U.P.

LAW BOC TAXATION

U.P. LAW BOC TAXATION
U.P. LAW BOC TAXATION
 U.P. LAW BOC
TABLE OF CONTENTS
TAXATION 1........................................................... 1
I. GENERAL PRINCIPLES OF TAXATION......... 2
A. CONCEPT AND PURPOSE OF TAXATION .... 2
1. DEFINITION AND CONCEPT ................................... 2
2. PURPOSE ......................................................... 2
3. TAX AS DISTINGUISHED FROM OTHER FORMS OF
EXACTIONS ....................................................... 4
B. POWER OF TAXATION AS DISTINGUISHED
FROM POLICE POWER AND EMINENT DOMAIN .. 7
C. THEORY AND BASIS OF TAXATION ............. 9
1. LIFEBLOOD THEORY ............................................ 9
2. NECESSITY THEORY ........................................... 9
3. BENEFITS-PROTECTION THEORY (SYMBIOTIC
RELATIONSHIP) .................................................. 9
D. JURISDICTION OVER SUBJECT AND
OBJECTS............................................................... 9
E. PRINCIPLES OF A SOUND TAX SYSTEM ... 10
1. FISCAL ADEQUACY ........................................... 10
2. ADMINISTRATIVE FEASIBILITY.............................. 10
3. THEORETICAL JUSTICE OR EQUALITY ................... 10
F. INHERENT AND CONSTITUTIONAL
LIMITATIONS ON TAXATION............................... 10
1. INHERENT LIMITATIONS ..................................... 10
a. Public Purpose ...................................... 10
b. Inherently Legislative ............................. 11
c. Territorial............................................... 12
d. International Comity............................... 13
e. Exemption of Government Entities,
Agencies, and Instrumentalities ................ 13
2. CONSTITUTIONAL LIMITATIONS ........................... 14
a. Provisions directly affecting Taxation...... 15
b. Provisions Indirectly Affecting Taxation .. 21
G. STAGES OR ASPECTS OF TAXATION........ 22
1. LEGISLATIVE ACT: LEVY OR IMPOSITION ............... 22
2. EXECUTIVE ACT: ASSESSMENT AND COLLECTION ......
................................................................. 23
3. TAXPAYER’S ACT: PAYMENT .............................. 23
4. TAXPAYER’S AND EXECUTIVE ACT: REFUND ......... 23
H. REQUISITES OF A VALID TAX .................... 23
TAXATION
I. KINDS OF TAXES ......................................... 24
1. AS TO OBJECT ..................................................24
2. AS TO BURDEN OR INCIDENCE .............................24
3. AS TO TAX RATES .............................................24
4. AS TO PURPOSE ...............................................25
5. AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX) .....
.................................................................25
6. AS TO GRADUATION ..........................................25
J. GENERAL CONCEPTS IN TAXATION .......... 25
1. PROSPECTIVITY OF TAX LAWS ............................25
2. IMPRESCRIPTIBILITY OF TAXES ............................26
3. SITUS OF TAXATION ..........................................27
4. DOUBLE TAXATION ...........................................29
a. Strict sense (Direct Duplicate Taxation) ..29
b. Broad sense (Indirect Duplicate Taxation)
29
5. ESCAPE FROM TAXATION ...................................30
a. Shifting of Tax Burden............................30
b. Tax Avoidance (Tax Minimization) ..........32
c. Tax Evasion (Tax Dodging) ....................32
d. Transformation.......................................33
6. EXEMPTION FROM TAXATION ..............................33
7. DOCTRINE OF EQUITABLE RECOUPMENT ..............35
8. PROHIBITION ON COMPENSATION AND SET-OFF ....35
9. COMPROMISE ..................................................35
10. TAX AMNESTY ..............................................36
K. CONSTRUCTION AND INTERPRETATION OF
TAX LAWS, RULES, AND REGULATIONS ........... 36
1. TAX LAWS .......................................................36
2. TAX EXEMPTION AND EXCLUSION ........................37
3. TAX RULES AND REGULATIONS ...........................37
4. PENAL PROVISIONS OF TAX LAWS .......................39
II. NATIONAL INTERNAL REVENUE CODE
(NIRC) OF 1997, AS AMENDED............................ 39
A. TAXING AUTHORITY.................................... 39
1. JURISDICTION, POWER AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE ...............39
a. Powers and Duties of the Bureau of Internal
Revenue (Sec. 2, NIRC) ...........................39
b. Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases.................39
c. Non-retroactivity of rulings (Sec. 246, NIRC)
39
 U.P. LAW BOC TAXATION

2. RULE-MAKING AUTHORITY OF THE SECRETARY OF a. Domestic Corporations and Resident

FINANCE ......................................................... 40 Foreign Corporations................................97
a. Authority of the Secretary of Finance to b. Non-resident Foreign Corporations (NRFC)
Promulgate Rules and Regulations (Sec. [Sec. 28(B)]............................................ 108
244, NIRC) .............................................. 40 c. Corporations Exempt from Income Tax . 108
b. Specific Provisions to be Contained in Rules 7. FILING OF RETURNS AND PAYMENT ................... 111
and Regulations (Sec. 245, NIRC)............ 40 a. Individual Return .................................. 111
b. Corporate Returns ............................... 113
B. INCOME TAX ............................................... 41
c. Return on Capital Gains Realized from Sale
1. DEFINITION, NATURE AND GENERAL PRINCIPLES ... 41 of Shares of Stock and Real Estate......... 114
a. Income Tax Systems ............................. 42 8. WITHHOLDING OF TAXES ................................. 114
b. Features of the Philippine Income Tax Law a. Concept ............................................... 114
............................................................. 43 b. Final Withholding Tax........................... 114
c. Criteria in Imposing Philippine Income Tax . c. Creditable Withholding Tax................... 114
............................................................. 43 d. Fringe Benefits Tax .............................. 115
d. Types of Philippine Income Tax ............. 43
TAXATION 2 ....................................................... 116
e. Kinds of Taxpayers................................ 44
f. Estates and Trusts ................................ 46 A. ESTATE TAX .............................................. 117
2. CONCEPT OF INCOME ....................................... 47
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION ... 117
a. When Income is Taxable ....................... 48
2. CLASSIFICATION OF DECEDENT ......................... 118
b. Tests in Determining Whether Income is
3. COMPOSITION OF GROSS ESTATE ..................... 119
Earned for Tax Purposes ......................... 49
c. Methods of Accounting .......................... 50 B. DONOR’S TAX............................................ 132
d. Situs of Income ..................................... 51
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION ... 132
3. GROSS INCOME ............................................... 51
2. REQUISITES OF VALID DONATION ...................... 132
a. Definition ............................................... 51
3. TRANSFERS WHICH MAY BE CONSIDERED AS
b. Distinguish: gross income, net income, and
DONATION ..................................................... 133
taxable income ........................................ 52
a. Sale, Exchange, or Transfer of Property for
c. Sources of Income Subject to Tax.......... 52
Less Than Adequate and Full Consideration
d. Exclusions............................................. 63
........................................................... 133
4. DEDUCTIONS FROM GROSS INCOME .................... 68
b. Condonation or Remission of Debt ....... 134
a. General Rules ....................................... 68
c. Renunciation of inheritance .................. 134
b. Concept of Return of Capital .................. 68
4. CLASSIFICATION OF DONOR ............................. 134
c. Distinguish: Itemized Deductions and
5. DETERMINATION OF GROSS GIFT (INCLUDING
Optional Standard Deductions.................. 69
COMPOSITION AND EXEMPTIONS) ...................... 135
d. Items Not Deductible ............................. 81
6. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN
5. INCOME TAX ON INDIVIDUALS ............................. 82
COUNTRY ...................................................... 137
a. Resident Citizens, Non-Resident Citizens
7. FILING OF RETURN AND PAYMENT ..................... 137
and Resident Aliens [Sec. 24(A)(1)] .......... 82
b. Non-Resident Aliens Engaged in Trade or C. VALUE-ADDED TAX (VAT) ......................... 148
Business ................................................. 88
1. NATURE & CHARACTERISTICS OF VAT ............... 148
c. Non-Resident Aliens Not Engaged in Trade
a. Tax on value added.............................. 148
or Business [Sec. 25 (B)] ......................... 88
b. Sales Tax ............................................ 148
d. Aliens Employed by Regional Headquarters,
c. Tax on Consumption ............................ 148
Regional Operating Headquarters, Offshore
d. Indirect tax: Impact and Incidence of Tax ...
Banking Units, and Petroleum Service
........................................................... 148
Contractors.............................................. 89
e. Tax Credit Method ............................... 148
e. Individual Taxpayers exempt from income
f. Destination Principle and Cross-Border
tax........................................................... 89
Doctrine ................................................. 148
6. INCOME TAX ON CORPORATIONS ........................ 97
2. PERSONS LIABLE TO VALUE-ADDED TAX ............ 150
 U.P. LAW BOC
3. COMPOSITION OF VALUE-ADDED TAX ................ 150
a. On sale of goods or properties ............. 150
b. On importation of goods....................... 155
c. On sale of services and use or lease of
properties .............................................. 155
4. ZERO-RATED AND EFFECTIVELY ZERO-RATED SALES
OF GOODS OR PROPERTIES, AND SERVICES......... 159
5. VALUE-ADDED TAX-EXEMPT TRANSACTIONS ....... 162
6. INPUT AND OUTPUT TAX .................................. 170
7. REFUND OR TAX CREDIT OF EXCESS INPUT TAX;
PROCEDURE ................................................. 174
8. COMPLIANCE REQUIREMENTS .......................... 179
a. Registration......................................... 179
b. Invoicing Requirements ....................... 179
c. Filing of Returns and Payment ............. 180
d. Withholding of Final Value-added Tax on
Sales to Government ............................. 181
e. Administrative and Penal Sanctions ..... 181
D. PERCENTAGE TAXES: CONCEPT AND
NATURE..................................................... 187
E. EXCISE TAX: CONCEPT AND NATURE .... 191
F. DOCUMENTARY STAMP TAX: CONCEPT AND
NATURE......................................................... 192
1. TAX REMEDIES UNDER THE NIRC .................... 193
2. TAXPAYER’S REMEDIES................................... 198
a. Protesting the assessment ................... 199
b. Recovery of Tax Erroneously or Illegally
Collected ............................................... 201
c. Power of Commissioner of Internal Revenue
to Compromise ...................................... 205
B.
d. Non-retroactivity of Rulings .................. 206
3. GOVERNMENT REMEDIES FOR COLLECTION OF
DELINQUENT TAXES ....................................... 206
a. Requisites ........................................... 207
b. Prescriptive Periods; Suspension of Running
of Statute of Limitations.......................... 207
c. Administrative Remedies ..................... 207
d. No Injunction Rule; Exceptions ............ 214
4. CIVIL PENALTIES ............................................ 214
a. Delinquency Interest and Deficiency Interest
........................................................... 214
b. Surcharge ........................................... 215
c. Compromise Penalty ........................... 215
d. Fraud Penalty...................................... 215
III. LOCAL TAXATION ........................................ 216
A. LOCAL GOVERNMENT TAXATION ........... 216
1. FUNDAMENTAL PRINCIPLES (U-PUCE-PIP) ....... 216
TAXATION
2. NATURE AND SOURCE OF TAXING POWER .......... 217
a. Grant of Local Taxing Power under the Local
Government Code (LGC)........................ 217
b. Authority to Prescribe Penalties for Tax
Violations ............................................... 217
c. Authority to Grant Local Tax Exemptions ...
........................................................... 217
d. Withdrawal of Exemptions .................... 217
e. Authority to Adjust Local Tax Rates ...... 218
f. Residual Taxing Power of Local
Governments ......................................... 218
3. SCOPE OF TAXING POWER ............................... 218
4. SPECIFIC TAXING POWER OF LGUS .................. 219
a. Taxing Powers of Provinces ................. 219
b. Taxing Powers of Municipalities............ 222
c. Taxing Powers of Cities........................ 226
d. Taxing Powers of Barangays ................ 226
5. COMMON REVENUE-RAISING POWERS ............... 227
6. COMMUNITY TAX ............................................ 227
7. COMMON LIMITATIONS ON THE TAXING POWERS OF
LGUS........................................................... 229
8. REQUIREMENTS FOR A VALID TAX ORDINANCE .... 231
9. COLLECTION OF TAXES.................................... 232
10. TAXPAYER’S REMEDIES ............................... 232
a. Protest of Assessment ......................... 233
b. Claim for Refund or Tax Credit of
Erroneously or Illegally Collected Tax, Fee or
Charge................................................... 233
c. Question the Legality of the Ordinance . 233
11. ASSESSMENT AND COLLECTION OF LOCAL TAXES .
............................................................... 234
REAL PROPERTY TAXATION .................... 236
1. FUNDAMENTAL PRINCIPLES .............................. 236
2. NATURE OF REAL PROPERTY TAX (RPT) ........... 236
3. IMPOSITION.................................................... 236
a. Power to Levy ...................................... 236
b. Exemptions from RPT .......................... 238
4. APPRAISAL AND ASSESSMENT OF REAL PROPERTY ...
............................................................... 238
a. Classes of Real Property...................... 239
b. Assessment of Real Property Based on
Actual Use ............................................. 240
5. COLLECTION OF REAL PROPERTY TAX ............... 241
6. TAXPAYER’S REMEDIES ................................... 244
a. Contesting the Valuation of Real Property..
........................................................... 244
b. Contesting a Deficiency Tax Assessment...
........................................................... 244
c. Compromising an RPT assessment ...... 246
 U.P. LAW BOC TAXATION

IV. JUDICIAL REMEDIES ................................... 250

A. JURISDICTION OF THE COURT OF TAX

APPEALS ....................................................... 250

1. CIVIL CASES ................................................. 250

a. Exclusive Original Jurisdiction of the Court in
Divisions................................................ 250
b. Exclusive Appellate Jurisdiction in Civil
Cases.................................................... 250
2. CRIMINAL CASES ........................................... 251
a. Exclusive Original Jurisdiction of the Court in
Divisions................................................ 251
b. Exclusive Appellate Jurisdiction in Criminal
Cases.................................................... 251
3. CIVIL CASES ................................................. 253
a. Who May Appeal, Mode of Appeal, Effect of
Appeal................................................... 253
b. Suspension of Collection of Taxes ....... 253
c. Injunction not available to restrain collection
253
4. CRIMINAL CASES ........................................... 255
a. Institution and Prosecution of Criminal
Actions .................................................. 255
b. Institution of Civil Action in Criminal Action .
........................................................... 255
c. Period to Appeal.................................. 255
5. APPEAL TO THE CTA EN BANC ........................ 256
6. PETITION FOR REVIEW ON CERTIORARI TO SUPREME
COURT ......................................................... 256
U.P. LAW BOC TAXATION 1 TAXATION

TAXATION 1
TAXATION LAW

Page 1 of 256
 U.P. LAW BOC TAXATION 1
I. GENERAL PRINCIPLES
OF TAXATION
A. CONCEPT AND PURPOSE
OF TAXATION
1. Definition and Concept
a. Revenue Raising Measure
The process or means by which the
sovereign, through its law-making body,
raises income to defray the necessary
expenses of government; a method of
apportioning the cost of government
among those who in some measure are
privileged to enjoy its benefits and must,
therefore, bear its burdens [51 Am. Jur. 34;
1 Cooley 72-93].
b. As a Power
i. It refers to the inherent power of the state
to demand enforced contributions for public
purpose.
ii. Is described as a destructive power
which interferes with the personal and
property rights of the people and takes
from them a portion of their property for the
support of the government. [Paseo Realty
& Development Corporation v. CA, G.R.
No. 119286 (2004)]
2. Purpose
a. Revenue-raising
The primary purpose is to generate funds
for the State to finance the needs of the
citizenry and to advance the common weal.
[Napocor v. Province of Albay G.R. No.
87479, 4 June 1990.]
Fees may be properly regarded as taxes
even though they also serve as an
instrument of regulation. If the purpose is
primarily revenue, or if revenue is, at least,
one of the real and substantial purposes,
then the exaction is properly called a tax.
Page 2 of 256
TAXATION
[PAL v. Edu, G.R. No. L-41383 (1988)]
b. Non-revenue/special or regulatory
Taxation is often employed as a device for
regulation by means of which certain
effects or conditions envisioned by
governments may be achieved. Taxes may
be levied with a regulatory purpose to
provide means for the rehabilitation and
stabilization of a threatened industry which
is affected with public interest as to be
within the police power of the state. Thus,
taxation can:
1. Promote general welfare of the
people as an implement of police
power
The so-called “sin taxes” on alcohol
and tobacco manufacturers help
dissuade the consumers from
excessive intake of these potentially
harmful products. [Southern Cross
Cement Corporation v. Cement
Manufacturers Association of the
Philippines, et al., G. R. No. 158540
(2005)]
2. Strengthen anemic enterprises or
provide incentives to greater
production through grant of tax
exemptions or the creation of
conditions conducive to their growth.
3. Protect local industries against
foreign competition by imposing
additional taxes on imported goods, or
encourage foreign trade by providing
tax incentives on imported goods.
4. Be a bargaining tool by setting tariff
rates first at a relatively high level
before trade negotiations are entered
into with another country.
5. Halt inflation in periods of prosperity
to curb spending power; ward off
depression in periods of slump to
expand business.
6. Reduce inequalities in wealth and
incomes, as for instance, the estate,
donor's and income taxes, their payers
 U.P. LAW BOC TAXATION 1
being the recipients of unearned wealth
or mostly in the higher income
brackets. Progressivity is based on the
principle that those who are able to pay
more should shoulder the bigger
portion of the tax burden.
[MAMALATEO]
7. Encourage economic growth
through the grant of incentives or
exemptions, which encourage
investment and thereby stimulate
economic activity
8. Taxes may be levied to promote
science and invention [see RA. No.
5448] or to finance educational
activities [see RA. No. 5447] or to
improve the efficiency of local
police forces in the maintenance of
peace and order through grant of
subsidy [see RA. No. 6141].
9. To push for the government’s health
measure, just like what happened in
the landmark legislation on sin taxes in
2012 [see R.A. No. 10351].
Nature
1. Inherent in sovereignty – The power to
tax is an attribute of sovereignty. It is a
power emanating from necessity because
it imposes a necessary burden to preserve
the State's sovereignty xxx [Phil. Guaranty
Co., Inc. v. Commissioner, G.R. No. L-
22074 (1965)].
2. Essentially a legislative function – The
power to tax is peculiarly and exclusively
legislative and cannot be exercised by the
executive or judicial branch of the
government [1 Cooley 160-161]. Hence,
only Congress, our national legislative
body, can impose taxes. The levy of a tax,
however, may also be made by a local
legislative body subject to such limitations
as may be provided by law. It includes the
authority to:
a. Determine the nature, purpose,
extent, coverage, apportionment,
situs, and method of collection of the
tax;
Page 3 of 256
TAXATION
b. Grant tax exemptions or
condonations; and
c. Specify or provide for the
administrative as well as judicial
remedies that either the government
or the taxpayers may avail themselves
in the proper implementation of the tax
measure.
3. Subject to constitutional and inherent
limitations – The power to tax is said to be
the strongest of all the powers of
government. It is unlimited, plenary,
comprehensive and supreme. In the
absence of constitutional restrictions, the
principal checks on its abuse rest on the
responsibility of members of Congress to
their constituents. However, the power of
taxation is subject to constitutional and
inherent limitations [MAMALATEO]. These
limitations are those provided in the
fundamental law or implied therefrom,
while the rest spring from the nature of the
taxing power itself although they may or
may not be provided in the Constitution.
Elements of Taxation
1. Enforced proportional contribution from
persons and properties - Its imposition is in
no way dependent upon the will or assent
of the person taxed. It is not contractual,
either express or implied, but positive acts
of government;
2. Imposed by the State by virtue of its
sovereignty; and
3. It is levied for the support of government
[Republic v. COCOFED, G.R. Nos. 147062-64
(2001)]
Characteristics of Taxing Power
1. It is comprehensive. Covers persons,
businesses, activities, professions, rights,
and privileges.
2. It is unlimited. A tax does not cease to be
valid merely because it regulates,
discourages, or even definitely deters the
activities taxed. The power to impose taxes
is one so unlimited in force and so
searching in extent, that the courts scarcely
 U.P. LAW BOC TAXATION 1
venture to declare that it is subject to any
restrictions whatever, except such as rest
in the discretion of the authority which
exercises it. [Tio v. Videogram Regulatory
Board, G.R. No. 75697 (1987)]
3. It is plenary or complete. Under NIRC, the
BIR may avail of certain remedies to
ensure the collection of taxes. Taxes, being
the lifeblood of the government, should be
collected without unnecessary hindrance,
every precaution must be taken not to
unduly suppress it. [Republic v. Caguioa
G.R. No. 168584 (2007)]
4. It is supreme. It is supreme insofar as the
selection of the subject of taxation is
concerned, but it does not mean that it is
superior to the other inherent powers of the
State.
Characteristics of Tax
1. Enforced contribution
2. Proportionate in character – Laid by
some rule of apportionment which is
usually based on ability to pay.
“The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation.” [Sec. 28
(1), Art. VI, 1987 Constitution];
3. Levied for public purpose. Revenues
derived from taxes cannot be used for
purely private purposes or for the exclusive
benefit of private persons. [Gaston v.
Republic Planters Bank, G.R. No. 77194
(1988)]; and
4. Generally payable in the form of money
– Although the law may provide payment in
kind (e.g. backpay certificates under Sec.
2, R.A. No. 304, as amended);
5. Personal to the taxpayer;
6. Levied on persons, property, rights,
acts, privileges, or transactions;
7. Levied by the State which has
jurisdiction or control over the subject
to be taxed;
8. Levied by the law-making body of the
Page 4 of 256
TAXATION
State. The power to tax is a legislative
power but is also granted to local
governments, subject to such guidelines
and limitations as law may be provided by
law.
“Each local government unit shall have the
power to create its own sources of
revenues and to levy taxes, fees, and
charges subject to such guidelines and
limitations as the Congress may provide,
consistent with the basic policy of local
autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local
governments.” [Sec. 5, Art. X, 1987
Constitution];
3. Tax as Distinguished from
Other Forms of Exactions
Tariff
Taxes Tariff
All embracing term to A kind of tax imposed
include various kinds on articles which are
of enforced traded internationally
contributions upon
persons for the
attainment of public
purposes
Tariff may be used in one of three (3) senses:
1. A book of rates drawn usually in
alphabetical order containing the names of
several kinds of merchandise with the
corresponding duties to be paid for the
same; or
2. The duties payable on goods imported or
exported; or
3. The system or principle of imposing duties
on the importation (or exportation of goods)
 U.P. LAW BOC TAXATION 1 TAXATION

Toll
Imposed on persons, Imposed only on the
Taxes Toll property and the right right to exercise a
to exercise a privilege
Paid for the support Paid for the use of privilege.
of the government another’s property.
Failure to pay does Failure to pay makes
Demand of Demand of not necessarily make the act or business
sovereignty proprietorship the act or business illegal.
illegal.
Generally, no limit on Amount paid
the amount collected depends upon the Penalty for non-
as long as it is not cost of construction payment:
excessive, or maintenance of Surcharges; or
unreasonable or the public Imprisonment
confiscatory improvement used. (except poll tax).
Imposed only by the Imposed by the
government government or by License or permit fee is a charge imposed
private individuals or under the police power for purposes of
entities. regulation.
A toll is a sum of money for the use of
License is in the nature of a special privilege,
something, generally applied to the
of a permission or authority to do what is within
consideration which is paid for the use of a
its terms. It makes lawful an act which would
road, bridge or the like, of a public nature. [1
otherwise be unlawful. A license granted by the
Cooley 77]
State is always revocable. [Gonzalo Sy Trading
v. Central Bank of the Phil., G.R. No. L-41480
License fee
(1976)]
License and
Taxes
Regulatory Fee Importance of the distinctions
1. It is necessary to determine whether a
Imposed under the Levied under the particular imposition is a tax or a license fee
taxing power of the police power of the because some limitations apply only to one
state for purposes of state. and not to the other, and for the reason that
revenue. exemption from taxes may not include
exemption from license fee.
Forced contributions Exacted primarily to 2. The power to regulate as an exercise of
for the purpose of regulate certain police power does not include the power to
maintaining businesses or impose fees for revenue purposes.
government occupations. [Progressive Development Corp. v.
functions. Quezon City, G.R. No. L-36081 (1989)]
3. An exaction, however, may be considered
Generally unlimited Should not
as to amount unreasonably both a tax and a license fee. This is true in
the case of car registration fees which may
exceed the
expenses of issuing be regarded as taxes even as they also
serve as an instrument of regulation. If the
the license and of
supervision. purpose is primarily revenue, or if revenue
is, at least, one of the real and substantial
purposes, then the exaction is properly

Page 5 of 256
 U.P. LAW BOC TAXATION 1 TAXATION

called a tax. [Phil. Airlines, Inc. v. Edu, G.R.

No. L- 41383 (1988)]
4. But it is possible that a tax may only have
a regulatory purpose. The general rule,
however, is that the imposition is a tax if its
primary purpose is to generate revenue,
and regulation is merely incidental; but if
regulation is the primary purpose, the fact
that incidentally revenue is also obtained
does not make the imposition a tax.
[Progressive Development Corp. v.
Quezon City, supra]
Primary purpose test (as seen in Progressive
Development Corp v. QC, supra):
1. Imposition must relate to an occupation or
activity that so engages the public interest
in health, morals, safety and development
as to require regulation for the protection
and promotion of such public interest;
2. Imposition must bear a reasonable relation
to the probable expenses of regulation,
taking into account not only the costs of
direct regulation but also its incidental
consequences as well.
It has general Exceptional both as
application both as to to time and locality
time and place
A special assessment is not a personal liability
of the person assessed, i.e., his liability is
limited only to the land involved. It is based
wholly on benefits (not necessity).
A charge imposed only on property owners
benefited is a special assessment rather than
a tax notwithstanding that the statute calls it a
tax. The rule is that an exemption from taxation
does not include exemption from special
assessment. But the power to tax carries with
it the power to levy a special assessment.
Note: The term "special levy" is the name used
in the present Local Government Code (RA.
No. 7160). A province, city, or municipality, or
the National Government, may impose a
special levy on lands especially benefited by
public works or improvements financed by it.
[Sec. 240, RA 7160]

Note: Taxes may also be imposed for Debt

regulatory purposes. It is called regulatory tax. Taxes Debt

Special assessment Based on laws Generally based on

Taxes Special contract, express or
Assessment implied.

Levied not only on Levied only on land Generally cannot be Assignable

land assigned

Imposed regardless Imposed because of Generally paid in May be paid in kind

of public an increase in value money
improvements of land benefited by
Cannot be a subject Can be a subject of
public improvement
of set off or set off or
Contribution of a Contribution of a compensation compensation (see
taxpayer for the person for the Art. 1279, Civil Code)
support of the construction of a
Imprisonment is a A person cannot be
government public improvement
sanction for non- imprisoned for non-
payment of tax, payment of debt
except poll tax (except when it
arises from a crime)

Page 6 of 256
 U.P. LAW BOC TAXATION 1 TAXATION

authority).
Governed by the Governed by the
special prescriptive ordinary periods of
Since Congress has the power to exercise the
periods provided for prescription
State inherent powers of Police Power,
in the NIRC
Eminent Domain and Taxation, the distinction
Does not draw Draws interest when between police power and the power to tax xxx
interest except only it is so stipulated or would not be of any moment when Congress
when delinquent where there is itself exercises the power. [NTC v. CA, G.R.
default No. 127937 (1999)

Imposed only by Can be imposed by

public authority private individual

A tax is not a debt in the ordinary sense of the

word.

Penalty
Taxes Penalty

Violation of tax laws Any sanction

may give rise to imposed as a
imposition of penalty punishment for
violation of law or
acts deemed
injurious

Primarily intended to Designed to regulate

raise revenue conduct

May be imposed only May be imposed by

by the government the government or
private individuals or
entities

Cannot be a subject Can be a subject of

of set off or set off or
compensation compensation (see
Art. 1279, Civil Code)

B. POWER OF TAXATION AS
DISTINGUISHED FROM POLICE
POWER AND EMINENT DOMAIN

When the distinction of exercise of

powers is relevant
The distinction is important when the one
exercising it is the LGU (mere delegated

Page 7 of 256
 U.P. LAW BOC TAXATION 1 TAXATION

Taxation Eminent Domain Police Power

May be exercised
May be exercised by:
May be exercised only only by:
Authority (who the government;
by: the government; or
exercises the its political subdivisions;
the government; or its political
Power) or may be granted to public service
its political subdivisions. subdivisions.
companies or public utilities.

The use of the

property is
The property (generally in
“regulated” for the
the form of money) is To facilitate the taking of private property for
Purpose purpose of
taken for the support of public use.
promoting the
the government.
general welfare; it is
not compensable.

Operates upon:
Operates upon: Operates on:
a community;
Persons Affected a community; an individual as the owner of a particular
or a class of
or class of individuals. property.
individuals.

The money contributed
Effect becomes part of the
public funds.
There is no transfer
of title. At most, there
There is a transfer of the right to property. is restraint on the
injurious use of
property.

Protection and benefits Indirect benefits

he receives.
The enjoyment of the Market value of the property The person affected
privileges of living in an receives indirect
Benefits
organized society, He receives the market value of the benefits as may
Received
established and property taken from him. arise from the
safeguarded by the maintenance of a
devotion of taxes to healthy economic
public purpose. standard of society.

Amount imposed
should just be
commensurate to
Generally, there is no
Amount of No amount imposed but rather the owner is cover the cost of
limit on the amount of tax
Imposition paid the market value of property taken. regulation,
that may be imposed.
issuance of a
license or
surveillance

Relatively free from

Subject to constitutional Inferior to the impairment prohibition;
constitutional
limitations, including the government cannot expropriate private
Relationship to limitations and is
prohibition against property, which under a contract had
Constitution superior to the
impairment of the previously bound itself to purchase from the
impairment of
obligation of contracts. other contracting party.
contract provision.
[MAMALATEO, Reviewer on Taxation 2nd Edition (2008), pp. 11-12]

Page 8 of 256
U.P. LAW BOC TAXATION 1
C. THEORY AND BASIS OF
TAXATION
1. Lifeblood theory
The underlying basis of taxation is
governmental necessity, for without taxation, a
government can neither exist nor endure.
Taxes are the lifeblood of the government and
so should be collected without unnecessary
hindrance. It is said that taxes are what we pay
for civilized society. Without taxes, the
government would be paralyzed for lack of the
motive power to activate and operate it [CIR v.
Algue, G.R. No. L-28896 (1988); See also CIR
v. Pineda, G.R. No. L-22734 (1967)].
2. Necessity theory
The power of taxation proceeds upon the
theory that the existence of the government is
a necessity; that it cannot continue without
means to pay its expenses; and that for those
means it has the right to compel all citizens and
property within its limits to contribute.
The power to tax is an attribute of sovereignty.
It is a power emanating from necessity. It is a
necessary burden to preserve the State's
sovereignty and a means to give the citizenry:
• an army to resist an aggression;
• a navy to defend its shores from invasion;
• a corps of civil servants to serve;
• public improvement designed for the
enjoyment of the citizenry and those which
come within the State's territory; and
• facilities and protection which a taxation which is not within its territorial
government is supposed to provide. [Phil.
Guaranty v. CIR, G.R. No. L-22074 (1965)]
The obligation to pay taxes rests upon the
necessity of money for the support of the
state. For this reason, no one is allowed to
object to or resist the payment of taxes
solely because no personal benefit to him
Page 9 of 256
TAXATION LAW
can be pointed out. [Lorenzo v. Posadas,
G.R. No. L-43082 (1937)]
3. Benefits-protection Theory
(Symbiotic Relationship)
This principle serves as the basis of taxation
and is founded on the reciprocal duties of
protection and support between the State
and its inhabitants.
Despite the natural reluctance to surrender part
of one's hard earned income to the taxing
authorities, every person who is able to, 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 moral and
material values. This symbiotic relationship is
the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method
of exaction by those in the seat of power. [CIR
v. Algue, supra]
D. JURISDICTION OVER
SUBJECT AND OBJECTS
The limited powers of sovereignty are confined
to objects within the respective spheres of
governmental control. These objects are the
proper subjects or objects of taxation and none
else.
1. Tax laws cannot operate beyond a
State’s territorial limits
2. The gov’t cannot tax a particular object of
jurisdiction
3. Property outside the State’s jurisdiction
does not receive any protection of the State
4. If a law is passed by Congress, it must see
to it that the object or subject of taxation
is within the territorial jurisdiction of the
taxing authority
U.P. LAW BOC TAXATION 1
E. PRINCIPLES OF A
SOUND TAX SYSTEM
1. Fiscal adequacy
The sources of tax revenue should coincide
with, and approximate the needs of,
government expenditures. The revenue should
be elastic or capable of expanding or
contracting annually in response to variations
in public expenditures.
2. Administrative feasibility
Tax laws should be capable of convenient, just
and effective administration. Each tax should
be:
• capable of uniform enforcement by
government officials,
• convenient as to the time, place, and
manner of payment,
• enforced with the least inconvenience to the
taxpayer; and
• not unduly burdensome upon or
discouraging to business activity.
3. Theoretical justice or equality
The tax burden should be in proportion to the
taxpayer’s ability to pay. This is the so-called
ability to pay principle. Taxation should be
uniform as well as equitable [Section 28(1), Art.
VI, 1987 Constitution] The State must evolve a
progressive system of taxation.
Taxation is said to be equitable when its burden
falls on those better able to pay; taxation is
progressive when its rate goes up depending
on the resources of the person affected.
Note: The non-observance of the above
principles will not necessarily render the tax
imposed invalid except to the extent those
specific constitutional limitations are violated.
[DE LEON]
Page 10 of 256
TAXATION 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 designed
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,
Tax Principles and Remedies (2015)]
F. INHERENT AND
CONSTITUTIONAL LIMITATIONS
ON TAXATION
1. Inherent Limitations
The following are the inherent limitations of
taxation:
a. Public Purpose
b. Inherently Legislative
c. Territorial
d. International Comity
e. Exemption of Government Entities,
Agencies, and Instrumentalities
a. Public Purpose
The proceeds of the tax must be used:
i. for the support of the State; or
ii. for some recognized objects of
government or directly to promote the
welfare of the community.
Test: Whether the statute is designed to
promote the public interest, as opposed to the
furtherance of the advantage of individuals,
although each advantage to individuals might
incidentally serve the public. [Pascual v. Sec.
of Public Works, G.R. No. L-10405 (1960)]
The public purpose of a tax may legally exist
even if the motive which impelled the
legislature to impose the tax was to favor one
industry over another. [Tio v. Videogram, G.R.
U.P. LAW BOC TAXATION 1
No. L-75697 (1987)]
Public use is no longer confined to the
traditional notion of use by the public but held
synonymous with public interest, public benefit,
public welfare, and public convenience.
(Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G.R. No. 159647
(2005)]
It is the purpose which determines the public
character of the tax law, not the number of
persons benefited. [Dimaampao, Tax
Principles and Remedies (2015)]
Tests in Determining Public Purpose:
a. Duty Test – Whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty
of the State as a government to
provide.
b. Promotion of General Welfare Test –
Whether the proceeds of the tax will
directly promote the welfare of the
community in equal measure.
c. Character of the Direct Object of the
Expenditure – It is the essential
character of the direct object of the
expenditure which must determine its
validity as justifying a tax and not the
magnitude of the interests to be
affected nor the degree to which the
general advantage of the community,
and thus the public welfare, may be
ultimately benefited by their promotion.
[Pascual v. Sec. of Public Works,
supra]
b. Inherently Legislative
General Rule: Delegata potestas non potest
delegari. (No delegated powers can be further
delegated.)
The power to tax is exclusively vested in the
legislative body and it may not be re-delegated.
Judge Cooley enunciates the doctrine in the
following oft-quoted language: "One of the
Page 11 of 256
TAXATION LAW
settled maxims in constitutional law is that the
power conferred upon the legislature to make
laws cannot be delegated by that department
to any other body or authority.” [People v. Vera,
G.R. No. L-45685 (1937)]
Stated in another way, taxation may
exceptionally be delegated, subject to such
well-settled limitations as:
a. The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
b. The delegation is effected either by:
· the Constitution; or
· by validly enacted legislative measures
or statute; and
c. The delegated levy power, except when
the delegation is by an express provision of
the Constitution itself, should only be in
favor of the local legislative body of the
local or municipal government concerned.
[VITUG and ACOSTA]
For a valid delegation of power, it is essential
that the law delegating the power must be
(1) complete in itself, that is, it must set forth
the policy to be executed by the delegate
and,
(2) it must fix a standard — limits of which are
sufficiently determinate or determinable —
to which the delegate must conform.
[Osmena v. Orbos, G.R. No. 99886 (1993)]
Legislature has the power to determine the:
a. Nature (kind),
b. Object (purpose),
c. Extent (rate),
d. Coverage (subjects) and
e. Situs (place) of taxation.
Exceptions
a. Delegation to local governments
This exception is in line with the
general principle that the power to
create municipal corporations for
purposes of local self-government
carries with it, by necessary
implication, the power to confer the
U.P. LAW BOC TAXATION 1
power to tax on such local
governments. (1 Cooley 190). This is
logical for after all, municipal
corporations are merely
instrumentalities of the state for the
better administration of the government
in respect to matters of local concern.
[Pepsi-Cola Bottling Co. of the Phil. Inc.
v. Mun. of Tanauan, G.R. No. L-31156
(1976)].
Under the new Constitution, however,
LGUs are now expressly given the
power to create its own sources of
revenue and to levy taxes, fees and
charges, subject to such guidelines
and limitations as the Congress may
provide which must be consistent with
the basic policy of local autonomy. [Sec
5, Art. X 1987 Constitution]
b. Delegation to the President
1. Tariff powers by Congress under
the Flexible Tariff Clause
The Congress may, by law,
authorize the President to fix within
specified limits, and subject to such
limitations and restrictions as it
may impose, tariff rates, import and
export quotas, tonnage and
wharfage dues, and other duties or
imposts within the framework of the
national development program of
the Government. [Sec. 28(2), Art.
VI, 1987 Constitution]
2. Emergency Powers [Sec. 23(2),
Art. VI, 1987 Constitution.
3. To enter into Executive
agreements; and
4. To ratify treaties which grant tax
exemption subject to Senate
concurrence.
Page 12 of 256
TAXATION LAW
c. Delegation to administrative
agencies
Limited to the administrative
implementation that calls for some
degree of discretionary powers under
sufficient standards expressed by law
or implied from the policy and purposes
of the Act.
There are certain aspects of the taxing
process that are not legislative and they
may, therefore, be vested in an
administrative body. The powers which are
not legislative include:
1. The power to value property for
purposes of taxation pursuant to fixed
rules;
2. The power to assess and collect the
taxes; and
3. The power to perform any of the
innumerable details of computation,
appraisement, and adjustment, and the
delegation of such details.
The exercise of the above powers is really not
an exception to the rule as no delegation of the
strictly legislative power to tax is involved.
The powers which cannot be delegated
include:
! The determination of the subjects to be
taxed;
! The purpose of the tax, the amount or rate
of the tax;
! The manner, means, and agencies of
collection; and
! The prescribing of the necessary rules with
respect thereto.
c. Territorial
Rule: A state may not tax property lying outside
its borders or lay an excise or privilege tax upon
the exercise or enjoyment of a right or privilege
derived from the laws of another state and
therein exercise and enjoyed. [51 Am.Jur. 87-
88].
U.P. LAW BOC TAXATION 1
Reasons:
a. Tax laws do not operate beyond a
country’s territorial limits.
b. Property which is wholly and exclusively
within the jurisdiction of another state
receives none of the protection for which a
tax is supposed to be a compensation.
Note: Where privity of relationship exists. It
does not mean, however, that a person outside
of state is no longer subject to its taxing
powers. The fundamental basis of the right to
tax is the capacity of the government to provide
benefits and protection to the object of the tax.
A person may be taxed where there is between
him and the taxing state, a privity of the
relationship justifying the levy. Thus, the
citizen’s income may be taxed even if he
resides abroad as the personal (as
distinguished from territorial) jurisdiction of his
government over him remains. In this case, the
basis of the power to tax is not dependent on
the source of the income nor upon the location
of the property nor upon the residence of the
taxpayer but upon his relation as a citizen to
the state. As such a citizen, he is entitled,
wherever he may be, inside or outside of his
country, to the protection of his
government.
d. International Comity
Comity – respect accorded by nations to each
other because they are sovereign equals.
Thus, the property or income of a foreign state
or government may not be the subject of
taxation by another state.
Reasons:
a. In par in parem non habet imperium. As
between equals there is no sovereign
(Doctrine of Sovereign Equality among
states under international law). One state
cannot exercise its sovereign powers over
another. All states, including the smallest
and least influential, are also entitled to
their dignity and the protection of their
honor and reputation. [Dimaampao, Tax
Principles and Remedies (2015)]
Page 13 of 256
TAXATION LAW
b. In international law, a foreign government
may not be sued without its consent.
Therefore, it is useless to impose a tax
which could not be collected.
c. Usage among states that when a foreign
sovereign enters the territorial jurisdiction
of another, there is an implied
understanding that the former does not
intend to degrade its dignity by placing
itself under the jurisdiction of the other.
e. Exemption of Government Entities,
Agencies, and Instrumentalities
If the taxing authority is the National
Government:
General Rule: Agencies and instrumentalities
of the government are exempt from tax. Their
exemption rests on the State's sovereign
immunity from taxation. The State cannot be
taxed without its consent and such consent,
being in derogation of its sovereignty, is to be
strictly construed. [Gomez v. Palomar, GR No.
L-23645, 29 October 1968]
Note: Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately
and directly exercises its sovereign powers.
With respect to government-owned or
controlled corporations performing proprietary
(not governmental) functions, they are
generally subject to tax unless exempted under
Section 27(C) of the Tax Code or, in certain
cases, if there is a tax exemption provisions in
their charters or the law creating them in line
with the rule that a specific law overrides a
general law.
If the taxing authority is a local government
unit: RA 7160 expressly prohibits LGUs from
levying tax on the National Government, its
agencies and instrumentalities and other
LGUs. [Sec. 133 (o), LGC]
U.P. LAW BOC TAXATION 1
Reasons for the exemption:
a. To levy a tax upon public property
would render necessary new taxes on
other public property for the payment of
the tax so laid and thus, the
government would be taxing itself to
raise money to pay over for itself.
b. This immunity also rests upon
fundamental principles of government,
being necessary in order that the
functions of government shall not be
unduly impeded. [1 Cooley 263.]
c. The practical effect of an exemption
running to the benefit of the
government is merely to reduce the
amount of money that has to be
handled by the government in the
course of its operations: For these
reasons, provisions granting
exemptions to government agencies
may be construed liberally in favor
of non-tax liability of such agencies.
[Maceda v. Macaraig, Jr., G.R. No.
88291 (1991)].
Exception: Government-owned or controlled
corporations (GOCCs) perform proprietary
functions hence, they are subject to taxation.
[Dimaampao, Tax Principles and Remedies
(2015)]
Exception to the Exception: The following
GOCCs are considered tax exempt:
1. Government Service Insurance
System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance
Corporation (PHIC)
4. Philippine Charity Sweepstakes Office
(PCSO) [NIRC as amended, Sec 27(c)]
There is no constitutional prohibition against
the government taxing itself. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
Page 14 of 256
TAXATION LAW
2. Constitutional Limitations
The following are the constitutional limitations
of taxation:
1. Provisions directly affecting taxation:
1. Prohibition against imprisonment for
non-payment of poll tax;
2. Uniformity and equality of taxation;
3. Grant by Congress of authority to the
President to impose tariff rates;
4. Prohibition against taxation of religious,
charitable entities, and educational
entities;
5. Prohibition against taxation of non-stock,
non-profit educational institutions;
6. Majority vote of Congress for grant of
tax exemption;
7. Prohibition on use of tax levied for
special purpose;
8. President’s veto power on appropriation,
revenue, tariff bills;
9. Non-impairment of jurisdiction of the
Supreme Court;
10. Grant of power to the local government
units to create its own sources of
revenue;
11. Flexible tariff clause;
12. Exemption from real property taxes;
and
13. No appropriation or use of public
money for religious purposes.
2. Provisions indirectly affecting taxation:
1. Due process
2. Equal protection;
3. Religious freedom;
4. Non-impairment of obligations of
contracts;
5. Freedom of speech and expression;
6. Presidential power to grant reprieves,
communications, and pardons, and
remit fines and forfeitures after
conviction by final judgement; and
7. No taking of private property for public
use without just compensation
U.P. LAW BOC TAXATION 1
a. Provisions directly affecting
Taxation
1. Prohibition against imprisonment for
non-payment of poll tax
No person shall be imprisoned for debt or
non-payment of a poll tax. [Sec. 20, Art. III,
1987 Constitution]
Capitation or poll taxes are taxes of a
fixed amount upon all persons, or upon all
the persons of a certain class, resident
within a specified territory, without regard
to their property or the occupations in
which they may be engaged. Taxes of a
specified amount upon each person
performing a certain act or engaging in a
certain business or profession are not,
however, poll taxes. [51 Am. Jur. 66-67]
2. Uniformity and equality of taxation
The rule of taxation shall be uniform and
equitable. Congress shall evolve a
progressive system of taxation. [Sec.
28(1), Art. VI, 1987 Constitution]
a. Uniformity – All taxable articles or
properties of the same class shall be
taxed at the same rate. [City of Baguio
v. De Leon, G.R. No. L-24756 (1968)]
i. Uniformity of operation
throughout tax unit – The rule
requires the uniform
application and operation,
without discrimination, of the
tax in every place where the
subject of it is found. This
means, for example, that a tax
for a national purpose must be
uniform and equal throughout
the country and a tax for a
province, city, municipality, or
barangay must be uniform and
equal throughout the province,
city, municipality or barangay.
ii. Equality in burden – the authority to classify the objects of
Uniformity implies equality in
Page 15 of 256
TAXATION LAW
burden, not equality in amount
or equality in its strict and literal
meaning. The reason is simple
enough. If legislation imposes
a single tax upon all persons,
properties, or transactions, an
inequality would obviously
result considering that not all
persons, properties, and
transactions are identical or
similarly situated. Neither does
uniformity demand that taxes
shall be proportional to the
relative value or amount of the
subject thereof. Taxes may be
progressive.
b. Equity
i. Uniformity in taxation is
effected through the
apportionment of the tax
burden among the taxpayers
which under the Constitution
must be equitable. “Equitable”
means fair, just, reasonable
and proportionate to the
taxpayer’s ability to pay.
Taxation may be uniform but
inequitable where the amount
of the tax imposed is excessive
or unreasonable.
ii. The constitutional requirement
of equity in taxation also
implies an approach which
employs a reasonable
classification of the entities or
individuals who are to be
affected by a tax. Where the
“tax differentiation is not based
on material or substantial
differences,” the guarantee of
equal protection of the laws
and the uniformity rule will
likewise be infringed.
Taxation does not require identity or
equality under all circumstances, or negate
taxation.
U.P. LAW BOC TAXATION 1
Equality and Uniformity distinguished:
Equality in taxation is accomplished when the
burden of the tax falls equally and impartially
upon all the persons and property subject to it.
Uniformity has been defined as that principle
by which all taxable articles or kinds of property
of the same class shall be taxed at the same
rate. A tax is uniform when it operates with the
same force and effect in every place where the
subject of it is found. It does not signify an
intrinsic but simply a geographical uniformity
[Churchill v Concepcion, GR No. 11572, 22
September 1916]
Test of Valid Classification: Classification, to
be valid, must be reasonable and this
requirement is not deemed satisfied unless:
a. It is based upon substantial distinctions
which make real differences;
b. These are germane to the purpose of the
legislation or ordinance;
c. The classification applies not only to
present conditions but also to future
conditions substantially identical to those of
the present; and
d. The classification applies equally to all
those who belong to the same class.
[Pepsi-Cola v. Butuan City, G.R. No. L-
22814 (1968)]
The progressive system of taxation would
place stress on direct rather than indirect taxes,
on non-essentiality rather than essentiality to
the taxpayer of the object of taxation, or on the
taxpayer’s ability to pay. Example is that
individual income tax system that imposes
rates progressing upwards as the tax base
(taxpayer’s taxable income) increases. A
progressive tax, however, must not be
confused with a progressive system of
taxation.
While equal protection refers more to like
treatment of persons in like circumstances,
uniformity and equity refer to the proper relative
treatment for tax purposes of persons in unlike
circumstances.
Page 16 of 256
TAXATION LAW
3. Grant by Congress of authority to the
President to impose tariff rates
Delegation of Tariff powers to the President
under the flexible tariff clause [Sec. 28(2), Art.
VI, 1987 Constitution], which authorizes the
President to modify import duties. [Sec. 1608,
Customs Modernization and Tariff Act]
4. Prohibition against taxation of religious,
charitable entities, and educational
entities
Sec. 28(3), Art. VI, 1987 Constitution:
a. Charitable institutions, churches and
personages or convents appurtenant
thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements,
b. Actually, directly, and exclusively used for
religious, charitable, or educational
purposes shall be exempt from taxation.
c. The tax exemption under this constitutional
provision covers property taxes only and
not other taxes [Lladoc v. Commissioner,
G.R. No. L-19201 (1965)].
d. In general, special assessments are not
covered by the exemption because by
nature they are not classified as taxes.
[Apostolic Prefect v. City Treasurer of
Baguio, G.R. No. L-47252 (1941)]
To be entitled to the exemption, the
petitioner must prove that:
a. It is a charitable institution
b. Its real properties are actually, directly
and exclusively used for charitable
purposes.
Revenue or income from trade, business or
other activity, the conduct of which is not
related to the exercise or performance of
religious, educational and charitable purposes
or functions shall be subject to internal revenue
taxes when the same is not actually, directly or
exclusively used for the intended purposes.
[BIR Ruling 046-2000]
U.P. LAW BOC TAXATION 1
Test of Use of the property, and not
Exemption the ownership [Abra Valley
College v. Aquino, G.R. No.
L-39086 (1988)]
Nature of Actual, direct and exclusive
Use use for religious, charitable
or educational purposes.
[Lladoc v. CIR, supra]
Scope of Real property taxes on
Exemption facilities which are actual,
incidental to, or reasonably
necessary for the
accomplishment of said
purposes such as in the case
of hospitals, a school for
training nurses, a nurses’
home, property to provide
housing facilities for interns,
resident doctors and other
members of the hospital
staff, and recreational
facilities for student nurses,
interns and residents, such
as athletic fields. [Abra
Valley College v. Aquino,
supra]
TEST: Whether an enterprise is charitable or
not:
· Whether it exists to carry out a purpose
recognized in law as charitable; or
· Whether it is maintained for gain, profit, or
private advantage.
A charitable insttution does not lose its
character as such and its exemption from taxes
simply because it derives income from paying
patients, whether out-patient, or confined in the
hospital, or receives subsidies from the
government, so long as the money received is
devoted or used altogether to the charitable
object which it is intended to achieve; and no
money inures to the private benefit of the
persons managing or operating the institution
(including honoraria to members of the board
of trustees; BIR Ruling No. 558-18, among
Page 17 of 256
TAXATION LAW
others).
“Exclusive" – possessed and enjoyed to the
exclusion of others; debarred from participation
or enjoyment;
"Exclusively" - “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. Solely
is synonymous with exclusively. [Lung Center
of the Philippines v. Quezon City, G.R. No.
144104 (2004)]
Note: Lung Center did not necessarily
overturn the case of Abra Valley College v.
Aquino, G.R. No. L-39086 (1988). Lung Center
just provided a stricter interpretation. In Abra
Valley, the Court held: The primary use of the
school lot and building is the basic and
controlling guide, norm and standard to
determine tax exemption, and not the mere
incidental use thereof. Under the 1935
Constitution, the trial court correctly held that
the school building as well as the lot where it is
built, should be taxed, not because the second
floor of the same is being used by the Director
and his family for residential purposes
(incidental to its educational purpose), but
because the first floor thereof is being used for
commercial purposes. However, since only a
portion is used for purposes of commerce, it is
only fair that half of the assessed tax be
returned to the school involved.
U.P. LAW BOC TAXATION 1 TAXATION LAW

5. Prohibition against taxation of non-

stock, non-profit educational Similar tax exemptions may be extended to
institutions proprietary (for profit) educational
institutions by law subject to such
Sec. 4, Art. XIV, 1987 Constitution limitations as it may provide, including
All revenues and assets of non-stock, non- restrictions on dividends and provisions for
profit educational institutions used actually, reinvestment. The restrictions are designed to
directly, and exclusively for educational ensure that the tax-exemption benefits are
purposes shall be exempt from taxes and used for educational purposes.
duties.
Lands, buildings, and improvements
Proprietary educational institutions, actually, directly and exclusively used for
including those cooperatively owned, may educational purposes are exempt from
likewise be entitled to such exemptions property tax [Sec. 28(3), Art. VI, 1987
subject to the limitations provided by law, Constitution], whether the educational
including restrictions on dividends and institution is proprietary or non-profit.
provisions for reinvestment.
Sec. 28, par. 3, Sec. 4, par. 3,
Subject to conditions prescribed by law, all Art. VI Art. XIV
grants, endowments, donations, or
contributions used actually, directly, and
exclusively for educational purposes shall be
exempt from tax. Charitable Non-stock, non-profit
institutions, churches educational
This provision covers only non-stock, non- and parsonages or institutions.
profit educational institutions. convents
appurtenant thereto,
The exemption covers income, property, and mosques, non-profit
donor’s taxes, custom duties, and other taxes cemeteries, and all
imposed by either or both the national lands, buildings, and
government or political subdivisions on all improvements,
revenues, assets, property or donations, used actually, directly, and
actually, directly and exclusively for exclusively used for
educational purposes. (In the case of religious religious, charitable,
and charitable entities and non-profit or educational
cemeteries, the exemption is limited to property purposes.
tax.)
Property taxes Income, property,
The exemption does not cover revenues and donor’s taxes
derived from, or assets used in, unrelated and custom duties.
activities or enterprise.

Revenues derived from assets used in the

operation of cafeterias, canteens, and
bookstores are also exempt if they are owned
and operated by the educational institution as
ancillary activities and the same are located
within the school premises [RMC No. 76-2003]

Page 18 of 256
U.P. LAW BOC TAXATION 1
6. Majority vote of Congress for grant of
tax exemption
Sec. 28, Art. VI, 1987 Constitution.
No law granting any tax exemption shall be
passed without the concurrence of a majority
of all the Members of the Congress.
Basis: The inherent power of the state to
impose taxes carries with it the power to grant
tax exemptions.
Exemptions may be created by:
a. The Constitution, or
b. Statutes, subject to constitutional
limitations
Vote required for the grant of exemption:
Absolute majority of the members of Congress
(at least ½ + 1 of ALL the members voting
SEPARATELY)
Vote required for withdrawal of such grant
of exemption: Relative majority is sufficient
(MAJORITY of the QUORUM).
The provision guaranteeing equal protection of
the laws and that mandating the rule of taxation
shall be uniform and equitable likewise limit,
although not expressly, the legislative power to
grant tax exemption.
Grants in the nature of tax exemptions:
a. Tax amnesties
b. Tax condonations
c. Tax refunds
Note:
a. Local government units may, through
ordinances duly approved, grant tax
exemptions, incentives or reliefs under
such terms and conditions as they may
deem necessary. [Sec. 192, LGC]
b. The President of the Philippines 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
Page 19 of 256
TAXATION LAW
municipality within the Metropolitan Manila
Area. [Sec. 277, LGC]
7. Prohibition on use of tax levied for
special purpose
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. [Gaston v.
Republic Planters Bank, G.R. No. L-77194
(1988)].
8. President’s veto power on
appropriation, revenue, tariff bills
Sec. 27(2), Art. VI, 1987 Constitution.
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 times to which
he does not object.
9. Non-impairment of jurisdiction of the
Supreme Court
Sec. 2, Art. VIII, 1987 Constitution.
The Congress shall have the power to
define, prescribe, and apportion the
jurisdiction of the various courts but may not
deprive the Supreme Court of its jurisdiction
over cases enumerated in Section 5 hereof.
U.P. LAW BOC TAXATION 1 TAXATION LAW

11. Flexible tariff clause

Sec. 5(2(b)), Art. VIII, 1987 Constitution.
The Supreme Court shall have the following
Delegation of tariff powers to the President
powers: xxx
under the flexible tariff clause [Sec. 28(2), Art.
(2) Review, revise, modify or affirm on
VI, 1987 Constitution]
appeal or certiorari, as the laws or the Rules
of Court may provide, final judgments and
Flexible tariff clause: the authority given to the
orders of lower courts in xxx
President, upon the recommendation of NEDA,
to adjust the tariff rates under Sec. 1608 of the
(b) all cases involving the legality of any tax,
CMTA in the interest of national economy,
impost, assessment or toll or any penalty
imposed in relation thereto. general welfare and/or national security.

12. Exemption from real property taxes

Even the legislative body cannot deprive the
SC of its appellate jurisdiction over all cases
Sec. 28(3), Art. VI, 1987 Constitution.
coming from inferior courts where the
Charitable institutions, churches and
constitutionality or validity of an ordinance or
personages or convents appurtenant
the legality of any tax, impost, assessment, or
thereto, mosques, non-profit cemeteries,
toll is in question. [San Miguel Corp v. Avelino,
and all lands, buildings, and improvements,
G.R. No. L-39699 (1979)]
actually, directly, and exclusively used for
religious, charitable, or educational purposes
Sec. 30, Art. VI, 1987 Constitution. shall be exempt from taxation.
No law shall be passed increasing the
appellate jurisdiction of the Supreme Court
13. No appropriation or use of public
without its advice and concurrence.
money for religious purposes

Scope of Judicial Review in taxation: limited

Sec. 29, Art. VI, 1987 Constitution
only to the interpretation and application of tax
No public money or property shall be
laws. Its power does not include inquiry into the
appropriated, applied, paid, or employed,
policy of legislation. Neither can it legitimately
directly or indirectly, for the use, benefit, or
question or refuse to sanction the provisions of
support of any sect, church, denomination,
any law consistent with the Constitution. [Coll.
sectarian institution, or system of religion, or
v. Bisaya Land Transportation, 105 Phil. 338
of any priest, preacher, minister, other
(1959)].
religious teacher, or dignitary as such,
except when such priest, preacher, minister,
10. Grant of power to the local government
or dignitary is assigned to the armed forces,
units to create its own sources of
or to any penal institution, or government
revenue
orphanage or leprosarium.
LGUs have power to create its own sources of
revenue and to levy taxes, fees and charges,
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
autonomy. [Sec. 5, Art. X, 1987 Constitution]

Page 20 of 256
U.P. LAW BOC TAXATION 1
b. Provisions Indirectly Affecting
Taxation
1. Due process
Sec. 1, Art. III, 1987 Constitution.
No person shall be deprived of life, liberty, or
property without due process of law, nor shall
any person be denied the equal protection of
the laws.
Substantive Due Process – An act is done
under the authority of a valid law or the
Constitution itself.
Procedural Due Process – An act is done
after compliance with fair and reasonable
methods or procedure prescribed by law.
Due Process in Taxation requirements:
(a) Public purpose
(b) Imposed within taxing authority’s territorial
jurisdiction
(c) Assessment or collection is not arbitrary or
oppressive
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 the confiscation of
property. [Sison v. Ancheta, G.R. No. L-
59431(1984)]
Due process is usually violated where:
! The tax imposed is for private, as
distinguished from, public purposes
! A tax is imposed on property outside the
State, i.e., extra-territorial taxation; or
! Arbitrary or oppressive methods are used
in assessing and collecting taxes.
But, a tax does not violate the due process
clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an
injury rather than a benefit to such taxpayer.
Page 21 of 256
TAXATION LAW
Due process does not require that the property
subject to the tax or the amount to be raised
should be determined by judicial inquiry, and a
notice and hearing as to the amount of the tax
and the manner in which it shall be apportioned
are generally not necessary to due process of
law. [Pepsi-Cola Bottling Co. of the Philippines,
Inc. v. Municipality of Tanauan, G.R. No. L-
31156 (1976)]
Instances of violations of the due process
clause:
• If the tax amounts to confiscation of
property;
• If the subject of confiscation is outside the
jurisdiction of the taxing authority;
• If the tax is imposed for a purpose other
than a public purpose;
• If the law which is applied retroactively
imposes just and oppressive taxes.
• If the law violates the inherent limitations
on taxation.
2. Equal protection
Sec. 1, Art. III, 1987 Constitution.
No person shall be deprived of life, liberty, or
property without due process of law, nor shall
any person be denied the equal protection of
the laws.
What the Constitution prohibits is class
legislation which discriminates against some
and favors others. As long as there are rational
or reasonable grounds for so doing, Congress
may, therefore, group the persons or properties
to be taxed and it is sufficient “if all of the same
class are subject to the same rate and the tax
is administered impartially upon them.” [1
Cooley 608].
The equal protection clause is subject to
reasonable classification [See requisites for
valid classification, supra].
U.P. LAW BOC TAXATION 1
3. Religious freedom
Sec. 5, Art. III, 1987 Constitution.
No law shall be made respecting an
establishment of religion, or prohibiting the
free exercise thereof. (Non-establishment
clause)
The free exercise and enjoyment of religious
profession and worship, without
discrimination or preference, shall forever be
allowed. (Free exercise clause)
No religious test shall be required for the
exercise of civil and political rights.
The free exercise clause is the basis of tax
exemptions.
The imposition of license fees on the
distribution and sale of bibles and other
religious literature by a non-stock, non-profit
missionary organization not for purposes of
profit amounts to a condition or permit for the
exercise of their right, thus violating the
constitutional guarantee of the free exercise
and enjoyment of religious profession and
worship which carries with it the right to
disseminate religious beliefs and information.
[American Bible Society v. City of Manila, G.R.
No. L-9637 (1957)]
• It is actually in the nature of a condition or
permit for the exercise of the right.
• This is different from a tax in the income of
one who engages in religious activities or a
tax on property used or employed in
connection with those activities.
• It is one thing to impose a tax on the
income or property of a preacher. It is quite
another thing to exact a tax for the privilege
of delivering a sermon.
The Constitution, however, does not prohibit
imposing a generally applicable tax on the sale
of religious materials by a religious
organization. [Tolentino v. Secretary of
Finance, G.R. No. 115455 (1994)]
Page 22 of 256
TAXATION LAW
4. Non-impairment of obligations of
contracts
Sec. 10, Art. III, 1987 Constitution.
No law impairing the obligation of contracts
shall be passed.
The Contract Clause has never been thought
as a limitation on the exercise of the State's
power of taxation save only where a tax
exemption has been granted for a valid
consideration. [Tolentino v. Secretary of
Finance, supra]
G. STAGES OR ASPECTS
OF TAXATION
The exercise of taxation involves the following
stages:
1. Legislative Act: Levy or
imposition
This process involves the passage of tax laws
or ordinances through the legislature. The tax
laws to be passed shall determine:
i. Those to be taxed (person, property or
rights);
ii. How much is to be collected (the rate
and the base of tax); and
iii. How taxes are to be implemented (the
manner of imposing and collecting tax).
It also involves the granting of tax exemptions,
tax amnesties or tax condonation.
Scope of legislative power to tax:
a) Discretion as to purpose for which
taxes shall be levied.
The sole arbiter of the purposes for which taxes
shall be levied is the legislature, provided the
purposes are public. The courts may review the
levy of the tax to determine whether the
U.P. LAW BOC TAXATION 1
purpose is a public one but once that is
determined, the courts can make no other
inquiry as to the purpose of tax, as it affects the
power to impose it. [Cooley Taxation, 4th Ed.,
171.]
b) Discretion as to subjects of taxation.
It is inherent in the power to tax that a state be
free to select the subjects of taxation, and it has
been repeatedly held that inequalities which
result from a singling out of one particular class
for taxation or exemption infringe no
constitutional limitation. [Lutz v. Araneta G.R.
No. L-7859 (1955)]
c) Discretion as to amount or rate of tax.
In the absence of constitutional prohibitions,
the legislature has the right to finally determine
the amount or rate of tax. Not only is the power
to tax unlimited in its reach as to subjects, but
in its very nature, it acknowledges no limits and
may be carried even to the extent of exhaustion
and destruction, thus becoming in its exercise
a power to destroy.
The power to tax includes the power to destroy
if it is used validly as an implement of the police
power in discouraging and in effect, ultimately
prohibiting certain things or enterprises inimical
to the public welfare, x x x But where the power
to tax is used solely for the purpose of raising
revenues, the modern view is that it cannot be
allowed to confiscate or destroy. If this is
sought to be done, the tax may be successfully
attacked as an inordinate and unconstitutional
exercise of the discretion that is usually vested
exclusively in the legislature in ascertaining the
amount of the tax. (Cruz, Constitutional Law,
2000 Ed., p. 87)
2. Executive Act: Assessment
and collection
This process involves the act of administration
and implementation of tax laws by the
executive through its administrative agencies
Page 23 of 256
TAXATION LAW
such as the Bureau of Internal Revenue or
Bureau of Customs.
3. Taxpayer’s Act: Payment
This process involves the act of compliance by
the taxpayer in contributing his share to pay the
expenses of the government. Payment of tax
also includes the options, schemes or
remedies as may be legally open or available
to the taxpayer.
4. Taxpayer’s and Executive
Act: Refund
A claim for refund must first be filed with the
Commissioner of Internal Revenue. A suit or
proceeding may be filed within two years from
the date of payment of the tax or penalty
regardless of any supervening cause that may
arise after payment. The Commissioner may,
even without a written claim therefor, refund or
credit any tax, where on the face of the return,
such payment appears clearly to have been
erroneously paid. [Sec. 229, NIRC]
H. REQUISITES OF A
VALID TAX
1. It must be for a public purpose;
2. Rule of taxation should be uniform;
3. The person or property taxed is within the
jurisdiction of the taxing authority;
4. Assessment and collection is in
consonance with the due process clause;
AND
5. The tax must not infringe on the inherent
and constitutional limitations of the
power of taxation.
U.P. LAW BOC TAXATION 1
I. KINDS OF TAXES
1. As to object
a. Personal, Poll or Capitation Tax – tax of
a fixed amount imposed on persons
residing within a specified territory, whether
citizens or not, without regard to their
property or the occupation or business in
which they may be engaged (e.g.
community (formerly residence) tax).
b. Property Tax – tax imposed on property,
real or personal, in proportion to its value
or in accordance with some other
reasonable method of apportionment (e.g.,
real estate tax). The obligation to pay the
tax is absolute and unavoidable and is not
based upon the voluntary action of the
person assessed.
c. Privilege/Excise Tax – it is said that an
excise tax is a charge imposed upon:
i. the performance of an act,
ii. the enjoyment of a privilege, or
iii. the engagement in an
occupation, profession, or
business.
The obligation to pay excise tax is based
on the voluntary action of the person taxed
in performing the act or engaging in the
activity which is subject to the excise. The
term “excise tax” is synonymous with
“privilege tax” and the two are often used
interchangeably (e.g., income tax, value
added tax, estate tax, donor’s tax).
2. As to burden or incidence
a. Direct Taxes – taxes which are
demanded from persons who also
shoulder them; taxes for which the
taxpayer is directly or primarily liable, or
which he cannot shift to another. The
liability for the payment of the tax
(incidence) and the burden (impact) of the
Page 24 of 256
TAXATION LAW
tax falls on the same person. (e.g., income
tax, estate tax, donor’s tax, community tax)
b. Indirect Taxes – taxes which are
demanded from one person in the
expectation and intention that he shall
indemnify himself at the expense of
another, falling finally upon the ultimate
purchaser or consumer; taxes levied upon
transactions or activities before the articles
subject matter thereof, reach the
consumers who ultimately pay for them not
as taxes but as part of the purchase price.
Thus, the person who absorbs or bears the
burden of the tax is other than the one on whom
it is imposed and required by law to pay the tax.
Practically all business taxes are indirect (e.g.,
VAT, percentage tax, excise taxes on specified
goods, customs duties).
3. As to tax rates
a. Specific Tax – a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or measurement.
It requires no assessment (valuation) other
than the listing or classification of the
objects to be taxed (e.g., taxes on distilled
spirits, wines, and fermented liquors; cigars
and cigarettes)
b. Ad Valorem Tax – a tax of a fixed
proportion of 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 from each
taxpayer can be determined. The phrase
“ad valorem” means literally, “according to
value.” (e.g., real estate tax, excise tax on
automobiles, non-essential goods such as
jewelry and perfumes, customs duties.
c. Mixed – a tax that has both the
characteristics of specific tax and ad
valorem tax
U.P. LAW BOC TAXATION 1
4. As to purpose
a. General or Fiscal Tax – levied for the
general or ordinary purposes of the
Government, i.e., to raise revenue for
governmental needs (e.g., income tax,
VAT, and almost all taxes).
b. Special/Regulatory/Sumptuary Tax –
levied for special purposes, i.e., to achieve
some social or economic ends irrespective
of whether revenue is actually raised or not
(e.g., protective tariffs or customs duties on
imported goods to enable similar products
manufactured locally to compete with such
imports in the domestic market).
Tariff duties intended mainly as a source of
revenue are relatively low so as not to
discourage imports.
5. As to scope (or authority
imposing the tax)
a. National – taxes imposed by the national
government, through Congress and
administered by the Bureau of Internal
Revenue (BIR) or the Bureau of Customs
(BOC) (e.g., national internal revenue
taxes, customs duties, and national taxes
imposed by laws).
b. Municipal or Local – taxes imposed by
local governments, through their respective
Sanggunians, and administered by the
local executive through the local treasurer
(e.g., business taxes that may be imposed
under the Local Government Code,
professional tax).
6. As to graduation
a. Progressive – The rate of tax increases as
the tax base or bracket increases, e.g.,
income tax, estate tax, donor’s tax.
b. Regressive – The rate of tax decreases as
the tax base or bracket increases. There is
no regressive tax in the Philippines.
c. Proportionate – The rate of tax is based
Page 25 of 256
TAXATION LAW
on a fixed percentage of the amount of the
property, receipts or other basis to be
taxed, e.g., real estate tax, VAT, and other
percentage taxes.
d. Digressive – A fixed rate is imposed on a
certain amount and diminishes gradually
on sums below it. The tax rate in this case
is arbitrary because the increase in tax rate
is not proportionate to the increase of tax
base.
Regressive/Progressive system of taxation
A regressive tax must not be confused with the
regressive system of taxation.
In a society where the majority of the people
have low incomes, a regressive taxation
system exists when there are more indirect
taxes imposed than direct taxes. Since the low-
income sector of the population as a whole
buys more consumption goods on which the
indirect taxes are collected, the burden of
indirect taxes rests more on them than on the
more affluent groups.
A progressive tax is, therefore, also different
from a progressive system of taxation.
Regressivity is not a negative standard for
courts to enforce. What Congress is required
by the Constitution to do is to "evolve a
progressive system of taxation." These
provisions are put in the Constitution as moral
incentives to legislation, not as judicially
enforceable rights. [Tolentino v. Secretary of
Finance, GR No. 115455, 25 August 1994]
J. GENERAL CONCEPTS
IN TAXATION
1. Prospectivity of Tax Laws
General rule:
Tax laws are prospective in operation.
Reason: Nature and amount of the tax under
tax laws enacted after the transaction could not
U.P. LAW BOC TAXATION 1
have been foreseen and understood by the
taxpayer at the time of the transaction.
Exception:
Tax laws may be applied retroactively provided
it is expressly declared or it is clearly the
legislative intent (e.g., increase taxes on
income already earned) except when
retroactive application would be so harsh
and oppressive. [Republic v. Fernandez, G.R.
No. L-9141 (1956)]
Statutes are prospective and not retroactive in
their operation, laws being the formulation of
rules for the future, not the past. [Curata v.
Philippine Ports Authority, G.R. Nos. 154211-
12 (2009)]
The language of the statute must clearly
demand or press that it shall have a retroactive
effect. [Lorenzo v. Posadas, supra]
Exception to the exception:
Collection of interest in tax cases is not penal
in nature; it is but a just compensation to the
State. Thus, the constitutional prohibition
against ex post facto laws is not applicable to
the collection of interest on back taxes. [Central
Azucarera v. CTA, G.R. No. L-23236 (1967)]
Non-retroactivity of rulings [Sec. 246, NIRC]
General rule:
Rulings do not have retroactive application if
the revocation, modification, or reversal will be
prejudicial to the taxpayer.
Exceptions:
a. Taxpayer’s deliberate misstatement or
omission of facts
b. BIR’s gathered facts is materially
different from the facts from which the
ruling was based on
c. Taxpayer acted in bad faith
Note: The rule on non-retroactivity of rulings
may be applied only if the parties in the ruling
involve the taxpayer himself/itself. The
taxpayer cannot invoke the rulings granted in
Page 26 of 256
TAXATION LAW
favor of the other taxpayers.
2. Imprescriptibility of Taxes
Unless otherwise provided by law, taxes are
imprescriptible. [CIR v. Ayala Securities
Corporation G.R. No. L-29485 (1980)]
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. [Commissioner
v. Standard Chartered Bank, G.R. No. 192173
(2015)]
a. Prescriptions found in statutes
(1) National Internal Revenue Code –
statute of limitations in the assessment
and collection of taxes therein
imposed.
Summary of prescription on assessment
and collection:
3 YEARS Prescription of assessment AND
collection from:
(a) the prescribed last day of
filing of returns (even if the
return was filed earlier than the
deadline); OR
(b) the day when the return was
actually filed if filed later than the
last day of filing [Sec. 203,
NIRC], whichever comes later.
10 Prescription of assessment in
YEARS cases of:
(a) false or fraudulent return with
intent to evade tax; OR
(b) failure or omission to file a
return [Sec. 222, NIRC]
Counted from the discovery of
the fraud, falsity, or omission.
U.P. LAW BOC TAXATION 1 TAXATION LAW

of the Local Government Code [Sec.

