TAXATION LAW

2021 GOLDEN NOTES

FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
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 ACADEMIC YEAR 2020-2021
CIVIL LAW STUDENT COUNCIL
LYODYCHIE Q. CAMARAO PRESIDENT
MARIA FRANCES FAYE R. GUTIERREZ VICE PRESIDENT INTERNAL
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UST BAR-OPS
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ELOUISA ANN D.C. CARREON SENIOR MEMBER
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PATRICIA MAE D. GUILLERMO SENIOR MEMBER
GLENN MATTHEW C. MANLAPID SENIOR MEMBER
CIARI T. MENDOZA SENIOR MEMBER
MARYLOU RENZI M. OLOTEO SENIOR MEMBER
LOUELLE JUDE B. QUE SENIOR MEMBER
JAMES ROSS L. TAN SENIOR MEMBER

ATTY. AL CONRAD B. ESPALDON

ADVISER
 ACADEMICS COMMITTEE 2021
MARIA FRANCES FAYE R. GUTIERREZ SECRETARY GENERAL
NATHAN RAPHAEL D.L. AGUSTIN ASST. SECRETARY GENERAL
JOHN EDWARD F. FRONDA EXECUTIVE COMMITTEE
ANGEL ISAH M. ROMERO EXECUTIVE COMMITTEE
KIRBY ANNE C. RENIA EXECUTIVE COMMITTEE
KAREN ABBIE C. ASPIRAS EXECUTIVE COMMITTEE
JOSE CHRISTIAN ANTHONY I. PINZON EXECUTIVE COMMITTEE
MARIA FRANCES FAYE R. GUTIERREZ LAYOUT ARTIST
CIARI T. MENDOZA COVER DESIGN ARTIST

TAXATION LAW COMMITTEE 2021

MA. SELYNA V. ROÑO
TAXATION LAW COMMITTEE HEAD

AIREI KIM P. GUANGA ASST. HEAD INCOME TAXATION,

TRANSFER TAXES
MARFE B. GADDI ASST. HEAD GENERAL PRINCIPLES,
LOCAL GOVERNMENT TAXATION
PATRICIA ANNE D. BAUTISTA ASST. HEAD TAX REMEDIES,
BUSINESS TAXATION

MEMBERS
FRANCES GRACE L. CRUZ MERVIN ANGELO V. MANALO
LESLEY YSABEL B. SUMAGPANG MICHAELLA G. RAMIREZ
LOUIZE ALLAINE T. AREÑO ANTHONY LUIGI B. DE VERA
FELIX ANGELO S. RAMOS

ATTY. KENNETH GLENN L. MANUEL

ATTY. CLARICE ANGELINE V. QUESTIN
Advisers
 ACADEMICS COMMITTEE 2020

AYA DOMINIQUE S. CAPARAS SECRETARY GENERAL

MARIA FRANCES FAYE R. GUTIERREZ ASST. SECRETARY GENERAL
RUTH MAE G. SANVICTORES EXECUTIVE COMMITTEE
NICOLE G. AMANTE EXECUTIVE COMMITTEE
JAYSON GABRIEL R. SORIANO EXECUTIVE COMMITTE
CARA ANGELA N. FLORES EXECUTIVE COMMITTEE
IANA CASSANDRA Y. ESMILE EXECUTIVE COMMITTEE
AYA DOMINIQUE S. CAPARAS LAYOUT ARTIST
CIARI T. MENDOZA COVER DESIGN ARTIST

TAXATION LAW COMMITTEE 2020

JOANNA MARIE REYES
TAXATION LAW COMMITTEE HEAD

LAUREN STAR BORROMEO ASST. HEAD, INCOME TAXATION

MEMBERS
ROCHELLE NIEVA CURIBA SHARMAINE ELIZA T. MACASERO
GERMAINE VIDA L. CARREON LIRAH ALORRA R. CALUAG

ATTY. KENNETH GLENN L. MANUEL

Adviser
 FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS

ACADEMIC OFFICIALS

ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAÑO, O.P.

DEAN REGENT

ATTY. ARTHUR B. CAPILI

FACULTY SECRETARY

ATTY. ELGIN MICHAEL C. PEREZ

LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC

JUDGE PHILIP A. AGUINALDO

SWDB COORDINATOR

LENY G. GADIANA, R.G.C.

GUIDANCE COUNSELOR
 OUR DEEPEST APPRECIATION TO OUR
MENTORS AND INSPIRATION

JUSTICE JAPAR B. DIMAAMPAO

ATTY. ABELARDO T. DOMONDON

ATTY. NOEL M. ORTEGA

ATTY. VIRGINIA JEANNIE P. LIM

ATTY. PRUDENCE ANGELITA A. KASALA

ATTY. BENEDICTA DU-BALADAD

ATTY. RIZALINA V. LUMBERA

ATTY. LEAN JEFF M. MAGSOMBOL

ATTY. KENNETH GLENN L. MANUEL

ATTY. CLARICE ANGELINE V. QUESTIN

For being our guideposts in understanding the intricate sphere of Taxation Law.

-Academics Committee 2021

 DISCLAIMER

THE RISK OF USE OF THIS BAR

REVIEW MATERIAL SHALL BE
BORNE BY THE USER
 TABLE OF CONTENTS

I. GENERAL PRINCIPLES .................................................................................................................................................. 1

A. CONCEPT AND PURPOSE OF TAXATION ................................................................................................... 1
1. Definition ...................................................................................................................................................................................1
2. Purpose .......................................................................................................................................................................................1
3. Distinguish: tax and other forms of exactions .........................................................................................................1
B. DISTNGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN ........................... 4
C. THEORY AND BASIS OF TAXATION ............................................................................................................ 6
1. Lifeblood theory .....................................................................................................................................................................6
2. Necessity theory .....................................................................................................................................................................7
3. Benefits-received theory ....................................................................................................................................................7
D. JURISDICTION OVER SUBJECT AND OBJECTS .......................................................................................... 7
E. PRINCIPLES OF A SOUND TAX SYSTEM ..................................................................................................... 7
1. Fiscal adequacy .......................................................................................................................................................................7
2. Theoretical justice .................................................................................................................................................................7
3. Administrative feasibility ..................................................................................................................................................7
F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION ..................................................... 8
G. STAGES OR ASPECTS OF TAXATION ....................................................................................................... 28
H. REQUISITES OF A VALID TAX ................................................................................................................... 30
I. KINDS OF TAXES ............................................................................................................................................ 30
J. GENERAL CONCEPTS IN TAXATION.......................................................................................................... 31
1. Prospectivity of taw laws ................................................................................................................................................ 31
2. Imprescriptibility................................................................................................................................................................ 32
3. Situs of taxation ................................................................................................................................................................... 32
4. Double taxation.................................................................................................................................................................... 34
a. Strict sense ................................................................................................................................................................... 34
b. Broad sense ................................................................................................................................................................. 34
c. Tax treaties as relief from double taxation................................................................................................... 34
5. Escape from taxation ........................................................................................................................................................ 35
a. Shifting of tax burden ............................................................................................................................................. 35
b. Distinguish: tax avoidance and tax evasion ................................................................................................. 36
6. Exemption from taxation ................................................................................................................................................ 37
7. Equitable recoupment ...................................................................................................................................................... 40
8. Prohibition on compensation and set-off ............................................................................................................... 41
9. Compromise .......................................................................................................................................................................... 42
10. Tax amnesty........................................................................................................................................................................ 42
K. CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES AND REGULATIONS ............... 43
II. NATIONAL TAXATION .............................................................................................................................................. 46
A. TAXING AUTHORITY ................................................................................................................................... 46
1. Jurisdiction, power, and functions of the Commissioner of Internal Revenue ..................................... 46
2. Rule-making authority of the Secretary of Finance ........................................................................................... 52
B. INCOME TAX .................................................................................................................................................. 55
1. Definition, nature and general principles ............................................................................................................... 55
a. Income tax systems .................................................................................................................................................. 55
i. Global ....................................................................................................................................................................... 55
ii. Schedular .............................................................................................................................................................. 55
iii. Others.................................................................................................................................................................... 55
b. Features of the Philippine income tax law ................................................................................................... 56
c. Criteria in imposing Philippine income tax law ......................................................................................... 56
 i. Citizenship .............................................................................................................................................................56
ii. Residence ..............................................................................................................................................................56
iii. Source....................................................................................................................................................................56
d. General principles of income taxation ............................................................................................................56
e. Types of Philippine income tax ..........................................................................................................................57
f. Kinds of taxpayers .....................................................................................................................................................57
g. Taxable period ............................................................................................................................................................58
2. Concept of income ..............................................................................................................................................................59
b. When income is taxable .........................................................................................................................................59
i. Existence of income...........................................................................................................................................59
ii. Realization of income......................................................................................................................................61
iii. Recognition of income...................................................................................................................................61
c. Tests in determining whether income is earned for tax purposes ...................................................62
i. Realization test ....................................................................................................................................................62
ii. Claim of right doctrine or doctrine of ownership, command or control ................................62
iii. Economic benefit test or doctrine of proprietary interest ..........................................................62
iv. Severance test ....................................................................................................................................................62
d. Method of accounting .............................................................................................................................................63
i. Distinguish: cash and accrual method......................................................................................................63
ii. Special method: installment, deferred payment, percentage of completion (in long-term
contracts) ...................................................................................................................................................................63
e. Situs of Income ...........................................................................................................................................................64
3. Gross income .........................................................................................................................................................................65
c. Sources of income subject to tax ........................................................................................................................67
i. Compensation income......................................................................................................................................67
ii. Fringe benefits....................................................................................................................................................68
iii. Professional income .......................................................................................................................................68
iv. Income from business ...................................................................................................................................69
v. Income from dealings in property ............................................................................................................69
(a) Distinguish ordinary asset and capital asset ..............................................................................70
(b) Types of gains ............................................................................................................................................72
(c) Special rules pertaining to income or loss from dealings in property classified as
capital asset (loss limitation rule, loss carry-over rule, holding period rule)....................74
(d) Tax-free exchanges .................................................................................................................................83
vi. Passive investment income .........................................................................................................................83
(a) Interest ..........................................................................................................................................................84
(b) Dividend .......................................................................................................................................................86
(c) Royalty income ..........................................................................................................................................91
(d) Rental income ............................................................................................................................................91
vii. Annuities and proceeds from life insurance or other types of insurance ...........................93
viii. Prizes and awards .........................................................................................................................................94
ix. Pension, retirement benefit, or separation pay.................................................................................96
x. Income from any source ................................................................................................................................96
(a) Condonation of indebtedness ............................................................................................................96
(b) Recovery of accounts previously written off..............................................................................97
(c) Receipt of tax refunds or credit .........................................................................................................97
d. Exclusions.....................................................................................................................................................................98
i. Rationale .................................................................................................................................................................98
ii. Taxpayers who may avail..............................................................................................................................98
iii. Distinguish: exclusions, deductions, and tax credits ......................................................................99
iv. Exclusions under the Constitution ....................................................................................................... 100
Amounts received under life insurance contracts under life insurance endowment or
annuity contracts.......................................................................................................................................... 104
4. Deductions .......................................................................................................................................................................... 114
a. General rule .............................................................................................................................................................. 115
b. Concept of return of capital .............................................................................................................................. 116
c. Distinguish: itemized deductions and optional standard deduction ............................................ 116
d. Requirements for deductible items .............................................................................................................. 117
 e. Items not deductible............................................................................................................................................. 145
5. Income tax on individuals............................................................................................................................................ 146
a. Resident citizens, non-resident citizens, and resident aliens .......................................................... 146
i. Coverage .............................................................................................................................................................. 149
ii. Taxation on compensation income ....................................................................................................... 149
(a) Inclusions.................................................................................................................................................. 150
(b) Exclusions ................................................................................................................................................ 150
iii. Taxation of business income/income from practice of profession ...................................... 158
(a) Schedular .................................................................................................................................................. 158
(b) 8% option ................................................................................................................................................. 159
iv. Taxation of partners in a general professional partnership .................................................... 160
v. Taxation of passive income ....................................................................................................................... 160
vi. Taxation of capital gains............................................................................................................................ 160
(a) Income from sale of shares of stock of a Philippine corporation .................................. 160
(b) Income from sale of real property situated in the Philippines....................................... 160
(c) Income from sale, exchange, and other disposition of other capital assets ............. 160
b. Non-resident aliens engaged in trade or business ................................................................................ 160
c. Non-resident aliens not engaged in trade or business ........................................................................ 161
d. Aliens employed by regional headquarters, regional operating headquarters, offshore
banking units, and petroleum service contractors .................................................................................... 161
e. Individual taxpayers exempt from income tax ........................................................................................ 162
i. Minimum wage earner ................................................................................................................................. 162
ii. Exemptions granted under international agreements ................................................................ 163
6. Income tax on corporations........................................................................................................................................ 163
a. Domestic Corporations ....................................................................................................................................... 165
i. Taxation – in general ..................................................................................................................................... 165
(a) Regular Corporate Income Tax (RCIT) ....................................................................................... 166
(b) Minimum Corporate Income Tax (MCIT) ................................................................................. 166
(c) Taxation of passive income .............................................................................................................. 170
(d) Taxation of capital gains ................................................................................................................... 170
(e) Improperly accumulated earnings tax ....................................................................................... 170
ii. Proprietary educational institutions and non-profit hospitals ............................................... 172
iii. Government-owned or controlled corporations, agencies, instrumentalities ............... 175
iv. Foreign currency deposit units .............................................................................................................. 175
b. Resident foreign corporations ........................................................................................................................ 175
i. Taxation – in general ..................................................................................................................................... 176
(a) Regular Corporate Income Tax (RCIT) ....................................................................................... 176
(b) Minimum Corporate Income Tax (MCIT) ................................................................................. 176
(c) Branch Profits Remittance Tax (BPRT) ...................................................................................... 176
(d) Taxation of passive income ............................................................................................................. 177
(e) Taxation of capital gains .................................................................................................................... 177
ii. Resident foreign corporations subject to preferential tax rates ............................................. 177
(a) International carriers ......................................................................................................................... 177
(b) Foreign currency deposit units and offshore banking units............................................ 178
(c) Regional or area headquarters and regional operating headquarters ....................... 179
c. Non-resident foreign corporations (NRFC) .............................................................................................. 179
i. Taxation of NRFC in general ...................................................................................................................... 179
ii. NRFCs subject to preferential tax rates .............................................................................................. 179
d. Corporations exempt from income tax ....................................................................................................... 179
e. Tax on other business entities; general partnerships, general professional partnerships, co-
ownerships, joint ventures, and consortia ..................................................................................................... 181
7. Filing of returns and payment ................................................................................................................................... 186
a. Individual return .................................................................................................................................................... 186
i. Who are required to file; exceptions ..................................................................................................... 186
ii. Substituted filing ............................................................................................................................................ 187
iii. When and where to file ............................................................................................................................. 188
b. Corporate returns.................................................................................................................................................. 188
i. Quarterly income tax ..................................................................................................................................... 188
 ii. Final adjustment return .............................................................................................................................. 188
iii. When and where to file.............................................................................................................................. 189
iv. Return of corporations contemplating dissolution or reorganization ............................... 189
c. Return on capital gains realized from sale of shares of stock and real estate .......................... 189
8. Withholding tax .............................................................................................................................................. 189
b. Final withholding tax ........................................................................................................................................... 190
c. Creditable withholding tax ................................................................................................................................ 190
i. Expanded withholding tax .......................................................................................................................... 191
ii. Withholding tax on compensation......................................................................................................... 191
d. Fringe benefits tax ................................................................................................................................................. 191
e. Duties of a withholding agent .......................................................................................................................... 191
C. ESTATE TAX................................................................................................................................................. 196
1. Basic principles, concept, and definition .............................................................................................................. 196
2. Classification of decedent ............................................................................................................................................ 197
3. Composition of gross estate ........................................................................................................................................ 197
a. Items to be included in determining gross estate .................................................................................. 200
i. Decedent’s interest ......................................................................................................................................... 200
ii. Transfers in contemplation of death .................................................................................................... 200
iii. Revocable transfers ..................................................................................................................................... 202
iv. Property passing under a general power of appointment ........................................................ 203
v. Proceeds of life insurance .......................................................................................................................... 204
vi. Prior interests................................................................................................................................................. 206
vii. Transfers for insufficient consideration........................................................................................... 206
b. Allowable deductions from gross estate .................................................................................................... 208
c. Exclusions from gross estate and exemptions of certain acquisitions and transmissions . 215
d. Tax credit for estate taxes paid to a foreign country............................................................................ 216
e. Filing of estate tax returns and payment of estate tax ......................................................................... 217
D. DONOR’S TAX.............................................................................................................................................. 221
1. Basic principles, concept, and definition .............................................................................................................. 221
2. Requisites of a valid donation .................................................................................................................................... 223
3. Transfers which may be considered as donation ............................................................................................. 224
a. Sale, exchange, or transfer of property for less than adequate and full consideration;
exception ........................................................................................................................................................................ 224
b. Condonation or remission of debt ................................................................................................................. 225
c. Renunciation of inheritance; exception ...................................................................................................... 225
4. Classification of donor ................................................................................................................................................... 226
5. Determination of gross gift ......................................................................................................................................... 226
a. Composition of gross gift.................................................................................................................................... 226
b. Valuation of gifts made in property .............................................................................................................. 226
c. Exemption of certain gifts .................................................................................................................................. 227
6. Tax credit for donor’s taxes paid to a foreign country................................................................................... 231
7. Filing of return and payment ..................................................................................................................................... 231
E. VALUE-ADDED TAX ................................................................................................................................... 233
1. Nature and characteristics of value-added tax .................................................................................................. 233
a. Tax on value added ............................................................................................................................................... 233
b. Sales tax ...................................................................................................................................................................... 233
c. Tax on consumption ............................................................................................................................................. 233
d. Indirect tax; impact and incidence of tax ................................................................................................... 234
e. Tax credit method.................................................................................................................................................. 234
f. Destination principle and cross-border principle .................................................................................. 234
2. Persons liable to value-added tax ............................................................................................................................ 236
3. Imposition of value-added tax ................................................................................................................................... 236
a. On sale of goods or properties......................................................................................................................... 236
i. Tax base: gross selling price ...................................................................................................................... 237
ii. Transactions deemed sale ......................................................................................................................... 238
iii. Change or cessation of status as value-added tax-registered person ................................. 239
b. On importation of goods .................................................................................................................................... 240
 c. On sale of services and use or lease of properties ................................................................................. 241
4. Zero-rated and effectively zero-rated sales of goods or properties, and services ........................... 246
5. Value-added tax-exempt transactions ................................................................................................................... 251
6. Input and output tax....................................................................................................................................................... 260
7. Refund or tax credit of excess input tax; procedure ....................................................................................... 266
8. Compliance requirements ........................................................................................................................................... 277
a. Registration .............................................................................................................................................................. 277
b. Invoicing requirements ...................................................................................................................................... 278
c. Filing of returns and payment ......................................................................................................................... 280
d. Withholding of final value-added tax on sales to government ........................................................ 281
e. Administrative and penal sanctions ............................................................................................................. 281
F. PERCENTAGE TAXES: CONCEPT AND NATURE ................................................................................... 283
G. EXCISE TAX: CONCEPT AND NATURE ................................................................................................... 285
H. DOCUMENTARY STAMP TAX: CONCEPT AND NATURE ................................................................... 288
I. TAX REMEDIES UNDER THE NATIONAL INTERNAL REVENUE CODE ............................................ 289
1. Assessment of internal revenue taxes ................................................................................................................... 290
a. Procedural due process in tax assessments.............................................................................................. 294
i. Letter of authority and tax audit.............................................................................................................. 294
ii. Informal conference ..................................................................................................................................... 295
iii. Preliminary assessment notice .............................................................................................................. 296
iv. Formal letter of demand and final assessment notice ................................................................ 298
v. Disputed assessment .................................................................................................................................... 299
vi. Administrative decision on a disputed assessment ..................................................................... 300
vii. Appeal from an administrative decision on disputed assessment ...................................... 300
b. Requisites of a valid assessment .................................................................................................................... 303
c. Tax delinquency and tax deficiency .............................................................................................................. 303
d. Prescriptive period for assessment .............................................................................................................. 304
i. General rule........................................................................................................................................................ 305
ii. Distinguish: false returns, fraudulent returns, and non-filing of returns........................... 309
iii. Suspension of statute of limitations .................................................................................................... 311
2. Taxpayer’s remedies ...................................................................................................................................................... 311
a. Protesting an assessment .................................................................................................................................. 312
i. Period to file protest ...................................................................................................................................... 312
ii. Kinds of protest – request for reconsideration or reinvestigation ........................................ 312
iii. Submission of supporting documents ................................................................................................ 313
iv. Effect of failure to file protest ................................................................................................................. 314
v. Action of the Commissioner on the protest filed ............................................................................ 314
(a) Period to file protest............................................................................................................................ 314
(b) Remedies of the taxpayer in case of denial or inaction of the Commissioner......... 316
(c) Effect of failure to appeal .................................................................................................................. 318
b. Recovery of tax erroneously or illegally collected ................................................................................ 319
i. Grounds, requisites, and periods for filing a claim for refund or issuance of a tax credit
certificate ................................................................................................................................................................ 319
ii. Proper party to file claim for refund or tax credit ii. Proper party to file claim for refund
or tax credit ........................................................................................................................................................... 324
iii. Distinguish from input value-added tax refund ............................................................................ 332
c. Power of Commissioner of Internal Revenue to compromise ......................................................... 334
d. Non-retroactivity of rulings.............................................................................................................................. 340
3. Government remedies for collection of delinquent taxes ............................................................................ 340
a. Requisites .................................................................................................................................................................. 340
b. Prescriptive periods; suspension of running of statute of limitations ........................................ 341
c. Administrative remedies .................................................................................................................................... 342
i. Tax lien ................................................................................................................................................................. 342
ii. Distraint and levy .......................................................................................................................................... 343
iii. Forfeiture of real property....................................................................................................................... 348
iv. Suspension of business operation ........................................................................................................ 348
 v. Judicial remedies ............................................................................................................................................ 349
d. No injunction rule; exceptions ........................................................................................................................ 349
4. Civil penalties..................................................................................................................................................................... 350
a. Delinquency interest and deficiency interest........................................................................................... 350
b. Surcharge................................................................................................................................................................... 351
c. Compromise penalty............................................................................................................................................. 352
d. Fraud penalty........................................................................................................................................................... 352
III. LOCAL TAXATION .................................................................................................................................................. 358
A. LOCAL GOVERNMENT TAXATION.......................................................................................................... 358
1. Fundamental principles ................................................................................................................................................ 358
2. Nature and source of taxing power ......................................................................................................................... 359
a. Grant of local taxing power under the Local Government Code ..................................................... 359
b. Authority to prescribe penalties for tax violations ............................................................................... 360
c. Authority to grant local tax exemptions ..................................................................................................... 361
d. Withdrawal of exemptions................................................................................................................................ 362
e. Authority to adjust local tax rates .................................................................................................................. 363
f. Residual taxing power of local governments ............................................................................................ 363
3. Scope of taxing power.................................................................................................................................................... 364
4. Specific taxing power of local government units .............................................................................................. 364
5. Common revenue raising powers ............................................................................................................................ 379
6. Community tax .................................................................................................................................................................. 379
7. Common limitations on the taxing powers of local government units .................................................. 380
8. Requirements for a valid tax ordinance ................................................................................................................ 383
9. Taxpayer’s remedies ...................................................................................................................................................... 384
a. Protest ......................................................................................................................................................................... 384
b. Refund ......................................................................................................................................................................... 384
c. Action before the Secretary of Justice .......................................................................................................... 385
10. Assessment and collection of local taxes ........................................................................................................... 386
a. Remedies of local government units ............................................................................................................ 388
b. Prescriptive period ............................................................................................................................................... 392
B. Real Property Taxation............................................................................................................................ 394
1. Fundamental principles ................................................................................................................................................ 394
2. Nature .................................................................................................................................................................................... 394
3. Imposition ........................................................................................................................................................................... 395
a. Power to levy ........................................................................................................................................................... 396
b. Exemption from real property tax................................................................................................................. 399
4. Appraisal and assessment ........................................................................................................................................... 406
a. Classes of real property ...................................................................................................................................... 407
b. Assessment based on actual use..................................................................................................................... 407
5. Collection ............................................................................................................................................................................. 410
a. Date of accrual ......................................................................................................................................................... 410
b. Periods to collect.................................................................................................................................................... 410
c. Remedies of local government units............................................................................................................. 412
6. Taxpayer’s remedies ...................................................................................................................................................... 416
a. Contesting an assessment .................................................................................................................................. 416
i. Payment under protest; exceptions ....................................................................................................... 417
ii. File protest with Treasurer ....................................................................................................................... 418
iii. Refunds or credits of real property taxes ......................................................................................... 418
b. Contesting a valuation of real property ...................................................................................................... 420
i. Appeal to the Local Board of Assessment Appeals (LBAA)......................................................... 420
ii. Appeal to the Central Board of Assessment Appeals (CBAA) ................................................... 420
iii. Effect of payment of taxes ........................................................................................................................ 421
c. Compromising real property tax assessment ........................................................................................... 421
IV. JUDICIAL REMEDIES .............................................................................................................................................. 423
A. JURISDICTION OF THE COURT OF TAX APPEALS .............................................................................. 424
1. Exclusive original and appellate jurisdiction over civil cases .................................................................... 424
 2. Exclusive original and appellate jurisdiction over criminal cases ........................................................... 429
B. PROCEDURE ................................................................................................................................................ 429
1. Filing of an action for collection of taxes .............................................................................................................. 429
a. Internal revenue taxes ........................................................................................................................................ 430
b. Local taxes ................................................................................................................................................................. 430
2. Civil cases............................................................................................................................................................................. 431
a. Who may appeal, mode of appeal, and effect of appeal ...................................................................... 431
b. Suspension of collection of taxes ................................................................................................................... 436
c. Injunction not available to restrain collection ......................................................................................... 438
3. Criminal cases.................................................................................................................................................................... 438
a. Institution and prosecution of criminal action........................................................................................ 438
b. Institution of civil action in criminal action.............................................................................................. 438
c. Period to appeal ...................................................................................................................................................... 439
4. Appeal to the Court of Tax Appeals en banc ....................................................................................................... 439
5. Petition for review on certiorari to the Supreme Court................................................................................ 442
 Taxation Law
GENERAL PRINCIPLES b. Regulation of activities/industries –
Taxes may also be imposed for a
CONCEPT AND PURPOSE OF TAXATION regulatory purpose as, for instance, in
the rehabilitation and stabilization of a
threatened industry which is affected
DEFINITION with public interest, like the oil
industry. (Caltex Philippines, Inc. v.
Taxation is the power by which the sovereign, Commission on Audit, et al., G.R. No.
through its law-making body, raises revenue to 92585, May 8, 1992)
defray the necessary expenses of government. It
is merely a way of apportioning the costs of Taxation also has a regulatory purpose
government among those who, in some measure, as in the case of taxes levied on excises
are privileged to enjoy its benefits and must bear or privileges like those imposed on
its burdens. (Aban, 2001) tobacco and alcoholic products, or
amusement places like night clubs,
It is a mode by which governments make cabarets, cockpits, etc. (Aban, 2001)
exactions for revenue in order to support their
existence and carry out their legitimate c. Reduction of social inequality – a
objectives. Taxation may refer to either or both progressive system of taxation prevents
the power to tax or the act or process by which the undue concentration of wealth in
the taxing power is exercised. (Vitug, 2006) the hands of few individuals.
Progressivity is based on the principle
In other words, taxation is: that those who are able to pay more
1. The inherent power of the sovereign should shoulder the bigger portion of
exercised through legislature the tax burden.
2. To impose burdens
3. Upon subjects and objects d. Encourage economic growth – the grant
4. Within its jurisdiction of incentives or exemptions encourage
5. For the purpose of raising revenues investment thereby stimulating
6. To carry out the legitimate objects of economic activity.
government
e. Protectionism – Protective tariffs and
PURPOSE customs duties are imposed as taxes in
order to protect important sectors of
1. Primary or revenue purpose – to raise the economy or local industries, as in
funds or property to enable the State to the case of foreign importations.
promote the general welfare and protection
of the people. f. To tax is two-fold. It is both inherent
and legislative in nature.
2. Secondary or non-revenue purposes
(PR2EP) DISTINGUISH: TAX AND OTHER
FORMS OF EXACTIONS
a. Promotion of general welfare – taxation
may be used as an implement of police TARIFF/
power to promote the general welfare TAX CUSTOMS
of the people. DUTIES
Coverage An all- Only a kind of
In the case of Lutz v. Araneta (G.R. No. L- embracing tax; therefore,
7859, December 22, 1955), the Supreme term to limited
Court upheld the validity of the Sugar include coverage.
Adjustment Act, which imposed a tax on various kinds
milled sugar since the purpose of the of enforced
law was to strengthen an industry that contributions
is so undeniably vital to the economy – imposed upon
the sugar industry. (Aban, 2001) persons for

1
 General Principles of Taxation
the TAX LICENSE FEE
attainment of commencement
public of a business or
purpose. profession
Object Persons, Goods Non-payment Non-payment
Effect of
property, imported or does not make makes the
Non-
privilege, or exported the business business illegal.
Payment
transactions illegal.
Normally paid Normally paid
TAX TOLL after the start of before the
An enforced A consideration business. commencement
Time of
proportional paid for the use of the business.
Payment
contribution of a road, bridge Post-activity
Definition from persons or the like, of a imposition Pre-activity
and property public nature. imposition
for public
purpose/s. Q: A municipality, BB, has an ordinance
Demand of Demand of which requires that all stores, restaurants,
Basis
sovereignty proprietorship and other establishments selling liquor
Generally, the Amount is should pay a fixed annual fee of P20,000.
amount is limited to the Subsequently, the municipal board proposed
unlimited. cost and an ordinance imposing a sales tax equivalent
Amount
maintenance of to 5% of the amount paid for the purchase or
public consumption of liquor in stores, restaurants,
improvement. and other establishments. The municipal
For the support For the use of mayor, CC, refused to sign the ordinance on
Purpose of the another’s the ground that it would constitute double
government property taxation. Is the refusal of the mayor justified?
May be May be imposed Reason briefly. (2004 BAR)
Imposing imposed by the by private
Authority State only. individuals or NO. The refusal of the mayor is not justified. The
entities. impositions are of different nature and
character. The fixed annual fee is in the nature of
NOTE: Taxes may be imposed only by the a license fee imposed through the exercise of
government under its sovereign authority; toll police power while the 5% tax on purchase or
fees may be demanded by either the government consumption is a local tax imposed through the
or private individuals or entities, as an attribute exercise of taxing powers. Both a license fee and
of ownership. a tax may be imposed on the same business or
occupation, or for selling the same article and
TAX LICENSE FEE this is not in violation of the rule against double
Imposed to For regulation taxation. (Campania General de Tabacos de
Purpose Filipinos v. City of Manila, 8 SCRA 367 (1963))
raise revenue. and control
Collected under Collected under
Basis the power of police power. SPECIAL
taxation. TAX ASSESSMENT
Generally, Limited to the
amount is necessary An enforced An enforced
Amount unlimited. expenses of proportional proportional
regulation and Nature contribution contribution
control. from persons from owners
Imposed on Imposed on the and property of lands
persons, exercise of a for public especially
Subject properties, right or purpose/s. those who are
rights or privilege such peculiarly
transactions as the benefited by

UNIVERSITY OF SANTO TOMAS 2

2021 GOLDEN NOTES
 Taxation Law
public collected on expressly
improvement any unpaid stipulated in
s. amount of tax writing.
Imposed on Levied only (deficiency (Article 1956,
Subject
persons, on land interest or Civil Code)
property delinquency
rights, or interest).
transactions
A personal Not a personal Refer to Civil
Person Penalties for
liability of the liability of the
Liable further
taxpayer person
assessed discussion.
May be May only be Interest – There shall Interest
Imposing rate to be be assessed depends upon
imposed by imposed by
Authority imposed and collected the written
national or the local
local government on any stipulation of
government unpaid the parties.
For the Contribution amount of
Purpose tax, interest If no written
support of the to the cost of
government public at the rate of stipulation, as
improvement double the to the rate,
Regular Exceptional as legal legal rate of
Scope interest rate interest shall
exaction to time and
locality for loans, or be imposed.
forbearance
TAX DEBT of any money
Basis Obligation Obligation in the
created by based on absence of an
law. contract, express
express or stipulation as
implied. set by the
Assignabili Not Bangko
Assignable Sentral ng
ty assignable
Mode of Generally Payable in Pilipinas
Payment payable in kind or in (BSP) from
money; in money. the date
exceptional prescribed
instances, it for payment
may be until the
satisfied in amount is
kind. fully paid.
Set-off Not subject Subject to set- Prescriptio Governed by Governed by
to set-off off n the special the ordinary
prescriptive periods of
Effect of May result in No
periods prescription.
non- Imprisonmen imprisonment
provided for
payment t. (except when
in the
debt arises
National
from crime).
Internal
Interest – No interest No interest
Revenue
stipulation unless there shall be due
Code (NIRC).
requireme shall be unless it has
nt assessed and been

3
 General Principles of Taxation
DISTNGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN

TAXATION POLICE POWER EMINENT DOMAIN

Authority who Government or its Government or its Government or public
exercises the political subdivision political subdivision service companies and
power public utilities
To raise revenue in Promotion of general To facilitate the taking of
support of the welfare through private property for
Purpose
Government. Regulation is regulations. public purpose.
merely incidental.
Upon the community or Upon the community or On an individual as the
Persons affected class of individuals class of individuals owner of a particular
property
Amount of No ceiling except inherent Limited to the cost of No imposition, the owner
monetary limitations. regulation, issuance of is paid the fair market
imposition license, or surveillance value of his property.
Protection of a secured Maintenance of healthy The person receives just
organized society, benefits economic standard of compensation (the fair
received from society, intangible market value of the
government, no direct altruistic feeling that he property taken from him);
Benefits received
benefit has contributed to the direct benefit results.
general welfare, no direct
benefit

Tax laws generally do not Contracts may be Contracts may be

impair contracts unless impaired. impaired.
Non-impairment the government is party to
of contracts contract granting
exemption for a
consideration.

NOTE: Taxation is distinguishable from police TAXATION POLICE POWER

power as to the means employed to implement No limit Limited to the cost of
these public good goals. Those doctrines that are regulation, issuance of
unique to taxation arose from peculiar the license, or
considerations such as those especially punitive surveillance
effects of taxation, and the belief that taxes are Benefits Received
the lifeblood of the State yet at the same time, it No special or direct No direct benefit is
has been recognized that taxation may be made benefit is received by received; a healthy
the implement of the State’s police power. the taxpayer; merely economic standard of
(Southern Cross Cement Corporation v. Cement general benefit of society is attained.
Manufacturers Association of the Philippines, et protection.
al., G. R. No. 158540, August 3, 2005) Non-impairment of Contracts
Contracts may not be Contracts may be
Q: Distinguish taxation power from police impaired. impaired.
power.
Transfer of Property Rights
A: Taxes paid become No transfer but only
TAXATION POLICE POWER part of public funds. restraint in its
exercise.
Purpose
Scope
To raise revenue To promote public
All persons, property All persons, property,
purpose through
and excises rights and privileges
regulations
Amount of Exaction

UNIVERSITY OF SANTO TOMAS 4

2021 GOLDEN NOTES
 Taxation Law
Q: Ordinance No. SP-2095 of the Quezon City
government imposes a Socialized Housing
Tax (SHT) equivalent to 0.5% on the assessed
value of land in excess of Php100,000. The
SHT will be used as one of the sources of
funds for urban development and housing
program. Can Quezon City impose such tax?
A: YES. Cities are allowed to exercise such
powers and discharge such functions and
responsibilities as are necessary, appropriate, or
incidental to efficient and effective provision of
the basic services and facilities which include,
among others, programs and projects for low-
cost housing and other mass dwellings. The
collections made accrue to its socialized housing
programs and projects. The tax is not a pure
exercise of taxing power or merely to raise
revenue; it is levied with a regulatory purpose.
The levy is primarily in the exercise of the police
power for the general welfare of the entire city.
(Ferrer, Jr. vs. Bautista, G.R. No. 210551, June 30,
2015)
Q: Galaxia Telecommunications Company
constructed a telecommunications tower for
the purpose of receiving and transmitting
cellular communications. Meanwhile, the
municipal authorities passed an ordinance
entitled “An Ordinance Regulating the
Establishment of Special Projects” which
imposed fees to regulate activities
particularly related to the construction and
maintenance of various structures, certain
construction activities of the identified
special projects, which includes “cell sites” or
telecommunications towers. Is the
imposition of the fee an exercise of the power
of taxation?
A: NO. The designation given by the municipal
authorities does not decide whether the
imposition is properly a license tax or a license
fee. The determining factors are the purpose and
effect of the imposition as may be apparent from
the provisions of the ordinance. If the generating
of revenue is the primary purpose and
regulation is merely incidental, the imposition is
a tax; but if regulation is the primary purpose,
the fact that incidentally revenue is also
obtained does not make the imposition a tax.
(Gerochi v. Department of Energy, 527 SCRA 696,
2007)
The fees in the ordinance are not impositions on
5
the building or structure itself; rather, they are
impositions on the activity subject of
government regulation, such as the installation
and construction of the structures. It is primarily
regulatory in nature, and not primarily revenue-
raising. While the fees may contribute to the
revenues of the municipality, this effect is
merely incidental. Thus, the fees imposed in the
said ordinance are not taxes. (Smart
Communications, Inc., v. Municipality of Malvar,
Batangas, G.R. No. 204429, February 18, 2014)
Q: Revenue laws R.A. 6260 and P.D. 276 were
enacted to establish the Coconut Investment
Fund and Coconut Consumers Stabilization
Fund (coco-levy funds). These funds shall be
owned by the coconut farmers in their
private capacities under the Coconut
Industry Code.
In 2000, E.O. 313 was issued creating the
Coconut Trust Fund and designating the
UCPB as the trustee bank. This aimed to
provide financial assistance to the coconut
farmers, to the coconut industry, and to other
agriculture-related programs. UCPB
suggested that the coco-levy funds are closely
similar to the SSS funds, which have been
declared not to be public funds but
properties of the SSS members and held
merely in trust by the government. Are the
coco-levy funds in the nature of taxes and
thus, can only be used for public purpose?
A: YES. The coco-levy funds were raised
pursuant to law to support a proper
governmental purpose. They were raised with
the use of the police and taxing powers of the
State for the benefit of the coconut industry and
its farmers in general.
Unlike ordinary revenue laws, R.A. 6260 and P.D.
276 did not raise money to boost the
government’s general funds but to provide
means for the rehabilitation and stabilization of
a threatened industry, the coconut industry,
which is so affected with public interest as to be
within the police power of the State. The subject
laws are akin to the imposed sugar liens. It
cannot be likened to SSS Law which collects
premium contributions that are not taxes and
not for public purpose. The SSS members pay
contributions in exchange for insurance
protection and benefits like loans, medical or
health services, and retirement package.
 General Principles
(Pambansang Koalisyon ng mga Samahang
Magsasaka at Manggagawa sa Niyugan v.
Executive Secretary, G.R. Nos. 147036-37, April 10,
2012)
Q: On February 26, 2004, R.A. 9257 was
issued, amending R.A. 7432, which provides
that the 20% senior citizen discount may be
claimed as a tax deduction from gross
income, gross sales, or gross receipts.
Petitioners challenge its constitutionality
and pray that the tax credit treatment of the
20% discount be reinstated. They posit that
the resolution of this case lies in the
determination of whether the legally
mandated 20% senior citizen discount is an
exercise of police power or eminent domain.
If it is police power, no just compensation is
warranted. But if it is eminent domain, the
tax deduction scheme is unconstitutional
because it is not a peso for peso
reimbursement of the 20% discount given to
senior citizens. Thus, it constitutes taking of
private property without payment of just
compensation. Is the tax deduction scheme
an exercise of police power or the power of
eminent domain?
A: POLICE POWER. The 20% discount given to
senior citizens is a valid exercise of police
power. Thus, even if the current law, through its
tax deduction scheme (which abandoned the tax
credit scheme under the previous law), does not
provide for a peso for peso reimbursement of
the 20% discount given by private
establishments, no constitutional infirmity
obtains because, being a valid exercise of police
power, payment of just compensation is not
warranted.
The 20% discount is intended to improve the
welfare of senior citizens who, at their age, are
less likely to be gainfully employed, more prone
to illnesses and other disabilities, and thus, in
need of subsidy in purchasing basic
commodities. The discount serves to honor
senior citizens who presumably spent the
productive years of their lives on contributing to
the development and progress of the nation.
This distinct cultural Filipino practice of
honoring the elderly is an integral part of this
law. As to its nature and effects, the 20%
discount is a regulation affecting the ability of
private establishments to price their products
and services relative to a special class of
individuals, senior citizens, for which the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Constitution affords preferential concern.
(Manila Memorial Park v. DSWD, 2013)
THEORY AND BASIS OF TAXATION
The theories underlying the power of taxation
are:
1. Lifeblood theory;
2. Necessity theory; and
3. Benefits-protection theory (Doctrine of
symbiotic relationship).
LIFEBLOOD THEORY
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 CTA, G.R. No. 106611, July 21, 1994)
The government chiefly relies on taxation to
obtain the means to carry on its operations.
Taxes are essential to its very existence. (CIR v.
Solidbank Corporation, G.R. No. 148191,
November 25, 2003)
Taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need. (CIR v. Pineda, GR No. L-22734,
September 15, 1967)
Manifestations of lifeblood theory:
1. Imposition even in the absence of
constitutional grant.
2. State’s right to select objects and subjects of
taxation.
3. No injunction to enjoin collection of taxes
except for a period of 60 days upon
application to the CTA as an incident of its
appellate jurisdiction.
4. Taxes could not be the subject of
compensation and set-off, subject to certain
exceptions.
5. A valid tax may result in destruction of
property.
Q: Discuss the meaning and the implications
of the statement: “Taxes are the lifeblood of
the government and their prompt and
certain availability is an imperious need”.
(1991 BAR)
A: It expresses the underlying basis of taxation
which is governmental necessity. For indeed,
6
 Taxation Law
without taxation, a government can neither exist
nor endure.
Considering that taxes are the lifeblood of the
government, and in Holmes’ memorable
metaphor, the price we pay for civilization, tax
laws must be faithfully and strictly implemented.
(CIR v. Acosta, G.R. No. 154068, August 3, 2007)
Taxes should be collected promptly. No court
shall have the authority to grant an injunction to
restrain the collection of any internal revenue
tax, fee or charge imposed by the NIRC. (Angeles
City v. Angeles Electric Cooperation, 622 SCRA 43,
2010)
NECESSITY THEORY
The theory behind the exercise of the power to
tax emanates from necessity. Without taxes, the
government cannot fulfill its mandate of
promoting the general welfare and well-being of
the people. (Gerochi v. DOE, G.R. No. 159796, July
17, 2007) 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. (Dimaampao, 2015)
BENEFITS-RECEIVED THEORY
It involves the power of the State to demand and
receive taxes based on the reciprocal duties of
support and protection between the State and its
citizens.
Taxes are what we pay for a civilized society.
Without taxes, the government would be
paralyzed for lack of motive power to activate
and operate it. Hence, despite the natural
reluctance to surrender part of one’s earned
income to the taxing authorities, every person
who is able must contribute his share in the
running of the government. The government, for
its part, is expected to respond in the form of
tangible and intangible benefits intended to
improve the lives of the people and enhance
their material and moral values”. (CIR v. Algue,
G.R. No. L-28896, February 17, 1988)
Special benefits to taxpayers are not required. A
person cannot object to or resist the payment of
7
taxes solely because no personal benefit to him
can be pointed out arising from the tax. (Lorenzo
v. Posadas, 64 Phil. 353) The expenses of
government, having for their object the interest
of all, should be borne by everyone, and the
more man enjoys the advantages of society, the
more he ought to hold. himself honored in
contributing to those expenses (ABAKADA Guro
Party List v. Ermita, G.R. No. 168056, September 1,
2005)
JURISDICTION OVER SUBJECT AND OBJECTS
It is the country, state or sovereign that gives
protection and has the right to demand payment
of taxes with which to finance activities so it
could continue to give protection. Taxation is
territorial because it is only within the confines
of its territory that a country, state or sovereign
may give protection.
PRINCIPLES OF A SOUND TAX SYSTEM
1. Fiscal Adequacy
2. Administrative Feasibility
3. Theoretical Justice
FISCAL ADEQUACY
Revenue raised must be sufficient to meet
government/public expenditures and other
public needs. (Chavez v. Ongpin, G.R. No. 76778,
June 6, 1990) Neither an excess nor a deficiency
of revenue vis-à-vis the needs of government
would be in keeping with the principle. (Vitug,
2006)
THEORETICAL JUSTICE
Must take into consideration the taxpayer’s
ability to pay (Ability to Pay Theory)
Art. VI, Sec. 28(1), 1987 Constitution mandates
that the rule on taxation must be uniform and
equitable and that the State must evolve a
progressive system of taxation.
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, G.R. No. 193007, July 19,
 General Principles
2011)
Q: True or False. A law that allows taxes to be
paid either in cash or in kind is valid.
A: TRUE. There is no law which requires
payment of taxes in cash only. However, a law
allowing payment of taxes in kind, although
valid, may pose problems of valuation. Hence,
will violate the principle of administrative
feasibility.
A violation of the principle of a sound tax
system may or may not invalidate a tax law
A tax law will retain its validity even if it is not in
consonance with the principles of fiscal
adequacy and administrative feasibility because
the Constitution does not expressly require so.
These principles are only designated to make
our tax system sound. However, if a tax law runs
contrary to the principle of theoretical justice,
such violation will render the law
unconstitutional considering that under the
Constitution, the rule of taxation should be
uniform and equitable. (Dimaampao, 2015)
Q: Is the VAT law violative of the
administrative feasibility principle?
A: NO. The VAT law is principally aimed to
rationalize the system of taxes on goods and
services. Thus, simplifying tax administration
and making the system more equitable to enable
the country to attain economic recovery.
(Kapatiran ng Mga Naglilingkod sa Pamahalaan
v. Tan, G.R. No. 81311, June 30, 1988)
Q: Is the imposition of VAT on tollway
operations valid?
A: YES. Administrative feasibility is one of the
canons of a sound tax system. Non-observance of
the canon, however, will not render a tax
imposition invalid “except to the extent that
specific constitutional or statutory limitations
are impaired.” Thus, even if the imposition of
VAT on tollway operations may seem
burdensome to implement, it is not necessarily
invalid unless some aspect of it is shown to
violate any law or the Constitution. (Diaz v.
Secretary of Finance, 654 SCRA 96, G.R. No.
193007, July 19, 2011)
Q: Frank Chavez, as taxpayer, and Realty
Owners Association of the Philippines, Inc.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
(ROAP), alleged that E.O. 73 providing for the
collection of real property taxes as provided
for under Section 21 of P.D. 464 (Real
Property Tax Code) is unconstitutional
because it accelerated the application of the
general revision of assessments to January 1,
1987 thereby increasing real property taxes
by 100% to 400% on improvements, and up
to 100% on land which would necessarily
lead to confiscation of property. Is the
contention of the Chavez and ROAP correct?
A: NO. Without E.O. 73, the basis for collection of
real property taxes will still be the 1978 revision
of property values. Certainly, to continue
collecting real property taxes based on
valuations arrived at several years ago, in
disregard of the increases in the value of real
properties that have occurred since then, is not
in consonance with a sound tax system. Fiscal
adequacy, which is one of the characteristics of a
sound tax system, requires that sources of
revenues must be adequate to meet government
expenditures and their variations. (Chavez v.
Ongpin, 186 SCRA 331, G.R. No. 76778, June 6,
1990)
NOTE: The case above was decided before the
effectivity of the Local Government Code (LGU).
INHERENT AND CONSTITUTIONAL
LIMITATIONS ON TAXATION
Inherent limitations (PITIE)
1. Public Purpose
2. Inherently Legislative
3. Territorial
4. International Comity
5. Exemption of government entities, agencies
and instrumentalities
Constitutional limitations
1. Provisions directly affecting taxation
a. Prohibition against imprisonment for
non-payment of poll tax (Art. III, Sec.
20)
b. Uniformity and equality of taxation
(Art. VI, Sec. 28)
c. Grant by Congress of authority to the
president to impose tariff rates (Art.
VI, Sec. 28)
d. Prohibition against taxation of
religious, charitable entities, and
educational entities (Art. VI, Sec. 28)
8
 Taxation Law
e. Prohibition against taxation of non- revenue is something which is the duty of
stock, non-profit educational the State as a government to provide.
institutions (Art. IX, Sec. 4)
f. Majority vote of Congress for grant of NOTE: The term “public purpose” is not
tax exemption (Art. VI, Sec. 28) defined. It is an elastic concept that can be
g. Prohibition on use of tax levied for hammered to fit modern standards.
special purpose (Art. VI, Sec. 29) Jurisprudence states that “public purpose”
h. President’s veto power on should be given a broad interpretation. It
appropriation, revenue, tariff bills (Art. does not only pertain to those purposes
VI, Sec. 27) which are traditionally viewed as essentially
i. Non-impairment of jurisdiction of the government functions, such as building
Supreme Court (Art. VI, Sec. 30) roads and delivery of basic services, but also
j. Grant of power to the LGUs to create includes those purposes designed to
its own sources of revenue (Art. IX, Sec. promote social justice. Thus, public money
5) may now be used for the relocation of illegal
k. Origin of Revenue and Tariff Bills (Art. settlers, low-cost housing and urban
VI, Sec. 24) agrarian reform. (Planters Products, Inc. v.
l. No appropriation or use of public Fertiphil Corporation, G.R. No. 166006, March
money for religious purposes (Art. VI, 14, 2008)
Sec. 28)
2. Promotion of general welfare test - Whether
2. Provisions indirectly affecting taxation (Art. the proceeds of the tax will directly promote
III, 1987 Constitution) the welfare of the community in equal
a. Due process (Sec. 1) measure. When a tax law is only a mask to
b. Equal protection (Sec. 1) exact funds from the public when its true
c. Religious freedom (Sec. 5) intent is to give undue benefit and
d. Non-impairment of obligations of advantage to a private enterprise, that law
contracts (Sec. 10) will not satisfy the requirement of "public
e. Freedom of the press (Sec. 4) purpose". (Planters Products, Inc. v. Fertiphil
Corporation, G.R. No. 166006, March 14,
The limitations are discussed in detail below. 2008)

INHERENT LIMITATIONS Determination when enacted tax law is for

PUBLIC PURPOSE
The proceeds of tax must be used (a) for the
support of the State; or (b) for some recognized
objective of the government or to directly
promote the welfare of the community.
Tax is considered for public purpose if:
public purpose
Determination lies in the Congress. However,
this will not prevent the court from questioning
the propriety of such statute on the ground that
the law enacted is not for a public purpose; but
once it is settled that the law is for a public
purpose, the court may no longer inquire into
the wisdom, expediency or necessity of such tax
measure.

1. It is for the welfare of the nation and/or for
greater portion of the population;
2. It affects the area as a community rather
than as individuals; and
3. It is designed to support the services of the
government for some of its recognized
objects.
Tests in determining public purpose
NOTE: If the tax measure is not for public
purpose, the act amounts to confiscation of
property.
Principles relative to public purpose
1. Tax revenue must not be used for purely
private purposes or for the exclusive benefit
of private persons.

1. Duty test – Whether the thing to be

furthered by the appropriation of public

9
 General Principles
2. Inequalities resulting from the singling out
of one particular class for taxation or
exemption infringe no constitutional
limitation because the legislature is free to
select the subjects of taxation.
NOTE: Legislature is not required to adopt a
policy of “all or none” for the Congress has
the power to select the object of taxation.
(Lutz v. Araneta, G.R. No. L-7859, 22
December 1955)
3. An individual taxpayer need not derive
direct benefits from the tax.
4. Public purpose is continually expanding.
Areas formerly left to private initiative now
lose their boundaries and may be
undertaken by the government if it is to
meet the increasing social challenges of the
times.
5. The public purpose of the tax law must exist
at the time of its enactment. (Pascual v.
Secretary of Public Works, G.R. No. L-10405,
December 29, 1960)
Q: Are subsequent laws, which convert a
public fund to private properties, valid?
A: NO. Taxes could be exacted only for a public
purpose; they cannot be declared private
properties of individuals although such
individuals fall within a distinct group of
persons. (Pambansang Koalisyon ng mga
Samahang Magsasaka at Manggagagawa sa
Niyugan v. Exec. Sec., G.R. Nos. 147036-37, April
10, 2012)
Q: Lutz assailed the constitutionality of
Sections 2 and 3 of C.A. 567, which provided
for an increase of the existing tax on the
manufacture of sugar. Lutz alleged such tax
as unconstitutional and void for not being
levied for a public purpose but for the aid
and support of the sugar industry
exclusively. Is the tax law increasing the
existing tax on the manufacture of sugar
valid?
A: YES. The protection and promotion of the
sugar industry is a matter of public concern. The
legislature may determine within reasonable
bounds what is necessary for its protection and
expedient for its promotion. Legislative
discretion must be allowed full play, subject only
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
to the test of reasonableness. If objective and
methods alike are constitutionally valid, there is
no reason why the State may not levy taxes to
raise funds for their prosecution and attainment.
Taxation may be made to implement the State’s
police power. (Lutz v. Araneta, G.R. No. L-7859,
December 22, 1955)
Q: Is the tax imposed on the sale, lease or
disposition of videograms for a public
purpose?
A: YES. Such tax is imposed primarily for
answering the need for regulating the video
industry, particularly because of the rampant
film piracy, the flagrant violation of intellectual
property rights, and the proliferation of
pornographic videotapes. While the direct
beneficiary of said imposition is the movie
industry, the citizens are held to be its indirect
beneficiaries. (Tio v. Videogram Regulatory
Board, G.R. No. 75697, June 18, 1987)
INHERENTLY LEGISLATIVE
Only the legislature has the full discretion as to
the persons, property, occupation or business to
be axed provided these are all within the State’s
territorial jurisdiction. It can also fully
determine the amount or rate of tax, the kind of
tax to be imposed and method of collection. (1
Cooley 176-184)
GR: The power to tax is exclusively vested in the
legislative body, being inherent in nature. Hence,
it may not be delegated. (Delegata potestas non
potest delegari)
The powers which Congress is prohibited from
delegating are those which are strictly, or
inherently and exclusively, legislative. Purely
legislative power, which can never be delegated,
has been described as the authority to make a
complete law, complete as to the time when it
shall take effect and as to whom it shall be
applicable; and to determine the expediency of
its enactment. (ABAKADA Guro Party List v. Hon.
Exec. Sec., G.R. No. 168056, September 1, 2005) It
cannot be delegated without infringing upon the
theory of separation of powers. (Pepsi-Cola
Bottling Company of the Phil. v. Mun. of Tanauan,
69 SCRA 460, February 27, 1976)
Non-delegable legislative powers
10
 Taxation Law
1. Selection of subject to be taxed
2. Determination of purposes for which taxes
shall be levied
3. Fixing of the rate/amount of taxation
4. Situs of tax
5. Kind of tax
XPNs:
1. Delegation to Local Government – Refers to
the power of LGUs to create its own sources
of revenue and to levy taxes, fees, and
charges. (Art. X, Sec. 5, 1987 Constitution)
NOTE: Art. X, Sec. 5 of the Constitution does
not change the doctrine that municipal
corporations do not possess inherent
powers of taxation; what it does is to confer
municipal corporations a general power to
levy taxes and otherwise create sources of
revenue and they no longer have to wait for
a statutory grant of these powers and the
power of the legislative authority relative to
the fiscal powers of local governments has
been reduced to the authority to impose
limitations on municipal powers. Thus, in
interpreting statutory provisions on
municipal fiscal powers, doubts will be
resolved in favor of municipal corporations.
(Quezon City et al. v. ABS-CBN Broadcasting
Corporation, G.R. No. 162015, March 6, 2006)
2. Delegation to the President – The authority
of the President to fix tariff rates, import or
export quotas, tonnage and wharfage dues
or other duties and imposts. (Art. VI, Sec.
28(2), 1987 Constitution)
NOTE: When Congress tasks the President
or his/her alter egos to impose safeguard
measures under the delineated conditions,
the President or the alter egos may be
properly deemed as agents of Congress to
perform an act that inherently belongs as a
matter of right to the legislature. It is basic
agency law that the agent may not act
beyond the specifically delegated powers or
disregard the restrictions imposed by the
principal. (Southern Cross Cement
Corporation v. Cement Manufacturers
Association of the Phil., G.R. No. 158540,
August 3, 2005)
3. Delegation to administrative agencies –
When the delegation relates merely to
administrative implementation that may call
11
for some degree of discretionary powers
under sufficient standards expressed by law
(Cervantes v. Auditor General, G.R. No. L-
4043, May 26, 1952) or implied from the
policy and purpose of the act. (Maceda v.
Macaraig, G.R. No. 88291, June 8, 1993)
NOTE: Technically, this does not amount to
a delegation of the power to tax because the
questions which should be determined by
Congress are already answered by Congress
before the tax law leaves Congress.
Q: In order to raise revenue for the repair
and maintenance of the newly constructed
City Hall of Makati, the City Mayor ordered
the collection of P1.00, called “elevator tax”,
every time a person rides any of the high-
tech elevators in the City Hall during the
hours of 8am to 10am, and 4pm to 6pm. Is
the imposition of elevator tax valid? (2003
BAR)
A: NO. The imposition of a tax, fee, or charge, or
the generation of revenue under the Local
Government Code (LGC), shall be exercised by
the Sanggunian of the LGU concerned through an
appropriate ordinance (Sec. 132, LGC). The city
mayor alone could not order the collection of the
tax; as such, the "elevator tax" is an invalid
imposition.
Q: The Municipality of Malolos passed an
ordinance imposing a tax on any sale or
transfer of real property located within the
municipality at a rate of ¼ of 1% of the total
consideration of the transaction. “X” sold a
parcel of land in Malolos which he inherited
from his deceased parents and refused to pay
the aforesaid tax. He instead filed
appropriate case asking that the ordinance
be declared null and void since such a tax can
only be collected by the national
government, as in fact he has paid the BIR the
required capital gains tax.
The Municipality countered that under the
Constitution, each local government is vested
with the power to create its own sources of
revenue and to levy taxes, and it imposed the
subject tax in the exercise of said
Constitution authority. Resolve the
controversy. (1991 BAR)
A: The ordinance is void. The LGC only allows
 General Principles
provinces and cities to impose a tax on the
transfer of ownership of real property (Secs. 135
and 151, LGC). Municipalities are prohibited
from imposing said tax that provinces are
specifically authorized to levy.
While it is true that the Constitution has given
broad powers of taxation to LGUs, this
delegation, however, is subject to such
limitations as may be provided by law. (Art. X,
Sec. 5, 1987 Constitution)
Q: R.A. 9337 (The VAT Reform Act) provides
that the President, upon the
recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate
of value-added tax to twelve percent (12%)
after any of the following conditions have
been satisfied: “(i) value-added tax collection
as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or (ii) national
government deficit as a percentage of GDP of
the previous year exceeds one and one-half
percent (1 ½%)”. Was there an invalid
delegation of legislative power?
A: NO. There is no undue delegation of
legislative power but only of the discretion as to
the execution of the law. This is constitutionally
permissible. Congress did not abdicate its
functions or unduly delegate power when it
describes what job must be done, who must do
it, and what is the scope of his authority. The
Secretary of Finance, in this case, becomes
merely the agent of the legislative department,
to determine and declare the event upon which
its expressed will is to take effect. The President
cannot set aside the findings of the Secretary of
Finance, who is not under the conditions acting
as her alter ego or subordinate. (ABAKADA Guro
Party List v. Ermita, etc., et al., G. R. No. 168056,
September 1, 2005)
Q: The Court promulgated a decision
declaring the phrase “internal revenue”
appearing in Sec. 284 of R.A. 7160 (Local
Government Code) unconstitutional and
deleted the same. The Office of the Solicitor-
General (OSG), however, contends that the
provisions of the LGC are not contrary to Sec.
6, Art. X of the Constitution. Is the OSG’s
contention correct?
A: NO. Sec. 6, Art. X of the 1987 Constitution
textually commands the allocation to the LGUs of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
the just share in the national taxes. Sec. 6
embodies three mandates: (1) the LGUs shall
have a just share in the national taxes; (2) the
just share shall be determined by law; and (3)
the just share shall be automatically released to
the LGUs.
Congress has exceeded its constitutional
boundary by limiting to the NIRTs the base from
which to compute the just share of the LGUs.
Although the power of Congress to make laws is
plenary in nature, congressional lawmaking
remains subject to the limitations stated in the
1987 Constitution. Thus, the phrase “national
internal revenue taxes” engrafted in Sec. 284 is
undoubtedly more restrictive than the term
national taxes written in Sec. 6. (Congressman
Hermilando I. Mandanas, et al. v. Executive
Secretary Paquito N. Ochoa, Jr., et al., G.R. No.
199802/208488, April 10, 2019)
TERRITORIAL
Taxation may be exercised only within the
territorial jurisdiction, the taxing authority (61
Am. Jur. 88). Within the territorial jurisdiction,
the taxing authority may determine the “place of
taxation” or “tax situs.”
GR: The taxing power of a country is limited to
persons and property within and subject to its
jurisdiction.
Reasons:
1. Taxation is an act of sovereignty which
could only be exercised within a
country’s territorial limits.
2. This is based on the theory that taxes
are paid for the protection and services
provided by the taxing authority which
could not be provided outside the
territorial boundaries of the taxing
State.
XPNs:
1. Where tax laws operate outside territorial
jurisdiction –
e.g., Taxation of resident citizens on their
incomes derived abroad.
2. Where tax laws do not operate within the
territorial jurisdiction of the State.
12
 Taxation Law
a. When exempted by treaty obligations;
or
b. When exempted by international
comity.
INTERNATIONAL COMITY
It refers to the respect accorded by nations to
each other because they are sovereign equals.
Thus, the property or income of a foreign state
may not be the subject of taxation by another
State.
This is a limitation founded on reciprocity
designed to maintain harmonious and
productive relationships among the various
state. Under international comity, a state must
recognize the generally-accepted tenets of
international law, among which are the
priniciples of sovereign equality among states
and of their freedom from suit without their
consent, that limits that authority of a
government to effectively impose taxes in a
sovereign state and its instrumentalities, as well
as in its property held and activities undertaken
in that capacity.
International comity as a limitation on the
power to tax
The Constitution expressly adopted the
generally accepted principles of international
law as part of the law of the land. (Art. II, Sec. 2,
1987 Constitution)
Thus, a State must recognize such generally
accepted tenets of international law that limit
the authority of the government to effectively
impose taxes upon a sovereign State and its
instrumentalities.
Reasons:
1. Par in parem non habet imperium. As
between equals, there is no sovereign
(Doctrine of Sovereign Equality).
2. The concept that when a foreign sovereign
enters the territorial jurisdiction of another,
it does not subject itself to the jurisdiction of
the other.
3. The rule of international law that a foreign
government may not be sued without its
consent so that it is useless to impose a tax
which could not be collected.
13
Q: ABCD Corporation (ABCD) is a domestic
corporation with individual and corporate
shareholders who are residents of the United
States. For the 2nd quarter of 1983, these
U.S.-based individual and corporate
stockholders received cash dividends from
the corporation. The corresponding
withholding tax on dividend income --- 30%
for individual and 35% for corporate non-
resident stockholders --- was deducted at
source and remitted to the BIR.
On May 15, 1984, ABCD filed with the
Commissioner of Internal Revenue a formal
claim for refund, alleging that under the RP-
US Tax Treaty, the deduction withheld at
source as tax on dividends earned was fixed
at 25% of said income. Thus, ABCD asserted
that it overpaid the withholding tax due on
the cash dividends given to its non-resident
stockholders in the U.S. The Commissioner
denied the claim.
On January 17, 1985, ABCD filed a petition
with the Court of Tax Appeals (CTA)
reiterating its demand for refund.
Is the contention of ABCD Corporation
correct? Why or why not? (2009 BAR)
A: YES. The provision of a treaty must take
precedence over and above the provisions of the
local taxing statute consonant with the principle
of international comity. Tax treaties are
accepted limitations to the power of taxation.
Thus, the CTA should apply the treaty provision
so that the claim for refund representing the
difference between the amount actually
withheld and paid to the BIR and the amount
due and payable under the treaty should be
granted. (Hawaiian-Philippine Company v. CIR,
CTA Case No. 3887, May 31, 1988)
Principle of Pacta Sunt Servanda in Taxation
Observance of any treaty obligation binding
upon the government of the Philippines is
anchored on the constitutional provision that
the Philippines “adopts the generally accepted
principles of international law as part of the law
of the land. (Art. II, Sec. 2, 1987 Constitution)
Pacta sunt servanda is a fundamental
international law principle that requires
agreeing parties to comply with their treaty
 General Principles
obligations in good faith. Hence, the application
of the provisions of the NIRC must be subject to
the provisions of tax treaties entered into by the
Philippines with foreign countries. (Air Canada
vs. CIR, G.R. No. 169507, January 11, 2016)
EXEMPTION FROM TAXATION OF
GOVERNMENT ENTITIES
GR: The government is exempt from tax.
RATIONALE: Otherwise, we would be “taking
money from one pocket and putting it in
another.” (Board of Assessment Appeals of
Laguna v. CTA, G.R. No. L-18125, May 31, 1963)
XPN: When it chooses to tax itself. Nothing
prevents Congress from decreeing that even
instrumentalities or agencies of the government
performing government functions may be
subject to tax. Where it is done precisely to fulfill
a constitutional mandate and national policy, no
one can doubt its wisdom. (MCIAA v. Marcos, G.R.
No. 120082, September 11, 1996)
Government may tax itself
Since sovereignty is absolute and taxation is an
act of high sovereignty, the State if so minded
could tax itself, including its political
subdivisions. (Maceda v. Macaraig, G.R. No.
88291, June 8, 1993)
National government is exempt from local
taxation
If the taxing authority is the LGU, R.A. 7160
expressly prohibits LGUs from levying tax on the
National Government, its agencies and
instrumentalities and other LGUs.
In Manila International Airport Authority (MIAA)
v. CA, G.R. No. 155650 (2006), MIAA's Airport
Lands and Buildings are exempt from real estate
tax imposed by local governments. Being an
instrumentality of the national government, it is
exempt from local taxation. Also, the real
properties of MIAA are owned by the Republic of
the Philippines and thus exempt from real estate
tax.
Agency of the government
It refers to any of the various units of the
government, including a department, bureau,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
office, instrumentality, or government-owned or
controlled corporation, or a local government or
a distinct unit therein.
1. Taxability of agencies of government
2. Performing governmental functions: tax
exempt unless expressly taxed
3. Performing proprietary functions: subject
to tax unless expressly exempted
Instrumentality of the government
It refers to any agency of national government,
not integrated within the department
framework, vested with special functions or
jurisdiction by law, endowed with some if not all
corporate powers, administering special funds,
and enjoying operational autonomy, usually
through charter.
Taxability of instrumentalities of
government
A government instrumentality falls under
Section 133(o) of the LGC, which states:
“SEC. 133.Common Limitations on the Taxing
Powers of Local Government Units. — Unless
otherwise provided herein, the exercise of the
taxing powers of provinces, cities,
municipalities, and barangays shall not extend to
the levy of the following: xxx
(o) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities and local government units.”
Q: LLL is a government instrumentality
created by Executive Order to be primarily
responsible for integrating and directing all
reclamation projects for the National
Government. It was not organized as a stock
or a non-stock corporation, nor was it
intended to operate commercially and
compete in the private market.
By virtue of its mandate, LLL reclaimed
several portions of the foreshore and
offshore areas of the Manila Bay, some of
which were within the territorial jurisdiction
of Q City. Certificates of title to the reclaimed
properties in Q City were issued in the name
of LLL in 2008. In 2014, Q City issued
Warrants of Levy on said reclaimed
properties of LLL based on the assessment
for delinquent property taxes for the years
14
 Taxation Law
2010 to 2013.
a. Are the reclaimed properties registered
in the name of LLL subject to real
property tax?
b. Will your answer be the same in (a) if
from 2010 to the present time, LLL is
leasing portions of the reclaimed
properties for the establishment and use
of popular fastfood restaurants J Burgers,
G Pizza, and K Chicken? (2015 BAR)
A:
a. The reclaimed properties are not subject to
real property tax because LLL is a
government instrumentality. Under the law,
real property owned by the Republic of the
Philippines is exempt from real property tax
unless the beneficial use thereof has been
granted to a taxable person (Sec. 234, LGC)
When the title of the real property is
transferred to LLL, the Republic remains the
owner of the real property. Thus, such
arrangement does not result in the loss of
the tax exemption. (Republic of the
Philippines, represented by The Philippine
Reclamation Authority v. City of Paranaque,
677 SCRA 246, 2012)
b. NO. As a rule, properties owned by the
Republic of the Philippines are exempt from
real property tax except when beneficial use
thereof has been granted, for consideration,
or otherwise, to a taxable person. When LLL
leased out portions of the reclaimed
properties to taxable entities, such as
popular fast food restaurants, the reclaimed
properties are subject to real property tax.
(Sec. 234(a), LGC; GSIS v. City Treasurer and
City Assessor of the City of Manila, 2009)
Q: Is PEZA a government instrumentality or a
GOCC? Is it exempt from real property
taxation?
A: PEZA is an instrumentality of the government.
It is not integrated within the department
framework but is an agency attached to the
Department of Trade and Industry. PEZA is also
vested with special functions or jurisdiction by
law. Congress created the PEZA to operate,
administer, manage, and develop special
economic zones in the Philippines. Although a
body corporate vested with some corporate
powers, the PEZA is not a GOCC that is taxable
15
for real property taxes because it was not
organized as a stock or non-stock corporation.
Being an instrumentality of the national
government, it cannot be taxed by LGUs. (PEZA v.
Lapu-lapu City, 742 SCRA 524)
Q: The Philippine Fisheries Development
Authority (PFDA) took over the management
and operation of the Lucena Fishing Port
Complex (LFPC) which is one of the fishery
infrastructure projects undertaken by the
National Government under the Nationwide
Fish Port-Package built on a reclaimed land.
The City Government of Lucena then
demanded payment of realty taxes on the
LFPC property. Is PFDA liable for the real
property tax assessed on the Lucena Fishing
Port Complex?
A: NO. The exercise of the taxing power of LGUs
is subject to the limitations enumerated in Sec.
133 of the LGC. Under Sec. 133(o) of the LGC,
LGUs have no power to tax instrumentalities of
the national government like the PFDA. Thus,
PFDA is not liable to pay real property tax except
those portions which are leased to private
persons or entities. Also, as property of public
dominion, the Lucena Fishing Port Complex is
owned by the Republic of the Philippines and
thus exempt from real estate tax. (Philippine
Fisheries Development Authority v. Central Board
of Assessment Appeals, G.R. No. 178030, December
15, 2010)
Government-owned and controlled
corporation (GOCC)
It refers to any agency:
1. organized as a stock or non-stock
corporation;
2. vested with functions relating to public
needs whether governmental or proprietary
in nature; and
3. owned by the Government directly or
through its instrumentalities either wholly,
or, where applicable as in the case of stock
corporations, to the extent of at least fifty-
one (51) percent of its capital stock.
NOTE: Government instrumentality may include
a GOCC and there may be “instrumentality” that
does not qualify as GOCC.
Taxability of GOCCs
 General Principles
GOCCs perform proprietary functions. Hence,
they are subject to taxation.
However, certain corporations have been
granted exemption under Section 27(c) of R.A.
8424 as amended by R.A. 9337, which took effect
on July 1, 2005, to wit:
1. Government Service Insurance System
(GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation
(PHIC)
4. Local Water Districts (LWDs)
NOTE: Philippine Charity Sweepstakes
Office (PCSO) were removed by TRAIN and
replaced by LWDs.
CONSTITUTIONAL LIMITATIONS
Taxation, being inherent in sovereignty, need
not be clothed with any constitutional authority
for it to be exercised by the sovereign state.
Instead, constitutional provisions are meant and
intended more to regulate and define, rather
than to grant, the power emanating therefrom.
CONSTITUTIONAL LIMITATIONS:
PROVISIONS DIRECTLY AFFECTING
TAXATION
PROHIBITION AGAINST IMPRISONMENT
FOR NON-PAYMENT OF POLL TAX
BASIS: No person shall be imprisoned for debt
or non-payment of a poll tax. (Art. III, Sec. 20)
A poll tax is one levied on persons who are
residents within the territory of the taxing
authority without regard to their property,
business, or occupation. Thus, only the basic
community tax under the LGC could qualify as a
poll tax, and the non-payment of other
(additional) taxes imposed, not being in the
nature of poll taxes, may validly be subjected by
law to imprisonment. (Vitug, 2006)
In other words, while a person may not be
imprisoned for non-payment of a cedula or poll
tax, he may be imprisoned for non-payment of
other kinds of taxes where the law so expressly
provides. (Dimaampao, 2015)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
UNIFORMITY AND EQUALITY OF TAXATION
BASIS: The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation. (Art. VI, Sec.
28(1))
Q: Explain the following concepts in taxation:
a. Uniformity;
b. Equitability; and
c. Equality.
A:
a. Uniformity – It means that all taxable
articles or kinds of property of the same
class shall be taxed at the same rate.
A tax is considered uniform when it
operates with the same force and effect in
every place where the subject is found.
Different articles may be taxed at different
amounts provided that the rate is uniform
on the same class everywhere, with all
people at all times.
b. Equitability – Taxation is said to be
equitable when its burden falls on those
better able to pay.
c. Equality – It is accomplished when the
burden of the tax falls equally and
impartially upon all the persons and
property subject to it.
Q: Explain the requirement of uniformity as
a limitation in the imposition and/or
collection of taxes. (1998 BAR)
A: Uniformity in the imposition and/or
collection of taxes means that all taxable
articles, or kinds of property of the same class
shall be taxed at the same rate. The requirement
of uniformity is complied with when the tax
operates with the same force and effect in every
place where the subject of it is found (Churchill
& Tait v. Concepcion, 34 Phil. 969). Different
articles may be taxed at different amounts
provided that the rate is uniform on the same
class everywhere with all people at all times.
Accordingly, singling out one particular class for
taxation purposes does not infringe the
requirement of uniformity.
Q: A law was passed exempting doctors and
lawyers from the operation of the value-
16
 Taxation Law
added tax. Other professionals complained
and filed a suit questioning the law for being
discriminatory and violative of the equal
protection clause of the Constitution since
complainants were not given the same
exemption. Is the suit meritorious or not?
Reason briefly. (2004 BAR)
A: YES, the suit is meritorious. The VAT is
designed for economic efficiency. Hence, should
be neutral to those who belong to the same
class. Professionals are a class of taxpayers by
themselves who, in compliance with the rule of
equality of taxation, must be treated alike for tax
purposes. Exempting lawyers and doctors from
a burden to which other professionals are
subjected will make the law discriminatory and
violative of the equal protection clause of the
Constitution. While singling out a class for
taxation purposes will not infringe upon this
constitutional limitation (Shell v. Vano, 94 Phil.
389 (1954)), singling out a taxpayer from a class
will no doubt transgress the constitutional
limitation [Ormoc Sugar Co. Inc., v. Treasurer of
Ormoc City, 22 SCRA 603 (1968)]. Treating
doctors and lawyers as a different class of
professionals will not comply with the
requirements of a reasonable, hence valid
classification, because the classification is not
based upon substantial distinction which makes
real differences. The classification does not
comply with the requirement that it should be
germane to the purpose of the law either. (Pepsi-
Cola Bottling Co., Inc. v. City of Butuan, 24 SCRA
789 (1968))
Q: Heeding the pronouncement of the
President that the worsening traffic
condition in the metropolis was a sign of
economic progress, the Congress enacted
R.A. 10701, also known as An Act Imposing
a Transport Tax on the Purchase of Private
Vehicles.
Under R.A. 10701, buyers of private
vehicles are required to pay a transport
tax equivalent to 5% of the total purchase
price per vehicle purchased. R.A. 10701
provides that the Land Transportation
Office (LTO) shall not accept for
registration any new vehicles without
proof of payment of the 5% transport tax.
R.A. 10701 further provide that existing
owners of private vehicles shall be
required to pay a tax equivalent to 5% of
17
the current fair market value of every
vehicle registered with the LTO. However,
R.A. 10701 exempts owners of public
utility vehicles and the Government from
the coverage of the 5% transport tax.
A group of private vehicle owners sue on
the ground that the law is unconstitutional
for contravening the Equal Protection
Clause of the Constitution.
Rule on the constitutionality and validity of
R.A. 10701. (2017 BAR)
A: R.A. 10701 is valid and constitutional. A levy
of tax is not unconstitutional because it is not
intrinsically equal and uniform in its operation.
The uniformity rule does not prohibit
classification for purposes of taxation. (British
American Tobacco v. Jose Isidro N. Camacho, G.R.
No. 163583, April 15, 2009)
Uniformity in taxation, like the kindred concept
of equal protection, merely requires that all
subjects or objects of taxation, similarly situated,
are to be treated alike both in privileges and
liabilities. Uniformity does not forfend
classification as long as: (1) the standards that
are used therefor are substantial and not
arbitrary; (2) the categorization is germane to
achieve the legislative purpose; (3) the law
applies, all things being equal, to both present
and future conditions; and (4) the classification
applies equally well to all those belonging to the
same class. (Rufino R. Tan v. Ramon R. Del
Rosario, Jr., G.R. Nos. 109289, October 3, 1994, 237
SCRA 324) All of the foregoing requirements of a
valid classification having been met and those
which are singled out are a class in themselves,
there is no violation of the “Equal Protection
Clause” of the Constitution.
Q: Does the 20% Sales Discount for Senior
Citizens and Persons with Disabilities
violates the constitutional right of equal
protection clause?
A: NO. The equal protection clause is not
infringed by legislation which applies only to
those falling within a specified class. If the
groupings are characterized by substantial
distinctions that make real differences, one class
may be treated and regulated differently from
another. (Southern Luzon Drug Corporation v.
DSWD, G.R. No. 199669, April 25, 2017)
 General Principles
Progressive taxation
Taxation is progressive when tax rate increases
as the income of the taxpayer increases. It is
based on the principle that those who are able to
pay more should shoulder the bigger portion of
the tax burden.
Q: Does the Constitution prohibit regressive
taxes?
A: NO, the Constitution does not really prohibit
the imposition of regressive taxes. What it
simply provides is that Congress shall evolve a
progressive system of taxation.
Meaning of “evolve” as used in the
Constitution
The constitutional provision has been
interpreted to mean simply that "direct taxes
are to be preferred and as much as possible,
indirect taxes should be minimized.” The
mandate of Congress is not to prescribe but to
evolve a progressive tax system. This is a mere
directive upon Congress, not a justiciable right
or a legally enforceable one. We cannot avoid
regressive taxes but only minimize them.
(Tolentino et.al. v. Secretary of Finance, G.R. No.
115455, Oct. 30, 1995)
GRANT BY CONGRESS OF AUTHORITY TO
THE PRESIDENT TO IMPOSE TARIFF RATES
BASIS: The Congress may, by law, authorize the
President to fix within specified limits and
subject to such limitations and restrictions at 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. VI, Sec. 28 (2))
Flexible tariff clause
This clause provides the authority given to the
President to adjust tariff rates under Sec. 1608
of R.A. 10863, known as Customs Modernization
and Tariff Act (CMTA) of 2016. This authority,
however, is subject to limitations and
restrictions indicated within the law itself.
Requisites on the authority of the President
in imposing tax
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
1. Delegated by Congress through a law – The
authorization granted to the President must
be embodied in a law. Hence, the
justification cannot be supplied simply by
inherent executive powers.
It is Congress which authorizes the
President to impose tariff rates, import and
export quotas, tonnage and wharfage dues,
and other duties or imposts. Thus, the
authority cannot come from the Finance
Department, the National Economic
Development Authority, or the World Trade
Organization, no matter how insistent or
persistent these bodies may be. (Southern
Cross Cement Corporation v. Cement
Manufacturers Association of the Phil., G.R.
No. 158540, August 3, 2005)
2. Subject to Congressional limits and
restrictions – The authorization to the
President can be exercised only within the
specified limits set in the law and is further
subject to limitations and restrictions which
Congress may impose. Consequently, if
Congress specifies that the tariff rates
should not exceed a given amount, the
President cannot impose a tariff rate that
exceeds such amount.
Assuming there is a conflict between the
specific limitation in the Constitution and
the general executive power of control and
supervision, the former prevails in the
specific instance of safeguard measures such
as tariffs and imposts and would thus serve
to qualify the general grant to the President
of the power to exercise control and
supervision over his/her subalterns.
(Southern Cross Cement Corporation v.
Cement Manufacturers Association of the
Phil., G.R. No. 158540, August 3, 2005)
3. Within the framework of national
development program.
PROHIBITION AGAINST TAXATION OF
RELIGIOUS, CHARITABLE ENTITIES, AND
EDUCATIONAL ENTITIES
BASIS: 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,
18
 Taxation Law
or educational purposes shall be exempt from
taxation. (Art. IV, Sec. 28 (3))
Q: What is the coverage of tax exemption?
A: It covers real property taxes only.
Accordingly, a conveyance of such exempt
property can be subject to transfer taxes.
Properties exempt under the Constitution
from the payment of property taxes
1. Charitable institutions;
2. Churches and parsonages or convents
appurtenant thereto;
3. Mosques;
4. Non-profit cemeteries; and
5. 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))
Meaning of “charitable”
It is not restricted to relief of the poor or sick.
The test whether an enterprise is charitable or
not is whether it exists to carry out a purpose
recognized in law as charitable or whether it is
maintained for gain, profit, or private advantage.
(Lung Center of the Philippines v. Quezon City, G.R.
No. 144104, June 29, 2004)
Also, an organization must meet the substantive
test of charity. Charity is essentially a gift to an
indefinite number of persons which lessens the
burden of government. In other words,
charitable institutions provide for free goods
and services to the public which would
otherwise fall on the shoulders of government.
(CIR v. St. Luke’s Medical Center, Inc., G.R. No.
195909 September 26, 2012)
Meaning of “actual, direct and exclusive use
of the property for religious, charitable, and
educational purposes”
It is the direct, immediate, and actual application
of the property itself to the purposes for which
the charitable institution is organized. It is not
the use of the income from the real property that
is determinative of whether the property is used
for tax-exempt purposes.
NOTE: In the case of Lung Center of the
19
Philippines v. City Assessor of Quezon City (433
SCRA 119), the Court ruled that under the 1987
Constitution, for “lands, buildings, and
improvements” of the charitable institution to be
considered exempt, the same should not only be
“exclusively” used for charitable purposes; it is
required that such property be used “actually”
and “directly” for such purposes.
“Exclusive” is defined as possessed and enjoyed
to the exclusion of others; debarred from
participation or enjoyment; and “exclusively” is
defined, “in a manner to exclude; as enjoying a
privilege exclusively.” If real property is used for
one or more commercial purposes, it is not
exclusively used for the exempted purposes but
is subject to taxation.
The words “dominant use” or “principal use”
cannot be substituted for the words “used
exclusively” without doing violence to the
Constitution and the law.
In sum, the Court ruled that the portions of the
land leased to private entities as well as those
parts of the hospital leased to private individuals
are not exempt from taxes.
Rules on taxation of non-stock corporations
for charitable and religious purposes
1. For purposes of income taxation
a. The income of non-stock corporations
operating exclusively for charitable and
religious purposes, no part of which
inures to the benefit of any member,
organizer, officer, or any specific
person, shall be exempt from tax.
However, the income of whatever kind
and nature from any of their properties,
real or personal or from any of their
activities for profit regardless of the
disposition made of such income shall
be subject to tax. (Sec. 30 (E) and last
par., NIRC)
NOTE: An organization may be
considered as non-profit if it does not
distribute any part of its income to
stockholders or members. However,
despite its being a tax-exempt
institution, any income such institution
earns from activities conducted for
 General Principles
profit is taxable, as expressly provided
in the last paragraph of Sec. 30. (CIR v.
St. Luke’s Medical Center, Inc., G.R. No.
195909, September 26, 2012)
Refer to “Income Taxation – provision
Corporations exempt from Income Tax”
for further discussion.
b. Donations received by religious,
charitable, and educational institutions
are considered as income but not
taxable income as they are items of
exclusion. (Sec. 32(B)(3), NIRC)
On the part of the donor, such
donations are deductible expense
provided that no part of the income of
which inures to the benefit of any
private stockholder or individual in an
amount not exceeding 10% in case of
individual, and 5% in case of a
corporation, of the taxpayer’s taxable
income derived from trade or business
or profession. (Sec. 34 (H), NIRC)
Refer to “Gross Income – Exclusions” for
further discussion.
2. For purposes of estate tax – Donations in
favor of charitable institutions are
generally not subject to tax. Provided,
however, that not more than 30% of the
said bequests, devises, legacies, or transfers
shall be used by such institutions for
administration purposes. (Sec. 87(D), NIRC)
Refer to “Estate Tax – Exclusions from Gross
Estate, and exemptions of certain
acquisitions and transmissions” for further
discussion.
3. For purposes of donor’s tax – Donations in
favor of religious and charitable institutions
are generally not subject to tax provided,
however, that not more than 30% of the
said bequests, devises, legacies, or transfers
shall be used by such institutions for
administration purposes. (Sec. 101, NIRC)
Refer to “Donor’s Estate – Exemption of
certain gifts” for further discussion.
SUMMARY OF RULES ON EXEMPTION OF
PROPERTIES ACTUALLY, DIRECTLY, AND
EXCLUSIVELY USED FOR RELIGIOUS,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
EDUCATIONAL AND CHARITABLE PURPOSES
Covers real property tax only.
Coverage of The income of whatever kind
constitutional and nature from any of their
properties, real or personal,
or from any of their activities
for profit regardless of the
disposition made of such
income shall be subject to tax.
Requisite to Property must be “actually,
avail of this directly, and exclusively
exemption used” by religious, charitable,
and educational institutions.
Test for the Use of the property for such
grant of this purposes, not the ownership
exemption thereof.
NOTE: Under the 1987 Constitution, the
doctrine of exemption by incidental purpose is
no longer applicable. Such doctrine is only
applicable to cases where the cause of action
arose under the 1935 Constitution. Under the
1987 Constitution, it must be proved that the
properties are ACTUALLY, DIRECTLY, and
EXCLUSIVELY used for the purpose of
institution for the exemption to be granted.
(Sababan, 2008)
PROHIBITION AGAINST TAXATION OF NON-
STOCK, NON-PROFIT EDUCATIONAL
INSTITUTIONS
BASIS: 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.
(Sec 4 (3) and (4), Art XIV)
Actually, directly, and exclusively used
The use of the term “actually, directly, and
exclusively used” referring to religious
institutions cannot be applied to non-stock, non-
profit educational institutions. The provision of
Article VI, Section 28(3) applies to religious,
charitable, and educational institutions – while
Article XIV applies solely to non-stock, non-
profit educational institutions.
20
 Taxation Law
ART. XIV, ART. VI, SEC.
SEC. 4(3) 28(3)
Grantee Non-stock, Religious,
non-profit educational,
educational charitable
institution
Tax All taxes and Real Property
Exemptions duties. Tax
Granted
Hence, in this case, we should apply its literal
interpretation – “solely” – in consonance with
the principle of strictissimi juris. The word
“exclusively” indicates that the provision is
mandatory. (J. Dimaampao, 2015, citing McGee v.
Republic, 94 Phil. 821)
The last paragraph of Section 30 of the Tax Code
is without force and effect with respect to non-
stock, nonprofit educational institutions.
Provided, that the non-stock, nonprofit
educational institutions prove that its assets and
revenues are used actually, directly, and
exclusively for educational purposes. Moreover,
the tax-exemption constitutionally granted to
nonstock, nonprofit educational institutions, is
not subject to limitations imposed by law.
The tax exemption granted by the Constitution
to non-stock, nonprofit educational institutions
is conditioned only on the actual, direct, and
exclusive use of their assets, revenues, and
income for educational purposes. A plain
reading of the Constitution would show that
Article XIV, Section 4(3) does not require that
the revenues and income must have also been
sourced from educational activities or activities
related to the purposes of an educational
institution. The phrase all revenues is
unqualified by any reference to the source of
revenues.
When a non-stock, nonprofit educational
institution proves that it uses its revenues
actually, directly, and exclusively for
educational purposes, it shall be exempted from
income tax, value-added tax, and local business
tax. 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
real property tax. (CIR vs. De La Salle University,
Inc., G.R. No. 196596, November 9, 2016)
Refer to “Income tax – Proprietary educational
institutions and non-profit hospitals” for further
21
discussion.
Q: UP is the registered owner of a parcel of
land. UP entered into a contract of lease with
ALI (Ayala Land Inc.) over the subject land on
27 October 2006. The leased property is now
known as the UP-Ayala Technohub. In a
Notice of Assessment addressed to ALI dated
23 August 2012, ALI was informed that the
subject property has been "reclassified and
assessed for taxation purposes with an
assessed value of P499,500,000.00 effective
2009." For the first time and without a prior
Notice of Assessment, a Statement of
Delinquency dated 27 May 2014 addressed
to UP was issued by the City Treasurer
demanding the payment of real property tax
on the subject property amounting to
P106,992,990.00 for the years 2009 to 2013
and the first quarter of 2014. Is UP liable for
real property tax imposed on the subject
property leased by ALI?
A: NO. The enactment and passage of R.A. 9500
in 2008 superseded Sections 205(d) and 234(a)
of the Local Government Code. Before the
passage of Republic Act No. 9500, there was a
need to determine who had beneficial use of
UP's property before the property may be
subjected to real property tax. After the passage
of R.A. 9500, there is a need to determine
whether UP's property is used for educational
purposes or support thereof before the property
may be subjected to real property tax.
Section 22 of R.A. 9500 allows UP to lease and
develop its land subject to certain conditions.
The Contract of Lease between UP and ALI
shows that there is an intent to develop "a
prestigious and dynamic science and technology
park, where research and technology-based
collaborative projects between technology and
the academe thrive, thereby becoming a catalyst
for the development of the information
technology and information technology-enabled
service". The development of the subject land is
clearly for an educational purpose, or at the very
least, in support of an educational purpose.
(University of The Philippines v. City Treasurer of
Quezon City, G.R. 214044, June 19, 2019)
MAJORITY VOTE OF CONGRESS FOR GRANT
OF TAX EXEMPTION
BASIS: No law granting any tax exemption shall
 General Principles
be passed without the concurrence of a majority
of all the members of Congress. (Section 28 (4),
Art. VI)
The inherent power of the State to impose taxes
carries with it the power to grant tax
exemptions.
Granting of exemptions
Exemptions may be created:
1. By the Constitution; or
2. By statute, subject to limitations as the
Constitution may provide.
Required vote for grant of tax exemption
In granting tax exemptions, the absolute
majority vote of all the members of Congress is
required. It means at least 50% plus 1 of all the
members voting separately. (Art. VI, Sec. 28(4),
1987 Constitution)
Tax amnesties, tax condonations, and tax
refunds are in the nature of tax exemptions.
Such being the case, a law granting tax
amnesties, tax condonations, and tax refunds
requires the vote of an absolute majority of the
members of the Congress.
Required vote for withdrawal of such grant
of tax exemption
A relative majority or plurality of votes is
sufficient, that is, majority of a quorum.
PROHIBITION ON USE OF TAX LEVIED FOR
SPECIAL PURPOSE
BASIS: 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. (Sec. 29(3), Art. VI)
NOTE: In Gaston v. Republic Planters Bank, 158
SCRA 626, the Court ruled that the “stabilization
fees” collected by the State for the promotion of
the sugar industry were in the nature of taxes
and no implied trust was created for the benefit
of sugar industries. Thus, the revenues derived
therefrom are to be treated as a special fund to
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
be administered for the purpose intended. No
part thereof may be used for the exclusive
benefit of any private person or entity but for
the benefit of the entire sugar industry. Once the
purpose is achieved, the balance, if any
remaining, is to be transferred to the general
funds of the government. (Vitug, 2006)
PRESIDENT’S VETO POWER ON
APPROPRIATION, REVENUE, TARIFF BILLS
(ART BILL)
BASIS: 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 which he
does not object. (Art. VI, Sec. 27(2))
The item or items vetoed shall be returned to the
Lower House of Congress together with the
objections of the President. If after consideration
2/3 of all the members of such House shall agree
to pass the bill, it shall be sent, together with the
objection, to the other House by which it shall
likewise be considered, and if approved by 2/3
of all the members of that House, it shall become
a law. (J. Dimaampao, 2015)
NOTE: The President can only veto particular
item or items for ART Bills. The President
cannot veto particular item or items with regard
to non-ART Bills; he can only veto them as a
whole.
NON-IMPAIRMENT OF JURISDICTION
OF THE SUPREME COURT
BASIS: The Supreme Court shall have the power
to review, revise, reverse, modify, or affirm on
appeal on certiorari as the laws 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(2)(b))
NOTE: These jurisdictions are concurrent with
the Regional Trial Court (RTC). Thus, the
petition should generally be filed with the RTC
following the hierarchy of courts. However,
questions on tax laws are usually filed directly
with the Supreme Court as these are impressed
with paramount public interest. It is also
provided under Art. VI, Sec. 30 of the
Constitution that “no law shall be passed
22
 Taxation Law
increasing the appellate jurisdiction of the
Supreme Court without its advice and
concurrence.”
The courts cannot inquire into the wisdom of a
taxing act, EXCEPT when there is an allegation
of violation of constitutional limitations or
restrictions.
GRANT OF POWER TO THE LGUS TO CREATE
ITS OWN SOURCES OF REVENUE
BASIS: Each LGU 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)
Justification in the delegation of legislative
taxing power to local governments
Delegation of legislative taxing 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.
Exception to non-delegation of legislative
powers
The general principle against the delegation of
legislative powers as a consequence of the
principle of separation of powers is subject to
one well-established exception: legislative
powers may be delegated to LGUs. Included in
this grant of legislative power is the grant of
local taxing power.
Q: May Congress, under the 1987
Constitution, abolish the power to tax of
local governments? (2003 BAR)
A: NO. The Congress cannot abolish the local
government’s power to tax as it cannot abrogate
what is expressly granted by the fundamental
law. The only authority conferred to Congress is
to provide the guidelines and limitations on the
local government’s exercise of the power to tax.
The local government’s power to tax is the
23
most effective instrument to raise the
needed revenues
The right of LGUs to collect taxes due must
always be upheld to avoid severe tax erosion.
This consideration is consistent with the State
policy to guarantee the autonomy of the local
government and the objective of the LGC that
they enjoy genuine and meaningful local
autonomy to empower them to achieve their
fullest development as self-reliant communities
and make them effective partners in the
attainment of national goals. (Dimaampao,
2015)
ORIGIN OF REVENUE AND TARIFF BILLS
BASIS: All appropriation, revenue or tariff bills,
bills authorizing increase of the public debt, bills
of local application, and private bills shall
originate exclusively in the House of
Representatives, but the Senate may propose or
concur with amendments. (Art VI, Sec. 24)
What is required to originate in the House of
Representatives is not the law but the revenue
bill which must “originate exclusively” in the
lower house. The bill may undergo such
extensive changes that the result may be a
rewriting of the whole. The Senate may not only
concur with amendments but also propose
amendments. To deny the Senate's power not
only to “concur with amendments” but also to
“propose amendments” would be to violate the
coequality of legislative power of the two houses
of Congress and in fact make the House superior
to the Senate. (Tolentino v. Secretary of Finance,
G.R. No. 115873, Aug. 25, 1994)
Q: Why must appropriation, revenue, or
tariff bills originate from the Congress?
A: On the theory that, elected as they are from
the districts, the members of the House of
Representatives can be expected to be more
sensitive to the local needs and problems.
Q: R.A. 9337 is a consolidation of three
legislative bills namely, H.B. Nos. 3555 and
3705, and S.B. No. 1950. Because of the
conflicting provisions of the proposed bills,
the Senate agreed to the request of the House
of Representatives for a committee
conference. The Conference Committee on
the Disagreeing Provisions of House Bill
 General Principles
recommended the approval of its report,
which the Senate and the House of the
Representatives did.
1. Does R.A. 9337 violate Art. VI, Sec. 24 of
the Constitution on exclusive origination
of revenue bills?
2. Does R.A. 9337 violate Art. VI, Sec. 26(2)
of the Constitution on the “No-
Amendment Rule”?
A:
1. NO. It was H.B. Nos. 3555 and 3705 that
initiated the move for amending provisions
of the NIRC dealing mainly with the VAT.
Upon transmittal of said House bills to the
Senate, the Senate came out with S.B. No.
1950 proposing amendments not only to
NIRC provisions on the VAT but also
amendments to NIRC provisions on other
kinds of taxes.
Since there is no question that the revenue
bill exclusively originated in the House of
Representatives, the Senate was acting
within its Constitutional power to introduce
amendments to the House bill when it
included provisions in S.B. No. 1950
amending corporate income taxes,
percentage, excise and franchise taxes.
Verily, Art. VI, Sec. 24 of the Constitution
does not contain any prohibition or
limitation on the extent of the amendments
that may be introduced by the Senate to the
House revenue bill. The Senate can propose
amendments and in fact, the amendments
made are germane to the purpose of the
house bills, which is to raise revenues for
the government. The sections introduced by
the Senate are germane to the subject
matter and purposes of the house bills,
which is to supplement our country’s fiscal
deficit, among others. Thus, the Senate acted
within its power to propose those
amendments.
2. NO. The “no-amendment rule” refers only to
the procedure to be followed by each house
of Congress with regard to bills initiated in
each of said respective houses, before said
bill is transmitted to the other house for its
concurrence or amendment. Verily, to
construe said provision in a way as to
proscribe any further changes to a bill after
one house has voted on it would lead to
absurdity as this would mean that the other
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
house of Congress would be deprived of its
Constitutional power to amend or introduce
changes to said bill. Thus, Art. VI, Sec. 26 (2)
of the Constitution cannot be taken to mean
that the introduction by the Bicameral
Conference Committee of amendments and
modifications to disagreeing provisions in
bills that have been acted upon by both
houses of Congress is prohibited. (ABAKADA
Guro v. Executive Secretary, G.R. No. 168056,
168207, 168461, 168463 and 168730,
September 1, 2005)
NO APPROPRIATION OR USE OF PUBLIC
MONEY FOR RELIGIOUS PURPOSES
BASIS: 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))
This is in consonance with the inviolable
principle of separation of the Church and State.
CONSTITUTIONAL LIMITATIONS:
PROVISIONS INDIRECTLY AFFECTING
TAXATION
DUE PROCESS
BASIS: No person shall be deprived of life,
liberty, or property without due process of law x
x x. (Art. III, Sec. 1)
REQUIREMENTS OF
DUE PROCESS IN TAXATION
Substantive Due Process
1. Tax must be for public purpose; and
2. It must be imposed within territorial
jurisdiction.
Procedural Due Process
No arbitrariness or oppression either in the
assessment or collection.
24
 Taxation Law
Q: When is deprivation of life, liberty, and
property by the government done in
compliance with due process?
A: If the act is done:
1. Under authority of a law that is valid or the
Constitution itself (substantive due process);
and
2. After compliance with fair and reasonable
methods of procedure prescribed by law
(procedural due process).
Q: When may violation of due process be
invoked by the taxpayer?
A: The due process clause may be invoked
where a taxing statute is so arbitrary that it
finds no support in the Constitution, as where it
can be shown to amount to a confiscation of
property. (Reyes v. Almanzor, G.R. Nos. L-49839-
46 April 26, 1991)
While it is true that the Philippines as a State is
not obliged to admit aliens within its territory,
once an alien is admitted, he cannot be deprived
of life without due process of law. This
guarantee includes the means of livelihood. The
shelter of protection under the due process and
equal protection clause is given to all persons,
both aliens and citizens. (Villegas v. Hiu Chiong
Tsai Pao Ho, G.R. No. L-29646, Nov. 10, 1978)
Illustrative cases of violations of the due
process clause
1. Tax amounting to confiscation of property
2. Subject of confiscation is outside the
jurisdiction of the taxing authority
3. Law is imposed for a purpose other than a
public purpose
4. Law which is applied retroactively imposes
unjust and oppressive taxes
5. The law is in violation of inherent
limitations
EQUAL PROTECTION
BASIS: No person shall be denied the equal
protection of the laws. (Art. III, Sec. 1)
Definition
It means that all persons subjected to such
legislation shall be treated alike, under like
circumstances and conditions, both in the
25
privileges conferred and in the liabilities
imposed. (1 Cooley 824-825; Sison Jr. v. Ancheta,
G.R. No. 59431, July 25, 1984)
The power to select subjects of taxation and
apportion the public burden among them
includes the power to make classifications. The
inequalities which result in the singling out of
one particular class for taxation or exemption
infringe no Constitutional limitation. (Lutz v.
Araneta, G.R. No. L-7859, Dec. 22, 1955)
Requisites for a valid classification (PEGS)
1. Apply both to present and future
conditions
2. Apply equally to all members of the same
class
3. Must be germane to the purposes of the
law
4. Must be based on substantial distinction
Q: Is Revenue Memorandum Circular No. 47-
91 classifying copra as an agricultural non-
food product discriminatory and violative of
the equal protection clause?
A: NO. It is not violative and not discriminatory
because there is a material or substantial
difference between coconut farmers and copra
producers, on one hand, and copra traders and
dealers, on the other. The former produce and
sell copra, the latter merely sells copra. The
Constitution does not forbid the differential
treatment of persons, so long as there is
reasonable basis for classifying them differently.
(Misamis Oriental Association of Coco Traders
Inc. v. Secretary of Finance, G.R. No. 108524,
November 10, 1994)
Principle of Equality
It admits of classification or distinctions as long
as they are based upon real and substantial
differences between the persons, property, or
privileges and those not taxed must bear some
reasonable relation to the object or purpose of
legislation or to some permissible government
policy or legitimate end of the government.
Q: What is the “rational basis” test? Explain
briefly. (2010 BAR)
A: The rational basis test is applied to gauge the
constitutionality of an assailed law in the face of
 General Principles
an equal protection challenge. It has been held
that “in areas of social and economic policy, a
statutory classification that neither proceeds
along suspect lines nor infringes constitutional
rights must be upheld against equal protection
challenge if there is any reasonably conceivable
state of facts that could provide a rational basis
for the classification.” Under the rational basis
test, it is sufficient that the legislative
classification is rationally related to achieving
some legitimate State interest. (British American
Tobacco v. Camacho and Parayno, GR No.
163583, April 15, 2009)
Q: RC is a law-abiding citizen who pays his
real estate taxes promptly. Due to a series of
typhoons and adverse economic conditions,
an ordinance is passed by MM City granting a
50% discount for payment of unpaid real
estate taxes for the preceding year and the
condonation of all penalties on fines
resulting from the late payment. Arguing
that the ordinance rewards delinquent
taxpayers and discriminates against prompt
ones, RC demands that he be refunded an
amount equivalent to ½ of the real taxes he
paid. The municipal attorney rendered an
opinion that RC cannot be reimbursed
because the ordinance did not provide for
such reimbursements. RC files suit to declare
the ordinance void on the ground that it is a
class legislation. Will a suit prosper? (2004
BAR)
A: NO. The remission or condonation of taxes
due and payable to the exclusion of taxes
already collected does not constitute unfair
discrimination. Each set of taxes is a class by
itself and the law would be open to attack as
class legislation only if all taxpayers belonging
to one class were not treated alike. (Juan Luna
Subdivision, Inc., v. Sarmiento, G.R. L-3538, May
28, 1952)
Q: An E.O. was issued pursuant to law,
granting tax and duty incentives only to
businesses and residents within the “secured
area” of the Subic Economic Special Zone,
and denying said incentives to those who
live within the zone but outside such
“secured area:” Is the Constitutional right to
equal protection of the law violated by the
Executive Order? (2000 BAR)
A: NO. Equal protection of the law clause is
subject to reasonable classification.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Classification, to be valid, must (1) rest on
substantial distinctions; (2) be germane to the
purpose of the law; (3) not be limited to existing
conditions only, (4) apply equally to all
members of the same class. There are
substantial differences between big investors
being enticed to the “secured area” and the
business operators outside that are in accord
with the equal protection clause that does not
require territorial uniformity of laws.
The classification applies equally to all the
resident individuals and businesses within the
“secured area.” The residents, being in like
circumstances to contributing directly to the
achievement of the end purpose of the law, are
not categorized further. Instead, they are
similarly treated, both in privileges granted and
obligations required. (Tiu, et al, v. CA, et al, G.R.
No. 127410, January 20, 1999)
Q: The City Council of Ormoc enacted
Ordinance No. 4, Series of 1964 taxing the
production and exportation of only
centrifugal sugar. At the time of the
enactment, plaintiff Ormoc Sugar Co. was the
only sugar central in Ormoc. Petitioner
alleged that said Ordinance is
unconstitutional for being violative of the
equal protection clause. Is the Ordinance
valid?
A: NO. Equal protection clause applies only to
persons or things identically situated and does
not bar a reasonable classification of the subject
of legislation. The classification, to be
reasonable, should be in terms applicable to
future conditions as well. The taxing ordinance
should not be singular and exclusive as to
exclude any substantially established sugar
central, of the same class as Ormoc Sugar Co.,
from the coverage of the tax. (Ormoc Sugar
Industry v. City Treasurer of Ormoc City, G.R. No.
L-23794, February 17, 1968)
RELIGIOUS FREEDOM
BASIS: No law shall be made respecting an
establishment of religion or prohibiting the free
exercise thereof. The free exercise and
enjoyment of religious profession and worship,
without discrimination or preference, shall
forever be allowed. No religious test shall be
required for the exercise of civil or political
rights. (Art. III, Sec. 5)
26
 Taxation Law
Q: Is the real property tax exemption of
religious organizations violative of the non-
establishment clause?
A: NO. Neither the purpose nor the effect of the
exemption is the advancement or the inhibition
of religion; and it constitutes neither personal
sponsorship of, nor hostility to religion. (Walz v.
Tax Commission, 397 US 664)
Q: Is the imposition of fixed license fee a
prior restraint on the freedom of the press
and religious freedom?
A: YES. As a license fee is fixed in the amount
and unrelated to the receipts of the taxpayer,
the license fee, when applied to a religious sect,
is actually being imposed as a condition for the
exercise of the sect’s right under the
Constitution. (Tolentino v. Secretary of Finance,
G.R. No. 115873, August 25, 1994)
Q: Is a municipal license tax on the sale of
bibles and religious articles by a non-stock,
non-profit missionary organization at
minimal profits valid?
A: NO. Such imposition of license tax constitutes
curtailment of religious freedom and worship
which is guaranteed by the Constitution.
(American Bible Society v. City of Manila, 101
Phil. 386)
Q: Is VAT registration restrictive of religious
and press freedom?
A: NO. The VAT registration fee, although fixed
in amount, is not imposed for the exercise of a
privilege but only for defraying part of the cost
of registration. (Tolentino v. Secretary of Finance,
G.R. No. 115873, August 25, 1994)
NON-IMPAIRMENT CLAUSE
BASIS: No law impairing the obligation of
contracts shall be passed. (Art. III, Sec. 10)
Instances when there is impairment of the
obligations of contract
When the law changes the terms of the contract
by:
1. Making new conditions;
2. Changing conditions in the contract; or
27
3. Dispenses with the conditions expressed
therein.
Rationale for the non-impairment clause in
relation to contractual tax exemption
When the State grants an exemption on the
basis of a contract, consideration is presumed to
be paid to the State and the public is supposed
to receive the whole equivalent thereof.
NOTE: This applies only where one party is the
government and the other party, a private
person.
Rules regarding non-impairment of
obligation and contract with respect to the
grant of tax exemptions
1. If the grant of the exemption is merely a
spontaneous concession by the legislature,
such exemption may be revoked.
(Unilaterally granted by law)
2. If it is without payment of any consideration
or the assumption of any new burden by the
grantee, it is a mere gratuity and exemption
may be revoked. (Franchise)
3. However, if the tax exemption constitutes a
binding contract and for valuable
consideration, the government cannot
unilaterally revoke the tax exemption.
(Bilaterally agreed upon)
In Tolentino v. Secretary of Finance (1994), the
Court ruled that R.A. 7716 (E-VAT Law) does not
violate the non-impairment clause. The
contention that the imposition of the VAT on the
sales and leases of real estate by virtue of
contracts entered into prior to the effectivity of
the law would violate the constitutional
provision that “No law impairing the obligation
of contracts shall be passed” is without legal
basis.
The parties to a contract cannot fetter the
exercise of the taxing power of the State. For not
only are existing laws read into contracts in
order to fix obligations as between parties, but
the reservation of essential attributes of
sovereign power is also read into contracts as a
basic postulate of the legal order.
The Contract Clause has never been thought as a
limitation on the exercise of the State’s power of
taxation save only where a tax exemption has
 General Principles
been granted for a valid consideration.
Q: X Corporation was the recipient in 1990 of
two tax exemptions both from Congress, one
law exempting the company’s bond issues
from taxes and the other exempting the
company from taxes in the operation of its
public utilities. The two laws extending the
tax exemptions were revoked by Congress
before their expiry dates. Were the
revocations constitutional? (1997 BAR)
A: YES. The exempting statutes are both granted
unilaterally by Congress in the exercise of taxing
powers. Since taxation is the rule and tax
exemption, the exception, any tax exemptions
unilaterally granted can be withdrawn at the
pleasure of the taxing authority without
violating the Constitution. (Mactan Cebu
International Airport Authority v. Marcos, G.R.
No. 120082, September 11, 1996)
Q: A law was passed granting tax exemptions
to certain industries and investments for a
period of 5 years. However, 3 years later, the
law was repealed. With the repeal, the
exemptions were considered revoked by the
BIR, which assessed the investing companies
for unpaid taxes effective on the date of the
repeal of the law.
NPC and KTR companies questioned the
assessments on the ground that, having made
their investments in full reliance with the
period of exemption granted by the law, its
repeal violated their Constitutional right
against the impairment of the obligations
and contracts. Is the contention of the
company tenable? (2004 BAR)
A: NO. The exemption granted is in the nature of
a unilateral exemption. Since the exemption
given is spontaneous on the part of the
legislature and no service or duty or other
remunerative conditions have been imposed on
the taxpayer receiving the exemption, it may be
revoked by will by the legislature. (Christ Church
v. Philadelphia, 24 How 300, 1860) What
constitutes an impairment of the obligation of
contracts is the revocation of an exemption
which is founded on a valuable consideration
because it takes the form and essence of a
contract. (Casanovas v. Hord, 8 Phil. 12, 1907);
(Manila Railroad Co. v. Insular Collector of
Customs, 1915).
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
FREEDOM OF THE PRESS
BASIS: No law shall be passed abridging the
freedom of speech, of expression, or of the press,
or the right of the people peaceably to assemble
and petition the government for redress of
grievances. (Art. III, Sec. 4)
Q: Is R.A. 7716 unconstitutional for it violates
the freedom of the press under Art. III, Sec. 4
of the Constitution by imposing VAT on the
gross receipts of newspapers from
advertisements and on their acquisition of
paper, ink and services for publication?
A: NO. Even with due recognition of its high
estate and its importance in a democratic
society, however the press is not immune from
general regulation by the State. It has been held
that the publisher of a newspaper has no
immunity from the application of general laws.
He has no special privilege to invade the rights
and liberty of others. He must answer for libel.
He may be punished for contempt of court. Like
others, he must pay equitable and
nondiscriminatory taxes on his business.
(Tolentino v. Secretary of Finance, G.R. No.
115873, August 25, 1994)
STAGES OR ASPECTS OF TAXATION
1. Levy or imposition (tax legislation)
2. Assessment and collection (tax
administration)
3. Payment
4. Refund
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.
Q: Taxes are assessed for the purpose of
generating revenue to be used for public
needs. Taxation itself is the power by which
the State raises revenue to defray the
expenses of government. A jurist said that a
tax is what we pay for civilization. In our
jurisdiction, which of the following
statements may be erroneous?
28
 Taxation Law
1. Taxes are pecuniary in nature.
2. Taxes are enforced charges and
contributions.
3. Taxes are imposed on persons and
property within the territorial
jurisdiction of a State.
4. Taxes are levied by the executive branch
of the government.
5. Taxes are assessed according to a
reasonable rule of apportionment. (2004
BAR)
A: (4) Taxes are levied by the executive
branch of government. This statement is
erroneous because levy refers to the act of
imposition by the legislature which is done
through the enactment of a tax law. Levy is an
exercise of the power to tax which is exclusively
legislative in nature and character. Clearly, taxes
are not levied by the executive branch of
government. (NPC v. Albay, G.R. No. 87479, June 4,
1990)
ASSESSMENT AND COLLECTION
(TAX ADMINISTRATION)
This is the act of administration and
implementation of the tax law by executive
through its administrative agencies.
The act of assessing and collecting taxes is
administrative in character, and therefore can be
delegated. (Dimaampao, 2015)
NOTE: The term “assessment” which here
means notice and demand for payment of a tax
liability, should not be confused with
“assessment” relative to a real property taxation,
which refers to the listing and valuation of
taxable real property.
Q: Is the approval of the court, sitting as
probate or estate settlement court, required
in the enforcement of the estate tax? (2005
BAR)
A: NO. The approval of the court, sitting in
probate, is not a mandatory requirement in the
collection of estate tax. On the contrary, under
Section 94 of the NIRC, it is the probate or
settlement court which is forbidden to authorize
the executor or judicial administrator of the
decedent’s estate, to deliver any distributive
share to any party interested in the estate,
unless a certification from the Commissioner of
29
the Internal Revenue that the estate tax has been
paid is shown. (Marcos II v. CA, G.R. No.120880,
June 5, 1997)
NOTE: Assessment and collection may be
delegated but not levy since it is exclusively
conferred with the Congress.
PAYMENT
The act of compliance by the taxpayer, including
such options, schemes, or remedies as may be
legally available.
GR: Tax shall be paid by the person subject
thereto at the time the return is filed. (Sec.
56(A)(1), NIRC)
XPN: When the tax due is in excess of P2,000,
the taxpayer other than a corporation may elect
to pay the tax in 2 equal installments in which
case, the first installment shall be paid at the
time the return is filed and the second
installment, on or before October 15 following
the close of the calendar year. (Sec. 56(A)(2),
NIRC)
NOTE: If any installment is not paid on or before
the date fixed for its payment, the whole amount
of the tax unpaid becomes due and payable,
together with delinquency penalties.
REFUND
The recovery of any alleged to have been
erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected
without authority, or of any sum alleged to have
been excessively, or in any manner wrongfully
collected.
Q: Is proof of remittance necessary for
Philippine Airlines, Inc. to claim a refund
under its charter, Presidential Decree No.
1590?
A: NO. Remittance need not be proven. PAL
needs only to prove that taxes were withheld
from its interest income. PAL is uncontestedly
exempt from paying the income tax on interest
earned. Considering that PAL is not liable to pay
the tax on interest income from bank deposits,
any payments made for that purpose are in
excess of what is due from it. Thus, if PAL
 General Principles
erroneously paid for this tax, it is entitled to a
refund. (PAL v. CIR, G.R. No. 206079-80, January
17, 2018)
REQUISITES OF A VALID TAX
1. It should be for a public purpose;
2. It should be uniform;
3. The person or property being taxed should
be within the jurisdiction of the taxing
authority; and
4. The tax must not impinge on the inherent
and constitutional limitations on the power
of taxation.
KINDS OF TAXES
AS TO OBJECT
1. Personal /poll or capitation tax – A fixed
amount imposed upon all persons, or upon
all persons of a certain class or residents
within a specified territory, without regard
to their property or occupation. (e.g.,
community tax)
2. Property tax – Tax imposed on property,
whether real or personal, in proportion
either to its value, or in accordance with
some other reasonable method of
apportionment. (e.g., real property tax)
3. Privilege/excise tax – A charge upon the
performance of an act, the enjoyment of a
privilege, or the engaging in an occupation.
An excise tax is a tax that does not fall as
property tax. (e.g., income tax, estate tax,
donor’s tax, VAT)
NOTE: This is different from the excise tax
under the NIRC which is a business tax imposed
on items such as cigars, cigarettes, wines,
liquors, frameworks, mineral products, etc.
AS TO BURDEN OR INCIDENCE
1. Direct
2. Indirect
Q: Distinguish a direct from an indirect tax.
Give examples (1994, 2000, 2001, 2006 BAR)
A:
(1) Direct taxes are demanded from the very
person who, as intended, should pay the tax
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
which he cannot shift to another.
(2) Indirect taxes are demanded in the first
instance from one person with the expectation
that he can shift the burden to someone else, not
as a tax but as a part of the purchase price.
Income tax, estate tax, and donor's tax are
considered as direct taxes. On the other hand,
value-added tax, excise tax, other percentage
taxes, and documentary stamp tax are indirect
taxes.
It is direct taxes when the impact or liability for
the payment of tax as well as incidence or
burden of tax of the tax falls on the same person.
On the other hand, it is indirect taxes when the
impact or liability for the payment of tax falls on
one person but the incidence or burden thereof
can be shifted or passed to another.
NOTE: The liability for payment of the indirect
taxes lies only with the seller of the goods or
services, not in the buyer thereof. Thus, one
cannot invoke one’s exemption privilege to
avoid the passing on or the shifting of the VAT to
him by the manufacturers or suppliers of the
goods. Hence, it is important to determine if the
tax exemption granted specifically includes the
indirect tax, otherwise, it is presumed that the
tax exemption embraces only those taxes for
which the buyer is directly liable. (CIR v. PLDT,
478 SCRA 61)
Indirect taxes, like VAT and excise tax, are
different from withholding taxes (direct taxes).
To distinguish, in indirect taxes, the incidence of
taxation falls on one person, but the burden
thereof can be shifted or passed on to another
person, such as when the tax is imposed upon
goods before reaching the consumer who
ultimately pays for it. On the other hand, in case
of withholding taxes, the incidence and burden
of taxation fall on the same entity, the statutory
taxpayer. The burden of taxation is not shifted to
the withholding agent who merely collects, by
withholding, the tax due from income payments
to entities arising from certain transactions and
remits the same to the government. Due to this
difference, the deficiency VAT and excise tax
cannot be “deemed” as withholding taxes merely
because they constitute indirect taxes. (Asia
International Auctioneers, Inc. v. CIR, G.R. No.
179115, September 26, 2012)
In indirect taxation, a distinction is made
30
 Taxation Law
between the liability for the tax and burden of
the tax: The seller who is liable for the VAT may
shift or pass on the amount of VAT it paid on
goods, properties, or services to the buyer. In
such a case, what is transferred is not the
seller's liability but merely the burden of the
VAT. (Diaz v. The Secretary of Finance, G.R. No.
193007, July 19, 2011)
Where the burden of the tax is shifted to the
purchaser, the amount passed on to it is no
longer a tax but becomes an added cost on the
goods purchased, which constitutes a part of the
purchase price. The proper party to question or
seek a refund of an indirect tax is the statutory
taxpayer, the person on whom the tax is
imposed by law and who paid the same even if
he shifts the burden thereof to another. (Silkair
v. CIR, G.R. No. 166482, January 25, 2012)
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. (e.g., excise tax on
cigar, 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. (e.g., real estate tax,
income tax, donor’s tax and estate tax)
3. Mixed – a choice between ad valorem
and/or specific depending on the condition
attached.
AS TO PURPOSES
1. General/fiscal or revenue – tax imposed
solely for the general purpose of the
government. (e.g., income tax and donor’s
tax)
2. Special/regulatory or sumptuary – tax
levied for specific purpose, i.e., to achieve
some social or economic ends. (e.g., tariff
and certain duties on imports)
AS TO SCOPE OR AUTHORITY TO IMPOSE
1. National tax – Tax levied by the National
Government. (e.g., income tax, estate tax,
donor’s tax, VAT, other percentage taxes and
documentary stamp taxes)
31
2. Local or municipal – Tax levied by a local
government. (e.g., real estate tax and
community tax)
AS TO GRADUATION
1. Progressive – A tax rate which increases as
the tax base or bracket increases. (e.g.,
income tax, estate tax and donor’s tax)
2. Regressive – The tax rate decreases as the
tax base or bracket increases.
3. Proportionate – A tax of a fixed percentage
of amounts of the base (value of the
property, or amount of gross receipts etc.).
(e.g., VAT and other percentage taxes)
GENERAL CONCEPTS IN TAXATION
PROSPECTIVITY OF TAW LAWS
GR: Tax laws must only be imposed
prospectively.
XPN: 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, G.R. No. 154068 August 3, 2007)
Ex post facto law as applied in taxation
The prohibition against ex post facto laws
applies only to criminal matters and not to laws
which are civil in nature.
NOTE: When it comes to civil penalties like fines
and forfeiture (except interest), tax laws may be
applied retroactively unless it produces harsh
and oppressive consequences which violate the
taxpayer’s constitutional rights regarding equity
and due process. But criminal penalties arising
from tax violations may not be given retroactive
effect.
Q: In 1997, Mrs. Rocosta filed an amended
return which showed an overpayment of
income tax for her 1996 income report. She
now claims a refund of taxes withheld on her
1996 income as provided for in the 1997
NIRC. Should the 1997 tax reform
retroactively apply?
A: NO. Tax laws are prospective in operation,
 General Principles
unless the language of the statute clearly
provides otherwise. At the time Mrs. Rocosta
filed her amended return, the 1997 NIRC was
not yet in effect. Hence, she has no reason at
that time to think that the filing of an amended
return would constitute the written claim for
refund required by applicable law. (CIR v.
Acosta, G.R. No. 154068, August 3, 2007)
Q: Due to uncertainty as to whether a new tax
law is applicable to printing companies, DEF
Printers submitted a legal query to the BIR
on that issue. The BIR issued a ruling that
printing companies are not covered by the
new law. Relying on this ruling, DEF Printers
did not pay said tax. Subsequently, however,
the BIR reversed the ruling and issued a new
one stating that the tax covers printing
companies. Could the BIR now assess DEF
Printers for back taxes corresponding to the
years before the new ruling? Reason briefly.
(2004 BAR)
A: NO. The reversal of the ruling shall not be
given a retroactive application, if said reversal
will be prejudicial to the taxpayer. Therefore, the
BIR cannot assess DEF Printers for back taxes
because it would be violative of the principle of
non-retroactivity of rulings and doing so would
result to grave injustice to the taxpayer who
relied on the first ruling in good faith. (Sec. 246,
NIRC; Commissioner v. Burroughs, Ltd., G.R. No. L-
66653, June 19, 1986)
The retroactive application of the BIR regulation
that is prejudicial to the taxpayer is a violation of
due process. When there is a clash between the
lifeblood doctrine and due process, the latter
prevails. (Dimaampao, J., 2015; Commisioner v.
CIR, G.R. No. 117982. February 6, 1997)
NOTE: SEC. 246. Non-Retroactivity of Rulings –
Any revocation, modification, or reversal of any
of the rules and regulations promulgated by the
Commissioner or any of the rulings or circulars
promulgated by him shall not be given
retroactive application if the revocation,
modification, or reversal 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 in
any document required of him by the BIR;
2. Where the facts subsequently gathered by
the Bureau of Internal Revenue are
materially different from the facts on which
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
the ruling is based; or
3. Where the taxpayer acted in bad faith.
IMPRESCRIPTIBILITY
GR: Taxes are imprescriptible by reason that it is
the lifeblood of the government.
XPN: Tax laws may provide for statute of
limitations. In particular, the NIRC and LGC
provide for the prescriptive periods for
assessment and collection.
Tax laws provide for statute of limitations in the
collection of taxes for the purpose of
safeguarding taxpayers from any unreasonable
examination, investigation or assessment. (CIR v.
B.F. Goodrich Phils., G.R. No. 104171, February 24,
1999)
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.,
G.R. Nos. L-12100 & L-11812, May 29, 1959)
SITUS OF TAXATION
It is the place or authority that has the right to
impose and collect taxes. (Commissioner of
Internal Revenue v. Marubeni Corporation, G.R.
No. 137377, December 18, 2001)
Factors that determine the situs of taxation
(ReCiNS2)
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
Rules Observed in Fixing Tax Situs
1. Poll/Capitation/Community Tax –
Residence of taxpayer, regardless of the
source of income or location of property of
the taxpayer
2. Property Tax
a. Real Property – Location of the
32
 Taxation Law
property (lex rei sitae/lex situs), its business is located in the
regardless of whether the owner is a Philippines;
resident or non-resident 4. Shares, obligations, or bonds
issued by any foreign corporation
Rationale: if such shares, obligations or
i. The taxing authority has control bonds have acquired a business
because of the stationary and situs in the Philippines; and
fixed character of the property. 5. Shares or rights in any
ii. The place where the real partnership, business or industry
property is situated gives established in the Philippines.
protection to the real property.
Hence, the property or its owner Application of the doctrine of mobilia
should support the government sequuntur personam not mandatory in all
of that place. cases
b. Personal Property
Such doctrine has been decreed as a mere
Tangible – Location of the property "fiction of law having its origin in considerations
of general convenience and public policy and
Intangible – cannot be applied to limit or control the right of
the State to tax property within its jurisdiction,"
GR: Domicile of the owner, wherever it and must "yield to established fact of legal
is actually kept or located, pursuant to ownership, actual presence and control
the principle of the mobilia sequntur elsewhere, and cannot be applied if to do so
personam, which literally means would result in inescapable and patent
“movable follows the person/owner.” injustice." (Wells Fargo Bank and Union Trust v.
Collector, G.R. No. L-46720, June 28, 1940)
XPN:
i. When the property has acquired 3. Excise Tax
a business situs in another a. Income Tax and Donor’s Tax
jurisdiction, such that it has
definite location there, Criteria Income Tax Donor’s
accompanied by some degree of Tax
permanency; or Place (applied to (applied to
ii. When an express provision of the NRA, NRFC, NRA)
statute provides for another rule. NRC)
Taxed on
NOTE: Under Sec. 104 of the NIRC, in From sources properties
case of donor’s and estate tax, the of income situated
following properties are considered as derived within the
situated, thus taxed, in the Philippines within the Philippines
and the residence of their owners are Philippines
immaterial, except where the foreign Nationality (applied to (applied to
country grants exemption or does not RC, DC) RC, NRC)
impose taxes on intangible properties
to Filipino citizens. From sources Taxed upon
of income their
1. Franchise which must be derived properties
exercised in the Philippines; within and wherever
2. Shares, obligations, or bonds without the situated
issued by any corporation Philippines
sociedad anonima organized or Residence (applied to (applied to
constituted in the Philippines in RA, RFC) RA)
accordance with its laws;
3. Shares, obligations, or bonds by From sources Taxed upon
any foreign corporation 85% of of income their

33
 General Principles
derived properties
within the wherever
Philippines situated.
b. VAT – Place where the transaction is
made. If the transaction is made
(perfected and consummated) outside
of the Philippines, we can no longer
tax such transaction. (J. Dimaampao,
2015)
NOTE: Situs of taxation of excise tax is the place
where the privilege is exercised. In case of a
franchise, which is a right or privileges granted
to it by the government, the situs of taxation is
the place where the franchise holder exercises
its franchise regardless of the place where its
services or products are delivered. Thus, in a
franchise of electric power distribution, the
franchisee is liable within the jurisdiction it
exercises its privilege. (City of Iriga v. Camarines
Sur III Electric Cooperative, G.R. No. 192945,
September 5, 2012)
The Documentary Stamp Tax is in the nature of
an excise tax because it is imposed upon the
privilege, opportunity, or facility offered at
exchanges for the transaction of the business.
(CIR v. Pilipinas Shell Petroleum Corporation, G.R.
No. 192398, September 29, 2014)
Remedies available against multiplicity of
situs
Tax laws and treaties with other States may:
1. Exempt foreign nationals from local
taxation and local nationals from foreign
taxation under the principle of reciprocity;
2. Credit foreign taxes paid from local taxes
due;
3. Allow foreign taxes as deduction from
gross income; or
4. Reduce the Philippine income tax rate.
DOUBLE TAXATION
There is no constitutional prohibition against
double taxation in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional requirement
is not thereby violated, such as the requirement
that taxes must be uniform. (Villanueva v. City of
Iloilo, 1968)
DIRECT (STRICT SENSE)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Double taxation in the objectionable or
prohibited sense since it violates the equal
protection clause of the Constitution.
Elements of Direct Double Taxation
1. The same property is taxed twice when it
should be taxed only once; and
2. Both taxes are imposed:
a. on the same subject matter,
b. for the same purpose,
c. by the same taxing authority,
d. within the same jurisdiction,
e. during the same taxing period; and
f. the taxes must be of the same kind or
character. (City of Manila v. Coca Cola
Bottlers Philippines, G.R. No. 181845,
August 4, 2009)
All the elements must be present in order to
apply double taxation in its strict sense.
INDIRECT (BROAD) SENSE
It is a permissible double taxation. It is indirect
when some elements of direct double taxation
are absent.
Tax treaties as relief from double taxation
The purpose is to reconcile the national fiscal
legislation of the contracting parties in order to
help the taxpayer avoid simultaneous taxation
in two different jurisdictions (international
double taxation). This is to encourage the free
flow of goods and services and the movement of
capital, technology, and persons between
countries, conditions deemed vital in creating
robust and dynamic economies.
TAX TREATY RESORTS TO
SEVERAL METHODS:
1. First, it sets out the respective rights to tax of
the state of source or situs and of the state of
residence with regard to certain classes of
income or capital. In some cases, an
exclusive right to tax is conferred on one of
the contracting states. However, for other
items of income or capital, both states are
given the right to tax, although the amount of
tax that may be imposed by the state of
source is limited.
34
 Taxation Law
2. The second method for the elimination of
double taxation applies whenever the state
of source is given a full or limited right to tax
together with the state of residence. In this
case, the treaties make it incumbent upon
the state of residence to allow relief in order
to avoid double taxation. There are two
methods of relief:
a. 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 taxpayer's
remaining income or capital; and
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.
How to determine if a tax is direct or indirect
Refer to previous discussion on “Kinds of Taxes –
As to burden or incidence.”
Meaning of impact and incidence of taxation

b. Credit method – although the income or IMPACT OF INCIDENCE OF

capital which is taxed in the state of TAXATION TAXATION
source is still taxable in the state of It refers to the It is the economic cost
residence, the tax paid in the former is statutory liability to of tax. It is also known
credited against the tax levied in the pay the tax. It falls on as burden of taxation.
latter. the person originally It is the payment of
assessed with a tax. (Burden)
NOTE: The basic difference between the two particular tax.
methods is that in the exemption method, the It is the imposition of
focus is on the income or capital itself, whereas tax. (Liability)
the credit method focuses upon the tax. (CIR v. It is on the seller upon It is on the final
S.C. Johnson and Son, Inc., G.R. No. 127105, 1999) whom the tax has consumer, the place at
been imposed. which the tax comes
ESCAPE FROM TAXATION to rest.

SHIFTING OF TAX BURDEN TAX AVOIDANCE

Shifting is the transfer of the burden of tax by A scheme where the taxpayer uses legally
the original payer or the one on whom the tax permissible alternative method of assessing
was assessed or imposed to another or someone taxable property or income, in order to avoid or
else without violating the law. reduce tax liability.

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.
It is a 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. (CIR v. The Estate of Benigno Toda Jr., G.R.
No. 30554, February 28, 2004)

Ways of shifting the tax burden
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
Q: Mr. Pascual’s income from leasing his
property reaches the maximum rate of tax
under the law. He donated ½ of his said
property to a non-stock, non-profit
educational institution whose income and
assets are actually, directly, and exclusively
used for educational purposes, and therefore
qualified for tax exemption under Art. XIV,
Sec. 4 (3) of the Constitution and Sec. 3 (h) of
the NIRC. Having thus transferred a portion

35
 General Principles
of his said asset, Mr. Pascual succeeded in
paying a lesser tax on the rental income
derived from his property. Is there tax
avoidance or tax evasion? Explain. (2000
BAR)
of domestic corporation, which is a capital asset,
is subject to a final tax of 15% on the net capital
gains realized. (Sec. 24(C) NIRC)
TAX EVASION / TAX DODGING

A: YES. Mr. Pascual has exploited a legally
permissive alternative method to reduce his
income by transferring part of his rental income
to a tax-exempt entity through a donation of ½
of the income producing property. The donation
is likewise exempt from donor’s tax. The
donation is the legal means employed to
transfer the incidence of income tax on the
rental income.
Tax evasion is a scheme where the taxpayer
uses illegal or fraudulent means to defeat or
lessen payment of a tax.
It 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. (CIR v. The Estate of Benigno
Toda Jr., G.R. No. 30554, February 28, 2004)

Q: Maria Suerte, a Filipino citizen, purchased Elements to be considered in determining

a lot in Makati City in 1980 at a price of P1 that there is tax evasion (USE)
million. Said property has been leased to
MAS Corporation, a domestic corporation 1. Course of action is unlawful;
engaged in manufacturing paper products, 2. Accompanying state of mind, which is
owned 99% by Maria Suerte. In October described as being evil, in bad faith, willful,
2007, EIP Corporation, a real estate or deliberate and not accidental; and
developer, expressed its desire to buy the 3. End to be achieved, i.e., payment of less than
Makati property at its fair market value of that known by the taxpayer to be legally
P300 million, payable as follows: (a) P60 due, or non-payment of tax when it is
million down payment; and (b) balance, shown that the tax is due.
payable equally in twenty four (24) monthly
consecutive instalments. Upon the advice of a DISTINGUISH:
tax lawyer, Maria Suerte exchanged her TAX AVOIDANCE AND TAX EVASION
Makati property for shares of stocks of MAS
Corporation. A BIR ruling, confirming the tax- TAX TAX
free exchange of property for shares of stock, AVOIDANCE EVASION
was secured from the BIR National Office and Validity Legal and not Illegal and
a Certificate Authorizing Registration was subject to subject to
issued by the Revenue District Officer (RDO) criminal criminal
where the property was located. penalty penalty
Subsequently, she sold her entire Effect Almost always
stockholdings in MAS Corporation to EIP Minimization of results in
Corporation for P300 million. In view of the taxes absence of tax
tax advice, Maria Suerte paid only the capital payment.
gains tax of P44,850,000 (P299 million x
15%), instead of the corporate income tax of Evidence that may be used to prove tax
P89,700,000 (30% on P299 million gain from evasion
sale of real property) After evaluating the
capital gains tax payment, the RDO wrote a 1. Failure of taxpayer to declare for taxation
letter to Maria Suerte, stating that she purposes his true and actual income
committed tax evasion. derived from business for two (2)
consecutive years. (Republic v. Gonzales, G.R.
Is the contention of the RDO tenable? No. L-17744, April 30, 1965)
Explain. 2. Substantial under declaration of income in
the income tax return for four (4)
A: NO. The exchange of the real state property consecutive years coupled by intentional
for the shares of stocks is considered as a overstatement of deductions. (Perez v. CTA,
legitimate tax avoidance scheme. (Sec. 40 G.R. No. L-10507, May 30, 1958)
(C)(2)(b), NIRC) The sale of the shares of stocks

UNIVERSITY OF SANTO TOMAS 36

2021 GOLDEN NOTES
 Taxation Law
Q: CIC, thru its authorized representative BT,
sold a 16-storey commercial building to RA
for 100M who then sold it on the same day to
RMI for 200M. These two transactions were
evidenced by two separate Deeds of Absolute
Sale notarized on the same day by the same
notary public. For the sale of the property to
RMI, RA paid a capital gains tax in the
amount of P10M. Is the scheme perpetuated
a case of tax evasion or tax avoidance?
A: It is a tax evasion scheme. The scheme
resorted to by CIC in making it appear that there
were two sales of the subject properties, i.e.,
from CIC to RA, and then from RA to RMI cannot
be considered a legitimate tax planning (one
way of tax avoidance). Such scheme is tainted
with fraud.
In the case, it is obvious that the objective of the
sale to Altonaga was to reduce the amount of tax
to be paid especially that the transfer from him
to RMI would then subject the income to only
6% individual capital gains tax and not the 35%
(presently 30%) corporate income tax. (CIR v.
The Estate of Benigno Toda Jr., GR No. 147188,
Sept. 14, 2004)
Q: Gloria Kintanar was charged of violation
of Art. 255 of the NIRC for failure to make or
file her ITRs. Kintanar claimed that
entrusted the duty of filing the said returns
to her husband who filed their ITRs, through
their hired accountant. Is Gloria Kintanar
guilty of tax evasion?
A: YES. Supreme Court, in its resolution,
affirmed the conviction of a taxpayer for tax
evasion due to non-filing of income tax returns
(ITR). The accused Gloria Kintanar was not able
to satisfactorily convince the court that she did
not deliberately and willfully neglect to file her
ITR, considering that she entrusted the filing to
her husband who caused the filing through an
accountant. The court believed that the accused
was not relieved from her criminal liability. As
principal, she must assume responsibility over
the acts of her accountant (Sec. 51(f) NIRC). The
CTA doctrine on willful blindness simply means
that an individual or corporation can no longer
say that the errors on their tax returns are not
their responsibility or that it is the fault of the
accountant they hired.
Hence, the natural presumption is that the
37
petitioner knows what her tax obligations under
the law are. As a businesswoman, she should
have taken ordinary care of her tax duties and
obligations and she should know that their ITRs
should be filed and should have made sure that
their ITRs were filed. She cannot just leave
entirely to her husband the filing of her ITR.
Petitioner also testified that she does not know
how much her tax obligations was, nor did she
bother to inquire or determine the facts
surrounding the filing of her ITR. Such neglect
or omission as aptly found by the former second
division is tantamount to “deliberate ignorance
or conscious avoidance.” Further, such non-
compliance with the BIR’s notices clearly shows
petitioner’s intent not to file her ITR. (People v.
Kintanar, G.R. No. 196340, August 26, 2009)
EXEMPTION FROM TAXATION
It is the grant of immunity, express or implied,
to particular persons or corporations, from a tax
upon property or an excise tax which persons or
corporations generally within the same taxing
districts are obliged to pay.
It is the legislature, unless limited by a provision
of the state constitution, which has full power to
exempt any person, corporation, or class of
property from taxation; its power to exempt
being as broad as its power to tax. Other than
Congress, the Constitution may itself provide for
specific tax exemptions, or local governments
may pass ordinances on exemption only from
local taxes. (John Hay Peoples Alternative
Coalition et al. v. Lim et. al., G. R. No. 119775,
October 24, 2003)
Nature of tax exemption
1. Personal in nature and covers only taxes for
which the grantee is directly liable.
NOTE: It cannot be transferred or assigned
by the person to whom it is given without
the consent of the State.
2. Strictly construed against the taxpayer.
3. Implies a waiver on the part of the
government of its right to collect what
otherwise would be due.
4. Exemptions are not presumed. The burden
is upon the claimant to establish right to
exemption beyond reasonable doubt.
However, the strict interpretation does not
 General Principles
apply in the case of exemptions running to
the benefit of the government itself or its
agencies.
NOTE: Taxation is the rule and exemption is the
exception. (FELS Energy Inc. v. Province of
Batangas, 516 SCRA 186) The burden of proof
rests upon the party claiming exemption to
prove that it is, in fact, covered by the
exemption so claimed. As a rule, tax exemptions
are construed strongly against the claimant.
Exemptions must be shown to exist clearly and
categorically and supported by clear legal
provision. (PAGCOR v. BIR, G.R. No. 172087,
March 15, 2011)
Principles governing tax exemptions
1. Tax exemptions are highly disfavored in
law.
2. Tax exemptions are personal and non-
transferable.
3. He who claims an exemption must justify
that the legislature intended to exempt him
by words too plain to be mistaken. He must
convincingly prove that he is exempted.
4. It must be strictly construed against the
taxpayer.
NOTE: Deductions for income tax purposes
partake of the nature of tax exemptions,
hence, they are also strictly construed
against the taxpayer.
5. Constitutional grants of tax exemptions are
self-executing.
6. Tax exemption is generally revocable,
unless founded on contracts which are
protected by the Non-impairment clause.
7. In order to be irrevocable, the tax
exemption must be founded on a contract or
granted by the Constitution.
8. The congressional power to grant an
exemption necessarily carries with it the
consequent power to revoke the same.
NOTE: Since the power to tax includes the
power to exempt thereof which is
essentially a legislative prerogative, it
follows that a municipal mayor who is an
executive officer may not unilaterally
withdraw such an expression of a policy
thru the enactment of a tax. (Philippine
Petroleum Corporation v. Mun. of Pililla, G.R.
No. 90776, June 3, 1991)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
9. Revocations are constitutional even though
the corporate do not have to perform a
reciprocal duty for them to avail of tax
exemptions.
Not all refunds are in the nature of a tax
exemption
A tax refund may only be considered as a tax
exemption when it is based either on a tax-
exemption statute or a tax-refund statute. Tax
refunds or tax credits are not founded
principally on legislative grace, but on the legal
principle of quasi-contracts against a person’s
unjust enrichment at the expense of another.
NOTE: The erroneous payment of tax as a basis
for a claim of refund may be considered as a
case of solutio indebiti, which the government is
not exempt from its application and has the duty
to refund without any unreasonable delay what
it has erroneously collected.
KINDS OF TAX EXEMPTION
As to basis
1. Constitutional – Immunities from taxation
which originate from the Constitution.
2. Statutory – Those which emanate from
legislation.
3. Contractual – Agreed to by the taxing
authority in contracts lawfully entered into
by them under enabling laws.
4. Implied – When particular persons,
properties or excises are deemed exempt as
they fall outside the scope of the taxing
provision.
NOTE: The law looks with disfavor on tax
exemptions and he who would seek to be
thus privileged must justify it by words too
plain to be mistaken and too categorical to
be misinterpreted. (Western Minolco
Corporation v. CIR, G.R. No. L-61632, August
16, 1983)
5. Treaty
6. Licensing ordinance
As to extent
38
 Taxation Law
1. Total – Connotes absolute immunity
2. Partial – One where a collection of a part of
the tax is dispensed with
As to object
1. Personal – Granted directly in favor of
certain persons.
2. Impersonal – Granted directly in favor of a
certain class of property.
These exemptions must not be confused with
tax exemptions granted under franchises which
are not contracts within the purview of the
non-impairment clause of the constitution.
(Cagayan Electric Co. v. Commissioner, G.R. No.
L-601026, September 25, 1985)
NOTE: Contractual tax exemptions may not be
unilaterally so revoked by the taxing authority
without thereby violating the non-impairment
clause of the Constitution. (Vitug, 2000)
Nevertheless, since taxation is the rule and
exemption therefrom is the exception, the
exemption may thus be withdrawn at the
pleasure of the taxing authority. The only
exception to this rule is where the exemption
was granted to private parties based on
material consideration of a mutual nature,
which then becomes contractual and is thus
covered by the non-impairment clause of the
Constitution. (MCIAA v. Marcos, G.R. No. 120082,
September 11, 1996).
Rationale/grounds for exemption
The inherent power of the State to impose taxes
naturally carries with it the power to grant tax
exemptions.
The rationale or grounds for tax exemption are
the same as the non-revenue/special or
regulatory purposes of taxation:
1. Sumptuary or regulatory purpose – The
sumptuary purpose of tax exemption is to
promote the general welfare and to protect
the health, safety, or morals of inhabitants.
2. Tax exemptions made the implement of the
state’s police power.
3. Compensatory purpose – The
compensatory purpose of tax exemption is
to implement the social justice provisions
of the Constitution through the progressive
system of taxation, which would result to
39
equal distribution of wealth etc.
(Domondon, 2009)
NOTE: There is no tax exemption based solely
on the ground of equity. (Davao Gulf v. CIR, 293
SCRA 76)
Q: The BTC Power Corporation (BTC)
entered in a Build-Operate-Transfer (BOT)
agreement with National Power Corporation
(NPC), a tax-exempt entity as provided by its
Charter under a special law. The BOT
Agreement provided that NPC shall be
responsible for the payment of all taxes
imposed on the power station except income
and permit fees. Later on, the City Treasurer
demanded payment of business taxes and
penalties. BTC contended that NPC should be
liable for such taxes and penalties, as
provided for in their BOT agreement. NPC,
however, contends that it’s a tax-exempt
entity. Is NPC correct?
A: NO. The 1991 Local Government Code (LGC)
repealed NPC’s exemption from all taxes under
its Charter. It removed the blanket exclusion of
government instrumentalities from local
taxation as it expressed a general repeal of all
statutes granting exemptions from local taxes.
Considered as the most revolutionary piece of
legislation on local autonomy, the LGC
effectively deals with the fiscal constraints faced
by LGUs. It widens the tax base of LGUs to
include taxes which were prohibited by
previous laws.
In recent years, the increasing social challenges
of the times expanded the scope of state activity,
and taxation has become a tool to realize social
justice and the equitable distribution of wealth,
economic progress, protection of local
industries as well as public welfare, and similar
objectives. Taxation assumes even greater
significance with the ratification of the 1987
Constitution. (Batangas Power Corporation v.
Batangas City, G.R. No. 152675, April 28, 2004)
Revocation of tax exemption
Since taxation is the rule and exemption is the
exception, the exemption may thus be
withdrawn at the pleasure of the taxing
authority. (Mactan Cebu International Airport
Authority v. Marcos et al., 261 SCRA 667)
 General Principles
By granting exemptions, the State does not
forever waive the exercise of its sovereign
prerogative. Thus, in withdrawing the
exemption of the press (media) from VAT, the
law merely subjects the same to the same tax
burden to which other businesses have long ago
been subject. It is not discriminatory as the
exemptions are granted for a purpose, in some
cases, to encourage agricultural production and,
in other cases, for the personal benefit of the
end-user rather than for profit. (Tolentino v. Sec.
of Finance, G.R. No. 115455, October 30, 1995)
Restrictions on revocation of tax exemptions
1. Non-impairment clause.
2. A municipal franchise once granted as a
contract cannot be altered or amended
except by actual consent of the parties
concerned.
3. Adherence to form. If the exemption is
granted by the Constitution, its revocation
may be affected through constitutional
amendment only.
4. Where the tax exemption grant is in the
form of a special law and not by a general
law; even if the terms of the general act are
broad enough to include the codes in the
general law unless there is manifest intent
to repeal or alter the special law. (CIR v. CA,
207 SCRA 487)
NOTE: Withdrawal of tax exemption is not to be
construed as prohibiting future grants of tax
exemptions. (Domondon, 2009) The erroneous
application and enforcement of the law by
public officers do not preclude subsequent
correct application of the statute, and the
government is never estopped by the mistake or
error on the part of its agents. (Philippine
Basketball Association v. CA, 337 SCRA 358,
August 8, 2000)
Q: BCDA was the owner of four (4) real
properties in BGC collectively referred to as
the "Expanded Big Delta Lots”. It entered into
a contract to sell with the NET GROUP. The
total purchase price was P2,032,749,327.96.
NET GROUP deducted the amount of
Php101,637,466.40 as CWT and issued to
BCDA the corresponding certificates of
creditable tax withheld at source. BCDA then
wrote the BIR for refund of the amount but to
no avail. BCDA claimed that it was exempt
from all taxes and fees arising from or in
relation to the sale, as provided under its
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
charter, Republic Act (RA) 7227, as amended
by RA 7917. Is BCDA exempt from Creditable
Withholding Tax (CWT) on the sale of its BGC
properties?
A: YES. Insofar as the sale of the "Expanded Big
Delta Lots" is concerned, R.A. 7227 as amended
by R.A. 7917 specifically exempts BCDA from
taxes. R.A. 7227, as amended is a special law.
The NIRC, being a general law, is not deemed to
have amended or superseded the special law in
the absence of an express repeal thereof in the
NIRC itself. Section 8 of R.A. 7227, as amended
by R.A. 7917, specifically governs BCDA's
disposition of the properties enumerated
therein and their sale proceeds. The law
exempts these sale proceeds from all kinds of
fees and taxes as the same law has already
appropriated them for specific purposes and for
designated beneficiaries.
It is settled that between a general law and a
special law, the latter prevails. For a special law
reveals the legislative intent more clearly than a
general law does. Verily, the special law should
be deemed an exception to the general law. (CIR
v. BCDA, G.R. No. 217898, January 15, 2020, as
penned by J. Lazaro-Javier)
Q: Differentiate Tax Exemption from Tax
Assumption.
A: A tax exemption is a grant of immunity from
payment of tax, while an assumption of tax
liability does not provide immunity from
payment of tax as it merely allows the shifting of
the burden of taxation to another entity. (BIR
Ruling No. ITAD 023-2017 dated 13 July 2017)
EQUITABLE RECOUPMENT
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-law countries, not in the Philippines.
Q: True or False. The doctrine of equitable
recoupment allows a taxpayer whose claim
40
 Taxation Law
for refund has prescribed to offset tax and the taxpayer against each other have
liabilities with his claim of overpayment. already become due, demandable, and fully
liquidated, compensation takes place by
A: TRUE. The doctrine arose from common law operation of law and both obligations are
allowing offsetting of a prescribed claim for extinguished to their concurrent amounts. In
refund against a tax liability arising from the the case of the taxpayer’s claim against the
same transaction on which an overpayment is government, the government must have
made, and underpayment is due. The doctrine appropriated the amount thereto. (Domingo v.
finds no application to cases where the taxes Garlitos, G.R. No. L-18994, June 29, 1963)
involved are totally unrelated, and although it
seems equitable, it is not allowed in our Offsetting can be allowed if the determination
jurisdiction. (CIR v. UST, 104 Phil 1062 (1958)) of the taxpayer’s liability is intertwined with
the resolution of the claim for tax refund of
PROHIBITION ON COMPENSATION erroneously or illegally collected taxes under
AND SET-OFF Section 229 of the NIRC. (CIR v. Toledo Power
Company, G.R. No. 196415. December 2, 2015)
Compensation or set-off shall take place when
NOTE: In CIR v. Toledo Power Company, the SC
two persons, in their own right, are creditors
did not allow BIR to assess Toledo Power if
and debtors of each other. (Article 1278, Civil
deficiency taxes and claim compensation
Code)
because the case involves a VAT refund claim
under Section 112.
Rules governing compensation or set-off as
applied in taxation
RATIONALE: To award such refund despite the
existence of that deficiency assessment is an
GR: No set-off is admissible against the
absurdity and a polarity in conceptual effects”
demands for taxes levied for general or local
and that “to grant the refund without
governmental purposes.
determination of the proper assessment and
the tax due would inevitably result in
Taxes cannot be subject to compensation
multiplicity of proceedings or suits. (CIR v. CTA,
because the government and the taxpayer are
G.R. No. 106611, July 21, 1994, 234 SCRA 348)
not creditors and debtors of each other. (Philex
Mining Corporation v. CIR, 356 Phil. 189, 198;
Q: Can an assessment for a local tax be the
294 SCRA 687, 695 (1998), cited in CIR v. Toledo
subject of set-off or compensation against a
Power Company, G.R. No. 196415. December 2,
final judgment for a sum of money obtained
2015)
by a taxpayer against the local government
that made the assessment? (2005 BAR)
NOTE: The prevalent rule in our jurisdiction
disfavors set-off or legal compensation of tax
A: NO. Taxes and debts are of different nature
obligations for the following reasons: (1) taxes
and character. Taxes cannot be subject to
are of a distinct kind, essence, and nature; and
compensation for the simple reason that the
these impositions cannot be so classed in merely
Government and the taxpayers are not
the same category as ordinary obligations; (2)
creditors and debtors of each other, debts are
the applicable laws and principles governing
due to the Government in its corporate
each are peculiar, not necessarily common to
capacity, while taxes are due to the Government
each; and (3) public policy is better subserved if
in its sovereign capacity. (South African Airways
the integrity and independence of taxes be
v. CIR, 612 SCRA 665, 2010) The taxes assessed
maintained (lifeblood doctrine). The collection
or the obligation of the taxpayer arising from
of a tax cannot await the results of a lawsuit
law, while the money judgment against the
against the government. (Republic v. Mambulao
government is an obligation, arising from
Lumber Company, 4 SCRA 622, 1962; Francia v.
contract, whether express or implied. Inasmuch
IAC, G.R. No. L-67649, June 28, 1988;
as taxes are not debts, it follows that the two
Caltex Philippines, Inc. v. Commission on Audit, et
obligations are not susceptible to set-off or
al., G.R. No. 92585, May 8, 1992)
legal compensation. Hence, no set-off or
compensation between the two different
XPN: Where both the claims of the government

41
 General Principles
classes of obligations is allowed. (Francia v. IAC, what is due it and to give tax evaders who wish
162 SCRA 753, 1988) to relent a chance to start with a clean slate.
(Asia International Auctioneers, Inc. v. CIR, G.R.
NOTE: It is only when the local tax assessment No. 179115, September 26, 2012)
and the final judgment are both overdue,
demandable, as well fully liquidated may set-off A tax amnesty, much like a tax exemption, is
or compensation be allowed. (Domingo v. never favored or presumed in law. The grant of
Garlitos, 8 SCRA 443, 1963) a tax amnesty, similar to a tax exemption, must
be construed strictly against the taxpayer and
COMPROMISE liberally in favor of the taxing authority. (Asia
International Auctioneers, Inc. v. CIR, G.R. No.
Compromise is a contract whereby the parties, 179115, September 26, 2012)
by reciprocal concessions, avoid litigation or put
an end to one already commenced. It implies the Tax Amnesty distinguished from Tax
mutual agreement by the parties in regard to the Exemption
thing or subject matter which is to be
compromised. TAX TAX
AMNESTY EXEMPTION
Compromises are generally allowed and Immunity Immunity
enforceable when the subject matter thereof is from all from civil
not prohibited from being compromised and the criminal, civil liability only
person entering such compromise is duly and
Scope of
authorized to do so. administrative
immunity
obligations
Persons allowed to enter into compromise of arising from
tax obligations non-payment
of taxes
1. BIR Commissioner, as expressly authorized General A freedom
by the NIRC, and subject to the following pardon given from a charge
conditions: Grantee to all erring or burden to
a. When a reasonable doubt as to validity of taxpayers which others
the claim against the taxpayer exists; or are subjected
b. The financial position of the taxpayer
demonstrates a clear inability to pay the How Applied Applied
assessed tax. (Sec. 204(A), NIRC) applied retroactively prospectively
There is None, because
2. Collector of Customs, with respect to revenue loss there were no
customs duties limited to cases where the Presence since there actual taxes
legitimate authority is specifically granted of actual was actually due as the
such as in the remission of duties. (Sec. 709, revenue taxes due, but person or
TCC) loss collection was transaction is
waived by the protected by
3. Customs Commissioner, subject to the government tax exemption
approval of the Secretary of Finance, in cases
involving the imposition of fines, surcharges, Q: Does the mere filing of tax amnesty return
and forfeitures. (Sec. 2316, TCC) shield the taxpayer from immunity against
prosecution?
TAX AMNESTY
A: NO. The taxpayer must have voluntarily
Tax amnesty, being a general pardon or disclosed his previously untaxed income and
intentional overlooking by the State of its must have paid the corresponding tax on such
authority to impose penalties on persons previously untaxed income. (People v. Judge
otherwise guilty of evasion or violation of a Castañeda, 165 SCRA 327, 1988)
revenue or tax law. It partakes of an absolute
waiver by the government of its right to collect Q: Can a taxpayer claim tax amnesty if he is a

UNIVERSITY OF SANTO TOMAS 42

2021 GOLDEN NOTES
 Taxation Law
withholding tax agent?
A: The claim of a taxpayer under a tax amnesty
shall be allowed when the liability involves the
deficiency in payment of income tax. However, it
must be disallowed when the taxpayer is
assessed on his capacity as a withholding tax
agent because the person who earned the
taxable income was another person other than
the withholding agent. (LG Electronics
Philippines, Inc. v. CIR, G.R. No. 165451, December
3, 2014)
Q: The BIR assessed Garments Co
deficiencies on taxes for non-payment of
VAT on its undeclared sales. While the case
was pending before the SC, Garment Co filed
a Manifestation and Motion that it had
availed and was able to comply with the
government’s tax amnesty program under
the 2007 Tax Amnesty Law. However, BIR
contends that Garment Co is disqualified per
“BIR RMC 19-2008” or “A Basic Guide on the
Tax Amnesty Act of 2007” which disqualifies
taxpayers with issues and cases that were
ruled by any court (even without finality) in
favor of the BIR prior to amnesty availment
of the taxpayer. Did Garment Co qualify for
the tax amnesty program?
A: YES. While tax amnesty, similar to a tax
exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing
authority. It is also a well-settled doctrine that
the rule-making power of administrative
agencies cannot be extended to amend or
expand statutory requirements or to embrace
matters not originally encompassed by the law.
Administrative regulations should always be in
accord with the provisions of the statute they
seek to carry into effect, and any resulting
inconsistency shall be resolved in favor of the
basic law. Thus, BIR RMC 19-2008 is invalid as
the exception goes beyond the scope of the
provisions of the 2007 Tax Amnesty Law. (CS
Garment, Inc. v. CIR, G.R. No. 182399, March 12,
2014)
Q: Transfield received Final Assessment
Notices issued by CIR. It filed a protest, but
such was not acted upon and BIR demanded
immediate payment of the assessments.
Transfield availed the benefits of the Tax
Amnesty Program under R.A. 9480,
complying with all the requirements. The CIR
43
insists that Transfield is still liable for
deficiency taxes, contending that under RMC
No. 19-2008, the latter is still disqualified to
avail of tax amnesty because it falls under the
exception of "delinquent accounts or
accounts receivable considered as assets by
the BIR or the Government, including self-
assessed tax." Is CIR’s contention correct?
A: NO. It remains undisputed that Transfield
complied with all the requirements pertaining to
its application for tax amnesty. A tax amnesty
operates as 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 is
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. A tax amnesty,
much like a tax exemption, is never favored nor
presumed in law. The grant of a tax amnesty is
akin to a tax exemption. Thus, it must be
construed strictly against the taxpayer and
liberally in favor of the taxing authority. 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 maxim expressio unius est exclusio alterius. In
implementing tax amnesty laws, the CIR cannot
now insert an exception where there is none
under the law. Indeed, a tax amnesty must be
construed strictly against the taxpayer and
liberally in favor of the taxing authority.
However, the rule-making power of
administrative agencies cannot be extended to
amend or expand statutory requirements or to
embrace matters not originally encompassed by
the law. Administrative regulations should
always be in accord with the provisions of the
statute they seek to implement, and any
resulting inconsistency shall be resolved in favor
of the basic law. (Commissioner of Internal
Revenue v. Transfield Philippines, Inc., G.R.
211449, January 16, 2019)
CONSTRUCTION AND INTERPRETATION OF
TAX LAWS, RULES AND REGULATIONS
TAX LAWS
GR: Tax statutes must be construed strictly
against the government and liberally in favor of
the taxpayer. (MCIAA v. Marcos, G.R. No. 120082
 General Principles
September 11, 1996) The imposition of a tax
cannot be presumed.
XPN: Unless a statute imposes a tax clearly,
expressly, and unambiguously, what applies is
the equally well-settled rule that the imposition
of a tax cannot be presumed. Where there is
doubt, tax laws must be construed strictly
against the government and in favor of the
taxpayer. This is because taxes are burdens on
the taxpayer and should not be unduly imposed
or presumed beyond what the statutes
expressly and clearly import. (CIR v. The
Philippine American Accident Insurance, Inc., 453
SCRA 668, G.R. No. 141658 March 18, 2005)
The rule that, in case of doubt of legislative
intent, the doubt must be liberally construed in
favor of taxpayer does not extend to cases
involving the issue of the validity of the tax law
itself which, in every case, is presumed valid.
TAX EXEMPTION AND EXCLUSION
GR: Statutes granting tax exemptions are
construed in strictissimi juris against the
taxpayers and liberally in favor of the taxing
authority. (MCIAA v. Marcos, G.R. No. 120082
September 11, 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, G.R. No. 179961, January 31, 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. Thus, the omission or
removal of PAGCOR from exemption from the
payment of corporate income tax is to require it
to pay corporate income tax. (PAGCOR v. BIR,
G.R. No. 172087, March 15, 2011)
XPNs:
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, G.R. No.
120082, September 11, 1996)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
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, G.R. No.
88291, May 31, 1991)
3. Erroneous payment of the tax, or absence of
law for the government’s exaction. (CIR v.
Fortune Tobacco Corporation, G.R. Nos.
167274-75, July 21, 2008)
TAX RULES AND REGULATIONS
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,
G.R. No. 175707, November 19, 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 implement. (CIR
v. SM Prime Holdings, Inc., 613 SCRA 774, 2010)
Admittedly the government is not estopped
from collecting taxes legally due because of
mistakes or errors of its agents. But like other
principles of law, this admits of exceptions in
the interest of justice and fair play, as where
injustice will result to the taxpayer. (CIR v. CA,
44
 Taxation Law
G.R. No. 117982, February 6, 1997)
PENAL PROVISIONS OF TAX LAWS
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, G.R.
No. 48134-37, October 18, 1990)
NON-RETROACTIVE APPLICATION
TO TAXPAYERS
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, G.R. No. 182045,
September 19, 2012)
c. Where the taxpayer acted in bad faith.
(Sec. 246, NIRC)
2. 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.
NOTE: Retroactive application of revenue laws
may be allowed if it will not amount to denial of
due process. There is violation of due process
when the tax law imposes harsh and oppressive
tax. (Dimaampao, 2015)

Revenue statutes are substantive laws and in no

sense must their application be equated with
that of remedial laws. (CIR v. Acosta, G.R. No.
154068, August 3, 2007)

GR: Tax laws operate prospectively whether

they enact, amend, or repeal.

XPN: Tax laws may only be given retroactive

application if the legislature expressly or
impliedly provides that it shall be given
retroactive application.

BIR Rules and Regulations that revoke,

modify or reverse a ruling or circular

GR: It shall not be given retroactive application

if the revocation, modification, or reversal will
be prejudicial to the taxpayers.

