Professional Documents
Culture Documents
TAXATION
VER. 2010.06.12
copyrighted 2010
How to use the “BAR STAR NOTES.” The “BAR STAR NOTES” in the form of questions and
answers as well as textual discussion were specially prepared by Prof. Domondon for the exclusive
use of Bar Reviewees who attended his 2010 Lectures on TAXATION held at the University of the
Philippines. Included in the presentation are doctrines contained in Supreme Court decisions up to April
2010.
The purpose of the ‘BAR STAR NOTES” is to provide the Bar Reviewee with a handy review material
which serves as “memory-joggers” for the September 12, 2010 Bar Examinations in Taxation. The author
tries to second guess what would be included in the Bar Exams using statistical analysis. The actual Bar
questions may not be formulated in the same manner as the “BAR STAR NOTES”. However, the
doctrines tested in the Bar would in all probability be included in these Notes.
If pressed for time, the author suggests that the reader should focus his attention on the following:
Nice to know
Should know
Must know and master
It is further suggested that the reader should merely browse those without stars.
WARNING:
These materials are copyrighted and/or based on the writer’s books on Taxation and future revisions. It
is prohibited to reproduce any part of these Notes in any form or any means, electronic or mechanical,
including photocopying without the written permission of the author. Unauthorized users shall not be
prosecuted but SHALL BE SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER
PASS THE BAR OR WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of the author.
TAXATION
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
7. Distinguish a tax from a license fee. SUGGESTED ANSWER: The following are
the distinctions: a. Purpose: Tax imposed for revenue while license fee for regulation. Tax for
general public purposes while license fee for regulatory purposes only. b. Basis:
Tax imposed under power of taxation while license fee under police power. c.
Amount: In taxation, no limit as to amount while license fee limited to cost of the license and the
expenses of police surveillance and regulation. d. Time of payment: Taxes
normally paid after commencement of business while license fee before. e. Effect of payment:
Failure to pay a tax does not make the business illegal while failure to pay license fee makes business
illegal. f. Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for
lawful consideration while a license fee may be surrendered with or without consideration. (Cooley on
Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)
8. How may the power to tax be utilized to carry out the social justice program of
our government ? SUGGESTED ANSWER: The compensatory purpose of taxation is to
implement the social justice provisions of the constitution through the progressive system of taxation,
which would result to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement
Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
In recent years, the increasing social challenges of the times expanded the scope of the state activity,
and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare and similar objectives.
(Batangas Power Corporation v. Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004
citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
10. Taxation distinguished from police power. Taxation is distinguishable from police
power as to the means employed to implement these public goals. Those doctrines that are unique to
taxation arose from peculiar considerations such as those especially punitive effects (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540,
August 3, 2005) as the power to tax involves the power to destroy and the belief that taxes are lifeblood of
the state. (Ibid.) taxes being the lifeblood of the government, their prompt and certain availability is of the
essence.”
These considerations necessitated the evolution of taxation as a distinct legal concept from police
power. (Ibid.)
11. How the power of taxation may be used to implement power of eminent
domain. Tax measures are but ”enforced contributions exacted on pain of penal sanctions” and “clearly
imposed for public purpose.” In most recent years, the power to tax has indeed become a most effective
tool to realize social justice, public welfare, and the equitable distribution of wealth. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)
Establishments granting the 20% senior citizens discount may claim the discounts granted to senior
citizens as tax deduction based on the net cost of the goods sold or services rendered: Provided, That
the cost of the discount shall be allowed as deduction from gross income for the same taxable year that
the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value
added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National Internal Revenue Code, as
amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded
Senior Citizens Act of 2003, Sec. 4 (a)]
12. What are the three basic principles of a sound tax system? Explain each
briefly. SUGGESTED ANSWER: The canons of a sound tax system, also known as the
characteristics or, principles of a sound tax system, are used as a criteria in order to determine whether a
tax system is able to meet the purposes or objectives of taxation. They are:
a. Fiscal adequacy.
b. Administrative feasibility.
c. Theoretical justice.
13. What are the elements or characteristics of a tax ? SUGGESTED ANSWER:
a. Enforced contribution.
b. Generally payable in money.
c. Proportionate in character.
d. Levied on persons, property or exercise of a right or privilege.
e. Levied by the state having jurisdiction.
f. Levied by the legislature.
g. Levied for a public purpose.
h. Paid at regular periods or intervals.
INHERENT LIMITATIONS
5. Only those directly affected have locus standi to impugn the alleged
encroachment by the executive department into the legislative domain of Congress.
a. Only those who shall be directly affected by such executive encroachment, such as for example
employees who would find themselves subject to disciplinary powers that may be imposed under the
questioned Executive Order as they have a direct and specific interest in raising the substantive issue
therein (Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No.
157509, January 18, 2005) or employees who are going to be demoted, transferred or otherwise affected
by any personnel action subject o the rule on exhaustion of administrative remedies.
b. Moreover, and if at all, only Congress, can claim any injury from the alleged executive
encroachment of the legislative function to amend, modify and/or repeal laws. (Automotive Industry
Workers Alliance (AIWA),etc., et al., supra, citing Gonzales v. Narvasa, G. R. No. 140835, August
14,2000, 337 SCRA 733, 741)
6. Locus standi being merely a matter of procedure, have been waived in certain
instances where a party who is not personally injured may be allowed to bring suit.
The following are examples of instances where suits have been brought by parties who have not have
been personally injured by the operation of a law or any other government act but by concerned citizens,
taxpayers or voters who actually sue in the public interest:
a. Taxpayer’s suits to question contracts entered into by the national government or government-
owned or controlled corporations allegedly in contravention of the law.
b. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or
that public money is being deflected to any improper purpose, or that there is a wastage of public funds
through the enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919,
February 14, 2007)
7. The VAT law provides that, the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%) after any of the following conditions have been satisfied.
“(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national
government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).”
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of the
discretion as to the execution of the law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power when it describes what job must be
done, who must do it, and what is the scope of his authority. In the above case the Secretary of Finance
becomes merely the agent of the legislative department, to determine and declare the even upon which
its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance,
who is not under the conditions acting as the execute alter ego or subordinate. . [Abakada Guro Party
List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing various
cases]]
10. Taxing power of the local government is limited. The taxing power of local
governments is limited in the sense that Congress can enact legislation granting tax exemptions.
While the system of local government taxation has changed with the onset of the 1987 Constitution, the
power of local government units to tax is still limited.
While the power to tax by local governments may be exercised by local legislative bodies, no longer
merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5,
Article X of the Constitution, the basic doctrine on local taxation remains essentially the same, “the power
to tax is [still] primarily vested in the Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc.,
G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v.
Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)
11. Further amplification by Bernas of the local government’s power to tax. “What
is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the
doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer
municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no
longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to
the fiscal powers of local governments has been reduced to the authority to impose limitations on
municipal powers. Moreover, these limitations must be “consistent with the basic policy of local
autonomy.” The important legal effect of Section 5 is thus to reverse the principle that doubts are
resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal
fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that
taxes imposed by local government must be for a public purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the local unit to pass.” (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)
15. Ensite, Ltd.. is a Canadian corporation not doing business in the Philippines.
It holds 40% of the shares of Philippine Stamping Plant, Inc.,., a Philippine company
while the 60% is owned by Fred Corporation, a Filipino-owned Philippine corporation.
Ensite Co. also owns 100% of the shares of Susanto Co., an Indonesian company
which has a duly licensed Philippine branch. Due to worldwide restructuring of the
Ensite Ltd.,. group, Ensite Ltd.,. decided to sell all its shares in Philippine Stamping
Plant, Inc. and Susanto Co. The negotiations for the buy-out and the signing of the
Agreement of Sale were all done in the Philippines. The Agreement provides that the
purchase price will be paid to Ensite Ltd’s bank account in the U.S. and that title to
the Philippine Stamping Plant, Inc. and Susanto Co. shall be transferred to General
Co., in Toronto Canada where stock certificates will be delivered. General Co. seeks
your advice as to whether or not it will subject the payments of the purchase price to
withholding tax. Explain your advice. SUGGESTED ANSWER: The payments of the
purchase price will be subject to withholding tax. Considering that all the activities (sales) occurred within
the Philippines, the income is considered as income from within, subject to Philippine income taxation.
Ensite, Ltd. being a foreign corporation is to be taxed on its income derived from sources within the
Philippines. 16. Ensite, Ltd. is a
Canadian corporation, which has a duly licensed Philippine branch engage in trading
activities in the Philippines. Ensite, Ltd.. also invested directly in 40% of the shares
of stock of Philippine Stamping Plant, Inc.., a Philippine corporation. These shares
are booked in the Head Office of Ensite, Ltd.. and are not reflected as assets of the
Philippine branch. In 2009, Philippine Stamping Plant, Inc.. declared dividends to its
stockholders. Before remitting the dividends to Ensite Ltd.,., Philippine Stamping
Plant, Inc. Co. seeks your advice as to whether it will subject the remittance to
withholding tax. There is no need to discuss WT rates, if applicable. Focus your
discussion on what is the issue. SUGGESTED ANSWER: Philippine Stamping
Plant, Inc.. should subject the remittance to withholding tax.. Since Philippine Stamping Plant. is a
Philippine corporation, its shares of stock have obtained a business situs in the Philippines, hence the
dividends are considered as income from within. Ensite. Ltd., being a foreign corporation, should be
subject to tax on its income from within.
17. Philippine Stamping Plant, Inc., a Philippine corporation, has an executive
Larry who is a Filipino citizen. Philippine Stamping Plant, Inc,. has a subsidiary in
Malaysia (Kuala Lumpur Manufacturing, Inc.) and will assign Larry for an indefinite
period to work full time for Kuala Lumpur Manufacturing, Inc.. Larry will bring his
family to reside in Malaysia and will lease out his residence in the Philippines. The
salary of Larry will be shouldered 50% by Philippine Stamping Plant, Inc.. while the
other 50% plus housing, cost of living and educational allowances of Larry’s
dependents will be shouldered by Kuala Lumpur Manufacturing, Inc.. Philippine
Stamping Plant, Inc.. will credit the 50% of Larry’s salary to his Philippine bank
account. Larry will sign the contract of employment in the Philippines. He will also
be receiving rental income for the lease of his Philippine residence.
Are these salaries, allowances and rentals subject to Philippine income tax?
Explain briefly. SUGGESTED ANSWER: The salaries and allowances of Larry, being
derived from labor or personal services rendered outside of the Philippines is considered as income from
without. Since Larry is an OCW, then he is to be taxed only on his income derived from within the
Philippines such as the rentals on his Philippine residence, and not on his income from without.
18. Obama Airlines, Inc., a foreign airline company which does not maintain any
flight to and from the Philippines sold air tickets in the Philippines, through a general
sales agent, relating to the carriage of passengers and cargo between two points,
both outside the Philippines.
a. Is Obama, Inc., subject to income taxes on the sale of the tickets ?
SUGGESTED ANSWER: Yes. The source of income which is taxable is that “activity” which produced
the income. The ”sale of tickets” in the Philippines is the activity that determines whether such income is
taxable in the Philippines.
The tickets exchanged hands here and payments for fares were also made here in Philippine currency.
The situs of the source of payments is the Philippines. the flow of wealth proceeded from and occurred,
within the Philippine territory, enjoying the protection accorded by the Philippine Government. In
consideration of such protection, the flow of wealth should share the burden of supporting the
government. [Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC), 149
SCRA 395]
Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in
the Philippines and their income from sales of passage documents here is income from within the
Philippines. Thus, the off-line air carrier liable for the 32% (now 30%) tax on its taxable income. [South
African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010 citing Commissioner of
Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987,
149 SCRA 395]
b. Supposing that Obama, Inc., sells tickets outside of the Philippines for
passengers it carry from Gold City, South Africa to the Philippines but returns to
South Africa without any cargo or passengers. Would it then be subject to any
Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any income tax
because the activity which generated the income (the sale of the tickets) was performed outside of the
Philippines.
It is not subject to the carrier’s tax based on gross Philippine billings because there were no lifts
that originated from the Philippines. “Gross Philippine Billings” refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of
the ticket or passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)]
c. Would your answer be the same if Obama, Inc. sold tickets outside of the
Philippines for travelers who are going to picked up by Obama, Inc., planes from the
Diosdado Macapagal Intl. Airport at Clark, Angeles, Pampanga, bound for Nairobi,
Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the carrier’s tax based
on Gross Philippine Billings. (GPB).
“Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or passage document.”
[NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur from the
Philippines, income is included in GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. No.
180356, February 16, 2010)
19. No improper delegation of legislative authority to tax. The power to tax is inherent
in the State, such power being inherently legislative, based on the principle that taxes are a grant of the
people who are taxed, and the grant must be made by the immediate representatives of the people; and
where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal
Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
CONSTITUTIONAL LIMITATIONS
6. Requisites for valid classification. All that is required of a valid classification is that it be
reasonable, which means that a. the classification should be based on substantial distinctions which
make for real differences,
b. that it must be germane to the purpose of the law;
c. that it must not be limited to existing conditions only; and
d. that it must apply equally to each member of the class.
The standard is satisfied if the classification or distinction is based on a reasonable foundation or
rational basis and is not palpably arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No.
166715, August 14, 2008]
7. Equal protection does not demand absolute equality. It merely requires that all
persons shall be treated alike, under like circumstances and conditions, both as to the privileges
conferred and liabilities enforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
It is imperative to duly establish that the one invoking equal protection and the person to which she is
being compared were indeed similarly situated, i.e., that they committed identical acts for which they were
charged with the violation of the same provisions of the NIRC; and that they presented similar arguments
and evidence in their defense - yet, they were treated differently. (Santos, supra)
8. Tests to determine validity of classification. The United States Supreme Court has
established different tests to determine the validity of a classification and compliance with the equal
protection clause. The recognized tests are:
a. The traditional (or rational basis) test.
b. The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class) test.
9. The traditional (or rational basis) test used in order to determine the validity of
classification. The classification is valid if it is rationally related to a constitutionally permissible state
interest.
The complainant must prove that the classification is “invidous,” “wholly arbitrary,” or ”capricious,”
otherwise the classification is presumed to be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61;
McGowan v. Maryland, 366 U.S. 420; United States Railroad Retirement Board v. Fritz, 449 U.S. 166)
10. The strict scrutiny (or compelling interest) test used in order to determine the
validity of the classification. Government regulation that intentionally discriminates against a
“suspect class” such as racial or ethnic minorities, is subject to strict scrutiny and considered to violate the
equal protection clause unless found necessary to promote a compelling state interest.
A classification is necessary when it is narrowly drawn so that no alternative, less burdensome means
is available to accomplish the state interest.
Thus, it was held that denial of free public education to the children of illegal aliens imposes an
enormous and lasting burden based on a status over which the children have no control is violative of
equal protection because there is no showing that such denial furthers a “substantial” state goal. (Plyler v.
Doe, 457 U.S. 202)
11. The intermediate level of scrutiny (or quasi-suspect class) test used in order
to determine the validity of he classification. Classification based on gender or legitimacy are
not “suspect,” but neither are they judged by the traditional or rational basis test.
Intentional discriminations against members of a quasi-suspect class violate equal protection unless
they are substantially related to important government objectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows, but not widowers, has been held valid
for it furthers the state policy of cushioning the financial impact of spousal loss upon the sex for whom that
loss usually imposes a heavier burden. (Kahn v. Shevin, 416 U.S. 351)
12. Equality and uniformity of taxation may mean the same as equal protection .
In such a case, the terms would mean that all subjects and objects of taxation which are similarly situated
shall be subject to the same burdens and granted the same privileges without any discrimination
whatsoever.
13. It is inherent in the power to tax that the State be free to select the subjects
of taxation, and it has been repeatedly held that, "inequalities which result from a singling out of one
particular class of taxation, or exemption, infringe no constitutional limitation." (Commissioner of Internal
Revenue, et al., v. Santos, et al., 277 SCRA 617)
9. Benjie is a law-abiding citizen who pays his real estate taxes promptly. Due to
a series of typhoons and adverse economic conditions, an ordinance is passed by
Soliman City granting a 50% discount for payment of unpaid real estate taxes for the
preceding year and the condonation of all penalties on fines resulting from the late
payment.
Arguing that the ordinance rewards delinquent tax payers and discriminates
against prompt ones, Benjie demands that he be refunded an amount equivalent to
one-half of the real property taxes he paid. The municipal attorney rendered an
opinion that Benjie cannot be reimbursed because the ordinance did not provide for
such reimbursement. Benjie files suit to declare the ordinance void on the ground
that it is a class legislation. Will his suit prosper ? Explain your answer briefly.
SUGGESTED ANSWER: No. There is no class legislation because there is no violation of the equal
protection suit. There is a valid classification between those who already paid their taxes and those who
have not. Furthermore, the taxing authority has the prerogative to select the subjects and objects of
taxation, including granting a 50% discount in the payment of unpaid real estate taxes, and the
condonation of all penalties on fines resulting from late payment.
