR L-21609;
September 29, 1966);
 TAX REMEDIES UNDER NIRC
5. Where CIR and the taxpayer Agreed in writing
for the extension of the assessment, the tax may
be assessed within the period so agreed upon
6. When the taxpayer Requests for reinvestigation
which is granted by the Commissioner;
Only the period to collect is suspended because
assessment has been done at this point (Ingles,
2015).
The request must be granted by the CIR. A
request for reconsideration alone does not
suspend the period to collect.
7. When there is an Answer filed by the BIR to the
petition for review in the CTA (Hermanos v. CIR,
GR. No. L-24972. September 30, 1969) where the
court justified this by saying that in the answer
filed by the BIR, it prayed for the collection of
taxes.
When Commissioner is prohibited from making
the assessment or collection of taxes in a
proceeding in court
When in the opinion of the CTA, the collection by the
BIR may jeopardize the interest of the Government
and/or the taxpayer, the Court in any stage of the
proceeding may suspend the said collection and
require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than
double the amount with the Court (Sec. 11, R.A. No.
1125).
Q. Do the provisions of the Civil Code on
suspension of the prescriptive period by
extrajudicial demand suspend the running
period of prescription of actions in tax collection
cases?
A. NO. The provisions of the NIRC being a special
law take precedence over the provisions of the Civil
Code, a general law. Furthermore, the provisions of
the NIRC were crafted to ensure expeditious
collection of tax money to ensure the continuous
delivery of government services.
ADDITIONS TO TAX
They are imposed in addition to the tax required to
be paid. Section 247 of the NIRC provides that the
additions to the tax or deficiency tax apply to all
taxes, fees and charges imposed by the NIRC.
Tax laws imposing penalties for delinquencies are
intended to hasten tax payments by punishing
evasions or neglect of duty in respect thereof. The
intention of the law is to discourage delay in the
285
payment of taxes due to the Government and, in this
sense, the penalty and interest are not penal in
nature but compensatory for the concomitant use of
the funds by the taxpayer beyond the date when he
is supposed to have paid them to the government
(Ingles, 2015, citing Philippine Refining Company vs
CA).
Civil Penalties or Surcharge
A civil penalty, also know as surcharge, is imposed
by law as an addition to the basic tax required to be
paid (Sec. 248, NIRC).A surcharge is a civil
administrative sanction provided as a safeguard
for the protection of the State revenue and to
reimburse the government for the expenses of
investigation and the loss resulting from the
taxpayer’s fraud. A surcharge added to the main
tax is subject to interest.
Two categories of civil penalties
1. 25% Surcharge[F-TOP]
a. Failure to File any return and pay the tax due
thereon as required under the provisions of the
NIRC or rules and regulations on the date
prescribed,
b. Failure to pay the deficiency tax within the Time
prescribed for its payment in the notice of
assessment
- In cases of late payment of a deficiency tax
assessed, taxpayer shall be liable for the
delinquency interest incident to late
payment (RR 18-2013).
c. Unless otherwise authorized by the CIR, filing a
return with an internal revenue officer Other
than those with whom the return is required to
be filed
d. Failure to Pay the full or part of the amount of
tax shown on any return required to be filed
under the provisions of the NIRC or rules and
regulations, or the full amount of tax due for
which no return is required to be filed, on or
before the date prescribed for its payment (Sec
248 [A], NIRC)
NOTE: There is no 25% surcharge when tax
return is filed on time and paid the full amount
stated in the return, but subsequently
discovered that the return filed and the amount
paid was erroneous (Ingles, 2015).
2. 50% Surcharge
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
a. Willful neglect to file the return within the
period prescribed
- If the taxpayer voluntarily files the return
without notice from BIR, only 25%
surcharge shall be imposed for late filing
and late payment of tax. But if the taxpayer
files the return after prior notice in writing
from BIR, then the 50% surcharge will be
imposed. Thus:
o No demand from the BIR and the
taxpayer pays, albeit late, 25%
o With demand by the BIR, 50%
(Ingles, 2015).
b. False or fraudulent return is willfully made
- The fraud contemplated by law is actual
fraud, not constructive fraud. It must be
intentional fraud, consisting of deception
willfully and deliberately done or resorted
to. Negligence, whether slight or gross, is
not equivalent to fraud with intent to evade
the tax contemplated by law (Aznar vs. CTA,
G.R. No. L-20569, August 23, 1974).
Prima facie evidence of a false or fraudulent
return
Substantial under-declaration of taxable sales,
receipts or income, or
Substantial overstatement of deductions
Note: Substantial underdeclaration is the failure to
report sales, receipts or income in an amount
exceeding 30% of that declared per return, and a
claim of deductions in an amount exceeding 30% of
actual deductions (Sec. 248, NIRC).
Q: Businessman Lincoln filed an income tax
return for 1993 showing business net income of
P350,000 on which he paid an income tax of
P61,000. After filing the return he realized that
he forgot to include an item of business income
in 1993 for P50.000. Being an honest taxpayer,
he included this income in his return for 1994
and paid the corresponding income tax thereon.
In the examination of his 1993 return the BIR
examiner found that Lincoln failed to report this
item of P50,000 and assessed him a deficiency
income tax on this item, plus a 50% fraud
surcharge.
a. Is the examiner correct?
b. If you were the lawyer of Lincoln, what
would you have advised your client before
he included in his 1994 return the amount of
UNIVERSITY OF SANTO TOMAS
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286
P50.000 as 1993 income to avoid the fraud
surcharge?
c. Considering that Lincoln had already been
assessed a deficiency income tax for 1993
for his failure to report the P50.000 income,
what would you advise him to do to avoid
the penalties for tax delinquency?
d. What would you advise Lincoln to do with
regard to the income tax he paid for the
P50.000 in his 1994 return? In case your
remedy fails, what is your other recourse?
(1995 Bar)
A:
a. The examiner is correct in assessing a
deficiency income tax for taxable year 1993 but
not in imposing the 50% fraud surcharge. The
amount of all items of gross income must be
included in gross income during the year in
which received or realized (Sec. 38, NIRC). The
50% fraud surcharge attaches only if a false or
fraudulent return is willfully made by Lincoln
(Sec. 248, NIRC). The fact that Lincoln included
it in his 1994 return belies any claim of
willfulness but is rather indicative of an honest
mistake which was sought to be rectified by a
subsequent act that is the filing of the 1994
return.
b. Lincoln should have amended his 1993 income
tax return to allow for the inclusion of the
P50,000 income during the taxable period it
was realized.
c. Lincoln should file a protest questioning the
50% surcharge and ask for the abatement
thereof.
d. Lincoln should file a written claim for refund
with the CIR of the taxes paid on the P50,000
income included in 1994 within 2 years from
payment pursuant to Sec. 204 [3] of the NIRC.
Should this remedy fail in the administrative
level, a judicial claim for refund can be
instituted before the expiration of the two-year
period.
Interests
Kinds of interest in income taxation:
1. General interest – There shall be
assessed and collected on any unpaid
amount of tax, interest at the rate of
double the legal interest rate for loans
or forbearance of any money in the
absence of an express stipulation as set
by the BSP, from the date prescribed
for payment until the amount is fully
paid (Section 249 (A), TRAIN)
2. Deficiency interest – Any deficiency
in the tax due shall be subject to
 TAX REMEDIES UNDER NIRC
interest at the rate of 12% per annum
(double the legal interest rate
prescribed in Section 249(A), which
interest shall be assessed and collected
from the date prescribed for its
payment until the full payment thereof,
or upon issuance of a notice and
demand by the CIR, whichever comes
earlier (Sec. 249 (B), TRAIN).
NOTE: The new interest rate shall be applied
only in cases of deficiency taxes for 2018
onwards. If the deficiency taxes were for earlier
taxable period, it shall be computed pro-rata i.e.
20% for 2017 and earlier (under the NIRC) and
the 12% for 2018 onwards (under TRAIN).
3. Delinquency interest – There shall be
assessed and collected on the unpaid
amount, interest at the rate of 20% per
annum until the amount is fully paid,
which interest shall form part of the
tax, in case of failure to pay:
- Amount of tax due on any return
required to be filed, or
- Amount of tax due for which no
return is required, or
- Deficiency tax, or any surcharge
on interest thereon on the due
date appearing in the notice and
demand of the CIR (Sec. 249 (C),
NIRC).
NOTE: Deficiency interest on deficiency income
tax accrues and commences from the date of
assessment as shown in the assessment notice.
4. Interest on extended payment –
There shall be assessed and collected
interest at the rate of 20% per annum
on the tax or deficiency tax or any part
thereof unpaid from the date of notice
and demand until it is paid:
- If any person required to pay the tax is
qualified and elects to pay the tax on
installment, but fails to pay the tax or any
installment hereof, or any part of such
amount or installment on or before the date
prescribed for its payment, or
- Where the CIR has authorized an extension
of time within which to pay a tax or a
deficiency tax or any part thereof (Sec. 249
(D), NIRC).
Compromise penalties
287
It is a certain amount of money which the taxpayer
pays to compromise a tax violation. Compromise
penalties are paid in lieu of criminal prosecution,
and cannot be imposed in the absence of a showing
that the taxpayer consented thereto. If an offer of
compromise is rejected by the taxpayer, the
compromise penalty cannot be enforced through an
action in court or by distraint and levy. The CIR
should file a criminal action if he believes that the
taxpayer is criminally liable for violation of the tax
law as the only way to enforce a penalty
(Dimaampao, J. 2015).
Q: A domestic corporation failed to withhold and
remit the tax on income received from
Philippine sources by a non-resident foreign
corporation. In addition to the civil penalties
provided for under the NIRC, a compromise
penalty was imposed for violation of the
withholding tax provisions. May the
Commissioner of Internal Revenue legally
enforce the collection of compromise penalty?
(2000 Bar)
A: NO. There is no showing that the compromise
penalty was imposed by the Commissioner of
Internal Revenue with the agreement and
conformity of the taxpayer (Wonder Mechanical
Engineering Corporation v. Court of Tax Appeals, et.
al., 64 SCRA 555).
ASSESSMENT PROCESS &
REGLEMENTARY PERIODS
The assessment process starts with the self-
assessment by the taxpayer of his tax liability, the
filing to the tax return, and the payment of the entire
tax due shown in his tax return in accordance with
the methods and within the dates prescribed in the
law and regulations (Mamalateo 2014).
Upon discovery of the BIR that the self-assessment
was either deficient or when no return was made by
the taxpayer, the BIR issues deficiency assessment
(Ingles, 2015).
Deficiency Assessment Process
A. Tax Audit (including the Letter of Authority)
B. Issuance of Preliminary Assessment Notice
(PAN)
C. Reply
D. Issuance Formal Letter of Demand and Final
Assessment Notice (FLD/FAN).
E. Disputed assessment
A. LETTER OF AUTHORITY (LA)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
It is an official document that authorizes a revenue
officer to examine and scrutinize a taxpayer’s books
of accounts and other accounting records, in order
to determine the taxpayer’s correct internal
revenue tax liabilities (Sec. 13, NIRC).
There must be a grant of authority before any
revenue officer can conduct an examination or
assessment and the revenue officer must not go
beyond authority. Otherwise, the assessment or
examination is a nullity.
A Letter of Authority should cover a taxable period
not exceeding one taxable year. The practice of
issuing LAs covering audit of “unverified prior
years” is therefore prohibited (CIR v. Sony
Philippines, Inc., G.R. No. 178697, November 17,
2010).
Cases which need not be covered by a valid LA:
1. Cases involving civil or criminal tax fraud which
fall under the jurisdiction of the tax fraud
division of the Enforcement Services; and
2. Policy cases under audit by the Special Teams in
the National Office (RMO 36-99).
Service of Letter of Authority
It must be served to the taxpayer within 30 days
from its date of issuance; otherwise, it shall become
null and void. The taxpayer shall then have the right
to refuse the service of this LA, unless the LA is
revalidated.
Q: How is LA revalidated? How often can it be
revalidated?
A: Revalidated through the issuance of a new LA. It
can be revalidated:
- only once, if issued by the Regional
Director;
- twice, if issued by the CIR.
The suspended LA(s) must be attached to the new
issued LA (RMO 38-88).
Tax audit
This includes the examination of books of accounts
and other accounting records of the taxpayers by
revenue officers to determine the correct tax
liability (Mamalateo, 2014).
Period within which an RO should conduct an
audit
A revenue officer is allowed only 120 days to
conduct the audit and submit the required report of
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
288
investigation from the date of receipt of a LA by the
taxpayer. If the RO is unable to submit his final
report of investigation within the 120-day period,
he must then submit a Progress Report to his Head
of Office, and surrender the LA for revalidation.
Q: How many times can a taxpayer be subjected
to examination and inspection for the same
taxable year?
A: GR: Only once per taxable year
XPN: [FRC3]
1. When the CIR determines that Fraud,
irregularities, or mistakes were committed
by the taxpayer
2. When the taxpayer himself requests for the
Re-investigation or re-examination of his
books of accounts and it was granted by the
commissioner
3. When there is a need to verify the
taxpayer’s Compliance with withholding
and other internal revenue taxes as
prescribed in a Revenue Memorandum
Order issued by the Commissioner
4. When the taxpayer’s Capital gains tax
liabilities must be verified
5. When the Commissioner chooses to
exercise his power to obtain information
relative to the examination of other
taxpayers (Secs. 5 and 235, NIRC).
Q: In 2010, pursuant to a LA issued by the
Regional Director, Mr. Abcede was assessed
deficiency income taxes by the BIR for the year
2009. He paid the deficiency. In 2011, Mr.
Abcede received another LA for the same year
2009, this time from the National Investigation
Division, on the ground that Mr. Abcede's 2009
return was fraudulent. Mr. Abcede contested
the LA on the ground that he can only be
investigated once in a taxable year. Decide.
(2013 Bar)
A: Mr. Abcede’s contention is not correct. While
the general rule is to the effect that for income tax
purposes, a taxpayer must be subject to
examination and inspection by the internal revenue
officers only once in a taxable year, this will not
apply if there is fraud, irregularity or mistakes as
determined by the Commissioner. In the instant
case, what triggered the second examination is the
findings by the BIR that Mr. Abcede’s 2009 return
was fraudulent, accordingly, the examination is
legally justified (Sec. 235, NIRC).
Principle of estoppel
 TAX REMEDIES UNDER NIRC
The error made by a tax official in the assessment of
his tax liabilities does not have the effect of relieving
the taxpayer from the obligation to pay the full
amount of his tax liability, for taxes are fixed by law
and the government is never estopped to collect the
legitimate taxes because of errors committed by its
agents (Commissioner v. Atlas Consolidated Mining
Co., 102 SCRA 246).
Notice of Informal Conference
Presently, there is no requirement for the issuance
of a Notice for Informal Conference. R.R. 18-2013
deleted such requirement.
(B) PRELIMINARY ASSESSMENT NOTICE(PAN)
If after review and evaluation by the Commissioner
or his duly authorized representative, as the case
may be, it is determined that there exists sufficient
basis to assess the taxpayer for any deficiency tax or
taxes, the said Office shall issue to the taxpayer a
PAN for the proposed assessment. It shall show in
detail the facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment is
based (R.R. No. 18-2013, emphasis supplied).
NOTE: Prior to the issuance of the PAN, the taxpayer
may be allowed to make voluntary payments of
probable deficiency taxes and penalties (RMO 11-
2014).
Requirements of a valid PAN
1. In writing; and
2. Should inform the taxpayer of the law and the
facts on which the assessment is made (Sec. 228,
NIRC)
The sending of PAN to taxpayer to inform him of the
assessment made is but part of the “due process
requirement in the issuance of a deficiency tax
assessment,” the absence of which renders nugatory
any assessment made by the tax authorities.
Therefore, for its failure to send the PAN stating the
facts and the law on which the assessment was
made as required by the law, the assessment made
by CIR is void (CIR v. Metro Star Suprema, Inc., G.R.
No. 185371, December 8, 2010).
Exceptions to issuance of PAN
GR: There must be a PAN issued by the BIR before
issuing a Formal Letter of Demand (FLD)/ Final
Assessment Notice (FAN).
XPN: PAN is not required in the following instances:
[MEDEC]
289
1. When the finding for any deficiency tax is the
result of Mathematical error in the computation
of the tax appearing on the face of the tax return
filed by the taxpayer; or
2. When the Excise tax due on excisable articles
has not been paid; or
3. When a Discrepancy has been determined
between the tax withheld and the amount
actually remitted by the withholding agent; or
4. When an article locally purchased or imported
by an Exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and
spare parts, has been sold, traded or
transferred to non-exempt persons (Sec. 228,
NIRC); or
5. When a taxpayer who opted to claim a refund or
tax credit of excess creditable withholding tax
for a taxable period was determined to have
Carried over and automatically applied the
same amount claimed against the estimated tax
liabilities for the taxable quarter or quarters of
the succeeding taxable year (Sec. 3.1.2, R.R. No.
18-2013).
In the above-cited cases, a FLD/FAN shall be issued
outright. (2002 BAR)
Q: In the investigation of the withholding tax
returns of AZ Medina Security Agency (AZ) for
the taxable years 1997 and 1998, a discrepancy
between the taxes withheld from its employees
and the amounts actually remitted to the
government was found. Accordingly, before the
period of prescription commenced to run, the
BIR issued an assessment and a demand letter
calling for the immediate payment of the
deficiency withholding taxes in the total amount
of P250,000.00. Counsel for AZ protested the
assessment for being null and void on the
ground that no pre-assessment notice had been
issued. Is the contention of the counsel tenable?
(2002 Bar)
A: NO. The contention of the counsel is untenable.
Sec. 228, NIRC expressly provides that no pre-
assessment notice is required when a discrepancy
has been determined between the tax withheld and
the amount actually remitted by the withholding
agent. Since the amount assessed relates to
deficiency withholding taxes, the BIR is correct in
issuing the assessment and demand letter calling for
the immediate payment of the deficiency
withholding taxes.
Q: Mr. Tiaga has been a law-abiding citizen
diligently paying his income taxes. On May 5,
2014, he was surprised to receive an assessment
notice from the BIR informing him of a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
deficiency tax assessment as a result of a
mathematical error in the computation of his
income tax, as appearing on the face of his
income tax return for the year 2011, which he
filed on April 15, 2012. Mr. Tiaga believes that
there was no such error in the computation of
his income tax for the year 2011. Based on the
assessment received by Mr. Tiaga, may he
already file a protest thereon? (2014 Bar)
A: YES. Mr. Tiaga may consider the assessment
notice as a final assessment notice and his right to
protest within 30 days from receipt may now be
exercised by him.
When the finding of a deficiency tax is the result of
mathematical error in the computation of the tax
appearing on the face of the return, a pre-
assessment notice shall not be required, hence, the
assessment notice is a final assessment notice (Sec.
228, NIRC; RR No. 18-2013).
(C) REPLY TO PAN
Period for the taxpayer to respond to PAN via
“Reply”
The taxpayer has 15 days from receipt of PAN to file
a written reply contesting the proposed assessment.
Effect of taxpayer’s failure to respond to PAN
The taxpayer shall be considered in default, in
which case, a FLD/FAN shall be issued calling for
payment of the taxpayer's deficiency tax liability,
inclusive of the applicable penalties (Par. 2, Sec.
3.1.1, R.R. No. 18-2013).
For the purpose of contesting in writing the findings
contained in a PAN, the regulations use the term
“reply” to distinguish the written objections against
a FAN issued by the BIR, where the generic term
“protest” or the specific term “request for
reconsideration” or “request for reinvestigation” is
utilized.
The failure to file a reply to PAN will not bar the
taxpayer from protesting the FAN because PAN is
not the final assessment which can be protested as
contemplated under the NIRC.
(D) FORMAL LETTER OF DEMAND AND FINAL
ASSESSMENT NOTICE (FLD/FAN)
Issuance of FLD/FAN
The CIR or his duly authorized representative may
issue FLD/FAN:
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
290
1. If there is no need to issue a PAN, because the
circumstances show that it fall within the
exceptions for the issuance of PAN;
2. If the taxpayer is in default for failure to respond
to a PAN within a period of 15 days from the
receipt of PAN; or
3. If the CIR or his duly authorized representative
does not agree with the justifications stated by
the taxpayer in his reply to the PAN (Domondon,
2014).
The FLD/FAN calling for payment of the taxpayer's
deficiency tax or taxes shall state the facts, the law,
rules and regulations, or jurisprudence on which the
assessment is based; otherwise, the assessment shall
be void (R.R. No. 18-2013).
The FAN and FLD should always go together. The law
requires that the factual and/or legal bases of the
assessment must be stated, and this requirement is
not satisfied by the issuance of FAN alone, a letter of
demand fills up the void and explains to the
taxpayer how the deficiency assessment was
arrived at, including the reasons and legal bases for
the assessment (Mamalateo, 2014).
Period to issue FLD/FAN
If the taxpayer, within 15 days from date of receipt
of the PAN, responds that he/it disagrees with the
findings of deficiency tax or taxes, an FLD/FAN shall
be issued within 15 days from filing/submission of
the taxpayer’s response, calling for payment of the
taxpayer's deficiency tax liability, inclusive of the
applicable penalties (R.R. No. 18-2013, emphasis
supplied).
NOTE: An FLD/FAN issued beyond 15 days from
filing/submission of the taxpayer’s response to the
PAN shall be valid, provided that, it is issued within
the period of limitation to assess internal revenue
taxes. The non-observance of the 15-day period,
however, shall constitute an administrative
infraction and the revenue officers who caused the
delay shall be subject to administrative sanctions
as provided for by law and pertinent revenue
issuances (RMO 11-2014).
NOTE: Upon receipt of the PAN, taxpayer has 15
days to reply. Failure to do so, shall cause the
issuance of the FLD/FAN. Issuance of FAN/FLD
without waiting for the 15-day period to reply to
PAN is a violation of due process. (CIR vs. Next
Mobile, Inc., CTA EB Case No. 1419, November
21, 2016)
Q: Who issues the FAN?
 TAX REMEDIES UNDER NIRC
A: It shall be issued by the Commissioner or his duly
authorized representative.
Q: In what form shall the FAN be and what
should it contain?
A:
1. In writing; and
2. Shall state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based, otherwise, the FAN shall
be void (Sec. 228, NIRC; Sec. 3.1.3, R.R. No. 18-
2013).
NOTE: If the FAN is deemed insufficient insofar as
compliance with Section 228 of the NIRC is
concerned, such insufficiency can be cured, if the
FLD can show the legal and factual bases relied upon
in the issuance of the assessment which the FAN
failed to detail.
Q: What does the phrase “in writing” under Sec.
228 mean?
A: It does not exclusively mean written words.
“Writing” consists of letters, word, numbers, or their
equivalent, set down by handwriting, typewriting,
printing, photostating, photographing, magnetic
impulse, mechanical or electronic recording, or
other form of data compilation. Indubitably, figures
are also “writings” and if the numerical presentation
is understandable enough, then there is no reason
why it should be automatically rejected as
inadequate compliance with the law (Sevilla, v. CIR,
CTA Case 6211, October 4, 2004).
Q: Is substantial compliance of the notice
requirement under Section 228 of the NIRC
allowed?
A: YES. The notice requirement under Section 228
of the NIRC is substantially complied with whenever
the taxpayer had been fully informed in writing of
the factual and legal bases of the deficiency taxes
assessment, which enabled the latter to file an
effective protest.
In the case of Samar I Electric Cooperative v. CIR, the
Court held that although the FAN and demand letter
were not accompanied by a written explanation of
the legal and factual bases of the assessed deficiency
taxes, the records showed that CIR responded to
taxpayer’s letter-protest, explaining at length the
factual and legal bases of the deficiency tax
assessments and denying the protest.
Considering the foregoing exchange of
correspondence and documents between the
291
parties, the requirement of Section 228 was
substantially complied with. Respondent had fully
informed petitioner in writing of the factual and
legal bases of the deficiency taxes assessment,
which enabled the latter to file an “effective”
protest. Taxpayer’s right to due process was thus
not violated (Samar Electric Corp v. CIR, G.R. No.
193100, December 10, 2014).
Q: Taxpayer duly protested a PAN it received
from the BIR. Subsequently, the BIR issued a FAN
to the taxpayer. The demand letter states: “This
is our final decision based on investigation. If you
disagree, you may appeal the final decision
within 30 days from receipt hereof, otherwise
said deficiency tax assessment shall become final,
executory and demandable.” Instead of filing a
protest on the assessment, the taxpayer filed a
petition for review with the CTA. The BIR filed a
motion to dismiss on the ground that the
taxpayer failed to exhaust administrative
remedies by filing a protest on the assessment.
Should the motion be granted?
A: NO. This case is an exception to the rule on
exhaustion of administrative remedies, i.e., estoppel
on the part of BIR. The taxpayer cannot be blamed
for not filing a protest against the FAN since the
language used and the tenor of the demand letter
indicate that it is the final decision of the CIR on the
matter. The CIR must indicate, in a clear and
unequivocal language, whether its action on a
disputed assessment constitutes its final
determination thereon in order for the taxpayer
concerned to determine when his or her right to
appeal to the tax court accrues. Thus, the CIR is now
estopped from claiming that it did not intend the
FAN to be a final decision (Allied Banking Corp. v.
CIR, G.R. No. 175097, February 5, 2010).
NOTE: An FLD/FAN issued reiterating the
immediate payment of deficiency taxes and
penalties previously made in the PAN is a denial of
the response to the PAN. A final demand letter for
payment of delinquent taxes may be considered a
decision on a disputed assess ment. This includes a
disputed PAN. So long as the parties are given the
opportunity to explain their side, the requirements
of due process are satisfactorily complied with
(RMO 11-2014).
(E) DISPUTED ASSESSMENT
Remedies of the taxpayer after the issuance of a
FAN
The taxpayer may protest the assessment within 30
days from receipt. Otherwise, the assessment
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
becomes final, executory, demandable and not
appealable to the CTA.
The protest comes in the form of either a written
request for reconsideration or reinvestigation.
After the request is filed and received by the BIR, the
assessment becomes a disputed assessment (CIR v.
Isabela Cultural Corp., G.R. No. 135210, July 11, 2001).
NOTE: Refer to “Protesting an assessment” under
Taxpayer’s Remedies for complete discussion on
protest.
COLLECTION
The government is given two ways to collect:
1. Summary or administrative remedies, and
2. Judicial remedies
The legislature may adopt any reasonable method
for the effective enforcement of the collection of
taxes, subject to:
1. The right of the person to notice; and
2. The opportunity to be heard.
The power to impose taxes is clothed with the
implied authority to devise ways and means to
accomplish collection in the most effective manner.
Without this implied power, the ends of government
may fail (CIR v. Pineda, G.R. No. L-22734, September
15, 1967).
Requisites
GR: Collection is only allowed when there is already
a final assessment made for the determination of
the tax due.
XPN: Judicial action to collect the tax liability is
permitted even without an assessment when the
taxpayer:
1. Files a false or fraudulent return with intent
to evade the tax, or
2. Fails to file a return.
In the above cases, collection must be done within
10 years after the discovery of falsity, fraud, or
omission.
However, once an assessment is made against the
taxpayer, the government cannot avail of the 10-
year period in Section 222(A). If the assessment is
made, then the period to collect is five years from
the assessment and not 10 years (Ingles, 2015).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
292
In sum, as a rule, the government can only file a
proceeding in court to collect once the assessment
has become final and unappealable.
Assessments are deemed final when:
1. The taxpayer failed to file a protest 30 days
from receipt of the assessment
2. After the 180-day period and the CIR has not yet
acted on the protest, the taxpayer fails to appeal
it
3. After 30 days from the receipt of the decision of
the CIR the taxpayer fails to appeal
Collectibility of tax liability arises in the
following instances:
1. Self-assessed tax shown in the return was not
paid within the date prescribed by law
- Internal revenue taxes are self-assessing and
no further assessment by the government is
required to create the tax liability. The taxpayer
is immediately considered as delinquent with
respect to the unpaid amount of tax;
2. When final assessment is not protested
administratively within 30 days from the date
of receipt;
3. Failure to question assessment served upon the
decedent’s heirs (Marcos II v. Court of Appeals,
273 SCRA 47);
4. Non-compliance with the condition laid in the
approval of protest - construed as if no protest
was filed;
5. Failure to file a timely appeal to the CTA on the
final decision of the Commissioner or his
authorized representative on the disputed
assessment.
NOTE: Refer to “Protesting an assessment” under
Taxpayer’s Remedies for complete discussion on
finality of assessment.
Prescriptive periods
GR: The prescriptive period to collect taxes due is
five years from the date of assessment.
XPNs:
1. False or fraudulent return with with intent to
evade the tax: within 10 years from discovery
without need of assessment
2. Failure or omission to file return: within 10
years from discovery without need of
assessment
 TAX REMEDIES UNDER NIRC

