2021-2022 Last Minute - HO 3 - Taxation Law

2021-2022 LAST MINUTE Handout No.
TAXATION LAW
BASIC PRINCIPLES OF TAXATION IN THE CONSTITUTION
Taxes, as burdens that must be endured by the taxpayer, should not be presumed to go beyond
what the law expressly and clearly declares
RMC No. 65-2012 is invalid for ordaining that "gross receipts of condominium corporations
including association dues, membership, fees, and other assessments/charges are subject to VAT,
income tax and income payments made to it are subject to applicable withholding taxes." A law
will not be construed as imposing a tax unless it does so clearly and expressly. In case of doubt,
tax laws must be construed strictly against the government and in favor of the taxpayer. (BIR v.
First E-Bank Tower Condominium Corp., G.R. Nos. 215801 & 218924, January 15, 2020)
Stages, Aspects, and Phases of taxation

1. Imposition or Levy - enactment of tax laws;
2. Assessment and Collection - implementation, enforcement or administration of tax laws;
and
3. Payment - act of compliance by the taxpayer. (Dimaampao, Tax Principles and Remedies,
2015)
Fundamental Principles of a Sound Taxation System

1. Fiscal adequacy - sources of government revenue must be sufficient to meet government
expenditures and other public need. (Chavez v. Ongpin, GR No. 76788, June 6, 1990)
2. Administrative feasibility – the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer. (Diaz v.
Secretary of Finance, GR No. 193007, July 19, 2011)
3. Theoretical justice – a sound tax system must be based on the taxpayer’s ability to pay
(Ability-to-pay theory). Taxation must be uniform and equitable. (Article VI, Section 28 (1),
1987 Constitution)
Inherent limitations of taxation

1. Public purpose; (Planters Product v. Fertiphil Corp., GR No. 166006, March 14, 2008)
2. Territoriality; (CIR v. Marubeni, GR No. 137377, December 18, 2001)
3. International comity; (Arigo v. Swift, GR No. 206510, September 16, 2014)
4. Exemption from taxation of government agencies and instrumentalities; (MIAA v. CA, GR
No. 155650, July 20, 2006) and
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2021-2022 LAST MINUTE Handout No. 3
TAXATION LAW
5. Non-delegation of the power to tax; (Quezon City PTCA v. DepEd, GR No. 188720, February
23, 2016)
Non-delegation of Power to Tax
General Rule: What has been delegated, cannot be delegated (potestats delegata non delegari
potest) (Rodrigo v. The Honorable Sandiganbayan, GR No. 125498, July 2, 1999)
Exception:
1. Tariff powers of the President; (Art. VI, Sec. 28 (2), 1987 Constitution)
2. Delegation to Local Government; (Art. X, Sec. 5, 1987 Constitution)
Tax Exempt Entities under the Constitution
Art. XIV, Sec. 4 (3), 1987 Art. VI, Sec 28 (3), 1987
Constitution Constitution
Non-stock, non-profit Charitable institutions,
educational institution churches and parsonages or
convents appurtenant
thereto, mosques, non-
profit cemeteries, and all
Institution Exempt lands, buildings, and
improvements, actually,
directly, and exclusively
used for religious,
charitable, or educational
purposes
Income tax, custom duties, Property Tax
Taxes Covered
property tax, VAT, LBT
All revenues, assets and income All lands, buildings, and
must be used for educational improvements, used for
Scope
purposes religious, charitable, or
educational purposes

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TAXATION LAW
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping
from taxation. 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. 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.
Tax evasion connotes the integration of three factors: (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. (CIR v. Estate of Toda, Jr., G.R. No. 147188, September 14,
2004)
Difference between income and capital
Income is distinct from capital. Income means all the wealth, which flows into the taxpayer other
than a mere return on capital while capital is a fund or property existing at one distinct point in
time, while income denotes a flow of wealth during a definite period of time. Income is gain
derived and severed from capital. (CREBA, Inc. v. Romulo, GR No. 1607656, March 9, 2010). The
essential difference between capital and income is that capital is a fund; income is a flow.
(Madrigal v. Rafferty, GR No. L-12287, August 7, 1918)
Taxes are the lifeblood of government and should be collected without hindrance. However,
the collection of taxes should be exercised "reasonably and in accordance with the prescribed
procedure.
The essential nature of taxes for the existence of the State grants government with vast remedies
to ensure its collection. However, taxpayers are guaranteed their fundamental right to due
process of law, as articulated in various ways in the process of tax assessment. After all, the
State's purpose is to ensure the well-being of its citizens, not simply to deprive them of their
fundamental rights.
Compliance with Section 228 of the NIRC is a substantive requirement. It is not a mere formality.
Providing the taxpayer with the factual and legal bases for the assessment is crucial before
proceeding with tax collection. Tax collection should be premised on a valid assessment, which
would allow the taxpayer to present his or her case and produce evidence for substantiation. (CIR
v. Fitness by Design, Inc., G.R. No. 215957, November 9, 2016)

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TAXATION LAW
Non-impairment Clause of the Constitution. A subsequent law may repeal a tax exemption
under a franchise or special law and the same will not violate the non-impairment clause under
the Constitution.
A franchise partakes the nature of a grant, which is beyond the purview of the non-impairment
clause of the Constitution. Contractual tax exemptions, in the real sense of the term and where
the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the government, acting in its private
capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked without impairing the obligations of contracts. Article
XII, Sec. 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the operation of a public utility shall be granted
except under the condition that such privilege shall be subject to amendment, alteration or
repeal by Congress as and when the common good so requires. (MERALCO vs. Province of Laguna,
GR No. 131359, May 5, 1999)
Test to determine whether revenues of non-stock, non-profit (NSNP) educational Institutions

are exempt from taxes based on the Constitution
The test is the actual, direct, and exclusive (ADE) use of the revenues for educational purposes,
not the source of said revenues. Thus, when an NSNP educational institution proves that it uses
its revenues ADE for educational purposes, it shall be exempted from income tax, VAT, and LBT.
This is known as the utilization rule. (CIR V. DLSU, GR No. 196596, November 9, 2016)
In distinguishing tax and regulation as a form of police power, the determining factor is the
purpose of the implemented measure.
If the purpose is primarily to raise revenue, then it will be deemed a tax even though the measure
results in some form of regulation. On the other hand, if the purpose is primarily to regulate, then
it is deemed a regulation and an exercise of the police power of the state, even though
incidentally, revenue is generated. (AUF vs. City of Angeles, G.R. No. 189999, June 27, 2012)