10. The rewards law to tax collectors does not violate equal protection. The equal
protection clause recognizes a valid classification, that is, a classification that has a reasonable
foundation or rational basis and not arbitrary. With respect to RA 9335, it’s expressed public policy is the
optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the
subject of the law is the revenue- generation capability and collection of the BIR and the BOC, the
incentives and/or sanctions provided in the law should logically pertain to the said agencies. Moreover,
the law concerns only the BIR and the BOC because they have the common distinct primary function of
generating revenues for the national government through the collection of taxes, customs duties, fees and
charges.
Indubitably, such substantial distinction is germane and intimately related to the purpose of the law.
Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the
demands of equal protection. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715,
August 14, 2008)
11. The prosecution of one guilty person while others equally guilty are not
prosecuted, however, is not, by itself, a denial of the equal protection of the laws .
Where the official action purports to be in conformity to the statutory classification, an erroneous or
mistaken performance of the statutory duty, although a violation of the statute, is not without more a
denial of the equal protection of the laws.
The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to
those who are entitled to be treated alike, is not a denial of equal protection unless there is shown to be
present in it an element of intentional or purposeful discrimination. This may appear on the face of the
action taken with respect to a particular class or person, or it may only be shown by extrinsic evidence
showing a discriminatory design over another not to be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12. Equal protection should not be used to protect commission of crime . While all
persons accused of crime are to be treated on a basis of equality before the law, it does not follow that
they are to be protected in the commission of crime. It would be unconscionable, for instance, to excuse a
defendant guilty of murder because others have murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal laws as to some persons should be
converted into a defense for others charged with crime, the result would be that the trial of the district
attorney for nonfeasance would become an issue in the trial of many persons charged with heinous
crimes and the enforcement of law would suffer a complete breakdown. (Santos v. People, et al, G. R. No.
173176, August 26, 2008)
13. Illustration of double taxation in local taxation. there is indeed double taxation if
Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since
these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of
Manila; (2) for the same purpose – to make persons conducting business within the City of Manila
contribute to city revenues; (3) by the same taxing authority – City of Manila; (4) within the same taxing
jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per
calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or
receipts of the business. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845,
August 4, 2009)
14. A lawful tax on a new subject, or an increased tax on an old one, does not
interfere with a contract or impairs its obligation , within the meaning of the
constitution. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)
17. When withdrawal of a tax exemption impairs the obligation of contracts. The
Contract Clause has never been thought as a limitation on the exercise of the State’s power of taxation
save only where a tax exemption has been granted for a valid consideration. (Smart Communications, Inc. v.
The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008) citing Tolentino v. Secretary of Finance, G. R.
No. 115455, August 25, 1994, 235 SCRA 630, 685) The author opines that since practically all franchises
granted to telecommunications companies are similarly worded that the above doctrine finds application
to the others)
18. The primary reason for the withdrawal of tax exemption privileges granted to
government owned and controlled corporations and all other units of government was that
such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated
enterprises, hence resulting in the need for these entities to share in the requirements of development,
fiscal or otherwise, by paying the taxes and other charges due them. (Philippine Ports Authority v. City of
Iloilo, G. R. No. 109791, July 14, 2003)
19. National Power Corporation (NPC) is of the insistence that it is not subject to
the payment of franchises taxes imposed by the Province of Isabela because all of its
shares are owned by the Republic of the Philippines. It is thus, an instrumentality of
the National Government which is exempt from local taxation. As such it is not a
private corporation engaged in “business enjoying franchise”
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v. City of Davao,
et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local
government unit, to impose and collect a local franchise tax because the Local Government Code has
withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to
impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them.
20. “In lieu of all taxes” in the franchise of ABS-CBN does not exempt it from
local franchise taxes. It does not expressly provide what kind of taxes ABS-CBN is exempted from.
It is not clear whether the exemption would include both local, whether municipal, city or provincial, and
national tax. Whether the “in lieu of all taxes provision” would include exemption from local tax is not
unequivocal.
The right to exemption from local franchise tax must be clearly established and cannot be made out of
inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the “in lieu
of all taxes” provision should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is
in fact covered by the exemption so claimed but has failed to do so . (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another
telecommunications company Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds application to the others.)
21. “In lieu of all taxes” refers to national internal revenue taxes and not to local
taxes. The “in lieu of all taxes” clause applies only to national internal revenue taxes and not to local
taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case
involving a demand for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax,
imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to
local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee
shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code."
Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner
of Internal Revenue or his duly authorized representative in accordance with the National Internal
Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by
the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is
for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and
not to local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause
does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes,
Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress
could have used the language in Section 9(b) of Clavecilla's old franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by
any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly
exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all
taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule
on strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers
only to national and not to local taxes. [Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No.
155491, September 16, 2008 citing Philippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil.
571, 594 (2003)]
NOTES AND COMMENTS: The author opines that the above finds application to all telecommunications
companies.
22. The “in lieu of all taxes” clause in the franchise of ABS-CBN has become
functus officio with the abolition of the franchise tax on broadcasting companies with
yearly gross receipts exceeding Ten Million Pesos. The clause “in lieu of all taxes” does not
pertain to VAT or any other tax. It cannot apply when what is paid is a tax other than a franchise tax.
Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million
pesos has been abolished, the “in lieu of all taxes” clause has now become functus officio, rendered
inoperative. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another
telecommunications company. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds application to the others.)
23. Double taxation in its generic sense, this means taxing the same subject or
object twice during the same taxable period. In its particular sense, it may mean direct
duplicate taxation, which is prohibited under the constitution because it violates the concept of equal
protection, uniformity and equitableness of taxation. Indirect duplicate taxation is not anathematized by
the above constitutional limitations.
the same subject or object twice, by the same taxing authority, etc., there is no violation of the equal protection clause
because all subjects and objects that are similarly situated are subject to the same burdens and granted the same
privileges without any discrimination whatsoever,
The presence of the 2 element, taxing all of the subjects and objects for the first time, without taxing all for the
nd
second time, results to discrimination among subjects and objects that are similarly situated, hence violative of the
equal protection clause.
25. Double taxation a valid defense against the legality of a tax measure if the
double taxation is direct duplicate taxation, because it would violate the equal protection clause
of the constitution.
26. When an item of income is taxed in the Philippines and the same income is
taxed in another country, this would be known as international juridical double
taxation which is the imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C.
Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)
28. Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability,
an allowance against the tax itself, or a deduction from what is owned.
A tax credit reduces the tax due, including –whenever applicable – the income tax that is determined
after applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)
29. A tax deduction is defined as a subtraction fro income for tax purposes, or an amount that is
allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax
which is due.
A tax deduction reduces the income that is subject to tax in order to arrive at taxable income.
(Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)
30. The petitioners allege that the R-VAT law is constitutional because the
Bicameral Conference Committed has exceeded its authority in including provisions
which were never included in the versions of both the House and Senate such as
inserting the stand-by authority to the President to increase the VAT from 10% to
12%; deleting entirely the no pass-on provisions found in both the House and Senate
Bills; inserting the provision imposing a 70% limit on the amount of input tax to be
credited against the output tax; and including the amendments introduced only by
Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax.
Thus, there was a violation of the constitutional mandate that revenue bills shall
originate exclusively from the House of Representatives.
Are the contentions of such weight as to constitute grave abuse of discretion
which may invalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the changes and
modifications made by the Bicameral Conference Committee were germane to subjects of the provisions
referred to it for reconciliation.
The Bicameral Conference Committee merely exercised the judicially recognized long-standing
legislative practice of giving said conference committee ample latitude for compromising differences
between the Senate and the House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,
September 1, 2005 and companion cases]
31. The VAT while regressive is NOT violative of the mandate to evolve a
progressive system of taxation. Do you agree ? The mandate to Congress is not to prescribe
but to evolve a progressive system of taxation. Otherwise, sales taxes which perhaps are the oldest form
of indirect taxes, would have been prohibited with the proclamation of the constitutional provision. Sales
taxes are also regressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1,
2005 and companion cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235
SCRA 630]
32. All revenues and assets of non-stock, non-profit educational institutions that
are actually, directly and exclusively used for educational purposes shall be exempt
from taxation.
OTHER CONCEPTS
2. Compensation takes place by operation of law, where the local government and the taxpayer
are in their own right reciprocally debtors and creditors of each other, and that the debts are both due and
demandable, in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443)
8. Strict interpretation of tax exemption laws. Taxes are what civilized people pay for
civilized society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are
construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax
exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise
stated, taxation is the rule, exemption is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008 citing Mactan Cebu International Airport Authority v. Marcos, G.R.
No. 120082, September 11, 1996, 261 SCRA 667, 680) The burden of proof rests upon the party claiming the
exemption to prove that it is in fact covered by the exemption so claimed. (Quezon City, supra citing Agpalo,
R.E., Statutory Construction, 2003 ed., p. 301)
9. Rationale for strict interpretation of tax exemption laws. The basis for the rule on
strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential
treatment and foster impartiality, fairness and equality of treatment among taxpayers. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) He who claims an exemption from his
share of common burden must justify his claim that the legislature intended to exempt him by
unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They
must be expressed in the clearest and most unambiguous language and not left to mere implications. It
has been held that “exemptions are never presumed the burden is on the claimant to establish clearly his
right to exemption and cannot be made out of inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule and exemption the exception, the intention to
make an exemption ought to be expressed in clear and unambiguous terms. (Quezon City, supra citing
Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)
10. Why are tax exemptions are strictly construed against the taxpayer and
liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State.
11. In case of a tax overpayment, where the BIR’s obligation to refund or set-off
arises from the moment the tax was paid under the principle of solutio indebeti.
(Commissioner of Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
12. But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001
which held that in order for the rule on solutio indebeti to apply it is an essential condition that the
petitioner must first show that its payment of the customs duties was in excess of what was required by
the law at the time the subject 16 importations of milk and milk products were made. Unless shown
otherwise, the disputable presumption of regularity of performance of duty lies in favor of the Collector of
Customs.
13. Strict interpretation of a tax refund that partakes of the nature of a tax does
not apply to tax refund based on erroneous payment or where there is no law that
authorizes collection of the tax. There is parity between tax refund and tax exemption only when
the former is based either on a tax exemption statute or a tax refund statute. (Commissioner of Internal
Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on
the legal principle which underlies all quasi-contracts abhorring a person’s unjust enrichment at the
expense of another. [Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay, Sr., 178 Phil. 482 (1979);
Puyat & Sons v. City of Manila, et al., 117 Phil. 985 (1963)]
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. (Commissioner, supra citing Civil Code, Arts.
2142, 2154 and 2155)
The Government is not exempt from the application of solutio indebiti. (Commissioner, supra citing
Commissioner of Internal Revenue v. Fireman’s Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA
315, 324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of Manila, supra)
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. (Commissioner, supra citing
Commissioner of Internal Revenue v. Tokyo Shipping Co., supra at 338) If the State expects its taxpayers to
observe fairness and honesty in paying their taxes, it must hold itself against the same standard in
refunding excess (or erroneous) payments of such taxes. It should not unjustly enrich itself at the
expense of taxpayers. [Commissioner, supra citing AB Leasing and Finance Corporation v. Commissioner of
Internal Revenue, 453 Phil. 297 in turn citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510,
518 (2000)] And so, given its essence, a claim for tax refund necessitates only preponderance of evidence
for its approbation like in any other ordinary civil case. (Commissioner, supra)
14. Tax refunds premised upon a tax exemption strictly construed, Tax exemption is
a result of legislative grace. And he who claims an exemption from the burden of taxation must justify his
claim by showing that the legislature intended to exempt him by words too plain to be mistaken.
[Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing
Surigao Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue and Court of Tax Appeals, 119 Phil. 33,
37 (1963)]
The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be
conferred unless the terms under which it is granted clearly and distinctly show that such was the
intention. [Commissioner, supra citing Phil. Acetylene Co. v. Commission of Internal Revenue, et al., 127 Phil. 461,
472 (1967); Manila Electric Company v. Vera, G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao
Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case,
the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the
nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit
and categorical language. The taxpayer must show that the legislature intended to exempt him from the
tax by words too plain to be mistaken. [Commissioner, supra with a note to see Surigao Consolidated Mining Co.
Inc. v. CIR, supra at 732-733; Philex Mining Corp. v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999);
Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-892 (1998); . Commissioner of Internal
Revenue v. Tokyo Shipping Co., Ltd., 314 Phil. 220, 228 (1995)]
16. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to
impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law.
It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax
evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption,
is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority. (Philippine Banking
Corporation, etc., v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)
19. Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion
is the use of illegal means to escape the payment of taxes.
22. Tax sparing is a provision in some tax treaties which provides that the state of residence
allows as credit the amount that would have been paid, as if no reduction has been made. (Vogel, Klaus on
Double Taxation Conventions, Third Edition, p.1255 cited in Segarra, Venice H, Tax Treaties: Trick or treat ?,
Philippine Daily Inquirer, December 6, 2002, p. C5)
There may be instances where a particular income is exempt from taxation in order to encourage
foreign investments which may lead to economic development. If the tax credit method is used, there
would be no more tax to credit since there is no more tax to credit as a result of the tax exemption.
Consequently, when the tax method credit method is applied to these items of income, such incentives
are siphoned off since, in effect, the tax benefits are cancelled out. (Ibid.) Thus, the need for the tax
sparing provision.
1. Rep. Act No. 1405, the Bank Deposits Secrecy Law prohibits inquiry into bank
deposits. As exceptions to Rep. Act No. 1405, the Commissioner of Internal Revenue
is only authorized to inquire into the bank deposits of:
a. a decedent to determine his gross estate; and
b. any taxpayer who has filed an application for compromise of his tax liability by reason of financial
incapacity to pay his tax liability. [Sec. 5 (F), NIRC of 1997]
c. A taxpayer who authorizes the Commissioner to inquire into his bank deposits.
2. Purpose of the NIRC of 1997. Revenue generation has undoubtedly been a
major consideration in the passage of the Tax Code. (Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
3. Purpose of shift from ad valorem system to specific tax system in taxation of
cigarettes. The shift from the ad valorem system to the specific tax system is likewise meant to
promote fair competition among the players in the industries concerned, to ensure an equitable
distribution of the tax burden and to simplify tax administration by classifying cigarettes, among others,
into high, medium and low-priced based on their net retail price and accordingly graduating tax rates.
(Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
TAX ON INCOME
1. The Tax Code has included under the term “corporation” partnerships, no
matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997]
2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing Mertens that the term
partnership includes a syndicate, group, pool, joint venture or other unincorporated organization,
through or by means of which any business, financial operation, or venture is carried on.
1997]
4. Co-heirs who own inherited properties which produce income should not
automatically be considered as partners of an unregistered corporation subject to
income tax for the following reasons:
a. The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns are
derived. There must be an unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 436)
b. 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 been put
by their forebears. (Ibid.)
c. Persons who contribute property or funds to a common enterprise and agree to share the
gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no common stock capital, and no
community of interest as principal proprietors in the business itself from which the proceeds were derived.
(Elements of the Law of Partnership by Floyd R. Mechem, 2 Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of
nd
6. The income from the rental of the house, bought from the earnings of co-
owned properties, shall be treated as the income of an unregistered partnership to be
taxable as a corporation because of the clear intention of the brothers to join together in a venture for
making money out of rentals.
7. Income is gain derived and severed from capital, from labor or from both combined. For
example, to tax a stock dividend would be to tax a capital increase rather than the income.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
8. The term taxable income means the pertinent items of gross income specified in the Tax
Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of
income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997)
11. An insolvent debtor does not realize taxable income from the cancellation or
forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10 ) th
12. The insolvent debtor realizes income resulting from the cancellation or
forgiveness of indebtedness when he becomes solven t. (Lakeland Grocery Co., v.
Commissioner 36 BTA (F) 289)
13. If a creditor merely desires to benefit a debtor and without any consideration
therefor 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.
15. Members of cooperatives not subject to tax on the interest earned from their
deposits with the cooperative . No less than our Constitution guarantees the protection of
cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments for social
justice and economic development. At the same time, Section 10 of Article II of the Constitution declares
that it is a policy of the State to promote social justice in all phases of national development. In relation
thereto, Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include
the commitment to create economic opportunities based on freedom of initiative and self-reliance.
Bearing in mind the foregoing provisions, we find that an interpretation exempting the members of
cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest
earned by deposits) is more in keeping with the letter and spirit of our Constitution. (Dumaguete Cathedral
Credit Coopertive [DCCC)] etc., v. Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)
In closing, cooperatives, including their members, deserve a preferential tax treatment because of the
vital role they play in the attainment of economic development and social justice. Thus, although taxes
are the lifeblood of the government, the State’s power to tax must give way to foster the creation and
growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: “The power of taxation, while
indispensable, is not absolute and may be subordinated to the demands of social justice.” (Ibid., citing
Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), 500 Phil. 586 (2005).