XPNs:
1. It may be given retroactive effect even if
such would be prejudicial to the taxpayer in
the following cases:
a. Where the taxpayer deliberately
misstates or omits material facts from
his return, or any document required of
him by the BIR;
b. Where the facts subsequently gathered
by the BIR are materially different from
the facts on which the ruling is based;
or

45
 National Taxation
NATIONAL TAXATION
TAXING AUTHORITY
Powers and duties of the BIR (JEnAReS)
1. Assessment and collection of all national
internal revenue taxes, fees, and charges;
2. Enforcement of all forfeitures, penalties, and
fines;
3. Execution of judgments in all cases decided
in its favor (by the CTA and regular courts);
4. Give effect and administer the supervisory
and police powers conferred to it by the
NIRC and other laws; and
5. Recommend to the Secretary of Finance all
needful rules and regulations for the
effective enforcement of the provision of the
NIRC.
Chief Officials of the BIR
The BIR is headed by the CIR and 4 Deputy
Commissioners, who lead the following
divisions:
1. Operations group;
2. Legal Inspection Group;
3. Resource and Management Group; and
4. Information Systems Group.
Q: Is the BIR authorized to collect estate tax
deficiencies by the summary remedy of levy
upon and sale of real properties of the
decedent without first securing the authority
of the court sitting in probate over the
supposed will of the decedent? (1998 BAR)
A: YES. The BIR is authorized to collect estate
tax deficiency through the summary remedy of
levying upon and sale of real properties of a
decedent without the cognition and authority of
the court sitting in probate over the supposed
will of the deceased because of the collection of
estate tax is executive in character. As such the
estate tax is exempted from the application of
the statute of non-claims, and this is justified by
the necessity of government funding,
immortalized in the maxim that taxes are the
lifeblood of the government. (Marcos v. CIR, G.R.
No. 120880, June 5, 1997)
Q: In 2008, Apo Cement availed of the tax
amnesty under Republic Act No. 9480 which
affects its 1999 deficiency documentary
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
stamp taxes. It filed a Motion to Cancel Tax
Assessment which was granted by the CTA.
The CTA found that Apo Cement is a qualified
tax amnesty applicant under Republic Act No.
9480 and fully compliant with the
requirements of the law. The Commissioner
of Internal Revenue filed a Motion for
Reconsideration on October 19, 2009. It
disputes the correctness of Apo Cement’s
2005 SALN because it allegedly did not
include in its declaration of assets in the
SALN the 57,500,000 shares of stocks it
acquired in 1999 from its subsidiary. Does
the CIR have the standing to question the
SALN of Apo Cement?
A: NO. Under Section 4 of Republic Act No. 9480,
there is a presumption of correctness of the
SALN and only parties other than the Bureau of
Internal Revenue or its agents may dispute the
correctness of the SALN. Even assuming that
petitioner has the standing to question the SALN,
Republic Act No. 9480 provides that the
proceeding to challenge the SALN must be
initiated within one year following the date of
filing of the Tax Amnesty documents.
Respondent asserts that it availed of the tax
amnesty program on January 25, 2008. Hence,
petitioner’s challenge made only in April 2009,
was already time-barred. (CIR v. APO, G.R. No.
193381, February 8, 2017)
JURISDICTION, POWER, AND FUNCTIONS OF
THE COMMISSIONER OF INTERNAL REVENUE
Powers of the Commissioner
1. Power to interpret tax laws and to decide
cases (Sec. 4, NIRC); and
2. Power to obtain information and to summon
or examine and take testimony of persons.
(Sec. 5, NIRC)
Q: What are the purposes of these powers?
A:
1. To ascertain correctness of the return;
2. To make a return when none has been made;
3. To determine liability of any person for any
internal revenue tax;
4. To collect such liability; and
5. To evaluate tax compliance.
Q: What are the scope of such powers?
46
 Taxation Law
A:
1. To examine any book, paper, record, or other
data which may be relevant or material to
such inquiry;
2. To obtain any information (costs, volume of
production, receipts, sales, gross income) on
a regular basis, from any person other than
the person under investigation and any office
or officer of the national or local government;
3. To summon the following to produce records
and to give testimony:
a. The person liable for tax or required to file
a return;
b. Any officer or employee of such person;
c. Any person having in his possession,
custody, and care the books of accounts,
accounting records of entries related to
the business of such taxpayer.
4. Power to make assessments and prescribe
additional requirements for tax
administration and enforcement (Sec. 6,
NIRC);
5. Power to assign internal revenue officers and
other employees (Secs. 16 and 17, NIRC); and
6. Power to suspend the business operations of
a taxpayer for violations of VAT rules. (Sec.
115, NIRC)
Q: Can a Regional Trial Court order the
Commission on Audit (COA), Bureau of
Internal Revenue (BIR), and the Bureau of
Customs (BOC) to open and examine the
books of accounts of a domestic private
juridical entity?
A: NO. The RTC cannot order COA to open and
examine the books of accounts of a domestic
private juridical entity because its audit
jurisdiction generally covers public entities. On
the other hand, the BIR, as allowed by law, can
only to ascertain the correctness of any return,
or in making a return when none was made, or
in determining the liability of any person for any
internal revenue tax, or in collecting such
liability, or evaluating the person's tax
compliance. Lastly, the BOCC is authorized to
audit or examine all books, records, and
documents of importers necessary or relevant
for the purpose of collecting the proper duties
and taxes. In consideration of the fact that there
are no taxes or duties involved in this case, the
BIR and the BOC likewise have no power and
authority to open and examine the books of
accounts of the aforementioned domestic
47
private juridical entity. (The Commission on
Audit, Represented by Its Chairman, The Bureau
of Internal Revenue, Represented by Its
Commissioner, and The Bureau of Customs,
Represented by Its Commissioner v. Hon. Silvino T.
Pampilo, Jr., Et Al./Chevron Philippines, Inc. v.
Hon. Silvino T. Pampilo, Jr., et al./Petron
Corporation v. Hon. Silvino T. Pampilo, Jr., et al.,
G.R. No. 188760/189060/189333, June 30, 2020)
Q: When can the CIR suspend the business
operation of a taxpayer?
A:
1. In the case of VAT-registered person:
a. Failure to issue receipts or invoices;
a. Failure to file a VAT return as required
under Sec. 114; or
b. Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipts for the taxable
quarter.
2. Failure of any person to register as required
under Sec. 236:
The temporary closure of the establishment
shall be for the duration of not less than 5
days and shall be lifted only upon
compliance with whatever requirements
prescribed by the CIR in the closure order.
(Sec. 115 NIRC)
The CIR is also authorized to do the following
1. To terminate taxable period for reasons
provided in the NIRC:
a. Retiring from business subject to tax;
b. Intending to leave the Philippines or to
remove his property therefrom or to
hide or conceal his property; or
c. Performing any act tending to obstruct
the proceedings for the collection of the
tax for the past or current quarter or
year or to render the same totally or
partly ineffective unless such
proceedings are begun immediately.
2. To make or amend return in case taxpayer
fails to file a return or files a false or
fraudulent return.
3. To examine returns and determine tax due.
4. To prescribe any additional requirements
for the submission or preparation of
 National Taxation
financial statements accompanying tax
returns.
5. To inquire into bank deposits of:
a. Decedent to determine his gross
income;
b. A taxpayer who filed application to
compromise payment of tax liability by
reason of financial incapacity; and
c. A specific taxpayer or taxpayers subject
of a request for the supply of tax
information from a foreign tax authority
pursuant to an international convention
or agreement on tax matters to which
the Philippines is a signatory or a party
of. Provided, that the information
obtained from the banks and other
financial institutions may be used by the
BIR for tax assessment, verification,
audit and enforcement purposes.
In case of a request from a foreign tax
authority for tax information held by
banks and financial institutions, the
exchange of information shall be done in
a secure manner to ensure
confidentiality thereof under such rules
and regulations as may be promulgated
by the Secretary of Finance, upon
recommendation of the Commissioner.
The Commissioner shall forward the
information as promptly as possible to
the requesting foreign tax authority. To
ensure a prompt response, the
Commissioner shall confirm receipt of a
request in writing to the requesting tax
authority and shall notify the latter of
deficiencies in the request, if any, within
sixty (60) days from receipt of the
request.
If the Commissioner is unable to obtain
and provide the information within
ninety (90) days from receipt of the
request, due to obstacles encountered in
furnishing the information or when the
bank or financial institution refuses to
furnish the information, he shall
immediately inform the requesting tax
authority of the same, explaining the
nature of the obstacles encountered or
the reasons for refusal.
The term “foreign tax authority,” as
used herein, shall refer to the tax
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
authority or tax administration of the
requesting State under the tax treaty or
convention to which the Philippines is a
signatory or a party of.
6. To delegate powers vested upon him to
subordinate officials with rank equivalent to
Division Chief or higher, subject to
limitations and restrictions imposed under
the rules and regulations.
7. To prescribe property values.
NOTE: Also known as zonal value.
8. To take inventory of goods of any taxpayer,
and place any business under observation or
surveillance IF there is reason to believe
that such is not declaring his correct income,
sales or receipts for tax purposes;
9. To register tax agents.
The Commissioner shall accredit and
register, based on their professional
competence, integrity and moral fitness,
individuals and general professional
partnerships and their representatives who
prepare and file tax returns, statements,
reports, protests, and other papers with or
who appear before, the Bureau for
taxpayers.
Q: What are the powers of the BIR which
cannot be delegated?
A: (RICA)
1. To Recommend promulgation of rules and
regulations by the Secretary of Finance.
2. To Issue rulings of first impression or to
reverse, revoke or modify any existing rule
of the BIR.
GR: To Compromise or abate any tax
liability.
XPN: The Regional Evaluation Board may
compromise assessments involving
deficiency taxes of P500,000 or less and
minor crime violations.
3. To Assign or reassign internal revenue
officers to establishments where articles
subject to excise tax are kept.
48
 Taxation Law
Q: Will errors or mistakes of administrative
officials bind the government as to the
collection of taxes?
A: GR: Errors or mistakes of administrative
officials (including the BIR) should never be
allowed to jeopardize the financial position of
the government.
Reason: Taxes are the lifeblood of the nation
through which the government agencies
continue to operate and with which the State
effects its functions for the welfare of its
constituents. (CIR v. Citytrust and CTA, G.R. No.
106611, July 21, 1994)
XPN: For the purpose of safeguarding taxpayers
from any unreasonable examination,
investigation, or assessment, our tax law
provides a statute of limitations in the collection
of taxes. Thus, the law on prescription, being a
remedial measure, should be liberally construed
in order to afford such protection. As a corollary,
the exceptions to the law on prescription should
perforce be strictly construed. (CIR v. Goodrich
Philippines Inc., G.R No. 104171, February 24,
1999)
NOTE: In the Citytrust case, which involves a
claim for refund, the error or neglect was the
failure of the Solicitor General to present its
evidence, as counsel for the CIR, due to the
unavailability of the necessary records from BIR,
prompting the Solicitor to submit the case for
decision without presenting any evidence.
While in Goodrich, the error committed refers to
the neglect of the BIR to make assessment within
the 3-year period as required in Sec. 203, NIRC.
Powers of the Commissioner to interpret tax
laws and to decide tax cases
The power to interpret the provisions of NIRC
and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner,
subject to review by the Secretary of Finance.
The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto,
or other matters arising under the NIRC or other
laws or portions thereof administered by the
BIR is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of
Tax Appeals. (Sec. 4, NIRC)
49
Power to interpret
1. The NIRC; and
2. Other tax laws.
Power to decide on
1. Disputed assessments,
2. Refunds of internal revenue taxes,
3. Fees or other charges, and penalties
imposed in relation thereto,
4. Other matters arising under the NIRC or
other laws or portions thereof
administered by the BIR.
Q: On January 27, 2017, Ramon, the
comptroller of Vantage Point, Inc., executed a
document entitled “Waiver of the Statute of
Limitations” in connection with the BIR’s
investigation of the tax liabilities of the
company for 2012.
However, the Board of Directors of Vantage
Point, Inc., did not adopt a board resolution
authorizing Ramon to execute the waiver.
On October 14, 2017, Vantage Point, Inc.,
received a preliminary assessment notice
from the BIR indicating its deficiency
withholding taxes for the year 2012. Vantage
Point, Inc., filed its protest. On October 30,
2017, the BIR issued a formal letter of
demand and final assessment notice. Vantage
Point, Inc., again filed a protest. The CIR
denied the protests and directed the
collection of the assessed deficiency taxes.
Accordingly, Vantage Point, Inc., filed a
petition for review in the CTA to seek the
cancellation and withdrawal of the
assessment on the ground of prescription.
a. What constitutes a valid waiver of the
statute of limitations for the assessment
and collection of taxes? Explain your
answer.
b. Has the right of the Government to assess
and collect deficiency taxes from Vantage
Point, Inc. for the year 2012 prescribed?
Explain your answer. (2017 BAR)
A:
a. Generally, a valid waiver of the statute of
limitations for the assessment and collection
of taxes must be executed by the taxpayer
and accepted by the BIR prior to the
expiration of the period which it seeks to
 National Taxation
extend. The same must also be executed by
the taxpayer or his duly authorized
representative, or in the case of a
corporation, it must be signed by any of its
responsible officers. (CIR v. Kudos Metal
Corporation, G.R. No. 178087, May 5, 2010)
Such requirements must be met considering
that a waiver of the statute of limitations
under the NIRC, to a certain extent, is a
derogation of the taxpayers right to security
against prolonged and unscrupulous
investigations and must therefore be
carefully and strictly construed. (Philippine
Journalists, Inc. v. CIR, G.R. No. 162852,
December 16, 2004)
b. YES, the final assessment was issued beyond
the three-year prescriptive period to make
an assessment. (Section 203, NIRC) The
Waiver did not extend the three-year
prescriptive period since it was executed
after the expiration of such period.
Non-Retroactivity of Rulings
The rulings of the BIR are not retroactive. Any
revocation, modification, or reversal of any of
the rules and regulations promulgated or any of
the rulings or circulars promulgated by the CIR
shall not be given retroactive application if it will
be prejudicial to the taxpayers, except in the
following cases:
1. Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
2. Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith (Sec.
246, NIRC)
NOTE: If the revocation is due to the fact that
the regulation is erroneous or contrary to law,
such revocation shall have retroactive operation
as to affect past transactions, because a wrong
construction of the law cannot give rise to a
vested right that can be invoked by a taxpayer.
Q: XYZ Corporation, an export-oriented
company, was able to secure a BIR Ruling in
June 2005 that exempts from tax the
importation some of its raw materials. The
ruling is of first impression, which means the
interpretation made by the CIR is one
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
without established precedents.
Subsequently, however, the BIR issued
another ruling which in effect would subject
to tax such kind of importation. XYZ
Corporation is concerned that said ruling
may have a retroactive effect, which means
that all their importations done before the
issuance of the second ruling could be
subject to tax.
a. What is a BIR Ruling?
b. What is required to make a BIR ruling of
first impression a valid one?
c. Does a BIR ruling have a retroactive
effect, considering the principle that tax
exemptions should be interpreted
strictly against the taxpayer? (2007 BAR)
A:
a. A BIR ruling is an administrative
interpretation of the Revenue Law as
applied and implemented by the Bureau.
They can be relied upon by taxpayers and
are valid until otherwise determined by the
courts or modified or revoked by a
subsequent ruling or opinion. They are
accorded great weight and respect, but not
binding on the courts. (Commission v.
Ledesma, L-17509, January 30, 1970)
b. A BIR ruling of first impression, to be a valid
ruling, must be issued within the scope of
authority granted to the CIR, and not
contravene any law or decision of the SC.
(CIR v. Michel Lhuillier Pawnshop, Inc., G.R.
No. 150947, July 15, 2003; Sec. 7, NIRC)
c. A BIR ruling cannot be given retroactive
effect if it would be prejudicial to the
taxpayer. Sec. 246 of the NIRC provides for
retroactive effect in the following cases:
1. Where the taxpayer deliberately
misstates or omits material facts from
his return, or any document required of
him by the BIR;
2. Where the facts subsequently gathered
by the BIR are materially different from
the facts on which the rulings are based;
or
3. Where the taxpayer acted in bad faith.
(Sec. 246, NIRC)
Q: Due to an uncertainty whether or not a
new tax law is applicable to printing
companies, DEF Printers submitted a legal
query to the BIR on that issue. The BIR issued
50
 Taxation Law
a ruling that printing companies are not
covered by the new law. Relying on this
ruling, DEF Printers did not pay said tax.
Subsequently, however, the BIR reversed the
ruling and issued a new one stating that the
tax covers printing companies. Could the BIR
now assess DEF Printers for back taxes
corresponding to the years before the new
ruling? Reason briefly. (2004 BAR)
A: NO. Reversal of a ruling shall not be given a
retroactive application if said reversal will be
prejudicial to the taxpayer. Therefore, the BIR
cannot assess DEF printers for back taxes
because it would be violative of the principle of
non-retroactivity of rulings and doing so would
result in grave injustice to the taxpayer who
relied on the first ruling in good faith. (Sec. 246,
NIRC; CIR v. Burroughs, Inc., 142 SCRA 324, 1986)
Various Kinds of Revenue Issuances by the
CIR
1. Revenue Regulations (RRs) – Issuances
signed by the Secretary of Finance (SoF),
upon recommendation of the CIR, that
specify, prescribe or define rules and
regulations for the effective enforcement of
the provisions of the Tax Code.
2. Revenue Memorandum Orders (RMOs) -
Issuances signed by the CIR that provide
directives or instructions; prescribe
guidelines; and outline processes,
operations, activities, workflows, methods
and procedures necessary in the
implementation of stated policies, goals,
objectives, plans and programs of the BIR in
all areas of operations, except auditing.
3. Revenue Memorandum Circulars (RMCs) -
Issuances signed by the CIR which publish
pertinent and applicable portions, as well as
amplifications, of laws, rules, regulations,
and precedents issued by the BIR and other
agencies/offices.
4. Revenue Administrative Orders (RAOs)-
Issuances signed by the CIR that cover
subject matters dealing strictly with the
permanent administrative set-up of the BIR,
more specifically, the organizational
structure, statements of functions and/or
responsibilities of BIR offices, definitions
and delegations of authority, staffing and
51
personnel requirements and standards of
performance.
5. Revenue Delegation of Authority Orders
(RDAOs) - Issuances signed by the CIR which
refer to functions delegated by the CIR to
revenue officials in accordance with law.
6. Revenue Special Orders (RSOs) –
Administrative order issued by the CIR
assigning revenue officers and employees of
the BIR to special duties which shall not
exceed 1 year.
7. BIR Rulings – official positions of the CIR to
queries raised by taxpayers and other
stakeholders relative to clarification and
interpretation of tax laws. Rulings may come
in different forms:
a. BIR Rulings
b. VAT Rulings
c. Rulings issued by International Tax
Affairs Division (ITAD); and
d. Rulings issued thru delegated
authorities or unnumbered rulings
8. Revenue Audit Memorandum Orders (RAMOs)
– Declarations of audit programs of the BIR
for a specific taxable year signed by the CIR.
9. Revenue Memorandum Rulings (RMRs) –
Rulings, opinions, and interpretations
signed by the CIR with respect to the 1997
Tax Code as amended, as applied to a
specific set of facts, with or without
established precedents, for guidance of
taxpayers.
10. Revenue Bulletins (RBs) – periodic issuances,
notices, and official announcements of the
CIR that consolidate the BIR’s position on
certain issues, for the guidance of the public
signed by the CIR.
11. Revenue Travel Assignment Orders (RTAOs) –
issued by the CIR transferring, assigning, or
re-assigning revenue officers or employees
to other or special duties connected with the
enforcement or administration of revenue
laws as the exigencies of the services may
require.
Limit: Revenue officers assigned to perform
assessment or collection functions shall not
remain in the same assignment for more
 National Taxation
than 3 years. conveyed thither, their manner of storage
and method of keeping entries and records,
RULE-MAKING AUTHORITY OF also the books to be kept by Revenue
THE SECRETARY OF FINANCE Inspectors and the reports to be made by
them in connection with their supervision
of such houses.
The Secretary of Finance, upon recommendation
of the Commissioner, shall promulgate all
6. The conditions under which denatured
needful rules and regulations for the effective
alcohol may be removed and dealt in, the
enforcement of the provisions of NIRC. (Sec. 244,
character and quantity of the denaturing
NIRC)
material to be used, the manner in which
the process of denaturing shall be effected,
General principles on the rule-making power
so as to render the alcohol suitably
denatured and unfit for oral intake, the
1. Rules and regulations, as well as
bonds to be given, the books and records to
administrative opinions, and rulings,
be kept, the entries to be made therein, the
ordinarily should deserve weight and respect
reports to be made to the CIR, and the signs
by the courts.
to be displayed in the business or by the
2. All such issuances must not override but
person for whom such denaturing is done
must remain consistent and in harmony with
or by whom, such alcohol is dealt in;
the law they seek to apply and implement.
3. Administrative rules and regulations are
7. The manner in which revenue shall be
intended to carry out, neither to supplant nor
collected and paid, the instrument,
to modify, the law. (CIR v. CA, G.R. No. 108358,
document or object to which revenue
January 20, 1995)
stamps shall be affixed, the mode of
cancellation, the manner in which the
Specific Provisions to be Contained in Rules
proper books, records, invoices and other
and Regulations
papers shall be kept, and entries therein
made by the person subject to the tax, as
Rules and regulations must contain provisions
well as the manner in which licenses and
specifying, prescribing, or defining:
stamps shall be gathered up and returned
after serving their purposes.
1. The time and manner in which Revenue
Regional Director shall canvass their
8. The conditions to be observed by revenue
respective Revenue Regions to discover
officers respecting the enforcement of Title
persons and property liable to national
III imposing a tax on estate of a decedent,
internal revenue taxes, and the manner
and other transfers mortis causa, as well as
their lists and records of taxable persons
on gifts and such other rules and
and taxable objects shall be made and kept.
regulations which the CIR may consider
suitable for the enforcement of the said
2. The forms of labels, brands or marks to be
Title III.
required on goods subject to excise tax, and
the manner how the labeling, branding or
9. The manner tax returns, information, and
marking shall be effected.
reports shall be prepared and reported, and
the tax collected and paid, as well as the
3. The condition and manner for goods
conditions under which evidence of
intended for export, which if not exported
payment shall be furnished the taxpayer,
would be subject to an excise tax, shall be
and the preparation and publication of tax
labeled, branded or marked.
statistics.
4. The conditions to be observed by revenue
10. The manner in which internal revenue taxes,
officers respecting the institutions and
such as income tax, including withholding
conduct of legal actions and proceedings.
tax, estate and donor's taxes, value-added
tax, other percentage taxes, excise taxes
5. The conditions under which goods intended
and documentary stamp taxes shall be paid
for storage in bonded warehouses shall be
through the collection officers of the BIR or

UNIVERSITY OF SANTO TOMAS 52

2021 GOLDEN NOTES
 Taxation Law
through duly authorized agent banks which
are hereby deputized to receive payments
of such taxes and the returns, papers and
statements that may be filed by the
taxpayers in connection with the payment
of the tax: Provided, however, that
notwithstanding the other provisions of the
NIRC prescribing the place of filing of
returns and payment of taxes, the CIR may,
by rules and regulations require that the
tax returns, papers and statements and
taxes of large taxpayers be filed and paid,
respectively, through collection officers or
through duly authorized agent banks:
Provided, further, that the CIR can exercise
this power within 6 years from the
approval of R.A. 7646 or the completion of
its comprehensive computerization
program, whichever comes earlier:
Provided, finally, that separate venues for
the Luzon, Visayas and Mindanao areas
may be designated for the filing of tax
returns and payment of taxes by said large
taxpayers. (Sec. 245, NIRC)
LARGE TAXPAYER
A large taxpayer is anyone who satisfies any
of the following criteria
1. Value-Added Tax (VAT) – Business
establishment with VAT paid or payable of
at least One hundred thousand pesos
(P100, 000) for any quarter of the
preceding taxable year.
2. Excise tax - Business establishment with
excise tax paid or payable of at least One
million pesos (P1, 000,000) for the
preceding taxable year.
3. Corporate Income Tax – Business
establishment with annual income tax paid
or payable of at least One million pesos
(P1,000,000) for the preceding taxable
year.
4. Withholding tax – Business establishment
with withholding tax payment or
remittance of at least One million pesos
(P1,000,000) for the preceding taxable
year.
Provided, however, that the Secretary of
Finance, upon recommendation of the
53
Commissioner, may modify or add to the above
criteria for determining a large taxpayer after
considering such factors as inflation, volume of
business, wage and employment levels, and
similar economic factors.
The penalties prescribed under Section 248 of
this Code shall be imposed on any violation of
the rules and regulations issued by the Secretary
of Finance, upon recommendation of the
Commissioner, prescribing the place of filing of
returns and payments of taxes by large
taxpayers. (Sec. 245, NIRC)
The following taxpayers shall be
automatically classified as candidate to be a
Large Taxpayer and will be notified in
writing as such by the CIR
1. All branches of a taxpayer under the Large
Taxpayers Service;
2. Subsidiaries, affiliates, and entities of
conglomerates or group of companies of a
large taxpayer initially listed as of the
effectivity of this Regulations;
3. The surviving company, in case of merger or
consolidation involving a large taxpayer;
4. Any corporation that absorbs the operation
or business in case of spin-off/s of any large
taxpayer;
5. Corporations with an authorized
capitalization of at least P300 million
registered with the Securities and Exchange
Commission (SEC);
6. Multi-national enterprises (MNEs) with an
authorized capitalization or assigned
capital of at least P300 million;
7. Publicly-listed corporations;
8. Universal, Commercial, and Foreign banks:
The Regular Banking Unit (RBU) and the
Foreign Currency Deposit Unit
(FCDU)/Offshore Banking Unit (OBU) of a
bank shall be considered as one taxpayer
for purposes of classifying it as a Large
Taxpayer, even if the said units are
assigned different Taxpayer Identification
Numbers (TINs);
 National Taxation

9. Taxpayers with an authorized capitalization

of at least P100 million belonging to the
following industries: Banks, Insurance,
Telecommunication, Utilities, Petroleum,
Tobacco and Alcohol; and

10. Corporate taxpayers engaged in the

production of metallic minerals.

UNIVERSITY OF SANTO TOMAS 54

2021 GOLDEN NOTES
 Taxation Law
INCOME TAX INCOME TAX SYSTEMS

1. Global tax system;

DEFINITION, NATURE, AND 2. Schedular tax system; and
GENERAL PRINCIPLES 3. Semi-schedular or semi-global tax system.

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)
Income tax is a tax on all yearly profits arising
from property, profession, trade, or business, or
a tax on person’s income, emoluments, profits
and the like. (Fisher v. Trinidad, G.R. No. L-19030,
October 20, 1922)
Enumerated income tax systems are discussed
in detail below.
Global
System employed where the tax system views
indifferently the tax base and generally treats in
common all categories of taxable income of the
individual. (Tan v. Del Rosario, Jr., 237 SCRA 324,
331)
Schedular

It is generally regarded as an excise tax. It is not System employed where the income tax
levied upon persons, property, funds, or profits treatment varies and is made to depend on the
but on the privilege of receiving said income kind or category of taxable income of the
or profit. taxpayer. (Tan v. Del Rosario, Jr., 237 SCRA 324,
331)
Q: GHI, Inc. is a corporation authorized to
engage in the business of manufacturing Others
ultra-high density microprocessor unit
packages. After its registration on July 5, All compensation income, business, or
2005, GHI, Inc. constructed buildings and professional income, capital gain, passive
purchased machineries and equipment. As of income, and other income not subject to final tax
December 31, 2005, the total cost of the are added together to arrive at the gross income.
machineries and equipment amounted to After deducting the allowable deductions and
₱250,000,000.00. However, GHI, Inc. failed to exemptions from the gross income, the taxable
commence operations. Its factory was income is subjected to one set of graduated tax
temporarily closed effective September 15, rate for individual or normal corporate income
2010. On October 1, 2010, it sold its tax rate for corporation. (Mamalateo, 2014)
machineries and equipment to JKL
Integrated for ₱300,000,000.00. Thereafter, Schedular Treatment vs. Global Treatment
GHI, Inc. was dissolved on November 30, (1994 BAR)
2010.
SCHEDULAR
Is the sale of the machineries and equipment GLOBAL TREATMENT
TREATMENT
to JKL Integrated subject to normal corporate Different tax rates Unitary or single tax
income tax or capital gains tax? Explain. rate
(2019 BAR) Different categories No need for
of taxable income classification as all
A: The sale of machineries and equipment to JKL taxpayers are subjected
Integrated subject to normal corporate income to a single tax rate
tax. Under Sec. 27(D)(5) of the NIRC, a Usually used in Applied to corporations
corporation is only subject to capital gains tax income taxation of
for the sale of land and buildings. In this case, individuals
GHI Inc., a corporation, sold machineries and (Business income, (Business income,
equipment. Hence, the sale is subject to normal professional income, professional income,
corporate income tax. passive income, passive income, illegal
illegal income) income)

55
 National Taxation
You cannot add all of All of them are added b. Only on his income from sources within the
them together, due to together and subjected Philippines, if he qualifies as a non-resident
different tax rates. to a single tax rate. citizen.

FEATURES OF THE 2. Residence

PHILIPPINE INCOME TAX LAW
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 (i.e.,
income tax, donor’s tax, estate tax).
On the other hand, 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 (i.e.,
VAT), where the seller is liable to pay the
output VAT but shifts the burden to the
buyer).
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
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)

2. Progressive tax NOTE: Only resident citizens and domestic

corporations are taxable on worldwide income.
Tax base increases as the tax rate increases.
It is founded on the “ability to pay” principle. GENERAL PRINCIPLES OF INCOME TAXATION

3. Comprehensive Except when otherwise provided in the NIRC:

It adopted the citizenship principle, the 1. A RC is taxable on all income derived from
residence principle, and the source sources within and without the Philippines.
principle. 2. An NRC is taxable only on income derived
from sources within the Philippines.
4. Semi-schedular or semi-global tax system 3. An individual citizen who is working and
(Mamalateo, 2014) deriving income from abroad as an overseas
contract worker (OCW) is taxable only on
CRITERIA IN IMPOSING income from sources within the Philippines.
PHILIPPINE INCOME TAX LAW 4. An alien, (RA or NRA), is taxable only on
income within the Philippines.
1. Citizenship 5. A domestic corporation (DC) is taxable on all
income derived within and without the
A citizen of the Philippines is subject to Philippines.
Philippine income tax: 6. A foreign corporation, (engaged or not in
trade or business in the Philippines), is
a. On his worldwide income, if he resides in taxable only on income derived from
the Philippines; sources within the Philippines.

RC NRC RA NRA DC FC
Within ✓ ✓ ✓ ✓ ✓ ✓
Without ✓ x x x ✓ x

UNIVERSITY OF SANTO TOMAS 56

2021 GOLDEN NOTES
 Taxation Law
TYPES OF PHILIPPINE INCOME TAX A resident citizen can be (a) engaged in trade or
business or in the exercise of his profession in
1. Minimum corporate income tax (MCIT); the Philippines; (b) not engaged in trade or
2. Capital gains tax on sale or exchange of business or in the exercise of his profession; or
unlisted shares of stock of a domestic (c) engaged in trade or business or in the
corporation classified as capital asset; exercise of his profession and at the same time,
3. Capital gains tax on sale or exchange of real he derives compensation and/or other income
property located in the Philippines classified “mixed income.” (Mamalateo, 2014)
as capital asset
4. Final withholding tax on certain passive Non-resident Citizens
investment incomes
5. Final withholding tax on income payments 1. A citizen of the Philippines who establishes
made to non-resident individuals or to the satisfaction of the Commissioner the
corporations fact of his physical presence abroad with a
6. Fringe benefit tax (FBT) definite intention to reside therein.
7. Branch profit remittance tax
8. Improperly accumulated earnings tax 2. A citizen of the Philippines who leaves the
(IAET) Philippines during the taxable year to
9. Normal corporate income tax on reside abroad, either as an immigrant or for
corporations employment on a permanent basis.
10. Graduated income tax on individuals, or
11. Optional income tax of 8% for individuals 3. A citizen of the Philippines who works and
12. Special income tax on certain corporations derives income from abroad and whose
employment thereat requires him to be
KINDS OF TAXPAYERS physically present abroad most of the time
during the taxable year.
1. Individuals
a. Citizen 4. A citizen who has been previously
i. Resident Citizen (RC) considered as non-resident citizen and who
ii. Non-Resident Citizen (NRC) arrives in the Philippines at any time during
b. Aliens the taxable year to reside permanently in
i. Resident Alien (RA) the Philippines shall likewise be treated as
ii. Non-Resident Alien (NRA) a non-resident citizen for the taxable year
(1) Engaged in Trade or Business in which he arrives in the Philippines with
(NRA-ETB) respect to his income derived from sources
(2) Not Engaged in Trade or abroad until the date of his arrival in the
Business (NRA-NETB) Philippines.
iii. Special Alien
c. Special class of individual employees 5. The taxpayer shall submit proof to the
i. Minimum wage earner Commissioner to show his intention of
leaving the Philippines to reside
2. Corporations permanently abroad or to return to and
a. Domestic reside in the Philippines as the case may be
b. Foreign for purposes of this Section. (Sec. 22(E),
i. Resident foreign corporation NIRC)
(RFC)
ii. Non-resident foreign corporation Resident Alien
(NRFC)
c. Joint venture and consortium An individual whose residence is within the
d. Partnership Philippines and who is not a citizen thereof. (Sec.
22(F), NIRC)
3. Estates
4. Trusts Non-resident Alien

Resident Citizens An individual whose residence is not within the

57
 National Taxation
Philippines and who is not a citizen thereof. (Sec.
22(G), NIRC)
Domestic Corporation
Corporations created or organized in the
Philippines or under its laws. (Sec. 22(C), NIRC)
Foreign Corporation
A corporation which is not domestic. (Sec. 22(D),
NIRC)
Resident Foreign Corporation
A foreign corporation engaged in trade or
business within the Philippines. (Sec. 22(H),
NIRC)
Non-resident Foreign Corporation
A foreign corporation not engaged in trade or
business within the Philippines. (Sec. 22(I),
NIRC)
Importance of knowing the classification of
taxpayers
In order to determine the applicable (GREED)
1. Gross income
2. Income tax Rates
3. Exclusions from gross income
4. Exemptions
5. Deductions
It is important to know the classification of
different taxpayers since tax treatments for
those enumerate above varies from one
taxpayer to another.
It is important to know the tax status of a
taxpayer for income tax purposes, since only
resident citizens and domestic corporations are
taxable on their worldwide income, while the
other types of individual and corporate
taxpayers are taxable only on income derived
from sources within the Philippines. Thus, a
citizen of the Philippines residing therein is
taxable on all income derived from sources
within and without the Philippines.
A non-resident citizen is taxable only on income
derived from sources within the Philippines. A
citizen of the Philippines who is working and
deriving income from abroad as an overseas
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
contract worker is taxable only on income 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.
An alien individual, whether or not a resident of
the Philippines, is taxable only on income
derived from sources within the Philippines.
On the other hand, a domestic corporation is
taxable on all its income from sources within
and without the Philippines.
However, a foreign corporation, whether
resident or non-resident, is taxable only on
income from sources within the Philippines.
(Mamalateo, 2014)
TAXABLE PERIOD
Taxable period is a period within which the net
income is computed as a whole for income tax
purposes.
Kinds of taxable periods
1. Calendar period
The 12 consecutive months starting from
January 1 and ending December 31.
Instances when calendar year shall be
the basis for computing net income:
a. When the taxpayer is an individual;
b. When the taxpayer does not keep books
of account;
c. When the taxpayer has no annual
accounting period; or
d. When the taxpayer is an estate or a
trust.
NOTE: Taxpayers other than a corporation
are required to use only the calendar year.
The final adjustment return shall be filed on
or before the fifteenth (15th) day of April.
2. Fiscal period
It is a period of 12 months ending on the last
day of any month other than December.
(NIRC, Sec. 22 (Q))
58
 Taxation Law
NOTE: The final adjustment return shall be
filed on or before the fifteenth (15th) day of
the fourth (4th) month following the close of
the fiscal year.
3. Short period
GR: The taxable period, whether it is a
calendar year or fiscal year always consists
of 12 months.
XPN: Instances when the taxpayer may have
a taxable period of less than 12 months:
1. When the corporation is newly
organized and commenced operations
on any day within the year
2. When the corporation changes its
accounting period
3. When a corporation is dissolved
4. When the Commissioner of Internal
Revenue, by authority, terminates the
taxable period of a taxpayer (NIRC, Sec.
6(D))
5. In case of final return of the decedent
and such period ends at the time of his
death
Q: Differentiate between a calendar year and
a fiscal year. (2019 BAR)
A: Calendar year means an accounting period of
twelve months ending on the last day of
December. On the other hand, fiscal year means
an accounting period of twelve months ending
on the last day of any month other than the
month of December.
Q: When is the deadline for the filing of a
corporation's final adjustment return for a
calendar year? How about for a fiscal year?
(2019 BAR)
A: For a calendar year, the final return should be
filed on or before the 15th day of April following
the close of the taxable year. For a fiscal year, the
final return is filed on or before the 15th day of
the 4th month following the close of the taxable
year.
CONCEPT OF INCOME
Income refers to all wealth which flows into the
taxpayer other than as mere return of capital. It
includes the forms of income specifically
59
described as gains and profits, including gains
derived from the sale or other disposition of
capital assets. (Sec. 36, RR No. 2)
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, G.R. No. 12287, August 8, 1918)
WHEN INCOME IS TAXABLE
The following are important considerations to
discover whether or not there is income for tax
purposes:
1. Existence of income;
2. Realization of income; and
3. Recognition of income.
Enumerated important considerations are
discussed in detail below.
Existence of income
A primary consideration in income taxation is
that there must be income before there could be
income taxation. (Domondon, 2013)
Receipts not considered as income
1. Advance payments or deposits for payments;
Advances are not revenues of the period in
which they are received but as revenue of the
period or periods in which they are earned.
2. Property received as compensation but
subject to forfeiture;
3. Assessments for additional corporate
contributions;
4. Increments resulting from revaluation of
property;
Until the revalued property is disposed of
there is no income realized.
5. Parent’s share in the accumulated and
current equity on subsidiaries’ net earnings
prior to distribution;
6. Money earmarked for some other persons
not included in gross income;
 National Taxation
7. Money or property borrowed;
Borrowed money has to be repaid by the
debtor. On the other hand, the creditor does
not receive any income upon payment
because it is merely a return of capital.
8. Increase in net worth resulting from
adjusting entries (Domondon, 2013)
Security advances and security deposits paid
by a lessee to a lessor
The amount received by the lessor as security
advances or deposits is not considered income
because it will eventually be returned to the
lessee; hence the lessor did not earn, gain, or
profit therefrom. (Tourist Trade and Travel v.
CIR, CTA Case No. 4806, January 19, 1996)
Q: Mr. X borrowed ₱10,000 from his friend
Mr. Y payable in one year without interest.
When the loan became due, Mr. X told Mr. Y
that he (Mr. X) was unable to pay because of
business reverses. Mr. Y took pity on Mr. X
and condoned the loan. Mr. X was solvent at
the time he borrowed the ₱10,000 and at the
time the loan was condoned. Did Mr. X derive
any income from the cancellation or
condonation of his indebtedness? Explain.
(1995 BAR)
A: NO. Mr. X did not derive any income from the
cancellation or condonation of his indebtedness.
Since it is obvious that the creditor merely
desired to benefit the debtor in view of the
absence of consideration for the cancellation, the
amount of the debt is considered as a gift from
the creditor to the debtor and need not be
included in the latter’s gross income.
Q: Petitioner condominium corporation filed
a case seeking to invalidate RMC No. 65-2012,
which subjects condominium association
dues, membership fees and other
assessments to income tax and VAT.
Petitioner contends that membership fees,
assessment dues, and other fees of similar
nature only constitute contributions to
and/or replenishment of the funds for the
maintenance and operations of the facilities
offered by recreational clubs to their
exclusive members and thus, they do not
constitute profit or gain. Are the petitioners
correct?
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A: YES. Condominium corporations are not
engaged in activities that generate profit. The
collection of association dues, membership fees,
and other assessments/charges is purely for the
benefit of the condominium owners. It is a
necessary incident to the purpose of effectively
overseeing, maintaining and governing the
common areas of the condominium. Therefore,
they are not subject to income tax because they
do not constitute profit or gain. Furthermore,
they are also not included as sources of gross
income under Section 32 of the Tax Code.
Consequently, they are not subject to
VAT/Withholding tax because they neither arise
from transactions involving the sale, barter, or
exchange of goods or property nor are generated
by the performance of services. (Bureau of
Internal Revenue (BIR), as herein represented by
its Commissioner Kim S. Jacinto-Henares v. First
E-Bank Tower Condominium Corp. or First E-
Bank Tower Condominium Corp. v. Bureau of
Internal Revenue (BIR), as herein represented by
its Commissioner Kim S. Jacinto-Henares, GR.
215801 / 218924., January 15, 2020., as penned
by J. Lazaro-Javier)
Q: Bureau of Internal Revenue (BIR) issued
RMC No. 35-2012, entitled "Clarifying the
Taxability of Clubs Organized and Operated
Exclusively for Pleasure, Recreation, and
Other Non-Profit Purposes," which was
addressed to all revenue officials, employees,
and others concerned for their guidance
regarding the income tax and Valued Added
Tax (VAT) liability of the said recreational
clubs.
On the income tax component, RMC No. 35-
2012 states that "clubs which are organized
and operated exclusively for pleasure,
recreation, and other non-profit purposes
are subject to income tax under the National
Internal Revenue Code (NIRC) of 1997, as
amended (1997 NIRC)."
Likewise, on the VAT component, RMC No.
35-2012 provides that "the gross receipts of
recreational clubs including but not limited
to membership fees, assessment dues, rental
income, and service fees are subject to VAT."
Association of Non-profit Clubs Inc. (ANPC),
on behalf of its club members, filed a petition
for declaratory relief before the RTC on
September 17, 2014, seeking to declare RMC
No. 35-2012 invalid, unjust, oppressive,
60
 Taxation Law
confiscatory, and in violation of the due
process clause of the Constitution. RTC
denied the petition for declaratory relief and
upheld the validity and constitutionality of
RMC No. 35-2012. Is the RTC correct?
A: NO. RMC No. 35-2012 erroneously foisted a
sweeping interpretation that membership fees
and assessment dues are sources of income of
recreational clubs from which income tax
liability may accrue. Membership fees,
assessment dues, and other fees of similar
nature only constitute contributions to and/or
replenishment of the funds for the maintenance
and operations of the facilities offered by
recreational clubs to their exclusive members.
They represent funds “held in trust” by these
clubs to defray their operating and general costs
and hence, only constitute infusion of capital.
In fine, for as long as these membership fees,
assessment dues, and the like are treated as
collections by recreational clubs from their
members as an inherent consequence of their
membership, and are, by nature, intended for
the maintenance, preservation, and upkeep of
the clubs' general operations and facilities, then
these fees cannot be classified as “the income of
recreational clubs from whatever source” that
are “subject to income tax.” Instead, they only
form part of capital from which no income tax
may be collected or imposed.
In the same way, the Court declares as invalid
the BIR's interpretation in RMC No. 35-2012 that
membership fees, assessment dues, and the like
are part of “the gross receipts of recreational
clubs” that are “subject to VAT.”
As ANPC aptly pointed out, membership fees,
assessment dues, and the like are not subject to
VAT because in collecting such fees, 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 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 1997 NIRC.
(Association of Non-Profit Clubs, Inc. (ANPC) v.
Bureau of Internal Revenue, G.R. 228539, June 26,
2019)
61
Realization of income
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met:
1. The earning process is complete or virtually
complete.
2. An exchange has taken place. (Manila
Mandarin Hotels, Inc. v. CIR, CTA Case No.
5046, March 24, 1997)
NOTE: Mere increase in the value of property is
not considered as income for tax purposes since
it is an unrealized increase in capital.
Q: Mr. Castillo is a resident Filipino citizen.
He purchased a parcel of land in Makati in
1970 at a consideration of ₱1 million. In
2011, the land had a fair market value of ₱20
million. Mr. Ayala offered to buy the same for
₱20 million. Is Mr. Castillo liable to pay for
income tax in 2011 based on the offer to buy
by Mr. Ayala? (2011 BAR)
A: NO. Mr. Castillo is not liable for income tax in
2011 was for income tax attaches only if there is
a gain realized resulting from a closed and
completed transaction. (Madrigal v. Rafferty, G.R.
No. L12287, August 7, 1918)
Increase in the net worth of a taxpayer
The increase in the net worth of a taxpayer is
taxable if it is the result of the receipt of
unreported or unexplainable tax income.
However, if they are merely shown as correction
of errors in its entries in its books relating to its
indebtedness to certain creditor which had been
erroneously overstated or listed as outstanding
when they had in fact been duly paid, they are
not taxable.
NOTE: If and when there are substantial
limitations or conditions under which payment
is to be made, such does not constitute
constructively realized.
Recognition of income
When income considered received for
Philippines income tax purposes:
1. If actually or physically received by
taxpayer; or
 National Taxation
2. If constructively received by taxpayer.
Actual vis-a-vis constructive receipt
1. Actual receipt - Income may be actual
receipt or physical receipt.
2. Constructive receipt - Occurs when money
consideration or its equivalent is placed at
the control of the person who rendered the
service without restriction by the payor.
(Sec. 4.108-4, RR 16-2005)
The income is credited to the account of the
taxpayer and set apart for him which he can
withdraw at any time without restrictions
and/or conditions although not yet actually
received by him physically or reduced to
his possession is already taxable to him.
Examples of income constructively
received: (BITIS)
1. Deposits in banks which are made
available to the seller of services
without restrictions
2. Issuance by the debtor of a notice to
offset any debt or obligation and
acceptance thereof by the seller as
payment for services rendered
3. Transfer of the amounts retained by the
payor to the account of the contractor
4. Interest coupons that have matured and
are payable but have not been encashed
5. Undistributed share of a partner in the
profits of a general professional
partnership
TESTS IN DETERMINING WHETHER
INCOME IS EARNED FOR TAX PURPOSES
Realization test
There is no taxable income unless income is
deemed realized. Revenue is generally
recognized when both conditions are met:
1. The earning process is complete or virtually
complete; and
2. An exchange has taken place. (Manila
Mandarin Hotels, Inc. v. CIR, CTA Case No.
5046, March 24, 1997)
Claim of right doctrine or doctrine of
ownership, command or control
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A taxable gain is conditioned upon the presence
of a claim of right to the alleged gain and the
absence of a definite unconditional obligation to
return or repay. (CIR v. Javier, G.R. 78953)
Economic benefit test or 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.
Severance test
Income is recognized when there is separation
of something which is of exchangeable value.
(Eisner v. Macomber, 252 US 189)
Q: Isabela Cultural Corporation (ICC)
incurred professional fees for legal services
that pertain to the 1984 and 1985. ICC did
not claim deductions for said expenses in
1984 and 1985 since the cost of the services
was not yet determinable at that time. It
claimed deductions only in 1986 when ICC
received the billing statements for said
services. BIR, however, contends that since
ICC is using the accrual method of
accounting, expenses for professional
services that accrued in 1984 and 1985,
should have been declared as deductions
from income during the said years and the
failure of ICC to do so bars it from claiming
said expenses as deduction for the taxable
year 1986. Decide.
A: The expenses should have been claimed as
deductions in 1984 and 1985. For a taxpayer
using the accrual method, the accrual of income
and expense is permitted when the all-events
test has been met.
The all-events test requires the right to income
or liability be fixed, and the amount of such
income or liability be determined with
reasonable accuracy. However, the test does not
demand that the amount of income or liability
be known absolutely, only that a taxpayer has at
his disposal the information necessary to
compute the amount with reasonable accuracy.
The amount of liability does not have to be
determined exactly; it must be determined with
"reasonable accuracy."
The propriety of an accrual must be judged by
62
 Taxation Law
the facts that a taxpayer knew, or could
reasonably be expected to have known, at the
closing of its books for the taxable year. Accrual
method of accounting presents largely a
question of fact; such that the taxpayer bears
the burden of proof of establishing the accrual
of an item of income or deduction. From the
nature of the claimed deductions and the span
of time during which the firm was retained, ICC
can be expected to have reasonably known the
retainer fees charged by the firm as well as the
compensation for its legal services. The failure
to determine the exact amount of the expense
during the taxable year when they could have
been claimed as deductions cannot thus be
attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the
exercise of due diligence could have inquired
into the amount of their obligation to the firm,
especially so that it is using the accrual method
of accounting. For another, it could have
reasonably determined the amount of legal and
retainer fees owing to its familiarity with the
rates charged by their long-time legal
consultant. (CIR v. Isabela Cultural Corp., G.R. No.
172231, February 12, 2007)
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:
1. The taxpayer does not employ a method for
computing income; or
2. The taxpayer’s method for accounting does
not clearly reflect the income. (Domondon,
205, citing Sec. 43 of NIRC)
Distinguish: cash and accrual method
In cash method, 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. Stated otherwise, income is
earned when cash is collected, and expense is
incurred when cash is disbursed.
63
Meanwhile, in accrual method, income is
recognized in the period it is earned, regardless
of whether it has been received or not. In the
same manner, expenses are accounted for in the
period they are incurred and not in the period
they are paid (Domondon, 2013). Amounts of
income accrue when the right to receive them
become fixed, when there is a created
enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time
of payment. (CIR v. Isabela Cultural Corp., G.R. No.
172231, February 12, 2007)
Special methods
1. Installment;
2. Deferred payment; and
3. Percentage of completion (in long-term
contracts)
Installment basis
Gross income is recognized and reported in
proportion to the collection from the installment
sales.
Installment basis is available to the following
taxpayers:
1. Dealers of personal property on the sale of
properties they regularly sell;
2. Dealers of real properties, only if their
initial payment does not exceed 25% of the
selling price
3. Casual sale of non-dealers in property, real
or personal, when their selling price
exceeds P1,000 and their initial payment
does not exceed 25% of the selling price.
(Banggawan, 2020)
Deferred payment
A variant of the accrual basis and is used in
reporting income when a non-interest bearing
note is received as consideration in a sale.
The gross income is computed based on the
present value (discounted value) of a note
receivable from the contract. The discount
interest on the note is amortized as interest
income over the installment term. (Ibid)
Percentage of completion (in long-term
contracts)
 National Taxation
The estimated gross income from construction is enumerated above shall be allocated or
reported based on the percentage of completion apportioned to sources within or without the
of the construction project. There are several Philippines.
methods of estimating project completion in
practice, but the output method based on SUMMARY RULES ON DETERMINATION OF
engineering survey is prescribed by the NIRC. SITUS ACCORDING TO KINDS OF INCOME
(Ibid)
KINDS OF INCOME TAX SITUS
SITUS OF INCOME Service or Place of performance
compensation of service
Income from sources within the Philippines income
Rent Location of property
1. Interests derived from sources within the (real or personal)
Philippines; Royalties Place of use of
2. Dividends from domestic and foreign intangibles
corporations, if more than 50% of its gross Merchandising Place of sale
income for the three-year period ending Gain on sale of Place of sale
with the close of the taxable year prior to personal property
the declaration of dividends was derived purchased and
from sources within the Philippines; not produced
3. Compensation for services performed Gain on sale of Location of property
within the Philippines; real property
4. Rentals and royalties from properties Mining income Location of the mines
located in the Philippines or any interest in Farming income Place of farming
such property including rentals or royalties activities
for the use of or for the privilege of using Gain on sale of Income within the
within the Philippines intellectual property domestic stock Philippines
rights such as trademarks, copyrights,
Interest Residence of the
patents, etc.;
debtor
5. Gains on sale of real property located in the
Gain on sale of Place of activity that
Philippines;
transport produces the income
6. Gains on sale of personal property other
document
than shares of stock within the Philippines;
Manufacturing:
and
a. Produced in Income purely within
7. Gains on sale of shares of stock in a
whole within
domestic corporation.
and sold
within
Income from sources without the Philippines
b. Produced in Income purely without
whole without
1. Interest and dividends derived from
and sold
sources other than those within the
without
Philippines;
c. Produced Income partly within
2. Compensation for services performed
within and and partly without
outside the Philippines; and
sold without
3. Rentals and royalties from properties
d. Produced Income partly within
located outside the Philippines or any
without and and partly without
interest in such property including rentals
sold within
or royalties for the use of or for the
privilege of using outside the Philippines Dividend income
intellectual property rights such as from:
trademarks, copyrights, patents, etc. a. Domestic Income within
Corporation
Income derived partly within and partly b. Foreign
without the Philippines Corporation –
If for the 3-
Gains, profits, or incomes other than those year period

UNIVERSITY OF SANTO TOMAS 64

2021 GOLDEN NOTES
 Taxation Law
preceding the derived” irrespective of the voluntary or
declaration of involuntary action of the taxpayer in producing
dividend, the income. Moreover, under the “claim of right
ratio of such doctrine,” the recipient even if he has the
corporation’s obligation to return the same has a voidable title
Phil income to to the money received through mistake.
the world (Gutierrez v. CIR, CTA Case No. 65, August 31,
(total) was: Entirely without 1955)
- Less than
50% Proportionate* Q: Congress enacted a law imposing a 5% tax
- 50% to on the gross receipts of common carriers.
85% Entirely within The law does not define the term “gross
- More than receipts.” Express Transport a bus company
85% has time deposits with ABC Bank. In 2007,
Express Transport earned ₱1 million
*Formula (Proportionate) interest, after deducting the 20% final
withholding tax from its time deposits with
the bank. The BIR wants to collect a 5% gross
receipts tax on the interest income of Express
Transport without deducting the 20% final
withholding tax. Is the BIR correct? (2006
GROSS INCOME BAR)

Except when otherwise provided, gross income
means all income derived from whatever
source, including but not limited to the
following items: (CG2I- R2DAP3)
1. Compensation for services in whatever form
paid, including, but not limited to fees,
salaries, wages, commissions and similar
items
2. Gross income derived from the conduct of
trade or business or the exercise of a
profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions and
11. Partner’s distributive share from the net
income of the general professional
partnership (NIRC, Sec. 32 (A))
NOTE: The above enumeration of gross income
under NIRC is not exclusive.
Q: Is money received under payment by
mistake, income subject to income tax?
A: Income paid or received through mistake may
be considered as “income from whatever source
A: YES. The term "Gross Receipts" is broad
enough to include income constructively
received by the taxpayer. The amount withheld
is paid to the government on its behalf, in
satisfaction of withholding taxes. The fact that it
did not actually received the amount does not
alter the fact that it is remitted in satisfaction of
its tax obligations. Since the income withheld is
an income owned by Express Transport, the
same forms part of its gross receipts. (CIR v.
Solidbank Corp., G.R. No. 148191, November 25,
2003)
Q: Explain briefly whether the following
items are taxable or non-taxable:
1. Income from jueteng;
2. Gain arising from expropriation of
property;
3. Taxes paid and subsequently refunded
4. Recovery of bad debts previously
charged off; and
5. Gain on the sale of a car used for
personal purposes. (2005 BAR)
A:
1. Taxable. Gross income includes "all income
derived from whatever source" (Sec. 32(A),
NIRC), which was interpreted as all income
not expressly excluded or exempted from
the class of taxable income, irrespective of
the voluntary or involuntary action of the
taxpayer in producing the income. Thus, the
income may proceed from a legal or illegal

65
 National Taxation
source such as from jueteng. Unlawful gains, INCOME deductions. (Dimaampao,
gambling winnings, etc. are subject to 2018)
income tax. The NIRC stands as an TAXABLE The pertinent items of gross
indifferent neutral party on the matter of INCOME income specified in this Code,
where the income comes from. (CIR v. less deductions, if any,
Manning, G.R. No. L-28398, August 6, 1975) authorized for such types of
income by this Code or other
2. Taxable. Sale, exchange or other disposition special laws. (Sec. 31, NIRC)
of property to the government of real
property is taxable. It includes taking by the DISTINGUISH:
government through condemnation GROSS INCOME AND NET INCOME
proceedings. (Gonzales v. CTA, G.R. No. L-
14532, May 26, 1965) BASIS GROSS NET
INCOME INCOME
3. Taxable if the taxes were paid and As to Allows no Allows
subsequently claimed as deduction and deduction deductions deductions
which are subsequently refunded or s
credited. It shall be included as part of gross As to Grants no Grants
income in the year of the receipt to the exemption exemptions exemptions
extent of the income tax benefit of said s
deduction. (NIRC, Sec. 34 C (1)) However, it As to tax Gross Income Net Income
is not taxable if the taxes refunded were not base
originally claimed as deductions. Advantag Simplifies the Confusing and
es/ income tax complex
4. Taxable under the tax benefit rule. Recovery Disadvant system process of
of bad debts previously allowed as ages filing income
deduction in the preceding years shall be tax return
included as part of the gross income in the Substantial Vulnerable to
year of recovery to the extent of the income reduction in corruption on
tax benefit of said deduction (NIRC, Sec. 34 E corruption and account of
(1)) This is sometimes referred as the tax evasion margin of
Recapture Rule. since the discretion in
exercise of the grant of
NOTE: “Tax benefit rule” refers to the discretion, to deductions
principle that if a taxpayer recovers a loss or allow or
expense that was deducted in a previous disallow
year, the recovery must be included in the deductions, is
current year’s gross income to the extent dispensed with
that it was previously deducted (Black, More Provides
2004); administrativel equitable
y feasible reliefs in the
5. Taxable. Since the car is used for personal form of
purposes, it is considered as a capital asset deductions,
hence the gain is considered income (NIRC, exemptions
Sec. 32 A (3) and Sec. 39 A (1)) and tax credit
Does away Tax audit
DISTINGUISH:
with wastage minimizes
GROSS INCOME, NET INCOME,
of manpower fraud
AND TAXABLE INCOME
and supplies
BASIS DEFINITION
Net income taxation
GROSS All income derived from
INCOME whatever source. (Sec. 32(A), Net income taxation is a system of taxation
NIRC) where the income subject to tax may be reduced
NET Gross Income less allowable by allowable deductions.

UNIVERSITY OF SANTO TOMAS 66

2021 GOLDEN NOTES
 Taxation Law
Gross income
Gross income is equal to all income less
exclusions (1980, 1983 BAR)
Taxable income or net income
The term “taxable income” means the pertinent
items of gross income specified in this Code, less
the deductions, if an, authorized for such types
of income by this Code or other special laws.
(Sec.31, NIRC)
Q: Lao is a big-time swindler. In one year, he
was able to earn ₱1 Million from his
swindling activities. When the CIR discovered
his income from swindling, the CIR assessed
him a deficiency income tax for such income.
The lawyer of Lao protested the assessment
on the following grounds:
a. The income tax applies only to legal
income, not to illegal income;
b. Lao’s receipts from his swindling did not
constitute income because he was under
obligation to return the amount he had
swindled, hence, his receipt from
swindling was similar to a loan, which is
not income, because for every peso
borrowed he has a corresponding
liability to pay one peso; and
c. If he has to pay the deficiency income tax
assessment there will be hardly anything
left to return to the victims of the
swindling. How will you rule on each of
the three grounds for the protest? (1995
BAR)
A:
a. The ground is unmeritorious. Sec. 32 of the
NIRC includes within the purview of gross
income all income from whatever source
derived. Hence, the illegality of the income
will not preclude the imposition of the
income tax thereon.
b. The ground is unmeritorious. When a
taxpayer acquires earnings, lawfully or
unlawfully, without the consensual
recognition, express or implied, of an
obligation to repay and without restriction
as to their disposition, he has received
taxable income, even though it may still be
claimed that he is not entitled to retain the
money, and even though he may still be
adjudged to restore its equivalent. To treat
67
the embezzled funds as not taxable income
would perpetuate injustice by relieving
embezzlers of the duty of paying income
taxes on the money they enrich themselves
with, by embezzlement, while honest people
pay their taxes on every conceivable type of
income. (James v. U.S., 202 US 401)
c. The ground is unmeritorious. The deficiency
income tax assessment is a direct tax
imposed on the owner which is an excise on
the privilege to earn an income. It will not
necessarily be paid out of the same income
that was subjected to the tax. Lao’s liability
to pay the tax is based on him having
realized a taxable income from his swindling
activities and will not affect his obligation to
make restitution. Payment of the tax is a
civil obligation imposed by law while
restitution is a civil liability arising from a
crime.
The tax implication when there is exchange of
services without compensation is that both
parties are taxable as if both each sold their
services.
Self-help income is the amount saved for doing
a work by the taxpayer himself instead of hiring
someone to do the work. Self-help income is
exempt from tax. For example, A person wants to
repaint his house. Instead of hiring a painter,
that person did the painting job himself to save
money.
SOURCES OF INCOME SUBJECT TO TAX
1. Compensation income;
2. Fringe benefits;
3. Professional income;
4. Income from business;
5. Income from dealings in property;
6. Passive investment income;
7. Annuities, proceeds from life insurance or
other types of insurance;
8. Prizes and awards;
9. Pensions, retirement benefit or separation
pay; and
10. Income from any source whatever.
The classifications of income subject to tax are
discussed in detail below.
COMPENSATION INCOME
 National Taxation
Compensation income includes all remuneration
for services rendered by an employee for his
employer unless specifically excluded under the
NIRC. (Sec. 2.78.1, RR No. 2-1998)
Q: As a way to augment the income of the
employees of DEF, Inc., a private corporation,
the management decided to grant a special
stipend of P50,000.00 for the first vacation
leave that any employee takes during a given
calendar year. In addition, the senior
engineers were also given housing inside the
factory compound for the purpose of
ensuring that there are available engineers
within the premises every time there is a
breakdown in the factory machineries and
equipment. (2019 BAR)
a. Is the special stipend part of the taxable
income of the employees receiving the
same? If so, what tax is applicable and
what is the tax rate? Explain.
b. Is the cash equivalent value of the
housing facilities received by the senior
engineers subject to fringe benefits tax?
Explain.
A:
a. YES, the special stipend is part of the
taxable income of the employees since the
same may very well be considered income
on his part.
b. NO. The cash equivalent value of the
housing facilities received by the senior
engineers is not subject to fringe benefits
tax. The same is exempt from FBT since the
housing is located within the Company’s
premises and is generally for the
convenience of the employer.
Q: Capt. Canuto is a member of the Armed
Forces of the Philippines. Aside from his pay
as captain, the government gives him free
uniforms, free living quarters in whatever
military camp he is assigned, and free meals
inside the camp. Are these benefits income of
Capt. Canuto? Explain. (1995 BAR)
A: NO. The free uniforms, free living quarters
and the free meals inside the camp are not
income to Capt. Canute because these are
facilities or privileges furnished by the employer
for the employer’s convenience which are
necessary incidents to proper performance of
the military personnel’s duties.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Refer to “Taxation on compensation income” for
further discussion.
FRINGE BENEFITS
Fringe benefit is any good, service or other
benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to
an individual employee, except a rank-and-file
employee, such as but not limited to:
(HEV-HIM-HEEL)
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver
and others
5. Interest on loans at less than market rate to
the extent of the difference between the
market rate and the actual rate granted
6. Membership fees, dues and other expenses
athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or
his dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows (Sec. 33(B),
NIRC; Sec. 2.33 (B), RR No. 3-1998)
Refer to “Taxation on compensation income” for
further discussion.
PROFESSIONAL INCOME
Professional income refers to the fees received
by a professional from the practice of his
profession, provided that there is no employer-
employee relationship between him and his
clients.
The existence or nonexistence of employer-
employee relationship is material to determine
whether the income is a compensation income
or professional income. If the employer-
employee relationship is present, then it is
considered compensation income. Otherwise, it
is a professional income.
For purposes of taxation, there is no deduction
allowed against compensation income, whereas
allowable deductions may be made from
professional income.
NOTE: Professional income shall be subject to
68
 Taxation Law
creditable withholding tax rates prescribed (RR merchandising, mining, manufacturing, and
No. 3-1998) farming operations.

Distinguish: Compensation income and NOTE: Business is any activity that entails time
professional income and effort of an individual or group of
individuals for purposes of livelihood or profit.
Compensation Professional
income income Gross income derived from business
Definition All Income derived
remuneration by self- The term “gross income” derived from business
for services employed from shall be equivalent to gross sales less sales
rendered by an trade or returns, discounts and allowances and cost of
employee for business goods sold. In the case of taxpayers engaged in
his employer (trading, the sale of service, “gross income” means gross
unless manufacturing, receipts less sales returns, allowances and
specifically merchandising, discounts. (Sec. 27 (A), NIRC)
excluded under farming, and
the Tax Code. others), and Cost of goods sold
(RR No. 12- income derived
1998) by professionals It includes all business expenses directly
from the incurred to produce the merchandise, to bring
practice of them to their present location and use such as
professions. invoice cost of the goods sold, for a trading
(Dimaampao, concern, or cost of production for a
2018) manufacturing concern.
Entitleme Not entitled Entitled
nt to 8% Cost of services
income tax
option All direct costs and expenses necessarily
Possibility Yes, the None, should incurred to provide the service required by the
of employer files file quarterly customers and clients including:
substitute the income tax income tax
d filing return of the returns and an 1. Salaries and employee benefits of personnel,
employee. If annual return consultants, and specialists directly
the amount of rendering the service; and
tax is correctly 2. Cost of facilities directly utilized in providing
withheld by the the service. (Sec. 27(E)(4), NIRC)
employer, the
employee no INCOME FROM DEALINGS IN PROPERTY
longer needs to
file an annual Types of properties from which income may
income tax be derived
return.
Rate/amo Based on None 1. Ordinary assets – refer to properties held
unt of graduated by the taxpayer used in connection with his
withholdin withholding tax trade or business which includes the
g rates ranging following: (SOUR)
from 0% to
35% on net a. Stock in trade of the taxpayer or other
taxable property of a kind which would
compensation. properly be included in the inventory of
the taxpayer if on hand at the close of
INCOME FROM BUSINESS the taxable year;

Business income refers to income derived from

69
 National Taxation
b. Property held by the taxpayer primarily
for sale to customers in the ordinary
course of trade or business;
c. Property used in the trade or business
of a character which is subject to the
allowance for depreciation provided in
the NIRC; or
1. Stock in trade of the taxpayer or other
property of a kind which would be properly
included in the inventory of the taxpayer if on
hand at the close of the taxable year;
2. Property held by the taxpayer primarily for
sale to customers in the ordinary course of
trade or business;

d. Real property used in trade or business 3. Property used in the trade or business of a
of the taxpayer. character which is subject to the allowance
for depreciation provided in Sec. 34 (f) of the
Examples of ordinary assets NIRC; or

a. The condominium building owned by a 4. Real property used in trade or business of the
realty company, the units of which are taxpayer. (Sec. 31(A)(1), NIRC)
for rent or for sale.
b. Machinery and equipment of a GUIDELINES IN DETERMINING WHETHER A
manufacturing concern subject to REAL PROPERTY IS A CAPITAL ASSET OR
depreciation ORDINARY ASSET
c. The motor vehicles of a person engaged Real estate All real properties acquired
in transportation business. dealer are ordinary assets.
Real estate All real properties which
2. Capital assets – include property held by developer are:
the taxpayer (whether or not connected 1. Acquired whether
with his trade or business) other than SOUR developed or
above. undeveloped;
2. Held by the real estate
Examples of capital assets developer primarily for
sale or for lease in the
a. Jewelry not used for trade or business ordinary course of trade
b. Residential houses and lands owned or business or which
and used as such would be included in the
c. Automobiles not used in trade or inventory of the
business taxpayer if on hand at
d. Stock and securities held by taxpayers the close of the taxable
other than dealers of securities year; and
3. Used in trade or
Construction and interpretation of capital business, whether in the
assets form of land, building, or
improvements shall be
The general rule has been laid down that the considered as ordinary
codal definition of a capital asset must be assets
narrowly construed while the exclusions from Real estate All real properties whether
such definitions must be interpreted broadly. lessor land and/or other
(Tuazon v. Lingad, 58 SCRA 176) improvements, which are for
lease/rent or being offered
Distinguish ordinary asset and capital asset for lease/rent, or for use or
(2003 BAR) being used in the trade or
business, shall be considered
“Capital assets” include property held by the as ordinary assets.
taxpayer whether or not connected with his Taxpayers All real properties acquired
trade or business, but the term does not include habitually in the course of trade or
any of the following, which are consequently engaged in the business shall be considered
considered “ordinary assets”: (SOUR) real estate as ordinary assets.

UNIVERSITY OF SANTO TOMAS 70

2021 GOLDEN NOTES
 Taxation Law
business (including
expropriation
Taxpayers not Real properties whether
or foreclosure
engaged in the land, building, or other
sale)
real estate improvements, which are
business used or being used or have
Significance of determining whether the
been previously used in the
capital asset is ordinary asset or capital asset
trade or business shall be
considered as ordinary
They are subject to different rules. There are
assets.
special rules that apply only to capital asset
Taxpayer It will not result in the
transactions, to wit:
changing reclassification of real
business from property from ordinary to
1. Holding period rule
real estate to capital asset.
2. Capital loss limitation
non-real
3. Net capital loss carry-over (NCLCO)
estate
business
Q: State with reason the tax treatment of the
Taxpayers All real properties originally
following in the preparation of annual
originally acquired by them shall
income tax returns: Income realized from
registered to continue to be treated as
sale of:
be engaged in ordinary assets.
a. Capital assets; and
the real estate
b. Ordinary assets. (2005 BAR)
business but
failed to
A:
subsequently
a. Generally, what are to be reported in the
operate
annual income tax return are the capital
Abandoned Real property initially gains derived from the disposition of
and idle real acquired by a taxpayer capital assets other than real property or
property engaged in the real estate shares of stocks in domestic corporations,
business shall not result in which are not subject to final tax. Capital
its conversion into a capital gains derived from real properties and
asset even if the same is shares of stock not traded in the stock
subsequently abandoned or
exchange are subject to final tax (capital
becomes idle. gains tax).
Provided, however, that b. Income realized from sale of ordinary assets
properties classified as is part of Gross Income, included in the
ordinary assets for being Income Tax Return (Sec.32(A)(3), NIRC)
used in business by a
taxpayer engaged in Q: May capital asset be reclassified as
business other than real ordinary asset?
estate business as defined in
Section 2 (g) hereof are A: YES. Property initially classified as capital
automatically converted into asset may thereafter be treated as an ordinary
capital assets upon showing asset if a combination of the factors indubitably
of proof that the same have tends to show that the activity was in
not been used in business furtherance of or in the course of the taxpayer’s
for more than two (2) years trade or business.
prior to the consummation
of the taxable transactions Q: In January 1970, Juan bought 1 hectare of
involving said properties. agricultural land in Laguna for ₱100,000.
(RR No. 7-2003) This property has a current fair market value
Real property No effect on the of ₱10 million in view of the construction of a
subject of classification of the property concrete road traversing the property. Juan
involuntary in the hands of the agreed to exchange his agricultural lot in
transfer involuntary seller.

71
 National Taxation
Laguna for a one-half hectare residential
property located in Batangas, with a fair
market value of ₱10 million, owned by Alpha
Corporation, a domestic corporation engaged
in the purchase and sale of real property.
Alpha Corporation acquired the property in
2007 for ₱9 million. What is the nature of the
real properties exchanged for tax purposes –
capital or ordinary asset? (2008 BAR)
A: The one-hectare agricultural land owned by
Juan is a capital asset because it is not a real
property used in trade or business. The one-half
hectare residential property owned by Alpha
Corporation is an ordinary asset because the
owner is engaged in the purchase and sale of
real property. (Sec. 39, NIRC, RR No. 7-2003)
Types of gains
Gains derived from dealings in property mean
all income derived from the disposition of
property whether real, personal or mixed for:
1. Money, in case of sale
2. Property, in case of exchange
3. Combination of both sales and exchange,
which results in gain
NOTE: Gain is the difference between the
proceeds of the sale or exchange and the
acquisition value of the property disposed by
the taxpayer (tax basis).
Rules on determining Adjusted basis or Cost
of the property sold (tax basis)
1. By purchase
2. Included in the inventory
3. By devise, bequest or inheritance
4. By gift
5. Acquired (other than capital assets) for less
than adequate consideration in money or
money’s worth
6. Stock or security property received if the
exchange is one where gain or loss may not
be recognized (1994 BAR)
7. Stock of security received if the exchange is
one where the gain or loss may not be
recognized (1985 BAR)
8. Property transferred in the hands of the
transferee if exchange is one where the
gain, if any, but not the loss is to be
recognized
Enumerated rules are discussed in detail below.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
By purchase
1. Acquired before March 1, 1913 – FMV on
such date
2. Acquired on or after March 1, 1913 – Cost
plus expenses of acquisition (Sec. 136, RR
No. 2)
Included in the inventory
Its latest inventory value (Sec. 36, RR No. 2)
By devise, bequest or inheritance
FMV or value of such property at the time of the
acquisition – death of the decedent (Sec. 139, RR
No. 2)
By gift
The same basis as if it would be in the hands of
the donor or the last preceding owner by whom
it was acquired by gift, except that if such basis
is greater than the fair market value of the
property at the time of the gift, then for the
purpose of determining the loss, the basis shall
be such fair market value. (Dimaampao, 2018)
Acquired (other than capital assets) for less
than adequate consideration in money or
money’s worth
Amount paid by the transferee. (Ibid)
Stock or security property received if the
exchange is one where gain or loss may not
be recognized (1994 BAR)
The same as the basis of the stock, or security or
property given in exchange. (Ibid)
Stock of security received if the exchange is
one where the gain or loss may not be
recognized (1985 BAR)
Basis of the property, stock, or security given in
exchange:
Less: Cash and FMV of property given in
exchange
Add: Dividend and/or gain recognized
Basis of stock or security received
72
 Taxation Law
Property transferred in the hands of the Difference between treatment of capital
transferee if exchange is one where the gain, gains and losses between individuals and
if any, but not the loss is to be recognized corporations

The same basis as it would be in the hands of BASIS INDIVIDUAL CORPORATION

transferor increased by the amount of the gain Availability Holding
recognized to the transferor on the transfer. of holding period Not applicable
(Ibid) period available
The
Ordinary income vs. Ordinary loss percentages
of gain or
ORDINARY loss to be
ORDINARY LOSS
INCOME taken into
It includes the gain The loss that may be account shall
derived from the sustained from the sale be the ff.:
sale or exchange of or exchange of ordinary 100% - if Capital gains
ordinary asset. asset. Extent of the capital and losses are
Recognition assets have taxable to the
Capital gain vs. Capital loss (Taxability) been held for extent of 100%
12 months
CAPITAL GAIN CAPITAL LOSS or less; and
It includes the The loss that may be 50% - if the
gain derived from sustained from the sale or capital asset
the sale or exchange of an asset not has been
exchange of an connected with the trade held for
asset not or business. more than
connected with 12 months
the trade or Capital loss may not Non-
business. exceed capital gains when deductibility of
used as a deduction to Net Capital
income. losses

Ordinary gain vs. Capital gain Non- XPN: If any

deductibility domestic bank
ORDINARY GAIN CAPITAL GAIN of Net or trust
A gain derived A gain derived from the Capital company, a
from the sale or sale or exchange of capital losses substantial part
exchange of assets or property of whose
ordinary assets whether or not connected Capital business is the
Deductibility
such as SOUR with the trade or business losses are receipt of
of capital
of the tax payer other than allowed only deposits, sells
losses
SOUR up to the any bond,
extent of the debenture, note
Actual gain vs. Presumed gain capital gains; or certificate or
hence, the other evidence
ACTUAL GAIN PRESUMED GAIN net capital of indebtedness
Excess of the The law presumes that loss is not issued by any
selling price over the seller of real deductible. corporation
the cost of the property classified as (including one
asset capital asset realized issued by a
gains, which is taxed at government or
6% of the selling price political
or fair market value, subdivision)
whichever is higher. Availability NCLCO NCLCO not
of NCLCO allowed for a allowed

73
 National Taxation
period of capital asset
one (1) year
1. Loss limitation rule;
Capital gains subject to final tax vs. capital 2. Loss carry-over rule; and
gains reported in the income tax return 3. Holding period rule

SUBJECT TO REPORTED Loss limitation rule

BASIS
FINAL TAX IN THE ITR
The capital Losses from sale or exchanges of capital assets
gains are shall be allowed only up to the extent of the
aggregated gains from such sales or exchanges. (Sec. 39(C),
There is a with other NIRC)
As to
fixed rate for income to
deductions Thus, under this capital loss limitation rule,
the tax constitute
gross income capital loss is deductible only up to the extent of
subject to capital gain. The taxpayer can only deduct
deductions capital loss from capital gain. If there is no
GR: It does capital gain, then no deduction is allowed
not matter because you cannot deduct capital loss from
whether or ordinary gain.
not capital
gains are Rationale: To allow the deduction of non-
actually business (capital) losses from business
earned (ordinary) income or gain could mean the
(presumed reduction or even elimination of taxable income
There must of the taxpayer through personal, non-business
gains)
As to actual be actual related expense, resulting in substantial losses of
gains capital gains revenue to the government. (Mamalateo, 2014)
XPN:
earned
Disposition of
shares not Where the capital loss limitation rule will
traded in the NOT apply:
stock
exchange or 1. If a bank or trust company is incorporated
thru initial under the laws of the Philippines;
public 2. A business whose substantial part is the
offering receipt of deposits;
GR: Holding 3. Sells any bond, debenture, note or
period is certificate or other evidence of
immaterial indebtedness issued by any corporation,
with interest coupons or in registered form;
XPN: and
As to Disposition of Holding 4. Any losses resulting from such sale shall
holding shares not period is not be subject to the above limitations and
period traded in the considered. shall not be included in determining the
stock applicability of such limitation to other
exchange or losses. (Sec. 39(C), NIRC)
thru initial
public Q: Can a taxpayer deduct ordinary loss from
offering ordinary gain and from capital gain?
As to Net
Could be A: YES, in both cases. Ordinary loss may be
Loss Carry Not allowed
availed deducted from ordinary gain while only from
Over
certain types of capital gain may ordinary loss be
Special rules pertaining to income or loss deducted.
from dealings in property classified as
Rule on Matching Cost

UNIVERSITY OF SANTO TOMAS 74

2021 GOLDEN NOTES
 Taxation Law
Under this rule, only ordinary and necessary
expenses are deductible from gross income or
ordinary income. Capital loss is a non-business
connected expense as it can be sustained only
from capital transactions. To allow that capital
loss as a deduction from ordinary income would
run counter to the rule on matching cost against
revenue.
Loss carry-over rule/Net Capital Loss Carry
Over (NCLCO)
vis-à-vis short-term capital gain)
Where the taxpayer held the capital asset sold
for more than 12 months, the gain derived
therefrom is taxable only to the extent of 50%.
Consequently, if the taxpayer held the capital
asset sold for a year or less, the whole gain shall
be taxable. The same also applies to capital loss.
It is a form of tax avoidance since the taxpayer
can exploit it in order to reduce his tax due. (Sec.
39(B), NIRC)

If any taxpayer, other than a corporation, NOTE: Holding period does not find application
sustains in any taxable year a net capital loss, in the case of disposition of:
such loss (in an amount not in excess of the net
income for such year) shall be treated in the 1. Shares of stock of a domestic corporation
succeeding taxable year as a loss from the sale held as capital asset; and
or exchange of a capital asset held for not more 2. Real property considered as capital asset,
than 12 months. (Sec. 39(D), NIRC) whether the seller is an individual, trust,
estate or a private corporation.
Rules with regard to NCLCO
NOTE: Only individual taxpayers can avail of the
1. NCLCO is allowed only to individuals, holding period rule. It is not allowed to
including estates and trusts. corporations.
2. The net loss carry-over shall not exceed the
net income for the year sustained and is Net Capital Gain and Net Capital Loss
deductible only for the succeeding year.
3. The capital assets must not be real property Net capital gain is the excess of the gains from
or stocks listed and traded in the stock sales or exchanges of capital assets over the
exchange. losses from such sales or exchanges. Net capital
4. Capital asset must be held for not more than loss is the excess of the losses from sales or
12 months. exchanges of capital assets over the gains from
such sales or exchanges.
NCLCO vs. Net Operating Loss Carry Over
(NOLCO) Recognition of gain or loss in exchange of
property
BASIS NCLCO NOLCO
As to Arises from Arises from GR: Upon the sale or exchange of property, the
source capital ordinary entire amount of the gain or loss shall be
transactions transactions recognized.
meaning meaning involving
involving capital ordinary asset XPN: Instances where no gain or loss is
asset recognized:
As to Can be availed of Can be availed of 1. A corporation which is a party to a merger
who by individual by individual and or consolidation exchanges property solely
can taxpayer only corporate taxpayer for stock in a corporation which is a party to
avail the merger or consolidation;
As to May be carried Allows carryover 2. A shareholder exchanges stock in a
period over only in the of operating loss in corporation which is a party to the merger
of next succeeding 3 succeeding or consolidation solely for the stock of
carry- taxable year taxable years or 5 another corporation, also a party to the
over years, in the case of merger or consolidation;
mining companies 3. A security holder of a corporation which is
party to the merger or consolidation
Holding period rule (long-term capital gain exchanges his securities in such corporation

75
 National Taxation
solely for stock securities in another
corporation, a party to the merger or
consolidation; or
4. If property is transferred to a corporation by
a person in exchange for stock or unit of
participation in such a corporation, as a
result of such exchange said person gains
control of said corporation, provided that
stocks issued for services shall not be
considered as issued in return for property.
(Sec. 40(C)(2), NIRC)
NOTE: “No gain or loss shall be recognized”
means that if there is a gain it shall not be
subject to tax and if there is a loss it shall not be
allowed as a deduction.
Q: When is gain or loss not recognized in
cases of transfer of shares of stock of
corporation in exchange of property?
A: The requisites for the non-recognition of gain
or loss are as follows:
1. The transferee is a corporation;
2. The transferee exchanges its shares of stock
for property/properties of the transferor;
3. The transfer is made by a person, acting
alone or together with others, not exceeding
four persons; and
4. As a result of the exchange, the transferor,
alone or together with others, not exceeding
four, gains control of the transferee. (CIR v.
Filinvest Development Corporation, G.R. Nos.
163653 and 167689, July 19, 2011)
MERGER OR CONSOLIDATION
FOR PURPOSES OF TAXATION
Merger or consolidation means:
1. Ordinary merger or consolidation; or
2. The acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock provided that:
a. A merger or consolidation must be
undertaken for a bona fide business
purpose and not solely for the
purpose of escaping the burden of
taxation.
b. In determining whether a bona fide
business purpose exists each and
every step of the transaction shall
be considered and the whole
transaction or series of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
transactions shall be treated as a
single unit.
NOTE: In determining whether the property
transferred constitutes a substantial portion of
the property of the transferor, the term
“property” shall be taken to include the cash
assets of the transferor
Tax treatment of capital gains and losses
1. From Sale of Stocks of Corporations
a. Stocks Traded in the Stock Exchange –
subject to six-tenths of one percent
(6/10 of 1%) of the gross selling price
or gross value in money of the shares
of stock sold, bartered, exchanged or
otherwise disposed which shall be
paid by the seller or transferor. (Sec.
127(A), NIRC)
b. Stocks Not Traded in the Stock
Exchange – subject to capital gains tax.
2. From Sale of Real Properties/Land and/or
Buildings in the Philippines – capital gain
derived is subject to capital gains tax but no
loss is recognized because gain is presumed.
NOTE: the NIRC speaks of real property
with respect to individual taxpayers, estate
and trust but only speaks of land and/or
building with respect to domestic
corporations.
Gains from sale to the government of real
property classified as capital asset
The taxpayer has the option to either:
1. Include as part of gross income subject
allowable deductions and personal
exemptions, then subject to the schedular
tax; or
NOTE: This is not available to a corporate
taxpayer.
2. Subject to final tax of 6% on capital gains
(Sec. 24(D), NIRC)
3. From Sale of Other Capital Assets– the
rules on capital gains and losses apply in the
determination of the amount to be included
in gross income subject to the graduated
rates of 0-35% for individuals and the
normal corporate income tax of 30% for
corporations, and not subject to capital
gains tax.
76
 Taxation Law
Capital gains from sale of shares of stock not
traded in the stock exchange
A final tax at the rate of fifteen percent (15%) is
imposed. (Sec. 24, NIRC as amended)
For RFCs and NRFCs the rates are:
Not over P100,000 5%
On any amount in excess of 10%
P100,000
(Sec 28(A)(7)(c), Sec. 29(5)(c), NIRC)
NOTE: What is controlling is whether or not the
shares of stock are traded in the local stock
exchange and not where the actual sale
happened. (Del Rosario v. CIR, CTA, Case No.
4796, December 1, 1994)
Persons liable to pay capital gains tax on the
sale of shares of stock not traded in the stock
exchange
1. Individuals – both citizens and aliens
2. Corporations – both domestic and foreign
3. Estates and Trusts
Rules in determining the selling price of the
shares disposed
1. In case of cash sale — the selling price is the
total consideration as indicated in the deed
of sale.
2. If the consideration is partly in money and
partly in kind — the selling price is the cash
or money received plus the fair market
value of the property received.
3. In case of exchange — the selling price is
the fair market value (FMV) of the property
received.
4. If the FMV of the shares of stock disposed is
higher than the amount of amount and/or
fair market value of the property received,
the excess of the FMV of the shares of stock
disposed over the amount of money and the
FMV of the property, shall be deemed a gift
subject to the donor’s tax. (RR 6-2008)
5. In the case of shares of stock not listed and
traded in the local stock exchange, the value
of the shares of stock at the time of sale
shall be the FMV. In determining the value
of the shares, the Adjusted Net Asset
77
Method shall be used whereby all assets
and liabilities are adjusted to FMV. The net
of adjusted asset minus the liability values
is the indicated value of the equity.
6. The appraised value of real properties shall
be the highest of the three:
a. FMV determined by the Commissioner,
b. FMV as shown in the schedule of values
fixed by provincial and city assessors,
or
c. FMV as determined by independent
appraiser (RR No. 6-2013)
NOTE: The basis of determining the Capital
Gains Tax (CGT) is the capital gain and not the
fair market value.
The above rules apply to DC, RFC, and NRFC.
Important features as regards capital gains
from sale of shares of stock
1. No capital loss carry-over for capital losses
sustained during the year (not listed and
traded in a local stock exchange) shall be
allowed but capital losses may be deducted
on the same taxable year only.
2. The entire amount of capital gains and
capital loss (not listed and traded in a local
stock exchange) shall be considered
without taking into account the holding
period irrespective of the type/kind of
taxpayer.
3. Non-deductibility of losses on wash sales
and short sales.
4. Gain from sale of shares of stock in a foreign
corporation is not subject to capital gains
tax but to graduated rates either as capital
gain or ordinary income depending on the
nature of the trade of business of the
taxpayer.
Q: As to tax implication, distinguish shares of
stocks not listed and traded through stock
exchange from those listed and traded
through stock exchange (2008, 2011 BAR)
A:
NOT LISTED LISTED AND
AND TRADED TRADED
As to Income Business
 National Taxation
natur b. If John directly sold the shares to his best
e friend, a US citizen residing in Makati, at
As to Capital gains tax Percentage tax a gain of ₱200,000, is he liable for
kind Philippine income tax? If so what is the
of tax tax base and rate?
As to Before TRAIN Before TRAIN
rate Law: Law: A:
Not over ½ of 1% a. NO. The gain on the sale or disposition of
₱100,000 – 5% shares of stock of a domestic corporation
In excess of Under TRAIN held as capital assets will not be subjected
₱100,000 – 10% Law: to income tax if these shares sold are listed
6/10 of 1% and traded in the stock exchange (Sec. 24
Under TRAIN (C), NIRC)
Law:
15% final tax, if However, the seller is subject to the
covered by the percentage tax of ½ of 1% of the gross
TRAIN Law selling price (Sec. 127 (A), NIRC)

For RFCs and NOTE: The current rate is

NRFCs under
TRAIN Law: b. YES. The sale of shares of stocks of a
Not over domestic corporation held as capital, not
₱100,000 – 5% through a trading in the local stock
In excess of exchange, is subject to capital gains tax
₱100,000 – 10% based on the net capital gain during the
As to Net capital gain Gross selling taxable year. The tax rate is 15%.
tax price
base Q: Federico, a Filipino citizen, migrated to
the United States some six years ago and got
Q: What is the effect if the sale is made by a a permanent resident status or green card.
dealer in securities? Should he pay Philippine income tax on the
gains he derived from the sale in the New
A: The shares of stock (whether listed and York Stock Exchange of shares of stock in
traded in the local stock exchange, listed but not PLDT, a Philippine corporation? (2011 BAR)
traded in the local stock exchange, or not listed)
shall be treated as ordinary assets and the A: YES. The gain from the sale of shares of stock
ordinary gain, if any, from the sale or transfer in a domestic corporation shall be treated as
thereof shall be subject to the graduated income derived entirely from sources within the
tax rates in the case of an individual seller, or to Philippines, regardless of where the said shares
the normal corporate income tax, in the case of are sold. (Sec. 42(E), NIRC)
corporate seller. It will not be subject to Stock
Transaction Tax (STT), but subject to VAT. General rule on shares of stocks

Q: John, US citizen residing in Makati City, Transaction Tax Treatment

bought shares of stock in a domestic Sold by a Treated as an ordinary asset
corporation whose shares are listed and dealer in whose ordinary gains and
traded in the Philippine Stock Exchange at securities losses are subject to regular
the price of ₱2 Million. A day after, he sold income tax.
the shares of stock through his favorite Sold by an If sold through LSE: subject to
Makati stockbroker at a gain of ₱200,000. individual stock transaction tax of 6/10
a. Is John subject to Philippine income tax non-dealer of 1%.
on the sale of his shares through his in If not sold through LSE:
stockbroker? Is he liable for any other securities treated as a capital asset
tax?
If domestic stocks were sold:

UNIVERSITY OF SANTO TOMAS 78

2021 GOLDEN NOTES
 Taxation Law
Subject to 15% capital gains
tax based on net gain
If foreign stocks were sold:
Subject to regular income tax
(also subject to capital loss
limitation rule, holding
period rule, and net capital
loss carry over) Only gain
from sources within the
Philippines is subject to
capital gains tax.
A Not subject to income tax.
corporation Excess of price above par is
selling its not considered as an income.
own stocks
May be subject to percentage
tax on initial public offerings.
Corporation If sold through LSE: subject to
selling stock transaction tax of 50%
stocks of of 1% (0.50%)
another If not sold through LSE:
corporation treated as a capital asset
If domestic stocks were sold:
Subject to 15% capital gains
tax
For RFCs and NRFCs:
Not over ₱100,000 – 5%
In excess of ₱100,000 – 10%
If foreign stocks were sold:
Subject to regular income tax
(NOT subject to capital loss
limitation rule, holding
period rule, and net capital
loss carry over)
Capital gains realized from the sale of real
property/ land and/or buildings
Treatment of sale or disposition of real property
located in the Philippines treated as capital asset
A final tax of 6% shall be imposed based on the
higher amount between:
Capital gains realized from the sale of real
property/ land and/or buildings
Treatment of sale or disposition of real property
located in the Philippines treated as capital asset
A final tax of 6% shall be imposed based on the
higher amount between:
79
1. The gross selling price; or
2. Whichever is higher between the current
fair market value as determined by:
a. Zonal Value – prescribed zonal value of
real properties as determined by the
CIR; or
b. Assessed Value – the fair market value
as shown in the schedule of values of
the Provincial and City assessors (NIRC,
Sec. 24 D (1))
Actual gain or loss is immaterial since there is a
conclusive presumption of gain.
As regards transactions affected by the 6%
capital gain tax, the NIRC speaks of real
property with respect to individual taxpayers,
estate and trust but also speaks of land and/or
building with respect to domestic corporations.
NOTE: The above discussion of CGT on sale or
disposition of real properties shall apply only to
domestic corporations, since foreign
corporations (RFC and NRFC) cannot own
properties in the Philippines.
Tax treatment if property is not located in the
Philippines
Gains realized from the sale, exchange or other
disposition of real property not located in the
Philippines by resident citizens or domestic
corporations shall be subject to ordinary income
taxation (Sec. 4(F), RR No. 7-2003) but subject to
foreign tax credits.
Such income may be exempt in the case of non-
resident citizens, alien individuals and foreign
corporations (Sec. 4(F), RR No. 7-2003)
Transactions covered by the “presumed”
capital gains tax on real property
It covers:
1. Sale;
2. Exchange; or
3. Other disposition, including pacto de retro
and other forms of conditional sales. (Sec.
24 D(1), NIRC)
NOTE: “Sale, exchange, or other disposition”
includes taking by the government through
expropriation proceedings.
Q: Hopeful Corporation obtained a loan from
 National Taxation
Generous Bank and executed a mortgage on
its real property to secure the loan. When
Hopeful Corporation failed to pay the loan,
Generous Bank extrajudicially foreclosed the
mortgage on the property and acquired the
same as the highest bidder. A month after
the foreclosure, Hopeful Corporation
exercised its right of redemption and was
able to redeem the property. Is Generous
Bank liable to pay capital gains tax as a
result of the foreclosure sale? Explain. (2014
BAR)
A: NO. In a foreclosure of a real estate mortgage,
the capital gains tax accrues only after the lapse
of the redemption period because it is only then
that there exists a transfer of property. Thus, if
the right to redeem the foreclosed property was
exercised by the mortgagor before the
expiration of the redemption period, as in this
case, the foreclosure is not a taxable event. (RR
No. 4-1999; Supreme Transliner, Inc. v. BPI
Family Savings Bank, Inc. G.R. No. 165617,
February 25, 2011)
Q: The Department of Agriculture (DA),
through its Secretary, executed a Deed of
Assignment of a parcel of land in favor of the
Bureau of Fisheries and Aquatic Resources
(BFAR) without any monetary consideration.
By virtue of the Deed, BFAR applied for the
issuance of a land title in its own name. Is the
assignment subject to CGT or regular
corporate income tax?
A: NO. While the conveyance of property by the
DA in favor of the BFAR was pursuant to a Deed
of Assignment, the assignment was made
without monetary consideration. Hence, it is not
subject to CGT. Neither is it subject to the
regular corporate income tax since the DA and
the BFAR, which are both government agencies
exercising purely governmental functions when
the Deed was executed, are exempt from such
regular corporate income tax. (BIR Ruling No.
229-2017 dated 15 May 2017)
Q: Manalo, Filipino citizen residing in Makati
City, owns a vacation house and lot in
Tagaytay, which he acquired in 2000 for ₱15
million. On Jan. 10, 2013, he sold said real
property to Mayaman, another Filipino
residing in Quezon City for ₱20 million. On
Feb. 9, 2013, Manalo filed the capital gains
return and paid ₱1.2 million representing
6% capital gains tax. Since Manalo did not
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
derive any ordinary income, no income tax
return was filed by him for 2013. After the
tax audit conducted in 2014, the BIR officer
assessed Manalo for deficiency income tax
computed as follows: ₱5 million (₱20million
less ₱15 million) x 30%= ₱1.5 million,
without the capital gains tax paid being
allowed as tax credit. Manalo consulted a
real estate broker who said that the ₱1.2
million capital gains tax should be credited
from the ₱1.5 million deficiency income tax.
a. a. Is the BIR officer’s tax assessment
correct? Explain.
b. b. If you were hired by Manalo as his tax
consultant, what advice would you give
him to protect his interest? Explain.
(2008 BAR)
A:
a. NO. The BIR officer’s tax assessment is
wrong for two reasons. First, the rate of
income tax used is the corporate income tax
although the taxpayer is an individual.
Second, the computation of the gain
recognized from the sale did not consider
the holding period of the asset. The capital
asset having been for more than 12 months,
only 50% of the gain is recognized. (Sec.
39(B), NIRC)
b. I will advise him to ask for the issuance of
the final assessment notice and request for
the crediting of the capital gains tax paid
against the income tax due. The taxpayer
should explain that the capital gains tax was
paid in good faith because the property sold
is a capital asset and considering that what
was paid is also an income tax it should be
credited against the income tax assessment
on the ground of equity. Once the final
assessment is made, I will advise him to
protest within 30 days from receipt,
invoking the holding period and the wrong
tax rate used.
Q: A corporation, engaged in real estate
development, executed deeds of sale on
various subdivided lots. One buyer, after
going around the subdivision, bought a
corner lot with a good view of the
surrounding terrain. He paid ₱1.2 million,
and the title to the property was issued. A
year later, the value of the lot appreciated to
a market value of ₱1.6 million, and the buyer
decided to build his house thereon. Upon
inspection, however, he discovered that a
80
 Taxation Law
huge tower antenna had been erected on the
lot frontage totally blocking his view. When
he complained, the realty company
exchanged his lot with another corner lot
with an equal area but affording a better
view. Is the buyer liable for capital gains tax
on the exchange of the lots? (1997 BAR)
A: YES. The buyer is subject to capital gains tax
on the exchange of lots on the basis of prevailing
fair market value of the property transferred at
the time of the exchange or the fair market value
of the property received, whichever is higher
(Sec. 21(E), NIRC)
Real property transactions subject to capital
gains tax are not limited to sales. It also includes
exchanges of property unless exempted by a
specific provision of law.
Q: A, a doctor by profession, sold in the year
2000 a parcel of land which he bought as a
form of investment in 1990 for ₱1 million.
The land was sold to B, his colleague and at a
time when the real estate prices had gone
down, for only ₱800,000 which was then the
fair market value of the land. He used the
proceeds to finance his trip to the United
States. He claims that he should not be made
to pay the 6% final tax because he did not
have any actual gain on the sale. Is his
contention correct? (2001 BAR)
A: NO. The 6% capital gains tax on sale of a real
property held as capital asset is imposed on the
income presumed to have been realized from
the sale, which is the fair market value or selling
price thereof, whichever is higher. (Sec. 24 (D),
NIRC)
Actual gain is not required for the imposition of
the tax, but it is the gain by fiction of law which
is taxable. Thus, capital gains tax is imposed
even though the sale results in net loss.
Q: In January 1970, Juan bought 1 hectare of
agricultural land in Laguna for ₱100,000.
This property has a current fair market
value of ₱10 million in view of the
construction of a concrete road traversing
the property. Juan agreed to exchange his
agricultural lot in Laguna for a one-half
hectare residential property located in
Batangas, with a fair market value of ₱10
million, owned by Alpha Corporation, a
81
domestic corporation engaged in the
purchase and sale of real property. Alpha
Corporation acquired the property in 2007
for ₱9 million.
a. What is the nature of real properties
exchanged for tax purposes – capital
asset or ordinary asset? Explain.
b. Is Juan Gonzales subject to income tax on
the exchange of property? If so, what is
the tax based and rate? Explain.
c. Is Alpha Corporation subject to income
tax on the exchange of property? If so,
what is the tax base and rate? Explain.
(2008 BAR)
A:
a. The one-hectare agricultural land owned by
Juan Gonzales is a capital asset because it is
not a real property used in trade or in
business. The one-half hectare residential
property owned by Alpha Corporation is an
ordinary asset because the owner is
engaged in the purchase and sale of real
property. (Sec. 39, NIRC, RR No. 7-2003)
b. YES. The tax base in a taxable disposition of
a real property classified as a capital asset
is the higher between two values; the fair
market value of the property received in
exchange and the fair market value of the
property exchanged. Since the fair market
value of these two properties is the same,
the said fair market value should be taken
as the tax base which is P10 Million. The
income tax rate is 6 %. (Sec. 24(D)(1), NIRC)
c. YES. The gain from the exchange
constitutes an item of gross income, and
being a business income, it must be
reported in the annual income tax return of
Alpha Corporation. From the pertinent
items of gross income, deductions allowed
by law from gross income can be claimed to
arrive at the net income which is the tax
base for the corporate income tax rate of
30%. (Sec. 27(A) and Sec. 31, NIRC)
Q: Sps. Salvador are the registered owners of
a parcel of land. The Republic, represented
by the DPWH, filed a Complaint before the
RTC for the expropriation of a portion of said
parcel of land for the construction of a
highway. The RTC rendered judgment in
favor of the Republic condemning the subject
 National Taxation
property. The RTC likewise directed the
Republic to pay respondents consequential
damages equivalent to the value of the
capital gains tax and other taxes necessary
for the transfer of the subject property in the
Republic's name. The RTC reasoned that the
payment of capital gains tax and other
transfer taxes is but a consequence of the
expropriation proceedings. Is the RTC
correct in awarding consequential damages
to the Sps. Salvador as the payment for
capital gains tax?
A: NO. It is settled that the transfer of property
through expropriation proceedings is a sale or
exchange within the meaning of Sections 24(D)
and 56(A)(3) of the NIRC, and profit from the
transaction constitutes capital gain. Since capital
gains tax is a tax on passive income, it is the
seller, or respondents in this case, who are liable
to shoulder the tax.
In fact, BIR Ruling No. 476-2013 has constituted
the DPWH as a withholding agent tasked to
withhold the 6% final withholding tax in the
expropriation of real property for infrastructure
projects. As far as the government is concerned,
the capital gains tax in expropriation
proceedings remains a liability of the seller, as it
is a tax on the seller's gain from the sale of real
property. (Republic of the Philippines,
represented by the DPWH vs. Spouses Salvador,
G.R. No. 205428, June 7, 2017)
Sale of Principal Residence
Principal residence – refers to the dwelling
house, including the land on which it is situated,
where the individual and members of his family
reside, and whenever absent, the said individual
intends to return. Actual occupancy is not
considered interrupted or abandoned by reason
of temporary absence due to travel or studies or
work abroad or such other similar
circumstances. (RR No. 14-2000)
NOTE: The address shown in the ITR is
conclusively presumed as the principal
residence. If the taxpayer is not required to file a
return, certification from Barangay Chairman or
Building Administrator (for Condominium
units) shall suffice.
Sale of principal residence by an individual
A sale of principal residence by an individual is
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
exempt from capital gains tax provided the
following requisites are present:
1. Sale or disposition of the old actual
principal residence;
2. By a citizen or resident alien;
3. Proceeds from which is fully utilized in
acquiring or constructing a new principal
residence within 18 calendar months from
the date of sale or disposition;
4. Notify the CIR within 30 days from the date
of sale or disposition through a prescribed
return of his intention to avail the tax
exemption;
5. Can be availed of once every 10 years;
6. The historical cost or adjusted basis of his
old principal residence shall be carried over
to the cost basis of his new principal
residence;
7. If there is no full utilization, the portion of
the gains presumed to have been realized
shall be subject to capital gains tax; and
8. The 6% capital gains tax due shall be
deposited with an authorized agent bank
subject to release upon certification by the
RDO that the proceeds of the sale have been
utilized. (RR No. 14-2000)
Q: Mr. H decided to sell the house and lot
wherein he and his family have lived for the
past 10 years, hoping to buy and move to a
new house and lot closer to his children’s
school. Concerned about the capital gains tax
that will be due on the sale of their house,
Mr. H approaches you as a friend for advice if
it is possible for the sale of their house to be
exempted from capital gains tax and the
conditions they must comply with to avail
themselves of said exemption. How will you
respond? (2015 BAR)
A: Mr. H may avail the exemption from capital
gains tax on sale of principal residence by
natural persons. Under the law, the following
are the requisites:
1. Proceeds of the sale of the principal
residence have been fully utilized in
acquiring or constructing new principal
residence within 18 calendar months from
the date of sale or disposition.
2. The historical cost or adjusted basis of the
real property sold or disposed will be
carried over to the new principal residence
built or acquired.
3. The Commissioner has been duly notified,
through a prescribed return, within 30 days
from the date of sale or disposition of the
82
 Taxation Law
person’s intention to avail of the tax
exemption.
4. Exemption was availed only once every 10
years.
Q: If the taxpayer constructed a new
residence and then sold his old house, is the
transaction subject to capital gains tax?
A: YES. Exemption from capital gains tax does
not find application since the law is clear that
the proceeds should be used in acquiring or
constructing a new principal residence. Thus,
the old residence should first be sold before
acquiring or constructing the new residence.
Tax-free exchanges
Tax-free exchanges refer to those instances
enumerated in Section 40(C)(2) of the NIRC of
1997 that are not subject to Income Tax, Capital
Gains Tax, Documentary Stamp Tax and/or
Value-added Tax, as the case may be.
Two Kinds of Tax-Free Exchanges
1. Transfer to a controlled corporation; and,
2. Merger or consolidation.
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.
Merger or Consolidation
No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation:
1. A corporation, which is a party to a merger
or consolidation, exchanges property solely
for stock in a corporation, which is a party
to the merger or consolidation;
2. A shareholder exchanges stock in a
corporation, which is a party to the merger
or consolidation, solely for the stock of
another corporation also a party to the
merger or consolidation; or
3. A security holder of a corporation, which is
a party to the merger or consolidation,
83
exchanges his securities in such
corporation, solely for stock or securities in
another corporation, a party to the merger
or consolidation.
Q: B transferred his ownership over a 1,000-
square meter commercial land and three-
door apartment to ABC Corp., a family
corporation of which B is a stockholder. The
transfer was in exchange of 10,000 shares of
stock of ABC Corp. As a result, B acquired 51
% ownership of ABC Corp., with all the shares
of stock having the right to vote. B paid no tax
on the exchange, maintaining that it is a tax
avoidance scheme allowed under the law.
The Bureau of Internal Revenue, on the other
hand, insisted that B's alleged scheme
amounted to tax evasion. Should B pay taxes
on the exchange? Explain. (2019 BAR)
A: NO. B should not pay taxes on the said
exchange.
As a general rule, upon the sale or exchange of
property, the entire amount of the gain or loss,
as the case may be, shall be recognized. One of
the accepted exceptions to the said rule is when
a property is transferred to a corporation by a
person in exchange for stock or unit of
participation in such a 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:
provided, that stocks issued for services shall
not be considered as issued in return for
property. (Sec. 40(C)(6)(c),NIRC)
In the case, B transferred his ownership over a
1,000-square meter commercial land and three-
door. As a result, B acquired 51% ownership of
ABC Corp., with all the shares of stock having
the right to vote.
PASSIVE INVESTMENT INCOME
Passive income refers to income derived from
any activity in which the taxpayer has no active
participation or involvement.
Q: What is meant by “income subject to final
tax?” (2001 BAR)
A: Income subject to final tax refers to an income
wherein the tax due is fully collected through the
withholding tax system. Under this procedure,
 National Taxation
the payor of the income withholds the tax and
remits it to the government as a final settlement
of the income tax due on said income. The
recipient is no longer required to include the
item of income subjected to “final tax” as part of
his gross income in his income tax returns.
EXAMPLE: Interest income from bank deposits.
The bank (payor) deducts and/or withholds the
final withholding tax from the interest income.
The bank is required to remit the tax to the
government. On the other hand, the taxpayer
need not declare the interest income in his/her
income tax return.

SUMMARY RULES ON THE TAX TREATMENT OF CERTAIN PASSIVE INCOME

AS APPLIED TO CORPORATIONS (SEC. 27 (D))
NATURE OF INCOME DC RFC NRFC
Interests from any currency bank deposits, yield, or 20% Short-term Shall be
any other monetary benefits from deposit interest: considered
substitutes and from trust fund and similar 20% as part of
arrangement and Royalties derived from sources gross income
within the Philippines Long term subject to
interest: 30% NCIT.
NOTE: Interest income or yield earned by DC from 30%
sources outside the Philippines shall not be subject to
final tax of 20% but included in the gross income
and subject to NCIT.
Interest Income derived under expanded foreign 15% 7.5% Exempt
currency deposit system
Interest derived by depositary bank under the 10% 10% Exempt
expanded foreign currency deposit system from
foreign currency loans granted to residents other than
offshore banking units (OBUs)

NOTE: If granted to non-residents, OBUs, local

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

Interest 2. Regional or international financing

institutions established by foreign
It is the amount of compensation paid for the government (Sec. 25(A)(2), NIRC);
use of money or forbearance from such use. 3. On loans extended by any of the above-
mentioned entities;
Tax-exempt interest income: (FIL2D) 4. On bonds, debentures, and other certificate
of indebtedness received by any of the
1. From bank deposits. The recipient must be above-mentioned entities;
any following tax-exempt recipients: 5. On bank deposit maintained under the
a. Foreign government expanded foreign currency deposit
b. Financing institutions owned,
controlled, or financed by foreign NOTE: In order to avail exemption under
government item no. 4, the recipient must be a non-
resident alien or non-resident foreign
corporation. Otherwise, it is subject to final
tax of 15%.

UNIVERSITY OF SANTO TOMAS 84

2021 GOLDEN NOTES
 Taxation Law
6. From long term investment or deposit with
a maturity period of 5 years or more.
Long-term deposits or investments
depository bank under the expanded foreign
currency deposit system, it shall be subject to a
final tax at the rate of 15% of such income. (Sec.
24(B)(1), NIRC)

Certificate of time deposit or investment in the Non-resident citizen and non-resident alien are
form of savings, common or individual trust exempt from payment of the 15% final tax on
funds, deposit substitutes, investment interest income under the expanded foreign
management accounts or other investments, currency deposit system.
with maturity of not less than 5 years, the form
of which shall be prescribed by the Bangko Meanwhile, interest income derived by a
Sentral ng Pilipinas (BSP) and issued by banks domestic corporation and resident foreign
(not by nonbank financial intermediaries and corporation from a depository bank under the
finance companies) to individuals in expanded foreign currency deposit system
denominations of P10,000 and other (EFCDS) shall be subject to final income tax rate
denominations as may be prescribed by the BSP. of 15%. Correspondingly, interest income
(Sec. 22(FF), NIRC) received by RFC shall be subject to final income
tax rate of 7.5%, while the NRFC shall be
Deposit substitute exempt.

This is an alternative form of obtaining funds Interest income subject to 10% final tax
from the public other than deposits, through the Interest derived from foreign currency loans
issuance, endorsement, or acceptance of debt granted by depositary banks to residents (DC
instruments for the borrower’s own account, for or RFC) other than offshore banking units in the
the purpose of re-lending or purchasing of Philippines or other depositary banks under the
receivables and other obligations or financing expanded system shall be subject to 10% final
their own needs or the needs of their agent or tax.
dealer. (Sec. 22 (Y))
NOTE: If the loan is granted to non-residents,
In order for an instrument to qualify as a OBUs, or local commercial banks, including
deposit substitute, the borrowing must be made branches of foreign banks authorized by the BSP
from twenty (20) or more individual or to transact business, it shall be EXEMPT.
corporate lenders at any one time. The mere
flotation of a debt instrument is not considered “Interest Income subject to Final
to be a public borrowing and is not deemed a Withholding Tax (20%)” vs. “Income subject
deposit substitute, if there are only 19 or less to Gross Receipts Tax (5%) on banks”
individual or corporate lenders at any one time.
(RR No. 14-2012) This is called the 19-lender 20% FWT ON 5% GROSS RECEIPTS
rule. INTEREST INCOME TAX ON BANKS
It is an income tax It is a business tax
Foreign currency deposit system under Title II of the (percentage tax)
NIRC (Tax on under Title V (Other
It refers to the conduct of banking transactions Income). Percentage Taxes).
whereby any person whether natural or judicial FWT is imposed on Gross Receipts Tax
may deposit foreign currencies forming part of the gross interest (GRT) is measured by
the Philippine international reserves, in income realized in a a certain percentage
accordance with the provisions of RA 6426, An taxable year. on the gross receipts
Act Instituting a Foreign Currency Deposit or earnings.
System in the Philippines, and for other FWT is a GRT is not a
purposes. withholding tax. withholding tax.

Interest income subject to 15% final tax NOTE: The 20% final tax withheld on a bank’s
passive income should be included in the
If the interest is received by an individual computation of GRT. (China Banking Corporation
taxpayer (except non-resident individual) from a v. CIR, G.R. No. 175108, February 27, 2013)

85
 National Taxation
Q: Maribel, a retired public school teacher,
relies on her pension from the GSIS and the
Interest Income from a time deposit of
₱500,000 with ABC Bank. Is Maribel liable to
pay any tax on her income?
A: YES. Maribel is exempt from tax on the
pension from the GSIS (Sec. 32(B)(6)(f), NIRC).
However, with her time deposit, the interest she
receives thereon is subject to 20% final
withholding tax.
Q: In 2007, spouses Renato and Judy Garcia
opened peso and dollar deposits at the
Philippine branch of the Hong Kong Bank in
Manila. Renato is an overseas worker in
Hong Kong while Judy lives and works in
Manila.
During the year, the bank paid interest
income of ₱10,000 on the peso deposit and
US$1,000 on the dollar deposit. The bank
withheld final income tax equivalent to 20%
of the entire interest income and remitted
the same to the BIR.
a. Are the interest incomes on the bank
deposits of spouses Renato and Judy
Garcia subject to income tax? Explain.
b. Is the bank correct in withholding the
20% final tax on the entire interest
income? Explain.
A:
a. YES. The interest income from the peso
bank deposit is subject to 20% final
withholding tax. The interest income from
the dollar deposit is subject to 15% final
withholding tax but only on the portion of
the interest attributable to Judy or $500. The
interest on the dollar deposit attributable to
Renato, a non-resident is exempt from
income tax. (Sec. 24(B)(1), NIRC)
b. NO. Only the interest income on a peso
deposit is subject to 20%. The interest
income from a dollar deposit is subject to
15% if the earner is a resident individual.
(Sec. 24(B), NIRC)
Q: What is the tax treatment of the following
interest on deposits with:
a. BPI Family Bank?
b. A local offshore banking unit of a foreign
bank? (2005 BAR)
A:
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
a. It is a passive income subject to a
withholding tax rate of 20%.
b. It is a passive income subject to final
withholding tax rate of15% (Sec. 24(B)(1),
NIRC)
Both interests are not to be declared as part of
gross income in the income tax return.
Q: On 2004, Edison Bataan Cogeneration
Corporation (EBCC) received from the CIR a
Formal Letter of Demand and Final
Assessment Notice assessing EBCC of
deficiency Final Withholding Tax (FWT) for
taxable year 2000. Upon the CIR’s inaction to
the letter-protest filed by EBCC, the latter
elevated the case to the CTA. The CTA
Division held, among others, that EBCC was
not liable for the deficiency FWT assessment
on interest payments on loan agreements for
taxable year 2000 since its liability for
interest payment became due and
demandable only on 2002. The CIR
contended that EBCC was liable to pay the
interest from the date of the execution of the
contract on 2000, not from the date of the
first payment on 2002, as the loan agreement
clearly indicated that the interest was to be
paid separately from the principal. The
decision of the CTA Division was affirmed by
the CTA en banc. Is EBCC liable for deficiency
FWT for the year 2000?
A: NO. EBCC's liability for interest payment
became due and demandable starting 2002. The
obligation of EBCC to deduct or withhold tax
arises at the time an income is paid or payable,
whichever comes first, and considering further
that under the RR 2-98, the term "payable"
refers to the date the obligation becomes due,
demandable or legally enforceable, the CTA en
banc correctly ruled that EBCC had no obligation
to withhold any taxes on the interest payment
for the year 2000 as the obligation to withhold
only commenced on June 1, 2002, and thus
cancelling the assessment for deficiency FWT on
interest payments arising from EBCC' s loan
from Ogden. (Edison (Bataan) Cogeneration
Corporation vs. CIR, G.R. No. 201665 & 201668,
August 30, 2017)
Dividend
Dividend is any distribution made by a
corporation to its shareholders out of its
86
 Taxation Law
earnings or profits and payable to its
shareholders, whether in money or in other
property.
Kinds of dividends
1. Cash dividend – paid in given sum of
money.
2. Property dividend – one paid in corporate
property such as bonds, securities or stock
investments held by the corporation, not its
own stock. They are taxable to the extent of
the fair market value of the property
received at the time of distribution.
3. Stock dividend – one paid by a corporation
with its own stock.
Stock dividends, strictly speaking, represent
capital and do not constitute income to its
recipient. So that the mere issuance thereof
is not subject to income tax as they are
nothing but enrichment through increase in
value of capital investment. In a loose sense,
stock dividends issued by the corporation,
are considered unrealized gain, and cannot
be subjected to income tax until that gain
has been realized. Before the realization,
stock dividends are nothing but a
representation of an interest in the
corporate properties. (Commissioner v.
ANSCOR, G.R. No. 108576, January 20, 1999)
XPNs:
a. Change in the stockholder’s equity,
right, or interest in the net assets of the
corporation
b. Recipient is other than the shareholder
c. Cancellation or redemption of shares of
stock
d. Distribution of treasury shares
e. Dividends declared in the guise of
treasury stock dividend to avoid the
effects of income taxation
f. Different classes of stock were issued
NOTE: A stock dividend does not constitute
taxable income if the new shares did not
confer new rights nor interests than those
previously existing, and that the recipient
owns the same proportionate interest in the
net assets of the corporation. (RR No. 2, Sec.
252)
4. Scrip dividend – one that is paid in the
form or promissory notes.
87
5. Indirect dividend – one made through the
exercise of right or other means of payment
e.g., Cancellation or condonation of
indebtedness.
6. Liquidating dividend – one resulting from
the distribution by a corporation of all its
property or assets in compete liquidation
or dissolution. It is generally a return of
capital, and hence, it is not income.
However, it is taxable income with respect
to the excess of amount received over cost
of the shares surrendered. (Dimaampao,
2015)
Inter-corporate dividends
There is inter-corporate dividend when a
dividend is declared by one corporation and
received by another corporation which is a
stockholder to the former. The following rules
shall apply:
1. Dividends received from DC
a. Dividends received by a DC and RFC
from a domestic corporation shall not
be subject to tax (Sec. 27(D)(4), Sec.
28(A)(7)(d), NIRC);
RATIONALE: The law assumes that the
dividends received will be incorporated
to the capital which will eventually be
taxed when the corporation gets income
from its use of the capital.
b. Dividends received by a NRFC from a DC
shall be subject to 15% FWT. This is
known as the tax sparing rule. (Sec.
28(B)(5)(b), NIRC)
Tax sparing rule
Under this rule, the dividends received
shall be subject to 15% FWT, provided,
that the country in which the
corporation is domiciled either (i)
allows a tax credit of 15% against the
taxes due from the foreign corporation
for taxes deemed paid; or (ii) does not
impose income tax on such dividends.
(CIR v. Wander Philippines Inc., G.R. No.
L-68375, April 15, 1988); otherwise, the
dividend shall be subject to 30%.
The phrase “deemed paid” “tax credit”
does not mean tax credit actually
granted by the foreign country. There is
 National Taxation
no statutory provision or revenue multinationals
regulation requiring “actual grant”. 2. Inter-corporate dividends
received from domestic
The 15% represents the difference corporation by non-resident
between the NCIT of 30% on foreign corporation
corporations and the 15% tax on 3. Share of an individual in the
dividends. distributable net income
after tax of a partnership
2. Dividends received from a foreign (other than a GPP) which he
corporation: is a partner
a. Dividends received by a DC from a 4. Share of an individual in the
foreign corporation shall be subject to net income (after tax) of an
30% NCIT; association, joint account, or
a joint venture or consortium
b. Dividends received by RFC and NRFC taxable as corporation for
from a foreign corporation shall be which he is a member or co-
subject to 30% NCIT, IF the income of venturer
the foreign corporation is derived from Exempt Inter-corporate dividends
sources within the Philippines; IF the from received from domestic
said income is derived from sources tax corporation by another domestic
outside the Philippines, the dividends corporation and resident foreign
received shall be exempt from tax. corporation
(Tabag, 2015)
In determining whether income is derived
from sources within or without the SUMMARY OF TAX TREATMENT OF
Philippines, the ratio of the foreign DIVIDEND RECEIVED FROM DOMESTIC
corporation’s Philippine gross income to the CORPORATION
world gross income within the 3-year period
preceding the declaration of such dividend TAXABLE (TAX RATE) /
should be considered. RECIPIENT
EXEMPT
DC / RFC Tax exempt
PHILIPPINE GROSS RC, NRC, RA 10%
SOURCE OF
INCOME = % WORLD NRA – ETB 20%
INCOME
GROSS INCOME NRA – NETB 25%
Less than 50% Entirely without NRFC 15% subject to credit sparing
50 - 85% Proportionate rule
(partly within;
partly without) Dividend received from foreign corporation
More than 85% Entirely within
Dividend received from foreign corporation is
TAX TREATMENT OF DIVIDEND INCOME subject to Philippine income tax if at least 50%
of the world (total) income of the foreign
Subject 1. Dividends from foreign
corporation must be derived from the
to corporation
Philippines for three years preceding the
basic 2. Share in the income of a GPP
declaration of such dividend. (Dimaampao,
tax 3. Share in income of an exempt
2015)
joint venture
Subject 1. Cash and/or property Q: Does tax on income and dividends amount
to final dividends actually or to double taxation?
tax constructively received by
individuals from domestic A: NO. Tax on income is different from tax on
corporation or from a joint dividend because they have different tax basis.
stock company, insurance or (Afisco Insurance Companies v. CA, G.R. No.
mutual fund company and 1123675, January 25, 1999)
regional operating
headquarters of

UNIVERSITY OF SANTO TOMAS 88

2021 GOLDEN NOTES
 Taxation Law
Q: What are disguised dividends in income
taxation? (1994 BAR)
A: Disguised dividends are those income
payments made by a domestic corporation,
which is a subsidiary of a non-resident foreign
corporation, to the latter ostensibly for services
rendered by the latter to the former, but which
payments are disproportionately larger than the
actual value of the services rendered. In such
case, the amount over and above the true value
of the service rendered shall be treated as a
dividend and shall be subjected to the
corresponding tax on Philippine sourced gross
income. E.g., Royalty payments under a
corresponding licensing agreement.
Q: Suppose the creditor is a corporation and
the debtor is its stockholder, what is the tax
implication in case the debt is condoned by
the corporation?
A: This may take the form of indirect
distribution of dividends by a corporation. On
the part of the stockholder whose indebtedness
has been condoned he is subject to 10% final tax,
on the masked dividend payment. On the part of
the corporation, said amount cannot be claimed
as deduction. When the corporation declares
dividends, it can be considered as interest on
capital therefore not deductible.
Q: BBB, Inc., a domestic corporation, enjoyed
a particularly profitable year in 2014. In June
2015, its Board of Directors approved the
distribution of cash dividends to its
stockholders. BBB, Inc. has individual and
corporate stockholders. What is the tax
treatment of the cash dividends received
from BBB, Inc. by the following stockholders?
a. A resident citizen
b. Non-resident alien engaged in trade or
business
c. Non-resident alien not engaged in trade
or business
d. Domestic corporation
e. Non-resident foreign corporation (2015
BAR)
A:
a. A final withholding tax of 10% shall be
imposed upon cash dividends actually or
constructively received by a resident citizen
from BBB, Inc. (Sec. 24(B)(2))
89
b. A final withholding tax of 20% shall be
imposed upon cash dividends actually or
constructively received by a non-resident
alien engaged in trade or business from
BBB, Inc. (Sec. 24(A)(2), NIRC)
c. A final withholding tax equal to 25% of the
entire income received from all sources
within the Philippines, including the cash
dividends received from BBB, Inc. (Sec.
25(B), NIRC)
d. Dividends received by a domestic
corporation from another domestic
corporation, such as BBB, Inc., shall not be
subject to tax. (Sec. 27(D)(4), NIRC)
e. Dividends received by a non-resident
foreign corporation from a domestic
corporation are generally subject to an
income tax of 30% to be withheld at source.
(Sec. 28(B)(1), NIRC)
However, a final withholding tax of 15% is
imposed on the amount of cash dividends
received from a domestic corporation like BBB,
Inc. f the tax sparing rule applies (Sec.
28(B)(5)(b), NIRC). Pursuant to this rule, the
lower rate of tax would apply if the country in
which the non-resident foreign corporation is
domiciled would allow as a tax credit against the
tax due from it, taxes deemed paid in the
Philippines of 15% representing the difference
between the regular income tax rate and the
preferential rate.
Q: Fred, was a stockholder in the Philippine
American Drug Company. Said corporation
declared a stock dividend and that a
proportionate share of stock dividend was
issued to Fred. The CIR, demanded payment
of income tax on the aforesaid dividends.
Fred protested the assessment made against
him and claimed that the stock dividends in
question are not income but are capital and
are, therefore, not subject to tax. Are stock
dividends income?
A: NO. Stock dividends are not income and are
therefore not taxable as such. A stock dividend,
when declared, is merely a certificate of stock
which evidences the interest of the stockholder
in the increased capital of the corporation. A
declaration of stock dividend by a corporation
involves no disbursement to the stockholder of
 National Taxation
accumulated earnings and the corporation parts
with nothing to its stockholder. The property
represented by a stock dividend is still that of
the corporation and not of the stockholder. The
stockholder has received nothing but a
representation of an interest in the property of
the corporation and as a matter of fact, he may
never receive anything, depending upon the final
outcome of the business of the corporation.
(Fisher v. Trinidad, G.R. No. L-21186, February 27,
1924)
Q: The JV was tasked to develop and manage
FDC’s 50% ownership of its PBCom Office
Tower Project “the Project”. FDC paid its
subscription by executing a Deed of
Assignment of its rights and interests in the
Project worth ₱5.7M in favor of the JV. The
BIR assessed deficiency income tax on the
gain on the supposed dilution and/or
increase in the value of FDC’s shareholdings
in FAC. Did the BIR properly impute
deficiency income taxes to FDC which was
supposedly incurred by it as a consequence
of the dilution of its shares in FAC?
A: NO. The mere appreciation of capital is not
taxable. Gain is realized upon disposition. No
deficiency income tax can be assessed on the
gain on the supposed dilution and/or increase
in the value of FDC’s shareholdings in FAC. (CIR
v. Filinvest Development Corporation, G.R. Nos.
163653 & 167689, July 19, 2011)
Q: Is the redemption of stocks of a
corporation from its stockholders as well as
the exchange of common with preferred
shares considered as “essentially equivalent
to the distribution of taxable dividend”
making the proceeds thereof taxable?
A: YES. The general rule states that a stock
dividend representing the transfer of surplus to
capital account shall not be subject to tax.
However, if a corporation cancels or redeems
stock issued as a dividend at such time and in
such manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be
considered as taxable income to the extent it
represents a distribution of earnings or profits
accumulated.
The redemption converts into money the stock
dividends which become a realized profit or gain
and consequently, the stockholder’s separate
property. Profits derived from the capital
invested cannot escape income tax. As realized
income, the proceeds of the redeemed stock
dividends can be reached by income taxation
regardless of the existence of any business
purpose for the redemption. (CIR v. CA, G.R. No.
108576, January 20, 1999)

SUMMARY OF RULES ON DIVIDENDS

SOURCE OF DIVIDENDS
RECIPIENT DC RFC NRFC
RC 10% final tax Regular income tax Regular income tax (0-
(0- 35%) 35%)
RA 10% final tax Less than 50% of income of RFC/NRFC is from
PH: Non-taxable Income from sources outside
PH are not taxable for RA, NRC, NRAETB, and
NRC 10% final tax
NRANETB)

NRAETB 20% final tax If 50%-85% of income of RFC/NRFC is from PH, a

proportion of the income is considered as income
within the Philippines, subject to regular income
NRANETB 25% final tax
tax (or 25% final tax for NRANETB)

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

PH, entire dividend income is considered as
income within the Philippines, subject to regular
income tax (or 25% final tax for NRANETB)
DC Exempt (intercorporate Same rule for RFCs Regular corporate income
dividends) and NRFCs (see tax (30%)

UNIVERSITY OF SANTO TOMAS 90

2021 GOLDEN NOTES
 Taxation Law
below)
RFC Exempt (intercorporate Less than 50% of income of RFC/NRFC is from
dividends) PH: Non-taxable Income from sources outside
PH are not taxable for RFC and NRFC)

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

NRFC 15% subject to credit sparing proportion of the income is considered as income
rule within the Philippines, subject to regular income
tax (or 30% final tax on gross income for NRFC)

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

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

Royalty income Rental income

No definition was provided for royalty income
under the NIRC. Nonetheless, Webster
Dictionary defined the same as a share of the
earnings as from invention, book or play, paid to
the inventor, writer, etc. for the right to make,
use or publish the same. (Tabag, 2015)
Moreover, in Universal Food Corporation vs. CA,
1970, it was defined to be the compensation for
the use of a patented invention.
Tax treatment of royalty income
SUBJECT TO 10% FINAL TAX
Royalties on books, other literary works and
musical composition from sources within the
Philippines.
SUBJECT TO 20% FINAL TAX
Royalties derived from sources within the
Philippines other than royalties subject to
10% to final tax
SUBJECT TO BASIC TAX
Royalties derived by RC and DC from sources
without the Philippines.
(Tabag, 2015)
Rental income is a fixed sum, either in cash or in
property equivalent, to be paid at a definite
period for the use or enjoyment of a thing or
right. All rentals derived from lease of real
estate or personal property, of copyrights,
trademarks, patents and natural resources
under lease.
Prepaid rent
Prepaid or advance rental is taxable income to
the lessor in the year received, if received under
a claim of right and without restriction as to its
use, regardless of method of accounting
employed.
NOTE: Security deposit applied to the rental of
terminal month or period of contract must be
recognized as income at the time it is applied.
The purpose of security deposit is to ensure
contract compliance. It is not income to the
lessor until the lessee violates any provision of
the contract.
Rent is subject to special rate

Rent vs. Royalty 1. Those paid to non-resident Cinematographic

Film owner or lessor or distributor – 25% of
BASIS RENT ROYALTY its gross income from all sources within the
As to Must be Need not be Philippines. (Sec. 28(B)(2), NIRC)
reporting reported as reported 2. Those paid to non-resident owner or lessor
part of gross since subject of vessels chartered by Philippine national –
income to final tax. 4.5% of gross rentals. (Sec. 28(B)(3), NIRC)
3. Those paid to non-resident owner or lessor
As to tax Regular Final tax
of aircraft, machineries, and other
rate progressive
equipment – 7.5% of gross rental or fees.
tax if
(Sec. 28(B)(4), NIRC)
individual

91
 National Taxation
Additional rent income may be grouped into be counted for 1 rental payment unlike with the
2: spread out method it would be distributed to the
remaining term of the lease contract.
1. Obligations of Lessors to 3rd parties assumed
by the lessee: Q: X leased his vacant lot in Binondo to Y for
a. Real estate taxes on leased premises; a term of 10 years at an annual rental of
b. Insurance premiums paid by lessee on ₱600,000. The contract provides that Y will
property; put up a building on the lot and after 10
c. Dividends paid by lessee to years, the building will belong to X.
stockholders of lessor-corporation; and
d. Interest paid by lessee to holder of The building was erected at a cost of
bonds issued by lessor-corporation. ₱6,000,000 and has an estimated useful life
of 30 years. Assuming the fair value of the
2. Value of permanent improvement made by completed building is the same as the
lessee on leased property of the lessor upon construction cost, what is the total income of
expiration of the lease X if he opts to report his income on the
leasehold improvements using:
Lease of personal property a. Outright method
b. Spread out method
Rental income on the lease of personal property
located in the Philippines and paid to a non- A:
resident taxpayer shall be taxed as follows: a. If X reports his income on the
improvements in the year it was completed,
NRC NRA his total rental income shall be:
Vessel 4.5% 25%
FMV of the building in the
Aircraft, machineries 7.5% 25% ₱ 6,000,000
year of completion
and other equipment Add: Annual rental 600,000
Other assets 30% 25% Total rental income ₱ 6,600,000
Tax treatment of leasehold improvements by
b. If X reports his income on the
lessee: Recognized methods in reporting the
improvements using the spread out
value of permanent improvement
method, his total rental income shall be:
Where the lease contract provides that the
Cost of the building ₱ 6,000,000
lessee will erect a permanent improvement on
Less: Accumulated
the rented property and after the term of the
depreciation at the end of
lease, the improvement shall become the
lease term 2,000,000
property of the lessor, the lessor may, at his
(₱6,000,000/30 years x 10
option, report the income therefrom upon either
years)
of the following methods:
Book value of the building
4,000,000
at the expiration of lease
1. Outright Method or Lumpsum-Method – the
fair market value of the building or Divided by: Lease term 10
improvement shall be reported as additional Annual income of X on the
400,000
rent income at the time when such building improvement
or improvements are completed; and Regular rental income 600,000
2. Spread Out Method or Annual-Method – Total annual rental income ₱ 1,000,000
allocate over the life of the lease the
estimated book value of such buildings or Tax treatment of advance rental/long term
improvements at the termination of the lease
lease and report as additional rent for each
year of the lease an aliquot part thereof in If the advance payment by the lessee is really a
addition to the regular rent income. loan to the lessor, or an option money for the
property or a security deposit for the faithful
NOTE: With the outright method it would only performance of certain obligations of the lessee,

UNIVERSITY OF SANTO TOMAS 92

2021 GOLDEN NOTES
 Taxation Law
the lessor realizes no taxable income in the year during the life of a person or for a guaranteed
the advance payment is received. If the advance fixed period of time, whichever is longer, in
payment is, in fact, a prepaid rental, there is consideration of capital paid by him.
taxable income to the lessor whether the latter is The portion representing return of premium is
using the cash or accrual method of accounting. not taxable while that portion that represents
interest is taxable.
FORMS OF
TAX WHEN
ADVANCE NOTE: The portion of annuity net of premiums
TREATMENT TAXABLE
PAYMENT is taxable being interest or earnings of the
A loan to the G.R.: Non- premium and not return of capital.
lessor from taxable
the lessee Q: X purchased a life annuity for P100,000
XPN: If the which will pay him P10,000 a year. The life
lessee violates expectancy of X is 12 years. How much is
the terms of excluded from the gross income of X?
the contract
An option G.R. Non- A: The P100,000 is excluded from the gross
money for taxable income of X since it represents a return of
the property premiums which is not income but a return of
XPN: If the capital.
lessee violates
the terms of Proceeds of life insurance
the contract
A security G.R.: Non- GR: Amounts received under a life insurance,
deposit to taxable endowment, or annuity contact, whether in a
insure the single sum or in installments, paid to the
faithful XPN: If the beneficiaries upon the death of the insured are
performance lessee violates excluded from the gross income of the
of the lease the terms of beneficiary.
the contract
A security G.R.: Non- Taxable at XPNs:
deposit taxable the time it is 1. If such amounts, when added to amounts
which applied already received before the taxable year
restricts the XPN: Security under such contract, exceed the aggregate
lessor as to deposit premiums or considerations paid, the excess
its use applied to shall be included in the gross income.
rental shall be
subject tom NOTE: However, in the case of a transfer for
VAT at the a valuable consideration by assignment or
time of its otherwise, of a life insurance, endowment or
application annuity contract or any interest therein,
Prepaid Taxable In the year it only the actual value of such consideration
rental is received and the amount of the premiums and other
without irrespective sums subsequently paid by the transferee
restriction of the are exempt from taxation.
as to its use accounting
method 2. Interest payments thereon if such amounts
employed by are held by the insurer under an agreement
the lessor to pay interest shall be taxable. If paid to a
transferee for a valuable consideration, the
ANNUITIES AND PROCEEDS FROM LIFE proceeds are not exempt.
INSURANCE OR OTHER TYPES OF INSURANCE
NOTE: The life insurance proceeds must be
It refers to the periodic installment payments of paid by reason of the death of the insured.
income or pension by insurance companies Payments for reasons other than death are

93
 National Taxation
subject to tax up to the excess of the
premiums paid.
Any policy loans or borrowings made on the
policy shall be deducted as advances from the
life insurance proceeds received upon death.
Recipients of non-taxable life insurance
proceeds
Proceeds of life insurance policies paid to
individual beneficiaries upon the death of the
insured are exempt. Also, it has been held that
proceeds of life insurance policies taken by a
corporation on the life of an executive to
indemnify it against loss in case of his death do
not constitute taxable income. (El Oriente
Fabrica de Tabacos v. Posadas, G.R. No. 34774,
September 21, 1931)
Difference between the tax treatment of life
insurance proceeds under income and estate
taxation
In estate taxation, the concept of revocability or
irrevocability in the designation of the
beneficiary is necessary to determine whether
the life insurance proceeds are included in the
gross estate or not. However, if the appointed
beneficiary is the estate, executor or
administrator, the proceeds shall be included
from the gross estate.
NOTE: Under the Insurance Code, the insured
shall have the right to change the beneficiary he
designated in the policy, unless he has expressly
waived this right in said policy. Notwithstanding
the foregoing, in the event the insured does not
change the beneficiary during his lifetime, the
designation shall be deemed irrevocable. (Sec.
11, R.A. No. 10607 )
On the other hand, in income taxation, there is
no need for the determination of revocability or
irrevocability of the beneficiary for purposes of
exclusion of such proceeds from the gross
income. They are non-taxable regardless of who
the recipient is.
Q: ABC Corp. took two insurance policies
covering the life of its employee, Y. The first
insurance designated W, wife of Y as the
beneficiary; while in the second insurance, it
was ABC Corp. which was the designated as
the irrevocable beneficiary. In both
insurances, it was ABC Corp. paying the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
premiums. Y died.
a. Do the proceeds form part of the taxable
income of the recipients?
b. Are the proceeds part of the taxable
estate of the deceased?
A:
a. NO. The proceeds are not part of the taxable
income of the recipients. Section 32(B)(1)
expressly excludes from income taxation
proceeds of life insurance. This is based on
the theory that such proceeds, for income
tax purposes, are considered as forms of
indemnity. Thus, they are non-taxable
regardless of who the recipient is.
b. NO. The proceeds of the two policies are
excluded as part of the gross estate. For
estate tax purposes, the determining factor
on whether the proceeds of insurance shall
be excluded in the gross estate is when the
designation of the beneficiary is made
irrevocable. Pursuant to the amendment
introduced by R.A. 10607, the second
paragraph of Sec. 11 of the Insurance Code
now reads “Notwithstanding the foregoing,
in the event the insured does not change the
beneficiary during his lifetime, the
designation shall be deemed irrevocable”.
Thus, since the Y did not exercise his right to
change W, as his beneficiary, the designation
is deemed irrevocable and hence, the
proceeds of the insurance not taxable.
PRIZES AND AWARDS
It refers to amount of money in cash or in kind
received by chance or through luck and is
generally taxable except if specifically
mentioned under the exclusion from
computation of gross income under Sec. 32(B) of
NIRC.
Tax treatment for prizes and winnings
Generally, prizes exceeding P10,000 and other
winnings from sources within the Philippines
shall be subject to 20% final withholding tax, if
received by a citizen, resident alien or non-
resident engaged in trade or business in the
Philippines. If the recipient is a non-resident
alien not engaged in trade or business in the
Philippines, the prizes and other winnings shall
be subject to 25% final withholding tax. If the
recipient is a corporation (domestic or foreign),
94
 Taxation Law
the prizes and other winnings are added to the 2. All prizes and awards granted to athletes in
corporation’s operating income and the net local and international sport competitions
income is subject to 30% corporate income tax. and tournaments whether held in the
Philippines or abroad and sanctioned by
RECIPIENTS TAX RATES their national sports associations
Citizen, resident alien or Subject to 20%
non-resident engaged in final NOTE: The national sports association
trade or business in the withholding referred to by law that should sanction said
Philippines tax sport activity is the Philippine Olympic
Non-resident alien not Subject to 25% Committee. (Sec. 13, RA. No. 6847)
engaged in trade or final
business in the withholding 3. Prizes that winning inventors receive from
Philippines tax the nationwide contest for the most
Corporation (domestic or Subject to 30% innovative New and Renewable Energy
foreign) corporate Systems jointly sponsored by the PNOC and
income tax other organizations for during the first ten
years reckoned from the date of the first sale
Prizes and winning subject to income tax of the invented products, provided that such
sale does not exceed ₱200,000 during any
1. Prizes derived from sources within the twelve-month period. (R.A. No. 7459, Sec. 5
Philippines not exceeding ₱10,000 are and 6; BIR Ruling 069-2000)
included in the gross income subject to
regular income tax. SUMMARY OF TAX TREATMENT OF
PRIZES AND OTHER WINNINGS
2. Winnings derived from sources within the
Philippines is subject to final tax on passive EXEMPT FROM TAX
income 1. Prizes and award made primarily in
recognition of:
3. PCSO and lotto winnings is subject to final a. Religious, charitable;
tax on passive income b. Scientific;
c. Educational artistic, literary; or
NOTE: Only taxable if the amount exceeds d. Civic achievement.
P10,000 for RC, NRC and RA. (Sec. 25(B)(1),
NIRC) Always exempt for NRA-ETB. (Sec. Provided the recipient was:
25(A)(2), NIRC) Always subject to tax for a. Selected without any action on his
NRA-NETB. (Sec. 25(B), NIRC) part to enter the contest or
proceeding (not constituting gains
4. Prizes and winnings from sources outside from labor); and
the Philippines b. Not required to render substantial
future services as a condition to
Prizes and awards exempt from income tax receive the prize/ award.

1. Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary, or
civic achievement provided, the following
conditions are met:
a. The recipient was selected without any
action on his part to enter the contest or
proceeding; and
b. The recipient is not required to render
substantial future services as a
condition to receiving the prize or
award.
2. All prizes and awards granted to athletes
in local and international sports
competitions and tournaments, whether
held in the Philippines or abroad and
sanctioned by their respective national
sports association.
3. PCSO/Lotto winnings.
NOTE: Only exempt if the amount is P10,000
or less for RC, NRC and RA. (Sec. 25(B)(1),
NIRC) Always exempt for NRA-ETB. (Sec.
25(A)(2), NIRC) Always subject to tax for
NRA-NETB. (Sec. 25(B), NIRC)

95
 National Taxation
SUBJECT TO BASIC TAX voluntary or involuntary action of the taxpayer
1. Prizes and Other winnings derived by in producing the income. The source of the
resident citizens and domestic income may be legal or illegal.
corporation from sources without the
Philippines. Examples of “income from whatever source
2. Prizes and Winnings received by derived” which form part of the taxable
corporation from sources within the income of the taxpayer
Philippines.
3. Prizes received by individuals from 1. Gains arising from expropriation of
sources within the Philippines property which would be considered as
amounting to P10,000 or less. income from dealings in property;
2. Gains from gambling;
SUBJECT TO 20% FINAL TAX 3. Gains from embezzlement or stealing
1. Prizes received by individuals (except money;
NRA-NETB) from sources within 4. Gains, money or otherwise derived from
Philippines exceeding P10,000 extortion, illegal gambling, bribery, graft
2. Other winnings from sources within the and corruption, kidnapping, racketeering,
Philippines regardless of amount (Other etc.;
than PCSO and Lotto winnings for NRA-
ETB). Rationale: These are taxable because title
3. PCSO and Lotto winnings exceeding is merely voidable.
P10,000 for RC, NRC and RA.
5. In stock options, the difference between
SUBJECT TO 25% FINAL TAX the fair market value of the shares at the
Prizes and other winnings (including PCSO and time the option is exercised, and the option
Lotto winnings) received by NRA-NETB price constitutes additional compensation
income to the employee (Commissioner v.
(Tabag, 2015) Smith, 324 U.S. 177);
6. Money received under solutio indebiti;
Pension, retirement benefit, or separation
pay Rationale: Under the claim of right
doctrine, the recipient, even if he has the
It refers to amount of money received in lump obligation to return the same, has a
sum or on staggered basis in consideration of voidable title to the money received
services rendered given after an individual through mistake.
reaches the age of retirement.
7. Condonation of indebtedness for a
Pension being part of gross income is taxable to consideration.
the extent of the amount received except if there
is a BIR approved pension plan. (Sec. 32 B (6), Rationale: This is because when a creditor
NIRC) cancels a debt as part of a business
transaction, the debtor is enriched or
The amounts that do not qualify as exclusions receives financial advantages thereby
are considered as part of income subject to tax. increasing his net assets, and thus realizes
(Domondon, 2013) taxable income.

Refer to “Exclusions from Gross Income” for Condonation of indebtedness

further discussion.
1. When cancellation of debt is income – If an
INCOME FROM ANY SOURCE individual performs services for a creditor,
who in consideration thereof, cancels the
“Income from whatever source derived” implies debt, it is income to the extent of the amount
that all income not expressly exempted from the realized by the debtor as compensation for
class of taxable income under our laws form his services.
part of the taxable income, irrespective of the

UNIVERSITY OF SANTO TOMAS 96

2021 GOLDEN NOTES
 Taxation Law
2. When cancellation of debt is a gift – If a
creditor merely desires to benefit a debtor
and without any consideration therefore
cancels the amount of the debt, it is a gift
from the creditor to the debtor and need not
be included in the latter’s income. The
creditor is subject to donor’s tax.
3. When cancellation of debt is a capital
transaction. If a corporation to which a
stockholder is indebted forgives the debt, the
transaction has the effect of payment of a
dividend. (RR No. 2, Sec. 50)
4. An insolvent debtor does not realize taxable
income from the cancellation or forgiveness.
(CIR v. Gin Co. 43 F.2d 327)
5. The insolvent debtor realizes income
resulting from the cancellation or
forgiveness of indebtedness when he
becomes solvent. (Lakeland Grocery Co. v.
CIR, 36 BTA 289)
Q: Mr. Gipit borrowed from Mr. Maunawain
₱100,000.00, payable in 5 equal monthly
installments. Before the first installment
became due, Mr. Gipit rendered general
cleaning services in the entire office building
of Mr. Maunawain, and as compensation
therefor, Mr. Maunawain cancelled the
indebtedness of Mr. Gipit up to the amount
of ₱75,000.00. Mr. Gipit claims that the
cancellation of his indebtedness cannot be
considered as gain on his part which must be
subject to income tax, because according to
him, he did not actually receive payment
from Mr. Maunawain for the general
cleaning services. Is Mr. Gipit correct?
Explain. (2014 BAR)
A: NO. Section 50 of Revenue Regulations 2,
otherwise known as Income Tax Regulations,
provides that if a debtor performs services for a
creditor who cancels the debt in consideration
for such services, the debtor realizes income to
that amount as compensation for his services. In
the given problem, the cancellation of Mr. Gipit’s
indebtedness up to the amount of ₱75,000.00
gave rise to compensation income subject to
income tax, since Mr. Maunawain condoned
such amount as consideration for the general
cleaning services rendered by Mr. Gipit.
Recovery of accounts previously written off
97
“Tax Benefit Rule” or Equitable Doctrine of
Tax Benefit
It is a principle that if a taxpayer recovers a loss
or expense that was deducted in a previous year,
the recovery must be included in the current
year's gross income up to the extent that it was
previously deducted.
Two instances where Tax benefit rule applies
1. Recovery of bad debts
2. Receipt of tax refund or credit
Recovery of bad debts
The recovery of bad debts previously allowed as
deduction in the preceding year or years shall
be included as part of the taxpayer’s gross
income in the year of such recovery to the
extent of the income tax benefit of said
deduction.
If the taxpayer did not benefit from deduction of
the bad debt written-off because it did not result
in any reduction of his income tax in the year of
such deduction as in the case where the result of
the taxpayer’s business operation was a net loss
even without deduction of the bad debts
written-off, his subsequent recovery thereof
shall be treated as a mere recovery or a return
of capital, hence, not treated as receipt of
realized taxable income.
Receipt of tax refunds or credit
If a taxpayer receives tax credit certificate or
refund for erroneously paid tax which was
claimed as a deduction from his gross income
that resulted in a lower net taxable income or a
higher net operating loss that was carried over
to the succeeding taxable year, he realizes
taxable income that must be included in his
income tax return in the year of receipt.
XPN: The foregoing principle does not apply to
tax credits or refunds of the following taxes
since these are not deductible from gross
income:
1. Income tax (except FBT);
2. Estate tax;
3. Donor’s tax;
4. Special assessments;
5. VAT; and
 National Taxation
6. Stock Transactions Tax.
General rule on taxation of debts
Borrowed money is not part of taxable income
because it has to be repaid by the debtor. On the
other hand, the creditor does not receive any
income upon payment because it is merely a
return of the investment.
James Doctrine
This doctrine provides that even though the law
imposes a legal obligation upon an embezzler or
thief to repay the funds, the embezzled or stolen
money still forms part of the gross income since
the embezzler or thief has no intention of
repaying the money.
Proceeds of stolen or embezzled property
are taxable
The money or other proceeds of the sale or
other disposition of stolen property is subject to
income tax because the proceeds are received
under a claim of right.
Q: ABC, a domestic corporation, entered into
a software license agreement with XYZ, a
non-resident foreign corporation based in
the U.S. Under the agreement which the
parties forged in the U.S., XYZ granted ABC
the right to use a computer system program
and to avail of technical know-how relative
to such program. In consideration for such
rights, ABC agreed to pay 5% of the revenues
it receives from customers who will use and
apply the program in the Philippines. Discuss
the tax implication of the transaction. (2010
BAR)
A: The amount payable under the agreement is
in the nature of a royalty. The term royalty is
broad enough to include compensation for the
use of an intellectual property and supply of
technical know-how as a means of enabling the
application or enjoyment of any such property
or right (Sec 42(4) NIRC). The royalties paid to
the non-resident US Corporation, equivalent to
5% of the revenues derived by ABC for the use of
the program in the Philippines, is subject to a
30% final withholding tax, unless a lower tax
rate is prescribed under an existing tax treaty
(Sec 28(B)(1) NIRC).
EXCLUSIONS
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Exclusions from gross income refer to the flow
of wealth to the taxpayers which are not
considered part of gross income for purposes of
computing the taxpayer’s taxable income due to
the following:
1. It does not come within the definition of
income; or
2. It is exempted by the fundamental law or
by statute.
The exclusion of income should not be confused
with the reduction of gross income by
application of allowable deductions. Exclusions
are not taken into account in determining gross
income, however, deductions are subtracted
from the gross income. (Tabag, 2015)
Construction of exclusions
Exclusions are in the nature of tax exemptions;
thus, they must be strictly construed against the
taxpayer and liberally in favor of the
Government. It behooves upon the taxpayer to
establish them convincingly.
Rationale
There are exclusions from the gross income
either because they:
1. Represent return of capital;
2. Are not income, gain or profit;
3. Are subject to another kind of internal
revenue tax; or
4. Are income, gain or profit that is expressly
exempt from income tax under the
Constitution, Tax treaty, NIRC, or general or
a special law.
Taxpayers who may avail
All kinds of taxpayers – individuals, estates,
trusts and corporations, whether citizens,
aliens, whether residents or non-residents may
avail of the exclusions.
Rationale: The excluded receipts are not
considered as income for tax purposes.
(Domondon, 2013)
Exclusion from gross income vs. deductions
from gross income
DEDUCTION
EXCLUSION FROM
FROM GROSS
GROSS INCOME
INCOME
98
 Taxation Law
It refers to a flow of It refers to exemption by deducted Philippine
wealth to the taxpayer amounts which virtue of a to arrive at income tax to
which are not treated as the law allows law or treaty; net income arrive at the tax
part of gross income, for to be deducted hence, not due and
purposes of computing from gross included in payable
the taxpayer’s taxable income in order the
income, due to the to arrive at net computation Other Tax
following reasons: income. of gross Credits (as can
a. It is expressly income. be seen in BIR
exempted from Form 1701):
income tax by the 1. Prior Year’s
fundamental law or Excess
statute; Credits
b. It is subject to 2. Tax
another kind of Payments
internal revenue for the First
tax; and Three (3)
c. It does not come Quarters
within the 3. Creditable
definition of Tax
income as when the Withheld
amount received for the First
represents return Three (3)
of capital. Quarters
Pertains to the Pertains to the 4. Creditable
computation of gross computation of Tax
income net income Withheld
Something received or Something per BIR
earned by the taxpayer spent or paid in Form No.
which do not form part earning gross 2307 for
of gross income income the 4th
Example of an exclusion Example of a Quarter
from gross income is deduction is 5. Creditable
proceeds of life business rental Tax
insurance received by Withheld
the beneficiary upon the per BIR
death of the insured Form No.
which is not an income 2316
or 13th month pay of an 6. Tax Paid in
employee not exceeding Return
₱82,000 which is an Previously
income not recognized Filed, if this
for tax purposes is an
Amended
Distinguish: exclusions, deductions, and tax Return
credits 7. Special Tax
Credits, if
DEDUCTI applicable
EXCLUSIONS TAX CREDIT 8. Other Tax
ONS
Incomes These are It refers to Credits/Pay
received or included in foreign taxes ments
earned but the gross paid
are not income beforehand but Q: Differentiate tax exclusions from tax
taxable but are are claimed as deductions. (2019 BAR)
because of later credits against

99
 National Taxation
A: Tax exclusions pertain to the computation of e. Income derived by the government or
gross income while tax deductions pertains to its political subdivisions
the computation of net income. Tax exclusions f. GSIS, SSS, Medicare and other
are something received or earned by the contributions
taxpayer which do not form part of gross income g. Gains from the sale of bonds,
while tax deductions are something spent or debentures or other certificate of
paid in earning gross income. Lastly, the former indebtedness
is flow of wealth to the taxpayer which are not h. Gains from redemption of shares in
treated as part of gross income for purposes of mutual fund (Sec. 32(B), NIRC)
computing the taxpayer’s taxable income due to
the following reasons: The exclusions are discussed in detail below.

1. It is exempted by the fundamental law; Gifts, Bequests and Devises

2. It is exempted by a statute; and
3. It does not fall within the definition of The value of property acquired by gift, bequest,
income. devise, or descent is excluded from gross
income.
On the other hand, tax deductions are the Provided, however, that income from such
amounts which the law allows to be subtracted property, as well as gift, bequest, devise, or
from gross income in order to arrive at net descent of income from any property, in cases of
income. transfers of divided interest, shall be included in
gross income.
Exclusions under the Constitution
NOTE: The consideration is based on pure
1. Income derived by the Government or its liberality and is already subject to donor’s or
political subdivision is exempt from gross estate tax as the case may be. Moreover, there is
income, if the source of the income is from no income.
any public utility or from the exercise of
any essential governmental functions. “Gift” is any transfer not in the ordinary course
2. All revenues and assets of non-stock, non- of business which is not made for full and
profit educational institutions used adequate consideration in money or money’s
actually, directly, and exclusively for worth. The giver is called the donor and the
educational purposes shall be exempt from recipient is called the donee.
taxes and duties. (Article XIV, Sec. 4(3), 1987
Constitution) Q: If Mr. Generous gave a gift to Ms. Gorgeous
what are the tax implications?
Exclusions under the NIRC
A: Mr. Generous, the donor is subject to donor’s
Items that are excluded in gross income and tax while Ms. Gorgeous the donee is not subject
exempt from gross income taxation (GLAM-RIC) to donee’s tax. The value of the gift received by
Ms. Gorgeous is not included in the computation
1. Gifts, bequests and devises of gross income pursuant to Sec. 32(B)(3), NIRC,
2. Life insurance proceeds gifts, bequest and devises are excluded from
3. Amount received by insured as return of gross income.
premium
4. Retirement benefits, pensions, gratuities, Bequest and Devise
etc.
5. Income exempt under treaty Bequest is a gift of personal property and devise
6. Compensation for injuries or sickness is a gift of real property. Both are donations
7. Miscellaneous items. (13P2IG3) mortis causa. The giver is either known as the
a. 13thmonth pay and other Benefits; testator or decedent while the recipient may be
b. Prizes and awards the heirs or beneficiaries.
c. Prizes and awards in sports
competitions Tax implications of a Bequest and Devise
d. Income derived by foreign government

UNIVERSITY OF SANTO TOMAS 100

2021 GOLDEN NOTES
 Taxation Law
The estate of the testator or the decedent is
subject to estate tax, while the heirs or
beneficiaries are not required to pay donee’s tax
as the same was already abolished. The value of
the bequest and/or the devise received by the
heirs or beneficiary/ies is/are not included in
the computation of their gross income since
gifts, bequest and devises are excluded from
gross income. (Sec. 32(B)(3), NIRC)
Donation inter vivos and mortis causa
Regardless of whether the donation is inter vivos
or mortis causa, it is excluded from gross income
for it is not product of capital or industry.
Furthermore, the property is already subject to
donor’s or estate taxes as the case may be.
Gift Tax Test
When a person gives a thing or right to another
and it is not a “legally demandable obligation,”
then it is treated as a gift and excluded from
gross income. However, if there is a legally
demandable obligation to give such as for
services rendered by one to the donor or due to
his merits, the amount received is taxable
income to the recipient.
Q: The Constitution exempts from taxation
charitable institutions, churches,
parsonages, or convents appurtenant
thereto, mosques, and non-profit cemeteries
and lands, buildings and improvements
actually, directly, and exclusively used for
religious, charitable or educational
purposes. Mercy Hospital is a 100 bed
hospital organized for charity patients. Can
said hospital claim exemption from taxation
under the provision? (1996 BAR)
A: YES. Mercy Hospital can claim exemption
from taxation under the provision of the
Constitution, but only with respect to real
property taxes provided that such real
properties are used actually, directly, and
exclusively for charitable purposes.
Q: Art. VI, Sec. 28(3) of the Constitution
provides that charitable institutions,
churches and parsonages or covenants
appurtenant thereto, mosques, non-profit
cemeteries and all lands, buildings and
improvements actually, directly, and
exclusively used for religious, charitable or
101
educational purposes shall be exempt from
taxation. To what kind of taxes does this
exemption apply? (2000 BAR)
A: This exemption applies only to property
taxes. What is exempted is not the institution
itself but the lands, buildings, and
improvements actually, directly and exclusively
used for religious, charitable, and educational
purposes. (CIR v. CA, et al., G.R. No. 124043,
October 14, 1998)
Q: The Roman Catholic Church owns a 2-
hectare lot in a town in Tarlac province. The
southern side and middle part are occupied
by the church and a convent, the eastern side
by the school run by the church itself. The
south eastern side by some commercial
establishments, while the rest of the
property, in particular, the northwestern
side, is idle or unoccupied. May the church
claim tax exemption on the entire land?
(2005 BAR)
A: NO. The portion of the land occupied and
used by the church, convent and school run by
the church are exempt from real property taxes
while the portion of the land occupied by
commercial establishments and the portion,
which is idle, are subject to real property taxes.
The “usage” of the property and not the
“ownership” is the determining factor whether
or not the property is taxable. (Lung Center of
the Philippines v. Quezon City, G.R. No.
144104, June 29, 2004)
Q: Due to rising liquidity problems and
pressure from its concerned suppliers, P
Corp. instituted a flash auction sale of its
shares of stock. P Corp. was then able to sell
its treasury shares to Z, Inc., an unrelated
corporation, for Pl,000,000.00, which was
only a little below the valuation of P Corp. 's
shares based on its latest audited financial
statements. In connection therewith, P Corp.
sought a Bureau of Internal Revenue ruling
to confirm that, notwithstanding the price
difference between the selling price of the
shares and their book value, the said
transaction falls under one of the recognized
exemptions to donor's tax under the Tax
Code. (2019 BAR)
a. Cite the instances under the Tax Code
where gifts made are exempt from
donor's tax.
 National Taxation
b. Does the above transaction fall under
any of the exemptions? Explain.
A:
a. The following are the instances where gifts
made are exempt from donor’s tax:
i. Gifts made to or for the use of the
National Government or any entity
created by any of its agencies which
are not conducted for profit, or to any
political subdivision of the said
Government; and,
ii. Gifts in favor of an educational and/or
charitable, religious, cultural or social
welfare corporation, institution,
accredited non-government
organization, trust or philantrophic
organization or research institution or
organization, not more than 30% of
said gifts shall be used by such donee
for administration purposes.
b. NO, the transaction does not fall under any
of the exemption. However, the transaction
may still be exempt from donor’s tax even
when the shares of stock were sold on a
selling price that is less than the fair market
value of the shares provided that the sale is
made in the ordinary course of business, in
a transaction which is a bona fide, at arm’s
length, and free from any donative intent.
Q: Quiroz worked as chief accountant of a
hospital for 45 years. When he retired at the
age of 65, he received retirement pay
equivalent to 2 months salary for every year
of service as provided in the hospital BIR
approved retirement plan. The Board of
Directors of the hospital felt that the hospital
should give Quiroz more than what was
provided for in the hospital’s retirement plan
in view of his loyalty and invaluable services
for 45 years. Hence, it resolved to pay him a
gratuity of ₱1 million over and above his
retirement pay. The CIR taxed the ₱1 million
as part of the gross compensation income of
Quiroz who protested that it was excluded
from income because (a) it was a retirement
pay, and (b) it was a gift.
Is Quiroz correct in claiming that the
additional ₱1 million was gift and therefore
excluded from income?
A: NO. The amount received was in
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
consideration of his loyalty and invaluable
services to the company which is clearly a
compensation income received on account of
employment. Under the employer’s ‘motivation
test,’ emphasis should be placed on the value of
Quiroz services to the company as the
compelling reason for giving him the gratuity;
hence it should constitute a taxable income. The
payment would only qualify as a gift if there is
nothing but ‘good will, esteem and kindness’
which motivated the employer to give the
gratuity. (Stonton v. U.S., 186 F. Supp. 393)
Q: C is a creditor of D. The debt is condoned
by C. What is the tax implication of the
condonation of debt?
A: For D, that amount is a remuneratory donation
and is subject to income tax. C should pay
donor’s tax if the amount condoned is more than
P250,000.
Q: C lends D ₱150,000.00 but D failed to pay
the debt. C told D that D should work in C’s
Restaurant and part of D’s salary will be
applied to the obligation. What is the tax
implication there?
A: For D, it is fruit of labor and it is subject to
income tax. For C, since he pays the salary of D, it
is not subject to tax; it is a deductible item. It is a
business expense and therefore it is an allowable
deduction.
Q: C lends D ₱250,000.00 but D failed to pay
the debt. D is a government employee. C told
D that D’s wife and daughter should work in
C’s Restaurant and part of their salary will be
applied to the obligation. What is the tax
implication?
A: The wife and daughter should pay income tax
because it is fruit of labor. They are not liable for
donor’s tax since the amount falls within the
P250,000 exempt threshold. For C, since he pays
the salary of D, it is not subject to tax; it is a
deductible item. It is a business expense and
therefore it is an allowable deduction. For D,
there is no tax because payment of obligation is
not taxable.
Life insurance proceeds
Life insurance is insurance on human life and
insurance appertaining thereto or connected
therewith. (Sec. 179, IC)
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 Taxation Law
Conditions for the exclusion of life insurance
proceeds from gross income (ProHeDS)
1. Proceeds of life insurance policies
2. Paid to the Heirs or beneficiaries
3. Upon the Death of the insured
4. Whether in a single Sum or otherwise.
Rationale for the exclusion of the proceeds
from life insurance
They are not considered as income because they
partake the nature of an indemnity or
compensation rather than gain to the recipient.
Life insurance proceeds also serve the same
purpose as nontaxable inheritance.
Exceptions to the rule that the amount of the
proceeds of life insurance should be
excluded from the gross income (ASV-PPC)
1. If there is an Agreement between the
insured and the insurer to the effect that the
amount shall be withheld by the insurer
under an agreement to pay interest thereon,
the interest held by the insurer pursuant to
that agreement is the one taxable but not the
principal amount. (Sec. 32B (1), NIRC)
2. Where the life insurance policy is used to
Secure a money obligation
3. Where the life insurance policy was
transferred for a Valuable consideration
4. The recipient of the insurance proceeds is a
business Partner of the deceased and the
insurance was taken to compensate the
partner-beneficiary for any loss in income
that may result as the death of the insured
partner.
5. The recipient of the insurance proceeds is a
Partnership in which the insured is a
partner, and the insurance was taken to
compensate the partnership for any loss in
income that may result from the dissolution
of the partnership caused by the death of the
insured partner.
6. The recipient of the life insurance proceeds
is a Corporation in which the insured was an
employee or officer. (Sec. 62, RR No. 2)
Interest earned on the proceeds from life
103
If such amounts of the life insurance proceeds
are held by the insurer under an agreement to
pay interest thereon, the interest payments shall
be included in the gross income. (Sec. 32(B)(1),
NIRC)
Designation of the beneficiary
In determining income tax, life insurance
proceeds are always considered as exclusions
regardless of whether the beneficiary is
designated as revocable or irrevocable. The
designation is material only in determining the
gross estate of the decedent to determine his
gross estate.
Q: Suppose the employer insures the life of
his employee and the one paying the
premiums on that life insurance policy is the
employer. If the employee dies:
a. Are the proceeds of the life insurance
policy excluded from the gross income?
b. Will the proceeds form part of the estate
of the decedent and therefore subject to
estate tax?
c. Assuming the designation of the 3rd
person in the policy is silent whether his
designation is revocable or irrevocable,
what is the rule?
A:
a. YES. The manner of designation or the name
of the beneficiary is immaterial. The amount
of the proceeds is excluded from the gross
income.
b. It depends. If the heirs, estate,
administrator or executor is designated as
beneficiary, the proceeds form part of the
estate whether the designation is revocable
or irrevocable.
If the person designated is a 3rd person
(which includes the employer,) the proceeds
form part of the estate if the designation is
revocable. If the designation is irrevocable,
the proceeds will not be included in the
gross estate.
c. It shall be considered as revocably
designated. However, if the insured fail to
exercise his right to change the beneficiary
during his lifetime, then the designation
shall be deemed irrevocable. Under Sec. 11
of the Insurance Code of the Philippines, as
 National Taxation
amended by R.A. 10607, the insured has the
right to change the beneficiary he
designated in the policy, unless he has
expressly waived this right in said policy.
Notwithstanding the foregoing, in the event
the insured does not change the beneficiary
during his lifetime, the designation shall be
deemed irrevocable.
Q: On 30 June 2000, X took out a life
insurance policy on his own life in the
amount of ₱2,000,000.00. He designated his
wife, Y, as irrevocable beneficiary to
₱1,000,000.00 and his son, Z, to the balance
of ₱1,000,000.00 but, in the latter
designation, reserving his right to substitute
him for another. On 01 September 2003, X
died and his wife and son went to the insurer
to collect the proceeds of X’s life insurance
policy. Are the proceeds of the insurance
subject to income tax on the part of Y and Z
for their respective shares? Explain. (2003
BAR)
A: NO. The law explicitly provides that proceeds
of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured are
excluded from gross income and is exempt from
taxation. The proceeds of life insurance received
upon the death of the insured constitute a
compensation for the loss of life, hence a return
of capital, which is beyond the scope of income
taxation. (Section 32(B)(1), NIRC)
Q: Noel is a bright computer science
graduate. He was hired by HP. To entice him
to accept the job, he was offered the
arrangement that part of his compensation
package would be an insurance policy with a
face value of ₱20 million. The parents of Noel
are made the beneficiaries of the insurance
policy. Will the proceeds of the insurance
form part of the income of the parents of Noel
and be subject to income tax? (2007 BAR)
A: NO. The proceeds of life insurance policies
paid to the heirs or beneficiaries upon the death
of the insured are not included as part of the
gross income of the recipient. There is no
income realized because nothing flows to Noel’s
parents other than a mere return of capital, the
capital being the life of the insured. (Sec.
32(B)(1), NIRC)
Amounts received under life insurance
contracts under life insurance endowment or
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
annuity contracts
Endowment –The insurer agrees to pay a sum
certain to the insured if he outlives a designated
period. If he dies before that date, the proceeds
are to be paid to the designated beneficiary.
Treatment of proceeds received under
endowment policies
If the insured dies and the beneficiary receives
the life insurance proceeds, these are not taxable
income because they are excluded from gross
income as proceeds from life insurance.
If the insured does not die and survives the
designated period, the amount pertaining to the
premiums he paid are excluded from gross
income, but the excess shall be considered part
of his gross income.
Q: Suppose A obtained an endowment policy
valued at ₱1 million. He paid premiums
amounting to ₱800,000. Upon maturity, he
received ₱1 million, what amount is taxable?
A: The amount of ₱200,000 is taxable. The
difference between the value of the insurance
and the actual premiums paid forms part of A’s
gross income.
Q: Mario worked his way through college.
After working for more than 2 years in X
Corporation, Mario decided to retire and
avail of the benefits under the very
reasonable retirement plan maintained by
his employer. On the day of his retirement on
April 30, 1985, he received his endowment
insurance policy, for which he was paying an
annual premium of ₱1,520 since 1965, also
matured. He was then paid the face value of
his insurance policy in the amount of
₱50,000. Is his ₱50,000 insurance proceeds
exempt from income taxation?
A: The ₱50,000 insurance proceeds is not totally
exempt from income tax. The excluded amount
is that portion which corresponds to the
premiums that he had paid since 1965. At the
rate of ₱1,520 per year multiplied by twenty
(20) years which was the period of the policy, he
must have paid a total of ₱30,400 (₱1,520 x 20
years) Accordingly, he will be subject to report
as taxable income the amount of ₱19,600. (Sec.
28, NIRC)
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 Taxation Law
Conditions for the exclusion of the return of 1. Where the retirement plan is established in
premium paid from gross income the CBA or other applicable employment
contract –Any employee may be retired
1. Amount received by insured upon reaching the retirement age
2. As a return of premium paid by him established in the CBA or other applicable
3. Under a life insurance, endowment or employment contract.
annuity contract
4. Either: In case of retirement, the employee shall be
a. During the term; entitled to receive such retirement benefits
b. At the maturity of the term mentioned as he may have earned under existing laws
in the contract; or and any CBA and other agreements:
c. Upon surrender of the contract. Provided, however, that an employee's
retirement benefits under any collective
NOTE: The amount returned is not income but bargaining and other agreements shall not
mere return of capital. be less than those provided by the law.