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TAXATION LAW
Tax License Fee

Levied in the exercise of Emanates from Police Power of
Basis
Taxing Power the State
Purpose Generate revenues Regulatory purposes
Generally, no limit as to Amount of exaction or charge
amount must be sufficient to include
As to Limitation on
expenses of issuing a license;
Amount
cost of necessary inspection or
police surveillance
Normally paid after the start Normally paid before the
As to When Paid of the business commencement of business
operations
Non-payment does not make Non-payment makes the
As to Effect of Non- the business illegal but may business illegal
payment be ground for criminal
prosecution
The principle of strictissimi juris
General Rule: This principle states that tax exemptions are strictly construed against the taxpayer
and liberally construed in favor of the government.
Exception:
a. When the Law expressly provides for liberal interpretation or construction of tax exemptions;
b. When the grantee of tax exemption is a Religious or Charitable institution;
c. When the grantee of tax exemption is the Government, its political subdivisions or
instrumentalities; (Maceda v. Macaraig, G.R. No. 88291, May 31, 1991)
d. When the taxpayer falls within the purview of exemption by clear Legislative intent (CIR v.
Arnoldus Carpentry Shop, G.R No. 71122, March 25, 1988)
INCOME TAX
The accrual of income and expense is permitted when the all-events test has been met. This
test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.

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TAXATION LAW
The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not
demand that the amount of income or liability be known absolutely, only that a taxpayer has
at his disposal the information necessary to compute the amount with reasonable accuracy.
The all events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much
as unknowable, within the taxable year. (ING Bank N.V. v. CIR, G.R. No. 167679, July 22, 2015)
Claim of Right Doctrine
In the claim-of-right doctrine, if a taxpayer receives money or other property and treats it as its
own under the claim of right that the payments are made absolutely and not contingently, such
amounts are included in the taxpayer's income, even though the right to the income has not
been perfected at that time. It does not matter that the taxpayer's title to the property is in
dispute and that the property may later be recovered from the taxpayer. (CIR v Manila Electric
Co. CTA EB No. 773 November 13, 2012)
Situs of taxation. 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.
In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income.
The tickets exchanged hands here and payments for fares were also made here in Philippine
currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow of wealth should share
the burden of supporting the government. (CIR v. British Overseas Airways Corp., G.R. Nos. L-
65773-74, April 30, 1987)
Exclusions from Gross Income
The following items shall not be included in gross income and shall be exempt from taxation:
1. Proceeds from Life insurance;

2. Amount received by insured as a return of Premium;

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TAXATION LAW
3. Gifts, bequests and devises;

4. Income exempt under Treaty;
5. Compensation for injuries or sickness;
6. Retirement benefits, pensions, gratuities, etc.;
7. Separation pay without the fault of the Employee-taxpayer;
8. Miscellaneous items;
a. Income derived by Foreign government from investments in the Philippines;
b. Income derived by the Government or its political subdivisions;
c. Prizes and awards (selected without any action and no substantial future
services);
d. Prizes and awards in sanctioned sports competition;
e. 13th month pay and other benefits not exceeding P90,000;
f. GSIS, SSS, Medicare and other contributions
g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness -
with a maturity of more than five (5) years; and
h. Gains from Redemption of Shares in Mutual Fund, (Section 32 (B), NIRC, as
amended)
Deductions from Gross Income
1. Business Expenses;
2. Interest;
3. Taxes;
4. Losses;
5. Bad debts;
6. Depreciation;
7. Charitable and Other Contributions;
8. Research & Development; and
9. Pension Trusts. (Section 34, NIRC, as amended)
Distinguish Exclusions from Deductions.
Exclusions from gross income are actually income earned by the taxpayer but are not taxable
as income because of the exemption provided for by law or by tax treaties. Deductions from
gross income are the expenses and other allowable deductions as provided for by law which
are incurred for engaging in trade or business or exercise of profession. (PLDT v. Province of
Laguna, GR No. 151899, August 16, 2005)

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TAXATION LAW
Tax-Free Exchanges
The requisites for the non-recognition of gain or loss under the foregoing provision are as
follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for
property/ies of the transferor; (c) the transfer is made by a person, acting alone or together
with others, not exceeding four persons; and, (d) as a result of the exchange the transferor,
alone or together with others, not exceeding four, gains control of the transferee. (CIR v.
Filinvest Development Corp., G.R. Nos. 163653 & 167689, July 19, 2011)
Charitable institutions are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28 (3),
Article VI of the Constitution requires that a charitable institution use the property "actually,
directly and exclusively" for charitable purposes. To be exempt from income taxes, Section 30
(E) of the NIRC requires that a charitable institution must be "organized and operated
exclusively" for charitable purposes. Likewise, to be exempt from income taxes, Section 30 (G)
of the NIRC requires that the institution be "operated exclusively" for social welfare. (CIR v. St.
Luke's Medical Center, Inc., G.R. No. 195909, 195960, September 26, 2012)
The withholding agent is constituted the agent both the government and the taxpayer. With
respect to the collection and/or withholding of the tax, he is the Government's agent. In
regard to the filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. (Filipinas Synthetic Fiber Corp. v. CA, G.R. Nos.
118498 & 124377, October 12, 1999)
Requirements for the sale of principal residence to be exempt from capital gains tax
The following must be met:

1. The proceeds must be fully utilized in acquiring or constructing a new principal residence
within 18 calendar months from date of disposition;

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TAXATION LAW
2. The taxpayer shall notify the CIR within 30 days from the date of sale or disposition of his
intention to avail of tax exemption; and
3. This exemption can only be availed of once every 10 years. (Sec. 24 (D) (2), NIRC, as
amended)
Optional Standard Deduction (OSD) for general professional partnerships (GPPs)
A GPP and its partners may avail of the OSD only once - either by the GPP or by the partners
comprising the GPP. If the GPP avails of the OSD, the partners may no longer claim any expenses.
However, if the GPP avails of the itemized deduction, the partners may still claim itemized
deduction but limited only to the items that are not claimed as deductions by the GPP. (Sec. 34
(L), NIRC, as amended by TRAIN)
8% Tax under the TRAIN Law
An individual taxpayer (except a nonresident alien not engaged in trade or business) earning
income purely from self-employment and/or practice of profession and whose gross
sales/receipts and other non-operating income does not exceed P3,000,000.00 shall have the
option to be taxed as follows:
a. The Graduated rates under Sec. 24(A)(2)(a) of the Tax Code, as amended; or
b. An Eight percent (8%) tax on gross sales or receipts (net of returns and cash discounts) and
other non- operating income in excess of two hundred fifty thousand pesos (P250,000.00) in
lieu of the graduated income tax rates under Sec. 24(A) ;and
c. Percentage tax under Section 116 all under the Tax Code, as amended.
An individual taxpayer (except a nonresident alien not engaged in trade or business) earning
income both from compensation and from self-employment (business or practice of profession)
shall be taxed as follows:
a. Compensation Income – graduated rates; and,
b. Income from business or practice of profession - gross sales/receipts and other non-operating
income does not exceed P3,000,000.00 shall have the option to be taxed either at the
graduated rates or the 8% tax.

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TAXATION LAW
The following are not qualified to avail of the 8% Tax
a. Purely Compensation income earners;

b. VAT registered taxpayers;
c. Non-VAT taxpayers whose gross receipts/sales exceed P3,000,000.00;
d. Taxpayers subject to other Percentage taxes except Sec. 116;
e. Partners of General Professional Partnerships; and,
f. Individuals enjoying income tax exemption such as those registered with Barangay Micro
Business Enterprise since taxpayers are not allowed to avail of double or multiple tax
exemptions under different tax laws unless specifically provided by law.
Notes: The taxpayer must signify his intention to avail of the 8% income tax rate in the 1st Quarter
ITR / Percentage Tax Return, or on the initial quarter return of the taxable year after the
commencement of a new business/practice of profession. Otherwise, the taxpayer is considered
to have availed of the graduated rates. Such election shall be irrevocable and no amendment of
option shall be made for the said taxable year.
Partners of a GPP by virtue of their distributive share from GPP which is already net of cost and
expenses cannot avail of the 8% income tax rate option.
The P250,000.00 exemption for those subject to the 8% tax is not applicable to mixed income
earners
Since it is already incorporated in the first tier of the graduated income tax rates applicable to
compensation income. Under the said graduated rates’ the excess of the P250,000.00 over the
actual taxable compensation income is not deductible/creditable against the taxable income
from business/practice of profession under the 8% income tax rate option.
A taxpayer shall automatically be subject to the graduated rates under Sec. 24(A)(2)(a) of the
NIRC, as amended, even if the flat 8% income tax rate option is initially selected
When taxpayer's gross sales/receipts and other non- operating income exceeded P3,000,000.00
the VAT threshold during the taxable year. In such case, his income tax shall be computed under
the graduated income tax rates and shall be allowed a tax credit for the previous quarter/s
income tax payment/s under the 8% income tax rate option.

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TAXATION LAW
The irrevocability rule in claiming for the refund of its excess and/or unutilized creditable
withholding tax
The irrevocability rule is enunciated in Section 76 of the NIRC: Once the option to carry over
and apply the excess quarterly income tax against income tax due for the taxable years of the
succeeding taxable years has been made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or issuance of a tax credit certificate shall be
allowed therefor.
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer
chose an option; and once it had already done so, it could no longer make another one.
Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable
period, the question of whether or not it actually gets to apply said tax credit is irrelevant.
Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been
made, "no application for tax refund or issuance of a tax credit certificate shall be allowed
therefor. (Rhombus Energy, Inc. v. Commissioner of Internal Revenue, G.R. No. 206362, August
1, 2018.)
Non-Retroactivity of Rulings
General Rule: Any revocation, modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers
Exception:
1. Where the taxpayer deliberately misstates or omits material facts from his return or
any document required of him by the Bureau of Internal Revenue;
2. Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith. (Section 246, NIRC, as amended)

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TAXATION LAW
Final Withholding Tax System Creditable Withholding Tax

System
Full and final payment of the Intended to equal, or at least
As to the Amount
income due from the payee on approximate the tax due from
Collected
the said income. the payee on the said income.
Party Primarily Liability rests primarily on the Liability rests upon the
Liable withholding agent. taxpayer.
Payee is not required to file an Income recipient is still require
income tax return for the to file an income tax return
Need to File Tax
particular income and/or pay the difference
Return
between the tax withheld an d
tax due on the income.
1. All income subject to final 1. Those income payments
taxes (e.g. passive income, covered by the Expanded
or gross income of NRA- Withholding Tax (RR No. 2-
NETB); 98, as amended)
2. Fringe Benefit; (Sec. 33,
NIRC, as amended) and
3. Informer's Reward to
Coverage
Persons Instrumental in
the Discovery of Violations
of the National Internal
Revenue Code and in the
Discovery and Seizure of
Smuggled Goods (Sec. 282,
NIRC, as amended)
Any income subject to income tax may be subject to withholding tax; however, income exempt
from income tax is consequently exempt from withholding tax. Further, income not subject to
withholding tax does not necessarily mean that it is not subject to income tax. (Sec. 2.57.2, RR
No. 2-98, as amended)
VALUE-ADDED TAX
Destination Principle and Cross Border Doctrine
The Destination Principle provides that goods and services are taxed only in the country where
these are consumed. In connection with the said principle, the Cross Border Doctrine mandates
that no VAT shall be imposed to form part of the cost of the goods destined for consumption