16. The Global system of income taxation is a system employed where the tax system
views indifferently the tax base and generally treats in common all categories of taxable income of the
individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
17. The Schedular system of income taxation is a system employed where the income tax
treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. (Tan
v. del Rosario, Jr., 237 SCRA 324, 331)
18. Under the National Internal Revenue Code the global system is applicable to
taxable corporations and the schedular to individuals.
21. A non-resident alien, who has stayed in the Philippines for an aggregate
period of more than 180 days during any calendar year, shall be considered as a
non-resident alien doing business in the Philippines. Consequently, he shall be subject to
income tax on his income derived from sources from within the Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized deductions including the personal and additional exemptions
subject to the rule on reciprocity.
22. What are considered as de minimis benefits not subject to withholding tax
on compensation income of both managerial and rank and file employees ?
SUGGESTED ANSWER:
a. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the
year;
b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per
semester or P125 per month;
c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than
P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f. Laundry allowance not exceeding P300 per month;
g. Employees achievement awards, e.g. for length of service or safety achievement, which must be
in the form of a tangible persona property other than cash or gift certificate, with an annual monetary
value not exceeding P10,000.00 received by an employee under an established written plan which does
not discriminate in favor of highly paid employees;
h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum;
i. Flowers, fruits, books, or similar items given to employees under special circumstances, e.g. on
account of illness, marriage, birth of a baby, etc.; and
j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic
minimum wage.
The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered
in determining the P30,000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code.
However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be
taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling,
provided, further, that any amount given by the employer as benefits to its employees, whether classified
as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer.
[Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
23. Income subject to “final tax” refers to an income collected through the
withholding tax system. The payor of the income withholds the tax and remits it to the government
as a final settlement of the income tax as a final settlement of the income tax due on said income. The
recipient is no longer required to include the income subjected to a final tax as part of his gross income in
his income tax return.
26. What are the conditions for excluding retirement benefits from gross income,
hence tax-exempt ?
SUGGESTED ANSWER:
a. Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with the employer’s reasonable
private benefit plan approved by the BIR.
b. Retiring official or employee
1) In the service of the same employer for at least ten (10) years;
2) Not less than fifty (50) years of age at time of retirement;
3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The
retiring official or employee should not have previously availed of the privilege under the retirement
plan of the same or another employer. [1 par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]
st
27. What kind of separation (retirement) pay is excluded from gross income,
hence tax-exempt ?
SUGGESTED ANSWER:
a. Any amount received by an official, employee or by his heirs,
b. From the employer
c. As a consequence of separation of such official or employee from the service of the employer
because of
1) Death, sickness or other physical disability; or
2) For any cause beyond the control of said official or employee [Sec. 32 (B) (6) (b), NIRC
of 1997], such as retrenchment, redundancy and cessation of business. [1 par., Sec. 2.78 (B),
st
28. What are the Itemized deductions from gross income and who may avail
of them ?
a. Ordinary and necessary trade, business or professional expenses.
b. The amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayer’s profession, trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in
trade and business, on their gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens
and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in
trade and business, on their gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens
and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in
trade and business, on their gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens
and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
e. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off within
the taxable year, connected with profession, trade or business, not sustained between related parties.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in
trade and business, on their gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens
and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
f. Depreciation or a reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in
trade and business, on their gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens
and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
g. Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually a
natural resource.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in
trade and business, on their gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens
and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
h. Charitable and other contributions. Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts
may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
i. Research and development expenditures treated as deferred expenses paid or incurred by
the taxpayer in connection with his trade, business or profession, not deducted as expenses and
chargeable to capital account but not chargeable to property of a character which is subject to
depreciation or depletion.
Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in
trade and business, on their gross incomes other from compensation income are allowed to deduct these
expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens
and foreign corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
j. Contributions to pension trusts. Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts
may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from
within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
k. Insurance premiums for health and hospitalization. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and business, on their gross
incomes other from compensation income are allowed to deduct these expenses. Nonresident citizens
and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes
from within may also deduct these premiums.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and resident alien on their gross
incomes and from compensation income are allowed to deduct these premiums. Nonresident citizens on
their gross incomes from within may also deduct this expense. Nonresident alien individuals engaged in
trade or business in the Philippines are allowed to deduct these exemptions under reciprocity.
Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed
to deduct this expense.
30. What are the requisites for the deductibility of business expenses ?
SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses:
a. Compliance with the business test:
1) Must be ordinary and necessary;
2) Must be paid or incurred within the taxable year;
3) Must be paid or incurred in carrying on a trade or business.
4) Must not be bribes, kickbacks or other illegal expenditures
b. Compliance with the substantiation test. Proof by evidence or records of the deductions allowed by
law including compliance with the business test.
31. What are the requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and auditing
services ?
SUGGESTED ANSWER:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the taxable year dependent upon the method of
accounting upon the basis of which the net income is computed.
c. it must be supported by receipts, records or other pertinent papers. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)
32. TMG Corporation is issuing the accrual method of accounting. In 2005 XYZ
Law Firm and ABC Auditing Firm rendered various services which were billed by
these firms only during the following year 2006. Since the bills for legal and auditing
services were received only in 2006 and paid in the same year, TMG deducted the
same from its 2006 gross income. The BIR disallowed the deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the professional and legal
fees in the year they were incurred in 2005 and not in 2006 because at the time the services were
rendered in 2005, there was already an obligation to pay them. (Commissioner of Internal Revenue v,
Isabela Cultural Corporation, G. R. No. 172231, February 12, 2007)
NOTES AND COMMENTS:
a. Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R.
No. 172231, February 12, 2007)
The two (2) principal accounting methods for recognition of income are the (a) accrual method; and the
(b) cash method.
b. Recognition of income and expenses under the accrual method of accounting. Amounts of
income accrue where the right to receive them becomes fixed, where there is created an enforceable
liability. Liabilities, are incurred when fixed and determinable in nature without regard to indeterminacy
merely of time of payment.. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No.
172231, February 12, 2007)
The accrual of income and expense is permitted when the all-events test has been met. (Ibid.)
c. All-events test. 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 test does not demand that the amount of such income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain; if its basis is unchangeable, the
test is satisfied where a computation may be unknown, but is not as much as unknowable, within the
taxable year. The amount of liability does not have to be determined exactly,; it must be determined with
“reasonable accuracy” implies something less than an exact or completely accurate amount.
The propriety of an accrual must be judged by the fact 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. (Commissioner of Internal Revenue v, Isabela cultural
Corporation, G. R. No. 172231, February 12, 2007)
d. Under the cash method income is to be construed as income for tax purposes only upon
actual receipt of the cash payment. It is also referred to as the “cash receipts and disbursements method”
because both the receipt and disbursements are considered. Thus, income is recognized only upon
actual receipt of the cash payment but no deductions are allowed from the cash income unless actually
disbursed through an actual payment in cash.
33. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value
of fringe benefits furnished, granted or paid by the employer to the employee, except rank and file
employees. [1 par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
st
35. Fringe benefits that are not subject to the fringe benefits tax:
a. When the fringe benefit is required by the nature of, or necessary to the trade, business or
profession of the employer; or
b. When the fringe benefit is for the convenience or advantage of the employer. [Sec. 32(A), NIRC
of 1997; 1 par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
st
c. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under
any special law;
d. Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
e. Benefits given to the rank and file employees, whether granted under a collective bargaining
agreement or not; and
f. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of
Finance upon recommendation of the Commissioner of Internal Revenue. [1 par., Sec. 32 (C), NIRC of
st
36. De minimis benefits are facilities and privileges (such as entertainment, medical
services, or so-called “courtesy discounts” on purchases), furnished or offered by an employer to his
employees. They are not considered as compensation subject to income tax and consequently to
withholding tax, if such facilities are offered or furnished by the employer merely as a means of promoting
the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as
amended by Rev. Regs. No. 8-2000]
37. Preferred shares are considered capital regardless of the conditions under
which such shares are issued and dividends or “interests” paid thereon are not
allowed as deductions from the gross income of corporations. (Revenue Memorandum
Circular No. 17-71)
38. Bad debts are those which result from the worthlessness or uncollectibility, in whole or in part,
of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income
from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99)
39. Who are related parties ?
SUGGESTED ANSWER: The following are related parties:
a. Members of the same family. The family of an individual shall include only his brothers and
sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants;
b. 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;
c. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with
respect to each trust; or
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]
40. What are the requisites for valid deduction of bad debts from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable;
b. The same must be connected with the taxpayer’s trade, business or practice of profession;
c. The same must not be sustained in a transaction entered into between related parties;
d. The same must be actually charged off the books of accounts of the taxpayer as of the end of the
taxable year; and
e. The debt must be actually ascertained to be worthless and uncollectible during the taxable
year;
f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E) (1), NIRC
of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; Philippine Refining
Corporation v. Court of Appeals, et al., 256 SCRA 667]
g. Must have been reported as receivables in the income tax return of the current or prior years.
(Sec. 103, Rev. Regs. No. 2)
:
41. What is the “tax benefit” rule ?
SUGGESTED ANSWER: The “tax benefit rule” posits that 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.
NOTES AND COMMENTS:
a. If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of
the income tax due from him on account of the said deduction, his subsequent recovery thereof from his
debtor shall be treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
b. If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it
did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his
business operation was a net loss even without deduction of the bad debts written-off), then 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. (Sec. 4, Rev. Regs. 5-99)
42. Depreciation is the gradual diminution in the useful value of tangible property resulting from
ordinary wear and tear and from normal obsolescence. The term is also applied to amortization of the
value of intangible assets the use of which in the trade or business is definitely limited in duration.
by Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec. 35 (B), NIRC of 1997 as amended by
Rep. Act No. 9504]
NOTES AND COMMENTS:
a. It is clear that under the amendment, single individuals may now claim for the additional
exemptions. Furthermore, the concept of head of a family does not find application anymore.
b. “A dependent means
a. a legitimate, illegitimate or legally adopted child
b. chiefly dependent upon and living with the taxpayer
c. if such dependent is
1) not more than twenty-one (21) years of age,
2) unmarried and
3) not gainfully employed or
d. if such dependent,
1) regardless of age
2) is incapable of self-support
3) because of mental or physical defect.” [2 par., Sec. 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended
nd
by Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec. 35 (b), NIRC of 1997, as amended by
Rep. Act No. 9504]
c. It is to be noted that under the NIRC of 1997, as amended by Rep. Act No. 9504, only qualified
dependent children are considered for additional exemptions. Grandparents, parents, as well, as brothers
or sisters, and other collateral relatives are not qualified dependents to be claimed as additional
exemptions.
However, if they are senior citizens they may qualify as additional exemptions under the “Senior
Citizens Law” but not under the NIRC of 1997, as amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents provided for in the National Internal Revenue Code, as
amended, and as such, individual taxpayers caring for them, be they relatives or not shall be accorded
the privileges granted by the Code insofar as having dependents are concerned. [last par. Sec. 5 (a), Rep.
Act No. 7432, as amended by Rep. Act 9257, “The Expanded Senior Citizens Act of 2003”]
47. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected
with his trade or business, and which are not included among the real properties considered as ordinary
assets. (Sec. 2.a, Rev. Regs. No. 7-2003)
The term “capital assets” means property held by the taxpayer (whether or not connected with his
trade or business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. 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, or
c. Property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business, or
d. Property used in the trade or business, of a character which is subject to the allowance for
depreciation; or real property used in the trade or business of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997,
capitalized words, numbering and arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
49. Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in
the inventory of a taxpayer if on hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business; or
c. Real property used in trade or business (i.e. buildings and/or improvements), of a character
which is subject to the allowance for depreciation; or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)
51. Tax treatment of real properties that have been transferred. Real properties
classified as capital or ordinary asset in the hands of the seller/transferor may change their character in
the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee
shall be determined in accordance with the following rules:
a. Real property transferred through succession or donation to the heir or donee who is not
engaged in the real estate business with respect to the real property inherited or donated, and who does
not subsequently use such property in trade or business, shall be considered as a capital asset in the
hands of the heir or donee.
b. Real property received as dividend by stockholders who are not engaged in the real estate
business and who not subsequently use such real property in trade or business shall be treated as capital
assets in the hands of the recipient even if the corporation which declared the real property dividend is
engaged in real estate business.
c. The real property received in an exchange shall be treated as ordinary asset in the hands of
the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a
taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate
business, will use in business the property received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
52. The tax is “imposed upon capital gains presumed to have been realized from
the sale, exchange, or other disposition of real property located in the Philippines,
classified as capital assets.” [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations No. 7-2003 has
defined real property as having “the same meaning attributed to that term under Article 415 of Republic
Act No. 386, otherwise known as the ‘Civil Code of the Philippines.’ (Sec. 2.c, Rev. Regs. No. 7-2003)
53. Transactions covered by the presumed capital gains tax on real property:
a. sale,
b. exchange,
c. or other disposition, including pacto de retro sales and other forms of conditional sales.
[Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement supplied]
d. “ Sale, exchange, or other disposition” includes taking by the government through condemnation
proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121
Phil. 861)
54. In case the mortgagor exercises his right of redemption within one (1) year
from the issuance of the certificate of sale, in a foreclosure of mortgage sale of real property, no capital
gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or
transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
55. In case of non-redemption of the property sold upon a foreclosure of mortgage sale,
the presumed capital gains tax shall be imposed, based on the bid price of the highest bidder but only
upon the expiration of the one year period of redemption provided for under Sec. 6 of Act No. 3135, as
amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-
year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
56. The basis for the final presumed capital gains tax of six per cent (6%) is
whichever is the higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each zone or area as determined by
the Commissioner of Internal Revenue after consultation with competent appraisers both from the
private and public sectors; or
2) the fair market value as shown in the schedule of values of the Provincial and City
Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]
It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital
gains tax. It is the transaction that is taxed not the gain.
57. Holding period not applied to the taxation of the presumed capital gains derived from the
sale of real property considered as capital assets.
58. The tax liability, of individual taxpayers (not corporate), if any, on gains from
sales or other dispositions of real property, classified as capital assets, to the
government or any of its political subdivisions or agencies or to government owned or controlled
corporations shall be determined, at the option of the taxpayer, by including the proceeds as part of gross
income to be subjected to the allowable deductions and/or personal and additional exemptions, then to
the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the final
presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the
NIRC of 1997]
59. The seller of the real property, classified as a capital asset, pays the
presumed capital gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A) (3) in relation
to Sec. 24 (D) (1), both of the NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25 (B) in
relation to Sec. 24 (D) (1), both of the NIRC of 1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
60. Excepted from the payment of the presumed capital gains tax are those
presumed to have been realized from the disposition by natural persons of their
principal place of residence
a. the proceeds of which is fully utilized in acquiring or constructing a new principal residence;
b. within eighteen (18) calendar months from the date of sale or disposition
c. the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from
the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption;
and
d. the said tax exemption can only be availed of once every ten (10) years. [Sec. 24 (D) (2), NIRC of
1997]
ESTATE TAXES
DONOR’S TAXES
5. How are gifts of personal property to be valued for donor’s tax purposes ?
SUGGESTED ANSWER: The market value of the personal property at the time of the gift shall be
considered the amount of the gift. (Sec. 102, NIRC of 1997)
6. What is the valuation of donated real property for donor’s tax purposes ?
SUGGESTED ANSWER: The real property shall be appraised at its fair market value as of the time of
the gift.
However, the appraised value of the real property at the time of the gift shall be whichever is the higher
of:
a. the fair market value as determined by the Commissioner of Internal Revenue (zonal valuation) or
b. the fair market value as shown in the schedule of values fixed by the Provincial and City
Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC of 1997]
7. A died leaving as his only heirs, his surviving spouse B, and three minor
children, X, Y and Z. Since B does not want to participate in the distribution of the
estate, she renounced her hereditary share in the estate.
a. Is the renunciation subject to donor’s tax ? Explain.
SUGGESTED ANSWER: No. The general renunciation by an heir, including the surviving spouse,
as in the case B, of her share in the hereditary estate left by the decedent is not subject to donor’s tax. (4 th
10. A, who is engaged in the car “buy and sell” business sold to B P7
million Jaguar for only P4 million. The proper VAT on the sale was paid. If you are
the BIR examiner assigned to review the sale, would you issue a tax assessment on
the transaction ? Explain your answer briefly.
SUGGESTED ANSWER: Donor’s taxes would be due on the insufficiency of consideration.
Where property, other than real property that has been subjected to the final capital gains tax, is
transferred for less than an adequate and full consideration in money or money’s worth, then the amount
by which the fair market value of the property at the time of the execution of the Contract to Sell or
execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the
agreed or actual consideration or selling price shall be deemed a gift, and shall be included in computing
the amount of gifts made during the calendar year. (5 par., Sec. 11, Rev. Regs. No. 2-2003)
th
WARNING !!! Approximately 10% of the total questions asked in the Bar Examination are sourced
from VAT and its concepts. This area is probably the most difficult area to forecast because there are no
statistically perceived patterns. The author has retained the “Stars System” for VAT. Considering the
limited period of time, the reader is advised to focus on areas marked with stars and just browse the
unmarked areas.
