DE LA SALLE UNIVERSITY COLLEGE OF LAW

Lasallian Commission on Bar Operations

TAXATION LAW
Animo Notes 2019
 GENERAL PRINCIPLES OF TAXATION

Q: Define and explain the concept of taxation?

A: Taxation is a mode of raising revenue demanding enforced contributions for public purposes (De Leon & De
Leon, 2010). It is an inherent power of the State by which the sovereign through its law-making body raises income
to defray the necessary expenses of government by apportioning the cost among those who, in some measure,
are privileged to enjoy its benefits and, therefore, must bear its burdens. (51 Am. Jur. 34, 1 Cooley Taxation, 4th Ed.,
72-93, as cited in Dimaampao, 2015.)

It is described as a destructive power, which interferes with the personal and property rights of the people and
takes from them a portion of their property for the support of the government. (Paseo Realty & Development
Corporation v. CA, GR No. 119286, 2004)

Q: What are the purposes of taxation?

A: The purposes of taxation are:
(1) To raise revenues; and
(2) For non-revenue or special/regulatory purposes.

The primary purpose of taxation is to raise funds or property to enable the State to promote the general welfare
and protection of its citizens. (Dimaampao, 2015) Fees may be properly regarded as taxes even though they also
serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called a tax. (PAL v. Edu, GR No. L-41383, 1988)

The secondary purposes of taxation are:

(1) To Reduce Social Inequality. The Philippine tax system has adopted the progressive system of taxation.
This system aims at reducing the inequality in the distribution of wealth by preventing its undue
concentration in the hands of a few individuals.

(2) To Encourage the Growth of Local Industries. It is a settled rule that the power to tax carries with it the
power to grant tax exemptions. Tax exemptions and tax reliefs serve as incentives to encourage
investment in our local industry and thereby promote economic growth.

(3) To Protect our Local Industry Against Unfair Competition. The Tariff and Customs Code allows the
imposition of certain taxes (countervailing and dumping duties) upon imported goods or articles to
further protect our local industry.

(4) To Serve as a Regulatory Measure or Implement of the Police Power of the State. Tax measures are but
“enforced contributions exacted on pain of penal sanctions” and “clearly imposed for a public purpose.
The power to tax has become the most effective tool to realize social justice, public welfare, and the
equitable distribution of wealth.” (CIR v. Central Luzon Drug Corporation, 456 SCRA 414)

Q: Distinguish Taxation from Police Power.

A:
(1) As to PURPOSE. Taxation is levied for the purpose of raising revenues. Police power is exercised to
promote public welfare through regulation. (Dimaampao, 2015)

(2) As to AMOUNT OF EXACTION. The amount gathered in the exercise of taxation contemplates no limits.
In police power, the exaction is limited to the cost of regulation, issuance of the license, or surveillance.

(3) As to the BENEFITS RECEIVED BY THE TAXPAYER. In taxation, no special or direct benefit is received
by the taxpayer other than the fact that the government secures to the citizen that general benefit
resulting from the protection of his person and property, the welfare of all, and the maintenance of a
healthy economic standard of society. (51 Am. Jur. 42-43, as cited in Dimaampao, 2015)

(4) As to SUPERIORITY OF CONTRACTS. Taxation recognizes the obligations imposed by contracts. (Art.
III, Sec. 10, Constitution) This limitation does not apply to police power.
 (5) As to TRANSFER OF PROPERTY RIGHTS. In taxation, the taxes paid form part of the public funds,
whereas police power allows merely the restraint on the exercise of property rights.

(6) As to VALIDITY. Taxation must not be contrary to the inherent and constitutional limitations. In police
power, it must comply with the tests on “lawful subjects” and “lawful means.”

Q: Distinguish Taxation from Power of Eminent Domain.

A:
(1) As to PURPOSE. Taxation is exercised in order to raise public revenue. Eminent domain or expropriation
is the taking of property for public use.

(2) As to COMPENSATION. Payment of taxes accrues to the general benefit of the citizens of the taxing
state. In eminent domain, just compensation is given the owner of the expropriated property.

(3) As to PERSONS AFFECTED. Taxation applies to all persons, property and excises that may be subject
thereto. In eminent domain, only particular property is comprehended.

(4) As to AUTHORITY WHO EXERCISES THE POWER. Taxation is imposed by the government or its
political subdivision. In eminent domain, it is imposed by the Government or public service companies
and public utilities.

Q: Can taxation be used as an implement for the exercise of the police power?
A: Yes. When the purpose of the imposition of a royalty fee upon an oil company is not for the purpose of
generating revenue but a recognition that the oil industry is imbued with public interest, then the royalty fee will
be considered as a regulatory fee.

Simply stated an imposition that is for revenue is generally a tax while an imposition that has another purpose
such as regulation is an exercise of police power. (Chevron v. BCDA and CDC, 2010)

Q: What is the lifeblood doctrine?

A: The power of taxation is essential because the government can neither exist nor endure without taxation.
Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which
the state effects its functions for the welfare of its constituents (CIR v. Citytrust and CTA, 1994)

Government projects and infrastructures are made possible through the availability of funds provided through
taxation. The government’s ability to serve and protect the people depends largely upon taxes. Taxes are what
we pay for a civilized society. As the lifeblood of our nation, its collection should be actively pursued without
unnecessary impediment or hindrance. (Commissioner v. Algue, Inc., 158 SCRA 9)

Q: What is the necessity theory?

A: The power of taxation proceeds upon the theory that the existence of government is a necessity. It cannot
continue without means to pay its expenses.

Taxation is a power predicated upon necessity. It is a necessary burden to preserve the State's sovereignty and
a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of
civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the
State's territory and facilities and protection which a government is supposed to provide. (Phil Guaranty Co., Inc.
v. Commissioner, 1965)

Q: What is the Benefits-Protection Theory?

A: The Benefits-Protection Theory bases the power of the State to demand and receive taxes on the reciprocal
duties of support and protection. The citizen supports the State by paying the portion from his property that is
demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized
society. Thus, the taxpayer cannot question the validity of the tax law on the ground that payment of such tax
will render him impoverished, or lessen his financial or social standing, because the obligation to pay taxes is
involuntary and compulsory, in exchange for the protection and benefits one receives from the government.
(Dimaampao, 2015)
Q: What is the Doctrine of Symbiotic Relationship?
A: The basis of taxation is the symbiotic relationship, which is the reciprocal relationship of protection and
support between the State and the taxpayer. The State gives protection and for it to continue giving protection,
it must be supported by the taxpayer in the form of taxes. (Domondon, 2017)

Q: What are the principles of a sound tax system?

A: “FAT”
(1) Fiscal adequacy - Sources of revenues must be adequate to meet government expenditures (Chavez v.
Ongpin, 1990), and other public needs. This is in consonance with the doctrine that taxes are the lifeblood
of the government.
(2) Administrative feasibility - A tax system should be capable of being effectively administered and
enforced with the least inconvenience to the taxpayer. (Diaz v. Sec. of Finance, 2011) Tax laws must not
obstruct business growth and economic development.
(3) Theoretical justice - The rule on taxation must be uniform and equitable and that the State must evolve
a progressive system of taxation. (Art. VI, Sec. 28 (1), 1987 Constitution) It must take into consideration
the taxpayer’s ability to pay. The laws mandate that taxes must be reasonable, just, fair, and conscionable.

Q: What is the extent of the taxing power?

A: Taxation is: “CUPS”
(1) Comprehensive – as it covers persons, businesses, activities, professions, rights, and privileges.
(2) Unlimited – The power to impose taxes is one so unlimited in force and so searching in extent that the
courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in
the discretion of the authority which exercises it.
(3) Plenary – as it is complete.
(4) Supreme – Taxation, although referred to as the strongest of all the powers of the government, cannot
be interpreted to mean that it is superior to the other inherent powers of the government. It is supreme
insofar as the selection of the subject of taxation is concerned.
(Tio v. Videogram Regulatory Board, 151 SCRA 208)

Q: What are the inherent limitations on the power to tax?

A: “PITIE”
(1) Public Purpose — The power to tax exists for the general welfare; hence, it cannot be used for purely
private purposes or for the exclusive benefit of private persons. Tax is considered for public purpose if:
a. It is for the welfare of the nation and/or for greater portion of the population;
b. It affects the area as a community rather than as individuals;
c. It is designed to support the services of the government for some of its recognized objects

(2) Inherently legislative/Non-delegability of the taxing power — Only the legislature has full discretion
as to the persons, property, occupation or business to be taxed, provided these are all within the State’s
territorial jurisdiction. It can also finally determine the amount or rate of tax, the kind of tax to be
imposed and the method of collection.

(3) Territorial — Taxation may be exercised only within the territorial jurisdiction of the taxing authority.
Within its territorial jurisdiction, the taxing authority may determine the “place of taxation” or “tax situs”.

(4) International comity — This is a limitation, which is founded on reciprocity designated to maintain a
harmonious and productive relationships among the various states. Under international comity, a state
must recognize the generally accepted tenets of international law, among which are the principles of
sovereign equality among states and of their freedom from suit without their consent, that limit the
authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as
well as on its property held, and activities undertaken in that capacity.

(5) Exemption of government entities, agencies and instrumentalities – Properties of the National
Government as well as those of the local government units are not subject to tax, otherwise it will result
in the absurd situation of the government “taking money from one pocket and putting it in another”.
 NOTE: As a rule, agencies performing governmental functions are tax-exempt unless expressly taxed.
On the other hand, agencies performing proprietary functions are subject to tax unless expressly
exempted.

Q: What are the constitutional limitations on the power to tax?

A:
1. DUE PROCESS OF LAW. The constitutional safeguard of due process is embodied in the fiat “no person
shall be deprived of life, liberty or property without due process of law.” The due process clause may be
properly invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a
confiscation of property. (Sison, Jr. v. Ancheta, 1984)

2. EQUAL PROTECTION OF THE LAW. Equality of taxation is accomplished when the burden of the tax
falls equally and impartially upon all persons and property subject to it, so that no higher rate or greater
levy in proportion to value is imposed upon one person or species or property than upon others similarly
situated or of like character.

Elements of a Valid Classification:

(1) Substantial distinctions which make for real differences
(2) Germane to the purpose of the law
(3) Not limited to existing conditions only
(4) Must apply equally to all members of the same class
3. UNIFORMITY OF TAXATION. All taxable articles or kinds of property of the same class shall be taxed at
the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on
the same class everywhere, with all people and at all times.

4. PROGRESSIVE TAXATION. Taxation is progressive when its rate goes up depending on the resources
of the person affected. It is built on the principle of the taxpayer’s ability to pay, and in proportion to the
revenue which they respectively enjoy under the protection of the state.”

5. NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX. “No person shall be imprisoned for non-
payment of a debt or poll tax.” (Art. III, Sec. 20, Constitution) However, a taxpayer may be imprisoned for
non-payment of other kinds of taxes where the law so expressly provides. (Dimaampao, 2015)

6. ORIGIN OF REVENUE AND TARIFF BILLS. All appropriation, revenue or tariff bills, bills authorizing the
increase of the public debt, bills of local application and private bills, shall originate exclusively in House
of Representatives, but the Senate may propose or concur with amendments. (Art. III, Sec. 24,
Constitution) This is based on the theory that the members of the HOR, elected as they are from the
districts, can be expected to be more sensitive to the local needs and problems. (Tolentino v. Secretary
of Finance, 1995)

7. PRESIDENTIAL VETO. The President shall have the power to veto any particular item or items in an
appropriation, revenue or tariff bill but the veto shall not affect the item or items to which he does not
object. (Art. VI, Sec. 27 [2], Constitution)

8. PRESIDENTIAL POWER TO FIX TARIFF RATES. The President is vested with the authority by law to
increase tariff rates, even for revenue purposes only. The Constitution expressly grants permission to
Congress to authorize the President “to fix within specified limits and subject to such limitations and
restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues and
other duties or imposts within the framework of the national development program of the Government”.
(Art. VIII, Sec. 28 [2], Constitution)

9. TAX EXEMPTION FROM PROPERTY TAX OF PROPERTIES OF RELIGIOUS, EDUCATION,

CHARITABLE INSTITUTIONS. Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements
actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt
from taxation. (Art. VI, Sec. 28 [3], Constitution) The test exemption from realty taxation, there must be
proof of the actual and direct use of the land buildings, and improvement for religious or charitable
purposes. (Province of Abra v. Hernando, 1981)
 However, it is not limited to property “actually indispensable” but extends to facilities which are
incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of
hospitals, a school for training nurses, and recreational facilities for student nurses, interns, and
residents, among others. (Herrera v. Quezon City Board of Assessment Appeals, 1961)

10. TAX EXEMPTIONS GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS. All

revenues and assets of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes shall be exempt from taxes and duties. Subject to conditions
prescribed by law, all grants, endowments, donations or contributions used actually, directly and
exclusively for educational purposes shall be exempt from tax (Art. XIV, Sec. 4[3] and [4], Constitution)

11. APPROPRIATION OF PUBLIC MONEY. No public money or property shall be appropriated, applied, paid
or employed directly or indirectly for the use, benefit or support of any sect, church, denomination,
sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher
or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed
forces or to any penal institution or government orphanage or leprosarium. (Art. VI, Sec. 29[2],
Constitution) This is in consonance with the inviolable principle of separation of Church and State.

12. GRANT OF TAX EXEMPTIONS. The inherent power of the State to impose taxes naturally carries with
it the power to grant tax exemptions. The power to exempt from taxation, as well as the power to tax, is
an essential attribute of sovereignty, and may be exercised in the Constitution, or in a statute, unless the
Constitution expressly or by implication prohibits action by the legislature on the subject. (Revenue
Memorandum Circular No. 76-2003)

Exemptions from taxation may be created directly by the Constitution (Art. VI, Sec. 28[3]) such as those
granted to religious, charitable and educational institutions. Furthermore, Art. VI, Sec. 28[4] notes that
in granting exemptions, an absolute majority vote of the Members of the Congress is required, while in
the cases of withdrawal of such tax exemption, a relative majority is sufficient. This shall also be
applicable to tax amnesties, tax condonations, and tax refunds, for these are in the nature of tax
exemptions. (Dimaampao, 2015)

13. GRANT OF POWER OF TAXATION TO LOCAL GOVERNMENT UNITS. Each local government unit shall
have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. (Art. X, Sec.
5, Constitution)

This is an exception to the general principle of the non-delegability of legislative powers. Delegation of
legislative power to local governments is justified by the necessary implication that the power to create
political corporations for purposes of local self-government carries with it the power to confer on such
local government agencies the authority to tax. (Pepsi-Cola Bottling Co. of the Philippines, Inc. v.
Municipality of Tanauan, Leyte, 1976)

However, despite the grant of taxing power to local government, judicial admonition is given to the effect
that the tax so levied must be for a public purpose, uniform and must not transgress any constitutional
provision nor repugnant to a controlling statute. (Villanueva v. City of Iloilo, 1968)

14. MONEY COLLECTED FOR A SPECIAL PURPOSE SHALL BE CONSIDERED A SPECIAL FUND. All money
collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such
purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the general funds of the government. (Art. VI, Sec. 29[3],
Constitution)

Hence, in the question of whether the Oil Price Stabilization Fund (OPSF) shall be treated as a “special
fund” under P.D. 1956 or a “trust fund” under E.O. 1024, the Supreme Court held that: while the funds
collected may be referred to as taxes, they are exacted in the exercise of the police power of the state.
The OPSF is a special fund is plain from the special treatment given it by E.O. 137. It is segregated from
 the general fund; and while it is placed in what the law refers to as a “trust liability account,” the fund
nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these
measures comply with the constitutional description of a “special fund.” OPSF was established precisely
to protect local consumers from the adverse consequences that such frequent oil price adjustments may
have upon the economy. (Osmeña v. Orbos, 1993)

15. SUPREME COURT’S JURISDICTION OVER TAX CASES. The Supreme Court has the power to review,
revise, reverse, modify or affirm on appeal or certiorari as the law or the Rules of Court may provide,
final judgments or orders of lower courts in all cases involving the legality of any tax, impost, assessment
or toll, or any penalty imposed in relation thereto. (Art. VIII, Sec. 5, Constitution) The Congress shall have
the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive
the Supreme Court of its jurisdiction over cases enumerated in Section 5 hereof. (Art. VIII, Sec. 2,
Constitution)

Congress may not pass a law declaring that decisions of the Court of Appeals (CA) on tax cases shall be
final and executory. However, a law making decisions of the CA appealable directly to the Supreme Court
(SC) is valid. Congress cannot deprive the SC of its power to review, revise, modify or affirm the decisions
of lower courts. (Dimaampao, 2015)

Q: What is the situs of taxation?

A: It is the place or authority that has the right to impose and collect taxes. (Commissioner v. Marubeni, G.R. No.
137377, 2001).

Q: What are the factors that determine the situs of taxation?

A: “ReCiNSS”
(1) Residence of the taxpayer
(2) Citizenship of the taxpayer
(3) Nature of the tax
(4) Subject matter of the tax
(5) Source of income

Q: What are the stages of taxation?

A: “LAPaR”
(1) Levy or Imposition (Tax Legislation) — this refers to the enactment of a law by Congress authorizing the
imposition of tax. It further contemplates the determination of the subject of taxation, purpose for which
the tax shall be levied, fixing the rate of taxation and the rules of taxation in general.

(2) Assessment and Collection (Tax Administration) — this is the act of administration and implementation
of the tax law by the executive department through the administrative agencies. The act of assessing
and collecting taxes, being administrative in character, can therefore be delegated. (Dimaampao, 2015)

NOTE: The term “assessment” which here means notice and demand for payment of a tax liability. It
should not be confused with “assessment” relative to a real property taxation, which refers to the listing
and valuation of taxable property

(3) Payment — this is the act of compliance by the taxpayer, including such options, schemes or remedies
as may be legally available.

(4) Refund — The recovery of any tax alleged to have been erroneously or illegally assessed or collected, or
any penalty claimed to have been excessively, or in any manner wrongfully collected.

Q: What are the characteristics of taxes?

A: “SLEP4”
(1) It is levied by the STATE, which has the jurisdiction over the person or property.
(2) It is levied by the State through its LAW-MAKING body.
(3) It is an ENFORCED contribution not dependent on the will of the person taxed.
(4) It is generally PAYABLE in money.
 (5) It is PROPORTIONATE in character.
(6) It is levied on PERSONS and property
(7) It is levied for a PUBLIC purpose

Q: What is the nature of a tax?

A: It is a forced charge, imposition or contribution. As such, it operates ad invitum; i.e., it is in no way dependent
upon the will or contractual assent, express or implied of the person taxed. It is not contractual, either express
or implied, but positive acts of government. (Panay Electric Co. v. Internal Revenue, 1958)

Q: What are the requisites of a valid tax?

A: “PUJI”
(1) It should be for a Public purpose.
(2) It should be Uniform.
(3) That either the Person or Property being taxed be within the Jurisdiction of the taxing authority.
(4) The tax must not Impinge on the inherent and constitutional limitations on the power of taxation.

Q: Distinguish tax from a special assessment.

A:
Taxes
Imposed on persons, property rights or transactions
Personal liability of the taxpayer
An enforced proportional contribution from persons
and property for public purposes
Regular exaction
Special Assessment
Levied only on land
As a rule, cannot be made a personal liability of the
persons assessed
An enforced proportional contribution from owners
of lands especially those who are peculiarly benefited
by public improvements
Exceptional both as to time and locality

Q: Distinguish a tax from a license.

A:
Taxes License Fee
Imposed under the taxing power of the state for
Levied under the police power of the state
purposes of revenue
Purpose is to generate revenue; regulation is
Imposed for regulatory purposes
merely incidental
Forced contributions for the purpose Exacted primarily to regulate certain
of maintaining government functions businesses or occupations
Amount is limited to the necessary expenses of
Generally, unlimited as to amount
regulation and control
Imposed on persons, property, rights or
Imposed on the exercise of a right or privilege
transaction
Failure to pay does not necessarily make the act or
Failure to pay makes the act or business illegal
business illegal

Q: Distinguish a tax from a toll.

A:
Tax Toll
An enforced proportional contribution from persons A consideration paid for the use of a road, bridge or
and property for public purpose the like, of a public nature
Demand of sovereignty Demand of proprietorship
Amount is generally unlimited Amount is limited to the cost and maintenance of
public improvement
Purpose: to support the government Purpose: for the use of another’s property
Imposed by the State only May be imposed by private individuals or entities
Q: Distinguish a tax from a penalty.
A:
Tax Penalty
An enforced proportional contribution from persons A punishment for the commission of a crime
and property for public purpose
Purpose: to raise revenue Purpose: to regulate a conduct
Imposed by the State only Imposed by the government or private entities

Q: Distinguish a tax from a debt.

A:

Taxes Debt
Based on law Generally based on contract, expressed or implied
Generally cannot be assigned Assignable
Generally paid in money May be paid in kind
Cannot be subject of set off Can be subject of set off
Non-payment is punished by imprisonment except No imprisonment in case of non-payment (Art. III, Sec,
in poll taxes 20 of the 1987 Constitution)
Governed by the special prescriptive periods Governed by the ordinary periods of prescription
provided for in the NIRC under the NCC

Q: What are the kinds of taxes?

A:
As to Object
(1) Personal/Poll or Capital tax - A fixed amount imposed upon all persons, or upon all persons of a certain
class, residents within a specified territory, without regard to their property or occupation. Ex.
community tax
(2) Property tax — imposed on property, whether real or personal, in proportion either to its value, or in
accordance with some other reasonable method of apportionment. Ex. Real Property tax
(3) Privilege/Excise tax — a charge upon the performance of an act, enjoyment of a privilege, or engaging
in an occupation.

As to burden or incidence
(1) Direct — one that is demanded from the person who also shoulders the burden of tax. Ex. income tax
and estate tax
(2) Indirect - taxes imposed on a taxpayer who shifts the burden to someone else. Ex. VAT

As to tax rates
(1) Specific — tax of a fixed amount imposed by the head or number, or by some standard of weight or
measurement. Ex. excise tax on cigarettes and liquors.
(2) Ad valorem — tax based on the value of the property with respect to which the tax is assessed. It requires
the intervention of assessors or appraisers to estimate the value of such property before the amount
due can be determined. Ex. Real Estate and Income tax.
(3) Mixed - A choice between ad valorem and/or specific depending on the condition attached.

As to purpose
(1) Fiscal or revenue — tax imposed solely for the general purpose of the government.
(2) Special — tax levied for specific purpose, i.e. to achieve social or economic ends. Ex. tariff.

As to authority to impose
(1) National tax — tax levied by the National Government. Ex. Income tax, Estate tax and VAT
(2) Local/Municipal —tax levied by a local government. Ex. real estate tax

As to graduation
(1) Progressive — tax rate, which increases as the tax base, or bracket increases.
(2) Regressive — tax rate decreases as the tax base or bracket increases.
Q: What are the sources of tax laws?
A:
(1) Constitution
(2) National Internal Revenue Code
(3) Tariff and Customs Code
(4) Local Government Code (Book II)
(5) Local tax ordinances / City or Municipality tax codes
(6) Tax treaties and international agreements
(7) Special laws
(8) Court decisions
(9) Revenue rules and regulations, and Administrative rulings and opinions (Tabag, 2015)

Q: How are tax laws construed?

A: As a general rule, statutes levying taxes are construed against the government. It is a general rule in the
interpretation of statutes levying taxes or duties, that in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or citizens, because burdens are not to be imposed,
nor presumed to be imposed beyond what the statutes expressly and clearly import. (Collector v. Fireman's Fund
Insurance Co., 1987)

Q: How are tax exemptions and tax exclusions construed?

A: As a general rule, statutes granting tax exemptions are construed in strictissimi juris against the taxpayers and
liberally in favor of the taxing authority. (MCIAA v. Marcos, 1996) Tax refunds are in the nature of tax exemptions,
which are construed in strictissimi juris against the taxpayer and liberally in favor of the government. (Kepco
Philippines Corporation v. CIR, 2011) It is a basic precept of statutory construction that the express mention of
one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est
exclusio alterius. (PAGCOR v. BIR, 2011).