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TAXATION LAW
outside the territorial border of the taxing authority. (Atlas Consolidated Mining and
Development Corporation, G.R. Nos. 141104 and 148763; June 8, 2007)
Transactions Deemed Sale
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; or
b. Creditors in payment of debt;
3. Consignment of goods if actual sale is not made within sixty (60) days following the date
such goods were consigned; and
4. Retirement from or cessation of business with respect to inventories of taxable goods
existing as of such retirement or cessation. (Sec. 106 (B), NIRC, as amended)
New VAT Exempt Transactions under TRAIN Law
1. Sale or lease of goods and services to Senior citizens and Sale or lease of goods and
services to senior citizens and persons with Disabilities;
2. Transfer of Property pursuant to Section 40 (C) (2) of the Transfer of Property pursuant
to Section 40 (C) (2) of the NIRC, as amended;
3. Association dues, membership fees, and other assessments Association dues,
membership fees, and other assessments and charges collected on a purely
reimbursement basis by and charges collected on a purely reimbursement basis by
homeowners' associations and condominium corporations;
4. Sale of Gold to the Bangko Sentral ng Pilipinas; and
5. Sale of drugs and medicines prescribed for Diabetes, high Cholesterol, and Hypertension;
(Sec. 109 NIRC, as amended; Sec. 4.109-1 of RR No. 13-18, March 15, 2018)
Membership fees, assessment dues, and the like collected by recreational clubs are not subject
to value-added tax
By collecting membership fees, assessment dues, and the like, the club is not selling its service to
the members. Conversely, the members are not buying services from the club when dues are
paid; hence, there is no economic or commercial activity to speak of as these dues are devoted

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TAXATION LAW
for the operations/maintenance of the facilities of the organization. As such, there could be no
'sale, barter or exchange of goods or properties, or sale of a service' to speak of, which would
then be subject to VAT under the Tax Code." This principle equally applies to condominium
corporations which are similarly situated with recreational clubs insofar as membership fees,
assessment dues, and other fees of similar nature collected from condominium owners are
devoted to the operations and maintenance of the facilities of the condominium. (ANPC vs. BIR,
G.R. No. 228539, June 26, 2019)
The amounts earmarked and eventually paid by MEDICARD to the medical service providers do
not form part of gross receipts for VAT purposes
MEDICARD's act of earmarking or allocating 80% of the amount it received as membership fee at
the time of payment that weakens the ownership imputed to it. By earmarking or allocating 80%
of the amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the
concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD's
right in relation to these amounts is a mere inchoate owner which would ripen into actual
ownership if, and only if, there is underutilization of the membership fees at the end of the fiscal
year. Prior to that, MEDICARD is bound to pay from the amounts it had allocated as an
administrator once its members avail of the medical services of MEDICARD's healthcare
providers. (Medicard Philippines, Inc. v. CIR, G.R. No. 222743, April 5, 2017)
Requisites for the Entitlement to Tax Refund or Credit of Excess input VAT Attribute to Zero-
rated Sale
Under Section 4.112-1 (a) of Revenue Regulations No. (RR) 16-05, otherwise known as
the Consolidated VAT Regulations of 2005, in relation to Section 112 of the Tax Code, a claimant's
entitlement to a tax refund or credit of excess input VAT attributable to zero-rated sales hinges
upon the following requisites:
1. the taxpayer must be VAT-registered;
2. the taxpayer must be engaged in sales which are Zero-rated or Effectively zero-rated;
3. the claim must be filed within Two years after the close of the taxable quarter when such
sales were made; and
4. the creditable input tax due or paid must be Attributable to such sales, except the
transitional input tax, to the extent that such input tax has not been applied against the
output tax. (CIR v. Deutsche Knowledge Services Pte. Ltd., G.R. No. 234445, July 15, 2020)

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TAXATION LAW
Zero-Rated and Effectively Zero-Rated Transactions
Zero-Rated Transactions Effectively Zero-Rated

Transactions
Export sale of goods and supply Sale of goods or supply of
of services. services to persons or entities
whose exemption under
Special laws or International
Nature
agreements to which the
Philippines is a signatory
effectively subjects such
transactions to a zero rate.
The seller of such transactions charges no output tax, but can
Effect claim a Refund of or a Tax credit certificate for the VAT
previously charged by suppliers.
Primarily intended to be Intended to benefit the
enjoyed by the seller who is purchaser who, not being
directly and legally liable for directly and legally liable for
the VAT, making such seller the payment of the VAT, will
Benefit
internationally competitive by ultimately bear the burden of
allowing the refund or credit of the tax shifted by the
input taxes that are suppliers.
attributable to export sales.
(CIR v. Seagate, GR No. 153866, February 11, 2005)
Zero-Rated and VAT Exempt Transactions
Zero-Rated Transactions VAT Exempt Transactions

Still a taxable transactions but Not subject to VAT.
As to being considered
does not result in an output
as Taxable Sales
VAT.
Input VAT on purchases may Seller is not entitled to any
As to Refund of Input be allowed as tax credit or Input VAT on his purchases
VAT refund. despite the issuance of VAT
Invoice or Receipt
Required to register as VAT Registration is optional for
As to Registration
registered person. VAT-exempt persons