1. Value-added tax (VAT) is a tax which is imposed only on the increase in the worth, merit or
importance of goods, properties or services, and not on the total value of the goods or services being sold
or rendered.
2. Nature of VAT. VAT is an indirect tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. As such, it should be understood not in the
context of the person or entity that is primarily, directly liable for its payment, but in terms of its nature as a
tax on consumption. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005 citing various authorities}
VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course
of trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also
levied on every importation of goods whether or not in the course of trade or business. The tax base of
the VAT is limited only to the value added to such goods, properties, or services by the seller, transferor
or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
3. Effect of exemptions from VAT which is an indirect tax. 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.
REASON: The 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. [Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866, February 11, 2005)
6. Illustration of the meaning of consumption as used under the VAT system. For
example the services rendered by a local firm to its foreign client are performed or successfully completed
upon its sending to a foreign client the drafts and bills it has gathered from service establishments here.
Its services, having been performed in the Philippines, are therefore also consumed in the Philippines.
Such facilitation service has no physical existence, yet takes place upon rendition, and therefore upon
consumption, in the Philippines. [Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.),
Inc. G. R. No. 164365, June 8, 2007]
9. How the VAT is imposed on the increase in worth, merit or improvement of the
goods or services. The VAT utilizes the concept of the output and input taxes.
Output VAT less Input VAT = VAT due on the increase in worth, merit or improvement f the goods or
services.
10. The right to credit the input tax be limited by legislation because it is a mere
creation of law. Prior to the enactment of multi-stage sales taxation, the sales taxes paid at every level
of distribution are not recoverable from the taxes payable. With the advent of Executive Order No. 273
imposing a 10% multi-stage tax on all sales, it was only then that the crediting of the input tax paid on
purchase or importation of goods and services by VAT-registered persons against the output tax was
established. Thiscontinued with the Expanded VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997
(R.A. No. 8424). The right to credit input tax as against the output tax is clearly a privilege created by law,
a privilege that also the law can limit. It should be stressed that a person has no vested right in statutory
privileges. (ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207, October 15, 2005, and companion
cases, on the motion for reconsideration)
11. Output tax is the value-added tax due on the sale or lease or taxable goods, properties or
services by any VAT-registered person.
12. Input tax is the value-added tax due on or paid by a VAT-registered person on importation of
good or local purchases of goods or services, including lease or use of properties, in the course of his
trade or business. (Rev. Regs. No. 4.110-1, 1 par.)
st
15. Concept of presumptive input tax credits. Persons or firms engaged in the
processing of sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and packed
noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax,
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.
As used in this paragraph, 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 a manner as to prepare it for special use to which it could not have been put in its original
form or condition. [Rev. Regs. No. 16-2005, Sec.4.111-1, (b)]
16. The VAT registration fee does NOT violate religious freedom. The VAT
registration fee imposed on non-VAT enterprises which includes among others, religious sects which sells
and distributes religious literature is not violative of religious freedom, although a fixed amount is not
imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration.
The registration fee is thus more of an administrative fee, one not imposed on the exercise of a
privilege, much less a constitutional right. (Tolentino v. Secretary of Finance, et al., and companion cases, 235
SCRA 630)
17. Interpretation of the term “In the Course of Trade or Business” as used in the
VAT system. The term "doing business" or “course of business” conveys the idea of business being
done, not from time to time, but all the time. It does not include isolated transactions. (Commissioner of
Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)
18. Pursuant to a government program of privatization, NDC, a VAT-registered
entity created for the purpose of selling real property, decided to sell to private
enterprise all of its shares in its wholly-owned subsidiary the National Marine
Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of
its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. The vessels
were constructed for the NDC between 1981 and 1984, then initially leased to Luzon
Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels
were transferred and leased, on a bareboat basis, to the NMC. The NMC shares and
the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay "a value
added tax of 10% on the value of the vessels." Magsaysay Lines, Inc., offered to buy
the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay
Lines, purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong . The bid
was approved by the Committee on Privatization, and a Notice of Award was issued
to Magsaysay Lines. Is the sale subject to VAT ?
SUGGESTED ANSWER: No. The term "carrying on business" does not mean the performance of a
single disconnected act, but means conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing business" conveys the idea of business
being done, not from time to time, but all the time. "Course of business" is what is usually done in the
management of trade or business. "Course of business" or "doing business" connotes regularity of
activity. In the instant case, the sale was an isolated transaction. The sale which
was involuntary and made pursuant to the declared policy of Government for privatization could no longer
be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity
of NDC is leasing personal property. This finding is confirmed by the Revised Charter of the NDC
which bears no indication that the NDC was created for the primary purpose of selling real property.
(Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)
19. Under the Value Added Tax (VAT), the tax is imposed on sales, barter, or
exchange or goods and services. The VAT is also imposed on certain transactions
“deemed sales” which include: a. Transfer, use or consumption not
in the course of business or properties originally intended for sale or for use in the course of business.
xxx
b. Distribution or transfer to:
1) Shareholders or investors as share in the profits of the VAT- registered person; xxx or
2) Creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within sixty (60) days following the date such
goods were consigned. Consigned goods returned by the consignee within the 60-day period are not
deemed sold.
d. Retirement from or cessation of business, with respect to all goods on hand,
1) whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement,
or cessation,
2) whether or not the business is continued by the new owner or successor. xxx [Rev. Regs. No.
16-2005, Sec. 4.106-7, paraphrasing, arrangement and numbering supplied]
21. Sale of or lease of real properties subject to VAT. Sale of real properties 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. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1 par.)
st
Thus, capital transactions of individuals are not subject to VAT. Only real estate dealers are subject to
VAT.
22. On September 4, 2009, XYZ, Inc., a domestic
corporation engaged in the real estate business, sold a building for P10,000,000.00.
Is the sale subject to the value-added tax (VAT)? If so, how much? Explain.
SUGGESTED ANSWER: Yes. 12% on the gross selling price because the sale was made in the
ordinary course of trade of business of X, a domestic corporation engaged in the real estate business.
23. The following sales of real properties are exempt from VAT, namely:
a. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business;
b. Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise
known as the “Urban and Development Housing Act of 1992” and other related laws, such as RA No.
7835 and RA No. 8763.
xxx xxx xxx
c. Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other
related laws wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined
by the HUDCC and the NEDA and other related laws.
xxx xxx xxx
d. Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and
below, or house & lot and other residential dwellings valued at Two Million Give Hundred Thousand Pesos
(P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or after
November 1, 2005, provided, That not later than January 31, 2009 and every three (3) years thereafter,
the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as
published by the National Statistics Office (NSO); provided, further, that such adjustment shall be
published through revenue regulations to be issued not later than March 31 of each year.
If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of
utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the
lots do not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or
separate tax declarations, when sold or disposed of to one and the same buyer, whether covered by one
or separate Deed of Conveyance, shall be presumed as a sale of one residential lot. [Rev. Regs. No.
4.109-1 (B), (p), paraphrasing and numbering supplied]
25. “Sale or exchange of services”, defined. The term “sale or exchange of services”
means the performance of all kinds of services in the Philippines for others for a fee, remuneration or
consideration, whether in kind or in cash, including those performed or rendered by the following:
a. construction and service contractors; b. stock, real estate,
commercial, customs and immigration brokers; c. lessors of property,
whether personal or real; d. persons engaged in warehousing services e.
lessors or distributors of cinematographic films; f. persons engaged in milling, processing,
manufacturing or repacking goods for others; g. proprietors, operators or
keepers of hotels, motels, rest-houses, pension houses, inns, resorts; theaters, and movie houses;
h. proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; i. dealers in securities; j. lending investors;
k. 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; l. 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; m. sales of electricity by generation companies, transmission,
and/or distribution companies; n. franchise grantees of electric utilities,
telephone and telegraph, radio and 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 Ten Million Pesos (P10,000,000.00), and franchise grantees of gas and water
utilities; o. non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and
p. similar services regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 16-
2005, Sec. 4,108-2, 1 par., arrangement and numbering supplied]
st
28. Concept of VAT zero-rating. The tax rate is set at zero. When applied to the tax base,
such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions
charges no output tax, but can claim a refund or a tax credit certificate for the VAT previously charged by
suppliers. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005]
Under a zero-rating scheme, the sale or exchange of a particular service is completely freed from the
VAT, because the seller is entitled to recover, by way of a refund or as an input tax credit, the tax that is
included in the cost of purchases attributable to the sale or exchange. The tax paid or withheld is not
deducted from the tax base. (Commissioner, of Internal Revenue v. American Express International, Inc.
(Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases)
30. Destination principle under the VAT System. As a general rule, the VAT system
uses the destination principle as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where they are consumed. Thus, exports are
zero-rated, while imports are taxed.
This is also known as the “Cross Border Doctrine.”
31. Exception to the destination principle. The law clearly provides for an exception
to the destination principle; that is, for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the [BSP]."
32. Rationale for zero-rating of exports. The Philippine VAT system adheres to the Cross
Border Doctrine, according to which, 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. [Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] The “Cross Border Doctrine” is
also known as the destination principle. Hence, actual or constructive export of goods
and services from the Philippines to a foreign country must be zero-rated for VAT; while, those destined
for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT.
35. Sale of gold to the Central Bank considered as export sales . As export sales, the
sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating
is primarily intended to be enjoyed by the seller, which charges no output VAT but can claim a refund of
or a tax credit certificate for the input VAT previously charged to it by suppliers. (Commissioner of Internal
Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005)
36. Sales to ecozone, such as PEZA, considered export-sale. Notably, while an
ecozone is geographically within the Philippines, it is deemed a separate customs territory and is
regarded in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this
separate customs territory are deemed as exports and treated as export sales. These sales are zero-
rated or subject to a tax rate of zero percent. (Commissioner of Internal Revenue v. Sekisui Jushi Philippines,
Inc., G. R. No. 149671, July 21, 2006 citing various authorities)
37. “Ecozone”, defined. An ECOZONE or a Special Economic Zone has been described as
– [S]elected areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose
metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any
or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers. The national territory of the Philippines outside of the proclaimed borders of
the ECOZONE shall be referred to as the Customs Territory. [Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]
38. Zero-rated sale of service, defined. A zero-rated sale of service (by a VAT-registered
person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the
input tax on purchases of goods, properties or services related to such zero-rated sale shall be available
as tax credit or refund in accordance with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005, Sec. Sec.
4.108-5 (a), words in italics supplied)
40. While the service performed by American Express is subject to VAT it is zero-
rated, and BIR Revenue Regulations that alter the legal requirements for zero-rating
are ultra vires and invalid. The VAT system uses the destination principle which posits that the
goods and services are taxed only in the country where they are consumed,
However, the law itself provides for clear exceptions under which the supply of services shall be zero-
rated, among which are the following:
a. The service is performed in the Philippines;
b. The services are within the categories provided for under the Tax Code; and
c. It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas.
American Express renders assistance to its foreign clients by receiving the bills of service
establishments located in the country and forwarding them to their clients abroad. The services are
performed or successfully completed upon send to its foreign clients the drafts and bills it has gathered
from service establishments here, Its services, having been performed in the Philippines are therefore
also consumed in the Philippines. Thus, its services are exempt from the destination principle and are
zero-rated.
The BIR could not change the law. [Commissioner, of Internal Revenue v. American Express International,
Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005]
44. Transactions are exempt from VAT. (Subject to the election by a VAT-registered person not
to be subject to the value-added tax), the following shall be exempt from VAT:
(A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry
of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock
and genetic materials therefor.
Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall include fowls,
ducks, geese and turkey, Livestock or poultry does not include fighting cocks, race horses, zoo animals
and other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster,
shrimps, prawns, oysters, mussels and clams.
Meat, fruit, fish, vegetables and other agricultural and marine food Products classified under this
paragraph shall be considered in their original state even if they have undergone the simple processes of
preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or
stripping, including those using advanced technological means of packaging, such as shrink wrapping in
plastics, vacuum packing, tetra-pack, and other similar packaging methods. Polished and/or husked rice,
corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original
state.
Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5o and above
are presumed to be refined sugar.
Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined
sugar:
(3) product of a production line of a sugar mill accredited by the BIR to be producing sugar
with polarimeter reading of 99.5o and above, and for which the quedanissued 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.
(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and
poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of
finished feeds (except specialty feeds for race horses, fighting cocks, aquarium 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 the residents of the Philippines
returning from abroad and nonresident 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;
(D) Importation of professional instruments and implements, wearing apparel, domestic animals,
and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the
manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle
in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or
arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to
the Commissioner of Internal Revenue, that such persons are actually coming to settle in the Philippines
and that the change of residence is bona fide;
(E) Services subject to percentage tax under Title V of the Tax Code, as enumerated below:
(1) Sale or lease of goods or properties or the performance of services of non-VAT-registered
persons, other than the transactions mentioned in paragraphs (A) to (U) of Sec. 109 (1) of the Tax
Code, the annual sales and/or receipts of which does not exceed the amount of One Million Five
Hundred thousand Pesos (P1,500,000.00), Provided, That not later than January 31, 2009 and
every three (3) years thereafter, the amount herein stated shall be adjusted to its present value
using the Consumer Price Index, as published by the National Statistics Office (NSO). (Sec. 116,
Tax Code)
(2) Services rendered by domestic common carriers by land for the transport of passengers and
keepers of garages. (Sec. 117)
(3) Services rendered by international air/shipping carriers. (Sec. 118)
(4) Service rendered by franchise grantees of radio and/or television broadcasting whose annual
gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00) and by
franchises of gas and water utilities. (Sec. 119)
(5) Service rendered for overseas dispatch message or conversation originating from the
Philippines. (Sc. 120)
(6) Services rendered by any person, company or corporation (except purely cooperative
companies or associations ) doing life insurance business of any sort in the Philippines. (Sec.
123)
(7) Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance
companies. (Sec. 124)
(8) Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing
exhibitions professional basketball games, jai-Alai and race tracks. (Sec. 125). and
(9) Receipts on sale, barter or exchange of shares of stock listed and traded through the local
stock exchange or through initial public offering. (Sec. 127)
(F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits
and sugar cane into raw sugar;
“Agricultural contract growers” refers 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.
(H) Educational services rendered by private educational institutions, duly accredited by the
Department of Education (DEPED), the Commission on Higher Education (CHED), the Technical
Education And Skills Development Authority (TESDA) 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 by regional or area headquarters established in the Philippines by
multinational corporations which act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the
Philippines;
(K) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except those under Presidential Decree No. 529 – Petroleum Exploration
Concessionaires under the Petroleum Act of 1949; and;
(L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority
(CDA) to their members as well as sale of their produce, whether in its original state or processed form,
to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts
thereof, to be used directly and exclusively in the production and/or processing of their produce;
(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered
and in good standing with the Cooperative Development Authority;
(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the
Cooperative Development Authority: Provided, That the share capital contribution of each member does
not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus
ratably distributed among the members;
Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and
equipment, including spare parts thereof, to be used by them are subject to VAT.
(O) Export sales by persons who are not VAT-registered;
(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business, or real property utilized for low-cost and socialized housing as defined by
Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other
related laws, such as RA No. 7835 and RA No. 8765, residential lot valued at One million five hundred
thousand pesos (P 1,500,000) and below, house and lot, and other residential dwellings valued at Two
million five hundred thousand pesos (P 2,500,000) and below: Provided, That not later than January 31,
2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present
values using the Consumer Price Index, as published by the National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P 10,000)
Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein
stated shall be adjusted to its present value using the Consumer Price Index as published by the National
Statistics Office (NSO);
(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;
(S) 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 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 years (15) years old, (ii) for tankers, the age limit
is ten (10) years old, and (iii) For high-speed passenger cars, 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.”
(T) 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 fuel,
goods and supplies shall be subject to 10% VAT (now 12%);
(U) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries; and
(V) Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not
exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later
than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to
its present value using the Consumer Price Index as published by the National Statistics Office (NSO).
For purposes of the threshold of P1,500,000.00, the husband and wife shall be cnsidered separate
taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a profesional,
aside from the practice ofhis 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 to be icluded in determining the threshold. [NIRC
of 1997, Sec. 109 (1), as amended by R. A. No. 9337; words in italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B),
words in parentheses supplied]
1. Income tax returns being public documents, until controverted by competent evidence,
are competent evidence, are prima facie correct with respect to the entries therein. (Ropali Trading v.
NLRC, et al., 296 SCRA 309, 317)
7. Minimum wage earners are exempt from income taxation. That minimum wage
earners (is a worker in the private sector paid the statutory minimum wage, or is 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) shall be exempt from the payment of income tax on their
taxable income: Provided, further, That the 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. 51
(A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as amended by Rep. Act. 9504]
9. A corporation files its income tax return and pays its income tax four (4) times
during a single taxable year. Quarterly returns are required to be filed for the first three quarters,
then a final adjustment return is filed covering the total taxable income for the whole taxable year, be it
calendar or fiscal.