3. Waiver in writing executed before the the five-
year period expires: period agreed upon
NIRC v. Civil Code v. Rules of Court
The prescriptive period to assess or collect
deficiency tax is governed by NIRC (a special law)
and not the Civil Code (a general law). The same can
be said between NIRC and the Rules of Court. Hence,
claims for taxes may be collected even after the
distribution of the decedent’s estatae. Claims for
estate taxes are exempted from the application of
the statute of non-claims (Ingles, 2015, citing several
cases).
Summary:
FALSE, FRAUDULENT,
REGULAR RETURN
OR FAILURE TO FILE A
WAS MADE
RETURN
Also, the attempt of the BIR to collect the tax
through its Answer with a demand for the taxpayer
to pay the assessed DST in the CTA is not deemed
compliance with the NIRC which provides that
assessed tax must be collected by distraint or levy
and/or court proceeding within the prescribed
period. (China Banking Corporation vs.
Commissioner of Internal Revenue, G.R. No. 172509,
February 04, 2015).
Tax is deemed collected for purposes of
prescriptive periods
1. If collection is through summary remedies
(distraint and levy), when the government
avails of a distraint and levy procedures
prescribed under NIRC.
- Distraint and Levy proceedings are begun
by the issuance of warrant and service
thereof to the taxpayer (BPI v. CIR, G.R. No.
139736, October 17, 2005).

2. If collection is through judicial remedies (civil

Collection with prior assessment
or criminal), when the government files the
Collection should be complaint with the proper court
made within 5 years - A judicial action for the collection of a tax
from the date of may be initiated by:
assessment, either 1. Filing a complaint with the proper
by: regular trial court, or where the
1. Summary Same assessment is appealed to the CTA; or
proceedings; or 2. By filing an answer to the taxpayer’s
2. Judicial petition for review wherein payment of
proceedings the tax is prayed for (PNOC v. CA, G.R. No.
(Sec.222 [c], 109976, April 26, 2005).
NIRC)
Q: What is the prescriptive period where the
Collection without prior assessment government action is on a bond which the
Collection is within 10 taxpayer executes in order to secure the
years from discovery, of payment of his tax obligation?
the falsity, fraud or
omission to file a return. A: Ten (10) years under Art. 1144 (1) of the Civil
Code and not 3 years under the NIRC. In this case,
the Government proceeds by court action to forfeit
Limited to purely
judicial remedies a bond. The action is for the enforcement of a
(Section 222[A]). contractual obligation (Republic v. Araneta, G.R. No.
L-14142, May 30, 1961).

Q: May the collection of taxes be barred by

Computation of the prescriptive period prescription? Explain your answer. (2001 Bar)

The assesment of the tax is deemed made and the
period for collection of the assessed tax begins to
run on the date the assessment notice had been
released, mailed or sent by the BIR to the taxpayer.
Thus, failure of the BIR to file a warrant of distraint
or serve a levy on taxpayer's properties nor file
collection case within the prescriptive period is
fatal.
A: YES. The collection of taxes may be barred by
prescription. The prescriptive periods for collection
of taxes are governed by the tax law imposing the
tax. However, if the tax law does not provide for
prescription, the right of the government to collect
taxes becomes imprescriptible.
TAXPAYER’S REMEDIES

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293 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Remedies Before Payment 1. In writing;
1. Administrative remedies 2. Addressed to the CIR or his duly athorized
a. Protest of assessment; representative;
i. Reconsideration 3. State the facts, applicable law, rules and
ii. Reinvestigation regulations or jurisprudence on which the
b. Compromise; and protest is based otherwise the protest would
c. Abatement be void; and
4. Must contain the following:
2. Judicial Remedies a. Name of the taxpayer and address for the
immediate past 3 taxable years;
Remedies After Payment b. Nature of the request, specifying the newly
1. Administrative remedies discovered evidence to be presented;
a. Tax refund c. Taxable periods covered by the
b. Tax credit assessment;
2. Judicial remedies d. Amount and kind of tax involved and the
assessment notice number;
Administrative Remedies e. Date of receipt of the assessment notice or
letter of demand;
Guidelines that must be observed with respect f. Itemized statement of the finding to which
to administrative remedies the taxpayer agrees (if any) as basis for the
computation of the tax due, which must be
BASIS GOVERNMENT TAXPAYER paid upon filing of the protest;
If Express Must observe Must observe the g. Itemized schedule of the adjustments to
the legal doctrine of which the taxpayer does not agree;
parameters set exhaustion of h. Statements of facts or law in support of the
forth in the law administrative protest; and
(e.g. procedure remedies. Thus, i. Documentary evidence as it may deem
for distraint of before the necessary and relevant to support its
personal taxpayer may protest to be submitted 60 days from the
property (Sec. question an filing thereof.
207 [A], NIRC), assessment before
for levy on real the CTA, he must Protested assessment is the same as disputed
property (Sec. first file an assessment.
207 B) and administrative
enforcement of protest before the Effect of a protest against an assessment
tax lien (Sec. BIR. (Same is true Prescriptive period provided by law to make
219) with claims for collection by distraint or levy or by a proceeding in
refunds) court is interrupted once a taxpayer protests the
If Implied Both may avail of the usual remedies assessment and requests for its cancellation.
for convenience and expediency.
Period to file protest
(A) PROTESTING AN ASSESSMENT
The taxpayer or its authorized representative or tax
Administrative protest agent may protest administratively against the
FLD/FAN within thirty (30) days from date of
The taxpayer or its authorized representative or tax receipt thereof.
agent may protest administratively against the
aforesaid FLD/FAN within thirty (30) days from Form, content and validity of protest
date of receipt thereof.
The taxpayer protesting an assessment may file a
Administrative protest is the act by the taxpayer of written request for reconsideration or
questioning the validity of the imposition of the reinvestigation defined as follows:
corresponding delinquency increments for internal
revenue taxes as shown in the notice of assessment 1. Request for reconsideration — refers to a plea
and letter of demand. of re-evaluation of an assessment on the basis of
existing records without need of additional
Requisites of a protest evidence. It may involve both a question of fact
or of law or both.

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
294
 TAX REMEDIES UNDER NIRC

2. Request for reinvestigation — refers to a plea executory and demandable; and the taxpayer
of re-evaluation of an assessment on the basis of shall be required to pay the deficiency tax or
newly discovered or additional evidence that a taxes attributable thereto, in which case, a
taxpayer intends to present in the collection letter shall be issued to the taxpayer
reinvestigation. It may also involve a question of calling for payment of the said deficiency tax or
fact or of law or both. taxes, inclusive of the applicable surcharge
and/or interest.
The taxpayer shall state in his protest:
2. If there are several issues involved in the
1. The nature of protest whether reconsideration disputed assessment and the taxpayer fails to
or reinvestigation, specifying newly state the facts, the applicable law, rules and
discovered or additional evidence he intends regulations, or jurisprudence in support of his
to present if it is a request for reinvestigation, protest against some of the several issues on
2. Date of the assessment notice, and which the assessment is based, the same shall be
3. The applicable law, rules and regulations, or considered undisputed issue or issues, in which
jurisprudence on which his protest is based, case, the assessment attributable thereto shall
otherwise, his protest shall be considered void become final, executory and demandable; and
and without force and effect. the taxpayer shall be required to pay the
deficiency tax or taxes attributable thereto and a
REQUEST FOR REQUEST FOR collection letter shall be issued to the taxpayer
RECONSIDERATION REINVESTIGATION calling for payment of the said deficiency tax,
2. A claim for re-
3. A claim for re-evaluation inclusive of the applicable surcharge and/or
evaluation of the of the assessment based interest.
assessment based on on newly-discovered or
existing records without additional evidence. Q: A taxpayer receives two final assessments,
need of additional one for Net Income Tax (NIT) and one for VAT. If
evidence. the taxpayer would only like to protest the one
4. It may involve 5. a It may also involve a for NIT and not the one for VAT, what should he
question of fact or law question of fact or law or do to file a protest for the NIT?
or both. both.
It does not toll the 6. It tolls the statute of A: The taxpayer should first pay the tax due under
statute of limitations. limitations. the VAT, where he does not intend to file a protest.

NOTE: A motion for reconsideration of the denial of
the administrative protest does not toll the 30-day
period to appeal to the CTA (Fishwealth Canning
Corporation v. CIR, G.R. No. 179343, January 21,
2010).
NOTE: This is not payment under protest for this is
neither a tax under the TCC nor a Real Property Tax
(RR 12-99).
Submission of supporting documents

There is a distinction between a request for
reconsideration and a request for reinvestigation. A
reinvestigation which entails the reception and
evaluation of additional evidence will take more
time than a reconsideration of a tax assessment,
which will be limited to the evidence already at
hand; this justifies why the reinvestigation can
suspend the running of the statute of limitations on
collection of the assessed tax, while the
reconsideration cannot. (BPI v. CIR, G.R. No. 181836,
July 9, 2014).
For requests for reinvestigation, the taxpayer shall
submit all relevant supporting documents in
support of his protest within sixty (60) days from
date of filing of his letter of protest. Otherwise, the
assessment shall become final.
“Relevant supporting documents”
These refer to those documents necessary to
support the legal and factual bases in disputing a tax
assessment as determined by the taxpayer.

Protest against validity of some of the issues
1. If there are several issues involved in the
FLD/FAN but the taxpayer only disputes or
protests against the validity of some of the issues
raised, the assessment attributable to the
undisputed issue or issues shall become final,
These are documents which the taxpayer feels
would be necessary to support his protest and not
what the Commissioner feels should be submitted,
otherwise, the taxpayer would always be at the
mercy of the BIR which may require production of
such documents which taxpayer could not produce

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295 FACULTY OF CIVIL LAW
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(Standard Chartered Bank v. CIR, CTA case No. 5696,
August 16, 2001).
The BIR can only inform the taxpayer to submit
additional documents. The BIR cannot demand
what type of supporting documents should be
submitted. Otherwise, a taxpayer will be at the
mercy of the BIR, which may require the production
of documents that a taxpayer cannot submit (CIR vs.
First Express Pawnshop Co., Inc., G.R. Nos. 172045-46,
June 16, 2009, 607).
The assessment shall become final
The failure of the taxpayer who requested for a
reinvestigation to submit all relevant supporting
documents within the 60-day period shall render
the FLD/FAN “final” by operation of law. He/it shall
be barred from disputing the correctness of the
FLD/FAN by the introduction of newly discovered
or additional evidence because he/it is deemed to
have lost his/its chance to present evidence. The
BIR shall then deny the request for reinvestigation
through the issuance of an FDDA.
3. NOTE: The sixty (60)-day period for the
submission of all relevant supporting documents
shall not apply to requests for reconsideration.
Effect of failure to file protest
4. If the taxpayer fails to file a valid protest against
the FLD/FAN within thirty (30) days from date of
receipt thereof, the assessment shall become final,
executory and demandable. No request for
reconsideration or reinvestigation shall be granted
on tax assessments that have already become final,
executory and demandable
Period to act upon or decide on the protest filed
a. By the duly authorized representative
1. Request for investigation – within 180 days
from submission of relevant documents
2. Request for reconsideration - within 180
days from filing of protest
b. By CIR
1. In case of protest – within 180 days from
filing of protest
2. In case of administrative appeal - within
180 days from the filing of administrative
appeal
Administrative appeal – request for
reconsideration filed wth the CIR to elevate
the denial made by his duly authorized
representative
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296
Decision on the protest filed
a. Direct grant or denial of protest
Final Decision on a Disputed Assessment (FDDA)
The decision of the Commissioner or his duly
authorized representative shall state:
1. the facts, the applicable law, rules and
regulations, or jurisprudence on which such
decision is based, otherwise, the decision shall
be void, and
2. That the same is his final decision.
b. Indirect denial of protest
a. Formal and final letter of demand from the
BIR to the taxpayer
b. Civil collection can also be considered as
denial of protest of assessment (BIR v.
Union Shipping Corp., G.R. No. 66160, May
21, 1990)
NOTE: Preliminary collection letter may serve
as assessment notice (United International
Pictures v. CIR, G.R. No. 110318, August 28,
1996).
c. Filing of criminal action against the
taxpayer
d. Issuance of warrant of distraint and levy to
enforce collection of deficiency assessment
is outright denial of the request for
reconsideration (Hilado v. CIR, CTA case
1256, Feb. 25, 1964).
c. Inaction by the CIR or his duly authorized
representative
Remedies of taxapayer in case of denial or inaction
By the CIR’s duly authorized representative
1. If the protest is denied, in whole or in part,
the taxpayer may either:
a. appeal to the CTA within 30 days from
date of receipt of the said decision; or
b. elevate his protest through request
for reconsideration to the CIR within
30 days from date of receipt of the
said decision.
No request for reinvestigation shall be
allowed in administrative appeal and only
issues raised in the decision of the CIR’s
duly authorized representative shall be
 TAX REMEDIES UNDER NIRC
entertained by the CIR.
2. If the protest is not acted upon, the
taxpayer may either:
a. appeal to the CTA within 30 days after
the expiration of the 180-day period;
or
b. await the final decision of the CI R’s
duly authorized representative on the
disputed assessment.
NOTE: Items 1&2 are mutually exclusive. The
exercise of one option bars the other.
By the CIR
a. If the protest or administrative appeal, as
the case may be, is denied, in whole or in
part, the taxpayer may appeal to the CTA
within 30 days from date of receipt of the
said decision. Otherwise, the assessment
shall become final, executory and
demandable.
A motion for reconsideration of the CIR’s
denial of the protest or administrative
appeal, as the case may be, shall not toll the
30-day period to appeal to the CTA.
b. If the protest or administrative appeal is
not acted upon, the taxpayer may either:
1. appeal to the CTA within 30 days from
after the expiration of the 180-day
period; or
2. await the final decision of the CIR on the
disputed assessment and appeal such
final decision to the CTA within 30 days
after the receipt of a copy of such
decision.
NOTE: Items 1&2 are mutually exclusive. The
exercise of one option bars the other.
In case of inaction on protested assessment within
the 180-day period, the option of the taxpayer is to
either:
1. file a petition for review with the CTA within 30
days after the expiration of the 180-day period;
or
2. await the final decision of the Commissioner or
his duly authorized representative on the
disputed assessment and appeal such final
decision to the CTA within 30 days after the
receipt of a copy of such decision.
These options are mutually exclusive and the
resort to one bars the application of the other.
297
When the law provided for the remedy to appeal the
inaction of the CIR, it did not intend to limit it to a
single remedy of filing an appeal after the lapse of
180-day prescribed period. When a taxpayer
protested an assessment, he naturally expects the
CIR to decide either positively or negatively. A
taxpayer cannot be prejudiced if he chooses to wait
for the final decision of the CIR on the protested
assessment (Lascona Land Co., Inc. v. CIR, G.R. No.
171251, March 5, 2012).
Q: The FDDA issued by the CIR to Liquigaz
merely contained a table of Liquigaz’s
supposed tax liabilities, without providing any
details. The CIR explains that the FDDA still
complied with the requirements of the law as it
was issued in connection with the PAN and
FLD/FAN, which had an attachment of the
details of discrepancies. Hence, the CIR
concludes that Liquigaz was sufficiently
informed in writing of the factual bases of the
assessment. Is the CIR correct?
A: NO. It is undisputed that the FDDA merely
showed Liquigaz’ tax liabilities without any details
on the specific transactions which gave rise to its
supposed tax deficiencies. While it provided for the
legal bases of the assessment, it fell short of
informing Liquigaz of the factual bases thereof. The
CIR erred in claiming that Liquigaz was informed of
the factual bases of the assessment because the
FDDA made reference to the PAN and FAN/FLD,
which were accompanied by details of the alleged
discrepancies.
The rules specifically require that the decision of the
CIR or his duly authorized representative on a
disputed assessment shall state the facts, law and
rules and regulations, or jurisprudence on which the
decision is based. Failure to do so would
invalidate the FDDA. To rule otherwise would
tolerate abuse and prejudice. Taxpayers will be
unable to file an intelligent appeal before the CTA as
they would be unaware on how the CIR or his
authorized representative appreciated the defense
raised in connection with the assessment (CIR v.
Liquigaz Philippines Corp., G.R. No. 215534, April 18,
2016).
Q: What is the effect of a void FDDA?
A: FDDA that does not inform the taxpayer in
writing of the facts and law on which it is based
renders the decision void. The written notice
requirement for both the FLD and the FAN is in
observance of due process — to afford the taxpayer
adequate opportunity to file a protest on the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
assessment and thereafter file an appeal in case of
an adverse decision.
However, a void FDDA does not ipso facto render the
assessment void. The assessment remains valid
notwithstanding the nullity of the FDDA because the
assessment itself differs from a decision on the
disputed assessment. An FDDA that does not inform
the taxpayer in writing of the facts and law on which
it is based renders the decision void. Therefore, it is
as if there was no decision rendered by the CIR. It is
tantamount to a denial by inaction by the CIR, which
may still be appealed before the CTA and the
assessment evaluated on the basis of the available
evidence and documents (CIR v. Liquigaz Philippines
Corp., G.R. No. 215534, April 18, 2016).
Q: A taxpayer received a tax deficiency
assessment of P1.2 Million from the BIR
demanding payment within 10 days, otherwise,
it would collect through summary remedies. The
taxpayer requested for a reconsideration
stating the grounds therefor. Instead of
resolving the request for reconsideration, the
BIR sent a Final Notice before Seizure to the
taxpayer. May this action of the Commissioner of
Internal Revenue be deemed a denial of the
request for reconsideration of the taxpayer to
entitle him to appeal to the Court of Tax
Appeals? Decide with reasons. (2005 Bar)
A: YES, the final notice before seizure was in effect
a denial of the taxpayer's request for
reconsideration, not only was the notice the only
response received, its nature, content and tenor
supports the theory that it was the BIR's final act
regarding the request for reconsideration (CIR v.
Isabela Cultural Corporation, G.R. No. 135210, July
11, 2001).
Q: PAGCOR received a FAN on January 17, 2008
for payment of deficiency Fringe Benefit Tax. 7
days later, it filed a protest to the FAN addressed
to RD Misajon of Revenue Region No. 6 of the
BIR. On August 14, 2008, PAGCOR elevated its
protest to CIR, there being no action taken
thereon as of that date. On March 11, 2009,
PAGCOR filed a Petition for Review before the
CTA alleging respondent’s inaction in its protest.
CTA Division dismissed the petition for being
filed out of time. CTA En banc affirmed CTA
Division’s ruling. In its Petition for Review before
the SC, PAGCOR argues that its protest before the
CIR on August 14, 2008 starts a new period from
which to determine the last day to file its
petition before the CTA. Is PAGCOR correct?
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298
A: NO. The rules give a protesting taxpayer three
options:
1. If the protest is wholly or partially denied by the
CIR or his authorized representative, then the
taxpayer may appeal to the CTA within 30 days
from receipt of the whole or partial denial of the
protest.
2. If the protest is wholly or partially denied by the
CIR's authorized representative, then the
taxpayer may appeal to the CIR within 30 days
from receipt of the whole or partial denial of the
protest.
3. If the CIR or his authorized representative
failed to act upon the protest within 180 days
from submission of the required supporting
documents, then the taxpayer may appeal to the
CTA within 30 days from the lapse of the 180-
day period.
To further clarify the three options: A whole or
partial denial by the CIR’s representative may be
appealed to the CIR or the CTA. A whole or partial
denial by the CIR may be appealed to the CTA. The
CIR or the CTA’s authorized representative’s failure
to act may be appealed to the CTA. There is no
mention of an appeal to the CIR from the failure to
act by the CIR's authorized representative.
PAGCOR did not wait for the RD or the CIR’s decision
on its protest. PAGCOR made separate and
successive filings before the RD and the CIR before
it filed its petition with the CTA. PAGCOR rendered
the second option moot when it formulated its own
rule and “elevated an appeal” to the CIR without any
decision from the RD. The third option states that
the remedy for failure to act by the CIR or his
authorized representative is to file an appeal to the
CTA within 30 days after the lapse of 180 days from
the submission of the required supporting
documents. PAGCOR clearly failed to do this. If we
consider, for the sake of argument, PAGCOR’s
submission before the CIR as a separate protest and
not as an appeal, then such protest should be denied
for having filed out of time. It is clear that PAGCOR
failed to make use of any of the three options
described above. Indeed, PAGCOR’s lapses in
procedure have made the BIR’s assessment final,
executor and demandable (PAGCOR v. BIR, G.R. No.
208731, January 27, 2016).
Effect of the failure to appeal by a taxpayer
The decision or assessment becomes final and
executory. The assessment is considered correct
which may be enforced by summary or judicial
remedies. The assessment which has become final
 TAX REMEDIES UNDER NIRC

and executory cannot be superseded by a new assessment; unjustly or

assessment. 2. Financial excessively
incapacity of assessed; or
In an action for the collection of the tax by the the taxpayer 2. The
government, the taxpayer is barred from re-opening administration
the question already decided. and collection
costs involved
In a proceeding for collection of tax by judicial do not justify
action, the taxpayer’s defenses are similar to those the collection
of the defendant in a case for the enforcement of a of the amount
judgment by judicial action. due.