However, there are certain exceptions. These are:

(1) If the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction
does not apply because the practical effect of the exemption is merely to reduce the amount of money
that has to be handled by the government in the course of its operations (MCIAA v. Marcos, 1996).
(2) The exemption granted in favor of NAPOCOR must be liberally construed. It is a recognized principle
that the rule on strict interpretation does not apply in the case of exemptions in favor of a government
political subdivision or instrumentality. In the case of property owned by the state or a city or other
public corporations, the express exemption should not be construed with the same degree of strictness
that applies to exemptions contrary to the policy of the state, since as to such property "exemption is
the rule and taxation the exception” (Maceda v. Macaraig, 1991).
(3) Erroneous payment of the tax, or absence of law for the government’s exaction (CIR v. Fortune Tobacco
Corporation, 2008).

Q: How are tax rules and regulations construed?

A: The construction placed by the office charged with implementing and enforcing the provisions of a Code
should be given controlling weight unless such interpretation is clearly erroneous. It is of course axiomatic that
a rule or regulation must bear upon, and be consistent with, the provisions of the enabling statute if such rule or
regulation is to be valid. In case of conflict between a statute and an administrative order, the former must prevail.
To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling law.
An implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to implement.
Any rule that is not consistent with the statute itself is null and void (Fort Bonifacio Development Corporation v.
CIR, 2014).

Revenue Memorandum Circulars (RMCs) must not override, supplant, or modify the law, but must remain
consistent and in harmony with the law they seek to apply and and implement (CIR v. SM Prime Holdings, Inc.,
2010).

Q: In case of conflict between a statute and an administrative order, which prevails?

A: The former must prevail. To be valid, an administrative rule or regulation must conform, not contradict, the
provisions of the enabling law. An implementing rule or regulation cannot modify, expand, or subtract from the
law it is intended to implement. Any rule that is not consistent with the statute itself is null and void. To
recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax credit under
Section 105 is a nullity. (CIR v. Fort Bonifacio Development Corp., 2014)

Q: How are penal provisions of tax laws construed?

A: In criminal cases, statutes of limitations are acts of grace, a surrendering by the sovereign of its right to
prosecute. They receive strict construction in favor of the Government and limitations in such cases will not be
presumed in the absence of clear legislation (Lim v. CA, 1990).

Q: What is the “Non-retroactive application of taxpayers”?

A: Tax laws, including rules and regulations operate prospectively unless otherwise legislatively intended by
express terms or by necessary implication (Gulf Air Company, Philippine Branch v. CIR, 2012). As a general rule,
Tax laws operate prospectively whether they enact, amend or repeal.

However, as an exception, tax laws may only be given retroactive application if the legislature expressly or
impliedly provides that it shall be given retroactive application.

Q: What are the doctrines in taxation?

A:
(1) Prospectivity of Tax laws. As a general rule, tax laws must only be imposed prospectively. However, as
an exception, if the law expressly provides for retroactive application. Retroactive application of revenue
laws may be allowed if it will not amount to denial of due process. There is a violation of due process
when the tax law imposes harsh and oppressive tax (CIR v. Acosta, 2007).

(2) Imprescriptibility of taxes. As a general rule, Taxes are imprescriptible by reason that it is the lifeblood
of the government. However, as an exception, tax laws may provide for statute of limitations. In
particular, the NIRC and LGC provide for the prescriptive periods for assessment and collection.

NOTE: Although the NIRC provides for the limitation in the assessment and collection of taxes imposed,
such prescriptive period will only be applicable to those taxes that were returnable. The prescriptive
period shall start from the time the taxpayer files the tax return and declares his liability (Collector of
Internal Revenue v. Bisaya Land Transportation Co., Inc., 1959).

Q: Does the ex post facto rule apply to tax laws?

A: Tax laws are neither political nor penal in nature, and they are deemed laws of the occupied territory rather
than of the occupying enemy (Hilado v. CIR, 1956); hence, the ex post facto rule, except for the penalty imposed
(not the interest), would be inapplicable (Central Azucarera de Don Pedro v. CTA, 1967). A harsh retroactivity of
the law may make it inequitable and violative of the Constitution; similarly, due process is violated if the tax is
oppressive (Welch v. Henry, 1938).

Q: Explain the constitutional provision, “Congress shall evolve a progressive system of taxation.”
A: All tax measures must originate from the House of Representatives but Senate may propose or concur with
amendments. The rule on taxation must be uniform and equitable; Congress shall evolve a progressive system of
taxation (tax rate and tax base are directly proportional as against proportional system which has a fixed rate
regardless of tax base; and regressive system where the tax rate and tax base are inversely proportional). The
constitutional provision has been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as
much as possible, indirect taxes should be minimized." (Tolentino v. Secretary of Finance, 1995)

Q: What is double taxation? Is it prohibited?

A: Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing the
same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice,
when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed
on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes must be of the same kind or character (Nursery Care Corporation v.
City of Manila, 2014).

Double taxation, although not favored, is permissible in the absence of express or implied constitutional
prohibition. In some states where double taxation is not expressly prohibited, it is held that double taxation is
permissible, or not invalid or unconstitutional, or necessarily unlawful, provided some other constitutional
requirement is not thereby violated, as a requirement that taxes must be equal and uniform. (84 CJS 131-134).

Memory Aid for the Requisites of Double Taxation: JAPSKY

 Same property in the same Jurisdiction;
 By the same taxing Authority;
 For the same Purpose;
 On the same Subject matter;
 The same Kind or character of tax;
 In the same taxable Year.

Q: For the first quarter of 1999, the City of Manila assessed and collected taxes from Star Appliance Center,
Inc. pursuant to Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of
the Revenue Code of Manila. At the same time, the City of Manila imposed additional taxes upon it pursuant
to Section 21 (Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under the NIRC) of the
Revenue Code of Manila, as amended, as a condition for the renewal of its business for the year 1999. Section
21 imposed a tax of fifty percent (50%) of one percent (1%) per annum on the gross sales or receipts.

Star Appliance Center, Inc. requested the Office of the City Treasurer for the tax credit or refund of the local
business taxes paid under protest. It claimed entitlement thereto since the enforcement of Section 21
constituted double taxation, because the local business taxes under Section 15 and Section 17 of the Revenue
Code of Manila were already being paid by it.

Did the collection of taxes under Section 21 constitute double taxation?

A: Yes. All the elements of double taxation concurred upon the City of Manila’s assessment on and collection from
Star Appliance Center, Inc. of taxes for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of
Manila.

Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who sold goods and
services in the course of trade or business based on a certain percentage of his gross sales or receipts in the
preceding calendar year, while Section 15 and Section 17 likewise imposed the tax on a person who sold goods
and services in the course of trade or business but only identified such person with particularity, namely, the
wholesaler, distributor or dealer (Section 15), and the retailer (Section 17), all the taxes – being imposed on the
privilege of doing business in the City of Manila in order to make the taxpayers contribute to the city’s revenues
– were imposed on the same subject matter and for the same purpose.

Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within the same
jurisdiction in the same taxing period (i.e., per calendar year).

Thirdly, the taxes were all in the nature of local business taxes.

In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila constituted double taxation,
and the taxes collected pursuant thereto must be refunded (Nursery Care Corporation v. City of Manila, 2014)

Q: What is “international juridical double taxation”?

A: It 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 periods (CIR v. SC Johnson & Son, Inc., 1999)

It is a form of indirect double taxation because the tax is not imposed in the same jurisdiction by the same taxing
authority.

Q: What are the methods to eliminate occurrence of double taxation?

A: There are two methods of relief - the exemption method and the credit method.
In the exemption method, the income or capital, which is taxable in the state of source or situs, is exempted in
the state of residence, although in some instances it may be taken into account in determining the rate of tax
applicable to the taxpayers remaining income or capital.

On the other hand, in the credit method, although the income or capital, which is taxed in the state of source, is
still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter.

The basic difference between the two methods is that in the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon the tax (CIR v. SC Johnson, 1999)

Q: Does the power to tax include the power to destroy?

A: Yes. The power of taxation is sometimes called the power to destroy. Therefore, it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg" (Roxas v. CTA, 1958)

Q: Reconcile the two seemingly conflicting statements, “The power to tax is the power to destroy” (J. Marshall,
McCulloch v. Maryland), and “The power to tax is not the power to destroy while this Court sits” (J. Holmes,
Panhandle Oil Co. v. Mississippi).
A: In the words of Justice Isagani Cruz, the conflict is more apparent than real. Both statements may be regarded
as correct, but from different viewpoints.

The power to tax may include the power to destroy if it is used validly as an implement of the police power in
discouraging and in effect ultimately prohibiting certain things or enterprises inimical to the public welfare, i.e.
onerous taxes for massage parlors found to be mere fronts for prostitution.

But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot
be allowed to confiscate or destroy (Isagani Cruz, Constitutional Law, 2007 Updated Edition, p. 88).

The power to tax must be exercised fairly, equally, and uniformly; justly and not treacherously. While the power
to tax has been deemed the power to destroy, the Courts will step in to make sure it is not. In any case, where it
can be demonstrated that the challenged statutory provision fails to abide by the Constitution, then the Court
must so dictate it to be null and void. (Sison v. Ancheta)

Q: What are the forms of escape from taxation?

A:
(1) Shifting of tax burden
(2) Tax avoidance
(3) Tax evasion
(4) Capitalization
(5) Transformation
(6) Exemption

Shifting is the transfer of the burden of tax by the original payer or the one on whom the tax was assessed or
imposed to another or someone else without violating the law. Examples of taxes when shifting may apply are
VAT, percentage tax, excise tax on excisable articles, ad valorem tax that oil companies pay to BIR upon removal
of petroleum products from its refinery.

Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the
taxpayer in good faith and at arm's length. (CIA v. Estate of Benigno Toda, 2004) Tax avoidance is a scheme where
the taxpayer uses legally permissible alternative method of assessing taxable property or income, in order to
avoid or reduce tax liability.

Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.

Capitalization refers to the reduction in the price of taxed object equal to the capitalized value of the future
taxes, which the purchaser expects to be called upon to pay. It is made when the price of the property is lowered
to accommodate the exclusion of tax, which is expected to be paid by seller as a result of sale transaction. (Income
Taxation, Valencia & Roxas, 2016)

Transformation occurs when the producer absorbs the payment of tax to reduce the price and to maintain
market share. The producer recovers his additional tax expense by improving the process of production. The tax
therefore is transformed into a gain through the medium of production. (Income Taxation, Valencia & Roxas, 2016)

Exemption grants of immunity to a particular class of persons or things from a tax which persons within the
same state or taxing district are obliged to pay.

Q: What are ways of shifting the tax burden?

A:
1. Forward shifting – When the burden of tax is transferred from a factor of production through the factors
of distribution until it finally settles on the ultimate purchaser or consumer.
2. Backward shifting – When the burden is transferred from the consumer through the factors of
distribution to the factors of production.
3. Onward shifting – When the tax is shifted two or more times either forward or backward.

NOTE: Only indirect taxes may be shifted. In case of direct taxes, the shifting of burden can only be made
via contractual provision.

Q: What are the factors to consider in tax evasion?

A:
(1) The End to be achieved; i.e., the payment of less than that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax is due;
(2) An accompanying state of mind which is described as being "Evil," in "bad faith" "willful," or "deliberate
and not accidental"; and
(3) A course of action or failure of action, which is Unlawful. (Manila Home Textile v. Commissioner)

Q: Explain the willful blindness doctrine.

A: The taxpayer’s deliberate refusal or avoidance to verify the contents of his or her ITR and other documents
constitutes “willful blindness” on his or her part. It is by reason of this doctrine that taxpayers cannot simply
invoke reliance on mere representations of their accountants or authorized representatives in order to avoid
liability for failure to pay the correct taxes. It is a rule that ignorance of the law excuses no one from compliance
therewith. In order to be liable, it is enough that the taxpayer knows his or her obligation to file the required
return and he has failed to comply thereto in the manner required by law (People v. Kintanar, 2010).

Q: What is a tax exemption?

A: An exemption from taxation is a grant of immunity, express or implied, to particular persons or corporations
or to persons or corporations of a particular class, from a tax upon property or an excise which persons and
corporations generally within the same taxing district are obliged to pay. It is a freedom from a charge or burden
to which others are subject. (Greenfield v. Meer, 1946)

NOTE: He who claims the exemption must point to some provision of law creating the right. It cannot be allowed
to exist upon a mere vague implication or inference. It must be indubitably shown to exist, for every presumption
is against it and a well-founded doubt is fatal to the claim. (Floro Cement v. Goroipe, 1991)

NOTE: In cases involving tax exemption, interpretation must be construed against taxpayer and liberally in favor
of the government except when the grantee is a municipal corporation or local government.

Q: What determines the EXEMPTION of property used for religious, charitable, or educational purposes from
taxes?
A: It is the use of property that determines exemption, not the use of income coming from such property.
Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries and all lands, buildings and improvements, actually, directly and exclusively (ADE) used for religious,
charitable or educational purposes are tax exempt. ADE means solely used for the purposes enumerated in the
Constitution. (Lung Center of the Philippines v. Quezon City, 2004)
Q: Does revoking a tax exemption violate the non-impairment clause under the 1987 Constitution?
A: As a general rule, since taxation is the rule and exemption is the exception, the exemption may, thus, be
withdrawn at the pleasure of the taxing authority. (MC/AA v. Marcos, 1996) However, if the tax exemption
constitutes a binding contract and for valuable consideration, the government cannot unilaterally revoke the tax
exemption.

The non-impairment clause is violated if it is based on contract where valuable consideration is given. However,
there is no violation if it is a franchise granted by the Congress or based on economic policy. (Tolentino vs.
Secretary of Finance, 1994; see also Article VI, Section 24 of the 1987 Constitution)

Q: What is the doctrine of equitable recoupment?

A: It is a principle which allows a taxpayer, whose claim for refund has been barred due to prescription, to recover
said tax by setting off the prescribed refund against a tax that may be due and collectible from him. Under this
doctrine, the taxpayer is allowed to credit such refund to his existing tax liability.

NOTE: Equitable recoupment is allowed only in common countries, not in the Philippines. The Supreme Court,
rejected this doctrine in Collector v. UST (1958), since it may work to tempt both parties to delay and neglect their
respective pursuits of legal action within the period set by law.

Q: May taxes be the subject of set-off or compensation? Explain.

A: As a general rule, taxes cannot be the subject of set-off or compensation for the following reasons:
a. The lifeblood theory requires that there should be no unnecessary impediments to the collection of
taxes to make available to the government the wherewithal to meet its legitimate objectives; and
b. The payment of taxes is not a contractual obligation but arises out of a duty to pay, and in respect of
the positive acts of government, regarding the making and enforcing of taxes, the personal consent of
the individual taxpayer is not required. (Republic v. Mambulao Lumber Co., 1962; Caltex v. Commission
on Audit, 1992; and Philex v. Commissioner of Internal Revenue, 1998)

Exceptions: When set-off or compensation are allowed for local taxes.

(1) Where both claims already become overdue and demandable as well as fully liquidated. Compensation
takes place by operation of law under Art. 1200 in relation to Arts. 1279 and 1290 of the Civil Code.
(Domingo v. Garlitos, 1963)
(2) Compensation takes place by operation of law, where the government and the taxpayer are in their
own right reciprocally debtors and creditors of each other, and that the debts are both due and
demandable. This is in consequence of Arts. 1278 and 1279 of the Civil Code. (Ibid)

Other instances where compensation or set-off were allowed:

(1) The SC upheld the validity of a set-off between the taxpayer and the government. In both cases, the
claims of the taxpayers therein were certain and liquidated. The claims were certain since there was
no doubt or dispute as to their refundability. In fact, the government admitted the fact of over-
payment. (CIR v. Esso, 172 SCRA 364)
(2) In case of tax overpayment, the BIR’s obligation to refund or set-off arises from the moment the tax
was paid. Reason: Solutio Indebiti (Ibid)
(3) While judgment should be rendered in favor of Republic for unpaid taxes, judgment ought at the same
time to issue for Sampaguita Pictures commanding payment to the latter by the Republic of the value
of the backpay certificates which the Republic received. (Republic v. Ericta, 172 SCRA 623)

Q: What is a compromise?
A: Compromise is a contract between the government and the taxpayer to settle tax liability subject to minimum
compromise tax rate. Under Section 204 (A) of the Tax Code, the BIR Commissioner may compromise the
payment of any internal revenue tax, when:
(1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or
(2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

Q: What is tax amnesty? Can it be presumed?

A: A tax amnesty refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and
power to impose penalties on persons or entities guilty of violating a tax law. Tax amnesty aims to grant a general
reprieve to tax evaders who wish to come clean by giving them an opportunity to straighten out their records.
Amnesty taxpayers may immediately enjoy the privilege and immunities under a Tax Amnesty Law, provided they
fulfill the suspensive condition imposed therein (CS Garments Inc. v. Commissioner of Internal Revenue, 2014).

Tax amnesty, much like a tax exemption, is never favored or 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.
(Asia International Auctioneers v. CIR, 2012)

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 tax law. It partakes of an absolute forgiveness or
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. 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. (CIR v. Philippine Aluminum Wheels, 2017)

Q: Distinguish a tax amnesty from a tax exemption.

A:
(1) Tax amnesty is immunity from all criminal, civil and administrative liabilities arising from nonpayment
of taxes. Tax exemption is immunity from the civil liability only.
(2) Tax amnesty is a general pardon given to all taxpayers. It is an immunity or privilege, a freedom from a
charge or burden to which others are subjected. (Florer v. Sheridan, 1894).
(3) Tax amnesty applies only to past tax periods, hence, of retroactive application. (People v. Castañeda,
1988). Tax exemption is generally prospective in application.
(4) In tax amnesty, there is revenue loss since there was actually taxes due but collection was waived by the
government. In tax exemption, there is no actual revenue loss because there was no actual taxes due as
the person or transaction is protected by tax exemption.

TAXING AUTHORITY

Q: What is the extent of rule-making authority of the Secretary of Finance?

A: The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and
regulations for the effective enforcement of the provisions of NIRC (Sec. 244, NIRC).

Rules and regulations, as well as administrative opinions and rulings, ordinarily should deserve weight and
respect by the courts. All such issuances must not override, but must remain consistent and in harmony with,
the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither
to supplant nor to modify, the law (CIR v. CA, 1995).

Q: What are the powers and duties of the BIR?

A:
(1) Assessment and collection of all national internal revenue taxes, fees and charges;
(2) Enforcement of all forfeitures, penalties and fines;
(3) Execution of judgments in all cases decided in its favor (by the CTA and regular courts);
(4) Give effect and administer the supervisory and police powers conferred to it by the NIRC and other laws;
(5) Recommend to the Secretary of Finance all needful rules and regulations for the effective enforcement
of the provision of the NIRC.

Q: Are the rulings of the BIR retroactive?

A: No. The rulings of the BIR are not retroactive. Any revocation, modification or reversal of any of the rules and
regulations promulgated or any of the rulings or circulars promulgated by the CIR shall not be given retroactive
application if it will be prejudicial to the taxpayers, except in the following cases:
(1) Where the taxpayer deliberately misstates or omits material facts from his return or any document
required of him by the BIR;
(2) Where the facts subsequently gathered by the BIR are materially different from the facts on which the
ruling is based; or
(3) Where the taxpayer acted in bad faith (Sec. 246, NIRC).
NOTE: If the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation
shall have retroactive operation as to affect past transactions, because a wrong construction of the law cannot
give rise to a vested right that can be invoked by a taxpayer.

Q: XYZ Corporation, an export-oriented company, was able to secure a Bureau of Internal Revenue (BIR) ruling
in June 2005 that exempts from tax the importation of some of its raw materials. The ruling is of first
impression, which means the interpretations made by the Commissioner of Internal Revenue is one without
established precedents. Subsequently, however, the BIR issued another ruling, which in effect would subject
to tax such kind of importation. XYZ Corporation is concerned that said ruling may have a retroactive effect,
which means that all their importations done before the issuance of the second ruling could be subject to tax.

(1) Who has the power to promulgate BIR rulings?

(2) Does a BIR ruling have a retroactive effect, considering the principle that tax exemptions should be
interpreted strictly against the taxpayer? (2007 Bar)

A:
(1) The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (NIRC, Sec. 4)
The power to issue rulings of first impression or to reverse, revoke or modify any existing BIR ruling shall
not be delegated. [NIRC, Sec. 7(b)].
(2) No. A BIR ruling cannot be given retroactive effect if its retroactive application is prejudicial to the
taxpayer (NIRC, Sec. 246; CIR v. Court of Appeals et. Al., 1997).

Q: Differentiate a general interpretative rule and a specific ruling.

A: A general interpretative rule is applicable to all taxpayers while a specific ruling is applicable only to a particular
taxpayer. (CIR v. San Roque, 2013)

Q: Differentiate ruling of first impression from ruling of with established precedents.

A: Rulings of first impression — These refer to the rulings, opinions and interpretations of the Commissioner of
Internal Revenue with respect to the provisions of the Tax Code and other tax laws without established
precedent, and which are issued in response to a specific request for ruling filed by a taxpayer with the Bureau
of Internal Revenue. Provided, however, that the term shall include reversal, modification or revocation of any
existing ruling.

Rulings with established precedents — These refer to mere reiteration of previous rulings, opinions and
interpretations of the Commissioner, as delegated to duly authorized internal revenue officers (i.e., Deputy
Commissioner, Legal and Inspection Group; Assistant Commissioner, Legal Service; Regional Directors) that are
issued in response to a specific request for ruling filed by a taxpayer with the Bureau of Internal Revenue.
(Revenue Administrative Order No. 2-2001, as amended by Revenue Administrative Order No. 01-03)

INCOME TAX

Q: What is an income tax?

A: It is a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person's
income, emoluments, profits and the like (LG Electronics Philippines, Inc. v. Commissioner of Internal Revenue,
2014).

Q: What are the general principles of income taxation?

A: Except as otherwise provided by the Code:
(1) Citizen of the Philippines residing therein - taxable on all income derived from sources within and
without the Philippines;
(2) Non-resident citizen - taxable only on income derived from sources within the Philippines
(3) Individual citizen of the Philippines who is working and deriving income from abroad as an overseas
contract worker - taxable only on income derived from sources within the Philippines: Provided, That a
seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad
as a member of the complement of a vessel engaged exclusively in international trade shall be treated as
an overseas contract worker;
 (4) Alien individual, whether a resident or not of the Philippines - taxable only on income derived from
sources within the Philippines;
(5) Domestic corporation - taxable on all income derived from sources within and without the Philippines;
and
(6) Foreign corporation, whether engaged or not in trade or business in the Philippines - is taxable only on
income derived from sources within the Philippines. (Section 23, NIRC)

Q: What is the nature of “income taxation”?

A: Income taxation is in the nature of an excise taxation system, or taxation on the exercise of privilege, the
privilege to earn yearly profits from various sources. It is a system that does not provide for the taxation of
property (Domondon, 2013).

Q: What are the types of income tax systems?

A:
(1) GLOBAL TAX SYSTEM - All items of gross income, deductions, and personal and additional exemptions,
if any, are reported in one income tax return, and one set of tax rates are applied on the tax base.
(Philippine Income Tax, Mamalateo, 2010) Global treatment is a system where the tax treatment views
indifferently the tax base and generally treats in common all categories of taxable income of the
taxpayer. (Tan vs. Del Rosario, Jr., 1994)

(2) SCHEDULAR TAX SYSTEM - Different types of incomes are subject to different sets of graduated or flat
income tax rates. Schedular approach is a system employed where the income tax treatment varies and
made to depend on the kind or category of taxable income of the taxpayer. (Tan vs. Del Rosario, Jr., supra)

(3) SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM –

a. Global aspect
i. All compensation income, business or professional income, capital gain and passive
income not subject to final withholding income tax, and other income not subject to
final tax are added together to arrive at the gross income;
ii. After deducting the total allowable deductions from business or professional income,
capital gain and passive income and other income not subject to capital gains tax and
final tax, in the case of corporations, as well as personal and additional exemptions in
the case of individual taxpayers: and
iii. The taxable income (i.e., gross income less allowable deductions and exemptions) is
subjected to one set of graduated tax rates (if individual) or regular corporate income
tax rate (if corporation).
b. Schedular aspect
i. Passive investment income subject to final tax and capital gains tax from the sale or
transfer of shares of stocks of a domestic corporation and sale or transfer of real
property remain subject to different sets of tax rates covered by different tax returns
(Mamalateo, 2010)

NOTE: The Philippines follow a semi-global and semi-schedular tax system.

Q: What are the features of the Philippine Income Tax Law?