5 YEARS Prescription of collection of tax
194 and 270, LGC].
if:
d. In case of fraud or intent to evade the
(1) assessed within the 3-year
payment of taxes, fees, or charges, the
and 10-year prescriptive
same may be assessed within ten (10)
periods;
years from the discovery of the fraud or
(2) assessed within the
intent to evade payment.
extended period agreed upon by
the Commissioner and taxpayer
The prescriptive period is tolled when:
(waiver of the prescriptive
a. The treasurer is legally prevented from
period); and
making the assessment or collection;
(3) Collected by distraint, levy,
b. The taxpayer requests for a
or by a proceeding in court.
reinvestigation and executes a waiver
[Sec. 222, NIRC]
in writing before expiration of the period
within which to assess or collect; and
Note: The prescriptive period from final c. The taxpayer is out of the country or
liquidation is three (3) years, except in cases otherwise cannot be located.
of:
1. Tentative liquidation; 3. Situs of Taxation
2. Payment under protest;
3. Fraud; and
Meaning: Situs of taxation literally means the
4. Compliance audit.
place of taxation.
! The state where the subject to be taxed has
(2) Customs Modernization and Tariffs
a situs may rightfully levy and collect the
Act (CMTA)
tax; and
! The situs is necessarily in the state which
Under Sec. 430, it provides that “[i]n the
has jurisdiction or which exercises
absence of fraud and when the goods have
dominion over the subject in question.
been finally assessed and released, the
Within the territorial jurisdiction, the taxing
assessment shall be conclusive upon all
authority may determine the situs.
parties three (3) years from the date of final
payment or duties, or upon completion of the
Factors that Determine Situs:
post-clearance audit.”
a. Nature of the tax;
b. Subject matter of the tax (person,
(3) Local Government Code
property, act or activity)
c. Possible protection and benefit that
The LGC prescribes the following prescriptive
may accrue both to the government
periods for the assessment and collection of
and the taxpayer;
local taxes, fees, or charges [Sec. 194, LGC]:
d. Citizenship of the taxpayer;
a. Taxes, fees, and charges shall be
e. Residence of the taxpayer;
assessed five (5) years from the date
f. Source of income.
they become due;
b. Taxes, fees, and charges must be
collected five (5) years from the date of
assessment by administrative or
judicial action;
c. The prescriptive period for assessment
and collection shall be three (3) years
if the tax accrued before the effectivity

Page 27 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

Situs of Income Tax

Intangible General Rule: Domicile of
Taxpayer Source of Income personal the owner. Mobilia
property sequuntur personam
(e.g., credits, (movables follow the
Citizen- Residency Within PH. Outsi bills person)
ship de receivables,
PH. bank Exceptions: When property
deposits, has acquired a business
Filipino Resident Taxable Taxab bonds, situs in another jurisdiction;
le
promissory or
notes, When the law provides for
Filipino Non- Taxable Non-
Resident Taxab mortgage the situs of the subject of
loans, tax (e.g., Sec 104, NIRC)
le
judgments ! Franchise, patents,
Alien Resident Taxable Non- and copyrights,
Taxab corporate trademarks – situs
le stocks) is the place of the
country where such
Alien Non- Taxable Non- intangibles are
Resident Taxab exercised
le ! Receivables –
Domicile or
residence of the
Situs of Property Tax
debtor
Kind of Situs ! Bank deposits –
Property Location of the
depository bank
Real property Where it is located (lex rei
sitae)
Situs of Excise Tax
Tangible Where property is Kind of Excise Tax Situs
Personal physically located although
property the owner resides in
another jurisdiction; or Income Tax Source of the
place of sale or transaction income, nationality or
residence of
taxpayer (Sec. 23,
NIRC)
! Occupation –
where the
occupation is
engaged in
! Transaction –
where the
transaction took
place

Page 28 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

6. Of the same kind or character of tax.

Donor’s Tax Location of property;
[Swedish Match Phils., Inc. v. Treasurer,
nationality or
supra]
residence of donor

Estate Tax Location of property; b. Broad sense (Indirect Duplicate

nationality or Taxation)
residence of
deceased There is double taxation in the broad sense or
indirect duplicate taxation if any of the
Situs of Business Tax elements for direct duplicate taxation is
absent.
Kind of Business Situs
Tax It extends to all cases in which there is a
burden of two or more pecuniary impositions.
VAT Where transaction is For example, a tax upon the same property
made (i.e. where the imposed by two different states.
good/service is
sold/perform and Double taxation, standing alone and not being
consumed) forbidden by our fundamental law, is not a valid
defense against the legality of a tax measure
Sale of Real Where the real
[Pepsi Cola v. Mun. of Tanauan, G.R. No. L-
Property property is located
31156 (1976)].
Sale of Personal Where the personal
Constitutionality of double taxation
Property property was sold
There is no constitutional prohibition
against double taxation in the Philippines. It is
4. Double Taxation something not favored, but is permissible,
provided some other constitutional requirement
Double taxation means taxing the same is not thereby violated. [Villanueva v. City of
property twice when it should be taxed only Iloilo, G.R. No. L-26521 (1968)]
once; that is, “taxing the same person twice by
the same jurisdiction for the same thing.” If the tax law follows the constitutional rule on
[Swedish Match Phils., Inc. v. Treasurer, G.R. uniformity, there can be no valid objection to
No. 181277 (2013)] taxing the same income, business or property
twice. [China Banking Corp. v. CA, G.R. No.
a. Strict sense (Direct Duplicate 146749 (2003)]
Taxation)
Double taxation in its narrow sense is
undoubtedly unconstitutional but in the broader
The same property must be taxed twice when
sense is not necessarily so. [DE LEON, citing
it should be taxed once. The requisites are:
26 R.C.L 264-265]. Where double taxation (in
1. Both taxes must be imposed on the same
its narrow sense) occurs, the taxpayer may
property or subject matter;
seek relief under the uniformity rule or the
2. For the same purpose;
equal protection guarantee. [DE LEON, citing
3. By the same State, Government, or
84 C.J.S.138].
taxing authority;
4. Within the same territory, jurisdiction or
taxing district;
5. During the same taxing period; and

Page 29 of 256
U.P. LAW BOC TAXATION 1
International Double Taxation
Double taxation usually takes place when a
person is resident of a contracting state and
derives income from, or owns capital in, the
other contracting state and both states impose
tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts
to several methods.
The purpose of these international agreements
is to reconcile the national fiscal legislations of
the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax
conventions are drafted with a view towards
the elimination of international juridical
double taxation, which is defined as the
imposition of comparable taxes in two or more
states on the same taxpayer in respect of the
same subject matter and for identical periods.
The apparent rationale for doing away with
double taxation 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. [CIR v. SC
Johnson & Sons, Inc., G.R. No. 127105 (1999)]
Modes of eliminating double taxation
a. Allowing reciprocal exemption either by law
or by treaty;
b. Allowance of tax credit for foreign taxes
paid;
c. Allowance of deductions such as for
foreign taxes paid, and vanishing
deductions in estate tax; or
d. Reduction of Philippine tax rate.
5. Escape from Taxation
a. Shifting of Tax Burden
Shifting
The act of transferring the burden of a tax from
the original payer or the one on whom the tax
was assessed or imposed to someone else.
What is transferred is not the payment of the
Page 30 of 256
TAXATION LAW
tax but the burden of the tax.
All indirect taxes may be shifted; direct taxes
cannot be shifted.
Ways of shifting the tax burden
1. Forward shifting - When the burden of the
tax is transferred from a factor of
production through the factors of
distribution until it finally settles on the
ultimate purchaser or consumer.
! Examples: VAT, percentage tax.
2. Backward shifting - When the burden of
the tax is transferred from the consumer or
purchaser through the factors of
distribution to the factor of production.
! Example: Consumer or purchaser
may shift tax imposed on him to
retailer by purchasing only after the
price is reduced, and from the latter
to the wholesaler, and finally to the
manufacturer or producer.
3. Onward shifting - When the tax is shifted
two or more times either forward or
backward.
Factors determining tax shifting
1. Elasticity of demand and supply - The
more the elasticity, the lower the incidence
on the sales and the higher the incidence
on supply.
2. Nature of markets – In an oligopolistic
market (i.e. few sellers and many buyers)
tax shifting to buyers is high since few
sellers can team up to determine the
market price. In a situation where there are
many buyers and sellers, a large portion of
tax will be borne by sellers. For a
monopolistic market, the entire tax burden
falls on the shoulders of the buyer.
3. Government policy on pricing – In the
case of government price control, the
supplier cannot increase prices, hence
cannot shift tax burden to buyers and vice
versa.
4. Geographical location – If taxes are
imposed on certain regions, it is hard to
shift them to consumers because
U.P. LAW BOC TAXATION 1 TAXATION LAW

consumers will move to regions with low Impact Distinguished from Incidence
taxes.
Impact Incidence
5. Nature of tax (Direct or Indirect tax) –
Direct tax e.g. PAYE (pay-as-you-earn)
cannot be shifted whatsoever while indirect Initial burden of tax Ultimate burden of
taxes can be shifted through increase in the tax
prices.
6. Rate of tax – If the rate is too high, shifting
can occur backwards or forwards; if the At the point of At the point of
rate is too low, it may be absorbed by the imposition settlement
manufacturer.
7. Time available for adjustment – The
person who can adjust faster (buyer or Falls upon the Rests on the person
seller) will be able to shift the tax e.g. if the person from whom who pays it
buyer can shift to substitute goods, the the tax is collected eventually
seller will bear the tax burden.
8. The tax point
May be shifted Cannot be shifted
Taxes that can be shifted
1. Value-added Tax Incidence is the end
2. Percentage Tax of the shifting
3. Excise Tax process. Sometimes,
however, when no
Meaning of Impact and Incidence of shifting is possible,
Taxation as in the case of
Impact of taxation is the point where the tax income tax or such
is originally imposed or the one on whom the other direct taxes,
tax is formally assessed. [Ingles, Tax Made the impact coincides
Less Taxing (2018)] In so far as the law is with incidence on the
concerned, the taxpayer, the subject of tax, is same person.
the person who must pay the tax to the
government. Application:
Suppose a tax — excise duty — is imposed on
Incidence of taxation is the point on whom the soap. Its impact is on the producers, in the first
tax burden finally rests. [INGLES] It takes place instance, as they are liable to pay it to the
when shifting has been effected from the government. But, the producers may succeed
statutory taxpayer to another. in collecting it from the consumers by raising
the price of soap by the amount of tax. In that
case, consumers eventually pay the tax and so
the incidence falls upon them.

Page 31 of 256
U.P. LAW BOC TAXATION 1
Relationship between Impact, Shifting, and
Incidence of a Tax
Impact Shifting Incidence
Initial Intermediate Result
phenomenon process
Imposition of Transfer of Setting or
the tax the tax coming to
rest of the
tax
Example: Impact in VAT is on the producer who
shifts the burden to the customer who finally
bears the incidence of the tax
b. Tax Avoidance (Tax Minimization)
The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order
to avoid or reduce tax liability. It is politely
called “tax minimization” and is NOT
punishable by law.
Example: A person refrains from engaging in
some activity or enjoying some privilege in
order to avoid the incidental taxation or to lower
his tax bracket for a taxable year.
c. Tax Evasion (Tax Dodging)
Tax Evasion - is the use by the taxpayer of
illegal or fraudulent means to defeat or
lessen the payment of a tax. It is also known as
“tax dodging.” It is punishable by law.
Example: Deliberate failure to report a taxable
income or property; deliberate reduction of
income that has been received; overstatement
of expenses.
Elements of Tax Evasion
a. The end to be achieved. Example: the
payment of less than that known by the
Page 32 of 256
TAXATION LAW
taxpayer to be legally due, or in paying no
tax when such is due;
b. An accompanying state of mind described
as being “evil,” “in bad faith,” “willful,” or
“deliberate and not accidental”; and
c. A course of action (or failure of action)
which is unlawful. [CIR v. Estate of Toda,
G.R. No. 147188 (2004)]
Since fraud is a state of mind, it need not be
proved by direct evidence but may be inferred
from the circumstances of the case. Thus:
! The failure of the taxpayer to declare for
taxation purposes his true and actual
income derived from his business for
two consecutive years has been held as
an indication of his fraudulent intent to
cheat the government of its due taxes.
[Republic v. Gonzales, G.R. No. L-17962
(1965)]
! The substantial underdeclaration of
income in the income tax returns of the
taxpayer for four (4) consecutive years
coupled with his intentional
overstatement of deductions justifies the
finding of fraud. [Perez v. CTA and
Collector, G.R. No. L-10507 (1958)].
Mere understatement of a tax is not itself proof
of fraud for the purpose of tax evasion. The
burden of proof is on the prosecution to prove
beyond reasonable doubt that the accused
willfully failed to supply correct and accurate
information. [People v. Judy Ann Santos, CTA
Crim. Case No. 0-012 (2013)]
The Willful Blindness doctrine states that a
taxpayer can no longer raise the defense that
the errors on their tax returns are not their
responsibility or that it is the fault of the
accountants they hired. Intent to defraud need
not be shown for a conviction of tax evasion.
The only thing that needs to be proven is that
the taxpayer was aware of his obligation to file
the tax return but he nevertheless voluntarily,
knowingly, and intentionally failed to file the
required returns. [INGLES citing People v.
Kintanar, C.T.A. E.B. No. 006 (2010)]
U.P. LAW BOC TAXATION 1 TAXATION LAW

Tax Avoidance v. Tax Evasion It is a waiver of the government's right to collect

the amounts that would have been collectible
Tax Avoidance Tax Evasion
under our tax laws. Thus, when the law speaks
of a tax exemption, it should be understood as
Also Tax Tax Dodging freedom from the imposition and payment of a
called as Minimization particular tax. [Secretary of Finance v. Lazatin,
G.R. No. 210588 (2016)]

Means Legal Illegal Taxation is the rule; exemption is the

exception. He who claims exemption must be
able to justify his claim or right thereto, by a
Outcome of tax Outcome of grant expressed in terms “too plain to be
planning tax fraud mistaken and too categorical to be
misinterpreted.” If not expressly mentioned in
the law, it must at least be within its purview by
Punisha No Yes clear legislative intent. [Jaka Investments Corp.
ble? v. CIR, G.R. No. 147629 (2010)]
Purpose Merely Entirely
He who claims an exemption must be able to
minimize escape point to some positive provision of law creating
payment of payment of the right; it cannot be allowed to exist upon a
taxes (tax taxes mere vague implication or inference. The right
savings) of taxation will not be held to have been
surrendered unless the intention to surrender
d. Transformation is manifested by words too plain to be
mistaken, for the state cannot strip itself of the
Method of escape in taxation whereby the most essential power of taxation by doubtful
manufacturer or producer upon whom the tax words; it cannot, by ambiguous language, be
has been imposed pays the tax and endeavors deprived of this highest attribute of sovereignty.
to recoup himself by improving his process of [Manila Electric Corporation v. Vera, G.R. No.
production thereby turning out his units of L-29987 (1975)]
products at a lower cost. The taxpayer escapes
by a transformation of the tax into a gain If there is nothing in a law that points that the
through the medium of production. word “exemption” refers to taxes, the
implication would be that the term would be an
exemption of something else, such as
6. Exemption from Taxation regulatory or reporting requirements. [Ingles
citing PLDT v. City of Davao, G.R. No. L-29987
Meaning of exemption from taxation
(1975)]
The grant of immunity to particular persons or
corporations or to persons or corporations of a
Grounds for Tax Exemption
particular class from a tax which persons and
a. It may be based on a contract.
corporations generally within the same state or
b. It may be based on some ground of public
taxing district are obliged to pay. It is an
policy.
immunity or privilege; it is freedom from a
c. It may be created in a treaty on grounds of
financial charge or burden to which others are
reciprocity or to lessen the rigors of
subjected. It is strictly construed against the
international or multiple taxation.
taxpayer.

Page 33 of 256
U.P. LAW BOC TAXATION 1
But equity is NOT a ground for tax exemption.
While equity cannot be used as a basis or
justification for tax exemption, a law may validly
authorize the condonation of taxes on
equitable considerations.
There is no tax exemption solely on the ground
of equity. [Davao Gulf Lumber Corp. v. CIR,
G.R. No. 117359 (1998)]
Nature of tax exemption
a. Mere personal privilege – cannot be
assigned or transferred without the consent
of the legislature. The legislative consent to
the transfer may be given either in the
original act granting the exemption or in a
subsequent law.
b. General rule: Revocable by the
government.
Exception: If founded on a contract which
is protected from impairment. But the
contract must contain the essential
elements of other contracts. An exemption
provided for in a franchise, however, may
be repealed or amended pursuant to the
Constitution [Sec. 11, Art. XII, 1987
Constitution]. A legislative franchise is a
mere privilege.
c. Implies a waiver on the part of the
government of its right to collect taxes due
to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an
express grant and must be strictly
construed.
d. Not necessarily discriminatory, provided
it has a reasonable foundation or rational
basis. Where, however, no valid distinction
exists, the exemption may be challenged
as violative of the equal protection
guarantee or the uniformity rule.
Kinds of Tax Exemption
a. Express or Affirmative - either entirely or
in part, may be made by provisions of the
Constitution, statutes, treaties, ordinances,
franchises, or contracts.
b. Implied or Exemption by Omission -
Page 34 of 256
TAXATION LAW
when a tax is levied on certain classes
without mentioning the other classes.
Every tax statute, in a very real sense,
makes exemptions since all those not
mentioned are deemed exempted. The
omission may be either accidental or
intentional.
Exemptions are not presumed, but when
public property is involved, exemption is
the rule, and taxation is the exception.
c. Contractual - The legislature of a
State may, in the absence of special
restrictions in its constitution, make a
valid contract with a corporation in
respect to taxation, and that such
contract can be enforced against the
State at the instance of the corporation.
[Casanovas v. Hord, G.R. No. 3473
(1907)]
In the real sense of the term and where
the non-impairment clause of the
Constitution can rightly be invoked, this
includes those agreed to by the taxing
authority in contracts, such as those
contained in government bonds or
debentures, lawfully entered into by
them under enabling laws in which the
government, acting in its private
capacity, sheds its cloak of authority
and waives its governmental immunity.
These contractual tax exemptions,
however, are not to be confused with
tax exemptions granted under
franchises. A franchise partakes the
nature of a grant which is beyond the
purview of the non-impairment clause
of the Constitution. [Manila Electric
Company v. Province of Laguna, G.R.
No. 131359 (1999)]
Rationale of Tax Exemption
Such exemption will benefit the body of the
people and not particular individuals or private
interest and that the public benefit is sufficient
U.P. LAW BOC TAXATION 1
to offset the monetary loss entailed in the grant
of the exemption.
Principles of Tax Exemption:
a. As the power of taxation is a high
prerogative of sovereignty, the
relinquishment is never presumed and
any reduction or diminution thereof with
respect to its mode or its rate, must be
strictly construed, and the same must be
couched in clear and unmistakable terms in
order that it may be applied. [Floro Cement
v. Gorospe, G.R. No. L-46787 (1991)
b. When granted, they are strictly construed
against the taxpayer [Luzon Stevedoring
Co. v. CTA, G.R. No. L-30232 (1988)]
c. Tax exemptions are strictly construed
against the taxpayer, they being highly
disfavored and may almost be said “to be
odious to the law.” [Manila Electric
Company v. Vera, supra]
Revocation of Tax Exemption
General Rule: Revocable by the government.
Exception: Contractual tax exemptions may
not be unilaterally so revoked by the taxing
authority without thereby violating the non-
impairment clause of the Constitution.
7. Doctrine of Equitable
Recoupment
The doctrine of equitable recoupment allows a
taxpayer whose claim for refund has been
barred by prescription to offset such claims
against a current assessment.
The doctrine also allows the government to
offset taxes that have not been collected from
the taxpayer against a current claim for refund,
although the government is time-barred from
collecting the previous taxes.
The doctrine finds NO application in this
jurisdiction.
Page 35 of 256
TAXATION LAW
8. Prohibition on Compensation
and Set-Off
General rule: Taxes cannot be subject to
compensation [South African Airways v. CIR,
G.R. No. 180356 (2010)]
Reasons:
a. This would adversely affect the
government revenue system [Philex Mining
v. CA, G.R. No. 125704 (1998)].
b. The government and the taxpayer are not
creditors and debtors of each other. There
is a material distinction between a tax and
debt. Debts are due to the Government in
its corporate capacity, while taxes are due
to the Government in its sovereign
capacity. We find no cogent reason to
deviate from the aforementioned
distinction. [South African Airways v. CIR,
supra]
Exception: If the claims against the
government have been recognized and an
amount has already been appropriated for that
purpose. Where both claims have already
become:
a. Due,
b. Demandable, and
c. Fully liquidated,
compensation takes place by operation of law
under Art. 1200 in relation to Articles 1279 and
1290 of the NCC, and both debts are
extinguished to the concurrent amount.
[Domingo v. Garlitos, G.R. No. L-18994 (1963)]
9. Compromise
A contract whereby the parties, by making
reciprocal concessions, avoid litigation or put
an end to one already commenced [Art. 2028,
Civil Code]. It involves a reduction of the
taxpayer’s liability.
Requisites of a tax compromise:
a. The taxpayer must have a tax liability.
b. There must be an offer (by the taxpayer or
U.P. LAW BOC TAXATION 1 TAXATION LAW

Commissioner) of an amount to be paid by No. 156 (1946)]. It is generally prospective in

the taxpayer. application [Dimaampao, 2005, p. 111].
c. There must be acceptance (by the
Commissioner or the taxpayer, as the case Tax Amnesty v. Tax Exemption
may be) of the offer in settlement of the
Tax Tax
original claim.
Amnesty Exemption

10. Tax Amnesty

Benefit Immunity Immunity
Definition from civil, from civil
A tax amnesty partakes of an absolute criminal, liability
forgiveness or waiver by the Government of administrati (relief from
its right to collect what otherwise would be due ve liability paying
it, and in this sense, prejudicial thereto, arising from taxes)
particularly to give tax evaders, who wish to non-
relent and are willing to reform a chance to do payment of
so and become a part of the new society with a taxes
clean slate. [Republic v. IAC, G.R. No. L-69344
(1991)] Coverage Past tax Future tax
liability liability
A tax amnesty, much like a tax exemption, is
never favored nor presumed in law. If granted,
the terms of the amnesty, like that of a tax Actual Yes None
exemption, must be construed strictly Revenue Loss
against the taxpayer and liberally in favor of
the taxing authority.
K. CONSTRUCTION AND
He who claims an exemption (or an amnesty) INTERPRETATION OF TAX LAWS,
from the common burden must justify his claim RULES, AND REGULATIONS
by the clearest grant of organic or state law. It
cannot be allowed to exist upon a vague 1. Tax Laws
implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in General Rule: Tax laws are construed strictly
favor of the state. [CIR v. Marubeni Corp., G.R. against the government and liberally in favor of
No. 137377 (2001)]. the taxpayer. [Manila Railroad Co. v. Coll. of
Customs, G.R. No. L-30264 (1929)].
Amnesty distinguished from tax exemption
Tax amnesty is immunity from all criminal and No person or property is subject to taxation
civil obligations arising from non-payment of unless within the terms or plain import of a
taxes. It is a general pardon given to all taxing statute. [see 72 Am. Jur. 2d 44] Taxes,
taxpayers. It applies to past tax periods, hence being burdens, are not to be presumed beyond
of retroactive application. [People v. what the statute expressly and clearly
Castañeda, G.R. No. L-46881 (1988)] declares. [Coll. v. La Tondena, G.R. No. L-
10431 (1962)].
Tax exemption is immunity from all civil
liability only. It is an immunity or privilege, a Thus, a tax payable by “individuals” does not
freedom from a charge or burden of which apply to “corporations.”
others are subjected. [Greenfield v. Meer, C.A.

Page 36 of 256
U.P. LAW BOC TAXATION 1
Tax statutes offering rewards are liberally
construed in favor of informers. [Penid v.
Virata, G.R. No. L-44004 (1983)].
Exceptions:
a. The rule of strict construction as against the
government is not applicable where the
language of the statute is plain and there is
no doubt as to the legislative intent [see 51
Am. Jur. 368]. E.g. Word “individual” was
changed by the law to “person”. This clearly
indicates that the tax applies to both natural
and juridical persons, unless otherwise
expressly provided.
b. The rule does not apply where the
taxpayer claims exemption from the tax.
Tax statutes are to receive a reasonable
construction or interpretation with a view to
carrying out their purpose and intent. They
should not be construed as to permit the
taxpayer easily to evade the payment of tax.
[Carbon Steel Co. v. Lewellyn, 251 U.S. 201].
Thus, the good faith of the taxpayer is not a
sufficient justification for exemption from the
payment of surcharges imposed by the law for
failing to pay tax within the period required by
law.
2. Tax Exemption and Exclusion
Tax exemptions must be shown to exist clearly
and categorically, and supported by clear
legal provisions. [NPC v. Albay, G.R. No.
87479 (1990)]
General Rule:
In the construction of tax statutes, exemptions
are not favored and are construed strictissimi
juris against the taxpayer. [Republic Flour Mills
v. Comm. & CTA, G.R. No. L-25602 (1970)]
a. NPC v. Albay [supra]: Tax exemptions
must be shown to exist clearly and
categorically, and supported by clear
legal provisions.
b. Floro Cement v. Gorospe [supra]: Claims
for an exemption must be able to point out
some provision of law creating the right,
and cannot be allowed to exist upon a
Page 37 of 256
TAXATION LAW
mere vague implication or inference.
c. RCPI v Provincial Assessor of South
Cotabato [G.R. No. 144486 (2005)]:
Exemptions are strictly construed against
the taxpayer and liberally in favor of the
taxing authority—it is the taxpayer’s duty to
justify the exemption by words too plain to
be mistaken and too categorical to be
misinterpreted.
d. CIR v. CA [supra]: Refunds are in the
nature of exemption and must be
construed strictly against the
grantee/taxpayer.
e. Quezon City v. ABS-CBN Broadcasting
Corporation [G.R. No. 166408 (2008)]:
Since taxation is the rule and exemption
the exception, the intention to make an
exemption ought to be expressed in clear
and unambiguous terms
Exceptions:
a. When the law itself expressly provides for
a liberal construction, that is, in case of
doubt, it shall be resolved in favor of
exemption;
b. When the exemption is in favor of the
government itself or its agencies, or of
religious, charitable, and educational
institutions because the general rule is that
they are exempt from tax.
c. When the exemption is granted under
special circumstances to special classes of
persons.
d. If there is an express mention or if the
taxpayer falls within the purview of the
exemption by clear legislative intent, the
rule on strict construction does not apply.
[Comm. v. Arnoldus Carpentry Shop, Inc.,
G.R. No. 71122 (1988)].
3. Tax Rules and Regulations
General Rule:
The Secretary of Finance, upon
recommendation of the CIR, shall promulgate
all needful rules and regulations for the
effective enforcement of the provisions of the
NIRC. [Sec. 244, NIRC]
U.P. LAW BOC TAXATION 1
It is an elementary rule in administrative law
that administrative regulations and policies
enacted by administrative bodies to interpret
the law which they are entrusted to enforce
have the force of law and are entitled to great
respect. They have in their favor a presumption
of legality [Gonzales v. Land Bank, G.R. No.
76759 (1990)]
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. [Fort Bonifacio
Development Corp v. CIR, GR 175707 (2014)]
Requisites for validity and effectivity of
regulations
a. Reasonable;
b. Within the authority conferred;
c. Not contrary to law and the Constitution
[Art. 7, NCC]; and
d. Must be published.
Tax regulations whose purpose is to enforce or
implement existing law must comply with the
following requisites to be effective [RP v.
Pilipinas Shell Petroleum Corp., G.R. No.
173918 (2008)]:
a. Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
b. Filed with the UP Law Center Office of the
National Administrative Register (ONAR)
[Ch 2, Book VII, EO 292]
Note: Administrative rules and regulations
must always be in harmony with the provisions
of the law. In case of conflict with the law or
the Constitution, the administrative rules and
regulations are null and void. As a matter of
policy, however, courts will declare a regulation
or provision thereof invalid only when the
conflict with the law is clear and unequivocal.
Administrative interpretations and opinions
The power to interpret the provisions of the Tax
Code and other tax laws is under the exclusive
Page 38 of 256
TAXATION LAW
and original jurisdiction of the Commissioner of
Internal Revenue subject to review by the
Secretary of Finance [Sec. 4, par.1, NIRC].
Revenue regulations are the formal
interpretation of the provisions of the NIRC and
other laws by the Secretary of Finance upon
the recommendation of the Commissioner of
Internal Revenue.
General rule: The Commissioner has the sole
authority to issue rulings but he also has the
power to delegate said authority to his
subordinates with the rank equivalent to a
division chief or higher.
Exceptions: The Commissioner may not
delegate the following:
a. The power to recommend the promulgation
of rules and regulations by the Secretary of
Finance;
b. The power to issue rulings of first
impression or to reverse, revoke, or modify
any existing ruling of the Bureau; and
c. The power to compromise or abate any tax
liability as provided by Sec. 204 and 205 of
the NIRC
Exception to the exception: BUT
assessments issued by RDOs involving (a)
Php500,000 or less, and (b) minor criminal
violations as determined by the Secretary of
Finance as recommended by the
Commissioner, may be compromised by a
Regional Evaluation Board [Sec. 7, NIRC].
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on all
subordinate courts and have the force and
effect of law. As provided for in Article 8 of the
Civil Code, they “form part of the law of the
land.”
The same is also true with respect to decisions
of the Court of Tax Appeals. However, by the
nature of its jurisdiction, the decisions of this
court are still appealable to the Supreme Court
by a petition for review on certiorari (Rule 45).
U.P. LAW BOC TAXATION 1
[Sec. 11, RA 9282]
4. Penal Provisions of Tax Laws
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the
language of a rule, however beneficent its
intention, beyond the fair and ordinary meaning
of its language.
A penal statute should be construed strictly
against the State and in favor of the accused.
The reason for this principle is the tenderness
of the law for the rights of individuals and the
object is to establish a certain rule by
conformity to which mankind would be safe,
and the discretion of the court limited. [People
v. Purisima, G.R. No. L-42050-66 (1978)].
II. NATIONAL INTERNAL
REVENUE CODE (NIRC) OF
1997, AS AMENDED
A. TAXING AUTHORITY
1. Jurisdiction, Power and
Functions of the
Commissioner of Internal
Revenue
a. Powers and Duties of the Bureau of
Internal Revenue [Sec. 2, NIRC]
1. To assess and collect all national
internal revenue taxes, fees, and
charges;
2. To enforce all forfeitures, penalties and
fines connected therewith;
3. To execute judgment in all cases
decided in its favor by the CTA and the
ordinary courts; and
4. To give effect to and administer the
supervisory and police powers
conferred upon it by the Tax Code or
other special laws.
Page 39 of 256
TAXATION LAW
b. Power of the Commissioner to
Interpret Tax Laws and to Decide
Tax Cases
Power to Interpret
The power to interpret provisions of the NIRC
and other tax laws shall be under the exclusive
and original jurisdiction of the CIR, subject to
review by the Secretary of Finance. [Sec. 4,
NIRC]
A ruling by the CIR that interprets provisions of
the NIRC and other tax laws shall be presumed
valid unless modified, reversed or superseded
by the Secretary of Finance. A taxpayer who
receives an adverse ruling from the CIR may,
within thirty (30) days from the date of receipt
of such ruling, seek its review by the Secretary
of Finance. The Secretary of Finance may also
review the rulings motu proprio. [DOF Order
No. 007-02, 7 May 2002]
Taxpayers acting in good faith should not be
made to suffer for adhering to general
interpretative rules of the Commissioner
interpreting tax laws, should such interpretation
later turn out to be erroneous and be reversed
by the Commissioner or this Court. Indeed,
Section 246 of the Tax Code expressly
provides that a reversal of a BIR regulation or
ruling cannot adversely prejudice a taxpayer
who in good faith relied on the BIR regulation
or ruling prior to its reversal. [CIR v. San
Roque, G.R. No. 187485 (2013)]
Power to Decide Tax Cases
The power to decide (1) disputed
assessments, (2) refunds of internal revenue
taxes, fees, charges and penalties, or (3) other
matters arising under the NIRC or other laws
administered by the BIR is vested in the CIR,
subject to the exclusive appellate jurisdiction of
the CTA. [Sec. 4, NIRC]
U.P. LAW BOC TAXATION 1
c. Non-retroactivity of rulings (Sec.
246, NIRC)
General Rule: Any revocation, modification or
reversal of (1) rules and regulations
promulgated in accordance with the NIRC, or
(2) any rulings or circulars promulgated by the
CIR shall not be given retroactive application if
the revocation, modification, or reversal is
prejudicial to the taxpayers.
Exceptions:
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.
Under Sec. 246, taxpayers may rely upon a
rule or ruling issued by the CIR from the time
the rule or ruling is issued up to its reversal by
the CIR or this Court. The reversal is not given
retroactive effect. There must, however, be a
rule or ruling issued by the Commissioner that
is relied upon by the taxpayer in good faith. A
mere administrative practice, not formalized
into a rule or ruling, will not suffice because
such a mere administrative practice may not be
uniformly and consistently applied. [CIR v. San
Roque, supra].
2. Rule-Making Authority of the
Secretary of Finance
a. Authority of the Secretary of
Finance to Promulgate Rules and
Regulations [Sec. 244, NIRC]
The Secretary of Finance, upon
recommendation of the CIR, shall promulgate
all needful rules and regulations for effective
enforcement of the provisions of the Code.
Page 40 of 256
TAXATION LAW
b. Specific Provisions to be
Contained in Rules and
Regulations [Sec. 245, NIRC]
1. The manner in which revenue shall be
collected and paid, the instrument, document
or object to which revenue stamps shall be
affixed, the mode of cancellation of the same,
the manner in which the proper books, records,
invoices and other papers shall be kept and
entries therein made by the person subject to
the tax, as well as the manner in which licenses
and stamps shall be gathered up and returned
after serving their purposes;
2. The manner in which tax returns, information
and reports shall be prepared and reported and
the tax collected and paid, as well as the
conditions under which evidence of payment
shall be furnished the taxpayer, and the
preparation and publication of tax statistics;
3. The manner in which internal revenue taxes,
such as income tax, including withholding tax,
estate and donor's taxes, value-added tax,
other percentage taxes, excise taxes and
documentary stamp taxes shall be paid
through the collection officers of the BIR or
through duly authorized agent banks which are
hereby deputized to receive payments of such
taxes and the returns, papers and statements
that may be filed by the taxpayers in connection
with the payment of the tax:
Provided, however, that notwithstanding the
other provisions of this Code 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 six (6) years from the
approval of R.A. 7646 (An Act Authorizing the
CIR to Prescribe the Place for Payment of
Internal Revenue Taxes by Large Taxpayers)
U.P. LAW BOC TAXATION 1
or the completion of its comprehensive
computerization program, whichever comes
earlierFor the purpose of this Section, 'large
taxpayer' means a taxpayer who satisfies any
of the following criteria:
a. Value-Added Tax (VAT) – Business
establishment with VAT paid or payable of
at least P100,000 for any quarter of the
preceding taxable year;
b. Excise tax – Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
c. Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
d. Withholding tax - Business establishment
with withholding tax payment or remittance
of at least P1,000,000 for the preceding
taxable year.
Provided, however, That the Secretary of
Finance, upon recommendation of the CIR,
may modify or add to the above criteria for
determining a large taxpayer after considering
such factors as inflation, volume of business,
wage and employment levels, and similar
economic factors.
The penalties prescribed under Sec. 248 shall
be imposed on any violation of the rules and
regulations issued by the Secretary of Finance,
upon recommendation of the CIR, prescribing
the place of filing of returns and payments of
taxes by large taxpayers.
B. INCOME TAX
1. Definition, Nature and
General Principles
Definition
Income Tax is defined as a tax on all yearly
profits arising from property, professions,
trades, or offices, or as a tax on the person’s
Page 41 of 256
TAXATION LAW
income, emoluments, profits and the like. It
may be succinctly defined as a tax on income,
whether gross or net, realized in one taxable
year. [DE LEON citing CJS and AmJur]
Nature
Income tax is generally classified as an excise
tax. It is not levied upon persons, property,
funds or profits but upon the right of a person
to receive income or profits. [DE LEON]
General Principles [Sec. 23, NIRC]
1. A resident citizen of the Philippines is
taxable on all income derived from sources
within and without the Philippines;
2. A nonresident 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 overseas contract worker is
taxable only on income derived from sources
within the Philippines: Provided, That a
seaman shall be treated as an overseas
contract worker if he (1) is a citizen of the
Philippines, and (2) receives compensation for
services rendered abroad as a member of the
complement of a vessel engaged exclusively in
international trade;
4. An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
5. A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
6. A foreign corporation, whether engaged or
not in trade or business in the Philippines, is
taxable only on income derived from sources
within the Philippines.
Taxpayer Within Without
Resident Citizen √ √
Non-resident Citizen
√ X
and OCW
U.P. LAW BOC TAXATION 1 TAXATION LAW

Resident Alien √ X Global System Schedular System

Non-resident Alien √ X A personal tax based

A tax on income-
on the income of the
Domestic Corporation √ √ producing activities.
taxpayer.
Foreign Corporation √ X Emphasizes the Emphasizes revenue
burden allocation and administrative
a. Income Tax Systems aspects. aspects.

Most equitable Because of its

i. Global system yet multiple rates, the tax
developed for burden of a person
Under a global tax system, it does not matter distributing tax does not correspond
whether the income received by the taxpayer is burden. The burden to his income but
classified as compensation income, business of an individual is rather falls
or professional income, passive investment closely related to his fortuitously on the
income, capital gain, or other income. All items resources and his type of his income. It
of gross income, deductions, and personal and ability to pay. is fixed and final.
additional exemptions, if any, are reported in
one income tax return, and one set of tax rates It serves as a means This function is alien
are applied on the tax base. for redistributing to schedular system
income and wealth. where in times of
A global tax system is one where the tax Big income earners plenty or in times of
treatment views indifferently the tax base and are subject to higher need, people pay the
generally treats in common all categories of taxes than small same fixed tax on
taxable income of the taxpayer. [Tan v. Del income earners. their income.
Rosario, Jr., G.R. No. 109289 (1994)]
Administration is not
The administration is
ii. Schedular quite as easy as
simple, being
schedular because
confined to each
Under a schedular tax system, different types one has to consider
transaction or
of income are subject to different sets of all income from
activity.
graduated or flat income tax rates. The whatever source.
applicable tax rate(s) will depend on the
classification of the taxable income and the
iii. Semi-schedular or Semi-global Tax
basis could be gross income or net income.
System
Separate income tax returns (or other types of
return applicable) are filed by the recipient of
All compensation income, business or
income for the particular types of income
professional income, capital gain and passive
received. [MAMALATEO]
income not subject to final tax, and other
income are added together to arrive at the
A schedular approach in taxation is one where
gross income, and after deducting the sum of
the income tax treatment varies and is made to
allowable deductions, the taxable income is
depend on the kind or category of taxable
subjected to one set of graduated tax rates or
income of the taxpayer. [Tan v. Del Rosario,
normal corporate income tax. With respect to
Jr., supra]
such income the computation is global.
For those other income not mentioned above,

Page 42 of 256
U.P. LAW BOC TAXATION 1
they remain subject to different sets of tax rates
and covered by different returns. [Mamalateo]
Note: The Philippines, under the NIRC, follows
a semi-schedular and semi-global tax system.
b. Features of the Philippine Income
Tax Law
i. Direct Tax – The tax burden is borne
by the income recipient upon whom the
tax is imposed.
ii. Progressive – The tax rate increases
as the tax base increases. It is founded
on the ability to pay principle and is
consistent with Sec. 28, Art. VI, 1987
Constitution.
iii. Comprehensive – The Philippines has
adopted the most comprehensive
system of imposing income tax by
adopting the citizenship principle, the
residence principle, and the source
principle. Any of the three principles is
enough to justify the imposition of
income tax on the income of a resident
citizen and a domestic corporation that
are taxed on a worldwide income.
iv. Semi-Schedular or Semi-Global Tax
System – The Philippines follows the
semi-schedular or semi-global system
of income taxation, although certain
passive investment incomes and
capital gains from sale of capital assets
(namely: (a) shares of stock of
domestic corporations, and (b) real
property) are subject to final taxes at
preferential tax rates [MAMALATEO].
c. Criteria in Imposing Philippine
Income Tax
i. Citizenship
A citizen of the Philippines is subject to
Philippine income tax:
a. On his worldwide income, if he resides in
the Philippines; or
b. Only on his income from sources within the
Page 43 of 256
TAXATION LAW
Philippines, if he qualifies as a non-resident
citizen. [MAMALATEO]
ii. Residence
A resident alien is liable to pay Philippine
income tax only on his income from sources
within the Philippines but is exempt from tax on
his income from sources outside the
Philippines. [MAMALATEO]
iii. Source
An alien is subject to Philippine income tax
because he derives income from sources
within the Philippines. Thus, a non-resident
alien or non-resident foreign corporation is
liable to pay Philippine income tax on income
from sources within the Philippines, such as
dividend, interest, rent, or royalty, despite the
fact that he has not set foot in the Philippines.
[MAMALATEO]
d. Types of Philippine Income Tax
There are several types of income tax under
the NIRC, namely: [MAMALATEO]
i. Graduated income tax and fixed tax on
gross sales or receipts for individuals;
ii. Normal corporate income tax on
corporations;
iii. Minimum corporate income tax on
corporations;
iv. Special income tax on certain
corporations;
v. Capital gains tax on sale or exchange
of unlisted shares of stock of a
domestic corporation classified as
capital assets;
vi. Capital gains tax on sale or exchange
of real property located in the
Philippines classified as a capital
asset;
vii. Final withholding tax on certain passive
investment income paid to residents;
U.P. LAW BOC TAXATION 1 TAXATION LAW

viii. Final withholding tax on income Special

payments made to non-residents; Classes
ix. Fringe benefits tax on fringe benefits of of Minimum Wage Earner
Individu
supervisory or managerial employees; als
x. Branch profit remittance tax; and
xi. Tax on improperly accumulated Domestic Corporations

earnings of corporations Resident

Corporation
e. Kinds of Taxpayers s
Corporations
Foreign
Corporations Non-
Taxpayer – any person subject to tax imposed resident
by Title II of the Tax Code. [Sec. 22(N), NIRC] Corporation
s
Person – means an individual, a trust, estate
Estates and
or corporation. [Sec. 22(A), NIRC]
Trusts

For income tax purposes, taxpayers are General Partnership

classified generally as follows: Partnerships
a. Individuals General Professional Partnership
b. Corporations
c. Estates and Trusts i. Individual Taxpayers
d. Partnerships (General Partnership and
General Professional Partnerships) CITIZENS
a. Resident Citizens (RC)
Primary b. Non-resident Citizens (NRC) [Sec. 22 (E),
Sub-Classification(s)
Classification NIRC]
1. PH citizen who establishes to the
Citizens Resident citizens
satisfaction of the CIR the fact of his
of the
Philippi physical presence abroad with a
Non-resident citizens definite intention to reside therein.
nes
2. PH citizen who leaves the Philippines
Residents during the taxable year to reside
abroad, either as an immigrant or for
Engaged in
Trade or
employment on a permanent basis.
Individuals Business in 3. PH citizen who works and derives
the income from abroad and whose
Aliens Non-
Philippines employment thereat requires him to be
resident physically present abroad most of the
Not time during the taxable year. To be
s
Engaged in
Trade or
considered physically present abroad
Business in most of the time during the taxable
the year, a contract worker must have
Philippines been outside the PH for not less than
183 days during such taxable year.
[BIR R.R. 1-79, Sec. 2]
4. PH citizen previously considered as a
non-resident citizen and who arrives

Page 44 of 256
U.P. LAW BOC TAXATION 1
during the taxable year to reside
permanently in the PH - Treated as
NRC with respect to his income derived
from sources abroad until his arrival in
the PH
Note: The term ‘residence’ is to be understood
not in its common acceptation as referring to
‘dwelling’ or ‘habitation,’ but rather to ‘domicile’
or legal residence, that is, ‘the place where a
party actually or constructively has his
permanent home, where he, no matter where
he may be found at any given time, eventually
intends to return and remain (animus
manendi). [Japzon v. COMELEC, G.R. No.
180088 (2009)]
ALIENS
1. Resident Alien – An alien actually present
in the Philippines who is not a mere
transient or sojourner is a resident for
income tax purposes.
a. No/Indefinite Intention = RESIDENT:
If he lives in the Philippines and has no
definite intention as to his stay, he is a
resident. A mere floating intention
indefinite as to time, to return to
another country is not sufficient to
constitute him a transient.
b. Definite Intention = TRANSIENT:
One who comes to the Philippines for a
definite purpose, which in its nature
may be promptly accomplished, is a
transient.
Exception: Definite Intention but such cannot
be promptly accomplished; If his purpose is of
such nature that an extended stay may be
necessary for itsnot accomplishment, and thus
the alien makes his home temporarily in the
Philippines, then he becomes a resident.
2. Non-resident Alien
a. Engaged in trade or business within
the Philippines - If the aggregate
period of his stay in the Philippines is
more than 180 days during any
calendar year. [Sec. 25(A)(1), NIRC]
Page 45 of 256
TAXATION LAW
b. Not engaged in trade or business
within the Philippines - If the
aggregate period of his stay in the
Philippines does not exceed 180 days.
ii. Corporations
Includes all types of corporations, partnerships
(no matter how created or organized), joint
stock companies, joint accounts (cuentas en
participacion), associations, or insurance
companies, whether or not registered with the
SEC. [MAMALATEO]
Excludes general professional partnerships
(GPP); joint ventures or consortiums formed for
the purpose of (1) undertaking construction
projects or (2) 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]
Law of Incorporation Test
To determine the residence of a corporation,
the Philippines adopted the Law of
Incorporation test under which a corporation is
considered domestic if it is organized or
created in accordance with or under the laws of
the Philippines and foreign if it is organized or
created in accordance with or under the laws of
a foreign country. [MAMALATEO]
Domestic corporations
A corporation created and organized in the
Philippines or under its laws. [Sec. 22 (C),
NIRC]
Foreign corporations
A corporation which is not domestic. [Sec. 22
(D), NIRC]
1. Resident foreign corporations – Foreign
corporation engaged in trade or business
within the Philippines. [Sec. 22 (H), NIRC]
2. Non-resident foreign corporations –
Foreign corporation not engaged in trade
or business within the Philippines. [Sec. 22
(I), NIRC]
U.P. LAW BOC TAXATION 1
DOING BUSINESS – implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance
of acts or works or the exercise of some of the
functions normally incident to, and in
progressive prosecution of commercial gain or
for the purpose and object of the business
organization. [CIR v. BOAC, G.R. No. L-65773
(1987)]
Includes:
1. soliciting orders, service contracts
2. opening offices, whether called "liaison"
offices or branches
3. appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a
period totaling 180 days or more
4. participating in the management,
supervision or control of any domestic
business, firm, entity or corporation in the
Philippines.
Excludes:
1. mere investment as a shareholder in
domestic corporations, and/or the exercise
of rights as such investor
2. having a nominee director or officer to
represent its interests in such corporation
3. appointing a representative or distributor
domiciled in the Philippines which
transacts business in its own name and for
its own account. [RA 7042, Foreign
Investments Act]
f. Estates and Trusts
Income tax imposed on individuals shall apply
to income of estates or of any kind of property
held in trust. [Sec. 60 (A), NIRC]
Exceptions: (1) Employee’s trust [Sec. 60,
NIRC]; (2) Revocable trusts [Sec. 63, NIRC];
(3) Income for Benefit of Grantor [Sec. 64,
NIRC]
Taxable income of the estate or trust is
computed in the same manner as an individual,
Page 46 of 256
TAXATION LAW
subject to certain special rules [Sec 61, NIRC]
Estate
Refers to all the property, rights and obligations
of a person which are not extinguished by his
death and those which have accrued thereto
since the opening of the succession. [DE
LEON citing Arts. 776 and 781 NCC]
Trust
An arrangement created by will or an
agreement under which legal title to property is
passed to another for conservation or
investment with the income therefrom and
ultimately the corpus (principal) to be
distributed in accordance with the directions of
the creator as expressed in the governing
instrument. [DE LEON]
d. Partnerships, Joint Ventures, Co-
ownership
General Partnerships
A partnership which is not a general
professional partnership. Treated as a
corporation.
General Professional Partnerships (GPP)
A partnership formed by persons for the sole
purpose of exercising their common
profession, no part of the income of which is
derived from engaging in any trade or
business. [Sec. 22 (B), NIRC]
The partners themselves, not the partnership,
shall be liable for income tax in their separate
and individual capacities. Each partner shall
report as gross income his distributive share,
actually or constructively received, in the net
income of the partnership. [Sec. 26, NIRC]
Joint venture and consortium
Essential factors of a joint venture or
consortium:
1. Each party must make a contribution,
not necessarily of capital but by way of
services, skill, knowledge, material or money;
2. Profits must be shared among the
U.P. LAW BOC TAXATION 1
parties;
3. There must be a joint proprietary
interest and right of mutual control over the
subject matter of the enterprise;
4. There is a single business transaction.
A joint venture or consortium is treated as a
corporation, except those formed for the
purpose of:
1. Undertaking construction projects, or
2. engaging in petroleum, coal,
geothermal and other energy operations
pursuant to an operating consortium
agreement under a service contract with the
Government.
Co-ownership
There is co-ownership whenever the
ownership of an undivided thing or right
belongs to different persons. [Art. 484, NCC]
Co-ownerships are not subject to tax as a
corporation if the activities of the co-owners are
limited to the preservation of the property and
the collection of the income therefrom, in which
case each co-owner is taxed individually on his
distributive share in the income of the co-
ownership. [DE LEON citing Sec. 210 Regs]
f. Taxable Period
"Taxable year" means the calendar year, or
the fiscal year ending during such calendar
year, upon the basis of which the net income is
computed. Taxable year includes, in the case
of return made for a fractional part of a year
under the provisions of Title II (Tax on Income),
the period for which such return is made [Sec.
22 (P), NIRC].
a. Calendar Year – An accounting period
of 12 months ending on the last day of
December.
b. Fiscal Year – An accounting period of
12 months ending on the last day of
any month other than December [Sec.
22(Q), NIRC].
c. Short Period – An accounting period
Page 47 of 256
TAXATION LAW
which starts after the first month of the
tax year or ends before the last month
of the tax year (less than 12 months).
Instances whereby short accounting
period arises:
i. When a corporation is newly
organized.
ii. When a corporation is
dissolved. [Sec. 52(c), NIRC]
iii. When a corporation changes
its accounting period. [Sec 46,
NIRC]
iv. When the taxpayer dies.
General rule: Taxable income shall be
computed based on the taxpayer’s annual
accounting period, which may be fiscal year or
calendar year
Exception: Taxable income shall be computed
based on the basis of calendar year only:
a. If the taxpayer's annual accounting period
is other than a fiscal year;
b. If the taxpayer has no annual accounting
period;
c. If the taxpayer does not keep books of
accounts; or
d. If the taxpayer is an individual [Sec. 43,
NIRC].
2. Concept of Income
a. Definition
Income means all wealth which flows to the
taxpayer other than a mere return of capital.
Income is a gain derived from labor or capital,
or both labor and capital; and includes the gain
derived from the sale or exchange of capital
assets. [DE LEON]
Income includes earnings, lawfully or
unlawfully acquired, without consensual
recognition, express or implied, of an obligation
to repay and without restriction as their
disposition. [James v. US, 366 US 213 (1961)]
Income may be received in the form of cash,
property, service, or a combination of the three.
U.P. LAW BOC TAXATION 1 TAXATION LAW

Income v. Capital assets. [VALENCIA AND ROXAS]

" The essential difference between capital and
income is that capital is a fund; income is a b. When Income is Taxable
flow. A fund of property existing at an instant of
time is called capital. A flow of services i. Existence of Income
rendered by that capital by the payment of
money from it or any other benefit rendered by Requisites for income to be taxable [DE
a fund of capital in relation to such fund through LEON]
a period of time is called income." [Madrigal v. 1. There is INCOME, gain or profit
Rafferty, G.R. No. 12287 (1918)] 2. RECEIVED or REALIZED during the
taxable year
Income Capital 3. NOT EXEMPT from income tax

Denotes a flow of ii. Realization of Income

Fund or property
wealth during a
existing at one Income is realized when there is a gain or profit
definite period of
distinct point in time. derived from a closed and completed
time.
transaction. The realization of gain may take
Service of wealth Wealth itself the form of actual receipt of cash or may occur
as a constructive receipt of income. [Valencia
Return of capital is and Roxas]
Subject to tax
not subject to tax
Mere increase in the value of property without
Fruit Tree actual realization, either through sale or other
disposition, is not taxable. [De Leon]
Classification of Income
1. Compensation Income Actual v. Constructive receipt
Means all remuneration for services 1. Actual receipt – Income is actually
performed by an employee for his reduced to possession. The realization of
employer under an employer-employee gain may take the form of actual receipt of
relationship, unless explicitly excluded by cash.
the Tax Code of special law. 2. Constructive receipt – An income is
[MAMALATEO] considered constructively received when it
2. Profession or Business Income is credited to the account of, or segregated
The value derived from an exercise of in favor of, a person.
profession, business or utilization of capital
including profit and gain derived from sale Examples of Constructive receipt:
or conversion of assets. Examples are net 1. Interest credited on savings bank deposit;
income from business and gain from the 2. Matured interest coupons not yet collected
sale of assets used in trade or business. by the taxpayer;
3. Passive Income 3. Dividends applied by the corporation
An income in which the taxpayer merely against the indebtedness of a stockholder;
waits for the amount to come in. Examples 4. Share in the profit of a partner in a general
are royalty, interest, prizes, and winnings. professional partnership, although not yet
4. Capital Gain distributed, is regarded as constructively
An income derived from sale of assets not received; or
used in trade or business. Examples are 5. Intended payment deposited in court
sale of family home and other capital (consignation).

Page 48 of 256
U.P. LAW BOC TAXATION 1
The doctrine of constructive receipt is designed
to prevent the taxpayer using the cash basis
from deferring or postponing the actual receipt
of taxable income. Without the rule, the
taxpayer can conveniently select the year in
which he will report the income. [DIMAAMPAO]
iii. Recognition of Income
Income realized pertains to the accrual basis of
accounting.
Recognition of income in the books is when it
is realized and expenses are recognized when
incurred. It is the right to receive and not the
actual receipt that determines the inclusion of
the amount in gross income
Examples:
i. Interest or rent income earned but not
yet received
ii. Rent expense accrued but not yet paid
iii. Wages due to workers but remaining
unpaid
c. Tests in Determining Whether
Income is Earned for Tax Purposes
i. Realization Test
No taxable income until there is a separation
from capital of something of exchangeable
value, thereby supplying the realization or
transmutation which would result in the receipt
of income [Eisner v. Macomber, 252 U.S. 189,
190 (1920)]. Thus, stock dividends are not
income subject to income tax on the part of the
stockholder when he merely holds more shares
representing the same equity interest in the
corporation that declared stock dividends
[Fisher v. Trinidad, supra].
Income is recognized when both of the
following conditions are met: (a) the earning is
complete or virtually complete; and (b) an
exchange has taken place. [INGLES]
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TAXATION LAW
ii. Claim of Right Doctrine
a.k.a. Doctrine of Ownership, command, or
control
In the claim-of-right doctrine, if a taxpayer
receives money or other property and treats it
as its own under the claim of right that the
payments are made absolutely and not
contingently, such amounts are included in the
taxpayer's income, even though the right to the
income has not been perfected at that time. It
does not matter that the taxpayer's title to the
property is in dispute and that the property may
later be recovered from the taxpayer. [CIR v.
Meralco, C.T.A. EB No. 773 (2012)]
iii. Economic Benefit Test,
Doctrine of Proprietary
Interest
Any economic benefit to the employee that
increases his net worth, whatever may have
been the mode by which it is effected, is
taxable. Thus, in stock options, the difference
between the fair market value of the shares at
the time the option is exercised and the option
price constitutes additional compensation
income to the employee at the time of exercise
(not upon the grant or vesting of the right).
Anything that benefits a person materially or
economically in whatever way is taxable.
However, note that a mere increase in the
value of property without actual realization is
not taxable. [INGLES]
iv. Severance Test
Under the severance test of income, in order
that income may exist, it is necessary that there
be a separation from capital of something of
exchangeable value. The income requires a
realization of gain.
Hence, the increase in value of an asset is not
income as it has not yet been exchanged or
transferred for something else. Once the asset
U.P. LAW BOC TAXATION 1 TAXATION LAW

is exchanged, then a severance of the gain property [Sec 49 (B), NIRC]; and
from its original value takes place, resulting into Sellers of real property [Sec 49 (B) &
taxable income. [Ingles] (C), NIRC]

d. Methods of Accounting Personal Property Real Property

Dealer
PRINCIPAL METHODS: ● Installment ● Installment
1. Cash method – income, profits and gains method method if initial
earned are not included in gross income ● Person who payments do
until received, and expenses are not regularly not exceed
deducted until paid. [DE LEON] sells/disposes of 25% of the
2. N.B. “received” here includes actual and personal gross selling
constructive receipt. property on price
3. Accrual method – income, profits and instalment plan ● Deferred
gains are included in gross income when ● Held as ordinary payment
earned, whether received or not, and asset method if initial
expenses are allowed as deductions when ● Regardless of payments
incurred, although not yet paid. It is the amount of exceed 25% of
right to receive and not the actual receipt percentage of the gross
that determines the inclusion of the amount initial payments selling price
in gross income. [DE LEON] ● Held as
4. Hybrid method – income and expenses inventory
are reported by employing the combination Casual Sale
of cash and accrual method. Example: ● Installment
where a taxpayer is engaged in more than method if :(1)
one trade or business, he may use a Selling price
different method of accounting for each exceeds P1k
trade or business. [DE LEON] and (2) Initial
payments do not
SPECIAL METHODS: exceed 25% of
1. Installment Basis [Sec. 49, NIRC] selling price
Taxpayer reports as income only a part of ● Deferred
the gross profit to be realized from the sale payment
on the instalment plan equivalent to that method if
proportion of the instalments received neither of the 2
every year which the gross profit realized conditions are
or to be realized when payment is met
completed bears to the contract price. ● Personal
property not
Gross considered
Income to be Profit inventory
Instalment Sale by Individuals
reported for = ×
Received Contract ● Installment
the year
Price method
provided; initial
payments do not
Installment basis is available to:
exceed 25% of
Dealers in personal property [Sec 49
selling price
(A), NIRC]; Casual Sellers of personal

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U.P. LAW BOC TAXATION 1 TAXATION LAW

● Held as capital e. Situs of Income

asset
Income Situs
Interest Residence of the debtor
Initial payments mean the payments received Dividends Residence of the corporation
in cash or property (other than evidence of declaring the dividends
indebtedness of the purchaser) by the seller Services Place of performance
during the taxable year of the disposition of the Rentals Location of the property
real property. [Sec 49(B), NIRC] Royalties Place of use or exercise
Sale of Real Location of realty
2. Deferred Payment Sales Property
a. Applicable when the initial payments Sale of ● Tangible
exceed 25% of the selling price Personal ▪ Manufactured w/in
b. The income to be reported during the Property and sold w/o: Partly
year of sale is the difference between w/in and partly w/o
the selling or contract price and the the PH
cost of the property, even though the ▪ Manufactured w/o
entire purchase price has not been and sold w/in: Partly
actually received in the year of sale. w/in and partly w/o
c. The obligations of the purchaser the PH
received by the vendor are considered ▪ Purchased w/in but
as equivalent of cash. sold w/o: Place of
Sale
3. Percentage of completion [Sec. 48, ▪ Purchased w/o but
NIRC] sold w/in: Place of
Income from long-term contracts is sale
reported for tax purposes on the basis of ● Intangible
percentage of completion. “Long-term ▪ General rule: Place
contracts” means building, installation or of Sale
construction contracts covering a period in ▪ Exception: Shares of
excess of 1 year. stock of domestic
corporations: Place
Gross income already earned though not of incorporation
yet received, based on estimates of
architects or engineers duly certified by
them, is reported in a taxable year; and all 3. Gross Income
deductions relating to such gross income
for the taxable year, even if not yet paid are a. Definition
taken into account. [DE LEON] Gross Income [Sec. 32(A)]

Completed contract method – No longer
allowed since January 1, 1998 as per RA
8424. Cost of the contract is accumulated
during the years of construction and
deducted from the income of the contract in
the year it is completed.
Gross Income means all income derived from
whatever source, including (but not limited to)
the following items:
• Compensation for services in whatever
form paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items;
• Gross income derived from the conduct of

Page 51 of 256
U.P. LAW BOC TAXATION 1
trade or business or the exercise of a
profession;
• Gains derived from dealings in property;
interests; rents; royalties; dividends;
annuities; prizes and winnings; pensions;
and partner's distributive share from the net
income of the general professional
partnership.
The list here is NOT exclusive.
The definition of gross income is broad enough
to include all passive income subject to specific
rates or final taxes. However, since these
passive incomes are already subject to
different rates and taxed finally at source, they
are no longer included in the computation of
gross income which determines taxable
income. [CIR v. PAL, GR 160628 (2006)]
b. Distinguish: gross income, net
income, and taxable income
Gross income – The total income of a
taxpayer subject to tax. It includes the gains,
profits, and income derived from whatever
source, whether legal or illegal. [Sec. 32(A),
NIRC] It does not include income excluded by
law, or which are exempt from income tax.
[Sec. 32(B), NIRC]
Net income – Means gross income less
statutory deductions and exemptions. [Sec. 31,
NIRC ]
Taxable income – means the pertinent items
of gross income specified in the Tax Code, less
the deductions and/or personal and additional
exemptions, if any, authorized for such types of
income by the Tax Code or other special laws
[Sec. 31, NIRC ]. It is synonymous to the term
“net income.” [VALENCIA and ROXAS]
c. Sources of Income Subject to Tax
The following sources of income subject to tax
are the following.
1. Compensation income;
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TAXATION LAW
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 benefits, or
separation pay.
10. Income from any source
i. Compensation Income
All remunerations for services performed by an
employee for his employer under an employer-
employee (ER-EE) relationship, unless
excepted under the provisions of the NIRC are
considered as compensation income. [RR No.
02-98, Sec 2.78.1]
It includes, but is not limited to, salaries and
wages, honoraria and emoluments, allowances
(e.g., transportation, representation,
entertainment), commissions, fees (including
directors’ fees, if the director is, at the same
time, an employee of the payor-corporation),
tips, taxable bonuses, fringe benefits except
those subject to Fringe Benefit Tax (FBT)
under Section 33 of the Tax Code, and taxable
pensions and retirement pay (e.g., retirement
benefits earned without meeting the conditions
for exemption thereof, such as retirement of
less than 50 years of age.)
The term wages does NOT include
remuneration paid:
a. For agricultural labor paid entirely in
products of the farm where the labor is
performed
b. For domestic service in a private home
c. For casual labor not in the course of the
employer's trade or business
d. For services by a citizen or resident of the
Philippines for a foreign government or an
int’l organization. [Sec. 78(A), NIRC]
U.P. LAW BOC TAXATION 1
The term “remuneration for domestic
services” refers to remuneration paid for
services of a household nature performed by
an employee in or about the private home of
the person whom he is employed. The services
of household personnel furnished to an
employee (except rank and file employees) by
an employer shall be subject to the fringe
benefits tax pursuant to Sec. 33 of the Tax
Code.
The term “casual labor” includes labor which
is occasional, incidental or regular. “Not in the
course of the employer’s trade or business”
includes labor that does not promote or
advance the trade or business of the employer.
General Rule: Compensation income
including overtime pay, holiday pay, night shift
differential pay, and hazard pay, earned by
MINIMUM WAGE EARNERS (MWE) who has
no other returnable income are NOT taxable
and not subject to withholding tax on wages
[RA 9504];
Exception: If he receives/earns additional
compensation such as commissions,
honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P90,000
[RA 10963], taxable allowance, and other
taxable income other than the statutory
minimum wage (SMW), holiday pay, overtime
pay, hazard pay and night shift differential pay.
FORMS OF COMPENSATION AND HOW
THEY ARE ASSESSED
Cash – If compensation is paid in cash, the full
amount received is the measure of the income
subject to tax.
Medium other than money – If services are
paid for in a medium other than money (e.g.,
shares of stock, bonds, and other forms of
property), the fair market value (FMV) of the
thing taken in payment is the amount to be
included as compensation subject to tax. If the
services are rendered at a stipulated price, in
Page 53 of 256
TAXATION LAW
the absence of evidence to the contrary, such
price will be presumed to be the FMV of the
remuneration received.
If meals, living quarters, and other facilities and
privileges are furnished to an employee for the
convenience of the employer, and incidental to
the requirement of the employee’s work or
position, the value of that privilege need not be
included as compensation [Henderson v.
Collector, G.R. No. L-12954 (1961)]
ii. Fringe Benefits
Definition
Fringe benefit means any goods, services, or
other benefit furnished or granted in cash or in
kind, in addition to basic salaries, to an
individual employee, except a rank and file
employee [RR No. 03-98, Sec 2.23b]
Fringe benefit means includes but not limited to
the following:
• Housing
• Expense Account
• Vehicle of any kind
• Household personnel, such as maid,
driver and others
• Interest on loan at less than market rate
to the extent of the difference between
the market rate and actual rate
granted.
• Membership fees, dues and other
expenses borne by the employer for
the employee in social and athletic
clubs and similar organizations
• Expenses for foreign travel
• Holiday and vacation expenses
• Educational assistance to the
employee or his dependents; and
• Life or health insurance and other non-
life insurance premiums or similar
amounts on excess of what the law
allows. [Sec. 33(B)]
U.P. LAW BOC TAXATION 1
Tax Rate and Tax Base
Tax base is based on the grossed-up
monetary value (GMV) of fringe benefits.
Rate is generally 35%, since this is the
headline or the highest tax rate for individual
income taxpayers.
FBT is calculated using the GMV multiply by
the 35%. [Sec. 33 (A), NIRC]
GMV represents
i. the whole amount of income realized by
the employee which includes the net
amount of money or net monetary value of
property that has been received; and
ii. the amount of fringe benefit tax due from
the employee which has been withheld
and paid by the employer for and in behalf
of his employee.
How GMV is determined
GMV is determined by dividing the actual
monetary value of the fringe benefit by 65%
[100% - tax rate of 35%].
For example, the actual monetary value of the
fringe benefit is P1,000. The GMV is equal to
P1,538.46 [P1,000 / 0.65]. The fringe benefit
tax, therefore, is P538.46 [P1538.46 x 35%].
Special Cases:
For fringe benefits received by non-resident
alien not engaged in trade of business in the
Philippines (NRANETB), the tax rate is 25% of
the GMV. The GMV is determined by dividing
the actual monetary value of the fringe benefit
by 75% [100% - 25%].
What is the tax implication if the employer
gives ‘fringe benefits’ to rank-and-file
employees?
Fringe benefits given to a rank-and-file
employee are treated as part of his
compensation income subject to normal tax
rate and withholding tax on compensation
income, except de minimis benefits and
benefits provided for the convenience of the
Page 54 of 256
TAXATION LAW
employer.
Payor of Fringe Benefit Tax (FBT): The
employer withholds and pays the FBT but the
law allows him to deduct such tax from his
gross income.
Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
Fringe benefits not considered as gross
income – if it is required or necessary to the
business of employer; if it is for the
convenience or advantage of employer
Fringe Benefit that is not taxable under Sec. 32
(B) – Exclusions from Gross Income
Fringe benefits not subject to Fringe Benefit
Tax:
a. Fringe Benefits which are authorized and
exempted from income tax under the Code
or under special laws;
b. Contributions of the employer for the
benefit of the employee for retirement,
insurance and hospitalization benefit
plans;
c. Benefits given to the rank-and-file
employees, whether granted under a
collective bargaining agreement or not;
and
d. Fringe benefits granted for the
convenience of the employer;
e. De minimis benefits
If the Fringe Benefit is exempted from the FBT,
the same may, however, still form of the
employee’s gross compensation income which
is subject to income tax; hence, likewise
subject to withholding tax on compensation
income payment.
De Minimis Benefits
De Minimis Benefits are facilities and privileges
furnished or offered by an employer to his
employees that are relatively small value and
are offered or furnished by the employer
U.P. LAW BOC TAXATION 1 TAXATION LAW

merely as means of promoting health, goodwill, highly paid employees; [RR No. 5-2011]
contentment, and efficiency of his employees 9. Gifts given during Christmas and major
[RR No. 3-98, Sec 2.23c] anniversary celebrations not exceeding
P5,000 per employee per annum; [RR No.
The following De Minimis Benefits are exempt 5-2011]
from income tax and withholding tax on 10. Daily meal allowance for overtime work
compensation income of BOTH managerial and night/graveyard shift not exceeding
and rank and file EEs [as provided by R.R. No. twenty-five percent (25%) of the basic
11-2018/ R.R. No. 5-2011 / R.R. No. 8-2012 minimum wage on a per region basis; [RR
and R.R. No. 1-2015 ]: No. 3-98]
1. Monetized unused vacation leave credits of 11. Benefits received by an employee by virtue
PRIVATE employees not exceeding ten of a collective bargaining agreement (CBA)
(10) days during the year. Note that the and productivity incentive schemes
monetization of unused VL credits in provided that the total monetary value
excess of 10 days and monetization of SL received from both CBA and productivity
even if not exceeding 10 days are subject incentive schemes combined do not
to tax; [RR No. 5-2011] exceed P10,000.00 per employee per
2. Monetized value of vacation and sick leave taxable year. [RR No 1-2015]
credits paid to GOVERNMENT officials
and employees. Note that there is no limit All other benefits given by employers which are
as to the number of credits; [RR No. 5- not included in the above enumeration shall
2011] NOT be considered as "de minimis" benefits
3. Medical cash allowance to dependents of and hence, shall be subject to withholding tax
employees, not exceeding P1,500 per on compensation (rank and file employees)
employee per semester or P250 per and FBT (managerial/supervisory employees).
month; [RR No. 11-2018]
4. Rice subsidy of P2,000 or one (1) sack of Housing
50 kg. rice per month amounting to not Fringe Benefit
more than P2,000; [RR No. 11-2018]
Tax Base
5. Uniform and Clothing allowance not Housing Privilege
(Monetary
exceeding P6,000 per annum; [RR No. 11-
Value)
2018]
6. Actual medical assistance, e.g. medical LEASE of residential MV= 50% of
allowance to cover medical and healthcare property for the lease payments,
needs, annual medical/executive check- residential use of where MV =
up, maternity assistance, and routine employees monetary value
consultations, not exceeding P10,000.00 of the FB
per annum; [RR No. 5-2011]
7. Laundry allowance not exceeding P300 per Assignment of MV= [5% (FMV or
month; [RR No. 5-2011] residential property ZV, whichever is
8. Employees achievement awards, e.g., for owned by employer for higher) x 50%]
length of service or safety achievement, use of employees
which must be in the form of a tangible
personal property other than cash or gift Purchase of residential MV= 5% x
certificate, with an annual monetary value property in installment acquisition cost
not exceeding P10,000 received by the basis for the use of the exclusive of
employee under an established written employee interest x 50%
plan which does not discriminate in favor of

Page 55 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

Purchase of residential MV= FMV or ZV, Employer owns and

property and ownership whichever is maintains a fleet of
MV = (AC/5) x
is transferred in the higher motor vehicles for use
50%
name of the employee of the business and of
employees
ZV = Zonal Value = value of the land or
improvement, as declared in the Real Property Employer leases and
Declaration Form maintains a fleet for the MV = 50% of
use of the business and rental payment
FMV = Fair Market Value = FMV as determined of employees
by the Commissioner of Internal Revenue

Non-taxable housing fringe benefit: Pure Compensation Earner

a. Housing privilege of the Armed Forces of (Minimum Wage Earner, Rank & File,
the Philippines (AFP) officials – i.e. those of Executive)
the Philippine Army, Philippine Navy, or Minimum
Philippine Air Force Managerial or
Wage Rank and File
b. A housing unit, which is situated inside or Supervisory
Earner
adjacent to the premises of a business or
factory – maximum of 50 meters from Basic Compensation
perimeter of the business premises
c. Temporary housing for an employee who Taxable Taxable
Exempt
stays in housing unit for three months or Compensation Compensation
less Holiday Pay, OT, Nightshift Pay, Hazard
Pay
Motor Vehicle
Fringe Benefit Taxable Taxable
Exempt
Tax Base Compensation Compensation
Motor Vehicle
(Monetary
13th Month Pay up to P90,000
Value)
Exempt Exempt Exempt
Purchased in the name MV = acquisition
of the employee cost Other Benefit in Excess of P90,000

Cash given to employee MV = cash N/A (with Taxable Taxable

to purchase in his own received by caveat) Compensation Compensation
name employee
Fringe Benefit
Purchase on MV = acquisition
installment, in the name cost exclusive of Subject to
Taxable
of employee interest Fringe Benefit
Compensation
Tax
N/A Tax
Employee shoulders Tax
MV = amount shouldered by
part of the purchase shouldered by
shouldered by employee
price, ownership in the employer
employer
name of employee
De Minimis Benefit

Exempt Exempt Exempt

Page 56 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

iii. Professional Income

Ordinary Asset Capital Asset
Refers to fees received by a professional from Gain from sale, exchange or other
the practice of his profession, provided that disposition
there is NO employer-employee relationship
between him and his clients. Ordinary Gain (part
Capital Gain
of Gross Income)
It includes the fees derived from engaging in an
endeavor requiring special training as Loss from sale, exchange, or other
professional as means of livelihood, which disposition
includes, but is not limited to, the fees of CPAs,
doctors, lawyers, engineers, and the like [RR Ordinary Loss (part
No. 2-98]. of Allowable
Capital Loss
Deductions from
The existence of employee-employer Gross Income)
relationship is the distinguishing factor
between compensation income versus Excess of Gains over Losses
professional income.
Part of Gross Income Net Capital Gain
iv. Income from Business Excess of Losses over Gains

Any income derived from doing business. Part of Allowable

Deductions from Net Capital Loss
Doing business: The term implies a continuity Gross Income
of commercial dealings and arrangements, and
contemplates, to that extent, the performance
of acts or works or the exercise of some of the (a) Capital v. Ordinary Asset
functions normally incident to, and in
progressive prosecution of, the purpose and Ordinary Assets Capital Assets
object of its organization. 1. Stock in trade of Property held by the
the taxpayer/ taxpayer, whether
v. Income from Dealings in Property other property of or not connected
a kind which with his trade or
Dealings in property such as sales or would properly business which is
exchanges may result in gain or loss. The kind be included in not an ordinary
of property involved (i.e., whether the property the inventory of asset.
is a capital asset or an ordinary asset) the taxpayer if on
determines the tax implication and income tax hand at the close
treatment, as follows: of the taxable
year.
2. Property held by
Net Capital the taxpayer
Taxable Ordinary Gains (other primarily for sale
Net Net than those to customers in
= +
Income Income subject to the ordinary
final CGT) course of his
trade or
business.