10. An individual earning from the practice of his profession or who engages in
trade or business files his income tax return and pays his income tax four (4) times
during a single taxable year. Quarterly returns are required to be filed for the first three quarters,
then an annual income tax return is filed covering the total taxable income for the whole of the previous
calendar year.
11. The purpose of the above four (4) times a year requirement is to make
available sufficient funds to meet the budgetary requirements, on a quarterly basis thereby
increasing government liquidity. It also eases hardships on the part of individuals who are required to
make this four time return. Thus, the taxpayer does not have to raise large sums of money in order to pay
the tax.
12. An individual earning purely compensation income files only one annual
income tax return covering the total taxable compensation income for the whole of the previous
calendar year.
13. Under the withholding tax system, taxes imposed or prescribed by the NIRC
of 1997 are to be deducted and withheld by the payors from payments made to
payees for the former to pay directly to the Bureau of Internal Revenue. It is also known
as collection of the tax at source.
14. A withholding agent is explicitly made personally liable under the Tax Code
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. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October
12, 1999) The system facilitates tax collection and reduces tax evasion.
15. The two (2) types of withholding at source are the 1) final withholding tax;
and 2) creditable withholding tax.
16. Under the final withholding tax system the amount of income tax withheld by
the withholding agent is constituted as a full and final payment of the income due
from the payee on the said income. [1 sentence, 1 par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
st st
The liability for payment of the tax rests primarily on the payor or the withholding agent.. Thus, in case
of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from
the payor withholding agent. The payee is not required to file an income tax return for the particular
income.
17. Under the creditable withholding tax system, taxes withheld on certain
income payments are intended to equal or at least approximate the tax due from the
payee on the said income. The income recipient is still required to file an income tax return and/or
pay the difference between the tax withheld and the tax due on the income . [1 and 2 sentences, Sec.
st nd
18. The two kinds of creditable withholding taxes are (a) taxes withheld on income
payments covered by the expanded withholding tax; and (b) taxes withheld on compensation income.
19. Payments to the following are exempt from the requirement of withholding or
when no withholding taxes required:
a. National Government and its instrumentalities including provincial, city, or municipal governments;
b. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law,
general or special, such as but not limited to the following:
1) Sales of real property by a corporation which is registered with and certified by the HLURB or
HUDCC as engaged in socialized housing project where the selling price of the house and lot or
only the lot does not exceed P180,000.00 in Metro Manila and other highly urbanized areas and
P150,000.00 in other areas or such adjusted amount of selling price for socialized housing as may
later be determined and adopted by the HLURB;
2) Corporations registered with the Board of Investments and enjoying exemptions from income
under the Omnibus Investment Code of 1997;
3) Corporations exempt from income tax under Sec. 30, of the Tax Code, like the SSS, GSIS,
the PCSO, etc. However, income payments arising from any activity which is conducted for profit
or income derived from real or personal property shall be subject to a withholding tax. (Sec. 57.5,
Rev. Regs. No. 2-98)
20. For tax amnesty purposes, the withholding agent is not a taxpayer . He is made
to pay the tax where he fails to withhold as a penalty and not because the tax is due from him.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999, the Anscor case)
1. Surtaxes or surcharges, also known as the civil penalties, are the amounts imposed in addition to
the tax required.
They are in the nature of penalties and shall be collected at the same time, in the same manner, and as
part of the tax. [Sec.248 (A), NIRC of 1997]
4. Deficiency interest, defined. The interest assessed and collected on any unpaid amount
of tax at the rate of 20% per annum or such higher rate as may be prescribed by regulations, from the
date prescribed for payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]
5. Delinquency interest, defined. The interest assessed and collected on the unpaid
amount until fully paid where there is failure on the part of the taxpayer to pay the amount die on any
return required to be filed; or the amount of the tax due for which no return is required; or a deficiency tax,
or any surcharge or interest thereon, on the date appearing in the notice and demand by the
Commissioner of Internal Revenue. [Sec.249 (c), NIRC of 1997]
6. After resolving the issues the BIR Commissioner reduced the assessment.
Was it proper to impose delinquency interest despite the reduction of the
assessment ? Why ?
SUGGESTED ANSWER: Yes. The intention of the law is to discourage delay in the payment of taxes
due to the State and in this sense the surcharge and interest charged are not penal but compensatory in
nature – they are compensation to the State for the delay in payment, or for the concomitant tuse of the
funds by the taxpayer beyond the date he is supposed to have paid them to the State. (Bank of the
Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006)
7. Compromise penalty is the amount agreed upon between the taxpayer and the
Government to be paid as a penalty in cases of a compromise.
1. Discuss the role of the judiciary in taxation. SUGGESTED ANSWER: The role of the
judiciary is to be the sympathetic or vigilant court which would check injustices or abuses of the legislative
and administrative agents of the State in their exercise of the power of taxation.
2. What is the nature and composition of the Court of Tax Appeals ?
SUGGESTED ANSWER: The Court of Tax Appeals is the special tax court created under Republic
Act No. 1125, as amended, and is composed of a Presiding Justice and eight (8) Associate Justices,
organized into three (3) divisions.
3. What are the purposes for the creation of the Court of Tax Appeals ?
SUGGESTED ANSWER:
a. To prevent delay in the disposition of tax cases by the then Courts of First Instance (now RTCs), in
view of the backlog of civil, criminal, and cadastral cases accumulating in the dockets of such courts; and
b. To have a body with special knowledge which ordinary Judges of the then Courts of First Instance
(now RTCs), are not likely to possess, thus providing for an adequate remedy for a speedy determination
of tax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209)
5. It is the Regional Trial Court that has jurisdiction to rule upon the
constitutionality of a tax law or a regulation issued by the taxing authorities. 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. The determination of whether a specific rule or set of rules issued by
an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular
courts.
Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in
the courts, including the regional trial courts. This is within the scope of judicial power, which includes the
authority of the courts to determine in an appropriate action the validity of the acts of the political
departments. Judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government. (British American Tobacco v. Camacho et al., G. R. No. 163583, August 20,
2008 with an intervenor)
NOTES AND COMMENTS: The above doctrine supersedes Asia International Auctioneers, Inc., etc et
al., .v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18, 2007 which ruled that it is the Court of
Tax Appeals that has jurisdiction relative to matters involving the constitutionality of regulations issued by
the BIR. The reason was that this falls under the concept of decisions of the BIR Commissioner on “other
matter” arising under the provisions of laws administered by the Commission. Issuance of revenue
regulations are authorized under the NIRC.
British American Tobacco reversed Asia International Auctioneers upon the concept of the judiciary’s
“expanded power.”
6. Instances where the Court of Tax Appeals would have jurisdiction even if
there is no decision of the Commissioner of Customs:
a. Decisions of the Secretary of Trade and Industry or the Secretary of Agriculture in anti-dumping
and countervailing duty cases are appealable to the Court of Tax Appeals within thirty (30) days from
receipt of such decisions.
b. In case of automatic review by the Secretary of Finance in seizure or forfeiture cases where
the value of the importation exceeds P5 million or where the decision of the Collector of Customs which
fully or partially releases the shipment seized is affirmed by the Commissioner of Customs.
c. In case of automatic review by the Secretary of Finance of a decision of a Collector of Customs
acting favorably upon a customs protest.
2. The word assessment when used in connection with taxation, may have more
than one meaning. More commonly the word “assessment” means the official valuation of a
taxpayer’s property for purpose of taxation. The above definition of assessment finds application under
tariff and customs taxation as well as local government taxation.
For real property taxation, there may be a special meaning to the burdens that are imposed
upon real properties that have been benefited by a public works expenditure of a local
government. It is sometimes called a special assessment or a special levy. (Commissioner of Internal
Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)
For internal revenue taxation assessment as laying a tax. The ultimate purpose of an assessment
to such a connection is to ascertain the amount that each taxpayer is to pay. (Ibid.)
5. Sec. 6 (B) of the NIRC of 1997 allows the BIR to make or amend a tax return
from his own knowledge or obtained through testimony or otherwise . Thus, the
Commissioner of Internal Revenue investigates ”any circumstance which led him to believe that the
taxpayer had taxable income larger than that reported. Necessarily, this inquiry would have to be outside
of the books because they supported the return as filed. He may take the sworn testimony of the
taxpayer, he may take the testimony of third parties; he may examine and subpoena, if necessary,
traders’ and brokers’ accounts and books and the taxpayer’s books of accounts. The Commissioner is
not bound to follow any set of patterns. The existence of unreported income may be shown by any
particular proof that is available in the circumstances of the particular situation. (Commissioner of Internal
Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005)
7. Meaning of "best evidence obtainable" under Sec. 6 (B), NIRC of 1997. This
means that the original documents must be produced. If it could not be produced, secondary
evidence must be adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA - G.R. SP No.
47172, September 30, 1998)
8. The following are the general methods developed by the Bureau of Internal
Revenue for reconstructing a taxpayer’s income where the records do not show the true
income or where no return was filed or what was filed was a false and fraudulent return
(a) Percentage method;
(b) Net worth method.;
(c) Bank deposit method;
(d) Cash expenditure method;
(e) Unit and value method;
(f) Third party information or access to records method;
(g) Surveillance and assessment method. (Chapter XIII. Indirect Approach to Investigation,
Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)
9. Third party information or access to records method. The BIR may require third
parties, public or private to supply information to the BIR, and thus, “obtain on a regular basis from any
person other than the person whose internal revenue tax liability is subject to audit or investigation, or
from any office or officer of the national and local governments, government agencies and
instrumentalities including the Bangko Sentral ng Pilipinas and government-owned or –controlled
corporations, any information such as, but not limited to, costs and volume of production, receipts or
sales and gross incomes of taxpayers, and the names , addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional operating headquarters or
multinational companies, joint accounts, associations, joint ventures or consortia and registered
partnerships, and their members; xxx” [Sec. 5 (B), NIRC of 1997)
10. A pre-assessment notice is a letter sent by the Bureau of Internal Revenue to a taxpayer
asking him to explain within a period of fifteen (15) days from receipt why he should not be the subject of
an assessment notice. It is part of the due process rights of a taxpayer.
As a general rule, the BIR could not issue an assessment notice without first issuing a pre-assessment
notice because it is part of the due process rights of a taxpayer to be given notice in the form of a pre-
assessment notice, and for him to explain why he should not be the subject of an assessment notice.
This mandate governs the question of prescription of the government’s right to assess internal revenue
taxes primarily to safeguard the interests of taxpayers from unreasonable investigation. Accordingly, the
government must assess internal revenue taxes on time so as not to extend indefinitely the period of
assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further
investigation for taxes after the expiration of reasonable period of time. (Commissioner of Internal Revenue
v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v.
Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 225)
16. Requisites for Formal Letter of Demand and Assessment Notice. The
formal letter of demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand 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 formal letter of demand and assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by personal delivery.
17. What are the requirements for the validity of a formal letter of demand and
assessment notice ?
SUGGESTED ANSWER:
a. There must have been previously issued a pre-assessment notice until excepted;
b. It must have been issued prior to the prescriptive period; and
c. The letter of demand 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 formal letter of demand and assessment notice shall be void. (Sec. 3.1.4, Rev. Regs. No. 12-99)
18. What are the reasons for presumption of correctness of assessments ?
SUGGESTED ANSWER:
a. Lifeblood theory
b. Presumption of regularity (Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No.
136975, March 31, 2005) in the performance of public functions. (Commissioner of Internal Revenue v. Tuazon,
Inc., 173 SCRA 397)
c. The likelihood that the taxpayer will have access to the relevant information [Commissioner of
Internal Revenue, supra citing United States v. Rexach, 482 F.2d 10 (1973). The certiorari was denied by the United
States Supreme Court on November 19, 1973]
d. The desirability of bolstering the record-keeping requirements of the NIRC. (Ibid.)
19. Give instances where prima facie correctness of a tax assessment does not
apply.
SUGGESTED ANSWER: The “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.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No.
136975, March 31, 2005 citing United States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such a
situation, “the determination of the Commissioner contained in a deficiency notice disappears.”
[Commissioner of Internal Revenue, supra citing a U.S. Court of Appeals ruling, in Clark and Clark v. Commissioner
of Internal Revenue, 266 F. 2d 698 (1959)] “Hence, the determination by the CTA must rest on all the
evidence introduced and its ultimate determination must find support in credible evidence.” [Commissioner
of Internal Revenue, supra]
20. What are the instances that suspends the running of the prescriptive
periods (Statute of Limitations) within which to make an assessment and the
beginning of distraint or levy or of a proceeding in court for the collection, in respect
of any tax deficiencies?
SUGGESTED ANSWER:
a. When the Commissioner is prohibited from making the assessment, or beginning distraint, or levy
or proceeding in court and for sixty (60) days thereafter;
b. When the taxpayer requests for and is granted a reinvestigation by the commissioner;
c. When the taxpayer could not be located in the address given by him in the return filed upon which
the tax is being assessed or collected;
d. 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 could be located;
and
e. When the taxpayer is out of the Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712,
February 25, 1999 (Carnation case) that the waiver of the period for assessment must be in writing and
have the written consent of the BIR Commissioner is still doctrinal because of the provisions of Sec. 223,
NIRC of 1997 which provides for the suspension of the prescriptive period:
21. Under RMO No. 20-90, which implements Sections 203 and 222 (b), the
following procedures should be followed for a valid waiver of the prescriptive period
for an assessment: a. The waiver must be in the proper form;
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. Soon after
the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official
authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted
and agreed to the waiver. The date of such acceptance by the Bureau should be indicated. Both the
date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration
of the period of prescription or before the lapse of the period agreed upon in case a subsequent
agreement is executed. c. The following revenue officials are authorized to sign the waiver.
A. In the National Office xxxx
3. Commissioner For tax cases involving more than P1M B. In
the Regional Offices 1. The Revenue District Officer with respect to tax cases
still pending investigation and the period to assess is about to prescribe regardless of amount.
xxxx d. The waiver must be executed in three (3) copies, the original
copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for
the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be
indicated in the original copy. d. The foregoing procedures shall be strictly
followed. Any revenue official found not to have complied with this Order resulting in prescription of the
right to assess/collect shall be administratively dealt with. (Renumbering and emphasis supplied.)
If the above are not followed there is no valid waiver and prescription would run. (Commissioner of
Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine Journalists,
Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 228-229)
22. The procedures in RMO No. 20-90 are NOT merely directory and that the
execution of a waiver is a renunciation of a taxpayer’s right to invoke prescription.
RMO No. 20-90 must be strictly followed. A waiver of the statute of limitations under the NIRC,
to a certain extent being a derogation of the taxpayer’s right to security against prolonged and
unscrupulous investigations, must be carefully and strictly construed. The waiver of the statute of
limitations does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally,
particularly where the language of the document is equivocal.
Thus a waiver becomes unlimited in time, and invalid, because it did not specify a definite date,
agreed upon between the BIR and the taxpayer, within which the former may assess and collect taxes. It
also would have no binding effect on the taxpayer if there was no consent by the Commissioner. On this
basis, no implied consent can be presumed, nor can it be contended that the concurrence to such waiver
is a mere formality. (Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No. 167765, June
30, 2008 citing Philippine Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852, December 16,
2004, 447 SCRA 214, 229 in turn citing Id. at 229, citing Commissioner of Internal Revenue v. Court of Appeals, G.R.
No. 115712, February 25, 1999, 303 SCRA 614, 620-622.)
23. BIR cannot rely on its invocation of the rule that the government cannot be
estopped by the mistakes of its revenue officers in the enforcement of RMO No. 20-90
because the law on prescription should be interpreted in a way conducive to bringing about the beneficent
purpose of affording protection to the taxpayer within the contemplation of the Commission which
recommended the approval of the law. To the Government, its tax officers are obliged to act promptly in
the making of assessment so that taxpayers, after the lapse of the period of prescription, would have a
feeling of security against unscrupulous tax agents who will always try to find an excuse to inspect the
books of taxpayers, not to determine the latter’s real liability, but to take advantage of a possible
opportunity to harass even law-abiding businessmen. Without such legal defense, taxpayers would be
open season to harassment by unscrupulous tax agents. [Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No. 167765, June 30, 2008 citing Republic of the Phils. v. Ablaza, 108 Phil. 1105,
1108 (1960)]
24. The signatures of both the Commissioner and the taxpayer, are required for
a waiver of the prescriptive period, thus a unilateral waiver on the part of the taxpayer does not
suspend the prescriptive period. [Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712,
February 25, 1999 (Carnation case)]
47. The act of requesting a reinvestigation alone does not suspend the running of
the prescriptive period. The request for reinvestigation must be granted by the CIR.
The Supreme Court declared that the burden of proof that the request for reinvestigation had been
actually granted shall be on the Commissioner of Internal Revenue. Such grant may be expressed in its
communications with the taxpayer or implied from the action of the Commissioner or his authorized
representative in response to the request for reinvestigation. [Bank of Philippine Islands (Formerly Far East
Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008]
2. What are the two ways of protesting an assessment notice for an internal
revenue tax ? Alternatively, what are the two types of protests ? Explain briefly.