A:
(1) DIRECT TAX – Tax burden is borne by the income recipient upon whom the tax is imposed. It is a tax
demanded from the very person who, it is intended or desired, should pay it, while indirect tax is a tax
demanded in the first instance from one person in the expectation and intention that he can shift the
burden to someone else.
(2) PROGRESSIVE TAX – Tax base increases as the tax rate increases. It is founded on the “ability to pay”
principle.
(3) COMPREHENSIVE – It adopted the citizenship principle, the residence principle and the source
principle.
(4) Semi-schedular or semi- global tax system (Mamalateo, 2014).
Q: What are the criteria in imposing Philippine income tax?
A:
(1) Citizenship or nationality principle – A citizen of the Philippines is subject to Philippine income tax
a. On his worldwide income, if he resides in the Philippines;
b. Only on his Philippine source income, if he qualifies as a non-resident citizen.
(2) Residence or domicile principle – A resident alien is liable to pay Philippine income tax on his income
from sources within the Philippines but is exempt from tax on his income from sources outside the
Philippines.
(3) Source principle - An alien is subject to Philippine income tax because he derives income from sources
within the Philippines. A non-resident alien or non-resident foreign corporation is liable to pay
Philippine income tax on income from sources within the Philippines, despite the fact that he has not
set foot in the Philippines (Mamalateo, 2014).

Q: What is the taxable period?

A: Taxable period is the calendar year or the fiscal year ending during such calendar year, upon the basis of which
the net income is computed for income tax purposes.

There are three (3) kinds of taxable periods:

1. Calendar period: The twelve (12) consecutive months starting on January 1 and ending on December 31.
Taxable income shall be computed on the basis of the calendar year if the:
(OA! B.I.)
a. Taxpayer's accounting period is Other than fiscal year;
b. Taxpayer has no annual Accounting period:
c. Taxpayer does not keep Books; or
d. Taxpayer is an Individual (Sec. 43, NIRC):
2. Fiscal period: It is a period of twelve (12) months ending on the last day of any month other than
December (NIRC, Sec. 22(Q)).
3. Short period: An accounting period where income is computed on the basis of a period less than twelve
(12) months when the:
a. Taxpayer, other than an individual, with the approval of the Commissioner, changes his
accounting period from fiscal year to calendar year, or from calendar year to fiscal year, or from
one fiscal year to another (Sec. 47, NIRC);
b. Taxpayer dies (Applicable to the decedent's final personal income tax covering the beginning of
the taxable year until his death, the income of his estate, and estate tax return) (Sec. 90, par. (A),
NIRC);
c. Corporation is newly organized
d. Corporation is dissolved; and
e. Tax period is terminated by the Commissioner by authority of law (Sec. 6, par. (D), NIRC).

Q: May a corporation change its taxable period?

A: Yes. A taxpayer, other than an individual, with the approval of the Commissioner, may change the basis of
computing its net income from fiscal year to calendar·year, from calendar year to fiscal year or from one fiscal
year to another fiscal year (Sec. 47, NIRC).

Q: Who are citizens of the Philippines?

A: The following are the citizens of the Philippines: (CFBNM)
(1) Those who are citizens of the Philippines at the time of the adoption of the 1987 Constitution (i.e.
February 2, 1987);
(2) Those whose Fathers or mothers are citizens of the Philippines;
(3) Those born Before January 17, 1973 (effectivity of 1973 Constitution), of Filipino mothers, who elect
Philippine citizenship upon reaching the age of majority; and
(4) Those who are Naturalized in accordance with law (Art. IV, Sec. 1, Constitution).
(5) Citizens of the Philippines who Marry aliens shall retain their citizenship, unless by their act or
omission, they are deemed, under the law to have renounced it (Art. IV, Sec. 4, Constitution).
Q: Who is a resident citizen?
A: A citizen of the Philippines who stay in the Philippines or who, without the intention of transferring their
physical presence abroad to stay permanently or temporarily as an OCW, stay outside the Philippines for less
than 183 days during the taxable year (Income Taxation, Valencia & Roxas, 2016).

Q: What is meant by residence for taxation purposes?

A: This is the permanent home, the place to which, whenever absent for business or pleasure, one intends to
return (Saluda, Jr. v. Ameri can Express International, Inc., 2006).

Q: Who is a non-resident citizen?

A: The following are considered as non-resident citizens: (WELP)
(1) A citizen of the Philippines who Works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable year;
(2) A citizen of the Philippines who Establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside there in;
(3) A citizen of the Philippines who Leaves the Philippines during the taxable year to reside abroad, either
as an immigrant or for employment on a permanent basis;
(4) A citizen who has been Previously considered as non-resident citizen and who arrives in the Philippines
at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as
a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the Philippines (Sec. 22(E), NIRC).

Q: Who is an overseas contract worker?

A: All overseas contract worker (OCW) refers to a Filipino citizen employed in foreign country, who is physically
present in a foreign country as a consequence of his employment thereat. His salaries and wages are paid by an
employer abroad and not borne by any entity, or person in the Philippines.
Note: To be considered as an OCW:
(1) He must be duly registered as such with the Philippine Overseas Employment Administration (POEA);
and
(2) He must have a valid working contract to work abroad (R.R. No. 01-2011, Sec. 2).

Q: When is a seaman considered as an OCW?

A: A seaman is considered as an OCW provided the following requirements are met (CAIRO):
(1) A Citizen of the Philippines;
(2) Receives compensation for services rendered Abroad as a member of the complement of a vessel;
(3) Such vessel is engaged exclusively in International trade (Sec. 23(C), NIRC);
(4) He must be duly Registered as such with the POEA; and
(5) He has a valid Overseas Employment Certificate (DEC) and a Seafarers Identification Record Book or
Seaman's book issued by the Maritime Industry Authority (MARINA) (R.R. No. 01-2011, Sec. 2).

Q: Who is a resident alien?

A: A resident alien is an individual whose residence is within the Philippines and who is not a citizen thereof
(Sec. 22 (F), NIRC). An alien may be considered a resident of the Philippines for income tax purposes if: (TIN)
(1) He is not a mere Transient or sojourner (RR. No. 02-40, Sec. 5);
(2) He has no definite Intention as to his stay in the Philippines; or
(3) His purpose is of such a nature that an extended stay may be Necessary for its accomplishment and to
that end, the alien makes his home temporarily in the Philippines (BIR DA-ITAD Ruling No. 153-06).

Q: Who is a non-resident alien?

A: A non-resident alien is an individual whose residence is not within the Philippines and who is not a citizen
thereof (Sec. 22, par. (G), NIRC). A non-resident alien individual may be:
(1) Engaged in trade or business (ETB) in the Philippines - if the aggregate period of stay in the Philippines
exceeds 180 days for each calendar year; or
(2) Not engaged in trade or business (NETB) - if the aggregate period of stay in the Philippines does not
exceed 180 days for each calendar year (Sec. 25, par. (A)(1), NIRC).
Q: Define corporations for income tax purposes.
A: The term corporation shall include: (PJ-JAI)
(1) Partnerships, no matter how created or organized;
(2) Joint stock companies;
(3) Joint accounts (cuentas en participation); and
(4) Associations or Insurance companies.
It does not include: (GJ)
(1) General professional partnerships; and
(2) A Joint Venture· or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an operation or
consortium agreement under a service contract with the government (Sec. 22. par. (B), NIRC)

Q: What is a domestic corporation?

A: The term domestic when applied to a corporation, means created or organized in the Philippines or under its
laws (NIRC, Sec. 22 (C)).

Q: What is a foreign corporation?

A: A foreign corporation is one, which is not domestic (NIRC, Sec. 22 (D)).

Q: What is a resident foreign corporation?

A: A resident foreign corporation is a foreign corporation engaged in trade or business within the Philippines
(NIRC, Sec. 22 (H)).

Note: In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business such as the appointment of local agent,
and not one of a temporary character. (Commissioner of Internal Revenue v. British Overseas Airways Corp., 1987).
It involves any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate
to that extent the performance of acts or works, or the exercise of some of the functions normally incident to,
and in the progressive prosecution of commercial gain or of the purpose and object of the business organization.
(R.A. No. 7042, Foreign Investment Act of 1991, Sec. 3 (d)).

Q: What is a non-resident foreign corporation?

A: A non-resident foreign corporation foreign corporation not engaged in trade or business within the
Philippines (NIRC. Sec. 22 (I))

Q: What is meant by taxable income?

A: 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)

Q: What is income?
A: Income refers to all wealth which flows into the taxpayer other than as mere return of capital. It includes the
forms of income specifically described as gains and profits, including gains derived from the sale or other
disposition of capital assets (R.R. No. 2, Sec. 36).

An income is an amount of money coming to a person or corporation within a specified time, whether as payment
for services, interest or profit from investment. Unless otherwise specified, income means cash or its equivalent
(Conwi v. CIR, G.R. No. 48532, August 31, 1992).

Income is a flow of service rendered by capital by payment of money from it or any benefit rendered by a fund of
capital in relation to such fund through a period of time (Madrigal v. Rafferty, 1918).

Q: When is income taxable?

A:
(1) Existence of income. A primary consideration in income taxation is that there must be income before
there could be income taxation. (Domondon, 2013)
 (2) Realization of income. Under the realization principle, revenue is generally recognized when both of
the following conditions are met:
a. The earning process is complete or virtually complete
b. An exchange has taken place (Manila Mandarin Hotels, Inc. v. CIR, 1997).

NOTE: Mere increase in the value of property is not considered as income since it is an unrealized
increase in capital.

(3) Recognition of income. When income considered received for Philippines income tax purposes:
a. If actually or physically received by taxpayer; or
b. If constructively received by taxpayer

(4) Methods of Accounting. Accounting methods for tax purposes comprise a set of rules for determining
how to report income and deductions. As a general rule, the law does not provide for a specific method
of accounting to be employed by the taxpayer. The law only authorizes the CIR to employ particular
method of accounting of income where:
a. The taxpayer does not employ a method for computing income, or
b. The taxpayer’s method for accounting does not clearly reflect the income (Domondon, 205,
citing Sec. 43 of NIRC).

Q: What are the two methods of accounting?

A:
(1) Cash method of accounting. Income is recognized only upon actual or constructive receipt of cash
payments or property but no deductions are allowed from the cash income unless actually disbursed
through an actual or constructive payment in cash or property.
(2) Accrual method of accounting. income is recognized in the period it is earned, regardless of whether
it has been received or not. In the same manner, expenses are accounted for in the period they are
incurred and not in the period they are paid (Domondon, 2013). Amounts of income accrue where the
right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities
are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time
of payment (CIR v. Isabela Cultural Corp., 2007).

Q: What are the tests in determining whether income is earned for tax purposes?
A:
(1) Realization test - There is no taxable income unless there is a separation of capital for something of
exchangeable value, thereby supplying the realization or transmutation which would result in the
receipt of income. Revenue is generally recognized when both conditions are met:
a. The earning process is complete or virtually complete; and
b. An exchange has taken place (Manila Mandarin Hotels, Inc. v. CIR, 1997).

(2) Claim of right doctrine or doctrine of ownership, command or control – A taxable gain is conditioned
upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional
obligation to return or repay.

(3) Economic benefit test, doctrine of proprietary interest - Taking into consideration the pertinent
provisions of law, income realized is taxable only to the extent that the taxpayer is economically
benefited.

(4) Severance test - Income is recognized when there is separation of something, which is of
exchangeable value (Eisner v. Macomber, 1920).

(5) All events test - The all events test requires fixing a right to income or liability to pay, and the availability
of reasonably accurate determination of such income or liability (CIR v. Isabela Cultural Corporation,
2007).
Q: Explain the doctrine of constructive receipt of income.
A: Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him
at any time is subject to tax for the year during which credit is set apart although not then actually reduced to
possession. To constitute receipt in such sense, the income must be credited to the taxpayer without any
substantial limitation or restriction as to the time, or manner of payment, or condition upon which payment is
to be made (RR No. 2-40, Sec. 52).

Q: What are tax-free exchanges?

A: Tax-free exchanges refer to those instances enumerated in Section 40(C)(2) of the NIRC that are not subject
to Income Tax, Capital Gains Tax, Documentary Stamp Tax and/or Value-added Tax, as the case may be. There
are two kinds of tax-free exchange:
1. Transfer to a controlled corporation - no gain or loss shall be recognized if property is transferred to a
corporation by a person in exchange for stock or unit of participation in such corporation of which as a
result of such exchange said person. alone or together with others. not exceeding four persons. Gains
control of said corporation; and
2. Merger or consolidation - no gain or loss shall be recognized if in pursuance of a plan of merger or
consolidation:
a. a corporation which is a party to a merger or consolidation exchanges property solely for stock
in a corporation, which is a party to the merger or consolidation; or
b. a shareholder, exchanges stock in a corporation, which is a party to the merger or
consolidation. solely for the stock of another corporation also a party to the merger or
consolidation; or
c. a security holder of a corporation, which is a party to the merger or consolidation. exchanges
his securities in such corporation, solely for stock or securities in another corporation, a party
to the merger or consolidation (NIRC , Sec. 40 (C) (2)).

Q: Where is the situs of income taxation?

A:
Income from sources within the Philippines
(1) Interests derived from sources within the Philippines
(2) Dividends from:
i. Domestic corporations; and
ii. Foreign corporations, provided that
1. At least 50% of its gross income is from sources within the Philippines; and
2. Such gross income must be for the 3-year period ending with the close of the
taxable year preceding the declaration of such dividends.
(3) Compensation for services performed within the Philippines
(4) Rentals and royalties from properties located in the Philippines or any interest in such property
including rentals or royalties for the use of or for the privilege of using within the Philippines
intellectual property rights such as trademarks, copyrights, patents, etc.
(5) Gains, profits and income from the sale of real property located in the Philippines
(6) Gains, profits and income from the sale of personal property other than shares of stock within
the Philippines

Note: Gains, profits and income from the sale of personal property is treated as derived entirely from
sources within the country if the property was:
a. Purchased within and sold without the Philippines; or
b. Purchased without and sold within the Philippines (NIRC. Sec. 42, par. (A)).
(7) Gains on sale of shares of stock in a domestic corporation

Note: Gain from the sale of shares of stock in a domestic corporation, shall he treated as derived entirely
from sources within the Philippines regardless of the place where the shares were sold (NIRC, Sec. 42,
par. (E)).
a. Purchased within and sold without the Philippines; or
b. Purchased without and sold within the Philippines (NIRC. Sec. 42, par. (A)).
 Income from sources without the Philippines
(1) Interests other than those derived from sources within the Philippines (e.g., interest earned
from deposits on banks located outside 1he Philippines, interest on loans where the debtor is
not a resident of the Philippines);
(2) Dividends other than those derived from sources within the Philippines (e.g., dividends received
from a foreign corporation less than 50% of the gross income of which is from sources within
the Philippines for the 3-year period ending with the close of its taxable year preceding the
declaration of such dividends);
(3) Compensation for services performed outside the Philippines
(4) Rentals and royalties from properties located outside the Philippines or any interest in such
property including rentals or royalties for the use of or for the privilege of using outside the
Philippines intellectual property rights such as trademarks, copyrights, patents, etc.
(5) Gains, Profits, and income from the sale of real property located without the Philippines (NIRC,
Sec. 42(C)).

Income derived partly within and partly without the Philippines

Items of gross income not allocated to sources from within or without the Philippines shall, unless
unmistakably from a source within or ·source without the Philippines, be treated as derived from
sources partly within and partly without the Philippines (R.R No. 02-40, Sec. 162). _Gains, profits
and income from the sale of personal property is treated as partly from· sources within and partly
from sources without the Philippines if the property was:
a. Produced, in whole or in part, within and sold without the Philippines; or
b. Produced, in whole or in part; without and sold within the Philippines (NIRC, Sec. 42, par.
(E)).

Q: What is “source of income”?

A: “Source of income” relates to the property, activity or service that produced the income. The source of an
income is the property, activity or service that produced the income. For the source of income to be considered
as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. (CIR
v. Baier-Nickel, 2006)

Q: Are liquidating dividends subject to income tax?

A: A liquidating dividend is payment or distribution to a stockholder of his capital investment in case of liquidation
of assets of a dissolved corporation. Hence, liquidating dividend is not subject to income tax to the extent that it
does not represent a realized gain but constitutes a return of capital. As implemented by RR No. 6-2008, where
gain is realized or loss is sustained by the stockholder, such shall be treated as capital gain or loss subject to
regular income tax rates under the NIRC.

Q: What is gross income taxation? Explain.

A: Gross Income - Except when otherwise provided in this Title, gross income means all income derived from
whatever source, including (but not limited to) the following items: (CARD-GRIP-GPP)
1. Compensation for services in whatever form paid. Including but not limited to fees, salaries, wages,
commissions. and similar items;
2. Annuities,
3. Royalties,
4. Dividends,
5. Gross income derived from the conduct of trade or business or the exercise of a profession,
6. Rents,
7. Interests,
8. Prizes and winnings,
9. Gains derived from dealings in property,
10. Pensions; and Partner's distributive share from the net income of the general professional partnership.
(NIRC, Sec. 32)

The definition of gross income is broad enough to include all passive incomes subject to specific rates or final
taxes. However, since these passive incomes are already subject to different rates and taxed finally at source,
they are no longer included in the computation of gross income, which determines taxable income. (CIR v. PAL,
2006)
Q: Differentiate gross income vis-à-vis net income vis-à-vis taxable income
A: “Net income taxation” is a system of taxation where the income subject to tax may be reduced by allowable
deductions. On the other hand, “Taxable income or net income” refers to the pertinent items of gross income
specified in the NIRC less the deductions, if any, authorized for such types of income by the NIRC or other special
laws.

Q: What are the classifications of income subject to tax?

(1) Compensation income - It includes all remuneration for services rendered by an employee for his
employer unless specifically excluded under the NIRC (R.R. 2-98, Sec. 2.78.1).

(2) Fringe benefits - is any good, service or other benefit furnished or granted by an employer in cash
or in kind in addition to basic salaries, to an individual employee, except a rank and file employee

(3) Professional income - Professional income refers to the fees received by a professional from the
practice of his profession, provided that there is no employer-employee relationship between him
and his clients. (NOTE: Professional income shall be subject to creditable withholding tax rates
prescribed (R.R. No. 2-98)).

(4) Income from business – Business income refers to income derived from merchandising, mining,
manufacturing and farming operations. (NOTE: Business is any activity that entails time and effort
of an individual or group of individuals for purposes of livelihood or profit.)

(5) Income from dealings in property

a) Ordinary assets – refer to properties held by the taxpayer used in connection with his trade
or business which includes the following: [SOUR]
i. Stock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year
ii. Property held by the taxpayer primarily for sale to customers in the Ordinary course
of trade or business
iii. Property Used in the trade or business of a character which is subject to the
allowance for depreciation provided in the NIRC
iv. Real property used in trade or business of the taxpayer

Note: The list is exclusive. The yardstick of determining whether a property is capital or
ordinary asset is its actual use (BIR Ruling No. DA 217-07)

b) Capital assets - include property held by the taxpayer (whether or not connected with his
trade or business) other than SOUR above.

(6) Passive investment income - Passive income refers to income derived from any activity in which
the taxpayer has no active participation or involvement.

(7) Annuities, proceeds from life insurance or other types of insurance – Annuity refers to the
periodic installment payments of income or pension by insurance companies during the life of a
person or for a guaranteed fixed period of time, whichever is longer, in consideration of capital paid
by him. Proceeds of life insurance refers to Amounts received under a life insurance, endowment,
or annuity contact, whether in a single sum or in installments, paid to the beneficiaries upon the
death of the insured are excluded from the gross income of the beneficiary.

(8) Prizes and awards - It refers to amount of money in cash or in kind received by chance or through
luck and are generally taxable except if specifically mentioned under the exclusion from
computation of gross income under Sec. 32[B] of NIRC.

(9) Pensions, retirement benefit or separation pay - It refers to amount of money received in lump
sum or on staggered basis in consideration of services rendered given after an individual reaches
 the age of retirement. Pension being part of gross income is taxable to the extent of the amount
received except if there is a BIR approved pension plan (NIRC, Sec. 32 B [6]).

(10) Income from any source whatever - “Income from whatever source derived” implies that all income
not expressly exempted from the class of taxable income under our laws form part of the taxable
income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income.
The source of the income may be legal or illegal (James v. US).

Q: When are fringe benefits treated as part of compensation income subject to income tax and when are fringe
benefits subjected to fringe benefits tax (FBT)?
A: Fringe benefits received by supervisory and managerial employees are subject to FBT under Sec.33 (A). Fringe
benefits received by rank-and-file employees are treated as part of his compensation income subject to income
tax and withholding tax on compensation income. (Philippine Income Tax, Mamalateo, 2010, p.151)

Q: What is “Personal Income” and “Professional Income”?

A: Personal income refers to all remuneration for services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the Code.

On the other hand, professional income refers to income derived from the exercise of a profession, provided that
there is no employer-employee relationship between him and his client.

Q: When are gains from dealings involving real property treated as part of gross income under Sec.32(A)?
A: They form part of the gross income under Sec. 32(A) if the real property sold is an ordinary asset. A real
property is an ordinary asset if it is used in the taxpayer’s trade, business or profession, or treated as fixed asset
used in his trade, business or profession, subject to taxation. (Mamalateo, 2010) The gains derived from sale of
ordinary assets would be subject to either 0-35% schedular rate under Sec. 5 for individual taxpayers or 30% rate
for corporate taxpayers, under RA 10963 as amended.

Note: If the real property is a capital asset, then the sale of the real property would be subject to 6% capital gains
tax on the fair market value or the gross selling price, whichever is higher.

Q: What are the items excluded from the income tax? (PIG-CTRM)
A:
(1) Proceeds of life, accident, or health insurance policies;
(2) Amounts received by Insured as return of premium paid;
(3) Value of property acquired by Gift, bequest, devise or descent;
(4) Compensation for injuries or sickness;
(5) Income exempt under tax Treaty;
(6) Amounts received under life insurance, endowment or annuity contracts;
(7) Retirement benefits, pensions, gratuities, etc.; and
(8) Amount received through accident or health insurance;
(9) Miscellaneous
a. Income derived by foreign government
b. Income derived by the government or its political subdivisions
c. Prizes and awards
d. Prizes and awards in sports competition
e. 13th month pay and other benefits
f. GSIS. SSS. Medicare and other contributions
g. Gains from sale of bonds. debentures or other certificate of indebtedness with a maturity of
more than five (5) years
h. Gains from redemption of shares in mutual funds (NIRC Sec. 32(B))
i. Advanced payments received by the taxpayer under the accrual method of accounting
Q: Differentiate deductions from gross income from exclusions from gross income.
A:
Deductions from gross income Exclusions from gross income
A flow of wealth to the taxpayer which are not treated as
part of the gross income for purposes of computing the
The amounts, which the law allows to be
taxpayer’s taxable income, due to the following reasons:
subtracted from, gross income in order to
(a) It is exempted by the fundamental law;
arrive at the net income.
(b) It is exempted by statute; or
(c) It does not come within the definition of income.
Pertains to the computation of net income. Pertains to the computation of the gross income.
Something spent or paid in earning gross Something received or earned by the taxpayer, which do not
income. form part of gross income.
A. Expenses
a. Ordinary and Necessary Trade,
Business or Professional Expenses
b. Expenses Allowable to Private
Educational Institutions
B. Interest
C. Taxes
A. Life Insurance
D. Losses
B. Amount Received by Insured as Return of Premium
E. Bad Debts
C. Gifts, Bequests, and Devises
F. Depreciation
D. Compensation for Injuries or Sickness
G. Depletion of Oil and Gas Wells and Mines
E. Income Exempt under Treaty
H. Charitable and Other Contributions
F. Retirement Benefits, Pensions, Gratuities, etc.
I. Research and Development
G. Miscellaneous Items (as amended by RA 10963)
J. Pension Trusts
K. Additional Requirements for Deductibility of
Certain Payments
L. Optional Standard Deduction (as amended
by RA 10963)
M. Premium Payments on Health and/or
Hospitalization Insurance of an Individual
Taxpayer

Q: Who is a resident alien?

A: An individual whose residence is within the Philippines and who is not a citizen thereof. [NIRC, Sec. 22 (F)]
For income tax purposes, an alien may be considered a resident of the Philippines if:

(1) He is not a mere transient or sojourner [R.R. No. 02-40, Sec. 5];
(2) He has no definite intention to stay in the Philippines; or
(3) His purpose is of such nature that an extended stay may be necessary for the accomplishment and to
that end, the alien makes his home temporarily in the Philippines [BIR DA-ITAD Ruling No. 153-06]

Q: When is a residency of an alien lost?