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U.P. LAW BOC TAXATION 1 TAXATION LAW

3. Property used in located in the Philippines, classified as capital

the trade or
business of a
character which
is subject to the
allowance for
depreciation, or
4. Real property
used in the trade
or business of
the taxpayer,
including
property held for
rent.
Note in ordinary assets, that the list is
EXCLUSIVE. The actual use determines
whether a property is an ordinary asset or a
capital asset. [BIR Ruling No. DA 212-07, April
3, 2007]
(b) Types of Gains
ORDINARY INCOME VIS-À-VIS CAPITAL
GAIN.
a. If the asset involved is classified as
ordinary, the entire amount of the gain
from the transaction shall be included in
the computation of gross income [Sec
32(A)], and the entire amount of the loss
shall be deductible from gross income.
[Sec 34(D)]. (See Allowable Deductions
from Gross Income - Losses
b. If the asset involved is a capital asset, the
rules on capital gains and losses apply in
the determination of the amount to be
included in gross income. (See Capital
Gains and Losses).
These rules do not apply to:
a. real property with a capital gains tax (final
tax), or
b. shares of stock of a domestic corporation
with a capital gains tax (final tax).
ACTUAL GAIN VIS-À-VIS PRESUMED GAIN
asset, the tax base is the gross selling price or
fair market value, whichever is higher. The law
presumes that the seller makes a gain from
such sale.
Thus, whether or not the seller makes a profit
from the sale of real property, he has to pay 6%
capital gains tax.
Actual Gain: The tax base in the sale of real
property classified as an ordinary asset is the
actual gain.
Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
______________________________
NET GAIN (LOSS)
(c) Special rules pertaining to
income or loss from dealings in
property classified as capital
asset
Long Term Capital Gain Vis-À-Vis Short
Term Capital Gain
Long-term capital gain: Capital asset is held
for more than twelve months before it is sold.
Only 50% of the gain is recognized.
Short-term capital gain: Capital asset is held
for 12 months or less, 100% of the gain is
subject to tax.
Note: If the taxpayer is a corporation, 100% of
the gain is recognized regardless of the holding
period.
Net Capital Gain Vis-À-Vis Net Capital Loss
Net Capital Gain: Excess of the gains over the
losses on sales or exchange of capital assets
during the taxable year.

Presumed Gain: In the sale of real property Net Capital Loss: Excess of the losses over

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U.P. LAW BOC TAXATION 1
the gains on sales or exchanges of capital
assets during the taxable year. [Sec. 39 (A),
NIRC]
Income Tax Treatment of Capital Loss
Capital loss limitation rule (applicable to both
corporations and individuals)
General Rule: Losses from sales or
exchanges of capital assets shall be allowed
only to the extent of the gains from such sales
or exchanges [Sec. 39(C), NIRC].
Exception for Banks and Trust Companies:
If a bank or trust company incorporated under
the laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells
any bond, debenture, note, certificate or other
evidence of indebtedness issued by any
corporation (including one issued by a
government or political subdivision thereof)
with interest coupons or in registered form, any
loss resulting from such sale shall not be
subject to the foregoing limitation and shall not
be included in determining the applicability of
such limitation to other losses [Sec. 39(C),
NIRC].
Net loss carry-over rule (applicable only to
individuals)
If an individual sustains in any taxable year a
net capital loss, such loss (in an amount not in
excess of the net income for the year) shall be
treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset
held for not more than 12 months [Sec. 39(D),
NIRC].
(d) Tax free exchanges [Sec. 40
(c)(2)]
Merger or Consolidation
No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation
a. A corporation, which is a party to a merger
or consolidation, exchanges property
solely for stock in a corporation, which is a
party to the merger or consolidation; or
b. A shareholder exchanges stock in a
Page 59 of 256
TAXATION LAW
corporation, which is a party to the merger
or consolidation, solely for the stock of
another corporation also a party to the
merger or consolidation; or
c. A security holder of a corporation, which is
a party to the merger or consolidation,
exchanges his securities in such
corporation, solely for stock or securities in
such corporation, a party to the merger or
consolidation.
Both corporations in the aforementioned cases
must be parties to a merger or consolidation.
Merger occurs when one corporation acquires
all or substantially all the properties of another
corporation. Consolidation occurs when two or
more corporations merge to form one
corporation.
Substantially all the properties of another
corporation means the acquisition of at least
80% of the assets, including cash, of another
corporation which has the element of
permanence and not merely momentary
holding [Banggawan citing BIR Gen.Circ. V-
253 (1957)]
Initial Acquisition of Control
No gain or loss shall also be recognized if
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 (4)
persons, gains control of said corporation:
Provided, That stocks issued for services shall
not be considered as issued in return for
property.
vi. Passive Investment Income
Under Sec 24(B) of the Tax Code, a final tax is
imposed upon gross passive income of citizen
and resident aliens. An income is considered
passive if the taxpayer merely waits for it to be
realized.
U.P. LAW BOC
Sources
The following are the sources of passive
income subject to final tax
a. Interest income;
b. Dividend Income;
c. Royalty Income; and
d. Rental Income.
Note that these sources of income are NOT
added to other income in the determination of
ordinary income tax liability.
Passive income is only subject to final tax if the
source is within the Philippines.
(a) Interest Income
An earning derived from depositing or lending
of money, goods or credits [Valencia and
Roxas]
(b) Dividend Income
A form of earnings derived from the distribution
made by a corporation out of its earnings or
profits and payable to its stockholders, whether
in money or in property.
The following are the classification
dividends:
1. Cash dividends
2. Stock dividends
3. Property dividends; and
4. Liquidating dividends.
Cash dividends
Dividends are subject to final tax under the
NIRC. However, dividends received by a
domestic corporation from another domestic
corporation, and a non-resident foreign
corporation from a domestic corporation is
exempt from income tax.
Stock dividends
Stock dividend is generally exempt from
income tax, EXCEPT:
a. If a corporation cancels or redeems stock
issued as a dividend xxx the amount so
Page 60 of 256
TAXATION 1 TAXATION LAW
distributed in redemption or cancellation of
the stock shall be considered as taxable
income to the extent that it represents a
distribution of earnings or profits [Sec.
73(B), NIRC]; or
b. Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends; some
stockholders exercised the option to take
cash of property dividends; and the exercise
of option resulted in a change of the
stockholders’ proportionate share in the
outstanding share of the corporation.
Property dividends
Property dividends are subject to tax at the
preferential rate under the NIRC.
Liquidating dividends
Represents distribution of all the property or
assets of a corporation in complete liquidation
or dissolution. It is strictly not dividend income,
but rather is treated in effect, a return of capital
to the extent of the shareholder’s investment.
The difference between the cost or other basis
of the stock and the amount received in
liquidation of the stock is a capital gain or a
of capital loss. Where property is distributed in
liquidation, the amount received is the FMV of
such property. The income is subject to
ordinary income tax rates. It is subject neither
to the FWT on dividends nor to the CGT on sale
of shares.
(c) Royalty Income
Where a person pays royalty to another for the
use of its intellectual property, such royalty is
generally a passive income of the owner
thereof subject to withholding tax.
(d) Rental Income
Refers to earnings derived from leasing real
estate as well as personal property. Aside from
the regular amount of payment for using the
property, it also includes all other obligations
U.P. LAW BOC TAXATION 1
assumed to be paid by the lessee to the third
party in behalf of the lessor (e.g., interest,
taxes, loans, insurance premiums, etc.) [RR
19-86]
Lease of personal property
Rental income on the lease of personal
property located in the Philippines and paid to
a non-resident taxpayer shall be taxed as
follows:
NRA-
NRFC
NETB
Vessel 4.5% 25%
Aircraft, 7.5% 25%
machineries and
other Equipment
Other assets 30% 25%
Leasehold improvements by lessee
Rent Income from leasehold improvements:
1. Outright method- lessor shall report as
income FMV of the buildings or
improvements subject to the lease in the
year of completion.
2. Spread-out method- lessor shall spread
over the remaining term of the lease the
estimated depreciated (book) value of
such buildings or improvements at the
termination of the lease, and reports as
income for each remaining term of the
lease an aliquot part thereof.
Estimated BV at the end of the lease contract/
remaining lease term = Income per year
vii. Annuities, Proceeds from Life
insurance or Other Types of
Insurance
It refers to periodic installment payments of
income or pension by insurance companies
during the life of a person or for a guaranteed
fixed period of time, whichever is longer, in
Page 61 of 256
TAXATION LAW
consideration of capital paid by him. It is paid
annually, monthly, or periodically, computed
upon the amount paid yearly, but necessarily
for life. [Peralta v. Auditor General, G.R. No. L-
8480 (1957)]
The annuity payments represent a part that is
taxable and not taxable. If part of annuity
payment represents interest, then it is a taxable
income. If the annuity is a return of premium, it
is not taxable.
viii. Prizes and Awards
A prize is a reward for a contest or a
competition. Such payment constitutes gain
derived from labor.
The EXCEPTIONS are as follows:
1. Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary or
civic achievements are EXCLUSIONS
from gross income if:
2. The recipient was selected without any
action on his part to enter a contest or
proceedings; and
3. The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.
4. Prizes and awards granted to athletes in
local and international sports competitions
and tournaments held in the Philippines
and abroad and sanctioned by their
national associations shall be EXEMPT
from income tax.
ix. Pensions, Retirement Benefit, or
Separation Pay
A stated allowance paid regularly to a person
on his retirement or to his dependents on his
death, in consideration of past services,
meritorious work, age, loss or injury.
[VALENCIA]
U.P. LAW BOC TAXATION 1 TAXATION LAW

x. Income from Any Source Illustration:

Case A Case B Case C
Inclusion of all income not expressly exempted
within the class of taxable income under the Year 1
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains, Gross
and whether derived from legal or illegal 500,000 400,000 500,000
Income
sources
Less:
(a) Condonation of Indebtedness Allowable
Deduction
The cancellation of indebtedness may have s (before
(200,00 (480,000 (495,000
any of three possible consequences: write-off of
0) ) )
1. It may amount to payment of income. If, for Uncollectib
example, an individual performs services le
to or for a creditor, who, in consideration Accounts/
thereof, cancels the debt, income in that Debts)
amount is realized by the debtor as
compensation for personal services. Taxable
2. It may amount to a gift. If a creditor wishes Income
merely to benefit the debtor, and without (Net Loss)
300,000 (60,000) 5,000
any consideration therefore, cancels the before
debt, the amount of the debt is a gift to the write-off
debtor and need not be included in the
latter’s report of income. Deduction
3. It may amount to a capital transaction. If a for
corporation to which a stockholder is Accounts
(2,000) (2,000) (6,000)
indebted forgives the debt, the transaction Receivable
has the effect of a payment of dividend. written off

Taxable
(b) Recovery of Accounts
Income
Previously Written-off
(Net Loss) 298,000 (62,000) (1,000)
after write-
Bad debts claimed as a deduction in the
off
preceding year(s) but subsequently recovered
shall be included as part of the taxpayer’s gross Year 2
income in the year of such recovery to the
extent of the income tax benefit of said Recovery
deduction. There is an income tax benefit when of
the deduction of the bad debt in the prior year 2,000 2,000 6,000
Amounts
resulted in lesser income and hence tax Written Off
savings for the company. [Sec. 4, RR 5-99]
Taxable
Income on
2,000 - 5,000
the
Recovery

In Case A, the entire amount recovered

Page 62 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

(P2,000) is included in the computation of

gross income in Year 2 because the taxpayer
benefited by the same extent. Prior to the write-
off, the taxable income was P300,000; after the
write-off, the taxable income was reduced to
P298,000.
In Case B, none of the P2,000 recovered would
be recognized as gross income in Year 2. Note
that even without the write-off, the taxpayer
would not have paid any income tax anyway.
The “taxable income” before the write-off was
actually a net loss.
Note: The enumeration of tax refunds that are
not taxable (income) is derived from an
enumeration of tax payments that are not
deductible from gross income.
If a tax is not an allowable deduction from gross
income when paid (no reduction of taxable
income, hence no tax benefit), the refund is not
taxable.

In Case C, only P5,000 of the P6,000

recovered would be recognized as gross
income in Year 2. It was only to this extent that
the taxpayer benefited from the write-off. The
taxpayer did not benefit from the extra P1,000
because at this point, the P1,000 was already
a net loss.

(c) Receipt of tax refunds or credit

General rule: A refund of a tax related to the

business or the practice of profession, is
taxable income (e.g., refund of fringe benefit
tax) in the year of receipt to the extent of the
income tax benefit of said deduction.

Exceptions: However, the following tax

refunds are not to be included in the
computation of gross income:
1. Philippine income tax, except the fringe
benefit tax
2. Income tax imposed by authority of any
foreign country, if the taxpayer claimed a
credit for such tax in the year it was paid or
incurred.
3. Estate and donor’s taxes
4. Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special assessments)
5. Value Added Tax
6. Fines and penalties due to late payment of
tax
7. Final taxes
8. Capital Gains Tax

Page 63 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

d. Exclusions Items of Exclusions because they are

expressly exempt from income tax
Exclusions from gross income refer to income a. Under the Constitution
received or earned but is not taxable as income b. Under a tax treaty
because it is exempted by law or by treaty. c. Under special laws
Such tax-free income is not to be included in
the income tax return unless information i. Rationale
regarding it is specifically called for. Receipts
which are not in fact income are, of course, The term “exclusions” refers to items that are
excluded from gross income. not included in the determination of gross
income because:
The exclusion of income should not be a. They represent return of capital or are not
confused with the reduction of gross income by income, gain or profit;
the application of allowable deductions. While b. They are subject to another kind of internal
exclusions are simply not taken into account in revenue tax;
determining gross income, deductions are c. They are income, gain or profit expressly
subtracted from gross income to arrive at net exempt from income tax under the
income. [DE LEON] Constitution, tax treaty, Tax Code, or a
general or special law. [MAMALATEO]
Items of Exclusions representing return of
capital ii. Taxpayers Who May Avail
Amount of capital is generally recovered
through deduction of the cost or adjusted basis Exclusion Taxpayer
of the property sold from the gross selling price
or consideration, or through the deduction from All taxpayers since
gross income of depreciation relating to the Return of capital
there is no income.
property used in trade or business before it is
sold. All taxpayers unless
Already subject to
provided that income
internal revenue tax
It may also relate to indemnities, such as is to be included.
proceeds of life insurance paid to the insured’s
beneficiaries and return of premiums paid by As expressly
Express exclusion
the insurance company to the insured under a provided.
life insurance, endowment or annuity contract.
iii. Exclusions Distinguished from
Damages, in certain instances, may also be Deductions and Tax Credit
exempt because they represent return of
capital. Exclusions from gross income refer to flow of
wealth to the taxpayer which are not treated as
Items of Exclusion because it is subject to part of gross income for purposes of computing
another internal revenue tax the taxpayer’s taxable income, due to the
The value of property acquired by gift, bequest, following reasons: (1) it is exempted by the
devise or descent is exempt from income tax Constitution or a statute; or (2) it does not come
on the part of the recipient because the receipt within the definition of income.
of such property is already subject to transfer
taxes (estate tax or donor’s tax). Deductions, on the other hand, are the
amounts which the law allows to be subtracted
from gross income in order to arrive at net

Page 64 of 256
U.P. LAW BOC TAXATION 1
income.
Exclusions pertain to the computation of gross
income, while deductions pertain to the
computation of net income.
Exclusions are something received or earned
by the taxpayer which do not form part of gross
income while deductions are something spent
or paid in earning gross income.
Tax Credit refers to amounts subtracted from
the computed tax in order to arrive at taxes
payable.
iv. Exclusions Under the Constitution
Income derived by the government or its
political subdivisions from the exercise of any
essential governmental function
Also, all assets and revenues of a non-stock,
non-profit private educational institution used
directly, actually and exclusively for private
educational purposes shall be exempt from
taxation.
v. Exclusions Under the Tax Code
[Sec. 32(b), NIRC]
(a) Proceeds of life insurance
policies
The proceeds of life insurance policies paid to
his estate or to any beneficiary (but not a
transferee for a valuable consideration),
directly or in trust, upon the death of the
insured, are excluded from the gross income of
the beneficiary.
However, if such amounts are held by the
insurer under an agreement to pay interest
thereon, the interest payments received by the
insured shall be included in gross income. The
interest income shall be taxed at the graduated
income tax rates.
Page 65 of 256
TAXATION LAW
(b) Return of premium paid
General rule: The amount received by the
insured as a return of premiums paid by him
under life insurance, endowment, or annuity
contracts, either during the term or at the
maturity of the term mentioned in the contract
or upon surrender of the contract is a return of
capital and not income.
This refers to the cash surrender value of the
contract.
Exception: If the amounts received by the
insured (when added to the amounts already
received before the taxable year under such
contract) exceed the aggregate premiums or
considerations paid (whether or not paid during
the taxable year), then the excess shall be
included in gross income.
(c) Amounts received under life
insurance, endowment or
annuity contracts
Amounts received (other than amounts paid by
reason of the death of the insured and interest
payments on such amounts) under a life
insurance, endowment or annuity contracts are
excluded from gross income, but if such
amounts (when added to amounts already
received before the taxable year under such
contract) exceed the aggregate premiums of
considerations paid (whether or not paid during
the taxable year), then the excess shall be
included in gross income. However, in the case
of a transfer for valuable consideration, by
assignment or otherwise, of a life insurance,
endowment, or annuity contract, or any interest
therein, only the actual value of such
consideration and the amount of the premiums
and other sums subsequently paid by the
transferee are exempt from taxation.
U.P. LAW BOC TAXATION 1 TAXATION LAW

(d) Value of property acquired by

Alienation of Any damages as
gift, bequest, devise or descent
affection, or breach compensation for
of promise to marry unrealized income
Gifts, bequests and devises (which are subject
to estate or gift taxes) are excluded from gross Any amount received
income, BUT not the income from such as a return of capital
property. If the amount received is on account or reimbursement of
of services rendered, whether constituting a expenses
demandable debt or not, or the use or
opportunity to use of capital, the receipt is
income [Pirovano v. Commissioner, G.R. No. (f) Income exempt under tax treaty
L-19865, July 31, 1965]
Income of any kind, to the extent required by
(e) Amount received through any treaty obligation binding upon the
accident or health insurance Government of the Philippines.
(Compensation for damages)
(g) Retirement benefits, pensions,
As a rule, amounts received through accident gratuities, etc.
or health insurance or under workmen’s
compensation acts, as compensation for These are:
personal injuries or sickness, plus the amount • Retirement benefits under RA 7641, RA
of any damages received, whether by suit or 4917, and Section 60(B) of the NIRC
agreement, on account of such injuries or • Terminal pay
sickness are excluded from gross income. • Retirement Benefits from foreign
government agencies
Examples of non-taxable and taxable • Veterans benefits
damages recoveries are: • Benefits under the Social Security Act
• GSIS benefits
Non-taxable – Taxable –
compensation for compensation for
Retirement benefits received under RA
damages on damages on
7641(The Retirement Pay Law) and those
account of account of
received by officials and employees of private
Actual damages for firms under a reasonable private benefit plan
Personal (physical) (RPBP) maintained by the employer under RA
loss of anticipated
injuries or sickness 4917 (now Section 32(B)(6)(a) of NIRC) are
profits
excluded from gross income subject to income
Any other damages Moral and exemplary tax.
recovered on damages awarded
account of personal as a result of break of RA 7641 RPBP
injuries or sickness contract
Retiring employee Retiring official or
Exemplary and moral must be in the employee must have
damages for out-of- Interest for non- service of same been in the service of
court settlement, taxable damages employer the same employer
including attorney’s above CONTINUOUSLY for for at least ten (10)
fees at least five (5) years years.

Page 66 of 256
U.P. LAW BOC TAXATION 1
Retiring employee
Retiring official or
must be at least sixty
employee must be at
(60) years old but not
least fifty (50) years
more than 65 years
old at the time of
of age at the time of
retirement
retirement
Retiring employee
shall not have
Availed of only once,
previously availed of
and only when there
the privilege under a
is no RPBP
retirement benefit
plan of the same or
another employer
Plan must be
reasonable. Its
implementation must
be fair and equitable
for the benefit of all
employees (e.g. from
president to laborer)
Plan must be
approved by BIR
A 'reasonable private benefit plan' means a
pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit
of some or all of his employees wherein
contributions are made by such employer, or
employees, or both for the purpose of
distributing to such employees the earnings
and principal of the fund thus accumulated by
the trust in accordance with such plan (trust
fund)
Further, it should be provided in the plan that at
no time prior to the satisfaction of all liabilities
with respect to employees under any trust,
shall any part of the corpus or income of the
fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of his
employees.
Page 67 of 256
TAXATION LAW
Terminal pay/Separation pay
Any amount received by an 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, other physical disability or for any
cause beyond the control of the employee. The
phrase “for any cause beyond the control of the
said official or employee” means that the
separation of the employee must be
involuntary and not initiated by him.
The separation must not be of his own making.
Notes:
a. Sickness must be life-threatening or one
which renders the employee incapable of
working
b. Retrenchment of the employee due to
unfavorable business conditions or
financial reverses is considered as
involuntary.
c. BIR Ruling 143-98: The “terminal leave
pay” (amount paid for the commutation of
leave credits) of retiring government
employees is considered not part of the
gross salary, and is exempt from taxes.
[Commissioner v. CA and Castaneda,
G.R. 96016 (1991)].
Retirement BENEFITS from foreign
government agencies – The social security
benefits, retirement gratuities, pensions and
other similar benefits received by resident or
non-resident citizens or aliens who come to
reside permanently in the Philippines from
foreign government agencies and other
institutions, private or public;
Payments of VETERANS benefits under
U.S. Veterans Administration – Payments of
benefits due or to become due to any person
residing in the Philippines under the laws of the
United States administered by the United
States Veterans Administration
Social Security Act benefits – Payments of
benefits received under the Social Security Act
U.P. LAW BOC TAXATION 1
of 1954 [RA 8282], as amended, e.g., Maternity
Benefits
GSIS benefits – Benefits received from GSIS
under the GSIS Act of 1937, as amended, and
the retirement gratuity received by government
officials and employees are not taxable. [Sec.
32B6., NIRC; Sec. B1, RR 2-98]
h. Winnings, prizes and award, including
those in sports competitions
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 national
sports associations shall not be included in
gross income and shall be tax exempt. [Sec. 32
B7d, NIRC]
Prizes and awards made primarily in
recognition of charitable, literary, educational,
artistic, religious, scientific, or civic
achievement are not taxable, provided
recipient was selected without any action on
his part to enter the contest or proceeding; and
recipient is not required to render substantial
future services as a condition to receiving the
prize or award
4. Deductions from Gross
Income
Deductions are items or amounts authorized by
law to be subtracted from the pertinent items of
gross income to arrive at taxable income.
Deductions from income tax purposes partake
of the nature of tax exemptions; hence, if tax
exemptions are to be strictly construed, then it
follows that deductions must also strictly
construed. [CIR v. Isabela Cultural Co., G.R.
No. 172231 (2007)]
However, if there is an express mention in the
law or if the taxpayer falls within the purview of
the exemption by clear legislative intent, the
rule on strict construction will not apply.
Page 68 of 256
TAXATION LAW
[Commissioner v. Anoldus Carpentry Shop,
G.R. No. 71122 (1988)]
Types of Deductions
There are four (4) types of deductions from
gross income:
1. itemized deductions in Section 34(A) to (J)
and (M) available to all kinds of taxpayers
engaged in trade or business or practice of
profession in the Philippines;
2. optional standard deduction in Section
34(L) available only to individual taxpayers
deriving business, professional, capital
gains and passive income not subject to
final tax, or other income; and
3. optional standard deduction available to
corporations under Section 34(L) of the
Tax Code (introduced by RA No. 9504)
4. the special deductions in Sections 37 and
38 of the NIRC, and in special laws like the
BOI law (E.O. 226).
a. General Rules
1. Deductions must be paid or incurred in
connection with the taxpayer’s trade,
business or profession
2. Deductions must be supported by
adequate receipts or invoices (except
standard deduction)
b. Concept of Return of Capital
Income tax is levied by law only on income;
hence, the amount representing return of
capital should be deducted from proceeds from
sales of assets and should not be subject to
income tax.
Costs of goods purchased for resale, with
proper adjustment for opening and closing
inventories, are deducted from gross sales in
computing gross income [Sec. 65, Rev. Reg. 2]
Sale of inventory of goods by manufacturers
and dealers of properties: In sales of goods
representing inventory, the amount received by
the seller consists of return of capital and gain
U.P. LAW BOC TAXATION 1
from sale of goods or properties. That portion
of the receipt representing return of capital is
not subject to income tax. Accordingly, cost of
goods manufactured and sold (in the case of
manufacturers) and cost of sales (in the case
of dealers) is deducted from gross sales and is
reflected above the gross income line in a profit
and loss statement.
Sale of stock in trade by a real estate dealer
and dealer in securities: Real estate dealers
and dealers in securities are ordinarily not
allowed to compute the amount representing
return of capital through cost of sales. Rather
they are required to deduct the total cost
specifically identifiable to the real property or
shares of stock sold or exchanged.
Sale of services: Their entire gross receipts are
treated as part of gross income.
c. Distinguish: Itemized Deductions
and Optional Standard Deductions
Itemized Deductions
• Expenses
• Interest
• Taxes
• Losses
• Bad debts
• Depreciation
• Depletion of oil and gas wells and mines
• Charitable and other contributions
• Research and development
• Pension trusts
Timing of Claiming Deductions
A taxpayer has the right to deduct all
authorized allowances for the taxable year. As
a rule, if he does not within any year deduct
certain of his expenses, losses, interest, taxes
or other charges, he cannot deduct them from
the income of the next of any succeeding year
[Sec. 76, Income Tax Regulations]
Expenses
Business expenses deductible from gross
income include the ordinary and necessary
Page 69 of 256
TAXATION LAW
expenditures directly connected with or
pertaining to the taxpayer’s trade or business.
The cost of goods purchased for resale, with
proper adjustment for opening and closing
inventories, is deducted from gross sales in
computing gross income.
Requisites for deductibility
a. Ordinary AND necessary
ORDINARY - normal and usual in relation to
the taxpayer's business and surrounding
circumstances; need not be recurring
NECESSARY - appropriate and helpful in
the development of taxpayer's business or
are proper for the purpose of realizing a
profit or minimizing a loss
b. Paid or incurred during the taxable year;
c. Paid or incurred in carrying on or which are
directly attributable to the development,
management, operation and/or conduct of
the trade, business or exercise of
profession;
d. Substantiated by adequate proof –
documented by official receipts or adequate
records, which reflect the amount of
expense deducted and the connection or
relation of the expense to the
business/trade of the taxpayer);
e. Legitimately paid (not a BRIBE, kickback, or
otherwise contrary to law, morals, public
policy);
f. If subject to withholding tax, the tax required
to be withheld on the expense paid or
payable is shown to have been properly
withheld and remitted to the BIR on time;
g. Amount must be reasonable.
Note: The expenses allowable to a non-
resident alien or a foreign corporation consist
of only such expenses as are incurred in
carrying on any business or trade conducted
within the Philippines exclusively. [Sec. 77 RR
2]
U.P. LAW BOC TAXATION 1
Substantiation requirement – Sec.
34(A)(1)(b), NIRC: No deduction from gross
income shall be allowed unless the taxpayer
shall substantiate with sufficient evidence,
such as official receipts or other adequate
records: (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.
Kinds of business expenses
These are:
a. 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
b. Travelling expenses
c. Cost of materials
d. Rentals and/or other payments for use or
possession of property
e. Repairs and maintenance
f. Expenses under lease agreements
g. Expenses for professionals
h. Entertainment expenses
i. Political campaign expenses
j. Training expenses
k. Others
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
Given for personal services must be actually
rendered and reasonable.
For income payment to be allowed as
deduction, the withholding tax must have been
paid [RR No. 12-2013].
Bonuses are deductible when:
1. made in good faith
2. given as additional compensation for
Page 70 of 256
TAXATION LAW
personal services actually rendered
3. such payments, when added to the
stipulated salaries, do not exceed a
reasonable compensation for the
services rendered
Traveling expenses
This include transportation expenses and
meals and lodging [Secs. 65 and 66, Rev. Reg.
No. 2]
Expenses must be reasonable and necessary.
Must be incurred or paid “while away from
home;” tax home is the principal place of
business, when referring to “away from home”
Incurred or paid in the conduct of trade or
business.
Note: However, necessary transportation
expenses of the taxpayer in its “tax home” are
deductible. Thus, a taxpayer operating its
business in Manila is allowed transportation
expenses from its office to its customers’ place
of business and back. But the transportation
expenses of an employee from his residence to
its office and back are not deductible as they
are considered personal expenses.
Cost of materials
Deductible only to the amount that they are
actually consumed and used in operation
during the year for which the return is made,
provided that their cost has not been deducted
in determining the net income for any previous
year.
Rentals and/or other payments for use or
possession of property
a. Required as a condition for continued use
or possession of property.
b. For purposes of trade business or
profession.
c. Taxpayer has not taken or is not taking title
to the property or has no equity other than
that of lessee, user, or possessor.
d. On the accrual basis, rent is deductible as
U.P. LAW BOC TAXATION 1
expense when liability is incurred during
the period of use. On cash basis, rent is
deductible when it is incurred and paid.
[VALENCIA and ROXAS]
Repairs and maintenance
Incidental or ordinary repairs are deductible.
Repairs which neither materially add to the
value of the property nor appreciably prolong
its life, but keep it in an ordinarily efficient
working condition, may be deducted as
expenses, provided the plant or property
account is not increased by the amount of such
expenditure. [Visayan Transportation Co. v.
CTA, CTA Case No. 1119, (1964)]
Extraordinary repairs are not deductible – they
are capital expenditures
Repairs which add material value to the
property or appreciably prolong its life
Repairs in the nature of replacement, to the
extent that they arrest deterioration and
appreciably prolong the life of the property,
should be charged against the depreciation
reserves if such account is kept. [Sec. 68, Rev.
Regs. 2]
All maintenance expenses on account of non-
depreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
Expenses for professionals
Deductible in the year the professional services
are rendered, not in the year they are billed,
provided that the “all events” is present.
“All events test” requires:
1. Fixing a right to income or liability to pay;
and
2. The availability of reasonably accurate
determination of such income or liability.
The “all-events test” does not demand that the
amount of income or liability be known
absolutely; it only requires that a taxpayer has
at its disposal the information necessary to
compute the amount with reasonable
Page 71 of 256
TAXATION LAW
accuracy, which implies something less than
an exact or completely accurate amount.
[Commissioner v. Isabela Cultural Corporation,
G.R. No. 172231 (2007)]
A professional may claim as deductions the
cost of supplies used by him in the practice of
his profession, expenses paid in the operation
and repair of transportation equipment used in
making professional calls, dues to professional
societies and subscriptions to professional
journals. [MAMALATEO]
Entertainment/Representation expenses
These are entertainment, amusement and
recreation (EAR) expenses incurred or paid
during the year that are directly connected to
the development, management and operation
of the trade, business or profession of the
taxpayer.
Requisites for deductibility:
1. Reasonable in amount.
2. Paid or incurred during the taxable
period.
3. Directly connected to the development,
management, and operation of the trade,
business or profession of the taxpayer,
or that are directly related to or in
furtherance of the conduct thereof.
4. Not to exceed 0.50% of net sales for
sellers of goods or properties or 1% of
net revenues for sellers of services,
including taxpayers engaged in the
exercise of profession and use or lease
of properties)
5. Not incurred for purposes contrary to
law, morals, public policy or public order.
6. Must be substantiated with sufficient
evidence such as receipts and/or
adequate records.
Exclusions from EAR 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
U.P. LAW BOC TAXATION 1
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; and
6. Other expenses of a similar nature.
Political campaign expenses
Amount expended for political campaign
purposes or payments to campaign funds are
NOT deductible either as business expenses
or as contribution [CTA Case No. 695, April 30,
1969, citing Mertens]
Training expenses
Organization and pre-operating expenses of a
corporation (including training expenses) are
considered as capital expenditures and are
therefore, not deductible in the year they are
paid or incurred.
But taxpayers who incur these expenses and
subsequently enter the trade or business to
which the expenditures relate can elect to
amortize these expenditures over a period not
less than sixty (60) months. [BIR Ruling 102-
97, Sept. 29, 1997]
This rule, however, does not apply to a
situation where an existing corporation incurs
these same expenditures for the purpose of
expanding its business in a new line of trade,
venture or activity.
OTHERS
Expenses Allowable to Private Educational
Institutions
In addition to the expenses allowable as
deductions under the NIRC, a private
Page 72 of 256
TAXATION LAW
proprietary educational institution may at its
OPTION, elect either:
a. To deduct expenditures otherwise
considered as capital outlays or
depreciable assets incurred during the
taxable year for the expansion of school
facilities, OR
b. To deduct allowances for depreciation
thereof.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for
yearly depreciation of the school facilities are
allowed.
Advertising Expenses
The media advertising expenses which were
found to be inordinately large and thus, not
ordinary, and which were incurred in order to
protect the taxpayer’s brand franchise which is
analogous to the maintenance of goodwill or
title to one’s property, are not ordinary and
necessary expenses but are capital
expenditures, which should be spread out over
a reasonable period of time. [CIR v. General
Foods Phils. Inc, G.R. No. 143672 (2003)]
Interest
Requisites for deductibility
1. There is a valid and existing indebtedness.
2. The indebtedness is that of the taxpayer
3. The indebtedness is connected with the
taxpayer‘s trade, profession, or business.
4. The interest must be legally due.
5. The interest must be stipulated in writing.
6. The taxpayer is LIABLE to pay interest on
the indebtedness.
7. The indebtedness must have been paid or
accrued during the taxable year.
8. The interest payment arrangement must
not be between related taxpayers
9. The interest must not be incurred to finance
petroleum operations.
10. In case of interest incurred to acquire
property used in trade, business or
exercise of profession, the same was not
treated as a capital expenditure,
U.P. LAW BOC TAXATION 1
Non-deductible interest expense
Interest paid in advance by the taxpayer who
reports income on cash basis shall only be
allowed as deduction in the year the
indebtedness is paid.
If the indebtedness is payable in periodic
amortizations, only 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.
Interest payments made between related
taxpayers.
Interest on indebtedness incurred to finance
petroleum exploration.
Related Taxpayers
a. Between members of the family, i.e.
brothers and sisters (whether by the whole
or half-blood), spouse, ancestor, and lineal
descendants; or
a. Except in case of distributions in
liquidation, between an individual
and a corporation, where the
individual owns directly or indirectly
more than 50% of the outstanding
stock of the corporation
b. Except in the case of distributions
in liquidation, between two
corporations where:
i. Either one is a personal
holding company of a
foreign personal holding
company with respect to
the taxable year preceding
the date of the sale of
exchange; and
ii. More than 50% of the
outstanding stock of each
is owned, directly or
indirectly, by or for the
same individual; or
b. Between parties to a trust – Grantor and
Fiduciary; or
c. Fiduciary of a trust and fiduciary of another
trust if the same person is a grantor with
Page 73 of 256
TAXATION LAW
respect to each trust; or
d. Fiduciary and Beneficiary
INTEREST SUBJECT TO SPECIAL RULES
Interest paid in advance
No deduction shall be allowed if within the
taxable year an individual taxpayer reporting
income on cash basis incurs an indebtedness
on which an interest is paid in advance through
discount or otherwise.
But the deduction shall be allowed in the year
the indebtedness is paid.
Interest periodically amortized
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.
Interest expense incurred to acquire
property for use in
trade/business/profession
At the option of the taxpayer, interest expense
on a capital expenditure may be allowed as
a. A deduction in full in the year when
incurred;
b. A capital expenditure for which the
taxpayer may claim only as a deduction
the periodic amortization of such
expenditure.
Should the taxpayer elect to deduct the interest
payments against its gross income, the
taxpayer cannot at the same time capitalize the
interest payments. In other words, the taxpayer
is not entitled to both the deduction from gross
income and the adjusted (increased) basis for
determining gain or loss and the allowable
depreciation charge. [Paper Industries Corp. v.
Commissioner, G.R. Nos. 106949-50 (1995)]
Reduction of interest expense/interest
arbitrage
The taxpayer's allowable deduction for interest
expense shall be reduced by an amount equal
to 33% of the interest income subjected to final
U.P. LAW BOC TAXATION 1 TAXATION LAW

tax; effective January 1, 2009. [RA 9337] [CIR v. Palanca, G.R. No. L-16626 (1966)]

Taxes Treatment of special assessment

Taxes Proper: Refers to national and local
taxes
Requisites for deductibility
a. Paid or incurred within the taxable year;
b. Paid or incurred in connection with the
taxpayer‘s trade, profession or business;
c. Imposed directly on the taxpayer;
d. Not specifically excluded by law from
being deducted from the taxpayer‘s gross
income.
Special assessments and other taxes
assessed against local benefits of a kind
tending to increase the value of the property
assessed are non-deductible from gross
income.
Tax credit vis-à-vis deduction
Tax credit – amount allowed by law to reduce
the Philippine income tax due, subject to
limitations, on account of taxes paid or accrued
to a foreign country

The following taxes are deductible: Tax Credit Tax Deduction

a. Import duties;
b. Business tax; Taxes are deductible
c. Professional/occupation tax; Taxes are deductible
from gross income in
d. Privilege and excise tax; from the Phil.
computing the
e. DST; Income tax itself
taxable income
f. Motor vehicle registration fees;
g. Real property tax; Effect: Reduces
Effect: Reduces
h. Electric energy consumption tax; and taxable income upon
Philippine income
i. Interest on delinquent taxes. which the tax liability
tax liability
is calculated
Non-deductible taxes
a. Philippine income tax, except Fringe Sources: Only
Benefit Taxes; foreign income taxes
Sources: Deductible
b. Income tax imposed by authority of any may be claimed as
taxes (e.g. business
foreign country, if taxpayer avails of the credits against
tax, excise tax)
Foreign Tax Credit (FTC) Philippine income
tax.
However, when the taxpayer does NOT signify
his desire to avail of the tax credit for taxes of The following may claim tax credits:
foreign countries, the amount may be allowed a. Resident citizens
as a deduction from gross income of citizens b. Domestic corporations, which include all
and domestic corporations subject to the partnerships except general professional
limitations set forth by law. partnerships
c. Members of general professional
Treatments of surcharges/interests/fines partnerships
for delinquency d. Beneficiaries of estates or trusts
The amount of deductible taxes is limited to the
basic tax and shall not include the amount for The following may NOT claim tax credits:
any surcharge or penalty on delinquent taxes. a. Non-resident citizens
However, interest on delinquent taxes, b. Aliens, whether resident or non-resident
although not deductible as tax, can be c. Foreign corporations, whether resident on
deducted as interest expense at its full amount. non-resident

Page 74 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

Note: Tax credits for foreign taxes are allowed

only for income derived from sources outside Worldwide
the Philippines. The above taxpayers are not Taxable
entitled to tax credit; they are taxable only on Income
income derived from Philippine sources.

Limitations on Tax Credit. Note: Computation of FTC: Limit #2 applies

where taxes are paid to two or more foreign
Per Country Limit countries. Allowable tax credit is the lower
The amount of tax credit shall not exceed the between the tax credit computed under Limit
same proportion of the tax against which such #1 and that computed under Limit#2.
credit is taken, which the taxpayer's taxable
income from sources within such country bears FTC Limitations – lowest of the 3:
to his entire taxable income for the same 1. Actual FTC
taxable year; and 2. For taxes paid to one foreign country
3. For taxes paid to 2 or more foreign
Worldwide Limit countries
The total amount of the credit shall not exceed
the same proportion of the tax against which Losses
such credit is taken, which the taxpayer's
taxable income from sources without the Requisites for deductibility
Philippines taxable bears to his entire taxable a. Loss must be that of the taxpayer (e.g.,
income for the same taxable year. losses of the parent corp. cannot be
deducted by its subsidiary);
Formula: b. Actually sustained and charged off within
Limit #1 Per Country Limit the taxable year;
c. Incurred in trade, business or profession;
Taxable d. Of property connected with the trade,
Income Per business, or profession, if the loss arises
Foreign from fires, storms, shipwreck or other
Country Phil. Limit on casualties, or from robbery, theft, or
x Income = amount of embezzlement;
Tax tax credit e. Sustained in a closed and completed
Worldwide transaction;
Taxable f. Not compensated for by insurance or other
Income form of indemnity;
g. Not claimed as a deduction for estate tax
purposes;
h. In case of casualty loss, filing of notice of
Limit #2 World Limit loss with the BIR within 45 days from the
Limit #2 World Limit date of the event that gave rise to the
casualty; and
i. The taxpayer must prove the elements of
Taxable Limit on
Phil. the loss claimed, such as the actual nature
Income Per amount
x Income = and occurrence of the event and amount
Foreign of tax
Tax of the loss.
Country credit

In case a non-depreciable vehicle is sold at a

Page 75 of 256
U.P. LAW BOC TAXATION 1
loss, the loss incurred from the sale of non-
depreciable vehicle is not allowed as a
deduction. [RR No. 2-2013]
No loss is recognized in the following:
a. Merger, consolidation, or control securities
(where no gains are recognized either);
b. Exchanges not solely in kind;
c. Related taxpayers (see above – (c)
Interest expense incurred to acquire
property for use in
trade/business/profession)
d. Wash sales;
e. Illegal transactions
OTHER TYPES OF LOSSES
a. Capital losses
b. Incurred in the sale or exchange of capital
assets (allowable only to the extent of
capital gains, except for banks and trust
companies under conditions in Sec. 39 of
NIRC where loss from such sale is not
subject to the foregoing limitation)
c. Resulting from securities becoming
worthless and which are capital assets
(considered loss from sale or exchange)
on last day of the taxable year
d. Losses from short sales of property;
e. Losses due to failure to exercise privileges
or options to buy or sell property.
Securities becoming worthless
Loss in shrinkage in value of stock through
fluctuation in the market is not deductible from
gross income. (To be deductible, the loss must
be actually suffered when the stock is disposed
of.)
Exception: If the stock of the corporation
becomes worthless, the cost or other basis
may be deducted by its owner in the taxable
year in which the stock became worthless,
provided a satisfactory showing of its
worthlessness be made, as in the case of bad
debts.
Page 76 of 256
TAXATION LAW
Losses on wash sales of stocks or securities
Wash Sale - a sale or other disposition of stock
or securities where substantially identical
securities (substantially the same as those
disposed of) are acquired or purchased (or
there was an option to acquire, and the
acquisition or option should be by purchase or
exchange upon which gain or loss is
recognized under the income tax law) within a
61-day period, beginning 30 days before the
sale and ending 30 days after the sale
General rule: Not deductible from gross
income
Exception: If by a dealer in securities in the
course of ordinary business, it is deductible.
Wagering losses
Losses from wagering (gambling) are
deductible only to the extent of gains from such
transactions. A wager is made when the
outcome depends upon CHANCE.
Net Operating Loss Carry Over (NOLCO)
Net operating loss (NOL) is the excess of
allowable deductions over gross income for
any taxable year immediately preceding the
current taxable year.
NOLCO: The NOL of the business or
enterprise which had not been previously offset
as deduction from gross income shall be
carried over as a deduction from gross income
for the next three (3) consecutive taxable years
immediately following the year of such loss,
provided however, that any net loss incurred in
a taxable year during which the taxpayer was
exempt from income tax shall not be allowed
as a deduction. [Sec. 34(3)(D), NIRC]
Exception: Mines other than oil and gas wells,
where a net operating loss without the benefit
of incentives provided for under EO No. 226
(Omnibus Investments Code) incurred in any of
the first ten (10) years of operation may be
carried over as a deduction from taxable
U.P. LAW BOC TAXATION 1
income for the next five (5) years immediately
following the year of such loss.
Requisites for NOLCO
a) The taxpayer was not exempt from income
tax the year the loss was incurred;
b) There has been no substantial change in
the ownership of the business or enterprise
wherein:
c) AT LEAST 75% of nominal value of
outstanding issued shares is held by or on
behalf of the same persons; or
d) AT LEAST 75% of the paid up capital of the
corporation is held by or on behalf of the
same persons.
Taxpayers Entitled to NOLCO
Individuals engaged in trade or business or in
the exercise of his profession (including
estates and trusts);
Note: An individual who avails of 40% OSD
shall not simultaneously claim deduction of
NOLCO. However, the three-year
reglementary period shall continue to run
during such period notwithstanding the fact that
the aforesaid taxpayer availed of OSD during
the said period.
Domestic and resident foreign corporations
subject to the normal income tax or preferential
tax rates under the Code (e.g., private
educational institutions, hospitals, and regional
operating headquarters) or under special laws
(e.g., PEZA-registered companies)
Note: Domestic and resident foreign
corporations taxed during the taxable year with
Minimum Corporate
Income Tax cannot enjoy the benefit of
NOLCO. However, the three-year period for
the expiry of the NOLCO is not interrupted by
the fact that the corporation is subject to MCIT
during such three-year period.
Bad debts
Debts resulting from the worthlessness or
Page 77 of 256
TAXATION LAW
uncollectibility, in whole or in part, of amounts
due the taxpayer actually ascertained to be
worthless and the corresponding receivable
should have been written off or charged off
within the taxable year.
A debt is worthless when after taking
reasonable steps to collect it, there is no
likelihood of recovery at any time in the future.
Requisites for deductibility
a. Valid and legally demandable debt due to
the taxpayer
b. Debt is connected with the taxpayer's
trade, business or practice of profession;
c. Debt was not sustained in a transaction
entered into between related parties;
d. Actually ascertained to be worthless and
uncollectible as of the end of the taxable
year (taxpayer had determined with
reasonably degree of certainty that the
claim could not be collected despite the
fact that the creditor took reasonable steps
to collect); and
e. Actually charged off the books of accounts
of the taxpayer as of the end of the taxable
year
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the
uncollectibility of debt
Exceptions:
a. Banks as creditors – BSP Monetary Board
shall ascertain the worthlessness and
uncollectibility of the debt and shall
approve the writing off
b. Receivables from an insurance or surety
company (as debtor) may be written off as
bad debts only when such company is
declared closed due to insolvency or
similar reason
The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove
that he exerted diligent efforts to collect:
a. Sending of statement of accounts
b. Collection letters
U.P. LAW BOC TAXATION 1 TAXATION LAW

c. Giving the account to a lawyer for

collection
d. Filing the case in court [Phil. Refining
Corp. v. CA, G.R. No. 118794 (1996)]
Rev. Reg. No. 5-1999
“Actually ascertained to be worthless” –
Determination of worthlessness must depend
upon the particular facts and circumstances of
the case. A taxpayer may not postpone a bad
debt deduction on the basis of a mere hope of
ultimate collection or because of a continuance
of attempts to collect, where there is no
showing that the surrounding circumstances
differ from those relating to other notes which
were charged off in a prior year.
Depreciation
An annual reasonable allowance to reduce the
wasteful value of the tangible fixed assets
resulting from wear and tear and normal
obsolescence
For intangible assets, the annual allowance to
reduce their useful value is called amortization.
Requisites for Deductibility
a. It must be reasonable.
b. It must be charged off during the year.
c. The asset must be used in profession,
trade or business.
d. The asset must have a limited useful life.

Accounts receivable may be written off as bad The depreciable asset must be located in the
debts even without conclusive evidence that Philippines if the taxpayer is a nonresident
they had definitely become worthless when: alien or a foreign corporation. [VALENCIA and
a. the amount is insignificant; and ROXAS]
b. collection through court action may be
more costly to the taxpayer. No depreciation shall be allowed for yachts,
helicopters, airplanes and/or aircrafts, and land
“Actually charged off from the taxpayer’s book vehicles which exceed the threshold amount of
of accounts” – Receivable which has actually P2,400,000, unless the taxpayer’s main line of
become worthless at the end of the taxable business is transport operations or lease of
year has been cancelled and written off. Mere transportation equipment and the vehicles
recording in the books of account of estimated purchased are used in the operations. [RR No.
uncollectible accounts does not constitute a 12-2012]
write-off.
Methods of computing depreciation
EFFECT OF RECOVERY OF BAD DEBTS allowance
(cost- salvage
Tax Benefit Rule on Bad Debts
Straight-line value) ÷
Bad debts claimed as deduction in the
estimated life
preceding year(s) but subsequently recovered
shall be included as part of the taxpayer‘s gross Cost x Rate of
income in the year of such recovery the extent Depreciation*
of the income tax benefit of said deduction.
Also called the equitable doctrine of tax benefit. *rate = (1÷
estimated life) x
Requisites: Declining balance
multiplier applicable
a. Allowance must be reasonable ex. Double
b. Charged off during the taxable year from declining balance
the taxpayer‘s books of accounts. multiplier is 200%
c. Does not exceed the acquisition cost of
the property.

Page 78 of 256
U.P. LAW BOC TAXATION 1
Note: depreciation
allowance should
not cause the asset
to be valued below
its salvage value
(remaining life ÷
Sum-of-the-year- SYD) x (cost-
digit (SYD) salvage value)
Charitable and other contributions
Requisites for deductibility
a) Actually PAID or made to the ENTITIES or
institutions specified by law;
b) Made within the TAXABLE year.
c) It must be EVIDENCED by adequate
receipts or records.
d) For Contributions Other than Money: The
amount shall be BASED on the acquisition
cost of the property (i.e., not the fair market
value at the time of the contribution).
e) For Contributions subject to the statutory
limitation: It must NOT EXCEED 10%
(individual) or 5% (corporation) of the
taxpayer‘s taxable income before
charitable contributions
Amount that May Be Deducted
Kinds of Contributions:
a. Contributions deductible in full;
b. Contributions subject to the statutory limit.
Contributions Deductible in Full:
1. Donations to the Government of the
Philippines, or to any of its agencies, or
political subdivisions, including fully
owned government corporations
2. Exclusively to finance, provide for, or to be
used in undertaking priority activities in
3. Education
4. Health
5. Youth and sports development
6. Human settlements
7. Science and culture, and
8. Economic development
Page 79 of 256
TAXATION LAW
9. in accordance with a National Priority Plan
determined by NEDA (otherwise, subject
to statutory limit)
10. Donations to Certain Foreign Institutions
or International Organizations which are
fully deductible in compliance with
agreements, treaties or commitments
entered into by the Government of the
Philippines and the foreign institutions or
international organizations or in
pursuance of special laws
11. Donations to Accredited Non-government
Organizations subject to conditions set
forth in RR No. 13-98 – NGO means a
non-stock non-profit domestic corporation
or organization:
a. Organized and operated exclusively
for:
i. scientific,
ii. research,
iii. educational,
iv. character-building and youth and
sports development,
v. health,
vi. social welfare,
vii. cultural or
viii. charitable purposes, or
ix. a combination thereof,
No part of the net income of which inures to the
benefit of any private individual
Administrative expense, on an annual basis,
must not exceed 30% of total expenses for the
taxable year
Contributions subject to the Statutory
Limit:
These contributions are not deductible in full as
specified by the law or such deduction has not
met the requirements to be deducted in full.
Those made to:
a. Government or any of its agencies or
political subdivisions exclusively for public
purposes (contributions for non-priority
activities)
b. Accredited domestic corporation or
U.P. LAW BOC TAXATION 1
associations organized exclusively for
c. Religious
d. Charitable
e. Scientific
f. youth and sports development
g. cultural
h. educational purposes or
i. rehabilitation of veterans
j. Social welfare institutions
k. Non-government organizations: No part of
the net income of which inures to the
benefit of any private stockholder or
individual
Statutory Limit:
a. 10% in the case of an individual (individual
donor), and
b. 5% in the case of a corporation (corporate
donor), of the taxpayer's/donor’s income
derived from trade, business or profession
computed before the deduction for
contributions and donations
The amount deductible is the actual
contribution or the statutory limit computed,
whichever is lower.
Contributions to pension trusts
Contribution to a pension trust may be claimed
as deduction as follows:
a. Amount contributed for the present/normal
service cost – 100% deductible
b. Amount contributed for the past service
cost – 1/10 of the amount contributed is
deductible in year the contribution is
made, the remaining balance will be
amortized equally over nine consecutive
years
General Rule: An employer establishing or
maintaining a pension trust to provide for the
payment of reasonable pensions to his
employees shall be allowed as a deduction, a
reasonable amount transferred or paid into
such trust in excess of the contributions to such
trust made during the taxable year.
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TAXATION LAW
Requisites for deductibility of payments to
pension trusts
a. There must be a pension or retirement
plan established to provide for the
payment of reasonable pensions to
employees;
b. The pension plan is reasonable and
actuarially sound;
c. It must be funded by the employer;
d. The amount contributed must no longer be
subject to the employer’s control or
disposition; and
e. The payment has not theretofore been
allowed before as a deduction.
Optional Standard Deduction
Individuals, except non-resident aliens
May be taken by an individual in lieu of itemized
deductions except those earning purely
compensation income.
If an individual opted to use OSD, he is no
longer allowed to deduct cost of sales or cost
of services.
Amount: 40% of gross sales or gross receipts
(under RA 9504, effective July 6, 2008)
Requisites:
a. Taxpayer is a citizen or resident alien;
b. Taxpayer’s income is not entirely from
compensation;
c. Taxpayer signifies in his return his
intention to elect this deduction; otherwise
he is considered as having availed of the
itemized deductions;
d. Election is irrevocable for the year in which
made; however, he can change to
itemized deductions in succeeding years.
Corporations, except non-resident foreign
corporations
The option to elect Optional Standard
Deduction granted is now granted to
corporations by virtue of RA 9504. The OSD is
40% of its gross income.
Corporations availing of OSD are still required
U.P. LAW BOC TAXATION 1
to submit their financial statements when they
file their annual ITR and to keep such records
pertaining to its gross income. [RR 2-2010].
Partnerships
For purposes of taxation, the Code considers
general co-partnerships as corporations.
Hence, rules on OSD for corporations are
applicable to general co-partnerships.
d. Items Not Deductible
General rule: In determining deductions, one
of the general rules is that deductions must be
paid or incurred in connection with the
taxpayer’s trade, business or profession.
Capital expenditures (e.g. acquisition cost of a
building) are also not deductible, because
these are not expenses, but form part of
assets.
Exceptions: In computing taxable net income,
no deduction shall be allowed with respect to:
a. Personal, living or family expenses
b. Any amount paid out for new buildings or
for permanent improvements (capital
expenditures), or betterments made to
increase the value of any property or
estate
c. Any amount expended in restoring
property (major repairs) or in making good
the exhaustion thereof for which an
allowance [for depreciation or depletion] is
or has been made
d. Premiums paid on any life insurance policy
covering the life of any officer, employee,
or any person financially interested in the
trade or business carried on by the
taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a
beneficiary under such policy
e. Interest expense and bad debts between
related parties [Sec. 36(B), NIRC)]
f. Losses from sales or exchanges of
property between related taxpayers.
g. Non-deductible interest – should the
taxpayer elect to deduct interest payments
against its gross income, he cannot at the
Page 81 of 256
TAXATION LAW
same time capitalize such interest and
claim depreciation on the undepreciated
cost which includes the interest. [PICOP v.
Commissioner, G.R. No. 106949-50
(1995)]
h. Non–deductible taxes
i. Non-deductible losses
j. Losses on Wash Sales (except if by dealer
in securities in ordinary course of exempt
corporations) These are:
k. Proprietary Educational Institutions and
hospitals
l. Government owned and controlled
corporations
m. Others
Relevant points regarding related taxpayers
a. Payment of interest is not deductible.
b. Bad debts are not deductible.
c. Losses from sales or exchanges of
property are not deductible.
Related Parties [Sec. 34(B), NIRC]
a. Between members of a family (which shall
include only his brothers and sisters,
spouse, ancestors and lineal
descendants)
b. Between an individual and a corporation
more than 50% in value of the outstanding
stock of which is owned, directly or
indirectly, by or for such individual –
except in the case of distributions in
liquidation
c. Between two corporations more than 50%
in value of the outstanding stock of each
of which is owned, directly or indirectly by
or for the same individual
d. Between the grantor and the fiduciary of a
trust
e. Between the fiduciary of a trust and the
fiduciary of another trust if the same
person is a grantor with respect to each
trust
f. Between the fiduciary of a trust and a
beneficiary of such trust [Section 36(B),
NIRC]
U.P. LAW BOC TAXATION 1 TAXATION LAW

5. Income Tax on Individuals Worker (OCW) is taxable only on

income from sources within the
Summary Table for Taxation of Individuals Philippines (i.e. sideline income in the
(all individual taxpayers, including non- Philippines).
resident aliens) b. OCW – Filipino citizens who are
physically present in a foreign country
Tax as a consequence of their employment.
Classification Taxable Income
Rates
Their salaries and wages are paid by
Income from an employer abroad and is not borne
Resident sources within and by an entity or person in the
0%-35%
Citizen outside the Philippines. [Sec. 2, RR 1-11]
Philippines c. An OCW’s income arising from sources
outside the Philippines is exempt from
Income from
Non-Resident income tax.
sources within the 0%-35%
Citizen 3. Resident Aliens
Philippines
A resident alien is taxable only on income
Income from from sources within the Philippines.
Resident Alien sources within the 0%-35%
Philippines
ii. Taxation on Compensation Income
Non-resident
Income from Income arising from an employer-employee
Alien Engaged
sources within the 0%-35%
in Trade or
Philippines
relationship.
Business
(a) Inclusions
Non-resident
Alien Not Income from
Engaged in sources within the 25% 1. Monetary compensation – If
Trade or Philippines compensation is paid in cash, the full
Business amount received is the measure of the
income subject to tax.
2. Regular salary/wage
a. Resident Citizens, Non-Resident
Salary – earnings received periodically for
Citizens and Resident Aliens [Sec. a regular work other than manual labor,
24(A)(1)] such as monthly salary of an employee.

i. Coverage Wages – all remuneration for services

performed by an employee for his
1. Resident Citizens employer, including the cash value of all
A Filipino resident citizen is taxable on non-cash remuneration. [Sec. 78(A), NIRC]
income from all sources (both within and
outside Philippines). Separation pay/retirement benefit not
2. Non-resident Citizens exempt
A non-resident citizen is taxable only on
income derived from sources within the Retirement pay – a lump sum payment
Philippines. received by an employee who has served
a company for a considerable period of
Other considerations: time and has decided to withdraw from
a. A Filipino citizen working and deriving work into privacy. [Sec. 2(b), RR No. 6-82]
abroad as an Overseas Contract

Page 82 of 256
U.P. LAW BOC TAXATION 1
General rule: Retirement pay is taxable
Exceptions:
i. SSS or GSIS retirement pays [Sec.
32(B)(6), NIRC]
ii. Retirement benefit under R.A.
7641 provided the following
requirements are met:
iii. Retirement program is approved by
the Commissioner;
iv. Retirement benefit is pursuant to a
reasonable private benefit plan.
v. Retiree employed for 10 years by
the employer;
vi. Retiree should have been 50 years
old or above at the time of
retirement; and
vii. Retirement benefit availed only
once [Sec. 32 (B)(6)(a), NIRC].
Separation pay
General Rule: Separation pay taxable
if voluntarily availed of.
Exception: if due to causes such as
death, sickness, disability,
reorganization or bankruptcy of the
company or for any other cause
beyond the control of the said
employee.
3. Bonuses, 13th month pay, and other
benefits not exempt
Tips and Gratuities – those paid directly
to the employee (usually by employer’s
customer) which are not accounted for by
the employee to the employer. (taxable
income but not subject to withholding tax)
[Sec. 2.78.1, RR No. 2-98]
13th month pay – taxable only for the part
which exceeds P90,000 [Sec. 32(7)(e),
NIRC]
Overtime Pay – premium payment
received for working beyond regular hours
of work which is included in the
computation of gross salary of employee.
Page 83 of 256
TAXATION LAW
4. Directors’ fees, allowances and
bonuses
General Rule: taxable as compensation
income when the recipient director has an
employee-employer relationship with the
corporation which pays the same
Exception: not taxable as compensation
income when recipient director’s duties is
confined to attendance and participation only in
the meetings of the Board of Directors, but
taxable as income arising from exercise of
profession [R.M.C 34-08].
5. Non-monetary compensation – measure
of income subject to tax is the equivalent
value in money.
(b) Exclusions
1. Fringe benefit subject to tax
(See Gross Income, supra for the
discussion of Taxable and Non-taxable
fringe benefits)
If the recipient of the fringe benefits is a
rank and file employee, and the said fringe
benefit is not tax-exempt, then the value of
such fringe benefit shall be considered as
part of taxable compensation income.
[DOMONDON]
Where the recipient of the fringe benefit is
not a rank and file employee, and the said
benefit is not tax-exempt, then the value of
such fringe benefit shall not be included in
the taxable compensation income. It is
instead levied upon the employer.
[DOMONDON]
Convenience of the employer Rule
If meals, living quarters, and other facilities
and privileges are furnished to an
employee for the convenience of the
employer, and incidental to the
requirement of the employee’s work or
position, the value of that privilege need not
U.P. LAW BOC TAXATION 1
be included as compensation [Henderson
v. Collector (1961)]
2. De minimis benefits
Facilities or privileges of relatively small
value furnished by an employer to his
employees and are as a means of
promoting the health, goodwill,
contentment, or efficiency of his employees
[RR No. 11-18].
These are exempt from both fringe benefit
tax and compensation income tax [Sec. 33
(C)(4), NIRC].
(See Gross Income, supra for the
discussion of de minimis benefits)
3. 13th month pay and other benefits and
payments specifically excluded from
taxable compensation income
Gross benefits received by employees up
to P90,000 (amounts in excess are
considered compensation income)
Benefits include:
a) Benefits received by government
employees under RA 6686;
b) Benefits received by employees
pursuant to PD 851 (13th Month Pay
Decree);
c) Benefits received by employees not
covered by PD 851 as amended by
Memorandum Order No. 28; and,
d) Other benefits such as productivity
incentives and Christmas bonus.
iii. Taxation of Business
Income/Income From Exercise of
Profession
All income obtained from doing business or
exercising of profession shall be included in the
computation of gross income.
Individuals earning purely business or
professional income
Individuals earning income purely from self-
Page 84 of 256
TAXATION LAW
employment and/or practice of profession,
whose gross sales/receipts and other non-
operating income does not exceed the VAT
threshold as provided under Sec. 109 (BB) of
the Tax Code, as amended, shall have the
option to avail of:
a. The graduated rates under Sec. 24
(A)(2)(a) of the Tax Code, as amended;
OR
b. An eight percent (8%) tax on gross sales
or receipts and other non-operating
income in excess of two hundred fifty
thousand pesos (P250,000.00) in lieu of
the graduated income tax rates under Sec.
24 (A) and the percentage tax under Sec.
116 of the NIRC.
Individuals earning mixed income
For mixed income earners, the income tax
rates applicable are:
a. The compensation income shall be subject
to the tax rates prescribed under Section 24
(A)(2)(a); AND
b. The income from business or practice of
profession shall be subject to the following:
c. If the gross sales/receipts and other non-
operating income do not exceed the VAT
threshold, the individual has the option to be
taxed at:
d. The aforementioned graduated taxable
income rates; OR
e. The aforementioned optional 8% gross
income tax.
f. If the gross sales/receipts and other non-
operating income exceeds the VAT
threshold, the individual shall be subject to
the graduated income tax rates.
iv. Taxation of Partners in a General
Professional Partnership
GPP is not subject to income tax imposed
pursuant to Sec. 26 of the Tax Code, as
amended. However, the partners shall be liable
to pay income tax on their separate and
individual capacities for their respective
distributive share in the net income of the GPP.
U.P. LAW BOC TAXATION 1 TAXATION LAW

Each partner shall report as gross income his

4 years to less than 5 5%
distributive share in the net income of the GPP,
years
actually or constructively received.
3 years to less than 4 12%
In computing the distributive share of the years
partners, the net income of the GPP shall be
computed in the same manner as a less than 3 years 20%
corporation. [Sec. 26, NIRC]
Any income of nonresidents, whether
If the partnership sustains a net operating loss,
individuals or corporations, from transactions
the partners shall be entitled to deduct their
with depository banks under the expanded
respective shares in the net operating loss from
system shall be exempt from income tax.
their individual gross income.
For interest from foreign currency loans
v. Taxation of Passive Income
granted by FCDUs to residents other than
Offshore Banking Units (OBUs) or other
Passive Income Subject to Final Tax
depository banks under the expanded system
“Final tax” means tax withheld from source,
– tax rate is 10% if payors are RESIDENTS,
and the amount received by the income earner
whether individuals or corporations.
is net of the tax already. The income having
been tax-paid already, it need not be included
Royalties
in the gross income in the yearly submission of
(See summary table, infra)
ITR.
Dividends from domestic corporation
Interest income
a. cash and/or property dividends actually or
• on any currency bank deposit, yield or any
constructively received by an individual
other monetary benefit from deposit
from
substitutes, trust funds and similar
b. a domestic corporation
arrangements - 20% final tax
c. a joint stock company
• under the expanded foreign currency
d. insurance or mutual fund companies
deposit system (EFCDS) - 15% final tax
e. regional operating headquarters of
for residents, exempt if non-residents
multinational companies
f. share of an individual in the distributable
Treatment of income from long-term
net income after tax of a partnership
deposits
(except a general professional
On long-term deposit or investment certificates
partnership) of which he is a partner
(LTDIC) in banks (e.g., savings, common or
g. share of an individual member or co-
individual trust funds, deposit substitutes,
venturer in the net income after tax of an
investment management accounts and other
association, a joint account, or a joint
investments, which have maturity of 5 years or
venture or consortium taxable as a
more) – exempt
corporation
Should LTDIC holder pre-terminate LTDIC
Rate:
before the 5th year, a final tax shall be imposed
a. 10% for residents (RC, RA) and non-
on the entire income based on the remaining
resident citizens (NRC);
maturity:
b. 20% for non-resident aliens engaged in
trade or business (NRAETB)

Page 85 of 256
U.P. LAW BOC TAXATION 1
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 that
it represents a distribution of earnings or
profits. [Sec. 73 (B), NIRC]
In other words, stock dividends are generally
not subject to tax as long as there are no
options in lieu of the shares of stock.
On the other hand, a stock dividend constitutes
income if it gives the shareholder an interest
different from that which his former
stockholdings represented.
Prizes and other winnings
Prizes and other winnings - 20%, except
a. Prizes amounting to P10,000 or less, which
shall be subjected to the graduated rates
under Subsection A of Section 24; and
b. Philippine Charity sweepstakes / lotto
winnings which does not exceed P10,000 -
exempt ;
c. Prizes excluded from gross income.
Prize, differentiated from winnings:
A prize is the result of an effort made (e.g.,
prize in a beauty contest), while winnings are
the result of a transaction where the outcome
depends upon chance (e.g., betting).
Taxation of Capital Gains
Income from sale of shares of stock of a
Philippine corporation
Shares traded and listed in the stock exchange
– CGT-exempt, but subject to business tax
The transaction is exempt from income tax
regardless of the nature of business of the
seller or transferor. However, it is subject to a
business tax of six-tenths of one percent
(0.6%) of the gross selling price [Sec. 127 (A),
Page 86 of 256
TAXATION LAW
NIRC].
Shares not listed and traded in the stock
exchange – subject to final tax
On sale, barter, exchange or other disposition
of shares of stock of a domestic corporation not
listed and traded through a local stock
exchange, held as a capital asset
On the net capital gain: Final Tax of 15%
Net capital gain: selling price less cost
Selling price: consideration on the sale OR fair
market value of the shares of stock at the time
of the sale, whichever is higher
Cost: original purchase price
Income from the sale of real property situated
in the Philippines
What property covered
Property located in the PH classified as capital
assets
What transactions covered
Sales, exchanges, or other disposition of real
property (classified as capital assets), including
pacto de retro sales and other forms of
conditional sales of the following: citizens,
resident aliens, NRAETB, NRANETB,
domestic corporations.
Tax rate
General rule: 6% of —whichever is higher of:
GSP, or FMV in accordance with Sec. 6 (E).
Exception:
a. In case of sales made to the government,
any of its political subdivisions or
agencies, or to GOCCs, it can be taxed
either:
b. Under Sec. 24 (D)(1) – 6% CGT, or
c. Under Sec. 24 (A), at the option of the
taxpayer.
d. In case of the sale of or disposition of their
principal residence by natural persons
U.P. LAW BOC TAXATION 1
Requirements:
a. Sale or disposition by a natural person of
his principal residence,
b. The proceeds of which is fully utilized in
acquiring/constructing a new principal
residence,
c. Such acquisition/construction taking place
within 18 calendar months from the date of
sale or disposition,
d. The taxpayer notifies the Commissioner
within 30 days from the sale/disposition
through a prescribed return of his intention
to avail of the exemption,
e. The tax exemption can only be availed of
once every 10 years.
Tax treatment of sale of principal residence:
Exempt from capital gains tax (CGT). If there is
no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to
have been realized from the sale or disposition
shall be subject to CGT.
How taxable portion and tax determined:
[HIGHER of Gross selling price or FMV @
sale]
The historical cost or adjusted basis of the real
property sold or disposed shall be carried over
to the new principal residence built or acquired.
Computation for the basis of new principal
residence:
Historical cost of old principal
residence XXX
Add: Additional cost to acquire
new principal residence* XXX
Adjusted cost basis of the new
principal residence XXX
*Additional cost to acquire new
principal residence:
Cost to acquire new principal
residence XXX
Page 87 of 256
TAXATION LAW
Less: Gross selling price of old
principal residence (XXX)
Additional cost to acquire new
principal residence XXX
(c) Income from the sale, exchange,
or other disposition of other
capital assets
Other properties shall be subject to income
tax
a. At the graduated income tax rates, if the
seller is an individual
b. Long-term capital gains: only 50% is
recognized.
c. Short-term capital asset transactions:
100% subject to tax [Sec. 39(B), NIRC].
Determination of whether short- or long-
term: Short-term if held for 12 months or less;
otherwise, it is a long-term capital gain.
At 30% corporate income tax, if the seller is a
corporation.
Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties
held by a taxpayer, whether or not connected
with his trade or business, and which are not
included among the real properties considered
as ordinary assets under Section 39(A)(1).
Ordinary assets shall refer to all real
properties specifically excluded from the
definition of capital assets under Section
39(A)(1), NIRC, namely:
a. Stock in trade of a taxpayer or other real
property of a kind which would properly be
included in the inventory of the taxpayer if
on hand at the close of the taxable year; or
b. Real property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or business; or
c. Real property used in trade or business
(i.e., buildings and/or improvements) of a
character which is subject to the allowance
U.P. LAW BOC TAXATION 1
for depreciation provided for under Sec.
34(F) of the Code; or
d. Real property used in trade or business of
the taxpayer
b. Non-Resident Aliens Engaged in
Trade or Business
General Rule: Subject to income tax in the
same manner as an individual citizen and a
resident alien individual on taxable income
from all sources within the Philippines.
The following shall be subject to an income
tax of 20% on the total amount thereof:
 the entire income and shall be deducted and
a. Cash and/or property dividends from:
b. A domestic corporation;
c. A joint stock company;
d. An insurance or mutual fund company;
e. A regional operating headquarters of
multinational company;
f. The share of a nonresident alien individual
in the distributable net income after tax of
a partnership (except a general
professional partnership) of which he is a
partner;
g. The share of a nonresident alien individual
in the net income after tax of an
association, a joint account, or a joint
venture taxable as a corporation of which
he is a member or a co-venturer;
h. Interests 
 resident aliens.
i. Royalties (in any form); and 

j. Prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which
shall be subject to graduated tax) and
other winnings (except PCSO/lotto
winnings which shall not exceed P10,000)
Except:
The following Royalties shall be subject to
a final tax of ten percent (10%) on the total
amount thereof:
a. On books as well as other literary works;
and
b. On musical compositions
c. Cinematographic films and similar works
shall be subject to twenty-five percent
Page 88 of 256
TAXATION LAW
(25%) of the gross income 

d. Interest income from long-term deposit or
investment in the form of savings,
common or individual trust funds, deposit
substitutes, investment management
accounts and other investments
evidenced by certificates in such form
prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the
tax 

But should the holder of the certificate pre-
terminate the deposit or investment before the
fifth (5th) year, a final tax shall be imposed on
withheld by the depository bank from the
proceeds of the long-term deposit or
investment certificate based on the remaining
maturity thereof:
a. Four (4) years to less than five (5) years -
5%;
b. Three (3) years to less than four (4) years
- 12%; and 

c. Less than three (3) years - 20%. 