SUGGESTED ANSWER:
a. Request for reconsideration which refers to a plea for re-evaluation of an assessment on the basis
of existing records without need of additional evidence. It may involve both a question of fact or of law or
both.
b. Request for reinvestigation which refers to a plea for re-evaluation of an assessment on the basis
of newly-discovered evidence or additional evidence that a taxpayer intends to present in the
investigation. It may also involve a question of fact or law or both. (Commissioner of Internal Revenue v.
Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Rev. Regs. No. 12-85)
3. What is that type of protest that suspends the running of the statute of
limitations for the beginning of distraint or levy or a proceeding in court for collection
? Why ?
SUGGESTED ANSWER: It is that type of protest “when the taxpayer requests for a reinvestigation
which is granted by the Commissioner” (Sec. 223, NIRC of 1997), that suspends the running of the
statute of limitations for collection of the tax. (Commissioner of Internal Revenue v. Philippine Global
Communication, Inc., G. R. No. 167146, October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of 1997) When a
taxpayer demands a reinvestigation, the time employed in reinvestigation should be deducted from the
total period of limitation. [Commissioner of Internal Revenue, supra citing Republic v. Lopez, 117 Phil. 575, 578; 7
SCRA 566, 568-569 (1963)]
Undoubtedly, 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 former can suspend the running of the statute of limitations on collection of the
assessed tax, while the latter cannot. (Commissioner of Internal Revenue v. Philippine Global Communication,
Inc., G. R. No. 167146, October 31, 2006 citing Bank of Philippine Islands v. Commissioner of Internal Revenue, G.
R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231)
4. Instances where the Court of Tax Appeals would have jurisdiction even if
there is no decision yet by the Commissioner of Internal Revenue:
a. Where the Commissioner has not acted on the disputed assessment after a period of 180
days from submission of complete supporting documents, the taxpayer has a period of 30 days from the
expiration of the 180 day period within which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e),
NIRC of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001)
b. Where the Commissioner has not acted on an application for refund or credit and the two year
period from the time of payment is about to expire, the taxpayer has to file his appeal with the Court of
Tax Appeals before the expiration of two years from the time the tax was paid.
It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the ruling,.
It would make matters more exasperating for the taxpayer if the doors of justice would be closed for such
a relief until after the Commissioner, would have, at his personal convenience, given his go signal.
(Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.)
1. General rule: Collection of taxes is imprescriptible. While this may be so, statutes
may provide for periods of prescription,
4. What is a compromise ?
SUGGESTED ANSWER: A compromise is a contract whereby the parties, by making reciprocal
concessions, avoid a litigation or put an end to one already commenced. (Art. 2028, Civil Code)
A compromise penalty could not be imposed by the BIR, if the taxpayer did not agree. A
compromise being, by its nature, mutual in essence requires agreement. The payment made under
protest could only signify that there was no agreement that had effectively been reached between the
parties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001)
5. What tax cases may be the subject of a compromise ?
SUGGESTED ANSWER: The following cases may, upon taxpayer’s compliance with the basis
for compromise, be the subject matter of compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest after issuance of the Final Assessment Notice to the
taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office;
c. Civil tax cases being disputed before the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than those already filed in court, or those involving criminal tax fraud.
(Sec. 2, Rev. Regs. No. 30-2002)
9. The collection of a tax may not be suspended. Only the Court of Tax Appeals may
issue an order suspending the collection of a tax.
10. As a general rule, “No court shall have the authority to grant an injunction to
restrain the collection of any national internal revenue tax, fee or charge.” (Sec. 218,
NIRC)
“No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the
Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the
Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may
be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing law: Provided, however, 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 at 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, Rep. Act No. 1125, as amended by Sec. 9, Rep. Act No.
9282 )
The Supreme Court may enjoin the collection of taxes under its general judicial power but it should be
apparent that the source of the power is not statutory but constitutional.
1. What are the grounds for refund or credit of internal revenue taxes ?
SUGGESTED ANSWER: The grounds for refund or credit or internal revenue taxes are the following:
a. The tax was illegally collected. There is no law that authorizes the collection of the tax.
b. The tax was excessively collected. There is a law that authorizes the collection of a tax but the tax
collected was more than what the law allows.
c. The tax was paid through a mistaken belief that the taxpayer should pay the tax (solution indebeti)
2. What are the three (3) conditions for the grant of a claim for refund of
creditable withholding tax ?
SUGGESTED ANSWER:
a. The claim is filed with the Commissioner of Internal Revenue within the two-year period from the
date of the payment of the tax.
b. It is shown on the return of the recipient that the income payment received was declared as part of
the gross income; and
c. The fact of withholding is established by a copy of a statement duly issued by the payee showing
the amount paid and the amount of tax withheld therefrom. (Banco Filipino Savings and Mortgage Bank v.
Court of Appeals, et al., G. R. No. 155682, March 27, 2007)
NOTES AND COMMENTS:
a. Proof of fact of withholding. “Sec. 10. Claim for tax credit or refund. – (a) Claims for Tax Credit
or Refund of Income tax deducted and withheld on income payments shall be given due course only
when it is shown on the return that the income payment received has been declared as part of the gross
income and 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 the amount of the tax withheld therefrom xxx”
(Rev. Regs. No. 6-85, as amended)
The document which may be accepted as evidence of the third condition, that is, the fact of
withholding, must emanate from the payor itself, and not merely from the payee, and must indicate the
name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and the
nature of the tax paid. (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682,
March 27, 2007)
4. What is The legal remedy under the NIRC of 1997 at the judicial level with
respect to refund or recovery of tax erroneously or illegally collected ?
SUGGESTED ANSWER: Filing of a suit or proceeding with the Court of Tax Appeals
a. before the expiration of two (2) years from the date of payment of the tax regardless of any
supervening cause that may arise after payment (2 par., Sec. 229, NIRC of 1997), or
nd
b. within thirty (30) days from receipt of the denial by the Commissioner of the application for refund
or credit. (Sec. 11, R.A. No. 1125)
5. The two (2) year period and the thirty (30) day period should be applied on a
whichever comes first basis. Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2
year period is about to lapse but there is no decision yet by the Commissioner which would trigger the 30-
day period, the taxpayer should file an appeal, despite the absence of a decision. (Commissioners, etc. v.
Court of Tax Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.)
6. Where the taxpayer is a corporation the two year prescriptive period from
“date of payment” for refund of income taxes should be the date when the
corporation filed its final adjustment return not on the date when the taxes were paid on a
quarterly basis. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024,
January 28, 1999)
It is only when the return, covering the whole year, is filed that the taxpayer will be able to
ascertain whether a tax is still due or refund can be claimed based on the adjusted and audited figures.
(Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001)
9. As a general
rule the filing of an application for refund or credit with the Bureau of Internal
Revenue is an administrative precondition before a suit may be filed with the Court of
Tax Appeals ? SUGGESTED ANSWER:
SUGGESTED ANSWER: Yes. The failure to first file a written claim for refund or credit is not fatal to a
petition for review involving a disputed assessment where an assessment was disputed but the protest
was
denied by the Bureau of Internal Revenue. To hold that the taxpayer has now lost the right to appeal
from the ruling on the disputed assessment and require him to file a claim for a refund of the taxes paid as
a condition precedent to his right to appeal, would in effect require of him to go through a useless and
needless ceremony that would only delay the disposition of the case, for the Commissioner would
certainly disallow the claim for refund in the same way as he disallowed the protest against the
assessment. The law, should not be interpreted as to result in absurdities. (vda. de San Agustin., etc., v.
Commissioner of Internal Revenue, G.R. No. 138485, September 10, 2001 citing Roman Catholic Archbishop of
Cebu v. Collector of Internal Revenue, 4 SCRA 279) NOTE: Reconciliation between above two numbers (8
and 9). An application for refund or credit under Sec. 229 of the NIRC of 1997 is required where the case
filed before the CTA is a refund case, which is not premised upon a disputed assessment. There is no
need for a prior application for refund or credit, if the refund is merely a consequence of the resolution of
the BIR’s denial of a protested assessment. Who could apply
for a tax refund or credit ?
10. Who could apply for a refund or credit ?
SUGGESTED ANSWER: The person who paid the tax may apply for a refund or credit.
A withholding tax agent may also apply for a refund. In a sense, he is also a taxpayer because
the tax may be collected from him if he does not withhold.
11. What is the nature of the taxpayer’s remedy of either to ask for a refund of
excess tax payments or to apply the same in payment of succeeding taxable periods’
taxes ?
SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76 of the NIRC of 1997) provides
that any excess of the total quarterly payments over the actual income tax computed in the adjustment or
final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited
against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. To
ease the administration of tax collection, these remedies are in the alternative and the choice of one
precludes the other. Since the Bank has chosen the tax credit approach it cannot anymore avail of the
tax refund. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No.
112024, January 28, 1999)
NOTES AND COMMENTS:
a. The choice, is given to the taxpayer, whether to claim for refund under Sec. 76 or have its
excess taxes applied as tax credit for the succeeding taxable year, such election is not final. Prior
verification and approval by the Commissioner of Internal Revenue is required. The availment of the
remedy of tax credit is not absolute and mandatory. It does not confer an absolute right on the part of the
taxpayer to avail of the tax credit scheme if it so chooses. Neither does it impose a duty on the part of the
government to sit back and allow an important facet of tax collection to be at the sole control and
discretion of the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No.
119286, October 13, 2004)
12. What is the “irrevocability rule” in claims for refund and what is the rationale
behind this ?
SUGGESTED ANSWER: A corporation entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the
issuance of a tax credit certificate or to claim a cash refund. If the option to carry over the excess credit is
exercised, the same shall be irrevocable for that taxable period.
In exercising its option, the corporation must signify in its annual corporate adjustment return (by
marking the option box provided in the BIR form) its intention either to carry over the excess credit or to
claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one
precludes the other. [Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September
21, 2007 citing Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)]
This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the
Tax Code. 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.
The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic
credit against taxes for the taxable quarters of the succeeding years for which no tax credit certificate has
been issued and (2) as a tax credit either for which a tax credit certificate will be issued or which will be
claimed for cash refund. (Systra Philippines, Inc., supra citing De Leon, Hector, The National Internal Revenue
Code, Seventh Edition, 2000, p. 430)
13. In the year 2000 Systra derived excess tax credits and exercised the
option to carry them over as tax credits for the next taxable year. However, the tax
due for the next taxable year is lower than excess tax credits. It now applies for a
refund of the unapplied tax credits. May its refund be granted ? If the refund is
denied, does Systra lose the unapplied tax credits ? Explain briefly your answer.
SUGGESTED ANSWER: Systra’s claim for refund should be denied. Once the carry over option
was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax
credits were actually or fully utilized Under Section 76 of the Tax Code, a claim for refund of such excess
credits can no longer be made. The excess credits will only be applied “against income tax due for the
taxable quarters of the succeeding taxable years.”
Despite the denial of its claim for refund, Systra does not lose the unapplied tax credits. The amount
will not be forfeited in favor of the government but will remain in the taxpayer’s account. Petitioner may
claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until
fully utilized. (Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007
citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, 14
December 2005, 477 SCRA 761)
Supposing in the above problem that Systra permanent ceased operations, what happens to the
unapplied credits ?
SUGGESTED ANSWER: Where, the corporation permanently ceases its operations before full
utilization of the tax credits it opted to carry over, it may then be allowed to claim the refund of the
remaining tax credits. In such a case, the remaining tax credits can no longer be carried over and the
irrevocability rule ceases to apply. Cessante ratione legis, cessat ipse lex. (Footnote no. 23, Systra
Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007)
NOTES AND COMMENTS: The holding in State Land Investment Corporation v. Commissioner of
Internal Revenue, G. R. No. 171956, January 18, 2008 that the taxpayer is entitled to a refund because
during the succeeding year there was no tax due against which the excess tax credits may be applied is
not doctrinal. This is so because it interpreted the provisions of then Sec. 69 of the NIRC, which did not
provide for the “irrevocability rule” now contained in Sec. 76 of the NIRC of 1997.
14. A simultaneous filing of the application with the BIR for refund/credit and the
institution of the court suit with the CTA is allowed. There is no need to wait for a BIR denial.
REASONS:
a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997);
b. The doctrine that delay of the Commissioner in rendering decision does not extend the
peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for refund with the Commissioner
under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for filing suit in court under Sec.
230, NIRC (now Sec. 229, NIRC of 1997), unlike in protests of assessments under Sec. 229 (now Sec.
228, NIRC of 1997), which fixed the period (thirty days from receipt of decision) for appealing to the court,
thus clearly implying that the prior decision of the Commissioner is necessary to take cognizance of the
case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No. 34102,
September 9, 1994; Gibbs v. Collector of Internal Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101
Phil. 151)
15. The grant of a refund is founded on the assumption that the tax return is
valid, i.e. that the facts stated therein are true and correct. (Commissioner of Internal Revenue v. Court
of Tax Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA 348) Without the tax return it would be
virtually impossible to determine whether the proper taxes have been assessed and paid. After all, it is
axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. (Paseo
Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004)
However, in BPI-Family Savings Bank v. Court of Appeals, 386 Phil. 719; 326 SCRA 641 (2000), refund
was granted, despite the failure to present the tax return, because other evidence was presented to
prove that the overpaid taxes were not applied. (Ibid.)
16. Discuss the difference between tax refund and tax credit..
SUGGESTED ANSWER: There are unmistakable formal and practical differences between the
two modes. Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer,
while a tax credit involves the application of the reimbursable amount against any sum that may be due
and collectible from the taxpayer.
On the practical side, the taxpayer to whom the tax is refunded would have the option, among others,
to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead
to receive a tax credit. (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No.
144440, September 1, 2004)
NOTES AND COMMENTS: It may be that there is no essential difference between a tax refund and a
tax credit since both are moves of recovering taxes erroneously or illegally paid to the government.
(Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004)
17. A bank-trustee of employee trusts filed an application for the refund of taxes
withheld on the interest incomes of the investments made of the funds of the
employees’ trusts. Instead of presenting separate accounts for interest incomes
made of these investments, the bank-trustee instead presented witness to establish
that it would next to impossible to single out the specific transactions involving the
employees’ trust funds from the totality of all interest income from its total
investments. On the above basis will the application for refund prosper ?
SUGGESTED ANSWER: No. The application for refund will not prosper.
The bank-trustee needs to establish not only that the refund is justified under the law (which is so
because incomes of employees’ trusts are tax exempt), but also the correct amount that should be
refunded.
Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi juris against the
person or entity claiming the exemption. The burden in proving the amount to be refunded necessarily
falls on the bank-trustee, and there is an apparent failure to do so.
A necessary consequence of the special exemption enjoyed alone by employees’ trusts would be a
necessary segregation in the accounting of such income, interest or otherwise, earned from those trusts
from that earned by the other clients of the bank-trustee. (Far East Bank and Trust Company, etc., v.
Commissioner, etc., et al., G.R. No. 138919, May 2, 2006) The amounts that are the exempt earnings of
the employee’s trust has not been shown as they have been commingled with the interest income of the
other clients of the bank-trustee.
18. CTA Circular No. 1-95 clearly requires that photocopies of the receipts or
invoices must be pre-marked and submitted to the CTA to verify the correctness of
the summary listing and the CPA certification. CTA Circular No. 1-95, issued on 25 January
1995, reads:
“1. The party who desires to introduce as evidence such voluminous documents must present: (a)
Summary containing the total amount/s of the tax account or tax paid for the period involved and a
chronological or numerical list of the numbers, dates and amounts covered by the invoices or receipts;
and (b) a Certification of an independent Certified Public Accountant attesting to the correctness of the
contents of the summary after making an examination and evaluation of the voluminous receipts and
invoices. Such summary and certification must properly be identified by a competent witness from the
accounting firm.
2. The method of individual presentation of each and every receipt or invoice or other documents for
marking, identification and comparison with the originals thereof need not be done before the Court or the
Commissioner anymore after the introduction of the summary and CPA certification. It is enough that the
receipts, invoices and other documents covering the said accounts or payments must be pre-
marked by the party concerned and submitted to the Court in order to be made accessible to the
adverse party whenever he/she desires to check and verify the correctness of the summary and
CPA certification. However, the originals of the said receipts, invoices or documents should be ready for
verification and comparison in case doubt on the authenticity of the particular documents presented is
raised during the hearing of the case.” (Emphasis supplied)
19. Manila Electric Company a grantee of a legislative franchise under Act No.
484, as amended by Republic Act No. 4159 and Presidential Decree No. 551,# had [3]
been paying a 2% franchise tax based on its gross receipts, in lieu of all other taxes
and assessments of whatever nature. Upon the effectivity of Executive Order No. 72
on February 10, 1987, however, respondent became subject to the payment of regular
corporate income tax.
For the last quarter ending December 31, 1987, respondent filed on April 15, 1988
its tentative income tax reflecting a refundable amount of P101,897,741, but only
P77,931,812 was applied as tax credit for the succeeding taxable year 1988.