A: A resident alien who has acquired residence in the Philippines retains his status until he abandons the same
and actually departs from the Philippines. Mere intention to change his residence is not enough [R.R. No. 2-40,
Sec. 6]

Q: When is a non-resident alien taxable?

A: An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from
sources within the Philippines. [NIRC, 25(A)(1)].

Q: Who are the special types of alien employees entitled to preferential tax rates?
A:
(1) Aliens employed by Regional or Area Headquarters and Regional Operating Headquarters (RHQs and
ROHQs) of Multinational Companies (NIRC, Sec. 25C)
(2) Aliens employed by Offshore Banking Units (OBU) [NIRC, Sec.25(D)] 3. Alien Individual Employed by
Petroleum Service Contractor and Subcontractor (PSCS) [NIRC, Sec.25(E)]
Common rule: 15% of their gross compensation income from sources within the Philippines.
Note: The same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens
employed by these multinational companies. Multinational companies are foreign firms or entities engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign
markets.

However, the preferential income tax rate under subsection C, D and E of Sec. 25 of the NIRC, as amended shall
no longer be applicable without prejudice to the application of preferential tax rates under existing international
tax treaties, if warranted. Thus, all concerned employees of the RHQ, ROHQ, OBU, and PSCS shall be subject to
regular income Tax rate under Sec. 24 (A) (2) (a) of the NIRC, as amended. [R.R. 8-2018, Sec. 4 (C)]

Q: What is the difference between income tax rates on individuals concerning capital gains from sale of real
property, and income tax rates on domestic corporations on capital gains realized from the sale, exchange or
disposition of lands and/or buildings?
A: The tax treatment is the same as that of individuals. The capital gains tax is applied on the gross selling price,
or the current fair market value at the time of the sale of real property classified as capital assets, whichever is
higher. Any gain or loss on the sale is immaterial because there is a conclusive presumption by law that the sale
resulted in a gain. [NIRC, 24(D)].

Sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a
corporation and are treated as capital assets tax are also subject to a 6% capital gains tax on the fair market value
or gross selling price, whichever is higher. [NIRC, 27(D)(5)].

Q: What are the two types of non-resident aliens?

A: Non-resident Alien engaged in trade or business within the Philippines (NRAETB) - If the aggregate period of
his stay in the Philippines is more than 180 days during any calendar year. [NIRC, 25(A)(1)].

Non-resident Alien not engaged in trade or business within the Philippines (NRANETB) – [NIRC, 25(B)].

Q: Is the Interest Income from bank deposits received by non-stock non-profit educational institutions
subject to the twenty (20%) final tax or is it tax-exempt?
A: It depends. It is exempt if the interest income is actually, directly, and exclusively used for educational
purposes.

Note: Revenues consist of the amounts earned by a person or entity from the conduct of business operations. It
may refer to the sale of goods, rendition of services, or the return of an investment. Revenue is a component of
the tax base in income tax, VAT, and local business tax (LBT).

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity. It may refer to
real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property
from which the person or entity may derive income or use to generate the same. In Philippine taxation, the fair
market value of real property is a component of the tax base in real property tax (RPT). Also, the landed cost of
imported goods is a component of the tax base in VAT on importation and tariff duties.

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and
exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand,
when it also shows that it uses its assets in the form of real property for educational purposes, it shall be
exempted from RPT. (CIR v. DLSU)

Q: An international airline with no landing rights in the Philippines sold tickets in the Philippines for air
transportation. Is income derived from such sales of tickets considered taxable income of the said
international air carrier from Philippine sources under the Tax Code? Explain.
A: Yes. The income derived from the sales of the tickets is considered taxable income of the international air
carrier from Philippine sources. The source of income is the property, activity, or service that produced the
income. The sale of tickets in the Philippines is the activity that produces the income. The absence of landing
rights in the Philippines cannot alter the fact that revenues were derived from ticket sales in the Philippines (CIR
v. Japan Air Lines, 1991 reiterating CIR v. BOAC, 1987)

Q: What is the liability of an off-line international carrier selling passage documents through an independent
sales agent in the Philippines?
A: The carrier is subject to income tax at the rate of 32% of its taxable income. Off-line air carriers having general
sales agents in the Philippines are engaged in or doing business in the Philippines and that their income from
sales of passage documents here is income from within the Philippines (South African Airways v. CIR, 2010).

Q: What are the requirements that must be complied with for retirement benefits to be exempted from
income tax?
A:
(1) The plan must be reasonable;
(2) The benefit plan must be approved by the BIR;
(3) The retiring official or employee must have been in the service of the same employer for at least ten (10)
years and must at least be fifty (50) years old at the time of retirement; and
(4) The retiring official or employee should not have previously availed of the privilege under the retirement
benefit plan of the same or another employer.

Note: It does not matter if the retirement is voluntary. As long as the requirements are met, the retirement
proceeds are excluded in the gross income. However, if the retirement is compulsory, there is no need to comply
with the above requirements before the retirement benefits would be excluded because the same would be
excluded as separation pay beyond the control of the employee [2 DOMONDON, Taxation]

Q: What are the requirements to exempt winnings, prizes and awards from the income tax?
A:
(1) The prizes and awards were given in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement; RC SEA LC
(2) The recipient was selected without any action on his part to enter the contest or proceeding; and
(3) The recipient is not required to render substantial future services as a condition to receiving the prize
or award. [NIRC, Sec. 32, (B) (7) (c)]

Q: When are prizes to athletes not subject to income tax?

A: Prizes and awards granted to athletes in local and international sports competitions and tournaments whether
held in the Philippines or abroad when sanctioned by their national sports associations are not included in the
computation of gross income. (Sec.32 (B)(7)(d))

Note: National Sports Associations are those which are duly accredited by the Philippine Olympic Committee
[R.A. No. 7549, Sec. 2(2)]

Q: What are the tax implications of prizes and awards in sports competitions under R.A. No. 7549 or the Act
Exempting All Prizes and Awards Gained from Local and International Sports Tournaments and Competitions
from the Payment of Income and Other Forms of Taxes and for Other Purposes?
A:
(1) The prizes and awards shall be exempt from income tax;
(2) They shall be deductible in full from the gross income of the donor; and
(3) The donors of such prizes and awards are exempt from donor’s tax [R.A. No. 7549, Sec. 1]

Q: What are the items subject to final tax?

A: The following are subject to final tax: FB SWS DRIPS
(1) Fringe Benefits
(2) Branch or profit remittance tax of 15% that is effectively connected in the conduct of trade or business
(3) Sale or Exchange of disposition of real property considered as capital asset not used in the trade or
business
(4) Winnings
(5) Sale or exchange of shares of stocks under Sec.127(A)
(6) Dividend income
 It is only subject to final tax under two (2) situations:
a. Recipient must be an individual
b. Must be non-resident foreign corporation
(7) Royalties
(8) Interest income from bank deposits including deposit substitutes (“deposit substitutes” means
obtaining funds from the public. The operative word is “public”. The term “public” means borrowing
funds from more than 20 individuals or lenders. (Banco de Oro vs. Republic, 2016)
(9) Prizes: if more than P10,000
(10) Shares: Share of a partner from the net income after tax of a business partnership.

Q: What are fringe benefits?

A: Any good, service or other benefits furnished or granted in cash or in kind, in addition to basic salaries, by an
employer to a managerial or supervisory employee. [NIRC, Sec. 33 (B)]

Q: Who pays the fringe benefit tax (FBT)?

A: The FBT is actually due from the employee but paid by the employer for and in behalf of the employee. Such
tax is additional cost to the employer. Moreover, the payment of tax by the employer means the tax is an
additional benefit to the subject employee thereto. Thus, the need to gross up the monetary value of the fringe
benefit received in computing the FBT due thereon. [R.R. No. 3-98, Sec. 2.33 (A); De Leon]

Q: What are the taxable fringe benefits?

A: These fringe benefits are subject to FBT: (HEV-HIM-EHEL)
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than the market rate to the extent of the difference between the market rate and
actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic
clubs or other similar organizations;
(7) Expense for foreign travel;
(8) Holiday and Vacation Expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what
the law allows [NIRC, Sec. 33, (BB)]

Q: What are the instances when housing privilege is subject to FBT?

A:
(1) Employer leases residential property for use of the employee;
(2) Employer owns a residential property and assigns the same for use by the employee;
(3) Employer purchases a residential property on installment basis and allows use by the employee;
(4) Employer purchases a residential property and transfers ownership to the employee; or
(5) Employer provides a monthly fixed amount for the employee to pay his landlord [R.R. No. 3-98, Sec. 2.33
(B) (1)]

Q: What are housing privileges not subject to FBT?

A: The following are non-taxable:
(1) Housing privileges of military officials of the AFP consisting of officials of the Phil. Army, Phil. Navy, and
Phil. Air Force;
Rationale: The State shall provide its soldiers with the necessary quarters which are within or accessible
from the military camp so that they can readily be on call to meet the exigencies of the military service.
(2) Housing unit which is situated inside or adjacent (i.e., the unit is located within the maximum of 50
meters from the perimeter of the business premises) to the premises of a business or factory; and
(3) Temporary housing for an employee who stays in a housing unit for 3 months or less [R.R. No. 3-98 Sec.
2.33 (B)(1)]
Q: What expenses incurred by the employee are subject to FBT?
A:
(1) Expenses incurred by the employee, but which are paid by his employer except when the expenditures
are duly receipted for and in the name of the employer and the expenditures do not partake the nature
of a personal expense attributable to such employee;
(2) Expenses paid for by the employee but reimbursed by his employer except when the expenditures are
duly receipted for and in the name of the employer and the expenditures don’t partake the nature of a
personal expense attributable to said employee; and
(3) Personal expenses of the employee paid for or reimbursed by the employer whether or not the same are
duly receipted for in the name of the employer [R.R. No. 3-98 Sec. 2.33 (B) (2)]

Note: Representation and transportation allowances which are fixed in amounts and are regularly received
by the employees as part of their monthly compensation are not treated as taxable fringe benefits but are
considered as taxable compensation income subject to regular tax rates [R.R. No. 3-98, Sec. 2.33 (B)(2)(d)]

Q: What are the instances when motor vehicles privilege is subjected to FBT?
A: Any of the ff is subject to FBT:
(1) Employer purchases vehicle in employee’s name;
(2) Employer provides employee cash for vehicle purchases;
(3) Employer purchases car on installment and the ownership of which is placed in the name of the
employee;
(4) Employer shoulders a portion of the purchase price;
(5) Employer owns and maintains a fleet of motor vehicles for use of business and employees;
(6) Employer leases and maintains a fleet of motor vehicles for the use of the business and employees;
(7) The use of aircraft owned and maintained by the employer; and
(8) The use if yacht whether owned and maintained or leased by the employer [2 CASASOLA, NIRC (2013)]

Q: Is the use of aircraft subject to FBT?

A: No. The use of aircrafts, including helicopters owned and maintained by the employer, shall be treated as
business use and not subject to FBT. [R.R. No. 3-98 Sec. 2.33 (B)(3)(g)]

Q: Are household personnel expenses of employees borne by employer subject to FBT?

A: Yes. The following shall be treated as taxable:
(1) Salaries of household help, personal driver of the employee; or
(2) Other similar personal expenses like payment for household’s association dues, garbage dues, etc. [R.R.
No. 3-98 Sec. 2.33(B)(4)]

Q: When is interest on loans obtained by the employees from the employer subject to FBT?
A: If the employer lends money to his employee free of interest or a rate lower than 12%, such interest foregone
by the employer or the difference of the interest assumed by the employee and the rate of 12% shall be treated
as taxable fringe benefit [R.R No. 3-98 Sec. 2.33 (B)(5)]

Q: What are the expenses for foreign travel which are NOT subject to FBT?
A:
(1) Inland travel expenses such as expenses for food, beverages and local transportation;
(2) The cost of lodging in a hotel or similar establishment amounting to an average of US $300 or less per
day;
(3) The cost of economy and business class airplane tickets;
(4) 70% of the cost of the first-class airplane ticket [R.R. No. 3-98 Sec. 2.33 (B)(7): DE LEON, NIRC Annotated]

Q: What are non-taxable fringe benefits?

A:
(1) Those which are authorized and exempted from income tax under the NIRC;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
(3) Benefits given to rank-and-file employees, which are granted under a collective bargaining agreement
(CBA) or not;
(4) De minimis benefits [NIRC, Sec. 33 (C); R.R. 3-98 Sec. 2.33 (C)]; and
 (5) Those required by the nature of or necessary to the trade, business or profession of the employer;
(6) Those for the convenience or advantage of the employer;
(7) Benefits received by an employee by virtue of a CBA and productivity incentive schemes provided that
the total annual monetary value received from both CBA and productivity incentive schemes combined,
doesn’t exceed P10,000 per employee per taxable year [R.R. No. 1-15]
Note: Exemption from FBT is not an exemption from other income taxes, unless such benefit is also stated
expressly to be exempt from other income taxes [2 CASASOLA, NIRC]

Q: What are de minimis benefits?

A: Facilities or privileges furnished or offered by an employer to his employees that are of relatively small value
and are offered or furnished by the employer, which are not considered as compensation, but merely as a means
of promoting the health, goodwill, contentment and efficiency of his employees. [R.R. No. 3-98, Sec. 2.33 (C)]

Q: When do de minimis benefits form part of compensation income?

A: De minimis benefits granted by an employer shall form part of compensation income subject to the graduated
rates but only the amount in excess of the ceiling prescribed (i.e., P90,000) and the same were given to rank-
and-file employees. If the same were given to managerial and supervisory employees, the excess shall be subject
to FBT [R.M.C. No. 5-11]

Q: What is the optional standard deduction?

A: A fixed percentage deduction which is allowed to certain taxpayers without regard to any expenditure. This is
in lieu of the itemized deduction. [NIRC, Sec. 34 (L)] The optional standard deduction is an amount not exceeding:
(1) 40% of the gross sales or gross receipts of a qualified individual taxpayer; or
(2) 40% of the gross income of a qualified corporation.

Q: Who may avail of the OSD?

A:
(1) Individuals (including estate and trust), except individuals earning purely compensation income and
non-resident aliens;
(2) Corporations, except non-resident foreign corporations [R.R. No. 16-08, Sec. 2]; and
(3) General Professional Partnerships provided that:
i. GPP and partners comprising such partnership may avail OSD only once
ii. Either by the GPP or the partners comprising the partnership [NIRC, as amended by
TRAIN Law, Sec. 34 (L)]

Q: What are the items that are not deductible from gross income?
A:
(1) Personal, living or family expenses;
(2) Any amount paid for new buildings or for permanent improvements (capital expenditures);
(3) Any amount expended in restoring property (major repairs) or in making good the exhaustion thereof
for which an allowance is or has been made;
(4) Premiums paid on life insurance policy covering life or any other officer or employee financially
interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer
is directly or indirectly a beneficiary under such policy;
(5) Interest expense, bad debts, and losses from sales of property between related parties;
(6) Losses from sale or exchange of property;
(7) Non-deductible interest;
(8) Non-deductible taxes;
(9) Non-deductible losses; and
(10) Losses from wash sales of stock or securities.

Q: Define “related parties” in relation to those items not deductible from gross income
A: According to Section 36(B) of the NIRC:
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
 (2) Except in the case of distributions in liquidation, between an individual and corporation more than
fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation, between 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 if either one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.

Q: What is tax arbitrage as applied to interest as an allowable deduction?

A: Tax arbitrage is a tax benefit on the part of the taxpayer through a difference on the tax rate on income and
the corresponding rate of tax benefit imposed on the taxpayer. Under Section 34(B) of the NIRC, the taxpayer’s
allowable deduction for interest shall be reduced by thirty-three percent (33%) of the interest income
subjected to final tax.

Note: Under R.R. No. 13-00, the limitation on the allowable interest expense shall apply, regardless if whether or
not the tax arbitrage scheme was entered into by the taxpayer, or regardless of the date when the interest
bearing loan and the date when the investment was made for as long as, during the taxable year, there is an
interest expense incurred on one side and an interest income earned on the other side, which interest income
had been subjected to final withholding tax.

Q: Are interests paid on delinquent taxes subject to the tax arbitrage?

A: NO. Interest paid or incurred by the taxpayer on all unpaid business-related taxes shall be fully deductible
from gross income and shall not be subject to the limitation on deduction. Thus, such interest expense paid or
incurred shall not be diminished by the percentage of interest income earned which had been subjected to
FWT. [R.R. No. 13-00]

Q: What interest expenses are non-deductible?

A:
(1) Interest paid in advance by an individual taxpayer through discount or otherwise who is reporting
income on cash basis. The interest may only be deductible:
(a) In the year indebtedness is paid; and
(b) If the indebtedness is payable in periodic amortization, the amortized amount of interest paid
during the year shall be allowed as deduction in such taxable year [NIRC, Sec. 34 par. (B)(2)(a)];
(2) If the indebtedness is incurred to finance petroleum exploration, the interest incurred is capitalized as
“deferred exploration cost” [NIRC, Sec. 34 par. (B)(2)(c) in relation to Sec. 34 (G)]
(3) Interest in the form of Dividends paid to preferred shareholders [R.R. No. 02-40 Sec. 78; R.M.C. No. 17-
71];
(4) Interest for Cost keeping on account of capital or surplus invested in business which does not
represent changes arising under the interest bearing obligations [R.R. No, 2-40, Sec. 79]
(5) Interest paid when there is no Stipulation for the payment thereof or where there is no indebtedness
as when the obligation is unenforceable [CIR vs. Prieto, 1960]
(6) Interest paid on earned and unclaimed Salary [Kuenzie & Streiff, Inc. vs., CIR, 1959]; and
(7) Interest paid in indebtedness between Related Taxpayers [NIRC, Sec. 36 (B)]

Q: What is the Net Operating Loss Carry-Over (NOLCO) rule?

A: The net operating loss of the business or enterprise for any taxable year immediately preceding the current
taxable year, which had not been previously offset as deduction from gross income shall be carried over as a
deduction from gross income for the next three (3) consecutive taxable years immediately following the year of
such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating
loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or
enterprise.
Q: What are the requisites of Net Operating Loss Carry-Over (NOLCO) rule?
A: The requisites for deductibility are:
(1) The net operating loss of the business or enterprise
(2) For any taxable year immediately preceding the current taxable year,
(3) Had not been previously offset as deduction from gross income
(4) Shall be carried over as a deduction from gross income
(5) For the next three consecutive taxable years immediately following the year of such loss.
(6) Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not
be allowed as a deduction.
(7) NOLCO shall be allowed only if there has been no substantial change in the ownership of the business
or enterprise,
a. Not less than 75% of nominal value of outstanding issued shares is held by or on behalf of the
same persons; or
b. Not less than 75% of the paid-up capital of the corporation is held by or on behalf of the same
persons. [NIRC, Sec. 34, par. (D)(3)]

Note: In the case of oil and gas well, losses incurred in any of the first 10 years of operation may be carried
over as a deduction from the gross income for the next 5 years following such loss. [NIRC, Sec. 34, par.
(D)(3)]

Q: In case of merger, consolidation, or combination, is the transfee or assignee entitled to claim the NOLCO
of the transferor?
A: The transferee or assignee shall not be entitled to claim the same as deduction from gross income except when
as a result of the said merger, consolidation, or combination, the shareholders of the transferor/assignor, or the
transferor gains control of:

(1) At least 75% or more in the nominal value of outstanding issued shares or paid-up capital of the
transferee/assignee, if a corporation; or
(2) At least 75% or more interest in the business of the transferee/assignee, if not a corporation (75% equity
rule) [R.R. No. 14-01, Sec. 2.4]

Note: The 75% equity rule or ownership or interest rule, only applies to a corporation in cases where there is a
transfer or assignment of the taxpayer’s net operating losses as a result of or arising from the said taxpayer’s
merger or consolidation or business combination with another person.

Q: Who are entitled to deduct NOLCO from gross income?

A:
(1) Individuals engaged in trade or business or in the exercise of his profession;
(2) Domestic corporations and resident foreign corporations subject to the normal income tax;
(3) Special corporations subject to preferential tax-rates (e.g., private educational institutions, hospitals,
and regional operating headquarters); and
(4) Estates and trusts [R.R. No. 14-01, Sec. 4]

Q: Who are not entitled in relation to the preceding question?

A:
(1) Offshore Banking Units (OBU) of foreign banking corporation, and FCDU of a domestic or foreign
banking corporation, duly authorized as such by the BSP;
(2) An enterprise registered with the Board of Investment enjoying the income tax holiday incentive;
(3) PEZA registered enterprise;
(4) SBMA registered enterprise and other enterprises negotiated under RA No. 7227;
(5) Foreign corporations engaged in international shipping or air carriage business in the Philippines;
(6) Any person, natural or juridical, enjoying exemption from income tax [R.R. No, 14-01 Sec. 4]

Q: Differentiate Net Operating Loss Carry-over from Net Capital Loss Carry-over.
A: NOLCO (Net Operating Loss Carry-over) is the excess of allowable deductions over income of business for
any taxable year, which had not been previously offset as deduction from gross income [NIRC Sec. 34 (D)(3)].
NELCO (Net Capital Loss Carry-over) is if any taxpayer, other than a corporation, sustains in any taxable year a
net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the
succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months
[NIRC, Sec. 39(D)].

Rules:
(1) NELCO is available only to individuals, including estates and trusts.
(2) The net-loss carry-over shall not exceed the net income for the year sustained and is deductible only
for the succeeding year.
(3) The capital assets must not be real property or stocks listed and traded in the stock exchange.
(4) Capital asset must be held for not more than 12 months.

Q: What is capital gains tax?

A: Capital gains tax is a tax imposed on the income from the sale or exchange of shares of stock of a domestic
corporation, and capital gains tax on sale or exchange of real property, which are classified as capital assets.

Q: Are real properties transferred pursuant to expropriation proceedings subject to capital gains tax?
A: Yes. The transfer is a sale or exchange within the meaning of Sec. 24 (D) and 56 (A) (3) of the NIRC, as amended,
and the profit of the transaction constitutes capital gain. Such capital gains is subject to CGT. [Republic,
represented by DPWH, vs. Spouses Senando and Josefina Salvador, 2017]

Note: The expropriation of property classified as capital asset is subject to CGT and DST based on the amount of
just compensation [R.M.C. No. 41-91]. It is not subject to CWT and VAT [BIR Ruling No. DA-212-07]

Q: Who is liable for CGT in expropriation proceedings?

A: The seller is liable. It is the seller or, respondents in this case who are liable to shoulder the tax. Thus, as far as
the government is concerned, the capital gains tax in expropriation proceedings remains a liability of the seller,
as it is a tax on the seller's gain from the sale of real property. [Republic, represented by DPWH, vs. Spouses Senando
and Josefina Salvador, 2017]

Q: Differentiate Ordinary Income Tax from Capital Gains Tax.

A: Ordinary income tax or regular corporate income tax is to be paid if the property is an ordinary asset,
regardless of the type of proceedings and personality of mortgagees or selling persons. On the other hand, capital
gains tax is to be paid if the property is a capital asset.

Q: What is the treatment of dealings in shares of stock of Philippine Corporations?

A: It depends whether the subject shares are traded and listed in the stock exchange. Thus:

If the subject shares are traded and listed in the
stock exchange
Subject to stock transaction tax at the rate of six-
tenths of one percent (6/10 of 1%) of the gross
selling price or gross value in money of the shares of
stock.
If the subject shares are NOT traded and listed in
the stock exchange
Subject to capital gains tax or final tax of fifteen
percent (15%) as the case may be, on net capital
gains during the taxable year.

Q: What are the five (5) kinds of ordinary assets?

A: PARIS
1. Property primarily held for sale to customers in the ordinary trade or business
2. Allowance for depreciation of depreciable assets
3. Real property used in trade or business
4. Inventoriable assets
5. Stock in Trade.

Q: Why is it important to know the five kinds of ordinary assets?