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TAXATION LAW
To claim a refund of unutilized or excess input VAT, purchase of goods or properties must be
supported by VAT Sales Invoices, while purchase of services must be supported by VAT Official
Receipts
Strict compliance with substantiation and invoicing requirements is necessary considering VAT's
nature and VAT system's tax credit method, where tax payments are based on output and input
taxes and where the seller's output tax becomes the buyer's input tax that is available as tax
credit or refund in the same transaction. It ensures the proper collection of taxes at all stages of
distribution, facilitates computation of tax credits, and provides accurate audit trail or evidence
for BIR monitoring purposes.
Pursuant to Sections 106 (D) and 108 (C) in relation to Section 110 of the 1997 NIRC, the output
or input tax on the sale or purchase of goods is determined by the total amount indicated in the
VAT invoice, while the output or input tax on the sale or purchase of services is determined by
the total amount indicated in the VAT official receipt. (Team Energy Corp. v. CIR, G.R. Nos. 197663
& 197770, March 14, 2018)
The two-year prescriptive period does not refer to the filing of the judicial claim with the CTA
but to the filing of the administrative claim with the Commissioner. (Note: Sec 112 has already
been amended by RA 10963 but the two year prescriptive period remains)
Section 112 (A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime within the
two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing to
decide the claim. If the Commissioner decides the claim on the 120th day, or does not decide it
on that day, the taxpayer still has 30 days to file his judicial claim with the CTA. This is not only
the plain meaning but also the only logical interpretation of Section 112 (A) and (C). (CIR v. San
Roque Power Corp., G.R. Nos. 187485, 196113 & 197156, February 12, 2013)
DONOR’S TAX
Transfer for Insufficient Consideration
General Rule: If a person sells property below its fair market value, except for real property
subject to the 6% capital gains tax, the difference between the fair market value and the selling

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price is considered a donation subject to donor’s tax. The sale is considered a transfer for less
than an adequate and full consideration in money or money’s worth.
Exception: However, even if the sale is made below its fair market value, the transfer will be
considered as made for an Adequate and Full consideration in money or money’s worth if the
sale is:
a. Bona fide;
b. at Arm’s length; and
c. Free from any donative intent.
Thus, the transaction will not be subject to donor’s tax. (Sec. 100 of the NIRC, as amended by the
TRAIN Law)
Rules on Political Contributions
Any contribution in cash or in kind to any candidate, political party or coalition of parties for
campaign purposes, provided the same is duly reported to the COMELEC, is exempt from Donor’s
tax. (Sec. 99(C) of the NIRC in relation to Sec. 13 of RA No. 7166)
Unutilized/excess campaign funds, that is, campaign contributions net of the candidate’s
campaign expenditures, shall be considered as subject to income tax. Corollary thereto, failure
to submit statement of expenditures to the COMELEC subjects the entire contributions to income
tax. Since, the candidate will be precluded from claiming expenditures as “deductions” from his
campaign contributions. (Revenue Regulations No. 7-2011; February 16, 2011)
Political contributions which are not utilized during the campaign period is subject to Donor’s tax.
Also, political contributions made by a foreign corporation is subject to Donor’s tax. (Revenue
Memorandum Circular No. 30-2016; March 14, 2016)
Rules on Renunciation of the Conjugal/Community Share and Share in the Inheritance
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.
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

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in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary
estate. (Revenue Regulations No. 12-2018, January 25, 2018)
REMEDIES
(JURISDICTION OF COURTS, PRESCRIPTION, REMEDIES AGAINST ASSESSMENT NOTICE)
Requisites for a valid assessment
1. It must have been issued within the prescriptive period for the issuance of assessment
notices;
2. As a general rule, it may be issued only after a pre-assessment notice (PAN) has been
served upon the taxpayer;
3. There is final demand for payment;
4. It shall state, in writing, the law and the facts on which the assessment is made (Sec. 228,
NIRC, as amended); and
5. The assessment must be served on and received by the taxpayer. (CIR v. Pascor Realty &
Dev’t Corp, G.R. No. 123895, June 12, 1999)
Importance of proving the release, mailing or sending of the notice
An assessment is made when sent within the prescribed period, even if received by the taxpayer
after its expiration, the release, mailing, or sending of the notice be clearly and satisfactorily
proved. Mere notations made without the taxpayer's intervention, notice, or control, without
adequate supporting evidence, cannot suffice; otherwise, the taxpayer would be at the mercy of
the revenue offices, without adequate protection or defense. Thus, failure of BIR to prove the
receipt of the assessment by respondent would necessarily lead to the conclusion that no
assessment was issued. (CIR v. BPI, G.R. No. 224327, June 11, 2018)
The requirement of revalidating an LOA that is unserved, as opposed to revalidating it after

service, in connection with the "120-day rule”
Before Service of LOA: A Letter of Authority must be served or presented to the taxpayer within
30 days from its date of issue; otherwise, it becomes null and void unless revalidated. The
taxpayer has all the right to refuse its service if presented beyond the 30-day period depending
on the policy set by top management. The rules clearly impose a 30-day expiration period for