Return of premium v. Life insurance 2. In the absence of a reasonable private

proceeds benefit plan or agreement providing for
retirement benefits of employees in the
The difference lies in cases where the insured in establishment
a life insurance contract survives. In order that a. Optional – the conditions are:
life insurance proceeds may be totally exempt i. An employee upon reaching the
from income taxation, the insured must die. If he age of 60 years or more but not
survives, there is only a partial exemption, i.e., beyond 65;
only the portion of the proceeds representing ii. Who has served at least 5 years
return of premiums previously paid is excluded, in the said establishment; and
being a mere return of capital. iii. May retire and shall be entitled
to retirement pay equivalent to
Retirement benefits, pensions, gratuities, etc. ½ month salary for every year
that are excluded from gross income of service, a fraction of at least 6
(7FRUGS2) months being considered as one
whole year.
1. Retirement benefits under R.A. 7641
2. Social security benefits, retirement b. Mandatory – the conditions are:
gratuities, pensions and other similar i. An employee upon reaching the
benefits received by resident or non- age of beyond 65 years which is
resident citizens or resident alien from the compulsory retirement age;
Foreign government agencies and other ii. Who has served at least 5 years
institutions, private or public in the said establishment; and
3. Retirement received by officials and iii. May retire and shall be entitled
employees of private firms, whether to retirement pay equivalent to
individual or corporate, in accordance with ½ month salary for every year
a Reasonable private benefit plan of service, a fraction of at least 6
maintained by the employer months being considered as one
4. Benefits from the US Veterans whole year. (RA 7641,
Administration Retirement Pay Law)
5. GSIS benefits
6. SSS Reasonable Private Benefit Plan (RPBP)
7. Separation pay
Pension, gratuity, stock bonus, or profit-sharing
Salient features of R.A. 7641, amending the plan maintained by an employer for the benefit
Labor Code with regard to the retirement pay of some or all his officials or employees, wherein
of qualified employees in the absence of any contributions are made by such employer for the
retirement plan officials or employees, or both, for the purpose
of distributing the earnings and principal of the

105
 National Taxation
fund thus accumulated, any part of which shall
not be used or diverted to any purpose other
than for the exclusive benefit of the said officials
and employees. (Sec. 32(B)(6)(a), NIRC)
Conditions in order to avail the exemption
under a RPBP (Approved-10-50-once)
1. The RPBP must be approved by the BIR;
2. The retiree must have been in the service of
same employer for at least 10 years at the
time of retirement;
3. The private employee or official must be at
least 50 years old at the time of his
retirement; and
4. The benefits under the RPBP must have
been availed of only once.
NOTE: Once the benefits under the RPBP have
been availed of, the retiree can no longer avail of
the same exemption for the second time under
another RPBP but can avail exemption under
another ground such as SSS or GSIS benefits.
Meaning of the phrase “shall not have availed
of the privilege under a retirement benefit
plan of the same or another employer” under
Sec. 32(B)(6)(a) of the NIRC
It means that the retiring official must not have
previously received retirement benefits from the
same or another employer who has a qualified
retirement benefit plan. (BIR Ruling No. 125-98)
Q: Ma. Isabel Santos was the Human Resource
Manager of Servier Philippines, Inc. (Servier)
since 1991. In 1998, Santos suffered a sudden
attack of “alimentary allergy”. She fell into
coma and was confined in the hospital. After
a year of medical treatment, evaluation
disclosed that she has not recovered
mentally and physically. Servier was
constrained to terminate the services of
Santos effective 31 August 1999. Servier paid
disability retirement benefits but withheld a
portion for taxation purposes. Under the
retirement plan of Servier, employees are
barred from claiming from additional
benefits on top on that provided for in the
Plan. Santos was 41 years of age at the time
of her termination. Under the circumstances,
was the withholding of a portion of the
retirement benefits proper?
A: YES. Pursuant to the NIRC provisions on
exclusion, retirement benefits received in
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
accordance with a reasonable private benefit
plan maintained by the employer (under R.A. No.
4917) are exempted provided that the retiring
official or employee has been in the service of
the same employer for at least 10 years and is
not less than 50 years of age at the time of his
retirement. Here, Santos was qualified for
disability retirement. At the time of her
retirement, she was only 41 years of age; and
had been in the service for more or less 8 years.
As such, the above exclusion is not applicable for
failure to comply with the age and length of
service requirements. Therefore, Servier cannot
be faulted for deducting a portion from Santos’
total retirement benefits for taxation purposes.
(Santos v. Servier Philippines, Inc., G.R. No.
166377, 28, November 2008)
Retirement benefits paid by an employer
which does not have a private benefit plan
but has an existing CBA providing for
retirement benefits of employees are
excluded from income tax
It is excluded provided that the minimum age
requirement and the length of service are met.
Under RA 7641, the actual retirement age may
even be lower than 60 years of age, pursuant to
the CBA or other applicable employment
contract which is deemed the law between the
parties Thus, for purposes of determining the
taxability of retirement benefits received by
retiring employees, the retirement age is that
age established in the CBA or other applicable
employment contract. However, if the CBA or
other applicable employment contract does not
provide for a retirement age, the minimum
requirement of 50 years provided for under
Section 32(B)(6)(a), of the 1997 NIRC, as
amended, shall apply in order to qualify for the
exemption granted therein. (BIR Ruling No. SB
(041) 603-2009, September 22, 2009)
Q: Mel received from his first employer,
₱20,000 as retirement benefit and was
subsequently employed by another
employer. After rendering 10 years, Mel
retired from his second employer and
received ₱50,000. Payment was made under
a BIR approved retirement plan. Is the said
amount taxable or not?
A: YES. It is taxable because the benefit of
exemption can only be availed of once.
Q: If the second employer is a Government
106
 Taxation Law
entity (assuming Mel was employed by the
DPWH), would your answer be the same?
A: NO. According to R.A. 8291 (The GSIS Act of
1997), all benefits he received are tax exempt,
including retirement gratuity.
Q: Mario worked his way through college.
After working for more than 2 years in X
Corporation, Mario decided to retire and
avail of the benefits under the very
reasonable retirement plan maintained by
his employer. On his retirement, he received
₱400,000 as retirement benefit. Is Mario’s
₱400,000 retirement benefit subject to
income tax?
A: YES. Mario’s ₱400,000 retirement benefit is
subject to income tax. To be exempt, the
retirement pay must have been extended to an
employee who is at the service of his employer
for at least 10 years. The amount cannot be
considered as separation pay that would have
exempted benefits from income tax since it was
Mario who had decided to retire instead of being
required to do so.
Conditions in order that separation pay may
be excluded from gross income
1. Amount received by an official, employee or
by his heirs;
2. From the employer; and
3. As a consequence of separation of such
official or employee from the service of the
employer:
a. Because of death, sickness or other
physical disability; or
b. For any cause beyond the control of
the official or employee (Sec
32(B)(6)(b), NIRC)
Causes beyond the control of the employee
1. Retrenchment
2. Cessation of business
3. Redundancy (Sec. 2(b)(2), RR No. 2-98)
Q: Who will be the recipient of separation
pay if the cause of separation is death,
physical disability or sickness? (2007 BAR)
A:
107
1. In case of death, the estate unless there is a
designated beneficiary.
2. In case of physical disability or sickness, the
employee is the recipient of the separation
pay.
Tax treatment for separation pay
Separation pay is not taxable irrespective of the
age of the employee, length of service, number of
benefits received or the recipient thereof (Sec.
32 B (6) b)
Terminal leave pay
Terminal leave pay is the amount received
arising from the accumulation of sick leave or
vacation leave credits. (Commutation of leave
credits)
Q: Bernardo, a retired employee of the SC
filed a request with the SC for the refund of
the amount of ₱59,502 which were deducted
from his terminal leave pay as withholding
tax. The Court said that the terminal leave
pay of Bernardo, which he received by virtue
of his compulsory retirement, can never be
considered as part of his salary subject to
income tax. Hence, Bernardo’s request was
granted. Is terminal leave pay subject to
income tax?
A: NO. Since terminal leave pay is applied for by
an officer or employee who has already severed
his connection with his employer and who is no
longer working, it necessarily follows that the
terminal leave pay or its cash equivalent is no
longer compensation for services rendered.
Therefore, it cannot be received by the said
employee as salary. It is one of those excluded
from gross income and is therefore not subject
to tax. (Re: Request of Atty. Bernardo Zialcita, AM
90-6-015-SC, October 18, 1990)
Q: A, an employee of the Court of Appeals,
retired upon reaching the compulsory age of
65 years. Upon compulsory retirement, A
received the money value of his accumulated
leave credits in the amount of ₱500,000.00. Is
said amount subject to tax? Explain. (1996
BAR)
A: NO. The commutation of leave credits, more
commonly known as terminal leave pay, i.e., the
cash equivalent of accumulated vacation and
 National Taxation
sick leave credits given to an officer or
employee who retires or separated from the
service through no fault of his own, is exempt
from income tax. Compulsory retirement is
considered as cause beyond the control of the
employee. Hence, all benefits received are tax
exempt. (BIR Ruling 238-91 dated November 8,
1991; Commissioner v. CA and Efren Castaneda,
GR No. 96016, October 17, 1991; Re: Request of
Atty. Zialcita for Reconsideration, A.M. No. 90-6-
015-SC, October 18, 1990)
Q: Assuming it does not form part of the
terminal leave pay, as when it is given
annually to the employee, wherein the
vacation or sick leave may be converted into
cash. What is the tax treatment of the cash
equivalent of such vacation leave credits?
A: It depends.
1. For private employees – vacation leaves are
exempt from tax up to 10 days while sick
leaves are always taxable.
2. For government employees – both vacation
and sick leaves are tax exempt irrespective
of the number of days.
NOTE: These are de minimis benefits.
Tax treatment of sick leave credits
For private employees: they are taxable
irrespective of the number of days. This applies
if the sick or vacation leave credits do not form
part of the compulsory retirement benefit.
For government employees: they are exempt
irrespective of the number of days.
Q: Jacobo worked for a manufacturing firm.
Due to business reverses the firm offered
voluntary redundancy program to reduce
overhead expenses. Under the program an
employee who offered to resign would be
given separation pay equivalent to his 3
months basic salary for every year of service.
Jacobo accepted the offer and received
₱400,000 as separation pay under the
program.
After all the employees who accepted the
offer were paid, the firm found its overhead
is still excessive. Hence it adopted another
redundancy program. Various unprofitable
departments were closed. As a result,
Kintanar was separated from the service. He
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
also received ₱400,000 as separation pay.
a. Did Jacobo derive income when he
received his separation pay?
b. Did Kintanar derive income when he
received his separation pay? (1995 BAR)
A:
a. YES. Because his separation from
employment was voluntary on his part in
view of his offer to resign. What is excluded
from gross income is any amount received
by an official or employee as a consequence
of separation of such official or employee
from the service of the employer for any
cause beyond the control of the said official
or employee. (Sec 28, NIRC)
b. NO. Because his separation from
employment is due to causes beyond his
control. The separation was involuntary as it
was a consequence of the closure of various
unprofitable departments pursuant to the
redundancy program.
Q: Z, a Filipino immigrant living in the United
States for more than 10 years. He is retired
and came back to the Philippines a
balikbayan. Every time he comes to the
Philippines, he stays here for about a month.
He regularly receives a pension from his
former employer in the United States,
amounting US$1,000 a month. Does the
US$1,000 pension become taxable because
he is now residing in the Philippines?
A: NO. The law provides that pensions received
by resident or non-resident citizens of the
Philippines from foreign government agencies
and other institutions, private or public, are
excluded from gross income. (Sec. 32(B)(6)(c),
NIRC)
Q: X, an employee of ABC Corporation died.
ABC Corporation gave X’s widow an amount
equivalent to X’s salary for one year. Is the
amount considered taxable income to the
widow? Why? (1996 BAR)
A: NO. Any amount received by an official or
employee or by his heirs from the employer as a
consequence of separation of such official or
employee from the service of the employer
because of death sickness or other physical
disability or for any cause beyond the control of
the said official or employee are excluded from
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 Taxation Law
gross income. (Sec. 32(B))
Q: A Co., a Philippine corporation, has two
divisions manufacturing and construction.
Due to the economic situation, it had to close
its construction division and lay-off the
employees in that division. A Co. has a
retirement plan approved by the BIR, which
requires a minimum of 50 years of age and
10 years of service in the same employer at
the time of retirement. There are 2 groups of
employees to be laid off:
1. Employees who are at least 50 years of
age and has at 10 years of service at the
time of termination of employment.
2. Employees who do not meet either the
age or length of service A Co. plans to give
the following:
a. For category (A) employees – the
benefits under the BIR approved plan
plus an ex gratia payment of one
month of every year of service.
b. For category (B) employees – one
month for every year of service.
For both categories, the cash equivalent of
unused vacation and sick leave credits. A Co.
seeks your advice as to whether or not it will
subject any of these payments to WT. Explain
your advice. (1999 BAR)
A: For category A employees, all the benefits
received on account of their separation are not
subject to income tax. Hence no withholding tax
shall be imposed. The benefits received under
the BIR-approved plan upon meeting the service
requirement and age requirement are explicitly
excluded from gross income. The ex gratia
payment also qualifies as an exclusion from
gross income being in the nature of benefit
received on account of separation due to causes
beyond the employees’ control. (Section 32(B),
NIRC) The cash equivalent of unused vacation
and sick leave credits qualifies as part of
separation benefits excluded from gross income.
(CIR v. Court of Appeals, GR No. 96O16, October
17, 1991)
For category B employees, all the benefits
received by them will also be exempt from
income tax. Hence not subject to withholding
tax. These are benefits received on account of
separation due to causes beyond the employees’
control, which are specifically excluded from
109
gross income. (Section 32(B), NIRC)
Income exempt under tax treaty
Income of any kind, to the extent required by
any treaty obligation binding upon the
Government of the Philippines is exempt from
tax. (Sec. 32(B)(5), NIRC)
NOTE: Public policy recognizes the principles of
reciprocity and comity among nations.
Reasons for granting tax exemption through
a treaty
1. Reciprocity
2. To lessen the rigors of international juridical
double taxation
Most Favored Nation Clause
This grants to the contracting party treatment
not less favorable than which has been or may
be granted to the most favored among other
countries. It allows the taxpayer in one state to
avail of more liberal provisions granted in
another tax treaty to which the country of
residence of such taxpayer is also a party;
provided that the subject matter of taxation is
the same as that in the tax treaty under which
the taxpayer is liable. (CIR v. SC Johnson and Son
Inc., G.R. No. 127105, June 25, 1999)
Compensation for injuries or sickness
Kinds of compensation for injuries or
sickness that may be excluded from gross
income
1. Amounts received through accident or
health insurance or Workmen’s
Compensation Act as compensation for
personal injuries or sickness
2. Amounts of any damages received whether
by suit or agreement on account of such
injuries or sickness. (Sec. 32(B)(4), NIRC)
NOTE: They are mere compensation for injuries
or sickness suffered and not income. It is
intended to make the injured party whole as
before the injury.
Q: JR was a passenger of an airline that
crashed. He survived the accident but
sustained serious physical injuries which
 National Taxation
required hospitalization for 3 months.
Following negotiations with the airline and
its insurer, an agreement was reached under
the terms of which JR was paid the following
amounts: ₱500,000 for his hospitalization;
₱250,000 as moral damages; ₱300,000 for
loss of income during the period of his
treatment and recuperation. In addition, JR
received from his employer the amount of
₱200,000 representing the cash equivalent of
his earned vacation and sick leaves. Which if
any, of the amounts are subject to income
tax? (2005 BAR)
A: The amount of ₱200,000 that JR received
from his employer is subject to income tax,
except the money equivalent of 10 days
unutilized vacation leave credits which is not
taxable. Amounts of vacation allowances or sick
leave credits which are paid to an employee
constitute compensation. (RR No. 2-98, as
amended by Sec. 2.78(A)(7), RR No. 10-2000)
The amounts that JR received from the airline
are excluded from gross income and not subject
to income tax because they are compensation for
personal injuries suffered from an accident as
well as damages received as a result of an
agreement on account of such injuries. (Sec.
32(B)(4), NIRC)
Q: A was hospitalized for two months
because of car accident. B, the person who hit
him gave ₱22,000, A’s two months salary. Is
that ₱22,000 taxable?
A: YES. As a general rule, compensatory
damages, actual damages, moral damages,
exemplary damages, attorney’s fees, and the cost
of the suit, are excluded from gross income of
the awarded party pursuant to Section 32(B)(4)
of the Tax Code. However, consequential
damages representing the loss of the victim’s
earning capacity are not excluded from gross
income. Such damages are merely replacement
of income which would have been subject to tax
if earned. (BIR Ruling No. 26-2018)
Q: In the problem above, If the salary
actualized is given by the employer, is it
taxable?
A: YES, consequential damages representing the
loss of the victim’s earning capacity are not
excluded from gross income. Such damages are
merely replacement of income which would
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
have been subject to tax if earned. (See BIR
Ruling No. 26-2018)
Q: Ms. A and her minor children instituted an
action for damages arising from a crime. The
Court awarded them with actual,
consequential, moral and exemplary
damages. Separately, Ms. A also instituted a
civil case for the annulment of a sale of real
property. The Court granted the annulment
of the sale with damages and ordered the
transfer of the subject property to A. Are the
damages awarded by the Court classified as
taxable income? (2005 BAR)
A: It depends. Pursuant to Section 32(B)(4) of
the Tax Code, compensatory damages, actual
damages, moral damages, exemplary damages,
attorney’s fees, and the cost of the suit are
excluded from gross income. However,
consequential damages representing loss of the
victim’s earning capacity are not excluded from
gross income. Such consequential damages are
mere replacements of income which would have
been subjected to tax, if earned. Thus, only the
consequential damages is subject to income tax.
(BIR Ruling No. 026-2018 dated 18 January 2018)
Q: What is the income tax implication in the
following insurances?
a. Life Insurance
b. Fire Insurance
c. Accident Insurance
A:
a. Life Insurance beneficiaries are not liable for
income tax.
b. Fire insurance is not taxable because it is a
mere return of capital.
c. Accident insurance is not taxable because it
is considered compensation for injuries
sustained.
Profit actualized
Profit actualized is always taxable as compared
to salary actualized wherein we need to qualify
who paid the salary.
13th Month Pay and Other Benefits
Gross benefits received by officials and
employees of public and private entities may be
excluded from gross income provided that the
110
 Taxation Law
total exclusion shall not exceed P90,000. The
excess would be considered as part of the
compensation income of the employee where it
is subject on a schedular rate. (Sec. 32(B)(7)(e),
NIRC)
Prizes and Awards
The following are the requisites in order for
prizes and awards be exempted from tax:
1. Primarily in recognition of Scientific, Civic,
Artistic, Religious, Educational, Literary, or
Charitable achievement (SCAR-CEL)
2. The recipient was selected without any
action on his part to enter the contest or
proceeding; and
3. He is not required to render substantial
future services as condition to receiving the
prize or award.
Q: JM, received a prize of ₱100,000 for
winning the on-the-spot peace poster contest
sponsored by the Lions Club. Is the award
included in the gross income of JM for tax
purposes? (2000 BAR)
A: NO. It is not included. It is subject to a final tax
of 20% for the amount is in excess of ₱10,000,
otherwise it would be included in his gross
income and subjected to a scheduler rate. (Sec.
24(B)(1), NIRC)
NOTE: The prize constitutes a taxable income
for it was made primarily in recognition of his
artistic achievement which he won due to an
action on his part to enter the contest. (Sec.
32(B)(7)(c), NIRC)
Q: Q won ₱2,500 as part of the Palanca Award
for an outstanding short story. She was also
named MVP of the Varsity volleyball team
and was given a trophy and ₱10,000. Finally,
she received a Fellowship Award from the
University of California to pursue a master’s
degree in American literature. The
fellowship is for $10,000 plus free board and
lodging. Should Q include these awards and
fellowship in her gross income? (1993 BAR)
A: The first award granted to Q, a Palanca award,
requires submission of literary works. Hence,
this is included in the gross income because it
fails to meet the legal requirement that the
recipient was selected without any action on his
111
part to enter the contest or proceeding.
In the second award, Q did not file any
application to enter into any contest. The award
was given to her in recognition for her
outstanding performance in the field of sports.
However, the recognition in the field of sports is
not among those stated under Sec. 28 B (8) e, to
wit: “Prizes and awards made primarily in
recognition of religious charitable, scientific,
educational, artistic, literary, or civic
achievement”. Therefore, this is subject to tax
and should be included in her gross income.
The fellowship award of $10,000 is however,
excluded from her income as she was selected
without any action on her part and the same was
given to her in recognition of her literary and
educational achievement, presumably without
her being required to render future services for
the grantor.
Prizes and Awards in Sports Competition
The following are the requisites for the exclusion
of prizes and awards in sports competition from
gross income: (PATS)
1. All Prizes and awards;
2. Granted to Athletes;
3. In local and international sports
Tournaments and competitions; and
4. Sanctioned by their national sports
associations. (Sec. 32(B)(7)(d), NIRC)
NOTE: National sports associations are those
duly accredited by the Philippine Olympic
Committee. The sports competitions and
tournaments are whether held in the Philippines
or abroad.
Q: Mr. A, a citizen and resident of the
Philippines, is a professional boxer. In a
professional boxing match held in 2013, he
won prize money in United States (US)
dollars equivalent to ₱300,000,000.
a. Is the prize money paid to and received
by Mr. A in the US taxable in the
Philippines? Why?
b. May Mr. A's prize money qualify as an
exclusion from his gross income? Why?
c. The US already imposed and withheld
income taxes from Mr. A's prize money.
How may Mr. A use or apply the income
 National Taxation
taxes he paid on his prize money to the
US when he computes his income tax
liability in the Philippines for 2013?
(2015 BAR)
A:
a. YES. Under the NIRC, the income within and
without of a resident citizen is taxable. Since
Mr. A is a resident Filipino citizen, his
income worldwide is taxable in the
Philippines.
b. NO. Under the law, all prizes and awards
granted to athletes in local and international
sports competitions whether held in the
Philippines or abroad and sanctioned by
their national sports association are
excluded from gross income. However, in
this case, there is no showing that the
boxing match was sanctioned by the
Philippine National Sports Commission.
Therefore, the prize money is not excluded,
and it would be considered as the taxpayer’s
taxable and professional income.
c. Mr. A may avail of tax credit against his tax
liability in the Philippines for taxes paid in
foreign countries. He has to signify in his
income tax return his desire to avail of the
tax credit.
Q: A won ₱100,000 in a competition
sanctioned by the national sports
association. Give the tax implication/s as to
the recipient as well as to the donor or
contributor.
A: As to the recipient of the award, it is exempt
from income tax. As to the contributor/donor of
the award, it is exempt from donor’s tax not
based on the NIRC but on R.A. 7549.
Contributor/donor is allowed to claim it as a
deduction from gross income based on R.A.
7549.
Q: Onyoc, an amateur boxer, won in a boxing
competition sponsored by the Gold Cup
Boxing Council, a sports association duly
accredited by the Philippine Boxing
Association. Onyoc received the amount of
₱500,000 as his prize which was donated by
Ayala Land Corporation. The BIR tried to
collect income tax on the amount received by
Onyoc who refuses to pay. Decide. (1996
BAR)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A: The prize will not constitute a taxable income
to Onyoc, hence the BIR is not correct in
imposing the income tax. R.A. 7549 explicitly
provides that “All prizes and awards granted to
athletes in local and international sports
tournaments and competitions in the Philippines
or abroad and sanctioned by their respective
national sports association shall be exempt from
income tax.”
Neither is the BIR correct in collecting the
donor’s tax from Ayala Land Corporation. The
law is clear when it categorically stated “That
the donors of said prizes and awards shall be
exempt from the payment of the donor’s tax.”
Income Derived by Foreign Government
For an income derived by foreign government
from investments in the Philippines be
exempted from tax:
1. It must be an income derived from
investments in the Philippines
2. It must be derived from BOnds, Loans or
other Domestic securities, Stocks or
Interests on deposits in banks; (BOLDSI)
3. The recipient of such income from
investment in the Philippines must be a:
a. foreign government;
b. financing institutions owned, controlled
or financed by foreign government; or
c. regional or international financing
institutions established by foreign
government. (Sec. 32(B)(7), NIRC)
NOTE: The exclusion may be premised either on
the principle of comity or upon the principle of
reciprocity.
Income Derived by the Government or Its
Political Subdivisions
Income derived by the Government or its
political subdivision is exempt from gross
income, if the source of the income is from any
public utility or from the exercise of any
essential governmental functions.
Government Owned and Controlled
Corporations (GOCCs) performing:
1. Governmental Function:
GR: Government agencies performing
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 Taxation Law
governmental functions are tax exempt
XPN: Unless expressly taxed
2. Proprietary Functions
GR: Subject to tax
XPN: Unless expressly exempted
NOTE: Under Sec. 27 (c) of RA 8424 the
following corporations have been granted
exemptions:
1. Government Service Insurance System
2. Social Security System
3. Philippine Health Insurance Corporation
4. Local Water Districts
Q: X Rural Bank and Y Rural Bank are the
constituent banks in a Plan of Consolidation
Agreement and Articles of Consolidation.
The constituent banks did not previously
avail of or enjoy the five-year tax exemption
granted under RA No. 7353 or the Rural
Banks Act of 1992. The consolidated bank, Z
Rural Bank, was issued a Certificate of
Authority to operate as a rural bank under
RA No. 7353. Is Z Rural Bank, a bank formed
through consolidation, entitled to tax
exemption under RA No. 7353?
A: YES. Rural banks created and organized
under the provisions of RA No. 7353 are exempt
from the payment of all taxes, fees and charges
(except corporate income tax and local taxes)
for a period of five years from the date of
commencement of operations. Rural banks
formed through consolidation may still enjoy
the tax exemption for the entire period of five
years from the date of commencement of
operations in case any or both of the
constituent banks did not avail this exemption,
or for the remaining period in case the tax
exemption was availed. (BIR Ruling No. 272-
2017 dated 7 June 2017)
Gains from the Sale of Bonds, Debentures or
Other Certificate of Indebtedness
The bonds, debentures or other certificate of
indebtedness sold, exchanged or retired must be
with a maturity of more than 5 years.
Gains from Redemption of Shares in Mutual
Fund
113
Mutual fund company means an open-end and
close-end investment company as defined under
the Investment Company Act. (Sec.22(BB), NIRC )
Q: Mr. D, a Filipino amateur boxer, joined an
Olympic qualifying tournament held in Las
Vegas, USA, where he won the gold medal.
Pleased with Mr. D's accomplishment, the
Philippine Government, through the
Philippine Olympic Committee, awarded him
a cash prize amounting to ₱1,000,000.00.
Upon receipt of the funds, he went to a casino
in Pasay City and won the ₱30,000,000.00
jackpot in the slot machine. The next day, he
went to a nearby Lotto outlet and bought a
Lotto ticket which won him a cash prize of
₱5,000.00. Which of the above sums of
money is/are subject to income tax? Explain.
(2019 BAR)
A: Mr. D’s winnings from the casino in Pasay
City, worth P30,000,000.00 is subject to income
tax. Under the TRAIN Law, other prizes and
winnings in excess of P10,000 shall be subject to
a 20% final tax on the entire amount of the
winnings. In this case, Mr. D’s winnings from the
casino in Pasay City are more than P10,000.
Hence, it shall be subject to income tax.
With regard to Mr. D’s cash prize award after
winning in an Olympic qualifying tournament
held in Law Vegas, it is not subject to income tax.
Under the NIRC, prizes and awards granted to
athletes in local and international sports
competitions and tournaments whether held in
the PH or abroad and sanctioned by their
national sports associations, which in this case is
the Philippine Olympic Committee, shall not be
subject to income tax.
With regard to Mr. D’s Lotto winnings, it is not
subject to income tax. Under the NIRC, any
winnings through the PCSO Lotto that are in the
amount of P10,000 or less shall be exempt from
income tax. In this case, Mr. D won P5,000 thru
the PCSO Lotto. Hence, it shall not be subject to
income tax.
Exclusions under special laws
1. P.D. 87, Oil Exploration and Development
Act, as amended by PD 1354
2. E.O. 226, The Omnibus Investment Code of
1987, as amended
 National Taxation
3. R.A. 3538, the exemption of salaries paid in
dollars to non-Filipino citizens for services
rendered to the Ford Foundation
4. R.A. 6938, Cooperative Code of the
Philippines, as amended by R.A. 1176, 8241
and 8424
5. R.A. 7482, Senior Citizens Act as amended
by R.A. 9257
6. R.A. 7929, Urban Development and Housing
Act of 1992
7. R.A. 8502, Jewelry Industry Development
Act of 1998
8. R.A. 8282, which exempts income of the SSS
form income taxation
9. R.A. 8479, An Act Deregulating the
Downstrean Oil Industry and For Other
Purposes
10. R.A. 9182, The Special Purpose Vehicle Act
11. R.A. 9505, PERA Act of 2008
Personal Equity and Retirement Account
(PERA)
companies.
Requirement in order to qualify as PERA
investment product
To qualify as a PERA investment product, the
product must be non-speculative, readily
marketable, and with a track record of regular
income payments to investors.
Requirement for tax-exemption
The concerned Regulatory Authority must first
approve the product before being granted tax-
exempt privileges by the BIR.
Income earned from investments and
reinvestments of the PERA
All income earned from the investments and
reinvestments of the maximum amount allowed
herein are tax exempt.

PERA refers to the voluntary retirement account Maximum annual PERA contribution allowed
established by and for the exclusive use and by this Act
benefit of the contributor for the purpose of
being invested solely in PERA investment MAXIMUM ANNUAL PERA
CONTRIBUTORS
products in the Philippines. (Sec. 3, R.A. 9505) CONTRIBUTIONS
If the contributor ₱100,000 or its equivalent
Contributors is single in any convertible foreign
currency at the prevailing
A contributor may be any person with the rate at the time of the actual
capacity to contract and who possesses a tax contribution
identification number. The contributor If the contributor Each of the spouses shall be
establishes and makes contributions to a PERA. is married entitled to make a maximum
contribution of one hundred
PERA Investment Products thousand pesos (₱100,000)
or its equivalent in any
It may be a unit investment bust fund, mutual convertible foreign
fund, annuity contract, insurance pension currency.
products, pre-need pension plan, shares of stock, OFW Double the allowable
and other securities listed and traded in a local maximum amount
exchange, exchange-traded bonds or any other
investment product or outlet which the
DEDUCTIONS
concerned Regulatory Authority may allow for
PERA purposes.
These refer to items or amounts authorized by
law to be subtracted from pertinent items of
Regulatory Authority
gross income to arrive at the taxable income.
(Sec. 34, NIRC)
It refers to the Bangko Sentral ng Pilipinas (BSP)
as regards banks, other supervised financial
Nature of deductions
institutions and trust entities, the Securities and
Exchange Commission (SEC) for investment
The items of amounts allowed as deductions
companies, investment houses stockbrokerages
represent the expenses (reduction of wealth) of
and pre-need plan companies, and the Office of
the taxpayer (other than personal expenses and
the Insurance Commission (OIC) for insurance

UNIVERSITY OF SANTO TOMAS 114

2021 GOLDEN NOTES
 Taxation Law
capital expenditures) in earning the income
(increase of wealth) subject to tax as well as
reasonable living expenses.
GENERAL RULE
1. Deductions must be paid or incurred in
connection with the taxpayer’s trade,
business, or profession.
Matching concept of deductibility
This posits that the deductions must, as a
general rule, “match” the income, i.e., helped
earn the income. (Domondon, 2013)
Ordinary and necessary expenses must have
been paid or incurred during the taxable
year for it to be deductible from gross
income. Further, the deduction shall be
taken for the taxable year in which 'paid or
accrued' or 'paid or incurred.' Otherwise, the
expenses are barred as deductions in
subsequent years. (CIR v. Isabela Cultural
Corporation, G.R. No. 172231, February 12,
2007)
2. Deductions must be supported by adequate
receipts or invoices.
XPN: standard deduction
3. The withholding and payment of tax
required must be shown.
Any income payment which is otherwise
deductible shall be allowed as a deduction
from gross income only if it is shown that
the income tax required to be withheld has
been paid to the BIR. (Sec. 2.58.5, RR No. 2-
98)
Where no withholding made but still
deductible
A deduction will also be allowed in the following
cases where no withholding of tax was made:
1. The payee reported the income and the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure
to withhold the tax, and surcharges, if
applicable, at the time of the original audit
and investigation;
115
2. The recipient/payee failed to report the
income on the due date thereof, but the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure
to withhold the tax and surcharges, if
applicable, at the time of the original audit
and investigation; or
3. The withholding agent erroneously
underwithheld the tax but pays the
difference between the correct amount and
the amount of tax withheld, including the
interest, incident to such error, and
surcharges, if applicable, at the time of the
original audit and investigation. (Sec. 2.58.5,
RR 2-98)
Where no withholding made but still
deductible
A deduction will also be allowed in the following
cases where no withholding of tax was made:
1. The payee reported the income, and the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure
to withhold the tax, and surcharges, if
applicable, at the time of the original audit
and investigation;
2. The recipient/payee failed to report the
income on the due date thereof, but the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure
to withhold the tax and surcharges, if
applicable, at the time of the original audit
and investigation; or
3. The withholding agent erroneously
underwithheld the tax but pays the
difference between the correct amount and
the amount of tax withheld, including the
interest, incident to such error, and
surcharges, if applicable, at the time of the
original audit and investigation. (Sec. 2.58.5,
RR 2-98)
Persons who are NOT ALLOWED to claim
deductions from gross income
1. Subject to final tax on their gross income
derived from sources within the
Philippines, hence, no deductions allowed
to them:
a. NRANETB
b. NRFC
 National Taxation
2. When their income is purely compensation goods such as raw materials used, direct labor
income they are not entitled to deductions: and manufacturing overhead, freight cost,
a. RC insurance premiums and other costs incurred to
b. NRC bring the raw materials to the factory or
c. RA warehouse. The term may be used
interchangeably with "cost of goods
Deductions that can be claimed by a manufactured and sold".
corporation
Cost of services (COS)
1. Domestic Corporations (DC) and Resident
Foreign Corporation (RFC) may opt COS means all direct costs and expenses
between the Optional Standard Deduction necessarily incurred to provide the services
(OSD) or the Itemized Deductions. required by the customers and clients including:
2. Non-Resident Foreign Corporation (NRFC)
which is subject to final tax on its gross 1. Salaries and employee benefits of
income from sources within the Philippines personnel, consultants and specialists
(no deduction allowed). directly rendering the service, and
2. Cost of facilities directly utilized in
CONCEPT OF RETURN OF CAPITAL providing the service such as depreciation
(COST OF SALES OR SERVICES) or rental of equipment used and cost of
supplies.
The mere return of capital is allowed as
deduction from gross income in order to arrive NOTE: COS shall not include interest expense
at income subject to tax. While in general, the except in the case of banks and other financial
nomenclature of “cost of sales or cost of goods institutions. (RR No. 16-2008)
sold” is applied, the return of capital have
different components depending upon the DISTINGUISH: ITEMIZED DEDUCTIONS
nature of the business being taxed. (Domondon, AND OPTIONAL STANDARD DEDUCTION
2013)
ITEMIZED OPTIONAL
The amount representing return of capital DEDUCTIO STANDARD
should be deducted from the proceeds from the NS DEDUCTIONS
sales of assets and should not be subject to Definition Under the In lieu of the
income tax.. itemized itemized
deductions, deductions,
Cost of goods purchased for resale, with proper taxpayers regular or
adjustment for opening and closing inventories list every special,
are deducted from gross sales in computing item of including
gross income. (Sec. 65, RR No. 2) business NOLCO. The
expense deduction is
Cost of goods sold (CGS) they claim merely
as presumed as a
CGS shall include the purchase price or cost to deductions. fixed
produce the merchandise and all expenses Deductions percentage of
directly incurred in bringing them to their are strictly gross income
present location and use. construed for corporations
against the and gross sales
For trading or merchandising concern, CGS taxpayer. or gross
means the invoice cost of goods sold, plus import receipts for
duties, freight in transporting the goods to the individuals.
place where the goods are actually sold, Deduction Deductible Individuals:
including insurance while the goods are in items 40% of total
transit. allowed by sales/
the law revenues/
For manufacturing concern, CGS means all receipts/ fees
costs incurred in the production of the finished

UNIVERSITY OF SANTO TOMAS 116

2021 GOLDEN NOTES
 Taxation Law
Refer to discussions on itemized deductions
Corporations: for the requirements of each deduction.
40% of gross
income 3. There must be proof of entitlement to the
Who may All All taxpayers deductions. The burden of proof to establish
avail? taxpayers who are subject the validity of claimed deduction is on the
except to tax on taxpayer. This is consistent with the rule
those taxable net that tax exemptions must be strictly
subject to income (RC, construed against the taxpayer and liberally
tax on NRC, RA, NRA- in favor of the State.
gross ETB, DC, RFC)
income can claim 4. The deductions must not have been waived.
(NRA- deductions
NETB & except the 5. The withholding and payment of tax
NRFC). following: required must be shown. (Domondon, 2013)
1. NRA-ETB
2. Taxpayers 6. Expenses which are ordinary and necessary
mandate to for the conduct of trade or business, or
use profession.
itemized
deductions 7. It must be a legitimate and legal
Substantiati It must be It requires no expenditure.
on of claim substantiat proof of
ed by expenses 8. As a general rule, there is no limitation as to
receipts. incurred. the amount of expense, however, it must be
(Banggawan, 2019) reasonable.

The election to claim either the OSD or itemized Itemized Deductions (Sec. 34, NIRC)
deductions must be signified in the income tax
return filed for the first quarter of the taxable Except for taxpayers earning compensation
year. Unless the corporation signified in his income arising from personal services rendered
return his intention to elect optional standard under an employer-employee relationship
deduction, it shall be considered as having where no deductions shall be allowed other than
availed itself of the itemized deduction. premium payments on health and/or
hospitalization insurance, in computing taxable
Once the election is made, the same type of income subject to income tax there shall be
deduction must be consistently applied for all allowed the following deductions from gross
succeeding quarters and in the annual income income:
tax return. In other words, the choice shall be
irrevocable for the taxable year for which the 1. Expenses
return is made. 2. Interest
3. Taxes
NOTE: A taxpayer who is required but fails to 4. Losses
file the quarterly income tax return for the first 5. Bad debts
quarter shall be deemed to have elected to avail 6. Depreciation
of itemized deductions for the taxable year. 7. Depletion of oil and gas wells and mines
8. Charitable and other contributions
REQUIREMENTS FOR DEDUCTIBLE ITEMS 9. Research and development
10. Contributions to pension trusts
1. There must be specific provision of law
allowing the deductions, since deductions The itemized deductions are discussed in detail
do not exist by implication. below.

2. The requirements of deductibility must be Expenses

met.

117
 National Taxation
There shall be allowed as deduction from gross
income:
1. All the ordinary and necessary expenses;
2. Paid or incurred during the taxable year;
3. In carrying on or which are directly
attributable to, the development,
management, operation and/or conduct of
the trade, business or exercise of a
profession. (Sec. 34(A)(1)(a), NIRC)
Requisites for deductibility of expenses (in
general) (D-STROWN)
1. Paid or incurred during the taxable year;
2. The expense must be substantiated by
proof; (substantiation rule)
3. The expense must be incurred in trade or
business carried on by the taxpayer (must
be directly attributable to the development,
management, operation, and or conduct of
trade or business of the taxpayer, or in the
exercise of the taxpayer’s profession);
4. The expense must be reasonable;
5. The expense must be ordinary and
necessary;
6. If subject to withholding taxes, proof of
payment to BIR; and
7. Expenses must not be against public policy,
public moral or law such as bribes,
kickbacks, for immoral purposes.
Ordinary expenses – It is any expense that is
normal or usual in relation to the taxpayer’s
business and the surrounding circumstances.
(General Electric, Inc. v. Collector, CTA Case No.
1117, July 14, 1963)
Necessary expenses – Appropriate and helpful
in the development of taxpayer’s business and is
intended to minimize losses or to increase
profits (Ibid.)
Test to determine whether or not an expense
is ordinary and necessary
If they are directly attributable to the
development, management, operation, and or
conduct of trade or business of the taxpayer, or
in the exercise of the taxpayer’s profession,
including:
1. Reasonable allowances for salaries, wages
and other compensation for personal
services actually rendered, including gross
monetary value of fringe benefits;
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
2. Travel expenses in pursuit of trade or
business;
3. Rental and other payments for the
continued use or possession of property, for
the purpose of trade, business or
profession; and
4. Entertainment, amusement and recreation
expenses during the taxable year.
Ordinary expenses vs. capital expenditures
Ordinary expenses are those which are common
to incur in trade or business. On the other hand,
capital expenditures are those incurred to
improve assets and benefits for more than one
(1) taxable year. Ordinary expenses are usually
incurred during a taxable year and benefits such
taxable year.
Substantiation rule
The taxpayer shall substantiate the expense
being deducted with sufficient evidence such as
official receipts or other adequate records
showing:
1. The amount of the expense being deducted;
and
2. The direct connection or relation of the
expense being deducted to the
development, management, operation
and/or conduct of the trade, business or
profession of the taxpayer. (Sec.
34(A)(1)(B), NIRC)
Q: When there are no receipts to prove a
deduction, can the taxpayer still claim it as a
deduction?
A: YES. The lack of supporting vouchers,
receipts, and other documentary proof however
may be excused under Sec. 235 of the NIRC, the
provision which requires the preservation of the
books of accounts and other accounting records
for a period of 3 years from the date of last
entry. (Basilan Estates v. CIR, G.R. No. L-022492,
September 5, 1967)
Cohan rule
Under this principle, taxpayers may use
estimates when they can show that there is
some factual foundation on which to base a
reasonable approximation of the expense, they
can prove that they had made a deductible
expenditure but just cannot prove how much
118
 Taxation Law
that expenditure was. (Cohan v. CIR, 39 F (2d)
540)
It is the use of estimates or approximations of
the amount of cash and other assets where the
taxpayer lacks adequate records.
NOTE: If there is showing that expenses have
been incurred but the exact amount thereof
cannot be ascertained due to the absence of
receipts and vouchers of the expenditures
involved, the BIR will make an estimate of
deduction that may be allowable in computing
the taxpayer's taxable income bearing heavily
against the taxpayer whose inexactitude is of his
own making. That disallowance of 50% of the
taxpayer’s claimed deduction is valid (RMC No.
23-2000)
Examples of ordinary and necessary
expenses
1. Salaries, wages and other forms of
compensation for personal services actually
rendered;
2. Travelling expenses;
3. Rental expenses;
4. Entertainment, amusement and recreation;
5. Advertising and promotional expenses;
6. Cost of materials and supplies; and
7. Repairs.
Q: MC, a contractor who won the bid for the
construction of a public highway, claims as
expense, facilities fee which according to
them is standard operating procedure in
transactions with the government. Are these
expenses allowable as deduction from gross
income?
A: NO. The alleged facilitation fees which they
claims as standard operating procedure in
transactions with the government comes in the
form of bribes or “kickback” which are not
allowed as deductions from gross income as
they are illegal. (Sec. 34(A)(1)(c), NIRC)
Q: OXY is the president and CEO of ADD
Computers, Inc. When OXY was asked to join
the government service as director of a
bureau under the Department of Trade and
Industry, he took a leave of absence from
ADD. Believing that its business outlook,
goodwill and opportunities improved with
OXY in the government, ADD proposed to
119
obtain a policy of insurance on his life. On
ethical grounds, OXY objected to the
insurance purchase but ADD purchased the
policy anyway. Its annual premium
amounted to ₱100,000. Is said premium
deductible by ADD Computers, Inc.? (2004
BAR)
A: NO. The premium is not deductible because it
is not an ordinary business expense. The term
"ordinary" is used in the income tax law in its
common significance and it has the connotation
of being normal, usual or customary. (Deputy v.
Du Pont, 308 US 488 (1940)) Paying premiums
for the insurance of a person not connected to
the company is not normal, usual or customary.
Another reason for its non-deductibility is the
fact that it can be considered as an illegal
compensation made to a government employee.
This is so because if the insured, his estate or
heirs were made as the beneficiary (because of
the requirement of insurable interest), the
payment of premium will constitute bribes
which are not allowed as deduction from gross
income. (Sec. 34(A)(1)(c), NIRC)
Even if the company was made the beneficiary,
whether directly or indirectly, the premium is
not allowed as a deduction from gross income.
(Sec. 36(A)(14), NIRC)
Q: Masarap Food Corporation (MFC) incurred
substantial advertising expenses in order to
protect its brand franchise for one of its line
products. In its income tax return, MFC
included the advertising expense as
deduction from gross income, claiming it as
an ordinary business expense. Is MFC
correct? Explain. (2009 BAR)
A: NO. The protection of taxpayer’s brand
franchise is analogous to the maintenance of
goodwill or title to one’s property which is in the
nature of a capital expenditure. An advertising
expense, of such nature does not qualify as an
ordinary business expense, because the benefit
to be enjoyed by the taxpayer goes beyond one
taxable year. (CIR v General Foods Inc. 401 SCRA
545)
Q: Freezy Corporation, a domestic
corporation engaged in the manufacture and
sale of ice cream, made payments to an
officer of Frosty Corporation, a competitor in
the ice cream business, in exchange for said
 National Taxation
officer’s revelation of Frosty Corporation’s
trade secrets. May Freezy Corporaton claim
the payment to the officer as deduction from
its gross income? Explain. (2014 BAR)
A: NO. Payments made in exchange for the
revelation of a competitor’s trade secrets is
considered as an expense which is against law,
morals, good customs or public policy, which is
not deductible. (3M Philippines, Inc. v. CIR, G.R.
No. 82833, September 26, 1988)
Also, the law will not allow the deduction of
bribes, kickbacks and other similar payments.
Applying the principle of ejusdem generis,
payment made by Freezy Corporation would fall
under “other similar payments” which are not
allowed as deduction from gross income.
(Section 34(A)(1)(c), NIRC)
Q: How can the taxpayer prove that the
expense has been paid or incurred during
the taxable year?
A: It is a basic requirement that all expenses
must be substantiated by original copy of
receipts or in the absence thereof, a taxpayer can
still prove that the claimed deduction was really
paid or incurred by providing other evidence
such as certified true copies of the official
receipts in case of loss, payment vouchers and
checks.
Q: Amounts of income accrue where the right
to receive them become fixed, where there is
created an enforceable liability. Similarly,
liabilities are accrued when fixed and
determinable in amount, without regard to
indeterminacy merely of time of payment.
For a taxpayer using the accrual method,
when do the facts present themselves in such
a manner that the taxpayer must recognize
income or expense? (2012 BAR)
A: The accrual of income and expense is
permitted when the ALL-EVENTS TEST has been
met. This test requires: (1) fixing of a right to
income or liability to pay, and (2) the availability
of the reasonable accurate determination of such
income or liability. The all-events test requires
the right to income or liability be fixed, and the
amount of such income or liability be
determined with reasonable accuracy. (CIR v.
Isabela Cultural Corporation, G.R. No. 172231,
February 12, 2007)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Q: When is “all-events” test applicable?
A: It is applicable when:
1. A person who uses the cash method
where all sales have been fully paid by
the buyers thereof;
2. A person who uses the installment sales
method, where the full amount of
consideration is paid in full by the
buyer thereof within the year of sale;
3. A person who uses the accrual method,
whereby an expense is deductible for
the taxable year in which all the events
had occurred which determined the fact
of the liability and the amount thereof
could be determined with reasonable
accuracy; or
4. A person who uses the completed
method, whereby the construction
project has been completed during the
year the contract was signed.
Salaries, wages and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe
benefit tax which tax should have been paid
The following are the requisites before an
employer can deduct compensation payments to
employees:
1. The payments must be reasonable;
2. They are, in fact, payments for personal
services rendered; (Sec. 70, Revenue
Regulation 2) and
3. Subjected to withholding tax.
NOTE: Reasonable and true compensation is
only such amount as would ordinarily be paid
for services like enterprises in like
circumstances.
Inclusions in compensation for services
which are allowed as deductions from gross
income
1. Wages, salaries, commissions, professional
fees, vacation-leave pay, retirement pay,
and other compensation
2. Bonuses in good faith
3. Pensions and compensation for injuries if
not compensated for by insurance or
otherwise
4. Grossed-up monetary value of fringe
benefit provided for, as long as the final tax
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 Taxation Law
imposed has been paid. The fringe benefit
must have been granted to managerial and
supervisory employees, otherwise it
cannot be availed as deduction.
Q: What are the requisites for deductibility of
bonus? (2006 BAR)
A:
1. The payment of the bonus is made in good
faith for additional compensation;
2. It must be for personal services actually
rendered;
3. The bonus when added to salaries is
“reasonable” when measured by the
amount and quality of the services
performed with relation to the business of
the particular taxpayer; and
4. Must be subjected to withholding tax.
Bonuses to employees made in good faith and as
additional compensation for the services
actually rendered by the employees are
deductible, provided such payments, when
added to the stipulated salaries, do not exceed a
reasonable compensation for the services
rendered. (Kuenzle & Streiff, Inc. v. CIR, G.R. No. L-
18840, May 29, 1969)
Bonuses given to corporate officers out of sale of
corporate land are not deductible as an ordinary
business expenses in the absence of showing
what role said officers performed to effectuate
said sale. The taxpayer must show that personal
services had been rendered and that the amount
was reasonable. (Aguinaldo Industries
Corporation v. CIR, G.R. No. L-29790, February 25,
1982)
The following conditions may be taken into
consideration:
1. The payment made in good faith;
2. The character of the taxpayer’s business;
e.g., the volume and amount of its net
earnings; its locality; the type and extent of
the services rendered; the salary policy of
the corporation
3. The size of the particular business;
4. The employees’ qualification and
contributions to the business venture; and
5. General economic conditions (C.M. Hoskins
& Co., Inc. v. CIR, G.R. No. L-24059, November
28, 1969)
Q: Gold and Silver Corporation gave extra
121
14th month bonus to all its officials and
employees in the total amount of ₱75
million. When it filed its corporate income
tax return the following year, the
corporation declared a net operating loss.
When the income tax return of the
corporation was reviewed by the BIR the
following year, it disallowed as item of
deduction the ₱75 million bonus the
corporation gave its officials and employees
on the ground of unreasonableness. The
corporation claimed that the bonus is an
ordinary and necessary expense that should
be allowed. If you were the CIR, how will you
resolve the issue? (2006 BAR)
A: I will rule against the deductibility of the
bonus. The extra bonus is not normal to the
business and unreasonable. Giving an extra
bonus at a time that the company suffers
operating losses is not a payment done in good
faith and is not normal to the business, hence
unreasonable and would not qualify as ordinary
and necessary expense.
Q: Noel is a bright computer science
graduate. He was hired by Hewlett Packard.
To entice him to accept the job, he was
offered the arrangement that part of his
compensation would be an insurance policy
with a face value of ₱20 million. The parents
of Noel are made the beneficiaries of the
insurance policy. Can the company deduct
from its gross income the amount of the
premium?
A: YES, the premiums paid are ordinary and
necessary business expenses of the company.
They are allowed as a deduction from gross
income so long as the employer is not a direct or
indirect beneficiary under the policy of
insurance. Since the parents of the employee
were made the beneficiaries, the prohibition for
their deduction does not exist. (Sec. 36(A)(4),
NIRC)
Travelling/transportation expenses
The following are the requisites for its
deductibility:
1. Reasonable and necessary expenses;
2. Incurred or paid while away from home;
and
3. In pursuit of trade, business or profession.
 National Taxation
NOTE: Travelling expense includes
transportation, meals and lodging. (Rev. Reg. 2)
“Away from home”
It means away from the location of the
employee’s principal place of employment
regardless of where the family residence is
maintained.
Rules in deducting travel expenses
1. The employer cannot claim as a deduction
the excess over the cost of a business plane
ticket or its equivalent, whether paid
directly by the employer to the airline
company or reimbursed to the employee.
2. Deductions to be claimed by the employer
for the allowance which are pre-computed
by the employer on a daily basis, or
reimbursement for the cost of meals and
lodging in foreign trips by the employee for
the pursuit of employer’s trade or business
may not exceed;
3. Reimbursement for travel taxes, airport
fees and other charges, if duly receipted or
substantiated, may be deducted by the
employer as business expenses.
4. Subject to the above rules, expenses
incurred in attending two foreign
professional conventions a year shall
constitute a deductible expense.
NOTE: These maybe considered as fringe
benefit subject to fringe benefits tax. In such
cases, it is deductible from the employer’s gross
income. (Domondon, 2009)
Costs of materials
Materials and supplies are deductible only to the
amount actually consumed or used in the
operation during the taxable year, provided that
the cost of such materials and supplies has not
been deducted in determining the net income for
any previous year.
Methods utilized to determine materials
used
1. Actual consumption method or inventory
method
2. Direct purchase method
Q: Assuming the taxpayer purchases
materials but has no record of consumption,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
is it deductible?
A: YES, provided the net income is clearly
reflected by direct purchase method.
If a taxpayer carries incidental materials or
supplies on hand for which no record of
consumption is kept or of which physical
inventories at the beginning and end of the year
are not taken, it will be permissible for the
taxpayer to include in his expenses and deduct
from gross income the total cost of such
supplies and materials as were purchased
during the year for which the return is made,
provided the net income is clearly reflected by
this method (Section 67, Rev. Reg. 2)
Rentals and/or other payments for use or
possession of property
The following are the requisites for its
deductibility
1. Payment was made as a condition to the
continuous use of or possession of the
property;
2. Taxpayer has not taken or is not taking title
to the property or has no equity other than
that of a lessee, user or possessor;
3. Property must be used in the trade or
business; and
4. The withholding tax must have been
withheld and paid.
Inclusions in rental expense
1. Aliquot part of the amount used to acquire
leasehold over the number of years the
lease will run;
2. Taxes and other obligations of the lessor
paid by the lessee; and
3. Annual depreciation of the cost of the
leasehold improvements introduced by the
lessee over the remaining period of the
lease, or over the life of the improvements,
whichever period is shorter.
NOTE: It is NOT the cost of the leasehold
improvements but only its annual depreciation
that is considered as rental expense.
Repairs and maintenance
Repairs are allowed as deduction when it is
minor and ordinary, and keeps the asset in its
ordinary working condition. Major and
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 Taxation Law
extraordinary repairs are capitalized and 3. Membership dues to professional
included in determining depreciation expense associations or societies and subscriptions
because they tend to prolong the life of the to journals
asset. 4. Office rentals
5. Utilities expense for water and electricity
Expenses under lease agreements consumed in connection with the exercise
of the profession
Expenses under the lease agreement which may 6. Communication expense
be allowed as deductions by the lessor. 7. Expenses for hiring employees or office
assistants
Since the rentals are considered as income of the 8. Expenses incurred for books, furniture and
lessor (owner of the property), such lessor may professional instruments and equipment
deduct all ordinary and necessary expenses paid with short useful life
or incurred during the taxable year to the
earning of the income. (Sec. 2.01, RR No. 19-86) NOTE: Those of a permanent character are not
allowable as deductions.
Among such deductions may be cost of repairs
and maintenance, salaries and wages of Entertainment/representation expenses
employees attendant to such lease, interest
payment, property taxes, etc. The following are the requisites to avail of this
deduction:
Where a leasehold is acquired for business
purposes for a specified sum, the purchaser may 1. Paid or incurred during the taxable year;
take deduction in his return for an aliquot part 2. Directly connected to the development,
of such sum each year, based on the number of management, and operation of the business,
years the lease will run. trade or profession of the taxpayer; or
directly related to or in furtherance of the
Taxes paid by a tenant to or for a landlord for conduct of its trade, business or exercise of
business property are additional rent and a profession;
constitute a deductible item to the tenant and 3. Not contrary to law, morals, good customs,
taxable income to the landlord; the amount of public policy or public order;
the tax being deductible by the latter. 4. Must not constitute as a bribe, kickback, or
other similar payment;
The cost of leasehold improvements are NOT 5. Duly substantiated by adequate proof or
considered business expenses since they are receipt; and
capital investments. 6. Withholding tax, if any, should have
withheld therefrom and paid.
In order to return to such taxpayer his
investment of capital, an annual deduction may Q: Who may claim entertainment,
be made from gross income of an amount equal amusement and recreation expenses?
to the cost of such improvements divided by the
number of years remaining of the term of the A:
lease, and such deduction shall be in lieu of a 1. Individuals engaged in business, including
deduction for depreciation. If the remainder of taxable estates and trusts
the term of lease is greater than the probable life 2. Individuals engaged in practice of
of the building erected, or of the improvements profession
made, this deduction shall take the form of an 3. Domestic corporation
allowance for depreciation. (Section 74, RR No. 2) 4. Resident foreign corporation
5. General professional partnerships,
Expenses for professionals including its members

1. Supplies expense Ceiling or limitation on the amount allowed

2. Expenses paid in the operation and repair as entertainment, amusement, and
of transportation equipment used in recreation expense
making professional calls

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 National Taxation
Entertainment, amusement and recreation
expense shall be allowed as a deduction from
gross income but in no case shall exceed:
1. For taxpayers engaged in sale of goods or
properties – 0.50% of net sales (i.e., gross
sales less sales returns or allowances and
sales discounts)
2. For taxpayers engaged in sale of services,
including exercise of profession and use or
lease of properties – 1% of net revenue (i.e.,
gross revenue less discounts)
3. For taxpayers deriving income from both sale
of goods and services – the allowable
deduction shall in all cases be determined
based on an apportionment formula taking
into consideration the percentage of the net
sales/net revenue to the total net sales/net
revenue, but which in no case shall exceed
the maximum percentage ceiling provided
(Sec. 5, RR No. 10-2002)
Apportionment Formula:
Q: What are included as entertainment,
amusement and recreation expenses?
A: They include representation expenses and/or
depreciation or rental or public order; expense
relating to entertainment facilities.
NOTE: “Representation expenses” shall refer to
expenses incurred by a taxpayer in connection
with the conduct of his trade, business or
exercise of profession, in entertaining, providing
amusement and recreation to, or meeting with,
a guest or guests at a dining place, place of
amusement, country club, theater, concert, play,
sporting event and similar events or places.
If the taxpayer is the registered member of a
country, golf, or sports club, the presumption is
that the expenses are fringe benefits subject to
the FBT unless the taxpayer can prove these are
actually representation expenses. (Ingles, 2015)
“Entertainment facilities” shall refer to a yacht,
vacation home or condominium; and any other
similar item of real or personal property used
by the taxpayer primarily for the entertainment,
amusement, or recreation of guests or
employees (Sec. 2, RR No. 10-2002)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
To be considered an entertainment facility, it
must be owned or form part of the taxpayer’s
trade, business, or profession for which he
claims depreciation or rental expense.
A yacht is considered an entertainment facility if
its use is not restricted to specified officers or
employees. If the yacht is restricted to them, it
would be a fringe benefit, subject to the FBT.
Expenses that are not considered
entertainment, amusement, and recreation
expenses
1. Expenses which are treated as
compensation or fringe benefits for services
rendered under an employer-employee
relationship
2. Expenses for charitable or fund-raising
events
3. Expenses for bona fide business meeting of
stockholders, partners or directors
4. Expenses for attending or sponsoring an
employee to a business league or
professional organization meeting
5. Expenses for events organized for
promotion, marketing and advertising
including concerts, conferences, seminars,
workshops, conventions, and other similar
events
6. Other expenses of similar nature (Sec. 3, RR
No. 10-2002)
Advertising and Promotional Expenses
The following are the requisites for the
deductibility of advertising and promotional
expenses: (Sub-pro-ser)
1. Substantiated with sufficient evidence;
2. All payments for the purchase of
promotional giveaways, contest prizes or
similar material must be properly
receipted; and
3. All payments for services such as radio and
TV time, print ads, talent fees, advertising
expense or know-how must be subjected to
withholding tax.
Kinds of advertising and their deductibility
1. Advertising to stimulate the CURRENT sale
of merchandise or use of services are
deductible as business expenses, provided
the amount incurred is reasonable.
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 Taxation Law
2. Advertising designed to stimulate the
FUTURE sale of merchandise or use of
services must be spread over a reasonable
period of time that it help earn the income.
Ratio: Matching concept of deductibility.
3. Advertising to promote the sales of SHARES
OF STOCK or to create a corporate image is
not deductible as an advertisement.
(Domondon, 2009)
Expenses paid to advertising firms to promote
sale of capital stock for acquisition of additional
capital is not deductible from taxable income.
Efforts to establish reputation are akin to
acquisition of capital assets, and therefore,
expenses related thereto are not business
expense but capital expenditures. (Atlas
Consolidated Mining & Development Corporation
v. CIR, G.R. No. L-26911, January 27, 1981)
Q: Algue, Inc. is a domestic corporation
engaged in engineering, construction and
other allied activities. Philippine Sugar
Estate Development Company (PSEDC)
appointed Algue as its agent, authorizing it to
sell its land, factories and oil manufacturing
processes. Pursuant to said authority and
through the joint efforts of the officers of
Algue, they formed the Vegetable Oil
Investment Corporation, inducing other
persons to invest in it. This new corporation
later purchased the PSEDC properties. For
this sale, Algue received as an agent a
commission of ₱125,000 and from this
commission the ₱75,000 promotional fees
were paid to the officers of Algue. Is the
promotional expense deductible?
A: YES. The promotional expense paid by PSEDC
to Algue amounting to ₱75,000 is deductible for
it was reasonable and not excessive. Algue
proved that the payment of the fees was
necessary and reasonable in the light of the
efforts exerted by the payees in inducing
investors and prominent businessmen to
venture in an experimental enterprise
(Vegetable Oil Investment Corporation) and
involve themselves in a new business requiring
millions of pesos. (CIR v. Algue, G.R. No. L-28896
February 17, 1988)
Training Expenses
125
Grants for manpower training and special
studies given to rank-and-file employees
pursuant to a program prepared by the labor-
management committee for development skills
identified as necessary by the appropriate
government agencies shall entitle the business
enterprise to a special deduction from gross
income equivalent to fifty percent (50%) of the
total grants over and above the allowable
ordinary and necessary business deductions for
said grants under the NIRC. (Sec. 7(2), RA No.
6071; Sec. 1, RMC No. 102-90)
Other business expenses allowed by special
laws as deductions
1. Discounts granted by establishments for
senior citizens and PWDs. (RR No. 8-2010
and RR No. 5-2017)
2. Expenses incurred by a private health and
non-health facility, establishment, or
institution, in complying with the Expanded
Breastfeeding Promotion Act of 2009 – up
to twice the actual amount incurred. (R.A.
10028)
3. Expenses incurred in training schemes
pursuant to the Jewelry Industry
Development Act of 1998 – additional 50%
of actual amount incurred. (R.A. 8502)
4. Expenses incurred for adopting a school
based on the Adopt-a-School program –
additional 50% of actual amount incurred.
(R.A. 8525)
5. A lawyer or professional partnerships
rendering actual free legal services, as
defined by the Supreme Court, shall be
entitled to an allowable deduction from
gross income, the amount that could have
been collected for the actual free legal
services rendered up to ten percent (10%)
of gross income derived from the actual
performance of the legal profession,
whichever is lower. (R.A. 9999)
6. Private companies that employ PWDs as
regular employee, apprentice or learner are
entitled to a gross income deduction
equivalent to 25 percent (25%) of the total
amount paid as salaries and wages to PWDs.
(IRR of R.A. 10524)
7. Qualified business enterprises that promote
green jobs are entitled to a special
deduction from the taxable income
equivalent to 50% of the total expense for
skills training and research development
expenses. (R.A. 10771)
 National Taxation
8. Section 42 of R.A.7916 or the PEZA Law
provides that an additional deduction
equivalent to half the value of training
expenses incurred in developing skilled or
unskilled labor or for managerial or other
management development programs
incurred by enterprises in the economic
zone (ecozone) can be deducted from the
National Government’s 3% share as
provided in Section 24 of the law.
Interest
The amount of interest:
1. paid or incurred
2. within a taxable year
3. on indebtedness
4. in connection with the taxpayer's
profession, trade or business
shall be allowed as deduction from gross
income. (Sec 34(B), NIRC)
Requirements under the NIRC for interest to
be deductible
1. There must be an indebtedness;
2. The indebtedness must be that of the
taxpayer;
3. The interest must be legally due and
stipulated in writing;
4. The interest must be paid or incurred
during the taxable year;
5. The indebtedness must be connected with
the taxpayer’s trade, business, or exercise of
profession;
6. The interest arrangement must not be
between related taxpayers; and
7. The allowable deduction have been reduced
by an amount equal to 33% of the interest
income subject to tax. (Sec. 34(B)(1), NIRC
as amended by R.A. 6337)
Q: How is interest as a deduction from gross
income defined? (1992 BAR)
A: Interest shall refer to the payment for the use
or forbearance or detention of money,
regardless of the name it is called or
denominated. It includes the amount paid for the
borrower’s use of money during the term of the
loan, as well as for his detention of money after
the due date for its repayment (Sec. 2(a), RR No.
13-2000)
Q: What are the deductible interest
expenses?
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A: Interest:
1. On taxes, such as those paid for deficiency
or delinquency, since taxes are considered
indebtedness (provided that the tax is a
deductible tax.) However, fines, penalties,
and surcharges on account of taxes are not
deductible. The interest on unpaid business
tax shall not be subjected to the limitation
on deduction;
2. Paid by a corporation on scrip dividends;
3. On deposits paid by authorized banks of the
BSP to depositors, if shown that the tax on
such interest was withheld; and
4. Paid by a corporate taxpayer, liable on a
mortgage upon real property of which the
said corporation is the legal or equitable
owner, even though it is not directly liable
for the indebtedness.
Non-deductible Interest Expense
1. Interest on preferred stock, which in
reality is dividend;
2. Interest on unpaid salaries and bonuses;
3. Interest calculated for cost keeping;
4. Interest paid where parties provide no
stipulation in writing to pay interest;
5. If the indebtedness is incurred to finance
petroleum exploration;
6. Interest paid on indebtedness between
related taxpayers; and
7. Interest on indebtedness paid in advance
through discount or otherwise and the
taxpayer reports income on cash basis.
NOTE: Interest is allowed as a deduction in the
year the indebtedness is paid, not when the
interest was paid in advance. If the
indebtedness is payable in periodic
amortizations, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed as deduction in such taxable year.
Related Taxpayers
1. Members of the same family, brothers and
sisters, whether in full or half blood,
spouse, ancestors and lineal descendants;
2. Stockholders and a corporation, when he
holds more than 50% in value of its
outstanding capital stock, except in case of
distribution in liquidation;
3. Corporation and another corporation, with
interlocking stockholders;
4. Grantor and fiduciary in a trust;
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 Taxation Law
5. Fiduciary of a trust and fiduciary in another
trust, if the same person is a grantor with
respect to each trust; and
6. Fiduciary of a trust and beneficiary of such
trust. (Sec. 36(B), NIRC)
Arm’s length interest rate
It is the rate of interest which was charged or
would have been charged at the time the
indebtedness arose in independent transaction
with or between unrelated parties under similar
circumstances.
Theoretical interest is not deductible
It is not deductible because:
1. It is not paid or incurred for it is merely
computed or calculated; and
2. It does not arise from interest bearing
obligation. (PICOP v. CA, G.R. Nos. 106949-
50;84-85, December 1, 1995)
Q: Does the CIR have the power to impute
theoretical interest?
A: NO. CIR’s powers of distribution,
apportionment, or allocation of gross income
and deductions under Section 43 (now Section
50) of the NIRC and Section 179 of RR No. 2
does not include the power to impute
“theoretical interests” to the controlled
taxpayer’s transactions. There must be proof of
actual receipt or realization of income. (CIR v.
Filinvest Development Corporation, G.R. Nos.
163653 & 167689, July 19, 2011)
Interest paid in advance
Interest paid in advance through discount or
otherwise in case of cash basis, the taxpayer is
allowed as deduction in the year the debt is paid.
Optional treatment of interest expense on
capital expenditure
Interest incurred to acquire property used in
trade, business or profession may be allowed
either:
1. Treated as capital expenditure, i.e., it forms
part of the cost of the asset; or
2. As a deduction. (Sec. 34(B)(2), NIRC)
NOTE: Interest paid in advance, interest
periodically amortized, and interest incurred to
127
acquire property used in trade or business is
also treated the same, the taxpayer can deduct it
as an outright deduction or capital expenditure.
Interest periodically amortized
If indebtedness is payable in periodic
amortizations, interest is deducted in proportion
to the amount of the principal paid.
Interest expense incurred to acquire
property for use in trade / business /
profession
Q: Is the interest on loans used to acquire
capital equipment or machinery deductible
from gross income? (1999 BAR)
A: YES. The law gives the taxpayer the option to
claim it as a deduction or treat it as capital
expenditure interest incurred to acquire
property used in trade, business or exercise of a
profession. (Section 34(B)(3), NIRC)
Reduction of interest expense/interest
arbitrage
Limitation on the amount of deductible
interest expense
The taxpayer’s otherwise allowable deduction
for interest expense shall be reduced by an
amount equal to 33% of the interest income
subject to final tax. (Sec. 34(B)(1), NIRC)
This is to safeguard from tax arbitrage schemes.
This limitation on the deductibility of interest
expense was legislated to specifically address
the tax arbitrage arising from the difference
between the 20% final tax on interest income
and the normal corporate income tax rate under
which interest expense can be claimed as a
deduction.
This limitation shall apply regardless of whether
or not a tax arbitrage scheme was entered into
by the taxpayer or regardless of the date of the
interest-bearing loan and the date when the
investment was made, for as long as, during the
taxable year, there is an interest expense
incurred on one side and an interest income
earned on the other side, which interest income
had been subjected to final withholding tax.
NOTE: The rate of interest limitation is actually
 National Taxation
the difference between the normal corporate
income tax and the 20% final tax as a percentage
of the NCIT rate, rounded off. Thus, under the
30% NCIT, (30%-20%) / 30% = 33.33%.
Tax arbitrage
It is a strategy which takes advantage of the
difference in tax rates or tax systems as the
basis for profit.
Taxes
Taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade
or business, shall be allowed as deduction xxx
(Sec 34(C), NIRC)
Examples of taxes which are deductible
1. Import duties;
2. Business licenses, excise and stamp taxes;
3. Local government taxes such as real
property taxes, license taxes, professional
taxes, amusement taxes, franchise taxes and
other similar impositions;
4. FBT;
5. DST;
6. Percentage taxes; and
7. Foreign Income Tax if not claimed as tax
credit.
Q: In 2006, Sally, a fruit market operator
received an assessment for customs duties
for her imported market equipment in the
amount of ₱75,000. Believing that the
amount is excessive, she paid the same under
protest. Because of the assurances from her
retained CPA that she stands a good chance
of being able to secure a refund of ₱50,000
she did not deduct the same anymore from
her income tax return. She deducted only the
₱25,000 which she believed was due from
her. She received the refund amounting to
P50,000 in 2008. What should have been the
proper tax treatment of the payment of
₱75,000 in 2006?
A: Sally should have deducted the total ₱75,000
customs duties in 2006. When she received the
refund of ₱50,000 in 2008, she should have
included the amount as part of her income.
Under the tax benefit rule, taxes allowed as
deductions, when refunded or credited shall be
included as part of gross income in the year of
receipt to the extent of the income tax benefit of
said deduction.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Limitation on the deduction
In the case of RA, NRC, NRA-ETB and RFC, the
deductions for taxes shall be allowed only if and
to the extent that they are connected with
income from sources within the Philippines
(Sec. 34(C)(2), NIRC)
Requisites for deductibility of taxes
1. Payments must be for taxes;
2. Tax must be imposed by law on, and
payable by the taxpayer;
3. Paid or incurred during the taxable year in
connection with taxpayer’s trade, business
or profession; and
4. Taxes are not specifically excluded by law
from being deducted from the taxpayer’s
gross income.
When to claim deductions for taxes
GR: Taxes may be deducted only on the year it
was paid or incurred.
XPN: In the case of contingent tax liability, the
obligation to deduct arises only when the
liability is finally determined.
Non-deductible taxes
Taxes not allowed as deduction from gross
income to arrive at taxable income:
1. Income tax provided under the NIRC
(Philippine income tax);
GR: Income taxes imposed by authority of
any foreign country
XPN: When the taxpayer does not signify in
his return his desire to avail of the tax credit
(except FBT).
2. Estate tax and donor’s taxes;
3. Special assessments - taxes assessed against
local benefits of a kind tending to increase
the value of property assessed;
4. Stock transaction tax - Taxes on sale, barter,
exchange of shares of stock listed and
traded through the local stock exchange or
through initial public offering;
5. Final taxes;
6. Presumed capital gains tax; and
7. VAT.
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 Taxation Law
Treatments of surcharges / interests / fines
for delinquency
These are not considered as taxes, hence they
are not allowed as deductions. However, interest
on delinquent taxes is deductible as they
considered as interest on indebtedness and not
as taxes. (CIR v. Palanca, Jr., 18 SCRA 496)
Treatment of special assessment
Special assessments are deductible as taxes
where these are made for the purpose of
maintenance or repair of local benefits, if the
payment of such assessment is ordinary and
necessary in the conduct of trade, business or
profession.
Where the assessments are made for the
purpose of constructing local benefits tending to
increase the value of the property assessed, the
payments are in the nature of capital
expenditures that are not deductible.
TAX CREDIT vis-a-vis DEDUCTION
Treatment to income taxes paid in foreign
countries
The taxpayer may either claim it as:
1. Foreign tax credits against Philippine
income tax due of citizens and domestic
corporations; or
2. A deduction from gross income of citizens
and domestic corporations.
Foreign tax credit
It is the right of an income taxpayer to deduct
from income tax payable the foreign income tax
he has paid to a foreign country subject to
certain limitations. This is to avoid the rigors of
indirect double taxation, although not prohibited
by the Constitution for being violative of the due
process, results to a tax being paid twice on the
same subject matter or transaction.
Tax credit vs. Tax deduction
TAX
TAX CREDIT
DEDUCTION
Subtracted Income before
Tax due
from tax
The Income upon
Reduces
taxpayer’s which tax
129
tax liability liability is
peso for peso computed
Persons entitled to claim tax credit
1. Resident citizens;
2. Domestic corporations (Sec. 34(C)(3)(a),
NIRC);
3. Members of a GPP; and
4. Beneficiary of an estate or trust. (Sec.
34(C)(3)(b), NIRC)
Persons not entitled to claim tax credit
1. Alien individuals, whether resident or non-
residents;
2. Foreign corporation, whether resident or
non-residents; and
3. Non-resident citizen including overseas
contracted workers and seamen.
Limitations when claiming tax credit
1. The amount of the credit in respect to the
tax paid or incurred to any country shall not
exceed the same proportion of the tax
against which such credit is taken, which
the taxpayer’s taxable income from sources
within such country under this Title (Tax on
Income) bears to his entire taxable income
for the same taxable year.
2. The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken, which
the taxpayer’s income from sources without
the Philippines taxable under Title II of the
NIRC (Tax on Income) bears to his entire
taxable income for the same taxable year.
(Sec. 34(C)(4), NIRC)
Q: Are taxes paid and subsequently refunded
taxable or non-taxable? (2005 BAR)
A: Taxable only if the taxes were paid and
claimed as deduction and which are
subsequently refunded or credited. It shall be
included as part of gross income in the year of
the receipt to the extent of the income tax
benefit of said deduction. (Sec. 34(C)(1), NIRC)
Not taxable if the taxes refunded were not
originally claimed as deductions.
Losses
1. Actually sustained during the taxable year
 National Taxation
2. Not compensated for by insurance or other
forms of indemnity shall be allowed as
deductions:
a. If incurred in trade, profession or
business;
b. Of property connected with the trade,
business or profession, if the loss
arises from fires, storms, shipwreck, or
other casualties, or from robbery, theft
or embezzlement. (Sec. 34(D), NIRC)
Requisites for deductibility (TAE-TIE-C45)
1. Loss belongs to the taxpayer
2. Actually sustained and charged off during
the taxable year
3. Evidenced by a closed and completed
transaction
4. Not compensated by insurance or other
forms of indemnity
5. Not claimed as a deduction for estate tax
purposes in case of individual taxpayers
6. Must be connected with taxpayer’s trade,
business or profession or incurred in any
transaction or incurred by an individual in
any transaction entered into for profit
though not connected with his trade,
business or profession
7. If it is casualty loss, it is evidenced by a
declaration of loss filed within 45 days with
the BIR
Types of losses
1. Ordinary losses – incurred in trade,
profession or business.
These are losses that are incurred by a
taxable entity as a result of its day to day
operations conducted for profit or
otherwise. (Domondon, 2013)
2. Casualty losses – The loss is of property
connected with trade, business or
profession arising from fire, storm,
shipwreck or other casualty, or from
robbery, theft or embezzlement.
These are the loss or physical damage
suffered by property used in trade,
business or the profession that results from
unforseen identifiable events that are
sudden, unexpected and unusual in
character. (Domondon, 2013)
A declaration of loss must be filed with the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
BIR within 45 days after the date of event.
Measurement of casualty loss
1. Total loss – Actual loss is the book value of
the asset.
2. Partial loss – Book value or cost to restore
the asset to its normal operating condition,
whichever is lower.
Actual loss shall be reduced by insurance
recovery or any form of indemnity. Any excess
of cost to restore over the book value shall be
capitalized. (Tabag, 2015)
Q: X, a travelling salesman in Sulu. In the
course of his travel, a band of MNLF seized
his car by force and used it to kidnap a
foreign missionary. The next day, the
military and the MNLF band had a chance
encounter which caused X’s car to be a total
wreck. Can X deduct the value of his car from
his income as casualty loss? (1993 BAR)
A: It depends. Before the TRAIN Law if X is an
employee of a company, he cannot deduct the
losses incurred since an individual taxpayer who
derives income from compensation is allowed
only personal and additional deductions and the
reasonable premiums for health and
hospitalization insurance. Under the TRAIN Law,
personal and additional deductions are no
longer applicable.
If X is engaged in trade or business, he can
deduct the value of the car from his gross
income provided he can recover only up to the
amount of the casualty loss that does not exceed
its book value, and that it is not compensated by
insurance or otherwise.
Net Operating Loss Carry-over (NOLCO)
Net operating loss refers to the excess of
allowable deduction over gross income of the
business in a taxable year. The net operating
loss of the business or enterprise for any taxable
year immediately preceding the current taxable
year, which had not been previously offset as
deduction from gross income shall be carried
over as a deduction from gross income for the
next 3 consecutive taxable years immediately
following the year of such loss; provided that:
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 Taxation Law
1. The taxpayer was not exempt from income
tax in the year of such net operating loss;
and
2. There has been no substantial change in the
ownership of the business or enterprise.
NOTE: NOLCO is on a first-in first-out basis.
“Substantial change in ownership of the
business or enterprise”
The 75% equity rule (or ownership or interest
rule) shall only apply to transfer or assignment
of the taxpayer’s net operating losses as a result
of or arising from the said taxpayer’s merger or
consolidation or business combination with
another person.
The transferee or assignee shall not be entitled
to claim the same as a deduction from gross
income except when as a result of the said
merger, consolidation or combination, the
shareholders of the transferor/assignor, or the
transferor gains control of:
1. At least 75% or more in nominal value of the
outstanding issued shares or paid up capital
of the transferee/assignee, if a corporation;
2. At least 75% or more interest in the business
of the transferee/assignee, if not a
corporation (75% equity rule) (RR 14-2001,
Sec. 2.4)
Determination of whether or not there is
substantial change in ownership
Substantial change in ownership shall be
determined on the basis of any change in the
ownership in said business or enterprise arising
from or incident to its merger, consolidation, or
combination with another person. It shall be
determined as of the end of the taxable year
when NOLCO is to be claimed as deduction. (Sec.
5.1, RR No. 14-2001)
Q: In case of mines other than oil and gas
wells, NOLCO shall be allowed for what
period?
A: A net operating loss during the first 10 years
of operation shall be allowed as NOLCO for the
next 5 years immediately following the year of
such loss.
Persons entitled to deduct NOLCO from gross
131
income
1. Individuals engaged in trade or business or
in the exercise of his profession;
2. Domestic and Resident foreign corporation
subject to the normal income tax or
preferential tax rates; and
3. Estates and trusts.
Effect of NOLCO when the corporate taxpayer
is subject to MCIT
The running of the 3-year period for the expiry
of NOLCO is not interrupted by the fact that such
corporation is subject to MCIT in any taxable
year during such 3-year period. However, such
corporation cannot enjoy the benefit of NOLCO
for as long as it is subject to MCIT in any taxable
period.
An individual who claims the 40% OSD cannot
claim deduction of NOLCO simultaneously. Even
if NOLCO was not claimed, the 3-year period
shall continue to run. (RR No. 14-2001)
Who are not qualified to avail NOLCO?
1. OBUs for a foreign banking corporation
and FCDU of a domestic banking
corporations
2. Enterprise registered with the BOI
enjoying the Income Tax Holiday Incentive
3. PEZA-registered enterprise
4. SBMA-registered enterprise
5. Foreign corporations engaged in
international shipping or air carriage
business in the Philippines
6. Any person, natural or juridical, enjoying
exemption from income tax (RR No. 14-
2001)
Capital losses
Losses from sale or exchange of capital assets. It
is deductible to the extent of capital gains only.
Q: What is the rationale for the rule
prohibiting the deduction of capital losses
from ordinary gains? Explain. (2003 BAR)
A: It is to insure that only costs or expenses
incurred in earning the income shall be
deductible for income tax purposes consonant
with the requirement of the law that only
necessary expenses are allowed as deductions
 National Taxation
from gross income. The term “necessary
expenses” presupposes that in order to be
allowed as deduction, the expense must be
business connected, which is not the case insofar
as capital losses are concerned. This is also the
reason why all nonbusiness connected expenses
like personal, living and family expenses, are not
allowed as deduction from gross income.
(Section 36(A)(1) of the 1997, NIRC)
Refer to “Income on dealings in property” for
further discussion.
Securities becoming worthless
If securities become worthless during the
taxable year and are capital assets, the loss
resulting therefrom shall be considered as a loss
from the sale or exchange, on the last day of such
taxable year, of capital assets. (Section 34(D),
NIRC)
Losses from shares of stock, held as capital asset,
which have become worthless during the taxable
year shall be treated as capital loss as of the end
of the year. However, this loss is not deductible
against the capital gains realized from the sale,
barter, exchange, or other forms of disposition of
shares of stock during the taxable year, but must
be claimed against other capital gains. For 15%
net capital gains (for individuals and DC) 5%
and 10% net capital gains (for RC, NRFC) tax to
apply, there must be an actual disposition of
shares of stock held as capital asset, and the
capital gain and capital loss used as the basis in
determining net capital gain, must be derived
and incurred respectively, from a sale, barter,
exchange or other disposition of shares of stock.
(RR No. 06-2008)
NOTE: Securities becoming worthless refer to
shares when offered for sale or requested for
share redemption, no amount can be realized by
the owner of the share (RR No. 06-2008)
Q: Are worthless securities deductible from
gross income for income tax purposes? (1999
BAR)
A: Worthless securities, which are ordinary
assets, are not allowed as deduction from gross
income because the loss is not realized.
However, if these worthless securities are
capital assets, the owner is considered to have
incurred a capital loss as of the last day of the
taxable year and therefore, deductible to the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
extent of capital gains. This deduction, however,
is not allowed to a bank or trust company. (Sec.
34(D)(4), Sec. 34(E)(2), NIRC)
Special Losses
1. Wagering losses – deductible only to the
extent of gain or winnings deemed to only
apply to individuals. (Sec. 34(D)(6), NIRC)
2. Losses on wash sales of stocks
Wash sale - A sale of stock or securities
where substantially identical securities are
acquired or purchased within 61-day
period, beginning 30 days before the sale
and ending 30 days after the sale.
GR: Losses from wash sale are not
deductible since these are considered as
artificial loss.
XPN: When a taxpayer is a dealer in
securities, and the transaction from which
the loss resulted was made in the ordinary
course of business of such dealer, the loss
is deductible in full.
Non-deductible losses
1. Losses not incurred in trade, profession, or
business or in any transaction entered into
profit;
2. Losses from sales or exchanges of property
entered into between related taxpayers are
not deductible as provided under Section 36
of the NIRC but the gains are taxable;
3. Losses from exchanges of property in a
corporate readjustment;
4. Losses from illegal transactions; and
5. Loss on voluntary removal of building on
land purchased with a view to erect another
building. Such loss shall form part of the
cost of the new building to be erected.
(Tabag, 2015)
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 Taxation Law
Rules on Deductibility

LOSSES RULES ON DEDUCTIBILITY

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

N.B. A net operating loss during the first 10 years of operation shall be allowed
as NOLCO for the next 5 years in case of mines other than oil and gas wells,
i. When a contract area where petroleum operations are undertaken is
partially or wholly abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be allowed as a
deduction.
Abandonment ii. When a producing well is subsequently abandoned, the unamortized costs
losses in petroleum thereof, as well as the undepreciated costs of equipment directly used
operations therein, shall be allowed as a deduction in the year of abandonment.

Note: If such abandoned well is re-entered and production is resumed, or if

such equipment or facility is restored into service, the said costs shall be
included as part of gross income in the year of resumption or restoration.

Marcelo doctrine Bad debts refer to debts resulting from the

A loss in one line of business is not permitted as
a deduction from gain in another line of
business. (Marcelo Steel Corporation v. CIR, G.R.
No. L-12401, October 31, 1960)
worthlessness or uncollectibility, in whole or in
part, of amount due to the taxpayer by others,
arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered. (Sec. 2, RR No. 5-99)

Bad debts NOTE: A mere recording in the taxpayer’s books

of account of estimated uncollectible accounts
These are debts due to the taxpayer actually does not constitute a write-off of the said
ascertained to be worthless and charged off in receivable. Hence, it shall not be a valid basis for
the books of the taxpayer within the taxable year its deduction as a bad debt expense.
except those:
Bad Debt Theory
1. Not connected with trade, business or
profession; and Absence of creditor is not bad debt.
2. Between related taxpayers (Sec. 36(B),
NIRC)

133
 National Taxation
Requisites for deductibility (UST-CAR)
1. The debts are uncollectible despite diligent
effort exerted by the taxpayer.
To prove that the taxpayer exerted diligent
efforts to collect the debts:
a. Sending of statement of accounts;
b. Sending of collection letters;
c. Giving the account to a lawyer for
collection; and
d. Filing a collection case in court.
2. Existing indebtedness subsisting due to the
taxpayer which must be valid and legally
demandable.
3. Connected with the taxpayer’s trade,
business or practice of profession;
4. Actually charged off in the books of
accounts of the taxpayer as of the end of the
taxable year;
5. Actually ascertained to be worthless and
uncollectible as of the end of the taxable
year.
NOTE: In lieu of requisite No. 5, the BSP,
thru its Monetary Board, shall approve the
writing off of said indebtedness from the
banks’ books of accounts at the end of the
taxable year (RR No. 5-1999)
In no case may a receivable from an
insurance or surety company be written off
from the taxpayer’s books and claimed as
bad debts deduction unless such company
has been declared closed due to insolvency
or for any such similar reason by the
Insurance Commissioner. (RR No. 5-1999)
6. Must not be sustained in a transaction
entered into between related parties.
Related parties
1. Members of the same family (brothers and
sisters, whether whole or half-blood;
spouse, ancestors, and lineal descendants);
2. An individual and a corporation more than
fifty percent (50%) in value of the
outstanding stock of which is owned,
directly or indirectly, by or for such
individual;
3. Two corporations more than fifty percent
(50%) in value of the outstanding stock of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
each of which is owned, directly or
indirectly, by or for the same individual;
4. The grantor and a fiduciary of any trust;
5. The fiduciary of a trust and the fiduciary of
another trust of the same person is a
grantor with respect to each trust; and
6. A fiduciary of a trust and a beneficiary of
such trust.
NOTE: Relatives by affinity and collateral
relatives other than brothers and sisters are not
considered related parties.
Q: What factors will determine whether or
not the debts are bad debts? (2004 BAR)
A: The factors to be considered include, but are
not limited to, the following:
1. The debtor has no property or visible
income;
2. The debtor has been adjudged bankrupt
or insolvent;
3. There are numerous debtors with small
amounts of debts and further action on
the accounts would entail expenses
exceeding the amounts sought to be
collected;
4. The debt can no longer be collected
even in the future; and
5. Collateral shares have become
worthless.
NOTE: "Worthless" is not determined by an
inflexible formula or slide rule calculation, but
upon the exercise of sound business judgment.
In order that debts be considered as bad debts
because they have become worthless, the
taxpayer should:
1. Ascertain the debt to be worthless in the
year for which the deduction is sought; and
2. Act in good faith in ascertaining the debt to
be worthless. (CIR v. Goodrich International
Rubber Co., G.R. No. L-22265, December 22,
1967)
Testimony of a CPA as substantial evidence
for the deductibility of a claimed worthless
debt
Mere testimony of a CPA explaining the
worthlessness of said debts is seen as nothing
more than as a self-serving exercise which lacks
probative value. Mere allegations cannot prove
the worthlessness of such debts. (Philippine
Refining Co. v. CA, G.R. No. 118794, May 8, 1996)
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 Taxation Law
Deductibility of “reserves for bad debts” from
gross income for income tax purposes
Bad debts must be charged off during the taxable
year to be allowed as deduction from gross
income. The mere setting up of reserves will not
give rise to any deduction. (Sec. 34(E), NIRC)
Effect of recovery of bad debts
That recovery of bad debts previously allowed
as deduction in the preceding years shall be
included as part of the gross income in the year
of recovery to the extent of the income tax
benefit of said deduction. (Sec. 34(E), NIRC) This
is also known as the tax benefit rule.
Depreciation
There shall be allowed as a depreciation
deduction:
1. Reasonable allowance for the exhaustion,
wear and tear (including reasonable
allowance for obsolescence)
2. Of property used in the trade or business
(Sec. 34(F), NIRC)
Depreciation is the gradual diminution in the
useful value of tangible property resulting from
exhaustion, wear and tear and obsolescence.
(Domondon, 2013)
Requisites for deductibility
1. The property subject to depreciation must
be property with life of more than 1 year;
2. The property depreciated must be used in
trade, business, or exercise of a profession;
3. The depreciation must have been charged
off during the taxable year;
4. The depreciation method used must be
reasonable and consistent; and
5. A depreciation schedule should be attached
to the income tax return.
Person entitled to claim depreciation
expense
The person entitled to claim depreciation
expense is the person who sustains an economic
loss from the decrease in property value due to
depreciation which is usually the owner.
In the case of a non-resident alien individual
135
engaged in trade or business or resident foreign
corporation, a reasonable allowance for the
deterioration of property arising out of its use or
employment or its non-use in the business, trade
or profession shall be permitted only when such
property is located in the Philippines. (Sec.
34(F)(6), NIRC)
Depreciable and non-depreciable assets for
tax purposes
1. Depreciable assets:
a. Only property that is used for trade,
business or exercise of a profession or
held for the production of income.
b. All kinds of tangible property (other
than land) with life of more than 1 year
and do not form part of the stock in
trade that are part of the inventory.
c. All kinds of intangible property (other
than shares of stock) with life of more
than 1 year.
d. Subject to exhaustion within a
determinable period of time, that is it
has a limited useful life.
2. Non-depreciable assets:
a. Land, apart from the improvements of
physical development added to it,
cannot be depreciated.
b. Inventories or stock in trade.
c. Personal effects or clothings, except
costumes used in theatrical business.
d. Bodies of minerals subject to depletion.
e. Automobiles and other transportation
equipment used solely by the taxpayer
for pleasure.
f. Building used solely by the taxpayer as
his residence, and the furniture or
furnishing used in said building.
g. Intangibles, the use in trade, business
or exercise of profession is not of
limited duration.
Q: Is depreciation of goodwill deductible
from gross income? (1999 BAR)
A: Goodwill may or may not be subject to
depreciation.
GR: Depreciation for goodwill is not allowed as
deduction from gross income. While intangibles
maybe allowed to be depreciated or amortized,
it is only allowed to those intangibles whose use
in the business or trade is definitely limited in
 National Taxation
duration (Basilan Estates, Inc. v, CIR, 21 SCRA
17). Such is not the case with goodwill.
XPN: If the goodwill is acquired through capital
outlay and is known from experience to be of
value to the business for only a limited period.
(Sec. 107, RR No. 2) In such case, the goodwill is
allowed to be amortized over its useful life.
Methods for computing depreciation
allowance under NIRC
1. Straight line method – The annual
depreciation charge is calculated by
allocating the amount to be depreciated
equally over the number of years of the
estimated useful life of the tangible. It
results in a constant charge over the useful
life.
2. Declining balance method – accelerated
method of depreciation which writes off a
relatively larger amount of the asset’s cost
nearer the start of its useful life than that of
the straight line.
3. Sum of the years digit method – accelerated
method of depreciation expense in the
earlier years and lower charges in the later
years.
4. Any other method which may be prescribed
by DOF upon recommendation of the CIR.
Determination of depreciation method
The BIR and the taxpayer may agree in writing
on the useful life of the property to be
depreciated subject to modification if justified by
facts or circumstances. The change shall not be
effective before the taxable year on which notice
in writing by certified mail or registered mail is
served by the party initiating. However, if there
is no agreement and the BIR does not object to
the rate and useful life being used by the
taxpayer, the same shall be binding.
Method to be used in depreciation of
properties used in petroleum operations
It may either be straight line or declining
balance method with a useful life of 10 years or
shorter, as allowed by the CIR.
NOTE: If the property is not directly related to
production, depreciation is for an estimated
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
useful life of 5 years using the straight-line
method. (Sec. 34(F)(4), NIRC)
Method to be used in depreciation of properties
used in mining operations other than petroleum
operations:
1. At the normal rate of depreciation if the
expected life is less 10 years or less; or
2. Depreciated over any number of years
between 5 years and the expected life if the
latter is more than 10 years and the
depreciation thereon is allowed as
deduction from taxable income.
Provided, that the contractor notifies the CIR at
the beginning of the depreciation period which
depreciation rate allowed will be used.
Q: What is the annual depreciation of a
depreciable fixed asset with a cost of
₱100,000 having a salvage value of ₱10,000
and an estimated useful life of 20 years
under the straight line method?
A: The annual depreciation is ₱4,500 computed
as follows: Acquisition cost less salvage value,
then divide the difference by its useful life.
(100,000 – 10,000 = 90,000) then (90,000 / 20
= 4,500)
Q: Z purchased fully depreciated
machineries and entered the machineries in
his books at ₱120,000. Based on the
independent appraisal and engineering
report, Z assigned to the machineries an
economic life of 5 years. Adopting the
straight-line method, Z claimed a
depreciation deduction of ₱24,000 in his
income tax return. Is the deduction proper,
considering that in the hands of the original
owner, the said machineries were already
fully depreciated? (1983 BAR)
A: YES. The starting point for the computation
of the deductions for depreciation is the
reasonable cost of acquiring the asset and its
economic life. The fact that the machineries
were already depreciated by its original owner
does not matter. Z is allowed a depreciation
allowance for the exhaustion, wear and tear
(including reasonable allowance for
obsolescence) of the machineries which he is
using in his trade or business. (Sec. 34 (F), NIRC)
Depletion of oil and gas wells and mines
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 Taxation Law
Depletion refers to the deduction from gross
income arising from the exhaustion of natural 2.
resources like mines and oil and gas wells as a
result of production or severance from such
mines or wells.
3.
Conditions for deductibility: (COILE)
1. The method allowed under the rules and 4.
regulations prescribed by the Secretary of
Finance is cost depletion method.
2. Can be availed of by oil and gas wells and
mines.
3. The basis of cost depletion is the capital
invested in the mine which is the
accumulated exploration and development
expenses.
4. When the allowance shall equal the capital Requisites for deductibility (AW-SEA)
invested no further allowance shall be
granted. 1.
5. In case of RFC, allowance for depletion shall
be authorized only in respect to oil and gas 2.
wells and mines located in the Philippines. 3.
Persons who may avail deduction for 4.
depletion
5.
Annual depletion deductions are allowed only to
mining entities which own an economic interest
in mineral deposits. (Sec. 3, RR No. 5-76)
Contributions that are deductible in full
Economic interest
These are: (GAFA)
It means interest in minerals in the place of
investment therein or secured by operating or 1.
contract agreement for which income is derived,
and return of capital expected, from the
extraction of mineral.
Charitable and other contributions
nongovernment organizations.
In accordance with rules and regulations
promulgated by the secretary of finance,
upon recommendation of the
commissioner;
No part of the net income of which inures to
the benefit of any private stockholder or
individual;
In an amount not in excess of:
a. 10% in the case of an individual, and
b. 5% in the case of a corporation, of the
taxpayer’s taxable income derived
from trade, business or profession as
computed without the benefit of this
and the following subparagraphs. (Sec
34(H)(1), NIRC)
The contribution or gift must be actually
paid;
It must be paid within the taxable year;
It must be given to the organization
specified by law;
It must be evidenced by adequate receipts
or records; and
The amount of charitable contribution of
property other than money shall be based
on the acquisition cost of said property.
Donations to the Government of the
Philippines, or political subdivisions
including fully-owned government
corporation to be used exclusively in
undertaking priority activities in:
(CHEESHY)

1. Contributions or gifts actually paid or made a. Culture

within the taxable year, b. Health
a. To, or for the use of the Government of c. Economic Development
the Philippines or any of its agencies d. Education
or any political subdivision thereof e. Science
exclusively for public purposes, or to f. Human Settlement
accredited domestic corporations, or g. Youth and Sports development
b. Associations organized and operated
exclusively for religious, charitable, NOTE: NEDA determines annually which
scientific, youth and sports will be considered as a priority activity.
development, cultural or educational
purposes or for the rehabilitation of 2. Donations to foreign institutions and
veterans, or international organizations in compliance
c. To social welfare institutions, or to

137
 National Taxation
with treaties and agreements with the
Government.
3. Donations to accredited NGO’s
a. Exclusively for: (C2HES2Y-RC)
i. Cultural
ii. Charitable
iii. Health
iv. Educational
v. Scientific
vi. Social welfare
vii. Character building &youth and
sports Development
viii. Research
ix. Any combination of the above
b. Donation must be utilized not later than
the 15th day of the 3rd month following
the close of taxable year.
c. Administrative expense must not
exceed 30% of the total expenses.
d. Upon dissolution, assets shall be
transferred to another non-profit
domestic corporation or to the State.
4. Donations of prizes and awards to Athletes
(Sec. 1, RA 7549)
Donations that are deductible in FULL under
special laws
Donations to:
1. The Integrated Bar of the Philippines (IBP)
(P.D. 81)
2. Development Academy of the Philippines
(P.D. 205)
3. Aquaculture Department of the Southeast
Asian Fisheries and Development Center
(SEAFDEC) (P.D. 292)
4. National Social Action Council (P.D. 294)
5. National Museum, Library and Archives
(P.D. 373)
6. University of the Philippines and other state
colleges and universities
7. Philippine Rural Reconstruction Movement
8. The Cultural Center of the Philippines (CCP)
9. Trustees of the Press Foundation of Asia
10. Humanitarian Science Foundation
11. Artesian Well Fund (R.A. 1977)
12. International Rice Research Institute
13. National Science Development Board (now
the DOST) and its agencies and to public or
recognized non-profit, non-stock
educational institutions (R.A. 3589)
14. Ministry of Youth & Sports Development
(P.D. 604)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
15. Social Welfare, Cultural & Charitable
Institution (P.D. 507)
16. Museum of Philippine Costumes (P.D. 1388)
17. Intramuros Administration (P.D. 1616)
18. Lungod ng Kabataan (P.D. 1631)
19. Foster child agencies (R.A. 10165)
Gifts and donations to the University of the
Philippines shall be exempt from donor’s tax and
the same shall be allowable as a deduction up to
150% of the value of the donation (R.A. 9500)
Contributions to the National Book Trust Fund
shall likewise be exempt from donor’ tax and
the same shall be allowable as a deduction up to
150% of the value of the donation (R.A. 9521)
Donations that are subject to limitation
1. Donations that are not in accordance with
the priority plan;
2. Donations whose conditions are not
complied with;
3. Donations to the Government of the
Philippines or political subdivision exclusive
for public purposes; and
4. Donations to domestic corporations
organized exclusively for:
a. Scientific
b. Educational
c. Cultural
d. Charitable
e. Religious
f. Rehabilitation of veteran
g. Social welfare
Limitations on deductions
Amount deductible shall not exceed:
1. For individuals - 10% of taxable income
before contributions
2. For corporations - 5% of taxable income
before contributions (Sec. 34(H)(1), NIRC)
Q: On December 6, 2001, LVN Corp. donated
a piece of vacant lot situated in Mandaluyong
City to an accredited and duly registered
non-stock, non-profit educational institution
to be used by the latter in building a sports
complex for students.
May the donor claim in full as deduction
from its gross income for the taxable year
2001 the amount of the donated lot
equivalent to its fair market value/zonal
value at the time of the donation? (2002
138
 Taxation Law
BAR)
A: NO. Donations and/or contributions made to
qualified institutions consisting of property
other than money shall be based on the
acquisition cost of the property. The donor is
not entitled to claim as full deduction the fair
market value/zonal value of the lot donated.
(Sec. 34(H), NIRC)
Q: The Filipinas Hospital for Crippled
Children is a charitable organization. X
visited the hospital and gave ₱100,000 to the
hospital and ₱5,000 to a crippled girl whom
he particularly pitied. A crippled son of X is
in the hospital as one of its patients. X wants
to exclude both the ₱100,000 and the ₱5,000
from his gross income. Discuss. (1993 BAR)
A: If X is earning from compensation income, he
could not deduct either the ₱100,000 and the
₱5,000. If he is earning from trade or business,
he could deduct the ₱100,000 if the hospital is
accredited as an institution. If not, then no
deduction is allowed.
However, he could not deduct the ₱5,000
because to qualify for exemption, the charitable
contribution must be given to accredited
organizations or associations. (Sec. 34(H)(1),
NIRC)
Q: On the part of the contributor, are
contributions to a candidate in an election
allowable as a deduction from gross income?
(1998 BAR)
A: The contributor is not allowed to deduct the
contributions because the said expense is not
directly attributable to the development,
management and/or operation and/or conduct
of trade or business or profession.
Research and development expenditure
1. Taxpayer may treat research or
development expenditures
2. Which are paid or incurred by him during
the taxable year
3. In connection with his trade, business, or
profession as:
a. Ordinary and necessary expenses,
which are not chargeable to capital
account, and shall be allowed as
139
deduction during the taxable year when
paid or incurred, or
b. Deferred expenses
- Paid or incurred by the taxpayer in
connection with his trade, business,
or profession;
- Not treated as ordinary expenses;
and
- Chargeable to capital account but
not chargeable to property of a
character which is subject to
depreciation or depletion. (Sec.
34(I), NIRC)
Period for amortizing the deferred research
and development expenditures
In computing taxable income,
1. Such deferred expenses shall be allowed as
deduction;
2. Ratably distributed over a period of not
less than 60 months (beginning with the
month in which the taxpayer first realizes
benefits from such expenditures)
Research and development expenditures
that are not deductible
Any expenditure:
1. For the acquisition or improvement of land
or for the improvement of property to be
used in connection with research and
development subject to depreciation and
depletion; and
2. Paid or incurred for the purpose of
ascertaining the existence, location, extent
or quality of any deposit of ore or other
mineral including oil or gas. (Sec. 34 (I)(3),
NIRC)
Pension Trusts
1. An employer establishing or maintaining a
pension trust
2. To provide for the payment of reasonable
pensions to his employees
3. Shall be allowed as a deduction (in addition
to the contributions to such trust during the
taxable year to cover the pension liability
accruing during the year, allowed as a
deduction for ordinary and necessary
expenses)
4. A reasonable amount transferred or paid
into such trust during the taxable year in
excess of such contributions,
 National Taxation
5. But only if such amount:
a. Has not theretofore been allowed as a
deduction, and
b. Is apportioned in equal parts over a
period of 10 consecutive years
beginning with the year in which the
transfer or payment is made. (Sec.
34(J), NIRC)
Requisites for deductibility (P-FRANC)
1. The employer must have established a
pension or retirement plan to provide for
the payment of reasonable pensions to his
employees
2. It must be funded by the employer
3. The pension plan is reasonable and
actuarially sound
4. The deduction is apportioned in equal parts
over a period of 10 consecutive years
beginning with the year in which the
transfer or payment is made
5. The payment has not yet been allowed as a
deduction
6. The amount contributed must no longer be
subject to the control and disposition of the
employer
Deductible payment to pension trusts
1. Employer’s current liability or Current
Service Cost.
Amount contributed during the taxable
year shall be treated as an ordinary and
necessary expense.
2. Employer’s liability for past services or Past
Service Cost.
1/10 of the reasonable amount paid to
cover pension liability applicable to the
preceding 10 years.
NOTE: When an employer makes a contribution
to his employee’s Personal Equity and
Retirement Account (PERA), the employer can
claim this amount as a deduction but only to the
extent of the employer’s contribution that
would complete the maximum allowable PERA
contribution of an employee. (RR No. 17-2011,
RA. No. 9505)
Q: When can an employer claim as deduction
the payment of reasonable pension?
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A: If the employer contributes to a private
pension plan for the benefit of its employee.
Q: Are the following expenses deductible
from gross income:
a. Employer’s contribution to the
Christmas fund of his employees
b. Contribution to the construction of a
chapel of a university that declares
dividends to its stockholders
c. Premiums paid by the employer for the
life insurance of his employees
d. Contribution to a newspaper fund for
needy families when such newspaper
organizes a group of civic spirited
citizens solely for charitable purposes
(1968 BAR)
A:
a. YES. Under No. 27 RAMO 1-87 subject to the
condition that the contribution does not
exceed ½ month’s basic salary of all the
employees. It is part of the ordinary and
necessary expenses.
b. NO, part of the net income of the university
inures to the benefit of its private
stockholders (Sec. 34(H), NIRC)
c. NO, for the beneficiary is the employer (Sec.
36(A)(4), NIRC)
d. NO, contributions to a newspaper fund for
needy families are not deductible for the
reason that the income inures to the benefit
of the private stockholder of the printing
company.
Additional requirements for deductibility
Taxpayers who claim deductions for expenses,
the amounts of which are subject to withholding
tax, must prove that said deductions were in fact
subjected to proper withholding. If no
withholding was made, then claimed deductions
will not be allowed. (Sec. (34)(K), NIRC)
No deductions shall be allowed notwithstanding
payments of withholding tax at the time of the
audit investigation or
reinvestigation/reconsideration in cases where
no withholding of tax was made. (RR No. 12-
2013)
Special Deductions
140
 Taxation Law
Special deductions allowable under the NIRC: liability and the payment of losses,
mutual expenses and
1. Private proprietary educational institutions – workmen’s reinsurance reserve
In addition to the expenses allowed as compensation (Sec. 37(C), NIRC)
deduction, they have the option to treat the and mutual
amount utilized for the acquisition of casualty
depreciable assets for expansion of school insurance
facilities as: Amount actually deposited
a. Outright expense (the entire amount is with officers of the
deducted from gross income); or Government of the
b. Capital asset and deduct only from the Assessment
Philippines pursuant to
Insurance
gross income an amount equivalent to law as addition to
its depreciation every year (Sec. guarantee or reserve
34(A)(2), NIRC) funds (NIRC, Sec. 37 (D))

2. Estates and trusts can deduct the: Deductions under special laws
a. Amount of income paid, credited or
distributed to the heirs/beneficiaries; 1. Special deductions for productivity bonus
and and manpower training under the
b. Amount applied for the benefit of the Productivity Incentives Act of 1990
grantor (Sec. 61, NIRC) 2. Deductions for training expenses of
qualified jewelry enterprises
3. Insurance companies can deduct: 3. Deductions under the Adopt-a-School Act of
1998
TYPE OF 4. Deductions under the Magna Carta for
SPECIAL DEDUCTIONS
INSURANCE Persons with Disability
1. Net additions, if any, 5. Deduction under Free Legal Assistance Act
required by law to be of 2010
made within the year to 6. Deductions under the Expanded Senior
reserve funds Citizen Act of 2003
2. Sum paid on the policy 7. Deductions under the Sports Benefits and
within the year and Incentives Act of 2001
Non-Life annuity contracts other
than dividends, Sales on discounts on (PWD)
provided that the
released reserve be PWDs are entitled to claim at least 20%
treated as income for discount.
the year of release (Sec. 1. The following establishments relative to the
37(A), NIRC) sale of goods or services for their exclusive
1. Amounts repaid to use or enjoyment:
policy holders on a. Hotels and similar lodging
account of premiums establishments and restaurants;
previously paid by b. Sports and recreation centers;
Mutual them c. Theatres, cinema houses, concert halls,
marine 2. Interest paid upon circuses, carnivals, and other similar
insurance those amounts between places of culture, leisure, and
the date of amusement;
ascertainment and the d. Drugstore regarding purchase of
date of its payment medicines;
(Sec. 37(B), NIRC) e. Medical and dental privileges in
Mutual 1. Portion of the premium government facilities such as but not
insurance – deposits returned to limited to diagnostic and laboratory fees
mutual fire the policy holders including professional fees of attending
and mutual 2. Portion of the premium doctors in private facilities, subject to
employer’s deposits retained for

141
 National Taxation
guidelines to be issued by the DOH, in
coordination with the PHIC;
f. Domestic air and sea transportation
based on the actual fare except
promotional fare. If the promotional
fare discount is higher than the 20%
discount privilege, the PWD may choose
the promotional fare and should no
longer be entitled to the 20% discount
privilege; and
g. Land transportation privileges in bus
fares such as ordinary, aircon fares, and
on public railways such as LRT, MRT,
PNR, and such other similar
infrastructures that will be constructed,
established, and operated by public or
private entity.
Toll fees of skyways and expressways are
likewise subject to 20% discount which can
be availed of only by a person with disability
owning the vehicle. (RR No. 1-2009)
Provided, however, that the foregoing
privileges granted to PWDs shall not be
claimed if the said PWD claims a higher
discount as may be granted by the
commercial establishment and/or existing
laws or in combination with other discount
program/s.
Thus, if a PWD is also a senior citizen, he can
only claim one 20% discount on a particular
sales transaction.
2. Conditions for Availment by establishments
of sales discounts as special deduction from
gross income:
a. Allowed as deduction from gross
income for the same taxable year when
the discount is granted;
b. Only that portion of the gross sales
exclusively used, consumed, or enjoyed
by the PWD shall be eligible for the
deduction;
c. Only the actual amount of the sales
discount granted or a sales discount not
exceeding 20% of the gross selling price
or gross receipt can be deducted from
the gross income, net of VAT, if
applicable, for income tax purposes and
from gross sales or receipts of the
business enterprise concerned, for VAT
or other percentage tax purposes and
shall be subject to proper documents
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
under pertinent provisions of the tax
code; and
d. The business establishment giving sales
discount to qualified person with
disability is required to keep separate
and accurate record of sales, which shall
include the name of the PWD, ID
Number, gross sales or receipts, sales
discounts granted, date of transactions
and invoice number for every sale
transaction to PWD.
Free Legal Assistance Act of 2010
A lawyer or professional partnerships rendering
actual free legal services, as defined by the SC,
shall be entitled to an allowable deduction from
the gross income.
Deduction would be the amount that could have
been collected for the actual free legal services
rendered or up to 10% of the gross income
derived from the actual performance of the legal
profession, whichever is lower.
Condition for it to be availed of as a
deduction from gross income
It shall be deductible provided that the actual
free legal services contemplated shall be
exclusive of the minimum 60-hour mandatory
legal aid services rendered to indigent litigants
as required under the Rule on Mandatory Legal
Aid Services for Practicing Lawyers, under BAR
Matter No. 2012, issued by the SC.
Expanded Senior Citizen Act of 2003
1. Deduction from gross income of private
establishments for the 20% sales discount
granted to senior citizens on the sale of
goods and/or services
2. Additional deduction from gross income of
private establishments for compensation
paid to senior citizens.
Tax treatment of senior citizen’s discount
This discount should be considered as a
deductible expense from gross income and no
longer as tax credit. (CIR v. Central Luzon Drug
Corp., G.R. No. 159610, 2008)
Persons who could avail of the deduction for
the 20% senior citizen’s discount
142
 Taxation Law
1. Resident citizens and domestic
corporations; and
2. Non-resident citizens, aliens (whether
residents or not) and foreign corporations,
from their income arising from their
profession, trade or business, derived from
sources within the Philippines.
Establishments that can claim the discounts
granted as deduction
1. Hotels and similar lodging establishments;
2. Restaurants;
3. Recreation centers;
4. Theaters, cinema houses, concert halls,
circuses, carnivals, and other similar places
of culture, leisure and amusement;
5. Drug stores, hospitals, pharmacies, medical
and optical clinics, and similar
establishments dispensing medicines;
6. Medical and dental services in private
facilities;
7. Domestic air and sea transportation
companies;
8. Public land transportation utilities; and
9. Funeral parlors and similar establishments.
Conditions in order for establishments to
avail the 20% sales discounts as deduction
from gross income
1. Only that portion of the gross sales
exclusively used, consumed, or enjoyed by
the senior citizen shall be eligible for the
deductible sales discount.
2. The gross selling price and the sales
discount must be separately indicated in the
official receipt or sales invoice issued by the
establishment from the sale of goods or
services to the senior citizen.
3. Only the actual amount of the discount on a
sales discount not exceeding 20% of the
gross selling price can be deducted from the
gross income, net of value-added tax, if
applicable, for income tax purposes, and
from gross sales or gross receipts of the
business enterprise concerned, for VAT or
other percentage tax purposes.
4. The discount can only be allowed as
deduction from gross income for the same
taxable year that the discount is granted.
5. The business establishment giving sale
discounts to qualified senior citizens is
required to keep separate and accurate
record of sales, which shall include the name
143
of the senior citizen, OSCA ID, gross
sales/receipts, sales discounts granted,
dates of transaction and invoice number for
every sale transaction to senior citizen.
6. Only those establishments selling any of the
qualified goods and services to a Senior
Citizen where an actual discount was
granted can claim the deductions.
7. The seller must not claim the optional
standard deduction during the taxable year.
(Sec. 7, RR No. 7-2010)
Additional deduction from gross income of
private establishments for compensation
paid to senior citizens
Private establishments employing senior
citizens shall be entitled to additional deduction
from their gross income equivalent to 15% of
the total amount paid as salaries and wages to
senior citizens provided the following are
present:
1. Employment shall have to continue for a
period of at least 6 months; and
2. Annual taxable income of the senior citizen
does not exceed the poverty level as may be
determined by the NEDA thru the National
Statistical Coordination Board (NSCB). For
this purpose, the senior citizen shall submit
to his employer a sworn certification that his
annual taxable income does not exceed the
poverty level. (Sec. 12, RR No. 7-2010)
Sports Benefits and Incentives Act of 2001
The following are the benefits and privileges for
National Athletes and Coaches:
1. The grant of twenty percent (20%)
discount from all establishments relative to
the utilization of transportation services,
hotels and other lodging establishments,
restaurants and recreation centers, and
purchase of medicine and sports equipment
anywhere in the country for the actual and
exclusive use or enjoyment of the national
athlete and coach.
2. Minimum of twenty percent (20%)
discount on admission fees charged by
theaters, cinema houses and concert halls,
circuses, carnivals, and other similar places
of culture, leisure and amusement for the
actual and exclusive use and enjoyment of
the national athlete and coach.
 National Taxation
Such privately-owned establishments shall enjoy “cost of service” in case of individual seller of
tax deductions equivalent to the discounts services, is not allowed to be deducted for
extended to the national athletes and coaches purposes of determining the basis of the OSD
under paragraphs (a) and (b) hereof, subject to pursuant to RA 9504. (RR No. 16-2008)
the rules and regulations to be issued by the
Secretary of Finance, as recommended by the Persons who may avail of the OSD under the
Commissioner of Internal Revenue, within NIRC
ninety (90) days upon the effectivity of this Act:
Provided, That the failure of the Bureau of 1. Individuals
Internal Revenue (BIR) to promulgate the rules” a. Resident citizens (RC)
and regulations shall not prevent the b. Non-resident citizens (NRC)
implementation of aforementioned benefits. c. Resident aliens (RA)
(Sec. 4, RA. No. 10699) 2. Corporations
a. Domestic Corporations (DC)
Optional Standard Deduction b. Resident foreign corporations (RFC)
3. Partnerships
OSD is a fixed percentage deduction which is 4. Estates and trusts
allowed to certain taxpayers without regard to
any expenditure. This is in lieu of the itemized An individual who avails of the OSD is not
deduction. required to submit final statements provided
that said individual shall keep such records
The optional standard deduction is an pertaining to his gross sales or gross receipts.
amount not exceeding:
A corporation is still required to submit its
1. 40% of the gross sales or gross receipts of a financial statements when it files its annual
qualified individual taxpayer; or income tax return and keep such records
2. 40% of the gross income of a qualified pertaining to its gross income.
corporation. (Sec. 34(L), NIRC)
Persons who may not avail of the OSD
Illustration:
1. Non-resident aliens (NRA), whether or not
A corporation has gross sales of ₱1M, sales engaged in trade or business in the
return of ₱25k, cost of goods sold of ₱600k, Philippines; and
rental income of ₱275k and with an itemized 2. Non- resident foreign corporations (NRFC)
deductions of ₱200,000.
Following the new income tax forms as
OSD ITEMIZED prescribed in RR 2-2014, the following are not
Gross Sales 1,000,000 1,000,000 entitled to avail the OSD:
Rental Income 275,000 275,000
TOTAL REVENUE 1,275,000 1,275,000 Corporation, partnerships and other non-
Less: Sales 25,000 25,000 individuals:
Returns
Cost of goods 600,000 600,000 1. Exempt under the NIRC and other special
sold laws, with no other taxable income;
GROSS INCOME 650,000 650,000 2. With income subject to special or
Less: Deductions preferential tax rates;
OSD (650k x 260,000 3. With income subject to special or
40%) preferential tax rates, plus income subject to
Itemized 200,000 income tax under Sec. 27(A) and Sec. 28
TAXABLE INCOME 390,000 450,000 (A)(1)of the NIRC; and
Rate of Tax 30% 30% 4. Juridical entities whose taxable base is gross
INCOME TAX DUE 117,000 135,000 revenue or receipts. (e.g., special RFC; NRFC;
special NRFC)
NOTE: It should be emphasized that the “cost of
Q: In 2012, Dr. K decided to return to his
sales” in case of individual seller of goods, or the
hometown to start his own practice. At the

UNIVERSITY OF SANTO TOMAS 144

2021 GOLDEN NOTES
 Taxation Law
end of 2012, Dr. K found that he earned gross
professional income in the amount of
P1,000,000.00; while he incurred expenses
amounting to P560,000.00 constituting
mostly of his office space rent, utilities, and
miscellaneous expenses related to his
medical practice.
However, to Dr. K’s dismay, only P320,000.00
of his expenses were duly covered by
receipts. What are the options available for
Dr. K so he could maximize the deductions
from his gross income? (2015 BAR)
A: Dr. K may opt to use the optional standard
deduction (OSD) in lieu of the itemized
deduction. OSD is a maximum of 40% of gross
receipts during the taxable year. Proof of actual
expenses is not required, but Dr. K shall keep
such records pertaining to his gross receipts.
Determination of OSD allowed for
individuals, corporations, and GPPs
INDIVIDUAL
It depends on the accounting method used by
the taxpayer in recognizing income and
deductions:
1. Accrual basis – the OSD shall be based on
the gross sales during taxable year.
2. Cash Basis – the OSD shall be based on the
gross receipts during the taxable year.
NOTE: Costs of sales or costs of services are
not allowed to be deducted for purposes of
determining the basis of the OSD in case of an
individual taxpayer.
CORPORATION
In case of a corporation, the basis of the OSD is
the gross income. Sales returns, discounts and
allowances and cost of goods (or cost of
services) are deducted from the gross receipts
to arrive at gross income. The method of
accounting is not taken into consideration
unlike in the case of an individual.
GENERAL PROFESSIONAL PARTNERSHIP
1. For purposes of computing the distributive
share of the partners, the net income of the
GPP shall be computed in the same manner
as a corporation. As such, a GPP may claim
either the itemized deductions allowed
under Sec. 34 or in lieu thereof, it can opt to
avail of the OSD allowed to a corporation.
145
2. If the GPP avails of itemized deductions
under Sec. 34 of the NIRC in computing net
income, the partners may still claim
itemized deductions on their net
distributive share that have not been
claimed by the GPP.
The partners, however, are not allowed to
claim OSD on their share of net income
because the OSD is a proxy for all items of
deductions allowed in arriving at taxable
income.
3. If the GPP avails of OSD in computing net
income, the partners may no longer claim
further deductions from their net
distributive share, whether itemized or
OSD. (RR 2-2010)
ITEMS NOT DEDUCTIBLE
In computing net income, no deduction shall in
any case be allowed in respect to:
1. Personal, living or family expenses – These
are personal expenses and not related to the
conduct of trade or business.
2. Any amount paid out for new buildings of
for permanent improvements, or
betterments made to increase the value of
any property or estate.
These are capital expenditures added to the
cost of the property and the periodic
depreciation is the amount that is
considered as deductible expense.
NOTE: Shall not apply to intangible drilling
and development costs incurred in
petroleum operations which are deductible
under Subsection (G)(1) of Sec. 34 of the
NIRC.
3. Any amount expended in restoring property
or in making good the exhaustion thereof for
which an allowance is or has been made
(Major Repairs).
4. Premiums paid on any life insurance policy
covering the life of any officer or employee,
or of any person financially interested in any
trade or business carried on by the taxpayer,
individual, or corporate, when the taxpayer
 National Taxation
is directly or indirectly a beneficiary under 5. Interest expense, bad debts, and losses from
such policy. (Sec. 36(A), NIRC) sales of property between related parties.

NOTE: A person is said to be financially 6. Bribes, kickbacks, and other similar

interested in the taxpayer’s business, if he is payments.
a stockholder thereof or if he receives as
compensation his share of the profits of the 7. Items where the requisites for deductibility
business. are not met.

SUMMARY OF RULES ON DEDUCTIONS WITH LIMITS

LIMIT
Engaged in sale of goods or properties
– 0.50% of net sales (i.e., gross sales less sales returns or allowances and sales
Entertainment,
discounts)
Amusement, And
Recreational
Engaged in sale of services, including exercise of profession and use or lease of
Expense
properties
– 1% of net revenue (i.e., gross revenue less discounts)
The allowable deduction has been reduced by an amount equal to 33% of the
Interest Expense
interest income subject to final tax
In the case of NRAETB and RFC, the deductions for taxes shall be allowed only if
Taxes and to the extent that they are connected with income from sources within the
Philippines
Capital Losses Deductible up to the extent of capital gains
Wagering Losses Deductible only to the extent of wagering gains.

INCOME TAX ON INDIVIDUALS Philippines who:

who stays in a. Establishes to the
RESIDENT CITIZENS, NON-RESIDENT the Philippines satisfaction of the CIR the
CITIZENS, AND RESIDENT ALIENS without the fact of his physical
intention of presence abroad with a
Classes of individual taxpayers: transferring definite intention to
his physical reside therein;
1. Citizen presence b. Leaves the Philippines
a. Resident Citizen (RC) abroad during the taxable year to
b. Non-Resident Citizen (NRC) whether to reside abroad, either as
i. Overseas Contract Worker (OCW) stay an immigrant or for
ii. Seaman permanently employment on a
2. Aliens or temporarily permanent basis;
a. Resident Alien (RA) as an overseas c. Works and derives
b. Non- Resident Alien (NRA) contract income from abroad and
i. Engaged in Trade or Business (NRA- worker whose employment
ETB) thereat requires him to be
ii. Not Engaged in Trade or Business physically present abroad
(NRA- NETB) most of the time during
c. Special Aliens the taxable year;
3. Special class of individual employees
a. Minimum wage earner NOTE: “Most of the time
during the taxable year”
CITIZENS has been interpreted to
be at least 183 days.
RC NRC
A citizen of the A citizen of the Philippines d. Has been previously

UNIVERSITY OF SANTO TOMAS 146

2021 GOLDEN NOTES
 Taxation Law
considered as a non- statutory minimum wage in the non-
resident citizen and who agricultural sector where he is assigned.
arrives in the Philippines
at any time during the Significance of classifying an alien as a
taxable year to reside resident or a non-resident
permanently in the
Philippines. BASIS RA NRA
ETB NETB
NOTE: Treated as NRC Tax 0% - 35% 0% - 35% 25% of
with respect to income treatm schedular schedular gross
derived from sources ent rate rate income
abroad until the date of Person Entitled Entitled Not
his arrival. al subject to entitled
exempt the rule on
Taxpayer shall submit proof ion reciprocity
to the CIR to show his
intention of leaving the Special classes of aliens under NIRC
Philippines to reside
permanently abroad or to Special aliens are individuals with
return to and reside in the managerial/highly technical positions working
Philippines. (Sec. 22(E), in: (ROP)
NIRC) 1. Regional or area headquarters and regional
operating headquarters of multinational
ALIENS companies established in the Philippines;
RA NRA 2. Offshore banking units (OBU) established in
the Philippines. OBUs are foreign banks
An individual An individual whose
allowed to operate in the Philippines and to
whose residence is not within the
conduct foreign currency transactions;
residence is Philippines and who is not a
3. Petroleum service contractors and sub-
within the citizen thereof. (Sec. 22(G),
contractors in the Philippines.
Philippines NIRC)
but who is not
NOTE: When a special alien leases a property, he
a citizen
shall be taxed under NRA-EBT and NRA-NEBT,
thereof (Sec.
depending on the number of stay.
22(F), NIRC)
Engaged in NOT Special aliens are not required to submit ITR
trade or engaged in because the obligation to file income ITR rests
business trade or upon his employer.
business
An alien who An alien who Two instances where alternative taxation
stays in the stays in the may be applied
Philippines Philippines
for an for 180 days 1. Filipino considered as special alien;
aggregate or less (Sec. 2. When a taxpayer’s capital asset is sold to the
period of 25(B), NIRC) Government. (Involuntary Sale or
more than Expropriation)
180 days
(Sec. 25(A), Meaning of seamen as contemplated in the
NIRC) law
SPECIAL CLASS OF INDIVIDUAL
EMPLOYEES: MINIMUM WAGE EARNER They should be working in a ship engaged
Refers to a worker in the private sector paid exclusively in international trade or commerce.
the statutory minimum wage or to an If engaged only in local trade or commerce, they
employee in the public sector with are just considered as normal employees.
compensation income of not more than the

147
 National Taxation
Formula in determining taxable income Gross Compensation P xxx
Income
The term taxable income means the pertinent Net Compensation Income xxx
items of gross income specified in this Code, less Add:
the deductions, if any, authorized for such types Net business xxx
of income by this Code or other special laws. income or
(Sec. 31, NIRC) Net professional xxx
income
Other income xxx
Taxable income subject to P xxx
graduated rates

General Principles and Applicable Tax Rates

INCOME DERIVED FROM GROSS OR NET RATE

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

Employee: NIT

Businessman: NIT or GIT, if he

availed of the OSD

Self-employed: NIT or 8% tax on

RC ✓ ✓ 0-35%
gross sales or receipts and non-
operating income in excess of
₱250,000
NOTE: Gross sales or gross
receipts and other non-operating
income do not exceed the VAT
Threshold (₱3M)

NRC ✓ X NIT 0-35%

OCW/Seaman ✓ X NIT 0-35%

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

NIT
NRA-EBT ✓ X 0-35%

GIT
NRA-NEBT ✓ X 25%

Special Alien ✓ X GIT 25%

Estate Under ✓ ✓ NIT 0-35%

UNIVERSITY OF SANTO TOMAS 148

2021 GOLDEN NOTES
 Taxation Law
Judicial
Settlement
Irrevocable Trust ✓ ✓
Co-owners ✓ ✓
Coverage
1. A citizen of the Philippines residing therein
is taxable on all income derived from
sources within and without the Philippines.
2. A non-resident citizen is taxable only on
income derived from sources within the
Philippines.
3. An individual citizen of the Philippines who
is working and deriving income from abroad
as an OFW is 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. An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines. (Sec. 23, NIRC)
The general rule is that resident citizens are
taxable on income from all sources within and
without the Philippines. Whereas, non-resident
citizens, overseas contract workers, seamen who
are members of the complement of a vessel
engaged exclusively in international trade,
resident aliens, and non-resident aliens are
taxable only on income from sources within the
Philippines.
Q: Ms. C, a resident citizen, bought ready-to-
wear goods from Ms. B, a non-resident
citizen.
a. If the goods were produced from Ms. B’s
factory in the Philippines, is Ms. B’s
income from the sale to Ms. C taxable in
the Philippines? Explain.
b. If Ms. B is an alien individual and the
goods were produced in her factory in
China, is Ms. B’s income from the sale of
149
NIT 0-35%
NIT 0-35%
the goods to Ms. C taxable in the
Philippines? Explain. (2015 BAR)
A:
a. YES. The income of Ms. B from the sale of
ready-to-wear goods to Ms. C is taxable. A
non-resident citizen is taxable only on
income derived from sources within the
Philippines. In line with the source rule of
income taxation, since the goods are
produced and sold within the Philippines,
Ms. B’s Philippine-sourced income is taxable
in the Philippines. (Sec. 23, NIRC)
b. YES. But only a proportionate part of the
income. Gains, profits and income from the
sale of personal property produced by the
taxpayer without and sold within the
Philippines, shall be treated as derived part.
(Sec. 42(E), NIRC)
TAXATION ON COMPENSATION INCOME
Compensation income includes all remuneration
for services rendered by an employee for his
employer unless specifically excluded under the
NIRC. (Sec. 2.78.1, RR No. 2-1998)
The name by which the remuneration for
services is designated is immaterial. Thus,
salaries, wages, emoluments, honoraria,
allowances, commissions (i.e., transportation,
representation, entertainment and the like); fees
including director’s fees, if the director is, at the
same time, an employee of the employer/
corporation; taxable bonuses and fringe benefits
except those which are subject to the fringe
benefits tax; taxable pensions and retirement
pay; and other income of a similar nature
constitute compensation income. (Sec. 2.78.1, RR
No. 2-1998)
The test is whether such income is received by
virtue of an employer-employee relationship.
Requisites for taxability of compensation
income (SAR)
 National Taxation
1. Personal services actually rendered
2. Payment is for such services rendered
3. Payment is reasonable
Payment for the services rendered by an
independent contractor
Payment for the services of an independent
contractor is not classified as compensation
income since there is no employer-employee
relationship. The income of the independent
contractor is derived from the conduct of his
trade or business, which is considered as
business income and not compensation income.
Q: Give an instance that payment is made for
services rendered yet it may not qualify as
compensation income.
A: The share of a partner in a general
professional partnership. The general partner
rendered services and the payment is in the
form of a share in the profits is not within the
meaning of compensation income because it is
derived from the exercise of profession classified
as professional income.
Inclusions
1. Monetary compensation
a. Regular salary/wage
b. Separation pay/retirement benefit not
otherwise exempt
c. Bonuses, 13th month pay, and other
benefits not exempt
d. Director’s fees
2. Non-monetary compensation
3. Fringe benefit not subject to tax
Exclusions
1. Fringe benefit subject to tax
2. De minimis benefit
3. 13th month pay and other benefits and
payments specifically excluded from taxable
compensation income
The above exclusions are discussed in detail
below
Fringe Benefits
Fringe benefit is any good, service or other
benefit furnished or granted by an employer in
cash or in kind, in addition to basic salaries, to
an individual employee, except rank and file
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
employee, such as but not limited to: (HEV-
HIM-HEEL)
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver
and others
5. Interest on loans at less than market rate to
the extent of the difference between the
market rate and the actual rate granted
6. Membership fees, dues and other expenses
borne by the employer for the employee in
social and athletic clubs or other similar
organizations
7. Holiday and vacation expenses
8. Expenses for foreign travel
9. Educational assistance to the employee or
his dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows (Sec. 33(B),
NIRC; Sec. 2.33(B), RR No. 3-1998)
Tax treatment for fringe benefits
If the benefit is not tax-exempt and the recipient
is:
1. A rank-and-file employee – the value of such
fringe benefit shall be considered as part of
the compensation income of such
employee subject to tax payable by the
employee.
2. A managerial or supervisory employee – the
value shall not be included in the
compensation income of such employee
subject to tax. The fringe benefit tax (FBT)
is payable by the employer on behalf of the
employee. (Sec. 33, NIRC)
Difference among Managerial, Supervisory
and Rank-and-File Employees
MANAGERIAL EMPLOYEES
Employees who are given powers or
prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
discipline employees.
SUPERVISORY EMPLOYEES
Employees who effectively recommend such
managerial actions, if the exercise of such
authority is not merely routinary or clerical in
nature but requires the use of independent
judgment.
150
 Taxation Law
RANK-AND-FILE EMPLOYEES
Employees who are holding neither managerial
nor supervisory position.
Nature of a fringe benefit tax (FBT)
FBT is a final withholding tax imposed on the
grossed-up monetary value (GMV) of fringe
benefit furnished, granted or paid by the
employer to the employee, except rank and file
employees. (Sec. 2.33(A), RR No. 3-1998)
Grossed-up Monetary Value
This represents the whole amount of income
realized by the employee, which includes the
net amount of money or net monetary value of
property which has been received, plus the
amount of fringe benefit tax thereon otherwise
due from the employee but paid by the
employer for and in behalf of his employee (Sec.
2.33, RR No. 3-1998)
1. Money, or is directly paid for by the employer
– the value is the amount granted or paid.
2. Property other than money and ownership is
transferred to the employee – the value of
the fringe benefit shall be equal to the fair
market value of the property as determined
in accordance with the authority of the
Commissioner to prescribe real property
values (zonal valuation).
3. Property other than money BUT ownership is
NOT transferred to the employee – the value
of the fringe benefit is equal to the
depreciation value of the property. (RR 3-
1998, Sec 2.33)
NOTE: These guidelines are only used in
instances where there are no specific
guidelines. For example, there are specific
guidelines for the valuation of real property and
automobiles.

Computing for the GMV Purpose behind Fringe Benefit Tax

It shall be determined by dividing the monetary The FBT is a measure to ensure that an income
value of the fringe benefit by the grossed-up tax is paid on fringe benefits. If they were given
divisor. The grossed-up divisor is the difference in cash, an income is automatically withheld and
between 100% and the applicable individual tax collected by the government. An additional
rates. compensation which is given in non-cash form
is virtually untaxed. Such a situation has caused
GROSSED- inequity in the distribution of the tax burden.
FBT The FBT can enhance the progressiveness and
EMPLOYEE UP
RATE fairness of the tax system. (Dimaampao, 2011)
DIVISOR
Citizen, RA, NRA-
65% 35% Q: Who is required to pay the Fringe Benefit
EBT
NRA-NEBT 75% 25% Tax? (2003 BAR)
Special alien and any
Filipino employees A: It is the employer who is legally required to
who are employed pay an income tax on the fringe benefit. The
and occupying the fringe benefit tax is imposed as a final
75% 25% withholding tax placing the legal obligation to
same position as
those occupied or remit the tax on the employer, such that, if the
held by the special tax is not paid, the legal recourse of the BIR is to
alien employees. go after the employer. Any amount or value
Employees in special received by the employee as a fringe benefit is
economic zones considered tax paid hence, net of the income tax
(Clark Special due thereon. The person who is legally required
Economic Zone and 75% 25% to pay (same as statutory incidence as
Subic Special distinguished from economic incidence) is that
Economic and Free person who, in case of non-payment, can be
Trade Zone) legally demanded to pay the tax.

Thus, if the fringe benefit is granted or Reasons why the Fringe Benefit Tax is
furnished in: collected from the employer

151
 National Taxation
Valuation of benefits is easier at the level of the from his gross income. The deduction for the
firm. The problem of allocating the benefits employer is the grossed-up monetary value of
among individual employees is avoided. the fringe benefit. (Sec. 32(B)(3), NIRC)
Collection of the FBT is also ensured because
the FBT is withheld at the source and does not Salaries and wages of managerial or
depend on the self-declaration of the individual. supervisory employee, not subject to FBT
(Dimaampao, 2011)
Basic salary of managerial or supervisory
Fringe Benefit Tax as a deductible expense employee is excluded and not subject to FBT
because it is part of his compensation income.
FBT is not an additional tax on the employer.
Rather, the employer can claim the fringe
benefit and the FBT as a deductible expense

Compensation Income vs. Fringe Benefit

COMPENSATION INCOME FRINGE BENEFIT

Part of the gross income of an GR: Not reported as part of
employee. the gross income of an
employee.
As part of gross income of an
employee
XPN: Fringe benefits given to
a rank-and-file employee are
included in his gross income.
As to who should pay the tax The employee is liable to pay the The employer pays the fringe
NOTE: The person who is legally tax on his income earned. benefit tax on behalf of the
required to pay is that person employee.
who, in case of non-payment, can
be legally demanded to pay the
tax.
Managerial, supervisory, and Managerial and supervisory
As to taxpayers covered
rank-and-file employees employees
Subject to creditable withholding Subject to final withholding
As to withholding tax tax – the employer withholds the tax
treatment tax upon the payment of the
compensation income.

Fringe benefits exempt from fringe benefits
tax
1. Fringe benefits which are authorized and
exempted from tax under the NIRC or
special laws.
(e.g., separation benefits which are given to
employees who are involuntarily separated
from work)
2. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit plans.
3. Benefits given to the rank and file
employees, whether granted under a
collective bargaining agreement or not.
4. De minimis benefits, whether given to rank
and file employees or to supervisory or
managerial employees. (Sec 32(3), NIRC)
5. Fringe benefits granted to employee as
required by the nature of, or necessary to
the trade, business or profession of the
employer.
6. Fringe benefits granted for the convenience
of the employer. (Employer’s Convenience
Rule) (Sec. 32, Sec. 33(A), NIRC; Sec. 2.33 (C),
RR No. 3-1998)
NOTE: Although a fringe benefit may be
exempted from the FBT, it may still fall under a
different tax under another law, such as the
compensation income tax or the like.

UNIVERSITY OF SANTO TOMAS 152

2021 GOLDEN NOTES
 Taxation Law
Convenience of the Employer Rule
An exemption from taxation is granted to
benefits which are given to the employee for the
exclusive benefit or convenience of the employer.
Requirements for the application of the
convenience of the employer rule where the
employer furnished living quarters
Such shall not be considered as part of the
employee’s gross compensation income if:
1. It is furnished in the employer’s business
premises, and
2. Employee is required to accept such lodging
as a condition of his employment (No. 2.2,
RAMO No. 1-1987)
Requirements for the application of the
convenience of the employer rule in case of
free meals
Such shall not be considered as part of the
employee’s gross income if:
1. Furnished to the employee during his work
day; or
2. To have the employee available for work
during his meal period. (No. 2.3, RAMO No.
1-1987)
Benefits which are considered necessary to
the business of the employer or are granted
for the convenience of the employer
1. Housing privilege of military officials of the
Armed Forces of the Philippines, consisting
of officials of the Philippine Army,
Philippine Navy and Philippine Air Force.
2. A housing unit which is situated inside or
adjacent to the premises of a business of
factory – it is considered adjacent to the
premises if it is located within the
maximum 50 meters from the perimeter of
the business premises.
3. Temporary housing for an employee who
stays in a housing unit for 3 months or less.
4. The use of aircraft (including helicopters)
owned and maintained by the employer.
5. Reasonable business expenses which are
paid for by the employer for the foreign
153
travel of his employee for the purpose of
attending business or conventions.
6. A scholarship grant to the employee by the
employer, if the education or study involved
is directly connected with the employer’s
trade, business or profession, and there is a
written contract between them that the
employee is under obligation to remain in
the employ of the employer for a period of
time that they have mutually agreed upon.
7. Cost of premiums borne by the employer
for the group insurance of his employees.
8. Expenses of the employee which are
reimbursed, if they are supported by
receipts in the name of the employer and do
not partake the nature of a personal
expense of the employee.
9. Motor vehicles used for sales, freight,
delivery service and other non-personal
uses. (RR No. 3-1998)
Q: X was hired by Y to watch over Y’s
fishponds with a salary of ₱10,000. To enable
him to perform his duties well, he was also
provided a small hut, which he could use as
his residence in the fishponds. Is the fair
market value of the use of the small hut by X
a “fringe benefit” that is subject to the 35%
tax imposed by Sec. 33 of the NIRC? (2001
BAR)
A: NO. X is neither a managerial nor a
supervisory employee. Only managerial or
supervisory employees are entitled to a fringe
benefit subject to the FBT. Even assuming that
he is a managerial or supervisory employee, the
small hut is provided for the convenience of the
employer, hence does not constitute a taxable
fringe benefit. (Sec. 3, Sec. 33, NIRC)
Housing privilege subject to FBT
1. Employer leases residential property for
use of the employee;
2. Employer owns a residential property and
assigns the same for the use by the
employee;
3. Employer purchases a residential property
on installment basis and allows use by the
employee;
 National Taxation
4. Employee purchases a residential property
and transfers ownership to the employee;
or
5. The employee provides a monthly fixed
amount for the employee to pay his
landlord.
Housing privilege exempt from FBT
1. Housing privilege of military officials of the
Armed Forces of the Philippines consisting
of officials of the Philippine Army,
Philippine Navy, and Philippine Air Force.
(Sec. 2.33(D)(1)(f), NIRC);
NOTE: Benefit to said officials shall not be
treated as taxable fringe benefit in
accordance with the existing doctrine that
the State shall provide its soldiers with
necessary quarters which are within or
accessible from the military camp so that
they can readily be on call to meet the
exigencies of their military service.
2. A housing unit which is situated inside or
adjacent to the premises of a business or
factory.
NOTE: A housing unit is considered
adjacent to the premises if it is located
within the maximum 50 meters from the
perimeter of the business premises.
3. Temporary housing for an employee who
stays in a housing unit for three (3) months
or less. (Sec. 2.33(D)(1)(g), RR No. 3-98)
Q: As a way to augment the income of the
employees of DEF Inc., a private corporation,
the senior engineers were given housing
inside the factory compound for the purpose
of ensuring that there are available
engineers within the premises every time
there is a breakdown in the factory
machineries and equipment. Is the cash
equivalent value of the housing facilities
received by the senior engineers subject to
fringe benefit tax? (2019 BAR)
A: NO, the cash equivalent value of the housing
facilities received by the senior engineers is not
subject to fringe benefits tax. The same is
exempt from FBT since the housing is located
within the Company’s premises and is generally
for the convenience of the employer.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Expenses treated as taxable fringe benefits
1. Expenses incurred by the employee but
which are paid by his employer.
2. Expenses paid for by the employee but
reimbursed by his employer.
3. Personal expenses of the employee (like
purchases of groceries for the personal
consumption of the employee and his family
members, salaries of household personnel,
etc.) paid for or reimbursed by the
employer to the employee, whether or not
the same are duly receipted for in the name
of the employer.
4. Membership fees, dues, and other expenses
borne by the employer for his employee, in
social and athletic clubs or other similar
organizations shall be treated as taxable
fringe benefits of the employee in full.
Expenses treated as non-taxable fringe
benefits
1. Expenditures incurred by the employee and
paid by his employer but are duly receipted
for and in the name of the employer, and
such do not partake the nature of a personal
expense attributable to the said employee.
2. Expenditures paid for by the employee and
reimbursed by his employer but are duly
receipted for and in the name of the
employer, and such do not partake the
nature of a personal expense attributable to
the said employee.
3. Representation and transportation
allowances which are fixed in amounts and
are regularly received by the employees as
part of their monthly compensation income.
4. Business expenses which are paid for by the
employer for foreign travel of his
employees in connection with business
meetings or conventions. (RR 3-1998)
Motor vehicle subject to fringe benefit tax
A motor vehicle shall be subjected to fringe
benefits tax whenever the employer:
1. Purchases vehicle in employee’s name,
regardless of usage of vehicle;
154
 Taxation Law
2. Provides employee cash for vehicle
purchase;
3. Purchases car on installment in the name of
the employee;
4. Shoulders a portion of the purchase price;
5. Owns and maintains a fleet of motor vehicle
for the use of the business and employees;
or
6. Leases and maintains a fleet of motor
vehicles for the use of the business and
employees.
XPN: The use of aircraft (including helicopters)
owned and maintained by the employer shall be
treated as business use and not be subject to the
fringe benefits tax.
Interest on loan at less than market rate
If the employer lends money to his employees
free of interest or at a rate lower than 12%, such
interest foregone by the employer or the
difference of the interest assumed by the
employee and the rate of 12% shall be treated
as fringe benefit.
The rule shall apply to installment payments or
loans with interest rate lower than 12% (Sec.
2.33(D)(5), RR No. 3-1998)
Expenses for foreign travel
GR: Fixed and variable transportation,
representation and other allowances are
subject to FBT.
XPN: They are subject to FBT if incurred or
reasonably expected to be incurred by the
employee in the performance of his duties,
subject to the following conditions:
1. Ordinary and necessary in the pursuit of
employer’s business and paid or incurred
by employee; and
2. Liquidated or substantiated by receipts or
other adequate documentation. (Sec.
2.33(D)(7)(c), RR No. 3-1998)
Educational assistance to the employee or his
dependents
GR: The cost of the educational assistance to the
employee which is borne by the employer shall
be treated as taxable fringe benefit.
155
XPN: A scholarship grant shall not be treated as
taxable fringe benefit if:
1. Education/study is directly connected with
employer’s trade, business or profession;
2. There is written contract that the employee
shall remain employed with the employer
for a period of time mutually agreed upon
by the parties; and
3. The educational assistance extended to the
dependents of the employee was provided
through a competitive scheme. (RR 3-98, Sec.
2.33 (D) (9) (b))
Life or health insurance
GR: The cost of life or health insurance and
other non-life insurance premiums borne by the
employer are taxable fringe benefits.
XPNs:
1. Contributions of the employer for the
benefit of employee to the SSS, GSIS, or
similar contributions arising from
provisions of any existing law; and
2. The cost of premiums borne by the
employer for the group of insurance of
employees. (Sec. 2.33(D)(10), RR No. 3-1998)
Stock Options
The difference between the fair market value and
the exercise price at the time of exercise of stock
options are subject to FBT.
NOTE: Employees receive stock options as part
of their payment for the services they rendered
to their employer, which entitles them to buy
their employer’s shares of stock at an agreed
price.
De Minimis Benefits
These are facilities or privileges furnished or
offered by an employer to his employees
(managerial, supervisory or rank and file) that
are of relatively small value and are offered or
furnished by the employer merely as a means of
promoting the health, goodwill, contentment
and efficiency of his employees.
Q: Mapagbigay Corporation grants all its
employees (rank-and-file, supervisors, and
managers) 5% discount of the purchase
price of its products. During an audit
investigation, the BIR assessed the company
 National Taxation
the corresponding tax on the amount
equivalent to the courtesy discount received
by all the employees, contending that the
courtesy discount is considered as additional
compensation for the rank-and-file
employees and additional fringe benefit for
the supervisors and managers. In its defense,
the company argues that the discount given
to the rank-and-file employees is a de
minimis benefit and not subject to tax. As to
its managerial employees, it contends that
the discount is nothing more than a privilege
and its availment is restricted.
Is the BIR assessment correct? (2016 BAR)
A: YES. Items, even though of small value, if not
included in the list of de minimis benefits in
accordance with regulations, may be taxable.
Q: What are de minimis benefits and how are
these taxed? Give three (3) examples of
deminimis benefits. (2015 BAR)
A: De minimis fringe benefits and their
respective ceiling amounts
As per RR 2-98 and 3-98, as amended by RR 5-
2008, 5-2011, 5-2011, 8-2012, 1-2015, and 11-
2018 de minimis benefits include (see table
below):
MONETIZED UNUSED VACATION LEAVE
CREDITS OF EMPLOYEES
Qualify:
1. Private employees:
a. Vacation leave - exempt up to 10 days
b. Sick leave – always taxable
2. Government employees:
Vacation and sick leave are always tax
exempt regardless of the number of days.
MEDICAL CASH ALLOWANCE TO
DEPENDENTS OF EMPLOYEES
Not exceeding ₱1,500 per semester or ₱250
per month (RR No. 11-2018)
RICE SUBSIDY
₱2,000 or one sack of 50-kg rice per month
amounting to not more than ₱2,000 (RR No.
11-2018)
UNIFORMS AND CLOTHING ALLOWANCES
Not exceeding ₱6,000 per annum (RR No. 11-
2018)
ACTUAL MEDICAL ASSISTANCE
e.g., medical allowance to cover medical
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
and healthcare needs, annual
medical/executive check-up, maternity
assistance, and routine consultations
Not exceeding ₱10,000 per annum
LAUNDRY ALLOWANCE
Not exceeding ₱300 per month
EMPLOYEE ACHIEVEMENT AWARDS
UNDER AN ESTABLISHED WRITTEN PLAN
WHICH DOES NOT DISCRIMINATE IN
FAVOR OF HIGHLY PAID EMPLOYEES
(e.g., for length of service or safety
achievement)
In the form of tangible personal property
other than cash or gift certificate with an
annual monetary value not exceeding ₱10,000
GIFTS GIVEN DURING CHRISTMAS AND
MAJOR ANNIVERSARY CELEBRATIONS
Not exceeding ₱5,000 per employee per
annum
DAILY MEAL ALLOWANCE FOR OVERTIME
WORK
Not exceeding 25% of the basic minimum
wage on a per region basis
BENEFITS RECEIVED BY VIRTUE OF
COLLECTIVE BARGAINING AGREEMENT
(CBA) AND PRODUCTIVITY INCENTIVE
SCHEME
Not exceeding ₱10,000 per employee per
annum from the two items combined (RR 1-
2015)
All other benefits given by employers, which are
not included in the above enumeration shall
NOT be considered as de minimis benefits, and
hence, shall be subject to income tax, as well as
to withholding tax on compensation income. The
benefits provided in the Regulations shall apply
to income earned starting the year 2011. (RR
No. 5-2011)
NOTE: Flowers, fruits, books, similar items given
to employees under special circumstances (e.g.,
on account of illness, marriage, birth of baby,
etc.) are now taxable.
De minimis benefits in excess of respective
ceilings
The amount of benefits exceeding their
respective ceilings shall be considered as part of
“other benefits” under Sec. 32(B)(7)(e) of the
NIRC.
Under Sec. 32(B)(7)(e) of the NIRC, 13th month
pay and other benefits are excluded from gross
156
 Taxation Law
income, provided that they do not exceed
P90,000 any excess thereof is considered part of
the compensation income of an individual,
hence, subject to income tax.
13th Month Pay and other Benefits
The 13th month pay and other benefits are
excluded from gross income, provided that they
do not exceed P90,000. Any excess thereof is
considered part of the compensation income of
an individual, hence, subject to income tax (Sec.
32(B)(7)(e), NIRC)
The threshold amount of ₱90,000 shall apply
to the 13th-month pay and other benefits
which covers only the following:
1. Thirteenth month pay equivalent to the
mandatory one month basic salary of
officials and employees of the government,
(whether national or local), including
government-owned or -controlled
corporations, and or private offices
received after the 12th-month pay; and
2. Other benefits, such as Christmas bonus,
productivity-incentive bonus, loyalty
award, gifts in cash or in kind and other
benefits of similar nature actually received
by officials and employees of both
government and private offices.
In no case shall the exemption apply to other
compensation received by an employee under an
employer employee relationship, such as basic
salary and other allowances. (R.A. No. 10653 as
clarified by RR No. 3-2015)
SUMMARY OF TAX IMPLICATIONS
OF EMPLOYEES
SALARY
Fixed salary – Taxable
Other Benefits (ECOLA, 13th month pay,
Christmas Bonus,
Transportation/Representation
allowances, tips, etc.) – the 1st P90,000 is
exempted from income tax, any excess is
taxable.
Transportation/Representation allowances
 If there is liquidation, not taxable.
 If there is no liquidation, taxable.
157
SICK LEAVE/ VACATION LEAVE/SERVICE
INCENTIVE LEAVE (SIL)
If paid or availed of as salary of an
employee who is on vacation or on sick
leave notwithstanding his absence from
work, it constitutes taxable compensation.
(RR No. 6-1982)
Monetized value of unutilized vacation
leave credits of private employees (RR No.
2-1998)
 10 days or below – not taxable
 Any excess over 10 days is taxable
Sick leave credits of private employees -
Always taxable
Vacation and sick leave credits of
government employees - Always tax-
exempt
Service Incentive Leave - Not taxable.
SEPARATION PAY
It is only taxable if voluntarily availed of by
the employee.
If due to any cause beyond the control of the
official or employee, it is not taxable.
The phrase “for any cause beyond the control
of the said official or employee” connotes
involuntariness on his/her part.
Examples of involuntary separation:
1. Death
2. Sickness
3. Disability
4. Reorganization
5. Company at the brink of bankruptcy
2nd, 3rd, 4th ad infinitum separation pay is
not taxable as long as the employee is not
at fault.
Any payment received on account of dismissal
constitutes compensation regardless of
whether the employer is legally bound by
contract, statute, or otherwise, to make such
payment. (Sec. 2.78.1(B)(1)(b), RR No. 2-
1998)
Financial assistance with the condition that
you have to leave the company – that amount
is taxable.
 National Taxation
BACKWAGES
Taxable because it is income actually given by
the employer.
RETIREMENT BENEFITS
Generally, retirement benefits are tax-exempt
because they are mere provisions for the
person’s impending state of unemployment.
The following retirement benefits are tax-
exempt:
1. SSS or GSIS retirement pays;
2. Optional Retirement Plan - Retirement
pay due to old age under R.A. 7641,
subject to the following conditions:
a. The retirement program
approved by the BIR
Commissioner;
b. It must be a reasonable benefit
plan, i.e., it must be fair and
equitable for the benefit of all
employees.
c. The retiree should have been
employed for at least 10 years in
the said company;
d. The retiree should have been 50
years old at the time of retirement;
and
e. It should have been availed of for
the first time.
DBP Case – Tax free means, the company will
shoulder the taxes
NOTE: It does not include pre-terminated
annuity and gratuity programs (they are
taxable except if the employee is more than
60 years old).
the option to avail of:
a. Schedular tax rate (Sec. 24(A)(2)(a)
of the NIRC); or
b. 8% of the gross sales/gross receipts
and other non-operating income in
excess of ₱250,000 (No. 22, RMC No.
50-2018)
2. Self-employed individuals and/or
professionals with gross sales/gross
receipts and other non-operating
income more than ₱3M – Schedular tax
rate (Sec. 24(A)(2)(a), NIRC) only
Mixed Income Earners
is 1. All income from compensation –
schedular tax rate (Sec. 24(A)(2)(a), NIRC)
2. All income from business or practice of
profession
a. If gross sales and/or gross receipts
and other non-operating income
does not exceed ₱3M – Shall have the
option to avail of:
i. Schedular tax rate (Sec.
24(A)(2)(a), NIRC); or
ii. 8% of the gross sales/gross
receipts and other non-
operating income NOTE:
₱250,000 shall not be
deducted. (No. 22, RMC No.
50-2018)
b. If gross sales and/or gross receipts
and other non-operating income
exceeds ₱3M – schedular tax rate
(Sec. 24(A)(2)(a), NIRC)
Schedular

TERMINAL LEAVE PAYMENTS Graduated rates applicable to the income of

They are not taxable regardless of whether individuals
the recipient is a government or private
employee. INCOME BRACKET APPLICABLE
TAX RATE
Not over ₱250,000 Tax
TAXATION OF BUSINESS INCOME/INCOME exempt
FROM PRACTICE OF PROFESSION 20% of
but not
Over the
Purely Self-Employed and/or Professionals over
₱250,00 excess
₱400,00
0 over
1. Self-employed individuals and/or 0
₱10,000
professionals with gross sales/gross
Over but not 25% of
receipts and other non-operating
₱400,00 over ₱30,000 + the
income NOT more than ₱3M – shall have
0 ₱800,00 excess

UNIVERSITY OF SANTO TOMAS 158

2021 GOLDEN NOTES
 Taxation Law
0 over threshold;
₱30,000 4. Taxpayers who are subject to OPT, except
30% of those under Section 116;
but not the 5. Partners of a GPP since their distributive
Over share from the GPP is already net of costs
over ₱130,00 excess
₱800,00 + and expenses; and
₱2,000,0 0 over
0 6. Individuals enjoying income tax exemption
00 ₱800,00
0 such as those registered under the BMBEs,
etc./, since taxpayers are not allowed to
32% of
avail of double or multiple tax exemptions
but not the
Over under different laws, unless specifically
over ₱490,00 excess
₱2,000,0 + provided by law. (No. 16, RMC No. 50-2018)
₱8,000,0 0 over
00
00 ₱2,000,
What are the salient features of both the
000
graduated and the 8% income tax rates?
35% of (RMC 50-2018)
the
Over
₱2,410, excess Particulars Graduated 8% IT rates
₱8,000,0 +
000 over IT rates
00
₱8,000, Applicability In general, May be
000 applicable to availed only
(Sec. 24(A)(2), TRAIN) all by qualified
individuals individuals
8% option engaged in
the business
Self-employed individuals and/or professionals or practice
shall have the option to avail of an eight percent of
(8%) tax on gross sales or gross receipts and profession
other non-operating income in excess of two whose gross
hundred fifty thousand pesos (₱250,000) in lieu sales/receip
of the graduated income tax rates under ts and other
Subsection (A)(2)(a) of this Section and the non-
percentage tax under Section 116 of this Code. operating
(Sec. 24(A)(2)(b), NIRC) income does
now exceed
Base Amount of the 8% income tax rate ₱3,000,000
Basis of IT Net taxable Gross
The 8% income tax rate shall be based on the income sales/receip
gross sales/receipts and other non-operating ts, and other
income, net of returns and cash discounts. non-
However, if the individual earns purely from operating
business or practice of profession, he/she is income
entitled to the reduction of ₱250,000 before Allowed Allowable Allowed
computing for the 8% income tax. (No. 22, RMC deductions itemized reduction of
No. 50-2018) deductions only
or Optional ₱250,000
Those not qualified to avail of the 8% Income Standard from an
Tax Rate: Deduction individual
(OSD) whose
1. Purely compensation income earner; income
2. VAT-registered taxpayers, regardless of the comes
amount of gross sales/receipts and other purely from
non-operating income; business or
3. Non-VAT taxpayers whose gross practice of
sales/receipts and other non-operating profession
income exceeded the ₱3,000,000 VAT

159
 National Taxation
Business tax Percentage If qualified, 1. Itemized expenses; or
Tax or VAT not subject 2. 40% optional standard deduction.
to PT
Required 1. If If qualified, The GPP then distributes the net income to the
financial itemize no FS partners. The share of each partner, actually or
statements d: required constructively received, is taxable income of
each partner.
FS – if
gross is The partners cannot claim further deductions
less from their distributive share.
than
₱3M; The partners cannot avail of the 8% income tax
rate either because the distributive share from
Audited the GPP is already net of cost and expenses. But
FS – if if the partner also derives income from other
gross is sources distinct from the share in the GPP, he or
more she can claim either itemized deductions or OSD
than from the other source of income. (Ingles, 2018)
₱3M
TAXATION OF PASSIVE INCOME
2. If OSD,
no FS Refer to previous discussions on “Passive
require Investment Income”.
d
TAXATION OF CAPITAL GAINS
TAXATION OF PARTNERS IN A GENERAL
PROFESSIONAL PARTNERSHIP Refer to previous discussions on “Special rules
pertaining to income or loss from dealings in
A general professional partnership (GPP) shall property classified as capital asset”.
not be subject to the income tax. Persons
engaging in business as partners in a GPP shall Income from sale of shares of stock of a
be liable for income tax only in their separate Philippine corporation
and individual capacities.
Refer to previous discussions on “Special rules
For purposes of computing the distributive pertaining to income or loss from dealings in
share of the partners, the net income of the property classified as capital asset”.
partnership shall be computed in the same
manner as a corporation. Income from sale of real property situated in
the Philippines
Each partner shall report as gross income his
distributive share, actually or constructively Refer to previous discussions on “Special rules
received, in the net income of the partnership. pertaining to income or loss from dealings in
(Sec. 26, NIRC) property classified as capital asset”.
A GPP is not a taxable entity for income tax Income from sale, exchange, and other
purposes because it only acts as a “pass-through disposition of other capital assets
entity where its income is ultimately passed to
the partners. (Ingles, 2018) Refer to previous discussions on “Special rules
pertaining to income or loss from dealings in
Special Rule on GPPs and the choice of property classified as capital asset”.
deductions
NON-RESIDENT ALIENS ENGAGED
In computing a GPP’s distributable taxable IN TRADE OR BUSINESS
income, the GPP may avail of the following
deductions: Non-Resident Aliens Engaged in Trade or

UNIVERSITY OF SANTO TOMAS 160

2021 GOLDEN NOTES
 Taxation Law
Business are taxed on their income derived from
all sources within the Philippines in the same
manner as an individual citizen or a resident
alien individual, subject to the schedule rate of
0-35%, subject to the rule of reciprocity.
A non-resident alien individual who shall come
to the Philippines and stay therein for an
aggregate period of more than one hundred
eighty (180) days during any calendar year shall
be deemed a non-resident alien doing business in
the Philippines.
Q: Patrick is a successful businessman in the
United States and he is a sole proprietor of a
supermarket which has a gross sales of $10
million and an annual income of $3 million.
He went to the Philippines on a visit and, in a
party, he saw Atty. Agaton who boasts of
being a tax expert. Patrick asks Atty. Agaton:
if he (Patrick) decides to reacquire his
Philippine citizenship under RA 9225,
establish residence in this country, and open
a supermarket in Makati City, will the BIR tax
him on the income he earns from his U.S.
business? If you were Atty. Agaton, what
advice will you give Patrick? (2016 BAR)
A: I will advise Patrick that if he reacquires his
Philippine citizenship and establish residence
in the Philippines, he shall be considered as a
resident citizen subject to tax on incomes
derived from sources within or without
the Philippines. (Sec. 23(A), NIRC of 1997)
Consequently, the BIR could now tax him on his
income derived from sources without the
Philippines which is the income he earns from
his U.S. business. (Domondon)
NON-RESIDENT ALIENS NOT ENGAGED
IN TRADE OR BUSINESS
Non-Resident Aliens Not Engaged in Trade or
Business are taxed on their income received
from all sources within the Philippines as
interest, cash, and/or property dividends, rents,
salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or
other fixed or determinable annual or periodic
or casual gains, profits, and income, and capital
gains, a tax equal to twenty-five percent (25%)
of such income.
Capital gains realized from the sale of shares of
stock in any domestic corporation and real
161
property shall be subject to capital gains tax.
Refer to previous discussions on “Special rules
pertaining to income or loss from dealings in
property classified as capital asset”.
Q: Assuming X, a resident citizen, married
and has 4 qualified dependents. In 2009, he
earned a monthly compensation income of
₱25,000. In addition to his compensation
income, he earned ₱150, 000 as net income
from his retail business. How much is his
taxable income for the year 2009?
A: X’s taxable income for the year 2009 is
₱300,000 computed as follows:
Gross Compensation PhP300,000
Income (₱25,000 x 12)
Net Compensation Income 300,000
Add:
Net business 150,000
income
Taxable income PhP450,000
Q: How much is his income tax payable?
A: From the taxable income of ₱300,000, the
income tax payable is ₱65,000.
Over ₱250,000 ₱50,000+30% of the
but not over excess over ₱250,000
P500,000
NOTE: The tax rate used was the effective tax
rate in 2009.
Q: Assume that X is a non-resident alien not
engaged in trade or business. He earned
gross income in the amount of ₱1.5 million
from his one-night concert in the Philippines.
How much will he pay for his income tax?
A: X must pay ₱375,000 as income tax
(₱1,500,000 x 25%). Since X is a non-resident
alien not engaged in trade or business, his gross
income within the Philippines is subject to 25%
final tax and is not allowed any deductions.
ALIENS EMPLOYED BY REGIONAL
HEADQUARTERS, REGIONAL OPERATING
HEADQUARTERS, OFFSHORE BANKING
UNITS, AND PETROLEUM SERVICE
CONTRACTORS
 National Taxation
According to RR No. 8-2010 issued by the BIR,
preferential income tax rate under subsection
(C), (D) and (E) of Section 25 of the Tax Code
shall no longer be applicable to special aliens
(like those employed by regional headquarters,
regional operating headquarters, offshore
banking units, and petroleum service
contractors), without prejudice to preferential
tax rates under existing tax treaties. As such,
these special aliens are now subject to regular
income tax rate. (RR No. 8-2018)
INDIVIDUAL TAXPAYERS EXEMPT
FROM INCOME TAX
1. Minimum wage earner; and
2. Exemptions granted under international
agreements.
Minimum wage earner
A minimum wage earner is a worker in the
private sector paid the statutory minimum wage,
or to an employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-agricultural
sector where he/she is assigned. (Sec. 22(HH),
NIRC, as amended by R.A. 9504)
Minimum wage earners shall be exempt from
the payment of income tax on their taxable
income. Holiday pay, overtime pay, night shift
differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt
from income tax. (Sec. 24(A)(2), NIRC, as
amended by R.A. 9504)
However, minimum wage earners receiving
“other benefits” exceeding P82,000 limit shall be
taxable on the excess benefits.
Statutory Minimum Wage
It refers to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as
defined by the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor and
Employment (DOLE). (Sec. 22(GG), NIRC, as
amended by R.A. 9504)
NOTE: Effective November 22, 2018 the daily
minimum wage rate in NCR for non-agricultural
sector is P537.00 (P512.00 Basic Wage with
COLA + Basic Wage Increase). (National Wages
and Productivity Commission Per Wage Order No.
NCR-22Z)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Q: R.A. 9504 was approved and took effect on
6 July 2008. The law granted MWEs
exemption from payment of income tax on
their minimum wage, holiday pay, overtime
pay, night shift differential pay and hazard.
On 24 September 2008, the BIR issued RR 10-
2008 implementing the provisions of R.A.
9504. Decide the following:
a. Whether an MWE is exempt for the entire
taxable year 2008 or from 6 July 2008
only;
b. Whether an MWE who becomes non-
MWE during the year still qualifies for
the exemption;
c. Whether Sections 1 and 3 of RR 10-2008
are consistent with the law in providing
that an MWE who receives other benefits
in excess of the statutory limit of P30,000
(Now at P90,000) is no longer entitled to
the exemption provided by R.A. 9504.
A:
a. The MWE is exempt for the entire taxable
year 2008. As it stands, the calendar year
2008 remained as one taxable year for an
individual taxpayer. Therefore, RR 10-2008
cannot declare the income earned by a
minimum wage earner from 1 January 2008
to 5 July 2008 to be taxable and those
earned by him for the rest of that year to be
tax-exempt. To do so would be to contradict
the NIRC and jurisprudence, as taxable
income would then cease to be determined
on a yearly basis.
NOTE: The above ruling that the MWE
exemption is available for the entire taxable
year 2008 is premised on the fact of one's
status as an MWE during the entire year of
2008.
b. When the wages received exceed the
minimum wage anytime during the taxable
year, the employee loses the MWE
qualification. Therefore, wages become
taxable as the employee ceased to be an
MWE. But the exemption of the employee
from tax on the income previously
earned as an MWE remains. The
improvement of one's wage cannot justly
operate to make the employee liable for tax
on the income earned as an MWE.
c. Sections 1 and 3 of RR 10-2008 add a
requirement not found in the law by
162
 Taxation Law
effectively declaring that an MWE who
receives other benefits in excess of the
statutory limit of P30,000 is no longer A corporation for income tax purposes shall:
entitled to the exemption provided by R.A.
9504. 1.
R.A. 9504 is explicit as to the coverage of the
exemption: the wages that are not in excess of
the minimum wage as determined by the wage
boards, including the corresponding holiday,
overtime, night differential and hazard pays.
The minimum wage exempted by R.A. 9504 is
distinct and different from other payments 2.
including allowances, honoraria, commissions,
allowances, or benefits that an employer may
pay or provide an employee.
The treatment of bonuses and other benefits
that an employee receives from the employer in
excess of the P30,000 (now at 90,000) is taxable.
The treatment of this excess cannot operate to
disenfranchise the MWE from enjoying the
exemption explicitly granted by R.A. 9504.
(Soriano v. Secretary of Finance, G.R. Nos. 184450,
184508, 184538 & 185234, January 24, 2017)
Exemptions granted under international
agreements
Those employed by Foreign
Embassies/Diplomatic Missions
Only the following shall be exempt from
Philippine income tax:
1. Diplomatic agents who are not nationals or Kinds of corporation under the NIRC
permanent residents of the Philippines;
2. Members of family of the diplomatic agent 1.
forming part of his/her household who are
not Philippine nationals;
3. Members of the administrative and
technical staff of the mission together with
members of their families forming part of
their respective households who are not 2.
nationals or permanent residents of the
Philippines;
4. Members of the service staff of the mission
who are not nationals or permanent
residents of the Philippines; and
5. Private servants of members of the mission 3.
who are not nationals or permanent
residents of the Philippines. (RMC No. 31-
2013 citing Vienna Convention on
Dimplomatic Relations)
163
INCOME TAX ON CORPORATIONS
Include:
a. Partnerships;
b. Joint stock companies;
c. Joint accounts (cuentas en
participacion);
d. Associations; and
e. Insurance companies.
Not include:
a. General Professional Partnerships
(GPP)
NOTE: The distributive share of each
partner in a general professional
partnership shall form part of partner’s
gross income in its individual tax
returns subject to graduated income tax
rates.
b. A joint venture or consortium formed
for purposes of undertaking
construction projects
c. A joint venture or consortium formed
for the purpose of engaging in
petroleum, coal, geothermal and other
energy operations pursuant to an
operating or consortium agreement
under a service contract with the
government (Sec. 22 (B), NIRC)
Domestic Corporations (DC) – a corporation
created or organized in the Philippines or
under its laws and is liable for its income
from sources within and without (Sec. 22
(C), NIRC)
Resident Foreign Corporation (RFC) – a
corporation which is not domestic and is
engaged in trade or business in the
Philippines and is liable for income from
sources within the Philippines
Non-resident Foreign Corporation (NRFC) –
a corporation which is not domestic and not
engaged in trade or business in the
Philippines and is liable for income from
sources within and without
 National Taxation
4. Special Types of Corporations – those
corporations subject to different tax rates
a. Special RFC
i. Domestic depositary banks (foreign
currency deposit units)
ii. International carriers
iii. Offshore banking units
iv. Regional or Area Headquarters and
Regional Operating Headquarters of
multinational companies
b. Special NRFC
i. Non-resident cinematographic film
owners, lessors or distributors
ii. Non-resident owners or lessors of
vessels chartered by Philippine
nationals
iii. Non-resident lessors of aircraft,
machinery and other equipment
Q: Weber Realty Company, which owns a 3-
hectare land in Antipolo entered into a JOINT
VENTURE AGREEMENT (JVA) with Prime
Development Company for the development
of said parcel of land. Weber Realty as the
owner of the land contributed the land to the
Joint Venture and Prime Development
agreed to develop the same into a residential
subdivision and construct residential houses
thereon. They agreed that they would divide
the lots between them.
Does the JVA entered into by and between
Weber and Prime create a separate taxable
entity? (2007 BAR)
Kinds of corporate taxpayers and their rates
(2008 BAR)
A: NO. Since the arrangement between Weber
Realty Co. and Prime Development Co. is for the
purpose of undertaking a construction project,
there is no separate taxable entity pursuant to
Sec. 22 (B) of the NIRC.
The term 'corporation' shall include
partnerships, no matter how created or
organized, joint-stock companies, joint accounts
(cuentas en participacion), association, or
insurance companies, but does not include
general professional partnerships and a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
Government. (Sec. 22(B), NIR)

TAXABILITY OF INCOME
DERIVED FROM
SOURCES
CORPORATE TAXPAYER IS A:
Outside
Within the
the TAX BASE RATE
Philippines
Philippines
DOMESTIC CORPORATION
Net taxable
✓ ✓ 30%
income
RESIDENT FOREIGN CORPORATION
Net taxable
✓ X 30%
income
NON-RESIDENT FOREIGN CORPORATION
✓ X GROSS income 30%
SPECIAL DOMESTIC CORPORATION
1. Proprietary educational
institutions
Net taxable
XPN: Those whose gross ✓ ✓ 10%
income
income from unrelated
sources exceeds 50% of
their total gross income,

UNIVERSITY OF SANTO TOMAS 164

2021 GOLDEN NOTES
 Taxation Law
which shall be subject to
30% tax on the entire
taxable income
Net taxable
2. Non-profit hospitals ✓ ✓ 10%
income
3. Government-owned or
controlled corporations
including the PCSO
Net taxable
✓ ✓ 30%
income
P; Those exempt GOCCs
(GSIS, SSS, PHIC, and the
local water districts)
SPECIAL RESIDENT FOREIGN CORPORATION
2 ½% of Philippine
1. International carrier ✓ X Gross revenue
gross billings
interest
2. Offshore banking units ✓ X 10% final tax
income
3. Branch profit remittances
total profits 15% of the total
applied or profits applied or
XPN: those registered with ✓ X
earmarked for earmarked for
PEZA (they have their own remittance remittance
tax rules as incentives)
4. Regional or area
✓ X N/A Tax-exempt
headquarters
10%
5. Regional operating taxable
✓ X
headquarters income
SPECIAL NON-RESIDENT FOREIGN CORPORATION
1. Cinematographic film 25% of gross
✓ X gross income
owner/lessor/distributor income
2. Lessor of machinery,
gross rentals 7 ½% of gross
equipment, aircraft and ✓ X
or fees income
others
gross rentals,
3. Lessor of vessels chartered 4 1/2% of gross
✓ X lease or
by Philippine nationals income
charter fees

DOMESTIC CORPORATIONS - 2% of gross income, if MCIT applies

DC is a corporation created or organized in the
Philippines or under its laws and is liable for its
income from sources within and without. (Sec.
22 (C), NIRC)
Outline of taxes imposed on DC
3. Gross income tax (Optional corporate income
tax)
- 15% of gross income, if qualified
4. Improperly Accumulated Earnings Tax
- 10% of improperly accumulated earnings

1. Normal corporate income tax (NCIT) 5. Final tax on passive income

- 30% of taxable income from all sources
within and without the Philippines TAXATION – IN GENERAL

2. Minimum corporate income tax (MCIT) NORMAL CORPORATE INCOME TAX (NCIT)

165
 National Taxation
OR REGULAR CORPORATE INCOME TAX Cost of Goods Sold (COGs) for a Service
(RCIT) Concern (Cost of Services)

An income tax of thirty percent (30%) shall be This shall mean all direct costs and expenses
imposed upon the taxable income derived necessarily incurred to provide the services
during the taxable year from all sources within required by the customers and clients, including
and without the Philippines for DC. salaries and employee benefits of personnel,
consultants and specialists directly rendering
Illustration: the service, and cost of facilities directly utilized
in providing the service, such as depreciation or
Gross Sales Ph₱ xxx rental of equipment used and cost of supplies.
Less:
Sales Returns/ MINIMUM CORPORATE INCOME TAX (MCIT)
(xxx)
Allowances/ Discounts
Cost of Goods Sold/Cost Concept and rationale of MCIT
(xxx)
of Services
Gross Income xxx MCIT is a new concept introduced by R.A. 8424
Less: to the Philippine taxation system. It came about
Allowable Deductions (xxx) as a result of the perceived inadequacy of the
Taxable Income xxx self-assessment system in capturing the true
Multiply: income of corporations.
Tax Rate 30%
NCIT due Ph₱ xxx Congress intended to put a stop to the practice
of corporations which, while having large
Gross Income turnovers, report minimal or negative net
income resulting in minimal or zero income
It includes all items enumerated under Sec. taxes year in and year out, through under-
32(A) of the NIRC, except income exempt from declaration of income or over-deduction of
income tax and income subject to final expenses otherwise called tax shelters. The MCIT
withholding tax. (RR No. 12-2007) serves to put a cap on such tax shelters.