A: If an asset is not any one of the five ordinary assets (PARIS), then it is automatically considered as capital asset.
Therefore, the special rules will apply to the capital assets.
Q: What are capital assets?
A: Capital assets means property held by the taxpayer (whether or not connected with his trade or business),
BUT DOES NOT include the following: (SOUR)
(1) Stock in trade of taxpayer or other property of a kind which would properly be included in the inventory
of the taxpayer if on hand at the close of the taxable year;
(2) Property held by the taxpayer primarily for sale by customers in the ordinary course of his trade or
business;
(3) Property used in trade or business, of a character which is subject to the allowance for depreciation;
(4) Real property used in trade or business of the taxpayer. (Sec. 39 (A)(1))

Q: Differentiate Ordinary Asset from Capital Asset.

A:
ORDINARY ASSET
Property held by the taxpayer used in connection
with his trade or business.
Includes the following:
(a) Stock in trade of a taxpayer or other real
property of a kind which would properly be
included in the inventory of the taxpayer if on
hand at the close of the taxable year;
(b) Real property held by the taxpayer primarily
for sale to customers in the ordinary course
of his trade or business;
(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 provided for under §34(F) of
the Code; or
Real property used in trade or business of the
taxpayer (§2.b, RR 07-2003).
CAPITAL ASSET
Defined by an exclusion of all ordinary assets
Includes the following
(a) 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 under §39(A)(1) of the Code (Sec. 2.a,
RR 07-2003);
Property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business, or property used in the trade or business, of
a character which is subject to the allowance for
depreciation (Sec. 39 (A)(1), NIRC).

Q: May an asset originally classified as ordinary asset be reclassified into a capital asset?
A: As a general rule, a property purchased for future use in the business, even though this purpose is later
thwarted by circumstances beyond the taxpayer’s control, does not lose its character as an ordinary asset. Nor
does a mere discontinuance of the active use of the property change its character previously established as a
business property (RR No. 7-2003, Sec. 3(a)(4)).

However, Sec. 3(e) of RR No. 7,2003 provides that properties classified as ordinary assets for being used in
business by a taxpayer engaged in business other than real estate business are automatically converted into
capital assets upon showing of proof that the same have not been used in business for more than 2 years prior to
the consummation of the taxable transactions involving the properties (BIR Ruling No. 142-2011). The conversion
from ordinary to capital asset is allowed only if the taxpayer is not engaged in real estate business.

Q: When are shares of stocks be treated as ordinary assets and when are they treated as capital assets?
A: An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in
either a capital gain or a capital loss. Shares or stock like the other securities defined in Sec. 22(T} of the NIRC.
would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of an active
trader (for his own account) in securities. In the hands, however, of another who holds the shares of stock by way
of an investment, the shares to him would be capital assets. When the shares held by such investor become
worthless. the loss is deemed to be. A loss from the sale or exchange of capital assets (China Banking Corporation
vs. CA, 2000)

Q: What are the special rules that govern capital transactions?

A: These special rules apply to capital transactions:
1. Holding period rule (Sec. 39(B), NIRC) –the capital asset is not allowed to be sold within the 12-month
period
2. Capital loss limitation (Sec. 39(C), NIRC) – capital loss is deducted from capital gain (It is only applicable
to corporate and individual taxpayers. Bank and trust companies are exempt.)
 3. Net capital loss carry over (NOLCO) (Sec. 39(D), NIRC)

Note: Only individual taxpayers can carry over capital loss. However, under Section 34 (D)(3), corporate taxpayers
may carry over net operation loss provided the conditions are followed.)

Q: Why is the “holding period rule” considered a form of tax avoidance?

A: This rule prohibits the sale of capital assets within the 12-month period. However, if the sale is made after the
12-month period, only 50% of the capital gain is taxable. (NOTE: It only applies to individual taxpayers)

Q: In 2003, Mr. Naval bought a lot for 1M in a subdivision with the intention of building his residence on it. In
2012, he abandoned his plan to build his residence on it because the surrounding area became a depressed
area and land values in the subdivision went down; instead he sold it for P800,000. Is the land a capital asset
or an ordinary asset?
A: The land is a capital asset. It is not used in trade or business because it was intended for Mr. Naval’s residence.
[NIRC, Sec. (39)(A)].

Q: How is a general professional partnership taxed?

A: General Professional Partnership is not subject to income tax. It is only required to file information returns for
its income for the purpose of furnishing information as to the share in net income of the partnership, exempt
income under Sec. 32 [B] NIRC setting forth the items of gross income and deductions allowed, name taxpayers
identification number, addresses and shares of each partner, which each partner should include in his individual
return.

Partners shall be liable for income tax in their separate and individual capacities.

Q: What are the general requisites for deductibility of compensation for personal services actually rendered?
A: The requisites are the following: (OPT-SPR)
(1) The expense must be both Ordinary and necessary;
(2) The salaries must be Paid or incurred within the taxable year;
(3) The 3alaries must be incurred in carrying on a Trade or business;
(4) The expense ·must in fact be Salaries or other compensation:
(5) The salaries must be for Personal services actually rendered; and
(6) The salaries must be Reasonable in amount (Mamalateo, 2014).

Q: What are the requisites for deductibility of travel or transportation expenses?

A: The requisites are the following:
(1) It must be paid or incurred while away from home;
(2) It was made in the pursuit of trade or business: and
(3) It must be reasonable and necessary (NIRC, Sec. 34 (A)(1 )(a)(ii)).

Note: The term “away from home” means away from the location of the employee's principal place. of employment
regardless of where the family residence is maintained like business trips. It includes transportation, meals, and
lodging (R.R. No. 02-40 Secs 65 and 66). Thus:
(1) Transportation expenses from main office to branch or from branch to main office are deductible;
(2) Transportation expenses from office to home or from home to office are not deductible: and
(3) If company car is utilized both for business or personal use, the allowable deduction must be in
proportion to the use for business (RMC 5-11).

Q: What are the requisites for deductibility of rental expenses?

A: The requisites are the follcwing: (CUTTT)
(1) It must be made as a condition to the Continued Use or possession of property;
(2) Taxpayer has not taken or is not' taking Title to the property or has no equity other than that of a lessee,
user ·or possessor;
(3) Property must be used in Trade or business; and
(4) Subjected to withholding Tax of 5% (R.R. No. 02-98, Secs. 2. 57. 2(8} and (C)).
Q: What are the requisites for deductibility of Entertainment/Amusement/Representation Expenses (EAR)?
A: The requisites for deductibility are the following: (DR-LB-SPWE)
(1) Directly connected to the development, management, and operation of the trade, business or profession
of the taxpayer or directly related to or in furtherance of the conduct of· trade, business, or profession
(R.R. No. 10-02 Sec. 4(B));
(2) Is Reasonable;
(3) Not contrary to Laws, morals, policy or public order (R.R . No . . 10-02, Sec. 4(C));
(4) Does not constitute a Bribe, kickback or other similar payment (R.R. No. 10-02, Sec.4(O));
(5) Substantiated with adequate proof. The official receipt, or invoices or bills or statements of account
should be in the name of the taxpayer claiming the deduction (R.R. No. 10.02. Sec. 4(B));
(6) Must be Paid or incurred during the taxable year (R.R. No. 10-02, Sec. 4(A));
(7) The appropriate amount of Withholding tax. if applicable, should have been withheld therefrom and paid
to the BIR (R.R. No. 10-02, Sec. 4(F)); and
(8) Does not Exceed:
a) For taxpayers engaged in sale of goods/properties - one half of one percent (.50%) or net sales:
b) For taxpayers engaged in sale of services - one percent (1%) of net revenues;
c) For taxpayers engaged in both sale of goods/properties and services - determined using an
apportionment formula, taking into consideration the percentage ceiling prescribed above (i.e. .. Net
Sales (or Revenues) / Total Sales and Revenues x EAR ) (R.R . No. 10-02. Sec. 5).

Q: What are the requisite s for deductibility of interest expense?

A: Section 3 of RR. 13-2000 provides fur the following requirements for deductibility of interest expense: (TIO-
CROWD-TA)
(1) The indebtedness must be that of the Taxpayer;
Note: The term "indebtedness" has been defined as an unconditional and legally enforceable obligation
for the payment of money (Commissioner of Internal Revenue v. Prieto, GR. No. L- 13912. September 30,
1960).
(2) Interest expense must have been paid or incurred during the taxable year;
(3) There must be an indebtedness incurred by the taxpayer based on a bona fide Debtor-creditor
relationship;
Note: A bona fide debtor-creditor relationship is one based on a valid and enforceable obligation wherein
the debtor is under unconditional obligation to repay the creditor (Philex Mining Corp. v. Commissioner,
CTA Case No. 5200, August 21, 1998).
(4) The indebtedness must be Connected with the taxpayer's trade business, or exercise of profession:
(5) The Interest must NOT be between Related taxpayers;
(6) The interest must NOT be incurred to finance petroleum Operations:
(7) The interest must be stipulated in Writing :
(8) The interest must be legally Due:
(9) In case of interest incurred to incurred property used in Trade, business or exercise of profession, the
same was NOT treated as capital expenditure (NIRC, Sec. 34(B)); and
(10) Interest expense is subject to interest Arbitrage rule. (Commissioner of Internal Revenue vs. Ludo & Luym
Corporation. CTA EB No. 1559, June 8, 2018).

Q: What are the requisites for deductibility of taxes?

A: The requisites are the following: (TPT LL)
(1) Payment must be for Taxes;
(2) It must be Paid or incurred within the taxable year;
(3) It must be incurred in connection with the taxpayer’s Trade business or profession;
(4) Tax must be imposed by Law on and payable by the taxpayer (indirect taxes are not included); and
(5) Taxes are not specifically excluded by Law from being deducted from the taxpayer’s gross income.
Note: In the case of NRA-ETB and a RFC, taxes for which deduction is claimed must be connected with
income from sources within the Philippines (NIRC, Sec. 34(C)(2); R.R. No. 02-40, Sec. 80)

Q: Can expenses other than those in the NIRC be deducted?

A: No. The principle of expressio unius est exclusio alterius must be applied to allowable deductions. An expense,
which is not provided in Section 34 of the NIRC, is not deductible.
Q: What is a Resident Foreign Corporation and what are the deductions available?
A: Resident Foreign Corporation (RFC) is a corporation which is not domestic and engaged in trade or business
within the Philippines [NIRC, Sec. 22 (D) & (H)]. RFC is taxed under normal or basic corporate income tax of 30%
of net taxable income from sources within the Philippines, or Minimum Corporate Income Tax - 2% MCIT Gross
Income from sources within the Philippines, under the same conditions as domestic corporations on the
deductions available to RFCs are itemized deductions and optional standard deduction (NIRC, Sec. 28).

Q: What are the exempt organizations and associations?

A: The exempt organizations are stated in Sections 22(B), 27(C) and 30.

Under Section 22(B), the exempt organizations or associations are:

(1) General professional partnerships;
(2) Joint ventures undertaking construction projects; and
(3) Joint consortiums, provided these two (2) requisites are present:
a. It must operate geothermal energy and other petroleum operations; and
b. It must be consistent with the consortium agreement with the government.

Under Section 27(C), the following are exempt government-owned or controlled corporations (GOCC):
(1) Government Service Insurance System (GSIS)
(2) Social Security System (SSS)
(3) Philippine Health Insurance Corporation (PHIC)
(4) Local Water Districts (NIRC, Sec. 27(C))

Note: PAGCOR is included in the list pursuant to R.A. No. 9337. However, according to the case of PAGCOR vs. BIR
(2011), PAGCOR is exempt as regards to its income derived from gaming operations. It is taxable in so far as its
income from other related services is concerned.

Note: Under Sec. 27(C) of NIRC, PCSO is among the list of GOCCs, agencies or instrumentalities that are exempt
from payment of corporate income tax. Under the TRAIN Law, PCSO is no longer exempt from payment of
corporate income tax.

In addition to the list of exemptions enumerated in Section 30, there are also two (3) rulings that govern the
exemptions of charitable institutions:

1. YMCA Doctrine (1998)

Although YMCA is a non-stock, non-profit organization, charitable or religious organization, it is nonetheless
subject to corporate income tax on the receipt of the rent income derived from the lease of its properties,
real or personal. This is in accordance with the last paragraph of Section 30.

2. St. Luke’s Medical Center Inc. Doctrine (2012)

A charitable hospital is exempt only if (NOON):
a. Non-stock corporation,
b. Organized exclusively for charitable purposes,
c. Operated exclusively for charitable purposes, and
d. No part of its income or asset shall inure to the benefit of a particular individual.

(NOTE: However, St. Luke’s Medical Center Inc. is not qualified as an exempt charitable hospital because it
does not operate exclusively for charitable purposes as it is in fact derives income from paying patients.)

3. In the DLSU case, the Supreme Court held that according to Art. 14 Sec. 4 par. 3 there are two
requisites for full tax exemption:

1. Must be formed or organized as a non-stock non-profit educational institution.

2. Such income must be actually, directly and exclusively used for educational purposes.
 Example: Interest income from bank deposits derived by non-stock non-profit educational institutions
regardless of the source are exempt if they are actually, directly and exclusively used for educational
purpose.

Q: When do you file an income tax return for individual taxpayers?

A:
(1) For Income Tax Return - On or before the fifteenth (15th) day of April of each year covering income for
the preceding taxable year (NIRC, Sec. 51(C))
(2) Return on capital gains tax:
a. From the sale or exchange of shares of stock not traded thru a local stock exchange –
Within thirty (30) days after each transaction and a final consolidated return on or before
April 15 of each year covering all stock transactions of the preceding taxable year; and
b. From the sale or disposition of real property – Within thirty (30) days of the following
each sale or other disposition.

Q: When do you file an income tax return for corporations?

A: The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first
three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15 th)
day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal
year, as the case may be. (NIRC, Sec. 77(B))

Note: According to TRAIN Law, the ITR shall consist a maximum of four (4) pages in paper OR electronic form. It
shall also contain the information as required in ITRs of individual taxpayers. These requirements shall not
affect the implementation of Tax Incentives Management and Transparency Act (TIMTA) (NIRC, Sec. 5(B))

Q: What is the concept of withholding?

A: Withholding tax represent the amount of taxes deducted by the payor or employer from the payments made
to the payee by the payor or employer from the payments made to the payee or employee. The withholding taxes
are deducted by the withholding agents (Who have control, custody, or receipt of the funds) when the income
payments are paid or payable. A withholding agent is an agent of BOTH the state and the taxpayer.

Q: What are the kinds of withholding taxes?

A:
(1) Withholding of final tax on certain incomes - It is a kind of withholding tax which is prescribed on
certain income payments and is not creditable against the income tax due of the payee on other
income subject to regular rates of tax for the taxable year.
(2) Witholding of creditable tax at source – It is withheld on certain income payments are intended to
equal or at least approximate the tax due from payee on the saind income
(3) Witholding of VAT – Value Added Tax on all payments subject to VAT:
a. Gross payments for the purchase of goods
b. Gross payments for the purchase of services
c. Payments made to government public works contractor
d. Payments for lease or use of property or property rights to non-resident owners

Q: Differentiate final withholding tax from creditable withholding tax.

A: Under the final withholding tax system, the amount of income tax withheld is constituted as a full and final
payment of the income tax due from the payee on said income. The liability for payment of the income tax rests
primarily on the payor of income as a withholding agent. FWT is not creditable from income tax liability at the
end of the taxable year. The rate is a fixed rate imposable on specified items of income listed under Section 57 (A)
of the Tax Code.

Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal
or at least approximate the tax due of the payee on the said income. The income recipient is still required to file
quarterly and annual income tax return to report the income and/or to pay the difference between the tax
withheld and the tax due on the income. The CWT is creditable from income tax liability at the end of the taxable
year. The rate may be at the rate of not less than 1% but not more than 32% as may be imposed by the Secretary
of Finance, upon the recommendation of the Commissioner. (Revenue Regulation 2-98, Section 57 of Tax Code,
Section 79 of Tax Code, Philippine Income Tax, Mamalateo, 2010).
Q: PAL filed a refund claim for its final taxes withheld on its interest income from its deposits with various
banks, pursuant to its exemption under its franchise. CIR denied the claim arguing that PAL failed to prove
the remittance of the taxes withheld. Rule.
A: The certificate of creditable tax withheld at source is the competent proof to establish the fact that taxes are
withheld. It is not necessary for the person who executed and prepared the certificate of creditable tax withheld
at source to be presented and to testify personally to prove the authenticity of the certificates (PAL v. CIR, 2018).

ESTATE TAX

Q: What is estate tax?

A: It is a tax on the gratuitous transfer of the decedent’s estate to a beneficiary. It is an excise tax imposed upon
the privilege of transmitting property at the time of death and on the privilege that a person is given in controlling
to a certain extent the disposition of his property to take effect upon death. The tax is measured by the value of
the property transmitted at the time of death, regardless of its appreciation or depreciation.

Q: Who are the taxpayers liable to pay estate tax?

A:
(1) Resident citizens (RCs)
(2) Non-resident citizens (NRCs)
(3) Resident aliens (RAs)
(4) Non-resident aliens (NRAs)

RCs, NRC,s and RAs are liable for estate taxes on all of their properties at the time of their death, which
properties may be real or personal, tangible or intangible, wherever they may be situated.

Q: Can a corporation be held liable for estate tax?

A: No, Only natural persons can be held liable for estate tax. A corporation cannot be liable for the obvious reason
that they cannot die (naturally speaking).

Q: What is Estate Planning Scheme?

A: It is the process or preparation for the distribution or management of a person’s estate, the purpose of which
is to reduce administration cost and estate tax.

Q: What is the current rate of Estate Tax to be collected and paid upon the transfer?
A: 6% based on the value of such net estate.

Q: For purposes of computing estate tax, how is the term “residence” interpreted? How may one change his
or her residence?
A: For purposes of estate taxation, “residence” refers to domicile, the permanent home or the place to which
whenever absent, one intends to return (animus revertendi), and depends on facts and circumstances, in the
sense that they disclose intent. It is therefore, not necessarily the actual place of residence. (Corre v. Tan Corre,
1956). To effect the abandonment of one’s domicile, there must be 1.) a deliberate and provable choice of a new
domicile, coupled with 2.) actual residence in the place chosen, with 3.) a declared or provable intent that it
should be one’s fixed and permanent place of abode, one’s home. (Velilla v. Posadas, 1935).

Q: What are the items to be included in the gross estate?

A: The value of the gross estate of the decedent shall be determined by including the value at the time of his
death of all property, real or personal, tangible or intangible. In case of a nonresident citizen, only that part of
the entire gross estate, which is situated in the Philippines, shall be included in his taxable estate.
(1) Decedent’s Interest
(2) Transfer in Contemplation of Death
(3) Revocable Transfer
(4) Property Passing under General Power of Appointment
(5) Proceeds of Life Insurance (if the designation of the beneficiary is revocable)
(6) Prior Interests
(7) Transfers for Insufficient Consideration (NIRC, Sec. 85).
Q: What are those considered to be “transfers in contemplation of death”?
A: It is a transfer motivated by the thought of an impending death regardless of whether or not death is imminent.
(Ingles, 2018) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust
or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of
which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for
any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the
income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person
who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an
adequate and full consideration in money or money's worth. (Section 85 (b), NIRC)

Q: What are the itemized deductions from the gross estate?

A: NIRC, Sec. 86 (as amended by RA 10963) provides:
In case of a citizen or resident:
1. Standard Deduction —P5,000,000
2. Claims against the estate
3. Claims of the deceased against insolvent persons*
4. Unpaid mortgages*
5. Property Previously Taxed
6. Transfers for Public Use
7. Family Home*- Based on the current fair market value of the decedent's family home not exceeding Ten
Million pesos (P10M); the excess shall be subject to estate tax
8. Amount Received by Heirs under Republic Act No. 4917*
9. Net share of surviving spouse in conjugal or community property

In case of Non- resident

1. Standard Deduction- P500,000
2. Claims against the estate
3. Claims of the deceased against insolvent persons*
4. Unpaid mortgages*
5. Property Previously Taxed
6. Transfers for Public Use
7. Net Share in the Conjugal Property

NOTE: *Must be included in the gross estate

Q: What are those excluded from the gross estate?

A:
(1) Capital of surviving spouse
(2) Proceeds of life insurance where designation of beneficiary is irrevocable
(3) Exemptions of certain acquisitions or transmissions
(4) Other exemptions under special laws
a. GSIS proceeds/benefits
b. Accruals from SSS
c. Proceeds of life insurance under a group insurance taken by employer
d. War damage payments
e. Transfer by way of bona fide sales
f. Transfer of property to the government or to any of its political subdivisions
g. Merger or usufruct in the owner of the naked title
h. Properties held in trust by the decedent
i. Acquisition and/or transfer expressly declared as not taxable

Q: What are the transmissions exempted from payment of estate tax?

A: Under Sec. 87 of the NIRC, the following are the transmissions exempted from payment of estate tax:
(1) The merger of the usufruct in the owner of the naked title
(2) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary
 (3) The transmission from the first hear, legatee or donee in favor of another beneficiary, in accordance
with the desire of the predecessor
(4) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided
that no part of the net income of which inures to the benefit of any individual and not more than 30% of
the said bequests, devises, legacies or transfers shall be used for administration purposes.

Other exemptions include:

(1) Irrevocable life insurance to someone other than the estate, administrator, or executor
(2) GSIS/SSS benefits
(3) Retirement benefits of private firms approved by the BIR
(4) Separate property of the surviving spouse

Q: When do you file the estate tax return? Where do you file the estate tax return?
A: The estate tax return must be filed within one (1) year from death of the decedent. However, this may be
extended for a period not exceeding thirty (30) days but only on meritorious cases. It should be filed:
• If the decedent is a resident – with an authorized agent bank, or Revenue District Officer, Collection
Officer, or duly authorized Treasurer of the city or municipality in which the decedent was
domiciled at the time of his death
• If the decedent is not a resident – with the Office of the Commissioner

Q: Should the notice of death be filed?

A: No. There is no more notice of death requirement since R.A. No. 10963 repealed Section 89 of the NIRC.

Q: A, died intestate, leaving behind his wife B, and his children C, Irene, and Fernando Jr. B renounced her
conjugal share in favor of her favorite child, C. What is the tax implication of the renunciation by B in favor of
C?
A: B is liable for Donor’s Tax. Renunciation by the surviving spouse of his/her share in the conjugal partnership
or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any
other person/s is subject to donor’s tax whereas general renunciation by an heir, including the surviving spouse,
of his/her share in the hereditary estate left by the decedent is not subject to donor’s tax, unless specifically and
categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the
hereditary estate. (Sec. 12, RR 12-2018)

Q: T, in his will, designated his son-in-law, B, as executor. T died leaving behind as heir his only daughter, A.
Who is liable to pay the estate tax?
A: B is liable to pay the estate tax. This is because Section 91(d) of the NIRC and Section 9 of RR 12-2018 provide
that the estate tax imposed by the Code shall be paid by the executor or administrator before the delivery of the
distributive share in the inheritance to any heir or beneficiary.

Q: The mother of a decedent offered masses for which she paid 100,000 pesos in total. How much can the
estate of the decedent deduct from the masses that the mother offered?
A: None. R.A. No. 10963 removed funeral expenses from the items to be excluded in the gross estate of the
decedent. Moreover, any portion of the funeral and burial expenses borne or defrayed by relatives and friends of
the deceased are not deductible. (Sec. 86, NIRC)

DONOR’S TAX

Q: What is donor’s tax?

A: A donor’s tax is a tax on the gratuitous transfer of the donor’s property to a donee. It is levied, assessed,
collected and paid upon the transfer by any person, resident or nonresident, of the property by gift. (Sec. 98(A),
NIRC) It shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and
whether the property is real or personal, tangible or intangible. (Sec. 98(B), NIRC)

Q: What is the nature of donor’s tax?

A: It is not a property tax. It is an excise tax imposed on the privilege of the donor to give or on the transfer of
property by way of gift inter vivos. (Lladoc v. CIR, 1965)
Q: How much is the current donor’s tax rate?
A: The tax for each calendar year shall be 6% computed on the basis of the total gifts in excess of P250,000
exempt gift made during the calendar year (Sec. 99(A), NIRC).

Q: What are the requisites of a valid donation?

A:
(1) Capacity of the donor – All person who may contract and dispose of his/her property and does not
extend to the done
(2) Donative intent – Must always be present
(3) Delivery – Donor’s tax does not apply unless and until there is a complete gift, whether constructive or
actual, and was accepted by the done
(4) Acceptance – The relevant time of taxation is at the time of acceptance (FMV), not at the time of the
donation. Acceptance of an immovable may be made in the same Deed of Donation or in a separate
instrument, but must be made during the lifetime of the donor (RR 12-2018)

Q: What are the transfers, which may be constituted as a donation?