Capital gains
Capital gains realized from sale, barter or
exchange of shares of stock in domestic
corporations not traded through the local stock
exchange, and real properties shall be subject
to the similar tax prescribed on citizens and
Sale, barter or exchange of Shares of stock in
domestic corporation not traded – 15% of net
capital gains
Sale, barter or exchange of real properties –
6% of gross selling price or current FMV
whichever is higher
c. Non-Resident Aliens Not Engaged
in Trade or Business [Sec. 25 (B),
NIRC]
There shall be levied, collected, and paid for
each taxable year upon the entire income
received from all sources within the PH by
U.P. LAW BOC TAXATION 1
every NRANETB within the PH 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 equivalent to 25% of such income.
d. Aliens Employed by Regional
Headquarters, Regional Operating
Headquarters, Offshore Banking
Units, and Petroleum Service
Contractors
The preferential tax treatment of 15% shall no
longer be applicable to employees of regional
headquarters (RHQs), regional operating
headquarters (ROHQs), offshore banking units
(OBUs) or petroleum service contractors and
subcontractors. They are now subject to
regular income tax rates [Sec. 25 (F)]. [Note
item A of veto message of the President on
TRAIN Law]
e. Individual Taxpayers exempt from
income tax are:
a. Senior Citizens (with qualifications) 

b. Minimum wage earners
c. Exemptions granted under international
agreements
All individuals and entities claiming exemption
from imposition of taxes on income and,
consequently, from withholding taxes are
required to provide a copy of a valid, current
and subsisting tax exemption certificate or
ruling, as per existing administrative issuances
and any issuance that may be issued from time
to time, before payment of the related income.
The tax exemption certificate or ruling must
explicitly recognize the grant of tax exemption,
as well as the corresponding exemption from
imposition of withholding tax. Failure on the
part of the taxpayer to present the said tax
exemption certificate or ruling as herein
Page 89 of 256
TAXATION LAW
required shall subject him to the payment of
appropriate withholding taxes due on the
transaction. [RMC No. 8-14]
i. Minimum Wage Earners
Rule: they shall be exempt from payment of
income tax on their taxable income.

Limit: However, if he receives “other benefits”
in excess of the allowable statutory amount of
P90,000, then he shall be taxable on the
exceeds benefits as well as his salaries,
wages, and allowances, just like an employee
receiving compensation income beyond the
statutory minimum wage.
The treatment of bonuses and other benefits
that [a minimum wage earner] receives from
the employer in excess of the [₱90,000] ceiling
cannot but be the same as the prevailing
treatment prior to R.A. 9504 - anything in
excess of ₱30,000 is taxable; no more, no less.
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. No.
184450 (2017)]
The minimum wage shall be exempt from the
payment of income tax on their taxable income:
Provided, further, That the holiday pay,
overtime pay, night shift differential pay and
hazard pay received by such minimum wage
earners shall likewise be exempt from income
tax.
Compensation income including overtime pay,
holiday pay and hazard pay, earned by
minimum wage earners who have no other
returnable income are NOT taxable and not
subject to withholding tax on wages [RA 9504].
ii. Exemptions Granted Under
International Agreements
See RMC No, 31-2013, April 12, 2013 –
taxation of compensation income of Philippine
U.P. LAW BOC TAXATION 1 TAXATION LAW

nationals and alien individuals employed by

foreign governments/embassies/diplomatic
missions and international organizations
situated in the Philippines.

The Government of the Philippines is a

signatory of certain international agreements
and a party to different tax treaties which
specifically provide for the exemption of certain
persons or entities from taxes imposed by the
Philippines.

Examples of these tax exemptions are those

accorded to diplomats or ambassadors of other
countries here in the Philippines. The World
Health Organization is also tax exempt upon an
international agreement [CIR v. Gotamco, G.R.
No. L-31092 (1987)

Page 90 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

SUMMARY TABLES OF RATES

Citizens,
Interest, Royalties, Prizes and Other Winnings NRAETB NRANETB
Residents

Interest from any currency bank deposit 20% 20% 25%

Yield or any other monetary benefit from deposit substitute 20% 20% 25%

Yield or any other monetary benefit from trust funds and similar
20% 20% 25%
arrangements

Royalties, in general 20% 20% 25%

Royalties on books as well as other literary works and musical

10% 10% 25%
compositions

Prizes exceeding P10,000 20% 20% 25%

Other winnings (except Philippine Charity Sweepstakes and

20% 20% 25%
Lotto winnings not exceeding P10,000)

15%
Interest incomes received from a depositary bank under Note: NRC –
Exempt Exempt
expanded foreign currency deposit system exempt (RR 1-
11)

Interest income from long-term deposit or investment

evidenced by certificates prescribed by BSP. If preterminated
before fifth year, a final tax shall be imposed based on
remaining maturity Exempt Exempt 25%

4 years to less than 5 years 5% 5% 25%

3 years to less than 4 years 12% 12% 25%

Less than 3 years 20% 20% 25%

Citizens,
Cash and/or Property Dividends NRAETB NRANETB
Residents

Cash and/or property dividends actually or constructively

received from a domestic corp. or from a joint stock corp.,
insurance or mutual fund companies and regional operation 10% 20% 25%
headquarters of multinational companies (beginning Jan. 1,
2000)

Share of an individual in the distributable net income after tax

of a PARTNERSHIP (other than a general professional 10% 20% 25%
partnership) (beginning Jan. 1, 2000)

Share of an individual in the net income after tax of an

ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE
10% 20% 25%
or CONSORTIUM taxable as a corporation, of which he is a
member or a co-venturer (beginning Jan. 1, 2000)

Page 91 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

Sec. 24 (C). Capital Gains Tax from Sale of Shares

Citizens,
of Stock of a domestic corporation NOT TRADED NRAETB NRANETB
Residents
in the Stock Exchange

Tax base: Net Capital Gain 15% 15% 15%

Sec. 24 (D). Capital Gains Tax from Sale of Real Citizens,

NRAETB NRANETB
Property Classified as Capital Asset Residents

Tax base: Gross selling price or current fair market

value, whichever is higher

Tax Rate 6% 6% 6%

Resident Non-Resident

Citizen Alien Citizen NRAETB NRANETB

Category of income
Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines

Based on Taxable (i.e. Net) Income

Schedular Income Tax Rates (i.e. 0% to 35% (Sec. 24) (See table
below)
Compensation/ Business/
Profession
For those earning purely business or professional income or mixed
income not exceeding the threshold gross sales/receipts for the year
Prizes of P10,000 or less
of P3,000,000, the taxpayer can opt to avail of the 8% tax on gross
sales/receipts in lieu of graduated income tax rates and percentage
tax – for the business/professional income portion – upon the option
of the taxpayer

Interest from any currency bank

deposit, etc.
Gross Income Within the Philippines (GIW) – 20% Final Withholding
Royalties, in general
Tax
GIW – 25%
Winnings/ Prizes (except prizes
P10,000 and below)

Royalties from books, literary

GIW – 10% Final Withholding Tax
works, musical compositions

Interest from long-term deposit or
investment certificates, which have
a maturity of 5 years or more
EXEMPT; However:
In case of pre-termination, with remaining maturity of:
4 years to less than 5 years -5% on entire income
3 years to less than 4 years – 12% on entire income
less than 3 years – 20% on entire income

Cash/ Property Dividends from a

domestic corporation, etc., OR share
in the distributed net income after tax GIW – 10% Final Withholding Tax GIW – 20%
of a partnership (except a general
professional partnership), etc.

Page 92 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

Interest (Expanding Foreign

GIW – 15% Final Withholding Tax Exempt
Currency Deposit System)

Prizes Subject to schedular rates if not exceeding P10,000

Winnings on Philippine
Exempt if P10,000 and below
Sweepstakes/ Lotto

Capital Gains on Sale of

Shares of Domestic Corp Net capital gains: 15% Final Tax
(not traded in a domestic
stock exchange

Capital Gains on Sale of

Real Property in the Gross Selling Price or FMV, whichever is higher – 6% Final Withholding Tax
Philippines

Sale of Shares of Domestic 0.6 of 1% of the Selling Price (Stock Transaction Tax)
Corp. (traded in a domestic
stock exchange) Note: Stock Transaction Tax is not an income tax, but a business (percentage) tax

Sale of Real Property

located Abroad
Schedular/Graduated Income Tax Rates (i.e. 0% to 35%) (Sec. 24)
For those earning purely business or professional income or mixed income, the
Sale of Shares of Foreign
taxpayer can opt to avail of the 8% tax on gross sales/receipts in lieu of graduated
Corp.
rates – for the business/professional income portion – upon the option of the taxpayer
Passive Income from Abroad

SCHEDULE OF INCOME TAX RATES FOR INDIVIDUAL CITIZENS, RESIDENTS, AND NRAETB

RANGE OF TAXABLE INCOME TAX DUE (a+b)

Basic Amount (a) Additional Rate (b)

0 to 250,000 - -

Over 250,000 but not more than 400,000 - 20% of excess over 250,000

Over 400,000 but not more than 800,000 30,000 25% of excess over 400,000

Over 800,000 but not over 2,000,000 130,000 30% of excess over 800,000

32% of excess over

Over 2,000,000 but not over 8,000,000 490,000
2,000,000

35% of excess over

Over 8,000,000 2,410,000
8,000,000

Page 93 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

Computations [RR 08-2018] Pure Compensation Income

Illustration: Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00 which consists
of the overtime pay — P80,000.00, night shift differential — P30,000.00, hazard pay — P15,000.00,
and holiday pay — P15,000.00. He has P5,000 mandatory contributions (SSS, Pag-Ibig, Phil-health,
etc.) and P11,000 non-taxable benefits.

Total Compensation Income P135,000.00

Add: Overtime, night shift differential, hazard, and holiday pay 140,000.00

–––––––––––

Total Income P275,000.00

Less: Mandatory contributions P5,000.00

Non-taxable benefits 11,000.00 16,000.00

––––––––––– –––––––––––

Net taxable income P259,000.00

Tax due (20% in excess of P250,000) 1,800

Mixed-income (i.e. compensation income and business income/income from the practice of
profession – opted to avail of 8% tax on business/professional income)

Illustration: Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation in 2018
of P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a
convenience store, with gross sales of P2,400,000. His cost of sales and operating expenses are
P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00.

a. His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent
(8%) income tax rate on his gross sales for his income from business:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00
––––––––––––
Taxable Compensation Income P1,410,000.00

Tax due:
1. On Compensation:
On P800,000.00 P130,000.00
On excess (P1,410,000 - P800,000) x 30% 183,000.00
––––––––––––
Tax due on Compensation Income P313,000.00
––––––––––––
2. On Business Income:
Gross Sales P2,400,000.00
Add: Non-operating Income 100,000.00

Page 94 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

––––––––––––
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
––––––––––––
Tax Due on Business Income P200,000.00
––––––––––––
Total Income Tax Due (Compensation and Business) P513,000.00

* The option of 8% income tax rate is

applicable only to taxpayer's income from
business, and the same is in lieu of
the income tax under the
graduated income tax rates and the
percentage tax under Section 116 of
the Tax Code, as amended.
* The amount of P250,000.00 allowed as
deduction under the law for taxpayers
earning solely from self-
employment/practice of profession, is not
applicable for mixed income earner under
the 8% income tax rate option.
* The P250,000.00 mentioned above is
already incorporated in the first tier of the
graduated income tax rates applicable to
compensation income.
|||
Mixed-income (i.e. compensation income and business income/income from the practice of
profession)

Illustration: Same facts for Mr. MAG. His tax due for 2018 shall be computed as follows if he did not
opt for the eight percent (8%) income tax based on gross sales/receipts and other non-operating
income:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00
––––––––––––
Taxable Compensation Income P1,410,000.00
Add: Taxable Income from Business —
Gross Sales P2,400,000.00
Less: Cost of Sales 1,000,000.00
–––––––––––
Gross Income P1,400,000.00
Less: Operating Expenses 600,000.00
–––––––––––
Net Income from Operation P800,000.00
Add: Non-operating Income 100,000.00 900,000.00
––––––––––– ––––––––––––
Total Taxable Income P2,310,000.00

Tax Due:
On P2,000,000.00 P490,000.00

Page 95 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

On excess (P2,310,000 - 2,000,000) x 32% 99,200.00

––––––––––––
Total Income Tax P589,200.00

* The taxable income from both compensation and business shall be combined for purposes of
computing the income tax due if the taxpayer chose to be subject under the
graduated income tax rates.

Pure Business/Professional Income (Opted to be taxed at 8% of gross sales or receipts)

Illustration: Ms. EBQ operates a convenience store while she offers bookkeeping services to her
clients. In 2018, her gross sales amounted to P800,000.00, in addition to her receipts from
bookkeeping services of P300,000.00. She already signified her intention to be taxed at 8% income
tax rate in her 1st quarter return.
Her income tax liability for the year will be computed as follows:

Gross Sales — Convenience Store P800,000.00

Gross Receipts — Bookkeeping 300,000.00
––––––––––––
Total Sales/Receipts P1,100,000.00
Less: Amount allowed as deduction under Sec. 24 (A) (2) (b) 250,000.00
––––––––––––
Taxable Income P850,000.00

Tax Due:
8% of P850,000.00 P68,000.00

* The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00.
* Taxpayer's source of income is purely from self-employment, thus she is entitled to the amount
allowed as deduction of P250,000.00 under Sec. 24 (A) (2) (b) of the Tax Code, as amended.

* Income tax imposed herein is based on the total of gross sales and gross receipts.
* Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and
percentage tax due, by express provision of law.

Pure Business/Professional Income (Opted to be taxed at schedular rates)

Illustration: Ms. EBQ above, failed to signify her intention to be taxed at 8% income tax rate on gross
sales in her initial Quarterly Income Tax Return, and she incurred cost of sales and operating expenses
amounting to P600,000.00 and P200,000.00, respectively, or a total of P800,000.00, the income tax
shall be computed as follows:

Gross Sales/Receipts P1,100,000.00

Less: Cost of Sales 600,000.00
––––––––––––
Gross Income P500,000.00
Less: Operating Expenses 200,000.00
––––––––––––
Taxable Income P300,000.00

Tax Due:
On excess (P300,000 - P250,000) x 20% P10,000.00

Page 96 of 256
U.P. LAW BOC TAXATION 1
6. Income Tax on Corporations
a. Domestic Corporations and
Resident Foreign Corporations
Domestic Corporations
A corporation created and organized in the
Philippines or under its laws (the law of
incorporation test) [Sec. 22 (C), NIRC].
Taxable on all income derived from sources
within and without the Philippines; and
Resident Foreign Corporations
A corporation organized under the laws of a
foreign country, which is engaged in trade or
business in the Philippines. [See “Doing
Business” definition under the FIA above]
Taxable only on income derived from sources
within the Philippines.
A Philippine branch of a foreign corporation
duly licensed by the SEC is considered a
resident foreign corporation. Thus, only the
income of the Philippine branch from sources
within the Philippines is subject to Philippine
income tax.
As general rule, the head office of a foreign
corporation is the same juridical entity as its
branch in the Philippines following the single
entity concept. Thus, the income from sources
within the Philippines of the foreign head office
shall thus be taxable to the Philippine branch.
But, when the head office of a foreign
corporation independently and directly
invested in a domestic corporation without the
funds passing through its Philippine branch,
the taxpayer, with respect to the tax on
dividend income, would be the non-resident
foreign corporation itself and the dividend
income shall be subject to the tax similarly
imposed on non- resident foreign corporations.
[Marubeni v. Commissioner, G.R. No. 76573
(1989)]
Page 97 of 256
TAXATION LAW
i. Taxation in General
(a) Regular Corporate Income Tax
(RCIT)
Default income tax. Except as otherwise
provided, income tax of 30% is imposed on
taxable income.
Applies equally to both: (a) Domestic
corporations (on income from within and
without the Philippines) and (b) Resident
Foreign Corporations (on income from within
the Philippines)
Normal/Regular Corporate Income Tax Rate:
30% of Taxable Income
Gross Income xxx
Less: Allowable Deductions xxx
Taxable Income xxx
(b) Optional gross income tax (GIT)
Section 27 (A) provides for an optional gross
income tax of 15% based on gross income.
(c) Minimum Corporate Income Tax
(MCIT)
a. Applies to domestic corporations and
RFCs whenever such corporations
b. have zero or negative taxable income, or
whenever the
c. MCIT is greater than the normal income
tax due.
d. Imposed beginning the fourth taxable year
from the taxable year the corporation
commenced its business operations. For
purposes of MCIT, the taxable year in
which business operations commenced
shall be the year when the corporation
registers with the BIR (not in which the
corporation started commercial
operations).
e. Tax rate: 2% of Gross Income
U.P. LAW BOC TAXATION 1 TAXATION LAW

Gross Income
Gross Sales xxx
Less: Sales Returns xxx
Sales Discounts xxx
Allowances xxx
Cost of Goods Sold xxx xxx
Gross Income xxx
If apart from deriving income from core
business activities there are other items of
gross income realized or earned by the
taxpayer which are subject to the normal
corporate income tax, they must be included as
part of gross income for computing MCIT. [Sec.
27 (E), NIRC; RR 12-07]
This means that the term “gross income” will
also include all items of gross income
enumerated under Section 32(A), except: (a)
income exempt from income tax, and (b)
income subjected to FWT.
Cost of goods sold
In general – includes all business expenses
directly incurred to produce the merchandise to
bring them to their present location and use.
Trading or merchandising – includes invoice
cost of the goods sold, plus import duties,
freight in transporting the goods to the place
where the goods are actually sold including
insurance while the goods are in transit.
Direct cost of services all direct costs and
expenses necessarily incurred to provide the
services required by the customers and clients
including (i) salaries and employee benefits of
personnel, consultants and specialists directly
rendering the service and (ii) cost of facilities
directly utilized in providing the service such as
depreciation or rental of equipment used and
cost of supplies. In the case of banks, it
includes interest expense.
MCIT is in the nature of a tax credit, not an
allowable deduction.
It addresses the previously rampant practice of
some corporations not declaring their actual
income or bloating their expenses.
There is no MCIT on the first three taxable
years as incentive to do business.
What amount of income tax is paid by the
corporation to the BIR?

Whichever is higher between the normal tax
and the minimum corporate income tax.
Coverage
The MCIT covers domestic and resident
foreign corporations which are subject to the
regular income tax. Corporations subject to a
special corporate tax system do not fall within
the coverage of the MCIT.

Manufacturing – include all costs of These special corporations include Proprietary

production of finished goods, such as raw educational institutions, nonprofit hospitals,
materials used, direct labor and manufacturing OBUs, FCDUs, ROHQs, firms registered in
overhead, freight cost, insurance premiums PEZA/BCDA/other ecozones, International
and other costs incurred to bring the raw Carriers .
materials to the factory or warehouse.
For corporations whose operations or activities
Gross Receipts xxx are partly covered by regular income tax and
Less: Sales Returns xxx special income tax system, MCIT shall apply
Sales Discounts xxx on operations covered by the regular corporate
income tax system.
Allowances xxx
Cost of Services xxx xxx
Gross Income xxx

Page 98 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW

Illustration:
E Co., a domestic trading corporation, in its fourth year of operations had a gross income from sales
of P300,000 and net taxable income of P100,000. How much was the income tax paid by the
corporation for the year?

MCIT (P300,000 x 2%) P6,000

Normal Income Tax (P100,000 x 30%) P30,000
Income Tax to be paid for the year (whichever is higher) P30,000

Carry forward of excess minimum tax

Any excess of the minimum corporate income tax over the normal income tax shall be carried forward
on an annual basis. The excess can be credited against the normal income tax in the next three (3)
succeeding taxable years only [Sec. 27(E)(2), NIRC]. In the year to which it was carried forward, the
normal tax should be higher than the MCIT.

Sample Computation of MCIT Carry Forward:

A domestic corporation had the following data on computations of the normal tax (NT) and the
minimum corporate income tax (MCIT) for five years.

Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K

The excess MCIT over NT carried-forward as follows:

Year 4 Year 5 Year 6 Year 7 Year 8

MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000

Excess MCIT over 60,000(a) 20,000(b) n/a 20,000(c) n/a

NT
(MCIT – NT)

Income Tax to be 80,000 50,000 40,000 40,000 70,000

paid
(Higher of MCIT or
NT)
Less: MCIT carry n/a n/a (40,000) (a) n/a (20,000) (a)
forward
(20,000) (b)
Tax Due 80,000 50,000 0 40,000 30,000

(a) 60k excess MCIT from year 4 is credited against the normal tax to be paid in year 6 and 8.
(b) 20k excess MCIT from year 5 is credited against the normal tax to be paid in year 8.
(c) 20k excess MCIT from year 7 will be credited against future normal tax to be paid.

Page 99 of 256
U.P. LAW BOC TAXATION 1
Relief from MCIT [Sec. 27 (E)(3), NIRC]
The Secretary of Finance may suspend
imposition of MCIT on any corporation which
sustained substantial losses on account of
(LMB):
a. Prolonged labor dispute (losses from a
strike staged by employees that lasts for
more than 6 months and caused the
temporary shutdown of operations), or
b. Force majeure (acts of God and other
calamity; includes armed conflicts like war
or insurgency), or
c. Legitimate business reverses (substantial
losses due to fire, robbery, theft or other
economic reasons).
Quarterly MCIT Computation
The computation and the payment of MCIT
shall likewise apply at the time of filing the
quarterly corporate income tax. In the
computation of the tax due for the taxable
quarter, if the quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be
paid for such taxable quarter at the time of filing
the quarterly corporate income tax return shall
be the MCIT.
Items allowed to be credited against quarterly
MCIT due: (a) CWT, (b) Quarterly income tax
payments under the normal income tax; and (c)
MCIT paid in the previous taxable quarter(s).
Excess MCIT from the previous taxable year/s
shall not be allowed to be credited against the
quarterly MCIT tax due.
Annual Income Tax Computation.
The final comparison between the normal
income tax payable and the MCIT shall be
made at the end of the taxable year. The
payable or excess payment in the Annual
Income Tax Return shall be computed taking
into consideration corporate income tax
payment made at the time of filing of quarterly
corporate income tax returns whether this be
MCIT or normal income tax.
In the computation of annual income tax due, if
Page 100 of 256
TAXATION LAW
the normal income tax due is higher than the
computed annual MCIT, the following shall be
allowed to be credited against the annual
income tax: (a) quarterly MCIT payments, (b)
quarterly normal income tax payments, (c)
excess MCIT in the prior year/s (subject to the
prescriptive period allowed for its creditability),
(d) CWTs in the current year, (d) excess CWTs
in the prior year.
If in the computation of annual income tax due,
the computed annual MCIT due is higher than
the annual normal income tax due, the
following may be credited against the annual
income tax: (a) quarterly MCIT payments of
current taxable quarter, (b) quarterly normal
income tax payments in current year, (c) CWTs
in the current year, (d) excess CWTs in the
prior year.
Excess MCIT from the previous taxable year/s
shall not be allowed to be credited against the
annual MCIT due as the same can only be
applied against normal income tax.
Manner of Filing and Payment.
The MCIT shall be paid in the same manner
prescribed for the payment of the normal
corporate income tax which is on a quarterly
and on a yearly basis.
(d) Taxation of Passive Income
Interest from deposits and yield or any other
monetary benefit from deposit substitutes and
from trust funds and similar arrangements and
royalties
a. 20% final tax on:
b. interest on any currency bank deposit,
c. yield or any other monetary benefit from
deposit substitutes, trust funds and similar
arrangements, and
d. Royalties
e. same for Domestic Corporations and
Resident Foreign Corporations
f. Collected as Final Withholding Tax [Sec.
57, NIRC]
U.P. LAW BOC TAXATION 1
Interest Income derived by a domestic
corporation from depository bank under the
expanded foreign currency deposit system
[Section 27 (D)(1), NIRC]
a. 15% final income tax
b. same for Domestic Corporations and
Resident Foreign Corporations
c. Collected as Final Withholding Tax [Sec.
57, NIRC]
Inter-corporate dividends
a. Dividends received from a domestic
corporation by another domestic
corporation or resident foreign corporation
- Exempt
b. Dividends received from a domestic
corporation by a non-resident foreign
corporation (NRFC): 30% of the amount of
cash and/or property dividend; provided
that it may be reduced to 15% of the
amount of cash and/or property dividend,
if the country in which the NRFC is
domiciled shall allow a credit against the
tax due from the NRFC deemed to have
been paid in the Philippines equivalent to
15%, which represents the difference
between the regular income tax of 30%
and the 15% tax sparing rate.
Stock dividends are exempt if there is no
change in proportionate interest.
Taxation of Capital Gains
Capital gain from sale of shares of stock not
traded in the stock exchange
 Rule: In addition to other income taxes, there
Final tax on net capital gains realized by a
domestic corporation during the taxable year
from the sale, barter, exchange or other
disposition of shares of stock in a domestic
corporation not listed and traded through a
local stock exchange: 15% of net capital gains
[Sec. 27 (D)(2), NIRC].
Final tax on net capital gains realized by
Resident Foreign Corporations and
Nonresident Foreign Corporations during the
Page 101 of 256
TAXATION LAW
taxable year from the sale, barter, exchange or
other disposition of shares of stock in a
domestic corporation not listed and traded
through a local stock exchange:
Capital gains realized from the sale,
exchange, or disposition of lands and/or
buildings
a. On the sale, exchange or disposition of
lands and/or buildings which are not
actually used in the business of a
corporation and are treated as capital
assets
b. On the gross selling price, or the current
fair market value at the time of the sale,
whichever is higher, a final tax of 6%;
c. If it is a Resident Foreign Corporation., it is
subject to the regular corporate income tax
rate of 30%
d. The capital gains tax is applied on the
gross selling price, or the current fair
market value at the time of the sale,
whichever is higher. Any gain or loss on
the sale is immaterial because there is a
conclusive presumption by law that the
sale resulted in a gain.
e. Applicable to domestic corporations only.
f. Tax treatment is similar to that of
individuals.
(e) Improperly Accumulated
Earnings Tax
[Sec. 29, NIRC, as implemented by RR 2-2001]
is imposed for each taxable year a tax equal to
10% of the improperly accumulated taxable
income.
Applies to every corporation formed or availed
for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders
of any other corporation, by permitting earnings
and profits to accumulate instead of being
divided or distributed.
U.P. LAW BOC TAXATION 1 TAXATION LAW

Rationale: It is a tax in the nature of a penalty Less: Amount that may be

to the corporation for the improper retained (100% of Paid-Up xx
accumulation of its earnings, and a deterrent to Capital) xx
the avoidance of tax upon shareholders who xx
are supposed to pay dividends tax on the IAE xx
earnings distributed to them. 10
Multiply by: IAET Rate %
Effect of imposition of IAET xx
Once the profit has been subjected to IAET, the IAET xx
same shall no longer be subjected to IAET in
later years even if not declared as dividend.
The use of undistributed earnings and profits
Profits which have been subjected to IAET, for the reasonable needs of the business would
when finally declared as dividends, shall generally not make the accumulated or
nevertheless be subject to tax on dividends. undistributed earnings subject to IAET.

In applying the above rules, dividends shall be Immediacy Test: The term "reasonable needs
deemed to have been paid out of the most of the business" means (1) the immediate
recently accumulated profits (LIFO: last in, first needs of the business, including (2) reasonably
out). anticipated needs.

Sample computation (RMC No. 35-2011) The corporation should be able to prove (1) an
xx immediate need for the accumulation of the
Taxable Income for the Year xx earnings and profits, or (2) the direct
Add: correlation of anticipated needs to such
xx accumulation of profits.
(a) Income subjected to Final Tax xx
xx Accumulation for Reasonable needs under
(b) NOLCO xx RR 2-2001
xx Accumulation of earnings up to 100% of paid-
(c) Income exempt from tax xx up capital;
(d) Income excluded from gross xx xx
income xx xx Definite corporate expansion projects requiring
xx considerable capital expenditure (approved by
xx Board of Directors or equivalent body);
Less:
xx Building, Plant or Equipment Acquisition
Income Tax paid xx (approved by Board of Directors or equivalent
xx xx body)
Dividends declared/paid xx xx a. compliance with any Loan Covenant or
xx pre-existing obligation (established under
Total xx a legitimate business agreement);
Add: Retained Earnings from xx b. required by Law or applicable regulations
prior years xx to be retained;
Accumulated Earnings as of end xx c. in case of subsidiaries of foreign
of current year xx corporations in the Philippines,
undistributed earnings reserved for
Investments within the Philippines

Page 102 of 256

U.P. LAW BOC TAXATION 1
Coverage:
a. IAET applies to: domestic corporations
classified as closely- held corporations.
b. IAET does not apply to:
c. Banks and other non-bank financial
intermediaries;
d. Insurance companies;
e. Publicly-held corporations;
f. Taxable partnerships;
g. General professional partnerships;
h. Non- taxable joint ventures; and
i. Enterprises registered with PEZA (RA
7916), BCDA (RA 7227), and other special
economic zones declared by law which
enjoy a special tax rate in lieu of other
taxes.
Closely-held corporations are those:
a. at least 50% in value of the outstanding
capital stock; or
b. at least 50% of the total combined voting
power of all classes of stock entitled to
vote
c. is owned directly or indirectly by or for not
more than 20 individuals. Domestic
corporations not falling under the
aforesaid definition are, therefore,
publicly- held corporations.
N.B. the same definition and rules as in Tax on
IPO in Sec. 127 (B); not the same as close
corporation under the Revised Corporation
Code]
BIR Ruling 025-02
The ownership of a domestic corporation for
purposes of determining whether it is a closely
held corporation or a publicly held corporation
is ultimately traced to the individual
shareholders of the parent company.
Where at least 50% of the outstanding capital
stock or at least 50% of the total combined
voting power of all classes of stock entitled to
vote in a corporation is owned directly or
indirectly by at least 21 or more individuals, the
corporation is considered as a publicly-held
corporation, thus, exempt from IAET.
Page 103 of 256
TAXATION LAW
Determination of Purpose to Avoid Income
Tax
Being a holding or investment company is
prima facie evidence of purpose to avoid
dividend tax. Holding or investment company –
corporation having practically no activities
except holding property, and collecting the
income therefrom or investing the same;
Accumulation in excess of reasonable needs is
determinative of the purpose to avoid dividend
tax. Prima facie instances of this include: (i)
investment of substantial earnings and profits
in unrelated business or in stock or securities
of unrelated business; (ii) investment in
bonds and other long-term securities; (iii)
accumulation of earnings in excess of 100% of
paid-up capital
The controlling intention of the taxpayer is that
which is manifested at the time of
accumulation, not subsequently declared
intentions which are merely the product of
afterthought.
A speculative and indefinite purpose will not
suffice. Definiteness of plan/s coupled with
action/s taken towards its consummation are
essential.
Branch Profit Remittance Tax (BPRT)
Coverage
a. Applies to non-resident foreign
corporations. Imposed on profits remitted
by the Philippine branch to the head office.
b. Collected as Final Withholding Tax [Sec.
57, NIRC]
Taxable transaction – any profit remitted by a
branch to its head office
Tax Rate and Base – 15% final tax based on
the total profits applied or earmarked for
remittance without any deduction for the tax
component (except those activities registered
with PEZA).
U.P. LAW BOC TAXATION 1
The following are not treated as branch profits
unless effectively connected with the conduct
of trade or business in the Philippines:
a. Interests, dividends, rents, royalties
(including remuneration for technical
services),
b. salaries, wages,
c. premiums, annuities, emoluments, or
d. other fixed or determinable annual,
periodic or casual gains, profits, income
and capital gains received during each
taxable year from all sources within the
Philippines
Income Tax on Special Domestic
Corporations
ii. Proprietary Educational Institutions
and Non-profit Hospitals [Sec. 27(B),
NIRC]
Tax Rate and Base –10% tax on taxable
income (except on income subject to capital
gains tax and passive income subject to final
tax) within and without the Philippines
Caveat: If gross income from unrelated trade or
business or other activity exceeds 50% of total
gross income derived from all sources, the tax
rate of 30% shall be imposed on the entire
taxable income.
Unrelated trade, business or other activity –
any trade, business or other activity, the
conduct of which is not substantially related to
the exercise or performance by such
educational institution or hospital of its primary
purpose or function.
Proprietary educational institution – any private
school maintained and administered by private
individuals or groups with an issued permit to
operate from DepEd, CHED or TESDA [Sec.
27 (B), NIRC].
Page 104 of 256
TAXATION LAW
iii. Government-owned or Controlled
Corporations, Agencies,
Instrumentalities [Sec. 27(C), NIRC]
GOCCs
General rule: GOCCs are taxable as any other
corporation engaged in similar business,
industry or activity
Exceptions:
a. Government Service Insurance System
(GSIS)
b. Social Security System (SSS)
c. Philippine Health Insurance Corporation
(PHIC)
d. Local water districts (LWDs) [Sec. 27 (C),
NIRC]
Government agencies or instrumentalities
General rule: The government is exempt from
tax.
Exception: When it chooses to tax itself.
Nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the
government performing governmental
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. [Mactan Cebu Airport v Marcos
(1996)]
iv. Foreign Currency Deposit Units
[Sec. 27(D)(3), NIRC]
Income derived by a depository bank under the
expanded foreign currency deposit system
from:
Foreign currency transactions with
nonresidents, offshore banking units in the
Philippines, local commercial banks, including
branches of foreign banks authorized by the
BSP to transact business with foreign currency
depository system units and other depository
banks under the EFCDS – exempt from income
tax
U.P. LAW BOC TAXATION 1
Except net income from transactions specified
by the Secretary of Finance upon
recommendation by the Monetary Board –
subject to regular income tax payable by banks
Foreign currency loans granted to residents
(other than offshore banking units in the
Philippines) – interest income subject to a final
tax of 10%
Income of nonresidents, individuals or
corporations, from transactions with depository
banks under the EFCDS – exempt from income
tax
Same for Domestic and Resident Foreign
Corporations.
Similar treatment to OBUs.
v. Resident Foreign Corporations
Subject to Preferential Tax Rates
(a) International Carriers
Tax Rate and Base – 2.5% on Gross Philippine
Billings (GPB)
International Air Carriers, GPB means:
a. gross revenue derived from
b. carriage of persons, excess baggage,
cargo and mail
c. originating from the Philippines in a
continuous and uninterrupted flight,
d. irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document
e. tickets revalidated, exchanged and/or
indorsed to another international airline –
part of GPB if passenger boards a plane in
a port or point in the PH
f. flights which originate from the PH, but
transshipment of passenger takes place at
a port outside PH on another airline – part
of GPB only the aliquot portion of the cost
of the ticket corresponding to the leg flown
from the PH to transshipment point [RR
15-02]
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TAXATION LAW
Air Canada vs. CIR (CTA Case No. 6572):
A foreign airline company selling tickets in the
Philippines through their local agents shall be
considered as a resident foreign corporation
engaged in trade or business in the country.
The absence of flight operations within the
Philippine territory cannot alter the fact that the
income received was derived from activities
within the Philippines.
The test of taxability is the source, and the
source is that activity which produced the
income.
International Shipping, GPB means:

Gross revenue for (a) passenger, cargo or mail
(b) originating from the Philippines up to final
destination, (c) regardless the place of sale or
payments of the passage or freight documents.
(b) Foreign Currency Deposit Units
and Offshore Banking Units
FOREIGN CURRENCY DEPOSIT UNITS
[Sec. 28(A)(7)]
Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes,
Trust Funds and Similar Arrangements and
Royalties [Sec. 28(B)(7)(a), NIRC]
Derived from sources within the Philippines -
Final income tax at tax rate of 20% of interest
income
Interest income derived by RFC from a
depository bank under the expanded foreign
currency deposit system - 7.5% of interest
income
Income derived by a depository bank under
the expanded foreign currency deposit
system [Sec. 28(B)(7)(b), NIRC]
Note: The provision discussing income derived
by a resident foreign corporation under the
expanded foreign currency deposit system
cites the same rule as that derived by a
domestic corporation [Sec. 27(D)(3), NIRC].
U.P. LAW BOC TAXATION 1 TAXATION LAW

See discussion above. business planning and coordination; (iii)

sourcing and procurement of raw
Offshore Banking Units [Sec. 28(A)(4), materials and components; (iv) corporate
NIRC] finance advisory services; (v) marketing
Income derived by OBUs authorized by the control and sales promotion; (vi) training
BSP from: and personnel management; (vii) logistic
a. foreign currency transactions with services; (viii) research and development
nonresidents, other OBUs, local services and product development; (ix)
commercial banks, including branches of technical support and maintenance; (x)
foreign banks authorized by the BSP to data processing and communications; and
transact business with OBUs – exempt (xi) business development. [Sec. 22 (EE),
from income tax NIRC]
b. except net income from transactions b. tax of 10% of their taxable income.
specified by the Secretary of Finance upon
recommendation by the Monetary Board –
subject to regular income tax payable by
banks
c. foreign currency loans granted to
residents (other than offshore banking
units in the Philippines)– interest income
subject to a final tax of 10%
d. income of nonresidents, individuals or
corporations, from transactions with OBUs
– exempt from income tax
e. similar treatment to FCDUs

(c) Regional or Area Headquarters

and Regional Operating
Headquarters [Sec. 28(A)(6),
NIRC]

Regional or area headquarters

a. branch established in the Philippines by
multinational companies and which
headquarters do not earn or derive income
from the Philippines and which act as
supervisory, communications and
coordinating center for their affiliates,
subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets
[Sec. 22 (DD)]
b. not subject to income tax

Regional operating headquarters

a. branch established in the Philippines by
multinational companies which are
engaged in any of the following services:
(i) general administration and planning; (ii)

Page 106 of 256

U.P. LAW BOC TAXATION 1 TAXATION LAW

Summary of Tax Bases and Rates of Special Corporations

Type of Corporation Tax Base Tax Rate
Domestic Corporation
Proprietary Educational Institutions and Hospitals
Taxable income from all sources 10%
(Non-profit)
Depository Banks (Foreign Currency Deposit
Units) Exempt (except that net income
With respect to income derived under the from such transactions is subject
expanded foreign currency deposit system from to the regular income tax payable
certain foreign currency transactions by banks)
With respect to interest income from foreign
currency loans to residents other than offshore
banking units in the Philippines or other
depository banks under the expanded system Amount of interest income 10%
Resident Foreign Corporation
International Carriers Gross Philippines Billings 2.5%
Offshore Banking Units Exempt (except that net income
With respect to income derived by offshore from such transactions is subject
banking units from certain foreign currency to the regular income tax payable
transactions by banks)
With respect to interest income derived from
foreign currency loans granted to residents other
than offshore banking units or local commercial
banks Amount of interest income 10%
Resident Depository Banks (Foreign Currency
Deposit Units) Exempt (except that net income
With respect to income derived under the from such transactions is subject
expanded foreign currency deposit system from to the regular income tax payable
certain foreign currency transactions by banks)
With respect to interest income from foreign
currency loans to residents other than offshore
banking units in the Philippines or other
depository banks under the expanded system Amount of interest income 10%
Regional Operation Headquarters of Multinational Taxable income from within the
10%
Companies Philippines
Non-Resident Foreign Corporation
Non-resident cinematographic film owners, Gross income from the
25%
lessors or distributors Philippines
Non-resident owner or lessor of vessels charted Gross rentals, lease and charter
4.5%
by Philippines nationals fees from the Philippines
Non-resident owner or lessor of aircraft, Gross rentals, lease and charter
7.5%
machineries or other equipment fees from the Philippines

Page 107 of 256

U.P. LAW BOC TAXATION 1
b. Non-resident Foreign
Corporations (NRFC) [Sec. 28(B),
NIRC]
i. Taxation of NRFC in general
A corporation organized under the laws of a
foreign country, which is not engaged in trade
or business in the Philippines. [See “Doing
Business” definition under the FIA in B.7.2.
Corporations]
Taxable only on income derived from sources
within the Philippines.
Income taxes on nonresident foreign
corporations are collected as Final Withholding
Tax under Sec. 57, NIRC.
General rule
The tax is 30% of gross income received during
each taxable year from all sources within the
Philippines
This includes: interests, dividends, rents,
royalties, salaries, premiums (except
reinsurance premiums), annuities,
emoluments or other fixed or determinable
annual, periodic or casual gains, profits and
income, and capital gains (except capital gains
on the sale of shares not traded in the stock
exchange)
ii. NRFCs subject to preferential tax
rates
Non-resident cinematographic film owner,
lessor or distributor – 25% of gross income
from all sources within the Philippines
Non-resident owner or lessor of vessels
chartered by Philippine nationals – 4.5% of
gross rentals, lease or charter fees from leases
or charters to Filipino citizens or corporations,
as approved by the Maritime Authority
Non-resident owner or lessor of aircraft,
machineries and other equipment – 7.5% of
Page 108 of 256
TAXATION LAW
gross rentals, charters or other fees
TAX ON CERTAIN INCOME RECEIVED BY
NRFC
Tax on Interest on foreign loans: contracted on
or after August 1, 1986 – 20% [Sec. 28
(B)(5)(a), NIRC]
Tax on Inter-corporate dividends
Inter-corporate Dividend – 15% on dividends
received from domestic corporations, if the
country in which the nonresident foreign
corporation is domiciled allows a tax credit of at
least 15% for taxes “deemed paid” in the
Philippines
15% foreign tax credit represents the
difference between the regular income tax of
30% on corporations and the 15% tax on
dividends (“tax sparing credit”)
If the country within which the NRFC is
domiciled does NOT allow a tax credit, the tax
is 30% on dividends received from a domestic
corporation.
Tax on Capital gain from sale of shares of
stock not traded in the stock exchange

Final tax on net capital gains realized during
the taxable year from the sale, barter,
exchange or other disposition of shares of
stock in a domestic corporation not listed and
traded through a local stock exchange:
First P100k – 5%
Amount in excess of P100k – 10%
c. Corporations Exempt from Income
Tax
Tax exempt corporations [Sec. 30, NIRC]
a. Labor, agricultural or horticultural
organization – non-profit
b. mutual savings bank or cooperative bank
– non-stock, non-profit, operated for
mutual purposes
c. Beneficiary society, order, or association –
U.P. LAW BOC TAXATION 1
operating for the exclusive benefits of their
members; includes: fraternal organization
operating under the lodge system; or
mutual aid association or a nonstock
corporation organized by employees
providing life, sickness, accident, or other
benefits exclusively to the members
d. Cemetery company – owned and
operated exclusively for the benefit of its
members
e. Non-stock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes or for the rehabilitation of
veterans, provided that no part of its
income or asset belong to or inure to the
benefit of any individual
f. Business league, chamber of commerce,
or board of trade – Non-profit; no part of
net income inures to the benefit of an
individual
g. Civic league or organization – Non-profit;
operating exclusively for the promotion of
social welfare
h. Non-stock and non-profit educational
institutions
i. Government educational institutions
j. Organizations of a purely local character
whose income consists solely of
assessment, duties and fees collected
from their members to meet expenses;
includes: farmers’ or other mutual typhoon
or fire insurance company, mutual ditch or
irrigation company and mutual or
cooperative telephone company
k. Farmers’, fruit growers’, and like
association – whose primary function is to
market the product of their members
Notwithstanding the provisions in the
preceding paragraphs, the income of the
foregoing organizations from (1) their
properties, real or personal, or from (2) their
activities conducted for profit regardless of the
disposition made of such income, shall be
subject to tax imposed under the NIRC.
N.B. This means capital gains tax, tax on
Page 109 of 256
TAXATION LAW
passive income, etc. applies to these otherwise
exempt organizations.
Tax on Other Entities: General Partnerships,
General Professional Partnerships, Co-
ownerships, Joint Ventures, and Consortia
General Partnerships
Partnerships where all or part of their income is
derived from the conduct of trade or business;
it is treated as a corporation [Sec. 22 (B),
NIRC].
General rule: The partnership is subject to the
same rules and rates as corporations.
Exceptions: A partner’s share in the
partnership’s distributable net income is
deemed actually or constructively received by
the partners in the same taxable year [Sec. 73
(D), NIRC]. Consequently:
a. such share will be subjected to dividend
tax (10%) whether actually distributed or
not.
b. there can never be an instance of
improperly accumulated taxable income;
note that RR 2-01 provides that IAET does
not apply to taxable partnerships.
Distributable net income of the partnership is
its taxable income less the normal corporate
income tax (30%).
A partner’s contribution to the general
partnership fund is a capital investment and is
not taxable income of the partnership.
General Professional Partnerships
Partnerships formed by persons for the sole
purpose of exercising their common
profession, no part of the income of which is
derived from engaging in any trade or
business. [Sec 22 (B), NIRC]
A GPP as such shall not be subject to the
income tax. It is not a taxable entity for income
tax purposes.
U.P. LAW BOC TAXATION 1
GPP is not a taxable entity
The GPP is deemed to be no more than a mere
mechanism or a flow-through entity in the
generation of income by, and the ultimate
mechanism distribution of such income to the
individual partners [Tan v. Commissioner, G.R.
No. 109289 (1994)].
But the partnership itself is required to file
income tax returns for the purpose of furnishing
information as to the share in the gains or
profits which each partner shall include in his
individual return [RR 2-98].
The share of an individual partner in the net
profit of a general professional partnership is
deemed to have been actually or constructively
received by the partner in the same taxable
year in which such partnership net income was
earned, and shall be taxed to them in their
individual capacities, whether actually
distributed or not, at the graduated income tax
ranging from 5% to 32%.
Because the principle of constructive receipt is
applied to undistributed profits of GPPs, the
actual distribution to the partners of such tax-
paid profits in another year should no longer be
liable to income tax. [MAMALATEO]
A GPP may claim either the itemized
deductions allowed under Section 34 of the
Code or in lieu thereof, it can opt to avail of the
OSD allowed to corporations in claiming the
deductions in an amount not exceeding forty
percent (40%) of its gross income.
The distributable net income of the partnership
may be determined by claiming either itemized
deductions or OSD. The share in the net
income of the partnership, actually or
constructively received, shall be reported as
taxable income of each partner. The partners
comprising the GPP can no longer claim further
deduction from their distributive share in the
net income of the GPP and are not allowed to
avail of the 8% income tax rate option since
their distributive share from the GPP is already
Page 110 of 256
TAXATION LAW
net of cost and expenses. [RR No. 08-2018]
Co-ownerships
There is co-ownership whenever the
ownership of an undivided thing or right
belongs to different persons. [Art. 484, NCC] It
may be created by succession or donation.
When Co-ownership is not subject to tax
When the co-ownership’s activities are limited
merely to the preservation of the co-owned
property and to the collection of the income
from the property. Each co-owner is taxed
individually on his distributive share in the
income of the co-ownership. [De Leon]
When Co-ownership is subject to tax
The following circumstances would render a
co-ownership subject to a corporate income
tax:
a. When a co-ownership is formed or
established voluntarily, or upon
agreement of the parties;
b. When the individual co-owner reinvested
his share, and
c. When the inherited property remained
undivided for more than ten years, and no
attempt was ever made to divide to same
among the co-heirs, nor was the property
under administration proceedings nor held
in trust, the property should be considered
as owned by an unregistered partnership.
[Valencia and Roxas]
Automatically converted into an unregistered
partnership the moment the said common
properties and/or the incomes derived from
them are used as a common fund with intent to
produce profits for the heirs in proportion to
their respective shares in the inheritance as
determined in a project partition either duly
executed in an extrajudicial settlement or
approved by the court in the corresponding
testate or intestate proceeding. [Ona v. CIR,
G.R. No. L-19342 (1972)]
U.P. LAW BOC TAXATION 1
Joint Ventures and Consortiums
To constitute a” joint venture,” certain factors
are essential. Each party to the venture must
make a contribution, not necessarily of capital,
but by way of services, skill, knowledge,
material or money; profits must be shared
among the parties; there must be a joint
proprietary interest and right of mutual control
over the subject matter of the enterprise; and
usually, there is single business transaction.
General rule: An unincorporated joint venture
is taxed like a corporation. The share of the
joint venture partners will no longer be taxable
to them because they partake in the nature of
inter-corporate dividends.
Exception: an unincorporated joint venture
formed for the purpose of undertaking a
construction project or engaging in petroleum
operations pursuant to the consortium
agreement with the Philippine Government is
not subject to the corporate income tax. Only
the joint venture partners will be taxed on their
respective shares in the income of the joint
ventures. [Sec. 22 (B), NIRC]
Two elements necessary to exempt a joint
venture or consortium from tax
a. The joint venture must be an unincorporated
entity formed by two or more persons
b. The joint venture was formed for the
purpose of undertaking a construction
project, or engaging in the petroleum and
other energy operations with operating
contract with the government.
7. Filing of Returns and
Payment
Tax Return
Tax return refers to a formal report prepared by
the taxpayer or his agent in a prescribed form
showing an enumeration of taxable amounts
and description of taxable transactions,
allowable deductions, amount of tax and tax
payable to the government.
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TAXATION LAW
Examples of tax returns are:
a. BIR Form Nos. 1700 and 1701 – Annual
Income Tax Returns for Individual
b. BIR Form No. 1702 – Annual Income Tax
Return for Corporations and Partnerships
c. BIR Form No. 1800 – Donor’s Tax Return
d. BIR Form No. 1801 – Estate Tax Return
Information Return
Any individual not required to file an income tax
return may nevertheless be required to file an
information return pursuant to rules and
regulations prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner. [Sec. 51(A)(3), NIRC]
Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to
the Commissioner an annual information return
containing the list of payees and income
payments, amount of taxes withheld from each
payee and such other pertinent information as
may be required by the Commissioner [Sec. 58
(C), NIRC].
Every employer required to deduct and
withhold the taxes in respect of the wages of
his employees shall, on or before January 31st
of the succeeding year, submit to the
Commissioner 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 [Sec. 83 (B), NIRC].
a. Individual Return
i. Who are required to file; Exceptions
[Sec. 51(A), NIRC]
General Rule: The following are required to file
income tax return:
a. Resident citizen
b. Non-resident citizen, on income from
sources within the Philippines
U.P. LAW BOC TAXATION 1
c. Resident alien, on income from sources
within the Philippines
d. Non-resident alien engaged in trade or
business or in the exercise of profession in
the Philippines, on income from sources
within the Philippines
Exceptions: The following shall not be
required to file income tax return:
a. Individuals whose gross income does not
exceed P250,000 except citizen and alien
individuals engaged in business or
practice of profession within the
Philippines who shall file income tax
returns regardless of the amount of gross
income.
b. Individuals with respect to pure
compensation income from sources within
the Philippines, the income tax on which
has been withheld; except when such
compensation has been derived from
more than one employer.
c. Individuals whose sole income has been
subjected to final withholding tax
(pursuant to Sec. 57 (A)).
d. Minimum wage earner (as defined in Sec.
22 (HH))
e. Individuals who are exempt from income
tax pursuant to the provisions of the Tax
Code and other laws.
Special Provisions
Married individuals (whether citizens, resident
or nonresident aliens) who do not derive
income purely from compensation, shall file
only one consolidated return to cover the
income of both spouses for the taxable year,
but where it is impracticable for the spouses to
file one return, each spouse may file a separate
return of income but the returns so filed shall
be consolidated by the BIR for verification [Sec.
51 (D), NIRC].
The income of unmarried minors is a tax liability
of the minor but where such income is derived
from property received from a living parent, the
income shall be included in the return of the
parent except (a) when the donor’s tax has
Page 112 of 256
TAXATION LAW
been paid on such property, or (b) when the
transfer of such property is exempt from the
donor’s tax [Sec. 51 (E), NIRC].
If the taxpayer is unable to make his return,
such as when he suffers from disability, the
return may be made by his duly authorized
agent or representative or by the guardian or
other person charged with the care of the
taxpayer or his property; the principal and his
representative or guardian assuming
responsibility for penalties for erroneous, false
or fraudulent returns [Sec. 51 (F), NIRC].
ii. Substituted Filing
Applicable to individual taxpayers:
a. receiving purely compensation income,
regardless of amount
b. from only one employer in the Philippines
for the calendar year, and
c. the income tax of which has been withheld
correctly by the employer
The certificate of withholding filed by their
respective employers, duly stamped ‘received’
by the BIR, shall be tantamount to the
substituted filing of income tax returns by the
employee [Sec. 51-A, NIRC].
iii. When and Where to File
Income tax return of an individual who is not on
a substituted basis shall be filed on or before
April 15 of each year covering income of the
preceding taxable year. [Sec. 51 (C)(1), NIRC]
Individuals subject to capital gains tax [Sec.
51 (C)(2), NIRC]:
a. Sale of shares not traded thru a local stock
exchange – file a return within 30 days
from the transaction, and a final
consolidated return on or before April 15
of each year covering all stock
transactions of the preceding taxable year
b. Sale of real property – file a return within
30 days from each sale
U.P. LAW BOC TAXATION 1 TAXATION LAW

Individuals deriving self-employment corporations not engaged in trade or business

income (as sole source of income or mixed) – in the Philippines.
must file quarterly return of summary
declaration of gross income and deductions, The return shall be filed by the President, Vice-
and a final or adjustment [Sec. 74 (A), NIRC]. President or other principal officer, and shall be
sworn to by such officer and by the treasurer or
Due Date for Filing assistant treasurer.
Period
Return
Q1 Return May 15 of the same year ii. When and Where to File
August 15 of the same
Q2 Return Domestic corporations and resident foreign
year
November 15 of the same corporations shall file quarterly corporate
Q3 Return income tax returns within 60 days after the end
year
April 15 of the following of the calendar or fiscal quarter used, and
Annual Return annual corporate income tax return on or
year
before the 15th day of the fourth month
Self-employment income consists of earnings following the close of the calendar year or fiscal
derived by the individual from the practice of year, as the case may be [Sec. 74].
profession or conduct of trade or business, as
a sole proprietor or as a member in a general The filing of the tax returns by a corporation
professional partnership. [Sec. 74 (A), NIRC] using the calendar year:

Filing of these returns shall be in lieu of filing of Period Due Date for Filing Return
a declaration of estimated income under Sec. Period Due Date for Filing
74, primarily for the reason that the procedure Return
prescribed in Sec. 74 may not reasonably Q1 Return May 31 of the same year
approximate the correct amount of tax to be Q2 Return August 31 of the same
paid. [DE LEON citing RR No. 2-93] year
Q3 Return November 30 of the same
Where to File year
Except in cases where the CIR otherwise Annual Return April 15 of the following
permits, the return shall be filed with an year
authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized Where to File
Treasurer of the city or municipality in which Except in cases where the CIR otherwise
such person has his legal residence or permits, the return shall be filed with an
principal place of business in the Philippines, authorized agent bank, Revenue District
or if there be no legal residence or place of Officer, Collection Agent or duly authorized
business in the Philippines, with the Office of Treasurer of the city or municipality having
the Commissioner [Sec. 51 (B), NIRC]. jurisdiction over the place where the
corporation’s principal office is located and
b. Corporate Returns where its books of accounts and other data are
kept; otherwise, the returns shall be filed and
i. Quarterly Income Tax the tax paid thereon with the Office of the
Commissioner of Internal Revenue [Sec. 77
All corporations subject to income tax shall (A), NIRC].
render quarterly income tax returns and a final
or adjustment return, except foreign

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U.P. LAW BOC TAXATION 1
Payment of Income Tax
General rule: The total amount of tax imposed
by this Title (Tax on Income) shall be paid by
the person subject thereto at the time the return
is filed.
Exception: 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:
the first installment 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]
Return of Corporations Contemplating
Dissolution or Reorganization
Within 30 days after the adoption of the plan for
dissolution or reorganization (including
corporations notified of possible involuntary
dissolution by the SEC), render a correct return
to the CIR, verified under oath, setting forth the
terms of such plan and such other information
required by rules and regulations. Prior to the
issuance by the SEC of the Certificate of
Dissolution or Reorganization, the corporation
shall secure a certificate of tax clearance from
the BIR which shall be submitted to the SEC.
[Sec. 52 (C), NIRC]
c. Return on Capital Gains Realized
from Sale of Shares of Stock and
Real Estate
Return on Capital Gains Realized from Sale of
Shares of Stock not Traded in the Local Stock
Exchange – file a return within 30 days from the
transaction, and a final consolidated return on
or before the 15th day of the fourth month
following the close of the taxable year [Sec. 52
(D), NIRC]
8. Withholding of Taxes
a. Concept
Withholding tax is a method of collecting
income tax in advance from the taxable income
of the recipient of income.
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TAXATION LAW
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. The revenue officers
generally disallow the expenses claimed as
deduction from gross income, if no withholding
of tax as required by law or the regulations was
withheld and remitted to the BIR within the
prescribed dates.
In addition, the withholding tax that should
have been withheld and remitted to the BIR as
well as the penalties for non-, late or erroneous
payment of the withholding tax such as
surcharges and deficiency interest are
assessed by the BIR. [MAMALATEO]
b. Final Withholding Tax
The amount of income tax withheld by the
withholding agent is constituted as a full and
final payment of the income tax due from the
payee on the said income.
The liability for payment of the tax rests
primarily on the payor as withholding agent.
Thus, in case of his failure to withhold the tax
or in case of under withholding, the deficiency
tax shall be collected from the
payor/withholding agent. The payee is not
required to file an income tax return for the
particular income.
c. Creditable Withholding Tax
Under the creditable withholding tax system,
taxes withheld on certain income payments are
intended to equal or at least approximate the
tax due of the payee on said income.
The income recipient is still required to file an
income tax return, to report the income and/or
U.P. LAW BOC TAXATION 1 TAXATION LAW

pay the difference between the tax withheld Withholding of VAT [Sec 114 (C), NIRC]
and the tax due on the income. Taxes withheld The government (political subdivisions,
on income payments covered by the expanded instrumentalities, agencies, GOCCs) shall
withholding tax and compensation income are deduct and withhold final VAT of 5% of gross
creditable in nature. payment on purchase of goods and services
subject to VAT. If the payment is for lease or
i. Expanded Withholding Tax use of properties to a nonresident owner,
withholding tax shall be 12%.
Withholding Tax at Source [Sec 57, NIRC]
Withholding of final tax of certain income – Note: Beginning January 1, 2021, the VAT
Subject to rules and regulations the Secretary withholding system shall shift from final to a
of Finance may promulgate, upon the creditable system.
recommendation of the CIR, the tax imposed
or prescribed by the NIRC on certain specified ii. Withholding Tax on Compensation
items of income shall be withheld by payor-
corporation and/or person. Except in the case of minimum wage earner,
every employer making payment of wages
N.B. Sec. 57 contains an extensive list of taxes. shall deduct and withhold upon such wages a
These items of income include taxes on certain tax determined in accordance with the rules
passive incomes (interest, dividends), capital and regulations to be prescribed by the
gains tax (shares not traded, real property), Secretary of Finance, upon recommendation of
branch profit remittance tax, and certain the CIR.
payments to nonresident aliens /foreign
corporations.] d. Fringe Benefits Tax
Withholding of creditable tax at source – Note: See earlier discussion on Fringe Benefits
The Secretary of Finance may, upon the under Gross Income.
recommendation of the CIR, require the
withholding of a 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 1% but not more than
32%, which shall be credited against the
income tax liability of the taxpayer for the
taxable year. 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. [Sec. 57 (B), NIRC]

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U.P. LAW BOC TAXATION 2 TAXATION LAW

TAXATION 2
TAXATION LAW

Page 116 of 256

 U.P. LAW BOC TAXATION 2
TRANSFER TAXES
A. ESTATE TAX
1. Basic Principles, Concept,
and Definition
Estate tax is an excise tax on the right 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. [Vitug
and Acosta at 211]
Estate tax is levied upon the transfer of the net
estate [Sec. 84, NIRC].
1. Estate tax accrues at the time of the
decedent’s death, distinct from the
obligation to pay the same as fixed by law.
2. The tax is measured by the value of the
property AT THE TIME OF DEATH.
Subsequent appreciation or depreciation is
immaterial;
3. Estate taxation is governed by the statute
in force at the time of the death of the
decedent. Tax laws cannot be given
retroactive effect unless they explicitly
provide for it. [Sec. 3, RR 12-2018]
Nature, Purpose, and Object
It is a transfer tax (i.e. an excise tax on the
right of transmitting property), not a property
tax. Unlike the old inheritance tax, estate tax is
a tax on the right to transfer and not the right to
inherit property.
Purpose: To tax the shift of economic benefits
and enjoyment of property from the dead to the
living.
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TAXATION LAW
Taxable objects/subjects:
1. Right/privilege of the deceased person to
transmit his/her estate to his/her lawful
heirs and beneficiaries at the time of death;
2. Certain transfers, during his lifetime, which
are made by law as equivalent to
testamentary disposition.
Justification Theories for its Imposition:
1. Benefits-received theory – The State
collects the tax because of the services it
renders in the distribution of the estate of
the decedent, either by law or in
accordance with his will.
2. Privilege theory or state partnership
theory – Succession to the property of a
deceased person is not a right but a
privilege granted by the State and
consequently, the legislature can
constitutionally burden such succession
with a tax
3. Ability-to-pay theory – Receipt of
inheritance is in the nature of unearned
wealth which creates an ability to pay the
tax and thus contributes to government
income.
4. Redistribution of wealth theory – The
imposition of estate tax reduces the
property received by the successor, which
helps promote a more equitable distribution
of wealth in society.
a. Time and Transfer of Properties
The rights to the succession are transmitted
from the moment of the death of the decedent.
[Art. 777, Civil Code]. The decedent’s estate
includes property to the extent of the interest
therein of the decedent at the time of his death.
[Sec. 85(A), NIRC]
The executor or administrator shall not deliver
a distributive share to any party interested in
the estate despite the transfer of properties and
rights at the time of death, unless there is a
certification from CIR that estate tax has been
paid. [Sec. 94, NIRC]
 U.P. LAW BOC TAXATION 2
Time of death governs:
1. The determination of the extent of the
decedent’s interest for computing his gross
estate.
2. The statute that governs estate taxation.
3. The accrual of the estate tax.
Taxable Transfers
1. Transfers Mortis Causa. These are
gratuitous transfers that take effect after
death, either testate or intestate. These are
subject to estate tax.
A donation which purports to be one inter
vivos but withholds from the donee the right
to dispose of the donated property during
the donor's lifetime is in truth one mortis
causa. [Maglasang v Heirs of Cabatingan,
G.R. No. 131953 (2002)]
2. Transfers Inter Vivos. Gratuitous
transfers that take effect during the lifetime
of the donor. (See Donor’s Tax for
requisites)
General Rule: Donation Inter Vivos is subject
to donor’s tax.
Exceptions: Donation Inter Vivos is subject to
estate tax when it is treated by law as
substitutes for testamentary dispositions:
a. Transfers in contemplation of death [Sec.
85(B), NIRC]
b. Revocable transfers [Sec. 85(C), NIRC]
c. Transfers of property arising under general
power of appointment [Sec. 85(D), NIRC]
d. Transfers for insufficient consideration
[Sec. 85(G), NIRC]
Note: These transfers would be included in the
computation of the gross value of estate.
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TAXATION LAW
2. Classification of Decedent
Estate Tax applies only to individuals. The
decedent may be classified into:
1. Citizens and residents (RC/NRC/RA) or
2. Non-resident alien (NRA).
Concept of residence
For purposes of estate taxation, “residence”
refers to domicile, the permanent home or the
place to which whenever absent, one intends
to return (animus revertendi), and depends on
facts and circumstances, in the sense that they
disclose intent. It is, therefore, not necessarily
the actual place of residence. [Corre v Tan
Corre, G.R. No. L-10128 (1956)
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam
(movables follow the person)
Principle: Taxation of intangible personal
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks)
follows the residence/domicile of the owner.
[Collector v Fisher, G.R. No. L-11622 (1961)]
Exception: When it is inconsistent with
express provisions of law.
Exception to the exception: Rule of
Reciprocity with respect to an NRA.
Intangible Properties which are considered
situated in the Philippines [Sec 104, NIRC]
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
3. Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which 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
 U.P. LAW BOC TAXATION 2
5. Shares or rights in any partnership,
business or industry established in the
Philippines
Rule of Reciprocity
There is reciprocity if the foreign country of
which the decedent was a citizen and resident
at the time of his death:
1. 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. Allowed a similar exemption from
transfer tax in respect of intangible
personal property owned by citizens
of the Philippines not residing in that
country
If there is reciprocity, the intangible personal
property of an NRA shall not be included in his
gross estate. If there is no reciprocity, such
intangible personal property will be included.
[Sec. 104, NIRC]
Valuation of Gross Estate [Sec. 88, NIRC]
General Rule: Gross Estate = FMV at the time
of the decedent’s death [Sec. 5, RR 12-2018]
Real Property
1. Appraised value, whichever is higher
between:
a. FMV, as determined by the
Commissioner of Internal Revenue
(zonal value) or
b. FMV, as shown in the schedule of
values fixed by the Provincial or City
Assessor.
2. If there is an improvement, the value of
improvement is the construction cost per
building permit or the FMV per latest tax
declaration. [Sec. 5, RR 12-2018]
Personal Property
1. FMV at the time of death.
2. Shares of stocks
a. If listed = FMV is the mean between
the highest and lowest quotation at
a date nearest the date of death, if
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TAXATION LAW
none is available on the date of
death
b. If unlisted = book value at the time
of death (common shares) or par
value (preferred shares) [Sec. 5, RR
12-2018]
Note: In determining the book value, appraisal
surplus and the value assigned to preferred
shares, if any, shall not be considered. The
valuation of unlisted shares shall be exempt
from the provisions of RR 6-2013, which
prescribes the use of the Adjusted Net Asset
Method. [Sec. 5, RR 12-2018]
Units of Participation in Any Association,
Recreation or Amusement Club (golf, polo,
etc.)
FMV shall be the bid price nearest the date of
death published in any newspaper or
publication of general circulation. [Sec. 5, RR
12-2018]
Right to Usufruct, Use or Habitation, and
Annuity
The probable life of the beneficiary in
accordance with the latest basic standard
mortality table shall be taken into account.
[Sec. 5, RR 12-2018]
3. Composition of Gross Estate
Items to be included in the Gross Estate
[Sec. 85, NIRC]
1. Decedent’s interest [Sec. 85(A), NIRC] –
This includes property owned by the
decedent actually and physically
present in his estate at the time of his
death [MAMALATEO 2014 at 358];
2. Properties not physically in the estate, such
as:
a. Transfers in contemplation of death
[Sec. 85(B), NIRC];
b. Revocable transfers [Sec. 85(C),
NIRC];
c. Property passing under general
power of appointment [Sec. 85(D),
NIRC];
 U.P. LAW BOC TAXATION 2
d. Proceeds of life insurance [Sec.
85(E), NIRC];
e. Prior interest [Sec. 85(F), NIRC]
f. Transfers for insufficient
consideration [Sec. 85(G), NIRC];
i. Decedent’s interest [Sec. 85(A),
NIRC]
All property owned by the decedent to the
extent of his interest therein at the time of his
death. This includes any interest, having value
or capable of being valued or transferred, in
property owned or possessed by the decedent
at the time of his death., This also includes
those transferred by the decedent at the time
of his death.
Examples:
a. dividend declared on or before death, but
is received by the estate after death
b. partnership profits which have accrued
before his death, but received after death
ii. Transfers in Contemplation of Death
[Sec. 85(B), NIRC]
It is a transfer in contemplation of death if the
decedent either has retained for his life or for
any period which does not in fact end before
his death:
a. the possession or enjoyment of, or the right
to the income from the property, or
b. the right, either alone or in conjunction with
any person, to designate the person who
shall possess or enjoy the property or the
income therefrom
Exception: In case of a bona fide sale for an
adequate and full consideration in money or
money's worth
Note: The term “in contemplation of death”
does not refer to the general expectation of
death. The words mean that it is the thought
of death, as a controlling motive, which
induces the disposition of the property for the
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TAXATION LAW
purpose of avoiding the tax. The decedent’s
motive is a question of fact. Thus, the
imminence of death may afford convincing
evidence of the impelling cause of transfer.
[MAMALATEO, Reviewer on Taxation]
iii. Revocable Transfers [Sec. 85(C),
NIRC]
General Rule: A transfer is revocable where:
1. There is a transfer by trust or
otherwise,
Exception: In case of a bona fide sale
for an adequate and full consideration
in money or money’s worth
2. The enjoyment thereof was subject at
the date of his death to any change
through the exercise of a power (in
whatever capacity exercisable) by:
a. The decedent alone;
b. 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
c. Where any such power is
relinquished in contemplation of
the decedent death.
Note: The power to alter, amend or revoke shall
be considered to exist on the date of the
decedent’s death even though:
a) The exercise of the power is subject to
a precedent giving of notice, or
b) The alteration, amendment or
revocation takes effect only on the
expiration of a stated period after the
exercise of the power, whether or not
on or before the date of the decedent’s
death notice has been given or the
power has been exercised.
c) If notice has not been given or the
power has not been exercised before
the date of his death, such notice shall
be considered to have been given, or
 U.P. LAW BOC
the power exercised, on the date of his
death.
iv. Property Passing under a Special
Power of Appointment [Sec. 85(D),
NIRC]
Power of Appointment – the right to
designate the person or property who shall
enjoy and possess certain property from a
donor or a prior decedent.
a. General Power of Appointment (GPA):
when it gives to the decedent the power to
appoint any person he pleases including
himself, thus having as full dominion over
the property as though he owned it
b. Special Power of Appointment (SPA):
when the decedent can appoint only
among a designated class of persons other
than himself, his estate, the creditors of his
estate [AmJur]
General Rule: Property passing under a GPA
is excluded from gross estate
Exception: Included in the gross estate if the
property arises under a GPA exercised by the
decedent:
1. By will; or
2. By deed executed in contemplation of, or
intended to take effect in possession or
enjoyment at or after his death; or
3. By deed under which he has retained for
his life or any period not ascertainable
without reference to his death or for any
period which does not in fact end before his
death –
a. The possession or enjoyment of, or the
right to the income from the property; or
b. The right, either alone or in conjunction
with any person, to designate the
persons who shall enjoy or possess the
property or the income therefrom.
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TAXATION 2 TAXATION LAW
v. Proceeds of Life Insurance [Sec.
85(E), NIRC]
Inclusion of proceeds of life insurance to the
gross estate depends on (i) the designated
beneficiary; (ii) the revocability of the
insurance; and (iii) the period and source of
funds used in premiums.
When included in the gross estate
Proceeds of life insurance taken out by the
decedent on his own life shall be included in
the gross estate when the beneficiary is:
1. The estate of the deceased, his executor or
administrator, irrespective of whether or
not the insured retained the power of
revocation; or
2. Any beneficiary designated in the policy,
except when designation is irrevocable.
When not taxable
1. Irrevocably designated; how done
a. By expressly stating it in the policy
(if not stated, the designation is
PRESUMED to be REVOCABLE);
b. By not changing the beneficiary
during the lifetime of the insured, it
is deemed irrevocable. [Sec. 11,
RA 10607 (2013)]
2. Accident insurance proceeds as the Tax
Code specifically mentions only life
insurance policies
3. Proceeds of a group insurance policy taken
out by a company for its employees.
4. Amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured. The transfer is
absolute and the insured did not retain any
legal interest in the insurance.
5. Proceeds of insurance policies issued by
the GSIS are exempt from all taxes; [PD
1146]
6. Benefits accruing under the SSS Law [RA
1161]
7. Proceeds of life insurance payable to heirs
of deceased members of military personnel
[RA 360]
 U.P. LAW BOC TAXATION 2
To determine the conjugal or separate
character of proceeds, the following factors
are considered:
1. Policy was taken before marriage –
source of funds determines ownership of
the proceeds of life insurance
2. Policy was taken during marriage:
a. Beneficiary is estate of the
insured – proceeds are presumed
conjugal; hence, one-half share of
the surviving spouse is not taxable
b. Beneficiary is third person –
proceeds are payable to
beneficiary even if premiums were
paid out of the conjugal interest
[MAMALATEO]
vi. Prior Interest [Sec. 85(F), NIRC]
The subsections pertaining to (1) transfers in
contemplation of death, (2) revocable transfers
and (3) proceeds of life insurance shall apply to
the transfers, trusts, estates, interests, rights,
powers and relinquishment of powers whether
made, created, arising, existing, exercised or
relinquished before or after the effectivity of the
NIRC.
vii. Transfers for Insufficient
Consideration [Sec. 85(G), NIRC]
This refers to any (1) transfer in contemplation
of death, (2) revocable transfer or (3) property
passing under GPA that is made, created,
exercised or relinquished for a consideration in
money or money’s worth, but is NOT a bona
fide sale for an adequate and full consideration
in money or money’s worth.
The value to be included in the gross estate is
the excess of the FMV of the property at the
time of the decedent’s death over the
consideration received.
Note: The transfer is subject to estate tax if the
3 instances mentioned are present. Otherwise,
it is subject to donor’s tax.
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TAXATION LAW
Capital of the Surviving Spouse [Sec.85(H),
NIRC]
It is NOT part of the gross estate of the
deceased spouse.
The capital of the surviving spouse is
considered an exclusion from the deceased’s
gross estate.
b. Allowable Deductions and
Exclusions from Estate
Deductions and/or losses already deducted
from gross income can no longer be
deducted from gross estate. Deductions
should not be compensated for by any
insurance or extrajudicial settlement.
Otherwise, they are not valid deductions.
1. Ordinary Deductions
a. Losses, Indebtedness and
Taxes, Etc. (LIT)
i. Claims Against the Estate
[Sec. 86 (A)(2)]
“Claims” generally mean debts or demands of
a pecuniary nature which could have been
enforced against the deceased in his lifetime
and could have been reduced to simple money
judgments. Claims against the estate or
indebtedness in respect of property may arise
out of contract, tort, or operation of law. [Sec.
6(2), RR 12-2018]
Requisites for Deductibility [Sec. 6 (2.1) and
(2.2), RR 12-2018].
a. The liability represents a personal
obligation of the deceased existing at the
time of his death;
b. The liability was contracted in good faith
and for adequate and full consideration in
money or money’s worth;
c. The claim must be a debt or claim which is
valid in law and enforceable in court;
d. The indebtedness must not have been
condoned by the creditor or the action to
 U.P. LAW BOC TAXATION 2
collect from the decedent must not have
prescribed; and
e. They must be reasonably certain in
amount, and substantiated.
Substantiation Requirements [Sec. 6 (2.2),
RR 12-2018].
In case of simple loan (including advances):
a. The debt instrument must be duly
notarized at the time the indebtedness
was incurred, except for loans granted by
financial institutions where notarization is
not part of the business practice/policy.
b. Duly notarized Certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death.
c. Proof of financial capacity of the
creditor to lend the amount at the time the
loan was granted, as well as its latest
audited balance sheet showing the unpaid
balance of the decedent-debtor.
d. A statement under oath executed by the
administrator or executor of the estate
reflecting the disposition of the proceeds of
the loan if it was contracted within 3
years prior to the death of the decedent.
If the unpaid obligation arose from
purchase of goods or services:
a. Documents evidencing the purchase of
goods or service (e.g., sales
invoice/delivery receipt or contract for
services), and statement of account given
by the creditor
b. Duly notarized certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death.
c. Certified true copy of the latest audited
balance sheet of the creditor with a
detailed schedule of its receivable showing
the unpaid balance of the decedent-debtor.
A certified true copy of the updated latest
subsidiary ledger/records of the debtor-
decedent, should likewise be submitted.
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TAXATION LAW
Note: Where the settlement is made through
the Court in a testate or intestate proceeding,
pertinent documents filed with the Court
evidencing the claims against the estate, and
the Court Order approving the said claims, if
already issued, in addition to the documents
mentioned in the preceding paragraphs. [Sec.
6(2.2.3), RR 12-2018]
ii. Claims against Insolvent
Persons [Sec. 86 (A)(3),
NIRC]
These are claims of the deceased against
insolvent persons as defined under RA 10142
(The Financial Rehabilitation and Insolvency
Act of 2010) and other existing laws, where the
value of the decedent’s interest therein is
included in the value of the gross estate. [Sec.
6(3), RR 12-2018]
Requirements for deductibility:
1. The full amount owed by the insolvent must
first be included in the decedent’s gross
estate; and
2. The incapacity of the debtor to pay his
obligation should be proven, although a
judicial declaration of insolvency is not
required. [Monserrat v. Collector of Internal
Revenue, CTA Case No. 11 (1955)]
Note: If the insolvent could only pay a partial
amount, the full amount owed shall be included
in the gross estate, and the amount
uncollectible shall be allowed as a deduction.
iii. Unpaid Mortgages, Losses,
and Taxes [Sec. 86(A)(4),
NIRC]
Unpaid Mortgages
Requisites for Deductibility [Sec. 6(4.1), RR 12-
2018]:
a. The value of the decedent’s interest
therein, undiminished by such mortgage or
indebtedness, is included in the value of
the gross estates.
 U.P. LAW BOC TAXATION 2
b. The mortgages were contracted bona fide
and for an adequate and full consideration
in money or money’s worth.
Note: In case the loan of the decedent is only
an accommodation loan where the loan
proceeds went to another person, the value of
the unpaid loan must be included as a
receivable of the estate. If there is a legal
impediment to recognize the same as a
receivable of the estate, said unpaid obligation
shall not be allowed as a deduction. In all
instances, the mortgaged property, to the
extent of the decedent’s interest therein,
should always form part of the gross taxable
estate. [Sec. 6(4), RR 12-2018]
iv. Unpaid Taxes [Sec. 6(4.2), RR
12-2018]
Requisites for Deductibility:
a. Taxes which have accrued as of or before
the death of the decedent, and
b. Unpaid as of the time of his death,
regardless of whether or not it was incurred
in connection with trade or business.
Casualty Losses
Requisites for Deductibility:
a. Incurred during the settlement of the estate
b. Arising from fires, storms, shipwreck, or
other casualties, or from robbery, theft, or
embezzlement
c. Not compensated for by insurance or
otherwise
d. At the filing of the estate tax return, such
losses have NOT been claimed as a
deduction for income tax purposes in an
income tax return
e. Incurred not later than the last day for the
payment of the estate tax (i.e., 1 YEAR
from decedent’s death).. Therefore, all
casualty losses after the prescribed period
from the payment of tax are not deductible.
Value to deduct: The difference of the FMV
before and after incurring the loss.
[AMPONGAN]
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TAXATION LAW
Casualty loss can be allowed as deduction
in one instance only, either for income tax
or estate tax purposes. [Sec. 6(A)(5)), Rev.
Reg 2-2003]
Note: See Formula for computing Ordinary
Deductions of NRA below (footnotes under
table).
b. Property Previously Taxed
(Vanishing Deduction) [Sec.
86(A)(5)]
This is an amount allowed to reduce the gross
estate where the property was previously
subjected to transfer taxes, either donor’s tax
or estate tax.
Requisites for deductibility:
1. Death – The present decedent died within
5 YEARS from the date of death of the prior
decedent OR the date of gift.
2. Identity of the property – The property
can be identified as the one received from
prior decedent or donor.
3. Inclusion of the property – The property
must have formed part of the gross estate
situated in the Philippines of the prior
decedent, or have been included in the
total amount of the gifts of the donor.
4. Previous taxation of property – The
estate tax on the prior succession, or the
donor’s tax on the gift must have been
finally determined and paid by the prior
decedent or by the donor.
5. No previous vanishing deduction on the
property – No such deduction on the
property was allowed in determining the
value of the net estate of the prior
decedent. This is intended to preclude the
application of vanishing deduction on the
same property more than once.
Steps (L.I.A.R):
1. Lower value – Identify the property and its
proper value (i.e., the value at the time
previously taxed or the value of the
 U.P. LAW BOC TAXATION 2 TAXATION LAW

property in the present estate, whichever is Note: Amount of Vanishing Deduction is

lower)
2. Initial Basis - Deduct any mortgage or lien
paid by the present decedent to arrive at
the initial basis.
3. Actual or Final Basis - From the initial
basis, deduct the proportionate amount for
(a) claims against the estate, (b) claims
against insolvent persons, (c) unpaid
mortgages, taxes and casualty losses, and
(d) transfers for public use [pars. 2, 3, 4 and
6 of Sec. 86(A) of the NIRC] based on the
ratio of the initial basis over the gross
estate. Thus, deductions are only Losses
Indebtedness and Taxes (LIT) and
Transfer for Public Use (TPU).
deducted from the exclusive property of the
decedent, NOT from the conjugal property.
c. Transfers for Public Use [Sec.
86(A)(6)]
Requisites for deductibility:
1. The disposition is in a last will and
testament
2. To take effect after death
3. In favor of the Government of the Republic
of the Philippines, or any political
subdivision thereof
4. Exclusively for public purposes
5. The value of the property given is included
in the gross estate.