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service. Upon expiration, the LOA becomes wholly unenforceable, inasmuch as it cannot be
served without revalidation upon the taxpayer who, in turn, has the right to refuse the same.
After Service of LOA: Failure to comply with the 120-day rule does not void LOA ab initio. The
expiration of the 120-day period merely renders an LOA unenforceable, inasmuch as the
revenue officer must first seek ratification of his expired authority to audit to be able to validly
continue investigation beyond the first 120 days. Without revalidation, the LOA shall be
considered void and the assigned revenue officer is "prohibited from further investigation and
contact with the taxpayer." The revalidation requirement here is aimed at reconfirming the
revenue officer's authority and extending the period of audit. It contemplates
a served LOA and an on-going audit investigation. Stated differently, the revenue officer was
already authorized to commence an audit only that he was unable to conclude it within 120
days. (AFP General Insurance Corp. v. CIR, G.R. No. 222133, November 4, 2020)
Rules on Judicial claim for refund under Sec. 112(C) of the NIRC, as amended by the TRAIN Law
The BIR has ninety (90) days from the filing of the administrative claim for refund to decide on
the said claim. If the taxpayer receives a decision on its claim for refund, the taxpayer has thirty
(30) days to file an appeal with the CTA. Failure on the part of any official, agent, or employee of
the BIR to act on the application within the ninety (90)-day period shall be punishable under
Section 269 of the Tax Code (i.e. administrative fine and imprisonment).
Note: The judicial claim for refund or appeal with the CTA under Sec. 112(C) need not be filed
within the 2-year period under Sec. 112 (A). The 2-year period only applies to the administrative
claim for refund with the BIR. (CIR v. San Roque Power Corporation, GR No. 187485; February 12,
2013)
Prescription (Period to Assess Internal Revenue Taxes)
General Rule: The BIR has three (3) years counted from:
a. Actual date of filing of the return; or
b. Deadline for filing of the return, whichever comes later, to make a deficiency tax assessment.
(Sec. 203, NIRC as amended).
Exception: The prescriptive period to assess is extended to ten (10) years if there is Failure to file
a return, there is filing of a False return or a Fraudulent return with intent to evade taxes. The

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10-year period starts to run from the discovery of the omission, falsity or fraud. (Sec. 222(a), NIRC
as amended)
Prescription (Period to Collect Internal Revenue Taxes)
General Rule: The BIR has five (5) years from the date of receipt or sending of the FAN to collect
a deficiency tax liability. (Sec. 222 (c) of the NIRC)
Exception: The BIR may judicially collect a deficiency tax liability without an assessment within
ten (10) years if there is an omission to file a return, there is filing of a false return or a fraudulent
return with intent to evade taxes. The 10-year period starts to run from the discovery of the
omission, falsity or fraud. (Sec. 222 (a) of the NIRC)
If the BIR alleges that the taxpayer filed a fraudulent return with intent to evade tax in order to
avail of the 10-year prescriptive period to assess, it is indispensable for the CIR to include the
basis for its allegations of fraud in the assessment notice. (CIR v. Fitness by Design, G.R No.
215957, November 9, 2016)
Suspension of Running of Statute of Limitations
The prescriptive period to assess and/or collect is suspended under Sec. 223 of the NIRC:
1. For the period during which the Commissioner is Prohibited from making an assessment or
beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter;
2. When the taxpayer requests for a Reinvestigation which is granted by the Commissioner;
3. When the taxpayer Cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, that, if the taxpayer informs the
Commissioner of any change in address, the running of the Statute of Limitations will not be
suspended;
4. When the Warrant of distraint or levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient discretion, and no property
could be located; and,
5. When the taxpayer is Out of the Philippines.

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Waiver of Statute of Limitations
RMO No. 14-2016 amending the requirements of a valid waiver of the statute of limitations under
the NIRC. Currently, a valid waiver must comply with the following requirements:
1. The waiver must be executed by the taxpayer and accepted by the BIR Before the expiration
of the period to assess or collect taxes (or before the lapse of the period agreed upon in case
a subsequent agreement is executed);
2. The waiver must be Signed by the taxpayer himself or his duly authorized representative. In
the case of a corporation, the waiver must be signed by any of its responsible officials;
3. the Expiry date of the period agreed upon to assess/collect the tax after the regular three-
year period of prescription should be indicated;
4. The waiver of the prescriptive period to collect must indicate the particular Taxes assessed.
The waiver of prescriptive period to assess may simply state “all internal revenue taxes;” and,
5. Two material dates must appear on the waiver: (1) the date of Execution; and, (2) the Expiry
date of the period the taxpayer waives the statute of limitations.
Application of Concept of Estoppel in Execution of Defective Waiver
General Rule: Estoppel will not validate a defective waiver.
Exception: In at least three (3) cases, the Supreme Court declared valid a defective waiver on the
ground of estoppel:
1. Partial Payment of an assessment which is covered by a defective waiver. (RCBC v. CIR, G.R.
No. 170257, September 7, 2011);
2. When the application of estoppel would Promote the administration of the law, prevent
injustice and avert the accomplishment of a wrong and undue advantage. (CIR v. Next Mobile,
Inc., G.R. No. 212825, December 7, 2015);
3. When the taxpayer Never raised the invalidity of the Waivers at the earliest opportunity and
the Waivers were necessary to give the taxpayer time to fully comply with the BIR notices for
audit examination and to respond to its Informal Conference request to discuss the
discrepancies. (CIR v. Transitions Optical Phils., G.R. No. 227544, November 22, 2017)