A:
(1) Sale, exchange, transfer of property for less than adequate and full consideration (Sec. 100, NIRC)
(2) Condonation/remission of debt (Dizon v. CTA, 2008)
(3) Renunciation in favor of other heirs (Sec. 12, RR 12-2018)
(4) Sale of shares not listed and traded in a local stock exchange below fair market value (FMV) (Sec. 7.c.1.4,
RR 6-2008)

Q: What are the requisites for a transfer made in the ordinary course of business be considered as made for
an adequate and full consideration?
A: If the transfer is made in the ordinary course of business, it will be considered as made for an adequate and
full consideration, if the following requisites are present:
(1) Bona fide transaction
(2) Arm’s length
(3) Free from any donative intent (Section 100, NIRC)

Q: Who are the taxpayers liable to pay donor’s tax?

A:
(1) Residents/ Citizens - for all properties, real or personal, tangible or intangible, wherever situated
(2) Non-resident Alien - for properties situated in the Philippines, except for intangible personal property
which is subject to the rule on reciprocity (NOTE: If there is reciprocity, intangible assets are excluded
from gross gift)

Q: What are those excluded from the composition of gross gift?

A:
(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies
which is not conducted for profit, or to any political subdivision of the said Government; (Sec. 101 (A)(1))
(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited nongovernment organization, trust or philanthropic organization or research
institution or organization: Provided not more than 30% of said gifts will be used by such donee for
administration purposes; (Sec. 101 (A)(2))

The entity must be:

a) Non-stock
b) Paying no dividends;
c) Governed by trustees who receive no compensation; and
d) Devoting all its income to the accomplishment of the purpose enumerated in its Articles of
Incorporation.

(3) Encumbrances on the property donated if assumed by the donee in the deed of donation;
(4) Donations made to entities exempted under special laws.
Q: What are the nine (9) exempt donations under Sec. 101(a.3) ? CARTER CPS
A: The following are exempt provided it has complied with all the requisites mentioned in Sec. 103.
Charitable Institutions;
Accredited NGOs;
Religious Institutions
Trust Foundations;
Educational Institutions (non-stock and non-profit);
Research Institution;

Cultural Organization;
Philanthropic Organizations; and
Social Welfare Organizations.

Q: Are earnings from Sports Competition(s)/ Tournament(s) exempted from donor’s tax?
A: Yes, it is exempted from donor’s tax under R.A. 7549. (Section 32 b.7. item D of the NIRC - Prizes and Awards in
Sports Competition)

Q: Can the above-stated donor claim tax deduction?

A: Under R.A. 7549, it may be claimed as deduction as gross income of the donor.

Q: What provisions regarding exemptions from Donor’s Tax were deleted by the “TRAIN” Law?
A: R.A. No. 10963 deleted the provision, which exempted from donor’s tax the dowries, or gifts made by parents
to each of their legitimate, recognized natural, or adopted children on account of marriage.

Q: What are the facts that must be stated in the donor’s tax return? When should it be filed?
A: There must be an accomplished donor’s tax return under oath filed within 30 days after the date the gift is
made stating the following:
(1) Each gift made during the calendar years which is to be included in computing net gifts
(2) Deductions claimed and allowed
(3) Any previous net gifts made during the same calendar year
(4) Names of donee
(5) Relationship of donor to donee
(6) Other information CIR may require

VALUE-ADDED TAX (VAT)

Q: What is Value Added Tax (VAT)?

A: It is a tax on consumption levied on the sale, barter, exchange, or lease of goods or properties, or services in
the Philippines and on the importation of goods into the Philippines.

Q: Who are liable to pay VAT?

A: Section 105 of the NIRC provides that “any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to
the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services.”

The term “in the course of trade or business” means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any persons regardless of whether or not the
person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or government entity.

Q: What are the requisites of VAT on sale of goods or properties?

A:
(1) There is an actual or deemed sale, barter or exchange of goods or properties for a valuable consideration;
(2) The sale is undertaken in the course of trade or business or exercise of profession in the Philippines;
(3) The goods or properties are located within the Philippines and are for use or consumption therein; and
(4) The sale is not exempt from value added tax under Section 109 of the Tax Code, special law, or international
agreement binding upon the government of the Philippines.

Q: When shall VAT be assessed and collected on importation of goods?

A: VAT shall be assessed and collected upon goods brought into the Philippines whether or not in the course of
trade or business.

Importation begins when a vessel or aircraft enters the Philippine jurisdiction with the intention to unload
goods/cargo. Importation ends upon the payment of duties, taxes, and other charges due upon the article, or to
be paid at the port of entry and legal permit for withdrawal have been granted. (Sec. 103, CMTA)

Q: What is technical importation?

A: Sale of good by a PEZA-registered enterprise to a buyer in the Philippines shall be treated as a technical
importation. Such buyer shall be treated as an importer thereof and shall be imposed with the corresponding
import taxes.

Q: What is the meaning of “sale or exchange of services” subject to VAT?

A: Section 108 of the NIRC defines “sale or exchange of services” to mean the “performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration.”

The term shall include:

(1) Construction and service contractors
(2) Stock, real estate, commercial, customs and immigration brokers
(3) Lessors of property, whether personal or real
(4) Persons engaged in warehousing services
(5) Lessors or distributors of cinematographic films
(6) Persons engaged in milling, processing, manufacturing or repacking goods for others
(7) Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters, and
movie houses
(8) Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs
and caterers
(9) Dealers in securities
(10) Lending investors
(11) 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
(12) 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
(13) Sales of electricity by generation, transmission, by any entity, and/or distribution companies, including
electric cooperatives
(14) Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all
other franchise grantees, except franchise grantees of radio and/or television broadcasting whose annual
gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000), and franchise grantees
of gas and water utilities
(15) Non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies
(16) Similar services regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties

The phrase also includes:

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret
formula or processes, goodwill, trademark, trade brand or other like property or right
(2) The lease or the use of, or the right to use any industrial, commercial or scientific equipment
(3) The supply of scientific, technical, industrial or commercial knowledge or information
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as is mentioned in subparagraph b) hereof or any
such knowledge or information as is mentioned in subparagraph c) hereof
(5) The supply of services by a non-resident person or his employee in connection with the use of property or
rights belonging to, or the installation of operation of any brand, machinery or other apparatus purchased
from such non-resident person
(6) The supply of technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or scheme
(7) The lease of motion picture films, film tapes and discs
(8) The lease or the use of, or the right to use, radio, television, satellite transmission and cable television time.
NOTE: In CIR v. SM Primeholdings (2010), the Supreme Court held that the showing or exhibition of films
(admission ticket) is NOT SUBJECT TO VAT.
a. What is subject to VAT is lease of films and not the act of exhibition.
b. It is not the intent of the law to subject such exhibition to VAT because it is already
subject to amusement taxes.
c. Payment of VAT would be an unreasonable burden on the taxpayer when to the
taxpayer had already paid the amusement tax. (Dimaampao Lecture)

Q: What does service mean?

A: “The art of doing something useful for a person or company for a fee” or “useful labor or work rendered or to
be rendered for another for a fee”

Q: What are the requisites for the taxability of sale or exchange or services or lease or use of property?
A:
(1) There is a sale or exchange of service or lease or use of property enumerated in the law or other similar
services
(2) The service is performed or to be performed in the Philippines
(3) The service is in the course of trade of taxpayer’s trade or business or profession
(4) The service is for a valuable consideration actually or constructively received
(5) The service is not exempt under the Tax Code, special law, or international agreement

Q: A is engaged in the business of baking pastries, which she sells to different restaurants. She bought delivery
vans to meet her client’s demands. After 2 years, she sold one of the delivery vans. Is the sale of the delivery
van subject to VAT?
A: Yes. Any sale, barter, or exchange of goods and services in the course of trade or business is subject to VAT.
Section 105 makes use of the phrase “in the course of trade or business”, which means the regular conduct or
pursuit of a commercial activity or an economic activity, including transactions incidental thereto. The sale of a
vehicle used in the business of the taxpayer, even though isolated, is subject to VAT as the transaction was an
incidental transaction made in the course of the taxpayer’s trade or business. (Mindanao II Geothermal
Partnership v. CIR, 2013).

Q: What is the impact of VAT?

A: The burden is on the seller upon whom the tax has been imposed

Q: What is the incidence of VAT?

A: The burden is on the final consumer, the place at which the tax comes to rest.

Q: What is the destination principle or cross-border doctrine?

A: The destination of the goods determines the taxation or exemption from VAT. Goods and services are taxed
only in the country where they are consumed. Export sale of goods are subject to zero percent (0%) rate (or zero
based) because the consumption of such goods will be made outside the Philippines, while imports of goods are
subject to the regular value added tax because they are for consumption within the Philippines. In case of export
or import of services, the rule is different. Consumption takes place where the service is performed, following
the “situs-of-service principle” (CIR v. American Express International)

Q: What is the consequence if a tax-exempt person transfers imported goods to a non-exempt person?
A: The buyer or transferee shall be considered as an importer and shall be held liable for VAT and other internal
revenue taxes due on such importation
Q: What is the effect when a tax-exempt entity subsequently sells imported articles to a non-tax exempt
entity?
A: When a person who was exempt from the VAT on his importation subsequently sells in the Philippines such
imported article to a non-exempt person or entity, the purchaser will be required to pay the VAT.

Q: What are the transactions deemed sale?

A:
(1) Transfer, use or consumption not in the course of business of goods or properties originally intended
for sale or for use in the course of business;
(2) Distribution or transfer to:
a. Shareholders or investors as share in the profits of the VAT-registered persons,
b. Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60) days following the date of such goods;
(4) Retirement from or cessation of business with respect to all goods on hand, whether capital goods,
stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the
business is continued by the new owner or successor:
a. Change of ownership of the business – There is change in the ownership of the business when a single
proprietorship incorporates or the proprietor of a single proprietorship sells his entire business,
b. Dissolution of a partnership and creation of a new partnership, which takes over the business.

Q: What is a zero-rated transaction?

A: 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 these regulations.

Q: What are the zero-rated sale of goods or properties?

A:
(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may influence or determine the transfer of
ownership of goods so exported, paid for in acceptable foreign currency or its equivalent in goods or
services, and accounted for in accordance with the rules and regulations of the BSP;
(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local
export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer’s goods, paid for in acceptable foreign currency, and accounted for in
accordance with the rules and regulations of the BSP;
(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales
exceed 70% of total annual production;
(4) Transactions considered as export sold under EO 226 (Omnibus Investment Code of 1987) and other
special laws;
(5) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations: Provided, That the goods, supplies, equipment, and fuel shall be
used exclusively for international shipping or air transport operations. (Sec. 4.106-5, RR 13-2018)

Q: What is the rationale for zero-rating exports sale?

A: It is because 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.

Q: What is an effectively zero-rated transaction?

A: It refers to the local sale of goods and properties by a VAT-registered person to a person or entity who was
granted indirect tax exemption under special laws or international agreement.

Q: What are the zero-rated sales of service?

A:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
 (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero percent (0%) rate;
(4) Services rendered to persons engaged in international shipping or international air transport operations,
including leases of property for use thereof: Provided, that these services shall be exclusively for
international shipping or air transport operations . Thus, the services referred to herein shall not pertain
to those made to common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines, the same being subject to
twelve percent (12%) VAT under Sec. 108 of the Tax Code.Services performed by subcontractors and/or
contractors in processing, converting, of manufacturing goods for an enterprise whose export sales
exceed seventy percent (70%) of total annual production;
(5) Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign
country. Gross receipts of international air carriers doing business in the Philippines and international
sea carriers doing business in the Philippines are still liable to a percentage tax of 3% based on their
gross receipts as provided in Sec. 18 of the Tax Code but shall not be liable to VAT; and
(6) Sale of power or fuel generated through sources of energy such as, but not limited to, biomass, solar,
wind hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies
such as fuel cells and hydrogen fuels; Provided, however, that zero-rating shall apply strictly to the sale
of power or fuel generated through renewable sources of energy and shall not extend to the sale of
services related to the maintenance or operation of plants generating the said power.
(7) Services rendered to (Section 108 (B), as amended by RA 10963):
a. Separate Customs Territory (Atlas Consolidated Mining v. CIR; RMC 77-99); or
b. Tourism Enterprise Zones (RA No. 9594 IRR)

Q: What is the difference between Zero-rated VAT transactions from Effectively Zero-rated VAT
transactions?
A:
Zero-rated VAT Transaction Effectively Zero-rated VAT Transaction
A zero-rated transaction is a taxable transaction for
An effectively zero-rated sale, on the other hand, is a
VAT purposes, but shall not result in any output tax.
kind of zero-rated transaction, which refers to the
However, the input tax on purchases of goods,
local sale of goods, properties and services by a VAT-
properties, or services, related to such zero-rated
registered person to an entity that was granted
sale, shall be available as a tax credit or refund in
indirect tax exemption under special laws or
accordance with existing regulations. Under this
international agreements. Since the buyer is exempt
type of sale, no VAT shall be shifted or passed-on by
from indirect tax, the seller cannot pass on the VAT
VAT-registered sellers/suppliers from the Customs
and therefore, the exemption enjoyed by the buyer
Territory on their sale, barter or exchange of goods,
shall extend to the seller, making the sale effectively
properties, or services to the subject registered
zero-rated.
Freeport Zone Enterprises.

Q: What are the VAT-exempt transactions?

A: These refer to the sale of goods or properties and/or services and the use or lease of properties that is not
subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. Thus, the
person making the exempt sale of goods or properties and/or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT.

(1) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of
a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and
genetic materials therefor;
(2) 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);
(3) Importation of personal and household effects belonging to residents of the Philippines returning from
abroad and non-resident citizens coming to resettle in the Philippines; Provided, that such goods are
exempt from customs duties under the Tariff and Customs Code of the Philippines;
(4) Importation of professional instruments and implements, tools of trade, occupation or employment,
wearing apparel, domestic animals, and personal and household effects belonging to persons coming to
settle in the Philippines or Filipinos or their families and descendants who are now residents or citizens of
other countries, such parties hereinafter referred to as overseas Filipinos, in quantities and of the class
suitable to the profession, rank or position of the persons importing said items, for their own use and not
for barter or sale, accompanying such persons, or arriving within a reasonable time: Provided, That the
Bureau of Customs may, upon the production of satisfactory evidence that such persons are actually coming
to settle in the Philippines and that the goods are brought from their former place of abode, exempt such
goods from payment of duties and taxes: Provided, further, that vehicles, vessels, aircrafts, machineries and
other similar goods for use in manufacture, shall not fall within this classification and shall therefore be
subject to duties, taxes and other charges;
(5) Services subject to percentage tax under Title V of the Code, as enumerated below:
a. 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
gross annual sales and/or receipts of which does not exceed the amount of P3,000,000;
b. Services rendered by domestic common carriers by land, for the transport of passengers and
keepers of garages (Sec. 117);
c. Services rendered by international air/shipping carriers (Sec. 118);
d. Services rendered by franchise grantees of radio and/or television broadcasting whose annual gross
receipts of the preceding year do not exceed P10,000,000, and by franchise grantees of gas and
water utilities (Sec. 119);
e. Service rendered for overseas dispatch, message or conversation originating from the Philippines
(Sec. 120);
f. 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);
g. Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies
(Sec. 124);
h. 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
i. 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).
(6) Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar
cane into raw sugar;
(7) Medical, dental, hospital and veterinary services except those rendered by professionals;
a. 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.
b. Professionals refer to doctors
(8) Educational services rendered by private educational institutions duly accredited by the Department of
Education (DepED), the Commission on Higher Education (CHED) and the Technical Education and Skills
Development Authority (TESDA) and those rendered by the government educational institutions;
a. “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 mentioned
agencies.
(9) Services rendered by individuals pursuant to an employer-employee relationship
a. Contract of contractual employees are subject to VAT
b. Contract of project employees are not subject to VAT
(10) 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;
(11) Transactions which are exempt under international agreements to which the Philippines is a signatory or
under special laws except those granted under P.D. No. 529 - Petroleum Exploration Concessionaires under
the Petroleum Act of 1949;
(12) Sales by agricultural cooperatives duly registered and in good standing with the Cooperative Development
Authority (CDA) to their members, as well as 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;
a. Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer
of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g.
trader), then only those sales to its members shall be exempted from VAT.
(13) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good
standing with the Cooperative Development Authority;
(14) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in good
standing with CDA; Provided, that the share capital contribution of each member does not exceed Fifteen
Thousand Pesos (P15,000.00) and regardless of the aggregate capital and net surplus ratably distributed
among the members;
a. 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.
(15) Export sales by persons who are not VAT-registered;
(16) 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 Development and Housing Act of 1992" and other related laws, such as RA No. 7835 and
RA No. 8763;
i. “Low-cost housing” refers to housing projects intended for homeless low-income family
beneficiaries, undertaken by the Government or private developers, which may either be
a subdivision or a condominium registered and licensed by the Housing and Land Use
Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law,
wherein the unit selling price is within the selling price per unit as set by the Housing and
Urban Development Coordinating Council (HUDCC) pursuant to RA No. 7279 otherwise
known as the “Urban Development and Housing Act of 1992” and other laws.
c. Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related
laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P450,000.00 or as
may from time to time be determined by the HUDCC and the NEDA and other related laws.
“Socialized housing” refers to the housing programs and projects covering houses and lots or home
lots only undertaken by the Government or the private sector for the underprivileged and homeless
citizens which shall include sites and services development, long-term financing, liberated terms
on interest payments, and such other benefits in accordance with the provisions of RA 7279 (Urban
Development and Housing Act of 1992) and RA 7835 and RA 8763. “Socialized housing” shall also
refer to projects intended for the underprivileged and homeless wherein the housing package
selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP)
or any equivalent housing program of the Government, the private sector or non-government
organizations.
d. Sale of residential lot valued at P1,500,000.00 and below, or house & lot and other residential
dwellings valued at P2,500,000.00 and below, as adjusted in 2011 using the 2010 Consumer Price
Index.
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 P1,5000,000.00. Adjacent residential lots, although covered by the
separate titles and/or separate tax declarations, when sold or disposed 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.
(17) Lease of residential units with a monthly rental per unit not exceeding P15,000.00.
The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds
P15,000.00 but the aggregate of such rentals of the lessor during the year do not exceed P3,000,000.00
shall likewise be exempt from VAT, however the same shall be subjected to 3% percentage tax.
(18) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which
appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally
to the publication of paid advertisements;
(19) Transport of passengers by international carriers;
(20) 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, however, that the exemption
from VAT on the importation and local purchase of passenger and/or cargo vessels shall be subject to the
requirements on restriction on vessel importation and mandatory vessel retirement program of Maritime
Industry Authority (MARINA);
(21) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport
operations: Provided, That the fuel, goods and supplies shall be used for international shipping or air
transport operations;
(22) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-
bank financial intermediaries, such as money changers and pawnshops, subject to percentage tax under
Sections 121 and 122, respectively of the Tax Code;
(23) Sale or lease of goods and services to senior citizens and persons with disabilities, as provided under RA
Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges
of Persons with Disability), respectively;
(24) Transfer of Property pursuant to Sec. 40(C)(2) of the Tax Code, as amended;
(25) Association dues, membership fees, and other assessments and charges collected on a purely
reimbursement basis by homeowners’ associations and condominium corporations established under RA
No. 9904 (Magna Carta for Homeowners and Homeowners’ Association) and RA No. 4726 (The Condominium
Act), respectively;
(26) Sale of gold to the Bangko Sentral ng Pilipinas;
(27) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January
1, 2019, as determined by the Department of Health; and
(28) 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
P3,000,000.00.

Q: What is input tax and output tax?

A: Input tax is the actual payments, costs and expenses incurred by registered taxpayer in connection with his
purchase of goods and services. Thus, it is the tax paid by a VAT-registered person/entity in the course of
his/her/its trade or business.

Output tax is the VAT due on the sale or lease or taxable goods, properties or services by an VAT-registered
person.

Q: What are the requisites for a claim for refund or tax credit for unutilized input value-added tax (VAT)?
A:
(1) the taxpayer is VAT-registered;
(2) the taxpayer is engaged in zero-rated or effectively zero-rated sales;
(3) the input taxes are due or paid;
(4) the input taxes are not transitional input taxes;
(5) the input taxes have not been applied against output taxes during and in the succeeding quarters;
(6) the input taxes claimed are attributable to zero-rated or effectively zero-rated sales;
(7) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the acceptable foreign
currency exchange proceeds have been duly accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas;
(8) where there are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the
input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be
proportionately allocated on the basis of sales volume; and
(9) the claim is filed within two years after the close of the taxable quarter when such sales were made
(Luzon Hydro Corp. v. CIR, 2013)

Memory Aid for the Requisites of Tax Credit/Refund involving VAT: PRICE
 Made within the Prescribed period (Sec. 112 - Two (2) years from close of the taxable quarter when such
sales were made)
 Taxpayer is VAT-Registered
 Input tax which has not been applied, credited, or deducted against output tax
 Creditable input tax attributable to zero-rated sales or effectively zero-rated transactions
  May cover Export sales

Q: What are the required information to be placed in an invoice to be considered as VAT exempt or zero-
rated?
A: In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the claim but also
compliance with all the documentary and evidentiary requirements therefor. Section 110(A)(1) of the NIRC
provides that creditable input taxes must be evidenced by a VAT invoice or official receipt, which must, in turn,
comply with Sections 237 and 238 of the same law, as well as Section 4.108.1 of RR 7-95.

The foregoing provisions require, inter alia, that an invoice must reflect, as required by law:
(1) the BIR Permit to Print;
(2) the TIN-VAT of the purchaser; and
(3) the word "zero-rated" imprinted thereon. In this relation, failure to comply with the said invoicing
requirements provides sufficient ground to deny a claim for tax refund or tax credit.

A VAT-registered taxpayer is required to comply with all the VAT invoicing requirements to be able to file for a
claim for input taxes on domestic purchase for goods or services attributable to zero-rated sales. A "VAT invoice"
is an invoice that meets the requirements of Section 4.108-1 of RR 7-95. RR-7-95 expressly states that "All
purchases covered by invoice other than a VAT invoice shall not give rise to any input tax. (J.R.A. Philippines, Inc.
v. CIR, G.R. No. 171307, August 28, 2013)

Q: What are the instances where one can avail of a VAT-refund?

A: One may avail of a VAT-refund when there are
(1) Zero-rated and effectively zero-rated sales
(2) Cancellation of VAT registration
(3) Closing or cessation of business

Q: Explain the three periods in Sec. 112.

A:
(1) 2 years – application for tax credit/refund of input tax
(2) 120 days (now 90 days under TRAIN)– period for the BIR to render a decision on the application
(3) 30 days – period to file an appeal from the decision or inaction of the BIR to the CTA

Q: What are the steps in the application for a tax credit or tax refund?
A:
(1) Application with the BIR
(2) Appeal to the CTA in division within 30 days after CIR denies the claim within the 90-day period; or
within 30 days from the expiration of the 120-day period if the CIR does not act within the 120-day
period.
(3) Appeal to the CTA en banc
(4) Appeal to the Supreme Court

Q: What are the rules with regard to the “two-year rule” in the filing of administrative and judicial claims for
refund?
A: The rules are summarized in CIR v. Mindanao II Geothermal (2014)
(1) It is only the administrative claim that must be filed within the two-year prescriptive period (Aichi
Forging doctrine)
(2) The proper reckoning date for the two-year prescriptive period is the close of the taxable quarter when
the relevant sales were made (Mirant, San Roque doctrines)
(3) The taxpayer can file the judicial claim in one of two ways:
a. File the judicial claim by way of appeal within 30 days after CIR denies the claim within the 120-
day period; or
b. File the judicial claim by appealing the CIR’s inaction within 30 days from the lapse or expiration
of the 120-day period.
(4) As a general rule, the 30-day period to appeal is both mandatory and jurisdictional (Aichi, San Roque).
Premature filing of the judicial claim, or the filing of a petitioner prior to the lapse of the 120-day period
under Sec. 112(c) of the NIRC and without any adverse decision from the CIR will rob the CTA of its
jurisdiction to entertain the refund case
 a. An exception is when BIR Ruling No. DA-489-03 was in force between December 10, 2003
(issuance of BIR Ruling No. DA-489-03) and October 6, 2010 (promulgation of Aichi). The judicial
claim need not await the expiration of the 120-day period and premature filing is allowed.
(5) Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in force.
Note: TRAIN: 120-day period amended to 90-day period (See discussion on enhanced VAT Refund System).