Cost of Goods Sold (COGs) in general
It includes all business expenses directly
incurred to produce the merchandise and bring
them to their present location and use.
Cost of Goods Sold (COGS) for Trading or
Merchandising
As a tax on gross income, it prevents tax evasion
and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations
of deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.
(Chamber of Real Estate and Builders’
Association, Inc. v. Hon. Executive Secretary, G.R.
No. 160756, March 9, 2010)

This shall include the invoice cost of the goods Q: What is the purpose of MCIT? (2001 BAR)
sold, plus import duties and freight in
transporting the goods to the place where they A: The imposition of the MCIT is designed to
are actually sold, including insurance while the forestall the prevailing practice of corporations
goods are in transit. of over claiming deductions in order to reduce
their income tax payments.
Cost of Goods Sold (COGS) for a
Manufacturing Concern Nature of MCIT

This shall include all costs of production of
finished goods, such as raw materials used,
direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs
incurred to bring the raw materials to the
factory or warehouse.
The MCIT is equal to 2% of the gross income of
the corporation at the end of the taxable quarter,
except income exempt from income tax and
income subject to final withholding tax.
Being a minimum income tax, a corporation
should pay the MCIT whenever its normal

UNIVERSITY OF SANTO TOMAS 166

2021 GOLDEN NOTES
 Taxation Law
corporate income tax (NCIT) is lower than the corporations which are subject to the 30%
MCIT, or when the firm reports a net loss in its normal corporate income tax; hence,
tax return. Conversely, the NCIT is paid when it corporations which are subject to special
is higher than the MCIT. (Dimaamapo, 2015) corporate taxes do not fall within the coverage of
Therefore, the taxable due for the taxable year the MCIT.
will be NCIT (30% of taxable income) or MCIT
(2% of gross income), whichever is HIGHER. The minimum corporate income tax is a proxy
for the normal corporate income tax of 30%, not
Illustration: the special corporate taxes paid by a
corporation. For instance, a proprietary
1. A domestic corporation in its 4th year of educational institution may be subject to a
operations had a gross income of regular corporate income tax of 10% (depending
₱300,000 and net taxable income of on its dominant income), but it is exempt from
₱100,000. How much is the income tax due the imposition of MCIT because the latter is not
for the year? intended to substitute special tax rates. So is
with PEZA enterprises, CDA enterprises etc.
MCIT (₱300,000 x ₱6,000
2%) Q: When shall the MCIT commence to be
NCIT (₱100,000 x ₱30,000 imposed on a corporation?
30%)
Income tax due – ₱30,000 A: The MCIT is imposed beginning on the fourth
NCIT (whichever is taxable year immediately following the year in
higher) which the corporation commenced its business
operations. For purposes of the MCIT, the
2. A domestic corporation in its 4th year of taxable year in which business operations
operations had a gross income of commenced shall be the year in which the
₱400,000 and net taxable income of domestic corporation registered with the BIR,
₱20,000. How much is the income tax due regardless of whether the corporation is using
for the year? the calendar year or fiscal year.

MCIT (₱400,000 x 2%) ₱8,000 Firms which were registered with BIR in 1994
NCIT (₱20,000 x 30%) ₱6,000 and earlier years shall be covered by the MCIT
Income tax due – MCIT ₱8,000 beginning January 1, 1998. (Sec. 27(E)(1), NIRC;
(whichever is higher) RR No. 9-98; Dimaampao,. 2015) ; (Manila
Banking Corporation v. CIR, G.R. No. 168118)
Q: What is the gross income for purposes of
computing MCIT? NOTE: Recognizing the birth pangs of
A: businesses and the reality of the need to recoup
1. As to sale of goods – it shall mean gross sales initial major capital expenditures, MCIT
less sales returns, discounts and allowances commences only on the 4th taxable year.
and cost of goods sold.
2. As to sale of services – it shall mean gross Q: When is MCIT reported and paid?
receipts less sales returns, allowances,
discounts and cost of services. A: The MCIT shall be paid in the same manner
prescribed for the payment of the normal
Imposition of MCIT corporate income tax which is on a quarterly
and on a yearly basis. The taxpayer shall pay
1. If taxable income is zero; the MCIT whenever it is greater than the regular
2. If taxable income is negative; or or normal corporate income tax.
3. If MCIT is greater than the NCIT due (Sec.
27(E), NIRC) The MCIT shall likewise apply to the quarterly
corporate income tax but the final comparison
Coverage of the MCIT (2001 BAR) between the NCIT payable by the corporation
and the MCIT shall be made at the end of the
The MCIT covers domestic and resident foreign taxable year. The payable or excess payment in

167
 National Taxation
the Annual Income Tax Return shall be
computed taking into consideration corporate
income tax payment made at the time of filing of
quarterly corporate income tax return, whether
this be MCIT or normal income tax. (RR 12-2007)
Q: Can MCIT be allowed as a deduction from
gross income?
A: No. Since MCIT is an estimate of the normal
income tax, it cannot be claimed as a deduction.
Q: CREBA assails the constitutionality of
MCIT on the contention that it violates due
process. Is the imposition of MCIT
unconstitutional?
A: No, the imposition of MCIT is not violative of
due process for the following reasons:
1. MCIT is imposed on gross income and not on
capital. Thus, it is not arbitrary or
confiscatory.
2. It is not an additional tax imposition but is
imposed in lieu of normal net income tax
and only if said tax is suspiciously low.
3. There is no legal objection to a broader tax
base or taxable income resulting from the
elimination of all deductible items and, at
the same time, reduction of the applicable
tax rate. In as much as deductions are a
matter of legislative grace, Congress has the
power to condition, limit or deny deductions
from gross income in order to arrive at the
net that it chooses to tax. (CREBA, Inc. v.
Romulo, G.R. No. 160756, March 9, 2010)
Q: KKK Corp. secured its Certificate of
Incorporation from the Securities and
Exchange Commission on June 3, 2013. It
commenced business operations on August
12, 2013. In April 2014, Ms. J, an employee of
KKK Corp. in charge of preparing the annual
income tax return of the corporation for
2013, got confused on whether she should
prepare payment for the regular corporate
income tax or the minimum corporate
income tax.
a. As Ms. J's supervisor, what will be your
advice?
b. What are the distinctions between
regular corporate income tax and
minimum corporate income tax? (2015
BAR)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A:
a. As Ms. J’s supervisor, I will advise that KKK
Corp. should prepare payment for the
regular corporate income tax and not the
minimum corporate income tax (MCIT)
Under the NIRC, MCIT is only applicable
beginning the 4th taxable year following the
commencement of business operation. (Sec.
27(E)(1), NIRC)
b. The distinctions between regular corporate
income tax and the minimum corporate
income tax are the following:
i. As to taxpayer: Regular corporate
income tax applies to all corporate
taxpayers while minimum corporate
income tax applies to domestic
corporations and resident foreign
corporations.
ii. As to tax rate: Regular corporate
income tax is 30% while minimum
corporate income tax is 2%.
iii. As to tax base: Regular corporate
income tax is based on the net taxable
income while minimum corporate
income tax is based on gross income.
iv. As to period of applicability: Regular
corporate income tax is applicable once
the corporation commenced its business
operation, while minimum corporate
income tax is applicable beginning on
the 4th taxable year following the
commencement of business operations.
v. As to imposition: The minimum
corporate income tax is imposed
whenever it is greater than the regular
corporate income tax o the corporation.
(Sec. 27 (A) and (E), NIRC; RR No. 998)
Carry-forward of the excess of MCIT
1. The excess of MCIT over the NCIT shall be
carried forward on an annual or quarterly
basis.
2. The excess shall be credited against the
NCIT due for the three (3) immediately
succeeding taxable years.
3. Any excess not credited in the next three
years shall be forfeited.
4. Carry forward (annually or quarterly) is
possible only if MCIT is greater than NCIT.
5. The maximum amount that can be credited
is only up to the amount of the NCIT, there
can be no negative NCIT.
Illustration:
168
 Taxation Law
A domestic corporation had the following data 3. Legitimate Business Reverses – include
on computations of the NCIT and MCIT for five substantial losses due to fire, theft or
years: embezzlement or for other economic
reason, as determined by the Secretary of
YEAR YEAR YEAR YEAR YEAR Finance (Sec. 27 (E)(3), NIRC; RR No. 9-98,
4 5 6 7 8 Sec. 2.27 (E) (4)(b,c,d))
MCIT 80k 50k 30k 40k 35k
NCIT 20k 30k 40k 20k 70k MCIT Limitations
Excess: (60k) (20k) (20k)
1. MCIT does not apply on the first 3 years of
NCIT 40k 70k business operation of a corporation.
higher 2. MCIT is not applicable to DC or RFC not
subject to NCIT.
Less: a. Domestic proprietary educational
Excess institutions subject to 10% tax.
of b. Domestic non-profit hospital subject to
MCIT 10% tax.
c. Domestic depository banks under the
expanded foreign currency deposit
From (40k)
system otherwise known as FCDUs.
Year 4
d. Resident foreign international carrier
From (20k)
subject to tax at 2 ½% of their Gross
Year 5
Philippines Billings.
From (20k)
e. Resident foreign offshore banking units.
Year 7
f. Resident foreign regional operating
TAX 80k 50k 0 40k 30k
headquarters.
DUE:
g. Firms enjoying special income tax rate
under the PEZA Law (R.A. 7916), Bases
NOTE: While only 40k out of ₱60k excess MCIT
Conversion and Development Act of
in Year 4 was used in Year 6, the unused ₱20k
1992 (R.A. 7227) and those enjoying
cannot be used because Year 8 was beyond three
income tax holiday incentives (RR 9-98,
years from Year 4.
Sec. 2.27 (E)(8)), However, the related
income from unregistered activities (or
Suspension of the imposition of MCIT
those not covered by the tax incentives)
is subject to MCIT.
Since certain businesses may be incurring
genuine repeated losses, the law authorizes the
3. For domestic corporation, whose operations
Secretary of Finance, upon recommendation of
are partly covered by NCIT and partly
the BIR, to suspend the imposition of MCIT if a
covered under a special income tax system,
corporation suffers losses due to any of the
MCIT shall apply only on operations covered
following:
by NCIT.
1. Prolonged Labor Dispute – losses arising
4. For resident foreign corporation, MCIT is
from a strike staged by the employees
applicable only to gross income from
which lasted for more than 6 months within
sources within the Philippines.
a taxable period and which has caused the
temporary shutdown of business
5. When, by authority of the Secretary of
operations;
Finance, the imposition of the MCIT is
suspended upon submission of proof by the
2. Force Majeure – a cause due to an
applicant corporation that the corporation
irresistible force as by ‘Act of God’ like
sustained substantial losses:
lightning, earthquake, storm, flood and the
a. on account of a prolonged labor
like, and shall also include armed conflicts
dispute;
like war or insurgency; or
b. because of “force majeure”; or

169
 National Taxation
c. because of legitimate business Q: What consists of “Improperly Accumulated
reverses; Earnings”?

Applicability of MCIT where a corporation is A: These are the profits of a corporation that are
governed party under NCIT and partly under accumulated, instead of distributing them to its
a special income tax system shareholders, for the purpose of avoiding the
income tax with respect to its shareholders or
In the case of a domestic corporation whose the shareholders of another corporation. (RR 2-
operations or activities are partly covered by 2001, Sec. 2)
the normal income tax system (subject to 30%
NCIT) and partly covered under a special Formula:
income tax system, the MCIT will apply only on
operations covered by the regular income tax
system. Taxable Income during the
Ph₱ xxx
current year
For example, if a BOI-registered enterprise has a Add:
"registered" and an "unregistered" activity, the Income exempt
xxx
MCIT shall apply to the unregistered activity. from tax
(RR No. 9-1998) Income excluded
xxx
from gross income
TAXATION OF PASSIVE INCOME Income subject to
xxx
final tax
Refer to previous discussions on “Passive Income” NOLCO deducted xxx
and “Dealings in Property.” Less:
Income tax
Refer to previous discussions on “Passive paid/payable (xxx)
Investment Income” and “Special rules pertaining during the year
to income or loss from dealings in property Dividends actually
classified as capital asset”. or constructively (xxx)
paid
TAXATION OF CAPITAL GAINS Amount reserved
for the reasonable
(xxx)
Refer to previous discussions on “Passive needs of the
Investment Income” and “Special rules pertaining business
to income or loss from dealings in property Improperly Accumulated
classified as capital asset.” xxx
Taxable Income
Multiply:
IMPROPERLY ACCUMULATED EARNINGS TAX 10%
Improperly Accumulated
Domestic corporations as defined under the Tax Ph₱ xxx
Earnings Tax (IAET)
Code and which are classified as closely-held
corporations are subject to 10% improperly Touchstone of the liability
accumulated earnings tax on their improperly
accumulated earnings. (Sec. 29(A), NIRC) It is the purpose behind the accumulation of the
income and not the consequences of the
Closely-held Corporations accumulation. Thus, if the failure to pay
dividends is due to some other causes, such as
These are corporations, at least 50% in value of the use of undistributed earnings and profits for
the outstanding capital stock of which or at least the reasonable needs of the business, such
50% of the total combined voting power of all purpose would not generally make the
classes of stock entitled to vote is owned directly accumulated or undistributed earnings subject
or indirectly by or not more than 20 individuals. to the tax. However, if there is a determination
(Sec. 4, RR No. 2-2001) that a corporation has accumulated income
beyond the reasonable needs of the business, IAET
NOTE: Corporations outside the above definition shall be imposed. (Dimaampao., 2015)
are considered publicly held corporations.

UNIVERSITY OF SANTO TOMAS 170

2021 GOLDEN NOTES
 Taxation Law
Rationale: IAET is imposed in the nature of a
penalty to the corporation for the improper
accumulation of its earnings and as a form of
deterrent to the avoidance of tax upon
shareholders who are supposed to pay
dividends tax on the earning distributed to them
by the corporation. If the earnings and profits
were distributed, the shareholders would be
liable for tax on dividends. (Commissioner v.
Ayala Securities Corp., 101 SCRA 231)
Q: How can the “reasonable needs” of the
business be determined in order to justify an
accumulation of earnings? (2010 BAR)
A: To determine the “reasonable needs” of the
business in order to justify an accumulation of
earnings, the Courts of the United States have
invented the so-called “Immediacy Test” which
construed the words “reasonable needs of the
business” to mean the immediate needs of the
business, and it was generally held that if the
corporation did not prove an immediate need
for the accumulation of the earnings and profits,
the accumulation was not for the reasonable
needs of the business, and the penalty tax would
apply. (Manila Wine Merchants, Inc. v CIR, G.R.
No. 26145, February 20, 1984)
In order to determine whether profits are
accumulated for the reasonable needs, it must
be shown that the controlling intention of the
taxpayer is manifest at the time of accumulation,
not subsequently, which are mere afterthoughts.
Furthermore, the accumulated profits must be
used within a reasonable time after the close of
the taxable year. (Cyanamid Philippines, Inc. v.
CA, G.R. No. 108067, January 20, 2000)
NOTE: Once the profit has been subjected to
IAET, the same shall no longer be subjected to
IAET in later years even if not declared as
dividend. Notwithstanding the imposition of the
IAET, profits which have been subjected to IAET,
when finally declared as dividends shall
nevertheless be subject to tax on dividends
imposed under the NIRC, except in those
instances where the recipient is not subject
thereto. (Sec. 5, RR No. 2-2001)
Q: What constitute accumulation of earnings
for the reasonable needs of the business?
A:
171
1. Allowance for the increase in accumulation
of earnings up to 100% of the paid-up
capital.
The basis of the 100% threshold of retention
(considered within the reasonable needs of
the business) shall be the paid-up capital or
the amount contributed to the corporation
representing the par value of the shares of
stock. Any excess capital over and above the
par (APIC/Premium) shall be excluded.
(RMC No. 35-2011)
2. Earnings reserved for definite corporate
expansion approved by the Board of
Directors or equivalent body.
3. Reserved for building, plant or equipment
acquisition as approved by the Board of
Directors or equivalent body.
4. Reserved for compliance with any loan
covenant or pre-existing obligation
5. Earnings required by law or applicable
regulations to be retained.
6. In case of subsidiaries of foreign
corporations in the Philippines, all
undistributed earnings intended or reserved
for investments within the Philippines. (Sec.
3, RR No. 2-2001)
Prima facie instances of accumulation of
profits beyond the reasonable needs of a
business
1. Investment of substantial earnings and
profits of the corporation in unrelated
business or in stock or securities in
unrelated business.
2. Investment in bonds and other long-term
securities.
3. Accumulation of earnings in excess of 100%
of paid-up capital, not otherwise intended
for the reasonable needs of the
business .(Sec. 7, RR No. 2-2001)
Prima facie evidence to show purpose of
accumulation is Tax evasion or Tax
avoidance
The fact that –
1. Any corporation is a mere:
 National Taxation
a. Holding company – one having
practically no activities except holding
property and collecting income
therefrom or investing therein; or
b. Investment (mutual fund) company –
when activities of the company further
include or consist substantially of
buying and selling stocks, securities,
real estate, or other investment
properties so that income is derived not
only from investment yield but also
from profits upon market fluctuations.
2. The earnings or profits of a corporation are
permitted to accumulate beyond the
reasonable needs of the business (Sec. 7, RR
No. 2-2001)
IAET not applicable to the following:
1. Publicly-held corporations (Sec. 29(B)(2),
NIRC)
2. Banks and other non-bank financial
intermediaries
3. Insurance companies
4. Publicly-held corporations
5. Taxable partnerships
6. General professional partnerships
7. Non-taxable joint ventures
8. Enterprises duly registered with the
Philippine Economic Zone Authority under
R.A. 7916, and enterprises registered
pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227,
as well as other enterprises duly registered
under special economic zones declared by
law which enjoy payment of special tax rate
on their registered operations or activities
in lieu of other taxes, national or local (Sec.
4, RR No. 2-2001)
PROPRIETARY EDUCATIONAL INSTITUTIONS
AND NON-PROFIT HOSPITALS
It is any private school maintained and
administered by private individuals or groups
with an issued permit to operate from the
Department of Education (DepEd) or the
Commission on Higher Education (CHED), or the
Technical Education and Skills Development
Authority (TESDA), as the case may be, in
accordance with existing laws and regulations.
They are not tax-exempt but are rather taxed at
a preferential rate of 10% on their taxable
income, except on certain passive incomes which
are subject to final tax.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
10% Preferential Rate
Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit
hospitals as charitable institutions under Section
30(E) and (G) The effect of the introduction of
Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary
non-profit educational institutions and
proprietary non-profit hospitals, among
institutions covered by Section 30, to the 10%
preferential rate under Section 27(B) instead of
the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section
27(A)(1)
The only qualifications for hospitals are that
they must be (1) proprietary; and (2) non-
profit. “Proprietary” means private, following
the definition of a “proprietary educational
institution” as “any private school maintained and
administered by private individuals or groups”
with a government permit. “Non-profit” means
no net income or asset accrues to or benefits any
member or specific person, with all the net
income or asset devoted to the institution’s
purposes and all its activities conducted not for
profit. (CIR v. St. Luke’s Medical Center, Inc., G.R.
No. 195909, 195960, September 26, 2012)
Predominance test
If the gross income from unrelated
trade/business/other activity exceeds 50% of
the total gross income from all sources, the
entire taxable income of the proprietary
educational institution shall be subject to the
regular corporate tax rate of 30%.
Unrelated trade/business/activity of a
proprietary educational institution
The trade, business or other activity of a
proprietary educational institution is unrelated
when the conduct of which is not substantially
related to the exercise or performance by such
educational institution of its primary purpose or
function.
NOTE: Related activities include auxiliary
activities such as school-owned canteen,
cafeteria, dormitory and bookstore within the
school premises. (BIR Ruling 237-87, December
16, 1987)
Difference in the tax treatment between a
172
 Taxation Law
proprietary educational institution and a business or business or benefit of any
non-stock non-profit educational institution other activity other activity member,
exceeds 50% does not organizer,
Proprietary educational institutions which are of total gross exceed 50% officer or any
non-profit shall pay a tax of 10% on their income from of total gross specific
taxable income, except on certain passive all sources. income from purpose.
incomes which are subject to final tax: Provided, all sources.
that if the gross income from unrelated trade, Hospitals and
business or other activity exceeds 50% of the educational
total gross income derived from all sources, the institutions
entire taxable income of the proprietary claiming to be
educational institution shall be subject to the proprietary
regular corporate tax rate of 30%. (Sec. 27 (B), non-profit but
NIRC) do not meet
the definition
A non-stock non-profit educational institution is thereof. (Sec.
exempt from tax on its revenues and assets 27(B), NIRC)
actually, directly and exclusively used for
educational purposes. (Sec. 30, NIRC) (Sec. 4(3), Q: De La Salle University leases out a portion
Art. XIV, 1987 Constitution) of its property to private concessionaires,
i.e., commercial canteens and bookstores.
Non-Profit Hospitals The lease payments were factually proven to
be used for educational purposes.
A nonstock-nonprofit hospital that is operated
for charitable and social welfare purposes is a. Is the land owned by De La Salle
exempt from income tax under Section 30 (E) University subject to real property tax?
and (G) of the NIRC. However, as provided in St. b. Are the lease payments received by De
Luke's Medical Center, Inc. vs CIR (2011), the La Salle University subject to income
nonstock-nonprofit hospital must satisfy the tax?
following requisites in order to be entitled to c. Are the lease payments received by De
the exemption from income tax: La Salle University subject to VAT?
(2016 BAR)
1. It is a nonstock corporation;
2. It is operated exclusively for charitable A:
purposes; and a. YES. The leased portion of the building may
3. No part of its net income or asset shall be subject to real property tax. The test of
belong to or inure to the benefit of any exemption from taxation is the use of the
member, organizer, officer or any specific property for purposes mentioned in the
person. Constitution. The lease of a portion of a
school building for commercial purposes,
TAX ON PROPRIETARY NON-PROFIT removes such asset from the property tax
EDUCATIONAL INSTITUTIONS AND exemption granted under the Constitution.
NON-PROFIT HOSPITALS There is no exemption because the asset is
not used actually, directly and exclusively
30% 10% Exempt for educational purposes. The commercial
Private, non- Private, non- Organized use of the property is also not incidental to
profit profit and operated and reasonably necessary for the
hospitals and hospitals and exclusively accomplishment of the main purpose of a
proprietary proprietary for charitable university, which is to educate its students.
educational educational purposes, and (Abra Valley College, Inc. v. Aquino, 245 Phil.
institutions institutions no part of its 83; 162 SCRA 106 (1988), cited in CIR vs. De
whose gross whose gross net income or La Salle University, Inc., G.R. No. 196596,
income from income from asset shall November 9, 2016)
unrelated unrelated belong to or
trade, trade, inure to the b. &c.

173
 National Taxation
NO. If the university actually, directly and
exclusively uses for educational purposes
the revenues earned from the lease of its
school building, such revenues shall be
exempt from taxes and duties. The tax
exemption no longer hinges on the use of
the asset from which the revenues were
earned, but on the actual, direct and
exclusive use of the revenues for
educational purposes. To avail of the
exemption, the taxpayer must factually
prove that it used actually, directly and
exclusively for educational purposes the
revenues or income sought to be exempted.
In sum, the crucial point of inquiry then is on
the use of the assets or on the use of the
revenues. These are two things that must be
viewed and treated separately. (CIR vs. De La
Salle University, Inc., G.R. No. 196596, November
9, 2016)
DONOR’S TAX, ESTATE TAX, VAT
AND OTHER TAXES
Art. XIV, Sec. 4(4) which provides that “all
grants, endowments, donations, or
contributions used actually, directly and
exclusively for educational purposes shall be
exempt from tax” is not self-executing as it
requires legislative enactment providing certain
conditions for exemption. However, since Sec.
101(a)(3) of NIRC under Donor’s tax declared
its exemption, then these donations are tax
exempt. (Dimaampao, 2015)
Under the Estate Tax, non-stock, non-profit
educational institutions are not included under
the exempt transfers mortis causa, hence, they
are not tax exempt.
Pursuant to Section 109(H), private educational
institutions shall be exempt from VAT, provided
they are duly accredited by DepEd, CHED or
TESDA. However, this does not extend to other
activities involving the sale of goods and
services.
However, they shall be subject to internal
revenue taxes on income from trade, business
or other activity, the conduct of which is not
related to the exercise or performance of their
educational purposes or functions. (Dimaampao,
2015)
Q: Under Art. XIV, Sec. 4(3) of the 1987
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Constitution, all revenues and assets of non-
stock, non-profit educational institutions,
used actually, directly and exclusively for
educational purposes, are exempt from taxes
and duties. Are incomes derived from
dormitories, canteens and bookstores as
well as interest income on bank deposits and
yields from deposit substitutes
automatically exempt from taxation? (2000
BAR)
A: NO. The interest income on bank deposits
and yields from deposit substitutes are not
automatically exempt from taxation. There must
be a showing that the incomes are used actually,
directly, and exclusively for educational
purposes.
The income derived from dormitories, canteens
and bookstores are not also automatically
exempt from taxation. There is still a
requirement for evidence to show actual, direct
and exclusive use for educational purposes.
NOTE: The 1987 Constitution does not
distinguish with respect to the source or origin
of the income. The distinction is with respect to
the use which should be actual, direct and
exclusive for educational purposes. Where the
Constitution does not distinguish with respect
to source or origin, the NIRC should not make
distinctions. (Mamalateo, 2008)
TAX ON PROPRIETARY NON-PROFIT
EDUCATIONAL INSTITUTIONS AND
PROPRIETARY NON-PROFIT HOSPITALS
Section 27(b) of the NIRC did not remove the
exemption from income tax of proprietary non-
profit hospitals as charitable institutions. The
provision merely introduced the preferential
income tax rate of 10% for proprietary non-
profit educational institutions and proprietary
non-profit hospitals. (CIR v. St. Luke’s Medical
Center, G.R. No. 195909, September 26, 2012)
Proprietary – private
Non-Profit – no net income or asset accrues to
or benefits any member of specific person, with
all the net income or asset devoted to the
institution’s purposes and its activities
conducted not for profit.
Charitable institutions – one providing for free
goods and services to the public which would
174
 Taxation Law
otherwise fall on the shoulders of the
government.
Q: UP Los Banos, a government education
institution, requested for a confirmation for
its tax exemption under Section 30 (l) of the
Tax Code. Is UP Los Banos exempt from
income tax?
A: YES. Pursuant to Section 30 (l) of the Tax
Code, in relation to Article XIV of the 1987
Philippine Constitution, Government education
institutions are exempt from tax on income used
actually, directly and exclusively for educational
purposes.
GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS, AGENCIES,
INSTRUMENTALITIES
GOCC refers to any agency:
1. organized as a stock or non-stock
corporation,
2. vested with functions relating to public
needs whether governmental or proprietary
in nature, and
3. owned by the Government directly or
through its instrumentalities either wholly,
or, where applicable as in the case of stock
corporations, to the extent of at least fifty-
one (51) percent of its capital stock
NOTE: Government instrumentality may include
a GOCC and there may be “instrumentality” that
does not qualify as GOCC.
Taxability of GOCCs
GR: All corporations owned or controlled by the
government are taxed in the same manner that
domestic private corporations are taxed.
XPNs:
1. Government Service Insurance System
(GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation
(PHIC)
4. Local Water District (LWD) (R.A. 10026
amending Section 27(c) of NIRC)
Under Sec. 32(B)(7) of the NIRC, even if the GOCC
is not one of those enumerated under Sec. 27(C),
it may still be exempt if it is performing
governmental function. Thus, income derived
175
from any public utility or from the exercise of
any essential government function accruing to
the Government of the Philippines or to any
political subdivision shall be exempt from
income tax.
NOTE: PAGCOR is no longer exempt from
corporate income tax as it has been effectively
omitted from the list of GOCCs that are exempt
from the payment of the income tax. PAGCOR’s
income from gaming operations is subject only
to 5% franchise tax under P.D. No. 1869, while
its income from other related services is subject
to corporate income tax pursuant to PD No.
1869 in relation to R.A. No. 9337. SC clarified
that RA No. 9337 did not repeal the tax privilege
granted to PAGCOR under PD No. 1869, with
respect to its income from gaming operations.
What RA No. 9337 withdrew was PAGCOR's
exemption from corporate income tax on its
income derived from other related services,
previously granted under Section 27(C) of R.A.
No. 8424. (PAGCOR v. BIR, G.R. No. 215427,
December 10, 2014)
FOREIGN CURRENCY DEPOSIT UNITS
Income derived by a foreign currency deposit
unit under the expanded foreign currency
deposit system from foreign currency
transactions with local commercial banks,
including branches of foreign banks that may be
authorized by the BSP to transact business with
foreign currency depository system units and
other depository banks under the expanded
foreign currency deposit system, including
interest income from foreign currency loans
granted by such depository banks under said
expanded foreign currency deposit system to
residents, shall be subject to a final income tax
at the rate of ten percent (10%) of such income.
RESIDENT FOREIGN CORPORATIONS
RFC is a corporation organized, authorized, or
existing under the laws of any foreign country,
engaged in trade or business within the
Philippines. (Sec. 28 (A)(1), NIRC)
NOTE: The general rule is that RFC shall be
liable for a 30% income tax on their income from
within the Philippines, except for:
1. Resident foreign corporations that are
international carriers which shall be
 National Taxation
taxed at 2 ½% on their Gross Philippine during the taxable year from all sources within
Billings. (Sec 28(A)(3), NIRC) the Philippines for RFC.
2. Income derived by offshore banking units
authorized by the BSP, from foreign Illustration:
currency transactions with non-residents,
other offshore banking units, local Gross Sales ₱ xxx
commercial banks, including branches of Less:
foreign banks that may be authorized by Sales Returns/
the BSP to transact business with offshore Allowances/ (xxx)
banking units shall be exempt from all Discounts
taxes except net income from such Cost of Goods
(xxx)
transactions as may be specified by the Sold/Cost of Services
Secretary of Finance, upon Gross Income xxx
recommendation of the Monetary Board Less:
which shall be subject to the regular Allowable Deductions (xxx)
income. Provided, however, that any Taxable Income xxx
interest income derived from foreign Multiply:
currency loans granted to residents other Tax Rate 30%
than offshore banking units or local NCIT/RCIT due ₱ xxx
commercial banks, including local branches
of foreign banks that may be authorized by Gross Income
the BSP to transact business with offshore
banking units, shall be subject only to a It includes all items enumerated under Sec.
final tax at the rate of ten percent. (10%). 32(A) of the NIRC, except income exempt from
(Sec. 28 (A)(4), NIRC) income tax and income subject to final
3. Regional or area headquarters (Sec. withholding tax. (RR No. 12-2007)
22(DD), NIRC) shall not be subject to
income tax. (Sec. 28(A)(6), NIRC) COGS
4. Regional operating headquarters as
defined in Section 22(EE) shall pay a tax of Refer to previous discussion on “Domestic
ten percent (10%) of their taxable income. Corporation – NCIT or RCIT”.
(Sec. 28(A)(6), NIRC)
MINIMUM CORPORATE INCOME TAX (MCIT)
Outline of taxes imposed on RFC
Refer to previous discussions on “MCIT” under
1. NCIT – 30% of taxable income from sources Domestic Corporations.
within the Philippines (Sec. 28 (A), NIRC)
2. MCIT – 2% of gross income, if MCIT applies BRANCH PROFITS REMITTANCE TAX (BPRT)
3. GIT (Optional corporate income Tax) – 15%
of gross income, if qualified Any profit remitted by branch office of a
4. Final tax on passive income multinational corporation to its head office is
5. Interest from deposits and yields and subject to 15% final tax based on total profits
royalties applied or earmarked for remittance without
6. Capital gains from sale of shares not traded deduction for the tax component. A branch is
in the stock exchange classified as a resident foreign corporation. As
7. Income derived under the Expanded such, it is subject to income tax at the rate of
Foreign Currency Deposit System 30% on its net income derived within the
8. Inter-corporate dividends Philippines. Such income items include interest,
9. Branch profit remittance tax dividends, rents, royalties, including
remuneration for technical services, salaries,
TAXATION – IN GENERAL wages, premiums, annuities, emoluments or
other fixed or determinable annual, periodic or
REGULAR CORPORATE INCOME TAX (RCIT) casual gains, profits, income and capital gains
received during each taxable year from all
An income tax of thirty percent (30%) shall be sources within the Philippines.
imposed upon the taxable income derived

UNIVERSITY OF SANTO TOMAS 176

2021 GOLDEN NOTES
 Taxation Law
For purposes of branch profit remittance,
income items which are not effectively
connected with the conduct of its trade or
business in the Philippines are not considered
branch profits. To be ‘effectively connected’, it is
not necessary that the income be derived from
the actual operation of the branch’s trade or
business. It is sufficient that the income arises
from the business activity in which the branch is
engaged. The 15% final tax should exclude
profits on activities registered with PEZA.
(Tabag, 2015)
TAXATION OF PASSIVE INCOME
Refer to previous discussions on “Passive
Investment Income” and “Special rules pertaining
to income or loss from dealings in property
classified as capital asset”.
TAXATION OF CAPITAL GAINS
Refer to previous discussions on “Passive
Investment Income” and “Special rules pertaining
to income or loss from dealings in property
classified as capital asset.”
RESIDENT FOREIGN CORPORATIONS
SUBJECT TO PREFERENTIAL TAX RATES
1. International carries
2. Foreign currency deposit units and offshore
banking units
3. Regional or area headquarters and regional
operating headquarters
These would be discussed in detail below.
International carriers
An international carrier refers to foreign
airline corporation doing business in the
Philippines which has landing rights in any
Philippine port to perform international air
transportation services or flight operations
anywhere in the world. They shall be taxed at
2.5% on their Gross Philippine Billings (GPB)
unless it is subject to preferential rate or exempt
from tax on the basis of applicable tax
treaty/international agreement to which the
Philippines is a signatory or on the basis of
reciprocity, such that an international carrier,
whose home country grants income tax
exemption to Philippine carries, shall likewise be
exempt from income tax imposed under the
177
NIRC.
Reciprocity may be invoked by an international
carrier as basis for GBP Tax exemption when its
Home Country grants income tax exemption to
Philippine carriers.
The domestic law of the Home Country granting
exemption shall cover income taxes and shall not
refer to other types of taxes that may be
imposed by the relevant taxing jurisdiction. The
fact that the tax laws of the Home Country
provide for exemption from business tax, such as
gross sales tax, in respect of the operations of
Philippine carriers shall not be considered as
valid and sufficient basis for exempting an
international carrier from Philippine income tax
on account of reciprocity.
Reciprocity requires that Philippine carriers
operating in the Home Country of an
international carrier are actually enjoying the
income tax exemption. (RR No. 15-2013)
Q: What is Gross Philippine Billings? (2005
BAR)
A: It refers to the amount of gross revenue
realized from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue
and the place of payment of the ticket or passage
document. (Dimampao, 2015)
Off-line international carrier is subject to
corporate income tax
An off-line airline having a branch office or a
sales agent in the Philippines which sells
passage documents for compensation or
commission to cover off-line flights of its
principal or head office, or for other airlines
covering flights originating from Philippine
ports or off-line flights, is not considered
engaged in business as an international air
carrier in the Philippines and is, therefore,
not subject to Gross Philippine Billings Tax
provided for in Section 28(A)(3)(a) of the Code
nor to the three percent (3%) common carrier's
tax under Section 118(A) of the same Code. This
provision is without prejudice to classifying such
taxpayer under a different category pursuant to
a separate provision of the same Code. (RR No.
15-2002)
 National Taxation
Sec. 28(A)(3)(a) of the 1997 NIRC does not, in
any categorical term, exempt all international air
carriers from the coverage of Sec. 28(A)(1) of
the 1997 NIRC.
The general rule is that resident foreign
corporations shall be liable for a 30% income tax
on their income from within the Philippines,
except for resident foreign corporations that are
international carriers that derive income "from
carriage of persons, excess baggage, cargo, and
mail originating from the Philippines" which
shall be taxed at 2 1/2% of their Gross
Philippine Billings. An international carrier with
no flights originating from the Philippines, does
not fall under the exception.
To reiterate, if an international air carrier
maintains flights to and from the Philippines, it
shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air
carriers that do not have flights to and from the
Philippines but nonetheless earn income from
other activities in the country will be taxed at
the rate of 30% of such income. (South African
Airways v. Commissioner of Internal Revenue,
February 16, 2010; Air Canada v. CIR, G.R. No.
169507, January 11, 2016)
NOTE: An offline carrier is "any foreign air
carrier not certificated by the (Civil Aeronautics)
Board, but who maintains office or who has
designated or appointed agents or employees in
the Philippines, who sells or offers for sale any
air transportation in behalf of said foreign air
carrier and/or others, or negotiate for, or holds
itself out by solicitation, advertisement, or
otherwise sells, provides, furnishes, contracts, or
arranges for such transportation. (Civil
Aeronautics Board Economic Regulation No. 4,
chap. I, sec. 2(b) cited in Air Canada v. CIR, G.R.
No. 169507, January 11, 2016)
Q: Petitioners in assailing the validity of RR
15-2013 this RR subjects demurrage and
detention fees collected by international
shipping carriers to regular corporate
income tax rate. They contend that the RR
unduly widened the scope of RA 10378 by
imposing additional taxes on international
shipping carriers not authorized or provided
by law. BThey state that demurrage and
detentions fees are not income but penalties
imposed by the carrier on the charterer,
shipper, consignee, or receiver, to allow the
carrier to recover losses or expenses
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
associated with or caused by the undue delay
in the loading and/or discharge of the latter's
shipments from the containers. Assuming
that demurrage and detention fees may be
treated as income, these fees are taxable only
if they form part of Gross Philippine Billings
(GPB) and taxed at the preferential rate of
2.5%. Are the contentions of the Petitioners
correct?
A: NO. RR 15-2013 merely sums up the rules by
which international carriers may avail of
preferential rates or exemption from income tax
on their gross revenues derived from the
carriage of persons and their excess baggage
based on the principle of reciprocity or an
applicable tax treaty or international agreement
to which the Philippines is a signatory.
Interpretative regulations are intended to
interpret, clarify or explain existing statutory
regulations under which the administrative
body operates. Their purpose or objective is
merely to construe the statute being
administered and purport to do no more than
interpret the statute. (Association of
International Shipping Lines, Inc., APL Co., Pte
Ltd., and Maersk-Filipinas, Inc. Petitioner v.
Secretary of Finance and Commissioner of
Internal Revenue. Respondent., G.R. No. 222239.,
January 15, 2020, as penned by J. Lazaro – Javier)
Foreign currency deposit units and offshore
banking units
OBU is a branch, subsidiary or affiliate or a
foreign banking corporation located in an
Offshore Financial Center which is duly
authorized by the BSP to transact offshore
banking business in the Philippines. OBUs are
allowed to provide all traditional banking
services to non-residents in any currency other
than Philippine national currency. OBUs are
forbidden to make any transactions in Philippine
Peso. Banking transactions to residents are
omitted and restricted. (Tabag, 2015)
Income Exempt from Tax
Income derived from
1. Non-residents
2. Foreign currency transactions with local
commercial banks,
3. Foreign currency transactions with
branches of foreign banks authorized by the
BSP
178
 Taxation Law
4. Foreign currency transactions with OBUs in
the Philippines
Income subject to 10% Final Tax
Interest income derived from foreign currency
loans granted to residents other than OBUs or
local commercial banks. (Ibid)
Resident Depository Banks (Foreign
Currency Deposit Units)
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with local
commercial banks, including branches of foreign
banks that may be authorized by the BSP to
transact business with foreign currency
depository system units and other depository
banks under the expanded foreign currency
deposit system, including interest income from
foreign currency loans granted by such
depository banks under said expanded foreign
currency deposit system to residents, shall be
subject to a final income tax at the rate of ten
percent (10%) of such income.
Regional or area headquarters and regional
operating headquarters
Income tax rate of ROHQ is 10% of net income.
ROHQ is a branch established in the Philippines
which is engaged in any of the following
qualifying services:
1. General administration and planning;
2. Business planning and coordination;
3. Sourcing/procurement of raw materials
and components;
4. Corporate finance advisory services;
5. Marketing control and sales promotion;
6. Training and personnel management;
7. Logistics services;
8. Research and development services, and
product development;
9. Technical support and maintenance;
10. Data processing and communication; and
11. Business development.
RHQ is a tax-exempt entity. It is a branch
established in the Philippines and which
headquarters do not earn or derived income
from the Philippines and which act as
supervisory, communications and coordinating
center for its affiliates, subsidiaries, or branches
179
in the Asia-Pacific region and other foreign
markets. (Tabag, 2015)
NON-RESIDENT FOREIGN CORPORATIONS
(NRFC)
Taxation of NRFC in general
A foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal
to 30% of the gross income during such taxable
year from all sources within the Philippines
except capital gains from sale of shares of stock
not traded in the stock exchange. (Sec. 28(B)(1),
NIRC)
NRFCs subject to preferential tax rates
1. Non-resident Cinematographic Film owner,
lessor or distributor – 25% of its gross
income from all sources within the
Philippines
2. Non-resident owner or lessor of vessels
chartered by Philippine nationals – 4.5% of
gross rentals, lease, or charter fees
3. Non-resident owner or lessor of aircraft,
machineries and other equipment – 7.5% of
gross rentals or fees
CORPORATIONS EXEMPT FROM INCOME TAX
The following organizations shall not be taxed
in respect to income received by them as such:
(Sec. 30, NIRC)
1. Labor, agricultural or horticultural
organization, not organized principally for
profit
a. Provincial fairs and like associations of a
quasi-public character designed to
encourage development of better
agricultural and horticultural products
through a system of awards, prizes and
premiums, and whose income derived
from gate receipts, entry fees,
donations, etc. is used exclusively to
meet necessary expenses of upkeep and
operation are thus exempt.
b. The holding of periodical race meets by
associations, the profits from which
inure to the benefit of their stockholder
are not tax exempt. Similarly,
corporations engaged in growing
agricultural or horticultural products or
raising livestock or similar products for
 National Taxation
profits are subject to tax (RR No. 2, Sec.
25)
2. Mutual savings banks and cooperative
banks, either domestic or foreign, provided
that:
a. No capital represented by shares.
b. Earnings, less only the expenses of
operating, are distributable wholly
among the depositors; and
c. It is operated for mutual purposes and
without profit.
NOTE: If the deposits are made
compulsory under contract between the
bank and the depositors and is operated
for speculation rather for savings, the
bank is not qualified as a mutual savings
bank.
3. A Beneficiary Society, Order or Association,
provided that:
a. It must be operated under lodge system
or for the exclusive benefit of the
members of society, with parent and
local organizations which are active;
b. There must be an established system of
payment to its members or their
dependents of life, sick, accident or
other benefits; and
c. No part of the net income inures to the
benefit of the stockholders/members.
4. Cemetery Companies, provided that:
a. It must be owned and operated
exclusively for the benefit of their
owners; and
b. It is not operated for profit.
5. Religious, Charitable, Scientific, Athletic or
Cultural Corporations, provided that:
a. It is organized and operated for one or
more specified purposes; and
b. No part of the net income inures to the
benefit of the any private stockholder or
individual.
NOTE: St. Luke’s Medical Center, Inc. fails to
meet an indispensable requirement under
Section 30(E) –operated exclusively for
charitable purposes – to be completely tax
exempt from all its income. It admitted
paying patients from which profit is derived.
(CIR v. St. Luke’s Medical Center, Inc., 682
SCRA 66)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
6. Business, Chamber of Commerce, or Board
of Trade, provided that:
a. It is an association of persons having
some common business interest;
b. Its activities are limited to work for such
common interests;
c. Not engaged in a regular business for
profit; and
d. No part of the net income inures to the
benefit of any private stockholder or
individual.
7. Civic league, provided that:
a. It is not organized for profit but
operated exclusively for purposes
beneficial to the community as a whole.
In general, organizations engaged in
promoting the welfare of mankind;
b. Sworn affidavit filed with the BIR
showing the following:
i. Character of the league or
organization
ii. Purpose for which it was organized
iii. Actual activities
iv. Sources of income and disposition
thereof, and
v. All facts relating to the operation of
the organization which affects it
right to exemption.
vi. The copy of articles of
incorporation, by laws and financial
statements should be attached to
the sworn affidavit.
8. Government Educational Institutions
9. Mutual Fire Insurance Companies and like
Organizations
Requisites for exemption:
a. Income is derived solely from
assessments, dues and fees collected
from members; and
b. Fees collected from members are for the
sole purpose of meeting its expenses.
To be exempt from income tax, Sec.
30(E) of the NIRC requires that a
charitable institution must be
“organized and operated exclusively”
for charitable purposes. Likewise, to be
exempt from income tax, Sec. 30 (G)
requires that the institution be
“operated exclusively” for social
welfare. (CIR v. St. Luke’s, G.R. Nos.
195909 and 195960, September 26,
180
 Taxation Law
2012)
10. Farmers, Fruit Growers, or like Associations
Requisites for exemption:
a. Formed and organized as sales agent for
the purpose of marketing the product of
its members;
b. No net income to the members; and
c. Proceeds of the sale shall be turned over
to them less necessary selling expenses
on the basis of the quantity of goods
produced by them.
The income of whatever kind and character of
the foregoing organizations from any of their
properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be
subject to tax imposed under the NIRC.
1. Cooperatives under R.A. 6938, the
Cooperative Code of the Philippines
NOTE: Since interest from any Philippine
currency bank deposit and yield or any
other monetary benefit from deposit
substitutes are paid by banks, cooperatives
are not required to withhold the
corresponding tax on the interest from
savings and time deposits of their members.
Moreover, the amendment in Article 61 of
R.A. 9520, specifically providing that
members of cooperatives are not subject to
final taxes on their deposits, affirms the
interpretation of the BIR that Section 24
(B)(1) of the NIRC does not apply to
cooperatives and confirms that such ruling
carries out the legislative intent.
(Dumaguete Cathedral Cooperative v. CIR,
G.R. No. 182722, January 22, 2010)

The foregoing exempt corporations have 2. Foundations created for scientific purposes
common requisites for exemption: (PrInSE) under Sec. 24 of R.A. 2067, an Act to
Integrate, Coordinate, and Intensify
1. Not organized and operated principally for Scientific and Technological Research and
profit; Development and to Foster Invention
2. No part of the net income inures to the
benefit of any member or individual; TAX ON OTHER BUSINESS ENTITIES;
3. No capital is represented by shares of stock; GENERAL PARTNERSHIPS, GENERAL
and PROFESSIONAL PARTNERSHIPS, CO-
4. Educational or instructive in character. OWNERSHIPS, JOINT VENTURES, AND
CONSORTIA
The moment they invest their income or receive
income from their properties, real or personal Tax on General Partnerships
conducted for profit, such income derived from
those properties is subject to tax. Classifications of partnerships for tax purposes:
1. General professional partnerships
NOTE: If religious, charitable or social welfare 2. Business partnership
corporations derive income from their
properties or any of their activities conducted Q: Distinguish between the income tax
for profit, income tax shall be imposed on said liability of “X”, a general professional
items of income irrespective of their disposition. partnership engaged in the practice of law
(CIR v. YMCA, G.R. No. 124043, October 14, 1998) and “Y”, as a general partnership engaged in
a logging concession. (1981 BAR)
However, in case of non-stock, non-profit
educational institution, as long as the income is A:
actually, directly and exclusively used for GENERAL BUSINESS
educational purpose, such income is exempt as PROFESSIONAL PARTNERSHIP/
provided for in Art. XIV, Sec. 3 of the 1987 PARTNERSHIP GENERAL
Constitution. (GPP) PARTNERSHIP
Formed by persons Formed by persons
Other corporations exempt from income tax for the sole purpose for the sole purpose
under Special Laws of exercising their of engaging in any
common profession, trade or business.
no part of income of

181
 National Taxation
which is derived the net income declared by the partnership for a
from engaging in any taxable year after deducting the corresponding
trade or business. corporate income tax. A partner’s distributive
NOT a taxable entity. Considered as a share is already being subjected to a final tax;
corporation hence a hence, it is no longer needed to be reported in
taxable entity and each partner’s individual tax return.
its income is taxable
as such. NOTE: In a business partnership, there is no
The distributive The share of an constructive receipt of distributive share in the
share of the partners individual in the net income.
in the net income is distributable net
reportable and income after tax of a Q: Do co-heirs who own inherited properties
taxable as part of the general partnership which produce income automatically be
partner’s gross is subject to a final considered as partners of an unregistered
income subject to tax. corporation hence subject to income tax?
the scheduled rates.
NO need to file an Must file an income A: NO, for the following reasons:
income tax return tax return. 1. The sharing of gross returns does not of
but an information itself establish a partnership, whether or not
return. the persons sharing them have a joint or
NOT subject to Taxed once on its common right or interest in any property
double taxation income and again from which the returns are derived. There
being taxed only when the share in must be an unmistakable intention to form a
once. the profits of the partnership or joint venture. (Obillos, Jr. v.
partners is CIR, 139 SCRA 436)
distributed; then 2. There is no contribution or investment of
taxed as dividends. additional capital to increase or expand the
inherited properties, merely continuing the
Registration of partnership dedication of the property to the use to
which it had been put by their forebears.
Registration of a partnership is immaterial for (Ibid.)
income tax purposes. It is taxable as long as the 3. Persons who contribute property or funds
following requisites concur: (AI) to a common enterprise and agree to share
1. There is an agreement, oral or writing, to the gross returns of that enterprise in
contribute money, property, or industry to a proportion to their contribution, but who
common fund; and severally retain the title to their respective
2. There is an intention to divide the profits. contribution, are not thereby rendered
partners. They have no common stock
Treatment of loss in case the partnership capital, and no community of interest as
resulted in a loss principal proprietors in the business itself
from which the proceeds were derived.
Results of operation of a partnership shall be (Pascual v. CIR, 166 SCRA 560)
treated in the same way as a corporation. In case
of loss, it will be divided as agreed upon by the NOTE: The income from the rental of the house,
partners and shall be taken by the individual bought from the earnings of co-owned
partners in their respective returns. properties, shall be treated as the income of an
unregistered partnership to be taxable as a
NOTE: The partners shall be entitled to deduct corporation because of the clear intention of the
their respective shares in the net operating loss co-owners to join together in a venture for
from their individual gross income. making money out of rentals.

Distributive share of a partner in the net Tax on General Professional Partnerships

income of a business partnership
GPP not subject to income tax
It is equal to each partner’s distributive share of
GPPs are not subject to income tax but are

UNIVERSITY OF SANTO TOMAS 182

2021 GOLDEN NOTES
 Taxation Law
required to file information returns for its
income for the purpose of furnishing
information as to the share in the net income of
the partnership, which each partner should
include in his individual return. Partners shall be
liable for income tax in their separate and
individual capacities.
GPP is only required to file a return for its
income, except income exempt under Sec. 32(B)
of the NIRC, setting forth the items of gross
income and of deductions allowed, and the
names, Taxpayer Identification Numbers (TIN),
addresses and shares of each of the partners.
(Sec. 55, NIRC)
Partners shall nonetheless be liable for income
tax in their separate and individual capacities.
Computation of net income
For purposes of computing the distributive
share of the partners, the net income of the
partnership shall be computed in the same
manner as a corporation. (Sec. 26, NIRC)
Each partner shall report his distributive share
in the net income of the partnership as gross
income in his separate return, whether actually
or constructively received.
Q: A, B, and C, all lawyers, formed a
partnership called ABC Law Firm so that they
can practice their profession as lawyers. For
the year 2012, ABC Law Firm received
earnings and paid expenses, among which
are as follows:
Earnings:
1. Professional/legal fees from various
clients;
2. Cash prize received from a religious
society in recognition of the exemplary
service of ABC Law Firm; and
3. Gains derived from sale of excess
computers and laptops.
Payments:
1. Salaries of office staff;
2. Rentals for office space; and
3. Representation expenses incurred in
meetings with clients.
a. What are the items in the above-
mentioned earnings which should be
183
included in the computation of ABC Law
Firm’s gross income? Explain.
b. What are the items in the above-
mentioned payments which may be
considered as deductions from the gross
income of ABC Law Firm? Explain.
c. If ABC Law Firm earns net income in
2012, what, if any, is the tax
consequence on the part of ABC Law
Firm insofar as the payment of income
tax is concerned? What, if any, is the tax
consequence on the part of A, B, and C as
individual partners, insofar as the
payment of income tax is concerned?
(2014 BAR)
A:
1. The three (3) items of earnings should be
included in the computation of ABC Law
Firm’s gross income. The professional or
legal fees from various clients are included
as part of gross income being in the nature
of compensation for services. (Section
32(A)(1), NIRC).The cash prize from a
religious society in recognition of its
exemplary services is also included there
being no law providing for its exclusion.
This is not a prize in recognition of any of
the achievements enumerated under the
law hence, should form part of gross
income. (Section 32(B)(7)(c), NIRC) The
gains from sale of excess computers and
laptops should also be included as part of
the firm’s gross income because the term
gross income specifically includes gains
derived from dealings in property. (Section
32(A)(3), NIRC)
2. The law firm being formed as general
professional partnership is entitled to the
same deductions allowed to corporation.
(Section 26, NIRC) Hence, the three (3)
items of deductions mentioned in the
problem are all deductible, they being in
the nature of ordinary and necessary
expenses incurred in the practice of
profession. (Section 34(A), NIRC) However,
the amount deductible for representation
expenses incurred by a taxpayer engaged in
sale of services, including a law firm, is
subject to a ceiling of 1% of net revenue.
(RR No. 10-2002)
3. The net income having been earned by the
law firm which is formed and qualifies as a
 National Taxation
general professional partnership, is not
subject to income tax because the earner is
devoid of any income tax personality. Each
partner shall report as gross income his
distributive shares, actuality or
constructively received, in the net income
of the partnership. The partnership is
merely treated for income tax purposes as a
pass-through entity so that its net income is
not taxable at the level of the partnership
bur said net income should be attributed to
the partners, whether or not distributed to
them, and they are liable to pay the income
tax based on their respective taxable
income as individual taxpayers. (Section 26,
NIRC)
Tax on Co-Ownerships
As a rule, co-ownership is tax exempt. It
becomes taxable if it is converted into an
unregistered partnership. It is converted into
partnership if the properties and income are
used as common fund with the intention to
produce profits. If after partition, the shares of
the heirs are held under a single management
for profit making, unregistered partnership is
formed. (Ona v. CIR, 45 SCRA 74)
A joint purchase of land, by two, does not
constitute a co-partnership in respect thereto,
nor does an agreement to share the profits and
losses on the sale of land create a partnership;
the parties are only tenants in common. Where
the transactions are isolated, in the absence of
other circumstances showing a contrary
intention, the case can only give rise to a co-
ownership. (Pascual v. CIR, 166 SCRA 560)
Co-heirs who own inherited properties which
produce income should not automatically be
considered as partners of an unregistered
partnership or corporation subject to income
tax.
Rationale: Sharing of gross returns does not by
itself establish a partnership; there must be an
unmistakable intention to form a partnership or
joint venture. There is no contribution or
investment of additional capital to increase or
expand the inherited properties, merely
continuing the dedication of the property to the
use to which it had not been put by their
forbears. (Obillos Jr. v. CIR, 139 SCRA 436)
Co-ownership is not taxable if the activities of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
the co-owners are limited to the preservation of
the property and the collection of income. In
such case, the co-owners shall be taxed
individually on their distributive share in the
income of the co-ownership.
Co-owners investing the income in a business
for profit
If the co-owners invest the income in a business
for profit, they would constitute themselves into
a partnership and such shall be taxable as a
corporation.
Q: Brothers A, B, and C borrowed a sum of
money from their father which amount
together with their personal monies was
used by them for the purpose of buying real
properties. The real properties they bought
were leased to various tenants. The BIR
demanded the payment of income tax on
corporations, real estate dealer’s tax, and
corporation residence tax. However, A, B, and
C seek to reverse the letter of demand and be
absolved from the payment of taxes in
question. Are they subject to tax on
corporations?
A: YES. As defined in the NIRC, the term
“corporation” includes partnership, no matter
how created or organized. This qualifying
expression clearly indicates that a joint venture
need not be taken in any of the standard form, or
conformity with the usual requirements of the
law on partnerships, in order that one could be
deemed constituted for the purposes of the tax
on corporations. (Evangelista v. Collector of
Internal Revenue, G.R. No. L-9996, October 15,
1957)
Q: Pascual and Dragon bought 2 parcels of
land from Bernardino and 3 from Roque.
Thereafter, the first two were sold to
Meirenir Development Corporation and the
remaining were sold to Reyes and Samson.
They divided the profits between the two (2)
of them. The Commissioner contended that
they formed an unregistered partnership or
joint venture taxable as a corporation under
the Code and its income is subject to the
NIRC. Is there an unregistered partnership
formed?
A: NONE. The sharing of returns does not in
itself establish a partnership whether or not the
sharing therein has a joint or common right or
184
 Taxation Law
interest in the property. (NCC, Art. 1769) There
is no adequate basis to support the proposition
that they thereby formed an unregistered
partnership. The two isolated transactions
whereby they purchased properties and sold the
same few years thereafter did not make them
partners. The transactions were isolated. The
character of habituality peculiar to business
transactions for the purpose of gain was not
present. (Pascual and Dragon v. CIR, G.R. No.
78133, October 18, 1988)
Q: On March 2, 1973, Joe Obillos Sr.
transferred his rights under contract with
Ortigas Co. to his 4 children to enable them to
build residences on the lots. TCTs were
issued. Instead of building houses, after a
year, Obillos children sold them to Walled
City Securities Corporation and Olga Cruz
Canda. The BIR required the children to pay
corporate income tax under the theory that
they formed an unregistered partnership or
joint venture. Are they liable for corporate
income tax?
A: NO. The Obillos children are co-owners. It is
an isolated act which shows no intention to
form a partnership. It appears that they decided
to sell it after they found it expensive to build
houses. The division of profits was merely
incidental to the dissolution of the co-
ownership, which was in the nature of things a
temporary state. (Obillos, Jr. v. CIR, G.R. No. L-
68118, October 29, 1985)
Tax on Joint Ventures and Consortia
Joint Venture is a commercial undertaking by
two or more persons, differing from a
partnership in that it relates to the disposition
of a single lot of goods or the completion of a
single project. Joint venture or consortium, in
general, is taxable as corporation. (Tabag, 2015)
However, a joint venture or consortium formed
for the purpose of undertaking construction
projects is not considered as corporation under
Section 22 of the NIRC provided:
1. The joint venture was formed for the
purpose of undertaking a construction
project;
2. Should involve joining/pooling of resources
by licensed local contracts; that is, licensed
as general contactor the Philippine
185
Contractors Accreditation Board (PCAB) of
the Department of Trade and Industry (DTI);
3. The local contractors are engaged in
construction business; and
4. The joint venture itself must likewise be duly
licensed as such by the Philippines
Contractors Accreditation Board (PCAB) of
the Department of trade Industry (DTI).
Joint ventures involving foreign contractors may
also be treated as a non-taxable corporation
only if the member foreign contractor is:
1. Covered by a special license as contractor by
the PCAB of the DTI; and
2. The construction project is certified by the
appropriate Tendering Agency (government
office) that the project is a foreign financed
or internationally-funded project and that
international bidding is allowed under the
Bilateral Agreement entered into by and
between the Philippine Government and the
foreign or international financing institution
pursuant to the implementing rules and
regulations of Republic Act No. 4566
otherwise known as Contractor’s License
Law.
Absent any one the aforesaid requirements, the
joint venture or consortium formed for the
purpose of undertaking construction projects
shall be considered as taxable corporations.
In addition, the tax-exempt joint venture or
consortium as herein defined shall not include
those who are mere suppliers of goods, services
or capital to a construction project.
The member to a Joint Venture not taxable as
corporation shall each be responsible in
reporting and paying appropriate income taxes
on their respective share to the joint ventures
profit. (RR 10-2012)
Tax treatment of the co-venturer’s share in
the joint venture profit
INDIVIDUAL
CORPORATE
CO-
CO-VENTURER
VENTURER
The respective The respective
Taxable share in the share in the
Joint joint venture joint venture
Venture profit is profit is
considered as considered as
 National Taxation
INDIVIDUAL 4. Every non-resident alien engaged in trade
CORPORATE
CO- or business or in the exercise of profession
CO-VENTURER
VENTURER in the Philippines. (Sec. 51(A)(1), NIRC)
dividend dividends
income received income The following are also required to file ITR:
by a DC from a received by an
DC. Hence, it individual 1. A citizen of the Philippines and any alien
shall be treated taxpayer from individual engaged in business or practice
as inter- a DC. of profession within the Philippines,
corporate Consequently, regardless of the amount of gross income;
dividend which it shall be 2. An individual deriving compensation
is tax exempt. subject to 10% concurrently from two or more employers
final at any time during the taxable year; and
NOTE: Tax- withholding 3. An individual whose pure compensation
exempt if tax. income derived from sources within the
received by a Philippines exceeds Two Hundred Fifty
domestic NOTE: This thousand pesos (P250,000). (RMC 50-2018)
corporation or a applies if the
resident foreign venturer is a XPNS: The following individuals shall not be
corporation RC/ NRC/ RA. required to file an income tax return:
from a domestic
joint venture. 1. An individual whose gross income does not
The respective The respective exceed his total personal and additional
share in the share in the exemptions for dependents;
joint venture joint venture 2. Individual taxpayer receiving purely
profit shall be profit shall be compensation income, regardless of
included in the subject to amount, from only one employer in the
computation of creditable Philippines for the calendar year, the
Non- income tax of which has been withheld
the corporate withholding
taxable correctly by said employer (Substituted
venturer’s tax.
Joint Filing);
taxable income Consequently,
Venture 3. An individual whose sole income has been
subject to the same be
normal included in the subjected to final withholding tax; and
corporate computation of 4. A minimum wage earner or an individual
income tax of the individual who is exempt from income tax. (Sec.
30%. taxpayer’s 51(A)(2), NIRC)
taxable income.
(Tabag, 2015) NOTE: Individuals not required to file an income
tax return may nevertheless be required to file
FILING OF RETURNS AND PAYMENT an information return. (Sec. 51(A)(3), NIRC)

Q: Mr. C is employed as a Chief Executive

INDIVIDUAL RETURN
Officer of MNO Company, receiving an annual
compensation of ₱10M, while Mr. S is a
Who are required to file; exceptions
security guard in the same company earning
an annual compensation of ₱200,000. Both of
GR: The following individuals are required to file
them source their income only from their
an income tax return:
employment with MNO Company. (2019 Bar)
1. Every Filipino citizen residing in the
a. At the end of the year, is Mr. C
Philippines;
personally required to file an annual
2. Every Filipino citizen residing outside the
income tax return?
Philippines, on his income from sources
b. How about Mr. S? Is he personally
within the Philippines;
required to file an annual income tax
3. Every alien residing in the Philippines, on
income derived from sources within the return?
Philippines; and

UNIVERSITY OF SANTO TOMAS 186

2021 GOLDEN NOTES
 Taxation Law
A:
a. NO, individuals receiving purely
compensation income from a single
employer, which has been correctly
withheld are no longer required to file
their annual ITR.
b. NO, individuals receiving purely
compensation income from a single
employer, which has been correctly
withheld are no longer required to file
their annual ITR.
Special Rules
1. ITR of married individuals
2. Income of unmarried minors/children
3. Filing a return for a disabled taxpayer
These are discussed in detail below.
ITR of married individuals
Married individuals, whether citizens, resident
or non-resident aliens, who do not derive
income purely from compensation, shall file a
return for the taxable year to include the income
of both spouses.
Where it is impracticable to file one return, each
spouse may file a separate return of income, but
the returns so filed shall be consolidated by the
Bureau for purposes of verification for the
taxable year. (Sec. 51(D), NIRC)
Income of unmarried minors/children
GR: The income of unmarried minors derived
from property received from a living parent
shall be included in the return of the parent.
XPNs:
1. When the donor’s tax has been paid on such
property; or
2. When the transfer of such property is
exempt from donor’s tax. (Sec. 51(E), NIRC)
Filing a return for a disabled taxpayer
If the taxpayer is unable to make his own return,
the return may be made by his:
1. Duly authorized agent;
2. Representative;
3. Guardian; or
187
4. Other person charged with the care of his
person or property, the principal and the
representative or guardian assuming the
responsibility of making the return and
incurring penalties provided for erroneous,
false or fraudulent returns. (Sec. 51(F),
NIRC)
Substituted filing
Substituted filing applies only if all of the
following requirements are present:
1. The employee received purely
compensation income (regardless of
amount) during the taxable year.
2. The employee received the income from
only one employer in the Philippines during
the taxable year.
3. The amount of tax due from the employee at
the end of the year equals the amount of tax
withheld by the employer.
4. The employee’s spouse also complies with
all 3 conditions stated above.
5. The employer files the annual information
return (BIR Form No. 1604-CF).
6. The employer issues BIR Form No. 2316 to
each employee.
Q: Indicate whether each of the following
individuals is required or not required to file
an income tax return:
a. Filipino citizen residing outside the
Philippines on his income from sources
outside the Philippines.
b. Resident alien on income derived from
sources within the Philippines.
c. Resident citizen earning purely
compensation income from two
employers within the Philippines, whose
income taxes have been correctly
withheld.
d. Resident citizen who falls under the
classification of minimum wage earners.
e. An individual whose sole income has
been subjected to final withholding tax.
(2015 BAR)
A:
a. Not required. The income of a non-resident
Filipino citizen is taxable only on income
sourced within the Philippines. Accordingly,
his income from sources outside the
 National Taxation
Philippines is exempt from income tax. (Sec.
51(A)(1)(b), NIRC)
b. Required. A resident alien is taxable only on
income derived from sources within the
Philippines. (Sec. 51(A)(1)(c), NIRC)
c. Required. A resident citizen who is earning
purely compensation income from two
employers should file income tax return. If
the compensation income is received
concurrently from two employers during
the taxable year, the employee is not
qualified for substituted filing.
d. Not required. Under the law, all minimum
wage earners in the private and public sector
shall be exempt from payment of income tax.
(Sec. 51(A)(2)(d), NIRC in relation to R.A. No.
9504)
e. Not required. Under the law, an individual
whose sole income has been subjected of
final withholding tax pursuant to Sec. 57(A),
NIRC, need not file a return. What he
received is a tax paid income. (Sec.
51(A)(2)(c), NIRC)
When and where to file
Basic Tax
The return of any individual required to file the
same shall be filed on or before April 15th day of
each year covering income for the preceding
taxable year.
However, individuals who are self-employed or in
practice of a profession are required to file and
pay estimated income tax every quarter as
follows:
1. First Quarter return - May 15
2. Second Quarter return - August 15
3. Third Quarter return - November 15
4. Final adjusted (annual) return - April 15 of
the succeeding year (same with 1st quarter
return)
Final Withholding Tax on Passive Income
(Manual Filing)
1. Quarterly return – filed and the payment
made not later than the last day of the
month following the close of the quarter
during which withholding was made.
2. Annual Information Return – filed on or
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
before January 31 of the year following the
calendar year in which income payments
subjected to final withholding taxes were
paid or accrued.
Where to file?
Except in cases where the Commissioner
otherwise permits, the return shall be filed with
any of the following:
1. Authorized agent bank
2. Revenue district officer
3. Collection agent
4. Duly authroized city treasurer where he
is legally residing
5. Office of the Commissioner
For non-resident citizens, the return shall be
filed with the
1. Philippine Embassy, or
2. nearest Philippine Consulate, or
3. be mailed directly to the CIR. (Sec. 51(B),
NIRC)
CORPORATE RETURNS
Quarterly income tax
Every corporation shall file in duplicate a
quarterly summary declaration of its gross
income and deductions on a cumulative basis
for the preceding quarter or quarters. The tax so
computed shall be decreased by the amount of
tax previously paid or assessed during the
preceding quarters.
First, Second and Third Quarter returns – A
corporation must file tax return within 60 days
after the close of each of the first three (3)
quarters of the taxable year.
Final adjustment return
Every corporation liable to tax under Sec. 27 of
the NIRC shall file a final adjustment return
covering the total taxable income for the
preceding calendar or fiscal year.
If the sum of the quarterly return is not equal to
the total tax due, the corporation shall either:
1. Pay the balance;
2. Carry over the excess credit perpetually; or
3. Be credited or refunded with the excess
amount.
188
 Taxation Law
In case the corporation is entitled to a tax credit
or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on
its final adjustment return may be carried over
and credited against the estimated quarterly
income tax liabilities for the taxable quarters of
the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly
income tax against income tax due for the
taxable quarters of the succeeding taxable years
has been made, such option shall be considered
irrevocable for that taxable period and no
application for cash refund or issuance of a tax
credit certificate shall be allowed therefor. (Sec.
76, NIRC)
When and where to file
When to file?
1. For quarterly declarations: within 60 days
following the close of the quarter.
2. For final return: on or before April 15, or
the 15th of the 4th month following the close
of the fiscal year.
Where to file?
Except in cases where the Commissioner
otherwise permits, the return shall be filed with
any of the following:
1. Authorized agent bank;
2. Revenue District Officer;
3. Collection Agent; or
4. Duly authorized city of municipal Treasurer
in which such person has his legal
residence or principal place of business, or
if there be no legal residence or principal
place of business, with the Office of the
Commissioner.
Return of corporations contemplating
dissolution or reorganization
Within thirty (30) days after the adoption of a
resolution or plan for its dissolution, or for the
liquidation of the whole or any part of its capital
stock, including a corporation which has been
notified of possible involuntary dissolution by
the SEC of for its reorganization, shall render a
correct return to the CIR, verified under oath,
setting forth the items of such resolution or plan
and such other information. (Sec. 52(C), NIRC)
189
RETURN ON CAPITAL GAINS REALIZED FROM
SALE OF SHARES OF STOCK AND REAL
ESTATE
1. Shares of stock
a. Ordinary Return – 30 days after each
transaction
b. Final Consolidated Return – on or
before April 15 of the following year
2. Real Property – 30 days following each sale
or other disposition (Sec. 51(C)(2), NIRC)
WITHHOLDING TAX
Taxes imposed or prescribed by the NIRC are to
be deducted and withheld by the payor-
corporations and/or persons for the former to
pay the same directly to the BIR. Hence, the
taxes are collected practically at the same time
the transaction is made or when the taxable
transaction occurs. It is taxation at source.
(Domondon, 2013)
The withholding tax system is embedded in the
income tax system in the Philippines to ease the
administration and collection of taxes. It is not a
“separate” kind of tax as withholding tax is
simply a way of collecting tax from the source.
(Ingles, 2015)
Importance of Withholding Taxes
In the operation of the withholding tax system,
the payee is the taxpayer– the person on whom
the tax is imposed, while the payor, a separate
entity, acts no more than an agent of the
government for the collection of the tax in order
to ensure its payment.
The duty to withhold is different from the duty
to pay income tax. Indeed, the revenue officers
generally disallow the expenses claimed as
deductions from gross income, if no withholding
tax as required by law or regulations was
withheld and remitted to the BIR within the
prescribed dates. (Mamalateo, 2008)
Purpose of the Withholding Tax System
1. Provide the taxpayer a convenient manner
to meet his probable income tax liability.
2. Ensure the collection of the income tax
which would otherwise be lost or
substantially reduced through the failure to
file the corresponding returns.
 National Taxation
3. Improve the government’s cash flow.
4. Minimize tax evasion, thus resulting in a
more efficient tax collection system. (CREBA
vs. Romulo, 9 March 2010)
When to withhold
It arises at the time an income payment is paid
or payable or accrued or recorded as an expense
or asset, whichever is applicable in the payor’s
books, whichever comes first. (RR No. 2-1998,
Sec. 2.57.4, as amended by RR No. 12-2001)
The term “payable” refers to the date the
obligation becomes due, demandable or legally
enforceable. (RR No. 2-1998, Sec. 2.57.4, as
amended by RR 12-2001)
FINAL WITHHOLDING TAX
1. The liability for payment of the tax rests
primarily on the withholding agent as
payor.
2. In case he fails to withhold, the withholding
agent will be liable for the deficiency.
3. The payee is not required to file any
income tax return for the particular
income.
4. The finality of the withheld tax is limited
on that particular income and will not
extend to the payee’s other tax liability.
(Ingles, 2015)
CREDITABLE WITHHOLDING TAX
1. Taxes withheld on certain income
payments are intended to equal or at least
approximate the tax due of the payee on
said income.
2. Creditable tax must be withheld at source,
but should still be included in the tax
return of the recipient.
3. The liability to withhold arises upon the
accrual, not upon the actual remittance.
The purpose of the withholding tax is to
compel the agent to withhold under all
circumstances. (Ingles, 2015)

Creditable Withholding Tax vs. Final Withholding Tax

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

UNIVERSITY OF SANTO TOMAS 190

2021 GOLDEN NOTES
 Taxation Law
Expanded withholding tax (EWT)
EWT is a kind of withholding tax which is
prescribed only for certain payors and is
creditable against the income tax due of the
payee
for the taxable quarter year.
The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the withholding of tax on the items of income
payable to natural or juridical persons
residing in the Philippines, by payor-
corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but not
more than thirty-two percent (32%), provided,
that, beginning January 1, 2019, the rate of
withholding shall not be less than one percent
(1%) but not more than fifteen percent (15%) of
the income payment, which shall be credited
against the income tax liability of the taxpayer
for the taxable year.
Withholding tax on compensation (WTC)
WTC applies to all employed individuals
whether citizens or aliens deriving income from
compensation for services rendered in the
Philippines.
The employer is considered the withholding
agent. Every employer making payments of
wages shall deduct from and withhold tax,
except for MWEs. Employer shall be liable if he
fails to withhold and remit.
Nature of withholding tax on the income of
government employees
The withholding tax on compensation income is
creditable in nature. Thus, pursuant to Sec.
79(C)(2) of the NIRC, the amount deducted and
withheld during any calendar year, shall be
allowed as a credit to the recipient of such
income against the tax imposed under Sec. 24(A).
Obligation of an employer required to deduct
and withhold a tax
An employer shall furnish to each employee in
respect of his employment during the calendar
year, on or before January 31 of the succeeding
year, or if his employment is terminated before
the close of such calendar year, on the same day
191
of which the last payment of wages is made, a
written statement confirming the wages paid
by the employer to such employee during the
calendar and the amount of tax deducted and
withheld in respect of such wages.
He shall also submit to the Commissioner on or
before January 31 of the succeeding year, an
annual information return containing a list of
employees, the total amount of compensation
income of each employee, the total amount of
taxes withheld therefrom during the year,
accompanied by copies of the statement referred
to in the preceding paragraph, and such other
information as may be deemed necessary.
FRINGE BENEFITS TAX
Refer to previous discussion on “Income tax on
individuals – Taxation on compensation income –
Exclusions”.
DUTIES OF A WITHHOLDING AGENT
1. Register – To register within 10 days after
acquiring such status with the RDO having
jurisdiction over the place where the
business is located
2. Deduct and withhold – To deduct tax from all
money payments subject to withholding tax
3. Remit the tax withheld – To remit tax
withheld at the time prescribed by law and
regulations
4. File Annual Return – To file the
corresponding Annual Information Return
at the time prescribed by law and
regulations
5. Issue Withholding Tax Certificates – To
furnish Withholding Tax Certificates to
recipient of income payments subject to
withholding.
Withholding agent
A withholding agent is a separate entity acting
no more than an agent of the government for
the collection of tax in order to ensure its
payments.
A withholding agent is explicitly made
personally liable under Sec. 251 of the NIRC for
the payment of the tax required to be withheld,
in order to compel the withholding agent to
withhold the tax under any and all
circumstances. In effect, the responsibility for
 National Taxation
the collection of the tax as well as the payment
thereof is concentrated upon the person over
whom the Government has jurisdiction.
(Filipinas Synthetic Fiber Corporation v. CA, et al.,
G.R. Nos. 118498 & 124377, October 12, 1999)
NOTE: In applications for refund, the
withholding agent is considered a taxpayer
because if he does not pay, the tax shall be
collected from him. (CIR v. P&G, G.R. No. L-66838,
December 2, 1991)
The withholding agent is liable for the correct
amount of the tax that should be withheld. The
withholding agent is, moreover, subject to and
liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld
be finally found to be less than the amount that
should have been withheld under the law. Given
this responsibility, a withholding agent can
validly claim for tax refund.
Q: In several transactions including but not
limited to the sale of real properties, lease
and commissions, respondent allegedly
earned income and paid the corresponding
income taxes due which were collected and
remitted by various payors as withholding
agents to the BIR during the taxable year
2000. BIR denied the claim for refund
because of absence of proof of actual
remittance. Is the proof of actual remittance
to BIR is a condition to claim for a refund of
unutilized tax credits?
A: NO. Proof of actual remittance by the
respondent is not needed in order to prove
withholding and remittance of taxes to
petitioner. Section 2.58.3(B) of Revenue
Regulation No. 2-98 clearly provides that proof
of remittance is the responsibility of the
withholding agent and not of the taxpayer-
refund claimant. It should be borne in mind by
the petitioner that payors of withholding taxes
are by themselves constituted as withholding
agents of the BIR. The taxes they withhold are
held in trust for the government. Moreover,
pursuant to Section 57 and 58 of the NIRC of
1997, as amended, the withholding of income
tax and the remittance thereof to the BIR is the
responsibility of the payor and not the payee.
Therefore, the respondent taxpayer-refund
claimant has no control over the remittance of
the taxes withheld from its income by the
withholding agent or payor who is the agent of
the petitioner. The Certificates of Creditable Tax
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Withheld at Source issued by the withholding
agents of the government are prima facie proof
of actual payment by herein respondent-payee
to the government itself through said agents.
(CIR vs. PNB, G.R. No. 180290, September 29,
2014, as penned by J. Leonen)
Persons required to withhold taxes
The withholding taxes shall be withheld by the
person having control over the payment and
who at the same time claims the expenses. The
following persons are constituted as withholding
agents:
1. Juridical person, whether or not engaged in
trade or business;
2. Individuals, with respect to payments made
in connection with his trade or business;
3. Individual buyers, whether or not engaged
in trade or business insofar as taxable sale,
exchange or transfer of real property is
concerned; and
4. All government offices including GOCCs as
well as provincial, city and municipal
governments and barangay (Sec. 2.57.3, RR
No. 2-1998)
Withholding agent in case the employer is
the Government of the Philippines
If the employer is the Government of the
Philippines or any of its political subdivision,
agency or instrumentality thereof, the return of
the amount deducted and withheld upon any
wage shall be made by the officer or employee
having control of the payment of such wage, or
by any officer or employee duly designated for
the purpose. (Sec. 82, NIRC)
Consequences for Failure to Withhold
1. Liable for surcharges and penalties;
2. Liable upon conviction to a penalty equal to
the total amount of the tax not withheld, or
not accounted for and remitted (Sec. 251,
NIRC); and
3. Any income payment which is otherwise
deductible from the payor’s gross income
will not be allowed as a deduction if it is
shown that the income tax required to be
withheld is not paid to the BIR (Sec. 2, RR
No. 18-2013)
Q: In case of failure by the withholding agent
to perform his duty to withhold and remit
192
 Taxation Law
tax, is the taxpayer absolved of liability?

A: The liability of the withholding agent is

independent from that of the taxpayer. The
former cannot be made liable for the tax due
because it is the latter who earned the income
subject to withholding tax. The withholding
agent is liable only insofar as he failed to
perform his duty to withhold the tax and remit
the same to the government. The liability for the
tax, however, remains with the taxpayer
because the gain was realized and received by
him. xxx (The taxpayer) remains liable for the
payment of tax as (he) shares the responsibility
of making certain that the tax is properly
withheld by the withholding agent, so as to
avoid any penalty that may arise from the non-
payment of the withholding tax due. (RCBC vs.
CIR, G.R. No. 170257, 7 September 2011)

193
 National Taxation
TRANSFER TAX
These are taxes imposed upon the privilege of
passing ownership of property without any
valuable consideration. (Domondon, 2014)
Kinds of Transfer Taxes under the NIRC
1. Estate tax
2. Donor’s tax
Q: Are donations inter vivos and donations
mortis causa subject to estate tax? (1994
BAR)
A: GR: Donations inter vivos are subject to
donor's tax while donations mortis causa are
subject to estate tax.
XPN: If the transferor's control over the
property donated inter vivos extends up to the
death of the donor, such transfers in
contemplation of death, revocable transfers, are
subject to estate tax.

Transfer Tax vs. Income Tax

TRANSFER TAX INCOME TAX

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

Estate Tax vs. Donor’s Tax

ESTATE TAX DONOR’S TAX

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

XPN: Encumbrance on the property

Grant of
Sec. 86, NIRC donated, if assumed by the donee and
deductions
amount specifically provided by the
donor as a diminution of the property
donated may be claimed as deduction.
GR: Notice of donation is not required.

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

NOTE: Notice is required in the given

exceptions in order for the donation to be

UNIVERSITY OF SANTO TOMAS 194

2021 GOLDEN NOTES
 Taxation Law
ESTATE TAX DONOR’S TAX
exempt from donor’s tax and to claim full
deduction of the donation given to
qualified donee.
Notice, Notice of death to the Commissioner, not
when filed required.
1. A transfer subject to estate tax
Filing of 2. Estate consists of registered or
A transfer subject to donor’s tax
return registrable property, regardless of
value of gross estate
1. Each gift made during the calendar
year which is to be included in
1. Value of the gross estate computing net gifts
2. Deductions under Sec. 86, NIRC 2. The deductions claimed and allowable
3. Other pertinent information 3. Any previous net gifts made during
Contents of
the same calendar year
return
If Gross Estate exceeds P5M, certified by a 4. The name of the donee
CPA as to assets, deductions, tax due,
whether paid or not Such further information as may be
required by rules and regulations made
pursuant to law.
Within 1 year from death of decedent,
Time of
except in meritorious cases where an Within 30 days after donation was made.
filing
extension not exceeding 30 days is granted No extension allowed.
return
by the Commissioner. (Sec. 90, NIRC)
Payment of
Pay as you file. Pay as you file.
tax due
GR: Extension of payment is not allowed.

XPN: When it would impose undue

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

Payment by Installment – if the available

Extension cash of the estate is insufficient to pay the
None
of payment tax due, payment by installment shall be
allowed within two (2) years from when it
should be paid without penalty and
interest.

XPNs to the XPN: When taxpayer is guilty

of:
1. Negligence
2. Intentional disregard of rules and
regulation
3. Fraud
Requireme
nt for
Bond not exceeding double the amount of
grant of
the tax and with such sureties as the None
extension
Commissioner deems necessary.
of payment

195
 National Taxation
ESTATE TAX
BASIC PRINCIPLES, CONCEPT,
AND DEFINITION
Estate tax 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. Estate
tax laws rest in their essence upon the principle
that death is the generating source from which
the taxing power takes its being, and that it is
the power to transmit or the transmission from
the dead to the living on which the tax is more
immediately based. (Lorenzo v. Posadas, 64 Phil
353)
Inheritance tax is a tax imposed on the legal
right or privilege to succeed to, receive or take
property by or under a will, intestacy law, or
deed, grant or gift becoming operative at or after
the death. (Lorenzo v. Posadas, 64 Phil. 353)
NOTE: Presently, there is no inheritance tax
imposed by law. P.D. No. 69 passed on
November 24, 1972, effective January 1, 1973,
abolished the inheritance tax for failure to meet
one of the requisites of a sound tax system,
which is administrative feasibility.
Estate planning is the manner by which a
person takes step to conserve the property to be
transmitted to his heirs by decreasing the
amount of estate taxes to be paid upon his death.
It is considered as lawful because, “the legal
right of a taxpayer to decrease the amount of
what otherwise would be his taxes or altogether
avoid them by means which the law permits,
cannot be doubted”. (Delpher Trades Corporation
v. IAC, et al. G.R. No. 73584, January 28, 1988)
Q: A law was passed by Congress abolishing
estate tax. Is the law valid?
A: YES, it is in the nature of a tax exemption.
Settled is the rule that the power to tax includes
the power to grant an exemption.
Nature of estate tax
It is not a tax on property because their
imposition does not rest upon general
ownership but rather, they are privilege tax
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
since they are imposed on the act of passing
ownership of property. (Domondon, 2009)
Characteristics of estate tax (TANG-DEP)
1. It is a transfer tax.
It is the tax imposed upon the privilege of
passing ownership of property without any
valuable consideration.
2. It is an ad valorem tax.
The amount of transfer tax is dependent on
the value of the properties transferred.
3. It is a national tax.
It is a tax levied by the national government.
4. It is a general tax.
It applies to all transfers through succession.
5. It is a direct tax.
It cannot be shifted to another. It subjects
transferor-decedent to tax.
6. It is an excise tax.
It is a tax imposed on the privilege of
transferring property.
Requisites for imposition of estate tax (DAD)
1. Death of decedent
2. Successor is alive at the time of decedent’s
death
3. Successor is not disqualified to inherit
Purpose and object of estate tax
1. To generate additional revenue for the
government.
2. To compensate the government for the
protection given to the decedent that enabled
him to prosper and accumulate wealth.
3. Remove the disparity in the tax treatment of
a sale and transfer by death.
NOTE: Generally, the purpose of the estate tax is
to tax the shifting of economic benefits and
enjoyment of property from the dead to the
living.
196
 Taxation Law
Theories on the purposes of estate tax
Benefits-protection
It is based on the power of the State to
demand and receive taxes on the reciprocal
duties of support and protection.
Privilege or State-partnership
The State, as a passive and silent partner in
the privilege of accumulating property, has
the right to collect the share which is
properly due it.
Ability to Pay
The receipt of inheritance is in the nature of
unearned wealth which creates the ability to
pay the tax.
Redistribution of wealth
The receipt of inheritance contributes to the
widening inequalities in wealth. Through
estate tax, the value received by the
successor is reduced and brings said value
into the coffers of the government.
3. Resident alien (RA)
4. Non-resident alien (NRA)
NOTE: Only natural persons can be held liable
for estate tax. Domestic and foreign corporations
cannot be liable because they are not capable of
death.
COMPOSITION OF GROSS ESTATE
Determination of gross estate
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, wherever situated:
provided, however, that in the case of a non-
resident decedent who at the time of his death
was not a citizen of the Philippines, only that
part of the entire gross estate which is situated
in the Philippines shall be included in his taxable
estate. (Sec. 86, TRAIN Law)
Gross estate based on citizenship and
residency

Time and Transfer of Properties DECEDENT GROSS ESTATE

1. All properties, real or
The properties and rights are transferred to the personal, wherever
successors at the time of death. (Art. 777, Civil Citizens and
Residents situated.
Code) 2. Intangible personal
property wherever
The statute in force at the time of death of the (RC, NRC, RA) situated.
decedent governs the imposition of the estate
tax.
1. Real property
situated in the
Estate tax accrues at the time of death of
Philippines.
decedent. As such, succession takes place and
2. Tangible personal
the right of the state to tax vests instantly.
property situated in
the Philippines.
The tax is to be measured by the value of the
3. Intangible personal
estate as it stood at the time of the decedent’s NRA
property, its
death regardless of any postponement of actual
inclusion is subject to
possession or any subsequent increase or
the rule on
decrease in value. (Lorenzo v. Posadas, 64 Phil
reciprocity provided
353)
for under Sec. 104 of
the NIRC.
CLASSIFICATION OF DECEDENT
(R.A. 10963)
Individuals liable to pay estate tax:
1. Resident citizens (RC)
2. Non-resident citizens (NRC)

197
 National Taxation
SUMMARY OF RULES ON GROSS ESTATE
Residents or Citizens
Property location Within Outside
Real properties ✓ ✓
Personal
properties
Tangible ✓ ✓
Intangible ✓ ✓
Q: Is there a need to disclose properties
outside the Philippines?
A: YES, whether resident or non-resident. A
citizen or resident decedent is taxed on
properties within or without. On the other hand,
while a non-resident alien decedent is taxed only
on properties within the Philippines, it is a
requirement that his estate tax return should
disclose the value of his gross estate outside the
Philippines in order to avail of the allowable
deductions. (Sec. 86 (B), NIRC)
Intangible personal property deemed
situated in the Philippines
1. Franchise which must be exercised in the
Philippines.
2. Shares, obligations or bonds issued by any
corporation or sociedad anonima organized
or constituted in the Philippines in
accordance with its laws (domestic
corporation).
3. Shares, obligations or bonds by any foreign
corporation 85% of its business is located in
the Philippines.
4. Shares, obligations or bonds issued by any
foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines.
5. Shares or rights in any partnership, business
or industry established in the Philippines.
(Sec. 104, NIRC)
NOTE: These intangible personal properties are
in effect exceptions to the Latin maxim of
mobilia sequuntur personam. This enumeration
is significant only for non-resident alien because
they are the only set of taxpayers where the situs
of the property is considered in determining
whether their property shall form part of the
gross estate or not.
Q: When shall intangible personal properties
of a non-resident alien be excluded from the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
NRA without reciprocity NRA with reciprocity
Within Outside Within Outside
✓ x ✓ x
✓ x ✓ x
✓ x x x
gross estate?
A: Said properties shall be excluded on the basis
of reciprocity. No donor’s or estate tax shall be
collected in respect of intangible personal
property:
1. Total exemption
If the decedent at the time of his death or
the donor at the time of the donation was a
citizen and resident of a foreign country
which at the time of his death or donation
did not impose a transfer tax of any
character, in respect of intangible personal
property of citizens of the Philippines not
residing in that foreign country, or
2. Partial exemption
If the laws of the foreign country of which
the decedent or donor was a citizen and
resident at the time of his death or donation
allows a similar exemption from transfer or
death taxes of every character or
description in respect of intangible
personal property owned by citizens of the
Philippines not residing in that foreign
country. (Sec. 104, NIRC)
NOTE: Reciprocity in exemption does not
require the “foreign country” to possess
international personality in the traditional sense
(i.e., compliance with the requisites of
statehood). Thus, Tangier, Morocco (Collector v.
Campos-Rueda, 42 SCRA 23) and California, a
state in the American Union (Collector v. de Lara,
102 Phil 813) were held to be foreign countries
within the meaning of Section 104.
Q: For purposes of estate and donor’s tax, do
we adhere to mobilia sequuntur personam?
A: NO.
GR: The situs of an intangible property is
198
 Taxation Law
determined by the domicile or residence of the value) or
owner. This is known as the principle of “mobilia 2. Fair market value as
sequuntur personam.” shown in the schedule of
values fixed by the
XPN: The principle is not controlling: provincial and city
1. When it is inconsistent with the express assessors (fair market
provisions of statute; or value that appears in the
2. When justice does not demand that it latest tax declaration)
should be, as when the property has in fact
a situs elsewhere. (Mamalateo, 2014) If there is an improvement,
the value of improvement is
Q: Will shares of stock issued by a foreign the construction cost per
corporation in favor of a non-resident form building permit or the fair
part of the gross estate? market value per latest tax
declaration.
A: YES, if 85% of the business of the foreign
corporation who issued the stocks is located in Fair market value is the price
the Philippines or if it is considered to have at which any seller will sell,
obtained business situs in the Philippines. and any buyer will buy both
(Section 104, NIRC) willingly without any force or
intimidation. It is the price
Instances where amount of the gross estate is which a property will bring
significant when it is offered by one who
desires to buy and one who is
1. Estate tax returns showing a gross value not compelled to sell.
exceeding Five million pesos (P5,000,000)
shall be supported with a statement duly Whether tangible or
certified to by a Certified Public Accountant Personal intangible, appraised at FMV.
containing the following: property “Sentimental value” is
a. Itemized assets of the decedent with practically disregarded.
their corresponding gross value at the Unlisted
time of his death, or in the case of a 1. Unlisted common - book
non-resident, not a citizen of the value
Philippines, of that part of his gross 2. Unlisted preferred - par
estate situated in the Philippines; value
b. Itemized deductions from gross estate
allowed in Section 86; and Listed – Closing rate AT THE
c. The amount of tax due whether paid TIME of death. If none is
or still due and outstanding. (Sec. 90 available, the FMV is the
(A), NIRC) arithmetic mean between the
Shares of highest and lowest quotation
2. The value of the gross estate not situated in stock at a date nearest the date of
the Philippines of a decedent who is a non- death.
resident alien must be included in the estate
tax return in order to be allowed to claim In determining the book value
deductions. (Sec.86(D), NIRC) of common shares, the
following shall not be
Basis for the valuation of gross estate considered:
1. Appraisal surplus
PROPERTY VALUATION 2. The value assigned to
Whichever is higher between preferred shares, if there
the: is any
Real
1. Fair market value as Right to Shall be taken into account the
property
determined by the usufruct, probable life of the beneficiary
Commissioner (zonal use or in accordance with the latest

199
 National Taxation
habitation, basic standard mortality table,
as well as to be approved by the
that of Secretary of Finance, upon
annuity recommendation of the
Insurance Commissioner.
ITEMS TO BE INCLUDED IN
DETERMINING GROSS ESTATE
(DIGRI-PLS)
1. Decedent's interest;
2. Transfer in contemplation of death;
3. Revocable transfer;
4. Property under General Power of
Appointment (GPA);
5. Proceeds of life insurance;
6. Prior interests;
7. Transfers for insufficient consideration;
8. Share of the Surviving Spouse (Sec 85,
NIRC)
NOTE: Nos. 2, 3, 4 and 7 are properties not
physically in the estate (these have already
been transferred during the lifetime of the
decedent but are still subject to payment of
estate tax) Although these properties are inter
vivos in form, they are treated as mortis causa in
substance. Note that transfers made for a bona
fide consideration shall not be included in the
gross estate.
Items above are discussed in detail below.
Decedent’s interest
This refers to the extent of equity or ownership
participation of the decedent on any property
physically existing and present in the gross
estate, whether or not in his possession, control,
or dominion. It also refers to the value of any
interest in property owned or possessed by the
decedent at the time of his death. (Tabag, 2015)
The decedent’s interest includes any interest
including its fruits, having value or capable of
being valued, transferred by the decedent at his
death. Rental income from buildings and
dividends from investments, interest on bank
deposits which have accrued at the time of his
death qualify as decedent’s interest which
should be included in the gross estate.
Q: Jose Ortiz owns 100 hectares of
agricultural land planted with coconut trees.
He died on May 30, 1994. Prior to his death,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
the government, by operation of law,
acquired under the Comprehensive Agrarian
Reform Law all his agricultural lands except
5 hectares. Upon the death of Ortiz, his
widow asked you how she will consider the
100 hectares of agricultural land in the
preparation of the estate tax return. What
advice will you give her? (1994 BAR)
A: The 100 hectares of land that Jose Ortiz
owned but which prior to his death on May 30,
1994 were acquired by the government under
CARP are no longer part of his taxable gross
estate, with the exception of the remaining 5
hectares which under Sec. 78(a) of the NIRC still
forms part of “decedent's interest”
Q: If the decedent is a partner in a
partnership, will his interest in the
partnership considered as part of his gross
estate?
A: YES. The decedent’s interest in the
partnership at the time of his death shall form as
part of his gross estate. His contributions and
his share in the partnership’s profits and surplus
shall be included in his gross estate.
Transfers in contemplation of death
It is a transfer motivated by the thought of an
impending death regardless of whether or not
death is imminent.
This takes place:
1. When the decedent has, at any time, made a
transfer in contemplation of or intended to
take effect in possession or enjoyment at or
after death; or
2. When decedent has, at any time, made a
transfer under which he has retained for
his life or for a period not ascertainable
without reference to his death or any
period which does not in fact end before his
death:
a. Possession, enjoyment or right to
income from the property; or
b. The right, either alone or in
conjunction with any other person, to
designate the person who will possess
or enjoy the property or income
therefrom.
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 Taxation Law
XPN: In case of a bona fide sale for an adequate
and full consideration in money or money’s
worth.
NOTE: The concept of transfer does not
constitute any transfers made by a dying person.
It is not the mere transfer that constitutes a
transfer in contemplation of death but the
retention of some type of control over the
property transferred. In effect, there is no full
transfer of all interests in the property inter
vivos.
Q: Mr. Agustin, 75 years old and suffering
from an incurable disease, decided to sell for
valuable and sufficient consideration a house
and lot to his son. He died one year later.
In the settlement of Mr. Agustin's estate, the
BIR argued that the house and lot were
transferred in contemplation of death and
should therefore form part of the gross
estate for estate tax purposes. Is the BIR
correct? (2013 BAR)
A: NO. Pursuant to Section 85(B) of the NIRC,
properties that are transferred in contemplation
of death form part of the gross estate of the
decedent. An exception to this is a bona fide sale
for an adequate and full consideration in money.
Therefore, the house and lot which Mr. Agustin
sold to his son for a valuable and sufficient
consideration should not be considered as
forming part of Mr. Agustin’s gross estate.
Q: A, aged 90 years and suffering from
incurable cancer, on August 1, 2001 wrote a
will and, on the same day, made several
inter-vivos gifts to his children. Ten days
later, he died. In your opinion, are the inter-
vivos gifts considered transfers in
contemplation of death for purposes of
determining properties to be included in his
gross estate? (2001 BAR)
A: YES. When the donor makes his will within a
short time of, or simultaneously with, the
making of gifts, the gifts are considered as
having been made in contemplation of death.
(Roces v. Posadas, 58 Phil. 108) Obviously, the
intention of the donor in making the inter-vivos
gifts is to avoid the imposition of the estate tax
and since the donees are likewise his forced
heirs who are called upon to inherit, it will
create a presumption juris tantum that said
201
donations were made mortis causa, hence, the
properties donated shall be included as part of
A's gross estate.
Circumstances to consider in determining
that the transfer is in contemplation of death
1. Age of the decedent at the time the transfers
were made;
2. Decedent’s health, as he knew it at or before
the time of the transfers;
3. The interval between the transfers and the
decedent’s death;
4. The amount of property transferred in
proportion to the amount of property
retained;
5. The nature and disposition of the decedent;
6. The existence of a general testamentary
scheme of which the transfers were a part;
7. The relationship of the donee(s) to the
decedent;
8. The existence of a desire on the part of the
decedent to escape the burden of managing
property by transferring the property to
others;
9. The existence of a long-established gift-
making policy on the part of the decedent;
10. The existence of a desire on the part of the
decedent to vicariously enjoy the enjoyment
of the donees for the property transferred;
11. The existence of the desire by the decedent
of avoiding estate taxes by means of making
inter vivos transfers of property (Estate of
Oliver Johnson v. Commissioner, 10 T.C. 680);
and
12. Concurrent making of will or making a will
within a short time after the transfer. (Roces
v. Posadas, 58 Phil. 108)
Motives which negate transfer in
contemplation of death
1. To relieve the donor from the burden of
management;
2. To save income taxes or property taxes;
3. To settle family litigated and unlitigated
disputes;
4. To provide independent income for
dependents;
5. To see the children enjoy the property while
the donor is alive;
6. To protect family from hazards of business
operations; or
7. To reward services rendered.
 National Taxation
Q: On April 9, 1928, Felix Dison made a gift
inter vivos, transferring 22 tracts of land, in
favor of his son Luis Dizon. Luis formally
accepted the donation in writing on April 17
and such acceptance was acknowledged
before a notary public on April 20, 1928. On
April 21, 1928, Felix Dison died. Is the
donation inter vivos or mortis causa?
A: The transfer is inter vivos in form but mortis
causa in substance; it is a transfer in
contemplation of death. (Dison v. Posadas, 57
Phil. 465)
Q: On March 10 and 12, 1925, Esperanza
Tuazon, by means of public documents,
donated certain parcels of land situated in
Manila to Concepcion and Elvira, who
accepted the same. On January 5, 1926, the
donor died without any forced heir and in
her will which was admitted to probate, she
bequeathed to each of the said donees the
sum of P5,000. After the estate had been
distributed among the instituted legatees
and before delivery of their respective
shares, the appellee herein, as CIR, ruled that
the appellants, as donees and legatees,
should pay as deficiency inheritance tax. Are
these donations mortis causa, thus should be
included as part of the gross estate?
A: YES. These donations are inter vivos but made
in contemplation of death, thus, considered as
donation mortis causa. The concurrent making of
a will or making a will within a short time after
the transfer shows clearly the intention of the
donor in making the said donations inter vivos in
order to avoid imposition of estate tax. We refer
to the allegations that such transmissions were
effected in the month of March, 1925, that the
donor died in January, 1926, and that the donees
were instituted legatees in the donor's will
which was admitted to probate. It is from these
allegations, especially the last, that we infer a
presumption juris tantum that said donations
were made mortis causa. (Roces v. Posadas, 58
Phil. 108)
Revocable transfers
It is a transfer by trust or otherwise, where the
enjoyment thereof was subject at the date of his
death to any change through the exercise of a
power to alter or amend or revoke or terminate
such transfer by:
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
1. Decedent alone;
2. By the decedent in conjunction with any
other person (without regard to when or
from what source the decedent acquired
such power), to alter, amend, revoke or
terminate; or
3. Where any such power is relinquished in
contemplation of the decedent’s death
other than a bone fide sale for an adequate
and full consideration in money or money’s
worth. (Sec. 85(C)(1), NIRC)
Power to alter, amend, or revoke considered
to exist on the date of decedent’s death even
though
1. The exercise of the power is subject to a
precedent giving of notice; or
2. The alteration, amendment or revocation
takes effect only on the expiration of a
stated period for the exercise of the power,
whether or not on or before the date of the
decedent’s death:
a. Notice has been given
b. The power has been exercised.
In such cases, proper adjustment shall be made
representing the interest which would have
been excluded from the power if the decedent
had lived, and for such purpose if notice has not
been given or the power has not been exercised
on or before the date of his death, such notice
shall be considered to have been given, or the
power exercised on the date of his death. (Sec.
85(C)(2), NIRC)
NOTE: Revocable transfer is part of the gross
estate of the decedent because the transferor
can revoke the transfer any time, such person
wields tremendous amount of power such that
he can revoke the transfer as if none was
actually made.
Q: Is it necessary that the decedent should
have exercised such right?
A:
GR: No. It is sufficient that the decedent has the
power to revoke, though he did not exercise
such power.
XPN: In case of a bona fide sale for an adequate
and full consideration in money and money’s
worth.
Transfer not revocable, thereby not subject
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 Taxation Law
to estate tax when creditors of his estate.

1. The decedent’s power could only be General Power of Appointment (GPA) vs.
exercised with the consent of all parties Special Power of Appointment (SPA)
having an interest in the transferred
property and if the power adds nothing to GPA SPA
the rights the parties possess under local Donee appoints
law. (Lober v. United States, 346 US 335) Donee has the
successor to
power to
the property
appoint any
2. When the decedent has been completely within a
divested of the power at the time of his person he
As to limited group
chooses or
death. (ibid.) nature or class of
enjoy the
persons
3. Where the exercise of the power by the property
according to
without
decedent was subject to a contingency the will of the
beyond the decedent’s control which did not restriction.
donor.
occur before his death. (Hurd v. Makes
Commissioner of Internal Revenue, 160 F.2d appointed
610 (1st Cir. 1947)) property, for Not includible
As to tax all intents, the in the gross
4. The mere right to name trustees. Neither is implicati property of the estate of the
the grantor’s limited power to appoint ons donee; thus, donee when he
himself as trustee under conditions which forms part of dies.
did not exist at his death. (24 American the gross
Jurisprudence, Second Edition, p 790) estate.
Donee holds
Q: Mr. Mayuga donated his residential house the appointed
and lot to his son and duly paid the donor's Donee holds
property with
tax. In the Deed of Donation, Mr. Mayuga the appointed
all the
expressly reserved for himself the usufruct As to property in
attributes of
over the property for as long as he lived. effects trust or under
ownership
Describe the donated property from the the concept of a
under the
taxation perspective. (2013 BAR) trustee.
concept of an
owner.
A: The property will form part of Mr.
Mayuga's gross estate when he dies. Applying Properties passing under a GPA forms part of
Section 85(B)(1) of the NIRC, the donated decedent’s estate through
property will still form part of the gross estate of
the decedent when in the deed of donation, the 1. Will
donor “has retained for his life or for any period 2. Deed executed in contemplation of death, or
which does not in fact end before his death the intended to take effect in possession or
possession or enjoyment of, or the right to the enjoyment at, or after his death
income from the property”. Therefore, the 3. Deed under which he has retained for his life
property will form part of Mr. Mayuga’s gross or for any period not ascertainable without
estate when he dies because he donated the reference to his death or for any period
property in contemplation of death. which does not in fact end before his death:

Property passing under a general power of a. The possession, enjoyment or right to

appointment
It is the right to designate by will or deed,
without restrictions, the persons who shall
succeed to the property of the prior decedent.
The appointment could be in favor of anybody,
including himself, his estate, his creditors, or the
income from the property; or
b. The right to designate the person who
will possess or enjoy the property or
income therefrom. (Sec. 85(D), NIRC)
Q: What is the reason for inclusion of the said
property in the donee’s gross estate?

203
 National Taxation
A: The power of the donee to dispose the said 1. The estate of the decedent, his executor or
property through power of appointment is administrator taken out by the decedent
equivalent to an act of dominion, which is an upon his own life regardless of whether the
essential attribute of ownership. designation is revocable or irrevocable; or
2. A third person, other than the decedent’s
Q: What properties passing under GPA are estate, executor, or administrator provided
not included as part of a decedent’s gross that the designation is not irrevocable.
estate?
NOTE: Under the Insurance Code, in the absence
A: Those properties transferred under a bona of an express designation, the presumption is
fide sale for an adequate and full consideration that the beneficiary is revocably designated.
in money or money’s worth. Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during
Q: In his last will and testament, X his lifetime, the designation shall be deemed
bequeathed a painting to his only son, Z. The irrevocable. (Sec. 11, R.A. 10607)
will also granted Z the power to appoint his
wife, W, as successor to the painting in the Not part of the gross estate when
event of Z’s death. Z died and W succeeded to
the property. Should the painting be included 1. Proceeds from a life insurance policy is
in the gross estate of Z and thus be subject to receivable by a 3rd person (NOT the
estate tax? (2009 BAR) decedent’s estate, executor or administrator)
AND that the said beneficiary is designated as
A: NO. Only property passing under a general irrevocable;.
power of appointment is included in the gross 2. Where the life insurance was not taken by the
estate of the decedent. In this case, the painting decedent upon his own life even though the
has to be transferred by Z only to his wife, W, beneficiary is the decedent’s estate, executor,
based on the will of his father, X. Since the or administrator.
power of appointment is specific (i.e., only to his 3. Proceeds of a group insurance policy taken
wife), such property should not be included in out by a company for its employees.
his gross estate. 4. Proceeds of insurance policies issued by the
GSIS to government officials and employees
Transfer in contemplation of death vs. are exempt from all taxes.
property passing under general power of 5. Benefits accruing from SSS law.
attorney 6. Proceeds of life insurance payable to heirs of
deceased members of military personnel.
TRANSFER IN
GENERAL
CONTEMPLA- To determine the conjugal or separate
POWER OF
TION OF character of proceeds, the following factors
APPOINTMENT
DEATH are considered
For his life or any
period not 1. Policy taken before marriage
ascertainable w/o – Source of funds determines ownership of
Effectiv At or after reference to his the proceeds of life insurance
ity death death or for any
period which does 2. Policy taken during marriage
not in fact end a. Beneficiary is estate of the insured
before his death. – Proceeds are presumed conjugal;
Property passed hence, one-half share of the surviving
By trust or spouse is not taxable
Means under GPA and by
otherwise
will or by deed
b. Beneficiary is third person
Proceeds of life insurance – Proceeds are payable to beneficiary
even in premiums were paid out of the
Proceeds of life insurance forms part of the conjugal
gross estate when the beneficiary is:
Q: If the beneficiary who was irrevocably

UNIVERSITY OF SANTO TOMAS 204

2021 GOLDEN NOTES
 Taxation Law
designated caused the death of the insured,
will the proceeds be included in the gross
estate?
A: YES. It is considered revocable unless he
acted in self-defense.
NOTE: The interest of a beneficiary in a life
insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or
accessory in willfully bringing about the death of
the insured. In such a case, the share forfeited
shall pass on to the other beneficiaries, unless
otherwise disqualified. In the absence of other
beneficiaries, the proceeds shall be paid in
accordance with the policy contract. If the policy
contract is silent, the proceeds shall be paid to
the estate of the insured. (Sec. 12, Insurance Code
as amended by R.A. 10607, August 15, 2013)
Q: Suppose an employer takes a life
insurance policy on the life of an employee
where the employer is designated as the
beneficiary, what are its tax implications?
A: The premiums paid by the employer will not
be deductible from its employer’s gross income.
(Sec. 36 (A)(4), NIRC) On the part of the
employee, it will not be included in his/her gross
income of the based on Sec. 32(B)(1), NIRC.
However, the life insurance proceeds will form
part of the gross estate of the decedent
employee if his designation is revocable.
Conversely, if the designation is irrevocable, it
will not form part of his gross estate.
Q: Ralph Donald, an American citizen, was a
top executive of a U.S company in the
Philippines until he retired in 1999. He came
to like the Philippines so much that following
his retirement, he decided to spend the rest
of his life in the country. He applied for and
was granted permanent resident status the
following year. In the spring of 2004, while
vacationing in Orlando Florida USA, he
suffered a heart attack and died. At the time
of his death, he left the following properties:
a. Bank deposits with Citibank Makati and
Citibank Orlando Florida;
b. Rest house in Orlando, Florida;
c. A condominium unit in Makati;
d. Shares of stock in the Phil subsidiary of
the U.S company where he worked;
e. Shares of stock in San Miguel Corporation
and PLDT;
205
f. Shares of stock in Disney World in
Florida
g. U.S treasury bonds; and
h. Proceeds from a life insurance policy
issued by a US corporation.
Which of the foregoing assets shall be
included in the taxable gross estate in the
Philippines? Explain. (2005 BAR)
A: All of the properties enumerated except (h),
the proceeds from life insurance, are included in
the taxable gross estate in the Philippines. Ralph
Donald is considered a resident alien for tax
purposes since he is an American citizen and
was a permanent resident of the Philippines at
the time of his death. The value of the gross
estate of a resident alien decedent shall be
determined by including the value at the time of
his death of all property, real or personal,
tangible or intangible, wherever situated. (Sec.
85, NIRC)
The other item, (h) proceeds from a life
insurance policy, may be included in his gross
estate only when it was Ralph Donald who took
out the insurance upon his own life, payable
upon his death to his estate, or when the
beneficiary is a third person other than his
estate who is not designated as an irrevocable
beneficiary. (Sec. 85(E), NIRC)
Q: If the property insured was destroyed
after the taxpayer’s death, will insurance
money still form part of the gross estate?
A: NO, it will be considered as a receivable of the
estate.
NOTE: The value of the property prior to its
destruction and at the time of the death of the
decedent is included as part of the gross estate.
Q: Antonia Santos, 30 years old, gainfully
employed, is the sister of Eduardo Santos.
She died in an airplane crash. Edgardo is a
lawyer and he negotiated with the airline
company and insurance company and they
were able to agree to settlement of P10
million. This is what Antonia would have
earned as somebody who was gainfully
employed. Edgardo was her only heir.
a. Is the P10 million subject to estate tax?
 National Taxation
b. Should Edgardo report the 10 million as
his income being Antonia’s only heir?
(2007 BAR)
A:
a. NO. The estate tax is a tax on the privilege
enjoyed by an individual in controlling the
disposition of her properties to take effect
upon her death. The P10 million is not a
property existing at the time of the
decedent’s death; hence it cannot be said
that she exercised control over its
disposition. Since the privilege to transmit
property is not exercised by the decedent,
the estate tax cannot be imposed thereon.
b. NO. The amount received in a settlement
agreement with the airline company and
insurance company is an amount received
from the accident insurance covering the
passenger of the airline company and is in
the nature of compensation for personal
injuries and for damages sustained on
account of such injuries, which is excluded
from the gross income of the recipient.
Q: On June 30, 2000, X took out a life
insurance policy on his own life in the
amount of P2,000,000. He designated his
wife, Y, as irrevocable beneficiary to
P1,000,000 and his son Z, to the balance of
P1,000,000, but in the latter designation,
reserving his right to substitute him for
another.
On September 1, 2003 X died and his wife
and son went to the insurer to collect the
proceeds of X’s life insurance policy.
a. Are the proceeds of the insurance subject
to income tax on the part of Y and Z for
their respective shares? Explain.
b. Are the proceeds of the insurance to form
part of the gross estate of X? Explain.
(2003 BAR)
A:
a. NO. The law explicitly provides that the
proceeds of life insurance policies paid to
the heirs or beneficiaries upon the death of
the insured are excluded from gross income
and is exempt from taxation. The proceeds
of life insurance received upon the death of
the insured constitute a compensation for
the loss of life, hence a return of capital,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
which is beyond the scope of income
taxation. (Sec. 32 B (1), NIRC)
b. Only the proceeds of 1M given to the son, Z,
shall form part of the Gross Estate of X.
Under the NIRC, proceeds of life insurance
shall form part of the gross estate of the
decedent to the extent of the amount
receivable by the beneficiary designated in
the policy of the insurance except when it is
expressly stipulated that the designation of
the beneficiary is irrevocable. As stated in
the problem, only the designation of Y is
irrevocable while the insured/decedent
reserved the right to substitute Z as
beneficiary for another person. Accordingly,
the proceeds received by Y shall be excluded
while the proceeds received by Z shall be
included in the gross estate of X. (Sec. 85(E),
NIRC)
Prior interests
Prior Interest a real transfers, trusts, estates,
interests, rights, powers and relinquishment of
powers made, created, arising existing, exercised
or relinquished before or after the effectivity of
the NIRC. (Sec. 85, NIRC)
Coverage of prior interest
1. Transfers in contemplation of death
See previous discussion on “Transfers in
contemplation of death.”
2. Revocable transfers
See previous discussion on “Revocable
transfers.”
3. Life insurance proceeds to the extent of the
amount receivable by the estate of the
deceased, executor or administrator under
policies taken out by the decedent upon his
own life or to the extent of the amount
receivable by any beneficiary not expressly
designated as irrevocable.
See previous discussion on “Proceeds of life
insurance.”
Transfers for insufficient consideration
When a transfer is for insufficient consideration,
only the excess of the fair market value of the
206
 Taxation Law
property at the time of the decedent’s death over
the consideration received shall be included in
the gross estate.
This is applicable to:
1. Transfers in contemplation of death
2. Revocable transfers
3. Transfers under GPA
NOTE: The above transfers should be made for a
consideration in money or money’s worth but is
not a bona fide sale for an adequate and full
consideration in money and money’s worth.
Otherwise, if not included in the three transfers
enumerated above, the transfer for insufficient
consideration is subject to donor’s tax.
Q: What is the amount to be included in the
gross estate of the decedent? How about in
net gift in case of transfers for insufficient
consideration subject to donor’s tax?
A: Only the amount in excess of the fair market
value at the time of death over the consideration
received at the time of transfer. In case of
transfers for insufficient consideration subject to
donor’s tax, the amount of the net gift shall be
the excess of the fair market value at the time of
transaction over the consideration received.
Q: Mr. A knows that he is dying, therefore he
sold his car worth P500,000 to his only son
for P300,000. Mr. A died and at the time of
his death, the fair market value of his car is
P550,000. How much is to be included as part
of the gross estate? What if he is not dying
and indeed, he is very much alive and
kicking?
A: P250,000. This represents the excess of the
FMV at the time of his death which is P550,000
over the consideration received on the amount
of P300,000.
On the second scenario, the insufficient
consideration shall not be considered as part of
the gross estate because the transfer does not
fall under any of the following: transfer in
contemplation of death, revocable transfer, or
property passing under general power of
appointment. Hence, the difference of P200,000
(P500K-300K) is subject to gift tax.
207
Share of the surviving spouse
Q: Is the capital of the surviving spouse
considered part of the gross estate?
A: NO. The capital or paraphernal property of
the surviving spouse is not included in the
computation of the gross estate. It is actually a
deduction from the decedent’s gross estate in
order to arrive at the net estate.
Under Section 85 (H) of the NIRC, capital
pertains to the property of the spouses brought
into the marriage. Under the Civil Law capital
means property brought by the husband to the
marriage while the properties brought into the
marriage by the wife is called paraphernal
property.
Exclusive properties under the system of
absolute community of properties (ACP)
1. Property acquired during the marriage by
gratuitous title by either spouse, and the
fruits as well as the income thereof, if any,
unless it is expressly provided by the
donor, testator or grantor that they shall
form part of the community property.
2. Property for personal and exclusive use of
either spouse. However, jewelry shall form
part of the community property.
3. Property acquired before the marriage by
either spouse who has legitimate
descendants by a former marriage, and the
fruits as well as the income, if any, of such
property.
Exclusive properties under the system of
conjugal partnership of gains (CPG)
1. That which is brought to the marriage as
his or her own.
2. That which each acquires during the
marriage by gratuitous title (note that the
fruits and income of those acquired by
gratuitous title during marriage shall be
community property).
3. That which is acquired by right of
redemption, by barter or by exchange with
property belonging to only one of the
spouses; and
 National Taxation
4. That which is purchased with exclusive
money of the wife or the husband. (Art. 109,
Family Code)
Q: Can you apply Sec. 85 in separation of
property?
A: NO, in that case, there will be no division.
ALLOWABLE DEDUCTIONS
FROM GROSS ESTATE
The deductions from the gross estate are:
1. Ordinary deductions (VET)
a. Expenses, losses, indebtedness,
taxes, etc. (ELIT)
i. Claims against the estate
ii. Claims against insolvent
persons
iii. Unpaid mortgage or
indebtedness on property
iv. Taxes
v. Losses
b. Vanishing deduction
c. Transfer for public use
2. Special deductions (FAS)
a. Family home
b. Standard deduction
c. Amount received by heir under RA 4917
NOTE: NRA cannot avail of the special
deductions except standard deduction. (Sec 86
(B)(1), NIRC)
Q: When is deduction not allowed from the
gross estate of NRA?
A: No deduction shall be allowed in the case of a
non-resident decedent not a citizen of the
Philippines, unless the executor, administrator,
or anyone of the heirs, as the case may be,
includes in the return required to be filed under
Section 90 of the Code the value at the time of
the decedent’s death of that part of his gross
estate NOT situated in the Philippines. (Sec. 86
(D), NIRC; Sec 7, RR 2-2003)
Enumerated deductions are discussed in detail
below.
Expenses, losses, indebtedness and taxes
(ELIT)
The difference in the treatment of ELIT as
deduction allowed to non-resident decedents is
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
that in the case of a non-resident not a citizen of
the Philippines, ELIT is allowed such proportion
of the deduction allowed to resident decedents
which the value of such part bears to the value of
his entire gross estate wherever situated.
Formula for computing ELIT deductible from
the gross estate of NRA decedent
Claims against the estate
Claims are debts or demands of pecuniary
nature which could have been enforced against
the deceased in his lifetime and could have been
reduced to simple money judgments.
Sources of claims (CTO)
1. Contract;
2. Tort; and
3. Operation of law;
Requisites for deductibility:
1. It must be a personal obligation of the
deceased existing at the time of his death
except those incurred incidental to his death
such as unpaid funeral expenses and unpaid
medical expenses.
2. The liability was contracted in good faith and
for adequate and full consideration in money
or money’s worth.
3. Debt or claim must be valid and enforceable
in court.
4. Indebtedness not condoned by the creditor
or the action to collect from the decedent
must not have prescribed. (RR No. 2-2003)
5. It must be duly substantiated.
NOTE: Unpaid taxes such as income and real
estate taxes that have accrued after the death of
the decedent are not deductible from gross
estate as they are properly chargeable to the
income of the estate. (Dela Vina v. Collector, 65
Phil. 620)
Q: BIR issued an Estate Tax Assessment
Notice demanding payment of the deficiency
208
 Taxation Law
estate tax against Jose Fernandez’s estate.
The administrator claims that in as much as
the valid claims of creditors against the
estate are in excess of the gross estate, no
estate tax was due.
May the actual claims of the creditors be fully
allowed as deductions from the gross estate
of Jose despite the fact that the claims were
reduced or condoned through compromise
agreements entered into by the estate with
its creditors?
A: YES. Under the date-of-death valuation rule,
claims existing at the time of death should be
made the basis of the determination of allowable
deductions. Thus, post-death developments,
such as condonation in this case, are not
material in determining the amount of the
deduction. (Dizon, et. al v. CA, G.R. No. 140944,
April 30, 2008)
Q: Who can avail this deduction?
A: This may be claimed as a deduction by a RC,
NRC or RA decedent provided that:
1. At the time the indebtedness was incurred
the debt instrument was duly notarized; and
2. If the loan was contracted within 3 years
before the death of the decedent, the
administrator or executor shall submit a
statement showing the disposition of the
proceeds of the loan. (Sec 86(A)(1)(c), NIRC)
Claims against insolvent persons
Requisites for deductibility:
1. The full amount of the receivables be
included first in the gross estate.
2. The incapacity of the debtors to pay their
obligation is proven not merely alleged.
NOTE: Judicial declaration of insolvency is not
necessary. It is enough that the debtor’s
liabilities exceeded his assets.
Definitions of Insolvent and Insolvent’s
debtor’s estate under Financial
Rehabilitation and Insolvency Act (FRIA) of
2010 or RA No. 10142
Insolvent shall refer to the financial condition of
a debtor that is generally unable to pay its or his
209
liabilities as they fall due in the ordinary course
of business or has liabilities that are greater than
its or his assets. (Section 4(p), RA. No. 10142)
Insolvent debtor's estate shall refer to the
estate of the insolvent debtor, which includes all
the property and assets of the debtor as of
commencement date, plus the property and
assets acquired by the rehabilitation receiver or
liquidator after that date, as well as all other
property and assets in which the debtor has an
ownership interest, whether or not these
property and assets are in the debtor's
possession as of commencement date: provided,
that trust assets and bailment, and other
property and assets of a third party that are in
the possession of the debtor as of
commencement date, are excluded therefrom.
(Section 4(q), RA. No. 10142)
Unpaid mortgage or indebtedness on
property
Requisites for deductibility:
1. The value of the property to the extent of the
decedent’s interest therein, undiminished by
such mortgage or indebtedness is included in
the gross estate; and
2. The mortgage indebtedness was contracted
in good faith and for an adequate and full
consideration in money or money’s worth.
NOTE: In case unpaid mortgage payable is being
claimed by the estate, and the loan is found to be
merely an accommodation loan where the loan
proceeds went to another person, the value of
the unpaid loan, to the extent of the decedent’s
interest therein must be included as a receivable
of the estate.
If there is a legal impediment to recognize the
same as receivable of the estate, said unpaid
obligation/mortgage payable shall not be
allowed as a deduction from the gross estate.
(Section 86(A)(1))(e), NIRC)
Where the decedent owned only one-half of the
property mortgaged so that only one-half of its
value was included in his estate, only one-half of
the mortgage debt was deductible, even though
the executor paid the entire debt, the liability of
the decedent being solidary, inasmuch as the
executor would be subrogated to the rights of
the mortgagee as against the co-owner and co-
mortgagor. (Parrot v. Commissioner, 279 U.S.
 National Taxation
870)
Q: During his lifetime, Mr. Sakitin obtained a
loan amounting to P10 million from Bangko
Uno for the purchase of a parcel of land
located in Makati City, using such property as
collateral for the loan. The loan was
evidenced by a duly notarized promissory
note. Subsequently, Mr. Sakitin died. At the
time of his death, the unpaid balance of the
loan amounted to P2 million. The heirs of Mr.
Sakitin deducted the amount of P2 million
from the gross estate, as part of the "Claims
against the Estate." Such deduction was
disallowed by the Bureau of Internal
Revenue (BIR) Examiner, claiming that the
mortgaged property was not included in the
computation of the gross estate. Do you agree
with the BIR? Explain. (2014 BAR)
A: YES. Unpaid mortgages upon, or any
indebtedness with respect to property are
deductible from the gross estate only if the value
of the decedent’s interest in said property,
undiminished by such mortgage or
indebtedness, is included in the gross estate.
(Section 86(A)(1)(e), NIRC)
In the instant case, the interest of the decedent
in the property purchased from the loan where
the said property was used as collateral, was not
included in the gross estate. Accordingly, the
unpaid balance of the loan at the time of Mr.
Sakitin’s death is not deductible as “claims
against the estate.”
Taxes
Requisites for deductibility:
1. Taxes which have accrued as of or before the
death of the decedent
2. Unpaid as of the time of his death
Taxes NOT deductible:
1. Income tax on income received after death
2. Property tax not accrued before death
3. Estate tax due from the transmission of his
estate
Losses
Requisites for deductibility:
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A. Allowed as deductions from the gross estate
of RC, NRC and RA decedent provided that
they: (DACIP)
1. Were incurred during the settlement of
the estate
2. Arise from fire, storm, shipwreck, or
other casualties, or from robbery, theft or
embezzlement
3. Not compensable (no insurance)
4. Not claimed as a deduction from income
tax
5. Incurred not later than the last day or
any extension thereof for payment of the
estate tax
B. Allowed as deductions from the gross estate
of NRA decedent:
The same items herein shall be allowed as
deduction but only the proportion of such
deductions which the value of his gross
estate in the Philippines bears to the value
of his entire gross estate, wherever situated
shall be deducted.
NOTE: Allowed deductions include those
incurred up to the last day prescribed by law or
any extension thereof for the payment of estate
tax. For a period of 1 year extendible to: a) 2
years (extrajudicial settlement), b) 5 years
(judicial settlement)
Casualty loss can be allowed as deduction in one
instance only, either for income tax purposes or
estate tax purposes.
Vanishing deduction
Vanishing deduction is the deduction allowed on
the property left behind by the decedent which
was previously subject to donor’s or estate taxes.
In property previously taxed, there are two (2)
transfers of property. Within a period of 5 years,
the same property has been transferred from the
first to the second decedent or from a donor to
the decedent. In such case, the first transfer has
been subject to a transfer tax. The second
transfer would now be subject to a vanishing
deduction.
Purpose
To lessen the harsh effects of double taxation
210
 Taxation Law
Requisites for deductibility: (VIPED) Basis for Vanishing
xxx
Deduction
1. Present decedent died within 5 years from Multiply:
receipt of property from a prior decedent or 100%, 80%,
donor. 60%, 40%, or
xx%
20% (as the
2. The property formed part of the gross estate case may be)
situated in the Philippines of the prior Vanishing deductions P xxx
decedent or was a taxable gift of the donor.
Rules in vanishing deductions:
3. The estate tax on the prior succession or
donor’s tax must have been paid. 1. The deduction allowed is only in the
amount finally determined as value of
4. The property must be identified as the one property in determining the value of the
received or acquired. gift, or the gross estate of prior decedent.

5. No vanishing deduction was allowed on the 2. Only to the extent that the value of such
same property on the prior decedent’s estate. property is included in decedent’s gross
estate.
Rate of deduction
3. Only if in determining the value of the
This depends on the period reckoned from date estate of the prior decedent, no deduction
of transfer to death of the decedent enumerated was allowed for property previously taxed
below: in respect of the property of properties
given in exchange therefore.
PERIOD DEDUCTION
1 day to 1 year 100% 4. Where a deduction was allowed of any
1 year and 1 day to 2 years 80% mortgage or lien in determining the gift tax,
2 years and 1 day to 3 or the estate tax of the prior decedent,
60% which were paid in whole or in part prior to
years
3 years and 1 day to 4 the decedent’s death, then the deduction
40% allowable for property previously taxed
years
4 years and 1 day to 5 shall be reduced by the amount so paid.
20%
years
More than 5 years No deduction 5. Such deduction allowable shall be reduced
allowed by an amount which bears the same ratio to
the amounts allowable as deductions for
Formula for computing vanishing deduction: expenses, losses, indebtedness, taxes and
transfers for public use as the amount
otherwise deductible for property
previously taxed bears to the value of the
decedent’s estate.

*Initial Basis (Value of property previously
taxed)
**Mortgage debt paid, if any (first deductions)
( )
6. Where the property referred to consists of
two or more items, the aggregate value of
such items shall be used for the purpose of
computing the deduction.
Transfer for public use

The amount of all bequests, legacies, devises or

New Initial Basis P xxx transfers to or for the use of the Government of
Less: the Republic of the Philippines, or any political
Second subdivision thereof, for exclusively public
(xxx)
deduction purposes.

211
 National Taxation
Requisites for deductibility: political subdivision which are
thereof, for public exempted from
1. The disposition is in a last will and purpose which are estate tax.
testament; deducted from the gross
2. To take effect after death; estate
3. In favor of the government of the
Philippines or any political subdivision Family home
thereof;
4. For exclusive public purposes; and It is the dwelling house, including the land
5. The value of the property given is included where it is situated where the married person or
in the gross estate. an unmarried head of the family and his family
resides. (Art. 152, Family Code)
NOTE: In case of a NRA decedent, the property
transferred must be located within the It is deemed constituted on the house and lot
Philippines and included in the gross estate. from the time that it is constituted as a family
residence and is considered as such so long as
Government of Republic of the Philippines vs. any of the beneficiaries actually resides therein.
National Government (Art. 153, Family Code)

GOVERNMENT OF NATIONAL NOTE: Actual occupancy for the house and lot as
THE PHILIPPINES GOVERNMENT the family residence shall not be considered
Refers to the Refers to the entire interrupted or abandoned in such cases as the
corporate machinery of the temporary absence from the constituted family
governmental entity central government, home due to travel or studies or work abroad,
through which the as distinguished from etc. The family home is generally characterized
functions of the different forms of by permanency, that is, the place to which,
government are local governments. whenever absent for business or pleasure, one
exercised throughout The National still intends to return. (RR No. 12-2018)
the Philippines, Government then is
including, save as the composed of the Requisites for deductibility:
contrary appears from three great
the context, the departments: the 1. The family home must be the actual
various arms through executive, legislative residential home of the decedent and his
which political and judicial. (Mactan family at the time of his death, as certified
authority is made Cebu v. Marcos, G.R. by the Barangay Captain of the locality
effective in the No. 120082, where the family home is situated
Philippines, whether September 11, 1996) 2. The total value of the family home must be
pertaining to the included as part of the gross estate
autonomous regions, 3. Allowable deduction must be in the amount
the provincial, city, equivalent to:
municipal, or
barangay a. The current FMV of the family home as
subdivisions, or other declared or included in the gross
forms of local estate, or
government. b. The extent of the decedent’s interest
(whether conjugal/community or
Sec. 86(A)(3) vs. Sec. 87(D) of the NIRC: exclusive property), whichever is
lower.
SEC. 86(A)(6) SEC. 87(D)
It contemplates It contemplates 4. The deduction does not exceed
transfers by a citizen or transfers to P10,000,000
resident of the social welfare,
Philippines in favor of cultural and NOTE: NRA decedents are not allowed to avail
the Government of the charitable family home deduction because they are
Philippines or any institutions expressly prohibited by the Constitution from
acquiring lands.

UNIVERSITY OF SANTO TOMAS 212

2021 GOLDEN NOTES
 Taxation Law
For purposes of availing this deduction, a person SUMMARY OF DEDUCTIONS WITH LIMITS
may constitute only one family home. AS TO TIME AND AMOUNT

Standard deduction DEDUCTION TIME AMOUNT

Claims Incurred No limit – only
The standard deduction shall be P5,000,000 against the before the the unpaid
without need of any substantiation for citizens estate death of the portion at the
and residents (Sec. 86 (A)(1), R.A. 10963) For an Unpaid decedent time of death.
NRA deduction in the amount of P500,000 shall taxes Ignore post-
be allowed without need of substantiation (Sec Unpaid death
86 (B)(1), R.A. 10963) mortgage developments.
Claims Receivable No limit –
Standard deduction (SD) vs. optional against existing at entire
standard deduction (OSD) insolvent the death of uncollectible
persons the portion may be
SD in decedent claimed.
OSD in
ESTATE TAX Casualty Not later No limit – only
INCOME TAX
(Sec. 86 losses than the last uninsured
(Sec. 34 (L))
(A)(5)) day or any portion may be
Deduction in Deduction in extension deductible
addition to lieu of thereof for
As to nature
the other itemized payment of
deductions deductions the estate
Fixed at 40% of gross tax
P5,000,000for income or Transfers No limit No limit
As to
RC, NRC, and gross for public
amount of
RA; Fixed at sales/receipts use
deduction
P500,000 for as the case Vanishing Two 100% down to
NRA may be deduction transfers 20%
Applies to all must not be depending on
Available to individual more than time interval
As to
RC, NRC, RA, taxpayers five years between two
availability
and NRA except NRA, apart transfers
and NFC Family No limit Not exceed
home P10,000,000
Amount received under R.A. 4917 Standard No limit P5,000,000 for
deduction RC, NRC, and
Any amount received by heirs from the RA; Fixed at
decedent’s employer as a consequence of the P500,000 for
death of the decedent-employee in accordance NRA
with R.A. 4917 (An Act Providing That Amounts No limit No limit
Retirement Benefits of Employees of Private received
Firms Shall Not Be Subject to Attachment, Levy, under RA
Execution, or Any Tax Whatsoever) shall be 4917
allowed as a deduction from the gross estate.
SUMMARY OF DEDUCTIONS AS TO
Requisites for deductibility: APPLICABILITY TO TAXPAYERS

1. Amounts received by heirs from decedent’s Resident or Non-resident

employer; Deduction
Citizen Alien
2. Received as a consequence of death of the
Ratable/
decedent-employee; and Claims proportionate
3. Amount is included in the gross estate of the Fully
against the deduction
decedent (Sec. 86(A)(7), NIRC) deductible
estate only.
(Proportion of

213
 National Taxation
Unpaid gross estate in a. NO, only the amount pertaining to the value
taxes the of the decedent’s family home is deductible
Unpaid Philippines from the gross estate, provided that the
mortgage over the conditions for the deductibility of a family
Claims worldwide are complied with. Funeral expenses are
against gross estate) not considered deductible items under RA
insolvent No. 10963.
persons
Casualty Estate taxation is governed by the statute in
losses force at the time of the death of the
Transfers decedent. The tax rates and procedures
for public prescribed by RA No. 10963, otherwise
Fully Fully known as the Tax Reform for Acceleration
use
deductible deductible and Inclusion Law and RR No. 12-2018
Vanishing
deduction shall govern the estate of decedent who
Family died on or after the effectivity date of the
home TRAIN Law which is January 1, 2018. Since
Standard the decedent died on December 2018, the
deduction operative law in force at this time is the
Fully No deduction TRAIN LAW. The said law removed funeral
Amounts deductible allowed expenses from the list of deductible items
received for purposes of estate taxation.
under RA
4917 The conditions for the deductibility of
family home from the gross estate of the
decedent are as follows:
Net share of the surviving spouse
The family home must be the actual
The net share of the surviving spouse in the
residential home of the decedent and his
conjugal partnership property as diminished by
family at the time of his death, as certified
the obligations properly chargeable to such
by the barangay captain of the locality
property shall be deducted from the net estate of
where the family home is situated;
the decedent. (Sec. 86(C))
The total value of the family home must be
Q: A, a resident Filipino citizen, died in
included as part of the gross estate of the
December 2018. A's only assets consist of a
decedent; and
house and lot in Alabang, where his heirs
currently reside, as well as a house in Los
Allowable deductions must be an amount
Angeles, California, USA. In computing A's
equivalent to the current fair market value
taxable net estate, his heirs only deducted: 1.
of the decedent’s family home as declared
₱10,000,000.00 constituting the value of
or included in the gross estate; or the
their house in Alabang as their family home;
extent of the decedent’s interest (whether
and 2. ₱200,000.00 in funeral expenses
conjugal/community, or exclusive property,
because no other expenses could be
whichever is lower, but not exceeding
substantiated. (2019 BAR)
₱10,000,000. (Sec. 6(7) (7.2), RR No. 12-
a. Are both deductions claimed by A's heirs
2018)
correct? Explain.
b. May a standard deduction be claimed by
Considering that all the said requisites are
A's heirs? If so, how much and what
complied with, the 10,000,000php, the
proof needs to be presented for the
amount pertaining to the value of the
same to be validly made?
decedent’s family home is deductible from
c. In determining the gross estate of A,
the gross estate of A.
should the heirs include A's house in Los
Angeles, California, USA? Explain.
b. YES, the heirs can claim a standard
deduction in the amount of 5,000,000php.
A:

UNIVERSITY OF SANTO TOMAS 214

2021 GOLDEN NOTES
 Taxation Law
As provided under RR No. 12-2018, the
value of the net estate of a citizen or
resident alien of the Philippines shall be
subject to a standard deduction. A
deduction in the amount of five million
pesos shall be allowed without need of a
substantiation. The full amount of the five
million pesos shall be allowed as deduction
for the benefit of the decedent (RR No. 12-
2018, Sec. 6(1)) Since A is a resident filipino
citizen, the heirs of the said decedent can
claim a standard decution in the amount of
5,000,000.00.
c. YES, for estate tax purposes, the heirs
should include the value of the A’s house in
Los Angeles, California, USA.
As provided under the TRAIN Law and RR
No. 12-2018, for the purposes of computing
the estate tax of a resident or a Filipino
citizen, all properties, real or personal,
tangible or intangible, wherever situated
shall be included in determining the gross
estate. Since A was a resident Filipino
citizen, the properties of A within and
outside the Philippines should be included
in determining his or her gross estate.
Hence, the heirs of A should include A’s
house in Los Angeles, California, USA in
determinign the latter’s gross estate.
EXCLUSIONS FROM GROSS ESTATE
AND EXEMPTIONS OF CERTAIN
ACQUISITIONS AND TRANSMISSIONS
Excluded from gross estate are those
provided for under NIRC (Sections 85, 86 and
87) and under special laws.
Exclusions under Sec. 85 and 86 NIRC:
1. Exclusive property (capital/paraphernal) of
surviving spouse. (Sec. 85 (H), NIRC)
2. Property outside Philippines of NRA
decedent.
3. Intangible personal property in the
Philippines of NRA decedent provided there
is reciprocity.
Exclusions under Sec. 87 NIRC:
1. The merger of the usufruct in the owner of
the naked title.
215
2. The transmission or the delivery of the
inheritance or legacy by the fiduciary heir or
legatee to the fideicommissary.
3. The transmission from the first heir, legatee,
or donee in favor of another beneficiary, in
accordance with the desire of the
predecessor.
4. All the bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions, provided no part of the net
income of which inures to the benefit of any
individual and that not more than 30% of the
value given is used for administrative
purposes.
Exclusions from estate under special laws:
1. Benefits received by members from the
Government Service Insurance System (P.D.
1146) and the Social Security System (R.A.
1161, as amended) by reason of death
2. Amounts received from the Philippine and
United States governments for damages
suffered during the last war (R.A. 227)
3. Benefits received by beneficiaries residing
in the Philippines under laws administered
by the U.S. Veterans Administration (R.A.
360)
4. Grants and donations to the Intramuros
Administration (P.D. 1616) (Mamalateo,
2014)
Exemption of Certain Acquisitions and
Transmissions
Transmissions exempted from payment of
estate tax:
1. The merger of usufruct in the owner of the
naked title.
E.g., Y died leaving a condominium unit, the
naked title belongs to W and usufruct to F
for a period of 5 years, then F died after two
years. Upon the death of F, the usufruct will
merge into the owner of the naked title W
who shall become the absolute owner of the
said condominium unit. The transfer from F
to W is exempt from estate tax.
 National Taxation
2. The transmission or delivery of the
inheritance or legacy by the fiduciary heir
or legatee to the fideicommissary
E.g., X dies and leaves in his will a lot to his
brother, Y, who is entrusted with the
obligation to transfer the lot to Z, a son of X,
when Z reaches legal age. Y is the fiduciary
heir and Z is the fideicommissary. The
transfer from X to Y is subject to estate tax.
But the transmission or delivery to Z upon
reaching legal age shall be exempt from
estate tax.
3. The transmission from the first heir, legatee
or donee in favor of another beneficiary, in
accordance with the desire of the
predecessor
4. All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions, provided that no part of the net
income of which inures to the benefit of any
individual and not more than thirty percent
(30%) of the said bequests, devises,
legacies or transfers shall be used for
administration purposes. (Sec. 87, NIRC)
NOTE: Bequests, devises, legacies or transfers
made to educational institutions are not
included.
TAX CREDIT FOR ESTATE TAXES PAID
TO A FOREIGN COUNTRY
Estate tax credit is a remedy against
international double taxation to minimize the
onerous effect of taxing the same property twice.
Q: Who may avail?
A: Only the estate of a citizen or a resident alien
at the time of death can claim tax credit for any
estate taxes paid in a foreign country.
Limitations in estate tax credit:
1. Per country basis: The amount of the credit
in respect to the tax paid to any country
shall not exceed the same proportion of the
tax against which such credit is taken,
which the decedent’s net estate situated
within such country taxable under the NIRC
bears to his entire net estate; and
2. Overall basis: The total amount of the credit
shall not exceed the same proportion of the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
tax against which such credit is taken,
which the decedent’s net estate situated
outside the Philippines taxable under the
NIRC bears to his entire net estate.
Determination of Net Estate
The same rule as the gross estate and afterwards
subtracting the allowable deductions from the
gross estate.
NOTE: Before you can arrive at the value of the
net estate, you have to determine first the value
of gross estate.
Gross Estate vs. Net Estate
Gross Estate Net Estate
The total value of all The net properties of
property, real or the decedent after all
personal, tangible or the pertinent
intangible, the actual deductions allowable
and beneficial by law that is subject
ownership of which to tax.
was in the decedent at
the time of his death.
(Sec. 85, NIRC)
Q: Tong Siok, a Chinese billionaire and a
Canadian resident, died and left assets in
China valued at P80 billion and in the
Philippines assets valued at P20 billion.
For Philippine estate tax purposes the
allowable deductions for expenses, losses,
indebtedness, and taxes, property previously
taxed, transfers for public use, and the share
of his surviving spouse in their conjugal
partnership amounted to P15 billion. Tong's
gross estate for Philippine estate tax
purposes is? (2011 BAR)
A: P20 billion. Being a non-resident alien, the
estate tax to be paid will be based on his
properties situated in the Philippines. The
deductions are not included since the question
pertains to gross estate, not the net estate.
NOTE: Gross estate tax is adding all those
included and deducting the exclusions while net
estate is arrived at after subtracting the
allowable deductions from the gross estate.
Estate tax formula
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 Taxation Law
Gross Estate PhP xxx Must be under oath and shall contain the
Less: following:
Ordinary
(xxx)
Deductions 1. The value of the gross state of the decent at
Special the time of his death or in case of a non-
(xxx)
Deductions resident, not a citizen of the Philippines, the
Total Deductions (xxx) part of his gross estate situated in the
Net Estate xxx Philippines;
Less:
Share of 2. The deductions allowed from the gross
Surviving (xxx) estate in determining the estate;
Spouse
Net Taxable Estate xxx 3. Such part of the information as may at the
Multiply: time be ascertainable and such
Tax Rate 6% supplemental data as may be necessary to
Tax due xxx establish the correct taxes. (Sec. 90(A), NIRC)
Less:
Tax Credit (xxx) NOTE: If the estate tax return shows a gross
Tax Liability PhP xxx value exceeding P5 million, the return shall be
supported with a statement duly certified by a
(Based on the illustrative examples of RR No. 12 –
CPA containing the following:
2018)
1. Itemized assets at the time of his death;
FILING OF ESTATE TAX RETURNS AND
2. Itemized deductions to the gross estate;
PAYMENT OF ESTATE TAX
and
3. Amount of tax due, whether paid or still
When estate tax return is filed:
outstanding.
It is filed within 1 year from the decedent’s
The taxpayer must pay the estate tax upon filing,
death. Extension to file an estate tax return is
under the “Pay as you file system.” Extension to
allowed in meritorious cases but not to exceed
pay estate tax may be granted if the
30 days. (Sec. 90, NIRC)
Commissioner finds that such payment would
impose undue hardships upon the estate or any
Who files estate tax return:
heir and shall:
1. Executor
1. Not exceed 5 years in case of judicial
2. Administrator
settlement;
3. Any legal heir
2. Not exceed 2 years in case of extrajudicial
settlement; and
Where estate tax return is filed:
3. Payment by installment if and only if the
available cash of the estate is insufficient.
1. If resident decedent
Requisites for granting extension to pay
To an authorized agent bank, RDO,
estate tax:
Collection Officer, or duly authorized
Treasurer in the city or municipality where
1. The request for extension must be filed
the decedent was domiciled at the time of
before the expiration of the original period
his death, or to the Office of the CIR.
to pay which is within 6 months from
death;
2. If non-resident decedent
2. There must be a finding that the payment
To the RDO or to the Office of the CIR (Sec.
on the due date of the estate tax would
90(D), NIRC)
impose undue hardship upon the estate or
any of the heirs;
Contents of estate tax return:

217
 National Taxation
3. The extension must be for a period not
exceeding 5 years if the estate is settled
judicially or 2 years if settled extra-
judicially; and
4. The Commissioner may require the posting
of a bond in an amount not exceeding
double the amount of tax to secure the
payment thereof.
Q: Remedios, a resident citizen, died on
November 10, 2006. She died leaving three
condominium units in Quezon City valued at
P5M each. Rodolfo was her only heir. He
reported her death on December 6, 2006 and
filed the estate tax return on March 30, 2007.
Because she needed to sell one unit of the
condominium to pay for the estate tax she
asked the CIR to give her one year to pay the
estate tax due. The CIR approved the request
of extension of time provided that the estate
tax be computed on the basis of the value of
property at the time of payment of tax.
a. Does CIR have the power to extend the
payment of estate tax?
b. Does the condition that the basis of the
estate tax will be the value at the time of
the payment have legal basis? (2007
BAR)
A:
a. YES. The CIR may allow an extension of time
to pay the estate tax if the payment on the
due date would impose undue hardship
upon the estate or any of the heirs. The
extension in any case, will not exceed 2
years if the estate is not under judicial
settlement of 5 years if it is under judicial
settlement. The CIR may require the posting
of a bond to secure the payment of the tax.
(Sec. 91(B), NIRC)
b. NO. The valuation of properties comprising
the estate of a decedent is the fair market
value as of the time of death. No other
valuation date is allowed by law. (Sec. 88,
NIRC)
Effects for granting extension to pay estate
taxes:
1. The amount shall be paid on or before
expiration of the extension and running of
the statute of limitations for assessment
shall be suspended for the period of any of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
such extension.
2. The CIR may require a bond not exceeding
double the amount of the tax and with such
sureties as the CIR deems necessary when
the extension of payment is granted.
3. Any amount paid after the statutory due
date of the tax, but within the extension
period, shall be subject to interest but not
to surcharge. (Sec. 91(B))
Instances where request for extension of
time to pay estate tax should be denied:
1. Negligence
2. Intentional disregard of rules and
regulations
3. Fraud
Who shall pay the estate tax:
1. The executor or administrator, before
delivery to any beneficiary of his
distributive share.
2. The beneficiary, to the extent of his
distributive share in the estate, shall be
subsidiarily liable for the payment of such
portion of the estate tax as his distributive
share bears to the value of the total net
estate.
Instances when Certificate of Payment of Tax
from the Commissioner is required:
1. Before a judge shall authorize the executor
or judicial administrator to deliver a
distributive share to any party interested in
the estate.
2. Before the Register of Deeds shall register in
the Registry of Property any document
transferring real property or real rights
therein or any chattel mortgage, by way of
gifts inter vivos or mortis causa, legacy or
inheritance.
3. When a lawyer, by reason of his official
duties, intervenes in the preparation or
acknowledgment of documents regarding
partition or disposal of donation inter vivos
or mortis causa, legacy or inheritance.
4. When a notary public, by reason of his
official duties, intervenes in the preparation
218
 Taxation Law
or acknowledgment of documents regarding
partition or disposal of donation inter vivos
or mortis causa, legacy or inheritance.
5. When a government officer, by reason of his
official duties, intervenes in the preparation
or acknowledgment of documents regarding
partition or disposal of donation inter vivos
or mortis causa, legacy or inheritance.
6. Before a debtor of the deceased pay his
debts to the heirs, legatee, executor or
administrator of his creditor.
7. Before a transfer to any new owner in the
books of any corporation, Sociedad anonima,
partnership, business, or industry organized
or established in the Philippines any share,
obligation, bond or right by way of gift inter
vivos or mortis causa, legacy or inheritance.
Payment of Tax Antecedent to the Transfer of
Shares, Bonds, or Rights and Bank Deposits
Withdrawal
If a bank has knowledge of the death of a person,
who maintained a bank deposit account alone, or
jointly with another, it shall allow the
withdrawal from the said deposit account,
subject to a final withholding tax of six percent
(6%) of the amount to be withdrawn, provided
that the withdrawal shall only be made within
one year from the date of the decedent. The bank
is required to file the prescribed quarterly
return on the final tax withheld on or before the
last day of the month following the close of the
quarter during which the withholding was made.
The bank shall issue the corresponding BIR
Form No. 2306 certifying such withholding. In all
cases, the final tax withheld shall not be
refunded, or credited on the tax due on the net
taxable estate of the decedent.
The executor, administrator, or any of the legal
heirs, withdrawing from the deposit account
shall provide the bank where such withdrawal
shall be made, with the TIN of the estate of the
decedent. For this purpose, the bank shall
require prior to such withdrawal, the
presentation of BIR Form No. 1904 of the estate,
duly stamped received by the BIR. Further, all
withdrawal slips shall contain the following
terms and conditions: (a) a sworn statement by
any one of the joint depositors to the effect that
all of the joint depositors are still living at the
219
time of withdrawal; and (b) a statement that the
withdrawal is subject to the final withholding
tax of 6%.
In instances where the bank deposit accounts
have been duly included in the gross estate of
the decedent and the estate tax due thereon
paid, the executor, administrator, or any of the
legal heirs shall present the electronic Certificate
Authorizing Registration (eCAR) issued for the
said estate prior to withdrawing from the bank
deposit account. Such withdrawal shall no
longer be subject to the withholding tax imposed
under this section. (RR No. 12 – 2018)
Liability of a co-depositor who was able to
withdraw funds from the account of a
deceased depositor without paying the estate
tax
They shall be held liable for perjury because all
withdrawal slips contain a statement to the
effect that their co-depositors are still living at
the time of the withdrawal by any one of the
joint depositors and such statements are
deemed under oath.
Distribution of the estate be made
Upon payment of the estate tax, the
administrator shall deliver the distributive share
in the inheritance to any heir or beneficiary. The
estate clearance tax issued by the CIR or the RDO
having jurisdiction over the estate will serve as
the authority to distribute the
remaining/distributive properties/share in the
inheritance of the heir or beneficiary. In case of
installment payments, the clearance shall be
released only with respect to the property the
corresponding tax of which has been paid.
(Section 94, NIRC)
The estate tax can be paid in installment in case
the available cash of the estate is not sufficient to
pay the total estate tax liability and the clearance
shall be released with respect to the property
the corresponding/computed tax on which has
been paid.
NOTE: There shall, therefore, be as many
clearances (Certificate Authorizing Registration)
as there are many properties releases because
they have been paid for by the installment
payments of the estate tax. The computation of
the estate tax, however, shall always be on the
 National Taxation
cumulative amount of the net taxable estate. Any
amount paid after the statutory due date is
approved by the Commissioner or his duly
authorized representative, the imposable
penalty thereon shall only be an interest.
Nothing in this paragraph, however, prevents
the Commissioner from executing enforcement
action against the estate after the due date of the
estate tax provided that all the applicable laws
and required procedures are followed/observed
(RR No. 2-2003)

Rule on restitution of tax upon satisfaction of

outstanding obligations:

If after the payment of the estate tax, new

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

Q: A tax refund was filed by a taxpayer.

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

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

it will. Otherwise, it will not be included.

Deficiency estate tax

Three situations when deficiency occurs:

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

Deficiency estate tax vs. delinquency estate

tax

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

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

UNIVERSITY OF SANTO TOMAS 220

2021 GOLDEN NOTES
 Taxation Law
DONOR’S TAX
BASIC PRINCIPLES, CONCEPT,
AND DEFINITION
Donation is an act of liberality whereby a
person (donor) disposes gratuitously of a thing
or right in favor of another (donee) who accepts
it. (Art. 725, Civil Code)
Donor’s tax is an excise tax imposed on the
privilege of transferring property by way of a
gift inter vivos based on pure act of liberality
without any or less than adequate consideration
and without any legal compulsion to give.
Law governing imposition of donor’s tax
the imposition of donor’s tax. (Sec. 11, RR 2-
2003)
Kinds of donations:
1. Donation inter vivos
A donation made between living persons.
Its perfection is at the moment when the
donor knows the acceptance of the donee.
It is subject to donor’s tax.
2. Donation mortis causa
A donation which takes effect upon the
death of the donor. It is subject to estate
tax.

The law in force at the time of the

perfection/completion of the donation governs

Donation Inter Vivos vs. Donation Mortis Causa

DONATION INTER VIVOS DONATION MORTIS CAUSA

It is not made out of the donor’s
generosity, although the subject It is made in consideration of death, without
As to
matter is not delivered at once, or the the donor’s intention to lose the thing
consideration
delivery is to be made post-mortem, conveyed or its free disposal in case of
which is a simple matter of form and survival.
does not change the nature of the act.
It is perfected upon knowledge of the
donor of the acceptance of the donee.
Such contract is consensual in nature.