Judicial Remedies Compromise

In case the CIR decides adversely or if no decision
yet after the lapse of 180 days, the taxpayer may
appeal to the CTA Division, 30 days from the receipt
of the decision or from the lapse of the 180 days
otherwise the decision shall become final, executory
and demandable (RCBC v. CIR, G.R. No. 168498, April
24, 2007).
If the decision is adverse to the taxpayer, he may file
a motion for reconsideration or new trial before the
same Division of the CTA within 15 days from notice
thereof.
In case the resolution of a Division of the CTA on a
motion for reconsideration or new trial is adverse
to the taxpayer, he may file a petition for review
with the CTA En Banc.
In case of tax assessment, compromise is the
contract between the government and the taxpayer
to setlle the liability.
Court cannot compel the CIR to compromise in cases
when such is allowed, in order to assure that no
improper compromise is made to the prejudice of
the Government.
NOTE: Compromise as amount of paid by the
taxpayer to settle his tax liability is different from
compromise penalty which is the amount paid by
the taxpayer to compromise tax violation and paid
in lieu of criminal prosecution. (Refer to Additions to
Tax.)
Requisites for Compromise

The ruling or decision of the CTA en banc may be 1. Tax liability of the taxpayer;
appealed with the Supreme Court through a verified 2. An offer of the taxpayer of an amount to be paid
petition for review on certiorari pursuant to Rule 45 by him; and
of the 1997 Rules of Civil Procedure. 3. The acceptance (the CIR or the taxpayer) of the
offer in the settlement of the claim
NOTE: Refer to “Court of Tax Appeals” for complete
discussion on judicial remedies. Authority of the CIR to compromise taxes

COMPROMISE AND ABATEMENT OF TAXES The CIR may compromise the payment of any
internal revenue tax, when:
Compromise vs. Abatement
a. A reasonable doubt as to the validity of the
COMPROMISE ABATEMENT claim against the taxpayer exists provided that
Nature Involves a Involves the the minimum compromise entered into is
reduction of cancellation of equivalent to 40% of the basic tax (Doubtful
the taxpayer’s the entire tax Validity);
liability liability of a b. The financial position of the taxpayer
through a taxpayer. demonstrates a clear inability to pay the
mutual assessed tax provided that the minimum
agreement. compromise entered into is equivalent to 10%
Authorize CIR, REB, NEB CIR of the basic assessed tax (Financial
d Incapacity),
Officer
Grounds 1. Reasonable 1. The tax or any MINIMUM COMPROMISE RATES
doubt as to portion thereof Based on doubtful 40% of the basic
the validity of appears to be validity assessed tax

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299 FACULTY OF CIVIL LAW
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Based on 10% of the basic
financialincapacity assessed tax
Where the basic tax involved exceeds P1M or where
the settlement offered is less than the prescribed
minimum rates, the compromise shall be subject to
the approval of the National Evaluation Board
(NEB). In other words, compromise settlement
lower than the minimum amount prescribed above
may be entered subject to the approval of NEB.
Offers of compromise of assessments issued by the
Regional Offices involving basic deficiency taxes of
P500,000 or less and for minor criminal violations
discovered by the Regional and District Offices, shall
be subject to the approval by the Regional
Evaluation Board (REB). However, if the offer of
compromise is less than the prescribed rates, the
same shall always be subject to the approval of the
NEB (RR No. 30-2002).
Doubtful Validity
There is reasonable doubt on the validity of the
assessment when: [JABAW F4]
1. The delinquent account or disputed assessment
is one resulting from a Jeopardy assessment.
2. The assessment seems to be Arbitrary in
nature, appearing to be based on presumptions
and there is reason to believe that it is lacking
in legal and/or factual basis.
3. The taxpayer Failed to file an administrative
protest on account of the alleged failure to
receive notice of assessment and there is reason
to believe that the assessment is lacking in legal
and/or factual basis.
4. The taxpayer Failed to file a request for
reinvestigation/reconsideration within 30 days
from receipt of final assessment notice and
there is reason to believe that the assessment is
lacking in legal and/or factual basis.
5. The taxpayer Failed to elevate to the CTA an
adverse decision of the CIR, or his authorized
representative, in some cases, within 30 days
from receipt thereof and there is reason to
believe that the assessment is lacking in legal
and/or factual basis.
6. The assessment were issued on or after January
1, 1988, where the demand notice allegedly
failed to comply with the Formalities
prescribed under Section 228 of the NIRC of
1997.
7. Assessments made based on the “Best Evidence
Obtainable Rule” and there is reason to believe
that the same can be disputed by sufficient and
competent evidence.
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8. Assessment was issued within the prescriptive
period for assessment as extended by the
taxpayer’s execution of Waiver of the Statute of
Limitations the validity or authenticity of which
is being questioned or at issue and there is
strong reason to believe and evidence to prove
that it is not authentic (Sec. 3.1, RR 30-2002).
9. The assessment is based on an issue where a
court of competent jurisdiction made an
Adverse decision against the bureau, but for
which the Supreme Court has not decided upon
with finality (R.R. 8-2004).
Financial Incapacity
The offer for compromise based on financial
incapacity may be accepted upon showing that:
[CoIN BaLD]
1. The taxpayer is a Compensation income
earner with no other source of income and
the family’s gross monthly compensation
income does not exceed the levels of
compensation income provided for Sec.
4.1.1. of RR No. 30-2002 and it appears that
the taxpayer possesses no other
leviable/distrainable assets, other than his
family home
NOTE: Sec. 4.1.1 of RR 30-2002: “If taxpayer is
an individual whose only source of income is
from employment and whose monthly salary, if
single, is P10,500 or less, or if married, whose
salary together with his spouse is P21,000 per
month, or less, and it appears that the taxpayer
possesses no other leviable/distrainable assets,
other than his family home”
2. The taxpayer has been declared by any
competent tribunal/authority/body/
government agency as Bankrupt or
insolvent.
3. The corporation ceased operation or is
already Dissolved;
Note: The tax liabilities corresponding to the
Subscription Receivable or Assets
distributed/distributable to the stockholders
representing return of capital at the time of
cessation of operation or dissolution cannot be
compromised.
4. The taxpayer, as reflected in its latest
Balance Sheet supposed to be filed with the
Bureau of Internal Revenue, is suffering
from surplus or earnings deficit resulting to
Impairment in the original capital by at
least 50%;
 TAX REMEDIES UNDER NIRC
5. That amounts payable or due to
stockholders other than business-related
transactions which are properly includible
in the regular “accounts payable” are by
fiction of law considered as part of capital
and not liability, and that the taxpayer has
no sufficient liquid asset to satisfy the tax
liability
6. The taxpayer is suffering from a Net worth
deficit (total liabilities exceed total assets)
computed by deducting total liabilities (net
of deferred credits and amounts payable to
stockholders/owners reflected as
liabilities, except business related
transactions) from total assets (net of pre-
paid expenses, deferred charges, pre-
operating expenses, as well as appraisal
increases in fixed assets,) taken from the
latest audited financial statements,
7. In the case of an individual taxpayer, he has
no other leviable properties under the law
other than his family home.
Requisites for financial incapacity as ground for
compromise settlement
1. Clear inability to pay the tax; and
2. The taxpayer must waive in writing his
privilege of the secrecy of bank deposit
under RA 1405 or other general or special
laws, which shall constitute as the CIR’s
authority to inquire into said bank deposits
(Sec. 6 [F], NIRC).
Grounds for denial of compromise settlement
based on financial incapacity [CRAW]
1. If the taxpayer has a Tax Credit Certificate,
issued under the NIRC, or
2. If the taxpayer has a pending claim for tax
refund or tax credit with the BIR, Department of
Finance One-Stop-Shop Tax Credit and Duty
Drawback Center (Tax Revenue Group or
Investment Incentive Group) and/or the courts,
or
3. If the taxpayer has an existing finalized
agreement or prospect of future agreement
with any party that resulted or could result to
an increase in the equity of the taxpayer at the
time of the offer for compromise or at a definite
future time, or
4. If the taxpayer failed to execute a waiver of his
privilege of the secrecy of bank deposits under
Republic Act No. 1405 or under other general or
special laws (R.R. 30-2002).
Q: Can the CIR inquire into the bank deposits of
a taxpayer? If so, does this power of the
301
Commissioner conflict with R.A. 1405 (Secrecy
of Bank Deposits Law)? (1998 Bar)
A: The CIR is authorized to inquire into the bank
deposits of:
1. a decedent to determine his gross estate;
2. any taxpayer who has filed an application for
compromise of his tax liability by means of
financial Incapacity to pay his tax liability (Sec.
6(F), NIRC).
The limited power of the CIR does not conflict with
R.A. No. 1405 because the provisions of the NIRC
granting this power is an exception to the Secrecy of
Bank Deposits Law as embodied in a later
legislation.
Furthermore, in case a taxpayer applies for an
application to compromise the payment of his tax
liabilities on his claim that his financial position
demonstrates a clear inability to pay the tax
assessed, his application shall not be considered
unless and until he waives in writing his privilege
under R.A. No. 1405, and such waiver shall
constitute the authority of the CIR to inquire into the
bank deposits of the taxpayer.
Q: May the CIR compromise the payment of
withholding tax where the financial position of
the taxpayer demonstrates a clear inability to
pay the assessed tax? (1998 Bar)
A: NO. A taxpayer who is constituted as withholding
agent who has deducted and withheld at source the
tax on the income payment made by him holds the
taxes in trust for the government (Sec. 58 [D], NIRC)
and is obligated to remit them to the BIR. The
subsequent inability of the withholding agent to
pay/remit the taxes withheld is not a ground for
compromise because the withholding tax is not
a tax upon the withholding agent but it is only a
procedure for the collection of a tax.
Q: May the tax liability of a taxpayer be
compromised during the pendency of an
appeal? (1996 Bar)
A: YES, as long as any of the grounds for a
compromise i.e.; doubtful validity of assessment and
financial incapacity of taxpayer is present. A
compromise of a tax liability is possible at any stage
of litigation, even during appeal, although legal
propriety demands that prior leave of court should
be obtained (Pasudeco v. CIR, G.R. No. L-39387, June
29, 1982).
Q: After the tax assessment had become final
and unappealable, the CIR initiated the filing of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
a civil action to collect the tax due from NX. After
several years, a decision was rendered by the
court ordering NX to pay the tax due plus
penalties and surcharges. The judgment became
final and executory, but attempts to execute the
judgment award were futile.
Subsequently, NX offered the CIR a compromise
settlement of 50% of the judgment award,
representing that this amount is all he could
really afford. Does the CIR have the power to
accept the compromise offer? Is it legal and
ethical? (2004 Bar)
A: YES, the CIR has the power to accept the offer of
compromise if the financial position of the taxpayer
clearly demonstrates a clear inability to pay the tax
(Sec. 204, NIRC).
As represented by NX in his offer, only 50% of the
judgment award is all he could really afford. This is
an offer for compromise based on financial
incapacity which the CIR shall not accept unless
accompanied by a waiver of the secrecy of bank
deposits (Sec. 6 [F], NIRC). The waiver will enable
the CIR to ascertain the financial position of the
taxpayer, although the inquiry need not be limited
only to the bank deposits of the taxpayer but also as
to his financial position as reflected in his financial
statements or other records upon which his
property holdings can be ascertained.
If indeed, the financial position of NX as determined
by the CIR demonstrates a clear inability to pay the
tax, the acceptance of the offer is legal and ethical
for the ground upon which the compromise was
anchored is within the context of the law and the
rate of compromise is well within and far exceeds
the minimum prescribed by law which is only 10%
of the basic tax assessed.
Q: Does the Court of Appeals have the power to
review compromise agreements forged by the
Commissioner of Internal Revenue and a
taxpayer? Explain. (2010 Bar)
A: As a general rule, the Court of Appeals does not
have the power to review compromise agreements
made between the Commissioner of Internal
Revenue and the tax payer considering that the
Commissioner is vested with the authority to
compromise and such authority is exercised
according to his discretion. Such authority should
be exercised in accordance with the CIR discretion
and courts have no power, as a general rule, to
compel him to exercise such discretion one way or
another. If the CIR abuses his discretion by not
following the parameters set by law, the CTA, not
UNIVERSITY OF SANTO TOMAS
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302
the CA, may correct such abuse if the matter is
appealed to it. In case of arbitrary or capricious
exercise by the CIR of the power to compromise, the
compromise can be attacked and reversed through
judicial process. It must be noted however, that a
compromise is considered as other matters arising
under the NIRC which vests the CTA with
jurisdiction and since the decision of the CTA is
appealable to the Supreme Court, the Court of
Appeals is devoid of any power to review a
compromise settlement forged by the CIR.
Limitations on the Power to Compromise a Tax
Liability
The CIR is allowed to enter into a compromise only
if the basic tax involved does not exceed P1M and
the settlement offered is not less than the
prescribed percentages (Sec. 204 [A], NIRC).
1. Minimum compromise rate:
A. For cases of “financial incapacity”
a. If taxpayer is an individual whose only
source of income is from employment
and whose monthly salary, if single is
P10,500 or less or if married, whose
salary together with his spouse is
P21,000 per month, or less and it
appears that the taxpayer possesses no
other available distrainable assets
other than his family home – 10%
b. If taxpayer is an individual without any
source of income – 10%
c. Taxpayer is under any of the following
conditions
i. zero net worth – 10%
ii. negative net worth – 10%
iii. dissolved corporations – 20%
iv. already non-operating companies
for a period of: (a) 3 years or more
as of the date of application for
compromise settlement - 10%; (b)
less than 3 years – 20%
v. Surplus or earning deficit
resulting to impairment in the
original capital by at least 50% -
40%
vi. Declared insolvent or bankrupt
unless taxpayer falls squarely
under any situation as discussed
above, thus resulting to the
application of the appropriate rate
– 10%
B. For cases of “doubtful validity” – a
minimum compromise rate equivalent to
40% of the basic tax assessed (Sec. 4, R.R.
30-2002).
 TAX REMEDIES UNDER NIRC
2. Subject to approval of Evaluation Board:
a. When basic tax involved exceeds
P1,000,000;
b. Where the settlement offered is less than
the prescribed minimum rates (Sec. 204,
NIRC);
c. When the CIR is not authorized to
compromise.
Cases which may be compromised (1998, 2002,
2005, Bar) [DANC3]
1. Delinquent accounts
2. Cases under Administrative protest after
issuance of the Final Assessment Notice to the
taxpayer which are still pending in the RO, RDO,
Legal Service, Large Taxpayer Service,
Collection Service, Enforcement Service, and
other offices in the National Office
3. Cases covered by pre-assessment notices but
taxpayer is Not agreeable to the findings of the
audit office as confirmed by the review office
4. Civil tax cases disputed before the courts
5. Collection cases filed in courts
6. Criminal violations except:
a. Those already filed in courts; and
b. Those involving criminal tax fraud (Sec.3,
R.R. 30-2002).
Cases which cannot be compromised [F3EW-CD]
1. Criminal tax Fraud cases, confirmed as such by
the CIR or his duly authorized representative.
2. Cases where Final reports of reinvestigation or
reconsideration have been issued resulting to
reduction in the original assessment and the
taxpayer is agreeable to such decision by
signing the required agreement form for the
purpose.
3. Cases which become Final and executory after
final judgment of a court, where compromise is
requested on the ground of doubtful validity of
the assessment.
4. Estate tax cases where compromise is
requested on the ground of financial incapacity
of the taxpayer.
5. Withholding tax cases, unless the applicant –
taxpayer invokes provisions of law that cast
doubt on the taxpayer’s obligation to withhold.
6. Criminal violations already filed in courts.
7. Delinquent accounts with duly approved
schedule of installment payments (Sec. 3, R.R.
30-2002).
NOTE: The CTA may issue an injunction to
prevent the government from collecting taxes
under a compromise agreement when such
would be prejudicial to the government.
303
When must compromise be made?
1. Criminal cases – It must be entered into prior to
the institution of the corresponding criminal
action arising out of a violation of the provisions
of the NIRC. A compromise can never be
entered into after final judgment because by
virtue of such final judgment the Government
had already acquired a vested right (Roviro v.
Amparo, G.R. No. L- 5482, May 5, 1982).
NOTE: A compromise validly entered into
between the CIR and the taxpayer prior to the
institution of the corresponding criminal action
arising out of a violation of the provisions of the
NIRC becomes a bar to such criminal
action(People v. Magdaluyo, G.R. No. L-16235,
Apr. 20, 1965).
Extent of Commissioner’s Power to
Compromise Criminal violations:
a. Before the complaint is filed with the
Prosecutor’s Office – full discretion to
compromise except those involving fraud;
b. After the complaint is filed with the
Prosecutor’s Office but before the
information is filed with the court – can still
compromise provided that the prosecutor
gives his consent;
c. After the information is filed with the court –
no longer permitted to compromise with or
without the consent of the Prosecutor
(People v. Magdaluyo, G.R. No. L-1595, April.
20, 1961).
2. Civil cases – Before litigation or at any stage of
the litigation, even during appeal, although
legal propriety demands that prior leave of
court should be obtained.
Remedies in case the taxpayer refuses or fails to
follow the tax compromise
1. Enforce the compromise
a. If it is a judicial compromise, it can be
enforced by mere execution. A judicial
compromise is one where a decision based
on the compromise agreement is rendered
by the court on request of the parties.
b. Any other compromise is extrajudicial and
like any other contract can only be enforced
by court action.
2. Regard it as rescinded and insist upon original
demand (Art. 2041, NCC).
Prescriptive period to enforce compromises
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
As a rule, the obligation to pay tax is based on law.
But when, for instance, a taxpayer enters into a
compromise with the BIR, the obligation of the
taxpayer becomes one based on contract.
Compromise is a contract whereby the parties, by
reciprocal concessions, avoid litigation or put an
end to one already commenced (Art. 2028 NCC).
Since it is a contract, the prescriptive period to
enforce the same is 10 years based on Art. 1144 NCC
reckoned from the time the cause of action accrued.
Abatement and cancellation of tax liability
Grounds for abatement(Sec. 204[B], NIRC):
1. The tax or any portion thereof appears to be
unjustly or excessively assessed: [W-SLICE]
a. The filing of the return/payment is made at
the Wrong venue.
b. The taxpayer fails to file the return and pay
the tax on time due to,
i. Substantial losses from prolonged
labor dispute;
ii. Force majeure;
iii. Legitimate business reverses.
NOTE: The abatement shall only cover the
surcharge and the compromise penalty and
not the interest imposed under Sec. 249,
NIRC
c. There is Late payment of the tax under
meritorious circumstances (i.e. Failure to
beat bank cut-off time, surcharge
erroneously imposed.)
d. The assessment is brought about or
resulted from taxpayer’s non-compliance
with the law due to a difficult
Interpretation of said law.
e. The taxpayer fails to file the return and pay
the correct tax on time due to
Circumstances beyond his control.
NOTE: The abatement shall only cover the
surcharge and the compromise penalty and
not the interest.
f. The taxpayer’s mistake in payment of his
tax is due to Erroneous written official
advice of a revenue officer (Sec. 2, R.R. 13-
2001).
2. The administration and collection costs
involved do not justify the collection of the
amount due: [A-WORD]
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
304
a. Abatement of penalties on assessment
confirmed by the lower court but Appealed
by the taxpayer to a higher court.
b. Abatement of penalties on Withholding tax
assessment under meritorious
circumstances.
c. Abatement of penalties on assessment
reduced after Reinvestigation but taxpayer
is still contesting reduced assessment.
d. Abatement of penalties on Delayed
installment payment under meritorious
circumstances.
e. Such Other circumstances which the CIR
may deem analogous to the enumeration
above (Sec. 3, R.R. 13-2001).
Q: Explain the extent of the authority of the CIR
to compromise and abate taxes. (1996 Bar)
A: The authority of the CIR to compromise
encompasses both civil and criminal liabilities of the
taxpayer. The civil compromise is allowed only in
cases: (1) where the tax assessment is of doubtful
validity, or (2) when the financial position of the
taxpayer demonstrates a clear inability to pay the
tax. All criminal violations may be compromised
except: (1) those already filed in court, or (2) those
involving fraud.
The compromise settlement of any tax liability shall
be subject to the following minimum amounts: (1)
ten percent (10%) of the basic assessed tax in case
of financial capacity; and (2) forty percent (40%) of
the basic assessed tax in other cases.
Where the basic tax involved exceeds P1 million or
where the settlement offered is less than the
prescribed minimum rates, the compromise shall be
subject to the approval of the Evaluation Board
which shall be composed of the CIR and the four (4)
Deputy Commissioners.
The CIR may also abate or cancel a tax liability
when: (1) the tax or any portion thereof appears to
have been unjustly or excessively assessed; or (2)
the administrative and collection costs involved do
not justify collection of the amount due (Sec. 204,
NIRC).
RECOVERY OF TAX ERRONEOUSLY
OR ILLEGALLY COLLECTED
Remedies of taxpayer after payment
1. Tax refund - Actualreimbursement of tax
2. Tax credit – Government issues Tax Credit
Certificate (TCC) which may be applied against
any internal revenue tax, excluding withholding
 TAX REMEDIES UNDER NIRC

taxes, for which the taxpayer is directly liable
(Sec. 204 [C], NIRC).
All TCCs issued by the BIR shall not be allowed
to be transferred or assigned to any person
(RR14-2011).
1. There is tax collected erroneously or illegally, or
a penalty collected without authority, or a sum
excessively or wrongfully collected (Sec. 229,
NIRC).
NOTE: Payment under protest is not required.