Q: What are the exceptions to the 120-day period within which refund or tax credit of input taxes shall be
made?
A:
(1) If the Commissioner, through a specific ruling, misleads a particular taxpayer to prematurely file a
judicial claim with the CTA. Such specific ruling is applicable only to such particular taxpayer.
(2) Where the Commissioner, through a general interpretative rule misleads all taxpayers into filing
prematurely judicial claims with the CTA. In these cases, the Commissioner cannot be allowed to later
on question the CTA’s assumption of jurisdiction over such claim since equitable estoppel has set in as
expressly authorized under Section 246 of the Tax Code. (CIR v. San Roque, 2013)

Q: Is BIR Ruling No. DA-489-03, stating that taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of Petition for Review, a general interpretative
rule?
A: Yes. It was a response to a query made by a government agency tasked with processing tax refunds and credits,
that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This
government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, the
agency was in fact asking the Commissioner what to do in cases like the tax claim where the taxpayer did not
wait for the lapse of the 120-day period. Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus,
all taxpayers can rely on it from the time of its issuance up to its reversal by this Court where it was held that the
120+30 day periods are mandatory and jurisdictional. (CIR v. San Roque, 2013)

Q: What is an enhanced VAT Refund System?

A: Under RR 13-2018, export sales shall be subject to 12% VAT and no longer be subject to 0% VAT rate upon
satisfaction of the following conditions:
1. The successful establishment and implementation of an enhanced VAT Refund System that grants and
pays refunds of creditable input tax within 90 days from the filing of the VAT refund application with the
BIR.

The 90-day period to process and decide, pending the establishment of the enhanced VAT Refund
System shall only be up to the date of approval of the Recommendation Report on such application for
VAT refund by the Commissioner or his duly authorized representative.

However, all claims for refund/tax credit certificate filed prior to January 1, 2018 shall still be governed
by the 120-day processing period.

The Secretary of Finance shall provide transitory rules for the grant of refund under the enhanced VAT
Refund System after the determination of the fulfillment of the condition by the CIR; and

2. All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019.

The Department of Finance shall establish a VAT refund center in the BIR and in the Bureau of Customs (BOC)
that will handle the processing and granting of cash refunds of creditable input tax.

Q: When are VAT returns filed? When is VAT paid?

A: Under Sec. 114, every person liable to pay VAT shall file a quarterly return of the amount of his gross sales or
receipts within 25 days following the close of each taxable quarter prescribed for each taxpayer. VAT-registered
persons shall pay the VAT on a monthly basis.

NOTE: As amended by TRAIN, beginning January 1, 2023, the filing and payment required under the Tax Code
shall be done 25 days following the close of each taxable quarter.
Q: Where are VAT returns filed? Where is VAT paid?
A: Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid to an authorized
agent bank, Revenue Collection Officer or duly authorized city or municipal Treasurer in the Philippines located
within the revenue district where the taxpayer is registered or required to register.

Q: When is VAT withheld?

A: VAT is withheld in two (2) instances:
1. In sales of goods and services to the Government (5% withheld by the government); and
2. In payment for lease or use of properties to nonresident owners (12% withheld by the lessee).

NOTE: In transactions with the government, should actual input VAT attributable to sales to government exceed
7% of gross payments, the excess may form part of the seller’s expense or cost. If the actual input VAT is less than
7%, the difference should be counted as income.

Q: What are the characteristics of VAT?

A:
(1) It is a percentage tax imposed at every stage of the distribution process on the sale, barter, or exchange
or lease of goods or properties and on the performance of service in the course of trade or business or
on the importation of goods, whether for business or non-business.
(2) It is a business tax levied on certain transactions involving a wide range of goods, properties and services,
such tax being payable by the seller, lessor or transferor.
(3) It is an excise tax or a tax on the privilege of engaging in the business of selling goods or services or in
the importation of goods.
(4) It is an indirect tax, the amount of which may be shifted to or passed on the buyer, transferee or lessee
of the goods, properties or services.
(5) It is an ad valorem tax as its amount or rate is based on gross selling price or gross value in money or
gross receipts derived from the transaction

Q: What is the tax credit method in VAT?

A: It is sometimes called “invoice method” which refers to the manner by which the value added tax of a taxpayer
is computed using the invoice credit method. An entity can credit against or subtract from the VAT charged on
its sales or outputs the VAT it paid on its purchases, inputs and imports.

Q: When is the change in or cessation of status of VAT registered person subject to VAT?
A:
(1) Change of business activity from VAT taxable status to VAT-exempt status
(2) Approval of a request for cancellation of registration due to reversion to exempt status
(3) Approval of a request for cancellation of registration due to a desire to revert to exempt status after the
lapse of 3 consecutive years from the time of registration by a person who voluntarily registered despite
being exempt under Sec. 109 (2) of the Tax Code
(4) Approval of a request for cancellation of registration of one who commenced business with the
expectation of gross sales or receipt exceeding P1,919,500 but who failed to exceed this amount during
the first twelve (12) months of operation

Q: When is the change in or cessation of status of a VAT registered person not subject to VAT?
A:
(1) Change of control in the corporation by the acquisition of controlling interest of the corporation by
another stockholder or group of stockholders. The goods or properties used in the business or those
comprising the stock-in-trade of the corporation will not be considered sold, bartered, or exchanged
despite the change in the ownership interest. However, exchange of property by the corporation
acquiring control for the shares of stocks of the target corporation is subject to VAT
(2) Change in the trade or corporate name of the business
(3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the
date of merger or consolidation, shall be absorbed by the surviving or new corporation
 TAX REMEDIES UNDER THE NATIONAL INTERNAL REVENUE CODE (NIRC)

Q: What is an assessment and what are its requisites?

A: The official action of an administrative officer in determining the amount of tax due from a taxpayer, or it may
be a notice to the effect that the amount therein stated is due from the taxpayer as a tax with a demand for
payment of the tax or deficiency stated therein. It is a written notice and demand made by the BIR on the taxpayer
for the settlement of a due tax liability (Adamson v. CA, 2009). But not all documents coming from the BIR
containing a computation of the tax liability can be deemed assessments (CIR v. Pascor Realty & Development
Corp., 1999).

The requisites are:

(1) It must be in a written document and signed by the CIR or his/her duly authorized representative;
(2) It must be addressed to the taxpayer;
(3) It must demand payment of the taxes described therein within a specific period;
(4) It must be duly sent to and received by the taxpayer; and
(5) It must state the factual and/or legal bases of the assessment

Q: What is the difference between tax delinquency and tax deficiency?

A: Tax deficiency is the amount still due and collectible from taxpayer upon audit or investigation (shortage of
payment). Tax delinquency is the failure of the taxpayer to pay the tax due on the date fixed by law or indicated
in the assessment notice or letter of demand (delay in payment).

Q: What is the new rule on the imposition of interest?

A: Sec. 248 of the Tax Code, as amended by TRAIN Law, provides that in no case shall the deficiency and the
delinquency interest be imposed simultaneously. Deficiency tax is the tax imposed when the amount by which
the tax imposed by this Title exceeds the amount shown as the tax in the filed return. Delinquency interest is
imposed when there is a tax due on any return to be filed, tax due for which no return is required, or a deficiency
tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the
Commissioner.

Q: What is a jeopardy assessment?

A: It refers to a tax assessment, which was assessed without the benefit of complete or partial audit by an
authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will
be jeopardized by delay because of the taxpayer’s failure to:
a. Comply with audit and investigation requirements to present his books of accounts and/or pertinent
records; or
b. Substantiate all or any of the deductions, exemptions, or credits claimed in his return (Sec. 3, [1][a], R.R.
30-2002).

Q: When may the BIR resort to this “best evidence obtainable”?

A: Under Section 6(B), the BIR may resort to this best evidence obtainable if any of these exist: (FINE)
(1) False report;
(2) Incomplete report;
(3) No report;
(4) Erroneous report.

Q: When should assessment be made?

A: As a general rule, an assessment must be done within 3 years from last day prescribed by law for the filing or
actual filing date of the return, whichever is later.

The exceptions are in cases of false or fraudulent return with intent to evade tax or failure to file a return, the
assessment must be made within 10 years from discovery. Another exception is when there is a waiver of the
statute of limitations in writing.
Q: What is the difference between (1) false return, (2) fraudulent return, and (3) failure to file a return?
A: False return implies deviation from the truth, whether intentional or not. Fraudulent return implies intentional
or deceitful entry with intent to evade the taxes due. Non-filing of a return is the failure or omission to file a
return in the date prescribed by law. (Aznar v. CTA, 1974)

Q: What constitutes as prima facie evidence of a false or fraudulent return?

A: When the taxpayer substantially underdeclared his taxable sales, receipts or income, or substantially
overstated his deductions. The taxpayer’s failure to report sales, receipts or income in an amount exceeding
30% of that declared per return, and a claim of deduction in an amount exceeding 30% of actual deduction
shall render the taxpayer liable for substantial under- declaration and over- declaration, respectively, and will
justify the imposition of the 50% surcharge on the deficiency tax due from the taxpayer [Sec. 248, NIRC].

Q: What are the grounds for the suspension of running of the statute of limitations in case of assessments?
A: The running of the statute of limitations on the making of assessment and collection shall be suspended in the
following instances: (P-CORDA)
(1) PERIOD during which the Commissioner is prohibited from making the assessment or beginning
distraint or levy or a proceeding in court and for 60 days thereafter;
(2) When the taxpayer REQUESTS for a reinvestigation which is granted by the Commissioner;
(3) When the taxpayer CANNOT be located in the address given by him in the return filed upon which a tax
is being assessed or collected; except when the taxpayer informs the Commissioner of any change in
address;
(4) When the warrant of DISTRAINT or levy is duly served upon the taxpayer, his authorized representative,
or a member or his household with sufficient discretion, and no property could be located; and
(5) When the taxpayer is OUT of the Philippines (Sec. 223, NIRC)
(6) Where CIR and the taxpayer AGREED in writing for the extension of the assessment, the tax may be
assessed within the period so agreed upon.

Q: What are the requisites of a valid waiver of the statute of limitations?

A: There is a valid waiver of statute of limitations if all of the following are present: (BAWAS- FED)
(1) It must be made BEFORE the expiration of the prescriptive period;
(2) It must be made by a person duly AUTHORIZED;
(3) It must be in WRITING;
(4) It must be APPROVED by the board if it is a corporation;
(5) It must be SIGNED by the taxpayer or duly authorized representative;
(6) Taxpayer must be FURNISHED with a copy of the waiver;
(7) EXPIRY date of the period agreed upon to assess/collect the tax must be indicated; and
(8) DATE of acceptance must be indicated.

Q: What is the effect when both the BIR and the taxpayer did not comply with the rules prescribed in order to
have a valid waiver of prescription?
A: In pari delicto connotes that the two parties to a controversy are equally culpable or guilty and they shall have
no action against each other. However, although the parties are in pari delicto, the Court may interfere and grant
relief at the suit of one of them, where public policy requires its intervention, even though the result may be that
a benefit will be derived by one party who is in equal guilt with the other. To uphold the validity of the waivers
would be consistent with the public policy embodied in the principle that taxes are the lifeblood of the
government, and their prompt and certain availability is an imperious need. The waiver will be valid and the BIR
can make an assessment. (CIR v. Next Mobile, 2015)

Q: What is the assessment process?

A: The assessment process is as follows:
a. Letter of Authority (LOA)
b. Request for Documents
c. Audit Proper
d. Notice of Informal Conference
e. Issuance of Preliminary Assessment Notice (PAN)
f. Issuance of Formal Letter of Demand and Assessment Notice/Final Assessment Notice (FAN)
g. Disputed Assessment
Q: What is the period for conducting an audit?
A: A revenue officer is allowed only 120 days from the date of receipt of a LOA by the taxpayer to conduct the
audit and submit the required report of investigation. However, it may be re-sent to the Head Office for
revalidation and further extension of the period to audit.

Q: Is the failure to strictly comply with notice requirements prescribed under Section 228 of the National
Internal Revenue Code (NIRC) of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due
process?
A: Yes, it is tantamount to a denial of due process. Section 228 of the NIRC provides that when the Commissioner
or his duly authorized representatives find that proper taxes should be assessed, he shall first notify the taxpayer
of his findings. The taxpayer shall be informed in writing of the law and facts on which the assessment is made;
otherwise, the assessment shall be void. Said provision clearly requires that the taxpayer must first be informed
that he is liable for deficiency taxes through the sending of a PAN. The law imposes a substantive, not merely a
formal requirement. This is further confirmed by Section 3 of RR 12-99, which clearly requires that the sending
of a PAN to the taxpayer to inform him of the assessment made is but part of the due process requirement in the
issuance of a deficiency tax assessment, the absence of which renders nugatory any assessment made by the tax
authorities. The use of the word shall describes the mandatory nature of the service of a PAN. (CIR v. Metro Star
Superama, Inc., 2010)

Q: What are the instances when PAN shall not be required?

A: Pursuant to Art. 228, NIRC, as amended, PAN shall not be required in any of the following cases:
(1) When deficiency tax is the result of mathematical error;
(2) When there is a discrepancy between the tax withheld and the amount actually remitted;
(3) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period carried over and automatically applied the same amount claimed against the estimated
tax liabilities for the taxable year quarter(s) of the succeeding taxable year;
(4) When the excise tax due on excisable articles has not been paid; or
(5) When an article locally purchased or imported by an exempt person has been sold, traded or transferred
to non-exempt persons (RR 18-2013, Sec. 3.1.2)

Q: Can a void Final Decision on Disputed Assessment (FDDA) render the assessment void?
A: NO, a void Final Decision on Disputed Assessment (FDDA) does not ipso facto render the assessment void. It
is the “decision” which is appealable to the CTA and not the assessment. Thereafter, the CIR either issues a
decision on the disputed assessment or fails to act on it and is, therefore, considered denied. The taxpayer may
then appeal the decision on the disputed assessment or the inaction of the CIR. The requirement that “the
taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise the
assessment shall be void” applies to FDDA. Based on Section 3.1.6 of RR No. 12-99, it is clearly necessary for the
BIR to inform the taxpayer of the facts, law, rules and regulations and jurisprudence on which the decision is
based, otherwise, the decision shall be void. While the FDDA indicated the legal provisions relied upon for the
assessment, the basis or the sources of the amounts from which the assessments arose were not shown. The
need for stating the factual basis, i.e., for specifying the source of the amounts used in the assessment, gains
more prominence in the instant case, where the FDDA reflects different amounts than that contained in the
Formal Assessment Notice. Without the statement of the factual basis, or details of the assessment, the FDDA
suffers from the appearance of being a mere arbitrary reduction of the assessment previously reflected in the
Formal Letter to Demand. Thus, the assessment is void. (CIR v. Liquigaz Philippines Corporation, 2016)

Q: What is the period to file protest?

A: The taxpayer or his authorized representative or tax agent may protest administratively against the FLD/FAN
within 30 days from the date of receipt thereof; otherwise, the assessment shall become final, executory and
demandable (RR 18-2013, Sec. 3.1.4)

Q: What are the instances when the assessment shall become final, executory and demandable?
A: The following are the instances when assessment shall become final, executory and demandable: (RMO 26-16)
(VASMAR)
(1) Failure to file a valid protest within 30 days from receipt of the FLD/FAN;
(2) Failure of the tax payer to appeal to the CIR or the CTA within 30 days from the date of receipt of the
FDDA issued by the Commissioner’s duly authorized representative;
 (3) Failure of the tax payer to submit all relevant documents in support of his protest by way of request for
reinvestigation within 60 days from the date of filing thereof;
(4) Failure of the tax payer to timely file a MR or MNT before the CTA div. or failure to appeal to the CTA EB
and SC based on existing Rules of Procedure;
(5) Failure of the tax payer to appeal to the CTA within 30 days from the date of receipt of the FDDA issued
by the Commissioner;
(6) Failure of the tax payer to receive any assessment notices because it was served in the address indicated
in the BIR’s registration database and the TP transferred to a new address or closed/cease operations
without updating and transferring its BIR registration or cancelling its BIR registration, as the case may
be.

Q: Can the CTA still take cognizance of an assessment case, which has become final and unappealable for the
failure of the taxpayer to protest within the 30-day protest period?
A: No, the fact that an assessment has become final for failure of the taxpayer to file a protest within the time
allowed only means that the validity or correctness of the assessment may no longer be questioned on appeal.
(CIR v. Hambrecht & Quist Philippines, Inc., 2010).

Q: When is collection of taxes allowed? What are the prescriptive periods for the collection of taxes?
A: Collection is only allowed when there is already a final assessment made for the determination of the tax due
(Revenue Regulation 18-2013). As a general rule, the prescriptive period to collect taxes due is 5 years from the
date of assessment (Sec. 222, NIRC). The exceptions are the following (Sec. 222, NIRC):
(1) 10 years from discovery in case of false or fraudulent return with intent to evade tax or of failure to file
a return
(2) Tax may be collected on the period agreed upon, when there is a waiver in writing executed before the
five-year period expires with the period agreed upon by Commissioner and taxpayer .

Q: May a final and unappealable assessment give the CIR the right to collect the taxes where such right to
collect has already prescribed?
A: No. The validity of the assessment itself is a separate and distinct issue from the issue of whether the right of
the CIR to collect the validly assessed tax has prescribed. This issue of prescription, being a matter provided for
by the NIRC, is well within the jurisdiction of the CTA to decide. (CIR v. Hambrecht & Quist Philippines, Inc., 2010)

Q: Can the CTA have jurisdiction to inquire into the validity of the undisputed assessment and is not limited
to the timeliness and validity of the collection procedure?
A: Yes. Section 7(a)(1) of RA 1125, An Act Creating the Court of Tax Appeals, the jurisdiction of the CTA over “other
matters arising under the NIRC or other laws or part of law administered by the BIR”, is not limited to the
timeliness and validity of the collection procedure itself. Hence, the court can still look into the validity of the
assessment. (CIR v. Alpha Rigging & Moving Systems, Inc. (Alpha Rigging), 2015)

Q: What are the differences between a request for reconsideration and a request for reinvestigation?
A: Request for Reconsideration is a plea for evaluation of assessment on the basis of existing records without
need of presentation of additional evidence. It does not suspend the period to collect the deficiency tax. Request
for Reinvestigation is a plea for re-evaluation on the basis of newly discovered evidence that will be introduced
for examination for the first time. It suspends the prescriptive period to collect, taxpayer can submit supporting
documents within 60 days (RR 18-2013).

Q: Distinguish Section 229 (Recovery of Tax erroneously paid or Illegally Collected) from Section 112
(Refunds or Tax Credits of Input Tax)
A:
Sec. 112 Sec. 229
Input VAT Any tax erroneously paid or illegally collected
Amount paid is correct and proper Amount paid is “excessively” collected
Only the person legally liable to pay the tax can file
the judicial claim for refund. The person to whom
Claim for refund is filed by the person not liable to
the tax is passed on as part of the purchase price has
pay the Input VAT
no personality to file the judicial claim under Section
229
 Prescriptive period for filing a judicial claim – 2 years
from the close of the taxable quarter when the sale
was made by the person legally liable to pay the
output VAT
(CIR v. San Roque, 2013)
Prescriptive period for judicial claim – 2 years from
the date of payment of the tax or penalty regardless
of any supervening cause that may arise after
payment

LOCAL TAXATION

Q: What are the fundamental principles of Local Government Taxation?

A: Section 130 of R.A. No. 7160 provides that the following fundamental principles shall govern the exercise of the
taxing and other revenue-raising powers of local government units:
(1) Taxation shall be uniform in each local government unit;
(2) Taxes, fees, charges and other impositions shall:
a. be equitable and based as far as practicable on the taxpayer's ability to pay;
b. be levied and collected only for public purposes;
c. not be unjust, excessive, oppressive, or confiscatory;
d. not be contrary to law, public policy, national economic policy, or in the restraint of trade;
(3) The collection of local taxes, fees, charges and other impositions shall in no case be left to any private
person;
(4) The revenue collected shall inure solely to the benefit of, and be subject to the disposition by, the local
government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided
herein; and
(5) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

Q: What is the nature of the taxing power of the provinces, municipalities and cities? How will the local
government units be able to exercise their taxing powers?
A: The taxing power of the provinces, municipalities and cities is directly conferred by the Constitution by giving
them the authority to create their own sources of revenue. The local government units do not exercise the power
to tax as an inherent power or by a valid delegation of the power by the Congress, but pursuant to a direct
authority conferred by the Constitution. (Mactan Cebu International Airport Authority v. Marcos, 1996; NPC v. City
of Cabanatuan, 2003).

The local government units exercise the power to tax by levying taxes, fees and charges consistent with the basic
policy of local autonomy, and to assess and collect all these taxes, fees and charges, which will exclusively accrue,
to them. The local government units are authorized to pass tax ordinances (levy) and to pursue actions for the
assessment and collection of the taxes imposed in the said ordinances. (Section 129 and 132, Local Government
Code).

Q: What are the characteristics of the taxing power of the LGUs?

A:
(1) It is not inherent; may only be exercised if delegated by the national legislature or conferred by the
Constitution.
(2) It is not absolute since it is subject to limitations and guidelines as may be provided by law and the
Constitution.
(3) It is exercised by the LGU sanggunian through appropriate ordinance.
(4) Its application is bounded by the geographical limits of the LGU that imposes the tax.

Q: Are the LGUs empowered and authorized to create its own sources of revenue and to levy taxes, fees, and
charges?
A: Yes, subject to the provisions of the LGC and consistent with the basic policy of local autonomy, every LGU is
now empowered and authorized to create its own sources of revenue and to levy taxes, fees, and charges which
shall accrue exclusively to the local government unit as well as to apply its resources and assets for productive,
developmental, or welfare purposes, in the exercise or furtherance of their governmental or proprietary powers
and functions. (Ferrer, Jr. v. Bautista, 2015)
Q: What are the specific taxing powers of provinces, cities, municipalities, and barangays?
A:
(1) Provinces:
a. Tax on transfer of real property ownership
b. Tax on the business of printing and publication
c. Franchise tax
d. Tax on sand, gravel, and other resources
e. Professional tax
f. Amusement tax
g. Annual fixed tax for every delivery truck or van of manufacturer or producers, wholesalers of,
dealers, or retailers in certain products
(2) Municipalities:
a. Taxes, fees, and charges not otherwise levied by provinces, except as otherwise provided in the LGC
(3) Cities
a. Taxes, fees, and charges which the province or municipality may impose, except as otherwise
provided in the LGC
(4) Barangays:
a. Barangay taxes on stores or retailers with fixed business establishments
b. Service fees or charges
c. Barangay clearance
d. Other fees and charges

Q: What are the limitations on capacity of LGUs to exercise their taking powers?
A: Section 133 prescribes the limitations on capacity of LGUs to exercise their taking powers. Paragraph (h) if the
said section mentions 2 kinds of taxes, which cannot be imposed by LGUs, namely:
 excise tax on articles under the NIRC, and
 taxes, fees, or charges on petroleum products.

Q: How do you determine if a tax ordinance is valid or not?

A: It is not valid if it is not for public use and the collection is entrusted to a private person. (Note: Fundamental
Principles of Local Government Taxation) It must not prohibit, but may only regulate trade (Magtajas v. Pryce
Properties Corporation, Inc., 1994).

Q: How does a tax ordinance become valid?

A: It must be based on valid classification. SAGA
1. Substantial Distinctions
2. Apply not only to the present conditions but also to future conditions
3. Germane to the purpose of the law
4. Apply to all members of the same class.

Q: What are the common revenue raising powers of LGUs?

A:
(1) Fees, service or user charges
(2) Public utility charges
(3) Toll fees or charges

Q: May LGUs impose taxes on bases or subjects not provided in the Local Government Code?
A: Yes. LGUs may exercise the power to levy taxes. Fees, or charges on any base or subject not otherwise
specifically enumerated in the
(1) Local Government Code or
(2) Taxes under the NIRC or
(3) Other applicable laws.

These taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared
national policy. Additionally, the ordinance levying such taxes, feed, or charges shall not be enacted without any
prior public hearing conducted for the purpose. (Section 151, 152 Local Government Code)
Q: What is the period of assessment and collection of local taxes, fees and charges?
A: The assessment must be made within FIVE (5) years from the date they become due. However, In case of fraud
or intent to evade, it must be made within TEN (10) years from discovery of fraud or intent to evade payment
[Sec. 194]. The collection must be made within FIVE (5) years from the date of assessment by administrative or
judicial action

REAL PROPERTY TAXATION

Q: What are the fundamental principles of Real Property Taxation?