Acting on a yearly routinary Letter of Authority No. 0018064 NA dated June 27,
1988 issued by petitioner, directing the investigation of tax liabilities of respondent
for taxable year 1987, an investigation was conducted by Revenue Officer Frederick
Capitan which showed that respondent was liable for “1. deficiency income tax in the
amount of P2,340,902.52; and 2. deficiency franchise tax in the amount of
P2,838,335.84.”
On April 17, 1989, respondent filed an amended final corporate Income Tax Return
ending December 31, 1988 reflecting a refundable amount of P107,649,729.
Respondent thus filed on March 30, 1990 a letter-claim for refund or credit in the
amount of P107,649,729 representing overpaid income taxes for the years 1987 and
1988.
Petitioner not having acted on its request, respondent filed on April 6, 1990 a
judicial claim for refund or credit with the Court of Tax Appeals.
It is gathered that respondent paid the deficiency franchise tax in the amount of
P2,838,335.84. It protested the payment of the alleged deficiency income tax and
claimed as an alternative remedy the deduction thereof from its claim for refund or
credit.
The Court of Tax Appeals granted the P107,649,729 claim for refund, or in the
alternative for the BIR to issue a tax credit. Is the Court of Tax Appeals correct ?
SUGGESTED ANSWER: Yes. Section 69 of the National Internal Revenue Code of 1986, now Sec.
76 provides, if the sum of the quarterly tax payments made during a taxable year is not equal to the total
tax due on the entire taxable income of that year as shown in its final adjustment return, the corporation
has the option to either: (a) pay the excess tax still due, or (b) be refunded the excess amount paid. The
returns submitted are “merely pre-audited which consist mainly of checking mathematical accuracy of the
figures in the return.” After such checking, the purpose of which being to “insure prompt action on
corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income
taxes,” (Revenue Memorandum Order No. 32-76 dated June 11, 1976) the refund or tax credit is granted.
(Commissioner of Internal Revenue v. Manila Electric Company, G. R. No. 121666, October 10, 2007)
3. The flexible tariff clause is a provision in the Tariff and Customs Code, which
implements the constitutionally delegated power to the Congress to further delegate to the President of
the Philippines, in the interest of national economy, general welfare and/or national security upon
recommendation of the NEDA (a) to increase, reduce or remove existing protective rates of import duty,
provided that, the increase should not be higher than 100% ad valorem; (b) to establish import quota or to
ban imports of any commodity, and (c) to impose additional duty on all imports not exceeding 10% ad
valorem, among others.
4. Customs duties defined. Customs duties is the name given to taxes on the importation
and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported
to, a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)
5. Special customs duties are additional import duties imposed on specific kinds
of imported articles under certain conditions. The special customs duties under the Tariff and
Customs Code (TCCP) are the anti-dumping duty, the countervailing duty, the discriminatory duty, and the
marking duty, and under the Safeguard Measures Act (SMA) additional tariffs as safeguard measures.
6. The special customs duties are imposed for the protection of consumers and
manufacturers, as well as Philippine products.
7. Dumping duty is an additional special duty amounting to the difference
between the export price and the normal value of such product, commodity or article
(Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999.”) imposed on the
importation of a product, commodity or article of commerce into the Philippines at less than its normal
value when destined for domestic consumption in the exporting country which is causing or is threatening
to cause material injury to a domestic industry, or materially retarding the establishment of a domestic
industry producing the like product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping
Act of 1999”]
9. Normal value for purposes of imposing the anti-dumping duty is the comparable
price at the date of sale of like product, commodity, or article in the ordinary course of trade when
destined for consumption in the country of export. [Sec. 301 (s) (3 ), TCC, as amended by Rep. Act No.
8752, “Anti-Dumping Act of 1999”]
10. The imposing authority for the anti-dumping duty is the Secretary of Trade
and Industry in the case of non-agricultural product, commodity, or article or the
Secretary of Agriculture, in the case of agricultural product, commodity or article , after
formal investigation and affirmative finding of the Tariff Commission . [Sec. 301 (a), TCC, as amended by Rep.
Act No. 8752, “Anti-Dumping Act of 1999”]
11. Even when all the requirements for the imposition have been fulfilled, the
decision on whether or not to impose a definitive anti-dumping duty remains the
prerogative of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-
Dumping Act of 1999”] Thus, the cabinet secretaries could not contravene the recommendation of the Tariff
Commission. They could not impose the anti-dumping duty or any special customs duty without the
favorable recommendation of the Tariff Commission.
12. In the determination of whether to impose the anti-dumping duty, the Tariff
Commission, may consider among others, the effect of imposing an anti-dumping
duty on the welfare of the consumers and/or the general public, and other related
local industries. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)
13. The amount of anti-dumping duty that may be imposed is the difference
between the export price and the normal value of such product, commodity or article.
(Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)
The anti-dumping duty shall be equal to the margin of dumping on such product, commodity or article
thereafter imported to the Philippines under similar circumstances, in addition to ordinary duties, taxes
and charges imposed by law on the imported product, commodity or article.
14. What are countervailing duties and when are they imposed ?
SUGGESTED ANSWER: Countervailing duties are additional customs duties imposed on any product,
commodity or article of commerce which is granted directly or indirectly by the government in the country
of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or
exportation of such product commodity or article, and the importation of such subsidized product,
commodity, or article has caused or threatens to cause material injury to a domestic industry or has
materially retarded the growth or prevents the establishment of a domestic industry. (Sec. 302, TCCP as
amended by Section 1, R.A. No. 8751)
15. The imposing authority for the countervailing duties is the Secretary of Trade
and Industry in the case of non-agricultural product, commodity, or article or the
Secretary of Agriculture, in the case of agricultural product, commodity or article , after
formal investigation and affirmative finding of the Tariff Commission.
Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to
impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. (Sec. 301 (a),
TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)
16. The countervailing duty is equivalent to the value of the specific subsidy .
17. Marking duties are the additional customs duties imposed on foreign articles (or its
containers if the article itself cannot be marked), not marked in any official language in the Philippines, in
a conspicuous place as legibly, indelibly and permanently in such manner as to indicate to an ultimate
purchaser in the Philippines the name of the country of origin.
20. A discriminatory duty is a new and additional customs duty imposed upon articles wholly or
in part the growth or product of, or imported in a vessel, of any foreign country which imposes, directly or
indirectly, upon the disposition or transportation in transit through or re-exportation from such country of
any article wholly or in part the growth or product of the Philippines, any unreasonable charge, exaction,
regulation or limitation which is not equally enforced upon like articles of every foreign country, or
discriminates against the commerce of the Philippines, directly or indirectly, by law or administrative
regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge, exaction,
classification, regulation, condition, restriction or prohibition, in such manner as to place the commerce of
the Philippines at a disadvantage compared with the commerce of any foreign country.
22. Safeguard measures are emergency measures, including tariffs, to protect domestic
industries and producers from increased imports which inflict or could inflict serious injury on them.
The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing
safeguard measures as provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA ). (Southern
Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004)
The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably
recommend its imposition.
23. Imposing authority for safeguard measures. The imposing authority for the
countervailing duties is the Secretary of Trade and Industry in the case of non-
agricultural product, commodity, or article or the Secretary of Agriculture, in the case
of agricultural product, commodity or article, after formal investigation and affirmative finding
of the Tariff Commission.
24. Safeguards measures that may be imposed. Additional tariffs, import quotas or
banning of imports.
25. The basis of dutiable value of merchandise that is subject to ad valorem
customs duties is the transaction value, which shall be the price actually paid or payable for the
goods when sold for export to the Philippines, adjusted by adding certain cost elements to the extent that
they are incurred by the buyer but are not included in the price actually paid or payable for the imported
goods, and may include the following:
a. Cost of containers and packing,
b. Insurance, and
c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No. 9135)
26. The above transaction value is the primary method of determining dutiable
value. If the transaction value of the imported article could not be determined using
the above, the following alternative methods should be used one after the other:
a. Transaction value of identical goods
b. Transaction value of similar goods
c. Deductive method
d. Computed method
e. Fallback method
27. How and to whom should claims for refund of customs duties be made ?
SUGGESTED ANSWER: All claims for refund of duties shall be made in writing and forwarded to the
Collector of Customs to whom such duties are paid, who upon receipt of such claim, shall verify the same
by the records of his Office, and if found to be correct and in accordance with law, shall certify the same to
the Commissioner of Customs with his recommendation together with all necessary papers and
documents. Upon receipt by the Commissioner of such certified claim he shall cause the same to be paid
if found correct. (Sec. 1708, TCC)
29. A flight stewardess arrived from Singapore. Upon her arrival she was asked
whether she has anything to declare. She answered none, and she submitted her
“Customs Baggage Declaration Form” which she accomplished and signed with
nothing or written on the space for items to be declared. When her hanger bag was
examined some pieces of jewelry were found concealed within the lining of said bag.
She was then convicted of violating of Sec. 3601 of the Tariff and Customs Code
for unlawful importation which penalizes any person who shall fraudulently import or
bring into the Philippines any article contrary to law.
She now appeals claiming that lower court erred n convicting her under Sec. 3601
when the facts alleged both in the information and those shown by the prosecution
constitute the offense under Sec. 2505 “Failure to Declare Baggage,” of which she
was acquitted. Is she correct ?
SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. It merely provides, inter alia, the
administrative remedies which can be resorted to by the Bureau of Customs when seizing dutiable
articles found the baggage of any person arriving in the Philippines which is not included in the
accomplished baggage declaration submitted to the customs authorities, and the administrative penalties
that such person must pay for the release of such goods if not imported contrary to law.
Such administrative penalties are independent of the criminal liability for smuggling that may be
imposed under Sec. 3601, and other provisions of the TCC which can only be determined after the
appropriate criminal proceedings, prescinding from the outcome in any administrative case that may have
been filed and disposed of by the customs authorities.
Indeed the second paragraph of Sec. 2505 provides that nothing shall prevent the bringing of a criminal
action against the offender for smuggling under Section 3601. (Jardeleza v. People, G. R. No. 165265,
February 6, 2006)
30. Payment is not a defense in smuggling. “When upon trial for violation of this section, the
defendant is shown to have possession of the article in question, possession shall be deemed sufficient
evidence to authorize conviction, unless the defendant shall explain the possession to the satisfaction of
the court: Provided, however, That payment of the tax due after apprehension shall not constitute a valid
defense in any prosecution under this section.” (last par., Sec. 3601, TCC)
32. The Collector of Customs sitting in seizure and forfeiture proceedings has
exclusive jurisdiction to hear and determine all questions touching on the seizure
and forfeiture of dutiable goods. RTCs are precluded from assuming cognizance
over such matters even through petitions of certiorari, prohibition or mandamus.
(The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)
What is the rationale for this doctrine ?
SUGGESTED ANSWER:
a. Regional Trial Courts have no jurisdiction to replevin a property which is subject to seizure and
forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of
property for violation of the Customs laws could easily be undermined by the simple device of replevin.
(De la Fuente v. De Veyra, et al., 120 SCRA 455)
b. The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the RTCs is
anchored upon the policy of placing no unnecessary hindrance on the government’s drive, not only to
prevent smuggling and other frauds upon Customs,
c. but more importantly, to render effective and efficient the collection of import and export duties due
the State, which enables the government to carry out the functions it has been instituted to perform. (Jao,
et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43)
d. The issuance by regular courts of writs of preliminary injunction in seizure and forfeiture
proceedings before the Bureau of Customs may arouse suspicion that the issuance or grant was for
consideration other than the strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003])
e. Under the doctrine of primary jurisdiction, the Bureau of Customs has exclusive administrative
jurisdiction to conduct searches, seizures and forfeitures of contraband without interference from the
courts. It could conduct searches and seizures without need of a judicial warrant except if the search is to
be conducted in a dwelling place.
Where an administrative office has obtained a technical expertise in a specific subject, even the courts
must defer to this expertise.
NOTES AND COMMENTS: The Bureau of Customs could search and seize articles without need of a
judicial warrant unless the place to be searched is a dwelling place. In such a case customs requires a
judicial warrant.
33. “A” claiming to be the owner of a vessel which is the subject of customs
warrant of seizure and detention sought the intercession of the RTC to restrain the
Bureau of Customs from interfering with his property rights over the vessel. Would
the suit prosper?
SUGGESTED ANSWER: No. His remedy was not with the RTC but with the CTA, as issues of
ownership of goods in the custody of customs officials are within the power of the CTA to determine.
The Collector of Customs has exclusive jurisdiction over seizure and forfeiture proceedings and trial
courts are precluded from assuming cognizance over such matters even through petitions for certiorari,
prohibition or mandamus. (Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05,
January 31, 2006)
34. The customs authorities do not have to prove to the satisfaction of the court
that the articles on board a vessel were imported from abroad or are intended to be
shipped abroad before they may exercise the power to effect customs searches,
seizures, or arrests provided by law and continue with the administrative hearings .
(The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)
35. The Tariff and Customs Code allows the Bureau of Customs to resort to the
administrative remedy of seizure, such as by enforcing the tax lien on the imported
article when the imported articles could be found and be subject to seizure and
forfeiture.
36. The Tariff and Customs Code allows the Bureau of Customs to resort to the judicial
remedy of filing an action in court when the imported articles could not anymore be
found.
37. Section 2301 of the TCCP states that seized articles may not be released under
bond if there is prima facie evidence of fraud in their importation . Commissioner of
Customs v. Court of Tax Appeals, et al., G. R. No. 171516-17, February 13, 2009
Section 2301. Warrant for Detention of Property-Cash Bond. – Upon making any seizure, the
Commissioner shall issue a warrant for the detention of the property; and if the owner or importer desires
to secure the release of the property for legitimate use, the Collector shall, with the approval of the
Commissioner of Customs, surrender it upon the filing of a cash bond, in an amount fixed by him,
conditioned upon the payment of the appraised value of the article and/or any fine, expenses and costs
which may be adjudged in the case: Provided, That such importation shall not be released under any
bond when there is prima facie evidence of fraud in the importation of the article: Provided, further,
That articles the importation of which is prohibited by law shall not be released under any circumstances
whatsoever: Provided, finally, That nothing in this section shall be construed as relieving the owner or
importer from any criminal liability which may arise from any violation of law committed in connection with
the importation of the article. (emphasis supplied)
39. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax
appeals, et al., 217 SCRA 298, the Supreme Court clarified that the fraud contemplated by law
must be actual and not constructive. It must be intentional, consisting of deception, willfully and
deliberately done or resorted to in order to induce another to give up some right.
41. On January 7, 1989, the vessel M/V ”Star Ace, ”coming from Singapore laden
with cargo, entered the Port of San Fernando, La Union for needed repairs. When the
Bureau of Customs later became suspicious that the vessel’s real purpose in docking
was to smuggle cargo into the country, seizure proceedings were instituted and
subsequently two Warrants of Seizure and Detention were issued for the vessel and
its cargo.
Cesar does not own the vessel or any of its cargo but claimed a preferred maritime
lien. Cesar then brought several cases in the RTC to enforce his lien. Would these
suits prosper ?
SUGGESTED ANSWER: No. The Bureau of Customs having first obtained possession of the vessel
and its goods has obtained jurisdiction to the exclusion of the trial courts.
When Cesar has impleaded the vessel as a defendant to enforce his alleged maritime lien, in the RTC,
he brought an action in rem under the Code of Commerce under which the vessel may be attached and
sold.
However, the basic operative fact is the actual or constructive possession of the res by the tribunal
empowered by law to conduct the proceedings. This means that to acquire jurisdiction over the vessel,
as a defendant, the trial court must have obtained either actual or constructive possession over it. Neither
was accomplished by the RTC as the vessel was already in the possession of the Bureau of Customs.
(Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)
NOTES AND COMMENTS:
a. Forfeiture of seized goods in the Bureau of Customs is in the nature of a proceeding in
rem, i.e. directed against the res or imported goods and entails a determination of the legality of their
importation. In this proceeding, it is in legal contemplation the property itself which commits the violation
and is treated as the offender, without reference whatsoever to the character or conduct of the owner.
The issue is limited to whether the imported goods should be forfeited and disposed of in accordance
with law for violation of the Tariff and Customs Code. .(Transglobe International, Inc. v. Court of Appeals,
et al., G.R. No. 126634, January 25, 1999)
Forfeiture of seized goods in the Bureau of Customs is a proceeding against the goods and not against
the owner. (Asian Terminals, Inc. v. Bautista-Ricafort, G .R. No. 166901, October 27, 2006 citing
Transglobe)
42. The Collector of Customs upon probable cause that the articles are imported or
exported, or are attempted to be imported or exported, in violation of the tariff and
customs laws shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93)
If the search and seizure is to be conducted in a dwelling place, then a search warrant should be
issued by the regular courts not the Bureau of Customs.
There may be instances where no warrants issued by the Bureau of Customs or the regular courts is
required, as in search and seizures of motor vehicles and vessels.