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Protesting an Assessment: Summary (Section 228 of the NIRC)
1. If the protest is wholly or partially denied by the CIR or his authorized representative, then
the taxpayer may appeal to the CTA within 30 days from receipt of the whole or partial denial
of the protest;
2. If the protest is wholly or partially denied by the CIR's authorized representative, then the
taxpayer may appeal to the CIR within 30 days from receipt of the whole or partial denial of
the protest; and,
3. If the CIR or his authorized representative failed to act upon the protest within 180 days
from submission of the required supporting documents, then the taxpayer may appeal to the
CTA within 30 days from the lapse of the 180- day period. (PAGCOR v. BIR, G.R. No. 208731,
January 27, 2016)
Receipt of FAN need not be within the prescriptive periods
The prescriptive period for issuance of FAN is 3 years from due date if return is filed on or before
due date and if filed beyond due date, 3 years from date of actual filing. When an assessment is
made within the prescriptive period, receipt by the taxpayer may or may not be within said
period. (CIR v. GJM Philippines Manufacturing Inc. GR No. 202695, February 29, 2016)
A Final Decision on Disputed Assessment (“FDDA”) must state the facts and law on which it is
based to provide the taxpayer the opportunity to file an intelligent appeal.
An FDDA which contains a taxpayer’s supposed tax liabilities, without providing any details on
the specific transactions which gave rise to its supposed tax deficiencies is void. The FDDA differs
from the FAN. The nullity of the FDDA does not extend to the FAN. (CIR v. Liquigaz Phils.
Corporation, G.R No. 215534, April 18, 2016)
The “twin prescription rule” under Section 229 of the Tax Code (Recovery of Tax Erroneously or
Illegally Collected) of the NIRC states that both the administrative and judicial claim must be
made within 2 years from the date of payment of taxes.
The twin prescription rule under Section 229 of the NIRC provides that a claimant for refund must
first file an administrative claim for refund before the CIR, prior to filing a judicial claim before
the CTA and that both the administrative and judicial claims for refund should be filed within the

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two (2)-year prescriptive period from the date the taxes are erroneously paid, and that the
claimant is allowed to file the latter even without waiting for the resolution of the former in order
to prevent the forfeiture of its claim through prescription. (Metropolitan Bank & Trust Company
v. CIR, G.R. No. 182582, April 17, 2017)
Note: Under Section 112 of the Tax Code (Input VAT Refund), the 2-year period applies only to
the filing of the administrative claim with the CIR. (CIR v. San Roque, G.R. No. 187485, February
12, 2013)
Section 112, NIRC as amended Section 229, NIRC as

amended
Excess input VAT for zero-rated Erroneous, illegally,
Nature or effectively zero-rated sales. excessively or in any manner
wrongfully collection of tax.
Administrative claim with BIR Administrative claim with BIR
filed within 2 years after the filed within 2 years from the
Application of the 2-
close of the taxable quarter date of payment of the tax or
year Prescriptive
when the sales were made. penalty regardless of any
Period
supervening cause that may
arise after payment.
Judicial Claim for refund Judicial Claim for refund must
(Appeal to CTA) is a MUST be filed within the same 2 year
period from payment of
Appeal to CTA Within 30 days from receipt of internal revenue tax.
BIR Decision denying or partly
granting/denying the
refund.
Concept of Willful Blindness Doctrine
The taxpayer’s mere reliance on the representations made by his accountant, with deliberate
refusal or avoidance to verify the contents of his tax return and to inquire on its authenticity
constitutes “willful blindness” on his part. Mere reliance on another person in preparing, filing
and paying income taxes is not a justification for failure to file the right information on income
taxes. (People v. Gloria Kintanar CTA EB Crim. No. 006, December 3, 2010)

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Court of Tax Appeals
Jurisdiction of CTA In Division Jurisdiction of CTA EN BANC

Exclusive original or appellate jurisdiction to The following cases are directly appealable
review by appeal: to the CTA En Banc:
A. Decisions of the CIR in cases involving A. Decisions by the Central Board of
disputed assessments, refunds of Assessment Appeals in Real Property Tax
internal revenue taxes, fees or other Cases;
charges, penalties in relation thereto, or B. Decisions by the Regional Trial Court in
other matters arising under the 1997 Tax the exercise of its appellate jurisdiction
Code or other laws administered by the in local tax cases;
BIR. C. Decisions by the Regional Trial Court in
B. Inaction by the CIR in cases involving: the exercise of its appellate jurisdiction
a. Disputed assessments in tax collection cases; and
b. Refunds of internal revenue taxes, D. Decisions by the Regional Trial Court in
fees or other charges or penalties in the exercise of its appellate jurisdiction
relation thereto, in criminal cases. (Sec. 7 of RA No. 9282)
c. Other matters arising under the Tax
Code
d. Other laws administered by the BIR
where the Tax Code or other
applicable law provides a specific
period for action
Exclusive jurisdiction over cases involving
criminal offenses:
A. All criminal offenses arising from the Tax
Code or other laws administered by the
BIR where the principal amount of taxes
and fees, exclusive of charges and
penalties claimed is:
a. P1M or more – Original Jurisdiction
b. P1M or less or where there is no
specified amount claimed –
Appellate Jurisdiction
Exclusive jurisdiction over tax collection
cases:
A. Tax collection cases involving final and
executory assessments for taxes, fees,
charges and penalties, where the
principal amount of taxes and fees,

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exclusive of charges and penalties

claimed is
a. P1M or more – Original Jurisdiction
B. Appellate jurisdiction over appeals from
the judgments, resolutions or orders of
the RTC in tax collection cases originally
decides by them within their respective
territorial jurisdiction
In civil cases, in order for the CTA En Banc to take cognizance of an appeal, a timely motion for
reconsideration or new trial must first be filed with the CTA Division.
Failure to do so is a ground for the dismissal of the appeal. The foregoing rule also applies to an
amended decision. An amended decision is a different decision and is a proper subject of a
motion for reconsideration. Thus, if an amended decision is rendered by the CTA Division
disposing of the motions for reconsideration filed by the taxpayer and the CIR, the amended
decision must also be contested by way of a motion for reconsideration before any appeal can
be made to the CTA En Banc. (CIR vs. Asiatrust Development Bank, G.R. Nos. 201680-81; April 19,
2017)
The CTA has jurisdiction on judicial claim for tax refund or credit without awaiting for the
decision of the CIR nearing the 2 year prescription period
The two-year period in filing a claim for tax refund is crucial. While the law provides that the
two-year period is counted from the date of payment of the tax, jurisprudence, however,
clarified that the two-year prescriptive period to claim a refund actually commences to run, at
the earliest, on the date of the filing of the adjusted final tax return because this is where the
figures of the gross receipts and deductions have been audited and adjusted, reflective of the
results of the operations of a business enterprise.
Under the circumstances, if respondent awaited for the commissioner to act on its
administrative claim (before resort to the Court),chances are, the two-year prescriptive period
will lapse effectively resulting to the loss of respondent's right to seek judicial recourse and
worse, its right to recover the taxes it erroneously paid to the government. Hence, respondent's
immediate resort to the Court is justified. (CIR v. Univation Motor Philippines, Inc., G.R. No.
231581, April 10, 2019)