A: Section 198 of the R.A. No. 7160 provides the following fundamental principles:
(1) Real property shall be appraised at its current and fair market value;
(2) Real property shall be classified for assessment purposes on the basis of its actual use;
(3) Real property shall be assessed on the basis of a uniform classification within each local government
unit;
(4) The appraisal, assessment, levy and collection of real property tax shall not be let to any private person;
and
(5) The appraisal and assessment of real property shall be equitable.

Q: What is “actual use”?

A: It shall refer to the purpose for which the property is principally or predominantly utilized by the persons in
possession of the property. (Sec. 199 (b), LGC)

Q: What is the nature of real property tax?

A:
(1) It is a direct tax
(2) Indivisible single obligation
(3) Ad valorem tax based on the assessed value of the property
(4) A local tax
(5) Imposed on the use and not on the ownership of the property
(6) Progressive in character, depending on the certain extent on the use and value of the property

Q: How does the Local Government Code explain the “Doctrine of the Supremacy of the National Government
over Local Government Units”?
A: The exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the
levy of the Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities
(Sec.133 (o), LGC).

Q: What are the properties exempt from Real Property Tax? PRC LGC
A: Under Section 234, LGC, the following are exempted from payment of real property tax:
(1) Pollution Control (There must be use of the machinery and equipment)
(2) Real Property owned by the Republic of the Philippines (There must be ownership)
(3) Charitable, Educational, and Religious Institutions (Must be actually, directly, and exclusively used for
such purposes)
(4) Local Water District (There must be use and limited to machineries and equipment)
(5) Government Owned and Controlled Corporations (There must be use)
(6) Cooperatives (There must be ownership of the real property)

*Determination of whether the exception is based on use or ownership is crucial (Dimaampao Lecture).

Q: May real property owned by the government or its instrumentality be subjected to real property tax by the
local government?
A: As a general rule, real property owned by the government is not subject to real property tax. However, such
exemption ceases under Sec 234(a) of the LGC when “the beneficial use thereof has been granted, for a
consideration or otherwise, to a taxable person.” (GSIS v. City Treasurer of Manila, 2009)
Q: Is the Manila International Airport Authority exempt from Real Estate Tax?
A: Yes, MIAA’s Airport Lands and Buildings are exempt from real estate tax imposed by local governments. First,
MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government
and, thus, exempt from local taxation. Second, the real properties of MIAA are owned by the Republic of the
Philippines and, thus, exempt from real estate tax. (Manila International Airport Authority v. Court of Appeals,
2006)

Q: Is the Philippine Reclamation Authority exempt from Real Property Tax?

A: Yes. The Philippine Reclamation Authority (PRA) is considered an instrumentality of the government vested
with corporate powers and performing an essential public service pursuant to Section 2(10) of the Introductory
Provisions of the Administrative Code. Being an incorporated government instrumentality, it is exempt from
payment of real property tax. (Republic v. City of Parañaque, 2012)

Q: Is the Mactan Cebu International Airport Authority exempt from Real Property Tax?
A: Yes. Mactan-Cebu International Airport Authority (MCIAA) exempt from Real Property Tax because it is an
instrumentality of the government. Thus, its properties actually, solely and exclusively used for public purposes,
consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are situated, are
not subject to real property tax and respondent City is not justified in collecting taxes from petitioner over said
properties. (Mactan Cebu International Airport Authority (MCIAA) v. City of Lapu-Lapu, 2015)

Q: Is the GSIS exempt from Real Property Tax?

A: Yes, the Government Service Insurance System (GSIS) without any qualification is an instrumentality of the
government and is exempted from real property tax. (Government Service Insurance System vs. City Treasurer of
the City of Manila, 2009)

Q: What does “Instrumentality” mean as provided in the 1987 Administrative Code?

A: It refers to any agency of the National Government, not integrated within the department framework vested
within special functions or jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory
agencies, chartered institutions and government-owned or controlled corporations. (Section 2(10), 1987
Administrative Code)

Q: What are the five (5) features/characteristics of an instrumentality of the national government that make
it exempt from (real property) taxation? NEVEA
A: Not integrated within the department framework;
Endowed with corporate powers;
Vested with jurisdiction or special powers by law;
Enjoys operational autonomy; and
Administers special funds

Q: What is the procedure for payment under protest in real property taxation?
A:
(1) Pay the tax under protest and an annotation of “paid under protest” must be stated in the receipt
(2) File written protest with local treasurer within 30 days from payment of the tax
(3) Treasurer must decide within 60 days from receipt of the protest
(4) Appeal to the LBAA within 60 days from the treasurer’s decision or inaction
(5) LBAA must decide within 120 days
(6) Appeal the LBAA decision to the CBAA within 30 days from receipt of adverse decision
(7) Appeal CBAA decision to CTA en banc within 30 days from receipt of the adverse decision
Appeal CTA en banc decision to the SC within 15 days from receipt of the adverse decision

Q: What is the period for filing a protest of the assessment issued by the City Treasurer?
A: Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a written protest with
the local treasurer contesting the assessment; otherwise, the assessment shall become final and executory.
(Section 195, LGC)
Q: What is the prescriptive period for the claim of refund or tax credit?
A: No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date of
the payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit. (Section
196, LGC)

Q: What are the remedies of the local governments in collecting real property tax?
A: Local government has two remedies for the collection of real property tax:
(1) by administrative action through levy on real property; and
(2) by judicial action.

Under Sections 257 and 258 of the LGC, the basic real property tax constitutes as a lien on the property subject
to the tax, which may be levied upon through the issuance of a warrant. The local government unit concerned
may also enforce the collection of the basic real property tax by civil action in any court of competent jurisdiction.
(Republic vs. City of Kidapawan, 2005)

Q: What are the remedies available to a taxpayer for real property tax?
A: If the issue involves the validity of the tax ordinance, the taxpayer may raise the question on its legality before
the Secretary of Justice. If it involves the constitutionality of the ordinance, the same must be raised before the
regular courts.

If the issue involves the correctness, reasonableness or excessiveness of the assessment, the taxpayer can avail
of the remedies under Secs. 226 to 231 of the Local Government Code.

Q: Does the Local Board of Assessment Appeals (LBAA) and Central Board of Assessment Appeals (CBAA) has
jurisdiction to review the constitutionality of a tax ordinance, which gave rise to the assessment?
A: Yes. Even though respondent’s appeal to the LBAA and CBAA likewise raises the issue of constitutionality of
Paranaque City Ordinance No. 03-06, the same does not divest the LBAA of its jurisdiction to hear and decide on
the correctness of the new assessment, which is the very subject of respondent’s appeal. (City Assessor of
Paranaque v. Portal Holdings, Inc., CTA EB Case No. 998, 2016)

Q: What is the remedy of a taxpayer to question the validity of a tax ordinance?

A: The law requires that the dissatisfied taxpayer who questions the validity or legality of a tax ordinance must
file his appeal to the Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary decides
the appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the Secretary does not
act thereon, after the lapse of 60 days, a party could already proceed to seek relief in court. (Section 187 of the
Local Government Code; Cagayan Electric Power and Light Co., Inc. vs. City of Cagayan de Oro, 2012)

JUDICIAL REMEDIES

Q: What is the jurisdiction of the CTA?

A:
Exclusive Original
Exclusive Appellate
CTA EN BANC
Administrative, ceremonial and non-adjudicative functions
I. Decisions or resolutions on motion for reconsideration or new trial of
the Court in Division
II. Decisions, resolutions or orders of the RTCs decided or resolved by
them in the exercise of their appellate jurisdiction over:
a. Local tax cases
b. Tax collection cases where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is
less than One million pesos (P1,000,000.00)
c. Criminal offenses by the BIR or BOC where the principal
amount of taxes and fees, exclusive of charges and
penalties, claimed is less than One million pesos
(P1,000,000.00)
III. Decision of CBAA in the exercise of appellate jurisdiction
 CTA DIVISION
Exclusive Original I. All criminal offenses arising from violations of the NIRC or TCC and
other laws administered by the BIR or BOC with principal amount of
taxes and fees, exclusive of charges and penalties, claimed is One
million pesos (P1,000,000.00) and above.
II. Tax collection cases involving final and executory assessments for
taxes, fees, charges and penalties where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is One million
pesos (P1,000,000.00) and above.
Exclusive Appellate 1. Decisions of or inaction by the CIR in cases involving:
a. disputed assessments,
b. refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or
c. other matters arising under the NIRC or other laws
administered by the BIR;

2. Decisions, orders or resolutions of the Regional Trial Courts in local tax

cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction

3. Decisions of the Commissioner of Customs in cases involving:

a. liability for customs duties, fees or other money charges,
b. seizure, detention or release of property affected,
c. fines, forfeitures or other penalties in relation thereto, or
d. other matters arising under the Customs Law or other laws
administered by the BOC;

4. Decisions of the Central Board of Assessment Appeals in the exercise of

its appellate jurisdiction over cases involving the assessment and
taxation of real property originally decided by the provincial or city
board of assessment appeals;

5. Decisions of the Secretary of Finance on customs cases elevated to him

automatically for review from decisions of the Commissioner of
Customs which are adverse to the Government;

6. Decisions of the Secretary of Trade and Industry (nonagricultural

product, commodity or article), and the Secretary of Agriculture
(agricultural product, commodity or article, involving dumping and
countervailing duties) under the Tariff and Customs Code, and
Republic Act No. 8800, where either party may appeal the decision to
impose or not to impose said duties.

7. Appeals from the judgments, resolutions or orders of the RTCs in tax

cases originally decided by them, in their respected territorial
jurisdiction

8. Criminal offenses over petitions for review of the judgments,

resolutions or orders of the RTCs in the exercise of their appellate
jurisdiction over tax cases;
9. Appeals from the judgments, resolutions or orders of the RTCs in the
exercise of their appellate jurisdiction over tax collection cases where
the principal amount of taxes and fees, exclusive of charges and
penalties, claimed is less than One million pesos (P1,000,000.00).
REGULAR COURTS
Exclusive Original (MTC or I. Criminal offenses arising from violations of the NIRC or TCC and
RTC, depending on other laws administered by the BIR or BOC, where the principal
amount)/ amount of taxes and fees, exclusive of charges and penalties,
 claimed is less than One million pesos (P1,000,000.00) or where
Exclusive Appellate (RTC there is no specified amount claimed;
over cases originally II. Tax collection cases where the principal amount of taxes and fees,
decided by MTC) exclusive of charges and penalties, claimed is less than One million
pesos (P1,000,000.00);
III. Local tax cases.

Q: Among the decisions listed above, what are directly appealable to the CTA en banc?
A: Only two are directly appealable to the CTA en banc, specifically:
(1) Decisions of the Regional Trial Court
(2) Decisions of the Central Board of Assessment Appeals

All the rest must first be appealed to the CTA in Division. The 30-day period must be observed, either from
the receipt of the decision or from the lapse of the prescriptive period. This is applicable for petition for
review under Rule 42 and 43.

Q: What are the decisions that are appealable to the Court of Tax Appeals?
A: The following are the decisions appealable to the Court of Tax Appeals: (BIR CTA SC)
(1) Bureau of Internal Revenue decisions
(2) Inaction of the BIR on disputed assessments or tax refund
(3) Regional Trial Court’s decisions
(4) Customs Commissioner’s decisions
(5) Secretary of Trade and Industry’s decisions involving the imposition of countervailing and dumping duties
of non-agricultural products
(6) Secretary of Agriculture’s decisions involving imposition of countervailing and dumping duties of
agricultural products
(7) Secretary of Finance’s decisions on automatic review cases
(8) Central Board of Assessment Appeals’ decisions

Q: What are the remedies available to a taxpayer?

A: The taxpayer may avail of the following administrative remedies:
(1) Protest;
(2) Abandonment;
(3) Refund, drawback, abatement;
(4) Payment of fine or redemption;
(5) Appeal to the Customs Commissioner.

Furthermore, the taxpayer has the following judicial remedies:

(1) Appeal to the CTA;
(2) Action to question the legality of the seizure.

Q: What is the period to appeal?

A:
Deciding Body Period to Appeal Mode of Appeal
RTC (original jurisdiction) to CTA 15 days from receipt of decision Appeal under Rule 122 of the
Division ROC
CTA Division to CTA en Banc 15 days from receipt of decision; Petition for Review under Rule
subject to extension if for good cause 43 of ROC
RTC (appellate jurisdiction) to 15 days from receipt of decision Petition for Review under Rule
CTA Division 43 of ROC

Q: To whom must the PAGCOR appeal the assessments made against it by the BIR? Is it:
(1) the Court of Tax Appeals under Republic Act No. 1125, Section 7(1) of which grants the CTA the
exclusive appellate jurisdiction to review, among others, the decisions of the Commissioner of
Internal Revenue "in cases involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under the National
 Internal Revenue Code (NIRC) or other law or part of law administered by the Bureau of Internal
Revenue”; or
(2) the Secretary of Justice under P.D. No. 242, with regard to the adjudication of all disputes/claims and
controversies, solely between or among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including government--owned and controlled
corporations, such as those arising from the interpretation and application of statues, contracts or
agreements; and is also the latter enactment?

A: The CTA. Citing PNOC v. CA (2005), the Court held that following the rule on statutory construction involving
a general and a special law (generalia specialibus non derogant), then P.D. No. 242 should not affect R.A. No. 1125.
R.A. No. 1125, specifically Section 7 thereof on the jurisdiction of the CTA, constitutes an exception to P.D. No.
242. Disputes, claims and controversies, tailing under Section 7 of R.A. No. 1125, even though solely among
government offices, agencies, and instrumentalities, including government-owned and controlled corporations,
remain in the exclusive appellate jurisdiction of the CTA. Such a construction resolves the alleged inconsistency
or conflict between the two statutes. (CIR v. Secretary of Justice and PAGCOR, 2016)

Q: Where do you appeal a Revenue Memorandum Circular, Revenue Memorandum Order, or rulings of the
BIR?
A: In accordance with Section 4 of the NIRC, decisions or BIR rulings, BIR memorandum circulars or orders of
the BIR Commissioner may be subject to approval by the Secretary of Finance, 30 days from its promulgation.

Q: Where do you appeal the decision of the Secretary of Finance?

1st Suggested Answer:
Under Section 4 of the NIRC, the decision of the Secretary of Finance may be reviewed by the CTA because it is
a specialized court and it has developed expertise on the issues involving taxation. (Banco De Oro vs. Republic,
2016)

2nD Suggested Answer:

According to the case of CIR vs. CTA and Petron (2015), the decisions of the Secretary of Finance may be appealed
in the following order:
1. Office of the President
2. Court of Appeals
3. Supreme Court

Q: In the last paragraph of Section 228, how do you apply the 180-day period?
A: There are two remedies:
(1) If a decision has been rendered within that 180-day period, the remedy is to appeal the decision of the BIR
to the CTA in Division.
(2) If NO decision has been rendered:
a. The remedy is to appeal such inaction within 30 days from the lapse of that 180-day period.
b. Taxpayer may await the decision of the BIR, and within 30 days from the receipt thereof file an appeal
to the Court of Tax Appeals. (NOTE: prevailing jurisprudence although not mentioned in Section 228.)

Q: Does the CTA en banc have jurisdiction on Petitions for Certiorari under Rule 65?
A: Yes, the CTA en banc have jurisdiction on petition for certiorari under Rule 65. (CE Casecnan Water and Energy
Company, Inc. v. Province of Nueva Ecija, 2015, citing City of Manila v. Grecia-Cuerdo, 2014)

Article 8, Section 1, par. 2 of the Constitution provides of the meaning of judicial power. It includes the power to
determine whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction,
which is precisely the ground under Rule 65. The Supreme Court further ruled that CTA has the power to take
cognizance of this petition since it is still a court established by law.

Q: Does the CTA en banc have jurisdiction over Petitions for Annulment of Judgment?
A: No. According to the ruling in CIR vs. Kepco Ilijan Corporation (2016), CTA en banc has no jurisdiction over such
petition for annulment of judgment involving decisions of the CTA in Division.

These are the 3 reasons:

 (1) RA 9282 and RA 1125 confer no jurisdiction of such petition for annulment on the CTA. The rule is basic
that jurisdiction is conferred by law.
(2) Revised Rules of the CTA provide no such rule conferring jurisdiction to petition for annulment of the CTA
en banc.
(3) The Rules of Court, which may be applied suppletorily, do not provide such jurisdiction.

Q: Does the CTA en banc have jurisdiction over interlocutory orders of the CTA in Division?
A: No, an interlocutory order of the CTA in Division is not appealable to the CTA en banc. However, an
interlocutory of the CTA in Division under Rule 65 can be directly appealable to the Supreme Court. Although the
court made no categorical ruling on the propriety of an appeal of an interlocutory order directly with the SC, the
case of Pacquiao vs. CIR (2016) still ruled to that effect.

Q: Can the CTA pass on the constitutionality of a Revenue Regulation or Revenue Memorandum Circular, as
opposed to regular courts?
A: Yes. The CTA can now rule on the validity or constitutionality of a revenue regulation or revenue memorandum
circular but only if it is involved in a tax assessment case or claim for tax refund. (British American Tobacco v.
Camacho, 2008; Philamlife v. Sec. of Finance, 2014).

Q: Can a civil or criminal action for recovery of taxes be filed without the approval of the CIR?
A: No. The approval of the CIR is required under the NIRC. Regional Directors may also approve the filing of cases
if this power is expressly delegated to him by the CIR.

Q: How does an LGU enforce collection of local taxes?

A: The LGU may enforce collection of delinquent taxes, fees, charges and other revenues by civil action in any
court of competent jurisdiction. The civil action shall be filed by the local treasurer within 5 years from the date
of assessment before the MTC, RTC, or CTA depending on the jurisdictional amount. (Sec. 194, LGC)

Q: What are the instances when the running of prescriptive period for assessment and collection of taxes will
be suspended?
A:
(a) The treasurer is legally prevented from making the assessment of collection;
(b) The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the
period within which to assess or collect; and
(c) The taxpayer is out of the country or otherwise cannot be located. (Sec. 194 (d), LGC)

Q: When do you institute a civil action?

A: A civil action is resorted to when a tax liability becomes collectible. It is collectible in the following
circumstances:
(1) When tax is assessed and the assessment becomes final and executory because the taxpayer fails to file
a protest with the CIR within 30 days from receipt.
(2) When a protest against an assessment is filed and a decision of the CIR was rendered but the said
decision became final, executory, and demandable for failure of the taxpayer to appeal the decision to
the CTA within 30 days from the receipt of the decision.
(3) When the protest is not acted upon by the CIR within 180 days from the submission of the documents
and the taxpayer failed to appeal with the CTA within thirty (30) days from the lapse of the 180 days
period.
(4) In case of a false or fraudulent return with intent to evade tax or of failure to file a return, a proceeding
in court for the collection of such tax may be filed without assessment, at any time within 10 years after
the discovery of the falsity, fraud, or omission.

Q: What are some instances when the running of the prescriptive period for assessment and collection of
taxes will be suspended?
A:
(1) The treasurer is legally prevented from making the assessment of collection;
(2) The taxpayer requests for reinvestigation and executes a waiver in writing before expiration of the
period within which to assess or collect; and
(3) The taxpayer is out of the country or otherwise cannot be located.
Q: Does an appeal to the CTA suspend the collection of tax?
A: No. Appeal to the CTA shall not suspend the payment, levy, distraint, and sale of taxpayer’s property. No appeal
taken to the CTA from the decision of the CIR, or the Commissioner of Customs, or the RTC, provincial, city, or
municipal treasurer, or the Secretary of Finance, the Secretary of Trade and Industry, or the 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. When in the opinion of the Court, the
collection by aforementioned government agencies may jeopardize the interest of the Government and/or
taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with
the court. (Sec. 9, RA 9282)

Q: Who may appeal?

A: Any party adversely affected by a decision, ruling, or inaction of the CIR, or the Commissioner of Customs, or
the RTC, provincial, city, or municipal treasurer, or the Secretary of Finance, the Secretary of Trade and Industry,
or the Secretary of Agriculture, may file an appeal with the CTA:
(1) Within thirty (30) days after receipt of such decision or ruling; or
(2) After the expiration of the period fixed by law action referred to in Sec. 7(a)(2) of RA 9282, in which case
the inaction shall be deemed a denial.

Q: What is the mode of appeal?

(1) Appeal may be made by filling a petition for review under a procedure analogous to that provided for
under Rule 42 of the 1997 of Civil Procedure, within thirty (30) days from the receipt of the decision or
ruling or from the expiration of the period fixed by law for the official concerned to act, in cases of
inaction, before the CTA. A Division of the CTA shall hear the appeal.
(2) Appeals with respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional
Trial Court in the exercise of its appellate jurisdiction, may be made by filing a petition for review under
a procedure analogous to that provided for under Rule 43 of the 1997 Rules of Civil Procedure, with CTA,
which shall hear the case en banc.
(3) Petition for Review on Certiorari may be filed by a party adversely affected by a decision or ruling of the
CTA en banc, through a verified petition before the Supreme Court, pursuant to Rule 45 of the 1997 Rules
of Civil Procedure.

Q: What is the period to appeal a decision on collection without prior assessment?

A:
(1) Appeal to CTA in division – within 30 days from receipt of decision on the protest or from the lapse of
180 days due to inaction of the CIR. (Sec. 228, NIRC)
(2) Appeal to the CTA en banc – the party adversely affected by the decision of a CTA division may file a
motion for reconsideration or new trial within 15 days from receipt of the decision of the CTA division.
If the MR is denied file a petition for review with the CTA en banc.
(3) Appeal to the SC — within 15 days from the receipt of the decision of the CTA.
(4) By way of special civil action — Petition for certiorari, prohibition and mandamus to the SC in cases of
grave abuse of discretion, lack or excess of jurisdiction.
(5) Action to contest foeiture of chattel, at any time before the sale or destruction thereof, to recover the
same, and upon giving proper bond, enjoin the sale; or after the sale and within 6 months, an action to
recover the net proceeds realized at the sale. (Sec. 231, NIRC)
(6) Action for damages against a RO by reason of any act done in the performance of official duty. (Sec. 227,
NIRC)
(7) Injunction - when the CTA is of the opinion that the collection by the BIR may jeopardize taxpayer.

Q: What are the common crimes punishable under the NIRC?

A:
(1) Willful attempt to evade or defeat tax;
(2) Failure to file return, supply correct and accurate information, pay tax, withhold and remit tax and
refund excess taxes withheld on compensation.

Q: How are criminal actions instituted and prosecuted?

A: All criminal actions before the Court in Division in the exercise of its original jurisdiction shall be instituted by
the filing of an information in the name of the People of the Philippines. In criminal actions involving violations
of the National Internal Revenue Code and other laws enforced by the Bureau of Internal Revenue, the
Commissioner of Internal Revenue must approve their filing. In criminal actions involving violations of the tariff
and Customs Code and other laws enforced by the Bureau of Customs, the Commissioner of Customs must
approve their filing. (Sec. 2., Rule 9, A.M. No. 05-11-07- CTA).

For failure of the State Prosecutor to comply with the order to submit to the CTA the written approval issued by
the CIR to file the case and the records of the preliminary investigation, the case was dismissed, without
prejudice. (People v. Renne Samala, 2011)

Q: How are civil actions instituted in criminal actions?

A: Criminal actions instituted on behalf of the Government under the authority of the Tax Code or other laws,
enforced by the BIR, shall be brought in the name of the Government of the Philippines and shall be conducted
by the Legal officers of the BIR. But no civil or criminal action for the recovery of taxes or the enforcement of any
fine, penalty or forfeiture under this code shall be filed in court without the approval of the commissioner. (C.R.
144942, July 4, 2002) Such as tax evasion, criminal charges in tax related cases are filed with the DOJ. Thereafter,
the taxpayer is notified that a criminal case had been filed against him. It must be stressed that a criminal
complaint is instituted not to demand payment but to penalize the taxpayer for violation of the tax code. (Lucas
v. Vinzons-Chato, 2009)

NOTE: A prior assessment is not a condition sine qua non for criminal prosecution of tax evasion. (J. Dimaampao)

“Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.”
- John Adams