1. Personal property
a. Oral with simultaneous
Being testamentary in nature, it should be
delivery if value does not
As to form embodied in a last will and testament. (Art.
exceed P5,000
728, Civil Code)
b. In writing if value exceeds
P5,000
2. Real property
a. Both donation and
acceptance must be in a
public instrument
The transfer conveys no title or ownership
to the transferee before the death of the
transferor, or the transferor retains the
As to The effect is produced while the donor
ownership, full or naked, of the property
effectivity is still alive.
conveyed. It is the donor’s death that
determines the acquisition of or the right to
the property.
As to The transfer is revocable before the
The transfer is irrevocable.
irrevocability transferor’s death and revocability may be

221
 National Taxation
DONATION INTER VIVOS
Acceptance is a requirement.
As to
acceptance
(Mamalateo, 2014)
Nature
It is an excise tax on the privilege of the donor to
give or on the transfer of property by way of gift
inter vivos. It is not a property tax. (Lladoc v. CIR,
14 SCRA 292)
Purpose or object
1. To supplement estate tax
2. To prevent avoidance of income tax through
the device of splitting income among
numerous donees who are usually members
of a family or into many trusts, with the
donor thereby escaping the effect of the
progressive rates of income taxation
Transfers subject to donor’s tax:
Transfer in trust or otherwise, whether the gift
is direct or indirect, and whether the property is
real or personal, tangible or intangible.
1. Include not only the transfer of ownership
in the fullest sense but also the transfer of
any right or interest in property, but less
than title.
2. Where property, other than real property
subject to capital gains tax, is transferred for
less than an adequate and full consideration
in money or money’s worth, then the
amount by which the FMV of the property
exceeded the value of the consideration
shall, for the purpose of the donor’s tax, be
deemed a gift, and shall be included in
computing the amount of gifts made during
the calendar year. Provided, however, that a
sale, exchange, or other transfer of property
made in the ordinary course of business (a
transaction which is a bona fide, at arm’s
length, and free from donative intent), will
be considered as made for an adequate and
full consideration in money or money’s
worth.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
DONATION MORTIS CAUSA
provided indirectly by means of a reserved
power in the donor to dispose of the
property conveyed.
Being in the form of a will, it is never
accepted by the donee during the donor’s
lifetime.
3. Renunciation by the surviving spouse of
his/her share in the conjugal partnership or
absolute community after the dissolution of
the marriage in favor of the heirs of the
deceased spouse or any other person/s is
subject to donor’s tax.
4. However, general renunciation by an heir,
including the surviving spouse, of his/her
share in the hereditary estate left by the
decedent is not subject to donor’s tax, unless
specifically and categorically done in favor
of identified heir/s to the exclusion or
disadvantage of the other co-heirs in the
hereditary estate.
Rationale: In general renunciation, there is
no donation since the renouncer has never
become the owner of the property/share
renounced.
5. Transfers of any right or interest. Transfers
subject to donor’s tax not only include
transactions where there is a transfer of
ownership, but also where there is a
transfer less than title.
Instances when there is neither a sale,
exchange nor donation
1. The transfer of stocks in a corporation
organized as a mutual benefit association, to
its members, which transfer is merely a
conversion of the owner-member
contributions to shares of stocks is not
subject to capital gains tax or donor’s tax
because it is neither a sale, exchange nor
donation. (BIR Ruling No. 207, July 15, 1987)
2. Similarly, the transfer of property (lands)
from a non-stock, non-profit community
association to its member-beneficiaries, who
actually bought the property, is not subject
to donor’s tax, since the transfer, while
222
 Taxation Law
without consideration, is a mere formality to
finally effect the transfer of said property to
its real owners. (BIR Ruling No. 412-05,
October 4, 2005)
3. Spouses P & Q established a revocable inter
vivos trust (PQ Family trust, represented by
P & Q as its trustee) which holds title to all
the spouses’ real properties, shares of stock
and securities. The transfer of title involves
no actual transfer of ownership from the
trustor to the trustee and is then not subject
to donor’s tax. (BIR Ruling No. 416-05,
October 6, 2005)
4. The transfer of conjugal properties in favor
of the children pursuant to a court order
arising from the declaration of nullity of
marriage of the parents is not subject to
donor’s tax since there is no donative intent
on the part of the spouses, because the
transfer is only in compliance with the court
order. Neither is the transfer subject to
capital gains tax and documentary stamp tax
as the transfer is considered a delivery of
presumptive legitime. (BIR Ruling No. DA-
414-06, July 4, 2006.)
5. A company’s act of extending its credit line
to its sister company for the latter’s bank
loan, is not considered a transfer of property
by gift because there is no intention on the
part of the company to donate anything of
value, the transaction being purely loan
accommodation and for a legitimate
purpose which is to support the sister
company. Furthermore, the company has
the right to be indemnified by its sister
company in the event the latter fails to pay
the loan obligation. (BIR Ruling No. DA-710-
06, Dec. 14, 2006.) (Paras, pp. 761-762
REQUISITES OF A VALID DONATION (CIDAF)
1. Capacity of donor to donate
The donor’s capacity shall be determined as
of the time of the making of the donation.
(Art. 737, NCC)
2. Donative intent
Donative intent is necessary only in cases of
direct gift. If the gift is indirectly taking
place by way of sale, exchange, or other
223
transfer of property as contemplated in
cases of transfers for less than adequate
and full consideration (Sec. 100, NIRC), not
always essential to constitute a gift.
3. Actual or constructive delivery of gift
There is delivery if the subject matter is
within the dominion and control of the
donee.
4. Acceptance by the donee
Acceptance is necessary because nobody is
obliged to receive a gift against his will.
(Osorio v. Osorio, 14 Phil. 531)
5. Form prescribed by law
a. In case of real property, donation must
be in a public instrument.
b. If personal property, it may be made:
i. Oral with simultaneous delivery if
value does not exceed P5,000
ii. In writing if value exceeds P5,000
(Art. 748, NCC)
NOTE: The donor’s tax shall not apply unless
and until there is a completed gift. The transfer
of property by gift is perfected from the moment
the donor knows of the acceptance by the done.
It is completed by the delivery, either actually or
constructively, of the donated property to the
donee. (Sec. 11, RR 2-2003)
A transfer becomes complete and taxable only
when the donor has divested himself of all
beneficial interests in the property transferred
and has no power to recover any such interest in
himself or his estate.
Tax treatment in case of donations made by
spouses
Husband and wife are considered as separate
and distinct taxpayers for purposes of the
donor’s tax.
However, if what was donated is a conjugal or
community property and only the husband
signed the deed of donation, there is only one
donor for donor’s tax purposes, without
prejudice to the right of the wife to question the
validity of the donation without her consent.
(Par. 1., Sec. 12, RR 2-2003)
 National Taxation
Q: When does an incomplete gift become a
complete one, subject to donor’s tax?
A: A gift that is incomplete because of reserved
powers becomes complete when either:
1. The donor renounces the power to recover;
or
2. His right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of
some condition, other than because of the
donor’s death. (Ibid)
Elements of remunerative donation
A person gives to another a thing or right:
1. On account of the latter’s merit or services
rendered by him to the donor; and
2. The giving does not constitute a
demandable debt or when the gift imposes
upon the donee a burden which is less than
the value of the thing given.
NOTE: Donations made by a corporation to its
deceased officer out of gratitude for past
services are subject to donor’s tax. Past services
rendered without relying on a promise, express
or implied, that such services would be paid for
in the future do not constitute a demandable
debt. Thus, the amount given by the corporation
to the heirs of the deceased officer of the
corporation as gratitude for past services
rendered by the officer is subject to donor’s tax.
Q: Are onerous donations subject to donor’s
tax?
A:
GR: NO, since there is no gratuitous disposal.
XPNs:
1. Where the transfer is for less than an
adequate and full consideration in money
or money’s worth; or
2. The gift imposes upon the donee a burden
which is less than the value of the thing
given.
NOTE: The excess of the fair market value of the
property over the actual value of the
consideration shall be subject to donor’s tax.
TRANSFERS WHICH MAY BE
CONSIDERED AS DONATION (ICL)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
1. Sale/exchange/transfer of property for
insufficient consideration;
2. Condonation/remission of debt; and
3. Transfer for less than adequate and full
consideration.
SALE, EXCHANGE, OR TRANSFER OF
PROPERTY FOR LESS THAN ADEQUATE AND
FULL CONSIDERATION; EXCEPTION
Rule regarding transfer for less than
adequate and full consideration
GR: Where a property is transferred for less
than adequate and full consideration in money
or money’s worth, the amount by which the FMV
exceeds the consideration shall be deemed a gift
and be included in computing the amount of gifts
made during the calendar year. It is as if the
property was donated but in order to avoid
paying donor’s tax, the donor opted to transfer
the property for inadequate consideration.
XPN:
1. Where the sale, exchange, or transfer is
made in the ordinary course of business
which is:
a. Bona fide;
b. Made at arm’s length;
c. Free from any donative intent
2. Where property transferred is real
property located in the Philippines
considered as capital asset, the transfer is
not subject to donor’s tax but to a capital
gains tax, which is a final income tax of 6%
of the fair market value or gross selling
price, whichever is higher, and therefore,
there can be no instance where the seller
can avoid any tax by selling his capital
assets below its FMV.
NOTE: Arm’s length transactions are described
as those dealings wherein both parties are
independent of each other has no relationship
with the other dealing party. They are acting in
their own self-interest.
Q: A, an individual, sold to B, her sister-in-
law, his lot with a market value of P1,000,000
for P600,000. A's cost in the lot is P100,000.
B is financially capable of buying the lot. A
also owns X Co., which has a fast growing
business.
A sold some of her shares of stock in X Co. to
224
 Taxation Law
her key executives in X Co. These executives
are not related to A. The selling price is P3,
000,000, which is the book value of the
shares sold but with a market value of P5,
000,000. A's cost in the shares sold is P1,
000,000. The purpose of A in selling the
shares is to enable her key executives to
acquire a proprietary interest in the business
and have a personal stake in its business.
Explain if the above transactions are subject
to donor's tax. (1999 BAR)
A: The first transaction where a lot was sold by
A to her sister-in-law for a price below its fair
market value will not be subject to donor's tax if
the lot qualifies as a capital asset. The transfer
for less than adequate and full consideration,
which gives rise to a deemed gift, does not apply
to a sale of property subject to capital gains tax
(Sec. 100, NIRC) However, if the lot sold is an
ordinary asset, the excess of the fair market
value over the consideration received shall be
considered as a gift subject to the donor's tax.
The sale of shares of stock below the fair market
value thereof is subject to the donor's tax
pursuant to the provisions of Section 100 of the
NIRC. The excess of the fair market value over
the selling price is a deemed gift.
Q: In 2011, Mr. Vicente Tagle, a retiree,
bought 10,000 CDA shares that are unlisted
in the local stock exchange for P10 per share.
In 2015, the said shares had a book value per
share of P60. In view of a car accident in
2015, Mr. Tagle had to sell his CDA shares but
he could sell the same only for P50 per share.
The sale is subject to tax as follows: (2012
BAR)
A: 5%/10% capital gains tax on the capital gain
from sale of P40 per share (P50 selling price less
P10 cost) plus donor’s tax on the excess of the
fair market value of the shares over the
consideration.
NOTE: The answer uses the prevailing rate in
2011, the current prevailing rate is 15%.
CONDONATION OR REMISSION OF DEBT
Rule regarding condonation/remission of
debt
225
If the creditor condones the indebtedness of the
debtor, the following rules apply:
1. On account of debtor’s services to the
creditor the same is in taxable income to the
debtor; or
2. If no services were rendered but the
creditor simply condones the debt, it is
taxable gift and not a taxable income.
Q: Creditors X, Y, and Z condoned the debt of
ABC Corporation pursuant to a court-
approved restructuring. Are the creditors
liable for donor’s tax?
A: NO. The transaction is not subject to donor’s
tax since the condonation was not implemented
with a donative intent but only for business
consideration. The restructuring was not a result
of the mutual agreement of the debtors and
creditors. It was through court action that the
debt rehabilitation plan was approved and
implemented. (BIR Ruling DA 028-2005, Jan. 24,
2005)
Q: A is indebted to B while B is indebted to C.
A paid the debt of B to C. Is this subject to
donor’s tax?
A: YES. This is considered as an indirect
donation in favor of B.
RENUNCIATION OF INHERITANCE;
EXCEPTION
1. 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.
2. 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.
(RR No. 12 – 2018)
Q: In the settlement of the estate of Mr.
Barbera who died intestate, his wife
renounced her inheritance and her share of
the conjugal property in favor of their
children. The BIR determined that there was
 National Taxation
a taxable gift and thus assessed Mrs. Barbera DETERMINATION OF GROSS GIFT
as a donor. Was the BIR correct? (2013 BAR)
GROSS GIFT NET GIFT
A: YES. The BIR is correct that there was a All property, real or The net economic
taxable gift but only insofar as the renunciation personal, tangible or benefit from the
of the share of the wife in the conjugal property intangible, that was transfer that accrues
is concerned. This is a transfer of property given by the donor to to the donee.
without consideration, which takes effect during the donee by way of
the lifetime of the wife. But the renunciation of gift, without the
the wife’s share in the inheritance from her benefit of any
deceased husband is not a taxable gift, deduction. (Sec. 104,
considering that the property is automatically NIRC)
transferred to the other heirs by operation of
law due to her repudiation of her inheritance. NOTE: If a mortgaged property is transferred as
a gift, but imposing upon the donee the
Q: Juan died leaving his only heirs, his obligation to pay the mortgage liability, then the
surviving spouse Maria, and three minor net gift is measured by deducting from the fair
children, Luz, Vis and Minda. Maria market value of the property the amount of
renounced her hereditary share in the estate mortgage assumed.
of Juan. Is Maria’s renunciation subject to
donor’s tax? COMPOSITION OF GROSS GIFT
A: NO. The general renunciation by an heir is not DONOR GROSS GIFT
subject to donor’s tax. This is so because the
All real properties, tangible
general renunciation of Maria was not
RC, NC and RA and intangible personal
specifically and categorically done in favor of
properties wherever located
identified heir/s to the exclusion or
All real properties, tangible,
disadvantage of the other co-heirs in the
NRA and intangible properties
hereditary estate. (Sec. 11, RR 2-2003)
located in the Philippines
unless the reciprocity
Q: With the given set of facts, what happens
applies
when Maria renounced her share in favor of
Minda who is a special child? Is the
Refer to previous discussion on “Estate Tax -
renunciation subject to donor’s tax?
intangible properties deemed situated in the
Philippines and the rule on reciprocity”
A: YES, the renunciation was specifically and
categorically done in favor of Minda to the
VALUATION OF GIFTS MADE IN PROPERTY
exclusion of Luz and Vis, the other co-heirs in
the estate of Juan. (Sec. 11, RR 2-2003)
1. Personal property
CLASSIFICATION OF DONOR The fair market value of the property given
at the time of the gift shall be the value of
1. Resident the gross gift.
a. Resident citizen (RC)
b. Non-resident citizen (NRC) Refer to previous discussion on “Estate tax –
c. Resident alien (RA) Property Valuation”
d. Domestic corporation (DC)
2. Real property
2. Non-resident
a. Non-resident alien (NRA) The fair market value as determined by the
b. Foreign corporation (FC) CIR (zonal value) at the time of donation or
the value fixed by the assessor (assessed
NOTE: A corporation, domestic or foreign, value), whichever is higher. (Sec. 102)
cannot be made liable to pay estate tax, but may
be liable to pay donor’s tax. If there is no zonal value, the taxable base is

UNIVERSITY OF SANTO TOMAS 226

2021 GOLDEN NOTES
 Taxation Law
the fair market value that appears in the
latest tax declaration. If there is an
improvement, the value of the improvement
is the construction cost per building permit
and or occupancy permit plus 10% per year
after year of construction, or the market
value per latest tax declaration.
Q: Mr. L owned several parcels of land and he
donated a parcel each to his two children. Mr.
L acquired both parcels of land in 1975 for
112,000,000.00. At the time of donation, the
fair market value of the two parcels of land,
as determined by the CIR, was
112,300,000.00; while the fair market value
of the same properties as shown in the
schedule of values prepared by the City
Assessors was 112,500,000.00. What is the
proper valuation of Mr. L's gifts to his
children for purposes of computing donor's
tax? (2015 BAR)
A: The valuation of Mr. L’s gift to his children is
the fair market value (FMV) of the property at
the time of donation. It is the higher of the FMV
as determined by the Commissioner or the FMV
as shown in the schedule of values fixed by the
provincial or city assessors. In this case, for the
purpose of computing donor’s tax, the proper
valuation is the value prepared by the City
Assessors amounting to P12,500,00.00 because
it is higher than the FMV determined by the CIR.
EXEMPTION OF CERTAIN GIFTS
1. Donation for political campaign purposes
(Sec. 99(C), NIRC)
2. Certain gifts made by residents (Sec. 101(A),
NIRC)
3. Certain gifts made by non-resident aliens
(Sec. 101(B), NIRC)
4. Donation of intangibles subject to
reciprocity (Sec. 104, NIRC)
5. Donation for athlete’s prizes and awards
(R.A. 7549)
6. Donation under the “Adopt-a-School
Program” (R.A. 8525)
7. Exemption under other special laws
Donation for political campaign purposes
Q: Are donations for political campaign
purposes exempted from donor’s tax?
A: YES. Any contribution in cash or in kind to
227
any candidate, political party or coalition of
parties for campaign purposes shall be governed
by the Election Code as amended. [Sec. 99(B),
NIRC, Sec. 28 (B) of R.A. No. 10963 (TRAIN Law)].
Q: Mr. De Sarapen is a candidate in the
upcoming Senatorial elections. Mr. De
Almacen, believing in the sincerity and
ability of Mr. De Sarapen to introduce much
needed reforms in the country, contributed
P500,000.00 in cash to the campaign chest of
Mr. De Sarapen. In addition, Mr. De Almacen
purchased tarpaulins, t-shirts, umbrellas,
caps and other campaign materials that he
also donated to Mr. De Sarapen for use in his
campaign. Is the contribution of cash and
campaign materials subject to donor’s tax?
(2014 BAR)
A: The answer must be qualified. Section 99(C)
of the NIRC explicitly provides that any
contribution in cash or in kind to any candidate,
political party or coalition of parties for
campaign purposes shall be governed by the
Election Code, as amended. On the other hand,
Section 13 of the Republic Act No. 7166
specifically states that any provision of law to
the contrary notwithstanding, any contribution
in cash or kind to any candidate or political
party or coalition of parties for campaign
purposes, duly reports to the Commission on
Elections (COMELEC) shall not be subject to the
payment of any gift tax.
Thus, if Mr. De Almacen reported his campaign
contributions of Php 500,000.00 in cash,
tarpaulins, t-shirts, umbrellas, caps, and other
campaign materials to the COMELEC, then the
BIR cannot impose donor’s tax on such
contributions. Conversely, if Mr. De Almacen
failed to report these campaign contributions to
the COMELEC, such contributions would be
subject to donor’s tax.
Certain gifts may by residents
1. Specific exemption - net gifts of the amount
of P250,000 or less are exempt
2. Gifts made to or for the use of the National
Government or any entity created by any of
its agencies which is not conducted for
profit, or to any political subdivision of the
said Government
4. Gifts in favor of: (CARTER-CuPS)
 National Taxation
a. Charitable
b. Accredited NGOs
c. Religious
d. Trust foundations
e. Educational institutions
f. Research institutions
g. Cultural foundations
h. Philanthropic organizations
i. Social welfare corporations
NOTE: In order to be exempt from donor’s tax
and to claim full deduction of the donation given
to qualified donee institution duly accredited by
the Philippine Council for NGO Certification, Inc.
(PCNC), the donor engaged in business shall give
a notice of donation on every donation worth at
least 50,000 to the RDO which has jurisdiction
over his place of business within 30 days after
the receipt of the qualified donee institution’s
duly issued Certificate of Donation, which shall
be attached to the said Notice of Donation,
stating that not more than 30% of said donations
or gifts for the taxable year shall be used by such
accredited non-stock, non-profit
corporation/NGO institution for administration
purposes. (Domondon, 2008)
Requisites for the exemption of gifts made to
the CARTER-CuPS
1. Donee is incorporated as a non-stock, non-
profit entity, paying no dividends;
2. Governed by trustees;
3. Trustees receive no compensation;
4. Donee devotes all its income, whether
students' fees or gifts, donation, subsidies or
other forms of philanthropy, to the
accomplishment and promotion of the
purposes enumerated in its Articles of
Incorporation; and
5. Not more than 30% of the donation is used
for administrative purposes. (Sec. 101, NIRC)
Q: The Congregation of Mary Immaculate
donated a parcel of land and a dormitory
building located along España St. in favor of
Sisters of the Holy Cross, a group of nuns
operating a free clinic and high school
teaching basic spiritual values. Is the
donation subject to donor’s tax? (2007 BAR)
A: NO. Gifts in favor of educational and/or
charitable, religious, social welfare corporation
or cultural institution, accredited non-
government organization, trust or philanthropic
organization or research institution or
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
organization are exempt from donor’s tax,
provided, that, no more than 30% of the gifts are
used for administration purposes. The donation
being in the nature of real property complies
with the utilization requirement. (Sec. 101(A)(3),
NIRC)
Q: In 1991, Imelda gave her parents a
Christmas gift of P100,000 and a donation of
P80,000 to the parish church. She also
donated a parcel of land for the construction
of a building to the PUP Alumni Association a
non-stock, non-profit organization. Portions
of the Building shall be leased to generate
income for the association.
a. Is the Christmas gift of P100,000 to
Imelda’s Parents subject to tax?
b. How about the donation to the parish
church?
c. How about the donation to the PUP
alumni association? (1994 BAR)
A:
a. The Christmas gift of P100,000 given by
Imelda to her parents is not taxable
because under the law (Sec. 99(A), NIRC),
net gifts not exceeding P250,000 are
exempt.
b. The donation of P80,000.00 to the parish
church even is tax exempt provided that not
more than 30% of the said bequest shall be
used by such institutions for administration
purposes. (Sec. 101(A)(2), NIRC)
c. The donation to the PUP Alumni Association
does not qualify for exemption both under
the Constitution and the aforecited law
because it is not an educational or research
organization, corporation, institution,
foundation or trust.
Q: Due to the rising liquidity problems and
pressure from its concerned suppliers, P.
Corp instituted a flash auction sale of its
shares of stock. P. Corp was then able to sell
its treasury shares to Z Inc., an unrelated
corporation for P1,000,000.00, which was
only a little below the valuation of P. Corp.’s
shares based on its latest audited financial
statements. In connection therewith, P. Corp.
sought a Bureau of Internal Revenue ruling
to confirm that, notwithstanding the price
difference between the selling price of the
shares and their book value, the said
228
 Taxation Law
transaction falls under one of the recognized
exemptions to donor’s tax under the Tax
Code.
a. Cite the instances under the Tax Code
where gifts made are exempt from
donor’s tax.
b. Does the above transaction fall under
any of the exemptions? Explain. (2019
BAR)
A:
a. The following are the instances where gifts
are made exempt from donor’s tax:
i. 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; and
ii. 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,
not more than 30% of said gifts shall
be used by such done for
administration purposes.
b. No, the transaction does not fall under any
of the exemption. However, the transaction
may still be exempt from donor’s tax even
when the shares of stock were sold on a
selling price that is less than the fair market
value of the shares provided that the sale is
made in the ordinary course of business, in
a transaction which is bona fide, at arm’s
length and free from any donative intent.
NOTE: Exemption of Dowries has been removed
under Republic Act No. 10963, otherwise known
as TRAIN Law.
Certain gifts made by non-resident aliens
1. Specific exemption – net gifts of the amount
of P250,000 or less are exempt
2. Gifts made to or for the use of the National
Government or any entity created by any of
its agencies which is not conducted for
profit, or to any political subdivision of the
said Government.
229
3. Gifts in favor of an educational and/or
charitable, religious, cultural or social
welfare corporation, institution, foundation,
trust or philanthropic organization or
research institution or organization:
Provided, however, that not more than
thirty percent (30%) of said gifts shall be
used by such donee for administration
purposes. (Sec. 101(B), NIRC)
Donation of intangibles subject to reciprocity
Rule on donation of intangible personal
properties
Under Sec. 104, the following intangible
properties shall be considered as situated in the
Philippines for estate and donor’s tax purposes:
1. Franchise which must be exercised in the
Philippines;
2. Shares, obligations or bonds issued by any
corporation or Sociedad anonima organized
or constituted in the Philippines in
accordance with its laws (domestic
corporation);
3. Shares, obligations or bonds by any foreign
corporation 85% of its business is located in
the Philippines;
4. Shares, obligations or bonds issued by any
Foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines; and
5. Shares or rights in any partnership, business
or industry established in the Philippines.
(Sec. 104, NIRC)
However, no tax shall be collected with respect
to donation of intangible personal property
(Reciprocity Rule):
1. If the donor at the time of the donation was
a citizen and resident of a foreign country
which at the time of the donation did not
impose a transfer tax of any character, in
respect of intangible personal property of
citizens of the Philippines not residing in
that foreign country; or
2. If the laws of the foreign country of which
the donor was a citizen and resident at the
 National Taxation
time of the donation allows a similar
exemption from transfer of every character
or description in respect of intangible
personal property owned by citizens of the
Philippines not residing in that foreign
country.
Donation for athlete’s prizes and awards
Requirements for exemption from donor’s
tax of athlete’s prizes and awards:
1. The donation must be prizes and awards
given to athletes in local and international
tournaments and competitions;
2. Held in the Philippines or abroad; and
3. Sanctioned by their respective sports
association. (Sec. 1, R.A. 7549)
Q: Levox Corporation wanted to donate P5
million as prize money for the world
professional billiard championship to be
held in the Philippines. Since the Billiard
Sports Confederation of the Philippines does
not recognize the event, it was held under the
auspices of the International Professional
Billiards Association, Inc. Is Levox subject to
the donor's tax on its donation? (2011 Bar)
A: Yes, since the national sports association for
billiards does not sanction the event.
Donation under the “Adopt-a-School
Program”
Under R.A. 8525, any aid, help, contribution or
donation provided by an adopting private entity
to a government school, whether elementary,
secondary or tertiary are exempt from donor’s
taxes. The assistance may be in the form of, but
not limited to infrastructure, teaching, and skills
development, learning, support, computer and
science laboratories and food and nutrition.
Exemption under other special laws
1. R.A. 2707 - Donation to International Rice
Research Institute (IRRI)
2. R.A. 3676 - Donation to Ramon Magsaysay
Award Foundation (RMAF)
3. R.A. 3850 - Donation to Philippines
Inventors Convention (PIC)
4. P.D. 181 - Donation to Integrated Bar of the
Philippines (IBP)
5. P.D. 205 - Donation to the Development
Academy of the Philippines
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
6. Donation to social welfare, cultural or
charitable institution, no part of the net
income of which inures to the benefit of any
individual, if not more than 30% of the
donation shall be used by the donee for
administration purposes
7. P.D. 292 - Donation to Aquaculture
Department of the Southeast Asian Fisheries
Development Center of the Philippines
8. R.A. 8492 - Donation to the National
Museum
9. R.A. 1006 - Donation to the National Library
10. P.D. 294 - Donation to the National Social
Action Council (NSAC)
11. R.A. 3062 - Donation to the Philippine
American Cultural Foundation
12. Donation to Task Force on Human
Settlement on the donation of equipment,
materials, and services
13. R.A. 2067 – Donation to Scientific and
Technological Research and Development
14. R.A. 1606 – Donation to Philippine
Government for Scientific, Engineering and
Technological Research, Invention and
Development
15. R.A. 6847 – Donation to Philippine Sports
Commission
16. R.A. 11358 – National Vision Screening Act
17. R.A. 11392 – National Performing Arts
Companies Act
18. R.A. 11321 – Sagip Saka Act
19. R.A. 11291 – Magna Carta of the Poor
20. R.A. 11037 – Masustansyang Pagkain para
sa Batang Pilipino Act
21. R.A. 11510 – Alternative Learning System
Act
22. R.A. 11448 – Transnational Higher
Education Act
Q: A non-stock, non-profit school always had
cash flow problems, resulting in failure to
recruit well- trained administrative
personnel to effectively manage the school.
In 2010, Don Leon donated P100 million
pesos to the school, provided the money shall
be used solely for paying the salaries, wages,
and benefits of administrative personnel.
The donation represents less than 10% of
Don Leon's taxable income for the year. Is he
subject to donor's taxes? (2011 BAR)
A: YES because the donation is to be wholly used
for administration purposes.
230
 Taxation Law
TAX CREDIT FOR DONOR’S TAXES FILING OF RETURN AND PAYMENT
PAID TO A FOREIGN COUNTRY
Person Liable
The donor’s tax imposed by the NIRC upon a
donor who was a citizen or a resident at the time Any person making a donation is required to file
of donation shall be credited with the amount of donor’s tax return unless the donation is
any donor’s taxes of any character and specifically exempted under NIRC or other
description imposed by the authority of a special laws. He is required for every donation to
foreign country. accomplish under oath a donor’s tax return in
duplicate (Sec. 98, NIRC)
Who may avail
Rate of Donor’s Tax
Only donors who are citizens or residents at the
time of the donation are entitled to claim tax R.A. No. 10963, otherwise known as the TRAIN
credit. Law has simplified the donor’s tax schedule from
an eight-bracket schedule with rates ranging
Limitations in donor’s tax credit from 2% to 15% to a single fixed rate of 6% of
total gifts in excess of P250,000. It removed the
1. Per country basis: The amount of the credit distinction between relatives and strangers in
in respect to the tax paid to any country terms of the imposition of donor’s tax, meaning
shall not exceed the same proportion of the regardless of whether it is a relative or stranger,
tax against which such credit is taken, which it will be subject to the fixed rate of 6%.
the net gifts situated within such country
taxable under the NIRC bears to his entire Time of filing donor’s tax return
net gift; and Donor’s tax return is filed within 30 days after
2. Overall basis: The total amount of the the date the donation or gift is made.
credit shall not exceed the same proportion
of the tax against which such credit is taken, Formula in computing taxable donation:
which the net gifts situated outside the
Philippines taxable under the NIRC bears to 1. On the first donation of the year
his entire net gift..
Gross Gift PhP xxx
Formula in computing the donor’s tax credit: Less:
Deductions/Exemptions (xxx)
Lower of actual tax paid and the amounts Net Gifts xxx
derived by computing the tax limits as follows: Multiply:
Fixed Tax Rate 6%
Limitation A (per country): Tax due xxx
Less:
( ) Tax Credit (xxx)
( )
Tax Liability PhP xxx
Limitation B (by total):
2. On subsequent donation during the year
( )
( ) Gross gift PhP xxx
Less:
NOTE: If there’s only one foreign country, the Deductions/Exemptions (xxx)
tax credit shall be the lower between actual tax Net Gift xxx
paid and Limitation A. If there are donations in Add:
more than one country, the tax credit shall be Prior Net Gifts xxx
the lower between (a) actual tax paid and (b) Aggregate Net Gifts xxx
lower between Limitation A and Limitation B. Multiply:
Fixed Tax Rate 6%
Tax due on Aggregate Net Gifts xxx

231
 National Taxation
Less:
Prior donor’s tax paid (xxx)
Donor’s tax due on this date xxx
Less:
Tax Credit (xxx)
Donor’s tax payable on this date PhP xxx

Contents of donor’s tax return

The donor’s tax return, which shall be made

under oath, in duplicate, shall set forth the
following:

1. Each gift made during the calendar year

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

UNIVERSITY OF SANTO TOMAS 232

2021 GOLDEN NOTES
 Taxation Law
VALUE-ADDED TAX
Value Added Tax (VAT) is a business tax
imposed and collected on every (a) sale, barter,
or exchange of goods or properties (real or
personal), (b) lease of goods or properties (real
or personal) or (c) rendition of services, all in
the course of trade or business, and (d)
importation of goods (whether or not in the
course of trade or business). (Sec. 105, NIRC)
It is an indirect tax, thus, it can be shifted or
passed on to the buyer, transferee or lessee of
goods, properties or services. (Sec. 105, NIRC)
VAT is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties
and services in the Philippines and on
importation of goods into the Philippines. The
seller is the one statutorily liable for the
payment of the tax but the amount of the tax
may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or
services. (Sec. 4.105-2, RR No. 16 – 2005) This
rule shall likewise apply to existing contracts of
sale or lease of goods, properties or services at
the time of the effectivity of R.A. No. 7716. (Sec.
105, NIRC) However, in the case of importation,
the importer is the one liable for the VAT. (Sec.
107, NIRC)
Classification of transactions under the VAT
system
1. VAT-taxable transactions
a. Subject to 12% VAT rate
b. Zero-rated transactions
2. Exempt transactions
NATURE AND CHARACTERISTICS OF VALUE-
ADDED TAX
Q: Is VAT regressive?
A: YES. The principle of progressive taxation
has no relation with the VAT system in as much
as the VAT paid by the consumer or business for
every goods bought or services enjoyed is the
same regardless of income. In other words, the
VAT paid eats the same portion of an income,
whether big or small. The disparity lies in the
income earned by a person or profit margin
marked by a business, such that the higher the
income or profit margin, the smaller the portion
of the income or profit that is eaten by VAT. A
233
converse, the lower the income or profit margin,
the bigger the part that the VAT eats away. At
the end of the day, it is really the lower income
group or businesses with low-profit margins
that is always hardest hit. (ABAKADA Guro v.
Ermita, G.R. No. 168056, September 1, 2005)
Q: Is VAT a withholding tax?
A: NO. Indirect taxes, like VAT and excise tax, are
different from withholding taxes. To distinguish,
in indirect taxes, the incidence of taxation falls
on one person but the burden thereof can be
shifted or passed on to another person. On the
other hand, in withholding taxes, the incidence
and burden of taxation fall on the same entity,
the statutory taxpayer. The burden of taxation is
not shifted to the withholding agent who merely
collects, by withholding, the tax due from
income payments to entities arising from certain
transactions and remits the same to the
government (Asia International Auctioneers, Inc.,
v. CIR, G.R. No. 179115, September 26, 2012)
TAX ON VALUE ADDED
It is a tax on value added of a taxpayer arising
from the sales of goods, properties or services
during the quarter. “Value added” is the
difference between the total sales of the
taxpayer for the taxable quarter subject to VAT
and his total purchases for the same period
subject also to value added tax. (Mamalateo,
2014)
SALES TAX
VAT is a tax on the taxable sale, barter or
exchange of goods, properties or services. A
barter or exchange has the same tax
consequence as a sale. A sale may be an actual or
deemed sale, or an export sale or local sale.
(Mamalateo, 2014) The buyer is informed that
the price includes VAT and it is shown in the
official receipt/sales invoice.
TAX ON CONSUMPTION
Every sale of goods, properties or services at the
levels of manufacturers or producers and
distributors is subject to VAT. However, the tax
burden rests on the final consumers.
(Mamalateo, 2014)
INDIRECT TAX; IMPACT AND
 National Taxation
INCIDENCE OF TAX
An 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. The impact of taxation is on the
seller upon whom the tax has been imposed,
while the incidence of tax is on the final
consumer, the place at which the tax comes to
rest. (Mamalateo, 2014)
VAT on toll way operations cannot be deemed a
tax on tax due to the nature of VAT as an indirect
tax. The seller remains directly and legally liable
for the payment of VAT, but the buyer bears its
burden since the amount of VAT paid by the
former is added to the selling price. Once shifted,
the VAT ceases to be a tax and simply becomes
part of the cost that the buyer must pay in order
to purchase the good, property or service.
(Renato V. Diaz and Aurora Ma. F. Timbol v.
Secretary of Finance and CIR, G.R. No. 193007,
July 19, 2011)
TAX CREDIT METHOD
Tax credit is collected through the tax credit
method. The input taxes shifted by the sellers to
the buyer are credited against the buyer’s output
taxes when he in turn sells the taxable goods,
properties or services. (Sec. 105 and 110 (A),
NIRC)
The input tax shifted by the seller to the buyer is
credited or deducted against the buyer’s output
taxes when he in turn sells the taxable goods,
properties or services.
Under the VAT method of taxation, which is
invoice-based, an entity can subtract from the
VAT charged on its sales or outputs the VAT it
paid on its purchases, inputs and imports. (CIR v.
Seagate, G.R. No. 153866, Feb. 11, 2005)
Formula:
Net VAT Payable = Output Tax > Input Tax
Excess Input Tax = Output tax < Input Tax
Illustration:
For the month of January 2017, Mr. A sells to Mr.
B steel cabinets for P112,000. Within the same
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
month, Mr. A purchased steel plates and other
materials to make these cabinets for P56,000.
Determine Mr. A’s VAT payable.
To compute for the output tax from sale:
Total selling price (equivalent Ph₱ 112,000
to 112%)
Vatable gross sales or receipts
(100,000)
(112,000/1.12 to get 100%)
Output VAT (12% of P100,000) Ph₱ 12,000
To compute for the input tax from purchases:
Domestic purchase of good
Ph₱ 56,000
(equivalent to 112%)
Vatable gross purchases
(50,000)
(56,000/1.12 to get 100%)
Input VAT (12% of P50,000) Ph₱ 6,000
To compute for the VAT payable:
Output VAT Ph₱ 12,000
Less: Input VAT 6,000
VAT payable Ph₱ 6,000
In the same example, if Mr. B is a trader of steel
cabinets, he now has an input tax of P12,000
from the purchase of steel cabinets from Mr. A. If
Mr. B sells it for P168,000, he would be liable to
pay the output tax of P18,000. He could reduce
the output tax by deducting or crediting his
input tax, arriving at a VAT payable of P6,000
(P18,000 less P12,000).
Refer to discussion on “Output and Input Tax”.
DESTINATION PRINCIPLE AND
CROSS-BORDER PRINCIPLE
The destination of the goods determines
taxation or exemption from tax. Export sales of
goods are subject to zero percent (0%) rate
while imports of goods are subject to 12% value
added tax. Exports are zero-rated because the
consumption of such goods will be made outside
of the Philippines, while imports of goods are
subject to 12% value added tax because they are
for consumption within the Philippines.
(Mamalateo, 2014)
Q: Is the destination principle absolute?
A: NO. The law clearly provides for an
234
 Taxation Law
exemption to the destination principle; that is,
for a zero percent (0%) VAT rate for services
that are performed in the Philippines, paid for in
acceptable foreign currency and accounted for in
accordance with the rules of BSP. (Sec. 108(B)(2)
as cited in Commissioner of Internal Revenue v.
American Express International, Inc., G.R. No.
152609, June 29, 2005)
Consistent with the destination principle, the
purchases of goods and services destined for
consumption within an ECOZONE should be free
of VAT; hence, no input VAT should then be paid
on such purchases. With no input VAT paid,
there is nothing to be refunded or credited
under Sec. 112 of the NIRC. (Coral Bay Nickel
Corp. v. CIR, G.R No. 190506, June 13, 2016)
Q: XYZ Law Offices, a law partnership in the
Philippines and a VAT-registered taxpayer,
received a query by e-mail from Gainsburg
Corporation, a corporation organized under
the laws of Delaware, but the e-mail came
from California where Gainsburg has an
office. Gainsburg has no office in the
Philippines and does no business in the
Philippines.
XYZ Law Offices rendered its opinion on the
query and billed Gainsburg US$1,000 for the
opinion.
Gainsburg remitted its payment through
Citibank which converted the remitted
US$1,000 to pesos and deposited the
converted amount in the XYZ Law Offices
account. What are the tax implications of the
payment to XYZ Law Offices in terms of VAT?
A: The payment is subject to VAT but at a zero-
rate. The zero-rating applies because the
services were rendered to a non-resident person
who is engaged in business outside the
Philippines, the consideration for which was
paid for in acceptable foreign currency and
accounted for in accordance with the BSP rules.
Consequently, the law office is entitled to claim
the input tax attributable to such zero-rated sale
as a credit against its output tax or, at its option,
apply for refund or issuance of a tax credit
certificate to the extent that such input tax was
not utilized as a credit against output tax.
(Sections 108(B)(2), 110(A)(1) and 112, NIRC; See
also Accenture, Inc. vs. CIR, G.R. No. 190102, July
11, 2012)
235
Q: SMZ Inc., is a VAT-registered enterprise
engaged in the general construction
business. HP International contracts the
services of SMZ, Inc. to construct HP
International’s factory building located in the
Laguna Techno Park, a special economic
zone. HP International is registered with the
Philippine Economic Zone Authority (PEZA)
as an ecozone export enterprise, and, as such,
enjoys income tax holiday pursuant to the
Special Economic Zone Act of 1995.
SMZ, Inc., files an application with the Bureau
of Internal Revenue (BIR) for the VAT zero-
rating of its sale of services to HP
International. However, the BIR denies SMZ,
Inc.’s application on the ground that HP
International already enjoys income tax
holiday.
Is the BIR correct in denying SMZ, Inc.’s
application? Explain your answer. (2017
BAR)
A: NO. All sales of goods, properties, and
services made by a VAT registered supplier from
the Customs Territory to an ecozone enterprise
shall be subject to VAT, at zero percent (0%)
rate, regardless of the latter’s type or class of
PEZA registration. (Coral Bay Nickel Corporation
v. CIR, G.R. No. 190506, June 13, 2016, citing
Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.), Inc., G.R. No.
350154, August 9, 2005, 466 SCRA 221)
Moreover, under Section 108 (B)(3), of the 1997
NIRC as amended, services rendered to persons
or entities whose exemption under special laws
effectively subjects the supply of such services to
zero percent (0%) rate are considered zero-
rated. Considering the law does not provide for
any additional qualification or disqualification,
the BIR cannot deny the application on the
ground that HP International already enjoys
income tax holiday.
An administrative agency may not enlarge, alter
or restrict a provision of law. It cannot add to the
requirements provided by law. To do so
constitutes lawmaking, which is generally
reserved for Congress. (Soriano v. Secretary of
Finance, et al., G.R. No. 184450, 184508, 184538,
185234, January 24, 2017)
 National Taxation
PERSONS LIABLE TO VALUE-ADDED TAX
1. Sells, barters, or exchanges goods or
properties in the course of trade or
business;
2. Sells services in the course of trade or
business; or
3. Imports goods, whether or not in the
course of trade or business. (Ingles, 2018)
GR: The seller is the one statutorily liable for the
payment of the tax but the amount of the tax
may be shifted or passed on to the buyer,
transferee or lessee of goods, properties or
services.
XPN: In case of importation, the importer is the
one liable for VAT. (Sec. 107, NIRC)
Q: Lily’s Fashion Inc. is registered as a Subic
Bay Freeport Enterprise under R.A. 7227 and
a non-VAT taxpayer. As such, it is exempt
from payment of all local and national
internal revenue taxes. During its operations,
it purchased various supplies and materials
necessary in the conduct of its manufacturing
business. The supplier of these goods shifted
to Lily’s Fashion, Inc. the 10% (now 12%)
VAT on the purchased items amounting to
P500,000. Lily’s Fashion Inc. filed with the
BIR a claim for refund for the input tax
shifted to it by the suppliers. If you were the
SUMMARY OF RULES ON SALE OF REAL PROPERTIES
TRANSACTION
Real properties held primarily for sale to customers, in general
Residential lot with gross selling price exceeding
*₱1,500,000(seller is a real estate dealer or developer)
Residential lot with gross selling price not exceeding
*₱1,500,000(seller is a real estate dealer or developer)
Residential house and lot or other residential dwellings
exceeding *₱2,500,000(seller is a real estate dealer or
developer)
Residential house and lot or other residential dwellings not
exceeding *₱2,500,000 (seller is a real estate dealer or
developer)
Residential house and/or lot by a seller not engaged in
business
Commercial place or lot (seller uses property in business)
Real property used in business, taxpayer is not engaged in
dealing with real estate
UNIVERSITY OF SANTO TOMAS 236
2021 GOLDEN NOTES
CIR will you allow the refund? (2006 BAR)
A: NO. The exemption of Lily’s Fashion Inc. is
only for taxes for which it is directly liable,
hence, it cannot claim exemption for tax shifted
to it, which is not at all considered a tax to the
buyer but part of the purchase price. Lily’s
Fashion Inc. is not a taxpayer in so far as the
passed-on tax is concerned and therefore, it
cannot claim for a refund of a tax merely shifted
to it. Only taxpayers are allowed to file a claim
for refund.
IMPOSITION OF VALUE-ADDED TAX
ON SALE OF GOODS OR PROPERTIES
1. Those held for sale to customers in the
ordinary course of trade or business;
2. Those held for lease in the ordinary course
of trade or business; and
3. Those used in the trade or business of the
seller (as it is incidental to the taxpayer’s
main business). (RR No. 4–2007)
Output tax shall be recognized by the seller and
input tax shall accrue to the buyer at the time of
the execution of the instrument of sale (at the
time of consummation of sale) Payments that
are subsequent to “initial payments” shall no
longer be subject to output VAT. (RR No. 4–2007)
TAX TREATMENT
12% VAT
12% VAT
VAT-exempt, not subject to
percentage tax
12% VAT
VAT-exempt, not subject to
percentage tax
Not subject to VAT or OPT.
May be subject to CGT, except sale of
principal residence, which may be
exempt subject to certain conditions
12% VAT
12% VAT (incidental transaction)
 Taxation Law
*RR No. 13-2018 clarified that the thresholds to
be used until December 31, 2020 are the
thresholds as adjusted in 2011 using the 2010
Consumer
Price Index values:
Section Amount in Adjusted
Pesos (2005) threshold
amounts
Sec. 109(P) 1,500,000 1,919,500
Sec. 109(P) 2,500,000 3,199,200
(RR No. 16-2011)
NOTE: Beginning January 1, 2021, the VAT
exemption shall only apply to sale of real
properties not primarily held for sale to
customers or held for lease in the ordinary
course of trade or business, sale of real property
utilized for socialized housing as defined by
Republic Act No. 7279, sale of house and lot, and
other residential dwellings with selling price of
not more than Two million pesos (₱2,000,000).
(Sec. 109(P), NIRC)
Tax base: gross selling price
The value-added tax rate is 12% on the gross
selling price or gross value in money of the good
or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor. (Sec.
106(A), NIRC)
Gross selling price
It means the total amount of money or its
equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of
the sale, barter or exchange of goods or
properties, excluding the value-added tax. The
excise tax, if any, on such goods or properties
shall form part of the gross selling price. (Sec.
106(A)(1), NIRC)
Gross selling price in case of sale or exchange
of real property
It is the consideration stated in the sales
document or the fair market value whichever is
higher.
The term "fair market value" shall mean
whichever is the higher of:
1. The fair market value as determined by
the Commissioner (zonal value), or
237
2. The fair market value as shown in
schedule of values of the Provincial and
City Assessors (real property tax
declaration)
However, in the absence of zonal value, gross
selling price refers to the market value shown in
the latest real property tax declaration or the
consideration, whichever is higher.
Allowable deductions from gross selling
price
In computing the taxable base during the month
or quarter, the following shall be allowed as
deductions from gross selling price:
1. Discounts
a. Determined and granted at the time of
sale
b. Which are expressly indicated in the
invoice;
c. The amount thereof forming part of
the gross sales duly recorded in the
books of accounts;
d. The grant of which is not dependent
upon the happening of a future event;
and
2. Sales returns and allowances for which a
proper credit or refund was made during
the month or quarter to the buyer for sales
previously recorded as taxable sales. (Sec.
106(D), NIRC)
“In the course of trade or business”
The phrase “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 person,
regardless of whether or not the person engaged
therein is a non-stock, non-profit private
organization (irrespective of the disposition of
its net income and whether or not it sells
exclusively to members or their guests) or
government entity. (Sec. 105(par.3), NIRC)
Transaction that are undertaken incidental to
the pursuit of a commercial or economic activity
are considered as entered into in the course of
trade or business. (Mamalateo, 2014)
Two conditions of “in the ordinary course of
 National Taxation
trade or business” (CR)
There should be:
1. Commercial or economic activity – It
implies that a transaction is conducted for
profit; and
2. Regularity or habituality in the action –
Regularity involves more than one isolated
transaction and involves repetition and
continuity of action. (Ingles, 2018)
XPNs to regularity:
a. Non-resident aliens who perform
services in the Philippines are deemed
to be making sales in the course of
trade or business, even if the
performance of services is not regular.
(Sec. 4.105-3, RR No. 16 – 2005)
b. Importations are subject to VAT
whether in the course of trade or
business or not.
Q: Masarap Kumain, Inc. (MKI) is a Value-
Added Tax (VAT)-registered company which
has been engaged in the catering business for
the past 10 years. It has invested a
substantial portion of its capital on flat
wares, table linens, plates, chairs, catering
equipment, and delivery vans. MKI sold its
first delivery van, already 10 years old and
idle, to Magpapala Gravel and Sand Corp.
(MGSC), a corporation engaged in the
business of buying and selling gravel and
sand. The selling price of the delivery van
was way below its acquisition cost. Is the sale
of the delivery van by MKI to MGSC subject to
VAT?
A: YES. For VAT purposes, a transaction “in the
course of trade or business” includes
“transactions incidental thereto.” In the course
of business, MKI bought and eventually sold the
delivery van. Prior to the sale, the motor vehicle
was used as part of MKI’s property, plat, and
equipment. Therefore, the sale of the delivery
van is an incidental transaction made in the
course of MKI’s business which should be liable
for VAT regardless of the fact that there was no
profit realized from the sale. (2014 BAR)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Transactions deemed sale
There is no actual sale of goods took place but
such transactions are subject to VAT.
In a transaction deemed sale, the input VAT was
already used by the seller as a credit against
output VAT. However, since there was no actual
sale, no output VAT is actually charged to
customers. Consequently, the State will be
deprived of its right to collect the output VAT. To
avoid the situation where a VAT registered
taxpayer avail of input VAT credit without being
liable for corresponding output VAT, certain
transactions should be considered sales even in
the absence of actual sale. (Tabag, 2015)
In transactions deemed sale, the seller is also the
buyer and no valuable consideration is thus
paid. (Mamalateo, 2014) For example, if the
owner withdraws goods for personal use from
his inventory, he derives a tax advantage from
the input tax, which he has already credited at
the time of purchase against his output tax. Since
the withdrawal or tranfer of goods results in the
use or cosumption of such goods by a person
(seller himself) who is effectively the final
consumer, such withdrawal or tranfer is deemed
a sale subject to value added tax. The rationale of
the transaction deemed sale provision recapture
the value added tax that was claimed as input
tax at the time of purchase.
The following are transactions deemed sale
and therefore subject to VAT: (CORD)
1. Transfer, use, or consumption not in the
course of business of goods or properties
originally intended for sale or for use in the
course of business (i.e., when a VAT-
registered person withdraws goods from
his business for his personal use).
2. Distribution or transfer to:
a. Shareholders or investors as share in
the profits of the VAT-registered
persons
NOTE: Property dividends which
constitute stocks in trade or
properties primarily held for sale or
lease declared out of retained earnings
on or after January 1, 1996 and
238
 Taxation Law
distributed by the company to its
shareholders shall be subject to VAT
based on the zonal value or fair
market value at the time of
distribution, whichever is applicable.
(Sec. 106.7, RR 16-2005)
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.
NOTE: Consigned goods returned by the
consignee within the 60-day period are not
deemed sold.
4. Retirement from or cessation of business
with respect to all goods on hand, whether
capital goods, stock-in-trade, supplies or
materials as of the date of such retirement
or cessation, whether or not the business is
continued by the new owner or successor.
(Sec. 106(A)(2)(B), NIRC)
Transactions that are considered retirement
or cessation of business
1. Change of ownership of the business – There
is change in the ownership of the business
when a single proprietorship incorporates;
or the proprietor of a single proprietorship
sells his entire business.
2. Dissolution of a partnership and creation of
a new partnership which takes over the
business (Sec. 4.106-7, RR 16-2005)
Consideration in determining whether a
transaction is “deemed sale”
Before considering whether the transaction is
“deemed sale,” it must first be determined
whether the sale was in the ordinary course of
trade or business or not. Even if the transaction
was “deemed sale” if it was not done in the
ordinary course of trade or business or was not
originally intended for sale in the ordinary
course of business, the transaction is not subject
to VAT. (CIR v. Magsaysay Lines Inc., G.R. No.
146984, July 28, 2006)
Tax base of transactions deemed sale
In cases where a transaction is a deemed sale,
barter or exchange of goods or where the selling
239
price is unreasonably lower than the actual
market value, the Commissioner shall determine
the appropriate tax base.
NOTE: The gross selling price is unreasonably
lower than the actual market value if it is lower
by more than 30% of the actual market value of
the same goods of the same quantity and quality
sold in the immediate locality on or nearest the
date of sale. (Sec. 4.106-7, RR No. 16 – 2005)
The output tax shall be based on the market
value of the goods deemed sold as of the time of
the occurrence of the transactions enumerated
above in numbers 1, 2, and 3.
However, in the case of retirement or cessation
of business, the tax base shall be the acquisition
cost or the current market price of the goods or
properties, whichever is lower.
In the case of a sale where the gross selling price
is unreasonably lower than the fair market
value, the actual market value shall be the tax
base. (Sec. 4.106-7, RR No. 16 – 2005)
Nonetheless, if one of the parties in the
transaction is the government as defined and
contemplated under the Administrative Code,
the output VAT on the transaction shall be based
on the actual selling price. (Sec. 7, RR No. 4 –
2007)
Inventory used for promotions and office
supplies
Goods given for free in the course of trade or
business in order to promote sales efforts are
not considered deemed sale transactions. (VAT
Ruling No. 109-88, April 25, 1988)
Change or cessation of status as value-added
tax-registered person
The 12% vat rate in Sec. 106(A) shall also apply
to goods disposed of or existing as of a certain
date if under circumstances to be prescribed in
rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of
the Commissioner, the status of a person as a
VAT-registered person changes or is terminated.
(Sec. 106(A)(2)(C), NIRC)
The following change in or cessation of status
of a VAT registered person are subject to
 National Taxation
VAT:
1. Change of business activity from VAT
taxable status to VAT-exempt status.
2. Approval of a request for cancellation of
registration due to reversion to exempt
status.
3. Approval of a request for cancellation of
registration due to a desire to revert to
exempt status after the lapse of 3
consecutive years from the time of
registration by a person who voluntarily
registered despite being exempt under Sec
109 (2) of the NIRC.
4. Approval of a request for cancellation of
registration of one who commenced
business with the expectation of gross sales
or receipt exceeding P1,919,500 but who
failed to exceed this amount during the first
12 months of operations.
The following change in or cessation of status
of a VAT registered person are NOT subject to
Output Tax
1. Change of control in the corporation of as
corporation by the acquisition of
controlling interest of the corporation by
another stockholder or group of
stockholders.
NOTE: 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, the exchange of real
estate properties held for sale or for lease,
for shares of stocks, whether resulting to
corporate control or not, is subject to VAT,
subject to exceptions provided under
Section 4.106-3 (Sale of real properties)
hereof. On the other hand, if the transferee
of the transferred real property by a real
estate dealer is another real estate dealer,
in an exchange where the transferor gains
control of the transferee-corporation, no
output VAT is imposable on the said
transfer. (Sec. 8, RR No. 4 – 2007)
2. Change in the trade or corporate name of
the business.
3. Merger or consolidation of corporations.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
NOTE: 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.
ON IMPORTATION OF GOODS
Importation is an act of bringing goods and
merchandise into a country (Philippines) from a
foreign country.
There shall be levied, assessed and collected on
every importation of goods a value-added tax
equivalent to twelve percent (12%) based on
the total value used by the Bureau of Customs in
determining tariff and customs duties, plus
customs duties, excise taxes, if any, and other
charges, such tax to be paid by the importer
prior to the release of such goods from customs
custody: Provided, that where the customs
duties are determined on the basis of the
quantity or volume of the goods, the value-added
tax shall be based on the landed cost plus excise
taxes, if any. (Sec. 107(A), NIRC)
Every importation of goods shall be subject to
the VAT, whether for use in business or not.
(Ingles, 2018)
VAT is imposed on goods brought into the
Philippines, whether for use in business or not,
except those specifically exempted under
Section 109(1) of the NIRC.
Purpose: This is to protect our local or domestic
goods or articles and to regulate the entry or
introduction of foreign articles to our local
market.
Tax base of VAT on importation
GR: The tax base shall be based on the total
value used by the BOC in determining tariff and
customs duties plus customs duties, excise taxes,
if any, and other charges to be paid by the
importer prior to the release of such goods from
customs custody. (Transaction value)
XPN: In case the valuation used by the BOC in
computing customs duties is based on volume or
quantity of the imported goods, the landed cost
shall be the basis for computing VAT.
Landed cost consists of the invoice amount,
240
 Taxation Law
customs duties, freight, insurance and other
charges. If the goods imported are subject to
excise tax, the excise tax shall form part of the
tax base.
The same rule applies to technical importation
of goods sold by a person located in a Special
Economic Zone to a customer located in a
customs territory. (Sec. 4.107-1, RR No. 16 –
2005)
Payment of tax on imported goods
The VAT on importation shall be paid by the
importer prior to the release of such goods
from customs custody.
Importer refers to any person who brings goods
into the Philippines, whether or not made in the
course of his trade or business. It includes non-
exempt persons or entities who acquire tax-free
imported goods from exempt persons, entities or
agencies.
Beginning and end of importation
Importation begins when the carrying vessel or
aircraft enters the Philippine territory with the
intention to unload therein. Importation is
deemed terminated when the duties, taxes, and
other charges due upon the goods have been
paid or secured to be paid at the port of entry or
in case the goods are deemed free of duties,
taxes and other charges, when the goods have
legally left the jurisdiction of the Bureau. (Sec.
103, CMTA)
Consequence if a tax exempt person would
transfer imported goods to a non-exempt
person
The purchaser or transferee shall be considered
as an importer and shall be held liable for VAT
and other internal revenue tax due on such
importation. (Sec. 107(B), NIRC)
The tax due on such importation shall constitute
a lien on the goods, superior to all charges/or
liens, irrespective of the possessor of said goods.
Q: Anshari, an alien employee of Asian
Development Bank (ADB) who is retiring
soon has offered to sell his car to you, which
he imported tax-free for his personal use.
The privilege of exemption from tax is
241
recognized by tax authorities. If you decide to
purchase the car, is the sale subject to tax?
Explain. (2005 BAR)
A: YES. The sale is subject to tax. Sec. 107 (B) of
the NIRC provides that “In case of tax-free
importation of goods into the Philippines by
persons, entities or agencies exempt from tax,
where the goods are subsequently, sold,
transferred or exchanged in the Philippines to
non-exempt persons or entities, the purchasers,
transferees or recipients shall be considered the
importer thereof, who shall be liable for any
internal revenue tax on such importation.
ON SALE OF SERVICES AND USE
OR LEASE OF PROPERTIES
Q: Power Sectors Assets and Liabilities
Management (PSALM), a government-owned
and controlled corporation is mandated to
manage the orderly sale, disposition, and
privatization of the National Power
Corporation (NPC) generation assets, real
estate and other disposable assets, and
Independent Power Producer contracts with
the objective of liquidating all NPC financial
obligations and stranded contract costs in an
optimal manner. (BIR) issued a Final
Assessment Notice (FAN) covered by
Assessment No. VT-08-00072 alleging that,
for taxable year ending 31 December 2008,
PSALM is liable to pay a deficiency VAT
amounting to ₱10,103,158,715.06, inclusive
of penalties and interests. PSALM filed its
administrative protest against the FAN,
alleging that the privatization of NPC assets is
an original mandate of PSALM and not
subject to VAT. The CIR held that the sale of
electricity is subject to VAT under R.A. 9337
and the real properties sold by PSALM are
regarded as real properties used in trade or
business. Is the CIR correct?
A: NO. Applying our ruling in G.R. No. 198146
involving the same parties and similar issues,
the sale of the generating assets - the Masinloc,
Ambuklao-Binga and Pantabangan power plants
- in the present case is likewise not subject to
VAT, since the sale was pursuant to the mandate
of PSALM under the EPIRA to privatize NPC
assets. The sale of the power plants is not in
pursuit of a commercial or economic activity but
a governmental function mandated by law to
privatize NPC generation assets. The sale of the
 National Taxation
power plants is clearly not the same as the sale
of electricity by generation companies,
transmission, and distribution companies, which
is subject to VAT under Section 108 of the NIRC.
Thus, we do not find any merit in the arguments
raised by the CIR. Under the EPIRA, PSALM, as
the conservator of NPC assets, operates and
maintains NPC assets and manages its liabilities
in trust for the national government, until the
NPC assets could be sold or disposed of. Thus,
during its corporate life, PSALM has powers
relating to the management of its personnel and
leasing of its properties as may be necessary to
discharge its mandate. (Power Sector Assets and
Liabilities Management Corporation v.
Commissioner of Internal Revenue, G.R. 226556,
July 3, 2019)
Tax base: Gross receipts
The value-added tax rate is twelve precent
(12%) of gross receipts derived from the sale or
exchange of services, including the use or lease
of properties. (Sec. 108 (A), NIRC)
The phrase “sale or exchange of sevices” broadly
embraces the performance of all kinds of
services in the Philippines for others for a fee,
remuneration or consideration, regardless of
whether the performance thereof calls for the
exercise of the physical or mental faculties and is
not expressly exempt from value added tax
under the Tax Code or special law. (Mamalateo,
2014)
Sale of services in the course of trade or
business includes those performed or
rendered by:
1. Construction and service contractors;
2. Stock, real estate, commercial, customs and
immigration brokers;
3. Lessors of property, whether personal or
real;
NOTE: Lease of property shall be subject to
VAT regardless of the place where the
contract of lease or licensing agreement
was executed if the property leased or used
is located in the Philippines.
VAT on rental and/or royalties payable to
non-resident foreign corporations or
owners for the sale of services and use or
lease of properties in the Philippines shall
be based on the contract price agreed upon
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
by the licensor and the licensee. The
licensee shall be responsible for the
payment of VAT on such rentals and/or
royalties in behalf of the non-resident
foreign corporation or owner.
If the advance payment constitutes a pre-
paid rental, then such payment is taxable to
the lessor in the month when received,
irrespective of the accounting method
employed by the lessor.
4. Transmission of electricity by electric
cooperatives;
5. Persons engaged in warehousing services;
6. Lessors or distributors of cinematographic
films;
7. Persons engaged in milling, processing,
manufacturing or repacking goods for
others
8. Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses;
9. Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers;
10. Dealers in securities;
11. Lending investors;
12. Transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes for
hire and other domestic common carriers
by land relative to their transport of goods
or cargoes;
13. Common carriers by air and sea relative to
their transport of passengers, goods or
cargoes from one place in the Philippines to
another place in the Philippines;
14. Sales of electricity by generation,
transmission, and/or distribution
companies;
NOTE: That sale of power or fuel generated
through renewable sources of energy such
as, but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels shall be subject to 0% VAT.
15. Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other
franchise grantees, except franchise
grantees of radio and/or television
broadcasting whose annual gross receipts
242
 Taxation Law
of the preceding year do not exceed 8. The lease or the use of or the right to use
P10,000,000, and franchise grantees of gas radio, television, satellite transmission and
and water utilities; cable television time. (RR 16-2005)

NOTE: Franchise grantees of radio and/or NOTE: The above list is not exclusive.
television broadcasting whose annual gross
receipts of the preceding year do not Requisites for the taxability of sale or
exceed P10,000,000, shall have an option to exchange of services or lease or use of
be registered as a VAT taxpayer and pay the property (SPaCeVaN)
tax due thereon. Once the option is
exercised, said option shall not be
1. There is a sale or exchange of service or
irrevocable. (Sec. 119, NIRC)
lease or use of property enumerated in the
law or other similar services;
16. Non-life insurance companies (except their
2. The service is performed or to be
crop insurances), including surety, fidelity,
performed in the Philippines;
indemnity and bonding companies; and
3. The service is in the course of trade of
17. Similar services regardless of whether or
taxpayer’s trade or business or profession;
not the performance thereof calls for the
4. The service is for a valuable consideration
exercise or use of the physical or mental
actually or constructively received; and
faculties.
5. The service is not exempt under the NIRC,
special law or international agreement.
This shall likewise include: (LE4SU4)
NOTE: Absence of any of the requisites renders
1. The lease or the use of or the right or
the transaction exempt from VAT but may be
privilege to use any copyright, patent,
subject to other percentage tax under Title V of
design or model plan, secret formula or
the NIRC.
process, goodwill, trademark, trade brand
or other like property or right;
Gross receipts
2. The lease or the use of, or the right to use of
any industrial, commercial or, scientific
It pertains to the total amount of money or its
equipment;
equivalent representing the contract price,
3. The supply of scientific, technical,
compensation, service fee, rental or royalty,
industrial or commercial knowledge or
including the amount charged for materials
information;
supplied with the services and deposits and
4. The supply of any assistance that is
advanced payments (1) actually or (2)
ancillary and subsidiary to and is furnished
constructively received during the taxable
as a means of enabling the application or
quarter for the services performed or to be
enjoyment of any such property, or right as
performed for another person, excluding VAT,
is mentioned in subparagraph (2) or any
except those amounts earmarked for payment to
such knowledge or information as is
unrelated third (3rd) party or received as
mentioned in subparagraph (3);
reimbursement for advance payment on behalf
5. The supply of services by a non-resident
of another which do not redound to the benefit
person or his employee in connection with
of the payor (service provider).
the use of property or rights belonging to,
or the installation or operation of any
A payment is a payment to a third (3rd) party
brand, machinery or other apparatus
if the same is made to settle an obligation of
purchased from such non-resident person;
another person. Such obligation should be
6. The supply of technical advice, assistance
evidenced by the sales invoice/official receipt
or services rendered in connection with
issued by the said third party to the
technical management or administration of
customer/client of the service provider.
any scientific, industrial or commercial
undertaking, venture, project or scheme;
An advance payment is an advance payment on
7. The lease of motion picture films, films,
behalf of another if the same is paid to a third
tapes and discs; and
(3rd) party for a present or future obligation of
said customer or client which obligation is

243
 National Taxation
evidenced by a sales invoice or official receipt
issued by the creditor (3rd party) to the
customer or client (the aforementioned another
party) for the sale of goods or services by the
former to the latter.
For this purpose, “unrelated party” shall not
include taxpayer’s employees, partners, affiliates
(parent, subsidiary and other related
companies), relatives by consanguinity or
affinity within the fourth (4th) civil degree, and
trust fund where the taxpayer is the trustor,
trustee or beneficiary, even if covered by an
agreement to the contrary. (Sec. 11, RR No. 04-
2007)
Constructive receipt
It occurs when the money consideration or its
equivalent is placed at the control of the person
who rendered the service without restrictions
by the payor.
Examples of constructive receipts:
1. Deposit in banks which are made available
to the seller without restrictions.
2. Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for
services rendered.
3. Transfer of the amounts retained by the
payor to the account of the contractor. (RR
No. 16 – 2005)
Q: Are non-stock, non-profit entities liable to
pay VAT for sale of goods and services?
A: YES. As long as the entity provides service for
a fee, remuneration or consideration, then the
service rendered is subject to VAT.
(Commissioner v. CA, G.R. No. 125355, March 30,
2000)
Q: Are toll fees collected by tollway operators
are subject to VAT?
A: YES. First, VAT is imposed on “all kinds of
services” When a tollway operator takes a toll
fee from a motorist, the fee is in effect for the
latter’s use of the tollway facilities over which
the operator enjoys private proprietary rights.
Second, VAT is imposed on “franchise grantees”.
The word “franchise” broadly covers
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
government grants of a special right to do an act
or series of acts of public concern and is not
limited to legislative franchises. Tollway
operators are, owing to the nature and object of
their business, “franchise grantees.” The
construction, operation, and maintenance of toll
facilities on public improvements are activities
of public consequence that necessarily require a
special grant of authority from the state.
Third, the public nature of the services rendered
by tollway operators does not exclude such
services from the vatable services. In specifically
including by way of example electric utilities,
telephone, telegraph, and broadcasting
companies in its list of VAT-covered businesses,
Section 108 opens other companies rendering
public service for a fee to the imposition of VAT.
Fourth, on the argument that toll fee is a “user’s
tax” and to impose VAT on toll fees is
tantamount to taxing a tax, it is established that
tollway fees are not taxes. Indeed, they are not
assessed and collected by the BIR and do not go
to the general coffers of the government. Toll
fees are collected by private tollway operators as
reimbursement for the costs and expenses
incurred in the construction, maintenance and
operation of the tollways, as well as to assure
them a reasonable margin of income. (Diaz v.
Sec. of Finance, G.R. No. 193007, July 19, 2011)
Q: Are gross receipts derived from sales of
admission tickets in showing motion pictures
subject to VAT?
A: NO. The legislative intent is not to impose
VAT on persons already covered by the
amusement tax. The repeal by the LGC of 1991 of
the Local Tax Code transferring the power to
impose amusement tax on cinema/theater
operators or proprietors to the local government
did not grant nor restore the said power to the
national government nor did it expand the
coverage of VAT. Since the imposition of a tax is
a burden on the taxpayer, it cannot be presumed
nor can it be extended by implication. As it is, the
power to impose amusement tax on
cinema/theater operators or proprietors
remains with the local government.
A contrary ruling will subject cinema/theater
operators or proprietors to a total of 40% tax,
the 10% (now 12%) VAT being on top of the
30% amusement tax imposed by the Local
Government Code of 1991, thereby killing the
244
 Taxation Law
“(goose) that lays the golden egg(s).”
The “lease of motion picture films, films, tapes
and discs” under Sec. 108 of the NIRC is not the
same as the showing or exhibition of motion
pictures or films. “Exhibition” is defined as “to
show or to display. x xx To produce anything in
public so that it may be taken in possession”. On
the other hand, “lease” is defined as “a contract
by which one owning such property grants to
another the right to possess, use and enjoy it on
specified period of time in exchange for periodic
payment of a stipulated price, referred as rent.”
Thus, the legislature never intended to include
cinema/theater operator operators or
proprietors in the coverage of VAT. (CIR v. SM
Prime Holdings, Inc., G.R. No. 183505, February
26, 2010)
Q: The Bureau of Internal Revenue (BIR)
issued Rvenue Memorandum Circular (RMC)
No. 65-2012 imposing Value-Added Tax
(VAT) on association dues and membership
fees collected by condominium corporations
from its member condominium-unit owners.
The RMC’s validity is challenged before the
Supreme Court (SC) by the condominium
corporations. The Solicitor General, counsel
for BIR, claims that association dues,
membership fees, and other assessment/
charges collected by a condominium
corporation are subject to VAT since they
constitute income payments or
compensation for the beneficial services it
provides to its members and tenants. On the
other hand, the lawyer of the condominium
corporations argues that such dues and fees
are merely held in trust by the condominium
corporations exclusively for their members
and used solely for administrative expenses
in implementing the condominium
corporations’ purposes. Accordingly, the
condominium corporations, do not actually
render services for a fee subject to VAT.
Whose argument is correct? Decide. (2014
BAR)
A: The lawyer of the condominium corporations
is correct. The association dues, membership
fees, and other assessment/charges do not
constitute income payments because they were
collected for the benefit of the unit owners and
the condominium corporation is not created as a
business entity. The collection is the money of
the unit owners pooled together and will be
245
spent exclusively for the purpose of maintaining
and preserving the building and its premises
which they themselves own and possess. (First
e-Bank Tower Condominium Corp., v. BIR, Special
Civil Action No. 121236, RTC Br. 146, Makati City)
When an affiliate provides funds to a taxpayer
who then uses the funds to pay a third party, the
transaction is not subject to VAT, as there was
no sale, barter, or exchange between the affiliate
and the taxpayer. The money was simply given
as a dole-out. (CIR v. Sony Philippines, Inc., G.R.
No. 178697, November 17, 2010)
However, if a taxpayer renders service to an
affiliate for a fee (even if the fee is merely to
reimburse costs), the service is subject to VAT.
Thus, the collection of condominium
corporations of association dues and
membership fees from its member
condominium-unit owners are subject to VAT
even if receives payments for services rendered
to its affiliates in trust and on reimbursement-of-
cost basis only, without realizing profit.
Q: All the homeowners belonging to ABC
Village Homeowners' Association elected a
new set of members of the Board of Trustees
for the Association effective January 2019.
The first thing that the Board looked into is
the need to increase the prevailing
association dues. Mr. X, one of the trustees,
proposed an increase of 100% to account for
the payment of the 12% value-added tax
(VAT) on the association dues which were
being collected for services allegedly
rendered "in the course of trade or business"
by ABC Village Homeowners' Association.
Is Mr. X correct in stating that the
association dues are subject to VAT?
A: Yes, Mr. X is correct in stating that the
association dues are subject to VAT.
Association dues, membership fees, and other
assessments and charges are exempt from VAT
but only to the extent of those collected on a
purely reimbursement basis by homeowners’
associations. In this case, the association dues
were being collected for services allegedly
rendered “in the course of trade or business”.
Thus, the association dues collected by ABC
Village Homeowners’ association are subject to
VAT.
 National Taxation
ZERO-RATED AND EFFECTIVELY ZERO-
RATED SALES OF GOODS OR PROPERTIES,
AND SERVICES
Zero-rated sale by a VAT-registered person is a
taxable transaction for VAT purposes but the
sale does not result in any output tax. However,
the input tax on the purchases of goods,
properties or services related to such zero-rated
sale shall be available as tax credit or refund.
To be subject to zero tax-rate, however, the
seller must be a VAT-registered person because
if he is not VAT registered, the transactions
entered into by him are exempt from the tax.
Purpose: To exempt the transaction completely
from VAT previously collected since input taxes
passes to him may be recovered as refund or
credits. (Ingles, 2018)
The zero-rated seller becomes internationally
competitive by allowing the refund or credit of
input taxes that are attributable to export sales.
(CIR v. Seagate Technology (Phil.), G.R. No.
153866, Feb. 11, 2005)
ZERO-RATED SALE OF GOODS
1. Export sales
2. Effectively zero-rated sales
Export sales
The term export sales means: (FINE GO)
1. The sale and actual shipment of goods from
the Philippines to a Foreign country:
a. Irrespective of any shipping
arrangement; and
b. Paid for in acceptable foreign currency
or its equivalent in goods or services
and accounted for in accordance with
the rules and regulations of BSP.
2. Sale and deliver of goods to:
a. Registered enterprises within separate
custom territory as provided by
special laws; and
b. Registered enterprises within tourism
enterprise zones as declared by
Tourism Infrastracture and Enterprise
Authority (TIEZA) subject to the
provisions under R.A. 9593 or the
Tourism Act of 2009.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
3. Sale of raw materials or packaging
materials by a VAT-registered entity to a
Non-resident buyer:
a. For delivery to a resident local export-
oriented enterprise;
b. Used in the manufacturing, processing,
packing, repacking in the Philippines
of the said buyer’s goods;
c. Paid for in acceptable foreign currency
and accounted in accordance with the
rules of BSP.
4. Sale of raw material or packaging materials
to Export oriented enterprise whose export
sales exceed 70% of total annual
production;
5. Those considered as export sales under the
Omnibus Investment Code of 1987 (E.O. No.
226);
6. The sale of goods, supplies, equipment and
fuel to persons engaged in International
shipping or international air transport
operations, provided that:
a. Goods, supplies, equipment, and fuel
shall be used; and
b. For international shipping or air
transport operations. (Sec.
106(A)(2)(a), NIRC)
Enhanced VAT refund system
Sales of raw materials to non-resident buyer
under the aforementioned, sale of raw materials
to export-oriented enterprise whose export
sales exceed 70% of total annual production, and
those under the Omnibus Investments Code
shall be under 12% VAT and no longer be
considered as export sales subject to 0% VAT
rate upon the following:
1. Successful establishment of VAT refund
system which grants refunds of creditable
input tax within ninety (90) days from the
filing of the VAT refund application with the
Bureau; and
2. Pending VAT refund claims as of December
31, 2017 shall be fully paid in cash by
December 31, 2019.
“Considered export sales under EO 226” shall
mean the Philippine port F.O.B. value
determined from invoices, bills of lading, inward
letters of credit, landing certificates, and other
246
 Taxation Law
commercial documents, of export products
exported directly by a registered export
producer, or the net selling price of export
products sold by a registered export producer to
another export producer, or to an export trader
that subsequently export the same; Provided,
that sales of export products to another
producer or to an export trader shall only be
deemed export sales when actually exported by
the latter, as evidenced by landing certificates or
similar commercial documents.
Constructive exports
1. Sales to bonded manufacturing warehouses
of export-oriented manufacturers;
2. Sales to export processing zones;
3. Sales to registered export traders operating
bonded trading warehouses supplying raw
materials in the manufacture of export
products under guidelines to be set by the
Board in consultation with the BIR and the
BOC;
4. Sales to diplomatic missions and other
agencies and/or instrumentalities granted
tax immunities, of locally manufactured,
assembled or repacked products whether
paid for in foreign currency or not. (Sec.
4.106-5, RR No. 13 – 2018)
Rationale for zero-rating exports sale
territory are deemed as exports and treated as
export sales. These sales are zero-rated or
subject to a tax rate of zero percent. (CIR v.
Sekisui Jushi Philippines, Inc., G.R. No. 149671, July
21, 2006)
An ecozone or a Special Economic Zone has been
described as selected areas with highly
developed or which have the potential to be
developed into agro-industrial, industrial,
tourist, recreational, commercial, banking,
investment and financial centers whose metes
and bounds are fixed or delimited by
Presidential Proclamations. An ecozone may
contain any or all of the following: industrial
estates (IEs), export processing zones (EPZs),
free trade zones and tourist/recreational
centers. The national territory of the
Philippines outside of the proclaimed borders of
the ecozone shall be referred to as the Customs
Territory. (CIR v. Toshiba Information Equipment
(Phils.), Inc., G.R.. No. 150154, August 9, 2005)
EFFECTIVELY ZERO-RATED TRANSACTIONS
The term “effectively zero-rated sale of goods
and properties” shall refer 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.

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.
Since the buyer is exempt from indirect tax, the
seller cannot pass on the VAT and therefore, the
exemption enjoyed by the buyer shall extend to
the seller, making the sale effectively zero-rated.
(R.M.C. 50-2007)

Export sale, when exempt and when zero- Effectively Zero-rated vs. Automatic Zero-
rated rated transaction

RULES ON EXPORT SALES BASIS EFFECTIVELY AUTOMATIC

By a Non-VAT VAT exempt ZERO-RATED ZERO-RATED
registered TRANSACTION TRANSACTION
By a VAT registered VATable at 0% (zero Refers to sales Refers to
rated) to persons or export sales
entities whose and foreign
Q: Is the sale of goods to ecozone, such as exemption currency
PEZA, considered as export sale? under special denominated
Nature laws or sales
A: YES. While an ecozone is geographically international
within the Philippines, it is deemed a separate agreements to
customs territory and is regarded in law as which the
foreign soil. Sales by suppliers from outside the Philippines is a
borders of the ecozone to this separate customs signatory

247
 National Taxation
BASIS EFFECTIVELY AUTOMATIC corporation, and the rest are sold to various
ZERO-RATED ZERO-RATED enterprises doing business in the Mactan
TRANSACTION TRANSACTION Export Processing Zone. Inasmuch as both
An application No need to file sales are considered export sales subject to
for zero-rating an application VAT at 0% rate under the National Internal
must be filed form and to Revenue Code, as amended, it filed an
and the BIR secure BIR application for tax credit/refund of VAT paid
Need to approval is approval for the said period representing excess VAT
apply for necessary before the sale input payments. The CIR belies the claim for
zero- before the is considered refund. Is the grant of a refund representing
rating transaction zero-rated. unutilized input VAT to Cebu Toyo proper?
may be
considered A: YES. Cebu Toyo is engaged in taxable rather
effectively than exempt transactions. Taxable transactions
zero-rated. are those transactions which are subject to VAT
Intended to Primarily either at the rate of 12% or 0%. In taxable
benefit the intended to be transactions, the seller shall be entitled to tax
purchaser who, enjoyed by the credit for the VAT paid on purchases and leases
not being seller who is of goods, properties or services. An exemption
directly and directly and means that the sale of goods, properties or
legally liable legally liable services and the use or lease of properties is not
For for the for the VAT, subject to VAT (output tax) and the seller is not
whose payment of the making such allowed any tax credit on VAT (input tax)
benefit is VAT, will seller previously paid. A VAT-registered purchaser of
it ultimately bear internationally goods, properties or services that are VAT
intended the burden of competitive by exempt, is not entitled to any input tax on such
the tax shifted allowing the purchases despite the issuance of a VAT invoice
by the refund or or receipt. Under the system, a zero-rated sale
suppliers. credit of input by a VAT-registered person, which is a taxable
taxes that are transaction for VAT purposes, shall not result in
attributable to any output tax, but the input tax on his purchase
export sales. of goods, properties or services related to such
Required. The Not required. zero-rated sale shall be available as tax credit or
buyer, as The buyer, as refund. (CIR v. Cebu Toyo Corporation, G.R. No.
Stamping shown by his shown by his 149073, February 16, 2005)
of “zero- address in the address in the
rated” on sales invoice sales invoice Q: SEAGATE is registered with the PEZA to
VAT and shipping and shipping engage in the manufacture of recording
invoice documents, is documents, is components primarily used in computers for
or located outside located outside export. SEAGATE is a VAT-registered entity.
receipt the Philippines the Philippines. An administrative claim for refund of VAT
merely by input taxes with supporting documents was
fiction of law. filed with Revenue District Office in Cebu.
Results in no tax chargeable The administrative claim for refund was not
against the purchaser. acted upon by the petitioner prompting the
respondent to elevate the case to the CTA.
Effect The CIR contended that since ‘taxes are
The seller can claim a refund or a
tax credit certificate for the VAT presumed to have been collected in
previously charged by suppliers. accordance with laws and regulations,
Seagate has the burden of proof that the
Q: Cebu Toyo Corp., an export enterprise, taxes sought to be refunded were
duly registered with the Philippine Economic erroneously or illegally collected.
Zone Authority pursuant to PD 66 and is also Unfortunately, Seagate failed to do so. Is
registered with the BIR as a VAT taxpayer. It Seagate entitled to the refund or issuance of
sells 80% of its products to its mother Tax Credit Certificate representing alleged
unutilized input VAT paid on capital goods

UNIVERSITY OF SANTO TOMAS 248

2021 GOLDEN NOTES
 Taxation Law
purchased?
A: YES. As a PEZA-registered enterprise within a
special economic zone, it is entitled to the fiscal
incentives and benefits provided for in either PD
66 or EO 226 which would not subject Seagate to
internal revenue laws and regulations, among
others. Thus, Seagate enjoys preferential tax
treatment. The VAT on capital goods is an
internal revenue tax from which the entity is
exempt. Although the transactions involving
such tax are not exempt, Seagate as a VAT-
registered person, however, is entitled to their
credits.
Since the purchases of Seagate are not exempt
from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and R.A. 7916
effectively subjects such transactions to a zero
rate, because the ecozone within which it is
registered is managed and operated by the PEZA
as a separate customs territory. This means that
in such zone is created the legal fiction of foreign
territory. Under the cross-border principle of the
VAT system being enforced by the BIR, no VAT
shall be imposed to form part of the cost of
goods destined for consumption outside of the
territorial border of the taxing authority. If
exports of goods and services from the
Philippines to a foreign country are free of the
VAT, then the same rule holds for such exports
from the national territory – except specifically
declared areas – to an ecozone. (CIR v. Seagate
Technology (Phil.), G.R. No. 153866, Feb. 11, 2005)
Q: A contractor constructed an office building
for the World Health Organization (WHO)
BIR assessed the contractor of VAT,
contending that, although WHO is exempt,
the tax is being assessed on the contractor,
and not on WHO. Is the BIR correct?
A: NO. As an international organization, WHO
enjoys privileges and immunities such as
exemption from all direct and indirect taxes. The
contention of BIR should be rejected. In context,
direct taxes are those that are demanded from
the very person who, it is intended or desired,
should pay them; while indirect taxes are those
that are demanded in the first instance from one
person in the expectation and intention that he
can shift the burden to someone else. The VAT is
of course payable by the contractor but in the
last analysis it is the owner of the building that
shoulders the burden of the tax because the
249
same is shifted by the contractor to the owner as
a matter of selfpreservation. Thus, it is an
indirect tax. And it is an indirect tax on the WHO
because, although it is payable by the contractor,
the latter can shift its burden on the WHO. (CIR
v. John Gotamco & Sons, Inc., G.R. No. L-31092,
February 27,1987, (Modified))
ZERO-RATED SALES OF SERVICES
The following services performed in the
Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate:
1. Processing, manufacturing, or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the BSP;
2. Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the
Philippines or to a non-resident person not
engaged in business who is outside the
Philippines when the services are
performed, the consideration for which is
paid for in acceptable foreign currency and
accounted for in accordance with the rules
and regulations of the BSP, i.e., recruitment;
3. Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to 0%
rate;
4. Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof; provided, that
these services shall be exclusive for
international shipping or air transport
operations;
5. Services performed by subcontractors
and/or contractors in processing,
converting, or manufacturing goods for an
enterprise whose export sales exceed 70%
of total annual production;
 National Taxation
6. Transport of passengers and cargo by
domestic air or sea vessels from the
Philippines to a foreign country;
7. Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels; and
8. Services rendered to:
a. Registered enterprises within a
separate customs territory as
provided for by special law; and
b. Registered enterprises within tourism
enterprise zones as declared by TIEZA.
(Sec. 108(B), NIRC)
Services other than processing,
manufacturing, or repacking of goods;
requirements to qualify for zero-rating
1. The services other than “processing,
manufacturing or repacking of goods”
must be performed in the Philippines;
2. That the payment for such services be in
acceptable foreign currency
accounted for in accordance with BSP
rules; and
3. That the recipient of such services is
doing business outside of the
Philippines.
In CIR vs. American Express International, Inc.,
(2005), the Court ruled that the Legislature does
not intend to impose the condition of being
"consumed abroad" in order for services
performed in the Philippines by a VAT-
registered person to be zero-rated. In this case,
the taxpayer renders services in the Philippines
and facilitates the collection and payment of
receivables belonging to its non-resident foreign
client, for which it gets paid in acceptable foreign
currency inwardly remitted and accounted for in
conformity with BSP rules and regulations.
In Accenture Inc. vs CIR (2012), the Court ruled
that the recipient of the service must be doing
business outside the Philippines for the
transaction to qualify for zero-rating under
Section 108 (B) of the NIRC. To come within the
purview of Section 108 (B) (2), it is not enough
that the recipient of the service be proven to be a
foreign corporation; rather, it must be
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
specifically proven to be a non-resident foreign
corporation.
Services rendered to persons engaged in
international shipping or international air
transport operations
In order to qualify for zero-rating, the services
rendered by a VAT-registered person to a
person engaged in international air transport
operations must pertain to or must be
attributable to the transport of goods and
passengers from a port in the Philippines
directly to a foreign port without docking or
stopping at any port in the Philippines.
Accordingly, the services provided by hotels to
their clients engaged in international air
transport operations pertaining to room
accommodations and food and beverage services
should be subject to the 12% VAT. As they are
rendered within the hotel's premises, they have
no direct connection with the transport of goods
or passengers, and as such, they cannot be
considered as services directly attributable to
the transport of goods and passengers from a
Philippine port directly to a foreign port entitled
to zero-rating. (RMC No. 031-11)
Q: Are the following transactions subject to
VAT? If yes, what is the applicable rate for
each transaction. State the relevant
authority/ies for your answer.
a. Construction by XYZ Construction Co.
of concrete barriers for the Asian
Development Bank in Ortigas Center
to prevent car bombs from ramming
the ADB gates along ADB Avenue in
Mandaluyong City.
b. Call Center operated by a domestic
enterprise in Makati that handles
exclusively the reservations of a
hotel chain which are all located in
North America. The services are paid
for in US$ and duly accounted for
with the BangkoSentral ng Pilipinas.
(2010 BAR)
A:
a. The transaction is subject to VAT at the
rate of zero percent (0%) ADB is exempt
from direct and indirect taxes under a
special law, thereby making the sale of
services to it by a VAT-registered
construction company effectively zero-
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 Taxation Law
rated. (Sec. 108(B)(3), NIRC) considered as pets.

b. The sale of services subject to VAT at Marine food products shall include fish and
zero percent (0%) Zero-rated sale of crustaceans, such as, but not limited to, eels,
services includes services rendered to a trout, lobster, shrimps, prawns, oysters, mussels,
person engaged in business outside the and clams.
Philippines and consideration is paid in
acceptable foreign currency duly Meat, fruit, fish, vegetables and other
accounted for by the BangkoSentral ng agricultural and marine food products classified
Pilipinas. (Sec. 103(B)(2)NIRC) under this paragraph shall be considered in their
original date even if they have undergone the
VALUE-ADDED TAX-EXEMPT simple processes of preparation or preservation
TRANSACTIONS for the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping,
Exempt Party vs. Exempt Transaction including those using advanced technological
means of packaging, such as shrink wrapping in
EXEMPT plastics, vacuum packing, tetra-pack, and other
EXEMPT PARTY similar packaging methods.
TRANSACTION
A person or entity Involves goods or
Polished and/or husked rice, corn grits, raw
granted VAT services which, by
cane sugar and molasses, ordinary salt and
exemption under the their nature are
copra shall be considered as agricultural food
NIRC, special law or specifically listed in
products in their original state.
international and expressly
agreement to which exempted from the
Sugar whose content of sucrose by weight, in the
RP is a signatory, and VAT under the NIRC,
dry state, has a polarimeter reading of 99.5º and
by virtue of which its without regard to the
above are presumed to be refined sugar.
taxable transactions tax status of the
become exempt from parties in the
Cane sugar produced from the following shall be
the VAT. transactions.
presumed, for internal revenue purposes, to be
Such party is not Transaction is not
refined sugar:
subject to the VAT, but subject to VAT, but
1. Product of a refining process;
may be allowed a tax the seller is not
2. Products of a sugar refinery; or
refund or credit of allowed any tax
3. Product of a production line of a sugar
input tax paid, refund or credit for
mill accredited by the BIR to be
depending on its any input taxes paid.
producing and/or capable of producing
registration as a VAT
sugar with polarimeter reading of 99.5o
or non-VAT taxpayer.
and above, and for which the quedan
issued therefor, and verified by the
Exempt transactions, enumerated
Sugar Regulatory Administration,
identifies the same to be of a
A. Sale or importation of
polarimeter reading of 99.5º and above.
1. Agricultural and marine food
products in their original state,
Bagasse is not included in the exemption
2. Livestock and poultry of
provided for under this section. (Sec. 4.109-
a. A kind generally used as, or
1(B)(1)(a), RR No. 16 – 2005)
yielding or producing foods for
human consumption, and
Refined sugar subject to VAT
b. Breeding stock and genetic
materials therefor.
Raw Sugar refers to sugar produced by simple
process of conversion of sugar cane without a
Livestock shall include cows, bulls and calves,
need of any of mechanical or similar device such
pigs, sheep, goats and rabbits. Poultry shall
as muscovado. For this purpose, raw sugar
include fowls, ducks, geese and turkey. Livestock
refers only to muscovado sugar.
or poultry does not include fighting cocks, race
horses, zoo animals and other animals generally

251
 National Taxation
Centrifugal process of producing sugar is not in
itself a simple process. Therefore, any type of
sugar produced therefrom is not exempt from
VAT. (RR. No. 13 – 2013)
B. Sale or importation of
1. Fertilizers
2. Seeds, seedlings and fingerlings,
3. Fish, prawn, livestock and poultry
feeds, including ingredients, whether
locally produced or imported, used in
the manufacture of finished feeds
a. Except specialty feeds for race
horses, fighting cocks, aquarium
fish, zoo animals and other
animals generally considered as
pets;
Specialty feeds refers to non-agricultural feeds
or food for race horses, fighting cocks, aquarium
fish, zoo animals and other animals generally
considered as pets.
C. Importation of personal and household
effects
1. Belonging to
a. Residents of the Philippines
returning from abroad, and
b. Non-resident citizens coming to
resettly in thte Philippines,
2. Provided, that such goods are exempt
from customs duties under the Tariff
and Customs Code of the Philippines;
D. Importation of professional instruments
and implements, tools of trade,
occupation or employment, wearing
apparel, domestic animals, and personal
household effects, except any vehicle,
vessel, aircraft, machinery and other
goods for use in the manufacture and
merchandise of any kind in commercial
quantity
1. Belonging to
a. Persons coming to settle in the
Philippines, or
b. Their families and descendants
who are now residents or citizens
of other countries (overseas
Filipinos),
2. In quantities and of the class suitable
to the profession, rank or position of
the persons importing said items,
3. For their own use and not for barter
or sale,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
4. Accompanying such persons, or
arriving within a reasonable time,
5. Provided, that the Bureau of Customs
may exempt such goods from
payment of duties and taxes
a. Upon the production of
satisfactory evidence that
i. Such persons are actually
coming to settle in the
Philippines, and
ii. The goods are brought from
their former place of abode;
E. Services subject to percentage tax;
Refer to discussion on percentage tax.
F. Services by
1. Agricultural contract growers, and
2. Milling for others of
a. Palay into rice,
b. Corn into grits, and
c. Sugar cane into raw sugar;
Agricultural contract growers refer to those
persons producing for others poultry, livestock
or other agricultural and marine food products
in their original state.
G. Medical, dental hospital and veterinary
services, except those rendered by
professionals;
Laboratory services are exempted. If the hospital
or clinic operates a pharmacy or drug store, the
sale of drugs and medicine is subject to VAT.
Q: PHILHEALTH, operates a health care
delivery system or a health maintenance
organization to take care of the sick and
disabled persons enrolled in the health care
plan, inquired before the CIR whether the
services it provided to the participants in its
health care program were exempt from the
payment of VAT. The Commissioner issued
VAT Ruling 231-88 stating that PHILHEALTH,
as a provider of medical services, was
exempt from the VAT coverage.
Meanwhile, R.A. 7716 (E-VAT Law) took
effect, amending further the NIRC of 1977.
Subsequently, R.A. 8424 (NIRC of 1997) took
effect, substantially adopting and
reproducing the provisions of E.O. 273 on
VAT and the E-VAT law. With the passage of
these laws, the BIR sent PHILHEALTH a
252
 Taxation Law
Preliminary Assessment Notice for deficiency
in its payment of the VAT and documentary
stamp taxes (DST) for taxable years 1996 and
1997 and a letter demanding payment of
“deficiency VAT” and DST for taxable years
1996 to 1997.
PHILHEALTH filed a protest with the
Commissioner but the latter did not take
action on its protest. Consequently,
PHILHEALTH brought the matter to the CTA.
The CTA declared that VAT Ruling 231-88 is
void and without force and effect and
ordered it to pay the VAT deficiency, but
canceling the payment of DST. After a Motion
for Partial Reconsideration, CTA overruled
its decision with respect to the payment of
deficiency VAT and held that PHILHEALTH
was entitled to the benefit of non-
retroactivity of rulings guaranteed under
Section 246 of the NIRC, in the absence of
showing of bad faith on its part. Are the
services of PHILHEALTH subject to VAT?
A: YES, PHILHEALTH’s services are not VAT-
exempt. Those exempted from VAT are those
engaged in the performance of medical, dental,
hospital and veterinary services except those
rendered by professionals. PHILHEALTH is not
actually rendering medical service but merely
acting as a conduit between the members and
their accredited and recognized hospitals and
clinics. It merely provides and arranges for the
provision of pre-need health care services to its
members for a fixed prepaid fee for a specified
period of time; that it then contracts the services
of physicians, medical and dental practitioners,
clinics and hospitals to perform such services to
its enrolled members; and that it enters into
contract with clinics, hospitals, medical
professionals and then negotiates with them
regarding payment schemes, financing and
other procedures in the delivery of health
services. (CIR v. Philippine Health Care Providers
Inc., G.R. No. 168129, April 24, 2007)
H. Educational services rendered by
a. Private educational
institutions duly accredited
by the
i. Department of
Education (DepED),
a. Commission on Higher Education
(CHED),
253
b. Technical Education and Skills
Development Authority (TESDA),
and
2. Government educational institutions;
Educational services shall refer to academic,
technical or vocational education provided by
private educational institutions duly accredited
by the DepED, the CHED and TESDA and those
rendered by government educational
institutions and it does not include seminars, in-
service training, review classes and other similar
services rendered by persons who are not
accredited by the DepED, the CHED and/or the
TESDA.
I. Services rendered by individuals
pursuant to an employer-employee
relationship;
J. Services rendered
1. By regional or area headquarters
established in the Philippines by
multinational corporations,
2. Which act as
a. Supervisory,
b. Communications, and
c. Coordinating centers in the Asia
Pacific Region for their
i. Affiliates,
ii. Subsidiaries, or
iii. Branches, and
3. Do not earn or derive income from
the Philippines;
K. Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under
special laws except those granted under
PD No. 529 which refers to Petroleum
Exploration Concessionaires under the
Petroleum Act of 1949;
L. Sales by agricultural cooperatives duly
registered with the Cooperative
Development Authority (CDA) to their
members, as well as sale of their
produce, whether in its original state or
processed form, to non-members; their
importation of direct farm inputs,
machineries and equipment, including
spare parts thereof, to be used directly
and exclusively in the production and/or
processing of their produce;
 National Taxation
M. Gross receipts from lending activities by By a Non-VAT registered VAT exempt
credit or multi-purpose cooperatives
By a VAT registered VATable at 0% (zero
duly registered and in good standing
rated)
with the Cooperative Development
Authority;
NOTE: The reason is to encourage exporters of
goods to register as a VAT-registered person
N. Sales by non-agricultural, non-electric
with the BIR to be able to claim unused input tax
and non-credit cooperatives duly
in the form of refund or tax credit.
registered with and in good standing
with the CDA; Provided, That the share
If he is a VAT-registered person, his export sales
capital contribution of each member
are zero-rated.
does not exceed Fifteen Thousand Pesos
(P15,000.00) and regardless of the
P. Sales of real properties, namely:
aggregate capital and net surplus ratably
1. Sale of real properties not primarily
distributed among the members;
held for sale to customers or held for
lease in the ordinary course of trade
Importation by non-agricultural, non-electric
or business
and non-credit cooperatives of machineries and
equipment, including spare parts thereof, to be
However, even if the real property is not
used by them are subject to VAT.
primarily held for sale to customers or held for
lease in the ordinary course of trade or business
SUMMARY RULES ON COOPERATIVES
but the same is used in the trade or business of
the seller, the sale thereof shall be subject to
To/From
Sales/Gross To/From VAT being a transaction incidental to the
Non-
Receipts by Members taxpayer’s business.
Members
Agricutural Cooperatives 2. Sale of real properties utilized for
Own produce low-cost housing as defined by R.A.
(processed or at its No. 7279, otherwise known as the
Exempt Exempt
origial state) "Urban Development and Housing
Act of 1992" and other related laws
Other that own
produce (i.e., from Exempt *VAT “Low-cost housing" refers to housing projects
traders) intended for homeless low-income family
Credit or Multipurpose Cooperatives beneficiaries, undertaken by the Government or
From lending private developers, which may either be a
Exempt Exempt
activities subdivision or a condominium registered and
From non-lending licensed by the Housing and Land Use
VAT VAT
activities Regulatory Board/Housing (HLURB) under BP
Electric cooperatives Blg. 220, PD No. 957 or any other similar law,
In general VAT VAT wherein the unit selling price is within the
Non-agricultral, non-lending and selling price ceiling per unit as set by the
multipurpose, non-electric Housing and Urban Development Coordinating
Contribution per Council (HUDCC) pursuant to R.A. No. 7279,
Exempt Exempt otherwise known as the "Urban Development
member < P15K
Contribution per and Housing Act of 1992" and other laws.
VAT VAT
member > P15K
*Exempt if referring to agricultural food product 3. Sale of real properties utilized for
at its original state. (Tabag, 2015) socialized housing as defined under
R.A. No. 7279, and other related laws,
O. Export sales by persons who are not VAT- such as R.A. No. 7835 and R.A. No.
registered; 8763, wherein the price ceiling per
unit is P450,000 or as may from time
to time be determined by the HUDCC
Rules on Export Sales
and the NEDA and other related laws,

UNIVERSITY OF SANTO TOMAS 254

2021 GOLDEN NOTES
 Taxation Law
"Socialized housing" refers to housing Sale not in the ordinary course of trade or
programs and projects covering houses and lots business
or home lots only undertaken by the VAT
Government or the private sector for the In general
exempt
underprivileged and homeless citizens which Sale of residential lot by a real estate dealer
shall include sites and services development, VAT
long-term financing, liberated terms on interest Selling price < *₱1,500,00
exempt
payments, and such other benefits in accordance
Selling price > *₱1,500,00 VAT
with the provisions of R.A. No. 7279, otherwise
known as the "Urban Development and Housing Sale of residential lot by a non-dealer
Act of 1992" and R.A. No. 7835 and R.A. No. Use in business (incidental
8763. "Socialized housing" shall also refer to VAT
transaction)
projects intended for the underprivileged and Not use in business (regardless
homeless wherein the housing package selling 6% CGT
of amount)
price is within the lowest interest rates under Sale of residential house & lot and other
the Unified Home Lending Program (UHLP) or residential dwellings by a real estate dealer
any equivalent housing program of the VAT
Government, the private sector or non- Selling price < *₱2,500,000
exempt
government organizations.
Selling price > *₱2,500,000 VAT
4. Sale of residential lot valued at P1, Sale of residential house & lot and other
500, 000 and below or house and lot, residential dwellings by a non-dealer
and other residential dwellings Use in business (incidental
VAT
valued at P2,500,000 and below, as transaction)
adjusted in 2011 using the 2010 Not use in business (regardless
6% CGT
Consumer Price Index Values. of amount)
Sale of real property classified as low cost
If two or more adjacent residential lots are sold housing
or disposed in favor of one buyer, for the VAT
In general
purpose of utilizing the lots as one residential exempt
lot, the sale shall be exempt from VAT only if the Sale of real property classified as socialized
aggregate value of the lots do not exceed housing
P1,500,000. Adjacent residential lots, although VAT
In general
civered by separate titles and/or separate tax exempt
declarations, when sold or disposed to one and *RR No. 13-2018 clarified that the thresholds to
the same buyer, whether coveered by one or be used until December 31, 2020 are the
separate deed of Conveyance, shall be presumed thresholds as adjusted in 2011 using the 2010
as a sale of one residential unit. Consumer Price Index values:

Provided, that beginning January 2021, the Section Amount in Adjusted

VAT exemption shall only apply to : Pesos (2005) threshold
a. Sale of real properties not primarily amounts
held for sale to customers or held for Sec. 109(P) 1,500,000 1,919,500
lease in the ordinary course of trade or Sec. 109(P) 2,500,000 3,199,200
business, (RR No. 16-2011)
b. Sale of real property utilized for
socialized housing as defined by R.A. NOTE: Beginning January 1, 2021, the VAT
7229, exemption shall only apply to sale of real
c. Sale of house and lot, and other properties not primarily held for sale to
residential dwelling with selling price of customers or held for lease in the ordinary
not more than P2, 000,000. (Sec. 109(P), course of trade or business, sale of real property
NIRC) utilized for socialized housing as defined by
Republic Act No. 7279, sale of house and lot, and
SUMMARY RULES ON SALES OF REAL other residential dwellings with selling price of
PROPERTIES not more than Two million pesos (₱2,000,000).

255
 National Taxation
(Sec. 109(P), NIRC)
Q. Lease of residential units with a monthly
rental per unit not exceeding fifteen
thousand pesos (15,000), regardless of
the amount of aggregate rentals received
by the lessor during the year;
Every 3 years thereafter, the amount shall be
adjusted to its present value using the Consumer
Price Index, as published by the Philippine
Statistic Authority. Such adjustment shall be
published through revenue regulations to be
issued not later than March 31 of each year.
The foregoing notwithstanding, lease of
residential units where the monthly rental per
unit exceeds ₱15,000 but the aggregate of such
rentals of the lessor during the year do not
exceed ₱3,000,000 shall likewise be exempt
from VAT, however, the same shall be subjected
to 3% percentage tax.
In cases where a lessor has several residential
units for lease, some are leased out for a
monthly rental per unit of not exceeding
₱15,000 while others are leased out for more
than ₱15,000 per unit, his tax liability will be as
follows:
1. The gross receipts from rentals not
exceeding ₱15,000 per month per unit shall
be exempt from VAT regardless of the
aggregate annual gross receipts.
2. The gross receipts from rentals exceeding
₱15,000 per month per unit shall be subject
to VAT if the aggregate annual gross
receipts from said units only exceeds
₱3,000,000. Otherwise, the gross receipts
will be subject to the 3% tax imposed under
Section 116 of the NIRC. (RR No. 13–2018)
In case of mixed transactions, the
abovementioned rule should be observed.
Residential unit
The term “residential units” shall refer to
apartments and houses & lots used for
residential purposes, and buildings or parts or
units thereof used solely as dwelling places (e.g.,
dormitories, rooms and bed spaces) except
motels, motel rooms, hotels and hotel rooms,
lodging houses, inns and pension houses. (RR No.
13–2018)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Unit
The term “unit” shall mean an apartment unit in
the case of apartments, house in the case of
residential houses; per person in the case of
dormitories, boarding houses and bed spaces;
and per room in case of rooms for rent.
Illustration 1: A lessor rents his 15 residential
units for ₱14,500 per month. During the taxable
year, his accumulated gross receipts amounted
to ₱2,610,000. He is not subject to VAT since the
monthly rent per unit does not exceed ₱15,000.
He is also not subject to 3% Percentage Tax.
Using the same example, assuming he has 20
residential units with the same monthly rent per
unit and his accumulated gross receipts during
the taxable year amounted to ₱3,480,000, he is
still not subject to VAT even if the accumulated
earnings exceeded ₱3,000,000 since the monthly
rent per unit does not exceed ₱15,000. He is also
not subject to 3% Percentage Tax.
Illustration 2: A lessor rents his 15 residential
units for ₱15,500 per month. During the taxable
year, his accumulated gross receipts amounted
to ₱2,790,000. He is not subject to VAT since his
accumulated gross receipts did not exceed
₱3,000,000. He is, however, subject to 3%
Percentage Tax since the monthly rent per unit
is more than ₱15,000.00. Using the same
example, assuming he has 20 residential units
with the same monthly rent per unit and his
accumulated gross receipts during the taxable
year amounted to ₱3,720,000, he is already
subject to VAT since the accumulated earnings
exceeded ₱3,000,000 and the monthly rent per
unit is more than ₱15,000.00.
Illustration 3: A lessor rents his 2 commercial
and 10 residential units for monthly rent of
₱60,000 and ₱15,000 per unit, respectively.
During the taxable year, his accumulated gross
receipts amounted to ₱3,240,000 (₱1,440,000
from commercial units and ₱1,800,000 from
residential units) The ₱1,440,000 from
commercial units is not subject to VAT since it
did not exceed ₱3,000,000. It is, however,
subject to 3% Percentage Tax. On the other
hand, the ₱1,800,000 accumulated receipts from
the residential units are not subject to
Percentage Tax and exempt from VAT since the
monthly rent is not more than ₱15,000. Using
the same example, assuming the lessor has 5
commercial units and his accumulated gross
receipts during the taxable year amounted to
256
 Taxation Law
₱5,400,000 (₱3,600,000 from commercial units
and ₱1,800,000 from residential units), he is
subject to VAT with respect to ₱3,600,000 since
it exceeded P3,000,000. The ₱1,800,000
accumulated receipts from residential units are
not subject to Percentage Tax and exempt from
VAT since the monthly rent is not more than
₱15,000.
regardless of the total annual aggregate income
of X received during the year.
NOTE: If the rent of an apartment is more than
₱15,000 per unit but the aggregate rent income
of the lessor does not exceed ₱3,000,00, the
lessor is not VATable, but he is subject to the 3%
direct percentage tax. (Lim, 2014)

Illustration 4: A lessor rents his 5 commercial R. Sale, importation, printing or publication

and 10 residential units for monthly rent of of books and any newspaper, magazine,
₱60,000 and ₱15,500 per unit, respectively. review, or bulletin which appears at
During the taxable year, his accumulated gross regular intervals with fixed prices for
receipts amounting to ₱5,460,0000 (₱3,600,000 subscription and sale and which is not
from commercial units and ₱1,860,000 from devoted principally to the publication of
residential units) shall be subject to VAT since it paid advertisements;
exceeded the ₱3,000,000 threshold and the
monthly rent of residential units is more than A newspaper, magazine, review or bulletin must
₱15,000. be:
1. Printed or published at regular
SUMMARY OF RULES ON LEASE OF intervals;
RESIDENTIAL UNITS: 2. Available for subscription and sale at
fixed prices; and
AMOUNT OF SUBJECT TO VAT? 3. Are not principally devoted to the
MONTHLY publication of paid advertisements.
RENTALS
Monthly rental VAT exempt and no The terms "book", "newspaper", "magazine",
₱15,000 or less percentage tax "review" and "bulletin" as used in the provision
regardless of refer to printed materials in hard copies. They
annual gross sales do not include those in digital or electronic
Monthly rental VAT-exempt under format or computerized versions, including but
above ₱15,0000 but Sec. 109 (W) but not limited to: e-books, e-journals, electronic
annual gross sales shall pay 3% copies, online library sources, CDs and software.
do not exceed percentage tax under (RMC No. 57-2012)
₱3,000,000 Section 116 of NIRC
Monthly rental Subject to VAT S. Transport of passengers by international
above ₱15,000 and carriers;
annual gross sales
exceed ₱3,000,000 The transport of cargo by international carriers
doing business in the Philippines shall be
NOTE: Lease of commercial units, regardless of exempt from VAT as the same is subject to
the amount of monthly rental is subject to VAT Common Carrier's Tax (Percentage Tax on
unless the lessor is non-VAT registered and International Carriers) International carriers
annual gross receipts < ₱3,000,000. (Tabag, exempt under Sections 109(1)(S) and 109(1)(E)
2015) of the NIRC, as amended, shall not be allowed to
register for VAT purposes. (RR No. 15 – 2015)
Q: X operates a dormitory beside the school
compound. Student bed-spacers are charged SUMMARY OF RULES FOR TRANSPORT OF
₱2,500 each per month. X has an average of PASSENGERS OR CARGOES
40 students every month. Since “Lease” is
VATable, can X pass the 12% VAT to the 12% VAT 0% VAT EXEMPT
students? Why? Domestic International Transport of
transport of transport of passengers
A: The lease is VAT exempt because the monthly passengers or passengers or by
rental per student is less than ₱15,000 cargoes by air cargoes by air international

257
 National Taxation
and sea or sea air and subject to twelve percent (12%) VAT.
shipping
NOTE: If NOTE: carriers Fuel, when exempt from VAT and when zero-
domestic Transport rated
transport of should be NOTE: In
passengers or done by case of Fuel is exempt if imported by persons engaged
cargoes by domestic transport of in international shipping or air transport
land, the carriers with cargoes, the operations. On the other hand, fuel is zero-rated
common international international when sold to persons engaged in international
carrier is flightssuch as air or shipping or international air transport
liable to PAL, Cebu shipping operations without docking or stopping at any
percentage Pacific, etc., carrier shall other port in the Philippines.
tax on otherwise, be subject to
common exempt 3% V. Services of
carriers percentage 1. Banks,
tax on 2. Non-bank financial intermediaries
international performing quasi-banking functions,
carriers and
3. Other non-bank financial
intermediaries such as money
T. Sale, importation or lease of passenger or changers and pawnshops, subject to
cargo vessels and aircraft, including percentage tax under Secs. 121 and
engine, equipment and spare parts 122 of the NIRC;
thereof for domestic or international
transport operations; In Tambunting Pawnshop, Inc. vs. CIR, G.R. No.
179085 (2010), since the taxpayer (pawnshop) is
Provided, that the exemption from VAT on the a non-bank intermediary, it is subject to 10%
importation and local purchase of passenger (now 12%) VAT for the tax years 1996-2002;
and/or cargo vessels shall be subject to the however, with the levy, assessment and
requirements on restriction on vessel retirement collection of VAT from non-bank intermediaries
program of Maritime Industry Authority being specifically deferred by law, then taxpayer
(MARINA). is not liable for VAT during these tax years. But
with the full implementation of the VAT system
U. Importation of fuel, goods and supplies on non-bank financial intermediaries starting
by persons engaged in international January 1, 2003, taxpayer is liable for 10% VAT
shipping or air transport operations; for the said tax year. And beginning 2004 up to
the present, by virtue of R.A. No. 9238, taxpayer
Provided, that the fuel, goods and supplies shall is no longer liable for VAT but it is subject to
be used for international shipping or air percentage tax on gross receipts from 0% to 5%
transport operations. as the case may be.

Thus, said fuel, goods and supplies shall be used
exclusively or shall pertain to the transport of
goods and/or passenger from a port in the
Philippines directly to a foreign port, or vice
versa, without docking or stopping at any other
port in the Philippines unless the docking or
stopping at any other Philippine port is for the
purpose of unloading passengers and/or cargoes
that originated from abroad, or to load
passengers and/or cargoes bound for abroad.
Provided, further, that if any portion of such fuel,
goods or supplies is used for purposes other
than that mentioned in this paragraph, such
portion of fuel, goods and supplies shall be
Pawnshops are not liable to pay VAT
Pawnshops are not classified as lending
investors and therefore, they are not subject to
VAT. They are subject to percentage tax as
imposed on Section 122 of NIRC. (Tambunting
Pawnshop, Inc., v CIR, G.R. No. 179085, January
21, 2010; R.A. 9238; RMC 74-2005)
W. Sale or lease of goods and services to
senior citizens and persons with
disability;
As provided under Republic Act Nos. 9994
(Expanded Senior Citizens Act of 2010) and

UNIVERSITY OF SANTO TOMAS 258

2021 GOLDEN NOTES
 Taxation Law
10754 (An Act Expanding the Benefits and
Privileges of Persons with Disability),
respectively.
X. Transfer of property pursuant to Sec.
40(C)(2) of the NIRC, as amended;
Y. Association dues, membership fees, and
other assessments and charges collected
on a purely reimbursement basis by
homeowners associations and
condominium corporations;
As established under Republic Act No. 9904
(Magna Carta for Homeowners and
Homeowners’ Association) and Republic Act No.
4726 (The Condominium Act), respectively.
Z. Sale of gold to the Bangko Sentral ng
Pilipinas;
AA. Sale of drugs and medicines prescribed
for diabetes, high cholesterol, and
hypertension beginning January 1, 2019
as determined by Department of Health;
BB. Sale or lease of goods or properties or
services other than the transactions
mentioned above wherein the gross
annual sales or receips do not exeed
3,000,000 pesos.
Every three (3) years thereafter, the amount
shall be adjusted to its present value using the
Consumer Price Index, as published by the NSO.
Such adjustment shall be published through
revenue regulations to be issued not later than
March 31 of each year.
For purposes of the threshold of ₱1,919,500, the
husband and the wife shall be considered
separate taxpayers. However, the aggregation
rule for each taxpayer shall apply. For instance,
if a professional, aside from the practice of his
profession, also derives revenue from other lines
of business which are otherwise subject to VAT,
the same shall be combined for purposes of
determining whether the threshold has been
exceeded. Thus, the VAT-exempt sales shall not
be included in determining the threshold.
Q: State whether the following transactions
are: (a) VAT Exempt, (b) subject to VAT at
12%; or (c) subject to VAT at 0%:
259
1. Sale of fresh vegetables by AlingIning at
the Pamilihang Bayan ng Trece Martirez.
2. Services rendered by Jake's
Construction Company, a contractor to
the World Health Organization in the
renovation of its offices in Manila.
3. Sale of tractors and other agricultural
implements by Bungkal Incorporated to
local farmers.
4. Sale of RTW by Cely's Boutique, a
Filipino dress designer, in her dress
shop and other outlets.
5. Fees for lodging paid by students to
Bahay-Bahayan Dormitory, a private
entity operating a student dormitory
(monthly fee P1,500). (1998 BAR)
A
1. VAT exempt. Sale of agricultural products,
such as fresh vegetables, in their original
state, of a kind generally used as, or
producing foods for human consumption is
exempt from VAT. (Sec. 109(A), NIRC)
2. VAT at 0%. Since Jake's Construction
Company has rendered services to the
World Health Organization, which is an
entity exempted from taxation under
international agreements to which the
Philippines is a signatory, the supply of
services is subject to zero percent (0%)
rate. (Sec. 108(B)(3), NIRC)
3. VAT at 12%. Tractors and other
agricultural implements fall under the
definition of goods which include all
tangible objects which are capable of
pecuniary estimation. (Sec. 106(A)(1), NIRC)
4. VAT at 12%. This transaction also falls
under the definition of goods which include
all tangible objects which are capable of
pecuniary estimation. (Sec. 106(A)(1), NIRC)
5. VAT Exempt. The monthly fee paid by each
student falls under the lease of residential
units with a monthly rental per unit not
exceeding P15,000, which is exempt from
VAT regardless of the amount of aggregate
rentals received by the lessor during the
year. (RR No. 13 – 2018) The term unit shall
mean per person in the case of dormitories,
boarding houses and bed spaces. (Sec.
4.103-1, RR No. 7-95)
 National Taxation
Zero-rated vs. VAT-exempt transactions of removes VAT at taxable for
transac the exempt stage VAT purposes
ZERO-RATED VAT- EXEMPT -tion although the
It generally refers to In VAT-exempt tax levied is
the export sale of good sales, the 0%
and supply of services. taxpayer/seller By Need not be a Made by a
The output tax rate is shall not bill any whom VAT-registered VAT-
set at zero. When output tax on his made person registered
applied to the tax base, sales to his person
such rate obviously customers and Input Not subject to May claim
results in no tax corollary, is not tax output tax, thus input tax
chargeable against the allowed any credit cannot claim credit
purchaser. or refund of the input tax credit. although the
input taxes he paid transaction
The seller of such on his purchases. resulted to
transactions charges no zero output
output tax but can This non-crediting tax.
claim a refund or tax of input taxes is Tax Cannot avail of Can claim or
credit certificate for the exempt Credit/ tax credit or enjoy tax
VAT previously charged transactions is the Refund refund. Thus, credit/refund
by suppliers. (AT&T underlying reason may result in (Total Relief)
Communications why the NIRC increased prices
Services Phils., Inc. v. adopted the rule on (Partial Relief)
CIR, G.R. No. 182364, apportionment of
August 3, 2010) tax credits under INPUT AND OUTPUT TAX
Section 104(A)
No VAT shall be shifted whenever a VAT-
Output Tax
or passed-on by VAT- registered taxpayer
registered sellers or engages in other
It means the value-added tax due on the sale or
suppliers from the VAT taxable and
lease of taxable goods or properties or services
Customs Territory on non-VAT taxable
by (1) any person registered or (2) required to
their sale, barter or sales (CIR v.
register under Sec. 236 of the NIRC. (Sec.
exchange of goods, Eastern Telecomm.
110(A)(3), NIRC)
properties or services Phils., Inc., G.R. No.
to the subject 163835, July 7,
Output tax is what the taxpayer-seller passes on
registered Freeport 2010)
to the purchases. Note that what is output tax
Zone enterprises.
for the seller is input tax to the purchaser.
(Ingles, 2015)
Simply put, the difference lies in the input tax. In
VAT-exempt transactions there is no input tax
Output tax may come from:
credit allowed. In the case of 0% rated
1. Actual sale
transaction of a VAT registered person, the sale of
2. Transaction deemed sales
goods or properties is multiplied by 0% thus his
output tax is P 0.00. If the person is VAT
Input Tax
registered, he may claim such input tax as tax
credit or refund.
It means the value-added tax due on or paid by a
VAT-registered person on importation of goods
E.g.
or local purchase of goods, properties or
Output tax Ph₱ 0
services, including lease or use of properties, in
Less:
the course of his trade or business. It shall also
Input tax (5,000)
include the transitional input tax and the
Excess input tax Ph₱ 5,000 presumptive input tax determined in accordance
with Section 111 of the NIRC. (Sec. 110(A)(3),
BASIS EXEMPT ZERO-RATED NIRC)
Nature Not taxable; Transaction is

UNIVERSITY OF SANTO TOMAS 260

2021 GOLDEN NOTES
 Taxation Law
It includes input taxes which can be from primary agricultural and
1. Directly attributed to transactions marine food producs, the supply of
subject to the VAT, plus which is exempt from VAT
2. A ratable portion of any input tax which Transitional input tax credit(Sec. 2%
cannot be directly attributed to either 111 (A), NIRC) – may be claimed by transitio
the taxable or exempt activity. (RR No. persons who become liable to VAT nal or
16 – 2005) for the first time and such 12%
represent input tax on inventories actual
Input tax is what is passed on to the goodsw, materials and supplies input
purchaser/taxpayer by the seller. If the existing on the date of tax rate
purchaser is VAT-registered person, then he can commencement of a person’s
use the input tax as credit to the output taxes status as a taxable person
that he is liable to remit to the BIR. (Ingles, 2015) Final withholding tax credit(Sec. 5%
114(C), NIRC) – is based on the
Input VAT or input tax represents the actual amount paid to the supplier of
payments, costs and expenses incurred by a goods or services by the
VAT-registered taxpayer in connection with his government and is required to be
purchase of goods and services. On the other withheld by the government to the
hand, when that person or entity sells his/its BIR (refer to withholding of final
products or services, the VAT-registered tax on sales to government)
taxpayer generally becomes liable for 10% (now Excess input tax credit(refer to NA
12%) of the selling price as Output VAT or output discussion on application on tax
tax. (CIR v. Benguet Corporation, G.R. No. 145559, refund or tax credit certificate)
July 14,2006)
Sources of Creditable Input Tax
Effect of VAT exempt purchases to input tax
Any input tax evidenced by a VAT invoice or
VAT exempt transactions cannot be credited for official receipt issued in accordance with Section
input tax. However, a transaction which cannot 113 of the NIRC on the following transactions
be directly attributed in either the taxable or shall be creditable against the output tax:
exempt activity, a ratable portion of the input tax
may be credited. 1. Purchase or importation of goods:
a. For sale; or
Input tax not a property right under the Due b. For conversion into or intended to
Process Clause form part of a finished product for sale
including packaging materials; or
A VAT-registered person’s entitlement to the c. For use as supplies in the course of
creditable input tax is a mere statutory privilege business; or
which may be limited or removed by law. d. For use as materials supplied in the
sale of service; or
Categories of input tax e. For use in trade or business for which
deduction for depreciation or
TYPE OF INPUT TAX RATE amortization is allowed under NIRC,
Input tax on importation of 12% except automobiles, aircraft and
goods and local purchases of standar yachts. (Capital Goods)
goods, properties and d or 0% 2. Purchases of real properties for which a
services(Sec. 110, NIRC) VAT has actually been paid
Presumptive input tax 4% 3. Purchases of services in which a VAT has
credit(Sec. 111(B), NIRC) – may be actually been paid (Sec. 110, NIRC)
calimed by persons engaged in the 4. Transactions “deemed sales”
business of processing ssardines, 5. Presumptive input tax
mackerel and milk; manufacturing 6. Transitional input tax credits allowed
refined sugard and cooking oil; and under the transitory and other provisions.
noodle based instant meals; all of (Sec. 4.110-1, RR No. 16 – 2005)
which are substantially produced

261
 National Taxation
Presumptive input tax
It is an input tax credit allowed to persons or
firms engaged in the: (SMM-RCN)
1. Processing of:
a. Sardines
b. Mackerel
c. Milk
2. Manufacturing of:
a. Refined sugar
b. Cooking oil
c. Packed noodle based instant meals
The allowed input tax shall be equivalent to four
percent (4%) of the gross value in money of
their purchases of primary agricultural products
which are used as inputs to their production.
(Sec. 111 (B), NIRC)
They are given this 4% presumptive input tax
because the goods used in the said enumeration
are VAT-exempt. (Ingles, 2015)
NOTE: The term “processing” shall mean
pasteurization, canning and activities which
through physical or chemical process alter the
exterior texture or form or inner substance of a
product in such manner as to prepare it for
special use to which it could not have been put in
its original form or condition.
Q: COFA is a multi-purpose agricultural
cooperative. Its farmer-members deliver
sugarcane to be milled and processed in
COFA’s name with the sugar mill. An
Authorization from BIR is required before
the refined sugar is released. In several
instances, BIR issued the Authorization
without requiring COFA to pay advanced
VAT, pursuant to the latter’s tax exemption
under the law. Later on, BIR required
payment of advance VAT for the issuance of
the Authorization. COFA paid under protest.
Later, COFA filed an administrative claim for
refund. Is COFA’s claim with merit?
A: YES. COFA is a VAT-exempt agricultural
cooperative. Exemption from the payment of
VAT on sales made by the agricultural
cooperatives to members or to non-members
necessarily includes exemption from the
payment of "advance VAT" upon the withdrawal
of the refined sugar from the sugar mill. VAT is a
tax on transactions, imposed at every stage of
the distribution process on the sale, barter,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
exchange of goods or property, and on the
performance of services, even in the absence of
profit attributable thereto, so much so that even
a non-stock, non-profit organization or
government entity, is liable to pay VAT on the
sale of goods or services. There are, however,
certain transactions exempt from VAT such as
the sale of agricultural products in their original
state, including those which underwent simple
processes of preparation or preservation for the
market, such as raw cane sugar.
For an agricultural cooperative to be exempted
from the payment of advance VAT on refined
sugar, it must be (a) a cooperative in good
standing duly accredited and registered with the
CDA; and (b) the producer of the sugar. Having
established that COFA is a cooperative in good
standing and duly registered with the CDA and is
the-producer of the sugar, its sale then of refined
sugar whether sold to members or non-
members, following the express provisions of
Section 109(L) of R.A. 8424, as amended, is
exempt from VAT. As a logical and necessary
consequence then of its established VAT
exemption, COFA is likewise exempted from the
payment of advance VAT required under RR No.
13-2008. (Commissioner of Internal Revenue v.
Negros Consolidated Farmers Multi-Purpose
Cooperative, G.R. 212735, December 5, 2018)
Transitional input tax
Transitional input tax credit operates to benefit
newly VAT-registered persons, whether or not
they previously paid taxes in the acquisition of
their beginning inventory of goods, materials,
and supplies. During that period of transition
from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of
the VAT on the taxpayer. At the very beginning,
the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from
its sales as output VAT.
The transitional input tax credit mitigates this
initial diminution of the taxpayer’s income by
affording the opportunity to offset the losses
incurred through the remittance of the output
VAT at a stage when the person is yet unable to
credit input VAT payments. (Fort Bonifacio
Development Corporation v. CIR, 583 SCRA 168)
These can be availed by taxpayers who
become VAT registered persons upon:
262
 Taxation Law
1. Exceeding the minimum turnover of
P1,919,500 in any 12-month period; or
2. Who voluntarily register even if they do not
reach the threshold, except for franchise
grantees of radio and TV broadcasting
whose threshold is P10,000,000.
The said taxpayers shall be entitled to a
transitional input tax on the inventory on hand
as of the effectivity of their VAT registration on
the following:
1. Goods purchased for resale in the
present condition;
2. Raw materials - Materials purchased for
further processing but which have not
yet undergone processing;
3. Manufactured goods;
4. Goods in process for sale; and
5. Goods and supplies for use in the course
of the taxpayer’s trade or business as a
VAT-registered person. (Sec. 4.110-1(a.),
RR No. 16 – 2005)
The allowed input tax shall be whichever is
higher between:
1. 2% of the value of the taxpayer’s
beginning inventory of goods, materials
and supplies; or
2. The actual value-added tax paid on such
goods. (Sec.111(A), NIRC)
NOTE: Transitional input tax credit may only be
availed once. It may be carried over to the next
taxing period, until fully utilized.
Prior payment of taxes is not necessary
before a taxpayer could avail of transitional
input tax credit. All that is required from the
taxpayer is to file a beginning inventory with
BIR.
A transitional input tax credit is not a tax refund
per se but a tax credit. Section 112 of the NIRC
does not prohibit cash refund or tax credit of
transitional input tax. The grant of a refund or
issuance of tax credit certificate in this case
would not contravene the above provision. The
refund or tax credit would not be
unconstitutional because it is precisely pursuant
to section 105 of the old NIRC which allows
refund/tax credit. (Fort Bonifacio Development
Corporation vs. CIR, G.R. No. 173425, January 22,
2013)
Q: Is Transitional Input Tax Credit applicable
263
to real property?
A: YES. Under Sec. 105 of the old NIRC (now Sec.
111(A)), the beginning inventory of “goods”
forms part of the valuation of the transitional
input tax credit. Goods, as commonly understood
in the business sense, refer to the product which
the VAT-registered person offers for sale to the
public. With respect to real estate dealers, it is
the real properties themselves which constitute
their “goods”. Such real properties are the
operating assets of the real estate dealer. (Ibid.)
DETERMINATION OF OUTPUT/INPUT TAX;
VAT PAYABLE; EXCESS INPUT TAX CREDITS
Determination of output tax
In a sale of goods or properties, the output tax is
computed by multiplying the gross selling price
by the regular rate of VAT. For sellers of
services, the output tax is computed by
multiplying the gross receipts by the regular rate
of VAT.
In all cases where the basis for computing the
output tax is either the gross selling price or the
gross receipts, but the amount of VAT is
erroneously billed in the invoice, the total
invoice amount shall be presumed to be
comprised of the gross selling price/gross
receipts plus the correct amount of VAT. Hence,
the output tax shall be computed by multiplying
the total invoice amount by a fraction using the
rate of VAT as numerator and one hundred
percent (100%) plus rate of VAT as the
denominator. Accordingly, the input tax that can
be claimed by the buyer shall be the corrected
amount of VAT computed in accordance with the
formula herein prescribed.
There shall be allowed as a deduction from the
output tax the amount of input tax deductible to
arrive at VAT payable on the monthly VAT
declaration and the quarterly VAT returns. (RR
No. 16 – 2005)
Determination of input tax creditable
The amount of input taxes creditable during a
month or quarter shall be determined by adding
all creditable input taxes arising from the
transactions enumerated under “Sources of
input tax” in page during the month or quarter
plus any amount of input tax carried-over from
 National Taxation
the preceding month or quarter, reduced by the to recognize input tax credit on transactions
amount of claim for VAT refund or tax credit subject to VAT as follows:
certificate (whether filed with the BIR, the 1. All the input taxes that can be directly
Department of Finance, the Board of attributed to transactions subject to VAT
Investments or the BOC) and other adjustments, may be recognized for input tax credit:
such as purchases returns or allowances, input Provided, that input taxes which are
tax attributable to exempt sales and input tax directly attributable to VAT taxable sales of
attributable to sales subject to final VAT goods and services from the Government or
withholding. any of its political subdivisions,
instrumentalities or agencies, including
The succeeding table illustrates the computation GOCCs shall not be credited against output
of output tax, creditable input tax and the taxes arising from sales to non-government
resulting net VAT payable or excess of tax entities, and
credits:
2. If any input tax cannot be directly
BASIS EXAMPLE AMOUN attributed to either a VAT taxable or VAT-
T exempt transaction, the input tax shall be
Output Vatable Sale of ₱12.00 pro-rated to the VAT taxable and VAT-
tax gross hanky for exempt transactions; only the ratable
sales or total price portion pertaining to transactions subject
receipts of ₱112 to VAT may be recognized for input tax
(amount VAT-Ex. credit.
exclusive Amt: P100
VAT) c (₱112/1.12) Input tax attributable to VAT-exempt sales shall
VAT rate not be allowed as credit against the output tax
(12% or Output tax: but should be treated as part of cost of goods
0%) ₱100*12% sold.
Input Vatable Purchase of ₱6.00
tax purchases materials For persons engaged in both zero-rated sales
(amount for total and non-zero-rated sales, the aggregate input
exclusive price of P56 taxes shall be allocated ratably between the
of VAT) x zero-rated and non-zero-rated sales (RR No. 16 –
applicable VAT-Ex- 2005)
VAT rate Amt:
₱50 Determination of VAT payable or excess tax
(₱56/1.12) credits

Input tax: The resulting computation of output tax and

₱50*12% crediting of input tax shall result to either the
Net VAT Payable or Excess tax ₱6.00 net VAT payable or excess tax credits.
credits
(Output tax less Input Tax) Net VAT Payable (NVP)

Net VAT payable = Output tax >
Input tax
Excess tax credits = Output tax <
Input tax
NOTE: VAT-exempt transactions do not result to
any output or input taxes.
Allocation of input tax on mixed transactions
A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed
If at the end of any taxable quarter the output
tax exceeds the input tax, the excess shall be
paid by the VAT-registered person.
Excess Tax Credits (ETC)
If the input tax inclusive of input tax carried over
from the previous quarter exceeds the output
tax, the excess input tax shall be carried over to
the succeeding quarter or quarters.
Provided, that any input tax attributable to zero-
rated sales by a VAT-registered person may at

UNIVERSITY OF SANTO TOMAS 264

2021 GOLDEN NOTES
 Taxation Law
his option be refunded or applied for a tax credit TRANSACTIONS REQUIRED SUPPORT
certificate which may be used in the payment of the VAT invoice for the
internal revenue taxes entire selling price and
non-VAT Official Receipt
Thus, input tax, attributable to zero-rated sales for the initial and
may be: succeeding payments
1. Refunded, or
2. Credited against other internal revenue Public instrument and
taxes of the VAT taxpayer (e.g., income tax) b. Installment VAT Official Receipt for
basis every payment
PERIOD OUTPUT INPUT NVP OR Input tax on Official receipt showing
TAX TAX ETC domestic the information required
Jan. ₱12 M ₱6 M NVP ₱6M purchases of in Sec. 113 and 237 of the
Feb. 6M 18 M ETC (12M) service NIRC
Mar. 6M 18 M ETC (12M) Transitional Inventory of goods as
Q1 ₱24 M ₱ 42 M ETC input tax shown in a detailed list to
(₱18M) be submitted to the BIR
Input tax on Required invoices
For the months of January and February, only “deemed sale
the monthly taxes are computed. However, for transaction”
the month of March, the accumulated taxes for Input tax from Monthly Remittance
the first quarter will be aggregated to determine payments Return of Value Added
the NVP or ETC. made to non- Tax Withheld (BIR Form
residents 1600) filed by the
In the example, the excess tax credit of P18 can (such as for resident payor in behalf
be refunded or credited against the other services, of the non-resident
internal revenue taxes of the taxpayer after the rentals, or evidencing remittance of
application and approval from the BIR royalties) VAT due which was
Commissioner. withheld by the payor.
Advance VAT Payment order showing
Substantiation of input tax credits on sugar payment of the advance
VAT
TRANSACTIONS REQUIRED SUPPORT
Importation of Import entry or other NOTE: Cash register machine tape issued to a
goods equivalent document registered buyer constitute valid proof of official
showing actual payment receipt. All purchases covered by
of VAT on imported invoices/receipts other than VAT Invoice/VAT
goods Official Receipt shall not give rise to any input
Input taxes on Invoice showing tax. (Sec. 4.113-1(A), RR No. 16 – 2005)
domestic information required
purchases of under Section 113 and Persons who can avail of input tax credit
goods or 237 of the NIRC
properties The input tax credit on importation of goods or
made in the local purchases of goods, properties or services
course of trade by a VAT-registered person shall be creditable:
or business
Input tax on 1. To the importer upon payment of the VAT
purchases of prior to the release of the goods from the
real property customs custody;
2. To the purchaser of the domestic goods or
a. Public instrument (i.e., properties upon consummation of the sale;
Cash/deferred deed of absolute sale, or
basis deed of conditional sale, 3. To the purchaser of the services or the
contract/agreement to lessee or the licenses upon payment of the
sell, etc.) together with

265
 National Taxation
compensation, rental, royalty or fee (RR No.
16 – 2005)
As long as the invoices from the suppliers are
issued in the name of the taxpayer and expenses
were actually incurred by the taxpayer, then the
input tax pertaining to such expenses must be
credited to the taxpayer. Where the money came
from to pay these expenses is another matter all
together but it does not change the fact that
input tax has been incurred. (CIR v. Sony
Philippines, Inc., G.R. No. 178697, November 17,
2010)
REFUND OR TAX CREDIT OF EXCESS
INPUT TAX; PROCEDURE
Who may claim for refund/apply for issuance
of Tax Credit Certificate (TCC)
The following can avail of refund or tax credit:
1. Zero-rated and effectively zero-rated
sales
Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated. (Sec. 112
(A), NIRC)
A VAT-registered person whose sales of goods,
properties or services are zero-rated or
effectively zero-rated may apply for the issuance
of a tax refund of input tax attributable to such
sales. The input tax that may be subject of the
claim shall exclude the portion of input tax that
has been applied against the output tax. The
application should be filed within two (2) years
after the close of the taxable quarter when such
sales were made.
In case of zero-rated sales under Secs.
106(A)(2)(a)(1) and (3), Secs. 108(B)(1) and (2)
of the Tax Code, the payments for the sales must
have been made in acceptable foreign currency
duly accounted for in accordance with the BSP
rules and regulations.
Where the taxpayer is engaged in both zero-
rated or effectively zero-rated sales and in
taxable (including sales subject to final
withholding VAT) or exempt sales of goods,
properties or services, and the amount of
creditable input tax due or paid cannot be
directly and entirely attributed to any one of the
transactions, only the proportionate share of
input taxes allocated to zero-rated or effectively
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
zero-rated sales can be claimed for refund or
issuance of a tax credit certificate.
2. Cancellation of VAT registration
A VAT-registered person whose registration has
been cancelled due to retirement from or
cessation of business, or due to changes in or
cessation of status under Sec. 106 (C) of the Tax
Code may, within two (2) years from the date of
cancellation, apply for the issuance of tax credit
certificate for any unused input tax which he
may use in payment of his other internal
revenue taxes.
Provided, however, that he shall be entitled to a
refund if he has no internal revenue tax
liabilities against which the tax credit certificate
may be utilized.
Provided, further, that the date of cancellation
being referred hereto is the date of issuance of
tax clearance by the BIR, after full settlement of
all tax liabilities relative to cessation of business
or change of status of the concerned taxpayer.
Provided, finally, that the filing of the claim shall
be made only after completion of the mandatory
audit of all internal revenue tax liabilities
covering the immediately preceding year and
the short period return and the issuance of the
applicable tax clearance/s by the appropriate
BIR Office which has jurisdiction over the
taxpayer.
Requirements to claim for VAT refund
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 as it cannot be claimed as a refund or
credit;
5. The input taxes have not been applied
against output taxes during and in the
succeeding quarters;
6. The input taxes claimed are attributable to
zero-rated or effectively zero-rated sales;
7. For zero-rated sales under Section
106(A)(2)(1) and (2); 106(B); and
108(B)(1) and (2), the acceptable foreign
currency exchange proceeds have been
duly accounted for in accordance with the
rules and regulations of the BSP;
266
 Taxation Law
8. Where there are both zero-rated or
effectively zero- rated sales and taxable or
exempt sales, and the input taxes cannot be
directly and entirely attributable to any of
these sales, the input taxes shall be
proportionately allocated on the basis of
sales volume; and
9. The claim is filed within two years after the
close of the taxable quarter when such sales
were made. (Luzon Hydro Corporation v.
CIR, G.R. No. 188260, November 13, 2013)
The taxpayer must prove the following for a
tax refund to prosper:
1. That it is a VAT-registered entity; and
2. It must substantiate the input VAT paid by
purchase invoices or official receipts.
(Commissioner v. Manila Mining
Corporation, G.R. No. 153204, August 31,
2005)
Failure to comply with the invoicing
requirements is a ground to deny a claim for
tax refund or tax credit
In a claim for tax refund or tax credit, the
applicant must prove not only entitlement to the
claim but also compliance with all the
documentary and evidentiary requirement.
(Eastern Telecommunication Phils. Inc. v. CIR, G.R.
No. 183531, March 25, 2015)
Section 110(A)(1) of the NIRC provides that
creditable input taxes must be evidenced by a
VAT invoice or official receipt, which must, in
turn, comply with Section 113 of RA. 10963.
Substantiation requirements to be entitled to
refund or tax credit under Sec. 112, NIRC. The
claimant’s duties are two-fold: (a) prove
payment of input VAT to supplier; and (b) prove
zero-rated sales to purchasers. The documents
required are VAT receipt for sale of services or
lease of property and VAT invoice for sale of
goods. The words ‘zero-rated’ must also be
stated in the VAT receipt or invoice. (Western
Mindanao Power Corporation v. CIR, G.R No.
181136, June 13, 2012)
The VAT invoice and VAT receipt should not be
confused as referring to one and the same thing;
the law did not intend the two to be used
alternatively. The taxpayer tried to substantiate
its input VAT on purchases of goods with official
267
receipts and on purchases of services with
invoices. Claim denied. (KEPCO v. CIR, G.R No.
181858 November 24, 2010)
In one case, the claim for refund/tax credit was
denied because the proof for the zero-rated sale
consisted of secondary evidence like financial
statements. (Luzon Hydro Corp. v. CIR G.R. No.
188260, November 13, 2013)
In another case, the proofs for zero-rated sales
of services were sales invoices. The claim was
denied. (Takenaka Corp.-Philippine Branch v. CIR,
G.R No. 193321, October 19, 2016)
Q: Are sales invoices sufficient as evidence to
prove zero-rated sale of services by a
taxpayer thereby entitling him to claim the
refund of its excess input VAT?
A: NO. The claim for refund must be denied on
the ground that the taxpayer had not established
its zero-rated sales of services through the
presentation of official receipts.
As evidence of an administrative claim for tax
refund or tax credit, there is a certain distinction
between a receipt and an invoice.
Section 113 of the R.A. 10963 provides that a
VAT invoice is necessary for every sale, barter or
exchange of goods or properties, while a VAT
official receipt properly pertains to every lease
of goods or properties, as well as to every sale,
barter or exchange of services.
A "sales or commercial invoice" is a written
account of goods sold or services rendered
indicating the prices charged therefor or a list by
whatever name it is known which is used in the
ordinary course of business evidencing sale and
transfer or agreement to sell or transfer goods
and services.
A "receipt" on the other hand is a written
acknowledgment of the fact of payment in
money or other settlement between seller and
buyer of goods, debtor or creditor, or person
rendering services and client or customer.
The taxpayer submitted sales invoices, not
official receipts, to support its claim for refund.
In light of the aforestated distinction between a
receipt and an invoice, the submissions were
inadequate to comply with the substantiation
 National Taxation
requirements for administrative claims for tax
refund or tax credit. (Takenaka Corporation –
Philippine Branch vs. CIR, G.R. No. 193321,
October 19, 2016, penned by Justice Bersamin)
Q: May a taxpayer who has pending claims
for VAT input credit or refund, set off said
claims against his other tax liabilities?
Explain your answer. (2001 BAR)
A: NO. Set-off is available only if both obligations
are liquidated and demandable. Liquidated
debts are those where the exact amounts have
already been determined. In the instant case, a
claim of the taxpayer for VAT refund is still
pending and the amount has still to be
determined.
A fortiori, the liquidated obligation of the
taxpayer to the government cannot, therefore,
be set-off against the unliquidated claim which
the taxpayer conceived to exist in his favor.
(Philex Mining Corp. v. CIR, 294 SCRA 687)
Q: Petitioner X Cola, Inc. (X Cola) failed to
declare certain input taxes in its VAT return
for the 3rd and 4th quarters of 2007. X Cola
alleged overpayment of VAT for the said
taxable periods since the undeclared input
taxes were not credited against output tax.
Since X Cola could not amend its VAT returns
due to the issuance of a BIR Letter of
Authority for 2007, it filed with the BIR
claims for refund of alleged overpaid VAT for
the 3rd and 4th quarters of 2007. The BIR
failed to act on the claims, so X Cola filed a
Petition for Review with the CTA. Is X Cola
entitled to its claims for refund?
A: NO. X Cola is not entitled to the refunds as the
amounts claimed represent undeclared input
taxes, not erroneously paid taxes, as
contemplated under Section 229 of the NIRC.
Section 229 of the NIRC allows recovery of any
national internal revenue tax (including VAT)
which was erroneously or illegally assessed or
collected.
X Cola’s input taxes for the 3rd and 4th quarters of
2007 should have been declared in its quarterly
VAT returns so that these could be creditable
against the output tax for the same taxable
periods. Since it failed to report the input taxes
in its VAT returns, it could not offset the
undeclared input taxes against the output VAT.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Under RR No. 16-2005, input taxes must be
substantiated and reported in the VAT returns to
be able to claim credit against the output tax.
While X Cola was able to substantiate a portion
of its claims, the input taxes were not reported
in its VAT Returns. (Coca-cola Bottlers Phils., Inc.
v. CIR, CTA Case Nos. 7986 & 8028, June 14, 2013)
Q: AWSPI is the Philippine branch of a
multinational company organized and
existing under and by virtue of the laws of
Australia. It rendered qualifying services to
its foreign affiliates-clients, from which it
generated service revenues. As a value-
added tax (VAT)-registered enterprise, can
AWSPI file for an Application for Tax
Refund/Credit with the Philippine Tax
Authorities?
A: YES. AWSPI may file for an application for tax
refund provided that it follows the requisites
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, which
states that 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.
It is worth noting that for purposes of zero-
rating under Section 108 (B) (2) of the Tax Code,
the claimant must establish the two components
of a client's NRFC status, viz.: (1) that their client
was established under the laws of a country not
the Philippines or, simply, is not a domestic
corporation; and (2) that it is not engaged in
trade or business in the Philippines. To be sure,
there must be sufficient proof of both of these
components: showing not only that the clients
are foreign corporations, but also are not doing
business in the Philippines. Such proof must be
especially required from ROHQs such as AWSPI.
(Commissioner of Internal Revenue v. Deutsche
Knowledge Services Pte. Ltd., G.R. No. 234445, July
15, 2020)
268
 Taxation Law
Q: Team Energy filed with the BIR its
Quarterly VAT Returns and its Monthly VAT
Declaration. CIR thereafter filed an
administrative claim for cash refund or
issuance of tax credit certificate
corresponding to the input VAT reported in
its Quarterly VAT Returns. Due to CIR’s
inaction on its claim, Team Energy filed a
Petition for Review. However, in its Answer,
the CIR argued that the alleged claim for
refund is still subject to administrative
investigation/examination and that Team
Energy failed to prove compliance with the
requirements. Is the CIR’s contention
correct?
A: NO. Respondent's failure to submit a
Certificate of Compliance issued by the Energy
Regulatory Commission does not disqualify it
from claiming a tax refund or tax credit. Given
that respondent in this case likewise anchors its
claim for tax refund or tax credit under Section
108(B)(3) of the Tax Code, it cannot be required
to comply with the requirements under the
EPIRA before its sale of generated power to NPC
should qualify for VAT zero-rating. Section
108(B)(3) of the Tax Code in relation to Section
13 of the NPC Charter, clearly provide that sale
of electricity to NPC is effectively zero-rated for
VAT purposes.
The basis for the VAT zero-rated treatment of
the supplier is the tax exemption of the
purchaser of services, and not the qualification
of the supplier itself, in order to relieve the tax-
exempt purchaser from tax burden considering
that it may not be able to offset or utilize any
input tax passed on by its supplier of services,
had the services it purchased been subject to
VAT of 12%. (Commissioner of Internal Revenue
v. Team Energy Corporation, G.R. No. 230412,
March 27, 2019)
Q: On March 30, 2005, XYZ Company filed an
application for tax credit of its
excess/unused input taxes attributable to
zero-rated sales for the taxable year 2004 in
the total amount of ₱27,828,748.95. By
reason of the inaction by the BIR, XYZ
Company filed a Petition for Review before
the CTA on March 31, 2006. In its Answer,
respondent CIR interposed the defense,
among others, that XYZ Company’s excess
input VAT paid for its domestic purchases of
goods and services attributable to zero-rated
269
sales for the four quarters of taxable year
2004 was not fully substantiated by proper
documents. CTA Division denied the latter's
claim for failure to submit the required VAT
official receipts as proof of zero-rated sales.
In its appeal before the CTA En Banc, XYZ
Company alleged that it had fully complied
with the invoicing requirements when it
submitted sales invoices to support its claim
of zero-rated sales. XYZ Company argued that
there is nothing in the tax laws and
regulations that requires the sale of goods or
properties to be supported only by sales
invoices, or the sale of services by official
receipts only. Is XYZ Company's contention
correct?
A: NO. Sales invoices and documents other than
official receipts are not proper in substantiating
zero-rated sales of services in connection with a
claim for refund. VAT official receipts are
indispensable to prove sales of services by a
VAT-registered taxpayer. When a VAT-taxpayer
claims to have zero-rated sales of services, it
must substantiate the same through valid VAT
official receipts, not any other document, not
even a sales invoice which properly pertains to a
sale of goods or properties. A VAT invoice is
necessary for every sale, barter or exchange of
goods or properties while a VAT official receipt
properly pertains to every lease of goods or
properties, and for every sale, barter or
exchange of services. Thus, a VAT invoice and a
VAT receipt should not be confused as referring
to one and the same thing; the law did not intend
the two to be used alternatively.
In this case, the documentary proofs presented
by XYZ Company to substantiate its zero-rated
sales of services consisted of sales invoices and
other secondary evidence like transfer slips,
credit memos, cargo manifests, and credit notes.
It is very clear that these are inadequate to
support the petitioner's sales of services.
(Nippon Express (Philippines) Corporation v.
Commissioner of Internal Revenue, G.R. 191495,
July 23, 2018)
Period to file claim for refund/apply issuance
of tax credit certificate
The claim, which must be in writing, for both
cases, must be filed within 2 years after the close
of the taxable quarter when the sales were
 National Taxation
made.
Reckoning point for the two (2) year period
Zero-rated or effectively zero-rated sales
Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within
two (2) years after the close of the taxable
quarter when the sales were made. (Sec. 112(A),
NIRC)
The two-year period should be reckoned from
the close of the taxable quarter when the
relevant sales were made pertaining to the input
VAT regardless of whether said tax was paid or
not. (CIR vs. Mirant Pagbilao Corporation, GR
172129, September 12, 2008)
Thus, when a zero-rated VAT taxpayer pays its
input VAT for the purchase from its supplier a
year after the pertinent transaction of its sale to
its purchaser, the said taxpayer only has a year
to file claim for refund or tax credit of the
unutilized creditable input VAT. (Ingles, 2015)
In case the taxpayer is engaged in zero-rated and
also in taxable or exempt sale, and the amount of
creditable input tax due or paid cannot be
directly and entirely attributed to any one of the
transactions, it shall be allocated
proportionately on the basis of the volume of
sales.
Q: Kepco Ilijan Corporation, a duly registered
domestic corporation, claimed a refund or
issuance of the tax credit certificate for
P74,000,000.00 for the VAT incurred in
taxable year 2002. It filed its quarterly VAT
returns for the four quarters of taxable year
2002. On April 13, 2004, it brought its
administrative claim for refund with RDO of
the BIR, claiming excess input VAT
amounting to P74,000,000.00 for taxable
year 2002. Nine days after filing the
administrative claim, the petitioner filed its
petition for review with the CTA. CTA
dismissed the petition on the ground that it
did not acquire jurisdiction for Kepco’s
failure to observe the 120-30 day period in
filing administrative and judicial claims. Rule
on the following:
1. the proper reckoning of the periods
under Section 112(A) and Section
112(C) of the NIRC for bringing the
administrative and judicial claims to
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
seek the refund or issuance of the tax
credit certificate of the VAT; and
2. the jurisdiction of the CTA over the case.
A:
1. The Court in Mirant held that "the
reckoning frame would always be the end
of the quarter when the pertinent sales or
transaction was made, regardless when the
input VAT was paid," applying Section
112(A) of the NIRC and no other provisions
that pertained to erroneous tax payments.
(Kepco Ilijan Corporarion v. Commissioner of
Internal Revenue, G.R. No. 205185,
September 26, 2018)
2. In San Roque, the Court acknowledged an
instance when a premature filing in the CTA
was allowed. The mandatory and
jurisdictional nature of the 120-30 period
rule did not apply to claims for refund that
were prematurely filed during the interim
period from the issuance of BIR Ruling No.
DA-489-03 on December 10, 2003 to
October 6, 2010. The CTA could still take
cognizance of the claims because they were
filed within the period exempted from the
mandatory and jurisdictional 120-30
period rule. (Ibid)
Cessation of business or VAT status
The person may, within two (2) years from the
date of cancellation, apply for the issuance of a
tax credit certificate for any unused input tax
which may be used in payment of his other
internal revenue taxes. (Sec. 112(B), NIRC)
SUMMARY OF RULES ON PRESCRIPTIVE
PERIODS FOR CLAIMING REFUND
OR CREDIT OF INPUT TAX
Administrative Claim: Two-Year
Prescriptive Period
Only the administrative claim that must be
filed within the period
GR: The reckoning date is the close of the
taxable quarter when the relevant sales were
made
XPN: From June 8, 2007 to September 12,
2008 the two-year prescriptive period for
filing a claim for tax refund or credit should
be counted from the date of filing of the VAT
return and payment of the tax.
270
 Taxation Law
(Atlas Consolidated Mining and Dev. Corp v
CIR, G.R. No. 141104, June 8, 2007)
Judicial Claim: 90 +30 Day Period
Two ways of filing an appeal to the CTA:
a. Within 30 days after the CIR
denies the claim within the 90-
day period, or
b. Within 30 days from the
expiration of the 90-day period if
the CIR does not act within the 90-
day period.
GR: The 30-day period to appeal always
applies as it is both mandatory and
jurisdictional.
XPN: As an exception, premature filing is
allowed only if filed between 10 December
2003 and 5 October 2010, when BIR Ruling
No. DA-489-03 was still in force
NOTE: Late filing is absolutely prohibited.
(Commissioner of Internal Revenue v.
Mindanao II Geothermal Partnership, G.R. No.
191498, January 15, 2014)
NOTE: The rule on a claim for refund or
credit of an erroneously or illegally collected
tax under Section 229 of the NIRC is
different. Under such, both the
administrative and judicial claim must be
filed within the two (2)-year prescriptive
period from the date of payment. The claim
for refund or credit and the appeal to CTA
may occur simultaneously.
Period within which BIR Commissioner grants
Tax Credit Certificates/refund for creditable
input taxes
The Commissioner may grant TCC/refund for
creditable input taxes within 90 days from the
day of submission of the complete documents in
support of the application filed Provided, That,
should the Commissioner find that the grant of
refund is not proper, the Commissioner must
state in writing the legal and factual basis for the
denial. (Sec. 112, NIRC; RR No. 13 – 2018)
Note that the 90-day period begins to run from
the submission of complete documents
supporting the administrative claim. If there is
no evidence showing that the taxpayer was
required to submit – or actually submitted –
271
additional documents after the filing of the
administrative claim, it is presumed that the
complete documents accompanied the claim
when it was filed. (Silicon Philippines, Inc., v. CIR,
G.R. No. 182737, March 2, 2016)
If the claim for VAT is not acted upon by the
Commissioner within 90-day period as required
by law, such inaction shall be deemed a denial of
the application for tax refund or credit.
Q: Team Sual Corporation (TSC) is a domestic
corporation principally engaged in the
business of power generation and sale to
National Power Corporation (NPC) under a
Build, Operate, and Transfer scheme.
TSC applied for zero-rating VAT registration
for its sale of power generation services to
NPC for the taxable year 2001. For the first,
second, third, and fourth quarters of 2001,
TSC reported excess input VAT amounting to
P37,985,009.25, P29,298,556.12,
P32,869,835.40, and P66,566,967.02,
respectively. The total excess input VAT
claimed by TSC for the taxable year
amounted to P166,720,367.79.
On March 20, 2003, TSC filed with the BIR an
administrative claim for refund for the
aggregate amount of its unutilized input VAT
for the taxable year 2001. On March 31,
2003, it filed with the CTA Division a petition
for review praying for the refund or issuance
of tax credit certificates for its unutilized
input VAT for the first quarter of taxable year
2001. On July 23, 2003, TSC filed another
petition for review praying for the refund or
issuance of tax credit certificates for its
unutilized input VAT for the second, third,
and fourth quarters of taxable year 2001.
The CTA En Banc rendered a Consolidated
Decision granting petitioner's claim for
refund of input VAT for the second, third, and
fourth quarters of taxable year 2001
amounting to P123,110,001.68. Insofar as
the refund of the input VAT for the first
quarter of taxable year 2001 is concerned,
the CTA En Banc ruled that the CTA did not
acquire jurisdiction over it as it had been
filed prematurely. Is the ruling of the CTA En
Banc correct?
A: YES. In order for the CTA to acquire
 National Taxation
jurisdiction over a judicial claim for refund or
tax credit arising from unutilized input VAT, the
said claim must first comply with the mandatory
120+30-day waiting period. Any judicial claim
for refund or tax credit filed in contravention of
said period is rendered premature, depriving the
CTA of jurisdiction to act on it.
The CIR is then given a period of 120-days from
the submission of complete documents in
support of the application to either grant or
deny the claim. If the claim is denied by the CIR
or the latter has not acted on it within the 120-
day period, the taxpayer-claimant is then given a
period of 30 days to file a judicial claim via
petition for review with the CTA.
TSC filed its administrative claim for refund for
taxable year 2001 on March 20, 2003, well
within the two-year period provided for by law.
TSC then filed two separate judicial claims for
refund: one on March 31, 2003 for the first
quarter of 2001, and the other on July 23, 2003
for the second, third, and fourth quarters of the
same year.
Given the fact that TSC's administrative claim
was filed on March 20, 2003, the CIR had 120
days or until July 18, 2003 to act on it. Thus, the
first judicial claim covering the first quarter of
2001 was premature because TSC filed it a mere
11 days after filing its administrative claim.
On the other hand, the second judicial claim filed
by TSC was filed on time because it was filed on
July 23, 2003 or five days after the lapse of the
120-day period. Accordingly, it is clear that the
second judicial claim complied with the
mandatory waiting period of 120 days and was
filed within the prescriptive period of 30 days
from the CIR's action or inaction. Therefore, the
CTA division only acquired jurisdiction over
TSC's second judicial claim for refund covering
its second, third, and fourth quarters of taxable
year 2001. (Team Sual Corporation v.
Commissioner of Internal Revenue, G.R. 201225-
26, April 18, 2018)
Q: Company A filed an administrative claim
for refund with the BIR for its excess and
unutilized input VAT credits. In support of its
application for refund, the company
submitted documents it deemed necessary
for the grant of its refund claim. It even
authorized the examination of voluminous
supporting documents which were kept in its
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
office and granted revenue officers access
thereto. This notwithstanding, the CIR failed
to apprise Company A of the completeness
and adequacy of its supporting documents
within the 120-day period under Section 112
(C) of the NIRC. Can Company A file a petition
for review with the CTA Division after the
lapse of the 120-day period without any
action from the CIR?
A: YES. Section 112 of the Tax Code, as amended,
provides the periods relative to the filing of a
claim for VAT refunds. Preliminarily, the law
allows the taxpayer to file an administrative
claim for refund with the BIR within two years
after the close of the taxable quarter when the
purchase was made (for the input tax paid on
capital goods) or after the close of the taxable
quarter when the zero-rated or effectively zero-
rated sale was made (for input tax attributable
to zero-rated sale). The CIR must then act on the
claim within 120 days from the submission of
complete documents in support of the
application. In the event of an adverse decision,
the taxpayer may elevate the matter to the CTA
by way of a petition for review within 30 days
from the receipt of the CIR's decision. If, on the
other hand, the 120-day period lapses without
any action from the CIR, the taxpayer may
validly treat the inaction as denial and file a
petition for review before the CTA within 30
days from the expiration of the 120-day period.
An appeal taken prior to the expiration of the
120-day period without a decision or action of
the CIR is premature, without a cause of action,
and, therefore, dismissible on the ground of lack
of jurisdiction. (Commissioner of Internal
Revenue v. Chevron Holdings, Inc., [Formerly
Caltex (Asia) Limited, G.R. No. 233301, February
17, 2020)
Effect of failure to submit complete
supporting documents to judicial claim of
refund in the CTA
A distinction must be made between
administrative cases appealed due to:
1. Inaction of the CIR or the Commissioner
2. Failure of the taxpayer to submit
supporting documents
If the CIR dismissed an administrative claim
due to the taxpayer's failure to submit
complete documents despite
notice/request, then the judicial claim
272
 Taxation Law
before the CTA would be dismissible, not
for lack of jurisdiction, but for the
taxpayer's failure to substantiate the claim
at the administrative level.
When a judicial claim for refund or tax credit in
the CTA is an appeal of an unsuccessful
administrative claim, the taxpayer has to
convince the CTA that the CIR had no reason to
deny its claim. It, thus, becomes imperative for
the taxpayer to show the CTA that not only is he
entitled under substantive law to his claim for
refund or tax credit, but also that he satisfied all
the documentary and evidentiary requirements
for an administrative claim. It is, thus, crucial for
a taxpayer in a judicial claim for refund or tax
credit to show that its administrative claim
should have been granted in the first place.
Consequently, a taxpayer cannot cure its failure
to submit a document requested by the BIR at
the administrative level by filing the said
document before the CTA. (Pilipinas Total Gas,
Inc. v. CIR, G.R. No. 207112, December 8, 2015)
Taxpayer must await the lapse of the 90-day
period before taxpayer can appeal to CTA
The second paragraph of Section 112(C) of the
R.A. NO.10963 envisions two scenarios: (1)
when a decision is issued by the CIR before the
lapse of the 90-day period; and (2) when no
decision is made after the 90-day period. In both
instances, the taxpayer has 30 days within which
to file an appeal with the CTA. As we see it then,
the 90-day period is crucial in filing an appeal
with the CTA. (CIR v. Aichi Forging Company of
Asia, Inc., GR 184823, October 6, 2010)
Failure to comply with the 90-day waiting
period violates a mandatory provision of law. It
violates the doctrine of exhaustion of
administrative remedies and renders the
petition premature and thus without a cause of
action, with the effect that the CTA does not
acquire jurisdiction over the taxpayer's petition.
One of the conditions for a judicial claim of
refund or credit under the VAT System is
compliance with the 90+30 day mandatory and
jurisdictional periods. Thus, strict compliance
with the 90+30 day periods is necessary for such
a claim to prosper, whether before, during or
after the effectivity of the Atlas doctrine, except
for the period from the issuance of BIR Ruling
273
No. DA-489-03 on December 10, 2003 to
October 6, 2010 when the Aichi doctrine was
adopted, which again reinstated the 120+30
(90+30 day period under TRAIN LAW) day
periods as mandatory and jurisdictional. (CIR v.
Mirant Pagbilao Corp., G.R. No. 180434, January
20, 2016)
Exception to the mandatory and
jurisdictional nature of the 90+30 day period
(BIR Ruling No. DA-489-03 dated December
10, 2003)
1. During the effectivity of BIR Ruling No. DA-
489-03,
2. BIR Specific Ruling which misleads a
particular taxpayer to prematurely file a
judicial clam with the CTA.
As an exception to the mandatory and
jurisdictional 90+30 day period, it was
emphasized that from the time of issuance of
BIR Ruling No. DA-489-03 on December 10, 2003
up to its reversal by the Supreme Court in the
Aichi case on October 6, 2010,
taxpayers/claimant need not wait for the lapse
of 120-day period (90-day period under TRAIN
LAW, RA. 10963) before it could seek judicial
relief with the CTA by way of Petition for
Review. (RMC 54-2014)
Before and after the aforementioned period
(i.e., December 10, 2003 to October 6, 2010),
the observance of the 120-day period (90-
day period under TRAIN LAW, RA. 10963) is
mandatory and jurisdictional to the filing of
judicial claim for refund of excess input VAT. (CE
Luzon Geothermal Power Co., Inc. v. CIR, G.R. No.
200841-42, August 26, 2015)
There is no need for a taxpayer to specifically
invoke BIR Ruling No. DA-489-03 to benefit from
the same. As long as the judicial claim was filed
between December 10, 2003 and October 6,
2010, then the taxpayer would not be required
to wait for the lapse of 120-day period. (CIR v.
Air Liquide Phils. Inc., G.R. No. 210646, July 29,
2015)
Q: Y Company is a VAT-registered taxpayer
which was granted by the BIR a zero-rating
on its sales of electricity to National Power
Corporation. On 22 December 2005 and 27
February 2006, they filed two separate
administrative claims for refund of its
 National Taxation
alleged unutilized input tax for the period
January 2004 up to March 2004, and April
2004 up to December 2004, respectively.
Due to the inaction of respondent CIR, Y
Company filed petitions for review before the
CTA. The CTA Division partially granted the
refund claim of the petitioner. The CIR
moved for reconsideration but to no avail.
Thus, the CIR filed a petition for review with
the CTA En Banc sided with the CIR in ruling
that the judicial claims of Y Company were
prematurely filed in violation of the 120-day
and 30- day periods prescribed in Section
112 (D) of the NIRC. The court held that by
reason of prematurity of its petitions for
review, Y Company failed to exhaust
administrative remedies which is fatal to its
invocation of the court's power of review. Is
the court correct?
A: NO. The 120-day and 30-day periods are
mandatory and jurisdictional. Thus,
noncompliance with the mandatory 120+30-day
period renders the petition before the CTA void.
However, it is to be noted that BIR Ruling No.
DA-489-03 provides, “A 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.”
It is a general interpretative rule issued by the
CIR pursuant to its power under Section 4 of the
NIRC, hence, applicable to all taxpayers. Thus,
taxpayers can rely on this ruling from the time of
its issuance on 10 December 2003.
In other words, the 120+30-day period is
generally mandatory and jurisdictional from the
effectivity of the 1997 NIRC on 1 January 1998,
up to the present. By way of an exception,
judicial claims filed during the window period
from 10 December 2003 to 6 October 2010,
need not wait for the exhaustion of the 120-day
period. In this case, the two judicial claims filed
by the petitioner fell within the window period,
thus, the CTA can take cognizance over them.
(San Roque Power Corporation v. Commissioner
of Internal Revenue, G.R. 203249, July 23, 2018)
Remedy in case of CIR’s inaction within 90-
day period or CTA’s denial of claim for TCC/
tax refund
CIR’s inaction
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
The taxpayer may also appeal to the CTA within
30 days after the lapse of 90 days from the
submission of the complete documents, if no
action has been taken by the Commissioner.
CTA’s denial
The taxpayer may appeal the full or partial
denial of the claim to the Court of Tax Appeal
(CTA) within 30 days from the receipt of said
denial, otherwise the decision shall become final.
Q: Gangwam Corporation (GC) filed its
quarterly tax returns for the calendar year
2012 as follows:
First quarter - April 25, 2012
Second quarter - July 23, 2012
Third quarter - October 25, 2012
Fourth quarter - January 27, 2013
On December 22, 2013, GC filed with the
Bureau of Internal Revenue (BIR) an
administrative claim for refund of its
unutilized input Value-Added Tax (VAT) for
the calendar year 2012. After several months
of inaction by the BIR on its claim for refund,
GC decided to elevate its claim directly to the
Court of Tax Appeals (CTA) on April 22, 2014.
In due time, the CTA denied the tax refund
relative to the input VAT of GC for the first
quarter of 2012, reasoning that the claim was
filed beyond the two-year period prescribed
under Section 112(A) of the National Internal
Revenue Code (NIRC)
a. Is the CTA correct?
b. Assuming that GC filed its claim
before the CTA on February 22, 2014,
would your answer be the same?
(2014 BAR)
A:
a. NO. The CTA is not correct. The two-year
period to file a claim for refund refers to the
administrative claim and does not refer to
the period within which to elevate the claim
to the CTA. The filing of the administrative
claim for refund was timely done because it
is made within two years from the end of the
quarter when the zero-rated transaction
took place (Section112 (A), NIRC) When GC
decided to elevate its claim to the CTA on
April 22, 2014, it was after the lapse of 120
days (90-day period under TRAIN LAW,
RA. 10963) from the filing of the claim for
274
 Taxation Law
refund with the BIR, hence, the appeal is
seasonably filed. The rule on VAT refunds is
two years to file the claim with the BIR, plus
120 (90-day period under TRAIN LAW,
RA. 10963) for the Commissioner to act and
inaction after 120 days (90 days) is a
deemed adverse decision on the claim,
appealable to the CTA within thirty (30)
days from the lapse of the 120-day (90-day)
period. (CIR v. Aichi Forging Company of
Asia, Inc., G.R. No. 184823, October 6, 2010)
b. YES. The two-year prescriptive period to file
a claim for refund refers to the
administrative claim with the BIR and not
the period to elevate the claim to the CTA.
Hence, the CTA cannot deny the refund for
reasons that the first quarter claim was filed
beyond the two-year period prescribed by
law. However, when the claim is made
before the CTA on February 24, there is
definitely no appealable decision as yet
because the 120-day (90-day under TRAIN
LAW, RA. 10963) period for the
Commissioner to act on the claim for refund
has not yet lapsed. Hence, the act of the
taxpayer in elevation the claim to the CTA is
premature and the CTA has no jurisdiction
to rile thereon. (CIR v. Aichi Forging
Company of Asia, Inc., G.R. No. 184823,
October 6, 2010)
Q: Is Team Energy's (A VAT-registered entity)
failure to comply with the 120 + 30 day
prescriptive period is fatal to its claim?
A: YES. A claim for input VAT refund or credit is
construed strictly against the
taxpayer. Accordingly, there must be strict
compliance with the prescriptive periods and
substantive requirements set by law before a
claim for tax refund or credit may prosper. The
mere fact that Team Energy has proved its
excess input VAT does not entitle it as a matter
of right to a tax refund or credit. The 120+30-
day periods (90 + 30 day periods under TRAIN
LAW) in Section 112 is not a mere procedural
technicality that can be set aside if the claim is
otherwise meritorious. It is a mandatory and
jurisdictional condition imposed by law. Team
Energy's failure to comply with the prescriptive
periods is, thus, fatal to its claim. (Team Energy v.
CIR, G.R. No. 197663, March 14, 2018)
Q: For calendar year 2011, FFF, Inc., a VAT-
275
registered corporation, reported unutilized
excess input VAT in the amount of
Pl ,000,000.00 attributable to its zero-rated
sales. Hoping to impress his boss, Mr. G, the
accountant of FFF, Inc., filed with the BIR on
January 31, 2013 a claim for tax
refund/credit. Not having received any
communication from the BIR, Mr. G filed a
Petition for Review with the CTA on March
15, 2013, praying for the tax refund/credit of
the Pl,000,000.00 unutilized excess input
VAT of FFF, Inc. for 2011.
a. Did the CTA acquire jurisdiction over
the Petition of FFF, Inc.?
b. Discuss the proper procedure and
applicable time periods for
administrative and judicial claims for
refund/credit of unutilized excess
input VAT. (2015 BAR)
A:
a. NO. The CTA has not acquired jurisdiction
over the Petition of FFF, Inc. because the
juridical claim has been prematurely filed on
March 15, 2013. The Supreme Court ruled
that the 30-day period after the expiration
of the 120-day period (90-day period
under TRAIN LAW, RA. 10963) fixed by law
for the Commissioner of Internal Revenue to
act on the claim for refund is jurisdictional
and failure to comply would bar the appeal
and deprive the CTA of its jurisdiction to
entertain the appeal.
In this case, Mr. G filed the administrative
claim on January 31, 2013. The petition for
review should have been should have been
filed on June 30, 2013. Filing the judicial
claim on March 15, 2013 is premature, thus
the CTA did not acquire jurisdiction.
b. The administrative claim must be filed with
the CIR within the two-year prescriptive
period. The proper reckoning period date
for the two-year prescriptive period is the
close of the taxable quarter when the
relevant sales were made. However, as an
exception, are claims applied only from June
8, 2007 to September 12, 2008, wherein the
two-year prescriptive period for filing a
claim for tax refund or credit of unutilized
input VAT payments should be counted
from the date of filing of the VAT return and
payment of the tax.
 National Taxation
The taxpayer can file a judicial claim in one
of two ways: (1) file the judicial claim within
thirty days after the Commissioner of
Internal Revenue denies the claim within
the 120-day period, or (2) file the judicial
claim within 30 days from the expiration of
the 120-day period if the Commissioner
does not act within the 120-day period.
As a general rule, the 30-day period to
appeal is both mandatory and jurisdictional.
As an exception, premature filing is allowed
only if filed between December 10, 2003 and
October 5, 2010, when the BIR Ruling No.
DA-489-03 was still in force.
Q: On March 26, 2009, petitioner filed an
administrative claim with the Bureau of
Internal Revenue Laguna Regional District
Office for the issuance of a tax credit
certificate. This amount represented
"unutilized input taxes on its local purchases
and/or importation of goods and services,
capital goods and payments for services
rendered by non-residents, which were all
attributable to petitioner’s zero-rated sales
for the period of January 1, 2007 to
December 31, 2007, pursuant to Section 112
(A) of the Tax Code of 1997, as amended.
The next day, March 27, 2009, petitioner
filed a petition for review with the Court of
Tax Appeals since respondent had not yet
issued a final decision on its administrative
claim. BIR raised prematurity of judicial
claim as one of its defenses in its answer. Did
the petitioner timely filed its judicial claim
for the issuance of tax credit certificate. If
yes, when is the reckoning period for the 90
day period to file an administrative claim for
refund/credit of input VAT.
A: Compliance with the 120-day and the 30-day
periods under Section 112 of the Tax Code, save
for those Value-added Tax refund cases that
were prematurely (i.e., before the lapse of the
120-day period) filed with the Court of Tax
Appeals between December 10, 2003 (when the
Bureau of Internal Revenue Ruling No. DA- 489-
03 was issued) and October 6, 2010,is
mandatory and jurisdictional. Petitioner filed its
judicial claim on March 27, 2009, only a day
after it had filed its administrative claim on
March 26, 2009. Clearly, petitioner failed to
comply with the 120-day waiting period, the
time expressly given by law to the Commissioner
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
of Internal Revenue to decide whether to grant
or deny its application for tax refund or credit.
Section 112(A) of the Tax Code, as amended,
provides that the reckoning period in filing an
administrative claim is from the close of the
taxable quarter when the sales were made and
not from the date of filing of the return and
payment of the tax due. (CBK Power V. CIR, G.R.
No. 202066, September 30, 2014)
Q: On September 26, 2007, CE Casecnan filed
before the Bureau of Internal Revenue an
administrative claim for refund or issuance
of tax credit certificate for the excess or
unutilized input VAT in the total amount of ₱
26,066,286.96.
On March 14, 2008, CE Casecnan filed its
Petition for Review, docketed as CTA Case No.
7739, due to the inaction of the
Commissioner of Internal Revenue on its
administrative claim.
On December 2, 2010, the Court of Tax
Appeals Former Second Division denied CE
Casecnan's judicial claim.
Did CTA En Banc erred in denying CE
Casecnan claim for refund due to
prescription?
A: NO. Resort to an appeal before the Court of
Tax Appeals should be made only within thirty
(30) days either from receipt of the decision
denying the claim or the expiration of the one
hundred twenty (120)-day period given to the
Commissioner to decide the claim.
The thirty (30)-day period provided in Section
112 of the 1997 National Internal Revenue Code
to appeal the decision of the Commissioner of
Internal Revenue or its inaction is statutorily
provided. Failure to comply is a jurisdictional
error. The window of exemption created in
Commissioner of Internal Revenue v. San Roque
Power Corporation is limited to premature filing
of the judicial remedy. It does not cure lack of
jurisdiction due to late filing. (CE Casecnan v. CIR,
G.R. No. 203928, July 22, 2015)
Difference between Sec. 112 on refund for
VAT and Sec. 229 on refund of other taxes
SEC. 112 (VAT) SEC. 229
(OTHER
276
 Taxation Law
TAXES) REGISTRATION
Period is 2 years after the Period is 2
close of the taxable years from the Persons required to register for value-added
quarter when the sales date of tax
were made. payment of
the tax. Any person who, in the course of trade or
business, sells, barters or exchanges goods or
The 30-day period of Period to file an properties, ore engages in the sale or exchange
appeal to the CTA need not administrative of services, shall be liable to register for value-
necessarily fall within the claim before added tax if:
two-year prescriptive the CIR AND
period, as long as the judicial claim 1. His gross sales or receipts for the past
administrative claim with the CTA twelve (12) months, other than those that
before the CIR is filed must fall within are exempt under Section 109(A) to (BB),
within the two-year the 2-year have exceeded three million pesos
prescriptive period. This prescriptive (₱3,000,000); or
is because Sec. 112 (C) of period.
the 1997 NIRC mandates 2. There are reasonable grounds to believe
that a taxpayer can file the that his gross sales or receipts for the next
judicial claim: (1) only twelve (12) months, other than those that
within thirty days after the are exempt under Section 109(A) to (BB),
Commissioner partially or will exceed three million pesos
fully denies the (₱3,000,000).
claim within the 120-day
period(90-day period Every person who becomes liable to be
under TRAIN LAW, RA. registered under paragraph (1) of this
10963) , or (2) only subsection shall register with the Revenue
within thirty days from the District Office which has jurisdiction over the
expiration of the 120-day head office or branch of that person. If he fails to
(90-day period under register, he shall be liable to pay the tax under
TRAIN LAW, RA. 10963) Title IV as if he were a VAT-registered person,
period if the Commissioner but without the benefit of input tax credits for
does not act within the the period in which he was not properly
120-day period (90-day registered. (Sec. 236, NIRC)
period). (CIR v. San Roque
Power Corporation, G.R. Optional registration for value-added tax of
Nos. 187485, 196113, exempt person. –
197156, February 12,
2013) 1. Any person who is not required to register
for value-added tax under Subsection (G)
hereof may elect to register for value-added
Manner of Giving Refund tax by registering with the Revenue District
Office that has jurisdiction over the head
Refund shall be made upon warrants drawn by office of that person, and paying the annual
the Commissioner or by his duly authorized registration fee in Subsection (B) hereof; or
representative without the necessity of being
countersigned by the Chairman of Commission 2. Any person who elects to register under
on Audit (COA) the provision of the Revised this Subsection shall not be entitled to
Administrative Code to the contrary cancel his registration under Subsection
notwithstanding: Provided, that refunds under (F)(2) for the next three (3) years.
this paragraph shall be subject to post audit by
the COA. Provided that any person taxed under Section
24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC
COMPLIANCE REQUIREMENTS who elected to pay the eight percent (8%) tax on