Grounds for claim for refund and tax credit 2. There must be a written claim for refund filed
by the taxpayer with the CIR (Vda. De Aguinaldo
1. Tax is erroneouslyor illegally assessed or v. CIR, G.R. No. L-19927, February 26, 1965).
collected;
2. Penalty is imposed without authority; and XPNs:
3. Sum collected is excessive or in any manner a. When on the face of the return upon which
wrongfully collected. payment was made, such payment appears
clearly to have erroneously paid - the CIR
Illegally collected tax vis-a-vis erroneously may refund or credit the tax even without a
collected tax written claim (Sec. 229, NIRC).
b. A return filed showing an overpayment
ILLEGALLY ERRONEOUSLY shall be considered as a written claim for
COLLECTED COLLECTED credit or refund (Sec. 204 (C), NIRC).(2002,
TAX TAX 2010 Bar)
Definition There is a No violation of
violation of the law but there 3. Must be a categorical claim for refund or credit;
certain is a mistake in - It is for the CIR to afford an opportunity to
provisions of collection. correct the action of subordinate officers;
tax law or and
statute. - To notify the Government that such taxes
On the part The tax was The payment have been questioned and the notice
of the paid by him was made under should then be borne in mind in estimating
Taxpayer under duress. a mistake of fact. the revenue available for expenditure
On the part The tax was The collection (Bermejo v. CIR, G.R. No. L-3029, July 25,
of the collected in was made based 1950).
Government patent on a
disregard of misapplication 4. Must be filed within 2 years from date of
the law. of the law. payment of the tax or penalty regardless of
any supervening cause that may arise after
Distinguish tax refund from tax credit payment. No suit or proceeding shall be
instituted after the expiration of the such
TAX REFUND TAX CREDIT period; and (2008 Bar)
As to The taxpayer The taxpayer
purpose asks for asks that the 5. The taxpayer must present proof of payment of
restitution of money paid be the tax.
the money paid applied to his
as tax. There is existing tax Q: Congress enacts a law granting grade school
actual liability except and high school students a 10% discount on all
reimbursement withholding school-prescribed textbooks purchased from
taxes any bookstore. The law allows bookstores to
Reckoning 2-yr period to 2-yr period claim the discount in full as a tax credit.
point of file the claim starts from the
the 2-year with the CIR date such credit a. If in a taxable year a bookstore has no tax
period starts after the was allowed – in due on which to apply the tax credits, can the
payment of the case credit is bookstore claim from the BIR a tax refund in
tax or penalty wrongly made lieu of tax credit?
b. Can the BIR require the bookstores to
deduct the amount of the discount from
Requisites for a claim of tax refund or tax credit
their gross income?
(2002, 2005 Bar)
c. If a bookstore closes its business due to
losses without being able to recoup the

UNIVERSITY OF SANTO TOMAS

305 FACULTY OF CIVIL LAW
 LAW ON TAXATION
discount, can it claim reimbursement of the
discount from the government on the
ground that without such reimbursement,
the law constitutes taking of private
property for public use without just
compensation? (2006 Bar)
A:
a. No, there is nothing in the law that grants a
refund when the bookstore has no tax liability
against which the tax credit can be used. A tax
credit is in the nature of a tax exemption and in
case of doubt, the doubt should be resolved in
strictissimi juris against the claimant (CIR v.
Central Luzon Drug, G.R. No. 159647, Apr. 15,
2005).
b. No, tax credit which reduces the tax liability is
different from a tax deduction which merely
reduces the tax base. Since the law allowed the
bookstores to claim the discount in full as a tax
credit, the BIR is not allowed to expand or
contract the legislative mandate (CIR v.
Bicolandia Drug Corporation, G.R. 148083, July
21, 2006).
c. No, if the business continues to operate at a loss
and no other taxes are due, thus compelling it to
close shop, the credit can never be applied and
will be lost altogether (CIR v. Central Luzon
Drug, G.R. No. 159647, Apr. 15, 2005). The grant
of the discount to the taxpayer is a mere
privilege and can be revoked anytime.
Q: Is a deficiency tax assessment a bar to a claim
for tax refund or tax credit? (2005 Bar)
A: YES, the deficiency tax assessment is a bar to a
tax refund or credit. The taxpayer cannot be entitled
to a refund and at the same time liable for a tax
deficiency assessment for the same year. The
deficiency assessment creates a doubt as to the
truth and accuracy of the Tax Return. Said Return
cannot therefore be the basis of the refund (CIR v.
CA, G.R. No. 106611, July 21, 1994).
Q: On June 16, 1997, the BIR issued against the
Estate of Mott a notice of deficiency estate tax
assessment, inclusive of surcharge, interest and
compromise penalty. The Executor of the Estate
of Mott filed a timely protest against the
assessment and requested for waiver of the
surcharge, interest and penalty. The protest was
denied by the CIR with finality on Sept. 13, 1997.
Consequently, the Executor was made to pay the
deficiency assessment on Oct. 10, 1997. The
following day, the Executor filed a Petition with
the CTA praying for the refund of the surcharge,
interest and compromise penalty. The CTA took
cognizance of the case and ordered the CIR to
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
306
make a refund. The CIR filed a Petition for
Review with the CA assailing the jurisdiction of
the CTA and the Order to make refund to the
Estate on the ground that no claim for refund
was filed with the BIR.
a. Is the stand of the CIR correct?
b. Why is the filing of an administrative claim
with the BIR necessary? (2000 Bar)
A:
a. YES, for there was no claim for refund or credit
that has been duly filed with the CIR which is
required before a suit or proceeding can be filed
in any court (Sec. 229, NIRC). The denial of the
claim by the CIR is the one which will vest the
CTA jurisdiction over the refund case should the
taxpayer decide to appeal on time.
b. The filing of an administrative claim for refund
with the BIR is necessary in order:
i. To afford the CIR an opportunity to
consider the claim and to have a chance to
correct the errors of subordinate officers
(Gonzales v. CTA, G.R. No. 14532, May 26,
1965); and
ii. To notify the Government that such taxes
have been questioned and the notice
should be borne in mind in estimating the
revenue available for expenditures
(Bermejo v. Collector, G.R. No. L-3028, July
29, 1950).
Payment under protest is not a requirement
A suit or proceeding for tax refund may be
maintained “whether or not such tax, penalty or sum
has been paid under protest or duress” (Sec. 204 [3],
NIRC).
When payment under protest required
It is necessary in claims for refund for real
property taxes under Sec. 252, LGC and for
customs duties under Sec. 2308, TCC.
Rule on government’s liability for interests on
tax refunds
GR: There can be no interest on refund of tax in the
absence of statutory provison clearly and expressly
directing or authorizing such payment.
XPNs:
1. If interest is authorized by law;
2. Arbitrariness in the collection of tax;
 TAX REMEDIES UNDER NIRC
3. Under Sec. 79(C)) [2] with respect to
income taxes withheld on the wages of the
employees.
NOTE: An action is not arbitrary when exercised
honestly and upon due consideration where there is
room for two opinions, however much it may be
believed that an erroneous conclusion was reached.
Arbitrariness presupposes inexcusable or obstinate
disregard of legal provisions (Philex Mining Corp. v.
CIR, G.R. 120324, April 21, 1999).
Tax Refund or Tax Credit may be forfeited to the
Government
1. Tax Refund – When a refund check or warrant
remains unclaimed or uncashed within 5 years
from date of mailing or delivery.
2. Tax Credit – a Tax Credit Certificate which
remains unutilized after 5 years from date of
issue, shall be invalid. Unless revalidated (Sec.
230, NIRC).
Two-year prescriptive period
No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the
CIR a claim for credit or refund within 2 years after
the payment of the tax or penalty (Sec 204(C), NIRC).
No suit or proceeding shall be filed after the
expiration of 2 years from the date of payment of the
tax or penalty regardless of any supervening cause
that may arise after payment (Sec 229, NIRC).
It is necessary that the tax be paid in full, and that
the claim for refund in the BIR as well as the
proceedings in the CTA be commenced within 2
years counted from the payment of the tax.
Thus, as a rule, the two-year prescriptive period
runs from the payment of tax. However, the
following instances provide for different
commencement of the two-year period.
Tax is paid in installments (For individuals):
From the date of the final payment
Payments effected through the withholding
tax system: From the date it falls due at the end
of the taxable year
In case of payments effected through
withholding tax system, the tax liability is
deemed paid when the same falls due at the end
of the tax year. This is because a taxpayer,
resident or non-resident, who contributes to the
withholding tax system, do not really deposit an
amount to the CIR, but, in truth, performs and
307
extinguishes his tax obligation for the year
concerned (Gibbs v. CIR, G.R. No. L-17406,
November 29, 1965).
Overpaid quarterly corporate income tax:
From the date the final adjustment return is filed
after the end of the taxable year. The period is
counted from the actual filing, not the last day
allowed by law to file.
The filing and payment of the quarterly income
tax should only be considered as mere
installments of the annual tax due. These
quarterly payments should be treated as
advances or portions of the annual income tax
due, to be adjusted at the end of the year, its Final
Adjustment Return(CIR v. TMX Sales, G.R. No.
83736, January 15,1992 reiterated in CIR v. CA,
G.R. No. 117254, January 21, 1999).
The two-year period for filing tax refund is not
jurisdictional
The Supreme Court held that even if the two-year
period had already lapsed, the same is not
jurisdictional and may be suspended for reasons of
equity and other special circumstances(CIR v. PNB,
474 SCRA 303).
Founded on moral and equitable grounds, the
following circumstances may stay the two-year
period:
1. Assurance on the part of the BIR that steps were
being taken to credit taxpayer with the amount
sought to be refunded;
2. An agreement or understanding with the BIR
that they await the result of a pending cases
involving similar issue raised in the claim for
refund (Panay Electric Co., Inc. v. CIR, 103 Phil
819).
Waiver of prescription in an action for refund
GR: The 2-year period is not jurisdictional.
Therefore, if the government failed to plead
prescription in a motion to dismiss or as a defense
in its answer to the petition for review, it is deemed
waived.
XPN: Taxpayer amends his petition for review
alleging therein a new cause of action and the
government pleads prescription in his answer to the
amended petition for review.
Q: Alyanna has a pending claim for refund with
the CIR. The 2-year period is about to end and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
the CIR has yet to decide on the claim. What must
Alyanna do to pursue her claim for refund?
A: A claim for refund must be filed with the BIR and
the commencement of the proceedings in the CTA
must be done within the 2-year period from the date
of full payment of the tax or penalty regardless of
any supervening event. Thus, Alyanna must
commence the proceedings with the CTA before the
end of the 2-year period without waiting for the
decision of the CIR.
Q: On Mar. 12, 2001, REN paid his taxes. Ten
months later, he realized that he had overpaid
and immediately filed a claim for refund with
the CIR. On Feb. 27, 2003, he received the
decision of the CIR denying REN's claim for
refund. On Mar. 24, 2003, REN filed an appeal
with the CTA. Was his appeal filed on time or
not? (2004 Bar)
A: NO, his appeal was not filed on time. The 2-year
period for filing a claim for refund is not only a
limitation for pursuing the claim at the
administrative level but also for appealing the case
to the CTA. The law provides that "no suit or
proceeding shall be filed after the expiration of 2
years from the date of the payment of the tax or
penalty regardless of any supervening cause that
may arise after payment. Since the appeal was only
made on Mar. 24, 2003, more than two years had
already elapsed from the time the taxes were paid
on Mar. 12, 2003. Accordingly, REN had lost his
judicial remedy because of prescription.
Q: XCEL Corp. filed its quarterly income tax
return for the first quarter of 1985 and paid
P500.000 on May 15, 1985. In the subsequent
quarters, XCEL suffered losses. On Apr. 15, 1986
it declared a net loss of P1,000,000 in its annual
income tax return. After failing to get a refund,
XCEL filed on Mar. 1, 1988 a case with the CTA to
recover the P500.000 in taxes paid on May 15,
1985. Is the action to recover the taxes filed
timely? (1994 Bar)
A: The action for refund was filed with the CTA on
time. In the case of overpaid quarterly corporate
income tax, the two-year period for filing claims for
refund in the BIR as well as in the institution of an
action for refund in the CTA, the two-year
prescriptive period for tax refunds is counted from
the filing of the final, adjustment return under
Sec. 67 of the NIRC, and not from the filing of the
quarterly return and payment of the quarterly tax.
The CTA action on Mar. 1, 1988 was clearly within
the reglementary 2-year period from the filing of the
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
308
final adjustment return of the corporation on Apr.
15, 1986.
Taxpayer’s remedy in case of denial of claim for
refund
The taxpayer may appeal to CTA in case of denial by
CIR of the claim for refund. It must be filed within 30
days from receipt of the decision of the CIR but not
to exceed the 2-year period from date of payment of
the tax or penalty regardless of any supervening
cause that may arise after payment.
In case the decision of the CIR takes too long and the
2-year period is about to end, proceedings in the
CTA must be commenced and there would no longer
be any need to wait for the decision of the CIR.
Distinction of remedies in tax assessment and
claim for refund
Against an Assessment
A tax assessment becomes final unless it is
disputed or contested within 30 days from
receipt thereof by the taxpayer. If the action
taken by the CIR on the request for
reconsideration is unacceptable to the taxpayer,
the latter must then appeal, by way of Petition for
Review to the CTA within 30 days from receipt of
the decision of the CIR.
The taxpayer may also opt to pay the tax before
the finality of the assessment (e.g., within 30 days
from receipt of the assessment) and then file
within 2 years a written claim for the refund of
the tax.
Claim for Refund (Sec. 229)
A denial by the CIR of a claim for refund must be
appealed to the CTA within 30 days from receipt
of notice of denial and within 2 years from the
day of full and final payment.
Continued inaction by the CIR on claims for
refund may thus be taken as a denial appealable
to the CTA, in order to permit the appeal to be
considered or having been made within the two-
year mandatory period.
Excess input VAT (Sec. 112) vs. Excessively
collected tax (Sec. 229):
In a claim for refund or credit of “excess” input VAT
under Section 110(B) and Section 112(A), the input
VAT is not “excessively” collected as understood
under Section 229. At the time of payment of the
input VAT the amount paid is the correct and proper
amount. The person legally liable for the input VAT
cannot claim that he overpaid the input VAT by the
mere existence of an “excess” input VAT. The term
 TAX REMEDIES UNDER NIRC
“excess” input VAT simply means that the input VAT
available as credit exceeds the output VAT.
From the plain text of section 229, it is clear that
what can be refunded or credited is a tax that is
“erroneously, illegally, excessively or in any manner
wrongfully collected.” In short, there must be a
wrongful payment because what is paid, or part of
it, is legally due.
Distinction between the application of the 2-
Year prescriptive period under Sec. 112 and Sec.
229
1. Under Sec. 112, the 2-year prescriptive period
applies only to the administrative claim before
the CIR and not to judicial claim before the CTA
because the taxpayer always has 30 days from
the decision of the CIR or from the lapse of the
120-day period even after the lapse of 2 years
from the taxable quarter where the sales were
made (CIR v. Mindanao Geothermal II
Partnership, 713 SCRA 645, [2014]).
Thus, it is only the administrative claim that
must be filed within the two-year prescriptive
period; the judicial claim need not fall within
the two-year prescriptive period.
2. Under Section 229, the decision of the CIR is
appealable to the CTA sitting in division within
30 days after the receipt but must be within the
2-year period from payment or filing of the final
adjusted return. Thus, if the Commissioner
denies the claim for refund within the 2-year
period, the remedy is to file an appeal with the
CTA 30 days from the receipt of such denial.
But, such 30-day period must also be within the
2-year period. For example, if there are only 10
days left within such 2-year period, then, the
taxpayer has only 10 days within which to
appeal his claim. However, if there is an inaction
on the part of the Commissioner and the 2-year
period is about to lapse, the remedy is to file an
appeal also with the CTA.
Transitional input tax credit is a form of tax
credit, not tax refund
A transitional input tax credit is not a tax refund per
se but a tax credit. Prior payment of taxes is not
required before a taxpayer could avail of
transitional input tax credit. A tax credit is not
synonymous to tax refund. Tax refund is defined as
the money that a taxpayer overpaid and is thus
returned by the taxing authority. Tax credit, on the
other hand, is an amount subtracted directly from
one’s total tax liability. It is any amount given to a
309
taxpayer as a subsidy, a refund, or an incentive to
encourage investment (Fort Bonifacio Development
Corporation v. Comm., G.R. No. 173425, January 22,
2013).
Statutory basis for tax refund
Tax refunds are not founded principally on
legislative grace. It is based on legal principle which
underlies in all quasi-contracts abhorring a person’s
unjust enrichment at the expense of another. The
dynamic of erroneous payment of tax fits to a tee the
prototypic quasi-contract, solutio indebiti, which
covers not only mistake in fact but also mistake in
law (J. Dimaampao, 2015).
The Government is not exempt from the application
of solutio indebiti. Indeed, the taxpayer expects fair
dealing from the Government, and the latter has the
duty to refund without any unreasonable delay
what it has erroneously collected (CIR. v. Fortune
Tobacco, Corp., G.R. No. 167274-75, July 21, 2008).
The pertinent laws governing this principle are
found in Article 2142 and Article 2154 of the New
Civil Code.
Provisions of the NIRC regarding refund
1. Corporations entitled to refund of excess
estimated quarterly income paid as shown on
its final adjustment return (Sec. 75 and 76,
NIRC)
2. Claims for refund of VAT-registered persons,
whose sales are zero-rated or effectively zero-
rated, with regard to their creditable input tax
due, except transitional input tax, to the extent
that such input tax has not been applied against
output tax (Sec. 112, NIRC)
3. Locally produced or manufactured goods,
whether in their original state or as ingredients,
any excise tax paid thereon shall be credited or
refunded upon submission of proof of actual
exportation (Sec. 130(d), NIRC)
4. National Internal Revenue Tax: a) erroneously
or illegally assessed or collected; b) any penalty
claimed to have been collected without
authority; or c) any sum allegedly to have been
excessively or in any manner wrongfully
collected, may be recovered in a suit or
proceeding for that purpose (Sec. 229 and Sec.
204(c), NIRC)
Proof for claim or refund
Evidence that may be presented that would best
substantiate claim for tax refund:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
The pertinent invoices, receipts, and export sales
documents are the best and competent pieces of
evidence required to substantiate a taxpayer’s claim
for tax credit or refund. No evidence which has not
been formally offered shall be considered and
where the pertinent invoices or receipts
purportedly evidencing the VAT paid by the
taxpayer were not submitted, the court may not
determine the veracity of the amount of VAT that
the taxpayer paid. Mere allegations of the figures in
the amended return are not sufficient proof of the
amount of its refund entitlement (Atlas Consolidated
Mining and Development Corporation v. CIR, 546
SCRA 150).

Burden of proof for claim of refund

GR: Being in the nature of a claim for exemption,

refund is construed in strictissimi juris against the
entity claiming the refund and in favor of the taxing
power. This is the reason why a claimant must
positively show compliance with the statutory
requirements provided for under the NIRC in order
to successfully pursue one's claim (Winebrenner &
Iñigo Insurance Brokers, Inc. v. CIR, G.R. No. 206526,
January 28, 2015).

In order to discharge this burden, the law intends

the filing of an application for a refund to
necessarily include the filing of complete
supporting documents to prove entitlement for the
refund. Otherwise, the mere filing of an application
without any supporting document would be as good
as filing a mere scrap of paper (Hedcor v. CIR, G.R. No.
207575, July 15, 2015).

XPN: The contention that a tax refund takes on the

nature of a tax exemption does not apply where the
claim for refund is premised on erroneous payment
of tax.

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 TAX REMEDIES UNDER NIRC
Proper party to claim refund or tax credit is given the right to appeal the decision or ruling of
the Commissioner.
GR: The “taxpayer” is the person entitled to claim a
tax refund. He is the “party adversely affected” who
XPN: Under the following situations:
CASE THE ONE ENTITLED FOR THE REFUND
The taxpayer (even if the tax was shifted
by the taxpayer to his customers as in
Where the tax has sales tax and even if the tax has been billed
been shifted as a separate item in the invoice) (CIR v.
American Rubber, G.R. No. L-19667,
November 29, 1966).
Theater goers can claim the illegally
exacted taxes not the theater owners
(Medina v. Baguio, G.R. No. L-4060, August
29, 1952).
Where the payer is
not the taxpayer
1. The withholding agent (CIR v. Procter
and Gamble, G.R. No. L-66838,
December 2, 1991)
2. Withholding agent may file a claim for
refund for taxes which was withheld
and paid on behalf of a non-resident
foreign corporation (Filipinas Synthetic
Fiber Corporation v CA, G.R. Nos.
118498 & 124377, October 12, 1999).
3. In case the taxpayer does not file a
Where the payer is claim for refund, the withholding agent
the withholding has the right to file the claim, even
agent when it is unrelated to, or is not a
wholly owned subsidiary of, the
principal taxpayer (CIR vs. Smart
Communications, Inc, G.R. Nos. 179045-
46, August 25, 2010).
NOTE: Since this is merely an exception,
the rule is that the withholding agent is
not considered as the taxpayer, hence he
is not entitled to a tax amnesty due for the
taxpayer’s account.
Where the donor’s Donee is the proper party to claim the
tax was assumed by refund of the donor’s tax (even if the tax
the donee was advanced by the donor)
311
REASON
The sales tax is imposed directly on the
seller. Once recovered, the seller must
hold the refunded taxes in trust for the
individual purchasers who advanced
payment thereof and whose name must
appear on his record
The amount collected (the illegal
municipal taxes) from the theater goers
by theater owners are owned by the
theater goers. Only owners of property
have the right to claim it. The theater
owners merely acted as agents of the
theater goers and as such they cannot
claim the amount illegally imposed by
the municipality (Medina v. Baguio, ibid.).
1. The withholding agent is considered a
‘taxpayer” under the NIRC as he is
personally liable for the withholding tax
as well as for deficiency assessments,
surcharges, and penalties, should the
amount of the tax withheld be finally
found to be less than the amount that
should have been withheld under law.”
2. As an agent of the taxpayer, the
withholding agent has the authority to
file the necessary income tax return and
to remit the tax withheld to the
government impliedly includes the
authority to file a claim for refund and to
bring an action for recovery of such
claim.” (CIR v. Smart Communications,
Inc., ibid).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Proper party to question/seek a tax refund in
indirect taxes
The proper party is the statutory taxpayer, the
person on whom the tax is imposed by law and who
paid the tax even when he shifts the burden thereof
to another because once shifted, it is no longer in the
nature of a tax, but part of the purchase price or the
cost of goods or services sold (Exxon Mobil
Petroleum and Chemical Holdings, Inc. vs. CIR, G.R.
No. 180909, January 19, 2011; Silkair (Singapore)
Pte., Ltd. v. CIR, G.R. No. 166482, January 25, 2012).
Q: Silkair purchased aviation jet fuel from
Petron for use on Silkair international flights.
Silkair, contending that it is exempt from the
payment of excise taxes, filed a formal claim for
refund with the CIR. Silkair claims that it is
exempt from the payment of excise tax under
the NIRC, specifically Sec. 135, and under Art. 4
of the Air Transport Agreement between the
Governments of the Republic of the Philippines
and the Republic of Singapore (Air Agreement).
The CIR denied the claim contending that since
the liability for the excise tax payment is
imposed by law on Petron as the manufacturer
of the petroleum products, any claim for refund
should only be made by Petron as the statutory
taxpayer.
a. Decide whether or not Silkair is the proper
party to claim a refund for the excise taxes
paid.
b. What is the proper remedy of the Silkair?
A:
a. Silkair is not the proper party to claim a refund
for the excise taxes paid. The SC held that “the
proper party to question, or seek a refund of an
indirect tax is the statutory taxpayer, the person
on whom the tax is imposed by law and who paid
the same even if he shifts the burden thereof to
another.”
Excise tax on petroleum is an indirect tax.
Although the burden to pay an indirect tax can
be passed on to the purchaser of the goods, the
liability to pay the indirect tax remains with the
petroleum manufacturer or seller. When the
manufacturer or seller decides to shift the
burden of the excise tax to the tax-exempt
purchaser, the tax becomes a part of the price of
the commodity. Thus, in this case, the petroleum
manufacturer who is the statutory taxpayer is
the proper party to claim the refund.
b. The exempt entity’s remedy is to invoke its tax
exemption before buying the petroleum so that
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
312
the petroleum manufacturer would not pass on
the excise taxes as part of the purchase price
(Silkair Singapore PTE. Ltd. v. CIR, GR 171383 &
172379, Nov. 14, 2008).
Q: Chevron filed a claim for refund or tax credit
for the excise taxes paid on its importation of
petroleum products that it had sold to the Clark
Development Corporation (CDC), en entity
exempt from direct and indirect taxes. Is
Chevron entitled to the tax refund or tax credit?
A: Excise tax is a tax on property; hence, the
exemption from the excise tax expressly granted
under Section 135 of the NIRC must be construed in
favor of the petroleum products on which the excise
tax was initially imposed. Accordingly, the excise
taxes that Chevron paid on its importation of
petroleum products subsequently sold to CDC were
illegal and erroneous, and should be credited or
refunded to Chevron in accordance with Sec. 204 of
NIRC.
Chevron, being the statutory taxpayer, paid the
excise taxes on its importation on the petroleum
products. Pursuant to Section 135(c), petroleum
products sold to entities that are by law exempt
from direct and indirect taxes are exempt from
excise tax. Inasmuch as its liability for the payment
of the excise taxes accrued immediately upon
importation and prior to the removal of the
petroleum products from the customs house,
Chevron was bound to pay, and actually paid such
taxes. But the status of the petroleum products as
exempt from the excise taxes would be confirmed
only upon their sale to CDC. Consequently, the
payment of the excise taxes by Chevron upon its
importation of petroleum products was deemed
illegal and erroneous upon the sale of the petroleum
products to CDC.
In cases involving excise tax exemptions on
petroleum products under Section 135 of the NIRC,
the Court has consistently held that it is the
statutory taxpayer, not the party who only bears the
economic burden, who is entitled to claim the tax
refund or tax credit. The general rule applies here
because Chevron did not pass on to CDC the excise
taxes paid on the importation of the petroleum
products, the latter being exempt from indirect
taxes (Chevron Phil. Inc. v. CIR, G.R. No. 210836,
September 01, 2015).
Q: Does a withholding agent have the right to file
an application for tax refund? Explain. (2005
Bar)
 TAX REMEDIES UNDER THE NIRC
A: YES. A withholding agent should be allowed to
claim for tax refund, because under the law said
agent is the one who is held liable for any violation
of the withholding tax law should such violation
occur (Commissioner of Internal Revenue v. Wander
Philippines Inc., 160 SCRA 570, 1988).
Furthermore, since the withholding agent is made
personally liable to deduct and withhold any tax
under Section 53(c) of the NIRC, it is imperative that
he be considered the taxpayer for all legal intents
and purposes. Thus, by any reasonable standard,
such person should be regarded as a party in
interest to bring suit for refund of taxes
(Commissioner of Internal Revenue v. Procter and
Gamble Philippines Manufacturing Corporation and
CTA, 204 SCRA 377, 1991).
Corporate taxpayer’s options in case of excess
quarterly income taxes paid
If the sum of the quarterly tax payments made
during the said taxable year exceeds the total tax
due on the entire taxable income of that year, the
corporation shall either:
a. Carry-over the excess credit against the
estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable
years; or
b. be credited (TCC); or
c. refunded with the excess amount paid (Sec 76,
NIRC).
The above options are alternative and not
cumulative in nature, that is, the choice of one
precludes the other. The logic behind the rule is to
ease tax administration, particularly the self-
assessment and collection aspects (Republic v. Team
(Phils.) Energy Corp., G.R. No. 188016, January 14,
2015).
The Irrevocability Rule
Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the
taxable quarters of the succeeding taxable years has
been made, such option shall be considered
irrevocable for that taxable period and no
application for cash refund or issuance of a tax
credit certificate shall be allowed therefor (Sec 76,
NIRC).
The phrase “such option shall be considered
irrevocable for that taxable period” means that the
option to carry over the excess tax credits of a
particular taxable year can no longer be revoked
313
(SYSTRA Phil., Inc. v. CIR, G.R. No. 176290, September
21, 2007).
The exercise of an option is irrevocable and a
decision to carry-over and apply tax overpayment
continues until the overpayment has been fully
applied to tax liabilities (until fully exhausted) (CIR
vs. McGeorge Food Industries, Inc., G.R. No. 174157,
October 20, 2010).
NOTE: Under the old provision, the option to carry-
over the excess or overpaid income tax for a given
taxable year is limited to the immediately
succeeding taxable year only. In contrast, under
Section 76 of the NIRC of 1997, the application of the
option to carry over the excess of creditable tax is
not limited only to the immediately following
taxable year but extends to the next succeeding
taxable years. The clear intent in the amendment
under section 76 is to make the option, once
exercised, irrevocable for the “succeeding taxable
years” (Asiaworld Properties Philippines Corporation
v. CIR, G.R. No. 171766, July 29, 2010).
Failure to signify preference in the return does
not bar outright a claim for refund
The corporation must signify its intention by
marking the corresponding option box provided in
the final adjustment return (FAR). While a taxpayer
is required to mark its choice in the form provided
by the BIR, this requirement is only for facilitating
tax collection to ease tax administration,
particularly the self-assessment and collection
aspects.
Failure to signify one's intention in the FAR does not
mean outright barring of a valid request for a
refund, should one still choose this option later on.
Despite the failure of taxpayer to make the
appropriate marking in the BIR form, the filing of its
written claim effectively serves as an expression of
its choice to request a tax refund, instead of a tax
credit. To assert that any future claim for a tax
refund will be instantly hindered by a failure to
signify one's intention in the FAR is to render
nugatory the clear provision that allows for a two-
year prescriptive period (Philam Asset Management
Inc. v. CIR, G.R. Nos. 156637/162004, December 14,
2005).
Claim for tax refund or credit of excess and
unutilized creditable withholding tax (CWT)
The requirements for entitlement of a corporate
taxpayer for a refund or the issuance of TCC
involving excess withholding taxes are as follows:
(TIF)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
1. That the claim for refund was filed within the
two-year reglementary period pursuant to
Section 229 of the NIRC;
2. When it is shown on the ITR that the income
payment received is being declared part of the
taxpayer's gross income; and
3. When the fact of withholding is established by a
copy of the withholding tax statement, duly
issued by the payor to the payee, showing the
amount paid and income tax withheld from that
amount.
The contention of the BIR that a taxpayer in claim
for tax refund should submit its quarterly returns to
show that it did not carry-over the excess
withholding tax to the succeeding quarter is without
merit. When the taxpayer is able to establish prima
facie its right to the refund by testimonial and object
evidence, the BIR should present rebuttal evidence
to shift the burden of evidence back to the taxapayer
(Republic v. Team (Phils.) Energy Corp., G.R. No.
188016, January 14, 2015).
There is no question that those who claim must not
only prove its entitlement to the excess credits, but
likewise must prove that no carry-over has been
made in cases where refund is sought. Proving that
no carry-over has been made does not
absolutely require the presentation of the
quarterly ITRs.The rule is that any document,
other than quarterly ITRs may be used to establish
that indeed the non-carry over clause has been
complied with, provided that such is competent,
relevant and part of the records. Thus, quarterly
ITRs are not indispensable in a claim for refund
for no court can limit a party to the means of
proving a fact for as long as they are consistent
with the rules of evidence and fair play. To stress,
what the NIRC merely requires is to sufficiently
prove the existence of the non-carry over of excess
CWT in a claim for refund (Winebrenner & Iñigo
Insurance Brokers, Inc. v. CIR, G.R. No. 206526,
January 28, 2015).
Q: In its final adjustment return for the 2010
taxable year, ABC Corp. had excess tax credits
arising from its over-withholding of income
payments. It opted to carry over the excess tax
credits to the following year. Subsequently, ABC
Corp. changed its mind and applied for a refund
of the excess tax credits. Will the claim for
refund prosper? (2013 Bar)
A: NO; it is barred by the irrevocability rule. If the
corporation opts to carry-over its excess credit in
the final adjustment return, its choice shall be
irrevocable for that taxable period. The purpose of
this rule is to prevent a taxpayer from claiming
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
314
excess tax credits twice. In the given problem, ABC
Corp. opted to carry-over its excess tax credits for
the 2010 taxable year. Consequently, ABC Corp. can
no longer revoke its choice to carry-over the excess
tax credits and instead claim for a refund.
Q: In its 1997 ITR, PM Management
International Inc. expressly signified that it had
a CWT of P1.2M for taxable year 1997 to be
claimed as tax credit in taxable year 1998.
However, due to its net-loss position in 1998, the
taxpayer was unable to claim the P1.2M as tax
credit.
On April 12, 2000, the taxpayer filed with BIR a
written claim for the refund of the P1.2M
unutilized CWT for taxable year 1997. Is the
taxpayer entitled to refund?
A: NO. Inasmuch as the respondent already opted to
carry over its unutilized CWT of P1.2M to taxable
year 1998, the carry-over could no longer be
converted into a claim for tax refund because of the
irrevocability rule provided in Section 76 of the
NIRC of 1997. Thereby, the respondent became
barred from claiming the refund.
However, in view of its irrevocable choice, the
respondent remained entitled to utilize that amount
of P1.2M as tax credit in succeeding taxable years
until fully exhausted. In this regard, prescription did
not bar it from applying the amount as tax credit
considering that there is no prescriptive period for
the carrying over of the amount as tax credit in
subsequent taxable years (CIR vs. PL Management
International Philippines, Inc., April 4, 2011).
GOVERNMENT REMEDIES
CLASSIFICATION OF GOVERNMENT REMEDIES
1. Administrative remedies
a. Tax lien
b. Distraint of personal property; levy and
sale of real property
c. Forfeiture of real property to the
government for want of bidder
d. Suspension of business operation
e. Non-availability of injunction to restrain
collection of tax
2. Judicial remedies
a. Ordinary civil action;
b. Criminal action
Administrative remedies
(1) TAX LIEN
 TAX REMEDIES UNDER THE NIRC