Formula for proportionate deduction:

2. Special Deductions
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐵𝑎𝑠𝑖𝑠
𝑥 (𝐿𝐼𝑇
𝐺𝑟𝑜𝑠𝑠 𝑒𝑠𝑡𝑎𝑡𝑒 𝑜𝑓 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑑𝑒𝑐𝑒𝑑𝑒𝑛𝑡 a. Family Home [Sec. 86(A)(7),
+ 𝑇𝑃𝑈) NIRC; Sec. 6(7), RR 12-2018]

Family home – The dwelling house, including

4. Rate - Multiply the actual basis by the the land on which it is situated, where the
applicable rate based on the length of time husband and wife, or a head of the family, and
the property has been acquired: members of their family reside, as certified to
by the Barangay Captain of the locality. It is
More than Not more than Rate deemed constituted on the house and lot from
- 1 year 100% the time it is actually occupied as the family
1 year 2 years 80% residence and considered as such for as long
2 years 3 years 60% as any of its beneficiaries actually resides
3 years 4 years 40% therein.
4 years 5 years 20%
Temporary absence from the constituted family
home due to travel or studies or work abroad,
FORMULA: etc. does not interrupt actual occupancy. The
family home is generally characterized by
Value Taken of Property (Lower) permanency, that is, the place to which one still
Less: Mortgage debt paid, if any intends to return.
= Initial Basis
Less: Proportionate Deduction It must be part of the ACP/CPG/exclusive
= Actual or Final Basis property of the decedent. It may also be
Multiplied by Applicable Rate constituted by an unmarried head of a family on
= VANISHING DEDUCTION his or her own property.

Page 125 of 256

 U.P. LAW BOC
For purposes of availing this deduction, a
person may constitute only one family home.
[Sec. 6(7.1), RR 12-2018 citing Arts. 152, 153,
156 and 161, Family Code]
Requisites for Deductibility [Sec. 6(7.2), RR
12-2018]
1. The decedent was married (or if single, was
the head of the family).
2. Along with the decedent, any of the
beneficiaries must be dwelling in the family
home.
3. The family home as well as the land on
which it stands must be owned by the
decedent.
4. The family home must be the actual
residential home of the decedent and his
family at the time of his death, as certified
by the Barangay Captain of the locality
where the same is situated.
5. The total value of the family home must be
included as part of the gross estate.
6. Allowable deduction must be in an amount
equivalent to whichever is lowest of:
a. the current FMV of the family home as
declared or included in the gross
estate, or
b. the extent of the decedent’s interest
(whether conjugal/community or
exclusive property), or
c. P10,000,000. [AMPONGAN, 2017 and
TABAG, 2019]
Beneficiaries of a Family Home [Sec. 6(7),
RR 12-2018]
1. The husband and wife, or an unmarried
person who is the head of a family; and
2. Their parents, ascendants, descendants,
brothers and sisters, whether the
relationship be legitimate or illegitimate,
who are living in the family home and who
depend upon the head of the family for
legal support.
1 An Act Providing that Retirement Benefits of Employees
of Private Firms shall not be subject to attachment, levy,
execution or any tax whatsoever
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TAXATION 2 TAXATION LAW
b. Standard Deduction [Sec.
86(A)(1), NIRC]
An amount equivalent to P5,000,000 shall be
deducted from the gross estate without need
of substantiation.
For NRAs, the Standard Deduction is
P500,000 [Sec. 86 (B)(1)].Amounts Received
by Heirs Under RA 49171 [Sec. 86(A)(8),
NIRC]
Any amount received by the heirs from the
decedent’s employer as a consequence of the
death of the decedent-employee in accordance
with RA 4917, provided that such amount is
included in the gross estate of the decedent.
This includes retirement benefits given by
private firms with a reasonable private benefit
plan, if the employee is not less than 50 years
old and has been with the same employer for
at least 10 years. Such benefit may be availed
of only once.
3. Net Share of Surviving Spouse in
CPG/ACP [Sec. 86(C), NIRC; Sec. 6(9),
RR 12-2018]
(Compare with Capital of Surviving Spouse
which is excluded from the gross estate).
The amount deductible from the net estate of
the decedent is the net share of the surviving
spouse in the conjugal property. The net share
is equivalent to ½ of the conjugal property after
deducting the obligations chargeable to such
property. The net share of the surviving spouse
is neither an ordinary nor a special deduction.
 U.P. LAW BOC TAXATION 2 TAXATION LAW

c. Summary of the Composition of the Gross Estate and Exclusions, Deductions

therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate [Sec. 85, NIRC]
All properties, real or personal, tangible or Only properties situated in the Philippines,
intangible, wherever situated [Sec. 4, RR 12- provided that the inclusion of intangible personal
2018] property is subject to the rule of reciprocity
provided for under Section 104 of the NIRC [Sec.
4, RR 12-2018]

Note: If there is reciprocity, intangible assets are

excluded from gross estate
Exclusions from Gross Estate [Sec 85(H) and Sec 87 of NIRC, and special laws]
Exclusion
a. Separate property of the surviving spouse [Sec. 85 (H), NIRC]

Exemptions under the NIRC

b. Merger of usufruct in the owner of the naked title [Sec. 87 (A), NIRC]
c. Transmission of inheritance or legacy by fiduciary heir or legatee to the fideicommissary
[Sec. 87 (B), NIRC]
d. Transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the desire of the predecessor [Sec. 87 (C), NIRC]
e. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions,
no part of the net income of which inures to the benefit of any individual: provided that not
more than 30% of said transfer shall be used for administration purposes [Sec. 87 (D), NIRC]

Exemptions under special laws

f. GSIS proceeds/benefits [P.D. 1146]
g. Accruals from SSS [R.A. 1161]
h. Proceeds of life insurance where the beneficiary is irrevocably appointed
i. Proceeds of life insurance under a group insurance taken by employer
j. War damage payments and Benefits received from US Veterans Administration [R.A. 227]
k. Transfer of property to the National Government or to any of its political subdivisions
l. Benefits received by beneficiaries residing in the Philippines under laws administered by the
US Veteran Administration [R.A. 360]
m. Grants and donations to the Intramuros Administration [P.D 1616]
n. Properties held in trust by the decedent
o. Acquisition and/or transfer expressly declared as not taxable
p. Personal equity and Retirement Account (PERA) assets of the decedent-contributor (Sec.
14, RA 9505) [TABAG, 2019 at 43-44]

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Deductions from Gross Estate to arrive at the Net Estate [Sec. 86 (A) and (B), NIRC]
Ordinary deductions2:
Ordinary deductions:
a. Proportionate deductions for LIT3
a. Losses, indebtedness, taxes (LIT)
● Claims against the estate
● Claims against the estate
● Claims against insolvent persons
● Claims against insolvent persons
● Unpaid mortgages
● Unpaid mortgages
● Taxes
● Taxes
● Casualty losses
● Casualty losses
b. Vanishing deductions (property previously
b. Vanishing deductions (property previously
taxed)
taxed)
c. Transfers for public use
c. Transfers for public use
Special deduction
Special deductions
d. Standard Deduction of P500,000
d. Family home (max of P10Million)
e. Standard deduction (fixed at P5Million)
Net share of the surviving spouse
f. Amounts received under R.A. 4917
N.B: No deduction for Family home and
Net share of the surviving spouse
Amounts received under R.A. 4917
[Sec. 6, RR 12-2018]
[Sec. 7, RR 12-2018]
* Funeral expenses, judicial expenses, and medical expenses are no longer allowed as
deductions under the TRAIN LAW

Gross Estate vis-à-vis Net Estate Formula for Estate Tax

Gross Estate
Value at the time of
death of all the
decedent’s property
wherever situated
HOWEVER, in the
case of an NRA at the
time of his death, only
that part of the entire
gross estate which is
situated in the
Philippines shall be
included in his taxable
estate. [Sec 85, NIRC]
Net Estate Gross Estate (Sec. 85)
The value of the Less: Deductions (Sec. 86(A), (B))
gross estate less -------------------------------------------------------
allowable Net estate before share of surviving spouse, if
deductions; also married
called net taxable Less: ½ share of the surviving spouse in the
estate, after deducting conjugal property (Sec. 86(C))
the net share of -------------------------------------------------------
surviving spouse, if = Net taxable estate
any.
Multiply by: tax rate of 6% (Sec. 84)
-------------------------------------------------------
Tax Rate: FLAT RATE
OF 6% [Sec. 84, NIRC]
= Estate Tax Due
Tax Base: Net Estate Less: Tax Credit, if any (Sec. 86(E)
-------------------------------------------------------
= Estate Tax Payable

2 No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs DID NOT include 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]

3 Formula for Proportionate Deductions of NRA [Sec. 7, RR 12-2018]: Allowable Deduction = Phil Gross Estate World Gross Estate
x LIT

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

d. Tax Credit for Estate Taxes Paid in Compare the tax credit allowed under
a Foreign Country Limitation A and Limitation B. The lower of the
two amounts is the final allowable tax credit.
Estate Tax Credit is a remedy against
international double taxation to minimize the The resulting amount will be compared to the
onerous effect of taxing the same property actual tax paid to the foreign country. The
twice. lower amount will be the final allowable tax
credit.
General Rule: The estate tax imposed by the
NIRC shall be credited with the amounts of any Illustration:
estate tax imposed by the authority of a foreign A resident decedent died leaving the following:
country. [Sec. 86(E), NIRC] Net estate, Philippines P8,000,000
Net estate, Indonesia P3,000,000
Who may claim: RC/NRC/RA. Only the estate Estate tax paid, Indonesia P200,000
of a decedent who was a citizen or a resident Net estate, UK P2,000,000
of the Philippines at the time of his death can Estate tax paid, UK P100,000
claim tax credit for any estate tax paid to a Net estate, Australia (P1,000,000)
foreign country.
Question: How much is the estate tax payable
LIMITATIONS ON CREDIT after estate tax credit?
1. Specific Country Limitation; Limit A
The amount of the credit in respect to the ANSWER: P480,000
tax paid to any country shall not exceed the Total taxable net estate P12,000,000
same proportion of the tax against which Multiplied by tax rate 6%
such credit is taken, which the decedent's Estate tax due 720,000
net estate situated within such country Less: estate tax credit (240,000)*
taxable under the tax code bears to his Estate tax payable 480,000
entire net estate. [Sec. 86(E)(2)(a), NIRC]
SOLUTION:
Tax Credit Limit A: Limit A:
𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦) Indonesia:
𝑥 𝑃𝐻 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
Limit P180,000**
Actual P200,000
2. Global Limitation; Limit B Allowed P180,000
The total amount of the credit shall not UK:
exceed the same proportion of the tax
against which such credit is taken, which Limit P120,000**
the decedent's net estate situated outside Actual P100,000
the Philippines taxable under the tax code Allowed P100,000
bears to his entire net estate. [Sec.
86(E)(2)(b), NIRC] Total Allowed (Indonesia and UK):
P280,000
Tax Credit Limit B:
𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝑎𝑙𝑙 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠) Limit B:
𝑥 𝑃𝐻 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
Limit P240,000***
Actual P300,000

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 U.P. LAW BOC TAXATION 2
Allowed: P240,000
*Allowable Tax Credit (lower between Limit A
or B): P240,000
e. Filing of estate tax returns and
payment of estate tax
Filing of Notice of Death
[Sec. 89, NIRC] – Repealed by the TRAIN Law
[R.A. 10963]. Hence, no such requirement.
FILING OF ESTATE TAX RETURN [Sec. 90,
NIRC]
When Required (Copies in duplicate) [Sec.
90 (A), NIRC]
1. In all cases of transfers subject to estate
tax, or
2. Regardless of the gross value of the estate,
when the said estate consists of registered
or registrable property such as real
property, motor vehicle, shares of stock or
other similar property for which a clearance
from the BIR is required as a condition
precedent for the transfer of ownership
thereof in the name of the transferee.
Contents [Sec. 90 (A), NIRC]
The return shall be filed in duplicate, setting
forth:
1. The value of the gross estate of the
decedent at the time of his death, or in case
of a NRA, of that part of his gross estate
situated in the Philippines;
2. The deductions allowed from gross estate
in determining the net taxable estate; and
3. Such part of such information as may at the
time be ascertainable and such
supplemental data as may be necessary to
establish the correct taxes.
4. For estate tax returns showing a gross
value exceeding P5,000,000, there must
be a statement duly certified to by a CPA
containing the following:
a. Itemized assets of the decedent with
their corresponding gross value at the
time of his death, or in the case of a
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TAXATION LAW
**Apply the Limit A computation (per foreign
country)
***Apply the Limit B computation (total of all
foreign countries)
NRA, of that part of his gross estate
situated in the Philippines;
b. Itemized deductions from gross estate
allowed in Sec. 86; and
c. The amount of tax due whether paid or
still due and outstanding.
Period for Filing [Sec. 90 (B), NIRC]
General Rule: Must be filed within 1 year from
the decedent's death.
Exception [Sec. 90 (C), NIRC]
The CIR shall have authority to grant, in
meritorious cases, a reasonable extension not
exceeding 30 days for filing the return.
Who will file: The executor, administrator, or
any of the legal heirs, as the case may be,
under oath. If there is no executor or
administrator appointed, qualified, and acting
within the Philippines, any person in actual or
constructive possession of any property of the
decedent may file this return.
Where to file the estate tax return and pay
the tax due [Sec. 90(D), NIRC]
1. Resident Citizen (RC and RA): The
executor or administrator shall register the
estate of the decedent and secure a new
TIN from the RDO where the decedent was
domiciled at the time of his death and shall
file the estate tax return and pay the
corresponding estate tax with:
a. An authorized agent bank (AAB), or
b. Revenue District Officer (RDO), or
c. Collection Officer, or
d. Duly authorized Treasurer of the city or
municipality in which the decedent was
domiciled at the time of his death
 U.P. LAW BOC TAXATION 2
2. Non-resident decedent (NRA/NRC)
a. With executor or administrator in the
Philippines
The estate tax return shall be filed with and
the TIN for the estate shall be secured from
the RDO where such executor or
administrator is registered.
If the executor or administrator is not
registered, it shall be filed with and the TIN
for the estate shall be secured from the
RDO having jurisdiction over the executor
or administrator’s legal residence. [Section
9(8), RR 12-2018]
b. Without an executor or
administrator in the Philippines
The estate tax return shall be filed with and
the TIN for the estate shall be secured from
the Office of the Commissioner through
RDO 39 QC. [Section 9(8), RR 12-2018]
PAYMENT OF ESTATE TAX [Sec. 91, NIRC]
Time of Payment [Sec. 91(A), NIRC]
“Pay as you file”: At the time the return is filed
by the executor, administrator or the heirs.
Who are liable for the payment of estate
taxes
Primarily, the estate, through the executor or
administrator.
1. Payment shall be made before the delivery
of the distributive share in the inheritance.
2. If there are two or more executors or
administrators, all of them are severally
liable for the payment of the tax.
3. The tax clearance issued by the CIR or the
RDO having jurisdiction over the estate will
serve as the authority to distribute the
remaining properties.
Subsidiarily, the heirs or beneficiaries, for the
payment of that portion of the estate tax which
his distributive share bears to the value of the
total net estate. [Sec. 9(9), RR 12-2018]
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TAXATION LAW
The heirs shall be liable in proportion to their
share in the inheritance. [Marcos v. CA, G.R.
No. 120880 (1997)]
Extension of Payment [Sec. 91(B), NIRC]
The CIR may allow an extension of payment, if
payment on the due date would impose undue
hardship upon the estate or any of the heirs:
1. Extension not to exceed 5 years, in case
the estate is settled judicially, or
2. Two (2) years in case the estate is settled
extrajudicially.
Where the taxes are assessed by reason of
negligence, intentional disregard of rules
and regulations, or fraud on the part of the
taxpayer, no extension will be granted by the
CIR.
If extension is granted, the CIR may require the
executor, or administrator, or beneficiary, as
the case may be, to furnish a bond in such
amount, not exceeding double the amount of
the tax and with such sureties as the CIR
deems necessary, conditioned upon the
payment of the said tax in accordance with the
terms of the extension.
Effects of granting an extension
1. Payment of the amount in respect of which
the extension is granted on or before the
date of the expiration of the period of the
extension
2. Suspension of the running of the statute of
limitations for deficiency assessment for
the period of any extension
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. 9(5), RR 12-2018]
Payment by installment [Sec. 91(C), NIRC]
In case the available cash of the estate is
insufficient to pay the total estate tax due,
payment by installment shall be made within 2
years from the statutory date of filing, without
civil penalty and interest.
 U.P. LAW BOC TAXATION 2
Restitution of tax paid [Sec. 96, NIRC]
If, after the payment of the estate tax, new
obligations of the decedent appear, and the
persons interested satisfied them by order of
the court, they shall have a right to the
restitution of the proportional part of the tax
paid.
Withdrawal from bank account of decedent
General rule: 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 withdrawal from the said deposit
account, subject to a final withholding tax of
6%. [Sec. 97, NIRC]
Exception: No withholding tax shall be
imposed where the bank deposit accounts
have been duly included in the gross estate of
the decedent and the estate tax due thereon
has been paid provided that an eCAR is
presented prior to withdrawing. [Sec. 10, RR
12-2018]
Tax deficiency after distribution of
properties
1. The BIR may recover the deficiency from
all the heirs and collect from each of them
the amount proportionate to the inheritance
received.
2. By virtue of a lien created under Sec. 219,
it may go after one heir and subject the
property he received from the estate to the
payment of estate tax. Such heir may seek
reimbursement from the other heirs.
B. DONOR’S TAX
1. Basic Principles, Concept,
and Definition
A donor’s tax is levied, assessed, collected
and paid upon the transfer by any person,
resident or nonresident, of the property by gift.
[Sec. 98(A), NIRC]. It shall apply whether the
Page 132 of 256
TAXATION LAW
transfer is in trust or otherwise, whether the gift
is direct or indirect, and whether the property is
real or personal, tangible or intangible. [Sec.
98(B), NIRC]
It is a tax on donations. Thus, it is a tax on –
1. An act of the donor disposing gratuitously
of a thing/right in favor of a donee; and
2. Sales, exchanges or other transfers of
properties, other than real property
(defined in Sec. 24(D)) classified as capital
asset within the Philippines, for less than
an adequate and full consideration in
money or money’s worth. [Sec. 100, NIRC]
Nature of donor’s tax
1. Donor’s tax is not a property tax, but a tax
imposed on the transfer of property by way
of gift inter vivos (i.e., an excise tax). [Sec
12, RR 12-2018 citing Lladoc v. CIR, G.R.
No. L-19201 (1965)]
2. It is a direct tax imposed on the donor.
3. It applies to both natural and juridical
persons. [AMPONGAN, 2014]
Object: 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 tax.
Time and Transfer of Properties
Donor’s tax shall not apply unless and until
there is a completed gift. The transfer of
property by gift is perfected from the moment
the donor knows of the acceptance by the
donee; it is completed by delivery, either
actually or constructively, of the donated
property, to the donee. Thus, the law in force at
the time of the perfection/completion of the
donation shall govern the imposition of the
donor’s tax. [Sec. 12, RR 12-2018]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

2. Requisites of Valid Donation 3. Transfers which May be

Considered as Donation
Art. 725, NCC. Donation is an act of
liberality whereby a person disposes a. Sale, Exchange, or Transfer of
gratuitously of a thing or right in favor of Property for Less Than Adequate
another, who accepts it.
and Full Consideration
Requisites of a VALID and COMPLETE
General rule: Where property, other than real
donation
property referred to in Sec. 24(D), is
1. Donative intent of the donor
transferred for less than an adequate and full
Donative intent must be present in a direct
consideration, then the amount by which the
gift. It is not, however, required in transfers
FMV of the property exceeded the value of the
of property for less than adequate and full
consideration shall be deemed a gift.
consideration. [MAMALATEO; Sec. 100,
NIRC]
Exception: A transfer of property made in the
2. Capacity of the donor
ordinary course of business (a transaction
3. Delivery of the donated property
which is bona fide, at arm’s length, and free
4. Acceptance of the donee
from any donative intent), will be considered as
5. Donation must be in the proper form
made for an adequate and full consideration in
a. Movable: orally or in writing if value is
money or money’s worth. [Sec. 100, NIRC]
equal to or less than P5,000.
Otherwise, it shall be in writing.
Requisites:
b. Immovable: must be made in a public
The excess of FMV over the value of the
document.
consideration will be considered a donation
and subject to donor’s tax when:
Re: Acceptance [Sec. 12, RR 12-2018]
1. The transfer was for less than adequate
1. For movables exceeding P5,000 –
and full consideration;
Acceptance shall be in writing [Art. 748,
2. Such transfer was effective during his
Civil Code]
lifetime (inter vivos); and
2. For immovable [Art. 749, Civil Code] –
3. It involves property other than real property
a. Must be in the same deed of donation;
classified as capital asset within the
OR
Philippines as defined in Sec. 24(D). [Sec.
b. In a separate public document – the
100, NIRC]
donor shall be notified thereof in an
authentic form, and this step shall be
Note: Real property considered as capital
noted in both instruments
assets under the Tax Code are exempted
from this rule because the taxable value
Note: Acceptance shall not take effect
taken into account in the computation of
unless it is done during the lifetime of
tax is the higher of either the gross selling
the donor and of the donee [Art. 746,
price or the FMV; not gain. [Sec. 100 in
Civil Code].
relation to Sec. 24(D), NIRC]

Note: The absence of donative intent does not

exempt the sales of stock transaction from
donor's tax since Sec. 100 of the NIRC
categorically states that the amount by which
the fair market value of the property exceeded

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

the value of the consideration shall be deemed If donor is:

a gift. [Philam Life v. Secretary of Finance, G.R.
No. 210997 (2014)]
b. Condonation or Remission of Debt
Condonation or remission of debt is defined as
an act of liberality, by virtue of which, without
receiving any equivalent, the creditor
renounces the enforcement of the obligation,
which is extinguished in its entirety or in that
part or aspect of the same to which the
remission refers. It is an essential
characteristic of remission that it be gratuitous.
[Dizon v. CTA, G.R. No. 140944, (2008)]
c. Renunciation of inheritance
Renunciation in favor of other heirs is subject
to donor’s tax. [Sec 12, RR 12-2018]
a. Renunciation by the surviving spouse of
his/her share in the ACP/CPG after the
dissolution of the marriage in favor of heirs
of the deceased spouse or any other
person/s
b. Renunciation by an heir, specifically and
categorically in favor of identified heir/s to
the exclusion or disadvantage of the other
co-heirs in the hereditary estate
1. RC/NRC/RA/DC/RFC = liable for donor’s
tax REGARDLESS of where the gift was
made or where property is located
2. NRA/NRFC = liable for donor’s tax only if
the property donated is within the
Philippines
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam
Principle: Taxation of intangible personal
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks)
follows the residence/domicile of owner
thereof. Situs is the domicile or residence of the
owner. [Collector v. Fisher, supra.]
Exceptions: When it is inconsistent with
express provisions of law
Rule of Reciprocity
Same as in Estate Tax, supra.

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. [Sec
12, RR 12-2018]

4. Classification of Donor
Donor’s tax applies to individuals and
corporations. Classifications:
1. Residents (RC/RA/DC/RFC)
2. Non-Residents (NRC/NRA/NRFC)

Such classification is important in determining

the deductions from the gross gift of the donor,
and in filing the return.

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

5. Determination of Gross Gift (including Composition and

Exemptions)
RC/NRC/RA/DC/RFC NRA/NRFC
Composition and Determination of Gross Gift
All properties, real or personal, tangible or ● Only properties situated in the
intangible, wherever situated Philippines, provided that the inclusion
of intangible personal property is subject
to the rule of reciprocity

Note: If there is reciprocity, intangible assets are

excluded from gross gifts [Sec. 104, NIRC]
Exemptions from GROSS gift to arrive at NET Gifts
Gifts made to or for the use of the National Government or any entity created by any of its agencies
which is not conducted for profit, or to any political subdivision of the said Government. [Sec. 101
(A)(1), NIRC]
Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited nongovernment organization, trust or philanthropic organization or research
institution or organization: Provided not more than 30% of said gifts will be used by such donee for
administration purposes.

For the purpose of this exemption, a 'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or philanthropic organization
and/or research institution or organization' is a:
1. school, college or university and/or charitable corporation,
2. accredited nongovernment organization, or;
3. trust or philanthropic organization and/or research institution or organization, that is:
a. incorporated as a non-stock entity,
b. paying no dividends,
c. governed by trustees who receive no compensation, and
d. devoting 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. [Sec. 101 (A)(2), NIRC]
Common Exemptions
1. Encumbrances on the property donated if assumed by the donee in the deed of donation.
2. Donations made to entities exempted under special laws

NOT SUBJECT TO DONOR’S TAX

1. Contributions to a candidate or political
party for campaign purposes duly reported
to COMELEC [Sec. 99 (B), NIRC]
Donation to a Political Candidate
Prior to R.A. 7166, a donation for a political
candidate was subject to donor’s tax.
[ACCRA v CIR, G.R. No. 120721 (2005)]
Under R.A. 7166, contributions duly
reported to the BIR are not subject to
donor’s tax, as long as it is utilized in his
campaign. Unutilized/excess campaign
funds, that is, campaign contributions net
of the candidate’s campaign expenditures,
shall be considered as subject to income
tax and must be included in the candidate’s

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 U.P. LAW BOC TAXATION 2
taxable income as stated in his/her ITR
[Sec. 2, RR 7-2011]
2. Gift to Parish Priest or Church (applies only
to real property tax)
3. Onerous donations or donations in
exchange for goods/services (they are
subject to income tax)
SUBJECT TO DONOR’S TAX
Gratuitous Donations to Homeowners’
Association
Valuation of Gifts Made in Property
TAXABLE BASE:
Net gifts - the net economic benefit from the
transfer that accrues to the donee AT THE
TIME OF DONATION
1. If gift is personal property = FMV at the
time of donation [Sec. 102, NIRC]
2. If gift is real property = whichever is
HIGHER
a. FMV as determined by the CIR (Zonal
Value) or
b. FMV in the latest schedule of values
fixed by the provincial and city
assessor (MV per Tax Declaration)
[Sec. 102 in relation to Sec. 88(B),
NIRC]
3. If there is an improvement = construction
cost per building permit or the FMV based
on the latest tax declaration.
4. If unlisted stocks = Adjusted Net Asset
Method shall be used whereby all assets
and liabilities are adjusted to fair market
values. The net of adjusted asset minus
the adjusted liability value is the indicated
value of the equity. [RR 6-2013]
Note: Where the consideration is fictitious,
the entire value of the property shall be subject
to donor’s tax.
Exemptions of Gifts from Donor’s Tax
It is more appropriate to consider these
“exemptions” as “deductions” as they are
Page 136 of 256
TAXATION LAW
subtracted from the gross value of the property
donated to arrive at the value of the net gift,
which is the tax base for donor’s tax. [DE
LEON]
1. Gifts made to or for the use of the National
Government or any entity created by any of
its agencies which is not conducted for
profit, or to any political subdivision of the
said Government. [Sec. 101 (A)(1), NIRC]
2. Gifts in favor of an educational and/or
charitable, religious, cultural or social
welfare corporation, institution, accredited
nongovernment organization, trust or
philanthropic organization or research
institution or organization: Provided not
more than 30% of said gifts will be used by
such donee for administration purposes.
[Sec. 101 (A)(2), NIRC]
3. Encumbrances on the property donated if
assumed by the donee in the deed of
donation.
4. Donations made to entities exempted
under special laws.
a. Aquaculture Department of the
Southeast Asian Fisheries
Development Center of the Philippines
b. Development Academy of the
Philippines
c. Integrated Bar of the Philippines
d. International Rice Research Institute
e. National Museum
f. National Library
g. National Social Action Council
h. Ramon Magsaysay Foundation
i. Philippine Inventor’s Commission
j. Philippine American Cultural
Foundation
k. Task Force on Human Settlement on
the donation of equipment, materials
and services
 U.P. LAW BOC TAXATION 2
6. Tax Credit for Donor’s Taxes
Paid in a Foreign Country
Donor’s tax credit
The donor’s tax imposed upon a citizen or
resident at the time of the donation shall be
credited with the amount of any donor’s tax, of
any character and description, imposed by the
authority of a foreign country. [Sec. 101(C),
NIRC]
Who may claim the tax credit:
Resident or Citizen: RC, NRC, RA, DC, RFC
(not NRA or NRFC)
Limitations on credit
1. Per Country Limit
𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦)
𝑥 𝑃𝐻 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡
2. Worldwide Limit
𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 (𝐴𝑙𝑙 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠)
𝑥 𝑃𝐻 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡
Note: The allowable tax credit is the lower of
the tax limit and the actual tax paid.
7. Filing of Return and Payment
Persons liable
Every person, whether natural or juridical,
resident or non-resident, who transfers or
causes to transfer property by gift, whether in
trust or otherwise, whether the gift is direct or
indirect and whether the property is real or
personal, tangible or intangible [Sec. 98, NIRC]
Donor’s tax return
Separate return is filed for each gift made on
different dates during the year reflecting therein
any previous net gifts made in the same
calendar year. If the gift involves
conjugal/community property, each spouse
shall file separate return with respect to his/her
respective share in the said property.
Page 137 of 256
TAXATION LAW
Contents
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; and
5. Such further information as the CIR may
require. [Sec. 103(A), NIRC]
Period for Filing
The return must be filed within 30 days after
the date when the gift was made or completed.
The tax due thereon shall be paid at the same
time that the return is filed (pay-as-you-file).
[Sec. 103(B), NIRC]
Who will file: Any person who made a gift
(whether direct or indirect), is required to file
under oath a donor’s tax return in duplicate
[Sec. 103(A), NIRC]
Where to File the Donor’s Tax Return and
Pay the Tax Due
1. Residents
Unless the CIR permits otherwise, the return
shall be filed and the tax paid to:
a. AAB
b. Revenue District Officer
c. Revenue Collection Officer
d. duly Authorized City or Municipal
Treasurer where the donor was
domiciled at the time of the transfer
[Sec. 103(B), NIRC]
2. Non-residents
The Philippine Embassy or Consulate in the
country where he is domiciled at the time of the
transfer, or
Directly with the Office of the Commissioner
(i.e., Revenue District Office No. 39 – South
QC) [Sec. 103(B), NIRC; Sec. 15(B), RR 12-
2018]
 U.P. LAW BOC TAXATION 2
PAYMENT OF DONOR’S TAX
Payment: “Pay as you file”
The donor’s tax is paid upon filing of the return
[Sec. 103(B), NIRC]
Notice of donation to donee institutions
duly accredited by the Philippine Council
for NGO Certification, Inc. (PCNC)
Requisites to be exempt from donor’s tax and
to claim full deduction:
1. Donor must give notice on every donation
worth at least P50,000
2. Notice is given to the RDO which has
jurisdiction over donor’s place of business
3. Notice must be given within 30 days after
receipt of the qualified done institution’s
Certificate of Donation
4. Certificate of Donation must be attached to
the Notice
5. Notice must state that not more than 30%
of the donation for the taxable year shall be
used by the qualified donee institution for
administration purposes [Sec. 15 (C), RR
12-2018 in relation to Sec. 101(A)(2) and
(B)(2)]
Tax Basis
The tax for each calendar year shall be
computed on the basis of the total gifts in
excess of P250,000 made during the calendar
year.
Tax Rate: FLAT RATE OF 6% [Sec. 99, NIRC]
Page 138 of 256
TAXATION LAW
General Formula
Gross Gifts
Less: Allowable deductions
-----------------------------------------------------
Net Gifts
Less: Exempt gift of P250,000
-----------------------------------------------------
Taxable Net Gift
Multiply by: Tax rate of 6%
-----------------------------------------------------
= Donor’s Tax Due
Less: Tax Credit, if any
-----------------------------------------------------
= Donor’s Tax Payable
If there are several gifts during the year
Gifts made on a certain date
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts made on a certain date
Add: Prior gifts during the year
-----------------------------------------------------
= Aggregate Net Gifts
-----------------------------------------------------
Less: Exempt gift of P250,000
-----------------------------------------------------
Taxable Net Gift
Multiply by: Tax rate of 6%
-----------------------------------------------------
= Donor’s Tax on Aggregate Gifts
Less: Tax credits:
Payments for Prior Net Gifts During the
Year
Foreign Donor’s Tax Credit
-----------------------------------------------------
= Donor’s Tax Payable, if any
 U.P. LAW BOC TAXATION 2 TAXATION LAW

SUMMARY OF TRANSFER TAXES

TRANSFER TAXES
Estate Tax Donor’s Tax
Time for filing a return and payment of tax
FILED: FILED: within thirty (30) days after the gift
GR: within one (1) year from the decedent's (donation) is made
death.
EXC: extension not exceeding 30 days (in PAID: upon filing of return
meritorious cases)
Note:
PAID: upon filing of return and before the ● If the gift involves conjugal/community
delivery of the distributive share in the property, each spouse shall file separate
inheritance to any heir or beneficiary return with regard to his/her respective share
in the property.
Extension: (when payment on the due date ● A separate return is filed for each gift made
would impose undue hardship) not to exceed: on different dates during the year reflecting
● 5 years, in case the estate is settled therein any previous net gifts made in the
judicially; or same calendar year.
● 2 years if settled extra-judicially.
N.B. when extension is granted, a bond may be
required by CIR not exceeding double the
amount of tax
Where to file and to whom paid
Resident Resident
To the Authorized Agent Bank (AAB), or To the AAB, RDO, RCO or duly authorized
Revenue District Officer (RDO), Revenue Treasurer of the city or municipality in which the
Collection Officer (RCO) or duly authorized decedent was domiciled at the time of his death
Treasurer of the city or municipality in the
Revenue District Office having jurisdiction over Non-resident
the place of domicile of the decedent at the time ● The Philippine Embassy or Consulate in
of his death the country where he is domiciled at the
time of the transfer, or
Nonresident ● Directly with the Office of the
Commissioner.
● With executor/administrator in the
Philippines: to the RDO where such
executor/administrator is registered or,
if not registered, to the RDO having
jurisdiction over his/her legal residence
● Without executor/administrator in the
Philippines: to the Office of the
Commissioner through RDO No. 39-
South QC
Who should file
● The executor/administrator or any of the Any person, natural or juridical, resident or non-
legal heirs of the decedent, whether resident resident, who transfers or causes to transfer
or non-resident of the Philippines, under any property by gift, whether in trust or otherwise,
of the following situations: whether the gift is direct or indirect and whether

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

the property is real or personal, tangible or

1. In all cases of transfers subject to estate intangible.
tax, or
2. Regardless of the gross value of the
estate, where the said estate consists of
registered or registrable property such
as real property, motor vehicle, shares
of stock or other similar property for
which a clearance from the BIR is
required as a condition precedent for the
transfer of ownership thereof in the
name of the transferee; or
● If there is no executor or administrator
appointed, qualified, and acting within the
Philippines, then any person in actual or
constructive possession of any property of
the decedent.

N.B: The executor/administrator has the primary

obligation to pay the estate tax but the heir or
beneficiary has subsidiary liability for the
payment of that portion of the estate which his
distributive share bears to the value of the total
net estate. The extent of his liability, however,
shall in no case exceed the value of his share in
the inheritance.

ESTATE TAX

EXCLUSIVE COMMUNITY TOTAL

Gross Estate4
Real Properties (excluding family home)
Personal Properties

4 DO NOT INCLUDE: Exemptions

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Add:
Taxable Transfers & Others Value Taken of Property
Revocable Transfers/Donation Mortis Causa Less: Mortgage debt paid, if any
Transfers in contemplation of death
Property passing under GPA Initial Basis
Transfers for insufficient consideration5 Less: Proportionate Deduction**
Decedent’s Interest Accrued6
Proceeds of Life Insurance7 Final Basis
Family Home Multiplied by Vanishing Deduction Rate
Claims against an Insolvent Person8
Amount received by heirs VANISHING DEDUCTION

Less: (Ordinary Deductions)

**Proportionate Deduction:
LIT9: Claims against the Estate
=
Claims against Insolvent Persons
Unpaid Mortgages, Taxes and Casualty
Losses
Vanishing Deductions
Transfers for Public Use
Retirement Benefits Received by Heirs10

Estate After Ordinary Deductions

Less: (Special Deductions11)
Standard Deduction12
Family Home13
Amounts received by heirs

5 Amount included in the GE = FMV at the time of death – consideration amount

6 Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death; partnership’s
profit earned on/before and received after, accrued interest and rents on/before and collected after death
7 Beneficiary must be the estate of the decedent, or the executor or administrator or any beneficiary designated as revocable. If

premiums are paid using conjugal funds, the proceeds shall form part of the conjugal property.
8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under LIT.

9 In case of an NRA, these are prorated.

10 This is not allowed as deduction for an NRA.

11 These are not allowable deductions when taxpayer is NRA (except SD of P500,000).

12 P5M for RC/NRC/RA, P500,000 for NRA

13 Maximum of P10M

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Net Estate If only 1 country is involved: (whichever is lower)

Less: Share of Surviving Spouse
(Community Property less Ordinary
Estate Tax Credit =
Deductions = Net Community
Property
OR actual estate tax paid to foreign country
Divided by 2)

Net Taxable Estate If two or more countries are involved: (whichever is lower)
Multiply by Tax Rate of 6%
Estate Tax Credit =

OR

OR actual estate tax paid to foreign country

Estate Tax Due

Less: Tax Credit14, if any
ESTATE TAX PAYABLE
Illustration: [RR 12-2018]

(1) Decedent is an unmarried head of the family, family home more than P10,000,000:

Real and personal properties P 14,000,000

Family Home 30,000,000
Gross Estate P44,000,000

Less: Deductions
Ordinary Deductions
Unpaid real estate tax (2,000,000)

Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Total Deductions (17,000,000)

NET TAXABLE ESTATE P27,000,000

Although the family home is valued at P30 million, the maximum allowable deduction for the
family home is P10 million only.

14 Applies only to RC/NRC/RA

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U.P. LAW BOC TAXATION 2 TAXATION LAW

(2) Decedent is married, the family home is conjugal property, more than P10,000,000:

Exclusive Conjugal Total

Conjugal Properties:
Family Home P30,000,000 P30,000,000
Real and personal properties 14,000,000 14,000,000
Exclusive Properties: 5,000,000 5,000,000
Gross Estate 5,000,000 44,000,000 P49,000,000

Less:
Ordinary Deductions
Conjugal Ordinary (2,000,000) (2,000,000)
Deductions
Net Conjugal Estate 42,000,000
Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Total Deductions (17,000,000)

Net Estate 32,000,000

Less: ½ Share of Surviving
Spouse (21,000,000)
Conjugal Property P44,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P42,000,000
(P42,000,000/2)

NET TAXABLE ESTATE P11,000,000

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U.P. LAW BOC TAXATION 2 TAXATION LAW

(3) Decedent is married, the family home exclusive property, more than P10,000,000:

Exclusive Conjugal Total

Conjugal Properties:
Real and personal properties 14,000,000 14,000,000
Exclusive Properties:
Family Home 30,000,000 30,000,000
Gross Estate 30,000,000 14,000,000 P44,000,000

Less:
Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000) (2,000,000)
Net Conjugal Estate 12,000,000
Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Total Deductions (17,000,000)

Net Estate 27,000,000

Less: ½ Share of Surviving Spouse (6,000,000)
Conjugal Property P14,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P12,000,000
(P12,000,000/2)

NET TAXABLE ESTATE P21,000,000

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

(4) Decedent is unmarried, the family home is

below P10,000,000:

Real and personal properties 14,000,000

Family Home 9,000,000
Gross Estate P23,000,000

Less: Deductions
Ordinary Deductions (2,000,000)
Special Deductions (14,000,000)
Family Home (9,000,000)
Standard Deduction (5,000,000)
Total Deductions (16,000,000)

NET TAXABLE ESTATE (7,000,000)

(5) Decedent is married, the family home is conjugal property and is below P10,000,000:

Exclusive Conjugal Total

Conjugal Properties:
Family Home P9,000,000 P9,000,000
Real and personal properties 14,000,000 14,000,000
Exclusive Properties: 5,000,000 5,000,000
Gross Estate 5,000,000 23,000,000 P28,000,000

Less:
Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000) (2,000,000)
Net Conjugal Estate 21,000,000
Special Deductions
Family Home (4,500,000)
Standard Deduction (5,000,000)
Total Deductions (11,500,000)

Net Estate 16,500,000

Less: ½ Share of Surviving
Spouse (10,500,000)
Conjugal Property P23,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P21,000,000
(P21,000,000/2)

NET TAXABLE ESTATE P6,000,000

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

(6) Decedent is married, the family home exclusive property and below P10,000,000:

Exclusive Conjugal Total

Conjugal Properties:
Real and personal properties 14,000,000 14,000,000
Exclusive Properties:
Family Home 9,000,000 9,000,000
Gross Estate 9,000,000 14,000,000 P23,000,000

Less:
Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000) (2,000,000)
Net Conjugal Estate 12,000,000
Special Deductions
Family Home (9,000,000)
Standard Deduction (5,000,000)
Total Deductions (16,000,000)

Net Estate 7,000,000

Less: ½ Share of Surviving Spouse (6,000,000)
Conjugal Property P14,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P12,000,000
(P12,000,000/2)

NET TAXABLE ESTATE P1,000,000

DONOR’S TAX

ON FIRST DONATION

Gross Gift xxx

Less: Allowable Deductions xxx

Net Gift xxx

Less: Exempt Gift of P250,000 xxx

Net Taxable Gift xxx

Multiply by Tax Rate of 6% xxx

Donor’s Tax Due xxx

Less: Tax Credit (Foreign Taxes Paid)15, if any xxx
DONOR’S TAX PAYABLE xxx

ON SUBSEQUENT DONATIONS w/in the same calendar year

Gross Gift xxx

Less: Allowable Deductions xxx

Net Gift xxx

Add: All previous net gifts during the year xxx

15 Applies only to RC/NRC/RA

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Aggregate Net Gifts xxx

Less: Exempt Gift of P250,000 xxx
Taxable Net Gift xxx
Multiply by Tax Rate of 6% xxx

Donor’s Tax Due xxx

Less: Tax Credit Payments:
Donor’s tax on previous net gifts during the year xxx
Foreign Donor’s Tax Credit16 xxx

DONOR’S TAX PAYABLE xxx

Illustration: [RR 12-2018]

Donations were made on January 30, 2018 at P2,000,000; on March 30, 2018 at P1,000,000; and August 15, 2018 at
P500,000.

Solution/computation:

Date of donation Amount Donor’s Tax

1. January 30, 2018 P2,000,000
January 30, 2018 donation 2,000,000
Less: Exempt Gift (250,000)
1,750,000 P105,000
2. March 30, 2018 1,000,000
March 30, 2018 donation 1,000,000
Add: January 30, 2018 donation 2,000,000
Less: Exempt Gift (250,000)
Total 2,750,000

Tax Due Thereon 165,000

Less: Tax due/paid on January donation 105,000
Tax due/payable on the March donation 60,000

3. August 15, 2018 500,000

August 15, 2018 donation 500,000
Add: January 2018 donation 2,000,000
March 2018 donation 1,000,000
Less: Exempt Gift (250,000)
Total 3,250,000

Tax Due Thereon 195,000

Less: Tax due/paid on Jan./March donation 165,000
Tax due/payable on the August donation 30,000

16 Applies only to RC/NRC/RA

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 U.P. LAW BOC TAXATION 2
C. VALUE-ADDED TAX
(VAT)
1. Nature & Characteristics of
VAT
a. Tax on value added
It is imposed only on the value added of a
taxpayer. “Value added” is the difference
between total sales of the taxpayer and his total
purchases for the same period subject also to
VAT. [MAMALATEO]
b. Sales Tax
The taxpayer (seller) determines his tax liability
by computing the tax on the gross selling price
or gross receipts (output tax), and subtracting
or crediting the VAT on the purchase (or
importation) of goods or services (input tax)
against the tax due on his own sale.
VAT rate: 12% standard rate; 0% on certain
sales or transactions
VAT base: gross selling price or gross receipts
c. Tax on Consumption
VAT is a consumption tax imposed at every
stage of the distribution process on (i) the sale,
barter, exchange, or lease of goods or
properties, (ii) rendition of services in the
course of trade or business, and (iii) the
importation of goods, whether or not such
imported goods are for use in business. [Sec.
4.105-2, RR 16-2005]
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TAXATION LAW
d. Indirect tax: Impact and Incidence
of Tax
Impact Incidence
Refers to the statutory Refers to the buyer /
taxpayer (i.e., the final consumer, the
seller/importer), the one who ultimately
one who collects tax bears the burden of
and pays to the taxation
government
e. Tax Credit Method
Under the VAT method of taxation, which is
invoice-based, an entity can credit against or
subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs
and imports. [CIR v. Seagate, G.R. No. 153866
(2005)].
The VAT payable is the excess of output tax
over input tax:
OUTPUT VAT – INPUT VAT = VAT PAYABLE
or EXCESS INPUT TAX
Note: If input VAT is higher than output VAT,
the excess input tax is carried over to the
succeeding taxable quarter/s as tax credit.
However, any input tax attributable to zero-
rated sales may instead be refunded or
credited against other internal revenue taxes.
[Sec. 4.110-7, RR 16-2005]
f. Destination Principle and Cross-
Border Doctrine
General rule: The VAT system uses the
destination principle as a basis for the
jurisdictional reach of the tax. Goods and
services are taxed only in the country where
they are consumed. Thus, exports are zero-
rated, while imports are taxed. [CIR v.
American Express International, G.R. No.
152609 (2005)]
 U.P. LAW BOC TAXATION 2
Exception: Zero-rated services under Sec.
108(b)(1)[1] and (2)
Requisites for the exception to apply:
1. The service is performed in the Philippines;
2. The service falls under any of the
categories provided in Section 108(b) of
the Tax Code; and
Note: The recipient of such services must
be doing business outside the Philippines.
[CIR v. Burmeister, G.R. No. 153205
(2007)]
3. It is paid for in acceptable foreign currency
that is accounted for in accordance with the
regulations of the BSP. [CIR v. American
Express International, G.R. No. 152609
(2005)]
In a zero-rated service, the place where the
service is rendered determines the
jurisdiction to impose the VAT. The place of
payment is immaterial; much less is the place
where the output of the service will be further
or ultimately used. [ibid.]
CONSTITUTIONALITY OF VAT
ABAKADA Guro Party List, et. al. v. Ermita,
G.R. No. 168056 (2005):
1. The VAT law is uniform: it provides a
standard rate of 10% (now 12%) on all
goods or services and 0% rate on certain
sales and transactions.
2. It is equitable: The law is equipped with a
threshold margin where VAT does not
apply to sales of goods or services with
gross annual sales or receipts not
exceeding P1.5 million (now P3 million).
3. VAT, by its very nature, is regressive,
BUT the Constitution does not prohibit
the imposition of indirect taxes. What it
simply provides is that Congress shall
“evolve a progressive system of taxation”.
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TAXATION LAW
CHARACTERISTICS OF A VAT-TAXABLE
TRANSACTION
General Characteristics/Nature:
1. Percentage Tax – imposed by law not on
the thing or service but on the act (sale,
barter, exchange, lease, importation, or
performance of service)
2. Ad Valorem Tax – the amount or rate is
based on the gross selling price or gross
value in money, or the gross receipts
derived from the transaction
3. Indirect Tax – 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. 105, NIRC]
Note: In the case of importation, the
importer is the one liable for VAT. [Sec.
4.105.2, RR 16-2005]
4. Excise Tax - a tax on the privilege of
engaging in the business of selling goods
or services, or in the importation of goods
5. Broad-based Tax on Consumption – VAT
is levied on every sale of goods, properties
or services at all stages of manufacture,
production, and distribution of goods and
services. [MAMALATEO]
6. Regressive Tax – By its very nature, VAT
is regressive. The principle of progressive
taxation has no relation with the VAT
system inasmuch as the VAT paid by the
consumer or business for every goods
bought or services enjoyed is the same
regardless of income. [ABAKADA Guro
Party List v. Executive Secretary, G.R.
168056 (2005)]
ELEMENTS OF A VAT-TAXABLE
TRANSACTION IN GENERAL
1. There must be a sale, barter, exchange, or
lease of goods or properties, performance
of service in the Philippines, or importation
of good
 U.P. LAW BOC TAXATION 2
2. The subject matter must be taxable goods
or properties or services
3. The sale must be made by a taxable
person in the course of trade or business
or in the furtherance of one’s profession.
Meaning of “in the course of trade or
business” (Rule of Regularity)
The regular conduct or pursuit of a commercial
or economic activity, including transactions
incidental thereto, by any person regardless of
whether or not the person engaged therein is a
nonstock, nonprofit private organization
(irrespective of the disposition of its net income
and whether or not it sells exclusively to
members or their guests), or government
entity. [Sec. 105, NIRC; Section 4.105-3, RR
16-2005]
Exceptions:
1. Services rendered by non-resident foreign
persons shall be considered as being
rendered in the course of trade or
business, even if the performance of
services is not regular. [Section 4.105-3,
RR 16-2005]
2. Importation are subject to VAT whether or
not made in the course of trade or business
[Sec. 4.105-1, RR 16-2005]
3. Any business where the gross sales or
receipts do not exceed P100,000 during
the 12-month period shall be considered
principally for subsistence or livelihood and
not in the course of trade or business.
Thus, they are exempt from VAT and
percentage tax. [RMC 7-2014 in relation to
RR 7-2012]
2. Persons Liable to Value-
Added Tax
Persons Liable:
1. Any person who sells, barters, exchanges,
or leases goods or properties, or who
renders services, in the course of trade or
business
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TAXATION LAW
Exceptions:
a. A non-VAT-registered person whose
annual gross sales or receipts do not
exceed P3M.
b. Franchise grantees under Sec. 119 of
this Code whose annual gross receipts
do not exceed P10M and who are not
VAT-registered.
2. Any person who imports goods, whether or
not in the course of business
3. Any person who voluntarily registers its
business under the VAT system,
regardless of level of sales.
The term “person” refers to any individual,
trust, estate, partnership, corporation, joint
venture, cooperative or association [Sec.
4.105-1, RR 16-2005].
VAT and Percentage Tax
General Rule: VAT and Percentage Tax cannot
be charged together. The transaction is subject
to either VAT or Other Percentage Tax, but not
both.
Exception: When a non-VAT registered person
erroneously issues a VAT invoice [Sec. 4.113-
4, RR 16-2005]
3. Composition of Value-Added
Tax
a. On sale of goods or properties
Transactions:
! Every sale, barter or exchange (actual sale
and in the course of trade or business)
! Transactions “deemed sale” of taxable
goods or properties [Sec. 4.106-1, RR 16-
2005]
Rate: 12% VAT [Sec. 106, NIRC]
Who Pays: Seller/Transferor[Sec. 106(A),
NIRC]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

Meaning of goods or properties

Commercial
Goods or properties – all tangible and
Property
intangible objects which are capable of
(Sale/Lease)
pecuniary estimation, including:
a. Real properties held primarily for sale to Residential If monthly rental ≤
customers or held for lease in the ordinary Units (Lease) P15,000 = VAT
course of trade or business; and OPT-exempt
b. The right or the privilege to use patent, If monthly rental >
copyright, design, or model, plan, secret P15,000 but
formula or process, goodwill, trademark, aggregate annual
trade brand or other like property or right; rentals ≤ P3M =
c. The right or the privilege to use in the subject to OPT
Philippines of any industrial, commercial or If monthly rental >
scientific equipment; P15,000 and
d. The right or the privilege to use motion aggregate annual
picture films, films, tapes and discs; rentals > P3M =
e. Radio, television, satellite transmission and subject to VAT
cable television time. [Sec. 106(A)(1),
NIRC] Sale of If SP > P1.5M =
Residential Lot subject to VAT
Requisites for Taxability of Sale of Goods If SP ≤ P1.5M = VAT-
or Personal Properties exempt
a. There is an actual or deemed sale of
goods or properties for a valuable Sale of If SP > P2.5M =
consideration Residential subject to VAT
b. Undertaken in the course of trade or House and Lot If SP ≤ P2.5M = VAT-
business exempt
c. For use or consumption in the
Philippines (regardless of the payment Sales of real properties subject to VAT
arrangements) Sale of real properties held primarily for sale to
d. Not exempt from VAT under Sec. 109 customers or held for lease in the ordinary
of the NIRC, special law, or course of trade or business of the seller shall
international agreement be subject to VAT. [Sec. 4.106-3, RR 16-2005]
[MAMALATEO]
Requisites for Taxability of Sale or
Exchange of Real Property
Summary of Rules on Transactions a. The seller executes a deed of sale,
Involving Real Properties barter or exchange, assignment or
Casual sale conveyance, or contract to sell of real
(Capital Subject to 6% CGT property.
Assets) b. The real property is located within the
Philippines.
Regular sales c. The seller or transferor is engaged in
(Ordinary Subject to 12% VAT real estate business either as a real
Assets): estate dealer, developer, or lessor.
d. The real property is held primarily for
sale or for lease in the ordinary course
of his trade or business, or at least an

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 U.P. LAW BOC TAXATION 2
ordinary asset used in the trade or
business of the VAT taxpayer as an
incident to his VAT-taxable activity.
e. The sale is not exempt from VAT under
Sec. 109 of the NIRC, special law, or
international agreement.
[MAMALATEO]
Modes of Sales of Real Estate; Effects
a. Cash sale – the entire selling price is
taxable in the month of sale
b. Installment sales
1. Meaning of installment sale: a
sale in which the initial payments in
the year of sale do not exceed 25%
Gross Selling Price (GSP)
2. Effect: VAT is recognized based
on collection, including interest and
penalties, actually and/or
constructively received by the
seller. [Sec. 4.106-3, RR 16-2005]
Note: “Initial payments” means
payment or payments which the seller
receives before or upon execution of
the instrument of sale and payments
which he expects or is scheduled to
receive in cash or property during the
taxable year when the sale or
disposition of the real property was
made. It covers any down payment
made and includes all payments
actually or constructively received
during the year of sale, the aggregate
of which determines the limit set by law.
c. Sale on a deferred-payment basis
1. Meaning: initial payments in the
year of sale exceed 25% of the
GSP
2. Effect: The transaction shall be
treated as cash sale which makes
the entire selling price taxable in
the month of sale. Subsequent
payments are no longer subject to
VAT. [Sec. 4.106-3, RR 16-2005]
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TAXATION LAW
Sale of Real Property NOT subject to VAT
a. Sale of real properties not primarily held for
sale or lease in the course of trade or
business
b. Real property utilized for low cost or
socialized housing
c. Residential lot valued at P1.5M and below
d. House and lot, and other residential
dwellings valued at P2.5M and below
[Sec. 109(1)(P)]
Note: Beginning January 1, 2021, the
VAT exemption for sale of house and
lot, and other residential dwellings shall
apply only to those with selling price of
not more than P2,000,000.
e. Transfer of property to a corporation in
exchange for shares of stocks in a tax-
free exchange under Sec. 40(C)(2) of
the NIRC [Sec. 109(1)(X), NIRC]
f. Transmission of property to a trustee if
the property is to be merely held in trust
for the trustor and/or beneficiary [Sec.
4.106-3, RR 16-2005]
Exception: If the property transferred is
originally intended for sale, lease or
use in the ordinary course of trade or
business AND the transfer constitutes
a completed gift, the transfer is subject
to VAT as a deemed sale transaction.
The transfer is a completed gift if the
transferor divests himself absolutely of
control over the property, i.e.,
irrevocable transfer of corpus and/or
irrevocable designation of beneficiary.
[Sec. 4.106-3, RR 16-2005]
i. Tax base: gross selling price
Basis: Gross selling price or gross value in
money of the goods or properties sold,
bartered or exchanged.
Meaning of Gross Selling Price (GSP): The
total amount of money or its equivalent which
the purchaser pays or is obligated to pay to the
 U.P. LAW BOC TAXATION 2
seller in consideration of the sale, barter or
exchange of the goods or properties, excluding
VAT. The excise tax, if any, on such goods or
properties shall form part of the gross selling
price [Sec. 106(A), NIRC]
• Excludes: VAT, sales discounts and,
allowances and returns
• Includes: Excise tax paid, initial
payments, interests and penalties (if
installment), commission income (if
exported), purchase price, charges for
packing, delivery and insurance
GSP in case of sale or exchange of real
property
a. The consideration stated in the sales
document or
b. The fair market value (FMV) whichever is
higher.
Meaning of FMV – Whichever is higher of the
following:
1. The FMV as determined by the CIR (zonal
value) or
2. The FMV as shown in the schedule of
values of the Provincial and City Assessors
(real property tax declaration). [Sec. 4.106-
4, RR 16-2005]
Note: If the VAT is not billed separately in
the document of sale, the stated selling
price or consideration shall be deemed
inclusive of VAT. However, if the GSP is
based on the zonal value or market value
of the property, the zonal or market value
shall be deemed exclusive of VAT. Thus,
the zonal value/market value, net of the
output VAT, should still be higher than the
consideration in the document of sale,
exclusive of the VAT. [Sec. 4.106-4, RR
16-2005]
Allowable Deductions from GSP
a. Sales returns and allowances – those for
which a proper credit or refund was made
during the month or quarter to the buyer for
sales previously recorded as taxable sales
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TAXATION LAW
These refer to the value of goods or
properties sold and subsequently returned
or for which allowances were granted by a
VAT-registered person.
b. Sales Discounts – bona fide or regular
discounts given to purchasers, which are
ascertainable and definitely agreed upon
between the vendor and the vendee at the
time of sale
1. Must be determined and granted at
the time of sale
2. Must be expressly indicated in the
sales invoice and the amount
forming part of the gross sales duly
recorded in the books of accounts
3. The grant is not dependent upon
the happening of a future event
ii. Transactions deemed sale
Rate: 12% VAT
Basis: Market value of the goods deemed sold
as of the time of the occurrence of the
transactions
However, in 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 FMV, the
actual market value shall be the tax base. 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 16-2005]
The following are transactions deemed sale:
[Sec. 106(B), NIRC]
a. Transfer, use or consumption not in the
course of business of goods or properties
originally intended for sale or for use in the
U.P. LAW BOC TAXATION 2
course of business [Sec. 4.106-7(a)(1), RR
16-2005]
Example: when a VAT-registered
person withdraws goods from his
business for his personal use
Note: Transmission of property to a
trustee, if such property is one for sale,
lease or use in the ordinary course of
trade or business and the transfer
constitutes a completed gift, is subject
to VAT as a deemed sale transaction.
[Sec. 4.106-3, RR 16-2005]
b. Distribution or transfer to:
(i) shareholders or investors as share
in the profits of the VAT-registered
person; or
(ii) creditors in payment of debt. [Sec.
4.106-7(a)(2), RR 16-2005]
c. Consignment of goods if actual sale is
not made within 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. [Sec. 4.106-7(a)(3),
RR 16-2005]
d. Retirement from or cessation of
business with respect to goods on
hand
This covers 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. 4.106-
7(a)(3), RR 16-2005]
Examples:
(i) change of ownership of the
business (e.g., when a sole
Page 154 of 256
TAXATION LAW
proprietorship incorporates, or the
sole proprietor sells his entire
business)
(ii) dissolution of a partnership and
creation of a new partnership which
takes over the business
i. Change or cessation of
status as value-added tax-
registered person
Rate: 12% VAT
Basis: the acquisition cost or the current
market price of the goods or properties,
whichever is LOWER
VAT shall apply to goods disposed of or
existing as of a certain date if, under certain
circumstances, the status of a person as a
VAT-registered person changes or is
terminated. [Sec. 106(C), NIRC]
(a) Subject to VAT
The 12% VAT is applicable to goods or
properties originally intended for sale or
use in business and capital goods which
are existing as of the occurrence of the
following:
a. Change of business activity from VAT
taxable status to VAT-exempt status –
Example: A VAT-registered person
engaged in a taxable activity like
wholesaler or retailer who decides to
discontinue such activity and engages
instead in life insurance business or in
any other business not subject to VAT.
b. Approval of request for cancellation of
a registration due to reversion to
exempt status
c. Approval of request for cancellation of
registration due to:
1. Reversion to exempt status
2. A desire to revert to exempt status
after lapse of 3 consecutive years
 U.P. LAW BOC TAXATION 2
from the time of registration by a
person who voluntarily registered
despite being exempt under Sec.
109(2) of the NIRC
3. Failure to exceed the threshold of
P3,000,000 by one who
commenced business with the
expectation of gross sales or
receipts exceeding said threshold
[Sec. 4.106-8(a), RR 16-2005]
(b) Not Subject to VAT
VAT shall not apply to goods or properties
originally intended for sale or use in the
course of business which existing as of the
occurrence of the following:
a. Change of control of a corporation by
the acquisition of the controlling
interest of such corporation by another
stockholder (individual or corporate) or
group of stockholders.
b. Change in the trade or corporate name
of the business
c. Merger or consolidation of
corporations: The unused input tax of
the dissolved corporation, as of the
date of merger or consolidation, shall
be absorbed by the surviving or new
corporation.
b. On importation of goods
Rate: 12% VAT
Basis: Total value used by the Bureau of
Customs (BOC) in determining tariff and
customs duties, plus customs duties, excise
taxes, if any, and other charges (such as
postage, commission)
Where the customs duties are determined on
the basis of the quantity or volume of the
goods, VAT shall be based on the landed cost,
plus excise taxes, if any.
Page 155 of 256
TAXATION LAW
Who Pays: IMPORTER prior to the release of
such goods from customs custody [Sec. 107
(A), NIRC]
Importer: any person who brings goods into
the Philippines, whether or not made in the
course of his trade or business, including non-
exempt persons or entities who acquire tax-
free imported goods from exempt persons,
entities or agencies [Sec. 4.107-1 (b), RR 16-
2005]
Customs duty – amount of customs duty
legally due and paid by the importer
Other similar chargers:
a. Other taxes (special import tax)
b. Bank charges
c. Arrastre charges
d. Wharfage dues
e. Brokerage fees
f. All other charges or expenses
Landed Cost - invoice amount including costs
of loading, shipping and unloading, customs
duties, freight, insurance, other charges,
excise tax (if any)
Expenses incurred after the release of the
goods such as those incurred in delivering
goods do not form part of the landed cost.
Transfer of Goods by Tax-Exempt Persons
(Technical Importation):
a. If the importer is tax-exempt, the
subsequent purchasers, transferees or
recipients who are non-exempt persons
shall be considered as importers who shall
be liable for VAT due on such importation.
b. The tax due on such importation shall
constitute a lien on the goods superior to all
charges or liens on the goods, irrespective
of the possessor thereof. [Sec. 107(B),
NIRC]
 U.P. LAW BOC TAXATION 2
c. On sale of services and use or
lease of properties
Rate: 12% VAT
Basis: Gross receipts derived from the sale or
exchange of services, including the use or
lease of properties
Gross Receipts – the total amount of money
or its equivalent representing the contract
price, compensation, service fee, rental or
royalty, including the amount charged for
materials supplied with the services and
deposits and advanced payments actually or
constructively received during the taxable
quarter for the services performed or to be
performed for another person, excluding VAT
[Sec. 108 (A), NIRC]
Gross receipts shall exclude those amounts
earmarked for payment to unrelated third party
or received as reimbursement for advance
payment on behalf of another which do not
redound to the benefit of the payor. [Sec. 11,
RR 4-2007]
“Constructive receipt” 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
are:
a. Deposit in banks which are made available
to the seller of services without restrictions
b. Notice by debtor to offset any debt or
obligation and acceptance thereof by the
seller as payment for services rendered
c. Transfer of the amounts retained by the
contractee to the account of the contractor.
[Sec. 4.108-4, RR 16-2005]
Requisites for Taxability
a. There is a sale or exchange of service or
lease or use of property enumerated in the
law or other similar services;
b. The service is performed or to be
performed in the Philippines;
c. For a valuable consideration actually or
constructively received; and
Page 156 of 256
TAXATION LAW
d. The service is not exempt under the NIRC,
special law or international agreement
[MAMALATEO]
SALE OR EXCHANGE OF SERVICES
Means the performance of all kinds of services
in the Philippines for others for a fee,
remuneration or consideration [Sec 108 (A),
NIRC]
“Sale or exchange of services” includes
services performed by the following:
a. Construction and service contractors
b. Stock, real estate, commercial, customs
and immigration brokers
c. Lessors of property, whether personal or
real
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 is leased or used
in the Philippines. [Sec. 4.108-3 (a), RR 16-
2005]
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 paid by the licensees on behalf of the
non-resident owner.
Note: Lease of a residential unit with a
monthly rental not exceeding P15,000 shall
be exempt from VAT. [Sec. 109(1)(Q),
NIRC]
d. Persons engaged in warehousing service
e. Lessors or distributors of cinematographic
films
f. Persons engaged in milling, processing,
manufacturing or repacking goods for
others(except palay into rice, corn into
corn grits, and sugarcane into raw sugar)
g. Proprietors, operators, or keepers of
hotels, motels, rest houses, pension
houses, inns, resorts
 U.P. LAW BOC TAXATION 2
h. Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers
i. Dealers in securities – merchants of stock
or securities who buy and sell securities to
customers with a view to the gains and
profits that may be derived therefrom
“Gross receipts” means gross selling
price less cost of the securities sold.
j. Lending investors – all persons OTHER
than banks, non-bank financial
intermediaries, finance companies and
other financial intermediaries NOT
performing quasi-banking functions who
make a practice of lending money for
themselves or others at interest
k. Transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes
for hire and other domestic common
carriers by land relative to their transport of
goods or cargoes
Note: Common carriers which transport
passengers by land are subject to the 3%
percentage tax under Sec. 117 of the
NIRC. [Sec. 4.108-3(d), RR 16-2005]
l. Common carriers by air and sea relative to
their transport of passengers, goods or
cargoes from one place in the Philippines
to another place in the Philippines
m. Sales of electricity by generation
companies, transmission by any entity
including the National Grid Corporation of
the Philippines (NGCP), and distribution
companies, including electric cooperatives
(as amended by TRAIN Law; Sec. 2, RR
13-2018)
Note: Sale of power or fuel generated
through renewable sources of energy shall
be subject to 0% VAT (zero-rated). [Sec.
108(B)(7), NIRC]
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TAXATION LAW
n. Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other
franchise grantees
Exceptions:
! Franchise grantees of radio and/or
television broadcasting whose annual
gross receipts of the preceding year do
not exceed P10,000,000 shall be
subject to 3% franchise tax, subject to
optional registration; while franchise
grantees of gas and water utilities shall
be subject to 2% franchise tax. [Sec.
119, NIRC; Sec. 4.108-3(h), RR 16-
2005]
! With respect to franchise grantees of
telephone and telegraph services,
amounts received for overseas
dispatch, message, or conversation
originating from the Philippines are
subject to the 10% percentage tax and
hence exempt from VAT. [Sec. 120,
NIRC; Sec. 4.108-3, RR 16-2005]
o. Non-life insurance companies (except crop
insurances) including surety, fidelity,
indemnity and bonding companies
Note: Life and disability insurance, and
health and accident insurance are subject
to the 2% percentage tax under Sec. 123
of the NIRC.
Non-life reinsurance premiums are NOT
subject to VAT. However, insurance and
reinsurance commissions, whether life or
non-life, are subject to VAT. [Sec. 4.108-
3(i), RR 16-2005]
p. Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties
Health Maintenance Organizations
(HMOs) – entities which arrange for
coverage or designated managed care
 U.P. LAW BOC TAXATION 2
services needed by plan holders/members
for fixed prepaid membership fees and for
a specified period of time [Sec. 4.108-3(k),
RR 16-2005]
HMO’s gross receipts shall be the total
amount of money or its equivalent
representing the service fee actually or
constructively received during the taxable
period for the services performed or to be
performed for another person, excluding
VAT. [Sec. 4.108-3(i), RR 16-2005]
Additional services subject to VAT:
The amounts earmarked and eventually
paid by the HMO to the medical service
providers do not form part of its gross
receipts for VAT purposes. [Medicard
Philippines, Inc. v. CIR, G.R. No. 222743
(2017)]
“Sale or exchange of services” shall
likewise include the following:
a. The lease or the use of or the right or
privilege to use any copyright, patent,
design or model, plan secret formula or
process, goodwill, trademark, trade
brand or other like property or right
b. The lease of the use of, or the right to
use of any industrial, commercial or
scientific equipment
c. The supply of scientific, technical,
industrial or commercial knowledge or
information
d. The supply of any assistance that is
ancillary and subsidiary to and is
furnished as a means of enabling the
application or enjoyment of any such
property, or right as is mentioned in
subparagraph (b) or any such
knowledge or information as is
mentioned in subparagraph (c)
e. The supply of services by a
nonresident person or his employee in
connection with the use of property or
rights belonging to, or the installation or
operation of any brand, machinery or
other apparatus purchased from such
nonresident person
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TAXATION LAW
f. The supply of technical advice,
assistance or services rendered in
connection with technical management
or administration of any scientific,
industrial or commercial undertaking,
venture, project or scheme
g. The lease of motion picture films, films,
tapes and discs
h. The lease or the use of or the right to
use radio, television, satellite
transmission and cable television time
a. Services performed in the exercise of
profession or calling by individuals
subject to professional tax under the
LGC, and professional services
rendered by general professional
partnerships (GPPs) [R.A. 7716, as
amended by R.A. 8241]
Requisites:
1. The performance of services
should not be in pursuit of an
employer-employee relationship
between the service-provider and
the service-recipient
2. His/her gross receipts exceed
P3,000,000
Note: Services rendered by doctors, and
lawyers were previously VAT-exempt
under R.A. 9238, but such exemption has
since been removed by R.A. 9337.
b. Services performed by
actors/actresses, talents, singers,
emcees, radio/television broadcasters,
choreographers, musical, radio, movie,
television, stage directors, and
professional athletes [R.A. 7716, as
amended by R.A. 8241]
c. Lease or use of sports facilities and
equipment by amateur players [R.A.
7716, as amended by R.A. 8241]
 U.P. LAW BOC TAXATION 2
4. Zero-rated and Effectively
Zero-rated sales of goods or
properties, and services
4. Those considered export sales under the
Rate: 0% VAT
Concept: A zero-rated sale of goods,
properties, or services by a VAT-registered
person is a taxable transaction for VAT
purposes but shall not result in any output
tax. However, the input tax on purchases of
goods, properties or services, related to such
zero-rated sale, shall be available as tax credit
or refund.
The following transactions are subject to VAT
at 0%
a. Export sales
b. Sales of goods or property to persons
or entities who are tax-exempt
(Effectively Zero-Rated Sales)
c. Zero-rated sale of services
Export Sales [Sec. 106(A)(2)(a), NIRC]
1. The (i) sale and actual shipment of goods
from the Philippines to a foreign country
AND (ii) paid for in acceptable foreign
currency or its equivalent in goods or
services, AND (iii) accounted for in
accordance with the rules and regulations
of the BSP
2. The (i) sale of raw materials or packaging
materials to a nonresident buyer (ii) for
delivery to a resident local export-oriented
enterprise (iii) to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer's goods AND
(iv) paid for in acceptable foreign currency
AND (v) accounted for in accordance with
the rules and regulations of the BSP
3. Sale of raw materials or packaging
materials to export-oriented enterprise
whose export sales exceed 70% of total
annual production
Export-oriented enterprise – any
enterprise whose export sales exceed 70%
Page 159 of 256
TAXATION LAW
of the total annual production of the
preceding taxable year [Sec. 4.106-5(a)(3),
RR 16-2005]
Omnibus Investment Code of 1987, and
other special laws (e.g. Bases Conversion
& Development Act of 1992)
Considered Export Sales under the
Omnibus Investment Code (EO 226):
a. Philippine port F.O.B. value
determined from invoices, bills of
lading, inward letters of credit, landing
certificates, and other commercial
documents, of export products
exported directly by a registered export
producer; OR
b. Net selling price of export products sold
by a registered export producer to
another export producer, or to an
export trader that subsequently exports
the same (only when actually exported
by the latter) as evidenced by landing
certificates.
Constructive Exports (without actual
exportation):
a. Sales to bonded manufacturing
warehouses of export-oriented
manufacturers
b. Sales to export processing zones [R.A.
7916, R.A. 7922, R.A. 7903 and other
similar export zones];
c. Sales to registered export traders
operating bonded trading warehouses
supplying raw materials in the
manufacture of export products;
d. 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(a)(4), RR
16-2005]
 U.P. LAW BOC TAXATION 2
Notes:
! Export sales of registered export
traders shall include commission
income.
! The exportation of goods on
consignment shall not be deemed
export sales until the export products
consigned are in fact sold by the
consignee.
! Sales by a VAT-registered supplier to a
manufacturer/producer whose
products are 100% exported are
considered export sales. A certification
to this effect must be issued by the
Board of Investment (BOI) which shall
be good for 1 year unless subsequently
re-issued [Sec. 4.106-5(a)(4), RR 16-
2005]
5. The sale of goods, supplies, equipment
and fuel to persons engaged in
international shipping or international air
transport operations: Provided, That the
goods, supplies, equipment and fuel shall
be used exclusively for international
shipping or air transport operations [as
amended by Train Law; Sec. 2, RR 13-
2018]
a. Limited to goods, supplies,
equipment and fuel to be used in
the transport of goods and
passengers 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 it is for
unloading passengers and/or
cargoes originating abroad, or to
load passengers and/or cargoes
bound for abroad
b. If any portion of such fuel, goods,
supplies or equipment is used for
purposes other than that
mentioned, such portion shall be
subject to 12% VAT [Sec. 4.106-5,
RR 16-2005 as amended by RR
13-2018]
Page 160 of 256
TAXATION LAW
Note: items (2), (3), and (4) above shall be
subject to the 12% VAT and no longer be
considered export sales subject to 0% VAT
rate upon satisfaction of the following
conditions:
1. The successful establishment and
implementation of an enhanced VAT
refund system that grants refunds of
creditable input tax within 90 days from
the filing of the VAT refund application
with the Bureau; and
2. All pending VAT refund claims as of
December 31, 2017 shall be fully paid
in cash by December 31, 2019.
The Department of Finance shall establish a
VAT refund center in the BIR and in the BOC
that will handle the processing and granting of
cash refunds of creditable input tax. [Sec.
106(A), NIRC]
Effectively Zero-Rated Sales [Sec.
106(A)(2)(b), NIRC]
This refers to (i) the local sale of goods and
properties (ii) by a VAT-registered person (iii)
to a person or entity who was granted direct
and indirect tax exemption under special laws
or international agreement (e.g., PEZA, Asian
Development Bank, International Rice
Research Institute). [MAMALATEO; RR 4-
2007]
ECOZONES
Ecozones shall be managed and operated by
PEZA as a separate customs territory [Sec. 8,
RA 7916 or the “Special Economic Zone Act of
1995”].
Tax Treatment of Sales to and by PEZA-
registered Enterprises [RMC 74-99]:
1. Any sale of goods, property or services
made by a VAT registered supplier
from the Customs Territory to any
registered enterprise operating in the
ecozone, regardless of the class or
type of the latter’s PEZA registration,
shall be subject to 0% VAT. [Sec. 3,
RMC 74-99]
U.P. LAW BOC TAXATION 2
“Customs Territory” shall mean the
national territory of the Philippines
outside of the proclaimed boundaries
of the ECOZONES except those areas
specifically declared by other laws
and/or presidential proclamations to
have the status of special economic
zones and/or free ports. [Sec. 2(g),
Rule 1, Part I, RA 7916-IRR]
2. Sale of goods, property and services
by a VAT-exempt supplier from the
Customs Territory to a PEZA
registered enterprise shall be EXEMPT
from VAT, regardless of whether or not
the PEZA registered buyer is subject to
taxes under the NIRC or enjoying the
5% special tax regime. [Sec. 4, RMC
74-99]
3. Sales made by a PEZA registered
enterprise
a. Sale of goods by a PEZA
registered enterprise to a buyer
from the Customs Territory (i.e.,
domestic sales) shall be treated as
a technical importation made by
the buyer.
b. Sale of services by a PEZA
registered enterprise to a buyer
from the Customs Territory is NOT
embraced by the 5% special tax
regime, hence, such seller shall be
subject to 12% VAT.
c. Sale of goods by a PEZA
registered enterprise to another
PEZA registered enterprise (intra-
ecozone) shall be EXEMPT from
VAT. [Sec. 5, RMC 74-99]
d. Sale of services by ecozone
enterprise to another ecozone
enterprise (intra-ecozone) shall be:
i. exempt from VAT
if PEZA registered
seller is subject to 5%
special tax regime
Page 161 of 256
TAXATION LAW
ii. subject to 0% VAT
if PEZA registered
seller is subject to
taxes under NIRC (i.e.
not subject to 5%
special tax regime)
pursuant to “cross
border doctrine” [Sec.
4, RMC 74-99]
Zero Rated Sale of Services [Sec. 108 (B),
NIRC]
The following services performed in the
Philippines by a VAT-registered person shall
be subject to 0% VAT:
1. Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the BSP;
2. Services other than those mentioned in
the preceding paragraph, rendered to a
person engaged in business conducted
outside the Philippines or to a
nonresident person not engaged in
business who is outside the Philippines
when the services are performed, the
consideration for which is paid for in
acceptable foreign currency and
accounted for in accordance with the
rules and regulations of the BSP;
Note: The 0% VAT on services
performed in the Philippines is an
exception to the destination principle,
which states that goods and services
are taxed only in the country where
they are consumed. [CIR v. American
Express International, G.R. No.
152609 (2005)]
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;
 U.P. LAW BOC TAXATION 2 TAXATION LAW

4. Services rendered to persons engaged Difference between Zero-rated and VAT-

in international shipping or international exempt
air transport operations, including
leases of property for use thereof: Zero-rated VAT-exempt
Provided, That these services shall be
exclusively for international shipping or It is a taxable Not subject to output
air transport operations [as amended transaction but does tax
by TRAIN Law]; not result in an output
5. Services performed by subcontractors tax.
and/or contractors in processing,
converting, or manufacturing goods for
an enterprise whose export sales The input VAT The seller is not
exceed 70% of total annual production; attributable to zero- entitled to any input
6. Transport of passengers and cargo by rated sales may be tax on his purchases
domestic air or sea vessels from the allowed as tax credits despite the issuance
Philippines to a foreign country [as or refund. of a VAT invoice or
amended by TRAIN Law]; and receipt.