277
 National Taxation
gross sales or receipts shall not be allowed to
avail of this option. (Sec. 236, NIRC)
Failure to register as VAT taxpayer
He shall be held liable to pay the tax as if he is a
VAT registered person but he cannot avail of the
input tax credit for the period that he has not
properly registered. (Sec. 236(G), NIRC)
Summary of Rules for VAT registration
BUSINESS EFFECT
Gross sales Mandatory VAT
exceed registration. Generally
P3,000,000 liable to pay 12% VAT.
Gross sales do Subject to optional VAT
not exceed. ₱ registration
3,000,000 If VAT-registered: generally
liable to pay 12% VAT.
If non-VAT registered:
generally liable to pay 3%
percentage tax
This however, does not include the sale of
parking lot which may or may not be included
in the sale of condominium units. The sale of
parking lots in a condominium is a separate and
distinct transaction and is not covered by the
rules on threshold amount not being a
residential lot, house & lot or a residential
dwelling, thus, should be subject to VAT
regardless of amount of selling price. (RR No. 13
– 2012)
NOTE: It is only the sale of real properties
primarily held for sale to customers or held for
lease in the ordinary course of trade or business
of the seller which shall be subject to VAT. As
such, transactions involving real properties held
as capital asset of individuals are not subject to
VAT. However, it may give rise to capital gains
tax liability.
Only persons engaged in real estate business
either as a real estate dealer, developer or
lessors, are subject to VAT.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
SUMMARY OF RULES
Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not
been applied against output tax, with the appropriate
BIR Office-Large Taxpayer or RDO having jursidiction
over the principal place of business of the taxpayer.
Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one
hundred twenty (90) days from the date of
submission of compete documents in support of the
application.
In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the
period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.
INVOICING REQUIREMENTS
Invoicing requirements, in general
A VAT-registered person shall issue:
1. A VAT invoice for every sale, barter or
exchange of goods or properties; and
2. A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services. (Sec. 113
NIRC)
Only VAT-registered persons are required to
print their TIN followed by the word "VAT" in
their invoice or official receipts. Said documents
shall be considered as a "VAT Invoice" or VAT.
Information required to be indicated on the
VAT invoice or VAT official receipts
278
 Taxation Law
1. A statement that the seller is a VAT-
registered person, and the taxpayer's
identification number (TIN);
2. The total amount which the purchaser pays
or is obligated to pay to the seller with the
indication that such amount includes the
VAT. Provided that:
a. The amount of the tax shall be shown
as a separate item in the invoice or
receipt;
NOTE: Under RR 18-2011 (November
21, 2011), in case of failure to indicate
the VAT as a separate item in the sales
invoice or official receipt, a fine of not
less than P1,000 but not more than
P50,000 shall, upon conviction, be
collected for each act or omission in
addition to imprisonment of not less
than 2 years but not more than 4
years.
b. If the sale is exempt from value-added
tax, the term "VAT-exempt sale" shall
be written or printed prominently on
the invoice or receipt;
c. If the sale is subject to 0% VAT, the
term "zero-rated sale" shall be written
or printed prominently on the invoice
or receipt; or
d. If the sale involves goods, properties
or services some of which are subject
to and some of which are VAT zero-
rated or VAT-exempt, the invoice or
receipt shall clearly indicate the
breakdown of the sale price between
its taxable, exempt and zero-rated
components, and the calculation of the
value-added tax on each portion of the
sale shall be shown on the invoice or
receipt: "Provided, That the seller may
issue separate invoices or receipts for
the taxable, exempt, and zero-rated
components of the sale.
3. The date of transaction, quantity, unit cost
and description of the goods or properties
or nature of the service; and
4. In the case of sales in the amount of P1,000
or more where the sale or transfer is made
to a VAT-registered person, the name,
279
business style, if any, address and taxpayer
identification number (TIN) of the
purchaser, customer or client. (Sec. 113(B),
NIRC)
NOTE: The appearance of the word “zero rated”
on the face of invoices covering zero rated sales
prevents buyers from falsely claiming input VAT
from their purchases when no VAT was actually
paid. If, absent such word, a successful claim for
input VAT is made, the government would be
refunding money it did not collect. Further, the
printing of the word “zero-rated” on the invoice
helps segregate sales that are subject to 12%
VAT from those sales that are zero-rated. Unable
to submit the proper invoices, taxpayer has been
unable to substantiate its claim for refund.
(Eastern Telecommunication Phils. Inc. v. CIR, G.R.
No. 183531, March 25, 2015)
The failure to print the word “zero-rated” in the
invoice/receipts is fatal to a claim for
credit/refund of input VAT on zero rated sales.
(JRA Philippines, Inc. v. CIR, G.R. No. 177127,
October 11, 2010)
Invoicing requirements in deemed sale
transactions
In the case of Sec. 106(B)(1) (transfer, use or
consumption not in the ordinary course of
business of goods or properties originally
intended for sale or for use in the ordinary course
of business), a memorandum entry in the
subsidiary sales journal to record withdrawal of
goods for personal use is required.
In the case of Sec. 106(B)(2), (distribution or
transfer to shareholders or creditors) and Sec.
106 (B)(3) (consignment of goods if actual sale is
made within 60 days after the date of such
consignment),an invoice shall be prepared at the
time of the occurrence of the transaction, which
should include, all the information prescribed in
Sec. 113-1. The data appearing in the invoice
shall be duly recorded in the subsidiary sales
journal. The total amount of “deemed sale” shall
be included in the return to be filed for the
month or quarter.
In the case of Sec. 106(B)(4), (retirement or
cessation of business), an inventory shall be
prepared and submitted to the RDO who has
jurisdiction over the taxpayer’s principal place
of business not later than 30 days after
 National Taxation
retirement or cessation from business.
An invoice shall be prepared for the entire
inventory, which shall be the basis of the entry
into the subsidiary sales journal. The invoice
need not enumerate the specific items appearing
in the inventory, but it must show the total
amount. It is sufficient to just make a reference
to the inventory regarding the description of the
goods. However, the sales invoice number
should be indicated in the inventory filed and a
copy thereof shall form part of this invoice.
the close of each taxable quarter prescribed for
each taxpayer:
Provided, however, That VAT-registered persons
shall pay the value-added tax on a monthly
basis: provided, finally. that beginning January 1,
2023, the filing and payment required under
this Subsection shall be done within twenty-five
(25) days following the close of each taxable
quarter. (Sec. 114 of NIRC)
Payment of VAT

If the business is to be continued by the new VAT must be paid every month.
owners or successors, the entire amount of
output tax on the amount deemed sold shall be FORM FORM
allowed as input taxes. 2550-M 2550-Q
Scope Monthly sales Quarterly sales
If the business is to be liquidated and the and/or and/or receipts
goods in the inventory are sold or disposed receipts within 25 days
of to VAT-registered buyers, an invoice or within 20 after the close of
instrument of sale or transfer shall to prepared days following each taxable
citing the invoice number wherein the tax was the end of quarter.
imposed on the deemed sale. At the same time month.
the tax paid corresponding to the goods sold The VAT payable
should be separately indicated in the instrument Accomplished for each calendar
of sale. (Sec. 4.113-2, RR No. 16-2005) only for each quarter shall be
of the first 2 reduced by the
Consequences of issuing erroneous VAT months of total amount of
invoice or VAT official receipt each taxable taxes previously
quarter. paid for the
1. In case of non-VAT registered person who preceding 2
issues a VAT invoice/receipt shall be held months and/or
liable for: the sum of the
a. Payment of percentage tax if allowance excess
applicable; input tax carried
b. Payment of VAT without input tax; over and the VAT
c. 50% surcharge on tax due as provided withheld by the
for under Sec. 248(B); and government.
Deadline 20th day of 25th day of
2. In case a VAT-registered who issues a VAT following following
invoice/official receipt for a VAT-exempt month calendar quarter
sale without the words “VAT Exempt Sale,”
the transaction shall become taxable and Where to file the return and pay the Tax
the issuer shall be liable to pay VAT
thereon. The purchaser shall be entitled to GR: It shall be filed with and the tax paid to
claim an input tax credit on his purchase.
1. An Authorized Agent Bank (AAB);
FILING OF RETURNS AND PAYMENT 2. Revenue Collection Officer (RCO); or
3. Duly authorized city or municipal
Filing of return Treasurer, where such Treasurer is

Every person liable to pay the value-added tax a. Within the Philippines; and
imposed under this Title shall file a quarterly b. Located within the revenue district
return of the amount of his gross sales or where the taxpayer is registered or
receipts within twenty-five (25) days following

UNIVERSITY OF SANTO TOMAS 280

2021 GOLDEN NOTES
 Taxation Law
required to register. (Sec. 114(B),
NIRC)
XPN: As the Commissioner otherwise permits.
WITHHOLDING OF FINAL VALUE-ADDED TAX
ON SALES TO GOVERNMENT
Rule regarding the withholding of final VAT
on sales to government
The Government or any of its political
subdivisions, instrumentalities or agencies,
including government owned or controlled
corporations (GOCCs) shall, before making
payment on account of its purchase of goods
and/or services taxed at 12% shall deduct and
withhold a final VAT of 5% of the gross
payment.
The payment for lease or use of properties or
property rights to non-resident owners shall be
subject to 12% withholding tax at the time of
payment. For purposes of this section, the payor
or person in control of the payment shall be
considered as the withholding agent. (Sec.
114(C), NIRC)
NOTE: The five percent (5%) final VAT
withholding rate shall represent the net VAT
payable to the seller.
The remaining seven percent (7%) effectively
accounts for the standard input VAT for sales of
goods or services to government or any of its
political subdivisions, instrumentalities or
agencies including GOCCs, in lieu of the actual
Input VAT directly attributable or ratably
apportioned to such sales.
Should actual input VAT attributable to sale to
government exceed seven percent (7%) of gross
payments, the excess may form part of the
seller’s expense or cost.
If actual input VAT attributable to sale to
government is less than 7% of gross payment,
the difference must be closed to expense or cost.
The government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs, as well as private corporations,
individuals, estates and trusts, whether large or
non-large taxpayers, shall withhold ten percent
(12%) VAT with respect to the following
281
payments:
1. Lease or use of properties or property
rights owned by non-residents;
2. Services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; and
3. Other services rendered in the Philippines
by non-residents.
VAT withheld and paid for the non-resident
recipient (remitted using BIR Form No. 1600),
which VAT is passed on to the resident
withholding agent by the non-resident recipient
of the income, may be claimed as input tax by
said VAT-registered withholding agent upon
filing his own VAT Return, subject to the rule on
allocation of input tax among taxable sales, zero-
rated sales and exempt sales. The duly filed BIR
Form No. 1600 is the proof or documentary
substantiation for the claimed input tax or input
VAT.
Nonetheless, if the resident withholding agent is
a non-VAT taxpayer, said passed-on VAT by the
non-resident recipient of the income, evidenced
by the duly filed BIR Form No. 1600, shall form
part of the cost of purchased services, which
may be treated either as an "asset" or "expense",
whichever is applicable, of the resident
withholding agent.
The VAT withheld shall be remitted within 10
days following the end of the month the
withholding was made. (Sec. 4.114-2, RR No. 16-
2005)
NOTE: It was held in the case of Abakada Guro
Partylist v. Ermita, G.R. No. 168056, September 1,
2005, that since it has not been shown that the
class subject to the 5% final withholding tax has
been unreasonably narrowed, there is no reason
to invalidate the provision. It applies to all those
who deal with the government.
ADMINISTRATIVE AND PENAL SANCTIONS
Power of Commissioner to suspend the
business operations of taxpayer
The Commissioner or his authorized
representative is empowered to suspend the
business operations and temporarily close the
business establishment for any of the following
violations:
 National Taxation
1. In case of a VAT-registered person
a. Failure to issue receipts or invoices,
b. Failure to file a value-added tax return
as required under Section 114, or
c. Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter;

2. Failure of any person to register as

required under Section 236

The temporary closer of the establishment shall

be for the duration of not less than five (5) days
and shall be lifted only upon compliance with
whatever requirements prescribed by the
Commissioner in the closure order. (Sec. 115,
NIRC)

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2021 GOLDEN NOTES
 Taxation Law
PERCENTAGE TAXES: CONCEPT AND NATURE
As a rule, VAT is imposed on every sale, barter,
or exchange of goods or services and on
importations. However, there are instances
where the same does not apply because the
transaction is subject to other percentage taxes
(OPT) as required by the NIRC.
Percentage tax is a tax imposed on sale, barter,
exchange or importation of goods, or sale of
services based upon gross sales, value in money
of receipts derived by the manufacturer,
producer, importer or seller measured by
certain percentage of the gross selling price or
receipts. If the transaction is subject to OPT, it is
no longer subject to VAT. Nonetheless, OPT as
well as VAT may be imposed together with
excise taxes. (Tabag, 2015)

Tax Rates

COVERAGE BASIS TAX RATE

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

283
 National Taxation
COVERAGE BASIS TAX RATE
maturities of instruments:
•Maturity period is more than five years 1%
Life Insurance Companies Total premiums collected 2%
(except purely cooperative
companies or associations)
Agents of foreign insurance companies (except reinsurance premium):
Insurance agents authorized Total premiums collected 4%
under the Insurance Code to
procure policies of insurance
for companies not authorized
to transact business in the
Philippines
Owners of property obtaining Total premiums paid 5%
insurance directly with
foreign insurance companies
Proprietor, lessee or operator of the following:
Cockpits Gross receipts 18%
Cabarets, Night or Day Clubs Gross receipts 18%
videoke bars, karaoke bars,
karaoke televisions, karaoke
boxes and music lounges
Boxing exhibitions Gross receipts 10%
Professional basketball games Gross receipts 15%
Jai-alai and race track Gross receipts 30%
(operators shall withheld tax
on winnings)
Winnings on horse races  Winnings or 'dividends' 10%
 Winnings from double forecast/quinella and 4%
trifecta bets
 Prizes of owners of winning race horses 10%
Sale, Barter, Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or
Through Initial Public Offering
Sale, barter, exchange or other Gross selling price or gross value in money .60% of gross
disposition of shares of stock selling price
listed and traded through the or 6/10 of
Local Stock Exchange other 1%
than the sale by a dealer of
securities (Sec. 127 (A))
Sale, barter or exchange or Gross selling price or gross value in money
other disposition through
initial public offering (IPO) of Proportion of disposed shares to total outstanding shares after the
shares of stock in closely-held listing in the local stock exchange:
corporations (Sec. 127 (B))  Up to 25% 4%
 Over 25% but not over 33 1/3% 2%
 Over 33 1/3% 1%
(www.bir.gov.ph)

UNIVERSITY OF SANTO TOMAS 284

2021 GOLDEN NOTES
 Taxation Law
EXCISE TAX: CONCEPT AND NATURE
Excise tax is essentially a tax on goods,
products or articles
The term "excise tax" under Title VI of the 1997
NIRC relates to taxes applied to goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported. (Separate
opinion of J. Bersamin in CIR v. Pilipinas Shell
Petroleum Corp., G.R. No. 188497, 2014)
Kinds of excise taxes
1. Specific tax – imposed and based on
weight or volume capacity or any other
physical unit of measurement.
2. Ad valorem tax – imposed and based on
the selling price or other specified value of
the goods.
Two concepts of ‘excise’ tax
As used in the NIRC, excise taxes refer to taxes
applicable to certain specified goods or articles
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported into the
Philippines. Excise tax is essentially a tax on
property. (Sec. 129, NIRC; Chevron Philippines,
Inc. v. CIR, G.R No. 210836 September 1, 2015)
As used in classifying taxes according to tax
base, excise tax is “a tax upon the performance,
carrying on, or exercise of some right, privilege,
activity, calling or occupation. This is derived
from American Jurisprudence. Examples are
income tax, transfer tax, VAT, percentage tax and
documentary stamp tax. The meaning of “excise
tax” has undergone a transformation, morphing
from the Am Jur definition to its current
signification in the NIRC which is a tax on certain
specified goods or articles.
The payment of excise taxes is the direct
liability of the manufacturer or producer
The production, manufacture or importation of
the goods belonging to any of the categories
enumerated in Title VI of the NIRC (i.e., alcohol
products, tobacco products, petroleum products,
automobiles and non-essential goods, mineral
products) are not the sole determinants for the
proper levy of the excise tax. It is further
285
required that the goods be manufactured,
produced or imported for domestic sale,
consumption or any other disposition. The
accrual of the tax liability is, therefore,
contingent on the production, manufacture or
importation of the taxable goods and the
intention of the manufacturer, producer or
importer to have the goods locally sold or
consumed or disposed in any other manner. This
is the reason why the accrual and liability for the
payment of the excise tax are imposed directly
on the manufacturer or producer of the taxable
goods and arise before the removal of the goods
from the place of their production. (Separate
opinion of J. Bersamin in CIR v. Pilipinas Shell
Petroleum Corp., G.R. No. 188497, 2014)
Major classification of excisable articles
1. Alcohol Products (Secs. 141 – 143, NIRC)
a. Distilled Spirits (Sec. 141, NIRC)
b. Wines (Sec. 142, NIRC)
c. Fermented Liquors (Sec. 143, NIRC)
2. Tobacco Products (Secs. 144 – 146, NIRC)
a. Tobacco Products (Sec. 144, NIRC)
b. Cigars and Cigarettes (Sec. 145,
NIRC)
c. Inspection Fee (Sec. 146, NIRC)
3. Petroleum Products (Sec. 148, NIRC)
4. Miscalleneous Articles (Secs. 149 – 150,
NIRC)
a. Automobiles (Sec. 149, NIRC)
b. Non-Essential Goods (Sec. 150,
NIRC)
5. Mineral Products (Sec. 151, NIRC)
NOTE: Oil companies are exempt from the
payment of excise tax on petroleum products
manufactured and sold by them to international
carriers. Section 135 (a), in fulfillment of
international agreement and practice to exempt
aviation fuel from excise tax and other
impositions, prohibits the passing of the excise
tax to international carriers who buys petroleum
products from local manufacturers/sellers. (CIR
v. Pilipinas Shell Petroleum Corporation, G.R. No.
188497. February 19, 2014)*
NOTE: 2017 Edition of the Golden Notes quoted
the 2012 decision in CIR v. Pilipinas Shell. A
motion for reconsideration filed by Pilipinas Shell
was granted on 2014 reversing the 2012 ruling.
Accordingly, oil companies are now exempt from
the payment of excise tax on petroleum products
manufactured and sold by them to international
 National Taxation
carriers.
Pursuant to Section 135(c), petroleum products
sold to entities that are by law exempt from
direct and indirect taxes are exempt from excise
tax. The phrase “which are by law exempt from
direct and indirect taxes describes the entities to
whom the petroleum products must be sold in
order to render the exemption operative. Section
135(c) should thus be construed as an
exemption in favor of the petroleum products on
which the excise tax was levied in the first place.
The exemption cannot be granted to the buyers
— that is, the entities that are by law exempt
from direct and indirect taxes — because they
are not under any legal duty to pay the excise
tax. (Chevron Philippines, Inc. vs. Commissioner of
Internal Revenue, G.R. No. 210836, September 1,
2015)
Q: “San Mig Light” has been registered since
1999 as a “Medium Priced Brand.” It was
later on confirmed as a new brand. However,
the BIR issued a Notice of Discrepancy
against San Miguel Corporation (SMC),
stating that San Mig Light was a variant of
SMC’s existing beer products and must,
therefore, be subject to the higher excise tax
rate for variants. The BIR assessed SMC and
directed it to pay deficiency excise taxes
since 1999. SMC, after paying for the excise
tax, filed a claim for refund. Due to the BIR’s
inaction, SMC filed a petition for review
before the CTA, which ordered the refund or
grant of a tax credit certificate in favor of
SMC.
The BIR argued that "San Mig Light," is not a
new brand but merely a low-calorie variant
of "San Miguel Pale Pilsen." Thus, the
application of the higher excise tax rate for
variant products is appropriate and SMC
should not be entitled to a refund or issuance
of a tax credit certificate.
SMC countered that "San Mig Light" is a new
brand; that the classification of "San Mig
Light" as a new and medium-priced brand
may not be revised except by an act of
Congress; and that the CTA did not err in
granting its claim for refund or issuance of
tax credit certificate.
1. Is “San Mig Light” a new brand?
2. Can the BIR issue a Notice of
Discrepancy, effectively changing “San
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Mig Light’s” classification from a new to
brand to a variant?
A:
1. YES, San Mig Light is a new brand.
The Notice of Discrepancy was nullified by
the subsequent issuance of Revenue
Memorandum Order No. 6-2003—
Prescribing the Guidelines and Procedures in
the Establishment of Current Net Retail
Prices of New Brands of Cigarettes and
Alcohol Products Pursuant to Revenue
Regulations No. 9-2003—which included
"San Mig Light” as a new brand.
Before R.A. No. 9334 (which amended
Section 143 of the Tax Code) was passed,
the Tax Code under R.A. No. 8240 defined a
"variant of a brand" as “a brand on which a
modifier is prefixed and/or suffixed to the
root name of the brand and/or a different
brand which carries the same logo or design
of the existing brand.
The variant contemplated under the Tax
Code has a technical meaning. The purpose
behind the definition was to properly tax
brands that were presumed to be riding on
the popularity of previously registered
brands by being marketed under an almost
identical name with a prefix, suffix, or a
variant. It seeks to address price
differentials employed by a manufacturer
on similar products differentiated only in
brand or design.
"San Mig Light" and "Pale Pilsen" do not
share a root word. Neither is there an
existing brand in the list called "San Mig" to
conclude that "Light" is a suffix rendering
"San Mig Light" as its "variant." As such,
"San Mig Light" should be considered as
one brand name.
2. NO. The BIR cannot change “San Mig
Light’s” classification from a new brand
to a variant.
Any reclassification of fermented liquor
products should be by act of Congress.
Section 143 of the Tax Code, as amended by
R.A. No. 9334, provides for this
classification freeze referred to by the
parties: “Such classification of new brands
286
 Taxation Law
and brands introduced between January 1,
1997 and December 31, 2003 shall not be
revised except by an act of Congress.” This
Court discussed the legislative intent
behind the classification freeze, that is, to
deter the potential for abuse if the power to
reclassify is delegated and much discretion
is given to the Department of Finance and
Bureau of Internal Revenue.

In any event, BIR’s letters and Notices of

Discrepancy, which effectively changed San
Mig Light's brand's classification from "new
brand to variant of existing brand,"
necessarily changes San Mig Light's tax
bracket. Based on the legislative intent
behind the classification freeze provision,
BIR has no power to do this. (CIR v. San
Miguel Corp., G.R. No. 205045, January 25,
2017)

287
 National Taxation
DOCUMENTARY STAMP TAX: sales of real property are contemplated therein.
CONCEPT AND NATURE (CIR v. La Tondeña Distillers, Inc. (LTDI (now
Ginebra San Miguel), G.R. No. 175188, 15 July
2015, Del Castillo, J.)
NATURE AND PERSONS LIABLE FOR THE TAX

In General

The documentary stamp taxes under Title VII of

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

Exception

Whenever one of the parties to the taxable

transaction is exempt from the tax imposed
under Title VII of the Code, the other party
thereto that is not exempt shall be the one
directly liable for the tax. (RR No. 09 – 2000)

Q: Company A entered into a Plan of Merger

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

A: The contention of Company B will prevail

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

UNIVERSITY OF SANTO TOMAS 288

2021 GOLDEN NOTES
 Taxation Law

TAX REMEDIES UNDER THE NATIONAL a. Ordinary civil action

INTERNAL REVENUE CODE i. Court collection filed in court
ii. Hold-order against the
departure of erring taxpayer
LEGAL BASIS OF TAX REMEDIES b. Criminal action – pursuing criminal
prosecution of taxpayer
1. Government – Lifeblood doctrine
2. Taxpayer – Due process clause of the NOTE: The government may use these remedies
Constitution singly or independently of each other, repeated
or some or all of them simultaneously until there
REMEDIES OF THE GOVERNMENT is full settlement of the taxpayer’s liability.

These are courses of action provided or allowed REMEDIES OF THE TAXPAYER

by law to implement the tax laws or enforce tax
collection. It is an action available to either the government
or a taxpayer whether judicial or extrajudicial, to
1. Administrative or Extrajudicial enforce collection of taxes, on the part of the
remedies former, or to prevent arbitrary collection of
a. Assessment taxes, abuses, or harassment, by those enforcing
b. Compromise the tax and payment of illegal taxes, in the part
c. Tax lien of the latter.
d. Distraint
e. Levy 1. Administrative or Extrajudicial
f. Garnishment Remedies
g. Forfeiture of real property a. Before payment:
h. Public sale of forfeited properties i. Tax minimization (Tax
i. Suspension of business operation avoidance)
j. Enforcement of administrative fines ii. Secure BIR ruling or opinion of
(surcharge and interest) the CIR
k. Requiring the filing of bond to secure iii. c. Amendment of the tax return
tax liability – within three (3) years from
l. Requiring proof of filing Income Tax submission of that which is to
Return be amended provided
m. Deportation of aliens there is no investigation/
n. Use of national tax registry audit or assessment
o. Use of authorized cash machines by yet.
business establishments iv. Disputing an assessment
p. Requiring printers to secure authority v. Compromise of the civil and/or
from BIR to print receipts/invoices criminal
q. Obtaining information from others vi. Abatement of tax liability
about subject taxpayer vii. Abandonment of imported
r. Abatement goods
s. Inventory taking/Surveillance
t. Prescribing presumptive gross sale or b. After payment:
gross receipts i. Tax refund
u. Prescribing real estate values ii. Amendment of return with
v. Termination of tax period payment and claim for refund
w. Arrest, search and seizure in certain or credit within two (2) years
cases from payment
x. Giving informer’s rewards iii. Payment of the assessed tax
y. Inquiring into bank deposits in certain without disputing the same and
cases claim for tax refund or credit
within two (2) years from
2. Judicial remedies payment

289
 National Taxation
iv. Question the validity of
forfeiture
v. Redemption of real property
2. Judicial Remedies
a. Civil Remedies
i. Appeal to the CTA
ii. Secure injunction order from
the CTA
iii. Appeal from CTA to SC
iv. Sue internal revenue officer for
damages caused in the
performance of their duties
arbitrarily
v. Action to contest forfeiture of
chattel, enjoin its sale or
recover proceeds of sale
vi. Action to question the validity
of sale of properties under
distraint, levy, garnishment, or
tax lien
b. Criminal Remedies – criminal action
against tax officials in the ordinary
courts for harassment, injury and the
like.
c. Special Remedies
i. Appeal to the President of the
Republic in case of revocation
of license to do business in the
country
ii. Secure favorable legislation by
participating public hearing
iii. Publishing tax views in the
media or use of broadcast
media
iv. Lobbying in Congress
v. People’s power or initiatives
vi. Use of ballot boxes to choose
public officials that are
sympathetic to taxpayers
vii. Running for a seat in the
Congress to influence revenue
bills
ASSESSMENT OF INTERNAL REVENUE TAXES
Tax Assessment
A formal written notice/communication with the
computation of the tax liability sent to the
taxpayer and demanding for the settlement of a
due tax liability within the indicated period
thereof.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Neither the NIRC nor the revenue regulations
governing the protest of assessments provide a
specific definition or form of an assessment.
However, the NIRC defines the specific functions
and effects of an assessment. An assessment
informs the taxpayer that he or she has tax
liabilities. But not all documents coming from
the BIR containing a computation of the tax
liability can be deemed assessments. (CIR vs.
PASCOR, 309 SCRA 402)
In the context in which it is used in the NIRC, an
assessment is a written notice and demand
made by the BIR on the taxpayer for the
settlement of a due tax liability that is there
definitely set and fixed. (Adamson v. CA, 588
SCRA 27)
Tax assessment is the official action of an officer
authorized by law in ascertaining the amount of
tax due under the law from a taxpayer. This
action necessarily involves:
1. The computation of the sum due;
2. Giving notice to that effect to the taxpayer;
and
3. The making, simultaneously with or
sometime after the giving of notice, of a
demand upon him for the payment of the
deficiency stated. (Tabag, 2015)
Importance of a tax assessment
TO THE
TO THE GOVERNMENT
TAXPAYER
1. To enforce taxpayer
liabilities and certain
1. To be
matters that relate to
informed of
it, such as the
his liabilities;
imposition of
2. To determine
surcharges and
the period to
interests;
protest;
2. Statute of Limitations;
3. To determine
3. Establishment of tax
prescription
liens; and
of government
4. In estimating the
claim.
revenues that may be
collected.
What Does Not Constitute an Assessment
1. The advice of tax deficiency and preliminary
five-day letter given by the CIR to an
employee of taxpayer are not valid
substitutes for the mandatory notice in
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 Taxation Law
writing of the legal and factual bases of the
assessment
2. The revenue officers’ Affidavit-Report,
which was attached to the criminal
Complaint filed with the Department of
Justice, does not constitute an assessment.
(CIR vs. PASCOR)
A written communication by a revenue officer of
tax liability of the taxpayer, giving him an
opportunity to contest or disprove the BIR
examiner’s findings is not an assessment since it
is yet indefinite. The said recommendation
letter served merely as the prima facie basis for
filing criminal information for the violation of
the NIRC. (Adamson v. CA 588 SCRA 27)
Kinds of assessments
1. Self-assessment (Section 56(A), NIRC) –
When the taxpayer computes his own
liability, files his return and pays the tax
based on his computation.
2. Deficiency assessment (Section 56(B),
NIRC) – this occurs upon discovery of the
BIR that the self-assessment was either
deficient or when no return was made by
the taxpayer. (Ingles, 2015)
Q: Do all types of taxes require issuance of
assessment?
A:
GR: Internal Revenue Taxes are self-assessing
and do not require the issuance of an
assessment notice in order to establish the tax
liability of a taxpayer. (Tupaz v. Ulep, 316 SCRA
118) The NIRC follows the pay-as-you-file
system of taxation under which the taxpayer
computes his own tax liability, prepares the
return, and pays the tax as he files the return.
XPN:
1. When the taxable period of a taxpayer is
terminated (Sec. 6 (D), NIRC)
2. In case of deficiency tax liability arising from
a tax audit conducted by the BIR (Sec. 56 (B),
NIRC)
3. Tax lien (Sec. 219, NIRC)
4. Dissolving corporation (Sec. 52 (c), NIRC)
5. Improperly Accumulated Earnings Tax (Sec.
29, NIRC)
291
Modes of Service
1. Personal service
2. Service by mail
3. Substituted delivery
Service to the tax agent/practitioner, who is
appointed by the taxpayer, shall be deemed
service to the taxpayer. (RR No. 18-2013)
When assessment is made
An assessment is deemed made only when the
Collector of Internal Revenue RELEASES, MAILS
OR SENDS such notice to the taxpayer. (CIR, v.
Pascor Realty and Development Corporation, et.
al. G.R. No. 128315, June 29, 1999)
Principles governing tax assessments (PAD3)
1. Prima facie presumed correct and made
in good faith
Assessments are prima facie presumed
correct and made in good faith, with the
taxpayer having the burden of proving
otherwise. (FELS Energy, Inc. V. The Province
of Batangas, et al., G.R. No. 168557, February
16, 2007) In the absence of any irregularities
in the performance of official duties, an
assessment will not be disturbed. Failure to
present proof of error in assessments will
justify judicial affirmance of said
assessment. (ACMDC v. CA, 242 SCRA 289)
The burden of proof is on the taxpayer
contesting the validity or correctness of an
assessment to prove not only that the CIR is
wrong but the taxpayer is right. Otherwise,
the presumption in favor of correctness of
tax assessment stands.
Reasons for presumption of correctness of
assessments:
a. Lifeblood Theory
b. Presumption of regularity in the
performance of public functions
c. The likelihood that the taxpayer will
have access to the relevant
information.
d. The desirability of bolstering the
record-keeping requirements of the
NIRC.
 National Taxation
When prima facie correctness of a tax
assessment does not apply:
Upon proof that an assessment is utterly
without foundation, meaning it is arbitrary
and capricious. Where the BIR has come out
with a “naked assessment” i.e., without any
foundation character, the determination of
the tax due is without rational basis. (CIR v.
Hantex Trading Co. Inc., G.R, No. 136975,
March 31, 2005)
2. Should be based on Actual facts. (CIR vs.
Benipayo, G.R. No. L-13656, January 31,
1962)
However, in the absence of the accounting
records of a taxpayer, his tax liability may be
determined by estimation. The CIR is not
required to compute such tax liabilities with
mathematical exactness. Approximation in
the calculation of the taxes due is justified.
However, the rule does not apply where the
estimation is arrived at arbitrarily and
capriciously. (CIR v. Hantex Trading Co. Inc.,
G.R, No. 136975, March 31, 2005)
An assessment on estimates is prima facie
valid and lawful where it does not appear to
have been arrived at arbitrarily or
capriciously. The burden of proof is upon
the complaining party to show clearly that
the assessment is erroneous. Failure to
present proof of error in the assessment will
justify the judicial affirmance of the said
assessment. (RMC 23-2000)
3. Discretionary on the part of the
Commissioner
Mandamus cannot lie to compel the CIR to
impose deficiency tax assessment. The CIR’s
power to assess is a discretionary one.
(Meralco v. Sevillano, G.R. No. L-46245,
October 23, 1982)
4. Must be Directed to the right party
An affidavit, which was executed by the
revenue officers stating the tax liabilities of
the taxpayer and attached to a criminal
complaint for tax evasion cannot be deemed
a valid assessment, not having been received
by the taxpayer and thus the taxpayer was
not informed of the law and facts in which
the assessment was made. (CIR v. Pascor
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Realty Dev. Corp., G.R. No 128315, June 19,
1999)
5. The authority vested in the
Commissioner to assess taxes may be
Delegated (Sec.7, NIRC)
The authority to make tax assessments may
be delegated to subordinate officers. Said
assessment has the same force and effect as
that issued by the CIR if not revised or
reviewed by the latter. (Oceanic Network
Wireless Inc. v. CIR, GR 148380, December 9,
2005)
Before the delegated revenue officer can
conduct examination or assessment, there
must be a clear grant of authority. This
authority is embodied in a Letter of
Authority (LOA) (CIR vs. Sony Philippines, Inc.
GR No. 178697, November 17, 2010)
Best evidence obtainable
Pursuant to CIR’s power to make assessment,
the CIR shall assess the proper tax on the best
evidence obtainable: (FINE)
1. When a report required by law as a basis for
assessment of any internal revenue tax shall
not be forthcoming within the time fixed by
law or regulation, or
2. Any such report is false, incomplete or
erroneous. (Sec. 6(B), NIRC)
This rule applies when a tax report is required
by law for the purpose of assessment and it is
not available or when the report is incomplete
or fraudulent. (Sy Po vs. CTA, G.R. No. 81446,
August 18, 1988)
The "best evidence" includes the corporate and
accounting records of the taxpayer who is the
subject of the assessment process, the
accounting records of other taxpayers engaged
in the same line of business, including their
gross profit and net profit sales. Such evidence
also includes data, record, paper, document or
any evidence gathered by internal revenue
officers from other taxpayers who had personal
transactions or from whom the subject taxpayer
received any income; and record, data,
document and information secured from
government offices or agencies.
The law allows the BIR access to all relevant or
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 Taxation Law
material records and data in the person of the
taxpayer. It places no limit or condition on the
type or form of the medium by which the record
subject to the order of the BIR is kept. The
purpose of the law is to enable the BIR to get at
the taxpayer's records in whatever form they
may be kept. Such records include computer
tapes of the said records prepared by the
taxpayer in the course of business.
The best evidence obtainable may consist of
hearsay evidence, such as the testimony of third
parties or accounts or other records of other
taxpayers similarly circumstanced as the
taxpayer subject of the investigation. As a rule,
administrative agencies such as the BIR are not
bound by the technical rules of evidence. (CIR v.
Hantex Trading Co., Inc., GR No. 136975, March
31, 2005)
Q: BIR assessed the taxpayer for alleged
deficiency taxes. The assessment was based
on photocopies of 77 Consumption Entries
furnished by an informer, the taxpayer
understated its importations. However, the
BIR failed to secure certified true copies of
the subject Consumption Entries from the
Bureau of Customs since, according to the
custodian, the originals had been eaten by
termites. Can the BIR base its assessment on
mere photocopies of records/documents?
A: NO. While it is true that the CIR can assess
taxpayers based on the “best evidence
obtainable,” such best evidence obtainable does
not include photocopies of records/documents
which are mere scraps of paper and are of no
probative value as basis for any deficiency
income or business taxes against a taxpayer.
(CIR v. Hantex Trading Co., Inc., GR 136975, Mar.
31, 2005)
Instances when CIR may make or amend a
tax return
The CIR shall make or amend the return from his
own knowledge and from such information as he
can obtain through testimony or otherwise:
1. In case a person fails to file a required
return or other document at the time
prescribed by law; or
2. Willfully or otherwise files a false or
fraudulent return or other document. (Sec.
6(B), NIRC)
293
When CIR shall compute income for taxation
The CIR shall compute income for taxation in
accordance with the method as in his opinion
clearly reflects income:
1. If no method of accounting was employed by
the taxpayer, or
2. The accounting method employed does not
clearly reflect the income. (Sec. 43, NIRC)
Constructive Method of Income
Determination
Some of the methods that BIR may use to
determine whether a taxpayer has not reported
all of his income during a particular taxable year
are: (PeCaN BUSTS)
1. Net worth method
2. Cash expenditure method
3. Percentage method
4. Bank deposit method
5. Unit and value method
6. Third party information or access to records
method
7. Surveillance and assessment method
8. Such methods as in the opinion of the BIR
Commissioner clearly reflect the income
Net worth method
A method of reconstructing income which is
based on the theory that if the taxpayer’s net
worth has increased in a given year in an
amount larger than his reported income, he has
understated his income for the year.
It is a method of determining income where a
government can prove with reasonable certainty
the increase of taxpayer’s net worth at a given
date by reasonable inference with independent
evidence such as bank deposits or purchase of
assets. (Holland v. U.S., 348, U.S., 121)
Section 43 of the NIRC allows the CIR to use any
method of computation or accounting which
would more clearly reflect the income of the
taxpayer. (Collector v. Avelino, 3 SCRA 57)
The formula of the taxpayer’s net worth: ASSETS
– LIABILITIES = NET WORTH. His net worth at
the beginning of the taxable year is then
compared with his net worth at the end of the
year. Any increase in the net worth is presumed
 National Taxation
to be income not declared for tax purposes.
Presumption: The unexplained increase in net
worth of the taxpayer is derived from taxable
sources.
The inference is disputable in the sense that the
taxpayer is not precluded from adducing
evidence to show that the excess was derived
from items which are excluded from gross
income.
PROCEDURAL DUE PROCESS
IN TAX ASSESSMENTS
Assessment Process
The assessment process starts with the self-
assessment by the taxpayer of his tax liability,
the filing to the tax return, and the payment of
the entire tax due shown in his tax return in
accordance with the methods and within the
dates prescribed in the law and regulations.
(Mamalateo 2014)
Upon discovery of the BIR that the self-
assessment was either deficient or when no
return was made by the taxpayer, the BIR issues
deficiency assessment. (Ingles, 2015)
Deficiency Assessment Process
A. Tax Audit (including the Letter of Authority)
B. Issuance of Preliminary Assessment Notice
(PAN)
C. Reply
D. Issuance Formal Letter of Demand and Final
Assessment Notice (FLD/FAN)
E. Disputed assessment
Letter of authority and tax audit
It is an official document that authorizes a
revenue officer to examine and scrutinize a
taxpayer’s books of accounts and other
accounting records, in order to determine the
taxpayer’s correct internal revenue tax
liabilities. (Sec. 13, NIRC)
There must be a grant of authority before any
revenue officer can conduct an examination or
assessment and the revenue officer must not go
beyond authority. Otherwise, the assessment or
examination is a nullity.
A Letter of Authority should cover a taxable
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
period not exceeding one taxable year. The
practice of issuing LAs covering audit of
“unverified prior years” is therefore prohibited.
(CIR v. Sony Philippines, Inc., G.R. No. 178697,
November 17, 2010)
Cases which need not be covered by a valid
LA:
1. Cases involving civil or criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement Services;
and
2. Policy cases under audit by the Special
Teams in the National Office. (RMO 36-1999)
Service of Letter of Authority
It must be served to the taxpayer within 30 days
from its date of issuance; otherwise, it shall
become null and void. The taxpayer shall then
have the right to refuse the service of this LA,
unless the LA is revalidated.
Q: How is LA revalidated? How often can it be
revalidated?
A: Revalidated through the issuance of a new LA.
It can be revalidated:
1. only once, if issued by the Regional
Director;
2. twice, if issued by the CIR.
The suspended LA(s) must be attached to the
new issued LA. (RMO 38-1988)
Tax audit
This includes the examination of books of
accounts and other accounting records of the
taxpayers by revenue officers to determine the
correct tax liability. (Mamalateo, 2014)
Period within which an RO should conduct an
audit
A revenue officer is allowed only 120 days to
conduct the audit and submit the required
report of investigation from the date of receipt
of a LA by the taxpayer. If the RO is unable to
submit his final report of investigation within
the 120-day period, he must then submit a
Progress Report to his Head of Office and
surrender the LA for revalidation.
Q: How many times can a taxpayer be
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 Taxation Law
subjected to examination and inspection for
the same taxable year?
A: GR: Only once per taxable year
XPN: (FRC3)
1. When the CIR determines that Fraud,
irregularities, or mistakes were committed
by the taxpayer;
2. When the taxpayer himself requests for the
Re-investigation or re-examination of his
books of accounts and it was granted by the
commissioner;
3. When there is a need to verify the taxpayer’s
Compliance with withholding and other
internal revenue taxes as prescribed in a
Revenue Memorandum Order issued by the
Commissioner;
4. When the taxpayer’s Capital gains tax
liabilities must be verified; or
5. When the Commissioner chooses to exercise
his power to obtain information relative to
the examination of other taxpayers. (Secs. 5
and 235, NIRC)
Q: In 2010, pursuant to a LA issued by the
Regional Director, Mr. Abcede was assessed
deficiency income taxes by the BIR for the
year 2009. He paid the deficiency. In 2011,
Mr. Abcede received another LA for the same
year 2009, this time from the National
Investigation Division, on the ground that Mr.
Abcede's 2009 return was fraudulent. Mr.
Abcede contested the LA on the ground that
he can only be investigated once in a taxable
year. Decide. (2013 BAR)
A: Mr. Abcede’s contention is not correct.
While the general rule is to the effect that for
income tax purposes, a taxpayer must be subject
to examination and inspection by the internal
revenue officers only once in a taxable year, this
will not apply if there is fraud, irregularity or
mistakes as determined by the Commissioner. In
the instant case, what triggered the second
examination is the findings by the BIR that Mr.
Abcede’s 2009 return was fraudulent,
accordingly, the examination is legally justified.
(Sec. 235, NIRC)
Principle of estoppel
The error made by a tax official in the
assessment of his tax liabilities does not have the
effect of relieving the taxpayer from the
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obligation to pay the full amount of his tax
liability, for taxes are fixed by law and the
government is never estopped to collect the
legitimate taxes because of errors committed by
its agents. (Commissioner v. Atlas Consolidated
Mining Co., 102 SCRA 246)
Informal conference
Presently, there is no requirement for the
issuance of a Notice for Informal Conference. RR
18-2013 deleted such requirement.
Notice of Discrepancy
This replaces the Notice of Informal Conference.
It will be issued to the taxpayer if he is found to
be liable for deficiency taxes during
investigation conducted by a revenue officer.
A Notice of Discrepancy is not yet a deficiency
tax assessment. It only aims to fully afford the
taxpayer with an opportunity to present and
explain his side on the discrepancies found.
The taxpayer must be able to present and
explain its side on the discrepancies noted by
the BIR within 5 days from receipt of the notice.
If the taxpayer needs more time to present
documents, he may submit such documents after
the discussion but within 30 days from receipt of
the Notice of Discrepancy.
The discussion of discrepancies shall not extend
beyond 30 days from the receipt of the notice.
Within 10 days from the conclusion of the
discussion of discrepancies, the investigating
office shall endorse the case for review and
approval for issuance of a Preliminary
Assessment Notice if the taxpayer is still found
to be liable for deficiency taxes. (RR. No. 22-
2020)
Q: On July 15, 2009, the CIR issued to DEF,
Inc. a Letter of Notice (LN) informing it of the
discrepancy found after comparing its tax
returns for Calendar Year (CY) 2007 with the
Reconciliation and Third-Party Matching
under the Tax Reconciliation System. The LN
was received and signed by a certain Malou
Bohol on July 24, 2009. Subsequently, the BIR
issued a follow-up letter dated August 24,
2009. The letter was received and signed by a
certain Amado Ramos. Due to the inaction of
 National Taxation
DEF, Inc., the CIR issued to it, on January 12,
2010, the following: (1) Letter of Authority
(LOA) for the examination of its book of
accounts; and other accounting records and
(2) a Notice of Informal Conference (NIC). On
March 29, 2010, the CIR issued a Preliminary
Assessment Notice (PAN) with attached
Details of Discrepancies that found DEF, Inc.
liable for deficiency income tax (IT) and
value-added tax (VAT). On July 20, 2010, the
CIR issued a Final Assessment Notice (FAN),
assessing DEF, Inc. with deficiency VAT and
deficiency IT. On November 28, 2012, the
Revenue District Officer (RDO) issued a
Preliminary Collection Letter requesting
DEF, Inc. to pay the assessed tax liability
within 10 days from notice. On January 23,
2013, the RDO issued a Final Notice Before
Seizure (FNBS) giving DEF, Inc. the last
opportunity to settle its tax liability within
10 days from notice. Are the assessments
made against DEF, Inc. for the deficiency IT
and deficiency VAT are void?
A: YES. Section 228 of the National Internal
Revenue Code (NIRC) of 1997, as amended,
requires the assessment to inform the taxpayer
in writing of the law and the facts on which the
assessment is made; otherwise, the assessment
shall be void. Section 3 of Revenue Regulations
(RR) 12-9928 dated September 6, 1999
highlights the due process requirement in
Section 228 of the NIRC. service of the PAN or
the FAN to the taxpayer may be made by
registered mail.
Under Section 3(v), Rule 131 of the Rules of
Court, there is a disputable presumption that "a
letter duly directed and mailed was received in
the regular course of the mail." However, the
presumption is subject to controversion and
direct denial, in which case the burden is shifted
to the party favored by the presumption to
establish that the subject mailed letter was
actually received by the addressee. In view of
DEF, Inc.'s categorical denial of due receipt of
the PAN and the FAN, the burden was shifted to
the CIR to prove that the mailed assessment
notices were indeed received by DEF, Inc. or by
its authorized representative. As ruled by the
CTA En Banc, the CIR's mere presentation of
Registry Receipt Nos. 5187 and 2581 was
insufficient to prove DEF, Inc.'s receipt of the
PAN and the FAN. It held that the witnesses for
the CIR failed to identify and authenticate the
signatures appearing on the registry receipts;
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
thus, it cannot be ascertained whether the
signatures appearing in the documents were
those of DEF, Inc.'s authorized representatives.
(Commissioner of Internal Revenue v. T Shuttle
Services, Inc., G.R. No. 240729, August 24, 2020)
Preliminary assessment notice
If after review and evaluation by the
Commissioner or his duly authorized
representative, as the case may be, it is
determined that there exists sufficient basis to
assess the taxpayer for any deficiency tax or
taxes, the said Office shall issue to the taxpayer a
PAN for the proposed assessment. It shall show
in detail the facts and the law, rules and
regulations, or jurisprudence on which the
proposed assessment is based. (RR No. 18-2013,
emphasis supplied)
NOTE: Prior to the issuance of the PAN, the
taxpayer may be allowed to make voluntary
payments of probable deficiency taxes and
penalties. (RMO 11-2014)
Requirements of a valid PAN
1. In writing; and
2. Should inform the taxpayer of the law and
the facts on which the assessment is made.
(Sec. 228, NIRC)
The sending of PAN to taxpayer to inform him of
the assessment made is but part of the “due
process requirement in the issuance of a
deficiency tax assessment,” the absence of which
renders nugatory any assessment made by the
tax authorities. Therefore, for its failure to send
the PAN stating the facts and the law on which
the assessment was made as required by the
law, the assessment made by CIR is void. (CIR v.
Metro Star Suprema, Inc., G.R. No. 185371,
December 8, 2010)
Exceptions to issuance of PAN
GR: There must be a PAN issued by the BIR
before issuing a Formal Letter of Demand
(FLD)/ Final Assessment Notice (FAN)
XPN: PAN is not required in the following
instances: (MEDEC)
1. When the finding for any deficiency tax is
the result of Mathematical error in the
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 Taxation Law
computation of the tax appearing on the face
of the tax return filed by the taxpayer; or
2. When the Excise tax due on excisable
articles has not been paid; or
3. When a Discrepancy has been determined
between the tax withheld and the amount
actually remitted by the withholding agent;
or
4. When an article locally purchased or
imported by an Exempt person, such as, but
not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold,
traded or transferred to non-exempt
persons (Sec. 228, NIRC); or
5. When a taxpayer who opted to claim a
refund or tax credit of excess creditable
withholding tax for a taxable period was
determined to have Carried over and
automatically applied the same amount
claimed against the estimated tax liabilities
for the taxable quarter or quarters of the
succeeding taxable year. (Sec. 3.1.2, RR No.
18-2013)
In the above-cited cases, a FLD/FAN shall be
issued outright. (2002 BAR)
Q: In the investigation of the withholding tax
returns of AZ Medina Security Agency (AZ)
for the taxable years 1997 and 1998, a
discrepancy between the taxes withheld
from its employees and the amounts actually
remitted to the government was found.
Accordingly, before the period of
prescription commenced to run, the BIR
issued an assessment and a demand letter
calling for the immediate payment of the
deficiency withholding taxes in the total
amount of P250,000.00. Counsel for AZ
protested the assessment for being null and
void on the ground that no pre-assessment
notice had been issued. Is the contention of
the counsel tenable? (2002 BAR)
A: NO. The contention of the counsel is
untenable. Sec. 228, NIRC expressly provides
that no pre-assessment notice is required when
a discrepancy has been determined between the
tax withheld and the amount actually remitted
by the withholding agent. Since the amount
assessed relates to deficiency withholding taxes,
the BIR is correct in issuing the assessment and
demand letter calling for the immediate
payment of the deficiency withholding taxes.
297
Q: Mr. Tiaga has been a law-abiding citizen
diligently paying his income taxes. On May 5,
2014, he was surprised to receive an
assessment notice from the BIR informing
him of a deficiency tax assessment as a result
of a mathematical error in the computation
of his income tax, as appearing on the face of
his income tax return for the year 2011,
which he filed on April 15, 2012. Mr. Tiaga
believes that there was no such error in the
computation of his income tax for the year
2011. Based on the assessment received by
Mr. Tiaga, may he already file a protest
thereon? (2014 BAR)
A: YES. Mr. Tiaga may consider the assessment
notice as a final assessment notice and his right
to protest within 30 days from receipt may now
be exercised by him.
When the finding of a deficiency tax is the result
of mathematical error in the computation of the
tax appearing on the face of the return, a pre-
assessment notice shall not be required, hence,
the assessment notice is a final assessment
notice. (Sec. 228, NIRC; RR No. 18-2013)
Reply to Pan
Period for the taxpayer to respond to PAN via
“Reply”
The taxpayer has 15 days from receipt of PAN to
file a written reply contesting the proposed
assessment.
Effect of taxpayer’s failure to respond to PAN
The taxpayer shall be considered in default, in
which case, a FLD/FAN shall be issued calling for
payment of the taxpayer's deficiency tax liability,
inclusive of the applicable penalties. (Par. 2, Sec.
3.1.1, RR No. 18-2013)
For the purpose of contesting in writing the
findings contained in a PAN, the regulations use
the term “reply” to distinguish the written
objections against a FAN issued by the BIR,
where the generic term “protest” or the specific
term “request for reconsideration” or “request
for reinvestigation” is utilized.
The failure to file a reply to PAN will not bar the
taxpayer from protesting the FAN because PAN
is not the final assessment which can be
 National Taxation
protested as contemplated under the NIRC.
Formal letter of demand and final
assessment notice
Issuance of FLD or FAN
The CIR or his duly authorized representative
may issue FLD or FAN:
1. If there is no need to issue a PAN, because
the circumstances show that it fall within
the exceptions for the issuance of PAN;
2. If the taxpayer is in default for failure to
respond to a PAN within a period of 15 days
from the receipt of PAN; or
3. If the CIR or his duly authorized
representative does not agree with the
justifications stated by the taxpayer in his
reply to the PAN. (Domondon, 2014)
The FLD/FAN calling for payment of the
taxpayer's deficiency tax or taxes shall state the
facts, the law, rules and regulations, or
jurisprudence on which the assessment is based;
otherwise, the assessment shall be void. (RR No.
18-2013)
The FAN and FLD should always go together. The
law requires that the factual and/or legal bases
of the assessment must be stated, and this
requirement is not satisfied by the issuance of
FAN alone, a letter of demand fills up the void
and explains to the taxpayer how the deficiency
assessment was arrived at, including the reasons
and legal bases for the assessment. (Mamalateo,
2014)
Period to issue FLD or FAN
If the taxpayer, within 15 days from date of
receipt of the PAN, responds that he/it disagrees
with the findings of deficiency tax or taxes, an
FLD/FAN shall be issued within 15 days from
filing/submission of the taxpayer’s response,
calling for payment of the taxpayer's deficiency
tax liability, inclusive of the applicable penalties.
(RR No. 18-2013, emphasis supplied)
NOTE: An FLD or FAN issued beyond 15 days
from filing or submission of the taxpayer’s
response to the PAN shall be valid, provided
that, it is issued within the period of limitation to
assess internal revenue taxes. The non-
observance of the 15-day period, however, shall
constitute an administrative infraction and the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
revenue officers who caused the delay shall be
subject to administrative sanctions as provided
for by law and pertinent revenue issuances.
(RMO No. 11-2014)
NOTE: Upon receipt of the PAN, the taxpayer has
15 days to reply. Failure to do so, shall cause the
issuance of the FLD or FAN. Issuance of the
FAN/FLD without waiting for the 15-day period
to reply to PAN is a violation of due process. (CIR
vs. Next Mobile, Inc., CTA EB Case No. 1419, 21
November 2016)
Q: Who issues the FAN?
A: It shall be issued by the Commissioner of
Internal Revenue or his duly authorized
representative.
Q: In what form shall the FAN be and what
should it contain?
A:
1. In writing; and
2. Shall state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based, otherwise, the FAN
shall be void. (Sec. 228, NIRC; Sec. 3.1.3, RR
No. 18-2013)
NOTE: If the FAN is deemed insufficient insofar
as compliance with Section 228 of the NIRC is
concerned, such insufficiency can be cured, if the
FLD can show the legal and factual bases relied
upon in the issuance of the assessment which
the FAN failed to detail.
Q: What does the phrase “in writing” under
Sec. 228 mean?
A: It does not exclusively mean written words.
“Writing” consists of letters, word, numbers, or
their equivalent, set down by handwriting,
typewriting, printing, photostating,
photographing, magnetic impulse, mechanical or
electronic recording, or other form of data
compilation. Indubitably, figures are also
“writings” and if the numerical presentation is
understandable enough, then there is no reason
why it should be automatically rejected as
inadequate compliance with the law. (Sevilla, v.
CIR, CTA Case 6211, October 4, 2004)
Q: Is substantial compliance of the notice
requirement under Section 228 of the NIRC
allowed?
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 Taxation Law
A: YES. The notice requirement under Section
228 of the NIRC is substantially complied with
whenever the taxpayer had been fully informed
in writing of the factual and legal bases of the
deficiency taxes assessment, which enabled the
latter to file an effective protest.
In the case of Samar I Electric Cooperative v. CIR,
the Court held that although the FAN and
demand letter were not accompanied by a
written explanation of the legal and factual bases
of the assessed deficiency taxes, the records
showed that CIR responded to taxpayer’s letter-
protest, explaining at length the factual and legal
bases of the deficiency tax assessments and
denying the protest.
Considering the foregoing exchange of
correspondence and documents between the
parties, the requirement of Section 228 was
substantially complied with. Respondent had
fully informed petitioner in writing of the factual
and legal bases of the deficiency taxes
assessment, which enabled the latter to file an
“effective” protest. Taxpayer’s right to due
process was thus not violated. (Samar Electric
Corp v. CIR, G.R. No. 193100, December 10, 2014)
Q: Taxpayer duly protested a PAN it received
from the BIR. Subsequently, the BIR issued a
FAN to the taxpayer. The demand letter
states: “This is our final decision based on
investigation. If you disagree, you may appeal
the final decision within 30 days from receipt
hereof, otherwise said deficiency tax
assessment shall become final, executory and
demandable.” Instead of filing a protest on
the assessment, the taxpayer filed a petition
for review with the CTA. The BIR filed a
motion to dismiss on the ground that the
taxpayer failed to exhaust administrative
remedies by filing a protest on the
assessment. Should the motion be granted?
A: NO. This case is an exception to the rule on
exhaustion of administrative remedies, i.e.,
estoppel on the part of BIR. The taxpayer cannot
be blamed for not filing a protest against the
FAN since the language used and the tenor of the
demand letter indicate that it is the final decision
of the CIR on the matter. The CIR must indicate,
in a clear and unequivocal language, whether its
action on a disputed assessment constitutes its
final determination thereon in order for the
taxpayer concerned to determine when his or
299
her right to appeal to the tax court accrues. Thus,
the CIR is now estopped from claiming that it did
not intend the FAN to be a final decision. (Allied
Banking Corp. v. CIR, G.R. No. 175097, February 5,
2010)
NOTE: An FLD/FAN issued reiterating the
immediate payment of deficiency taxes and
penalties previously made in the PAN is a denial
of the response to the PAN. A final demand letter
for payment of delinquent taxes may be
considered a decision on a disputed assessment.
This includes a disputed PAN. So long as the
parties are given the opportunity to explain their
side, the requirements of due process are
satisfactorily complied with (RMO 11-2014)
Disputed assessment
Remedies of the taxpayer after the issuance
of a FAN
The taxpayer may protest the assessment within
30 days from receipt. Otherwise, the assessment
becomes final, executory, demandable and not
appealable to the CTA.
The protest comes in the form of either a written
request for reconsideration or reinvestigation.
After the request is filed and received by the BIR,
the assessment becomes a disputed assessment.
(CIR v. Isabela Cultural Corp., G.R. No. 135210,
July 11, 2001)
NOTE: Refer to “Protesting an assessment”
under Taxpayer’s Remedies for complete
discussion on protest.
Q: Avon claims that from the start up to the
end of the administrative process, the
Commissioner ignored all of its protests and
submissions to contest the deficiency tax
assessments. The Commissioner issued
identical Preliminary Assessment Notice,
Final Assessment Notices, and Collection
Letters without considering Avon's
submissions or its partial payment of the
assessments. Avon asserts that it was not
accorded a real opportunity to be heard,
making all of the assessments null and void.
Is the contention of Avon valid?
A: YES. Avon was not fully apprised of the legal
and factual bases of the assessments issued
 National Taxation
against it. The Details of Discrepancy attached to
the Preliminary Assessment Notice, as well as
the Formal Letter of Demand with the Final
Assessment Notices, did not even comment or
address the defenses and documents submitted
by Avon. Thus, Avon was left unaware on how
the Commissioner or her authorized
representatives appreciated the explanations or
defenses raised in connection with the
assessments. The Commissioner's total
disregard of due process rendered the identical
Preliminary Assessment Notice, Final
Assessment Notices, and Collection Letter null
and void, and of no force and effect. (CIR v. Avon)
Q: Is the Final Assessment Notice issued
against respondent Fitness by Design, Inc. is
a valid assessment under Section 228 of the
National Internal Revenue Code and Revenue
Regulations No. 12-99?
A: NO. The disputed Final Assessment Notice is
not a valid assessment. Compliance with Section
228 of the National Internal Revenue Code 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)
Q: On October 9, 2007, Transitions Optical
executed a Waiver of the Defense of
Prescription for the assessment of its
internal revenue taxes for the year 2004. The
prescriptive period for the assessment was
extended to June 20, 2008.This was followed
by another Waiver of the Defense of
Prescription dated June 2, 2008 which
extends the prescriptive period to November
30, 2008. The CIR issued a Final Assessment
Notice (FAN) and a Formal Letter of Demand
(FLD) dated November 28, 2008. However,
Transitions Optical alleged that the demand
for deficiencies had already prescribed at the
time the FAN was mailed on December 2,
2008. The CTA ruled in favor of Transitions
Optical after finding that the Waivers are
defective and therefore, void. Is Transitions
Optical estopped from claiming that the
Waivers were invalid, and that the
prescription had set in?
A: YES. Estoppel applies against a taxpayer who
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
did not only raise at the earliest opportunity its
representative’s lack of authority to execute two
(2) waivers of defense of prescription, but was
also accorded, through these waivers, more time
to comply with the audit requirements of the
Bureau of Internal Revenue. Transitions Optical
repeatedly failed to comply with CIR’s notices,
directing it to submit its books of accounts and
related records for examination by the BIR. The
former also ignored the latter’s request for an
Informal Conference to discuss other
“discrepancies” found in the partial documents
submitted. The Waivers were necessary to give
respondent time to fully comply with the BIR
notices for audit examination and to respond to
its Informal Conference request to discuss the
discrepancies. Thus, having benefited from the
Waivers executed at its instance, Transitions
Optical is estopped from claiming that they were
invalid, and that prescription had set in.
Nonetheless, the tax assessment is void because
it was served beyond the supposedly extended
period. (CIR V. Transition Optical)
Administrative decision on a disputed
assessment
Final Decision on Disputed Assessment
(FDDA) is the final decision of the CIR or a duly
authorized representative on the protest to the
FAN. Pursuant to the law and regulations, the
FDDA should state the facts, the applicable law,
the rules and regulations, or the jurisprudence
on which such decision is based. Otherwise, the
decision shall be void for depriving the taxpayer
of their right to due process. Without the facts
and the law or regulations on which such a
decision is based, the taxpayer cannot
intelligently dispute the assessment. (Balauag,
2020)
Appeal from an administrative decision on
disputed assessment
If the taxpayer chooses to protest the FDDA,
however, he may do so administratively or
judicially. As provided under Revenue
Regulations (RR) No. 18-2013, if the protest or
administrative appeal is denied in whole or in
part by the CIR:
1. the taxpayer may appeal to the CTA within
30 days from receiving the said decision; or
2. elevate his protest through a request for
reconsideration to the Commissioner
within 30 days of the decision.
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 Taxation Law
Otherwise, the tax deficiency shall be final,
executory, and demandable.
NOTE: That the remedies discussed are mutually
exclusive.
In a request for reconsideration, the taxpayer
hopes that the CIR will overturn his own or his
authorized representative’s decision. The
taxpayer must consider that a request for
reconsideration is indirectly telling the BIR that
it failed to fully consider all the circumstances of
the case or that the BIR committed an error.
A request for reconsideration may be granted or
denied. If denied, the taxpayer’s only remedy
will be the Courts, an appeal to the CTA.
Under RR No. 18-2013, the failure of the
taxpayer to administratively or judicially elevate
his protest to the FDDA will open up a remedy
for the government — to collect the tax. Section
205 provides for civil remedies for collecting
delinquent taxes; Section 207 provides for
several summary remedies, such as the distraint
of the personal property and the levy of the
taxpayer’s real property.
If the amount is fully paid, pursuing a request for
reconsideration or filing a case with the CTA are
not viable options under the taxpayer’s current
circumstances. The taxpayer may pursue a
compromise settlement, abatement, or
cancellation of tax liability.
Section 204(A) of the Tax Code provides that the
CIR may compromise on the payment of internal
revenue tax on grounds such as doubtful validity
of assessment or when the taxpayer shows
financial incapacity to pay the assessed tax.
Section 204(B) of the Tax Code also provides
that the CIR may abate or cancel a tax liability
when (1) the tax or any portion thereof appears
to be unjustly or excessively assessed; or (2) the
administration and collection costs involved do
not justify the collection of the amount due.
However, the CIR has the sole discretion to grant
the offer of compromise settlement or
abatement of taxes. The CIR’s denial of these
remedies is not subject to judicial review. Also,
interest on the tax deficiency continues to run
while the application for compromise settlement
or abatement is pending and should be paid if
the application is denied. (Ambatali, 2018)
301
Q: Through a letter dated May 6, 1991, the
CIR sent Assessment Notices to Citytrust
Banking Corporation (Citytrust) in
connection with its deficiency interim
revenue taxes for the year 1986. The
assessments came after Citytrust's execution
of three Waivers of the Statute of Limitations
(Waivers) under the National Internal
Revenue Code. (NIRC) dated August 11, 1989,
July 12, 1990, and November 8, 1990
extending the prescriptive period for the CIR
to issue an assessment. Citytrust protested
the assessments on May 30, 1991 and, again,
on February 17, 1992. In the interim, through
the Bureau of lnternal Revenue (BIR) Office
of the Accounting Receivable/Billing Section
letter dated February 5, 1992, the CIR
demanded the payment of the subject
deficiency taxes within 10 days from receipt
thereof.
Meanwhile, on November 4, 2011, BPI
received a separate Warrant of Distraint
and/or Levy (November 201; Warrant), this
time in relation to Citytrust's deficiency EWT,
WTD, DFT, and WTC assessments. Similarly,
BPl assailed the November 2011 Warrant
before the CTA through a petition for review
(Second CTA Petition) asking the tax court to
suspend the collection of the alleged
deficiency taxes, cancel the November 2011
Warrant, and enjoin the CIR from further
implementing it. It also prayed for the CTA to
declare the assessments as prescribed and to
cancel the assessments related thereto.
1. Did the CTA have jurisdiction over BPI's
Second CTA Petition?
2. Did the CIR timely issue assessments
against Citytrust for deficiency EWT,
WTD, DFT, and WTC pertaining to the
taxable year 1986?
3. May the CIR still collect the unpaid
taxes?
A:
1. YES. The CTA properly exercised its
jurisdiction over BPI's petition for review.
First, in the present case there is no proof
of receipt. The CIR did not even attach a
copy of the letter relied upon to the present
petition. Notably, failure to append
“material portions of the record as would
support the petition” is a ground for
dismissal thereof. Second, the
aforementioned letter is irrelevant .in
 National Taxation
ascertaining Whether the tax court
properly took cognizance of BPI's Second
CTA Petition. As the CTA correctly pointed
out, BPI did not come to question any final
decision issued in connection with
Citytrust's assessments. They went before
the CTA primarily to assail the November
2011 Warrant's issuance and
implementation. To be sure, the issue for
the CTA to resolve was the propriety not of
any assessment but of a tax collection
measure implemented against BPI.
Accordingly, the CTA's disposition was
distinctly for the cancellation of the
warrant and nothing else.
The law expressly vests the CTA the
authority to take cognizance of "other
matters" arising from the 1977 Tax Code
and other laws administered by the BIR
which necessarily includes rules,
regulations, and measures on the collection
of tax. Tax collection is part and parcel of
the CIR's power to make assessments and
prescribe additional requirements for tax
administration and enforcement. Thus, the
CTA properly exercised jurisdiction over
BPl's Second Petition. (Commissioner of
Internal Revenue v. Bank of the Philippine
Islands, G.R. No. 227049, September 16,
2020)
2. NO. The CIR’s right to assess has already
prescribed. Both the CTA Division and CTA
EB carefully reviewed and examined the
records (i.e., tax returns for each tax type,
waivers of the statutes of limitations, etc.)
to precisely ascertain whether the period to
assess each tax type has prescribed. The
court a quo ultimately invalidated the
waivers of the statutes of limitations due to
the absence of the CIR's signature and
found that only the assessments for EWT
and DFT have not prescribed. The Court
shall no longer disturb the afore-cited
findings. Verily, the 1977 Tax Code, as
amended, allowed the parties to execute an
agreement waiving the three-year statute
of limitation for tax assessment. However, it
is already established that, to be valid,
waivers of this nature must be in the form
as prescribed by the applicable tax
regulations. That both parties must signify
their assent in extending the assessment
period is not merely a formal requisite
under tax rules, but one that is essential to
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
the validity of a contract under the Civil
Code.
Furthermore, the Court already ruled that
BPI is not estopped from raising questions
on the waivers' validity. That the
fundamental defect that invalidated the
subject waivers were caused by the CIR
gives more reason to the taxpayer to seek
redress for this inadve1ience. Be that as it
may, even if the Court excuses these flaws,
the CIR is still barred from coll1•cting the
subject taxes from BPI. (Ibid)
3. NO. The BIR may no longer collect the
alleged deficiency taxes. Under the 1977
Tax Code, as amended, "any internal
revenue tax which has been assessed
within the period of limitation above-
prescribed may be collected by distraint or
levy or by a proceeding in court within
three years following the assessment of the
tax." Stated differently, the three-year
prescriptive period for the BIR to collect
taxes via summary administrative
processes shall be reckoned from “the date
the assessment notice had been released,
mailed or sent by the BIR to the taxpayer.”
This reckoning point is not clear from the
facts of the present case. However, the
parties no longer dispute: (a) that the CIR
issued a letter dated May 6, 1991 to which
the subject assessment notices were
appended; (b) that Citytrust filed its protest
(dated May 27, 1991) on May 30, 1991; and
that (c) the first instance the CIR proceeded
to administratively collect the assessed
taxes was through the issuance of the
November 2011 Warrant. With only these,
considerations, the latest possible time the
CIR could have released the assessment
was the same day Citytrust protested the
same or on May 30, 1991. From this time,
the CIR had three years to collect the taxes
assessed or until May 30, 1994. No matter
how the CIR frames the arguments, it is
glaring from the 20-year gap between the
issuance or release of the assessment
(1991) and the enforcement of collection
through distraint and/or levy (2011) that
prescription had already set in.
It is clear that the tax authorities had been
remiss in the performance of their duties.
The Court must bar the CIR from collecting
the taxes in the present case because,
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 Taxation Law
"[w]hile taxes are the lifeblood of the
nation, the Court cannot allow tax
authorities indefinite periods to assess
and/or collect alleged unpaid taxes.
Certainly, it is an injustice to leave any
taxpayer. In perpetual uncertainty whether
he will be made liable for deficiency or
delinquent taxes. (Ibid)
REQUISITES OF A VALID ASSESSMENT
(BaD SAWS)
1. In writing and signed by the BIR;
2. Contains the law and the facts on which the
assessment is based (basis must be
provided);
3. Contains a demand for payment within the
prescribed period;
4. Must be served on and received by the
taxpayer.
The taxpayers shall be informed in writing of the
law and the facts on which the assessment is
made; otherwise, the assessment shall be void.
Moreover, the regulations provide that the
Formal Letter of Demand and Final Assessment
Notice shall be issued by the Commissioner or
his duly authorized representative. The FLD or
FAN calling for payment of the taxpayer's
deficiency tax or taxes shall state the facts, the
law, rules and regulations, or jurisprudence on
which the assessment is based; otherwise, the
assessment shall be void. (RR No. 18-13)
Q: After examining the books and records of
EDS Corporation, the 2004 final assessment
notice, showing basic tax of P1,000,000
deficiency interest of P400,000 and due date
for payment of April 30, 2007, but without
the demand letter, was mailed and released
by the BIR on April 15, 2007. The registered
letter, containing the tax assessment, was
received by the EDS Corporation on April 25,
2007.
a. What is an assessment notice? What are
the requisites of a valid assessment? Explain
b. As tax lawyer of EDS Corporation, what
legal defense(s) would you raised against the
assessment? Explain. (2008 BAR)
A:
a. An assessment notice is formal notice to the
taxpayer stating that the amount thereon is due
as a tax and containing a demand for the
payment thereof (Alhambra Cigar and Cigarette
Mfg. Co. v Collector, 105 PR 1337, 1959; CIR v.
Pascor Realty and Development Corp., 309 SCRA
402, 1999) To be valid, the taxpayer must be
informed in writing of the law and the facts on
which assessment is made (Sec. 228 NIRC)
b. I will question the validity of the assessment
because of the failure to send the demand letter
which contains a statement of the law and the
facts upon which the assessment is based. If an
assessment notice is sent without informing the
taxpayer in writing about the law and facts on
which the assessment is made, the assessment is
void. (Sec. 228, NIRC; Azucena T Reyes v. CIR, 480
SCRA 382, 2005)

TAX DELINQUENCY AND TAX DEFICIENCY

DELINQUENCY TAX DEFICIENCY TAX

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

303
 National Taxation
Can immediately be collected through: Cannot be collected immediately as the taxpayer
(1) administrative action - the issuance of a may file the protest assessment & there should be
warrant of distraint and levy a denial of such protest by the BIR.
(2) judicial action
CIVIL ACTION
The filing of a civil action for the collection of The filing of a civil action at the ordinary court for
the delinquent tax in the ordinary court is a collection during the pendency of protest may be
proper remedy. the subject of a motion to dismiss. In addition to a
motion to dismiss, the taxpayer must file a
petition for review with the CTA to toll the
running of the prescriptive period.
PENALTIES
Subject to administrative penalties such as 25% Not subject to the 25% surcharge, although
surcharge, interest, and compromise penalty. subject to interest and compromise penalty.

Illustration: 2. When no return is required, tax is

If a taxpayer computes an income tax due of
₱2,000,000 and pays only P1,000,000 or none at
all, then there is delinquency tax. However, if a
taxpayer computes an income tax due of
₱2,000,000, but the BIR finds out that there are
undeclared income and the correct income tax
due should have been ₱3,000,000, then there is
deficiency tax.
A delinquency tax assessment made without the
benefit of a complete or partial investigation by
an authorized revenue officer who has a reason
to believe that the assessment and collection of a
deficiency tax will be jeopardized by delay
caused by the taxpayer’s failure to:
1. Comply with audit and investigation
requirements to present his books of
accounts and/or pertinent records, or
2. Substantiate all or any of the deductions,
exemptions or credits claimed in his return
(Sec. 3 (1)(a), RR 30-2002)
NOTE: This is issued when the revenue officer
finds himself without enough time to conduct an
appropriate or thorough examination in view of
the impending expiration of the prescriptive
period for assessment. To prevent the issuance
of a jeopardy assessment, the taxpayer may be
required to execute a waiver of the statute of
limitations.
PRESCRIPTIVE PERIOD FOR ASSESSMENT
Basic rules on prescription
1. When the tax law itself is silent on
prescription, the tax is imprescriptible;
imprescriptible and tax may be assessed at
any time as the prescriptive periods
provided in Sec. 203 and 222, NIRC are not
applicable. Remedy of the taxpayer is to file
a return for the prescriptive period to
commence.
NOTE: Limitation on the right of the
government to assess and collect taxes will
not be presumed in the absence of a clear
legislation to the contrary.
3. Prescription is a matter of defense, and it
must be proved or established by the
taxpayer relying upon it.
It is incumbent upon a taxpayer who wants
to avail of the defense of prescription to
prove that he indeed submitted a return. If
he fails to do so, the conclusion should be
that no such return was filed, in which the
Government has 10 years within which to
make the corresponding assessments.
(Taligaman Lumber Co., Inc., v. CIR, G.R. No.
L-15716, March 31, 1962)
4. Defense of prescription is waivable, such
defense is not jurisdictional and must be
raised seasonably, otherwise it is deemed
waived;
5. Being a remedial measure, it should be
interpreted liberally in order to protect the
taxpayer; and
6. If the last day of the period falls on a
Saturday, a Sunday or a legal holiday in the
place where the Court sits, the time shall not
run until the next working day. (Sec. 1, Rule
22, ROC)

UNIVERSITY OF SANTO TOMAS 304

2021 GOLDEN NOTES
 Taxation Law
3 important prescriptive periods: 2. Period to collect tax
3. Period to file a criminal action. (Mamalateo,
1. Period to assess tax 2014)

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

General rule Rationale for Prescriptive Period or Statute

Prescriptive periods for making assessments
GR: The right to assess must be done within 3
years from the date of:
1. Actual filing of the return, or
2. From the last date prescribed by law for
the filing of such return, whichever is
later.
Why “whichever is later”? This is to benefit the
government, so they have more time to make the
assessment on the taxpayer. (Ingles, 2015)
XPN:
1. False or fraudulent return with intent to
evade tax: within 10 years from discovery of
falsity or fraud
2. Failure to file any return at all: within 10
years from discovery of omission to file a
return
3. Waiver of statute of limitations in writing,
which must be made before the expiration of
the period of assessment of taxes: period
agreed upon.
NOTE: The period agreed upon may be
extended by subsequent written agreements
made before the period previously agreed
upon.
of Limitations for Assessments
This is for the benefit of both the government
and taxpayers. Reasons:
1. The government is benefited because the
officers would be obliged to act properly and
promptly in making assessments.
2. The taxpayers are benefited because after the
lapse of the period of prescription, they
would have a feeling of security against
unscrupulous tax agents who will take
advantage of every opportunity to molest
law-abiding citizens.
3. Without such legal defense, the taxpayers
would furthermore be under obligation to
always keep their books and to keep them
open for inspection subject to harassment by
unscrupulous tax agents.
Thus, for the purpose of safeguarding
taxpayers from any unreasonable
examination, investigation or assessment,
our tax laws provide a statute of limitations
in the collection of taxes as well as their
assessments. (Domondon, 2014, citing several
cases)
Determining whether prescription to assess
had set in
The important date to remember is the date

305
 National Taxation
when the demand letter or notice is released
or mailed or sent by the CIR to the taxpayer.
Provided the release was effected before the
prescription sets in, the assessment is deemed
made on time, even if the taxpayer actually
receives it after the prescriptive period.
However, the fact that the assessment notice
was mailed before the prescription period sets
in must be proved with substantial evidence by
the CIR. The presumption that a letter duly
directed and mailed was received in the regular
course of mail cannot be applied if there is no
substantial evidence to prove that the notice was
indeed sent. (Ingles, 2015)
Q: GJM filed its Annual Income Tax Return for
the taxable year 1999 on April 12, 2000. BIR
sent FAN through registered mail on April 14,
2003, well within the 3-year prescriptive
period. GJM however denies having received
any FAN. BIR failed to prove that GJM
received the FAN. Should the assessment be
given due course?
A: NO. When an assessment is made within the
prescriptive period, as in the case at bar, receipt
by the taxpayer may or may not be within said
period. But the rule does not dispense with the
requirement that the taxpayer should actually
receive the assessment notice, even beyond the
prescriptive period. If the taxpayer denies
having received the assessment from the BIR, it
then becomes incumbent upon the latter to
prove by competent evidence that such notice
was indeed received by the addressee.
Here, the onus probandi has shifted to the BIR to
show by contrary evidence that GJM indeed
received the assessment in the due course of
mail. While it is true that an assessment is made
when the notice is sent within the prescriptive
period, the release, mailing, or sending of the
same must still be clearly and satisfactorily
proved. (CIR v. GJM, G.R. No. 202695, February 29,
2016)
Return as the starting point of the
prescriptive period
Tax return refers to the form prescribed by the
BIR showing basic information about the
taxpayer and the computation of his tax liability,
which is required to be filed within the periods
prescribed by law and used as the basis for
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
payment of tax assess by the taxpayer. Two
types of returns are (a) original and (b)
amended return. (Mamalateo, 2014)
In order that the filing of return may serve as the
starting point of the period of the making of
assessment, the return must be substantially
complete as to include the eeded details on
which the full assessment may be made.
If the taxpayer files an amended return which
is substantially different from the original
return, the period of prescription of the right to
issue the deficiency assessment should be
counted from the filing of the amended return
and not the original return. To hold otherwise
would pave the way for taxpayers to evade
payment of taxes by simply reporting in their
original return heavy losses and amending the
same after the CIR has lost his authority to
assess the proper tax.
Amendment considered Substantial
1. There is under declaration (exceeding 30%
of that declared) of taxable sales, receipts or
income; or
2. There is overstatement (exceeding 30% of
deductions) (Sec. 248 (B), NIRC)
If the taxpayer files the wrong return, it is as
though the taxpayer filed no return at all. This is
true even if all the necessary information was
reflected in the erroneous return. In situations
like this, the 10-year prescriptive period will
apply. (Ingles, 2015, citing several cases)
Computation of the three (3) year period
The computation of the three-year period is
based on the Administrative Code, where a
"year” shall be understood to be 12 calendar
months.
The Administrative Code of 1987 governs the
computation of legal periods, being the more
recent law than the Civil Code which provides
that a year is equivalent to 365 days whether it
be a regular year or a leap year. (CIR v.
Primetown Property Group, Inc., G.R. No. 162155,
August 28, 2007)
Q: A Co., a domestic corporation, filed its
1995 ITR on Apr. 15, 1996 showing a net loss.
On Nov. 10, 1996, it amended its 1995 ITR to
show more losses.
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 Taxation Law
After an investigation, the BIR disallowed
certain deductions claimed by A Co., putting
A Co., in a net income position. As a result, on
Aug. 5, 1999, the BIR issued a deficiency
income assessment against A Co. A Co.,
protested the assessment on the ground that
it has prescribed. Decide. (2002 BAR)
A: The right of the BIR to assess the tax has not
prescribed. The rule is that internal revenue
taxes shall be assessed within three years after
the last day prescribed by law for the filing of the
return (Sec. 203, NIRC) However, if the return
originally filed is amended substantially, the
counting of the three-year period starts from
the date the amended return was filed. (CIR v.
Phoenix Assurance Co., Ltd., 14 SCRA 52)
There is a substantial amendment in this case
because a new return was filed declaring more
losses, which can only be done either (1) in
reducing gross income or (2) in increasing the
items of deductions, claimed.
Q: Mr. Reyes, a Filipino citizen engaged in the
real estate business, filed his 2004 ITR on
Mar. 30, 2005. On Dec. 30, 2005, he left the
Philippines as an immigrant to join his family
in Canada. After investigation of said return,
the BIR issued a notice of deficiency income
tax assessment on Apr. 15, 2008.
Mr. Reyes returned to the Philippines as a
balikbayan on Dec. 8, 2008. Finding his name
to be in the list of delinquent taxpayers, he
filed a protest against the assessment on the
ground that he did not receive a notice of
assessment and the assessment had
prescribed. Will the protest prosper? (2000
BAR)
A: NO. The assessment has not yet prescribed
since the BIR has a period of 3 years from the
last day prescribed by law for the filing of the
return.
The return was filed on March 30, 2005, that is,
before the last day prescribed by law for its
filing, hence the law considers it as being filed on
the last day prescribed by law for the filing of the
same, which is April 15, 2005. The assessment
issued on April 15, 2008 is therefore within the
three-year prescriptive period.
Q: Mr. Sebastian is a Filipino seaman
307
employed by a Norwegian company which is
engaged exclusively in international
shipping. He and his wife, who manages their
business, filed a joint ITR for 1997 on Mar.
15, 1998. After an audit of the return, the BIR
issued on Apr. 20, 2001 a deficiency income
tax assessment for the sum of P250,000
inclusive of interest and penalty. For failure
of Mr. and Mrs. Sebastian to pay the tax
within the period stated in the notice of
assessment, the BIR issued on Aug. 19, 2001
warrants of distraint and levy to enforce
collection of the tax.
If you are the lawyer of Mr. and Mrs.
Sebastian, what possible defenses will you
raise in behalf of your clients against the
action of the BIR in enforcing collection of the
tax? (2002 BAR)
A: I will raise the defense of prescription. The
right of the BIR to assess prescribes after three
years counted from the last day prescribed by
law for the filing of the income tax returns when
the said return is filed on time. (Sec. 203, NIRC)
The last day for filing the 1997 income tax
return is April 15, 1998. Since the assessment
was issued only on Apr. 20, 2001, the BIR's right
to assess has already prescribed on April 15,
2001.
Waiver of the Statute of Limitations
Section 222 (b) of the NIRC provides that the CIR
or her duly authorized representative and the
taxpayer or its authorized representative may
agree in writing as to a specific future date
within which to assess the taxpayer for
internal revenue taxes for a given taxable
period, before the expiration of the period to
assess taxes.
The waiver of the Statute of Limitations should
not be construed as a waiver of the right to
invoke the defense of prescription but rather an
agreement between the taxpayer and the BIR to
extend the period to a date certain, within which
the latter could still assess or collect taxes due.
The waiver does not mean that the taxpayer
relinquishes the right to invoke prescription
unequivocally. (BPI v. CIR, GR No. 139736,
October 17, 2005)
A waiver of the statute of limitation under the
 National Taxation
NIRC, to a certain extent, is a derogation of the
taxpayer’s right to security against prolonged
and unscrupulous investigations and must
therefore be carefully and strictly construed.
(Phil. Journalists, Inc. v. CIR, G.R. No. 162852,
December 16, 2004)
The CIR cannot validly agree to reduce the
prescriptive period to less than that granted by
law because it would result to the detriment of
the State. Such reduction diminishes the
Government’s opportunity to collect taxes.
(Republic v. Lopez, G.R. L-18007, March 30, 1967)
The taxpayer’s waiver of statute of limitation
does not cover taxes already prescribed.
(Republic v. Lim De Yu, G.R. No. L-17438, April 30,
1964)
Extended Assessment
An assessment issued as a result of the waiver of
the prescriptive period is known as an “extended
assessment”, which has a prescriptive period for
collection of five (5) years from the time of
issuance of the assessment.
Guidelines on proper execution of waivers
1. The waiver may be, but not necessarily, in
the form prescribed by RMO No. 20-90 or
RDAO No. 05-01. The taxpayer's failure to
follow the aforesaid forms does not
invalidate the executed waiver, for as long as
the following are complied with:
a. The Waiver of the Statute of Limitations
under Section 222 (b) and (d) shall be
executed before the expiration of the
period to assess or to collect taxes. The
date of execution shall be specifically
indicated in the waiver.
b. The waiver shall be signed by the
taxpayer himself or his duly authorized
representative. In the case of a
corporation, the waiver must be signed by
any of its responsible officials;
c. The expiry date of the period agreed upon
to assess/collect the tax after the regular
three-year period of prescription should
be indicated;
2. Except for waiver of collection of taxes which
shall indicate the particular taxes assessed,
the waiver need not specify the particular
taxes to be assessed nor the amount thereof,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
and it may simply state “all internal revenue
taxes” considering that during the
assessment stage, the CIR or her duly
authorized representative is still in the
process of examining and determining the
tax liability of the taxpayer.
3. Since the taxpayer is the applicant and the
executor of the extension of the period of
limitation for its benefit in order to submit
the required documents and accounting
records, the taxpayer is charged with the
burden of ensuring that the waivers of
statute of limitation are validly executed by
its authorized representative. The authority
of the taxpayer’s representative who
participated in the conduct of audit or
investigation shall not be thereafter
contested to invalidate the waiver.
4. The waiver may or may not be notarized. It is
sufficient that the waiver is in writing as
specifically provided by the NIRC.
5. Considering that the waiver is a voluntary act
of the taxpayer, the waiver shall take legal
effect and be binding on the taxpayer upon
its execution thereof.
6. It shall be the duty of the taxpayer to submit
its duly executed waiver to the CIR or
officials previously designated in existing
issuances or the concerned revenue district
officer or group supervisor as designated in
the Letter Of Authority/Memorandum of
Assignment who shall then indicate
acceptance by signing the same. Such waiver
shall be executed and duly accepted prior to
the expiration of the period to assess or to
collect. The taxpayer shall have the duty to
retain a copy of the accepted waiver.
7. Note that there shall only be two (2) material
dates that need to be present on the waiver:
a. The date of execution of the waiver by the
taxpayer or its authorized representative;
and
b. The expiry date of the period the taxpayer
waives the statute of limitations
8. Before the expiration of the period set on the
previously executed waiver, the period
earlier set may be extended by subsequent
written waiver. (RMO No. 14-2016)
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 Taxation Law
Effect of failure to conform to the
requirements of waiver of the statute of
limitations
It is invalid and ineffective to extend the
prescriptive period to assess taxes. (CIR v. Next
Mobile Inc., G.R. No. 212825, December 07, 2015)
Taxpayer estopped from questioning validity
of waivers
In case a taxpayer executed five waivers and
delivered them to CIR, one after the other and
allowed the latter to rely on them and did not
raise any objection against their validity until he
was assessed, said taxpayer is estopped from
questioning the validity of its waivers. The
application of estoppel is necessary to prevent
the undue injury that the government would
suffer because of the cancellation of assessment
of taxpayer’s tax liabilities. (CIR v. Next Mobile
Inc., G.R. No. 212825, December 07, 2015)
Taxpayer is also estopped from questioning the
waiver if it had impliedly admitted the validity of
the said waivers. Had it believed that the waiver
was invalid and that the period to assess had
effective prescribed, the taxpayer could have
refused to make any payment based on any
assessment against it. (RCBC v. CIR, G.R. 170257,
September 7, 2011)
NOTE: The period to assess can likewise be
suspended under Section 223 of the NIRC. Refer
to “Suspension of prescriptive periods” for
complete discussion.
Q: In 1993, the BIR issued against respondent
assessment notice for deficiency income tax
for 1989. A waiver of the defense of
prescription was executed but it was not
signed by the Commissioner or any of his
authorized representatives and did not state
the date of acceptance. Has the right to
collect of the Commissioner prescribed?
A: YES. The Court held that the Commissioner’s
right to collect has prescribed. The period to
assess and collect deficiency taxes may be
extended only upon a written agreement
between the Commissioner and the taxpayer
prior to the expiration of the three-year
prescribed period. The BIR cannot claim the
benefits of extending the period when it was the
BIR’s inaction which is the proximate cause of
the defects of the waiver. (CIR v. The Stanley
Works Sales (Phils.), Incorporated, G.R. No.
187589, December 03, 2014)
Q: What is the effect of the execution by a
taxpayer of a "waiver of the statute of
limitations" on his defense of prescription?
(2010 BAR)
A: The waiver of the statute of limitation
executed by a taxpayer is not a waiver of the
right to invoke the defense of prescription.
The waiver of the statute of limitation is
merely an agreement in writing between the
taxpayer and the BIR that the period to
assess and collect taxes due is extended to a
date certain. If prescription has already set in
at the time of the execution of the waiver is
invalid, the taxpayer can still raise
prescription as a defense. (Phil. Journalists
Inc., v. CIR, GR No. 162852, December 16,
2004)

Distinguish: False Returns, Fraudulent Returns, and Non-Filing of Returns

False Return Fraudulent Returns Failure to File a Return

Contains wrong information
due to mistake, carelessness
or ignorance (Aznar v. CTA,
G.R. No. L-20569, August 23,
1974)
Deviation from the truth,
whether intentional or not
Does not make the taxpayer
criminally liable
Intentional and deceitful with the
sole aim of evading the correct
tax due
Intentional or deceitful entry
with intent to evade the taxes
due.
Filing a fraudulent return will
make the taxpayer liable for the
crime of moral turpitude as it
Omission to file a return in the
date prescribed by law
Omission can be intentional or
not
The mere omission is already a
violation regardless of the
fraudulent intent or willfulness of

309
 National Taxation
False Return Fraudulent Returns Failure to File a Return
entails willfulness and fraudulent the individual (CIR vs. Bank of
intent on the part of the Commerce, CTA EB Case No. 654,
individual. (Republic v. Marcos II, March 14, 2011)
G.R. Nos. 130371 & 130855,
August 4, 2009, 595 SCRA 43)
Not subject to 50% penalty Subject to 50% penalty surcharge Not subject to 50% penalty
surcharge surcharge
The tax may be assessed, or a proceeding in court for the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud or omission.

Fraud not presumed for neglect to file
required return
Fraud is a question of fact and the circumstances
constituting fraud must be alleged and proved in
the court. Fraud is never lightly to be presumed
because it is a serious charge. Hence, if fraud is
not proven, the Government cannot use the 10-
year period to make the assessment. (CIR v.
Ayala Securities Corporation, G.R. No. L-29485,
March 31, 1976) Fraud must be established.
Claiming fictitious expenses as deductions is a
proof of falsity or fraud in the income tax return.
(Tan Guan v. CTA, G.R. L-23676, April 27, 1967)
An honest mistake as to the valuation of the
property cannot be indicative of fraud. (Republic
v. Heirs of Jalandoni, G.R. No. L-18384, September
20, 1965)
The two returns are different but have the same
prescriptive periods to be assessed, which is 10-
years. The importance in distinguishing the two
lies in the application of the penalty surcharge.
Actual fraud, not constructive fraud, is subject to
50% penalty surcharge. For the surcharge to
apply, it must be intentional fraud.
Negligence, whether slight or gross, is not
equivalent to fraud with intent to evade the tax
contemplated by law. (Ingles, 2015)
Just because the 10-year period applies, it
doesn’t necessarily mean that the taxpayer will
be penalized with the 50% surcharge. When a
taxpayer files a false return and not a fraudulent
one, the 10-year period applies but the 50%
surcharge will not. (Aznar v. CTA, G.R. No. L-
20569, August 23, 1974)

Q: What constitutes prima facie evidence of a
false or fraudulent return to justify the
imposition of a 50% surcharge on the
deficiency tax due from a taxpayer? Explain.
(2002 BAR)
A: There is a prima facie evidence of false or
fraudulent return when the taxpayer
substantially underdeclared his taxable sales,
receipts or income, or substantially overstated
his deductions. The taxpayer’s failure to report
sales, receipts or income in an amount exceeding
30% of that declared per return, and a claim of
deduction in 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)
Importance of distinguishing between a
“false return” and a “fraudulent return”
Q: Danilo, who is engaged in the trading
business, entrusted to his accountant the
preparation of his income tax return and the
payment of the tax due. The accountant filed
a falsified tax return by under declaring the
sales and overstating the expense deductions
by Danilo. Is Danilo liable for the deficiency
tax and the penalties thereon? What is the
liability, if any, of the accountant? Discuss.
(2005 BAR)
A: Danilo is liable for the deficiency tax as well
as for the deficiency interest. He should not be
held liable for the fraud penalty because the
accountant acted beyond the limits of his
authority. There is no showing in the problem
that Danilo signed the falsified return or that it
was prepared under his direction. On the other
hand, the accountant may be held criminally
liable for violation of the NIRC when he falsified
the tax return by under declaring the sale and
overstating the expense deductions. If Danny's
accountant is a Certified Public Accountant, his

UNIVERSITY OF SANTO TOMAS 310

2021 GOLDEN NOTES
 Taxation Law
certificate as a CPA shall automatically be
revoked or cancelled upon conviction.
Suspension of statute of limitations
Grounds for suspension of the prescriptive
period for both the power to assess and the
power to collect: (LOW-PARA)
1. When taxpayer cannot be Located in the
address given by him in the return.
XPN: He informs the CIR of any change in his
address thru a written notice to the BIR.
2. When the taxpayer is Out of the Philippines.
justified this by saying that in the answer
filed by the BIR, it prayed for the collection
of taxes.
When Commissioner is prohibited from
making the assessment or collection of taxes
in a proceeding in court
When in the opinion of the CTA, the collection by
the BIR may jeopardize the interest of the
Government and/or the taxpayer, the Court in
any stage of the proceeding may suspend the
said collection and require the taxpayer either to
deposit the amount claimed or to file a surety
bond for not more than double the amount with
the Court. (Sec. 11, R.A. No. 1125)

3. When the Warrant of distraint and levy is
duly served upon the taxpayer, his
authorized representative or a member of
his household with sufficient discretion and
no property is located.
Q: Do the provisions of the Civil Code on
suspension of the prescriptive period by
extrajudicial demand suspend the running
period of prescription of actions in tax
collection cases?

Only period to collect is suspended. A: NO. The provisions of the NIRC being a special
law take precedence over the provisions of the
4. Where the CIR is prohibited from making Civil Code, a general law. Furthermore, the
the assessment or beginning distraint or provisions of the NIRC were crafted to ensure
levy or a proceeding in court for 60 days expeditious collection of tax money to ensure
thereafter, such as where there is a Pending the continuous delivery of government services.
petition for review in the CTA from the
decision on the protested assessment. TAXPAYER’S REMEDIES
(Republic v. Ker & Co., GR L-21609;
September 29, 1966) Remedies Before Payment
5. Where CIR and the taxpayer Agreed in 1. Administrative remedies
writing for the extension of the assessment, a. Protest of assessment
the tax may be assessed within the period so i. Reconsideration
agreed upon. ii. Reinvestigation
b. Compromise
6. When the taxpayer Requests for c. Abatement
reinvestigation which is granted by the 2. Judicial Remedies
Commissioner.
Remedies After Payment
Only the period to collect is suspended
because assessment has been done at this 1. Administrative remedies
point. (Ingles, 2015) a. Tax refund
b. Tax credit
The request must be granted by the CIR. A 2. Judicial remedies
request for reconsideration alone does not
suspend the period to collect. Administrative Remedies
7. When there is an Answer filed by the BIR to Guidelines that must be observed with
the petition for review in the CTA. respect to administrative remedies
(Hermanos v. CIR, GR. No. L-24972.
September 30, 1969) where the court BASIS GOVERNMENT TAXPAYER

311
 National Taxation
If Must observe Must observe the e. Date of receipt of the assessment notice
Expre the legal
doctrine of or letter of demand;
ss parameters setexhaustion of f. Itemized statement of the finding to
forth in the law
administrative which the taxpayer agrees (if any) as
(e.g., procedure
remedies. Thus, basis for the computation of the tax
for distraint of
before the due, which must be paid upon filing of
personal taxpayer may the protest;
property (Sec.question an g. Itemized schedule of the adjustments to
207 (A), NIRC),
assessment which the taxpayer does not agree;
for levy on real
before the CTA, h. Statements of facts or law in support of
property (Sec.he must first file the protest; and
207 B) and an administrative i. Documentary evidence as it may deem
enforcement ofprotest before necessary and relevant to support its
tax lien. (Sec.
the BIR. (Same is protest to be submitted 60 days from
219) true with claims the filing thereof.
for refunds)
If Both may avail of the usual Protested assessment is the same as disputed
Impli remedies for convenience and assessment.
ed expediency.
Effect of a protest against an assessment
PROTESTING AN ASSESSMENT
Prescriptive period provided by law to make
Administrative protest collection by distraint or levy or by a proceeding
in court is interrupted once a taxpayer protests
The taxpayer or its authorized representative or the assessment and requests for its cancellation.
tax agent may protest administratively against
the aforesaid FLD/FAN within thirty (30) days Period to file protest
from date of receipt thereof.
The taxpayer or its authorized representative or
Administrative protest is the act by the taxpayer tax agent may protest administratively against
of questioning the validity of the imposition of the FLD/FAN within thirty (30) days from date
the corresponding delinquency increments for of receipt thereof.
internal revenue taxes as shown in the notice of
assessment and letter of demand. KINDS OF PROTEST – REQUEST FOR
RECONSIDERATION OR REINVESTIGATION
Requisites of a protest
Form, content and validity of protest
1. Must be in writing;
2. Addressed to the CIR or his duly authorized The taxpayer protesting an assessment may file
representative; a written request for reconsideration or
3. State the facts, applicable law, rules and reinvestigation defined as follows:
regulations or jurisprudence on which the
protest is based otherwise the protest 1. Request for reconsideration — refers to a
would be void; and plea of re-evaluation of an assessment on the
4. Must contain the following: basis of existing records without need of
a. Name of the taxpayer and address for additional evidence. It may involve both a
the immediate past 3 taxable years; question of fact or of law or both.
b. Nature of the request, specifying the 2. Request for reinvestigation — refers to a
newly discovered evidence to be plea of re-evaluation of an assessment on the
presented; basis of newly discovered or additional
c. Taxable periods covered by the evidence that a taxpayer intends to present
assessment; in the reinvestigation. It may also involve a
d. Amount and kind of tax involved and question of fact or of law or both.
the assessment notice number;
The taxpayer shall state in his protest:

UNIVERSITY OF SANTO TOMAS 312

2021 GOLDEN NOTES
 Taxation Law
1. The nature of protest whether to the taxpayer calling for payment of the
reconsideration or reinvestigation, said deficiency tax or taxes, inclusive of the
specifying newly discovered or additional applicable surcharge and/or interest.
evidence he intends to present if it is a
request for reinvestigation, 2. If there are several issues involved in the
2. Date of the assessment notice, and disputed assessment and the taxpayer fails to
3. The applicable law, rules and regulations, state the facts, the applicable law, rules and
or jurisprudence on which his protest is regulations, or jurisprudence in support of
based, otherwise, his protest shall be his protest against some of the several issues
considered void and without force and on which the assessment is based, the same
effect. shall be considered undisputed issue or
issues, in which case, the assessment
REQUEST FOR REQUEST FOR attributable thereto shall become final,
RECONSIDERATION REINVESTIGATION executory and demandable; and the taxpayer
A claim for re- A claim for re- shall be required to pay the deficiency tax or
evaluation of the evaluation of the taxes attributable thereto and a collection
assessment based on assessment based on letter shall be issued to the taxpayer calling
existing records newly discovered or for payment of the said deficiency tax,
without need of additional evidence. inclusive of the applicable surcharge and/or
additional evidence. interest.
It may involve a It may also involve a
question of fact or question of fact or law Q: A taxpayer receives two final assessments,
law or both. or both. one for Net Income Tax (NIT) and one for
It does not toll the It tolls the statute of VAT. If the taxpayer would only like to
statute of limitations. limitations. protest the one for NIT and not the one for
VAT, what should he do to file a protest for
NOTE: A motion for reconsideration of the the NIT?
denial of the administrative protest does not toll
the 30-day period to appeal to the CTA. A: The taxpayer should first pay the tax due
(Fishwealth Canning Corporation v. CIR, G.R. No. under the VAT, where he does not intend to file a
179343, January 21, 2010) protest.

There is a distinction between a request for
reconsideration and a request for
reinvestigation. A reinvestigation which entails
the reception and evaluation of additional
evidence will take more time than a
reconsideration of a tax assessment, which will
be limited to the evidence already at hand; this
justifies why the reinvestigation can suspend the
running of the statute of limitations on collection
of the assessed tax, while the reconsideration
cannot. (BPI v. CIR, G.R. No. 181836, July 9, 2014)
NOTE: This is not payment under protest for
this is neither a tax under the TCC nor a Real
Property Tax. (RR No. 12-1999)
Submission of supporting documents
For requests for reinvestigation, the taxpayer
shall submit all relevant supporting documents
in support of his protest within sixty (60) days
from date of filing of his letter of protest.
Otherwise, the assessment shall become final.

Protest against validity of some of the issues “Relevant supporting documents”

1. If there are several issues involved in the FLD
or FAN but the taxpayer only disputes or
protests against the validity of some of the
issues raised, the assessment attributable to
the undisputed issue or issues shall become
final, executory and demandable; and the
taxpayer shall be required to pay the
deficiency tax or taxes attributable thereto, in
which case, a collection letter shall be issued
These refer to those documents necessary to
support the legal and factual bases in disputing a
tax assessment as determined by the taxpayer.
These are documents which the taxpayer feels
would be necessary to support his protest and
not what the Commissioner feels should be
submitted, otherwise, the taxpayer would
always be at the mercy of the BIR which may

313
 National Taxation
require production of such documents which
taxpayer could not produce. (Standard Chartered
Bank v. CIR, CTA case No. 5696, August 16, 2001)
The BIR can only inform the taxpayer to submit
additional documents. The BIR cannot demand
what type of supporting documents should be
submitted. Otherwise, a taxpayer will be at the
mercy of the BIR, which may require the
production of documents that a taxpayer cannot
submit. (CIR vs. First Express Pawnshop Co., Inc.,
G.R. Nos. 172045-46, June 16, 2009, 607)
The assessment shall become final
The failure of the taxpayer who requested for a
reinvestigation to submit all relevant supporting
documents within the 60-day period shall
render the FLD/FAN “final” by operation of law.
He/it shall be barred from disputing the
correctness of the FLD/FAN by the introduction
of newly discovered or additional evidence
because he/it is deemed to have lost his/its
chance to present evidence. The BIR shall then
deny the request for reinvestigation through the
issuance of an FDDA.
NOTE: The sixty (60)-day period for the
submission of all relevant supporting documents
shall not apply to requests for reconsideration.
Effect of failure to file protest
If the taxpayer fails to file a valid protest against
the FLD/FAN within thirty (30) days from date
of receipt thereof, the assessment shall become
final, executory and demandable. No request for
reconsideration or reinvestigation shall be
granted on tax assessments that have already
become final, executory and demandable
ACTION OF THE COMMISSIONER
ON THE PROTEST FILED
Period to file protest
Period to act upon or decide on the protest
filed
1. By the duly authorized representative
a. Request for investigation – within 180
days from submission of relevant
documents
b. Request for reconsideration - within
180 days from filing of protest
2. By CIR
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
1. In case of protest – within 180 days
from filing of protest
2. In case of administrative appeal -
within 180 days from the filing of
administrative appeal
Administrative appeal – request for
reconsideration filed with the CIR to
elevate the denial made by his duly
authorized representative
Decision on the protest filed
1. Direct grant or denial of protest
Final Decision on a Disputed Assessment
(FDDA)
The decision of the Commissioner or his
duly authorized representative shall state:
a. The facts, the applicable law, rules and
regulations, or jurisprudence on which
such decision is based, otherwise, the
decision shall be void, and
b. That the same is his final decision.
2. Indirect denial of protest
a. Formal and final letter of demand from
the BIR to the taxpayer
b. Civil collection can also be considered
as denial of protest of assessment.
(BIR v. Union Shipping Corp., G.R. No.
66160, May 21, 1990)
NOTE: Preliminary collection letter may
serve as assessment notice. (United
International Pictures v. CIR, G.R. No. 110318,
August 28, 1996)
c. Filing of criminal action against the
taxpayer
d. Issuance of warrant of distraint and
levy to enforce collection of deficiency
assessment is outright denial of the
request for reconsideration. (Hilado v.
CIR, CTA case 1256, Feb. 25, 1964)
3. Inaction by the CIR or his duly
authorized representative
Q: Bureau of Internal Revenue issued a
Preliminary Assessment Notice which
represented deficiency income tax and value-
added tax, inclusive of interest of V.Y.
314
 Taxation Law
Domingo. V.Y. Domingo thereafter filed a
Request for Re-evaluation or Re-
investigation and Reconsideration. However,
V.Y. Domingo then received a Preliminary
Collection Letter (PCL) from the Revenue
District Office (RDO) informing it of the
existence of two Assessment Notice for
collection of its tax liabilities. Upon receipt of
the requested copies of the notices, V.Y.
Domingo filed a Petition for Review praying
that Assessment Notices and the PCL be
declared null and void for allegedly having
been issued beyond the prescriptive period
for assessment and collection of internal
revenue taxes.
The CIR filed a Motion to Dismiss the
petition, arguing that it is neither the
assessment nor the formal letter of demand
that is appealable to the CTA but the decision
of the CIR on a disputed assessment.
Furthermore, CIR argued that there was no
disputed assessment to speak of, and that the
CTA had no jurisdiction. Is the CIR’s
contention correct?
A: NO. The CTA, being a court of special
jurisdiction, can take cognizance only of matters
that are clearly within its jurisdiction. Under the
law, it is clear that a protesting taxpayer like V.Y.
Domingo has only three options to dispute an
assessment: (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. (Commissioner of Internal
Revenue v. V.Y. Domingo Jewellers, Inc., G.R. No.
221780, March 25, 2019)
Q: The Court previously issued a resolution
for G.R. No. 241338, resolving to deny the
petition for failure to sufficiently show that
the Court of Tax Appeals En Banc committed
any reversible error with regards to its
ruling pertaining to the Final Assessment
315
Notice issued by the Commissioner of
Internal Revenue. Roca Security is arguing
that the Final Assessment Notice is violative
of its right to due process. Is the contention
of Roca correct?
A: YES. The Final Assessment Notice issued by
the CIR is void as it violates the respondent’s
right to due process. Section 228 of the National
Internal Revenue Code gives the taxpayer being
assessed a period of 60 days from the date of
filing a protest assailing the Preliminary
Assessment Notice within which to submit the
relevant supporting documents. In this case, the
respondent filed its protest on April 18, 2013
and still had 60 days from that date or until June
17, 2013 to present the documents.
(Commissioner of Internal Revenue v. Roca
Security and Investigation Agency, Inc., G.R. No.
241338, April 10, 2019)
Q: On January 6, 2003, Bureau of Internal
Revenue (BIR) issued Letter of Authority
(LOA) to petitioner Philippine Dream Co., Inc.
(PDCI) for examination of its financial
records for the following alleged tax
deficiencies. Under Memorandum dated May
30, 2003, the corresponding investigation
was not completed. On December 19, 2005, a
Preliminary Assessment Notice (PAN) was
issued to PDCI for its supposed VAT and EWT
deficiencies for taxable year 2002. PDCI
protested. By Letter dated March 24, 2006,
the protest was denied. On the VAT
assessment, it was firmly ruled that PDCI had
already ceased its operations as shown in its
tax returns filed from 2002 to 2005.
This finding was bolstered by the report of
the Maritime Industry Authority (MARINA)
that PDCI’s operations had already ceased as
of August 30, 2003. In view thereof, PDCI’s
assets were deemed sold and subjected to
VAT. As for the EWT assessment, PDCI failed
to prove that it remitted withholding taxes
on rental payments made.
Consequently, Formal Letter of Demand and
Assessment Notices dated March 31, 2006
were issued to PDCI for payment of the
following deficiency taxes, inclusive of
interests and surcharges, for taxable year
2002. PDCI received the notices on April 10,
2006. On May 10, 2006, PDCI interposed its
protest against the VAT assessment. It,
 National Taxation
nonetheless, signified its willingness to pay
its tax liabilities, and on this score, prayed
that the penalties be waived. On May 18,
2006, it paid the EWT assessment but not in
full. On November 22, 2006, Preliminary
Collection Letter was issued on PDCI’s EWT
and VAT liabilities. On January 4, 2007, PDCI
received a Final Notice Before Seizure giving
it ten (10) days from notice to settle its tax
liabilities, otherwise, a warrant of distraint
and/or levy and garnishment shall be issued
to enforce collection. On February 21, 2007,
PDCI was served a Warrant of Distraint
and/or Levy for its failure to pay its
purported tax deficiencies. On October 31,
2007, PDCI initiated a petition before the
Court of Tax Appeals seeking to nullify the
Final Notice Before Seizure, Warrant of
Distraint and Levy, and the auction sale, with
prayer for restraining order to prevent CIR
from taking possession of MV Philippine
Dream and turning it over to the winning
bidder.
Did PDCI timely file its appeal to the CTA?
A: NO. Section 228 of the Tax Code provides the
taxpayer’s remedy to dispute a tax assessment,
viz.: “Appeals within thirty (30) days from
receipt of the said decision, or from the lapse of
the one hundred eighty (180)-day period;
otherwise, the decision shall become final,
executory and demandable.” As found by the
CTA-second Division, PDCI mistakenly computed
the period of appeal. Having chosen the remedy
of appeal against the CIR’s supposed inaction on
its protest, PDCI should have reckoned its thirty-
day period for appeal from the lapse of one
hundred eighty (180) days from the time it filed
its protest against the Final Letter of Demand
and Assessment Notice. Thus, the petition
should have been filed on December 6, 2006 and
not on October 31, 2007.
Since petitioner did not submit additional
relevant documents in support of its protest, the
180-day period within which respondent should
act on the protest should be reckoned from the
filing of petitioner’s protest on May 10, 2006.
Accordingly, respondent had until November 6,
2006 within which to act on the protest.
Respondent failed to act on the protest on or
before November 6, 2006. Thus, petitioner had
thirty days from November 6, 2006 or until
December 6, 2006 within which to appeal
respondent’s inaction before this Court.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
However, records prove that no appeal was filed
before this Court on or before December 6, 2006.
The failure of petitioner to appeal the inaction
on time rendered the assessment final,
executory, demandable, and incontestable.
(Philippine Dream Company, Inc. v. Commissioner
of Internal Revenue, G.R. No. 216044, August 27,
2020)
Remedies of the taxpayer in case of denial or
inaction of the Commissioner
A. By the CIR’s duly authorized representative
1. If the protest is denied, in whole or in part,
the taxpayer may either:
a. appeal to the CTA within 30
days from date of receipt of the
said decision; or
b. elevate his protest through
request for reconsideration to
the CIR within 30 days from
date of receipt of the said
decision.
No request for reinvestigation shall be
allowed in administrative appeal and
only issues raised in the decision of
the CIR’s duly authorized
representative shall be entertained by
the CIR.
2. If the protest is not acted upon, the taxpayer
may either:
a. appeal to the CTA within 30 days
after the expiration of the 180-day
period; or
b. await the final decision of the CI
R’s duly authorized representative
on the disputed assessment.
NOTE: Items 1&2 are mutually exclusive. The
exercise of one option bars the other.
B. By the CIR
1. If the protest or administrative appeal, as
the case may be, is denied, in whole or in
part, the taxpayer may appeal to the CTA
within 30 days from date of receipt of the
said decision. Otherwise, the assessment
shall become final, executory and
demandable.
A motion for reconsideration of the CIR’s
denial of the protest or administrative
316
 Taxation Law
appeal, as the case may be, shall not toll the
30-day period to appeal to the CTA.
2. If the protest or administrative appeal is not
acted upon, the taxpayer may either:
a. Appeal to the CTA within 30 days
from after the expiration of the 180-
day period; or
b. Await the final decision of the CIR on
the disputed assessment and appeal
such final decision to the CTA within
30 days after the receipt of a copy of
such decision.
NOTE: Items 1&2 are mutually exclusive. The
exercise of one option bars the other.
In case of inaction on protested assessment
within the 180-day period, the option of the
taxpayer is to either:
1. File a petition for review with the CTA
within 30 days after the expiration of the
180-day period; or
2. Await the final decision of the Commissioner
or his duly authorized representative on the
disputed assessment and appeal such final
decision to the CTA within 30 days after the
receipt of a copy of such decision.
These options are mutually exclusive and the
resort to one bars the application of the
other.
When the law provided for the remedy to appeal
the inaction of the CIR, it did not intend to limit
it to a single remedy of filing an appeal after the
lapse of 180-day prescribed period. When a
taxpayer protested an assessment, he naturally
expects the CIR to decide either positively or
negatively. A taxpayer cannot be prejudiced if he
chooses to wait for the final decision of the CIR
on the protested assessment. (Lascona Land Co.,
Inc. v. CIR, G.R. No. 171251, March 5, 2012)
Q: The FDDA issued by the CIR to Liquigaz
merely contained a table of Liquigaz’s
supposed tax liabilities, without providing
any details. The CIR explains that the FDDA
still complied with the requirements of the
law as it was issued in connection with the
PAN and FLD/FAN, which had an attachment
of the details of discrepancies. Hence, the CIR
concludes that Liquigaz was sufficiently
informed in writing of the factual bases of the
317
assessment. Is the CIR correct?
A: NO. It is undisputed that the FDDA merely
showed Liquigaz’ tax liabilities without any
details on the specific transactions which gave
rise to its supposed tax deficiencies. While it
provided for the legal bases of the assessment, it
fell short of informing Liquigaz of the factual
bases thereof. The CIR erred in claiming that
Liquigaz was informed of the factual bases of the
assessment because the FDDA made reference to
the PAN and FAN/FLD, which were accompanied
by details of the alleged discrepancies.
The rules specifically require that the decision of
the CIR or his duly authorized representative on
a disputed assessment shall state the facts, law
and rules and regulations, or jurisprudence on
which the decision is based. Failure to do so
would invalidate the FDDA. To rule otherwise
would tolerate abuse and prejudice. Taxpayers
will be unable to file an intelligent appeal before
the CTA as they would be unaware on how the
CIR or his authorized representative appreciated
the defense raised in connection with the
assessment. (CIR v. Liquigaz Philippines Corp.,
G.R. No. 215534, April 18, 2016)
Q: What is the effect of a void FDDA?
A: FDDA that does not inform the taxpayer in
writing of the facts and law on which it is based
renders the decision void. The written notice
requirement for both the FLD and the FAN is in
observance of due process — to afford the
taxpayer adequate opportunity to file a protest
on the assessment and thereafter file an appeal
in case of an adverse decision.
However, a void FDDA does not ipso facto render
the assessment void. The assessment remains
valid notwithstanding the nullity of the FDDA
because the assessment itself differs from a
decision on the disputed assessment. An FDDA
that does not inform the taxpayer in writing of
the facts and law on which it is based renders
the decision void. Therefore, it is as if there was
no decision rendered by the CIR. It is
tantamount to a denial by inaction by the CIR,
which may still be appealed before the CTA and
the assessment evaluated on the basis of the
available evidence and documents. (CIR v.
Liquigaz Philippines Corp., G.R. No. 215534, April
18, 2016)
 National Taxation
Q: A taxpayer received a tax deficiency
assessment of P1.2 Million from the BIR
demanding payment within 10 days,
otherwise, it would collect through summary
remedies. The taxpayer requested for a
reconsideration stating the grounds therefor.
Instead of resolving the request for
reconsideration, the BIR sent a Final Notice
before Seizure to the taxpayer. May this
action of the Commissioner of Internal
Revenue be deemed a denial of the request
for reconsideration of the taxpayer to entitle
him to appeal to the Court of Tax Appeals?
Decide with reasons. (2005 BAR)
A: YES. The final notice before seizure was in
effect a denial of the taxpayer's request for
reconsideration, not only was the notice the only
response received, its nature, content, and tenor
support the theory that it was the BIR's final act
regarding the request for reconsideration. (CIR v.
Isabela Cultural Corporation, G.R. No. 135210,
July 11, 2001)
Q: PAGCOR received a FAN on January 17,
2008 for payment of deficiency Fringe
Benefit Tax. 7 days later, it filed a protest to
the FAN addressed to RD Misajon of Revenue
Region No. 6 of the BIR. On August 14, 2008,
PAGCOR elevated its protest to CIR, there
being no action taken thereon as of that date.
On March 11, 2009, PAGCOR filed a Petition
for Review before the CTA alleging
respondent’s inaction in its protest. CTA
Division dismissed the petition for being
filed out of time. CTA En banc affirmed CTA
Division’s ruling. In its Petition for Review
before the SC, PAGCOR argues that its protest
before the CIR on August 14, 2008 starts a
new period from which to determine the last
day to file its petition before the CTA. Is
PAGCOR correct?
A: NO. The rules give a protesting taxpayer three
options:
1. If the protest is wholly or partially denied by
the CIR or his authorized representative,
then the taxpayer may appeal to the CTA
within 30 days from receipt of the whole or
partial denial of the protest.
2. If the protest is wholly or partially denied by
the CIR's authorized representative, then
the taxpayer may appeal to the CIR within
30 days from receipt of the whole or partial
denial of the protest.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
3. If the CIR or his authorized representative
failed to act upon the protest within 180
days from submission of the required
supporting documents, then the taxpayer
may appeal to the CTA within 30 days from
the lapse of the 180-day period.
To further clarify the three options: A whole or
partial denial by the CIR’s representative may be
appealed to the CIR or the CTA. A whole or
partial denial by the CIR may be appealed to the
CTA. The CIR or the CTA’s authorized
representative’s failure to act may be appealed
to the CTA. There is no mention of an appeal to
the CIR from the failure to act by the CIR's
authorized representative.
PAGCOR did not wait for the RD or the CIR’s
decision on its protest. PAGCOR made separate
and successive filings before the RD and the CIR
before it filed its petition with the CTA. PAGCOR
rendered the second option moot when it
formulated its own rule and “elevated an appeal”
to the CIR without any decision from the RD.
The third option states that the remedy for
failure to act by the CIR or his authorized
representative is to file an appeal to the CTA
within 30 days after the lapse of 180 days from
the submission of the required supporting
documents. PAGCOR clearly failed to do this. If
we consider, for the sake of argument, PAGCOR’s
submission before the CIR as a separate protest
and not as an appeal, then such protest should
be denied for having filed out of time. It is clear
that PAGCOR failed to make use of any of the
three options described above. Indeed,
PAGCOR’s lapses in procedure have made the
BIR’s assessment final, executor and
demandable. (PAGCOR v. BIR, G.R. No. 208731,
January 27, 2016)
Effect of failure to appeal
The decision or assessment becomes final and
executory. The assessment is considered correct
which may be enforced by summary or judicial
remedies. The assessment which has become
final and executory cannot be superseded by a
new assessment.
In an action for the collection of the tax by the
government, the taxpayer is barred from re-
opening the question already decided.
In a proceeding for collection of tax by judicial
action, the taxpayer’s defenses are similar to
318
 Taxation Law
those of the defendant in a case for the
enforcement of a judgment by judicial action.
Q: On November 29, 2006, MISNET INC
received a Preliminary Assessment Notice
(PAN) from respondent Commissioner of
Internal Revenue (CIR) stating that after
examination, there was an alleged deficiency
in taxes for taxable year 2003 amounting to
P11,329,803.61, representing the expanded
withholding tax (EWT) and final withholding
VAT. MISNET filed a letter¬-protest on the
PAN.
On January 23, 2007, MISNET INC received a
Formal Assessment Notice (FAN) which
states that petitioner's tax deficiency for the
year 2003, amounted to P11,580,749.31,
inclusive of P25,000.00 Compromise Penalty.
appeal to the CTA from the final decision of the
CIR, the said rule could not be applied if the
Assessment Notice itself clearly states that the
taxpayer must file a protest with the CIR or the
Regional Director within 30 days from receipt of
the Assessment Notice. Under the circumstances
obtaining in this case, we opted not to apply the
statutory period within which to appeal with the
CTA considering that no final decision yet was
issued by the CIR on petitioner's protest. The
subsequent appeal taken by petitioner is from
the inaction of the CIR on its protest. (Misnet, Inc.
v. Commissioner of Internal Revenue, G.R. 210604,
June 03, 2019, as penned by J. J. Reyes Jr.)
RECOVERY OF TAX ERRONEOUSLY
OR ILLEGALLY COLLECTED
Remedies of Taxpayer After Payment

On March 28, 2011, MISNET received an
Amended Assessment Notice reflecting an
amended deficiency EWT after
reinvestigation. On the same date, MISNET
received a Final Decision on Disputed
Assessment (FDDA) stating that after
reinvestigation, there was still due from
petitioner the amount of P14,564,323.34. On
April 8, 2011, petitioner filed a letter-reply to
the Amended Assessment Notice and FDDA,
which was received by the CIR on April 11,
2011.
On May 9, 2011, the CIR sent a letter to
MISNET which states in part that MISNET's
letter-reply dated April 8, 2011 produced no
legal effect since it availed of the improper
remedy. It should have appealed the final
decision of the CIR to the Court of Tax
Appeals within thirty (30) days from the date
of receipt of the said Decision, otherwise, the
assessment became final, executory and
demandable. Is the CIR correct?
1. Tax refund – Actual reimbursement of tax
2. Tax credit – Government issues Tax Credit
Certificate (TCC) which may be applied
against any internal revenue tax, excluding
withholding taxes, for which the taxpayer is
directly liable. (Sec. 204 (C), NIRC)
All TCCs issued by the BIR shall not be allowed
to be transferred or assigned to any person. (Sec.
2, RR No. 14-2011)
Grounds, requisites, and periods for filing a
claim for refund or issuance of a tax credit
certificate
1. Tax is erroneously or illegally assessed or
collected;
2. Penalty is imposed without authority; and
3. Sum collected is excessive or in any manner
wrongfully collected.
Illegally collected tax vis-a-vis erroneously
collected tax

A: NO. Court has on several occasions relaxed ILLEGALLY ERRONEOU

this strict requirement. We have on several COLLECTE SLY
instances allowed the filing of an appeal outside D TAX COLLECTED
the period prescribed by law in the interest of TAX
justice, and in the exercise of its equity Definition There is a No violation
jurisdiction. MISNET's belated filing of an appeal violation of of the law
with the CTA is not without strong, compelling certain but there is a
reason. We could say that petitioner was merely provisions mistake in
exhausting all administrative remedies available of tax law or collection.
before seeking recourse to the judicial courts. statute.
While the rule is that a taxpayer has 30 days to

319
 National Taxation
On the part The tax was The payment or credit the tax even without a written
of the paid by him was made claim (Sec. 229, NIRC)
Taxpayer under under a b. A return filed showing an overpayment
duress. mistake of shall be considered as a written claim
fact. for credit or refund (Sec. 204 (C), NIRC)
On the part The tax was The (2002, 2010 BAR)
of the collected in collection
Governmen patent was made 3. Must be a categorical claim for refund or
t disregard of based on a credit;
the law. misapplicati
on of the It is for the CIR to afford an opportunity to
law. correct the action of subordinate officers;
and
Distinguish tax refund from tax credit
To notify the Government that such taxes
TAX REFUND TAX CREDIT have been questioned and the notice should
As to The taxpayer The taxpayer then be borne in mind in estimating the
purpose asks for asks that the revenue available for expenditure. (Bermejo
restitution of money paid v. CIR, G.R. No. L-3029, July 25, 1950)
the money paid be applied to
as tax. There is his existing 4. Must be filed within 2 years from date of
actual tax liability payment of the tax or penalty regardless
reimbursement except of any supervening cause that may arise
withholding after payment. No suit or proceeding shall
taxes be instituted after the expiration of the such
Reckoning 2-yr period to 2-yr period period; and (2008 BAR)
point of file the claim starts from
the 2-year with the CIR the date such 5. The taxpayer must present proof of payment
period starts after the credit was of the tax.
payment of the allowed – in
tax or penalty case credit is Q: Congress enacts a law granting grade
wrongly school and high school students a 10%
made discount on all school-prescribed textbooks
purchased from any bookstore. The law
Requisites for a claim of tax refund or tax allows bookstores to claim the discount in
credit (2002, 2005 BAR) full as a tax credit.

1. There is tax collected erroneously or a. If in a taxable year a bookstore has no tax

illegally, or a penalty collected without
authority, or a sum excessively or
wrongfully collected. (Sec. 229, NIRC)
NOTE: Payment under protest is not
required.
2. There must be a written claim for refund
filed by the taxpayer with the CIR. (Vda. De
Aguinaldo v. CIR, G.R. No. L-19927, February
26, 1965)
XPNs:
a. When on the face of the return upon
which payment was made, such
payment appears clearly to have
erroneously paid - the CIR may refund
due on which to apply the tax credits, can
the bookstore claim from the BIR a tax
refund in lieu of tax credit?
b. Can the BIR require the bookstores to
deduct the amount of the discount from
their gross income?
c. If a bookstore closes its business due to
losses without being able to recoup the
discount, can it claim reimbursement of
the discount from the government on the
ground that without such
reimbursement, the law constitutes
taking of private property for public use
without just compensation? (2006 BAR)
A:
a. NO, there is nothing in the law that grants a
refund when the bookstore has no tax

UNIVERSITY OF SANTO TOMAS 320

2021 GOLDEN NOTES
 Taxation Law
liability against which the tax credit can be
used. A tax credit is in the nature of a tax
exemption and in case of doubt, the doubt
should be resolved in strictissimi juris
against the claimant. (CIR v. Central Luzon
Drug, G.R. No. 159647, Apr. 15, 2005)
b. NO, tax credit which reduces the tax liability
is different from a tax deduction which
merely reduces the tax base. Since the law
allowed the bookstores to claim the
discount in full as a tax credit, the BIR is not
allowed to expand or contract the legislative
mandate. (CIR v. Bicolandia Drug
Corporation, G.R. 148083, July 21, 2006)
c. NO, if the business continues to operate at a
loss and no other taxes are due, thus
compelling it to close shop, the credit can
never be applied and will be lost altogether.
(CIR v. Central Luzon Drug, G.R. No. 159647,
Apr. 15, 2005) The grant of the discount to
the taxpayer is a mere privilege and can be
revoked anytime.
Q: Is a deficiency tax assessment a bar to a
claim for tax refund or tax credit? (2005
BAR)
A: YES, the deficiency tax assessment is a bar to
a tax refund or credit. The taxpayer cannot be
entitled to a refund and at the same time liable
for a tax deficiency assessment for the same
year. The deficiency assessment creates a doubt
as to the truth and accuracy of the Tax Return.
Said Return cannot therefore be the basis of the
refund. (CIR v. CA, G.R. No. 106611, July 21, 1994)
Q: On June 16, 1997, the BIR issued against
the Estate of Mott a notice of deficiency
estate tax assessment, inclusive of surcharge,
interest and compromise penalty. The
Executor of the Estate of Mott filed a timely
protest against the assessment and
requested for waiver of the surcharge,
interest and penalty. The protest was denied
by the CIR with finality on Sept. 13, 1997.
Consequently, the Executor was made to pay
the deficiency assessment on Oct. 10, 1997.
The following day, the Executor filed a
Petition with the CTA praying for the refund
of the surcharge, interest and compromise
penalty. The CTA took cognizance of the case
and ordered the CIR to make a refund. The
CIR filed a Petition for Review with the CA
321
assailing the jurisdiction of the CTA and the
Order to make refund to the Estate on the
ground that no claim for refund was filed
with the BIR.
a. Is the stand of the CIR correct?
b. Why is the filing of an administrative
claim with the BIR necessary? (2000
BAR)
A:
a. YES, for there was no claim for refund or
credit that has been duly filed with the CIR
which is required before a suit or
proceeding can be filed in any court. (Sec.
229, NIRC) The denial of the claim by the CIR
is the one which will vest the CTA
jurisdiction over the refund case should the
taxpayer decide to appeal on time.
b. The filing of an administrative claim for
refund with the BIR is necessary in order:
i. To afford the CIR an opportunity to
consider the claim and to have a
chance to correct the errors of
subordinate officers. (Gonzales v. CTA,
G.R. No. 14532, May 26, 1965); and
ii. To notify the Government that such
taxes have been questioned and the
notice should be borne in mind in
estimating the revenue available for
expenditures. (Bermejo v. Collector, G.R.
No. L-3028, July 29, 1950)
Q: PNB electronically filed its Annual Income
Tax Return and manually filed the same with
the required attachments. PNB thereafter
filed its claim for refund or issuance of tax
credit certificate of its excess creditable
withholding taxes. Due to the CIR’s inaction
to the claim, PNB filed a petition for review
for its claim. CTA Third Division found that
PNB’s evidence was insufficient to support its
claim for a refund or issuance of tax credit
certificate, ruling that the presentation of the
succeeding Quarterly ITRs was vital to its
claim. PNB is contending that the
presentation of the ITRs is not indispensable
to its claim for refund. Is PNB’s contention
correct?
A: YES. The presentation of the claimant's
quarterly returns is not a requirement to prove
entitlement to the refund. Once the minimum
statutory requirements have been complied
 National Taxation
with, the claimant should be considered to have
successfully discharged its burden to prove its
entitlement to the refund. After the claimant has
successfully established a prima facie right to
the refund by complying with the requirements
laid down by law, the burden is shifted to the
opposing party to disprove such claim. To rule
otherwise would be to unduly burden the
claimant with additional requirements which
has no statutory nor jurisprudential basis.
Thus, once the claimant has successfully
established that its claim was 1) filed within the
two-year prescriptive period; 2) that the income
related to the claimed CWT formed part of the
return during the taxable year when the refund
is claimed for; and 3) the fact of withholding of
said taxes, it shall be deemed to be entitled to its
claimed CWT refund. (Commissioner of Internal
Revenue v. Philippine National Bank, G.R. No.
212699, March 13, 2019)
Payment under protest is not a requirement
A suit or proceeding for tax refund may be
maintained “whether or not such tax, penalty or
sum has been paid under protest or duress” (Sec.
229, NIRC)
When payment under protest required
It is necessary in claims for refund for real
property taxes under Sec. 252, LGC and for
customs duties under Sec. 2308, TCC.
Rule on government’s liability for interests
on tax refunds
GR: There can be no interest on refund of tax in
the absence of statutory provision clearly and
expressly directing or authorizing such payment.
XPNs:
1. If interest is authorized by law;
2. Arbitrariness in the collection of tax;
3. Under Sec. 79(C)(2) with respect to income
taxes withheld on the wages of the
employees.
NOTE: An action is not arbitrary when exercised
honestly and upon due consideration where
there is room for two opinions, however much it
may be believed that an erroneous conclusion
was reached. Arbitrariness presupposes
inexcusable or obstinate disregard of legal
provisions. (Philex Mining Corp. v. CIR, G.R.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
120324, April 21, 1999)
Tax Refund or Tax Credit may be forfeited to
the Government
1. Tax Refund – When a refund check or
warrant remains unclaimed or uncashed
within 5 years from date of mailing or
delivery.
2. Tax Credit – a Tax Credit Certificate which
remains unutilized after 5 years from date of
issue, shall be invalid, unless revalidated.
(Sec. 230, NIRC)
Two-year prescriptive period
No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with
the CIR a claim for credit or refund within 2
years after the payment of the tax or penalty.
(Sec 204(C), NIRC)
No suit or proceeding shall be filed after the
expiration of 2 years from the date of payment of
the tax or penalty regardless of any supervening
cause that may arise after payment. (Sec 229,
NIRC)
It is necessary that the tax be paid in full, and
that the claim for refund in the BIR as well as the
proceedings in the CTA be commenced within 2
years counted from the payment of the tax.
Thus, as a rule, the two-year prescriptive period
runs from the payment of tax. However, the
following instances provide for different
commencement of the two-year period:
1. Tax is paid in installments (For
individuals): From the date of the final
payment.
2. Payments effected through the
withholding tax system: From the date it
falls due at the end of the taxable year.
In case of payments effected through
withholding tax system, the tax liability is
deemed paid when the same falls due at the
end of the tax year. This is because a
taxpayer, resident or non-resident, who
contributes to the withholding tax system,
not really deposit an amount to the CIR, but,
in truth, performs and extinguishes his tax
obligation for the year concerned. (Gibbs v.
CIR, G.R. No. L-17406, November 29, 1965)
322
 Taxation Law
3. Overpaid quarterly corporate income tax:
From the date the final adjustment return is
filed after the end of the taxable year. The
period is counted from the actual filing, not
the last day allowed by law to file.
The filing and payment of the quarterly
income tax should only be considered as
mere installments of the annual tax due.
These quarterly payments should be treated
as advances or portions of the annual income
tax due, to be adjusted at the end of the year,
its Final Adjustment Return. (CIR v. TMX Sales,
G.R. No. 83736, January 15,1992 reiterated in
CIR v. CA, G.R. No. 117254, January 21, 1999)
The two-year period for filing tax refund is
not jurisdictional
The Supreme Court held that even if the two-
year period had already lapsed, the same is not
jurisdictional and may be suspended for reasons
of equity and other special circumstances. (CIR v.
PNB, 474 SCRA 303)
Founded on moral and equitable grounds, the
following circumstances may stay the two-year
period:
1. Assurance on the part of the BIR that steps
were being taken to credit taxpayer with the
amount sought to be refunded;
2. An agreement or understanding with the
BIR that they await the result of a pending
cases involving similar issue raised in the
claim for refund. (Panay Electric Co., Inc. v.
CIR, 103 Phil 819)
Waiver of prescription in an action for
refund
GR: The 2-year period is not jurisdictional.
Therefore, if the government failed to plead
prescription in a motion to dismiss or as a
defense in its answer to the petition for review,
it is deemed waived.
XPN: Taxpayer amends his petition for review
alleging therein a new cause of action and the
government pleads prescription in his answer to
the amended petition for review.
Q: Alyanna has a pending claim for refund
with the CIR. The 2-year period is about to
end and the CIR has yet to decide on the
323
claim. What must Alyanna do to pursue her
claim for refund?
A: A claim for refund must be filed with the BIR
and the commencement of the proceedings in
the CTA must be done within the 2-year period
from the date of full payment of the tax or
penalty regardless of any supervening event.
Thus, Alyanna must commence the proceedings
with the CTA before the end of the 2-year period
without waiting for the decision of the CIR.
Q: On Mar. 12, 2001, REN paid his taxes. Ten
months later, he realized that he had
overpaid and immediately filed a claim for
refund with the CIR. On Feb. 27, 2003, he
received the decision of the CIR denying
REN's claim for refund. On Mar. 24, 2003,
REN filed an appeal with the CTA. Was his
appeal filed on time or not? (2004 BAR)
A: NO. His appeal was not filed on time. The 2-
year period for filing a claim for refund is not
only a limitation for pursuing the claim at the
administrative level but also for appealing the
case to the CTA. The law provides that "no suit
or proceeding shall be filed after the expiration
of 2 years from the date of the payment of the
tax or penalty regardless of any supervening
cause that may arise after payment. Since the
appeal was only made on Mar. 24, 2003, more
than two years had already elapsed from the
time the taxes were paid on Mar. 12, 2003.
Accordingly, REN had lost his judicial remedy
because of prescription.
Q: XCEL Corp. filed its quarterly income tax
return for the first quarter of 1985 and paid
P500.000 on May 15, 1985. In the subsequent
quarters, XCEL suffered losses. On Apr. 15,
1986 it declared a net loss of P1,000,000 in
its annual income tax return. After failing to
get a refund, XCEL filed on Mar. 1, 1988 a case
with the CTA to recover the P500.000 in
taxes paid on May 15, 1985. Is the action to
recover the taxes filed timely? (1994 BAR)
A: The action for refund was filed with the CTA
on time. In the case of overpaid quarterly
corporate income tax, the two-year period for
filing claims for refund in the BIR as well as in
the institution of an action for refund in the CTA,
the two-year prescriptive period for tax refunds
is counted from the filing of the final,
adjustment return under Sec. 67 of the NIRC,
 National Taxation
and not from the filing of the quarterly return
and payment of the quarterly tax. The CTA
action on Mar. 1, 1988 was clearly within the
reglementary 2-year period from the filing of the
final adjustment return of the corporation on
Apr. 15, 1986.
Q: On July 8, 2011, Univation Motor
Philippines, Inc. filed its amended Annual
Income Tax Return (ITR) for 2010 showing a
total gross income of P117,084,174.00 and
an overpayment of income taxes amounting
to P26,103,898.52. Univation Motor
Philippines filed its Application for Tax
Credit in the amount of P12,868,745.00.
Since the BIR has not yet acted upon
respondent's administrative claim,
petitioner filed a Petition for Review with the
CTA on April 12, 2013. CIR argued that
respondent prematurely filed its judicial
claim with the CTA depriving it with the
opportunity to act on the administrative
claim for refund/tax credit in violation of the
doctrine of exhaustion of administrative
remedies. Is the petitioner’s contention
correct?
A: NO. Indeed, 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. “Thus, it is
only when the Adjustment Return covering the
whole year is filed that the taxpayer would know
whether a tax is still due or a refund can be
claimed based on the adjusted and audited
figures.” (Commissioner of Internal Revenue v.
Univation Motor Philippines, Inc. (Formerly
Nissan Motor Philippines, Inc.), G.R. 231581, April
10, 2019, as penned by J. J. Reyes Jr.)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Taxpayer’s remedy in case of denial of claim
for refund
The taxpayer may appeal to CTA in case of denial
by CIR of the claim for refund. It must be filed
within 30 days from receipt of the decision of
the CIR but not to exceed the 2-year period from
date of payment of the tax or penalty regardless
of any supervening cause that may arise after
payment.
In case the decision of the CIR takes too long and
the 2-year period is about to end, proceedings in
the CTA must be commenced and there would
no longer be any need to wait for the decision of
the CIR.
Distinction of remedies in tax assessment
and claim for refund
Against an Assessment
A tax assessment becomes final unless it is
disputed or contested within 30 days from
receipt thereof by the taxpayer. If the action
taken by the CIR on the request for
reconsideration is unacceptable to the
taxpayer, the latter must then appeal, by way
of Petition for Review to the CTA within 30
days from receipt of the decision of the CIR.
The taxpayer may also opt to pay the tax
before the finality of the assessment (e.g.,
within 30 days from receipt of the
assessment) and then file within 2 years a
written claim for the refund of the tax.
Claim for Refund (Sec. 229)
A denial by the CIR of a claim for refund must
be appealed to the CTA within 30 days from
receipt of notice of denial and within 2 years
from the day of full and final payment.
Continued inaction by the CIR on claims for
refund may thus be taken as a denial
appealable to the CTA, in order to permit the
appeal to be considered or having been made
within the two-year mandatory period.
Proper party to file claim for refund or tax
credit
GR: The “taxpayer” is the person entitled to
claim a tax refund. He is the “party adversely
affected” who is given the right to appeal the
decision or ruling of the Commissioner.
324
 Taxation Law
XPN: Under the following situations:
CASE THE ONE ENTITLED FOR THE
REFUND
The taxpayer (even if the tax was
shifted by the taxpayer to his
customers as in sales tax and even if
Where the tax has
the tax has been billed as a separate
been shifted
item in the invoice). (CIR v. American
Rubber, G.R. No. L-19667, November
29, 1966)
Theater goers can claim the illegally
exacted taxes not the theater
owners. (Medina v. Baguio, G.R. No. L-
4060, August 29, 1952)
Where the payer is
not the taxpayer
1. The withholding agent (CIR v.
Procter and Gamble, G.R. No. L-
66838, December 2, 1991)
2. Withholding agent may file a
claim for refund for taxes which
was withheld and paid on behalf
of a non-resident foreign
corporation (Filipinas Synthetic
Fiber Corporation v CA, G.R. Nos.
118498 & 124377, October 12,
1999)
3. In case the taxpayer does not file
Where the payer is a claim for refund, the
the withholding withholding agent has the right to
agent file the claim, even when it is
unrelated to, or is not a wholly
owned subsidiary of, the
principal taxpayer. (CIR vs. Smart
Communications, Inc, G.R. Nos.
179045-46, August 25, 2010)
NOTE: Since this is merely an
exception, the rule is that the
withholding agent is not considered
as the taxpayer, hence he is not
entitled to a tax amnesty due for the
taxpayer’s account.
Where the donor’s Donee is the proper party to claim
tax was assumed by the refund of the donor’s tax (even if
the donee the tax was advanced by the donor).
Proper party to question/seek a tax refund in The proper party is the statutory taxpayer, the
indirect taxes person on whom the tax is imposed by law and
325
REASON
The sales tax is imposed directly on
the seller. Once recovered, the seller
must hold the refunded taxes in
trust for the individual purchasers
who advanced payment thereof and
whose name must appear on his
record
The amount collected (the illegal
municipal taxes) from the theater
goers by theater owners are owned
by the theater goers. Only owners of
property have the right to claim it.
The theater owners merely acted as
agents of the theater goers and as
such they cannot claim the amount
illegally imposed by the
municipality. (Medina v. Baguio,
ibid.)
1. The withholding agent is
considered a ‘taxpayer” under
the NIRC as he is personally
liable for the withholding tax as
well as for deficiency
assessments, surcharges, and
penalties, should the amount of
the tax withheld be finally found
to be less than the amount that
should have been withheld
under law.”
2. As an agent of the taxpayer, the
withholding agent has the
authority to file the necessary
income tax return and to remit
the tax withheld to the
government impliedly includes
the authority to file a claim for
refund and to bring an action for
recovery of such claim.” (CIR v.
Smart Communications, Inc.,
ibid)
 National Taxation
who paid the tax even when he shifts the burden
thereof to another because once shifted, it is no
longer in the nature of a tax, but part of the
purchase price or the cost of goods or services
sold. (Exxon Mobil Petroleum and Chemical
Holdings, Inc. vs. CIR, G.R. No. 180909, January 19,
2011; Silkair (Singapore) Pte., Ltd. v. CIR, G.R. No.
166482, January 25, 2012)
Q: Silkair purchased aviation jet fuel from
Petron for use on Silkair international flights.
Silkair, contending that it is exempt from the
payment of excise taxes, filed a formal claim
for refund with the CIR. Silkair claims that it
is exempt from the payment of excise tax
under the NIRC, specifically Sec. 135, and
under Art. 4 of the Air Transport Agreement
between the Governments of the Republic of
the Philippines and the Republic of
Singapore (Air Agreement) The CIR denied
the claim contending that since the liability
for the excise tax payment is imposed by law
on Petron as the manufacturer of the
petroleum products, any claim for refund
should only be made by Petron as the
statutory taxpayer.
a. Decide whether or not Silkair is the
proper party to claim a refund for the
excise taxes paid.
b. What is the proper remedy of the Silkair?
A:
a. Silkair is not the proper party to claim a
refund for the excise taxes paid. The SC held
that “the proper party to question or seek a
refund of an indirect tax is the statutory
taxpayer, the person on whom the tax is
imposed by law and who paid the same even
if he shifts the burden thereof to another.”
Excise tax on petroleum is an indirect tax.
Although the burden to pay an indirect tax
can be passed on to the purchaser of the
goods, the liability to pay the indirect tax
remains with the petroleum manufacturer or
seller. When the manufacturer or seller
decides to shift the burden of the excise tax
to the tax-exempt purchaser, the tax becomes
a part of the price of the commodity. Thus, in
this case, the petroleum manufacturer who is
the statutory taxpayer is the proper party to
claim the refund.
b. The exempt entity’s remedy is to invoke its
tax exemption before buying the petroleum
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
so that the petroleum manufacturer would
not pass on the excise taxes as part of the
purchase price. (Silkair Singapore PTE. Ltd.
v. CIR, GR 171383 & 172379, Nov. 14, 2008)
Q: Chevron filed a claim for refund or tax
credit for the excise taxes paid on its
importation of petroleum products that it
had sold to the Clark Development
Corporation (CDC), en entity exempt from
direct and indirect taxes. Is Chevron entitled
to the tax refund or tax credit?
A: Excise tax is a tax on property; hence, the
exemption from the excise tax expressly granted
under Section 135 of the NIRC must be
construed in favor of the petroleum products on
which the excise tax was initially imposed.
Accordingly, the excise taxes that Chevron paid
on its importation of petroleum products
subsequently sold to CDC were illegal and
erroneous and should be credited or refunded to
Chevron in accordance with Sec. 204 of NIRC.
Chevron, being the statutory taxpayer, paid the
excise taxes on its importation on the petroleum
products. Pursuant to Section 135(c), petroleum
products sold to entities that are by law exempt
from direct and indirect taxes are exempt from
excise tax. Inasmuch as its liability for the
payment of the excise taxes accrued immediately
upon importation and prior to the removal of
the petroleum products from the customs house,
Chevron was bound to pay, and actually paid
such taxes. But the status of the petroleum
products as exempt from the excise taxes would
be confirmed only upon their sale to CDC.
Consequently, the payment of the excise taxes by
Chevron upon its importation of petroleum
products was deemed illegal and erroneous
upon the sale of the petroleum products to CDC.
In cases involving excise tax exemptions on
petroleum products under Section 135 of the
NIRC, the Court has consistently held that it is
the statutory taxpayer, not the party who only
bears the economic burden, who is entitled to
claim the tax refund or tax credit. The general
rule applies here because Chevron did not pass
on to CDC the excise taxes paid on the
importation of the petroleum products, the
latter being exempt from indirect taxes. (Chevron
Phil. Inc. v. CIR, G.R. No. 210836, September 01,
2015)
Q: Does a withholding agent have the right to
326
 Taxation Law
file an application for tax refund? Explain.
(2005 BAR)
A: YES. A withholding agent should be allowed
to claim for tax refund, because under the law
said agent is the one who is held liable for any
violation of the withholding tax law should such
violation occur. (Commissioner of Internal
Revenue v. Wander Philippines Inc., 160 SCRA
570, 1988)
Furthermore, since the withholding agent is
made personally liable to deduct and withhold
any tax under Section 53(c) of the NIRC, it is
imperative that he be considered the taxpayer
for all legal intents and purposes. Thus, by any
reasonable standard, such person should be
regarded as a party in interest to bring suit for
refund of taxes. (Commissioner of Internal
Revenue v. Procter and Gamble Philippines
Manufacturing Corporation and CTA, 204 SCRA
377, 1991)
Corporate taxpayer’s options in case of
excess quarterly income taxes paid
If the sum of the quarterly tax payments made
during the said taxable year exceeds the total tax
due on the entire taxable income of that year, the
corporation shall either:
1. Carry-over the excess credit against the
estimated quarterly income tax liabilities for
the taxable quarters of the succeeding
taxable years; or
2. Be credited (TCC); or
3. Refunded with the excess amount paid. (Sec
76, NIRC)
The above options are alternative and not
cumulative in nature, that is, the choice of one
precludes the other. The logic behind the rule is
to ease tax administration, particularly the self-
assessment and collection aspects. (Republic v.
Team (Phils.) Energy Corp., G.R. No. 188016,
January 14, 2015)
The Irrevocability Rule
Once the option to carry-over and apply the
excess quarterly income tax against income tax
due for the taxable quarters of the succeeding
taxable years has been made, such option shall
be considered irrevocable for that taxable period
and no application for cash refund or issuance of
327
a tax credit certificate shall be allowed therefor.
(Sec 76, NIRC)
The phrase “such option shall be considered
irrevocable for that taxable period” means that
the option to carry over the excess tax credits of
a particular taxable year can no longer be
revoked. (SYSTRA Phil., Inc. v. CIR, G.R. No.
176290, September 21, 2007)
The exercise of an option is irrevocable and a
decision to carry-over and apply tax
overpayment continues until the overpayment
has been fully applied to tax liabilities (until fully
exhausted). (CIR vs. McGeorge Food Industries,
Inc., G.R. No. 174157, October 20, 2010)
NOTE: Under the old provision, the option to
carry-over the excess or overpaid income tax for
a given taxable year is limited to the
immediately succeeding taxable year only. In
contrast, under Section 76 of the NIRC of 1997,
the application of the option to carry over the
excess of creditable tax is not limited only to the
immediately following taxable year but extends
to the next succeeding taxable years. The clear
intent in the amendment under section 76 is to
make the option, once exercised, irrevocable for
the “succeeding taxable years”. (Asiaworld
Properties Philippines Corporation v. CIR, G.R. No.
171766, July 29, 2010)
Q: In its 2006 Annual ITR, UPSI-MI chose the
option "To be issued a tax credit certificate"
with respect to the amount P2,927,834.00,
representing unutilized excess creditable
taxes for the taxable year ending 31
December 2006.
In the following year, UPSI-MI changed its
taxable period from calendar year to fiscal
year ending on the last day of March. Thus, it
filed on 14 November 2007 an Annual ITR
covering the short period from January 1 to
March 31 of 2007. In the original 2007
Annual ITR, UPSI-MI opted to carry over as
"Prior Year's Excess Credits" the total
amount of P5,159,341.00 which included the
2006 unutilized creditable withholding tax of
P2,927,834.00. Thereafter, UPSI-MI amended
the return by excluding the sum of
P2,927,834.00 under the line "Prior Year's
Excess Credits" which amount is the subject
of the refund claim. Is UPSI-MI still entitled to
the refund of its 2006 excess tax credits in
 National Taxation
the amount of P2,927,834 even though it
initially filed its income tax return (for the
short period ending 31 March 2007)
indicating the option of carry-over?
A: NO. The Court interpreted Section 76 of the
NIRC that the irrevocability is limited only to the
option of carry-over such that a taxpayer is still
free to change its choice after electing a refund
of its excess tax credit. But once it opts to carry
over such excess creditable tax, after electing
refund or issuance of tax credit certificate, the
carry-over option becomes irrevocable.
Accordingly, the previous choice of a claim for
refund, even if subsequently pursued, may no
longer be granted.
Further, nothing in the contents of BIR 1702
expressly declares that the option of refund or
TCC is irrevocable. Even on the assumption that
the irrevocability also applies to the option of
refund, such would be an interpretation of the
BIR that is contrary to the intent of the law. It
must be stressed that such erroneous
interpretation is not binding on the court.
(University Physicians Services, Inc. v.
Commissioner of Internal Revenue, G.R. 205955,
March 7, 2018)
Q: On April 17, 2006, Z Company filed its
Annual Income Tax Return ("ITR") for
taxable year 2005, and reflected a tax
overpayment of P1,500,653.00. In said
Annual ITR for taxable year 2005, Z Company
indicated that its excess creditable
withholding tax ("CWT") for the year 2005
was "To be refunded". However, on its
Quarterly Income Tax Return for the first to
third quarter of the taxable year 2006, it
reflected prior year excess credits of
P1,500,653.00. On December 29, 2006,
respondent filed with the Revenue Region
No. 8 an administrative claim for refund of its
alleged excess/unutilized CWT for the year
2005 in the amount of P1,500,653.00. On
April 2, 2007, respondent filed its Annual
Income Tax Return for taxable year 2006
showing prior year's excess credits of P0.00.
On December 7, 2007, pending CIR's action
on Z Company's claim for refund or issuance
of a tax credit certificate of its excess or
unutilized CWT for the year 2005 and before
the lapse of the period for filing an appeal, Z
Company filed a Petition for Review with the
CTA.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
The CIR alleged: assuming without admitting
that respondent filed a claim for refund, the
same is subject to investigation by the BIR; Z
Company failed to demonstrate that the tax
was erroneously or illegally collected; taxes
paid and collected are presumed to have
been made in accordance with laws and
regulations, hence, not refundable; it is
incumbent upon respondent to show that it
has complied with the provisions of Section
204(C), in relation to Section 229 of the Tax
Code, as amended, upon which its claim for
refund was premised. Is Z Company barred
by the irrevocability rule in claiming for the
refund of its excess and/or unutilized
creditable withholding tax?
A: NO. In case the corporation is entitled to a tax
credit or refund of the excess estimated
quarterly income taxes paid, the excess amount
shown on its final adjustment return may be
carried over and credited against the estimated
quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. 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.
The CTA En Banc thereby misappreciated the
fact that Z Company had already exercised the
option for its unutilized creditable withholding
tax for the year 2005 to be refunded when it
filed its annual ITR for the taxable year ending
December 31, 2005. Based on the disquisition in
Republic v. Team Phils. Energy Corporation,
supra, the irrevocability rule took effect when
the option was exercised. In the case of Z
Company, therefore, its marking of the box "To
be refunded" in its 2005 annual ITR constituted
its exercise of the option, and from then
onwards Z Company became precluded from
carrying-over the excess creditable withholding
tax. The fact that the prior year's excess credits
were reported in its 2006 quarterly ITRs did not
reverse the option to be refunded exercised in
its 2005 annual ITR. As such, the CTA En Banc
erred in applying the irrevocability rule against
Z Company. (Rhombus Energy, Inc. v.
Commissioner of Internal Revenue, G.R. 206362,
August 01, 2018, as penned by J. Bersamin)
Failure to signify preference in the return
328
 Taxation Law
does not bar outright a claim for refund
The corporation must signify its intention by
marking the corresponding option box provided
in the final adjustment return (FAR) While a
taxpayer is required to mark its choice in the
form provided by the BIR, this requirement is
only for facilitating tax collection to ease tax
administration, particularly the self-assessment
and collection aspects.
Failure to signify one's intention in the FAR does
not mean outright barring of a valid request for a
refund, should one still choose this option later
on. Despite the failure of taxpayer to make the
appropriate marking in the BIR form, the filing
of its written claim effectively serves as an
expression of its choice to request a tax refund,
instead of a tax credit. To assert that any future
claim for a tax refund will be instantly hindered
by a failure to signify one's intention in the FAR
is to render nugatory the clear provision that
allows for a two-year prescriptive period.
(Philam Asset Management Inc. v. CIR, G.R. Nos.
156637/162004, December 14, 2005)
Claim for tax refund or credit of excess and
unutilized creditable withholding tax (CWT)
The requirements for entitlement of a corporate
taxpayer for a refund or the issuance of TCC
involving excess withholding taxes are as
follows: (TIF)
1. That the claim for refund was filed within
the two-year reglementary period pursuant
to Section 229 of the NIRC;
2. When it is shown on the ITR that the
income payment received is being declared
part of the taxpayer's gross income; and
3. When the fact of withholding is established
by a copy of the withholding tax statement,
duly issued by the payor to the payee,
showing the amount paid and income tax
withheld from that amount.
The contention of the BIR that a taxpayer in
claim for tax refund should submit its quarterly
returns to show that it did not carry-over the
excess withholding tax to the succeeding quarter
is without merit. When the taxpayer is able to
establish prima facie its right to the refund by
testimonial and object evidence, the BIR should
present rebuttal evidence to shift the burden of
evidence back to the taxpayer. (Republic v. Team
329
(Phils.) Energy Corp., G.R. No. 188016, January 14,
2015)
There is no question that those who claim must
not only prove its entitlement to the excess
credits, but likewise must prove that no carry-
over has been made in cases where refund is
sought. Proving that no carry-over has been
made does not absolutely require the
presentation of the quarterly ITRs. The rule is
that any document, other than quarterly ITRs
may be used to establish that indeed the non-
carry over clause has been complied with,
provided that such is competent, relevant and
part of the records. Thus, quarterly ITRs are
not indispensable in a claim for refund for no
court can limit a party to the means of
proving a fact for as long as they are
consistent with the rules of evidence and fair
play. To stress, what the NIRC merely requires is
to sufficiently prove the existence of the non-
carry over of excess CWT in a claim for refund.
(Winebrenner & Iñigo Insurance Brokers, Inc. v.
CIR, G.R. No. 206526, January 28, 2015)
Q: In its final adjustment return for the 2010
taxable year, ABC Corp. had excess tax credits
arising from its over-withholding of income
payments. It opted to carry over the excess
tax credits to the following year.
Subsequently, ABC Corp. changed its mind
and applied for a refund of the excess tax
credits. Will the claim for refund prosper?
(2013 BAR)
A: NO, it is barred by the irrevocability rule. If
the corporation opts to carry-over its excess
credit in the final adjustment return, its choice
shall be irrevocable for that taxable period. The
purpose of this rule is to prevent a taxpayer
from claiming excess tax credits twice. In the
given problem, ABC Corp. opted to carry-over its
excess tax credits for the 2010 taxable year.
Consequently, ABC Corp. can no longer revoke
its choice to carry-over the excess tax credits
and instead claim for a refund.
Q: In its 1997 ITR, PM Management
International Inc. expressly signified that it
had a CWT of P1.2M for taxable year 1997 to
be claimed as tax credit in taxable year 1998.
However, due to its net-loss position in 1998,
the taxpayer was unable to claim the P1.2M
as tax credit.
 National Taxation
On April 12, 2000, the taxpayer filed with BIR
a written claim for the refund of the P1.2M
unutilized CWT for taxable year 1997. Is the
taxpayer entitled to refund?
A: NO. Inasmuch as the respondent already
opted to carry over its unutilized CWT of P1.2M
to taxable year 1998, the carry-over could no
longer be converted into a claim for tax refund
because of the irrevocability rule provided in
Section 76 of the NIRC of 1997. Thereby, the
respondent became barred from claiming the
refund.
However, in view of its irrevocable choice, the
respondent remained entitled to utilize that
amount of P1.2M as tax credit in succeeding
taxable years until fully exhausted. In this
regard, prescription did not bar it from applying
the amount as tax credit considering that there
is no prescriptive period for the carrying over of
the amount as tax credit in subsequent taxable
years. (CIR vs. PL Management International
Philippines, Inc., April 4, 2011)
Q: XYZ, Inc. is a registered real estate
developer. On 15 April 2003, XYZ, Inc. filed
with the BIR its ITR for the year ending 31
December 2002. XYZ, Inc. indicated in its ITR
and amended ITR for taxable year 2002 that
it is opting to be issued a tax credit certificate
(TCC) for the alleged overpayment of
P18,992,055.00. On 4 March 2005, XYZ, Inc.
filed with the BIR a written claim for a TCC in
the amount of P18,992,055.00. When CIR
failed to act upon XYZ, Inc.'s claim, XYZ, Inc.
filed a Petition for Review with the CTA First
Division on 15 April 2005.
The Court commissioned Independent CPA
filed his Final and Consolidated Report which
stated that they found that the total CWT’s
claimed per December 31, 1998 Amended
ITR are as follows, Real Estate Sales-
P6,067,093.08, Real Estate Leasing-
P2,800,461.83, Other Income- Management
Fees - P124,500.00.
The CTA First Division agreed with the
findings of the Independent CPA, except for
the amount of P3,857.33 which was
erroneously included as part of the
Creditable Withholding Taxes (CWTs) filed
out of period in the amount of P2,818,260.83.
It found that the certificate supporting the
creditable tax of P3,857.33 shows that the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
same was withheld in taxable year 2002. It
further held that out of the total creditable
tax withheld of P18,992,055.00, only the
amount of P15,877,961.02 represents XYZ,
Inc.'s valid claim for taxable year 2002.
1. Can the XYZ, Inc. claim a refund of excess
creditable withholding tax?
2. Is the XYZ, Inc. liable for deficiency
income tax for taxable year 2003?
A:
1. YES. The requisites for claiming a refund of
excess creditable withholding taxes are: (l)
the claim for refund was filed within the
two-year prescriptive period; (2) the fact of
withholding is established by a copy of a
statement duly issued by the payor
(withholding agent) to the payee, showing
the amount of tax withheld therefrom; and
(3) the income upon which the taxes were
withheld was included in the income tax
return of the recipient as part of the gross
income. XYZ, Inc. complied with all the
requisites. However, the CTA First Division
found some discrepancies with the claimed
refund and the amount to which XYZ, Inc. is
entitled for refund.
First, XYZ, Inc. filed the claim for refund
within the two-year prescriptive period.
Second, as proof of taxes withheld, XYZ, Inc.
submitted the Certificate Authorizing
Registration, Withholding Tax Remittance
Returns, and Certificates of Creditable Tax
Withheld at Source, upon which the
Independent CPA based his report.
Third, XYZ, Inc. submitted its amended
2002 ITR to show that the income upon
which the taxes were withheld was
included in its ITR. However, upon
comparison with the Certificates of
Creditable Tax Withheld at Source and
Withholding Tax Remittance Returns, the
CTA First Division and the CTA En Banc
found certain discrepancies and held that
out of the total claimed CWT of
P15,877,961.02, XYZ, Inc. was only able to
provide valid proofs of withholding for the
amount of P15,752,461.03. (Commissioner
of Internal Revenue v. Cebu Holdings, Inc.,
G.R. 189792, June 20, 2018)
2. YES. XYZ, Inc. erroneously carried over the
330
 Taxation Law
amount of P16,194,108.00 as prior year's
excess credits, to which it is not entitled, to
the succeeding taxable year 2003 as shown
in XYZ, Inc.'s Annual ITR for the year 2003.
(Ibid)
Q: Commissioner of Internal Revenue (CIR)
issued RMO No. 23-2014 on the "Reiteration
of the Responsibilities of the Officials and
Employees of Government Offices for the
Withholding of Applicable Taxes on Certain
Income Payments and the Imposition of
Penalties for Non-Compliance Thereof” in
order to clarify the responsibilities of the
public sector to withhold taxes on its
transactions as a customer and as an
employer.
In G.R. No. 213446, petitioners filed a
Petition for Prohibition and Mandamus
before the SC, imputing grave abuse of
discretion on the part of CIR in issuing RMO
No. 23-2014. According to petitioners, the
said RMO classified some items of income of
government employees as taxable
compensation which they alleged to be
considered by law as non-taxable fringe and
de minimis benefits.
In G.R. No. 213658, petitioners filed a
Petition for Certiorari and Prohibition before
the SC seeking to nullify RMO No. 23-2014 on
the following grounds: (1) CIR is bereft of any
authority to issue the assailed RMO. The NIRC
of 1997 expressly vests to the Secretary of
Finance the authority to promulgate rules
and regulations for the effective enforcement
of tax provisions; and (2) CIR committed
grave abuse of discretion when it subjected
to withholding tax allowances of court
employees which are tax-exempt such as
Special Allowance for Judiciary (SAJ) and
additional cost of living allowance (AdCOLA),
among others.
Did the RMO go beyond the provisions of the
NIRC when it imposed new or additional
taxes to allowances, benefits or bonuses
granted to government employees claimed
by petitioners to be non-taxable?
A: NO. The RMO did not go beyond the
provisions of the NIRC when it imposed new or
additional taxes to allowances, benefits or
bonuses granted to government employees
331
claimed by petitioners to be non-taxable.
The RMO merely mirrors the relevant provisions
of the NIRC and its implementing rules on the
withholding tax on compensation income. It
simply reinforces the rule that every form of
compensation arising from employer-employee
relationship is deemed subject to income tax
and, consequently, to withholding tax, unless
specifically exempted or excluded by the NIRC.
While Section III of the RMO enumerates certain
allowances, which may be subject to withholding
tax, it does not exclude the possibility that these
allowances may fall under the exemptions, thus,
the phrase “subject to the exemptions
enumerated herein.” (Confederation for Unity,
Recognition and Advancement of Government
Employees (Courage), et al. v. Commissioner,
Bureau of Internal Revenue and The Secretary,
Department of Finance/ Judge Armando A. Yanga
And Cristina Carmela Japzon v. Hon.
Commissioner Kim Jacinto- Henares, G.R. 213446
/ 213658, July 3, 2018, as penned by J. Caguioa)
Q: In 2002, PAL made US dollar and
Philippine peso deposits and placements in
Chinabank, JPMorgan, PBCom, and Standard
Chartered. The agent banks withheld final
taxes from interest income earned from
these deposits.
In 2003, PAL filed with the BIR a written
request for a tax refund claiming that it was
exempt from final withholding taxes under
its franchise based on Presidential Decree
No. 1590. Upon failure to act by the
Commissioner, PAL elevated the case to the
CTA in Division. The CTA Special First
Division partially granted PAL’s petition and
ordered Commissioner to refund PAL for the
final income tax withheld and remitted by
JPMorgan and denied the claim for refund
for other banks. It ruled that PAL was
exempted from final withholding tax on
interest on bank deposits, but PAL failed to
adequately substantiate its claim for the
other banks’ remittances. The CTA En Banc
sustained that PAL failed to prove the
remittance by Chinabank, PBCom, and
Standard Chartered.
PAL questions the denial of its refund claim
and argues that it adequately presented
Certificates of Final Taxes Withheld issued
by these Agent Banks. The Commissioner
 National Taxation
argues that PAL is not entitled to the refund
as it failed to present its documentary
evidence before the BIR. Is the BIR’s claim
with merit?
A: NO. PAL is exempt from paying the income
tax on interest earned under its franchise, PD
No. 1590. Hence, PAL is entitled to its claim for
refund for taxes withheld by Chinabank, PBCom,
and Standard Chartered. Remittance need not
be proven. PAL needs only to prove that taxes
were withheld from its interest income.
To claim a refund, this Court rules that PAL
needs only to prove that taxes were withheld.
Taxes withheld by the withholding agent are
deemed to be the full and final payment of the
income tax due from the income earner or
payee. Certificates of Final Taxes Withheld
issued by the Agent Banks are sufficient
evidence to establish the withholding of the
taxes.
Proof of remittance is not necessary to claim a
tax refund of final withholding taxes. The same
principles used to rationalize the ruling apply to
final withholding taxes: (i) the payor-
withholding agent is responsible for the
withholding and remitting of the income taxes;
(ii) the payee-refund claimant has no control
over the remittance of the taxes withheld from
its income; (iii) the Certificates of Final Tax
Withheld at Source issued by the withholding
agents of the government are prima facie proof
of actual payment by payee-refund claimant to
the government itself and are declared under
perjury. (Philippine Airlines, Inc. v. Commissioner
of Internal Revenue, G.R. 206079-80, January 17,
2018, as penned by J. Leonen)
Distinguish from input value-added tax
refund
Excess input VAT (Sec. 112) vs. Excessively
collected tax (Sec. 229)
In a claim for refund or credit of “excess” input
VAT under Section 110(B) and Section 112(A),
the input VAT is not “excessively” collected as
understood under Section 229. At the time of
payment of the input VAT the amount paid is the
correct and proper amount. The person legally
liable for the input VAT cannot claim that he
overpaid the input VAT by the mere existence of
an “excess” input VAT. The term “excess” input
VAT simply means that the input VAT available
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
as credit exceeds the output VAT.
From the plain text of section 229, it is clear that
what can be refunded or credited is a tax that is
“erroneously, illegally, excessively or in any
manner wrongfully collected.” In short, there
must be a wrongful payment because what is
paid, or part of it, is legally due.
Distinction between the application of the 2-
Year prescriptive period under Sec. 112 and
Sec. 229
1. Under Sec. 112, the 2-year prescriptive
period applies only to the administrative
claim before the CIR and not to judicial claim
before the CTA because the taxpayer always
has 30 days from the decision of the CIR or
from the lapse of the 120-day period even
after the lapse of 2 years from the taxable
quarter where the sales were made (CIR v.
Mindanao Geothermal II Partnership, 713
SCRA 645, 2014)
Thus, it is only the administrative claim that
must be filed within the two-year
prescriptive period; the judicial claim need
not fall within the two-year prescriptive
period.
2. Under Section 229, the decision of the CIR is
appealable to the CTA sitting in division
within 30 days after the receipt but must be
within the 2-year period from payment or
filing of the final adjusted return. Thus, if the
Commissioner denies the claim for refund
within the 2-year period, the remedy is to
file an appeal with the CTA 30 days from the
receipt of such denial. But, such 30-day
period must also be within the 2-year
period. For example, if there are only 10
days left within such 2-year period, then, the
taxpayer has only 10 days within which to
appeal his claim. However, if there is an
inaction on the part of the Commissioner
and the 2-year period is about to lapse, the
remedy is to file an appeal also with the
CTA.
Transitional input tax credit is a form of tax
credit, not tax refund
A transitional input tax credit is not a tax refund
per se but a tax credit. Prior payment of taxes is
not required before a taxpayer could avail of
transitional input tax credit. A tax credit is not
332
 Taxation Law
synonymous to tax refund. Tax refund is defined
as the money that a taxpayer overpaid and is
thus returned by the taxing authority. Tax credit,
on the other hand, is an amount subtracted
directly from one’s total tax liability. It is any
amount given to a taxpayer as a subsidy, a
refund, or an incentive to encourage investment.
(Fort Bonifacio Development Corporation v.
Comm., G.R. No. 173425, January 22, 2013)
Statutory basis for tax refund
Tax refunds are not founded principally on
legislative grace. It is based on legal principle
which underlies in all quasi-contracts abhorring
a person’s unjust enrichment at the expense of
another. The dynamic of erroneous payment of
tax fits to a tee the prototypic quasi-contract,
solutio indebiti, which covers not only mistake in
fact but also mistake in law. (J. Dimaampao,
2015)
The Government is not exempt from the
application of solutio indebiti. Indeed, the
taxpayer expects fair dealing from the
Government, and the latter has the duty to
refund without any unreasonable delay what it
has erroneously collected. (CIR. v. Fortune
Tobacco, Corp., G.R. No. 167274-75, July 21, 2008)
The pertinent laws governing this principle are
found in Article 2142 and Article 2154 of the
New Civil Code.
Provisions of the NIRC regarding refund
1. Corporations entitled to refund of excess
estimated quarterly income paid as shown
on its final adjustment return. (Sec. 75 and
76, NIRC)
2. Claims for refund of VAT-registered persons,
whose sales are zero-rated or effectively
zero-rated, with regard to their creditable
input tax due, except transitional input tax,
to the extent that such input tax has not
been applied against output tax. (Sec. 112,
NIRC)
3. Locally produced or manufactured goods,
whether in their original state or as
ingredients, any excise tax paid thereon
shall be credited or refunded upon
submission of proof of actual exportation
and upon receipt of the corresponding
333
foreign exchange payment. (Sec. 130(d),
NIRC)
4. National Internal Revenue Tax: a)
erroneously or illegally assessed or
collected; b) any penalty claimed to have
been collected without authority; or c) any
sum allegedly to have been excessively or in
any manner wrongfully collected, may be
recovered in a suit or proceeding for that
purpose. (Sec. 229 and Sec. 204(c), NIRC)
Proof for claim or refund
Evidence that may be presented that would
best substantiate claim for tax refund
The pertinent invoices, receipts, and export sales
documents are the best and competent pieces of
evidence required to substantiate a taxpayer’s
claim for tax credit or refund. No evidence which
has not been formally offered shall be
considered and where the pertinent invoices or
receipts purportedly evidencing the VAT paid by
the taxpayer were not submitted, the court may
not determine the veracity of the amount of VAT
that the taxpayer paid. Mere allegations of the
figures in the amended return are not sufficient
proof of the amount of its refund entitlement.
(Atlas Consolidated Mining and Development
Corporation v. CIR, 546 SCRA 150)
Burden of proof for claim of refund
GR: Being in the nature of a claim for exemption,
refund is construed in strictissimi juris against
the entity claiming the refund and in favor of the
taxing power. This is the reason why a claimant
must positively show compliance with the
statutory requirements provided for under the
NIRC in order to successfully pursue one's claim.
(Winebrenner & Iñigo Insurance Brokers, Inc. v.
CIR, G.R. No. 206526, January 28, 2015)
In order to discharge this burden, the law
intends the filing of an application for a refund
to necessarily include the filing of complete
supporting documents to prove entitlement for
the refund. Otherwise, the mere filing of an
application without any supporting document
would be as good as filing a mere scrap of paper.
(Hedcor v. CIR, G.R. No. 207575, July 15, 2015)
XPN: The contention that a tax refund takes on
the nature of a tax exemption does not apply
 National Taxation
where the claim for refund is premised on
erroneous payment of tax.
POWER OF COMMISSIONER
INTERNAL REVENUE TO COMPROMISE
Compromise
In case of tax assessment, compromise is the
contract between the government and the
taxpayer to settle the liability.
Court cannot compel the CIR to compromise in
cases when such is allowed, in order to assure
that no improper compromise is made to the
prejudice of the Government.
NOTE: Compromise as amount of paid by the
taxpayer to settle his tax liability is different
from compromise penalty which is the amount
paid by the taxpayer to compromise tax
violation and paid in lieu of criminal
prosecution.
Requisites for Compromise
1. Tax liability of the taxpayer;
2. An offer of the taxpayer of an amount to be
paid by him; and
3. The acceptance (the CIR or the taxpayer) of
the offer in the settlement of the claim
Authority of the CIR to compromise taxes
The CIR 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 provided
that the minimum compromise entered into
is equivalent to 40% of the basic tax
(Doubtful Validity).
2. The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax provided that the minimum
compromise entered into is equivalent to
10% of the basic assessed tax (Financial
Incapacity).
MINIMUM COMPROMISE RATES
Based on doubtful 40% of the basic
validity assessed tax
Based on financial 10% of the basic
incapacity assessed tax
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Where the basic tax involved exceeds P1M or
where the settlement offered is less than the
prescribed minimum rates, the compromise
shall be subject to the approval of the National
Evaluation Board (NEB) In other words,
compromise settlement lower than the
minimum amount prescribed above may be
entered subject to the approval of NEB.
Offers of compromise of assessments issued by
the Regional Offices involving basic deficiency
taxes of ₱500,000 or less and for minor criminal
violations discovered by the Regional and
District Offices, shall be subject to the approval
by the Regional Evaluation Board (REB)
However, if the offer of compromise is less than
the prescribed rates, the same shall always be
subject to the approval of the NEB. (RR No. 30-
2002)
Doubtful Validity
There is reasonable doubt on the validity of the
assessment when: (JABAW F4)
1. The delinquent account or disputed
assessment is one resulting from a Jeopardy
assessment.
2. The assessment seems to be Arbitrary in
nature, appearing to be based on
presumptions and there is reason to believe
that it is lacking in legal and/or factual basis.
3. The taxpayer Failed to file an administrative
protest on account of the alleged failure to
receive notice of assessment and there is
reason to believe that the assessment is
lacking in legal and/or factual basis.
4. The taxpayer Failed to file a request for
reinvestigation/reconsideration within 30
days from receipt of final assessment notice
and there is reason to believe that the
assessment is lacking in legal and/or factual
basis.
5. The taxpayer Failed to elevate to the CTA an
adverse decision of the CIR, or his
authorized representative, in some cases,
within 30 days from receipt thereof and
there is reason to believe that the
assessment is lacking in legal and/or factual
basis.
6. The assessment were issued on or after
January 1, 1988, where the demand notice
allegedly failed to comply with the
Formalities prescribed under Section 228 of
the NIRC of 1997.
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 Taxation Law
7. Assessments made based on the “Best
Evidence Obtainable Rule” and there is
reason to believe that the same can be
disputed by sufficient and competent
evidence.
8. Assessment was issued within the
prescriptive period for assessment as
extended by the taxpayer’s execution of
Waiver of the Statute of Limitations the
validity or authenticity of which is being
questioned or at issue and there is strong
reason to believe and evidence to prove that
it is not authentic. (Sec. 3.1, RR 30-2002)
9. The assessment is based on an issue where a
court of competent jurisdiction made an
Adverse decision against the bureau, but for
which the Supreme Court has not decided
upon with finality. (RR No. 8-2004)
Financial Incapacity
The offer for compromise based on financial
incapacity may be accepted upon showing that:
(CoIN BaLD)
1. The taxpayer is a Compensation income
earner with no other source of income and
the family’s gross monthly compensation
income does not exceed the levels of
compensation income provided for Sec.
4.1.1. of RR No. 30-2002 and it appears that
the taxpayer possesses no other
leviable/distrainable assets, other than his
family home.
NOTE: Sec. 4.1.1 of RR 30-2002: “If taxpayer
is an individual whose only source of income
is from employment and whose monthly
salary, if single, is P10,500 or less, or if
married, whose salary together with his
spouse is P21,000 per month, or less, and it
appears that the taxpayer possesses no
other leviable/distrainable assets, other
than his family home”.
2. The taxpayer has been declared by any
competent tribunal/authority/body/
government agency as Bankrupt or
insolvent.
3. The corporation ceased operation or is
already Dissolved.
NOTE: The tax liabilities corresponding to
the Subscription Receivable or Assets
335
distributed/distributable to the
stockholders representing return of capital
at the time of cessation of operation or
dissolution cannot be compromised.
4. The taxpayer, as reflected in its latest
Balance Sheet supposed to be filed with the
Bureau of Internal Revenue, is suffering
from surplus or earnings deficit resulting to
Impairment in the original capital by at
least 50%.
5. That amounts payable or due to
stockholders other than business-related
transactions which are properly includible
in the regular “accounts payable” are by
fiction of law considered as part of capital
and not liability, and that the taxpayer has
no sufficient liquid asset to satisfy the tax
liability.
6. The taxpayer is suffering from a Net worth
deficit (total liabilities exceed total assets)
computed by deducting total liabilities (net
of deferred credits and amounts payable to
stockholders/owners reflected as liabilities,
except business related transactions) from
total assets (net of pre-paid expenses,
deferred charges, pre-operating expenses,
as well as appraisal increases in fixed
assets,) taken from the latest audited
financial statements.
7. In the case of an individual taxpayer, he has
no other leviable properties under the law
other than his family home.
Requisites for financial incapacity as ground
for compromise settlement
1. Clear inability to pay the tax; and
2. The taxpayer must waive in writing his
privilege of the secrecy of bank deposit
under RA 1405 or other general or special
laws, which shall constitute as the CIR’s
authority to inquire into said bank deposits.
(Sec. 6 (F), NIRC)
Grounds for denial of compromise settlement
based on financial incapacity (CRAW)
1. If the taxpayer has a Tax Credit Certificate,
issued under the NIRC;
2. If the taxpayer has a pending claim for tax
refund or tax credit with the BIR,
 National Taxation
Department of Finance One-Stop-Shop Tax
Credit and Duty Drawback Center (Tax
Revenue Group or Investment Incentive
Group) and/or the courts;
3. If the taxpayer has an existing finalized
agreement or prospect of future agreement
with any party that resulted or could result
to an increase in the equity of the taxpayer
at the time of the offer for compromise or at
a definite future time; or
4. If the taxpayer failed to execute a waiver of
his privilege of the secrecy of bank deposits
under Republic Act No. 1405 or under other
general or special laws. (RR No. 30-2002)
Q: Can the CIR inquire into the bank deposits
of a taxpayer? If so, does this power of the
Commissioner conflict with R.A. 1405
(Secrecy of Bank Deposits Law)? (1998 BAR)
A: The CIR is authorized to inquire into the bank
deposits of:
1. A decedent to determine his gross estate;
2. Any taxpayer who has filed an application
for compromise of his tax liability by means
of financial Incapacity to pay his tax liability.
(Sec. 6(F), NIRC)
The limited power of the CIR does not conflict
with R.A. No. 1405 because the provisions of the
NIRC granting this power is an exception to the
Secrecy of Bank Deposits Law as embodied in a
later legislation.
Furthermore, in case a taxpayer applies for an
application to compromise the payment of his
tax liabilities on his claim that his financial
position demonstrates a clear inability to pay the
tax assessed, his application shall not be
considered unless and until he waives in writing
his privilege under R.A. No. 1405, and such
waiver shall constitute the authority of the CIR
to inquire into the bank deposits of the taxpayer.
Q: May the CIR compromise the payment of
withholding tax where the financial position
of the taxpayer demonstrates a clear inability
to pay the assessed tax? (1998 BAR)
A: NO. A taxpayer who is constituted as
withholding agent who has deducted and
withheld at source the tax on the income
payment made by him holds the taxes in trust
for the government (Sec. 58 (D), NIRC) and is
obligated to remit them to the BIR. The
subsequent inability of the withholding agent
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
to pay/remit the taxes withheld is not a
ground for compromise because the
withholding tax is not a tax upon the
withholding agent but it is only a procedure for
the collection of a tax.
Q: May the tax liability of a taxpayer be
compromised during the pendency of an
appeal? (1996 BAR)
A: YES, as long as any of the grounds for a
compromise i.e., doubtful validity of assessment
and financial incapacity of taxpayer is present. A
compromise of a tax liability is possible at any
stage of litigation, even during appeal, although
legal propriety demands that prior leave of court
should be obtained. (Pasudeco v. CIR, G.R. No. L-
39387, June 29, 1982)
Q: After the tax assessment had become final
and unappealable, the CIR initiated the filing
of a civil action to collect the tax due from NX.
After several years, a decision was rendered
by the court ordering NX to pay the tax due
plus penalties and surcharges. The judgment
became final and executory but attempts to
execute the judgment award were futile.
Subsequently, NX offered the CIR a
compromise settlement of 50% of the
judgment award, representing that this
amount is all he could really afford. Does the
CIR have the power to accept the
compromise offer? Is it legal and ethical?
(2004 BAR)
A: YES, the CIR has the power to accept the offer
of compromise if the financial position of the
taxpayer clearly demonstrates a clear inability to
pay the tax. (Sec. 204, NIRC)
As represented by NX in his offer, only 50% of
the judgment award is all he could really afford.
This is an offer for compromise based on
financial incapacity which the CIR shall not
accept unless accompanied by a waiver of the
secrecy of bank deposits (Sec. 6 (F), NIRC) The
waiver will enable the CIR to ascertain the
financial position of the taxpayer, although the
inquiry need not be limited only to the bank
deposits of the taxpayer but also as to his
financial position as reflected in his financial
statements or other records upon which his
property holdings can be ascertained.
If indeed, the financial position of NX as
336
 Taxation Law
determined by the CIR demonstrates a clear with his spouse is P21,000 per
inability to pay the tax, the acceptance of the month, or less and it appears that
offer is legal and ethical for the ground upon the taxpayer possesses no other
which the compromise was anchored is within available distrainable assets other
the context of the law and the rate of than his family home – 10%
compromise is well within and far exceeds the ii. If taxpayer is an individual without
minimum prescribed by law which is only 10% any source of income – 10%
of the basic tax assessed. iii. Taxpayer is under any of the
following conditions
Q: Does the Court of Appeals have the power a) zero net worth – 10%
to review compromise agreements forged by b) negative net worth – 10%
the Commissioner of Internal Revenue and a c) dissolved corporations – 20%
taxpayer? Explain. (2010 BAR) d) already non-operating
companies for a period of: (a)
A: As a general rule, the Court of Appeals does 3 years or more as of the date
not have the power to review compromise of application for compromise
agreements made between the Commissioner of settlement - 10%; (b) less
Internal Revenue and the taxpayer considering than 3 years – 20%
that the Commissioner is vested with the e) Surplus or earning deficit
authority to compromise and such authority is resulting to impairment in the
exercised according to his discretion. Such original capital by at least
authority should be exercised in accordance 50% - 40%
with the CIR discretion and courts have no f) Declared insolvent or
power, as a general rule, to compel him to bankrupt unless taxpayer falls
exercise such discretion one way or another. If squarely under any situation
the CIR abuses his discretion by not following as discussed above, thus
the parameters set by law, the CTA, not the CA, resulting to the application of
may correct such abuse if the matter is appealed the appropriate rate – 10%
to it. In case of arbitrary or capricious exercise
by the CIR of the power to compromise, the b. For cases of “doubtful validity” – a
compromise can be attacked and reversed minimum compromise rate
through judicial process. It must be noted equivalent to 40% of the basic tax
however, that a compromise is considered as assessed (Sec. 4, RR 30-2002)
other matters arising under the NIRC which
vests the CTA with jurisdiction and since the 2. Subject to approval of Evaluation Board:
decision of the CTA is appealable to the Supreme a. When basic tax involved exceeds
Court, the Court of Appeals is devoid of any P1,000,000;
power to review a compromise settlement b. Where the settlement offered is
forged by the CIR. less than the prescribed minimum
rates (Sec. 204, NIRC);
Limitations on the Power to Compromise a c. When the CIR is not authorized to
Tax Liability compromise.