It is a legal claim or charge on property, personal or (2) DISTRAINT AND LEVY

real, established by law as a sort of security for the
payment of tax obligations (HSBC v. Rafferty, 39 Phil.
145).
Tax in itself is not a lien even upon the property
against which it is assessed, unless expressly made so
by statute.
Distraint is a summary remedy in which the
collection of tax is enforced on the taxpayer’s
personal property. When enforced to taxpayer’s
personal property not in his possession, it is called
garnishment. Meanwhile, levy is enforced on real
property.

Nature and extent of tax lien Distinctions among warrants of distraint,

garnishment and levy
When a taxpayer neglects or refuses to pay his tax
liability after demand, the amount shall be a lien in GARNISHMEN
DISTRAINT LEVY
favor of the Government from the time when the T
assessment was made by the CIR until paid, with Subject matter
interests, penalties, and costs that may accrue in Personal Personal Real property
addition thereto upon all property and rights to property property owned and in
property belonging to the taxpayer. Provided, that owned by and owned by the the
this lien shall not be valid against any mortgagee, in possession taxpayer but in possession of
purchaser or judgment creditor until notice of such of the the possession the taxpayer
lien shall be filed by the CIR in the Register of Deeds taxpayer of the third
of the province or city where the property is party
situated or located (Sec. 219, NIRC).
Acquisition by the Gov’t
5. The claim of the government predicated on a
tax lien is superior to the claim of a private litigant Personal Personal Real property
predicated on a judgment. The tax claim must be property property subject to levy
given preference over any other claim of any other distrained are garnished are is forfeited to
creditor, in respect of any and all properties of the purchased by purchased by the
insolvent (Republic v. Peralta, 150 SCRA 37). the the Government
Government Government then sold to
When tax lien is applied and resold to and resold to meet the
meet meet deficiency.
1. With respect to personal property – Tax lien deficiency. deficiency.
attaches when the taxpayer neglects or refuses
to pay tax after demand. Thus, the tax lien Advertisement of Sale
attaches not from the service of the warrant of No No newspaper Newspaper
distraint of personal property but from the time newspaper publication publication is
the tax became due and payable. publication required required once
required a week for 3
2. With respect to real property – from time of consecutive
registration with the Register of Deeds. weeks.

The residue, if any, goes back to the taxpayer or Requisites for the exercise of distraint and levy
owner of the property. (DeF –DeP)

Extinguishment of Tax Lien 1. Taxpayer is delinquent in payment of tax;

2. There must be subsequent demand to pay;
1. By payment or remission of the tax 3. Taxpayer failed to pay delinquent tax on time;
2. By prescription of the right of government to and
assess or collect 4. Period within which to assess and collect the
3. By failure to file notice of such tax lien in the tax due has not yet prescribed.
office of Register of Deeds
4. By destruction of property subject to tax lien Similarities between distraint and levy
5. By replacing it with a bond
1. Summary in nature
NOTE: A buyer in an execution sale acquires only 2. Requires notice of sale
the rights of the judgment creditor.

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315 FACULTY OF CIVIL LAW
 LAW ON TAXATION
3. May not be resorted to if the amount involved is Upon failure to pay the delinquent tax at the
less than P100 time required, the proper officer shall seize and
distraint any goods, chattels, or effects, and the
Distraint personal property, including stocks and other
securities, debts, credits, bank accounts and
It is a summary remedy whereby the collection of interests in and rights to personal property of
tax is enforced on the goods, chattels or effects of the the taxpayer in sufficient quantity to satisfy the
taxpayer (including other personal property of tax, expenses of distraint and the cost of the
whatever character as well as stocks and other subsequent sale (Sec. 207 [A], NIRC).
securities, debts, credits, bank accounts and interest
in or rights to personal property.) The property may Procedure that must be observed in effecting
be offered in a public sale, if taxes are not voluntarily actual distraint:
paid.
1. Commencement of distraint proceedings
Distinguish lien from distraint by the CIR or his duly authorized
representatives or by the revenue district
LIEN DISTRAINT officer as the case may be
Directed The property Need not be 2. Service of warrant of distraint upon
against subject to the directed against taxpayer or upon any person in possession
what tax the property of the property
subject to tax
To whom The property The property To whom warrant of distraint is served:
directed itself regardless should be
of the present presently owned 1. As to tangible goods:
owner of the by the taxpayer a. The owner or person in possession; or
property b. Someone of suitable age and discretion
at the dwelling or place of business of
Q: Who is authorized to issue the warrant of such person.
distraint? 2. As to stocks and/or securities:
a. Upon the taxpayer; and
A: b. President, manager, treasurer or other
1. CIR or his duly authorized representative – if the responsible officer of the corporation.
amount involved is in excess of P1 million; or
2. Revenue District Officer – if the amount involved 3. As to debts/credits:
is P1 million or less (Sec. 207 [A], NIRC). a. Upon the person owing the debt; or
b. The person having control over the
Effect of service of warrant of distraint (or levy) credit or his agent.

Its timely service suspends the running of the 4. As to bank accounts:

prescriptive period to collect the tax deficiency in
the sense that the disposition of the attached
properties might well take time to accomplish,
extending even after the lapse of the statutory
period for collections (Republic v. Hizon, G.R. No.
130430, December 13, 1999).
a. Upon the taxpayer and
b. The president, manager, treasurer or
other responsible officer of the bank.
NOTE: Distraint of bank accounts is called
garnishment.

Kinds of distraint 3. Posting of notice in not less than 2 public

1. Actual distraint – resorted to when at the time
required for payment, a person fails to pay his
delinquent tax obligation (Sec. 207 [A], NIRC).
Distraint consists in the actual seizure and
taking possession of personal property of the
taxpayer.
How actual distraint effected:
places in the municipality or city and notice
to taxpayer specifying the time and place of
sale and the articles distrained
4. Release of distrained property upon
payment prior to sale
The taxpayer may recover his property
prior to the consummation of the sale if, at
any time prior to the consummation of the
sale, all proper charges are paid to the
officer conducting the sale, the goods or

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
316
 TAX REMEDIES UNDER THE NIRC
effects distrained shall be restored to the
owner (Sec. 210, NIRC).
5. Sale at public auction to be held not less
than 20 days after notice to the owner or
possessor of the property and publication
or posting of such notice
Rules governing the sale
a. The sale must be held at the time and
place stated in the notice.
b. It may be conducted by the Revenue
Officer or through a licensed commodity
or stock exchange.
c. If the sale is conducted by the Revenue
Officer, it must be a public auction and
the property shall be sold to the highest
bidder for cash.
d. If the sale is through a licensed
commodity or stock exchange, it must
be with the approval of the CIR.
e. In case of stocks and other securities,
the officer making the sale shall execute
a bill of sale, which shall be delivered to
the buyer and to the corporation,
company or association which issued
the stocks or other securities. Upon
receipt of the copy of the bill of sale, an
entry of transfer should be made in the
company or association’s book and a
corresponding certificate of stock shall
be issued if required.
f. Residue over and above what is
required to pay the entire claim,
including expenses, shall be returned to
the owner of the property sold.
g. The officer making the sale shall make
a written report of the proceedings to
the CIR within 2 days after the sale (Sec.
211, NIRC).
6. Purchase by government at sale upon
distraint
The CIR or his deputy may purchase the
property in behalf of the National
Government for the amount of taxes,
penalties and cost due thereon when the
bid amount for the property under distraint
is:
a. Not equal to the amount of tax; or
b. Very much less than the actual market
value of the property offered for sale
(Sec. 212, NIRC).
Garnishment
317
It is the taking of personal properties, cash
or sums of money owned by a delinquent
taxpayer which is in the possession of a
third party (i.e. bank accounts.) Bank
accounts are garnished by serving a
warrant upon the taxpayer and upon the
president, manager, treasurer, or other
responsible officer of the bank.
Q: Is the BIR authorized to issue a warrant of
garnishment against the bank account of a
taxpayer despite the pendency of taxpayer’s
protest against the assessment with the BIR or
appeal with the CTA? (1998 Bar)
A: YES, the BIR is authorized to issue a warrant of
garnishment against the bank account of a taxpayer
despite the pendency of protest (Yabes v. Flojo, GR L-
46954 July 20, 1982). Nowhere in the NIRC is the CIR
required to first, rule on the protest before he can
institute collection proceedings on the tax assessed.
The legislative policy is to give the CIR much latitude
in the speedy and prompt collection of taxes
because it is in taxation that the Government
depends to obtain the means to carry on its
operations.
NOTE: The taxpayer may request that the warrant
be lifted. The CIR may, in his discretion, allow the
lifting of the order of distraint. He may ask for a
bond as a condition for the cancellation of the
warrant (Sec. 207, NIRC).
2. Constructive distraint – a preventive remedy
which aims at forestalling a possible dissipation
of the taxpayer’s assets when delinquency sets
in. No actual tax deliquency of the taxpayer is
necessary before the same is resorted to by
government.
How constructive distraint is effected:
It is effected by requiring the taxpayer or any
person having possession of the property:
1. To sign a receipt covering the property
distrained;
2. To obligate himself to preserve it intact and
unaltered; and
3. Not to dispose of it without the express
authority of the CIR.
Cases when constructive distraint is proper [CARL]
1. Retirement from any business subject to the
tax;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
2. Intending to leave the philippines or to remove Property levied upon by the order of a competent
his property therefrom; or to hide or conceal his court can be subsequently distrained. Such property
property; may, with the consent of such court, be
3. Intending to perform any act tending to subsequently distrained, subject to the prior lien of
obstruct the proceedings for collecting the tax the attachment creditor (CIR v. Flores, G.R. No. L-
due or which may be due from him (Sec. 206, 9675, September 28, 1957).
NIRC).
Disctinction between the two kinds of distraint
Specific cases when Notice or Warrant of
Constructive Distraint over the Property/ies of a ACTUAL CONSTRUCTIVE
Taxpayer may be Issued[LRT-CUBA] Nature Summary remedy
Subject Personal property
1. Taxpayer has a record of Leaving the matter
Philippines at least twice a year, unless such Availabilit Cannot be availed of if tax is not
business is justified and/or connected with his y more than P100.
trade, business or profession; To whom Delinquent Any taxpayer
2. Taxpayer applying for Retirement from made taxpayer (delinquent or not)
business has a huge amount of assessment How made Taking of Mere prohibition
pending with the BIR; possession from disposing the
or transfer property
NOTE: An assessment is huge if the amount of control
thereof is equal to or bigger than the networth How Leaving a Requiring taxpayer
or equity of the taxpayer. effected list of to sign a receipt or
property leaving a list of such
3. Taxpayer has record of Transferring his bank distrained property
deposits and other personal properties in the or service of
Phil. to any foreign country except if taxpayer is warrant
a banking institution; Effect on Immediate Merely to prevent
4. The BIR receives information or Complaint collection step to the taxpayer from
pertaining to undeclared income in an amount collect disposing his
of more than 30% of gross sales, receipt or property
revenue, and there is enough reason to believe
that said information is correct as when it is Levy
supported by substantial and credible
evidence; It is the seizure of real property and interest in or
5. There is big amount of Undeclared income rights to such properties for the satisfaction of taxes
known to the public and to the BIR and there is due from the delinquent taxpayer.
a strong reason to believe that the taxpayer will
hide or conceal his property; When levy on real property may be made:
6. Taxpayer keeps Bank deposits and other
properties under the name of other persons, It may be made before, simultaneously or after the
whether or not related to him, and the same are distraint of personal property of the same taxpayer.
not under any lawful fiduciary or trust capacity; It may be effected by serving upon the taxpayer a
7. Taxpayer uses Aliases in bank accounts other written notice of levy in the form of a duly
than the name for which he is legally and/or authenticated certificate prepared by Revenue
popularly known (Revenue Memorandum Order District Officer containing: [DNA]
No. 5- 2001).
1. Description of the property upon which levy is
In case taxpayer or person having possession of the made;
property refuses or fails to sign the receipt: 2. Name of the taxpayer;
3. Amount of tax and penalty due.
The officer shall:
1. Prepare a list of such property; and Procedure that must be observed in levy of real
2. Leave a copy of such list in the premises where property:
the property is located, in the presence of 2
witnesses. 1. Preparation of a duly authenticated certificate
which shall operate with force of a legal
execution throughout the Philippines;

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2019 GOLDEN NOTES
318
 TAX REMEDIES UNDER THE NIRC
2. Service of the written notice to the:
a. Delinquent taxpayer, or
b. If he is absent from the Philippines, to his
agent or the manager of the business in
respect to which the liability arose, or
c. If there be none, the occupant of the
property,
d. The Registry of Deeds of the place where
the property is located shall also be
notified;
Q: Suppose an auction sale of land for the
collection of delinquent taxes was held, is notice
by publication enough or must there be
personal service of notice?
A: Notice by publication is not enough there must be
a personal notice to the registered owner of the
property for cases involving an auction sale of land
for the collection of delinquent taxes are in
personam (Talusan v. Tayag, G.R. No. 133698, April 4,
2001).
NOTE: Failure of the heirs to receive a copy of
notices of levy does not bar its effectivity since the
taxpayer is in fact the estate (Marcos II vs. CA).
3. Advertisement of the time and place of sale
within 20 days after the levy by posting of
notice and by publication for three consecutive
weeks;
4. Sale at a public auction;
The taxpayer may recover his property prior to
the consummation of the sale. At any time
before the day fixed for the sale, the taxpayer
may discontinue all proceeding by paying the
taxes, penalties and interest (Sec. 213, NIRC).
5. Redemption of property sold;
Within 1 year from the date of sale, the
taxpayer or anyone for him, may pay to the
Revenue District Officer the total amount of
the following:
a. Public taxes;
b. Penalties;
c. Interest from the date of delinquency to
the date of sale; and
d. Interest on said purchase price at the rate
of 15% per annum from the date of sale to
the date of redemption.
NOTE: If the property was forfeited in favor of
the government: the Redemption price shall
include only the taxes, penalties and interest
plus costs of sale – no interest on purchase
price since the Government did not “purchase”
319
the property, for it was forfeited (Sec. 214,
NIRC).
Effect of the redemption to the property sold:
It shall entitle the taxpayer, the delivery of the
certificate issued to the purchaser and a
certificate from the Revenue District Officer
that he has redeemed the property. The
Revenue District Officer shall pay the
purchaser the amount by which such property
has been redeemed and said property shall be
free from lien of such taxes and penalties (Sec.
214, NIRC).
Person entitled to the possession of the
property levied:
The owner shall not be deprived of the
property until the expiration of the
redemption period and shall be entitled to
rents and other income until the expiration of
the period for redemption (Sec. 214, NIRC).
Final deed of purchaser:
In case the taxpayer shall not redeem the
property, the Revenue District Officer (RDO)
shall, as grantor, execute a deed conveying to
the purchaser so much of the property as has
been sold, free from all liens of any kind
whatsoever, and the deed shall succinctly
recite all the proceedings upon which the
validity of the sale depends (Sec. 204, NIRC).
6. Further distraint and levy.
The remedy of distraint and levy may be
repeated if necessary until the full amount of
the tax delinquency due including all expenses
is collected from the taxpayer (Sec. 217, NIRC).
Otherwise, a clever taxpayer who is able to
conceal most of the valuable part of his
property would escape payment of his tax
liability by sacrificing an insignificant portion of
his holdings.
NOTE: Further distraint and levy does not
apply when the real property was forfeited to
the government for it is in satisfaction of the
claim in question (Sec 215, NIRC).
(3) FORFEITURE OF REAL PROPERTY
BIR is allowed to forfeit the property subject to levy
only if:
1. There is no bidder; or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
2. The bid amount is insufficient to pay the taxes,
penalties and costs (Sec 215, NIRC).
Forfeiture
It is the divestiture of property without
compensation, in consequence of a default or
offense. It transfers the title to the specific thing
from the owner to the government. Also, there
would no longer be any further levy for such would
be for the total satisfaction of the tax due.
NOTE: The erring taxpayer may still be criminally
prosecuted even if the property has already been
forfeited (Garcia v. Coll., 66 Phil. 441).
Redemption of forfeited property:
The Register of Deeds shall transfer the title of
forfeited property to the Government without
necessity of a court order.
Within 1 year from the date of forfeiture, the
taxpayer, or any one for him may redeem said
property by paying to the CIR or Revenue Collection
Officer the full amount of the taxes and penalties,
together with interest thereon and the costs of sale,
but if the property be not thus redeemed, the
forfeiture shall become absolute (Sec. 215, NIRC).
Resale of Real Estate Taken for Taxes
The CIR shall have charge of any real estate obtained
by the Government in payment or satisfaction of
taxes, penalties or costs or in compromise or
adjustment of any claim.
The CIR may:
1. Sell and dispose of the same of public auction
upon the giving of not less than twenty (20)
days notice, or
2. Dispose of the same at private sale with prior
approval of the Secretary of Finance.
In either case, the proceeds of the sale shall be
deposited with the National Treasury, and an
accounting of the same shall rendered to the
Chairman of the Commission on Audit (Sec. 216,
NIRC)
Difference between forfeiture and seizure to
enforce a tax lien
FORFEITURE SEIZURE
Ownership is Taxpayer
Ownership transferred to retains
the ownership of
Government
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
320
property
seized
Disposition Excess not Excess
of the returned to returned to
proceeds of the taxpayer taxpayer
sale
(4) SUSPENSION OF BUSINESS OPERATION
The CIR or his authorized representative is
empowered to suspend the business operations and
temporarily close the business establishment of any
person for any of the following violations:
1. In the case of VAT-registered person:
a. Failure to issue receipts or invoices;
b. Failure to file a VAT return as required
under Sec. 114; or
c. Understatement of taxable sales or receipts
by 30% or more of his correct taxable sales
or receipts for the taxable quarter.
2. Failure of any person to Register as required
under Sec. 236: The temporary closure of the
establishment shall be for the duration of not
less than 5 days and shall be lifted only upon
compliance with whatever requirements
prescribed by the CIR in the closure order (Sec.
115 NIRC).
(5) NON-AVAILABILITY OF INJUNCTION TO
RESTRAIN COLLECTION OF TAX
GR: No court shall have the authority to grant an
injunction to restrain the collection of any national
internal revenue, tax, fee or charge (Sec. 219, R.A.
8424).
XPNs:
1. Filing of Injunction with the CTA as an incident
to its appellate jurisdiction
a. Showing that collection of the tax may
jeopardize the interest of the government
and/or the taxpayer;
b. Deposit of the amount claimed or file a
surety bond
c. Showing by taxpayer that appeal is not
frivolous nor dilatory
2. The SC, on exceptional cases of suits
questioning the constitutionality of a tax law
(Tolentino v. Executive Secretary)
3. In case of local taxes, RTCs may issue an
injunction upon a suit questioning their validity
NOTE: In the case of the collection of local taxes,
there is no express prohibition in the Local
Government Code prohibiting courts from
issuing an injunction to restrain local
 TAX REMEDIES UNDER THE NIRC

governments from collecting taxes. Such

statutory lapse or intent, however it may be
viewed, may have allowed preliminary
injunction where local taxes are involved
(Angeles City v. Angeles Electric Corporation, G.R.
No. 166134 [2010]).