Note: Gross receipts of international air or

shipping carriers doing business in the Persons engaged in Registration is
Philippines derived from transport of zero-rated optional for VAT-
passengers and cargo from the Philippines transactions are exempt persons.
to another country shall be subject to the required to register.
3% percentage tax. [Sec. 118, NIRC]

7. Sale of power or fuel generated

through renewable sources of energy 5. Value-added Tax-exempt
such as, but not limited to, biomass, Transactions
solar, wind, hydropower, geothermal,
ocean energy, and other emerging
VAT-exempt transactions refer to the sale of
energy sources using technologies
goods or properties and/or services and the
such as fuel cells and hydrogen fuels.
use or lease of properties that is NOT subject
to VAT (output tax) and the seller is not allowed
Note: Items (1) and (5) above shall be subject
any tax credit of VAT (input tax) on purchases.
to the 12% VAT and no longer be considered
[Sec. 4.109-1(A), RR 16-2005]
export sales subject to 0% VAT rate upon
satisfaction of the following conditions:
The person making the exempt sale of goods,
1. The successful establishment and
properties or services shall not bill any output
implementation of an enhanced VAT
tax to his customers. [Sec. 4.109-1(A), RR 16-
refund system that grants refunds of
2005]
creditable input tax within 90 days from
the filing of the VAT refund application
Note: The VAT-registered person may elect
with the Bureau; and
that the exemption not apply to its sale of goods
2. All pending VAT refund claims as of
or properties or services; provided that the
December 31, 2017 shall be fully paid
election made shall be irrevocable for a period
in cash by December 31, 2019. [Sec.
of three (3) years from the quarter the election
108(B), NIRC]
was made [Sec. 4.109-2, RR 16-2005 as
amended by RR 13-2018].

Page 162 of 256

 U.P. LAW BOC TAXATION 2
Exempt Transactions
The following transactions are exempt from
VAT: [Sec. 109, NIRC]
a. Sale or importation of agricultural and
marine food products in their original
state, livestock and poultry of a kind
generally used as, or yielding or producing
foods for human consumption, and
breeding stock and genetic materials
therefor;
! Products in their original state
remain as such even if they have
undergone the simple processes of
preparation or preservation for the
market, such as freezing, drying,
salting, broiling, roasting, smoking
or stripping, including those using
advanced technological means of
packaging, such as shrink
wrapping in plastics, vacuum
packing, tetra-pack, and other
similar packaging methods.
! Polished and/or husked rice, corn
grits, raw cane sugar and
molasses, ordinary salt, AND
COPRA shall be considered in their
original state
! Livestock or poultry do not include
fighting cocks, race horses, zoo
animals and other animals
generally considered as pets. [Sec.
4.109-1(B)(1)(a), RR 16-2005]
b. Sale or importation of fertilizers, seeds,
seedlings and fingerlings, fish, prawn,
livestock and poultry feeds including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium fish,
zoo animals, and other animals generally
considered as pets);
c. Importation of personal and household
effects belonging to (i) Philippine residents
returning from abroad and (ii) non-resident
citizens coming to resettle in the
Philippines; provided, that such goods are
also exempt from customs duties under the
Page 163 of 256
TAXATION LAW
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:
i. belonging to persons coming to
settle in the Philippines, or Filipinos
or their families and descendants
who are now residents or citizens
of other countries (i.e., overseas
Filipinos
ii. in quantities and of the class
suitable to the profession, rank or
position of the persons importing
said items
iii. for their own use and not for barter
or sale,
iv. accompanying such persons, or
arriving within a reasonable time
[as amended by TRAIN Law]
Note: The Bureau of Customs may,
upon production of satisfactory
evidence that such persons are
actually coming to settle in the
Philippines and that the goods are
brought from their former place of
abode, exempt such goods from
payment of duties and taxes [as
amended by TRAIN Law];
Exception: Vehicles, vessels,
aircrafts, machineries, and other goods
for use in manufacturing shall be
subject to duties, taxes and other
charges.
e. Services subject to percentage tax; (see
Percentage Tax, infra)
f. Services by agricultural contract growers
and milling for others of palay into rice, corn
into grits, and sugar cane into raw sugar;
! Agricultural contract growers refer
to those producing for others
poultry, livestock or other
agricultural and marine food
products in their original state.
 U.P. LAW BOC TAXATION 2 TAXATION LAW

[Sec. 4.109-1(B)(1)(f), RR 16- VAT if the producer is the

2005] cooperative itself. If not (e.g.,
g. Medical, dental, hospital and veterinary trader), then only those sales to its
services, except those rendered by members shall be exempted from
professionals; VAT. [RR 4-2007]
! Laboratory services are exempted. m. Gross receipts from lending activities by
If the hospital or clinic operates a credit or multi-purpose cooperatives duly
pharmacy or drugstore, the sale of registered with the CDA;
drugs and medicine is subject to n. Sales by non-agricultural, non-electric and
VAT. [Sec. 4.109-1(B)(1)(g), RR non-credit cooperatives duly registered
16-2005] and in good standing with the CDA;
! Note: R.A. 9337 removed the VAT- Provided, that the share capital
exemption previously granted to contribution of each member does not
doctors and lawyers. exceed P15,000 and regardless of the
h. Educational services (i) rendered by aggregate capital and net surplus ratably
private educational institutions, duly distributed among the members;
accredited by DepEd, CHED, TESDA, and ! However, their importation of
(ii) those rendered by government machineries and equipment,
educational institutions; including spare parts thereof, to be
i. Services rendered by individuals pursuant used by them are subject to VAT.
to an employer-employee relationship; [Sec. 4.109-1(B)(1)(n), RR 16-
j. Services rendered by regional or area 2005]
headquarters established in the Philippines o. Export sales by persons who are not VAT-
by multinational corporations which act as registered;
supervisory, communications and p. Sale of real properties as follows:
coordinating centers for their affiliates, i. Sale of real properties NOT
subsidiaries or branches in the Asia-Pacific primarily held for sale to customers
Region and do not earn or derive income or held for lease in the ordinary
from the Philippines; course of trade or business.
k. Transactions which are exempt under
international agreements to which the ii. Sale of real properties utilized for
Philippines is a signatory or under special low-cost housing as defined by
laws, except those under PD No. 529 R.A. 7279 (Urban Development
(Petroleum Exploration Concessionaires and Housing Act of 1992) and other
under the Petroleum Act of 1949); related laws (e.g., R.A. 7835, R.A.
l. Sales by agricultural cooperatives duly 8763;
registered with the Cooperative ! Low-cost housing" refers to
Development Authority (CDA) to their housing projects intended
members, as well as sale of their produce, for homeless low-income
whether it is original state or processed family beneficiaries,
form, to non-members; their importation of undertaken by the
direct farm inputs, machineries and Government or private
equipment, including spare parts thereof, developers, which may
to be used directly and exclusively in the either be a subdivision or a
production and/or processing of their condominium registered
produce; and licensed by the
! Sale by agricultural cooperatives to Housing and Land Use
non-members are exempted from Regulatory Board /

Page 164 of 256

U.P. LAW BOC TAXATION 2
Housing (HLURB) under
BP 220, PD 957 or any
other similar law, wherein
the unit selling price is
within the selling price
ceiling per unit as set by the
Housing and Urban
Development Coordinating
Council (HUDCC). [RR 13-
2018]
iii. Sale of real properties utilized for
socialized housing as defined
under RA 7279, and other related
laws, such as RA 7835 and RA
8763, wherein the price ceiling per
unit is P480,000 for a horizontal
socialized housing with a minimum
floor area of 24sq.m, and P700,000
(if within NCR and nearby areas) or
P600,000 (in other areas) for
socialized vertical/condominium
projects with a minimum floor area
of 22sq.m. [HUDCC Resolution
Nos. 1 and 2, series of 2018]
! "Socialized housing" refers
to housing programs and
projects covering houses
and lots or home lots only
undertaken by the
Government or the private
sector for the
underprivileged and
homeless citizens which
shall include sites and
services development,
long-term financing,
liberated terms on interest
payments, and such other
benefits. [RR 13-2018]
iv. Sale of residential lot valued at
P1.5M and below, or house & lot
and other residential dwellings
valued at P2.5M and below, as
adjusted in 2011 using the 2010
Consumer Price Index values.
! If two or more adjacent
residential lots are sold or
disposed of in favor of one
Page 165 of 256
TAXATION LAW
buyer (even if covered by
separate titles or tax
declarations or separate
deeds of conveyance), for
the purpose of utilizing the
lots as one residential lot,
the sale shall be exempt
from VAT only if the
aggregate value of the lots
does not exceed P1.5M.
[RR 13-2018]
! Sale of parking lots shall
not be considered a sale of
residential lot. Hence, it
shall be subject to VAT
regardless of its selling
price. [RR 13-2012]
Note: Beginning January 1, 2021,
the VAT exemption shall only apply
to (i) sale of real properties not
primarily held for sale to customers
or held for lease in the ordinary
course of trade or business, (ii) sale
of real property utilized for
socialized housing as defined by
RA No. 7279, (iii) sale of house and
lot, and other residential dwellings
with selling price of not more than
P2,000,000 [Sec. 109(1)(P), NIRC,
as amended by TRAIN Law]
q. Lease of residential units with a monthly
rental per unit not exceeding P15,000;
! If more than P15,000 but the
aggregate rentals of the lessor
during the year do not exceed P3M,
the lease shall be exempt from
VAT, but subject to 3% percentage
tax.
! Where a lessor has several
residential units for lease, his tax
liability will be as follows:
○ Gross receipts from rentals
not exceeding P15,000
shall be exempt from VAT
and percentage tax
regardless of the
 U.P. LAW BOC TAXATION 2
aggregate annual gross
receipts.
○ Gross receipts from rentals
exceeding P15,000 shall
be subject to VAT IF the
aggregate annual gross
receipts from said units
only exceed P3M.
Otherwise, the gross
receipts will be subject to
the 3% tax imposed under
Sec. 116 of the NIRC.
! Residential units' refers 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.
! ‘Unit' means an apartment unit in
the case of apartments, house in
the case of residential houses; per
person in the case of dormitories,
boarding houses and bed spaces;
and per room in case of rooms for
rent. [RR 13-2018]
r. Sale, importation, printing or publication of
books and any newspaper, magazine,
review or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is not devoted
principally to the publication of paid
advertisements;
s. Transport of passengers by international
carriers; [added by TRAIN Law]
! Note: Transport of cargoes by
international carriers doing
business in the Philippines is
likewise exempt from VAT, but
subject to 3% percentage tax under
Sec. 118 of the NIRC.
t. Sale, importation or lease of passenger or
cargo vessels and aircraft, including
engine, equipment and spare parts thereof
Page 166 of 256
TAXATION LAW
for domestic or international transport
operations;
! The exemption from VAT on the
importation and local purchase of
passenger and/or cargo vessels
shall be subject to the
requirements on restriction on
vessel importation and mandatory
vessel retirement program of the
Maritime Industry Authority
(MARINA). [RR 13-2018]
u. Importation of fuel, goods, and supplies by
persons engaged in international shipping
or air transport operations: Provided, That
the fuel, goods, and supplies shall be used
for international shipping or air transport
operations [as amended by TRAIN Law];
! The said fuel, goods and supplies
shall be used exclusively or shall
pertain to the transport of goods
and/or passengers from a port in
the Philippines directly to a foreign
port without stopping at any other
port in the Philippines, except to
unload passengers and/or cargoes
from abroad or load the same
bound for abroad.
! If any portion of such fuel, goods or
supplies is used for any other
purpose, such portion of fuel,
goods and supplies shall be
subject to VAT. [RR 13-2018]
v. Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries (such as money changers
and pawnshops) subject to percentage tax;
[RR 13-2018]
w. Sale or lease of goods and services to
senior citizens and persons with disability,
as provided under RA Nos. 9994
(Expanded Senior Citizens Act of 2010)
and 10754 (An Act Expanding the Benefits
and Privileges of Persons with Disability),
respectively [added by TRAIN Law];
x. Transfer of property pursuant to Section
40(C)(2) of the NIRC, as amended [added
by TRAIN Law];
 U.P. LAW BOC TAXATION 2 TAXATION LAW

y. Association dues, membership fees, and shall be considered separate

other assessment and charges collected taxpayers. However, the
by homeowners association and aggregation rule (e.g., combining
condominium corporations [added by income from business and
TRAIN Law]; profession) for each taxpayer shall
z. Sale of gold to BSP [added by TRAIN Law]; apply.
aa. Sale of drugs and medicines prescribed for ! The VAT-exempt sales shall NOT
diabetes, high cholesterol, and be included in determining the
hypertension beginning January 1, 2019 threshold. [Sec. 4.109-1(B), RR 16-
[added by TRAIN Law]; 2005]
bb. Sale or lease of goods or properties or the cc. Self-employed individuals and
performance of services other than the professionals availing of the 8% tax on
transactions mentioned in the preceding gross sales and/or receipts and other non-
paragraphs, the gross annual sales and/or operating income, under Sections
receipts do not exceed the amount of P3M; 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the
! For purposes of the threshold of NIRC [RR 13-2018].
P3M, the husband and the wife

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

SUMMARY OF VAT-EXEMPTIONS [SEC. 109, NIRC]

A Of agricultural and marine products in their original state

Sale or Of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock
importation and poultry feeds.
B
Exception: specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals, and other animals generally considered pets.
Of personal and household effects belonging to (i) residents of the
C Philippines returning from abroad and (ii) nonresident citizens coming
to resettle in the Philippines
Of professional instruments and implements, tools of trade,
Importation
occupation or employment, wearing apparel, domestic animals and
D personal household effects, belong to persons coming to settle in the
Philippines or overseas Filipinos for their own use and not for
barter or sale.
E Subject to percentage tax

By agricultural contract growers and milling for others of palay into

F
rice, corn into grits and sugarcane into raw sugar

Medical, dental, hospital and veterinary services

G
Exception: those rendered by professionals
Services
Educational services rendered by private educational institutions duly
H accredited by DepEd, CHED, and TESDA, and those rendered by
governmental educational institutions

I Rendered pursuant to an employer-employee relationship

J Rendered by a RAHQ established in the Philippines

Transactions exempt under international agreements or special laws,

K Others
except those under PD 529 (Petroleum concessionaires)

Sales By agricultural cooperatives duly registered with the CDA

L
By agricultural cooperatives of direct farm inputs, machineries and
Importation
equipment

Gross receipts from lending activities by credit or multi-purpose

M Services
cooperatives duly registered with the CDA

By non-agricultural, non-electric, and non-credit cooperatives duly

N Sales registered with the CDA. Provided, the share capital contribution of
each member does not exceed P15,000

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U.P. LAW BOC TAXATION 2 TAXATION LAW

O Export sales By persons who are not VAT-registered

Of real property not primarily held for sale to customers or held for
lease in the ordinary course of business, or real property for low-cost
P Sales and socialized housing, residential lot valued at P1.5M and below and
house and lot and other residential dwellings valued at P2.5M and
below
Q Lease Of a residential unit with a monthly rental not exceeding P15,000

Sale, importation, Of books and any newspaper, magazine, review or bulletin which
R printing, or appears at regular intervals with fixed prices for subscription and sale
publication and is not devoted principally to publication of paid advertisements

S Services Transport of passengers by international carriers

Of passenger or cargo vessels and aircraft, including engine,
Sale, importation,
T equipment and spare parts thereof for domestic or international
or lease
transport operations
Of fuel, goods, and supplies by persons engaged in international
U Importation
shipping or air transport operations

Of banks, non-bank financial intermediaries performing quasi-banking

V Services
functions and other non-bank financial intermediaries

W Sale or lease Of goods and services to senior citizens and persons with disability

Of property pursuant to Section 40(C)(2) of the NIRC (tax free

X Transfer
exchanges)

Association dues, membership fees, and other assessments and

Y Others charges collected by homeowners associations and condominium
corporations

Z Sale Of gold to BSP

Of drugs and medicines prescribed for diabetes, high cholesterol, and

AA Sale
hypertension beginning January 1, 2019

Sale or lease or Other than the transactions mentioned in the preceding paragraphs,
BB performance of the gross annual sales and/or receipts do not exceed the amount of
services P3M

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 U.P. LAW BOC TAXATION 2
6. Input and Output Tax
a. Definitions
Input tax – the VAT due from or paid by a VAT-
registered person on importation of goods or
local purchase of goods, properties, or
services, including lease or use of properties,
in the course of his trade or business [Sec.
110(A)(3), NIRC]
Output tax – the VAT due on the sale or lease
of taxable goods or properties or services by
any person registered or required to register
under Section 236 of the NIRC [Sec. 110(A)(3),
NIRC]
b. Sources of Input Tax
(a) Purchase or Importation of Goods
(evidenced by VAT invoice/receipt)
(i) For sale; or
(ii) For conversion into or intended
to form part of a finished
product for sale including
packaging materials; or
(iii) For use as supplies in the
course of business; or
(iv) For use as materials supplied
in the sale of service; or
(v) For use in trade or business for
which deduction for
depreciation or amortization is
allowed under the NIRC.
(b) Purchase of real properties for
which VAT has actually been paid
(c) Purchase of services in which VAT
has actually been paid
(d) Transactions deemed sale
(e) Transitional Input Tax [Sec 111(A),
NIRC]
Who may avail of transitional input tax:
1. A person who becomes VAT-liable
for the first time upon exceeding
P3M in any 12-month period, or
2. any person who voluntarily
registers even if their turnover does
Page 170 of 256
TAXATION LAW
not exceed P3M (except franchise
grantees of radio and television
broadcasting whose threshold is
P10M) [Sec. 4.111-1(a), RR 16-
2005]
Transitional Input VAT credit:
Whichever is higher of:
1. two percent (2%) of the value of the
beginning inventory on hand, OR
2. actual VAT paid on such goods,
materials and supplies.
Note: A real estate dealer is entitled to
claim transitional input VAT on its
beginning inventory based on the value of
the entire real property, including the
improvements thereon, regardless of
whether there was prior payment of VAT on
the purchase of such real property. [Fort
Bonifacio Development Corp. v. CIR, G.R.
Nos. 158885 and 170680 (2009)]
(f) Presumptive Input Tax [Sec. 111(B),
NIRC]
Who may avail: Persons or firms engaged
in the:
1. processing of (i) sardines, (ii)
mackerel and (iii) milk, and
2. manufacturing (i) refined sugar, (ii)
cooking oil and (iii) packed noodle
based instant meals
Rate and basis: 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]
“Processing” means 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.
[Sec. 111(B), NIRC]
 U.P. LAW BOC TAXATION 2
c. Persons Who Can Avail of Input Tax
Credit
Input tax on domestic purchase or
importation of goods or properties shall be
creditable:
a. To the importer upon payment of the
VAT prior to the release of the goods
from customs custody;
b. To the purchaser of domestic goods or
properties upon consummation of sale;
or
c. To the purchaser of services or the
lessee or licensee upon payment of the
compensation, rental, royalty or fee.
[Sec. 4.110-2, RR 16-2005]
d. Input Tax on Depreciable Goods
Capital goods or properties
1. Goods or properties with estimated
useful life greater than one (1) year;
2. Treated as depreciable assets under
Sec. 34(F) of the NIRC; and
3. Used directly or indirectly in the
production or sale of taxable goods or
services. [Sec. 16, RR 4-2007]
Claims for input tax on depreciable goods
Where a VAT-registered person purchases or
imports capital goods, which are depreciable
assets for income tax purposes, the aggregate
acquisition cost of which (excluding VAT) in a
calendar month exceeds P1,000,000,
regardless of the acquisition cost of each
capital good:
1. If the estimated useful life is 5 years or
more – the input tax shall be spread
evenly over the month of acquisition
and the 59 succeeding months (i.e., 60
months) and the claim for input tax
credit will start in the month of
acquisition
Page 171 of 256
TAXATION LAW
2. If the estimated useful life is less than
5 years – the input tax shall be spread
over such a shorter period by dividing
the input tax by the actual number of
months comprising the estimated
useful life [Sec. 4.110-3, RR 16-2005]
Notes:
! If the aggregate acquisition cost does
not exceed P1,000,000, the total input
taxes will be allowable as credit against
output tax in the month of acquisition.
! If the depreciable capital good is
sold/transferred within 5 years or prior
to the exhaustion of the amortizable
input tax, the entire unamortized input
tax can be claimed as input tax credit
during the month/quarter when the sale
or transfer was made. [Sec. 4.110-3,
RR 16-2005]
! The amortization of the input VAT shall
only be allowed until December 31,
2021 after which taxpayers with
unutilized input VAT on capital goods
purchased or imported shall be allowed
to apply the same as scheduled until
fully utilized
Claiming of input tax on motor vehicles
subject to the following conditions:
a. Purchase of vehicle must be
substantiated with official receipts or
other adequate records;
b. Taxpayer has to prove the direct
connection of the motor vehicle to the
business;
c. Only one vehicle for land transport is
allowed for the use of an
official/employee with value not
exceeding P2.4 million;
d. No depreciation shall be allowed for
yachts, helicopters, airplanes [Sec. 3,
RR 12-2012]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

ILLUSTRATION: CLAIMS FOR INPUT TAX ON DEPRECIABLE GOODS

[RR 13-2018]

(1) ABC Corporation sold capital goods on installment on October 1, 2018. It is agreed that the selling
price, including the VAT, shall be payable in 5 equal monthly installments with the first installment to
be paid on October 1, 2018. The data pertinent to the sold assets are as follows:

Selling Price 5,000,000 (exclusive of VAT)

Passed on VAT 600,000

Original Cost of Asset 3,000,000

Accumulated Depreciation 1,000,000

Unutilized Input Tax (Sold Asset) 100,000

Accounting:
SELLER BUYER

October 1, 2017 October 1, 2017

Cash [(P5M + P1,120,000 Asset P5,000,000

600k)/5]

Installment 4,480,000 Input Tax 600,000

Receivable
[(P5M+600k)-1.12M]

Accumulated 1,000,000
Depreciation

Output Tax (12% 600,000 Cash 1,120,000

x P5M)

Asset 3,000,000 Installment 4,480,000

Payable

Gain on sale of set 3,000,000

Page 172 of 256

 U.P. LAW BOC TAXATION 2 TAXATION LAW

To record VAT
liability:

Output Tax 600,000

Input Tax 100,000

VAT Payable 500,000

Periodic receipt of installment Periodic receipt of installment

Cash 1,120,000 Installment 1,120,000

Payable

Installment 1,120,000 Cash 1,120,000

Receivable

* The input tax of P600,000.00 shall be spread evenly over a period of 60 months starting on October
2018 or the month of purchase.

If the depreciable capital good is sold/transferred within a period of 5 years or prior to the exhaustion
of the amortizable input tax thereon, the entire unamortized input tax on the capital goods
sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer
was made.

(2) A manufacturer purchased capital goods on different occasions as follow :

Month of Amount 12% Input Useful Life No. of Last Month of

Purchase Tax Monthly Amortization
Amortization

January 2018 P8,500,000 P1,020,000 6 Years 60 December 2022

February 2018 P8,500,000 P1,020,000 4 Years 48 January 2022

December P10,000,000 P1,020,000 5 Years 60 November 2022

2018

Page 173 of 256

 U.P. LAW BOC TAXATION 2 TAXATION LAW

January 2018 P10,000,000 P1,020,000 5 Years - *Outright claim

on January 2022

a. For purchase made in January 2018, the amortization shall be for the shorter period of 5 years
only or up to December 2022 although the useful life is 6 years.
b. For purchase made in February 2018, the amortization shall be for a period of 4 years only or
up to January 2022 since the useful life of the asset is shorter than 5 years.
c. For purchase made in December 2021, the amortization shall be for the period of 5 years or
up to November 2026.
d. For purchase made in January 2022, no amortization shall be made and the input VAT shall
be claimed on the month of purchase or January 2022

7. Refund or Tax Credit of

𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻
Excess Input Tax; Procedure 𝟏𝟐%
= 𝑻𝒐𝒕𝒂𝒍 𝒊𝒏𝒗𝒐𝒊𝒄𝒆 𝒂𝒎𝒐𝒖𝒏𝒕 ×
𝟏𝟏𝟐%

Output VAT – Input VAT = VAT Payable or

Excess input VAT
Determination of output tax
[Sec. 4.110-6, RR 16-2005]
a. Output VAT in a sale of
goods/properties shall be computed by
multiplying the total amount indicated
in the invoice or receipt by 12%.
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 purchase returns or allowances and
× 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆
b. Output VAT in a sale of services shall
be computed by multiplying the total
amount indicated in the invoice or
receipt by 12%.
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑹𝒆𝒄𝒆𝒊𝒑𝒕𝒔 allowed tax credit as follows:
× 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆
c. Where VAT is erroneously billed in the
invoice, the total invoice amount shall
be presumed to be comprised of the
gross selling price or gross receipts
plus the correct amount of VAT. Hence,
the output tax is computed as follows:
Determination of input tax creditable
a. Add all input tax creditable to a VAT-
registered person during the taxable
month or quarter and any excess input
tax carried over from the preceding
month or quarter.
b. The sum shall be reduced by the
amount of claim for VAT refund or
credit (whether filed with the BIR, the
Department of Finance, the BOI or the
BOC) and other adjustments, such as
input tax attributable to exempt sale.
[Sec. 4.110-5, RR 16-2005]
Allocation of input tax on mixed
transactions
A VAT-registered person who is also engaged
in transactions not subject to VAT shall be
a. All input taxes directly attributable to
transactions subject to VAT may be
recognized for input tax credit. Input
taxes directly attributable to VAT
taxable sales to the Government,
including GOCCs, shall not be credited
against output taxes arising from sales
to non-government entities.

Page 174 of 256

 U.P. LAW BOC TAXATION 2 TAXATION LAW

b. If any input tax cannot be directly transactions subject to VAT may be

attributed to either a VAT taxable or recognized for input tax credit. [Sec.
VAT-exempt transaction, the input tax 4.110-4, RR 16-2005]
shall be pro-rated to the VAT taxable
and VAT-exempt transactions and
ONLY the ratable portion pertaining to

ILLUSTRATION: ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS

[Sec. 4.110-4, RR 16-2005, as amended by RR 4-2007]
ERA Corporation has the following sales during the month:

Sale to private entities subject to 12% 100,000

Sale to private entities subject to 0% 100,000

Sale of exempt goods 100,000

Sale to government subjected to 5% final withholding VAT 100,000

Total sales for the month 400,000

The following input taxes were passed on by its VAT suppliers:

Input tax on taxable goods (12%) 5,000

Input tax on zero-rated sales 3,000

Input tax on sale of exempt goods 2,000

Input tax on sale to government 4,000

Not attributable to any specific activity (monthly amortization for 60 months) 20,000

Page 175 of 256

 U.P. LAW BOC TAXATION 2 TAXATION LAW

The creditable input tax for the month shall be computed as follows:
Input tax on sale subject to 12% 5,000
Ratable portion of the input tax not directly attributable to any activity:

abcbdef gbefg (hi%)

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
ajkbe lbefg

100,000
× 20,000 = 5,000
400,000

Total input tax attributable to sales to private entities for the month: 10,000.00

The input tax attributable to zero-rated sales for the month shall be computed as follows:
Input directly attributable to zero-rated sale P 3,000
Ratable portion of the input tax not directly attributable to any activity:

vfwj wbkfx gbefg

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
ajkbe lbefg

100,000
× 20,000 = 5,000
400,000

Total input tax attributable to zero-rated sales for the month: 8,000

The input tax attributable to VAT-exempt sales for the month shall be computed as follows:
Input tax on VAT-exempt sales - 2,000
Ratable portion of the input tax not directly attributable to any activity:

yza fcf{|k gbefg

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
ajkbe lbefg

100,000
× 20,000 = 5,000
400,000

Total input tax attributable to VAT-exempt sales: 7,000

The input tax attributable to sales to government for the month shall be computed as follows:
Input tax on sale to gov’t. P 4,000
Ratable portion of the input tax not directly attributable to any activity:

abcbdef gbefg kj k}f ~j•fw€{f€k

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
ajkbe lbefg

100,000
× 20,000 = 5,000
400,000

Total input tax attributable to sales to government: 9,000

Page 176 of 256

 U.P. LAW BOC TAXATION 2
Determination of the VAT payable or excess
tax credits
If at the end of any taxable month or quarter:
a. The output tax exceeds the input tax,
the excess shall be paid by the VAT-
registered person
b. The input tax exceeds the output tax,
the excess shall be carried over to the
succeeding quarter or quarters.
However, any input tax attributable to
zero-rated sales may be refunded or
credited. [Sec. 110(B), NIRC]
Illustration:
For a given taxable quarter ABC Corp. has
output VAT of 100 and input VAT of 80. Since
output tax exceeds the input tax for such
taxable quarter, all of the input tax may be
utilized to offset against the output tax. Thus,
the VAT payable is 20.
Substantiation of Input Tax Credits
Input taxes must be substantiated and
supported by the following documents, and
must be reported in the information returns
required to be submitted to the BIR:
a. Importation of goods – import entry or
other equivalent document showing
actual payment of VAT on the imported
goods
b. Domestic purchase of goods and
properties – invoice showing the
information required under Secs. 113
(Invoicing Requirements) and 237
(Issuance of Receipts or Invoices) of
the NIRC
c. Purchase of real property – public
instrument, i.e., deed of absolute sale,
deed of conditional sale,
contract/agreement to sell, etc.,
together with VAT invoice issued by the
seller
d. Purchase of services – official receipt
showing the information required under
Secs. 113 and 237 of the NIRC
e. Transitional input tax – inventory of
goods as shown in a detailed list to be
submitted to the BIR
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TAXATION LAW
f. Input tax on "deemed sale"
transactions – required invoice
g. Input tax from payments made to
non-residents (such as for services,
rentals and royalties) – copy of the
Monthly Remittance Return of VAT
Withheld (BIR Form 1600) filed by the
resident payor in behalf of the non-
resident evidencing remittance of VAT
due which was withheld by the payor
h. Advance VAT on sugar – Payment
Order showing payment of the advance
VAT
Who May Claim for Refund/Apply for
Issuance of Tax Credit Certificate
a. Zero-Rated Sales [Sec. 112(A),
NIRC]
Requirements:
A claim for refund or tax credit for unutilized
input VAT may be allowed only if the following
requisites concur, namely:
1. the taxpayer is VAT-registered;
2. the taxpayer is engaged in zero-rated
or effectively zero-rated sales;
3. the input taxes are due or paid;
4. the input taxes are not transitional input
taxes;
5. the input taxes have not been applied
against output taxes during and in the
succeeding quarters;
6. the input taxes claimed are attributable
to zero-rated or effectively zero-rated
sales;
7. for zero-rated sales under Section
106(A)(2)(a)(1) and (3) and 108(B)(1)
and (2), the acceptable foreign
currency exchange proceeds have
been duly accounted for in accordance
with the rules and regulations of the
BSP;
8. where there are both zero-rated or
effectively zero-rated sales and taxable
or exempt sales, and the input taxes
cannot be directly and entirely
attributable to any of these sales, the
 U.P. LAW BOC TAXATION 2
input taxes shall be proportionately
allocated on the basis of sales volume;
and
9. the claim is filed within two (2) years
after the close of the taxable quarter
when such sales were made. [Luzon
Hydro Corporation v. CIR, G.R. No.
188260 (2013); Sec. 4.112-1, RR 16-
2005]
b. Cancelled VAT Registration [Sec.
112(B), NIRC]
1. A VAT-registered person whose
registration has been cancelled due
to (i) retirement from or cessation of
business, or due to changes in or (ii)
cessation of status under Section
106(C) of the NIRC 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.
2. The taxpayer shall be entitled to a
refund if he has no internal revenue tax
liabilities against which the tax credit
certificate may be utilized.
3. The date of cancellation shall be the
date of issuance of tax clearance by the
BIR, after full settlement of all tax
liabilities.
4. 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. [RR 13-
2018]
Period to File Claim/Apply for Issuance of
Tax Credit Certificate
Administrative Claim [Sec 112(C), par. 1,
NIRC]
a. The claim must be filed within 2 years
after the close of the taxable quarter
when the sales were made (or 2 years
from the date of cancellation of
Page 178 of 256
TAXATION LAW
registration). [Sec. 112(A) and (B),
NIRC]
Note: It is only the administrative claim that
must be filed within the two-year period,
which must be reckoned from the close of
the taxable quarter when the relevant sales
were made. [CIR v. San Roque Power
Corporation, G.R. 187485 (2013)]
Note: In tax refunds of erroneous tax
payments under Sec. 229 of the NIRC, the
administrative and judicial claims may be
made simultaneously, and the reckoning
point of the 2-year period is from the date
of payment.
b. The CIR shall grant the refund within 90
days from the date of submission of the
official receipts or invoices and other
documents in support of the
application.
Note: Prior to January 1, 2018, all claims
for refund or tax credit will be governed by
the 120-day processing period.
c. Should the CIR find that the grant of
refund is not proper, the CIR must state
in writing the legal and factual basis for
the denial.
Judicial Claim [Sec 112 (C), par. 2, NIRC]
a. In case of full or partial denial of the
claim for tax refund, the taxpayer may
appeal to the CTA within 30 days from
the receipt of decision.
b. The 30-day period to appeal is both
mandatory and jurisdictional.
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. [CIR v. San Roque
Power Corporation, G.R. 187485 (2013)]
 U.P. LAW BOC TAXATION 2
Effect of inaction by the CIR
Failure on the part of any official, agent, or
employee of the BIR to act on the application
within the 90-day period shall be punishable
under Section 269 of the NIRC (Violations
Committed by Government Enforcement
Officers). [Sec. 112(C), NIRC]
Note: The provision on the appeal of the CIR’s
failure to act on the application for refund or tax
credit was removed by the TRAIN Law.
Exclusive appellate jurisdiction of CTA
The CTA has exclusive appellate jurisdiction to
review by appeal the inaction by the CIR in
cases involving disputed assessments, refunds
of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other
matters arising under the NIRC or other laws
administered by the BIR, where the NIRC
provides a specific period of action, in which
case the inaction shall be deemed a denial.
[Sec. 7(a)(2), R.A. 1125 as amended by R.A.
9282]
Manner of Refund
Refunds shall be made upon warrants drawn
by the CIR or by his duly authorized
representative without the necessity of being
countersigned by the Chairman of the
Commission on Audit (COA), provided that
refunds shall be subject to post audit by COA.
[Sec. 112(D), NIRC]
8. Compliance Requirements
a. Registration
Note: Refer to table below for flowchart of VAT
registration
b. Invoicing Requirements
In General
A VAT-registered person shall issue:
a. A VAT invoice for every sale, barter or
exchange of goods or properties; and
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TAXATION LAW
b. A VAT official receipt (OR) for every
lease of goods or properties, and for
every sale, barter or exchange of
services [Sec. 113(A), NIRC]
Only VAT-registered persons are
required to print their TIN followed by
the word “VAT” in their invoice or ORs,
which shall be considered as a “VAT
Invoice” or “VAT OR”. All purchases
covered by invoices/receipts other than
VAT Invoice/VAT OR shall not give rise
to any input tax. [Sec. 4.113-1(A), RR
16-2005]
Information Contained in the VAT Invoice or
VAT Official Receipt:
1. A statement that the seller is a VAT-
registered person, followed by his
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:
a. The amount of the tax shall be shown
as a separate item in the
invoice/receipt;
b. If the sale is exempt from VAT, the term
"VAT-exempt sale" shall be written or
printed prominently on the invoice or
receipt;
c. If the sale is subject to 0% VAT, the
term "zero-rated sale" shall be written
or printed prominently on the invoice or
receipt;
d. If the sale involves goods, properties or
services some of which are subject to
and some of which are VAT zero-rated
or VAT-exempt, the invoice or receipt
shall clearly indicate the breakdown of
the sale price between its taxable,
exempt and zero-rated components,
and the calculation of the VAT on each
portion of the sale shall be shown on
the invoice or receipt. The seller may
issue separate invoices or receipts for
the taxable, exempt, and zero-rated
components of the sale.
 U.P. LAW BOC TAXATION 2
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, business style, if any, address and
TIN of the purchaser, customer or client.
[Sec. 113(B), NIRC]
In Deemed Sale Transactions
a. 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 –
Memorandum entry in the subsidiary sales
journal to record withdrawal of goods for
personal use
b. Distribution or transfer to shareholders,
investors or creditors; and
consignment of goods if actual sale is
not made within 60 days – Invoice, at the
time of the transaction, which should
include all the information required in a
VAT invoice; data in the invoice shall be
duly recorded in the subsidiary sales
journal
c. Retirement from or cessation of
business with respect to all goods on
hand – An inventory shall be prepared and
submitted to the RDO with jurisdiction over
the taxpayer’s principal place of business
not later than 30 days after 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. If the business is
to be continued by the new owners or
successors, the entire amount of output tax
on the amount deemed sold shall be
allowed as input taxes. [Sec. 4.113-2, RR
16-2005]
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TAXATION LAW
Issuance of a VAT Invoice or VAT Receipt
by a non-VAT person
If a person who is not a VAT-registered person
issues an invoice or receipt showing his TIN,
followed by the word "VAT", the erroneous
issuance shall result to the following:
a. The issuer shall be liable to:
1. percentage taxes applicable to his
transactions;
2. VAT due on transactions under Section
106 or 108 of the NIRC, without the
benefit of any input tax credit; and
3. a 50% surcharge under Section 248(B)
of the NIRC.
b. The VAT shall be recognized as an input
tax credit to the purchaser, if the other
requisite information is shown on the
invoice/receipt. [Sec. 113(D), NIRC]
Issuance of a VAT Invoice or VAT Receipt
on an Exempt Transaction by a VAT-
registered Person
If a VAT-registered person issues a VAT
invoice or VAT OR for a VAT-exempt
transaction, but fails to display prominently on
the invoice or receipt the term "VAT-exempt
Sale”:
a. the transaction shall become taxable;
b. the issuer shall be liable to pay VAT
thereon; and
c. the purchaser shall be entitled to claim
an input tax credit on his purchase.
[Sec. 4.113-4(B), RR 16-05]
c. Filing of Returns and Payment
Procedure
1. Every person liable to pay VAT shall file a
quarterly return of the amount of his gross
sales or receipts within 25 days after the
close of each taxable quarter prescribed for
each taxpayer.
2. The monthly VAT Declarations of
taxpayers whether large or non-large shall
be filed and the taxes paid not later than
the 20th day following the end of each
month.
 U.P. LAW BOC TAXATION 2
3. Beginning January 1, 2023, the filing of
return and payment of VAT shall be done
within 25 days following the close of each
taxable quarter. [Sec. 114(A), NIRC as
amended by TRAIN Law; Sec. 4.114-1(A),
RR 16-2005]
Note: VAT is paid on a monthly basis.
Payments in the monthly VAT declarations
shall be credited in the quarterly VAT return to
arrive at the net VAT payable or excess input
tax/overpayment as of the end of a quarter.
[Sec. 4.114-1(A), RR 16-2005]
d. Withholding of Final Value-added
Tax on Sales to Government
General Rule: VAT cannot be collected by way
of withholding.
Exceptions:
1. Gross payments by the government shall
be subject to the 5% final withholding VAT;
2. Gross payments by resident VAT-
taxpayers to non-residents shall be subject
to 12% withholding VAT. [Sec. 4.114-2, RR
16-2005]
Note: The payor or person in control of the
payment is considered as the withholding
agent.
Sales to Government
The government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall, before making
payment for purchases of goods and services
which are subject to the VAT, deduct and
withhold a 5% final VAT on the gross
payments. [Sec. 114(C), NIRC]
Note: Beginning January 1, 2021, the VAT
withholding system under this Subsection shall
shift from final to a creditable system. [Sec.
114(C), NIRC]
The 5% final VAT shall represent the net VAT
payable of the seller. The remaining 7%
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TAXATION LAW
effectively accounts for the standard input
VAT, in lieu of the actual input VAT directly
attributable or ratably apportioned to such
sales. [Sec. 4.114-2, RR 16-2005]
Should actual input VAT attributable to sales to
the government exceed 7% of the gross
payments, the excess may form part of the
sellers’ expense or cost. On the other hand, if
actual input VAT is less than 7% of gross
payment, the difference must be closed to
expense or cost. [Sec. 4.114-2, RR 16-2005]
Payments to non-residents
The government, as well as private
corporations, individuals, estates and trusts,
whether large or non-large taxpayers, shall
withhold 12% VAT with respect to the
following:
1. Lease or use of properties or property
rights owned by non-residents; and
2. Other services rendered in the
Philippines by non-residents. [Sec. 22,
RR 4-2007]
Note: Payments for purchases of goods and
services arising from projects funded by Official
Development Assistance (ODA) as defined
under RA No. 8182, or the ‘ODA Act of 1996’,
as amended, shall NOT be subject to the
final/creditable withholding tax system as
imposed in this Subsection. [Sec. 2, RR 13-
2018]
e. Administrative and Penal
Sanctions
Surcharge, interest and other penalties –
The interest on unpaid amount of tax, civil
penalties and criminal penalties imposed in
Title XI of the NIRC shall also apply to
violations of the VAT provisions of the NIRC.
[Sec. 115, NIRC; Sec. 4.115-1, RR 16-2005]
Suspension of business operations – In
addition to other administrative and penal
sanctions provided for in the NIRC and
implementing regulations, the CIR or his duly
 U.P. LAW BOC TAXATION 2 TAXATION LAW

authorized representative may order the (3) Understatement of taxable sales or

suspension or closure of a business
establishment for a period of not less than 5
days for any of the following violations:
(1) Failure to issue receipts and invoices
(2) Failure to file VAT return as required
under Sec. 114 of the NIRC
receipts by 30% or more of his correct
taxable sales or receipt for the taxable
quarter
(4) Failure of any person to register as
required under Sec. 236 of the NIRC

VAT FORMULA (IN GENERAL)

Actual Sales/Receipts xxx
Add: Excise Tax xxx
Remaining Merchandise (Cessation of VAT-registered Status) xxx
Transactions Deemed Sale xxx xxx

Less: Sales Returns and Allowances xxx

Sales Discounts xxx xxx

Total Sales (Taxable Base) xxx

Multiplied by 12% 12%
Output VAT on sales or gross receipts xxx
Less: Allowable Input Tax:
Input VAT on current purchases/importations/services xxx
Input VAT on sales to nonresidents xxx
Input VAT on capital goods exceeding P1M
(deferred from prior period) xxx
(from current period) xxx
Transitional Input VAT, if applicable xxx
Presumptive Input VAT, if applicable xxx
Input VAT Carry-over from previous period xxx
Total available input tax xxx
Less: Input tax on capital goods exceeding P1M xxx
deferred to next period
Input tax on exempt sales xxx
Input tax subject to VAT refund/TCC xxx xxx
Net VAT payable xxx
Less: Tax Credits/Payments:
Creditable VAT withheld xxx
Advance payments xxx
VAT paid in return previously filed xxx xxx
VAT Still Payable (Overpayment) xxx

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

SALES TO GOVERNMENT
Sales 1,000,000
Output VAT (Sales x 12%) 120,000
Purchases 700,000
Input VAT (Purchases x 12%) 84,000

Actual input VAT

84,000

Less: Standard input VAT

(7% x P1,000,000)

70,000

Excess Part of seller’s expense

14,000

OUTPUT VAT Payable in the VAT Returns:

Output VAT 120,000
Less: Standard Input VAT (7% of sales):
Actual Input VAT 84,000
Less: Excess Input Tax (Part of Expense) 14,000 70,000
Net VAT Payable 50,000
Less: Final Withholding VAT (5% of Sales) 50,000
Output VAT Payable 0__

Note: No VAT is payable since the 5% VAT withheld by the government is a final tax. However, the
difference between the standard input VAT and the actual input VAT shall be dealt with as follows:
! When Actual Input VAT > 7% Standard Input VAT: excess forms part of seller’s
expense/cost
! When Actual Input VAT < 7% Standard Input VAT: difference is closed to expense or cost
(i.e., treated as taxable other income)

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U.P. LAW BOC TAXATION 2 TAXATION LAW

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Illustration of the VAT System

VAT System (All VAT)

Raw Material (VAT) Manufacturer (VAT) Trader (VAT) End-User

SP (100+12) 100 112 SP (300 + 36) 300 SP (450 +54) 450

Cost 336 504
50 Cost (100 + 12) 100 Cost (300+36) 300
Profit 112 336
50 Profit 200 Profit 150

Purchase Purchases Purchases 504

112 336 12% VAT 54
Input VAT 12% VAT
12 36

OT 12% OT 12% OT 12%

12 36 54
IT IT IT
0 12 36
VAT Payable 12 Vat Payable 24 VAT Payable
18

VAT to BIR VAT to BIR VAT to BIR 18 Total VAT 54

12 24

VAT System (VAT Exempt 1st chain)

Raw Material Manufacturer Trader End-User
(VAT Exempt)

SP (100+ 0) 100 SP (300 + 36) 300 SP (450 +54) 450

Cost 50 336 504
Profit 50 Cost (100) 100 Cost (300+36) 300
Profit 200 336
Profit 150

Purchase Purchases Purchases 504

100 336 12% VAT 54
Input VAT 12% VAT
0 36

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

OT 0 OT 12% OT 12%
IT 36 54
0 IT IT
VAT Payable 0 0 36
Vat Payable VAT Payable 18
36

VAT to BIR VAT to BIR VAT to BIR Total VAT 54

0 36 18

VAT System (VAT Exempt mid-chain)

Raw Material Manufacturer Trader End-User
(VAT Exempt)

SP (100+12) 100 112 SP (300) SP (450 +54) 450

Cost 300 504
50 Cost (100 + 12) 100 Cost (300) 300
Profit 112 Profit 150
50 Profit
188

Purchase Purchases Purchases 504

112 300 12% VAT 54
No Input VAT No VAT 0
0

OT 12% OT 0 OT 12%
12 IT 0 54
IT 0 Vat Payable 0 IT 0
VAT Payable VAT Payable
12 54

VAT to BIR VAT to BIR VAT to BIR Total VAT 66

12 0 54

VAT System (VAT zero-rate mid-chain)

Raw Material Manufacturer Trader End-User
(VAT Zero-rated)

SP (100+12) 100 112 SP (300+ 0) SP (450 +54) 450

Cost 50 300 504
Profit 50 Cost (100 + 12) 100 Cost (300) 300
112 Profit 150

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Profit
188

Purchase Purchases Purchases 504

112 300 12% VAT 54
No Input VAT No VAT 0
12

OT 12% OT 12% OT 12%

12 0 54
IT IT IT
0 12 0
VAT Payable Vat Payable VAT Payable
12 (12) 54

VAT to BIR 12 VAT to BIR VAT to BIR Total VAT 54

(12) 54

D. PERCENTAGE TAXES:
CONCEPT AND NATURE
Concept
A percentage tax is a national tax measured by
a certain percentage of the gross selling price
or gross value in money of goods sold, bartered
or imported; or of the gross receipts or earnings
derived by any person engaged in the sale of
services. [CIR v. Solidbank Corp., G.R. No.
148191 (2003)]
Percentage tax is a business tax imposed on
persons, entities, or transactions specified
under Sections 116 to 127 of the NIRC.
Nature
It is a privilege tax. Like VAT, it is imposed on
the privilege to sell commodities or services.
[DE LEON]
TAX BASE: Gross Receipts
By its nature, a gross receipts tax applies to the
entire receipts without any deduction,
exemption or exclusion, unless the law clearly
provides otherwise. [China Banking Corp. v.
CA, G.R. No. 146749 (2003)]
TAX RATE
Any person whose sales or receipts are
exempt from the payment of VAT and who is
not a VAT-registered person shall pay a tax
equivalent to 3% of his gross quarterly sales
or receipts.

Note: Cooperatives shall be exempt from the

3% gross receipts tax. [Sec. 116, NIRC]

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

PERSONS OR TRANSACTIONS SUBJECT TO PERCENTAGE TAX

Persons/ Transactions Percentage tax
Persons Exempt from 3% of gross quarterly sales or receipts
VAT [Sec. 116, NIRC]

Domestic Carriers; 3% of gross quarterly receipts

Keepers of Garages
[Sec. 117, NIRC]
International Carriers 3% of quarterly gross receipts
[Sec. 118, NIRC]
Franchises [Sec. 119,
NIRC] a. 3% on gross receipts derived from the business covered by the
a. Radio and/or law granting the franchise
television
broadcasting Note: The franchisees may opt to register as VAT taxpayer, which shall
companies with be irrevocable once exercised.
annual gross
receipts not b. 2% on gross receipts derived from the business covered by the
exceeding P10M law granting the franchise

b. Gas and water

utilities
Overseas Dispatch, 10% on the amount paid for such services
Message or
Conversation Originating Exemptions:
in the Philippines [Sec. 1. Government
120, NIRC] 2. Diplomatic services
3. International organizations
4. News services
Banks and Non-bank The following taxes are collected on gross receipts from sources within
Financial Intermediaries the Philippines.
[Sec. 121, NIRC] 1. Interest, commissions and discounts from lending activities as
well as income from financial leasing, based on remaining
maturities:
a. 5 years or less – 5%
b. More than 5 years – 1%
2. Dividends and equity shares and net income of subsidiaries –
0%
3. Royalties, rentals of property, profits from exchange and all
other items of gross income under Sec. 32, NIRC – 7%
4. Net trading gains within the year on foreign currency, debt
securities, derivatives, and other financial instruments – 7%

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U.P. LAW BOC TAXATION 2 TAXATION LAW

Other Non-bank 5% on gross receipts derived from interest, commissions, discounts and
Financial Intermediaries other items of gross income
[Sec. 122, NIRC]
Note: Interests, commissions and discounts from lending, as well as
income from financial leasing shall be taxed based on the remaining
maturities:
1. 5 years of less – 5%
2. More than 5 years – 1%

Pawnshops are considered other non-bank financial intermediaries.

[First Planters Pawnshop v. CIR, G.R. No. 174134 (2008)]
Life Insurance Premiums 2% of total premiums collected, whether paid in money, notes, credits
[Sec. 123, NIRC] or substitute money

Taxable premiums exclude:

1. Premiums refunded within 6 months
2. Reinsurance
3. Premiums collected on the life insurance of a nonresident
insured
4. Premium collected on variable contracts in excess of the amount
necessary to insure the lives of variable contract owners.

Note: Purely cooperative companies or associations are exempted from

this tax.
Agents of Foreign A tax equal to twice the tax imposed in Sec. 123 of the NIRC
Insurance Companies ! This shall not apply to reinsurance.
[Sec. 124, NIRC] ! If property owner obtains insurance from foreign companies
without using an agent, he shall notify the Insurance
Commissioner and pay 5% on premiums paid.
Proprietors, Lessee or 1. Cockpits – 18%
Operator of Amusement 2. Cabarets, night or day clubs – 18%
Places [Sec. 125, NIRC] 3. Boxing exhibitions – 10%; exempt if a World or Oriental
Championship is at stake and a Filipino is a contender and the
exhibition is promoted by a Filipino or by an entity 60%-owned
by Filipinos
4. Professional basketball games – 15% in lieu of all other
percentage taxes
5. Jai-alai and racetracks – 30%

Gross receipts – all receipts of the proprietor, lessee or operator of the

amusement place, including income from TV, radio and motion picture
rights

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Winnings [Sec. 126, 1. Horse races – 10% on actual amount paid for every winning
NIRC] ticket after deducting the cost of ticket
2. Double forecast / quinella and trifecta bets – 4%
3. Owners of winning horses – 10% of the prizes

Sale, Barter or Exchange
of Shares of Stock Listed
and Traded through the
Local Stock Exchange or
through Initial Public
Offering (IPO)
1. Sale through the local stock exchange, other than sale by a
dealer in securities – 6/10 of 1% of the gross selling price or
gross value in money of the shares of stock
2. Sale through IPO of shares of stock in closely held corporations
The tax is based on gross selling price or gross value in money of
said shares in accordance with the proportion of shares disposed to
the total outstanding shares after listing:
a. Up to 25% - 4%
b. Over 25% but not over 33 1/3% - 1%

Closely held corporation – any corporation at least 50% in value of the

outstanding capital stock or at least 50% of the total combined voting
power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than 20 individuals

SUMMARY OF TAX ON CARRIERS BY LAND / AIR / SEA

Area Object Kind Business Tax Income Tax

Person Domestic 3% Percentage Tax Regular Tax

By Land
Cargo/Goods Domestic 12% VAT Regular Tax
Domestic travel -
Domestic Regular Tax
Person / Cargo / 12% VAT
Goods International travel –
Domestic Regular tax
0% VAT
2.5% on Gross
Philippine Billing if
By Air / Sea Persons International VAT-exempt
doing business in
the Philippines
2.5% on Gross
International (doing
Philippine Billing if
Cargo / Goods business in the 3% Percentage Tax
doing business in
Philippines)
the Philippines

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Nature
E. EXCISE TAX: CONCEPT Excise taxes, whether under the specific or the
AND NATURE ad valorem tax system, is basically an indirect
tax imposed on certain types or classes of
Concept goods, whether locally manufactured or
Excise taxes are taxes imposed on certain imported. While the tax is directly levied upon
specified goods manufactured or produced in the manufacturer/importer upon removal of the
the Philippines for domestic sale or taxable goods from its place of production or
consumption or for any other disposition and to from the customs custody, the tax, in reality, is
things imported as well as services performed actually passed on to the end consumer as part
in the Philippines. [Sec. 129, par. 1, NIRC] of the transfer value or selling price of the
goods, sold, bartered or exchanged. [Silkair
Kinds of Excise Taxes [Sec. 129, par. 2, (Singapore) Pte. Ltd. v. CIR, G.R. No. 166482
NIRC] (2012)]
1. Specific tax – tax due is computed based
on: In the refund of indirect taxes, the proper party
o weight to question or seek a refund of the tax is the
o volume capacity statutory taxpayer, the person on whom the tax
o any other physical unit of is imposed by law and who paid the same even
measurement. when he shifts the burden thereof to another.
2. Ad valorem tax – tax due is computed The tax liability remains with the
based on: manufacturer/producer/importer that is
o selling price primarily, directly, and legally liable for the
o other specified value of the good or payment of excise taxes. [Ibid.]
service performed
Purpose
The NIRC enumerates the specific goods and 1. To curtail consumption of certain
services that are subject to Excise Tax: commodities, the excessive or
NIRC Goods/Services indiscriminate use of which is considered
Sec. 141 Distilled Spirits harmful to the individual or community
Sec. 142 Wines (e.g., alcoholic beverages and tobacco
Sec. 143 Fermented Liquors products);
Sec. 144 Tobacco Products 2. To protect a domestic industry, the
Cigars and products of which face competition from
Sec. 145 similar imported articles;
Cigarettes
Manufactured Oils 3. To distribute the tax burden in proportion to
Sec. 148 the benefit derived from a particular
and Other Fuels
government service (e.g., excise taxes on
Sec. 149 Automobiles
gasoline, lubricating oils and denatured
Non-essential
Sec. 150 alcohol for motive power); and
Goods
4. To raise revenue [DE LEON]
Non-essential
Sec. 150-A
Services*
Sweetened
Sec. 150-B
Beverages*
Sec. 151 Mineral Products
*Added by TRAIN Law

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

Sec. 188 Certificates

F. DOCUMENTARY Sec. 189 Warehouse Receipts
STAMP TAX: CONCEPT Jai-alai, Horse Race Tickets,
AND NATURE Sec. 190 Lotto or Other Authorized
Numbers Games
Sec. 191 Bills of Lading or Receipts
Concept
Documentary stamp tax (DST) is a tax on Sec. 192 Proxies
documents, instruments, loan agreements and Sec. 193 Powers of Attorney
papers evidencing the acceptance, Leases and Other Hiring
Sec. 194
assignment, sale or transfer of an obligation, Agreements.
right, or property incident thereto. [Sec. 173, Mortgages, Pledges, and Deeds
Sec. 195
NIRC] of Trusts
Deeds of Sale, Conveyances
Sec. 196
The NIRC enumerates the specific documents and Donation of Real Property
that are subject to DST: Charter Parties and Similar
Sec. 197
NIRC Documents Instruments
Documents, Loan Agreements, Assignments and Renewals of
Sec. 173 Sec. 198
Instruments and Papers Certain Instruments
Original Issue of Shares of
Sec. 174
Stocks Nature
Sales, Agreements to Sell, A DST is actually an excise tax because it is
Memoranda of Sales, Deliveries imposed on the transaction rather than on the
Sec. 175 or Transfer of Due-bills, document. It is levied on the exercise by
Certificates of Obligation, or persons of certain privileges conferred by law
Shares of Certificates of Stock for the creation, revision, or termination of
Bonds, Debentures, Certificates specific legal relationships through the
Sec. 176 of Stock or Indebtedness Issued execution of specific instruments. Hence, in
in Foreign Countries imposing the DST, the Court considers not only
Certificates of Profits or Interest the document but also the nature and character
Sec. 177 of the transaction is considered. [Phil. Banking
in Property or Accumulations
Bank Checks, Drafts, Certificates Corp. v. CIR, G.R. No. 170574 (2009)]
Sec. 178 of Deposit not Bearing Interest,
and Other Instruments Being an excise tax, it is paid only once. Since
Sec. 179 All Debt Instruments DST is not a tax on income, an exemption from
Sec. 180 All Bills of Exchange or Drafts income tax does not include DST. [BIR Ruling
Acceptance of Bills of Exchange No. DA-106-08, August 4, 2008]
Sec. 181
and Others
Foreign Bills of Exchange and The tax base is the document itself, not the
Sec. 182 transaction or the property described in the
Letters of Credit
Sec. 183 Life Insurance Policies document. Thus, the validity or invalidity of the
transaction, or the extent of the right to the
Policies of Insurance Upon
Sec. 184 property is not affected by payment or non-
Property
payment of the DST. [VITUG and ACOSTA]
Fidelity Bonds and Other
Sec. 185
Insurance Policies
Person liable
Policies of Annuities and Pre- It is paid by the person making, signing,
Sec. 186
Need Plans issuing, accepting or transferring the
Sec. 187 Indemnity Bonds documents. However, when one party to the

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 U.P. LAW BOC TAXATION 2
taxable document enjoys the exemption from
the tax, the other party thereto who is not
exempt shall be the one directly liable for the
tax. [TABAG, p. 429 (2019)]
Purpose
The purpose of the law in imposing stamp
taxes is to raise revenue and not to invalidate
contracts or inflict penalties, and courts should
give it a liberal construction. [33 C.J.S. 315-
316]
Filing and Payment
The tax return shall be filed and the tax due
shall be paid at the same time within 10 days
after the close of the month when the taxable
document was signed, issued, accepted or
transferred. [Sec. 200(B), NIRC]
Effect of Failure to Pay DST
a. Failure to stamp a taxable
document shall not invalidate the
same. However, it shall not be
recorded or admitted or used as
evidence in any court until the
requisite stamp is affixed.
b. No notary or other officer
authorized to administer oaths
shall add his jurat or
acknowledgment to the document
unless the proper documentary
stamp is affixed thereto or
cancelled. [Sec. 201, NIRC]
1. Tax Remedies Under the NIRC
General Concepts
Taxpayer Remedies
1. Administrative Remedies (BIR)
a. Before payment
i. Filing a protest with request
for reconsideration or
reinvestigation; and
ii. Entering into a compromise
b. After payment
i. Filing a claim for refund;
and
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TAXATION LAW
ii. Filing a claim for tax credit
2. Judicial Remedies (CTA/RTC)
a. Civil Action
i. Appeal to the CTA
ii. Action to contest forfeiture
of chattel; and
iii. Action for damages
b. Criminal Action
i. Filing a criminal complaint
against erring BIR officials
and employees
Government Remedies
1. Administrative Remedies
a. Enforcement of tax lien
b. Distraint of personal property, and
garnishment of bank deposits
c. Levy of real property
d. Forfeiture of property
e. Compromise and abatement
f. Penalties and fines
g. Suspension of business operations
2. Judicial Remedies
a. Ordinary civil action
b. Criminal action
1. Assessment of Internal Revenue
Taxes
Definition
To assess means to impose a tax; to fix or
settle a sum to be paid by way of tax; to settle
determine or fix the amount of tax to be paid
(84 C.J.S 749-750)
An assessment is the notice to the effect that
the amount therein stated is due from a
taxpayer as a tax with a demand for payment
of the same within a stated period of time. [CIR
v. CTA, G.R. No. L-21483 (1969)]
Presumption of correctness
An assessment is presumed correct and made
in good faith in the performance of official
duties and failure to present proof of error will
prosper such assessment. [Atlas Consolidated
Mining and Development Corp. v. CA, G.R. No.
104151 and 105563 (1995)].
 U.P. LAW BOC TAXATION 2
a. Procedural due process in tax
assessments
[Sec. 228, NIRC; RR 12-99, as amended by
RR 18-13 and RR 7-18]
i. Letter of Authority and Tax Audit
Letter of Authority (LOA): An official
document that empowers 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.
General Rule: The issuance of an LOA is a
mandatory statutory requirement. [Sec. 13,
NIRC]
Any tax assessment issued without an LOA is
a violation of the taxpayers’ right to due
process and is therefore “inescapably void.”
[RMC 75-2018; Medicard Philippines, Inc. v.
CIR, G.R. No. 222743 (2017)]
Exception: The following cases need not be
covered by a valid LOA:
a. Cases involving civil or criminal tax
fraud which fall under the jurisdiction of
the Tax Fraud Division of the
Enforcement Services, and
b. Policy cases under audit by the special
teams in the National Office. [RMO 36-
99]
Letter of Authority vs. Letter Notice
A Letter Notice (LN) is not found in the NIRC
and is not an authority to conduct an audit. The
LN is merely a notice to the taxpayer that a
discrepancy is found based on the BIR’s third
party information data matching programs.
Thus, an LOA must still be secured before
proceeding with the further examination and
assessment of the taxpayer. [Medicard
Philippines, Inc. v. CIR, G.R. No. 222743
(2017)]
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TAXATION LAW
Tax audit
It is the process of examining, going over or
scrutinizing the books and records of the
taxpayer to ascertain the correctness of the tax
declared and paid by the taxpayer.
There must be a grant of authority before any
revenue officer can conduct an examination or
assessment. Equally important is that the
revenue officer so authorized must not go
beyond the authority given. In the absence of
such an authority, the assessment or
examination is a nullity. [CIR v. Sony
Philippines, Inc., G.R. No. 178697 (2010)]
Note: A Revenue Officer is allowed only 120
days from the date of receipt of an LOA by the
taxpayer to conduct the audit and submit the
required report of investigation. If the Revenue
Officer 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 LOA for
revalidation.
iii. Notice for Informal Conference (NIC)
The Revenue Officer who audited the
taxpayer’s records shall state in his report
whether or not the taxpayer agrees with his
findings that the taxpayer is liable for deficiency
taxes. If the taxpayer is not amenable, based
on the said Officer’s submitted report of
investigation, the taxpayer shall be informed, in
writing, of the discrepancies in the taxpayer’s
payment of his internal revenue taxes for the
purpose of “lnformal Conference,” in order to
afford the taxpayer with an opportunity to
present his side of the case.
The Informal Conference shall in no case
extend beyond 30 days from receipt of the
notice for informal conference. If it is found that
the taxpayer is still liable for deficiency tax or
taxes after presenting his side, and the
taxpayer is not amenable, the case shall be
endorsed within 7 days from the conclusion of
 U.P. LAW BOC TAXATION 2
the Informal Conference for the issuance of a
deficiency tax assessment.
iv. Issuance of Preliminary
Assessment Notice (PAN)
General rule: A PAN shall be issued if it is
determined that there exists sufficient basis to
assess the taxpayer for any deficiency tax. It
shall show in detail the facts and the law on
which the proposed assessment is based.
Exceptions to the issuance of a PAN
The NIC and the PAN shall not be required in
any of the following cases, in which case, a
Formal Letter of Demand and Assessment
Notice (FLD/FAN) shall be issued outright:
a. The finding for any deficiency tax is the
result of mathematical error in the
computation of the tax as appearing on
the face of the return; or
b. A discrepancy has been determined
between the tax withheld and the
amount actually remitted by the
withholding agent; or
c. 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; or
d. The excise tax due on excisable
articles has not been paid; or
e. 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 a non-exempt person.
[RR 18-2013]
Note: Prior to the issuance of a PAN, the
taxpayer may be allowed to make voluntary
payments of probable deficiency taxes and
penalties. [RMC 11-2014]
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Reply to the PAN
The taxpayer is given 15 days from the date of
receipt of the PAN to respond.
• If the taxpayer fails to respond, he is
considered in default and a formal
letter of demand and assessment
notice (FLD/FAN) shall be issued to the
taxpayer.
• If he responds that he disagrees with
the findings of deficiency 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 18-2013]
v. Issuance of a Formal Letter of
Demand and Final Assessment
Notice (FLD/FAN)
An FLD/FAN is a declaration of deficiency
taxes issued to a taxpayer who:
a. fails to respond to a PAN within the
prescribed period of time, or
b. whose reply to the PAN was found to
be without merit.
Contents of the FLD/FAN
The taxpayer shall be informed in writing of the
law and the facts on which the assessment is
made; otherwise the assessment shall be void.
[Sec. 228, NIRC]
An assessment contains not only a
computation of tax liabilities, but also a demand
for payment within a certain period.
Period for Issuance of the FLD/FAN
It must be issued within 15 days from the
filing/submission of the taxpayer’s response to
the PAN.
a. If the FLD/FAN is issued beyond the
15-day period, it shall still be valid, provided
that it is issued within the period of limitation
to assess internal revenue taxes.
 U.P. LAW BOC TAXATION 2 TAXATION LAW