43. Smuggled goods seized by virtue of a court warrant should be surrendered to
the court that issued the warrant and not to the Bureau of Customs because the goods
are in custodia legis.
44. Decisions of the Commissioner of Customs “in cases involving liability for
customs duties, fees or other money charges” that must be appealed to the Court of
Tax Appeals Division within thirty (30) days from receipt specifically refer to his decisions on
administrative tax protest cases, as stated in Section 2402 of the Tariff and Customs Code of the
Philippines (TCCP):
Unless an appeal is made to the Court of Tax Appeals in the manner and within the period
prescribed by laws and regulations, the action or ruling of the Commissioner shall be final and
conclusive. [Emphasis supplied.] (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No.
176380, June 18, 2009)
45. Administrative tax protest under the Tariff and Customs Code (TCCP). A tax
protest case, under the TCCP, involves a protest of the liquidation of import entries. (Pilipinas Shell
Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)
46. Liquidation, defined. A liquidation is the final computation and ascertainment by the
collector of the duties on imported merchandise, based on official reports as to the quantity, character,
and value thereof, and the collector’s own finding as to the applicable rate of duty; it is akin to an
assessment of internal revenue taxes under the National Internal Revenue Code where the tax liability of
the taxpayer is definitely determined. (Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R.
No. 176380, June 18, 2009)
48. A case becomes ripe for filing with the Regional Trial Court (RTC), as a
collection matter after the finality of the Commissioner of Customs assessment.
(Pilipinas Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June 18, 2009 citing Shell v.
Republic of the Philippines, G.R. No. 161953, March 6, 2008, 547 SCRA 701)
The assessment has long been final, and this recognition of finality removes all perceived hindrances,
based on this case, to the continuation of the collection suits.
A suit for the collection of internal revenue taxes, where the assessment has already become final and
executory, the action to collect is akin to an action to enforce the judgment. No inquiry can be made
therein as to the merits of the
In light of the conclusion that the present case does not involve a decision of the Commissioner of
Customs on a matter brought to him as a tax protest, Atty. Valera’s lack of authority to issue the collection
letters and to institute the collection suits is irrelevant. For this same reason, the injunction against Atty.
Valera cannot be invoked to enjoin the collection of unpaid taxes due from Shell. (Pilipinas Shell
Petroleum Corporation v. Commissioner of Customs, supra)
2. A law which deprives local government units of their power to tax would be
unconstitutional. The constitution has delegated to local governments the power to levy taxes, fees
and other charges. This constitutional delegation may only be removed by a constitutional amendment.
3. Under the now prevailing Constitution, where there is neither a grant nor
prohibition by statute, the taxing power of local governments must be deemed to
exist although Congress may provide statutory limitations and guidelines in order to
safeguard the viability and self-sufficiency of local government units by directly granting them general
and broad tax powers. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708,
March 25, 1999)
7. The fundamental law did not intend the direct grant to local government units to
be absolute and unconditional, the constitutional objective obviously is to ensure that, while local
government units are being strengthened and made more autonomous, the legislature must still see to it
that:
a. the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions;
b. each local government unit will have its fair share of available resources;
c. the resources of the national government will be unduly disturbed; and
d. local taxation will be fair, uniform and just. (Manila Electric Company v. Province of Laguna, et al.,
G.R. No. 131359, May 5, 1999)
8. Taxing power of the local government is limited. The taxing power of local
governments is limited in the sense that Congress can enact legislation granting tax exemptions.
While the system of local government taxation has changed with the onset of the 1987 Constitution, the
power of local government units to tax is still limited.
While the power to tax by local governments may be exercised by local legislative bodies, no longer
merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5,
Article X of the Constitution, the basic doctrine on local taxation remains essentially the same, “the power
to tax is [still] primarily vested in the Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc.,
G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority, v.
Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)
12. Requirements: Any individual or corporation employing a person subject to professional tax
shall require payment by that person of the tax on his profession before employment and annually
thereafter.
Any person subject to the professional tax shall write in deeds, receipts, prescriptions, reports,
books of account, plans and designs, surveys and maps, as the case may be, the number of the official
receipt issued to him.
Exemption: Professionals exclusively employed in the government shall be exempt from payment.
(Sec. 139, LGC)
NOTE: For the purpose of collecting the tax, the provincial or city treasurer or his duly authorized
representative shall require from such professionals their current annual registration cards issued by
competent authority before accepting payment of their professional tax for the current year. The PRC
shall likewise require the professionals presentation of proof of payment before registration of
professionals or renewal of their licenses. (last par., Art. 228, Rules and Regulations Implementing the
Local Government Code of 1991)
13. Who are the professionals who, if they are in practice of their profession, are
subject to professional tax ?
SUGGESTED ANSWER: The professionals subject to the professional tax are only those who have
passed the bar examinations, or any board or other examinations conducted by the Professional
Regulation Commission (PRC). for example, a lawyer who is also a Certified Public Accountant (CPA)
must pay the professional tax imposed on lawyers and that fixed for CPAs, if he is to practice both
professions. [Sec. 238 (f), Rule XXX, Rules and Regulations Implementing the Local Government Code
of 1991]
15. Authority of Local Government Units (LGUs) such as the City of Manila to
impose business taxes. Section 143 of the LGC, is the very source of the power of municipalities
and cities to impose a local business tax, and to which any local business tax imposed by cities or
municipalities such as the City of Manila must conform. It is apparent from a perusal thereof that when a
municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits,
wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city
may no longer subject the same manufacturers, etc. to a business tax under Section 143(h) of the same
Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are “not otherwise specified in preceding paragraphs.” In
the same way, businesses such as respondent’s, already subject to a local business tax under Section 14
of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable
for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of
the LGC]. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845, August 4,
2009)
3. Fair market value is the price at which a property may be sold by a seller who
is not compelled to sell and bought by a buyer who is not compelled to buy, taking into
consideration all uses to which the property is adopted and might in reason be applied.
The criterion established by the statute contemplates a hypothetical sale. Hence, the buyers need not
be actual and existing purchasers. (Allied Banking Corporation, etc., v. Quezon City Government, et al.,
G. R. No. 154126, October 11, 2005 )
NOTES AND COMMENTS: In fixing the value of real property, assessors have to consider all the
circumstances and elements of value and must exercise prudent discretion in reaching conclusions.
(Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11,
2005)
Preparation of fair market values:
a. The city or municipal assessor shall prepare a schedule of fair market values for the different
classes of real property situated in their respective Local Government Units for the enactment of an
ordinance by the sanggunian concerned; and
b. The schedule of fair market values shall be published in a newspaper of general circulation in the
province, city or municipality concerned or the posting in the provincial capitol or other places as required
by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999)
Proposed fair market values of real property in a local government unit as well as the ordinance
containing the schedule must be published in full for three (3) consecutive days in a newspaper of
local circulation, where available, within ten (10) days of its approval, and posted in at lease two (2)
prominent places in the provincial capitol, city, municipal or barangay hall for a minimum of three (3)
consecutive weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)
4. Approaches in estimating the fair market value of real property for real
property tax purposes ?
a. Sales Analysis Approach. The sales price paid in actual market transactions is considered by
taking into account valid sales data accumulated from among the Registrar of Deeds, notaries public,
appraisers, brokers, dealers, bank officials, and various sources stated under the Local Government
Code.
b. Income Capitalization Approach. The value of an income-producing property is no more than the
return derived from it. An analysis of the income produced is necessary in order to estimate the sum
which might be invested in the purchase of the property.
c. Reproduction cost approach is a formal approach used exclusively n appraising man-made
improvements such as buildings and other structures, based on such data as materials and labor costs to
reproduce a new replica of the improvement.
The assessor uses any or all of these approaches in analyzing the data gathered to arrive at the
estimated fair market value to be included in the ordinance containing the schedule of fair market values.
(Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005
citing Local Assessment Regulations No. 1-92)
6. Examples of personal property under the civil law that may be considered as
real property for purposes of taxes. Personal property under the civil law may be considered as
real property for purposes of taxes where the property is essential to the conduct of the business.
a. Underground tanks are essential to the conduct of the business of a gasoline station without which
it would not be operational. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296)
b. Light Rail Transit (LRT) improvements such as buildings, carriageways, passenger terminals
stations, and similar structures do not form part of the public roads since the former are constructed over
the latter in such a way that the flow of vehicular traffic would not be impaired. The carriageways and
terminals serve a function different from the public roads. Furthermore, they are not open to use by the
general public hence not exempt from real property taxes. Even granting that the national government
owns the carriageways and terminal stations, the property is not exempt because their beneficial use has
been granted to LRTA a taxable entity. (Light Rail Transit Authority v. Central Board of Assessment Appeals, et
al., G. R. No. 127316, October 12, 2000)
c. Barges on which were mounted gas turbine power plants designated to generate electrical power,
the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment
mounted on the barges were subject to real property taxes.
Moreover, Article 415(9) of the Civil Code provides that “[d]ocks and structures which, though floating,
are intended by their nature and object to remain at a fixed place on a river, lake or coast” are considered
immovable property by destination being intended by the owner for an industry or work which may be
carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or
work. (FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case)
7. Unpaid realty taxes attach to the property and is chargeable against the person
who had actual or beneficial use and possession of it regardless of whether or not he
is the owner. To impose the real property tax on the subsequent owner which was neither the owner
not the beneficial user of the property during the designated periods would not only be contrary to law but
also unjust.
Consequently, MERALCO the former owner/user of the property was required to pay the tax
instead of the new owner NAPOCOR. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001)
NOTES AND COMMENTS: The above May 18, 2001 decision was set aside by the Supreme
Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author
submits that the above ruling in the May 18, 2001 decision is still valid, not on the basis of the May 18,
2001 decision but in the light of pronouncements of the Supreme Court in other cases. Thus, do not cite
the doctrine as emanating from the May 18, 2001 decision.
9. Public hearings are mandatory prior to approval of tax ordinance , but this still
requires the taxpayer to adduce evidence to show that no public hearings ever took place. (Reyes, et al., v.
Court of Appeals, et al., G.R. No. 118233, December 10, 1999) Public hearings are required to be conducted
prior to the enactment of an ordinance imposing real property taxes. (Figuerres v. Court of Appeals, et al.,
G.R. No. 119172, March 25, 1999)
10. The concurrent and simultaneous remedies afforded local government units
in enforcing collection of real property taxes:
a. Distraint of personal property;
b. Sale of delinquent real property, and
c. Collection of real property tax through ordinary court action.
11. Notice and publication, as well as the legal requirements for a tax
delinquency sale, are mandatory, and the failure to comply therewith can invalidate the sale. The
prescribed notices must be sent to comply with the requirements of due process . (De Knecht, et al,. v. Court
of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)
12. The reason behind the notice requirement is that tax sales are administrative
proceedings which are in personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v.
I.A.C., 169 SCRA 314)
13. FELS Energy, Inc., had a contract to supply NPC with the electricity
generated by FELS’ power barges. The contract also stated that NPC shall be
responsible for all real estate taxes and assessments. FELS then received an
assessment of real property taxes on its power barges from the Provincial Assessor
of Batangas. If filed a motion for reconsideration with the Provincial Assessor.
a. Upon denial, FELS elevated the matter to the Local Board of Assessment
Appeals (LBAA), where it raised the following issues:
1) Since NPC is tax-exempt then FEL’s should also be tax-exempt because of
its contract with NPC.
2) The power barges are not real property subject to real property taxes.
b. Upon the other hand the Local Treasurer insists that the assessment has
attained a state of finality hence the appeal to the LBAA should be dismissed.
Rule on the conflicting contentions.
SUGGESTED ANSWER:
a. All the contentions of FELS are without merit:
1) NPC is not the owner of the power barges nor the operator of the power barges. The tax
exemption privilege granted to NPC cannot be extended to FELS. the covenant is between NPC
and FELs and does not bind a third person not privy to the contract such as the Province of
Batangas.
2) The Supreme Court of New York in Consolidated Edison Company of New York, Inc., et al., v.
The City of New York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of
Batangas, G. R. No. 168557, February 16, 2007 and companion case, held that barges on which
were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges
which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the
barges were subject to real property taxes.
Moreover, Article 415(9) of the Civil Code provides that “[d]ocks and structures which, though
floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast”
are considered immovable property by destination being intended by the owner for an industry or
work which may be carried on in a building or on a piece of land and which tend directly to meet
the needs of said industry or work.
b. The Treasurer is correct. The procedure do not allow a motion for reconsideration to be filed with
the Provincial Assessor.
To allow the procedure would indeed invite corruption in the system of appraisal and assessment. it
conveniently courts a graft-prone situation where values of real property ay be initially set unreasonably
high, and then subsequently reduced upon the request of a property owner. In the latter instance,
allusions of possible cover, illicit trade-off cannot be avoided, and in fact can conveniently take place.
Such occasion for mischief must be prevented and excised from our system. (FELS Energy, Inc., v.
Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case)
15. If the ground for the protest is validity of the real property tax ordinance and not
the unreasonableness of the amount collected the tax must be paid under protest, and the issue of
legality may be raised to the proper courts on certiorari without need of exhausting administrative
remedies.
16. If the ground for the protest is unreasonableness of the amounts collected
there is need to pay under protest and administrative remedies must be resorted to before
recourse to the proper courts.
18. The entitlement to a tax refund does not necessarily call for the automatic
payment of the sum claimed. The amount of the claim being a factual matter, it must still be
proven in the normal course and in accordance with the administrative procedure for obtaining a refund of
real property taxes, as provided under the Local Government Code. (Allied Banking Corporation, etc., v.
Quezon City Government, et al., G. R. No. 154126, September 15, 2006)
NOTES AND COMMENTS: In the above Allied Banking case, the Supreme Court provided for the
starting date of computing the two-year prescriptive period within which to file the claim with the
Treasurer, which is from finality of the Decision. The procedure to be followed is that shown below.
19. Procedure for refund of real property taxes based on validity of the tax
measure or solutio indebeti.
a. Payment under protest not required, claim must be directed to the local treasurer, within two (2)
years from the date the taxpayer is entitled to such reduction or readjustment, who must decide within
sixty (60) days from receipt.
b. The denial by the local treasurer of the protest would fall within the Regional Trial Court’s original
jurisdiction, the review being the initial judicial cognizance of the matter. Despite the language of Section
195 of the Local Government Code which states that the remedy of the taxpayer whose protest is denied
by the local treasurer is “to appeal with the court of competent jurisdiction,” labeling the said review as an
exercise of appellate jurisdiction is inappropriate since the denial of the protest is not the judgment or
order of a lower court, but of a local government official. (Yamane , etc. v. BA Lepanto Condominium
Corporation, G. R. No. 154993, October 25, 2005)
c. The decision of the Regional Trial Court should be appealed by means of a petition for review
directed to the Court of Tax Appeals (Division).
d. The decision of the Court of Tax Appeals (Division) may be the subject of a review by the Court of
Tax Appeals (en banc).
e. The decision of the Court of Tax Appeals (en banc) may be the subject of a petition for review on
certiorari on pure questions of law directed to the Supreme Court.
21. The constitutional tax exemptions refer only to real property that are actually,
directly and exclusively used for religious, charitable or educational purposes, and that the only
constitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock
educational institutions which are actually, directly and exclusively used for educational purposes.
(Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)
The constitutional tax exemption covers property taxes only. What is exempted is not the institution
itself, those exempted from real estate taxes are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
22. The 1935 Constitution stated that the lands, buildings, and improvements are
“used exclusively” but the present Constitution requires that the lands, buildings and
improvements are “actually, directly and exclusively used.” The change should not be
ignored. Reliance on past decisions would have sufficed were the words “actually” as well as :directly”
are not added. There must be proof therefore of the actual and direct use to be exempt from taxation.
(Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
23. The “actual, direct and exclusive use” of the property for charitable purposes
is the direct and immediate and actual application of the property itself to the purposes
for which the charitable institution is organized. It is not the use of the income from the real property that
is determinative of whether the property is used for tax-exempt purposes.
If real property is used for one or more commercial purposes, it is not exclusively used for the
exempted purpose but is subject to taxation,. The words “dominant use” or “principal use” cannot be
substituted for the words “used exclusively” without doing violence to the Constitution and the law. Solely
is synonymous with exclusively. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104,
June 29, 2004)
25. As a general principle, a charitable institution does not lose its character as
such and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies from
the government. So long as the money received is devoted or used altogether to the charitable object
which it is intended to achieve; and no money inures to the private benefit of the persons managing or
operating the institution. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29,
2004)
26. Property that are exempt from the payment of real property tax under the
Local Government Code.
a. Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted to a taxable person for a consideration or otherwise;
b. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-
profit or religious cemeteries, and all lands, buildings and improvements actually, directly and exclusively
used for religious, charitable and educational purposes;
c. Machineries and equipment, actually, directly and exclusively used by local water districts; and
government owned and controlled corporations engaged in the supply and distribution of water and
generation and transmission of electric power;
d. Real property owned by duly registered cooperatives;
e. Machinery and equipment used for pollution control and environmental protection.