Reason: The Lifeblood doctrine requires that the

collection of taxes cannot be enjoined, without
taxation, a government can neither exist nor endure.

UNIVERSITY OF SANTO TOMAS

321 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Figure 1. Process of Assessment from Self-Assessment, Issuance of Preliminary Assessment and Notice,
to Protesting Final Assessment Notice

NOTE: 30 days to serve

to taxpayer from date of
issuance

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
322
 TAX REMEDIES UNDER THE NIRC

Figure 2. Government Remedies if FLD/FAN becomes final

UNIVERSITY OF SANTO TOMAS

323 FACULTY OF CIVIL LAW
 LAW ON TAXATION
Figure 3. Taxpayer’s remedies upon issuance of FLD/FAN

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
324
 TAX REMEDIES UNDER THE NIRC

Figure 4. Taxpayer’s remedies for tax refund or tax credit

Claim denied:

File judicial claim

with
CTA within:

1 . Thirty (30) days

from receipt of
the denial, and
NOTE: 2 . Within two (2)
Under the NIRC, the years from the
lapse of the 120-day date of
period or the denial of
payment of
the CIR is mandatory
tax/penalty
and jurisdictional
before a judicial claim
may be filed.

Under the TRAIN,

Section 112(C) is
amended, granting the
CIR only 90 days from
submission of the
OR/invoices and other
docs to decide the
claim for refund.
There is no more
provision as regards
the lapse of the said
period. However,
pursuant to RA 1125,
as amended by RA No.
9282 and 9503,
taxpayer may still file
before the CTA in
cases of inaction by the
CIR.

Further NOTE:
TRAIN is applied only
for claims for refund
filed in 2018 onwards,
otherwise, apply NIRC.

UNIVERSITY OF SANTO TOMAS

325 FACULTY OF CIVIL LAW
 LAW ON TAXATION
JUDICIAL REMEDIES (R.A. NO. 1125, AS
AMENDED, AND THE REVISED RULES OF THE
CTA)
Court of Tax Appeals (CTA)
CTA is a highly specialized body specifically created
for the purpose of reviewing tax cases. The CTA is,
by the very nature of its function, dedicated
exclusively to the study and consideration of tax
problems (CIR v. CA, G.R. No. 115349, April 18 1997).
Nature and characteristics of the CTA
1. It is a highly specialized body created for the
purpose of reviewing tax cases (CIR v. General
Foods, Inc., G.R. No. 143672, April 24, 2003).
2. Proceedings therein are judicial in nature
although the CTA is not bound by technical
rules of evidence (Perez v. CTA, G. R. No. L-
10507, May 30, 1958).
NOTE: As a court of record, the CTA is bound by
the rules on documentary evidence. Under Sec.
8 of R.A. 1125, the CTA is described as a court of
record. As cases filed before it are litigated de
novo, party litigants should prove every minute
aspect of their cases (J. Dimaampao, 2011).
3. It is a court of special or limited jurisdiction and
as such, it can only take cognizance of such
matters as are clearly within its jurisdiction
(Ker & Company, Ltd. vs. CTA, G.R. No. L-12396,
January 31, 1962).
Composition of the CTA
The CTA is composed of:
1. A Presiding Justice, and
2. Eight Associate Justices
a. Each of whom shall be appointed by the
President
b. upon the nomination by the Judicial and Bar
Council for each vacancy (Sec. 2, R.A. 1125, as
amended).
Powers of the CTA [ADD PROCESS]
1. To administer oath ;
2. To assess damages against the appellant if the
appeal to CTA is found to be frivolous and
dilatory;
3. To render decision on cases brought before it.
4. To require production of papers or documents
by subpoena duces tecum;
5. To prescribe rules and regulations for the
conduct of its business;
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
426
6. To issue order authorizing distraint of personal
property and levy of real property;
7. To punish for contempt for the same causes
under the same procedure and with the same
penalties provided for in the rules of court;
8. To receive evidence;
9. To summon witnesses by subpoena; and
10. To suspend collection of tax pending appeal.
NOTE: Power to issue writs of prohibition and
injunction is supplementary to its appellate
jurisdiction (CIR v. Yuseco, G.R. No. L-12518, October
28, 1961).
CTA Proceedings
The CTA may sit en banc or in 3 Divisions, each
Division consisting of 3 Justices. The presiding
justice shall be the chairperson of the first division
and the 2 most senior associate justices shall serve
as chairpersons of the second and third divisions,
respectively (Sec. 2, R.A. 1125, as amended).
CTA Quorum
1. For Sessions En Banc – Five Justices shall
constitute a quorum. The presence at the
deliberation and the affirmative vote of 5
members of the Court en banc shall be
necessary to reverse the decision of a Division
but only a simple majority of the justices
present shall be necessary to promulgate a
resolution or decision in all other cases.
2. For Sessions of a Division – Two Justices shall
constitute a quorum and a concurrence of 2
members of Division shall be necessary for the
rendition of decision or resolution in Division
level (Sec. 2, RA 1125, as amended).
Q: What if the required quorum in a division cannot
be constituted?
A: When the required quorum cannot be constituted
due to any vacancy, disqualification, inhibition,
disability, or any other lawful cause, the presiding
justice shall designate any justice of other divisions
of the CTA to sit temporarily therein (ibid).
JURISDICTION OF THE
COURT OF TAX APPEALS
The CTA has jurisdiction over both civil and criminal
aspects of a tax case. The concentration of tax cases
in one court will enhance the disposition of these
cases since it will take them out of the jurisdiction of
regular courts which, admittedly, do not have
expertise in the field of taxation (J. Dimaampao,
2015).
 JUDICIAL REMEDIES
Expanded Jurisdiction of the CTA under RA 9282
[CTRL]
1. Exclusive original jurisdiction over criminal
cases arising from violations of the NIRC or the
TCCP and other laws administered by the BIR
and the BOC where the principal amount of
taxes and fees, exclusive of charges and
penalties, is P1 million or more and exclusive
appellate jurisdiction in lieu of the CA over
decisions of the RTC where the amount is less
than P1 million or no specified amount is
claimed;
2. Exclusive original jurisdiction over tax
collection cases where principal amount of
taxes and fees, exclusive of charges and
penalties, is P1 million or more and exclusive
appellate jurisdiction over decisions of the RTC
where the amount is less than P1 million.
3. Appellate jurisdiction over decisions of CBAA in
the exercise of their appellate jurisdiction over
cases involving the assessment of taxation of
real property; and
4. Exclusive appellate jurisdiction over decisions
of the RTC in local taxes originally decided by
them.
Salient features of RA 9282 regarding appeals
The decisions of the CTA are no longer appealable to
the CA. The decision of a division of the CTA may be
appealed to the CTA en banc, which in turn may be
appealed directly to the SC only on questions of law.
Q:Does the CTA have jurisdiction over a special
civil action for certiorari assailing an
interlocutory order issued by the RTC in a local
tax case?
A: YES. Although there is no categorical statement
under RA 1125 as well as the amendatory RA 9282,
which provides that the CTA has jurisdiction over
petitions for certiorari assailing interlocutory
orders issued by the RTC in local tax cases filed
before it, the prevailing doctrine is that a court may
issue a writ of certiorari in aid of its appellate
jurisdiction if said court has jurisdiction to review,
by appeal or writ of error, the final orders or
decisions of the lower court (The City Of Manila v.
Hon. Grecia-Cuerdo, G.R. No. 175723, February 4,
2014).
Exclusive Appellate Jurisdiction over Civil Tax
Cases
Cases within the jurisdiction of the Court en
banc (Sec. 2, Rule 4, Revised Rules of CTA)
427
The Court en banc shall exercise exclusive appellate
jurisdiction to review by appeal the following:
[ARMoR]
1. Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over: [ALT]
a. Cases arising from administrative
agencies – BIR, BOC, DoF, DTI, and DA;
b. Local tax cases decided by the RTC in the
exercise of their original jurisdiction; and
c. Tax collection cases decided by the RTC in
the exercise of their original jurisdiction
involving final and executory
assessments for taxes, fees, charges and
penalties, where the principal amount of
taxes and penalties claimed is less than P1
million pesos;
2. Decisions, resolutions or orders of the RTC in
cases decided or resolved by them in the
exercise of their appellate jurisdiction over:
a. Local tax cases
b. Tax collecton cases;
3. Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
Division in the exercise of its exclusive original
jurisdiction over tax collection cases; and
4. Decisions of the CBAAin the exercise of its
appellate jurisdiction over cases involving the
assessment and taxation of real property
originally decided by the provincial or city
board of assessment appeals (Sec. 2, Rule 4,
RRCTA).
NOTE: Decisions, orders, and resolutions of the RTC
in local tax cases do not include real property
taxwhich is an ad valorem tax. The jurisdiction of the
CTA en banc involves only those real property tax
cases originally decided by the CBAA in the exercise
of its appellate jurisdiction under Sec. 7[a][5] of R.A.
9282 and under R.A. 7160 (Habawel v. CTA, G.R. No.
174759, September 7, 2011).
Q: A Co., a Philippine corporation, is the owner
of machinery, equipment and fixtures located at
its plant in Muntinlupa City. The City Assessor
characterized all these properties as real
properties subject to the real property tax. A Co.
appealed the matter to the Muntinlupa Board of
Assessment Appeals. The Board ruled in favor of
the City. In accordance with RA 1125, A Co.
brought a petition for review before the CTA to
appeal the decision of the Board. Is the Petition
for Review proper? Explain. (1999 Bar)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
A: NO. The CTA is devoid of jurisdiction to entertain
appeals from the decision of the Municipal Board of
Assessment Appeals. The proper remedy is to
appeal such decision to the CBAA, which under the
LGC, has appellate jurisdiction over decisions of
Local Board of Assessment Appeals (Caltex Phil, Foe.
v. CBAA, L-50466, May 31, 1982).
RA 9282 provides that CTA has jurisdiction over
decisions of the CBAA in the exercise of its appellate
jurisdiction over cases involving the assessment
and taxation of real property originally decided by
the provincial or city board of assessment appeals.
Cases within the jurisdiction of the Court in
divisions (Sec. 3, Rule 4, RRCTA)
I. Exclusive Original Jurisdiction
Tax collection cases involving final and
executory assessments for taxes, fees, charges
and penalties, where the principal amount of
taxes and fees, exclusive of charges and
penalties, claimed is
P1 million pesos or more.
NOTE: Collection cases where the principal
amount of taxes and fees, exclusive of charges
and penalties claimed is less than P1 million shall
be tried by the proper MTC, MeTC, or RTC,
depending on their respective jurisdiction. The
jurisdiction of the CTA in these cases shall be
appellate (R.A. 1125, Sec. 7[b][1]).
II. Exclusive Appellate Jurisdiction
[DIReCTORS2]
1. Decisions of the CIR in cases involving: [DRO]
a. Disputed assessments;
Q: Which court has jurisdiction over
undisputed assessments?
A: Being an action for the collection of sum
of money, the CTA has exclusive original
jurisdiction over undisputed assessments
when the amount involved is P1 million or
more.
However, where the amount is less than P1
million, it is the RTC or the MTC that has
jurisdiction, as the case may be, depending
on the jurisdictional amount.
NOTE: Undisputed assessments are
already final and collectible. The taxpayer
failed to seasonably protest the assessment
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
428
within a period of 30 days from receipt of
the notice of assessment.
b. Refunds of internal revenue taxes, fees or
other charges and penalties imposed
thereto;
c. Other matters arising under NIRC or other
laws administered by the BIR.
Q: What does “other matters” under the
NIRC or the TCCP mean?
A: The term “other matters” includes cases
which can be considered within the scope
of the function of the BIR and BOC by
applying the ejusdem generis rule (that is,
such cases should be of the same nature as
those that have preceded them).
In CIR v. Hambrecht & Quist Philippines, Inc.
(G.R. No. 169225, November 17, 2010), the
term “other matters” is limited only by the
qualifying phrase that follows it. The
appellate jurisdiction of the CTA is not
limited to cases which involve the decisions
of the CIR on matters relating to
assessments or refunds. It covers other
cases that arise out of the NIRC or related
laws administered by the BIR. The issue of
whether or not the BIR’s right to collect
taxes had already prescribed is a subject
matter falling under the NIRC. In
connection therewith, the NIRC also states
that the collection of taxes is one of the
duties of the BIR. Thus, from the foregoing,
the issue of prescription of the BIR’s right
to collect taxes may be considered as
covered by the term “other matters” over
which the CTA has appellate jurisdiction.
Q: BDO questions a BIR ruling subjecting
interest income from zero-coupon bonds issued
by the government to the 20% final withholding
tax as they are deemed to be deposit substitutes.
BDO filed it to the CTA, not with the Secretary of
Finance. CIR contends that it violates the
principle of exhaustion of administrative
remedies. Is BDO correct?
A: YES. The jurisdiction to review the rulings of the
CIR pertains to the CTA. The questioned BIR Rulings
were issued in connection with the implementation
of the NIRC. Under Sec. 7 of RA No. 1125 as amended
by RA No. 9282, the CTA shall exercise exclusive
appellate jurisdiction to review by appeal on the
Decisions of the CIR in cases involving disputed
assessments, refunds of internal revenue taxes, fees
or other charges, penalties in relation thereto or
 JUDICIAL REMEDIES
other matters arising under the NIRC or other laws
administered by the BIR. Section 11 is likewise
worded as follows: Any party adversely affected by
a decision, ruling or inaction of the CIR, the
Commissioner of Customs, the Secretary of Finance,
the Secretary of Trade and Industry or the Secretary
of Agriculture or the Central Board of Assessment
Appeals or the Regional Trial Courts may file an
appeal with the CTA within 30 days after the receipt
of such decision or ruling. (Banco de Oro v. Republic,
G.R. No. 198756, January 13, 2015)
2. Inaction by the CIR in cases involving: [DROw]
a. Disputed assessments;
b. Refunds of internal revenue taxes, fees or
other charges and penalties imposed
thereto;
c. Other matters arising under NIRC or other
laws administered by the BIR, where the
NIRC provides a specific period for action.
NOTE: The inaction by the CIR within the
180-day period under Sec. 228 of the NIRC
is deemed a denial.
3. Decisions, Orders or Resolutions of the RTC in
the exercise of their original jurisdiction over
local tax cases and tax collection cases.
4. Decisions of the COC in cases involving: [DSFO]
a. Liability for customs duties, fees or other
money charges;
b. Seizure, detention or release of property
affected;
c. Fines, forfeitures or other penalties in
relation thereto; or
d. Other matters arising under Customs Law
or other laws administered by the BOC.
5. Decisions of the Secretary of Finance on
customs cases elevated for automatic review
from decisions of the COC which are adverse to
the Government under Section 2315 of the
TCCP (now Sec. 1128 of the CMTA); and
NOTE: The purpose and rationale of the
automatic review in customs cases- the
provision for automatic review by the COC and
the Secretary of Finance of unappealed seizure
and protest cases was conceived to protect the
government against corrupt and conniving
customs collectors (Yaokasin v. COC, G.R. No.
84111, December 22, 1989).
6. Decisions of the Secretary of Trade and
Industry, in the case of non-agricultural
product, commodity or article, and the
Secretary of Agriculture in the case of
429
agricultural product, commodity or article,
involving dumping and countervailing duties
under Sections 301 and 302, respectively of the
TCCP, and safeguard measures under RA 8800,
where either party may appeal the decision to
impose or not to impose said duties.
NOTE: The SC held that the lower courts can
acquire jurisdiction over a claim for collection
of deficiency taxes only after the assessment
made by the CIR has become final and
appealable, not where there is still a pending
CTA case(Yabes v. Flojo, G.R. No. L-46954, July 20,
1982).
Q: Does the CTA have the power to review tax
cases motu proprio? (1977 Bar)
A: NO. The CTA has no power motu proprio to
review tax cases. It can resolve cases only if a civil
action for collection of sum of money is filed before
it in the exercise of its exclusive original jurisdiction,
or a petition for review is filed in the exercise of its
exclusive appellate jurisdiction. An information may
be filed with the CTA directly where the principal
amount of taxes and fees, exclusive of charges and
penalties, is P1 million or more.
Q: Does the CTA have jurisdiction to rule on
validity of a Rule or Regulation issued by an
administrative agency?
A: NO. While the law confers on the CTA jurisdiction
to resolve tax disputes in general, this does not
include cases where the constitutionality of a law or
rule is challenged. Where what is assailed is the
validity or constitutionality of a law, or a rule or
regulation issued by the administrative agency in
the performance of its quasi-legislative function, the
regular courts have jurisdiction to pass upon the
same (British American Tobacco v. Camacho, G.R. No.
163583, August 20, 2008).
NOTE: However, in 2016, the Supreme Court ruled
that the Court of Tax Appeals has undoubted
jurisdiction to pass upon the constitutionality or
validity of a tax law or regulation when raised by the
taxpayer as a defense in disputing or contesting an
assessment or claiming a refund. It is only in the
lawful exercise of its power to pass upon all maters
brought before it, as sanctioned by Section 7 of
Republic Act No. 1125, as amended.
This Court, however, declares that the Court of Tax
Appeals may likewise take cognizance of cases
directly challenging the constitutionality or validity
of a tax law or regulation or administrative issuance
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
(revenue orders, revenue memorandum circulars,
rulings).
In other words, within the judicial system, the law
intends the Court of Tax Appeals to have exclusive
jurisdiction to resolve all tax problems. Petitions for
writs of certiorari against the acts and omissions of
the said quasi-judicial agencies should, thus, be filed
before the Court of Tax Appeals.
Republic Act No. 9282, a special and later law than
Batas Pambansa Blg. 129 provides an exception to
the original jurisdiction of the Regional Trial Courts
over actions questioning the constitutionality or
validity of tax laws or regulations. Except for local
tax cases, actions directly challenging the
constitutionality or validity of a tax law or
regulation or administrative issuance may be filed
directly before the Court of Tax Appeals.
Furthermore, with respect to administrative
issuances (revenue orders, revenue memorandum
circulars, or rulings), these are issued by the
Commissioner under its power to make rulings or
opinions in connection with the implementation of
the provisions of internal revenue laws. Tax rulings,
on the other hand, are official positions of the
Bureau on inquiries of taxpayers who request
clarification on certain provisions of the National
Internal Revenue Code, other tax laws, or their
implementing regulations. Hence, the
determination of the validity of these issuances
clearly falls within the exclusive appellate
jurisdiction of the Court of Tax Appeals under
Section 7(1) of Republic Act No. 1125, as amended,
subject to prior review by the Secretary of Finance,
as required under Republic Act No. 8424. (Banco de
Oro vs. Republic of the Philippines, G.R. No. 198756,
August 16, 2016).
Q: Disputing the assessment, PAGCOR appealed
to the Secretary of Justice, on the basis of
Sections 66 and 67 of the Revised
Administrative Code, which provides that “all
disputes/claims and controversies, solely
between or among the departments, bureaus,
offices, agencies and instrumentalities of the
National Government, including government -
owned and -controlled corporations, such as
those arising from the interpretation and
application of statues, contracts or agreements
shall be administratively settled or adjudicated
by the Secretary of Justice as Attorney-General
of the National Government and as ex officio
legal adviser of all government- owned or -
controlled corporations if involving only
questions of law.”
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
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The CIR contends that the CTA has jurisdiction
pursuant to Section 7(1) of R.A. No. 1125, which
grants the CTA the exclusive appellate
jurisdiction to review, among others, the
decisions of the Commissioner of Internal
Revenue “in cases involving disputed
assessments, refunds of internal revenue taxes,
fees or other charges, penalties imposed in
relation thereto, or other matters arising under
the NIRC or other law or part of law
administered by the Bureau of Internal
Revenue.
Is PAGCOR correct?
A: NO. Following the rule on statutory construction
involving a general and a special law, then P.D. No.
242 should not affect R.A. No. 1125. R.A. No. 1125,
specifically Section 7 thereof on the jurisdiction of
the CTA, constitutes an exception to P.D. No. 242.
Disputes, claims and controversies, falling under
Section 7 of R.A. No. 1125, even though solely among
government offices, agencies, and instrumentalities,
including GOCCs, remain in the exclusive appellate
jurisdiction of the CTA. Such a construction resolves
the alleged inconsistency or conflict between the
two statutes. (CIR v. Secretary of Justice, G.R. No.
177387, November 9, 2016, citing Philippine National
Oil Company v. Court of Appeals, G.R. Nos. 109976 and
112800, April 26, 2005)
In CIR v. Secretary of Justice, to restate, as a general
rule, all disputes/claims and controversies, solely
between or among the departments, bureaus,
offices, agencies and instrumentalities of the
National Government, including GOCCs, such as
those arising from the interpretation and
application of statues, contracts or agreements shall
be administratively settled or adjudicated by the
Secretary of Justice or the Solicitor General.
(Secs. 66-68, Revised Administrative Code)
As an exception, when the disputes/claims and
controversies involves a tax assessment, even when
the parties to the dispute are departments, bureaus,
offices, agencies and instrumentalities of the
National Government, including GOCCs, the
exclusive appellate jurisdiction remains with the
CTA. (Sec. 7, RA 1125)
Jurisdiction over criminal cases
Exclusive original jurisdiction
The CTA in Division have exclusive original
jurisdiction over all criminal offenses arising from
violations of the NIRC or TCCP and other laws
administered by the BIR or the BOC, where the
 JUDICIAL REMEDIES
principal amount of taxes and fees, exclusive of
charges and penalties, claimed is P1 million or more.
Regular courts shall have jurisdiction in offenses or
felonies where:
a) The principal amount of taxes and fees,
exclusive of charges and penalties claimed is
less than P1 million; or
b) No specified amount is claimed.
The jurisdiction of the CTA in these cases shall be
appellate (Sec. 7[b][1], RA 1125, as amended).
Inclusion of civil action in criminal action
Despite any provision of law or the Rules of Court,
the criminal action and the corresponding civil
action for the recovery of the civil liability for taxes
and penalties, shall at all times be simultaneously
instituted with, and jointly determined in the
proceeding before the CTA. The filing of the criminal
action is deemed to necessarily carry with it the
filing of civil action, and no right to reserve the
filing of such civil action separately from the
criminal action will be recognized (Sec. 7, RA
1125, as amended).
Exclusive appellate jurisdiction in criminal
cases
CTA in Divisions
Exclusive appellate jurisdiction over:
1. Appeals from the Judgments, Resolutions or
Orders of the RTC in their original jurisdiction
in criminal offenses arising from violations of
the NIRC or TCCP and other laws administered
by the BIR or BOC, where the principal amount
of taxes and fees, exclusive of charges and
penalties, claimed is less than P1 million or
where there is no specified amount claimed;
and
2. Criminal offenses over Petitions for Review of
the Judgments, Resolutions or Orders of the
RTC in the exercise of their appellate
jurisdiction on cases originally decided by the
MeTC, MTC and MCTC.
CTA en banc
Exclusive appellate jurisdiction to review by appeal
the following:
1. Decisions, Resolutions or Orders on Motions for
Reconsideration or New Trial of the Court in
division in the exercise of its exclusive original
431
jurisdiction over criminal offenses arising from
violations of the NIRC or TCCP and other laws
administered by the BIR or BOC where the
principal amount of taxes and fees, exclusive of
charges and penalties is P1 million or more;
2. Decisions, Resolutions or Orders on Motions for
Reconsideration or New Trial of the Court in
division in the exercise of its exclusive
appellate jurisdiction over criminal offenses
arising from violations of the NIRC or TCCP and
other laws administered by the BIR or BOC; and
3. Decisions, Resolutions or Orders of the RTC
decided or resolved by them in the exercise of
their appellate jurisdiction over criminal
offenses arising from violations of the NIRC or
TCCP and other laws administered by the BIR or
BOC where the principal amount of taxes and
fees, exclusive of charges and penalties claimed
is less than P1 million.
JUDICIAL PROCEDURES
Judicial action for collection of taxes
Where Tax (Local or National) Collection Cases
are filed
a. MTC, MeTC, MCTC, MTCs in cities
b. RTCs
c. CTA (in division)
Internal Revenue Taxes
Summary of procedures before the MTC and RTC
in the exercise of their exclusive original
jurisdiction
a. Initiatory action – Where the assessment has
attained a state of finality because the
assessment has not been disputed, the BIR files
an ordinary suit for the collection of a sum of
money with the court of appropriate
jurisdiction.
b. Appealed cases – Decisions of the MTCs
rendered in the exercise of their original
jurisdiction are appealed to the RTC by means of
notice of appeal.
Decision of the RTC rendered in aid of their
appellate jurisdiction shall be appealed to the
CTA en banc, by means of petition for review.
Adverse decisions of the CTA en banc shall be
appealed to the SC by means of petition for
review.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
Decisions or judgment rendered by the CTA in
divisions in the exercise of their exclusive
original jurisdiction
a. If no MR or MNT – Execution of judgment
b. If there is a motion filed with the Division that
rendered the judgment:
- If denied, appeal by means of a petition for
review before the CTA en banc;
- If denied by CTA en banc, appeal to the SC by
means of a petition for review on certiorari
Local Taxes
The procedures for internal revenue taxes are the
same for local and real property taxes if the case is
brought before the CTA in division in the exercise of
its original jurisdiction.
Remedies Available to taxpayer prior to
assessment
1. To question the constitutionality or legality of
tax ordinances or revenue measures on appeal
(Sec. 187, LGC); or
2. Petition for declaratory relief, when applicable.
Q: How does the LGU concerned enforce the
judicial remedy in collection of taxes?
A: The LGU may enforce collection of delinquent
taxes, fees, charges and other revenues by civil
action in any court of competent jurisdiction. The
civil action shall be filed by the local treasurer
within 5 years from the date of assessment (Sec. 194,
LGC).
NOTE: The LGU files an ordinary suit for the
collection of sum of money before the MTC, RTC or
CTA depending upon the jurisdictional amount.
Q: May regular court issue injunction to restrain
LGUs from collecting taxes?
A: YES. The LGC does not specifically prohibit an
injunction enjoining the collection of local taxes
unlike in the NIRC where there is an express
prohibition. Nevertheless, the Court noted that
injunctions enjoining the collection of local taxes are
frowned upon and should therefore be exercised
with extreme caution.
Prescriptive Period for Local Taxes (Sec. 194,
LGC)
A. Assessment
GR: Within 5 years from the date they become
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
432
due.
NOTE: No action for collection of such
taxes, fees, or charges, whether
administrative or judicial, shall be
instituted after the expiration of such
period.
XPN:In case of fraud or intent to evade the
payment of taxes, fees, or charges, the
assessment may be made 10 years from
discovery of fraud or intent to evade payment.
B. Collection
Within 5 years from date of assessment by
administrative or judicial action.
Grounds for the suspension of the running of the
prescriptive period for assessment and
collection of local taxes: [PRO]
a. The treasurer is legally prevented from making
the assessment or collection;
b. The taxpayer requests for a reinvestigation and
executes a waiver in writing before the
expiration of the period within which to assess
or collect; and
c. The taxpayer is out of the country or otherwise
cannot be located (Sec. 194, LGC).
Remedies available to taxpayer after
assessment
a. Protest of assessment (Sec. 195, LGC)
Within 60 days from the receipt of the notice of
assessment, the taxpayer may file a written
protest with the local treasurer; otherwise, the
assessment shall become final and executory.
The local treasurer shall decide the protest
within 60 days from the time of its filing.
The taxpayer shall have 30 days from the
receipt of the denial of the protest or from the
lapse of the 60-day prescribed period within
which to appeal with the court of competent
jurisdiction.
NOTE: In case of an illegal assessment where
the assessment was issued without authority,
exhaustion of administrative remedies is not
necessary and the taxpayer may directly resort
to judicial action. The taxpayer shall file a
complaint for injunction before the RTC to
enjoin the local government unit from
collecting real property taxes (City of Lapu-Lapu
v. PEZA, G.R. No. 187853, November 26, 2014).
b. Claim for refund of tax credit (Sec. 196, LGC)
 JUDICIAL REMEDIES
Prior to a judicial action for recovery of tax
erroneously or illegally collected, a written
claim for refund or credit must first be filed with
the local treasurer.
In any case, the judicial action for claim for
refund or credit must be made within 2 years
from the date of the payment of such tax, fee, or
charge, or from the date the taxpayer is entitled
to a refund or credit.
Civil cases
Q: What are the ways by which the civil tax
liability of a taxpayer is enforced by the
government through civil actions?
A:
1. By filing a civil case for the collection of sum of
money with the proper regular court.
2. By filing an answer to the petition for review
filed by the taxpayer with the CTA.
Who may Appeal
The following may appeal to the CTA in Division:
Any party adversely affected by a decision,
ruling, or inaction of the:
a. CIR on disputed assessments or claims for
refund of internal revenue taxes;
b. COC;
c. Secretary of Finance;
d. Secretary of Trade and Industry;
e. Secretary of Agriculture; or
f. RTC in the exercise of its original
jurisdiction.
The following may appeal to the CTA en banc:
Any party adversely affected by a decision or
ruling of:
a. The CTA in Division on a MR or MNT;
b. The CBAA, in the exercise of its appellate
jurisdiction; or
c. The RTC, in the exercise of its appellate
jurisdiction.
Q: Will the CTA acquire jurisdiction even in the
absence of a decision of the CIR or COC?
A:
GR: CTA has jurisdiction only, if there is a decision
of the CIR or COC.
XPNs:
433
1. If COC has not rendered a decision and the suit
is about to prescribe;
Reason: If the taxpayer waits, then his right of
action prescribes.
2. Deemed Denial / Inaction of the CIR in a refund
of illegally or erroneously collected tax and the
2-year prescriptive period is about to expire or
after the lapse of 120 day period or 90-day
period (for claims for refund 2018 onwards
under TRAIN) to decide in case of refund of
unutilized input VAT; or
Reason: The taxpayer would be left at the mercy
of the Commissioner, who by his delay leaves
the taxpayer without any positive and
expedient relief from the courts.
3. Deemed denial / inaction - where the CIR has
not acted upon a protested assessment within
180 days from submission of all relevant
documents supporting the protest, the taxpayer
adversely affected by the inaction may appeal to
the CTA within 30 days from the lapse of the
180 day period.
Q: On January 15, 1996, a taxpayer received an
assessment for an internal revenue tax
deficiency. On February 10, 1996, he filed a
petition for review with the CTA. Could the Tax
Court entertain the petition?
A: NO. Before a taxpayer can avail of judicial remedy
he must first exhaust administrative remedies by
filing a protest within 30 days from receipt of the
assessment.
It is the Commissioner's decision on the protest
that gives the Tax Court jurisdiction over the case
provided that the appeal is filed within 30 days from
receipt of the Commissioner's decision. An
assessment by the BIR is not the Commissioner's
decision from which a petition for review may be
filed with the CTA. Rather, it is the action taken by
the Commissioner in response to the taxpayer’s
protest on the assessment that would constitute the
appealable decision (Sec. 7, RA 1125).
Q: Under the above factual setting, the taxpayer,
instead of questioning the assessment he
received on January 15, 1996 paid, on March 1,
1996 the "deficiency tax" assessed, the taxpayer
requested a refund from the Commissioner by
submitting a written claim on March 1, 1997. It
was denied. The taxpayer, on March 15, 1997,
filed a petition for review with the CA. Could the
petition still be entertained? (1997 Bar)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
A: NO. The petition for review cannot be
entertained by the CA since decisions of the
Commissioner on cases involving claim for tax
refunds are within the exclusive and primary
jurisdiction of the CTA (Sec. 7, RA 1125).