The CIR is allowed to enter into a compromise
only if the basic tax involved does not exceed
P1M and the settlement offered is not less than
the prescribed percentages. (Sec. 204 (A), NIRC)
1. Minimum compromise rate:
a. For cases of “financial incapacity”
i. If taxpayer is an individual whose
only source of income is from
employment and whose monthly
salary, if single is P10,500 or less or
if married, whose salary together
Cases which may be compromised (1998,
2002, 2005 BAR) (DANC3)
1. Delinquent accounts;
2. Cases under Administrative protest after
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the
RO, RDO, Legal Service, Large Taxpayer
Service, Collection Service, Enforcement
Service, and other offices in the National
Office;

337
 National Taxation
3. Cases covered by pre-assessment notices,
but taxpayer is Not agreeable to the findings
of the audit office as confirmed by the
review office;
4. Civil tax cases disputed before the courts;
5. Collection cases filed in courts; and
6. Criminal violations except:
a. Those already filed in courts; and
b. Those involving criminal tax fraud.
(Sec.3, RR 30-2002)
Cases which cannot be compromised (F 3EW-
CD)
1. Criminal tax fraud cases confirmed as such
by the CIR or his duly authorized
representative.
2. Cases where final reports of reinvestigation
or reconsideration have been issued
resulting to reduction in the original
assessment and the taxpayer is agreeable to
such decision by signing the required
agreement form for the purpose.
3. Cases which become final and executory
after final judgment of a court, where
compromise is requested on the ground of
doubtful validity of the assessment.
4. Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer.
5. Withholding tax cases, unless the applicant –
taxpayer invokes provisions of law that cast
doubt on the taxpayer’s obligation to
withhold.
6. Criminal violations already filed in courts.
7. Delinquent accounts with duly approved
schedule of installment payments. (Sec. 3, RR
30-2002)
NOTE: The CTA may issue an injunction to
prevent the government from collecting
taxes under a compromise agreement when
such would be prejudicial to the
government.
When must compromise be made?
1. Criminal cases – It must be entered into prior
to the institution of the corresponding
criminal action arising out of a violation of
the provisions of the NIRC. A compromise
can never be entered into after final
judgment because by virtue of such final
judgment the Government had already
acquired a vested right. (Roviro v. Amparo,
G.R. No. L- 5482, May 5, 1982)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
NOTE: A compromise validly entered into
between the CIR and the taxpayer prior to
the institution of the corresponding criminal
action arising out of a violation of the
provisions of the NIRC becomes a bar to
such criminal action. (People v. Magdaluyo,
G.R. No. L-16235, Apr. 20, 1965)
Extent of Commissioner’s Power to
Compromise Criminal violations:
a. Before the complaint is filed with the
Prosecutor’s Office – full discretion to
compromise except those involving
fraud
b. After the complaint is filed with the
Prosecutor’s Office but before the
information is filed with the court – can
still compromise provided that the
prosecutor gives his consent
c. After the information is filed with the
court – no longer permitted to
compromise with or without the
consent of the Prosecutor (People v.
Magdaluyo, G.R. No. L-1595, April. 20,
1961)
2. Civil cases – Before litigation or at any stage
of the litigation, even during appeal,
although legal propriety demands that prior
leave of court should be obtained.
Remedies in case the taxpayer refuses or fails
to follow the tax compromise
1. Enforce the compromise
a. If it is a judicial compromise, it can be
enforced by mere execution. A judicial
compromise is one where a decision
based on the compromise agreement is
rendered by the court on request of the
parties.
b. Any other compromise is extrajudicial
and like any other contract can only be
enforced by court action.
2. Regard it as rescinded and insist upon
original demand. (Art. 2041, NCC)
Prescriptive period to enforce compromises
As a rule, the obligation to pay tax is based on
law. But when, for instance, a taxpayer enters
into a compromise with the BIR, the obligation
of the taxpayer becomes one based on contract.
Compromise is a contract whereby the parties,
338
 Taxation Law
by reciprocal concessions, avoid litigation or put
an end to one already commenced. (Art. 2028
NCC) Since it is a contract, the prescriptive
period to enforce the same is 10 years based on
Art. 1144 NCC reckoned from the time the cause
of action accrued.
Abatement and cancellation of tax liability
Grounds for abatement (Sec. 204(B), NIRC):
1. The tax or any portion thereof appears to be
unjustly or excessively assessed: (W-SLICE)
a. The filing of the return/payment is
made at the Wrong venue.
b. The taxpayer fails to file the return and
pay the tax on time due to,
i. Substantial losses from prolonged
labor dispute;
ii. Force majeure;
iii. Legitimate business reverses.
NOTE: The abatement shall only cover
the surcharge and the compromise
penalty and not the interest imposed
under Sec. 249, NIRC.
c. There is Late payment of the tax under
meritorious circumstances (i.e., Failure
to beat bank cut-off time, surcharge
erroneously imposed.)
d. The assessment is brought about or
resulted from taxpayer’s non-
compliance with the law due to a
difficult Interpretation of said law.
e. The taxpayer fails to file the return and
pay the correct tax on time due to
Circumstances beyond his control.
NOTE: The abatement shall only cover
the surcharge and the compromise
penalty and not the interest.
f. The taxpayer’s mistake in payment of
his tax is due to Erroneous written
official advice of a revenue officer. (Sec.
2, RR No. 13-2001)
2. The administration and collection costs
involved do not justify the collection of the
amount due: (A-WORD)
339
a. Abatement of penalties on assessment
confirmed by the lower court but
Appealed by the taxpayer to a higher
court.
b. Abatement of penalties on Withholding
tax assessment under meritorious
circumstances.
c. Abatement of penalties on assessment
reduced after Reinvestigation but
taxpayer is still contesting reduced
assessment.
d. Abatement of penalties on Delayed
installment payment under meritorious
circumstances.
e. Such Other circumstances which the CIR
may deem analogous to the
enumeration above. (Sec. 3, RR No. 13-
2001)
NOTE: For items a. to e., the abatement
of the surcharge and compromise
penalty shall be allowed only upon
written application by the taxpayer,
signifying his willingness to pay the
basic tax and interest or basic tax only,
whichever is applicable under
prevailing circumstance.
Q: Explain the extent of the authority of the
CIR to compromise and abate taxes. (1996
BAR)
A: The authority of the CIR to compromise
encompasses both civil and criminal liabilities of
the taxpayer. The civil compromise is allowed
only in cases: (1) where the tax assessment is of
doubtful validity, or (2) when the financial
position of the taxpayer demonstrates a clear
inability to pay the tax. All criminal violations
may be compromised except: (1) those already
filed in court, or (2) those involving fraud.
The compromise settlement of any tax liability
shall be subject to the following minimum
amounts: (1) ten percent (10%) of the basic
assessed tax in case of financial capacity; and (2)
forty percent (40%) of the basic assessed tax in
other cases.
Where the basic tax involved exceeds P1 million
or where the settlement offered is less than the
prescribed minimum rates, the compromise
shall be subject to the approval of the Evaluation
Board which shall be composed of the CIR and
the four (4) Deputy Commissioners.
 National Taxation
The CIR may also abate or cancel a tax liability The legislature may adopt any reasonable
when: (1) the tax or any portion thereof appears method for the effective enforcement of the
to have been unjustly or excessively assessed; or collection of taxes, subject to:
(2) the administrative and collection costs 1. The right of the person to notice; and
involved do not justify collection of the amount 2. The opportunity to be heard.
due. (Sec. 204, NIRC)
The power to impose taxes is clothed with the
Compromise vs. Abatement
implied authority to devise ways and means to
accomplish collection in the most effective
COMPROMISE ABATEMENT
manner. Without this implied power, the ends of
Involves a government may fail. (CIR v. Pineda, G.R. No. L-
reduction of Involves the 22734, September 15, 1967)
the taxpayer’s cancellation of
Nature liability the entire tax REQUISITES
through a liability of a
mutual taxpayer. GR: Collection is only allowed when there is
agreement. already a final assessment made for the
Authorize determination of the tax due.
d CIR, REB, NEB CIR
Officer XPN: Judicial action to collect the tax liability is
1. The tax or any permitted even without an assessment when the
portion taxpayer:
thereof 1. Files a false or fraudulent return with intent
appears to be to evade the tax; or
1. Reasonable
unjustly or 2. Fails to file a return.
doubt as to
excessively
the validity
assessed; or In the above cases, collection must be done
of
2. The within 10 years after the discovery of falsity,
Grounds assessment;
administratio fraud, or omission.
or
n and
2. Financial
collection However, once an assessment is made against
incapacity of
costs involved the taxpayer, the government cannot avail of the
the taxpayer.
do not justify 10-year period in Section 222(A) If the
the collection assessment is made, then the period to collect is
of the amount five years from the assessment and not 10 years.
due. (Ingles, 2015)

NON-RETROACTIVITY OF RULINGS In sum, as a rule, the government can only file a

Any revocation, modification, or reversal of any
rules and regulations promulgated in
accordance with the Tax Code (e.g., revenue
regulations) shall not be given retroactive effect
if the revocation, modification, or reversal will
be prejudicial to the taxpayer. (Sec. 246, NIRC)
GOVERNMENT REMEDIES FOR
COLLECTION OF DELINQUENT TAXES
Tax Collection
The government is given two ways to collect:
1. Summary or administrative remedies
2. Judicial remedies
proceeding in court to collect once the
assessment has become final and unappealable.
Assessments are deemed final when:
1. The taxpayer failed to file a protest 30 days
from receipt of the assessment.
2. After the 180-day period and the CIR has not
yet acted on the protest, the taxpayer fails to
appeal it.
3. After 30 days from the receipt of the
decision of the CIR the taxpayer fails to
appeal.
Collectability of tax liability arises in the
following instances

UNIVERSITY OF SANTO TOMAS 340

2021 GOLDEN NOTES
 Taxation Law
1. Self-assessed tax shown in the return was SUMMARY
not paid within the date prescribed by law
- Internal revenue taxes are self-assessing FALSE,
and no further assessment by the RETURN WAS FRAUDULENT, OR
government is required to create the tax MADE FAILURE TO FILE A
liability. The taxpayer is immediately RETURN
considered as delinquent with respect to the
unpaid amount of tax; Collection with prior assessment
2. When final assessment is not protested Collection should be
administratively within 30 days from the made within 5 years
date of receipt; from the date of
3. Failure to question assessment served upon assessment, either
the decedent’s heirs (Marcos II v. Court of by:
Appeals, 273 SCRA 47); 1. Summary Same
proceedings; or
4. Non-compliance with the condition laid in 2. Judicial
the approval of protest - construed as if no proceedings.
protest was filed; (Sec.222 (c),
5. Failure to file a timely appeal to the CTA on NIRC)
the final decision of the Commissioner or his
authorized representative on the disputed Collection without prior assessment
assessment. Collection is within 10
years from discovery,
NOTE: Refer to “Protesting an assessment” of the falsity, fraud or
under Taxpayer’s Remedies for complete omission to file a
discussion on finality of assessment. return.

PRESCRIPTIVE PERIODS; SUSPENSION OF Limited to purely

RUNNING OF STATUTE OF LIMITATIONS judicial remedies
(Section 222(A))
GR: The prescriptive period to collect taxes due
is five years from the date of assessment. Computation of the prescriptive period

XPNs: The assessment of the tax is deemed made and

1. False or fraudulent return with with intent
to evade the tax: within 10 years from
discovery without need of assessment
2. Failure or omission to file return: within 10
years from discovery without need of
assessment
3. Waiver in writing executed before the five-
year period expires: period agreed upon
NIRC vs. Civil Code vs. Rules of Court
The prescriptive period to assess or collect
deficiency tax is governed by NIRC (a special
law) and not the Civil Code (a general law). The
same can be said between NIRC and the Rules of
Court. Hence, claims for taxes may be collected
even after the distribution of the decedent’s
estate. Claims for estate taxes are exempted
from the application of the statute of non-claims.
(Ingles, 2015, citing several cases)
the period for collection of the assessed tax
begins to run on the date the assessment notice
had been released, mailed or sent by the BIR to
the taxpayer. Thus, failure of the BIR to file a
warrant of distraint or serve a levy on taxpayer's
properties nor file collection case within the
prescriptive period is fatal.
Also, the attempt of the BIR to collect the tax
through its Answer with a demand for the
taxpayer to pay the assessed DST in the CTA is
not deemed compliance with the NIRC which
provides that assessed tax must be collected by
distraint or levy and/or court proceeding within
the prescribed period. (China Banking
Corporation vs. Commissioner of Internal
Revenue, G.R. No. 172509, February 04, 2015)
Tax is deemed collected for purposes of
prescriptive periods

341
 National Taxation
1. If collection is through summary remedies
(distraint and levy), when the government
avails of a distraint and levy procedures
prescribed under NIRC.
Distraint and Levy proceedings are begun by
the issuance of warrant and service thereof
to the taxpayer. (BPI v. CIR, G.R. No. 139736,
October 17, 2005)
2. If collection is through judicial remedies
(civil or criminal), when the government
files the complaint with the proper court
A judicial action for the collection of a tax
may be initiated by:
a. Filing a complaint with the proper
regular trial court, or where the
assessment is appealed to the CTA;
or
b. By filing an answer to the taxpayer’s
petition for review wherein
payment of the tax is prayed for.
(PNOC v. CA, G.R. No. 109976, April
26, 2005)
Q: What is the prescriptive period where the
government action is on a bond which the
taxpayer executes in order to secure the
payment of his tax obligation?
A: Ten (10) years under Art. 1144 (1) of the Civil
Code and not 3 years under the NIRC. In this
case, the Government proceeds by court action
to forfeit a bond. The action is for the
enforcement of a contractual obligation.
(Republic v. Araneta, G.R. No. L-14142, May 30,
1961)
Q: May the collection of taxes be barred by
prescription? Explain your answer. (2001
BAR)
A: YES. The collection of taxes may be barred by
prescription. The prescriptive periods for
collection of taxes are governed by the tax law
imposing the tax. However, if the tax law does
not provide for prescription, the right of the
government to collect taxes becomes
imprescriptible.
ADMINISTRATIVE REMEDIES
1. Tax lien;
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
2. Distraint of personal property; levy and
sale of real property;
3. Forfeiture of real property to the
government for want of bidder;
4. Suspension of business operation; and
5. Non-availability of injunction to restrain
collection of tax
These are discussed in detail below.
TAX LIEN
It is a legal claim or charge on property, personal
or real, established by law as a sort of security
for the payment of tax obligations. (HSBC v.
Rafferty, 39 Phil. 145)
Tax in itself is not a lien even upon the property
against which it is assessed, unless expressly
made so by statute.
Nature and extent of tax lien
When a taxpayer neglects or refuses to pay his
tax liability after demand, the amount shall be a
lien in favor of the Government from the time
when the assessment was made by the CIR until
paid, with interests, penalties, and costs that
may accrue in addition thereto upon all property
and rights to property belonging to the taxpayer.
Provided, that this lien shall not be valid against
any mortgagee, purchaser or judgment creditor
until notice of such lien shall be filed by the CIR
in the Register of Deeds of the province or city
where the property is situated or located (Sec.
219, NIRC)
The claim of the government predicated on a tax
lien is superior to the claim of a private litigant
predicated on a judgment. The tax claim must be
given preference over any other claim of any
other creditor, in respect of any and all
properties of the insolvent. (Republic v. Peralta,
150 SCRA 37)
When tax lien is applied
1. With respect to personal property – Tax lien
attaches when the taxpayer neglects or
refuses to pay tax after demand. Thus, the
tax lien attaches not from the service of the
warrant of distraint of personal property
but from the time the tax became due and
payable.
342
 Taxation Law
2. With respect to real property – from time of Advertisement of Sale
registration with the Register of Deeds. No No newspaper Newspaper
newspaper publication publication is
The residue, if any, goes back to the taxpayer or publication required required once
owner of the property. required a week for 3
consecutive
Extinguishment of Tax Lien weeks.
1. By payment or remission of the tax Requisites for the exercise of distraint and
2. By prescription of the right of government to levy (DeF –DeP)
assess or collect
3. By failure to file notice of such tax lien in the 1. Taxpayer is delinquent in payment of tax;
office of Register of Deeds 2. There must be subsequent demand to pay;
4. By destruction of property subject to tax lien 3. Taxpayer failed to pay delinquent tax on
5. By replacing it with a bond time; and
4. Period within which to assess and collect
NOTE: A buyer in an execution sale acquires the tax due has not yet prescribed.
only the rights of the judgment creditor.
Similarities between distraint and levy
DISTRAINT AND LEVY
1. Summary in nature
Distraint is a summary remedy in which the 2. Requires notice of sale
collection of tax is enforced on the taxpayer’s 3. May not be resorted to if the amount
personal property. When enforced to taxpayer’s involved is less than P100
personal property not in his possession, it is
called garnishment. Meanwhile, levy is Distraint
enforced on real property.
It is a summary remedy whereby the collection
Distinctions among warrants of distraint, of tax is enforced on the goods, chattels or
garnishment and levy effects of the taxpayer (including other personal
property of whatever character as well as stocks
DISTRAIN GARNISHMEN and other securities, debts, credits, bank
LEVY
T T accounts and interest in or rights to personal
Subject matter property.) The property may be offered in a
Personal Personal Real property public sale, if taxes are not voluntarily paid.
property property owned and in
owned by owned by the the Distinguish lien from distraint
and in taxpayer but in possession of
possession the possession the taxpayer LIEN DISTRAINT
of the of the third Directed The property Need not be
taxpayer party against subject to the directed against
what tax the property
Acquisition by the Gov’t subject to tax
Personal Personal Real property To whom The property The property
property property subject to levy directed itself regardless should be
distrained garnished is is forfeited to of the present presently
is purchased by the owner of the owned by the
purchased the Government property taxpayer
by the Government then sold to
Governmen and resold to meet the Q: Who is authorized to issue the warrant of
t and meet deficiency. distraint?
resold to deficiency.
meet A:
deficiency.

343
 National Taxation
1. CIR or his duly authorized representative – if i. The owner or person in
the amount involved is in excess of P1 possession; or
million; or ii. Someone of suitable age and
2. Revenue District Officer – if the amount discretion at the dwelling or
involved is P1 million or less (Sec. 207 (A), place of business of such
NIRC) person.

Effect of service of warrant of distraint (or b. As to stocks and/or securities:

levy) i. Upon the taxpayer; and
ii. President, manager, treasurer
Its timely service suspends the running of the or other responsible officer of
prescriptive period to collect the tax deficiency the corporation.
in the sense that the disposition of the attached
properties might well take time to accomplish, c. As to debts/credits:
extending even after the lapse of the statutory i. Upon the person owing the
period for collections (Republic v. Hizon, G.R. No. debt; or
130430, December 13, 1999) ii. The person having control over
the credit or his agent.
Kinds of distraint
d. As to bank accounts:
1. Actual distraint – resorted to when at the i. Upon the taxpayer; and
time required for payment, a person fails to ii. The president, manager,
pay his delinquent tax obligation (Sec. 207 treasurer or other responsible
(A), NIRC) Distraint consists in the actual officer of the bank.
seizure and taking possession of personal
property of the taxpayer. NOTE: Distraint of bank accounts is
called garnishment.
How actual distraint effected:
3. Posting of notice in not less than 2
Upon failure to pay the delinquent tax at the public places in the municipality or city
time required, the proper officer shall seize and notice to taxpayer specifying the
and distraint any goods, chattels, or effects, time and place of sale and the articles
and the personal property, including stocks distrained
and other securities, debts, credits, bank
accounts and interests in and rights to 4. Release of distrained property upon
personal property of the taxpayer in payment prior to sale
sufficient quantity to satisfy the tax,
expenses of distraint and the cost of the The taxpayer may recover his property
subsequent sale. (Sec. 207 (A), NIRC) prior to the consummation of the sale if,
at any time prior to the consummation
Procedure that must be observed in of the sale, all proper charges are paid
effecting actual distraint: to the officer conducting the sale, the
goods or effects distrained shall be
1. Commencement of distraint restored to the owner. (Sec. 210, NIRC)
proceedings by the CIR or his duly
authorized representatives or by the 5. Sale at public auction to be held not less
revenue district officer as the case may than 20 days after notice to the owner
be or possessor of the property and
2. Service of warrant of distraint upon publication or posting of such notice
taxpayer or upon any person in
possession of the property Rules governing the sale

To whom warrant of distraint is a. The sale must be held at the time and
served: place stated in the notice.

a. As to tangible goods:

UNIVERSITY OF SANTO TOMAS 344

2021 GOLDEN NOTES
 Taxation Law
b. It may be conducted by the Revenue
Officer or through a licensed
commodity or stock exchange.
c. If the sale is conducted by the
Revenue Officer, it must be a public
auction and the property shall be
sold to the highest bidder for cash.
d. If the sale is through a licensed
commodity or stock exchange, it
must be with the approval of the CIR.
e. In case of stocks and other securities,
the officer making the sale shall
execute a bill of sale, which shall be
delivered to the buyer and to the
corporation, company or association
which issued the stocks or other
securities. Upon receipt of the copy
of the bill of sale, an entry of transfer
should be made in the company or
association’s book and
corresponding certificate of stock
shall be issued if required.
f. Residue over and above what is
required to pay the entire claim,
including expenses, shall be returned
to the owner of the property sold.
g. The officer making the sale shall
make a written report of the
proceedings to the CIR within 2
days after the sale (Sec. 211, NIRC)
6. Purchase by government at sale upon
distraint
The CIR or his deputy may purchase the
property in behalf of the National
Government for the amount of taxes,
penalties and cost due thereon when the
bid amount for the property under
distraint is:
a. Not equal to the amount of tax; or
b. Very much less than the actual
market value of the property
offered for sale. (Sec. 212, NIRC)
Garnishment
It is the taking of personal properties, cash or
sums of money owned by a delinquent
taxpayer which is in the possession of a third
party (i.e., bank accounts.) Bank accounts are
garnished by serving a warrant upon the
taxpayer and upon the president, manager,
treasurer, or other responsible officer of the
bank.
Q: Is the BIR authorized to issue a warrant
of garnishment against the bank account
of a taxpayer despite the pendency of
taxpayer’s protest against the assessment
with the BIR or appeal with the CTA?
(1998 BAR)
A: YES, the BIR is authorized to issue a
warrant of garnishment against the bank
account of a taxpayer despite the pendency
of protest. (Yabes v. Flojo, GR L-46954 July 20,
1982) Nowhere in the NIRC is the CIR
required to first, rule on the protest before he
can institute collection proceedings on the
tax assessed. The legislative policy is to give
the CIR much latitude in the speedy and
prompt collection of taxes because it is in
taxation that the Government depends to
obtain the means to carry on its operations.
a
NOTE: The taxpayer may request that the
warrant be lifted. The CIR may, in his
discretion, allow the lifting of the order of
distraint. He may ask for a bond as a
condition for the cancellation of the warrant.
(Sec. 207, NIRC)
2. Constructive distraint – a preventive
remedy which aims at forestalling a possible
dissipation of the taxpayer’s assets when
delinquency sets in. No actual tax
delinquency of the taxpayer is necessary
before the same is resorted to by
government.
How constructive distraint is effected:
It is effected by requiring the taxpayer or any
person having possession of the property:
1. To sign a receipt covering the property
distrained;
2. To obligate himself to preserve it intact and
unaltered; and
3. Not to dispose of it without the express
authority of the CIR.
Cases when constructive distraint is proper
(ARL)
1. Retirement from any business subject to the
tax;
2. Intending to leave the Philippines or to
remove his property therefrom; or to hide
or conceal his property; or
345
 National Taxation
3. Intending to perform any act tending to 2. Leave a copy of such list in the premises
obstruct the proceedings for collecting the where the property is located, in the
tax due or which may be due from him. presence of 2 witnesses.
(Sec. 206, NIRC)
Property levied upon by the order of a
Specific cases when Notice or Warrant of competent court can be subsequently distrained.
Constructive Distraint over the Property/ies Such property may, with the consent of such
of a Taxpayer may be Issued (LRT-CUBA) court, be subsequently distrained, subject to the
prior lien of the attachment creditor. (CIR v.
1. Taxpayer has a record of Leaving the Flores, G.R. No. L- 9675, September 28, 1957)
Philippines at least twice a year, unless such
business is justified and/or connected with Distinction between the two kinds of
his trade, business or profession. distraint

2. Taxpayer applying for Retirement from ACTUAL CONSTRUCTIVE

business has a huge amount of assessment Nature Summary remedy
pending with the BIR. Subject Personal property
matter
NOTE: An assessment is huge if the amount Availabili Cannot be availed of if tax is not
thereof is equal to or bigger than the net ty more than P100.
worth or equity of the taxpayer. To whom Delinquent Any taxpayer
made taxpayer (delinquent or
3. Taxpayer has record of Transferring his not)
bank deposits and other personal properties How Taking of Mere
in the Phil. to any foreign country except if made possession prohibition from
taxpayer is a banking institution. or transfer of disposing the
control property
4. The BIR receives information or Complaint How Leaving a list Requiring
pertaining to undeclared income in an effected of property taxpayer to sign
amount of more than 30% of gross sales, distrained or a receipt or
receipt or revenue, and there is enough service of leaving a list of
reason to believe that said information is warrant such property
correct as when it is supported by Effect on Immediate Merely to
substantial and credible evidence collection step to prevent the
collect taxpayer from
5. There is big amount of Undeclared income disposing his
known to the public and to the BIR and property
there is a strong reason to believe that the
taxpayer will hide or conceal his property. Levy
6. Taxpayer keeps Bank deposits and other It is the seizure of real property and interest in
properties under the name of other persons, or rights to such properties for the satisfaction
whether or not related to him, and the same of taxes due from the delinquent taxpayer.
are not under any lawful fiduciary or trust
capacity. When levy on real property may be made
It may be made before, simultaneously or after
7. Taxpayer uses Aliases in bank accounts the distraint of personal property of the same
other than the name for which he is legally taxpayer.
and/or popularly known. (RMO No. 5- 2001)
It may be effected by serving upon the taxpayer
In case taxpayer or person having possession a written notice of levy in the form of a duly
of the property refuses or fails to sign the authenticated certificate prepared by Revenue
receipt District Officer containing: (DNA)
The officer shall:
1. Prepare a list of such property; and

UNIVERSITY OF SANTO TOMAS 346

2021 GOLDEN NOTES
 Taxation Law
1. Description of the property upon which levy
is made;
2. Name of the taxpayer;
3. Amount of tax and penalty due.
Procedure that must be observed in levy of
real property
1. Preparation of a duly authenticated
certificate which shall operate with force of
a legal execution throughout the Philippines.
2. Service of the written notice to the:
a. Delinquent taxpayer;
b. If he is absent from the Philippines, to
his agent or the manager of the business
in respect to which the liability arose;
c. If there be none, the occupant of the
property; or
d. The Registry of Deeds of the place
where the property is located shall also
be notified.
Q: Suppose an auction sale of land for
the collection of delinquent taxes was
held, is notice by publication enough or
must there be personal service of
notice?
A: Notice by publication is not enough there
must be a personal notice to the registered
owner of the property for cases involving
an auction sale of land for the collection of
delinquent taxes are in personam. (Talusan
v. Tayag, G.R. No. 133698, April 4, 2001)
NOTE: Failure of the heirs to receive a copy
of notices of levy does not bar its effectivity
since the taxpayer is in fact the estate.
(Marcos II vs. CA)
3. Advertisement of the time and place of sale
within 20 days after the levy by posting of
notice and by publication for three
consecutive weeks.
4. Sale at a public auction.
The taxpayer may recover his property prior
to the consummation of the sale. At any
time before the day fixed for the sale, the
taxpayer may discontinue all proceeding by
paying the taxes, penalties and interest (Sec.
213, NIRC)
5. Redemption of property sold.
347
Within 1 year from the date of sale, the
taxpayer or anyone for him, may pay to the
Revenue District Officer the total amount of
the following:
a. Public taxes;
b. Penalties;
c. Interest from the date of delinquency
to the date of sale; and
d. Interest on said purchase price at the
rate of 15% per annum from the date
of sale to the date of redemption.
NOTE: If the property was forfeited in
favor of the government: the
Redemption price shall include only
the taxes, penalties and interest plus
costs of sale – no interest on purchase
price since the Government did not
“purchase” the property, for it was
forfeited. (Sec. 214, NIRC)
Effect of the redemption to the property
sold:
It shall entitle the taxpayer, the delivery of
the certificate issued to the purchaser and a
certificate from the Revenue District Officer
that he has redeemed the property. The
Revenue District Officer shall pay the
purchaser the amount by which such
property has been redeemed and said
property shall be free from lien of such
taxes and penalties. (Sec. 214, NIRC)
Person entitled to the possession of the
property levied:
The owner shall not be deprived of the
property until the expiration of the
redemption period and shall be entitled to
rents and other income until the expiration
of the period for redemption. (Sec. 214,
NIRC)
Final deed of purchaser:
In case the taxpayer shall not redeem the
property, the Revenue District Officer
(RDO) shall, as grantor, execute a deed
conveying to the purchaser so much of the
property as has been sold, free from all
liens of any kind whatsoever, and the deed
shall succinctly recite all the proceedings
upon which the validity of the sale
depends. (Sec. 204, NIRC)
 National Taxation
6. Further distraint and levy.
The remedy of distraint and levy may be
repeated if necessary until the full amount
of the tax delinquency due including all
expenses is collected from the taxpayer.
(Sec. 217, NIRC) Otherwise, a clever taxpayer
who is able to conceal most of the valuable
part of his property would escape payment
of his tax liability by sacrificing an
insignificant portion of his holdings.
The CIR shall have charge of any real estate
obtained by the Government in payment or
satisfaction of taxes, penalties or costs or in
compromise or adjustment of any claim.
The CIR may:
1. Sell and dispose of the same of public
auction upon the giving of not less than
twenty (20)-day notice; or
2. Dispose of the same at private sale with
prior approval of the Secretary of Finance.

NOTE: Further distraint and levy does not In either case, the proceeds of the sale shall be
apply when the real property was forfeited deposited with the National Treasury, and an
to the government for it is in satisfaction of accounting of the same shall rendered to the
the claim in question. (Sec 215, NIRC) Chairman of the Commission on Audit. (Sec. 216,
NIRC)
FORFEITURE OF REAL PROPERTY
Difference between forfeiture and seizure to
BIR is allowed to forfeit the property subject to enforce a tax lien
levy only if:
1. There is no bidder; or FORFEITURE SEIZURE
2. The bid amount is insufficient to pay the Ownership is Taxpayer
taxes, penalties and costs. (Sec 215, NIRC) Ownership transferred retains
to the ownership of
Forfeiture Government property
seized
It is the divestiture of property without Disposition Excess not Excess
compensation, in consequence of a default or of the returned to returned to
offense. It transfers the title to the specific thing proceeds the taxpayer taxpayer
from the owner to the government. Also, there of sale
would no longer be any further levy for such
would be for the total satisfaction of the tax due. Suspension of business operation

NOTE: The erring taxpayer may still be The CIR or his authorized representative is
criminally prosecuted even if the property has empowered to suspend the business operations
already been forfeited. (Garcia v. Coll., 66 Phil. and temporarily close the business
441) establishment of any person for any of the
following violations:
Redemption of forfeited property
1. In the case of VAT-registered person:
The Register of Deeds shall transfer the title of a. Failure to issue receipts or invoices;
forfeited property to the Government without b. Failure to file a VAT return as required
necessity of a court order. under Sec. 114; or
c. Understatement of taxable sales or
Within 1 year from the date of forfeiture, the receipts by 30% or more of his correct
taxpayer, or any one for him may redeem said taxable sales or receipts for the taxable
property by paying to the CIR or Revenue quarter.
Collection Officer the full amount of the taxes
and penalties, together with interest thereon 2. Failure of any person to Register as required
and the costs of sale, but if the property be not under Sec. 236: The temporary closure of the
thus redeemed, the forfeiture shall become establishment shall be for the duration of
absolute. (Sec. 215, NIRC) not less than 5 days and shall be lifted only
upon compliance with whatever
Resale of Real Estate Taken for Taxes

UNIVERSITY OF SANTO TOMAS 348

2021 GOLDEN NOTES
 Taxation Law
requirements prescribed by the CIR in the
closure order. (Sec. 115 NIRC)
JUDICIAL REMEDIES
1. Ordinary civil action
2. Criminal action
In case the CIR decides adversely or if no
decision yet after the lapse of 180 days, the
taxpayer may appeal to the CTA Division, 30
days from the receipt of the decision or from the
lapse of the 180 days otherwise the decision
shall become final, executory and demandable.
(RCBC v. CIR, G.R. No. 168498, April 24, 2007)
If the decision is adverse to the taxpayer, he may
file a motion for reconsideration or new trial
before the same Division of the CTA within 15
days from notice thereof.
In case the resolution of a Division of the CTA on
a motion for reconsideration or new trial is
averse to the taxpayer, he may file a petition for
review with the CTA En Banc.
The ruling or decision of the CTA En banc may be
appealed with the Supreme Court through a
verified petition for review on certiorari pursuant
to Rule 45 of the 1997 Rules of Civil Procedure.
NOTE: Refer to “Court of Tax Appeals” for
complete discussion on judicial remedies.
NO INJUNCTION RULE; EXCEPTIONS
GR: No court shall have the authority to grant an
injunction to restrain the collection of any
national internal revenue, tax, fee or charge.
(Sec. 219, R.A. 8424)
XPNs:
1. Filing of Injunction with the CTA as an
incident to its appellate jurisdiction
a. Showing that collection of the tax may
jeopardize the interest of the
government and/or the taxpayer
b. Deposit of the amount claimed or file a
surety bond
c. Showing by taxpayer that appeal is not
frivolous nor dilatory
2. The SC, on exceptional cases of suits
questioning the constitutionality of a tax
law. (Tolentino v. Executive Secretary)
349
3. In case of local taxes, RTCs may issue an
injunction upon a suit questioning their
validity
NOTE: In the case of the collection of local
taxes, there is no express prohibition in the
Local Government Code prohibiting courts
from issuing an injunction to restrain local
governments from collecting taxes. Such
statutory lapse or intent, however it may be
viewed, may have allowed preliminary
injunction where local taxes are involved.
(Angeles City v. Angeles Electric Corporation,
G.R. No. 166134 (2010))
Rationale: The Lifeblood doctrine requires that
the collection of taxes cannot be enjoined,
without taxation, a government can neither exist
nor endure.
Q: Standard Insurance Co., Inc., a non-life
insurance company, received from the BIR a
Final Decision on Disputed Assessment
(FDDA) dated November 25, 2014, declaring
its liability for the DST deficiency, including
interest and compromise penalty, totaling
P400,000.00. Standard, after its request for
reconsideration was denied, filed a Civil Case
before the RTC with prayer for issuance of a
temporary restraining order (TRO) or of a
writ of preliminary injunction and for the
judicial determination of the
constitutionality of Section 108 and Section
184 of the NIRC with respect to the taxes to
be paid by non-life insurance companies. The
RTC promulgated a judgment permanently
enjoining the BIR, its agents, representatives,
or any persons acting on its behalf from
proceeding with the implementation or
enforcement of Sections 108 and 184 of the
NIRC against Standard. Decide on the
propriety of the RTC ruling.
A: The injunctive relief is not available as a
remedy to assail the collection of a tax. Sec. 218
of the NIRC provides that no court shall have the
authority to grant an injunction to restrain the
collection of any national internal revenue tax,
fee or charge imposed by the NIRC. Also,
decisions or rulings of the BIR/CIR, among
others, assessing any tax, or levying, or
distraining, or selling any property of taxpayers
for the satisfaction of their tax liabilities are
immediately executory, and their enforcement is
not to be suspended by any appeals thereof to
 National Taxation
the CTA unless in the opinion of the CTA, the
collection by the BIR or the Commissioner of
Customs may jeopardize the interest of the
Government and/or the taxpayer, in which case
the CTA at any stage of the proceeding may
suspend the said collection and require the
taxpayer either to deposit the amount claimed or
to file a surety bond for not more than double
the amount.
The adequate remedy upon receipt of the Final
Decision on Disputed Assessment (FDDA) was
not the action for declaratory relief but an
appeal taken in due course to the CTA.
(Commissioner of Internal Revenue v. Standard
Insurance Co., Inc., G.R. No. 219340, November 7,
2018)
CIVIL PENALTIES
SURCHARGE AND INTEREST
They are imposed in addition to the tax required
to be paid. Section 247 of the NIRC provides that
the additions to the tax or deficiency tax apply to
all taxes, fees and charges imposed by the NIRC.
Tax laws imposing penalties for delinquencies
are intended to hasten tax payments by
punishing evasions or neglect of duty in respect
thereof. The intention of the law is to discourage
delay in the payment of taxes due to the
Government and, in this sense, the penalty and
interest are not penal in nature but
compensatory for the concomitant use of the
funds by the taxpayer beyond the date when he
is supposed to have paid them to the
government. (Ingles, 2015, citing Philippine
Refining Company vs CA)
DELINQUENCY INTEREST AND
DEFICIENCY INTEREST
Interests
Kinds of interest in income taxation:
1. Interest in general – There shall be
assessed and collected on any unpaid
amount of tax, interest at the rate of double
the legal interest rate for loans or
forbearance of any money in the absence of
an express stipulation as set by the BSP,
from the date prescribed for payment until
the amount is fully paid. (Section 249 (A),
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
NIRC)
2. Deficiency interest – Any deficiency in the
tax due shall be subject to interest at the
rate of 12% per annum (double the legal
interest rate prescribe in Sec. 249 (A),
which interest shall be assessed and
collected from the date prescribed for its
payment until the full payment thereof, or
upon issuance of a notice and demand by
the CIR, whichever comes earlier. (Sec. 249
(B), NIRC)
NOTE: The new interest rate shall be applied
only in cases of deficiency taxes for 2018
onwards. If the deficiency taxes were for earlier
taxable period, it shall be computed pro-rata i.e.,
20% for 2017 and earlier (under the NIRC) and
the 12% for 2018 onwards (under TRAIN).
Delinquency interest
There shall be assessed and collected on the
unpaid amount, interest at the rate of 20% per
annum until the amount is fully paid, which
interest shall form part of the tax, in case of
failure to pay:
1. Amount of tax due on any return required
to be filed, or
2. Amount of tax due for which no return is
required, or
3. Deficiency tax, or any surcharge on interest
thereon on the due date appearing in the
notice and demand of the CIR. (Sec. 249 (C),
NIRC)
NOTE: Deficiency interest on deficiency income
tax accrues and commences from the date of
assessment as shown in the assessment notice.
Interest on extended payment
There shall be assessed and collected interest at
the rate of 20% per annum on the tax or
deficiency tax or any part thereof unpaid from
the date of notice and demand until it is paid:
1. If any person required to pay the tax is
qualified and elects to pay the tax on
installment, but fails to pay the tax or any
installment hereof, or any part of such
amount or installment on or before the date
prescribed for its payment; or
350
 Taxation Law
2. Where the CIR has authorized an extension
of time within which to pay a tax or a
deficiency tax or any part thereof. (Sec. 249
(D), NIRC)
CIVIL PENALTIES OR SURCHARGE
A civil penalty, also known as surcharge, is
imposed by law as an addition to the basic tax
required to be paid. (Sec. 248, NIRC)
A surcharge is a civil administrative sanction
provided as a safeguard for the protection of
the State revenue and to reimburse the
government for the expenses of investigation
and the loss resulting from the taxpayer’s
fraud. A surcharge added to the main tax is
subject to interest.
Two categories of civil penalties
1. 25% Surcharge (F-TOP)
a. Failure to File any return and pay the
tax due thereon as required under the
provisions of the NIRC or rules and
regulations on the date prescribed.
b. Failure to pay the deficiency tax within
the Time prescribed for its payment in
the notice of assessment.
In cases of late payment of a deficiency
tax assessed, taxpayer shall be liable for
the delinquency interest incident to late
payment. (RR 18-2013)
c. Unless otherwise authorized by the CIR,
filing a return with an internal revenue
officer Other than those with whom the
return is required to be filed.
d. Failure to Pay the full or part of the
amount of tax shown on any return
required to be filed under the
provisions of the NIRC or rules and
regulations, or the full amount of tax
due for which no return is required to
be filed, on or before the date
prescribed for its payment. (Sec 248 (A),
NIRC)
NOTE: There is no 25% surcharge when
tax return is filed on time and paid the
full amount stated in the return, but
subsequently discovered that the return
filed and the amount paid was
351
erroneous. (Ingles, 2015)
2. 50% Surcharge
a. Willful neglect to file the return within
the period prescribed.
If the taxpayer voluntarily files the return
without notice from BIR, only 25%
surcharge shall be imposed for late filing
and late payment of tax. But if the
taxpayer files the return after prior
notice in writing from BIR, then the 50%
surcharge will be imposed. Thus:
- No demand from the BIR and the
taxpayer pays, albeit late, 25%
- With demand by the BIR, 50%
(Ingles, 2015)
b. False or fraudulent return is willfully
made.
The fraud contemplated by law is actual
fraud, not constructive fraud. It must be
intentional fraud, consisting of deception
willfully and deliberately done or
resorted to. Negligence, whether slight
or gross, is not equivalent to fraud with
intent to evade the tax contemplated by
law. (Aznar vs. CTA, G.R. No. L-20569,
August 23, 1974)
Prima facie evidence of a false or fraudulent
return
Substantial under-declaration of taxable sales,
receipts or income, or Substantial overstatement
of deductions
NOTE: Substantial underdeclaration is the
failure to report sales, receipts or income in an
amount exceeding 30% of that declared per
return, and a claim of deductions in an amount
exceeding 30% of actual deductions. (Sec. 248,
NIRC)
Q: Businessman Lincoln filed an income tax
return for 1993 showing business net income
of P350,000 on which he paid an income tax
of P61,000. After filing the return, he realized
that he forgot to include an item of business
income in 1993 for P50.000.
Being an honest taxpayer, he included this
income in his return for 1994 and paid the
 National Taxation
corresponding income tax thereon. In the
examination of his 1993 return the BIR
examiner found that Lincoln failed to report
this item of P50,000 and assessed him a
deficiency income tax on this item, plus a
50% fraud surcharge.
a. Is the examiner correct?
b. If you were the lawyer of Lincoln, what
would you have advised your client
before he included in his 1994 return the
amount of P50.000 as 1993 income to
avoid the fraud surcharge?
c. Considering that Lincoln had already
been assessed a deficiency income tax for
1993 for his failure to report the P50.000
income, what would you advise him to do
to avoid the penalties for tax
delinquency?
d. What would you advise Lincoln to do
with regard to the income tax he paid for
the P50.000 in his 1994 return? In case
your remedy fails, what is your other
recourse? (1995 BAR)
A:
a. The examiner is correct in assessing a
deficiency income tax for taxable year 1993
but not in imposing the 50% fraud
surcharge. The amount of all items of gross
income must be included in gross income
during the year in which received or
realized (Sec. 38, NIRC) The 50% fraud
surcharge attaches only if a false or
fraudulent return is willfully made by
Lincoln (Sec. 248, NIRC) The fact that Lincoln
included it in his 1994 return belies any
claim of willfulness but is rather indicative
of an honest mistake which was sought to be
rectified by a subsequent act that is the filing
of the 1994 return.
b. Lincoln should have amended his 1993
income tax return to allow for the inclusion
of the P50,000 income during the taxable
period it was realized.
c. Lincoln should file a protest questioning the
50% surcharge and ask for the abatement
thereof.
d. Lincoln should file a written claim for refund
with the CIR of the taxes paid on the
P50,000 income included in 1994 within 2
years from payment pursuant to Sec. 204 (3)
of the NIRC. Should this remedy fail in the
administrative level, a judicial claim for
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
refund can be instituted before the
expiration of the two-year period.
COMPROMISE PENALTY
It is a certain amount of money which the
taxpayer pays to compromise a tax violation.
Compromise penalties are paid in lieu of
criminal prosecution, and cannot be imposed in
the absence of a showing that the taxpayer
consented thereto. If an offer of compromise is
rejected by the taxpayer, the compromise
penalty cannot be enforced through an action in
court or by distraint and levy. The CIR should
file a criminal action if he believes that the
taxpayer is criminally liable for violation of the
tax law as the only way to enforce a penalty.
(Dimaampao, 2015)
Q: A domestic corporation failed to withhold
and remit the tax on income received from
Philippine sources by a non-resident foreign
corporation.
In addition to the civil penalties provided for
under the NIRC, a compromise penalty was
imposed for violation of the withholding tax
provisions. May the Commissioner of
Internal Revenue legally enforce the
collection of compromise penalty? (2000
BAR)
A: NO. There is no showing that the compromise
penalty was imposed by the Commissioner of
Internal Revenue with the agreement and
conformity of the taxpayer. (Wonder Mechanical
Engineering Corporation v. Court of Tax Appeals,
et. al., 64 SCRA 555)
FRAUD PENALTY
In case of willful neglect to file the return within
the period prescribed by this Code or by rules
and regulations, or in case a false or fraudulent
return is willfully made, the penalty to be
imposed shall be fifty percent (50%) of the tax
or of the deficiency tax, in case any payment has
been made on the basis of such return before the
discovery of the falsity or fraud.
Provided, that a substantial underdeclaration of
taxable sales, receipts or income, or a substantial
overstatement of deductions, as determined by
the Commissioner pursuant to the rules and
regulations to be promulgated by the Secretary
of Finance, shall constitute prima facie evidence
352
 Taxation Law
of a false or fraudulent return.

Provided, further, that failure to report sales,

receipts or income in an amount exceeding
thirty percent (30%) of that declared per return,
and a claim of deductions in an amount
exceeding thirty percent (30%) of actual
deductions, shall render the taxpayer liable for
substantial underdeclaration of sales, receipts or
income or for overstatement of deductions, as
mentioned herein. (Sec. 248 (B), NIRC)

353
 National Taxation
Figure 1. Process of Assessment from Self-Assessment, Issuance of Preliminary Assessment and
Notice, to Protesting Final Assessment Notice

UNIVERSITY OF SANTO TOMAS 354

2021 GOLDEN NOTES
 Taxation Law

Figure 2. Government Remedies if FLD/FAN becomes final

355
 National Taxation

Figure 3. Taxpayer’s remedies upon issuance of FLD/FAN

UNIVERSITY OF SANTO TOMAS 356

2021 GOLDEN NOTES
 Taxation Law

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

357
 Local Taxation
LOCAL TAXATION 5. Each LGU shall, as far as practicable, evolve
a Progressive system of taxation. (Sec. 130,
LOCAL GOVERNMENT TAXATION LGC)

NOTE: The fundamental principles of taxation

Local taxes are taxes that are imposed and are also known as the requisites of municipal
collected by the LGUs in order to raise revenues taxation.
to enable them to perform the functions for
which they have been organized. Q: The City of Makati, in order to solve the
traffic problem in its business districts,
Aspects of local taxation decided to impose a tax, to be paid by the
driver, on all private cars entering the city
1. Local Government Taxation (Secs. 128-196, during peak hours from 8:00 a.m. to 9:00
LGC) a.m. from Mondays to Fridays, but exempts
2. Real Property Taxation (Secs. 197-283, LGC) those cars carrying more than two
occupants, excluding the driver. Is the
LOCAL ordinance valid? (2003 BAR)
REAL PROPERTY
GOVERNMENT
TAXATION
TAXATION A: The ordinance is in violation of the Rule of
Imposition of System of levy on real Uniformity and Equality, which requires that all
license, taxes, property imposed on a subjects or objects of taxation, similarly situated
fees and other country-wide basis but must be treated in equal footing and must not
impositions, authorizing, to a limited classify the subjects in an arbitrary manner. In
including extent and within certain the case at bar, the ordinance exempts cars
community tax. parameters, local carrying more than two occupants from
governments to vary the coverage of the ordinance. Furthermore, the
rates of taxation. ordinance only imposes the tax on private cars
and exempts public vehicles from the
FUNDAMENTAL PRINCIPLES (UE-LIP) imposition of the tax, although both contribute
to the traffic problem. There exists no
1. Taxation shall be Uniform in each LGU. substantial standard used in the classification
2. Taxes, fees, charges and other impositions by the City of Makati.
shall: (EPUC)
a. be equitable and based as far as Another issue is the fact that the tax is imposed
practicable on the taxpayer's ability to on the driver of the vehicle and not on the
pay; registered owner. The tax does not only violate
b. be levied and collected only for public the requirement of uniformity, but the same is
purposes; also unjust because it places the burden on
c. shall not be unjust, excessive, someone who has no control over the route of
oppressive, or confiscatory; the vehicle. The ordinance is, therefore, invalid
d. not be contrary to law, public policy, for violating the rule of uniformity and equality
national economic policy, or in the as well as for being unjust.
restraint of trade;
NOTE: A city can validly tax the sales to
3. The collection of local taxes, fees, charges customers outside the city as long as the orders
and other impositions shall in no case be Let were booked and paid for in the company’s
to any private person. branch office in the city. A different
4. The revenues collected pursuant to the interpretation would defeat the tax ordinance in
provisions of the LGC shall Inure solely to question or encourage tax evasion by simply
the benefit of, and be subject to the arranging for the delivery at the outskirts of the
disposition by, the LGU levying the tax, fee, city. (Philippine Match Company v. City of Cebu,
charge or other imposition unless otherwise G.R. No. L-30745, January 18, 1978)
specifically provided herein.
Characteristics of the taxing power of LGUs
(DON2G)

UNIVERSITY OF SANTO TOMAS 358

2021 GOLDEN NOTES
 Taxation Law
1. Not inherent –May only be exercised if
delegated to them by national legislature or
conferred by the Constitution itself.
2. Direct grant from the Constitution – While a
direct grant, the same is subject to
limitations as may be set by Congress.
3. Not absolute –Subject to limitations and
guidelines as may be provided by law and
the Constitution such as progressivity etc.
It is a fundamental principle that municipal
ordinances are inferior in status and
subordinate to the laws of the state. An
ordinance in conflict with a state law of
general character and statewide application
is universally held to be invalid. (Batangas
CATV, Inc. v. Court of Appeals, 482 Phil. 544
(2004))
4. Exercised by the sanggunian of the LGU
concerned through an appropriate
Ordinance.
5. Its application is bounded by the
Geographical limits of the LGU that imposes
the tax.
Gross receipts realized by a specialty
contractor from its overseas construction
projects are not subject to tax. (Bureau of
Local Government Finance (BLGF) Opinion,
May 16, 2017)
NATURE AND SOURCE OF TAXING POWER
GRANT OF LOCAL TAXING POWER
UNDER THE LOCAL GOVERNMENT CODE
Legal foundations of LGU’s powers
1. Art. X, Sec. 5 of the 1987 Constitution - “Each
LGU shall have the power to create their 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.”
2. Sec. 129 of the Local Government Code (LGC)
- “Each LGU shall exercise its power to create
its own sources of revenue and levy taxes,
fees, and charges subject to the provisions
359
herein, consistent with the basic policy of
local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the
LGUs.”
3. Charter of Cities – additional taxing authority
exclusively granted to cities include the
power to impose percentage tax and taxes
on articles subject to specific tax.
Limitations upon Congress when it provides
guidelines and limitations on the LGUs power
of taxation
The Congress shall ensure that:
1. The taxpayers will not be overburdened or
saddled with multiple and unreasonable
impositions;
2. Each LGU will have its fair share of available
resources;
3. The resources of national government will
not be unduly disturbed; and
4. Local taxation will be fair, uniform and just.
Q: Does the ARMM and CAR have the same
source of power as the LGUs?
A: NO. The LGUs derive their power to tax from
Sec. 5, Article X of the 1987 Constitution. The
constitutional provision is self-executing. This is
applicable only to LGUs outside the Autonomous
Region of Muslim Mindanao and the Cordillera
Administrative Region since the authority to tax
the LGUs within their region is delegated by the
Organic Act creating them.
Sec. 20, Article X of the 1987 Constitution
authorizes the Congress to pass the Organic Act
which shall provide for legislative powers over
creation of sources of revenues. This provision is
not self-executing unlike Sec. 5, Article X of the
Constitution.
NOTE: The LGU’s power to tax is subject to such
guidelines and limitations as Congress may
provide while the ARMM and CAR’s power to tax
is based on the Organic Act which the
Constitution authorizes Congress to pass.
Paradigm shift in local government taxation
The power to tax is no longer vested exclusively
on Congress. Local legislative bodies are now
given direct authority to levy taxes, fees and
other charges pursuant to Art. X, Sec. 5 of the
 Local Taxation
Constitution. (NAPOCOR v. City of Cabanatuan,
G.R. No. 149110, April 9, 2003)
The reason of the shift results from the
realization that genuine development can be
achieved only by strengthening local autonomy
and promoting decentralization of governance.
(Ibid.)
The nature of the taxing power of the
provinces, municipalities and cities
Directly conferred by the Constitution by giving
them the authority to create their own sources
of revenue. The LGUs do not exercise the power
to tax as an inherent power or by a valid
delegation of the power by Congress, but
pursuant to a direct authority conferred by the
Constitution. (2007 BAR)
The Congress, under the 1987 Constitution,
cannot abolish the power to tax of local
governments
It is expressly granted by the fundamental law.
The only authority conferred to Congress is to
provide the guidelines and limitations on the
local government's exercise of the power to tax.
(Sec. 5, Art. X, 1987 Constitution) (2003 BAR)
NOTE: The authority to tax of LGUs within the
Autonomous Regions (Muslim Mindanao and the
Cordilleras) is not delegated by the Constitution,
but by the Organic Act creating them.
Q: On December 26, 1992, the Municipality of
Pasig enacted Ordinance No. 25 which
imposed a franchise tax at the rate of fifty
percent (50%) of one percent (1%) of gross
receipts derived from the operation of
business during the preceding calendar year.
Subsequently, the Municipality of Pasig was
converted into a highly urbanized city by
virtue of R.A. No. 7829 on January 25, 1995.
The Treasurer’s Office of the City
Government of Pasig informed MERALCO
that it is liable to pay taxes for the period of
1996 to 1999 amounting to P435,332,196.00,
exclusive of penalties. Is MERALCO liable to
pay the franchise tax levied by the
municipality of Pasig, and does the
conversion of Pasig into a city rectify the
defect of said ordinance?
A: NO. The power to impose franchise tax
belongs to the province by virtue of Section 137
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
of the LGC. The LGC further provides that the
power to impose a tax, fee, or charge or to
generate revenue shall be exercised by the
Sanggunian of the local government unit
concerned through an appropriate ordinance.
However, an ordinance must pass muster the
test of constitutionality and the test of
consistency with the prevailing laws. Otherwise,
it shall be void. It is not disputed that at the time
the ordinance in question was enacted in 1992,
the local government of Pasig, then a
municipality, had no authority to levy franchise
tax. Being void, it cannot be given any legal
effect. An assessment and collection pursuant to
the said ordinance is, perforce, legally infirm.
In this case, the validity of the municipal
ordinance imposing a franchise tax cannot be
made to rest upon the ambiguity of a provision
of law operating supposedly, albeit mistakenly,
under the context of promoting local autonomy.
Regard, too, must be made for the equally
important doctrine that a doubt or ambiguity
arising out of the term used in granting the
power of taxation must be resolved against the
local government unit.
In fine, the City of Pasig cannot legally make a
demand for the payment of taxes under the
challenged ordinance, which is void, even after
its conversion into a city. The CA, thus,
committed no reversible error. (City of Pasig and
Crispina V Salumbre, in her capacity as OIC-City
Treasurer of Pasig City v. Manila Electric
Company, G.R. 181710, March 7, 2018)
AUTHORITY TO PRESCRIBE PENALTIES
FOR TAX VIOLATIONS
1. Limited as to the amount of imposable fine
as well as the length or period of
imprisonment.
2. The Sanggunian is authorized to prescribe
fines or other penalties for violations of tax
ordinances.
a. In no case shall fines be less than
₱1,000 nor more than ₱5,000
b. Nor shall the imprisonment be less
than one (1) month nor more than six
(6) months
3. Such fine or other penalty shall be imposed
at the discretion of the court.
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 Taxation Law
4. The Sangguniang Barangay may prescribe a
fine of not less than ₱100 nor more than
₱1,000. (Sec. 516, LGC)
AUTHORITY TO GRANT
LOCAL TAX EXEMPTIONS
LGUs may, through ordinances duly approved,
grant tax exemptions, incentives or reliefs under
such terms and conditions as they may deem
necessary. (Sec. 192, LGC)
The power to grant tax exemptions, tax
incentives and tax reliefs shall not apply to
regulatory fees which are levied under the police
power of the LGU. (Sec. 1, Malacañang
Memorandum Circular No. 153, s. 1992)
The guidelines for granting tax exemptions,
incentives and reliefs: (Rules and Regulations
Implementing the LGC, Art. 282(b))
1. Tax Exemptions and Reliefs
a. May be granted in cases of natural
calamities, civil disturbance, general
failure of crops or adverse economic
conditions such as substantial decrease
in prices of agricultural or agri-based
products.
b. The grant shall be through an
ordinance.
c. Any exemption or relief granted to a
type or kind of business shall apply to
all businesses similarly situated.
d. The same may take effect only during
the calendar year not exceeding 12
months as may be provided in the
ordinance.
e. In case of shared revenues, the relief or
exemption shall only extend to the LGU
granting such.
2. Tax incentives
a. Shall be granted only to new
investments in the locality and the
ordinance shall prescribe the terms and
conditions therefore.
b. The grant shall be for a definite period
not exceeding 1 calendar year.
c. The grant shall be through an ordinance
passed prior to the 1st day of January of
any year.
361
d. Tax incentive granted to a type or kind
of business shall apply to all businesses
similarly situated.
NOTE: Tax exemption is conferred through the
issuance of a non-transferable tax exemption
certificate. (Art. 282, IRR of LGC)
Q: The LGC took effect on January 1, 1992.
PLDT’s legislative franchise was granted
sometime before 1992. Its franchise provides
that PLDT will pay only 3% franchise tax in
lieu of all taxes.
The legislative franchise of Smart and Globe
Telecoms were granted in 1998. Their
legislative franchises state that they will pay
only 5% franchise tax in lieu of all taxes.
The Province of Zamboanga del Norte passed
an ordinance in 1997 that imposes a local
franchise tax on all telecommunications
companies operating within the province.
The tax is 50% of 1% of the gross annual
receipts of the preceding calendar year based
on the incoming receipts, or receipts
realized, within its territorial jurisdiction.
Is the ordinance valid? Are PLDT, Smart and
Globe liable to pay franchise taxes? Reason
briefly (2007 BAR)
A: The ordinance is valid as it was passed
pursuant to the powers of provinces and cities to
impose taxes on businesses with franchises
under the Local Government Code (LGC) The
LGC, which took effect on January 1, 1992,
withdrew tax exemptions or incentives
previously enjoyed by all persons, except certain
entities. (Sec. 193, LGC)
PLDT is liable to pay the local franchise taxes
because its legislative franchise was granted by
Congress prior to the passage of the LGC. Thus,
the provision of the LGC withdrawing tax
exemptions or incentives applies to PLDT. Smart
and Globe are exempt from the local franchise
taxes imposed by the province since their
respective legislative franchises were granted in
1998, or after the enactment of the LGC.
Therefore, with respect to Smart and Globe, the
withdrawal of tax exemptions or incentives
under the LGC was superseded by the legislative
franchise requiring payment of the 5% franchise
 Local Taxation
tax “in lieu of all taxes.” (PLDT v. City of Davao,
G.R. No. 143867, August 22, 2001 and March 25,
2003)
Q: Is Smart Communications, Inc. (SMART)
exempt from local taxation?
A: Under its franchise, SMART is not exempt
from local business and franchise taxes.
Moreover, Section 23 of the Public
Telecommunications Act does not provide legal
basis for Smart’s exemption from local business
and franchises taxes. The term “exemption” in
Section 23 of the Public Telecommunications Act
does not mean tax exemption; rather, it refers to
exemption from certain regulatory or reporting
requirements imposed by government agencies
such as the National Telecommunications
Commission. (The City of Iloilo v. Smart
Communications Inc., G.R. No. 167260, February
27, 2009)
Government Instrumentalities Exempted
from Local Taxation
1. Philippine Amusement and Gaming
Corporation
2. Philippine Reclamation Authority
3. Manila International Airport Authority
4. Mactan Cebu International Airport Authority
5. Philippine Economic Zone Authority
6. Philippine Rice Research Institute
7. Philippine Ports Authority
8. Philippine National Railways
9. University of the Philippines
10. Bangko Sentral ng Pilipinas
11. Philippine Fisheries Development Authority
12. Cebu Port Authority
13. Cagayan De Oro Port Authority
14. San Fernando Port Authority
15. Government Service Insurance System
16. Laguna Lake Development Authorityå
17. Bases Conversion Development Authority
NOTE: Exemption likewise applies to real
property taxation.
WITHDRAWAL OF EXEMPTIONS
Privileges withdrawn upon the effectivity of
the LGC
GR: Tax exemptions or incentives granted to or
enjoyed by all persons, whether natural or
juridical, including government-owned or
controlled corporations are hereby withdrawn
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
upon the effectivity of the Local Government
Code. (Sec. 193, LGC)
XPNs: Those exemptions or incentives conferred
to:
1. Local water districts
2. Cooperatives duly registered under R.A.
6938
3. Non-stock and non-profit hospitals
4. Educational institutions
NOTE: However, withdrawal of tax exemption is
not to be construed as prohibiting future grants
of tax exemptions. The grant of taxing powers to
LGU’s under the LGC does not affect the power of
Congress to grant exemptions to certain persons,
pursuant to a declared national policy.
Necessity of Reenactment
The person claiming the exemption has the
burden of proving its claim by clear grant of
exemption after the enactment of the LGC.
(NAPOCOR v. City of Cabanatuan, G.R. No. 149110,
April 9, 2003)
The rule that special law must prevail over the
provisions of a later general law does not apply
as the legislative purpose to withdraw tax
privileges enjoyed under existing laws or
charters is apparent from the express provisions
of the LGC. (City of San Pablo, Laguna v. Reyes,
G.R. No. 127780, March 25, 1999)
Rationale for the withdrawal of tax
exemptions
The intention of the law in withdrawing the tax
exemptions is to broaden the tax base of LGU to
assure them of substantial sources of revenue.
(Philippine Rural Electric Cooperatives
Association v. The Secretary of DILG, G.R. No.
143076. June 10, 2003)
Q: Prior to the enactment of the Local
Government Code, consumer's cooperatives
registered under the Cooperative
Development Act enjoyed exemption from all
taxes imposed by a local government. With
the Local Government Code’s withdrawal of
exemptions, could these cooperatives
continue to enjoy such exemption? (2011
BAR)
A: YES. Their exemption is specifically
mentioned among those not withdrawn by the
362
 Taxation Law
Local Government Code.
AUTHORITY TO ADJUST LOCAL TAX RATES
LGUs shall have the authority to adjust the tax
rates as prescribed herein not oftener than once
every 5 years, but in no case shall such
adjustment exceed 10% of the rates fixed under
the LGC. (Sec. 191, LGC)
RESIDUAL TAXING POWER
OF LOCAL GOVERNMENTS
Residual Taxing Power of the LGU means
LGUs may exercise the power to levy taxes, fees
or charges on any base or subject NOT otherwise
specifically enumerated or taxed under the:
1. Local Government Code;
2. National Internal Revenue Code; or
3. Other applicable laws. (Sec. 186, LGC)
Conditions in the exercise of the residual
power of taxation (Sec. 133, Sec. 186, LGC)
1. The tax base or subject is not taxed under
the National Internal Revenue Code or other
applicable laws.
2. The taxes, fees, or charges are not unjust,
excessive, confiscatory, oppressive, or
contrary to the declare national economic
policy of the government.
3. A public hearing has been conducted prior
to the enactment of the ordinance levying
taxes, fees, or charges.
4. The procedures for the approval, effectivity,
and publication of tax ordinance have been
complied with.
5. The residual power is subject to the
constitutional limitations on the taxing
power and the common limitations on the
taxing power of LGUs as prescribed in
Section 133 of LGC.
6. Principle of Pre-emption or Exclusionary
Rule
Principle of Pre-emption or Exclusionary
Doctrine, when applicable
1. Taxes levied under the NIRC.
2. Taxes imposed under the Tariff and Customs
Code.
3. Taxes under special laws.
Preemption in the matter of taxation simply
363
refers to an instance where the national
government elects to tax a particular area,
impliedly withholding from the local
government the delegated power to tax the same
field. This doctrine primarily rests upon the
intention of Congress. Conversely, should
Congress allow municipal corporations to cover
fields of taxation it already occupies, then the
doctrine of preemption will not apply. (Victorias
Milling Co., Inc. v. The Municipality of Victorias,
Negros Occidental, G.R. No. L-21183, September
27, 1968)
Classification of common limitations
/excluded impositions (Sec. 133, LGC)
1. Taxes which are levied under the NIRC
unless otherwise provided by the LGC -
Items 1,2,3,8,9 & 10.
2. Taxes, fees, and charges which are imposed
under the Tariffs and Customs Code - Item 4
3. Taxes, fees and charges where the
imposition of which contravenes existing
governmental policies or which are violative
of the fundamental principles of taxation -
Items 5, 6, 7, 11, 13, 14 & 15
4. Taxes, fees and charges imposed under
special laws - Item 12
5. When Congress allows municipal
corporations to cover fields of taxation it
already occupies.
6. It does not apply beyond a certain level of
sales or receipts for the preceding year.
7. If the subject of the taxes levied by the
national and local governments are different
from each other.
Q: BATAS Law is a general professional
partnership operating in the City of
Valenzuela. It regularly pays value-added tax
on its services. All its lawyers have
individually paid the required professional
tax for the year 2017. However, as a
condition for the renewal of its business
permit for the year 2017, the City Treasurer
of Valenzuela assessed BATAS Law for the
payment of percentage business tax on its
gross receipts for the year 2016 in
accordance with the Revenue Tax Code of
Valenzuela. Is BATAS Law liable to pay the
assessed percentage business tax? Explain
your answer. (2017 BAR)
A: NO. Section 133(i) of the LGC provides that
the exercise of the taxing powers of local
 Local Taxation
government units such as the City of Valenzuela
shall not extend to the levy of “percentage or
value-added tax (VAT) on sales, barters or
exchanges or similar transactions on goods or
services” except as otherwise provided in the
LGC. Therefore, BATAS Law may not be assessed
with and required to pay percentage business
tax.
Q: Victoria Milling is a sugar miller. Its gross
receipts as a sugar central or sugar refinery
is subject to percentage tax by the NIRC. The
Municipality of Victorias imposed a tax on
sugar millers depending upon the annual
output capacity of the miller. Does the
principle of preemption apply?
A: NO. The NIRC imposes a percentage tax. The
ordinance does not deal with percentage tax.
Rather, the ordinance deals with a tax
specifically for operators of sugar centrals and
sugar refineries. The rates imposed are based on
the maximum annual output capacity, which is
not a percentage because it is not a share. Nor is
it a tax based on the amount of the proceeds
realized out of the sale of sugar, centrifugal or
refined. (Victorias Milling Co., Inc. v. The
Municipality of Victorias, Negros Occidental, G.R.
No. L-21183, September 27, 1968)
The following are the powers of taxation of
the LGUs
1. Common Revenue-Raising Powers of LGUs;
2. Specific Powers of LGU to Impose Taxes;
3. Power to Levy Community Tax; and
4. Powers under Miscellaneous Provisions.
LGUs cannot tax the National Government
GR: LGUs cannot impose taxes, fees or charges of
any kind on the National Government, its
agencies and instrumentalities. (Sec. 133, Par. O,
LGC).
XPN: When specific provisions of the LGC
authorize the LGUs to impose taxes, fees or
charges on the aforementioned entities. (City
Government of San Pablo, Laguna v. Reyes, G.R.
No. 127708, March 25, 1999)
SCOPE OF TAXING POWER
1. Each LGU shall exercise its power to create
its own sources of revenue and to levy taxes,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
fees, and charges, consistent with the basic
policy of local autonomy. Such taxes, fees,
and charges shall exclusively accrue to it.
(Sec. 129, LGC)
2. All LGUs are granted general powers to levy
taxes, fees or charges on any base or subject
not otherwise specifically enumerated
herein or taxed under the provisions of the
NIRC or other applicable laws. The levy
must not be unjust, excessive, oppressive,
confiscatory or contrary to a declared
national economic policy. (Sec. 186, LGC)
3. No such taxes, fees or charges shall be
imposed without a public hearing having
been held prior to the enactment of the
ordinance. (Sec. 187, LGC)
4. Copies of the provincial, city, and municipal
tax ordinances or revenue measures shall be
published in full for three consecutive days
in a newspaper of local circulation or posted
in at least two conspicuous and publicly
accessible places. (Sec. 188, LGC)
SPECIFIC TAXING POWER OF LOCAL
GOVERNMENT UNITS
TAXING POWER OF PROVINCES
Taxes, fees and charges which a province or a
city may levy
1. Tax on transfer of real property ownership
(Sec. 135, LGC)
2. Tax on business of printing and publication
(Sec. 136, LGC)
3. Franchise Tax (Sec. 137, LGC)
4. Tax on sand, gravel and other quarry
resources (Sec. 138, LGC)
5. Professional tax (Sec. 139, LGC)
6. Amusement tax (Sec. 140, LGC)
7. Annual fixed tax for every delivery truck or
van of manufacturers or producers,
wholesalers of, dealers, or retailer in certain
products (Sec. 141, LGC)
8. Annual ad valorem tax on real property such
as land, building, machinery, and other
improvement not specifically exempted at
the rate not exceeding 1% of the assessed
value of the real property (Sec. 232, LGC)
9. Special levies on real property
10. Toll fees or charges for the use of any public
road, pier, or wharf, waterway, bridge, ferry,
or telecommunication system funded and
364
 Taxation Law
constructed by the provincial government
(Sec. 155, LGC)
11. Reasonable fees and charges for services
rendered (Sec. 153, LGC)
12. Charges for the operation of public utilities
owned, operated, and maintained by the
provincial government (Sec. 154, LGC)
13. Slaughter fees, corral fees, market fees,
charges for holding benefits
14. Tuition fees from the operation of the
provincial high school, except in the public
elementary grades.

SUMMARY RULES ON THE TAXING POWER OF A PROVINCE

TRANSACTION SUBJECT EXCEPTI

TAX BASE TAX RATE
TO TAX ON
TAX ON TRANSFER OF REAL PROPERTY OWNERSHIP
Sale, donation, barter, or Whichever is higher between: Not more than 50% Transf
on any other mode of 1. Total consideration involved in of the 1% er
transferring ownership or the acquisition of the property; under
title of real property or the
2. The fair market value in case the Compr
monetary consideration involved ehensi
in the transfer is not substantial. ve
Agrari
an
Refor
m
Progra
m
Person Liable to Pay: Seller, donor, transferor, executor, or administrator
Time of Payment: within 60 days from the date of the execution of the deed or from the date of the
decedent’s death
Exception: If buyer is a foreign government, no tax is due.
TAX ON THE BUSINESS OF PRINTING AND PUBLICATION
Business of printing and Gross annual receipts for the Not exceeding 50% School
publication of books, preceding calendar year. of 1% texts or
cards, poster, leaflets, Capital Investment In the case of a referenc
handbills, certificates, newly started es,
receipts, pamphlets, and business, the tax prescribe
others of similar nature shall not exceed d by the
one-twentieth DepEd
(1/20) of 1% shall be
exempt
from tax.
FRANCHISE TAX
Businesses enjoying a Gross annual receipts for the Not exceeding 50%
franchise preceding calendar year based on of 1%
the incoming receipt, or realized,
within its territorial jurisdiction.
Capital investment. In the case of a
newly started
business, the tax
shall not exceed
1/20 of 1%
TAX ON SAND, GRAVEL AND OTHER QUARRY SERVICES

365
 Local Taxation
TRANSACTION SUBJECT EXCEPTI
TAX BASE TAX RATE
TO TAX ON
Sand, gravel and other Fair market value in the locality Not more than
resources extracted from per cubic meter of ordinary stones, 10%
public lands or from the sand, gravel, earth, and other
beds of seas, lakes, rivers, quarry resources.
streams, creeks, and other
public waters within its
territorial jurisdiction
Who issues permit: issued exclusively by the provincial governor pursuant to the ordinance of the
Sangguniang Panlalawigan

Distribution of Tax Proceeds:

a. Province – 30%
b. Component city or municipality – 30%
c. Barangay where resources were extracted 40%

NOTE: The authority to impose taxes and fees for extraction of sand and gravel belongs to the
province, and not to the municipality where they are found. (Municipality of San Fernando La Union
vs. Sta. Romana, G.R. No. L-30159, March 31, 1998)

Regalian Doctrine is not applicable. Province may not invoke the doctrine to extend the coverage
of its ordinance to quarry resources extracted from private lands. Such tax is a tax upon the
performance, carrying on, or exercises of an activity, hence an excise tax upon an activity already
being taxed under the NIRC.
Rationale: Tax statutes are construed strictissimi juris against the government. (Province of Bulacan
v. CA, G.R. No. 126232)
PROFESSIONAL TAX
Exercise or practice of At such amount and Not to exceed Professionals
profession requiring reasonable classification P300 exclusively
government licensure as the sanggunian employed in the
examination panlalawigan may government shall
impose be exempt from
the payment of
this tax.
Date of Payment: Payable annually on or before January 31 or before beginning the practice of the
profession.

Place of Payment: Province where he practices his profession or where the principal office is
located.

NOTE: TAX TO BE PAID ONLY ONCE. Person who has paid the corresponding professional tax shall
be entitled to practice his profession in any part of the Philippines without being subjected to any
other national or local tax, license, or fee for the practice of such profession.
AMUSEMENT TAX
Ownership, lease, or operation Gross receipts from Not more than GR: The holding of
of theaters, cinemas, concert admission fees. 10% of gross operas, concerts,
halls, circuses, boxing stadia receipts from dramas, recitals,
and other places of amusement In case of theaters or admission fees painting and art
cinemas, the tax shall exhibitions, flower
first be deducted and shows, musical
withheld by their programs, literary
proprietors, lessees, or and oratorical
operators and paid to presentation shall
the provincial treasurer be exempt from

UNIVERSITY OF SANTO TOMAS 366

2021 GOLDEN NOTES
 Taxation Law
TRANSACTION SUBJECT EXCEPTI
TAX BASE TAX RATE
TO TAX ON
before the gross receipts the payment of
are divided between amusement tax.
said proprietors, lessees,
or operators and the XPN:
distributors of the Holding of pop,
cinematographic films. rock, or similar
concerts shall be
subject to
amusement tax.
NOTE: Amendments to the VAT law have been consistent in exempting persons subject to
amusement tax under the NIRC from the coverage of VAT. Only lessor or distributors of
cinematographic films are included in the coverage of VAT. This reveals the legislative intent not to
impose VAT on persons already covered by the amusement tax. This holds true even in the case of
cinema/theater operators taxed under the LGC precisely because the VAT law was intended to
replace the percentage tax on certain services. (CIR v. SM Prime Holdings, Inc. etc., G.R. No. 183505,
February 26, 2010)

Distribution of Proceeds: Tax shall be shared equally by the province and municipality where such
amusement places are located.

NOTE: Resorts, swimming pools, bath houses, hot springs, and tourist spots do not belong to the
same category or class as theaters, cinemas, concert halls, and boxing stadia because the latter class
are venues primarily "where one seeks admission to entertain oneself by seeing or viewing the show
or performances". It follows that they cannot be considered as among the ‘other places of
amusement’ contemplated by Sec. 140 of LGU and which may properly be subject to amusement
taxes. (Pelizloy Realty Corporation v. Province of Benguet, G.R. No. 183137, April 10, 2013)
TAX ON DELIVERY TRUCK/VAN
Use by manufacturers, Every truck, van, or Not exceeding Exempt from
producers, wholesalers, dealers vehicle P500 tax on
or retailers of truck, van or any peddlers
vehicle in the delivery or imposed by
distribution of distilled spirits, municipalities
fermented liquors, soft drinks,
cigars and cigarettes, and other
products as may be determined
by the Sangguniang
Panlalawigan, to sales outlets
or consumers, whether directly
or indirectly.

Franchise Tax Q: Ferremaro, Inc., a manufacturer of

The word “franchise” in the phrase “tax on
business enjoying a franchise under Sec. 137
of the LGC:
The Congress defined it in the sense of a
secondary or special franchise. It is not levied on
the corporation simply for existing as a
corporation, upon its property or income, but on
its exercise of the rights or privileges granted to
it by the government.
handcrafted shoes, maintains its principal
office in Cubao, Quezon City. It has
branches/sales offices in Cebu and Davao. Its
factory is located in Marikina City where
most of its workers live. Its principal office in
Quezon City is also a sales office.
Sales of finished products for calendar year
2009 in the amount of P10 million were
made at the following locations:
Cebu branch 25%
Davao branch 15%

367
 Local Taxation
Quezon City branch 60%
Total 100%
Where should the applicable local taxes on
the shoes be paid? Explain. (2010 BAR)
A: Under the LGC, the manufacturers
maintaining a branch or sales outlet shall record
the sale in the branch or sales outlet making the
sale and pay the tax in the city or municipality
where the branch or sales outlet is located. Since
Ferremaro, Inc., maintains one factory, the sales
recorded in the principal office shall be allocated
and 30% of said sales are taxable in the place
where the principal office is located while the
70% is taxable in the place where the factory is
located.
Hence, 25% of total sales or Php 2.5M shall be
taxed in Cebu and 15% of total sales or Php 1.5M
shall be taxed in Davao. For the remaining 60%
sales amounting to Php 6.0M which is recorded
in the principal office, 30% thereof or Php 1.8M
is taxable in Quezon City where the principal
office is located and 70% or Php 4.2M is taxable
in Marikina City where the factory is located.
Q: CASURECO III is an electric cooperative
duly organized and existing by virtue of PD
269 and registered with the National
Electrification Administration (NEA) It is
engaged in the business of electric power
distribution to various end-users and
consumers within the City of Iriga and the
municipalities of Nabua, Bato, Baao, Buhi,
Bula and Balatan of the Province of
Camarines Sur, otherwise known as the
"Rinconada area."
Sometime in 2003, Petitioner City of Iriga
required CASURECO III to submit a report of
its gross receipts for the period 1997-2002 to
serve as the basis for the computation of
franchise taxes, fees and other charges. The
latter complied and was subsequently
assessed taxes.
CASURECO III refused to pay for the assessed
taxes, asserting that the computation of the
petitioner was erroneous because it included
gross receipts from service areas beyond the
latter’s territorial jurisdiction. Is Casureco
liable for the payment of the franchise tax on
the Rinconada area?
A: YES. CASURECO III is liable for franchise tax
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
on gross receipts within Iriga City and
Rinconada area. It should be stressed that what
the petitioner seeks to collect from CASURECO
III is a franchise tax, which as defined, is a tax on
the exercise of a privilege. As Section 137 of the
LGC provides, franchise tax shall be based on
gross receipts precisely because it is a tax on
business, rather than on persons or property.
Since it partakes of the nature of an excise
tax, the situs of taxation is the place where
the privilege is exercised, in this case in the
City of Iriga, where CASURECO III has its
principal office and from where it operates,
regardless of the place where its services or
products are delivered. Hence, franchise tax
covers all gross receipts from Iriga City and the
Rinconada area.
Q: CASURECO III maintains that it is exempt
from payment of franchise tax because of its
nature as a non-profit cooperative, as
contemplated in PD 269, and insists that only
entities engaged in business, and not non-
profit entities like itself, are subject to the
said franchise tax. Is this correct?
A: NO. In National Power Corporation v. City of
Cabanatuan, the Court declared that "a franchise
tax is a tax on the privilege of transacting
business in the state and exercising corporate
franchises granted by the State." It is not levied
on the corporation simply for existing as a
corporation, upon its property or its income, but
on its exercise of the rights or privileges granted
to it by the government." It is within this context
that the phrase “tax on businesses enjoying a
franchise‟ in Section 137 of the LGC should be
interpreted and understood."
To be liable for local franchise tax, the following
requisites should concur:
1. That one has a "franchise" in the sense of a
secondary or special franchise; and
2. That it is exercising its rights or privileges
under this franchise within the territory of
the pertinent LGU.
There is a confluence of these requirements in
the case at bar. By virtue of PD 269, NEA granted
CASURECO III a franchise to operate an electric
light and power service for a period of 50 years
from June 6, 1979, and it is undisputed that
CASURECO III operates within Iriga City and the
Rinconada area. It is, therefore, liable to pay
franchise tax notwithstanding its non-profit
368
 Taxation Law
nature (City of Iriga v. Camarines Sur III Electric
Cooperative Inc. G.R. No. 192945, September 5,
2012)
Professional Tax
Professionals who are subject to professional
tax:
They are those who have passed the bar
examinations, or any board or examinations
conducted by the Professional Regulation
Commission (PRC) e.g., A lawyer who is also a
Certified Public Accountant (CPA) must pay for
professional tax imposed on lawyer and that
fixed for CPAs, if he is to practice both
professions.
NOTE: Municipalities cannot impose
professional tax since such power is reserved
only to provinces and cities.
Q: Mr. Fermin, a resident of Quezon City, is a
Certified Public Accountant-Lawyer engaged
in the practice of his two professions. He has
his main office in Makati City and maintains a
branch office in Pasig City. Mr. Fermin pays
his professional tax as a CPA in Makati City
and his professional tax as a lawyer in Pasig
City.
a. May Makati City, where he has his main
office, require him to pay his professional
tax as a lawyer? Explain.
b. May Quezon City, where he has his
residence and where he also practices his
two professions, go after him for the
payment of his professional tax as a CPA
and a lawyer? Explain. (2005 BAR)
A:
a. NO. Makati City where Mr. Fermin has his
main office may not require him to pay his
professional tax as a lawyer. Mr. Fermin has
the option of paying his professional tax as a
lawyer in Pasig City where he practices law
or in Makati City where he maintains his
principal office. (Sec. 139(b), LGC)
b. NO, the situs of the professional tax is the
city where the professional practices his
profession or where he maintains his
principal office in case he practices his
profession in several places. The local
government of Quezon City has no right to
369
collect the professional tax from Mr. Fermin
as the place of residence of the taxpayer is
not the proper situs in the collection of the
professional tax.
Amusement Tax
Amusement and amusement places as
defined under the LGC:
1. Amusement is a pleasurable diversion and
entertainment. It is synonymous to
relaxation, avocation, pastime, or fun.
2. Amusement places include theaters, cinemas,
concert halls, circuses and other places of
amusement where one seeks admission to
entertain oneself by seeing or viewing the
show or performances. (Sec. 131(b) and (c),
LGC)
The following are the amusement places
upon which provinces or cities cannot
impose amusement taxes
1. Cockpits
2. Cabarets
3. Night or day clubs
4. Boxing exhibitions
5. Professional basketball games
6. Jai-Alai
7. Racetracks
NOTE: There can be no imposition of
amusement taxes on the above amusement
places since Sec. 125 of NIRC already imposes
amusement taxes on them.
Therefore, LGUs cannot collect amusement
taxes on admission tickets to the Philippine
Basketball Association (PBA) games including
the income from cession of streamers and
advertising spaces. (Philippine Basketball
Association v. CA, G.R. No. 119122, Aug. 8, 2000)
A golf course cannot be considered a place of
amusement therefore beyond the power of
LGU to impose amusement tax
Section 42 of the Revised Omnibus Tax
Ordinance, as amended, imposing amusement
tax on golf courses is null and void as it is
beyond the authority of respondent Cebu City to
enact under the LGC. A golf course cannot be
considered a place of amusement. People do not
enter a golf course to see or view a show or
 Local Taxation
performance. Proprietor or operators of the golf
course, do not actively display, stage, or present
a show or performance. People go to a golf
course to engage themselves in a physical sport
activity.
An LGU may exercise its residual power to tax
when there is neither a grant nor a prohibition
by statute; or when such taxes, fees, or charges
are not otherwise specifically enumerated in the
LGC, NIRC, or other applicable laws. In the
present case, Section 140, in relation to Section
131(c), of the LGC already explicitly and clearly
cover amusement tax and Cebu City must
exercise its authority to impose amusement tax
within the limitations and guidelines as set forth
in said statutory provisions. (Alta Vista Golf and
Country Club v. The City of Cebu, G.R. No. 180235,
January 20, 2016)
Q: A Provincial Tax Ordinance provided for
the levying a 10% amusement tax on gross
receipts from admissions to “resorts,
swimming pools, bath houses, hot springs
and tourist spots”. Pelizloy, an owner of a
resort located in the same province, is
arguing that the Tax Ordinance imposed a
percentage tax in violation of the limitation
on the taxing powers of LGUs thus, it was null
and void ab initio. The Province of Benguet
argued that the phrase ‘other places of
amusement’ in Section 140 (a) of the LGC
encompasses resorts, swimming pools, bath
houses, hot springs, and tourist spots which
are subject to amusement tax. Is the province
authorized to impose an amusement tax on
admission fees to resorts, swimming pools,
bath houses, hot springs, and tourist spots
for being “amusement places” under the LGC?
A: NO. Resorts, swimming pools, bath houses,
hot springs, and tourist spots are not among
those places expressly mentioned by Section 140
of the LGC as being subject to amusement taxes
and cannot be considered venues primarily
“where one seeks admission to entertain oneself
by seeing or viewing the show or performances”.
While it is true that they may be venues where
people are visually engaged, they are not
primarily venues for their proprietors or
operators to actively display, stage or present
shows and/or performances. Thus, resorts,
swimming pools, bath houses, hot springs and
tourist spots do not belong to the same category
or class as theaters, cinemas, concert halls,
circuses, and boxing stadia. It follows that they
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
cannot be considered as among the ‘other places
of amusement’ contemplated by Section 140 of
the LGC and which may properly be subject to
amusement taxes. (Pelizloy Realty Corporation v.
Province of Benguet, G.R. No. 183137, April 10,
2013)
TAXING POWER OF CITIES
Scope of the taxing power of a city
The city may levy the taxes, fees, and charges
which the province or municipality may impose,
except as otherwise provided in the LGC. Those
levied and collected by highly urbanized and
independent component cities shall accrue to
them and distributed in accordance with the
provisions of LGC. (Sec. 151, LGC)
NOTE: The rates of taxes that the city may levy
may exceed the maximum rates allowed for the
province or municipality by not more than 50%
except the rates of professional and amusement
taxes. (Ibid.)
Cities have the broadest taxing powers,
embracing both specific and general powers as
provinces and municipalities may impose.
Under the LGC, there are three types of cities,
Component Cities, Independent Component
Cities and Highly Urbanized Cities. ICCs and
HUCs are independent of the province. (Sec. 451-
452, LGC) This means that taxes, fees, and
charges levied and collected by ICCs and HUCs
accrue solely to them. (Sec. 151, LGC)
Specific limitations on the taxing power of
cities
GR: A city shall not levy the taxes and other
impositions enumerated under the common
limitations on the taxing powers of local
governments.
XPN:
1. Tax that may be levied by cities on the
transfer of real property ownership; and
2. Wharfage on wharves constructed and
maintained by the city.
Q: Cagayan Electric Power and Light
Company, Inc. (CEPALCO), who is leasing for
a consideration the use of its posts, poles or
towers to other pole users, assails the
validity of Ordinance No. 9503-2005 passed
370
 Taxation Law
by the Sangguniang Panlungsod of Cagayan
de Oro, which imposed a tax on the lease or
rental of electric and/or telecommunication
posts, poles or towers by pole owners to
other pole users at the rate of 10% of the
annual rental income derived therefrom.
CEPALCO contends that if it is a city which
imposes it, it can only impose up to 1/2 of
what the province or municipality may
impose, and since under Section 137, a
province may impose 50% of 1%, a city may
therefore only impose 25% of 1%. Is this
correct?
A: NO. Section 151 of the LGC states that, subject
to certain exceptions, a city may exceed by "not
more than 50%" the tax rates allowed to
provinces and municipalities. Therefore, a city
may impose a franchise tax of up to 0.75% of a
business’ gross annual receipts for the preceding
calendar year based on the incoming receipt, or
realized, within its territorial jurisdiction.
In the same manner, since a municipality may
impose a business tax at a rate not exceeding
"two percent of gross sales or receipts" under
Section 143, a city may impose a business tax of
up to 3% of a business’ gross sales or receipts of
the preceding calendar year (May exceed by not
more than 50% means it may impose up to 50%
more than what a province or municipality could
impose)
CEPALCO also erred when it equates Section
137’s "gross annual receipts" with Ordinance No.
9503-2005’s "annual rental income." Section 2 of
the ordinance imposes "a tax on the lease or
rental of electric and/or telecommunication
posts, poles or towers by pole owners to other
pole users at the rate of 10% of the annual rental
income derived therefrom," and not on
CEPALCO’s gross annual receipts. Thus, although
the tax rate of 10% is definitely higher than that
imposable by cities as franchise or business tax,
the tax base of annual rental income of "electric
and/or telecommunication posts, poles or
towers by pole owners to other pole users" is
definitely smaller than that used by cities in the
computation of franchise or business tax.
Q: The City of Cagayan de Oro contends that
the allowable rate of increase provided
under Section 151 of the LGC applies only to
those businesses identified and enumerated
under Section 143 thereof. Thus, the City of
371
Cagayan de Oro submits that the 2%
limitation prescribed under Section 143(h)
applies only to the tax rates on the
businesses identified thereunder and does
not apply to those that may thereafter be
deemed taxable under Section 186 of the
LGC. On the same vein, the City of Cagayan de
Oro submits that the limitation under Section
151 likewise does not apply in this particular
instance; otherwise it will run counter to the
intent and purpose of Section 186 of the LGC.
Is the City of Cagayan correct?
A: NO. The City of Cagayan de Oro’s imposition
of a tax on the lease of poles falls under Section
143(h) which speaks of any business, not
otherwise specified in the preceding paragraphs,
which the sanggunian concerned may deem
proper to tax. The treatment of the lease of poles
as a separate line of business is evident in
Section 4(a) of the ordinance requiring
CEPALCO to apply for a separate business
permit. And since "any person, who in the course
of trade or business x xx leases goods or
properties x xx shall be subject to the value-
added tax," the imposable tax rate should not
exceed two percent of gross receipts of the lease
of poles of the preceding calendar year.
Section 143(h) states that "on any business
subject to x xx value-added x xx tax under the
NIRC, as amended, the rate of tax shall not
exceed 2% of gross sales or receipts of the
preceding calendar year" from the lease of goods
or properties. Hence, the 10% tax rate imposed
by the ordinance clearly violates Section 143(h)
of the LGC. (Cagayan Electric Power and Light
Co., Inc. v. City of Cagayan de Oro, G.R. No. 191761,
November 14, 2012)
Q: The City of Cabanatuan (the City) assessed
the National Power Corporation (NAPOCOR)
a franchise tax amounting to P808,606.41,
representing 75% of 1% of its gross receipts
for 1992. NAPOCOR refused to pay, arguing
that it is exempt from paying the franchise
tax. Consequently, on November 9, 1993, the
City filed a complaint before the Regional
Trial Court of Cabanatuan City, demanding
NAPOCOR to pay the assessed tax due plus
25% surcharge and interest of 2% per month
of the unpaid tax, and costs of suit. Is the
yearly accrual of the 25% surcharge
unconscionable?
 Local Taxation
A: Respondent’s yearly imposition of the 25%
surcharge, which was sustained by the trial
court and the Court of Appeals, resulted in an
aggregate penalty that is way higher than
petitioner’s basic tax liabilities.
Furthermore, it effectively exceeded the
prescribed 72% ceiling for interest under
Section 168 of the Local Government Code. The
law allows the local government to collect an
interest at the rate not exceeding 2% per month
of the unpaid taxes, fees, or charges including
surcharges, until such amount is fully paid.
However, the law provides that the total interest
on the unpaid amount or portion thereof should
not exceed thirty-six (36) months or three (3)
years. In other words, respondent cannot collect
a total interest on the unpaid tax including
surcharge that is effectively higher than 72%.
Here, respondent applied the 25% cumulative
surcharge for more than three years. Its
computation undoubtedly exceeded the 72%
ceiling imposed under Section 168 of the Local
Government Code. Hence, respondent’s
computation of the surcharge is oppressive and
unconscionable. (NPC v. City of Cabanatuan, G.R.
No. 177332, October 1, 2014)
TAXING POWER OF MUNICIPALITIES
Scope of the taxing power of a municipality:
Municipalities may levy taxes, fees, and charges
not otherwise levied by provinces, except as
otherwise provided in the LGC. (Sec. 142, LGC)
Under the LGC, Municipality may impose the
following taxes
1. Tax on business (Sec. 143, LGC)
2. Fees and charges on business and
occupation (Sec. 147, LGC)
3. Fees for sealing and licensing of weights and
measures (Sec. 148, LGC)
4. Fishery rentals, fees and charges (Sec. 149,
LGC)
Under Section 143 of the LGC, the businesses
upon which municipalities may impose
business taxes are
1. On Manufacturers, assemblers, repackers,
processors, brewers, distillers, rectifiers,
and compounders of liquors, distilled spirits,
and wines or manufacturers of any article of
commerce of whatever kind or nature
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
2. On Wholesalers, distributors, or dealers in
any article of commerce of whatever kind or
nature
3. On exporters, and on manufacturers, millers,
producers, wholesalers, distributors, dealers
or retailers of Essential commodities such
as:
a. Rice and corn
b. Wheat or cassava flour, meat, dairy
products, locally manufactured,
processed or preserved food, sugar, salt
and other agricultural, marine and fresh
water products, whether in their
original state or not
c. Cooking oil and cooking gas
d. Laundry soap, detergents, and medicine
e. Agricultural implements, equipment
and post-harvest facilities, fertilizers,
pesticides, insecticides, herbicides, and
other farm inputs
f. Poultry feeds and other animal feeds
g. School supplies
h. Cement
4. On Retailers
NOTE: Retailers who are at the same time
wholesalers within the same tax period shall
be taxed on both activities but may avail of
the concession or the reduced tax.
5. On Contractors
6. Banks and other financial institutions
NOTE: Bank income NOT subject to local
taxation:
a. Interest earned under the expanded
foreign currency deposit system
b. Interest accumulated by lending
institutions on mortgages insured
under Home Financing Act (R.A. No.
480), as amended
c. Receipts form filing fees, service,
and other administrative charges
7. Peddlers
8. Other business not specified which the
sanggunian concerned may deem proper to
tax.
Definition of terms
372
 Taxation Law
1. Wholesale - A sale where the purchaser
buys or imports the commodities for resale
to persons other than the end user
regardless of the quantity of the transaction.
2. Dealers - One whose business is to buy and
sell merchandise, goods, and chattels as a
merchant. He stands immediately between
the producer or manufacturer and the
consumer and depends for his profit not
upon the labor he bestows upon his
commodities but upon the skill and foresight
with.
3. Retail - A sale where the purchaser buys the
commodity for his own consumption,
irrespective of the quantity of the
commodity sold.
4. Contractor - Includes persons, natural or
juridical, not subject to professional tax
under Section 139 of LGC, whose activity
consists essentially of the sale of all kinds of
services for a fee, regardless of whether or
not the performance of the service calls for
the exercise of the use of the physical or
mental faculties of such contractor or his
employees.
5. Peddler - Any person who, either for
himself or on commission, travels from
place to place and sells his goods or offers to
sell and deliver the same (Sec. 131(t), LGC)
Conditions to which other businesses not
specified may the sanggunian concerned
deem proper to tax under Sec. 143 (h)
1. Business not subject to VAT or percentage
tax under the NIRC; and
2. Tax rate not to exceed 2% of the gross
sales/receipts of the preceding calendar
year.
NOTE: “When a municipality or city has already
imposed a business tax on manufacturers, etc. of
liquors, distilled spirits, wines, and any other
article of commerce pursuant to Section 143(a)
of the LGC, said municipality or city may no
longer subject the same manufacturers, etc. to a
business tax under section 143(h) of the same
373
Code. Section 143(h) may be imposed only on
businesses that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs”.
(City of Manila v. Coca-Cola Bottlers Phils. Inc.,
G.R. No. 181845, August 4, 2009)
Q: ABC Corp. is registered as a holding
company and has an office in the City of
Makati. It has no actual business operations.
It invested in another company and its
earnings are limited to dividends from this
investment, interests on its bank deposits,
and foreign exchange gains from its foreign
currency account. The City of Makati
assessed ABC Corp. as a contractor or one
that sells services for a fee. Is the City of
Makati correct? (2013 BAR)
A: The City of Makati is wrong in assessing ABC
Corp. as a contractor. First, ABC Corp. is not a
contractor as defined in Section 131(h) of LGC. A
contractor as a person, natural or juridical, not
subject to professional tax under the LGC, but
whose activity consists essentially of the sale of
all kinds of services for a fee, regardless of
whether or not the performance of the service
calls for the exercise or use of the physical or
mental faculties of such contractor or his
employees.
In the given problem, ABC Corp. is merely a
holding company whose earnings are limited to
dividends, interests on bank deposits and
foreign exchange gains from foreign currency
account. Evidently, ABC Corp. is not engaged in
the sale of services for a fee. Second, Section 186
of LGC provides that LGUs cannot levy taxes, fees
or charges on any base or subject tax under the
provisions of the NIRC.
In the given problem, ABC Corp.’s dividends,
interest income and foreign exchange gains from
foreign currency account are already subject to
final income tax under the NIRC, specifically,
Sections 27(D)(4), 27(D)(1), 32(A), respectively.
Consequently, the City of Makati cannot levy
from ABC Corp. taxes on these incomes.
 Local Taxation
Tax on Various Types of Businesses

PERSON/ ENTITIES SUBJECT

TAX BASE TAX RATE EXCEPTION
TO TAX
TAX ON BUSINESS
Manufacturers, assemblers, Based on the GRADUATED
repackers, processors, brewers, taxpayer’s gross sales ANNUAL FIXED TAX
distillers, rectifiers, and or receipts for the
compounders of liquors, preceding calendar
distilled spirits and wines or year.
manufacturers of any article of Gross sales or receipts Ceases to be a fixed
commerce of whatever kind or amount to P6,500,000 tax, instead a
nature (Sec. 143(a)) or more for the PERCENTAGE TAX
preceding calendar of 37.5% of 1% is
year. imposed.
Wholesalers, distributors or Based on the gross GRADUATED
dealers in any article of sales or receipts for ANNUAL FIXED TAX
commerce of whatever kind or the preceding
nature (Sec. 143(b), LGC) calendar year.
Gross sales or receipts Tax becomes a
amounting to PERCENTAGE TAX
P2,000,000 or more. at the rate of 50% of
1%
Exporters and manufacturers, Gross Sales or Not exceeding one-
millers, producers wholesalers, Receipts half (1/2) of the
distributors, dealers or retailers rates prescribed
of the following essential under subsections
commodities (Sec. 143(c), LGC) (a), (b) and (d) of
this Section
Retailers (Sec. 143(d), LGC) Gross sales or receipts ANNUAL a. Gross sales
for the preceding PERCENTAGE TAX or receipts
calendar year of 2% in cities
P400,000 or less. P50,000 or
Sales or receipts ANNUAL less
exceeding P400,000. PERCENTAGE TAX b. Gross sales
of 1% or receipts
in
municipaliti
es P30,000
or less
NOTE: taxed
by barangays
Contractors and other Gross receipts for the GRADUATED
independent contractors (Sec. preceding calendar ANNUAL FIXED TAX
143(e), LGC) year.
Gross receipts PERCENTAGE TAX
amounting to of
P2,000,000 or more. 50% of 1%
Banks and other financial Gross receipts of the 50% of 1%
institutions (Sec. 143(f), LGC) preceding calendar
year derived from
interests, commission
and discounts from
lending activities,
income from financial

UNIVERSITY OF SANTO TOMAS 374

2021 GOLDEN NOTES
 Taxation Law
leasing, dividends,
rentals on property
and profit from
exchange or sale of
property insurance
premium.
Peddlers engaged in the sale of Per peddler Not exceeding P50
any merchandise or article of
commerce (Sec. 143(g), LGC)
On any business, not otherwise Gross Sales or Graduated schedule
specified above which the Receipts imposed by the
sanggunian concerned may Sanggunian
deem proper to tax: Provided, concerned, but in no
That on any business subject to case to exceed the
the excise, value-added or rates prescribed in
percentage tax under the Sec. 143, LGC.
National Internal Revenue Code,
as amended, the rate of tax shall
not exceed 2% of gross sales or
receipts of the preceding
calendar year (Sec. 143(h), LGC)
MUNICIPAL NON-REVENUE FEES & CHARGES
Municipalities may impose & collect reasonable fees & charges on business & occupation and,
except in case of professional tax, (w/c only provinces & cities may levy) on the practice of any
profession or calling commensurate w/ the cost of regulation, inspection & licensing before any
person may engage in such business/occupation/practice of such profession or calling (Sec. 147,
LGC)

Ceilings on Business Taxes Imposed by LGUs
within Metro Manila
The municipalities in Metro Manila may levy
taxes at rates which shall not exceed by 50% the
maximum rates prescribed in Section 143, LGC.
(Sec. 144, LGC)
1. Taxes shall be payable for every separate or
distinct establishment or place where
business subject to the tax is conducted and
one line of business does not become
exempt by being conducted with some other
business for which such tax has been paid.

Tax on Retirement of Business 2. The tax on a business must be paid by the

person conducting the same.
1. A business subject to tax shall, upon 3. In cases where a person conducts or
termination thereof, submit a sworn operates
statement of its gross sales or receipts for 4. 2 or more of the businesses mentioned in
the current year. Section 143 of LGC which are subject to:
a. Same rate of tax – the tax shall be
2. If the tax paid during the year be less than computed on the combined total gross
the tax due on said gross sales of receipts of sales or receipts of the said 2 or more
the current year, the difference shall be paid related business.
before the business is considered officially b. Different rates of tax – the gross sales
retired. (Sec. 145, LGC) or receipts of each business shall be
separately reported for the purpose of
Rules on Payment of Business Taxes computing the tax due from each
business.
Payment of Business Taxes, when made (Sec. 146,
LGC): Fees and Charges for Regulation and
Licensing

375
 Local Taxation
The municipality may impose and collect such
reasonable fees and charges on business and
occupation except professional taxes reserved
for provinces. (Sec. 147, LGC)
1. Fees for Sealing and Licensing of Weights
and Measures (Sec. 148, LGC)
2. Fishery Rentals, Fees and Charges, including
the authority to grant fishery privileges
within municipal waters, as well as issue
licenses for the operation of fishing vessels
of three tons or less.
3. The sanggunian may penalize the use of
explosives, noxious, or poisonous
substances, electricity, muro–ami, and other
deleterious methods of fishing and prescribe
a criminal penalty therefore (Sec. 149, LGC)
NOTE: Principal is the head or main office of the
business appearing in the pertinent documents
submitted to the SEC, or DTI, or other
appropriate agencies, as the case may be.

Situs of Tax Collected

SITUATION RECOGNITION OF SALE PAYMENT OF TAX

With branch or sales All sales made in the locality The tax shall be payable to the
office or warehouse where the branch or office or city or municipality where the
warehouse is located same is located.
Where there is no branch The municipality where the The tax shall accrue to the city or
or sales office or sale or transaction is made. municipality where said principal
warehouse The sale shall be recorded in office is located.
the principal office along with
the sales made by said
principal office
Branch office – A fixed place in a locality which conducts operations of the business as an
extension of the principal office.
Principal office – Head or main office of the business appearing in pertinent documents submitted
to the SEC and specifically mentioned in the Articles of Incorporation.
Where there is a factory, All sales shall be recorded in Of all sales recorded in the
project office, plant or the principal office. principal office:
plantation in pursuit of 1. 30% taxable to the city or
business municipality where the
If plantation is at a place principal office is located.
other than where the 2. 70% taxable to the city or
factory is located municipality where the
If manufacturer, factory, plant, etc. is located.
contractor, etc. has two
or more factories, project The 70% (above) shall be divided
offices, plants or as follows:
plantations located in 1. 60% to the city or
different localities. municipality where the
factory is.
2. 40% to the city or
municipality where the
plantation is located.

The 70% shall be prorated among

the localities where such
factories, project offices, plants
and plantations are located based
on their respective volumes of
production.

UNIVERSITY OF SANTO TOMAS 376

2021 GOLDEN NOTES
 Taxation Law
NOTE: In case of manufacturers or producers
which engage the services of an independent
contractor to produce or manufacture some of
their products, these rules shall apply except
that the factory or plant and warehouse of the
contractor utilized for the production and
storage of the manufacturers’ products shall be
considered as the factory or plant and
warehouse of the manufacturer.
Excise tax – Tax is imposed on the performance
of an act or occupation, enjoyment of a privilege.
The power to levy such tax depends on the place
in which the act is performed or the occupation
is engaged in; not upon the location of the office.
(Allied Thread Co., Inc. v. City Mayor of Manila, L-
40296, November 21, 1984)

The city or municipality where the port of
loading is located shall not levy and collect
reasonable fees unless the exporter maintains in
said city or municipality its principal office, a
branch, sales office, or warehouse, factory, plant
or plantation in which case, the rule on the
matter shall apply accordingly.
Situs according to Jurisprudence:
Sales Tax – With respect to sale, it is the place of
the consummation of the sale, associated with
the delivery of the things which are the subject
matter of the contract that determines the situs
of the contract for purposes of taxation, and not
merely the place of the perfection of the
contract. (Shell Co., Inc. v. Municipality of Sipocot,
Camarines Sur, 105 Phil 1263)

TAXING POWER OF BARANGAYS

Scope of the taxing power of a barangay

NOTE: The enumeration shall accrue EXCLUSIVELY to them.

SOURCES OF REVENUE TAX BASE TAX RATE FEES AND

CHARGES
Barangay Taxes – On Gross sales receipts for Not exceeding 1% of
stores or retailers with preceding calendar year of such gross sales or
fixed business - P50,000 or less (for receipts.
establishments barangay in the cities);
and
- P30,000 or less (for
barangay in
municipalities)
Service Fees or Services rendered in Reasonable Fees
Charges connection with the or charges
regulation or the use of
barangay-owned properties;
or
Service facilities such as
palay, copra, or tobacco
dryers
Barangay Clearance Reasonable fee as
the Sanggunian
Barangay may
impose
Other Fees and Reasonable fees
Charges and charges as the
a. Commercial barangay may
breeding of fighting levy.
cocks, cockfights
and cockpits

377
 Local Taxation
SOURCES OF REVENUE TAX BASE
b. Places of recreation
which charge
admission fees
c. Billboards,
signboards, neon
signs and outdoor
advertisements
Q: A sari-sari store initially paid the barangay
treasurer of Barangay T the amount of
₱120.00 representing 1% of the gross sales
of ₱12,000.00 CY 1994 in accordance with
the barangay tax code. Subsequently, the
same store also filed application for business
license with the Municipality of T for which a
municipal business tax and other regulatory
fees was assessed for the same store based
on its capital investment of ₱12,000.00
Are the tax assessments by the barangay and
the municipality correct?
A: The tax assessment by the barangay of 1% on
the gross sales of ₱12, 000.00 is in accordance
with Sec. 152 (a) of the LGC. The assessment of
the municipality of an additional business tax,
however, is erroneous since pursuant to Sec.
143(d) of the LGC the barangays “shall have
exclusive power to levy taxes as provided under
Sec. 152” of the same Code. The municipality,
nevertheless, may have to issue the
corresponding business permit/license in
accordance with Sec. 152(c) of the LGC, and may
impose as well reasonable regulatory fees on the
sari-sari store.
Q: RAVI is one of the Coconut Industry
Investment Fund (CIIF) holding companies
established to own and hold the shares of
stock of SMC. On January 24, 2012, the SC
rendered its decision in Philippine Coconut
Producers Federation, Inc. v. Republic,
declaring the CIIF companies, including RAVI,
and the CIIF block of SMC shares as “public
funds necessarily owned by the
Government.” On January 17, 2013, RAVI
filed with the RTC a claim for refund or credit
of erroneously and illegally collected local
business taxes (LBT) for the taxable year of
2010 in the amount of P503,346,
corresponding to its dividends from its SMC
preferred shares, on the mistaken
assumption that it is a non-bank financial
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
TAX RATE FEES AND
CHARGES
intermediary (NBFI). The RTC denied the
claim for refund or credit ruling that RAVI’s
dividends and interests are subject to LBT
under Sec. 143 (f) of R.A. No. 7160. Is RAVI an
NBFI subject to LBT under Sec. 143 (f) of R.A.
No. 7160?
A: NO. Essentially, LBT are taxes imposed by
local government units on the privilege of doing
business within their jurisdictions. To be sure,
the phrase “doing business” means some “trade
or commercial activity regularly engaged in as a
means of livelihood or with a view to profit.”
Particularly, the LBT imposed pursuant to Sec.
143 (f) is premised on the fact that the persons
made liable for such tax are banks or other
financial institutions by virtue of their being
engage in the business as such.
In this case, it is clear that RAVI is neither a bank
nor other financial institution, i.e., an NBFI. RAVI
is a CIIF holding company. The SMC preferred
shares held by it are considered government
assets owned by the National Government for
the coconut industry. Thus, RAVI's management
of the dividends from the SMC preferred shares,
including placing the same in a trust account
yielding interest, is not tantamount to doing
business whether as a bank or other financial
institution, i.e., an NBFI, but rather an activity
that is essential to its nature as a CIIF holding
company. Since RAVI is not a bank or other
financial institution, i.e., an NBFI, it cannot be
held liable for LBT under Section 143 (f) of the
LGC. (City of Davao v. Randy Allied Ventures, Inc.,
G.R. No. 241697, July 29, 2019)
Q: The Coconut Industry Investment Fund
(CIIF) invested in six (6) oil mills, the CIIF Oil
Mills Group (CIIF OMG). The CIIF OMG bought
shares of stock from SMC. It also established
fourteen (14) holding companies, one of
which is APHI, for the sole purpose of owning
and holding such shares. Over time, APHI
received cash and stock dividends from its
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 Taxation Law
SMC preferred shares. These dividends were
deposited in a trust account.
Petitioner City of Davao issued a Business
Tax Order of Payment directing APHI to pay
0.55% local business tax. The tax was
assessed on the dividends and interests APHI
earned from its SMC preferred shares and
money market placements, respectively. Is
APHI Liable to pay dividends tax on its SMC
shares?
A: NO. In the recent case of City of Davao, et al. v.
Randy Allied Ventures, Inc. (RAVI), the Court
ordained that RAVI, a CIIF holding company like
APHI, was exclusively established to own and
hold SMC shares of stock. As such, it is not liable
to pay local business taxes on the dividends
earned from its SMC preferred shares as the
same shares are government assets owned by
the national government for the benefit of the
coconut industry. (City of Davao and Mr. Erwin
Alparaque, in his official capacity as Acting City
Treasurer of the City of Davao. Petitioner v. AP
Holdings, Inc. Respondent., G.R. No. 245887.,
January 22, 2020., as penned by Lazaro – Javier)
COMMON REVENUE RAISING POWERS
1. Fees, service or user charges – LGUs may
impose and collect such reasonable fees and
charges for services rendered. (Sec. 153,
LGC)
2. Public utility charges – LGUs may fix the
rates for the operation of public utilities
owned, operated, and maintained by them
within their jurisdiction. (Sec. 154, LGC)
3. Toll fees or charges – The sanggunian
concerned may prescribe the terms and
conditions and fix the rates for the
imposition of toll fees or charges for the use
of any public road, pier, or wharf, waterway,
bridge, ferry or telecommunication system
funded and constructed by the LGU
concerned. (Sec. 155, LGC)
Persons exempted from payment of tolls,
fees, or other charges (HOP)
1. Officers and enlisted men of the Armed
Forces of the Philippines and members of
PNP on mission
2. Post office personnel delivering mail
3. Physically Handicapped and disabled
citizens who are 65 years or older (Ibid.)
379
LGUs may discontinue the collection of tolls
The sanggunian concerned may discontinue the
collection of the tolls when public safety and
welfare so requires. Thereafter, the said facility
shall be free and open for public use. (Sec. 155,
LGC)
COMMUNITY TAX
The community tax is a poll or capitation tax
imposed upon residents of a city or municipality.
It replaced the former residence tax. It may be
levied by a city or municipality but not a
province.
Persons liable to pay community tax
1. Individuals – Every inhabitant of the
Philippines 18 years of age or over:
a. who has been regularly employed on a
wage or salary basis for at least 30
consecutive working days during any
calendar year;
b. who is engaged in business or
occupation;
c. who owns real property with an
aggregate assessed value of P1,000.00
or more; or
d. who is required by law to file an income
tax return. (Sec. 157, LGC)
2. Juridical Persons –Every corporation no
matter how created or organized, whether
domestic or resident foreign, engaged in or
doing business in the Philippines. (Sec. 158,
LGC)
Amount of Community Taxes
1. Individuals –
a. Basic: ₱5.00
b. Additional: Additional tax of ₱1.00 for
every ₱1,000.00 of income regardless of
whether from business, exercise of
profession or from property which in no
case shall exceed ₱5,000.00
NOTE: In case of husband and wife, the
additional tax shall be based on the total
property, gross receipts or earnings
owned or derived by them.
 Local Taxation
2. Juridical persons – additional tax, which, in
no case, shall exceed ₱10,000.00 in
accordance with the following schedule:
a. For every ₱5,000.00 worth of real
property in the Philippines owned by it
during the preceding year based on the
valuation used for the payment of real
property tax under existing laws, found
in the assessment rolls of the city or
municipality where the real property is
situated - Two pesos (₱2.00); and
b. For every ₱5,000.00 of gross receipts or
earnings derived by it from its business
in the Philippines during the preceding
year - Two pesos (₱2.00). (Sec. 157
&158, LGC)
Venue of Payment
Residence of the individual, or in the place
where the principal office of the juridical entity
is located. (Sec. 160, LGC)
Payment of community tax, when required
Accrues on the 1st day of January of each year
which shall be paid not later than the last day of
February of each year. (Sec. 161, LGC)
Penalty for delinquency
An interest of 24% per annum from the due date
until it is paid shall be added to the amount due.
(Sec. 161, LGC)
Exemptions from Community Tax
1. Diplomatic and consular representatives
2. Transient visitors when their stay in the
Philippines does not exceed three (3)
months. (Sec. 159, LGC)
Definition of Community Tax Certificate
It is issued to every person or corporation upon
payment of the community tax. It may also be
issued to any person or corporation NOT subject
to the community tax upon payment of ₱1.00.
(Sec. 162, LGC)
Conditions: Bonded in accordance with law.
(Sec. 164, LGC)
Proceeds of the community tax collected through
the barangay treasurers shall be apportioned as
follows:
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
1. 50% accrues to the general fund of the city
or municipality concerned; and
2. 50% accrues to the barangay where the tax
is collected.
Presentation of community tax certificate,
when required
1. Acknowledgment of any document before a
notary public. (This is in accordance with
the provisions of the LGC, note that this is no
longer included under the competent
evidences of identity under the Revised Rules
on Notarial Practice.)
2. Taking an oath of office upon election or
appointment to any position in the
government service
3. Receiving any license, certificate or permit
from any public authority
4. Paying any tax or fee
5. Receiving any money from any public fund
6. Transacting other official business
7. Receiving any salary or wage from any
person or corporation (Sec. 163, LGC)
COMMON LIMITATIONS ON THE TAXING
POWERS OF LOCAL GOVERNMENT UNITS
The exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not
extend to the levy of the following: (IDE-C3AP3-
MENT)
1. Income tax, except when levied on banks
and other financial institutions.
2. Documentary stamp tax.
3. GR: Taxes on estates, inheritance, gifts,
legacies and other acquisitions mortis causa,
except as otherwise provided under the LGC
XPN: Tax on transfer of real property (Sec.
135, LGC)
4. Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues,
and all other kinds of customs fees, charges
and dues except wharfage on wharves
constructed and maintained by the LGU
concerned.
5. Taxes, fees, and charges and other
impositions upon goods carried into or out
of, or passing through, the territorial
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 Taxation Law
jurisdictions of LGUs in the guise of charges
for wharfage, tolls for bridges or otherwise,
or other taxes, fees, or charges in any form
whatsoever upon such goods or
merchandise.
6. Taxes, fees, or charges on agricultural and
aquatic products when sold by marginal
farmers or fishermen.
7. Taxes on business enterprises certified to by
the Board of Investments as pioneer or non-
pioneer for a period of six (6) and four (4)
years, respectively from the date of
registration.
NOTE: However, the grant of the Income
Tax Holiday for registered enterprises under
EO 226 is subject to the following rules:
a. For six (6) years from COMMERCIAL
OPERATION for pioneer firms and for
four (4) years for non-pioneer firms –
fully exempt; and
b. For a period of three (3) years from
COMMERCIAL OPERATION, registered
expanding firms shall be entitled to
exemption from income tax levied by
the National Government proportionate
to their expansion under such terms and
conditions as the Board may determine
(EO 226, Title III, Article 39)
8. Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees, or
charges on petroleum products.
NOTE: LGUs may impose tax on a petroleum
business. A tax on business is distinct from a
tax on the article itself. (Phil. Petroleum
Corporation vs. Municipality of Pililia Rizal,
G.R. No. 90776, June 3, 1991)
9. Percentage or VAT on sales, barters, or
exchanges or similar transactions on goods
or services except as otherwise provided
herein.
10. Taxes on the gross receipts of
transportation contractors and persons
engaged in the transportation of passengers
or freight by hire and common carriers by
air, land, or water, except as provided in this
Code.
381
11. Taxes on premiums paid by way or
reinsurance or retrocession.
12. Taxes, fees, or charges for the registration of
motor vehicles and for the issuance of all
kinds of licenses or permits for the driving
thereof, except tricycles.
13. Taxes, fees, or other charges on Philippine
products actually exported, except as
otherwise provided in the LGC. (i.e., Sec.
143(c), LGC- municipalities may impose
taxes on exporters)
14. Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and
cooperatives duly registered under R.A. No.
6810 and R.A. No. 6938 or the "Cooperative
Code of the Philippines" respectively.
15. Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and LGUs. (Sec. 133, LGC)
NOTE: An examination of the above
enumeration reveals that those taxes, charges,
and fees already imposed and collected by the
National Government such as income taxes,
estate taxes, donor’s taxes, documentary stamps
taxes. Simply stated, the LGUs cannot exercise
taxing powers reserved to the National
Government. Thus, it is also called the
“reservation rule” or the “exclusionary rule”.
Q: May LGUs impose taxes on petroleum
products?
A: NO. The power of LGUs to impose business
taxes derives from Section 143 of the LGC.
However, the same is subject to the explicit
statutory impediment provided for under
Section 133(h) which prohibits LGUs from
imposing "taxes, fees or charges on petroleum
products." It can, therefore, be deduced that
although petroleum products are subject to
excise tax, the same is specifically excluded from
the broad power granted to LGUs under Section
143(h) to impose business taxes. As long as the
subject matter of the taxing powers of the LGUs
is the petroleum products per se or even the
activity or privilege related to the petroleum
products, such as manufacturing and
distribution of said products, it is covered by the
said limitation and thus, no levy can be imposed.
 Local Taxation
Article 232(h) of the Implementing Rules and
Regulations (IRR) of the LGC of 1991 states that
the Municipality may impose taxes on
businesses except any business engaged in the
production, manufacture, refining, distribution
or sale of oil, gasoline, and other petroleum
products. (Batangas City v. Pilipinas Shell
Petroleum, G.R. No. 187631, July 08, 2015)
Q: Can LGUs validly impose business tax on
the gross receipts of transportation
contractors?
A: NO. It is already well-settled that although the
power to tax is inherent in the State, the same is
not true for the LGUs to whom the power must
be delegated by Congress and must be exercised
within the guidelines and limitations that
Congress may provide. In the case at bar, the
sanggunian of the municipality or city cannot
enact an ordinance imposing business tax on the
gross receipts of transportation contractors,
persons engaged in the transportation of
passengers or freight by hire, and common
carriers by air, land, or water, when said
sanggunian was already specifically prohibited
from doing so. Any exception to the express
prohibition under Section 133(j) of the LGC
should be just as specific and unambiguous.
Section 21(B) of the Manila Revenue Code, as
amended, is null and void for being beyond the
power of the City of Manila and its public
officials to enact, approve, and implement under
the LGC. (City of Manila vs. Colet, et al., G.R. No.
120051, December 10, 2014)
Principle of Pre-emption or Exclusionary
Doctrine
Where the National Government elects to tax a
particular area, it impliedly withholds from the
local government the delegated power to tax the
same field. This doctrine principally rests on the
intention of the Congress.
Conversely, should the Congress allow municipal
corporations to cover fields of taxation it already
occupies then the doctrine of pre-emption will
NOT apply. (Victorias Milling Co., Inc. v.
Municipality of Victorias Negros Occidental, G.R.
No. L-21183, September 27, 1968)
LGUs levy income taxes
GR: The exercise of the taxing authority of LGUs
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
shall not extend to the levy of income tax.
XPN: Income tax may be levied on banks and
other financial institutions. (Sec. 133 (a), LGC)
Q: Pheleco is a power generation and
distribution company operating mainly from
the City of Taguig. It owns electric poles
which it also rents out to other companies
that use poles such as telephone and cable
companies. Taguig passed an ordinance
imposing a fee equivalent to 1% of the
annual rental for these poles. Pheleco
questioned 'the legality of the ordinance on
the ground that it imposes an income tax
which LGUs are prohibited from imposing.
Rule on the validity of the ordinance. (2013
BAR)
A: The ordinance is void. The fee is based on
rental income and is therefore a tax on income.
The Sec. 32(A)(5) of the NIRC includes “rents” in
the enumeration of taxable income. Under
Section 1331 of the LGC, the exercise of the
taxing powers of provinces, cities,
municipalities, and barangays shall not extend to
the levy of income tax except when levied on
banks and other financial institutions.
Q: The Sangguniang Panlungsod of Cagayan
de Oro (City Council) passed an ordinance
imposing a tax on the lease or rental of
electric and/or telecommunication posts,
poles or towers by pole owners to other pole
users 10% of the annual rental income
derived from such lease or rental.
Cagayan Electric Power and Light Company,
Inc. (CEPALCO), who is leasing for a
consideration the use of its posts, poles or
towers to other pole users, assails its validity
on the ground that the tax imposed by the
disputed ordinance is in reality a tax on
income which the City of Cagayan de Oro may
not impose, the same being expressly
prohibited by Section 133(a) of LGC. Is the
ordinance valid?
A: YES. The ordinance is a tax on business not a
tax on income. Business being defined by Sec.
131(d) of the LGC as “trade or commercial
activity regularly engaged in as a means of
livelihood or with a view to profit.”
CEPALCO’s act of leasing for a consideration the
use of its posts, poles or towers to other pole
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 Taxation Law
users falls under the LGC’s definition of business.
In relation thereto, Section 131(d), Section
143(h) of the LGC provides that the city may
impose taxes, fees, and charges on any business
which is not specified in Section 143(a) to (g)
and which the Sanggunian concerned may deem
proper to tax. (Cagayan Electric Power and Light
Co., Inc. v. City of Cagayan de Oro, G.R. No. 191761,
November 14, 2012)
Wharfage
It is a fee assessed against the cargo of a vessel
engaged in foreign or domestic trade based on
quantity, weight, or measure received and/or
discharged by the vessel.
Authorization Limitation
With the exception of cities, each LGU could not
exercise the taxing powers granted to others.
Hence, a province could not exercise the powers
granted to municipality and vice-versa.
However, a city could exercise the taxing powers
of both a province and a municipality.
REQUIREMENTS FOR A VALID TAX
ORDINANCE
Procedure for Approval and Effectivity of Tax
Ordinances
1. The procedure applicable to local
government ordinances in general should
be observed (Sec. 187, LGC)
The following procedural details must be
complied with:
a. Necessity of a quorum
b. Submission for approval by the
local chief executive
c. The matter of veto and overriding
the same
d. Publication and effectivity (Secs.
54, 55, and 59, LGC)
2. Public hearings are required before any
local tax ordinance is enacted (Sec. 187,
LGC)
3. Within 10 days after their approval,
publication in full for 3 consecutive days in
a newspaper of general circulation. In the
absence of such newspaper in the province,
city or municipality, then the ordinance
383
may be posted in at least two conspicuous
and publicly accessible places. (Sec. 188 &
189, LGC)
NOTE: The requirement of publication in full for
3 consecutive days is mandatory for a tax
ordinance to be valid. The tax ordinance will be
null and void if it fails to comply with such
publication requirement. (Coca-Cola v. City of
Manila, G.R. No. 161893, June 27, 2006)
When an ordinance takes effect
In case the effectivity of any tax ordinance or
revenue measure falls on any date other than the
beginning of the quarter, the same shall be
considered as falling at the beginning of the next
ensuing quarter, and the taxes, fees, or charges
due shall begin to accrue therefrom.
Test in determining the validity of an
ordinance
To be valid, and ordinance must conform to the
following substantive requirements:
1. must not contravene the Constitution or
any statute;
2. must not be unfair or oppressive;
3. must not be partial or discriminatory;
4. must not prohibit but may regulate trade;
5. must be general and consistent with public
policy; and
6. must not be unreasonable.
Q: Which of the following statements is NOT
a test of a valid ordinance?
a. It must not contravene the Constitution
or any statute;
b. It must not be unfair or oppressive;
c. It must not be partial or discriminatory;
d. It may prohibit or regulate trade. (2012
BAR)
A: It may prohibit or regulate trade. To be valid,
an ordinance must not prohibit but may
regulate trade. (Magtajas v. Pryce Properties
Corporation, Inc., G.R. No. 111097, July 20, 1994)
Q: The City Government of Quezon City
imposed two additional taxes, which are now
being assailed as unconstitutional. The taxes
are (1) a socialized housing tax (SHT) which
is imposed at a rate of 0.5% based on the
assessed value of the land, and (2) a garbage
 Local Taxation
fee, which is imposed in varying amounts
based on land/floor area, classifying between
residential lots and condominium units. Are
the taxes valid?
A: The SHT is a valid tax. The legal basis is found
on R.A. No. 7279 or the "Urban Development and
Housing Act of 1992” (UDHA) Moreover, the use
of property bears a social function and that all
economic agents shall contribute to the common
good. This is likewise the use of taxation as an
implement of police power. Police power, which
flows from the recognition that salus populi est
suprema lex (the welfare of the people is the
supreme law), is the plenary power vested in the
legislature to make statutes and ordinances to
promote the health, morals, peace, education,
good order or safety and general welfare of the
people. Property rights of individuals may be
subjected to restraints and burdens in order to
fulfill the objectives of the government in the
exercise of police power. The general welfare
clause of the LGC allows local governments to
exercise police power.
The garbage fee is an invalid tax. Although the
authority of a local government unit to regulate
garbage falls within its police power to protect
public health, safety, and welfare, the garbage
fee violates the equal protection clause of the
Constitution and the provisions of the LGC that
an ordinance must be equitable and based as far
as practicable on the taxpayer’s ability to pay,
and not unjust, excessive, oppressive,
confiscatory. For the purpose of garbage
collection, there is, in fact, no substantial
distinction between an occupant of a lot, on one
hand, and an occupant of a unit in a
condominium, socialized housing project or
apartment, on the other hand. The classifications
under Quezon City’s tax ordinance are not
germane to its declared purpose of "promoting
shared responsibility with the residents to
attack their common mindless attitude in over-
consuming the present resources and in
generating waste." (Ferrer v. Bautista, G.R. No.
210551, June 30, 2015)
TAXPAYER’S REMEDIES
PROTEST
1. When the correct tax, fee, or charge is not
paid, the Local Treasurer shall issue a
notice of assessment within the applicable
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
prescriptive period, (Sec. 195, LGC) stating
the nature of the levy, the amount of
deficiency, the surcharges, interests and
penalties.
2. Within 60 days from receipt of the
assessment, the taxpayer may file a written
protest of the assessment with the local
treasurer contesting the assessment;
otherwise the assessment shall become
final and executory.
3. The local treasurer shall decide the protest
within 60 days from the time of its filing. If
the local treasurer finds the assessment to
be wholly or partly correct, he shall deny
the protest wholly or partly with notice to
the taxpayer.
4. The taxpayer shall have 30 days from the
receipt of the denial of the protest or from
the lapse of the 60-day period prescribed
herein within which to appeal with the
court of competent jurisdiction otherwise
the assessment becomes conclusive and
unappealable. (Sec. 195, LGC)
5. The competent court referred to is the
RTC/MTC/MetC/MCTC which acts in the
exercise of its original jurisdiction,
depending on the amount. Local tax cases
originally decided by the MTC/MetC/MCTC
may be appealed to RTC.
NOTE: When an assessment is seasonably
disputed, the collection of tax, fee, or
chrage subject matter of the assessment
should be held in abeyance pending final
determination thereof.
REFUND
1. A written claim for refund or credit is filed
with the local treasurer.
2. A claim or proceeding is then filed with the
court of competent jurisdiction (depending
upon the jurisdictional amount) within 2
years from the date of the payment of such
tax, fee, or charge, or from the date the
taxpayer is entitled to a refund or credit.
(Sec. 196, LGC)
NOTE: The filing of a written claim for
refund with the local treasurer is a
condition precedent for maintaining a
court action. If the local treasurer does not
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 Taxation Law
act on the written claim for refund and the
2-year statute of limitation is about to
expire, the taxpayer should forthwith
initiate the court action and consider the
treasurer’s inaction as a denial of his claim
for refund.
Q: The City Treasurer of Manila issued a SOA
to Philippine Beverage Partners, Inc.
showing that it is liable to pay local business
taxes and regulatory fees for the first quarter
of 2007 in the total amount of P2,930,239.82.
Philippine Beverage Partners protested the
assessment arguing that Tax Ordinance Nos.
7988 and 8011, amending the Revenue Code
of Manila (RCM), have been declared null and
void. It further argued that the collection of
local business tax under Sec. 21 of the RCM in
addition to Sec. 14 of the same code
constitutes double taxation. The City
Treasurer of Manila, however, denied
Philippine Beverage Partners’ protest.
After payment of the amount being collected,
Philippine Beverage Partners filed a written
claim for refund of erroneously/illegally
collected tax with the City Treasurer of
Manila amounting to P2,424,158.93. Further,
it filed a complaint for the revision of the SOA
and for refund or credit of LBT
erroneously/illegally collected with the RTC
which ruled in the affirmative. The City
Treasurer of Manila raised two points on its
arguments:
1. Can a taxpayer who protested an
assessment later on institute a judicial
action for refund?
2. May the alleged deficiency taxes be used
to offset claim for refund?
A:
1. YES. On the first point, the Court has settled
in the case of City of Manila v. Cosmos
Bottling Corporation that a taxpayer facing
an assessment issued by the local treasurer
may protest it and alternatively: (1) appeal
the assessment in court, or (2) pay the tax,
and thereafter, seek a refund. In this case,
after respondent received the assessment
on January 17, 2007, it protested such
assessment on January 19, 2007.
After payment of the assessed taxes and
charges, respondent wrote petitioner
385
another letter asking for the refund and
reiterating the grounds raised in the
protest letter.
Then, on February 6, 2007, respondent
received the letter denying its protest.
Thus, on March 8, 2007, or exactly thirty
(30) days from its receipt of the denial,
respondent brought the action before the
RTC of Manila. Hence, respondent was
justified in filing a claim for refund after
timely protesting and paying the
assessment. (City Treasurer of Manila v.
Philippine Beverage Partners, Inc., G.R. No.
233556, September 11, 2019)
2. NO. On the second point, Sec. 195 of the
LGC provides that "When the local
treasurer or his duly authorized
representative finds that correct taxes, fees,
or charges have not been paid, he shall
issue a notice of assessment stating the
nature of the tax, fee, or charge, the amount
of deficiency, the surcharges, interests and
penalties."
Thus, suffice it to say that the issuance of a
notice of assessment is mandatory before
the local treasurer may collect deficiency
taxes from the taxpayer.
The notice of assessment is not only a
requirement of due process but it also
stands as the first instance the taxpayer is
officially made aware of the pending tax
liability. The local treasurer cannot simply
collect deficiency taxes for a different
taxing period by raising it as a defense in an
action for refund of erroneously or illegally
collected taxes. (Ibid)
ACTION BEFORE THE SECRETARY OF JUSTICE
1. Administrative appeal questioning the
constitutionality or legality within 30 days
from the effectivity of the tax ordinance or
revenue measure.
2. Secretary of Justice shall render a decision
within 60 days from date of receipt of the
appeal.
3. Within 30 days after receipt of the decision
or the lapse of 60-day period without action
from the Secretary of Justice, aggrieved
 Local Taxation
party may file appropriate proceedings
with a court of competent jurisdiction.