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Secretary of Justice’s (SOJ) jurisdiction over tax disputes between the government and
government-owned and controlled corporations
This case involves a dispute between PSALM and NPC, which are both wholly government
owned corporations, and the BIR, a government office, over the imposition of VAT on the sale
of the two power plants. There is no question that original jurisdiction is with the CIR, who
issues the preliminary and the final tax assessments. However, if the government entity
disputes the tax assessment, the dispute is already between the BIR (represented by the CIR)
and another government entity, in this case, the petitioner PSALM.
Under Presidential Decree No. 242 (PD 242), all disputes and claims solely between
government agencies and offices, including government-owned or controlled corporations,
shall be administratively settled or adjudicated by the Secretary of Justice, the Solicitor General,
or the Government Corporate Counsel, depending on the issues and government agencies
involved. Thus, under PD 242, it is mandatory that disputes and claims "solely" between
government agencies and offices, including government-owned or controlled corporations,
involving only questions of law, be submitted to and settled or adjudicated by the Secretary of
Justice. (PSALM v. CIR, G.R. No. 198146, August 8, 2017)
Mere appeal to the CTA contesting the validity of an assessment does not suspend collection
of the deficiency taxes.
The taxpayer should file a motion to suspend collection on the ground that collection will
jeopardize the interests of the taxpayer. If granted, the CTA will require the taxpayer to post a
cash bond in an amount equivalent to the basic assessed tax or a surety bond equivalent to not
more than double the basic assessed tax.
The bond requirement should be dispensed with if:

1. Prescription has set in; or,
2. whenever it is determined by the courts that the Method employed by the CIR in the
collection of tax is not sanctioned by law. (Spouses Pacquiao vs. CTA, G.R. No. 213394;
April 6, 2016)
Note: In the case of the collection of local taxes, no express provision in the LGC prohibiting courts
from issuing an injunction to restrain local governments from collecting taxes. (Angeles City vs.
Angeles City Electric Corporation, G.R. No. 166134, June 29, 2010)

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2021-2022 Last Minute - HO 3 - Taxation Law

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2021-2022 Last Minute - HO 3 - Taxation Law

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2021-2022 LAST MINUTE Handout No.

BASIC PRINCIPLES OF TAXATION IN THE CONSTITUTION

Stages, Aspects, and Phases of taxation

Fundamental Principles of a Sound Taxation System

Inherent limitations of taxation

Legal Edge Bar Review 0942 – 949 91 76

Non-delegation of Power to Tax

Tax Exempt Entities under the Constitution

Legal Edge Bar Review 0942 – 949 91 76

Difference between income and capital

Legal Edge Bar Review 0942 – 949 91 76

Test to determine whether revenues of non-stock, non-profit (NSNP) educational Institutions

Legal Edge Bar Review 0942 – 949 91 76

Tax License Fee

The principle of strictissimi juris

Legal Edge Bar Review 0942 – 949 91 76

Claim of Right Doctrine

Exclusions from Gross Income

1. Proceeds from Life insurance;

Legal Edge Bar Review 0942 – 949 91 76

3. Gifts, bequests and devises;

Deductions from Gross Income

Distinguish Exclusions from Deductions.

Legal Edge Bar Review 0942 – 949 91 76

The following must be met:

Legal Edge Bar Review 0942 – 949 91 76

Optional Standard Deduction (OSD) for general professional partnerships (GPPs)

8% Tax under the TRAIN Law

Legal Edge Bar Review 0942 – 949 91 76

The following are not qualified to avail of the 8% Tax

a. Purely Compensation income earners;

Legal Edge Bar Review 0942 – 949 91 76

Legal Edge Bar Review 0942 – 949 91 76

Final Withholding Tax System Creditable Withholding Tax

Destination Principle and Cross Border Doctrine

Legal Edge Bar Review 0942 – 949 91 76

Transactions Deemed Sale

1. Transfer, use or consumption not in the course of business of goods or properties

New VAT Exempt Transactions under TRAIN Law

Legal Edge Bar Review 0942 – 949 91 76

Legal Edge Bar Review 0942 – 949 91 76

Zero-Rated and Effectively Zero-Rated Transactions

Zero-Rated Transactions Effectively Zero-Rated

Zero-Rated and VAT Exempt Transactions

Zero-Rated Transactions VAT Exempt Transactions

Legal Edge Bar Review 0942 – 949 91 76

Transfer for Insufficient Consideration

Legal Edge Bar Review 0942 – 949 91 76

Rules on Political Contributions

Rules on Renunciation of the Conjugal/Community Share and Share in the Inheritance

Legal Edge Bar Review 0942 – 949 91 76

Requisites for a valid assessment

Importance of proving the release, mailing or sending of the notice

The requirement of revalidating an LOA that is unserved, as opposed to revalidating it after

Legal Edge Bar Review 0942 – 949 91 76

Prescription (Period to Assess Internal Revenue Taxes)

Legal Edge Bar Review 0942 – 949 91 76

Prescription (Period to Collect Internal Revenue Taxes)

Suspension of Running of Statute of Limitations

Legal Edge Bar Review 0942 – 949 91 76

Waiver of Statute of Limitations

Application of Concept of Estoppel in Execution of Defective Waiver

General Rule: Estoppel will not validate a defective waiver.

Legal Edge Bar Review 0942 – 949 91 76