Mode of Appeal

In appeals to the CTA in Division:

1. By filing a Petition for Review under a

procedure analogous to that provided for under
Rule 42 of the ROC, within 30 days from the
receipt of the decision or ruling or from the
expiration of the period fixed by law or inaction
of the CIR on disputed assessments or claim for
refund of internal revenue taxes erroneously or
illegally collected, the COC, the Secretary of
Finance, the Secretary of Trade & Industry, the
Secretary of Agriculture, and the RTC in the
exercise of their original jurisdiction.

NOTE: The 30-day period to appeal decisions of

the RTC to CTA is extendible (SM Land v. City of
Manila, G.R. No. 197151, October 22, 2012).

In case of disputed assessments, inaction of

the CIR within the 180-day period shall be
deemed a denial, thus, appealable via a petition
for review to the CTA within 30 days from
receipt of copy of decision. Should the taxpayer
opt to await the final decision of the CIR beyond
the 180-day period, appeal to the CTA should be
made within 30 days after receipt of copy of
such decision.

In case of inaction of the CIR on claims for

refund of internal revenue taxes erroneously
or illegally collected under Sec. 204(C) and 229
of the NIRC, the 30-day period to file the
petition for review before the CTA after the
lapse of 180 days must be within the 2-year
period prescribed by law from payment of tax.
However, the 2-year period is not jurisdictional
and may be suspended for reasons of equity and
other special circumstances.

In claims for refund for unutilized input VAT

payments, 2-year period does not refer the
filing of judicial claim with the CTAbut to the
filing of the administrative claim with the CIR
(CIR v. San Roque power Corporation, G.R. No.
187485, February 12, 2013). The taxpayer will
always have 30 days to file the judicial claim
regardless of his action or inaction (CIR v.
Mindanao II Geothermal Partnership, G.R. No.
191498, January 15, 2014).

UNIVERSITY OF SANTO TOMAS

2019 GOLDEN NOTES
434
 JUDICIAL REMEDIES

Summary of Rule Laid Down in Mindanao II Geothermal Partnership case

NOTE: 90-day period to decide the claim for refund for VAT under TRAIN

Type of claim Inaction Appeal

Disputed assessments
Claims for refund of
internal revenue taxes
erroneously paid
Claims for unutilized
input VAT
Inaction within 180-day period is a
deemed denial
Inaction within the 2 year
prescriptive period (from date of
payment).
Inaction within 120-day or 90-day
period (as the case may be) is a
deemed denial.2-year period refers
to institution of administrative
claim, and it is jurisdictional
Appealable 30 days to CTA from receipt
of denial
Appealable 30 days to CTA from receipt
of denial provided it is within 2 years
from date of payment.2-year period is not
jurisdictional.
Appealable 30 days to CTA from receipt
of denial or from the lapse of the 120 day
period to decide.

Remedy of a party affected by a ruling or
decision of the CTA Division
The adverse party may file a MR or MNT before the
same Division of the CTA within 15 days from notice
thereof.
However in criminal cases, the general rule
applicable in regular courts on matters of
prosecution and appeal shall apply.
In appeals to the CTA en banc:
1. By filing a Petition for Review under a
procedure analogous to that provided for under
Rule 43 of the ROC, within 15 days from receipt
of decision or resolution of the Court in Division
on a MR or MNT. Upon proper motion and the
payment of the full amount of the docket and
other lawful fees and deposit for costs before
the expiration of the reglementary period
herein fixed, the Court may grant an additional
period not exceeding 15 days from the
expiration of the original period within which to
file the petition for review.
2. By filing a Petition for Review under a
procedure analogous to that provided for under
Rule 43 of the ROC, within 30 days from a
decision or ruling of the CBAA or the RTC in the
exercise of their appellate jurisdiction (Sec. 4,
Rule 8, RRCTA).
Remedy of a party affected by a decision or
ruling of the CTA en banc
The adverse party may file a Petition for Review on
Certiorari under Rule 45 of the ROC, through a
verified petition before the Supreme Court, within 15
days from receipt thereof (Sec. 1, Rule 16, RA 9282).
NOTE: The MR or MNT filed before the Court shall
be deemed abandoned if, during its pendency, the
movant shall appeal to the SC (Sec. 1, Rule 16, R.A.
9282).
30-day Prescriptive Period for Appeal with the
CTA
1. It runs from the date the taxpayer receives the
appealable decision or 30 days after the lapse of
180 days within which the BIR should act.
The two periods are mutually exclusive (RCBC v.
CIR, G.R. No. 168498, June 16, 2006).
2. It is jurisdictional and mandatory (CIR v. First
Express Pawnshop Company, Inc., G.R. No.
172045-46, June 16, 2009).
3. It is non-extendible (Filipinas Investment and
Finance Corporation v. CIR, G.R. No. L-23501, May
16, 1967).
After the 30-day period, an assessment may no
longer be disputed through the simple expedient of
paying the protested tax and by subsequently
claiming it as a refund within the period of two
years from date of payment (Sec. 3, Rule 8, RRCTA).
Q: Does the motion for reconsideration toll the
30-day period to appeal to the CTA?
A: NO. A motion for reconsideration of the denial of
the administrative protest does not toll the 30-day
period to appeal to the CTA (Fishwealth Canning
Corporation vs. CIR, G.R. No. 179343, January 21,
2010).
Q: A Co., a Philippine corporation, received an
income tax deficiency assessment from the BIR
on May 5, 1995. On May 31, 1995, A Co. filed its