Note: The revenue officers who caused the Modes of service of assessment notice
delay shall be subject to administrative 1. Personal Service – Notice is delivered
sanction. [RMC 11-2014] personally to the taxpayer at his known
address. If not practicable, notice shall be
b. If the FLD/FAN is issued before the served by substituted service or by mail.
lapse of the 15-day period, it shall be void. 2. Substituted Service – The notice is left with
a clerk or a person in charge at the
Note: Prematurely issuing an FLD/FAN before taxpayer’s known address.
the lapse of the 15-day period is a wanton 3. Service by mail [RR 18-2013]
disregard of the mandatory due process
requirement. [CIR v. Pacific Bayview Service to the tax agent shall be deemed
Properties, Inc., CTA EB No. 1677 (2018), service to the taxpayer. [RR 18-2013]
citing CIR v. Metro Star Superama, Inc., G.R.
No. 185371 (2010)] The notice shall first be served to the
taxpayer’s registered address before the same
vi. Disputed Assessment may be served to the taxpayer’s known
address, or in the alternative, may be served to
The taxpayer or his duly authorized the taxpayer’s registered address and known
representative may protest administratively address simultaneously. [RMC 11-2014]
against the FLD/FAN within 30 days from date
of receipt thereof. The taxpayer protesting an c. Tax Delinquency as
assessment may file a written request for Distinguished from Tax
reconsideration or reinvestigation. Deficiency
vii. Administrative Decision on a Deficiency is defined as the amount still due
Disputed Assessment
and collectible from a taxpayer upon audit or
investigation; whereas delinquency is defined
viii. Appeal from an Administrative as the failure of the taxpayer to pay the tax due
Decision on Disputed Assessment
on the date fixed by law or indicated in the
assessment notice or letter of demand.
b. Requisites for a valid [Takenaka Corporation Philippine Branch v.
assessment CIR, CTA EB No. 745 (2012)]
1. The taxpayer shall be informed in writing of
the law and the facts on which the Tax Delinquency v. Tax Deficiency
assessment is made; otherwise, the Tax Delinquency Tax Deficiency
assessment notice shall be rendered null ● The self- ● The amount by
and void. [Sec. 228, NIRC] assessed tax per which the tax
2. assessment contains not only a return was not imposed by law
computation of tax liabilities, but also a paid or only exceeds the
demand for payment within a prescribed partially paid; or amount shown in
period. [CIR v. Pascor, G.R. No. 128315 ● The deficiency the tax return; or
(1999)] tax assessed by ● If no amount is
3. assessment must be served on and the BIR became shown in the
received by the taxpayer. [CIR v. Pascor, final and return, or if there
ibid] executory. is no return, then
the amount by
which the tax as
determined by the
CIR exceeds the

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

amount 3. Failure to file a return. [Sec. 222, NIRC]

previously
assessed as a False return Fraudulent Failure to
deficiency [Sec. return file a return
56(B), NIRC] Contains Made with Omission to
Delinquency tax can Deficiency tax must wrong intent to file a return
be collected be assessed and information evade taxes within the
administratively by must go through the due to due time
distraint or levy or by process of filing the mistake, prescribed by
judicial action protest by the carelessness law
taxpayer and denial of or ignorance
such protest by the Deviation Intentional or Omission
BIR. may or may deceitful may or may
The filing of a civil The filing of a civil not be entry with not be
action for the action at the ordinary intentional intent intentional
collection of the court for collection Not subject to Subject to Not subject to
delinquent tax in the during the pendency 50% 50% 50%
ordinary court is a of protest may be the surcharge, surcharge surcharge,
proper remedy. subject of a motion to except if done except if
dismiss. In addition, willfully omission is
the taxpayer must file willful
a petition for review Assessment may be made within 10 years
with the CTA to toll after discovery of the falsity, fraud or omission
the running of the
prescriptive period.
Waiver of the Statute of Limitations
Subject to Subject to
The taxpayer and the CIR may agree in writing,
administrative administrative
before the expiration of the time prescribed in
penalties, such as penalties of interest
Sec. 203, to extend the period of assessment.
25% surcharge, and compromise
interest, and penalty, but NOT to [Sec. 222(b), NIRC]
compromise penalty the 25% surcharge
[MAMALATEO] Note: A waiver of the statute of limitations is a
derogation of the taxpayers’ right to security
against prolonged and unscrupulous
d. Prescriptive Period for
investigations and must therefore be carefully
Assessment and strictly construed. However, the waiver
does not mean that the taxpayer relinquishes
General Rule: Within 3 years after the last day the right to invoke the defense of prescription
prescribed by law for the filing of the return or unequivocally particularly where the language
from the date of actual filing, whichever comes of the document is equivocal. [Philippine
later; provided, that a return filed before the last Journalists Inc. v. CIR, G.R. No. 162852
day prescribed by law for filing shall be (2004)]
considered as filed on such last day [Sec. 203,
NIRC] Requisites for a valid waiver under RMO 14-
2016:
Exception: Within 10 years after the discovery a. It must be in writing, but not necessarily in
of the falsity, fraud or omission in case of: (FFF) the form prescribed by RMO No. 20-90 or
1. False return RDAO No. 05-01, for as long as the
2. Fraudulent return with intent to evade tax; following are complied with:
or

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 U.P. LAW BOC
i. It is executed before the expiration
of the prescriptive period. The date
of execution shall be indicated.
ii. It is signed by the taxpayer himself
or his authorized representative. In
a corporation, it must be signed by
its responsible officials
iii. The expiry date of the period agreed
upon to assess/collect the tax after
the regular 3-year period of
prescription should be indicated.
b. Except for waiver of collection of taxes
which shall indicate the particular taxes
assessed, the waiver need not specify the
particular taxes to be assessed nor the
amount thereof, and it may simply state “all
internal revenue taxes”.
c. It may or may not be notarized.
d. CIR or designated officials or the
concerned revenue district officer or group
supervisor must indicate acceptance by
signing the same before the expiration of
the period to assess or collect taxes, or
before the lapse of the period agreed upon
in a prior agreement.
e. The taxpayer has the duty to retain a copy
of the accepted waiver.
Two (2) material dates required on the
waiver:
1. The date of execution of the waiver by the
taxpayer or its authorized representative;
and
2. The expiry date of the period the taxpayer
waives the statute of limitations
Effect of noncompliance with the requisites
General Rule: When a waiver does not comply
with the requisites for its validity, it is invalid and
ineffective to extend the prescriptive period to
assess taxes.
Exception: When both the BIR and the
taxpayer are in pari delicto or “in equal fault”, it
would be more equitable if the BIR’s lapses
were allowed to pass and consequently uphold
the validity of the waivers in order to support
the principle that taxes are the lifeblood of the
Page 198 of 256
TAXATION 2 TAXATION LAW
government. [CIR v. Next Mobile, Inc., G.R.
No. 212825 (2015)]
Suspension of running of statute of
limitations
a. When the CIR is prohibited from
making the assessment or beginning
distraint or levy or a proceeding in
court, and for 60 days thereafter;
b. When the taxpayer requests for a
reinvestigation which is granted by the
CIR;
c. When the taxpayer cannot be located
in the address given by him in the
return filed, BUT if the taxpayer informs
the CIR of any change in address, the
running of the statute of limitations
shall not be suspended;
d. When the warrant of distraint or levy is
duly served upon the taxpayer, his
authorized representative, or a
member of his household with
sufficient discretion, and no property is
located; and
e. When the taxpayer is out of the
Philippines.
Determining if prescription has set in
The important date to remember is the date
when the demand letter or notice is released,
mailed or sent by the CIR to the taxpayer.
[Basilan Estates, Inc. v. CIR, G.R. No. L-22492
(1967)]
• Provided the release was effected
BEFORE prescription sets in, the
assessment is deemed made on time,
even if the taxpayer actually receives it
AFTER the prescriptive period.
• Mailing of the assessment before the
prescriptive period sets in must be proved
with substantial evidence by the CIR.
• Direct denial of receipt of a mailed demand
letter shifts the burden to the Government
to prove that such letter was indeed
received by the taxpayer [Republic v. CA,
G.R. No. L-38540 (1987)]. [INGLES]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

2. Taxpayer’s Remedies days from filing the

protest.
a. Protesting the assessment Counting of 180-day period for CIR to
decide
i. Period to File Protest From the filing of the From submission of
After issuance of the FLD/FAN, the taxpayer protest the complete
may protest the assessment within 30 days supporting
from receipt thereof by filing a request for documents
reconsideration or reinvestigation. [TABAG, p. 397 (2019]

ii. Kinds of Protest - request for Contents of the Protest

reconsideration or reinvestigation The protest shall state the following in his
protest; otherwise, the protest shall be
Request for Request for considered void and without force and effect.
Reconsideration Reinvestigation a. Nature of protest, whether reconsideration
As to nature/definition or reinvestigation, specifying newly
discovered or additional evidence he
It refers to a plea of It refers to a plea of
re-evaluation of an re-evaluation of an intends to present if it is a request for
reinvestigation,
assessment on the assessment on the
b. Date of the assessment notice, and
basis of existing basis of newly
c. law, rules and regulations, or jurisprudence
records without need discovered evidence
on which his protest is based. [RR 18-
of additional that a taxpayer
2013]
evidence. It may intends to present in
involve both a the reinvestigation. It
Protest Against Some of Several Issues in
question of fact or of may also involve a
FLD/FAN
law or both. question of fact or
law or both. • If there are several issues in the FLD/FAN
and the taxpayer disputes or protests only
As to effect on the status of limitations
some of them, the assessment relating to
It shall not suspend A request for
the undisputed issue(s) shall become final,
the prescriptive reconsideration does
executory and demandable.
period to collect not toll the running of
• If the taxpayer fails to state the facts, the
the prescriptive
applicable law, rules and regulations, or
Note: It will only toll period for the
jurisprudence in support of his protest
the prescriptive collection of an
against some of the several issues, the
period to collect if the assessed tax. [CIR v.
same shall be considered undisputed and
request for Philippine Global
the related assessment shall likewise
reinvestigation is Communication Inc.,
become final, executory and demandable.
granted by the BIR. G.R. No. 167146
[RR 18-2013]
(2006)]
As to evidence
iii. Submission of Supporting
It is limited to the It entails the
Documents
evidence already at reception and
hand. evaluation of
For requests for reinvestigation, the taxpayer
additional evidence.
shall submit all relevant supporting documents
in support of his protest within 60 days from
Supporting
filing of the protest; otherwise, the assessment
documents must be
shall become final.
submitted within 60

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 U.P. LAW BOC TAXATION 2
• “Relevant supporting documents” –
documents necessary to support the
legal and factual bases in disputing a
tax assessment as determined by the
taxpayer
• Assessment shall become final” –
taxpayer is barred from disputing the
correctness of the issued assessment
by introduction of newly discovered or
additional evidence, and the FDDA
shall consequently be denied.
• The 60-day period to submit supporting
documents shall NOT apply to
requests for reconsideration. [RR 18-
2013
iv. Effect of Failure to File Protest
Failure of the taxpayer to file a protest against
the FLD/FAN within 30 days will make the
assessment final, executory and demandable.
No request for reconsideration or
reinvestigation shall be granted on tax
assessments that have already become final,
executory and demandable.
v. Action of the Commissioner on the
Protest Filed
Period to act upon or decide the protest
filed
1. By the CIR’s duly authorized
representative
a. In a request for reinvestigation,
within 180 days from submission of
documents; or
b. In a request for reconsideration,
within 180 days from the date of
filing of the protest
2. By the CIR
a. In case of protest, within 180 days
from the filing of the protest
b. In case of an administrative appeal,
within 180 days from the filing of
the administrative appeal
Note: An administrative appeal to the CIR may
only be availed of upon the denial of the protest
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TAXATION LAW
to the FLD/FAN by the CIR’s duly authorized
representative. Under RR 18-2013, there is no
administrative appeal to the CIR for inaction by
the CIR’s representative. The remedy is to
await the decision or file a petition for review to
the CTA within 30 days after the lapse of the
180-day waiting period.
DECISION ON THE PROTEST FILED
1. Denial of the protest through the
issuance of a Final Decision on Disputed
Assessment (FDDA)
The decision of the CIR or his duly authorized
representatives shall state (a) the facts, the
applicable law, rules and regulations or
jurisprudence on which such decision is based,
and (b) that the same is his final decision.
Effect of a void FDDA
A void FDDA does not ipso facto render the
assessment void. A “decision” differs from an
“assessment” and failure of the FDDA to state
the facts and law on which it is based renders
the decision void, but not the assessment. [CIR
v. Liquigaz Philippines Corp., GR No. 215534,
(2016)]
2. Indirect denial of the protest
The following actions are equivalent to a denial
of the protest:
a. Filing of collection suit against taxpayer
[CIR v. Union Shipping, G.R. No. L-66160
(1990)]
b. Issuing a warrant of distraint and levy
[CIR v. Algue, G.R. No. L-28896 (1998)]
c. A final demand letter from BIR
Note: A final demand letter from the BIR,
reiterating to the taxpayer the immediate
payment of a tax deficiency assessment
previously made, is tantamount to a denial of
the taxpayer’s request for reconsideration.
Such letter amounts to an FDDA and is thus
appealable to the CTA. [CIR v. Isabela Cultural
Corporation, G.R. No. 135210 (2001)]
 U.P. LAW BOC TAXATION 2
d. Filing of criminal action against
taxpayer
3. Inaction by the CIR or his duly
authorized representative
If the protest is not acted upon within the 180-
day period, the inaction by the CIR is
considered as a denial of protest.
REMEDIES OF THE TAXPAYER IN CASE OF
DENIAL OR INACTION BY THE CIR
1. In case of denial of protest
a. If the protest is denied, in whole or in part,
by the CIR’s duly authorized
representative, the taxpayer may either:
i. Appeal to the CTA within 30
days from the date of receipt of
the decision
ii. Elevate his protest through a
request for reconsideration to
the CIR within 30 days from
date of receipt of the said
decision.
Note: No request for reinvestigation shall
be allowed in administrative appeal and
only issues raised in the decision of the
Commissioner’s duly authorized
representative shall be entertained by the
Commissioner. [RR 18-2013]
b. If the protest or administrative appeal, as
the case may be, is denied, in whole or in
part, by the CIR, the taxpayer may appeal
to the CTA within 30 days from receipt of
the decision denying the protest.
Otherwise, the assessment shall become
final, executory and demandable.
Note: A motion for reconsideration of the CIR’s
denial of the protest or administrative appeal
shall not toll the 30-day period to appeal to the
CTA.
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TAXATION LAW
2. In case of inaction by the CIR or his
duly authorized representative within the
180-day period
a. Appeal to the CTA within 30 days from the
lapse of the 180-day period, OR
b. Await the final decision of the CIR or his
duly authorized representative on the
disputed assessment and appeal such final
decision to the CTA within 30 days after
receipt of such decision. [RR 18-2013]
Note: These options are mutually exclusive,
and the resort to one bars the application of the
other. [Rizal Commercial Banking Corporation
v. CIR, G.R. No. 168498 (2007); RR 18-2013]
Effect of failure to appeal to the CTA in due
time
1. The decision or assessment becomes final,
executory and demandable.
2. The taxpayer is barred, in an action for
collection, from invoking any defense that
will re-open the question of his liability on
the merits;
3. The assessment is considered correct and
may be enforced by summary remedies or
by judicial action;
4. The taxpayer may raise only questions of
jurisdiction, collusion between the parties,
or fraud in the party offering the record with
respect to the proceedings.
5. The assessment which has become final
and executory cannot be superseded by a
new assessment. [DE LEON]
b. Recovery of Tax Erroneously or
Illegally Collected
Tax Refund as Distinguished from Tax
Credit
• Tax refund takes place when there is
actual reimbursement.
• Tax credit takes place upon the
issuance of a tax certificate or tax credit
memo, which can be applied against
any sum that may be due and collected
from the taxpayer.
 U.P. LAW BOC TAXATION 2
i. Grounds, Requisites, and Period for
Filing a Claim for Refund or
Issuance of a Tax Credit Certificate
(TCC)
Grounds for filing a claim for tax refund or
credit
1. Tax is erroneously or illegally assessed or
collected
a. Taxes are erroneously paid when a
taxpayer pays under a mistake of
fact, as when he is not aware of an
existing exemption in his favor at
the time that payment is made.
b. Taxes are illegally collected when
payments are made under duress.
c. Penalty is collected without
authority
2. Penalty is collected without authority
3. Sum collected is excessive or in any
manner wrongfully collected [Sec. 229,
NIRC]
Requisites for tax refund or tax credit
1. There is a tax collected erroneously or
illegally, or a penalty collected without
authority, or a sum excessively or
wrongfully collected.
2. There must be a written claim for refund
filed by the taxpayer to the CIR [Vda. De
Aguinaldo v. CIR, G.R. No. L-19927
(1965)]
Exceptions:
a. When on the face of the return upon which
payment was made, such payment
appears clearly to have been erroneously
paid, the CIR may refund or credit the tax
even without a written claim [Sec. 229,
NIRC]
b. A return filed showing an overpayment
shall be considered as a written claim for
credit or refund. [Sec. 204(C), NIRC]
c. The
 claim must be a categorical claim for
reimbursement [Bermejo v. CIR, G.R. No.
L-3029 (1950)]
d. The claim for refund must be filed within 2
years from the date of the payment of the
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TAXATION LAW
tax regardless of any supervening cause
[Sec. 229, NIRC]
Note: Both the claim for refund with the BIR
and the subsequent appeal to the CTA
must be filed within the 2-year period.
e. Taxpayer must show proof of the payment
of tax [Sec. 229, NIRC]
Note: The two-year period is not jurisdictional.
Even if it had already lapsed, the same may be
suspended for reasons of equity and other
special circumstances. [CIR v. Philippine
American Life Ins. Co., G.R. 105208 (1995)]
It is subject to waiver in the absence of
objection to a claim filed after 2 years.
Two-year period when counted
General Rule: From the date the tax was paid
Exceptions:
a. If the tax is withheld at source – from the
date it falls due at the end of the taxable
year [Gibbs v. CIR, G.R. No. L-17406
(1965)]
b. If the income is paid on a quarterly basis –
from the time of filing the final adjustment
return [CIR v. CA, G.R. No. 117254 (1999)]
c. When the tax is paid in installments – from
the date of final payment or the last
installment
Legal basis of tax refunds
Tax refunds are based on the principle of
quasi-contract or solutio indebiti. The
Government is not exempted from the
application of the time-honored doctrine that no
person shall unjustly enrich himself at the
expense of another. [CIR v. Acesite
(Philippines) Hotel Corporation, G.R. No.
147295 (2007); Secs. 2142 and 2154, NCC]
Necessity of proof in claim for refund
A claim for refund partakes of the nature of an
exemption and is strictly construed against the
claimant. The burden of proof is on the
taxpayer claiming the refund that he is entitled
 U.P. LAW BOC TAXATION 2
to the same. [CIR v. Tokyo Shipping, G.R. No.
L-68252 (1995)]
ii. Proper Party to File Claim for Refund
or Tax Credit
General Rule: The “taxpayer” is the person
entitled to claim a tax refund; hence, the proper
party to file a claim for refund or credit.
Exceptions:
a. In case of indirect taxes, the proper party 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 (Singapore)
Pte. Ltd. v. CIR, G.R. No. 173594 (2008)]
b. Withholding agent
a. In case the taxpayer does not file a
claim for refund, the withholding
agent may file the claim. [CIR v.
Smart Communications, Inc., G.R.
Nos. 179045-46 (2010)]
b. The withholding agent of a non-
resident foreign corporation may
file the claim. [CIR v. Procter &
Gamble Phil. Mfg. Corp., G.R. No.
L-66838 (1991)]
Reason: The withholding agent, who is made
personally liable for the withholding tax, is a
“taxpayer” under the NIRC. The withholding
agent is directly and independently liable for
the correct amount of tax that should be
withheld and for deficiency assessments,
surcharges and penalties. [CIR v. Procter &
Gamble Phil. Mfg. Corp., G.R. No. L-66838
(1991)]
Option of a corporate taxpayer in case of
excess income tax payments
If the sum of the quarterly tax payments made
during the taxable year exceeds the total tax
due on the entire taxable income of that year,
the corporation shall either:
a. carry-over the excess credit; or
b. be credited or refunded with the excess
amount paid
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TAXATION LAW
Note: These two options under Section 76 are
alternative in nature. The choice of one
precludes the other. [Republic v. Team (Phils.)
Energy Corporation, G.R. No. 188016 (2015)]
Irrevocability rule
Once the option to carry over and apply the
excess income tax payments to succeeding
quarters of the succeeding years is taken, that
option is irrevocable for that taxable period.
Consequently, a taxpayer is barred from
securing a refund of, or tax credit certificate for,
the excess amount that it has initially opted to
carry-over. [Sec. 76, NIRC]
Payment under protest not required
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].
Remedy upon Denial or Inaction by the CIR
Taxpayer’s remedies
1. If the CIR denies claim – appeal to the CTA
within 30 days from receipt of the CIR’s
decision and within 2 years from the date
of payment
2. If the CIR does not act on the claim and the
2-year period is about to lapse – file a claim
before the CTA prior to the lapse of the 2-
year period; otherwise, the claim shall be
barred [R.A. 1125, as amended]
Simultaneous filing allowed
If the CIR takes time in deciding the claim and
the period of two years is about to end, the suit
or proceeding must be started in the CTA
before the end of the 2 year period without
awaiting the decision of the CIR. [Gibbs v. CIR,
G.R. No. L-17406 (1965)]
Period for claiming refund once granted
The refund check or warrant must be claimed
or cashed within 5 years from the date such
warrant or check was mailed or delivered;
otherwise it shall be forfeited in favor of the
 U.P. LAW BOC TAXATION 2 TAXATION LAW

government and the amount thereof shall Exception: The judicial claim need not await
revert to the general fund. [Sec. 230(A), NIRC] the expiration of the 90-day period, if such was
filed from December 10, 2003 (issuance of BIR
Period for using the TCC Ruling No. DA-489-03) to October 6, 2010
TCCs may be applied against all internal (promulgation of Aichi).
revenue taxes, excluding withholding tax.
TCCs which remain unutilized after 5 years Sec. 229 Sec. 112
from the date of issue shall, unless revalidated, Refers to a refund or Refers to a refund or
be considered as invalid, and shall revert to the credit of tax credit of excess
general fund. [Sec. 230, NIRC] 1. tax erroneously or unutilized input
or illegally VAT attributable to
All TCCs issued by the BIR shall not be allowed assessed or zero-rated sales
to be transferred or assigned to any person. collected, or
[RR 14-2011] 2. penalty collected
without authority,
iii. Distinction Between Refund of or
Unutilized Input VAT (Sec. 112, 3. any sum
NIRC) and Refund of Erroneously or excessively or
Illegally Collected Tax (Sec. 229, wrongfully
NIRC) collected
The 2-year period The 2-year period
Rules on refund of excess or unutilized shall be reckoned shall be reckoned
input VAT from the date of from the close of the
1. When to file an administrative claim with payment of the tax taxable quarter
the CIR: or penalty. when the sales were
a. General rule: Within 2 years from made.
the close of the taxable quarter Both the Only the
when the sales were made [Sec. administrative claim administrative claim
112(A), NIRC; CIR v. Mirant with the CIR and the is required to be filed
Pagbilao, G.R. No. 172129 (2008)] appeal to the CTA within the 2-year
b. Exception: Within 2 years from the must be made within period.
date of payment of the output VAT, the 2-year period.
if the administrative claim was filed If the 2-year period is Sec. 112(C) of the
from June 8, 2007 (promulgation of about to lapse and NIRC provides a 90-
Atlas v. CIR) to September 12, the CIR has not day waiting period
2008 (promulgation of Mirant) acted on the claim, for the CIR to decide
2. When to file a judicial claim with the CTA: the taxpayer may on the application for
a. General rule: Section 112(D) already appeal to the tax refund or credit.
applies; not Section 229 CTA without waiting Compliance with the
i. Within 30 days from the full or for the decision of 90-day waiting
partial denial of the the CIR. period is mandatory
administrative claim by the CIR; and jurisdictional.
or
ii. Within 30 days from the Thus, the taxpayer
expiration of the 90-day period may elevate his
provided to the CIR to decide claim to the CTA (a)
on the claim. This is mandatory within 30 days from
and jurisdictional. the full or partial

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 U.P. LAW BOC TAXATION 2
denial of the claim, or
(b) within 30 days
after the lapse of the
90-day waiting
period, in case of
inaction by the CIR.
[CIR v. San Roque Power Corporation, G.R.
No. 187485 (2013); Visayas Geothermal
Power Company v. CIR, G.R. No. 197525
(2014); Sec. 112, NIRC, as amended by
TRAIN Law]
c. Power of Commissioner of Internal
Revenue to Compromise
Authority to compromise and abate taxes
General rule: The CIR has the authority to
compromise or abate any tax liability. [Sec.
7(C), NIRC]
Exception: The power to compromise may be
delegated to:
1. the Regional Evaluation Board (REB), in
case of:
a. assessments issued by regional
offices involving basic taxes of
P500,000 or less; and
b. minor criminal violations
discovered by regional and district
officials [Sec. 7(C), NIRC]
2. the National Evaluation Board (NEB),
when:
a. the basic tax exceeds P1,000,000,
or
b. the settlement offered is less than
the prescribed minimum rates
[Sec. 204(A), NIRC]
Grounds for a compromise
The CIR may compromise the payment of any
internal revenue tax in the following cases:
a. Doubtful validity of the assessment – when
there exists reasonable doubt as to the
validity of the claim against the taxpayer
(e.g., one arising from a jeopardy
assessment, arbitrary assessment); or
b. Financial incapacity – when the financial
position of the taxpayer demonstrates a
Page 205 of 256
TAXATION LAW
clear inability to pay the assessed tax.
[Sec. 204(A), NIRC; Sec. 3, RR 30-2002]
Limits of the CIR’s power to compromise
Ground Minimum compromise
rate
Financial 10% of the basic assessed
incapacity tax
Other cases 40% of the basic assessed
tax
[Sec. 204(A), NIRC]
Payment of compromise upon filing of
application
The compromise offer shall be paid by the
taxpayer upon filing of the application for
compromise settlement. No application for
compromise settlement shall be processed
without the full settlement of the offered
amount. In case of disapproval of the
application for compromise settlement, the
amount paid upon filing of the aforesaid
application shall be deducted from the total
outstanding tax liabilities. [RR 9-2013]
Requisites of a tax compromise
• The taxpayer must have a tax liability;
• There must be an offer by the taxpayer or
the Commissioner of an amount to be paid
by the taxpayer
• There must be an acceptance by the
Commissioner or taxpayer as the case may
be, of the offer in settlement of the original
claim.
Note: A compromise is consensual in nature.
Hence, it may not be imposed on the taxpayer
without his consent. The BIR may only suggest
settlement of the taxpayer’s liability through a
compromise.
Cases which may be compromised:
a. Delinquent accounts
b. Cases under administrative protest after
issuance of the FAN to the taxpayer which
are still pending in the Regional Offices,
Revenue District Offices, Legal Service,
 U.P. LAW BOC TAXATION 2 TAXATION LAW

Large Taxpayer Service (LTS), Collection Coverage of abatement

Service, Enforcement Service and other General rule: The CIR’s authority to abate is
offices in the National Office applicable to surcharge and compromise
c. Civil tax cases being disputed before the penalties only.
courts
d. Collection cases filed in courts Exception: In meritorious instances, the CIR
e. Criminal violations, except (i) those already may abate the interest as well as basic tax
filed in court or (ii) those involving criminal assessed, provided that cases for abatement
tax fraud [Sec. 2, RR 30-2002] or cancellation of tax, penalties and/or interest
by the CIR shall be coursed through certain
Cases which cannot be compromised: officials. [Sec. 4, NIRC]
a. Withholding tax cases, unless the
applicant-taxpayer invokes provisions of Compromise Abatement
law that cast doubt on the taxpayer's As to nature/definition
obligation to withhold It is a contract It is the cancellation
b. Criminal tax fraud cases confirmed as such whereby the parties, of the entire amount
by the CIR or his duly authorized by reciprocal of tax payable
representative concessions, avoid a because the tax
c. Criminal violations already filed in court litigation or to put an appears to be
d. Delinquent accounts with duly approved end to one already unjustly or
schedule of installment payments commenced. It excessively
e. Cases where final reports of reinvestigation reduces the amount assessed or the
or reconsideration have been issued of taxpayer’s liability. costs do not the
resulting in reduction in the original collection of the
assessment and the taxpayer is agreeable amount due.
to such decision by signing the required As to authorized officer
agreement form for the purpose. CIR and, in certain CIR
f. Cases which become final and executory cases, the NEB and
after final judgment of a court, where REB
compromise is requested on the ground of As to grounds
doubtful validity of the assessment 1. Doubtful validity 1. Unjustly or
g. Estate tax cases where compromise is of assessment excessively
requested on the ground of financial 2. Financial assessed tax
incapacity of the taxpayer [Sec. 2, RR 30- incapacity 2. Administration
2002] and collection
costs do not
ABATEMENT justify the
It refers to the cancellation of the entire amount collection of the
of tax payable. amount due

Grounds for abatement

d. Non-retroactivity of Rulings
a. The tax or any portion thereof appears to
be unjustly or excessively assessed; or
See Taxation 1 Reviewer, Part J. on
b. The administration and collection costs do
Prospectivity of Laws
not justify the collection of the amount due.
[Sec. 204(B), NIRC]

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 U.P. LAW BOC TAXATION 2
3. Government Remedies for
Collection of Delinquent
Taxes
a. Requisites
1. The government can initiate collection
administratively or judicially once the
assessment becomes final and executory.
2. Collection must be made within 5 years
following the assessment of the tax. [Sec.
222(c), NIRC]
The government has two ways to collect:
1. Summary or administrative remedies
a. Distraint on personal property
b. Levy on real property
2. Judicial remedies (civil or criminal)
Note: The remedies of distraint and levy shall
not be availed of where the amount of tax
involved is not more than P100.
b. Prescriptive Periods; Suspension
of Running of Statute of
Limitations
Prescriptive period
General Rule: The taxes due must be
collected within 5 years following the
assessment of the tax. [Sec. 222(c), NIRC]
Exception:
a. In case of (i) false or fraudulent return with
intent to evade tax or of (ii) failure to file a
return, a proceeding in court for the
collection of such tax without assessment
may be made within 10 years from
discovery of falsity, fraud or omission. [Sec.
222(a), NIRC]
b. When a waiver of the statute of limitation is
executed within the 5-year period,
collection may be made within the period
agreed upon. [Sec. 222(d), NIRC]
Court proceeding for collection of tax
General rule: No proceeding in court without
assessment for the collection of taxes may be
Page 207 of 256
TAXATION LAW
made after the 3-year period for making an
assessment. [Sec. 203, NIRC]
Exception: A proceeding in court for the
collection of such tax may be filed without
assessment in the case of (i) false or fraudulent
return with intent to evade tax or of (ii) failure to
file a return [Sec. 222(a), NIRC]
Waiver of prescriptive period
If tax was assessed within the period agreed
upon by the CIR and the taxpayer, such tax
may be collected by distraint or levy or by a
proceeding in court within the period agreed
upon in writing before the expiration of the 5-yr
period. [Sec. 222(d), NIRC]
Suspension of running of statute of
limitations
[see discussion under Assessments]
c. Administrative Remedies
i. Tax Lien
A tax lien is a legal claim or charge on property,
whether real or personal, established by law as
a source of security for the payment of tax
obligations. [HSBC v. Rafferty, G.R. No. L-
13188 (1918)]
Nature and extent of tax lien
1. When a taxpayer neglects or refuses to pay
his internal revenue tax liability after
demand, the amount so demanded shall be
a lien in favor of the government from the
time 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.
2. The 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 office of the Register of Deeds
of the province or city where the property of
the taxpayer is situated or located. [Sec.
219, NIRC]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

Grounds for Constructive Distraint:

Seizure under forfeiture vs. seizure to When the taxpayer is:
enforce a tax lien 1. delinquent; or
In the former, all the proceeds derived from the 2. retiring from any business subject to tax; or
sale of the thing forfeited are turned over to the 3. intending to leave the Philippines; or
CIR; in the latter, the residue after payment of 4. intending to remove his property from the
taxes and expenses is returned to the owner of Philippines or to hide or conceal his
the property. [BPI v. Trinidad, G.R. No. L- property; or
16014 (1921)] 5. planning to perform any act tending to
obstruct the proceedings for collecting the
ii. Distraint and Levy tax due or which may be due from him
[Sec. 206, NIRC]
DISTRAINT OF PERSONAL PROPERTY
How constructive distraint is effected:
Distraint is a remedy in which the collection of 1. By requiring the taxpayer or any person
tax is enforced on the goods, chattels, or having possession or control of such
effects, and other personal property of property to:
whatever character, including stocks and other a. sign a receipt covering the property
securities, debts, credits, bank accounts, and distrained;
interest in and rights to personal property. [Sec. b. obligate himself to preserve the
205(a), NIRC] same intact and unaltered; and
c. not to dispose of the same in any
Kinds of Distraint: manner whatever, without the
1. Constructive Distraint express authority of the CIR.
2. Actual Distraint 2. In case the taxpayer or the person having
the possession and control of the property
Constructive Distraint Actual Distraint refuses or fails to sign the receipt, the
As to procedure revenue officer effecting the constructive
The BIR does not take The personal property is distraint shall proceed to prepare a list of
physical possession of actually taken.
the personal property.
such property and, in the presence of 2
As to basis witnesses, leave a copy thereof in the
Delinquency of the The taxpayer is already premises where the property distrained is
taxpayer is not delinquent in the located. [Sec. 206, NIRC]
necessary. payment of his taxes.
As to the disposition of the personal property Garnishment
The personal property is The personal property is This refers to the taking of personal properties,
merely held as security taken to be sold in order
usually cash or sums of money, owned by a
to answer for any future to satisfy the tax
tax delinquencies. delinquencies. delinquent taxpayer which is in the possession
As to purpose of a third party (e.g., bank accounts).
The purpose is to protect The purpose is to
the government satisfy the tax, expenses Procedure for actual distraint
revenues and ensure of distraint and the cost 1. Commencement of distraint proceedings
that there are properties of the subsequent sale. The warrant of distraint is issued by:
that the government
could proceed against
a. CIR or his duly authorized
after a determination of representative – where the amount
the amount of deficiency involved is more than P1M
taxes.
(TABAG, p. 405-406 (2019))

Page 208 of 256

 U.P. LAW BOC TAXATION 2
b. Revenue District Officer – where the
amount involved is P1M or less [Sec.
207(A), NIRC]
2. Service of warrant of distraint
Distraint of tangible properties
The officer serving the warrant shall leave a list
of the personal property distrained, including a
statement of the sum demanded and note of
the time and place of sale, either:
a. with the owner or person from whose
possession such goods, chattels, or effects
or other personal property were taken, OR
b. with someone of suitable age and
discretion at the dwelling or place of
business of such person [Sec. 208, NIRC]
Distraint of intangible properties
a. Stocks and other securities: by serving a
copy of the warrants of distraint on the
taxpayer, and upon the president,
manager, treasurer or other responsible
officer of the corporation, company or
association which issued the stocks or
securities
b. Debts and credits: by leaving with the
person owing the debts or having in his
possession or under his control such
credits, or with his agent, a copy of the
warrant of distraint
c. Bank accounts: by serving a warrant of
garnishment upon the taxpayer and upon
the president, manager, treasurer or other
responsible officer of the bank [Sec. 208,
NIRC]
3. Report on the distraint
A report shall be submitted by the distraining
officer to the Revenue District Officer, and to
the Revenue Regional Director within 10 days
from receipt of the warrant.
Note: The CIR or his duly authorized
representative may, in his discretion, allow the
lifting of the order of distraint. [Sec. 207(A),
NIRC]
Page 209 of 256
TAXATION LAW
4. Notice of sale of distrained
properties
a. A notice of the public sale shall be posted
in not less than 2 public places in the
municipality or city (one of which is the
Office of the Mayor) where the distraint was
made.
b. The notice shall specify the time and place
of the sale.
c. The time of sale shall not be less than 20
days after notice to the owner and the
publication or posting of such notice. [Sec.
209, NIRC]
5. Sale at public auction
a. At the time of the public sale, the revenue
officer shall sell the goods, chattels, or
effects, or other personal property at a
public auction, to the highest bidder for
cash or with the approval of the CIR,
through a duly licensed commodity or stock
exchanges.
b. In case of stocks and other securities, the
officer shall execute a bill of sale which he
shall deliver to the buyer, and copy thereof
to the corporation, company or association
that issued the stocks or other securities.
c. Any residue over and above what is
required to pay the entire claim, including
expenses of sale and distraint, shall be
returned to the owner of the property sold.
The expenses shall be limited to actual
expenses of seizure and preservation of
the property pending the sale, excluding
charges for the services of the local internal
revenue officer or his deputy. [Sec. 209,
NIRC]
6. Release of the properties from
distraint
If at any time prior to the consummation of the
sale all proper charges are paid to the officer
conducting the sale, the goods or effects
distrained shall be restored to the owner. [Sec.
210, NIRC]
 U.P. LAW BOC TAXATION 2
7. Purchase by the government at sale
upon distraint
If the highest bid is not equal to the amount of
the tax or is very much less than the actual
market value of the articles offered for sale, the
CIR or his deputy may purchase the same on
behalf of the National Government for the
amount of taxes, penalties and costs due. The
property so purchased may be resold by the
CIR or his deputy. [Sec. 212, NIRC]
8. Report of sale to CIR
Within 2 days after the sale, the officer making
the same shall make a report of his
proceedings in writing to the CIR. [Sec. 211,
NIRC]
LEVY ON REAL PROPERTY
Levy refers to the seizure of real properties and
interest in or rights to such properties for the
satisfaction of taxes due from the delinquent
taxpayer.
When levy may be made
It can be made before, simultaneously or after
the distraint of personal property. [Sec. 207(B),
NIRC]
Note: If the warrant of levy is not issued before
or simultaneously with the warrant of distraint,
and the proceeds from the sale of the
distrained properties are not sufficient to satisfy
the tax delinquency, the CIR or his duly
authorized representative shall within 30 days
after execution of the distraint, proceed with the
levy on the taxpayer’s real property. [Sec.
207(B), NIRC]
Procedure for levy on real property
1. Issuance of warrant of levy
The CIR or his duly authorized representative
shall prepare a duly authenticated certificate
showing:
a. the name of the taxpayer;
b. the amount of tax and penalty due from
him; and
Page 210 of 256
TAXATION LAW
c. a description of the property levied
upon.
2. Service of written notice
Written notice of the levy shall be mailed to or
served upon:
a. the Register of Deeds of the city of the
province where the property is located
and
b. upon (i) the delinquent taxpayer, or (ii)
if he be absent from the Philippines, to
his agent or the manager of the
business in respect to which the liability
arose, or (iii) if there be none, to the
occupant of the property in question.
[Sec. 207(B), NIRC]
3. Advertisement of the sale
Within 20 days after levy, an advertisement of
the sale of the property or a usable portion
thereof necessary to satisfy the claim and cost
of sale shall be made, and the advertisement
shall cover a period of 30 days.
It shall be effected by:
a. posting a notice at the main entrance of
the municipal building or city hall and in
a public and conspicuous place in the
barrio or district in which the real estate
lies; and
b. publication once a week for 3 weeks in
a newspaper of general circulation in
the municipality or city where the
property is located.
The advertisement shall contain:
a. the amount of taxes and penalties due;
b. the time and place of sale;
c. the name of the taxpayer against whom
taxes are levied; and
d. a short description of the property to be
sold.
4. Sale of real property
At any time before the day fixed for the sale,
the taxpayer may discontinue all proceedings
by paying the taxes, penalties and interest.
Otherwise, the sale shall proceed. [Sec. 213,
NIRC]
 U.P. LAW BOC TAXATION 2
In case the proceeds of the sale exceed the
claim and cost of sale, the excess shall be
turned over to the owner of the property. [Sec.
213, NIRC]
5. Redemption of property sold
Within one (1) year from the date of sale, the
taxpayer or anyone for him, may pay to the
Revenue District Officer the following:
a. public taxes
b. penalties
c. interest from the date of delinquency to
the date of sale
d. interest of 15% per annum on said
purchase price from the date of sale to
the date of redemption. [Sec. 214,
NIRC; RMC 46-2018]
Note: The owner shall not be deprived of
possession of the said property and shall be
entitled to rents and other income until the
expiration of the period for redemption [Sec.
214, NIRC]
6. Final deed of sale to the purchaser
If the property is not redeemed within the
period of redemption, a final deed of sale shall
be issued in favor of the purchaser.
7. Forfeiture in Favor of the
Government
a. If there is no bidder for the real property
OR
b. If the highest bid is not sufficient to pay
the taxes, penalties and costs]
The Register of Deeds shall transfer the title of
the property upon registration with his office of
any declaration of forfeiture.
The taxpayer may redeem said property by
paying the full amount of taxes and penalties,
with interest thereon and the costs of sale
within 1 year from date of forfeiture. Otherwise,
the forfeiture shall become absolute. [Sec. 215,
NIRC]
Page 211 of 256
TAXATION LAW
Further distraint or levy
The remedy by distraint of personal property
and levy on realty may be repeated if
necessary until the full amount due, including
all expenses, is collected. [Sec. 217, NIRC]
SUMMARY
It is the seizure of personal
property, tangible or
Distraint intangible, by the government
to effect collection of taxes
including penalties.
It is the taking of personal
property, usually cash or sums
Garnishm
of money, owned by the
ent
delinquent taxpayer which is in
the possession of a third party.
It is the seizure of real property
Levy of of the taxpayer by the
real government in order to
property enforcement payment of
taxes.
[TABAG, p. 406 (2019)]
iii. Forfeiture of Real Property
Forfeiture implies a divestiture of property
without compensation in consequence of a
default or offense. The effect of forfeiture is to
transfer the title of the specific thing from the
owner to the government. [DE LEON]
Instances when forfeiture is appropriate
1. All chattels, machinery, and removable
fixtures of any sort used in the unlicensed
production of articles [Sec. 268(B), NIRC]
2. Dies and other equipment used for the
printing or making of any internal revenue
stamp, label or tag which is in imitation of or
purports to be a lawful stamp, label or tag [Sec.
268(B), NIRC]
3. Goods subject to excise tax which are
illegally stored or removed [Sec. 268(C)]
4. Liquor or tobacco shipped or removed
under a false name or brand [Sec. 262, NIRC]
 U.P. LAW BOC TAXATION 2
Enforcement of forfeitures
1. Forfeiture of chattels and removable
fixtures: enforced by the seizure, sale or
destruction of the specific forfeited property
2. Forfeiture of real property: enforced by a
judgment of condemnation and sale in a
legal action or proceeding civil or criminal
as the case may require [Sec. 224, NIRC]
Resale of real estate taken for taxes
In case of any real estate taken by the
government in payment of taxes, penalties or
costs or in compromise or adjustment of any
claim, the CIR may:
a. sell the same at a public auction after
giving not less than 20 days notice; or
b. dispose of the same at a private sale
upon approval of the Secretary of
Finance. [Sec. 216, NIRC]
When property to be sold or destroyed
1. Forfeited chattels and removable fixtures:
sold in the same manner and under the
same conditions as the public notice and
the time and manner of sale as are
prescribed for sales of personal property
distrained for the non-payment of taxes
2. Distilled spirits, liquors, cigars, cigarettes,
other manufactured products of tobacco
and all apparatus used in or about the illicit
production of such articles: destroyed by
the order of the CIR when the sale or use
would be injurious to public health or
prejudicial to the enforcement of the law
3. All other articles subject to excise tax
manufactured or removed in violation of the
Code, dies for the printing or making of
internal revenue stamps and labels: sold or
destroyed in the discretion of the CIR [Sec.
225, NIRC]
Note: Forfeited property shall not be destroyed
until at least 20 days after seizure. [Sec. 225,
NIRC]
Disposition of funds recovered in legal
proceedings or obtained from forfeiture
Page 212 of 256
TAXATION LAW
All judgments and monies recovered and
received for taxes, costs, forfeitures, fines and
penalties shall be paid to the CIR or his
authorized deputies as the taxes themselves
are required to be paid, and except as specially
provided, shall be accounted for and dealt with
in the same way. [Sec. 226, NIRC]
iv. Suspension of Business Operation
In addition to other administrative and penal
sanctions, the CIR or his duly authorized
representative may order the suspension or
closure of a business establishment for any of
the following violations:
1. Failure to issue receipts and invoices;
2. Failure to file VAT returns as required
under Sec. 114 of the NIRC;
3. Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipt for the taxable
quarter; [Sec. 115(a), NIRC]
4. Failure of any person to register as
required under Sec. 236 of the NIRC, in
which case, the closure shall be for a
duration of not less than 5 days and shall
be lifted only upon compliance [Sec.
115(b), NIRC]
v. Judicial Remedies
Form and Mode of Proceeding:
Civil and criminal action and proceedings
instituted in behalf of the Government under
the authority of this Code or other law enforced
by the BIR:
a. shall be brought in the name of the
Government of the Philippines;
b. shall be conducted by legal officers of the
BIR; and
c. shall be filed in court only with the approval
of the CIR. [Sec. 220, NIRC]
Civil Action
Two ways by which civil liability is enforced:
a. By filing a civil case for the collection of
sum of money with the proper regular court;
and
 U.P. LAW BOC TAXATION 2 TAXATION LAW

b. By filing an answer to the petition for review NIRC or who causes the commission of any
filed by the taxpayer with the CTA such offense by another shall be liable in the
[MAMALATEO] same manner as the principal. [Sec. 253(b),
NIRC]
Criminal Action
Any person convicted of a crime under the Offender Penalty
NIRC shall: Not a citizen He shall be deported
a. be liable for the payment of the tax, and of the immediately after serving the
b. be subject to the penalties imposed under Philippines sentence.
the NIRC. [Sec. 253(a), NIRC] The maximum penalty
prescribed for the offense shall
Prescriptive period for criminal action be imposed and he shall be
A public
All violations of any provision of the NIRC shall dismissed from public office,
officer or
prescribe after 5 years: employee
and perpetually disqualified
a. from the day of the commission of the from holding any public office,
violation, or to vote, and to participate in
any election.
b. if not known at the time, from the discovery
His license shall be
thereof and the institution of judicial CPA
automatically revoked or
proceedings for its investigation and
cancelled upon conviction.
punishment. [Sec. 281, NIRC]
Corporation The penalty shall be imposed
s, on the partner, president,
When prescription is interrupted association general manager, branch
a. when proceedings are instituted against s, manager, treasurer, officer-in-
the guilty persons and the period shall run partnership charge and employees
again if the proceedings are dismissed for s etc. responsible for the violation.
reasons not constituting jeopardy; or [Sec. 253, NIRC]
b. when the offender is absent from the
Philippines. Minimum amount of fine:
The fines imposed for any violation of the NIRC
Assessment not necessary before filing a shall not be lower than the fines imposed
criminal charge for tax evasion herein or twice the amount of taxes, interests
An assessment is not necessary before a and surcharges due from the taxpayer,
criminal charge can be filed. The criminal whichever is higher. [Sec. 253(e), NIRC]
charge need only be proved by a prima facie
showing of a willful attempt to file taxes, such Common crimes punishable under the
as failure to file a required tax return. [CIR v. NIRC
Pascor, G.R. No. 128315 (1999)] a. Attempt to evade or defeat tax [Sec. 254,
NIRC]
Payment of tax not a defense b. Willful failure to file return, supply correct
Payment of the tax due after a criminal case and accurate information, pay tax, withhold
has been filed shall not constitute a valid and remit tax and refund excess taxes
defense in any prosecution for violation of the withheld on compensation [Sec. 255,
provisions under the NIRC. [Sec. 253(a), NIRC]
NIRC]

Liability of person who aids or abets

Any person who willfully aids or abets in the
commission of a crime penalized under the

Page 213 of 256

 U.P. LAW BOC TAXATION 2 TAXATION LAW

Willful blindness doctrine collected from the date prescribed for its
The neglect or omission of the taxpayer to payment until: (a) full payment thereof; or (b)
ensure compliance with her obligation to file upon issuance of a notice and demand by the
her ITRs and pay the tax due is tantamount to CIR or his authorized representative,
“deliberate ignorance” or “conscious whichever comes first [Sec 249(B), NIRC; Sec.
avoidance”. [People v. Kintanar, CTA EB Crim. 3, RR 21-2018]
No. 006 (2010)]
2. Delinquency interest – Interest at the
d. No Injunction Rule; Exceptions rate of 12% per annum on the unpaid amount
in case of failure to pay:
General Rule a. the amount of the tax due on any return
No court shall have the authority to grant an required to be filed; or
injunction to restrain the collection of any b. the amount of the tax due for which no
national internal revenue tax, fee or charge return is required; or
imposed by the NIRC. [Sec. 218, NIRC] c. a deficiency tax, or any surcharge or
interest thereon on the due date
Exception appearing in the notice and demand of
When in the opinion of the CTA, the collection the CIR or his authorized
of tax may jeopardize the interest of the representative until the amount is fully
government and/or the taxpayer, the CTA may paid, which interest shall form part of
suspend said collection and require the the tax [Sec. 249(C), NIRC; Sec. 4, RR
taxpayer to deposit the amount claimed or file 21-2018]
a surety bond. [Sec. 11, R.A. 1125, as
amended] Deficiency Delinquency
interest interest
4. Civil Penalties Basic tax +
deficiency
Base Basic tax
interest +
a. Delinquency Interest and
surcharge
Deficiency Interest From the due
From the date
date appearing
INTEREST prescribed for
in the notice and
In general, interest is assessed and collected Reckoni its payment
demand of the
on any unpaid amount of tax at the rate of 12% ng date until the full
CIR until the
or double the legal interest rate for loans or payment
amount is fully
forbearance of any money as set by the BSP thereof
paid
from the date prescribed for payment until the Rate 12% per annum
amount is fully paid. [Sec. 249(A), NIRC; Sec.
2, RR 21-2018]
Note: Upon effectivity of the TRAIN Law on
January 1, 2018, the deficiency and the
Note: The rate of interest per BSP Circular No.
delinquency interest SHALL NOT be imposed
799 series of 2013 for loans or forbearance of
simultaneously. [Sec. 249(A), NIRC; Sec. 5,
any money in the absence of an express
RR 21-2018]
stipulation is 6%. Thus, the interest rate
imposable shall be 12%. [Sec. 2, RR 21-2018]
3. Interest on extended payment –
Interest at the rate of 12% per annum on the
1. Deficiency Interest – Interest at the
tax or deficiency tax or any part thereof unpaid
rate of 12% per annum on any deficiency tax
due, which interest shall be assessed and

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 U.P. LAW BOC TAXATION 2
from the date of notice and demand until it is
paid in the following cases:
a. When a person elects to pay the tax on
installment, but fails to pay the tax or
any installment, or any part of such
amount or installment on or before the
date prescribed for its payment; or
b. 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]
Effectivity of the 12% interest rate
The interest rate of 12% is effective starting
January 1, 2018. Prior to such date, the
applicable interest rate shall be 20%.
b. Surcharge
This is a civil penalty imposed in addition to the
tax required to be paid [Sec. 248, NIRC]
Rates of Surcharge (25% or 50%)
1. 25% of the amount due in the following
cases:
a. Failure to file any return and pay the tax
due on the prescribed date; or
b. Filing a return with an internal revenue
officer other than those with whom the
return is required to be filed, unless the
CIR authorizes otherwise; or
c. Failure to pay the deficiency tax within
the time prescribed for its payment in
the notice of assessment; or
d. Failure to pay the full or part of the
amount of tax due on or before the date
prescribed for its payment [Sec.
248(A), NIRC]
2. 50% of the tax or of the deficiency tax
in case any payment has been made, in the
following cases:
a. Willful neglect to file the return within
the prescribed period; or
b. A false or fraudulent return is willfully
made [Sec. 248(B), NIRC]
Page 215 of 256
TAXATION LAW
Prima facie evidence of a false or fraudulent
return
• Substantial underdeclaration of sales,
receipts or income – failure to report
sales, receipts or income in an amount
exceeding 30% of that declared per
return
• Substantial overstatement of
deductions – a claim of deductions in
an amount exceeding 30% of actual
deductions [Sec. 248(B), NIRC]
c. Compromise Penalty
A compromise penalty is an amount of money
paid by a taxpayer to compromise a tax
violation that he has committed, instead of the
BIR instituting a criminal action against the
taxpayer. A compromise is consensual in
character, hence, may not be imposed on the
taxpayer without his consent.[Sec. 6, RR 12-
99]
Note: All criminal violations may be
compromised except: (a) those already filed in
court, or (b) those involving fraud.
d. Fraud Penalty
Fifty percent (50%) of the tax or of the
deficiency tax xxx
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 (30%) of actual
deductions, shall render the taxpayer liable for
substantial under-declaration of sales, receipts
or income or for overstatement of deductions,
as mentioned herein. [Sec. 248 (B), NIRC]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

ILLUSTRATION
Mr. A has been assessed deficiency income tax of P1,000,000, exclusive of interest and surcharge,
for taxable year 2015. The tax liability remained unpaid despite the lapse of June 30, 2017, the
deadline for payment stated in the notice and demand issued by the Commissioner. Payment was
made by Mr. A on February 10, 2018. The civil penalties are computed as follows:

Basic Tax Due P 1,000,000.00

P
Add: 25% surcharge for late payment 250,000.00
20% Deficiency Interest from
April 16, 2016 to June 30, 2017
(441 days) 241,643.84 491,643.84
Total Amount Due, June 30,2017 P 1, 491,643.84
Add: 20% Deficiency Interest
from July 1, 2017 to December
31, 2017 (184 days based on
P1M) 100,821.92
Add: 20% Delinquency Interest
from July 1, 2017 to December
31, 2017 (184 days; based on
total amount as of June 30, 2017) 150,390.39
Add: 12% Delinquency Interest
from January 1, 2018 to February
10, 2018 (41 days; based on total
amount due as of June 30, 2017) 20,106.54 271,318.85
Total Amount Due, February 10,
2018 P 1,762,962.90

obe levied and collected only for

III. LOCAL TAXATION Public purposes;
o not be Unjust, excessive,
oppressive, or confiscatory;
A. LOCAL GOVERNMENT o not be Contrary to law, public
policy, national economic policy, or
TAXATION in restraint of trade;
c. The collection of local taxes, fees, charges
1. Fundamental Principles (U- and other impositions shall not be left to
PUCE-PIP) any Private person;
a. Taxation shall be Uniform in each local d. The revenue collected shall Inure solely to
government unit (LGU); the benefit of, and be subject to the
b. Taxes, fees, charges and other impositions disposition by, the LGU levying the tax, fee,
shall: charge or other imposition, unless
o be Equitable and based as far as otherwise specifically provided herein; and,
practicable on the taxpayer's ability
to pay;

Page 216 of 256

 U.P. LAW BOC TAXATION 2
e. Each LGU shall, as far as practicable,
evolve a Progressive system of taxation.
[Sec. 130, LGC]
2. Nature and Source of Taxing
Power
Nature of the taxing power of LGUs
1. Not inherent – Municipal corporations,
being mere creatures of law, may exercise
the power to tax only if delegated to them
by the national legislature or conferred to
them by the Constitution. The 1987
Constitution directly grants LGUs the
power to tax.
2. Limited – The taxing power of LGUs is not
absolute because it is subject to such
guidelines and limitations that Congress
may provide. [Sec. 5, Art. X, Constitution]
3. Legislative in nature – The power to
impose taxes is vested solely in the
legislative body (i.e., the Sanggunian) of
each LGU.
4. Territorial – It can only be exercised within
the territorial jurisdiction of each LGU.
a. Grant of Local Taxing Power under
the Local Government Code (LGC)
1. 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. [Sec. 5, Art. X, 1987
Constitution]
2. Each LGU shall exercise its power to
create its own sources of revenue and to
levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic
policy of local autonomy. Such taxes, fees,
and charges shall accrue exclusively to the
LGUs. (Sec. 129, LGC)
Page 217 of 256
TAXATION LAW
Local Taxing Authority
The power to impose a tax, fee, or charge, or
to generate revenue under the LGC shall be
exercised by the Sanggunian of the LGU
concerned through an appropriate ordinance.
[Sec. 132, LGC]
1. Sangguniang Panlalawigan for the
province;
2. Sangguniang Panlungsod for the city;
Sangguniang Bayan for the municipality;
3. Sangguniang Barangay for the barangay.
[Sec. 48, LGC]
Note: The exercise of the power to tax by the
local legislative assembly is subject to the veto
power of the local chief executive. [Sec. 55,
LGC]
b. Authority to Prescribe Penalties for
Tax Violations
1. The sanggunian of an LGU is authorized to
prescribe fines or other penalties for
violation of tax ordinances
a. in no case shall such fines be less
than P1,000 nor more than P5,000,
b. nor shall imprisonment be less than
1 month nor more than 6 months.
2. Such fine or other penalty, or both, shall be
imposed at the discretion of the court.
3. The Sangguniang Barangay may prescribe
a fine of not less than P100 nor more than
P1,000. [Sec. 516, LGC]
c. Authority to Grant Local Tax
Exemptions
LGUs may, through ordinances, grant tax
exemptions, incentives or reliefs under such
terms and conditions as they may deem
necessary. [Sec. 192, LGC]
d. Withdrawal of Exemptions
Local tax exemptions, in general
General rule: Unless otherwise provided, tax
exemptions or incentives granted to, or
presently enjoyed by all persons, whether
 U.P. LAW BOC TAXATION 2
natural or judicial, including government-
owned or controlled corporations are
withdrawn upon the effectivity of the LGC.
[Sec. 193, LGC]
Exceptions: Tax exemptions not withdrawn
1. Local water districts
2. Cooperatives duly registered under RA
6938 (Cooperative Code of the
Philippines),
3. Non-stock and non-profit hospitals and
educational institutions [Sec. 193, LGC]
Note: The LGC took effect on January 1, 1992.
Sec. 193 is an express and general repeal of
all statutes granting exemptions from local
taxes. It withdrew the sweeping tax privileges
previously enjoyed by private and public
corporations. [NPC v. Cabanatuan, G.R. No.
149110 (2003)]
e. Authority to Adjust Local Tax
Rates
LGUs shall have the authority to adjust the tax
rates not oftener than once every 5 years, but
in no case shall the adjustment exceed 10% of
the rates fixed by the LGC. [Sec. 191, LGC]
f. Residual Taxing Power of Local
Governments
LGUs may exercise the power to levy taxes,
fees, or charges on ANY base or subject not
otherwise specifically enumerated in the LGC
or taxed under the NIRC or other applicable
laws.
Limitations on the taxing power of LGUs
1. Not unjust, excessive, oppressive,
confiscatory, or contrary to declared
national policy [Sec. 186, LGC];
2. Pursuant to an ordinance enacted after a
public hearing conducted for the purpose
[Sec. 186, LGC];
3. Subject to the constitutional limitations on
the power to tax and the common
Page 218 of 256
TAXATION LAW
limitations on the taxing power of LGUs as
provided under Section 133 of the LGC;
and
4. The principle of preemption.
Principle of preemption or exclusionary
doctrine
Preemption in the matter of taxation simply
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, G.R. No. L-21183 (1968)]
3. Scope of Taxing Power
LGU Scope of Taxing Power
Except as otherwise provided in the
LGC, a province may levy only the
following taxes, fees, and charges:
[Sec. 134, LGC]
1. Transfer of real property
ownership [Sec. 135, LGC]
2. Business of printing and
publication [Sec. 136, LGC]
Province 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 [Sec. 141,
LGC]
May levy taxes, fees and charges not
Municipalit
otherwise levied by provinces [Sec.
y
142, LGC]
May levy taxes, fees and charges
City which the province or municipality
may impose [Sec. 151, LGC]
May levy only:
1. Taxes on stores or retailers
2. Service fees or charges
Barangay
3. Barangay clearance
4. Other fees and charges [Sec.
152, LGC]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

4. Specific Taxing Power of LGUs

Specific Taxes Province Municipality City Barangay
Tax on Transfer of Real Property ✔ ✔
Tax on Business of Printing and Publication ✔ ✔
Franchise Tax ✔ ✔
Tax on Sand, Gravel and other Quarry Resources ✔ ✔
Professional Tax [Sec. 139, LGC] ✔ ✔
Amusement Tax [Sec. 140, LGC] ✔ ✔
Annual Fixed Tax for Every Delivery Truck or Van of
Manufacturers or Producers, Wholesalers of, Dealers, or ✔ ✔
Retailers in, Certain Products [Sec. 141, LGC]
Tax on Business [Sec. 143, LGC] ✔ ✔
Fees and Charges on Regulation/Licensing of Business
✔ ✔
or Occupation, or Practice of Profession [Sec. 147, LGC]
Fees for Sealing and Licensing of Weights and Measures
✔ ✔
[Sec. 148, LGC]
Fishery Rentals, Fees and Charges [Sec. 149, LGC] ✔ ✔
Community Tax [Sec. 156, LGC] ✔ ✔
Tax on Small-scale Stores/Retailers [Sec. 152(a), LGC] ✔
Service Fees or Charges on the Regulation or Use of
✔
Barangay-owned Properties [Sec. 152(b), LGC]
Barangay Clearance [Sec. 152(c), LGC] ✔
Other Fees and Charges (on commercial breeding of
fighting cocks, cockfights, cockpits; places of recreation
✔
which charge admission fees; outside advertisements)
[Sec. 152(d), LGC]
Reasonable Fees and Charges for Services Rendered
✔ ✔ ✔ ✔
[Sec. 153, LGC]
Public Utility Charges [Sec. 154, LGC] ✔ ✔ ✔ ✔
Toll Fees or Charges [Sec. 155, LGC] ✔ ✔ ✔ ✔
✔
Real Property Tax [see separate discussion on Real
✔ (w/in ✔
Property Taxation]
Metro Manila)

a. Taxing Powers of Provinces

Transaction Taxed Tax Rate and Tax Base Exemptions Others
TAX ON TRANSFER OF REAL PROPERTY
Imposed on the sale, Tax Rate: Not more than Sale, transfer, or other Person Liable: seller,
donation, barter, or any 50% of 1% disposition of real property donor, transferor, executor
other mode of transfer of pursuant to RA 6657 or administrator
ownership or title to real Tax Base: Total (Comprehensive Agrarian
property [Sec 135, LGC] acquisition price or fair Reform Law) Time of Payment: Within
market value if monetary 60 days from the date of
consideration is not execution of deed or from

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U.P. LAW BOC TAXATION 2 TAXATION LAW

substantial, whichever is the date of decedent's

higher death

Note: Evidence of
payment of tax must be
presented to the Register
of Deeds before
registration, and to the
provincial assessor before
cancellation of an old tax
declaration.
TAX ON BUSINESS OF PRINTING AND PUBLICATION
Imposed on the business Tax Rate: Not exceeding Receipts from printing
of persons engaged in the 50% of 1% and/or publishing of books
printing, and/or publication and other reading
of books, cards, posters, Tax Base: Gross annual materials prescribed by
leaflets, handbills, receipts for the preceding the Department of
certificates, receipts, calendar year Education as school texts
pamphlets, and others of or references
similar nature [Sec 136, In the case of a newly
LGC] started business:
● Tax Rate: Not
exceeding 1/20 of 1%
● Tax Base: Capital
investment
FRANCHISE TAX
Imposed on businesses Tax Rate: Not exceeding No exception Franchise tax is a tax on
enjoying a franchise [Sec 50% of 1 the privilege of transacting
137, LGC] Notwithstanding any business in the state and
Tax Base: Gross annual exemption granted by any exercising corporate
receipts for the preceding law or other special law, franchises granted by the
calendar year based on the province may impose a state. It is not levied on the
the incoming receipt, or tax on businesses corporation simply for
realized, within its enjoying a franchise. [Sec. existing as a corporation.
territorial jurisdiction 137, LGC]
Requisites to be covered
In the case of a newly by franchise tax:
started business: a. that one has a franchise
● Tax Rate: Not more in the sense of a
than 1/20 of 1% secondary or special
● Tax Base: Capital franchise; and
investment b. that it is exercising its
rights or privileges
under this franchise
within the territory of the
concerned LGU [NPC v.
Province of Isabela,
G.R. No. 165827
(2006)]
TAX ON SAND, GRAVEL AND OTHER QUARRY RESOURCES
Levied on ordinary stones, Tax Rate: Not more than Who issues permit to
gravel, earth and other 10% extract: issued exclusively
quarry resources, as by the provincial governor
defined in the NIRC, Tax Base: Fair market pursuant to an ordinance
extracted from public value in the locality per by the Sangguniang
lands or from the beds of Panlalawigan

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U.P. LAW BOC TAXATION 2 TAXATION LAW

seas, lakes, rivers, cubic meter of the

streams, creeks, and other extracted resources Distribution of proceeds:
public waters within its a. Province - 30%
territorial jurisdiction [Sec b. Component city or
138, LGC] municipality where
resources were
extracted - 30%
c. Barangay where
resources were
extracted - 40%
PROFESSIONAL TAX
Exercise or practice of Tax Rate: Not to exceed Professionals exclusively Place of payment: To the
profession requiring P300 employed by the province where the
government examination government profession is practiced, or
[Sec 139, LGC] Tax Base: At such amount where the principal office is
and reasonable maintained
Note: A person who has classification determined
paid the professional tax is by the Sangguniang Time of payment:
entitled to practice his Panlalawigan Payable annually, on or
profession anywhere in the before January 31 or
country without being before beginning the
subjected to similar taxes practice of profession
for the practice of such
profession. Employers shall require
payment of professional
tax before employment
and annually thereafter.
AMUSEMENT TAX
Collected from proprietors, Tax Rate: Not more than Holding of operas, Note: In case of theaters or
lessees, or operators of 10% [RA 9640] concerts, dramas, recitals, cinemas, tax shall first be
theaters, cinemas, concert paintings, and art deducted and withheld by
halls, circuses, boxing Tax Base: Gross receipts exhibitions, flower shows, their proprietors, lessees
stadia, and other places of from admission fees musical programs, literary and operators before the
amusement [Sec 140, and oratorical gross receipts are divided
LGC] presentations among them.