NOTE: Such appeal shall not have the effect

of suspending the effectivity of the
ordinance and the accrual of the payment of
the tax, fee, or charge levied therein. (Sec.
187, LGC)

NOTE: The three separate periods (30-30-

60) are given for compliance as a pre-
requisite before seeking redress in a
competent court. (Jardine Davies Insurance
Brokers, Inc. vs. Aliposa, G.R. No. 118900,
February 27, 2003)

ASSESSMENT AND COLLECTION

OF LOCAL TAXES

GR: Local taxes, fees, or charges shall be

assessed within 5 years from the date they
became due. No action for the collection of such
taxes, fees, or charges, whether administrative
or judicial, shall be instituted after the expiration
of such period.
XPN: In case of fraud or intent to evade the
payment of taxes, fees, or charges, the same may
be assessed within 10 years from discovery of
the fraud or intent to evade payment. (Sec. 184
(a) and (b), LGC)

UNIVERSITY OF SANTO TOMAS 386

2021 GOLDEN NOTES
 Taxation Law
Protest of Assessment

387
 Local Taxation
NOTE: The competent court referred to is the
RTC/MTC/MetC/MCTC which acts in the
exercise of its original jurisdiction, depending on
the amount. Local tax cases originally decided
by the MTC/MetC/MCTC may be appealed to
RTC.
CLAIM FOR REFUND OF TAX CREDIT FOR
ERRONEOUSLY OR ILLEGALLY COLLECTED
TAX, FEE, OR CHARGE
Grounds for the refund of local government
taxes, fees or charges: (Sec. 196, LGC.)
1. Erroneously collected
2. Illegally collected
Procedure for the refund of local government
taxes, fees or charges
1. A written claim for refund or credit is filed
with the local treasurer.
2. A claim or proceeding is then filed with the
court of competent jurisdiction (depending
upon the jurisdictional amount) within 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
(Ibid.)
REMEDIES OF LOCAL GOVERNMENT UNITS
1. Local government lien
Local taxes, fees, charges, and other
revenues constitute a lien, superior to all
liens, charges or encumbrances in favor of
any person, enforceable by appropriate
administrative or judicial action, not only
upon any property or rights therein which
may be subject to the lien but also upon
property used in business, occupation,
practice of profession or calling, or exercise
of privilege with respect to which the lien is
imposed (Sec. 173, LGC)
The lien may only be extinguished upon full
payment of the delinquent local taxes fees
and charges including related surcharges
and interest.
2. Civil remedies (Secs. 173 & 174, LGC)
a. Distraint of personal property
b. Levy of real property
c. Judicial action
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Levy of real property may be simultaneously
issued with the warrant of distraint
The levy of a real property may be made before
or simultaneous with distraint. In case the levy
on real property is not issued before or
simultaneously with the warrant of distraint on
personal property, and the personal property of
the taxpayer is not sufficient to satisfy his
delinquency, the provincial, city or municipal
treasurer, as the case may be, shall within 30
days after execution of the distraint, proceed
with the levy on taxpayer’s real property. (Sec.
176, LGC)
LGU has right to purchase real property
advertised for sale, when
1. No bidder for the real property
2. If the highest bid is for an amount
insufficient to pay the taxes, fees, or charges,
related surcharges, interests, penalties and
costs
Local government may repeat the remedies
of distraint and levy
The remedies by distraint and levy may be
repeated if necessary until the full amount due,
including all expenses, is collected. (Sec. 184,
LGC)
Penalty of the local treasurer for failure to
issue and execute the warrant:
Automatically dismissed from service after
notice and hearing, if found guilty of abusing the
exercise thereof by competent authority,
without prejudice to criminal prosecution under
the RPC and other applicable laws. (Sec. 177,
LGC)
Exempt properties from distraint or levy
The following property shall be exempt from
distraint and the levy, attachment or execution
thereof for delinquency in the payment of any
local tax, fee or charge, including the related
surcharge and interest: (ToBe-ChoP-LBM)
1. Tools and implements necessarily used by
the delinquent taxpayer in his trade or
employment;
2. One horse, cow, carabao, or other Beast of
burden, such as the delinquent taxpayer
388
 Taxation Law
may select, and necessarily used by him in
his ordinary occupation;
3. His necessary Clothing, and that of all his
family;
4. Household furniture and utensils necessary
for housekeeping and used for that purpose
by the delinquent taxpayer, such as he may
select, of a value not exceeding P10,000.00;
5. Provisions, including crops, actually
provided for individual or family use
sufficient for 4 months;
389
6. The professional Libraries of doctors,
engineers, lawyers and judges;
7. One fishing Boat and net, not exceeding the
total value of P10,000.00, by the lawful use
of which a fisherman earns his livelihood;
and
8. Any Material or article forming part of a
house or improvement of any real property.
(Sec. 185, LGC)
 Local Taxation

Civil Remedies, in General

Summary for Procedure for Distraint

UNIVERSITY OF SANTO TOMAS 390

2021 GOLDEN NOTES
 Taxation Law
Summary of Procedure for Levy

391
 Local Taxation
JUDICIAL ACTION
LGU’s enforcement of the judicial remedy in
collection of taxes
The LGU concerned may enforce the 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
delinquent taxes, fees or charges become due.
(Sec. 183, LGC)
Mode of appeal from the decision of the
Regional Trial Court involving local taxes
R.A. 9282 expanded the jurisdiction of the CTA
to include, among others, the power to review by
appeal decisions, orders or resolutions of the
RTC in local tax cases originally decided or
resolved by them in the exercise of their original
or appellate jurisdiction. (City of Iriga vs
Camarines Sur Electric Cooperative, Inc., G.R. No.
192945, September 5, 2012)
The authority to exercise either original or
appellate jurisdiction over local tax cases
depended on the amount of the claim. In cases
where the amount sought to be refunded is
below the jurisdictional amount of the RTC, the
MetC, MTC, MCTC are clothed with ample
authority to rule on such claims.
In cases where the RTC exercises appellate
jurisdiction, it necessarily follows that there
must be a court capable of exercising original
jurisdiction – otherwise there would be no
appeal over which the RTC would exercise
appellate jurisdiction. The Court cannot consider
the City Treasurer as the entity that exercises
original jurisdiction not only because it is not a
“court” within the context of B.P. Blg. 129, but
also because B.P. 129 expressly delineates the
appellate jurisdiction of the Regional Trial
Courts, confining as it does said appellate
jurisdiction to cases decided by MeTC, MTC, and
MCTC. Verily, unlike in the case of the CA, B.P.
129 does not confer appellate jurisdiction on the
RTC over rulings made by non-judicial entities.
The RTC exercises appellate jurisdiction only
from cases decided by the MeTC, MTC, and MCTC
in the proper cases. The nature of the
jurisdiction exercised by these courts is original,
considering it will be the first time that a court
will take judicial cognizance of a case instituted
for judicial action. (China Banking Corp. v. City
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Treasurer of Manila, G.R. No. 204117, July 01,
2015)
Q: Doña Evelina, a rich widow engaged in the
business of currency exchange, was assessed
a considerable amount of local business
taxes by the City Government of Bagnet by
virtue of Tax Ordinance No. 24. Despite her
objections thereto, Doña Evelina paid the
taxes. Nevertheless, unsatisfied with said Tax
Ordinance, Doña Evelina, through her
counsel Atty. ELP, filed a written claim for
recovery of said local business taxes and
contested the assessment. Her claim was
denied, and so Atty. ELP elevated her case to
the RTC.
The RTC declared Tax Ordinance No. 24 null
and void and without legal effect for having
been enacted in violation of the public action
requirement of tax ordinances and revenue
measures under the Local Government Code
(LGC) and on the ground of double taxation.
On appeal, the CTA affirmed the decision of
the RTC. No motion for reconsideration was
filed and the decision became final and
executory.
a. If you are Atty. ELP, what advice will you
give Doña Evelina so that she can recover
the subject local business taxes?
b. If Doña Evelina eventually recovers the
local business taxes, must the same be
considered income taxable by the
national government? (2014 BAR)
A:
a. Move for the execution of the judgment
which has already become final.
b. YES, subject to the tax benefit rule. The local
business tax paid is a business-connected
tax hence, deductible from gross income. If
at the time of its deduction it resulted to a
tax benefit to Doña Evelina, then the
recovery will form part of gross income to
the extent of the tax benefit on the previous
deduction. (Section 34(C)(1),NIRC)
PRESCRIPTIVE PERIOD
Period of assessment of local taxes
Local taxes, fees, or charges shall be assessed
within 5 years from the date they become due.
(Sec. 194 (a), LGC)
392
 Taxation Law
Period of collection of local taxes appellate jurisdiction over
local taxes decided by the RTC
Local taxes, fees, or charges may be collected in the exercise of their
within 5 years from the date of assessment by original jurisdiction;
administrative or judicial action. (Sec. 194 (c),
LGC) 2. Over petitions for review of
the judgments, resolutions or
Suspension of Running of Prescriptive Period orders of the RTC in the
exercise of their appellate
The running of the periods of prescription jurisdiction over tax collection
provided in the preceding paragraphs shall be
cases originally decided by
suspended for the time during which: (PRO)
the MeTC, MTC and MCTC in
1. The treasurer is legally Prevented from their respective territorial
making the assessment of collection; jurisdiction.
2. The taxpayer Requests for a 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. (Sec. 194(d),
LGC)

MTC
If principal amount of taxes, fees,
exclusive of charges and
Original penalties does not exceed
P300,000 or P400,000 in Metro
Manila.
RTC
If principal amount of taxes, fees
exclusive of charges and
penalties exceeds P300,000 or
Original
P400,000 in Metro Manila,
provided, the amount is less than
1 million.
The RTC shall exercise appellate
jurisdiction over all cases decided
Appellate by the MeTC, MTC, and MCTC in
their respective territorial
jurisdiction.
CTA DIVISION
If principal amount of taxes, fees
Original exclusive of charges and
penalties is P 1 million or above.
Over appeals from the judgments,
resolutions or orders of the RTC
Appellate in tax collection cases originally
decided by them in their
respective jurisdiction.
CTA EN BANC
1. Decisions or resolutions over
petitions for review of the
Appellate
Court in Divisions in the
exercise of its exclusive

393
 Local Taxation
REAL PROPERTY TAXATION
Real property tax is a direct tax on ownership of
lands and buildings or other improvements
thereon not specially exempted and is payable
regardless of whether the property is used or
not, although the value may vary in accordance
with such factor.
NOTE: Real property tax is a fixed proportion of
the assessed value of the property being taxed
and requires, therefore, the intervention of
assessors.
The present law on real property taxation (R.A.
7160, LGC) adopts actual use of real property as
basis of assessment (Sec. 199(b), LGC), even if
the user is not the owner. (Province of Nueva
Ecija v. Imperial Mining Co., Inc. G.R. No. 59463,
November 19, 1982)
FUNDAMENTAL PRINCIPLES
Fundamental principles governing real
property taxation (CAULE)
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. (Doctrine of Usage)
NOTE: Actual use refers to the purpose for
which the property is principally or
predominantly utilized by the person in
possession of the property.
3. Real property shall be assessed on the basis
of a Uniform classification within each LGU.
4. The appraisal, assessment, levy and
collection of real property tax shall not be
Let to any private person.
5. The appraisal and assessment of real
property shall be Equitable. (Sec. 197, LGC)
NOTE: Real Property shall be classified, valued
and assessed on the basis of its actual use
regardless of where located, whoever owns it
and whoever uses it (Sec. 217, LGC)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
NATURE
1. Direct tax whose burden could not be
shifted by the one who pays to other
persons
2. Ad valorem tax based on the assessed value
of the property
3. Local tax
4. Imposed on use and not ownership
5. Progressive in character pending to a
certain extent on the use and value of the
property
6. Indivisible single obligation
LGUs responsible for the administration of
real property tax
1. Provinces
2. Cities
3. Municipalities in Metro Manila Area
SUBJECTS OF REAL PROPERTY TAXATION
Definition of Real Property
Under Article 415 of the New Civil Code, the
following are Immovable Property:
1. Land, buildings, roads and constructions of
all kinds adhered to the soil;
2. Trees, plants, and growing fruits, while they
are attached to the land or form an integral
part of an immovable;
3. Everything attached to an immovable in a
fixed manner, in such a way that it cannot be
separated therefrom without breaking the
material or deterioration of the object;
4. Statues, reliefs, paintings or other objects for
use or ornamentation, placed in buildings or
on lands by the owner of the immovable in
such a manner that it reveals the intention
to attach them permanently to the
tenements;
5. Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which
may be carried on in a building or on a piece
of land, and which tend directly to meet the
needs of the said industry or works;
6. Animal houses, pigeon-houses, beehives,
fish ponds or breeding places of similar
nature, in case their owner has placed them
or preserves them with the intention to have
them permanently attached to the land, and
394
 Taxation Law
forming a permanent part of it; the animals
in these places are included;
7. Fertilizer actually used on a piece of land;
8. Mines, quarries, and slag dumps, while the
matter thereof forms part of the bed, and
waters either running or stagnant;
9. Docks and structures which, though floating,
are intended by their nature and object to
remain at a fixed place on a river, lake, or
coast; and
10. Contracts for public works, and servitudes
and other real rights over immovable
property.
NOTE: An object used indirectly for the general
purpose of the business shall not be treated as
real property.
The SC has generally held that Art 415 of the
Civil Code provides an exclusive enumeration of
what constitutes real property, for tax purposes,
however, it is common for otherwise personal
properties under the Civil Code to be classified
as real property. (Mindanao Bus Co. v. City
Assessor, G.R. No. L-17870, September 29, 1962)
NOTE: The NIRC and the LGC prevail in
classifying property for tax purposes. Under the
LGC, machinery, which may or may not be
permanently attached to land, is subject to real
property tax.
Improvement is a valuable addition made to a
property or an amelioration in its condition,
amounting to more than a mere repair or
replacement of parts involving capital
expenditures and labor, which is intended to
enhance its value, beauty or utility or to adapt it
for new or further purposes. (Sec. 199 (m), LGC)
Requisites for taxability of an improvement
(ESI)
1. Must enhance the value of the property
2. Must be separately assessable
3. Can be treated independently from the main
property
NOTE: Whenever real property has been divided
into condominium, each condominium owned
shall be separately assessed, for purposes of real
property taxation and other tax purposes to the
owner thereof and tax on each such
condominium shall constitute a lien solely
thereof. (Sec. 25, R.A. No. 776, Condominium Act)
395
Doctrine of Essentiality
Properties considered as personal under the
Civil Code may nonetheless be considered as real
property for tax purposes where said property is
essential to the conduct of business. The
property to be considered as immobilized for
RPT must be “essential and a principal element”
of an industry without which such industry
would be unable to carry on the principal
industrial purpose for which it was established.
Examples:
1. Gasoline station equipment and machineries
like above ground and underground tanks,
elevated water tanks, water tanks, gasoline
pumps, computing pumps water pumps, car
washers, car lifts, air compressors, tire
inflators and the like attached to the
pavement and to the shed. (Caltex Phils. v.
CBAA, GR No. 50466, May 31, 1982)
2. A mining Company’s siltation dam and
decant system are not machineries but
improvements subject to real property tax.
(The Provincial Assessor of Marinduque v. CA,
G.R. No. 170532, April 30, 2009)
3. Pipelines embedded and attached to the
land which cannot be removed therefrom
without dismantling the steel pipes welded
to it to form the pipeline. (MERALCO v. CBAA,
G.R. No. L-46245, May 31, 1982)
Kinds of real property tax and special levies
(REIS)
1. Basic Real property tax
2. Additional levy on real property for the
Special Education Fund (Sec. 235, LGC)
3. Additional ad valorem tax on Idle lands (Sec
236, LGC)
4. Special levy by LGUs (Sec 240, LGC)
Imposed by other laws
Socialized Housing Tax (R.A. 7279, March 24,
1992)
LGUs are authorized to impose an additional
one-half percent (0.5%) on the assessed value of
all lands in urban areas in excess of P50,000,
except those from lands which are exempted
from the coverage of R.A. 7279.
IMPOSITION
 Local Taxation
POWER TO LEVY
Extent of the local taxing power in real
property taxation
Provinces, cities, and municipalities do not only
have the power to levy real estate taxes, but they
may also fix real estate tax rates. Sec. 233 of the
LGC provides that they shall fix a uniform rate of
basic real property tax applicable to their
respective localities.
Q: Capitol Wireless is in the business of
providing international telecommunications
services. Capwire has signed agreements
with other local and foreign
telecommunications companies covering an
international network of submarine cable
systems. The local government of Batangas
considered the submarine cable systems as
real property subject to real property tax. Is
the local government of Batangas correct?
A: YES. Submarine or undersea communications
cables are akin to electric transmission lines
which are “no longer exempted from real
property tax” and may qualify as “machinery”
subject to real property tax under the LGC. Both
electric lines and communications cables, in the
strictest sense, are not directly adhered to the
soil but pass-through posts, relays or landing
stations, but both may be classified under the
term “machinery” as real property under Article
415(5) of the Civil Code because such pieces of
equipment serve the owner’s business or tend to
meet the needs of his industry or works that are
on real estate.
Moreover, a portion of the submarine cable falls
within what the UNCLOS would define as the
country’s territorial sea (to the extent of 12
nautical miles outward from the nearest
baseline over which the country has sovereignty.
Further, under Article 79 of the UNCLOS, the
Philippines clearly has jurisdiction with respect
to cables laid in its territory that are utilized in
support of other installations and structures
under its jurisdiction. And as far as LGUs are
concerned, the areas described above are to be
considered subsumed under the term “municipal
waters” which, under the LGC, includes “not only
streams, lakes, and tidal waters within the
municipality, x x but also marine waters
included between two lines drawn
perpendicularly to the general coastline from
points where the boundary lines of the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
municipality or city touch the sea at low tide and
a third line parallel with the general coastline
and 15 kilometers from it.” (Capitol Wireless, Inc.
vs. Provincial Treasurer of Batangas, G.R. No.
180110. May 30, 2016)
NOTE: No public hearing shall be required
before the enactment of a local tax ordinance
levying the basic real property tax.
LGUs may refrain from imposing the real
property tax. The use of the words “may levy
and collect” gives the impression that a
province, city or municipality within
Metropolitan Manila Area, may or may not, at its
discretion impose real property tax. The word
“may” in the law generally interpreted as only
permissive or discretionary and operates to
confer discretion. This is also being consistent as
well with local autonomy which is the hallmark
of the LGC itself.
NOTE: Recourse may be taken to Sec. 5 of the
Code itself which provides for the rules of its
interpretation, to wit:
“Any provision on a power of a LGU shall
be liberally construed in its favor, and
in case of doubt, any question thereon
shall be resolved in favor of devolution of
powers and of the LGU. Any fair and
reasonable doubt as to the existence
of the power shall be interpreted in
favor of the LGU concerned.”
Q: The City of Makati levied and auctioned off
a real property after the registered owners
failed to pay the corresponding taxes.
Spouses Cruz, owners of the property,
claimed that the sale was null and void
because the notice of billing statements for
real property were mistakenly sent to a
different unit; no warrant of levy was ever
received by them; the notice of delinquency
sale was not posted; the delinquency sale
was not published; the Makati Treasurer's
Office did not notify them of the warrant of
levy; and the City did not remit the excess of
the proceeds of the sale to them. Is the
delinquency sale valid?
A: NO. The Local Government Code provides
that notice of delinquency and notice of
delinquency sale must be posted at the main hall
and in a publicly accessible and conspicuous
place in each barangay of the local government
unit concerned. They shall also be published
396
 Taxation Law
once a week for two (2) consecutive weeks, in a
newspaper of general circulation in the
province, city, or municipality. Failure to strictly
comply with the requisites of the LGC renders
the delinquency sale null and void. As the tax
sale was null and void, the title of the buyer
therein is also null and void.
There can be no presumption of regularity in
any administrative action which results in
depriving a taxpayer of his property; due
process of law must be followed in tax
proceedings, because a sale of land for tax
delinquency is in derogation of private property
and the registered owner's constitutional rights.
The principle of strict adherence to the statutes
governing tax sales is imperative, not only for
the protection of the taxpayers, but also to allay
any possible suspicion of collusion between the
buyer and the public officials called upon to
enforce the laws. (Spouses Cruz v. City of Makati,
G.R. No. 210894, September 12, 2018, as penned
by J. Leonen)
Real properties subject to tax
1. For Basic Real Property Tax and Special
Levy on Education Fund:
a. Land
b. Building
c. Machinery
d. Other improvements (Sec. 232, GC)
2. For Special Levy on Idle Lands and
Special Levy on Public Works (Special
Assessments):
a. Land Only
Rates of levy
1. In a Province – at the rate not exceeding 1%
of the assessed value of real property; and
2. In a City or Municipality within the Metro
Manila area – at the rate not exceeding 2%
of the assessed value of real property. (Sec.
233, LGC)
Ordinance imposing special levy for public
works must contain the following:
1. The ordinance shall
a. Describe the nature, extent, and
location of the project;
b. State estimated cost; and
397
c. Specify metes and bounds by
monuments and lines.
2. It must state the number of annual
installments, not less than 5 years nor more
than 10 years.
NOTE: In the apportionment of special levy,
Sanggunian may fix different rates
depending whether such land is more or less
benefited by the proposed work.
3. Notice to the owners and public hearing
(Sec. 242, LGC)
4. Owner can appeal to the LBAA and CBAA
Special levy or special assessment by LGUs
A province, city or municipality may impose a
special levy on the lands within its territorial
jurisdiction specially benefited by public works
projects or improvements by the LGU concerned.
XPN: It shall not apply to lands exempt from
basic real property tax and the remainder of the
land, portions of which have been donated to the
LGU concerned for the construction of such
projects or improvements. (Sec. 240, LGC)
NOTE: The special levy shall not exceed 60% of
the actual cost of such projects and
improvements, including the costs of acquiring
land and such other real property in connection
therewith.
Additional levy on real property for the
Special Education Fund
A province, city, or a municipality within the
Metro Manila area may levy and collect an
annual tax of 1% on the assessed value of real
property, which shall be in addition to the basic
real property tax. The proceeds thereof shall
exclusively accrue to the Special Education Fund
created under R.A. 5447. (Sec. 235, LGC)
Q: The Sangguniang Panlalawigan of Palawan
enacted Provincial Ordinance No. 332-A,
Series of 1995, entitled “An Ordinance
Approving and Adopting the Code Governing
the Revision of Assessments, Classification
and Valuation of Real Properties in the
Province of Palawan” (Ordinance) Chapter 5,
Section 48 of the Ordinance provides for an
additional levy on real property tax for the
special education fund at the rate of one-half
 Local Taxation
percent or 0.5% as follows: Section 48-
Additional Levy on Real Property Tax for
Special Education Fund. There is hereby
levied an annual tax at the rate of one-half
percent (1/2%) of the assessed value
property tax. The proceeds thereof shall
exclusively accrue to the Special Education
Fund (SEF).
On post-audit, the auditor noticed supposed
deficiencies in the special education fund
collected by the Municipality of Narra. He
questioned the levy of the special education
fund at the rate of only 0.5% rather than at
1%, the rate stated in Section 235. Whether
local government unit have discretion on the
rate at which they are to collect the real
property tax for special education fund.
A: The limits on the level of additional levy for
the special education fund under Section 235 of
the Local Government Code should be read as
granting fiscal flexibility to local government
units. Section 235’s permissive language is
unqualified. Moreover, there is no limiting
qualifier to the articulated rate of 1% which
unequivocally indicates that any and all special
education fund collections must be at such rate.
At most, there is a seeming ambiguity in Section
235. Consistent with what has earlier been
discussed however, any such ambiguity must be
read in favor of local fiscal autonomy. Fiscal
autonomy entails "the power to create own
sources of revenue." In turn, this power
necessarily entails enabling local government
units with the capacity to create revenue sources
in accordance with the realities and
contingencies present in their specific contexts.
(Demaala v. Commission on Audit, G.R. No.
199752, February 17, 2015)
Additional ad valorem tax on idle lands
A province or city or a municipality within the
Metro Manila area may levy an annual tax on
idle lands at the rate not exceeding 5% of the
assessed value of the property which shall be in
addition to the basic real property tax. (Sec. 236,
LGC)
The following are considered “idle lands”
1. Agricultural lands:
a. More than one (1) hectare in area
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
b. Suitable for cultivation, dairying, inland
fishery, and other agricultural uses
c. One-half (1/2) of which remain
uncultivated or unimproved by the
owner or person having legal interest.
NOTE: Agricultural lands planted to
permanent or perennial crops with at
least fifty (50) trees to a hectare shall
not be considered idle lands. Lands
actually used for grazing purposes shall
likewise not be considered idle lands.
2. Lands other than agricultural:
a. Located in a city or municipality
b. More than one thousand square meters
(1,000 m2) in area
c. One-half (1/2) of which remain
unutilized or unimproved by the owner
or person having legal interest.
Regardless of land area, this Section
shall apply to residential lots in
subdivisions duly approved by proper
authorities, the ownership of which has
been transferred to individual owners,
who shall be liable for the additional
tax: Provided, however, that individual
lots of such subdivisions, ownership of
which has not been transferred to the
buyer shall be considered as part of the
subdivision and shall be subject to the
additional tax payable by subdivision
owner or operator. (Sec. 237, LGC)
Causes for Exemption from Idle Lands Tax
1. Force majeure
2. Civil disturbance
3. Natural calamity
4. Any cause or circumstance which physically
or legally prevents the owner or person
having legal interest from improving,
utilizing or cultivating the same (Ibid.)
Purpose of imposing ad valorem taxes on idle
land
To penalize property owners who do not use
their property productively. It is also designed to
encourage utilization of land resources in order
to contribute to national development.
Q: May local governments impose an annual
realty tax in addition to the basic real
property tax on idle or vacant lots located in
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 Taxation Law
residential subdivisions within their
respective territorial jurisdictions? (2000
BAR)
A: Not all LGUs may do so. Only provinces, cities,
and municipalities within the Metro Manila area
(Sec. 232, LGC) may impose an ad valorem tax
not exceeding five percent (5%) of the assessed
value (Sec. 236, Ibid.) of idle or vacant residential
lots in a subdivision, duly approved by proper
authorities regardless of area. (Sec. 237, Ibid.)
Q: A city outside of Metro Manila plans to
enact an ordinance that will impose a special
levy on idle lands located in residential
subdivisions within its territorial jurisdiction
in addition to the basic real property tax. If
the lot owners of a subdivision located in the
said city seeks your legal advice on the
matter, what would your advice be? Discuss.
(2005 BAR)
A: I would advise the lot owners that a city, even
if it is outside Metro Manila, may levy an annual
tax on idle lands at the rate not exceeding five
percent (5%) of the assessed value of the
property which shall be in addition to the basic
real property tax. (Sec. 236, LGC) I would
likewise advise them that the levy may apply to
residential lots, regardless of land area, in
subdivisions duly approved by proper
authorities, the ownership of which has been
transferred to individual owners who shall be
liable for the additional tax. (Last par., Sec. 237,
LGC)
Finally, I would advise them to construct or
place improvements on their idle lands by
making valuable additions to the property or
ameliorations in the land's conditions so the
lands would not be considered as idle. (Sec.
199(m), LGC) In this manner their properties
would not be subject to the ad valorem tax on
idle lands.
EXEMPTION FROM REAL PROPERTY TAX
1. Real property owned by the Republic of the
Philippines or any of its political
subdivisions except when the beneficial use
thereof has been granted for consideration
or otherwise to a taxable person.
NOTE: This exemption shall not apply to
real properties the beneficial use of which
399
has been granted, for consideration or
otherwise, to a taxable person. (Testate
Estate of C.T. Lim v. City of Manila, G.R. No.
90639, February 21, 1990)
2. Charitable institutions, churches,
parsonages, or convents appurtenant
thereto, mosques, non-profit or religious
cemeteries, and all lands, buildings, and
improvements actually, directly and
exclusively used for religious, charitable, or
educational purposes.
NOTE: The tax exemption herein rests on
the premise that they are actually, directly
and exclusively used by said entities or
institutions for their stated purposes and
not necessarily because they are owned by
religious, charitable or educational
institutions.
3. All machineries and equipment that are
actually, directly and exclusively used by
local water utilities and government-owned
or controlled corporations engaged in the
supply and distribution of water and/or
generation and transmission of electric
power.
4. All real property owned by duly registered
Cooperatives as provided for under R.A.
6938.
5. Machinery and equipment used for
Pollution control and environmental
protection (Sec. 234, LGC)
NOTE: Pollution control and infrastructure
devices refers to infrastructure, machinery,
equipment and/or improvements used for
impounding, treating or neutralizing,
precipitating, filtering, conveying and
cleansing mine industrial waste and tailings
as well as eliminating or reducing hazardous
effects of solid particles, chemicals, liquids,
or other harmful by-products and gases
emitted from any facility utilized in mining
operations for their disposal. (R.A. No. 7942,
Sec. 3)
Except as herein provided, any exemption from
payment of real property tax previously granted
to, or presently enjoyed by all persons, whether
natural or juridical, including all government-
owned or controlled corporations, are hereby
 Local Taxation
withdrawn upon the effectivity of the LGC.
A taxpayer claiming exemption must submit
sufficient documentary evidence to the local
assessor within 30 days from the date of the
declaration of real property; otherwise, it shall
be listed as taxable in the Assessment Roll. (Sec.
206, LGC)
Other properties exempt from real property
tax
1. Real property in any one city or municipality
belonging to a single owner, the entire
assessed valuation of which is not in excess
of P1,000.00.
2. Land acquired by grant, purchase, or lease
from the public domain for conversion into
dairy farms for a period of 5 years from the
time of such conversion.
3. Machinery of a pioneer and preferred
industry as certified by the Board of
Investments used or operated for industry,
agriculture, manufacturing, or mining
purposes, during the first 3 years of the
operation of the machinery.
4. Perennial trees and plants of economic value
except where the land upon which they
grow is planted principally to such growth.
5. Properties owned by non-stock or non-
profit educational institutions, the total
assessed value of which does not exceed
P3,000.00, including those owned by
Educational Foundations organized under
R.A. No. 6055.
Q: City R owns a piece of land which it leased
to V Corp. In turn, V Corp. constructed a
public market thereon and leased the stalls
to vendors and small storeowners. The City
Assessor then issued a notice of assessment
against V Corp. for the payment of real
property taxes (RPT) accruing on the public
market building, as well as on the land where
the said market stands. Is the City Assessor
correct in including the land in its
assessment of RPT against V Corp., even if the
same is owned by City R? Explain. (2019
BAR)
A: YES. Under Section 234 of the Local
Government Code, real property owned by the
Republic of the Philippines or any of its political
subdivision is exempt from payment of real
property tax except when the beneficial use
thereof has been granted, for consideration or
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
otherwise, to a taxable person or entity.
Q: Are the transformers, electric posts,
transmission lines, insulators, and electric
meters of MERALCO exempt from real
property taxes?
A: NO. The transformers, electric posts,
transmission lines, insulators, and electric
meters of MERALCO are no longer exempted
from real property tax based on its franchise and
may qualify as "machinery" subject to real
property tax under the LGC. MERALCO is a
public utility engaged in electric distribution,
and its transformers, electric posts, transmission
lines, insulators, and electric meters constitute
the physical facilities through which MERALCO
delivers electricity to its consumers. Each may
be considered as one or more of the following: a
"machine," "equipment," "contrivance,"
"instrument," "appliance," "apparatus," or
"installation."
Under Sec. 199(o) of the LGC, machinery, to be
deemed real property subject to real property
tax, need no longer be annexed to the land or
building as these "may or may not be attached,
permanently or temporarily to the real
property," and in fact, such machinery may even
be "mobile." The same provision though requires
that to be machinery subject to real property tax,
the physical facilities for production,
installations, and appurtenant service facilities,
those which are mobile, self-powered or self-
propelled, or not permanently attached to the
real property (a) must be actually, directly, and
exclusively used to meet the needs of the
particular industry, business, or activity; and (2)
by their very nature and purpose, are designed
for, or necessary for manufacturing, mining,
logging, commercial, industrial, or agricultural
purposes.
Q: Is PEZA a government instrumentality or
a GOCC? Is it exempt from real property
taxation?
A: PEZA is an instrumentality of the
government. Being an instrumentality of the
national government, it cannot be taxed by LGUs.
Instrumentality is "any agency of the National
Government, not integrated within the
department framework, vested with special
functions or jurisdiction by law, endowed with
some if not all corporate powers, administering
special funds, and enjoying operational
400
 Taxation Law
autonomy, usually through a charter." Examples
of instrumentalities of the national government
are the MIAA, Philippine Fisheries Development
Authority, GSIS, and Philippine Reclamation
Authority. These entities are not integrated
within the department framework but are
nevertheless vested with special functions to
carry out a declared policy of the national
government.
Similarly, the PEZA is an instrumentality of the
national government. It is not integrated within
the department framework but is an agency
attached to the Department of Trade and
Industry. PEZA is also vested with special
functions or jurisdiction by law. Congress
created the PEZA to operate, administer, manage
and develop special economic zones in the
Philippines.
Although a body corporate vested with some
corporate powers, the PEZA is not a
government-owned or controlled corporation
taxable for real property taxes. To be
considered a GOCC, the entity must have been
organized as a stock or non-stock corporation.
Under its charter, the PEZA was created a body
corporate endowed with some corporate
powers. However, it was not organized as a
stock or non-stock corporation. Nothing in the
PEZA’s charter provides that the PEZA’s capital
is divided into shares. The PEZA also has no
members who shall share in the PEZA’s profits.
PEZA, therefore, is not a government-owned or
controlled corporation liable for real property
tax. (PEZA v. Lapu-lapu City, 742 SCRA 524)
Q: Group of Tibetan monks approached A and
offered to lease the building in order to use it
as a venue for their Buddhist rituals and
ceremonies. A accepted the rental of P1
million for the whole year. The following
year, the City Assessor issued an assessment
against A for non-payment of real property
taxes. Is the assessor justified in assessing A’s
deficiency real property taxes? Explain.
(2010 BAR)
A: NO. The property is exempt from real
property tax by virtue of the beneficial use
thereof by the Tibetan monks for their religious
rituals and ceremonies. A property that is
actually, directly and exclusively used for
religious purposes is exempt from real property
tax. The test of exemption from the tax is not
401
ownership but the beneficial use of the property.
Q: The Light Rail Transit Authority (LRTA)
resolutely argues that the improvements
such as, carriageways, passenger terminal
stations and similar structures, not of its
properties, but of the government-owned
national roads to which they are immovably
attached. They are thus not taxable as
improvements under the Real Property Tax
Code. It contends that to impose a tax on the
carriageways and terminal stations would be
to impose taxes on public roads. Are the LRT
improvements subject to real property tax?
A: YES. While it is true that carriageways and
terminal stations are anchored, at certain points,
on public roads, said improvements do not form
part of the public roads since the former are
constructed over the latter in such a way that the
flow of vehicular traffic would not be impaired.
These carriageways and terminals serve a
function different from the public roads. The
former are part and parcel of the LRT system
which, unlike the latter, are not open to use by
the general public. The carriageways are
accessible only to the LRT trains, while the
terminal stations have been built for the
convenience of LRTA itself and its customers
who pay the required fare. Even granting that
the national government owns the carriageways
and terminal stations, the property is not
exempt because their beneficial use has been
granted to LRTA which is a taxable entity. (LRTA
v. CBAA, G.R. No. 127316, October 12, 2000)
Q: Are the airport lands and buildings of
Manila International Airport Authority
(MIAA) exempt from real estate tax under
existing laws?
A: YES. First, MIAA is not a GOCC but an
instrumentality of the National Government and
thus exempt from local taxation. MIAA is a
government instrumentality vested with
corporate powers to perform efficiently its
governmental functions. MIAA is like any other
government instrumentality; the only difference
is that MIAA is vested with corporate powers.
Second, the real properties of MIAA are owned
by the Republic of the Philippines and thus
exempt from real estate tax. Airport lands and
buildings are outside the commerce of man. The
airport lands and buildings of MIAA are devoted
to public use and thus are properties of public
 Local Taxation
dominion. (MIAA v. CA, City of Paranaque, et al., to be exempt from the payment of real property
G.R. No. 155650, July 20, 2006) taxes. Also, in 2011, Congress passed Republic
Act No. 10149 or the GOCC Governance Act of
MCIAA MIAA 2011, which adopted the same categorization
Since the last MIAA is NOT a GOCC and explicitly lists petitioner together with the
paragraph of Section but an other government agencies that were previously
234 unequivocally instrumentality of held by thus Court to be exempt from the
withdrew upon the the National payment of real property taxes. (MWSS v. Local
effectivity of the LGC, Government. The Government of Quezon City, G.R. No. 194388,
exemption from exception to the November 7, 2018)
payment of real exemption in Sec.
property tax granted 234(a) does not Q: The Quezon City Local Government
to natural or juridical apply to MIAA assessed real property taxes on MWSS’s
persons including because it is not a properties located in Quezon City. MWSS
GOCCs, except as taxable entity under received several Final Notices of Real
provided in the said the LGC. Such Property Tax Delinquency from the Local
section, and MCIAA is, exception applies Government of Quezon City, covering various
undoubtedly a only if the beneficial taxable years, in the total amount of
government-owned use of real property P237,108,043.83 on MWSS’s real properties.
corporation it owned by the MWSS argues that it is exempt from taxation
necessarily follows Republic is given to a as it is an instrumentality of the government
that its exemption taxable entity. holding properties of the public dominion.
from such tax granted (Manila The local government argues that MWSS
it in Section 14 of its International Airport holds properties in the exercise of its
Charter, R.A. No. 6958, Authority v. CA, proprietary functions, and thus, are
has been withdrawn. supra.) susceptible to real property tax and points
Furthermore, note out that tax exemption granted in Republic
that Section 40(a) of Act No. 6234, Section 18 has been repealed
PD 464 as reproduced by Section 234 of the Local Government Code.
in Section 234(a), the May the local government unit assess real
phrase “and any GOCC property taxes on MWSS, a government
so exempt by its entity?
charter” was excluded A: NO. Government owned real property is
in the enumeration of exempt from real property tax (RPT) except
exemption from real when the beneficial use of the real property is
property tax. (Mactan granted to a taxable person. The general rule is
Cebu International that any real property owned by the Republic or
Airport Authority v. its political subdivisions is exempt from the
Marcos, G.R. No. payment of RPT except when the beneficial use
120082, Sept. 11, of the real property was granted to a taxable
1996) person. Executive Order No. 596 categorizes
MWSS as a government instrumentality vested
Q: MWSS claims that it is an instrumentality with corporate powers. Republic Act No. 10149
of the Republic; thus, its real properties or the GOCC Governance Act of 2011 adopted
should be exempt from real property tax. Is the same categorization and explicitly lists
the contention of MWSS correct? MWSS as exempt from the payment of RPT.
Thus, the real properties of the MWSS are
A: YES. After the promulgation of Manila exempt from real property taxes, except if the
International Airport Authority, then President beneficial use of its properties has been
Gloria Macapagal-Arroyo issued Executive Order extended to a taxable person. (Metropolitan
No. 596, which recognized this Court’s Waterworks and Sewerage System v. The Local
categorization of “government instrumentalities Government of Quezon City, City Treasurer of
vested with corporate powers.” Under Section 2 Quezon City, City Assessor of Quezon City,
of Executive Order No. 596, MWSS is categorized Sangguniang Panlungsod ng Quezon City and City
with other government agencies that were found Mayor of Quezon City, G.R. No. 194388, November
7, 2018, as penned by J. Leonen)

UNIVERSITY OF SANTO TOMAS 402

2021 GOLDEN NOTES
 Taxation Law
Q: In 1957, R.A. 2036 granted RCPI a 50 year
franchise and Sec. 14 thereof mandates it to
pay the taxes required by law on real estate,
buildings and other personal property except
radio equipment, machinery and spare parts
needed in connection with its business. In
consideration of the franchise, a tax equal to
one and one-half per centum of all gross
receipts from the business transacted under
this franchise by the grantee shall be paid
and such shall be in lieu of any tax collected
by any authority. The municipal treasurer of
Tupi, South Cotabato subsequently assessed
RCPI real property tax on its radio station
building, machinery shed, radio station
tower and its accessories and generating
sheds. RCPI protested such assessment. Is
RCPI liable to pay real property tax on the
said properties?
A: YES. RCPI’s radio relay station tower, radio
station building, and machinery shed are real
properties and are thus subject to real property
tax. The “in lieu of all taxes” clause in Section 14
of R.A. 2036, as amended by R.A. 4054, cannot
exempt RCPI from the real estate tax because the
same Section 14 expressly states that RCPI “shall
pay the same taxes on real estate, buildings.”
Subsequent legislations have radically amended
the “in lieu of all taxes” clause in franchises of
public utilities. The LGC of 1991 “withdrew all
the tax exemptions existing at the time of its
passage — including that of RCPI’s” with respect
to local taxes like the real property tax. Also,
R.A. 7716 abolished the franchise tax on
telecommunications companies effective 1
January 1996. To replace the franchise tax, R.A.
7716 imposed a 10% VAT on
telecommunications companies under Sec.102,
NIRC. Lastly, it is an elementary rule in taxation
that exemptions are strictly construed against
the taxpayer and liberally in favor of the taxing
authority. (Radio Communications of the
Philippines, Inc. v. Provincial Assessor of South
Cotabato, A.C. No. 5637, April 13, 2005)
Q: NAPOCOR entered into a build-operate-
transfer (BOT) agreement with First Private
Power Corporation (FPPC) for the
construction of a power plant in Bauang, La
Union and the creation of Bauang Private
Power Corporation (BPPC), a corporation
that will own, manage and operate the power
plant. When BPPC was assessed for real
property taxes on the machineries and
403
equipment, NAPOCOR sought the exemption
of the machineries and equipment from RPT
on the ground of its exemption from taxes
and the provision under the BOT Agreement
whereby Napocor assumes responsibility for
all real estate taxes. Is Napocor liable to pay
tax?
A: NO. Under Sec. 234(c) of the LGC of 1991,
machineries and equipment actually, directly
and exclusively used by a government-owned or
controlled corporation are exempt from real
property tax. BPPC, not being a GOCC, is not
entitled to the Sec. 234(c) exemption. NAPOCOR,
not being the actual, direct and exclusive user of
the machineries and equipment, cannot invoke
the Sec. 234(c) exemption either. (National
Power Corp. v. CBAA, G.R. No. 171470, January 30,
2009)
Q: Is GSIS exempt from real property taxes?
A: YES. Pursuant to Sec. 33 of P.D. 1146, GSIS
enjoyed tax exemption from real estate taxes,
among other tax burdens, until January 1, 1992
when the LGC took effect and withdrew
exemptions from payment of real estate taxes
privileges granted under PD 1146. R.A. 8291
restored in 1997 the tax exempt status of GSIS
by reenacting under its Sec. 39 what was once
Sec. 33 of P.D. 1146. If any real estate tax is due,
it is only for the interim period, or from 1992 to
1996, to be precise. (GSIS v. City Treasurer and
City Assessor of the City of Manila, G.R. No.
186242, Dec. 23, 2009)
Q: Is the National Grid Corporation of the
Philippines (NGCP) exempt from real
property taxes?
A: YES. Section 9 of R.A. 9511 states that NGCP’s
payment of franchise tax is in lieu of payment of
“income tax and any and all taxes, duties, fees
and charges of any kind, nature or description
levied, established or collected by any authority
whatsoever, local or national, on its franchise,
rights, privileges, receipts, revenues and profits,
and on properties used in connection with its
franchise.” Thus, in contrast to Smart’s franchise
as quoted above, Section 9 of R.A. 9511 clearly
stated that the NGCP’s “in lieu of all taxes” clause
includes taxes imposed by the local government
on properties used in connection with NGCP’s
franchise. However, NGCP’s tax exempt status on
real property due to the “in lieu of all taxes”
 Local Taxation
clause is qualified: NGCP shall be liable to pay
the same tax as other corporations on real
estate, buildings and personal property
exclusive of their franchise. (National Grid
Corporation of the Philippines vs. Oliva, G.R. No.
213157. August 10, 2016)
Q: Filipinas Palm Oil Plantation, Inc. is a
private organization engaged in palm oil
plantation. It leases the land from NGPI-NGEI
Cooperative. The LBAA assessed Filipinas of
real property taxes on the land it leases, on
the road it built primarily for the benefit of
the plantation, and on the machineries that
are not attached to the land. Is the
assessment of LBAA proper?
A: NO. Under Section 133(n) of the LGC, the
taxing power of LGUs shall not extend to the levy
of taxes, fees, or charges on duly registered
cooperatives under the Cooperative Code. NGPI-
NGEI, as the owner of the land being leased by
respondent, falls within the purview of the law.
Section 234 of the LGC exempts all real property
owned by cooperatives without distinction.
Nothing in the law suggests that the real
property tax exemption only applies when the
property is used by the cooperative itself.
Similarly, the instance that the real property is
leased to either an individual or corporation is
not a ground for withdrawal of tax exemption.
The roads that Filipinas Palm constructed within
the leased area should not be assessed with real
property taxes. The roads constructed became
permanent improvements on the land owned by
the NGPI-NGEI by right of accession under
Article 440 and 445 of the Civil Code. Hence,
whatever is incorporated in the land, either
naturally or artificially, belongs to the NGPI-
NGEI as the landowner. Although the roads were
primarily built for Filipinas Palm’s benefit, the
roads were also being used by the members of
NGPI and the public.
However, the assessment pertaining to the
machinery is proper. The definition of
“machinery” under Section 199 of the LGC
includes machines which may or may not be
attached, permanently or temporarily, to the
real property. (Provincial Assessor of Agusan del
Sur vs. Filipinas Palm Oil Plantation, Inc., G.R. No.
183416, October 5, 2016)
Q: Upon acquisition via execution sale in
August 2004, thirteen (13) parcels of land
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
located in Sta. Ana, Calatagan, Batangas are
registered since 2006 in the name of G
Corporation under Transfer Certificate of
Title (TCT) Nos. T-105907 to T-105919. From
March 2, 2006 up to August 12, 2009, the
Subject Property had been in actual
possession of Mr. C and D in their capacity as
assignees in an involuntary insolvency
proceeding against the Spouses Santos
pending before the Muntinlupa City RTC Br.
204. It was only on August 13, 2009 that G
Corporation was able to take full possession
and control of the subject property by virtue
of the July 31, 2009 Order of the Makati City
RTC Br. 56 granting the issuance of a writ of
execution, which, in tum, was based on the
final and executory Decision of the Court of
Appeals in CA¬ G.R. SP Nos. 93818 and
93823.
In a letter dated October 9, 2012, Provincial
Treasurer of Batangas sent to G Corporation
a Statement of Real Property Tax Liabilities
to collect the amount of P8,093,256.89, which
included the unpaid RPT on the subject
property for 2007, 2008, and January to
August 2009 (covered period). The demand
was reiterated in letters dated October 23,
2012 and November 21, 2012. The
assessment was paid under protest on
November 20, 2012. Less than a month after,
G Corporation filed a petition for prohibition
and mandamus against respondents. G
Corporation believes that the RPT
assessment is illegal and erroneous because
the subject property was not in its possession
during the covered period. Is G Corporation
liable for the real property tax?
A: YES. In real estate taxation, the unpaid tax
attaches to the property. The personal liability
for the tax delinquency is generally on whoever
is the owner of the real property at the time the
tax accrues. This is a necessary consequence that
proceeds from the fact of ownership.
Nonetheless, where the tax liability is imposed
on the beneficial use of the real property, such as
those owned but leased to private persons or
entities by the government, or when the
assessment is made on the basis of the actual use
thereof, the personal liability is on any person
who has such beneficial or actual use at the time
of the accrual of the tax. Beneficial use means
that the person or entity has the use and
possession of the property. Actual use refers to
404
 Taxation Law
the purpose for which the property is principally
or predominantly utilized by the person in
possession thereof.
G Corporation is an entity that is not tax exempt
under the law, is the registered owner of the real
property. Therefore, it is personally liable for the
RPT at the time it accrued. (Herarc Realty
Corporation v. The Provincial Treasurer of
Batangas, G.R. 210736, September 05, 2018, as
penned by J. Peralta)
Q: NPC entered into an Energy Conversion
Agreement with CEPA Pangasinan Electric
Limited for the construction, operation, and
maintenance of the Sual Coal-Fired Thermal
Power Plan. CEPA agreed to supply a coal-
fired thermal power station to NPC, while
NPC assumed all real property taxes. NPC
thereafter religiously paid real property
taxes for the land, buildings, machinery, and
equipment for the power plant. However,
NPC later stopped paying taxes pursuant to
R.A. No. 7160 that grants certain exemptions
from real property tax liabilities. Was NPC
correct in contending that the machinery and
equipment were exempted from paying real
property tax?
A: NO. Real property tax liability rests on the
owner of the property or on the person with the
beneficial use thereof such as taxes on
government property leased to private persons
or when tax assessment is made on the basis of
the actual use of the property. In either case, the
unpaid realty tax attaches to the property but is
directly chargeable against the taxable person
who has actual and beneficial use and
possession of the property regardless of
whether or not that person is the owner. NPC
was correct in arguing that a beneficial user may
also be legally burdened with the obligation to
pay for the tax imposed on a property and as
such, has legal interest therein and the
personality to protest an assessment or claim
exemption from tax liability. However, NPC is
neither the owner nor the possessor or
beneficial user of the subject facilities.
Therefore, it cannot be considered to have any
legal interest in the subject property to clothe it
with the personality to question the assessment
and claim for exemptions and privileges.
(National Power Corporation v. Province of
Pangasinan and Provincial Assessor of
Pangasinan, G.R. No. 210191, March 04, 2019, as
405
penned by J. Reyes, Jr.)
Q: ABC Corp. acquired through foreclosure
sales two different properties located at
PEZA, Rosario, Cavite. ABC Corp. became the
owner of Property 1 in March 2014, and
Property 2 in August 2014. Upon the lapse of
the redemption periods, ABC Corp. started
and tried to consolidate its tax declarations
over the two properties, but ABC Corp. could
not obtain the necessary tax clearance from
Provincial Government of Cavite and the
Provincial Treasurer of Cavite in order to
transfer the TDs over the Maxon and
Ultimate properties under its name because
of unpaid real property taxes. From the
records of the Provincial Treasurer of Cavite,
the two properties have unpaid real property
taxes in the following amounts: (1) Property
1 - P15,888,089.09 (for the years 2000-
2013); and (2) Property 2 - P6,238,407.76
(for the years 1997-2013).
The Provincial Treasurer of Cavite issued a
tax assessment and a warrant of levy after
having declared the properties as delinquent.
It also set the same for public auction on
December 10, 2014, in order to satisfy the
unpaid real property taxes assessed against
them. However, the scheduled auction did
not push through as the RTC issued a timely
preliminary writ of injunction enjoining the
prospective sale.
1. Is the RTC correct in issuing a
preliminary writ of injunction enjoining
the prospective sale?
2. ABC Corp ‘s Registration and Lease
Agreements with the PEZA indicate that
respondent was registered as an
Ecozone Facilities Enterprise. Is ABC
Corp. exempt from payment of real
property taxes?
A:
1. YES. In National Power Corp. v. Province of
Quezon et al., the Court explained that the
unpaid tax attaches to the property and is
chargeable against the taxable person who
had actual or beneficial use and possession
of it regardless of whether he is the owner.
In this case, ABC Corp. was not yet the
owner or entity with the actual or beneficial
use of the properties during the years for
which Provincial Government and
Provincial Treasurer of Cavite (Provincial
Government of Cavite) sought to collect real
 Local Taxation
property taxes. Specifically, Provincial
Government of Cavite sought to collect
from ABC Corp. real property taxes due on
the Maxon property for the years 2000-
2013 and on the Ultimate property for the
years 1997-2013.
However, ABC Corp. became the owner of
the Maxon property and the Ultimate
property only in March 2014, and August
2014, respectively. To impose the real
property taxes on ABC Corp., which was
neither the owner nor the beneficial user of
the property during the designated periods
would not only be contrary to law but is
also unjust. Given the foregoing, Provincial
Government of Cavite cannot conduct a tax
delinquency sale of the Maxon and Ultimate
properties which are now owned by ABC
Corp. To do so would effectively make ABC
Corp. liable for the payment of real
property taxes due on the Maxon property
for the years 2000-2013 and on the
Ultimate properties for the years 1997-
2013 when it did not yet own of had actual
or beneficial use of the properties. As the
Court has discussed above, such is not only
contrary to law, but is also unjust.
(Provincial Government of Cavite and
Provincial Treasurer of Cavite, Petitioner v.
CQM Management, Inc., G.R. No. 248033, July
15, 2020, as penned by J. Inting)
2. YES. ABC Corp. is exempt from paying real
property taxes over the Maxon and
Ultimate properties from the time it had
acquired ownership and/or actual or
beneficial use of the properties pursuant to
Section 24 of R.A. 7916, as amended by R.A.
8748. There is nothing in Section 24 which
requires prior concurrence from the local
government unit before ABC Corp. can avail
itself of the exemption provided under the
law. In fact, under Section 35 of R.A. No.
7916, the only requirement for business
enterprises within a designated ECOZONE
to avail themselves of all incentives and
benefits provided for under R.A. 7916 is to
register with the PEZA. This requirement
was satisfied by ABC Corp. ABC Corp.’s
Registration and Lease Agreements with
the PEZA indicate that respondent was
registered as an Ecozone Facilities
Enterprise.
Significantly, in response to queries made
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
by registered economic zone enterprises as
to whether they are exempted from
securing LGU Permits and from payment of
local taxes, fees, licenses, etc., the PEZA
issued Memorandum Circular No. 2004-024
which provides in part that “PEZA-
registered economic zone enterprises
availing of the 5% [gross income tax]
incentive are exempted from payment of all
national and local taxes, except real
property tax on land owned by developers.”
In this case, there is nothing to indicate that
respondent is a developer. Thus,
considering R.A. 7916, as amended, its IRR,
and Memorandum Circular No. 2004-024, it
is evident that save for the payment of 5%
gross income tax, ABC Corp.is exempt from
the payment of national and local taxes
including real property tax on the two
properties. (Ibid)
APPRAISAL AND ASSESSMENT
Fundamental Principles of Appraisal,
Assessment, Levy, and Collection of Real
Property Taxes (CAULE)
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 LGU;
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. (Sec. 198, LGC)
NOTE: Real Property shall be classified, valued,
and assessed on the basis of its actual use
regardless of where located, whoever owns it
and whoever uses it. (Sec. 247, LGC)
Steps in the assessment and collection of real
property tax
1. Declaration of real property.
2. Listing of real property in the assessment
rolls.
3. Appraisal and valuation of real property.
4. Determination of assessed value and RPT.
5. Payment and collection of tax.
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 Taxation Law
Limitations of local government to
administer, appraise, levy, and collect real
property taxes
1. Authorization Limitation – the LGC
authorizes only certain LGUs to administer
real property taxation (Sec. 200, LGC)
2. Fundamental principles of appraisal,
assessment, levy and collection of real
property taxes (Sec. 198, LGC)
3. The real property taxes collected shall
accrue solely to the benefit of the LGU
concerned (Sec. 5, Art. X, 1987 Constitution)
CLASSES OF REAL PROPERTY
Classes of real property for assessment
purposes
1. Residential
2. Agricultural
3. Commercial
4. Industrial
5. Mineral
6. Timberland
7. Special
Special classes of real property
Lands, buildings, and other improvements
thereon which are:
1. Actually, directly and exclusively used for
hospitals, cultural, or scientific purposes
2. Owned and used by local water districts
3. Owned and used by Government-owned or
controlled corporations rendering essential
public services in the supply and
distribution of water and/or generation
and transmission of electric power (Sec.
216, LGC)
NOTE: Special classes of real property have
lower assessment level compared with
other classes of real property.
ASSESSMENT BASED ON ACTUAL USE
Actual use refers to the purpose for which the
property is principally or predominantly utilized
by the person in possession thereof. (Sec. 199(b),
LGC)
NOTE: Unpaid realty taxes attach to the
property and are chargeable against the person
who had actual or beneficial use and possession
407
of it regardless of whether or not he is the
owner. (Estate of Lim vs. City of Manila, G.R. No.
90639, February 21, 1990)
The basis of taxing real property is actual use,
even if the user is not the owner.
Real property shall be classified, valued, and
assessed on the basis of its actual use regardless
of where located, whoever owns it, and whoever
uses it. (Sec. 217, LGC)
Q: The real property of Mr. and Mrs. Angeles,
situated in a commercial area in front of the
public market, was declared in their Tax
Declaration as residential because it had
been used by them as their family residence
from the time of its construction in 1990.
However, since January 1997, when the
spouses left for the United States to stay
there permanently with their children, the
property has been rented to a single
proprietor engaged in the sale of appliances
and agri-products. The Provincial Assessor
reclassified the property as commercial for
tax purposes starting January 1998. Mr. and
Mrs. Angeles appealed to the Local Board of
Assessment Appeals, contending that the Tax
Declaration previously classifying their
property as residential is binding. How
should the appeal be decided? (2002 BAR)
A: The appeal should be decided against Mr. and
Mrs. Angeles. The law focuses on the actual use
of the property for classification, valuation and
assessment purposes regardless of ownership.
Section 217 of the LGC provides that "real
property shall be classified, valued, and assessed
on the basis of its actual use regardless of where
located, whoever owns it, and whoever uses it".
Q: The Philippine-British Association, Inc.
(Association) is a non-stock, non-profit
organization which owns the St. Michael's
Hospital (Hospital) Sec. 216 in relation to
Sec. 215 of the LGC classifies all lands,
buildings and other improvements thereon
actually, directly, and exclusively used for
hospitals as "special." A special classification
prescribes a lower assessment than a
commercial classification.
Within the premises of the Hospital, the
Association constructed the St. Michael's
Medical Arts Center (Center) which will
 Local Taxation
house medical practitioners who will lease
the spaces therein for their clinics at
prescribed rental rates. The doctors who
treat the patients confined in the Hospital
are accredited by the Association.
The City Assessor classified the Center as
"commercial" instead of "special" on the
ground that the Hospital owner gets income
from the lease of its spaces to doctors who
also entertain out-patients. Is the City
Assessor correct in classifying the Center as
"commercial?" Explain. (2016 BAR)
A: NO. The City Assessor is not correct in
classifying the Center as “commercial.”
The fact alone that the separate St. Michael’s
Medical Arts Center will house medical
practitioners who shall treat the patients
confined in the Hospital and are accredited by
the Association takes away the said Medical Arts
Center from being categorized as “commercial”
since a tertiary hospital is required by law to
have a pool of physicians who comprise the
required medical departments in various
medical fields. (City Assessor of Cebu City v
Association of Benevola de Cebu, Inc., 524 SCRA
128 (2007)); (Domondon)
Assessment of Property
Assessment is the act or process of determining
the value of a property, or proportion thereof
subject to tax, including the discovery, listing,
classification, and appraisal of properties (Sec.
199(f), LGC)
Reassessment is the assigning of new assessed
values to property, particularly real estate, as
the result of a general, partial, or individual
reappraisal of the property (Sec. 199(q), LGC)
Effect of assessment
An assessment fixes and determines the tax
liability of the taxpayer. It is a notice to the effect
that the amount therein stated is due as tax and
a demand for payment thereof.
Instances when the provincial, city, or
municipal assessor or his duly authorized
deputy shall make classification, appraisal,
and assessment of real property irrespective
of any previous assessment or taxpayers’
valuation thereon (1st GR)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
1. Real property is declared and listed for
taxation purposes for the 1sttime
2. There is an ongoing general revision of
property classification and assessment
3. A request is made by the person in whose
name the property is declared assessor shall
make a classification, appraisal and
assessment or taxpayer's valuation (Sec.
220, LGC)
NOTE: Provided, however, that the assessment
of real property shall not be increased oftener
than once every 3 years except in case of new
improvements substantially increasing the value
of said property or of any change in its actual
use.
Assessment levels
Assessment level is the percentage applied to
the fair market value to determine the taxable
value of the property (Sec. 199(g), LGC)
The assessment levels to be applied to the fair
market value of real property to determine its
assessed value shall be fixed by ordinances of
the sangguniang panlalawigan, sangguniang
panlungsod or sangguniang bayan of a
municipality within the Metropolitan Manila
Area, at the rates not exceeding those
enumerated under Sec 218 of the LGC.
General revisions of assessments and
property classifications
The provincial, city, or municipal assessor shall
undertake a general revision of real property
assessments within 2 years after the effectivity
of this Code and every 3 years thereafter (Sec.
219, LGC)
Date of effectivity of assessment or
reassessment
All assessments or reassessments made after the
1st day of January of any year shall take effect on
the 1st day of January of the succeeding year:
Provided, however, That the reassessment of real
property due to its partial or total destruction,
or to a major change in its actual use, or to any
great and sudden inflation or deflation of real
property values, or to the gross illegality of the
assessment when made or to any other
abnormal cause, shall be made within 90 days
from the date of any such cause or causes
occurred, and shall take effect at the beginning
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 Taxation Law
of the quarter next following the reassessment.
(Sec. 221, LGC)
Q: St. Thomas Mall has requested that its real
property assessment be made effective on
2017, considering that the soft opening of the
mall was on 12 September 2015 and the
formal opening was in March 2016 only with
a Certificate of Occupancy permit being
issued by the Office of the City Engineer. Is
the RPT assessment reckoned from the date
the building was completed or from the time
it was issued a certificate of occupancy?
A: A new building, whether wholly completed or
partly completed, but occupied by the owner,
shall be subject to RPT beginning from the year
following that in which the same was completed
or rendered habitable. Under Section 221, LGC,
the date of effectivity of the assessment or
reassessment made after January 1 shall take
effect on the January 1 of the succeeding year.
The Manual on Real Property Appraisal and
Assessment Operation under Local Assessment
Regulation No. 1-04 provides that the appraisal
of the building shall be in accordance with the
approved Schedule of Base Unit Construction
Cost (SBUCC) for buildings and supported by a
copy of the approved building permit, building
plan, and/or Certificate of Completion or
Certificate of Occupancy permit from local
official concerned, among others.
In sum, the real property assessment of St.
Thomas Mall can only be made no earlier than
the issuance of the Certificate of Occupancy
permit in 2016, and the resulting assessment
thereon can only take effect in 2017, which is the
year following the date of assessment. (BLGF
Opinion, November 3, 2016)
Assessment of Real Property Subject to Back
Taxes
Real property declared for the first time shall be
assessed for taxes (back taxes) for the period
during which it would have been liable but in no
case of more than 10 years prior to the date of
initial assessment: Provided, however, that such
taxes shall be computed on the basis of the
applicable schedule of values in force during the
corresponding period.
If such taxes are paid on or before the end of the
409
quarter following the date the notice of
assessment was received by the owner, no
interest for delinquency shall be imposed
thereon; otherwise, taxes shall be subject to
interest at the rate of 2% per month or a fraction
thereof from the date of the receipt of the
assessment until such taxes are fully paid. (Sec.
222, LGC)
Notification of New or Revised Assessments
Assessor shall give a written notice to the person
whose property is assessed in case of new or
revised assessment.
When real property is assessed for the first time
or when an existing assessment is increased or
decreased, the provincial, city, or municipal
assessor shall within 30 days give written notice
of such new or revised assessment to the person
in whose name the property is declared. The
notice may be delivered personally or by
registered mail or through the assistance of the
punong barangay to the last known address of
the person to be served. (Sec. 223, LGC)
Appraisal and assessment of machinery
Classification of Machineries: (Sec. 199(o),
LGC)
A. Realty by Destination – Machinery
essential to the business
NOTE: Movable equipment to be
immobilized in contemplation of the law
must first be “essential and principal
elements” of an industry or works without
which such industry or works would be
“unable to function or carry on the
industrial purpose for which it was
established”. (Mindanao Bus Co. v. City
Assessor, G.R. no. L-17870, September 29,
1962)
B. Realty by Incorporation – Machinery
permanently attached
Appraisal and Assessment of Machinery
1. For brand new machinery, FMV is the
acquisition cost
2. In all other cases:
 Local Taxation
3. Depreciation allowance:
a. Rate not exceeding 5% of original cost
OR replacement or reproduction cost
for each year of use;
b. Remaining value shall be fixed at not
less than 20% of the cost;
c. Machinery remains useful and in
operation
COLLECTION
DATE OF ACCRUAL
Real property tax for any year shall accrue on
the first day of January. From that date it shall
constitute a lien on the property superior to any
other lien, mortgage, or encumbrance of any
kind whatsoever extinguished only upon the
payment of the delinquent tax. (Sec. 246, LGC)
Q: XYZ Company is an Ecozone Export
Enterprise registered with the Philippine
Economic Zone Authority (PEZA) It started
its operations in October 2014 and enjoys a
four-year income tax holiday (ITH) which
will expire on September 30, 2018, after
which it shall become subject to the 5% gross
income tax (GIT), in lieu of all national and
local taxes.
For fiscal year 2018, XYZ Company paid in
advance its RPT. However, it paid under
protest the RPT for the fourth quarter of FY
2018 claiming that by that time, XYZ
Company is already under the GIT tax
incentive.
Is XYZ Company subject to RPT for the fourth
quarter of 2018?
A: YES. The RPT for any year shall accrue on the
first day of January from the start of the
commercial operation (e.g., January of every
year) and not on the date of the start of its
commercial operation (e.g., October 2014) While
it may be true that the 5% GIT incentive shall be
applied to XYZ Company at the time of
expiration of its ITH, it cannot, however, apply to
RPT since its accrual begins on the first day of
January on the year following its operation.
Hence for RPT purposes, the GIT incentive
claimed by XYZ Company. will be applied in
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
January 2019 and not on the fourth quarter of FY
2018. Thus, XYZ Company. is subject to RPT for
the whole year of 2018. (BLGF Opinion, July 11,
2017)
Collection of Taxes
Collecting authority
GR: The collection of real property tax with
interest thereon and related expenses, and the
enforcement of the remedies are the
responsibility of the city or municipal treasurer.
XPN: Treasurer may deputize the barangay
treasurer to collect all taxes on real property
located in the barangay, provided that:
1. The barangay treasurer is properly bonded
for the purpose: provided, further,
2. The premium on the bond shall be paid by
the city or municipal government
concerned. (Sec. 247, LGC)
Duty of assessor to furnish local treasurer
with assessment rolls
The provincial, city, or municipal assessor shall
prepare and submit to the treasurer of the LGU,
on or before the 31st day of December each year,
an assessment roll containing a list of all persons
whose real properties have been newly assessed
or reassessed and the values of such properties.
(Sec. 248, LGC)
Notice of time for collection of taxes
Treasurer shall post the notice of the dates when
the tax may be paid without interest in a publicly
accessible place at the city or municipal hall.
Notice shall likewise be published in a
newspaper of general circulation in the locality
once a week for two consecutive weeks on or
before the 31st day of January each year in the
case of the basic real property tax and the
additional tax for the Special Education Fund or
any other date to be prescribed by the
sanggunian concerned in the case of any other
tax levied under this title. (Sec. 249, LGC)
PERIODS TO COLLECT
Both the Local Tax Code (LTC) and the Real
Property Tax Code (RPTC) do not have any
provision on prescription of the assessment and
collection of government taxes and other
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 Taxation Law
revenues. However, the LTC does not prohibit
the local government from providing for
prescription in its tax ordinances, and under Sec.
25 of RPTC, real properties declared for the first
cannot be assessed for back taxes for more than
10 years.
Period of collection of real property tax
under local government code
GR: Within 5 years from the date taxes become
due.
XPN: In case of fraud or intent to evade payment
- within 10 years from discovery of fraud or
intent. (Sec. 270, LGC)
Prescriptive period to collect is suspended
The period of prescription within which to
collect shall be suspended for the time during
which: (PRO)
1. The local treasurer is legally prevented from
collecting the tax;
2. The owner of the property or the person
having legal interest therein requests for
reinvestigation and executes a waiver in
writing before the expiration of the period
within which to collect; and
3. The owner of the property or the person
having legal interest therein is out of the
country or otherwise cannot be located.
Tax discount for advanced/prompt payment
If the basic real property tax and the additional
tax accruing to the Special Education Fund (SEF)
are paid in advance the sanggunian may grant a
discount not exceeding 20% of the annual tax
due. (Sec. 251, LGC)
NOTE: For prompt payment – discount not
exceeding 10% of annual tax due. (Art. 342, IRR)
Special Rules on Payment
Payment of real property taxes in installment
The owner or the person having legal interest
may pay the basic real property tax and the
additional tax for Special Education Fund (SEF)
due without interest in four equal installments
(on or before March 31/June30/September
30/December 31). (Sec. 250, LGC)
411
Interest on unpaid real property taxes
The rate is (2%) per month on the unpaid
amount until the delinquent tax shall have been
fully paid. Provided, in no case shall the total
interest on the unpaid tax or portion thereof
exceed 36 months. (Sec. 255, LGC)
Disposition of proceeds
Proceeds of real property tax, including interest
thereon plus proceeds from the use, lease or
disposition, sale or redemption of property
acquired at a public auction shall be distributed
as follows:
1. In the case of provinces:
a. Province —35% shall accrue to the
general fund;
b. Municipality —40% to the general fund
of the municipality where the property
is located; and
c. Barangay —25% shall accrue to the
barangay where the property is located.
2. In the case of cities:
a. City –70% shall accrue to the general
fund of the city; and
b. Component barangays – 30% shall be
distributed among the component
barangays of the cities where the
property is located in the following
manner:
i. 50% shall accrue to the barangay
where the property is located;
and
ii. 50% shall accrue equally to all
component barangays of the city.
3. In the case of a municipality within the
Metropolitan Manila Area:
a. Metropolitan Manila Authority – 35%
shall accrue to the general fund of the
authority;
b. Municipality – 35% shall accrue to the
general fund of the municipality where
the property is located;
c. Barangays – 30% shall be distributed
among the component barangays of the
municipality where the property is
located in the following manner:
i. 50% shall accrue to the barangay
where the property is located;
 Local Taxation
ii. 50% shall accrue equally to all
component barangays of the
municipality. (Sec. 271, LGC)
NOTE: The share of each barangay shall be
released, without need of any further action,
directly to the barangay treasurer on a quarterly
basis within 5 days after the end of each quarter
and shall not be subject to any lien or holdback
for whatever purpose.
Application of the proceeds of the additional
one percent SEF tax
The proceeds from the additional 1% tax on real
property accruing to the Special Education Fund
(SEF):
1. Shall be automatically released to the local
school boards, provided, in case of
provinces, the proceeds shall be divided
equally between the provincial and
municipal school boards
2. The proceeds shall be allocated for the:
a. Operation and maintenance of public
schools;
b. Construction and repair of school
buildings, facilities and equipment;
c. Educational research;
d. Purchase of books and periodicals;
e. Sports development as determined
and approved by the Local School
Board
Proceeds of the tax on idle lands
It shall accrue to the:
1. Respective general fund of the province
or city where the land is located
2. In the case of a municipality within the
Metropolitan Manila Area, the proceeds
shall accrue equally to the Metropolitan
Manila Authority and the municipality
where the land is located. (Sec. 273, LGC)
Proceeds of the special levy
The proceeds of the special levy on lands
benefited by public works, projects and other
improvements shall accrue to the general fund of
the LGU which financed such public works,
projects or other improvements. (Sec. 274, LGC)
REMEDIES OF LOCAL GOVERNMENT UNITS
Issuance of delinquency notice for real
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
property tax payment
When real property tax or other tax imposed
becomes delinquent, the local treasurer shall
immediately cause a notice of the delinquency to
be posted at the main hall and in a publicly
accessible and conspicuous place in each
barangay of the LGU concerned. Notice of
delinquency shall also be published once a week
for two (2) consecutive weeks, in a newspaper of
general circulation in the province, city, or
municipality.
LGU’s lien
Guidelines in the exercise of local government
lien
1. A legal claim on the property subject on the
real property tax as security for the payment
of tax obligation.
2. It is constituted on the property subject to
the tax from the date the RPT accrued, i.e.,
January 1 (Sec. 246, LGC)
3. It is superior to any lien, mortgage, or
encumbrance of any kind whatsoever (Sec.
246, LGC) in favor of any person,
irrespective of the owner or possessor
thereof. (Sec. 257, LGC)
4. It is enforceable by administrative or
judicial action. (Sec. 257, LGC)
5. It may be extinguished only upon payment
of the tax and related interests and
expenses. (Sec. 246 and 257, LGC)
Remedies in general
Remedies of the LGUs for the collection of
real property tax
1. Administrative action
a. Exercise of lien on the property subject
to tax
i. Superior to all liens, charges or
encumbrances and is enforceable
by administrative or judicial action.
It is extinguished only upon
payment of tax and other expenses
(Sec. 257, LGC)
b. Levy on the real property subject of the
tax
c. Distraint of personal property
2. Judicial action
Right of redemption of owner of the
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 Taxation Law
delinquent property
Within 1 year from the date of sale, the owner
of the delinquent real property or person having
legal interest therein, or his representative, shall
have the right to redeem the property upon
payment to the local treasurer of the:
1. Amount of the delinquent tax
2. The interest due thereon
3. The expenses of sale from the date of
delinquency to the date of sale
4. Plus interest of not more than 2% per
month on the purchase price from the date
of sale to the date of redemption (Sec.261,
LGC)
Effect of the redemption of the delinquent
property
Such payment shall invalidate the certificate of
sale issued to the purchaser and the owner of
the delinquent real property or person having
legal interest therein shall be entitled to a
certificate of redemption which shall be issued
by the local treasurer or his deputy. (Ibid.)
NOTE: From the date of sale until the expiration
of the period of redemption, the delinquent real
property shall remain in possession of the
owner or person having legal interest therein
who shall be entitled to the income and other
fruits thereof.
Effect of failure to redeem
In case the owner or person having legal interest
fails to redeem the delinquent property, the
treasurer shall execute a deed conveying to the
purchaser said property, free from lien of the
delinquent tax, interest due thereon and
expenses of sale.
Right of Pre-emption
At any time before the date fixed for the sale, the
taxpayer may stay the proceedings by paying the
taxes, fees, charged, penalties, and interests.
Distraint of personal property how effected
under real property taxation
When notice of delinquency has been
accordingly posted and published, the local
treasurer shall proceed to sell the personal
property of the delinquent taxpayer in order to
413
satisfy his unpaid obligation. (Sec. 254, LGC)
Q: Quezon City published on January 30,
2006 a list of delinquent real property
taxpayers in 2 newspapers of general
circulation and posted this in the main lobby
of the City Hall. The notice requires all
owners of real properties in the list to pay
the real property tax due within 30 days
from the date of publication, otherwise the
properties listed shall be sold at public
auction.
Joachin is one of those named in the list. He
purchased a real property in 1996 but failed
to register the document of sale with the
register of Deeds and secure a new real
property tax declaration in his name. He
alleged that the auction sale of his property
is void for lack of due process considering
that the City Treasurer did not send him
personal notice. For his part, the City
Treasurer maintains that the publication and
posting of notice are sufficient compliance
with the requirements of the law.
a. If you were the judge, how will you
resolve this issue?
b. Assuming Joachin is a registered owner,
will your answer be the same? (2006
BAR)
A:
a. I will resolve the issue in favor of Joachin. In
auction sales of property for tax
delinquency, notice to delinquent
landowners and to the public in general is
an essential and indispensable requirement
of law, the non-fulfillment of which vitiates
the same. (Tiongco v. Phil. Veterans Bank,
G.R. No. 82782, Aug. 5, 1992)
The failure to give notice to the right person
i.e., the real owner, will render an auction
sale void. (Tan v. Bantegui, G.R. No. 154027,
Oct. 24, 2005; City Treasurer of Q.C. v. CA, G.R.
No. 120974, Dec. 22, 1997)
b. YES. The law requires that a notice of the
auction sale must be properly sent to
Joachin and not merely through publication.
(Tan v. Bantegui, G.R. No, 154027, October 24,
2005; Estate of Mercedes Jacob v. CA, G.R. No.
120435, Dec. 22, 1997)
 Local Taxation
LGUs may purchase real property advertised The sanggunian concerned may, by ordinance
for sale when duly approved an upon notice of not less than
twenty (20) days, sell and dispose of the real
1. There is no bidder; or property acquired under the preceding Section
2. The highest bid is for an amount insufficient at public auction. The proceeds of the sale shall
to pay the real property tax, fees, charges, accrue to the general fund of the LGU concerned.
surcharges, interests or penalties. (Sec. 263, (Sec. 264, LGC)
LGC)
Further levy until full payment of amount
Resale of real estate taken for taxes, fees, or due
charges
Levy may be repeated if necessary until the full
Sanggunian may dispose of the real property amount due, including all expenses, is collected.
acquired. (Sec. 265, LGC)

UNIVERSITY OF SANTO TOMAS 414

2021 GOLDEN NOTES
 Taxation Law
Procedure for Levy for Purposes of Satisfying Real Property Taxes Local Government Code

Tax constitutes a lien on the property superior to all liens and may only be extinguished upon payment of the tax and charges.
(Sec. 257, LGC) Issuance of the certificate of sale to the purchaser. (Sec. 178, LGC)

Time for payment of real property tax expires. (Sec. 258, LGC) The delinquent taxpayer has one (1) year from the date of
sale to redeem the property. If property is redeemed, a certificate of redemption will be issued. (Sec. 179, LGC)

Warrant of levy issued by LT which has the force of legal execution in the LGU concerned, warrant of levy issued by LT, which has the
force of legal execution in the LGU concerned. If property is not redeemed, a final deed of sale shall be issued to the purchaser.

Warrant mailed to or served upon the delinquent owner. Written notice of levy and warrant is mailed/served upon the
assessor and the Register of Deeds of the LGU (Sec. 258, LGC) The local treasurer shall purchase the property on behalf of the
LGU if: a.) There is no bidder b.) The highest bid is insufficient to pay the deficiency tax. (Sec. 181, LGC)

Before the date of sale, the owner may

30 days from service of warrant, Sale is held
stay the proceedings by paying the
LT shall advertise sale of (Sec. 260, LGC)
delinquent tax, interest and expenses of property (Sec. 260, LGC)
sale (Sec 260, LGC)

IF there is a bidder AND highest bid is sufficient to IF there is no bidder OR highest bid is
pay real property tax and related interests and costs, insufficient to pay real property tax
bidder pays and treasurer reports sale to sanggunian and related interest and costs, LT
30 days after the sale. LT will deliver to purchaser the shall purchase the prop in behalf of
certificate of sale. Proceeds of sale in excess of the LGU.
delinquent tax, interest, expenses of sale remitted to
owner. (Sec. 260, LGC) Registrar of Deeds shall transfer the
title of forfeited prop to LGU without
Within one year from sale, owner may redeem upon need of Court order.
payment of the delinquent tax, interest due, expenses
of sale (from date of delinquency to date of sale), and Within one year from forfeiture,
additional interest of 2% per month on the purchase owner may redeem prop by paying to
price from date of sale to date of redemption. Treasurer full amount of tax, interest,
Delinquent owner retains possession and right to the costs of sale. (Sec. 263, LGC)
fruits. Price paid plus interest of 2% per month shall
be returned to the buyer. (Sec. 261, LGC) Sanggunian concerned may by
ordinance, sell/dispose by public
IF not redeemed, deed of conveyance shall be issued auction of prop acquired by
to the purchaser. (Sec. 262, LGC) forfeiture. (Sec. 264, LGC)

Levy may be repeated until full amount due; including all expenses is collected (Sec.
265, LGC)

415
 Local Taxation
TAXPTAXPAYER’S REMEDIES
AVAILABLE REMEDIES TO THE TAXPAYER
UNDER REAL PROPERTY TAXATION
1. Dispute assessment (Protest)
1. Any owner or person having legal
interest in the property who is not
satisfied with the action of the assessor
in the assessment of his property; or
2. Any owner of real property affected by a
special levy or any person having legal
interest therein may protest the
assessment by filing an appeal to the
LBAA within 60 days from receipt of
notice of the assessment.
2. Claim for refund or tax credit;
3. Redemption of Real Property (Sec. 261, LGC)
4. Judicial
a. Court Action
i. Appeal to the CTA en banc within
15 days from receipt in case of
adverse decision by the CBAA
ii. Appeal by certiorari with the SC
within 15 days from notice in case
of adverse decision by the CTA
b. Suit assailing the validity of the tax sale
(Sec. 267, LGC)
Deposit of amount for which the real
property was sold together with
interest of 2% per month from date of
sale to the time of institution of action.
Q: Madam X owns real property in Caloocan
City. On July 1, 2014, she received a notice of
assessment from the City Assessor, informing
her of a deficiency tax on her property. She
wants to contest the assessment.
a. What are the administrative remedies
available to Madam X in order to contest
the assessment and their respective
prescriptive periods?
b. May Madam X refuse to pay the
deficiency tax assessment during the
pendency of her appeal? (2014 Bar)
A:
a. The administrative remedies available to
Madam X to contest the assessment and
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
their respective prescriptive periods are as
follows:
1. Pay the deficiency real property tax
under protest (Section 252, LGC);
2. File the protest with the local treasurer
– The protest in writing muse be filed
within 30 days from payment of the tax
to the provincial, city, or municipal
treasurer, in the case of a municipality
within Metropolitan Manila Area, who
shall decide the protest within 60 days
from receipt (Section 252, LGC);
3. Appeal to the LBAA – If protest is denied
or upon the lapse of the 60-day period
for the treasurer to decide, the taxpayer
may appeal to the LBAA within 60 days
and the case decided within 120 days
(Section 226 & 229, LGC); and
4. Appeal to the CBAA – If not satisfied
with the decision of the LBAA, appeal to
the CBAA within 30 days from receipt of
a copy of the decision. (Section 229(c),
LGC)
b. NO. The payment of the deficiency tax is a
condition before she can protest the
deficiency assessment. It is the decision on
the protest or inaction thereon that gives
her the right to appeal. This means that she
cannot refuse to pay the deficiency tax
assessment during the pendency of the
appeal because it is the payment itself which
gives rise to the remedy. The law provides
that no protest (which is the beginning of
the disputation process) shall be
entertained unless the taxpayer first pays
the tax. (Section 252, LGC)
CONTESTING AN ASSESSMENT
Available remedy for a taxpayer contesting
an assessment
Any owner or person having legal interest in the
property not satisfied with the action of the
assessor in the assessment of his property may
within 60 days from the date of receipt of the
written notice of assessment appeal to the Board
of Assessment Appeals of the provincial or city
by filing a petition under oath in the form
prescribed for the purpose, together with copies
of the tax declarations and such affidavits or
documents submitted in support of the appeal.
(Sec. 226, LGC)
416
 Taxation Law
Payment under protest; exceptions
Reason for the necessity of prior payment
before protest may be entertained by the
courts
The basis for requiring payment before protest
can be entertained is that taxes are the lifeblood
of the nation and as such collection cannot be
restrained by injunction or any like action.
(Manila Electric Company v. Barlis, et. al., G.R. No.
114231, May 18, 2001)
Rules as to the necessity of paying real
property tax prior to protest
GR: The taxpayer must pay the real property tax
assessed prior to protesting a real property tax
assessment. (Sec. 252, LGC)
XPN: The payment of the tax prior to protest is
not necessary where the taxpayer questions the
authority and power of the assessor to impose
the assessment and of the treasurer to collect
the tax. (Ty, et. al., v. Trampe, G.R. No. 117577.
December 1, 1995)
NOTE: The protest contemplated under Section
252 is required where there is a question as to
the reasonableness or correctness of the amount
assessed. Hence, if a taxpayer disputes the
reasonableness of an increase in a real property
tax assessment, he is required to “first pay the
tax” under protest. Otherwise, the city or
municipal treasurer will not act on his protest.
(Ibid.)
Q: The Province of Quezon assessed Mirant
Pagbilao Corporation (Mirant) for unpaid
real property taxes. Napocor, which entered
into a Build-Operate-Transfer (BOT)
Agreement with Mirant, protested the
assessment before the Local Board of
Assessment Appeals (LBAA), claiming
entitlement to the tax exemptions provided
under Section 234 of the Local Government
Code (LGC) The real property taxes assessed
were not paid prior to the protest. The LBAA
dismissed Napocor’s petition for exemption
for its failure to comply with Section 252 of
the LGC requiring payment of the assailed tax
before any protest can be made. The Central
Board of Assessment Appeals (CBAA)
ultimately dismissed Napocor’s appeal for
failure to meet the requirements for tax
417
exemption; however, the CBAA agreed with
Napocor’s position that the protest
contemplated in Section 252 (a) is applicable
only when the taxpayer is questioning the
reasonableness or excessiveness of an
assessment. The CBAA ruled that the
requirement of payment prior to protest
does not apply where the legality of the
assessment is put in issue on account of the
taxpayer’s claim that it is exempt from tax.
The CTA en banc agreed with the CBAA’s
discussion.
1. If the taxpayer claims that the property is
exempt from real property tax, is the
taxpayer required to pay the tax
pursuant to Section 252?
2. Is Napocor’s action before the LBAA
prematurely filed?
A:
1. YES. By claiming exemption from realty
taxation, Napocor is simply raising a
question of the correctness of the
assessment. As such, the real property tax
must be paid prior to the making of a
protest. On the other hand, if the taxpayer is
questioning the authority of the local
assessor to assess real property taxes, it is
not necessary to pay the real property tax
prior to the protest. A claim for tax
exemption, whether full or partial, does not
question the authority of local assessor to
assess real property tax.
2. YES. It was an ill-advised move for Napocor
to directly file an appeal with the LBAA
under Section 226 without first paying the
tax as required under Section 252. Sections
252 and 226 provide successive
administrative remedies to a taxpayer who
questions the correctness of an assessment.
Section 226, in declaring that “any owner or
person having legal interest in the property
who is not satisfied with the action of the
provincial, city, or municipal assessor in the
assessment of his property may appeal to the
Board of Assessment Appeals,” should be
read in conjunction with Section 252 (d),
which states that in the event that the protest
is denied, the taxpayer may avail of the
remedies as provided for in Chapter 3, Title II,
Book II of the LGC (Chapter 3 refers to
Assessment Appeals, which includes
Sections 226 to 231). The “action” referred
to in Section 226 (in relation to a protest of
 Local Taxation
real property tax assessment) thus refers to
the local assessor’s act of denying the
protest filed pursuant to Section 252.
Without the action of the local assessor, the
appellate authority of the LBAA cannot be
invoked. Napocor’s action before the LBAA
was thus prematurely filed (NAPOCOR v.
Province of Quezon, G.R. No. 171586, January
25, 2010)
File protest with Treasurer
Guidelines in paying tax under protest
1. No protest shall be entertained unless the
taxpayer first pays the tax. There shall be
annotated on the tax receipts the words
"paid under protest" The protest in writing
must be filed within 30 days from payment
of the tax to treasurer who shall decide the
protest within 60 days from receipt.
2. The tax or a portion paid under protest shall
be held in trust by the treasurer concerned.
3. In the event that the protest is finally
decided in favor of the taxpayer, the amount
or portion of the tax protested shall be
refunded to the protestant or applied as tax
credit against his existing or future tax
liability.
4. In the event that the protest is denied or
upon the lapse of the 60-day period, the
taxpayer may avail appeal the assessment
before the Local Board of Assessment
Appeals. (Sec. 252, LGC)
5. In case there is adverse decision by the
LBAA, the taxpayer may appeal with the
CBAA within 30 from receipt of the adverse
decision by the LBAA.
XPN: The protest contemplated in Section 252 of
the LGC is needed when there is a question as to
the reasonableness of the amount assessed, not
where the question raised is on the very
authority and power of the assessor to impose
the assessment and of the treasurer to collect
the tax. (Ty v. Trampe, G. R. No. 117577,
December 1, 1995)
By posting the surety bond, a taxpayer may be
considered to have substantially complied with
Section 252 of the LGC for the said bond already
guarantees the payment to the Office of the Local
Treasurer of the total amount of real property
taxes and penalties due. (Camp John Hay
Development Corporation v. Central Board of
Assessment Appeals, G.R. No. 169234, October 2,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
2013)
Q: ABC, Inc. owns a 950-square meter
commercial lot in Quezon City. It received a
notice of assessment from the City Assessor,
subjecting the property to real property
taxes (RPT) Believing the assessment was
erroneous, ABC, Inc. filed a protest with the
City Treasurer. However, for failure to pay
the RPT, the City Treasurer dismissed the
protest.
a. Was the City Treasurer correct in
dismissing ABC, Inc.’s protest?
b. Assuming that ABC, Inc. decides to
appeal the dismissal, where should the
appeal be filed? (2019 BAR)
A:
a. YES, the City Treasurer was correct in
dismissing ABC Inc.’s protest.
Under Section 252 of the Local Government
Code, no protest shall be entertained unless
the taxpayer first pays the tax, in which the
words “paid under protest” shall be
annotated on the tax receipts.
Here, ABC, Inc. failed to first pay the real
property tax assessed by the Quezon City
when it filed a protest before the City
Treasurer.
b. Assuming that ABC, Inc. decides to appeal
the dismissal, the appeal should be filed
with the Local Board of Assessment
Appeals (LBAA).
If the local treasurer denies the protest or
fails to act upon it within the 60-day period
provided for in Section 252, the
taxpayer/real property owner may then
appeal or directly file a verified petition
with the LBAA within sixty days from
denial of the protest or receipt of the notice
of assessment, as provided in Section 226 of
R.A. No. 7160.
Refunds or credits of real property taxes
Remedy of a taxpayer in case of excessive
collections
The taxpayer may file a written claim for refund
or credit for taxes and interests with the local
treasurer, in case an assessment of RPT or any
418
 Taxation Law
other tax under Real Property Taxation (Title II, expiration of 60
LGC) is found to be illegal or erroneous (Sec. 253, days.
LGC) The LBAA has 120 The decision of the
days from receipt RTC is appealable to
Period for claim for refund of the appeal to the CTA (in division)
decide. by way of petition for
The claim must be filed with the local treasurer review.
within two (2) years from the date the taxpayer Taxpayer may The decision of CTA in
is entitled to such reduction or adjustment appeal the decision division may be the
(Ibid.) of LBAA to CBAA subject of a review by
within 30 days CTA en banc.
Procedure for claim for refund or credit from receipt of the
decision.
Taxpayer files a written claim for refund or credit The adverse The decision of CTA
with the treasurer within 2 years from the date the decision of CBAA enbanc may be
taxpayer is entitled to such reduction or adjustment. may be appealed to appealed to the SC by
the CTA in division way of petition for
within 30 days review on certiorari
from receipt of within 15 days from
Provincial or City Treasurer should decide the
decision. the receipt of decision.
claim within 60 days from receipt of the
claim. The decision of CTA
division may be
subjected to a
In case of denial, appeal to the LBAA within Motion for
30 days as in protest case. Reconsideration or
New Trial before
the CTA en banc,
and thereafter, an
Appeal to CBAA within 30 days if LBAA gives appeal to SC by
an adverse decision. means of petition
for review on
certiorari.
PROCEDURE FOR PROCEDURE FOR
TAX REFUND TAX REFFUND BASED Q: In view of the street widening and
BASED ON ON SOLUTIO cementing of roads and improvement of
UNREASONABLE INDEBITI drainage and sewers in the district of Ermita,
COLLECTION OF the City Council of the City of Manila passed
RPT an ordinance imposing and collecting a
Payment under Payment under special levy on lands in the district. Jose filed
protest at the time protest is NOT a protest against the special levy fifteen (15)
of payment or required. days after the last publication of the
within 30 days ordinance alleging that the maximum rate
thereafter is 60% of actual cost of the project allowed
MANDATORY. under Sec. 240 of the LGC was exceeded.
Treasurer has 60 Treasurer has 60 days
days from receipt from claim for refund Assuming that Jose Reyes is able to prove
of the protest to to decide on the claim. that the rate of special levy is more than the
decide. aforesaid percentage limitation, will his
protest prosper? (1991 BAR)
Taxpayer may Treasurer’s denial
appeal the decision would bring the case
A: No. His basis for the protest was the
or inaction of the within the original
unreasonably excessive payment. Payment
treasurer to the jurisdiction of the RTC.
under protest is thus an administrative
LBAA within 30
precondition for the suit.
days from receipt
of the decision or

419
 Local Taxation
Repayment of Excessive Collections
Remedy available for a taxpayer whose real
property was erroneously assessed
When an assessment of basic real property tax,
or any other tax levied under this Title, is found
to be illegal or erroneous and the tax is
accordingly reduced or adjusted, the taxpayer
may file a written claim for refund or credit for
taxes and interests with the provincial or city
treasurer within 2 years from the date the
taxpayer is entitled to such reduction or
adjustment. (Sec. 253, LGC)
CONTESTING A VALUATION
OF REAL PROPERTY
Appeal to the Local Board of Assessment
Appeals (LBAA)
Composition of the LBAA
1. The Registrar of Deeds, as Chairman;
2. The provincial or city prosecutor as
member;
3. The provincial or city engineer as a member
(Sec. 227, LGC)
Jurisdiction of the LBAA
LBAA has Jurisdiction to hear appeals of owners
or persons having legal interest in the property
who are not satisfied with the action of the
assessor on an assessment of his property.
NOTE: In the exercise of its appellate
jurisdiction, the LBAA shall have the power to
1. summon witnesses,
2. administer oaths,
3. conduct ocular inspection,
4. take depositions, and
5. issue subpoena and subpoena duces tecum.
The proceedings of the Board shall be conducted
solely for the purpose of ascertaining the facts
without necessarily adhering to technical rules
applicable in judicial proceedings (Sec. 229(b),
LGC)
Period for the decision of an appeal
The LBAA shall decide the appeal within 120
days from the date of receipt of such appeal. The
Board, after hearing, shall render its decision
based on substantial evidence or such relevant
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
evidence on record as a reasonable mind might
accept as adequate to support the conclusion
(Sec 229(a), LGC)
Appeal to the Central Board of Assessment
Appeals (CBAA)
Composition of the CBAA
1. A Chairman; and
2. Two (2) members (Sec. 230, LGC)
Jurisdiction of the CBAA
The Board shall have appellate jurisdiction over
all assessment cases decided by the LBAA. (Sec.
230, LGC)
NOTE: The CBAA can be appointed by the
Supreme Court to act as a court-appointed fact-
finding commission to assist the Court in
resolving the factual issues raised in the cases
before it. In that regard, the CBAA is not acting in
its appellate jurisdiction. (Mathay v.
Undersecretary of Finance, En banc Minute
Resolution, Nov. 5, 1991)
The owner of the property or the person having
legal interest therein or the assessor who is not
satisfied with the decision of the Board may,
within 30 days after receipt of the decision of
said Board, appeal to the Central Board of
Assessment Appeals, as herein provided. The
decision of the Central Board shall be final and
executory. (Sec. 229(c), LGC)
CBAA has NO authority to hear purely legal
issues
Such authority is lodged with the regular courts.
Thus, the issue of whether R.A. 7160 repealed
P.D. 921, is an issue which does not find referral
to the CBAA before resort is made to the courts.
(Ty, v. Trampe, G.R. No. 117577. December 1,
1995)
Appeal to LBAA or CBAA do NOT suspend the
collection of tax
An appeal on assessments of real property shall
in no case, suspend the collection of the
corresponding realty taxes the property
involved as assessed. This is without prejudice
to subsequent adjustment depending upon the
final outcome of the appeal. (Sec. 231)
420
 Taxation Law
NOTE: No court shall have the authority to
enjoin or restrain the collection of any tax, fee, or
charge collected by the provincial, city or
municipal treasurer. “No injunction rule”
Q: A Co., a Philippine corporation, is the
owner of machinery, equipment and fixtures
located at its plant in Muntinlupa City. The
City Assessor characterized all these
properties as real properties subject to the
real property tax. A Co. appealed the matter
to the Muntinlupa Board of Assessment
Appeals. The Board ruled in favor of the City.
A Co. brought a petition for review before the
CTA to appeal the decision of the City Board
of Assessment Appeals. Is the Petition for
Review proper? Explain. (1999 BAR)
A: NO. The CTA’s devoid of jurisdiction to
entertain appeals from the decision of the City
Board of Assessment Appeals. Said decision is
instead appealable to the Central Board of
Assessment Appeals, which under the LGC, has
appellate jurisdiction over decisions of LBAA.
(Caltex Phils. v. CBAA, G.R. No. L50466, May 31,
1982)
Instances where CTA (En Banc) has exclusive
appellate jurisdiction over cases filed with
CBAA
1. In the exercise of its appellate jurisdiction
2. Over cases involving the assessment and
taxation of real property
3. Originally decided by the provincial or CBAA
Period within which CBAA should resolve a
case submitted to it for decision
The Central Board shall decide cases brought on
appeal within 12 months from the date of
receipt thereof, which decision shall become
final and executory after the lapse if 15 days
from the date of receipt thereof by the appellant.
Exception when prior resort to
administrative action is not required
In disputes involving real property taxation, the
general rule is to require the taxpayer to first
avail of administrative remedies and pay the tax
under protest before allowing any resort to a
judicial action, except when the assessment itself
is alleged to be illegal or is made without legal
authority. For example, prior resort to
421
administrative action is required when among
the issues raised is an allegedly erroneous
assessment, like when the reasonableness of the
amount is challenged, while direct court action is
permitted when only the legality, power, validity
or authority of the assessment itself is in
question. Stated differently, the general rule of a
prerequisite recourse to administrative
remedies applies when questions of fact are
raised, but the exception of direct court action is
allowed when purely questions of law are
involved. (Capitol Wireless, Inc. vs. Provincial
Treasurer of Batangas, G.R. No. 180110. May 30,
2016)
Effect of payment of taxes
Appeal on assessments of real property shall, in
no case, suspend the collection of the
corresponding realty taxes on the property
involved as assessed by the provincial or city
assessor, without prejudice to subsequent
adjustment depending upon the final outcome of
the appeal. (Sec. 231, LGC)
COMPROMISING REAL PROPERTY
TAX ASSESSMENT
Instances which the sanggunian may
condone or reduce real property tax
The sanggunian by ordinance passed prior to the
1st day of January of any year and upon
recommendation of the local disaster
coordinating council, may condone or reduce,
wholly or partially, the taxes and interest
thereon for the succeeding year or years in the
city or municipality affected by the calamity in
cases of: (p-cal-cro)
1. General failure of crops;
2. Substantial decrease in the price of
agricultural or agri-based products;
3. Calamity in any province, city or
municipality.
President’s power to condone or reduce real
property tax
The president may, when public interest so
requires, condone or reduce the real property tax
and interest for any year in any province or city
or a municipality within the Metro. (Sec. 277,
LGC)
 Local Taxation
TAXPAYER’S REMEDIES INVOLVING COLLECTION OF REAL PROPERTY TAX
LOCAL GOVERNMENT CODE

UNIVERSITY OF SANTO TOMAS 422

2021 GOLDEN NOTES
 Taxation Law
JUDICIAL REMEDIES
Court of Tax Appeals (CTA)
CTA is a highly specialized body specifically
created for the purpose of reviewing tax cases.
The CTA is, by the very nature of its function,
dedicated exclusively to the study and
consideration of tax problems. (CIR v. CA, G.R. No.
115349, April 18, 1997)
Nature and characteristics of the CTA
1. It is a highly specialized body created for the
purpose of reviewing tax cases. (CIR v.
General Foods, Inc., G.R. No. 143672, April 24,
2003)
2. Proceedings therein are judicial in nature
although the CTA is not bound by technical
rules of evidence. (Perez v. CTA, G.R. No. L-
10507, May 30, 1958)
NOTE: As a court of record, the CTA is
bound by the rules on documentary
evidence. Under Sec. 8 of R.A. 1125, the CTA
is described as a court of record. As cases
filed before it are litigated de novo, party
litigants should prove every minute aspect
of their cases. (Dimaampao, 2011)
3. It is a court of special or limited jurisdiction
and as such, it can only take cognizance of
such matters as are clearly within its
jurisdiction. (Ker & Company, Ltd. vs. CTA,
G.R. No. L-12396, January 31, 1962)
Composition of the CTA
1. A Presiding Justice, and
2. Eight Associate Justices
a. Each of whom shall be appointed by
the President
b. upon the nomination by the Judicial
and Bar Council for each vacancy (Sec.
2, RA. No. 1125, as amended)
Powers of the CTA (ADD PROCESS)
1. To administer oath;
2. To assess damages against the appellant if
the appeal to CTA is found to be frivolous
and dilatory;
423
3. To render decision on cases brought before
it.
4. To require production of papers or
documents by subpoena duces tecum;
5. To prescribe rules and regulations for the
conduct of its business;
6. To issue order authorizing distraint of
personal property and levy of real
property;
7. To punish for contempt for the same
causes under the same procedure and
with the same penalties provided for in
the rules of court;
8. To receive evidence;
9. To summon witnesses by subpoena; and
10. To suspend collection of tax pending
appeal.
(RA. No. 1125, as amended)
NOTE: Power to issue writs of prohibition
and injunction is supplementary to its
appellate jurisdiction. (CIR v. Yuseco, G.R. No.
L-12518, October 28, 1961)
CTA Proceedings
The CTA may sit en banc or in 3 Divisions,
each Division consisting of 3 Justices. The
presiding justice shall be the chairperson of
the first division and the 2 most senior
associate justices shall serve as chairpersons
of the second and third divisions,
respectively. (Sec. 2, RA. No. 1125, as
amended)
CTA Quorum
1. For Sessions En Banc – Five Justices shall
constitute a quorum. The presence at
the deliberation and the affirmative vote
of 5 members of the Court en banc shall
be necessary to reverse the decision of a
Division but only a simple majority of
the justices present shall be necessary
to promulgate a resolution or decision
in all other cases.
2. For Sessions of a Division – Two Justices
shall constitute a quorum and a
concurrence of 2 members of Division
shall be necessary for the rendition of
decision or resolution in Division level
(Sec. 2, RA 1125, as amended)
Q: What if the required quorum in a
 Judicial Remedies
division cannot be constituted? appellate jurisdiction to review by appeal the
following: (ARMoR)
A: When the required quorum cannot be
constituted due to any vacancy, 1. Decisions or resolutions on motions for
disqualification, inhibition, disability, or any reconsideration or new trial of the Court in
other lawful cause, the presiding justice Divisions in the exercise of its exclusive
shall designate any justice of other divisions appellate jurisdiction over: (ALT)
of the CTA to sit temporarily therein. (Ibid)
a. Cases arising from administrative
JURISDICTION OF THE agencies – BIR, BOC, DoF, DTI, and DA;
COURT OF TAX APPEALS b. Local tax cases decided by the RTC in
the exercise of their original
jurisdiction; and
The CTA has jurisdiction over both civil and
c. Tax collection cases decided by the
criminal aspects of a tax case. The
RTC in the exercise of their original
concentration of tax cases in one court will
jurisdiction involving final and
enhance the disposition of these cases since it
executory assessments for taxes, fees,
will take them out of the jurisdiction of regular
charges and penalties, where the
courts which, admittedly, do not have expertise
principal amount of taxes and
in the field of taxation. (Dimaampao, 2015)
penalties claimed is less than P1
million pesos;
Salient features of R.A. 9282 regarding
appeals
2. Decisions, resolutions or orders of the RTC
in cases decided or resolved by them in the
The decisions of the CTA are no longer
exercise of their appellate jurisdiction over:
appealable to the CA. The decision of a division
a. Local tax cases
of the CTA may be appealed to the CTA En Banc,
b. Tax collection cases;
which in turn may be appealed directly to the SC
only on questions of law.
3. Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
Q: Does the CTA have jurisdiction over a
in Division in the exercise of its exclusive
special civil action for certiorari assailing an
original jurisdiction over tax collection
interlocutory order issued by the RTC in a
cases; and
local tax case?
4. Decisions of the Central Board of
A: YES. Although there is no categorical
Assessment Appeals (CBAA) in the exercise
statement under R.A. 1125 as well as the
of its appellate jurisdiction over cases
amendatory R.A. 9282, which provides that the
involving the assessment and taxation of
CTA has jurisdiction over petitions for certiorari
real property originally decided by the
assailing interlocutory orders issued by the RTC
provincial or city board of assessment
in local tax cases filed before it, the prevailing
appeals. (Sec. 2, Rule 4, RRCTA)
doctrine is that a court may issue a writ of
certiorari in aid of its appellate jurisdiction if
NOTE: Decisions, orders, and resolutions of the
said court has jurisdiction to review, by appeal
RTC in local tax cases do not include real
or writ of error, the final orders or decisions of
property tax which is an ad valorem tax. The
the lower court. (The City Of Manila v. Hon.
jurisdiction of the CTA en banc involves only
Grecia-Cuerdo, G.R. No. 175723, February 4, 2014)
those real property tax cases originally decided
by the CBAA in the exercise of its appellate
EXCLUSIVE ORIGINAL AND APPELLATE jurisdiction under Sec. 7(a)(5) of R.A. 9282 and
JURISDICTION OVER CIVIL CASES under R.A. 7160. (Habawel v. CTA, G.R. No.
174759, September 7, 2011)
Cases within the jurisdiction of the Court En
banc (Sec. 2, Rule 4, Revised Rules of CTA Q: A Co., a Philippine corporation, is the
(RRCTA)) owner of machinery, equipment and fixtures
located at its plant in Muntinlupa City. The
The Court en banc shall exercise exclusive City Assessor characterized all these

UNIVERSITY OF SANTO TOMAS 424

2021 GOLDEN NOTES
 Taxation Law
properties as real properties subject to the
real property tax. A Co. appealed the matter
to the Muntinlupa Board of Assessment
Appeals. The Board ruled in favor of the City.
In accordance with R.A. 1125, A Co. brought a
petition for review before the CTA to appeal
the decision of the Board. Is the Petition for
Review proper? Explain. (1999 BAR)
A: NO. The CTA is devoid of jurisdiction to
entertain appeals from the decision of the
Municipal Board of Assessment Appeals. The
proper remedy is to appeal such decision to the
CBAA, which under the LGC, has appellate
jurisdiction over decisions of Local Board of
Assessment Appeals. (Caltex Phil, Foe. v. CBAA, L-
50466, May 31, 1982)
R.A. 9282 provides that CTA has jurisdiction
over decisions of the CBAA in the exercise of its
appellate jurisdiction over cases involving the
assessment and taxation of real property
originally decided by the provincial or city board
of assessment appeals.
Q: PPA received a letter from the City
Assessor of Davao for the assessment of real
property taxes against administered
properties. It appealed the assessment to the
Local Board of Assessment Appeals. While
the case was pending, the City of Davao
posted a notice of sale of delinquent real
properties. The Local Board of Assessment
Appeals dismissed the PPA appeal for having
been filed out of time, and for its lack of
jurisdiction on the latter’s tax exemption.
The PPA appealed before the Central Board
of Assessment Appeals but was subsequently
denied. Thus, it filed an appeal with the Court
of Tax Appeals. The Philippine Ports
Authority claimed that it did not receive any
warrant of levy for its properties which were
sold to respondent City of Davao, or any
notice that they were going to be auctioned.
Thus, the PPA filed a petition for certiorari
with the Court of Appeals, arguing that the
City of Davao’s taxation of its properties and
their subsequent auction and sale to satisfy
the alleged tax liabilities were without or in
excess of its jurisdiction and contrary to law.
It argued that it had no other speedy and
adequate remedy except to file a petition for
certiorari with the Court of Appeals. While
the petition was pending with the Court of
Appeals, the Court of Tax Appeals
425
promulgated a decision, granting the
Philippine Ports Authority’s appeal, ordering
that its properties and buildings in the site
are exempt from real estate tax imposed by
Davao City, and voiding all the real estate tax
assessments issued by Davao City on such
properties. The Court of Appeals dismissed
the petition and held that the Court of Tax
Appeals had exclusive jurisdiction to
determine the matter and said that the
Philippine Ports Authority “should have
applied for the issuance of writ of injunction
or prohibition before the Court of Tax
Appeals.” Does the Court of Appeals have
jurisdiction to issue the injunctive relief
prayed for by PPA?
A: NO. CA had no jurisdiction to issue the
injunctive relief prayed for by PPA. Section 7,
paragraph (a)(5) of Republic Act No. 1125, as
amended by Republic Act No. 9282, provides
that the Court of Tax Appeals has exclusive
appellate jurisdiction over: “(5) 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.” (Philippine
Ports Authority v. The City of Davao, G.R. 190324,
June 6, 2018, as penned by J. Leonen)
Cases within the jurisdiction of the Court in
divisions (Sec. 3, Rule 4, RRCTA)
I. Exclusive Appellate Jurisdiction
(DIReCTORS2) (Sec. 3(a), Rule 4, RRCTA)
1. Decisions of the CIR in cases involving:
(DRO)
a. Disputed assessments;
Q: Which court has jurisdiction over
undisputed assessments?
A: Being an action for the collection of
sum of money, the CTA has exclusive
original jurisdiction over undisputed
assessments when the amount involved
is P1 million or more; and appellate
jurisdiction over appeals from the
judgments, resolutions, or orders of the
RTC in tax collection cases originally
decided by them within their
jurisdiction. (Sec. 3 Rule 4 RRCTA)
 Judicial Remedies
However, where the amount is less than
P1 million, it is the RTC or the MTC that
has jurisdiction, as the case may be,
depending on the jurisdictional amount.
NOTE: Undisputed assessments are
already final and collectible. The
taxpayer failed to seasonably protest
the assessment within a period of 30
days from receipt of the notice of
assessment.
b. Refunds of internal revenue taxes, fees or
other charges and penalties imposed
thereto;
c. Other matters arising under NIRC or
other laws administered by the BIR.
Q: What does “other matters” under
the NIRC or the TCCP mean?
A: The term “other matters” includes
cases which can be considered within
the scope of the function of the BIR and
BOC by applying the ejusdem generis
rule (that is, such cases should be of the
same nature as those that have
preceded them).
In CIR v. Hambrecht & Quist Philippines,
Inc. (G.R. No. 169225, November 17,
2010), the term “other matters” is
limited only by the qualifying phrase
that follows it. The appellate jurisdiction
of the CTA is not limited to cases which
involve the decisions of the CIR on
matters relating to assessments or
refunds. It covers other cases that arise
out of the NIRC or related laws
administered by the BIR. The issue of
whether or not the BIR’s right to collect
taxes had already prescribed is a subject
matter falling under the NIRC. In
connection therewith, the NIRC also
states that the collection of taxes is one
of the duties of the BIR. Thus, from the
foregoing, the issue of prescription of
the BIR’s right to collect taxes may be
considered as covered by the term
“other matters” over which the CTA has
appellate jurisdiction.
Q: BDO questions a BIR ruling
subjecting interest income from zero-
coupon bonds issued by the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
government to the 20% final
withholding tax as they are deemed
to be deposit substitutes. BDO filed it
to the CTA, not with the Secretary of
Finance. CIR contends that it violates
the principle of exhaustion of
administrative remedies. Is BDO
correct?
A: YES. The jurisdiction to review the
rulings of the CIR pertains to the CTA.
The questioned BIR Rulings were issued
in connection with the implementation
of the NIRC. Under Sec. 7 of R.A. No.
1125 as amended by R.A. No. 9282, the
CTA shall exercise exclusive appellate
jurisdiction to review by appeal on the
Decisions of the CIR in cases involving
disputed assessments, refunds of
internal revenue taxes, fees or other
charges, penalties in relation thereto or
other matters arising under the NIRC or
other laws administered by the BIR.
Section 11 is likewise worded as
follows: Any party adversely affected by
a decision, ruling or inaction of the CIR,
the Commissioner of Customs, the
Secretary of Finance, the Secretary of
Trade and Industry or the Secretary of
Agriculture or the Central Board of
Assessment Appeals or the Regional
Trial Courts may file an appeal with the
CTA within 30 days after the receipt of
such decision or ruling. (Banco de Oro v.
Republic, G.R. No. 198756, January 13,
2015)
2. Inaction by the CIR in cases involving:
(DROw)
a. Disputed assessments;
b. Refunds of internal revenue taxes, fees
or other charges and penalties imposed
thereto;
c. Other matters arising under NIRC or
other laws administered by the BIR,
where the NIRC provides a specific
period for action.
NOTE: The inaction by the CIR within
the 180-day period under Sec. 228 of
the NIRC is deemed a denial.
3. Decisions, Orders or Resolutions of the
RTC in the exercise of their original
jurisdiction over local tax cases and tax
collection cases.
426
 Taxation Law
4. Decisions of the Commissioner of Customs
(COC) in cases involving: (DSFO)
a. Liability for customs duties, fees or
other money charges;
b. Seizure, detention or release of property
affected;
c. Fines, forfeitures or other penalties in
relation thereto; or
d. Other matters arising under Customs
Law or other laws administered by the
BOC.
5. Decisions of the Secretary of Finance on
customs cases elevated for automatic
review from decisions of the COC which
are adverse to the Government under
Section 2315 of the TCCP (now Sec. 1128 of
the CMTA)
NOTE: The purpose and rationale of the
automatic review in customs cases- the
provision for automatic review by the COC
and the Secretary of Finance of unappealed
seizure and protest cases was conceived to
protect the government against corrupt and
conniving customs collectors. (Yaokasin v.
COC, G.R. No. 84111, December 22, 1989)
6. Decisions of the Secretary of Trade and
Industry, in the case of non-agricultural
product, commodity or article, and the
Secretary of Agriculture in the case of
agricultural product, commodity or
article, involving dumping and
countervailing duties under Sections 301
and 302, respectively of the TCCP, and
safeguard measures under R.A. 8800,
where either party may appeal the
decision to impose or not to impose said
duties.
NOTE: The SC held that the lower courts can
acquire jurisdiction over a claim for
collection of deficiency taxes only after the
assessment made by the CIR has become
final and appealable, not where there is still
a pending CTA case. (Yabes v. Flojo, G.R. No.
L-46954, July 20, 1982)
Q: Does the CTA have the power to review tax
cases motu proprio? (1977 BAR)
A: NO. The CTA has no power motu proprio to
review tax cases. It can resolve cases only if a
civil action for collection of sum of money is filed
427
before it in the exercise of its exclusive original
jurisdiction, or a petition for review is filed in
the exercise of its exclusive appellate
jurisdiction. An information may be filed with
the CTA directly where the principal amount of
taxes and fees, exclusive of charges and
penalties, is P1 million or more.
Q: Does the CTA have jurisdiction to rule on
validity of a Rule or Regulation issued by an
administrative agency?
A: NO. While the law confers on the CTA
jurisdiction to resolve tax disputes in general,
this does not include cases where the
constitutionality of a law or rule is challenged.
Where what is assailed is the validity or
constitutionality of a law, or a rule or regulation
issued by the administrative agency in the
performance of its quasi-legislative function, the
regular courts have jurisdiction to pass upon the
same. (British American Tobacco v. Camacho, G.R.
No. 163583, August 20, 2008)
NOTE: However, in the case of Banco de Oro vs.
Republic of the Philippines (G.R. No. 198756,
August 16, 2016), the Supreme Court ruled that
the Court of Tax Appeals has undoubted
jurisdiction to pass upon the constitutionality or
validity of a tax law or regulation when raised by
the taxpayer as a defense in disputing or
contesting an assessment or claiming a refund.
It is only in the lawful exercise of its power to
pass upon all maters brought before it, as
sanctioned by Section 7 of Republic Act No.
1125, as amended.
This Court, however, declares that the Court of
Tax Appeals may likewise take cognizance of
cases directly challenging the constitutionality
or validity of a tax law or regulation or
administrative issuance (revenue orders,
revenue memorandum circulars, rulings).
In other words, within the judicial system, the
law intends the Court of Tax Appeals to have
exclusive jurisdiction to resolve all tax problems.
Petitions for writs of certiorari against the acts
and omissions of the said quasi-judicial agencies
should, thus, be filed before the Court of Tax
Appeals.
Republic Act No. 9282, a special and later law
than Batas Pambansa Blg. 129 provides an
exception to the original jurisdiction of the
 Judicial Remedies
Regional Trial Courts over actions questioning
the constitutionality or validity of tax laws or
regulations. Except for local tax cases, actions
directly challenging the constitutionality or
validity of a tax law or regulation or
administrative issuance may be filed directly
before the Court of Tax Appeals.
Furthermore, with respect to administrative
issuances (revenue orders, revenue
memorandum circulars, or rulings), these are
issued by the Commissioner under its power to
make rulings or opinions in connection with the
implementation of the provisions of internal
revenue laws. Tax rulings, on the other hand,
are official positions of the Bureau on inquiries
of taxpayers who request clarification on certain
provisions of the National Internal Revenue
Code, other tax laws, or their implementing
regulations. Hence, the determination of the
validity of these issuances clearly falls within the
exclusive appellate jurisdiction of the Court of
Tax Appeals under Section 7(1) of Republic Act
No. 1125, as amended, subject to prior review by
the Secretary of Finance, as required under
Republic Act No. 8424. (Banco de Oro vs.
Republic of the Philippines, G.R. No. 198756,
August 16, 2016)
Q: Disputing the assessment, PAGCOR
appealed to the Secretary of Justice, on the
basis of Sections 66 and 67 of the Revised
Administrative Code, which provides that “all
disputes/claims and controversies, solely
between or among the departments, bureaus,
offices, agencies and instrumentalities of the
National Government, including government
-owned and -controlled corporations, such as
those arising from the interpretation and
application of statues, contracts or
agreements shall be administratively settled
or adjudicated by the Secretary of Justice as
Attorney-General of the National
Government and as ex officio legal adviser of
all government- owned or -controlled
corporations if involving only questions of
law.”
The CIR contends that the CTA has
jurisdiction pursuant to Section 7(1) of R.A.
No. 1125, which grants the CTA the exclusive
appellate jurisdiction to review, among
others, the decisions of the Commissioner of
Internal Revenue “in cases involving
disputed assessments, refunds of internal
revenue taxes, fees or other charges,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
penalties imposed in relation thereto, or
other matters arising under the NIRC or
other law or part of law administered by the
Bureau of Internal Revenue.
Is PAGCOR correct?
A: NO. Following the rule on statutory
construction involving a general and a special
law, then P.D. No. 242 should not affect R.A. No.
1125. R.A. No. 1125, specifically Section 7
thereof on the jurisdiction of the CTA,
constitutes an exception to P.D. No. 242.
Disputes, claims and controversies, falling under
Section 7 of R.A. No. 1125, even though solely
among government offices, agencies, and
instrumentalities, including GOCCs, remain in
the exclusive appellate jurisdiction of the CTA.
Such a construction resolves the alleged
inconsistency or conflict between the two
statutes. (CIR v. Secretary of Justice, G.R. No.
177387, November 9, 2016, citing Philippine
National Oil Company v. Court of Appeals, G.R.
Nos. 109976 and 112800, April 26, 2005)
In CIR v. Secretary of Justice, to restate, as a
general rule, all disputes/claims and
controversies, solely between or among the
departments, bureaus, offices, agencies and
instrumentalities of the National Government,
including GOCCs, such as those arising from the
interpretation and application of statues,
contracts or agreements shall be
administratively settled or adjudicated by the
Secretary of Justice or the Solicitor General.
(Secs. 66-68, Revised Administrative Code)
As an exception, when the disputes/claims and
controversies involve a tax assessment, even
when the parties to the dispute are departments,
bureaus, offices, agencies and instrumentalities
of the National Government, including GOCCs,
the exclusive appellate jurisdiction remains with
the CTA. (Sec. 7, R.A. 1125)
II. Exclusive jurisdiction over tax collections
cases (Sec. 3(c), Rule 4, RRCTA)
1. Original jurisdiction in 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 or
more.
428
 Taxation Law
NOTE: Collection cases where the principal
amount of taxes and fees, exclusive of
charges and penalties claimed is less than
P1 million shall be tried by the proper MTC,
MeTC, or RTC, depending on their
respective jurisdiction. The jurisdiction of
the CTA in these cases shall be appellate.
(Sec. 7(b)(1), R.A. 1125, as amended by RA.
No. 9282)
2. Appellate jurisdiction over appeals from
the judgments, resolutions or orders of the
Regional Trial Courts in tax collection cases
originally decided by them within their
respective territorial jurisdiction.
EXCLUSIVE ORIGINAL AND APPELLATE
JURISDICTION OVER CRIMINAL CASES
I. Exclusive original jurisdiction
The CTA in Division have exclusive original
jurisdiction over all criminal offenses arising
from violations of the NIRC or TCCP and
other laws administered by the BIR or the
BOC, where the principal amount of taxes
and fees, exclusive of charges and penalties,
claimed is P1 million or more.
Regular courts shall have jurisdiction in
offenses or felonies where:
1. The principal amount of taxes and fees,
exclusive of charges and penalties
claimed is less than ₱1 million; or
2. No specified amount is claimed.
The jurisdiction of the CTA in these cases
shall be appellate. (Sec. 7(b)(1), R.A. 1125, as
amended)
Inclusion of civil action in criminal action
Despite any provision of law or the Rules of
Court, the criminal action and the
corresponding civil action for the recovery
of the civil liability for taxes and penalties,
shall at all times be simultaneously
instituted with, and jointly determined in
the proceeding before the CTA. The filing of
the criminal action is deemed to necessarily
carry with it the filing of civil action, and no
right to reserve the filing of such civil
action separately from the criminal
action will be recognized. (Sec. 7, R.A. 1125,
as amended)
429
II. Exclusive appellate jurisdiction
CTA in Divisions
1. Appeals from the Judgments, Resolutions or
Orders of the RTC in their original
jurisdiction in criminal offenses arising
from violations of the NIRC or TCCP and
other laws administered by the BIR or BOC,
where the principal amount of taxes and
fees, exclusive of charges and penalties,
claimed is less than ₱1 million or where
there is no specified amount claimed; and
2. Criminal offenses over Petitions for Review
of the Judgments, Resolutions or Orders of
the RTC in the exercise of their appellate
jurisdiction over tax cases originally
decided by the MeTC, MTC and MCTC. (Sec.
7(b)(2)(b), RA. No. 1125 as amended by RA.
No. 9282)
CTA en banc
1. Decisions, Resolutions or Orders on Motions
for Reconsideration or New Trial of the
Court in division in the exercise of its
exclusive original jurisdiction over criminal
offenses arising from violations of the NIRC
or TCCP and other laws administered by the
BIR or BOC where the principal amount of
taxes and fees, exclusive of charges and
penalties is ₱1 million or more;
2. Decisions, Resolutions or Orders on Motions
for Reconsideration or New Trial of the
Court in division in the exercise of its
exclusive appellate jurisdiction over
criminal offenses arising from violations of
the NIRC or TCCP and other laws
administered by the BIR or BOC; and
3. Decisions, Resolutions or Orders of the RTC
decided or resolved by them in the exercise
of their appellate jurisdiction over criminal
offenses arising from violations of the NIRC
or TCCP and other laws administered by the
BIR or BOC where the principal amount of
taxes and fees, exclusive of charges and
penalties claimed is less than ₱1 million.
PROCEDURE
FILING OF AN ACTION FOR
COLLECTION OF TAXES
Where Tax (Local or National) Collection
 Judicial Remedies
Cases are filed
1. MTC, MeTC, MCTC, MTCs in cities
2. RTCs
3. CTA (in division)
INTERNAL REVENUE TAXES
Summary of procedures before the MTC and
RTC in the exercise of their exclusive original
jurisdiction
1. Initiatory action – Where the assessment
has attained a state of finality because the
assessment has not been disputed, the BIR
files an ordinary suit for the collection of a
sum of money with the court of appropriate
jurisdiction.
2. Appealed cases – Decisions of the MTCs
rendered in the exercise of their original
jurisdiction are appealed to the RTC by
means of notice of appeal.
Decision of the RTC rendered in aid of their
appellate jurisdiction shall be appealed to the
CTA En Banc, by means of petition for review.
Adverse decisions of the CTA En Banc shall
be appealed to the SC by means of petition
for review.
Decisions or judgment rendered by the CTA
in divisions in the exercise of their exclusive
original jurisdiction
1. If no MR or MNT – Execution of judgment
2. If there is a motion filed with the Division
that rendered the judgment:
a. If denied, appeal by means of a petition
for review before the CTA En Banc;
b. If denied by CTA En Banc, appeal to the
SC by means of a petition for review on
certiorari.
LOCAL TAXES
The procedures for internal revenue taxes are
the same for local and real property taxes if the
case is brought before the CTA in division in the
exercise of its original jurisdiction.
Remedies Available to taxpayer prior to
assessment
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
1. To question the constitutionality or legality
of tax ordinances or revenue measures on
appeal (Sec. 187, LGC); or
2. Petition for declaratory relief, when
applicable.
Q: How does the LGU concerned enforce the
judicial remedy in collection of taxes?
A: The LGU may enforce collection of delinquent
taxes, fees, charges and other revenues by civil
action in any court of competent jurisdiction.
The civil action shall be filed by the local
treasurer within 5 years from the date of
assessment. (Sec. 194, LGC)
NOTE: The LGU files an ordinary suit for the
collection of sum of money before the MTC, RTC
or CTA depending upon the jurisdictional
amount.
Q: May regular court issue injunction to
restrain LGUs from collecting taxes?
A: YES. The LGC does not specifically prohibit an
injunction enjoining the collection of local taxes
unlike in the NIRC where there is an express
prohibition. Nevertheless, the Court noted that
injunctions enjoining the collection of local taxes
are frowned upon and should therefore be
exercised with extreme caution. (Angeles City v.
Angeles City Electric Corporation G.R. No.166134,
June 29, 2010)
Prescriptive Period for Local Taxes (Sec. 194,
LGC)
A. Assessment
GR: Within 5 years from the date they
become due.
NOTE: No action for collection of such taxes,
fees, or charges, whether administrative or
judicial, shall be instituted after the
expiration of such period.
XPN: In case of fraud or intent to evade the
payment of taxes, fees, or charges, the
assessment may be made 10 years from
discovery of fraud or intent to evade
payment.
B. Collection
Within 5 years from date of assessment by
430
 Taxation Law
administrative or judicial action.
Grounds for the suspension of the running of
the prescriptive period for assessment and
collection of local taxes: (PRO)
1. The treasurer is legally prevented from
making the assessment or collection;
2. The taxpayer requests for a reinvestigation
and executes a waiver in writing before the
expiration of the period within which to
assess or collect; and
3. The taxpayer is out of the country or
otherwise cannot be located (Sec. 194, LGC)
Remedies available to taxpayer after
assessment
1. Protest of assessment (Sec. 195, LGC)
Within 60 days from the receipt of the
notice of assessment, the taxpayer may file a
written protest with the local treasurer;
otherwise, the assessment shall become
final and executory. The local treasurer
shall decide the protest within 60 days from
the time of its filing.
The taxpayer shall have 30 days from the
receipt of the denial of the protest or from
the lapse of the 60-day prescribed period
within which to appeal with the court of
competent jurisdiction.
NOTE: In case of an illegal assessment
where the assessment was issued without
authority, exhaustion of administrative
remedies is not necessary and the taxpayer
may directly resort to judicial action. The
taxpayer shall file a complaint for injunction
before the RTC to enjoin the local
government unit from collecting real
property taxes. (City of Lapu-Lapu v. PEZA,
G.R. No. 187853, November 26, 2014)
b. Claim for refund of tax credit (Sec. 196,
LGC)
Prior to a judicial action for recovery of tax
erroneously or illegally collected, a written
claim for refund or credit must first be filed
with the local treasurer.
In any case, the judicial action for claim for
refund or credit must be made within 2
431
years from the date of the payment of such
tax, fee, or charge, or from the date the
taxpayer is entitled to a refund or credit.
CIVIL CASES
Q: What are the ways by which the civil tax
liability of a taxpayer is enforced by the
government through civil actions?
A:
1. By filing a civil case for the collection of sum
of money with the proper regular court.
2. By filing an answer to the petition for review
filed by the taxpayer with the CTA.
WHO MAY APPEAL, MODE OF APPEAL,
AND EFFECT OF APPEAL
Who may Appeal
The following may appeal to the CTA in
Division:
Any party adversely affected by a decision,
ruling, or inaction of the:
1. CIR on disputed assessments or claims for
refund of internal revenue taxes;
2. COC;
3. Secretary of Finance;
4. Secretary of Trade and Industry;
5. Secretary of Agriculture; or
6. RTC in the exercise of its original
jurisdiction.
The following may appeal to the CTA en banc:
Any party adversely affected by a decision or
ruling of:
1. The CTA in Division on a MR or MNT;
2. The CBAA, in the exercise of its appellate
jurisdiction; or
3. The RTC, in the exercise of its appellate
jurisdiction. (Sec. 11 R.A. 1125 as amended)
Q: Will the CTA acquire jurisdiction even in
the absence of a decision of the CIR or COC?
A:
GR: CTA has jurisdiction only, if there is a
decision of the CIR or COC.
XPNs:
1. If COC has not rendered a decision and the
suit is about to prescribe.
 Judicial Remedies
Rationale: If the taxpayer waits, then his
right of action prescribes.
2. Deemed Denial / Inaction of the CIR in a
refund of illegally or erroneously collected
tax and the 2-year prescriptive period is
about to expire or after the lapse of 120-day
period or 90-day period (for claims for
refund 2018 onwards under TRAIN) to
decide in case of refund of unutilized input
VAT; or
RATIONALE: The taxpayer would be left at
the mercy of the Commissioner, who by his
delay leaves the taxpayer without any
positive and expedient relief from the
courts.
3. Deemed denial or inaction - where the CIR
has not acted upon a protested assessment
within 180 days from submission of all
relevant documents supporting the protest,
the taxpayer adversely affected by the
inaction may appeal to the CTA within 30
days from the lapse of the 180-day period.
Q: On January 15, 1996, a taxpayer received
an assessment for an internal revenue tax
deficiency. On February 10, 1996, he filed a
petition for review with the CTA. Could the
Tax Court entertain the petition?
A: NO. Before a taxpayer can avail of judicial
remedy he must first exhaust administrative
remedies by filing a protest within 30 days from
receipt of the assessment.
It is the Commissioner's decision on the
protest that gives the Tax Court jurisdiction
over the case provided that the appeal is filed
within 30 days from receipt of the
Commissioner's decision. An assessment by the
BIR is not the Commissioner's decision from
which a petition for review may be filed with the
CTA. Rather, it is the action taken by the
Commissioner in response to the taxpayer’s
protest on the assessment that would constitute
the appealable decision. (Sec. 7, R.A. 1125, as
amended)
Q: Under the above factual setting, the
taxpayer, instead of questioning the
assessment he received on January 15, 1996
paid, on March 1, 1996 the "deficiency tax"
assessed, the taxpayer requested a refund
from the Commissioner by submitting a
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
written claim on March 1, 1997. It was
denied. The taxpayer, on March 15, 1997,
filed a petition for review with the CA. Could
the petition still be entertained? (1997 BAR)
A: NO. The petition for review cannot be
entertained by the CA since decisions of the
Commissioner on cases involving claim for tax
refunds are within the exclusive and primary
jurisdiction of the CTA. (Sec. 7, R.A. 1125, as
amended)
Mode of Appeal
In appeals to the CTA in Division:
1. By filing a Petition for Review under a
procedure analogous to that provided for
under Rule 42 of the ROC, within 30 days
from the receipt of the decision or ruling or
from the expiration of the period fixed by
law or inaction of the CIR on disputed
assessments or claim for refund of internal
revenue taxes erroneously or illegally
collected, the COC, the Secretary of Finance,
the Secretary of Trade & Industry, the
Secretary of Agriculture, and the RTC in the
exercise of their original jurisdiction.
NOTE: The 30-day period to appeal
decisions of the RTC to CTA is extendible.
(SM Land v. City of Manila, G.R. No. 197151,
October 22, 2012)
In case of disputed assessments, inaction
of the CIR within the 180-day period shall be
deemed a denial, thus, appealable via a
petition for review to the CTA within 30
days from receipt of copy of decision.
Should the taxpayer opt to await the final
decision of the CIR beyond the 180-day
period, appeal to the CTA should be made
within 30 days after receipt of copy of such
decision.
In case of inaction of the CIR on claims for
refund of internal revenue taxes
erroneously or illegally collected under Sec.
204(C) and 229 of the NIRC, the 30-day
period to file the petition for review before
the CTA after the lapse of 180 days must be
within the 2-year period prescribed by law
from payment of tax. However, the 2-year
period is not jurisdictional and may be
suspended for reasons of equity and other
special circumstances. (RRCTA)
432
 Taxation Law
In claims for refund for unutilized input
VAT payments, 2-year period does not refer
the filing of judicial claim with the CTAbut to
the filing of the administrative claim with
the CIR (CIR v. San Roque power Corporation,
G.R. No. 187485, February 12, 2013) The
taxpayer will always have 30 days to file the
judicial claim regardless of his action or
inaction. (CIR v. Mindanao II Geothermal
Partnership, G.R. No. 191498, January 15,
2014)
SUMMARY OF RULE LAID DOWN IN MINDANAO II GEOTHERMAL PARTNERSHIP CASE
Type of claim Inaction Appeal
Disputed Inaction within 180-day period is a Appealable 30 days to CTA from receipt
assessments deemed denial. of denial
Claims for refund of Inaction within the 2-year Appealable 30 days to CTA from receipt
internal revenue prescriptive period (from date of of denial provided it is within 2 years
taxes erroneously payment). from date of payment.2-year period is not
paid jurisdictional.
Claims for Inaction within 120-day or 90-day Appealable 30 days to CTA from receipt
unutilized input period (as the case may be) is a of denial or from the lapse of the 120-day
VAT deemed denial.2-year period refers period to decide.
to institution of administrative
claim, and it is jurisdictional.
NOTE: 90-day period to decide the claim for refund for VAT under TRAIN

Remedy of a party affected by a ruling or

decision of the CTA Division
The adverse party may file a MR or MNT before
the same Division of the CTA within 15 days
from notice thereof.
However in criminal cases, the general rule
applicable in regular courts on matters of
prosecution and appeal shall apply.
2. By filing a Petition for Review under a
procedure analogous to that provided for
under Rule 43 of the ROC, within 30 days
from a decision or ruling of the CBAA or the
RTC in the exercise of their appellate
jurisdiction. (Sec. 4, Rule 8, RRCTA)
Remedy of a party affected by a decision or
ruling of the CTA en banc

In appeals to the CTA En Banc:
1. By filing a Petition for Review under a
procedure analogous to that provided for
under Rule 43 of the ROC, within 15 days
from receipt of decision or resolution of the
Court in Division on a MR or MNT. Upon
proper motion and the payment of the full
amount of the docket and other lawful fees
and deposit for costs before the expiration
of the reglementary period herein fixed, the
Court may grant an additional period not
exceeding 15 days from the expiration of
the original period within which to file the
petition for review.
The adverse party may file a Petition for Review
on Certiorari under Rule 45 of the ROC, through
a verified petition before the Supreme Court,
within 15 days from receipt thereof. (Sec. 1, Rule
16, R.A. 9282)
NOTE: The MR or MNT filed before the Court
shall be deemed abandoned if, during its
pendency, the movant shall appeal to the SC.
(Sec. 1, Rule 16, R.A. 9282)
30-day Prescriptive Period for Appeal with
the CTA

433
 Judicial Remedies
1. It runs from the date the taxpayer receives
the appealable decision or 30 days after the
lapse of 180 days within which the BIR
should act.
The two periods are mutually exclusive.
(RCBC v. CIR, G.R. No. 168498, June 16, 2006)
2. It is jurisdictional and mandatory (CIR v. First
Express Pawnshop Company, Inc., G.R. No.
172045-46, June 16, 2009)
3. It is non-extendible. (Filipinas Investment and
Finance Corporation v. CIR, G.R. No. L-23501,
May 16, 1967)
After the 30-day period, an assessment may no
longer be disputed through the simple expedient
of paying the protested tax and by subsequently
claiming it as a refund within the period of two
years from date of payment. (Sec. 3, Rule 8,
RRCTA)
Q: Does the motion for reconsideration toll
the 30-day period to appeal to the CTA?
A: NO. A motion for reconsideration of the denial
of the administrative protest does not toll the
30-day period to appeal to the CTA. (Fishwealth
Canning Corporation vs. CIR, G.R. No. 179343,
January 21, 2010)
Q: A Co., a Philippine corporation, received
an income tax deficiency assessment from
the BIR on May 5, 1995. On May 31, 1995, A
Co. filed its protest with the BIR. On July 30,
1995, A Co. submitted to the BIR all relevant
supporting documents. The CIR did not
formally rule on the protest but on January
25, 1996, A Co. was served a summons and a
copy of the complaint for collection of the tax
deficiency filed by the BIR with the RTC. On
February 20, 1996, A Co. brought a Petition
for Review before the CTA: The BIR
contended that the Petition is premature
since there was no formal denial of the
protest of A Co. and should therefore be
dismissed. (2002, 1999 BAR)
Does the CTA have jurisdiction over the case?
A: YES. The CTA has jurisdiction over the case
because this qualifies as an appeal from the
Commissioner’s decision on disputed
assessment. When the Commissioner decided to
collect the tax assessed without first deciding on
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
the taxpayer’s protest, the effect of the
Commissioner’s action of filing a judicial action
for collection is a decision of denial of the
protest, in which event the taxpayer may file an
appeal with the CTA. (Dayrit v. Cruz, L-39910,
Sept. 26, 1988)
Q: Does the RTC have jurisdiction over the
collection case filed by the BIR? Explain.
A: NO. The filing of an appeal with the CTA has
the effect of divesting the RTC of jurisdiction
over the collection case. There is no final,
executory and demandable assessment which
can be enforced by the BIR, once a timely appeal
is filed.
Q: A taxpayer received a tax deficiency
assessment of P1.2 Million from the BIR
demanding payment within 10 days;
otherwise, it would collect through summary
remedies. The taxpayer requested for a
reconsideration stating the grounds therefor.
Instead of resolving the request for
reconsideration, the BIR sent a Final Notice
before Seizure to the taxpayer.
May this action of the CIR be deemed a denial
of the request for reconsideration of the
taxpayer to entitle him to appeal to the CTA?
Decide with reasons. (2005 BAR)
A: YES. The Final Notice before Seizure
constitutes as a decision on a disputed or
protested assessment, hence, appealable to the
CTA. The Final Notice before Seizure should be
considered as the CIR’s decision of disposing the
request for reconsideration. The content and
tenor of the letter itself supports the theory that
it was the BIR’s final act regarding the request
for reconsideration. (CIR v. Isabela Cultural
Corporation, G.R. No. 135210, July 11, 2001)
NOTE: A final demand letter for payment of
delinquent taxes may be considered a decision
on a disputed or protested assessment.
Effect of the Appeal (2004, 2010 BAR)
GR: An appeal to the CTA shall not suspend
payment, levy, distraint and/or sale of any
property of taxpayer for the satisfaction of his
tax liability.
XPN: However, when in the opinion of the CTA,
the collection of tax may jeopardize the interest
434
 Taxation Law
of the government and/or the taxpayer, the
Court may suspend or restrain collection of tax
and require the taxpayer either to:
1. To deposit the amount claimed; or
2. To file a surety bond for not more than
double the amount of the tax due (Sec.
11, R.A. 1125)
Q: On June 1, 2003, Global Bank received a
final notice of assessment from the BIR for
deficiency documentary stamp tax in the
amount of P5 Million. On June 30, 2003,
Global Bank filed a request for
reconsideration with the Commissioner of
Internal Revenue. The Commissioner denied
the request for reconsideration only on May
30, 2006, at the same time serving on Global
Bank a warrant of distraint to collect the
deficiency tax. If you were its counsel, what
will be your advice to the bank? Explain.
(2006 BAR)
A: The denial for the request for reconsideration
is the final decision of the CIR. I would advise
Global Bank to appeal the denial to the CTA
within 30 days from receipt. I will further advise
the bank to file a motion for injunction with the
CTA to enjoin the Commissioner from enforcing
the assessment pending resolution of the appeal.
While an appeal to the CTA will not suspend the
payment, levy, distraint, and/or sale of any
property of the taxpayer for the satisfaction of
its tax liability, the CTA is authorized to give
injunctive relief if the enforcement would
jeopardize the interest of the taxpayer, as in this
case, where the assessment has not become final
(Lascona Land Co. v. CIR, CTA Case No. 5777,
January 4, 2000)
Q: RR disputed a deficiency tax assessment
and upon receipt of an adverse decision by
the CIR, filed an appeal with the CTA. While
the appeal is pending, the BIR served a
warrant of levy on the real properties of RR
to enforce the collection of the disputed tax.
Granting arguendo that the BIR can legally
levy on the properties, what could RR do to
stop the process? Explain briefly. (2004 BAR)
A: RR should file a motion for injunction with the
CTA to stop the administrative collection
process. An appeal to the CTA shall not suspend
the enforcement of the tax liability, unless a
motion to that effect shall have been presented
in court and granted by it on the basis that such
435
collection will jeopardize the interest of the
taxpayer or the Government (Pirovano v. CIR, 14
G.R. No. L-19865, July 31, 1965)
Q: Globesmart Services, Inc. received a FAN
with FLD from the BIR for deficiency income
tax, VAT, and withholding tax for the taxable
year 2016 amounting to P48 million.
Globesmart filed a protest against the
assessment, but the CIR denied the protest.
Hence, Globesmart filed a petition for review
in the CTA with an urgent motion to suspend
the collection of tax.
After hearing, the CTA Division issued a
resolution granting the motion to suspend
but required Globesmart to post a surety
bond equivalent to the deficiency assessment
within 15 days from notice of the resolution.
Globesmart moved for the partial
reconsideration of the resolution and for the
reduction of the bond to an amount it could
obtain. The CTA Division issued another
resolution reducing the amount of the surety
bond to P24 million. The latter amount was
still more than the net worth of Globesmart
Services, Inc. as reported in its audited
financial statements.
a. May the collection of taxes be
suspended?
b. Is the CTA Division justified in requiring
Globesmart to post a surety bond as a
condition for the suspension of the
deficiency tax collection? (2017 BAR)
A:
a. YES. As provided by R.A. No. 1125, as
amended by R.A. No. 9282, that when in the
opinion of the Court the collection by the
aforementioned government agencies may
jeopardize the interest of the Government
and/ or the taxpayer, the Court any stage of
the proceeding may suspend the said
collection and require the taxpayer either to
deposit the amount claimed or to file a
surety bond for not more than double the
amount with the Court.
b. NO. The Supreme Court, in the case of
Tridharma Marketing Corporation v. CTA
(G.R. No. 215950, June 20, 2016), cited the
case of Pacquiao v. CTA (G.R. No. 213394,
April 6, 2016) where it ruled that the CTA
 Judicial Remedies
should first conduct a preliminary hearing
for the proper determination of the
necessity of a surety bond or the reduction
thereof. In the conduct of its preliminary
hearing, the CTA must balance the scale
between the inherent power of the State to
tax and its right to prosecute perceived
transgressors of the law, on one side; and
the constitutional rights of petitioners to
due process of law and the equal protection
of the laws, on the other. In this case, the
CTA failed to consider that the amount of
the surety bond that it is asking Globesmart
to pay is more than its net worth. Thus, it is
necessary for the CTA to first conduct a
preliminary hearing to give taxpayer an
opportunity to prove its inability to come up
with such amount.
SUSPENSION OF COLLECTION OF TAXES
Requisites for suspension of collection of tax:
1. There is an appeal to the CTA from a decision
of the CIR;
2. In the opinion of the CTA, the collection may
jeopardize the interest of the government
and/or the taxpayer;
3. The taxpayer may be required to deposit the
amount claimed or to file a surety bond for
not more than double the amount with the
Court (Sec. 11, R.A. 1125); and
4. That the appeal is not frivolous or dilatory.
NOTE: The motion for the suspension of the
collection of tax shall be verified and shall state
clearly and distinctly the facts and the grounds
relied upon in support of the motion. (Sec. 4,
Rule 10, RRCTA)
Exceptions to the requirement of posting of
bond
1. Prescription of administrative action for
collection
Collector of Internal Revenue cannot, after 3
years from the time the taxpayer has filed
his income tax returns or from the time
when he should have filed the same, make
any summary collection of the deficiency
income taxes demanded thru administrative
methods and that the warrant of distraint
and levy as well as the contemplated sale at
public auction of the properties of the
taxpayer are null and void being as they are
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
in violation of Sec. 51 (d) of the NIRC.
(Collector v. Avelino, 100 Phil. 327 (1956))
2. Method of collection contrary to law
CTA has ample authority to issue injunctive
writs to restrain the collection of tax and to
even dispense with the deposit of the
amount claimed or the filing of the required
bond, whenever the method employed by
the CIR in the collection of tax jeopardizes
the interests of a taxpayer for being
patently in violation of the law. (Sps.
Pacquiao v. CTA, G.R. No. 213394, April 06,
2016)
It would certainly be an absurdity on the
part of the CTA to declare that the collection
by the summary methods of distraint and
levy was violative of the law, and then, on
the same breath, require the petitioner to
deposit or file a bond as a pre-requisite of
the issuance of a writ of injunction.
(Collector v. Zulueta, G.R. No. L-8840,
February 8, 1957)
NOTE: The prohibition on the issuance of a writ
of injunction to enjoin the collection of taxes is
applied only to national internal revenue taxes,
not to local taxes. (Angeles City v. Angeles Electric
Corp., G.R. No. 166134, June 29, 2010)
Q: In the investigation of the withholding tax
returns of AZ Medina Security Agency (AZ
Medina) for the taxable years 1997 and 1998,
a discrepancy between the taxes withheld
from its employees and the amounts actually
remitted to the government was found.
Accordingly, before the period of
prescription commenced to run, the BIR
issued an assessment and a demand letter
calling for the immediate payment of the
deficiency withholding taxes in the total
amount of P250, 000.00. Counsel for AZ
Medina protested the assessment for being
null and void on the ground that no pre-
assessment notice had been issued. However,
the protest was denied. Counsel then filed a
petition for prohibition with the CTA to
restrain the collection of the tax.
Will the special civil action for prohibition
brought before the CTA under Sec. 11 of R.A,
No. 1125 prosper? Discuss your answer.
(2002 BAR)
436
 Taxation Law
A: NO. The special civil action for prohibition
will not prosper because the CTA has no
jurisdiction to entertain the same. The power to
issue writ of injunction provided for under
Section 11 of R.A. 1125 is only ancillary to its
appellate jurisdiction. The CTA is not vested
with original jurisdiction to issue writs of
prohibition or injunction independently of and
apart from an appealed case. The remedy is to
appeal the decision of the BIR. (Collector v.
Yuseco, L-12518, October 28, 1961)
Taking of evidence
CTA may receive evidence in the following cases:
1. In all cases falling within the original
jurisdiction of the CTA in division
pursuant to Sec. 3, Rule 4 of RRCTA.
2. In appeals in both civil and criminal
cases where the court grants new trial
pursuant to Sec. 2, Rule 53 and Sec. 12,
Rule 124 of the ROC.
Persons authorized to take evidence:
1. Justice of the CTA
It may be made motu proprio or upon
proper motion, when:
a. The determination of a question of fact
arises at any stage of the proceedings;
b. The taking of an account is necessary; or
c. The determination of an issue of fact
requires the examination of a long
account. (Sec. 3, Rule 12, RRCTA)
2. Court official
a. Clerk of court;
b. Division clerk of court;
c. their assistants who are members of the
Philippine Bar; and
d. Court attorney. (Sec. 4, Rule 12, RRCTA)
NOTE: The taking of evidence by Court
official applies only in default or ex parte
hearings, or where the parties agree in
writing.
It shall be for the sole purpose of
marking, comparison with the original,
and identification by witnesses of such
documentary evidence.
The court official have no power to rule
on objections to any question or to the
admission of exhibits, which objections
437
shall be resolved by the Court upon
submission of his report and the
transcripts within 10 days from
termination of the hearing. (Sec. 4, Rule
12, RRCTA)
Q: How are evidence taken in the
proceedings before the CTA?
A: In case of voluminous documents or long
accounts, the party who desires to introduce in
such evidence must, upon motion and approval
by the Court, refer the voluminous documents to
an independent CPA for the purpose of
presenting:
a. A summary of the invoices or receipts
and the amount of taxes paid; and
b. A certification of the independent CPA
attesting to the correctness of the
contents of the summary after making
an examination, evaluation and audit of
voluminous receipts, invoices or long
accounts. (Sec. 5, Rule 12, RRCTA)
Motion for Reconsideration or New Trial
Any aggrieved party may seek a reconsideration
or new trial of any decision, resolution or order
of the Court within 15 days from the date he
received notice of the decision, resolution or
order of the Court in question. The adverse
party may file an opposition to the MR or MNT
within 10 days after receipt of a copy of such MR
or MNT. (Secs. 1 and 2, Rule 15, RRCTA)
Grounds for filing a Motion for New Trial
1. Fraud, accident, mistake or excusable
negligence (FAME) which ordinary
prudence could not have guarded against
and by reason of which such aggrieved party
has probably been impaired in his rights; or
2. Newly discovered evidence, which he could
not, with reasonable diligence, have
discovered and produced at the trial and,
which, if presented, would probably alter
the result.
A motion for new trial shall include all grounds
then available and those not included shall be
deemed waived. (Sec. 5, Rule 15, RRCTA)
Effect of filing a Motion for Reconsideration
or New Trial
 Judicial Remedies
The filing of the MR or MNT shall suspend the
running of the period within which an appeal
may be perfected. (Sec. 4, Rule 15, RRCTA)
NOTE: No second MR or MNT shall be allowed.
(Sec. 7, Rule 15, RRCTA)
The motion shall be in writing stating its
grounds; a written notice of which shall be
served by the movant on the adverse party. A
motion on the ground of FAME shall be
supported by affidavits of merits, while a
motion on the ground of newly discovered
evidence shall be supported by affidavits of the
witnesses by whom such evidence is expected to
be given, or by duly authenticated documents
which are proposed to be introduced in
evidence. Failure to comply shall render the MR
or MNT “pro forma”, which shall not suspend the
period. Also, if the MR is directed to the
Secretary of Finance it shall not suspend the
period.
INJUNCTION NOT AVAILABLE
TO RESTRAIN COLLECTION
Collection of taxes should not be enjoined except
upon clear showing of a right to an exemption.
RATIONALE: Lifeblood theory. (Northern Lines
Inc. v. CA, G.R. No. L-41376-77, June 29, 1988)
GR: Collection of internal revenue taxes and
customs duties cannot be enjoined. Even an
appeal to the CTA shall not suspend the
payment, levy, distraint and sale of taxpayer’s
property as a rule.
XPNs: However, the CTA is empowered to
suspend the collection of internal revenue taxes
and custom duties in cases pending appeal only
when:
1. in the opinion of the court the collection by
the BIR may jeopardize the interest of the
government and/ or taxpayer; and
2. the taxpayer is willing to deposit the amount
being collected or to file a surety bond for
more than double the amount of the tax to
be fixed by the court (Sec. 11, R.A. 1125)
NOTE: The CTA may issue injunction only in the
exercise of its appellate jurisdiction. (CIR v.
Yuseco, G.R. No. L-12518, October 28, 1961)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
CRIMINAL CASES
INSTITUTION AND PROSECUTION OF
CRIMINAL ACTION
All criminal actions before the Court in Division
in the exercise of its original jurisdiction shall be
instituted by the filing of an information in the
name of the People of the Philippines.
In criminal actions involving violations of the
NIRC and other laws enforced by BIR, the CIR
must approve their filing.
In criminal actions involving violations of the
TCCP and other laws enforced by the BOC, the
COC must approve their filing. (Sec. 2, Rule 9,
RRCTA)
All criminal actions will be under the direction
and control of the public prosecutor.
NOTE: The institution of the criminal action
shall interrupt the running of the period of
prescription. (Ibid)
INSTITUTION OF CIVIL ACTION IN
CRIMINAL ACTION
Rule on the institution of civil action with
criminal action (2010 BAR)
The criminal action and the corresponding civil
action for the recovery of civil liability for taxes
and penalties shall be deemed jointly instituted
in the same proceeding. The filing of the criminal
action shall necessarily carry with it the filing of
the civil action. No right to reserve the filing of
such civil action separately from the criminal
action shall be allowed or recognized (Sec. 11,
Rule 9, RRCTA)
Q: How are criminal actions prosecuted?
A: In criminal actions involving violation of the
NIRC or other laws enforced by the BIR, and
violations of the TCCP or other laws enforced by
the BOC, the prosecution may be conducted by
their respective duly deputized legal officers.
(Sec. 3, Rule 9, RRCTA)
Q: After filing an Information for violation of
Section 254 of the NIRC (Attempt to Evade or
Defeat Tax) with the CTA, the Public
Prosecutor manifested that the People is
438
 Taxation Law
reserving the right to file the corresponding
civil action for the recovery of the civil
liability for taxes. As counsel for the accused,
comment on the People's manifestation.
(2015 BAR)
behalf of the officials of said agencies sued in
their official capacity: Provided, however, such
duly deputized legal officers shall remain at all
times under the direct control and supervision
of the Solicitor General. (Sec. 10, Rule 9, RRCTA)

A: I will move for the denial of the manifestation. APPEAL TO THE COURT OF TAX
Any provision of law or the ROC to the contrary APPEALS EN BANC
notwithstanding, the criminal action and the
corresponding civil action for the recovery of
Q: May a decision or resolution of the CTA in
civil liability for taxes and penalties shall at all
Division be appealable directly to the CTA En
times be simultaneously instituted with, and
Banc in its exercise of its exclusive appellate
jointly determined in the same proceeding by
jurisdiction?
the CTA, the filing of the criminal action being
deemed to necessarily carry with it the filing of
A: NO. The petition for review of a decision or
the civil action, and no right to reserve the filing
resolution of the Court in Division must be
of such civil action separately from the criminal
preceded by the filing of a timely motion for
action shall be recognized.
reconsideration or new trial with the Division.
(Sec. 1, Rule 8, RRCTA)
Period to appeal
NOTE: The word “must” clearly indicates the
Appeal and Period to Appeal
mandatory (not directory) of the nature of a
requirement.
1. An appeal to the Court in criminal cases
decided by a RTC in the exercise of its
Q: On May 15, 2013, CCC, Inc. received the
original jurisdiction shall be taken by filing a
Final Decision on Disputed Assessment
notice of appeal pursuant to Sections 3(a)
issued by the CIR dismissing the protest of
and 6, Rule 122 of the ROC within 15 days
CCC, Inc. and affirming the assessment
from receipt of a copy of the decision or final
against said corporation. On June 10, 2013,
order with the court which rendered the
CCC, Inc. filed a Petition for Review with the
final judgment or order appealed from and
CTA in division. On July 31, 2015, CCC, Inc.
by serving a copy upon the adverse party.
received a copy of the Decision dated July 22,
The Court in Division shall act on the appeal.
2015 of the CTA division dismissing its
2. An appeal to the CTA En Banc in criminal
Petition. CCC, Inc. immediately filed a
cases decided by the Court in Division or the
Petition for Review with the CTA en banc on
RTC in the exercise of their appellate
August 6, 2015. Is the immediate appeal by
jurisdiction shall be taken by filing a petition
CCC, Inc. to the CTA en banc of the adverse
for review as provided in Rule 43 of the ROC
Decision of the CTA division the proper
within 15 days from receipt of a copy of the
remedy? (2015 BAR)
decision or resolution appealed from. (Sec. 9,
Rule 9, RRCTA)
A: NO. CCC, Inc. should first file a motion for
reconsideration with the CTA Division. Petition
Q: Who shall act as a representative of the
for review of a decision or resolution of the
People and the Government in the criminal
Court in Division must be preceded by the filing
action?
of a timely motion for reconsideration or new
trial with the Division. Before the CTA En Banc
A: The Solicitor General shall represent the
could take cognizance of the petition for review
People of the Philippines and government
concerning a case falling under its exclusive
officials sued in their official capacity in all cases
appellate jurisdiction, the litigant must
brought to the CTA in the exercise of its appellate
sufficiently show that it sought prior
jurisdiction. He may deputize the legal officers of
reconsideration or moved for a new trial with
the BIR in cases brought under the NIRC or other
the concerned CTA division.
laws enforced by the BIR, or the legal officers of
the BOC in cases brought under the TCCP or
Q: Asiatrust Development Bank, Inc.
other laws enforced by the BOC, to appear on
(Asiatrust) received from the CIR Formal

439
 Judicial Remedies
Letters of Demand (FLD) with Assessment
Notices for deficiency internal revenue taxes.
Asiatrust timely protested the assessment
notices. Due to the inaction of the CIR on the
protest, Asiatrust filed before the CTA a
Petition for Review praying for the
cancellation of the tax assessments for
deficiency taxes and also claimed that it
availed of the Tax Amnesty Law. The CTA
Division partially affirmed the CIR’s decision
but declared void some tax assessments for
having been issued beyond the three-year
prescriptive period. CIR filed a Motion for
Partial Reconsideration of the assessments
assailing the CTA Division's finding of
prescription. The CTA Division amended its
decision. Unsatisfied, both parties appealed
to CTA En Banc. The CTA En Banc denied the
CIR' s appeal for failure to file a prior motion
for reconsideration of the Amended Decision.
The CIR contends that the CTA En Banc erred
in dismissing his appeal for failing to file a
motion for reconsideration on the Amended
Decision as a perusal of the Amended
Decision shows that it is a mere resolution,
modifying the original Decision. Is the
contention of CIR meritorious?
A: NO. Section 1, Rule 8 of the Revised Rules
provide that an appeal to the CTA En Banc must
be preceded by the filing of a timely motion for
reconsideration or new trial with the CTA
Division. Failure to do so is a ground for the
dismissal of the appeal as the word "must"
indicates that the filing of a prior motion is
mandatory, and not merely directory. Due to this
procedural lapse, the Amended Decision has
attained finality insofar as the CIR is concerned.
The CIR, therefore, may no longer question the
merits of the case before the SC. (Asiatrust
Development Bank, Inc. vs. CIR, G.R. No. 201530,
April 19, 2017)
Q: Judy Anne was criminally charged for
filing a fraudulent income tax return before
the CTA. Thereafter, she filed a Motion to
Quash in the CTA First Division which has
been denied. The Motion for reconsideration
filed was also denied. A Motion for Extension
of time was filed for her Petition for review
in CTA en banc. Thereafter, the Petition for
Review before the CTA en banc was filed.
Both the motion for extension of time and the
petition for review were denied by the CTA
en banc on the ground that a Motion to Quash
is an interlocutory order therefore,
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
unappealable. Was the dismissal by the CTA
en banc proper?
A: YES. The Petitioner cannot file a Petition for
Review before the CTA en banc to appeal the
resolution of the CTA First Division denying her
Motion to Quash. The Resolution is
interlocutory, thus, unappealable. (Santos v.
People, G.R. No. 173176, August 26, 2008)
The CTA en banc has jurisdiction over final
order or judgment but not over interlocutory
orders issued by the CTA in division.
Considering that no appeal can be taken from
interlocutory CTA Orders, the aggrieved party
may file an appropriate special civil action under
Rule 65 pursuant to Sec. 1, Rule 41 of the ROC, as
in this case. (CIR v. CTA and CBK Power Co. Ltd.,
G.R. Nos. 203054-55, July 29, 2015)
Q: In response to an adverse BIR ruling
against it and as reviewed by the Secretary of
Finance, GGG, Inc. filed with the Court of
Appeals a Petition for Review under Rule 43
of the ROC. The CA, however, dismissed the
petition for lack of jurisdiction declaring that
it is the CTA which has jurisdiction over the
issues raised. Before which Court should
GGG, Inc. seek recourse from the adverse
ruling of the Secretary of Finance in the
exercise of the latter's power of review?
(2015 BAR)
A: GGG should file its petition with the CTA. The
Supreme Court held that the jurisdiction to
review the rulings of the Commissioner of
Internal Revenue pertains to the CTA which has
the authority to issue, among others, a writ of
certiorari in the exercise of its appellate
jurisdiction.
Q: The City of Liwliwa assessed local business
taxes against Talin Company. Claiming that
there is double taxation, Talin Company filed
a Complaint for Refund or Recovery of
Illegally and/or Erroneously-collected Local
Business Tax; Prohibition with Prayer to
Issue Temporary Restraining Order and Writ
of Preliminary Injunction with the RTC. The
RTC denied the application for a Writ of
Preliminary Injunction. Since its motion for
reconsideration was denied, Talin Company
filed a special civil action for certiorari with
the CA. The government lawyer representing
the City of Liwliwa prayed for the dismissal
of the petition on the ground that the same
440
 Taxation Law
should have been filed with the CTA. Talin
Company, through its lawyer, Atty. Frank,
countered that the CTA cannot entertain a
petition for certiorari since it is not one of its
powers and authorities under existing laws
and rules. Decide. (2014 BAR)
A: The petition for certiorari before the CA must
be dismissed, since such petition should have
been filed with the CTA. As stated in City of
Manila v. Caridad H. Grecia-Cuerdo (G.R. No.
175723, February 2, 2014), the CTA has the
power to determine whether or not there has
been grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of the
RTC in issuing interlocutory orders in cases
falling within the CTA’s exclusive appellate
jurisdiction. The CTA therefore has jurisdiction
to issue writs of certiorari in such cases.
Furthermore, its authority to entertain petitions
for certiorari questioning interlocutory orders
issued by the RTC is included in the powers
granted by the Constitution and inherent in the
exercise of its appellate jurisdiction.
Q: Can the CTA En Banc entertain a petition
for annulment of a decision of the CTA
Division?
A: NO. Annulment of judgment implies power by
a superior court over a subordinate one, as
provided for in Rule 47 of the Rules of Court,
wherein the appellate court may annul a
decision of the regional trial court, or the latter
court may annul a decision of the municipal or
metropolitan trial court. The laws creating the
CTA and expanding its jurisdiction (R.A. Nos.
1125 and 9282) and the court’s own rules of
procedure (the Revised Rules of the CTA) do not
sanction such a procedure.
The CTA sitting En Banc cannot annul a decision
of one of its divisions. The divisions are not
considered separate and distinct courts but are
divisions of one and the same court; there is no
hierarchy of courts within the Court of Tax
Appeals, for they each remain as one court
notwithstanding that they also work in divisions.
By analogy, the Supreme Court sitting En Banc is
not an appellate court vis-à-vis its divisions, and
it exercises no appellate jurisdiction over the
latter. Thus, it appears contrary to these features
that a collegial court, sitting En Banc, may be
called upon to annul a decision of one of its
divisions which had become final and executory,
441
for it is tantamount to allowing a court to annul
its own judgment and acknowledging that a
hierarchy exists within such court. (CIR v. Kepco
Ilijan Corporation, G.R. No. 199422, June 21,
2016)
Q: For the first quarter of 2007, the City of
Manila assessed Cosmos local business taxes
and regulatory fees in the total amount of
P1,226,781.05, as contained in the Statement
of Account dated January 15, 2007. Cosmos
protested the assessment through a letter
dated January 18, 2007, arguing that Tax
Ordinance Nos. 7988 and 801, amending the
Revenue Code of Manila (RCM), have been
declared null and void. Cosmos received a
letter from the City Treasurer denying their
protest. On March 8, 2007, Cosmos filed its
complaint with the RTC of Manila praying for
the refund or issuance of a tax credit
certificate in the amount of P1,094,786.82.
The RTC in its decision ruled in favor of
Cosmos but denied the claim for refund. The
petition for review was raffled to the CTA
Division.
The CTA Division essentially ruled that
Cosmos Bottling Corporation's (Cosmos)
local business tax liability for the calendar
year 2007 shall be computed based on the
gross sales or receipts for the year 2006.
Instead of filing a motion for reconsideration
or new trial, the petitioners directly filed
with the CTA En Banc a petition for review
praying that the decision of the CTA Division
be reversed or set aside. In its Resolution of
16 February 2011, the CTA En Banc ruled
that the direct resort to it without a prior
motion for reconsideration or new trial
before the CTA Division violated Section 18
of R.A. No. 1125, as amended by R.A. No. 9282
and R.A. No. 9503, and Section 1, Rule 8 of the
Revised Rules of the CTA (CTA Rules).
1. Did the CTA En Banc correctly dismiss
the petition for review before it for
failure of the petitioners to file a motion
for reconsideration or new trial with the
CTA Division?
2. Can a taxpayer who had initially
protested and paid the assessment may
shift its remedy to one of refund?
A:
 Judicial Remedies
1. YES. The CTA En Banc correctly dismissed b. Where payment was made, the
the petition for review. The filing of a taxpayer may thereafter maintain an
motion for reconsideration or new trial action in court questioning the validity
before the CTA Division is an indispensable and correctness of the assessment
requirement for filing an appeal before the (Section 195, LGC) and at the same
CTA En Banc. time seeking a refund of the taxes. In
truth, it would be illogical for the
The CTA En Banc was correct in taxpayer to only seek a reversal of the
interpreting Section 18 of R.A. No. 1125, as assessment without praying for the
amended by R.A. 9282 and RA. No. 9503 refund of taxes. Once the assessment is
set aside by the court, it follows as a
The rules are clear. Before the CTA En Banc matter of course that all taxes paid
could take cognizance of the petition for under the erroneous or invalid
review concerning a case failing under its assessment are refunded to the
exclusive appellate jurisdiction, the litigant taxpayer. (Ibid)
must sufficiently show that it sought prior
reconsideration or moved for a new trial PETITION FOR REVIEW ON CERTIORARI
with the concerned CTA division. TO THE SUPREME COURT
Procedural riles are not to be trifled or be
excused simply because their
Effect of the appeal
noncompliance may have resulted in
prejudicing a party’s substantive rights.
The MR or MNT shall be filed before the Court
(City of Manila and Office of the City
shall be deemed abandoned if, during its
Treasurer of Manila v. Cosmos Bottling
pendency, the movant shall appeal to the
Corporation, G.R. 196681, June 27, 2018)
Supreme Court (Sec. 1, Rule 16, RRCTA)
2. YES. A taxpayer who had protested and
Q: Who may file an appeal to the Supreme
paid an assessment may later on institute
Court by petition for review on certiorari?
an action for refund.
A: A party adversely affected by a decision or
Where an assessment is to be protested or
ruling of the Court En Banc may appeal
disputed, the taxpayer may proceed (a)
therefrom by filing with the Supreme Court a
without payment, or (b) with payment of
verified petition for review on certiorari within
the assessed tax, fee or charge. Whether
15 days from receipt of a copy of the decision or
there is payment of the assessed tax or not,
resolution, as provided in Rule 45 of the ROC.
it is clear that the protest in writing must
be made within sixty (60) days from receipt
If such party has filed a MR or MNT, the period
of the notice of assessment; otherwise, the
herein fixed shall run from the party’s receipt of
assessment shall become final and
a copy of the resolution denying the MR or MNT.
conclusive. Additionally, the subsequent
(Sec. 1, Rule 16, RRCTA)
court action must be initiated within thirty
(30) days from denial or inaction by the
Q: Does the CTA have jurisdiction over an
local treasurer; otherwise, the assessment
action to collect on a bond used to secure
becomes conclusive and unappealable.
payment of taxes?
a. Where no payment is made, the
taxpayer's procedural remedy is
A: NO. An action filed by the BOC against a
governed strictly by Section 195. That
bonding company to collect on a bond used to
is, in case of whole or partial denial of
secure payment of taxes is not a tax collection
the protest, or inaction by the local
case but rather a simple case for enforcement of
treasurer, the taxpayer's only recourse
a contractual liability. Hence, appellate
is to appeal the assessment with the
jurisdiction over the case properly lies with the
court of competent jurisdiction. The
CA rather than the CTA. (Phil. British Assurance
appeal before the court does not seek
Co., Inc. v. Republic of the Phil., G.R. No. 185588 ,
a refund but only questions the
Feb. 2, 2010)
validity or correctness of the
assessment.

UNIVERSITY OF SANTO TOMAS 442

2021 GOLDEN NOTES
 Taxation Law
Q: Can the SC take cognizance of a petition for
annulment of a decision of the CTA Division
or of the CTA En Banc?
A: NO. A direct petition for annulment of a
judgment of the CTA to the Supreme Court,
meanwhile, is unavailing, for the same reason
that there is no identical remedy with the High
Court to annul a final and executory judgment of
the Court of Appeals. R.A. No. 9282, Section 1
puts the CTA on the same level as the Court of
Appeals, so that if the latter’s final judgments
may not be annulled before the SC, then the
CTA’s own decisions similarly may not be so
annulled. And more importantly, annulment of
judgment is an original action, yet, it is not
among the cases enumerated in the
Constitution’s Article VIII, Section 5 over which
the SC exercises original jurisdiction. Annulment
of judgment also often requires an adjudication
of facts, a task that the Court loathes to perform,
as it is not a trier of facts. (CIR v. Kepco Ilijan
Corporation, G.R. No. 199422, June 21, 2016)
SUMMARY OF PROCEDURES IN APPEALING A
DECISION TO THE CTA AND BEYOND
1. Appeal within 30 days from receipt of
decision or period of inaction of the CIR,
COC, Secretary of Finance, or the CBAA
or the RTC
GR: Appeal to the CTA Division by a petition
for review under Rule 42 within 30 days.
XPN: In case of decisions of the CBAA or RTC
in the exercise of its appellate jurisdiction,
appeal to EN BANC by a petition for review
under Rule 43.
In criminal cases, appeal from the decision of
the RTC decided in the exercise of its original
jurisdiction is via a notice of appeal filed
within 15 days from the receipt of decision.
If the RTC acted in the exercise of its
appellate jurisdiction, appeal to the En Banc
by a petition for review under Rule 43 within
15 days from the receipt of decision.
2. In case the decision of the Division was
adverse: File an MR or MNT with the same
division within 15 days from the receipt of
the decision.
443
The MR or the MNT is a condition
precedent before bringing the case to the
CTA En Banc. (COC vs. Marina Sales, G.R. No.
183868, November 22, 2010)
3. In case the resolution of the Division on
the MR is still adverse: File a petition for
review with the CTA En Banc under Rule 43
within 15 days from the receipt of the
decision. The same rule applies for criminal
cases.
4. In case the decision of the CTA En Banc is
still adverse: File a review on certiorari with
the SC under Rule 45 within 15 days from
receipt of the decision. (Ingles, 2015)
MATRIX OF CTA JURISDICTION
EXCLUSIVE APPELLATE JURISDICTION TO
REVIEW BY APPEAL
Decisions of the Commissioner on Internal
Revenue in cases involving:
a. Disputed assessments
b. Refunds of internal revenue taxes, fees or
other charges and penalties imposed
thereto
c. Other matters arising under NIRC or
other laws (under BIR)
Inaction by the Commissioner of Internal
Revenue in cases involving:
a. Disputed assessments
b. Refunds of internal revenue taxes, fees or
other charges and penalties imposed
thereto
c. Other matters arising under NIRC or
other laws (under BIR), where the NIRC
provides a specific period for action, in
which case the inaction shall be deemed
a denial.
Decisions, orders or resolutions of the
Regional Trial Courts in local tax cases
originally decided or resolved by them in the
exercise of their original or appellate
jurisdiction.
Decisions of the Commissioner of Customs in
cases involving:
a. Liability for customs duties, fees or other
money charges
b. Seizure, detention or release of property
affected
c. Fines, forfeitures or other penalties in
relation thereto
d. Other matters arising under Customs
Law or other laws (under BOC)
 Judicial Remedies
Decisions of the Central Board of Assessment c. Other laws resolutions or
Appeals in the exercise of its appellate administer orders of the RTC
jurisdiction over cases involving the ed by BIR in tax cases
assessment and taxation of real property and BOC originally decided
originally decided by the provincial or city …originally decided by them.
board of assessment appeals; by the regular court
Decisions of the Secretary of Finance on where the principal
custom cases elevated to him automatically amount of the taxes
for review from decisions of the is less than P1M or
Commissioner of Customs which are adverse no special amount
to the Government under Section 2315 of the claimed.
TCCP (now Sec. 1128 of the Custom 2. Judgments, 2. Tax collection cases
Modernization & Tariff Act of 2016, as resolutions or from judgments,
amended). orders of the resolutions or
Decisions of the Secretary of Trade and RTC in tax orders of the RTC
Industry, in the case of non-agricultural cases originally in the exercise of
product, commodity or article, and the decided by its appellate
Secretary of Agriculture in the case of them. jurisdiction over
agricultural product, commodity or article, 3. Judgments, tax cases
involving dumping and countervailing duties resolutions or originally decided
under Sections 301 and 302, respectively of orders of the by the MeTC,
the TCCP, and safeguard measures under R.A. RTC in the MTC and MCTC.
8800, where either party may appeal the exercise of its
decision to impose or not to impose said appellate
duties. jurisdiction
Decisions of the Secretary of Agriculture in over tax cases
the case of agricultural product, commodity originally
or article, involving dumping and decided by the
countervailing duties under Secs. 301 and MeTC, MTC and
302, respectively of the TCCP, and safeguard MCTC.
measures under R.A. 8800, where either
party may appeal the decision to impose or
not to impose said duties.
EXCLUSIVE ORIGINAL JURISDICTION
Criminal Case/s: Civil Case/s:
1. Violations of: 1. Tax collection
a. NIRC, cases involving
b. TCCP, final and
c. Other laws executory
administer assessments for
ed by BIR taxes, fees,
and BOC, charges and
…where the penalties where
principal amount of the principal
taxes and fees, amount of taxes
exclusive of charges and fees, exclusive
and penalties of charges and
claimed is P1M and penalties claimed
above. is P1M and
above.
EXCLUSIVE APPELLATE JURISDICTION
Criminal Case/s: Civil Case/s:
1. Violations of : 1. Tax collection
a. NIRC cases from
b. TCCP, judgments,

UNIVERSITY OF SANTO TOMAS 444

2021 GOLDEN NOTES
 Taxation Law
FLOWCHART – MODE OF APPEAL

Fig 1. Procedure for Assessment:

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

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

Taxpayer filed the return on time,

and it is not fraudulent or false

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

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

FILE A REPLY

w/in 15 days from receipt of

PAN
REPEA FAILED TO FILE A FILED A REPLY,
T PAN REPLY DISAGREES WITH
FINDINGS OF
DEFICIENCY TAX

DECLARE TAXPAYER IN
DEFAULT

FINAL ASSESSMENT NOTICE (FAN)

AND DEMAND TO PAY

w/in 30 days from receipt of

FAN

Pay/Collection of Taxes File a PROTEST

(Taxpayer)

445
 Judicial Remedies
Fig 2. Protest Under the NIRC

FINAL ASSESSMENT NOTICE (FAN) & Demand to pay

within 30 days from receipt of FAN

FILE A PROTEST:
2 KINDS OF PROTESTS:
1. Request for reconsideration - 60 period NOT applicable
2. Request for reinvestigation - Suspends action of CIR for 60 days from
filing of protest

TAXPAYER MUST SUBMIT COMPLETE SET OF DOCUMENTS W/IN 60 DAYS

(Request for reinvestigation)

CIR IS GIVEN 180 DAYS TO DECIDE

PROTEST DENIED INACTION FOR 180 DAYS TAXPAYER OPTED TO WAIT FOR CIR's DECISION

within 30 days from denial/ lapse of 180 days/ decision

APPEAL TO CTA DIVISION

within 15 days from receipt of decision/ resolution/ order

MOTION FOR RECONSIDERATION OR NEW

TRIAL WITH THE CTA DIVISION

within 15 days from receipt of decision/ resolution/ order

APPEAL TO CTA EN BANC

within 15 days from receipt of decision/ resolution/ order

APPEAL TO SUPREME COURT

= Period to file

UNIVERSITY OF SANTO TOMAS 446

2021 GOLDEN NOTES
 Taxation Law
Fig 3. Elevation of Disputes to CTA Division, CTA En Banc, and the Supreme Court

447