UNIVERSITY OF SANTO TOMAS

435 FACULTY OF CIVIL LAW
 LAW ON TAXATION
protest with the BIR. On July 30, 1995, A Co.
submitted to the BIR all relevant supporting
documents. The CIR did not formally rule on the
protest but on January 25, 1996, A Co. was
served a summons and a copy of the complaint
for collection of the tax deficiency filed by the
BIR with the RTC. On February 20, 1996, A Co.
brought a Petition for Review before the CTA:
The BIR contended that the Petition is
premature since there was no formal denial of
the protest of A Co. and should therefore be
dismissed. (2002, 1999 Bar)
Does the CTA have jurisdiction over the case?
A: YES. The CTA has jurisdiction over the case
because this qualifies as an appeal from the
Commissioner's decision on disputed assessment.
When the Commissioner decided to collect the tax
assessed without first deciding on the taxpayer's
protest, the effect of the Commissioner’s action of
filing a judicial action for collection is a decision of
denial of the protest, in which event the taxpayer
may file an appeal with the CTA (Dayrit v. Cruz, L-
39910, Sept. 26, 1988).
Q: Does the RTC have jurisdiction over the
collection case filed by the BIR? Explain.
A: NO. The filing of an appeal with the CTA has the
effect of divesting the RTC of jurisdiction over the
collection case. There is no final, executory and
demandable assessment which can be enforced by
the BIR, once a timely appeal is filed.
Q: A taxpayer received a tax deficiency
assessment of P1.2 Million from the BIR
demanding payment within 10 days; otherwise,
it would collect through summary remedies. The
taxpayer requested for a reconsideration
stating the grounds therefor. Instead of
resolving the request for reconsideration, the
BIR sent a Final Notice before Seizure to the
taxpayer.
May this action of the CIR be deemed a denial of
the request for reconsideration of the taxpayer
to entitle him to appeal to the CTA? Decide with
reasons. (2005 Bar)
A: YES. The Final Notice before Seizure constitutes
as a decision on a disputed or protested assessment,
hence, appealable to the CTA. The Final Notice
before Seizure should be considered as the CIR’s
decision of disposing the request for
reconsideration. The content and tenor of the letter
itself supports the theory that it was the BIR's final
act regarding the request for reconsideration (CIR v.
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
436
Isabela Cultural Corporation, G.R. No. 135210, July
11, 2001).
NOTE: A final demand letter for payment of
delinquent taxes may be considered a decision on a
disputed or protested assessment.
Effect of the Appeal (2004, 2010 Bar)
GR: An appeal to the CTA shall not suspend payment,
levy, distraint and/or sale of any property of
taxpayer for the satisfaction of his tax liability.
XPN: However, when in the opinion of the CTA, the
collection of tax may jeopardize the interest of the
government and/or the taxpayer, the Court may
suspend or restrain collection of tax and require the
taxpayer either to:
1. To deposit the amount claimed; or
2. To file a surety bond for not more than
double the amount of the tax due (Sec. 11,
R.A. 1125).
Q: On June 1, 2003, Global Bank received a final
notice of assessment from the BIR for deficiency
documentary stamp tax in the amount of P5
Million. On June 30, 2003, Global Bank filed a
request for reconsideration with the
Commissioner of Internal Revenue. The
Commissioner denied the request for
reconsideration only on May 30, 2006, at the
same time serving on Global Bank a warrant of
distraint to collect the deficiency tax. If you were
its counsel, what will be your advice to the bank?
Explain. (2006 Bar)
A: The denial for the request for reconsideration is
the final decision of the CIR. I would advise Global
Bank to appeal the denial to the CTA within 30 days
from receipt. I will further advise the bank to file a
motion for injunction with the CTA to enjoin the
Commissioner from enforcing the assessment
pending resolution of the appeal. While an appeal to
the CTA will not suspend the payment, levy,
distraint, and/or sale of any property of the
taxpayer for the satisfaction of its tax liability, the
CTA is authorized to give injunctive relief if the
enforcement would jeopardize the interest of the
taxpayer, as in this case, where the assessment has
not become final (Lascona Land Co. v. CIR, CTA Case
No. 5777, January 4, 2000).
Q: RR disputed a deficiency tax assessment and
upon receipt of an adverse decision by the CIR,
filed an appeal with the CTA. While the appeal is
pending, the BIR served a warrant of levy on the
real properties of RR to enforce the collection of
 JUDICIAL REMEDIES
the disputed tax. Granting arguendo that the BIR
can legally levy on the properties, what could RR
do to stop the process? Explain briefly. (2004
Bar)
A: RR should file a motion for injunction with the
CTA to stop the administrative collection process.
An appeal to the CTA shall not suspend the
enforcement of the tax liability, unless a motion to
that effect shall have been presented in court and
granted by it on the basis that such collection will
jeopardize the interest of the taxpayer or the
Government (Pirovano v. CIR, 14 G.R. No. L-19865,
July 31, 1965).
Q: Globesmart Services, Inc. received a FAN with
FLD from the BIR for deficiency income tax, VAT,
and withholding tax for the taxable year 2016
amounting to P48 million. Globesmart filed a
protest against the assessment, but the CIR
denied the protest. Hence, Globesmart filed a
petition for review in the CTA with an urgent
motion to suspend the collection of tax.
After hearing, the CTA Division issued a
resolution granting the motion to suspend but
required Globesmart to post a surety bond
equivalent to the deficiency assessment within
15 days from notice of the resolution.
Globesmart moved for the partial
reconsideration of the resolution and for the
reduction of the bond to an amount it could
obtain. The CTA Division issued another
resolution reducing the amount of the surety
bond to P24 million. The latter amount was still
more than the net worth of Globesmart Services,
Inc. as reported in its audited financial
statements.
a. May the collection of taxes be suspended?
b. Is the CTA Division justified in requiring
Globesmart to post a surety bond as a
condition for the suspension of the
deficiency tax collection? (2017 Bar)
A:
a. YES. As provided by RA No. 1125, as amended
by RA No. 9282, that when in the opinion of the
Court the collection by the aforementioned
government agencies may jeopardize the
interest of the Government and/ or the
taxpayer, the Court any stage of the proceeding
may suspend the said collection and require the
taxpayer either to deposit the amount claimed
or to file a surety bond for not more than double
the amount with the Court.
437
b. NO. The Supreme Court, in the case of
Tridharma Marketing Corporation v. CTA (G.R.
No. 215950, June 20, 2016), cited the case of
Pacquiao v. CTA (G.R. No. 213394, April 6, 2016)
where it ruled that the CTA should first conduct
a preliminary hearing for the proper
determination of the necessity of a surety bond
or the reduction thereof. In the conduct of its
preliminary hearing, the CTA must balance the
scale between the inherent power of the State
to tax and its right to prosecute perceived
transgressors of the law, on one side; and the
constitutional rights of petitioners to due
process of law and the equal protection of the
laws, on the other. In this case, the CTA failed to
consider that the amount of the surety bond
that it is asking Globesmart to pay is more than
its net worth. Thus, it is necessary for the CTA
to first conduct a preliminary hearing to give
taxpayer an opportunity to prove its inability to
come up with such amount.
Injunction not available to restrain collection
Collection of taxes should not be enjoined except
upon clear showing of a right to an exemption.
Reason: Lifeblood theory (Northern Lines Inc. v. CA,
G.R. No. L-41376-77, June 29, 1988).
GR: Collection of internal revenue taxes and
customs duties cannot be enjoined. Even an appeal
to the CTA shall not suspend the payment, levy,
distraint and sale of taxpayer’s property as a rule.
XPNs: However, the CTA is empowered to suspend
the collection of internal revenue taxes and custom
duties in cases pending appeal only when:
1. in the opinion of the court the collection by the
BIR may jeopardize the interest of the
government and/ or taxpayer; and
2. the taxpayer is willing to deposit the amount
being collected or to file a surety bond for more
than double the amount of the tax to be fixed by
the court (Sec. 11, RA 1125).
NOTE: The CTA may issue injunction only in the
exercise of its appellate jurisdiction (CIR v. Yuseco,
G.R. No. L-12518, October 28, 1961).
Requisites for suspension of collection of tax:
1. There is an appeal to the CTA from a decision of
the CIR;
2. In the opinion of the CTA, the collection may
jeopardize the interest of the government
and/or the taxpayer;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
3. The taxpayer may be required to deposit the
amount claimed or to file a surety bond for not
more than double the amount with the Court
(Sec. 11, RA 1125); and
4. That the appeal is not frivolous or dilatory.
NOTE: The motion for the suspension of the
collection of tax shall be verified and shall state
clearly and distinctly the facts and the grounds
relied upon in support of the motion (Sec. 4, Rule 10,
RRCTA).
Exceptions to the requirement of posting of
bond
1. Prescription of administrative action for
collection
Collector of Internal Revenue cannot, after 3
years from the time the taxpayer has filed his
income tax returns or from the time when he
should have filed the same, make any summary
collection of the deficiency income taxes
demanded thru administrative methods and
that the warrant of distraint and levy as well as
the contemplated sale at public auction of the
properties of the taxpayer are null and void
being as they are in violation of Sec. 51 (d) of the
NIRC. (Collector v. Avelino, 100 Phil. 327 [1956]).
2. Method of collection contrary to law
CTA has ample authority to issue injunctive
writs to restrain the collection of tax and to
even dispense with the deposit of the amount
claimed or the filing of the required bond,
whenever the method employed by the CIR in
the collection of tax jeopardizes the interests
of a taxpayer for being patently in violation of
the law (Sps. Pacquiao v. CTA, G.R. No. 213394,
April 06, 2016).
It would certainly be an absurdity on the part of
the CTA to declare that the collection by the
summary methods of distraint and levy was
violative of the law, and then, on the same
breath, require the petitioner to deposit or file
a bond as a pre-requisite of the issuance of a
writ of injunction (Collector v. Zulueta, G.R. No.
L-8840, February 8, 1957).
NOTE: The prohibition on the issuance of a writ of
injunction to enjoin the collection of taxes is applied
only to national internal revenue taxes, not to local
taxes (Angeles City v. Angeles Electric Corp., G.R. No.
166134, June 29, 2010).
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
438
Q: In the investigation of the withholding tax
returns of AZ Medina Security Agency (AZ
Medina) for the taxable years 1997 and 1998, a
discrepancy between the taxes withheld from its
employees and the amounts actually remitted to
the government was found. Accordingly, before
the period of prescription commenced to run,
the BIR issued an assessment and a demand
letter calling for the immediate payment of the
deficiency withholding taxes in the total amount
of P250, 000.00. Counsel for AZ Medina
protested the assessment for being null and void
on the ground that no pre-assessment notice
had been issued. However, the protest was
denied. Counsel then filed a petition for
prohibition with the CTA to restrain the
collection of the tax.
Will the special civil action for prohibition
brought before the CTA under Sec. 11 of R.A, No.
1125 prosper? Discuss your answer. (2002 Bar)
A: NO. The special civil action for prohibition will
not prosper because the CTA has no jurisdiction to
entertain the same. The power to issue writ of
injunction provided for under Section 11 of RA 1125
is only ancillary to its appellate jurisdiction. The
CTA is not vested with original jurisdiction to issue
writs of prohibition or injunction independently of
and apart from an appealed case. The remedy is to
appeal the decision of the BIR (Collector v. Yuseco, L-
12518, October 28, 1961).
Taking of evidence
CTA may receive evidence in the following cases:
1. In all cases falling within the original
jurisdiction of the CTA in division pursuant
to Sec. 3, Rule 4 of RRCTA.
2. In appeals in both civil and criminal cases
where the court grants new trial pursuant
to Sec. 2, Rule 53 and Sec. 12, Rule 124 of
the ROC.
Persons authorized to take evidence:
1. Justice of the CTA
It may be made motu proprio or upon proper
motion, when:
a. The determination of a question of fact
arises at any stage of the proceedings;
b. The taking of an account is necessary; or
c. The determination of an issue of fact
requires the examination of a long account
(Sec. 3, Rule 12, RRCTA).
2. Court official
 JUDICIAL REMEDIES
a. Clerk of court;
b. Division clerk of court;
c. their assistants who are members of the
Philippine Bar; and
d. Court attorney (Sec. 4, Rule 12, RRCTA).
NOTE: The taking of evidence by Court
official applies only in default or ex parte
hearings, or where the parties agree in
writing.
It shall be for the sole purpose of marking,
comparison with the original, and
identification by witnesses of such
documentary evidence.
The court official have no power to rule on
objections to any question or to the
admission of exhibits, which objections
shall be resolved by the Court upon
submission of his report and the transcripts
within 10 days from termination of the
hearing (Sec. 4, Rule 12, RRCTA).
Q: How are evidence taken in the proceedings
before the CTA?
A: In case of voluminous documents or long
accounts the party who desires to introduce in such
evidence must, upon motion and approval by the
Court, refer the voluminous documents to an
independent CPA for the purpose of presenting:
1. A summary of the invoices or receipts and the
amount of taxes paid and
2. A certification of the independent CPA attesting
to the correctness of the contents of the
summary after making an examination,
evaluation and audit of voluminous receipts,
invoices or long accounts (Sec. 5, Rule 12,
RRCTA).
Motion for Reconsideration or New Trial
Any aggrieved party may seek a reconsideration or
new trial of any decision, resolution or order of the
Court within 15 days from the date he received
notice of the decision, resolution or order of the
Court in question. The adverse party may file an
opposition to the MR or MNT within 10 days after
receipt of a copy of such MR or MNT (Secs. 1 and 2,
Rule 15, RRCTA).
Grounds for filing a Motion for New Trial
1. Fraud, accident, mistake or excusable
negligence [FAME] which ordinary prudence
could not have guarded against and by reason
of which such aggrieved party has probably
439
been impaired in his rights; or
2. Newly discovered evidence, which he could not,
with reasonable diligence, have discovered and
produced at the trial and, which, if presented,
would probably alter the result.
A motion for new trial shall include all grounds then
available and those not included shall be deemed
waived (Sec. 5, Rule 15, RRCTA).
Effect of filing a Motion for Reconsideration or
New Trial
The filing of the MR or MNT shall suspend the
running of the period within which an appeal may
be perfected (Sec. 4, Rule 15, RRCTA).
NOTE: No second MR or MNT shall be allowed (Sec.
7, Rule 15, RRCTA).
The motion shall be in writing stating its grounds; a
written notice of which shall be served by the
movant on the adverse party. A motion on the
ground of FAME shall be supported by affidavits of
merits, while a motion on the ground of newly
discovered evidence shall be supported by affidavits
of the witnesses by whom such evidence is expected
to be given, or by duly authenticated documents
which are proposed to be introduced in evidence.
Failure to comply shall render the MR or MNT “pro
forma”, which shall not suspend the period.Also, if
the MR is directed to the Secretary of Finance it shall
not suspend the period.
Appeal to the CTA en banc
Q: May a decision or resolution of the CTA in
Division be appealable directly to the CTA en
banc in its exercise of its exclusive appellate
jurisdiction?
A: NO. The petition for review of a decision or
resolution of the Court in Division must be preceded
by the filing of a timely motion for reconsideration or
new trial with the Division (Sec. 1, Rule 8, RRCTA).
NOTE: The word “must” clearly indicates the
mandatory (not directory) of the nature of a
requirement.
Q: On May 15, 2013, CCC, Inc. received the Final
Decision on Disputed Assessment issued by the
CIR dismissing the protest of CCC, Inc. and
affirming the assessment against said
corporation. On June 10, 2013, CCC, Inc. filed a
Petition for Review with the CTA in division. On
July 31, 2015, CCC, Inc. received a copy of the
Decision dated July 22, 2015 of the CTA division
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
dismissing its Petition. CCC, Inc. immediately
filed a Petition for Review with the CTA en banc
on August 6, 2015. Is the immediate appeal by
CCC, Inc. to the CTA en banc of the adverse
Decision of the CTA division the proper remedy?
(2015 Bar)
A: NO. CCC, Inc. should first file a motion for
reconsideration with the CTA Division. Petition for
review of a decision or resolution of the Court in
Division must be preceded by the filing of a timely
motion for reconsideration or new trial with the
Division. Before the CTA En Banc could take
cognizance of the petition for review concerning a
case falling under its exclusive appellate
jurisdiction, the litigant must sufficiently show that
it sought prior reconsideration or moved for a new
trial with the concerned CTA division.
Q: Asiatrust Development Bank, Inc. (Asiatrust)
received from the CIR Formal Letters of Demand
(FLD) with Assessment Notices for deficiency
internal revenue taxes. Asiatrust timely
protested the assessment notices. Due to the
inaction of the CIR on the protest, Asiatrust filed
before the CTA a Petition for Review praying for
the cancellation of the tax assessments for
deficiency taxes and also claimed that it availed
of the Tax Amnesty Law. The CTA Division
partially affirmed the CIR’s decision, but
declared void some tax assessments for having
been issued beyond the three-year prescriptive
period. CIR filed a Motion for Partial
Reconsideration of the assessments assailing
the CTA Division's finding of prescription. The
CTA Division amended its decision. Unsatisfied,
both parties appealed to CTA En Banc. The CTA
En Banc denied the CIR' s appeal for failure to
file a prior motion for reconsideration of the
Amended Decision. The CIR contends that the
CTA En Banc erred in dismissing his appeal for
failing to file a motion for reconsideration on the
Amended Decision as a perusal of the Amended
Decision shows that it is a mere resolution,
modifying the original Decision. Is the
contention of CIR meritorious?
A:NO. Section 1, Rule 8 of the Revised Rules provide
that an appeal to the CTA En Banc must be preceded
by the filing of a timely motion for reconsideration
or new trial with the CTA Division. Failure to do so
is a ground for the dismissal of the appeal as the
word "must" indicates that the filing of a prior
motion is mandatory, and not merely directory. Due
to this procedural lapse, the Amended Decision has
attained finality insofar as the CIR is concerned. The
CIR, therefore, may no longer question the merits of
the case before the SC. (Asiatrust Development Bank,
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
440
Inc. vs. CIR, G.R. No. 201530, April 19, 2017, Del
Castillo, J.)
Q: Judy Anne was criminally charged for filing a
fraudulent income tax return before the CTA.
Thereafter, she filed a Motion to Quash in the
CTA First Division which has been denied. The
Motion for reconsideration filed was also
denied. A Motion for Extension of time was filed
for her Petition for review in CTA en banc.
Thereafter, the Petition for Review before the
CTA en banc was filed. Both the motion for
extension of time and the petition for review
were denied by the CTA en banc on the ground
that a Motion to Quash is an interlocutory order
therefore, unappealable. Was the dismissal by
the CTA en banc proper?
A: YES. The Petitioner cannot file a Petition for
Review before the CTA en banc to appeal the
resolution of the CTA First Division denying her
Motion to Quash. The Resolution is interlocutory,
thus, unappealable (Santos v. People, G.R. No.
173176, August 26, 2008).
The CTA en banc has jurisdiction over final order
or judgment but not over interlocutory orders
issued by the CTA in division. Considering that no
appeal can be taken from interlocutory CTA Orders,
the aggrieved party may file an appropriate special
civil action under Rule 65 pursuant to Sec. 1, Rule 41
of the ROC, as in this case (CIR v. CTA and CBK Power
Co. Ltd., G.R. Nos. 203054-55, July 29, 2015).
Q: In response to an adverse BIR ruling against
it and as reviewed by the Secretary of Finance,
GGG, Inc. filed with the Court of Appeals a
Petition for Review under Rule 43 of the ROC.
The CA, however, dismissed the petition for lack
of jurisdiction declaring that it is the CTA which
has jurisdiction over the issues raised. Before
which Court should GGG, Inc. seek recourse from
the adverse ruling of the Secretary of Finance in
the exercise of the latter's power of review?
(2015 Bar)
A: GGG should file its petition with the CTA. The
Supreme Court held that the jurisdiction to review
the rulings of the Commissioner of Internal Revenue
pertains to the CTA which has the authority to issue,
among others, a writ of certiorari in the exercise of
its appellate jurisdiction.
Q: The City of Liwliwa assessed local business
taxes against Talin Company. Claiming that
there is double taxation, Talin Company filed a
Complaint for Refund or Recovery of Illegally
and/or Erroneously-collected Local Business
 JUDICIAL REMEDIES
Tax; Prohibition with Prayer to Issue
Temporary Restraining Order and Writ of
Preliminary Injunction with the RTC. The RTC
denied the application for a Writ of Preliminary
Injunction. Since its motion for reconsideration
was denied, Talin Company filed a special civil
action for certiorari with the CA. The
government lawyer representing the City of
Liwliwa prayed for the dismissal of the petition
on the ground that the same should have been
filed with the CTA. Talin Company, through its
lawyer, Atty. Frank, countered that the CTA
cannot entertain a petition for certiorari since it
is not one of its powers and authorities under
existing laws and rules. Decide. (2014 Bar)
A: The petition for certiorari before the CA must be
dismissed, since such petition should have been
filed with the CTA. As stated in City of Manila v.
Caridad H. Grecia-Cuerdo (G.R. No. 175723, February
2, 2014), the CTA has the power to determine
whether or not there has been grave abuse of
discretion amounting to lack or excess of
jurisdiction on the part of the RTC in issuing
interlocutory orders in cases falling within the
CTA’s exclusive appellate jurisdiction. The CTA
therefore has jurisdiction to issue writs of certiorari
in such cases. Furthermore, its authority to
entertain petitions for certiorari questioning
interlocutory orders issued by the RTC is included
in the powers granted by the Constitution and
inherent in the exercise of its appellate jurisdiction.
Q: Can the CTA en banc entertain a petition for
annulment of a decision of the CTA Division?
A: NO. Annulment of judgment implies power by a
superior court over a subordinate one, as provided
for in Rule 47 of the Rules of Court, wherein the
appellate court may annul a decision of the regional
trial court, or the latter court may annul a decision
of the municipal or metropolitan trial court. The
laws creating the CTA and expanding its jurisdiction
(RA Nos. 1125 and 9282) and the court’s own rules
of procedure (the Revised Rules of the CTA) do not
sanction such a procedure.
The CTA sitting En Banc cannot annul a decision of
one of its divisions. The divisions are not considered
separate and distinct courts but are divisions of one
and the same court; there is no hierarchy of courts
within the Court of Tax Appeals, for they each
remain as one court notwithstanding that they also
work in divisions. By analogy, the Supreme Court
sitting En Banc is not an appellate court vis-à-vis its
divisions, and it exercises no appellate jurisdiction
over the latter. Thus, it appears contrary to these
features that a collegial court, sitting En Banc, may
441
be called upon to annul a decision of one of its
divisions which had become final and executory, for
it is tantamount to allowing a court to annul its own
judgment and acknowledging that a hierarchy exists
within such court. (CIR v. Kepco Ilijan Corporation,
G.R. No. 199422, June 21, 2016)
Petition for Review on Certiorari to the Supreme
Court
Effect of the appeal
The MR or MNT shall be filed before the Court shall
be deemed abandoned if, during its pendency, the
movant shall appeal to the Supreme Court (Sec. 1,
Rule 16, RRCTA).
Q: Who may file an appeal to the Supreme Court
by petition for review on certiorari?
A: A party adversely affected by a decision or ruling
of the Court en banc may appeal therefrom by filing
with the Supreme Court a verified petition for
review on certiorari within 15 days from receipt of
a copy of the decision or resolution, as provided in
Rule 45 of the ROC.
If such party has filed a MR or MNT, the period
herein fixed shall run from the party’s receipt of a
copy of the resolution denying the MR or MNT (Sec.
1, Rule 16, RRCTA).
Q: Does the CTA have jurisdiction over an action
to collect on a bond used to secure payment of
taxes?
A: NO. An action filed by the BOC against a bonding
company to collect on a bond used to secure
payment of taxes is not a tax collection case but
rather a simple case for enforcement of a
contractual liability. Hence, appellate jurisdiction
over the case properly lies with the CA rather than
the CTA (Phil. British Assurance Co., Inc. v. Republic
of the Phil., G.R. No. 185588 , Feb. 2, 2010).
Q: Can the SC take cognizance of a petition for
annulment of a decision of the CTA Division or of
the CTA en banc?
A: NO. A direct petition for annulment of a judgment
of the CTA to the Supreme Court, meanwhile, is
unavailing, for the same reason that there is no
identical remedy with the High Court to annul a final
and executory judgment of the Court of Appeals. RA
No. 9282, Section 1 puts the CTA on the same level
as the Court of Appeals, so that if the latter’s final
judgments may not be annulled before the SC, then
the CTA’s own decisions similarly may not be so
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 LAW ON TAXATION
annulled. And more importantly, annulment of
judgment is an original action, yet, it is not among
the cases enumerated in the Constitution’s Article
VIII, Section 5 over which the SC exercises original
jurisdiction. Annulment of judgment also often
requires an adjudication of facts, a task that the
Court loathes to perform, as it is not a trier of facts.
(CIR v. Kepco Ilijan Corporation, G.R. No. 199422, June
21, 2016)
Criminal cases
Institution and prosecution of criminal actions
All criminal actions before the Court in Division in
the exercise of its original jurisdiction shall be
instituted by the filing of an information in the name
of the People of the Philippines.
In criminal actions involving violations of the NIRC
and other laws enforced by BIR, the CIR must
approve their filing.
In criminal actions involving violations of the TCCP
and other laws enforced by the BOC, the COC must
approve their filing (Sec. 2, Rule 9, RRCTA).
All criminal actions will be under the direction and
control of the public prosecutor.
NOTE: The institution of the criminal action shall
interrupt the running of the period of prescription
(Ibid).
Rule on the institution of civil action with
criminal action (2010 Bar)
The criminal action and the corresponding civil
action for the recovery of civil liability for taxes and
penalties shall be deemed jointly instituted in the
same proceeding. The filing of the criminal action
shall necessarily carry with it the filing of the civil
action. No right to reserve the filing of such civil
action separately from the criminal action shall be
allowed or recognized (Sec. 11, Rule 9, RRCTA).
Q: How are criminal actions prosecuted?
A: In criminal actions involving violation of the NIRC
or other laws enforced by the BIR, and violations of
the TCCP or other laws enforced by the BOC, the
prosecution may be conducted by their respective
duly deputized legal officers (Sec. 3, Rule 9, RRCTA).
Q: After filing an Information for violation of
Section 254 of the NIRC (Attempt to Evade or
Defeat Tax) with the CTA, the Public Prosecutor
manifested that the People is reserving the right
UNIVERSITY OF SANTO TOMAS
2019 GOLDEN NOTES
442
to file the corresponding civil action for the
recovery of the civil liability for taxes. As
counsel for the accused, comment on the
People's manifestation. (2015 Bar)
A: I will move for the denial of the manifestation.
Any provision of law or the ROC to the contrary
notwithstanding, the criminal action and the
corresponding civil action for the recovery of civil
liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly
determined in the same proceeding by the CTA, the
filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action,
and no right to reserve the filing of such civil action
separately from the criminal action shall be
recognized.
Appeal and Period to Appeal
1. An appeal to the Court in criminal cases decided
by a RTC in the exercise of its original
jurisdiction shall be taken by filing a notice of
appeal pursuant to Sections 3(a) and 6, Rule
122 of the ROC within 15 days from receipt of a
copy of the decision or final order with the court
which rendered the final judgment or order
appealed from and by serving a copy upon the
adverse party. The Court in Division shall act on
the appeal.
2. An appeal to the CTA en banc in criminal cases
decided by the Court in Division or the RTC in
the exercise of their appellate jurisdiction shall
be taken by filing a petition for review as
provided in Rule 43 of the ROC within 15 days
from receipt of a copy of the decision or
resolution appealed from (Sec. 9, Rule 9,
RRCTA).
Q: Who shall act as a representative of the
People and the Government in the criminal
action?
A: The Solicitor General shall represent the People
of the Philippines and government officials sued in
their official capacity in all cases brought to the CTA
in the exercise of its appellate jurisdiction. He may
deputize the legal officers of the BIR in cases
brought under the NIRC or other laws enforced by
the BIR, or the legal officers of the BOC in cases
brought under the TCCP or other laws enforced by
the BOC, to appear in behalf of the officials of said
agencies sued in their official capacity: Provided,
however, such duly deputized legal officers shall
remain at all times under the direct control and
supervision of the Solicitor General (Sec. 10, Rule 9,
RRCTA).
 JUDICIAL REMEDIES

Petition for Review on Certiorari to the Supreme
Court
A party adversely affected by a decision or ruling of
the Court en banc may appeal therefrom by filing
with the SC a verified petition for review on
certiorari within 15 days from receipt of a copy of
the decision or resolution, as provided in Rule 45 of
the ROC. If such party has filed a motion for
reconsideration or for new trial, the period herein
fixed shall run from the party’s receipt of a copy of
the resolution denying the motion for
reconsideration or for new trial (Sec. 1, Rule 16,
RRCTA).
Effect of the appeal
The motion for reconsideration or for new trial filed
before the Court shall be deemed abandoned if,
during its pendency, the movant shall appeal to the
Supreme Court (Sec. 1, Rule 16, RRCTA).
Q: Can direct recourse to the SC be made even if
the case is under the exclusive jurisdiction of
CTA?
jurisdiction, appeal to the en banc by a petition
for review under Rule 43 within 15 days from
the receipt of decision.
2. In case the decision of the Division was
adverse: File an MR/MNT with the same
division within 15 days from the receipt of the
decision.
The MR or the MNT is a condition precedent
before bringing the case to the CTA en banc
(COC vs. Marina Sales, G.R. No. 183868, November
22, 2010).
3. In case the resolution of the Division on the
MR is still adverse: File a petition for review
with the CTA en banc under Rule 43 within 15
days from the receipt of the decision. The same
rule applies for criminal cases.
4. In case the decision of the CTA en banc is still
adverse: File a review on certiorari with the SC
under Rule 45 within 15 days from receipt of
the decision (Ingles, 2015).

A: NO. Such violates the principle of the hierarchy of

courts. In exceptional cases, however, SC
entertained direct recourse to it when “dictated by
public welfare and the advancement of public
policy, or demanded by the broader interest of
justice, or the orders complained of were found to
be patent nullities, or the appeal was considered as
clearly an inappropriate remedy (Banco de Oro v.
Republic, G.R. No. 198756, January 13, 2015 citing
Chong v. Dela Cruz, G.R. No. 184948, July 21, 2009)

SUMMARY OF PROCEDURES IN APPEALING A

DECISION TO THE CTA AND BEYOND

1. Appeal within 30 days from receipt of

decision or period of inaction of the CIR, COC,
Secretary of Finance, or the CBAA or the RTC

GR: Appeal to the CTA Division by a petition for

review under Rule 42 within 30 days.

XPN: In case of decisions of the CBAA or RTC in

the exercise of its appellate jurisdiction, appeal
to EN BANC by a petition for review under Rule
43.

In criminal cases, appeal from the decision of the

RTC decided in the exercise of its original
jurisdiction is via a notice of appeal filed within
15 days from the receipt of decision.

If the RTC acted in the exercise of its appellate

UNIVERSITY OF SANTO TOMAS

443 FACULTY OF CIVIL LAW
 LAW ON TAXATION
MATRIX OF CTA JURISDICTION
EXCLUSIVE APPELLATE JURISDICTION TO REVIEW BY APPEAL
Decisions of the Commissioner on Internal Revenue in cases involving:
a. Disputed assessments;
b. Refunds of internal revenue taxes, fees or other charges and penalties imposed thereto;
c. Other matters arising under NIRC or other laws (under BIR).
Inaction by the Commissioner of Internal Revenue in cases involving:
a. Disputed assessments;
b. Refunds of internal revenue taxes, fees or other charges and penalties imposed thereto;
c. Other matters arising under NIRC or other laws (under BIR), where the NIRC provides a specific
period for action, in which case the inaction shall be deemed a denial.
Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or
resolved by them in the exercise of their original or appellate jurisdiction.
Decisions of the Commissioner of Customs in cases involving:
a. Liability for customs duties, fees or other money charges;
b. Seizure, detention or release of property affected;
c. Fines, forfeitures or other penalties in relation thereto;
d. Other matters arising under Customs Law or other laws (under BOC)
Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over
cases involving the assessment and taxation of real property originally decided by the provincial or city
board of assessment appeals;
Decisions of the Secretary of Finance on custom cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of
the TCCP (now Sec. 1128 of the Custom Modernization & Tariff Act of 2016, as amended).
Decisions of the Secretary of Trade and Industry, in the case of non-agricultural product, commodity or
article, and the Secretary of Agriculture in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Sections 301 and 302, respectively of the TCCP, and
safeguard measures under RA 8800, where either party may appeal the decision to impose or not to
impose said duties.
Decisions of the Secretary of Agriculture in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Secs. 301 and 302, respectively of the TCCP, and
safeguard measures under RA 8800, where either party may appeal the decision to impose or not to
impose said duties.
EXCLUSIVE ORIGINAL JURISDICTION
Criminal Case/s: Civil Case/s:
1. Violations of: 1. Tax collection cases involving final and
a. NIRC, executory assessments for taxes, fees, charges
b. TCCP, and penalties where the principal amount of
c. Other laws administered by BIR and BOC, taxes and fees, exclusive of charges and
…where the principal amount of taxes and fees, penalties claimed is P1M and above.
exclusive of charges and penalties claimed is P1M
and above.
EXCLUSIVE APPELLATE JURISDICTION
Criminal Case/s: Civil Case/s:
1. Violations of : 1. Tax collection cases from judgments,
a. NIRC resolutions or orders of the RTC in tax cases
b. TCCP, originally decided by them.
c. Other laws administered by BIR and BOC
…originally decided by the regular court where the
principal amount of the taxes is less than P1M or
no special amount claimed.
2. Judgments, resolutions or orders of the RTC in 2. Tax collection cases from judgments,
tax cases originally decided by them. resolutions or orders of the RTC in the
3. Judgments, resolutions or orders of the RTC in exercise of its appellate jurisdiction over tax
the exercise of its appellate jurisdiction over cases originally decided by the MeTC, MTC
tax cases originally decided by the MeTC, MTC and MCTC.
and MCTC.
4.

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 JUDICIAL REMEDIES

FLOWCHART – MODE OF APPEAL

FIG 1. PROCEDURE FOR ASSESSMENT:

Legend:
= Discretionary upon the Commissioner on Internal Revenue
= Period to file
= Days within receipt of the Notice

*Note: The prescriptive period for “assessment” shall be 10 years from the discovery of none filing or false or
fraudulent return.

Taxpayer filed the return on time and it

is not fraudulent or false

1. An omission or failure to file the Deadline of Submission of Tax Payment of Taxes

return Return
2. If there was a return filed, it was 1) BIR
fraudulent, or; 2) Authorized Agent Bank
3. The return was false a. Bank Debit System
b. Over-the-counter Tax
Transfers
PRELIMINARY ASSESSMENT NOTICE c. Credit Facilities
(PAN) d. Tax Debit Memo

FILE A REPLY

w/in 15 days from receipt of PAN

REPEAT FAILED TO FILE A REPLY FILED A REPLY,

PAN DISAGREES WITH
FINDINGS OF DEFICIENCY
TAX

DECLARE TAXPAYER IN DEFAULT

FINAL ASSESSMENT NOTICE (FAN) AND

DEMAND TO PAY

w/in 30 days from receipt of FAN

Pay/Collection of Taxes File a PROTEST (Taxpayer)

UNIVERSITY OF SANTO TOMAS

445 FACULTY OF CIVIL LAW
 LAW ON TAXATION
FIG 2. PROTEST UNDER THE NIRC

FINAL ASSESSMENT NOTICE (FAN) & Demand to pay

Within 30 days from receipt of FAN

FILE A PROTEST
2 KINDS OF PROTEST
1. Request for reconsideration – 60 period NOT
applicable
2. Request for reinvestigation – suspends action of
CIR for 60 days from filing of protest

TAXPAYER MUST SUBMIT COMPLETE SET OF DOCUMENTS

W/IN 60 DAYS
(Request for reinvestigation)

CIR IS GIVEN 180 DAYS TO DECIDE

PROTEST INACTION FOR 180 TAXPAYER OPTED TO WAIT FOR CIR’s

DENIED DAYS DECISION
Within 30 days from denial/lapse of 180
days/decision

APPEAL TO CTA DIVISION

Within 15 days from receipt of

decision/resolution/order

MOTION FOR RECONSIDERATION OR NEW

TRIAL WITH THE CTA DIVISION

Within 15 days from receipt of

decision/resolution/order

APPEAL TO CTA EN BANC

Within 15 days from receipt of

decision/resolution/order

APPEAL TO SUPREME COURT

--- = Period to file

*Note: The prescriptive period for “assessment” shall be 10 years from the discovery of thenon–filing or the filing
of a false or fraudulent return.

UNIVERSITY OF SANTO TOMAS

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 JUDICIAL REMEDIES

FIG 3. ELEVATION OF DISPUTES TO CTA DIVISION, CTA EN BANC, AND THE SUPREME COURT

UNIVERSITY OF SANTO TOMAS

447 FACULTY OF CIVIL LAW