Not subject to Exception to exemption Distribution of proceeds:

amusement tax under (taxable): Pop, rock, or Shared equally by the
the LGC: similar concerts province and the
a. Resorts, swimming municipality where
pools, bath houses, hot amusement places are
springs, and tourist located
spots [Pelizloy Realty
Corp. v. Province of
Benguet, G.R. No.
183137 (2013)]
b. Professional basketball
games [PBA v. CA, G.R.
No. 119122 (2000)]
c. Golf courses [Alta Vista
Golf and Country Club v.
City of Cebu, G.R. No.
180235 (2016)]
d. Those subject to
amusement tax under
Sec. 125 of the NIRC

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

TAX ON DELIVERY TRUCK/VAN

Imposed on vehicles used Tax Rate: Not exceeding Such manufacturers,
by manufacturers, P500 producers, wholesalers,
producers, wholesalers, dealers and retailers shall
dealers or retailers in the Tax Base: Every truck, be exempt from the tax on
delivery or distribution of van, or vehicle peddlers.
distilled spirits, fermented
liquors, soft drinks, cigars
and cigarettes, and other
products, as may be
determined by the
Sangguniang
Panlalawigan, to sales
outlets, or consumers in
the province, whether
directly or indirectly [Sec
141, LGC]

b. Taxing Powers of Municipalities

Scope of taxing power: Municipalities may levy taxes, fees, and charges not otherwise levied by provinces. [Sec. 142,
LGC]

Tax on Various Types of Businesses [Sec. 143, LGC]

Businesses Taxed Rate/Amount and Base Other Information
Manufacturers, assemblers, Tax Rate: From P165 to P24,375
repackers, processors, brewers, per annum or at a rate not exceeding
distillers, rectifiers, and 37.5 % of 1%
compounders of liquors, distilled
spirits, and wines or manufacturers Tax Base: Gross sales or receipts
of any article of commerce of for the preceding calendar year
whatever kind or nature [Sec. 143(a),
LGC]
Wholesalers, distributors, or dealers Tax Rate: From P18 to P10,000 or “Wholesale” means a sale where
in any article of commerce of at a rate not exceeding 50% of 1% the purchaser buys or imports the
whatever kind or nature [Sec. 143(b), commodities for resale to persons
LGC] Tax Base: Gross sales or receipts other than the end user regardless of
for the preceding calendar year the quantity of the transaction. [Sec.
131(z), LGC]

“Dealer” means 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.
[Sec. 131(k), LGC]
Exporters and manufacturers, Not exceeding ½ of rates prescribed Essential Commodities: [RWC-
millers, producers, wholesalers, under Sec. 143 (a), (b) and (d) of the CLAPS]
distributor, dealers or retailers of LGC (on manufacturers; a. Rice and corn
essential commodities enumerated wholesalers, distributors and b. Wheat or cassava flour, meat,
below: [Sec. 143(c), LGC] dealers; and retailers, respectively) dairy products, locally
manufactured, processed or
preserved food, sugar, salt, and
other agricultural, marine, and

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U.P. LAW BOC
Retailers [Sec. 143(d), LGC]
Contractors and other independent
contractors [Sec. 143(e), LGC]
Banks and other financial
institutions[Sec. 143(f), LGC]
Peddlers engaged in the sale of any
merchandise or article of commerce
[Sec. 143(g), LGC]
TAXATION 2
Tax Rate:
a. 2% per annum on sales not
exceeding P400,000
b. 1% per annum on sales in
excess of the first P400,000 [Art.
232(d), LGC IRR]
Tax Base: Gross sales or receipts
for the preceding calendar year
Tax Rate: From P27.50 to P11,500
or at a rate not exceeding 50% of 1%
Tax Base: Gross sales or receipts
for the preceding calendar year
Tax Rate: Not exceeding 50% of 1%
Tax Base: Gross receipts of the
preceding calendar year derived
from interest, commissions and
discounts from lending activities,
income from financial leasing,
dividends, rentals on property and
profit from exchange or sale of
property, insurance premium
Tax Rate and Base: Not exceeding
P50 per peddler annually
Page 223 of 256
TAXATION LAW
freshwater products, whether in
their original state or not
c. Cooking oil and cooking gas
d. Cement
e. Laundry soap, detergents, and
medicine
f. Agricultural implements,
Equipment and post-harvest
facilities, fertilizers, pesticides,
insecticides, herbicides and
other farm inputs
g. Poultry feeds and other animal
feeds
h. School supplies [Sec. 143(c),
LGC]
Note: Barangays have the exclusive
power to tax gross sales or receipts
amounting to:
a. 50,000 or less in case of cities
b. 30,000 or less in case of
municipalities [Sec. 143(d), Sec.
152, LGC]
“Retail” means a sale where the
purchaser buys the commodity for
his own consumption, irrespective of
the quantity of the commodity sold.
[Sec. 131(w), LGC]
“Contractor” includes persons,
natural or juridical, not subject to
professional tax under Sec. 139 of
the 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 or
use of the physical or mental
faculties of such contractor or his
employees. [Sec. 131(h), LGC]
Note: All other income and receipts
of banks and other financial
institutions not otherwise
enumerated herein shall be
excluded from the taxing authority of
the LGU concerned. [Art. 232(f),
LGC IRR]
“Peddler” means 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]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

Any other business which the
Sanggunian concerned may deem
proper to tax [Sec. 143(h), LGC]
Tax Base: Gross sales or receipts
Tax Rate: The Sanggunian may
prescribe a schedule of graduated
rates but in no case to exceed the
rates prescribed herein.
Note: For any business subject to
excise, value-added or percentage
tax under the NIRC, the rate of tax
shall not exceed 2% of gross sales
or receipts of the preceding calendar
year.
Note: This is a catch-all provision.
Exception: Any business engaged
in the production, manufacture,
refining, distribution or sale of oil,
gasoline, and other petroleum
products shall not be subject to any
local tax imposed under Sec. 143 of
the LGC. [Art. 232(h), LGC IRR]

Tax base of local business tax
Business tax must be based on gross sales or
receipts, it being different from gross revenue.
[Ericsson Telecommunications Inc. v. City of
Pasig, G.R. No. 176667 (2007)]
“Gross Sales or Receipts” include the total
amount of money or its equivalent representing
the contract price, compensation or service
fee, including the amount charged or materials
supplied with the services and deposits or
advance payments actually or constructively
received during the taxable quarter for the
services performed or to be performed for
another person excluding discounts if
determinable at the time of sales, sales return,
excise tax, and VAT. [Sec. 131(n), LGC]
“Gross revenue” covers money or its
equivalent actually or constructively received,
including the value of services rendered or
articles sold, exchanged or leased, the
payment of which is yet to be received.
[Ericsson Telecommunications Inc. v. City of
Pasig, G.R. No. 176667 (2007)]
Ceiling on business tax within Metro Manila
Municipalities within Metro Manila may levy
taxes at rates which shall not exceed by 50%
the maximum rates prescribed in Sec 143 of
the LGC. [Sec. 144, LGC]
Tax on retirement of business
Upon termination of a business subject to tax
under Sec. 143 and 144, it shall submit a sworn
statement of its gross sales or receipts for the
current year. If the tax paid is less than the tax
due, the difference shall be paid before the
business is considered officially retired. [Sec.
145, LGC]
Rules on payment of business tax
1. Taxes imposed under Sec. 143 of the LGC
shall be paid for every separate or distinct
establishment or place where business
subject to tax is conducted.
2. One line of business is not exempted by
being conducted with some other
businesses for which such tax has been
paid.
3. The tax on a business must be paid by the
person conducting it.
4. If a person operates 2 or more businesses
mentioned in Sec. 143, the tax shall be
computed:
a. on the combined total gross sales
or receipts, if they are subject to the
same tax rate
b. separately based on the gross
sales or receipts of each business,
if they are subject to different tax
rates [Sec. 146, LGC]
Note: Condominium corporations are not
business entities, and are thus not subject to
local business tax. Even though the
corporation is empowered to levy assessments
or dues from the unit owners, these amounts
are not intended for the incurrence of profit by
the corporation, but to shoulder the multitude of
necessary expenses for maintenance of the

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 U.P. LAW BOC TAXATION 2
condominium. [Yamane v. BA Lepanto
Condominium Corp., G.R. No. 154993 (2005)]
Situs of business tax
a. Rule 1: In case of persons
maintaining/operating a branch or sales outlet
making the sale or transaction, the sale shall
be recorded in said branch or sales outlet and
the tax paid to the municipality/city where the
branch or sales outlet is located. [Sec. 150(a),
LGC]
“Branch or Sales Office” – a fixed place in a
locality which conducts operations of the
business as an extension of the principal office.
Offices used only as display areas of the
products where no stocks or items are stored
for sale, although orders for the products may
be received thereat, are not branch or sales
offices as herein contemplated. A warehouse
which accepts orders and/or issues sales
invoices independent of a branch with sales
office shall be considered as a sales office. [Art.
243(a)(2), LGC IRR]
b. Rule 2: Where there is NO branch or
sales outlet in the city/municipality where the
sale is made, the sale shall be recorded in the
principal office and the tax shall be paid to such
city/municipality. [Sec. 150(a), LGC]
“Principal Office” – the head or main office of
the business appearing in the pertinent
documents (e.g., articles of incorporation)
submitted to the SEC, or the DTI, or other
appropriate agencies, as the case may be [Art.
243(a)(1), LGC IRR]
c. Rule 3: In the case of manufacturers,
assemblers, contractors, producers, and
exporters having factories, project offices,
plants, and plantations, proceeds shall be
allocated as follows:
1. 30% of sales recorded in the principal
office shall be taxable by the
city/municipality where the principal
office is located; and
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TAXATION LAW
2. 70% shall be taxable by the
city/municipality where the factory,
project office, plant, or plantation is
located [Sec. 150(b), LGC]
Illustration of Rules 1 to 3
A company has a principal office in
Mandaluyong, and a sales office and a factory
in Sta. Rosa:
1. Sales made in Mandaluyong will be
recorded in Mandaluyong.
2. Sales made in Sta. Rosa by the Sta.
Rosa sales office will be recorded in
Sta. Rosa.
3. Sales made in Los Baños, Calamba or
Cabuyao [i.e., delivered to customers
located in these places and not made
by the Sta. Rosa sales office] will be
recorded in Mandaluyong where the
principal office is located. The
allocation shall be as follows:
a. 30% of all sales recorded in the
principal office shall be taxable
in Mandaluyong;
b. 70% of all sales recorded in the
principal office shall be taxable
in Sta. Rosa where the factory
is located.
d. Rule 4: In case the plantation is
located in a place other than the place where
the factory is located, the 70% in Rule 3 will be
divided as follows:
1. 60% to the city/municipality where the
factory is located; and
2. 40% to the city/municipality where the
plantation is located. [Sec. 150(c),
LGC]
e. Rule 5: In case of 2 or more factories,
project offices, plants or plantations in different
localities, the 70% shall be prorated among the
localities where they are located in proportion
to their respective volumes of production. [Sec.
150(d), LGC]
Illustration: A company has a principal office
in Valenzuela and 2 factories located in
 U.P. LAW BOC TAXATION 2
Malolos City, Bulacan and Mandaue City,
Cebu, which produced 60% and 40%,
respectively, of the total production for the
year. It also has branches selling merchandise
in Muntinlupa, Bacolod and Cebu City.
1. Sales made in Valenzuela will be
recorded in Valenzuela;
2. Sales made in Muntinlupa, Bacolod
and Cebu City shall be taxable in the
said cities;
3. Sales in all other places which do not
have a sales branch shall be
distributed as follows: 30% to
Valenzuela and 70% to be allocated
between Malolos City, and Mandaue
City based on the factories’ volume of
production. Hence, 42% shall be taxed
in Malolos City; while 28% shall be
taxed in Mandaue City.
Note: The sales allocation shall be applied
irrespective of whether or not sales are made
in the locality where the factory, project office,
plant, or plantation is located. [Sec. 150(e),
LGC]
Excise Tax: The business tax is imposed on
the performance of an act, enjoyment of a
privilege, or engagement in an occupation. 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
or the domicile of the person. [Allied Thread
Co., Inc. v. City Mayor of Manila, G.R. No. L-
40296 (1984)]
Sales Tax: 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, G.R. No. L-12680
(1959)]
Page 226 of 256
TAXATION LAW
Municipal Fees and Charges For Regulation
& Licensing
General rule: The municipality may impose
reasonable fees and charges on the conduct of
business or practice of profession
commensurate with the cost of regulation,
inspection and licensing. [Sec. 147, LGC]
Exception: Professional tax reserved to the
province in Sec. 139 of the LGC [Sec. 147,
LGC]
Specific rules:
1. The municipality may impose
reasonable fees for sealing and
licensing of weights and measures.
[Sec. 148, LGC]
2. The municipality has exclusive
authority to grant fishery privileges in
municipal waters and impose rentals,
fees or charges therefor. [Sec. 149,
LGC]
c. Taxing Powers of Cities
Scope of taxing power: The city may levy taxes,
fees, charges which the province or
municipality may impose.
1. Those levied and collected by highly
urbanized and independent component
cities shall accrue to them and
distributed according to the provisions
of the LGC.
2. Rates of taxes that the city may levy
may exceed the maximum rates
allowed for the province or municipality
by not more than 50%. [Sec. 151, LGC]
Exception: Rates of professional and
amusement taxes [Sec. 151, LGC]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

d. Taxing Powers of Barangays 5. Common Revenue-Raising

The following shall accrue exclusively to
Powers
1. Service fees and charges
the barangays:
LGUs may impose and collect such
1. Taxes on stores or retailers with fixed
reasonable fees and charges for services
business establishments with gross sales or
rendered. [Sec. 153, LGC]
receipts for the preceding calendar year of
P50,000 or less in case of cities, and P30,000
2. Public utility charges
or less in case of municipalities. [Sec. 152(a),
LGUs may fix the rates for the operation of
LGC]
public utilities owned, operated and
a. Tax Rate: not greater than 1%
maintained by them within their jurisdiction.
b. Tax Base: gross sales or receipts
[Sec. 154, LGC]
2. Service fees or charges – Barangays
3. Toll fees or charges
may collect reasonable fees or charges for
a. The Sanggunian may prescribe the
services rendered in connection with the
terms and conditions and fix the
regulation or the use of barangay-owned
rates for the imposition of toll fees
properties or facilities. [Sec. 152(b), LGC]
or charges for the use of any public
3. Barangay clearance – A city or
road, pier, or wharf, waterway,
municipality cannot issue a permit for business
bridge, ferry or telecommunication
without a clearance from the barangay
system funded and constructed by
concerned. The sangguniang barangay may
the LGU concerned.
impose a reasonable fee on the clearance.
b. The Sanggunian may discontinue
[Sec. 152(c), LGC]
the collection of the tolls when
public safety and welfare so
4. Reasonable fees and charges:
requires.
a. on commercial breeding of fighting
c. No toll fees or charges shall be
cocks, cockfights and cockpits;
collected from:
b. on places of recreation which charge
i. Officers and enlisted men
admission fees; and
of the AFP and members of
c. on billboards, signboards, neon signs,
the PNP on mission
and outdoor advertisements. [Sec.
ii. Post office personnel
152(d), LGC]
delivering mail
iii. Persons who are physically
handicapped
iv. Disabled citizens who are
65 years or older. [Sec.
155, LGC]

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

6. Community Tax
Who may levy
Cities or municipalities
[Sec. 156, LGC]
1. Individuals who are:
a. Inhabitants of the Philippines
b. 18 years of age or over
c. Either:
● Regularly employed on a wage or salary basis for at least 30
consecutive working days during any calendar year, or
Persons Liable
● Engaged in business or occupation, or
[Sec. 157 & 158,
● Owns real property with an aggregate assessed value of P1,000 or
LGC]
more, or
● Is required by law to file an income tax return
2. Juridical Persons
a. Every corporation no matter how created or organized
b. Whether domestic or resident foreign
c. Engaged in or doing business in the Philippines
1. Individuals
a. Annual community tax of P5.00 PLUS annual additional tax of P1.00
per P1,000 of income regardless of whether from business, exercise of
profession or property, but which shall not exceed P5,000
b. Husband and wife shall pay a basic tax of P5.00 each PLUS an
additional tax of P1.00 for every P1,000 of income based on the total
property owned by them and/or the total gross receipts or earnings
derived by them [Art. 246(b)(2), LGC IRR]
2. Juridical Persons
Rates [Sec. 157
a. Annual community tax of P500 PLUS annual additional tax, which shall
& 158, LGC]
not exceed P10,000 according to the following schedule:
● P2.00 for every P5,000 worth of real property in the Philippines
owned during the preceding year, based on the assessed value
used for the payment of the real property tax; and
● P2.00 for every P5,000 of gross receipts or earnings derived from
business in the Philippines during the preceding year.
b. Dividends received by a corporation from another corporation shall be
deemed part of the gross receipts or earnings for purposes of
computing additional tax.
Persons Exempt 1. Diplomatic and consular representatives
[Sec. 159, LGC] 2. Transient visitors who stay in the Philippines for not more than 3 months
Where individual resides, or where the principal office of the juridical entity is
located
Place of
Payment [Sec.
Note: In case of branch, sales office or warehouse where sales are made and
160, LGC]
recorded, corresponding community tax shall be paid to the LGU where such
branch, sales office or warehouse is located. [Art. 246(e)(3), LGC IRR]
Time of Payment Accrues on January 1 of each year to be paid not later than the last day of
[Sec 161, LGC] February of each year

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 U.P. LAW BOC TAXATION 2 TAXATION LAW

1. If a person reaches 18 years of age or otherwise loses the benefit of

exemption:
a. on or before June 30 – he shall be liable on the day he reaches such
age or upon the day the exemption ends;
b. on or before March 31 – he shall have 20 days to pay without being
delinquent.
2. If a person comes to reside in the Philippines, or reaches 18 years old, or
ceases to belong to an exempt class on or after July 1, he shall not be
subject to community tax for that year.
3. If a corporation is established and organized:
a. on or before June 30 – it shall be liable to community tax for that year
b. on or before March 31 – it shall have 20 days to pay without becoming
delinquent
c. on or after July 1 – it shall not be subject to community tax for that
year
Penalty [Sec. If unpaid within the prescribed period, an interest of 24% per annum shall be
161, LGC added from the due date until payment.

Community Tax Certificate (CTC) Distribution of proceeds of community tax

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 P1.00.
[Sec. 162, LGC]
Presentation of CTC is necessary when an
individual subject to community tax:
1. acknowledges any document before a
notary public;
2. takes the oath of office upon election or
appointment to any position in the
government service;
3. receives any license, certificate, or permit
from any public authority;
4. pays any tax or fee;
5. receives any money from any public fund
6. transacts other official business; or
7. receives any salary or wage from any
person or corporation [Sec. 163(a), LGC]
Note: Presentation of CTC is not needed in the
registration of a voter. [Sec. 163(a), LGC]
1. If the community tax is actually and directly
collected by the city or municipal treasurer,
the proceeds shall accrue entirely to the
general fund of the city or municipality.
2. If the community tax is collected through
the barangay treasurers, the proceeds
shall be apportioned equally between the
city/municipality and the barangay. [Sec.
164(c), LGC]
7. Common Limitations on the
Taxing Powers of LGUs
Unless otherwise provided, the following
cannot be levied by the local governments:
(IDEC-GAPEP-TRR-ECN):
a. Income tax, except when levied on banks
and other financial institutions under Sec.
143(f) of the LGC;
b. Documentary stamp tax;

Collection of community tax c. Taxes on Estate, inheritance, gifts,

The city or municipal treasurer shall deputize legacies and other acquisitions mortis
the barangay treasurers to collect, provided the causa;
latter be bonded. [Sec. 164(b), LGC]
Exception: Tax on transfer of real property)
[Sec. 135, LGC; Art. 221(c), LGC IRR]

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 U.P. LAW BOC TAXATION 2
d. Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues,
and all other kinds of customs fees,
charges and dues;
Exception: wharfage on wharves constructed
and maintained by the LGU concerned
“Wharfage” means 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
vessel. [Sec. 131(y), LGC]
e. Taxes, fees or charges on Goods carried
into or out of, or passing through, the
territorial jurisdictions of LGUs in the guise
of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges
in any form;
Note: Sec.133(e) prohibits the imposition, in
the guise of wharfage, of fees, as well as all
other taxes or charges in any form whatsoever,
on goods or merchandise. It is therefore
irrelevant if the fees imposed are actually for
police surveillance on the goods, because any
other form of imposition on goods passing
through the territorial jurisdiction of the
municipality is clearly prohibited. [Palma
Development Corp. v. Municipality of
Malangas, G.R. No. 152492 (2003)]
f. Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal
farmers or fishermen;
"Marginal Farmer or Fisherman" refers to an
individual engaged in subsistence farming or
fishing which shall be limited to the sale, barter
or exchange of agricultural or marine products
produced by himself and his immediate family.
[Sec. 131(p), LGC]
g. Taxes on business enterprises certified to
by the Board of Investments as Pioneer or
non-pioneer for a period of 6 and 4 years,
respectively from the date of registration;
Page 230 of 256
TAXATION LAW
h. Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees or
charges on petroleum products;
i. Percentage or VAT on sales, barters or
exchanges or similar transactions on
goods or services except as otherwise
provided herein;
Exceptions (Percentage taxes):
1. Tax on business of printing and
publication imposed by provinces/cities
[Sec. 136, LGC]
2. Amusement tax imposed by
provinces/cities [Sec. 140, LGC]
3. Tax on business imposed by
municipalities/cities on manufacturers,
wholesalers, distributors, dealers, and
contractors enumerated in Sec. 143 of
the LGC in accordance with the
schedules provided therein
j. Taxes on the gross receipts of:
1. Transportation contractors and
2. persons engaged in the transportation
of passengers or freight by hire and
3. common carriers by air, land or water
Exception: Tax on the operation and
franchising of tricycles [Art. 221(j), LGC IRR]
k. Taxes on premiums paid by way of
Reinsurance or retrocession;
l. 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;
m. Taxes, fees, or other charges on Philippine
products actually Exported;
Exception: Tax on exporters of essential
commodities [Sec. 143(c), LGC, Art. 221(m),
LGC IRR]
n. Taxes, fees, or charges on Countryside
and Barangay Business Enterprises and
 U.P. LAW BOC TAXATION 2
cooperatives duly registered under RA
6810 (Magna Carta for Countryside and
Barangay Business Enterprises) and RA
6938 (Cooperative Code of the
Philippines), respectively; and
o. Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and LGUs. [Sec. 133,
LGC]
8. Requirements for a Valid Tax
Ordinance
Local tax ordinance
The power to impose a tax, fee, or charge or to
generate revenue under the LGC shall be
exercised by the Sanggunian concerned
through an appropriate ordinance. [Sec. 132,
LGC]
Tests of a valid ordinance:
1. It must not contravene the Constitution or
any statut
2. It must not be unfair or oppressive;
3. It must not be partial or discriminatory;
4. It must not prohibit but may regulate trade;
5. It must be general and consistent with
public policy; and
6. It must not be unreasonable [Magtajas v.
Pryce Properties, G.R. No. 111097 (1994)]
Note: An ordinance is presumed valid unless
declared otherwise by a court in an appropriate
proceeding. [Rural Bank of Makati v.
Municipality of Makati, G.R. No. 150763
(2004)]
Procedure for approval of tax ordinances
1. Within 10 days from the filing of the
proposed tax ordinance, the same shall be
published for 3 consecutive days in a
newspaper of local circulation or posted
simultaneously in at least 4 conspicuous
public places within the territorial
jurisdiction of the LGU. [Art. 276(b)(1), LGC
IRR]
Page 231 of 256
TAXATION LAW
2. The Sanggunian shall send written notices,
specifying the date and venue of public
hearing, to the interested or affected
parties operating or doing business within
the concerned LGU. [Art. 276(b)(2), (3),
LGC IRR]
3. The public hearing must be held not earlier
than 10 days from sending the notices, or
the last day of publication, or date of
posting, whichever is later. [Art. 276(b)(3),
LGC IRR]
4. An ordinance must be approved on third
reading by a majority of the sanggunian
members present, there being a quorum.
[Art. 107(g), LGC IRR]
5. The enacted ordinance shall be presented
to the local chief executive (LCE), who
may:
a. Approve the same by affixing his
signature; or
b. Veto and return the same with his
objections to the Sanggunian
within 15 days in case of a
province, and 10 days in case of a
city or municipality; otherwise, the
ordinance shall be deemed
approved. [Art. 108, LGC IRR]
Note: The LCE, except the Punong Barangay,
may veto any ordinance on the ground that it is
ultra vires or prejudicial to public welfare. His
reasons shall be stated in writing. The LCE
may veto an ordinance only once. [Art. 109,
LGC IRR]
6. The sanggunian may override the veto of
the LCE by 2/3 vote of all its members,
thereby making the ordinance effective.
[Art. 109(c), LGC IRR]
7. Once approved, the ordinance shall be
transmitted to the higher level sanggunian
for review. If no action is taken by the latter
within 30 days after submission, the same
shall be deemed approved. [Arts. 110 and
111, LGC IRR]
8. Within 10 days after the approval of the
ordinance, certified true copies of all tax
ordinances or revenue measures shall be
 U.P. LAW BOC TAXATION 2 TAXATION LAW

published in full for 3 consecutive days in a

newspaper of local circulation. It may be extended by the
Sanggunian for justifiable
Where there are no newspapers of local reasons, without surcharges
circulation, it must be posted in at least 2 or penalties, for a period not
conspicuous and publicly accessible places. exceeding 6 months. [Sec.
[Art. 276, LGC IRR] 167, LGC]
1. Surcharge not exceeding
Effectivity of ordinance 25% on taxes, fees or
charges NOT paid on
1. Unless otherwise stated in the ordinance,
time; and
the same shall take effect after 10 days
2. Interest not exceeding
from the date a copy is posted at the Penalties on
2% per month of the
entrance of the provincial capitol or city, Unpaid
unpaid taxes, fees or
municipal, or barangay hall, as the case Taxes, Fees charges including
may be, and in at least 2 other conspicuous or Charges surcharges, until the
places in the LGU concerned. [Sec. 59, amount is fully paid
LGC] 3. In no case shall the total
2. In case the effectivity falls on any date interest exceed 36
other than the beginning of the quarter, the months. [Sec. 168, LGC]
same shall be considered as falling at the All local taxes, fees and
beginning of the next quarter and the taxes, charges shall be collected by
fees, or charges due shall begin to accrue the local treasurers or their
therefrom. [Art. 276(a), LGC IRR] duly authorized deputies.
Collection of
The provincial, city or
Taxes
9. Collection of Taxes municipal treasurer may
designate the barangay
treasurer as deputy to collect
Based on a calendar year,
local taxes. [Sec. 170, LGC]
Tax Period unless otherwise provided
The local treasurer may, by
[Sec. 165, LGC]
himself or through his
May be paid annually or in
Manner of deputies duly authorized in
quarterly installments [Sec.
Payment writing, examine the books,
165, LGC]
accounts, and other pertinent
General rule: Accrues on the records of any person
1st day of January of each subject to local taxes, fees
year and charges in order to
Inspection of ascertain, assess and collect
Exception: New taxes, fees the correct amount of the tax,
Books
Accrual of or charges, or changes in the fee or charge.
Tax rates thereof shall accrue on
the 1st day of the quarter next Examination must be done
following the effectivity of the during business hours, only
ordinance imposing such once for every tax period and
new levies or rates [Sec. shall be certified to by the
166, LGC] examining official. [Sec. 171,
Within the first 20 days of LGC]
January or of each
Time of
subsequent quarter. [i.e.,
Payment
January 20, April 20, July 20,
and October 20].

Page 232 of 256

 U.P. LAW BOC
10. Taxpayer’s Remedies
a. Protest of Assessment
1. Protest: The taxpayer may file a written
protest with the local treasurer within 60
days from receipt of the notice of
assessment; otherwise it shall become
final and executory.
2. Decision: The local treasurer shall decide
the protest within 60 days from the time of
its filing.
a. If found to be wholly or partly
meritorious, a notice cancelling
wholly or partially the assessment
will be issued.
b. If denied or when the 60-day period
already lapsed, the taxpayer shall
have 30 days thereafter to appeal
with the court of competent
jurisdiction; otherwise, the
assessment becomes conclusive
and unappealable. [Sec. 195, LGC]
Court of competent jurisdiction
1. Depending on the amount involved, the
taxpayer may appeal the decision of the
local treasurer to the MTC, MeTC, MCTC
or the RTC in the exercise of its original
jurisdiction.
2. Local tax cases decided by the MTC,
MeTC and MCTC may be appealed to the
RTC in the exercise of its appellate
jurisdiction.
3. Said cases decided by the RTC in its
original or appellate jurisdiction may be
elevated to the CTA.
With the passage of R.A. 9282, the authority to
exercise either original or appellate jurisdiction
over local tax cases depended on the amount
of the claim. 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 RTC exercises
appellate jurisdiction only from cases decided
Page 233 of 256
TAXATION 2 TAXATION LAW
by the Metropolitan, Municipal, and Municipal
Circuit Trial Courts in the proper cases, and not
those decided by non-judicial entities such as
the City Treasurer. [China Banking Corp. v.
City Treasurer, G.R. No. 204117 (2015)]
b. Claim for Refund or Tax Credit of
Erroneously or Illegally Collected
Tax, Fee or Charge
Requisites:
1. A written claim for refund or credit must be
filed with the local treasurer; and
2. The case or proceeding must be filed in
court within 2 years from the payment of tax
or from the date the taxpayer became
entitled to refund or credit. [Sec. 196, LGC]
c. Question the Legality of the
Ordinance
Any question on the constitutionality or legality
of tax ordinances or revenue measures may be
raised on appeal to the Secretary of Justice.
[Sec. 187, LGC]
Procedure:
1. Appeal must be made to the Secretary of
Justice within 30 days from effectivity of the
ordinance.
2. The Secretary must render a decision
within 60 days from receipt of the appeal.
Note: The appeal shall not suspend the
effectivity of the ordinance and the accrual and
payment of the tax, fee or charge levied
therein.
3. Within 30 days after receipt of the decision
or the lapse of the 60-day period without
any action from the Secretary of Justice,
the aggrieved party may file appropriate
proceedings with a court of competent
jurisdiction. [Sec. 187, LGC]
 U.P. LAW BOC TAXATION 2
Note: The Secretary of Justice can only review
the constitutionality or legality of the tax
ordinance, and, if warranted, to revoke it on
either or both of these grounds. There is no
need for a written protest when disputing an
ordinance. [Ingles]
11. Assessment and
Collection of Local Taxes
a. Remedies of LGUs
i. Local Government’s Lien
Local taxes, fees, charges and other revenues
constitute a lien, superior to all liens or
encumbrances in favor of any person,
enforceable by administrative or judicial action.
[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. [Sec. 173, LGC]
ii. Civil Remedies, in General
(a) Administrative action
DISTRAINT OF PERSONAL PROPERTY
Subject of distraint: goods, chattels or effects
and other personal property of whatever
character, including stocks and other
securities, debts, credits, bank accounts, and
interest in and rights to personal property [Sec.
174(a), LGC]
Procedure:
a. Seizure of personal property
b. Accounting of distrained goods
c. Publication of time and place of sale and
the articles distrained
d. Release of distrained property upon
payment prior to sale
e. Sale of the goods or effects distrained at
public auction.
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TAXATION LAW
Note: If the property distrained is not disposed
of within 120 days from the date of distraint, the
same shall be considered as sold to the LGU
for the amount of the assessment made. [Sec.
175(e), LGC]
f. Disposition of proceeds [Sec. 175, LGC]
LEVY ON REAL PROPERTY
Subject of Levy: real property and interest in
or rights to real property
Procedure
a. After expiration of the time for payment of
delinquent tax, fee or charge, real property
may be levied on before, simultaneously or
after the distraint of personal property.
b. Preparation of a duly authenticated
certificate by the local treasurer effecting
the levy and showing:
o the name of the taxpayer,
o the amount of the tax, fee or
charge, and penalty due, and
o the description of the property.
c. Service of written notice of levy to the
assessor, Register of Deeds, and the
delinquent taxpayer (or his agent if he be
absent from the Philippines, or if none, to
the occupant of the property in question)
d. Annotation of the levy on the tax
declaration and the certificate of title
e. Report on any levy to be submitted to the
Sanggunian within 10 days after receipt of
warrant [Sec. 176, LGC]
f. Advertisement of the sale or auction shall
be held within 30 days after the levy.
g. Before the date of sale, the taxpayer may
stay the proceedings by paying the taxes,
fees, charges, penalties and interests.
h. Sale of the subject property [Sec. 178,
LGC]
i. Redemption of property sold within 1 year
from date of sale [Sec. 179, LGC]
j. If not redeemed, the local treasurer shall
execute a deed conveying the property to
the purchaser [Sec. 180, LGC]
 U.P. LAW BOC TAXATION 2
k. Purchase of the real property by the local
treasurer in case there is no bidder for said
property or if the highest bid is insufficient
to pay the taxes, fees, or charges, related
surcharges, interests, penalties and costs;
resale of said property may be made at a
public auction [Sec. 181 and 182, LGC]
Further distraint or levy
The remedies of distraint or levy may be
repeated if necessary until the full amount due,
including all expenses, is collected [Sec. 184,
LGC]
Note: In case the levy is not issued before or
simultaneously with the warrant of distraint,
and the personal property of the taxpayer is not
sufficient to satisfy his delinquency, the local
treasurer shall within 30 days after execution of
the distraint, proceed with the levy on the
taxpayer's real property. [Sec. 176, LGC]
Property exempt from distraint or levy
(ToB-CUPLAF)
a. Tools and implements necessarily
used by the taxpayer in his trade or
employment
b. One horse, cow, carabao, or other
Beast of burden, such as the
delinquent taxpayer may select and
necessarily used by him in his ordinary
occupation
c. His necessary clothing, and that of all
his family
d. 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
e. Provisions, including crops, actually
provided for individual or family use
sufficient for 4 months
f. The professional Libraries of doctors,
engineers, lawyers and judges
g. One Fishing boat and net, not
exceeding the total value of P10,000 by
the lawful use of which a fisherman
earns his livelihood
Page 235 of 256
TAXATION LAW
h. Any material or Article forming part of a
house or improvement of any real
property [Sec. 185, LGC]
Penalty on local treasurer for failure to issue
and execute warrant of distraint or levy
Automatic dismissal from service after due
notice and hearing [Sec. 177, LGC]
(b) Judicial Action
The LGU may enforce the collection of
delinquent taxes, fees, charges or other
revenues by civil action in any court of
competent jurisdiction within 5 years from the
date they became due. [Secs. 183 and 194,
LGC]
Note: Either of these remedies (administrative
or judicial action) or all may be pursued
concurrently or simultaneously at the discretion
of the LGU concerned. [Sec. 174, LGC].
Injunction against collection of local taxes
The LGC does not contain a provision
prohibiting courts from enjoining the collection
of local taxes. Such lapse may have allowed
preliminary injunction under Rule 58 of the
Rules of Court where local taxes are involved.
[Angeles City v. Angeles City Electric
Corporation, G.R. No. 166134 (2010)]
Prescriptive Period
Prescriptive period for assessment
1. General Rule: Within 5 years from the date
they become due
2. Exception: In case of fraud or intent to
evade tax, within 10 years from discovery
of fraud or intent to evade payment [Sec.
194(a),(b), LGC]
Prescriptive period for collection
Within 5 years from the date of assessment by
administrative or judicial action. No such action
shall be instituted after the expiration of said
period. [Sec. 194(c), LGC]
 U.P. LAW BOC
Grounds for suspension of prescriptive
period
1. The treasurer is legally prevented from
making the assessment or collection
2. The taxpayer requests for reinvestigation
and executes a waiver in writing before the
lapse of the period for assessment or
collection
3. The taxpayer is out of the country or
otherwise cannot be located [Sec. 194(d),
LGC]
B. REAL PROPERTY
TAXATION
1. Fundamental Principles
a. Real property shall be appraised at its
current and fair market value.
b. Real property shall be classified for
assessment purposes on the basis of its
actual use.
c. Real property shall be assessed based on
a uniform classification within each LGU.
d. The appraisal, assessment, levy and
collection of real property tax shall not be
left to any private person.
e. The appraisal and assessment of real
property shall be equitable. [Sec. 198,
LGC]
2. Nature of Real Property Tax
(RPT)
a. It is a direct tax on the use of real property.
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]
b. It is an ad valorem tax where the tax base
is a fixed proportion of the value of the
property. [Sec. 199(c), LGC]
Page 236 of 256
TAXATION 2 TAXATION LAW
c. It is proportionate because the tax is
calculated on the basis of a certain
percentage of the value assessed.
d. It creates a single, indivisible obligation.
e. It attaches on the property (i.e., a lien) and
is enforceable against it.
3. Imposition
a. Power to Levy
Extent of taxing power
A province or city or a municipality within Metro
Manila may:
1. levy an annual ad valorem tax on real
property such as land, building, machinery,
and other improvement not hereinafter
specifically exempted; and [Sec. 232, LGC]
2. fix a uniform rate of basic real property tax
applicable to their respective localities.
[Sec. 233, LGC]
The following may levy real property tax:
1. Province
2. City
3. Municipality within Metro Manila [Sec.
232, LGC]
Note: A special levy on lands benefited by
public works may be imposed by municipalities
outside Metro Manila.
PROPERTIES SUBJECT TO RPT
1. Land
2. Building
3. Machinery
4. Other improvements not specifically
exempted [Sec. 232, LGC]
Note: The LGC contains no definition of the
term “real property”. Therefore, reference
should be made to the enumeration of
immovable property under Art. 415 of the Civil
Code.
Machinery
It embraces machines, equipment, mechanical
contrivances, instruments, appliances or
apparatus which may or may not be attached,
 U.P. LAW BOC TAXATION 2
permanently or temporarily, to the real
property. It includes the physical facilities for
production, the installations and appurtenant
service facilities, those which are mobile, self-
powered or self-propelled, and those not
permanently attached to the real property
which are actually, directly, and exclusively
used to meet the needs of the particular
industry, business or activity and which by their
very nature and purpose are designed for, or
necessary to its manufacturing, mining,
logging, commercial, industrial or agricultural
purposes [Sec. 199(o), LGC]
Summary of rules on machinery
1. Machinery that is permanently attached to
land and buildings is subject to RPT.
2. Machinery that is not permanently
attached:
a. Subject to the RPT if it is an
essential and principal element of
an industry, work or activity without
which such industry, work or
activity cannot function; and
b. Not subject to RPT if it is not an
essential and principal element of
an industry, work or activity. [DOF
Local Finance Circular No. 001-
2002]
Improvement
It 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]
TYPES OF REAL PROPERTY TAX
1. Basic RPT
a. Province: not exceeding 1% of the
assessed value of real property; and
b. City or municipality within Metro Manila: not
exceeding 2% of the assessed value of real
property. [Sec. 233, LGC]
2. Special levies on real property
Page 237 of 256
TAXATION LAW
a. Special Education Fund (SEF) – annual tax
of 1% on the assessed value of real
property which shall be in addition to the
basic RPT [Sec. 235, LGC]
b. Special Levy on Idle Lands – annual tax on
idle lands at the rate not exceeding 5% of
the assessed value of the property in
addition to the basic RPT [Sec. 236, LGC]
Idle lands covered
1. Agricultural lands more than 1 hectare
in area, suitable for cultivation,
dairying, inland fishery, and other
agricultural uses, 1/2 of which remain
uncultivated or unimproved
2. Non-agricultural lands more than 1,000
square meters in area 1/2 of which
remain unutilized or unimproved
3. Residential lots in subdivisions
regardless of land area [Sec. 237,
LGC]
Lands not considered idle
1. Agricultural lands planted to permanent
or perennial crops with at least 50 trees
to a hectare
2. Lands actually used for grazing
purposes [Sec. 237(a), LGC]
Idle lands may be exempted by reason of:
1. Force majeure,
2. Civil disturbance,
3. Natural calamity, or
4. Any cause or circumstance which
physically or legally prevents the owner
from improving, utilizing or cultivating
the same. [Sec. 238, LGC]
c. Special Levy for Public Works – a special
levy on lands specially benefited by public
works projects or improvements funded by
the LGU concerned, but which 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 [Sec. 240,
LGC]
 U.P. LAW BOC TAXATION 2
Exception: The special levy shall not apply to:
1. lands exempt from basic RPT; and
2. the remainder of the land, portions of
which were donated to the LGU for the
construction of such projects or
improvements. [Sec. 240, LGC]
Note: Municipalities outside Metro Manila may
impose a special levy on lands benefited by
public works.
b. Exemptions from RPT
1. Real property owned by the Republic of the
Philippines or any of its political
subdivisions
Exception: when beneficial use is granted for
a consideration or to a taxable person.
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
3. Machinery and equipment actually, directly
and exclusively used by local water
districts and GOCCs engaged in the supply
and distribution of water and/or generation
and transmission of electric power
4. Real property owned by duly registered
cooperatives as provided for under RA
6938 [Cooperative Code of the Philippines]
5. Machinery and equipment used for
pollution control and environmental
protection [Sec. 234, LGC]
A claim for exemption under Sec. 234(e) of the
LGC should be supported by evidence that the
property sought to be exempted is actually,
directly and exclusively used for pollution
control and environmental protection.
[Provincial Assessor of Marinduque v. CA,
G.R. No. 170532 (2009)]
Page 238 of 256
TAXATION LAW
Withdrawal of exemption
Except as provided herein, any exemption from
payment of RPT previously granted to, or
presently enjoyed by, all persons, whether
natural or juridical, including all government-
owned or controlled corporations (GOCCs) are
hereby withdrawn upon the effectivity of the
LGC. [Sec. 234, LGC]
Note: Section 234 of the LGC applies
specifically to RPT exemptions, while Section
193 of the LGC applies to exemptions from all
other local taxes.
Proof of exemption
Every person who shall claim tax exemption
shall file with the local assessor within 30 days
from the date of declaration of real property
sufficient documentary evidence in support of
such claim (e.g., corporate charters, title of
ownership, affidavits, by-laws, contract, articles
of incorporation). Otherwise, the property will
be listed as taxable in the assessment roll.
[Sec. 206, LGC]
GOCCs not exempt from RPT
The last paragraph of Sec. 234 of the LGC
expressly withdrew the exemption of GOCCs
from RPT upon the effectivity of the LGC.
Exemption of Charitable Institutions
To be entitled to the exemption, claimant must
prove, that (a) it is a charitable institution; and
(b) its real properties are actually, directly and
exclusively used for charitable purposes.
What is meant by actual, direct and exclusive
use of the property for charitable purposes is
the direct and immediate and actual application
of the property itself to the purposes for which
the charitable institution is organized. [Lung
Center of the Philippines v. Quezon City, G.R.
No. 144104 (2004)]
 U.P. LAW BOC TAXATION 2
4. Appraisal and Assessment of
Real Property
Appraisal is the act or process of determining
the value of property as of a specified date for
a specific purpose. [Sec. 199(e), LGC]
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]
a. Classes of Real Property
For purposes of assessment, real property
shall be classified as residential, agricultural,
commercial, industrial, mineral, timberland or
special. [Sec. 215, LGC]
1. Residential land – land principally
devoted to habitation [Sec. 199(u), LGC]
2. Agricultural land – land devoted
principally to the planting of trees, raising of
crops, livestock and poultry, dairying, salt
making, inland fishing and similar
aquaculture activities and other agricultural
activities and is not classified as mineral,
timber, residential, commercial or industrial
land [Sec. 199(d), LGC]
3. Commercial land – land devoted
principally for the object of profit and is not
classified as agricultural, industrial,
mineral, timber or residential land [Sec.
199(i), LGC]
4. Industrial land – land devoted principally
to industrial activity as capital investment
and is not classified as agricultural,
commercial, timber, mineral or residential
land [Sec. 199(n), LGC]
5. Mineral land – land in which minerals exist
in sufficient quantity or grade to justify the
necessary expenditures to extract and
utilize such minerals [Sec. 199(p), LGC]
6. Timberland – land identified as forest or
reserved area by the government, which
may or may not be granted to a
concessionaire, licensee, lessee or
Page 239 of 256
TAXATION LAW
permitee [BLGF Manual on Real Property
Appraisal and Assessment Operations]
7. Special
a. all lands, buildings and other
improvements actually, directly and
exclusively used for hospitals,
cultural, or scientific purposes, and
b. those owned and used by local
water districts, and GOCCs
rendering essential public services
in the supply and distribution of
water and/or generation and
transmission of electric power
[Sec. 216, LGC]
Declaration of real property by owner or
administrator
All persons owning or administering real
property, including improvements therein, shall
prepare a sworn statement:
1. declaring the true value of the property
which shall be the current and FMV of
the property; and
2. containing a sufficient description of
the property for assessment purposes.
The declaration must be filed with the assessor
once every 3 years during the period from
January 1 to June 30. [Sec. 202, LGC]
Declaration by person acquiring real
property or making improvements
A sworn statement declaring the true value of
the property must be filed with the provincial,
city or municipal assessor within 60 days after
the acquisition of a real property or upon
completion or occupancy of the improvement,
whichever comes earlier. [Sec. 203, LGC]
Declaration by the local assessor
When the person required to file the sworn
declaration under Sec. 202 of the LGC refuses
or fails to make such declaration, the
provincial, city or municipal assessor shall
declare the property in the name of the
defaulting owner, and shall assess the property
for taxation. [Sec. 204, LGC]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

Notice of transfer of real property the recommendation within 90 days from

Any person who shall transfer real property its receipt. [Sec. 214, LGC]
ownership to another shall notify the provincial,
city or municipal assessor within 60 days from FMV of Machinery
the date of such transfer. The notification shall Brand New The FMV is the acquisition cost.
include: [Sec. 224(a), LGC]
1. Mode of transfer,
2. Description of the property alienated, If the machinery is imported, the
and acquisition cost includes freight,
3. Name and address of the transferee insurance, bank and other
[Sec. 208, LGC] charges, brokerage, arrastre and
handling, duties and taxes, plus
cost of inland transportation,
Appraisal of Real Property at Fair Market
handling, and installation
Value
charges at the present site. [Sec.
All real property shall be appraised at the
224(b), LGC]
current and FMV prevailing at the locality
All Other FMV is determined by dividing
where the property is situated. [Sec. 201, LGC] Cases the remaining economic life of
the machinery by its estimated
FMV is the price at which property may be sold economic life and multiplied by
by a seller who is not compelled to sell and the replacement or reproduction
bought by a buyer who is not compelled to buy. cost. [Sec. 224(a), LGC]
[Sec. 199(l), LGC] Depreciatio Depreciation rate: not
n Allowance exceeding 5% of its original cost
Determination of FMV or its replacement or
1. The assessor of the province, city or reproduction cost, for each year
municipality or his deputy may summon the of use
owners or persons having legal interest
therein and witnesses, and may administer The remaining value shall be
oaths, and take deposition concerning the fixed at not less than 20% of such
property, its ownership, amount, nature, original, replacement or
and value. [Sec. 213, LGC] reproduction cost for so long as
2. The assessors shall prepare a schedule of the machinery is useful and in
FMV for the different classes of real operation. [Sec. 225, LGC]
property situated in their respective local
government units for enactment by b. Assessment of Real Property
ordinance of the Sanggunian concerned. Based on Actual Use
[Sec. 212, LGC]
3. The schedule of FMV shall be published in Basis of assessment
a newspaper of general circulation in the Real property shall be classified, valued and
LGU concerned or in the absence thereof, assessed on the basis of actual use regardless
shall be posted in the provincial capitol, city of where located, whoever owns it, and
or municipal hall and in 2 other whoever uses it. [Sec. 217, LGC]
conspicuous public places therein. [Sec.
212, LGC] “Actual Use” refers to the purpose for which
4. The assessor may recommend to the the property is principally or predominantly
Sanggunian amendments to correct errors utilized by the person in possession thereof
in valuation in the schedule of FMV. The [Sec. 199(b), LGC]
Sanggunian shall, by ordinance, act upon

Page 240 of 256

 U.P. LAW BOC TAXATION 2
Note: Unpaid realty taxes attach to the property
and are chargeable against the person who
had actual or beneficial use and possession of
it regardless of whether or not he is the owner.
[Estate of Lim v. City of Manila, G.R. No. 90639
(1990)]
Assessment levels
It is the percentage applied to the FMV to
determine the taxable value of the property.
[Sec. 199(g), LGC]
Note: Assessment levels shall be fixed by
ordinances of the Sanggunian at rates not
exceeding those prescribed under Sec. 218 of
the LGC.
Assessed or Taxable Value
It is the FMV of the real property multiplied by
the assessment level. [Sec. 199(h), LGC]
• Assessed Value = FMV × Assessment
Level
• RPT = Assessed Value × Tax Rate
General revisions of assessments and
property classification
The local assessor shall undertake a general
revision of real property assessments every 3
years. [Sec. 219, LGC]
Valuation of real property by assessor
The local assessor shall make a classification,
appraisal and assessment of the real property
irrespective of any previous assessment or
taxpayer’s valuation thereon in the following
cases:
1. real property is declared and listed for
taxation purposes for the first time;
2. there is an ongoing general revision of
property classification and assessment; or
3. a request is made by the person in whose
name the property is declared. [Sec. 220,
LGC]
Note: The assessment shall not be increased
more often than once every 3 years except in
case of new improvements substantially
Page 241 of 256
TAXATION LAW
increasing the value of said property or of any
change in its actual use. [Sec. 220, LGC]
Date of effectivity of assessment or
reassessment
General rule: All assessments or
reassessments made after January 1 of any
year shall take effect on January 1 of the
succeeding year [Sec. 221, LGC]
Exceptions: Reassessments due to the
following causes shall be made within 90 days
from the date of any cause and shall take effect
at the beginning of the quarter subsequent to
the reassessment:
1. partial or total destruction
2. major change in actual use;
3. any great and sudden inflation or deflation
of real property values;
4. gross illegality of the assessment when
made; or
5. any other abnormal cause. [Sec. 221, LGC]
Assessment of property subject to back taxes
Property declared for the first time shall be
assessed for taxes for the period during which
it would have been liable but in no case for
more than 10 years prior to the date of initial
assessment [Sec. 222, LGC]
Notification of new or revised assessment
When real property is assessed for the first
time or when an existing assessment is
increased or decreased, the local assessor
shall within 30 days give written notice of the
new or revised assessment to the person in
whose name the property is being declared.
Notice may be given 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]
 U.P. LAW BOC TAXATION 2
5. Collection of Real Property
Tax
Collecting authority
The collection of RPT shall be the responsibility
of the city or municipal treasurer concerned. He
may deputize the barangay treasurer to collect
all taxes on real property located in the
barangay provided the latter is bonded. [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 local treasurer, on or
before December 31 of 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 tax
The local treasurer shall post the notice of the
dates when the tax may be paid without interest
at a conspicuous and publicly accessible place
at the city or municipal hall:
1. on or before January 31 of each year in
the case of basic RPT and additional
tax for SEF; or
2. on any other date in the case of any
other tax.
The notice shall also be published in a
newspaper of general circulation in the locality
once a week for 2 consecutive weeks. [Sec.
249, LGC]
a. Date of Accrual
Real property tax for any year shall accrue on
the 1st day of January. [Sec. 246, LGC]
b. Periods to Collect
General Rule: Within 5 years from the date the
taxes become due
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TAXATION LAW
Exception: In case there is fraud or intent to
evade payment of tax, within 10 years from
discovery of fraud or intent to evade payment
[Sec. 270, LGC]
Grounds for suspension of prescriptive
period
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 to collect; and
3. The owner of the property or the person
having legal interest therein is out of
the country or cannot be located. [Sec.
270, LGC]
RULES ON PAYMENT
Payment of RPT
1. Payment of RPT and the additional tax for
SEF, without interest, may be made in 4
equal installments:
• 1st: March 31
• 2nd: June 30
• 3rd: September 30
• 4th: December 31
2. Any special levies shall be governed by
ordinance of the Sanggunian concerned.
[Sec. 250, LGC]
Note: Payments of RPT shall first be applied to
prior years’ delinquencies, interests and
penalties, if any, and only after the
delinquencies are settled may tax payments be
credited for the current period. [Sec. 250, LGC]
Interests on unpaid RPT
Interest at the rate of 2% per month on the
unpaid amount or a fraction thereof until the
delinquent tax shall have been fully paid, but
the total interest shall not exceed 36 months
[Sec. 255, LGC]
Discount for advance or prompt payment
1. Advance payment – not exceeding
20% of annual tax due [Sec. 251, LGC]
 U.P. LAW BOC TAXATION 2
2. Prompt payment – not exceeding 10%
of annual tax due [Art. 342, LGC IRR]
c. Remedies of LGUs
Issuance of notice of delinquency
When the real property tax becomes
delinquent, the local treasurer shall post a
notice of delinquency at the main hall and in a
publicly accessible and conspicuous place in
each barangay of the LGU concerned. [Sec.
254, LGC]
1. Local Government’s Lien
The RPT shall constitute a lien on the property
subject to tax, superior to all liens, charges or
encumbrances in favor of any person,
irrespective of the owner or possessor thereof,
enforceable by administrative or judicial action
and may only be extinguished upon payment of
the tax and the related interests and expenses.
[Sec. 257, LGC]
It constitutes a lien on the property from the
date of accrual (i.e., January 1) [Sec. 246,
LGC].
2. Administrative Action
1. Levy on real property
a. After expiration of the time required to pay
the tax when due, the local treasurer shall
issue a warrant of levy on or before, or
simultaneously with, the institution of the
civil action for the collection of the
delinquent tax.
b. The warrant shall include a duly
authenticated certificate showing:
1. the name of the owner or person
having legal interest therein,
2. description of the property, and
3. amount of the tax due and interest
thereon.
c. Warrant must be mailed to or served upon
the delinquent owner or person having
legal interest in the property.
d. Written notice of levy with the attached
warrant must be mailed to or served upon
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TAXATION LAW
the assessor and the Register of Deeds
where the property is located.
e. The Register of Deeds must annotate the
levy on the tax declaration and certificate of
title.
f. The levying officer shall submit a report on
the levy to the Sanggunian within 10 days
after receipt of warrant by the owner. [Sec.
258, LGC]
g. Advertisement of the sale or auction shall
be made within 30 days after service of
warrant.
h. Before the date of sale, the proceedings
may be stayed by paying the delinquent
tax.
i. Sale of the real property [Sec. 260, LGC]
j. Redemption of property sold within 1 year
from date of sale upon payment of the
delinquent tax [Sec. 261, LGC]
k. If not redeemed, the local treasurer shall
execute a deed conveying the property to
the purchaser. [Sec. 262, LGC]
l. Purchase of property by local treasurer in
case there is no bidder for the real property
or if the highest bid is insufficient to pay the
RPT and other costs; resale of such
property may be made at a public auction
[Sec. 263 and 264, LGC]
Further levy until full payment
Levy may be repeated if necessary until the full
due, including all expenses, is collected. [Sec.
265, LGC]
2. Distraint of personal property
The notice of delinquency shall state that
personal property may be distrained to effect
payment. It shall likewise state that any time
before the distraint of personal property,
payment of the tax with surcharges, interests
and penalties may be made. [Sec. 254, LGC]
3. Judicial Action
The LGU concerned may enforce the collection
of the basic RPT or any other related tax by civil
action in any court of competent jurisdiction.
The civil action shall be filed by the local
treasurer within the period prescribed for
 U.P. LAW BOC TAXATION 2
collection (i.e., 5 years or 10 years) under Sec.
270 of the LGC. [Sec. 266, LGC]
6. Taxpayer’s Remedies
a. Contesting the Valuation of Real
Property
i. Appeal to the Local Board of
Assessment Appeals (LBAA)
Who may appeal
Any owner or person having legal interest in the
property who is not satisfied with the action of
the local assessor in the assessment of his
property may appeal to the LBAA by filing a
petition under oath, together with copies of the
tax declarations and such affidavits or
documents submitted in support of the appeal.
[Sec. 226, LGC]
When to appeal
The appeal must be filed within 60 days from
the date of receipt of the written notice of
assessment. [Sec. 226, LGC]
Period to decide on the appeal
The LBAA shall decide the appeal within 120
days from the date of receipt of such appeal.
[Sec. 229(a), LGC]
Note: The LBAA shall have the power to
summon witnesses, administer oaths, conduct
ocular inspection, take depositions, and issue
subpoena and subpoena duces tecum. [Sec.
229(b), LGC]
Motion for reconsideration with local
assessor not allowed
The procedure likewise does not permit the
property owner the remedy of filing a motion for
reconsideration before the local assessor.
[Fels Energy Inc. v. Province of Batangas, G.R.
No. 168557 (2007)]
When appeal to LBAA not required
An exception to the rule on exhaustion of
administrative remedies is where the
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TAXATION LAW
controversy does not involve questions of fact
but only of law. Under Sec. 229(b) of the LGC
"the proceedings of the Board shall be
conducted solely for the purpose of
ascertaining the facts." It follows that appeals
to the LBAA may be fruitful only where
questions of fact are involved. [Ty v. Trampe,
G.R. No. 117577 (1995)]
ii. Appeal to the Central Board of
Assessment Appeals (CBAA)
Who may and when to appeal
The owner of the property or the person having
legal interest therein or the assessor who is not
satisfied with the decision of the LBAA, may,
within 30 days after receipt of the decision of
said LBAA, appeal to the CBAA. [Sec. 229,
LGC]
Period to decide and finality of decision
The CBAA shall decide cases on appeal within
12 months from the date of receipt thereof,
which shall become final and executory 15
days after receipt thereof by the appellant or
appellee, as the case may be. [Sec. 9, Rule 3,
Chapter VII, Manual of Real Property Appraisal
and Assessment Operations]
Effect of appeal on the payment of tax
Appeal on assessments of real property shall
not suspend the collection of the corresponding
realty taxes on the property involved as
assessed by the provincial or city assessor
without prejudice to subsequent readjustment
depending upon the final outcome of the
appeal. [Sec. 231, LGC]
b. Contesting a Deficiency Tax
Assessment
i. Payment of RPT under Protest;
Exceptions
General Rule: 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". [Sec. 252, LGC]
 U.P. LAW BOC TAXATION 2 TAXATION LAW

When the taxpayer questions the Erroneous assessment vs. illegal

excessiveness or reasonableness of the assessment
assessment, the taxpayer is required to first Erroneous Illegal assessment
pay the tax due before his protest can be assessment
entertained. [NPC v. Provincial Treasurer of Definition
Benguet, G.R. No. 209303 (2016)] An erroneous An assessment is
assessment illegal if it was made
Exception: “Payment under protest” is not a presupposes that the without the authority
prerequisite when the issue is the legality or taxpayer is subject to under the law.
validity of the assessment. Certainly, it would the tax but is disputing
be unjust to require the realty owner to first pay the correctness of the
the tax, the validity of which he precisely amount assessed.
questions, before he can lodge a complaint to The taxpayer claims
the court. [NPC v. Municipal Government of that the local assessor
Navotas, G.R. 192300 (2014)] erred in determining
any of the items for
ii. File Protest with Local Treasurer computing the RPT.
Exhaustion of administrative remedies
Period to file protest Taxpayer must The taxpayer may
The protest in writing must be filed within 30 exhaust the directly resort to
days from payment of the tax to the provincial, administrative judicial action without
city or municipal treasurer. [Sec. 252(a), LGC] remedies provided paying under protest
under the LGC. the assessed tax and
Note: The tax or a portion thereof paid under filing an appeal with
protest, shall be held in trust by the treasurer. the LBAA and CBAA.
[Sec. 252(b), LGC] [City of Lapu-Lapu v. PEZA, G.R. Nos. 184203
and 187583 (2014)]
Period to decide
The local treasurer shall decide the protest Note: A claim for exemption from the payment
within 60 days from receipt. [Sec. 252(a), LGC] of RPT pertains to the reasonableness or
correctness of the assessment by the local
Decision on the protest assessor, a question of fact which should be
a. If the protest is decided in favor of the resolved, at the very first instance, by the
taxpayer, the amount or portion of the LBAA. [NPC v. Provincial Treasurer of
tax protested shall be refunded to the Benguet, G.R. No. 209303 (2016)]
protestant, or applied as tax credit
against his existing or future tax iii. Refunds or Credits of RPT
liability. [Sec. 252(c), LGC]
b. If the protest is denied or the 60-day Repayment of excessive collections
period expired, the taxpayer may When an assessment of RPT is found to be
appeal to the LBAA and subsequently illegal or erroneous and the tax is accordingly
to the CBAA pursuant to Secs. 226 and reduced or adjusted, the taxpayer may file a
229 as in the case of assessment written claim for refund or credit for taxes and
appeals. [Sec. 252(d), LGC] interests with the provincial or city treasurer
within 2 years from the date the taxpayer is
entitled to such reduction or adjustment.

Page 245 of 256

 U.P. LAW BOC TAXATION 2 TAXATION LAW

The provincial or city treasurer shall decide the

claim for tax refund or credit within 60 days
from receipt thereof. [Sec. 253, LGC]

Remedy in case of denial by the local

treasurer
In case the claim for tax refund or credit is
denied, the taxpayer may follow the procedure
in questioning an assessment (i.e., appeal to
the LBAA, then to the CBAA, and subsequently
to the CTA En Banc). [Sec. 253, LGC]

c. Compromising an RPT
assessment

Condonation or reduction of RPT

1. The Sanggunian:, in case of general
failure of crops or substantial decrease in the
price of agricultural or agri-based products or
calamity, may, by ordinance, condone or
reduce taxes and interest for the succeeding
year/s in the city or municipality affected by the
calamity. [Sec. 276, LGC]
2. The President of the Philippines may,
when public interest so requires, condone or
reduce the real property tax and interest for any
year in any province or city or municipality
within Metro Manila. [Sec. 277, LGC]

Compromise by authority of the President

The CTA allowed the compromise agreement
between Batangas City, represented by its
Mayor, and the taxpayer since it was entered
into in line with an executive order issued by
the President to address the real property tax
issues of independent power producers
through the reduction of their tax liabilities and
the condonation of fines, penalties and interest
on deficiency taxes. [Kepco Ilijan Corporation
v. CBAA, CTA EB No. 909 (2013)]

Page 246 of 256

U.P. LAW BOC TAXATION 2 TAXATION LAW

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U.P. LAW BOC TAXATION 2 TAXATION LAW

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U.P. LAW BOC TAXATION 2 TAXATION LAW

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 U.P. LAW BOC TAXATION 2
IV. JUDICIAL REMEDIES
A. JURISDICTION OF THE
COURT OF TAX APPEALS
[R.A. 1125, as amended by R.A. No. 3457 and
further amended by R.A. 9282 and R.A. 9503,
and A.M. No. 05-11-07-CTA or the Revised
Rules of the Court of Tax Appeals (RRCTA)]
1. Civil Cases
a. Exclusive Original Jurisdiction of
the Court in Divisions
The Court in Divisions shall exercise exclusive
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. [Sec. 3(c)(1), Rule 4, RRCTA]
b. Exclusive Appellate Jurisdiction in
Civil Cases
The Court in Divisions shall exercise exclusive
appellate jurisdiction over appeals from the
judgments, resolutions or orders of the RTCs in
tax collection cases originally decided by them
within their respective territorial jurisdiction.
[Sec. 3(c)(2), Rule 4, RRCTA]
The Court in Divisions shall exercise exclusive
original or appellate jurisdiction to review by
appeal the following:
1. 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;
Page 250 of 256
TAXATION LAW
2. Inaction by 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, where the
NIRC or other applicable law provides a
specific period for action: Provided, that in
case of disputed assessments, the inaction
of the CIR within the one hundred eighty
day-period under Section 228 of the NIRC
shall be deemed a denial for purposes of
allowing the taxpayer to appeal his case to
the Court and does not necessarily
constitute a formal decision of the CIR on
the tax case; Provided, further, that should
the taxpayer opt to await the final decision
of the CIR on the disputed assessments
beyond the one hundred eighty day-period
above mentioned, the taxpayer may appeal
such final decision to the Court under
Section 3(a), Rule 8 of these Rules; and
Provided, still further, that in the case of
claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a
petition for review with the Court prior to the
expiration of the two-year period under
Section 229 of the NIRC;
3. Decisions, resolutions or orders of the RTC
in local tax cases decided or resolved by
them in the exercise of their original
jurisdiction;
4. Decisions of the Commissioner of Customs
in cases involving liability for customs
duties, fees or other money charges,
seizure, detention or release of property
affected, fines, forfeitures of other penalties
in relation thereto, or other matters arising
under the Customs Law or other laws
administered by the Bureau of Customs;
5. Decisions of the Secretary of Finance on
customs cases elevated to him
automatically for review from decisions of
the Commissioner of Customs adverse to
the Government under Section 2315 of the
Tariff and Customs Code; and
 U.P. LAW BOC TAXATION 2
6. Decisions of the Secretary of Trade and
Industry, in the case of nonagricultural
product, commodity or article, and the
Secretary of Agriculture, in the case of
agricultural product, commodity or article,
involving dumping and countervailing
duties under Section 301 and 302,
respectively, of the Tariff and Customs
Code, and safeguard measures under
Republic Act No. 8800, where either party
may appeal the decision to impose or not
to impose said duties. [Sec. 3(a), Rule 4,
RRCTA]
Civil cases within the jurisdiction of the
Court En Banc [Sec. 2(a-e), Rule 4, RRCTA]
The Court en banc shall exercise exclusive
appellate jurisdiction to review by appeal the
following:
1. Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
a. Cases arising from administrative
agencies – Bureau of Internal
Revenue, Bureau of Customs,
Department of Finance, Department of
Trade and Industry, Department of
Agriculture;
b. Local tax cases decided by the
Regional Trial Courts in the exercise of
their original jurisdiction; and
c. Tax collection cases decided by the
Regional Trial Courts in the exercise of
their original jurisdiction involving final
and executory assessments for taxes,
fees, charges and penalties, where the
principal amount of taxes and penalties
claimed is less than one million pesos.
2. Decisions, resolutions or orders of the RTC
in local tax cases and in tax collection
cases decided or resolved by them in the
exercise of their appellate jurisdiction;
3. Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
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TAXATION LAW
original jurisdiction over tax collection
cases; and
4. Decisions of the Central Board of
Assessment Appeals (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.
2. Criminal Cases
a. Exclusive Original Jurisdiction of
the Court in Divisions
The Court in Divisions shall exercise exclusive
original jurisdiction over all criminal offenses
arising from violations of the NIRC or Tariff and
Customs Code and other laws administered by
the BIR or the Bureau of Customs, where the
principal amount of taxes and fees, exclusive
of charges and penalties, claimed is one million
pesos or more. [Sec. 3(b)(1), Rule 4, RRCTA]
b. Exclusive Appellate Jurisdiction in
Criminal Cases
The Court in Divisions shall exercise exclusive
appellate jurisdiction over appeals from the
judgments, resolutions or orders of the RTC in
their original jurisdiction in criminal offenses
arising from violations of the NIRC or Tariff and
Customs Code and other laws administered by
the BIR or Bureau of Customs, where the
principal amount of taxes and fees, exclusive
of charges and penalties, claimed is less than
one million pesos or where there is no specified
amount claimed. [Sec. 3(b)(2), Rule 4, RRCTA]
Criminal cases within the jurisdiction of the
Court En Banc [Sec. 2(f-h), Rule 4, RRCTA]
The Court en banc shall exercise exclusive
appellate jurisdiction to review by appeal the
following:
1. Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over cases involving
 U.P. LAW BOC TAXATION 2
criminal offenses arising from violations of
the NIRC or the Tariff and Customs Code
and other laws administered by the BIR or
Bureau of Customs;
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
mentioned in the preceding subparagraph;
and
3. Decisions, resolutions or orders of the RTC
in the exercise of their appellate jurisdiction
over criminal offenses arising from
violations of the NIRC or the Tariff and
Customs Code and other laws
administered by the BIR or Bureau of
Customs.
Does the CTA have jurisdiction over a
special civil action for certiorari assailing
an interlocutory order issued by the RTC in
a local tax case? YES.
While there is no express grant of such power,
with respect to the CTA, Section 1, Article VIII
of the 1987 Constitution provides, nonetheless,
that judicial power shall be vested in one
Supreme Court and in such lower courts as
may be established by law and that judicial
power includes the duty of the courts of justice
to settle actual controversies involving rights
which are legally demandable and enforceable,
and to determine whether or not there has been
a grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any
branch or instrumentality of the Government.
On the strength of the above constitutional
provisions, it can be fairly interpreted that the
power of the CTA includes that of determining
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 an
interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court.
[City of Manila v. Grecia-Cuerdo, G.R. No.
175723 (2014)]
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TAXATION LAW
Procedure
i. Filing of an Action for Collection of
Taxes
(a) Internal Revenue Taxes
The remedies for the collection of internal
revenue taxes, fees or charges, and any
increment thereto resulting from delinquency
can be through the institution of a civil or
criminal action. [Sec. 205, NIRC]
Note: See Taxpayer’s Remedies – Collection
above.
When this remedy is resorted to:
The tax assessment becomes final and
executory because of the failure to appeal.
Even pending decision of the administrative
protest [CIR v. Union Shipping, G.R. No. L-
66160 (1990)]
(b) Local Taxes
The LGU concerned may enforce the collection
of delinquent taxes, fees, charges or other
revenues by civil action in any court of
competent jurisdiction. The civil action shall be
filed by the local treasurer. [Sec. 183, LGC]
MTC/RTC depending on jurisdictional
threshold amount.
Prescriptive period
Local taxes, fees, or charges shall be assessed
within five (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.
In case of fraud or intent to evade the payment
of taxes, fees, or charges, the same may be
assessed within ten (10) years from discovery
of the fraud or intent to evade payment.
 U.P. LAW BOC TAXATION 2
Local taxes, fees, or charges may be collected
within 5 years from the date of assessment by
administrative or judicial action.
No judicial or administrative action for
collection can be instituted after lapse of the
period for assessment except when there is
fraud or intent to evade tax. [Sec. 194 LGC]
The running of the periods of prescription shall
be suspended for the time during which:
1. The treasurer is legally prevented from
@making the assessment of collection;
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, LGC]
3. Civil Cases
a. Who May Appeal, Mode of Appeal,
Effect of Appeal
Appeal to CTA Division
1. A party aggrieved or adversely affected by
the decision or ruling or inaction of
a. CIR;
b. Commissioner of Customs;
c. Secretary of Finance;
d. Secretary of Trade and Industry;
e. Secretary of Agriculture; or
f. RTC exercising original jurisdiction
2. May appeal within 30 days from the receipt
of the copy of the decision or ruling, or the
expiration of the period fixed by law for the
Commissioner to decide, to the Court of
Tax Appeals Division.
Mode of Appeal: Rule 42
Aggrieved party may file a motion for
reconsideration or new trial within 15 days from
receipt of the copy of the decision.
Appeal to CTA en Banc
A party adversely affected by a decision or
resolution of a Division of the Court on a motion
Page 253 of 256
TAXATION LAW
for reconsideration or new trial may appeal
within 15 days from receipt of the copy of the
decision.
Mode of Appeal: Rule 43
A party adversely affected by a decision or
ruling of the Central Board of Assessment
Appeals and the Regional Trial Court in the
exercise of their appellate jurisdiction may
appeal within 30 days from the receipt of the
copy of the decision.
b. Suspension of Collection of Taxes
General rule: No appeal taken to the Court
shall suspend the payment, levy, distraint, or
sale of any property of the taxpayer for the
satisfaction of his tax liability as provided under
existing laws.
Exception: Where the collection of the amount
of the taxpayer’s liability, sought by means of a
demand for payment, by levy, distraint or sale
of any property of the taxpayer, or by whatever
means, as provided under existing laws, may
jeopardize the interest of the Government or
the taxpayer, an interested party may file a
motion for the suspension of the collection of
the tax liability [Sec. 11, RA 1125, as amended]
c. Injunction not available to restrain
collection
No court shall have authority to grant an
injunction to restrain the collection of any
national internal revenue tax, fee or charge
imposed by the Code. [Sec. 217, NIRC]
Exception: Sec. 11, R.A. 1125, supra.
The CTA has ample authority to dispense with
the deposit of the amount claimed or the filing
of the required bond, whenever the method
employed by the BIR in the collection of tax
jeopardizes the interest of the taxpayer for
being patently in violation of law. [Sps.
Pacquiao v. CTA First Division, G.R. No.
213394 (2016)]
 U.P. LAW BOC TAXATION 2
TAKING OF EVIDENCE
The Court may receive evidence in the
following cases:
1. In all cases falling within the original
jurisdiction of the Court in Division pursuant
to Section 3, Rule 4 of these Rules; and
2. In appeals in both civil and criminal cases
where the Court grants a new trial pursuant
to Section 2, Rule 53 and Section 12, Rule
124 of the Rules of Court. [Sec. 2, Rule 12,
A.M. No. 05-11-07]
TAKING OF EVIDENCE BY:
1. Justice—
The Court may, motu proprio or upon proper
motion, direct that a case, or any issue therein,
be assigned to one of its members for the
taking of evidence, when the determination of
a question of fact arises at any stage of the
proceedings, or when the taking of an account
is necessary, or when the determination of an
issue of fact requires the examination of a long
account. The hearing before such justice shall
proceed in all respects as though the same had
been made before the Court.
Upon the completion of such hearing, the
justice concerned shall promptly submit to the
Court a written report thereon, stating therein
his findings and conclusions. Thereafter, the
Court shall render its decision on the case,
adopting, modifying, or rejecting the report in
whole or in part, or, the Court may, in its
discretion, recommit it to the justice with
instructions, or receive further evidence. [Sec.
12, RA No. 1125, as amended; also Sec. 3,
Rule 12, A.M. No. 05-11-07]
2. Court Official –
In default or ex parte hearings, or in any case
where the parties agree in writing, the Court
may delegate the reception of evidence to the
Clerk of Court, the Division Clerks of Court,
their assistants who are members of the
Philippine bar, or any Court attorney. The
reception of documentary evidence by a Court
official shall be for the sole purpose of marking,
comparison with the original, and identification
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TAXATION LAW
by witnesses of such documentary evidence.
The Court official shall have no power to rule
on objections to any question or to the
admission of exhibits, which objections shall be
resolved by the Court upon submission of his
report and the transcripts within ten days from
termination of the hearing. [Sec. 4, Rule 12,
A.M. No. 05-11-07]
MOTION FOR RECONSIDERATION OR NEW
TRIAL
[Rule 15, A.M. No. 05-11-07]
Who: Any aggrieved party may seek a
reconsideration or new trial of any decision,
resolution or order of the Court.
Opposition: The adverse party may file an
opposition to the motion for reconsideration or
new trial within ten days after his receipt of a
copy of the motion for reconsideration or new
trial of a decision, resolution or order of the
Court.
When: He shall file a motion for
reconsideration or new trial within 15 days from
the date he received notice of the decision,
resolution or order of the Court in question.
The Court shall resolve the motion for
reconsideration or new trial within three months
from the time it is deemed submitted for
resolution.
How: 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 for new trial shall be proved in the
manner provided for proof of motions. A motion
for the cause mentioned in subparagraph [a] of
the preceding section shall be supported by
affidavits of merits which may be rebutted by
counter-affidavits. A motion for the cause
mentioned in subparagraph (b) of the
preceding section shall be supported by
affidavits of the witnesses by whom such
evidence is expected to be given, or by duly
 U.P. LAW BOC TAXATION 2 TAXATION LAW

authenticated documents which are proposed prosecution may be conducted by their

to be introduced in evidence. respective duly deputized legal officers.

A motion for reconsideration or new trial that b. Institution of Civil Action in

does not comply with the foregoing provisions Criminal Action
shall be deemed pro forma, which shall not toll
the reglementary period for appeal. In cases within the jurisdiction of the Court, the
criminal action and the corresponding civil
Effect: The filing of a motion for action for the recovery of civil liability for taxes
reconsideration or new trial shall suspend the and penalties shall be deemed jointly instituted
running of the period within which an appeal in the same proceeding. The filing of the
may be perfected. criminal action shall necessarily carry with it the
filing of the civil action. No right to reserve the
Restrictions: No party shall be allowed to file filing of such civil action separately from the
a second motion for reconsideration of a criminal action shall be allowed or recognized.
decision, final resolution or order; or for new
trial. c. Period to Appeal
4. Criminal Cases Deciding Period to Mode of
Body Appeal Appeal
a. Institution and Prosecution of Regional Appeal
Criminal Actions Trial Court in pursuant to
the exercise 15 days from Sec. 3[a] and
Institution of criminal action of its original receipt of 6, Rule 122
Instituted by the filing an information in the jurisdiction decision of the Rules
name of the People of the Philippines [to CTA of Court
Division]
Those involving violations of the NIRC and Petition for
other laws enforced by the BIR: Must be 15 days from review as
approved by the CIR receipt of provided in
decision Rule 43 of
Those involving violations of the tariff and CTA Division the Rules of
Customs Code and other laws enforced by the [to CTA En May be Court
Bureau of Customs: Must be approved by the Banc] extended for
Commissioner of Customs good cause The Court En
for not more Banc shall
Institution shall interrupt the running of the than 15 days act on the
period of prescription. appeal.
Regional
Prosecution of criminal action Trial Courts Petition for
Conducted and prosecuted under the direction in the review as
15 days from
and control of the public prosecutor exercise of provided in
receipt of
their Rule 43 of
decision
Those involving violations of the NIRC and appellate the Rules of
other laws enforced by the BIR or violations of jurisdiction Court
the tariff and Customs Code and other laws [To CTA
enforced by the Bureau of Customs - The division]

Page 255 of 256

 U.P. LAW BOC TAXATION 2 TAXATION LAW

Solicitor General as counsel for the People
and government officials sued in their
official capacity
The Solicitor General shall represent the
People of the Philippines and government
officials sued in their official capacity in all
cases brought to the Court in the exercise of its
appellate jurisdiction. He may deputize the
legal officers of the Bureau of Internal Revenue
in cases brought under the National Internal
Revenue Code or other laws enforced by the
Bureau of Internal Revenue, or the legal
officers of the Bureau of Customs in cases
brought under the Tariff and Customs Code of
the Philippines or other laws enforced by the
Bureau of Customs, to appear in behalf of the
officials of said agencies sued in their official
capacity: Provided, however, such duly
deputized legal officers shall remain at all times
under the direct control and supervision of the
Solicitor General.
5. Appeal to the CTA En Banc
No civil proceeding involving matters arising
under the National Internal Revenue Code, the
Tariff and Customs Code or the Local
Government Code shall be maintained, except
as herein provided, until and unless an appeal
has been previously filed with the CTA and
disposed of in accordance with the provisions
of this Act.
allowing a court to annul its own judgment and
acknowledging that a hierarchy exists within
such court. A proper remedy would have been
an original action for Certiorari under Rule 65.
[CIR v. Kepco Ilijan Corp., G.R. No. 199422
(2016)]
6. Petition for Review on
Certiorari to the Supreme
Court
[Rule 16, A.M. No. 05-11-07]
A party adversely affected by a decision or
ruling of the Court en banc may appeal by filing
with the Supreme Court a verified petition for
review on certiorari within fifteen days from
receipt of a copy of the decision or resolution,
as provided in Rule 45 of the Rules of Court.
The motion for reconsideration or for new trial
filed before the Court shall be deemed
abandoned if, during its pendency, the movant
shall appeal to the Supreme Court.

A party adversely affected by a resolution of a

Division of the CTA on a motion for
reconsideration or new trial, may file a petition
for review with the CTA en banc. [Sec. 18, RA
No. 1125 as amended]

The CTA En Banc cannot annul a final and

executory judgment of a division of the court
The laws creating the CTA and expanding its
jurisdiction, and the CTA’s own rules of
procedure do not provide for a scenario where
the CTA sitting en banc is asked to annul a
decision of one of its divisions. Annulment by a
collegial court, sitting En Banc is tantamount to

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